UBS AG
Annual Report 1999

Plain-text annual report

ab UBS is a global, integrated investment services firm and the leading bank in Switzerland. Financial Report 1999. UBS Group Financial Highlights UBS Group Financial Highlights CHF million (except where indicated) For the year ended Income statement key figures Operating income Operating expenses (1997 before restructuring) Operating profit before tax (1997 before restructuring) Net profit / (loss) Per share data (CHF) Basic earnings per share 1 Basic earnings per share before goodwill 1, 2 Diluted earnings per share 1 Diluted earnings per share before goodwill 1, 2 Dividends proposed Ratios (%) Return on shareholders’ equity 3 Return on shareholders’ equity before goodwill 2,3 Cost / income ratio 4 Cost / income ratio before goodwill 2, 4 As of Balance sheet key figures Total assets Shareholders’ equity Market capitalization BIS capital ratios (%) Tier 1 Total BIS Assets under management (CHF bn) Total assets under management Headcount 5 Total headcount thereof: Switzerland Rest of world Long term ratings Moody’s, New York Fitch/IBCA, London Standard & Poor’s, New York BankWatch, New York 31.12.1999 31.12.1998 31.12.1997 28,621 20,452 8,169 6,300 30.28 31.91 30.12 31.75 11.00 20.1 21.2 69.1 68.0 22,328 18,258 4,070 3,030 14.31 15.92 14.23 15.84 10.00 10.3 11.4 78.4 77.0 24,880 18,636 6,244 (667) (3.18) (2.52) (3.18) (2.52) n/a 14.5 14.9 71.2 70.7 31.12.1999 31.12.1998 31.12.1997 1,086,414 30,927 n/a 8.3 12.6 1,512 55,176 36,638 18,538 981,573 34,835 92,642 10.6 14.5 1,744 49,058 32,747 16,311 Aa1 AAA AA+ AA 944,116 32,395 90,720 9.3 13.3 1,572 48,011 32,706 15,305 Aa1 AAA AA+ AA 1 For EPS calculation, see Note 10 to the Financial Statements. 2 The amortization of goodwill and other purchased intangible assets are exclud- ed from the calculation. 3 Net profit / average shareholders’ equity excluding dividends. 1997 loss and shareholders’ equity adjusted for impact 4 Operating expenses / operating income before credit loss expenses of CHF 956 million in 1999, of restructuring including taxes thereon. CHF 951 million in 1998 and CHF 1,278 million in 1997. 5 The Group headcount of 49,058 as of 31 December 1999 does not include the Klinik Hirslanden headcount of 1,853. Table of Contents The 1999 Financial Shareholders’ Letter Report reflects the Group Review 1999 UBS Group structure and the 2000 brand architecture. Group Results and Initiatives The UBS Group Merger Integration Update Information Technology and Operations Human Resources Divisional Review UBS Segment Reporting UBS Private Banking UBS Warburg UBS Private and Corporate Clients UBS Asset Management UBS Capital Corporate Center Review of Risk Management and Control Risk Management Framework Analysis of Risks Asset and Liability Management UBS Group Financial Statements Table of Contents Group Financial Review Financial Statements Notes to the Financial Statements Report of the Group Auditors UBS AG (Parent Bank) Table of Contents Parent Bank Review Financial Statements Notes to the Financial Statements Report of the Statutory Auditors UBS Corporate Governance Corporate and Executive Bodies Corporate Information Glossary UBS Share Information UBS Shares Information for Shareholders 2 6 8 12 15 17 20 22 27 32 36 39 42 46 48 58 66 68 72 76 125 128 129 130 132 136 138 142 143 148 150 1 Shareholders’ Letter Dear Shareholders, merger now behind us, we see significant oppor- tunity for our wealth management businesses in the years ahead. Our new structure, announced recently and which we explain below, is specifi- cally designed to unlock and maximize the poten- tial of our distinct client-facing businesses. UBS Warburg had a great year in 1999, with record profits and volumes in many of its business areas, led by an outstanding Equities perform- ance. We are proud of our world-class investment banking and securities division, and particularly of the turnaround since the shocks of 1998. Our domestic business within the Private and Corporate Clients Division is consistently managed for enhanced profitability. Bottom line improve- ments are starting to show through, and we are confident that, with the delivery of merger-related savings, a new level of profitability is attainable. Investment performance was the principal fac- tor behind the disappointing results of our Asset Management Division. It also affected somewhat the growth of Private Banking assets under man- agement. Diversification and a more “open” product offering will be the key to unlinking these performance risks, and, in that light, we are ex- cited by the opportunities provided to private banking clients by the acquisition of Global Asset Management. Our private equity business continues to prove itself highly attractive, with strong link- ages to private banking clients and to investment banking, and a consistently excellent track record of value creation, demonstrated again in 1999. Overall, we are pleased that this year has marked not only the integration of two banks, but also huge progress towards our vision of an integrated busi- ness with every UBS division interacting profitably, and displaying true unity of purpose. As a result, the whole is greater than the sum of the parts. Our strategy UBS is a global, integrated investment services firm and the leading bank in Switzerland. But, more fundamentally, UBS exists to provide value to its clients and shareholders. Our strategies are designed around the overriding objective of creat- ing sustainable growth in shareholder returns. We are convinced that we have the ideal set of businesses – each a leader in its own field – to take advantage of the sweeping global trends increas- ing personal wealth, and driving securities invest- ment to the forefront of financial services. We are pleased to report that, in 1999, UBS net profit after tax reached CHF 6,300 million. This represents basic earnings per share of CHF 31.91 and a return on equity of 21.2% before goodwill. Our performance has strongly rebounded after a difficult 1998 when net profit after tax stood at CHF 3,030 million. That said, a number of sig- nificant one-off events in both 1999 and 1998, explained in detail elsewhere in this report, make like-for-like comparisons complex. However, even taking these one-off events into considera- tion, the year-on-year net profit increase is signif- icant. Assets under management increased 11% or CHF 172 billion, to CHF 1,744 billion. The Board of Directors recommends to share- holders a dividend of CHF 11 per share, com- pared to CHF 10 last year. What we accomplished in 1999 In 1999, we accomplished much of what we set out to do at the end of 1998. Notably, we achieved the integration of one of the biggest and most complex banking mergers in record time. A merger of this magnitude leaves no area of business untouched, and it is a consider- able tribute to the professionalism and commit- ment of our employees that we have emerged so rapidly as an integrated force. While the successful accomplishment of the merger positions us more strongly than ever at the forefront of the financial services industry, it has undoubtedly had a short term impact. Private Banking, in particular, has not achieved the growth we anticipated this year. With the 2 Shareholders’ Letter But our success will depend on far more than careful positioning. UBS will represent the best combination of old and new banking methods. Our commitment, as ever, is to the highest standards of personalized service quality, delivered with the ultimate in professionalism and integrity. New technology provides an immense oppor- tunity to deliver our services faster, cheaper, to a much wider clientele and in a way that brings us ever closer to our clients. In Switzerland our elec- tronic banking service captures even higher mar- ket share than our “traditional” offering. Proof that our skills and services are only enhanced by delivery through cutting edge channels. Our new business structure On 18 February 2000 we announced our new business structure, regrouping our wealth man- agement businesses with the aim of unlocking their potential to generate superior growth. The new organization reflects a different way of thinking about client requirements. As new technologies transform the financial industry landscape, clients themselves increasingly decide – through their choice of services and channels – which client segment they belong to. Lifetime relationships mean seamlessly offering a contin- uously evolving service to match each client’s financial aspirations as they develop. Swiss banking has a special place in the world of personal finance. By combining all Swiss-based and international offshore banking, we will focus and capitalize on this core asset. Our asset management businesses are now under one roof, allowing us to develop a variety of invest- ment styles and selectively introduce more third- party products to our clients. At the same time, we will aggressively expand the marketing and distribu- tion of our own mutual funds to clients outside UBS. Investment services activities for international private clients have significant growth potential, and are now set to benefit additionally from proximity to investment banking skills, services and image. These changes are a thorough modernization, allowing us to serve our clients in a way that re- flects tomorrow’s world as well as today’s. The way ahead Our commitment to new technology will be demonstrated in 2000 through the launch of our new pan-European “e-services” personal invest- ment business, expected in the autumn. We manage this as a separate business unit with an emphasis on “time to market”, and are excited by its prospects. This new initiative complements the already very successful e-commerce and mo- bile phone services offered by our Private and Corporate Clients Division. It would be impossible in this short space to reflect the diversity of the initiatives UBS is launching in 2000. Three programs have particu- lar resonance for us at his time. We intend 2000 to be the year in which UBS stock trades on the New York Stock Exchange. To us, a globally traded share is symbolic of our belief in UBS as a global firm, as well as giving us the flexibility to take advantage of potential ex- pansion opportunities in the US. Our brand is one of our most important assets. In 2000, all our brands will be instantly recog- nizable as part of an integrated UBS. And finally, our share buy-back program demonstrates our commitment to returning value to our shareholders, alongside our core focus on grow- ing “top-line” revenue and “bottom-line” earnings. Conclusion With our new business structure in place, we now have the agility to respond quickly to changing client demands, allowing us to increase our mo- mentum significantly. Our mix of businesses is ideal for exploiting the changing financial servic- es landscape. But success does not come easy in today’s ultra-competitive world. All our busi- nesses will have to fight their hardest to secure the rewards they are so well-positioned for. We assure you of our commitment to the growth that you, our fellow shareholders, deserve and we thank you – along with our staff and our clients – for your support during the past year. Alex Krauer Chairman of the Board of Directors Marcel Ospel Group Chief Executive Officer 3 A Worldwide Presence 4 3 2 1 6 5 Main locations Main locations 1 2 3 4 5 6 Zurich/Basel Zurich/Basel London London New Yorkork New Y Chicago Chicago Singapore Singapor Tokyookyo 4 Group Review Group Review Group Results and Initiatives Group Results and Initiatives UBS achieved solid UBS Group financial results financial results in 1999 while essentially com- pleting its post-merger integration. During 1999 UBS also launched a dynamic set of Group- wide initiatives focused on shareholder value creation, new technology and growth. 6 Headline Group financial results 1999 was a strong rebound year for UBS. UBS Group net profit after taxes and minority interests was CHF 6,300 million in 1999, while in 1998 it was CHF 3,030 million, an increase of 108%. Significant fi- nancial events in both 1999 and 1998, explained below, render like-for-like comparisons complex. Compared to 1998, total operating income after credit loss expenses increased 28% to CHF 28,621 million. This is partially attributable to a higher level of gains on divestments during 1999 than in 1998, as UBS increased its focus on core businesses. It was also due to significantly higher trading income in the context of positive markets and the strength of our global investment bank and securities division, UBS Warburg. Total operating expenses increased 12% to CHF 20,452 million as compared to 1998. In 1999, personnel expenses increased as a result of performance-related compensation associated with good investment banking results. In con- trast, in 1998 additional personnel expenses were charged against the restructuring reserve as part of our successful efforts to protect the investment banking franchise in the face of anticipated merg- er-related shortfalls in profits. In 1999, non-per- sonnel expenses were below those of the previous year period reflecting lower levels of provisions and stringent cost reduction programs. UBS Group assets under management in- creased 11%, or CHF 172 billion, to CHF 1,744 billion. Acquisitions contributed CHF 38 billion to Group assets under management, with the re- maining increase largely performance-driven. Significant financial events 1999 total operating income includes one-off pre- tax gains of CHF 1,838 million mainly from di- vestments. Total operating expenses were not im- pacted by significant financial events as they net- ted out to an immaterial amount. More detail on significant financial events can be found in the Group Financial Review on page 68. Group financial targets Targets policy Our targets policy no longer emphasizes absolute numbers and focuses rather on those ratios that best measure shareholder return. Financial tar- gets also relate only to organic growth and are excluding the impact of goodwill amortization. Following acquisitions, we will disclose any expected impact on our targets and adjust them accordingly. Financial targets UBS is confident in the ability of its existing busi- nesses to provide good returns for our share- holders from organic earnings growth and value creation. UBS therefore aims to achieve: – a return on equity averaging 15–20%, across periods of varying market conditions; – double-digit average annual earnings per share growth, across periods of varying mar- ket conditions; – active, continuous focus and downward pres- sure on the Group cost/revenue ratio substan- tiated by divisional initiatives; – clear demonstration of growth in net new money in the Private Banking and Affluent segment. 1999 performance against financial targets As mentioned above, our financial targets are based on income statement figures excluding the impact of goodwill amortization. Furthermore, we believe that a proper discussion and analysis of our current core ratios against our financial targets requires, in some cases, the adjustment of our 1999 figures, to eliminate the effect of signif- icant financial events. – Return on equity: Adjusting 1999 net profit after tax for the post-tax CHF 1,488 million gain from significant financial events listed on page 68 of the Group Financial Review, pre- goodwill return on equity in 1999 amounted to 16.4%. This is within our target range of 15–20%, but leaves us considerable scope for further increases. – Earnings per share: In 1999 pre-goodwill basic earnings per share was CHF 24.76, after adjusting for significant financial events. A like-for-like comparison of results between 1999 and 1998 is made complex by these events, but it is clear that our earnings re- bound comfortably represents underlying double digit growth. – Cost/income: The adjusted, pre-goodwill cost/ income ratio was 72.5% in 1999. Compar- Group Review Group Results and Initiatives isons to the exceptional 1998 cost/income ratio are not meaningful. However we stress that, as discussed on pages 13–14, UBS is im- plementing a series of cost control measures in UBS Private and Corporate Clients as well as UBS Warburg which we expect to yield tangi- ble results. – Net new money: In 1999, net new money growth of CHF 4.5 billion in Private Banking fell below the high standards we strive for and did not represent a strong growth trend. Our reorganization announced on 18 February 2000 is specifically designed to unlock the growth potential in all our wealth manage- ment businesses, hence re-establishing the pos- itive trend. Group initiatives UBS is a global, integrated investment services firm and the leading bank in Switzerland. This positioning is substantiated by our strategic vi- sion, set out in the Shareholders’ Letter and UBS Group Section, and is driven forward by a com- plete set of business initiatives. Many of these initiatives are devolved to divisional level and discussed in the relevant divisional chapter. How- ever, several demand mention in the overall Group context. We view new technology as a tremendous op- portunity. Our commitment to seizing that op- portunity is evident in our planned launch in au- tumn 2000 of a major new e-services initiative in Europe. Following an integrated multi-channel “clicks and mortar” approach, e-services will focus on providing financial products and servic- es to affluent European clients. More detail re- garding this initiative can be found on page 15 in the e-services, Information Technology and Op- erations section. UBS is in the process of registering with the US Securities and Exchange Commission and ap- plying to list its shares on the New York Stock Exchange. Through this action, we will position ourselves to take advantage of the changing US financial services landscape as the Gramm- Leach-Bliley Financial Modernization Act liber- alizes restrictions. We are adjusting our brand architecture to demonstrate more clearly our integrated business model. Brand will continue to rise in importance in the financial services sector as multiple providers and channels scramble for attention. We will devote significant effort to establishing UBS as a renowned and recognized global brand with all the advantages conferred by the Swiss tradition of banking. UBS is currently implementing a comprehen- sive value-based management approach. This means establishing shareholder value creation as the primary yardstick for planning, investment decisions, capital allocation, performance ap- praisal and compensation, and strategic risk management. In line with our commitment to shareholder value, we commenced early in 2000 a Swiss-spe- cific, tax-efficient stock buy-back program with the intention of subsequent share cancellation. As of 23 February 2000, the program has resulted in the repurchase of approximately 2.8 million shares, or about 1.3% of our market capitaliza- tion. This program is also discussed on page 63 of the Capital Management section of the Review of Risk Management and Control chapter. These Group initiatives, together with our broader set of devolved divisional initiatives, will deliver sustainable growth in shareholder returns in 2000 and thereafter. Forward-looking statements This Financial Report includes statements that constitute “forward-looking statements”. We refer you to our cautionary statement regarding forward-looking statements on page 150 for a discussion of such forward-looking statements. 7 Group Review The UBS Group The UBS Group UBS is a global, integrat- Mission ed investment services firm and the leading bank in Switzerland. Our inte- grated business model We are committed to providing clients with supe- rior value-added investment services, to provid- ing shareholders with above average rewards, to being an employer of choice, and to being a good corporate citizen. encompasses a uniquely Overview attractive combination of profitable and growing client and business seg- ments allowing us to benefit from numerous synergies within the Group. We expect the regrouping of our busi- nesses, announced in February 2000, to add new agility and momen- tum to the Group. The philosophy of our business model is that each operating division holds primary responsibility for managing relationships with well-defined client segments, while ensuring appropriate ac- cess to the products and services of the entire Group. The Corporate Center encompasses Group level functions that cannot be devolved to the operating divisions. Integrated investment services firm Being an integrated investment services firm means that our business divisions work together, in a coordinated manner to achieve our common goals. This allows UBS to provide our clients with the full range of products and services that they have come to expect from a premier financial in- stitution, while UBS benefits from efficient value capture and structurally diversified revenue streams. As one example of integration, the centralized approach to asset and liability management un- dertaken by the Group Treasury function fosters cost-efficient Group funding, optimal internal al- location of funds and global liquidity manage- Investment services model – UBS ment. Non-trading interest rate and currency risks are captured and pooled with the trading books to realize the Group’s entire netting potential. “Investment services” is a term that encom- passes a uniquely attractive combination of prof- itable and growing client and business segments. It covers the full range of end-clients from high net worth individuals through retail clients to institutional and corporate clients. It covers the business competencies of asset management, re- search and advisory, and execution and risk man- agement. It includes asset gathering businesses across all client types, in particular, the fast-grow- ing high net worth, affluent and defined contri- bution segments. It further includes investment banking, providing competitive product and risk management expertise to the asset gathering busi- nesses. The investment bank also serves its own institutional and corporate client base, profiting from access to the rapidly expanding global secu- rities markets. The leading bank in Switzerland UBS is the leading bank in Switzerland, by size and market penetration. More than four million private individuals in Switzerland, or over half the population, cite UBS as their primary or sec- ondary bank. Some 180,000 small and medium sized companies bank with UBS, and almost all top-tier Swiss corporations can be counted among our clients. UBS is the largest provider of investment fund services and the leading credit bank in Switzerland. With more than 30,000 staff in Switzerland, we are the third-largest pri- vate employer in the country. High net worth clients Retail clients Wholesale clients Market participants Asset Management Research & Advisory Execution & Risk Management Retail/Corporate/Transaction Banking UBS is a global, integrated investment services firm and the leading bank in Switzerland. 8 Group Review The UBS Group Integrated client service business model Affluent clients Swiss Retail & Corporate clients Wholesale clients Private Banking Private and Corporate clients FX/MM; Research; Securities; Derivatives; Asset Mgmt; Funds Investment Banking and Securities Asset Management Private Equity High net worth clients Wholesale clients Integrated client services model The integrated model begins with our investment banking and asset management divisions provid- ing wholesale clients with products and services through direct access to the capital markets and institutional asset management capabilities. The base that these divisions provide allows us to offer the full range of value-added services to clients of our Private Banking and Private and Corporate Clients divisions, including foreign ex- change and money market products, research, se- curities trading and execution, derivatives and risk management products and services, custody services, asset and portfolio management servic- es and investment fund (including private equity funds). Our integrated model allows us to benefit from multiple synergies within the Group. Exam- ples of interdivisional synergies include: – UBS Warburg provides research, securities brokerage, OTC trading, derivatives, foreign exchange, and value-added structured products to clients of UBS Private Banking and UBS Private and Corporate Clients. the allocation of margins as the industry trans- forms. We cannot predict precisely how this value will be divided five years from now. However, with our spectrum of leading businesses, we are uniquely positioned to capture a significant share, whatever the future shape of the industry. The new structure In February 2000, we announced a moderni- zation of our organizational structure and a regrouping of our wealth management business- es. We took this step to align ourselves more closely with evolving client needs. We expect this new grouping of our wealth management busi- nesses to unlock their immense growth potential. We emphasize that the changed structure will not impact client relationships, and that business initiatives and strategies will proceed as planned. UBS Group now consists of three main busi- ness groups: UBS Switzerland, UBS Asset Man- agement and UBS Warburg. – UBS Private Banking clients also have the op- New business structure portunity to invest in UBS Capital funds. – UBS Capital works closelywith UBS Warburg for companies that are considering initial pub- lic offerings. – Technology and premises infrastructure, oper- ations and other support services are general- ly shared between all divisions in a given coun- try, especially in Switzerland. This model allows us to capture in-house the profitability from the vast majority of the value chain. This cushions us from potential shifts in UBS UBS Switzerland UBS Asset Management UBS Warburg Private Banking Institutional Asset Management Corporate & Institutional Clients Private & Corporate Clients Mutual Funds UBS Capital (working titles only) GAM Int. Investment Services & e-services 9 Group Review The UBS Group 10 UBS Switzerland UBS Switzerland, led by Stephan Haeringer, is composed of two business units: the current Private and Corporate Clients business and Swiss Private Banking services, offered in Switzerland and in major international offshore centers. Georges Gagnebin is the CEO of Private Banking. UBS Switzerland will rely strongly on the product capabilities of the other two business groups, UBS Asset Management and UBS War- burg. In addition it will manage the products and services most relevant for its client base, for example consumer banking products in Switzer- land, lending for Swiss corporates, and portfolio management and trust services for Private Bank- ing clients. UBS Switzerland will manage its own multi-channel distribution network in Switzer- land and abroad. The new business group will re-emphasize the strength and merit of Swiss-based banking through the management of all Swiss-based clients under one leadership team. The business group will benefit from an integrated Swiss-based infrastructure. UBS Switzerland is the leading Swiss bank for individual and corporate clients and the premier Swiss private banking institu- tion. UBS Warburg UBS Warburg, under the leadership of Markus Granziol, retains the existing organization struc- ture of the integrated investment banking and se- curities businesses. Corporate Finance, Equities, Fixed Income and Treasury Products are joined by Private Equity (UBS Capital), headed by Pierre de Weck, international onshore Private Banking and e-services to form a leading global in- vestment services firm under the UBS Warburg brand. UBS Warburg will take advantage of the con- siderable growth potential resulting from putting investment banking and investment services ac- tivities for wholesale and private clients outside Switzerland under one roof. Internationally, both high net worth and affluent clients are more at- tuned to the investment banking style, services and brand. UBS Asset Management UBS Asset Management concentrates all invest- ment management businesses of the Group under the leadership of Peter Wuffli. The mutual funds business of the Group and the newly acquired Global Asset Management (GAM) have been regrouped with the existing Institutional Asset Management business. UBS Asset Management will develop a variety of investment styles and multi-manager options and will leverage global research capability through combining individual and institutional asset management. UBS Asset Management will adopt a client-centric approach, including strate- gic asset allocation. Group Executive Board As of 15 February 2000 the Group Executive Board is composed as follows: Group Chief Executive Officer Marcel Ospel Luqman Arnold Chief Financial Officer Georges Gagnebin CEO Private Banking Markus Granziol CEO UBS Warburg Stephan Haeringer CEO UBS Switzerland Pierre de Weck Peter Wuffli CEO UBS Capital CEO UBS Asset Management Clients, growth and efficiency The new UBS reflects a radically different way of thinking about client segmentation. As new tech- nologies transform the financial industry land- scape, clients increasingly drive services, seg- menting themselves through their choice of serv- ices and channels. The new UBS structure is de- signed to support lifetime client relationships, of- fering a continuously evolving service to match each client’s financial sophistication and aspira- tions as they develop. UBS Switzerland and UBS Warburg will provide services to the entire range of individual clients: on the one hand, Swiss and offshore private clients, and on the other hand in- ternational private clients. UBS intends to unlock the growth potential of its wealth management business through focus- ing on its distinct components: – Swiss and offshore private banking, with its special place in the world of personal finance, will be focused on and developed by UBS Switzerland. – The enormous growth potential of interna- tional onshore investment services for high net worth individuals and affluent investors will be exploited. – Mutual funds will be aggressively marketed and distributed outside the UBS Group, from Group Review The UBS Group its new position in UBS Asset Management, where GAM will continue to provide the “screened” architecture access to third party managers critical for the Group’s individual client base. The opportunity to bring together asset manage- ment businesses under one roof, and to rational- ize logistics infrastructure for the Swiss-based international businesses, positions UBS and strongly to continue to capture internal synergies in the years ahead. 11 Group Review Merger Integration Update Merger Integration Update Given the tremendous Scope of merger integration scope of the merger between Swiss Bank Corporation and Union Bank of Switzerland, UBS mastered the technical and organizational challenges of the merger in record time. With the completion of the infor- mation technology integration in one year from the legal consum- mation of the merger, UBS set a new industry benchmark. 12 When we announced the merger of Union Bank of Switzerland and Swiss Bank Corporation in De- cember 1997, we planned strict timelines in which to manage a merger of such scope and complexi- ty. Our ambitious total integration plan included resolving the issues of product and service offer- ings, branding, client communication, technical and operational integration, a new business model, distribution network redesign, and the re- tention of both clients and key employees. In ad- dition, two quite different business cultures had to be brought together. The integration process placed extraordinary demands on Information Technology (IT) and Operations, and our client representatives faced the daily challenge of main- taining service quality and client satisfaction. We announced that the integration timetable would vary by division between three months and four years. In particular, two divisional timelines were very ambitious. First, at UBS Warburg we aimed for, and successfully achieved, the integra- tion of information technology platforms on the date of the legal consummation of the merger, 29 June 1998. At UBS Private and Corporate Clients, we planned, and also succeeded in, the integration of the information technology platforms within one year of the legal merger date, achieving a new international benchmark in the industry. In Switzerland, more than 2.5 million client ac- counts were migrated to a common IT platform and 173 redundant branches, or 31% of the pre- merger branch network, have been closed. Thanks to the exemplary efforts of our em- ployees, the merger integration of UBS has suc- cessfully remained on track across all divisions in Switzerland and around the globe. All business divisions except UBS Private and Corporate Clients have essentially completed merger inte- gration. Redundancy programs in Switzerland and real estate disposal plans in the Corporate Center will continue to gain momentum in 2000. Integration by division UBS Private Banking The merger caused fundamental changes for the UBS Private Banking Division. Not only did the organizational structure change, but the informa- tion technology platforms, supplied by UBS Pri- vate and Corporate Clients, had to be integrated at the same time. The swiftness with which we completed the merger did have some negative ef- fects, causing a loss of momentum in the acquisi- tion of new clients as well as some client and em- ployee defections. However, we remain con- vinced that our decision to complete the integra- tion of this division as quickly as possible result- ed in a much smaller disruption of the business than if it had been carried out over several years. The transfer of client data to a common IT platform was completed for the main interna- tional centers (New York, Singapore, Hong Kong, London) in 1998, and in Switzerland by mid-1999. The resegmentation of the client base between UBS Private and Corporate Clients and UBS Private Banking was completed in 1999. The completion of the integration process will allow our wealth management businesses to move forward with the implementation of their powerful value proposition, thereby leveraging UBS’s position as the global leader in quality high net worth financial services. UBS Warburg The investment banking and securities business has been built up over the last five years through a series of successful mergers based on speed of execution and the ability to capture complemen- tary skills. The successful completion of the UBS War- burg integration by year-end 1998 created a client platform with a strong business momentum and a much enhanced franchise. The impressive results are clearly reflected in the 1999 published segment reports. UBS Private and Corporate Clients Thanks to the tremendous efforts of the employ- ees involved, the integration process in Switzer- land of the information technology platforms was brought to a successful conclusion in July 1999. Within one year, over 1,000 ATM’s were converted and over 23,000 employees trained in new products, processes and systems. Organiza- tional integration and rebranding were finished in 1998. A core component of the strategy of the Pri- vate and Corporate Clients Division is to stream- line the physical distribution network while si- multaneously enhancing alternative distribution channels such as phone and internet banking so- Group Review Merger Integration Update lutions. As mentioned above, by the end of 1999, 31% of the pre-merger branch network had been closed. The branch network will be further rationalized and specialized over the course of the next few years. Merger-related headcount reduction plans, branch reductions and specialization, re-engi- neering of operations and logistics, improve- ments in information technology, and the final decommissioning of Swiss Bank Corporation’s IT platform are expected to result in headcount being continually reduced during the 2000–2002 period. UBS Asset Management The integration of UBS Asset Management was successfully completed during 1998. Merger- related client attrition, notably in Europe, was pronounced but within corporate expectations. UBS Capital The merger process was smoothly completed in 1998, with the successful integration of SBC Equity Partners (which in 1999 became CapVis, Switzerland’s largest private equity fund) into UBS Capital. In 1999, UBS Capital established a new regional fund structure that will allow it to continue making significant direct investments within the important US market. Corporate Center The majority of real estate for the Group is man- aged by the Corporate Center. Merger-related property divestments started in 1998 and 1999, and real estate write-offs and sales will continue into 2000 and 2001. Merger cost savings By the end of 1999, we achieved sustainable merger-related cost savings of CHF 2 billion per year. Since 1997, headcount reductions will have resulted in total savings of CHF 1.6 billion per year. We estimate non-headcount savings to be around CHF 400 million per year, including ap- proximately CHF 75 million in eliminated depre- ciation expenses and other costs related to real estate. Since the merger announcement, UBS Warburg has essentially completed its integration including the reduction of personnel and the integration of information technology platforms. As we expect- ed, most of the cost savings over the past two years have been attributable to UBS Warburg. UBS Private and Corporate Clients has been rapidly integrating its business in line with a de- tailed timetable and project schedule. As planned, it still has additional milestones to reach. For ex- ample, now that the integration of technology platforms has been completed and in line with employee association agreements made in 1998, redundancy plans will gain momentum during 2000 and 2001. Furthermore, although the tech- nology platform integration was completed in mid-1999, one platform still remains to be de- commissioned in 2000. UBS Private Banking, UBS Asset Management and UBS Capital have essentially completed their integrations, while in the Corporate Center we expect the write-off or sale of the remaining redundant real estate to proceed in 2000 and 2001. As with any merger, cost savings attributable directly to the merger become increasingly diffi- cult to track over time. Across all divisions, nor- mal organic business growth, new investments and initiatives, and at least three acquisitions and six divestments cloud underlying developments since the time of the merger. For example, UBS Private Banking has invest- ed heavily over the past two years in building up its domestic private banking business outside Switzerland. Additionally, in 1999, UBS formed the e-services business area which will experience further significant investment. More information on divisional initiatives can be found in the re- spective divisional discussions. We are also implementing general cost control initiatives across all divisions, which extend well- beyond merger-related savings. These initiatives are already well-structured at UBS Warburg and UBS Private and Corporate Clients. UBS War- burg is continuing to focus on cost management with emphasis on improving overall efficiency such that revenue growth exceeds any growth in non-personnel costs. In addition, the UBS Warburg Investment Committee has carried out a rigorous review process to ensure that investments in infrastruc- ture are fully aligned with the strategy of the busi- ness. Within the UBS Private and Corporate Clients Division, the Strategic Projects Portfolio is ex- 13 pected to enhance revenues and reduce costs, in- cluding the ongoing realization of the division’s remaining merger-related cost savings. The proj- ects portfolio is well on track and is expected to yield a significant improvement in net profit by 2002. We will continue to track and communi- cate the progress of this portfolio. Restructuring provision In the fourth quarter of 1999, we recorded an ad- ditional pre-tax restructuring charge of CHF 300 million in respect of the merger between Union Bank of Switzerland and Swiss Bank Corpora- tion. This increase represents four percent of the initial CHF 7 billion charge made in 1997 and was due to revised estimates of the cost of lease breaks and property disposals. Of the CHF 7 billion merger-related restruc- turing provision created in 1997 and the addi- tional restructuring provision of CHF 300 mil- lion created in 1999, CHF 1,844 million was utilized in 1999. This brings total utilization to CHF 5,871 million and leaves CHF 1,429 mil- lion to address the remaining restructuring, mostly in UBS Private and Corporate Clients. In UBS Private and Corporate Clients, the transition to one common IT platform and the parallel operation of the systems account for the major part of IT provision utilization. UBS Warburg has already essentially concluded its restructuring activities. Premises costs at Corporate Center are primarily due to relocation and refurbishment costs from the move into common bank premises and vacancy costs re- garding decommissioned bank premises pending disposal. Restructuring provision used CHF million For the year ended UBS Private Banking UBS Warburg UBS Private and Corporate Clients UBS Asset Management UBS Capital Corporate Center Group total Personnel IT Premises Total used Total used Other 31.12.1999 31.12.1998 40 181 123 9 3 22 378 103 75 461 0 0 3 642 1 0 165 0 0 507 673 13 60 45 0 0 33 157 316 794 9 3 565 151 1,844 147 2,382 717 18 2 761 4,027 Restructuring provision as of 31.12.1997 Additional provision in 1999 Used in 1998 Used in 1999 Total used through 31.12.1999 Restructuring provision remaining 7,000 300 4,027 1,844 5,871 1,429 Additional information on the restructuring provision remaining is provided in Note 24. Group Review Merger Integration Update 14 e-services, Information Technology and Operations Group Review e-services, Information Technology and Operations e-commerce is changing UBS e-services initiatives Definitions the banking industry, and in 1999 UBS responded strongly to this trend with the establishment of a new “click and mortar” business area. Informa- tion Technology and Operations are increasingly important differentiators in the current competitive envi- ronment, especially given the advent of new tech- nologies. UBS recognizes this shift and will con- tinue to invest in its industry-leading skills and infrastructure. As asset allocation shifts away from deposits, as the penetration of the internet increases, and as technology continues to enable more user-friend- ly and broader solutions, we recognize the criti- cal importance of the targeted application of e-commerce as a distribution channel in the financial services industry. In 1999, we established a structure to coor- dinate Group-wide internet initiatives, centered on the Group Internet Business Council. All our businesses are internet-enabling their services, building new client franchises and creating specif- ic new products. These initiatives are reported in the relevant divisional review sections of this report. The success of our internet offering in Switzerland, where our share of the electronic banking market is greater than our share of the traditional banking market, is testament to our commitment and expertise in this new field. e-services business area This business area, known for the time being as “e-services”, is planning to launch a pan-Euro- pean personal investment services business in au- tumn 2000. Following an integrated multi-chan- nel approach, e-services will focus on providing financial products and services to affluent Euro- pean customers. The current plan foresees a phased launch of this business over the next two years in Germany, the UK, France and Italy. e-services infrastructure will be scaleable and open to ensure ease of further expansion, either by product, service, or geography. Target clients are the “second generation” of internet users who require services pitched between the private banking and retail levels. These clients are fo- cused on investment advice rather than trading services alone. e-services will develop an internet website as its major distribution channel. The business will also open investment centers in its target markets, as well as two large customer service centers in Edinburgh and Maastricht, to provide financial and technical advice by telephone. Increasingly important to UBS, especially in the current competitive environment, logistics is a term which we use to encompass information technology (IT) and Operations. IT today under- pins almost everything that is delivered by a bank, from Automatic Teller Machines (ATM’s) to net- marketed bond issues. Operations covers the post-transaction activities of the firm which en- sure that our services are delivered to our clients on time and with top quality. Once, these activi- ties were viewed as “back-office” functions. Now they take their place at the heart of our business. Trends At UBS, we view low cost and effective logistics as an increasingly important competitive advan- tage. As products and services in the financial services industry are becoming increasingly com- moditized, the traditional differentiators of prod- uct innovation and service quality are being joined in importance by logistics excellence. e-commerce is placing new demands on logis- tics. The impact of this new channel goes beyond just the front-end interface, such as the web page. Rather, the website acts as a clear window through which our clients can have a direct view into our internal systems. “Straight-through pro- cessing” – the complete automation of services from point of sale through execution and settle- ment – is critical to ensure quality service delivery in a real-time world. We are seeing an industry- wide re-evaluation of logistics functions and their place in the investment services enterprise. Financial services providers must be both willing and sufficiently capitalized to make significant in- vestments in logistics. These investments are not just driven by a desire to use leading-edge technol- ogy. They are simply necessary to keep up with the fast-paced changes in client needs and market structures. For example, the European securities market is in a period of unprecedented transforma- tion of both trading and settlement platforms. At UBS, we aim to be a thought leader in this trans- formation, enabling us to be well-ahead in the race to adapt our infrastructure and drive industry change. We co-founded and chair the European Security Industry Users’ Group (ESIUG), a forum established to drive market change in Europe. 15 Group Review e-services, Information Technology and Operations 16 Competitive environment Fundamentally, financial services remains the same business. However, the delivery of financial services is changing very rapidly. Through this pe- riod of innovation and change, we believe that es- tablished players have several distinct advantages. Logistics underpins the delivery of financial services. All the trends we have discussed above point to a significant competitive advantage for those with successful in-house provision of the “logistics chain”. UBS commands both the financial resources and the intellectual expertise to meet the challenges of this new environment itself. This is in contrast to many smaller finan- cial service providers and start-ups, which must purchase such services, making them more cost- ly and increasing their dependency on external providers. Our view is that the client bases of established institutions with trusted brand names are “stick- ier” than internet hype would have us believe. Start-ups have marketing expertise and often niche technology skills on their side, but they fre- quently lack the resources and expertise to build stable in-house infrastructure. We believe that winners from this technologi- cal revolution will predominantly be the big in- cumbent players who understand the increasing importance of the logistics function and grasp the opportunities that new technologies offer. UBS logistics strategy UBS’s strategy is to build dominant expertise in fi- nancial services logistics. This will enable us to extract competitive advantage from having the majority of the logistics chain in-house coupled with the ability to manage the associated opera- tional risks. In particular, this includes keeping costs internal rather than outsourcing them at a potentially higher cost. Furthermore, it ensures full flexibility in delivering solutions and services without excessive dependency on external ven- dors. Challenges Logistics is facing significant challenges from the industry trends mentioned above. Many of these challenges will originate from demands of the marketplace, for example the move to T+1 securi- ties settlement in the US. In addition, UBS’s logis- tics functions are faced with a tremendous expan- sion of scope as we continue to build domestic private client business outside Switzerland and as “e-services” prepares to launch in autumn 2000. UBS Operations are already global in structure and organization. But cost-effective delivery means that Operations must also continue glob- alizing in processes and systems. The continuing implementation of global processes and systems will revolutionize functions previously seen as “back office”, moving them from a clerical to an analytical focus. As margins tighten, Operations will be positioned as a revenue protector and service enhancer as well as a cost reducer. It is on this platform that our global, integrated invest- ment services firm is built. Group operations program At UBS, we look at the cost of logistics in two categories, “run-the-bank” and “change-the- bank”. “Run-the-bank” expenses ensure that logistics continues to perform the required day- to-day work. Our cost control objective with run- the-bank expenses is to ensure that, even with increasing revenues or volumes, associated costs will decrease, or at least increase at a slower rate. “Change-the-bank” expenses are the necessary investments we are continually making to capi- talize on our revenue growth opportunities and to achieve our cost control objectives. Here we are transforming our business processes for the better. To extract more synergies from the Group structure, we set up in 1999 the Group Opera- tions Program (GOP). The GOP has created a ro- bust governance structure for change-the-bank initiatives across the Group. While run-the-bank operations are still situated at the divisional level, the GOP seeks to ensure that, through prioritized single investments, run-the-bank expenses move downward in the future. Through the GOP lead- ership, Group initiatives are coordinated to avoid duplication and examined to ensure they will achieve returns exceeding the required hurdle rate. In 1999, run-the-bank expenses accounted for approximately 67% of total Operations and IT costs with change-the-bank expenses account- ing for 33%. Change-the-bank expenditures can be expected to account for a much higher pro- portion of our total Operations and IT expenses in the future. Human Resources Group Review Human Resources When the merger of Fierce competition for talent the Union Bank of Switzerland and Swiss Bank Corporation was announced in December 1997, the new Group set the ambitious goal of completing the majority of the integration by July 1999. Thanks to the com- mitment of all our em- ployees, we were able to achieve this milestone. During recent years, the international labor mar- ket has become more and more competitive, par- ticularly in the financial services sector. Through new marketing initiatives, challenging opportuni- ties and first-class development and training, UBS has been very successful in recruiting experienced professionals and new graduates in this tight market situation. Intellectual capital is the most important asset in the financial services sector. We recognize this by encouraging our employees to play an active role in their own development. Each of our divisions has its own training department which offers a wide range of courses, focusing on personal devel- opment, management skills, as well as specific business know-how. The expertise and integrity of our staff creates value for our clients and, through innovative and efficient processes, for the Group. We always aim to attract and retain the best talent in the market by providing a challenging climate of teamwork and meritocracy which motivates staff to achieve their full potential. Organization of Human Resources at UBS In April 1999, Group Human Resources was brought directly into the Group CEO area. This en- ables a better coordination of Human Resource processes and has led to substantial improvements and synergies in the fields of compensation and ben- efits, graduate and professional recruitment, train- ing and development and performance evaluation. Each division takes responsibility for its own human resources by having divisional Human Resources organizations geared to specific busi- ness needs. Under the lead of the Group CEO, the Group Human Resources Committee ensures that all Human Resources efforts support busi- ness objectives. Group Human Resources policies and standards are defined in all fields where con- sistency and global applicability create synergies and add value to the Group. Group Human Resources policies Recruitment and retention UBS aims to be an employer of choice for talent- ed individuals and therefore makes great efforts to identify and recruit the top candidates for every role. Internal development is emphasized to fill senior positions. We have successfully estab- lished a working environment in which talented employees wish to remain and to which candi- dates are attracted. Appreciation of diversity We foster a diverse workforce of varying back- grounds, experiences and perspectives. We con- centrate on increasing the awareness of the rele- vance of national and organizational “culture” with the goal of developing each employee’s per- sonal intercultural competence and consequently the aptitude for working in multi-cultural envi- ronments. Performance culture and meritocracy Common to all divisions is an environment that values performance and contribution. Recogni- tion, reward and opportunity for increased re- sponsibility are always based on merit. To meas- ure this, we use the Group-wide Performance Measurement and Management (PMM) tool, which is a web-based instrument. Compensation We manage our staff with a total remuneration strategy that attracts, retains, motivates and re- inforces performance, fairness, integrity and teamwork. We provide significant equity-based compensation to all levels of employees to ensure continual shareholder alignment and value creation. Additionally, UBS has a number of equity-based pay programs through which UBS employees can choose to invest in shares and options. Staff development Professional and personal development is a criti- cal management responsibility in order to ensure continued success. To be competitive as an employer, we must visibly add value to each indi- vidual’s career and market profile. Staff, regard- less of their function or title, may attend seminars or courses which focus on their development. UBS offers a variety of programs for each level and job function. We are focusing on expanding our existing on-line training programs, which will add flexibility and enable our employees to invest in their further development at times which are most convenient to them. 17 Group Review Human Resources UBS Group Employees by region 31 December 1999 16% 7% 10% Switzerland Americas Asia/Pacific Europe 67% UBS Group Employees by division 31 December 1999 0.2% 3.4% 1.9% 19.5% Technology skills New technology and globalization have a grow- ing impact on the world of banking. In response to the increasingly technical nature of banking and changing client demands, UBS has expanded its range of services. 24-hour Banking is now the norm and our e-services businesses are develop- ing rapidly. The critical importance of managing and prof- iting from these new media means it is imperative that we build up strong technology resources. Therefore, we are developing our critical mass of people with high technology skills. The global leadership experience The Global Leadership Experience (GLE) is a new development initiative that seeks to institutionalize cross-divisional cooperation. The GLE is a bank- wide network of personal contacts and intellectu- al opportunities that extend beyond the immediate workplace. The first program took place in late September 1999, bringing together key staff from all five business divisions. 49.1% 25.9% UBS Group personnel development UBS Private Banking UBS Warburg UBS Private and Corporate Clients UBS Asset Management UBS Capital Corporate Center At the end of 1999, UBS had a total of 49,058 employees worldwide across all divisions. This figure does not include the Klinik Hirslanden headcount of 1,853 employees. The graphs illus- Personnel 1 (Full-time equivalents) UBS Private Banking UBS Warburg UBS Private and Corporate Clients UBS Asset Management UBS Capital Corporate Center Group total thereof: Switzerland trate the geographical and divisional split be- tween divisions. Since December 1998 UBS Group’s headcount expanded by 2.2%, or 1,047 due to UBS Private Banking expansion, which has been partly mitigated by UBS Warburg’s non-core business reduction. Employee turnover was more stable during the second half of the year than during the first six months. The net turnover for the Group in 1999 was 11.7% worldwide and 11% in Switzerland. Towards the end of the year the figures stabilized signifi- cantly in all divisions. In 1999, UBS Private Banking’s headcount grew by 25.3%. This occurred primarily through the expansion of domestic private banking out- side Switzerland and the accompanying necessary logistics support, as well as through the integra- tion of Global Asset Management and the inter- national private banking business acquired from Bank of America. Apart from the transfer of the Swiss-related Global Trade Finance business to UBS Private and Corporate Clients, UBS Warburg’s head- count decline in 1999 took place mainly in non- core businesses, Treasury Products and Logistics. The minimal expansion in UBS Private Cor- porate and Clients’ headcount in 1999 is a result of the transfer of Swiss-related Global Trade Fi- nance from UBS Warburg which was almost com- pletely offset by the realization of planned head- count reductions. For example, in the fourth quarter of 1999, on a net basis, around 400 per- sonnel left the UBS Private and Corporate Clients Division. 31.12.1999 31.12.1998 Change in % 9,565 12,694 24,098 1,653 116 932 49,058 32,747 7,634 13,794 24,043 1,497 122 921 48,011 32,706 25 (8) 0 10 (5) 1 2 0 1 The Group headcount of 49,058 as of 31 December 1999 does not include the Klinik Hirslanden headcount of 1,853. 18 Divisional Review Divisional Review UBS Segment Reporting UBS Segment Reporting To allow a more meaning- UBS Segment reporting by business ful analysis of UBS’s results, Group results are CHF million For the year ended Revenues Credit loss expenses 1 presented on a manage- Total operating income ment reporting basis. Consequently, internal charges and transfer pricing adjustments have Personnel expenses General and administrative expenses Depreciation 2 Goodwill amortization 3 Total operating expenses Segment performance before tax Tax expense Net profit before minority interests Minority interests been reflected in the Net profit performance of each business. The basis of Cost/income ratios (%) 4 before goodwill amortization after goodwill amortization the reporting reflects the Regulatory equity used (avg) Assets under management (bn) 5 management of the UBS Private Banking 31.12.98 31.12.99 31.12.99 UBS Warburg 31.12.98 6,011 (24) 5,987 1,694 1,467 138 36 3,335 2,652 55 55 1,800 731 7,223 (26 ) 7,197 1,458 1,277 111 15 2,861 4,336 12,909 (330) 12,579 6,861 2,448 652 134 10,095 2,484 6,987 (500 ) 6,487 4,333 2,483 535 157 7,508 (1,021 ) 46 46 77 78 105 107 1,500 10,050 13,300 607 0 0 business within the UBS Purpose Management accounting principles Group. 20 Based on UBS’s management accounting, segment reporting provides accurate performance meas- urement of the UBS divisions to increase trans- parency and accountability. Segment reports are in line with the organizational structure of UBS. Accounting standards Although segment reports are based on manage- ment accounting, they comply with International Accounting Standards (IAS), and they are also ex- amined by UBS’s auditors, ATAG Ernst & Young AG. Where a different approach has been applied in order to increase the usefulness of the data, the figures are fully reconciled to our financial ac- counting. 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 of this supplementary in- formation include assets under management and headcount. – Interest revenues are apportioned to the divi- sions based on the opportunity costs of fund- ing. Accordingly, all assets and liabilities are refinanced with the Treasury Products busi- ness 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 segment reports, the divisions are credited with the risk-free return on the average equity used. Commissions are credited to the business division with the cor- responding customer relationship. – In addition to the direct costs of the divisions, inter-divisional costs are allocated based on service level agreements and treated as a cost reduction in the division providing the service. – The allocation of Corporate Center costs to the business segments is based upon concepts of benefit and controllability. Essentially, the division which controls the process or is responsible for a logistics service bears the costs. – In order to manage its exposure to credit risk effectively, and in particular to encourage ap- propriate pricing of transactions involving credit, UBS measures its exposure to credit Divisional Review UBS Segment Reporting 1 In order to show the relevant divi- sional performance over time, adjust- ed expected loss figures rather than the net credit loss expense are report- ed for all business divisions. The statistically derived adjusted expected losses reflect the inherent counterpar- ty and country risks in the respective portfolios. The difference between the statistically derived adjusted ex- pected loss figures to the net credit loss expenses for financial reporting purposes is reported in the Corporate Center. The divisional breakdown of the net credit loss expense for finan- cial reporting purposes of CHF 956 million as of 31 December 1999 is as follows: UBS Private Banking CHF 11 million, UBS Warburg CHF (20) million, UBS Private and Corporate Clients CHF 974 million, Corporate Center CHF (9) million. 2 The 1998 figures have been restated due to a refinement of the allocation methodology for depreciation. 3 The amortization of goodwill in- cludes other purchased intangible assets. 4 Operating expenses / revenues before credit loss expenses (UBS Pri- vate Banking 1998 excluding gain from divestment of Banca della Svizzera Italiana). 5 UBS Asset Management Decem- ber 1999: institutional assets CHF 376 bn, non-institutional assets CHF 198 bn. UBS Private & Corporate Clients 31.12.98 31.12.99 UBS Asset Management 31.12.98 31.12.99 31.12.99 UBS Capital 31.12.98 Corporate Center 31.12.98 31.12.99 31.12.99 UBS Group 31.12.98 7,193 (1,050) 7,025 (1,170 ) 6,143 3,363 1,061 555 2 4,981 1,162 69 69 8,550 439 5,855 3,238 1,025 680 4 4,947 908 70 70 8,250 434 1,096 0 1,096 444 177 29 113 763 333 59 70 160 574 1,163 0 1,163 454 154 29 78 715 448 55 61 100 531 315 0 315 105 47 2 5 159 156 49 50 340 0 585 0 585 121 35 0 1 157 428 27 27 250 0 2,053 448 2,501 110 818 141 50 1,119 1,382 296 745 1,041 212 1,643 128 87 2,070 (1,029 ) n / a n / a n / a n / a 29,577 (956) 23,279 (951 ) 28,621 22,328 12,577 6,018 1,517 340 9,816 6,617 1,483 342 20,452 18,258 8,169 1,815 6,354 (54) 6,300 68 69 4,070 1,045 3,025 5 3,030 77 78 7,850 6,350 28,750 29,750 0 0 1,744 1,572 risk using a forward looking statistical estimate of the expected loss based on the estimated probability of default of its counter- parties. The estimate of the “Expected Loss” associated with the credit risk in the portfolio which results from this process is then charged to the divisions through the management ac- counts in order to ensure that the anticipated risk cost associated with credit is taken into account in the assessment of divisional results. As each division is ultimately responsible for its credit decisions, the difference between ac- tual credit losses and annual expected losses will be charged or credited back to the division over time. Since the International Accounting Standards require that credit losses be recognized and charged to the financial accounts on an ex post basis as they arise rather than the forward look- ing statistical basis UBS uses for performance measurement, it is necessary to reconcile these two different approaches to the measurement of credit risk. This reconciliation is achieved through an offsetting entry in the Corporate Center accounts which represents the difference between the statistically estimated adjusted ex- pected loss which is charged to the management accounts of the divisions and the credit loss ex- pense which is recorded in the financial accounts in accordance with the requirements of Interna- tional Accounting Standards. Credit loss ex- penses according to the financial accounting methodology are also footnoted by division in the divisional management account tables. – 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 se- curity margin is added. The remaining equity, mainly for real estate, as well as unallocated equity remains in Corporate Center. – Assets under management are defined as third- party on- and off-balance sheet assets for which the bank has investment responsibility. This includes both discretionary assets, where the bank has a mandate to invest and manage the assets, as well as advisory assets. Where two divisions share responsibility for manage- ment of the funds (such as investment funds), the assets under management are included in both business segments. Custody-only assets are excluded. UBS is currently reviewing its definition of assets under management. – Headcount includes trainees and staff in management development programs, but not contractors. Reorganization impact Following our recent reorgani- zation, we are committed to providing continuing compara- bility and transparency in our segment reporting. This com- mitment will result in substan- tial disclosure at a level below the three main business groups. 21 Divisional Review UBS Private Banking UBS Private Banking Despite solid growth in Mission and business description assets under manage- ment in 1999, UBS Private Banking’s financial performance was nega- tively affected by merger- related disruption, certain underperforming port- folios and substantial investments in new busi- ness areas. In February 2000, the UBS Group an- nounced a reorganization which will focus on reigniting growth in the wealth management businesses. 22 UBS – The premier private bank UBS Private Banking is an integrated, global provider of a broad portfolio of financial prod- ucts and services to wealthy clients, and the fi- nancial intermediaries advising them. UBS Pri- vate Banking’s products and services are aimed at encompassing the complete life cycle of the client, including succession planning and the genera- tional change. UBS Private Banking had CHF 731 billion assets under management at year-end 1999, and 9,565 staff in 80 locations worldwide. Leverag- ing its relationship with UBS Warburg and UBS Capital, UBS Private Banking is able to provide its clientele with a unique palette of financial services products. It also draws on other areas of the Group, with UBS Asset Management provid- ing investment fund management services, and UBS Private and Corporate Clients the use of its information technology platform and investment fund distribution capabilities in Switzerland. Industry trends and strategic initiatives Industry trends Despite increasing competitive pressure from es- tablished players and new market entrants, pri- vate banking continues to remain a particularly attractive business in the financial services sector. According to industry forecasts, financial assets of high net worth individuals are expected to grow worldwide at nine percent annually over the medium-term. In general, growth rates for domestic markets in Europe, North America and in Asia are expected to show even higher increases than the international cross-border business. At the same time, the private banking industry is undergoing some fundamental changes. One of the most important challenges is the changing profile of private banking clients. New wealth is growing much more quickly than inherited wealth. Clients – increasingly globally oriented and mobile – are becoming more active, less risk- averse and more comfortable with technology. These new challenges are leading to the demand for superior investment performance, innovative and sophisticated products and services, and real- time information coupled with strong advisory capabilities and multiple access points. New technologies are another opportunity for the industry. The internet will transform private banking as it enables banks to compete globally, outside traditional geographic barriers. Charac- teristics of this development are an increase in in- formation breadth and depth, new distribution channels with marginal costs of reaching clients approaching zero, and new techniques that facil- itate client segmentation and increase the level of personalization and client intimacy. Banks must view the internet as both a new channel for serv- ing existing customers and a fundamentally new way of doing business to attract customers. UBS will further strengthen its presence in this bor- derless, highly customer-focused, and technolo- gy-driven environment. In this context, UBS Private Banking sees its proven advisory strengths combined with its life- cycle view and its attention to changing client profiles as key differentiating factors in providing intimacy and customization for its clients and, ultimately, success for the business and sustain- able long term value creation for shareholders. Strategic initiatives Aligned with industry trends, UBS Private Bank- ing’s strategic initiatives in 1999 were character- ized by four main pillars: – Focus on wealthy clients with individualized requirements across a broad product range and through the entire life cycle. In the private banking industry, the demand for specific and targeted professional advice is in- creasing. UBS Private Banking has addressed the challenge by setting up special advisory teams for the different needs of certain client groups like entrepreneurs or executives. New business initiatives during 1999 include the formation of the Global Executives Group, the Sports and Entertainment Advisory Group, the Corporate Advisory Group and the Real Es- tate Advisory Group. This represents our contin- uous efforts to harness UBS capabilities across all divisions and business units to create tailor-made solutions for clients’ entire wealth positions. UBS Private Banking’s unique concept behind the Global Executives Group, established to de- liver customized solutions for executives around the world, is to take a holistic approach to wealth management that uses individualized sector and Divisional Review UBS Private Banking 31.12.1999 31.12.1998 change (%) 6,011 (24) 5,987 1,694 1,467 138 36 3,335 2,652 1,800 55 55 731 9,565 5,835 3,730 7,223 (26 ) 7,197 1,458 1,277 111 15 2,861 4,336 1,500 46 46 607 7,634 5,092 2,542 (17) (8) (17) 16 15 24 140 17 (39) 20 20 25 15 47 UBS Private Banking Assets under management Development CHF million Revenues 1 Credit loss expenses CHF billion 7 0 6 5 8 + 1 3 7 e c n a m r o f r e P 5 + y e n o m w e n t e N 8 2 + s n o i t i s i u q c a y n a p m o C 6 + s r e f s n a r t l a n o i s i v i d r e t n I Total operating imcome Personnel expenses General and administrative expenses Depreciation Goodwill amortization 2 Total operating expenses Segment performance before tax Regulatory equity used (avg) Cost / income in % 3 Cost / income in %, before goodwill amortization 3 Total 31.12.98 Total 31.12.99 Assets under management (bn) Headcount of which: Switzerland of which: Rest of world UBS Private Banking Assets under management Advisory vs. discretionary 100% 80% 60% 40% 20% 0% 25% 25% 75% 75% 31.12.99 31.12.98 1998 Total: CHF 607 billion 1999 Total: CHF 731 billion Discretionary Advisory UBS Private Banking Assets under management By asset class 100% 80% 60% 40% 20% 0% 9% 29% 28% 18% 16% 9% 26% 32% 16% 17% 31.12.99 31.12.98 1998 Total: CHF 607 billion 1999 Total: CHF 731 billion Accounts Equities Bonds UBS Investment Funds Others 1 Includes sales profit and operating income from divested companies. 2 Includes amortization of other purchased intangible assets. 3 Before credit loss expense, 1998 excluding gain from divestment of Banca della Svizzera Italiana. product expertise to manage a client’s entire wealth position. This will be achieved by com- bining investment, executive compensation and private banking expertise, and leveraging this with a particular strength in managing concen- trated equity positions. This business is also an excellent example of what can be achieved by drawing on the full spectrum of the UBS Group’s resources. The experience so far indi- cates a strong positive response from the market- place. A new approach in communicating with exist- ing and potential new clients was taken in May 1999 with the launch of Optimus, a dedicated quarterly magazine, and Optimus online, the complementary web site with updated invest- ment information daily. These communication instruments will provide more interaction be- tween UBS Private Banking and its clients. – Strengthen the division’s position in private banking in Switzerland and in international offshore centers. The traditional private banking business – pri- vate banking in Switzerland for both Swiss and international cross-border clients – remains of critical importance to the UBS Group. 1999 was characterized by strategic developments such as expansion of our services in London, Monaco, Luxembourg, New York and Singapore where existing capacities were increased in line with client demands and the potential to secure future growth. In March 1999, UBS acquired Bank of Amer- ica’s international private banking activities in Europe and Asia which added CHF 5 billion to UBS Private Banking’s assets under management. The business was completely integrated into ex- isting UBS entities during 1999. – Build onshore private banking businesses out- side Switzerland organically and through selective acquisitions. Another key strategy is the expansion of onshore private banking outside Switzerland, particularly in Continental Europe. Thus, UBS Private Banking opened new offices during 1999 in Spain (Barcelona, Madrid, Marbella), Italy (Bologna, Rome), France (Paris) and its seventh office in Ger- many (Stuttgart). At the same time, the division strengthened its existing onshore private banking platforms in major financial centers, such as Lon- don, New York, Singapore and Hong Kong. UBS Group announced a reorganization of wealth management businesses in February 2000. Onshore private banking outside Switzer- land has been grouped with the “e-services” ini- tiative and will be managed in the new investment banking group under the UBS Warburg brand. e- services and onshore private banking outside Switzerland are both high-potential growth busi- nesses which will be driven forward under a com- 23 Divisional Review UBS Private Banking UBS Private Banking Assets under management By currency 100% 80% 60% 40% 20% 0% 22% 25% 4% 43% 6% 26% 25% 5% 38% 6% 31.12.99 31.12.98 1998 Total: CHF 607 billion 1999 Total: CHF 731 billion CHF EUR GBP USD Others UBS Investment funds Development Swiss-authorized funds only CHF billion 5 1 0 + 1 + 1 0 2 y c n e r r u C e c n a m r o f r e P 5 7 1 1 + y e n o m w e n t e N 31.12.98 31.12.99 24 mon management structure to maximize joint product offerings and delivery mechanisms while managing costs aggressively. The new private banking and affluent clients targeted by e-servic- es and onshore private banking outside Switzer- land will be particularly attracted to the invest- ment banking style, services and brand. – Diversify available investment styles. At UBS, the investment process has historically been integrated. As a result, the detrimental im- pact of 1999 investment performance in the in- stitutional investment management franchise car- ried over into Private Banking. In an effort to un- link this concentration of investment perform- ance risk, UBS will diversify the investment styles available to its private clients. As an important step to widen the product range available to private banking clients, UBS announced in September 1999 the acquisition of Global Asset Management (GAM). GAM is a leading global diversified asset management group with operations in Europe, North Ameri- ca, Asia and Middle East. It has brought assets under management of CHF 23 billion invested in 170 mutual funds and unit trusts. The acquisition is a cornerstone of the strate- gic plans of the UBS Group, and it will be central in developing a full range of wealth management services worldwide. As announced in February 2000, GAM will be moved to the UBS Asset Management division where it will contribute di- rectly to the diversification of investment styles and help to develop “screened” access to third- party funds. UBS Asset Management will lever- age Global Asset Management’s range of mutual funds and its multi-manager system, in which it selects the top 90 out of 6,000 third-party fund providers, to enhance the range of investment styles and investment funds. With its well-estab- lished and successful investment styles, GAM will retain its approach and brand identity within UBS Asset Management. Investment funds business In 1999, UBS strengthened its international in- vestment fund franchise amidst growing popular- ity of investment funds, and retained its position as the leading fund provider in Europe. By year- end 1999, assets under management increased 15% to reach CHF 201 billion. Growth was mainly attributable to good performance. The merging of the two pre-merger banks’ fund ranges and the amalgamations due to the intro- duction of the Euro were completed successfully and led to a reduction in the number of investment funds from 214 to 148. The resulting efficiency and liquidity impact is shown in the 67% increase of the average size of our fund portfolios from CHF 815 million to CHF 1,358 million. The continuing trend towards equity invest- ments helped grow our equity funds 51% to CHF 53.2 billion. Equities is now the largest asset cat- egory of UBS Investment Funds and accounts for 26.5% of total UBS Investment Funds volume. The UBS Investment Fund Account is a proven investment service which combines the simplicity of a bank account with the advantages of invest- ing in a well diversified fund portfolio. It offers six investment risk profiles as well as customized investment plans. UBS Investment Fund Ac- counts have been well received, growing accounts by 80% to 90,000 and assets by 39% to a total amount of CHF 2.5 billion in 1999. The launch of five new investment funds generated a net in- flow of CHF 1.7 billion. Assets under management from external dis- tribution partners increased by 31% to CHF 8.8 billion, while assets of funds managed under the brand of external distribution franchises grew by 74% to CHF 5.3 billion. With the introduction of Fund Gate on the in- ternet in autumn 1999, UBS started providing clients and other internet users with detailed first- hand information on UBS Investment Funds, giv- ing access to a unique set of price and perform- ance data on a daily basis. In addition, substan- tial efforts have been undertaken to further en- hance our product offering targeted at fast grow- ing electronic sales channels. UBS Investment Funds continued to receive awards in 1999 for first-class performance. Among others, UBS has been named “Switzer- land’s Best Overall Management Group” by Standard & Poor’s Fund Services. The business model for mutual fund distribution is changing. Financial institutions selling mutual funds are moving from a proprietary product focus to an open, “best of class”, sales architecture. To concentrate all investment management business of the UBS under one management team, Divisional Review UBS Private Banking UBS Investment funds By fund category1 100% 80% 60% 40% 20% 0% 22% 23% 20% 26% 6% 3% 20% 26% 24% 20% 7% 3% 31.12.99 31.12.98 1998 Total: CHF 175 billion 1999 Total: CHF 201 billion Asset allocation funds Money market funds Bond funds Equity funds Capital preservation funds Real estate funds 1 Swiss-authorized funds only. UBS announced as part of its reorganization in February 2000 that the mutual funds business will be combined with the UBS Asset Manage- ment division. UBS will open its mutual fund ar- chitecture, leveraging GAM’s abilities described above, to create a “screened” open architecture giving clients access to third-party funds. UBS also plans to make its mutual funds increasingly available to other third-party distributors. Results discussion In 1999, UBS Private Banking results did not match the high standards expected. This is due to lower levels of client transaction activity, sub- stantial investments in the expansion of domestic private banking activities outside Switzerland, and a delay in establishing a positive trend in net new money. The pause in re-establishing this trend in net new money stems to a large extent from the inte- gration of the two pre-merger private banking franchises. This involved fundamental changes throughout the organization. By the end of July, UBS Private Banking completed one of the final steps of the merger: the complex integration in Switzerland of the information technology plat- forms of the two predecessor banks. This task was finalized in record time, and the associated disruption is now behind us. Segment performance before tax was CHF 2,652 million in 1999, while it was CHF 4,336 million in 1998. Adjusted for the gain on divest- ments of BSI-Banca della Svizzera Italiana as well as related operating revenues and expenses, seg- ment performance before tax was CHF 3,135 million in 1998. Total operating income Total operating income before credit loss expenses was CHF 6,011 million in 1999 and CHF 7,223 million in 1998. Adjusting the 1998 period for gains and operating revenues from divestments, total operating income after credit loss expenses was up 2%, or CHF 116 million, to CHF 5,987 million in 1999. Besides lower transaction-related volumes, revenue growth was negatively impact- ed by the effect of internally hedging net income in foreign currencies and higher intra-Group in- centives paid for the distribution of investment funds. Assets under management Assets under management increased 20%, or CHF 124 billion, to CHF 731 billion in 1999. Strong markets, especially in Europe, the United States and in the technology sector, as well as the stronger US dollar led to a performance increase of CHF 85 billion for the full year. In addition, two acquisitions – Global Asset Management and the international private banking operations of Bank of America – accounted for a further CHF 28 billion and interdivisional transfers brought another CHF 6 billion. Net new money contributed CHF 5 billion, which was lower than expected due to merger disruption and the effects of some underperforming investment portfolios. Total operating expenses Total operating expenses, adjusting for divest- ment-related operating expenses increased 22%, or CHF 599 million, to CHF 3,335 million in 1999 and was to a large extent related to the ex- pansion of front-line staff as well as related in- frastructure investments. Cost growth is expect- ed to flatten out during 2000, and UBS Private Banking expects these new investments to deliver sustainable profits in the medium term. Personnel expenses increased 23%, or CHF 312 million, to CHF 1,694 million in 1999 mainly because of the headcount rise of 25% or 1,931 people. Growth was in line with our ex- pansion strategy in onshore business outside of Switzerland. This includes the recruitment of top industry professionals as well as graduates and post-graduates trained through a “best in class” formal Private Banking education pro- gram. In addition to growth in client-facing staff, the division has increased its logistics sup- port and added 501 people due to the GAM ac- quisition. General and administrative expenses increased 19%, or CHF 230 million, to CHF 1,467 million in 1999 as the division supported expansion with necessary infrastructure investments, for example with new systems and offices. Depreciation and non-goodwill amortization increased 35%, or CHF 36 million, to CHF 138 million in 1999. Goodwill amortization (not in- cluding GAM) increased CHF 21 million to CHF 36 million in 1999 because of the acquisition of the international banking operations of Bank of America. 25 Outlook In February 2000, UBS announced the reorgani- zation of its wealth management businesses to focus more on meeting clients’ needs. Swiss and international cross-border private banking will form a core part of the new business group UBS Switzerland. Private banking will continue to follow the broad set of initiatives mentioned above. At the same time, this new structure will re-emphasize the strength and core values of traditional private banking: safety, privacy and service. Further- more, it will enable the management of all Swiss- based clients under one unified team. UBS Switzerland will benefit from an integrated Swiss- based infrastructure with the potential for shared distribution for both affluent and private bank- ing clients. UBS remains the global leader in private bank- ing. With the broad set of strategies set forth above, we will leverage the fundamental strength of our core wealth management businesses in Switzerland and abroad to realize their full potential in this particularly attractive industry segment. Divisional Review UBS Private Banking 26 UBS Warburg Divisional Review UBS Warburg As the investment banking Mission and business description and securities division of the Group, UBS Warburg provides wholesale finan- cial and investment prod- ucts and advisory services to institutional, corporate and sovereign clients world-wide. 1999 was a year of strong financial performance when the division refocused on its core clients and products, made significant invest- ments in talent and tech- nology, and positioned itself to respond quickly and effectively to chang- ing client demands and market opportunities. Mission UBS Warburg is a leading global investment bank and securities firm in terms of client franchise and financial servicing capabilities. The division aims to provide UBS shareholders with a return on eq- uity consistent with the leaders in the industry. It plans to make this position sustainable by selec- tively investing in talent, taking advantage of new market opportunities and extending its client reach. UBS Warburg’s profitability is based on a solid institutional client franchise, a growing cor- porate client franchise, and a clear strategic focus for all business areas. Business focus As the investment banking and securities division of the Group, UBS Warburg provides wholesale financial and investment products and advisory services to institutional, corporate and sovereign clients world-wide. It focuses on core businesses that have attractive risk-return profiles and a solid basis for growth, and is organized around four main global product areas: – Equities – Treasury Products – Fixed Income – Corporate Finance Its investment banking revenues place UBS Warburg in the top group of equivalent global competitors. Group reorganization The UBS Group announced in February 2000 that these activities will be joined by private equity, international on-shore private banking and e-services to form a leading global invest- ment services firm under the UBS Warburg brand. The division will be strongly placed to take ad- vantage of the considerable growth potential re- sulting from putting investment banking and in- vestment services activities for international clients under one roof. Private, institutional and corporate clients will be serviced via complemen- tary distribution channels creating the potential for considerable cost and revenue synergies. Strategy and initiatives Institutional client franchise UBS Warburg has a very large and profitable in- stitutional client franchise. The institutional client business in equity products puts the divi- sion in the top three globally with a significantly improved market share in 1999 across cash and derivative products. UBS Warburg’s strength in selling and servicing cash and derivative fixed in- come products with institutional clients is widely recognized. UBS Warburg believes that it is par- ticularly well-positioned to leverage its research capability with institutional clients, and it will continue to strengthen its research capabilities in targeted sectors and regions. In the rapidly changing investment banking and securities industry, client connectivity and the application of leading technology is critical for the future success of the institutional business. UBS Warburg is focused on developing and delivering leading client connectivity capabilities. It is also improving its existing infrastructure with new technologies to extract additional trading value and cost efficiencies, and is leading the in- dustry in transforming our business to an elec- tronic basis. Central to this is the IBOL (Invest- ment Banking On-Line) website. This will be a true home page – the only place a client needs to go to deal with UBS Warburg. From this page, UBS Warburg’s clients can access all content elec- tronically: research, prices, analytic tools, and trade ideas. They can also link to the division’s execution capabilities across all products. By the end of 1999, UBS Warburg had made some significant achievements in e-commerce: – In Equities, 50 of the largest clients executed 15% of their volume electronically. – In Treasury Products, half of all client trans- actions were electronically priced, captured, settled and routed to the division’s risk en- gines. – In Euro Commercial Paper, 75% of the divi- sion’s clients were accessing prices on-line at UBS Warburg’s ground-breaking ECP website. – To support clients in all new endeavors, UBS Warburg has established a Global Help Ser- vice Desk for clients 24 hours per day, 6 days per week. – UBS Warburg has also invested heavily in securities processing power and is currently dealing with 100,000 domestic and cross- border trades per day processed straight through, with the capacity for a five-fold increase. Key strategic initiatives to develop the institu- tional client franchise include: 27 Divisional Review UBS Warburg 28 CHF million Corporate finance Equities Fixed income Treasury products Non-core Business Total Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Goodwill amortization 1 Total operating expenses Segment performance before tax Regulatory equity used (avg) Return on equity Return on equity before goodwill amortization Cost / income in % 2 Cost / income in % before goodwill 2 Headcount of which: Switzerland of which: Rest of world 31.12.1999 31.12.1998 Change (%) 2,050 5,916 2,460 1,801 682 12,909 (330) 12,579 6,861 2,448 652 134 10,095 2,484 10,050 25 26 78 77 12,694 1,768 10,926 1,665 2,572 399 2,351 6,987 (500 ) 6,487 4,333 2,483 535 157 7,508 (1,021 ) 13,300 (8 ) (6 ) 107 105 13,794 2,502 11,292 23 130 517 (23) 0 85 (34) 94 58 (1) 22 (15) 34 (24) (8) (29) (3) 1 Includes amortization of other purchased intangible assets. 2 Before credit loss expense. – Strengthening existing client relationships using electronic tools. – Enhancing cross-product marketing. – Capturing value from increased client volume flow. – Improving processing efficiency. Corporate client franchise UBS Warburg is committed to building a stronger position in its corporate client franchise, and in- creasing its market share of the global fee pool, particularly in its ten targeted global industry sectors. The division is a leading player in the Eurobond market and the top competitor in its target market segments in international bond origination. Its position in international equity origination slipped slightly in 1999, but the divi- sion is confident that it has the necessary re- sources and client relationships in place to main- tain a position in the top five on an ongoing basis. UBS Warburg has an increasingly credible global M&A franchise and is well positioned to grow. It will continue to selectively invest in corporate ad- visory talent over the next two years to strength- en its position. UBS Warburg is not yet a major provider of leveraged finance but has made sev- eral key hires in 1999 to build the business, and is committed to strengthening its advisory, re- search and distribution capabilities in both the US and Europe. Key strategic initiatives to develop the cor- porate client franchise include: – Investment in targeted global sector-based coverage that is tightly aligned to Equity Re- search and marketing initiatives. – Expansion of corporate coverage and presence in the major growth markets of Continental Europe. – Building Leveraged Finance origination and distribution capabilities in US and Europe. – Positioning the division to become the interna- tional debt issuer of choice for US corporates. Results discussion In 1999, UBS Warburg generated gross revenues of CHF 12,909 million, and segment results be- fore tax of CHF 2,484 million. The division en- joyed exceptionally strong revenues across all business areas with the exception of Treasury Products, and our profitability was driven by the division’s solid client franchise. Our Equities business, with gross revenues of CHF 5,916 million, continued to increase its overall market share and now ranks as one of the Divisional Review UBS Warburg Developments in UBS Warburg market VaR Reductions in UBS Warburg international credit portfolio 350 300 250 200 150 100 50 0 335 303 260 CHF million 222 210 198 224 6.98 9.98 12.98 3.99 6.99 9.99 12.99 350 300 250 200 150 100 50 0 268 200 176 CHF billion 150 132 107 99 6.98 9.98 12.98 3.99 6.99 9.99 12.99 Market risk: VaR (10-day holding period 99% confidence level). On-balance-sheet loans and off-balance-sheet committed facilities. leading global equities houses in both cash and derivative markets. Compared to 1998, revenues increased 130%, reflecting robust client flows and a strengthening of the UBS Warburg fran- chise with institutional and corporate clients. 1998’s results also included the loss of CHF 762 million in the pre-merger Global Equity Deriva- tives (GED) portfolio. UBS Warburg continued to reorient its Fixed Income business in 1999 to be more client fo- cused and this resulted in revenues of CHF 2,460 million, with strong client flows driving both in- vestor and issuer activities. As prior year revenues of CHF 399 million included losses from Long Term Capital Management of CHF 793 million and substantial losses in emerging markets, a comparison between 1999 and 1998 results is not meaningful. However, allowing for these excep- tional items, all parts of the business showed sig- nificantly improved profitability. The Treasury Products business produced rev- enues of CHF 1,801 million, primarily from the Foreign Exchange and Cash & Collateral Trad- ing businesses. The Foreign Exchange business, while continuing to be profitable, experienced re- duced levels of activity as a result of the intro- duction of the Euro, and narrowing margins from increased competition in the global markets. The division’s precious metals business was adversely impacted by the dramatic volatility in the gold market in the fourth quarter of 1999. Corporate Finance, which includes the Advi- sory, Equity Capital Markets and Debt Capital Markets results, delivered revenues of CHF 2,050 million, with strong performance in M&A revenues, and contributions from Equity and Debt Capital Markets in line with expectations. Market risk Market risk exposure, as measured by Value at Risk (VaR) has decreased primarily as a result of the reduction in the GED portfolio risk. UBS Warburg remains committed as an active player in the markets. We will also continue to take ap- propriate risk positions where it is required to fa- cilitate our clients needs. Non-core activities Non-core businesses generated revenues of CHF 682 million, which includes Global Trade Fi- nance, the pre-merger Global Equity Derivatives portfolio and lending to non-core clients. UBS Warburg’s program of exiting specific non-core businesses has yielded positive results and is on track in terms of timing and reduction in overall risk. The sale of the international Global Trade Finance business to Standard Chartered was completed in the second quarter of 1999 and generated a CHF 200 million gain for the divi- sion. All inventory positions from the pre-merg- er Global Equity Derivatives portfolio are now on the divisional risk management platform. The portfolio is closely monitored and the sensitivity to extreme stress events has been significantly reduced. UBS Warburg is also reducing its credit expo- sure through a selective reduction in lending to non-core clients. The international credit port- folio has been reduced as planned and at end of December stood at CHF 98.8 billion. Completion of merger With the integration of the investment bank now completed, the benefits of the merger have been 29 Divisional Review UBS Warburg 30 significant in terms of increased revenues, re- duced headcount, control over costs and lower utilization of regulatory equity. CHF million 1 1999 1997 Change in % Revenue 12,579 10,588 Total costs, including bonus 9,309 10,095 Profit before tax 1,279 2,484 12,694 18,620 Permanent headcount Average regulatory equity used 10,050 13,600 Return on average reg. equity 24.7% 9.4% 18.8 8.4 94.2 (31.3 ) (26.1 ) 1 Except headcount. League tables and market rankings UBS Warburg’s overall performance in 1999 has reconfirmed its position as one of the top five global investment banking and securities firms in primary and secondary markets across all corpo- rate and institutional client activities, as well as the leader in Europe. UBS Warburg is a leading player in the Eu- robond market and the top competitor in its target market segments in international bond origination. It is ranked 2nd in Eurobonds with a market share of 10.5%. In the specific international bond mar- ket segments that the division has chosen to pursue aggressively, UBS Warburg was ranked in first place with a 7.6% market share. The division’s position in international equi- ty origination slipped somewhat in 1999 to 6th, due in part to a small number of large trans- actions in which it was not involved, but the division is confident that it has the necessary resources and client relationships in place to maintain a position in the top five on an ongoing basis. In Mergers & Acquisitions, UBS Warburg has an increasingly credible global franchise and is well positioned to grow. It had a leading role in the largest deals announced in 1999, including Sprint / MCI WorldCom (sole advisor to Sprint) and Vodafone AirTouch / Mannesmann (joint ad- visor to Vodafone AirTouch). The division’s ranking in 1999 on completed transactions was 10th globally with a market share of 6.6%, and on announced transactions 6th with a market share of 14.0%, the latter reflecting the increase in market activity and its role as advisor in the second half of the year, with many of these deals scheduled for completion in early 2000. Togeth- er with its global research and growing corporate client franchise, UBS Warburg will reinforce its position in ten targeted global sectors. It will con- tinue to selectively invest in corporate advisory talent over the next two years to strengthen its position. In the Institutional Investor Global Research Team survey, UBS Warburg was ranked in 4th po- sition and was lauded for its innovative approach in the effective marketing of global research to US investors, the result of investments in talent and technology over the last few years in research and corporate finance. The Reuters / Tempest surveys rank securities firms on the quality of research and service to fund managers across all major regions. In the 1999 surveys, UBS Warburg was ranked No. 1 in European Large Cap Stocks, No. 1 in Hong Kong and China, No. 2 in UK Large Cap Stocks and No. 2 in Global Emerging Markets. Cost controls UBS Warburg’s personnel costs were significant- ly higher in 1999 due primarily to performance- related compensation directly tied to the strong divisional results for the year. The division remains committed to investment in leading edge technology and top quality talent. Cost control will emphasize improving overall ef- ficiency such that revenue growth exceeds any growth of non-personnel costs. The division will focus on managing personnel and non-personnel costs as a percentage of net revenues. In addition, the UBS Warburg Investment Committee has carried out a rigorous review of all change programs to ensure that investments in the UBS Warburg infrastructure are fully aligned with the strategy of the business. Outlook The most important trend affecting the invest- ment banking and securities industry is the con- tinued and substantial growth of the industry. Client sophistication and increased competitive pressures are squeezing industry margins, but volume growth is consistently and significantly outpacing this trend, and overall market fee pools are increasing steadily. Other significant trends include globalization and consolidation, the changing nature of com- petition, technology, the internet, funds available for investment, and communications and pro- Divisional Review UBS Warburg cessing power. The European single market con- tinues to drive explosive growth in issuance ac- tivity. As a leading client-focused investment bank- ing and securities organization with a unique global reach, UBS Warburg is very well posi- tioned to take advantage of all of these trends. With revenues of over CHF 12.5 billion, UBS Warburg represents a business of size, scale, scope and franchise value that compares well with other leading investment banks. UBS War- burg is well positioned for further growth and has the financial strength to fund key strategic initiatives out of current profitability. 31 Divisional Review UBS Private and Corporate Clients UBS Private and Corporate Clients 1999 was a successful Mission and business description Strategy and initiatives year for UBS Private and Corporate Clients. Pre-tax profits increased marked- ly as growth in revenues outpaced the rise in costs. 1999 was also dis- tinguished by the suc- cessful, record-setting integration of the pre- merger technology plat- forms as well as the launch of several well- received multi-channel initiatives. As announced in February 2000, UBS Private and Corporate Clients will be combined with Swiss and interna- tional offshore private banking to form a new business group, UBS Switzerland, putting UBS in a strong position for future growth. 32 The overriding mission for the UBS Private and Corporate Clients division is to further develop the most profitable bank serving private and cor- porate clients in Switzerland. UBS Private and Corporate Clients’ leading position in the Swiss market and its access to other Group divisions enables it to offer a com- prehensive range of products and services to a broad client base. As of year-end 1999, UBS Pri- vate and Corporate Clients had more than four million individual clients. Its client base is seg- mented into three million private clients with assets up to CHF 50,000, and one million afflu- ent clients with assets between CHF 50,000 and CHF 1 million. The anticipated growth of the affluent client segment is a tremendous oppor- tunity and a particular focus of the division’s energies and initiatives. The corporate clients segment consists of some 180,000 small and medium sized businesses. It also includes more than 10,000 larger corporate clients, with complex financial requirements. The 170 top-tier corporate clients are frequent users of capital market services. UBS Private and Cor- porate Clients provides corporate clients not only the services of a credit bank, but also structured finance, capital market and investment advisory services. In addition, the division offers payment and custodial services to some 1,800 banking insti- tutions world wide. UBS Private and Corporate Clients had CHF 439 billion in assets under management as well as CHF 165 billion in loans at year-end1999. Further detail on the credit portfolio can be found in the Credit Risk section of the Review of Risk Manage- ment and Control on pages 48–54. On the logistics side, UBS Private and Corpo- rate Clients provides a wide range of services to all divisions in Switzerland. Besides information technology and operations, UBS Private and Cor- porate Clients also supports other divisions in Switzerland as a major provider of settlement and payment services, and thus contributes signifi- cantly to the realization of synergies. Eighteen months after the legal consummation of the merger, UBS Private and Corporate Clients is especially pleased to have successfully aligned its entire product offering, resegmented its client base and migrated more than two million clients to a single platform. UBS Private and Corporate Clients’ strategy UBS Private and Corporate Clients is committed to providing its clients with innovative, personal- ized products consistently meeting high stan- dards, as well as optimizing customer-related processes from front to back. UBS Private and Corporate Clients’ focus on efficiency will result in further standardization of services, leading to an increased implementation of alternative distribution channels, such as the in- ternet, phone centers and Automatic Teller Ma- chines (ATM’s). The current branch network is di- vided into three different zones: one for ATM’s, one for the counter area and a third one dedicat- ed to advisory services. The division intends to move forward to a two-zone concept, slowly elim- inating the counter area. By doing this, it will cre- ate a clear cash services oriented zone and a very flexible and increasingly important advisory zone. In addition, UBS Private and Corporate Clients will further optimize its logistics function to realize additional synergies in the provision of services to all divisions in Switzerland. Organizational changes In October 1999, a new organization structure was implemented in UBS Private and Corporate Clients. Two dedicated business areas, individual clients and corporate clients, concentrate on busi- ness origination and allow the sales force to focus exclusively on the recognition of customer needs, market penetration and the exploitation of mar- ket opportunities. The Risk Transformation and Capital Man- agement business area was newly created to as- sume responsibility for managing capital alloca- tion including equity and equity participations, as well as asset and liability management of the division in cooperation with the Group Treasury. Risk Transformation and Capital Management is the owner of the division’s loan portfolio, includ- ing non-performing assets. One of its key respon- sibilities is the active management of recovery po- sitions. By implementing leading-edge portfolio management principles, Risk Transformation and Capital Management is able to optimize risk- adjusted returns. In addition, close cooperation with UBS Warburg facilitates the exploitation of secondary market opportunities such as securiti- zation. Divisional Review UBS Private and Corporate Clients CHF million 31.12.1999 31.12.1998 Change (%) Individual clients Corporate clients Risk transformation and capital management 1 Operations Others Total Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Goodwill amortization 2 Total operating expenses Segment performance before tax Regulatory equity used (avg) Cost / income in % 3 Cost / income in % before goodwill amortization 3 Assets under management (bn) Headcount of which: Switzerland of which: Rest of world 4,553 1,855 330 313 142 7,193 (1,050) 6,143 3,363 1,061 555 2 4,981 1,162 8,550 69 69 439 24,098 24,050 48 4,785 1,728 448 64 7,025 (1,170 ) 5,855 3,238 1,025 680 4 4,947 908 8,250 70 70 434 24,043 23,989 54 (5) 7 0 (30) 122 2 (10) 5 4 4 (18) (50) 1 28 4 1 0 0 (11) 1 Newly created business area in October 1999. Annualized income (1998 included in individual clients and corporate clients). 2 Includes amor- tization of other purchased intangible assets. 3 Before credit loss expense. To ensure the complete segregation of credit risk management activities as well as a uniform credit policy, the function of an independent Chief Credit Officer was created. This allows for increased efficiency by standardizing and central- izing credit decisions and frees up the business to concentrate on origination. Strategic projects portfolio Good progress has been made in the implemen- tation of the Strategic Projects Portfolio. This has resulted in a considerable contribution to net profit. The majority is attributable to revenue en- hancement initiatives. The continued implemen- tation of effective risk-adjusted pricing had a bet- ter than expected impact. The unified pricing structure on securities accounts as well as the very successful placement efforts of investment funds further increased operating income. Cost reductions have primarily been achieved by re-engineering processes in the logistics and in- frastructure areas as well as from positive effects of the multi-channel strategy. In the upcoming year, additional cost savings will be achieved by realizing IT-related synergy potential, by in- creased momentum in the division’s redundancy program and by implementing re-engineered business and logistics processes. On the customer side, UBS Private and Corporate Clients will focus more on advisory and customized services, both for individual clients and corporate clients. The division will also further optimize its credit product portfolio. Tight control and periodic reviews by top management will help to achieve the timely realiza- tion of these initiatives. Distribution channels In line with announced plans, branch closures proceeded during 1999, and by year-end some 173 branches have been closed, 31% of the pre- merger branch network. In total, the physical distribution network at year-end 1999 consisted of 385 locations. The division intends to further rationalize the network over the next two years. Following general trends, alternative distribu- tion channel usage increased significantly. During the last quarter of 1999, UBS focused on pushing forward its alternative distribution, launching new telebanking products as well as new pricing schemes within online banking. Overall UBS reached more than 450,000 UBS 24h-Banking contracts in December. On the Phonebanking side, calls over the Interactive Voice Response System doubled between June and December. Thirty percent of all payment orders are now 33 Divisional Review UBS Private and Corporate Clients UBS Private & Corporate Clients AuM by asset category in CHF billion Total 4351 125 310 Savings/Deposit accounts Securities accounts 1 Banks AuM of CHF 4 billion are not included. UBS Private & Corporate Clients AuM by segment in CHF billion Total 4351 2 223 210 handled through electronic banking channels. At the end of 1999, eleven percent of all UBS Private and Corporate Clients’ stock exchange transac- tions were made through UBS 24h-Banking. In October, UBS launched significant and well- received electronic banking initiatives. After the October launch of UBS’s exclusive personal finan- cial management software UBS Quicken, more than 15,000 packages were sold by December. Small and medium sized entreprises (SME’s) Aventic AG, with share capital of CHF 30 mil- lion, closed its first year successfully. This 100% UBS owned company is designed to assist small and medium sized businesses in financing inno- vative products and services. In 1999 more than 300 requests for capital and finance were reviewed, and more than 100 were passed on to Aventic itself or other venture capi- tal companies, or are still in the review process. Aventic holds shares in seven Venture Capital Funds, mainly in the sectors of biotechnology, in- ternet and medical technology. Besides that, Aventic manages a portfolio of direct capital en- gagements in Swiss SME’s, mostly industrial and technology businesses. The book value of the portfolio by the end of 1999 exceeded CHF 60 million with a commitment to an additional CHF 35 million in funding. Corporate clients Individual clients Recovery 1 Banks AuM of CHF 4 billion are not included. Results discussion The results of UBS Private and Corporate Clients were strong in 1999. Segment performance be- fore tax increased 28%, or CHF 254 million, to CHF 1,162 million. Higher operating income, lower credit loss expenses and rigorous cost con- trol led to this favorable result. Total operating income Total operating income increased 5% or CHF 288 million, to CHF 6,143 million in 1999. This im- provement was primarily due to higher margins on interest-related business, such as mortgages, as well as the first full-year impact of the amalgama- tion and repricing of products from the two former banks.Furthermore,the improved quality of the loan portfolio resulted in lower credit loss expenses. It is important to note that UBS Private and Corporate Clients’ results are dependent on in- terest-related business, which contribute almost 60% of operating income. The increased propor- tion of affluent clients will reduce dependency on the interest-related business in the future. Assets under management Assets under management increased CHF 5 bil- lion to CHF 439 billion from the prior year level of CHF 434 billion. This figure includes assets of the banks business area, which are held in trans- action accounts, are naturally volatile, and are not a core focus of UBS Private and Corporate Clients. Excluding this particular asset category, assets under management increased CHF 28 bil- lion, or seven percent, to CHF 435 billion. This is mainly due to positive performance of the Swiss stock market and to currency effects. Total operating expenses Despite tremendous efforts in completing tech- nology platform integration, UBS Private and Corporate Clients’ total operating expenses re- mained almost stable at CHF 4,981 million, an increase of one percent, or CHF 34 million. Personnel expenses and general and adminis- trative expenses both increased by four percent. These increases are due to the IT integration work, work related to the Year 2000 transition and the costs associated with the shift of the Swiss Trade Finance business from UBS Warburg. In addition, the positive development of the per- formance led to higher performance-related com- pensation. Depreciation decreased 18%, or CHF 125 million, to CHF 555 million in 1999. Headcount Headcount for the period increased 55, or 0.2%, to a year-end level of 24,098 comparing to 24,043 for 1998. By mid-year 1999, the Swiss Trade Fi- nance business was transferred from UBS Warburg to UBS Private and Corporate Clients with some 405 employees. Taking this transfer into account, headcount was reduced in 1999 by 350, the ma- jority of which occurred in the fourth quarter of 1999 as employees leaving the bank were not re- placed. This development is in line with expecta- tions for the realization of merger-related savings. Loan portfolio The loan portfolio remained stable at a level of CHF 165 billion. Continued implementation of risk-adjusted pricing has led to improved margins. 34 Divisional Review UBS Private and Corporate Clients UBS Private & Corporate Clients Loan portfolio by segment in CHF billion Total 165 21 68 76 Corporate clients Individual clients Recovery With regard to the recovery portfolio, major emphasis has been placed on workout initiatives. This effort has proved to be successful and re- duced the overall recovery positions by 20%, from CHF 26 billion for 1998 to CHF 21 billion for year-end 1999. As a result, the quality of the loan portfolio continued to improve. Mortgages account for 70% and commercial loans 30% of the total loan portfolio. As 50% of all mortgages relate to lower risk single family homes and 68% are fixed-rate mortgages, the structure of the mortgage portfolio has proved to be very stable compared to 1998. Outlook With the IT integration complete, UBS Private and Corporate Clients expects its cost savings pro- gram to gain further momentum in the coming year. Furthermore, the division’s employees are now able to concentrate completely on business growth. Together with its strong market position in Switzerland and the initiatives from the Strate- gic Project Portfolio, we remain confident that the division can continue to enhance its profitability. The organizational changes announced in February are focused on re-establishing positive momentum in the private banking business after a pause in 1999. Combining Swiss-based onshore and offshore private banking with individual and corporate client banking in Switzerland will unlock revenue synergies and cost efficiencies for the UBS Group. The strength and merit of tradi- tional Swiss banking expertise, an integrated Swiss-based infrastructure and a shared distribu- tion network will all contribute strongly to real- izing these goals. 35 Divisional Review UBS Asset Management UBS Asset Management UBS Asset Management Mission and business description Strategy and initiatives is one of the world’s lead- ing institutional asset managers, and among the most international. During 1999, equity markets were unfavorable to some of the funda- mental value-driven styles which the division applies to the majority of its clients’ portfolio, having a negative impact on assets under manage- ment development and earnings. Strategically, several initiatives were started during the year to diversify and broaden global investment capa- bilities and expand the division’s presence in tar- geted growth markets in Europe and Asia-Pacific. 36 UBS Asset Management is a leading global insti- tutional asset manager, with strong market posi- tions in the US, UK and Switzerland. It is also one of the largest active foreign managers in Japan. The division has a well-diversified client base in- cluding public and corporate pension funds, foundations and endowments as well as central banks. On behalf of UBS Switzerland, it also manages UBS investment funds. Investment capabilities are based on compre- hensive proprietary research in major equity, fixed income and currency markets around the world. The principal method of delivering value is to identify periodic discrepancies between mar- ket price and investment value and turn them to clients’ advantage. Investment solutions are tailored to clients’ investment needs based on global investment capabilities. Mandates range from global asset allocation portfolios to single country equity or fixed income portfolios or alternative investments such as private equity and real estate. Building on significant shares within the US, UK and Swiss markets and the breadth and depth of its investment capabilities, the division’s mission is to become the premier global institutional asset management firm. “Premier” means being among at least the top five companies in terms of market share position in core markets, in the top third in the industry in investment performance, and being a recognized thought leader and trend setter. While financial performance this past year was disappointing, UBS Asset Management ex- pects to fulfill its mission, the return of profit growth in line with the industry by protecting and strengthening the client franchise, pursuing tar- geted growth initiatives and expanding invest- ment capabilities. A reorganization of the UBS Group was an- nounced in February 2000. With the transfer of the Investment Funds and Global Asset Manage- ment areas of UBS Private Banking, all asset man- agement capabilities of the Group are now under UBS Asset Management’s responsibility which will enable a more aggressive exploitation of global mutual fund and defined contribution opportuni- ties and the implementation of an open, but screened, architectural platform for UBS private clients. During 1999, the management structure was re- aligned upon the arrival of Peter Wuffli as Chief Executive Officer. Subsequently, the UBS Brin- son Division was renamed UBS Asset Manage- ment and a new, more client-centric business model was developed and implemented to meet the increasingly differentiated needs of our clients. A core element of the division’s strategy is to pursue growth by increasing market shares in the growth areas of Europe and Asia-Pacific, and in attractive segments globally. It will also pursue style diversification opportunities, organically or through acquisition, when economically attrac- tive. Initiatives Regional business areas provide the leadership and flexibility to pursue local growth initiatives in the context of the global strategy. In Europe, outsourcing solutions for banks and life in- surance companies, including third-party mutu- funds and sub-advisory assignments are al being developed. Also, focusing on Germany, France and Italy, the division is developing onshore fund products. Similarly, in Japan, the platforms are being strengthened in order to capture attractive institutional growth oppor- tunities and distribute Japanese investment funds. Defined contribution opportunities are being pursued in the US and globally within the context of the Group’s overall asset gathering strategy. In 1999, the commitment to the broadening of investment capabilities was demonstrated through the acquisition of Allegis Realty In- vestors LLC. Allegis, a firm with top-quartile industry performance, has more than 20 years experience managing real estate investments for institutional investors. Renamed UBS Brinson Realty Investors LLC, it will provide integrated real estate investment services to clients. Tailored plans are being developed to address UBS Asset Management’s largest clients’ local and global investment needs. With the expansion and refinement of global investment capabilities and local delivery platforms, the division’s abili- ty to deliver value-added solutions to these clients should be unprecedented. Divisional Review UBS Asset Management 31.12.1999 31.12.1998 Change (%) 903 193 1,096 0 1,096 444 177 29 113 763 333 160 70 59 574 376 198 1,653 277 1,376 968 195 1,163 0 1,163 454 154 29 78 715 448 100 61 55 531 360 171 1,497 266 1,231 (7) (1) (6) – (6) (2) 15 0 45 7 (26) 60 8 4 16 10 4 12 Employees by region (1999) Total: 1,653 employees 12% CHF million Institutional Non-institutional Total Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Goodwill amortization 1 Total operating expenses Segment performance before tax Regulatory equity used (avg) Cost / income in % Cost / income in % before goodwill amortization Assets under management (bn) Institutional Non-institutional Headcount of which: Switzerland of which: Rest of world 1 Includes amortization of other purchased intangible assets. 36% 52% Europe, Middle East & Africa Americas Asia Pacific Institutional assets under management Development CHF billion 6 7 3 0 1 + s n o i t i s i u q c A 8 5 + e c n a m r o f r e P 0 6 3 2 5 – y e n o m w e n t e N Total 31.12.98 Total 31.12.99 Institutional assets under management By client mandate 100% 80% 60% 40% 20% 0% 9% 34% 23% 34% 4% 41% 23% 32% 31.12.99 31.12.98 1998 Total: CHF 360 billion 1999 Total: CHF 376 billion Private markets Asset allocation Fixed income Equity Results discussion The division’s pre-tax performance year-on-year declined by 26%, or CHF 115 million, to CHF 333 million. Results were impacted by an increase in non-cash charges related to the buyout of the former joint venture with the Long-Term Credit Bank of Japan (LTCB). Excluding non-cash de- preciation and amortization, the division’s oper- ating profits before tax showed a decline of 14%. Total operating income Overall, total operating income declined by 6%, or CHF 67 million, to CHF 1,096 million in 1999. Institutional revenues decreased 7%, or CHF 65 million, to CHF 903 million, primarily attributa- ble to the UK business. The institutional revenue development reflects a slight decline in average in- stitutional assets between 1998 and 1999, as gains from performance and currency were offset by client attrition related to the merger and perform- ance issues in certain mandate types, with the ma- jority of the attrition concentrated in Europe. While average non-institutional assets in- creased by 18%, non-institutional revenues de- clined slightly to CHF 193 million as a result of new interdivisional fee arrangements with UBS Private Banking. Assets under management Total assets under management increased by 8.1%, or CHF 43 billion, to CHF 574 billion during 1999. Institutional assets increased by 4.4% year-on-year, or CHF 16 billion, to CHF 376 billion, driven by investment performance, the acquisition of Allegis and growth in private markets mandates. Partially offsetting these effects, net new money fell CHF 52 billion reflecting client attrition related principally to performance issues in certain equity-related mandate types. Total operating expenses Total operating expenses versus the prior year in- creased by 7%, or CHF 48 million, to CHF 763 million. Personnel expenses declined by 2%, to CHF 444 million, reflecting decreased incentive compensation. Year-end headcount increased from 1,497 to 1,653, due to the acquisition of Allegis in December. Increases in general and adminis- trative expenses year-on-year relate to revisions in cost-sharing arrangements between UBS Asset Management and other divisions in the Group. Depreciation and amortization charges went up versus the prior year primarily due to charges re- lated to the acquisition of the LTCB joint venture in 1998. 37 Divisional Review UBS Asset Management Institutional assets under management By client location 100% 80% 60% 40% 20% 0% 49% 37% 14% 56% 34% 10% 31.12.99 31.12.98 1998 Total: CHF 360 billion 1999 Total: CHF 376 billion Europe, Middle East & Africa Americas Asia Pacific Investment capabilities and investment performance development Investment performance for 1999 was mixed for both the UBS Brinson and Phillips & Drew invest- ment areas. Led by the US market, world equity markets became increasingly driven by momen- tum during 1999, with market returns dominated by a narrow segment of technology and e-business stocks. The fundamental price / value philosophies at the core of the Brinson and Phillips & Drew in- vestment processes have led to an underweight of these stocks thereby negatively affecting invest- ment performance versus benchmarks. In the UBS Brinson investment area, while eq- uity and multi-asset portfolios lagged their bench- marks, strong returns were delivered within both fixed income and private markets, relative to fi- nancial indices and peers. Growth equity strate- gies also performed well in comparison to bench- marks. Within the Phillips & Drew investment area, returns were strong through the end of the third quarter. However, these gains were reversed in the final quarter of 1999 due to the strong share price appreciation of technology stocks in which Phillips & Drew was underweight. Outlook Recent equity investment performance in both UBS Brinson and Phillips & Drew investment areas has suffered under the momentum-driven markets of the past year. 2000 is also expected to be challenging given the uncertainty of future market developments and recent investment per- formance in certain areas. However, strategic growth initiatives in key markets and expansion of investment capabilities are expected to lay the groundwork for a return of profit growth to in- dustry levels and ensure the attainment of the mission of becoming the premier global institu- tional asset management firm. 38 UBS Capital Divisional Review UBS Capital UBS Capital’s aim is to Business profile Strategy and initiatives establish itself as the industry role model for an integrated global private equity group. During 1999, UBS Capital expanded substantially and successfully, making an important contribution to the overall success of the UBS Group. UBS Capital expanded substantially and success- fully during 1999 and will continue to make an important and growing value contribution to the overall success of UBS AG. Following the Group’s reorganization, UBS Capital is operating with the UBS Warburg business group. This is expected to further strengthen the synergies between the two businesses while maintaining the synergy links with Private Banking. During the course of last year, the private equi- ty group achieved many important objectives: the business comfortably surpassed investment tar- gets, it established new international offices, and it significantly developed its global funds strategy. Private equity offers the opportunity for above average investment returns with a typical invest- ment duration of several years. Strong capital flows into the industry have increased competi- tive pressures on market participants seeking at- tractive investment opportunities. However, UBS Capital is well positioned to take advantage of the favorable economic climate and stock market conditions to augment its position as a strong force in the industry. UBS Capital has important advantages to ensure success and is able to boast a local presence in every major industrialized region in Europe, North America, Latin America and Asia Pacific, with about 120 professionals in 13 offices worldwide. Last year, two new offices were established in Seoul and Sydney, reflecting the division’s long-held com- mitment to maintaining comprehensive local pres- ence and expertise. When coupled with the opera- tion’s global reach, the teams’ specialist knowledge allows the early identification of opportunities and their timely and effective development. UBS Capital makes medium term majority or minority investments in established or emerging unlisted companies to maximize shareholder value. By working in close partnership with man- agement, UBS Capital develops the businesses and manages these investments to optimize their performance, unlock their value and exit the in- vestment in a manner that will maximize the cap- ital gain. Although the main focus of the busi- ness’s investments is late-stage financing such as management buyouts, expansion or replacement capital, UBS Capital also targets a quarter of the portfolio toward early-stage investments in the technology and telecommunications sectors. The growing awareness of private equity as an at- tractive asset class for fund managers, coupled with widespread European industrial consolida- tion and moves to embrace shareholder value, have improved the opportunities for investment and increased the volume of funds available. The rivalry among industry professionals for poten- tial investment transactions is fierce. But despite increased competition, UBS Capital is able to leverage its unique strategic advantages and cap- italize on business synergies available throughout the UBS Group. Strategic advantages Using the Group’s own funds along with third- party investors allows UBS Capital to pursue a value strategy that differentiates it from its com- petitors. The business is not forced to invest sole- ly to meet target spend rates but considers trans- actions only if they offer fair value over the peri- od of an investment cycle. With its successful and highly qualified net- work of teams, UBS Capital is poised to become a key player in this rapidly expanding business worldwide. The main thrust of the division’s ex- pansion has focused on Western Europe and North America and is already seizing select value opportunities in Latin America and Asia Pacific. UBS Capital combines its global presence with local expertise and resources as required. In doing so, it aims to provide tailor-made solutions for cross-regional and cross-border transactions, which represent an increasingly important part of our business worldwide. To augment its competitive strengths, UBS Capital plans to gradually increase its annual in- vestment rate, targeting a portfolio book value of CHF 5 billion committed capital from UBS and CHF 5 billion from third-parties, while achieving maximum diversification in the timing and geog- raphy of earnings streams. Funds In view of the growing attention given by the in- dustry to larger transactions, UBS Capital has de- veloped plans for the formation of four regional funds – Europe, North America, Latin America and Asia. In the United States, the business re- cently launched a USD 1 billion investment fund targeting North America and Canada and a USD 39 Divisional Review UBS Capital Portfolio summary 31 December 1999 CHF billion 4.5 n b 2 1 . n b 2 . 4 4 3 2 1 0 n b 0 . 3 n b 8 1 . 8 9 . 2 1 . 1 3 e u a v l k o o B 9 9 . 2 1 . 1 3 e u a v l k o o B 9 9 . 2 1 . 1 3 9 9 . 2 1 . 1 3 e u a v l t e k r a M i n a g d e z i l a e r n U Book value by country 31 December 1999 34% 48% 3% 7% 8% European Union Switzerland Latin America Asia North America 40 CHF million Revenues Credit loss expenses Total operating income Personnel expenses General and administrative expenses Depreciation Goodwill amortization 1 Total operating expenses Segment performance before tax Regulatory equity used (avg) Cost/income in % 2 Cost/income in %, before goodwill amortization 2 Headcount of which: Switzerland of which: Rest of world 31.12.1999 31.12.1998 Change (%) 315 0 315 105 47 2 5 159 156 340 50 49 116 21 95 585 0 585 121 35 0 1 157 428 250 27 27 122 36 86 (46) – (46) (13) 34 – 400 1 (64) 36 (5) (42) 10 1 Includes amortization of other purchased intangible assets. 2 Before credit loss expense. 500 million fund targeting Latin America. Addi- tionally, two new funds have been launched in Europe. The first is Phildrew Ventures V, a GBP 330 million United Kingdom private equi- ty fund. The second is the CHF 307 million CapVis equity partners fund run by UBS Capital’s vehicle for investing in Switzerland. A European and Asian fund are expected to be launched in 2000. Group synergies UBS Capital’s strong relationship with UBS War- burg has cemented links between related business units. Deal origination, funding and optional exit strategies are just a few of the benefits. UBS Capital will also continue to work close- ly with the Group’s Private Banking unit to offer innovative solutions to company owners, partic- ularly European family businesses facing succes- sion problems. UBS Capital also offers its fund products to Private Banking clients and institu- tional investors. Portfolio UBS Capital is rapidly expanding and has a firm focus on building a globally diversified portfolio from its current book value of approximately CHF 2,993 million (compared to CHF 1,784 mil- lion at year-end 1998) to its target size of ap- proximately CHF 5 billion from the balance sheet. The 1999 investment rate target of CHF 800 million was easily exceeded with an impres- sive CHF 1,394 million of investment additions to the portfolio. The portfolio review and valuation resulted in an approximate market value of around CHF 4,155 million, compared to CHF 2,651 million at year-end 1998. This impressive growth equates to current unrealized gains of approximately CHF 1,162 million as compared to CHF 867 million at year-end 1998. The value creation for the year ended 1999, including 1999 realized gains and the increase in the portfolio’s unrealized gains, is estimated to be CHF 610 million. Risk control UBS Capital has established an innovative portfolio construction to protect its value and reduce the risk exposure by adopting the following methodology: – Geographic diversification with minimal con- centration of investments in specific locations – Diversification by industry sector to obtain a good spread between manufacturing and serv- ice sectors – Investment of a quarter of the portfolio in ear- lier-stage growth opportunities, such as tech- nology and telecommunications – Emphasis on later-stage investments, such as management buy-outs of existing businesses. Results discussion In 1999, segment performance before tax de- creased 64%, or CHF 272 million, to CHF 156 million. This reflects lower levels of realized gains and fewer divestments in full-year 1999 com- pared to full-year 1998. Divisional Review UBS Capital Total operating income Total operating income decreased 46%, or CHF 270 million, to CHF 315 million in 1999. This is within expectations and is due to the lower rate of optimal divestment opportunities and is in line with the current portfolio’s aging profile. Total operating expenses Although 1999 total operating expenses have increased by 1% from 1998, the CHF 159 million figure is still comfortably low. Operating expenses remained stable despite expansion into new regions and sectors, recruitment of new pro- fessionals, the high level of investment activity and the associated investment costs. Personnel expenses were reduced by 13%, or CHF 16 million, to CHF 105 million in 1999. As part of the restructuring related to the merger, one team from UBS Capital moved to another di- vision effective 1 January 1999. This resulted in a lower headcount during most of 1999 when compared to 1998. General and administrative expenses amount- ed to CHF 47 million and although this repre- sents a 34% increase over last year’s figure, this was mainly due to deal-related expenses. Outlook In the year 2000, UBS Capital will continue to build upon the considerable achievements made in recent years. We expect higher divestment activity in 2000 when compared to 1999. Also the private equity business will be strengthened through a portfolio diversified both by region and sector. By exploiting our unique strategic advantages, capitalizing on ex- isting synergies throughout the bank and leveraging our international presence, UBS Capital will con- tinue to be a strongly contributing franchise with- in the global integrated investment services firm. Book value by sector, including funds 31 December 1999 13% 6% 11% 20% 11% 20% 19% Energy Computer related Communications Diversified industrials Transportation Consumer related Other Book value by stage 31 December 1999 3% 15% 17% 6% 59% Expansion capital, first stage Expansion capital, second stage Management buy-out Replacement capital Other 41 Divisional Review Corporate Center Corporate Center In the context of a global, Business description integrated investment services firm, Corporate Center focuses on the long term maximization of shareholder value. It does this by helping to ensure UBS is competi- tively positioned in grow- ing market places with an optimal business model and adequate resources; by maintaining an appro- priate balance between risk and profit to provide financial stability on a Group-wide basis; and by ensuring that the divisions, while being accountable for their results, operate as a coherent and effective Group with a common set of values and principles. 42 To perform its role, Corporate Center establishes standards and principles to be applied by the di- visions, thereby minimizing staffing levels within Corporate Center itself. Corporate Center en- compasses the following Group level governance functions that cannot be devolved to the operat- ing divisions: – Group internal audit, which reports directly to the Chairman of the Board of Directors in order to ensure its operational independence. – Functions reporting to the Chief Executive Of- ficer, including human resources policies and standards; communications with staff, public and media; marketing and brand manage- ment; and the Group’s general counsel. – Functions reporting to the Chief Financial Of- ficer, including risk control; credit risk man- agement; financial control and management; Group treasury; Group strategy, and commu- nications with regulators, rating agencies, in- vestors and analysts. During 1999, the Corporate Center housed the start-up of the e-services business, which will now be brought to market by UBS Warburg. Review of 1999 During the year, the Corporate Center was reor- ganized following the decision taken by the Group Executive Board and the Board of Direc- tors to combine all risk and control functions under the leadership of the Group Chief Financial Officer. UBS was one of the first banks to recog- nize the opportunities presented by combining the controlling, risk, credit, treasury and strategic functions into a single area. These activities are all closely interrelated and are instrumental in maintaining an appropriate balance between risk and profit and allocating equity efficiently with- in the Group and among the divisions. The success of this reorganization is reflected in a number of major projects such as the refine- ment of our risk control and risk management processes, and the preparations for registering UBS with the US Securities and Exchange Com- mission and listing on the New York Stock Ex- change. In the second quarter of 1999, we formed the multi-discipline Group Strategic Analysis team to act as an objective and neutral adviser to the CEO, CFO and Group Executive Board. The team is built around three main centers of com- petence: the strategic analysis group covering business and logistics strategy and competitor analysis; the quantitative group covering risk-ad- justed performance measurement and business valuation; and the M&A group which analyzes potential acquisitions and divestments. In a market where products and services are be- coming increasingly global and commoditized, a strong brand is an important differentiator and a major competitive asset. To strengthen our mar- ket impact as an integrated investment services firm across all target groups, a review was under- taken during the year culminating in the decision to streamline and unify our brand architecture. Results discussion During 1999 the Corporate Center posted a pre- tax profit of CHF 1,382 million, versus a pre-tax loss of CHF 1,029 million in 1998. The 1998 re- sults were negatively impacted by the CHF 842 million provision 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 regarding Long Term Capital Management. During 1999, a number of significant financial events have impacted the results of Corporate Center as follows: – Pre-tax gains of CHF 1,490 million and CHF 110 million relating to the divestment of our stakes in Swiss Life / Rentenanstalt and Julius Baer registered shares, respectively. – An additional pre-tax restructuring charge of CHF 300 million in respect of the merger be- tween Union Bank of Switzerland and Swiss Bank Corporation, representing about four percent of the original CHF 7 billion provi- sion. The majority of this extra provision is due to revised estimates of the cost of lease breaks and disposals. – Additional pre-tax provisions of CHF 154 mil- lion relating to the settlement reached regarding dormant accounts and World War II related claims. When we created the corresponding provisions in 1998, we expected a certain level of contributions from Swiss industry. In the fourth quarter, it became clear that this level of contributions was not forthcoming as expected. Divisional Review Corporate Center CHF million Revenues Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Goodwill amortization 1 Total operating expenses Segment performance before tax Regulatory equity used (avg) Headcount of which: Switzerland Rest of world 1 Includes amortization of other purchased intangible assets. 31.12.1999 31.12.1998 Change (%) 2,053 448 2,501 110 818 141 50 1,119 1,382 7,850 932 796 136 296 745 1,041 212 1,643 128 87 2,070 (1,029 ) 6,350 921 821 100 594 (40) 140 (48) (50) 10 (43) (46) 24 1 (3) 36 – The booking of pre-paid employer pension contributions of CHF 456 million. This repre- sents the recognition, in accordance with in- ternational accounting standards, of the dif- ference between previously recorded and actu- arially determined pension expenses. This pre- payment has been recognized in 1999 after the resolution of certain legal and regulatory is- sues related to the utilization of these contri- butions subsequent to the integration of the pre-merger banks’ pension plans. Revenues attributable to Corporate Center arise from the funding, capital and balance sheet man- agement, and management of foreign currency earnings activities undertaken by Group Treasury. The results of our 91.2% holding in Klinik Hirslanden AG have been fully consolidated for the first time, resulting in an increase in operating income and expenses of approximately CHF 380 million. There is no material impact on net profit. The credit loss expense booked in Corporate Center reconciles the difference between manage- ment accounting and financial accounting, that is between the adjusted expected losses charged to the divisions and the credit loss expense recog- nized in the Group financial accounts. For more detail on credit loss methodology please see pages 20–21. The underlying operational costs booked in Corporate Center have reduced compared to 1999 mainly due to the further refinement of service level agreements with the divisions. This reduction has been partially offset by costs relat- ed to the build-up of the “e-services” business area. 43 44 Review of Risk Management and Control Review of Risk Management and Control Introduction Risk Management Framework Our risk processes seek The risk process at UBS to limit the scope for adverse variations in the Group’s earnings and in particular to protect the Group from the risk of loss in the event of unlikely, but possible, stress scenarios. 46 The risk process is an integral part of UBS’s com- mitment to providing consistent high quality re- turns for its shareholders. UBS believes that the delivery of superior shareholder returns depends on achieving an appropriate balance between risk and return. This requires a management process that gives appropriate focus to risk as well as re- turns and which integrates this approach with the management of the bank’s balance sheet and cap- ital. For this reason, UBS restructured the Corpo- rate Center in the course of 1999 to establish an integrated Group-wide function under the Chief Financial Officer (CFO) to address all aspects of finance, strategic planning, risk control and bal- ance sheet and capital management. The approach to risk management and control at UBS recognizes that risk is integral to its busi- ness. Our risk processes, which have evolved over a number of years, seek to limit the scope for ad- verse variations in the bank’s earnings and in par- ticular to protect the Group from the risk of loss in the event of unlikely, but possible, stress sce- narios arising from any of the material risks which the bank faces. The Group’s Risk Policy Frame- work focuses on the procedures for managing and controlling the risks which can affect the volatili- ty of earnings from period to period, and distin- guishes between the following three types of risk: – Primary risks: risks inherent in the businesses which UBS undertakes. The principal primary risks are credit risk and market risk. – Group risks: risks which UBS faces at the Group level in managing its business and bal- ance sheet. Principal group risks are tax risk, liquidity and funding risk and residual balance sheet related interest rate risk. – Consequential risks: risks which UBS faces as a consequence of the operational activities it undertakes to provide services to customers. This is sometimes referred to as “operational risk”. Principal consequential risks are trans- action processing risk, legal risk, compliance risk, liability risk and security risk. UBS’s risk framework recognizes that an effec- tive risk management and control process de- pends on sound processes to identify risks, and to establish and maintain limits and procedures to control these risks. The Chief Risk Officer (CRO) has overall responsibility for ensuring that the limits and procedures are appropriate and are ad- hered to for risks other than credit risk. The Chief Credit Officer (CCO) has overall responsibility for ensuring that the limits and procedures are appropriate and are adhered to for credit risk. Credit risk remains the single largest risk which UBS faces. The limits and procedures are de- signed to keep UBS’s risk exposures within the parameters determined by the Board of Directors (BoD). These limits and procedures take into ac- count not only the external environment that UBS faces, but also its internal capabilities to manage the risk, including issues such as the availability of appropriate information process- ing systems and the availability of suitably quali- fied staff to manage and control the risk. The BoD establishes the risk parameters with- in which the bank operates – and reviews on at least a quarterly basis the risk which UBS as- sumes. For this purpose, the BoD sets limits both on normal earnings volatility as well as on poten- tial losses under a stress scenario. UBS’s risk appetite defines the amount of earnings volatility which the BoD deems to be acceptable in normal market conditions in order to achieve divisional growth targets. This potential volatility is meas- ured by the risk control organization using meas- ures that estimate statistically possible losses. Value at risk (VaR) methodology is the principal quantitative measure for evaluating this risk. UBS’s risk bearing capacity seeks to establish a limit to the potential scale of the loss which UBS might face in unlikely, but possible, stress situa- tions. Stress loss limits are set by the BoD taking into account UBS’s overall earnings capacity. They are set in order to protect the Group against unacceptable damage to annual earnings, divi- dend paying capability, business viability and reputation. In addition, the BoD approves the key risk policies and, through the Chairman’s Office to which Group Internal Audit reports, maintains ongoing oversight of the integrity of the risk man- agement and control processes. The responsibility for implementing the risk framework on a day-to-day basis is delegated by the BoD to the GEB. The GEB allocates risk lim- its to the divisions and monitors the aggregate risk profile on an ongoing basis. It constitutes it- self as the Risk Council and usually meets twice Review of Risk Management and Control Introduction a month with the CRO and the CCO to review outstanding risk issues, large exposures and sig- nificant transactions. In addition, the GEB has es- tablished a Group Risk Committee and a Group Governance Committee. These Committees, which meet quarterly, consist of representatives from the risk control organization at the Corpo- rate Center and from the divisions and consider issues relating to the implementation and devel- opment of the risk framework. Each division also has a risk management and control structure in place which is appropriate to its particular business profile. The CRO and CCO have risk control staff located in each divi- sion who are responsible for seeing that the divi- sion implements the Group-wide risk policies and procedures appropriately. They ensure that all risks are adequately taken into account in assess- ing the risk profile of the divisions’ business ac- tivities. The focus is on identifying those infre- quent events with a potentially severe impact. In addition, each division has its own structure of risk and governance committees. This is designed to maintain an ongoing review of the risk profile which the division faces in new business initia- tives and in large and complex transactions. It is also designed to provide that any requirement for amendments to risk policies or limits is identified and where appropriate, is escalated in a timely manner to the GEB. UBS Risk Management and Control Framework y c i l o P k s i R l o r t n o C k s i R t n e d n e p e d n I t i d u A l a n r e t n I p u o r G t n e m e g a n a M k s i R Board of Directors Group Internal Audit Group Executive Board • Group Governance Committee • Group Risk Committee Corporate Center CRO & CCO Corporate Risk Control UBS Warburg Divisional CCO Divisional CRO UBS Private & Corporate Clients UBS Private Banking UBS Asset Management UBS Capital • Divisional Risk Committees • Divisional Logistics Functions 47 Review of Risk Management and Control Analysis of Risks Analysis of Risks Credit loss expenses are a known component of the banking business and This section summarizes the main trends and de- velopments in the course of 1999 in the key risks which UBS faces. to a certain extent pre- Credit risk dictable. Our approach to credit risk management is to estimate the expected loss as accurately as pos- sible and to limit extraor- dinary stress losses. Only an accurate quantifica- tion of future credit loss expenses (expected and unexpected) allows for an optimal balance between risk and return in our credit business. Credit risk is the risk of loss resulting from the de- fault of an obligor or counterparty. UBS’s defini- tion of 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 commitments to lend money or letters of credit. Credit risk is also in- herent in derivative contracts and other traded products, such as bonds and equity investments. In view of the significance of credit risk for UBS, the approval and monitoring of new transactions giving rise to credit risk plays a central part in the risk control process. Credit approval authorities are exercised independently from the business units. Credit authority is dependent on the amount involved, quality, security and tenor of a transaction as well as on the experience and com- petence of the credit professionals entrusted with this function. Credit loss expenses are a known component of the banking business and to a certain extent predictable. In order to manage its exposure to credit risk effectively, and in particular to en- courage appropriate pricing of transactions in- volving credit, UBS measures its exposure to credit risk using a forward looking statistical es- timate of the expected loss based on the estimat- ed probability of default of its counterparties. Such estimates are based on the volume and type of exposure, the value of potential collateral or support, and the quality of each counterparty. The quality of the counterparty is expressed in a rating with a specific default probability. For this Summary of banking products exposure and credit risk results purpose, the bank classifies all counterparties into a 14 point rating scale and the transfer risk into a 15 point country rating scale. The forward- looking expected loss from credit exposures is charged to the divisions through the management accounts. This ensures that the anticipated credit risk cost is adequately taken into account and allows for a risk-neutral assessment of divisional results. Analysis of credit results The following table provides a divisional break- down of UBS’s credit exposure together with the associated annual expected loss for the periods ended 31 December 1998 and 31 December 1999 and the credit loss expense which is recorded in the financial accounts. The fact that credit loss expenses as per financial accounting were below the “Expected Loss” is evidenced in the balanc- ing item in the Corporate Center account (see ex- planation below). Since International Accounting Standards re- quire that credit losses are recognized and charged to the financial accounts on an ex-post basis as they arise rather than on the forward looking statistical basis UBS uses for performance measurement, it is necessary to reconcile these two different approaches to the measurement of is achieved credit risk. This reconciliation through an offsetting entry in the Corporate Cen- ter accounts which represents the difference be- tween the statistically estimated adjusted expect- ed loss which is charged to the management ac- counts of the divisions and the credit loss expense which is recorded in the financial accounts in ac- cordance with the requirements of International Accounting Standards. The development of the total credit loss ex- pense in 1998 and 1999 includes the effect of allocations from the special reserve pools which CHF million For the year ending Loans (gross) Contingent claims Unutilized committed lines Total banking products exposure Annual expected loss Total credit loss expense Corporate Center balancing items UBS Private Banking UBS Group 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 Corporate Center UBS Warburg UBS Private & Corporate Clients 30,532 3,427 0 33,959 24 31,1221 4,052 0 82,265 14,986 60,412 134,6971 164,743 6,187 3,444 24,749 73,839 35,174 26 157,663 330 233,285 500 174,374 1,050 164,840 3,458 8,472 176,770 1,170 474 0 0 474 305 0 0 305 278,014 24,600 63,856 366,470 1,404 330,964 32,259 82,311 445,534 1,696 956 (448) 951 (745) 1 1998 allocation between UBS Private Banking and UBS Warburg restated (transfer of 6,989 million from UBS Warburg to UBS Private Banking). 48 Review of Risk Management and Control Analysis of Risks Movements in the Special Reserve Pool (SRP) during 1998 and 1999 to date CHF million SRP balance at the beginning of the year Utilized in the first quarter 1999 Utilized in the second quarter 1999 Utilized in the third quarter 1999 Utilized in the forth quarter 1999 SRP balance at the end of the year 31.12.1999 300 0 (40) (130) (130) SRP balance at the beginning of the year Utilized in the first half 1998 Utilized in the third quarter 1998 Utilized in the forth quarter 1998 0 SRP balance at the end of the year 31.12.1998 3,609 (1,629) (303) (1,377) 300 had been established in 1996, prior to the merg- er, by both Union Bank of Switzerland and Swiss Bank Corporation. These reserves were estab- lished to absorb probable losses not specifically identified at that time but which experience in- dicated were present in the portfolio. These to- talled CHF 3.6 billion at the beginning of 1998. CHF 3.3 billion was applied against specific loan exposures during 1998 and the balance of CHF 300 million was applied to such exposures in 1999. UBS does not believe there is a current need for such allowances. Following these allo- cations the credit loss expense incurred in 1998 was CHF 951 million and in 1999 CHF 956 mil- lion. Composition of credit risk Credit risk is assumed, as an integral part of their business, by UBS Warburg, UBS Private and Cor- porate Clients, and to a lesser extent by UBS Pri- vate Banking. The composition of UBS’s credit exposure dif- fers appreciably between these three divisions. As the charts below show, a vast majority of UBS Warburg’s counterparties fall into the internal rating categories C1–C5 both with respect to banking products (83%) and the traded products (94%) portfolio. Our internal rating classes C1– C5 compare to Moody’s Investor Services ratings Aaa to Baa3 and are considered Investment Grade. UBS Warburg’s exposure to lower rated customers is generally collateralized or otherwise structurally supported. UBS Warburg’s counter- parties are primarily sovereigns, insurance com- panies, financial institutions, multi-national cor- porate clients and investment funds. The aggre- gate unsecured exposure to hedge funds measured in terms of net replacement value amounted to CHF 55 million at 31 December 1999 compared to CHF 81 million at 31 December 1998. The charts on the next page provide an overview of the distribution of UBS Warburg’s banking and traded products exposure across counterparty rating categories. By contrast, the largest single component of the loan portfolio within UBS Private and Corporate Clients consists of residential mortgage lending in Switzerland, over half of which is classified within rating class C5. The chart “PCC mortgage port- folio by type of property” shows the breakdown of UBS’s mortgage lending by the type of proper- ty involved. The remainder of the Swiss portfolio, excluding mortgages, is fairly widely spread with the largest concentration being in rating classes C4 to C6 (comparable to Moody’s rating of Baa1 to Ba1). The chart “PCC banking products expo- sure by rating” evidences the overall improvement in the quality of the portfolio following the con- Status of total credit risk exposure CHF million For the year ending Loans utilization, net of allowances Contingent claims Unutilized committed lines Derivatives (positive replacement values) Tradable assets (net long, maximum default exposure) UBS Private Banking UBS Group 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 Corporate Center UBS Warburg UBS Private & Corporate Clients 30,437 3,427 – 3,457 31,0561 4,052 – 2,505 79,493 14,986 60,412 127,042 132,0691 154,370 6,187 3,444 – 24,749 73,839 167,395 152,996 3,458 8,472 – 19 37 219,019 82,194 2,766 3,768 465 – – – 471 936 945 300 – – – 264,765 24,600 63,856 130,499 316,421 32,259 82,311 169,900 289 222,275 86,288 589 705,995 687,179 594 719,244 701,722 Total credit risk exposure, net of allowances 37,340 37,650 500,952 480,246 166,767 168,694 Total credit risk exposure, gross 37,435 37,716 503,724 482,874 177,140 180,538 1 1998 allocation between UBS Private Banking and UBS Warburg restated (transfer of CHF 6,989 millions from UBS Warburg to UBS Private Banking). 49 Review of Risk Management and Control Analysis of Risks UBS Warburg banking products exposure by industries 4% 3% 7% 24% 8% 10% 17% 11% Finance Sector Manufacturing Consumer Goods/Retail Commodities 16% Services Energy Other Supranationals Real Estate UBS Private & Corporate Clients Mortgage exposure by type of property 19% 30% 51% Residential (single-family homes) Residential (multi-family homes) Commercial UBS Private & Corporate Clients Credit risk exposure by industries 5% 6% 7% 18% 15% Private households Construction and real estate Other* Manufacturing Wholesale and retail Public administration 50 UBS Warburg banking products exposure by counterparty rating in % of UBS Warburg Banking Products Exposure 30% 25% 20% 15% 10% 5% 0% C1 Aaa C2 C3 “Investment Grade” Categories A2 Baa1 Aa2 C4 C5 C6 Baa3 Ba1 C8 D0 C7 “Sub-investment Grade” Categories Ba2 Ba3 C9 B1 B2 December 1998 December 1999 UBS Warburg traded products exposure by counterparty rating in % of UBS Warburg Traded Products Exposure 50% 40% 30% 20% 10% 0% C1 Aaa C2 C3 “Investment Grade” Categories A2 Baa1 Aa2 C4 C5 C6 Baa3 Ba1 C8 D0 C7 “Sub-investment Grade” Categories Ba2 Ba3 C9 B2 B1 D1 B3 D4 D2 Caa D3 Classified D D1 B3 D4 D2 Caa D3 Classified D December 1998 December 1999 UBS Private & Corporate Clients banking products exposure by counterparty rating (excluding mortgages) in % of Private & Corporate Clients banking products exposure excluding mortgages 16% 14% 12% 10% 8% 6% 4% 2% 0% C1 Aaa C2 C3 “Investment Grade” categories A2 Baa1 Aa2 C4 C5 C6 Baa3 Ba1 C9 C8 D0 C7 “Sub-investment Grade” categories Ba2 B2 Ba3 B1 D1 B3 D4 D2 Caa D3 Classified D 49% December 1998 December 1999 tinued improvement in the Swiss economy and property markets. PCC’s largest sectoral exposure is to private households in Switzerland. Other significant ex- include construction & real estate posures (15%), manufacturing (7%), distribution & re- tailing (6%) and public administration (5%). UBS Private Banking extends credit predomi- nantly against pledge of marketable securities and against single-family real estate property. Loan portfolio The most significant development in UBS’s loan portfolio in 1999 has been the reduction in the Review of Risk Management and Control Analysis of Risks Total loan portfolio exposure by division CHF million For the year ending Loans to banks (gross) Loans to customers (gross) Loans, gross Counterparty allowance Country allowance Allowances for loan losses 2 UBS Private Banking UBS Group 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 Corporate Center UBS Warburg UBS Private & Corporate Clients 4,456 26,076 6,9891 24,133 25,891 56,374 62,2721 72,425 – 164,743 – 164,840 30,532 31,122 82,265 134,697 164,743 164,840 95 – 95 66 – 66 1,526 1,246 2,772 1,178 1,450 10,373 – 11,844 – 2,628 10,373 11,844 438 36 474 9 – 9 282 23 30,785 247,229 69,543 261,421 305 278,014 330,964 5 – 5 12,003 1,246 13,093 1,450 13,249 14,543 Loans, net of allowances 30,437 31,056 79,493 132,069 154,370 152,996 465 300 264,765 316,421 Counterparty provision for contingent claims Country provision for contingent claims Total provisions 3 Summary Allowances and provisions for counterparty risk Allowances and provisions for country risk Total allowances and provisions – – – 95 – 95 – – – 66 – 66 13 130 143 1,539 1,376 2,915 435 – 435 – – – – – – 1,613 1,450 10,373 – 11,844 – 3,063 10,373 11,844 6 – 6 15 – 15 – – – 5 – 5 19 130 149 435 0 435 0 12,022 1,376 0 13,528 1,450 13,398 14,978 11998 allocation between UBS Private Banking and UBS Warburg restated (transfer of CHF 6,989 million from UBS Warburg to UBS Private Banking. 2 Deducted from assets. 3 Booked as liabilities. UBS Warburg portfolio. This is a continuation of the strategy that began immediately after the merger in 1998 with the objective to improve the risk/reward profile of the international lending business. This initiative included the shift in focus away from Emerging Markets and into high qual- ity credits in the major OECD countries and the sale of the non-Swiss portion of the Global Trade Finance business. The overall impact of this shift has been a re- duction in the international credit portfolio (con- sisting of loans and unfunded commitments to clients, excluding banks) from over CHF 250 bil- lion at the time of the merger to CHF 99 billion by 31 December 1999. The loan component of this international lending book was reduced from CHF 148 billion in June 1998 to CHF 56.4 bil- lion as of 31 December 1999. On the other hand, the UBS Private and Cor- porate Clients loan portfolio remained virtually flat as accelerated write-offs and a transfer of clients to UBS Private Banking were replaced with new business at attractive pricing. Over-the-counter derivative contracts A significant proportion of UBS Warburg’s cred- it risk arises from its trading activities, including its trading of derivative products. The provision of risk management solutions, which involve the use of derivative products, is a core service which we offer to our clients. Derivative products by their nature are particularly sensitive to changes in market prices and consequently we pay close attention to the management and control of these risks. Our credit standards for entering into un- secured derivative contracts are very high as high- lighted in the chart “UBS Warburg traded prod- ucts exposure by counterparty rating” and par- ticular emphasis is paid to the maturity profile. Transactions with counterparties of lower quali- ty are generally only conducted on a secured basis. Consistent with this approach, the expo- sure shown in the C9 class is for the most part fully secured and represents a good risk despite the low rating. We measure our credit risk expo- sure to derivative contracts on the basis of re- placement value plus an add-on which reflects the residual term of the contract. A new system has been introduced in February 2000 to monitor this risk on the basis of a statistically calculated po- tential exposure, which will allow an even more precise valuation of the credit equivalent (Poten- tial Credit Exposure, PCE). The chart to the left shows the distribution of over-the-counter derivative credit exposure measured in gross replacement value plus add-on across products and maturities. Settlement risk Due to its international business, UBS is also ex- posed to settlement risk. Settlement risk arises in transactions involving the exchange of values where a counterparty fails to honor its obligation to deliver cash or securities. This risk is particu- 51 UBS Group OTC derivative exposure by product type and maturity1 in % of UBS Group total OTC derivative exposure 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 1 Measured in positive replacement value. Review of Risk Management and Control Analysis of Risks 52 UBS Warburg and UBS Private & Corporate Clients Settlement risk analysis 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 160 140 120 100 80 60 40 20 0 110 100 90 80 70 60 50 40 30 20 10 0 M P & X F s e m u o v l y l i a d e g a r e v A n o i l l i b F H C n i 9 9 Q 1 9 9 Q 2 9 9 Q 3 9 9 t c O 9 9 v o N 9 9 c e D Settlement risk residual expected losses Settlement risk reduction achieved Average daily settlement volume UBS transfer risk exposure by country rating classes and product All countries Emerging Markets 100% = CHF 905 billion 100% = CHF 25 billion 17% 24% 3% 68% 22% 10% 56% Banking products Traded products Tradable assets UBS Group Emerging Markets transfer risk exposure by region CHF billion 16 14 12 10 8 6 4 2 0 14.4 10.0 11.5 9.6 98/99 Emerging Asia 98/99 Emerging Americas 98 99 Banking products Traded products Tradable assets 4.7 3.3 98/99 Emerging Africa/ Middle East 1.8 1.6 98/99 Emerging Europe larly significant in relation to foreign exchange and precious metals transactions. UBS limits its exposure to settlement risk by tolerance levels as- signed to each counterparty in relation to its standing (rating). In addition, UBS monitors this risk on a permanent basis and seeks to shorten as much as practicable the period during which it is exposed and to reduce the exposure by way of net- ting agreements. Netting receives a high priority within UBS. UBS has also been an active partici- pant in an industry initiative to create a new or- ganization, called CLS Bank, which is being es- tablished to reduce substantially settlement risk between major international financial institu- tions. The participation in regulated payment and securities clearing systems also reduces settlement exposure. As the chart to the left shows, UBS took particular care to limit its exposure to settlement risk over year end 1999 in order to minimize its exposure to Year 2000 related counterparty risk. Country risk exposure UBS’s definition of country risk comprises all cross-border exposures from loans, derivative products and tradable assets. This definition in- cludes UBS’s own intracompany cross-border po- sitions, which amounted to CHF 416 billion at 31 December 1999, about 44.6% of the total non-emerging market country risk exposure of CHF 880 billion. As at 31 December 1999, 97.3% of UBS’s country risk exposure was with highly rated OECD countries where the risk of default is judged to be negligible. The chart in the middle summarizes UBS’s ag- gregate country risk exposure as of 31 December 1999 compared to 31 December 1998. The remaining 2.7% (CHF 24.6 billion) of our country risk exposure is to emerging markets which are classified in rating classes S3 to S14. This exposure has decreased as a result of the restruc- turing of the international loan portfolio and the exit from the GTF business during 1999. Total ex- posure to the emerging market group of countries fell by CHF 7.8 billion during 1999 – a reduction of 24%. In view of the higher risk associated with emerging markets, UBS closely monitors this ex- posure on an ongoing basis within the country lim- its approved by the Board of Directors. The chart to the left analyzes the Emerging Markets exposures by the major geographical areas as of 31 December 1999 compared to 31 December 1998. Review of Risk Management and Control Analysis of Risks Allowances and provisions for credit risk CHF million For the year ending Loans (gross) Impaired loans 2 Allowances for impaired loans Non-performing loans Allowances for non-performing loans Total allowances for impaired and non-performing loans Other allowances and provisions for credit and country risk Total allowances and provisions of which country allowances and provisions Ratios Impaired loans in % of gross loans Non-performing loans in % of gross loans Allowances and provisions for credit loss in % of gross loans Allocated allowances in % of impaired loans UBS Private Banking UBS Group 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 31.12.99 31.12.98 Corporate Center UBS Warburg UBS Private & Corporate Clients 30,532 31,1221 82,265 134,6971 164,743 164,840 474 305 278,014 330,964 140 95 71 56 95 95 – 0.5 0.2 0.3 67.9 175 66 68 66 66 66 – 0.6 0.2 0.2 37.7 97.1 3,202 1,994 1,586 1,336 3,319 1,667 2,042 1,289 19,050 10,373 11,353 7,264 22,953 11,844 14,003 8,646 1,994 1,667 10,373 11,844 921 1,396 2,915 1,376 3,063 10,373 11,844 1,450 – – 3.9 1.9 3.5 62.3 84.2 2.5 1.5 2.3 50.2 63.1 11.6 6.9 6.3 54.5 64.0 13.9 8.5 7.2 51.6 61.7 64 9 63 5 9 6 15 – 13.5 13.3 3.2 14.1 7.9 – 5 – 5 5 5 – 0.0 – 1.6 na na 22,456 12,471 13,073 8,661 26,447 13,582 16,113 10,006 12,471 13,582 927 1,396 13,398 14,978 1,376 1,450 8.1 4.7 4.8 55.5 66.3 8.0 4.9 4.5 51.4 62.1 Allocated allowances in % of non-performing loans 78.9 1 1998 allocation between UBS Private Banking and UBS Warburg restated (transfer of CHF 6,989 million from UBS Warburg to UBS Private Banking. 2 Includes non-performing loans. Impaired and non-performing loans UBS classifies a loan as impaired when it judges that there is a high probability that it will suffer a partial or full loss. A provision is then made with respect to the loan in question. Within this category, non-performing loans are defined as loans where payment of interest, principal or fees is overdue for 90 days. Non-performing loans have decreased to CHF 13,073 million at 31 De- cember 1999 from CHF 16,113 million at 31 De- cember 1998. The reduction reflects an accelerat- ed write-down in the Swiss domestic portfolio, a substantial reduction in our emerging markets exposure, a significant improvement in the macroeconomic situation in Switzerland and a faster than expected recovery in key Asian economies. The above table provides a breakdown by divisions of impaired and non-performing loans as of the dates indicated. Allowances and provisions The adequacy of the allowances and provisions for impaired loans is assessed by the Credit Risk Management and Control function which is in- dependent from the divisions. Allowances and provisions are determined based upon an indi- vidual assessment of counterparties and countries and their creditworthiness as well as the amount of collateral available to us to offset against the potential loss. As the table above shows, al- lowances and provisions for credit losses de- creased by CHF 1,580 million, or 10.5%, from CHF 14,978 million at 31 December 1998 to CHF 13,398 million at 31 December 1999 caused by net write-offs and recoveries and par- tially offset by the establishment of additional credit loss provisions. As impaired loans were re- duced by close to CHF 4 billion and non-per- forming loans by more than CHF 3 billion, the coverage ratio could be significantly increased. We are convinced that the inherent risk in our portfolio is adequately covered by allowances and provisions. The allowances and provisions for credit losses include a component for country risk. UBS’s approach to country risk provisioning fol- lows the guidelines of the Swiss Bankers’ Associa- tion, which allows banks to establish provisions based on their own portfolio scenarios. UBS establishes country-specific scenarios which are reviewed and used on an ongoing basis to eval- uate the current and future probability of default due to country risk incidents or country-specific 53 Review of Risk Management and Control Analysis of Risks 54 Swiss bankruptcy rates (1985–1999) in % of total registered companies 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 5 8 9 1 6 8 9 1 7 8 9 1 8 8 9 1 9 8 9 1 0 9 9 1 1 9 9 1 2 9 9 1 3 9 9 1 4 9 9 1 5 9 9 1 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 Source: Creditreform, SHAB systemic risks. The appropriate allowances and provisions are then determined by evaluating the type of credit exposure and the loss severities that have been attributed to each exposure type. Total provisions and allowances for emerging market related exposures stood at CHF 1,376 million at 31 December 1999 and CHF 1,450 million at 31 December 1998, reflecting on the one hand the reduction in the overall size of our emerging mar- ket exposure but on the other hand also the need for a reallocation of provisions from Asia to Latin America. In view of its overall credit exposure to the Swiss market, UBS’s provisions and allowances are highly dependent on economic developments in Switzerland. As the following chart shows, the better performance of the Swiss economy since 1997 has translated into a continued reduction of the bankruptcy rate. Given the broadly support- ed upswing now embracing all sectors of the economy, the present growth rate of 2% is set to continue throughout this year. The resulting im- provement in companies’ financial condition should result in a further reduction in default rates into the current year. Market risk Market risk is the risk UBS faces as a result of ad- verse movements in the value of foreign exchange, commodities, equity market and interest rates po- sitions. UBS incurs market risk mainly through its trading activities, which are centered in UBS War- burg, although market risk also arises – to a sub- stantially lesser extent – in relation to other activ- ities, notably in the context of balance sheet man- agement activities. UBS Warburg’s primary mar- ket risk exposure relates to its business activities in equities, fixed income products and foreign ex- change. The risk which UBS Warburg assumes is primarily related to the need to facilitate its cus- tomers activities in the major OECD markets. UBS measures its exposure to market risk using the framework of expected loss, statistical loss and stress loss, as follows: – 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 re- liable market price for a particular instrument – Statistical loss is measured based on a value at risk, or VaR, methodology. VaR is a forward looking estimate of potential loss. 1-day VaR looks forward one trading day, while 10-day VaR looks forward ten days. UBS calculates VaR using a 99% confidence level. In other words, under normal market conditions, we would expect over the course of a day a loss more than our 1-day VaR to occur with a 1 in 100 chance – Stress scenario loss is defined as the risk of an extreme market move affecting particular pre- defined market variables. In order to keep our exposure to market risk within acceptable boundaries, the Board of Di- rectors has set limits on our exposure to both sta- tistical loss by reference to the VaR exposures as well as to stress scenario loss by placing limits in relation to particular stress scenarios. UBS calculates the VaR associated with its ex- posure to market risk and consequently also its regulatory capital requirement using the histori- cal simulation technique, based on five years of data. VaR is calculated both on a 1-day 99% con- fidence interval and a 10-day 99% confidence in- terval, and the latter is used both for internal lim- its setting and 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 inter- est rates as well as the risk from price movements that are specific to an individual issuer. During 1999 UBS Warburg operated within a CHF 450 million 10-day VaR limit. During the course of 1999 UBS received ap- proval from the Swiss Federal Banking Commis- sion (FBC) to use its VaR model to compute reg- ulatory capital requirements for market risks. Review of Risk Management and Control Analysis of Risks While a VaR measure is the principal measure of UBS’s exposure to day-to-day movements in market prices, UBS’s risk control process is specifically focused on tail risks (or the risk of a loss significantly larger than the VaR number as a result of large movements in the risk factors, such as equity indices, foreign exchange rates and interest rates, on our portfolios). UBS has a con- sistent set of predefined large price movements, or shocks, and risk limits, which apply to all the major risk factors to which the bank is exposed as a basis to prevent risk concentration. This is the primary protection against any form of ex- treme event. In addition to this first level protec- tion, a stress loss limit has been introduced as a portfolio control for all the trading activities which are concentrated within UBS Warburg. The potential stress loss is calculated with respect to eight base scenarios which are supplemented by ad hoc analyses depending on external devel- opments or specific portfolio concentrations such as Year 2000 which we added to our stress test analysis in the third quarter of 1999. This ensures that both historical crises as well as forward look- ing extreme scenarios are incorporated in the analysis. Implementing this stress loss limit is a way of protecting our earnings during periods of extreme market stress. UBS Warburg market risk developments Since the merger, UBS Warburg has taken a num- ber of steps to improve its overall risk profile. These include adjusting its market risk profile, including its exposure to emerging market risk and equity market volatility. As the table below shows, VaR utilization within UBS Warburg has dropped across all major product lines in the course of 1999. This does not reflect a rationing of risk but a choice taken by UBS Warburg man- agement based on the risk-return opportunities in UBS Warburg backtesting results CHF million 200 100 0 –100 –200 –300 10-day VaR 1-day VaR Revenue the market. This reduction has in fact been achieved at a time when UBS Warburg has gener- ated some of its strongest earnings, which reflects a significant improvement in the risk-return pro- file of the businesses. All VaR models, while forward looking, are based on past events and are dependent upon the quality of available market data. In order to eval- uate the VaR model actual revenues are com- pared with the 1-day VaR on a daily basis, a process known as “backtesting”, with losses greater than the VaR estimate being known as “exceptions”. As the chart above shows, UBS Warburg’s backtesting results showed no excep- tions in the course of 1999. Market risk in the other divisions Although UBS assumes almost all of its active market risk in UBS Warburg, the Group-wide VaR for trading book market risk exposure includes all sources of market risk. This includes a small amount of risk which is assumed in order to facil- itate customer business by UBS Private Banking in Switzerland as well as the risk associated with the structural foreign exchange hedge positions man- aged by Corporate Center, which are discussed Summary of 10-day 99% confidence value at risk UBS Warburg CHF million Risk type Equities Interest rates Foreign exchange Precious metals Diversification effect Total UBS Warburg 12 months ending 31.12.1999 6 months ending 31.12.1998 Min. Max. Average 31.12.1999 Min. Max. Average 31.12.1998 122 88 10 5 –1 177 208 188 145 36 –1 276 163 140 58 21 (168 ) 213 173 140 76 28 (193 ) 224 152 129 21 16 –1 210 304 279 84 48 –1 400 216 181 47 32 (181 ) 295 215 170 73 19 (217) 260 55 1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. Review of Risk Management and Control Analysis of Risks 56 UBS Warburg revenue distribution Frequency in number of days 30 25 20 15 10 5 0 –200 –170 –140 –110 –80 –50 –20 10 40 70 100 130 160 190 Revenue in CHF million, including commissions Summary of 10-day 99% confidence value at risk for UBS Group UBS Group VaR CHF million UBS Warburg Corporate Center Other 1 Diversification effect UBS Group 31.12.1999 31.12.1998 223.6 59.8 4.3 (55.5) 232.2 259.9 79.2 5.4 (62.0) 282.5 1 The above table includes interest rate exposures in the banking books of the Private Label Banks. below under “Asset and Liability Management”. As the table on the previous page shows, however, the overall impact of these additional risks is to a significant degree offset by positions in the UBS Warburg portfolio. This is shown by the measure of the diversification effect which arises when total VaR for market risk is calculated at the Group level. Consequential risks In addition to credit and market risks which UBS assumes as an integral part of its business activi- ties, UBS also assumes a number of consequential risks – often referred to as “operational risk” – which arise as a consequence of its business ac- tivities. These risks include: – Operations or transactions processing risk – Legal risk – Compliance risk – Liability risk – Security risk. UBS is addressing the measurement of its conse- quential risks through the introduction of a generic operational risk-modeling framework. This framework groups risks into predetermined risk categories and identifies the factors behind the risk exposure. Operational risk scenarios are developed to stress the processes and procedures underlying the exposure. This helps to measure the risk of loss from the identified exposures in a similar manner to the statistical loss measure- ments of our credit and/or market risk exposures. UBS is reviewing whether this framework, which contains varied and sophisticated techniques, provides the potential to assess more accurately risk exposures to help ensure they are in accor- dance with UBS’s risk appetite and risk-bearing capacity. The primary focus of UBS’s operational risk monitoring during 1999 was on the need to man- age and control the risks associated with the transfer of customer accounts in UBS Private and Corporate Clients from the former Swiss Bank Corporation mainframe operating system (RTB) to the UBS system (Abacus) as well as the need to ensure a smooth transition to the Year 2000. The account migration from RTB to Abacus was com- pleted by mid-year 1999, which was the quickest integration following any major bank merger in recent years. Similarly, UBS’s Year 2000 transition ran very smoothly. Following a period of two years during Review of Risk Management and Control Analysis of Risks which the Year 2000 project had received the highest management priority in all divisions as well as at the Group level, UBS year end process- ing progressed with no material interruptions and all the bank’s business critical systems operated satisfactorily. The total cost of UBS’s Year 2000 project in 1999 was CHF 279 million. A further focus of UBS’s risk control process for consequential risk is the reliability of the data which supports its risk reporting systems. As rec- ommended in the 1998 risk review, a data integri- ty review of the UBS Warburg credit risk control systems was completed during 1999. This included the establishment of a comprehensive data quality monitoring process, a revision of the inter-system reconciliation procedures and continuing regular, independent tests of data quality. The review has re- sulted in a high degree of confidence in risk control data and concluded that no additional provisioning was required specifically relating to the review. 57 Review of Risk Management and Control Asset and Liability Management Asset and Liability Management UBS asset and liability management processes are designed to manage all balance sheet related risks on a coordinated Group-wide basis. The procedures and policies cover Group liquidity, Group funding and capi- tal management, and the management of non- trading foreign exchange UBS recognizes that the market and credit risk framework which is set out above cannot be fully applied to its asset and liability management ac- tivities which include Group liquidity, Group funding and capital management as well as the management of non-trading foreign exchange risk and non-trading interest rate risk. Conse- quently, specific processes and policies have been established for managing these risks. UBS’s asset and liability management function is undertaken at the Corporate Center by the Group Treasury department which reports directly to the CFO. Group Treasury is responsible for establishing and effectively managing the processes in relation to these risks in accordance with policies which have been approved by the Board of Directors. The overriding goals of all processes within the asset and liability management activities are: – Efficient management of the bank’s non trad- ing interest rate and foreign exchange expo- sures. – Sustainable and cost-efficient funding of the and interest rate risk. bank’s balance sheet. – Optimal liquidity management in order to generate cash when required. – Compliance with legal and regulatory require- ments. Interest rate management Interest rate risk is inherent to most of UBS’s busi- nesses. Interest rate risks arise from a variety of factors, including differences in the timing be- tween the contractual maturity or repricing of as- sets, liabilities and derivative instruments. Net in- terest income is affected by changes in market in- terest rates, given that the repricing characteris- tics 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 months LIBOR. In ad- dition, certain products have embedded options that affect their pricing and principal. UBS adopts a comprehensive Group-wide ap- proach to managing interest rate risk, and allo- cates the responsibility for managing this risk to a limited number of business areas. Under this ap- proach, interest rate risk is clearly segregated into trading and non-trading risk. All interest rate risks arising from non-trading business activities are captured at the point of business origination and transferred either to UBS Warburg’s Cash and Collateral Trading book – “CCT” – or to the Corporate Center’s Bank Book through a Group- wide transfer pricing mechanism. The risk is then managed centrally in accordance with the rele- vant risk policy. In the case of transactions with a fixed matu- rity, the interest rate risk is transferred from the relevant business area to CCT on a transaction by transaction basis. This means that products with fixed maturities immediately become part of the trading book in UBS Warburg and the business locks in an interest-rate-risk-free margin on such products thereby relieving them of any residual interest rate risk. As a result of this process, UBS benefits fully from the netting potential between its balance sheet and trading products. In the case of client business, such as savings accounts or current accounts, which have no con- tractual maturity date or directly market-linked customer rate the interest rate risk is transferred from the business areas by pooled transactions to the Bank Book. Since these products effectively contain various embedded options in respect of withdrawal/pre-payment and rate setting, they cannot be hedged by single back-to-back transac- tions. Consequently, Group Treasury manages the inherent interest rate risk in these products in the Bank Book through the establishment of replicating portfolios of revolving fixed-rate transactions of predefined maturities which ap- proximate the average cash flow behaviour of these positions. Group Treasury then hedges the overall risk in the Bank Book by means of inter- nal transactions with CCT. As a result of this process, all interest rate risks arising from client business are transferred either directly or indi- rectly via the Bank Book, to CCT. In addition to the interest rate risk associated with client business, a significant amount of in- terest rate risk arises in relation to non-business balance sheet items, such as in the refinancing of the bank’s real estate portfolio, equity invest- ments in associated companies and the invest- ment of the bank’s own equity. The refinancing of real estate and equity investments and the invest- ment of equity are all strategic decisions which implicitly create non-trading interest rate expo- sures. The interest rate risks inherent in these bal- ance sheet items are managed in the Bank Book by representing them as replicating portfolios, on 58 Review of Risk Management and Control Asset and Liability Management the basis of decisions taken by the Group Execu- tive Board as to the appropriate effective maturi- ties. Here, too, the risk is hedged by means of in- ternal transactions with CCT. All the replicating portfolios which are con- tained in the Bank Book are updated monthly by replacing maturing tranches with new aggregate tranches which reflect the changes in the balance sheet over the period. By their nature, the stag- gered tranches which constitute each replicating portfolio reduce the volume that must be hedged by the Bank Book at each monthly rollover. However, due to the extent of the underlying portfolio volumes, the new aggregate tranches are nevertheless of such a size that they cannot be hedged instantly. The Bank Book therefore as- sumes intramonth interest rate exposure until it can execute all the necessary offsetting hedges with CCT. The exposure of the Bank Book, which thus tends to fluctuate between monthly rollovers and the profits or losses arising out of the Bank Book are reported on an accrual basis in the fi- nancial statements and constitute an integral part of the Group’s net interest income. The Board of Directors has approved risk management policies, risk limits and the control framework for the entire interest rate risk man- agement process including the establishment of a value-at-risk limit for the interest rate exposure of the Bank Book. Market Risk Control monitors the risk in both CCT and in the Bank Book on a daily basis as part of UBS’s overall market risk in order to ensure the integrity of the interest rate Interest rate sensitivity of the Bank Book risk management process and its compliance within the defined risk limits. UBS’s approach to managing the interest rate risks inherent in the Bank Book complies with the regulatory framework recently introduced by Swiss Federal Banking Commission – the “FBC”. In the course of the year 2000, it will become mandatory for all Swiss banks to report to the Swiss National Bank the interest rate sensitivity of the Bank Book on a quarterly basis. Addition- ally, the specific composition of the underlying replicating portfolios used to manage individual balance sheet items must also be disclosed in order to assist the regulators to identify “out- liers” in terms of their interest rate risk profiles. The table below shows the interest rate sensi- tivity of the Bank Book as at 31 December 1999 measured in terms of the potential impact of a one basis point (0.01%) parallel rise in interest rates on the market value of each balance sheet item. The most significant component of the Bank Book sensitivity stems from the investment of the Group’s equity. At 31 December 1999, this was invested in a portfolio of fixed-rate CHF deposits with an average duration of 2.2 years and a sen- sitivity of CHF –8.1 million per basis point, in line with the strategic investment targets set by the Group Executive Board. In order to ensure that these GEB targets are met, the Group’s equity is represented as a liability position by a replication portfolio reflecting this target bench- mark. The Group’s equity is thus automatically CHF thousand per basis point CHF USD EUR GBP JPY Others Total 1 to 3 months 3 to 12 months Within 1 month (11 ) 3 0 0 0 0 11 (33 ) (3 ) 5 0 0 (8) (20) 1 to 5 years 850 83 30 77 (1 ) 0 Over 5 years (610 ) 1,207 210 815 (4 ) 0 Total 279 1,250 240 858 (5) 0 1,039 1,618 2,622 39 (10 ) 3 (39 ) 0 0 (7) of which replicated equity CHF 19 19 437 7,054 610 8,139 Bank Book without replicated equity Total (27) (39) (444) (6,015) 1,008 (5,517) 59 Review of Risk Management and Control Asset and Liability Management 60 invested according to the GEB strategic targets so as to offset the interest rate risk associated with this equity replication portfolio. The interest rate sensitivity of these investments indicates the ex- tent to which their marked-to-market value would be affected by an upward move in interest rates. This in turn is directly related to the invest- ment duration chosen by the GEB. However, when measured against the equity replication portfolio itself, the residual interest rate risk is negligible. Moreover, any reduction in this meas- ure of the interest rate sensitivity relating to the investment of the bank’s equity would inevitably require investing at significantly shorter maturi- ties, which would lead to a higher volatility of the bank’s interest earnings. In addition to the above standard sensitivity to a one basis point rise in rates, UBS uses the fol- lowing two measures to help to monitor the risk inherent in the Bank Book: – Net interest income at risk, which is defined as the exposure of the net interest income arising in the Bank Book to an adverse move- ment in interest rates over the next twelve months. Given the fact that all client business with fixed maturities is “match funded” with UBS Warburg, these transactions are not affected by changes in interest rates. Therefore only net interest income positions resulting out of replicating portfolios may be exposed to market changes. This measure estimates the impact of different changes in the level of interest rates using shock scenarios as well as gradual changes in interest rates over a period of time. All of the scenarios are com- pared with a scenario where current market rates are held constant for the next twelve months. – The economic value sensitivity, which is de- fined as the potential change in market value of the Bank Book resulting from changes in in- terest rates. This estimates the effect of an im- mediate interest rate shock on the net position in the Bank Book. The net interest income at risk measure on the Bank Book considers such variables as: – Repricing characteristics of assets and liabilities. – Rate barrier effects, such as caps and floors, on assets and liabilities. – Maturity effects of replicating portfolios. – Behaviour of competitors. Both measures are based on the Bank Book’s in- terest rate position excluding the liability position relating to the “equity replication portfolio”. The methodology is designed to highlight the effects of market changes in interest rates on existing bal- ance sheet positions; it ignores future changes in the asset and liability mix and therefore it is not by itself a measure of future net interest income. The two methodologies provide different measures of the level of interest rate risk. The eco- nomic value sensitivity measure provides a longer term view, since this considers the present value of all future cash flows generated from the exist- ing balance sheet positions. The net interest in- come at risk measure provides a shorter term view, as it considers the repricing effect of all ma- turing positions over the next twelve months. The table below shows the change in risk under both measures between the end of 1998 and 31 De- cember 1999. CHF million 31.12.99 31.12.98 Net interest income at risk Economic value sensitivity (355) (555) (265 ) (493 ) Among various scenarios that have been ana- lyzed, the net interest income at risk figure shown is the worst case and relates to an interest rate shock (parallel shift) of – 200 basis points. At 31 December 1998, the difference to the constant market rate scenario represents – 4.0% of 1998s total net interest income and – 5.6% at 31 De- cember 1999. In this extreme scenario the largest part of the decrease would occur due to lower margins on deposit accounts and lower returns on the investment of the Group’s equity. The economic value sensitivity shows the effect of a 100 basis point adverse interest rate shock, implying that the bank had an exposure of CHF – 493 million to rising rates at 31 December 1998 and CHF – 555 million at 31 December 1999. The increase in the economic value sensitivity in the course of 1999 was primarily due to the de- creased USD and GBP sensitivities. Since these exposures act as a counterweight to the dominant CHF position, this resulted in an increased over- all CHF exposure to rising rates. Liquidity and funding management UBS’s approach to liquidity management seeks to ensure that the Group will always have sufficient liquidity to meet its liabilities in a timely manner Review of Risk Management and Control Asset and Liability Management while preserving the option of exploiting potential strategic market opportunities. UBS’s centralized approach to liquidity management encompasses the entire network of branches and all subsidiaries and ensures that the liquidity position is more than adequate to cover short term liabilities at all times. UBS’s liquidity management is based on an integrated framework that incorporates an assess- ment of all known cash flows within the Group as well as the availability of high grade collateral which could be used to secure additional funding if required. The liquidity position is prudently managed under different potential scenarios tak- ing stress factors into due consideration (as sug- gested by the BIS in its 1992 working paper). The Board of Directors has approved a policy which establishes the core principles for liquidity management and has defined an appropriate con- tingency plan. A first set of principles relates to the establishment of liquidity risk limits (e.g. a net overnight funding limit). The risk limits are set by the Group Executive Board and monitored by the Financial Management Committee (“FMC”) which is chaired by the CFO and meets on a monthly basis in order to assess the bank’s liq- uidity exposure. A second set of principles con- centrates on liquidity crisis management for which detailed contingency plans have been worked out. Regional committees constantly monitor the markets in which we operate for po- tential threats and regularly report their findings to the FMC. In the event of a liquidity crisis re- gional crisis task forces will perform all necessary contingency actions under the command of sen- ior management. The liquidity management process is under- taken jointly by Group Treasury and CCT. Group Treasury’s function is to establish a comprehen- sive framework of directives and risk limits, while CCT undertakes the operational cash and collat- eral management transactions within the estab- lished parameters. UBS’s centralized cash and col- lateral business management structure facilitates a tight control on both the global cash position and the stock of highly liquid and rediscountable securities. UBS’s funding strategy seeks to ensure that business activities are funded at the lowest possi- ble cost. With a broad diversification (by market, product and currency) of funding sources UBS maintains a well balanced portfolio of liabilities which generate a stable flow of financing and ad- ditionally provides protection in the event of market disruptions. In this context UBS’s strong domestic retail business is a very valuable, cost efficient and reliable source of funding. Through the establishment of short, medium and long term funding programs in Europe, in the US and in Asia, UBS can raise funds globally in a very ef- ficient manner and minimize its dependence on any particular source of funding. In the course of 1999, UBS’s long term debt portfolio has increased from CHF 50.8 billion as of 31 December 1998 to CHF 56.3 billion as of 31 December 1999. During this period CHF 12.6 bil- lion of new long term securities were issued while at the same time CHF 7.1 billion have matured. The maturity profile of the long term debt port- folio is well balanced with a slight bias towards shorter term maturities due to the maturity profile of the bank’s assets. See the Notes to the Consoli- dated Financial Statements for further information concerning long term debt. Currency management UBS’s corporate currency management activities are designed to protect the bank’s equity and the expected future foreign currency cash flows from adverse currency movements against the Swiss franc while preserving the option of exploiting any market opportunities which may arise. The following principles guide the approach to managing this risk: – Equity must be invested in Swiss francs (trans- lation risk management). – Recognized foreign currency exposures must be hedged proactively for the whole financial year, which represents the cycle of financial ac- counting (transaction risk management). Translation (balance sheet) currency risk: UBS aims to maintain the flexibility to allow for- eign assets (a business unit or a non-financial asset) to be divested at any time without adverse curren- cy impacts. To eliminate these undesired foreign exchange impacts on investments and divestments of these assets, foreign currency assets are match funded in the relevant currency. The match-fund- ing principle is also applied to the financing of for- eign investments, including foreign equity invest- ments. This strategy, together with the repatriation into Swiss francs of foreign currency dividends and capital, ensures that the bank’s equity is always fully invested in Swiss francs. 61 Review of Risk Management and Control Asset and Liability Management 62 The following table summarizes the VaR usage in the course of 1999: Value at risk CHF million Minimum Maximum Average 1 July 1998 – 31 December 1998 1 January 1999 – 31 December 1999 37.2 1.4 133.7 77.8 77.5 37.1 Last value of period 79.2 59.7 Transaction (revenues/costs) currency risk: UBS’s transaction currency risk management process is designed to protect the budgeted annu- al foreign currency net profits against adverse currency movements during the relevant report- ing period. Foreign currency net profits are ac- tively managed by Group Treasury on behalf of the Group in accordance with the instructions of the Group Executive Board and subject to the VaR limit which has been established for this risk. The budgeted net profits are treated as long for- ward foreign exchange exposures in the local re- porting currency against the Swiss franc. The non-trading foreign currency exposures are mainly hedged with foreign exchange for- ward contracts, although foreign exchange op- tions are also used particularly where there is a measure of uncertainty about the magnitude of the underlying income. The net position of the budgeted net profits and the corresponding hedges, is the basis for the VaR calculation on Group Treasury’s non-trading currency position. During the year, actual results are continuously monitored. Major budget deviations must be communicated to Group Treasury for potential additional hedge transactions. The VaR analysis, which is performed daily, is based on the same 10 day 99% confidence level as applies in UBS War- burg. The validity of the VaR measurement is evaluated by conducting backtests, which com- pare the estimated VaR amount with the actual shift of the positions’ profit or loss due to ex- change rate movements. The principal contributors to our non-trading currency exposure are the operations in the UK and the US. In general, the VaR position is high- est at the beginning of the year when the budget- ed net profits are transferred to Group Treasury and is gradually reduced during the year depend- ing on the exact hedge strategy being used. The underlying policy is to keep the VaR of the non- trading currency position as low as practicable. Capital management Capital management is undertaken at UBS by Group Treasury as an integral part of the Group’s asset and liability management function. UBS’s overall capital needs are continually reviewed to ensure that our capital base can appropriately support the anticipated needs of the divisions as well as the regulatory capital requirements. As the table on the next page shows, UBS is very well capitalized. In the course of 1999, UBS’s BIS Tier 1 Ratio increased from 9.3% at 31 De- cember 1998 to 10.6 % at 31 December 1999 primarily resulting from a significant increase in retained earnings coupled with a reduction in risk weighted assets. The decrease in risk weighted as- sets is principally a result of reduced positive re- placement values, off-balance sheet contingent li- abilities and the reduction in the size of the inter- national loan book. See Note 33c in the consoli- dated financial statements for additional infor- mation on capital adequacy. The ratios measure capital adequacy by com- paring UBS’s eligible capital with the risk-weight- The following table shows the key capital figures and ratios as of 31 December 1999 and 31 December 1998: CHF million Balance sheet assets Off-balance sheet and other positions Market risk positions Total risk-weighted assets 31.12.1999 31.12.1998 219,383 48,282 10,813 278,478 238,024 50,659 16,018 304,701 Review of Risk Management and Control Asset and Liability Management The following table sets forth BIS risk-weighted assets as of 31 December 1999 and 31 December 1998: CHF million BIS Tier 1 capital BIS Tier 1 and Tier 2 capital in % BIS Tier 1 ratio BIS Tier 1 and Tier 2 Capital ratio 31.12.1999 31.12.1998 29,529 40,259 28,299 40,385 10.6 14.5 9.3 13.3 ed asset positions, which include balance sheet assets, the net positions in securities not held in the trading portfolio, off-balance sheet transac- tions converted into their credit equivalents and market risk positions at a weighted amount to re- flect their relative risk. UBS is committed to maintaining a strong cap- italization and rating as a distinguishing charac- teristic of UBS for both clients and shareholders. On 12 March 1999, UBS introduced a treasury stock buy-back program, planned to run for a period of two years. As of 31 December 1999, a total of 7.3 million shares had been acquired, rep- resenting about 3.4% of the total of outstanding shares. The objective of the buy-back program was to utilize the shares for acquisitions and the employee stock ownership program. UBS has subsequently concluded that this program is too limited for its purposes because of the continuous increase in capital which is projected to arise from ongoing retained earnings and the selective reduction in the risk profile as well as increasing capital efficiency. For this reason, UBS announced in December 1999 that it would replace the treasury stock buy-back program by a Swiss-specific program targeted at Swiss institutional shareholders, which is the only tax-efficient means that has been identified to achieve cancellation. This is called a second trading line program. The second trading line program was implemented in Janu- ary 2000. The subsequent cancellation of the shares bought back through the second trading line requires shareholders’ approval. In addition to this initiative, UBS recognizes and will address over time the potential for introducing a more active management of the composition of its cap- ital. As of 23 February 2000, the program has re- sulted in the repurchase of about 2.8 million shares, or about 1.3% of our market capitaliza- tion. Through this program we plan to buy back a maximum value of CHF 4 billion which will then be earmarked for cancellation on share- holders’ approval. This program may last at a maximum until March 2001. Performance measurement UBS is in the process of implementing a compre- hensive value based management approach to support management in key tasks like planning, investments, capital allocation, performance ap- praisal and compensation, strategic risk manage- ment and communication to investors and ana- lysts. Divisional business plans, planned acquisi- tions, investments and divestments are evaluated and approved on the basis of their expected con- tribution to shareholder value. Actual perform- ance is appraised using division specific hurdle rates and according to the contribution to value creation. The implicit costs of risk tolerance as well as the consumption of regulatory equity and risk control efforts are therefore considered in an appropriate way. 63 64 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 1 2 3 Summary of significant accounting policies Segment reporting by business division Segment reporting by geographic location Income statement 4 5 6 7 8 9 10 Net interest income Net fee and commission income Net trading income Gains / (Losses) from disposal of associates and subsidiaries Other income Operating expenses Earnings per share Balance sheet: assets 11 Money market paper 12a Due from banks and loans to customers 12b Allowance and provision 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 66 68 72 72 73 74 75 76 76 81 83 84 84 84 85 85 85 86 87 88 88 88 89 90 90 91 91 92 92 93 93 93 Balance sheet: liabilities Due to banks and customers 21 Long term debt 22 Other liabilities 23 Provisions, including restructuring provision 24 25 Income taxes 26 Minority interests Off balance sheet and other information 27 28 29 30 31 32 33 Derivative instruments Pledged assets Fiduciary transactions Commitments and contingent liabilities Operating lease commitments Litigation Financial instruments risk position a) Interest rate risk b) Credit risk c) Currency risk d) Liquidity risk e) Capital adequacy Fair value of financial instruments Retirement benefit plans and other employee benefits Equity participation plans Related parties Post-balance sheet events Significant subsidiaries and associates Significant currency translation rates Swiss banking law requirements 34 35 36 37 38 39 40 41 Report of the Group Auditors UBS Group Financial Statements Table of Contents 93 93 94 98 98 99 100 101 101 104 104 104 106 106 107 107 109 111 112 113 114 116 119 120 120 121 123 124 125 67 UBS Group Financial Statements Group Financial Review Group Financial Review Overview – Net profit was CHF 6,300 million in 1999, up from CHF 3,030 million in 1998. – Both years contain several significant financial events and thus direct comparisons are com- plex. – For 1999, return on equity stood at 21.2% before goodwill amortization and 20.1% after goodwill amortization, with comparable num- bers for 1998 of 11.4% and 10.3% respec- tively. – The cost/income ratio was 68.0% before goodwill amortization and 69.1% after good- will amortization in 1999, versus 77.0% and 78.4% in 1998, respectively. – In 1999 basic earnings per share reached CHF 31.91 before goodwill amortization, and CHF 30.28 after goodwill amortization against CHF 15.92 and CHF 14.31 in 1998, respec- tively. – Since 31 December 1998, Group assets under management have increased 10.9% to CHF 1,744 billion. Significant financial events 1999 total operating income includes: – CHF 1,490 million pre-tax gain relating to the sale of our 25% stake in Swiss Life / Renten- anstalt. – An additional pre-tax restructuring charge of CHF 300 million in respect of the merger between Union Bank of Switzerland and Swiss Bank Corporation, representing about four percent of the original CHF 7 billion provi- sion. The majority of this extra provision is due to revised estimates of the cost of lease breaks and property disposals. – Additional pre-tax provisions of CHF 154 million relating to the settlement reached regarding dormant accounts and World War II related claims. When we created the corre- sponding provisions in 1998, we expected a certain level of contributions from Swiss industry. In the fourth quarter, it became clear that this level of contributions was not forth- coming as expected. 1999 impact on net profit: – In sum, the significant financial items listed above represent pre-tax gains of CHF 1,840 million (CHF 1,488 million post-tax). – The acquisition of the international private banking business of Bank of America has had no material impact on Group or divisional results. – The Global Asset Management and Allegis acquisitions were completed in the final days of December 1999. Both are consolidated and have no material impact on the 1999 income statement. – CHF 110 million pre-tax gain from the dis- Income statement posal of Julius Baer registered shares. – CHF 200 million pre-tax gain from the inter- national Global Trade Finance disposal. – CHF 38 million pre-tax gain from the Long Total operating income increased 28% to CHF 28,621 million, while total operating expenses increased 12% to CHF 20,452 million. Term Capital Management rescue fund. 1999 total operating expenses include: – The booking of pre-paid employer pension contributions of CHF 456 million. This re- presents the recognition, in accordance with International Accounting Standards, of the difference between previously recorded and actuarially determined pension expenses. This pre-payment has been recognized in 1999 after the resolution of certain legal and regulatory issues related to the utilization of these contributions subsequent to the inte- gration of the pre-merger banks’ pension plans. Net interest income Net interest income before credit loss expenses decreased 4.6% compared to 1998, to 6,356 mil- lion. Higher margins in the domestic loan portfo- lio which resulted from more consistently applied risk-adjusted pricing were more than offset by the reduction of the international loan portfolio, the impact of the sale of activities (BSI, Adler) which contributed to the 1998 result, and lower returns on invested equity. Credit loss expense The credit loss expense for 1999 amounted to CHF 956 million. During 1998 a significant por- 68 UBS Group Financial Statements Group Financial Review tion of credit losses was charged against previ- ously established provisions, thus reducing the credit loss expense at December 1998 to CHF 951 million. Domestically we clearly benefited from our efforts on the recovery portfolio and the improv- ing macro-economic climate. Internationally, the absence of a major emerging market crisis and recoveries of previously provisioned exposures have impacted the results significantly and led to a release of country provisions. Net fee and commission income At CHF 12,607 million in 1999, net fee and com- mission income remained stable compared with CHF 12,626 million in 1998. Excluding the effect of divestments no longer reflected in 1999 figures, there was an increase of roughly one percent. The increase in investment fund fees of CHF 137 million is attributable to higher volumes and to pricing adjustments from the integration of the two pre-merger product platforms. Strong increases in custodian fees reflect higher custodi- an assets and a new pricing model. Brokerage fees are higher period-on-period mainly due to strong volumes in the UK, US and Asia. Underwriting and corporate finance fees are up 8% thanks to strong results in mergers and acquisitions. Credit-related fees and commissions decreased in line with reduced emerging market exposures and the sale of the international Global Trade Finance operations. Net trading income Net trading income was CHF 7,468 million in 1999, up from CHF 1,750 million in 1998. Dur- ing 1998, net trading income was negatively impacted by the pre-tax CHF 793 million and CHF 762 million write-downs on LTCM and pre- merger Global Equities Derivatives positions respectively, as well as mark-to-market losses in emerging markets. Net trading income comprises predominantly the net trading result of UBS Warburg and certain activities related to Group asset and liability management in the Corporate Center. The UBS Warburg trading result includes largely customer- related activities (market making, derivatives and foreign exchange), as well as some proprietary trading. During 1999, Group net trading income ben- efited from very strong customer volumes in equi- ty products globally. Fixed income trading rev- enues were strong across all major products, led by swaps and options, and investment grade debt. Income from foreign exchange and bank- notes trading was down period-on-period, as a result of Group asset and liability management, as well as lower volumes, and volatility in foreign exchange markets. Income from disposal of associates and subsidiaries Income from disposal of associates and sub- sidiaries was CHF 1,821 million during full-year 1999. Major items driving this line include – as mentioned above – the pre-tax gains of CHF 1,490 million from the sale of our stake in Swiss Life / Rentenanstalt and CHF 110 million from the disposal of Julius Baer registered shares. In 1998, disposal-related pre-tax gains of CHF 1,119 mil- lion resulted mainly from the sale of BSI. Other income Other income increased by CHF 203 million to CHF 1,325 million in 1999. Main contributors were the pre-tax CHF 200 million gain from the disposal of international Global Trade Finance and CHF 395 million from the first-time con- solidation of Klinik Hirslanden. This was par- tially offset by less income from investment in associates as a result of divestments and lower income from other properties. 1998 was nega- tively impacted by the CHF 367 million portion of the LTCM write-down. Personnel expenses Personnel expenses amounted to CHF 12,577 million in 1999. In 1998, this amount stood at CHF 9,816 million. At the end of 1997, UBS foresaw the proba- bility of a shortfall in profit in its investment banking business as a result of the merger. In order to protect its investment banking franchise, UBS realized it would probably need to make payments to personnel in excess of amounts determined by normal compensation methodolo- gies. An amount of approximately CHF 1 billion was recorded as part of the merger-related restructuring reserve for this purpose. By the end of 1998, this shortfall had materi- alized, and CHF 1,007 million of accrued pay- 69 UBS Group Financial Statements Group Financial Review 70 ments to personnel were charged against the restructuring reserve as planned. The shortfall in profits noted above was aggravated by losses associated with LTCM and the Global Equity Derivatives portfolio. Adjusting the prior year for the CHF 1,007 million, personnel expenses in 1999 increased by 16%. This is chiefly attributa- ble to higher performance-related compensation based on the good investment banking result in 1999. As discussed above, UBS recognized CHF 456 million as an asset and a credit in personnel expense. General and administrative expenses General and administrative expenses decreased 9%, or CHF 599 million, to CHF 6,018 million. Excluding the impact of the provision for the set- tlement related to the role of Swiss banks during and after World War II, representing CHF 154 million in 1999 and CHF 842 million in 1998, as well as the additional restructuring provision of CHF 300 million in 1999 and the CHF 130 mil- lion impact from the first-time full consolidation of Klinik Hirslanden, general and administrative expenses fell 6%, reflecting stringent cost reduc- tion programs throughout the Group. Depreciation and amortization Depreciation and amortization increased two percent to CHF 1,857 million. Excluding the impact of Klinik Hirslanden, depreciation and amortization remained flat. Tax expense UBS Group incurred a tax expense of CHF 1,815 million. The effective tax rate of 22.2% is lower than in 1998 principally because some income was sheltered by tax losses carried forward. Balance sheet Total balance sheet Total assets increased four percent to CHF 982 billion. Excluding currency-related effects, total assets declined four percent. Risk-weighted assets declined 8.6% over the year to CHF 278 billion reflecting mainly the reduction of the interna- tional credit portfolio and the decrease in positive replacement values. Loan book The reduction in our customers’ loan exposures from CHF 261 billion to CHF 247 billion is almost entirely attributable to UBS Warburg. The Private and Corporate Clients Division’s gross loans outstanding remained stable at CHF 165 billion as new business was offset by a transfer of exposure to UBS Private Banking during the process of integration as well as write-offs. The improved economic environment both in Switzerland and in Asia caused the quality of our loan book to further improve. With the continued positive economic outlook in mind, management believes that current provisioning levels adequate- ly cover the risks inherent in the portfolio. Treasury shares On 12 March 1999, UBS announced its intention to invest unallocated capital in its own stock. At 31 December 1998, UBS held 4,150,150 shares, or 2% of outstanding shares, in treasury stocks. At 31 December 1999, UBS held 7,830,110 shares, or 3.6% of its own shares in treasury stocks. This amount includes 526,541 shares that are at the disposal of our Board of Directors. On 14 December 1999 UBS announced a stra- tegic change to its share buy-back program and the opening of a second trading line. This trading line has been open since 17 January 2000. As of 23 February 2000, the program has resulted in the repurchase of about 2.8 million shares, or about 1.3% of our market capitalization. UBS Group Financial Statements 71 UBS Group Financial Statements Financial Statements Financial Statements UBS Group Income Statement CHF million, except per share data For the year ended Operating income Interest income Interest expense Net interest income Credit loss expense Net interest income after credit loss expense Net fee and commission income Net trading income Net gains from disposal of associates and subsidiaries Other income Total operating income Operating expenses Personnel General and administrative Depreciation and amortization Total operating expenses Operating profit before tax and minority interests Tax expense Net profit before minority interests Minority interests Net profit Basic earnings per share (CHF) Basic earnings per share (CHF) before goodwill 1 Diluted earnings per share (CHF) Diluted earnings per share (CHF) before goodwill 1 Note 31.12.1999 31.12.1998 Change % 4 4 12b 5 6 7 8 9 9 9 25 26 10 10 10 10 18,323 (11,967) 22,835 (16,173 ) 6,356 (956) 5,400 12,607 7,468 1,821 1,325 28,621 12,577 6,018 1,857 20,452 8,169 1,815 6,354 (54) 6,300 30.28 31.91 30.12 31.75 6,662 (951 ) 5,711 12,626 1,750 1,119 1,122 22,328 9,816 6,617 1,825 18,258 4,070 1,045 3,025 5 3,030 14.31 15.92 14.23 15.84 (4,512 ) 4,206 (306 ) (5 ) (311 ) (19 ) 5,718 702 203 6,293 2,761 (599 ) 32 2,194 4,099 770 3,329 (59 ) 3,270 15.97 15.99 15.89 15.91 (20) (26) (5) 1 (5) 0 327 63 18 28 28 (9) 2 12 101 74 110 – 108 112 100 112 100 1 The amortization of goodwill and other purchased intangible assets are excluded from this calculation. 72 UBS Group Financial Statements Financial Statements UBS Group Balance Sheet CHF million Note 31.12.1999 31.12.1998 Change % Assets Cash and balances with central banks Money market paper Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets 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 Foreign currency translation Retained earnings Treasury shares Total shareholders’ equity Total liabilities, minority interests and shareholders’ equity Total subordinated liabilities 11 12 13 14 15 27 12 16 17 18 19 20 21 13 14 15 27 21 22 23, 24, 25 5,073 69,717 29,907 113,162 144,796 217,001 130,500 234,858 7,039 5,167 1,102 8,701 3,543 11,007 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 1,806 51,327 (38,588 ) 21,467 3,511 54,413 (39,436 ) (13,068 ) 125 (1,460 ) (1,703 ) (1,185 ) 1,333 (1,085 ) 981,573 944,116 37,457 600 496 104 64,655 76,365 12,832 209,236 54,586 161,922 279,960 12,040 56,332 18,376 51,527 85,716 19,171 137,617 47,033 205,080 274,850 11,232 50,783 27,722 13,128 (9,351 ) (6,339 ) 71,619 7,553 (43,158 ) 5,110 808 5,549 (9,346 ) 946,304 910,731 35,573 26 434 990 (556 ) 4,309 13,929 (442) 20,501 (3,462) 34,835 4,300 13,740 (456 ) 16,293 (1,482 ) 32,395 9 189 14 4,208 (1,980 ) 2,440 981,573 944,116 14,801 13,652 37,457 1,149 55 279 (56) 23 2 33 (23) (5) 2 (22) (61) (12) 60 (9) 4 21 25 (11) (33) 52 16 (21) 2 7 11 (34) 4 (56) 0 1 (3) 26 134 8 4 8 73 UBS Group statement of Changes in Equity CHF million For the year ended Issued and paid up share capital Balance at the beginning of the year Issue of share capital Balance at the end of the year 1 Share premium Balance at the beginning of the year Premium on shares issued, warrants exercised Premium on disposal of Treasury shares Balance at the end of the year Foreign currency translation 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 Net profit for the year Dividends paid Balance at the end of the year Treasury shares, at cost Balance at the beginning of the year Acquisitions Disposals Balance at the end of the year 2 31.12.1999 31.12.1998 4,300 9 4,309 13,740 45 144 13,929 (456) 14 (442) 16,293 6,300 (2,092) 20,501 (1,482) (3,595) 1,615 (3,462) 4,296 4 4,300 13,260 111 369 13,740 (111) (345) (456) 15,464 3,030 (2,201) 16,293 (1,982) (2,796) 3,296 (1,482) Total shareholders’ equity 34,835 32,395 1 Comprising 215,446,581 ordinary shares at 31 December 1999 and 214,976,306 ordinary shares at 31 December 1998, at CHF 20 each, fully paid. 2 Comprising 7,830,110 ordinary shares at 31 December 1999 and 4,150,150 shares at 31 December 1998. In addition to Treasury shares, a maximum of 528,954 unissued shares (conditional capital) (999,229 at 31 December 1998) can be issued without the approval of the shareholders. This amount consists of unissued and reserved shares for the former Swiss Bank Corporation employee share ownership plan and optional dividend warrants. The optional dividend warrants were granted in lieu of a cash dividend by the former Swiss Bank Corporation in February 1996 (at the option of the shareholder). UBS Group Financial Statements Financial Statements 74 UBS Group statement of Cash Flows CHF million For the year ended Cash flow from / (used in) operating activities Net profit Adjustments to reconcile to cash flow from / (used in) operating activities Non cash items included in net profit / (loss) and other adjustments: Depreciation and amortization Provision for credit losses Income from associates Deferred tax expense / (benefit) Net gain from investing activities Net increase / (decrease) in operating assets: Net due from / to banks Reverse repurchase agreements, cash collateral on securities borrowed Trading portfolio including net replacement values Loans due to / from customers Accrued income, prepaid expenses and other assets Net increase / (decrease) in operating liabilities: Repurchase agreements, cash collateral on securities lent Accrued expenses and other liabilities Income taxes paid Net cash flow from / (used in) operating activities Cash flow from / (used in) investing activities Investments in subsidiaries and associates Disposal of subsidiaries and associates Purchase of property and equipment Disposal of property and equipment Net (investment) / divestment in financial investments Net cash flow from / (used in) investing activities Cash flow from / (used in) financing activities Money market paper issued Net movements in Treasury shares Capital issuance Dividends paid Issuance of long term debt Repayment of long term debt Repayment of minority interests 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 Total UBS Group Financial Statements Financial Statements 31.12.1999 31.12.1998 6,300 3,030 1,857 956 (211) 479 (2,282) (5,298) (24,978) (50,582) 17,222 2,545 65,280 (7,366) (1,063) 2,859 (1,720) 3,782 (2,820) 1,880 356 1,478 13,128 (1,836) 54 (2,092) 12,661 (7,112) (689) 14,114 147 18,598 83,679 102,277 5,073 69,717 27,487 102,277 1,825 951 (377) 491 (1,803) (65,172) 66,031 41,488 (5,626) 2,107 (49,145) 1,686 (733) (5,247) (1,563) 1,858 (1,813) 1,134 6,134 5,750 (4,073) 869 115 (2,201) 5,566 (9,068) 0 (8,792) (386) (8,675) 92,354 83,679 3,267 18,390 62,022 83,679 75 UBS Group Financial Statements Notes to the Financial Statements 76 Notes to the Financial Statements Note 1 Summary of significant accounting policies a) Basis of accounting UBS AG and subsidiaries (the “Group”) provides a broad range of financial services such as advi- sory, underwriting, financing, market making, asset management, brokerage, and retail banking on a global level. The Group was formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland merged. The merger was accounted for using the pooling of interests method of accounting. Due to the merger, the Group harmonized its accounting policies which have been retrospectively applied for the presen- tation of comparative information. The consolidated financial statements are stat- ed in Swiss francs, the currency of the country in which UBS AG is incorporated. They are pre- pared in accordance with International Account- ing Standards. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported. Actual results could differ from such estimates and the differences may be material to the consolidated financial statements. b) Consolidation The consolidated financial statements comprise those of the parent company (UBS AG), its sub- sidiaries and its special purpose entities, present- ed as a single economic entity. Subsidiaries and special purpose entities which are directly or indi- rectly controlled by the Group are consolidated. Subsidiaries acquired are consolidated from the date control passes. Companies which are ac- quired and held with a view to their subsequent disposal are recorded as financial investments. The effects of intra-group transactions are elim- inated in preparing the Group financial statements. Equity and net income attributable to minori- ty interests are shown separately in the balance sheet and income statement respectively. c) Offsetting 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 recognized in the income statement. On a date subsequent to the trade date, the terms of spot and forward trading transactions are fulfilled (“settlement date”) and a resulting financial asset or liability is recognized on the bal- ance 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 transaction. 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 different exchange rates are recognized directly in foreign currency translation within shareholders’ equity. f) Business and geographical segments The Group is organized on a worldwide basis into five major operating divisions and Corporate Center. These divisions are the basis upon which the Group reports its primary segment informa- tion. Segment revenue, segment expenses and seg- ment performance include transfers between business segments and between geographical seg- ments. Such transfers are accounted for at com- petitive prices charged to unaffiliated customers for similar services. 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. UBS Group Financial Statements Notes to the Financial Statements 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 purchases of securities under agreements to resell and sales of securities under agreements to repurchase substantially iden- tical securities. Securities which have been sold subject to repurchase agreements continue to be recognized in the balance sheet and are measured in accordance with the accounting policy for trad- ing balances or financial assets as appropriate. The proceeds from 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 col- lateralized by the 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 trading income also includes interest and dividend income on trading assets as well as the funding costs for holding these positions. j) Loans and allowance for credit losses Loans are initially recorded at cost. For loans originated by the Group, 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. The allowance for credit losses provides for risks of losses inherent in the credit extension process, including loans and lending-related com- mitments. Such commitments include letters of credit, guarantees and commitments to extend credit. Counterparties are individually rated and periodically reviewed and analyzed. The allowance is adjusted for impairments identified on a loan-by-loan basis. Impairments in loans are 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 loans. The carrying amounts of the loans are reduced to their estimated realiz- able 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. This management process has resulted in the following components of the overall allowance: Counterparty-specific: Individual credit expo- sures are evaluated based upon the borrower’s character, overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collat- eral. Impairment is measured and allowances are established based on discounted expected cash flows. Country-specific: Probable losses resulting from exposures in countries experiencing politi- cal and transfer risk, countrywide economic dis- tress, or problems regarding the legal enforce- ability of contracts are assessed using country specific scenarios and taking into consideration the nature of the individual exposures and their importance for the economy. Specific country allowances exclude exposures addressed in coun- terparty-specific allowances. Specific reserve pools: Specific risk reserve pools were established in 1996 to absorb proba- ble losses not specifically identified at that time, but which experience indicated were present in the portfolio. These pools subsequently have been applied to specific loans based on the analy- sis of individual credit exposures. The Group does not believe there is a current need for such allowances. 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 77 UBS Group Financial Statements Notes to the Financial Statements 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. k) Financial investments Financial investments are debt and equity securi- ties held for the accretion of wealth through dis- tributions, 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. Interest income on debt securities, including amortization 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 as well as gains and losses on disposal are includ- ed 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 impairments in value. Reductions of the carrying amount and reversals of such reductions as well as gains 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 ac- quired and held with a view to their subsequent disposal are included in financial investments (see private equity above). Investments in companies where the parent company does not hold a significant influence are recorded at cost less value adjustments for less than temporary declines in value. m) Property and equipment Property and equipment includes land, buildings, furnishings, fixtures, leasehold improvements, computer, telecommunications and other equip- ment. Property and equipment is carried at cost less accumulated depreciation and is periodically reviewed for impairment. 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 improvements Not exceeding 10 years Equipment Not exceeding 5 years 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. Goodwill and intangibles resulting from the acquisition of client franchises are recognized as an asset and are amortized using the straight-line basis over their estimated useful economic life, not exceed- ing 20 years. At each balance sheet date, goodwill is reviewed for indications of impairment. If such indications exist an analysis is performed includ- ing an assessment of future cash flows to deter- mine if a write-down is necessary. Goodwill and fair value adjustments arising on the acquisition of foreign subsidiaries are treated as local currency balances and are trans- lated into Swiss francs at the closing rate at sub- sequent balance sheet dates. o) Income taxes Income tax payable on profits, based on the appli- cable tax laws in each jurisdiction, is recognized as an expense in the period in which profits arise. The tax effects on income tax losses available for carry-forward are recognized as an asset when it is probable that future taxable profit will be avail- able against which those losses can be utilized. 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 temporary differences which will result in 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. 78 UBS Group Financial Statements Notes to the Financial Statements 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, own bonds and derivatives on own shares In the normal course of its trading and market making activities, the Group buys and sells own shares, own bonds and derivatives on own shares. These instruments are held in the trading portfolio similar to other trading instruments, and are carried at fair value. Changes in fair value and dividends received on UBS AG shares and interest on own bonds in the trading portfolio are recognized as net trading income. The Group also holds its own shares for non- trading purposes for instance employee compen- sation schemes and other strategic purposes. These shares are recorded within treasury shares and are deducted from shareholders’ equity. The difference between the proceeds of the sale of treasury shares and their cost basis is recognized in share premium. Dividends relating to treasury shares are not recognized. q) Retirement benefits The Group sponsors a number of retirement ben- efit plans for its employees worldwide. These plans include both defined benefit and defined contribution plans and various other retirement benefits such as post-employment medical bene- fit. As of 1 January 1999, the Group adopted IAS 19 (revised 1998) (“IAS 19”) to account for such plans. Under IAS 19, Group contributions to defined contribution plans are expensed when employees have rendered services in exchange for such contributions, generally in the year of con- tribution. In accordance with IAS 19, the Group uses the projected unit credit actuarial method to deter- mine the present value of its defined benefit obli- gations and the related current service cost and, where applicable, past service cost. The principal actuarial assumptions made by the actuary are set out in note 35. The Group recognizes a portion of its actuar- ial gains and losses as income or expenses if the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceeded the greater of: a) 10% of present value of the defined benefit obligation at that date (before deducting plan assets); and b) 10% of the fair value of any plan assets at that date. The unrecognized actuarial gains and losses exceeding the greater of the two values are rec- ognized in the income statement over the expect- ed average remaining working lives of the employees participating in the plans. r) Derivative instruments Derivative instruments are carried at fair value. 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 replacement values. Realized and unrealized gains and losses are rec- ognized in net trading income. Valuation adjust- ments to cover credit and market liquidity risks 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. s) Comparability Certain amounts have been reclassified from pre- vious years to conform to the 1999 presentation. The prior year financial statements reflect the requirements of the following revised or new International Accounting Standards, which the Group implemented in 1999: IAS 1 IAS 14 Segment Reporting IAS 17 Accounting for Leases IAS 19 Employee Benefits IAS 36 Impairment of Assets. Presentation of Financial Statements The implementation of the above standards had no material impact for the Group. t) Recent accounting standards not yet adopted IAS 37, Provisions, contingent liabilities and contingent assets In July 1998, the IASC issued IAS 37, Provisions, Contingent Liabilities and Contingent Assets, which is required to be adopted for the Group’s 79 financial statements as of 1 January 2000. The Standard provides accounting and disclosure requirements for contingent liabilities and con- tingent assets. IAS 37 also provides recognition and measurement requirements for provisions. The Group is currently assessing the impact of adoption on its financial statements. IAS 38, Intangible assets In July 1998, the IASC issued IAS 38, Intangible Assets, which is required to be adopted for the Group’s financial statements as of 1 January 2000. The Standard requires the capitalization and amortization of intangible assets, if it is probable that the future economic benefits that are attributable to the assets will flow to the enterprise and the cost of the asset can be meas- ured reliably. The amortization period for rec- ognized intangible assets should not exceed 20 years. If adopted in 1999 this standard would have increased operating profit by approximate- ly CHF 300 million. IAS 39, Recognition and measurement of financial instruments In December 1998, the IASC issued IAS 39, Recognition and Measurement of Financial Instruments, which is required to be adopted for the Group’s financial statements as of 1 Janu- ary 2001 on a prospective basis. The Standard provides comprehensive guidance on accounting for financial instruments. Financial instruments include conventional financial assets and liabili- ties and derivatives. IAS 39 requires that all finan- cial instruments should be recognized on the bal- ance sheet. Most financial instruments should be carried at fair value. IAS 39 also establishes hedge accounting criteria and guidelines. While the spe- cific impact on earnings and financial position of IAS 39 has not been determined, the activities that will be most affected by the new Standard have been identified. Specifically, the use of deriv- atives to hedge loans, deposits, and issuance of debt, primarily hedge of interest rate risk, will be affected by IAS 39. Management is currently evaluating the impact of IAS 39. The actual assessment of the impact of IAS 39 on the Group’s earnings and financial position will be based on the 1 January 2001 financial position, among other things, in accordance with the Standard. IAS 10 (revised), Events after the balance sheet date In May 1999, the IASC issued IAS 10 (revised), Events After the Balance Sheet Date, which is required to be adopted for the Group’s financial statements as of 1 January 2000. IAS 10 (revised) establishes requirements for the recognition and disclosure of events after the balance sheet date. Interpretation SIC 16, Share capital – reacquired own equity instruments (Treasury shares) In May 1999, the IASC issued Interpretation SIC 16, Share Capital – Reacquired Own Equity Instruments (Treasury Shares), which is required to be adopted for the Group’s financial state- ments as of 1 January 2000. The Interpretation provides guidance for the recognition, presenta- tion, and disclosure of Treasury shares. SIC 16 applies to own shares and derivatives on own shares held for trading and non-trading purpos- es. SIC 16 requires own shares and derivatives on own shares to be presented as Treasury shares and deducted from Shareholders’ equity. Gains and losses relating to the sale of own shares are not recognized in the income statement but rather as a change in Shareholders’ equity. The specific impact on the Group’s financial statements of SIC 16 will be determined and based on levels of activity upon adoption. UBS Group Financial Statements Notes to the Financial Statements 80 UBS Group Financial Statements Notes to the Financial Statements Note 2 Segment reporting by business division To enable a more meaningful analysis of UBS’s results, these 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. The basis of the reporting reflects the management of the business within UBS Group. Total revenue includes income, which is directly attributable to a segment whether from sales to external customers or from transactions with other segments. Revenue sharing agreements are used to allocate external customer revenues to a segment on a reasonable basis. Transactions between business segments are conducted at arms length. For the year ended 31 December 1999 UBS Private UBS Private & UBS Asset UBS Corporate Manage- ment Clients Banking Warburg CHF million Revenues Credit loss expense 1 Total operating income Personnel expenses General and administrative expenses Depreciation Goodwill amortization 3 Total operating expenses Segment performance before tax Tax expense Net profit before minority interests Minority interests Net profit 6,011 (24 ) 5,987 1,694 1,467 138 36 3,335 2,652 12,909 (330 ) 12,579 6,861 2,448 652 134 10,095 2,484 7,193 (1,050 ) 6,143 3,363 1,061 555 2 4,981 1,162 1,096 0 1,096 444 177 29 113 763 333 UBS Corporate Center2 Capital 315 0 315 105 47 2 5 159 156 2,053 448 2,501 110 818 141 50 1,119 1,382 UBS Group 29,577 (956) 28,621 12,577 6,018 1,517 340 20,452 8,169 1,815 6,354 (54) 6,300 Other information as of 31.12.1999 Total assets 4 Total liabilities 4 133,562 131,553 730,575 721,636 199,817 191,205 2,438 1,983 3,222 2,796 (88,041 ) (102,435 ) 981,573 946,738 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 respec- tive portfolios. The difference between the statistically derived adjusted expected loss figures to the net credit loss expenses for financial report- ing purposes is reported in the Corporate Center. The divisional breakdown of the net credit loss expense for financial reporting purposes of CHF 956 million as of 31 December 1999 is as follows: UBS Private Banking CHF 11 million, UBS Warburg CHF (20) million, UBS Private and Cor- porate Clients CHF 974 million, Corporate Center CHF (9) million. 2 Corporate Center operating income includes gains on the divestments of Swiss Life/Rentenanstalt for CHF 1,490 million and Julius Baer registered shares for CHF 110 million. 3 The amortization of goodwill includes other purchased intangible assets. 4 The funding surplus / requirement is reflected in each division and adjusted in Corporate Center. 81 UBS Group Financial Statements Notes to the Financial Statements For the year ended 31 December 1998 UBS Private UBS Private & UBS Asset UBS Corporate Manage- ment Clients Banking Warburg 7,223 (26 ) 6,987 (500 ) 7,025 (1,170 ) 7,197 1,458 1,277 111 15 2,861 4,336 6,487 4,333 2,483 535 157 7,508 (1,021) 5,855 3,238 1,025 680 4 4,947 908 1,163 0 1,163 454 154 29 78 715 448 CHF million Revenues Credit loss expense 1 Total operating income Personnel expenses General and administrative expenses Depreciation 2 Goodwill amortization 3 Total operating expenses Segment performance before tax Tax expense Net profit before minority interests Minority interests Net profit UBS Corporate Center Capital 585 0 585 121 35 0 1 157 428 296 745 1,041 212 1,643 128 87 2,070 (1,029) UBS Group 23,279 (951) 22,328 9,816 6,617 1,483 342 18,258 4,070 1,045 3,025 5 3,030 Other information as of 31.12.1998 Total assets 4 Total liabilities 4 107,772 106,197 685,921 675,041 173,028 164,865 800 724 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 respec- tive portfolios. The difference between the statistically derived adjusted expected loss figures to the net credit loss expenses for financial report- ing purposes is reported in the Corporate Center. The divisional breakdown of the net credit loss expense for financial reporting purposes of CHF 951 million as of 31 December 1998 is as follows: UBS Private Banking CHF 48 million, UBS Warburg CHF 506 million, UBS Private and Corporate Clients CHF 397 million. 2 The 1998 figures have been restated due to a refinement of the allocation methodology for depreciation. 3 The amortization of goodwill includes other purchased intangible assets. 4 The funding surplus / requirement is reflected in each division and adjusted in Corporate Center. 82 UBS Group Financial Statements Notes to the Financial Statements Note 3 Segment reporting by geographic location The geographic analysis of total assets is based on customer domicile whereas operating income and capital investment is based on the location of the office in which the transactions and assets are record- ed. Because of the global nature of financial markets the Group’s business is managed on an integrated basis worldwide, with a view to profitability by product line. The geographical analysis of operating income, total assets, and capital investment is provided in order to comply with International Accounting Standards, and does not reflect the way the Group is managed. Management believes that analysis by business division, as shown in Note 2 to these financial statements, is a more meaningful representation of the way in which the Group is managed. For the year ended 31 December 1999 Switzerland Europe Americas Asia / Pacific Africa / Middle East Total Total operating income Total assets Capital investment CHF million Share % CHF million Share % CHF million Share % 15,172 7,626 3,861 1,945 17 28,621 53 27 13 7 0 227,821 326,112 316,363 103,703 7,574 100 981,573 23 33 32 11 1 100 1,990 356 386 87 1 2,820 70 13 14 3 0 100 For the year ended 31 December 1998 Switzerland Europe Americas Asia / Pacific Africa / Middle East Total Total operating income Total assets Capital investment CHF million Share % CHF million Share % CHF million Share % 16,838 1,655 2,548 1,251 36 22,328 75 8 11 6 0 221,945 405,675 216,989 95,402 4,105 24 43 23 10 0 234 765 513 304 2 100 944,116 100 1,818 13 42 28 17 0 100 83 UBS Group Financial Statements Notes to the Financial Statements 84 Income statement Note 4 Net interest income CHF million For the year ended 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 Funding costs for trading positions Total Net interest income Note 5 Net fee and commission income CHF million For the year ended Credit-related fees and commissions Security trading and investment activity fees Underwriting and corporate finance fees Brokerage fees Fiduciary fees Custodian fees Portfolio and other management and advisory fees Investment fund fees Other Total Commission income from other services Total fee and commission income Fee and commission expense Brokerage fees paid Other Total 31.12.1999 31.12.1998 7,116 10,792 49 117 41 208 18,323 5,762 7,680 5,476 (6,951) 11,967 7,361 14,111 60 293 79 931 22,835 7,879 9,890 5,045 (6,641) 16,173 6,356 6,662 31.12.1999 31.12.1998 372 559 1,831 3,934 317 1,583 2,984 1,915 57 12,621 765 13,758 795 356 1,151 1,694 3,670 349 1,386 3,335 1,778 110 12,322 776 13,657 704 327 1,031 Net fee and commission income 12,607 12,626 UBS Group Financial Statements Notes to the Financial Statements Note 6 Net trading income CHF million For the year ended Foreign exchange 1 Fixed income Equities Net trading income 31.12.1999 31.12.1998 841 2,178 4,449 7,468 1,793 (762) 719 1,750 1 Includes other trading income such as banknotes, precious metals and commodities. Interest and dividends derived from the securities and derivative product portfolios held for trading are included within net trading income. The funding costs of holding these assets are charged to net trading income and credited to interest expense. Note 7 Gains / (Losses) from disposal of associates and subsidiaries CHF million For the year ended Net income from disposal of consolidated subsidiaries Net gains / (losses) from the disposal of investments in associates Net gains from disposal of associates and subsidiaries 31.12.1999 31.12.1998 8 1,813 1,821 1,149 (30) 1,119 While the 1999 figure represents mainly the disposal gains from our investments in Swiss Life / Rentenanstalt and Julius Baer registered shares, the 1998 number is mainly attributable to the dis- posal of the BSI – Banca della Svizzera Italiana. Note 8 Other income CHF million For the year ended Investments in financial assets (debt and equity) Net income from disposal of private equity investments Net income from disposal of other financial assets Net gains / (losses) from revaluation of financial assets Total Investments in property Net income from disposal of properties held for resale Net gains / (losses) from revaluation of properties held for resale Net income from other properties Total Equity income from investments in associates Other Total other income 31.12.1999 31.12.1998 374 180 (102) 452 78 (49) (20) 9 211 653 587 398 (556) 429 33 (106) 328 255 377 61 1,325 1,122 85 Note 9 Operating expenses CHF million For the year ended 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 postage Administration Marketing and public relations Travel and entertainment Professional fees, including IT outsourcing Other Total Depreciation and amortization Property and equipment Goodwill and other intangible assets Total 31.12.1999 31.12.1998 9,872 886 717 82 151 943 12,577 847 410 756 784 335 552 1,815 519 6,018 1,517 340 1,857 7,0821 535 5421 614 201 842 9,816 822 390 820 759 262 537 1,792 1,235 6,617 1,483 342 1,825 Total operating expenses 20,452 18,258 1 CHF 121 million of bonus related social contribution costs have been reclassed from Salaries and bonuses to Insurance and social contributions. 2 Includes CHF 456 million prepaid employer contributions (see Group Financial Review). UBS Group Financial Statements Notes to the Financial Statements 86 UBS Group Financial Statements Notes to the Financial Statements Note 10 Earnings per share For the year ended 31.12.1999 31.12.1998 Basic earnings per share calculation Net profit for the year (CHF million) Net profit for the year (CHF million) before goodwill amortization 1 Weighted average shares outstanding: Registered ordinary shares Treasury shares 6,300 6,640 3,030 3,372 215,248,513 (7,191,412) 214,855,064 (3,057,586) Weighted average shares for basic earnings per share 208,057,101 211,797,478 Basic earnings per share (CHF) Basic earnings per share (CHF) before goodwill amortization 1 30.28 31.91 14.31 15.92 Diluted earnings per share calculation Net profit for the year (CHF million) Net profit for the year (CHF million) before goodwill amortization 1 Weighted average shares for basic earnings per share Potential dilutive ordinary shares resulting from outstanding options, warrants and convertible debt securities 6,300 6,640 208,057,101 3,030 3,372 211,797,478 1,109,278 1,143,412 Weighted average shares for diluted earnings per share 209,166,379 212,940,890 Diluted earnings per share (CHF) Diluted earnings per share (CHF) before goodwill amortization 1 30.12 31.75 14.23 15.84 1 See Note 9 for reconciliation of goodwill included in other expenses. The amortization of goodwill and other purchased intangible assets is exclud- ed from this calculation. The weighted average number of shares is calculated based upon the average outstanding shares at the end of each month. All share amounts are restated in terms of new UBS AG shares. 87 UBS Group Financial Statements Notes to the Financial Statements 88 Balance sheet: assets Note 11 Money market paper CHF million Government treasury notes and bills Money market placements Other bills and cheques Total money market paper thereof eligible for discount at central banks 31.12.1999 31.12.1998 32,724 36,540 453 69,717 64,671 9,568 8,262 560 18,390 16,512 Note 12a Due from banks and loans to customers The composition of due from banks, the loan portfolio and the allowance for credit losses by type of exposure at the end of the year was as follows: CHF million Banks Allowance for credit losses Net due from banks Loans to customers Mortgages Other loans Subtotal Allowance for credit losses Net loans to customers Net due from banks and loans to customers thereof subordinated 31.12.1999 31.12.1998 30,785 (878) 29,907 127,987 119,242 247,229 (12,371) 234,858 264,765 86 69,543 (1,048) 68,495 140,785 120,636 261,421 (13,495) 247,926 316,421 133 The composition of due from banks and loans to customers by geographical region based on the location of the borrower at the end of the year was as follows: CHF million Switzerland Europe Americas Asia / Pacific Africa / Middle East Subtotal Allowance for credit losses Net due from banks and loans to customers 31.12.1999 31.12.1998 183,944 44,796 31,285 13,451 4,538 278,014 (13,249) 264,765 187,223 53,013 44,556 43,142 3,030 330,964 (14,543) 316,421 UBS Group Financial Statements Notes to the Financial Statements Note 12a Due from banks and loans to customers (continued) The composition of due from banks and loans to customers by type of collateral at the end of the year was as follows: CHF million Secured by mortgages Collateralized by securities Guarantees and other collateral Unsecured Subtotal Allowance for credit losses Net due from banks and loans to customers 31.12.1999 31.12.1998 130,835 19,061 28,725 99,393 278,014 (13,249) 264,765 145,247 13,185 27,953 144,579 330,964 (14,543) 316,421 Note 12b Allowance and provision for credit losses The allowance and provision for credit losses developed as follows: CHF million Balance at the beginning of the year Write-offs Recoveries Increase / (decrease) in credit loss allowance and provision Net foreign exchange and other adjustments 1 Balance at the end of the year Specific Country risk provision allowance Total 31.12.1999 Total 31.12.1998 13,528 (3,271) 65 1,122 578 12,022 1,450 (4) 0 (166) 96 1,376 14,978 (3,275) 65 956 674 13,398 16,213 (2,324) 59 951 79 14,978 1 Includes allowance for doubtful interest of CHF 409 million at 31.12.1999 and CHF 423 million at 31.12.1998. At the end of the year 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 liabilities related to commitments and contingent liabilities Total allowance and provision for credit losses 31.12.1999 31.12.1998 878 12,371 13,249 149 13,398 1,048 13,495 14,543 435 14,978 89 UBS Group Financial Statements Notes to the Financial Statements Note 12c Non-performing loans The non-performing loans by type of exposure were as follows: CHF million Banks Loans to customers Mortgages Other Subtotal Total non-performing loans 1 31.12.1999 31.12.1998 499 7,105 5,469 12,574 13,073 477 9,280 6,356 15,636 16,113 1 Includes non-performing loans of CHF 423 million at 31.12.1999 and CHF 397 million at 31.12.1998 that defaulted based on transfer risk pre- viously not aggregated. The non-performing loans by geographical region based on the location of the borrower were as fol- lows: CHF million Switzerland Europe Americas Asia / Pacific Africa / Middle East Total non-performing loans 1 31.12.1999 31.12.1998 11,435 223 697 373 345 13,073 14,022 405 1,156 281 249 16,113 1 Includes non-performing loans of CHF 423 million at 31.12.1999 and CHF 397 million at 31.12.1998 that defaulted based on transfer risk pre- viously not aggregated. When principal and interest are overdue by 90 days, loans are classified as non-performing, the recog- nition of interest income ceases and a charge is recognized against income for the unpaid interest receivable. Allowances are provided for non-performing loans to reflect their net estimated recover- able amount. Unrecognized interest related to such loans totaled CHF 409 million for the year ended 31.12.1999 and CHF 423 million for the year ended 31.12.1998. Note 13 Cash collateral on securities borrowed and lent CHF million Cash collateral by counterparties Banks Customers Securities borrowed 31.12.1999 Securities lent 31.12.1999 Securities borrowed 31.12.1998 Securities lent 31.12.1998 99,810 13,352 8,926 3,906 68,186 23,509 91,695 5,337 13,834 19,171 Total cash collateral on securities borrowed and lent 113,162 12,832 90 UBS Group Financial Statements Notes to the Financial Statements Note 14 Repurchase and reverse repurchase agreements CHF million Agreements by counterparties Banks Customers Reverse repurchase Repurchase agreements agreements 31.12.1999 31.12.1999 Reverse repurchase agreements 31.12.1998 Repurchase agreements 31.12.1998 100,077 44,719 131,970 77,266 107,565 33,720 77,942 59,675 Total repurchase and reverse repurchase agreements 144,796 209,236 141,285 137,617 Note 15 Trading portfolio Trading assets and liabilities are carried at fair value. The following table presents the carrying value of trading assets and liabilities at the end of the reporting period. CHF million 31.12.1999 31.12.1998 Trading portfolio assets Debt instruments Swiss government and government agencies US Treasury and government agency Other government Corporate listed instruments Other unlisted instruments Total Equity instruments Listed instruments (excluding own shares) Own shares Unlisted instruments Total Precious metals 7,391 21,821 65,821 13,646 8,439 13,448 9,969 62,639 8,519 8,100 117,118 102,675 87,227 4,561 2,968 94,756 5,127 49,848 3,409 841 54,098 5,815 Total trading portfolio assets 217,001 162,588 Trading portfolio liabilities Debt instruments Swiss government and government agencies US Treasury and government agency Other government Corporate listed instruments Total Listed equity instruments Total trading portfolio liabilities 0 24,535 11,917 6,459 42,911 11,675 54,586 96 4,455 34,979 3,154 42,684 4,349 47,033 The Group trades debt, equity, precious metals, foreign currency and derivatives to meet the financial needs of its customers and to generate revenue through its trading activities. Note 27 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 provide further details about cash collateral on securities borrowed and lent and repurchase and reverse repurchase agreements. 91 UBS Group Financial Statements Notes to the Financial Statements 92 Note 16 Financial investments CHF million Debt instruments Listed Unlisted Total Equity investments Listed Unlisted Total Private equity investments Properties held for resale Total financial investments thereof eligible for discount at central banks 31.12.1999 31.12.1998 1,357 609 1,966 356 557 913 3,001 1,159 7,039 563 1,880 547 2,427 400 1,048 1,448 1,759 1,280 6,914 544 The following table gives additional disclosure in respect of the valuation methods used. CHF million Valued at amortized cost Debt instruments Valued at the lower of cost or market value Debt instruments Equity instruments Properties held for resale Total Valued at cost less adjustments for impairments Private equity investments Total financial investments Book value 31.12.1999 Fair value 31.12.1999 Book value 31.12.1998 Fair value 31.12.1998 677 687 1,530 1,551 1,289 913 1,159 3,361 3,001 7,039 1,314 939 1,194 3,447 4,146 8,280 897 1,448 1,280 3,625 1,759 6,914 907 1,552 1,369 3,828 2,574 7,953 Note 17 Investments in associates CHF million Carrying amount as of 31.12.1998 Income Additions Disposals Carrying amount as of 31.12.1999 Total investments in associates 2,805 211 47 (1,961) 1,102 The figure of CHF 1,961 million for disposals for the year ended 31 December 1999 primarily con- sists of the sale of Swiss Life / Rentenanstalt. UBS Group Financial Statements Notes to the Financial Statements Note 18 Property and equipment CHF million Bank premises Other properties Equipment and furniture Total property and equipment1 Historical cost 10,668 1,802 6,035 18,505 Accumulated depreciation as of 31.12.1998 Carrying amount as of 31.12.1998 Additions Disposals Depreciation, write-offs Carrying Accumulated3 amount depreciation as of 31.12.1999 as of 31.12.1999 (4,096 ) (656 ) (3,867 ) (8,619 ) 6,572 1,146 2,168 9,886 292 705 1,823 2,820 (1,050) (325) (525) (1,900) (354) (59) (1,692) (2,105)2 5,460 1,467 1,774 8,701 (3,625) (539) (4,345) (8,509) 1 Fire insurance value of property and equipment is CHF 15,004 million (1998: CHF 14,941 million). 2 Depreciation, write-offs of CHF 2,105 million include a charge of CHF 588 million that was charged against the restructuring provision. 3 After elimination of CHF 2,215 million accumulated depreciation relating to disposals. Note 19 Intangible assets and goodwill Accu- mulated amorti- zation as of Accu- mulated amorti- zation2 as of cost 31.12.1998 31.12.1998 Additions1 write-offs 31.12.1999 31.12.1999 Carrying amount as of Carrying amount as of Amorti- zation, Historical 553 2,447 (301 ) (489 ) 252 1,958 55 1,618 (42) (298) 265 3,278 (40) (951) 3,000 (790 ) 2,210 1,673 (340) 3,543 (991) 2 After elimination of CHF 139 million accumulated amortization relating to intangible assets fully CHF million Intangible assets Goodwill Total intangible assets and goodwill 1 Including currency translation differences. written off and no longer used. Note 20 Other assets CHF million Deferred tax assets 1 Settlement and clearing accounts VAT and other tax receivables Other receivables Total other assets 1 Additional tax information is provided in note 25. Balance sheet: liabilities Note 21 Due to banks and customers CHF million Due to banks Due to customers in savings and investment accounts Amounts due to customers on demand and time Total due to customers Total due to banks and customers 31.12.1999 31.12.1998 742 4,911 702 4,652 11,007 1,205 5,543 839 4,505 12,092 31.12.1999 31.12.1998 76,365 78,640 201,320 279,960 356,325 85,716 79,723 195,127 274,850 360,566 93 UBS Group Financial Statements Notes to the Financial Statements 94 Note 22 Long term debt CHF million Total bond issues Shares in bond issues of the Swiss Regional or Cantonal Banks’ Central Bond Institutions Medium term notes Total long term debt 48,305 2,055 5,972 56,332 Contractual maturity date UBS AG (parent) CHF million 2000 2001 2002 2003 2004 2005–2009 Thereafter Total Fixed rate 13,395 7,866 5,313 3,093 2,316 9,795 3,476 45,254 Floating rate 524 121 270 147 47 208 32 1,349 Fixed rate 818 1,354 2,158 129 286 581 921 6,247 Subsidiaries Floating rate Total 31.12.1999 Total 31.12.1998 0 0 399 0 1,705 1,378 0 3,482 14,737 9,341 8,140 3,369 4,354 11,962 4,429 56,332 8,208 7,803 8,368 6,534 3,772 12,562 3,536 50,783 The Group issues both CHF and non-CHF denominated fixed and floating rate debt. Pub- licly placed fixed rate debt pays interest at rates up to 16%. Floating rate debt pays interest based on the three-month or six-month London Inter- bank Offered Rate (“LIBOR”). Subordinated debt securities are unsecured obligations of the Group and are subordinated in right of payment to all present and future senior indebtedness and certain other obligations of the Group. At 31 December 1999 and 31 Decem- ber 1998, the Group had CHF 13,106 million and CHF 12,071 million, respectively, in subor- dinated debt excluding convertible and ex- changeable debt and notes with warrants which have been included in the following paragraph. Subordinated debt usually pays interest annually and provides for single principal payments upon maturity. At 31 December 1999 and 31 Decem- ber 1998, the Group had CHF 41,093 million and CHF 36,379 million, respectively, in unsub- ordinated debt. The Group issues convertible obligations that can be exchanged for common stock of UBS AG and notes with warrants attached on UBS AG shares. Furthermore, the Group issues notes exchangeable into common stock or preferred stock of other companies, or repaid based on the performance of an index or group of securities. At 31 December 1999 and 31 December 1998, the Group had CHF 2,133 million and CHF 2,333 million, respectively, in convertible and exchangeable debt and notes with warrants attached outstanding. The Group, as part of its interest-rate risk management process, utilizes derivative instru- ments to modify the repricing and maturity char- acteristics of the notes/bonds issued. The Group also utilizes other derivative instruments to man- age the foreign exchange impact of certain long term debt obligations. Interest rate swaps are utilized to convert the economic characteristics of fixed rate debt to those of floating rate debt. The Group issues credit-linked notes generally through private placements. The credit-linked notes are usually senior unsecured obligations of UBS AG, acting through one of its branches, and can be subject to early redemption at the option of the Group or in the event of a defined credit event. Payment of interest and/or principal is dependent upon the performance of a reference entity or security. The rate of interest on each credit-linked note is either floating and deter- mined by reference to LIBOR plus a spread or fixed. Medium term and credit-linked notes have been included in the amounts disclosed above as unsubordinated debt. 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 as of 31.12.1999 Year of issue Interest rate in % Remarks Maturity Premature redemption possible Currency Amount in millions 1995 1996 1990 1997 1990 1998 1998 1994 1997 1990 1999 1999 1998 1998 1980 1999 1999 1998 1999 1999 1999 1999 1999 1993 1999 1999 1999 1999 1999 1999 1996 1995 1998 1999 1999 1996 1999 1999 1999 1999 1999 1996 1991 1998 1998 1999 1999 1999 1999 1998 1993 1997 1998 1998 1991 1994 1999 7.000 3.500 7.000 6.750 7.250 9.150 9.700 5.000 6.000 6.750 11.500 14.000 10.250 9.000 3.750 15.250 15.300 11.500 16.000 9.000 8.250 9.000 11.000 2.750 12.000 14.500 15.250 13.000 11.000 13.000 2.500 4.500 10.000 10.000 10.250 3.000 10.000 12.250 14.130 12.000 11.000 3.625 5.000 7.500 7.000 12.500 5.250 10.750 11.000 7.500 5.125 1.750 8.000 8.000 7.000 5.375 8.500 Subordinated Subordinated Subordinated 05.01.2000 18.01.2000 15.02.2000 25.02.2000 15.03.2000 27.03.2000 27.04.2000 20.06.2000 24.07.2000 31.07.2000 15.08.2000 25.08.2000 08.09.2000 14.09.2000 25.09.2000 25.09.2000 02.10.2000 09.10.2000 20.10.2000 27.10.2000 14.11.2000 20.11.2000 20.11.2000 01.12.2000 04.12.2000 06.12.2000 06.12.2000 11.12.2000 14.12.2000 18.12.2000 20.12.2000 21.12.2000 21.12.2000 29.12.2000 12.01.2001 07.02.2001 12.02.2001 15.02.2001 27.03.2001 29.03.2001 30.03.2001 10.04.2001 15.04.2001 11.05.2001 18.05.2001 06.06.2001 14.06.2001 15.06.2001 06.07.2001 10.07.2001 15.07.2001 25.07.2001 03.08.2001 17.08.2001 04.09.2001 07.09.2001 05.10.2001 Footnotes 11 Floating rate. 16 Issued by UBS Jersey Branch. 15 Convertible into Nikkei 225 Index. 17 Issued by former SBC. 18 Issued by former UBS. 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. 29 GOAL on Novartis shares. 30 GOAL on Roche GS. 31 GOAL on UBS shares. 32 GOAL on Zurich shares. 36 GOAL on Nokia. 38 GOAL on Compaq Computer. 39 GOAL on Pfizer. 40 GOAL on America Online. 41 GOAL on Swisscom. 42 GOAL on Bank Austria. 43 GOAL on Royal Dutch. 44 GOAL on Telefonica. 45 GOAL on Lloyds TSB. 47 GOAL on S&P. 48 Goal on British Telecom. 49 GOAL on ABB. 51 GOAL on Banco Bilbao Vizcaya. 52 Omvand Konvertible Svensk Basportfolj. 53 GOAL on Total Fina. 54 Convertible into Bank of Tokyo. 55 Convertible into DDI Corp. 56 Convertible into Sumitomo. 57 GOAL on SAP. 58 GOAL on Tesco. 62 GOAL on BP Amoco. 63 GOAL on BG plc. 64 GOAL on Deutsche Telekom. – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – DEM CHF CHF GBP CHF ITL ITL CHF USD CHF EUR EUR DEM CHF CHF USD SEK CHF USD JPY CHF JPY EUR CHF EUR GBP GBP USD JPY EUR CHF CHF USD CHF EUR USD CHF GBP SEK GBP USD CHF CHF CHF CHF GBP CHF EUR EUR CHF CHF USD CHF CHF CHF CHF CHF 370 6,17 200 6,17 300 17 100 6,17 300 17 224,000 6,22 150,000 6,23 300 18 200 6,17 300 18 75 6,44 100 6,36 600 6,24 255 6,25 100 1,17 150 6,38 40 6,52 315 6,26 65 6,40 9,001 6,54 200 6,29 6,387 6,55 100 6,64 200 18 30 6,51 10 6,58 10 6,63 90 6,39 10,000 6,56 12 6,53 300 18 300 6,17 65 6,27 250 6,31 125 6,43 100 6,17 300 6,41 20 6,45 193 6,52 25 6,48 50 6,47 400 18 60 17 852 6,26 738 6,29 10 6,62 410 6,30 20 6,57 30 6,42 412 6,30 30 18,21 125 6,15,17 920 6,31 500 6,32 250 17 200 18 50 6,49 95 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 as of 31.12.1999 Year of issue Interest rate in % Remarks Maturity 1999 1992 1998 1996 1999 1990 1992 1997 1997 1996 1997 1992 1996 1997 1995 1996 1991 1998 1993 1997 1998 1993 1993 1999 1998 1991 1995 1996 1993 1994 1992 1991 1999 1999 1997 1993 1995 1995 1995 1995 1995 1995 1995 1995 1999 1999 1996 1996 1999 1999 1996 1996 1995 1996 1997 1997 1998 11.625 7.000 5.750 4.000 11.000 7.500 7.500 6.500 1.000 2.000 1.000 7.000 6.750 1.250 4.375 3.250 7.500 1.000 4.875 1.500 1.000 4.000 3.500 1.000 1.625 7.000 5.250 1.500 3.000 6.250 7.250 4.250 3.500 0 7.375 4.750 4.000 5.500 5.625 8.750 6.750 5.250 5.000 4.500 0 3.500 4.250 4.000 2.500 1.500 7.250 7.250 5.000 6.250 8.000 5.750 3.500 Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated PEP Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated 06.12.2001 06.02.2002 18.03.2002 18.04.2002 06.06.2002 07.06.2002 10.07.2002 18.07.2002 07.08.2002 23.08.2002 17.09.2002 16.10.2002 18.10.2002 05.11.2002 07.11.2002 20.12.2002 15.02.2003 25.02.2003 03.03.2003 14.03.2003 20.03.2003 31.03.2003 31.03.2003 05.05.2003 14.05.2003 16.05.2003 20.06.2003 20.11.2003 26.11.2003 06.01.2004 10.01.2004 25.06.2004 01.07.2004 07.10.2004 26.11.2004 08.01.2005 07.02.2005 15.02.2005 13.04.2005 20.06.2005 15.07.2005 18.07.2005 24.08.2005 21.11.2005 08.12.2005 26.01.2006 06.02.2006 14.02.2006 29.03.2006 12.07.2006 15.07.2006 03.09.2006 07.11.2006 06.12.2006 08.01.2007 12.03.2007 27.08.2008 Premature redemption possible – – – – – – – – – – – – – – – – 15.02.2001 – – – – – – – – 16.05.2001 – – – – 10.01.2002 – – – 08.01.2003 – – – – – – – – 08.12.2000 – – – – – – – – – – – – Currency Amount in millions GBP CHF USD CHF GBP CHF CHF USD DEM CHF DEM CHF USD DEM CHF CHF CHF EUR CHF DEM NLG CHF CHF USD USD CHF CHF CHF CHF USD CHF CHF EUR USD GBP CHF CHF CHF CHF GBP USD CHF CHF CHF USD EUR CHF CHF CHF USD USD USD CHF DEM GBP DEM CHF 10 6,59 200 18 250 6 200 17 10 6,60 300 17 200 18 300 6,17 45 6,12,17 301 6,9,17 75 6,10,17 200 18 250 6,17 260 6,11,17 250 18 350 17 300 17 110 6,33 200 18 80 6,16,17 200 6,34 200 18 200 18 150 6,65 100 6,28 200 18 200 6,17 45 6,8,17 200 18 300 6,17 150 17 300 18 250 6 46 6,50 250 18,19 200 18 150 18 150 17 150 18 250 6,17 200 7,17 200 18 250 18 300 17 50 6,61 650 6 250 18 200 17 250 6 100 20,46 500 7,18 150 7,17 250 18 500 6,17 450 18,19 350 18,19 300 Footnotes 16 Issued by UBS Jersey Branch. 17 Issued by UBS New York Branch. 18 Convertible into SMI Index. 19 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. 16 Indexed to UBS Currency Portfolio. 17 Issued by former SBC. 18 Issued by former UBS. 19 Issued by UBS London Branch. 20 Issued by UBS Stamford Branch. 28 Convertible into UBS Oil Basket. 33 Convertible into FTSE shares. 34 Convertible into UBS Dutch Corporate Basket. 46 Convertible into AT&T. 50 GROI on Chesapeake. 59 GOAL on Granada Group. 60 GOAL on Glaxo. 61 PEP on Internet Pref. Basket /1st call at 120% thereafter annual step-ups of 20%. 65 Quanto style exchangeable bonds into Sony. PEP Protected Equity Participation 96 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 as of 31.12.1999 Year of issue Interest rate in % Remarks Maturity 1997 1986 1995 1995 1997 1990 1990 1995 1995 1996 5.875 5.000 7.375 7.000 7.375 0 0 7.500 8.750 7.750 Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated 18.08.2009 10.02.2011 15.07.2015 15.10.2015 15.06.2017 31.12.2019 31.03.2020 15.07.2025 18.12.2025 03.09.2026 Premature redemption possible – 10.02.2001 – – – – – – – – UBS Finance (Cayman Islands) Ltd., Grand Cayman 1997 1994 66 1991 66 0.000 GROI on Russian Basket 5.000 0.000 08.06.2000 01.07.2000 28.02.2001 Footnotes 62 At 1021⁄2%. 63 Private placement. 64 Issue price 17.45%. 65 Issue price 19.27%. 66 Issued by UBS Jersey Branch. 67 Issued by UBS New York Branch. 17 Issued by former SBC. 18 Issued by former UBS. 19 Issued by UBS London Branch. 66 Guaranteed by UBS. 67 Zero coupon, issue price 36.55%. 68 Guaranteed by S.G. Warburg Group plc. 69 Convertible into shares of Gillette Company. 70 Convertible into shares of UBS. 71 Zero coupon, issue price 15.68285%. 72 Zero coupon, issue price 12.41%. Protected Index Participation PIP GROI Guaranteed Return on Investment PEP GRIP Protected Equity Participation Guaranteed Return on Investment Participation UBS Australia Limited, Sydney 66 1997 1999 1999 3.250 5.000 5.000 6.500 9.250 2.500 2.500 9.125 2.750 UBS Finance (Curaçao) N.V. Netherlands Antilles 66 1995 1993 1996 1996 1990 1997 1992 1997 1998 FRN 70 0 0 S.G.W. Finance plc. 3 13.250 1991 S.G. Warburg Group plc. 1994 1986 9.000 7.625 02.10.2001 25.02.2002 25.02.2004 02.05.2000 23.08.2000 01.03.2001 30.10.2001 08.02.2002 16.06.2002 13.11.2002 29.01.2027 03.03.2028 21.03.2001 perpetual preference share GBP 1.– – – – – – – – – – – – – – – – – – Currency Amount in millions FRF CHF USD USD USD CHF CHF USD GBP USD USD CHF GBP USD AUD AUD DEM ITL USD DEM USD USD USD ITL DEM AUD GBP GBP 2,000 18,19 250 2,17 150 7,17 300 7,17 300 7,17 351 3,5,17 59 3,4,17 350 7,17 150 6,17 300 7,17 19 150 200 67 100 100 100 250 250,000 5 69 350 225 325 70 250 2,500,000 72 880 71 60 113 11 97 UBS Group Financial Statements Notes to the Financial Statements Note 23 Other liabilities CHF million 31.12.1999 31.12.1998 Provisions, including restructuring provision 1 Provision for commitments and contingent liabilities Current tax liabilities Deferred tax liabilities VAT and other tax payables 2 Settlement and clearing accounts Other payables 5,995 149 1,876 994 759 4,789 3,814 7,094 435 1,016 1,012 869 9,502 7,794 Total other liabilities 18,376 27,722 1 Further details to business risk and restructuring provisions are provided in note 24. 2 Additional information regarding income tax is provided in Note 25. Note 24 Provisions, including restructuring provision Business risk provision CHF million Balance at the beginning of the year New provisions charged to income Provisions applied Recoveries and adjustments Balance at the end of the year Restructuring provision CHF million Balance at the beginning of the year Addition Applied 1 Personnel IT Premises Other Total utilized during the year Balance at the end of the year 31.12.1999 31.12.1998 4,121 539 (705) 611 4,566 1,142 3,133 (484) 330 4,121 31.12.1999 31.12.1998 2,973 300 (378) (642) (673) (151) (1,844) 1,429 5,995 7,000 (2,024) (797) (267) (939) (4,027) 2,973 7,094 Total provisions, including restructuring provision 1 The expense categories refer to the nature of the expense rather than the income statement expense line. Provision for restructuring costs At the time of the merger, it was announced that the merged banks’ operations in various locations would be combined, resulting in vacant proper- ties, reductions in personnel, elimination of redundancies in the information technology plat- forms, 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. By the end of December 1999, the Group had utilized CHF 6 billion of the provision. As of today, many of the actions under these plans are completed or near completion. As a result of the real estate lease breaks or disposals which have been identified, the Group recognized an additional restructuring provision of CHF 300 million. 98 UBS Group Financial Statements Notes to the Financial Statements Note 25 Income taxes CHF million For the year ended Federal and Cantonal Current payable Deferred Foreign Current payable Deferred 31.12.1999 31.12.1998 978 511 359 (33) 354 463 200 28 Total income tax expense 1,815 1,045 The Group made net tax payments, including domestic federal, cantonal and foreign taxes, of CHF 1,063 million and CHF 733 million for the full year of 1999 and 1998, respectively. The components of operating profit before tax, and the differences between income tax expense reflected in the financial statements and the amounts calculated at the statutory rate of 25% are as follows: CHF million for the year ended Operating profit before tax Domestic Foreign Income taxes at statutory rate of 25% Increase / (decrease) resulting from: Applicable tax rates differing from statutory rate Tax losses not recognized Previously unrecorded tax losses now recognized Lower taxed income Non-deductible expenses Adjustments related to prior years Capital taxes Change in deferred tax valuation allowance Income tax expense 31.12.1999 31.12.1998 8,169 7,233 936 2,042 16 39 (215) (278) 132 (112) 99 92 1,815 4,070 10,486 (6,416) 1,018 86 1,436 (142) (1,849) 172 7 93 224 1,045 As of 31 December 1999 the Group had accumulated unremitted earnings from foreign subsidiaries on which deferred taxes had not been provided as the undistributed earnings of these foreign sub- sidiaries are indefinitely reinvested. In the event these earnings were distributed it is estimated that Swiss taxes of approximately CHF 35 million would be due. 99 UBS Group Financial Statements Notes to the Financial Statements 100 Note 25 Income taxes (continued) Significant components of the Group’s deferred income tax assets and liabilities (gross) are as follows: CHF million Deferred tax assets Compensation and benefits Restructuring provision Allowance for credit losses Net operating loss carryforwards Others Total Valuation allowance Net deferred tax assets Deferred tax liabilities Property and equipment Investments in associates Other provisions Unrealized gains on investment securities Others Total 31.12.1999 31.12.1998 316 316 138 2,194 237 3,201 (2,459) 742 342 153 142 93 264 994 114 718 370 1,610 170 2,982 (1,777) 1,205 484 299 109 103 17 1,012 The change in the balance of the net deferred tax asset (liability) at 31 December 1999 and 31 Decem- ber 1998 does not equal the deferred tax expense (benefit) in those years. This is due to the effect of foreign currency rate changes on tax assets and liabilities denominated in currencies other than CHF. Certain foreign branches and subsidiaries of the Group have deferred tax assets related to net oper- ating loss carryforwards and other items. Because recognition of these assets is uncertain, the Group has established valuation allowances of CHF 2,459 million and CHF 1,777 million at 31 December 1999 and 31 December 1998, respectively. Net operating loss carryforwards totalling CHF 9,149 million at 31 December 1999 are available to reduce future taxable income of certain branches and subsidiaries. The carryforwards have lives as follows: One year 2 to 4 years More than 4 years Total Note 26 Minority interests CHF million Minority interests in profit / (loss) Preferred stock 1 Minority interests in equity Total minority interests 31.12.1999 15 215 8,919 9,149 31.12.1999 31.12.1998 54 380 434 (5) 689 306 990 1 Represents Auction Market Preferred Stock, issued by UBS Inc., New York, a subsidiary whose ordinary share capital is completely owned by UBS. UBS Group Financial Statements Notes to the Financial Statements Off balance sheet and other information Note 27 Derivative instruments Derivatives held or issued for trading purposes Most of the Group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of deriva- tive products to customers at competitive prices to enable them to transfer, modify or reduce current or expected risks. Trading involves mar- ket making, positioning and arbitrage activities. 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 favorable 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 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 mar- ket interest rates change. These fluctuations in fair value are managed 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 financial instruments for both trading and non-trading purposes: Swaps Swaps are transactions in which two parties exchange cash flows on a specified notional 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 (OTC), whereas futures are standardized con- tracts 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. 101 UBS Group Financial Statements Notes to the Financial Statements Note 27 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 trans- actions. The notional amount is the amount of a derivative’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 transacted 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 (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. 102 UBS Group Financial Statements Notes to the Financial Statements Note 27 Derivative instruments (continued) Term to maturity Within 3 months NRV2 PRV1 3 to 12 months NRV PRV 1 to 5 years NRV PRV Over 5 years NRV PRV Total PRV Total NRV Total notional amount CHF bn CHF million Interest rate contracts Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts 3 Futures Options Total Foreign exchange contracts Over-the-counter (OTC) contracts Forward contracts Interest and currency swaps Options Exchange-traded contracts 3 Futures Options Total Precious metals contracts Over-the-counter (OTC) contracts Forward contracts Options Exchange-traded contracts 3 Futures Options Total Equity / Index contracts Over-the-counter (OTC) contracts Forward contracts Options Exchange-traded contracts 3 Futures Options Total Commodity contracts Over-the-counter (OTC) contracts Forward contracts Options Total 34 5,386 108 55 2,100 27 68 3,163 47 19 2,871 742 6 22,843 268 1 24,168 12 0 35,942 4 0 30,301 2,018 108 67,334 427 75 59,440 2,799 554.0 2,650.9 1,877.0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 774.1 54.4 5,528 2,182 3,278 3,632 23,117 24,181 35,946 32,319 67,869 62,314 5,910.4 9,669 622 3,344 14,264 520 2,708 3,661 2,036 3,934 7,008 1,826 3,138 445 529 8,883 851 6,076 411 25 2,567 30 37 1,518 10 13,800 5,754 16,191 22,160 9,940 6,267 1,077.1 252.3 813.5 0 0 1 1 0 4 0 1 0 0 0 0 0 0 0 0 0 4 1 2 3.5 3.7 13,635 17,494 9,635 11,973 9,857 7,338 2,622 1,565 35,749 38,370 2,150.1 1,112 277 1,047 215 0 0 0 5 53 594 0 5 62 466 80 1,168 60 1,059 0 8 0 0 0 10 0 117 0 0 0 130 1,245 2,156 1,169 1,870 0 0 0 5 0 23 30.0 82.9 0.8 4.9 1,389 1,267 652 536 1,248 1,129 117 130 3,406 3,062 118.6 526 1,941 1,721 1,611 1,148 4,013 2,044 10,021 503 10,146 5,325 27,182 1,762 439 2,787 2,985 3,939 16,539 11,877 41,799 149.4 264.7 74 1,061 3,602 46 304 0 1,744 0 4,047 0 72 0 63 0 0 0 0 74 2,877 46 4,414 25.1 79.8 3,682 6,905 16,112 10,721 32,570 2,201 5,772 23,429 58,136 519.0 32 15 47 25 15 40 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 32 15 47 25 15 40 Total derivative instruments 31.12.1999 24,201 24,665 20,470 32,253 44,943 65,218 40,886 39,786 130,500 161,922 Total derivative instruments 31.12.1998 31,614 50,150 32,251 29,404 57,023 75,261 49,048 50,265 169,936 205,080 1 PRV: Positive replacement value. 2 NRV: Negative replacement value. 3 Exchange-traded products include proprietary trades only. 167.9 79.7 247.6 – – 103 UBS Group Financial Statements Notes to the Financial Statements 104 Note 28 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 pledged assets Carrying amount 31.12.1999 Related liability 31.12.1999 Carrying amount 31.12.1998 Related liability 31.12.1998 35,578 2,536 23,837 170 2,110 64,231 707 1,736 585 91 0 3,119 6,981 2,955 13,902 147 0 23,985 5 2,047 5,636 71 0 7,759 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. These assets are also segregated per- suant to certain regulatory requirements. Note 29 Fiduciary transactions CHF million Placements with third parties Fiduciary credits and other fiduciary financial transactions Total fiduciary transactions 31.12.1999 31.12.1998 60,221 1,438 61,659 60,612 652 61,264 Fiduciary placement represents funds which customers have instructed the Group to place in foreign banks. The Group is not liable to the customer for any default by the foreign bank nor do creditors of the Group have a claim on the assets placed. Note 30 Commitments and contingent liabilities Commitments and Contingencies represent po- tential 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; note issuance facilities and revolving underwrit- ing facilities, which allow clients to issue money 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. UBS Group Financial Statements Notes to the Financial Statements Note 30 Commitments and contingent liabilities (continued) CHF million 31.12.1999 31.12.1998 Contingent liabilities Credit guarantees and similar instruments 1 Sub-participations Total Performance guarantees and similar instruments 2 Sub-participations Total Irrevocable commitments under documentary credits Sub-participations Total Gross contingent liabilities Sub-participations Net contingent liabilities Irrevocable commitments Undrawn irrevocable credit facilities Sub-participations Total Liabilities for calls on shares and other equities Gross irrevocable commitments Sub-participations Net irrevocable commitments Gross commitments and contingent liabilities Sub-participations Net commitments and contingent liabilities 18,822 (3,665) 15,157 6,782 (42) 6,740 2,704 0 2,704 28,308 (3,707) 24,601 65,693 (1,836) 63,857 57 65,750 (1,836) 63,914 94,058 (5,543) 88,515 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) 82,420 120,177 (5,498) 114,679 1 Credit guarantees in the form of bill of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit, endorse- ment liabilities from bills rediscounted, advance payment guarantees and similar facilities. 2 Bid bonds, performance bonds, builders’ guaran- tees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and similar facilities. CHF million Overview of collateral Gross contingent liabilities Gross irrevocable commitments Liabilities for calls on shares and other equities Total 31.12.1999 Total 31.12.1998 Mortgage collateral Other collateral Unsecured Total 191 386 0 577 389 11,356 8,774 0 20,130 33,363 16,761 56,533 57 73,351 86,425 28,308 65,693 57 94,058 120,177 105 UBS Group Financial Statements Notes to the Financial Statements 106 Note 31 Operating lease commitments Our minimum commitments for non-cancellable leases of premises and equipment are presented as follows: CHF million Operating leases due 2000 2001 2002 2003 2004 2005 and thereafter Total commitments for minimum payments under operating leases 31.12.1999 247 202 184 187 153 1,919 2,892 Operating expenses include CHF 742 million and CHF 797 million in respect of operating lease rentals for the year ended 31.12.1999 and for the year ended 31.12.1998 respectively. Note 32 Litigation In the United States, several class actions, in rela- tion to what is known as the Holocaust affair, have been brought against the bank (as legal suc- cessor to Swiss Bank Corporation and Union Bank of Switzerland) in the United States District Court for the Eastern District of New York (Brooklyn). These lawsuits were initially filed in October 1996. Another Swiss bank has been designated as a defendant alongside us. On 12 August 1998, however, a settlement was reached between the parties. This settlement pro- vides for a payment by the defendant banks to the plaintiffs, under certain terms and conditions, of an aggregate amount of USD 1.25 billion. UBS agreed to contribute up to two-thirds of this amount. To the extent that other Swiss compa- nies agreed to participate in this fund, and to the extent of applicable payments to beneficiaries of eligible dormant accounts, our share was to be reduced. Based on our estimate of such expected contributions, we provided a reserve of USD 610 million in 1998 and an additional USD 95 million in 1999. A number of persons have elected to opt out of the settlement and not participate in the class action. It is expected that a decision approv- ing the settlement will be issued in 2000, which will be followed by hearings on the allocation of the settlement amount. In addition, the bank 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 33 Financial instruments risk position Overall risk position The Group manages risk in a number of ways, including the use of a value-at-risk model com- bined with a system of trading limits. 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 following sets out the extent to which the Group was exposed to interest rate risk at 31 De- cember 1999. The table shows the potential im- pact of a one basis point (0.01%) increase in mar- ket interest rates which would influence the fair values of both assets and liabilities that are sub- ject 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. 107 UBS Group Financial Statements Notes to the Financial Statements Note 33 Financial instruments risk position (continued) a) Interest rate risk (continued) Interest rate sensitivity position CHF thousand per basis point Within 1 month Interest sensitivity by time bands as of 31.12.1999 3 to 12 months 1 to 3 months 1 to 5 years Over 5 years CHF USD EUR GBP JPY Others Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading 171 (30 ) (411 ) 3 (39 ) 0 1 0 484 0 (34 ) 0 (902 ) (8 ) 1,018 (33 ) (239 ) (3 ) 43 5 (1,708 ) 0 46 0 466 (398 ) 386 (10 ) 113 3 10 (39 ) 927 0 50 0 506 (6,204 ) (109 ) 83 600 30 (34 ) 77 (101 ) (1 ) (195 ) 0 (417 ) (1,220 ) (908 ) 1,207 (1,406 ) 210 (77 ) 815 135 (4 ) 24 0 CHF thousand per basis point Within 1 month Interest sensitivity by time bands as of 31.12.1998 3 to 12 months 1 to 3 months 1 to 5 years Over 5 years 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 (322 ) (7,522 ) (575 ) 72 (559 ) 48 (919 ) 130 1,002 6 (158 ) 0 (464 ) (546 ) 1,254 1,502 339 256 491 876 263 146 (152 ) 0 Total (176) (7,860) (24) 1,250 (971) 240 (57) 858 (263) (5) (109) 0 Total (819) (8,435) 752 1,561 (434) 296 (72) 990 133 150 (350) 0 Trading The major part of the trading related interest rate risk is generated in fixed income securities trad- ing, 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 sizable in USD and Euro as these are still the predominantly traded cur- rencies 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 with respect to trading positions, which can vary significantly on a daily basis. 108 UBS Group Financial Statements Notes to the Financial Statements Note 33 Financial instruments risk position (continued) a) Interest rate risk (continued) 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 subor- dinated notes issues which are intentionally unswapped since they are regarded as constituting a part of the Group’s equity for asset and liability management purposes. At 31 December 1999, the Group’s equity was invested in a portfolio of fixed rate CHF deposits with an average duration of 2.16 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 (7.9) million, which is reflect- ed in the table above. This is in line with the dura- tion and sensitivity targets set by the Group Exec- utive Board. Investing in shorter term or variable rate instruments would mean exposing the earn- ings stream (interest income) to higher fluctua- tions. 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 counter- parties 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 af- fecting a particular industry or geographic loca- tion. (b)(i) On-balance sheet assets As of 31 December 1999, due from banks and loans to customers amounted to CHF 278 billion. 66.2% of the loans were 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 94 billion in credit commitment and contingent liabilities as at 31 December 1999, 11% related to clients domiciled in Switzerland, 36% in Europe (excluding Switzerland) and 42% in North America. Derivatives Credit risk represents the current replacement value of all outstanding derivative contracts in a gain position without factoring in the impact of master netting agreements or the value of any col- 109 UBS Group Financial Statements Notes to the Financial Statements Note 33 Financial instruments risk position (continued) b) Credit risk (continued) lateral. Positive replacement values amounted to CHF 130 billion as at 31 December 1999, before applying any master netting agreements. Based on the location of the ultimate counterparty, 4% of this credit risk amount related to Switzerland, 49% to Europe (excluding Switzerland) and 37% to North America. 71% of the positive replace- ment values are with other banks. (b)(iii) Credit risk mitigation techniques Credit risk associated with derivative instruments is mitigated by the use of master netting agree- ments. A further method of reducing credit expo- sure arising from derivative transactions is to use collateralization arrangements. Master netting agreements eliminate risk to the extent that only the net claim is due to be settled in the case of a default of the counterparty. The impact of master netting agreements as at 31 December 1999 is to mitigate credit risk on derivative instruments by approximately CHF 66 billion. The impact can change substantially over short periods of time, because the exposure is affected by each transaction subject to the ar- rangement. 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, diversi- fication and maturity structure of the portfolio. Credit utilization for all products is compared with established limits on a continual basis and is subject to a standard exception reporting process. 110 UBS Group Financial Statements Notes to the Financial Statements Note 33 Financial instruments risk position (continued) c) Currency risk The Group views itself as a Swiss entity, with the Swiss franc as its reporting currency. Hedging trans- actions are used to manage risks in other currencies. Breakdown of assets and liabilities by currencies 31.12.1999 CHF billion CHF USD EUR Other 31.12.1998 USD CHF Assets Cash and balances with central banks Money market paper Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets 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 3.4 1.5 7.5 0.1 2.0 34.1 16.7 166.4 2.5 1.7 0.9 7.4 1.2 3.1 248.5 1.0 8.1 0.1 16.5 0.0 21.7 127.5 3.1 23.7 9.1 0.3 34.8 0.2 38.6 7.7 106.4 54.8 77.4 11.5 35.0 2.9 1.8 0.1 0.5 2.2 1.9 0.5 0.7 5.3 1.1 37.9 26.9 1.3 5.3 0.7 0.5 0.0 0.1 0.0 2.5 1.0 28.9 9.4 5.6 50.1 78.6 101.0 28.2 0.9 1.2 0.1 0.7 0.1 3.5 341.0 82.8 309.3 55.7 36.3 6.5 103.6 38.2 11.7 93.8 4.9 17.6 4.0 0.0 0.0 0.3 14.5 1.0 27.8 5.4 3.4 23.7 0.5 3.1 0.8 0.0 0.0 7.7 17.5 5.2 61.3 11.0 125.1 35.0 3.6 11.9 4.5 0.1 0.0 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 Other 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 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 3.1 247.3 442.9 38.5 33.6 5.9 74.3 8.1 19.8 80.2 2.6 16.9 6.1 0.0 0.0 12.0 26.7 13.2 52.6 38.7 158.0 56.7 5.3 10.5 7.0 0.0 0.0 245.9 372.3 80.5 282.9 277.4 286.0 380.7 111 UBS Group Financial Statements Notes to the Financial Statements Note 33 Financial instruments risk position (continued) d) Liquidity risk Maturity analysis of assets and liabilities CHF billion On demand Subject to notice1 Due between 3 and 12 mths Due between 1 and 5 years Due after 5 years Assets Cash and balances with central banks Money market papers Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets 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 31.12.1999 Total 31.12.1998 5.1 8.4 217.0 130.5 5.0 5.2 – – – 11.0 382.2 376.6 10.1 Liabilities Money market paper issued Due to banks Cash collateral on securities lent Repurchase agreements 54.6 Trading portfolio liabilities 161.9 Negative replacement values 58.6 Due to customers Accrued expenses and deferred income 12.0 – Long term debt 18.4 Other liabilities Total 31.12.1999 Total 31.12.1998 315.6 367.9 Due within 3 mths – 67.8 19.1 112.7 142.9 – – – – 407.5 375.8 24.3 60.2 12.8 197.9 – – – 53.4 – – – 53.4 59.9 1.1 82.1 127.0 0.4 – 83.6 83.5 6.3 428.5 371.1 – 1.9 1.6 1.9 – – 0.5 0.5 – 64.9 0.1 39.2 0.2 70.8 0.9 – – 0.3 – 6.6 0.8 1.1 8.7 3.5 21.0 22.3 – – – 72.7 66.0 0.3 0.3 1.7 2.5 28.0 13.2 30.0 29.7 16.0 16.3 Total 5.1 69.7 29.9 113.2 144.8 217.0 130.5 234.9 7.0 5.2 1.1 8.7 3.5 11.0 981.6 944.1 64.7 76.4 12.8 209.2 54.6 161.9 280.0 12.0 56.3 18.4 946.3 910.7 – – – 44.8 43.5 40.4 4.4 11.3 8.1 8.4 72.6 42.2 1 Deposits without a fixed term, on which notice of withdrawal or termination has not been given. (Such funds may be withdrawn by the depos- itor or repaid by the borrower subject to an agreed period of notice.) 112 UBS Group Financial Statements Notes to the Financial Statements Note 33 Financial instruments risk position (continued) e) Capital adequacy Risk-weighted assets (BIS) CHF million Balance sheet assets Due from banks and other collateralized lendings Net positions in securities 1 Positive replacement values Loans, net of allowances for credit losses and other collateralized lendings Accrued income and prepaid expenses Property and equipment 2 Other assets Off-balance sheet and other positions Contingent liabilities Irrevocable commitments Forward and swap contracts 3 Purchased options 3 Market risk positions 4 Total risk-weighted assets Balance sheet / notional amount 31.12.1999 229,794 77,858 130,500 292,928 5,167 8,701 11,007 28,308 65,693 4,881,483 406,208 – – Risk- weighted amount 31.12.1999 9,486 11,177 18,175 159,835 3,164 9,860 7,686 14,459 17,787 13,213 2,823 10,813 278,478 Balance sheet / notional amount 31.12.1998 244,246 28,109 169,936 305,155 6,627 9,886 12,092 37,731 82,337 5,177,912 489,005 – – Risk- weighted amount 31.12.1998 13,845 8,316 29,494 164,113 3,190 11,166 7,900 19,471 18,197 7,130 5,861 16,018 304,701 1 Excluding positions in the trading book, these are included in market risk positions. 2 Including CHF 1,159 million (1998: CHF 1,280 million) foreclosed properties and properties held for disposal, which are recorded in the balance sheet under financial investments. 3 The risk-weight- ed 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 Tier 1 Tier 2 Total BIS Capital CHF million 31.12.1999 Ratio % 31.12.1999 Capital CHF million 31.12.1998 Ratio % 31.12.1998 29,529 10,730 40,259 10.6 – 14.5 28,299 12,086 40,385 9.3 – 13.3 Among other measures UBS monitors the adequa- cy of its capital using ratios established by the Bank for International Settlements (BIS). The Group has maintained all BIS and Swiss capital adequacy rules for all periods presented. 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 positions at a weighted amount to reflect their relative 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 113 UBS Group Financial Statements Notes to the Financial Statements 114 Note 33 Financial instruments risk position (continued) e) Capital adequacy (continued) an issuer of securities arising from its physical holdings and other related transactions in that security. For contingent liabilities and irrevocable facil- ities granted, the credit equivalent is calculated by multiplying the nominal value of each transaction by its corresponding credit conversion factor. The resulting amounts are then weighted for credit risk using the same percentage as for balance sheet assets. In the case of OTC forward con- tracts and purchased options, the credit equiva- lent is computed on the basis of the current replacement value of the respective contract plus a security margin (add-on) to cover the future potential credit risk during the remaining dura- tion of the contract. UBS calculates 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 approach 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, the use of the Group internal models was accepted by the Swiss Federal Banking Com- mission in July 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 sub- ordinated long term debt. Note 34 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 assump- tions. It is presented because not all financial instruments are reflected in the financial state- ments 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 esti- mated using present value or other estimation and valuation techniques based on market condi- tions 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 are measured at fair value by reference to quoted market prices when available. If quoted mar- ket prices are not available, then 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; the fair value of demand deposits and savings is accounts with no specific maturity (c) UBS Group Financial Statements Notes to the Financial Statements Note 34 Fair value of financial instruments (continued) 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 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. 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 assets 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 Carrying value Fair Unrealized gain/(loss) 31.12.1999 31.12.1999 31.12.1999 31.12.1998 31.12.1998 31.12.1998 Fair Unrealized value gain/(loss) Carrying value value 5.0 69.7 30.0 113.2 144.8 217.0 130.5 235.1 5.9 64.7 76.9 12.8 209.2 54.6 161.9 280.1 56.4 5.0 69.7 30.0 113.2 144.8 217.0 130.5 235.3 7.1 64.7 76.9 12.8 209.2 54.6 161.9 280.1 57.6 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 0 0 0 0 0 0 0 0.2 1.2 0 0 0 0 0 0 0 (1.2) 0.5 0.7 0 0 0.1 0 0 0 0 2.4 0.8 0 0 0 0 0 0 (0.3) (2.3) 1.0 1.7 The table does not reflect the fair values of non-financial assets and liabilities such as prop- erty (including those properties carried as finan- cial investments), equipment, prepayments and non-interest accruals. The interest amounts ac- crued to date for respective financial instruments are included, for purposes of the above fair value disclosure, in the carrying value of the financial instruments. Substantially all of the Group’s commitments to extend credit are at variable rates. Accordingly, the Group has no significant exposure to fair value fluctuations related to these commitments. Changes in the fair value of the Group’s fixed rate loans, long and medium term notes and bonds issued are hedged by derivative instru- ments, mainly interest rate swaps. The interest rate risk inherent in the balance sheet positions 115 UBS Group Financial Statements Notes to the Financial Statements Note 34 Fair value of financial instruments (continued) with no specific maturity is also hedged with derivative instruments based on the management view on the economic maturity of the products. The hedging derivative instruments are carried at fair value on the balance sheet and are part of the replacement values in the above table. The difference between the total amount of valuation gains and losses and the amortized amount is deferred and shown net in the table as fair value effect on income of hedging derivatives recorded on accruals basis. During 1999, the interest rate level of leading economies increased substantially. The biggest move in rates was noted in Switzerland, where in particular mid and long term rates increased. These moves in rates had direct impact on the fair value calculation of fixed term transactions. As the bank has an excess volume of fixed rate long term assets over fixed rate long term liabili- ties, the net fair value unrealized gain is reduced substantially. In addition to fixed rate balance sheet positions, the bank has a number of retail products traditionally offered in Switzerland such as variable mortgage loans and customer savings and deposits. These instruments have no maturity or have a contractual repricing maturi- ty of less than one year. Based on the assumptions and the guidance under IAS, they are excluded from the fair value calculations of the table above. The exclusion of the above traditional bank- ing products from the fair value calculation leads to certain fair value swings. By calculating the fair value differences based on the economic maturity of the non maturity liabilities, such as savings and deposits, in an environment of rais- ing interest rates, they would generate fair value gains which may offset most of the fair value loss reported for fixed term transactions. Note 35 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, the UK, the US and Germany. Independent actuarial valuations are performed for the plans in those locations. Swiss pension plans until 30 June 1999 The pension funds of the Group are set up as trusts, domiciled in Basel 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% and 12%. The Group con- tributions are variable and amount from 125% to 250% of the employees contributions depending on the financial situation of the pension fund. fits covered include retirement benefits, disabili- ty, death and survivor pension. Swiss pension plans starting 1 July 1999 The pension plans of both former banks in Switzerland are in the process of being liquidated and a new foundation with domicile in Zurich has been created as of 21 January 1999. The new pension scheme became operational as of 1 July 1999. As a result of the merger of the plans of the former banks in Switzerland, on 1 July 1999 there was a one-time increase of vested plan ben- efits for the beneficiaries of such plans. This had the effect of increasing the Defined Benefit Obli- gation at this date by CHF 3,525 million. In accordance with IAS 19 (revised 1998) this resulted in a one-time charge to income which was offset by the recognition of assets (previously unrecognized due to the paragraph 58 (b) limita- tion of IAS 19) (revised 1998) used to fund this increase in benefits. The pension plan formula is based on years of contributions and final covered salary. The bene- The pension plan, covers practically all employees in Switzerland and exceeds the mini- 116 UBS Group Financial Statements Notes to the Financial Statements Note 35 Retirement benefit plans and other employee benefits (continued) mum benefits requirements under the Swiss law. Contributions for the pension plan are paid for by the employees and the Group. The employee contributions are calculated as a percentage of the insured annual salary and are deducted monthly. The percentages deducted from the salary for the full benefit coverage (including risk benefits) are depending on age and vary between 7% and 10%. The Group pays a variable contri- bution that ranges between 150% and 220% of the sum of the employees’ contributions. 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. The Group booked an amount of CHF 456 million in 1999 related to the recognition of “Excess Employer Contributions”. These assets were recognized in the fourth quarter as certain legal and regulatory issues related to the Group’s ability to utilize these assets for future funding purposes were resolved. CHF million Swiss pension plans Defined benefit obligation Plan assets at fair value Plan assets in excess of benefit obligation Unrecognized net actuarial (gains) / losses Unrecognized assets (Unfunded accrued) / prepaid pension cost Additional details to fair value of plan assets Own financial instruments and securities lent to UBS included in plan assets Any assets used by the bank included in plan assets Retirement benefits expense Current service cost Interest cost 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 31.12.1999 31.12.1998 (17,011) 18,565 1,554 (724) (374) 456 6,785 187 464 636 (883) (150) 172 (180) 59 11.9 4.0 5.0 2.0–3.0 1.5 (14,944) 17,885 2,941 (385) (2,556) 0 2,761 176 535 726 (856) 148 6 (185) 374 6.7 5.0 5.0 3.5–5.5 2.0 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 in the UK, the US and Germany. These locations together with Switzerland cover nearly 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. 117 UBS Group Financial Statements Notes to the Financial Statements 118 Note 35 Retirement benefit plans and other employee benefits (continued) The assumptions used in foreign plans take into account local economic conditions. The amounts shown for foreign plans reflect the net funded positions of the major foreign plans. Postretirement medical and life plans The Group in the US and the UK offers retiree medical benefits that contribute to the health care coverage of the employees and bene- ficiaries after retirement. In addition to retiree medical, the US also provides retiree life insur- ance benefits. The benefit obligation in excess of plan assets for those plans amounts to CHF 113 million as of 31 December 1999 (1998 CHF 93 million, 1997 CHF 100 million) and the total unfunded accrued postretirement liabilities to CHF 83 million (1998 CHF 62 million, 1997 CHF 50 million). The actuarially determined net postretirement cost amounts to CHF 17 million for 1999 (1998 CHF 17 million, 1997 CHF 14 million). CHF million Pension plans abroad Defined benefit obligation Plan assets at fair value Plan assets in excess of benefit obligation Unrecognized net actuarial (gains) / losses Unrecognized transition amount Unrecognized past service cost Unrecognized assets (Unfunded accrued) / prepaid pension cost Movement of net (liability) or asset Prepaid pension cost at the beginning of the period Net periodic pension cost Employer contributions Currency adjustment (Unfunded accrued) / prepaid pension cost at the end of the year Retirement benefits expense Current service cost Interest cost Expected return on plan assets Amortization of net transition liability Adjustment to limit prepaid pension cost Immediate recognition of transition assets under IAS 8 Amortization of unrecognized prior service costs Amortization of unrecognized net (gain) / losses 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 rates of return on assets p.a. Expected rate of salary increase Rate of pension increase 31.12.1999 31.12.1998 (2,444) 2,880 (2,009) 2,173 436 (474) 1 2 (28) (63) 43 (123) 22 (5) (63) 118 123 (195) 0 21 0 77 (6) 0 (15) 123 15.3 164 (63) 2 0 (60) 43 36 (33) 43 (3) 43 116 140 (191) 2 2 (23) 7 (3) (8) (9) 33 5.2 5.75–7.5 8.0–8.5 3.5–5.6 0.0–2.5 6.5–7.5 8.5–8.75 3.5–9.0 0.0–3.75 UBS Group Financial Statements Notes to the Financial Statements Note 36 Equity participation plans UBS AG has established various equity participa- tion plans in the form of stock plans and stock option plans to further align the long term inter- ests of managers, staff and shareholders. Key personnel are awarded a portion of their performance-related compensation in UBS AG shares or options, which are restricted for a spec- ified number of years. Long-term stock options are granted to key employees under another plan. A number of awards under these plans are made in notional shares or options, which generally are settled in cash and are treated as liabilities. Par- ticipation in both plans is mandatory. Long term stock options are blocked for three or five years, during which they cannot be exercised. For the 1997 options and certain of the 1998 options, one half of each award is subject to an accelera- tion clause after which certain forfeiture provi- sions lapse. One option gives the right to pur- chase one registered UBS AG share at the option’s strike price. Neither the fair value nor the intrin- sic value of the options granted is recognized as an expense in the financial statements. Other employees have the choice to invest part of their annual bonus in UBS AG shares or in options or derivatives on UBS AG shares, which may be exercised or settled in cash. A number of awards under these plans are made in notional shares or instruments, which generally are settled in cash. A holding period, generally three years, applies during which the instruments cannot be sold or exercised. In addition, participants in the plan receive a restricted matching contribution of additional UBS AG shares or derivatives. Shares awarded under the plan are purchased or hedged in the market. Under another plan, employees in Switzerland are entitled to purchase a specified number of UBS AG shares at a predetermined dis- counted price each year (the discount is recorded as compensation expense). The number of shares that can be purchased depends primarily on years of service and rank. Any such shares purchased must be held for a specified period of time. Infor- mation on shares available for issuance under these plans is included in the Group Statement of Changes in Equity. Number of options 31.12.1999 Weighted-average exercise price (in CHF) 31.12.1999 Number of options 31.12.1998 Weighted-average exercise price (in CHF) 31.12.1998 Outstanding, at the beginning of the year Granted during the year Exercised during the year Forfeited during the year 3,601,393 1,719,571 (35,883) (215,850) Outstanding, at the end of the year 5,069,231 Exercisable, at the end of the year 325,320 353 474 357 380 393 371 949,962 2,905,889 (11,485 ) (242,973 ) 3,601,393 0 371 363 355 535 353 0 Of the total options outstanding at 31 December 1999: 4,987,385 options (325,320 of which were exercisable) had exercise prices ranging from CHF 340 to CHF 474, or CHF 391 on average, and had a weighted-average remaining contrac- tual life of 4.58 years; and 81,846 options (none of which were exercisable) had exercise prices ranging from CHF 510 to CHF 540, or CHF 521 on average, and had a weighted-average remain- ing contractual life of 4.45 years. 119 Note 37 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. Total remuneration of related parties recognized in the income statement during the year amounted to CHF 193.1 million and CHF 102.8 million for the year ended 1998. The number of long term stock options outstanding from equity plans was 137,308 at 31 December 1999 and 127,500 at 31 Decem- ber 1998. This scheme is further explained in note 36 Equity Participation Plans. Total amount of shares and warrants held by members of the Board of Directors, Group Executive Board and Group Managing Board were 1,228,046 and 11,424,514 as of 31 December 1999 and 2,317,902 and 3,089,374 as of 31 December 1998. Total loans and advances receivable (mortgages only) from related parties were as follows: CHF million Mortgages at the beginning of the year Additions Reductions Mortgages at the end of the year 1999 27 6 (5) 28 Members of the Board of Directors, Group Executive Board and Group Managing Board are grant- ed mortgages at the same terms and conditions as other employees. Terms and conditions are based on third party conditions excluding credit margin. Loans and advances to significant associated companies were as follows: CHF million Loans and advances at the beginning of the year Additions Reductions Loans and advances at the end of the year Note 39 provides a list of significant associates. 1999 165 42 (145) 62 Note 38 Post-balance sheet events There have been no material post-balance sheet events which would require disclosure or adjustment to the December 1999 financial statements. UBS Group Financial Statements Notes to the Financial Statements 120 UBS Group Financial Statements Notes to the Financial Statements Note 39 Significant subsidiaries and associates Significant subsidiaries Company Registered office Division Share capital in millions Equity interest accumul- ated in % Bern Zurich Basel Lugano Chicago Georgetown Zurich St Helier Zurich Zurich Zurich Geneva Hamilton Armand von Ernst & Cie AG Aventic AG Bank Ehinger & Cie AG BDL Banco di Lugano Brinson Partners Inc. Brunswick Warburg Limited Cantrade Privatbank AG Cantrade Private Bank Switzerland (CI) Ltd Crédit Industriel SA EIBA “Eidgenössische Bank” Factors AG Ferrier Lullin & Cie SA Global Asset Management Ltd HYPOSWISS, Schweizerische Hypotheken- und Handelsbank Zurich IL Immobilien-Leasing AG Indelec Holding AG Intrag Klinik Hirslanden AG NYRE Holding Corp Phillips & Drew Fund Management Limited Phillips & Drew Limited PT Warburg Dillon Read Indonesia SBC Equity Partners AG Schröder Münchmeyer Hengst AG SG Warburg & Co International BV SG Warburg Securities SA Solothurner Bank SoBa Systor AG Thesaurus Continentale Effekten-Gesellschaft Zürich UBS Investment Management Pte Ltd UBS (Bahamas) Ltd UBS (Cayman Islands) Ltd UBS (France) SA UBS (Italia) SpA UBS (Luxembourg) SA UBS (Monaco) SA UBS (Panama) SA UBS (Sydney) Limited UBS (Trust and Banking) Ltd UBS (USA), Inc. UBS Australia Holdings Ltd UBS Australia Ltd UBS Bank (Canada) UBS Beteiligungs-GmbH & Co KG UBS Brinson Asset Management Co. Ltd UBS Brinson Inc. UBS Brinson Investment GmbH UBS Brinson Limited UBS Brinson Ltd UBS Brinson Pte Ltd UBS Brinson SA UBS Capital AG UBS Capital Asia Pacific Ltd UBS Capital BV UBS Capital GmbH UBS Capital II LLC UBS Capital LLC Opfikon Basel Zurich Zurich Wilmington London London Jakarta Opfikon Hamburg Amsterdam Geneva Solothurn Zurich Zurich Singapore Nassau Georgetown Paris Milan Luxembourg Monte Carlo Panama Sydney Tokyo Delaware Sydney Sydney Toronto Frankfurt Tokyo New York Frankfurt London Sydney Singapore Paris Zurich Georgetown The Hague Frankfurt Delaware New York PB 1 PCC 2 PB PB AM 3 WA 4 PB PB CAP 5 CAP PCC PB AM PB PCC CAP PB CC 6 WA AM AM WA CAP PB WA WA PCC PCC CAP WA PB PB WA PB PB PB PB WA PB WA WA WA PB WA AM AM AM AM AM AM AM CAP CAP CAP CAP CAP CAP CHF CHF CHF CHF USD USD CHF GBP CHF CHF CHF CHF USD CHF CHF CHF CHF CHF USD GBP GBP IDR CHF DEM GBP CHF CHF CHF CHF SGD USD USD EUR ITL CHF EUR USD AUD JPY USD AUD AUD CAD EUR JPY USD DEM GBP AUD SGD EUR CHF USD EUR EUR USD USD 5.0 30.0 6.0 50.0 – 50.0 10.0 0.7 10.0 14.0 5.0 30.0 2.0 26.0 5.0 10.0 10.0 22.5 102.97 – 8.0 11,000.0 71.7 100.0 148.07 14.5 50.0 5.0 30.0 0.5 4.0 5.6 10.0 43,000.0 150.0 9.2 6.0 12.7 10,500.0 763.37 11.7 15.0 90.47 398.8 800.0 72.77 10.0 8.8 8.0 4.0 0.8 0.5 5.0 104.17 – 2.77 18.67 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 91.2 100.0 100.0 100.0 85.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 90.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 121 Footnotes 1 PB: UBS Private Banking. 2 PCC: UBS Private and Corporate Clients. 3 AM: UBS Asset Management. 4 WA: UBS Warburg. 5 CAP: UBS Capital. 6 CC: Corporate Center. 7 Share capital + share premium. UBS Group Financial Statements Notes to the Financial Statements Footnotes 1 PB: UBS Private Banking. 2 PCC: UBS Private and Corporate Clients. 3 AM: UBS Asset Management. 4 WA: UBS Warburg. 5 CAP: UBS Capital. 6 CC: Corporate Center. 7 Share capital + share premium. 122 Note 39 Significant subsidiaries and associates (continued) Significant subsidiaries (continued) Company UBS Capital Partners Ltd UBS Capital S.p.A. UBS Card Center AG UBS España SA UBS Finance (Cayman Islands) Limited UBS Finance (Curaçao) NV UBS Finance (Delaware) LLC UBS Finanzholding AG 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 Futures & Options Limited UBS Immoleasing AG UBS Inc. UBS International Holdings BV UBS Invest Kapitalanlagegesellschaft mbH UBS Lease Finance LLC UBS Leasing AG UBS Limited UBS Overseas Holding BV UBS Securities (Hong Kong) Ltd UBS Securities Limited UBS (International) Limited UBS Services (Japan) Ltd UBS Services Limited UBS Trust (Canada) UBS UK Holding Ltd UBS UK Limited Warburg Dillon Read (Asia) Ltd Warburg Dillon Read (Australia) Corporation Pty Limited Warburg Dillon Read (España) SA Warburg Dillon Read (France) SA Warburg Dillon Read (Hong Kong) Ltd Warburg Dillon Read (Italia) S.I.M. SpA Warburg Dillon Read (Japan) Ltd Warburg Dillon Read (Malaysia) Sdn. Bhd. Warburg Dillon Read (Nederland) BV Warburg Dillon Read AG Warburg Dillon Read Australia Ltd Warburg Dillon Read Derivatives Ltd Warburg Dillon Read Futures Inc. Warburg Dillon Read International Limited Warburg Dillon Read LLC Warburg Dillon Read Pte Ltd Warburg Dillon Read Securities (España) SVB SA Warburg Dillon Read Securities (India) Private Ltd Warburg Dillon Read Securities (Philippines) Inc Warburg Dillon Read Securities (South Africa) (Pty) Ltd Warburg Dillon Read Securities Co. Ltd Warburg Dillon Read Securities Ltd Registered office Division Share capital in millions Equity interest accumul- ated in % CAP London CAP Milan PCC Glattbrugg PB Madrid CC Georgetown CC Curaçao WA Wilmington CC Zurich PB Luxembourg PB Basel PB Tokyo PB Basel PB Luxembourg WA London PCC Zurich WA New York CC Amsterdam PB Frankfurt WA New York PCC Brugg WA London CAP Amsterdam WA Hong Kong WA London WA London WA London WA London PB Toronto WA London WA London WA Hong Kong WA Sydney WA Madrid WA Paris WA Hong Kong WA Milan Georgetown WA Kuala Lumpur WA WA Amsterdam WA Frankfurt WA Sydney WA Hong Kong WA Chicago WA London WA New York WA Singapore WA Madrid WA Mumbai WA Makati WA Sandton WA Bangkok WA London GBP ITL CHF EUR USD USD USD CHF CHF CHF JPY CHF CHF GBP CHF USD CHF DEM USD CHF GBP EUR HKD GBP GBP JPY GBP CAD GBP GBP HKD AUD EUR EUR HKD EUR JPY MYR EUR EUR AUD HKD USD GBP USD SGD EUR INR PHP ZAR THB GBP 6.7 50,000.0 40.0 35.3 0.5 0.1 37.37 10.0 42.0 18.0 1,000.0 1.0 2.5 2.0 3.0 308.77 5.5 5.0 16.7 10.0 10.0 18.17 20.0 10.0 10.0 41,353.5 – 10.0 5.0 609.0 20.0 50.47 1.2 22.9 30.0 1.8 30,000.0 0.5 10.9 155.7 571.57 20.0 14.37 18.0 535.07 3.0 13.4 0.4 120.0 22.0 400.0 140.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 64.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 75.0 100.0 100.0 100.0 100.0 UBS Group Financial Statements Notes to the Financial Statements Note 39 Significant subsidiaries and associates (continued) Significant associates Company Giubergia Warburg SIM SpA, Milan Motor Columbus AG, Baden National Versicherung AG, Basel Telekurs Holding AG, Zurich Swiss Financial Services Group AG, Zurich Equity interest in % Share capital in millions 50.0 35.6 28.4 33.3 30.7 ITL CHF CHF CHF CHF 29,000 253 35 45 26 None of the above investments carry voting rights that are significantly different from the proportion of shares held. Consolidated companies: changes in 1999 New companies Global Asset Management Ltd., Hamilton Klinik Hirslanden AG, Zurich UBS Brinson Realty Investors LLC, Hartford (formerly Allegis Realty Investors LLC) UBS Capital AG, Zurich UBS España SA, Madrid UBS (France) SA, Paris UBS Trustees (Channel Island) Ltd., Jersey (formerly Bankamerica Trust Company) Deconsolidated companies Name UBS (East Asia) Ltd, Singapore UBS Securities (Singapore) Pte Ltd, Singapore Reason for deconsolidation Deregistered Deregistered Note 40 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 EUR 1 GBP 100 JPY 100 DEM Spot rate Average rate 31.12.1999 31.12.1998 31.12.1999 31.12.1998 1.59 1.61 2.58 1.56 82.07 1.38 – 2.29 1.22 82.19 1.50 1.60 2.43 1.33 81.88 1.45 – 2.41 1.11 82.38 123 UBS Group Financial Statements Notes to the Financial Statements 124 Note 41 Swiss banking law requirements The significant differences between International Accounting Standards (IAS), which are the prin- ciples 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 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. Con- sideration received is presented in the financial statement 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. 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 Trading portfolio liabilities Treasury shares Assets Financial investments 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 31.12.1999 31.12.1998 47,401 273,093 375,080 (54,586) 3,136 (182) (1,726) (519) 97,907 40,915 185,855 (47,033) 1,482 369 (1,350) (1,235) 3,462 1,482 UBS Group Financial Statements Report of the Group Auditors 125 UBS AG (Parent Bank) UBS AG (Parent Bank) Table of Contents Parent Bank Review Financial Statements Income Statement Balance Sheet Statement of appropriation of retained earnings 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 129 130 130 131 131 132 133 133 133 133 133 134 134 Off balance sheet and other information Assets pledged or assigned as security for own obligations, assets subject to reservation of title 135 135 Fiduciary transactions Due to UBS pension plans, loans to corporate bodies / related parties 135 135 Report of the Statutory Auditors 136 UBS AG (Parent Bank) Table of Contents 128 Parent Bank Review UBS AG (Parent Bank) Parent Bank Review Income statement Balance sheet Due to the merger of Union Bank of Switzerland and Swiss Bank Corporation, the financial year of the parent bank UBS AG in 1998 covered a 15- month period from 1 October 1997 to 31 Decem- ber 1998. This should be borne in mind when comparing the two income statements where the profit of CHF 6,788 million for 1999 relates to CHF 650 million for the 15 months in 1998. – Income in associates investments decreased to CHF 1,669 million from CHF 2,974 million in 1998 due to the reduction of repatriation of capital to the parent bank. from income – Sundry from ordinary activities amounted to CHF 894 million in 1999, down from CHF 1,162 million in 1998. It includes a CHF 200 million gain from the disposal of the international Global Trade Finance business. – Allowances, provisions and losses were CHF 1,815 million. In 1998 they were CHF 4,849 million. This variance is discussed in more detail in the Group Financial Statements. – Extraordinary income amounted to CHF 2,518 million, while in 1998 it stood at CHF 3,940 million, reflecting the disposal of asso- ciated companies and the sale of bank premis- es. Further information regarding extraordi- nary income and expenses can be found in the Additional Income Statement Information. Total assets grew by CHF 58 billion to CHF 1,099 billion by 31 December 1999. Excluding currency related effects total assets declined 1%. The growing volume of reverse repurchase agree- ments and securities lending and borrowing led to an increase in assets and liabilities due from and to banks. Note that these transactions are presented differently in the Group balance sheet. These increases were offset by declining replace- ment values. 129 UBS AG (Parent Bank) Financial Statements Financial Statements Income Statement CHF million Interest and discount income Interest and dividend income from financial assets Interest expense Net interest income Credit-related fees and commissions Fee and commission income from securities and investment business Other fee and commission income 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 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 expense / (benefit) Profit for the period 01.01.1999– 31.12.1999 01.10.1997– 31.12.1998 24,172 41 (18,148) 6,065 361 7,758 534 (763) 7,890 5,593 440 1,669 30 894 (21) 3,012 22,560 9,178 5,154 14,332 8,228 423 1,815 5,990 2,518 411 1,309 6,788 33,205 240 (25,412) 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) 650 130 UBS AG (Parent Bank) Financial Statements 31.12.1999 31.12.1998 Change % 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 Share capital General statutory reserve Reserve for own shares Other reserves Profit brought forward Profit for the period 3,975 62,154 356,858 195,464 123,151 196,782 5,067 6,727 5,709 3,555 131,730 7,923 2,876 14,610 303,032 192,429 131,788 191,578 3,010 6,153 6,840 5,293 173,020 10,318 1,099,095 1,040,947 939 197,211 1,236 115,140 47,931 352,775 76,414 341,509 5,918 44,254 8,746 159,713 7,835 18,554 4,309 14,528 3,462 6,356 3 6,788 30,963 314,258 77,964 295,381 8,303 36,180 9,853 207,410 14,915 15,176 4,300 14,295 490 10,806 3 650 Total Total subordinated liabilities Total liabilities to Group companies 1,099,095 1,040,947 13,362 160,055 12,528 108,666 Statement of appropriation of retained earnings The Board of Directors proposes to the Annual General Meeting the following appropriation: Profit for the financial year 1999 as per the Parent Bank’s Income Statement Retained earnings from prior years Available for appropriation Appropriation to general statutory reserve Appropriation to other reserves Proposed dividends Retained earnings carried forward 1,099 47,544 53,826 3,035 (8,637 ) 5,204 2,057 574 (1,131 ) (1,738 ) (41,290 ) (2,395 ) 58,148 (297 ) 82,071 16,968 38,517 (1,550 ) 46,128 (2,385 ) 8,074 (1,107 ) (47,697 ) (7,080 ) 3,378 9 233 2,972 (4,450 ) 0 6,138 58,148 834 51,389 38 325 18 2 (7) 3 68 9 (17) (33) (24) (23) 6 (24) 71 55 12 (2) 16 (29) 22 (11) (23) (47) 22 0 2 607 (41) 0 944 6 7 47 CHF million 6,788 3 6,791 (215) (4,200) (2,364) 12 Dividend distribution Upon acceptance of this proposal, the dividend for 1999 will amount to CHF 11.– gross per share of CHF 20.– par value. The dividend will be paid on 26 April 2000, to shareholders or to their depository bank, after deduction of 35% Swiss withholding tax. 131 UBS AG (Parent Bank) Notes to the Financial Statements Notes to the Financial Statements Accounting and valuation principles The parent company’s accounting and valuation 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 41 to the Group Financial Statements. In addition, the following principles are applied for the parent bank: Investments in associated companies Investments in associated companies are equity interests which are held on a long term basis for the purpose of the parent company’s business 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 depreciation at a rate which takes account of the economic and business situation and which is permissible for tax purposes. Depre- ciation 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. The useful lives of Property and Equip- ment are summarized in Note 1, Significant Accounting Policies, of the Group Financial Statements. Extraordinary income and expenses Certain 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 appro- priate income or expense category. These are sep- arately identified below. Taxation Deferred Tax Assets, except those relating to Restructuring Provisions, and Deferred Tax Lia- bilities, 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. 132 UBS AG (Parent Bank) Notes to the Financial Statements Additional income statement information Net trading income CHF million Foreign exchange and banknotes Bonds and other interest rate instruments Equities Precious metals and commodities Total 01.01.1999– 31.12.1999 01.10.1997– 31.12.1998 717 1,816 3,089 (29) 5,593 2,156 (1,440) (421) 88 383 Extraordinary income and expenses Extraordinary income contains CHF 2,100 mil- lion (1998: CHF 1,532 million) from the sale of former subsidiaries, CHF 417 million (1998: CHF 33 million) from the sale of tangible fixed assets and CHF 0 million (1998: CHF 2,183 mil- lion) from a release of provisions no longer required. Extraordinary expenses consist mainly of losses of CHF 157 million (1998: CHF 38 mil- lion) from the disposal of investments in associ- ated companies and CHF 254 million (1998: CHF 8 million) from the sale of tangible fixed assets. Additional balance sheet information Value adjustments and provisions Provisions Recoveries, doubtful applied in interest, accordance currency with their translation specified differences purpose Balance at 31.12.1998 provisions New Provisions released charged and credited to income to income Balance at 31.12.1999 14,027 2,943 394 3,895 (2,980) (358) (146) (2,097) 705 510 28 (223) 1,601 1,356 964 1,287 (424) (1,184) (87) (482) 12,929 3,267 1,153 2,380 21,259 (5,581) 1,020 5,208 (2,177) 19,729 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 Allowances deducted from assets (6,083 ) Total provisions as per balance sheet 15,176 – – 1 Provisions for litigation, settlement and other business risks. – – – – – – (1,175) 18,554 133 Additional balance sheet information (continued) Statement of shareholders’ equity CHF million 31.12.1999 31.12.1998 Change % Shareholders’ equity Share capital at the beginning of the period General statutory reserves Reserves for own shares Other reserves Reserves for general banking risks Retained earnings Total shareholders’ equity at the 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 for the period Total shareholders’ equity at the end of the period (before distribution of profit) of which: Share capital General statutory reserves Reserves for own shares Other reserves Retained earnings Share capital 4,300 14,295 490 10,806 0 653 5,755 12,515 964 9,266 667 3,501 30,544 32,668 190 9 45 (38) 0 (2,092) 6,788 (1,467 ) 1,467 12 82 35 (667 ) (2,236 ) 650 (1,455 ) 1,780 (474 ) 1,540 (667 ) (2,848 ) (2,124 ) 1,467 (1,277 ) (3 ) (37 ) (73 ) 667 144 6,138 35,446 30,544 4,902 4,309 14,528 3,462 6,356 6,791 4,300 14,295 490 10,806 653 9 233 2,972 (4,450 ) 6,138 (25) 14 (49) 17 (100) (81) (7) – (87) (25) (45) (209) – (6) 944 16 0 2 607 (41) 940 Par value Ranking for dividends No. of shares Capital in CHF No. of shares Capital in CHF Issued and paid up 215,446,581 4,308,931,620 214,920,040 4,298,400,800 Conditional share capital 528,954 10,579,080 – – UBS AG (Parent Bank) Notes to the Financial Statements 134 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 31.12.1999 31.12.1998 Change in % Book value 35,475 1,869 3,722 41,066 Effective liability 702 1,325 188 2,215 Book value 6,956 2,410 14,852 24,218 Effective liability 0 1,602 8,883 10,485 Book value 410 (22 ) (75 ) 70 Effective liability – (17) (98) (79) Assets are pledged as collateral for securities borrowing and repo transactions, for collateralized credit lines with central banks, loans from mortgage institutions and security deposits relating to stock exchange membership. Fiduciary transactions CHF million Deposits with other banks with Group banks Loans and other financial transactions Total 31.12.1999 31.12.1998 Change 47,802 759 415 46,180 1,543 479 48,976 48,202 1,622 (784 ) (64 ) 774 Due to UBS pension plans, loans to corporate bodies / related parties CHF million 31.12.1999 31.12.1998 Change Due to UBS pension plans (including securities borrowed) and UBS securities held by pension plans Loans to directors, senior executives and auditing bodies 1 6,785 61 1,250 70 5,535 (9 ) % 4 (51) (13) 2 % 443 (13) 1 Loans to directors, senior executives and auditing bodies are loans to members of the Board of Directors, the Group Executive Board, 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. 135 UBS AG (Parent Bank) Report of the Statutory Auditors 136 UBS Corporate Governance UBS Corporate Governance Corporate and Executive Bodies Corporate and Executive Bodies UBS is committed to meet the highest interna- tional standards of corpo- rate governance in its organizational structure and its system of checks and balances. Corporate and executive bodies are organized in line with the leading codes of best practice as well as with Swiss legal requirements. 138 The Board of Directors As of 31 December 1999, the Board of Direc- tors (BoD) consisted of eight non-executive Directors, while the Articles of Association pro- vide flexibility to elect between eight and twelve members. The BoD has ultimate responsibility for the strategic direction of the UBS Group, developed and proposed by the Group Execu- tive Board (GEB). The BoD is also responsible for the supervision and control of the Group’s executive management. At the 1999 Annual General Meeting (AGM), two BoD members resigned: Georges Schorderet and Manfred Zobl. Eric Honegger, Chairman designate of SAirGroup, was newly elected. The BoD is organized as follows: the Chairman and the two Vice-Chairmen form the Chairman’s Office, which assumes a special level of authority within the organization, mainly in credit approval and compensation issues. The Chairman’s Office also acts as the Remuneration Committee. It fixes the remuneration of the BoD’s full-time members, the members of the Group Executive Board and of the Group Managing Board, and it proposes to the BoD the individual remuneration for its part- time members. In its capacity as the Audit Supervisory Board, the Chairman’s Office also assumes responsibili- ty for the supervision of internal audit. The Audit Supervisory Board and the head of Group Inter- nal Audit meet four times per year to discuss is- sues raised by both internal and external audit, and decide subsequently if any special measures need to be taken. The Audit Supervisory Board also reviews the annual objectives and activity re- ports of Group Internal Audit. The Audit Committee monitors the function- al adequacy of the auditing work and the co- operation between internal and external audit. It is chaired by Peter Böckli with Rolf A. Meyer as Vice-Chairman and Andreas Reinhart as an additional member. The Audit Committee meets two to three times per year together with the head of Group Internal Audit and the external auditors, and – specifically for the review of the annual accounts – with the Chief Financial Officer. With this structure in place, UBS observes the principles of best practice in corporate gover- nance. The world is, however, moving forward, and new principles are being discussed and intro- duced, primarily in the US. UBS carefully watch- es these developments and aims to remain at the forefront of organizational excellence. During 1999, the Board of Directors met eleven times for ordinary meetings, which are at- tended by the members of the Group Executive Board in an advisory capacity. The common meetings serve to provide a platform for high- level interaction between the two boards which have both clearly defined mandates, but share ul- timate responsibility for the success of the com- pany. In addition the BoD attended a full-day meeting to review the Group strategy proposed by the GEB, and it was informed in detail about the Group’s communication activities and the tar- gets of the Human Resources departments during a one-day offsite together with the GEB. The further development of the Group, its organiza- tional and capital structure and the plans to reg- ister with the US Securities and Exchange Com- mission (SEC) were major issues addressed. The review of the quarterly and year-end financial statements, the regular risk reports and the ap- proval of the annual budgets are among the core authorities of the BoD. The Group Executive Board The seven members of the Group Executive Board (GEB) assume ultimate responsibility for the de- velopment of the Group’s strategy, its implemen- tation and the financial results. As of 1 May 1999, Hans de Gier, CEO of the investment banking di- vision, retired. He was replaced by Markus Granziol, head of the Equity business area of UBS Warburg. Peter Wuffli, UBS Group CFO until the end of April, took over from Gary Brinson as CEO of the Asset Management Division on 1 Sep- tember. The position of the Group’s Chief Finan- cial Officer was assigned to Luqman Arnold, pre- viously Chief Operating Officer of UBS Warburg. These personnel changes were followed by some fundamental organizational alterations: all risk and control functions were combined and put under the leadership of the CFO, with the Group Chief Risk Officer and the Group Chief Credit Officer now reporting to the CFO. Pierre de Weck was named CEO of UBS Capital. As of 15 February 2000, Rudi Bogni, CEO of the Private Banking Division, left the Bank in connection with the reorganization of the Group’s asset management businesses. Georges Gagnebin, head of the business area “Interna- tional Clients”, became CEO of Private Banking UBS Corporate Governance Corporate and Executive Bodies and was appointed Member of the Group Execu- tive Board. At its biweekly meetings, the Group Executive Board discussed business issues of major impor- tance. In a two-day seminar at the beginning of the year, the GEB evaluated the Group’s strategy. During the year under review, it redefined inter- nal medium-term planning targets, elaborated a new policy of disclosing financial results and forecasts, and informed the financial community about these decisions during Investors’ Day on December 14. The growing importance of e-serv- ices in the financial industry was another focus of numerous GEB meetings. A new business area “e-services” was created as a result of these dis- cussions. An important concern for the GEB re- mained, of course, the integration of the two merged banks. Major initiatives were defined to take advantage of the possible synergies resulting from an integrated approach to the Group’s ac- tivities. It is one of the dominant functions of the GEB to enhance synergies through cross-divi- sional cooperation. The Group Managing Board The 32 members of the Group Managing Board (GMB) – 7 GEB members, 16 members of Divi- sional Management Boards and 9 members with key roles at the top level of the organization – met in London at the beginning of May to discuss strategic issues and to initiate the 1999 planning cycle. Group Internal Audit To guarantee full independence from the busi- ness, the head of Group Internal Audit, Walter Stürzinger, reports directly to the Chairman of the Board of Directors. With around 200 professionals worldwide, Group Internal Audit provides an independent review of the effectiveness of the system of inter- nal controls and compliance with key rules and regulations. All key issues raised by Group Internal Audit are communicated to the management respon- sible, the CEO and the Chairman’s Office via formal Audit Reports. The Audit Supervisory Board and the Audit Committee are regularly in- formed about the major findings. State-of-the-art systems technology helps ensure that all signifi- cant audit issues raised are globally monitored and subsequently resolved. The efficiency of audit work is increased by extensive cooperation between Group Internal Audit and our external auditors. External auditors After an intensive selection process ATAG Ernst & Young Ltd. have been assigned the global audit mandate for the UBS Group. In the past, different firms assumed audit functions on behalf of UBS. 139 Corporate and Executive Bodies Board of Directors Group Executive Board Marcel Ospel Group Chief Executive Officer Luqman Arnold Chief Financial Officer Rodolfo Bogni CEO Private Banking Division (until 15 February 2000) Georges Gagnebin CEO Private Banking Division (since 15 February 2000) Markus Granziol CEO Investment Banking and Securities Division Stephan Haeringer CEO Private and Corporate Clients Division Pierre de Weck CEO Private Equity Division Peter A. Wuffli CEO Asset Management Division Alex Krauer (AGM 2002)1 Chairman Member of the Audit Supervisory Board Alberto Togni (AGM 2001) Vice Chairman Chairman of the Audit Supervisory Board Markus Kündig (AGM 2002) Zug, Vice Chairman Member of the Audit Supervisory Board Peter Böckli (AGM 2003) Chairman of the Audit Committee Partner in the law firm Böckli, Bodmer & Partner, Basel Eric Honegger (AGM 2003) Chairman designate of SAirGroup, Zurich-Airport Rolf A. Meyer (AGM 2003) Member of the Audit Committee Chairman and Delegate of the Board of Ciba Specialty Chemicals Inc., Basel Hans Peter Ming (AGM 2000) Chairman of Sika Finanz AG, Baar Andreas Reinhart (AGM 2000) Member of the Audit Committee Chairman of Volkart Brothers Holding Ltd., Winterthur Secretary to the Board of Directors: Gertrud Erismann-Peyer 1 Term of office until AGM of the year indicated. UBS Corporate Governance Corporate and Executive Bodies 140 UBS Corporate Governance Corporate and Executive Bodies Group Managing Board In addition to the members of the Group Executive Board the following gentlemen belong to the Group Managing Board: Gary Brinson Chairman and Chief Investment Officer, UBS Asset Management Division Colin Buchan Global Head of Equity, UBS Warburg Division Richard C. Capone Regional Manager for UBS AG’s operations in the Americas, CEO Warburg Dillon Read LLC Crispian Collins CEO Phillips & Drew London, UBS Asset Management Division John Costas Chief Operating Officer and Global Head Fixed Income and Treasury Products, UBS Warburg Division Arthur Decurtins Deputy CEO and Head Products, Services and Logistics, UBS Private Banking Division Jeffrey J. Diermeier Deputy Chief Investment Officer UBS Brinson / Brinson Partners, UBS Asset Management Division Thomas K. Escher Business Area Head IT, UBS Private and Corporate Clients Division Carlo A. Grigioni Business Area Head The Americas, UBS Private Banking Division William (Bill) Johnson Business Area Head E-Services, Corporate Center Benjamin F. Lenhardt, Jr. CEO UBS Brinson/Brinson Partners, UBS Asset Management Division Franz Menotti Business Area Head Individual Clients, UBS Private and Corporate Clients Division Urs B. Rinderknecht Group Mandates, Corporate Center Marcel Rohner Group Chief Risk Officer, Corporate Center Gian Pietro Rossetti Business Area Head Swiss Clients, UBS Private Banking Division Hugo Schaub Group Controller, Corporate Center Jean Francis Sierro Business Area Head Resources, UBS Private and Corporate Clients Division Clive Standish CEO Warburg Dillon Read Asia/Pacific, UBS Warburg Division Marco Suter Group Chief Credit Officer, Corporate Center Rory Tapner Joint Global Head Corporate Finance, UBS Warburg Division Jürg Haller Business Area Head Risk Transformatioin and Capital Management, UBS Private and Corporate Clients Division Markus Weiss Business Area Head Private Banks, UBS Private Banking Division Eugen Haltiner Business Area Head Corporate Clients, UBS Private and Corporate Clients Division Stephan Zimmermann Business Area Head Operations, UBS Private and Corporate Clients Division Auditors External Auditor ATAG Ernst & Young Ltd., Basel Auditors for the Parent Bank and for the Group as prescribed by Company Law and Swiss Banking Law (term expires AGM 2000) Internal Audit Walter H. Stürzinger, Head of Group Internal Audit 141 UBS Corporate Governance Corporate Information Corporate Information UBS adopts best practice in its relationship with shareholders, rating agencies and regulators, and it has made trans- parency vis-à-vis regula- tors, the financial com- munity and the media one of its strategic targets. Relationship with regulators As UBS is a Swiss registered company, our main regulator is the Swiss Federal Banking Commis- sion. Major regulatory contacts, however, also exist with the Federal Reserve Board (US Fed) and the UK Financial Services Authority (FSA), the two countries where we have the most signif- icant non-Swiss business units. UBS also main- tains extensive contacts with other regulatory bodies. It is our aim to comply with all local and regional provisions, and we work closely togeth- er with the respective regulators. In an attempt to provide comprehensive, transparent, timely and up-to-date information, we are in a process of developing a web-based corporate information tool which will be accessible to selected regula- tory users. The Group Governance Committee, chaired by the CEO, coordinates the Group’s public policy interface with governments, central banks and regulators. It ensures that adequate policies and procedures exist and are enforced in order to minimize the bank’s reputational risks. The Group CFO, the Group Controller, the Chief Risk and Chief Credit Officers, the head of Group Internal Audit, the Group General Coun- sel and the divisional heads of Corporate Gover- nance and Legal and Compliance are the perma- nent members of the Committee. Relationship with shareholders More than 200,000 shareholders are entered in our share register. We are committed to providing quality information and keeping them regularly informed about the important developments of their company. For institutional shareholders and for all individual shareholders with an interest in in-depth information, we produce the annual and quarterly “Financial Reports”. These documents provide all information required by International Accounting Standards and the Swiss accounting regulations as well as analyses of, and comments on, the financial situation of the Group, its strengths and weaknesses, and its challenges and achievements. A more concise, easy-to-read “Letter to Shareholders” is sent to all sharehold- ers each quarter and explains the major factors driving the Group’s development. The “Annual Review” is a condensed report, centering on the annual results, the achievements of the Group and the divisions, and selected additional issues. The Annual General Meeting offers the op- portunity to our shareholders to raise any ques- tions regarding the development of the company and the achievements of the year under review. The members of the BoD and of the GEB as well as the internal and external auditors are present to answer these questions. Proxy voting offers all shareholders the option to express their views on each agenda point. UBS is committed to transparency and open- ness in its communication with shareholders, in- stitutional investors and equity analysts. We are continually improving our disclosure policies, making our information more transparent, consis- tent and reliable over time. We are committed to reporting our results on an absolute rather than on a cumulative quarterly basis starting with the first quarter of 2000, and publishing and explaining a detailed set of value drivers every quarter. For information about the distribution of UBS shares (size of individual holdings, geo- graphic origin of shareholders, individual/corpo- rate shareholders) see page 149. 142 Glossary Glossary 144 A C D 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 re- ported in the financial statements of the periods to which they relate. allowance for credit losses An allowance, which in manage- ment’s estimate is adequate to pro- vide for the credit losses inherent in the loan portfolio. The allowance for credit losses is deducted from the re- lated asset category on the balance sheet. associate An enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint ven- ture of the investor. Significant influ- ence is the power to participate in (but not control) the financial and operating policy decisions of the investee. B basic earnings per share The per share net profit or loss that is attributable to ordinary shareholders. It is calculated by dividing the net profit or loss for the period by the weighted average number of ordinary shares outstanding during the period. BIS capital ratio A measure of the capital resources underpinning the operations of banks (capital adequacy), as set by the Basel Committee on Banking Supervision which meets at the Bank for Interna- tional Settlements (BIS). Eligible capi- tal is broken down into core capital (or Tier 1 capital) and supplementary capital (Tier 2 capital). The bank’s as- sets are weighted from 0% to 100%. The ratio of the capital to the bank’s risk-weighted positions is the BIS capital ratio. business segment A distinguishable component of an enterprise that is engaged in provid- ing a group of related services which are subject to risks and returns that are different from those of other business segments. commitment Future obligation to enter into a transaction, backed by an agreement. compliance risk The risk that the conduct of business does not comply or appears not to comply with the applicable laws, in- ternal or external regulations, industry directives, restrictions or professional standards and practice, which may lead in particular to regulatory or criminal sanctions, costs and fees or reputational damages. concentration risk The risk of loss resulting from exces- sive exposure to a particular risk or a group of risks or to a particular coun- try, industry, currency or counterparty group. contingency A condition or situation, the ultimate outcome of which, gain or loss, will be confirmed only on the occurrence, or non-occurrence, of one or more uncertain future events. contract volume Corresponds to the receivable side of the underlying value or notional/ nominal amount underlying derivative instruments. country risk Comprises transfer and other country risks. Transfer risk is the risk of losses on foreign creditors’ and investors’ claims that would arise from sover- eign default or other restrictions on cross-border transfers of funds. Other country risk includes the potential for losses by foreign creditors and in- vestors arising from systemic country developments such as exchange rate or asset price reductions. credit risk The risk of loss to the bank due to a counterparty unable or not willing to perform payment obligations or other terms of contract. (Note that credit risk includes e.g. transfer risk.) currency risk The risk of loss or gain due to changes in the exchange rates. deferred tax asset The amount of income taxes recover- able in future periods in respect of (1) deductible temporary differences; (2) the carry forward of unused tax losses and unused tax credits. Deductible temporary differences are those differences between the carrying amount of an asset or liability and its tax base that will result in amounts deductible in determining taxable profit (tax loss) of future periods. deferred tax liability The amount of income taxes payable in future periods in respect of taxable temporary differences. Taxable tem- porary differences are those differ- ences between the carrying amount of an asset or liability and its tax base that will result in taxable amounts in determining taxable profit (tax loss) of future periods. defined benefit plan A post-employment benefit plan where the enterprise’s obligation is to provide the defined benefits to cur- rent and former employees. Actuarial risks (that benefits will cost more than expected) and investment risks (that the assets invested will be insufficient) fall in substance on the enterprise. defined contribution plan A post-employment benefit plan under which an enterprise pays de- fined contributions. The enterprise’s obligation is limited to the amount that it agrees to contribute. derivative financial instrument Financial instrument (1) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign ex- change rate, index of prices or rates, a credit rating or credit index or simi- lar variable (often called the ‘underly- ing’); (2) that requires no initial net investment or little initial net invest- ment relative to other types of con- tracts that have a similar response to changes in market conditions; and (3) that is settled at a future date. diluted earnings per share The basic earnings per share adjusted by the potential after tax dilutive ef- fect of financial instruments or other contracts that entitle their holders to ordinary shares. Dilutive means that only the effect that results in a de- crease from the basic earnings per share are taken into consideration. Glossary E G L N employee benefits All forms of consideration given by an enterprise in exchange for services rendered by employees. equity method The method used to account for asso- ciates. The investment in the associ- ate is initially recorded at cost and ad- justed thereafter for the post acquisi- tion change in the investors’ share of net assets of the associate. 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 instrument A contract that gives rise to both a fi- nancial asset of one enterprise and a financial liability or equity instrument of another enterprise. financial intermediaries Companies such as banks, securities or brokerage firms, investment com- panies, pension and mutual funds and insurance companies which facili- tate the flow of funds between bor- rowers and lenders in the economy. financial investments Equity and debt securities held for the accretion of wealth through distribu- tion, such as interest and dividends, and for capital appreciation. forwards and futures 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 counterparties in the over- the-counter market, whereas futures are standardized contracts that are transacted on regulated exchanges. funding risk The risk of being unable to obtain funding for a portfolio of assets at appropriate market rates. goodwill Any excess of the cost of an 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. the Group UBS AG (parent) and all its sub- sidiaries. H hedging An action which reduces risk, usually at the expense of potential reward, by use of one or more financial instru- ments (hedging instruments) so that their change in fair value is an offset, in whole or in part, to the change in fair value or cash flows of a hedged item. 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 interest rate risk The risk of gain or loss as a result of movements in interest rates. International Accounting Standards (IAS) Accounting standards issued by the International Accounting Standards Committee (IASC), with the objective of achieving uniformity in the ac- counting principles which are used by businesses and other organizations for financial reporting around the world. investment fund A fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities, or money market securities. It offers in- vestors the advantages of diversifica- tion and professional management and charges a management fee for these services. Product owners in the UBS Group are Private Banking, UBS Brinson and Warburg Dillon Read. legal risk The risk of loss because a contract cannot be enforced. This includes risks arising from inadequate docu- mentation, insufficient capacity or au- thority of a counterparty (ultra vires) or uncertain legality. liability risk The risk of loss due to an entity 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. liquidity risk Risk that an entity will have to sell as- sets at a loss to meet cash demands. It is generally explained as a ratio comparing available liquidity to the demand for funds. loss severity Also referred to as loss given default – the amount that the bank would lose in the event that a counterparty de- faults on its obligations. M market risk Uncertainty to which future earnings are exposed as a result of changes of the market prices of financial instru- ments. This risk is primarily a conse- quence of trading and investing activities in the interest rate, foreign exchange, equity and commodity markets. master netting agreement An arrangement providing for an en- terprise that undertakes a number of financial instrument transactions with a single counterparty to make a single net settlement of all financial instru- ments covered by the agreement in the event of default on, or termina- tion of, any one contract. minority interest That part of the net profit or loss and of net assets of a subsidiary attributa- ble to interests which are not owned, directly or indirectly through sub- sidiaries, by the parent. mutual fund See investment fund. negative replacement value Amount representing the fair value of a derivative financial instrument in a payable position. netting Setting off between counterparties, on the basis of bilateral or multilateral contracts, of mutual payment obliga- tions on expiry date, or in the case of default of a counterparty of unreal- ized profits and unrealized losses. notional amount Amount of the underlying asset, ref- erence rate or index which is used as the basis for calculating the value of derivative contracts. Notional/nominal values provide an indication of the volume of derivatives business trans- acted by UBS but do not provide any measure of risk. O operating lease In an operating lease, the lessor con- veys to the lessee in return for a pay- ment or series of payments the right to use an asset for an agreed period of time. 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 or human misbehaviour, system failures and inadequate procedures and con- trols. Particular elements of opera- tional risk are legal risk, compliance risk, liability risk or physical and crime risk. 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) Refers to financial instruments that are not traded on an organized ex- change or are traded on a market that is not part of an organized ex- change. OTC instruments can be cre- ated with any provisions allowed by law and acceptable to counterparties. 145 Glossary 146 P S T trading Entering into positions which are ac- tively managed and intended to be held in order to profit in the short term from fluctuations in the market price. V value at risk A measure of the maximum loss which would be expected to occur in a given portfolio with a given level of statistical probability. Value at risk (VaR) does not provide an estimate of the size of loss that could occur in the remaining cases which fall outside the predefined probability. securities borrowing / lending The loan of securities, on an unse- cured or secured basis, for which the borrower pays a fee to the lender. The lender retains the beneficial own- ership, and is therefore entitled to receive all coupons or dividends from the borrower during the term of the trade. settlement risk The risk of loss to the bank in making a payment or delivery on «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). Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. swaps Transactions in which two parties ex- change cash flows on a specified no- tional amount for a predetermined 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 payments which are based on the in- terest reference rates available at the inception of the contract on two dif- ferent currency principal balances that are exchanged. The principal balances are re-exchanged at an agreed upon rate at a specified future date. parent An enterprise that has one or more subsidiaries. physical and crime risk The risk of loss or damage to the bank due to natural forces, environ- mental dangers, fire and explosion, war or civil unrest, criminal or any other activity, which may cause a vio- lation of the bank’s standards or of laws and regulations. positive replacement value Amount representing the fair value of a derivative financial instrument in a receivable position. private equity Equity financing provided to, typically, unquoted companies, in order to actively increase their value and resell them after 3 to 6 years. This is the business of UBS Capital. R repurchase agreement An agreement whereby the holder of a security sells the security to a buyer, with a simultaneous agreement to re- purchase the security at a fixed future date at a stipulated price. reverse repurchase agreement The purchase of a security at a speci- fied price with an agreement to resell the same security at a specified price on a specified future date. From the buyer’s viewpoint it is a repurchase agreement. risk-bearing capacity Potential of the bank to absorb stress losses taking into account UBS’s over- all earnings capacity. It is set to pro- tect the Group from unacceptable damage to annual earnings, dividend- paying ability, business viability and the reputation of the bank. risk policy framework Organizational principles, methods and measures (policies, structures, processes) to manage and control risks. ROE (return on equity) Net result of the reporting period di- vided by the average equity during the same period. UBS Share Information UBS Share Information UBS Shares UBS Shares UBS share price perform- UBS share data ance in 1999 was disap- pointing. After a good performance in the first six months of the year, UBS’s share price declined on the basis of results lower than market expec- tations and pressure on financial stocks generally to close the year at CHF 430. 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 Dividend Book value Per share data (diluted) (CHF) Gross operating profit Group profit before taxes Net profit Book value Stock exchange prices Year-end 1999 (CHF) High / low 1999 (CHF) Price / net earnings (P / E) (basic) Price / book value (P / BV) (basic) Dividend yield, gross (high / low) (in percent) Total return Total return Swiss Market Index (SMI) Total return Swiss Performance Index (SPI) Market capitalization (CHF billion) Year-end % change year-on-year In % of the Swiss Market Index (SMI) In % of the Swiss Performance Index (SPI) High (3 May) Low (10 August and 25 October) Trading volumes (SWX only) (CHF million) Total Daily average Trading volumes (SWX only) (1000 units) Total Daily average 31.12.1999 31.12.19981 215,447 214,9202 7,191 208,057 209,166 137.56 39.26 30.28 11.00 167.43 136.83 39.06 30.12 166.54 430 528 / 405 14.2 2.6 2.7 / 2.1 4.33 5.7 11.7 92.6 2.09 10.6 8.5 113.5 87.2 214,976 214,450 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 3.7 / 1.5 2.63 15.7 16.8 90.7 n / a 11.8 9.6 140.0 57.9 97,584 3844 67,198 5175 214,695 8454 153,078 1,1785 1 In 1998, trading period of UBS registered shares was 29 June until 31 December. 2 Difference between shares outstanding and shares ranking for dividend are reserved shares. 3 Return from dividend and price changes. 4 In 1999 there were a total of 254 trading days. 5 Trading period 29 June until 31 December 1998 equals 130 trading days. Our disappointing share-price performance has two main causes. First, UBS Private Banking and UBS Asset Management reported weaker than expected asset growth. The negative devel- opment of net new money in the third quarter had a particularly strong adverse effect. Second, rising interest rates held back the share price de- velopment of financial institutions in the second half of the year. In 1999, the world economy recovered from the Asian, Russian and Brazilian crises. Most de- veloping economies stabilized and regained ac- cess to the capital markets. While Europe em- barked on a modest cyclical recovery, the US re- mained the driver of global growth. Despite the worldwide shifts towards a tighter monetary policy, global equity markets performed well last year. However, the performance among different sectors and regions diverged substantial- ly. In particular, the financial services industry was not able to match the performance of technology and telecommunications stocks. In the second half 148 UBS Share Information UBS Shares of the year, rising interest rates concerns and Year 2000 concerns affected bank stock valuations. In line with overall market trends, UBS shares moved to a high of CHF 528 on 3 May. In the second half of the year, this trend reversed. UBS shares reached their low of CHF 405 on 10 August. Although the share price recovered to CHF 479.50 during the third quarter, it closed the year at CHF 430 reflecting an annual per- formance of 1.9%. UBS share price chart 100% = 1 December 1998 UBS market capitalization 130% 125% 120% 115% 110% 105% 100% 95% 90% Recovery of market environment Rising interest rates and Y2K concerns Start of repurchasing program Announcement 1Q 99 results Announcement 3Q 99 results Announcement 1H 99 results Announcement 24h Banking 120 115 110 105 100 95 90 85 80 12.98 2.99 4.99 6.99 8.99 10.99 12.99 9 9 . 1 9 9 . 2 9 9 . 3 9 9 . 4 9 9 . 5 9 9 . 6 9 9 . 7 9 9 . 8 9 9 . 9 9 9 . 0 1 9 9 . 1 1 9 9 . 2 1 UBS registered SPI Swiss Performance Index Market capitalization in CHF billion Distribution of UBS shares registered as of 31 December 1999 Number of shares registered (1% = 1,099,263 shares) 1–100 101–1,000 1,001–5,000 5,001–10,000 10,001–50,000 50,001–100,000 >100,000 Total 0–1% 1–2% 2–3% 3–4% 4–5% over 5% Total Number of shareholders registered % of shareholders registered Number of shares % of shares registered registered 133,741 62,645 5,050 521 462 71 116 202,606 202,603 2 0 0 1 0 202,606 66.010 30.920 2.493 0.257 0.228 0.035 0.057 5,643,487 17,109,278 10,069,612 3,647,688 9,518,063 5,066,789 58,871,390 5.134 15.564 9.160 3.319 8.659 4.609 53.555 100 109,926,307 100 99.999 0.001 0.000 0.000 0.000 0.000 94,469,146 7,112,118 0 0 8,345,043 0 85.939 6.470 0.000 0.000 7.591 0.000 100 109,926,307 100 As of 31 December 1999 no identified investor was holding 5% or more of the total 215 million UBS shares outstanding. UBS employees were holding 3.8% of the shares registered. Individual shareholders Legal entities Nominees, fiduciaries Total Switzerland Europe North America Other countries Total 193,583 8,578 445 202,606 189,906 9,230 1,043 2,427 202,606 95.546 4.234 0.220 32,370,006 55,356,193 22,200,108 29.447 50.358 20.195 100 109,926,307 100 93.731 4.556 0.515 1.198 72,266,335 26,435,883 3,081,205 8,142,884 65.740 24.049 2.803 7.408 100 109,926,307 100 28,718,415 shares registered do not carry voting rights. 105,363,086 shares are classified as “non registered”, i.e. not entered in the share register as of 31 December 1999. 149 UBS Share Information Information for Shareholders 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 Financial calendar Annual General Meeting Thuesday, 18 April 2000 Ratio Exchange Symbol CUSIP 20 ADR = 1 UBS Share Dividend payment date Wednesday, 26 April 2000 OTC (over the counter) Publication first-quarter results Thursday, 25 May 2000 UBBSY Publication first-half results Tuesday, 22 August 2000 # 90261R105 Publication third-quarter results Tuesday, 28 Nov. 2000 For information contact Change of address UBS AG Investor Relations G41B P.O. Box CH-8098 Zurich Phone +41-1-234 41 00 Fax +41-1-234 34 15 UBS AG Shareholder Services FNNB P.O. Box CH-8098 Zurich Phone +41-1-235 62 02 Fax +41-1-235 31 54 Cautionary statement regarding forward-looking statements This Financial Report contains statements that constitute “forward- looking statements”. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made on our behalf. In this Financial Report, such forward-looking statements include, without limitation, state- ments relating to: – the implementation of strategic initiatives – the development of revenues overall and within specific business materially from those described by these forward-looking statements and as a result, financial results could differ from those set forth and those differences may be material to our financial statements. Many factors may influence our actual results and cause them to differ materially from expected results as described in the forward- looking statements. These factors include: – general market trends affecting demand for our products and areas services – the development of operating expenses – the anticipated level of capital expenditures and associated depre- – developments in the competitive environment in Switzerland and around the world ciation expense – the expected impact of the risks that affect our business, includ- ing the risk of loss resulting from the default of an obligor or counterparty – expected credit losses based upon our credit review – other statements relating to our future business development and – developments in technology – changes in our expenses associated with acquisitions and disposi- tions – our ability to attract and retain skilled personnel – credit ratings and the financial position of obligors and counter- parties economic performance – our ability to control risk in our businesses, including our ability to The words “anticipate”, “believe”, “expect”, “estimate”, “intend”, “plan” and other similar expressions identify some of these forward- looking statements. Readers are cautioned not to put undue reliance on forward-looking statements because actual events may differ – macroeconomic trends and government and regulatory policies affecting business in Switzerland and around the world, including changes in the level of interest or tax rates and movements in for- eign currency exchange rates. improve our overall risk profile 150 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-0001; CIF-Pub-No. 012. ab UBS AG P.O. Box, CH-8098 Zurich P.O. Box, CH-4002 Basel www.ubs.com 

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