UBS AG
Annual Report 2001

Plain-text annual report

ab Financial Report 2001 The Power of Partnership Flawless strategy, teamwork, and technology are the prerequisites for competing in the world’s great ocean races. The same elements underpin success in the global financial markets. UBS is Main Partner of Alinghi, Swiss Challenge for the Americas’ Cup 2003 and is also Principal Partner of the Nautor Challenge team for the 2001- 2002 Volvo Ocean Race. Our Annual Review carries pictures of the two teams. The very essence of yacht racing with the relentless demands of the ocean relies upon the crew to operate as a team. Whether on a match racing course, in the midst of the southern ocean, or indeed in the world of global finance – individual efforts are eclipsed by the Power of Partnership. Contents Profile Introduction UBS Group Financial Highlights UBS Group Our Business Groups Sources of Information about UBS Information for Readers Group Financial Review Group Results Review of Business Group Performance Introduction UBS Switzerland UBS Asset Management UBS Warburg Corporate Center UBS Group Financial Statements UBS AG (Parent Bank) Additional Disclosure Required under SEC Regulations 1 2 3 4 5 8 17 18 31 32 38 50 56 70 75 171 183 Introduction The Financial Report 2001 forms an essential part of our report- ing portfolio. It includes the audited Financial Statements of UBS Group for 2001 and 2000, prepared according to International Accounting Standards (IAS) and reconciled to United States Generally Accepted Accounting Principles (US GAAP), and the audited financial statements of UBS AG (the Parent Bank) for 2001, prepared according to Swiss Banking Law requirements. It also contains a discussion and analysis of the financial and business performance of UBS Group and its Business Groups, and some additional disclosures required under Swiss and US regulations. The Financial Report should be read in conjunction with the other information published by UBS described on page 5. We hope that you will find the information in these documents useful and informative. We believe that UBS is among the leaders in corporate disclosure, but we would be very interested to hear your views on how we might improve the content and presenta- tion of our information portfolio. Mark Branson Head of Group Communications UBS AG 1 Profile UBS Group Financial Highlights 1 Operating expenses / operating income before credit loss expense. CHF million, except where indicated For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 2 Excludes the amortization of goodwill and other intangible assets. 3 For EPS calculation, see Note 9 to the Financial Statements. 4 Net profit / average shareholders’ equity excluding dividends. 5 Includes hybrid tier 1 capital, please refer to Note 30e in the Notes to the Financial Statements. 6 Calculated using the former definition of assets under management. 7 The Group headcount does not include the Klinik Hirslanden AG headcount of 2,450, 1,839 and 1,853 for 31 December 2001, 31 December 2000 and 31 December 1999, respectively. 8 See the Capital strength section on pages 10 to 11 of the UBS Handbook 2001/2002. 9 Details of significant financial events can be found in the Group Financial Review. All earnings per share figures have been restated for the 3 for 1 share split which took place on 16 July 2001. Except where otherwise stated, all 31 De- cember 2001 and 31 December 2000 figures throughout this report include the impact of the acquisition of PaineWebber, which occurred on 3 November 2000. All invested assets figures for 31 December 2000 have been restated to reflect the new definition. 2 Income statement key figures Operating income Operating expenses Operating profit before tax Net profit Cost / income ratio (%) 1 Cost / income ratio before goodwill (%) 1, 2 Per share data (CHF) Basic earnings per share 3 Basic earnings per share before goodwill 2, 3 Diluted earnings per share 3 Diluted earnings per share before goodwill 2, 3 Return on shareholders’ equity (%) Return on shareholders’ equity 4 Return on shareholders’ equity before goodwill 2, 4 37,114 30,396 6,718 4,973 80.8 77.3 3.93 4.97 3.78 4.81 11.7 14.8 36,402 26,203 10,199 7,792 72.2 70.4 6.44 7.00 6.35 6.89 21.5 23.4 28,425 20,532 7,893 6,153 69.9 68.7 5.07 5.35 5.02 5.30 22.4 23.6 2 16 (34) (36) (39) (29) (40) (30) CHF million, except where indicated As at 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Balance sheet key figures Total assets Shareholders’ equity Market capitalization BIS capital ratios Tier 1 (%) 5 Total BIS (%) Risk-weighted assets Invested assets (CHF billion) Headcount (full time equivalents) 7 Long-term ratings 8 Fitch, London Moody’s, New York Standard & Poor’s, New York 1,253,297 43,530 1,087,552 44,833 105,475 112,666 11.6 14.8 253,735 2,457 69,985 AAA Aa2 AA+ 11.7 15.7 273,290 2,452 71,076 AAA Aa1 AA+ 896,556 30,608 92,642 10.6 14.5 273,107 1,7446 49,058 AAA Aa1 AA+ 15 (3) (6) (1) (6) (7) 0 (2) Earnings adjusted for significant financial events and pre-goodwill 2, 9 CHF million, except where indicated For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Operating income Operating expenses Operating profit before tax Net profit Cost / income ratio (%) 1 Basic earnings per share (CHF) 3 Diluted earnings per share (CHF) 3 Return on shareholders’ equity (%) 4 37,114 29,073 8,041 6,296 77.3 4.97 4.81 14.8 36,402 25,096 11,306 8,799 69.2 7.28 7.17 24.3 26,587 20,194 6,393 5,005 73.3 4.12 4.09 18.2 2 16 (29) (28) (32) (33) UBS Group UBS is one of the world’s leading financial firms, serving a discerning global client base. As an organ- ization, we combine financial strength with a reputation for innovation and a global culture which embraces change. Our vision is to be the pre-eminent global integrated investment services firm and the leading bank in Switzerland. We are the world’s leading provider of private banking services and one of the largest asset managers globally. In the investment banking and securities businesses we are among the select bracket of major global houses. In Switzerland, we are the clear market leader in cor- porate and retail banking. As an integrated group, not merely a holding company, we create added value for our clients by drawing on the combined resources and expertise of all our businesses. Our client philosophy puts advice at the heart of relationships. Our priority is to provide premium- quality services to our clients, giving them the best possible choice by supplementing best-in-class products we develop ourselves with a quality-screened selection of products from others. With head offices in Zurich and Basel, we operate in over 50 countries and from all major inter- national financial centers. Our global physical presence is complemented by leading edge on-line services. All our clients can benefit from our technology – it complements our advisory services and allows us to deliver our services faster, more widely and more cost-effectively than ever before. 3 Profile Our Business Groups All our Business Groups are in the top echelons of their sectors globally and are committed to vigorously growing their franchises. UBS Switzerland UBS Switzerland includes the world’s leading private banking business, with CHF 682 billion of invested assets at 31 December 2001. UBS Private Banking provides a comprehensive range of prod- ucts and services individually tailored for wealthy clients, through offices around the world. UBS Switzerland also provides a complete set of banking and securities services for some four million individual and corporate clients in Switzerland. Its CHF 182 billion of outstanding loans at 31 December 2001 give it around a quarter of the Swiss lending market. UBS Asset Management UBS Asset Management is a leading institutional asset manager and mutual fund provider, with invested assets of CHF 672 billion at 31 December 2001, offering a broad range of asset management services and products for institutional and individual clients across the world. UBS Warburg UBS Warburg operates globally as a client-driven securities, investment banking and wealth manage- ment firm. UBS Warburg provides innovative products, top-quality research and advice, and compre- hensive access to the world’s capital markets, for both its own corporate and institutional clients and for the other parts of the UBS Group. UBS PaineWebber, one of the top US wealth managers, became part of UBS Warburg in November 2000. Its distribution network of 8,870 financial advisors manages over CHF 782 billion of invested assets at 31 December 2001. On 1 January 2002, UBS PaineWebber was separated from UBS Warburg to form a new Business Group within UBS. Corporate Center Our portfolio of businesses is planned and managed for the long-term maximization of shareholder value. The role of the Corporate Center is to ensure that the Business Groups operate as a coherent and effective whole, in alignment with UBS’s overall corporate goals. 4 Sources of Information about UBS This Financial Report contains our audited Financial Statements for the year 2001 and accompanying detailed analysis. You can find out more about UBS from the sources shown below. Publications This Financial Report is available in English and German. (SAP-R/3 80531-0201) Annual Review 2001 Our Annual Review contains a short descrip- tion of UBS, and a summary review of our performance in the year 2001. It is available in English, German, French, Italian and Spanish. (SAP-R/3 80530-0201) Handbook 2001/2002 Our Handbook 2001/2002 contains a detailed description of UBS, its strategy, its organization and the businesses that make it up. It is available in English and German. (SAP-R/3 80532-0201) Quarterly reports We provide detailed quarterly financial reporting and analysis, including comment on the progress of our businesses and key strategic initiatives. These reports are available in English. How to order reports Each of these reports is available on the internet at: www.ubs.com/investors, in the Financials section. Alternatively, printed copies can be ordered, quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, CA50-XMB, P.O. Box, CH-8098 Zurich, Switzerland. E-information tools for investors Website Our at Investors and Analysts website www.ubs.com/investors offers a wide range of information about UBS, including our financial reporting, media releases, UBS share price graphs and data, corporate calendar and divi- dend information and copies of recent presen- tations given by members of senior management to investors at external conferences. Our internet-based information is available in English and German, with some sections also in French and Italian. Messenger service On the Investors and Analysts website, you can register to receive news alerts about UBS via SMS or e-mail. Messages are sent in either English or German and users are able to state their preferences for the theme of the alerts received, e. g. SEC filings or webcasts. Results presentations Senior management presents UBS’s quarterly results every quarter on publication date. These presentations are broadcast live over the inter- net, and can be downloaded on demand. The most recent results webcasts can also be found in the Financials section of our Investors and Analysts website. UBS and the Environment The Handbook 2001/2002 contains a sum- mary of UBS environmental policies. More detailed information is available at www. ubs.com/environment. Form 20-F and other submissions to the US Securities and Exchange Commission We file periodic reports and other information about UBS with the US Securities and Exchange Commission (SEC). Principal among these filings is the Form 20-F, our Annual Report filed pursuant to the US Securities Exchange Act of 1934. Our Form 20-F filing is structured as a “wrap-around” document. Most sections of the filing are satisfied by referring to part of the Handbook or to part of this Financial Report 5 Profile 2001. However, there is a small amount of addi- tional information in the Form 20-F which is not presented elsewhere, and is particularly targeted at readers from the US. You are encouraged to refer to this additional disclosure. You may read and copy any document that we file with the SEC on the SEC’s website, www.sec.gov, or at the SEC’s public reference room at 450 Fifth Street NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 (in the US) for further information on the opera- tion of its public reference room. You may also inspect our SEC reports and other information at the New York Stock Exchange, Inc., 20 Broad Street, New York, NY 10005 and the American Stock Exchange LLC, 86 Trinity Place, New York, NY 10006. Much of this additional infor- mation may also be found on the UBS website at www.ubs.com/investors, and copies of docu- ments filed with the SEC may be obtained from UBS’s Investor Relations team, at the addresses shown below. Corporate information The legal and commercial name of the com- pany is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS. UBS AG is incorporated and domiciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors. The address and telephone number of our two registered offices and principal places of business are: Bahnhofstrasse 45, CH-8098 Zurich, Switzer- land, telephone +41-1-234 11 11; and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, telephone +41-61-288 20 20. UBS AG shares are listed on the SWX Swiss Exchange and traded through virt-x (a joint ven- ture between Tradepoint and the SWX Swiss Exchange). They are also listed on the New York Stock Exchange and on the Tokyo Stock Exchange. 6 UBS Investor Relations Our Investor Relations team supports institutional, professional and retail investors from offices in Zurich and New York. E-mail: sh-investorrelations@ubs.com Web: www.ubs.com/investors Zurich New York Hotline Zurich: +41 1 234 4100 Hotline New York: +1 212 713 3641 Christian Gruetter +41 1 234 4360 Richard Feder +1 212 713 6142 Mark Hengel +41 1 234 8439 Christopher McNamee +1 212 713 3091 Charles Gorman +41 1 234 2733 Catherine Lybrook +41 1 234 2281 Fax +41 1 234 3415 Fax +1 212 713 1381 UBS AG Investor Relations G41B P.O. Box CH-8098 Zurich, Switzerland UBS Americas Inc. Investor Relations 1285 Avenue of the Americas, 14th Floor New York, NY 10019, USA UBS Group Media Relations Other useful contacts Switchboards For all general queries. UBS Shareholder Services UBS Shareholder Services, a unit of the Company Secretary, is responsible for the registration of the Global Registered Shares. It is split into two parts – a Swiss register, which is main- tained by UBS acting as Swiss transfer agent, and a US register, which is maintained by Mellon Investor Services as US transfer agent (see below). Zurich London New York Tokyo Zurich London New York Tokyo Zurich Telephone +41 1 234 8500 +44 20 7567 4714 +1 212 713 83 91 +81 3 5208 6275 Fax E-mail +41 1 234 8561 sh-gpr@ubs.com +44 20 7568 0955 sh-mr-london@ubsw.com +1 212 713 98 18 mediarelations-ny@ubsw.com +81 3 52 08 69 51 sh-comms-mktg-tokyo@ubs.com Telephone +41 1 234 1111 +44 20 7568 0000 +1 212 821 3000 +81 3 5293 3000 Telephone +41 1 235 6202 Fax E-mail +41 1 235 3154 sh-shareholder-service@ubs.com UBS AG Shareholder Services P.O. Box CH-8098 Zurich, Switzerland UBS Transfer Agent For all Global Registered Share related queries in the USA. Mellon Investor Services Overpeck Center 85 Challenger Road Ridgefield Park, NJ 07660, USA Telephone: +1 866 541 9689 Fax: +1 201 296 4801 Web: http:// www.melloninvestor.com UBS listed its Global Registered Shares on the New York Stock Exchange on 16 May 2000. Prior to that date UBS operated an ADR program. See the Frequently Asked Questions (FAQs) section at www.ubs.com/investors for further details about the UBS share. 7 Profile Information for Readers You should read the discussion and analysis in the Group Financial Review and Review of Business Group Performance in conjunction with the UBS Group Financial Statements and the related notes, which are shown in pages 75 to 169 of this document. Parent Bank Pages 171 to 181 contain the financial statements for the UBS AG Parent Bank – the Swiss com- pany, including branches worldwide, which owns all the UBS Group companies, directly or indi- rectly. Except in those pages, or where otherwise explicitly stated, all references to “UBS” refer to the UBS Group and not to the Parent Bank. Accounting standards The UBS Group Financial Statements have been prepared in accordance with International Accounting Standards (IAS). As a US listed com- pany, UBS Group provides a description in Note 40 of its Financial Statements of the significant differences which would arise were our accounts to be presented under United States Generally Accepted Accounting Principles (US GAAP), and a detailed reconciliation of IAS shareholders’ equity and net profit to US GAAP. Major dif- ferences between Swiss federal banking law requirements and IAS are described in Note 39 to the UBS Group Financial Statements. Except where clearly identified otherwise, all of UBS Group’s financial information presented in this document is presented on a consolidated basis under IAS. The Parent Bank’s financial statements are prepared in order to meet Swiss regulatory requirements and in compliance with Swiss federal banking law. All references to 2001, 2000 and 1999 refer to the UBS Group and the Parent Bank’s fiscal years ended 31 December 2001, 2000, and 1999, respectively. The Financial Statements for the UBS Group and the Parent Bank for each of these periods have been audited by Ernst & Young Ltd., as described in the Report of the Independent Auditors on page 169 and the Report of the Statutory Auditors on page 181. Implementation of IAS 39 On 1 January 2001, UBS Group adopted the new accounting standard IAS 39: Recognition and measurement of financial instruments. The prin- cipal effects on our accounts are outlined below. Profit and loss impact UBS’s strategy has always been to minimize the profit and loss volatility that can be caused by “non-qualifying” hedges. As a result, implemen- tation of IAS 39 has not had any significant effects on UBS’s net profit, and is not expected to do so in the foreseeable future. Changes to shareholders’ equity For the first time this year we identify “Gains / Losses not recognized in the income statement” as a separate section within shareholders’ equity. Within this we show three sub-sections, Foreign currency translation (which was an existing line in shareholders’ equity, reported in previous years) and two new sub-sections introduced as a result of the adoption of IAS 39 on 1 January 2001: Unrealized gains/losses on available for sale investments and Changes in fair value of deriva- tive instruments designated as cash flows hedges. Both sub-sections had opening balances: – The opening balance of Unrealized gains / losses on available-for-sale investments was a net gain of CHF 1,577 million, net of taxes, due to unrealized mark-to-market gains on financial investments classified as available for sale which were principally attributable to private equity investments, but also includ- ed other financial investments held by the Group. – The opening balance of Changes in fair value of derivative instruments designated as cash flows hedges was a net loss of CHF 380 mil- lion, net of taxes, due to unrealized mark-to- market losses on derivatives designated as cash flow hedges. These losses were previously 8 UBS / SBC merger restructuring provision used CHF million Personnel UBS Switzerland UBS Asset Management UBS Warburg Corporate Center Group total 361 2 0 7 370 IT 23 0 0 0 23 Initial restructuring provision in 1997 Additional provision in 1999 Used in 1998 Used in 1999 Used in 2000 Used in 2001 Total used up to 31.12.2001 Released to the income statement Restructuring provision at 31.12.2001 Premises Other 31.12.01 31.12.00 31.12.99 For the year ended 228 7 0 464 699 916 15 348 565 1,844 35 0 0 267 302 0 0 0 14 14 419 2 0 288 709 7,000 300 4,027 1,844 699 709 7,279 21 0 recorded in the balance sheet as a part of deferred losses. All movements within these categories are now recorded each year in the Statement of changes in equity. Other changes to accounting presentation For comparative purposes, UBS Group’s 2000 and 1999 figures have been restated to conform to the presentation used in 2001, reflecting changes in methods of presentation, including the reclassification of Money market paper held as Trading portfolio assets or Financial Invest- ments, as appropriate, and of Money market paper issued as Debt issued. Note 1 to the UBS Group Financial State- ments includes a detailed explanation of these and other accounting changes. The segment reporting shown in Note 2 to UBS Group Financial Statements has been restated to reflect the organization of the Group during 2001. See the Review of Business Group performance for details of changes since the 2000 presentation. PaineWebber merger Except where otherwise stated, all 2000 figures for UBS Group throughout this report, include the impact of the merger with Paine Webber Group, Inc., which was completed on 3 November 2000. Under purchase accounting rules, the results for 2000 reflect PaineWebber’s income and expenses for two months only, from 3 November 2000 until 31 December 2000. Results for 2001 include PaineWebber for the full year, while results for 1999 contain no contribution from PaineWebber. Restructuring provision The 1998 merger of Swiss Bank Corporation and Union Bank of Switzerland, which was completed on 29 June 1998, was accounted for under the “pooling-of-interests” method of accounting, referred to in IAS as “uniting of interests”. Under this method, a single uniform set of accounting policies was adopted and ap- plied retrospectively for the restatement of com- parative information. After the merger was effected, we began inte- grating the operations of the two predecessor banks. This process included streamlining opera- tions, eliminating duplicate information technol- ogy infrastructure, and consolidating banking premises. At the time of the merger, we estab- lished a restructuring provision of CHF 7 billion to cover UBS’s expected costs associated with the integration process. In December 1999, we recognized an addi- tional pre-tax restructuring charge of CHF 300 million in respect of the merger. The majority of the additional provision was due to revised estimates of the cost of lease breaks and property disposals. We have now completed the integration and restructuring process relating to the merger. At 9 Profile 31 December 2001, CHF 21 million of the restruc- turing provision remained and was released to the income statement. affecting this accounting policy relate to how we determine fair value for such assets and lia- bilities. Critical accounting policies We prepare our Financial Statements in accor- dance with IAS, and provide a reconciliation to US GAAP. When feasible, we try to reduce the dif- ferences between our Financial Statements under the two standards by applying accounting policies that are in accordance with both sets of standards. This approach limits (but does not completely eliminate) the range of elective accounting treat- ments available to us, but there are still rules under both standards which require us to apply judgment and make estimates in preparing our Financial Statements. The more significant of these accounting treatments are discussed in this section, as a guide to better understanding how their application affects our reported results and our disclosure. A broader description of the accounting policies we employ is shown in Note 1 to the UBS Group Financial Statements. The existence of alternatives and the applica- tion of judgment mean that any selection of dif- ferent alternatives or estimates would cause our reported results to differ. We believe that the choices we have made are appropriate, and that our Financial Statements therefore present our financial position and results fairly, in all materi- al respects. The alternative outcomes discussed below are presented solely to assist the reader to understand our Financial Statements, and are not intended to suggest that other alternatives or estimates would be more appropriate. Many of the judgments which we make in applying accounting principles depend on an assumption, which we believe to be correct, that UBS maintains sufficient liquidity to hold posi- tions or investments until a particular trading strategy matures – i.e. that we do not need to realize positions at unfavorable prices in order to fund immediate cash needs. Liquidity is dis- cussed in more detail on pages 80 to 83 of the UBS Handbook 2001/2002. Financial instruments – fair value Our trading portfolio assets and liabilities are recorded at fair value. As such, they must be recorded at fair value at each balance sheet date, with changes in fair value recorded as trading income in the income statement. Key judgments Where liquid markets exist, fair value is based on quoted market prices. However, for certain complex or illiquid financial instruments, we have to use projections, estimates and models to determine fair value. In addition, judgmental factors such as the need for credit adjustments, liquidity adjustments and other valuation adjust- ments affect the reported fair value amounts of many assets and liabilities. Further details of our valuation policies, including stress loss scenarios and interest rate risks, are given in the Risk Analysis section of the UBS Handbook 2001/2002, on pages 61 to 76. We believe the assumptions and estimates we have used are reasonable and supportable in the existing market environment. Because of the range of assumptions and estimates that could be used and the number of different sorts of prod- ucts covered, it is not possible to quantify or meaningfully disclose the impact of using differ- ent assumptions and estimates that would also be supportable. Hedge accounting. IAS 39 allows a company to apply hedge accounting if it fully complies with the specified hedge criteria. We have chosen to apply hedge accounting whenever we meet these criteria so that our Financial Statements clearly reflect the economic hedge effect obtained from the use of these instruments. Over the entire life of an effective hedging instrument, changes in the fair value or cash flows of the hedged item can be expected to be almost fully offset by changes in the fair value or cash flows of the hedging instrument, so the net impact on profit over time is relatively small. However, if the hedged item is one that would normally not be recorded at fair value (for instance if it is held at cost less impairment), but the hedging instrument is of a sort that would normally be accounted for at fair value, there could be substantial differences in the profit and loss effect for the two items during specific accounting periods, although over the whole life of the instrument these would be expected to balance out. Applying hedge accounting means that changes in the fair values of designated hedging instruments affect reported net profit in a period only to the extent that each hedge is ineffective. 10 Alternatively, if we were to choose not to apply hedge accounting, the entire change in fair value of the designated hedging instruments in each individual reporting period would be reported in net income for that period, regardless of the economic effectiveness of the hedge. For 2001, this would have resulted in a pre-tax gain of CHF 240 million. We believe that not applying hedge accounting could lead to misinterpre- tations of our results and financial position, since hedging transactions could have a material impact on reported net profit in a particular period, although over the total life of a hedge the net effect of the two treatments is identical. Financial investments – available for sale UBS has classified some of its financial assets, including investments not held for trading pur- poses, as available-for-sale. This classification is based on our determination that these assets are not held for the purpose of generating short- term trading gains. Upon adoption of IAS 39 at 1 January 2001, we elected to record changes in the fair value of available-for-sale assets in a sep- arate component of shareholders’ equity rather than in income. Had we made a different elec- tion, any changes in the fair value of these assets (i.e. unrealized gains or losses) would be reflect- ed in the income statement. Similarly, if we had originally decided that these were trading assets, or if we were to reclassify these assets as trading assets, changes in fair value would then have to be reflected in income rather than shareholders’ equity. The amount of unrealized gains or losses on the balance sheet date is disclosed in the state- ment of changes in equity in the UBS Group Financial Statements. Companies held in our private equity port- folio are not consolidated in UBS’s Financial Statements. This treatment has been determined after considering such matters as liquidity, exit strategies and degree and timing of our influence and control over these investments. We classify our private equity investments as financial investments available-for-sale, and carry them on the balance sheet at fair value, with changes in fair value being recorded directly in equity, while unrealized losses which are deter- mined to be permanent are recorded in our income statement as impairment charges. Since quoted market prices are generally unavailable for these companies, fair value is determined by applying recognized valuation techniques, which require the use of assumptions and estimates. While we believe that the assumptions and esti- mates we use to determine fair value are reason- able and supportable, different assumptions and estimates could be used, which would lead to dif- ferent results. In addition, the determination of when a decline in fair value below cost is per- manent is judgmental by nature, so profit and loss would be affected by differences in this judgment. Goodwill and other intangible assets We regularly review assets that are not carried at fair value for possible impairment indications. If impairment indicators are identified we make an assessment about whether the carrying value of such assets remains fully recoverable. When making this assessment we compare the carrying value to the market value, if available, or the value in use. Value in use is determined by dis- counting expected future net cash flows gener- ated by an asset or group of assets to its present value. Determination of the value in use requires management to make assumptions and use esti- mates. We believe that our assumptions and esti- mates used are reasonable and supportable in the existing market environment, but different ones could be used which would lead to differ- ent results. The single most significant amount of goodwill relates to the acquisition of PaineWebber. The val- uation model used to determine the fair value of UBS PaineWebber is sensitive to changes in the assumptions about the discount rate, growth rate and expected cash flows (i. e., assumptions about the future performance of the business). Adverse changes in any of these factors could lead us to record a goodwill impairment charge. Allowances and provisions for credit losses UBS has an extensive loan portfolio which is exposed to credit risk. These loans are initially recorded at cost (i. e., at the net amount of pro- ceeds lent), and then held at amortized cost reduced for credit reserves. Credit reserves are based upon management’s assessment of the likelihood that the borrower will not repay prin- cipal and interest according to the contractually agreed terms. Had we made different judgments about the need for credit reserves and their amounts, our credit loss expense charge would have been different. 11 Profile Further details of our policies in this area are given in the Risk Analysis section of the UBS Handbook 2001/2002, on pages 61 to 76. majority of our SPEs fall into this category. SPEs created for client investment purposes are gener- ally not consolidated. Securitizations and Special Purpose Entities UBS sponsors the formation of Special Purpose Entities (SPEs) primarily for the purpose of allowing clients to hold investments, for asset securitization transactions, and for credit protec- tion. In accordance with IAS we do not consoli- date those SPEs that we do not control. Under applicable accounting standards, determining the existence of control of an SPE is a complex matter and often requires judgments to be made about risks and rewards and the ability to make operating decisions for the SPE. The main difference to our financial state- ments between consolidation and non-consolida- tion of SPEs is generally that only in the latter case can we recognize gains arising on securiti- zation of assets and other transactions. UBS has a comprehensive process for moni- toring and controlling the creation and running of SPEs, designed to ensure that they are only created for purposes connected with our busi- ness, that any change of status, such as the acti- vation of a dormant SPE, is appropriate and that the SPEs and their assets and liabilities are cor- rectly accounted for. UBS manages the risk of consolidated SPEs in the same way as for any other subsidiary. Unconsolidated SPEs are treated like any other unaffiliated counterparty, under normal credit risk principles. SPEs used for securitization. SPEs for securi- tization are created when UBS has an asset (for example a portfolio of loans) which it sells to an SPE. The SPE in turn sells interests in the asset as securities to investors. Consolidation of these SPEs depends on whether UBS retains the risks and rewards of the assets in the SPE. We do not consolidate SPEs for securitization if UBS no longer retains any significant exposure (gain or loss) to the returns, including liquida- tion, on the assets sold to the SPE. This type of SPE is a bankruptcy remote entity – if UBS were to go bankrupt the holders of the securities would clearly be owners of the asset, while if the SPE were to go bankrupt the securities holders would have no recourse to UBS. However, in some cases UBS does retain exposure to some of the returns from the assets sold to the SPE – for example first loss on a loan portfolio. In these cases we consolidate the SPE and then derecognize the assets to the extent that we do not have exposure. SPEs for credit protection are set up to allow UBS to sell the credit risk on portfolios to investors. They are primarily to allow UBS to have a single counterparty (the SPE) which sells credit protection to UBS. The SPE in turn has a large number of investors who provide it with capital and participate in the risks and rewards of the credit events that it insures. SPEs for cred- it protection are generally consolidated. Principal types of SPE used by UBS SPEs used to allow clients to hold investments are structures that allow one or more clients to invest in an asset or set of assets which are pur- chased by the SPE in the open market and not transferred from UBS. The risk or reward of the assets held by the SPE resides with the cus- tomer – UBS has no exposure to them. Typically, UBS will receive service and commission fees for creation of the SPE, or because it acts as investment manager, custodian or in some other function. These SPEs range from mutual funds to trusts investing in real estate, for example UBS Alter- native Portfolio AG, which provides a vehicle for investors to invest in a diversified range of alter- native investments through a single share. The Equity compensation IAS does not specifically address the recognition and measurement of equity-based compensation including employee option plans. plans, Extensive literature on accounting for options granted to employees exists under US GAAP, which permits a company to elect either the intrinsic value method or the fair value method. Under the intrinsic value method, if the exercise price of options granted is equal to or greater than the fair value of the underlying equity at grant date, no compensation expense need be recorded. Under the fair value method, an amount would be computed for such options and charged to compensation expense. For IAS, UBS records as compensation expense only the intrinsic value at grant date, if any, of options 12 granted to employees. Subsequent changes in value are not recognized. Further information on UBS equity compensation plans is disclosed in Note 33 to the Financial Statements. Deferred tax UBS records a valuation allowance to reduce its deferred tax assets to the amount that we believe can be realized in our future tax returns. Our val- uation allowance is based on the assessment of future taxable income and our tax planning strategies. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. Changes in cir- cumstances may result in either an increase or reduction of the valuation allowance, and there- fore net income, depending on an adverse or favorable change of the factors that impact the recognized deferred tax assets. See Note 22 to the Financial Statements for further details. Segment reporting The policies used in preparation of our segment reporting affect the split of our income and expenses between the different Business Groups. Applying different rules would lead to different net profit in the different Business Groups, but would have no effect on the total Group profits. The most significant of these policies is the treatment of credit loss expense. If we had not applied the concept of adjusted expected loss in calculating the credit loss expense for each Business Group, Corporate Center would have incurred a significantly higher loss, UBS War- burg would have achieved a slightly lower profit and UBS Switzerland a significantly higher profit, in both 2001 and 2000. The concept of adjusted expected credit loss is explained in more detail in the Management Accounting sec- tion of this report on pages 32 to 36, which includes a table which reconciles the adjusted expected credit loss amount charged to the Business Groups with the actual IAS credit loss. Significant financial events We analyze UBS’s performance on a reported basis determined in accordance with IAS, and on a normalized basis which excludes from the reported amounts certain items we term signifi- cant financial events. We use figures adjusted for significant finan- cial events to illustrate the underlying opera- tional performance of our business, insulated from the impact of one off gains or losses outside the normal run of business. In particular, our financial targets have been set in terms of adjust- ed results, excluding significant financial events. A policy approved by the Group Executive Board defines which items may be classified as significant financial events. In general an item that is treated as a significant financial event should be: – Non-recurring – Event specific – Material at Group level – UBS-specific, not industry-wide and should not be a consequence of the normal run of business. Examples of items that we would treat as significant financial events include the gain or loss on the sale of a significant subsidiary or associate, such as the divestment in 1999 of UBS’s stake in Swiss Life / Rentenanstalt, or the restructuring costs associated with a major inte- gration, such as the merger with PaineWebber. Significant financial events are not a recog- nized accounting concept under IAS or US GAAP, and are therefore not separately reflected in the UBS Group Financial Statements. We restrict the use of numbers which have been adjusted for sig- nificant financial events to UBS’s business unit reporting and to the discussion and analysis of the Group’s results and the accompanying illus- trative tables. Where tables in the Business Group reporting show adjusted figures, we also include a table showing the reported figures. We clearly identify all adjusted figures as such, and clearly disclose both the pre-tax amount of each individual significant financial event, and the net tax benefit or loss associated with all the significant financial events in each period. We have not declared any significant financial events in 2001. Significant financial events during 1999 and 2000 are shown in the table on page 14 and described in more detail below. – During 2000, we recorded restructuring charges and provisions of CHF 290 million pre-tax relating to the integration of Paine- Webber into UBS. – During 1999, we recognized pre-tax gains of CHF 1,490 million on the sale of our 25% stake in Swiss Life / Rentenanstalt; CHF 110 13 Profile Significant Financial Events CHF million For the year ended Operating income as reported Julius Baer registered shares divestment International Global Trade Finance divestment Swiss Life / Rentenanstalt divestment LTCM gain Adjusted operating income Operating expenses as reported US Global Settlement Fund provision Pension Fund Accounting credit UBS / SBC Restructuring provision PaineWebber integration costs Adjusted operating expenses 30,396 Adjusted operating profit before tax and minority interests Tax expense Tax effect of significant financial events Adjusted tax expense Minority interests Adjusted net profit Adjusted net profit before goodwill 6,718 1,401 1,401 (344) 4,973 6,296 31.12.01 31.12.00 31.12.99 % change from 31.12.00 37,114 36,402 37,114 30,396 28,425 (110 ) (200 ) (1,490 ) (38 ) 26,587 20,532 (154 ) 456 (300 ) 20,534 6,053 1,686 (352 ) 1,334 (54 ) 4,665 5,005 2 2 16 18 (37) (40) (42) 295 (39) (28) 36,402 26,203 (150 ) (290 ) 25,763 10,639 2,320 100 2,420 (87 ) 8,132 8,799 million on the disposal of Julius Baer regis- tered shares; CHF 200 million on the sale of our international Global Trade Finance busi- ness; and CHF 38 million from our residual holding in Long Term Capital Management. – In fourth quarter 1999, we recognized a one- time credit of CHF 456 million in connection with excess employer pre-payments to staff pension funds. – In fourth quarter 1999, UBS recognized an additional pre-tax restructuring charge of CHF 300 million in respect of the 1998 merger between Union Bank of Switzerland and Swiss Bank Corporation. – During 1998, we established a provision of CHF 842 million in connection with the US Global Settlement of World War II related claims. We recognized additional pre-tax provisions relating to this claim of CHF 154 million in 1999 and CHF 150 mil- lion in 2000. Risk factors As a global financial services firm, UBS’s busi- nesses are affected by the external environment in the markets in which UBS operates. In particular, the results of our business in Switzerland, and notably the results of our credit-related activities, would be adversely affected by any deterioration in the state of the Swiss economy because of the impact this would have on our customers’ credit- worthiness. More generally, global economic and political conditions can impact UBS’s results and financial position by affecting the demand for our products and services, and the credit quality of our borrowers and counterparties. Similarly, any continued prolonged weakness in international securities markets would affect our business rev- enues through its effect on our clients’ investment activity and the value of their invested assets, which would in turn reduce our revenues from wealth management businesses. Competitive forces UBS faces intense competition in all aspects of its business. We compete with asset managers, retail and commercial banks, private banking firms, investment banking firms, brokerage firms and other investment services firms. In addition, the trend toward consolidation in the global finan- cial services industry is creating competitors with broader ranges of product and service offerings, increased access to capital, and greater efficiency and pricing power. 14 Fluctuations in currency exchange rates and interest rates Because UBS prepares its accounts in Swiss francs, changes in currency exchange rates, particularly between the Swiss franc and the US dollar, may have an effect on the earnings that UBS reports. (Revenues in US dollars represent the major part of our non-Swiss franc earnings). Our approach to managing this risk is explained in the Currency management section of the Group Treasury chap- ter in the UBS Handbook 2001/2002. In addition, changes in financial market struc- tures can affect our earnings. For example, the establishment of the euro during 1999 affected foreign exchange markets in Europe by reducing the extent of foreign exchange dealings among member countries and generating more harmo- nized financial products. Movements in interest rates can also affect our results. Our interest income is affected by changes in interest rates, although the precise mechanisms are compli- cated. Interest rate movements can also affect our fixed income trading portfolio and the investment performance of our asset manage- ment businesses. For further discussion of the effect of interest rate changes on our business see the Interest rate risk management section of the discussion of the Group Treasury chapter in the UBS Handbook 2001/2002. Operational risks All our businesses are dependent on our ability to process a large number of complex transac- tions across numerous and diverse markets in different currencies and subject to many differ- ent legal and regulatory regimes. UBS’s systems and processes are designed to ensure that the risks associated with our activities are appro- priately controlled, but we recognize that any weaknesses in these systems could have a nega- tive impact on the results of our operations. As a result of these and other factors beyond our control, UBS’s revenues and operating profit have been and are likely to continue to be subject to a measure of variability from period to period. Therefore UBS’s revenues and operating profit for any particular fiscal period may not be indicative of sustainable results, may vary from year to year and may impact our ability to achieve UBS’s strategic objectives. For a discussion of UBS’s risk management and control procedures see the Risk Manage- ment and Control section of the UBS Hand- book 2001/2002. 15 16 Group Financial Review 17 Group Financial Review Group Results Group Results 2001 UBS made significant progress in 2001, successful- ly integrating UBS PaineWebber, building our European wealth management business and expanding our presence in corporate finance, par- ticularly in the US. Our clients invested substantial net new money through our private client and asset management businesses, and we significantly improved our investment banking market share. It has been a challenging year for us financially, with a difficult market environment depressing trading returns, transaction volumes, and private equity valuations, in stark contrast to the buoyant cli- mate in 2000. Despite the markets, relative opera- tional performance in our core businesses has remained strong and we have benefited from our prudent attitude to risk and careful cost control. Group targets We focus on four key performance targets, designed to ensure that UBS delivers continually improving returns to its shareholders. – We seek to increase the value of UBS by achieving a sustainable, after-tax return on equity of 15–20%, across periods of varying market conditions. – We aim to increase shareholder value through double-digit average annual percentage growth of basic earnings per share (EPS), across periods of varying market conditions. – Through cost reduction and earnings enhance- ment initiatives, we aim to reduce UBS’s cost/ income ratio to a level that compares posi- tively with best-in-class competitors. – We aim to achieve a clear growth trend in net new money in the private client businesses (Private Banking and Private Clients). The first three targets are all measured pre- goodwill amortization, and adjusted for signifi- cant financial events. Our performance against these targets in 2001 reflects the extremely difficult market con- ditions we have faced. Before goodwill and adjusted for significant financial events: – Our return on equity for 2001 was 14.8%, only just below our target range of 15–20%. UBS Group Performance against Targets For the year ended 31.12.01 31.12.00 31.12.99 RoE (%) as reported before goodwill and adjusted for significant financial events 1 Basic EPS (CHF) as reported before goodwill and adjusted for significant financial events 1 Cost / income ratio (%) as reported before goodwill and adjusted for significant financial events 1 Net new money, private client units (CHF bn)2,3 UBS Switzerland – Private Banking UBS Warburg – Private Clients Total 11.7 14.8 3.93 4.97 80.8 77.3 22.5 36.0 58.5 21.5 24.3 6.44 7.28 72.2 69.2 2.8 15.2 18.0 22.4 18.2 5.07 4.12 69.9 73.3 2.3 2.0 4.3 1 Excludes the amortization of goodwill and other intangible assets. 2 Excludes interest and dividend income. 3 Calculated using the former def- inition of assets under management in 2000 and 1999. 18 Although this is lower than the 24.3% that we achieved in 2000, it represents a solid per- formance when set in the context of the trad- ing environment. Our return on equity in 2000 was boosted by extremely high returns in the exuberant markets of the first half-year, while this year has seen much weaker economic and stock market performance combined with higher average equity resulting from the acqui- sition of PaineWebber in fourth quarter 2000. UBS PaineWebber’s business. Despite this rise, operating expenses remained under tight con- trol, with decreases from 2000 levels in UBS Switzerland’s Private Banking and Private and Corporate Clients business units and UBS Warburg’s Corporate and Institutional Clients business unit, and a clear reduction through the year in UBS Warburg’s Private Clients business unit. Cost/income ratio1 (%) RoE1 (%) 30 25 20 15 10 5 0 e g a r e v A 9 9 9 9 9 1 0 0 Q 2 0 0 Q 3 0 0 0 2 1 0 Q 1 1 0 Q 2 1 0 0 2 1 0 Q 4 1 Excludes the amortization of goodwill and other intangible assets and adjusted for significant financial events. – Basic earnings per share fell 32% to CHF 4.97, a level still 21% higher than we achieved in 1999. Outstanding shares started 2001 higher than in most of 2000, as a result of issuance to fund the merger with Paine- Webber, but our continued buy-back program meant that by 31 December 2001 they were again below the pre-merger level. – The cost/income ratio for the year rose from 69.2% to 77.3%, reflecting lower revenues, the poor performance of our private equity portfolio this year and the influence of the relatively high cost / income ratio typical of Basic EPS1 (CHF) 8 7 6 5 4 3 2 1 0 e g a r e v A 9 9 9 9 9 1 0 0 Q 2 0 0 Q 3 0 0 0 2 1 0 Q 1 1 0 Q 2 1 0 0 2 1 0 Q 4 1 Excludes the amortization of goodwill and other intangible assets and adjusted for significant financial events. 80 75 70 65 60 e g a r e v A 9 9 9 9 9 1 0 0 Q 2 0 0 Q 3 0 0 0 2 1 0 Q 1 1 0 Q 2 1 0 0 2 1 0 Q 4 1 Excludes the amortization of goodwill and other intangible assets and adjusted for significant financial events. Our disciplined approach to both compen- sation and non-personnel costs allows us to con- tinue investing in the future growth of our key businesses. The percentage of revenue which we dedicate to rewarding our staff has remained almost unchanged since last year in our most important businesses, reflecting a substantial decrease in bonus payments. Net new money, private client units1 (CHF billion) 60 50 40 30 20 10 0 e g a r e v A 9 9 9 9 9 1 0 0 Q 2 0 0 Q 3 0 0 0 2 1 0 Q 1 1 0 Q 2 1 0 0 2 1 0 Q 4 1 Private Banking and Private Clients. Our asset gathering activities have delivered very strong results this year, with inflows in the private client units (Private Banking and Private Clients) of CHF 58.5 billion during 2001, compared to CHF 18.0 billion in 2000. Over the whole Group, we attracted a total of 19 Group Financial Review Group Results Invested Assets CHF billion UBS Group UBS Switzerland Private and Corporate Clients Private Banking UBS Asset Management Institutional Mutual funds UBS Warburg Private Clients UBS Capital Net new money2 2001 Net new money 2000 2, 3 31.12.01 31.12.001 2,457 2,452 320 682 328 344 782 1 345 691 323 319 773 1 8.5 22.5 6.2 28.7 36.0 0.1 0.4 2.8 (70.8) 2.9 15.2 1 Calculated using the new definition of invested assets. assets under management. 2 Excludes interest and dividend income. 3 Calculated using the former definition of CHF 102.0 billion in net new money, as clients increasingly value the quality of our advice and the breadth and depth of our wealth manage- ment capabilities. The UBS Group Private client invested assets by client domicile 33% US Americas – Other Switzerland Europe and the rest of the world 50% 11% 6% As at 31.12.2001 Net profit Our net profit for the year 2001 was CHF 4,973 million, 36% less than the CHF 7,792 million achieved in 2000, reflecting the much more diffi- cult market environment in 2001. The merger with PaineWebber resulted in much higher goodwill amortization expense in 2001 than in 2000. Pre-goodwill, net profit for the year was CHF 6,296 million, 26% lower than we achieved in the much stronger markets of 2000 and 28% lower if adjusted for signifi- cant financial events. Operating income Operating income was 2% higher in 2001 than in 2000, at CHF 37,114 million, with the effect of much more difficult market conditions offset by the addition of UBS PaineWebber’s busi- nesses. There were no significant financial events that affected operating income in either 2001 or 2000. Net interest income was 1% lower than in 2000, at CHF 8,041 million, compared to CHF 8,130 million in 2000, and net trading income was 12% lower than in 2000 at CHF 8,802 mil- lion, compared to CHF 9,953 million in 2000. Various factors can alter the mix between net interest income and net trading income between periods. As well as income from interest margin based activities (for example loans and deposits), net interest income includes some income earned as a result of trading activities (such as coupon and dividend income). This component is volatile from period to period, depending on the compo- sition of the trading portfolio. Furthermore, the classification of income arising from positions and their offsetting eco- nomic hedging transactions may be different. In fourth quarter 2001 this effect was particularly pronounced, as a result of the significant fall in short term USD interest rates which substantially reduced our borrowing costs, so boosting net interest income for the quarter. Our overall interest rate exposures are limited by hedging transactions using derivative instruments. As the USD rates fell, these economic hedges generated mark-to-market losses recorded in fixed income net trading income, offsetting a portion of the gains in net interest income. 20 Net Interest and Trading Income CHF million For the year ended Net interest income Net trading income Total net interest and trading income Breakdown by business activity: Net income from interest margin products Net income from trading activities Net income from treasury activities Other 1 Total net interest and trading income 1 Principally goodwill funding costs. 31.12.01 31.12.00 31.12.99 % change from 31.12.00 8,041 8,802 16,843 5,694 11,529 1,424 (1,804) 16,843 8,130 9,953 18,083 5,430 12,642 762 (751 ) 18,083 5,909 7,719 13,628 5,139 8,200 628 (339 ) 13,628 (1) (12) (7) 5 (9) 87 (140) (7) In order to provide a better explanation of the movements in net interest income and net trading income, we produce the disclosure shown above which sums net interest income and net trading income, and then analyzes the total according to the business activities which gave rise to the income, rather than by the type of income generated. Net income from interest margin products increased 5% from CHF 5,430 million to CHF 5,694 million, driven by the inclusion of UBS PaineWebber. Net income from trading activities was CHF 11,529 million, 9% lower than the CHF 12,642 million achieved in 2000. Falling interest rates and increased volatility in debt markets led to a very strong year for fixed income and foreign exchange trading, but equity trading revenues suffered from much lower market volumes, increased volatility and reduced arbitrage oppor- tunities. Net income from treasury activities was 87% higher than in 2000, at CHF 1,424 million, reflecting two main factors: – increased income from our invested equity, as a result of the expansion of our capital base since the PaineWebber merger, and changes in the investment portfolio’s maturity struc- ture leading to an increase in average interest rates; – and improved currency management results due to introduction of a new economic hedg- ing strategy and some one-off gains. Other net trading and interest income princi- pally reflects the costs of goodwill funding, with the CHF 1,053 million increase in cost from CHF 751 million in 2000 to CHF 1,804 million in 2001 mainly due to goodwill funding costs arising from the acquisition of PaineWebber. Credit loss expense. In 2001 credit loss expenses amounted to CHF 498 million, com- pared to a net recovery of CHF 130 million in 2000 but down from an expense of CHF 956 mil- lion in 1999. The global credit environment declined rapid- ly throughout 2001, with overall default rates as high as during the last major global recession in 1991. The phenomenon of investment grade companies falling into restructuring and default within a very short period of time became very prominent in the United States during 2001, and subsequently spread to Europe. In this difficult Actual IAS Credit Loss Expense (Recovery) CHF million For the year ended UBS Switzerland UBS Asset Management UBS Warburg Corporate Center Total 31.12.01 31.12.00 31.12.99 123 0 375 498 (695 ) 0 565 (130 ) 965 0 0 (9) 956 21 Group Financial Review Group Results Net Fee and Commission Income CHF million For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Underwriting fees Corporate finance fees Brokerage fees 1 Investment fund fees Fiduciary fees Custodian fees Portfolio and other management and advisory fees 1 Insurance-related and other fees 1 2,158 1,339 6,445 4,276 355 1,356 4,650 538 1,434 1,772 5,742 2,821 351 1,439 3,666 111 905 1,298 3,934 1,915 317 1,583 2,612 57 Total security trading and investment activity fees 21,117 17,336 12,621 Credit-related fees and commissions Commission income from other services 307 946 310 802 372 765 Total fee and commission income 22,370 18,448 13,758 Brokerage fees paid Other Total fee and commission expense 1,281 878 2,159 1,084 661 1,745 795 356 1,151 Net fee and commission income 20,211 16,703 12,607 50 (24) 12 52 1 (6) 27 385 22 (1) 18 21 18 33 24 21 1 Fee and commission income from insurance products now reported in Insurance-related and other fees was previously reported in Brokerage fees and in Portfolio and other management and advisory fees. Prior years have been restated. and challenging environment we have focused on ensuring that our counterparty ratings are rapidly adjusted to reflect the changing econom- ic situation. At the same time, we have increased the frequency of sector and geographic rating reviews. In UBS Warburg, the ongoing strategy of actively hedging credit exposure has kept new provisions to a relatively low level, resulting in a credit loss expense of CHF 375 million in 2001, compared to CHF 565 million in 2000. Corporate bankruptcies in Switzerland have now reached their lowest level since the early 1990s, and we have successfully improved the credit quality of our domestic portfolio over recent years. The level of recoveries of previ- ously existing provisions has, however, declined compared to the somewhat exceptional levels of 2000, reflecting less robust growth in the Swiss economy towards the end of 2001, fol- lowing the global economic slowdown. As a result, the trend of net recoveries of loan loss provisions observed in the previous year was reversed and credit loss expenses increased accordingly during 2001, although remaining below the long-term trend. Credit loss expense in UBS Switzerland in 2001 was CHF 123 mil- lion, compared to a net recovery of CHF 695 million in 2000. For further details on our risk management approach, how we measure credit risk and the development of our credit risk exposures, please see the Capital and Risk Management chapter of our Handbook 2001/2002. Net fee and commission income was CHF 20,211 million, up 21% from 2000 and at a record level, reflecting the inclusion of UBS PaineWebber and the introduction of higher fees for investment funds. Without UBS PaineWebber, net fee and commission income would have dropped 7%, driven by much lower brokerage fees and a reduction in corporate finance fees, with increases in market share during the year achieved against a background of much reduced market activity. Underwriting fees increased 50%, from CHF 1,434 million in 2000 to CHF 2,158 million in 2001. The majority of this increase was due to UBS PaineWebber, whose extensive retail net- work in the US provides a strong platform for distribution of both bonds and equities. UBS PaineWebber has a significant US municipal securities business, which completed the largest deal in its history in fourth quarter, raising USD 1.9 billion for the New Jersey Transit Trust Fund Authority, and helping to push it into first place in the league table rank- ings for fourth quarter, and second place for the 22 whole of 2001. The mortgage-backed securities business in the US has also benefited from the combination of UBS’s franchise and capital strength with existing PaineWebber expertise. UBS Warburg ranked first in US residential mortgage-backed securities in 2001, according to Thomson Financial Data. Equity underwriting was depressed in 2001, as volatile and uncertain markets reduced issuance. However, UBS’s league table rankings improved, from seventh in international equity new issues in 2000 to second in 2001, according to Capital Data Bondware. Even excluding the contribution from UBS PaineWebber, equity underwriting revenues increased by CHF 77 mil- lion, or 7%, from 2000. Although our corporate finance league table rankings were disappointing, down from sixth in 2000 for completed global mergers and acquisi- tions to eighth in 2001, we outperformed 2000 in terms of market share, with full year analysis showing us with a 4.5% share of fees, compared to 3.6% in 2000. Despite this, Corporate Finance fees were down 24%, from CHF 1,772 million in 2000 to CHF 1,339 million in 2001, reflecting the much more difficult market envi- ronment this year. Net brokerage fees rose 11% from CHF 4,658 million in 2000 to CHF 5,164 million in 2001, driven by the inclusion of UBS Paine- Webber. Without the contribution from UBS PaineWebber, net brokerage fees would have fallen by about 17% compared to 2000, reflect- ing the much lower trading volumes experienced in almost all major markets world wide in 2001. The level of net brokerage fees is closely linked to transaction volumes, and performance in 2002 will largely depend on whether markets improve and investor confidence returns. Investment fund fees rose 52% from CHF 2,821 million in 2000 to CHF 4,276 million in 2001, driven by the inclusion of UBS Paine- Webber. Excluding UBS PaineWebber, invest- ment fund fees would have increased by CHF 268 million, mainly reflecting a change in the pricing structure for UBS Investment Funds, introduced in January 2001, which brought charges up to market levels. Custodian fees, at CHF 1,356 million in 2001 were down 6% from 2000’s level of CHF 1,439 million, principally reflecting lower aver- age assets in Private Banking in Switzerland. Portfolio and other management and advisory fees increased 27% from CHF 3,666 million in 2000 to CHF 4,650 million in 2001, due to the addition of UBS PaineWebber. Excluding UBS PaineWebber, there would have been a slight decline from 2000, as a full year’s contribution from the O’Connor business in UBS Asset Management (created in June 2000) was more than offset by the effect of lower average assets on managed account fees. Insurance related and other fees increased substantially from CHF 111 million in 2000 to CHF 538 million in 2001, with almost all this increase due to UBS PaineWebber, where the biggest contribution came from the deferred an- nuities business. Other income fell 62% from CHF 1,486 mil- lion in 2000 to CHF 558 million in 2001, reflect- ing the very difficult conditions in the private equity market this year, which led to minimal opportunities for divestment and much greater levels of write-downs than last year. Operating expenses In light of lower revenues in 2001, cost control was a key focus of all our management teams, as we maintained strong discipline on both personnel and non-personnel costs, particularly in the Corporate and Institutional Clients and Private and Corporate Clients business units, bringing their operating expenses to record low levels. Total operating expenses increased 16% from CHF 26,203 million in 2000 to CHF 30,396 mil- lion in 2001, driven by the inclusion of UBS PaineWebber. Excluding significant financial events in 2000 and UBS PaineWebber, costs fell 7%, as performance-related compensation reduced, and non-personnel costs were carefully restricted. The principal significant financial events affecting the comparison of operating expenses are the CHF 150 million additional provision for the US Global Settlement of World War II related claims, recorded in 2000 in General and administrative expenses, and CHF 290 million of costs from the integration of PaineWebber, also recorded in 2000. Of this CHF 290 million, CHF 118 million was charged to Personnel expenses, CHF 93 million to General and administrative expenses and CHF 79 million to Depreciation. 23 Group Financial Review Group Results Headcount 1 (full time equivalents) UBS Switzerland Private and Corporate Clients Private Banking UBS Asset Management UBS Warburg Corporate and Institutional Clients UBS Capital Private Clients Corporate Center Group total thereof: Switzerland 31.12.01 31.12.00 Change in % 29,204 19,938 9,266 3,281 36,368 15,562 128 20,678 1,132 69,985 29,163 30,025 21,100 8,925 2,860 37,205 15,262 129 21,814 986 71,076 30,095 (3) (6) 4 15 (2) 2 (1) (5) 15 (2) (3) 1 The Group headcount does not include the Klinik Hirslanden AG headcount of 2,450 at 31 December 2001 and 1,839 at 31 December 2000. Personnel expenses in 2001 reflect consid- erable reductions in bonus and performance-relat- ed compensation, with average variable compen- sation per head down 23%, ensuring that overall compensation ratios for the year were kept in line with 2000’s ratio in our core businesses. However, the inclusion of CHF 5,178 million of Paine- Webber personnel expenses more than offset the reduction in performance-related pay, bringing the total to CHF 19,828 million, 16% up from 2000. Approximately 43% of this year’s person- nel expenses were bonus or other variable com- pensation, down from 48% last year. UBS Group headcount fell by 2% from 71,076 at 31 December 2000 to 69,985 at 31 December 2001, principally reflecting the effect of successful cost control efforts at UBS Switzerland’s Private and Corporate Clients business unit and UBS Warburg’s Private Clients business unit, slightly offset by the effect of acquisitions in UBS Asset Management and the expansion in Europe of UBS Switzerland’s Private Banking business unit. General and administrative expenses in- creased by 13% from CHF 6,765 million in 2000 to CHF 7,631 million in 2001 reflecting a full year’s costs for UBS PaineWebber, which more than offset the absence of the one-off charges and provisions recorded in 2000. General and administrative expenses in 2000 included a final provision of CHF 150 million related to the US Global Settlement of World War II related claims, and CHF 93 million of PaineWebber integration costs, which were both treated as significant financial events. Excluding these provisions and the extra costs in 2001 due to the inclusion of UBS PaineWebber, general and administrative costs would have been almost unchanged in 2001 compared to 2000. Depreciation and amortization increased 29% from CHF 2,275 million in 2000 to CHF 2,937 million in 2001, driven primarily by the goodwill amortization resulting from the merger with PaineWebber. UBS Group incurred a tax expense of CHF 1,401 million in 2001, down from CHF 2,320 mil- lion in 2000. This corresponds to an effective tax rate of 21% in 2001, compared to 23% in 2000. This relatively low rate results from significantly lower tax in Switzerland, reflecting the effect of lower profits triggering lower progressive tax rates, and a change in geographical earnings mix of the Group. We believe that this year’s tax rate of 21% is also a reasonable indicator for 2002. PaineWebber merger-related costs In 2001, UBS incurred amortization costs of CHF 846 million on goodwill and intangible assets resulting from the acquisition of UBS PaineWebber, while goodwill funding costs amounted to CHF 763 million. As part of the merger, UBS agreed to make retention payments to PaineWebber financial advisors, senior executives and other staff, sub- ject to these employees’ continued employment and other restrictions. The payments vest over periods of up to four years from the merger and the vast majority of them will be paid in the form of UBS shares. Because these payments are a regular and continuing cost of the business, they are not treated as significant financial events. Personnel expenses in 2001 include retention payments for key PaineWebber staff of USD 284 million (CHF 482 million) for the full year. 24 Dividend This year we plan once again to make a tax effi- cient distribution of capital to our shareholders rather than paying a dividend. The Board of Directors will recommend to the Annual General Meeting on 18 April 2002 that UBS make a par value repayment of CHF 2.00 per share, consis- tent with last year’s total per share distribution to shareholders of CHF 2.03. Balance sheet Total assets increased CHF 165 billion, or 15%, from CHF 1,088 billion at 31 December 2000, to CHF 1,253 billion at 31 December 2001. The balance sheet growth mostly occurred during the first half of the year, with a contraction following the terrorist attacks in the US on 11 September 2001, although this reduction was reversed during fourth quarter. Cash and balances with central banks rose from CHF 3 billion at 31 December 2000 to 21 billion at 31 December 2001, of which the overwhelming part stemmed from increased deposits with the Bank of Japan. This build-up relates to a change in the structure of our Japanese financial assets triggered by the regime of negative short-term interest rates in Japan. Trading related assets (cash collateral on secu- rities borrowed, trading portfolio assets and reverse repurchase agreements), grew by CHF 143 billion from 31 December 2000 to 31 De- cember 2001. A significant part of this change reflects an increase in collateralized positions, which grew by CHF 61 billion, due to increased client demand for collateralized funding in uncer- tain markets. Loans, net of allowances for credit losses declined from CHF 245 billion at 31 December 2000 to CHF 227 billion at 31 December 2001 as a result of reduced lending to corporate cus- tomers and public authorities. Total liabilities increased 16%, from CHF 1,040 billion at 31 December 2000 to CHF 1,206 billion at 31 December 2001, principally reflecting expansion of trading related liabilities (cash collateral on securities lent, repurchase agreements and trading portfolio liabilities) which together increased by CHF 103 billion during 2001. Amounts due to customers rose CHF 23 billion to CHF 334 billion at 31 Decem- ber 2001 due to an increase in time deposits originated with our retail and institutional cus- tomer base in Switzerland. Debt issued increased CHF 26.6 billion largely due to increased issuance of money market paper in support of the Principal Finance business in the US. UBS’s long-term debt portfolio increased from CHF 55 billion at 31 December 2000 to CHF 57 billion at 31 December 2001, driven by increased sales of retail structured products in the US and Europe, as clients sought ways to compensate for higher market volatility. During this year CHF 18.2 billion of long-term debt were issued while CHF 18.5 billion matured. UBS believes the maturity profile of the long- term debt portfolio is well balanced to match the maturity profile of UBS’s assets. Shareholders’ equity decreased CHF 1.3 bil- lion, or 3%, from 31 December 2000 to 31 De- cember 2001. The increase in retained earnings was more than offset by the effect of the repur- chase of own shares in 2001. Shares were repur- chased under UBS’ second trading line buy-back program, for employee share schemes and in order to repay the shares borrowed to pay the PaineWebber merger consideration. UBS maintains a significant percentage of liquid assets, including collateralized receivables and trading portfolios that can be converted into cash on relatively short notice and without adversely affecting UBS’s ability to conduct its ongoing businesses, in order to meet short-term funding needs. Collateralized receivables include reverse repurchase agreements and cash collat- eral on securities borrowed, and marketable cor- porate debt and equity securities and a portion of UBS’s loans and amounts due from banks which are secured primarily by real estate. The value of UBS’s collateralized receivables and trading portfolio will fluctuate depending on market conditions and client business. The indi- vidual components of UBS’s total assets, includ- ing the proportion of liquid assets, may vary sig- nificantly from period to period due to changing client needs, economic and market conditions and trading strategies. Cash flows In the twelve-month period to December 2001, cash equivalents increased by CHF 22,889 mil- lion, principally as a result of financing activities, which generated positive cash flow of CHF 18,103 million. CHF 24,226 million from the issuance of money market paper was offset by 25 Group Financial Review Group Results CHF 6,038 million for treasury shares and treasury share contract activity as well as CHF 683 million for capital repayment. Operating activities generated positive cash flow of CHF 12,873 million. Of this amount, CHF 4,973 million resulted from net profit, CHF 27,306 million from a net increase in amounts due to and from banks, a net increase in amounts due to customers and loans of CHF 42,813 million and a net cash inflow of CHF 19,470 million from repurchase and reverse repurchase agreements and cash collateral on securities borrowed and lent. These were offset by CHF 78,456 million from an increase in the size of the trading portfolio. Investing activities generated negative cash flow of CHF 7,783 mil- lion. CHF 5,770 million from the purchase of financial investments and CHF 2,021 million from the purchase of property and equipment. was 24.3%, clearly above our target range of 15–20%. Pre-goodwill earnings per share, again on an adjusted basis, were CHF 7.28 in 2000, representing an increase of 77% over 1999, well in excess of our target of double-digit growth over the cycle. Continued focus on cost control brought the pre-goodwill cost/income ratio, adjusted for significant financial events, down to 69.2% in 2000, from 73.3% in 1999. Net new money in the private client busi- nesses (Private Banking and Private Clients) was CHF 18.0 billion for the year, compared to CHF 4.3 billion in 1999, and including CHF 8.3 bil- lion of net new money in UBS PaineWebber in the last two months of 2000. UBS PaineWebber’s net new money growth since completion of the merger demonstrates the strength of its franchise and the momentum that it brings to UBS’s asset gathering performance. Outlook 2002 UBS’s core businesses have performed relatively strongly in 2001, demonstrating their ability to enhance market share in a challenging environ- ment. As 2002 begins, markets remain difficult, with uncertainty and volatility continuing to affect transaction levels and corporate activity. In the face of this challenging environment, we will continue to assess our cost base carefully, invest- ing where strategically most important. Our pru- dent resource management over the last two years means that we do not believe that significant staff reductions are likely to be necessary, unless mar- kets stagnate. With prospects for an economic recovery receding into the latter part of the year, potential for this year to outperform 2001 is lim- ited. However, our businesses have shown them- selves to be increasingly competitive and we are confident that we can continue the progress we have made in the past year, expanding in corpo- rate finance, further developing our European wealth management initiative and ensuring that all the strengths of our integrated group are focused on building the world’s leading wealth management and investment banking businesses. 2000 Group targets Adjusted for significant financial events, our pre-goodwill return on equity for the year 2000 Net profit Full year net profit was CHF 7,792 million, up 27% from the CHF 6,153 million reported in 1999. When adjusted for significant financial events, net profit for 2000 was CHF 8,132 mil- lion, up 74% from the CHF 4,665 million achieved in 1999. These results reflect the very strong and consistent performance recorded by the Group in every quarter of 2000. Operating income and expense includes income and expense of the former PaineWebber businesses from 3 November 2000, the date of the completion of the merger with PaineWebber. Operating income Total operating income increased 28% from 1999, to CHF 36,402 million, from CHF 28,425 million. Adjusted for significant financial events, total operating income increased 37%, to CHF 36,402 million, from CHF 26,587 million in 1999. This strong performance relative to 1999 was driven by excellent trading results, improved credit con- ditions in the Swiss market, much higher fee and commission income, and a successful year for the Group’s investment banking business. The principal significant financial events affecting the income comparison were from the one-off sales of businesses and investments in 1999, including pre-tax gains of CHF 1,490 million on the sale of UBS’s 25% stake in Swiss Life/Rentenanstalt, CHF 110 million on the disposal of Julius Baer registered shares, and 26 CHF 200 million on the sale of UBS’s inter- national Global Trade Finance business, which were all recorded in Other income. In addition UBS recognized a CHF 38 million gain in 1999 from its residual holdings in Long Term Capital Management, L.P., which was also recorded in Other income. Net interest income before credit loss increased by CHF 2,221 million, or 38%, from CHF 5,909 million in 1999 to CHF 8,130 mil- lion in 2000. This was principally the result of much stronger trading-related performance, as a result of buoyant markets, and the return of the balance sheet to more normal proportions after the contraction implemented as part of the Group’s precautions against potential Year 2000 related problems. Net trading income increased CHF 2,234 mil- lion, or 29%, to CHF 9,953 million for 2000, compared to CHF 7,719 million for 1999, driven by strong growth in equity trading income as a result of increased global market activity, espe- cially in the first quarter of 2000, and the increasing strength of UBS Warburg’s secondary client franchise. Net income from interest margin products increased 6% from 1999 to CHF 5,430 million in 2000, driven by the addition of UBS PaineWebber. In the main lending and deposit taking business in Switzerland, a reduction in loan volumes was more than offset by a slight improvement in mar- gins, reflecting a change in product mix. Net income from trading activities in 2000 was CHF 12,642 million, 54% higher than in 1999, driven by the exceptionally strong per- formance of the equity business in first half 2000, reflecting increased trading volumes, high- er market share and record levels of mergers and acquisitions activity. Fixed income and foreign exchange trading income also improved com- pared to 1999, driven by improved markets, a strong government bond and derivatives busi- ness and higher client flow in treasury products. Net income from treasury activities was CHF 762 million in 2000, 21% higher than in 1999, reflecting better results from the hedging of foreign currency revenues and higher income from the investment of equity. Income from invested equity increased due to the higher average equity following the issuance of trust preferred securities in September 2000 and the merger with PaineWebber. Other net trading and interest income princi- pally reflects the costs of goodwill funding, with the increase since 2000 mainly due to goodwill funding costs arising from the acquisition of PaineWebber in November 2000 and the acqui- sition of Global Asset Management (GAM) at the end of 1999. Credit loss expense. As a result of the signifi- cant recovery of the Swiss economy in 2000 and especially its effect on the real estate and con- struction markets, UBS was able to write back CHF 695 million of credit loss provisions in UBS Switzerland in 2000. These write-backs were only partly offset by additional provisions for the UBS Warburg portfolio of CHF 565 million, leading to an overall net credit recovery of CHF 130 million for 2000, compared to an expense of CHF 956 million in 1999. Net fee and commission income increased by CHF 4,096 million, or 32%, from CHF 12,607 million in 1999 to CHF 16,703 million in 2000. This was principally the result of high levels of brokerage fees, due to increased client activity in strong markets, especially in the first quarter of 2000, and the addition of PaineWebber. In addi- tion, two other new businesses, GAM, acquired at the end of 1999, and O’Connor, created in June 2000, contributed to the increase, as did the strong performance of UBS’s investment banking business during 2000. Credit-related fees and commissions de- creased by CHF 62 million in 2000 mainly as a result of the sale of UBS’s international Global Trade Finance business in 1999. Underwriting fees increased by 58% over 1999 with strong results in both fixed income and equity underwriting, despite UBS’s rela- tively limited involvement in the Technology, Media and Telecoms (TMT) sector, which led to lower equity league table rankings in 2000 than in 1999. Corporate Finance fees grew 37%, or CHF 474 million, from CHF 1,298 million in 1999 to CHF 1,772 million in 2000, reflecting good results in Europe and a strong perform- ance in mergers and acquisitions, where our league table rankings improved compared to 1999. Net brokerage fees were 48% higher in 2000 than in 1999 as a result of high levels of client activity in the exuberant markets of the early part of the year, and the inclusion of two months of results from PaineWebber. The increase of 27 Group Financial Review Group Results 47% in Investment fund fees from 1999 to 2000 resulted from higher average volumes in 2000 and a shift in the product mix, with a higher pro- portion of assets under management invested in higher margin equity funds. In addition, Invest- ment fund fees in 2000 benefited from the inclu- sion of GAM and PaineWebber’s contribution. Custodian fees and Portfolio and other manage- ment and advisory fees increased by a total of CHF 910 million, or 22%, from 1999, due to higher asset-related fees in 2000 and the inclu- sion of PaineWebber and the new O’Connor business. Other income decreased CHF 1,660 million, or 53%, from CHF 3,146 million in 1999 to CHF 1,486 million in 2000, driven by gains from the sales of our holdings in Swiss Life/ Rentenanstalt in 1999. Operating expenses Total operating expenses increased 28% from CHF 20,532 million to CHF 26,203 million in 2000. Adjusted for significant financial events, total operating expenses increased 25% to CHF 25,763 million from CHF 20,534 million in 1999. The increase was principally due to increased personnel expenses, reflecting higher performance-related pay driven by UBS’s excel- lent results in 2000, the inclusion of Paine- Webber and the cost of retention payments for PaineWebber staff. The principal significant financial events affecting the comparison of operating expenses are the CHF 150 million additional provision for the US Global Settlement of World War II related claims, recorded in 2000 in General and administrative expenses, and CHF 290 million of costs from the integration of PaineWebber, also recorded in 2000. Of this CHF 290 million, CHF 118 million was charged to Personnel expenses, CHF 93 million to General and administrative expenses and CHF 79 million to Depreciation. The various significant financial events affect- ing expenses in 1999, described on page 13, resulted in an increase in expense of CHF 2 mil- lion, made up of a CHF 456 million increase to personnel expenses and a decrease of CHF 454 million in General and administrative expenses. Personnel expenses increased CHF 4,586 mil- lion, or 36%, from CHF 12,577 million in 1999 to CHF 17,163 million in 2000. This increase was driven by increased bonus compensation, in line with the Group’s excellent results, and CHF 1,083 million resulting from the inclusion of PaineWebber. Approximately 48% of the annual total represented bonus and other variable compensation. Personnel expenses in 2000 include retention payments for key UBS PaineWebber staff of USD 76 million (CHF 128 million), charged in fourth quarter 2000. UBS’s headcount grew 45% over the year from 31 December 1999, to 71,076. The vast majority of this change was due to the inclusion of 23,000 PaineWebber staff. General and administrative expenses increased CHF 667 million, or 11%, from CHF 6,098 mil- lion in 1999 to CHF 6,765 million in 2000. General and administrative expenses in 2000 included a final provision of CHF 150 million related to the US Global Settlement of World War II related claims, and CHF 93 million of PaineWebber integration costs, which were both treated as significant financial events. General and administrative expenses in 1999 included a provision of CHF 154 million related to the US Global Settlement of World War II related claims, and CHF 300 million of additional provisions in respect of the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation. Adjusting for these effects, General and admin- istrative costs rose 16%, reflecting the incre- mental costs from the inclusion of PaineWebber offset by the success of UBS’s continued efforts to control non-revenue driven costs. Depreciation and amortization expenses increased CHF 418 million, or 23%, from CHF 1,857 million in 1999 to CHF 2,275 million in 2000, mainly due to the PaineWebber merger. Tax expense increased CHF 634 million, or 38%, from CHF 1,686 million in 1999 to CHF 2,320 million in 2000, principally due to in- creased operating profit. The effective tax rate of 23% in 2000 is slightly higher than the 21% effective tax rate in 1999, reflecting increased income in higher taxation jurisdictions. UBS Group’s performance without the impact of PaineWebber There are limitations to our ability to track the effect of the PaineWebber merger on the Group’s performance. Principally this is because of the full integration of PaineWebber’s capital markets business into the Corporate and Institutional 28 Earnings Adjusted for Significant Financial Events and the Estimated Impact of the PaineWebber Merger CHF million, except where indicated For the year ended 31.12.00 31.12.99 % change from 31.12.99 Operating income Operating expenses Operating profit before tax Net profit Cost / income ratio before goodwill (%) Basic earnings per share before goodwill (CHF) Diluted earnings per share before goodwill (CHF) Return on shareholders’ equity before goodwill (%) Clients unit. This was carried out very soon after the merger was completed on 3 November 2000, with staff and revenues completely integrated into the existing UBS Warburg structure. It is therefore not possible to identify clearly the specific impact of the capital markets business on results. However, the remaining PaineWebber businesses were reported as a separate business unit: US Private Clients. It is possible therefore to distinguish their contribution to Group profits. If additional adjustments are made for: goodwill amortization, funding costs, the share issuance, borrowing and subsequent repurchase, restruc- turing costs, and retention payments; it is possi- ble to make an approximate estimate of the underlying performance of UBS for 2000. Although this analysis should not be relied on as a definitive indication of the performance of the continuing UBS businesses during 2000, it demonstrates the very positive underlying per- formance of the Group. Par value reduction In October 2000, UBS paid a dividend of CHF 4.50 per share (CHF 1.50 per share adjusted for the July 2001 share split) in respect of the first three quarters of 2000, as part of the arrange- ments for the merger with PaineWebber. On 16 July 2001, UBS made a distribution to shareholders in respect of fourth quarter 2000 of CHF 1.60 per share (CHF 0.53 per share post split), paid in the form of a reduction in the par value of its shares, from CHF 10.00 to CHF 8.40. For shareholders who pay tax in Switzerland this payment is treated as a return of capital to share- holders, not as income, and is therefore tax effi- cient. The par value reduction also has advan- tages for shareholders outside Switzerland, as no Swiss withholding tax is payable on it. 35,309 24,319 10,990 8,403 67.6 7.48 7.39 27.5 26,587 20,534 6,053 4,665 73.3 4.12 4.09 18.2 33 18 82 80 82 81 This par value reduction brought the total distribution for the year 2000 to CHF 6.10 per share (CHF 2.03 per share post split), compared to the dividend of CHF 5.50 per share (CHF 1.83 per share post split) for 1999. At the same time as the par value reduction, UBS split its share 3 for 1, resulting in a new par value of CHF 2.80 per share. Cash flows In the twelve-month period to December 2000, cash equivalents decreased by CHF 8,907 mil- lion, principally as a result of investment activi- ties, which generated negative cash flow of CHF 19,135 million. This was mainly due to CHF 10,722 million of cash required for the PaineWebber merger and the purchase of CHF 8,770 million of financial investments. The positive cash flow of CHF 11,697 mil- lion from operating activities principally result- ed from net profit of CHF 7,792 million, a net increase in amounts due to customers and loans of CHF 12,381 million, CHF 11,553 million from an increase in the size of the trading port- folio and a net cash inflow of CHF 10,236 mil- lion from other assets and liabilities and accrued income and expenses. These were partially off- set by a net cash outflow of CHF 30,292 million for repurchase and reverse repurchase agree- ments and cash collateral on securities bor- rowed and lent. Financing activities generated net cash outflow of CHF 1,581 million. CHF 10,125 mil- lion from the issuance of money market paper, CHF 14,884 million from long-term debt and CHF 2,594 million from the issuance of trust preferred securities were offset by CHF 24,640 million for repayment of long-term debt and CHF 3,928 million for dividend payments. 29 30 Review of Business Group Performance 31 Review of Business Group Performance Introduction Introduction 2 1 Figures for 2000 have been restated to reflect the current business structure of the Group. All figures have been adjusted for significant financial events. In management accounts, statistically derived adjusted expected credit loss rather than the IAS actual net credit loss expense is reported in the business units. See Note 2 to the Financial Statements for further details. 3 Excludes the amortization of goodwill and other intangible assets. 4 Operating expenses / operating income before credit loss expense. 5 Excludes dividend and interest income. Figures for 2000 are calculated using the former definition of assets under management. 32 Reporting by Business Unit 1 CHF million For the year ended Income Credit loss expense / recovery 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax Business unit performance before tax and goodwill 3 Cost income ratio before goodwill (%) 3,4 Invested assets Net new money 5 Headcount Private and Corporate Clients Private Banking 31.12.01 31.12.00 31.12.01 31.12.00 7,161 (576) 6,585 2,988 991 459 0 4,438 2,147 2,147 62 320 8.5 19,938 7,443 (759 ) 6,684 3,187 1,058 419 27 4,691 1,993 2,020 63 345 0.4 21,100 6,314 (28) 6,286 1,776 1,609 157 41 3,583 2,703 2,744 56 682 22.5 9,266 6,928 (26 ) 6,902 1,956 1,561 142 43 3,702 3,200 3,243 53 691 2.8 8,925 Management accounting The discussion in this chapter reviews UBS’s 2001 and 2000 results by Business Group and business unit. Our management reporting systems and poli- cies determine the revenues and expenses directly attributable to each business unit. Internal charges and transfer pricing adjustments are reflected in the performance of each business unit. Inter-business unit revenues and expenses. Revenue sharing agreements are used to allocate external customer revenues to Business Groups on a reasonable basis. Transactions between Business Groups are conducted at arms length. Inter-business unit charges are recorded as a reduction to expenses in the business unit pro- viding the service. Corporate Center expenses are allocated to the operating business units, to the extent appropriate. Interest revenues are apportioned to business units based on the opportunity costs of funding their activities. Accordingly, all assets and liabil- ities are refinanced with the Group Treasury based on market rates. Revenues relating to bal- ance sheet products are calculated on a fully- funded basis. As a result, business units are addi- tionally credited with the risk-free return on the average equity used. Commissions are credited to the business unit with the corresponding customer relationship. Regulatory equity is allocated to business units based on the average regulatory capital requirement during the period. Only utilized equity is taken into account, and a buffer of 10% is added. The remaining equity, mainly covering real estate, and any unallocated equity, remains in Corporate Center. Headcount includes trainees and staff in management development programs, but not contractors. Changes to disclosure since 2000 Business unit structure We now report UBS Asset Management as a single Business Group, with no split into busi- ness units. However we continue to report sep- arate revenues and Key performance indicators UBS Asset Management Corporate and Institutional Clients UBS Capital Private Clients Corporate Center 31.12.01 31.12.00 31.12.01 31.12.00 31.12.01 31.12.00 31.12.01 31.12.00 31.12.01 31.12.00 2,110 0 2,110 1,003 564 46 266 1,879 231 497 76 672 34.9 3,281 1,953 0 1,953 880 439 49 263 1,631 322 585 70 642 (67.9 ) 2,860 16,011 (112) 15,899 8,339 2,705 454 145 11,643 4,256 4,401 18,033 (243 ) 17,790 9,284 2,779 555 149 12,767 5,023 5,172 72 70 15,562 15,262 (868) 0 (868) 96 66 2 0 164 (1,032) (1,032) 1 128 368 0 368 142 49 2 2 195 173 175 1 129 6,969 (18) 6,951 5,080 1,489 124 0 6,693 258 258 96 782 36.0 20,678 1,321 (3 ) 1,318 1,106 355 42 1 1,504 (186 ) (185 ) 114 773 15.2 21,814 678 236 914 546 207 372 25 1,150 (236) (211) 358 1,161 1,519 490 281 320 44 1,135 384 428 1,132 986 for the mutual funds and institutional busi- nesses. In addition, UBS Asset Management now includes Brinson Advisors (formerly Mitchell Hutchins), whose results were previously reported in UBS Warburg’s US Private Clients business unit. Reflecting the launch of our European wealth management initiative in February 2001, we UBS business units in 2000 reporting Private Banking (UBS Switzerland) e-services (UBS Warburg) International Private Clients (UBS Warburg) US Private Clients (UBS Warburg) Europe US, Japan and Australia UBS PaineWebber Mitchell Hutchins Institutional Asset Management (UBS Asset Management) Investment Funds/GAM (UBS Asset Management) in 2001 reporting Private Banking (UBS Switzerland) Private Clients (UBS Warburg) UBS Asset Management 33 Review of Business Group Performance Introduction reorganized our business unit reporting with effect from first quarter 2001. The e-services and International Private Clients business units which were previously part of UBS Warburg are no longer reported separately. The e-services initiative is no longer running as a stand-alone project and its infrastructure has now been inherited by the European wealth manage- ment initiative within UBS Private Banking. The domestic European private client busi- nesses previously reported as part of Internatio- nal Private Clients are now part of the Private Banking business unit, with separate key per- formance indicators for the European wealth management initiative, maintaining the trans- parency of this strategic development. We now report UBS Warburg’s US, Australian and Japanese private client operations, including the UBS PaineWebber business, in a combined Private Clients business unit. We have restated prior periods for the Private Banking and Private Clients units to reflect these changes. In December 2001 we announced that UBS Warburg’s Private Clients business unit would become a separate Business Group, and be renamed UBS PaineWebber. This change is effec- tive 1 January 2002 and will first be reflected in our financial reporting starting with the First Quarter 2002 Report, which will be published in May 2002. excludes wholesale custody-only assets, corre- spondent banking assets and transactional cash or current accounts. Non-bankable assets (e. g. Art collections) and interbank deposits are excluded from both measures. Where products are created in one Business Group, but sold in another, they are counted in both the investment management unit and the distribution unit, and double counted in group totals. (For example a mutual fund provided by UBS Asset Management but sold by Private Banking will be counted as invested assets in both business units.) Net new money is defined as the net inflow or outflow of invested assets during a period, excluding interest and dividend income. The effects of market or currency movements and of acquisitions and divestments are reported sepa- rately. System limitations mean that we are unable to restate 1999 assets under management figures in terms of the new definition, but invested assets at 31 December 2000 have been restated under the new definition. Group invested assets for 31 December 2000 were CHF 2,452 billion, CHF 17 billion lower than assets under manage- ment at the same date, under the old definition. Further details of the new definition can be found at: www.ubs.com/e/index/investors/archive/ corporate_information.html in the client assets reporting section. Client assets reporting In November 2000, we launched a proposal for a new definition of assets held for our clients. Following a positive reception for this initiative, we introduced the definitions into our reporting in our first quarter 2001 report. We now show the two assets metrics, Client assets and Invested assets, replacing the assets under management definition we previously used. – Client assets represents all client assets man- aged by or deposited with UBS. – Invested assets is more restricted and includes all client assets managed by or deposited with UBS for investment purposes. Invested assets is our central measure and excludes all assets held for purely transactional purposes. It includes, for example, managed institutional assets, mutual funds, discretionary and advisory private client portfolios, and pri- vate client securities or brokerage accounts, but Credit loss expense Credit loss expense represents the charges to the profit and loss account relating to amounts due to UBS from loans and advances, OTC deriva- tives or off-balance sheet products, that have had to be written-down because they are impaired or uncollectable. We determine the amounts of Credit loss expense in UBS’s financial accounts and in the business unit reporting on different bases. In the Group income statement, we report UBS’s results according to IAS. Under these standards, Credit loss expense is the total of net new allowances and direct write-offs less recoveries. These actual losses are recognized and charged to the income statement in the period when they arise. In contrast, in our segment and business unit reporting, we apply a different approach to the measurement of credit risk which reflects the average annual cost that management antici- 34 Business Group Credit Loss Charge CHF million For the year ended 31.12.01 Actuarial expected loss Deferred releases Credit loss expense charged to the Business Groups IAS actual credit loss expense UBS Switzerland UBS UBS Asset Warburg Management 722 (118) 604 123 168 (38) 130 375 0 0 0 0 Balancing item charged as Credit loss expense in Corporate Center Total 890 (156) 734 498 (236) pates will arise from today’s transactions that may become impaired in future. In order to manage exposure to credit risk more effectively, we price transactions with a view to earning – over time – sufficient income to compensate for the losses that are expected to be caused by value adjustments for impaired assets. The basis for measuring these inherent risks in the credit port- folios is the concept of “actuarial expected loss” (see further page 62 in the Risk Analysis section of the UBS Handbook 2001/2002). We quantify Credit loss expense at business unit level based on the actuarial expected loss rather than the actual credit loss expense report- ed in UBS’s income statement. However, while the actuarial expected loss should equal the actual credit loss expense over time, the latter are more erratic, in both timing and amount. In the business unit reporting therefore, in addition to the actuarial expected loss, we amortize the dif- ference between actual credit loss expense and actuarial expected loss. This deferral mechanism aims to ensure that each business unit is ulti- mately accountable for its credit decisions. Under amended management accounting policies effective for all Business Groups from 1 January 2001, the difference between actual credit losses and the actuarial expected loss cal- culated for management reporting purposes is charged or credited back to the business units over a three-year period, so that the risks and rewards are better reflected in their results. The sum of this deferral is reported together with the expected loss as the credit loss expense charged in the segment and business unit reporting. We reconcile the difference between the Credit loss expense in UBS’s income statement (the actual loss) and the credit loss expense shown in business unit reporting (expected loss plus deferral), by recording a balancing item in the Corporate Center. We also show the alloca- tion of actual Credit loss expense to the business units in the footnotes to Note 2a of the UBS Group Financial Statements. Key performance indicators We report carefully chosen key performance indicators for each of UBS’s business units or Business Groups, as appropriate. These do not carry explicit targets, but are intended as indica- tors of the business units’ success in creating value for shareholders and are an important part of our business planning process. They include both financial metrics, such as the cost / income ratio, and non-financial metrics, such as Invested assets or the number of Client advisors in a busi- ness unit. We use these key performance indicators for internal performance measurement as well as external reporting. This ensures that manage- Reconciliation of Business Group Credit Loss Charge to IAS Actual Credit Loss Expense/(Recovery) CHF million For the year ended UBS Switzerland UBS Asset Management UBS Warburg Corporate Center Total Credit loss charge IAS actual credit loss expense 31.12.01 31.12.00 31.12.99 31.12.01 31.12.00 31.12.99 604 0 130 785 0 246 1,071 0 333 734 1,031 1,404 123 0 375 498 (695 ) 0 565 (130 ) Balancing item in Corporate Center (236) (1,161 ) (448 ) 965 0 0 (9) 956 35 Review of Business Group Performance Introduction Indicative Tax Rates UBS Switzerland Private and Corporate Clients Private Banking UBS Asset Management UBS Warburg Corporate and Institutional Clients US Private Clients UBS Capital Tax rate Pre-goodwill Post-goodwill 20 22 19 23 39 32 37 4 20 22 19 33 68 33 37 4 ment have a clear responsibility to lead their busi- nesses towards achieving success in the Group’s key value drivers and avoids any risk of manag- ing to purely internal performance measures. Business Group tax rates The Business Groups of UBS do not represent separate legal entities. Business Group results are prepared through the application of UBS’s man- agement accounting policies to the results of the entities through which they operate. Indicative Business Group and business unit tax rates are calculated on an annual basis based on the results and statutory tax rates of the cur- rent financial year. These rates are approximate calculations, based upon the application to the year’s adjusted earnings of statutory tax rates for the locations in which the Business Groups oper- ated. These tax rates therefore give guidance on the tax cost to each Business Group of doing business during 2001 on a stand alone basis, without the benefit of tax losses brought for- ward from earlier years. The indicative tax rates are presented “pre- goodwill” and “post-goodwill”. The tax rate pre-goodwill gives an indication of what the tax rate would have been if goodwill were not charged for accounting purposes. It is the sum of the tax expense payable on net profit before tax and goodwill in each location, divided by the total net profit before tax and goodwill. In con- trast, the tax rate post-goodwill reflects the actual tax treatment of goodwill in different jurisdictions, expressed as a percentage of net profit before tax (after goodwill). The tax rates post-goodwill are higher than the pre-goodwill rates, because in some jurisdictions there are limitations on the tax deductibility of amorti- zation costs. Please note that these tax rates are not neces- sarily indicative of future tax rates for the busi- nesses or UBS Group as a whole. 36 Changes to disclosure in 2002 The following changes will be implemented in our financial disclosure with effect from the First Quarter Report 2002. They do not apply to the Business Group disclosures in this Financial Report – details are provided here to help read- ers who may read our future reports. With effect from the beginning of 2002, we will implement a new Business Group structure, with UBS PaineWebber becoming a separate Business Group, and we will be making some other changes to our financial disclosure and management accounting. At present, goodwill and intangible assets relating to the merger of UBS and PaineWebber are reported in the UBS Warburg Business Group and are not reflected in the results of the business units which make up the Business Group. With the separation of UBS PaineWebber to form a new Business Group, this goodwill will be assigned to the different business units that have benefited from the merger with PaineWebber. We expect that the majority of the goodwill will be allocated to UBS PaineWebber, but that a signif- icant portion will also be allocated to the Corporate and Institutional Clients business unit in UBS Warburg and smaller amounts to UBS Asset Management, which inherited the Mitchell Hutchins asset management business (now called Brinson Advisors), and also to UBS Switzerland’s Private Banking business unit. Associated amortization expense and funding charges will be charged to each business unit in proportion to its share of the goodwill and intangible assets. At the same time, we will take the opportuni- ty to rationalize our allocation of Corporate Center costs to the Business Groups, restricting charges to those services which are provided directly under explicit Service Level Agreements (“SLAs”), and discontinuing the practice of allo- cating a proportion of central Group overheads. Finally, earnings from the O’Connor business, which are currently allocated equally between the Equities business area in UBS Warburg’s Corporate and Institutional Clients unit and UBS Asset Management will now be allocated fully to UBS Asset Management. We will provide restated Business Group fig- ures for 2000 and 2001 reflecting the new Business Group structure and other disclosure changes, and expect to publish these at least two weeks prior to our first quarter 2002 financial report, which will be published on 14 May 2002. treatment of goodwill Accounting for goodwill under US GAAP A new accounting standard, SFAS 142, changes in Financial the Statements prepared under US GAAP. Instead of amortizing goodwill over its expected life, it will be retained on a company’s balance sheet at the level of 31 December 2001 and the company will be required to perform an annual impairment test according to detailed rules set out in the standard. These specify that the goodwill impairment test must be carried out at the level of a “reporting unit”, equivalent in UBS terms to a Business Group. If the goodwill is found to be impaired, the company must record a write- down, charged to its income statement. The introduction of SFAS 142 under US GAAP will not have a direct effect on our accounts, which are prepared under IAS, and will still show amortization costs. However, as part of the preparation of the reconciliation of our IAS Financial Statements to US GAAP we will have to perform annual SFAS 142 goodwill impairment tests, starting on 1 January 2002. We do not anticipate that we will need to record any write-downs of goodwill upon adoption of this standard. See Note 40 to the Financial Statements for further details. 37 Review of Business Group Performance UBS Switzerland UBS Switzerland “UBS Switzerland has completed another successful year, with the launch of the European wealth management initiative and very strong progress in asset gathering.” Stephan Haeringer Business Group Reporting CHF million, except where indicated For the year ended Income Credit loss expense 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Business Group performance before tax and goodwill 4 Additional information Regulatory equity used (average) Cost / income ratio (%) 5 Cost / income ratio before goodwill (%) 4, 5 31.12.01 31.12.001 31.12.991 % change from 31.12.00 13,475 (604) 12,871 4,764 2,600 616 41 8,021 4,850 4,891 9,300 60 59 14,371 (785 ) 13,586 5,143 2,699 633 70 8,545 5,041 5,111 10,550 59 59 12,884 (1,071 ) 11,813 4,882 2,450 475 38 7,845 3,968 4,006 10,150 61 61 (6) (23) (5) (7) (4) (3) (41) (6) (4) (4) (12) Stephan Haeringer CEO UBS Switzerland and CEO Private and Corporate Clients Georges Gagnebin CEO UBS Private Banking 38 Business Group Reporting Adjusted for Significant Financial Events CHF million, except where indicated For the year ended 31.12.01 31.12.001 31.12.991 % change from 31.12.00 Income Credit loss expense 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Business Group performance before tax and goodwill 4 Additional information Cost / income ratio (%) 5 Cost / income ratio before goodwill (%) 4, 5 13,475 (604) 12,871 4,764 2,600 616 41 8,021 4,850 4,891 60 59 14,371 (785 ) 13,586 5,143 2,6193 5613 70 8,393 5,193 5,263 58 58 12,884 (1,071 ) 11,813 4,882 2,450 475 38 7,845 3,968 4,006 61 61 (6) (23) (5) (7) (1) 10 (41) (4) (7) (7) 1 The 2000 and 1999 figures have been restated to reflect the restructuring of the Group on 1 January 2001. 2 In management accounts, statistically derived adjusted expected loss rather than the net IAS actual credit loss is reported in the business units (see Note 2 of the Financial 3 Excludes Significant Financial Events: General and administrative expenses, CHF 80 million, Depreciation, CHF 72 million for the Statements). 5 Operating expenses / operating income PaineWebber integration. before credit loss expense. 4 Excludes the amortization of goodwill and other intangible assets. 39 Review of Business Group Performance UBS Switzerland Private and Corporate Clients Business Unit Reporting CHF million, except where indicated For the year ended Individual clients Corporate clients Risk transformation and capital management Operations Other Income Credit loss expense 1 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax Business unit performance before tax and goodwill 2 KPI’s Invested assets (CHF billion) Net new money (CHF billion) 4, 5 Cost / income ratio (%) 6 Cost / income ratio before goodwill (%) 2, 6 Non-performing loans / gross loans outstanding (%) Impaired loans / gross loans outstanding (%) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 4,532 1,891 358 242 138 7,161 (576) 6,585 2,988 991 459 0 4,438 2,147 2,147 320 8.5 62 62 4.6 7.4 5,026 1,975 307 205 (70 ) 7,443 (759 ) 6,684 3,187 1,058 419 27 4,691 1,993 2,020 345 0.4 63 63 5.3 9.1 4,553 1,855 330 313 142 7,193 (1,050 ) 6,143 3,363 1,123 384 2 4,872 1,271 1,273 4393 68 68 6.8 11.4 (10) (4) 17 18 (4) (24) (1) (6) (6) 10 (100) (5) 8 6 (7) Additional information As at Client assets (CHF billion) Regulatory equity used (average) Headcount (full time equivalents) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 640 7,350 19,938 8,550 21,100 8,550 24,098 (14) (6) 1 In management accounts, statistically derived adjusted expected loss rather than the net IAS actual credit loss is reported in the business units 2 Excludes the amortization of goodwill and other intangible assets. 3 Calculated using the former (see Note 2 of the Financial Statements). 4 Calculated using the former definition of assets under management up to and including second definition of assets under management. 6 Operating expenses / operating income before credit loss expense. quarter 2001. 5 Excludes dividend and interest income. Components of Operating Income Private and Corporate Clients derives its operating income principally from: – net interest income from its loan portfolio and cus- tomer deposits; – fees for investment management services; and – transaction fees. As a result, Private and Corporate Clients’ operating income is affected by movements in interest rates, fluctu- ations in invested assets, client activity levels, investment performance and changes in market conditions. 40 Significant Financial Events There were no significant financial events that affected this business unit in 2001, 2000 or 1999. 2001 Key performance Indicators In 2001, Private and Corporate Clients attracted net new money of CHF 8.5 billion, a clear improvement over last year’s disappointing CHF 0.4 billion, and reflecting improved flows from both private clients and corporate clients, where flows can be larger and more volatile. Invested assets declined CHF 25 billion from CHF 345 billion at 31 December 2000 to CHF 320 billion at 31 December 2001, reflecting the effect of market declines during the year. Pre-goodwill cost / income ratio (%) 80 70 60 50 40 9 9 9 1 0 0 0 2 1 0 0 2 Private and Corporate Clients continues to focus successfully on stringent cost control meas- ures, reflected in a 1 percentage point decline in the full year’s pre-goodwill cost/income ratio from 63% in 2000 to 62% in 2001. This result- ed from reductions in headcount and in per- formance-related compensation expense. Private and Corporate Clients’ loan portfolio decreased from CHF 156 billion at 31 Decem- Impaired loans / gross loans (%) 14 12 10 8 6 4 2 0 9 9 . 2 1 . 1 3 0 0 . 2 1 . 1 3 1 0 . 2 1 . 1 3 ber 2000 to CHF 152 billion at 31 December 2001, driven by reductions in the more volatile business with banks and the further reduction in the recovery portfolio from CHF 15 billion to CHF 12 billion. The strength of the Swiss economy in the early part of 2001 and our continued successful recovery efforts were reflected in an improve- ment in key asset quality ratios since the end of last year. The non-performing loans to total loans ratio decreased from 5.3% to 4.6% while the ratio of impaired loans to gross loans further improved from 9.1% to 7.4%. Results Private and Corporate Clients enjoyed a very strong year, despite the much more difficult market conditions, with profit before tax in 2001 up 8% compared to 2000, at CHF 2,147 million, its highest level ever. The implementa- tion of risk adjusted pricing and the strength of the Swiss economy in 2000 and early 2001 led to a significant increase in credit quality, while operating expenses have remained under tight control, falling 5% compared to 2000. Performance before tax (CHF million) 2500 2000 1500 1000 500 0 9 9 9 1 0 0 0 2 1 0 0 2 Operating income Operating income in 2001 was down CHF 99 mil- lion from 2000 at CHF 6,585 million, princi- pally reflecting the effect of weaker markets in 2001 on fee and commission income, which more than offset the reduction in credit loss expense. Private and Corporate Clients has improved the quality of its loan portfolio considerably in recent years, principally through the introduc- tion of risk adjusted pricing, leading to a lower adjusted expected loss charge in 2001 compared to 2000. We have also introduced a new process for calculating the adjusted expected loss 41 Review of Business Group Performance UBS Switzerland charged to the Business Groups, under which the difference between the actual IAS credit losses and the actuarial expected loss calculated for management reporting purposes is charged or credited back to the business units over a three year period, so that the risks and rewards over the cycle are better reflected in their results. Since actual credit losses in Private and Corporate Clients have recently been lower than the adjust- ed expected loss charge, this deferral process has also resulted in a lower adjusted expected loss charge (see page 35 for further details). Together these effects led to a credit loss expense of CHF 576 million in 2001, down 24% from CHF 759 million in 2000. Income in Individual Clients declined 10% from CHF 5,026 million in 2000 to CHF 4,532 million in 2001. This change was driven by the much more difficult and uncertain conditions in securities markets, which led to lower brokerage fees and lower sales of investment funds. Interest income also declined, driven by the effect of the sale of Solothurner Bank in fourth quarter 2000. Income in Corporate Clients declined 4% from CHF 1,975 million in 2000 to CHF 1,891 in 2001, principally reflecting lower interest income as risk adjusted pricing shifted our focus to higher credit quality counterparties leading to lower lending volumes, but also to lower credit loss expense. Income from the Risk Transformation and Capital Management area benefited from higher interest income, following a change in the treat- ment of interest on impaired loans (previously recorded as a reduction in credit loss expense), which more than offset the effects of write- downs in some small investments. Overall income increased to CHF 358 million in 2001, from CHF 307 million in 2000. Income from Operations rose CHF 37 mil- lion, to CHF 242 million in 2001, reflecting one-off revenues from minority holdings in other companies, a decrease in custody fees paid due to lower average assets, which more than offset a decrease in custody revenues, again reflecting lower average assets, and high- er interest income from correspondent bank overdraft balances. Operating expenses Operating expenses remain under strict control, totaling CHF 4,438 million in 2001, CHF 253 million lower than in 2000. Operating expenses declined through the year and reached an all- time low in fourth quarter 2001. General and administrative expenses in 2001, were 6% lower than in 2000, at CHF 991 mil- lion, principally reflecting lower IT outsourcing costs and the continued effect of our efforts to control costs. As a result, general and adminis- trative expenses have now fallen for two years running, and are below their 1998 level. Personnel expenses declined by CHF 199 mil- lion compared to 2000, to CHF 2,988 million, reflecting a fall in headcount of 1,162 since the end of 2000, and lower performance related pay. Over the full year, the compensation ratio in Private and Corporate clients was 42%, down from 43% in 2000. Depreciation increased 10% from 2000, to CHF 459 million, principally reflecting can- cellation of previously capitalized software projects as a result of cost control measures. Goodwill amortization dropped from CHF 27 million in 2000 to CHF 0 in 2001, reflecting the write-off of goodwill on a credit card port- folio in 2000. Headcount Private and Corporate Clients’ headcount declined by a further 6% in 2001, from 21,100 at 31 December 2000 to 19,938 at 31 Decem- ber 2001, as the cost control effects from the systematic implementation of the strategic proj- ects portfolio and the benefits of the merger between Union Bank of Switzerland and Swiss Bank Corporation continue to be realized. Headcount has reduced by more than 5,700 since the merger, in line with the targets we set at the time. We expect that headcount will remain around the current level during 2002. Headcount (full time equivalents) 25 20 15 (in thousands) 9 9 . 2 1 . 1 3 0 0 . 2 1 . 1 3 1 0 . 2 1 . 1 3 42 2000 Key performance indicators Invested assets decreased by CHF 94 billion from CHF 439 billion at 31 December 1999 to CHF 345 billion at 31 December 2000. The vast majority of this change was due to the new defi- nition of invested assets introduced at 31 Decem- ber 2000, which excludes certain asset classes previously included in the old definition of assets under management, particularly current ac- counts. The underlying development was almost flat, with net new money of CHF 0.4 billion and slightly positive market performance over the year, roughly offsetting transfers of CHF 5 bil- lion to other business units. The pre-goodwill cost / income ratio in 2000, at 63%, improved significantly from 68% in 1999. This was principally due to lower operat- ing expenses resulting from continuing strict cost control, as the benefits of the 1998 merger between Union Bank of Switzerland and Swiss Bank Corporation continued to be realized. The quality of the Private and Corporate Clients’ loan portfolio improved considerably during the year, resulting in a non-performing loans / total loans ratio of 5.3% at 31 December 2000, compared to 6.8% at the end of 1999. This improvement was due in part to the unex- pected strengthening of the Swiss economy, and also to Private and Corporate Clients’ efforts to further enhance the risk / return profile of its loan portfolio. This was achieved through selec- tive origination with clear focus on higher quality counterparties, secondary market trans- actions, the disposal of non-core business sub- sidiaries, and the continued work-out of the recovery portfolio, which decreased from CHF 21 billion to CHF 15 billion during the year. Although UBS Switzerland’s non-performing loans ratio is somewhat higher than some com- parable banks, particularly in the US, the com- parison reflects different structural practices rather than underlying asset quality. In general, Swiss practice is to write off loans entirely only on final settlement of bankruptcy proceedings, the sale of the underlying assets or a formal debt forgiveness. In contrast, US practice is to write off non-performing loans much sooner, reducing the amount of such loans and corresponding provisions recorded at any given date. Results Record pre-tax profit for the year, at CHF 1,993 million, was an increase of CHF 722 million, or 57%, over 1999, clearly demonstrating the substantial benefits of the merger between the Union Bank of Switzerland and Swiss Bank Corporation for the combined domestic banking franchise. Operating income Private and Corporate Clients’ operating income in 2000 was CHF 6,684 million, CHF 541 mil- lion, or 9%, higher than in 1999. This improved performance primarily reflected higher fee income, particularly in the first half of the year, and reduced expected credit losses as the quality of the loan portfolio improved. Both of Private and Corporate Clients’ two main client business areas recorded increases in their operating income in 2000 as compared to 1999. – Individual Clients: Operating income in 2000 was CHF 5,026 million, an increase of CHF 473 million, or 10%, from CHF 4,553 mil- lion in 1999. This was primarily due to increases in brokerage and investment fund fees resulting from increased investment activ- ity, and minor gains on sales of subsidiaries and participations. – Corporate Clients: Operating income in 2000 was CHF 1,975 million, an increase of CHF 120 million, or 6%, from CHF 1,855 million in 1999, primarily due to higher interest income resulting from improved margins as well as increased fee and commission income. On the other hand, the two support business areas saw their incomes reduce. – Risk Transformation and Capital Manage- ment: Income was CHF 307 million in 2000. This was a decrease of CHF 23 million, or 7%, from the CHF 330 million recorded in 1999, primarily as a result of the reduced average size of the recovery loan portfolio, managed by this unit. – Operations: Revenues in 2000 were CHF 205 million, a decrease of CHF 108 million, or 35%, from CHF 313 million in 1999. Operations revenues were affected by lower interest revenues as a result of reduced corre- spondent bank overdraft balances, partially off- set by small one-off revenues from the revalua- tion of minority holdings in other companies. 43 Review of Business Group Performance UBS Switzerland Operating expenses Full year operating expenses in 2000 were CHF 4,691 million, down 4%, or CHF 181 million, from 1999. This was primarily due to falling per- sonnel costs as headcount was reduced. Personnel expense fell by CHF 176 million, or 5%, from CHF 3,363 million in 1999 to CHF 3,187 million in 2000. Increased performance- related compensation, reflecting the good results, was more than offset by a substantial reduction in headcount during the year. General and administrative expenses fell 6% over the year, despite our continued investments in online services, reflecting continued cost con- trol efforts. Depreciation expense increased by CHF 35 mil- lion, or 9%, to CHF 419 million, primarily due to the implementation of IAS 38, relating to the capitalization of software costs. Amortization of goodwill and other intan- gible assets increased CHF 25 million, from CHF 2 million in 1999 to CHF 27 million in 2000. This increase was primarily due to the acquisi- tion of a credit card portfolio during second quarter 2000. Headcount Private and Corporate Clients’ headcount declined by almost 3,000 in 2000 from 24,098 at the end of 1999 to 21,100 at 31 December 2000. This reduc- tion includes 948 staff transferred with Systor, which became an independent company at the start of 2000, 413 staff of Solothurner Bank, which was sold during 2000, and the transfer of 148 financial planning and wealth management staff to Private Banking. The remaining reduction of 1,489 staff demonstrates UBS’s continued success in realizing UBS / SBC merger-related synergies. 44 Private Banking Business Unit Reporting CHF million, except where indicated For the year ended Income Credit loss expense 2 Total operating income 31.12.01 31.12.001 31.12.991 % change from 31.12.00 Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax Business unit performance before tax and goodwill 4 KPI’s Invested assets (CHF billion) Net new money (CHF billion) 6 Gross margin on invested assets (bps) 7 Cost / income ratio (%) 8 Cost / income ratio before goodwill (%) 4, 8 Cost / income ratio before goodwill and excluding the European Wealth Management Initiative (%) 4, 8 6,928 (26 ) 6,902 1,956 1,5613 1423 43 3,702 3,200 3,243 691 2.85 99 53 53 5,691 (21 ) 5,670 1,519 1,327 91 36 2,973 2,697 2,733 6825 2.35 90 52 52 6,314 (28) 6,286 1,776 1,609 157 41 3,583 2,703 2,744 682 22.5 92 57 56 49 Client advisors (full time equivalents) 2,346 1,744 KPI’s for the European Wealth Management Initiative Income (9) 8 (9) (9) 3 11 (5) (3) (16) (15) (1) (7) 35 140 16 5.6 370 Invested assets (CHF billion) Net new money (CHF billion) 6 Client advisors (full time equivalents) Additional information As at Client assets (CHF billion) Regulatory equity used (average) Headcount (full time equivalents) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 840 1,950 9,266 2,000 8,925 1,600 8,131 (3) 4 1 The 2000 and 1999 figures have been restated to reflect the restructuring of the Group on 1 January 2001. 2 In management accounts, sta- tistically derived adjusted expected loss rather than the net IAS actual credit loss is reported in the business units (see Note 2 of the Financial Statements). 3 Excludes Significant Financial Events: General and administrative expenses, CHF 80 million, Depreciation, CHF 72 million for the PaineWebber integration. 4 Excludes the amortization of goodwill and other intangible assets. 5 Calculated using the former definition of assets under management. 6 Excludes dividend and interest income. 7 Income / average invested assets. 8 Operating expenses / operating income before credit loss expense. 45 Review of Business Group Performance UBS Switzerland Components of Operating Income Private Banking derives its operating income principally from: – fees for financial planning and wealth management services; – fees for investment management services; and – transaction-related fees. Private Banking’s fees are based on the market value of invested assets and the level of transaction-related activity. As a result, Private Banking’s operating income is affected by such factors as fluctuations in invested assets, changes in market conditions, investment per- formance and inflows and outflows of client funds. Significant financial events Following the merger with PaineWebber, our strategy for extending our wealth management services in Europe was reassessed and focus shifted to more affluent clients than those origi- nally targeted by the e-services initiative. The multi-currency and multi-entity core banking systems developed by the e-services initiative now form part of UBS Private Banking’s new wealth management strategy in Europe. Those parts of the infrastructure that were tailored to the mass affluent market, such as telephone call-centers, were closed and the investment in them written off. This resulted in a charge of CHF 80 million to General and administrative expenses. In addi- tion, capitalized software costs relating to parts of the systems which will now not be used were written off, resulting in a CHF 72 million charge to depreciation. These two amounts form part of the PaineWebber integration costs, which were treated as a significant financial event in 2000, and as a result these costs do not appear in the adjusted business unit results above. There were no significant financial events that affected this business unit in 2001 or 1999. 2001 Key performance indicators Net new money inflows in 2001, at CHF 22.5 billion, an eight-fold increase over 2000, demonstrate our success this year in re-energiz- ing our asset-gathering performance, and our determined focus on growing this world-leading business. Over the year from 31 December 2000, in- vested assets have fallen only 1%, despite the poor performance of securities markets, reflect- ing strong net new money growth and a rela- tively conservative asset mix. The gross margin fell from 99 basis points in 2000 to 92 basis points in 2001, clearly reflect- ing reduced transaction volumes, especially com- pared to the exuberant markets of the early part of 2000. The pre-goodwill cost/income ratio increased by three percentage points from 53% in 2000 to 56% in 2001, reflecting the costs of our invest- Net new money (CHF billion) 25 20 15 10 5 0 9 9 9 1 0 0 0 2 Invested assets (CHF billion) 800 600 400 200 0 9 9 . 2 1 . 1 3 0 0 . 2 1 . 1 3 Gross margin on invested assets (bps) 1 0 0 2 1 0 . 2 1 . 1 3 100 80 60 40 20 0 9 9 9 1 0 0 0 2 1 0 0 2 46 Pre-goodwill cost / income ratio (%) 70 60 50 40 30 9 9 9 1 0 0 0 2 1 0 0 2 ments in the European wealth management initiative, and weaker transaction volumes. European wealth management Early in 2001 we launched a European wealth management initiative, designed to expand our market share in five key target countries: Ger- many, the UK, France, Italy and Spain, a scope that covers about 80% of Europe’s investable assets. Our strategy is focused on wealthy clients, with services designed primarily for those with more than EUR 500,000 of investable assets, and developed within the context of our clear commitment to open architecture and the provi- sion of a full range of “best of breed” investment products to all our clients. The initiative makes full use of UBS PaineWebber’s top-class abilities in marketing, product management and innova- tion, technology, and training, deployed as a key catalyst for our European businesses. Net new money European Wealth Management (CHF billion) 3.0 2.0 1.0 0.0 1 0 Q 1 1 0 Q 2 1 0 Q 3 1 0 Q 4 Initial progress has been very promising, with net new money of CHF 5.6 billion in our target countries in 2001, despite the relatively difficult market conditions. Opening new offices and hiring new staff is a key component of the initia- tive – expanding our physical presence in the target markets. Hiring plans progressed well in 2001, with the number of client advisers in our five target countries rising to 370 at 31 Decem- ber 2001, an increase of 208 for the year. A fur- ther 40 newly hired advisors started on 1 Janu- ary 2002, bringing our total hiring in 2001 to 248, in line with our intention to recruit around 250 advisors a year. Client advisors European Wealth Management (full time equivalents) 400 300 200 100 0 1 0 . 3 . 1 3 1 0 . 6 . 0 3 1 0 . 9 . 0 3 1 0 . 2 1 . 1 3 Results Weaker markets than 2000 and the costs of investing in the European wealth management initiative brought full year pre-tax profits in 2001 down 16% from last year to CHF 2,703 million, despite a continued focus on controlling operat- ing costs. Performance before tax (CHF million) 4000 3000 2000 1000 0 9 9 9 1 0 0 0 2 1 0 0 2 Operating income Full year operating income was CHF 6,286 mil- lion, down 9% from the record CHF 6,902 mil- lion in 2000. This was driven by falling trans- action based revenues, reflecting the much less active markets in 2001. Asset based revenues fell only very slightly compared to last year, despite lower average assets, reflecting our success in providing added value services to our clients. 47 Review of Business Group Performance UBS Switzerland Operating expenses At CHF 3,583 million, operating expenses in 2001 were down 3% from 2000, driven by lower personnel expenses, which were down 9% at CHF 1,776 million due to lower performance- related compensation despite a 4% increase in headcount during the year. General and administrative expenses in- creased 3% from CHF 1,561 million in 2000 to CHF 1,609 million in 2001, principally reflect- ing the cost of investments in new product devel- opment, premises and systems in support of the European wealth management initiative. Depreciation increased from CHF 142 million in 2000 to CHF 157 million in 2001, reflecting increased investment in IT and premises. Headcount At 31 December 2001, Private Banking employ- ed 9,266 professionals, a 4% increase compared with year end 2000, driven by recruitment of client advisors and support personnel for the European Wealth Management initiative. At 31 December 2001, client advisors represented 25% of Private Banking’s staff, up from 20% at the end of 2000. Headcount (full time equivalents) (in thousands) 9 9 . 2 1 . 1 3 0 0 . 2 1 . 1 3 1 0 . 2 1 . 1 3 10 9 8 7 6 2000 from CHF 682 billion Key performance indicators Invested assets increased by CHF 9 billion, or 1%, to CHF 691 billion during 2000, primarily reflecting market performance and currency effects. Net new money during the year was disappointing, with a net inflow of CHF 2.8 billion, with the majority of the net inflow in the domestic European business. 48 Gross margin for the year, at 99 basis points, partly reflects the very strong performance in the exceptional markets of the first quarter. The rates for most of the year, (95 basis points in sec- ond quarter, 94 basis points in third quarter, and 96 basis points in fourth quarter) represent a solid improvement over the average of 90 basis points recorded in 1999, as we introduce more value-added products to our client base. The pre-goodwill cost / income ratio was 53% a slight increase from 52% in 1999, as higher revenues were offset by investment in the e-services project and expansion of the domestic business during 1999 and 2000. Results Net profit before tax for the year increased sig- nificantly, by CHF 503 million, or 19%, to CHF 3,200 million, from CHF 2,697 million in 1999. This reflects strong markets in the early part of 2000, and the margin enhancing benefits of introducing more added-value products during the year. Operating income The increase in gross margin to 99 basis points resulted in operating income of CHF 6,902 mil- lion, which was 22%, or CHF 1,232 million, higher than in 1999. Revenue quality also improved with asset-based fees growing faster over the year than transaction-based fees. Operating expenses Full year operating expenses were CHF 3,702 million, CHF 729 million or 25% higher than in 1999. Personnel expenses increased CHF 437 mil- lion, or 29%, mainly due to higher performance related compensation, investment in the e-servic- es project and the transfer of financial planning and wealth management staff from the Private and Corporate Clients unit. and General administrative expenses increased CHF 234 million, or 18%, primarily due to the investment in the e-services project. Recruitment and training expenses, and volume- driven transaction processing costs, also increased, as did project related technology costs. Depreciation expense increased by CHF 51 million, or 56%, principally due to investments in the e-services project. Headcount Headcount at year end 2000 was 8,925, repre- senting an increase of 794 during the year. This was mainly the result of an increase of 340 employees relating to the e-services project, the transfer of 148 financial planning and wealth management staff the Private and from Corporate Clients business unit and the comple- tion in first quarter 2000 of previous initiatives to strengthen product capabilities. 49 Review of Business Group Performance UBS Asset Management UBS Asset Management “A second straight year of successful relative invest- ment performance provides a strong foundation for continued progress in 2002.” John Fraser Business Group Reporting CHF million, except where indicated For the year ended Institutional fees Mutual funds fees Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Business Group performance before tax and goodwill 1 KPI’s Cost / income ratio (%) 2 Cost / income ratio before goodwill (%) 1, 2 Institutional Invested assets (CHF billion) Net new money (CHF billion) 4 Gross margin on invested assets (bps) 5 Mutual funds Invested assets (CHF billion) Net new money (CHF billion) 4 Gross margin on invested assets (bps) 5 Additional information As at Client assets (CHF billion) Regulatory equity used (average) Headcount (full time equivalents) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 1,007 1,103 2,110 1,003 564 46 266 1,879 231 497 89 76 328 6.2 32 344 28.7 33 1,119 834 1,953 880 439 49 263 1,631 322 585 84 70 323 (70.8)3 34 319 2.93 36 857 512 1,369 516 271 32 113 932 437 550 68 60 3673 (49.9)3 24 2313 (0.3)3 25 (10) 32 8 14 28 (6) 1 15 (28) (15) 2 (6) 8 (8) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 672 1,250 3,281 1,250 2,860 162 2,576 0 15 1 Excludes the amortization of goodwill and other intangible assets. 2 Operating expenses / operating income. 3 Calculated using the former definition of assets under management. 4 Excludes dividend and interest income. 5 Income / average invested assets. John Fraser CEO UBS Asset Management 50 Components of Operating Income UBS Asset Management generates most of its revenue from the asset management services it provides to insti- tutional clients, and from the distribution of investment funds. Fees charged to institutional clients and on invest- ment funds are based on the market value of invested assets and on successful investment performance. As a result, UBS Asset Management’s revenues are affected by changes in market levels as well as flows of client funds. Significant Financial Events There were no significant financial events that affected this Business Group in 2001, 2000 or 1999. 2001 Key performance indicators Invested assets increased 5% during the year from CHF 642 billion at 31 December 2000 to CHF 672 billion at 31 December 2001. Net new money was CHF 34.9 billion for the year, reflect- ing the recognition of strong relative investment performance and business development efforts. The pre-goodwill cost/income ratio rose from 70% in 2000 to 76% in 2001, principally reflect- ing the higher cost/income ratio of the Brinson Advisors business transferred from UBS Paine- Webber at the start of the year. Pre-goodwill cost / income ratio (%) 80 70 60 50 40 9 9 9 1 0 0 0 2 1 0 0 2 Institutional Institutional invested assets increased from CHF 323 billion at 31 December 2000 to CHF 328 billion at 31 December 2001. This 2% increase was due to CHF 6.2 billion net new money and a CHF 34 billion increase in invested assets from the acquisition of RT Capital (now Brinson Canada) which more than offset nega- tive market performance. Net new money in 2001 was CHF 6.2 billion, a great improvement from net outflows of CHF Net new money; Institutional (CHF billion) 9 9 9 1 0 0 0 2 1 0 0 2 20 0 –20 –40 –60 –80 70.8 billion in 2000 and CHF 49.9 billion in 1999, as clients start to recognize the success of our integrated global investment management platform, which delivered strong relative invest- ment performance in both 2001 and 2000. Gross margin on invested assets; Institutional (bps) 40 35 30 25 20 15 10 5 0 9 9 9 1 0 0 0 2 1 0 0 2 Full year gross margin was 32 basis points, a decrease of 2 basis points from 2000, primarily due to lower performance fees in O’Connor and the addition of the lower margin Brinson Advisors business. Mutual funds Mutual funds invested assets increased CHF 25 billion, from CHF 319 billion at 31 December 2000 to CHF 344 billion at 31 December 2001, driven by net new money. Market performance was limited to a negative impact on invested assets of less than 1%. Net new money of CHF 28.7 billion in 2001, 51 Review of Business Group Performance UBS Asset Management Net new money; Mutual funds (CHF billion) 30 25 20 15 10 5 0 –5 9 9 9 1 0 0 0 2 1 0 Q 1 1 0 0 2 compared to CHF 2.9 billion in 2000, reflected much better asset gathering performance in both Europe and the Americas, particularly in fixed income mandates. Gross margin on invested assets; Mutual funds (bps) 40 35 30 25 20 15 10 5 0 9 9 9 1 0 0 0 2 1 0 0 2 The gross margin for the year decreased 3 basis points to 33 basis points due to the addi- tion of Brinson Advisors, which has a high pro- portion of lower margin money market funds, partially offset by the introduction of a new pric- ing structure for UBS Investment Funds. Investment capabilities and performance In 2001, UBS Asset Management experienced one of its best years of relative investment per- formance, second only to 2000. Individual secu- rity selection made a very significant contribu- tion to 2001 performance, owing much to the benefits of our integrated global investment plat- form, and our improved ability to share research and knowledge across investment teams world- wide. A slowing global economy, continued de- clines in equity markets, and the ramifications from the terrorist attacks of 11 September were the predominant developments in 2001. Our Multi Asset Composite had another impressive year exceeding its benchmark by more than 10% and placing it in the top decile for the last two years. It currently sits ahead of its bench- mark for all periods since inception. The Multi Asset Composite has only had one down year in twenty and in the challenging equity market of the last two years returned 12.2% and 3.7%, respectively. Our Global Equity and US Equity composites also had a strong year in very tough markets. The Global Equity Composite outperformed its benchmark by more than 12%, placing it in the top quartile of peers. Its two-year annualized return compares favorably to its benchmark by more than 13% and by more than 6% for three years. Many of our equity portfolios returned positive absolute gains for the year despite con- siderable declines in their benchmark indices. For example, our US Equity Large/Intermediate and US Value Equity Composite each gained more than 3%, while their benchmarks had losses of 11% and 5.6%. Both of these compos- ites ranked near the top decile for the year. Nearly all of our major equity composites hold a sizable edge when compared to their bench- marks over two-, three- and five-year periods. Our fixed income composites also fared well during the year. The UK Fixed Interest portfolio gained 5% and the US Bond Composite posted gains of nearly 9% for the year, both beating their benchmark. In addition, the Emerging Markets Debt Composite returned 11% for the year, placing it well ahead of its benchmark. Our UK Balanced Composite finished in the top five of its peer group, giving up only 5.8% as the average balanced fund in the UK fell nearly 12% for the year. The UK Balanced Composite currently sits ahead of the CAPS median for one-, three-, five- and ten-year periods. UBS Investment Funds continued their strong relative investment performance with 70% of all funds outperforming their peer group averages for the year. More specifically, the UBS Strategy Funds performed well as a group, with more than 90% outperforming the peer group for the year. In addition, GAM had a successful year benefiting from a defensive stance on equities, excellent security selection and an allocation to alternative investments. Results Pre-tax profit of CHF 231 million in 2001 was 28% lower than 2000. Despite market declines and lower performance fees in the O’Connor busi- 52 ness, income increased as a result of the new investment funds pricing structure introduced in 2001, the acquisition of RT Capital (renamed Brinson Canada) and the inclusion of Brinson Advisors. This was more than offset by higher per- sonnel expenses and general and administrative expenses driven by spending on growth initiatives, the integration of Brinson Advisors and the acquisi- tion of Brinson Canada in third quarter. Performance before tax (CHF million) 600 500 400 300 200 100 0 e g a r e v A 9 9 9 9 9 1 0 0 Q 2 0 0 Q 3 0 0 0 2 1 0 Q 1 1 0 Q 2 1 0 0 2 1 0 Q 4 Operating income Operating income increased CHF 157 million, or 8%, from 2000 to CHF 2,110 million in 2001, as a result of the inclusion of Brinson Advisors, the new pricing structure introduced this year for investment funds and the acquisition of Brinson Canada. These effects were partially offset by lower performance fees at O’Connor, our alter- native investment business, and the effect on asset based revenues of market declines in 2001 and institutional asset outflows in 2000 which led to lower average assets compared to 2000. Institutional income fell 10% in 2001 com- pared to 2000, to CHF 1,007 million, while mutual fund revenue increased 32% from 2000 to CHF 1,103 million in 2001. Depreciation decreased 6% from CHF 49 mil- lion in 2000 to CHF 46 million in 2001. Amortization of goodwill and other intangible assets increased 1% to CHF 266 million in 2001, reflecting the effect of the acquisition of Brinson Canada. Headcount Headcount increased by 421 in 2001, from 2,860 at 31 December 2000 to 3,281 at 31 De- cember 2000, mostly due to the integration of Brinson Advisors and Brinson Canada. Headcount (full time equivalents) (in thousands) 9 9 . 2 1 . 1 3 0 0 . 2 1 . 1 3 1 0 . 2 1 . 1 3 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 2000 Key performance indicators The cost / income ratio before goodwill increased to 70% in 2000, from 60% in 1999, principally as a result of the inclusion of O’Connor, Global Asset Management (GAM) and UBS Realty Investors (which generate higher gross margins than the rest of the business, but at higher cost), spending on strategic initiatives to expand global reach, and lower asset-based revenues towards the end of the year. Operating expenses Operating expenses increased 15% to CHF 1,879 million in 2001, driven by the addition of Brinson Advisors and Brinson Canada. General and administrative expenses in- creased 28% from CHF 439 million in 2000 to CHF 564 million in 2001, principally reflecting the addition of Brinson Advisors. Personnel expenses increased 14% from CHF 880 million in 2000 to CHF 1,003 million in 2001, again mostly due to the addition of Brinson Advisors, which more than offset a considerable decline in performance related compensation. Institutional Invested assets at 31 December 2000 include CHF 31 billion invested at Brinson Advisors (formerly Mitchell Hutchins), which was pur- chased as part of the acquisition of Paine Webber Group, Inc. and subsequently transferred to UBS Asset Management. Invested assets decreased 12%, or CHF 44 billion, from CHF 367 billion at 31 Decem- ber 1999 to CHF 323 billion at 31 December 2000, with the majority of the decline due to client losses in the institutional business, particu- larly in the earlier part of the year. 53 Review of Business Group Performance UBS Asset Management Net new money for the year saw a net out- flow of CHF 70.8 billion. Net new money out- flows moderated as the year progressed, as loss- es of equity mandates continued to decline. Client losses continued to be concentrated pri- marily within US and to a lesser degree UK man- dates, reflecting past investment performance issues. The gross margin in 2000 was 34 basis points, an increase of 10 basis points over 1999. This rise reflects the contributions from two new higher margin businesses: O’Connor, created in June 2000, and UBS Realty Investors (formerly Allegis), purchased in December 1999. Mutual funds Invested assets at 31 December 2000 include CHF 90 billion invested at Brinson Advisors (formerly Mitchell Hutchins), which was pur- chased as part of the acquisition of Paine Webber Group, Inc., and subsequently transferred to UBS Asset Management. Invested assets increased 38%, from CHF 231 billion at 31 December 1999 to CHF 319 billion at year end 2000. The addition of Brinson Advisors assets offset a slight underlying decline. This underlying performance was largely a result of negative currency and market movements, partly offset by net new money of CHF 2.9 billion. The gross margin for the year, at 36 basis points, is significantly higher than the 25 basis points recorded in 1999, principally due to the contribution from GAM. Investment performance in 2000 The return of global equity markets towards fundamental values was the predominant development during 2000. This trend acceler- ated during the fourth quarter as the US econ- omy began to slow, and many companies with- in the Technology, Media and Telecommuni- cations (TMT) sector posted disappointing earnings. Within this challenging environment, strategic positions benefiting from the decline in the TMT sector, the associated drop in equity markets, the under-performance of the very largest capitalization equities, and the year-end turnaround in the euro, helped Institutional Asset Management deliver the best relative annual investment performance in its history. US equity strategies outperformed bench- marks by wide margins. Global, international and UK equity strategies were also significantly positive. Phillips & Drew was ranked the top- performing pension fund manager in Britain for the year 2000 by Combined Actuarial Performance Services (CAPS), the leading UK performance measurement consultancy. Phillips & Drew’s flagship Managed Exempt fund (equi- ties mixed with property) outperformed the average fund manager by more than 10% for the full year. Phillips & Drew’s strong performance in 2000 also benefited their balanced fund’s three and five year records, moving its ranking up from fourth quartile at the end of 1999 to second quartile at the end of 2000. Results Pre-tax profit of CHF 322 million was 26% lower than 1999. Despite asset losses in the core institu- tional business, operating income increased as a result of the launch of the O’Connor business and the acquisition of Allegis; but this was more than offset by higher performance-related personnel expenses, the additional costs of spending on new business initiatives, chiefly targeted at marketing investment funds outside UBS, and goodwill amortization costs relating to Allegis and GAM. Operating income Operating income increased CHF 584 million, or 43%, from CHF 1,369 million in 1999 to CHF 1,953 million in 2000. Institutional revenue increased CHF 262 mil- lion, or 31%, from CHF 857 million in 1999 to CHF 1,119 million in 2000. Despite the decrease in invested assets, operating income increased as a result of the acquisition of Allegis and the creation of the new O’Connor alternative asset management business, partially offset by lost revenue from client losses. Mutual fund income increased CHF 322 mil- lion, or 63%, from CHF 512 million in 1999 to CHF 834 million in 2000, primarily as a result of the GAM acquisition. Operating expenses Full year expenses increased by CHF 699 million to CHF 1,631 million. Personnel expenses increased 71%, or CHF 364 million, from CHF 516 million in 1999 to CHF 880 million in 2000 and General and 54 administrative expenses increased 62%, or CHF 168 million, over 1999 to CHF 439 million in 2000. Both categories of expense increased as a result of the acquisitions of GAM and Allegis, the addition of the new O’Connor business and investments in distribution initiatives. Depreciation and amortization expense increased CHF 167 million, or 115%, from CHF 145 million in 1999 to CHF 312 million in 2000, principally due to the goodwill amor- tization resulting from the acquisitions of Allegis and GAM. Headcount Headcount increased 11% from 2,576 at 31 De- cember 1999 to 2,860 at 31 December 2000, primarily as a result of an increase of staff to support mutual funds distribution initiatives and the creation of the new O’Connor business in June 2000. 55 Review of Business Group Performance UBS Warburg UBS Warburg “We have made excellent strategic progress in 2001, with increased share of fees in corporate finance and the successful merger with UBS PaineWebber.” Markus Granziol Business Group Reporting CHF million, except where indicated For the year ended Income 2 Credit loss expense 3 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets 2 Total operating expenses Business Group performance before tax Business Group performance before tax and goodwill 6 Additional information Regulatory equity used (average) Cost / income ratio (%) 7 Cost / income ratio before goodwill (%) 6, 7 31.12.01 31.12.001 31.12.991 % change from 31.12.00 21,349 (130) 21,219 13,515 4,260 580 991 19,346 1,873 2,864 26,200 91 86 19,590 (246 ) 19,344 10,618 3,196 606 290 14,710 4,634 4,924 24,850 75 74 13,118 (333 ) 12,785 7,087 2,538 644 139 10,408 2,377 2,516 10,590 79 78 9 (47) 10 27 33 (4) 242 32 (60) (42) 5 Markus Granziol Chairman UBS Warburg John Costas CEO UBS Warburg Joseph J. Grano Chairman and CEO, UBS PaineWebber 56 Business Group Reporting Adjusted for Significant Financial Events CHF million, except where indicated For the year ended 31.12.01 31.12.001 31.12.991 % change from 31.12.00 Income 2 Credit loss expense 3 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets 2 Total operating expenses Business Group performance before tax Business Group performance before tax and goodwill 6 Additional information Cost / income ratio (%) 7 Cost / income ratio before goodwill (%) 6, 7 21,349 (130) 21,219 13,515 4,260 580 991 19,346 1,873 2,864 19,590 (246 ) 19,344 10,5325 3,1835 5995 290 14,604 4,740 5,030 12,9184 (333 ) 12,585 7,087 2,538 644 139 10,408 2,177 2,316 91 86 75 73 81 79 9 (47) 10 28 34 (3) 242 32 (60) (43) 1 The 2000 and 1999 figures have been restated to reflect the restructuring of the Group on 1 January 2001. 2 Goodwill funding costs of CHF 763 million (2000: CHF 132 million) and amortization of goodwill and other intangible assets of CHF 846 million (2000: CHF 138 million) in respect of the PaineWebber acquisition are included in UBS Warburg results but are not reflected in any of its individual business units. 3 In management accounts, statistically derived adjusted expected loss rather than the net IAS actual credit loss is reported in the business units (see Note 2 of the Financial Statements). 4 Excludes Significant Financial Events: Income, CHF 200 million for the sale of the international Global Trade Finance business. 5 Excludes Significant Financial Events: Personnel expenses, CHF 86 million, General and administrative expenses, CHF 13 million and Depreciation, CHF 7 million, for the PaineWebber integration. 6 Excludes the amortization of goodwill and other intangible assets. 7 Operating expenses / operating income before credit loss expense. Goodwill costs UBS Warburg’s Business Group operating expenses for 2001 include CHF 846 million (2000: CHF 138 million) of amortization of goodwill and intangible assets and CHF 763 mil- lion (2000: CHF 132 million) of goodwill fund- ing costs which result from the merger with PaineWebber on 3 November 2000. These costs are recorded at the Business Group level, but are not allocated to the individual business units. In particular, the results of the Private Clients includes the former business unit, which PaineWebber private client businesses, do not reflect amortization or funding costs relating to the merger. 57 Review of Business Group Performance UBS Warburg Corporate and Institutional Clients Business Unit Reporting CHF million, except where indicated For the year ended Corporate Finance Equities Fixed income and foreign exchange Non-core business Income Credit loss expense 2 Total operating income Personnel expenses 3 General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax Business unit performance before tax and goodwill 5 KPI’s Compensation ratio (%) 6 Cost / income ratio (%) 7 Cost / income ratio before goodwill (%) 5, 7 Non-performing loans / gross loans outstanding (%) Impaired loans / gross loans outstanding (%) Average VaR (10-day 99%) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 2,544 6,655 6,536 276 16,011 (112) 15,899 8,339 2,705 454 145 11,643 4,256 4,401 52 73 72 2.6 5.4 252 2,701 10,429 4,622 281 18,033 (243 ) 17,790 9,2844 2,7794 5554 149 12,767 5,023 5,172 51 71 70 2.8 5.6 242 2,054 5,724 4,269 4821 12,529 (330 ) 12,199 6,861 2,429 629 134 10,053 2,146 2,280 55 80 79 1.6 3.4 213 (6) (36) 41 (2) (11) (54) (11) (10) (3) (18) (3) (9) (15) (15) 4 Additional information As at Client assets (CHF billion) Regulatory equity used (average) Headcount (full time equivalents) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 108 9,900 15,562 10,000 15,262 10,050 12,694 (1) 2 1 Excludes Significant Financial Events: Income, CHF 200 million for the sale of the international Global Trade Finance business. 2 In manage- ment accounts, statistically derived adjusted expected loss rather than the net IAS actual credit loss is reported in the business units (see Note 2 of the Financial Statements). 3 Includes retention payments in respect of the PaineWebber acquisition. 2001: CHF 46 million. 2000: CHF 11 million. 4 Excludes Significant Financial Events: Personnel expenses, CHF 86 million, General and administrative expenses, CHF 13 million and Depreciation, CHF 7 million, for the PaineWebber integration. 5 Excludes the amortization of goodwill and other intangible assets. 6 Personnel expenses / operating income before credit loss expense. 7 Operating expenses / operating income before credit loss expense. 58 Components of Operating Income The Corporate and Institutional Clients unit generates operating income from: – commissions on agency transactions and spreads or markups on principal transactions; – fees from debt and equity capital markets transactions, leveraged finance, and the structuring of derivatives and complex transactions; – mergers and acquisitions and other advisory fees; – interest income on principal transactions and from the – gains and losses on market making, proprietary, and arbitrage positions. As a result, Corporate and Institutional Clients’ operating income is affected by movements in market conditions, interest rate swings, the level of trading activity in primary and secondary markets and the extent of merger and acquisition activity. These and other factors have had, and may in the future have, a significant impact on results of operations from year to year. loan portfolio; and Significant financial events PaineWebber integration costs were treated as a significant financial event in 2000, and are not reflected in the figures shown in the table. The amounts involved were: personnel expenses CHF 86 million, general and administrative expenses CHF 13 million and depreciation CHF 7 million. In addition, a CHF 200 million gain on the sale of UBS’s international Global Trade Finance business in 1999 was treated as a significant financial event and is not reflected in the operat- ing income shown in the table. There were no significant financial events that affected this business unit in 2001. 2001 Key performance indicators UBS Warburg measures its expense base primari- ly in terms of percentage of revenues, looking at both personnel costs and non-personnel costs on this basis. Compensation / income (%) 60 55 50 45 40 9 9 9 1 0 0 0 2 1 0 0 2 We continue to maintain a tight focus on cost management in light of the current operating environment, and achieved a pre-goodwill cost / income ratio of 72% in 2001, up slightly from 70% in 2000, as a result of the reduced revenues in difficult market conditions. The ratio of per- sonnel costs to income was 52% in 2001, only a slight increase on the 51% recorded in 2000, and favorably comparable with our peer group. Pre-goodwill cost / income ratio (%) 100 90 80 70 60 50 9 9 9 1 0 0 0 2 1 0 0 2 Average Value at Risk (VaR) for Corporate and Institutional Clients increased only slightly from CHF 242 million in 2000 to CHF 252 mil- lion in 2001 and, in general, market risk expo- sures have stayed within the normal ranges. There was, however, a short term but significant increase in VaR in December 2001 resulting from sizeable client-driven equity transactions. The need for a temporary increase in limits was anticipated and pre-approved by the Group Average VaR (10-day 99%) 300 250 200 150 100 50 0 9 9 9 1 0 0 0 2 1 0 0 2 59 Review of Business Group Performance UBS Warburg Executive Board. The trades were successfully executed and the risk reduced to normal levels. Total loans decreased by 17% from CHF 73.8 billion at 31 December 2000 to CHF 61.2 billion at 31 December 2001, due to a reduction in Japanese government exposures, and repay- ments from European multinationals, reflecting the continued reduction of our commercial lend- ing risk profile. Impaired loans / gross loans (%) 8 7 6 5 4 3 2 1 0 9 9 . 2 1 . 1 3 0 0 . 2 1 . 1 3 1 0 . 2 1 . 1 3 Continued successful recovery efforts led the ratio of impaired loans to total loans to fall from 5.6% at 31 December 2000 to 5.4% at the end of 2001. The non-performing loans to total loans ratio declined from 2.8% to 2.6% over the same period. Results We recorded a strong performance in 2001, relative to the much weaker markets this year. Pre-tax profit in 2001 was CHF 4,256 million, a decline of 15% over 2000, our best year ever. Equities and corporate finance both suffered from the economic downturn and the conse- quent weakness in their global markets, while the fixed income and foreign exchange business delivered record results, driven by interest rate reductions and increased volatility, and sup- ported by the expansion of businesses acquired from PaineWebber. In corporate finance we con- tinued to outperform 2000 in terms of market share, with full year analysis showing us with a 4.5% share of fees, compared to 3.6% in 2000. Costs fell sharply to their lowest ever total. Operating income Operating income of CHF 15,899 million in 2001 was 11% lower than in 2000. Corporate finance revenues were CHF 2,544 million in 2001, 6% lower than in 2000, as our improved share of fees this year was more than offset by the general contraction experienced in corporate finance in 2001. Equities revenues for 2001 were also lower than in 2000, down 36% from CHF 10,429 mil- lion to CHF 6,655 million in 2000. This decline principally reflects reduced trading revenues, driven by the lack of mergers and acquisitions activity and increased volatility, together with a cautious approach to risk in difficult market conditions. Commission revenues have been broadly consistent with levels in 2000, reflecting the breadth and depth of our client franchise. Corporate and Institutional Clients Operating income by business area1 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 CHF million 482 4,269 2,054 5,724 281 4,622 2,701 10,429 276 6,536 2,544 6,655 31.12.99 31.12.00 31.12.01 For the year ended Equities Corporate finance Fixed income and foreign exchange Non-core business Performance before tax (CHF million) 1 Before credit loss expense. 6000 4000 2000 0 9 9 9 1 0 0 0 2 1 0 0 2 Fixed income and foreign exchange per- formed very strongly in 2001, with revenues up 41% from 2000, at CHF 6,536 million. This reflects the effect of interest rate reductions dur- ing the year, which led to increased issuance and higher volatility, and the inclusion of businesses taken over from PaineWebber. Non core revenues in 2001 were 2% lower than in 2000, at CHF 276 million. 60 Operating expenses Personnel expenses declined 10%, from CHF 9,284 million in 2000 to CHF 8,339 million in 2001, driven by reductions in incentive compen- sation in line with labor market conditions and full year results. General and administrative expenses in 2001 were 3% lower than in 2000, at CHF 2,705 mil- lion, reflecting the impact of cost control meas- ures put in place during 2001. (Fourth quarter 2001 general and administrative expenses were 25% lower than in fourth quarter 2000.) Depreciation fell 18% from 2000 to CHF 454 million in 2001, driven by reductions in IT expenditure as a result of cost control initiatives. Amortization of goodwill and other intangi- bles was almost unchanged at CHF 145 million in 2001, just CHF 4 million lower than in 2000. Headcount Headcount at 31 December 2001 remained lit- tle changed, at 15,562 compared to 15,262 at Headcount (full time equivalents) 16 15 14 13 12 11 10 (in thousands) 9 9 . 2 1 1 3 . 0 0 . 2 1 1 3 . 1 0 . 2 1 1 3 . the end of 2000. We have not engaged in wide- spread headcount reductions that might have long-term detrimental impact on our client franchises, but are upgrading staff quality in selected areas. 2000 The results for Corporate and Institutional Clients include the costs and revenues for November and December 2000 of the former PaineWebber capital markets businesses, which were integrated into this business unit from the completion of the merger on 3 November 2000. Key performance indicators Continued strong revenue performance in 2000 and active cost management led to a pre- goodwill cost / income ratio of 70%, down from 79% in the previous year, representing the result of significant cost management efforts on both personnel and non-personnel expenses. Corporate and Institutional Clients’ ratio of personnel cost to income fell to 51% in 2000, from 55% in 1999. UBS Warburg continues to invest in top quality professionals to help expand its capabilities and client reach and aims to compensate its employees at similar levels to its global competitors. Changes in non-personnel costs are less directly related to changes in income than per- sonnel costs. As a percentage of income, non- personnel costs decreased to 19% in 2000, from 25% in 1999. Improvements in overall cost management were offset by increased expenditure on technology and professional fees and the PaineWebber capital markets business. incremental costs of the Corporate and Institutional Clients’ non- performing loans rose CHF 905 million, or 78%, from CHF 1,163 million at 31 December 1999 to CHF 2,068 million at 31 December 2000, reflecting the weaker credit environment in the US. At the same time, the gross loans outstanding rose from CHF 72,717 million at 31 December 1999 to CHF 73,761 million at 31 December 2000. As a result, the ratio of non-performing loans to total loans increased to 2.8% at the end of 2000 from 1.6% at the end of 1999. Market risk utilization, as measured by average VaR, continued to remain well within the limit of CHF 450 million, although increas- ing from an average of CHF 213 million in 1999 to an average of CHF 242 million in 2000, reflecting the exceptional trading oppor- tunities in the early part of 2000. Results UBS Warburg’s Corporate and Institutional Clients business unit delivered record financial results in 2000, with each quarter performing significantly above the levels in the comparable quarter of 1999. Pre-tax profit of CHF 5,023 million was more than double the CHF 2,146 million achieved in 1999, itself a good year. 61 Review of Business Group Performance UBS Warburg Operating income Corporate and Institutional Clients generated revenues of CHF 18,033 million in 2000, an increase of 44% over 1999. Equities revenues during 2000 were CHF 10,429 million, or 82% higher than 1999’s revenues of CHF 5,724 million reflecting the strength of UBS Warburg’s global client franchise and increased market share in significantly stronger secondary markets, and strong market- making and trading revenues. UBS Warburg’s secondary equity sales business continues to be ranked as one of the global leaders, and the leading non-US equities house. Fixed Income and Foreign Exchange experi- enced a strong 2000, driven by active fixed income markets, significant principal finance activity and a good performance by the govern- ment bond and derivatives business, contribut- ing to overall revenues for the year 2000 of CHF 4,622 million, an improvement of 8%, or CHF 353 million over 1999’s revenues of CHF 4,269 million. Revenues for 1999 also included revenues relating to exchange-traded derivatives and alternative asset management, which were transferred to the Equities business area in 2000. Market conditions for mergers and acquisi- tions, advisory work and primary underwriting continued to be strong, driving Corporate Finance’s excellent performance. UBS Warburg’s corporate client franchise continued to develop, with strong performance in critical sectors in 2000, particularly Telecommunications and Consumer Goods. Productivity per head also increased in comparison to prior years. Overall, 2000 was a year of very strong growth in this area for UBS Warburg, with revenues of CHF 2,701 million, 31% ahead of 1999. The Corporate Finance business area within Corporate and Institutional Clients provides both advisory services and financing services. Financing services include both equity and fixed-income offerings undertaken in cooperation with the Equities and Fixed income business areas. Accordingly, a portion of operating income associ- ated with these services is allocated to those areas. Non core income In October and November 1998, UBS’s Board of Directors mandated and undertook a review of UBS’s risk profile and risk management and of UBS’s control processes and procedures. Corporate and Institutional Clients used the review to define its core and non-core business areas, and decided to wind down over time the identified non-core businesses, and the associated loan portfolio. In 2000, non-core revenues fell 42% compared to 1999, to CHF 281 million. UBS’s non-core loan portfolio decreased approximately CHF 65 billion, or 61%, from approximately CHF 106 billion as of 31 De- cember 1998 to CHF 41 billion as of 31 De- cember 1999. It has further reduced since, to CHF 23 billion at 31 December 2000 and CHF 10 billion at 31 December 2001. Operating expenses Corporate and Institutional Clients continues to carefully manage its cost base, with the pre- goodwill cost/income ratio remaining well below 1999 levels at 70%. Personnel expenses in- creased 35% from 1999, to CHF 9,284 million, reflecting increased headcount and growth in performance-related compensation in line with the excellent results. Personnel expenses include CHF 11 million of retention payments made to former PaineWebber staff. General and administrative expenses in- creased 14% compared to 1999, as a result of increased expenditure on technology outsourc- ing, professional fees and the incremental costs of the PaineWebber capital markets business. Overall costs grew at a significantly slower rate than revenues, delivering continued strong pre-tax profit growth. Headcount Corporate and Institutional Clients headcount rose 20% during the year, to 15,262, mainly due to business growth in the Corporate Finance and Equities areas, including the impact of the inte- gration of 1,628 staff from the PaineWebber capital markets businesses. 62 UBS Capital Business Unit Reporting CHF million, except where indicated For the year ended Total operating income / (loss) Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax Business unit performance before tax and goodwill 1 KPI’s 31.12.01 31.12.00 31.12.99 % change from 31.12.00 (868) 96 66 2 0 164 (1,032) (1,032) 368 142 49 2 2 195 173 175 (32) 35 0 (100) (16) 315 105 46 2 5 158 157 162 0.6 31.12.01 31.12.00 31.12.99 % change from 31.12.00 5.0 5.5 3.0 (9) 5.6 1 800 128 6.9 1 600 129 4.2 340 116 (19) 0 33 (1) 2 Historic cost of investments made, less divestments and permanent Value creation (CHF billion) (1.4) 0.6 As at Investment (CHF billion) 2 Additional information Portfolio fair value (CHF billion) Invested assets (CHF billion) Regulatory equity used (average) Headcount (full time equivalents) 1 Excludes the amortization of goodwill and other intangible assets. impairments. Components of Operating Income UBS Capital’s primary source of operating income is capi- tal gains from the disposal or sale of its investments, which are recorded at the time of ultimate divestment. As a result, appreciation in fair market value is recognized as operating income only at the time of sale. The level of annual operating income from UBS Capital is directly affected by the level of investment disposals that take place during the year. Similarly, depreciation in fair market value is only recognized against operating income if an investment becomes permanently impaired and has to be written-down. Write-downs of the value of its investments can negatively affect UBS Capital’s operating income. 63 Review of Business Group Performance UBS Warburg Significant financial events There were no significant financial events that affected this business unit in 2001, 2000 or 1999. 2001 Full year results for UBS Capital reflect the very challenging market in 2001, with few opportu- nities for divestments, and write-downs of several investments as a result of the problems caused for some of our investee companies by the deteriorating economic conditions. Pre-tax losses for 2001 of CHF 1,032 million, com- pared to pre-tax profits of CHF 173 million in 2000. Following a strategic review of the business, UBS will in future be focused on private equity asset management, with a restricted level of direct investments through UBS Capital, limited to those sectors and regions with a strong per- formance track record. We expect results in 2002 to show continued volatility, and net losses, unless there is a material improvement in economic conditions. Key performance indicators UBS Capital’s private equity investments have decreased to CHF 5.0 billion at 31 December 2001, from CHF 5.5 billion at the end of 2000, with the decline due to write-downs on the book value of investments, as well as a small number of divestments during the year, which more than offset the draw-down of previously committed investments and the small level of other new investments during the year. The fair value of the portfolio at the end of December 2001 was CHF 5.6 billion, down Investment (CHF billion) 19% from CHF 6.9 billion at 31 December 2000. The fair value included net unrealized gains of CHF 0.6 billion. Value reduction during 2001, was CHF 1.4 billion, compared to value creation of CHF 0.6 billion in 2000. Value Creation (CHF billion) 9 9 9 1 0 0 0 2 1 0 0 2 0.8 0.4 0.0 –0.4 –0.8 –1.2 –1.6 Results UBS Capital recorded an operating loss of CHF 868 million in 2001, compared to income of CHF 368 million in 2000. Challenging markets and the continued slow-down in corporate activ- ity meant that there were few opportunities for significant divestments in 2001, while weak eco- nomic conditions led to deteriorating valuations across a range of industry sectors resulting in a high level of write-downs of investments in the portfolio. Performance before tax (CHF million) 9 9 9 1 0 0 0 2 1 0 0 2 250 0 –250 –500 –750 –1000 –1250 9 9 . 2 1 . 1 3 0 0 . 2 1 . 1 3 1 0 . 2 1 . 1 3 Personnel expenses were CHF 96 million in 2001, down from CHF 142 million in 2000, reflecting lower incentive compensation which is driven by realized gains on divestments. General and administrative expenses were CHF 66 million, up from CHF 49 million in 2000 due principally to professional fees relating to our strategic review of the business. 6 5 4 3 2 1 0 64 2000 Key performance indicators The book value of UBS Capital’s private equity investments grew from CHF 3.0 billion at the end of 1999 to CHF 5.5 billion at 31 December 2000. New investments of CHF 2.1 billion were made during the full year, including new shareholdings across a diverse range of sectors. In addition, CHF 0.8 billion of investments made by PaineWebber were added to UBS Capital’s private equity port- folio in December 2000. The portfolio value was reduced by certain write-downs in investments in second and fourth quarters 2000. Until the introduction in 2001 of IAS 39, UBS Capital accounted for its private equity invest- ments at cost less permanent impairments. Our regular portfolio review and valuation at 31 De- cember 2000 resulted in an approximate current fair value of CHF 6.9 billion, compared to CHF 4.2 billion at 31 December 1999. This equated to unrealized gains of approximately CHF 1.4 billion at 31 December 2000, compared to CHF 1.2 billion at year-end 1999. The value creation during the year 2000, including realized gains since 1 January 2000, and the increase in the portfolio’s unrealized gains, was approxi- mately CHF 0.6 billion. Results In 2000, net profit was CHF 173 million, up CHF 16 million or 10% from CHF 157 million in 1999. Operating income Operating income increased 17% to CHF 368 million in 2000, from CHF 315 million in 1999. This reflects the realized gains from sales of investments in the year, partially offset by write-downs of the value of several under-per- forming companies in different sectors of the portfolio. Operating expenses Personnel, general and administrative expenses were CHF 191 million in 2000, an increase from the previous year of CHF 40 million, or 26%, driven mainly by bonus expenses. Bonuses are accrued when an investment is successfully exited, so personnel expenses move in line with successful divestments. 65 Review of Business Group Performance UBS Warburg Private Clients Business Unit Reporting CHF million, except where indicated For the year ended Income Credit loss expense 3 Total operating income Personnel expenses 4 General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax Business unit performance before tax and goodwill 5 KPI’s Invested assets (CHF billion) Net new money (CHF billion) 7 Gross margin on invested assets (bps) 8 Cost / income ratio (%) 9 Cost / income ratio before goodwill (%) 5, 9 Cost / income ratio before goodwill and retention payments (%) 5, 9 Recurring fees 10 Financial advisors (full time equivalents) Additional information As at Client assets (CHF billion) Regulatory equity used (average) Headcount (full time equivalents) 31.12.012 31.12.001, 2 31.12.991 % change from 31.12.00 6,969 (18) 6,951 5,080 1,489 124 0 6,693 258 258 782 36.0 90 96 96 90 2,277 8,870 1,321 (3 ) 1,318 1,106 355 42 1 1,504 (186 ) (185 ) 773 15.26 72 114 114 105 430 8,871 74 (3 ) 71 121 63 13 0 197 (126 ) (126 ) 256 2.06 35 266 266 428 500 427 359 319 195 (100) 345 1 25 430 0 31.12.01 31.12.00 31.12.99 % change from 31.12.00 854 1,750 20,678 2,750 21,814 200 581 (36) (5) 1 The 2000 and 1999 figures have been restated to reflect the restructuring of the Group on 1 January 2001. 2 Private Clients results include PaineWebber for 2001 and for 2000 from the date of acquisition, 3 November 2000. 3 In management accounts, statistically derived adjust- ed expected loss rather than the net IAS actual credit loss is reported in the business units (see Note 2 of the Financial Statements). 4 Includes retention payments in respect of the PaineWebber acquisition. 2001: CHF 436 million. 2000: CHF 117 million. 5 Excludes the amortization of goodwill and other intangible assets. 6 Calculated using the former definition of assets under management. 7 Excludes interest and dividend income. 8 Income / average invested assets. 9 Operating expenses / operating income before credit loss expense. 10 Asset based and advi- sory revenues including fees from mutual funds, wrap fee products and insurance products. Components of Operating Income The Private Clients business unit principally derives its operating income from: – fees for financial planning and wealth management services; fees for discretionary management services; and transaction-related fees. – – 66 These fees are based on the market value of invested assets and the level of transaction-related activity. As a result, operating income is affected by such factors as fluctuations in invested assets, changes in market condi- tions, investment performance and inflows and outflows of client funds. Significant financial events There were no significant financial events that affected this business unit in 2001, 2000 or 1999. PaineWebber The Private Clients business unit primarily con- sists of UBS PaineWebber, the fourth largest pri- vate client business in the US, which became part of UBS following the merger between UBS and Paine Webber Group, Inc., which was completed on 3 November 2000. The merger was accounted for using purchase accounting, so the results shown for Private Clients for 2000 reflect the inclusion of the PaineWebber businesses only for the period from 3 November 2000 until 31 December 2000. Results for 1999 do not include any contribution from UBS PaineWebber, while results for 2001 reflect a full year’s contribution. 2001 Comparisons of full year results reflect the very different scale of the UBS Warburg Private Clients business prior to the acquisition of Paine- Webber in November 2000. Key performance indicators At the end of 2001, Private Clients had CHF 782 billion of invested assets, compared to CHF 773 billion at 31 December 2000, a change of 1%, with negative market performance during the year more than offset by strong net new money flows. Invested assets (CHF billion) 900 750 600 450 300 150 0 0 0 . 2 1 . 1 3 1 0 . 3 . 1 3 1 0 . 6 . 0 3 1 0 . 9 . 0 3 1 0 . 2 1 . 1 3 Net new money for the year was CHF 36.0 billion, compared to CHF 15.2 billion in 2000, more than half of which was earned in the last quarter of 2000 after the integration of PaineWebber. Private Clients’ ability to continue to generate high levels of net new money despite the uncertain markets in 2001 reflects the strength of its client franchise amongst high net worth individuals in the US. Net new money (CHF billion) 15 10 5 0 0 0 Q 4 1 0 Q 1 1 0 Q 2 1 0 Q 3 1 0 Q 4 Gross Margin on invested assets increased to 90 basis points, from 72 basis points in 2000, reflecting the addition of UBS PaineWebber. Gross margin in the pre-existing business for the 9 months to 30 September 2000, before the addi- tion of UBS PaineWebber was 36 basis points. The gross margin fell slightly during 2001, reflecting the effect of uncertain markets on transaction volumes. Gross margin on invested assets (bps) 100 80 60 40 0 0 Q 4 1 0 Q 1 1 0 Q 2 1 0 Q 3 1 0 Q 4 The cost / income ratio before goodwill and retention payments was 90% in 2001 compared to 105% in 2000. Until the addition of UBS PaineWebber, the pre-existing business was loss making, reflecting the relatively early stage of its business development. Cost control has remained a strong focus during the year, with the cost income ratio in fourth quarter 2001 only one percentage point higher than in fourth quar- ter 2000. Recurring fees were CHF 2,277 million in 2001. This metric was not tracked prior to the 67 Review of Business Group Performance UBS Warburg Pre-goodwill cost / income ratio before retention (%) 100 90 80 70 60 0 0 Q 4 1 0 Q 1 1 0 Q 2 1 0 Q 3 1 0 Q 4 Performance before tax (CHF million) Results Pre-tax profits were CHF 258 million, a strong result relative to our peers, achieved against a particularly poor market environment, with two successive years of market declines in the US for the first time since the late 1970s leading to much lower transaction volumes. In 2000, Private Clients incurred a loss of CHF 186 million. 140 120 100 80 60 40 20 0 –20 0 0 Q 4 1 0 Q 1 1 0 Q 2 1 0 Q 4 1 0 Q 3 Operating income Operating income for the year was CHF 6,951 million, compared to CHF 1,318 million in 2000. Revenues were resilient during 2001, declining just 11% from first quarter to fourth quarter, despite recession and market uncer- tainty in the US. Operating expenses Total operating expenses were CHF 6,693 mil- lion in 2001 compared to CHF 1,504 million in 2000, reflecting the addition of UBS Paine- Webber. Private Clients implemented a number of cost control initiatives during the year, aimed at reducing discretionary expenditure and support costs, while protecting the business’s ability to serve its clients to the highest standards. Personnel expenses were CHF 5,080 million in 2001, compared to CHF 1,106 million in 2000, reflecting the completely different scale of the business. Expenses in 2001 included CHF 436 million of retention payments for key UBS PaineWebber staff, compared to CHF 117 mil- lion in 2000. Through 2001 personnel expenses reduced, from CHF 1,311 million in first quarter to CHF 1,216 million in fourth quarter, reflect- ing lower performance related and variable com- pensation and a reduction of support headcount. General and administrative expenses were CHF 1,489 million in 2001, compared to CHF integration of UBS PaineWebber in November 2000. During 2001, recurring fees declined 6% to CHF 545 million in fourth quarter 2001 compared to CHF 580 in first quarter 2001, due to the effects of market depreciation on client assets – recurring fees are priced based on the asset level at the end of the prior quarter. Recurring fees (CHF million) 600 500 400 300 200 100 0 0 0 Q 4 1 0 Q 1 1 0 Q 2 1 0 Q 3 1 0 Q 4 At the end of December 2001, Private Clients had 8,870 financial advisors, unchanged from a year before. Although we have continued to recruit and train new financial advisors during the year, the difficult market conditions have led to higher turnover amongst the least productive advisors. Financial advisors (full time equivalents) 10 9 8 7 (in thousands) 0 0 . 2 1 . 1 3 1 0 . 3 . 1 3 1 0 . 6 . 0 3 1 0 . 9 . 0 3 1 0 . 2 1 . 1 3 68 355 million in 2000, reflecting the addition of UBS PaineWebber. Cost control efforts drove expenses down during 2001, with fourth quarter general and administrative expenses 4% lower than in first quarter. Depreciation expenses were CHF 124 million in 2001, compared to CHF 42 million in 2000, reflecting the addition of UBS PaineWebber. with net new money flows averaging CHF 202.3 million per day in November and Decem- ber 2000, and totaling CHF 8.3 billion between the merger and the end of the quarter. This com- pared very favorably to the average pre-merger rate in the third quarter of 2000 of CHF 172.5 million per day, despite the effects of the holiday season. Headcount Headcount decreased 5% during the year from 21,814 at 31 December 2000 to 20,678 at 31 De- cember 2001. We continue to monitor market conditions, but prudent cost control in previous years means that we have not needed to make franchise threatening cuts to our headcount. Financial advisor headcount is almost unchanged over the year, but we continue to implement effi- ciency measures to help manage support head- count downwards. Headcount (full time equivalents) 23 22 21 20 19 18 (in thousands) 0 0 . 2 1 . 1 3 1 0 . 3 . 1 3 1 0 . 6 . 0 3 1 0 . 9 . 0 3 1 0 . 2 1 . 1 3 2000 Results for 2000 reflect the inclusion of UBS PaineWebber only for the period from the merger, on 3 November 2000, until 31 Decem- ber 2000. Key performance indicators At 31 December 2000, Private Clients had CHF 773 billion of invested assets. Net new money for the year was significant, at CHF 15.2 billion. Private Clients’ asset gath- ering continued successfully after the merger, Results Private Clients recorded a net loss for 2000 of CHF 186 million, compared to a net loss in 1999 of CHF 126 million. Adjusting for the addition of UBS PaineWebber, the previously existing businesses made a loss of CHF 167 million in 2000, partly due to restructuring costs incurred in first quarter 2000. Operating income Operating income was CHF 1,318 million in 2000, an increase of CHF 1,247 million from the CHF 71 million achieved in 1999. This change was mainly due to CHF 1,225 million income of UBS PaineWebber in November and December 2000. Operating expenses Operating expenses were CHF 1,504 million in 2000, up from CHF 197 in 1999 including CHF 1,244 million at UBS PaineWebber in November and December. Personnel expenses in 2000 were CHF 1,106 million, an increase of CHF 985 million from 1999. CHF 955 million of this increase resulted from UBS PaineWebber, and included CHF 117 million of retention payments to staff under the terms of the PaineWebber merger agreement. General and administrative expenses in 2000 were CHF 355 million, an increase of CHF 292 million from 1999, including CHF 258 mil- lion from UBS PaineWebber. Headcount Total headcount at 31 December 2000 was 21,814, up from 581 at 31 December 1999, with the vast majority of the change due to the ad- dition of UBS PaineWebber. 69 Review of Business Group Performance Corporate Center Corporate Center Business Group Reporting CHF million, except where indicated For the year ended Income Credit loss recovery 1 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Business Group performance before tax and goodwill 2 31.12.01 31.12.00 31.12.99 % change from 31.12.00 678 236 914 546 207 372 25 1,150 (236) (211) 358 1,161 1,519 522 431 320 44 1,317 202 246 2,010 448 2,458 92 839 366 50 1,347 1,111 1,161 89 (80) (40) 5 (52) 16 (43) (13) Additional information As at Regulatory equity used (average) Headcount (full time equivalents) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 6,200 1,132 8,450 986 7,850 862 (27) 15 Business Group Reporting Adjusted for Significant Financial Events3 CHF million, except where indicated For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Income Credit loss recovery 1 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Business Group performance before tax and goodwill 2 678 236 914 546 207 372 25 1,150 (236) (211) 358 1,161 1,519 490 281 320 44 1,135 384 428 372 448 820 548 385 366 50 1,349 (529 ) (479 ) 89 (80) (40) 11 (26) 16 (43) 1 1 In order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the net IAS actual credit loss expenses are reported for all business units. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures and the net IAS actual credit loss expenses recorded at Group level is reported in the Corporate Center (see Note 2 to the Financial Statements). 2 Excludes the amortization of 3 Excludes Significant Financial Events: Income, year ended 31 December 1999, CHF 38 million from the goodwill and other intangible assets. Long Term Capital Management (LTCM) fund, CHF 1,490 million for the sale of our 25% stake in Swiss Life / Rentenanstalt and CHF 110 mil- lion for the sale of Julius Baer registered shares. Personnel expenses, year ended 31 December 2000, CHF 32 million for the PaineWebber inte- gration. General and administrative expenses, year ended 31 December 2000, CHF 150 million net additional provision relating to the US Global Settlement. Personnel expenses, year ended 31 December 1999, CHF 456 million for the Pension Fund Accounting Credit. General and admin- istrative expenses, year ended 31 December 1999, CHF 300 million for the UBS / SBC Restructuring Provision and CHF 154 million for the increase in the provision for the US Global Settlement. 70 Significant financial events There were no significant financial events in Corporate Center in 2001. principally reflecting the swing in the credit loss results, offset by higher income from treasury activities. Significant financial events booked in Cor- porate Center in 2000 and 1999 were: – Personnel expenses of CHF 32 million relat- ing to the integration of PaineWebber into UBS in 2000. – Costs of CHF 154 million in 1999 and CHF 150 million in 2000 in General and adminis- trative expenses in connection with the US Global Settlement of World War II related claims. – Operating income of CHF 1,490 million from the sale of UBS’s 25% stake in Swiss Life / Rentenanstalt, CHF 110 million from the sale of Julius Baer registered shares, and CHF 38 million from UBS’s residual holding in Long Term Capital Management L.P., all in 1999. – A credit to Personnel expenses in 1999 of CHF 456 million in connection with excess pension fund employer pre-payments. – Costs of CHF 300 million in General and administrative expenses in 1999 in respect of an additional restructuring charge relating to the 1998 merger between UBS and SBC. 2001 Operating expenses Total operating expenses were CHF 1,150 mil- lion in 2001, 1% higher than in 2000. General and administrative expenses for 2001 were CHF 74 million lower than in 2000, at CHF 207 million. This was due to lower corpo- rate real estate costs and lower professional fees connected to the US global settlement of World War II related claims, offset by higher IT costs and one-off charges relating to the bankruptcy of SAir Group. In 2001 personnel expenses were CHF 546 mil- lion, an increase of 11% compared to 2000, driven by severance payments and the full year cost of senior management and other additional person- nel added through the PaineWebber merger. Headcount Headcount increased 15% during 2001 to 1,132 at 31 December 2001, driven by the transfer of International Mobility Program participants to Corporate Center headcount and the transfer of human resources staff from UBS Warburg. The International Mobility Program provides out- standing young employees of UBS with oppor- tunities for work experience overseas. Results Corporate Center recorded a pre-tax loss of CHF 236 million in 2001, compared to a pre-tax profit of CHF 384 million in 2000, adjusted for significant financial events. 2000 Results Operating income The credit loss expense or recovery booked in Corporate Center represents the difference between the adjusted statistically expected losses charged to the business units and the actual credit loss recognized in the Group income state- ment. UBS Group’s credit loss expense increased to CHF 498 million in 2001, compared to a recovery of CHF 130 million in 2000. For both 2000 and 2001, actual credit loss was less than the charge to the business units, resulting in a credit loss recovery in Corporate Center of CHF 236 million in 2001, compared to a recovery of CHF 1,161 million in 2000. Operating income decreased by CHF 605 mil- lion from 2000 to CHF 914 million in 2001, Operating income Adjusted for significant financial events, operating income before credit loss expense decreased CHF 14 million, or 4%, from CHF 372 million in 1999 to CHF 358 million in 2000. Gains and losses attributable to Corporate Center arise from fund- ing, capital and balance sheet management, the management of corporate real estate and the man- agement of foreign currency activities. Credit loss expense in Corporate Center reconciles the difference between management accounting and financial accounting, that is between the adjusted statistically calculated expected losses charged to the business units and the actual credit loss expense recognized in the Group income statement. The Swiss econ- 71 Review of Business Group Performance Corporate Center omy was strong in 2000, leading to credit loss expenses below the statistically calculated expected level, and to a net write back of credit loss provisions of CHF 695 million, resulting in a credit of CHF 130 million at the Group level. Corporate Center’s credit loss recovery of CHF 1,161 million reflects the balancing item between this amount and the CHF 1,031 million expected loss charged to the business units. Operating expenses Operating expenses decreased from CHF 1,349 million in 1999 to CHF 1,135 million in 2000. Headcount Headcount in Corporate Center increased 124 during 2000, reflecting the addition of staff from PaineWebber. 72 73 74 UBS Group Financial Statements 75 UBS Group Financial Statements Table of Contents Financial Statements Table of Contents Financial Statements UBS Group Income Statement UBS Group Balance Sheet UBS Group Statement of Changes in Equity UBS Group Statement of Cash Flows Notes to the Financial Statements 1 2a 2b Summary of Significant Accounting Policies Segment Reporting by Business Group Segment Reporting by Geographic Location Income Statement 3 4 5 6 7 8 9 Net Interest Income Net Fee and Commission Income Net Trading Income Other Income Personnel Expenses General and Administrative Expenses Earnings per Share (EPS) and Outstanding Shares Balance Sheet: Assets 10a 10b 10c 10d 11 Due from Banks and Loans to Customers Allowances and Provisions for Credit Losses Impaired Loans Non-Performing Loans Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase Agreements and Other Collateralized Transactions Trading Portfolio Financial Investments Investments in Associates Property and Equipment Goodwill and Other Intangible Assets Other Assets 12 13 14 15 16 17 Balance Sheet: Liabilities 18 19 20 21 22 23 24 Due to Banks and Customers Debt Issued Other Liabilities Provisions, including Restructuring Provision Income Taxes Minority Interests Derivative Instruments 76 78 78 79 80 82 83 83 92 95 96 96 96 97 97 97 98 98 99 99 100 100 101 102 103 104 106 106 107 107 108 108 108 114 114 116 118 118 Off-Balance Sheet and other Information 25 26 27 28 29 30 Pledged Assets Fiduciary Transactions Commitments and Contingent Liabilities Operating Lease Commitments Litigation Financial Instruments Risk Position a) b) Credit Risk Interest Rate Risk (b)(i) On-balance sheet assets (b)(ii) Off-balance sheet financial instruments (b)(iii) Credit risk mitigation techniques c) Currency Risk d) Liquidity Risk e) Capital Adequacy Fair Value of Financial Instruments Retirement Benefit Plans and Other Employee Benefits Equity Participation Plans a) Equity Participation Plans Offered b) UBS Share Awards c) UBS Option Awards d) Compensation Expense e) Pro-Forma Net Income Related Parties Post–Balance Sheet Events Significant Subsidiaries and Associates Acquisition of Paine Webber Group, Inc. Currency Translation Rates Swiss Banking Law Requirements Reconciliation to US GAAP Additional Disclosures Required under US GAAP and SEC Rules 31 32 33 34 35 36 37 38 39 40 41 Report of the Group Auditors 123 123 123 124 125 126 127 127 129 129 130 130 131 132 133 135 137 141 141 143 144 145 145 146 147 147 151 151 151 154 164 169 77 UBS Group Financial Statements Financial Statements Financial Statements UBS Group Income Statement CHF million, except per share data For the year ended Note 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Operating income Interest income Interest expense Net interest income Credit loss expense / recovery Net interest income after credit loss expense / recovery Net fee and commission income Net trading income Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation of property and equipment Amortization of goodwill and other intangible assets 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) 1 Basic earnings per share before goodwill (CHF) 1, 2 Diluted earnings per share (CHF) 1 Diluted earnings per share before goodwill (CHF) 1, 2 3 3 4 5 6 7 8 15 16 22 23 9 9 9 9 52,277 (44,236) 8,041 (498) 7,543 20,211 8,802 558 37,114 19,828 7,631 1,614 1,323 30,396 6,718 1,401 5,317 (344) 4,973 3.93 4.97 3.78 4.81 51,745 (43,615 ) 8,130 130 8,260 16,703 9,953 1,486 36,402 17,163 6,765 1,608 667 26,203 10,199 2,320 7,879 (87 ) 7,792 6.44 7.00 6.35 6.89 35,604 (29,695 ) 5,909 (956 ) 4,953 12,607 7,719 3,146 28,425 12,577 6,098 1,517 340 20,532 7,893 1,686 6,207 (54 ) 6,153 5.07 5.35 5.02 5.30 1 1 (1) (9) 21 (12) (62) 2 16 13 0 98 16 (34) (40) (33) 295 (36) (39) (29) (40) (30) 1 All earnings per share figures have been restated for the 3 for 1 share split which took place on 16 July 2001. 2 Excludes the amortization of goodwill and other intangible assets. 78 UBS Group Balance Sheet CHF million Note 31.12.01 31.12.001 % change from 31.12.00 Assets Cash and balances with central banks 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 Goodwill and other intangible assets Other assets Total assets Total subordinated assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total liabilities Minority interests Shareholders’ equity Share capital Share premium account Gains / (losses) not recognized in the income statement Retained earnings Treasury shares Total shareholders’ equity 10 11 11 12 24 10 13 14 15 16 17, 22 18 11 11 12 24 18 19 20, 21, 22 20,990 27,526 162,938 269,256 397,886 73,447 226,545 28,803 7,554 697 8,695 19,085 9,875 2,979 29,147 177,857 193,801 315,588 57,875 244,842 19,583 7,062 880 8,910 19,537 9,491 1,253,297 1,087,552 407 475 106,531 30,317 368,620 105,798 71,443 333,781 17,289 156,218 15,658 82,240 23,418 295,513 82,632 75,923 310,679 21,038 129,635 18,756 1,205,655 1,039,834 23 4,112 2,885 3,589 14,408 (193) 29,103 (3,377) 43,530 4,444 20,885 (687 ) 24,191 (4,000 ) 44,833 Total liabilities, minority interests and shareholders’ equity 1,253,297 1,087,552 Total subordinated liabilities 13,818 13,996 1 Changes have been made to prior year to conform to the current presentation (see Note 1: Summary of Significant Accounting Policies). 605 (6) (8) 39 26 27 (7) 47 7 (21) (2) (2) 4 15 (14) 30 29 25 28 (6) 7 (18) 21 (17) 16 43 (19) (31) (72) 20 (16) (3) 15 (1) 79 UBS Group Financial Statements Financial Statements UBS Group Statement of Changes in Equity CHF million For the year ended 31.12.01 31.12.00 31.12.99 Issued and paid up share capital Balance at the beginning of the year Issue of share capital Capital repayment by par value reduction 3 Cancellation of second trading line treasury shares (2000 Program) Balance at the end of the year Share premium Balance at the beginning of the year Premium on shares issued and warrants exercised Net premium / (discount) on treasury share and own equity derivative activity Share premium increase due to PaineWebber acquisition Borrow of own shares to be delivered Settlement of own shares to be delivered Cancellation of second trading line treasury shares (2000 Program) Balance at the end of the year Gains / (losses) not recognized in the income statement Foreign currency translation Balance at the beginning of the year Movements during the year Subtotal – balance at the end of the year 4,444 12 (683) (184) 3,589 20,885 80 (239) (2,502) (3,816) 14,408 (687) (82) (769) Unrealized gains / (losses) on available for sale investments, net of taxes Balance at the beginning of the year Change in accounting policy 1 Net unrealized gains / (losses) on available for sale investments Gains reclassified to the income statement Losses reclassified to the income statement 0 1,577 (92) (461) 11 Subtotal – balance at the end of the year 1,035 4,300 9 4,309 13,617 45 775 4,309 135 4,444 14,437 139 (391 ) 4,198 5,895 (3,393 ) 20,885 14,437 (442 ) (245 ) (687 ) (456) 14 (442) Change in fair value of derivative instruments designated as cash flow hedges, net of taxes Balance at the beginning of the year Change in accounting policy 1 Net unrealized gains / (losses) on the revaluation of cash flow hedges Net losses reclassified to the income statement 0 (380) (316) 237 Subtotal – balance at the end of the year Balance at the end of the year Retained earnings Balance at the beginning of the year Change in accounting policy 1 Balance at the beginning of the year (restated) Net profit for the year Dividends paid 2, 3 Balance at the end of the year Treasury shares, at cost Balance at the beginning of the year Acquisitions Disposals Cancellation of second trading line treasury shares (2000 Program) Balance at the end of the year Total shareholders’ equity (459) (193) 24,191 (61) 24,130 4,973 29,103 (4,000) (13,506) 10,129 4,000 (3,377) 43,530 (687 ) (442) 20,327 20,327 7,792 (3,928 ) 24,191 (8,023 ) (16,330 ) 20,353 (4,000 ) 44,833 16,224 16,224 6,153 (2,050) 20,327 (4,891) (6,595) 3,463 (8,023) 30,608 2 Dividends declared per 1 Opening adjustments to reflect the adoption of IAS 39 (see Note 1: Summary of Significant Accounting Policies). 3 On 16 July 2001, UBS made a distribution to shareholders share were CHF 1.50 in 2000 and CHF 1.83 in 1999, both paid in the year 2000. of CHF 1.60 per share, paid in the form of a reduction in the par value of its shares, from CHF 10.00 to CHF 8.40. At the same time, UBS split its share 3 for 1, resulting in a new par value of CHF 2.80 per share. 80 UBS Group Statement of Changes in Equity (continued) Shares issued For the year ended Balance at the beginning of the year Issue of share capital Issue of share capital due to PaineWebber acquisition Cancellation of second trading line treasury shares (2000 Program) Number of shares % change from 31.12.01 31.12.00 31.12.99 31.12.00 1,333,139,187 3,843,661 1,292,679,486 4,459,701 1,289,857,836 2,821,650 3 (14) 36,000,000 (55,265,349) Balance at the end of the year 1,281,717,499 1,333,139,187 1,292,679,486 (4) Treasury shares Number of shares % change from For the year ended 31.12.01 31.12.00 31.12.99 31.12.00 Balance at the beginning of the year Acquisitions Disposals Cancellation of second trading line treasury shares (2000 Program) 55,265,349 162,818,045 (121,563,094) 110,621,142 16,824,039 (72,179,832 ) 73,370,094 87,659,019 (50,407,971 ) (50) 868 68 (55,265,349) Balance at the end of the year 41,254,951 55,265,349 110,621,142 (25) During the year a total of 55,265,349 shares acquired under the second trading line buyback pro- gram 2000 were cancelled. At 31 December 2001, a maximum of 13,017,716 shares can be issued against the excercise of options from former PaineWebber employee option plans. Out of the total number of 41,254,951 treasury shares, 23,064,356 shares (CHF 1,834 million) were acquired under the second trading line buyback program 2001 and are earmarked for cancellation. The Board of Directors will propose to the Annual General Meeting on 18 April 2002 to reduce the outstanding number of shares and the share capital by the number of shares purchased for cancellation. 81 UBS Group Financial Statements Financial Statements UBS Group Statement of Cash Flows CHF million For the year ended Cash flow from / (used in) operating activities Net profit Adjustments to reconcile net profit to cash flow from / (used in) operating activities Non-cash items included in net profit and other adjustments: Depreciation of property and equipment Amortization of goodwill and other intangible assets Credit loss expense / (recovery) Equity in income of associates Deferred tax expense Net loss / (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 and securities pledged as collateral Loans / due to 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 Net money market paper issued Net movements in treasury shares and treasury share contract activity Capital issuance Capital repayment by par value reduction Dividends paid Issuance of long-term debt Repayment of long-term debt Issuance of trust preferred securities Dividend payments to / and purchase from 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 the year Cash and cash equivalents, end of the year Cash and cash equivalents comprise: Cash and balances with central banks Money market paper 1 Due from banks maturing in less than three months Total 31.12.01 31.12.00 31.12.99 4,973 7,792 6,153 1,614 1,323 498 (72) 292 513 27,306 1,608 667 (130 ) (58 ) 544 (730 ) (915 ) (60,536) (81,054 ) (78,456) 42,813 (424) 80,006 (5,235) (1,742) 12,873 (467) 95 (2,021) 380 (5,770) (7,783) 11,553 12,381 6,923 50,762 3,313 (959 ) 11,697 (9,729 ) 669 (1,640 ) 335 (8,770 ) (19,135 ) 24,226 10,125 (6,038) 12 (683) 18,233 (18,477) 1,291 (461) 18,103 (304) 22,889 93,370 116,259 20,990 69,938 25,331 116,259 (647 ) 15 (3,928 ) 14,884 (24,640 ) 2,683 (73 ) (1,581 ) 112 (8,907 ) 102,277 93,370 2,979 66,454 23,937 93,370 1,517 340 956 (211) 479 (2,282) (5,298) (12,656) (49,956) 17,222 2,545 52,958 (7,366) (1,063) 3,338 (1,720) 3,782 (2,820) 1,880 356 1,478 13,128 (2,312) 9 (2,050) 12,661 (7,112) (689) 13,635 148 18,599 83,678 102,277 5,073 69,717 27,487 102,277 1 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial investments. 82 UBS Group Financial Statements Notes to the Financial Statements Notes to the Financial Statements Note 1 Summary of Significant Accounting Policies a) Basis of accounting UBS AG and subsidiaries (“UBS” or the “Group”) provide a broad range of financial services including advisory services, underwrit- ing, financing, market making, asset manage- ment, 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 account- ed for using the uniting of interests method of accounting. The consolidated financial statements of the Group (the “Financial Statements”) are prepared in accordance with International Accounting Standards and stated in Swiss francs (CHF), the currency of the country in which UBS AG is incorporated. On 12 February 2002 the Board of Directors approved them for issue. b) Use of estimates in the preparation of Financial Statements In preparing the Financial Statements, manage- ment is required to make estimates and assump- tions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available informa- tion and application of judgement are inherent in the formation of estimates. Actual results in the future could differ from such estimates and the differences may be material to the Financial Statements. c) Consolidation The Financial Statements comprise those of the parent company (UBS AG), its subsidiaries and certain special purpose entities, presented as a single economic entity. The effects of intra-group transactions are eliminated in preparing the Financial Statements. Subsidiaries and special purpose entities which are directly or indirectly controlled by the Group are consolidated. Sub- sidiaries acquired are consolidated from the date control is transferred to the Group. Subsidiaries to be divested are consolidated up to the date of disposal. Temporarily controlled entities that are acquired and held with a view to their subse- quent disposal, are recorded as Financial invest- ments. Assets held in an agency or fiduciary capacity are not assets of the Group and are not reported in the Financial Statements. Equity and net income attributable to minori- ty interests are shown separately in the Balance sheet and Income statement, respectively. Investments in associates in which the Group has a significant influence are accounted for under the equity method of accounting. Signifi- cant influence is normally evidenced when UBS owns 20% or more of a company’s voting rights. Investments in associates are initially recorded at cost and the carrying amount is increased or decreased to recognize the Group’s share of the investee’s profits or losses after the date of acqui- sition. The Group sponsors the formation of com- panies, which may or may not be directly or indirectly owned subsidiaries, for the purpose of asset securitization transactions and to accomplish certain narrow and well defined objectives. These companies may acquire assets directly or indirectly from UBS or its affiliates. Some of these companies are bankruptcy- remote entities whose assets are not available to satisfy the claims of creditors of the Group or any of its subsidiaries. Such companies are con- solidated in the Group’s Financial Statements when the substance of the relationship between the Group and the company indicate that the company is controlled by the Group. Certain transactions of consolidated entities meet the criteria for derecognition of financial assets. Derecognition of a financial asset takes place when the Group loses control of the contractual rights that comprise the financial asset. These transactions do not affect the consolidation status of an entity. 83 UBS Group Financial Statements Notes to the Financial Statements d) 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 cur- rency monetary assets and liabilities, are recog- nized in the income statement. Exchange differences on non-monetary finan- cial assets are a component of the change in their fair value. Depending on the classification of a non-monetary financial asset, exchange differ- ences are either recognized in the income state- ment (applicable for example for equity securi- ties held for trading), or within Shareholder’s equity if non-monetary financial assets are classi- fied as available-for-sale financial investments. 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. e) Business and geographical segments The Group is organized on a worldwide basis into Business Groups and the Corporate Center. This organizational structure is the basis upon which the Group reports its primary segment information. Segment income, segment expenses and seg- ment performance include transfers between business segments and between geographical segments. Such transfers are accounted for at prices in line with charges to unaffiliated cus- tomers for similar services. f) Cash and cash equivalents Cash and cash equivalents consist of Cash and balances with central banks, balances included in Due from banks that mature in less than three months, and Money market paper included in Trading portfolio assets and Financial investments. been provided. Portfolio and other management, advisory and other service fees are recognized based on the terms of the applicable service con- tracts. Asset management fees related to invest- ment funds are recognized ratably over the period the service is provided. The same principle is applied for fees earned for wealth management, financial planning and custody services that are continuously provided over an extended period of time. Transaction-related fees earned from merger and acquisition and other advisory services, secu- rities underwriting, fund raising, and from other investment banking and similar services that have a non-recurring character, are recognized at the time the service has been completed. h) Securities borrowing and lending Securities borrowed and securities lent are recorded at the amount of cash collateral advanced or received. The Group monitors the market value of the securities borrowed and lent on a daily basis and calls for additional collateral when appropriate. Fees and interest received or paid are record- ed as interest income or interest expense, on an accrual basis. i) Repurchase and reverse repurchase transactions Securities purchased under agreements to resell (reverse repurchase agreements) and securities sold under agreements to repurchase (repurchase agree- ments) are generally treated as collateralized financ- ing transactions and are carried at the amounts at which the securities were acquired or sold, plus accrued interest. The Group monitors the market value of the underlying securities, (which collateral- ize the related receivables) on a daily basis and requests additional collateral when appropriate. Interest earned on reverse repurchase agree- ments and interest incurred on repurchase agree- ments is recognized as interest income and inter- est expense, over the life of each agreement. The Group offsets reverse repurchase agree- ments and repurchase agreements with the same counterparty for transactions covered by legally enforceable master netting agreements when net or simultaneous settlement is intended. g) Fee income Brokerage fees earned from executing securities transactions are recorded when the service has j) Trading portfolio Trading portfolio assets consist of money market paper, other debt instruments and equity instru- 84 ments as well as traded loans and precious metals which are owned by the Group (“long” positions). Obligations to deliver trading securi- ties sold but not yet purchased are reported as Trading portfolio liabilities. Trading portfolio liabilities consist of money market paper, other debt instruments and equity instruments which the Group has sold to third parties but does not own (“short” positions). The trading portfolio is carried at fair value, which includes valuation allowances for instru- ments, for which liquid markets do not exist, to adjust primarily for credit and settlement risks. Gains and losses realized on disposal or redemp- tion and unrealized gains and losses from changes in the fair value of trading portfolio assets or liabilities are reported as Net trading income. Interest and dividend income and expense on trading portfolio assets or liabilities are included in Interest and dividend income or Interest and dividend expense, respectively. When the Group becomes party to a contract classified in its trading portfolio, it recognizes from that date (trade date) in the income state- ment any unrealized profits and losses arising from revaluing that contract to fair value. On a date subsequent to the trade date, the terms of spot and forward trading transactions are ful- filled (settlement date) and a resulting financial asset or liability is recognized on the balance sheet at the fair value of the consideration given or received plus the change in fair value of the contract since the trade date. The determination of fair values of trading portfolio assets or liabilities is based on quoted market prices in active markets or dealer price quotations, pricing models (using assumptions based on market and economic conditions), or management’s estimates, as applicable. k) Loans originated by the Group Loans originated by the Group include loans where money is provided directly to the borrower, other than those that are originated with the intent to be sold immediately or in the short term, which are recorded as Trading portfolio assets. A participation in a loan from another lender is considered to be originated by the Group, provid- ed it is funded on the date the loan is originated by the lender. Purchased loans are either classified as Financial investments available-for-sale, or as Trading portfolio assets, as appropriate. Loans originated by the Group are recognized when cash is advanced to borrowers. They are initially recorded at cost, which is the fair value of the cash given to originate the loan, including any transaction costs, and are subsequently measured at amortized cost using the effective interest rate method. l) Allowance and provision for credit losses An allowance for credit losses is established if there is objective evidence that the Group will be unable to collect all amounts due. The allowance and provision for credit losses repre- sents management’s estimate of probable losses inherent in the loan portfolio and other lending- related commitments. Such commitments nor- mally include letters of credit, guarantees and commitments to extend credit. However, credit risk exposures are also inherent in other instru- ments. The allowance for credit losses is reported as a reduction of loans whereas the provision for credit losses for lending related commitments is reported in Other liabilities. Additions to the allowances and provisions for credit losses are made through the credit loss expense account. Allowance and provision for credit exposures are evaluated at a counterparty-specific and/or country-specific level based on following prin- ciples: 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 for credit losses are established for the difference between the carrying amount and its estimated recoverable amount. A loan is considered impaired when manage- ment determines that it is probable that the Group will not be able to collect all amounts due according to the original contractual terms, unless such loans are secured, in process of col- lection, or other factors exist which make the Group expect that all future cash flows accord- ing to the original terms of the contract will be received. An impaired loan is classified as non-performing when the contractual payments of principal and/or interest are in arrears for 90 days or more. 85 UBS Group Financial Statements Notes to the Financial Statements When a loan has been identified as impaired, the carrying amount of the loan is reduced by recording specific allowances for credit losses to its estimated recoverable amount, which is the present value of expected future cash flows dis- counted at the original effective interest rate of the loan. Upon impairment the accrual of inter- est income based on the original terms of the loan is discontinued. The increase of the present value of impaired loans due to the passage of time is reported as interest income. All impaired loans are reviewed and analyzed at least annually. Any subsequent changes to the amounts and timing of the expected future cash flows compared to the prior estimates will result in a change in the allowance for credit losses and be charged to credit loss expense. If there are indications of significant probable losses in the portfolio that have not been specifically identi- fied, allowances for credit losses would also be provided for on a portfolio basis. An allowance for an impairment is reversed only when the credit quality has improved such that there is reasonable assurance of timely col- lection of principal and interest in accordance with the original contractual terms of the loan agreement. 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 for credit losses and reduce the principal amount of a loan. Recover- ies in part or in full of amounts previously writ- ten off are credited to credit loss expense. 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. Specific country allowances are established based on this assessment, and exclude exposures addressed in counterparty-specific allowances. m) Securitizations The Group securitizes various consumer and commercial financial assets, which generally results in the sale of these assets to special-pur- pose vehicles which, in turn issue securities to investors. Financial assets are partially or wholly derecognized when the Group gives up control of the contractual rights that comprise the finan- cial asset. Interests in the securitized financial assets may be retained in the form of senior or subordi- nated tranches, interest-only strips or other residual interests (“retained interests”). Retained interests are primarily recorded in Trading port- folio assets and carried at fair value. The deter- mination of fair values of retained interest is gen- erally based on listed market prices or by deter- mining the present value of expected future cash flows using pricing models that incorporate management’s best estimates of critical assump- tions which may include credit losses, discount rates, yield curves and other factors. Gains or losses on securitization depend in part on the carrying amount of the transferred financial assets, allocated between the financial assets derecognized and the retained interests based on their relative fair values at the date of the transfer. Gains or losses on securitization are recorded in Net trading income. n) Financial investments Financial investments are classified as available- for-sale and recorded on a settlement date basis. Management determines the appropriate classi- fication of its investments at the time of the pur- chase. Financial investments consist of money market paper, other debt instruments and equity instruments, including private equity investments. Available-for-sale financial investments may be sold in response to needs for liquidity or changes in interest rates, foreign exchange rates or equity prices. Available-for-sale financial investments are carried at fair value. Unrealized gains or losses on available-for-sale investments are reported in Shareholders’ equity, net of applicable taxes, until such investment is sold, collected or other- wise disposed of, or until such investment is determined to be impaired. If an available-for- sale investment is determined to be impaired, the cumulative unrealized gain or loss previously recognized in Shareholders’ equity is included in net profit or loss for the period and reported in Other income. A financial investment is consid- ered impaired if its carrying value exceeds the recoverable amount. For non-quoted invest- ments, the recoverable amount is determined by applying recognized valuation techniques. Quot- ed financial investments are considered impaired 86 if the decline in market price below cost is of such a magnitude that recovery of the cost value cannot be reasonably expected within the fore- seeable future. On disposal of an available-for-sale invest- ment, the accumulated unrealized gain or loss included in Shareholders’ equity is transferred to net profit or loss for the period and reported in Other income. Gains and losses on disposal are determined using the average cost method. The determination of fair values of available- for-sale financial investments is generally based on quoted market prices in active markets, dealer price quotations, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment or based upon review of the investee’s financial results, condition and prospects including comparisons to similar companies for which quoted market prices are available. Interest and dividend income on available-for- sale financial investments is included in Interest and dividend income from financial investments. o) Property and equipment Property and equipment includes bank occupied properties, investment properties, software, IT and communication and other machines and equipment. Bank-occupied property is defined as property held by the Group for use in the supply of servic- es or for administrative purposes whereas invest- ment property is defined as property held by the Group to earn rentals and/or for capital apprecia- tion. If a property of the Group includes a por- tion that is bank occupied and another portion that is held to earn rentals or for capital appreci- ation, the classification is based on whether or not these portions can be sold separately. If both portions of the property can be sold separately these portions are accounted for as bank-occu- pied property and investment property, respec- tively. If the portions can not be sold separately, the whole property is classified as bank-occupied property unless the portion used by the bank is minor. The classification of property is reviewed on a regular basis to account for major changes in its usage. In 2001, investment properties with a carrying value of CHF 350 million (cost CHF 447 million less accumulated depreciation of CHF 97 million) have been reclassified to Bank occupied property. Assets with a value of CHF 144 million related to the PaineWebber acquisi- tion were transferred from Other machines and equipment to IT, software and communication, and CHF 30 million for leasehold improvements were reclassified from Investment properties to Other machines and equipment. Software development costs are capitalized when they meet certain criteria relating to identi- fiability, it is probable that future economic ben- efits will flow to the enterprise, and the cost can be measured reliably. Internally developed soft- ware meeting these criteria is classified in Prop- erty and equipment on the balance sheet. Property and equipment is carried at cost less accumulated depreciation and accumulated impairment losses. Property and equipment is periodically reviewed for impairment. Property and equipment is depreciated on a straight-line basis over its estimated useful life as follows: Properties Not exceeding 50 years Other machines and equipment Not exceeding 10 years IT, software and communication Not exceeding 3 years Property formerly bank-occupied or leased to third parties under an operating lease, which the Group has decided to dispose of and foreclosed property are defined as Properties held for resale and disclosed in Other assets. They are carried at the lower of cost or recoverable value. During 2001, properties with a carrying value of CHF 293 million (cost CHF 482 million less accumu- lated depreciation of CHF 189 million) have been reclassified from Investment property to Property held for resale. p) Goodwill and other intangible assets Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of net identifiable assets of the acquired entity at the date of acquisition. Other intangible assets are comprised of sepa- rately identifiable intangible items arising from acquisitions and certain purchased trademarks and similar items. Goodwill and other intangible assets are recognized as assets and are amortized using the straight-line basis over their estimated useful economic life, not exceeding 20 years. At each balance sheet date, goodwill and other intangible assets are reviewed for indications of impair- 87 UBS Group Financial Statements Notes to the Financial Statements ment. If such indications exist an analysis is per- formed to assess whether the carrying amount of goodwill or other intangible assets is fully recov- erable. A write-down is made if the carrying amount exceeds the recoverable amount. q) Income taxes Income tax payable on profits, based on the applicable tax laws in each jurisdiction, is recog- nized as an expense in the period in which prof- its arise. The tax effects of income tax losses available for carry-forward are recognized as an asset when it is probable that future taxable profit will be available against which those loss- es 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 recog- nized 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 in the period in which the asset will be realized or the liability will be settled based on enacted rates. 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 income tax benefit or expense except for deferred taxes recognized or disposed of upon the acquisition or disposal of a subsidiary. r) Debt issued Debt issued is initially measured at cost, which is the fair value of the consideration received, net of transaction costs incurred. Subsequent measure- ment is at amortized cost, using the effective interest rate method to amortize cost at inception to the redemption value over the life of the debt. Combined debt instruments that are related to non-UBS AG equity instruments, foreign exchange or credit instruments or indices are considered structured instruments. The embed- ded derivative is separated from the host con- tract and accounted for as a stand alone deriva- tive if the criteria for separation are met. The host contract is subsequently measured at amor- tized cost. Debt instruments with embedded derivatives that are related to UBS AG shares or to a deriva- tive instrument that has UBS AG shares as underlying are separated into a liability and an equity component at issue date, if they will be physically settled. Initially, a portion of the net proceeds from issuing the combined debt instru- ment are allocated to the equity component based on its fair value and reported in Share pre- mium account. The determination of fair values is generally based on listed market prices or option pricing models. Subsequent changes in fair value of the separated equity component are not recognized. The remaining amount is allo- cated to the liability component and reported as Debt issued. The liability component is subse- quently measured at amortized cost. However, if the combined instrument or the embedded derivative related to UBS AG shares is cash settled or the holder of the hybrid instru- ment has the right to require cash settlement, then the separated derivative is accounted for as a trading instrument with changes in fair value recorded in income. It is the Group’s policy to hedge the fixed interest rate risk on debt issues (except for cer- tain subordinated long-term notes issues, see Note 30a) and apply fair value hedge account- ing. The effect is such that when hedge account- ing is applied to fixed rate debt instruments, the carrying value of debt issues are adjusted for changes in fair value related to the hedged expo- sure rather than carried at amortized cost. See v) Derivative instruments for further discussion. Interest expense on debt instruments is included in Interest on debt issued. s) Treasury shares UBS AG shares held by the Group are classified in Shareholders’ equity as Treasury shares and accounted for at weighted average cost. The dif- ference between the proceeds from sales of treas- ury shares and their cost (net of tax, if any) is classified as Share premium. Contracts that require physical settlement or net share settlement in UBS AG shares or provide the Group with a choice to physically settle are classified as Shareholders’ equity and reported as Share premium. Upon settlement of such con- 88 tracts the proceeds received less cost (net of tax, if any), are reported as Share premium. t) Retirement benefits The Group sponsors a number of retirement benefit 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- fits. Group contributions to defined contribution plans are expensed when employees have ren- dered services in exchange for such contribu- tions, generally in the year of contribution. The Group uses the projected unit credit actuar- ial method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. The principal actuarial assumptions used by the actuary are set out in Note 32. 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 em- ployees participating in the plans. u) Equity participation plans The Group provides various equity participation plans in the form of stock plans and stock option plans. UBS generally uses the intrinsic value based method of accounting for such awards. Consequently, compensation expense is meas- ured as the difference between the quoted mar- ket price of the stock at the measurement date less the amount, if any, that the employee is required to pay, or by the excess of stock price over option strike price, if any. The Group’s pol- icy is to recognize compensation expense for equity awards at the date of grant. v) Derivative instruments All derivative instruments of the Group are car- ried at fair value on the balance sheet and are reported as Positive or Negative replacement val- ues. Fair values are obtained from quoted mar- ket prices, dealer price quotations, discounted cash flow models and option pricing models, which consider current market and contractual prices for the underlying instrument, as well as time value of money, yield curve and volatility of the underlying. The Group offsets positive and negative replacement values with the same counterparty for transactions covered by legally enforceable master netting agreements. Where the Group enters into derivatives for trading purposes, realized and unrealized gains and losses are recognized in Net trading income. The Group also uses derivative instruments as part of its asset and liability management activi- ties to manage exposures to interest rate risks, credit risks and foreign currency risks. The Group applies either fair value or cash flow hedge accounting when it meets the specified criteria to obtain hedge accounting treatment. Derivative instruments not qualifying for hedge accounting are treated as derivative instruments used for trad- ing purposes. The Group has entered into eco- nomic hedges of credit risk within the loan portfo- lio using credit default swaps to which it does not apply hedge accounting. However, in the event the Group recognizes an impairment on a loan that is economically hedged in this way, the gain on the credit default swap is offset against Credit loss expense/recovery. See Note 24 for additional information. In a qualifying hedge of exposures to changes in fair value, the change in fair value of the hedg- ing derivative is recognized in net profit and loss. The change in fair value of the hedged item attributable to the hedged risks adjusts the carry- ing value of the hedged item and is also recog- nized in net profit or loss. If the hedge relationship is terminated, the unamortized fair value adjustment of the hedged item is amortized to net profit or loss over the original hedge term or recognized in income if the hedged item is derecognized. In a qualifying cash flow hedge, the effective portion of the gain or loss on the hedging derivative is recognized in Shareholders’ equity while the ineffective portion is reported in net profit or loss. When the hedged firm commitment or forecasted transaction results in income or expense, then the associated gain or loss on the hedging derivative is removed from Shareholders’ equity and included in net profit 89 UBS Group Financial Statements Notes to the Financial Statements or loss in the same period during which the fore- casted transaction affects net profit or loss. If the forecasted transaction is no longer expected to occur, the cumulative gain or loss on the hedging derivative is recognized immediately in net profit or loss. If the hedge relationship is terminated, the cumulative gain or loss on the hedging deriv- ative that initially had been reported in Share- holders’ equity when the hedge was effective, remains in Shareholders’ equity until the com- mitted or forecasted transaction occurs, at which point it is reported in net profit or loss. In some cases, a derivative may be part of a hybrid instrument that includes both a derivative and a host contract. This is known as an embed- ded derivative. An embedded derivative is separat- ed from the host contract and accounted for as a stand alone derivative instrument if and only if the following conditions are met: the economic char- acteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, the host contract is not carried at fair value with changes in fair value reported in net profit or loss, and the embedded derivative meets the definition of a derivative. w) Comparability Certain amounts have been reclassified from pre- vious years to conform to the 2001 presentation. The Group adopted the following revised or new International Accounting Standards and Interpretations of the Standing Interpretation Committee (SIC) in 2001: IAS 12 (Revised) Income Taxes IAS 39 IAS 40 Interpretation SIC 17 Financial Instruments: Recognition and Measurement Investment Property Equity – Costs of an Equity Transaction Interpretation SIC 18 Consistency – Alternative Methods Interpretation SIC 19 Interpretation SIC 22 Interpretation SIC 24 Reporting Currency – Measurement and Presentation of Financial Statements under IAS 21 and IAS 29 Business Combinations – Subsequent Adjustment of Fair Values and Goodwill Initially Reported Earnings Per Share – Financial Instruments and Other Contracts that May Be Settled in Shares Additional SIC interpretations became effec- tive during 2001, which are not applicable to the Group. The implementation of the above standards and interpretations had no material impact on the Group’s Financial Statements in 2001 except for the following: IAS 39, Recognition and measurement of financial instruments The Group adopted IAS 39 prospectively as at 1 January 2001. The Standard provides compre- hensive guidance on accounting for financial instruments. Upon adoption, the Group decided to record unrealized gains and losses arising from changes in the fair value of available-for-sale financial investments directly in Shareholders’ equity until such investment is disposed of or until such investment is determined to be impaired. As a result of the adoption of IAS 39, the fol- lowing adjustments or changes in classification occurred: Gains/losses not recognized in the income statement is a new component of Share- holders’ equity as at 1 January 2001. It includes unrealized gains and losses on available for sale financial investments and on derivatives designated as cash flow hedges as well as Foreign currency translation. The opening adjustment as at 1 January 2001 to financial investments recorded as available for sale was a net unreal- ized gain of CHF 1,769 million (CHF 1,577 mil- lion net of taxes), and for derivatives designated as cash flow hedges an unrealized net loss of CHF 506 million (CHF 380 million net of taxes). Available-for-sale financial investments were previously carried at the lower of cost or market value and private equity investments were car- ried at cost less write-downs for impairments in value. Reductions of the carrying amount of available-for-sale financial investments and pri- vate equity investments and reversals of such reductions as well as gains and losses on disposal are included in Other income. As at 1 January 2001 these financial investments are now classi- fied as available-for-sale financial investments and carried at fair value. Changes in fair value are reported in Gains/losses not recognized in the income statement within Shareholders’ equity until these investments are disposed of. At the time an available-for-sale financial investment is 90 determined to be impaired, the cumulative unre- alized loss previously recognized in Share- holders’ equity is included in net profit or loss for the period. The opening adjustment to Retained earnings, a net debit of CHF 61 million as at 1 January 2001, consisted of CHF 19 million reflecting the impact of adopting the new hedge accounting rules and CHF 42 million reflecting the impact of remeasuring assets to either amortized cost or fair value as required under the Standard. Properties held for resale include properties formerly bank-occupied or leased to third parties under an operating lease, which the Group has decided to dispose of, and foreclosed properties which the Group received in satisfaction of a secured loan and which it does not intend to occupy. As at 1 January 2001, Properties held for resale in the amount of CHF 984 million were reclassified from Financial investments to Other assets. Comparative amounts have been reclassified accordingly. Money market paper and Money market paper issued Money market paper held for trading is now disclosed within Trading portfolio assets and Money market paper held as available-for-sale is now disclosed within Financial investments. Money market paper issued is disclosed within Debt issued. Interest income on Money market paper held as available-for-sale is disclosed as Interest and dividend income from financial investments. These changes became effective as at 1 January 2001 and all prior periods present- ed have been reclassified. The reclassification of Money market paper in the amount of CHF 66,454 million as at 31 December 2000 resulted in an increase of Trading portfolio assets by CHF 62,292 million and Financial investments by CHF 4,162 million for the year ended 31 December 2000. Money market paper issued in the amount of CHF 74,780 million as at 31 December 2000 was reclassified to Debt issued. 91 UBS Group Financial Statements Notes to the Financial Statements Note 2a Segment Reporting by Business Group UBS is organized into three Business Groups: UBS Switzerland, UBS Warburg and UBS Asset Management, and our Corporate Center. UBS Switzerland UBS Switzerland is the leading bank in Switzer- land. It is made up of two business units. The Private Banking business unit offers a comprehensive range of products and services individually tailored for wealthy clients, from offices around the world. It is the world’s largest private banking business. Within Switzerland, the Private and Corpo- rate Clients business unit provides a complete set of banking and securities services for indi- vidual and corporate clients, focused foremost on customer service excellence, profitability and growth via multi-channel distribution. The two business units share technolog- ical and physical infrastructure, and have joint departments supporting major functions such as e-commerce, financial planning and wealth management, and investment policy and strategy. UBS Asset Management UBS Asset Management is a leading institutional asset manager and mutual fund provider, offer- ing a broad range of asset management services and products for institutional and individual clients across the world. UBS Warburg UBS Warburg operates globally as a client- driven securities, investment banking and wealth management firm. It is made up of three business units. Corporate and Institutional Clients provides innovative products, top-quality research and advice, and comprehensive access to the world’s capital markets, for both its own corporate and institutional clients and for the other parts of the UBS Group. UBS Capital is the private equity business unit of UBS Warburg, investing UBS and third party funds, primarily in unlisted companies. UBS PaineWebber, one of the top US wealth managers, became part of UBS Warburg in November 2000. On 1 January 2002, UBS PaineWebber was separated from UBS Warburg and in future years will be reported as a separate Business Group within UBS. Corporate Center UBS’s Business Groups are accountable for their results and enjoy considerable autonomy in pur- suing their business objectives. The Corporate Center ensures that the Business Groups operate as a coherent and effective whole with a common set of values and principles. Corporate Center’s remit covers areas such as risk management, finan- cial reporting, marketing and communications, funding, capital and balance sheet management and management of foreign currency earnings. 92 Note 2a Segment Reporting by Business Group (continued) The Business Group results are presented on a management reporting basis. Consequently, internal charges and transfer pricing adjustments have been reflected in the performance of each business. Revenue sharing agreements are used to allocate external customer revenues to a Business Group on a reasonable basis. Transactions between Business Groups are conducted at arm’s length. The seg- ment reporting for all periods presented reflects the changes in business unit structure implemented 1 January 2001. For the year ended 31 December 2001 UBS Switzerland UBS Asset Management Corporate Center UBS Group CHF million Income Credit loss expense 1 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Tax expense Net profit before minority interests Minority interests Net profit 13,475 (604 ) 12,871 4,764 2,600 616 41 8,021 4,850 UBS Warburg 21,349 (130 ) 21,219 13,515 4,260 580 991 19,346 2,110 0 2,110 1,003 564 46 266 1,879 678 236 914 546 207 372 25 1,150 231 1,873 (236) 37,612 (498) 37,114 19,828 7,631 1,614 1,323 30,396 6,718 1,401 5,317 (344) 4,973 Other information as at 31 December 2001 2 Total assets Total liabilities and minority interests Capital expenditure 313,389 304,875 540 5,988 4,638 37 1,045,297 1,022,907 633 (111,377 ) (122,653 ) 811 1,253,297 1,209,767 2,021 1 In order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the IAS actual net credit loss expense are reported for each Business Group. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures and the IAS actual net credit loss expense recorded at Group level for financial reporting purposes is reported in the Corporate Center. The Business Group breakdown of the net credit loss expense for financial reporting purposes of CHF 498 million for the year ended 31 December 2001 is as follows: UBS Switzerland CHF 123 million, UBS Warburg CHF 375 million. 2 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center. 93 UBS Group Financial Statements Notes to the Financial Statements Note 2a Segment Reporting by Business Group (continued) For the year ended 31 December 2000 CHF million Income Credit loss recovery 1 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Tax expense Net profit before minority interests Minority interests Net profit UBS UBS Asset Switzerland Management Corporate Center UBS Group UBS Warburg 19,590 (246 ) 19,344 10,618 3,196 606 290 14,710 1,953 0 1,953 880 439 49 263 1,631 358 1,161 1,519 522 431 320 44 1,317 322 4,634 202 14,371 (785 ) 13,586 5,143 2,699 633 70 8,545 5,041 36,272 130 36,402 17,163 6,765 1,608 667 26,203 10,199 2,320 7,879 (87) 7,792 Other information as at 31 December 2000 2 Total assets Total liabilities and minority interests 281,780 272,134 6,727 5,513 870,608 846,451 (71,563 ) (81,379 ) 1,087,552 1,042,719 1 In order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the IAS actual net credit loss expense are reported for each Business Group. 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 and the IAS actual net credit loss expense recorded at Group level for financial reporting purposes is reported in the Corporate Center. The Business Group breakdown of the net credit loss recovery for finan- cial reporting purposes of CHF 130 million for the year ended 31 December 2000 is as follows: UBS Switzerland CHF 695 million recovery, UBS War- burg CHF 565 million expense. 2 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center. For the year ended 31 December 1999 CHF million Income Credit loss expense 1 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Tax expense Net profit before minority interests Minority interests Net profit UBS UBS Asset Switzerland Management UBS Warburg Corporate Center UBS Group 12,884 (1,071 ) 11,813 4,882 2,450 475 38 7,845 3,968 1,369 0 1,369 516 271 32 113 932 437 13,118 (333 ) 12,785 7,087 2,538 644 139 10,408 2,010 448 2,458 92 839 366 50 1,347 2,377 1,111 29,381 (956) 28,425 12,577 6,098 1,517 340 20,532 7,893 1,686 6,207 (54) 6,153 Other information as at 31 December 1999 2 Total assets Total liabilities and minority interests 254,577 270,137 10,451 4,614 719,568 693,633 (88,040 ) (102,436 ) 896,556 865,948 1 In order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the IAS actual net credit loss expense are reported for each Business Group. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures and the IAS actual net credit loss expense recorded at Group level for financial reporting purposes is reported in the Corporate Center. The Business Group breakdown of the net credit loss expense for financial reporting purposes of CHF 956 million for the year ended 31 December 1999 is as follows: UBS Switzerland 2 The funding surplus or requirement is reflected in each Business Group CHF 965 million expense and Corporate Center CHF 9 million recovery. and adjusted in Corporate Center. 94 Note 2b Segment Reporting by Geographic Location The geographic analysis of total assets is based on customer domicile whereas operating income and capital expenditure is based on the location of the office in which the transactions and assets are recorded. Because of the global nature of financial markets the Group’s business is managed on an integrated basis worldwide, with a view to profitability by product line. The geographical analysis of operating income, total assets, and capital expenditure is provided in order to comply with Inter- national Accounting Standards, and does not reflect the way the Group is managed. Management believes that analysis by Business Group, as shown in Note 2a to these Financial Statements, is a more meaningful representation of the way in which the Group is managed. For the year ended 31 December 2001 Total operating income Total assets Capital expenditure CHF million Share % CHF million Share % CHF million Share % 14,223 7,411 13,587 1,859 34 37,114 38 20 37 5 0 195,321 236,775 691,157 126,725 3,319 16 19 55 10 0 100 1,253,297 100 1,039 303 630 48 1 2,021 52 15 31 2 0 100 Total operating income Total assets Capital expenditure CHF million Share % CHF million Share % CHF million Share % 15,836 10,907 6,976 2,626 57 36,402 44 30 19 7 0 211,851 305,342 474,617 87,831 7,911 19 28 44 8 1 100 1,087,552 100 1,135 311 1,169 36 8 2,659 43 12 44 1 0 100 Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Total For the year ended 31 December 2000 Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Total For the year ended 31 December 1999 Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Total Total operating income Total assets Capital expenditure CHF million Share % CHF million Share % CHF million Share % 14,976 7,626 3,861 1,945 17 28,425 52 27 14 7 0 207,702 303,365 281,974 96,469 7,046 23 34 31 11 1 100 896,556 100 1,990 356 386 87 1 2,820 70 13 14 3 0 100 95 UBS Group Financial Statements Notes to the Financial Statements Income Statement Note 3 Net Interest Income CHF million For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Interest income Interest earned on loans and advances 1 Interest earned on securities borrowed and reverse repurchase agreements Interest and dividend income from financial investments 2 Interest and dividend income from trading portfolio Total Interest expense Interest on amounts due to banks and customers Interest on securities lent and repurchase agreements Interest and dividend expense from trading portfolio Interest on debt issued Total 16,955 20,413 18,340 18,337 453 16,532 52,277 14,088 14,517 7,815 7,816 44,236 19,088 402 11,842 51,745 15,660 14,915 5,309 7,731 43,615 11,422 244 5,598 35,604 13,845 8,446 2,070 5,334 29,695 Net interest income 8,041 8,130 5,909 (17) (4) 13 40 1 (10) (3) 47 1 1 (1) 1 Includes interest income from finance leasing and other interest income. All prior year figures have been restated accordingly. 2 Includes inter- est income from money market paper available for sale which was previously disclosed as other interest income. All prior year figures have been restated accordingly. Note 4 Net Fee and Commission Income CHF million For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Underwriting fees Corporate finance fees Brokerage fees 1 Investment fund fees Fiduciary fees Custodian fees Portfolio and other management and advisory fees 1 Insurance-related and other fees 1 2,158 1,339 6,445 4,276 355 1,356 4,650 538 1,434 1,772 5,742 2,821 351 1,439 3,666 111 905 1,298 3,934 1,915 317 1,583 2,612 57 Total Security trading and investment activity fees 21,117 17,336 12,621 Credit-related fees and commissions Commission income from other services 307 946 310 802 372 765 Total fee and commission income 22,370 18,448 13,758 Brokerage fees paid Other Total fee and commission expense 1,281 878 2,159 1,084 661 1,745 795 356 1,151 Net fee and commission income 20,211 16,703 12,607 50 (24) 12 52 1 (6) 27 385 22 (1) 18 21 18 33 24 21 1 Fee and commission income from insurance products now reported in Insurance-related and other fees was previously reported in Brokerage fees and in Portfolio and other management and advisory fees. All prior year figures have been restated accordingly. 96 Note 5 Net Trading Income Foreign exchange net trading income include gains and losses from spot and forward contracts, options, futures, and translation of foreign currency assets and liabilities, bank notes, precious metals, and commodities. Fixed income net trading income includes the results of making markets in instruments of both developed and emerging countries in government securities, corporate debt secu- rities, money market instruments, interest rate and currency swaps, options, and other derivatives. Equities net trading income includes the results of making markets globally in equity securities and equity derivatives such as swaps, options, futures, and forward contracts. CHF million For the year ended Foreign exchange 1 Fixed income Equities Net trading income 31.12.01 31.12.00 31.12.99 % change from 31.12.00 2,045 2,731 4,026 8,802 1,287 912 7,754 9,953 1,108 2,603 4,008 7,719 59 199 (48) (12) 1 Includes other trading income such as banknotes, precious metals and commodities. Note 6 Other Income CHF million For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Gains / losses from disposal of associates and subsidiaries Net gain from disposal of: Consolidated subsidiaries Investments in associates Total Financial Investments available for sale Net gain from disposal of: Private equity investments Other financial investments Impairment charges on private equity investments and other financial investments Total Net income from investments in property Equity in income of associates Other 1 Total other income 1 Includes income from properties held for disposal. Note 7 Personnel Expenses CHF million For the year ended Salaries and bonuses Contractors Insurance and social contributions Contribution to retirement plans Employee share plans Other personnel expenses Total personnel expenses 3 0 3 454 256 (1,294) (584) 68 72 999 558 57 26 83 919 162 (507 ) 574 96 58 675 8 1,813 1,821 374 180 (102 ) 452 (20 ) 211 682 1,486 3,146 (95) (100) (96) (51) 58 155 (29) 24 48 (62) 31.12.01 31.12.00 31.12.99 % change from 31.12.00 15,238 729 984 603 103 2,171 19,828 13,523 725 959 475 97 1,384 17,163 9,872 886 717 8 151 943 12,577 13 1 3 27 6 57 16 97 UBS Group Financial Statements Notes to the Financial Statements Note 8 General and Administrative Expenses CHF million For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Occupancy Rent and maintenance of machines and equipment Telecommunications and postage Administration Marketing and public relations Travel and entertainment Professional fees IT and other outsourcing Other Total general and administrative expenses 1,314 632 1,213 906 574 700 667 1,224 401 7,631 979 520 914 750 480 656 660 1,246 560 6,765 847 410 756 784 335 552 526 1,289 599 6,098 34 22 33 21 20 7 1 (2) (28) 13 Note 9 Earnings per Share (EPS) and Outstanding Shares CHF million For the year ended 31.12.01 31.12.00 31.12.99 % change from 31.12.00 Earnings (CHF million) Net profit Net profit before goodwill amortization 1 Net profit for diluted EPS Net profit before goodwill amortization for diluted EPS 1 4,973 6,296 4,8742 6,1972 7,792 8,459 7,7782 8,4452 6,153 6,493 6,153 6,493 Weighted average shares outstanding Weighted average shares outstanding Potentially dilutive ordinary shares resulting from outstanding options, warrants and convertible debt securities 3 Weighted average shares outstanding for diluted EPS Earnings per share (CHF) Basic EPS Basic EPS before goodwill amortization 1 Diluted EPS Diluted EPS before goodwill amortization 1 1,266,038,193 1,209,087,927 1,214,227,446 22,539,745 16,489,773 10,898,010 1,288,577,938 1,225,577,700 1,225,125,456 3.93 4.97 3.78 4.81 6.44 7.00 6.35 6.89 5.07 5.35 5.02 5.30 (36) (26) (37) (27) 5 37 5 (39) (29) (40) (30) 2 Net profit has been adjusted for the dilutive impact of own equity derivative 1 Excludes amortization of goodwill and other intangible assets. 3 Total equivalent shares outstanding on options that were not dilutive for the respective periods but could potentially dilute earnings activity. per share in the future were 28,741,886, 27,524,280 and 72,135,783 for the years ended 31 December 2001, 31 December 2000 and 31 December 1999, respectively. Shares outstanding As at Total ordinary shares issued Own shares to be delivered Second trading line treasury shares (2000 program) (2001 program) Other treasury shares Total treasury shares Outstanding shares 31.12.01 31.12.00 31.12.99 % change from 31.12.00 1,281,717,499 1,333,139,187 28,444,788 1,292,679,486 (4) 55,265,349 23,064,356 18,190,595 0 110,621,142 41,254,951 55,265,349 110,621,142 1,240,462,548 1,306,318,626 1,182,058,344 (25) (5) All shares and earnings per share figures have been restated for the 3 for 1 share split which took place on 16 July 2001. 98 Balance Sheet: Assets Note 10a Due from Banks and Loans to Customers By type of exposure 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 By geographical region (based on the location of the borrower) CHF million Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Subtotal Allowance for credit losses Net due from banks and loans to customers By type of collateral CHF million Secured by real estate Collateralized by securities Guarantees and other collateral Unsecured Subtotal Allowance for credit losses Net due from banks and loans to customers 31.12.01 31.12.00 28,261 (735) 27,526 126,211 107,512 233,723 (7,178) 226,545 254,071 249 31.12.01 158,996 42,279 42,809 15,986 1,914 261,984 (7,913) 254,071 31.12.01 128,259 30,635 20,217 82,873 261,984 (7,913) 254,071 30,064 (917) 29,147 120,554 133,898 254,452 (9,610) 244,842 273,989 393 31.12.00 164,645 46,882 52,939 16,504 3,546 284,516 (10,527) 273,989 31.12.00 122,898 37,714 28,373 95,531 284,516 (10,527) 273,989 99 UBS Group Financial Statements Notes to the Financial Statements Note 10b Allowances and Provisions for Credit Losses CHF million Specific allowances Country risk allowances and provisions Total 31.12.01 Total 31.12.00 Balance at the beginning of the year Write-offs Recoveries Increase / (decrease) in credit loss allowance and provision Foreign currency translation and other adjustments Balance at the end of the year 9,289 (2,967) 81 756 53 7,212 1,292 (41) 0 (258) 13 1,006 10,581 (3,008) 81 498 66 8,218 13,398 (2,995) 163 (130) 145 10,581 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 allowances and provisions for credit losses Note 10c Impaired Loans 31.12.01 31.12.00 735 7,178 7,913 305 8,218 917 9,610 10,527 54 10,581 A loan is classified as impaired if the book value of the claim exceeds the present value of the cash flows actually expected in future periods – interest payments, scheduled principal repayments and including liquidation of collateral. Impaired obligations are thus obligations where losses are prob- able and estimable. A provision is then made with respect to the loan in question. CHF million Impaired loans 1, 2 Amount of allowance for credit losses related to impaired loans 31.12.01 31.12.00 14,629 7,294 16,555 18,494 9,685 20,804 2 Interest income on impaired loans was CHF 504 million for 2001. 3 Aver- Average impaired loans 3 1 All impaired loans have a specific allowance for credit losses. age balances were calculated from quarterly data. 100 Note 10d Non-Performing Loans When principal, interest or commission are overdue by 90 days, loans are classified as non-per- forming, the recognition of interest or commission income ceases according to the original terms of the loan agreement. Allowances are provided for non-performing loans to reflect their net estimated recoverable amount. CHF million Non-performing loans Amount of allowance for credit losses related to non-performing loans Average non-performing loans 2 31.12.01 31.12.00 8,639 5,374 9,648 10,452 6,3291 11,884 1 31 December 2000 figure has been restated to account for an overallocation of allowances to non-performing loans. calculated from quarterly data. 2 Average balances are CHF million Non-performing loans at beginning of year Net additions / (reductions) Write-offs and disposals Non-performing loans at the end of the year By type of exposure CHF million Banks Loans to customers Mortgages Other Total loans to customers Total non-performing loans By geographical region (based on the location of the borrower) CHF million Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Total non-performing loans 31.12.01 31.12.00 10,452 1,111 (2,924) 8,639 13,073 (290) (2,331) 10,452 31.12.01 386 2,659 5,594 8,253 8,639 31.12.00 172 4,586 5,694 10,280 10,452 31.12.01 31.12.00 6,531 466 737 653 252 8,639 7,588 342 1,865 307 350 10,452 101 UBS Group Financial Statements Notes to the Financial Statements Note 11 Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase Agreements and Other Collateralized Transactions The Group enters into collateralized reverse repurchase and repurchase agreements and securities borrowing and securities lending transactions that may result in credit exposure in the event that the counterparty to the transaction is unable to fulfill its contractual obligations. The Group minimizes credit risk associated with these activities by monitoring counterparty credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Group when deemed necessary. CHF million Cash collateral by counterparty Banks Customers Total cash collateral on securities borrowed and lent CHF million Agreements by counterparty Banks Customers Total repurchase and reverse repurchase agreements Securities borrowed 31.12.01 Securities lent 31.12.01 Securities borrowed 31.12.00 Securities lent 31.12.00 155,214 7,724 27,640 2,677 159,619 18,238 18,291 5,127 162,938 30,317 177,857 23,418 Reverse repurchase agreements 31.12.01 Repurchase agreements 31.12.01 Reverse repurchase agreements 31.12.00 Repurchase agreements 31.12.00 197,902 71,354 213,942 154,678 144,505 49,296 175,421 120,092 269,256 368,620 193,801 295,513 Under reverse repurchase, securities borrowing, and other collateralized arrangements, the Group obtains securities on terms which permit it to repledge or resell the securities to others. At 31 Decem- ber 2001, the Group held CHF 593 billion (CHF 478 billion at 31 December 2000) of securities on such terms, CHF 475 billion (CHF 407 billion at 31 December 2000) of which have been either pledged or otherwise transferred to others in connection with its financing activities or to satisfy its commitments under short sale transactions. 102 Note 12 Trading Portfolio CHF million Trading portfolio assets Money market paper 1 Debt instruments Swiss government and government agencies US Treasury and government agencies Other government Corporate listed instruments Other unlisted instruments 2 Total thereof pledged as collateral thereof can be repledged or resold by the counterparty Equity instruments Listed instruments Unlisted instruments thereof pledged as collateral thereof can be repledged or resold by the counterparty Total Precious metals Total trading portfolio assets Trading portfolio liabilities Debt instruments Swiss government and government agencies US Treasury and government agencies Other government Corporate listed instruments Other unlisted instruments Total Equity instruments Total trading portfolio liabilities 31.12.01 31.12.00 63,164 62,292 1,246 95,203 18,811 108,114 32,781 256,155 153,464 101,517 67,772 6,367 21,264 19,939 74,139 4,428 397,886 565 25,117 12,187 10,868 30,793 79,530 26,268 105,798 1,104 19,769 33,222 64,514 26,583 145,192 63,071 49,687 102,571 2,320 8,683 9,761 104,891 3,213 315,588 439 13,645 5,070 31,905 192 51,251 31,381 82,632 1 CHF 29,895 million is pledged with central banks (CHF 28,395 million at 31 December 2000). 2 Includes CHF 6,139 million of traded loans reclassified to trading portfolio assets at 31 December 2001, upon the adoption of IAS 39. The amounts at 31 December 2000 have not been restated. The Group trades money market paper, debt, equity, precious metals, foreign currency and deriva- tives to meet the financial needs of its customers and to generate revenue through its trading activi- ties. Note 24 provides a description of the various classes of derivatives together with the related notional amounts, whereas Note 11 provides further details about cash collateral on securities bor- rowed and lent and repurchase and reverse repurchase agreements. 103 UBS Group Financial Statements Notes to the Financial Statements Note 13 Financial Investments Due to the adoption of IAS 39, Financial investments, available for sale, are reported at fair value from 1 January 2001. 31 December 2000 amounts have not been restated. CHF million Money market paper Debt instruments Listed Unlisted Total Equity investments Listed Unlisted Total Private equity investments Total financial investments thereof eligible for discount at central banks 31.12.01 6,774 31.12.00 4,162 1,194 10,348 11,542 1,949 1,819 3,768 6,719 28,803 10,370 1,403 4,803 6,206 1,119 1,438 2,557 6,658 19,583 381 The following table gives additional disclosure in respect of the valuation methods used in 2000. CHF million Valued at fair value Money market paper Valued at amortized cost Debt instruments Valued at the lower of cost or market value Debt instruments Equity instruments Total Valued at cost less adjustments for impairments Private equity investments Total financial investments Book Value 31.12.00 Fair Value 31.12.001 4,162 5,851 355 2,557 2,912 6,658 19,583 4,162 5,853 367 3,031 3,398 7,940 21,353 1 This column is presented for comparison purposes only and does not reflect amounts recorded in the Financial Statements. 104 Note 13 Financial Investments (continued) Unrealized gains not recognized in the income statement Unrealized losses not recognized in the income statement CHF million Fair value Gross Tax effect Net Gross Tax effect 31 December 2001 Money market paper Debt securities issued by the Swiss national government and agencies Debt securities issued by Swiss local governments Debt securities issued by US Treasury and agencies Debt securities issued by foreign governments and official institutions Corporate debt securities Mortgage-backed securities Other debt securities Equity securities Private equity investments Total 6,774 36 45 32 10,089 1,218 5 117 3,768 6,719 28,803 1 1 1 2 31 4 0 0 627 1,189 1,856 0 0 0 1 11 1 0 0 206 28 247 1 1 1 1 20 3 0 0 421 1,161 1,609 0 0 0 0 1 2 0 0 65 539 607 0 0 0 0 0 1 0 0 19 13 33 Net 0 0 0 0 1 1 0 0 46 526 574 Contractual maturities of the investments in debt instruments CHF million, except percentages Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Within 1 year 1–5 years 5–10 years Over 10 years 31 December 2001 Swiss national government and agencies Swiss local governments US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Other debt securities Total fair value 9 3 0 5,014 63 0 2 5,091 5.26 4.36 0.00 0.97 4.53 0.00 4.77 10 38 24 5,048 1,102 5 87 6,314 4.50 3.90 4.38 1.01 4.59 5.41 3.91 16 4 8 27 30 0 28 113 3.43 3.59 5.15 2.88 3.22 0.00 3.56 1 0 0 0 23 0 0 24 4.00 0.00 0.00 0.00 15.371 0.00 0.00 1 The yield presented is the current contractual yield based on current market rates at 31 December 2001, but may not represent the yield through maturity since this is a floating rate debt instrument. Proceeds from sales and maturities of investment securities available for sale during the year ended 31 December 2001 were CHF 27,910 million. Gross gains of CHF 223 million and gross losses of CHF 28 million were realized on those sales in 2001. 105 UBS Group Financial Statements Notes to the Financial Statements Note 14 Investments in Associates CHF million Carrying amount at the beginning of the year Additions Disposals Income Write-offs Change in equity Carrying amount at the end of the year 31.12.01 31.12.00 880 11 (216)2 74 (2) (50) 697 1 1,102 65 (287) 62 (4) (58) 880 1 Primarily consists of disposal of an investment in National Versicherung AG. following a review of the level of influence by the bank over certain investees. The impact of this reclassification on net profit is immaterial. 2 Includes a transfer of CHF 172 million to Financial Investments Note 15 Property and Equipment CHF million Historical cost Balance at the beginning of the year Additions Additions from acquired companies Disposals 1 Reclassifications 2 Foreign currency translation Balance at the end of the year Accumulated depreciation Balance at the beginning of the year Depreciation 3 Disposals 1 Reclassifications 2 Foreign currency translation Balance at the end of the year Net book value at the end of the year 4 Bank occupied Investment properties5 properties IT, soft- ware and communi- Other machines and cation equipment 31.12.01 31.12.00 8,807 222 0 (179 ) 447 0 9,297 3,840 262 (162 ) 97 2 4,039 5,258 1,830 148 0 (132 ) (959 ) 6 893 550 13 (40 ) (286 ) 2 239 654 4,257 919 4 (184 ) 144 6 5,146 3,074 933 (76 ) 0 1 3,932 1,214 3,737 728 0 (220 ) (114 ) 12 4,143 2,257 446 (125 ) 0 (4 ) 2,574 1,569 18,631 2,017 4 (715) (482) 24 19,479 9,721 1,654 (403) (189) 1 10,784 8,695 17,210 1,640 1,019 (769) (432) (37) 18,631 8,509 1,885 (453) (176) (44) 9,721 8,910 1 Includes write-offs of fully depreciated assets. Summary of significant accounting policies). 2000 includes CHF 40 million in 2001 and CHF 277 million in 2000 which were charged against the UBS / SBC restructuring provision. insurance value of property and equipment is CHF 15,531 million (2000: CHF 14,570 million). ment properties was CHF 990 million. 2 Properties held for resale and foreclosed properties have been reclassified (see Note 1: 3 Depreciation of CHF 1,654 million at 31 December 2001 and CHF 1,885 million at 31 December 4 Fire 5 At 31 December 2001 the fair value of Invest- 106 Note 16 Goodwill and Other Intangible Assets CHF million Goodwill Other intangible assets 31.12.01 31.12.00 Historical cost Balance at the beginning of the year Additions Write-offs 1 Foreign currency translation Balance at the end of the year Accumulated amortization Balance at the beginning of the year Amortization Write-offs 1 Foreign currency translation Balance at the end of the year 16,272 454 (232) 325 16,819 1,445 1,025 (232) 3 2,241 4,894 2 (15) 92 4,973 184 298 (15) (1) 466 21,166 456 (247) 417 21,792 1,629 1,323 (247) 2 2,707 4,534 17,841 (16) (1,193) 21,166 991 667 (16) (13) 1,629 Net book value at the end of the year 14,578 4,507 19,085 19,537 1 Represents write-offs of fully amortized goodwill and other intangible assets. A significant portion of the Goodwill and other intangible assets relates to the acquisition of Paine Webber Group, Inc. For more information, please refer to Note 37. Note 17 Other Assets CHF million Deferred tax assets Settlement and clearing accounts VAT and other tax receivables Prepaid pension costs Properties held for resale Other receivables Total other assets Note 22 31.12.01 31.12.00 3,449 1,431 452 567 844 3,132 9,875 2,208 3,153 419 405 984 2,322 9,491 107 UBS Group Financial Statements Notes to the Financial Statements Balance Sheet: Liabilities Note 18 Due to Banks and Customers CHF million Due to banks Due to customers in savings and investment accounts Other amounts due to customers Total due to customers Total due to banks and customers 31.12.01 106,531 67,782 265,999 333,781 440,312 31.12.00 82,240 68,213 242,466 310,679 392,919 Note 19 Debt Issued The Group issues both CHF and non-CHF denominated fixed and floating rate debt. Float- ing rate debt pays interest based on the three- month or six-month London Interbank 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 obliga- tions of the Group. At 31 December 2001 and 31 December 2000, the Group had CHF 14,598 million and CHF 14,233 million, respectively, in subordinated debt. Subordinated debt usually pays interest annually and provides for single principal payments upon maturity. At 31 December 2001 and 31 December 2000, the Group had CHF 42,613 million and CHF 40,622 million, respectively, in unsubordinat- ed debt (excluding money market paper). The Group issues debt with returns linked to equity, foreign exchange and credit instruments or indices. As described in Note 1r), derivatives embedded in these instruments are separated from the host debt contract and reported as stand alone derivatives. The amount recorded within Debt issued represents the host contract after the separation of the embedded derivative. At 31 December 2001 and 31 December 2000, the Group had CHF 1,397 million and CHF 1,380 million, respectively, in convertible and exchangeable debt on UBS shares and notes with warrants attached on UBS shares outstanding. In addition the Group uses interest rate and foreign exchange derivatives to manage the risk inherent in certain debt issues. In the case of inter- est rate risk management, the Group applies hedge accounting as discussed in Note 1 – Summary of Significant Accounting Policies and Note 24 – Derivative Instruments. As a result of applying hedge accounting, the carrying value of Debt issued has increased by CHF 220 million to reflect changes in fair value due to interest rate risk. CHF million Money market paper issued Total bond issues Shares in bond issues of the Swiss Regional or Cantonal Banks’ Central Bond Institutions Medium-term notes Total debt issued 31.12.01 31.12.00 99,006 51,061 934 5,217 74,780 48,179 1,305 5,371 156,218 129,635 108 Note 19 Debt Issued (continued) Contractual maturity date CHF million 2002 2003 2004 2005 2006 2007–2009 Thereafter Total UBS AG (Parent Bank) Subsidiaries Fixed rate 64,596 6,287 2,661 3,119 3,343 2,930 2,581 85,517 Floating rate 1,503 887 778 1,041 1,833 592 984 7,618 Fixed rate 48,161 1,461 1,451 700 1,242 2,353 1,387 56,755 Floating rate 1,779 125 1,164 227 635 1,708 690 6,328 Total 31.12.01 116,039 8,760 6,054 5,087 7,053 7,583 5,642 156,218 The table above shows the split between fixed and floating rate debt issues based on the contractual terms. However, it should be noted that the Group uses interest rate swaps to hedge many of the fixed rate debt issues, which changes their re-pricing characteristics into that of floating rate debt. The table below shows the notional amount and stated interest rate on the Group’s publicly placed bonds prior to the separation of any embedded derivatives or the application of hedge accounting. As a result, the notional amount shown does not necessarily correspond to the carrying amount of the debt and the stated interest rate on the debt does not necessarily refelect the effective interest rate the Group is paying to service its debt after the separation of embedded derivatives and the application of hedge accounting. Publicly placed bond issues of UBS AG (Parent Bank) outstanding as at 31.12.2001 1 Year of issue Interest rate in % Remarks Maturity Early redemption option Currency 1992 2000 2000 2000 1992 2001 1986 2000 2001 2001 2001 2001 2001 2000 1998 2001 2000 1996 2000 2001 1990 7.250 13.250 12.500 0.100 7.000 FRN 5.000 3.300 1.980 16.000 20.750 11.250 11.250 9.010 5.750 18.000 10.010 4.000 18.500 23.125 7.500 GOAL on Carrefour shares GOAL on Bayer shares Convertible into Nikkei 225 Index subordinated Resettable Daily Accrual Note GOAL on JP Morgan Chase shares GOAL on Nokia shares GOAL on Royal Dutch Petroleum shares GOAL on Allianz shares GOAL on ABB shares GOAL on Alcatel shares GOAL on UBS shares GOAL on Motorola shares GOAL on EMC Corp shares subordinated 10.01.2002 18.01.2002 18.01.2002 28.01.2002 06.02.2002 08.02.2002 10.02.2002 12.02.2002 28.02.2002 01.03.2002 01.03.2002 08.03.2002 08.03.2002 14.03.2002 18.03.2002 22.03.2002 10.04.2002 18.04.2002 28.05.2002 31.05.2002 07.06.2002 CHF EUR EUR JPY CHF USD CHF JPY USD USD EUR EUR EUR CHF USD EUR CHF CHF USD USD CHF Notional amount in millions in local currency 150 45 85 13,000 200 200 250 3,807 130 30 135 85 50 366 250 75 100 200 75 45 300 109 Protected Index Participation PIP PEP Protected Equity Participation GOAL Geld- oder Aktien-Lieferung (cash or share delivery) BULS Bullish Underlying Linked Securities GROI Guaranteed Return On Investment FRN Floating Rate Note UBS Group Financial Statements Notes to the Financial Statements Note 19 Debt Issued (continued) Publicly placed bond issues of UBS AG (Parent Bank) outstanding as at 31.12.20011 Year of issue Interest rate in % Remarks Maturity Early redemption option Currency Notional amount in millions in local currency 2000 1997 2001 1992 2001 2001 2001 2001 2001 2000 2001 2001 1996 2001 2000 1992 1996 2001 1995 2001 2001 2001 1996 2001 1993 2001 1997 1998 2001 1993 1993 2001 2001 2001 2001 1995 2001 1993 1994 2000 2001 2001 1991 1999 2001 1997 1993 1995 1995 2000 2000 Protected Index Participation PIP PEP Protected Equity Participation GOAL Geld- oder Aktien-Lieferung (cash or share delivery) BULS Bullish Underlying Linked Securities GROI Guaranteed Return On Investment FRN Floating Rate Note 110 18.250 6.500 19.500 7.500 19.250 19.500 8.000 12.250 18.250 8.375 14.125 14.000 2.002 GOAL on Intel shares GOAL on Deutsche Telecom shares subordinated GOAL on SAP shares GOAL on Cisco Systems shares GOAL on Nestlé shares GOAL on Deutsche Post shares GOAL on UBS shares GOAL on DaimlerChrysler shares GOAL on Home Depot shares GOAL on Deutsche Bank shares 26.000 GOAL on Uniphase Corporaton shares GOAL on UBS shares subordinated 9.000 7.000 6.750 12.500 4.375 10.000 7.375 8.125 3.250 8.000 4.875 8.750 1.500 GOAL on AOL Time Warner shares GOAL on Credit Suisse shares GOAL on Novartis shares GOAL on Roche shares GOAL on UBS shares subordinated GOAL on General Electric shares Indexed to UBS Currency Portfolio Convertible into UBS Dutch Corporate Basket GOAL on PepsiCo shares subordinated subordinated BULS on technology stock basket BULS on Celestica and others BULS on Biotech shares GOAL on Aventis shares subordinated GOAL on Pfizer shares 1.000 8.500 3.500 4.000 FRN 0.000 0.000 7.250 FRN 8.250 3.000 FRN 0.500 0.000 0.000 Cliquet GROI on NASDAQ 100 Index 4.250 subordinated 3.500 1.750 7.375 4.750 4.000 5.500 1.000 1.000 Exchangeable bonds on Yukos subordinated subordinated subordinated Convertible into Nasdaq 100 Index Convertible into STOXX 50 Index subordinated Convertible into NTT shares 27.06.2002 08.07.2002 08.07.2002 10.07.2002 15.07.2002 23.07.2002 25.07.2002 25.07.2002 31.07.2002 07.08.2002 15.08.2002 19.08.2002 23.08.2002 12.09.2002 02.10.2002 16.10.2002 18.10.2002 01.11.2002 07.11.2002 15.11.2002 22.11.2002 06.12.2002 20.12.2002 26.02.2003 03.03.2003 07.03.2003 14.03.2003 20.03.2003 28.03.2003 31.03.2003 31.03.2003 10.04.2003 28.04.2003 16.05.2003 05.06.2003 20.06.2003 16.07.2003 26.11.2003 06.01.2004 10.02.2004 14.04.2004 27.05.2004 25.06.2004 01.07.2004 31.08.2004 26.11.2004 08.01.2005 07.02.2005 10.02.2005 18.02.2005 21.03.2005 08.01.2003 USD USD EUR CHF EUR USD CHF EUR USD EUR USD EUR CHF USD CHF CHF USD USD CHF CHF CHF CHF CHF CHF CHF USD EUR EUR USD CHF CHF USD USD USD EUR CHF USD CHF USD USD USD USD CHF EUR USD GBP CHF CHF CHF USD EUR 50 300 45 200 45 60 325 45 45 70 30 70 299 51 345 200 250 48 250 325 100 325 350 220 200 105 51 57 30 200 200 80 40 32 55 200 45 200 300 40 46 40 300 250 310 265 200 150 150 50 50 Note 19 Debt Issued (continued) Publicly placed bond issues of UBS AG (Parent Bank) outstanding as at 31.12.20011 Year of issue Interest rate in % Remarks Maturity Early redemption option Currency 1995 2000 1995 1995 1995 1995 2001 1995 1999 1999 2001 1996 1996 2000 2001 1996 2001 2001 1996 2001 2001 1995 1996 2001 1997 1997 1997 2001 2001 1998 1997 1995 1995 1997 1995 1995 1996 Protected Index Participation PIP PEP Protected Equity Participation GOAL Geld- oder Aktien-Lieferung (cash or share delivery) BULS Bullish Underlying Linked Securities GROI Guaranteed Return On Investment FRN Floating Rate Note subordinated Convertible into Nikkei 225 Index subordinated subordinated subordinated subordinated PEP on Internet Perf. Basket Equity Exchangeables into Euro. Insurance Basket subordinated 5.625 0.000 FRN 6.750 5.250 5.000 0.000 4.500 0.000 3.500 1.000 4.250 4.000 2.500 Bermuda Callable Daily Accrual Range Note FRN 7.250 subordinated 7.500 Bermuda Callable Daily Accrual Note Callable Reverse Floater subordinated BULS on S&P 500 GOAL on UBS shares subordinated subordinated Zero-rate Note O’Connor Fund subordinated subordinated subordinated Fixed/Reverse Floating Note Notes on World Index Basket FRN 7.250 0.000 5.500 5.000 FRN 0.000 8.000 8.000 5.750 FRN 1.000 3.500 5.875 7.375 7.000 7.375 7.500 FRN 7.750 subordinated subordinated subordinated subordinated subordinated subordinated subordinated 15.04.2005 31.05.2005 20.06.2005 15.07.2005 18.07.2005 24.08.2005 18.10.2005 21.11.2005 08.12.2005 26.01.2006 01.02.2006 06.02.2006 14.02.2006 29.03.2006 29.06.2006 17.07.2006 26.07.2006 17.08.2006 01.09.2006 01.09.2006 02.10.2006 07.11.2006 06.12.2006 29.12.2006 08.01.2007 08.01.2007 12.03.2007 02.11.2007 11.12.2007 27.08.2008 18.08.2009 15.07.2015 15.10.2015 15.06.2017 15.07.2025 18.12.2025 01.09.2026 CHF JPY GBP USD CHF CHF USD CHF USD EUR EUR CHF CHF CHF USD USD USD USD USD USD CHF CHF EUR EUR GBP GBP EUR USD EUR CHF EUR USD USD USD USD GBP USD Notional amount in millions in local currency 150 5,000 249 200 200 250 288 300 50 650 100 250 200 250 98 500 39 30 150 54 66 250 254 40 237 296 197 59 50 300 329 150 300 300 350 149 300 111 UBS Group Financial Statements Notes to the Financial Statements Note 19 Debt Issued (continued) Publicly placed bond issues of UBS subsidiaries outstanding as at 31.12.2001 1 Year of issue Interest rate in % Remarks Maturity Early redemption option Currency Brooklands Euro Referenced Linked Notes 2001-1 Ltd 2001 2001 FRN FRN 20.12.2003 20.12.2013 20.12.2003 20.12.2013 Alpine Partners L.P. 2000 FRN North Street 2000 2000 2000 2000 2000 2000 2000 2000 2001 2001 2001 2001 FRN FRN FRN 20.000 9.490 18.000 FRN FRN FRN FRN FRN FRN UBS Americas Inc. (former PaineWebber) 1999 1995 2000 1992 1999 1993 2000 1998 1993 1998 1999 1999 1999 1999 1995 1998 1993 1996 1998 1998 1998 1996 1999 1998 1994 1997 1997 6.020 8.250 FRN 7.750 FRN 7.875 1.270 6.320 6.785 6.450 FRN 6.375 2.580 2.670 8.875 6.520 6.500 6.750 6.720 6.730 6.550 7.625 7.625 6.640 7.625 8.060 8.080 UBS Principal Finance LLC 2000 8.670 subordinated 08.10.2009 08.01.2003 28.04.2011 28.04.2011 28.04.2011 28.04.2011 30.10.2011 30.10.2011 30.10.2011 30.10.2011 30.04.2031 30.04.2031 30.07.2031 30.07.2031 22.04.2002 01.05.2002 15.07.2002 02.09.2002 18.11.2002 17.02.2003 13.03.2003 18.03.2003 01.07.2003 01.12.2003 11.05.2004 17.05.2004 13.10.2004 15.03.2005 15.03.2005 06.04.2005 01.11.2005 01.02.2006 01.04.2008 03.04.2008 15.04.2008 15.10.2008 01.12.2009 14.04.2010 17.02.2014 17.01.2017 01.03.2037 01.03.2002 20.01.2009 20.01.2002 EUR EUR USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD JPY USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD Notional amount in millions in local currency 50 50 709 31 40 36 43 36 43 61 33 100 60 100 60 45 125 100 175 40 100 9,000 45 30 340 45 525 30 45 125 30 200 100 35 43 250 150 275 30 200 25 199 102 Protected Index Participation PIP PEP Protected Equity Participation GOAL Geld- oder Aktien-Lieferung (cash or share delivery) Bullish Underlying Linked Securities BULS GROI Guaranteed Return On Investment FRN Floating Rate Note 112 Note 19 Debt Issued (continued) Publicly placed bond issues of UBS subsidiaries outstanding as at 31.12.2001 1 Year of issue Interest rate in % Eisberg Finance Ltd. 1998 1998 1998 FRN FRN FRN UBS Finance N.V., Curaçao 1990 1992 1997 1998 9.125 FRN 0.000 0.000 UBS Australia Holdings Ltd. 1999 1999 5.000 5.000 SBC Glacier Finance Ltd. 1997 1997 1997 FRN FRN FRN UBS Warburg AG 0.000 1998 0.000 2001 0.000 2001 0.000 2001 0.000 2001 0.000 2001 0.000 2001 0.000 2001 0.000 2001 0.000 2001 Remarks Maturity Early redemption option Currency Notional amount in millions in local currency 15.06.2004 15.06.2004 15.06.2004 10.10.2003 10.10.2003 10.10.2003 08.02.2002 13.11.2002 29.01.2027 03.03.2028 25.02.2002 25.02.2004 03.03.2003 10.09.2004 10.09.2004 10.09.2006 10.09.2002 10.03.2002 10.03.2002 19.12.2005 30.06.2006 30.06.2006 31.07.2006 30.09.2006 30.09.2006 02.01.2007 02.01.2007 02.01.2007 30.09.2011 USD USD USD USD USD EUR EUR AUD AUD USD USD USD EUR USD EUR EUR CHF USD EUR EUR EUR EUR 41 65 83 225 250 210 77 104 104 36 798 798 56 202 505 500 200 200 100 100 100 50 1 In this table only bonds with a carrying value exceeding CHF 50 million have been disclosed. The total notional amount of the bonds disclosed in this table is CHF 40,859 million. The total notional amount of publicly placed bonds of UBS Group is CHF 48,646 million of the total bond issues. Protected Index Participation PIP Protected Equity Participation PEP GOAL Geld- oder Aktien-Lieferung (cash or share delivery) BULS Bullish Underlying Linked Securities GROI Guaranteed Return On Investment FRN Floating Rate Note 113 UBS Group Financial Statements Notes to the Financial Statements Note 20 Other Liabilities CHF million Provisions, including restructuring provision Provision for commitments and contingent liabilities Current tax liabilities Deferred tax liabilities VAT and other tax payables Settlement and clearing accounts Other payables Note 21 10b 22 31.12.01 31.12.00 1,748 305 1,799 2,827 622 4,473 3,884 3,024 54 2,423 1,565 1,071 4,906 5,713 Total other liabilities 15,658 18,756 Note 21 Provisions, including Restructuring Provision Business risk provisions 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 CHF million Litigation Operational Other Total UBS / SBC merger restructuring provision CHF million Balance at the beginning of the year Addition Applied 1 Personnel IT Premises Other Total utilized during the year Released to the Income Statement Balance at the end of the year 31.12.01 31.12.00 2,294 384 (1,020) 90 1,748 2,182 746 (1,316) 682 2,294 31.12.01 31.12.00 712 240 796 1,748 598 374 1,322 2,294 31.12.01 31.12.00 730 0 (370) (23) (302) (14) (709) (21) 0 1,429 0 (188) (63) (399) (49) (699) 0 730 Total provisions, including restructuring provision 1,748 3,024 1 The expense categories refer to the nature of the expense rather than the income statement expense line. 114 Note 21 Provisions, including Restructuring Provision (continued) Cumulative utilization, since establishment of UBS / SBC merger restructuring provision through 31 December 2001 CHF million UBS Switzerland Private and Corporate Clients Private Banking UBS Asset Management UBS Warburg Corporate Center Group total Personnel 837 707 130 34 1,983 106 2,960 IT 1,109 974 135 9 373 34 1,525 Premises Other 219 209 10 0 1 1,421 1,641 220 217 3 3 413 517 1,153 Released to the Income Statement Total Total 2,385 2,107 278 46 2,770 2,078 7,279 21 7,300 At the announcement of the UBS / SBC merger in December 1997, it was communicated that the merged firm’s operations in various locations would be combined, resulting in vacant properties, reductions in personnel, elimination of redundancies in the information technology platforms, exit costs and other costs. As a result, a restructuring provision of CHF 7,300 million (of which CHF 7,000 million was recognized as a restructuring expense in 1997 and CHF 300 million was recog- nized as a component of general and administrative expense in the fourth quarter of 1999) was established, to be used over a period of four years. The restructuring provision included approximately CHF 3,000 million for employee termination benefits, CHF 1,500 million for sale and lease breakage costs associated with the closure of premis- es, CHF 1,650 million for IT integration projects and write-offs of equipment which management had committed to dispose of and CHF 1,150 million for other costs classified as Personal expenses, General and administrative expense or Other income. The employee terminations affected all functional levels and all operating Business Groups. CHF 2,000 million of the provision related to employee termination benefits reflects the costs of eliminating approximately 7,800 positions, after considering attrition and redeployment within the Company. CHF 1,000 million of the provision related to payments to maintain stability in the work- force during the integration period. As of 31 December 2001, approximately 7,100 employees had been made redundant or retired early. At 31 December 2001, the restructuring plan was completed, substantially in accordance with the above-mentioned plans. The remaining balance of the restructuring provision of CHF 21 million was recognized in the income statement. 115 UBS Group Financial Statements Notes to the Financial Statements Note 22 Income Taxes CHF million For the year ended Domestic Current payable Deferred Foreign Current payable Deferred Total income tax expense 31.12.01 31.12.00 31.12.99 563 231 546 61 1,401 1,325 233 451 311 2,320 849 511 359 (33) 1,686 The Group made net tax payments, including domestic and foreign taxes, of CHF 1,742 million, CHF 959 million and CHF 1,063 million for the full years of 2001, 2000 and 1999, 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 Swiss statutory rate of 25% are as follows: CHF million For the year ended Operating profit before tax Domestic Foreign Income taxes at Swiss statutory rate of 25% Increase / (decrease) resulting from: Applicable tax rates differing from Swiss statutory rate Tax losses not recognized Previously unrecorded tax losses now recognized Lower taxed income Non-deductible goodwill amortization Other non-deductible expenses Adjustments related to prior years Change in deferred tax valuation allowance 31.12.01 31.12.00 31.12.99 6,718 5,565 1,153 1,680 (239) 77 (630) (499) 429 134 371 78 10,199 7,079 3,120 2,550 (336 ) 164 (655 ) (401 ) 159 432 245 162 7,893 6,957 936 1,973 55 39 (215) (278) 98 34 (112) 92 Income tax expense 1,401 2,320 1,686 116 Note 22 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 carry forwards Trading assets Other Total Valuation allowance Net deferred tax assets Deferred tax liabilities Property and equipment Investments Other provisions Trading assets Other Total deferred tax liabilities 31.12.01 31.12.00 1,778 0 122 2,902 259 1,365 6,426 (2,977) 3,449 449 464 571 298 1,045 2,827 1,705 160 148 1,690 24 1,045 4,772 (2,564) 2,208 457 86 133 306 583 1,565 The change in the balance of net deferred tax assets and deferred tax liabilities does not equal the deferred tax expense 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 and also due to the acquisition of PaineWebber. Certain foreign branches and subsidiaries of the Group have deferred tax assets related to net operating loss carry forwards and other items. Because realization of these assets is uncertain, the Group has established valuation allowances of CHF 2,977 million (CHF 2,564 million at 31 Decem- ber 2000). For companies that suffered tax losses in either the current or preceding year an amount of CHF 965 million (CHF 59 million at 31 December 2000) has been recognized as deferred tax assets based on expectations that sufficient taxable income will be generated in future years to utilize the tax loss carry forwards. The company provides deferred income taxes on undistributed earnings of non-Swiss subsidiaries except to the extent that such earnings are indefinitely invested. In the event these earnings were distributed, additional taxes of approximately CHF 22 million would be due. At 31 December 2001 net operating loss carry forwards totaling CHF 7,462 million are available to reduce future taxable income of certain branches and subsidiaries. The carry forwards expire as follows: Within 1 year From 2 to 4 years After 4 years Total 31.12.01 123 148 7,191 7,462 117 UBS Group Financial Statements Notes to the Financial Statements Note 23 Minority Interests CHF million Balance at the beginning of the year Issuance of trust preferred securities Increases Decreases and dividend payments Foreign currency translation Minority interest in net profit Balance at the end of the year 31.12.01 31.12.00 2,885 1,291 0 (461) 53 344 4,112 434 2,594 2 (73) (159) 87 2,885 Note 24 Derivative Instruments Type of derivatives The Group uses the following derivative finan- cial instruments for both trading and hedging purposes: Swaps Swaps are transactions in which two parties exchange cash flows on a specified notional amount for a predetermined period. The major types of swaps transactions undertaken by the Group are described below. 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. Foreign currency swaps generally involve the exchange of two different currency principal bal- ances at inception and re-exchanged at an agreed upon rate at a specified future date. In addition, foreign currency interest rate swaps include the exchange of interest payments based on the two different currency principal balances and interest reference rates. Credit default swaps (CDS) are instruments where the seller of the CDS promises to pay the buyer an amount equal to the loss that would be incurred on holding an underlying reference asset as a result of a defined credit event. The buyer is not required to hold the underlying ref- erence asset. The buyer pays the seller a credit protection fee expressed in basis points, the amount of which is dependent on the credit spread of the reference asset. are effectively tailor-made agreements that are transacted between counterparties in the over- the-counter market (OTC), whereas futures are standardized contracts that are transacted on regulated exchanges. 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 predeter- mined price. The seller receives a premium from the purchaser for this right. Derivatives held or issued for trading purposes Most of the Group’s derivative transactions relate to sales and trading activities. Sales activi- ties include the structuring and marketing of derivative products to customers at competitive prices to enable them to transfer, modify or reduce current or expected risks. Trading in- volves market-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 market risk positions with the expec- tation of profiting from favorable movements in prices, rates or indices. Arbitrage activities involve identifying and profiting from price dif- ferentials between markets and products. Forwards and futures Forwards and futures are contractual obligations to buy or sell a financial instrument on a future date at a specified price. Forward contracts Derivatives held or issued for hedging purposes The Group enters into various derivative finan- cial instruments which are designated and qualify 118 as either fair value or cash flow hedges. The Group also enters into derivative transactions to hedge against economic risk exposures that do not receive hedge accounting treatment. As stated in Note 1 Summary of Significant Accounting Policies, the Group uses CDS to eco- nomically hedge credit risk exposures in the loan portfolio to which it does not apply hedge accounting. Gains on CDS used as economic hedges have been offset against Credit loss expense/recovery. Derivatives designated and accounted for as hedging instruments At inception of a hedge, the Group formally documents the relationship between hedging instruments and hedged items. This includes its risk management objectives and strategies for undertaking the hedge transaction, which are in accordance with the Group’s risk management policies, together with the methods that will be used to assess the effectiveness of the hedging relationship. In accordance with this, the Group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives used in its hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of the hedged item. In the case of hedging a forecasted transaction, the transaction must be highly probable and present an exposure to variations in cash flows that could ultimately affect reported net profit or loss. A hedge is normally regarded as highly effective if, at inception and throughout the life of the hedge, the Group can expect changes in the fair value or cash flows of the hedged item to be almost fully offset by the changes in the fair value or cash flows of the hedging instru- ment, and actual results are within a range of 80% to 125%. The Group discontinues hedge accounting when it is determined that a deriva- tive is not, or has ceased to be, highly effective as a hedge, or if the derivative expires, or is sold, terminated, or exercised. A highly effective hedging relationship is one in which the Group achieves offsetting changes in fair value or cash flows for the risk being hedged. Hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative differ from changes in the fair value of the hedged item or where changes in the cash flow of the derivative differ from expected changes in the cash flow of the hedged item) and gains and losses on components of a derivative that are excluded from assessing hedge effectiveness are recorded in current period earnings. Fair value hedges The Group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term debt due to changes in market interest rates. For the year ended 31 December 2001, the Group recognized a net loss of CHF 12 million (reported as Net trading income in the Financial Statements), which represents the ineffective portion of fair value hedges. Foreign currency interest rate swaps are also used as hedging instruments but only the interest rate element is designated against the interest rate risk exposure of the underlying hedged debt instruments. Therefore, when measuring hedge effectiveness, we consider only changes in fair value due to market interest rates. For the year ended 31 December 2001, CHF 275 million of foreign currency transaction net gains associated with foreign currency interest rate swaps used as fair value hedges were excluded from the assessment of hedge effectiveness. These foreign currency transaction gains were recorded as Net trading income. As of 31 December 2001, the fair values of outstanding derivatives designated as fair value hedges was a CHF 895 million net unreal- ized gain. Cash flow hedges of individual variable rate assets and liabilities The Group also uses interest rate swaps to protect against changes in cash flows of certain variable rate debt issues. For the year ended 31 December 2001, there has been no material gain or loss associated with ineffective portions of cash flow hedges. Gains and losses on derivative contracts that are reclassified from accumulated Gains/ losses not recognized in the income statement to current period earnings are included in Net inter- est income. As of 31 December 2001, CHF 14 mil- lion of the deferred net gains on derivative instru- ments accumulated in shareholders’ equity is expected to be reclassified into earnings during the next twelve months at the time the hedged cash flows occur. As of 31 December 2001, the 119 UBS Group Financial Statements Notes to the Financial Statements Note 24 Derivative Instruments (continued) fair value of outstanding derivatives designated as cash flow hedges was a CHF 16 million net unre- alized gain recorded in shareholders’ equity. Cash flow hedges of forecasted transactions The Group applies hedge accounting for its non- trading interest rate risk in major currencies by analyzing expected cash flows on an enterprise basis. The objective is to protect against changes in future interest cash flows relating to the fore- casted reinvestment or re-borrowing of cash flows due to changes in market interest rates. The Group accumulates information about financial assets and liabilities that it uses to estimate and aggregate cash flows and to schedule such esti- mated cash flows into applicable future periods in which they are expected to be paid or received. The forecasted cash flows include the expected future reinvestment or re-borrowing of financial assets and liabilities and are extended over a twenty-four year period. The Group has hedges that extend over this twenty-four year period. These cash flows are based on the contractual terms of the instruments and other factors, includ- ing estimates of prepayments and defaults. The aggregate cash flows form the basis for identifying the non-trading interest rate risk of the Group. Interest rate swaps are designated as hedges of these forecasted cash inflows and outflows. The schedule of forecasted cash flows as of 31 December 2001 is as follows. CHF million Cash in flows (Assets) Cash out flows (Liabilities) < 1 year 92,483 183,482 1–3 years 3–5 years 5–10 years over 10 years 154,733 299,566 81,015 229,368 92,027 401,674 11,253 352,707 Net cash flows (90,999) (144,833) (148,353) (309,647) (341,454) Gains and losses on derivative contracts that are reclassified from accumulated Gains/losses not recognized in the income statement to current period earnings are included in Net interest income. As of 31 December 2001, the fair value of outstanding derivatives designated as cash flow hedges of forecasted transactions was a CHF 554 million unrealized loss. Amounts reclassified from Gains/losses not recognized in the income statement to the Income statement due to discontinued hedges of forecasted trans- actions were immaterial. 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 notional 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. 120 Note 24 Derivative Instruments (continued) As at 31 December 2001 Term to maturity Within 3 months NRV2 PRV1 3–12 months NRV PRV 1–5 years PRV NRV over 5 years PRV NRV 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 Credit derivative contracts Over the counter (OTC) contracts Credit default swaps Total rate of return swaps 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 Total derivative instruments Replacement value netting Replacement values after netting 2,844 2,807 388 3,260 4,322 950 114 5,724 670 530 6,393 2,095 108 49,043 3,037 245 45,029 4,048 48 25,232 2,830 134 22,866 3,336 3,114 82,806 6,925 4,169 78,610 10,429 1,768.7 4,552.4 784.9 3 24 0 3 0 24 83.6 63.2 6,042 8,532 6,508 9,042 52,188 49,322 28,110 26,336 92,848 93,232 7,252.8 6 6 18 18 707 84 791 1,104 621 1,725 1,020 1,020 1,490 636 2,126 773 12 785 1,184 0 1,184 2,506 96 2,602 3,796 1,257 5,053 75.7 3.6 79.3 3,615 19,344 2,138 3,163 11,224 1,942 1,639 8,991 2,148 1,899 7,763 1,888 755 7,463 445 428 7,673 433 20 3,465 23 2,312 1 6,029 39,263 4,754 5,490 28,972 4,264 279.7 1,699.3 1,033.7 1 2 0 1 0 2 0.0 0.8 25,097 16,329 12,779 11,552 8,663 8,534 3,508 2,313 50,047 38,728 3,013.5 242 177 419 223 164 2 389 210 535 3 748 198 507 1 706 195 740 179 805 6 90 653 1,542 600 1,557 81 3 3 17.0 54.1 0.0 0.9 935 984 96 81 2,198 2,160 72.0 1,402 6,140 1,422 6,222 445 4,294 1,713 5,105 1,461 4,076 1,464 6,991 111 1,087 85 2,844 3,419 15,597 4,684 21,162 35.3 238.0 1,497 9,039 1,080 8,724 1,187 5,926 1,431 8,249 601 463 21 14 0 3,306 0 2,988 6,138 8,918 1,219 2,943 22,322 28,834 12.4 440.3 726.0 8 8 14 14 1 1 1 1 0 0 0 0 9 0 9 15 0 15 6.4 0.0 6.4 40,611 34,006 26,753 31,275 68,944 69,884 33,718 32,857 170,026 168,022 96,579 96,579 73,447 71,443 1 PRV: Positive replacement value. 2 NRV: Negative replacement value. 3 Exchange-traded products include proprietary trades only. 121 UBS Group Financial Statements Notes to the Financial Statements Note 24 Derivative Instruments (continued) As at 31 December 2000 Term to maturity CHF million Interest rate contracts Over the counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts 3 Futures Options Total Credit derivative contracts Over the counter (OTC) contracts Credit default swaps Total rate of return swaps 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 Total derivative instruments Replacement value netting Replacement values after netting Within 3 months NRV2 PRV1 3–12 months NRV PRV 1–5 years PRV NRV over 5 years PRV NRV Total PRV Total NRV Total notional amount CHF bn 517 1,566 542 791 4,231 453 167 5,398 865 360 1,694 2,882 284 15,759 623 256 7,793 5,162 27,892 625 20,872 2,044 968 50,615 2,655 1,407 34,590 10,541 1,066.3 3,030.2 829.1 6 10 0 0 0 16 454.6 24.1 2,625 5,481 6,430 4,946 16,666 13,211 28,517 22,916 54,238 46,554 5,404.3 313 313 88 88 87 91 178 889 1,087 1,976 1,700 1,453 3,153 76 356 432 2,497 121 2,618 965 1,756 2,721 4,372 1,665 6,037 35.5 3.0 38.5 0 22,652 2,563 2,958 20,140 1,621 2,726 8,098 2,921 2,896 9,410 2,507 3,031 939 8,715 821 1,084 7,031 438 35 3,019 28 27 2,098 35 31,724 17,218 6,703 30,661 13,257 6,230 1,250.3 345.9 786.8 4 1 21 4 0 25 0 5 1.0 1.2 28,177 24,488 13,936 14,952 10,475 8,553 3,082 2,160 55,670 50,153 2,385.2 176 128 1 305 187 80 2 269 211 206 6 423 181 201 12 394 369 934 394 936 2 85 17 119 758 1,353 779 1,336 7 14 15.3 75.2 0.7 1.3 1,303 1,330 87 136 2,118 2,129 92.5 1,417 1,751 3,186 3,867 1,170 6,977 2,271 12,358 2,424 4,752 3,019 17,985 1,715 311 2,948 2,648 6,726 13,791 11,424 36,858 32.2 283.8 1,771 4,939 1,647 8,700 819 1,051 400 446 2 3 0 2,992 0 3,147 15.3 45.2 8,966 15,680 7,576 21,450 2,028 5,599 23,509 51,429 376.5 1 1 2 0 1 1 0 3 3 1 3 4 0 0 0 4 4 2 4 6 0.0 0.0 0.0 36,359 39,028 29,756 36,150 37,999 47,701 34,146 33,429 138,260 156,308 80,385 80,385 57,875 75,923 1 PRV: Positive replacement value. 2 NRV: Negative replacement value. 3 Exchange-traded products include proprietary trades only. 122 Off-Balance Sheet and other Information Note 25 Pledged Assets Assets pledged or assigned as security for liabilities and assets subject to reservation of title CHF million Mortgage loans Securities 1 Property and equipment Other Total pledged assets Carrying amount 31.12.01 1,311 204,623 160 2 206,096 Related liability 31.12.01 873 163,134 89 0 164,096 Carrying amount 31.12.00 1,639 116,266 137 1 118,043 Related liability 31.12.00 1,121 62,616 66 0 63,803 1 Includes securities pledged in respect of securities lending and repurchase agreements. Assets are pledged as collateral for collateralized credit lines with central banks, loans from central mortgage institutions, deposit guarantees for savings banks, security deposits relating to stock exchange membership and mortgages on the Group’s property. Note 26 Fiduciary Transactions CHF million Placements with third parties Fiduciary credits and other fiduciary financial transactions Total fiduciary transactions 31.12.01 31.12.00 58,466 1,136 59,602 69,300 1,234 70,534 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. 123 UBS Group Financial Statements Notes to the Financial Statements Note 27 Commitments and Contingent Liabilities The Group utilizes various lending-related financial instruments in order to meet the financial needs of its customers. The Group issues commitments to extend credit, standby and other letters of credit, guarantees, commitments to enter into repurchase agreements, note issuance facilities and revolving underwriting facilities. Guarantees represent irrevocable assurances, subject to the satisfaction of cer- tain conditions, that the Group will make payment in the event that the customer fails to fulfill its obligation to third parties. The Group also enters into commitments to extend credit in the form of credit lines which are available to secure the liquidity needs of our customers, but not yet drawn upon by them, the majority of which range in maturity from 1 month to 5 years. The contractual amount of these instruments is the maximum amount at risk for the Group if the customer fails to meet its obligations. The risk is similar to the risk involved in extending loan facili- ties and is monitored with the same risk control processes and specific credit risk policies. For the years ended 31 December 2001, 2000 and 1999 the Group recognized expense in the income statement related to obligations incurred for contingencies and commitments of CHF 25 million, CHF 1 million and CHF 2 million, respectively. The Group generally enters into sub-participations to mitigate the risks from the Group’s com- mitments and contingencies. A sub-participation is an agreement with another party to fund a por- tion of the credit facility and to take a share of the loss in the event that the borrower fails to fulfill its obligations. The Group retains the contractual relationship with the borrower and the sub-partic- ipant has only an indirect relationship with the borrower. The Group will only enter into sub-partic- ipation agreements with banks whose rating is at least equal to or higher than that of the borrower. CHF million 31.12.01 31.12.00 Contingent liabilities Credit guarantees and similar instruments 1 Sub-participations Total Performance guarantees and similiar 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 18,566 (4,944) 13,622 4,865 (4) 4,861 2,056 0 2,056 25,487 (4,948) 20,539 50,608 (532) 50,076 98 50,706 (532) 50,174 76,193 (5,480) 70,713 18,651 (5,669) 12,982 6,337 (62) 6,275 2,798 0 2,798 27,786 (5,731) 22,055 53,510 (788) 52,722 133 53,643 (788) 52,855 81,429 (6,519) 74,910 1 Credit guarantees in the form of bill of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit, endorsement liabilities from bills rediscounted, advance payment guarantees and similar facilities. 2 Bid bonds, performance bonds, builders’ guarantees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and similar facilities. 124 Note 27 Commitments and Contingent Liabilities (continued) CHF million Overview of collateral Gross contingent liabilities Gross irrevocable commitments Liabilities for calls on shares and other equities Total 31.12.2001 Total 31.12.2000 Other commitments Mortgage collateral Other collateral Unsecured Total 293 1,418 1,711 1,278 14,243 11,382 25,625 20,158 10,951 37,808 98 48,857 59,993 25,487 50,608 98 76,193 81,429 The Group enters into commitments to fund external private equity funds and investments, which typically expire within five years. These commitments do not involve credit or market risk as the funds purchase investments at market value at the time the commitments are drawn. The maximum amount available to fund these investments at 31 December 2001 and 31 December 2000 was CHF 3,548 million and CHF 3,276 million, respectively. Note 28 Operating Lease Commitments Our minimum commitments for non-cancellable leases of premises and equipment are presented as follows: CHF million Operating leases due 2002 2003 2004 2005 2006 2007 and thereafter Total commitments for minimum payments under operating leases 31.12.01 1,200 1,081 965 823 742 5,953 10,764 Operating expenses include CHF 1,092 million, CHF 816 million and CHF 742 million in respect of operating lease rentals for the year ended 31 December 2001, 31 December 2000 and 31 Decem- ber 1999, respectively. 125 UBS Group Financial Statements Notes to the Financial Statements Note 29 Litigation In the United States, several class actions in rela- tion to the business activities of Swiss Compa- nies during World War II, have been brought against the bank (as legal successor to Swiss Bank Corporation and Union Bank of Switzer- land) 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 was designated as a defen- dant alongside us. On 12 August 1998, howev- er, a settlement was reached between the parties. This settlement provides for a payment by the defendant banks to the plaintiffs, under certain terms and conditions, of an aggregate amount of USD 1.25 billion. UBS agreed to contribute up to two-thirds of this amount. As a result of contributions by Swiss industrial companies to the settlement, UBS’ share was reduced by CHF 50 million. A number of persons have elected to opt out of the settlement and not to participate in the class action. The settlement agreement was approved by the court on 26 July 2000, and on 22 November 2000 the distribution plan has been approved. By 23 November 2000 the banks have transferred the last instalment of the settlement amount to the court for distribution. The approval of the Settlement became final by 30 May 2001. There is one appeal by the banks regarding the interpretation of the Settlement Agreement which has yet to be decided. Howev- er, this appeal is without financial impact to the bank. 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 Business risk provisions. In respect of the further claims asserted against the Group of which management is aware (and which, according to the principles outlined above, have not been provided for), it is the opinion 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. 126 Note 30 Financial Instruments Risk Position Overall risk position The Group manages risk in a number of ways, including the use of a Value-at-Risk (VaR) model combined with a system of trading limits. This section presents information about Group’s exposure to and its management of the risks associated with the use of financial instru- ments. a) Interest Rate Risk Interest rate risk is the potential impact from changes in market interest rates on the fair val- ues 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 presentation, described as a sensitivity analy- sis, is set out below. Interest rate sensitivity is one of the inputs to the VaR model used by the Group to manage its overall market risk, of which interest rate risk is a part. The following table sets out the extent to which the Group was exposed to interest rate risk at 31 December 2001 and 2000. The table shows the potential net impact of a one basis point (0.01%) increase in market interest rates on the fair values of both assets and liabilities that are subject to fixed interest rates. The impact of such an increase in rates depends on the net asset or net liability position of the Group in each catego- ry, currency and time band in the table. A nega- tive 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 deriv- ative instruments in trading and non-trading activities, as well as off-balance-sheet commit- ments are included in the table. The information presented below distin- guishes between trading and non-trading port- folios. This distinction follows the classification used by the business for VaR purposes, which differs somewhat from the accounting classifica- tion of trading and non-trading assets and liabili- ties. For purposes of this table, trading includes all assets and liabilities that are kept in the Group’s trading book and which receive a valua- tion-at-risk treatment for capital adequacy pur- poses. Non-trading includes all other assets and liabilities that are kept on the banking book including derivatives designated as hedging instruments for hedge accounting purposes. 127 UBS Group Financial Statements Notes to the Financial Statements Note 30 Financial Instruments Risk Position (continued) a) Interest Rate Risk (continued) Interest rate sensitivity position Interest sensitivity by time bands as of 31.12.2001 CHF thousand per basis point increase Within 1 month 1 to 3 months 3 to 12 months CHF USD EUR GBP JPY Others Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading 22 3 (299 ) 35 (129 ) (2) (89 ) 0 175 1 (51 ) 0 (121 ) (24 ) 35 (113 ) 73 (6) 27 (7) 695 0 167 (1) (35 ) (366 ) 96 (157 ) (269 ) (38 ) (520 ) (57 ) (98 ) (3) 126 0 1 to 5 years (297 ) (7,656 ) (960 ) (274 ) (308 ) 182 65 175 (1,386 ) 1 (404 ) (1 ) Interest sensitivity by time bands as of 31.12.2000 CHF thousand per basis point increase Within 1 month 1 to 3 months 3 to 12 months CHF USD EUR GBP JPY Others Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading 41 (39 ) (493 ) 13 (82 ) 0 (227 ) 0 293 0 (2 ) 0 (471 ) 49 2,007 58 (152 ) 9 152 0 (1,532 ) 0 (41 ) 0 854 (49 ) 293 11 114 1 145 (36 ) 1,088 0 124 0 1 to 5 years 63 (6,802 ) (2,293 ) (342 ) 1,190 82 (229 ) 270 62 (1 ) (50 ) 0 Over 5 years (314 ) (6,030 ) (2,115 ) (15 ) (806 ) 0 172 624 246 (4 ) 369 (4) Over 5 years (478 ) (3,018 ) 380 (183 ) (1,801 ) 177 521 585 (450 ) (4 ) (44 ) 0 Total (745) (14,073) (3,243) (524) (1,439) 136 (345) 735 (368) (5) 207 (6) Total 9 (9,859) (106) (443) (731) 269 362 819 (539) (5) (13) 0 Trading The major part of the trading related interest rate risk is generated in fixed income securities trading, fixed income derivatives trading, trad- ing in currency forward contracts and money market trading and is managed within the VaR model. Interest rate sensitivity arising from trad- ing activities is quite sizeable in USD, EUR, GBP and JPY as these are still the predominantly trad- ed currencies in the global interest rate markets. It should be noted that it is management’s view that an interest sensitivity analysis at a particular point in time has limited relevance with respect to trading positions, which can vary significantly on a daily basis. 128 Note 30 Financial Instruments Risk Position (continued) a) Interest Rate Risk (continued) Non-trading The management of the non-trading interest rate risk is primarily done within the Corporate Cen- ter. The interest rate risk of UBS Switzerland, related to client business with undefined maturi- ties and of CHF transactions with maturities above 1 year, is transferred to the Corporate Center where the strategic interest rate risk man- agement of the overall balance sheet is per- formed centrally. The most significant part of the interest rate sensitivity of the CHF book of CHF (14.1) mil- lion relates to the investment of the Group’s equi- ty. This is invested – in line with the duration and sensitivity targets set by the Board of Directors – in a portfolio of fixed rate CHF loans with an average duration of 3.0 years (previously 2.5 years). Investing in shorter-term or variable rate instruments would mean exposing the earnings stream (interest income) to higher fluctuations. For the currencies EUR and GBP the interest rate sensitivity arises mainly from subordinated notes issues which are intentionally unhedged as they are regarded as constituting a part of the Group’s equity for asset and liability management purpos- es. The interest rate sensitivity in USD can be attributed predominantly to the short-term refi- nancing of financial investments. b) Credit Risk Credit risk represents the loss which the Group would suffer if a counterparty or issuer failed to perform its contractual obligations in all forms. Credit risk is inherent in traditional banking products – loans, commitments to lend, and con- tracts to support counterparties’ obligations to third parties such as letters of credit – and in for- eign exchange and derivatives contracts, such as swaps and options (“traded products”). Positions in tradable assets such as bonds and equities, including both direct holdings and synthetic posi- tions through derivatives, also carry credit risk. This risk is managed primarily based on the review of the financial status of each specific counterparty, which is rated on a 14 point rating scale, based on probability of default for prod- ucts other than tradeable assets. Concentrations of credit risk exist if 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 economic, political or other conditions. (b)(i) On-balance sheet assets As of 31 December 2001, due from banks and loans to customers amounted to CHF 262 bil- lion. 60.7% of the loans were with clients domi- ciled in Switzerland. Please refer to Note 10 for a breakdown by region. The issuer default risk of securities posi- tions reported at fair value in the trading port- folio assets amounted to CHF 398 billion as of 31 December 2001. Please refer to Note 12 for a further breakdown by type of issuer. Derivatives Credit risk represents the current replacement value of all outstanding derivative contracts in a gain position by taking into consideration legally enforceable master netting agreements. Positive replacement values amounted to CHF 73 billion as at 31 December 2001. Based on the location of the ultimate counterparty, 10% of this credit risk amount related to Switzerland, 47% to Europe (excluding Switzerland) and 29% to North America. 50% of the positive replacement values are with other banks. 129 UBS Group Financial Statements Notes to the Financial Statements Note 30 Financial Instruments Risk Position (continued) b) Credit Risk (continued) (b)(ii) Off-balance sheet financial instruments Credit commitments and contingent liabilities Of the CHF 76 billion in credit commitment and contingent liabilities as at 31 December 2001, 13% related to clients domiciled in Switzerland, 24% in Europe (excluding Switzerland) and 55% in North America. (b)(iii) Credit risk mitigation techniques Credit risk associated with derivative instru- ments is mitigated by the use of master netting agreements. A further method of reducing credit exposure arising from 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 counter- party. The impact of master netting agreements as at 31 December 2001 is to mitigate credit risk on derivative instruments by approximately CHF 97 billion. The impact can change substan- tially over short periods of time, because the exposure is affected by each transaction subject to the arrangement. The Group subjects its derivative-related credit risks to the same credit approval, limit and monitoring standards that it uses for managing other transactions that create credit exposure. This includes evaluation of counterparties as to creditworthiness and suitability, and managing the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared against established limits on a con- tinual basis and is subject to a standard excep- tion reporting process. 130 Note 30 Financial Instruments Risk Position (continued) c) Currency Risk The Swiss franc is the Group’s reporting currency. Hedging transactions are used to manage forgeign currency risks (see Note 24: Deriv- ative Instruments). Breakdown of assets and liabilities by currencies CHF billion CHF USD 31.12.01 31.12.00 Other CHF USD Assets Cash and balances with central banks 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 Goodwill and other intangible assets Other assets Total assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Accrued expenses and deferred income Debt issued Other liabilities Minority interests Shareholders’ equity Total liabilities, minority interests and shareholders’ equity 3.0 5.0 0.1 5.1 9.6 30.6 151.4 2.9 0.7 0.7 6.3 0.2 2.1 217.7 8.0 0.0 12.8 2.8 25.7 123.3 2.4 15.7 7.2 0.1 43.5 0.3 8.6 156.4 142.9 265.2 11.4 43.1 7.4 4.9 0.0 1.5 18.5 5.6 665.8 68.6 24.3 271.1 65.2 6.5 138.8 10.0 120.0 6.1 3.9 0.0 EUR 0.6 5.2 2.5 40.2 47.2 1.2 11.9 1.5 0.8 0.0 0.1 0.0 0.8 17.1 8.7 3.9 81.1 75.9 30.2 20.1 17.0 1.2 0.0 0.8 0.4 1.4 112.0 257.8 12.9 3.2 30.7 12.5 1.6 41.5 0.9 8.8 0.9 0.0 0.0 17.0 2.8 54.0 25.3 37.7 30.2 4.0 11.7 1.5 0.1 0.0 1.9 5.8 0.5 5.3 16.1 11.7 154.2 6.5 1.6 0.7 6.9 0.3 3.2 214.7 6.5 0.1 10.0 2.0 8.6 118.8 3.0 18.3 9.9 0.2 44.8 0.2 10.4 169.2 83.7 184.1 6.9 52.3 8.3 4.4 0.0 1.4 19.1 3.3 543.3 46.5 12.6 194.6 52.4 6.3 129.7 11.8 90.7 3.6 2.5 0.0 241.5 714.5 113.0 184.3 222.2 550.7 EUR 0.5 8.0 2.4 37.4 38.2 0.6 7.1 0.9 0.2 0.1 0.0 0.0 0.6 96.0 10.6 5.0 16.1 11.4 2.0 29.9 1.7 4.4 2.5 0.1 0.0 83.7 Other 0.4 4.9 5.8 67.4 77.2 38.7 31.2 3.9 0.9 0.1 0.6 0.1 2.4 233.6 18.6 5.7 74.9 16.8 59.0 32.4 4.5 16.2 2.8 0.1 0.0 231.0 131 UBS Group Financial Statements Notes to the Financial Statements Note 30 Financial Instruments Risk Position (continued) d) Liquidity Risk Maturity analysis of assets and liabilities CHF billion Assets Cash and balances with central banks 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 Goodwill and other intangible assets Other assets Total 31.12.2001 Total 31.12.2000 Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total 31.12.2001 Total 31.12.2000 On demand Subject to notice1 Due within 3 mths Due between 3 and 12 mths Due between 1 and 5 years Due after 5 years 21.0 10.6 0.0 0.0 397.9 73.4 0.0 9.3 7.6 0.0 0.0 0.0 9.9 529.7 351.8 11.1 0.0 0.0 105.8 71.5 141.4 17.3 0.0 15.7 362.8 283.1 0.0 0.0 0.0 0.0 0.0 29.7 0.3 0.0 0.0 0.0 0.0 0.0 30.0 38.8 2.7 0.0 0.0 0.0 0.0 3.7 0.0 0.0 0.0 6.4 77.2 14.7 162.5 236.9 0.0 0.0 96.0 3.3 0.0 0.0 0.0 0.0 0.0 513.4 502.3 87.9 30.3 336.9 0.0 0.0 178.9 0.0 66.0 0.0 700.0 536.5 1.5 0.0 31.4 0.0 0.0 36.5 4.8 0.0 0.0 0.0 0.0 0.0 74.2 87.3 4.2 0.0 31.7 0.0 0.0 7.7 0.0 50.3 0.0 93.9 84.3 0.4 0.4 1.0 0.0 0.0 54.7 7.1 0.0 0.0 0.0 0.0 0.0 63.6 60.8 0.5 0.0 0.0 0.0 0.0 1.2 0.0 27.6 0.0 29.3 33.3 0.3 0.0 0.0 0.0 0.0 9.6 4.0 0.0 0.7 8.7 19.1 0.0 42.4 46.6 0.1 0.0 0.0 0.0 0.0 0.9 0.0 12.3 0.0 13.3 25.4 Total 21.0 27.5 162.9 269.3 397.9 73.4 226.5 28.8 7.6 0.7 8.7 19.1 9.9 1,253.3 1,087.6 106.5 30.3 368.6 105.8 71.5 333.8 17.3 156.2 15.7 1,205.7 1,039.8 1 Deposits without a fixed term, on which notice of withdrawal or termination has not been given (such funds may be withdrawn by the depositor or repaid by the borrower subject to an agreed period of notice). 132 Note 30 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 on securities 2 Positive replacement values Loans, net of allowances for credit losses and other collateralized lendings Accrued income and prepaid expenses Property and equipment 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 31.12.01 380,641 29,500 73,447 305,624 7,554 13,202 9,875 25,487 50,705 8,362,374 365,100 Risk- weighted amount 31.12.01 7,640 10,992 19,556 154,908 3,679 13,202 4,504 9,868 5,034 9,256 1,777 13,319 253,735 Balance sheet / notional amount1 31.12.00 333,270 20,463 57,875 312,376 7,062 13,620 9,491 27,786 53,643 5,743,239 380,411 Risk- weighted amount1 31.12.00 7,409 10,979 18,763 162,539 4,653 13,620 5,565 12,548 12,599 10,933 2,922 10,760 273,290 1 Changes have been made to prior year to conform to the current presentation (see Note 1: Summary of Significant Accounting Policies). 3 The risk-weighted amount corresponds to the security 2 Excluding positions in the trading book, these are included in market risk positions. 4 Value at Risk according to the internal model multiplied by a factor of 12.5 to create the risk-weighted margin (add-on) of the contracts. amount of the market risk positions in the trading book. BIS capital ratios Tier 1 of which hybrid Tier 1 Tier 2 Total BIS Capital CHF million 31.12.01 Ratio % 31.12.01 Capital CHF million 31.12.00 Ratio % 31.12.00 29,322 3,638 8,149 37,471 11.6 1.4 3.2 14.8 31,892 2,456 10,968 42,860 11.7 0.9 4.0 15.7 The Tier 1 capital includes CHF 3,638 million (USD 2,175 million) trust preferred securities at 31 December 2001 and CHF 2,456 million (USD 1,500 million) at 31 December 2000. Among other measures the Group monitors the adequacy of its capital using ratios established by the Bank for International Settlements (BIS). The BIS ratio is required to be at least 8%. The Group has complied with all BIS and Swiss capi- tal adequacy rules for all periods presented. These ratios measure capital adequacy by com- paring 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 con- verted into their credit equivalents and market risk positions at a weighted amount to reflect their relative risk. The capital adequacy rules require a mini- mum amount of capital to cover credit and mar- ket risk exposures. For the calculation of the capital required for credit risk the balance sheet assets are weighted according to broad cate- gories of notional credit risk, being assigned a 133 UBS Group Financial Statements Notes to the Financial Statements Note 30 Financial Instruments Risk Position (continued) e) Capital Adequacy (continued) risk weighting according to the amount of capi- tal deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50%, 100%) are applied; for example cash, claims col- lateralized by cash or claims collateralized by OECD central-government securities have a zero risk weighting which means that no capital is required to be held in respect of these assets. Uncollateralized loans granted to corporate or private customers carry a 100% risk weighting, meaning that they must be supported by capital equal to 8% of the carrying amount. Other asset categories have weightings of 20% or 50% which require 1.6% or 4% capital. The net positions in securities not held in the trading book reflect the Group’s exposure to an issuer of securities arising from its physical 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 trans- action 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 contracts and purchased options, the credit equivalent is computed on the basis of the cur- rent replacement value of the respective contract plus a security margin (add-on) to cover the future potential credit risk during the remaining duration of the contract. The Group 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 throughout the Group, using an internal Value- at-Risk (VaR) model. This approach was intro- duced in the BIS 1996 market risk amendment to the Basel Accord of July 1988 and incorporated in the Swiss capital adequacy rules of the Swiss 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 share capital, share premium, retained earnings including current year profit, foreign currency translation and minority interest less accrued dividends, net long positions in own shares and goodwill. Tier 2 capital includes the Group’s subordinated long- term debt. 134 Note 31 Fair Value of Financial Instruments The following table presents the fair value of financial instruments based on the following val- uation methods and assumptions. It is presented because not all financial instruments are reflect- ed in the financial statements at fair value. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction. We use market price to determine fair value, where an active market (such as a rec- ognized stock exchange) exists, as it is the best evidence of the fair value of a financial instru- ment. However, market prices are not available for a significant number of the financial assets and liabilities held and issued by the Group. Therefore, for financial instruments where no market price is available, the fair values presented in the following table have been estimated using present value or other estimation and valuation techniques based on market conditions existing at balance sheet dates. The values derived from applying these tech- niques are significantly affected by the under- lying assumptions used concerning both the amounts and timing of future cash flows and the discount rates. The following methods and assumptions have been used: (a) trading assets, derivatives and other trans- actions 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) financial investments classified as available- for-sale are measured at fair value by reference to quoted market prices when available. If quoted market prices are not available, then fair values are estimated on the basis of pricing models or other recognized valuation tech- niques. Prior to the adoption of IAS 39 in 2001, financial investments were carried at cost or if considered held for sale, at the lower of cost or market. Upon the adoption of the standard, all financial investments are carried at fair value. Unrealized gains and unrealized losses, excluding impairment write-downs, are recorded in shareholders’ equity until an asset is sold, collected or otherwise disposed of; (c) 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; (d) the fair value of demand deposits and sav- ings accounts with no specific maturity is as- sumed to be the amount payable on demand at the balance sheet date; (f) (e) the fair value of variable rate financial instruments is assumed to approximate their carrying amounts; 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 in the following table. However, because other institutions may use different methods and assumptions, such fair value disclosures in this note cannot necessarily be compared from one financial institution to another. 135 UBS Group Financial Statements Notes to the Financial Statements Note 31 Fair Value of Financial Instruments (continued) CHF billion Assets Cash and balances with central banks 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 Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Debt issued Subtotal Unrealized gains and losses recorded in shareholders’ equity before tax on: Financial investments Derivative instruments designated as cash flow hedges Net unrealized gains and losses not recognized in the income statement Carrying value 31.12.01 Fair Unrealized value gain / (loss) 31.12.01 31.12.01 Carrying value 31.12.00 Fair Unrealized value gain / (loss) 31.12.00 31.12.00 21.0 27.7 162.9 269.3 397.9 73.4 226.7 28.8 107.2 30.3 368.6 105.8 71.4 334.0 157.5 21.0 27.7 162.9 269.3 397.9 73.4 227.0 28.8 107.2 30.3 368.6 105.8 71.4 334.0 158.6 3.0 29.1 177.9 193.8 315.6 57.9 245.1 19.6 82.8 23.4 295.5 82.6 75.9 311.2 130.5 3.0 29.1 177.9 193.8 315.6 57.9 244.9 21.4 82.8 23.4 295.5 82.6 75.9 311.2 131.4 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.1) (0.8) 1.2 (0.6) (0.2) 0.0 0.0 0.0 0.0 0.0 0.0 (0.2) 1.8 0.0 0.0 0.0 0.0 0.0 0.0 (0.9) 0.7 (0.5) 1 0.2 1 Relates to the cash flow hedge opening adjustment for IAS 39 at 1 January 2001 (see Note 1 Summary of Significant Accounting Policies for more information on the adoption of IAS 39). 136 Note 31 Fair Value of Financial Instruments (continued) The table does not reflect the fair values of non- financial assets and liabilities such as property, equipment, goodwill, prepayments and non- interest accruals. The interest amounts accrued 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 predominantly hedged by deriv- ative instruments, mainly interest rate swaps. The interest rate risk inherent in the balance sheet positions 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. When fixed rate financial instruments are hedged with derivatives in a fair value hedge, they are reflected in the above table at fair value related to the hedged exposure with fair value changes record- ed in net profit. When derivative instruments are designated as cash flow hedges, the difference between the total amount of valuation gains and losses and the amortized amount of the deriva- tives is deferred and shown net in the table as unrealized gains and losses on derivative instru- ments designated as cash flow hedges. The decrease in the Net unrealized gains and losses during 2001 of CHF 0.4 billion is mainly attributable to the lower unrealized fair value gain from financial investments (down CHF 0.6 billion to CHF 1.2 billion). The change in the unrealized gains and losses of fixed rate long- term assets has increased by CHF 0.5 billion from the prior year as a result of declining inter- est rates during 2001. This was partially offset by an increase in fair value loss from fixed rate long- term debt issues and from hedging derivatives. Note 32 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 these locations. Swiss pension plans until 30 June 1999 The pension funds of the Group were set up as trusts, domiciled in Basel and Zurich. All domes- tic employees were covered. The pension funds were defined benefit plans. The pension plan benefits exceeded the minimum benefits required under Swiss law. Contributions were paid for by the Group and its employees. The employee contributions were calculated as a percentage of the insured annual salary and were deducted monthly. The percentages deducted from salary were depend- ent on age and varied between 8% and 12%. The Group contributions were variable and amount to 125% to 250% of the employees con- tributions depending on the financial situation of the pension fund. The pension plan formula was based on years of contributions and final covered salary. The benefits covered included retirement benefits, disability, 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 liqui- dated and a new foundation with domicile in Zurich was 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 an increase of vested plan benefits for the beneficiaries of such plans due to the alloca- tion of the excess of the fair value of plan assets over the benefit obligation. This had the effect of increasing the Defined benefit obligation by 137 UBS Group Financial Statements Notes to the Financial Statements Note 32 Retirement Benefit Plans and Other Employee Benefits (continued) CHF 3,525 million. In accordance with IAS 19 (revised 2000) this resulted in a one-time charge to income which was offset by the recognition of assets previously unrecognized due to the para- graph 58 (b) limitation of IAS 19 (revised 2000) used to fund this increase in benefits. The pension plan covers practically all employees in Switzerland and exceeds the mini- mum benefit requirements under Swiss law. Con- tributions to the pension plan are paid for by employees and the Group. The employee con- tributions are calculated as a percentage of insured annual salary and are deducted monthly. The percentages deducted from salary for full benefit coverage (including risk benefits) depend on age and vary between 7% and 10%. The Group pays a variable contribution that ranges between 150% and 220% of the sum of employ- ees’ contributions. The pension plan formula is based on years of contributions and final covered salary. The benefits covered include retirement benefits, dis- ability, death and survivor pension. In 1999, the Group recognized a prepaid pension asset of CHF 456 million representing excess employer contributions. In 2000, CHF 100 million of this asset was used to satisfy the benefit obligation. There was no asset used in 2001. Foreign pension plans The foreign locations of UBS operate various pension schemes in accordance with local regula- tions and practices. Among these schemes are defined contribution plans as well as defined benefit 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 workforce. Certain of these schemes permit employees to make contributions and earn matching or other contributions from the Group. The retirement plans provide benefits in the event of retirement, death, disability or employ- ment termination. The plans’ retirement benefits depend on age, contributions and level of com- pensation. The principal plans are financed in full by the Group. The funding policy for these plans is consistent with local government and tax requirements. The assumptions used in foreign plans take into account local economic conditions. The amounts shown for foreign plans reflect the net funded positions of the major foreign plans. Postretirement medical and life plans In the US and the UK the Group offers retiree medical benefits that contribute to the health care coverage of employees and beneficiaries after retirement. In addition to retiree medical benefits, the Group in the US also provides retiree life insurance benefits. The benefit obligation in excess of plan assets for those plans amounts to CHF 142 million as of 31 December 2001 (2000 CHF 111 million, 1999 CHF 113 million) and the total unfunded accrued postretirement liabilities to CHF 130 mil- lion as of 31 December 2001 (2000 CHF 108 mil- lion, 1999 CHF 83 million). The actuarially determined net postretirement cost amounts to CHF 24 million as of 31 December 2001 (2000 CHF 22 million, 1999 CHF 17 million). 138 Note 32 Retirement Benefit Plans and Other Employee Benefits (continued) CHF million 31.12.01 31.12.00 31.12.99 31.12.01 31.12.00 31.12.99 Swiss Foreign (17,712) (541) (674) (17,011 ) (545 ) (666 ) (262) 421 889 (211 ) 721 (14,944 ) (464 ) (636 ) (3,517 ) 1,000 571 979 (3,406) (121) (204) (1) (345) 107 (12) 429 (2,444 ) (165 ) (162 ) (3 ) (99 ) 84 (740 ) 123 (2,009) (118) (123) (2) 2 133 (269) (58) (17,879) (17,712 ) (17,011 ) (3,553) (3,406 ) (2,444) 19,074 (765) 656 213 (889) 18,565 535 490 205 (721 ) 17,885 2,136 515 180 (979 ) (1,172 ) 3,378 (220) 258 (107) 7 (429) 2,880 13 23 (84 ) 676 (130 ) 2,173 352 22 15 (133) 333 118 18,289 19,074 18,565 2,887 3,378 2,880 Reconciliation of benefit obligation Defined benefit obligation at beginning of the year Service cost Interest cost Plan amendments Special termination benefits Actuarial gain/(loss) Benefits paid Acquisition of PaineWebber Currency adjustment Other Defined benefit obligation at the end of the year Reconciliation of fair value of plan assets Fair value of plan assets at the beginning of the year Actual return on plan assets Employer contributions Plan participant contributions Benefits paid Special termination benefits Acquisition of PaineWebber Currency adjustments Other Fair value of plan assets at the end of the year Funded status Plan assets in excess of benefit obligation Unrecognized net actuarial gains Unrecognized transition amount Unrecognized past service cost Unrecognized assets 410 961 1,362 (331 ) 1,554 (724 ) (666) 673 (Unfunded accrued) / prepaid pension cost 356 (1,015) (675 ) 356 (374 ) 456 Movement in the net (liability) or asset (Unfunded accrued) / prepaid pension cost at the beginning of the year Net periodic pension cost Employer contributions Acquisition of PaineWebber Currency adjustments 356 (656) 656 456 (590 ) 490 0 (59 ) 515 (Unfunded accrued) / prepaid pension cost 356 356 456 Amounts recognized in the balance sheet Prepaid pension cost Accrued pension liability 356 (Unfunded accrued) / prepaid pension cost 356 356 356 456 456 2 9 (153) (97) 258 1 9 185 (176) 9 (28 ) (81 ) 1 2 (47 ) (153 ) (63 ) (55 ) 13 (63 ) 15 (153 ) 53 (206 ) (153 ) 436 (474) 1 2 (28) (63) 43 (123) 22 (5) (63) 49 (112) (63) 139 UBS Group Financial Statements Notes to the Financial Statements Note 32 Retirement Benefit Plans and Other Employee Benefits (continued) CHF million 31.12.01 31.12.00 31.12.99 31.12.01 31.12.00 31.12.99 Swiss Foreign Amounts recognized in the Income Statement Current service cost Interest cost Expected return on plan assets Adjustment to limit prepaid pension cost Amortization of unrecognized prior service costs Amortization of unrecognized net (gains) / losses Employee contributions Actuarially determined net periodic pension cost Actual return on plan assets (%) Principal actuarial assumptions used (%) Discount rate Expected rate of return on plan assets Expected rate of salary increase Rate of pension increase 541 674 (947) 339 262 545 666 (927 ) 300 211 464 636 (883 ) (150 ) 172 (213) (205 ) (180 ) 656 (4.0) 4.0 5.0 2.5 1.5 590 2.9 4.0 5.0 2.5 1.5 59 11.9 4.0 5.0 2.5 1.5 Additional details to fair value of plan assets Swiss 31.12.01 31.12.00 31.12.99 Own financial instruments Securities lent to UBS included in plan assets Other assets used by UBS included in plan assets 781 824 104 1,211 3,432 179 846 5,939 187 121 204 (228) 97 (7.3) 6.2 7.9 4.4 1.5 165 162 (243 ) 3 (9 ) (23 ) 55 (0.9 ) 6.3 8.1 4.4 1.6 118 123 (195) 21 77 (6) (15) 123 15.3 6.0 8.1 4.6 2.2 140 Note 32 Retirement Benefit Plans and Other Employee Benefits (continued) Foreign post-retirement medical and life plans CHF million 31.12.01 31.12.00 31.12.99 Post-retirement benefit obligation at beginning of the year Service cost Interest cost Plan amendments Actuarial gain/(loss) Benefits paid Acquisition of PaineWebber Currency adjustment Other Post-retirement benefit obligation at end of the year (115) (7) (9) (10) (6) 4 (2) (145) (117 ) (6 ) (8 ) (7 ) 27 5 (9 ) 0 0 (115 ) (96) (2) (6) 0 0 4 0 (16) (1) (117) CHF million 31.12.01 31.12.00 31.12.99 Fair value of plan assets at beginning of the year Actual return on plan assets Company contributions Benefits paid Fair value of plan assets at end of the year 4 0 3 (4) 3 4 0 4 (4 ) 4 3 1 4 (4) 4 The assumed health care cost trend used in determining the benefit expense for 2001 is 5.32%. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in the assumed health care cost trend rates would change the US post-retirement benefit obligation and the service and interest cost components of the net periodic post-retirement benefit costs as follows: CHF million Effect on total service and interest cost Effect on the post-retirement benefit obligation 1% increase 1% decrease 3.0 17.0 (2.0) (14.0) Note 33 Equity Participation Plans a) Equity Participation Plans Offered UBS has established several equity participation plans to further align the long-term interests of executives, managers, staff and shareholders. The plans are offered to eligible employees in approximately 50 countries and are designed to meet the complex legal, tax and regulatory requirements of each country in which they are offered. The explanations below describe the most significant plans in general, but specific plan rules and investment offerings may vary by country. Equity Plus Program (EPP): This plan replaces the Equity Investment Plan (EIP) (see below) and will be the main plan for all UBS employees going forward. It was previously only available to UBS PaineWebber employees. Equity Plus gives eligible UBS employees the opportunity to purchase UBS shares at fair market value on the purchase date and receive two options on UBS shares for each share purchased, up to a maxi- mum limit. The options have a strike price equal to the fair market value of the stock on the date the option is granted. Share purchases can be made annually from bonus compensation or quarterly, based on regular deductions from salary. Shares purchased under EPP are restrict- ed from resale for two years from the time of purchase, and the options granted have either a 141 UBS Group Financial Statements Notes to the Financial Statements Note 33 Equity Participation Plans (continued) a) Equity Participation Plans Offered (continued) two or three year vesting requirement and expire either seven or ten years after the date of grant. Discounted Purchase Plans: All employees in Switzerland are entitled to purchase a specified number of UBS 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. Equity Ownership Plan (EOP): Selected per- sonnel receive a mandatory portion of their per- formance related compensation in UBS shares and are also awarded a matching contribution in the form of additional UBS shares or options. Participants in certain countries are eligible to receive a portion of their award in Alternative Investment Vehicles (AIVs). These are generally money market funds, UBS and non-UBS mutual funds and other UBS sponsored funds. The awards vest either at the end of the restriction period (“cliff” vesting) which is normally three years or ratably over the vesting period. Under certain conditions, these awards are fully for- feitable by the employee. Long Term Incentive Plans: Under these plans, key employees are granted options to pur- chase UBS shares at a price not less than the fair market value of the shares on the date the option is granted. Long-term stock options are blocked for either three or five years during which they cannot be exercised. Expiration of the options is generally six years. One option gives the right to purchase one registered UBS share at the option’s strike price. In some grants, accelerated vesting or non-forfeitability may occur if certain share appreciation targets are met. Other deferred compensation plans: UBS sponsors other deferred compensation plans for selected eligible employees. Generally, contri- butions are made on a tax deferred basis. Partic- ipants are allowed to invest in UBS shares or AIVs. No additional company match is granted, and the plan is generally not forfeitable. In addi- tion, UBS also grants deferred compensation awards to new recruits, senior management and other key employees in the form of UBS shares, options or other leveraged interests in non-UBS instruments. Equity Investment Plan (EIP) (now discon- tinued): Prior to the discontinuance of new awards under this plan in 2001, employees had the choice to invest part of their annual bonus in UBS shares, warrants or other derivatives on UBS shares. A holding period, generally three years, applied during which the instruments could not be sold or exercised. In addition, par- ticipants in the plan received a matching contri- bution of additional UBS shares or derivatives. Only the UBS matching contribution was for- feitable. The last EIP vesting will take place in 2004. Staff who used to have the possibility to take part in EIP are now offered the opportunity to take part in EPP. 142 Note 33 Equity Participation Plans (continued) b) UBS Share Awards i) Stock bonus plans Shares granted under the various equity participation plans mentioned above are as follows: Stock bonus plans Shares awarded Weighted-average fair market value per share (in CHF) 31.12.01 15,644,000 90 31.12.00 38,340,000 76 31.12.99 10,407,000 73 The stock bonus awards for 2000 include approximately 19.8 million shares granted under the retention agreements with key employees of UBS PaineWebber. The bonus awards for 1999 include 4.2 million shares issued in exchange for previously issued non-share awards and for spe- cial bonuses. 9.5 million, 4.0 million and 3.1 million shares vested in 2001, 2000 and 1999, respectively. Of these shares, the majority vested on 15 March of each year and the remaining shares vested on various dates throughout the year. On 31 De- cember 2001, 2000 and 1999, there were 52.3 mil- lion, 47.5 million and 14.4 million unvested shares outstanding in various equity participation plans with a corresponding market value of CHF 4.4 billion in 2001, CHF 4.2 billion in 2000 and CHF 1.0 billion in 1999. ii) Stock purchase plans The following table shows the shares awarded and the weighted-average fair value per share for the Group’s stock purchase plans. Stock purchase plans Share quantity for discounted purchase plans Weighted-average purchase price (in CHF) Share quantity for UBS PaineWebber plans Weighted-average fair value purchase price (in USD) 31.12.01 1,701,099 47 1,221,416 51 31.12.00 966,000 35 298,725 46 31.12.99 5,406,000 49 143 UBS Group Financial Statements Notes to the Financial Statements Note 33 Equity Participation Plans (continued) c) UBS Option Awards Movements in options granted under various equity participation plans are as follows: Outstanding, at the beginning of the year Options due to the acquisition of PaineWebber Granted during the year Exercised during the year Forfeited during the year Outstanding, at the end of the year Exercisable, at the end of the year Weighted average exercise price (in CHF) 31.12.01 Number of options 31.12.00 Weighted average exercise price (in CHF) 31.12.00 Number of options 31.12.01 63,308,502 58 30,415,386 0 11,070,992 (10,083,075) (1,009,750) 63,286,669 25,550,932 18,975,8101 21,248,0462 (5,390,307 ) (1,940,433 ) 63,308,502 18,310,839 94 49 74 66 50 66 34 72 50 64 58 34 Number of options 31.12.99 21,608,358 0 10,317,426 (215,298 ) (1,295,100 ) 30,415,386 1,951,920 Weighted average exercise price (in CHF) 31.12.99 59 0 79 60 63 66 62 1 UBS AG issued options in exchange for options of PaineWebber which have been included in the purchase price for PaineWebber at a fair value of CHF 992 million. 2 Includes options granted to key employees of UBS PaineWebber, vesting over a 3-year period, subject to employee’s continued employment and other restrictions. Some of the options in the table above have exercise prices denominated in US dollars which have been converted into CHF at the year- end spot exchange rate for purposes of this table. The exercise dates can occur on any business day during the year. The following table summarizes additional information about stock options outstanding at 31 December 2001: Range of exercise prices per share Number of options outstanding Weighted-average exercise price Weighted-average remaining contractual life Number of options exercisable Weighted-average exercise price Options outstanding Options exercisable CHF 56.67–70.00 70.01–85.00 85.01–106.00 56.67–106.00 USD 6.34–15.00 15.01–25.00 25.01–35.00 35.01–45.00 45.01–55.00 55.01–58.76 6.34–58.76 19,966,200 11,017,595 6,024,480 37,008,275 5,269,657 2,879,652 5,983,999 0 10,067,766 2,077,320 26,278,394 CHF 63.08 78.41 98.60 73.42 USD 8.79 22.61 28.62 0 48.05 57.81 33.74 Years 3.3 3.3 6.8 3.8 Years 2.7 3.2 4.3 0.0 6.1 6.1 4.7 4,374,462 0 31,800 4,406,262 5,269,657 2,879,652 5,983,999 0 7,011,362 0 21,144,670 CHF 57.85 0 90.00 58.08 USD 8.79 22.61 28.62 0 47.05 0 28.97 Options are normally granted with a strike price either equal to fair market value or approximately 10% greater than the fair value of the underlying share on the grant date. 144 Note 33 Equity Participation Plans (continued) d) Compensation Expense Generally, the Group’s policy is to recognize expense at the date of grant for equity participa- tion instruments (shares, warrants, options and other derivatives for which the underlying is the Group’s own shares). The amount of expense recognized is equal to the intrinsic value of the instrument at such date and is calculated as follows: 1) For stock options, it is the difference between the strike price and fair value of shares at the date of grant, if any. 2) For UBS shares and other derivative instruments, it is the fair market value. 3) For discounted share plans, the expense is equal to the difference between the fair market value and discounted value. The accrued expense for share based compen- sation for the years ended 31 December 2001, 2000 and 1999 was CHF 974 million, CHF 1,749 million and CHF 1,684 million, respec- tively. The accruals include awards earned cur- rently but issued in the following year. e) Pro-Forma Net Income The following table presents Net income and Earnings per share for 2001, 2000 and 1999 as if the Group had adopted the fair value method of accounting for its equity compensation plans, rather than the intrinsic value method described in paragraph d) above. CHF million, except per share data 31.12.01 31.12.00 31.12.99 Net income Basic EPS Diluted EPS As reported Pro-forma As reported Pro-forma As reported Pro-forma 4,973 4,626 3.93 3.65 3.78 3.51 7,792 7,6341 6.44 6.31 6.35 6.22 6,153 6,0281 5.07 4.96 5.02 4.92 1 Pro-forma net income at 31 December 2000 and 31 December 1999 has been adjusted for expense reversals related to forfeitures. The effects of recognizing compensation expense and providing pro-forma disclosures are not likely to be representative of the effects on reported Net profit for future years. The fair value of options granted was determined using a proprietary option pricing model, substan- tially similar to the Black-Scholes model, with the following assumptions: Expected volatility Risk free interest rate (CHF) Risk free interest rate (USD) Expected dividend rate Expected life (years) 31.12.01 31.12.00 31.12.99 30% 3.51% 5.81% 2.67% 4.5 30% 3.27% 5.66% 2.44% 4.4 33% 2.07% – 1.44% 6 The weighted-average fair value of options granted in 2001, 2000 and 1999 was CHF 23, CHF 16 and CHF 20 per share, respectively. 145 UBS Group Financial Statements Notes to the Financial Statements Note 34 Related Parties Related parties include Associated companies, the Board of Directors, the Group Executive Board, the Group Managing Board, close family members and enterprises which are controlled by these individuals as well as certain persons performing similar functions. Total remuneration to related parties recognized in the income statement amounted to CHF 321.4 million in 2001, CHF 272.3 million in 2000 and CHF 193.1 million in 1999, including accrued pen- sion benefits of approximately CHF 35.4 million in 2001, CHF 30.0 million in 2000 and CHF 21.2 million in 1999. The remuneration paid to related parties in 2001 includes approximately USD 70 million (CHF 118 million) paid to employees of Paine Webber Group, Inc. who joined UBS at the merger on 3 November 2000. The number of long-term stock options outstanding to related parties from equity plans was 8,366,103 at 31 December 2001 and 4,693,458 at 31 December 2000. These plans are further explained in Note 33 Equity Participation Plans. The external members of the Board of Directors do not have employment or service contracts with UBS, and thus are not entitled to benefits upon termination of their service on the Board of Directors. The full-time Chairman and Vice-Chairmen have top-management employment contracts and receive pension benefits upon retirement. The total amounts of shares and warrants held by members of the Board of Directors, Group Executive Board and Group Managing Board were 4,068,918 and 60,578,417 as of 31 December 2001 and 7,583,184 and 69,504,577 as of 31 December 2000. No member of the Board of Direc- tors, Group Executive Board or Group Managing Board is the beneficial owner of more than 1% of the Group’s shares. Loans and advances receivable from related parties were as follows: CHF million Mortgages at the beginning of the year Additions Reductions Mortgages at the end of the year 31.12.01 31.12.00 36 8 (12) 32 28 9 (1) 36 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 adjusted for reduced credit risk. 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 31.12.01 31.12.00 0 65 0 65 62 0 (62) 0 All loans and advances to associated companies are transacted at arm’s length. At 31 December 2001, there are trading exposures and guarantees to significant associated companies of CHF 306 million. The Group routinely receives services from associated companies at an arm’s length basis. For the year ended 31 December 2001, the amount paid to significant associates was CHF 98 million. Note 36 provides a list of significant associates. 146 Note 35 Post-Balance Sheet Events There have been no material post-balance sheet events which would require disclosure or adjust- ment to the 31 December 2001 Financial State- ments. Bond issues have decreased by CHF 1,109 million from the balance sheet date to 12 February 2002. On 12 February 2002, the Board of Directors reviewed the Financial Statements and author- ized them for issue. These Financial Statements will be submitted to the Annual General Meeting of Shareholders to be held on 18 April 2002 for approval. Note 36 Significant Subsidiaries and Associates The legal entity group structure of UBS is designed to support the Group’s businesses within an effi- cient legal, tax, regulatory and funding framework. Neither the Business Groups of UBS (namely UBS Warburg, UBS Switzerland and UBS Asset Management) nor Corporate Center are replicated in their own individual legal entities but rather they generally operate out of the parent bank, UBS AG, through its Swiss and foreign branches. The parent bank structure allows UBS to capitalize on the advantages offered by the use of one legal platform by all the Business Groups. It provides for the most cost efficient and flexible struc- ture and facilitates efficient allocation and use of capital, comprehensive risk management and straightforward funding processes. Where, usually due to local legal, tax or regulatory rules or due to additional legal entities join- ing the UBS Group via acquisition, it is either not possible or not efficient to operate out of the par- ent bank then local subsidiary companies host the appropriate businesses. The significant operating subsidiary companies in the Group are listed below: Significant subsidiaries Company Jurisdiction of incorporation Business Group 1 Share capital in millions Equity interest accumul- ated in % CH Bern, Switzerland CH Zurich, Switzerland WA Rio de Janeiro, Brazil CH Basel, Switzerland CH Lugano, Switzerland AM Delaware, USA AM Halifax, Canada AM New York, USA Delaware, USA AM George Town, Cayman Islands WA CH Zurich, Switzerland CH CH Armand von Ernst & Cie AG Aventic AG Banco UBS Warburg SA Bank Ehinger & Cie AG BDL Banco di Lugano Brinson Advisors Inc Brinson Canada Co Brinson Partners (New York) Inc Brinson Partners Inc Brunswick UBS Warburg Limited Cantrade Privatbank AG Cantrade Private Bank Switzerland (CI) Limited St. Helier, Jersey Crédit Industriel SA EIBA «Eidgenössische Bank» Beteiligungs- und Finanzgesellschaft Factors AG Ferrier Lullin & Cie SA Fondvest AG Global Asset Management Limited Hirslanden Holding AG HYPOSWISS, Schweizerische Hypotheken- und Handelsbank Zurich, Switzerland Zurich, Switzerland Geneva, Switzerland Zurich, Switzerland Hamilton, Bermuda Zurich, Switzerland WA CH CH AM AM CC CH Zurich, Switzerland Zurich, Switzerland CHF CHF BRL CHF CHF USD CAD USD USD USD CHF GBP CHF CHF CHF CHF CHF USD CHF 5.0 30.0 52.9 6.0 50.0 35.22 117.0 0.5 – 25.02 10.0 0.7 10.0 14.0 5.0 30.0 4.3 2.0 22.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 91.2 CHF 26.0 100.03 147 Footnotes 1 CH: UBS Switzerland, AM: UBS Asset Management, WA: UBS Warburg, CC: Corporate Center. 2 Share Capital and Share Premium. 3 Sold subsequently to 31 December 2001. UBS Group Financial Statements Notes to the Financial Statements Note 36 Significant Subsidiaries and Associates (continued) Significant subsidiaries (continued) Company IL Immobilien-Leasing AG PaineWebber Capital Inc PT UBS Warburg Indonesia PW Trust Company SG Warburg & Co International BV SG Warburg Securities SA Thesaurus Continentale Effekten-Gesellschaft Zürich UBS (Bahamas) Ltd UBS (Cayman Islands) Ltd UBS (France) SA UBS (Italia) SpA UBS (Luxembourg) SA UBS (Monaco) SA UBS (Sydney) Limited UBS (Trust and Banking) Ltd UBS (USA) Inc UBS Americas Inc UBS Asset Management (Australia) Ltd UBS Asset Management (France) SA UBS Asset Management (Italia) SIM SpA UBS Asset Management (Japan) Ltd UBS Asset Management (Singapore) Ltd UBS Asset Management (Taiwan) Ltd UBS Asset Management Holding Limited UBS Australia Limited UBS Bank (Canada) UBS Beteiligungs-GmbH & Co KG UBS Bunting Warburg Inc UBS Capital (Jersey) Ltd UBS Capital AG UBS Capital Americas Investments II LLC UBS Capital Asia Pacific Limited UBS Capital BV UBS Capital II LLC UBS Capital Latin America LDC UBS Capital LLC UBS Capital Partners Limited UBS Capital SpA UBS Card Center AG UBS España SA UBS Finance (Cayman Islands) Limited UBS Finance (Curação) NV UBS Finance (Delaware) LLC UBS Finanzholding AG UBS Fund Holding (Luxembourg) SA UBS Fund Holding (Switzerland) AG UBS Fund Management (Switzerland) AG UBS Fund Services (Luxembourg) SA UBS Global Trust Corporation UBS Immoleasing AG UBS International Holdings BV UBS Invest Kapitalanlagegesellschaft mbH UBS Leasing AG Jurisdiction of incorporation Business Group 1 CH Opfikon, Switzerland WA Delaware, USA WA Jakarta, Indonesia New Jersey, USA WA Amsterdam, the Netherlands WA WA Geneva, Switzerland CH Zurich, Switzerland Nassau, Bahamas CH George Town, Cayman Islands CH CH Paris, France CH Milan, Italy CH Luxembourg, Luxembourg CH Monte Carlo, Monaco WA Sydney, Australia AM Tokyo, Japan WA Delaware, USA WA Delaware, USA AM Sydney, Australia AM Paris, France AM Milan, Italy AM Tokyo, Japan AM Singapore, Singapore AM Taipei, Taiwan AM London, Great Britain WA Sydney, Australia CH Toronto, Canada WA Frankfurt, Germany WA Toronto, Canada WA St. Helier, Jersey WA Zurich, Switzerland Delaware, USA WA George Town, Cayman Islands WA WA The Hague, the Netherlands Delaware, USA WA George Town, Cayman Islands WA WA Delaware, USA WA London, Great Britain WA Milan, Italy CH Glattbrugg, Switzerland Madrid, Spain CH George Town, Cayman Islands CC Willemstad, Netherlands Antilles CC WA Delaware, USA CC Zurich, Switzerland AM Luxembourg, Luxembourg AM Basel, Switzerland AM Basel, Switzerland AM Luxembourg, Luxembourg CH St. John, Canada CH Zurich, Switzerland CC Amsterdam, the Netherlands AM Frankfurt, Germany CH Brugg, Switzerland Share capital in millions CHF 5.0 25.72 USD IDR 11,000.0 4.42 USD 40.5 GBP 14.5 CHF 30.0 CHF 4.0 USD 5.6 USD 10.0 EUR 22.2 EUR 150.0 CHF 9.2 EUR AUD 12.7 JPY 10,900.0 USD 315.0 USD 3,562.92 8.0 AUD 0.8 EUR EUR 0.5 2,200.0 JPY 4.0 SGD 340.0 TWD 8.02 GBP 50.0 AUD CAD 20.7 398.8 EUR 33.3 CAD 36.02 GBP 5.0 CHF 90.02 USD 5.0 USD 3.2 EUR 2.62 USD – USD 18.52 USD 6.7 GBP 25.8 EUR 40.0 CHF 65.3 EUR 0.5 USD 0.1 USD 37.32 USD 10.0 CHF 42.0 CHF 18.0 CHF 1.0 CHF 2.5 CHF 0.1 CAD 3.0 CHF 5.5 CHF 6.4 EUR 10.0 CHF Equity interest accumul- ated in % 100.0 100.0 85.0 99.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 84.1 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 92.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Footnotes 1 CH: UBS Switzerland, AM: UBS Asset Management, WA: UBS Warburg, CC: Corporate Center. 2 Share Capital and Share Premium. 148 Note 36 Significant Subsidiaries and Associates (continued) Significant subsidiaries (continued) Company Jurisdiction of incorporation Business Group 1 Zurich, Switzerland London, Great Britain Delaware, USA Delaware, USA CH WA AM WA WA California, USA WA Delaware, USA WA Delaware, USA WA Hamburg, Germany CH Connecticut, USA AM London, Great Britain WA Toronto, Canada CH CH Nassau, Bahamas George Town, Cayman Islands CH CH St. Helier, Jersey CH Singapore, Singapore WA London, Great Britain WA London, Great Britain WA Hong Kong, China WA Paris, France Milan, Italy WA George Town, Cayman Islands WA WA Kuala Lumpur, Malaysia Amsterdam, the Netherlands WA WA Frankfurt, Germany WA WA WA WA WA WA WA WA WA WA WA WA WA WA UBS Life AG UBS Limited UBS O’Connor LLC UBS PaineWebber Inc UBS PaineWebber Incorporated of Puerto Rico Hato Rey, Puerto Rico UBS PaineWebber Life Insurance Company UBS Portfolio LLC UBS Principal Finance LLC UBS Private Banking Deutschland AG UBS Realty Investors LLC UBS Securities Limited UBS Trust (Canada) UBS Trustees (Bahamas) Ltd UBS Trustees (Cayman) Ltd UBS Trustees (Jersey) Ltd UBS Trustees (Singapore) Ltd UBS UK Holding Limited UBS UK Limited UBS Warburg Asia Limited UBS Warburg (France) SA UBS Warburg (Italia) SpA UBS Warburg (Japan) Limited UBS Warburg (Malaysia) Sdn Bhd UBS Warburg (Nederland) BV UBS Warburg AG UBS Warburg Australia Corporate Finance Ltd Sydney, Australia UBS Warburg Australia Corporation Pty Limited Sydney, Australia Sydney, Australia UBS Warburg Australia Equities Ltd Sydney, Australia UBS Warburg Australia Limited Hong Kong, China UBS Warburg Derivatives Limited Hong Kong, China UBS Warburg Hong Kong Limited London, Great Britain UBS Warburg International Ltd Delaware, USA UBS Warburg LLC London, Great Britain UBS Warburg Ltd Auckland, New Zealand UBS Warburg New Zealand Equities Ltd Melbourne, Australia UBS Warburg Private Clients Ltd Singapore, Singapore UBS Warburg Pte Limited Delaware, USA UBS Warburg Real Estate Securities Inc Madrid, Spain UBS Warburg Securities (España) SV SA UBS Warburg Securities (South Africa) (Pty) Limited UBS Warburg Securities Co Ltd UBS Warburg Securities India Private Limited Mumbai, India UBS Warburg Securities Ltd UBS Warburg Securities Philippines Inc London, Great Britain Makati City, Philippines Sandton, South Africa Bangkok, Thailand WA WA WA WA WA Share capital in millions 25.0 CHF 10.0 GBP USD 1.0 USD 1,672.32 31.02 USD 29.32 USD 0.1 USD 0.1 USD 51.0 EUR – USD 10.0 GBP 12.5 CAD 2.0 USD 0.5 USD 0.7 GBP 3.3 SGD GBP 5.0 609.0 GBP 20.0 HKD 22.9 EUR EUR 1.9 JPY 50,000.0 0.5 MYR EUR 10.9 155.7 EUR – AUD 50.42 AUD 190.02 AUD 571.52 AUD 20.0 HKD 30.0 HKD GBP 18.0 948.1 USD 17.5 GBP 7.5 NZD 53.9 AUD 55.0 SGD 0.42 USD 15.0 EUR ZAR THB INR GBP PHP 22.1 400.0 237.8 140.0 150.0 Equity interest accumul- ated in % 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 70.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 75.0 100.0 100.0 149 Footnotes 1 CH: UBS Switzerland, AM: UBS Asset Management, WA: UBS Warburg, CC: Corporate Center. 2 Share Capital and Share Premium. UBS Group Financial Statements Notes to the Financial Statements Note 36 Significant Subsidiaries and Associates (continued) Consolidated companies: changes in 2001 Significant new companies Brinson Canada Co - Halifax, Canada Deconsolidated companies Significant deconsolidated companies UBS (Panama) SA - Panama City, Panama Reason for deconsolidation Liquidated Significant associates Company FSG Swiss Financial Services Group AG - Zurich, Switzerland Giubergia UBS Warburg SIM SpA - Milan, Italy Motor Columbus AG - Baden, Switzerland Telekurs Holding AG - Zurich, Switzerland Volbroker.com Limited - London, Great Britain Industry Financial Financial Electricity Financial Financial Equity interest in % Share capital in millions 33.0 49.9 35.6 33.3 20.6 CHF 26 EUR 15 CHF 253 CHF 45 GBP 19 None of the above investments carry voting rights that are significantly different from the proportion of shares held. 150 Note 37 Acquisition of Paine Webber Group, Inc. On 3 November 2000, UBS completed its acquisition of 100% of the outstanding common stock of the Paine Webber Group, Inc. (“PaineWebber”), a full-service broker-dealer and one of the largest securities and commodities firms in the United States servicing both individual and institutional clients. The transaction was accounted for using the purchase method of accounting, making PaineWebber a wholly owned subsidiary of UBS. Results of operations of PaineWebber have been included in the con- solidated results beginning on the date of acquisition. Under IAS, the valuation of shares and options issued was measured on the date the acquisition was completed, 3 November 2000. Purchase consideration amounted to CHF 22.0 billion (USD 12.5 billion) consisting of shares, options and cash. Total goodwill recorded in connection with the acquisition amounted to CHF 12.8 billion (USD 7.3 billion) at 3 November 2000 and is being amortized using the straight line method over an estimated useful life of 20 years. In 2001, the goodwill amount increased by CHF 54.3 million, net of tax benefits, including real- ized tax benefits on options granted to employees before the merger and subsequently exercised, and other adjustments to the identifiable assets and liabilities acquired. At 31 December 2001 and 2000, the balance of goodwill related to the PaineWebber acquisition amounted to CHF 11.6 billion and CHF 11.8 billion respectively. Note 38 Currency Translation Rates The following table shows the principal rates used to translate the financial statements of foreign entities into Swiss francs: 1 USD 1 EUR 1 GBP 100 JPY Spot rate As at Average rate Year-to-date 31.12.01 31.12.00 31.12.01 31.12.00 31.12.99 1.67 1.48 2.43 1.27 1.64 1.52 2.44 1.43 1.69 1.50 2.44 1.40 1.69 1.56 2.57 1.57 1.50 1.60 2.43 1.33 Note 39 Swiss Banking Law Requirements The consolidated financial statements of UBS are prepared in accordance with International Accounting Standards. Set out below are the deviations which would result if the provisions of the Banking Ordinance and the Guidelines of the Swiss Banking Commission governing finan- cial statement reporting pursuant to Article 23 through Article 27 of the Banking Ordinance were applied in the preparation of the consoli- dated financial statements of UBS. 1. Treasury shares Under IAS, treasury shares are presented in the balance sheet as a deduction from Share- holders’ equity and accounted for at weighted average cost. Contracts that require physical settlement or net share settlement in UBS AG shares are classified in the Shareholders’ equity as Share premium and accounted for at weight- ed average cost. The difference between the proceeds from sales of treasury shares or con- tracts that require physical settlement or con- tracts that require net share settlement and their cost (net of tax) is reported as Share pre- mium. The par value of shares repurchased and cancelled is debited to the issued and paid up share capital for the par value, with the remain- der of the cost of the repurchased shares debit- ed to Share premium. No dividends are paid on treasury shares. 151 UBS Group Financial Statements Notes to the Financial Statements Under Swiss law, own shares held for market making purposes are presented in the balance sheet as Trading portfolio assets. Own shares held for other purposes are classified as Financial investments and a corresponding reserve for own shares is established within Shareholders’ equity. All derivative contracts on own shares are reported as Positive or Negative replacement values. Traded own shares and derivatives on own shares are carried at fair value. Gains and losses realized on disposal and unrealized gains and losses from changes in the fair value are recorded as Net trading income. Own shares reported within Financial investments are reported at the lower of cost or market value. Reductions to market value and reversals of such reductions, as well as gains and losses on dispos- al, are included in Other income. Own shares repurchased for cancellation are reported as financial investments and accounted for at cost. Upon cancellation, the par value of shares repur- chased and cancelled is debited against Share capital for the par value, with the remainder of the purchase cost debited against General statu- tory reserve. 2. Financial investments Under IAS, available-for-sale financial invest- ments are carried at fair value. Changes in the fair value of available-for-sale financial invest- ments are recorded as increases or decreases to Shareholders’ equity until an investment is sold, collected or otherwise disposed of, or until an investment is determined to be impaired. At the time an available-for-sale investment is determined to be impaired, the cumulative unrealized gain or loss previously recognized in Shareholders’ equity is included in net profit or loss for the period. On dispos- al of an available-for-sale investment, the dif- ference between the net disposal proceeds and the carrying amount, including any previously recognized unrealized gain or loss arising from a change in fair value reported within Share- holders’ equity, is included in net profit or loss for the period. Under Swiss law financial investments 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 dispos- al are included in Other income. 3. Cash flow hedges The Group also uses derivative instruments to hedge against the exposure from varying cash flows receivable and payable. Under IAS, when hedge accounting is applied for these instru- ments, the unrealized gain or loss on the effective portion of the derivatives is recorded in share- holders’ equity until the hedged cash flows occur, at which time the accumulated gain or loss is realized and released to income. Under Swiss law, the gains or losses on the effective portion of the derivative instruments used to hedge cash flow exposures are deferred on the balance sheet. The deferred amounts are released to income when the hedged cash flows occur. 4. Gains/losses not recognized in the income statement Gains/losses not recognized in the income state- ment is a separate line within Shareholders’ equity where under IAS unrealized gains and losses from currency translation, changes in fair value of financial investments available-for-sale and of derivative instruments designated as cash flow hedges are reported. Under Swiss law, only foreign currency trans- lation differences are reported in shareholders’ equity. The other two components are reported according to the methods described in captions 2. and 3. above. 5. Extraordinary income and expense Under IAS, items of income and expense can only be classified as extraordinary if they are clearly distinct from the ordinary activities and their occurrence is expected to be rare. Under Swiss law, income and expense items related to other accounting periods and/or not directly related with the core business activities of the enterprise (e.g. realized gains or losses on sale of Investments in associated companies or Property and equipment) are recorded as extraordinary income or expense. The significant differences between IAS and Swiss banking law are as follows: 152 Note 39 Swiss Banking Law Requirements (continued) CHF million Differences in the Balance Sheet Treasury shares Trading portfolio Financial investments Due to banks Shareholders’ equity Financial investments Due to banks Other liabilities Shareholders’ equity Cash flow hedges Other liabilities Shareholders’ equity Differences in the Income Statement Treasury shares Net trading income Other income Financial investments Other income Reclassification of extraordinary income and expense Other income Extraordinary income Extraordinary expense 31.12.01 31.12.00 128 3,253 24 3,357 (1,856) (215) (1,641) (459) 459 (70) (231) (607) (95) 109 14 4,007 2,516 1,491 133 68 (211) 233 22 153 UBS Group Financial Statements Notes to the Financial Statements Note 40 Reconciliation of International Accounting Standards (IAS) to United States Generally Accepted Accounting Principles (US GAAP) Note 40.1 Valuation and income recognition differences between IAS and US GAAP The consolidated financial statements of the Group have been prepared in accordance with IAS. The principles of IAS differ in certain respects from United States Generally Accepted Accounting Principles (“US GAAP”). The fol- lowing is a summary of the relevant significant accounting and valuation differences between IAS and US GAAP. a. Purchase accounting (merger of Union Bank of Switzerland and Swiss Bank Corporation) Under IAS, the Group accounted for the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation under the uniting of interests method. The balance sheets and income state- ments of the banks were combined, and no adjustments were made to the carrying values of the assets and liabilities. Under US GAAP, the business combination creating UBS AG is accounted for under the purchase method with Union Bank of Switzerland being considered the acquirer. Under the purchase method, the cost of acquisition is measured at fair value and the acquirer’s interests in identifiable tangible assets and liabilities of the acquiree are restated to fair values at the date of acquisition. Any excess con- sideration paid over the fair value of net tangible assets acquired is allocated, first to identifiable intangible assets based on their fair values, if determinable, with the remainder allocated to goodwill. Goodwill Under US GAAP until 31 December 2001, good- will acquired before 30 June 2001 is capitalized and amortized over its estimated useful life with adjustments for any impairment. For US GAAP purposes, the excess of the con- sideration paid for Swiss Bank Corporation over the fair value of the net tangible assets received has been recorded as goodwill and is being amortized on a straight line basis over a weight- ed average life of 13 years from 29 June 1998. Upon the adoption of Statement of Financial Accounting Standard (SFAS) 142, “Goodwill and Other Intangible Assets”, on 1 January 2002, the amortization of goodwill will no longer be recorded under US GAAP. Instead, goodwill will be subject to an annual impairment test, with any decrease in value recorded in the Income statement. Refer to section l of this note, “Recently issued accounting standards” for a more detailed discussion of SFAS 142. In 2001 and 2000, goodwill recorded under US GAAP was reduced by CHF 53 million and CHF 211 million respectively, due to recognition of deferred tax assets of Swiss Bank Corporation which had previously been subject to valuation reserves. Other purchase accounting adjustments The restatement of Swiss Bank Corporation’s net assets to fair value in 1998 resulted in decreasing net tangible assets by CHF 1,077 million for US GAAP. This amount is being amortized over periods ranging from two years to 20 years. b. Harmonization of accounting policies The business combination of Union Bank of Switzerland and Swiss Bank Corporation was accounted for under the uniting of interests method under IAS. Under the uniting of interests method of accounting, a single uniform set of accounting policies was adopted and applied to all periods presented. This resulted in a restate- ment of 1997 Shareholders’ equity and Net loss. US GAAP requires that accounting changes be recorded in the Income statement in the period the change is made. For US GAAP, the accounting policy harmonization recorded under IAS for 1997 was reversed, and the impact of the accounting changes was recorded in 1998. c. Restructuring provision Under IAS, restructuring provisions are recog- nized when a legal or constructive obligation has been incurred. In 1997, the Group recognized a CHF 7,000 million restructuring provision to cover personnel, IT, premises and other costs associated with combining and restructuring the 154 merged Group. A further CHF 300 million pro- vision was recognized in 1999, reflecting the impact of increased precision in the estimation of certain leased and owned property costs. Under US GAAP, the criteria for establishing restructuring provisions were more stringent than under IAS prior to 2000. For US GAAP, the aggregate CHF 7,300 million restructuring pro- vision was reversed. As a result of the business combination with Swiss Bank Corporation and the decision to combine and streamline certain activities of the banks for the purpose of reduc- ing costs and improving efficiencies, Union Bank of Switzerland recognized a restructuring pro- vision of CHF 1,575 million during 1998 for US GAAP. CHF 759 million of this provision related to estimated costs for restructuring the operations and activities of Swiss Bank Corpo- ration, and that amount was recorded as a lia- bility of the acquired business. The remaining CHF 816 million of estimated costs were charged to restructuring expense during 1998. The US GAAP restructuring provision was increased by CHF 600 million and CHF 130 million in 1999 and 2000, respectively. During 2001, CHF 112 million restructuring costs were expensed as incurred under US GAAP. These costs were already part of the restructur- ing provision under IAS, but were not eligible for recognition under US GAAP until 2001. The restructuring plan was completed and the remaining balance of the US GAAP restructuring provision was used substantially in accordance with previously disclosed plans. At 31 December 2001, the restructuring provision for both IAS and US GAAP has been fully utilized. d. Derivative instruments held or issued for hedging activities Prior to 1 January 2001, the Group applied no hedge accounting for US GAAP. As a result, all derivative instruments were carried on the bal- ance sheet at fair value, with changes in fair val- ue recorded in the Income statement. Under IAS, the Group accounted for derivative instruments hedging non-trading positions in the Income statement using the accrual or deferral method, which was the same as the accounting method- ology applied to the underlying item hedged. On 1 January 2001, the Group adopted IAS 39 for its IAS financial statements (see Note 1: Sum- mary of Significant Accounting Policies) and SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” for its US GAAP financial statements. These standards introduce new rules for the accounting and reporting of derivative instruments, including certain derivative instru- ments embedded in other contracts, and of hedg- ing activities. The adoption of SFAS 133 did not result in any transition items for the Group on 1 January 2001 as the Group previously did not apply hedge accounting under US GAAP. Under IAS 39, the Group is permitted to hedge interest rate risk based on forecasted cash inflows and outflows on a group basis. For this purpose, the Group accumulates information about financial assets, financial liabilities, and forward commitments which is then used to esti- mate and aggregate cash flows and to schedule the future periods in which these cash flows are expected to occur. Appropriate derivative instru- ments are then used to hedge the estimated future cash flows. SFAS 133 does not permit hedge accounting for hedges of future cash flows determined by this methodology. Accordingly, for US GAAP such items continue to be carried at fair value with changes in fair value recog- nized in Net trading income. Since 1 January 2001, the Group’s hedging rela- tionships have been treated the same under both IAS and US GAAP, except for hedges of interest rate risk of forecasted cash flows on a group basis as mentioned in the previous paragraph. In addition, amounts deferred under previous hedging relationships that now do not qualify as hedges under IAS 39 are being amortized against IAS net profit over the remaining life of the hedging relationship. Such amounts have been reversed for US GAAP as they have never been treated as hedges. e. Financial investments (prior to the adoption of IAS 39) Prior to the adoption of IAS 39 on 1 January 2001, financial investments were classified as either current investments or long-term invest- ments under IAS. The Group considered current financial investments to be held for sale and carried at lower of cost or market value (“LOCOM”). The Group accounted for long- term financial investments at cost, less any per- manent impairments. Under US GAAP, the Group’s financial investments are classified as available for sale (debt and marketable equity 155 UBS Group Financial Statements Notes to the Financial Statements securities), and are carried at fair value with changes in fair value recorded in Other compre- hensive income. Gains and losses are recognized in Net profit in the period sold, and losses are recognized in the period of permanent impair- ment. For the IAS to US GAAP reconciliation, debt and marketable equity securities were adjust- ed from LOCOM to fair value and classified as available for sale investments. Unrealized gains or unrealized losses relating to these investments were recorded in Other comprehensive income. f. Financial investments and private equity (after the adoption of IAS 39) With the adoption of IAS 39 on 1 January 2001, the accounting for financial investments classi- fied as available for sale is now generally the same under IAS and US GAAP. Two exceptions exist, however: 1) private equity investments and non-marketable equity financial invest- ments, which are classified as available for sale and carried at fair value under IAS, continue to be valued at cost less other than temporary impairments under US GAAP; and 2) write- downs on impaired assets can be fully or par- tially reversed under IAS if the value of the impaired assets increases. Such reversals of impairment write-downs are not allowed under US GAAP. There were no significant reversals under IAS in 2001. The opening adjustment and subsequent changes in fair value recorded in Unrealized gains/losses on available for sale investments related to private equity investments and non- marketable equity financial investments due to the implementation of IAS 39 on 1 January 2001 have been reversed under US GAAP to reflect the difference between the two standards in measur- ing such investments. g. Retirement benefit plans Under IAS, the Group recognizes pension expense based on a specific method of actuarial valuation used to determine the projected plan liabilities for accrued service, including future expected salary increases, and expected return on plan assets. Plan assets are recorded at fair value and are held in a separate trust to satisfy plan liabilities. Under IAS the recognition of a prepaid asset is subject to certain limitations, and any unrecognized prepaid asset is recorded as pension expense. Under US GAAP, pension expense is based on the same actuarial method of valuation of liabil- ities and assets as under IAS. Differences in the amounts of expense and liabilities (or prepaid assets) exist due to different transition date rules, stricter provisions for recognition of a prepaid asset, and the treatment of the 1998 merger of Union Bank of Switzerland and Swiss Bank Cor- poration. In addition, under US GAAP, if the fair value of plan assets falls below the accumulated bene- fit obligation (current value of accrued benefits without allowance for future salary increases), an additional minimum liability must be shown in the balance sheet. If an additional minimum liability is recognized, an equal amount will be recognized as an intangible asset up to the amount of any unrecognized past service cost. Any amount not recognized as an intangible asset is reported in Other comprehensive in- come. In order to record the net additional min- imum liability required under US GAAP in 2001, UBS booked a pre-tax adjustment to the liability of CHF 306 million, of which CHF 3 million was recognized in intangible assets and CHF 303 mil- lion in Other comprehensive income. In 2000, no adjustment was required. h. Other employee benefits Under IAS, the Group has recorded expenses and liabilities for post-retirement medical and life insurance benefits, determined under a method- ology similar to that described above under retirement benefit plans. Under US GAAP, expenses and liabilities for post-retirement medical and life insurance bene- fits are determined under the same methodology as under IAS. Differences in the levels of expens- es and liabilities have occurred due to different transition date rules and the treatment of the merger of Union Bank of Switzerland and Swiss Bank Corporation under the purchase method. i. Equity participation plans IAS does not specifically address the recognition and measurement requirements for equity partic- ipation plans. US GAAP permits the recognition of compen- sation cost on the grant date for the estimated fair value of equity instruments issued (SFAS 123) or based on the intrinsic value of equity instruments issued (Accounting Principles Board 156 “APB” No. 25), with the disclosure of the pro forma effects of equity participation plans on net profit and earnings per share, as if the fair value had been recorded on the grant date. Under IAS, the Group recognizes only intrinsic values at the grant date with subsequent changes in value not recognized. Under US GAAP, the Group applies the APB No. 25 intrinsic value method, which requires adjustments to intrinsic values subse- quent to the grant date in certain circumstances. The shares and other diversified instruments of the Group’s equity participation plans are held in trusts on behalf of the participants. Certain of these trusts are recorded on the Group’s balance sheet for US GAAP presentation, the effect of which is to increase assets by CHF 1,485 million and CHF 1,419 million, liabilities by CHF 1,607 million and CHF 1,559 million, and decrease shareholders’ equity by CHF 122 million and CHF 140 million (for UBS AG shares held by the trusts which are treated as treasury shares) at 31 December 2001 and 2000 respectively. For US GAAP, certain of the Group’s option awards have been determined to be variable pur- suant to APB No. 25, primarily because they may be settled in cash or because the Group has offered to hedge the value of the award. The effect of applying variable accounting to these option awards in the US GAAP reconciliation for the years ended 31 December 2001, 2000 and 1999, is a CHF 30 million decrease in compen- sation expense, CHF 85 million increase in com- pensation expense and CHF 41 million increase in compensation expense, respectively. In addi- tion, certain of the Group’s equity participation plans required a new expense measurement date due to diversification or cash settlement of awards. Additional expense was also recorded related to the consolidation of the trusts in the US GAAP Balance sheet and for social tax pay- ments on exercised options recorded directly in Shareholders’ equity for IAS. For US GAAP, the net effect of these transactions is an increase to expense of CHF 41 million, CHF 82 million and CHF 8 million for the years ended 31 December 2001, 2000 and 1999, respectively. j. Software capitalization Under IAS, effective 1 January 2000, certain costs associated with the acquisitions or devel- opment of internal use software must be capital- ized. Once the software is ready for its intended use, the costs capitalized are amortized to the Income statement over the estimated life of the software. Under US GAAP, the same principle applies, however this standard was effective 1 January 1999. For US GAAP, the costs associ- ated with the acquisition or development of internal use software that met the US GAAP soft- ware capitalization criteria in 1999 have been reversed from Operating expenses and amor- tized over a life of two years from the time that the software is ready for its intended use. From 1 January 2000, the only remaining reconcilia- tion item is the amortization of software capital- ized in 1999 for US GAAP purposes. This amount will be fully amortized by 31 December 2002, and there will no longer be a difference between IAS and US GAAP. k. IAS 39 opening retained earnings adjustment With the adoption of IAS 39 on 1 January 2001, an opening adjustment was made to reduce Retained earnings by CHF 61 million, consisting of CHF 19 million reflecting the impact of the new hedge accounting rules and CHF 42 million reflecting the impact of remeasuring assets to either amortized cost or fair value as required under the standard. For US GAAP purposes, the first adjustment was not required (because all derivatives were previously recorded in the Income statement) and was reversed, and the second adjustment was recorded in the Income statement. l. Recently issued US accounting standards In June 2001, the Financial Accounting Stan- dards Board (“FASB”) issued SFAS 141, “Busi- ness Combinations” and SFAS 142, “Goodwill and Intangible Assets”. SFAS 141 requires, among other things, that all business combinations initiated after 30 June 2001 be accounted for using the purchase method. The pooling of interests method has been eliminated. This new standard has no impact on these financial statements. UBS is required to adopt SFAS 142 from 1 January 2002, except for goodwill and intan- gible assets acquired in a business combination initiated after 30 June 2001. Any such acquisi- tion will be subject to the rules of SFAS 142 at the acquisition date. The standard requires that goodwill and intangible assets with indefi- 157 UBS Group Financial Statements Notes to the Financial Statements nite lives no longer be amortized, but be tested annually for impairment. Identifiable intangible assets with finite lives will continue to be amortized. The adoption of SFAS 142 is expected to have a material impact on the Group’s Income state- ment and Shareholders’ equity in accordance with US GAAP. Upon adoption, the US GAAP amortization charge related to the 1998 business combination of Union Bank of Switzerland and Swiss Bank Corporation (CHF 1.7 billion for 2001) will cease to be recorded. Under IAS, this charge was never recorded because of a different method of accounting for the business combi- nation. In addition, the introduction of SFAS 142 may result in two new reconciling items: 1) Intangible assets on the IAS Balance sheet with a book value of CHF 1.8 billion at 31 December 2001 may be reclassified to goodwill for US GAAP. 2) The amortization of IAS goodwill and the intangible assets reclassified to goodwill for US GAAP (CHF 1.1 billion in 2001) will be reversed. From 1 January 2002, the goodwill balance in the US GAAP Balance sheet will be maintained at historical amortized cost and will be reviewed annually for impairment. In August 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations”. The standard requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The standard is effective for fiscal years begin- ning after 15 June 2002. The Group does not expect the adoption of this standard to have a material effect on its financial statements. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which super- sedes both SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Trans- actions”. The statement primarily addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after 15 De- cember 2001. In addition, SFAS 144 eliminated the exception to consolidate subsidiaries for which control is likely to be temporary, as previ- ously contained in Accounting Research Bulletin No. 51 “Consolidated Financial Statements” as amended by SFAS 94, “Consolidation of All Majority-Owned Subsidiaries”. The impact of the adoption of SFAS 144 on the Group’s US GAAP reconciliation may be that the unrealized gains and losses on private equity investments disclosed in Gains/losses not recognized in the income statement under IAS would be recorded in Net profit for US GAAP, should the “AICPA Audit and Accounting Guide, Audits of Invest- ment Companies” be adopted. The estimated effect of such adoption would be a cumulative catch-up adjustment which would increase US GAAP Net profit before tax by approximately CHF 660 million at 1 January 2002. Had the Group applied such guidance in the US GAAP reconciliation in 2001, the estimated effect on Net profit before tax would have been a charge of approximately CHF 470 million. See section f of this note and table 40.2 for current treatment of private equity investments under US GAAP. The impact on the Group’s US GAAP reconcilia- tion of SFAS 144 and Investment Company Guide treatment of private equity investments is under further detailed review. 158 40.2 Reconciliation of IAS Shareholders’ equity and Net profit to US GAAP CHF million Amounts determined in accordance with IAS Adjustments in respect of SBC purchase accounting: Goodwill Other purchase accounting adjustments Harmonization of accounting policies Restructuring provision Derivative instruments held or issued for hedging activities Financial investments (prior to the adoption of IAS 39) Financial investments and private equity (after the adoption of IAS 39) Retirement benefit plans Other employee benefits Equity participation plans Software capitalization IAS 39 opening retained earnings adjustments Tax adjustments Note 40.1 Reference Shareholders’ equity Net profit 31.12.01 31.12.00 31.12.01 31.12.00 31.12.99 43,530 44,833 4,973 7,792 6,153 a a b c d e f g h i j k 16,142 (729) 0 0 17,835 (808 ) 0 112 (1,693) 79 0 (112) (1,719 ) 50 0 (238 ) (1,729) 37 (20) (1,598) (188) (857 ) 0 379 (709) 1,714 (8) (186) 60 19 (363) 0 1,898 (16 ) (311 ) 229 0 (334 ) 67 0 0 119 8 (12) (169) (42) 16 (1,353 ) (545) 28 0 59 8 (167 ) (160 ) 0 137 36 0 (19) 2 (47) 389 0 178 Total adjustments 15,752 18,127 (1,739) (3,355 ) (3,316) Amounts determined in accordance with US GAAP 59,282 62,960 3,234 4,437 2,837 40.3 Earnings per share Under IAS and US GAAP, basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-average common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilu- tive potential common shares that were outstanding during the period. The computations of basic and diluted EPS for the years ended 31 December 2001, 31 December 2000 and 31 December 1999 are presented in the following table. 31.12.01 31.12.00 31.12.99 For the year ended US GAAP IAS US GAAP IAS US GAAP IAS Net profit available for ordinary shares (CHF million) Net profit for diluted EPS (CHF million) Weighted average shares outstanding Diluted weighted average shares outstanding Basic earnings per share (CHF) Diluted earnings per share (CHF) 3,234 3,135 1,251,180,8151 1,273,720,5601 2.58 2.46 4,973 4,874 1,266,038,193 1,288,577,938 3.93 3.78 4,437 4,423 1,198,680,1931 1,215,169,9661 3.70 3.64 7,792 7,778 1,209,087,927 1,225,577,700 6.44 6.35 2,837 2,837 1,208,614,2151 1,219,512,2251 2.35 2.33 6,153 6,153 1,214,227,446 1,225,125,456 5.07 5.02 1 The difference between the IAS and US GAAP weighted average shares outstanding and diluted weighted average shares outstanding is related to the shares for employee equity participation plans. These shares are held in trusts which are consolidated for US GAAP only and are recorded as treasury shares. Amounts in prior years have been restated for these treasury shares. 159 UBS Group Financial Statements Notes to the Financial Statements Note 40.4 Presentation differences between IAS and US GAAP In addition to the differences in valuation and income recognition, other differences, essentially related to presentation, exist between IAS and US GAAP. Although there is no impact on IAS and US GAAP reported shareholders’ equity and net profit due to these differences, it may be use- ful to understand them to interpret the financial statements presented in accordance with US GAAP. The following is a summary of presenta- tion differences that relate to the basic IAS finan- cial statements. 1. Settlement date vs. trade date accounting The Group’s transactions from securities activi- ties are recorded under IAS on the settlement date for balance sheet and on the trade date for income statement purposes. This results in recording a forward transaction during the peri- od between the trade date and the settlement date. Forward positions relating to trading activ- ities are revalued to fair value and any unrealized profits and losses are recognized in Net profit. Under US GAAP, trade date accounting is required for spot purchases and sales of securi- ties. Therefore, all such transactions with a trade date on or before the balance sheet date with a settlement date after the balance sheet date have been recorded at trade date for US GAAP. This has resulted in receivables and payables to bro- ker-dealers and clearing organizations recorded in Other assets and Other liabilities in the US GAAP Balance sheet. 2. Financial investments Under IAS, the Group’s private equity invest- ments and non-marketable equity financial investments are included in Financial invest- ments. For US GAAP presentation, non-mar- ketable equity financial investments are reclassi- fied to Other assets, and private equity invest- ments are shown separately on the Balance sheet. 3. Securities received as proceeds in a securities for securities lending transaction In September 2000, the Financial Accounting Standards Board released SFAS No. 140, “Ac- counting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, a replacement of SFAS No. 125, which revises the standards for accounting for securitizations and other transfers of financial assets and collateral. The Group adopted the standard in accordance with its transition requirements, resulting in cer- tain of its provisions becoming effective in 2000. Additional provisions became effective on 1 April 2001. Under the new provisions, when the Group acts as the lender in a securities lending agree- ment and receives securities as collateral that can be pledged or sold, it recognizes the securities received and a corresponding obligation to return them. These securities are separately reflected on the US GAAP balance sheet in the line “Securities received as collateral” on the asset side of the balance sheet. The offsetting liability is included separately in the line “Obligation to return secu- rities received as collateral”. 4. Secured financing without margining The Group enters into certain specific secured financing transactions that result in a reclassifica- tion difference between IAS and US GAAP. Under IAS, they are considered secured financing trans- actions. Under US GAAP, however, they are con- sidered sale/buyback transactions due to the fact that the contracts do not require margining which is one of the criteria to meet US GAAP secured financing treatment. Due to the different treat- ment of these transactions under IAS and US GAAP, interest income and expense recorded under IAS must be reclassified to Other income for US GAAP. An additional reclassification on the US GAAP balance sheet is also required which reflects a spot purchase (Trading portfolio assets) and a forward sale transaction (Replacement val- ues), instead of a claim from customers (Cash col- lateral on securities borrowed) under IAS. 160 40.5 Consolidated Income Statement The following is a Consolidated Income Statement of the Group, for the years ended 31 December 2001, 31 December 2000 and 31 December 1999, restated to reflect the impact of valuation and income recognition differences and presentation differences between IAS and US GAAP. CHF million For the year ended Operating income Interest income Interest expense Net interest income Credit loss expense / (recovery) Net interest income after credit loss expense / (recovery) 31.12.01 31.12.00 31.12.99 Reference US GAAP IAS US GAAP IAS US GAAP IAS a, d ,4 a, 4 51,975 (44,178) 52,277 (44,236) 51,565 (43,584 ) 51,745 (43,615 ) 35,404 (29,660 ) 35,604 (29,695) 7,797 (498) 8,041 (498) 7,981 130 8,130 130 5,744 (956 ) 5,909 (956) 7,299 7,543 8,111 8,260 4,788 4,953 Net fee and commission income Net trading income Other income d, k, 4 e, 4 20,211 8,973 534 20,211 8,802 558 16,703 8,597 1,514 16,703 9,953 1,486 12,607 7,174 3,182 12,607 7,719 3,146 Total operating income Operating expenses Personnel General and administrative Depreciation of property and equipment Amortization of goodwill and other intangible assets Restructuring costs Total Operating profit / (loss) before tax and minority interests Tax expense / (benefit) Net profit / (loss) before minority interests Minority interests Net profit 37,017 37,114 34,925 36,402 27,751 28,425 c, g, h,i, j c, j 19,713 7,631 19,828 7,631 17,262 6,813 17,163 6,765 12,483 6,664 12,577 6,098 a, b, j 1,815 1,614 1,800 1,608 1,619 1,517 a c 2,782 112 1,323 0 2,152 191 667 0 1,835 750 340 0 32,053 30,396 28,218 26,203 23,351 20,532 4,964 1,386 6,718 1,401 6,707 2,183 10,199 2,320 4,400 1,509 7,893 1,686 3,578 5,317 4,524 7,879 2,891 6,207 (344) (344) (87 ) (87 ) (54 ) (54) 3,234 4,973 4,437 7,792 2,837 6,153 Note: References above coincide with the discussions in Note 40.1 and Note 40.4. These references indicate which IAS to US GAAP adjustments affect an individual financial statement caption. 161 UBS Group Financial Statements Notes to the Financial Statements 40.6 Condensed Consolidated Balance Sheet The following is a Condensed Consolidated Balance Sheet of the Group, as of 31 December 2001 and 31 December 2000, restated to reflect the impact of valuation and income recognition principles and presentation differences between IAS and US GAAP CHF million Reference US GAAP IAS US GAAP IAS 31.12.01 31.12.00 Total assets 1,314,856 1,253,297 1,124,554 1,087,552 a 4 1, 4 1, 4 a, d e, f, 2 3 4 1 3 1,4 a, d Assets Cash and balances with central banks 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 Securities received as collateral Accrued income and prepaid expenses Investments in associates Property and equipment Intangible assets and goodwill Private equity investments Other assets a, j a, g 2 d, g, h, i, 1, 2 Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Obligation to return securities received as collateral Negative replacement values Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total liabilities Minority interests Total shareholders’ equity Total liabilities, minority interests and shareholders’ equity a, d, k a, c, d, e, g, h, i, 1 20,990 27,550 162,566 269,256 399,577 73,051 226,747 20,676 20,119 7,545 697 9,276 33,765 6,069 36,972 20,990 27,526 162,938 269,256 397,886 73,447 226,545 28,803 7,554 697 8,695 19,085 9,875 2,979 29,182 177,857 193,801 318,788 57,775 245,214 10,985 7,062 880 9,692 35,726 6,658 27,955 2,979 29,147 177,857 193,801 315,588 57,875 244,842 19,583 7,062 880 8,910 19,537 9,491 106,531 30,317 368,620 108,924 20,119 71,018 333,766 17,289 156,462 38,416 106,531 30,317 368,620 105,798 71,443 333,781 17,289 156,218 15,658 82,240 23,418 295,513 87,832 75,423 310,686 21,038 129,750 32,809 82,240 23,418 295,513 82,632 75,923 310,679 21,038 129,635 18,756 1,251,462 1,205,655 1,058,709 1,039,834 4,112 59,282 4,112 43,530 2,885 62,960 2,885 44,833 1,314,856 1,253,297 1,124,554 1,087,552 Note: References above coincide with the discussions in Note 40.1 and Note 40.4. These references indicate which IAS to US GAAP adjustments affect an individual financial statement caption. 162 40.7 Comprehensive Income Comprehensive income is defined as the change in Shareholders’ equity excluding transaction with shareholders. Comprehensive income has two major components: Net profit, as reported in the income statement, and Other comprehensive income. Other com- prehensive income includes such items as foreign currency translation, unrealized gains/losses on available for sale securities, unreal- ized gains/losses on changes in fair value of derivative instruments designated as cash flow hedges and additional minimum pension liability. The components and accumulated other comprehensive income amounts for the years ended 31 December 2001, 31 Decem- ber 2000 and 31 December 1999 are as follows: CHF million Foreign currency translation Unrealized gains / (losses) on available for sale securities Unrealized gains / (losses) on cash flow hedges Additional minimum pension liability Accumulated other comprehensive Comprehensive income income Balance, 1 January 1999 Net Profit Other comprehensive income: Foreign currency translation Unrealized gains on available for sale investments arising during the year, net of CHF 18 million tax Reclassification adjustment for gains on available for sale investments realized in net profit, net of CHF 40 million tax Comprehensive income Balance, 31 December 1999 Net profit Other comprehensive income: Foreign currency translation Unrealized gains on available for sale investments arising during the year, net of CHF 152 million tax Reclassification adjustment for gains on available for sale investments realized in net profit, net of CHF 40 million tax Comprehensive income Balance, 31 December 2000 Net profit Other comprehensive income: Foreign currency translation Unrealized gains on available for sale investments arising during the year, net of CHF 27 million tax Reclassification adjustment for gains on available for sale investments realized in net profit, net of CHF 26 million tax Unrealized gains on cash flow hedges arising during the year, net of CHF 1 million tax Reclassification adjustment for losses on cash flow hedges realized in net profit, net of CHF 1 million tax Additional minimum pension liability Comprehensive income (456) 85 14 (442) (245 ) (687) (82 ) 74 (143 ) 16 456 (121 ) 351 109 (104 ) Balance, 31 December 2001 (769) 356 (371) 14 74 (143 ) (426) (245 ) 456 (121 ) (336) (82 ) 109 (104 ) 4 3 (303 ) (303 ) (303) (709) 4 3 7 2,837 (55 ) 2,782 4,437 90 4,527 3,234 (373 ) 2,861 163 UBS Group Financial Statements Notes to the Financial Statements Note 41 Additional Disclosures Required under US GAAP and SEC Rules 41.1 Financial investments See Note 13 for additional information on financial investments. The following table summarizes the Group’s financial investments at 31 December 2000: Amortized cost Gross unrealized gains Gross unrealized losses 31 December 2000 Money market paper Equity securities 1 Debt securities issued by the Swiss national government and agencies Debt securities issued by Swiss local governments Debt securities issued by foreign governments and official institutions Corporate debt securities Mortgage-backed securities Other debt securities Total 4,162 1,147 34 46 4,852 1,139 47 88 11,515 0 447 2 1 7 5 0 4 0 6 0 1 3 1 0 0 Fair value 4,162 1,588 36 46 4,856 1,143 47 92 466 11 11,970 1 The LOCOM value of the equity securities as reported in Note 13 is adjusted to cost basis for the purpose of the fair value calculation. Proceeds from sales and maturities of investment securities available for sale during the year ended 31 December 2000 were CHF 325 million. On those sales gross gains of CHF 162 million and gross losses of CHF 1 million were realized in 2000 in the income statement. Note 41.2 Sales of Financial Assets in Securitizations During the year ended 31 December 2001, the Group securitized (i.e., transformed owned financial assets into securities through sales transactions) residential mortgage loans and securities, commercial mortgage loans and other financial assets, acting as lead or co-manager. The Group’s continuing involvement in these transactions was primarily limited to the tempo- rary retention of various security interests. Pro- ceeds received at the time of securitization from residential mortgage, commercial mortgage and other financial asset securitizations were CHF 67.6 billion, CHF 4.1 billion and CHF 2.8 bil- lion, respectively. Related pre-tax gains recog- nized, including unrealized gains on retained interests, at the time of securitization were CHF 112.9 million, CHF 129.7 million and CHF 20.6 million, respectively. During 2000, the Group did not engage in significant securitization transac- tions involving the transfer of its financial assets. A significant portion of the securitization activi- ties conducted in 2001 were derived from busi- nesses acquired in the purchase of Paine Webber Group Inc. in November 2000. At 31 December 2001, the Group retained CHF 6.8 billion in residential mortgage securi- ties, backed by the Government National Mort- gage Association (GNMA), the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), and CHF 1.6 billion in other residential mort- gage securities. These retained interests are gen- erally valued using observable market prices. Retained interests in commercial mortgage and other securities were not material at 31 December 2001. 164 Note 41.3 Supplemental Guarantor Information Guarantee of PaineWebber Securities Following the acquisition of Paine Webber Group, Inc., UBS AG made a full and uncondi- tional guarantee of the publicly traded debt and trust preferred securities of PaineWebber. Prior to the acquisition, PaineWebber was an SEC registrant. Upon the acquisition, PaineWebber was merged into UBS Americas Inc., a wholly owned subsidiary of UBS AG. The following is summarized consolidating financial infor- mation segregating UBS AG Parent Bank, UBS Americas Inc. and UBS AG’s other non-guaran- tor subsidiaries as required by SEC regulation S-X Rule 3–10 “Financial statement require- ments for guarantors”. The information presented in this note is pre- pared in accordance with IAS and should be read in conjunction with the consolidated financial statements of the Group of which this informa- tion is a part. At the bottom of each column, Net profit and Shareholders’ equity has been recon- ciled to US GAAP. See Note 40 for a detailed reconciliation of the IAS financial statements to US GAAP for the Group on a consolidated basis. Supplemental Guarantor Consolidating Income Statement CHF million For the year ended 31 December 2001 UBS AG UBS Parent Bank1 Americas Inc. Subsidiaries Consolidating Entries UBS Group 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 Income from subsidiaries Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation of property and equipment Amortization of goodwill and other intangible assets Total operating expenses Operating profit / (loss) before tax and minority interests Tax expense / (benefit) Net profit before minority interests Minority interests Net profit / (loss) Net profit / (loss) US GAAP2 33,997 (26,979 ) 7,018 (471 ) 6,547 7,689 5,643 (21 ) 1,182 21,040 9,388 3,891 1,147 155 14,581 6,459 1,486 4,973 0 4,973 2,869 5,303 (5,724 ) (421 ) (15 ) (436 ) 5,587 870 0 39 6,060 5,178 1,853 181 808 8,020 (1,960 ) (477 ) (1,483 ) 0 (1,483 ) (1,519 ) 23,667 (22,223 ) (10,690 ) 10,690 1,444 (12 ) 1,432 6,935 2,289 0 (663 ) 9,993 5,262 1,887 286 360 7,795 2,198 392 1,806 (344 ) 1,462 1,884 0 0 0 0 0 21 0 21 0 0 0 0 0 21 0 21 0 21 0 52,277 (44,236) 8,041 (498) 7,543 20,211 8,802 0 558 37,114 19,828 7,631 1,614 1,323 30,396 6,718 1,401 5,317 (344) 4,973 3,234 1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss Banking Law requirements. For the purpose of this disclosure, the accounts have been adjusted to IAS. 2 Refer to Note 40 for a description of the differences between IAS and US GAAP. 165 UBS Group Financial Statements Notes to the Financial Statements Supplemental Guarantor Consolidating Balance Sheet CHF million At 31 December 2001 UBS AG UBS Parent Bank1 Americas Inc. Subsidiaries Consolidating Entries UBS Group Assets Cash and balances with central banks 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 Goodwill and other intangible assets Other assets Total assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total liabilities Minority interests Total shareholders’ equity Total liabilities, minority interests and shareholders’ equity 20,215 70,265 29,134 180,103 206,899 75,218 263,128 18,807 3,231 14,537 6,310 114 4,353 892,314 111,963 22,461 113,288 56,082 75,417 354,580 9,129 96,045 10,549 849,514 0 42,800 0 17,819 35,723 40,857 7,604 457 20,870 2,523 1,834 837 838 14,971 3,885 148,218 43,875 22,491 39,112 1,550 405 21,893 4,347 8,234 2,217 144,124 0 4,094 775 85,139 140,668 168,685 183,383 11,030 20,226 7,473 3,973 61 1,547 4,000 3,963 630,923 96,390 27,952 336,609 48,166 8,879 34,987 5,297 51,939 5,218 615,437 4,112 11,374 0 (145,697 ) (42,587 ) (120,389 ) 0 (13,258 ) (77,679 ) 0 (1,484 ) (14,738 ) 0 0 (2,326 ) 20,990 27,526 162,938 269,256 397,886 73,447 226,545 28,803 7,554 697 8,695 19,085 9,875 (418,158 ) 1,253,297 (145,697 ) (42,587 ) (120,389 ) 0 (13,258 ) (77,679 ) (1,484 ) 0 (2,326 ) 106,531 30,317 368,620 105,798 71,443 333,781 17,289 156,218 15,658 (403,420 ) 1,205,655 0 (14,738 ) 4,112 43,530 892,314 148,218 630,923 (418,158 ) 1,253,297 Total shareholders’ equity – US GAAP2 59,178 3,620 11,222 (14,738 ) 59,282 1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss Banking Law requirements. For the purpose of this disclosure, the accounts have been adjusted to IAS. 2 Refer to Note 40 for a description of the differences between IAS and US GAAP. 166 Supplemental Guarantor Consolidating Cash Flow Statement CHF million For the year ended 31 December 2001 UBS AG UBS Parent Bank1 Americas Inc. Subsidiaries UBS Group Net cash flow from / (used in) operating activities 10,243 85 2,545 12,873 Cash flow (used in) / from 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 (used in) / from investing activities Cash flow (used in) / from financing activities Net money market paper issued Net movements in treasury shares and treasury share contract activity Capital issuance Capital repayment by par value reduction Issuance of long-term debt Repayment of long-term debt Issuance of trust preferred securities Dividend payments to / and purchase from minority interests Net activity in investments in subsidiaries 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 the year Cash and cash equivalents, end of the year Cash and cash equivalents comprise: Cash and balances with central banks Money market paper Due from banks maturing in less than three months Total (44 ) 95 (1,316 ) 191 (5,514 ) (6,588 ) (54 ) 0 (295 ) 137 (269 ) (481 ) (369 ) 0 (410 ) 52 13 (714 ) (467) 95 (2,021) 380 (5,770) (7,783) 16,263 (6 ) 7,969 24,226 (6,038 ) 12 (683 ) 15,044 (15,861 ) 0 0 (620 ) 8,117 (164 ) 11,608 78,248 89,856 20,215 54,387 15,254 89,856 0 0 0 208 (1,260 ) 0 0 60 (998 ) (207 ) (1,601 ) 5,405 3,804 0 1,521 2,283 3,804 0 0 0 2,981 (1,356 ) 1,291 (461 ) 560 10,984 67 12,882 9,717 22,599 775 14,030 7,794 22,599 (6,038) 12 (683) 18,233 (18,477) 1,291 (461) 0 18,103 (304) 22,889 93,370 116,259 20,990 69,938 25,331 116,259 1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss Banking Law requirements. For the purpose of this disclosure, the accounts have been adjusted to IAS. Guarantee of other securities In October 2000, UBS AG, acting through a wholly-owned subsidiary, issued USD 1.5 billion (CHF 2.6 billion at issuance) 8.622% UBS Trust Preferred securities. In June 2001, UBS issued an additional USD 800 million (CHF 1.3 billion at issuance) of such securities (USD 300 million at 7.25% and USD 500 million at 7.247%). UBS AG has fully and unconditionally guaranteed these securities. 167 UBS Group Financial Statements Notes to the Financial Statements Note 41.4 Derivative instruments indexed to UBS shares US GAAP, like IAS, requires that derivatives indexed to a company’s own stock be recorded as an equity instrument if settlement is required in actual shares or the company has the choice to settle the contract by delivery or receipt of its own shares. If, however, the counterparty may require cash settlement, then the derivative must be classified as an asset or liability, with changes in fair value being recorded in income. Because the Group has no contracts for which the accounting treatment under US GAAP dif- fers from IAS, there is no reconciling item for these derivative instruments. However, US GAAP also requires disclosure of the amount of income recognized from such derivative instru- ments. UBS Warburg acts as a liquidity provider to the equity futures markets and as a market maker in UBS shares and derivatives. Trading income of CHF 261 million in 2001 and CHF 42 million in 2000 was recorded in both its IAS and US GAAP financial statements from trading in cash settled derivative instruments indexed to UBS shares. 168 UBS Group Financial Statements Report of the Group Auditors 169 170 UBS AG (Parent Bank) 171 UBS AG (Parent Bank) Table of Contents 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 Off-Balance Sheet and Other Information Assets Pledged or Assigned as Security for Own Obligations, Assets Subject to Reservation of Title Fiduciary Transactions Due to UBS Pension Plans, Loans to Corporate Bodies / Related Parties Report of the Statutory Auditors 173 174 174 175 175 176 177 177 177 178 178 179 179 180 180 180 180 181 172 UBS AG (Parent Bank) Parent Bank Review Parent Bank Review Income Statement The Parent Bank UBS AG net profit decreased CHF 3,251 million from CHF 7,906 million to CHF 4,655 million. Income from investments in associates in- creased to CHF 1,532 million from CHF 896 mil- lion in 2000 mainly due to higher distribution received. Sundry expense from ordinary activities was CHF 139 million, down from CHF 614 million in 2000. This was mainly due to lower net write- down of financial investments. Allowances, provisions and losses were CHF 1,140 million up from CHF 345 million in 2000 mainly caused by higher credit loss expenses. This variance is discussed in more detail in the Group Financial Statements. Extraordinary income contains CHF 87 mil- lion (2000: CHF 496 million) from the sale of former subsidiaries. Balance Sheet Total assets increased by CHF 81 billion to CHF 1,016 billion by 31 December 2001. This move- ment is impacted by increased trading related assets where mainly trading balances in securi- ties and precious metals and positive replace- ment values have increased. Liquid assets have significantly increased due to deposits with the Bank of Japan. 173 UBS AG (Parent Bank) Financial Statements Financial Statements Income Statement CHF million For the year ended 31.12.01 31.12.00 % change from 31.12.00 Interest and discount income Interest and dividend income from financial investments Interest expense Net interest income 38,056 185 (31,444) 6,797 Credit-related fees and commissions 291 Fee and commission income from securities and investment business 8,232 524 Other fee and commission income (1,176) Fee and commission expense Net fee and commission income Net trading income Net income from disposal of financial investments 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 expenses General and administrative expenses Operating expenses Operating profit Depreciation and write-offs on investments in associated companies and fixed assets Allowances, provisions and losses Profit before extraordinary items and taxes Extraordinary income Extraordinary expenses Tax expense / (benefit) Profit for the period 7,871 5,015 15 1,532 54 1,183 (139) 2,645 22,328 9,443 4,869 14,312 8,016 1,650 1,140 5,226 95 7 659 4,655 40,375 93 (32,161 ) 8,307 292 9,574 492 (1,229 ) 9,129 7,378 785 896 41 380 (614 ) 1,488 26,302 10,292 5,405 15,697 10,605 1,623 345 8,637 650 20 1,361 7,906 (6) 99 (2) (18) 0 (14) 7 (4) (14) (32) (98) 71 32 211 (77) 78 (15) (8) (10) (9) (24) 2 230 (39) (85) (65) (52) (41) 174 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 investments Investments in associated companies Tangible fixed assets Accrued income and prepaid expenses Positive replacement values Other assets Total assets 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 Total liabilities Total subordinated liabilities Total liabilities to Group companies 31.12.01 31.12.00 % change from 31.12.00 20,215 54,384 252,226 173,690 117,706 185,306 17,253 11,331 5,624 3,231 171,798 3,725 1,016,489 1,894 213,954 52,604 303,036 67,664 288,684 5,213 65,471 8,707 172,469 5,795 3,959 3,589 14,507 3,253 16,883 4,655 1,016,489 16,444 126,182 2,242 61,152 243,911 175,255 117,830 155,342 12,133 10,587 5,949 3,239 141,516 6,242 935,398 805 187,724 36,340 294,4401 68,069 263,459 5,408 42,731 11,230 155,059 8,0731 7,817 4,444 18,047 4,007 8,361 7 7,906 935,398 15,302 142,263 802 (11) 3 (1) 0 19 42 7 (5) 0 21 (40) 9 135 14 45 3 (1) 10 (4) 53 (22) 11 (28) (49) (19) (20) (19) 102 (100) (41) 9 7 (11) 1 Reclassification of CHF 65,512 million trading liabilities from Other liabilities to Due to banks. Statement of Appropriation of Retained Earnings CHF million The Board of Directors proposes to the Annual General Meeting the following appropriation: Profit for the financial year 2001 as per the Parent Bank’s Income Statement Appropriation to other reserves 4,655 4,655 Par Value Repayment The Board of Directors proposes to repay CHF 2.00 of the par value of each CHF 2.80 share, instead of distributing a dividend. This repayment would reduce the share capital by CHF 2,517 million, as at 31 December 2001, and reduce the par amount per share to CHF 0.80. The repayment of CHF 2.00 of the par value would be made on 10 July 2002 to those shareholders who hold UBS shares on 5 July 2002. 175 UBS AG (Parent Bank) Notes to the Financial Statements Notes to the Financial Statements Accounting and Valuation Principles The Parent Bank’s accounting and valuation policies are in compliance with Swiss banking law. The accounting and valuation policies are prinicipally the same as for the Group Financial Statements outlined in Note 1: Summary of Sig- nificant Accounting Policies. Major differences between the Swiss banking law requirements and International Accounting Standards are described in Note 39 to the Group Financial Statements. In addition, the following principles are ap- plied for the Parent Bank: Treasury shares Treasury shares is the term used to describe when an enterprise holds its own equity instru- ments. Under IAS, treasury shares are presented in the balance sheet as a deduction from equity. No gain or loss is recognized in the income state- ment on the sale, issuance, acquisition, or can- cellation of those shares. Consideration received or paid is presented in the financial statement as a change in equity. Under Swiss law, treasury shares are classified in the balance sheet as trading balances or as financial assets, short positions are included in Due to banks. Realized gains and losses on the sale, issuance or acquisition of treasury shares, and unrealized gains or losses from remeasure- ment of treasury shares in the trading portfolio to market value are included in the income state- ment. Treasury shares included in Financial investments are carried at the lower of cost or market value. Investments in associated companies Investments in associated companies are equity interests which are held for the purpose of the Parent Bank’s business activities or for strategic reasons. They are carried at cost less valuation reserves, if needed. Property and equipment Bank buildings and other real estate are carried at cost less accumulated depreciation. Depreciation of computer and telecommunication equipment, other office equipment, fixtures and fittings is recognized on a straight-line basis over the esti- mated useful lives of the related assets. The use- ful lives of Property and equipment are summa- rized 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 appropriate income or expense category. These items are separately identified below. Taxation Deferred Tax Assets and Deferred Tax Liabilities, except for a few immaterial exceptions, are not recognized in the Parent Bank financial state- ments. Swiss banking law does not require to recognize deferred taxes. 176 Additional Income Statement Information Net Trading Income CHF million For the year ended Foreign exchange and bank notes Bonds and other interest rate instruments Equities Precious metals and commodities Total 31.12.01 31.12.00 % change from 31.12.00 1,629 805 2,435 146 5,015 1,151 88 6,117 22 7,378 42 815 (60) 564 (32) Extraordinary Income and Expenses Extraordinary income contains CHF 87 million (2000: CHF 496 million) from the sale of sub- sidiaries and CHF 8 million (2000: CHF 15 mil- lion) from other disposals. Extraordinary expens- es consist mainly of losses of CHF 4 million from the liquidation of investments in subsidiaries. In 2000 losses of CHF 20 million resulted from the sale of tangible fixed assets. 177 UBS AG (Parent Bank) Notes to the Financial Statements Additional Balance Sheet Information Value Adjustments and Provisions CHF million Default risks (credit and country risk) Other business risks Capital and income taxes Other provisions Total allowance for general credit losses and other provisions Allowances deducted from assets Balance at 31.12.00 10,389 2,933 2,054 1,573 16,949 9,132 Total provisions as per balance sheet 7,817 Provisions applied in accordance with their specified purpose (2,976 ) (163 ) (1,634 ) (799 ) Recoveries, doubtful interest, currency translation differences 252 (165 ) (68 ) (212 ) New provisions charged to income 367 289 549 469 (5,572) (193) 1,674 Balance at 31.12.01 8,032 2,894 901 1,031 12,858 8,899 3,959 178 Statement of Shareholders’ Equity CHF million Shareholders’ equity Share capital at beginning of the period General statutory reserves Reserves for own shares Other reserves Retained earnings Total shareholders’ equity at beginning of the period (before distribution of profit) Reduction of share capital Capital increase Increase in General statutory reserves Share premium Other allocations 1 Prior-year dividend 2 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 31.12.01 31.12.00 % change from 31.12.00 4,444 18,047 4,007 8,361 7,913 42,772 (867) 12 275 (3,815) (145) 4,655 42,887 3,589 14,507 3,253 16,883 4,655 4,309 14,528 3,462 6,356 6,791 35,446 135 215 3,304 (1,979 ) (2,255 ) 7,906 42,772 4,444 18,047 4,007 8,361 7,913 3 24 16 32 17 21 (91) 28 (93) (100) (41) 0 (19) (20) (19) 102 (41) 1 The 31 December 2000 figure includes a partial dividend for the period from 1 January 2000 until 30 September 2000 distributed in the year 2000. 2 For the fourth quarter 2000 a par value repayment has been done instead of distributing a final dividend. Share Capital Issued and paid up Conditional share capital Par value Ranking for dividends No. of shares Capital in CHF No. of shares Capital in CHF 1,281,717,499 13,017,716 3,588,808,997 36,449,605 1,258,653,143 3,524,228,800 179 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 31.12.01 31.12.00 Change in % Book value 29,893 1,239 5,224 36,356 Effective liability 813 813 Book value 28,355 1,565 40,649 70,569 Effective liability Book value Effective liability 1,066 24,721 25,787 5 (21 ) (87 ) (48 ) (24) (100) (97) 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 31.12.01 31.12.00 % change from 31.12.00 38,978 532 1,042 40,552 50,274 682 403 51,359 (22) (22) 159 (21) Due to UBS Pension Plans, Loans to Corporate Bodies / Related Parties CHF million Due to UBS pension plans (including securities borrowed) and UBS securities held by pension plans Loans to directors, senior executives and auditors 1 31.12.01 31.12.00 % change from 31.12.00 1,605 32 4,644 36 (65) (11) 1 Loans to directors, senior executives and auditors 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. There are no loans to the auditors. 180 UBS AG (Parent Bank) Report of the Statutory Auditors 181 182 Additional Disclosure Required under SEC Regulations 183 Additional Disclosure Required under SEC Regulations Table of Contents Additional Disclosure Required under SEC Regulations Table of Contents A B C D Introduction Selected Financial Data Balance Sheet Data US GAAP Income Statement Data US GAAP Balance Sheet Data Ratio of Earnings to Fixed Charges Information on the Company Property, plant and equipment Information Required by Industry Guide 3 Selected statistical information Average Balances and Interest Rates Analysis of Changes in Interest Income and Expense Deposits Short-term Borrowings Loans Loan Maturities Impaired, Non-performing and Restructured Loans Cross-Boarder Outstandings Summary of Movements in Allowances and Provisions for Credit Losses Allocation of the Allowances and Provisions for Credit Losses Loss History Statistics 185 185 187 188 189 189 189 189 190 190 190 192 194 195 196 197 198 199 201 203 205 184 A – Introduction The following pages contain additional disclosure about UBS Group which is required under SEC regulations. B – Selected Financial Data UBS’s Financial Statements have been prepared in accordance with International Accounting Standards (IAS) and are denominated in Swiss francs, or CHF, the reporting currency of the Group. Certain financial information has also been presented in accordance with United States Generally Accepted Accounting Principles (US GAAP). The tables below set forth, for the periods and dates indicated, information concerning the noon buying rate for the Swiss franc, expressed in United States dollars, or USD, per one Swiss franc. The noon buying rate is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. On 28 February 2002 the noon buying rate was 0.5864 USD per 1 CHF. Year ended 31 December 1997 1998 1999 2000 2001 Month September 2001 October 2001 November 2001 December 2001 January 2002 February 2002 High 0.7446 0.7731 0.7361 0.6441 0.6331 High 0.6331 0.6217 0.6132 0.6136 0.6081 0.5932 Average rate1 Low (USD per 1 CHF) At period end 0.6890 0.6894 0.6605 0.5912 0.5910 0.6845 0.7281 0.6277 0.6172 0.5857 0.6510 0.6485 0.6244 0.5479 0.5495 Low 0.5859 0.6021 0.5985 0.5907 0.5814 0.5833 1 The average of the noon buying rates on the last business day of each full month during the relevant period. 185 Additional Disclosure Required under SEC Regulations B – Selected Financial Data (continued) CHF million, except where indicated For the year ended 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 Income statement data Interest income Interest expense Net interest income Credit loss (expense) / recovery Net interest income after credit loss (expense) / recovery Net fee and commission income Net trading income Other income Operating income Operating expenses Operating profit before tax Restructuring costs Tax expense/(benefit) Minority interests Net profit Cost / income ratio (%) 1 Cost / income ratio before goodwill (%) 1, 2 Per share data (CHF) Basic earnings per share 3, 4 Basic earnings per share before goodwill 2, 3, 4 Diluted earnings per share 3, 4 Diluted earnings per share before goodwill 2, 3, 4 Cash dividends declared per share (CHF) 5 Cash dividends declared per share (USD) 5 Dividend payout ratio (%) 5 Rates of return (%) Return on shareholders’ equity 6 Return on shareholders’ equity before goodwill 2, 6 Return on average equity Return on average assets 52,277 44,236 8,041 (498) 7,543 20,211 8,802 558 37,114 30,396 6,718 0 1,401 (344) 4,973 80.8 77.3 3.93 4.97 3.78 4.81 11.7 14.8 10.4 0.36 51,745 43,615 8,130 130 8,260 16,703 9,953 1,486 36,402 26,203 10,199 0 2,320 (87 ) 7,792 72.2 70.4 6.44 7.00 6.35 6.89 1.50 0.86 23.28 21.5 23.4 22.0 0.7 35,604 29,695 5,909 (956 ) 4,953 12,607 7,719 3,146 28,425 20,532 7,893 0 1,686 (54 ) 6,153 69.9 68.7 5.07 5.35 5.02 5.30 1.83 1.10 36.18 22.4 23.6 18.6 0.65 37,442 32,424 5,018 (951 ) 4,067 12,626 3,313 2,241 22,247 18,376 3,871 0 904 5 2,972 79.2 23,669 16,733 6,936 (1,278) 5,658 12,234 5,491 1,497 24,880 18,636 6,244 7,000 (105) (16) (667) 71.2 77.7 70.7 2.44 (0.53) 2.72 2.40 2.68 1.67 1.10 68.21 10.7 12.0 9.0 0.28 (0.53) (2.0) (0.07) 3 For EPS calculation, see Note 9 to the Financial Statements. 2 The amortization of goodwill and other intangible assets is excluded from 1 Operating expenses / operating income before credit loss expense. 4 The 2000, 1999, 1998 and 1997 share and earnings per share the calculation. 5 Dividends are normally declared and paid in the year figures have been adjusted for the 3 for 1 share split which took place on 16 July 2001. subsequent to the reporting period. In 2000, as part of the arrangements of the acquisition of PaineWebber, a dividend of CHF 1.50 was paid on 5 October 2000 in respect of the nine months ended 30 September 2000. Prior to the merger between Union Bank of Switzerland and Swiss Bank Corporation, each paid dividends in accordance with its own dividend policies. In 2001 a further amount of CHF 1.60 per share was dis- tributed to shareholders in the form of a par value reduction, in respect of 2000. No dividend will be paid out for the year 2001. A par value reduction of CHF 2.00 per share will be paid on 10 July 2002, in respect of 2001, subject to approval by shareholders at the Annual General Meeting. 6 Net profit / average shareholders’ equity excluding dividends. 186 Shares 1 Registered ordinary shares Own shares to be delivered Treasury shares BIS capital ratios Tier 1 (%) Total BIS (%) Risk-weighted assets Invested assets (CHF billion) B – Selected Financial Data (continued) CHF million, except where indicated As at 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 Balance sheet data Total assets Shareholders’ equity Average equity to average assets (%) 1,253,297 43,530 3.49 1,087,552 44,833 3.17 Market capitalization 105,475 112,666 896,556 30,608 3.52 92,642 861,282 28,794 3.06 90,720 1,086,414 30,927 3.40 1,281,717,499 0 41,254,951 1,333,139,187 28,447,788 55,265,349 1,292,679,486 0 110,621,142 1,289,857,836 0 73,370,094 1,286,174,100 0 38,236,224 11.6 14.8 253,735 2,457 8.3 12.6 345,904 11.7 15.7 273,290 2,4524 71,076 AAA Aa1 AA+ 10.6 14.5 273,107 1,744 49,058 AAA Aa1 AA+ 9.3 13.2 303,719 1,573 48,011 AAA Aa1 AA+ Headcount (full time equivalents) 2 69,985 Long-term ratings 3 Fitch, London Moody’s, New York Standard & Poor’s, New York AAA AA2 AA+ 1 The 2000, 1999, 1998 and 1997 share figures have been adjusted for the 3 for 1 split which took place on 16 July 2001. count does not include the Klinik Hirslanden AG headcount. nature of these ratings. 4 Restated to reflect the new definition. 2 The Group head- 3 See the UBS Handbook 2001/2002, page 10 to 11 for information about the Balance Sheet Data CHF million As at Assets Total assets Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Positive replacement values Loans, net of allowances for credit losses Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Debt issued Shareholders’ equity 31.12.01 31.12.001 31.12.991 31.12.981 31.12.971 1,253,297 27,526 162,938 269,256 397,886 73,447 1,087,552 29,147 177,857 193,801 315,588 57,875 896,556 29,907 113,162 132,391 211,932 62,957 861,282 68,495 91,695 141,285 159,179 90,511 1,086,414 66,582 82,656 216,355 210,738 149,538 226,545 244,842 234,858 247,926 270,917 106,531 30,317 368,620 105,798 71,443 333,781 156,218 43,530 82,240 23,418 295,513 82,632 75,923 310,679 129,635 44,833 76,365 12,832 196,914 54,638 95,786 279,960 120,987 30,608 85,716 19,171 137,617 47,033 125,847 274,850 102,310 28,794 159,634 14,140 191,793 68,215 170,162 302,516 109,864 30,927 1 Changes have been made to prior year to conform to the current presentation (see Note 1: Summary of Significant Accounting Policies in the Financial Statements). 187 31.12.01 31.12.00 31.12.99 31.12.98 51,565 (43,584 ) 7,981 130 8,111 16,703 8,597 1,514 34,925 17,262 6,813 3,952 191 28,218 6,707 2,183 4,524 (87 ) 4,437 35,404 (29,660 ) 5,744 (956 ) 4,788 12,607 7,174 3,182 27,751 12,483 6,664 3,454 750 23,351 4,400 1,509 2,891 (54 ) 2,837 29,136 (25,773) 3,363 (787) 2,576 8,925 455 725 12,681 7,938 6,259 2,403 1,089 17,689 (5,008) (1,339) (3,669) 4 (3,665) Additional Disclosure Required under SEC Regulations B – Selected Financial Data (continued) US GAAP Income Statement Data CHF million For the year ended Operating income Interest income Interest expense Net interest income Credit loss (expense) / recovery 51,975 (44,178) 7,797 (498) Net interest income after credit loss (expense) / recovery 7,299 Net fee and commission income Net trading income Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation and amortization Restructuring costs Total operating expenses Operating profit / (loss) before tax and minority interests Tax expense / (benefit) Net profit / (loss) before minority interests Minority interests Net profit / (loss) 20,211 8,973 534 37,017 19,713 7,631 4,597 112 32,053 4,964 1,386 3,578 (344) 3,234 188 B – Selected Financial Data (continued) US GAAP Balance Sheet Data CHF million As at Assets Total assets Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Positive replacement values 2 Loans, net of allowances for credit losses Intangible assets and goodwill Other assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values 2 Due to customers Accrued expenses and deferred income Debt issued Shareholders’ equity 31.12.01 31.12.001 31.12.991 31.12.981 1,314,856 1,124,554 893,525 899,589 27,550 162,566 269,256 399,577 73,051 226,747 33,765 36,972 106,531 30,317 368,620 108,924 71,018 333,766 17,289 156,462 59,282 29,182 177,857 193,801 318,788 57,775 245,214 35,726 27,955 82,240 23,418 295,513 87,832 75,423 310,686 21,038 129,750 62,960 29,954 113,162 132,391 228,230 62,294 235,401 21,428 18,717 76,363 12,832 173,840 52,658 95,004 279,971 12,040 120,704 51,833 68,554 91,695 141,285 178,130 90,520 248,657 21,707 29,398 85,716 19,127 136,824 47,772 125,857 274,861 11,232 101,973 54,761 1 Changes have been made to prior year to conform to the current presentation (see Note 1: Summary of significant Accounting Policies in the Financial Statements). 2 Positive and negative replacement values represent the fair value of derivative instruments. Ratio of Earnings to Fixed Charges The following table sets forth UBS AG’s ratio of earnings to fixed charges, for the periods indicated. Ratios of earnings to combined fixed charges and preferred stock dividends requirements are not pre- sented as there were no preferred share dividends in any of the periods indicated. For the year ended 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 IAS US GAAP 1.141 1.101, 2 1.231 1.151, 2 1.251 1.141, 2 1.111 0.801, 2 0.951 , 3 1 The ratio is provided using both IAS and US GAAP values, since the ratio is materially different under the two accounting standards. No US GAAP information is provided for 31 December 1997 as a US GAAP reconciliation was not required for that period. 2 The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 was CHF 5,319 million. 3 The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1997 was CHF 851 million. C – Information on the Company Property, plant and equipment At 31 December 2001, UBS operated about 2000 offices and branches worldwide, of which about 51% were in Switzerland, 10% in the rest of Europe, 37% in the Americas and 2% in Asia. in Switzerland were owned directly by UBS with the offices and branches 28% of the remainder, along with most of UBS’s offices outside Switzerland, being held under commer- cial leases. These premises are subject to continuous maintenance and upgrading and are considering suitable and adequate for our current and antic- ipated operations. 189 Additional Disclosure Required under SEC Regulations D – Information Required by Industry Guide 3 Selected statistical information The tables below set forth selected statistical information regarding the Group’s banking operations extracted the Financial Statements. Unless otherwise indicated, average balances for the year ended 31 December 2001, 31 December 2000 and 31 December 1999 are from calculated from monthly data. Certain prior year balances and figures have been reclassified to conform to current year presentation. The dis- tinction between domestic and foreign is gener- ally based on the booking location. For loans, this method is not significantly different from an analysis based on the domicile of the borrower. Average Balances and Interest Rates The following table sets forth average interest-earning assets and average interest-bearing liabilities, along with the average rates, for the years ended 31 December 2001, 2000 and 1999. CHF million, except where indicated Average balance Interest Average rate (%) Average balance Interest Average rate (%) Average balance Interest Average rate (%) 31.12.01 31.12.00 31.12.99 Assets Due from banks Domestic Foreign Cash collateral on securities borrowed and on reverse repurchase agreements Domestic Foreign Trading portfolio assets Domestic Foreign Loans Domestic Foreign Financial investments Domestic Foreign Net interest on swaps Total interest-earning assets Non-interest-earning assets Positive replacement values Fixed assets Other Total average assets 11,753 15,528 1,055 1,823 9.0 11.7 13,366 16,994 1,273 2,280 9.5 13.4 19,451 28,999 1,757 2,739 7,868 474,295 12,940 333,576 177,404 72,176 4,598 39,252 563 17,774 307 16,225 8,017 3,090 90 363 2,970 7.2 3.7 2.4 4.9 4.5 4.3 2.0 0.9 8,383 348,395 20,800 256,605 181,646 67,528 3,440 22,529 558 18,530 244 11,598 10,985 3,813 105 297 2,062 6.7 5.3 1.2 4.5 6.0 5.6 3.1 1.3 3,265 223,962 117 11,305 38,372 159,327 200,111 58,634 2,761 17,153 72 5,526 8,750 3,485 101 143 1,609 1,149,390 52,277 4.5 939,686 51,745 5.5 752,035 35,604 153,687 13,376 46,954 1,363,407 135,762 9,660 32,925 1,118,033 146,036 8,824 34,957 941,852 9.0 9.4 3.6 5.0 0.2 3.5 4.4 5.9 3.7 0.8 4.7 190 D – Information Required by Industry Guide 3 (continued) Average Balances and Interest Rates (continued) CHF million, except where indicated Liabilities and Equity Due to banks Domestic Foreign Cash collateral on securities lent and repurchase agreements Domestic Foreign Trading portfolio liabilities Domestic Foreign Due to customers Domestic Foreign Debt issued Domestic Foreign Total interest-bearing liabilities Non-interest-bearing liabilities Negative replacement values Other Total liabilities Shareholders’ equity 31.12.01 31.12.00 31.12.99 Average balance Interest Average rate (%) Average balance Interest Average rate (%) Average balance Interest Average rate (%) 36,260 61,642 1,424 3,506 13,147 415,121 600 13,917 2,526 94,597 139,014 187,783 12,823 139,982 1 7,814 2,420 6,738 587 7,229 1,102,895 44,236 165,220 47,676 1,315,791 47,616 3.9 5.7 4.6 3.4 0.0 8.3 1.7 3.6 4.6 5.2 4.0 31,133 57,258 2,397 3,758 12,700 284,220 478 14,437 1,078 66,597 143,809 143,432 15,569 116,095 4 5,305 2,202 7,303 778 6,953 871,891 43,615 157,668 53,049 1,082,608 35,425 1,118,033 7.7 6.6 3.8 5.1 0.4 8.0 1.5 5.1 5.0 6.0 5.0 37,581 41,583 3,254 2,261 12,830 144,837 0 48,560 155,887 122,411 16,387 95,919 106 8,340 0 2,070 1,931 6,399 952 4,382 675,995 29,695 171,800 60,946 908,741 33,111 941,852 8.7 5.4 0.8 5.8 0.0 4.3 1.2 5.2 5.8 4.6 4.4 Total average liabilities and shareholders’ equity 1,363,407 Net interest income Net yield on interest-earning assets 8,041 8,130 5,909 0.7 0.9 0.8 The percentage of total average interest-earning assets attributable to foreign activities was 81% for 2001 (76% for 2000 and 65% for 1999). The percentage of total average interest-bearing liabilities attributable to foreign activities was 82% for 2001 (77% for 2000 and 67% for 1999). All assets and liabilities are translated into CHF at uniform month-end rates. Interest income and expense are translated at month- ly average rates. Average rates earned and paid on assets and liabilities can change from period to period based on the changes in interest rates in general, but are also affected by changes in the currency mix included in the assets and liabilities. This is especially true for foreign assets and liabilities. Tax exempt income is not recorded on a tax-equivalent basis. For all three years presented, tax exempt income is considered to be insignificant and therefore the impact from such income is negligible. 191 Additional Disclosure Required under SEC Regulations D – Information Required by Industry Guide 3 (continued) Analysis of Changes in Interest Income and Expense The following tables allocate, by categories of interest-earning assets and interest-bearing liabilities, the changes in interest income and expense due to changes in volume and interest rates for the year ended 31 December 2001 compared to the year ended 31 December 2000, and for the year ended 31 December 2000 compared to the year ended 31 December 1999. Volume and rate variances have been calculated on movements in average balances and changes in interest rates. Changes due to a combination of volume and rates have been allocated proportionally. CHF million 2001 compared to 2000 2000 compared to 1999 Increase (decrease) due to changes in Increase (decrease) due to changes in Average volume Average rate Net change Average volume Average rate Net change Interest income from interest-earning assets Due from banks Domestic Foreign (153) (196) Cash collateral on securities borrowed and reverse repurchase agreements (65) (261) (218) (457) (550 ) (1,134 ) (35) 6,673 (94) 3,464 (255) 260 36 217 40 (7,429) 157 1,163 5 (756) 63 4,627 (2,713) (983) (2,968) (723) (51) (151) (15) 66 183 6,281 (33 ) 3,374 (807 ) 529 25 45 66 675 258 944 205 2,698 3,042 (201 ) (21 ) 109 (484) (459) 441 7,225 172 6,072 2,235 328 4 154 (501) 10,418 (2,632) (7,661) (3,133) 2,757 (1,182 ) 9,095 3,550 4,225 2,368 13,320 9,917 (10,293) (376) 908 532 7,913 7,775 15,688 453 16,141 Domestic Foreign Trading portfolio assets Domestic Foreign Loans Domestic Foreign Financial investments Domestic Foreign Interest income Domestic Foreign Total interest income from interest-earning assets Net interest on swaps Total interest income 192 D – Information Required by Industry Guide 3 (continued) Analysis of Changes in Interest Income and Expense (continued) CHF million 2001 compared to 2000 2000 compared to 1999 Increase (decrease) due to changes in Increase (decrease) due to changes in Average volume Average rate Net change Average volume Average rate Net change Interest expense on interest-bearing liabilities Due to banks Domestic Foreign 395 289 (1,368) (541) (973) (252) (558 ) 852 (299 ) 645 (857) 1,497 Cash collateral on securities lent and repurchase agreements Domestic Foreign Trading portfolio liabilities Domestic Foreign Due to customers Domestic Foreign Debt issued Domestic Foreign Interest expense Domestic Foreign (1 ) 8,026 373 (1,929 ) 17 6,676 6 2,240 (72) 2,262 (137) 1,433 105 (7,196) (9) 269 290 (2,827) (54) (1,157) 122 (520) (3) 2,509 218 (565) (191) 276 4 769 (150 ) 1,099 (48 ) 922 209 12,900 (1,036) (11,452) (827) 1,448 (753 ) 11,668 0 2,466 421 (195 ) (126 ) 1,649 369 2,636 3,005 Total interest expense 13,109 (12,488) 621 10,915 372 6,097 4 3,235 271 904 (174) 2,571 (384) 14,304 13,920 193 Additional Disclosure Required under SEC Regulations D – Information Required by Industry Guide 3 (continued) Deposits The following table analyzes average deposits and the average rates on each deposit category listed below for the years ended 31 December 2001, 2000 and 1999. The geographic allocation is based on the location of the office or branch where the deposit is made. Deposits by foreign depositors in domestic offices were CHF 54,095 million, CHF 45,815 million and CHF 45,285 million at 31 De- cember 2001, 31 December 2000 and 31 December 1999, respectively. CHF million, except where indicated Average deposit Average rate (%) Average deposit Average rate (%) Average deposit Average rate (%) 31.12.01 31.12.00 31.12.99 Banks Domestic offices Demand deposits Time deposits Total domestic offices Foreign offices Interest-bearing deposits 1 Total due to banks Customer accounts Domestic offices Demand deposits Savings deposits Time deposits Total domestic offices Foreign offices Demand deposits Total due to customers 1 Mainly time deposits. 3,741 8,012 11,753 15,528 27,281 41,664 66,089 31,261 139,014 187,783 326,797 1.2 4.2 3.3 5.7 4.6 1.7 1.1 3.2 1.7 3.6 2.8 4,649 8,717 13,366 16,994 30,360 44,403 72,207 27,199 143,809 143,432 287,241 1.9 8.7 6.3 6.6 6.5 1.3 1.1 3.0 1.5 5.1 3.3 12,736 6,715 19,451 28,999 48,450 49,261 80,543 26,083 155,887 122,411 278,298 0.9 12.6 5.0 5.4 5.2 0.6 1.1 2.8 1.2 5.2 3.0 At 31 December 2001, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies, was as follows: CHF million Within 3 months 3 to 12 months 1 to 5 years Over 5 years Total time deposits Domestic Foreign 34,240 4,103 981 56 156,183 7,783 705 896 39,380 165,567 194 D – Information Required by Industry Guide 3 (continued) Short-term Borrowings The following table presents our period-end, average and maximum month-end outstanding amounts for short-term borrowings, along with the average rates and period-end rates at and for the years ended 31 December 2001, 2000 and 1999. Money market paper issued Due to banks Repurchase agreements 1 CHF million, except where indicated 31.12.01 31.12.00 31.12.99 31.12.01 31.12.00 31.12.99 31.12.01 31.12.00 31.12.99 Period-end balance Average balance Maximum month-end balance Average interest rate during the period (%) Average interest rate at period-end (%) 99,006 96,253 117,022 4.4 2.6 74,780 78,154 89,821 5.6 6.0 64,655 58,102 76,368 3.9 4.6 77,312 70,621 85,808 7.0 2.2 51,245 58,031 73,355 7.0 4.1 40,580 30,714 64,562 9.7 4.8 462,316 400,648 502,578 3.2 2.9 330,857 278,601 342,427 4.8 4.8 217,736 149,071 217,736 4.8 3.9 1 For the purpose of this disclosure, balances are presented on a gross basis. 195 Additional Disclosure Required under SEC Regulations D – Information Required by Industry Guide 3 (continued) Loans Loans are widely dispersed over customer categories both within and outside of Switzerland. With the exceptions of private households (foreign and domestic) and banks and financial institutions out- side Switzerland, there is no material concentration of loans. For further discussion of the loan port- folio, see the UBS Handbook 2001/2002. The following table illustrates the diversification of the loan portfolio among customer categories at 31 December 2001, 2000, 1999, 1998 and 1997. The industry categories presented are consistent with the classification of loans for reporting to the Swiss Federal Banking Commission and Swiss National Bank. CHF million 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 Domestic Banks Construction Financial institutions Hotels and restaurants Manufacturing 1 Private households Public authorities Real estate and rentals Retail and wholesale Services 2 Other 3 Total domestic 1,533 3,499 5,673 2,950 8,686 93,746 5,222 14,992 8,674 12,161 1,860 2,896 4,870 5,725 3,526 9,577 91,667 5,658 16,673 9,635 11,767 2,651 5,802 6,577 9,387 4,259 11,377 93,846 5,277 19,835 10,904 14,862 1,818 4,543 7,897 10,240 4,129 13,505 97,664 5,858 21,231 8,912 11,582 1,662 158,996 164,645 183,944 187,223 17,751 9,627 11,371 4,668 16,440 109,044 6,354 22,915 10,512 13,083 1,862 223,627 Foreign Banks Chemicals Construction Electricity, gas and water supply Financial institutions Manufacturing 6 Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 4, 5 26,728 1,080 266 977 14,458 4,258 1,313 25,619 6,454 10,227 1,732 4,786 2,117 2,973 27,168 1,423 773 1,584 20,348 4,596 2,070 29,470 11,754 5,077 1,862 1,585 993 11,168 Total foreign Total gross 102,988 261,984 119,871 284,516 24,983 65,000 49,559 69,087 94,070 278,014 78,741 143,741 330,964 80,054 129,613 353,240 1 Includes chemicals, food and beverages. personal service activities. classifications are available. 3 Includes mining and electricity, gas and water supply. 2 Includes transportation, communication, health and social work, education and other social and 4 For the years prior to the year 2000, no detailed industry 5 Includes hotels and restaurants. 6 Includes food and beverages. 196 D – Information Required by Industry Guide 3 (continued) Loans (continued) The following table analyzes the Group’s mortgage portfolio by geographic origin of the customer and type of mortgage at 31 December 2001, 2000, 1999, 1998 and 1997. Mortgages are included in the industry categories mentioned above. CHF million Mortgages Domestic Foreign Total gross mortgages Mortgages Residential Commercial Total gross mortgages Loan Maturities 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 116,628 9,583 126,211 101,969 24,242 126,211 116,348 4,206 120,554 126,677 1,310 127,987 96,181 24,373 91,408 36,579 120,554 127,987 138,306 2,479 140,785 106,093 34,692 140,785 142,919 3,883 146,802 105,926 40,876 146,802 The following table discloses loans by maturity at 31 December 2001. The determination of maturi- ties is based on contract terms. Information on interest rate sensitivities can be found in Note 30 to the UBS Group Financial Statements. CHF million Domestic Banks Mortgages Other loans Total domestic Foreign Banks Mortgages Other loans Total foreign Total gross loans Within 1 year 1 to 5 years Over 5 years Total 1,384 63,952 31,578 96,914 26,153 8,746 63,927 98,826 149 45,246 7,671 53,066 305 664 2,110 3,079 195,740 56,145 0 7,430 1,586 9,016 270 173 640 1,083 10,099 1,533 116,628 40,835 158,996 26,728 9,583 66,677 102,988 261,984 197 Additional Disclosure Required under SEC Regulations D – Information Required by Industry Guide 3 (continued) Impaired, Non-performing and Restructured Loans A loan is classified as impaired if the book value of the claim exceeds the present value of the cash flows actually expected in future periods – interest payments, scheduled principal repayments and liquidation of collateral. Impaired obligations are thus obligations where losses are probable and estimable. A provision is then made with respect to the loan in question. Impaired loans include non- performing loans, for which the contractual payments of principal, interest or commission are over- due by 90 days. When loans are classified as non-performing, the recognition of interest or commis- sion income ceases to be recorded according to the original terms of the loan agreement. Allowances are provided for non-performing loans to reflect their net estimated recoverable amount. The gross interest income that would have been recorded on non-performing loans was CHF 336 million for the year ended 31 December 2001, CHF 182 million for the year ended 31 December 2000 and CHF 409 million for the year ended 31 December 1999. The amount of interest income that was includ- ed in net income for those loans was CHF 201 million for the year ended 31 December 2001. There was no interest income recorded in net income for non performing loans in 2000 and 1999. The table below provides an analysis of the Group’s non-performing and restructured loans. For further dis- cussion of impaired and non-performing loans, see the UBS Handbook 2001/2002. CHF million 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 Non-performing loans: Domestic Foreign Total non-performing loans Foreign restructured loans 1 6,531 2,108 8,639 7,588 2,864 10,452 179 11,435 1,638 13,073 287 14,023 2,091 16,114 449 15,238 1,426 16,664 638 1 Amounts presented for 2001, 2000, 1999 and 1998 include only performing foreign restructured loans. Amounts presented for 1997 include both performing and non-performing foreign restructured loans. UBS does not, as a matter of policy, typically restructure loans to accrue inter- est at rates different from the original contractual terms or reduce the principal amount of loans. Instead, specific loan allowances are established as necessary. Unrecognized interest related to foreign restructured loans was not material to the results of operations during these periods. In addition to the non-performing loans shown above, the Group had CHF 5,990 million, CHF 8,042 million, CHF 9,383 million and CHF 10,333 million in “other impaired loans” for the years ended 31 December 2001, 2000, 1999 and 1998, respectively. These are loans that are current, or less than 90 days in arrears, with respect to payment of principal or interest however, the Group’s credit officers have expressed doubts as to the ability of the borrowers to repay the loans. As at 31 December 2001 specific allowances of CHF 1,920 million had been established against these loans, which are primarily domestic. 198 D – Information Required by Industry Guide 3 (continued) Cross-Border Outstandings Cross-border outstandings consist of general banking products such as loans and deposits with third parties, credit equivalents of over-the-counter (OTC) derivatives and repurchase agreements, and the market value of the inventory of securities. Outstandings are monitored and reported on an ongoing basis by the credit risk management and control organization with a dedicated country risk infor- mation system. With the exception of the 27 most developed economies, these exposures are rigor- ously limited. Claims that are secured by third-party guarantees are recorded against the guarantor’s country of domicile. Outstandings that are secured by collateral are recorded against the country where the asset could be liquidated. This follows the “Guidelines for the Management of Country Risk”, which are applicable to all banks that are supervised by the Swiss Federal Banking Commission. The following tables list those countries for which cross-border outstandings exceeded 0.75% of total assets at 31 December 2001, 2000 and 1999. At 31 December 2001, there were no outstandings that exceeded 0.75% of total assets in any country currently facing liquidity problems that the Group expects would materially affect the country’s ability to service its obligations. For more information on cross-border outstandings, see the UBS Handbook 2001/2002. 199 Additional Disclosure Required under SEC Regulations D – Information Required by Industry Guide 3 (continued) CHF million United States United Kingdom Germany Japan Italy France Canada Netherlands CHF million United States Japan United Kingdom Germany Italy France Netherlands Australia CHF million United States Japan United Kingdom Germany Italy Netherlands France Australia Canada 31.12.01 Banking products Banks Non-banks Traded products1 Tradable assets2 % of total assets Total 2,360 2,483 3,605 640 1,086 159 114 1,834 1,284 543 6,395 770 498 2,043 950 2,414 31,129 9,128 11,962 4,442 11,628 4,114 5,220 6,126 114,615 27,754 11,755 22,995 11,180 8,052 8,038 3,110 149,388 39,908 33,717 28,847 24,392 14,368 14,322 13,484 11.9 3.2 2.7 2.3 1.9 1.1 1.1 1.1 31.12.00 Banking products Banks Non-banks Traded products1 Tradable assets2 1,826 123 1,795 2,686 1,293 1,085 910 27 958 895 1,224 3,720 931 1,900 1,480 370 21,796 6,378 9,037 13,198 3,629 3,956 6,092 3,113 64,077 58,779 22,440 5,085 9,700 5,987 3,803 7,508 31.12.99 Banking products Banks Non-banks Traded products1 Tradable assets2 3,202 1,117 3,417 4,455 2,462 1,932 1,200 2,688 866 2,508 965 3,193 3,174 762 1,149 1,395 409 492 41,970 7,153 11,273 41,422 6,803 6,648 7,324 6,342 5,233 48,012 69,194 58,300 8,181 8,708 4,993 4,379 3,735 807 Total 88,657 66,175 34,496 24,689 15,553 12,928 12,285 11,018 Total 95,692 78,429 76,183 57,232 18,735 14,722 14,298 13,174 7,398 % of total assets 8.2 6.1 3.2 2.3 1.4 1.2 1.1 1.0 % of total assets 10.7 8.8 8.5 6.4 2.1 1.6 1.6 1.5 0.8 1 Traded products consist of derivative instruments and repurchase agreements. In 2001 and 2000 unsecured OTC derivatives exposure is reported based on the Potential Credit Exposure measurement methodology and is therefore not directly comparable to the exposure in the prior 2 Tradeable assets consist of equity and fixed income financial years, which were measured based on Gross Replacement Values plus Add-on. instruments held for trading purposes, which are marked to market on a daily basis. 200 D – Information Required by Industry Guide 3 (continued) Summary of Movements in Allowances and Provisions for Credit Losses The following table provides an analysis of movements in allowances and provisions for credit losses. As a result of Swiss bankruptcy laws, banks write-off loans against allowances only upon final settlement of bankruptcy proceedings, the sale of the underlying assets and/or in case of the forgive- ness of debt. Under Swiss law, a creditor can continue to collect from a debtor who has emerged from bankruptcy, unless the debt has been forgiven through a formal agreement. CHF million 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 Balance at beginning of year 10,581 13,398 14,978 16,213 18,135 Write-offs Domestic Banks Construction Financial institutions Hotels and restaurants Manufacturing 1 Private households Public authorities Real estate and rentals Retail and wholesale Services 2 Other 3 0 (248) (51) (52) (109) (1,297) 0 (317) (115) (93) (46) 0 (261 ) (178 ) (193 ) (264 ) (640 ) 0 (729 ) (160 ) (227 ) (30 ) (4 ) (296 ) (92 ) (137 ) (242 ) (598 ) 0 (823 ) (210 ) (315 ) (41 ) (2 ) (228 ) (66 ) (98 ) (214 ) (534 ) (2 ) (610 ) (178 ) (116 ) (15 ) Total domestic domestic write-offs (2,328) (2,682 ) (2,758 ) (2,063 ) (5) (408) (226) (138) (514) (1,214) (19) (871) (227) (229) (29) (3,880) Foreign 4 Banks Chemicals Construction Electricity, gas and water supply Financial institutions Manufacturing 6 Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other Total foreign write-offs (24) (2) (10) (63) (74) (119) (304) (5) 0 (1) 0 (30) 0 (48) (680) (15 ) (13 ) (3 ) (33 ) (11 ) (4 ) (160 ) (8 ) (11 ) (55 ) (313 ) Total write-offs Recoveries Domestic Foreign Total recoveries Net write-offs (3,008) (2,995 ) (517 ) (3,275 ) (261 ) (2,324 ) (240) (4,120) 58 23 81 124 39 163 54 11 65 59 59 406 36 442 (2,927) (2,832 ) (3,210 ) (2,265 ) (3,678) Credit loss expense / (recovery) Other adjustments 5 Balance at end of year 498 66 8,218 (130 ) 145 956 674 951 79 10,581 13,398 14,978 1,432 324 16,213 1 Includes chemicals, food and beverages. personal service activities. are available. 5 See the following table for details. 6 Includes food and beverages. 3 Includes mining and electricity, gas and water supply. 2 Includes transportation, communication, health and social work, education and other social and 4 For years prior to 2000, no detailed industry classifications 201 Additional Disclosure Required under SEC Regulations D – Information Required by Industry Guide 3 (continued) Summary of Movements in Allowances and Provisions for Credit Losses (continued) CHF million 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 Doubtful interest Net foreign exchange Subsidiaries sold and other Total adjustments 0 44 22 66 182 23 (60 ) 145 409 351 (86 ) 674 423 (98 ) (246 ) 79 450 91 (217) 324 202 D – Information Required by Industry Guide 3 (continued) Allocation of the Allowances and Provisions for Credit Losses The following table provide an analysis of the allocation of the allowances and provisions for cred- it losses by industry categories and geographic location at 31 December 2001, 2000, 1999, 1998 and 1997. For a description of procedures with respect to allowances and provisions for credit losses, see the UBS Handbook 2001/2002. CHF million 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 Domestic Banks Construction Financial institutions Hotels and restaurants Manufacturing 1 Private households Public authorities Real estate and rentals Retail and wholesale Services 2 Other 3 Total domestic Foreign 8 Banks 4 Chemicals Construction Electricity, gas and water supply Financial institutions Manufacturing 9 Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 5 Total foreign, net of country provisions Country provisions Total foreign 6 Unallocated allowances 7 Total allowances and provisions for credit losses 34 467 262 346 722 1,082 37 1,067 395 448 165 5,025 39 5 0 88 420 653 169 103 0 9 0 414 45 242 2,187 1,006 3,193 843 328 454 863 1,570 1,635 629 419 413 7,154 32 0 11 107 262 547 586 72 0 82 41 126 2 267 2,135 1,292 3,427 41 1,247 342 690 1,223 2,350 40 2,696 779 934 141 49 1,671 668 657 1,331 2,741 107 3,333 825 766 71 10,483 12,219 34 1,449 510 512 1,036 2,264 59 2,591 723 661 52 9,891 1,539 1,376 2,915 1,309 1,450 2,759 1,399 1,175 2,574 3,748 8,218 10,581 13,398 14,978 16,213 2 Includes transportation, communication, health and social work, education and other social and 1 Includes chemicals, food and beverages. 4 Counterparty allowances and provisions only. Country personal service activities. 5 Includes hotels and restaurants. provisions with banking counterparties amounting to CHF 662 million are disclosed under country provisions. 6 The 2001, 2000, 1999 and 1998 amounts include CHF 305 million, CHF 54 million, CHF 149 million and CHF 435 million respectively of 7 The 1997 amount includes a provision for commitments and contingent liabilities of provisions and commitments for contingent liabilities. CHF 472 million. 8 For years prior to 2000, no detailed industry classifications are available. 9 Includes food and beverages. 3 Includes mining and electricity, gas and water supply. 203 Additional Disclosure Required under SEC Regulations D – Information Required by Industry Guide 3 (continued) Allocation of the Allowances and Provisions for Credit Losses (continued) The following table presents the percentage of loans in each category to total loans. This table can be read in conjunction with the preceding table showing the breakdown of the allowances and pro- visions for credit losses by industry categories to evaluate the credit risks in each of the categories. in % 31.12.01 31.12.00 31.12.99 31.12.98 31.12.97 Domestic Banks Construction Financial institutions Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Other Total domestic Foreign Banks Chemicals Construction Electricity, gas and water supply Financial institutions Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other Total foreign Total gross loans 0.6 1.3 2.2 1.1 3.3 35.8 2.0 5.7 3.3 4.6 0.8 60.7 10.2 0.4 0.1 0.4 5.5 1.6 0.5 9.8 2.5 3.9 0.7 1.8 0.8 1.1 39.3 1.0 1.7 2.0 1.2 3.4 32.2 2.0 5.9 3.4 4.1 1.0 57.9 9.5 0.5 0.3 0.6 7.2 1.6 0.7 10.4 4.1 1.8 0.7 0.6 0.3 3.8 42.1 100.0 100.0 2.1 2.4 3.4 1.5 4.1 33.8 1.9 7.1 3.9 5.3 0.7 66.2 9.0 1.4 2.4 3.1 1.2 4.1 29.5 1.8 6.4 2.7 3.5 0.5 56.6 19.6 5.0 2.7 3.2 1.3 4.7 30.9 1.8 6.5 3.0 3.7 0.5 63.3 14.0 24.8 33.8 100.0 23.8 43.4 100.0 22.7 36.7 100.0 204 D – Information Required by Industry Guide 3 (continued) Loss History Statistics The following is a summary of the Group’s loan loss history. CHF million, except where indicated 31.12.01 31.12.00 31.12.99 31.12.98 Gross loans Impaired loans Non-performing loans Allowances and provisions for credit losses Net write-offs Credit loss expense / (recovery) 261,984 14,629 8,639 8,218 2,927 498 284,516 18,494 10,452 10,581 2,832 (130 ) 278,014 22,456 13,073 13,398 3,210 956 330,964 26,447 16,114 14,978 2,265 951 31.12.97 353,240 16,664 16,213 3,678 1,432 Ratios Impaired loans as a percentage of gross loans Non-performing loans as a percentage of gross loans Allowance and provisions for credit losses as a percentage of: Gross loans Impaired loans Non-performing loans Allocated allowances as a percentage of impaired loans 1 Allocated allowances as a percentage of non-performing loans 2 Net write-offs as a percentage of: Gross loans Allowance and provisions for credit losses Allowance and provisions for credit losses as multiple of net write-offs 5.6 3.3 3.1 56.2 95.1 49.9 62.2 1.1 35.6 2.81 6.5 3.7 3.7 57.2 101.2 52.4 60.63 1.0 26.8 3.74 8.1 4.7 4.8 59.7 102.5 55.5 66.3 1.2 24.0 4.17 8.0 4.9 4.5 56.6 93.0 51.4 62.1 0.7 15.1 6.61 4.7 4.6 97.3 1.0 22.7 4.41 1 Allowances relating to impaired loans only. ed to account for an overallocation of allowances to non-performing loans. 2 Allowances relating to non-performing loans only. 3 31 December 2000 figure has been restat- 205 Cautionary statement regarding forward-looking statements This communication contains statements that constitute “forward-looking statements”, including, without limita- tion, statements relating to the implementation of strategic initiatives, including the implementation of the new European wealth management strategy, expansion of our corporate finance presence in the US and worldwide, the development of UBS Warburg’s new energy trading opera- tions, and other statements relating to our future business development and economic performance. While these forward-looking statements represent our judg- ments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, (1) general market, macro-economic, governmental and regulatory trends, (2) movements in local and international securities markets, currency exchange rates and interest rates, (3) competitive pressures, (4) technological developments, (5) changes in the financial position or credit-worthiness of our customers, obligors and counterparties, (6) legislative developments, (7) the impact of the terrorist attacks on the World Trade Center and other sites in the United States on 11 September 2001 and subsequent related developments, (8) the impact of the management changes and changes to our Business Group structure which took place in Decem- ber 2001 and (9) other key factors that we have indicated could adversely affect our business and financial perform- ance which are contained in our past and future filings and reports, including those with the SEC. More detailed information about those factors is set forth in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2001. UBS is not under any obligation to (and expressly disclaims any such obligations to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise. Imprint Publisher / Copyright: UBS AG, Switzerland; Photos: Thierry Martinez, Philippe Schiller (Alinghi); Daniel Forster, Carlo Borlenghi (Nautor Challenge); Marcel Grubenmann (Portraits). Languages: English, German; SAP-R / 3 80531E-0201 ab UBS AG P.O. Box, CH-8098 Zurich P.O. Box, CH-4002 Basel www.ubs.com 

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