ab
Financial Report 2002
The Concept: Gardens
We have chosen a number of distinct gardens from around the
world as the pictorial theme for our annual reporting products this
year. Gardens are the product of imagination, expertise and careful
attention to detail. Celebrated gardens evolve from inspired ideas
that are developed with consistent and relentless dedication over
years – and even generations.
Tofuku-ji (Kyoto, Japan)
Laid out in 1939 by Mirei Shigemori, a famous garden builder, the gardens were
arranged in four quarters around the Hojo, one of the main buildings in the
Tofuku-ji Temple. Originally founded in 1235 and reconstructed in 1890,
Tofuku-ji was the head temple of the Rinzai sect of Zen Buddhism. When he
designed the garden, Shigemori’s intention was to combine the simplicity of
Zen during the Kamakura period with the abstract constructions of modern art.
Site of Reversible Destiny-Yoro Park (Gifu, Japan)
Located in a section of Yoro Park, the Site of Reversible Destiny, which
opened in 1995, is an innovative park and architectural “intervention”
conceived by artists Shusaku Arakawa and Madeline Gins. Their intention
was to illustrate the concept of deconstruction by using the traditional idea
of a garden as a labyrinth for a series of physical meetings. Visitors are given
directions for use when entering – most of which are rather original and
unconventional. The site’s basic structure is a large oval basin with various
archipelagos of different sizes overlapped by pairs of hemispherical craters
and mounds linked by a number of maze-like winding paths.
Barnsley House Garden (Cirencester, Gloucestershire, UK)
Designed in the early 1950s by Rosemary Verey (OBE), a leading exponent of
the classic English Arts and Crafts country garden style, Barnsley House
Garden is a four and a half acre garden bounded on three sides by a high 18th
century wall which divides the garden into different areas of interest. Set
around Verey’s 17th century home, the garden also includes a gothic summer
house, a classical temple, a sculpture by Simon Verity and furniture by Charles
Verey. Features of the garden itself include a knot garden that was laid out
in 1975, a herb garden and the renowned Laburnum Walk (with yellow
laburnum falling onto purple alliums).
La Geria (Lanzarote, Canary Islands, Spain)
La Geria, known as the “wine road” of Lanzarote, passes through the moun-
tains of Chupaderos and Guadilama. It is directly bordered by lava fields
and vineyards, a unique feature of the overall landscape. The grapes, which
produce Malvasia wine, grow on vines that are protected from winds by
small curving walls.
Royal Botanic Gardens (Peradeniya, Sri Lanka)
One of the four colonial botanic gardens of the British Empire, Peradeniya’s
history goes back to 1821. The basic idea behind the founding of the garden
in the 19th century was to transfer the concept of an English landscape garden
to a tropical environment. Despite that, one part of the garden was left to
achieve a “tame jungle” effect, whereby branches are left uncut, and dead
tree trunks left to lie.
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 Wealth Management &
Business Banking
UBS Global Asset Management
UBS Warburg
UBS PaineWebber
Corporate Center
UBS Group
Financial Statements
UBS AG (Parent Bank)
Additional Disclosure
Required under
SEC Regulations
1
2
3
4
5
8
19
20
35
36
42
52
57
66
72
77
179
193
Introduction
The Financial Report 2002 forms an essential part of our reporting
portfolio. It includes the audited Financial Statements of the UBS
Group for 2002 and 2001, prepared according to International
Financial Reporting Standards (IFRS) and reconciled to the United
States’ Generally Accepted Accounting Principles (US GAAP), and
the audited financial statements of UBS AG (the “Parent Bank”) for
2002, prepared according to Swiss Banking Law requirements. It
also contains a discussion and analysis of the financial and business
performance of the UBS Group and its Business Groups, and addi-
tional disclosures required under Swiss and US regulations.
The Financial Report should be read in conjunction with the other
information published by UBS, described on pages 5 and 6.
We hope that you will find the information in our reporting docu-
ments 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 presen-
tation of our information portfolio.
Mark Branson
Chief Communication Officer
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
31.12.02
31.12.01
31.12.00
% change from
31.12.01
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
34,121
29,577
4,544
3,535
86.2
79.0
2.92
4.73
2.87
4.65
8.9
14.4
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
(8)
(3)
(32)
(29)
(26)
(5)
(24)
(3)
CHF million, except where indicated
As at
31.12.02
31.12.01
31.12.00
% change from
31.12.01
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)
Long-term ratings 7
Fitch, London
Moody’s, New York
Standard & Poor’s, New York
1,181,118
38,991
1,253,297
43,530
1,087,552
44,833
79,448
105,475
112,666
11.3
13.8
238,790
2,037
69,061
AAA
Aa2
AA+
11.6
14.8
253,735
2,448
69,9856
AAA
Aa2
AA+
11.7
15.7
273,290
2,445
71,0766
AAA
Aa1
AA+
(6)
(10)
(25)
(6)
(17)
(1)
Earnings adjusted for significant financial events and pre-goodwill 2, 8
CHF million, except where indicated
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
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
33,894
27,117
6,777
5,529
79.5
4.57
4.50
13.9
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
(9)
(7)
(16)
(12)
(8)
(6)
2 Excludes the amortization of goodwill
and other intangible assets.
3 For EPS calculation, see Note 8 to the
Financial Statements.
4 Net profit/average shareholders’ equity
excluding dividends.
5
Includes hybrid Tier 1 capital, please
refer to Note 29e in the Notes to the
Financial Statements.
6 Klinik Hirslanden was sold on 5 Decem-
ber 2002. The Group headcount does
not include the Klinik Hirslanden head-
count of 2,450 and 1,839 for 31 Decem-
ber 2001 and 31 December 2000,
respectively.
7 See the Capital strength section on
pages 10 and 11 of the UBS Handbook
2002/2003.
8 Details of significant financial events can
be found in the Group Financial Review
section.
The segment results have been restated
to reflect the new Business Group struc-
ture and associated management
accounting changes implemented during
2002.
All results presented include PaineWebber
from the date of acquisition, 3 Novem-
ber 2000.
2
UBS Group
UBS is one of the world’s leading financial firms, serving a discerning global client base. As an organi-
zation, we combine financial strength with a global culture that embraces change. We are the world’s
leading provider of wealth management 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 serving corporate and retail clients. As an integrated
firm, we create added value for our clients by drawing on the combined resources and expertise of all
our businesses.
Our first priority is always our clients’ success and we put advice at the heart of our relationships with
them. We take the time to understand the unique needs and goals of each of our clients. Our priority
is to provide premium quality services to our clients, giving them the best possible choice by supple-
menting best-in-class solutions we develop ourselves with a quality-screened selection of products
from others.
With head offices in Zurich and Basel, and more than 69,000 employees, we operate in over 50 coun-
tries and from all major international financial centers. Our global physical presence is complemented
by our strategy of offering clients products and services via a variety of different channels – from the
traditional retail bank branch to sophisticated, interactive online tools, helping us to deliver our
services more quickly, widely and 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 vigor-
ously growing their franchises.
UBS Wealth Management & Business Banking
UBS Wealth Management & Business Banking is the world’s leading wealth management business
and the leading corporate and retail bank in Switzerland. Almost 3,300 private banking client
advisors, working from offices around the world, provide a comprehensive range of in-house and
third party products and services customized for wealthy individuals. The Business Banking unit,
holding roughly a quarter of the Swiss lending market, offers comprehensive banking and securities
services for 3.5 million individuals and 180,000 corporate clients in Switzerland as well as 5,000
financial institutions worldwide.
UBS Global Asset Management
UBS Global Asset Management is a leading institutional asset manager and mutual fund provider,
with invested assets of CHF 557 billion. It offers a broad range of asset management services and
products for institutional clients and financial intermediaries across the world.
UBS Warburg
UBS Warburg is a global investment banking and securities firm. Consistently placing in the top tier
of major industry rankings, it is a leading player in the global primary and secondary markets for
equity and fixed income products. In investment banking, it provides first-class advice and execution
capabilities to its client base worldwide. Sharply client-focused, it provides innovative products, top-
quality research and comprehensive access to the world’s capital markets for its corporate and insti-
tutional clients and for the rest of UBS.
UBS PaineWebber
UBS PaineWebber is the fourth largest private client business in the US, with a client base of over
2 million private investors – focused on the most affluent in the country. Its network of almost
9,000 financial advisors manage CHF 584 billion in invested assets and provide sophisticated wealth
management services to their clients.
Corporate Center
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. The scope of Corporate Center’s
activities covers financial and capital management, risk management and control, branding, com-
munication, legal advice and human resources management.
4
Sources of Information about UBS
This Financial Report contains our audited Financial Statements for the year 2002 and the related 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 80531-0301).
Annual Review 2002
Our Annual Review contains a short description
of UBS, what our vision and values are, as well as
a summary review of our performance in the year
2002. It is available in English, German, French,
Italian and Spanish. (SAP-R/3 80530-0301).
Handbook 2002/2003
Our Handbook 2002/2003 contains a detailed
description of UBS, its strategy, organization and
the businesses that make it up. It is available in
English and German. (SAP-R/3 80532-0301).
Quarterly reports
We provide detailed quarterly financial reporting
and analysis, including comment on the progress
of our businesses and key strategic initiatives.
These quarterly 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
Investors and Analysts website at
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 in
French and Italian.
Messenger service
On the Investors and Analysts website, you can
register to receive news alerts about UBS via
Short Messaging System (SMS) or e-mail.
Messages are sent in either English or German
and users are able to state their preferences for
the topics of the alerts received.
Results presentations
Senior management present UBS’s results every
quarter. These presentations are broadcast live
over the internet, and can be downloaded on
demand. The most recent results webcasts can be
found in the “Financials” section of our Investors
and Analysts website.
UBS and the environment
The Handbook 2002/2003 contains a summary
of UBS environmental policies as part of the
Corporate Responsibility section. 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 submit other infor-
mation 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 parts of this
5
Profile
Handbook or to parts of the Financial Report
2002. 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 in 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, DC,
20549. Please call the SEC at 1-800-SEC-0330
(in the US) or at +1 202 942 8088 (outside the
US) for further information on the operation 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 information
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 on the following page.
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 addresses and telephone numbers 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 the latter’s major-
ity-owned virt-x trading platform. UBS shares
are also listed on the New York Stock Exchange
and the Tokyo Stock Exchange.
6
Switchboards
For all general queries.
Zurich
London
New York
Hong Kong
+41 1 234 1111
+44 20 7568 0000
+1 212 821 3000
+852 2971 8888
UBS Investor Relations
Our Investor Relations team supports
institutional, professional
and retail investors from offices in
Zurich and New York.
www.ubs.com/investors
Zurich
Hotline:
Christian Gruetter
Mark Hengel
Catherine Lybrook
Oliver Lee
Fax
+41 1 234 4100
+41 1 234 4360
+41 1 234 8439
+41 1 234 2281
+41 1 234 2733
+41 1 234 3415
New York
Hotline:
Richard Feder
Christopher McNamee
Fax
+1 212 713 3641
+1 212 713 6142
+1 212 713 3091
+1 212 713 1381
UBS AG
Investor Relations G41B
P.O. Box
CH-8098 Zurich, Switzerland
UBS Americas Inc.
Investor Relations
135 W. 50th Street, 9th Floor
New York, NY 10020, USA
sh-investorrelations@ubs.com
UBS Group Media Relations
Our Group Media Relations team
supports global media and jour-
nalists from offices in Zurich, London,
New York and Hong Kong.
Zurich
London
New York
Hong Kong
www.ubs.com/media
+41 1 234 8500
+44 20 7567 4714
+1 212 713 8391
+852 2971 8200
sh-gpr@ubs.com
sh-mr-london@ubsw.com
sh-mediarelations-ny@ubsw.com
sh-mediarelations-ap@ubs.com
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 Service
as US transfer agent (see below).
US Transfer Agent
For all Global Registered Share
related queries in the USA.
www.melloninvestor.com
Hotline
Fax
+41 1 235 6202
+41 1 235 3154
calls from the US
calls outside the US
+1 866 541 9689
+1 201 329 8451
UBS AG
Shareholder Services – GUMV
P.O. Box
CH-8098 Zurich, Switzerland
sh-shareholder-service@ubs.com
c/o Mellon Investor Services
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660, USA
shrrelations@melloninvestor.com
UBS listed its Global Registered Shares on the New York Stock Exchange on 16 May 2000. Prior to that date UBS operat-
ed 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
The discussion and analysis in the Group
Financial Review and Review of Business Group
Performance should be read in conjunction with
the UBS Group Financial Statements and the
related notes, which are shown in pages 77 to
177 of this document.
Parent Bank
Pages 179 to 190 contain the financial statements
for the UBS AG Parent Bank – the Swiss company,
including branches worldwide, which owns all
the UBS Group companies, directly or indirectly.
Except in those pages, or where otherwise explic-
itly 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 Internation-
al Financial Reporting Standards (IFRS). As a
US listed company, UBS Group provides a
description in Note 39 to the UBS Group
Financial Statements of the significant differences
which would arise were our accounts to be pre-
sented under the United States Generally Ac-
cepted Accounting Principles (US GAAP), and a
detailed reconciliation of IFRS shareholders’
equity and net profit to US GAAP. Major differ-
ences between Swiss Federal Banking Law
requirements and IFRS are described in Note 38
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 IFRS.
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 2002, 2001 and 2000 refer to
the UBS Group and the Parent Bank’s fiscal years
ended 31 December 2002, 2001, and 2000,
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 177 and the Report of the
Statutory Auditors on page 189.
Changes to accounting presentation
The segment reporting shown in Note 2 to
UBS Group Financial Statements has been restat-
ed to reflect the reorganization of the Group in
2002. See the “Review of Business Group
Performance” on page 35 for details of changes
since the 2001 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 No-
vember 2000. Under purchase accounting rules,
the results for 2000 reflect PaineWebber’s income
and expenses for two months only, from 3 No-
vember 2000 until 31 December 2000.
Restructuring provision
After the merger of Swiss Bank Corporation and
Union Bank of Switzerland was completed on
29 June 1998, we began integrating the opera-
tions of the two predecessor banks. This process
included streamlining operations, eliminating
duplicate information technology infrastructure,
and consolidating banking premises. 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 additional pre-tax restructuring
charge of CHF 300 million because of the merger.
We completed the integration and restructur-
ing process relating to the merger as of 31 De-
cember 2001 and released the remaining CHF
21 million of the restructuring provision to the
income statement.
8
Critical accounting policies
Basis of preparation and selection of policies
We prepare our Financial Statements in accor-
dance with IFRS, and provide a reconciliation to
generally accepted accounting principles in the
United States (US GAAP). When feasible, we
reduce the differences 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 elec-
tive accounting treatments available to us, but
there are still rules under both standards which
require us to apply judgement and make estimates
in preparing our Financial Statements. The more
significant of these accounting treatments are dis-
cussed in this section, as a guide to 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 judgement 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 mate-
rial respects. The alternative outcomes discussed
below are presented solely to assist the reader in
understanding our Financial Statements, and are
not intended to suggest that other alternatives or
estimates would be more appropriate.
Many of the judgements 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 discussed
in more detail on pages 81 to 84 of the Hand-
book 2002/2003.
Profit and loss impact
UBS’s strategy is to attempt to minimize the
profit and loss volatility that can be caused by
unrealized gains and losses on recognized finan-
cial assets and liabilities carried at fair value.
Upon implementation of IAS 39, UBS elected to
record changes in fair value of financial assets
classified as “available-for-sale” directly in share-
holders’ equity rather than in earnings.
Changes to shareholders’ equity
With the implementation of IAS 39 we identified
“Gains/losses not recognized in the income state-
ment” as a separate section within shareholders’
equity. Within this we show three subsections,
“Foreign currency translation” (which was an
existing line in shareholders’ equity, reported in
previous years) and two additional subsections
introduced as a result of the adoption of IAS 39
on 1 January 2001, and which are “Unrealized
gains/losses on available-for-sale investments”,
and “Changes in fair value of derivative instru-
ments designated as cash flow hedges”. Both
subsections had opening balances:
– the opening balance of “Unrealized gains/
losses on available-for-sale investments” was
a net increase of CHF 1,577 million, net of
taxes, on 1 January 2001 due to unrealized
mark-to-market gains on financial invest-
ments classified as available for sale which
were principally attributable to private equity
investments, but which also included other
financial investments held by the Group.
– the opening balance of “Changes in fair value
of derivative instruments designated as cash
flow hedges” was a net loss of CHF 380 mil-
lion, net of taxes, on 1 January 2001 due to
unrealized mark-to-market losses on deriva-
tives designated as cash flow hedges. These
losses were previously recorded in the balance
sheet as part of “Deferred losses”.
All movements within these categories are
now recorded each year in the statement of
changes in equity.
Recognition and measurement of
financial instruments
On 1 January 2001, UBS Group adopted the
accounting standard IAS 39: recognition and
measurement of financial instruments. The prin-
cipal effects of the standard on our accounts are
outlined as follows.
Financial instruments – fair value
Our trading portfolio assets and liabilities are
recorded at fair value on the balance sheet, with
changes in fair value recorded as trading income
in the income statement. Key judgements affect-
ing this accounting policy relate to how we deter-
mine fair value for such assets and liabilities.
9
Profile
For substantially all of our portfolios, fair
values are based on quoted market prices for the
specific instrument, comparisons with other
highly similar financial instruments, or the use
of models. Valuation models are used primarily
to value credit derivatives and certain equity and
fixed income derivatives. Where valuation
models are used to compute fair values, or where
they are used in our control functions for inde-
pendent risk monitoring, they must be validated
and periodically reviewed by qualified personnel
independent of the area that created the model.
There are a variety of factors that are con-
sidered by our models, including time value and
volatility factors, counterparty credit quality, activ-
ity in similar instruments in the market, adminis-
trative costs over the life of the transaction, and
liquidity/market volume considerations, among
others. Changes in assumptions about these fac-
tors could affect the reported fair value of financial
instruments. However, because these factors can
change with no correlation to each other, it is not
possible to provide a meaningful estimate of how
changes in any of these factors could affect report-
ed fair value of the portfolio as a whole.
As a result of the potential variability in com-
puted fair values, valuation adjustments are an
integral part of the valuation process and are
applied consistently from period to period.
Establishing valuations inherently involves the
use of judgement, and management also applies
its judgement in establishing reserves against
indicated valuations for aged positions, deterio-
rating economic conditions (including country-
specific risks), concentrations in specific indus-
tries, types of instruments or currencies, market
liquidity, model risk itself, and other factors.
Despite the fact that a significant degree
of judgement is required in order to establish fair
values in some cases, management believes the
fair values recorded in the balance sheet and the
changes in fair values recorded in the income
statement are reasonable, based on a number of
controls and procedural safeguards we employ.
Before models are used, they are certified by our
independent control function, called Quanti-
tative Risk Management. We then generally
employ “back-testing” procedures to test model
outputs with actual data and apply our models
consistently from one period to the next, while
also searching for comparative market prices for
additional verification.
Hedge accounting. IAS 39 allows a company to
apply hedge accounting if it fully complies with the
specified hedge criteria. One of the goals of a hedg-
ing program is to reduce volatility of fair values by
entering into a hedging transaction where changes
in fair values of the hedging transaction offset
changes in the fair values of the hedged item. Due
to cost and other considerations, a transaction
may not be hedged over its entire life, or a dynam-
ic hedging strategy may be used whereby different
transactions are designated as the hedging transac-
tion at different times. 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 impair-
ment), 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. We believe that, in such cases, not applying
hedge accounting could lead to misinterpretations
of our results and financial position, since hedging
transactions could have a material impact on
reported net profit in a particular period.
In principle, we apply hedge accounting
whenever we meet the criteria of IAS 39 so that
our Financial Statements clearly reflect the eco-
nomic hedge effect obtained from the use of these
instruments. However, in connection with eco-
nomically hedging selected credit risk exposures
we have entered into credit default swaps (CDS)
that include conditions that prevent their quali-
fying for hedge accounting under IAS 39. CDSs
are derivative instruments carried on our balance
sheet at fair value with changes in fair value
recorded in net trading income. This may add
volatility to our net trading income results, and
the impact may be either positive or negative in a
particular period. The use of CDSs coupled with
not applying hedge accounting may also add
volatility to net profit because changes in fair
value of a CDS and any credit loss expense relat-
ing to the hedged exposure may well be recorded
in different periods. Typically, the credit rating of
a company that ultimately defaults on its obliga-
tions deteriorates gradually over a period of time.
Such deterioration is reflected in a gradual
increase in fair value of the related CDS, resulting
in trading income gains being recorded. On the
other hand, a credit loss expense is not recorded
until the claim is deemed to be impaired, or if an
10
undrawn commitment is expected to be drawn
without prospect of full repayment. This timing
mismatch between recognizing income from
increases in the fair value of a CDS and recogniz-
ing expense for credit losses may introduce
period-to-period volatility in net profit. In addi-
tion, the positive effect of CDSs on reducing
credit losses is not reflected as a reduction in
reported credit loss expense.
In 2002, UBS recorded mark-to-market gains
of CHF 226 million on CDSs that hedge existing
credit risk exposures without recording a corre-
sponding credit loss expense. Had our CDSs
qualified for hedge accounting, we could have
deferred recognition of gains on the CDSs until
the underlying claim became impaired. Unless
we decide to settle CDSs prematurely, and thus
realize the mark-to-market gains, for example
because we believe that we will ultimately not
incur a credit loss on the hedged exposure, these
mark-to-market gains may be offset by losses in
future periods. This may occur either because the
fair value of the CDS will decrease or because a
credit loss is incurred on the hedged exposure.
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.
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 our fair
value hedges, not applying hedge accounting
would have resulted in a pre-tax gain of CHF
951 million in 2002 and a pre-tax gain of CHF
319 million in 2001. For our cash flow hedges,
the respective amounts are a pre-tax gain of CHF
326 million for 2002 and a pre-tax loss of CHF
79 million for 2001. Please refer to Note 1(v) to
the UBS Group Financial Statements for further
information on hedge accounting.
Financial investments – available-for-sale
UBS has classified some of its financial assets,
including investments not held for trading purpos-
es, 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, but rather for mid-to-long-term capital
appreciation. If we had originally decided that
these were trading assets, or if we were to reclas-
sify 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 statement 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. However, unrealized losses that are not
expected to be recoverable within a reasonable
time period are recorded in our income statement
as impairment charges. Since quoted market
prices are generally unavailable for these compa-
nies, fair value is determined by applying recog-
nized valuation techniques, which require the use
of assumptions and estimates. The valuation of
our investments is derived by application of our
valuation policy in a detailed quarterly invest-
ment by investment review involving the business
and control functions. Our standard valuation
method is to apply multiples of earnings that are
observed for comparable companies. These mul-
tiples depend on a number of factors and may
fluctuate over time. However the geographic,
stage and sector diversity of the portfolio means
that the valuations of these positions may not
move uniformly based on the changing econom-
ic environment. Although judgement is involved,
we believe that the estimates and assumptions
made in determining the fair value of each invest-
ment are reasonable and supportable. Since there
are no general estimates or assumptions underly-
ing the determination of fair value, but instead
fair value is determined on a case-by-case basis, it
is not possible to provide any meaningful esti-
mate of the impact on earnings of variations in
assumptions and estimates.
In addition, the determination of when a
decline in fair value below cost is not recoverable
within a reasonable time period is judgemental
by nature, so profit and loss could be affected by
differences in this judgement. We generally con-
sider investments as impaired if a significant
11
Profile
decline in fair value below cost extends beyond
the near term, unless it is readily apparent that an
investment is impaired, in which case this would
result in an immediate loss recognition.
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 generat-
ed by an asset or group of assets to present value.
Determination of the value in use requires man-
agement to make assumptions and use estimates.
We believe that the assumptions and estimates
used are reasonable and supportable in the exist-
ing market environment, but different ones could
be used which would lead to different 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.
In the fourth quarter of 2002, we took the
decision to move all our businesses to the single
UBS brand name. That decision necessitated the
writeoff of the carrying value of the intangible
asset related to the PaineWebber brand name,
which resulted in a charge of CHF 953 million
net of tax. Had we not made the decision to
abandon the PaineWebber brand name, the
writeoff would not have been made as it would
not have been deemed impaired.
Allowances and provisions for credit losses
UBS classifies a claim 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 repay-
ments, or other payments due (for example on
derivatives transactions or guarantees), including
liquidation of collateral where available. UBS has
established policies to ensure that the carrying
values of impaired claims are determined on a
consistent and fair basis, especially for those
impaired claims for which no market estimate or
benchmark for the likely recovery value is avail-
able. Future cash flows considered recoverable are
discounted to present value in accordance with
IAS 39. A provision is then recorded for the prob-
able loss on the claim in question and charged to
the income statement as credit loss expense.
Each case is assessed on its merits, and the
workout strategy and estimate of cash flows con-
sidered recoverable are independently approved
by the Credit Risk Control function. Although
judgement is involved, we believe that the esti-
mates and assumptions made in determining
provisions and allowances on each individual
impaired claim are reasonable and supportable.
Since there are no general estimates or assump-
tions underlying the determination of allowances
and provisions, but instead, as noted above, these
allowances and provisions are determined on a
case-by-case basis, it is not possible to provide
any meaningful estimate of the impact on earn-
ings of variations in assumptions and estimates.
Further details on this subject are given in
Note 1(l) to the UBS Group Financial Statements
and in the “Risk analysis” section of the
Handbook 2002/2003, on pages 59 to 77.
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 buying or
selling credit protection. In accordance with IFRS
we do not consolidate SPEs that we do not con-
trol. As it can sometimes be difficult to determine
whether we exercise control over an SPE, we
have to make judgements about risks and
rewards as well as our ability to make opera-
tional decisions for the SPE in question. In many
instances, elements are present that, considered
in isolation, indicate control or lack of control
over an SPE, but when considered together make
it difficult to reach a clear conclusion. In such
cases the Group generally consolidates an SPE.
UBS has a comprehensive process for moni-
toring and controlling the creation and running
of SPEs, designed to ensure that they are created
only for purposes connected with our business,
which includes the facilitation of client invest-
ment objectives, that any change of terms or
status, such as the activation of a dormant SPE,
12
is appropriate and that the SPEs and their assets
and liabilities are properly recorded, if consoli-
dated.
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.
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 gener-
ally purchased 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 clients.
Typically, UBS will receive service and commis-
sion 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
majority of our SPEs fall into this category. SPEs
created for client investment purposes are not
consolidated.
SPEs used for securitization. SPEs for securiti-
zation are created when UBS has assets (for
example a portfolio of loans) which it sells to an
SPE. The SPE in turn sells interests in the assets 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 has no control over the assets and no longer
retains any significant exposure (gain or loss) to the
returns, including liquidation, 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 assets,
while if the SPE were to go bankrupt, the securities
holders would have no recourse to UBS.
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, that may or
may not be held by UBS, to investors. They are pri-
marily to allow UBS to have a single counterparty
(the SPE) which sells credit protection to UBS. The
SPE in turn has investors who provide it with cap-
ital and participate in the risks and rewards of the
credit events that it insures. SPEs used for credit
protection are generally consolidated.
Equity compensation
Currently IFRS does not specifically address the
recognition and measurement of equity-based
compensation plans, including employee option
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 IFRS,
UBS records as compensation expense only the
intrinsic value at grant date, if any, of options
granted to employees. Subsequent changes in
value are not recognized.
Had we recognized the fair value of stock
option grants as compensation expense, net
income would have been lower by the follow-
ing amounts: CHF 690 million in 2002, CHF
347 million in 2001, and CHF 158 million in
2000. Further information on UBS equity com-
pensation plans is disclosed in Note 32 to the
UBS Group Financial Statements. In November
2002, the International Accounting Standards
Board issued ED2, “Share-based payments”,
which is expected to become effective in January
2004. ED2 in its current form would require a
different recognition method of compensation
expense for the fair value of stock options
granted than that applied to determine the
amounts disclosed above.
Deferred tax
Deferred tax assets arise from a variety of
sources, the most significant being: a) tax losses
that can be carried forward to be utilized against
profits in future years; b) expenses recognized in
the books but disallowed in the tax return until
the associated cash flow occurs; and c) valuation
changes of assets which need to be tax-effected
13
Profile
for book purposes but are taxable only when the
valuation change is realized.
UBS records a valuation allowance to reduce
its deferred tax assets to the amount that it
believes can be realized in its future tax returns.
Our valuation allowance is based on the assess-
ment of future taxable income and our tax
planning strategies. At each balance sheet date,
existing assessments are reviewed and, if neces-
sary, revised to reflect changed circumstances.
The magnitude of the valuation allowance is
significantly influenced by our own forecast of
future profit generation, which drives the extent
to which we will be able to utilize the deferred
tax assets. Were we to be more optimistic or
pessimistic when forecasting future taxable prof-
its we would record a lower or higher valuation
allowance, which would have a direct impact on
earnings. Additionally, changes in circumstances
may result in either an increase or a reduction of
the valuation allowance, and therefore net
income, depending on an adverse or favorable
change in the factors that impact the recognized
deferred tax assets. See Note 21 to the UBS
Group Financial Statements for further details.
Segment reporting
The policies used to prepare our segment report-
ing affect the split of our income and expenses
between the different Business Groups. Although
the application of rules different from the ones
we currently use would lead to altered net profit
results in the Business Groups, they would have
no effect on the total Group profit number.
The most significant of these policies is the
treatment of credit loss expense. If we had not
applied the concept of expected loss in calculat-
ing the credit loss expense for each Business
Group, Corporate Center would have incurred a
significantly higher loss in all periods presented,
UBS Warburg would have achieved a better result
in 2002 but slightly lower profit in both 2001
and 2000, and UBS Wealth Management &
Business Banking would have had a modestly
better result in 2002 preceded by a significantly
higher profit in both 2001 and 2000. The con-
cept of expected credit loss is explained in more
detail in the “Management accounting” section
of this report on pages 36 to 41, which includes
a table which reconciles the expected credit loss
amount charged to the Business Groups with the
actual IFRS credit loss.
Analysis of adjusted key figures and results
We analyze UBS’s performance on a reported
basis determined in accordance with IFRS.
Additionally, we provide comments and analysis
on an adjusted basis which excludes from the
reported amounts certain items we term signi-
ficant financial events (SFEs). An additional
adjustment we use in our results discussion is the
exclusion of the amortization of goodwill and
other acquired intangible assets.
These adjustments reflect our internal analysis
approach where SFE-adjusted figures before
goodwill/intangibles amortization are used to
assess past performance against peers and to
estimate future growth potential. In particular,
our financial targets have been set in terms of
adjusted results, excluding SFEs and goodwill/
intangibles amortization, and all the analysis
provided in our management accounting is based
on operational SFE-adjusted performance.
Significant financial events
For performance analysis, in particular to com-
pare our financial results with previous periods
and with peers, we use figures adjusted for signi-
ficant financial events (SFEs). This helps us to
illustrate the underlying operational performance
of our business, insulated from the impact of
one-off gains or losses outside the normal run of
business, and provides a better basis for our
internal performance assessment and planning. A
policy approved by the Group Executive Board
defines which items may be classified as SFEs. In
general an item that is treated as a SFE is:
– Non-recurring
– Event-specific
– Material at Group level
– UBS-specific, not industry-wide
and is not a consequence of the normal run of
business.
Examples of items that we would treat as SFEs
include the gain or loss on the sale of a significant
subsidiary or associate, such as the sale in 2002 of
Klinik Hirslanden and Hyposwiss, or the restruc-
turing costs associated with a major integration,
such as the merger with PaineWebber in 2000.
SFEs are not a recognized accounting concept
under IFRS or US GAAP, and are therefore not
reflected as such in the UBS Group Financial
Statements. We clearly identify all adjusted fig-
ures as such, and clearly disclose both the pre-tax
14
amount of each individual significant financial
event, and the net tax benefit or loss associated
with all the SFEs in each period, allowing the
reader to reconcile adjusted figures to the report-
ed ones. Where tables in the Business Group
reporting show adjusted figures, we also include
a table showing the reported figures.
SFEs during 2000 and 2002 are shown in the
table below and described in more detail below.
There were no SFEs in 2001.
– In first quarter 2002, we realized a pre-tax
gain of CHF 155 million from the sale of the
private bank Hyposwiss.
– In fourth quarter 2002, we recorded a non-
cash pre-tax writedown of CHF 1,234 million
related to the PaineWebber brand, an intangi-
ble asset. It was recorded following our deci-
sion to move to a single UBS brand. This
change in our brand strategy was announced
in November 2002 and we will effectively
introduce the single brand in June 2003.
– In fourth quarter 2002, we realized a pre-tax
gain of CHF 72 million from the sale of Klinik
Hirslanden, a private hospital group.
– During 2000, we recorded restructuring
charges and provisions of CHF 290 million
pre-tax relating to the integration of Paine-
Webber into UBS.
– In 2000 UBS recognized an additional pre-tax
provision of CHF 150 million in connection
with the US Global Settlement of World War
II-related claims. Previously, we had estab-
lished a provision of CHF 842 million (in
1998) and one of CHF 154 million (in 1999)
relating to this claim.
Amortization of goodwill and
other intangibles
In addition to IFRS figures, we discuss our Group
result excluding the amortization of goodwill
and other intangibles. The same adjustment is
used also for our Group financial targets, includ-
ing earnings per share. At UBS, we believe that
equity values are driven by future cash flows.
IFRS rules currently require that goodwill is
amortized over its estimated useful life regardless
of whether its economic value is maintained or
even increased. Furthermore, goodwill is an asset
that does not need to be replaced at the end of its
life. Consequently, amortization charges do not
represent cash outflows and are not an economic
cost. Therefore we believe they are not relevant
for assessing the value created for our share-
holders.
In our financial reporting, we clearly identify
all figures that exclude amortization charges
for goodwill and other intangibles and refer
to them as “pre-goodwill” figures. Reported
figures including amortization charges are always
disclosed and precede pre-goodwill disclosure.
Significant Financial Events
CHF million
For the year ended
Operating income as reported
Gain on disposal of Hyposwiss
Gain on disposal of Klinik Hirslanden
Adjusted operating income
Operating expenses as reported
Writedown of PaineWebber brand name
US Global Settlement Fund provision
PaineWebber integration costs
Adjusted operating expenses
31.12.02
34,121
(155)
(72)
33,894
29,577
(1,234)
28,343
Adjusted operating profit before tax and minority interests
5,551
Tax expense
Tax effect of significant financial events
Adjusted tax expense
Minority interests
Adjusted net profit
Adjusted net profit before goodwill
678
239
917
(331)
4,303
5,529
31.12.01
37,114
37,114
30,396
30,396
6,718
1,401
1,401
(344 )
4,973
6,296
31.12.00
36,402
36,402
26,203
(150)
(290)
25,763
10,639
2,320
100
2,420
(87)
8,132
8,799
15
Profile
Risk factors
As a global financial services firm, UBS’s
businesses are affected by the external
environment in the markets in which we
operate. Different risk factors can impact
our ability to effectively carry out our busi-
ness strategies or can directly affect our
earnings. Due to the factors described
below and to other influences 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 par-
ticular period may not be indicative of sus-
tainable results, may vary from year to
year and may affect our ability to achieve
UBS’s strategic objectives.
Fluctuations in interest rates,
equity prices, foreign currency rates
and other market variables
A substantial part of our business consists
of taking trading and investment positions
in the debt, currency, equity, precious
metal and energy markets and in private
equity, real estate and other assets. The
value of these assets can be adversely
affected by fluctuations in financial mar-
kets. While we selectively utilize hedging
techniques to mitigate these risks, these
hedging techniques may not always be
completely effective. More details on our
risk management approach are provided
in the “Market risk” section in the Hand-
book 2002/2003.
Because we prepare our 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 (as revenues in
US dollars represent the major part of our
non-Swiss franc income). Our approach in
managing this risk is explained in the
“Currency management” section of the
“Group Treasury” chapter in the Hand-
book 2002/2003.
In addition, changes in financial mar-
ket structures can affect our earnings.
For example, the euro’s introduction in
1999 affected foreign exchange markets
in Europe by reducing the extent of for-
eign exchange dealings among member
countries and prompting a greater har-
monization of financial products. Move-
ments in interest rates can also affect our
results as net interest income is affected
by changes in interest rates. Interest rate
movements can also affect our fixed
income trading portfolio and the invest-
ment performance of our asset manage-
ment businesses.
Furthermore, income in many of our
businesses, such as investment banking,
wealth and asset management, is often
directly related to client activity levels. As a
result, our income is also susceptible to the
adverse effect of a sustained market down-
turn or significant deterioration of investor
sentiment. Asset-based revenues generated
in our wealth and asset management busi-
nesses depend on the levels of client assets
which can be adversely affected by a dete-
rioration of market valuations.
Market values and volumes may be
affected by a broad range of issues beyond
our control, such as geopolitical events, the
possibility of war, terrorism, inflation and
economic developments such as recession
or depression globally or in particular
regions.
Counterparty risks
The results of our credit-related activities
(including loans, commitments to lend,
other contingent liabilities such as letters
of credit, derivative products such as
swaps and options) would be adversely
affected by any deterioration in the credit-
worthiness of our counterparties and the
ability of clients to meet their obligations.
The credit quality of our counterparties
may be affected by various factors, such as
an economic downturn, lack of liquidity,
or unexpected political events, and as a
result these events could cause us to incur
greater losses.
16
In general, we aim to avoid risk concen-
trations in our credit portfolio. We believe
that the incurred losses are adequately cov-
ered by our allowances and provisions.
Additionally, we make active use of credit
protection. A detailed discussion of credit
risk and our approach to managing this
risk can be found in the “Risk Analysis”
section of the “Risk Management and
Control” chapter in the Handbook 2002/
2003. If our risk management and control
measures prove inadequate or are not effec-
tive, then credit losses could have a mate-
rial adverse effect on our income and the
value of our assets.
Consequential risk
All our businesses are dependent on our
ability to process a large number of com-
plex transactions across many and diverse
markets in different currencies and subject
to many different legal and regulatory
regimes. UBS’s systems and processes are
designed to ensure that the risks associated
with our activities, including those arising
from process error, failed execution, fraud,
systems failure, failure of security and
physical protection are appropriately con-
trolled. However, if our system of internal
controls is ineffective in identifying and
remedying these risks, we will be exposed
to operational failures that could result in
losses. A detailed discussion of our ap-
proach in management and control of
these risks can be found in the “Con-
sequential risk” section of the “Risk
Management and Control” chapter in the
Handbook 2002/2003.
Competitive forces
We face intense competition in all aspects
of our business. In our various lines of busi-
ness, we compete, both domestically and
internationally, with asset managers, retail
and commercial banks, private banking
firms, investment banking firms, brokerage
firms and other investment services firms.
We face intense competition not only from
firms competing locally in particular lines
of business, but also from global financial
institutions that are comparable to us in
size and breadth.
In addition, the trend towards consoli-
dation in the global financial services
industry is creating competitors with
broader ranges of product and service
offerings, increased access to capital,
and greater efficiency and pricing power.
We expect these trends to continue
and competition to increase in the future.
Our competitive strength will depend on
the ability of our businesses to adapt
quickly to significant market and indus-
try trends.
Other risks arising from our global
presence
We operate in over 50 countries, and earn
income and hold assets and liabilities in
many different currencies and are subject
to many different legal and regulatory
regimes. Changes in local tax or legal regu-
lations may affect our clients’ ability or
willingness to do business with us.
Country, regional and political risks may
increase market and credit risk. Political,
economic and social deterioration in a
country or region, including that arising
from local market disruptions, currency
crises, terrorism or the breakdown of mon-
etary controls, may adversely affect the
ability of clients or counterparties located
in that region to obtain foreign exchange or
credit and, therefore, to satisfy their obliga-
tions towards us. As a truly global financial
services company, we are also exposed to
economic instability in emerging markets.
As discussed under the “Country risk” sec-
tion of the “Risk Management and Con-
trol” chapter in the Handbook 2002/2003,
we have in place a system of controls and
procedures to mitigate this risk. However,
if these controls fail to properly identify
and appropriately respond to country risk,
we may suffer large losses resulting in a
negative impact on our results of opera-
tions and financial condition.
17
18
Group Financial Review
19
Group Financial Review
Group Results
Group Results
UBS Group Performance Against Targets
For the year ended
31.12.02
31.12.01
31.12.00
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 billion) 2, 3
Private Banking
UBS PaineWebber
Total
8.9
13.9
2.92
4.57
86.2
79.5
16.6
18.5
35.1
11.7
14.8
3.93
4.97
80.8
77.3
24.64
33.2
57.8
21.5
24.3
6.44
7.28
72.2
69.2
1.24
14.55
15.7
RoE1 (%)
Cost/income ratio1 (%)
30
25
20
15
10
5
0
e
g
a
r
e
v
A
9
9
0
0
0
2
0
0
Q
2
0
0
Q
3
1
0
0
2
1
0
Q
1
1
0
Q
2
2
0
0
2
1
0
Q
4
80
75
70
65
60
e
g
a
r
e
v
A
9
9
0
0
0
2
0
0
Q
2
0
0
Q
3
1
0
0
2
1
0
Q
1
1
0
Q
2
2
0
0
2
1
0
Q
4
Basic EPS1 (CHF)
Net new money, private client units 2, 3 (CHF billion)
1 Excludes the amortization of goodwill
and other intangible assets and adjusted
for significant financial events.
2 Private Banking and UBS PaineWebber.
3 Excludes interest and dividend income.
4 Calculated using the former definition
of assets under management up to and
including second quarter 2001.
5 Calculated using the former definition
of assets under management in 2000.
8
7
6
5
4
3
2
1
0
20
60
50
40
30
20
10
0
e
g
a
r
e
v
A
9
9
0
0
0
2
0
0
Q
2
0
0
Q
3
1
0
0
2
1
0
Q
1
1
0
Q
2
2
0
0
2
1
0
Q
4
e
g
a
r
e
v
A
9
9
0
0
0
2
0
0
Q
2
0
0
Q
3
1
0
0
2
1
0
Q
1
1
0
Q
2
2
0
0
2
1
0
Q
4
Invested Assets and Net New Money
CHF billion
UBS Group
Invested assets
Net new money 1
31.12.02 31.12.01 31.12.00
2002
2001
2000
2,037
2,448
2,445
36.9
102.0
(49.5)
UBS Wealth Management & Business Banking 2
Private Banking
Business Banking Switzerland
UBS Global Asset Management
Institutional
Wholesale Intermediary
UBS Warburg
UBS PaineWebber
688
205
279
278
3
584
791
215
328
344
1
769
798
239
323
319
1
765
16.6
3.7
(0.6)
(1.8)
0.5
18.5
24.63
9.23
6.2
28.7
0.1
33.2
1.23
2.73
(70.8)
2.9
14.54
1 Excludes interest and dividend income.
1 July 2002. Prior-period figures have been restated accordingly.
and including second quarter 2001.
2 Calculated based on the new structure for UBS Wealth Management & Business Banking effective
3 Calculated using the former definition of assets under management up to
4 Calculated using the former definition of assets under management in 2000.
2002
UBS made significant progress in 2002. After the
successful integration of PaineWebber in 2001, we
continued to expand our investment banking
capabilities, especially in the US, and to build up
our European wealth management business. Our
achievements should be viewed in the context of
last year’s environment, which was one of the most
challenging seen in the financial industry during
the post-war era. Extensive corrections in major
global equity markets, depressed market levels,
low corporate activity, and broadly subdued
investor optimism reflected uncertainty about eco-
nomic and political developments. However, our
businesses were remarkably resilient and competi-
tive in view of the general conditions they faced in
2002. Strict cost discipline and focus on growth
across the firm helped us expand our market posi-
tion in a period where many in the financial indus-
try were forced to re-assess the basic assumptions
about their business. Our clients made substantial
new investments into our private client businesses,
and we significantly improved our investment
banking market share. Despite market develop-
ments, the relative operational performance in our
core businesses remained strong and we benefited
from our prudent attitude to risk and our tight
management of costs.
Net profit
UBS’s 2002 net profit was CHF 3,535 million,
down 29% from CHF 4,973 million in 2001.
This full-year profit was impacted by several
items which we call significant financial events
(SFEs): the non-cash after-tax writedown of
the value of the PaineWebber brand, which
reduced profit by 21%, and the impact of sales
of subsidiaries, which added 6% to profit.
Excluding these effects, and before goodwill
amortization, net profit fell by 12% between
2001 and 2002.
Return on equity, also affected by the brand
writedown, was 8.9% in 2002, down from
11.7% a year earlier. In the same timeframe,
basic earnings per share were CHF 2.92, 26%
lower than a year earlier while the cost/income
ratio was 86.2%, an increase of 5.4 percentage
points from 2001.
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 positively
with best-in-class competitors.
21
Group Financial Review
Group Results
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
31.12.02
31.12.01
31.12.00
% change from
31.12.01
10,546
5,572
16,118
5,275
10,605
1,667
(1,429)
16,118
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
31
(37)
(4)
(7)
(8)
17
21
(4)
1 Principally external funding costs of the Paine Webber Group, Inc. acquisition.
– We aim to achieve a clear growth trend in net
new money in the private client businesses
(Private Banking and UBS PaineWebber).
The first three targets are all measured pre-
goodwill amortization, and adjusted for signifi-
cant financial events.
Our performance against these targets in 2002
reflects the extremely difficult market conditions.
Before goodwill and adjusted for significant
financial events:
– Our return on equity for 2002 was 13.9%, down
from 14.8% a year ago and slightly below our
target range of 15–20%. The lower average level
of equity, which was 6% lower because of our
ongoing share buyback programs, partially offset
the market-related decline in earnings of 12%.
– Basic earnings per share for 2002 were CHF
4.57, a decline of 8% from 2001. The 12%
decline in profit was partially offset by the
reduced average number of shares outstand-
ing. Without the buyback programs, our earn-
ings per share in 2002 would have been 9%
lower.
– The cost/income ratio increased to 79.5%
from 77.3%. Ongoing cost initiatives across
all our businesses could not fully counteract
the drop in revenues due to the declining
market activity levels and subdued levels of
transactional and corporate activity as well as
ongoing private equity writedowns.
Net new money in the private client units
(Private Banking and UBS PaineWebber) dropped
from CHF 57.8 billion in 2001 to CHF 35.1 bil-
lion in 2002. The drop was mainly due to difficult
market conditions, which were accentuated by
the Italian tax amnesty.
Results
Operating income
Total operating income fell to CHF 34,121 mil-
lion in 2002 from CHF 37,114 million in 2001.
Adjusted for the divestment of Hyposwiss and
Klinik Hirslanden, total operating income in
2002 was CHF 33,894 million, a drop of 9%
from 2001. The decline was mainly due to the
difficult market environment, less favorable
trading conditions and a weakening of investor
sentiment. Falling market levels affected asset-
based revenues while our private equity business
continued to record losses due to ongoing poor
valuation and exit conditions.
Net interest income and net trading income.
Net interest income of CHF 10,546 million in
2002 was 31% higher than in 2001. Net trading
income declined 37% from CHF 8,802 million in
2001 to CHF 5,572 million in 2002.
In addition to income from interest margin-
based activities (loans and deposits), net interest
income includes income earned as a result of
trading activities (for example, coupon and divi-
dend income). This component is volatile from
period to period, depending on the composition
of the trading portfolio. In order to provide a
better explanation of the movements in net inter-
est income and net trading income, we analyze
the total according to the business activities that
give rise to the income, rather than by the type
of income generated.
Net income from interest margin products
was CHF 5,275 million in 2002, down 7% from
CHF 5,694 million a year earlier, mostly reflect-
ing lower interest margins on savings and cash
22
IFRS Actual Credit Loss Expense / (Recovery)
CHF million
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
UBS Wealth Management & Business Banking
UBS Warburg
UBS PaineWebber
Corporate Center
Total
241
(35)
15
(15)
206
123
360
15
0
498
(695 )
562
3
0
(130 )
96
0
(59)
accounts, as well as mortgages because of the
extremely low interest rate environment. This
was accentuated by the decline of the US dollar
and euro, which caused the Swiss franc equiva-
lent of US dollar interest rate revenues to drop.
Over the full year, net income from trading
activities fell by 8% from CHF 11,529 million in
2001 to CHF 10,605 million in 2002. Equities
revenues, at CHF 2,794 million in 2002, dropped
from the year earlier, reflecting worsening market
conditions and lower client activity, although we
recorded better results in our US equity business,
where we continue to gain market share. At CHF
6,041 million in 2002, fixed income trading rev-
enues were lower than a year earlier, when they
benefited from a buoyant trading environment
due to the coordinated interest rate cuts by
major central banks during the second half of
2001. This change in environment and lower
revenues from our Investment Grade Credit and
High Yield businesses were partially offset by
better results in our Principal Finance and
Emerging Market businesses. Additionally,
the full-year trading result of our fixed income
business profited from unrealized gains of CHF
226 million relating to credit default swaps
(CDS) hedging existing credit exposures in the
loan book. Our use of CDSs as hedging instru-
ments for our loan book is only one part of our
overall management approach to trading credit
risk. The “Critical accounting policies” section
on page 9 in this report and the “Capital and
Risk Management” section of our Handbook
2002/2003 contain further information on how
we use CDSs to hedge our credit exposure. Over
the full year, our foreign exchange trading rev-
enues, at CHF 1,500 million, increased slightly,
due to increased volumes and spreads.
Net income from treasury activities was CHF
1,667 million in 2002, an increase of 17% over
2001, reflecting higher income from our invested
equity, a drop in funding costs as well as higher
unrealized gains on derivatives used to economi-
cally hedge interest rate risk related to structured
notes issued.
Other net trading and interest income showed
a loss of CHF 1,429 million compared to a loss
of CHF 1,804 million in 2001. This drop was
mainly due to lower goodwill funding costs,
which reflected the weakening of the US dollar
against the Swiss franc, lower funding costs for
our private equity portfolio as well as the reclas-
sification of some revenues previously reported
as income from trading activities.
Credit loss expense. In 2002 credit loss expens-
es amounted to CHF 206 million, compared to
CHF 498 million in 2001.
Throughout 2002, the global credit environ-
ment continued the downward trend observed in
2001. Concerns regarding the sustainability of
the global economic recovery have increased.
Combined with rising geopolitical tensions, the
outlook for corporate profits has weakened.
Financial market development during the year
was characterized by heightened investor risk
aversion, with pronounced tiering by credit qual-
ity, resulting in higher-risk corporate and sover-
eign borrowers facing increasingly difficult
financing conditions.
Against this background, and in stark contrast
to the very challenging credit environment, UBS
Warburg achieved a strong credit performance
with net credit loss recoveries of CHF 35 million,
compared to credit loss expense of CHF 360 mil-
lion in 2001 and CHF 562 million in 2000. This
excellent performance was the result of minimal
exposures to new defaults plus the recovery of
country provisions for emerging markets expo-
sures which were repaid or sold during 2002.
Corporate bankruptcies in Switzerland have
reversed a five-year falling trend and climbed by
10.8% during the year. In our case, this negative
development did not come as a surprise and has
largely been compensated by the measures we have
23
Group Financial Review
Group Results
Net Fee and Commission Income
CHF million
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
Underwriting fees
Corporate finance fees
Brokerage fees
Investment fund fees
Fiduciary fees
Custodian fees
Portfolio and other management and advisory fees
Insurance-related and other fees
Total securities trading and investment activity fees
Credit-related fees and commissions
Commission income from other services
Total fee and commission income
Brokerage fees paid
Other
Total fee and commission expense
2,134
848
5,987
4,033
300
1,302
4,065
417
19,086
275
1,006
20,367
1,349
797
2,146
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
21,117
17,336
307
946
310
802
22,370
18,448
1,281
878
2,159
1,084
661
1,745
Net fee and commission income
18,221
20,211
16,703
(1)
(37)
(7)
(6)
(15)
(4)
(13)
(22)
(10)
(10)
6
(9)
5
(9)
(1)
(10)
undertaken to improve the asset quality of our
domestic credit portfolio. The gradual slowdown
of the Swiss economy and our success in substan-
tially reducing our impaired portfolio have, how-
ever, resulted in a lower level of recoveries com-
pared to previous years. This largely explains the
increase of our credit loss expense in UBS Wealth
Management & Business Banking to CHF 241
million, compared to CHF 123 million in 2001.
Group credit loss expense in 2002 amounted
to CHF 206 million, compared to CHF 498 mil-
lion in 2001 and to a net recovery of CHF 130 mil-
lion in 2000. The exceptional result in 2000 was
helped by favorable economic conditions in
Switzerland which, for UBS Wealth Management
& Business Banking, resulted in substantial write-
back of credit loss provisions taken in earlier
periods.
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 2002/2003.
Net fee and commission income for full-year
2002 was CHF 18,221 million, a decline of 10%
compared to a year earlier, due to a drop in most
revenue categories.
which increased by 67% compared to a year ear-
lier. However, this was offset by a much lower
result in our equity underwriting business due to
the markedly lower market activity.
Corporate Finance fees fell by 37% to CHF
848 million, reflecting lower market activity and
a significant drop in the global fee pool compared
to 2001. Despite that, we were again able to
improve our market position, increasing our
full-year share of the market from 4.4 % in 2001
to 5.0% in 2002.
Net brokerage fees dropped by 10% to CHF
4,638 million in the period due to much lower
client activity in 2002, reflecting the more diffi-
cult market environment. However, we increased
our market share as overall market volumes
decreased at a sharper rate.
Investment fund fees remained resilient and
dropped just 6% to CHF 4,033 million. The
drop was partially due to the lower asset base due
to much lower markets, and because of falling
sales-based commissions with investors reluctant
to commit to new investments.
Custodian fees, at CHF 1,302 million in 2002,
were down 4% from CHF 1,356 million, princi-
pally due to lower market values and, conse-
quently, average asset levels.
Underwriting fees, at CHF 2,134 million,
dropped only 1% from 2001, reflecting the
strong revenues from our fixed income business,
The drop in portfolio and other management
and advisory fees from CHF 4,650 million in
2001 to CHF 4,065 million reflects lower aver-
24
Headcount1
(full-time equivalents)
31.12.02
31.12.01
31.12.00
Change in %
31.12.01
UBS Wealth Management & Business Banking
Private Banking
Business Banking Switzerland
UBS Global Asset Management
UBS Warburg
Corporate and Institutional Clients
UBS Capital
UBS PaineWebber
Corporate Center
Group total
thereof: Switzerland
28,930
10,488
18,442
3,346
16,037
15,964
73
19,563
1,185
69,061
27,972
29,469
10,249
19,220
3,281
15,690
15,562
128
20,413
1,132
69,985
29,163
30,272
9,835
20,437
2,860
15,391
15,262
129
21,567
986
71,076
30,095
(2)
2
(4)
2
2
3
(43)
(4)
5
(1)
(4)
1 Klinik Hirslanden was sold on 5 December 2002. The Group headcount does not include the Klinik Hirslanden headcount of 2,450 and 1,839
for 31 December 2001 and 31 December 2000, respectively.
age asset levels and third-party fees due to the dif-
ficult market environment.
At CHF 417 million in 2002, insurance-relat-
ed and other fees decreased by 22% from a year
earlier. This drop was mainly due to a decrease in
insurance sales volumes in UBS PaineWebber
mirroring the more difficult market environment.
Credit-related fees and commissions dropped by
10% from CHF 307 million to CHF 275 million
reflecting lower revenues from guarantees as well
as a drop in revenues from documentary credits.
Other income showed a loss of CHF 12 mil-
lion compared to a gain of CHF 558 million a
year earlier. Higher impairment charges for UBS
Capital’s private equity investments and other
financial investments were only partially offset
by gains from disposals of financial investments
and of the Klinik Hirslanden and Hyposwiss
subsidiaries.
Operating expenses
In full-year 2002, total operating expenses, at
CHF 29,577 million, decreased by 3% from
CHF 30,396 million in 2001 because of lower
personnel expenses as well as falling general and
administrative expenses, reflecting our ability to
adjust our costs in line with revenue develop-
ments. The decline was accentuated by the fall of
the US dollar, UK sterling and euro against the
Swiss franc. This drop was partially offset by the
CHF 1,234 million charge for the writedown of
the PaineWebber brand. Without the writedown,
the drop in total operating expenses would have
been 7%.
Full-year personnel expenses dropped by 7%
to CHF 18,524 million in 2002 due to much
lower performance-related compensation expens-
es and lower salaries, and a reduction in head-
count, especially in UBS PaineWebber and Busi-
ness Banking Switzerland. The drop was further
accentuated by lower recruitment, training and
contractor costs across the firm, reflecting our
continued cost control initiatives. Finally, the
result was helped by a weaker US dollar against
the Swiss franc.
Personnel expenses are managed on a full-year
basis with final fixing of annual performance-
related payments in the fourth quarter. Over the
full year, approximately 42% of this year’s per-
sonnel expenses were bonus or other variable
compensation, down from 43% last year.
Average variable compensation per head in 2002
was 8% lower than in 2001.
We did not build up any significant overca-
pacity during the peak of the last business cycle,
and have therefore been able to reduce head-
count gradually as economic conditions weak-
ened – without resorting to drastic cuts. UBS
Group headcount dropped by 924 from 69,985
to 69,061, as we streamlined processes and struc-
tures at the same time as we expanded our capa-
bilities in areas with positive growth potential.
In full-year 2002, general and administrative
expenses, at CHF 7,072 million, were down from
CHF 7,631 million a year earlier. Strict cost con-
trol in all our businesses led to a drop in nearly
all cost categories. The biggest declines were in
telecommunication, IT, outsourcing and brand-
ing expenses. This was partially offset by higher
legal and security provisions including a glo-
bal settlement charge of CHF 111 million (USD
80 million) regarding equity research in the US.
25
Group Financial Review
Group Results
At CHF 1,614 million in 2001, depreciation
fell by 6% to CHF 1,521 million in 2002 mainly
due to lower depreciation charges for machines
and equipment.
Amortization of goodwill and other intangible
assets increased from CHF 1,323 million in 2001
to CHF 2,460 million in 2002, due to the write-
down of the PaineWebber brand name following
our decision made in fourth quarter 2002 to
move to a single brand.
Tax
We incurred a tax expense of CHF 678 million in
2002, down from CHF 1,401 million in 2001.
This corresponds to an effective tax rate of 15%
in 2002. Adjusted for significant financial events,
our 2002 tax expense of CHF 917 million
reflects an effective tax rate of 16.5%, well below
2001’s rate of 21%. The decline is mainly driven
by significantly lower progressive tax rates in
Switzerland, the ability to benefit from tax loss
carry-forwards in the US and UK and a higher
proportion of earnings generated in lower tax
jurisdictions.
PaineWebber merger-related costs
In 2002, UBS incurred amortization expenses of
CHF 2,005 million on goodwill and intangible
assets resulting from the acquisition of UBS
PaineWebber, while funding costs amounted to
CHF 988 million. The amortization includes a
non-cash writedown of CHF 1,234 million for the
PaineWebber brand name that had been held as
an intangible asset on our balance sheet. The
writedown was due to a strategic decision
announced in November 2002, to move all our
businesses to the single UBS brand in June 2003.
After the writedown, the remaining Paine-
Webber-related intangible assets on our balance
sheet amount to CHF 2,334 million. These intan-
gibles continue to be carried net of tax.
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 in
November 2000 and the vast majority of them
are 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 finan-
cial events. Personnel expenses in 2002 include
retention payments for key PaineWebber staff of
USD 261 million (CHF 405 million).
Dividend
For 2002, we plan to pay a normal dividend to
our shareholders after having made use of the
possibility to make a tax efficient distribution in
2000 (for the fourth quarter only) and 2001 in
the form of par value reductions.
The Board of Directors will recommend at the
Annual General Meeting on 16 April 2003 that
UBS should pay a dividend of CHF 2.00 per
share for the 2002 financial year, a level on par
with last year’s CHF 2.00 distribution.
If the dividend is approved, the ex-dividend
date will be 17 April 2003, with payment on
23 April 2003 for shareholders of record on
16 April 2003.
Balance sheet
Total assets were CHF 1,181 billion on 31 De-
cember 2002, down CHF 72 billion, or 6%, from
CHF 1,253 billion on 31 December 2001. The
balance sheet shrank because of the weakening of
the US dollar and UK sterling against the Swiss
franc, falling by 17% and 8% in the period
respectively.
Cash and balances with central banks were
CHF 4 billion on 31 December 2002, down from
CHF 21 billion on 31 December 2001. Most of
the decline was due to a drop in the deposits held
with the Bank of Japan. The strong increase seen
in 2001 in our cash and balance levels held with
central banks was related to a change in the
structure of our Japanese financial assets trig-
gered by the negative short-term interest rates in
that country. In 2002, however, the level of cash
and cash balances returned to a normal level.
Assets due from banks increased to CHF
32 billion on 31 December 2002 from CHF
28 billion at 31 December 2001, reflecting higher
time deposits.
Trading-related assets (cash collateral on secu-
rities borrowed, trading portfolio assets and
reverse repurchase agreements), dropped by
CHF 26 billion from 31 December 2001 to
31 December 2002. A significant part of this
change reflects the weakening of the US dollar
against the Swiss franc and lower volumes in
trading portfolio assets due to the more difficult
26
market environment. The drop was partially off-
set by an increase in reverse repurchase agree-
ments, due to higher volumes in our mortgage-
backed securities business in the US, which bene-
fited from the low interest rate levels for home
mortgages.
Loans, net of allowances for credit losses,
declined from CHF 227 billion on 31 December
2001 to CHF 212 billion on 31 December 2002.
Business Banking Switzerland as well as UBS
Warburg’s Corporate and Institutional Clients
business unit continued to reduce their recovery
portfolios. The drops were accentuated by the
declining value of the US dollar against the Swiss
franc.
Financial investments decreased from CHF
29 billion on 31 December 2001 to CHF 8 billion
on 31 December 2002, reflecting a decrease in
debt instruments of public authorities and money
market papers, and reduced positions in private
equity investments, mainly due to impairment
losses.
On 31 December 2002, goodwill and other
intangible assets were CHF 14 billion, CHF 5 bil-
lion lower than on 31 December 2001. The drop
was mainly due to the writedown of the Paine
Webber brand and the fall of the US dollar against
the Swiss franc.
Total liabilities decreased 6%, from CHF
1,206 billion on 31 December 2001 to CHF
1,139 billion on 31 December 2002. Liabilities
due to banks dropped 22% to CHF 83 billion,
reflecting a decrease in funding required for
related business activity. Amounts due to
customers decreased by CHF 27 billion to CHF
307 billion, because of the devaluation of the
US dollar and UK sterling against the Swiss franc.
The drop was somewhat offset by an expansion
of trading-related liabilities (cash collateral on
securities lent, repurchase agreements and trad-
ing portfolio liabilities) which together increased
by CHF 5 billion during 2002. Debt issued de-
creased CHF 27 billion to CHF 129 billion on
31 December 2002, largely due to decreased
issuance of money market paper that reflected
lower funding needs.
UBS’s long-term debt portfolio remained
unchanged at CHF 57 billion on 31 December
2002. During 2002, CHF 17 billion in long-term
debt was issued while CHF 15 billion reached
maturity or were redeemed early. The remaining
change was due to foreign currency impacts,
mainly the strengthening of the Swiss franc
against the US dollar. We believe the maturity
profile of our long-term debt portfolio is well
balanced to match the maturity profile of our
assets.
Shareholders’ equity decreased CHF 5 billion,
or 10%, from 31 December 2001 to 31 December
2002. The increase in retained earnings was more
than offset by the effect of the par value reduction
and the repurchase of own shares in 2002.
UBS maintains a significant percentage of
liquid assets that can be converted into cash on
relatively short notice in order to meet short-term
funding needs without adversely affecting UBS’s
ability to conduct its ongoing businesses. These
liquid assets include reverse repurchase agree-
ments and cash collateral on securities borrowed,
marketable corporate debt and equity securities
and a portion of UBS’s loans secured primarily
with real estate. The value of UBS’s collateralized
receivables and trading portfolio will fluctuate
depending on market conditions. The individual
components of UBS’s total assets, including the
proportion of liquid assets, may vary signifi-
cantly 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 2002,
cash equivalents decreased by CHF 33,915 mil-
lion, principally as a result of financing activi-
ties, which generated negative cash flow of
CHF 32,470 million. A cash outflow of CHF
26,206 million resulted from the repayment of
money market paper, CHF 5,605 million from
movements in treasury shares and derivative
activity in own equity, with CHF 2,509 million
resulting from a capital repayment by par value
reduction. The issuance of long-term debt of
CHF 17,132 million and repayments of CHF
14,911 million brought a net cash inflow of CHF
2,221 million.
Operating cash inflows (before changes in
operating assets and liabilities and income taxes
paid) amounted to CHF 8,192 million. Cash of
CHF 10,021 million was used to fund the net
increase in operating assets, while a net increase
in operating liabilities generated cash inflows of
CHF 37 million. Payments to tax authorities
were CHF 572 million.
27
Group Financial Review
Group Results
Investing activities generated cash inflow of
CHF 1,381 million. Divestments of financial
investments contributed CHF 2,153 million
while the sale of Hyposwiss and Klinik Hirs-
landen brought in CHF 984 million, both
partially offset the CHF 1,763 million of cash
outflow for the purchase of property and equip-
ment.
Outlook 2003
As 2003 begins, the environment continues
to be a challenging one. Uncertainty over
economic developments and market direction,
and rising geopolitical concerns are affecting
investor sentiment and therefore transaction lev-
els, and are holding back a significant recovery in
corporate activity. Therefore, we do not expect to
see an immediate pick-up in our financial per-
formance, as depressed asset levels, low levels of
investor activity and possible deterioration of the
credit environment weigh on our revenues. Any
recovery in the latter part of this year remains
simply unpredictable.
Because of this, we will continue to monitor
our cost base carefully, investing selectively in
our strategic priorities. Our prudent manage-
ment of resources over the last several years
leaves us excellently positioned for further com-
petitive gains.
2001
Net profit
Our net profit for the year 2001 was CHF
4,973 million, 36% less than the CHF 7,792 mil-
lion achieved in 2000, reflecting the much more
difficult 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 achieved in the much stronger markets of
2000 and 28% lower if adjusted for significant
financial events.
Return on equity in 2001 was 11.7%, com-
pared to 21.5% a year earlier. In 2001, basic
earnings per share were CHF 3.93, against CHF
6.44 a year earlier. The cost/income ratio was
80.8% in 2001, up from 72.2% in 2000.
Group targets
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%.
Although this is lower than the 24.3% that we
achieved in 2000, it represented a solid per-
formance when set in the context of the
trading environment. Our return on equity
in 2000 was boosted by extremely high
returns in the exuberant markets of the first
half-year, while 2001 saw much weaker eco-
nomic and stock market performance com-
bined with higher average equity resulting
from the acquisition of PaineWebber in
fourth quarter 2000.
– Basic earnings per share fell 32% to CHF
4.97 in 2001 from 2000. Despite the decline,
2001’s result was still 21% higher than that
achieved in 1999. The number of outstanding
shares at the outset of 2001 was higher than
during most of 2000 because of share issuance
to fund the merger with PaineWebber. An
ongoing share buyback program, however,
caused the number of outstanding shares to
fall to below their pre-merger level by 31
December 2001.
– The cost/income ratio rose from 69.2% to
77.3%, reflecting lower revenues, the poor
performance of our private equity portfolio in
2001 and the influence of the relatively high
cost/income ratio typical of UBS Paine-
Webber’s business. Despite this rise, operating
expenses remained under tight control, with
decreases from 2000 levels in UBS Wealth
Management’s Business Banking Switzerland
business unit and UBS Warburg’s Corporate
and Institutional Clients business unit, as well
as a clear reduction throughout the year of
costs at UBS PaineWebber.
Our disciplined approach to both compensa-
tion and non-personnel expenses allowed us to
continue investing in the future growth of our
key businesses. The percentage of revenue that
we devoted to rewarding our staff remained
almost unchanged since 2000 in our most impor-
tant businesses, reflecting a substantial decrease
in bonus payments.
Our asset-gathering activities have delivered
very strong results in 2001, with inflows in the
private client units (Private Banking and UBS
28
PaineWebber) of CHF 57.8 billion, compared to
CHF 15.7 billion in 2000. Across the whole
Group, we attracted a total 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 management capabilities.
Results
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 businesses.
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 aris-
ing from positions and their offsetting economic
hedging transactions may be different. In fourth
quarter 2001, this effect was particularly pro-
nounced, as a result of the significant fall in
short-term USD interest rates which substantial-
ly reduced our borrowing costs, while improving
net interest income for the quarter. Our overall
interest rate exposures were 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.
In order to provide a better explanation of the
movements in net interest income and net trading
income, we produce the disclosure shown on
page 22 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 in 2000
to CHF 5,694 million in 2001, driven by the
inclusion of UBS PaineWebber.
Net income from trading activities was CHF
11,529 million in 2001, 9% lower than the CHF
12,642 million achieved in 2000. Falling interest
rates and increased volatility in debt markets in
2001 led to a very strong year for fixed income
and foreign exchange trading, but equity trading
revenues suffered from much lower market vol-
umes, increased volatility and reduced arbitrage
opportunities.
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 structure
leading to an increase in average interest rates;
– improved currency management results due
to introduction of a new economic hedging
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 aris-
ing 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.
The global credit environment declined
rapidly throughout 2001, with overall default
rates as high as during the last major global reces-
sion 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 dif-
ficult and challenging environment we focused
on ensuring that our counterparty ratings are
rapidly adjusted to reflect the changing econom-
ic situation. At the same time, we increased the
frequency of sector and geographic rating
reviews.
In UBS Warburg, the ongoing strategy of
actively hedging credit exposure kept new provi-
29
Group Financial Review
Group Results
sions to a relatively low level, resulting in an
actual credit loss expense of CHF 360 million in
2001, compared to CHF 562 million in 2000.
Corporate bankruptcies
in Switzerland
reached their lowest level since the early 1990s,
and we successfully improved the credit quality of
our domestic portfolio in recent years. The level
of recoveries of previously existing provisions,
however, declined compared to the somewhat
exceptional levels of 2000, reflecting less robust
growth in the Swiss economy towards the end of
2001, following 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 Wealth Management & Business Banking in
2001 was CHF 123 million, compared to a net
recovery of CHF 695 million in 2000.
Net fee and commission income was CHF
20,211 million in 2001, 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 munici-
pal securities business. It completed the largest
deal in its history in fourth quarter 2001, 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 rankings for fourth
quarter 2001, and second place for the whole of
2001. The mortgage-backed securities business in
the US 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 is-
suance. However, UBS’s league table rankings
improved, from seventh in international equity
new issues in 2000 to second in 2001, according
to Dealogic EquitywarePlus. 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 4.4% 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 environment 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 worldwide in 2001.
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
30
biggest contribution came from the deferred
annuities 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 in 2001, which led to minimal
opportunities for divestment and much greater
levels of writedowns 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 person-
nel and non-personnel costs, particularly in the
Corporate and Institutional Clients and Business
Banking Switzerland 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 de-
clined, and non-personnel costs were tightly
managed.
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 mil-
lion of costs from the integration of Paine-
Webber, 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.
Personnel expenses in 2001 reflect consider-
able reductions in bonus and performance-
related compensation, with average variable
compensation per head down 23%, ensuring that
overall compensation ratios for 2001 were kept
in line with 2000’s ratio in our core businesses.
However, the inclusion of CHF 5,178 million of
UBS PaineWebber 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 personnel
expenses were bonus or other variable compen-
sation, 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
Wealth Management & Business Banking’s
Business Banking Switzerland business unit and
UBS PaineWebber, although that was slightly off-
set by the effect of acquisitions in UBS Global
Asset Management and further hiring for the
European wealth management initiative.
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 expenses 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.
Tax
UBS Group incurred a tax expense of CHF 1,401
million in 2001, down from CHF 2,320 million 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 the geographical earnings mix of the
Group.
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
31
Group Financial Review
Group Results
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.
Dividend
For 2001, we again made a tax-efficient distribu-
tion of capital to our shareholders rather than
paying a dividend. On 10 July 2002, we made a
distribution of CHF 2.00 to shareholders for the
financial year 2001 which reduced the par value
from CHF 2.80 to CHF 0.80. This is consistent
with the total per share distribution to share-
holders of CHF 2.03 in 2000.
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
CHF 6,038 million for treasury shares and treas-
ury share contract activity as well as CHF 683
million for capital repayments.
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 mil-
lion and a net cash inflow of CHF 19,470 million
from repurchase and reverse repurchase agree-
ments and cash collateral on securities borrowed
and lent. These were offset by CHF 78,456 mil-
lion from an increase in the size of the trading
portfolio.
Investing activities generated negative cash
flow of CHF 7,783 million, CHF 5,770 million
of which were from the purchase of financial
investments and CHF 2,021 million from the
purchase of property and equipment.
32
33
34
Review of Business Group Performance
35
Review of Business Group Performance
Introduction
Introduction
1 All figures have been adjusted for signi-
ficant financial events.
2
In management accounts, statistically
derived actuarial expected loss adjusted
by deferred releases rather than the net
IFRS actual credit loss is reported for
each business unit (see Note 2 to the
Financial Statements).
3 Excludes the amortization of goodwill
and other intangible assets.
Reporting by Business Unit 1
CHF million except where indicated
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
4 Operating expenses / operating income
Total operating expenses
before credit loss expense.
5 Excludes interest and dividend income.
6 Calculated using the former definition
of assets under management up to and
including second quarter 2001.
7 For informational purposes only. These
pre-tax amounts have not been recorded
in the Income statement. For details
on the fair value calculation, refer to Note
32e to the Financial Statements.
Business Group performance before tax
Business Group performance before tax and goodwill 3
Additional information
Cost / income ratio before goodwill (%) 3, 4
Net new money (CHF billion) 5
Invested assets (CHF billion)
Fair value of employee stock options granted 7
Headcount (full-time equivalents)
Private Banking
Business Banking
Switzerland
31.12.02
31.12.01
31.12.02
31.12.01
7,279
(28)
7,251
2,083
2,158
125
111
4,477
2,774
2,885
60
16.6
688
58
10,488
7,696
(37 )
7,659
1,947
2,038
151
109
4,245
3,414
3,523
54
24.66
791
10,249
5,494
(286)
5,208
2,727
159
355
0
3,241
1,967
1,967
59
3.7
205
38
18,442
5,792
(567 )
5,225
2,878
396
465
0
3,739
1,486
1,486
65
9.26
215
19,220
Management accounting
The discussion in this chapter reviews UBS’s
2002, 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 that it is appropriate.
relating to balance sheet products is calculated
on a fully funded basis. In a second step, busi-
ness units are additionally credited with the risk-
free return achieved on the average regulatory
equity used.
Commissions are credited to the business unit
with the corresponding customer relationship,
with revenue sharing agreements for the alloca-
tion of customer revenues where several business
units are involved in value creation.
Regulatory equity is allocated to business
units based on their average regulatory capital
requirement during the period. Only utilized
equity is taken into account, although we add an
additional financial buffer of 10% above the
individually determined business unit regulatory
capital requirement. The remaining equity,
which mainly covers real estate, and any other
unallocated equity, remains at the Corporate
Center.
Net interest income is apportioned to busi-
ness units based on the opportunity costs of
funding their activities. Net interest income
Headcount includes trainees and staff in man-
agement development programs, but not con-
tractors.
36
UBS Global
Asset Management
Corporate and
Institutional Clients
UBS Capital
UBS PaineWebber
Corporate Center
31.12.02
31.12.01
31.12.02
31.12.01
31.12.02
31.12.01
31.12.02
31.12.01
31.12.02
31.12.01
1,953
0
1,953
946
513
37
270
1,766
187
457
77
(2.4)
557
44
3,346
2,218
0
2,218
1,038
569
46
286
1,939
279
565
75
34.9
672
3,281
14,100
(128)
13,972
7,784
2,314
381
364
10,843
3,129
3,493
15,587
(112 )
15,475
8,258
2,586
454
402
11,700
3,775
4,177
74
72
(1,602)
0
(1,602)
94
64
1
0
159
(872 )
0
(872 )
96
64
2
0
162
(1,761)
(1,761)
(1,034 )
(1,034 )
567
15,964
15,562
15
73
128
5,561
(13)
5,548
4,245
1,263
149
457
6,114
(566)
(109)
102
18.5
584
73
19,563
6,391
(18 )
6,373
5,019
1,441
124
502
7,086
(713 )
(211 )
103
33.2
769
20,413
1,315
249
1,564
645
601
473
24
1,743
(179)
(155)
800
236
1,036
592
537
372
24
1,525
(489)
(465)
32
1,185
1,132
Changes to disclosure since 2001
Business unit structure
We implemented a new Business Group struc-
ture at the start of 2002, under which UBS
PaineWebber became a separate Business
Group. In the previous structure, UBS Paine-
Webber was reported as one of UBS Warburg’s
business units. Accordingly, goodwill and other
intangible assets relating to the merger of UBS
and PaineWebber were reported in the UBS
Warburg Business Group and not reflected in the
results of its individual business units. On the
separation of UBS PaineWebber from UBS
Warburg, the goodwill and intangible assets
were assigned to the different Business Groups
that have benefited from the merger with
PaineWebber. That means that they have been
assigned to the new UBS PaineWebber Business
Group, to UBS Warburg’s Corporate and
Institutional Clients business unit and to a lesser
extent to UBS Global Asset Management and to
the Private Banking business unit. Associated
amortization expense and net funding charges
are now being charged to each business unit in
proportion to the share of goodwill and intangi-
ble assets assigned.
At the same time, UBS transferred UBS Paine-
Webber’s non-US client business to Private
Banking. Finally, O’Connor, originally jointly
launched by UBS Global Asset Management
and UBS Warburg, became entirely part of
UBS Global Asset Management.
Our reporting structure also reflects the
revised business portfolio of the UBS Wealth
Management & Business Banking Business
Group, formerly UBS Switzerland. As of 1 July
2002, the business serving high-end affluent
clients was transferred from the former Private
and Corporate Clients (PCC) unit to Private
Banking. The Business Group now comprises the
following business units:
– Private Banking, which includes the full pri-
vate banking business and the high-end af-
fluent clients segment that were previously
part of the PCC business unit.
37
Review of Business Group Performance
Introduction
UBS Group
Reporting structure in 2002
UBS AG
UBS Wealth Management &
Business Banking
UBS Global Asset
Management
UBS Warburg
UBS PaineWebber
Private Banking
Corporate & Institutional Clients
Business Banking Switzerland
UBS Capital
Provide the whole range
of financial services
in an exclusive and very
individualized format
Corporate Center
– Business Banking Switzerland, consisting of
the individual and corporate clients businesses
of the former PCC business unit.
New disclosure has been added for the private
banking business, with separate income data and
key performance indicators (KPIs) for the Inter-
national Clients (clients domiciled outside of
Switzerland) and Swiss Clients (clients domiciled
in Switzerland) businesses.
While none of this restructuring had an
impact on the Group, we have restated prior
periods for all business units affected to reflect
these changes.
During the first half of 2003, we will create a
new holding company to incorporate GAM, our
specialist asset management firm, as well as our
five independent private banks – Cantrade
(Zurich), Banco di Lugano (Lugano), Ferrer
Lullin (Geneva), Bank Ehinger (Basel), and
Armand von Ernst (Bern). The new company will
be held at the Corporate Center, with the struc-
ture, effective from 1 January 2003, to be reflect-
ed in our financial reporting effective from the
first quarter 2003 onwards. We will release fig-
ures for 2000, 2001, and 2002 reflecting these
changes prior to the publication of first quarter
2003 results.
Other management accounting changes
In 2002 we implemented additional changes in our
management accounting that required us to restate
prior periods for the business units affected:
– We simplified our allocation of Corporate
Center costs to the Business Groups. In the
past certain central costs were allocated pro-
portionally to UBS business units. Since
1 January 2002, these charges have been
restricted to services that are provided directly
under explicit Service Level Agreements.
– On 1 January 2002, we changed the way in
which we calculate regulatory equity allocated
to the business units, adjusting the leverage
ratio (ratio of BIS Tier 1 capital excluding
hybrid capital to BIS total capital) for non-
goodwill items. This change in allocation also
affects the interest earned on regulatory
equity.
– On 1 January 2002, we reclassified certain
client assets of the Business Banking Switzer-
land business unit as custody-only, which
required a restatement of the business unit’s
invested assets.
– From 1 October 2002, recurring fees at UBS
PaineWebber were redefined to include alter-
native investment fees, fees from UBS Global
Asset Management and other advisory fees
that were not formerly included in the defini-
tion. These changes align the UBS Paine-
Webber definition of recurring fees with the
asset-based fee definition applied to the Private
Banking business. We now uniformly charac-
terize this type of revenue as “recurring fees” –
both in Private Banking and UBS PaineWebber.
Additional disclosure in 2002
In our management accounting, the expense for
equity-based compensation plans – including
employee option plans – is recorded at the intrin-
sic value of the instruments at grant date. To
enhance transparency, for every business unit and
Business Group we now disclose the additional
compensation expense we would have incurred
in 2002 had we recognized the fair value of stock
option grants. On a Group level, this additional
expense would have been CHF 827 million in
2002 (CHF 690 million after-tax).
Further details on the accounting treatment of
equity-based compensation can be found in the
section “Critical accounting policies” on page 13
and in Note 32e to the UBS Group Financial
Statements.
38
Seasonal characteristics
Our main businesses do not show significant
seasonal patterns – except for UBS Warburg’s
Corporate and Institutional Clients business unit,
where revenues are impacted by the seasonal
characteristics of general financial market acti-
vity and deal flows in investment banking.
When discussing quarterly performance, we
therefore compare UBS Warburg’s results of the
reported quarter with those achieved in the same
period of the previous year. For all other Business
Groups, results are compared with the previous
quarter. Considering the impact of UBS Warburg’s
performance on Group results, we discuss quar-
terly performance at Group level by comparing it
with the same quarter in the previous year.
Client / invested assets reporting
When reporting on client assets, we show two
assets metrics: client assets and invested assets:
– Client assets represent all client assets man-
both the investment management unit and the
distribution unit, and double counted in Group
totals. For example, a mutual fund provided by
UBS Global Asset Management but sold by
Private Banking will be counted as invested assets
in both business units, as they both provide an
independent service to their respective client, add
value and generate revenues. This approach is in
line with our open architecture strategy and
allows us to accurately reflect the actual per-
formance of our individual businesses.
On a Group level, approximately CHF 290 bil-
lion in invested assets were double counted
in 2002 out of total invested assets of CHF
2,037 billion (in 2001, approximately CHF
310 billion were double counted out of a total of
CHF 2,448 billion in invested assets). The major-
ity of assets that are double counted represent
institutional funds managed by UBS Global Asset
Management and distributed by UBS Wealth
Management & Business Banking and UBS
PaineWebber.
aged by or deposited with UBS.
Credit loss expense
– Invested assets is a more restrictive term
and includes all client assets managed by
or deposited with UBS for investment pur-
poses only.
Invested assets are our central measure and
exclude 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
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.
Net new money is defined as the sum of the
acquisition of invested assets from new clients,
the loss of invested assets due to client defection
and inflows and outflows of invested assets from
existing clients. Interest and dividend income as
well as the effects of market or currency move-
ments as well as acquisitions and divestments are
excluded from net new money.
This definition was introduced in 2001. Because
of that, invested assets on 31 December 2000 were
restated according to the new definition.
Where products are created in one Business
Group, but sold in another, they are counted in
Credit loss expense represents the charges to the
profit and loss account relating to amounts due
to UBS from loans and advances, over-the-
counter (OTC) derivatives and off-balance sheet
products that are considered impaired or uncol-
lectable (for more information, please refer to
Note 11 to the UBS Group Financial Statements
of this report).
We determine the amount 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 IFRS. Under these standards, credit
loss expense is the total of net new allowances
and direct writeoffs less recoveries. These actual
losses are recognized and charged to the income
statement in the period when they arise.
By contrast, in our segment and business unit
reporting, we apply an approach to the measure-
ment of credit risk which reflects the average
annual cost that management anticipates will
arise from transactions existing today that may
become impaired in the future. The basis for
measuring these inherent risks in the credit port-
folios is the concept of “expected loss” (further
information on page 60 in the “Risk Analysis”
section of the Handbook 2002/2003). Over the
39
Review of Business Group Performance
Introduction
Business Group Credit Loss Charge
CHF million
For the year ended 31.12.02
Actuarial expected loss
Deferred releases
Credit loss expense charged to
the Business Groups
IFRS actual credit loss expense
UBS
Wealth
Management &
Business Banking
UBS
Warburg
UBS
PaineWebber
Corporate
Center
569
(255 )
314
241
126
2
128
(35)
13
0
13
15
(15)
Balancing item charged as Credit loss expense in Corporate Center
Total
708
(253)
455
206
(249 )
longer term, the expected loss should equal the
actual credit loss expense, although the latter is
more erratic, in both timing and amount.
Therefore, in business unit reporting, in addition
to the expected loss, we also charge or refund the
difference between actual credit loss expense and
expected loss, amortized over a three-year
period. With this deferred charging mechanism
we not only make Business Groups ultimately
accountable for any credit losses they suffer but
also give them the incentive to align their credit
decisions and risk-adjusted pricing with the
medium-term risk profile of their credit trans-
actions. The sum of this “deferral” and the
expected loss makes up the Credit loss expense
charged in our 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 defer-
ral), by recording a balancing item in Corporate
Center. We also show the allocation of actual
credit loss expense to the business units in the
footnotes to Note 2a of the UBS Group Financial
Statements.
Key performance indicators
On Group level, we focus on a consistent set of
long-term financial targets defined across periods
of varying market conditions and designed to
ensure that UBS delivers continuously improving
returns to shareholders (see pages 21 and 22 of
this report). At the Business Group or business
unit level, performance is measured with careful-
ly chosen key performance indicators (KPIs).
These do not carry explicit targets, but are indi-
cators of the business units’ success in creating
value for shareholders. They reflect the key driv-
ers of each unit’s core business activities and
include both financial metrics, such as the
cost/income ratio, and non-financial metrics,
such as invested assets or the number of client
advisors.
KPIs are an important part of our business
planning process. They are used identically for
internal performance measurement and external
reporting. This ensures that management have a
clear responsibility to lead their businesses
towards achieving success in the Group’s key
value drivers and avoids any risk of managing to
purely internal performance measures.
Reconciliation of Business Group Credit Loss Charge to
IFRS Actual Credit Loss Expense / (Recovery)
CHF million
For the year ended
UBS Wealth Management &
Business Banking
UBS Warburg
UBS PaineWebber
Corporate Center
Total
Credit loss charge
IFRS actual credit loss expense
31.12.02
31.12.01
31.12.00
31.12.02
31.12.01
31.12.00
314
128
13
0
455
604
112
18
0
734
785
243
3
0
1,031
241
(35)
15
(15)
206
123
360
15
0
498
(695)
562
3
0
(130)
Balancing item in Corporate Center
(249)
(236 )
(1,161 )
40
Indicative Tax Rates
For the year ended 31 December 2002
UBS Wealth Management & Business Banking
Private Banking
Business Banking Switzerland
UBS Global Asset Management
UBS Warburg
Corporate and Institutional Clients
UBS Capital
UBS PaineWebber
Business Group tax rates
Indicative Business Group and business unit tax
rates are calculated on an annual basis based on
the results and statutory tax rates of the finan-
cial year. These rates are approximate calcula-
tions, 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 2002 on a stand-alone basis,
without the benefit of tax losses brought for-
ward from earlier years.
Tax rate
Pre-Goodwill
19
18
20
22
38
31
3
37
The indicative tax rates are presented “pre-
goodwill”. They give 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.
However, the tax rates post-goodwill are higher
than the pre-goodwill rates, because in some
jurisdictions there are limitations on the tax
deductibility of amortization 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.
41
Review of Business Group Performance
UBS Wealth Management & Business Banking
UBS Wealth Management & Business Banking
In 2002, Private Banking’s pre-tax profit adjusted for SFEs was CHF 2,774 million, a 19%
decline from 2001. Business Banking Switzerland’s profit before tax was CHF 1,967 million,
up 32% from the previous year. Private Banking continues to attract net new money with fur-
ther strong inflows in our European wealth management initiative. In Business Banking
Switzerland, operating expenses fell 13%, and were at their lowest level since 1999.
Business Group reporting
CHF million, except where indicated
For the year ended
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
Business Group performance before tax and goodwill 2
Additional information
Regulatory equity allocated (average)
Cost / income ratio (%) 3
Cost / income ratio before goodwill (%) 2, 3
Fair value of employee stock options granted
31.12.02
31.12.01
31.12.00
% change from
31.12.01
12,928
(314)
12,614
4,810
2,317
480
111
7,718
4,896
5,007
8,800
60
59
964
13,488
(604 )
12,884
4,825
2,434
616
109
7,984
4,900
5,009
9,400
59
58
14,355
(785 )
13,570
5,151
2,478
633
81
8,343
5,227
5,308
10,150
58
58
(4)
(48)
(2)
0
(5)
(22)
2
(3)
0
0
(6)
Business Group reporting adjusted for Significant Financial Events
CHF million, except where indicated
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
Income
Credit loss expense 1
Total operating income
12,7735
(314)
12,459
13,488
(604 )
12,884
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
(5)
(48)
(3)
0
(5)
(22)
2
(3)
(3)
(3)
14,355
(785 )
13,570
5,151
2,3986
5616
81
8,191
5,379
5,460
57
56
4,810
2,317
480
111
7,718
4,741
4,852
60
60
4,825
2,434
616
109
7,984
4,900
5,009
59
58
Georges Gagnebin
Chairman UBS Wealth Management
& Business Banking
Marcel Rohner
CEO UBS Wealth Management
& Business Banking
1
In management accounts, statistically
derived actuarial expected loss adjusted
by deferred releases rather than the
net IFRS actual credit loss is reported in
the Business Groups (see Note 2 to
the Financial Statements).
2 Excludes the amortization of goodwill
and other intangible assets.
3 Operating expenses / operating income
before credit loss expense.
4 For informational purposes only. These
pre-tax amounts have not been recorded
in the Income statement. For details on
the fair value calculation, refer to Note
32e to the Financial Statements.
5 Excludes significant financial event:
Income, CHF 155 million (Gain on
disposal of Hyposwiss).
6 Excludes significant financial events:
General and administrative expenses,
CHF 80 million and Depreciation, CHF 72
million (PaineWebber integration costs).
Additional information
Cost / income ratio (%) 3
Cost / income ratio before goodwill (%) 2, 3
42
Review of Business Group Performance
UBS Wealth Management & Business Banking
Private Banking
Business unit reporting
CHF million, except where indicated
For the year ended
Income
Credit loss expense 3
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 4
KPIs
Invested assets (CHF billion)
Net new money (CHF billion) 5, 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
Client advisors (full-time equivalents)
3,291
3,043
31.12.02
31.12.01
31.12.00
% change from
31.12.01
8,402
(35 )
8,367
2,030
2,0192
1452
55
4,249
4,118
4,173
798
1.2
105
51
50
5,890
550
7.5
107
7,2791
(28)
7,251
2,083
2,158
125
111
4,477
2,774
2,885
688
16.6
98
62
60
53
7,696
(37 )
7,659
1,947
2,038
151
109
4,245
3,414
3,523
791
24.6
97
55
54
48
5,2291
493
19.1
100
186
28
7.6
551
5,498
555
23.2
99
140
16
5.6
370
2,050
2,198
2,512
195
(2.5)
95
236
1.4
92
248
(6.3 )
100
(5)
(24)
(5)
7
6
(17)
2
5
(19)
(18)
(13)
1
8
(5)
(11)
1
33
75
49
(7)
(17)
3
1 Excludes significant financial event:
Income, CHF 155 million (Gain on
disposal of Hyposwiss).
2 Excludes significant financial events:
General and administrative expenses,
CHF 80 million and Depreciation,
CHF 72 million (PaineWebber integration
costs).
3
In management accounts, statistically
derived actuarial expected loss adjusted
by deferred releases rather than the net
IFRS actual credit loss is reported in the
Business Groups (see Note 2 to the
Financial Statements).
Private Banking – International Clients
Income
Invested assets (CHF billion)
Net new money (CHF billion) 5
Gross margin on invested assets (bps) 7
European wealth management initiative
(part of Private Banking – International Clients)
Income
Invested assets (CHF billion)
Net new money (CHF billion) 5
4 Excludes the amortization of goodwill and
Client advisors (full-time equivalents)
other intangible assets.
5 Excludes interest and dividend income.
6 Calculated using the former definition of
assets under management up to and
including second quarter 2001.
7
Income / average invested assets.
Private Banking – Swiss Clients
Income
Invested assets (CHF billion)
Net new money (CHF billion) 5, 6
Gross margin on invested assets (bps) 7
8 Operating expenses / operating income
before credit loss expense.
Additional information
As at
31.12.02
31.12.01
31.12.00
% change from
31.12.01
9 For informational purposes only. These
pre-tax amounts have not been recorded
in the Income statement. For details on
the fair value calculation, refer to Note
32e to the Financial Statements.
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted
Headcount (full-time equivalents)
836
3,100
589
10,488
949
3,550
10,249
2,600
9,835
(12)
(13)
2
43
Review of Business Group Performance
UBS Wealth Management & Business Banking
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 performance and in-
flows and outflows of client funds.
Significant Financial Events
In 2002, we decided to streamline our private
banking activities in the region of Zurich and
therefore sold our Hyposwiss subsidiary to the
Cantonal Bank of Saint Gall. The transaction
involved the transfer of 132 employees and CHF
6.4 billion in invested assets and generated a pre-
tax gain of CHF 155 million which we treated as
a significant financial event in 2002. This gain
does not appear in the 2002 adjusted business
unit result above.
Following the merger with PaineWebber in
2000, our strategy for extending our wealth man-
agement services in Europe was re-assessed and
focus shifted to more affluent clients than those
originally targeted by the so-called “e-services”
initiative. This change in strategy resulted in a
charge of CHF 80 million to general and
administrative expenses due to the closure of the
infrastructure related to the initiative and a
charge of CHF 72 million to depreciation due to
the writeoff of the system used. Both amounts
form part of the PaineWebber integration costs,
which were treated as 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. The
results in the discussion below exclude significant
financial events.
2002
Key performance indicators
For the full year, net new money inflows totaled
CHF 16.6 billion, down from the 2001 result of
CHF 24.6 billion. Excluding the net outflow of
over CHF 8 billion related to the Italian tax
amnesty, the net new money result was essen-
tially unchanged. International clients invested
net new money of CHF 19.1 billion in 2002,
down by only CHF 4.1 billion from a year earlier
despite the Italian tax amnesty. This excellent
underlying result in these difficult markets was
due to the continued success of our European
wealth management initiative as well as signi-
ficant inflows from clients in Asia and the
Americas.
Net new money (CHF billion)
30
25
20
15
10
5
0
0
0
0
2
1
0
0
2
2
0
0
2
In the year to 31 December 2002, invested
assets fell 13% to CHF 688 billion, mainly due to
the steep drop in global equity markets as well as
the 17% drop in the US dollar against the Swiss
franc. Some 38% of Private Banking’s invested
assets are denominated in US dollars.
Invested assets (CHF billion)
1000
750
500
250
0
31.12.00
31.12.01
31.12.02
Private Banking – International Clients
Private Banking – Swiss Clients
Gross margin on invested assets remained
resilient and rose by 1 basis point to 98 basis
44
points. Assets as well as revenues fell in 2002
from the already depressed 2001 levels. The
split of the margin remained unchanged from
2001 with 72% of the margin stemming from
recurring revenue and 28% from transactional
fees.
Gross margin on invested assets (bps)
120
100
80
60
40
20
0
0
0
0
2
1
0
0
2
2
0
0
2
Pre-goodwill cost/income ratio (%)
80
70
60
50
40
30
0
0
0
2
1
0
0
2
2
0
0
2
Over the full year, the pre-goodwill cost/
income ratio increased from 54% in 2001 to
60% in 2002, reflecting the ongoing investment
in our European wealth management initiative as
well as the strong decline in asset-based revenues.
Excluding the European wealth management
initiative, our cost/income ratio increased from
48% in 2001 to 53% in 2002.
European wealth management
Early in 2001 we launched the European wealth
management initiative, designed to expand our
market share in the five countries of France,
Germany, Italy, Spain and the UK, key markets
that cover 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,
developed with a clear commitment to open
architecture and the provision of a full range of
“best-of-breed” investment products.
Progress so far has been promising with net
new money inflows into our domestic European
network for full-year 2002 totaling CHF 7.6 bil-
lion, up 36% from last year’s intake of CHF
5.6 billion. The inflow in 2002 reflects an annual
growth rate in net new money of 48%. For full-
year 2002, income from our European wealth
management initiative was CHF 186 million, 33%
or CHF 46 million above the 2001 level, reflecting
the success of our business expansion program.
Net new money
European wealth management (CHF billion)
8
6
4
2
0
1
0
0
2
2
0
0
2
We hired a total of 181 client advisors in
2002, bringing the total at 31 December 2002 to
551. We remain committed to growing our pres-
ence in our European target markets and will
continue to invest in qualified advisory staff at a
rate determined by the market environment and
business opportunities.
Client advisors
European wealth management (full-time equivalents)
600
550
500
450
400
350
300
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
Results
Private Banking’s full-year 2002 pre-tax profit,
at CHF 2,774 million, fell 19% from 2001 due
to the steep decline in asset-based revenues
which could not be fully compensated by
cost reductions as we continue to invest in
our European wealth management initiative.
45
Review of Business Group Performance
UBS Wealth Management & Business Banking
Personnel as well as general and administra-
tive expenses increased due to this strategic
initiative.
Performance before tax (CHF million)
5000
4000
3000
2000
1000
0
0
0
0
2
1
0
0
2
2
0
0
2
Operating income
Full-year operating income was CHF 7,251 mil-
lion, down 5% from CHF 7,659 million in 2001.
Both non-recurring transaction revenues and
recurring asset-based revenues fell from 2001.
Operating expenses
At CHF 4,477 million, full-year operating
expenses for 2002 rose 5% from 2001, reflecting
investments in our European wealth manage-
ment initiative.
Both personnel expenses, which rose 7% to
CHF 2,083 million, as well as general and
administrative expenses, up 6% at CHF 2,158
million, increased chiefly because of the invest-
ments in this initiative.
Full-year depreciation fell in 2002 by 17% to
CHF 125 million because of lower charges for
information technology equipment, which is
increasingly being leased instead of bought, while
goodwill amortization was CHF 111 million, up
2% from 2001.
Headcount (full-time equivalents)
11
10
9
8
7
6
(in thousands)
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
Headcount
Headcount, at 10,488 on 31 December 2002,
increased by 239, mainly due to the hiring of
experienced client advisors for the buildup of
European wealth management activities. Overall,
the number of client advisors increased by 8% to
3,291 at the end of 2002 and represented 31% of
all Private Banking’s staff.
2001
Key performance indicators
Net new money inflows in 2001, at CHF 24.6
billion, were CHF 23.4 billion higher than in
2000, demonstrating our success in re-energizing
our asset-gathering performance, as well as our
determined focus on growing our wealth man-
agement franchise.
In the year to 31 December 2001, invested
assets fell a modest 1% despite the poor per-
formance of securities markets, reflecting strong
net new money growth and a relatively conser-
vative asset mix.
The gross margin fell from 105 basis points in
2000 to 97 basis points in 2001, clearly reflecting
reduced transaction volumes, especially com-
pared to the exuberant market environment in
the early part of 2000.
The pre-goodwill cost/income ratio increased
by four percentage points from 50% in 2000 to
54% in 2001, reflecting the costs of our invest-
ments in the European wealth management
initiative, and weaker transaction volumes.
European wealth management
In 2001, our domestic European network had
net new money inflows of CHF 5.6 billion, despite
the relatively difficult market conditions. Opening
new offices and hiring new staff is a key component
of the initiative. Hiring plans progressed well in
2001, with the number of client advisors in our five
target countries rising to 370 on 31 December
2001, an increase of 208 for the year. A further 40
newly hired advisors started on 1 January 2002,
bringing our total hiring in 2001 to 248.
Results
Weaker markets than in 2000 and the costs of
investing in the European wealth management
initiative brought full-year pre-tax profits in
46
2001 down 17% from 2000 to CHF 3,414 mil-
lion, despite a continued focus on controlling
operating costs.
Operating income
Full-year operating income was CHF 7,659
million, down 8% from the record CHF 8,367
million in 2000. This was driven by falling
transaction-based revenues, reflecting the much
less active markets in 2001. Asset-based rev-
enues fell only very slightly compared to 2000,
despite lower average assets, reflecting our suc-
cess in providing added value services to our
clients.
Operating expenses
At CHF 4,245 million, operating expenses in
2001 were nearly unchanged from 2000. Per-
sonnel expenses fell by 4% to CHF 1,947 million
in 2001, reflecting lower performance-related
compensation despite a 4% increase in head-
count during the year.
General and administrative expenses in-
creased 1% from CHF 2,019 million in 2000 to
CHF 2,038 million in 2001, principally reflecting
the cost of investments in new product develop-
ment, premises and systems in support of the
European wealth management initiative.
Depreciation increased from CHF 145 million
in 2000 to CHF 151 million in 2001, reflecting
increased investment in IT and premises.
Headcount
At 31 December 2001, Private Banking em-
ployed 10,249 professionals, a 4% increase
compared with year-end 2000, driven by recruit-
ment of client advisors and support personnel for
the European wealth management initiative. At
31 December 2001, client advisors represented
around 30% of Private Banking’s staff.
47
Review of Business Group Performance
UBS Wealth Management & Business Banking
Business Banking Switzerland
Business unit reporting
CHF million, except where indicated
For the year ended
Private clients
Corporate clients
Other areas
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
KPIs
Invested assets (CHF billion)
Net new money (CHF billion) 3, 4
Cost / income ratio (%) 5
Cost / income ratio before goodwill (%) 2, 5
Non-performing loans / gross loans outstanding (%)
Impaired loans / gross loans outstanding (%)
31.12.02
31.12.01
31.12.00
% change from
31.12.01
3,014
2,148
332
5,494
(286)
5,208
2,727
159
355
0
3,241
1,967
1,967
205
3.7
59
59
3.6
6.0
3,185
2,263
344
5,792
(567 )
5,225
2,878
396
465
0
3,739
1,486
1,486
215
9.2
65
65
4.8
7.7
3,520
2,217
216
5,953
(750 )
5,203
3,121
379
416
26
3,942
1,261
1,287
239
2.7
66
66
5.5
9.4
(5)
(5)
(3)
(5)
(50)
0
(5)
(60)
(24)
(13)
32
32
(5)
Additional information
As at or for the year ended
Deferred releases included in credit loss expense 1
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted
Headcount (full-time equivalents)
31.12.02
31.12.01
31.12.00
240
494
5,700
386
18,442
115
544
5,850
7,550
19,220
20,437
% change from
31.12.01
109
(9)
(3)
(4)
1 In management accounts, statistically derived actuarial expected loss adjusted by deferred releases rather than the net IFRS actual credit loss is
reported in the Business Groups (see Note 2 to the Financial Statements). Deferred releases represent amortization of historical differences
between actual credit losses and actuarial expected loss (for more information, please refer to pages 39 and 40 of the UBS Financial Report 2002).
2 Excludes the amortization of goodwill and other intangible assets.
4 Calculated using the former
5 Operating expenses / operating income before credit loss
definition of assets under management up to and including second quarter 2001.
6 For informational purposes only. These pre-tax amounts have not been recorded in the Income statement. For details on the fair
expense.
value calculation, refer to Note 32e to the Financial Statements.
3 Excludes interest and dividend income.
Components of Operating Income
Business Banking Switzerland derives its operating income
principally from:
– net interest income from its loan portfolio and cus-
tomer deposits;
– fees for investment management services;
– transaction fees.
As a result, Business Banking Switzerland’s operating
income is affected by movements in interest rates, fluc-
tuations in invested assets, client activity levels, invest-
ment performance and changes in market conditions.
48
Significant financial events
There were no significant financial events that
affected this business unit in 2002, 2001 or 2000.
2002
Key performance indicators
Invested assets fell from CHF 215 billion in 2001
to CHF 205 billion in 2002 as negative market
developments and the weakening of major cur-
rencies against the Swiss franc were only partially
offset by positive net new money inflows. In
2002, Business Banking Switzerland attracted net
new money of CHF 3.7 billion, down from CHF
9.2 billion in 2001. This drop was due to smaller
inflows from large corporate client accounts – a
business traditionally subject to volatile inflows
and outflows.
For full-year 2002, the cost/income ratio was
a record low 59%, 6 percentage points below the
previous year’s ratio of 65%, reflecting the drop
in total operating expenses to the lowest level
since 1999.
Pre-goodwill cost/income ratio (%)
70
65
60
55
50
45
40
0
0
0
2
1
0
0
2
2
0
0
2
Business Banking Switzerland’s loan portfolio
decreased to CHF 139 billion at 31 December
2002 from CHF 146 billion at 31 December 2001,
driven by lower volumes in the corporate clients
area and the further reduction in the recovery
portfolio from CHF 12 billion at 31 December
2001 to CHF 8.6 billion at 31 December 2002.
This positive development was also reflected in the
key credit quality ratios: the non-performing loan
ratio declined to 3.6% from 4.8%, while the ratio
of impaired loans to gross loans saw a further
improvement, falling to 6.0% from 7.7%.
Full-year interest income in 2002 was below
the previous year mainly due to lower interest
Impaired loans/gross loans (%)
10
8
6
4
2
0
0
0
.
2
1
1
3
.
1
0
.
2
1
1
3
.
2
0
.
2
1
1
3
.
margins on savings and cash accounts as well
as the fall in the US dollar, which caused the
Swiss franc equivalent of US dollar interest rate
revenues to drop.
Results
In 2002, full-year pre-tax profit was a record
CHF 1,967 million, up 32% from 2001,
achieved despite declining revenues in difficult
market conditions, due to continued tight man-
agement of our cost base and lower credit loss
expenses. Personnel expenses dropped due to
lower performance-related compensation as well
as a drop in headcount whereas general and
administrative expenses reached their lowest
level since 1999.
Performance before tax (CHF million)
2000
1500
1000
500
0
0
0
0
2
1
0
0
2
2
0
0
2
Operating income
Full-year operating income was CHF 5,208 mil-
lion, almost unchanged from 2001’s level of CHF
5,225 million. Interest income fell because of con-
tinued pressure on margins of liability products.
Trading and transactional income also declined,
reflecting the difficult market environment,
although these developments were mostly offset
by lower credit loss expenses, which fell to CHF
49
Review of Business Group Performance
UBS Wealth Management & Business Banking
286 million in 2002, down 50% from CHF 567
million in 2001. This drop reflects the continued
success in improving the quality of our loan port-
folio through the implementation of risk-adjusted
pricing and the deferred benefit of the prior year’s
better than expected credit performance.
Income from Private Clients declined from
CHF 3,185 million in 2001 to CHF 3,014 mil-
lion in 2002, reflecting mainly a decline in inter-
est income due to lower margins of liability prod-
ucts due to lower market rates. In addition, fee
income decreased as a result of a lower asset base
and weaker client activity.
Income from Corporate Clients declined 5%
from CHF 2,263 million in 2001 to CHF 2,148
million in 2002 reflecting lower interest, fee
and trading income due to the weak financial
markets.
Income from Other areas dropped by 3% to
CHF 332 million in 2002 from CHF 344 million
in 2001 mainly due to a methodology change
regarding the treatment of revenues from corre-
spondent banking clients.
Operating expenses
Full-year 2002 operating expenses decreased
13% from CHF 3,739 million in 2001 to CHF
3,241 million and were at their lowest level since
1999.
Personnel expenses dropped 5% from CHF
2,878 million in 2001 to CHF 2,727 million in
2002, due to lower headcount.
General and administrative expenses, at CHF
159 million, continued to drop and were 60%
lower than the CHF 396 million recorded in
2001. This drop reflects our continuous efforts to
control costs as well as higher usage of services,
mainly IT, provided to other business units.
Overall, the very low level of general and admin-
istrative expenses is explained by the integrated
business model of UBS through which Business
Banking Switzerland provides a significant num-
ber of services to other business units of the
Group, mainly Private Banking. In accounting
terms, the costs for these services are charged to
the receiving unit as general and administrative
expenses, offset by lower general and administra-
tive expenses in the provider unit.
Depreciation for full-year 2002 dropped to
CHF 355 million from CHF 465 million in 2001
as information technology equipment is increas-
ingly being leased instead of bought.
Headcount
Business Banking Switzerland’s headcount was
18,442 on 31 December 2002, a decline of 778
or 4% from 31 December 2001, as we continued
to streamline processes and structures.
Headcount (full-time equivalents)
21
19
17
15
(in thousands)
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
2001
Key performance indicators
In 2001, Business Banking Switzerland attracted
net new money of CHF 9.2 billion, a clear im-
provement over 2000’s CHF 2.7 billion, reflect-
ing improved flows from both private clients and
corporate clients, where flows can be larger and
more volatile. Invested assets were CHF 215 bil-
lion as of 31 December 2001.
Business Banking Switzerland continued to
focus successfully on stringent cost control meas-
ures reflected in a one percentage point decline in
the full year’s pre-goodwill cost/income ratio
from 66% in 2000 to 65% in 2001. This result-
ed from reductions in headcount and in perform-
ance-related compensation expenses.
Business Banking Switzerland’s loan portfolio
decreased from CHF 150 billion at 31 December
2000 to CHF 146 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 recov-
ery efforts were reflected in an improvement in
key asset quality ratios since the end of 2000. The
non-performing loans to total loans ratio
decreased from 5.5% to 4.8% while the ratio of
impaired loans to gross loans further improved
from 9.4% to 7.7%.
50
Results
Business Banking Switzerland enjoyed a very
strong year, despite the much more difficult
market conditions, with profit before tax in 2001
up 18% compared to 2000, at CHF 1,486 mil-
lion. The implementation 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% com-
pared to 2000.
Operating income
Operating income in 2001 was up CHF 22 mil-
lion from 2000 at CHF 5,225 million, principally
reflecting the reduction in credit loss expense
partially offset by the effect of weaker markets in
2001 on fee and commission income.
Business Banking Switzerland 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. In 2001, we introduced a new process
for calculating the adjusted expected loss
charged to the Business Groups, under which the
difference between the actual IFRS 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 Business Banking
Switzerland have recently been lower than the
adjusted expected loss charge, this deferral
process has also resulted in a lower adjusted
expected loss charge (see pages 39 and 40 for
further details).
Together these effects led to a credit loss
expense of CHF 567 million in 2001, down 24%
from CHF 750 million in 2000.
Income from Private Clients declined from
CHF 3,520 million in 2000 to CHF 3,185 mil-
lion in 2001 due to lower fee income, reflecting
lower market activity levels as well as lower
interest income because of liability margin pres-
sure.
Income from Corporate Clients increased by
2% from CHF 2,217 million in 2000 to CHF
2,263 million in 2001, reflecting higher income
due to a change in the treatment of interest on
impaired loans (previously recorded as a reduc-
tion in credit loss expense), which more than off-
set lower interest and fee income due to the
weaker financial markets.
Income from Other areas increased by 59%
from CHF 216 million in 2000 to CHF 344 mil-
lion in 2001 reflecting higher disposal revenues
(the sale of TicketCorner) and higher one-off
revenues from minority holdings.
Operating expenses
Operating expenses remain under strict control,
totaling CHF 3,739 million in 2001, CHF 203 mil-
lion lower than in 2000.
General and administrative expenses in 2001,
at CHF 396 million, were 4% higher than in
2000, principally reflecting higher liability risk
provisions, partially offset by lower IT outsourc-
ing costs and the continued effect of our efforts to
control costs.
Personnel expenses declined by CHF 243 mil-
lion compared to 2000, to CHF 2,878 million,
reflecting a fall in headcount of 1,217 since the
end of 2000, and lower performance-related pay.
Over the full year, the compensation ratio in
Business Banking Switzerland was 50%, down
from 52% in 2000.
Depreciation increased 12% from 2000, to
CHF 465 million, principally reflecting cancella-
tion of previously capitalized software projects as
a result of cost control measures. Goodwill
amortization dropped from CHF 26 million in
2000 to zero in 2001, reflecting the writeoff of
goodwill on a credit card portfolio in 2000.
Headcount
Business Banking Switzerland’s headcount
declined by a further 6% in 2001, from 20,437
on 31 December 2000 to 19,220 on 31 December
2001, as the cost control effects from the system-
atic implementation of the strategic projects
portfolio and the benefits of the merger between
Union Bank of Switzerland and Swiss Bank
Corporation continued to be realized.
51
Review of Business Group Performance
UBS Global Asset Management
UBS Global Asset Management
Pre-tax profit in 2002 was CHF 187 million, down 33% from 2001. The declines in equity markets
throughout 2002 resulted in lower invested asset levels and subsequently, lower asset-based
revenues. This decrease was partially offset by ongoing initiatives to control costs.
Business Group reporting
CHF million, except where indicated
For the year ended
Institutional fees
Wholesale Intermediary 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
KPIs
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) 6
Wholesale Intermediary
Invested assets (CHF billion)
Net new money (CHF billion) 4
Gross margin on invested assets (bps) 6
31.12.02
31.12.01
31.12.00
% change from
31.12.01
899
1,054
1,953
946
513
37
270
1,766
187
457
90
77
2793
(0.6)
29
2783
(1.8)
34
1,174
1,044
2,218
1,038
569
46
286
1,939
279
565
87
75
328
6.2
37
344
28.7
32
1,242
836
2,078
941
434
49
267
1,691
387
654
81
69
323
(70.8)5
38
319
2.95
36
(23)
1
(12)
(9)
(10)
(20)
(6)
(9)
(33)
(19)
(15)
(22)
(19)
6
Additional information
As at
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted
Headcount (full-time equivalents)
31.12.02
31.12.01
31.12.00
% change from
31.12.01
557
1,750
447
3,346
672
1,850
3,281
1,550
2,860
(17)
(5)
2
1 Excludes the amortization of goodwill and other intangible assets.
3 In the second quarter 2002
invested assets of CHF 7.7 billion were transferred from Mutual Funds (now renamed Wholesale Intermediary). Prior years are shown according
5 Calculated using the former definition of assets under management.
to the old classification.
6 Income / average invested assets.
7 For informational purposes only. These pre-tax amounts have not been recorded in the Income statement.
For details on the fair value calculation, refer to Note 32e to the Financial Statements.
4 Excludes interest and dividend income.
2 Operating expenses / operating income.
John A. Fraser
Chairman and CEO
UBS Global Asset Management
52
Components of Operating Income
UBS Global Asset Management generates its revenue
from the asset management services it provides to institu-
tional and wholesale intermediary clients. Fees charged to
institutional clients and wholesale intermediary clients are
based on the market value of invested assets and on suc-
cessful investment performance. As a result, UBS Global
Asset Management’s revenues are affected by changes in
market and currency valuation levels as well as flows of
client funds, and relative investment performance.
Significant financial events
There were no significant financial events that
affected this Business Group in 2002, 2001 or
2000.
2002
Key performance indicators
For 2002, the pre-goodwill cost/income ratio was
77%, up 2 percentage points from a year earlier.
The increase was primarily due to lower invested
asset values, which resulted in lower asset-based
revenues. Those developments, however, were
partially offset by lower operating expenses
prompted by ongoing initiatives to control costs.
Pre-goodwill cost/income ratio (%)
80
70
60
50
40
0
0
0
2
1
0
0
2
2
0
0
2
Net new money; Institutional (CHF billion)
0
0
0
2
1
0
0
2
2
0
0
2
10
0
–10
–20
–30
–40
–50
–60
–70
–80
Full-year gross margin was 29 basis points, a
decrease of 8 basis points from 2001 due to lower
performance fees and a lower proportion of
assets in alternative investments.
Gross margin on invested assets; Institutional (bps)
40
35
30
25
20
15
10
5
0
0
0
0
2
1
0
0
2
2
0
0
2
Institutional
Institutional invested assets, at CHF 279 billion
on 31 December 2002, declined 15% from their
level on 31 December 2001. The decrease in
assets was due to the decline seen in financial
markets during the year as well as the drop of the
US dollar against the Swiss franc over the year.
For full-year 2002, the outflow of net new
money was CHF 0.6 billion. This is a disap-
pointing figure compared to the net new money
inflow of CHF 6.2 billion recorded in 2001.
Strong inflows into equity mandates were more
than offset by outflows from alternative asset
and fixed income mandates.
Wholesale Intermediary
Invested assets stood at CHF 278 billion on 31 De-
cember 2002, down from CHF 344 billion on
31 December 2001. The decline was primarily
the result of negative currency impacts and
declining markets as well as slightly negative net
new money.
For full-year 2002, the outflow of net new
money was CHF 1.8 billion compared to an
inflow of CHF 28.7 billion in 2001. The outflow
was largely due to CHF 7.0 billion in money
market funds, primarily in the Americas. Inflows
of CHF 3.2 billion into equity and private mar-
ket mandates globally in all business areas as
well as an inflow of CHF 3.0 billion into alter-
53
Review of Business Group Performance
UBS Global Asset Management
Net new money; Wholesale Intermediary (CHF billion)
30
25
20
15
10
5
0
–5
0
0
0
2
1
0
0
2
1
0
Q
1
2
0
0
2
native investments, primarily at GAM, largely
offset the outflow.
The gross margin rose to 34 basis points in
2002 from 32 basis points in 2001 as a result of
the asset mix improving towards higher margin
asset classes.
Gross margin on invested assets;
Wholesale Intermediary (bps)
40
35
30
25
20
15
10
5
0
0
0
0
2
1
0
0
2
2
0
0
2
Investment capabilities and performance
Global equity markets ended the year in signi-
ficantly negative territory with the US market,
as measured by the S&P 500, posting its first
consecutive three-year decline since the Second
World War. Markets outside the US have now
fallen further from peak to trough than in their
most significant previous contraction in the
mid-1970s. Contributing to the erosion of
equity values was the investor realization that
any recovery would not be as robust as hoped,
both with regard to economic fundamentals
and earnings.
The majority of UBS Global Asset Manage-
ment funds finished the year strongly, well
above benchmark in the fourth quarter 2002.
The Global Equity Composite led the way, beat-
ing MSCI World Equity Free Index benchmark
returns for the year, 3- and 5-year periods by
significant margins. The UK Balanced Equity
portfolio continued to perform well against the
FTSE All-Share Index for the same periods and
our US Equity Composite surpassed the
Wilshire 5000 benchmark by more than 5 per-
centage points in 2002. It also remains ahead of
the benchmark for 3-, and 5-year periods.
Emerging equities also showed good results for
the year and have also outperformed their
benchmark, the MSCI Emerging Equity Markets
Free Index, for each of the past 3- and 5-year
periods as well.
The deteriorating global economy and a
flight to quality by equity investors provided the
backdrop for a rally in the global sovereign
bond market during the year. UBS Global Asset
Management’s Global Bond Composite exceed-
ed the Salomon WGBI index for the year and
the 3-year period as well, but trailed the index
for 5-year annualized returns. The US Bond
Composite also exceeded the Lehman US
Aggregate Index for the 3-, and 5-year periods.
Credit research has been strong, with the Global
Aggregate Composite finishing well ahead of
the Lehman Global Aggregate in 2002, but
Emerging Markets Debt ended the year poorly,
albeit preserving its 3- and 5-year outperfor-
mance against the JP Morgan EMBI Global
index.
Balanced portfolios also fared well this past
year, as exemplified by the Global Multi-Asset
Fund, which outperformed the Multiple Markets
Index by 4.6 percentage points. Security selec-
tion within the component asset classes and cur-
rency strategies favoring the euro at the expense
of the US dollar were primarily responsible. In
the 1-, 3-, and 5-year periods, returns continued
to be significantly ahead of the benchmark.
Results
UBS Global Asset Management reported for
full-year 2002 a pre-tax profit of CHF 187 mil-
lion, a decrease of 33% from 2001’s pre-tax
profit of CHF 279 million. The declines in equity
markets experienced throughout 2002 resulted
in lower invested asset levels and subsequently,
lower asset-based revenues. These develop-
ments were partially offset by ongoing initia-
tives to control costs. Over the year, personnel
expenses decreased due to a decline in incentive
compensation while general and administrative
54
Performance before tax (CHF million)
400
300
200
100
0
e
g
a
r
e
v
A
9
9
0
0
0
2
0
0
Q
2
0
0
Q
3
1
0
0
2
1
0
Q
1
1
0
Q
2
2
0
0
2
1
0
Q
4
expenses fell due to lower IT and premises
expenditures.
Operating income
In full-year 2002, operating income declined
CHF 265 million, or 12%, to CHF 1,953 mil-
lion, primarily due to the declines in financial
markets during the year feeding through to asset-
based revenues and the US dollar’s weakening
against the Swiss franc.
Institutional revenues fell to CHF 899 million
in full-year 2002 from CHF 1,174 million a year
earlier due to the US dollar’s weakening against
the Swiss franc, lower performance fees at
O’Connor, and the effect of market declines on
asset-based revenues.
For full-year 2002, Wholesale Intermediary
revenues, at CHF 1,054 million, increased slightly
from CHF 1,044 million a year earlier due to an
increase in higher margin assets invested with
GAM.
Operating expenses
For full-year 2002, operating expenses declined
to CHF 1,766 million from CHF 1,939 million
a year earlier, primarily due to cost saving initia-
tives.
Personnel expenses were CHF 946 million in
2002, CHF 92 million lower than in 2001,
reflecting lower incentive-based compensation
partially offset by higher severance expenses.
General and administrative expenses fell to
CHF 513 million from CHF 569 million in the
same period, reflecting a weaker US dollar, and
lower project-related expenses.
Over the year, depreciation decreased from
CHF 46 million to CHF 37 million as some assets
became fully depreciated. Amortization declined
CHF 16 million to CHF 270 million, reflecting
the drop in the US dollar against the Swiss franc.
Headcount
Headcount, at 3,346 on 31 December 2002, was
up from 3,281 on 31 December 2001. The
increase of 2% primarily reflects additional
headcount at GAM and a reclassification from
contractors to employees at O’Connor.
Headcount (full-time equivalents)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
(in thousands)
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
2001
Key performance indicators
Invested assets increased 5% during the year
from CHF 642 billion on 31 December 2000 to
CHF 672 billion on 31 December 2001. Net
new money was CHF 34.9 billion for the year,
reflecting the recognition of strong relative
investment performance and business develop-
ment efforts. The pre-goodwill cost/income
ratio rose from 69% in 2000 to 75% in 2001,
principally reflecting the higher cost/income
ratio of the Brinson Advisors (now rebranded
UBS Global Asset Management) business trans-
ferred from UBS PaineWebber at the start of the
year.
Institutional
Institutional invested assets increased from
CHF 323 billion on 31 December 2000 to CHF
328 billion on 31 December 2001. This 2%
increase was due to CHF 6.2 billion in net new
money and a CHF 34 billion increase in invested
assets from the acquisition of RT Capital (now
rebranded UBS Global Asset Management)
which more than offset negative market per-
formance.
Net new money in 2001 was CHF 6.2 billion,
a great improvement from the net outflows of
CHF 70.8 billion in 2000, as clients start to rec-
ognize the success of our integrated global invest-
55
Review of Business Group Performance
UBS Global Asset Management
ment management platform, which delivered
strong relative investment performance in both
2001 and 2000.
Full-year gross margin was 37 basis points, a
decrease of 1 basis point from 2000, primarily
due to lower performance fees in O’Connor
and the addition of the lower margin Brinson
Advisors business.
Wholesale Intermediary
Wholesale Intermediary’s invested assets in-
creased 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,
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.
The gross margin in 2001 decreased 4 basis
points to 32 basis points due to the addition of
Brinson Advisors, which has a high proportion of
lower margin money market funds, partially off-
set by the introduction of a new pricing structure
for UBS Investment Funds.
Results
Pre-tax profit of CHF 279 million in 2001 was
28% lower than 2000. Despite market declines
and lower performance fees in the O’Connor
business, income increased as a result of the new
investment funds pricing structure introduced in
2001, the acquisition of RT Capital and the
inclusion of Brinson Advisors. This was more
than offset by higher personnel expenses and
general and administrative expenses driven by
spending on growth initiatives, the integration
of Brinson Advisors and the acquisition of RT
Capital in third quarter.
Operating income
Operating income increased CHF 140 million, or
7%, from 2000 to CHF 2,218 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 RT
Capital. 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 5% in 2001 com-
pared to 2000, to CHF 1,174 million, while
Wholesale Intermediary revenue increased 25%
from 2000 to CHF 1,044 million in 2001.
Operating expenses
Operating expenses increased 15% to CHF
1,939 million in 2001, driven by the addition
of Brinson Advisors and RT Capital.
General and administrative expenses increased
31% from CHF 434 million in 2000 to CHF 569
million in 2001, principally reflecting the addition
of Brinson Advisors.
Personnel expenses increased 10% from CHF
941 million in 2000 to CHF 1,038 million in
2001, again mostly due to the addition of
Brinson Advisors, which more than offset a con-
siderable decline in performance-related com-
pensation.
Depreciation decreased 6% from CHF 49 mil-
lion in 2000 to CHF 46 million in 2001. Amorti-
zation of goodwill and other intangible assets
increased 7% to CHF 286 million in 2001,
reflecting the effect of the acquisition RT Capital.
Headcount
Headcount increased by 421 in 2001, from 2,860
at 31 December 2000 to 3,281 at 31 December
2001, mostly due to the integration of Brinson
Advisors and RT Capital.
56
Review of Business Group Performance
UBS Warburg
UBS Warburg
Corporate and Institutional Clients net profit before tax in 2002, at CHF 3,129 million, was
17% lower than in 2001. Market conditions remained challenging, although our Fixed
Income, Rates and Currencies business held up well. UBS Capital recorded a pre-tax loss of
CHF 1,761 million, with challenging market conditions and a slowdown in corporate activity
leading to deteriorating valuations in all markets and industries.
Business Group reporting
CHF million, except where indicated
For the year ended
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
Business Group performance before tax and goodwill 2
Additional information
Cost / income ratio (%) 3
Cost / income ratio before goodwill (%) 2, 3
Net new money (CHF billion) 4
Invested assets (CHF billion)
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted
31.12.02
31.12.01
31.12.00
% change from
31.12.01
12,498
(128)
12,370
7,878
2,378
382
364
11,002
1,368
1,732
88
85
0.5
3
133
13,100
5825
14,715
(112 )
14,603
8,354
2,650
456
402
11,862
2,741
3,143
81
78
0.1
1
109
14,300
18,240
(243 )
17,997
9,451
2,755
564
192
12,962
5,035
5,227
71
70
1
10,800
(15)
14
(15)
(6)
(10)
(16)
(9)
(7)
(50)
(45)
200
22
(8)
Business Group reporting adjusted for Significant Financial Events
CHF million, except where indicated
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
John P. Costas
Chairman and CEO
UBS Warburg
1
In management accounts, statistically
derived actuarial expected loss adjusted
by deferred releases rather than the
net IFRS actual credit loss is reported
in the Business Groups (see Note 2
to the Financial Statements).
2 Excludes the amortization of goodwill
and other intangible assets.
Income
Credit loss expense 1
3 Operating expenses / operating income
Total operating income
before credit loss expense.
4 Excludes interest and dividend income.
5 For informational purposes only. These
pre-tax amounts have not been recorded
in the Income statement. For details
on the fair value calculation, refer to
Note 32e to the Financial Statements.
6 Excludes significant financial events:
Personnel expenses, CHF 86 million,
General and administrative expenses,
CHF 13 million and Depreciation, CHF
7 million (all PaineWebber integration
costs).
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
Additional information
Cost / income ratio (%) 3
Cost / income ratio before goodwill (%) 2, 3
12,498
(128)
12,370
7,878
2,378
382
364
11,002
1,368
1,732
88
85
14,715
(112 )
14,603
8,354
2,650
456
402
11,862
2,741
3,143
81
78
18,240
(243 )
17,997
9,3656
2,7426
5576
192
12,856
5,141
5,333
70
69
(15)
14
(15)
(6)
(10)
(16)
(9)
(7)
(50)
(45)
57
Review of Business Group Performance
UBS Warburg
Corporate and Institutional Clients
Business Unit reporting
CHF million, except where indicated
For the year ended
Investment Banking 1
Equities
Fixed Income, Rates and Currencies 2
Non-core business
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 6
KPIs
Compensation ratio (%) 7
Cost / income ratio (%) 8
Cost / income ratio before goodwill (%) 6, 8
Non-performing loans / gross loans outstanding (%)
Impaired loans / gross loans outstanding (%)
Average VaR (10-day 99%)
31.12.02
31.12.01
31.12.00
% change from
31.12.01
1,915
5,625
6,490
70
14,100
(128)
13,972
7,784
2,314
381
364
10,843
3,129
3,493
55
77
74
1.6
3.2
275
2,541
6,422
6,350
274
15,587
(112 )
15,475
8,258
2,586
454
402
11,700
3,775
4,177
53
75
72
2.6
5.4
252
2,700
10,300
4,590
280
17,870
(243 )
17,627
9,2235
2,6955
5555
190
12,663
4,964
5,154
52
71
70
2.8
5.6
242
(25)
(12)
2
(74)
(10)
14
(10)
(6)
(11)
(16)
(9)
(7)
(17)
(16)
9
Additional information
As at or for the year ended
Deferred releases included in credit loss expense 3
Regulatory equity allocated (average)
Fair value of employee stock options granted
Headcount (full-time equivalents)
31.12.02
31.12.01
31.12.00
(2)
12,550
5679
15,964
38
13,600
36
10,250
15,562
15,262
% change from
31.12.01
(8)
3
2 Formerly Fixed Income and Foreign Exchange.
3 In management accounts, statistically derived actuarial
1 Formerly Corporate Finance.
expected loss adjusted by deferred releases rather than the net IFRS actual credit loss is reported in the Business Groups (see Note 2 to the
Financial Statements). Deferred releases represent amortization of historical differences between actual credit losses and actuarial expected loss
4 Includes retention payments in respect of the
(for more information, please refer to pages 39 and 40 of the UBS Financial Report 2002).
PaineWebber acquisition. 2002: CHF 54 million, 2001: CHF 46 million, 2000: CHF 11 million 5 Excludes significant financial events: Personnel
expenses, CHF 86 million, General and administrative expenses, CHF 13 million and Depreciation, CHF 7 million (all PaineWebber integration
7 Personnel expenses/operating income before credit loss expense.
costs).
8 Operating expenses/operating income before credit loss expense.
9 For informational purposes only. These pre-tax amounts have not been
recorded in the Income statement. For details on the fair value calculation, refer to Note 32e to the Financial Statements.
6 Excludes the amortization of goodwill and other intangible assets.
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 adjusted business unit results on the
previous page. The amounts involved were per-
sonnel expenses of CHF 86 million, general and
administrative expenses of CHF 13 million, and
depreciation of CHF 7 million.
There were no significant financial events that
affected this business unit in 2002 or 2001. The
results in the discussion below exclude significant
financial events.
2002
Key performance indicators
Our performance in 2002 reflects the worldwide
downturn in market conditions. However, as a
result of our strong client franchise and continu-
ing efforts to manage costs, results have proven
relatively resilient.
We continue to maintain a tight focus on cost
management in light of the current operating
environment. Over the full year, the pre-goodwill
cost/income ratio increased slightly to 74% from
72% in 2001.
Pre-goodwill cost/income ratio (%)
Our compensation ratio in 2002 was 55%, a
slight increase on the 53% recorded in 2001,
reflecting the relatively strong performance of
many of our businesses compared to competitors
and to market conditions.
Compensation ratio (%)
60
55
50
45
40
0
0
0
2
1
0
0
2
2
0
0
2
Average Value at Risk (VaR) for Corporate
and Institutional Clients increased from CHF
252 million in 2001 to CHF 275 million in 2002,
remaining within the normal ranges.
Average VaR (10-day 99%)
300
250
200
150
100
50
0
0
0
0
2
1
0
0
2
2
0
0
2
0
0
0
2
1
0
0
2
2
0
0
2
Total loans increased by 2% from CHF 61 bil-
lion on 31 December 2001 to CHF 62 billion on
31 December 2002, due to an increase in short-
term money market deposits although this was par-
tially offset by repayments from European multi-
59
80
75
70
65
60
55
50
Review of Business Group Performance
UBS Warburg
nationals, reflecting the continued reduction of our
non-core commercial lending activities as well as
the drop in the US dollar against the Swiss franc.
Continued successful recovery efforts led the
ratio of impaired loans to total loans to fall from
5.4% on 31 December 2001 to 3.2% at the end
of 2002. The non-performing loans to total loans
ratio declined from 2.6% to 1.6% over the
same period.
Impaired loans/gross loans (%)
6
5
4
3
2
1
0
Results
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
UBS Warburg’s Corporate and Institutional
Clients business unit reported 2002 pre-tax prof-
it of CHF 3,129 million, a decrease of 17% from
2001, reflecting difficult economic conditions,
particularly for the investment banking and equi-
ties businesses. This was partially offset by the
strong result of our fixed income, rates and cur-
rencies business. Over the full year, overall
expenses dropped by 7% reflecting lower per-
sonnel expenses driven by a reduction in incen-
tive compensation as well as the success of our
continued cost containment initiatives.
Performance before tax (CHF million)
5000
4000
3000
2000
1000
0
0
0
0
2
1
0
0
2
2
0
0
2
Operating income
Full-year revenues of CHF 14,100 million were
10% lower than in 2001.
Investment Banking revenues for the full-year
dropped by 25% from CHF 2,541 million to
CHF 1,915 million in 2002, due to much lower
corporate activity, which translated into a 22%
drop in the global fee pool compared to 2001.
Equities revenues for the full-year were also
lower than in 2001, down from CHF 6,422 mil-
lion to CHF 5,625 million, reflecting falling
indices worldwide and much lower market activ-
ity. Full-year primary revenues remained flat,
because of market share gains in the US and in
Asia, which compensated for the drop in overall
market activity.
Over the full year Fixed Income, Rates
and Currencies revenues increased 2% to CHF
6,490 million, primarily due to substantial
growth in our Emerging Markets and Principal
Finance businesses, offset by reductions in our
Interest Rates and Foreign Exchange business
lines. Revenues related to gains in credit default
swaps economic hedging credit exposures in the
loan book also positively impacted the result.
Our foreign exchange business increased vol-
umes and spreads compared to 2001.
Non-core revenues in 2002, at CHF 70 mil-
lion, were 74% lower than in 2001 reflecting our
continued reduction of our non-core lending
portfolio.
Income by business area (CHF million)
20
15
10
5
0
2000
2001
2002
Equities
Investment Banking
Non-core business
Fixed Income, Rates and Currencies
Operating expenses
Total operating expenses dropped by 7% from
2001 to CHF 10,843 million in 2002. The under-
lying decline in 2002 is even more marked than
these figures would suggest as the 2002 results
include a provision of CHF 90 million (USD
65 million) for the US equity research settlement
and a CHF 72 million charge for the restructuring
of our Energy trading business. The significant
60
underlying reduction of 9% from last year’s
expense levels reflects the continuing success of
our cost containment initiatives accentuated by
the drop of the US dollar against the Swiss franc.
In total, personnel expenses in 2002, at CHF
7,784 million, were CHF 474 million or 6%
lower than 2001, mainly driven by a reduction
in incentive compensation in line with lower
revenues and the weaker US dollar.
Full-year general and administrative expenses
were CHF 2,314 million in 2002, down 11%
from 2001’s CHF 2,586 million, as cost saving
programs implemented during the course of 2002
helped to lower IT and other costs, particularly
travel, advertising costs and professional fees.
In full-year 2002, depreciation declined to
CHF 381 million from CHF 454 million a year
earlier, reflecting our cost control initiatives,
which helped to lower charges for new computer
workstations and other IT-related equipment.
Amortization of goodwill and other intangibles
fell 9% for the full-year, reflecting the fact that
various assets became fully amortized in 2002.
Headcount
Headcount, at 15,964 on 31 December 2002,
increased by 402 or 3% from 31 December 2001
reflecting the expansion in our fixed income,
rates and currency area (which includes UBS
Warburg Energy) as well as the transfer of the
prime brokerage and Australian private clients
businesses from UBS PaineWebber.
Headcount (full-time equivalents)
revenues, looking at both personnel costs and
non-personnel costs on this basis.
The pre-goodwill cost/income ratio of 72% in
2001, was up slightly from 70% in 2000 as a
result of the reduced revenues in difficult market
conditions. The ratio of personnel costs to
income was 53% in 2001, only a slight increase
on the 52% recorded in 2000, comparing favor-
ably with our peer group.
Average VaR for Corporate and Institutional
Clients increased only slightly from CHF 242
million in 2000 to CHF 252 million in 2001. In
general, market risk exposures 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 trans-
actions. The need for a temporary increase in
limits was anticipated and pre-approved by the
Group Executive Board. The trades were success-
fully executed and the risk reduced to normal
levels.
Total loans decreased by 18% from CHF
74 billion at 31 December 2000 to CHF 61 bil-
lion at 31 December 2001, due to a reduction in
Japanese government exposures, and repayments
from European multinationals, reflecting the
continued reduction of our commercial lending
risk profile.
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.
(in thousands)
Results
17
16
15
14
13
12
11
10
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
2001
Key performance indicators
Corporate and Institutional Clients measures its
expense base primarily in terms of percentage of
We recorded a strong performance in 2001,
relative to the much weaker markets this year.
Pre-tax profit in 2001 was CHF 3,775 million, a
decline of 24% over 2000, our best year ever.
Equities and Investment Banking both suffered
from the economic downturn and the consequent
weakness in their global markets, while the Fixed
Income, Rates and Currencies business delivered
record results, driven by interest rate reductions
and increased volatility, and supported by the
expansion of businesses acquired from Paine-
Webber. Investment Banking continued to out-
perform 2000 in terms of market share, with full-
year analysis showing us with a 4.4% share of
fees, compared to 3.6% in 2000.
61
Review of Business Group Performance
UBS Warburg
Operating income
Operating income of CHF 15,475 million in
2001 was 12% lower than in 2000.
Investment Banking revenues were CHF
2,541 million in 2001, 6% lower than in 2000, as
our improved share of fees in 2001 was more
than offset by the general contraction experi-
enced in corporate finance in 2001.
Equities revenues for 2001 were also lower
than in 2000, down 38% from CHF 10,300
million to CHF 6,422 million in 2001. This
decline principally reflects reduced trading rev-
enues, driven by the lack of mergers and acqui-
sitions 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.
Fixed Income, Rates and Currencies per-
formed very strongly in 2001, with revenues up
38% from 2000, at CHF 6,350 million. This
reflects the effect of interest rate reductions,
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 274 million.
Operating expenses
Personnel expenses declined 10%, from CHF
9,223 million in 2000 to CHF 8,258 million in
2001, driven by reductions in incentive com-
pensation in line with labor market conditions
and full-year results.
General and administrative expenses in 2001
were 4% lower than in 2000, at CHF 2,586 mil-
lion, reflecting the impact of cost control meas-
ures put in place during 2001. (Fourth quarter
2001 general and administrative expenses were
27% 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 intan-
gibles increased by CHF 212 million to CHF
402 million in 2001 mainly driven by additional
goodwill amortization due to the acquisition of
PaineWebber.
Headcount
Headcount at 31 December 2001 remained little
changed, at 15,562 compared to 15,262 at the
end of 2000. We did not engage in widespread
headcount reductions that might have had a long-
term detrimental impact on our client franchises,
but upgraded staff quality in selected areas.
62
UBS Capital
Business unit reporting
CHF million, except where indicated
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
Total operating income
(1,602)
(872 )
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
94
64
1
0
159
96
64
2
0
162
(1,761)
(1,761)
(1,034 )
(1,034 )
370
142
47
2
2
193
177
179
(84)
(2)
0
(50)
(2)
(70)
(70)
KPIs
Value creation (CHF billion)
(1.4)
(1.4 )
0.6
0
As at
Investment (CHF billion) 2
Additional information
As at
Portfolio fair value (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted
Headcount (full-time equivalents)
31.12.02
31.12.01
31.12.00
% change from
31.12.01
3.1
5.0
5.5
(38)
31.12.02
31.12.01
31.12.00
% change from
31.12.01
3.8
550
153
73
5.6
700
128
6.9
550
129
(32)
(21)
(43)
1 Excludes the amortization of goodwill and other intangible assets.
2 Historic cost of investments made, less divestments and impairments.
3 For informational purposes only. These pre-tax amounts have not been recorded in the Income statement. For details on the fair value calcu-
lation, refer to Note 32e to the Financial Statements.
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. Writedowns 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 2002, 2001 or 2000.
2002
Key performance indicators
The level of our private equity investments was
CHF 3.1 billion on 31 December 2002, a decline of
38% from CHF 5.0 billion on 31 December 2001.
This reduction reflects writedowns made on direct
investments and third party funds, as well as suc-
cessfully executed exits. In full-year 2002, write-
downs included in operating income totaled CHF
1.7 billion, up from CHF 1.1 billion a year earlier.
Investment (CHF billion)
6
5
4
3
2
1
0
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
Results
Full-year results for UBS Capital reflect continued
tough economic conditions, impacting private
equity valuations across a range of sectors, a fac-
tor that was compounded by the prolonged down-
turn suffered by all major equity markets. The
challenging economic environment has adversely
affected many of the companies in the portfolio
while the continued hostile climate for divest-
ments has restricted capital gains from exit oppor-
tunities. Against this background, UBS Capital
posted a pre-tax loss in 2002 of CHF 1,761 mil-
lion, CHF 727 million worse than in 2001.
Total operating income for 2002 was negative
CHF 1,602 million, compared to negative CHF
872 million in 2001. Challenging economic con-
ditions have led to deteriorating valuations in all
markets and industries. The level of writedowns
in the portfolio has therefore been high and there
have been few opportunities to make significant
divestments in 2002.
Personnel expenses in 2002 were CHF 94 mil-
lion, down from CHF 96 million in 2001. This
reflects falling headcount and lower perform-
ance-related incentive payments. General and
administrative expenses remained unchanged at
CHF 64 million.
Performance before tax (CHF million)
The fair value of the portfolio on 31 Decem-
ber 2002 was CHF 3.8 billion, down from CHF
5.6 billion on 31 December 2001, reflecting
divestments in the portfolio and value reductions
for existing investments. The level of net unre-
alized gains was CHF 0.8 billion on 31 Decem-
ber 2002, up from CHF 0.6 billion on 31 Decem-
ber 2001.
250
0
–250
–500
–750
–1000
–1250
–1500
–1750
–2000
0
0
0
2
1
0
0
2
2
0
0
2
Value creation (CHF billion)
0
0
0
2
1
0
0
2
2
0
0
2
0.8
0.4
0.0
–0.4
–0.8
–1.2
–1.6
2001
Full-year results for UBS Capital reflect the
very challenging market in 2001, with few
opportunities for divestments, and writedowns
of several investments as a result of the prob-
lems caused for some of our investment compa-
nies by the deteriorating economic conditions.
The pre-tax loss for 2001 was CHF 1,034 mil-
lion, compared to a pre-tax profit of CHF 177
million in 2000.
64
Key performance indicators
Results
UBS Capital’s private equity investments de-
creased to CHF 5.0 billion on 31 December 2001
from CHF 5.5 billion at the end of 2000, with the
decline due to writedowns on the book value of
investments, as well as a small number of divest-
ments during the year, which more than offset
drawdowns of previously committed investments
and the low level of other new investments dur-
ing the year.
The fair value of the portfolio at the end of
December 2001 was CHF 5.6 billion, down 19%
from CHF 6.9 billion on 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.
UBS Capital recorded an operating loss of CHF
872 million in 2001, compared to operating
income of CHF 370 million in 2000. Challenging
markets and the continued slowdown in corpo-
rate activity meant that there were few opportu-
nities for significant divestments in 2001, while
weak economic conditions led to deteriorating
valuations across a range of industry sectors,
resulting in a high level of writedowns of invest-
ments in the portfolio.
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 64 million, up from CHF 47 million in
2000, due principally to professional fees relating
to our strategic review of the business.
65
Review of Business Group Performance
UBS PaineWebber
UBS PaineWebber
UBS PaineWebber’s pre-tax loss adjusted for SFEs in 2002 was CHF 566 million, with the
depreciation of the US dollar against the Swiss franc weighing on results. Excluding acqui-
sition costs, operating pre-tax profit was CHF 632 million compared to CHF 693 million a year
earlier.
Joseph J. Grano, Jr.
Chairman and CEO, UBS PaineWebber
Business Group reporting1
CHF million, except where indicated
For the year ended
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 Group performance before tax
Business Group performance before tax and goodwill 4
Business Group performance before tax
and acquisition costs 12
Mark B. Sutton
President and Chief Operating Officer
UBS PaineWebber
KPIs
Invested assets (CHF billion)
Net new money (CHF billion) 5
Interest and dividend income (CHF billion) 7
Cost / income ratio (%) 8
Cost / income ratio before goodwill (%) 4, 8
Recurring fees 9
Financial advisors (full-time equivalents)
31.12.02
31.12.01
31.12.00
% change from
31.12.01
5,561
(13)
5,548
4,245
1,263
149
1,691
7,348
(1,800)
(109)
632
584
18.5
17.9
132
102
2,199
8,857
6,391
(18 )
6,373
5,019
1,441
124
502
7,086
(713 )
(211 )
693
769
33.2
21.5
111
103
2,366
8,718
1,214
(3 )
1,211
1,098
344
42
84
1,568
(357 )
(273 )
(72 )
765
14.56
129
122
434
8,731
(13)
(28)
(13)
(15)
(12)
20
237
4
152
(48)
(9)
(24)
(17)
(7)
2
Additional information
As at
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted
Headcount (full-time equivalents)
31.12.02
31.12.01
31.12.00
650
7,450
7310
19,563
841
8,550
9,200
20,413
21,567
% change from
31.12.01
(23)
(13)
(4)
66
Business Group reporting adjusted for Significant Financial Events
CHF million, except where indicated
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
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 Group performance before tax
Business Group performance before tax and goodwill 4
Business Group performance before tax
and acquisition costs 12
KPIs
Gross margin on invested assets (bps) 13
Gross margin on invested assets before
acquisition costs (bps) 12, 13
Cost / income ratio (%) 8
Cost / income ratio before goodwill (%) 4, 8
Cost / income ratio before acquisition costs (%) 8, 12
5,561
(13)
5,548
4,245
1,263
149
45711
6,114
(566)
(109)
632
82
88
110
102
89
6,391
(18 )
6,373
5,019
1,441
124
502
7,086
(713 )
(211 )
693
84
90
111
103
90
1,214
(3 )
1,211
1,098
344
42
84
1,568
(357 )
(273 )
(72 )
67
71
129
122
105
(13)
(28)
(13)
(15)
(12)
20
(9)
(14)
(21)
(48)
(9)
(2)
(2)
4 Excludes the amortization of goodwill and other intangible assets.
6 Calculated using the former definition of assets under management.
1 Business Groups results include PaineWebber from the date of acquisition, 3 November 2000.
2 In management accounts, statistically derived
actuarial expected loss adjusted by deferred releases rather than the net IFRS actual credit loss is reported in the Business Groups (see Note 2 to
3 Includes retention payments in respect of the PaineWebber acquisition. 2002: CHF 351 million, 2001: CHF 436 mil-
the Financial Statements).
5 Excludes the interest and dividend income
lion, 2000: CHF 117 million.
7 For purposes of comparison with US peers.
noted below.
9 Asset-based and advisory revenues including fees from mutual funds,
8 Operating expenses / operating income before credit loss expense.
10 For informational purposes only.
wrap fee products and insurance products. Comparative amounts for 2001 and 2000 have been restated.
These pre-tax amounts have not been recorded in the Income statement. For details on the fair value calculation, refer to Note 32e to the
12 Acquisition costs
11 Excludes significant financial event: Writedown of PaineWebber brand of CHF 1,234 million.
Financial Statements.
include goodwill and intangible asset amortization and related funding, net of risk-free return on the corresponding equity allocated, and reten-
tion payments.
13 Income / average invested assets.
Components of Operating Income
UBS PaineWebber principally derives its operating income
from:
– fees for financial planning and wealth management
services
– fees for discretionary management services and
– transaction-related fees.
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, change in market condi-
tions, investment performance and inflows and outflows
of client funds, and investor activity levels.
67
Review of Business Group Performance
UBS PaineWebber
Significant financial events
The pre-tax non-cash writedown of CHF 1,234
million for the value of the PaineWebber brand
that was held as an intangible asset on our bal-
ance sheet was treated as a significant financial
event in 2002 and is therefore not reflected in the
adjusted Business Group results on the previous
page. The writedown followed a strategic deci-
sion announced in November 2002 to move all
our businesses to the single UBS brand. The new
brand structure will be implemented in June 2003.
There were no significant financial events that
affected this Business Group in 2001 or 2000.
The results in the discussion below exclude sig-
nificant financial events.
PaineWebber
UBS PaineWebber became part of UBS following
the merger between UBS and Paine Webber Group,
Inc., which was completed on 3 November 2000.
At the merger, it became a business unit of UBS
Warburg. On 1 January 2002, UBS PaineWebber
became a separate Business Group within UBS.
The merger was accounted for using purchase
accounting, so the results shown for UBS Paine-
Webber for 2000 reflect the inclusion of the
PaineWebber businesses only for the period from
3 November 2000 until 31 December 2000.
Results for 2001 and 2002 reflect a full-year’s
contribution.
2002
Key performance indicators
At the end of 2002, UBS PaineWebber had
CHF 584 billion in invested assets, compared to
CHF 769 billion on 31 December 2001. This
decline of 24% was partly due to the effect of the
Invested assets (CHF billion)
800
700
600
500
400
300
200
100
0
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
US dollar’s weakening against the Swiss franc.
Excluding the impact of currency fluctuations,
invested assets fell 8% during the year, mainly
due to US equity market declines although that
was partially offset by net new money inflows.
Net new money in 2002 was CHF 18.5 billion,
44% below the CHF 33.2 billion result reported
for 2001. The decline reflects weaker investor
sentiment, as well as the closure of the Japanese
domestic private client business, resulting in out-
flows of approximately CHF 1.6 billion.
Net new money (CHF billion) 1
35
30
25
20
15
10
5
0
0
0
0
2
1
0
0
2
2
0
0
2
1 Includes PaineWebber from the date of acquisition on 3 November 2000.
The gross margin on invested assets was 82
basis points for full-year 2002, down from 84 basis
points in 2001. The gross margin on invested assets
before acquisition costs (goodwill, net funding
costs and retention payments) was 88 basis points,
down from 90 basis points in 2001. Revenues
declined more than invested assets due to lower
customer activity levels. This was partially offset by
higher revenues from our municipal securities busi-
ness which had a record result in 2002.
The cost/income ratio before acquisition costs
was 89% for full-year 2002, compared to 90% in
2001. The improvement in the cost/income ratio
Gross margin on invested assets
before acquisition costs (bps) 1
100
80
60
40
0
0
0
2
1
0
0
2
2
0
0
2
1 Includes PaineWebber from the date of acquisition on 3 November 2000.
68
is a direct result of cost management initiatives
implemented in 2002, among them reductions in
non-financial advisor headcount, professional
fees, advertising and office-related costs.
Cost/income ratio before acquisition costs (%) 1
110
100
90
80
0
0
0
2
1
0
0
2
2
0
0
2
1 Includes PaineWebber from the date of acquisition on 3 November 2000.
In 2002, recurring fees were CHF 2,199 mil-
lion compared to CHF 2,366 million a year
earlier because of the weakening of the US dol-
lar against the Swiss franc. Excluding currency
translation effects, recurring fees rose 2% in
2002 from a year earlier. The increase is due to
higher account-based fees and higher recurring
fees in the municipal securities business. These
increases were offset by lower asset-based fees,
which fell in line with the decline in asset levels.
Recurring fees (CHF million) 1
2500
2000
1500
1000
500
0
0
0
0
2
1
0
0
2
2
0
0
2
We continue to invest in our distribution
channels and advisory personnel. In 2002, the
number of financial advisors rose by 139 from
8,718 to 8,857 with recruiting and retention
success partially offset by higher attrition rates
among less experienced and less productive
financial advisors.
Results
In 2002, political, economic and financial uncer-
tainty continued to adversely affect investor activ-
ity. The UBS Index of Investor Optimism dropped
significantly during 2002, reached an all-time low
in October and only slightly recovered by the end
of the year. Daily average client transaction vol-
umes were 10% lower than in 2001.
Because our business is almost entirely con-
ducted in US dollars, comparisons of 2002
results to 2001 are affected by the depreciation of
the US dollar versus the Swiss franc.
Over the full year, UBS PaineWebber reported a
pre-tax loss of CHF 566 million in 2002 compared
to a loss of CHF 713 million in 2001. Performance
before tax and acquisition costs showed a profit of
CHF 632 million in 2002 compared to CHF 693
million a year earlier. Excluding the effects of cur-
rency movements, 2002 performance before tax
and acquisition costs was 3% higher than in 2001.
Despite a decline in transactional revenues and
lower asset-based revenues following further
market drops, strict cost management discipline
enabled us to improve our full-year operating
performance. Excluding the USD 15 million (CHF
21 million) equity research settlement charge, full-
year results in USD terms would have improved by
6% over 2001. On a US dollar basis, performance
was the third best ever for our US private clients
business behind 1999 and 2000.
1 Includes PaineWebber from the date of acquisition on 3 November 2000.
Performance before tax and
acquisition costs (CHF million) 1
Financial advisors (full-time equivalents)
9000
8500
8000
7500
7000
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
800
600
400
200
0
–200
0
0
0
2
1
0
0
2
2
0
0
2
1 Includes PaineWebber from the date of acquisition on 3 November 2000.
69
Review of Business Group Performance
UBS PaineWebber
Operating income
For full-year 2002, total operating income was
CHF 5,548 million, compared to CHF 6,373 mil-
lion in 2001. Excluding the effects of currency
translation, operating income declined approxi-
mately 5% from 2001. This decline in operating
income is attributable to lower asset-based fees, a
drop in levels of customer activity, lower margin
lending, the transfer of prime brokerage business
to UBS Warburg and the closure of the Japanese
domestic private client business. These declines
were partially offset by increased revenues in
the municipal securities business, which had a
record year.
Operating expenses
Total operating expenses fell 14% to CHF 6,114
million in 2002 from CHF 7,086 million in 2001.
Excluding the effects of the weaker US dollar
against the Swiss franc, operating expenses
declined 5% from 2001, reflecting lower per-
formance-driven compensation and lower reten-
tion expenses. In addition, cost management ini-
tiatives implemented during the course of 2002,
the transfer of the prime brokerage business to
UBS Warburg and the closure of the Japanese
domestic private client businesses helped to
reduce overall expenses.
Personnel expenses dropped 15% from CHF
5,019 million in 2001 to CHF 4,245 million in
2002. Excluding the effects of currency transla-
tion, personnel expenses were 7% lower than
2001, reflecting lower performance-driven com-
pensation due to a decline in revenues, a fall in
non-financial advisor headcount, the transfer of
the prime brokerage business to UBS Warburg,
the closure of the Japanese domestic private
client business and lower retention expenses.
General and administrative expenses fell 12%
from CHF 1,441 million in 2001 to CHF 1,263
million in 2002. Excluding the impact of the falling
US dollar against the Swiss franc, general and
administrative expenses dropped by 4% compared
to 2001 due to the cost management initiatives
implemented during the course of 2002, reducing
our professional fees, advertising, travel and other
office-related costs. In addition, general and
administrative expenses were reduced by the trans-
fer of prime brokerage business to UBS Warburg
and the closure of the Japanese private client busi-
nesses. This was partially offset by the equity
research settlement charge of CHF 21 million.
Depreciation increased CHF 25 million to
CHF 149 million in 2002 from CHF 124 million
in 2001. Excluding currency movements, the
increase in depreciation of 32% was due to
higher technology equipment charges. Goodwill
and other intangible amortization dropped from
CHF 502 million in 2001 to CHF 457 million in
2002 as a result of the weakening US dollar
against the Swiss franc.
Headcount
UBS PaineWebber’s headcount decreased 4% dur-
ing the year to 19,563 reflecting our continued
cost management initiatives. Non-financial advi-
sor headcount was down by 989 or 8% compared
to end of 2001. Further, we closed our Japanese
domestic private client business and transferred
the prime brokerage business to UBS Warburg. At
the same time we expanded our financial advisor
headcount by 139, reflecting our continued aim
to extend the reach of our business.
Headcount (full-time equivalents)
(in thousands)
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
23
22
21
20
19
18
2001
Comparisons of full-year 2001 results to full-
year 2000 reflect the very different scale of this
Business Group prior to the acquisition of Paine-
Webber in November 2000.
Key performance indicators
At the end of 2001, UBS PaineWebber had CHF
769 billion of invested assets, compared to CHF
765 billion at 31 December 2000, a change of 1%,
with negative market performance during the year
nearly offset by strong net new money flows.
Net new money for the year was CHF 33.2 bil-
lion, compared to CHF 14.5 billion in 2000,
more than half of which was earned in the last
quarter of 2000 after the integration of Paine-
70
Webber. UBS PaineWebber’s 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.
Gross margin on invested assets before acqui-
sition costs (retention payments and goodwill
amortization) increased to 90 basis points, from
71 basis points in 2000, reflecting the addition of
PaineWebber. Gross margin in the pre-existing
business for the nine months to 30 September
2000, before the addition of PaineWebber was 36
basis points. The gross margin fell slightly during
2001, reflecting the effect of uncertain markets
on transaction volumes.
The cost/income ratio before acquisition costs
was 90% in 2001 compared to 105% in 2000.
Until the addition of PaineWebber, the pre-exist-
ing business was loss making, reflecting the rela-
tively 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 the same as in fourth quarter 2000.
Recurring fees were CHF 2,366 million in
2001. This metric was not tracked prior to the
integration of PaineWebber in November 2000.
During 2001, recurring fees declined 6% to CHF
566 million in fourth quarter 2001 compared to
CHF 601 million 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.
At the end of December 2001, UBS Paine-
Webber had 8,718 financial advisors, a number
virtually unchanged from the end of 2000.
Although we continued to recruit and train new
financial advisors in 2001, the difficult market
conditions led to higher turnover amongst the
least productive advisors.
Results
Pre-tax loss for 2001 was CHF 713 million.
Excluding acquisition costs, UBS PaineWebber
posted a profit of CHF 693 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, UBS Paine-
Webber incurred a loss of CHF 357 million –
excluding acquisition costs the loss was CHF
72 million.
Operating income
Operating income for the year was CHF 6,373
million, compared to CHF 1,211 million in
2000. Revenues were resilient during 2001,
declining just 12% from first quarter to fourth
quarter, despite recession and market uncertainty
in the US.
Operating expenses
Total operating expenses were CHF 7,086 million
in 2001 compared to CHF 1,568 million in 2000.
UBS PaineWebber implemented a number of
cost control initiatives in 2001, aimed at reduc-
ing discretionary expenditure and support costs,
while protecting the business’s ability to serve its
clients to the highest standards.
Personnel expenses were CHF 5,019 million
in 2001, compared to CHF 1,098 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 1,296 million in first quarter
to CHF 1,200 million in fourth quarter, reflecting
lower performance-related and variable compen-
sation and a reduction of support headcount.
General and administrative expenses were
CHF 1,441 million in 2001, compared to CHF
344 million in 2000. Cost control efforts drove
expenses down during 2001, with fourth quarter
general and administrative expenses 3% lower
than in first quarter.
Depreciation expenses were CHF 124 million
in 2001, compared to CHF 42 million in 2000,
reflecting the addition of PaineWebber. Amorti-
zation of goodwill and other intangible assets
increased from CHF 84 million to CHF 502 mil-
lion, reflecting the amortization costs due to the
PaineWebber acquisition.
Headcount
Headcount decreased 5% in 2001 from 21,567
at 31 December 2000 to 20,413 at 31 December
2001. We continued to monitor market con-
ditions, but prudent cost control in previous
years meant that we have not needed to make
franchise-threatening cuts to our headcount.
Financial advisor headcount is almost unchanged
from 2000, but we continued to implement effi-
ciency measures to help manage support head-
count downwards.
71
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
31.12.02
31.12.01
31.12.00
% change from
31.12.01
1,387
249
1,636
645
601
473
24
1,743
(107)
(83)
800
236
1,036
592
537
372
24
1,525
(489 )
(465 )
385
1,161
1,546
522
754
320
43
1,639
(93 )
(50 )
73
6
58
9
12
27
0
14
(78)
(82)
Additional information
As at
Regulatory equity allocated (average)
Fair value of employee stock options granted
Headcount (full-time equivalents)
31.12.02
31.12.01
31.12.00
9,400
323
1,185
8,250
1,132
12,300
986
% change from
31.12.01
14
5
Business Group reporting adjusted for Significant Financial Events
CHF million, except where indicated
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
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
1,3154
249
1,564
645
601
473
24
1,743
(179)
(155)
800
236
1,036
592
537
372
24
1,525
(489 )
(465 )
385
1,161
1,546
4905
6045
320
43
1,457
89
132
64
6
51
9
12
27
0
14
(63)
(67)
1 In order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the net IFRS actual credit loss
expenses are reported for all Business Groups. The difference between the adjusted expected loss figures and the net IFRS actual credit loss
2 Excludes the amortization of
expenses recorded at Group level is reported in the Corporate Center (see Note 2 to the Financial Statements).
3 For informational purposes only. These pre-tax amounts have not been recorded in the Income state-
goodwill and other intangible assets.
4 Excludes significant financial event: Income,
ment. For details on the fair value calculation, refer to Note 32e to the Financial Statements.
5 Excludes significant financial events: Personnel expenses, CHF 32 million (PaineWebber
CHF 72 million (Gain on disposal of Klinik Hirslanden).
integration costs); General and administrative expenses, CHF 150 million (Net additional provision relating to the US Global Settlement).
72
Significant financial events
There were no significant financial events in
Corporate Center in 2001.
Operating expenses
Total operating expenses were CHF 1,743 mil-
lion in 2002, 14% higher than in 2001.
Significant financial events booked in Cor-
porate Center in 2002 and 2000 were:
– Operating income of CHF 72 million from the
sale of Klinik Hirslanden in 2002.
– Personnel expenses of CHF 32 million relating
to the integration of PaineWebber into UBS
in 2000.
– General and administrative costs of CHF
150 million in 2000 in connection with the
US Global Settlement of World War II-relat-
ed claims.
None of these events are reflected in the
adjusted Business Group results in the table on
the previous page. The results in the discussion
below exclude significant financial events.
2002
Results
Corporate Center recorded a pre-tax loss of
CHF 179 million in 2002, compared to the pre-
tax loss of CHF 489 million in 2001.
Operating income
UBS Group recorded an actual credit loss of
CHF 206 million in 2002 and CHF 498 million in
2001. The difference between adjusted expected
losses charged to the business units and the actual
credit loss expense recognized in the Group
Financial Statements is booked as credit loss
expense or recovery in the Corporate Center. In
2002, the actual loss was lower than the overall
adjusted credit loss expense charged to the busi-
ness units, resulting in a credit loss recovery in
Corporate Center of CHF 249 million, compared
to a credit loss recovery of CHF 236 million in
2001.
Full-year total operating income increased by
51% from CHF 1,036 million in 2001 to CHF
1,564 million in 2002. This was primarily due to
higher interest income at Group Treasury, gains
from the sale of financial investments and an
unrealized gain on derivatives used to economi-
cally hedge interest rate risk related to structured
notes issued. These developments, however, were
partially offset by writedowns on financial
investments.
Over the full year, personnel expenses in-
creased by 9% from CHF 592 million in 2001 to
CHF 645 million in 2002, mainly reflecting
higher expenses at Klinik Hirslanden, although
that was partially offset by lower performance-
related compensation.
General and administrative expenses for 2002,
at CHF 601 million, were CHF 64 million higher
than in 2001. This was mainly due to higher pro-
visions for legal cases, advertising expenditures
and higher expenses at Klinik Hirslanden.
At CHF 473 million in 2002, depreciation
increased by 27% compared to a year earlier.
This was mainly due to higher software
depreciation which was previously capitalized as
well as higher depreciation levels for Klinik
Hirslanden.
Headcount
Headcount increased 5% during 2002 to 1,185
at 31 December 2002, reflecting hiring in Group
Human Resources and Group Controller areas as
well as transfers of staff from the Business
Groups.
2001
Results
Corporate Center recorded a pre-tax loss of
CHF 489 million in 2001, compared to a pre-tax
profit of CHF 89 million in 2000, adjusted for
significant financial events.
Operating income
The credit loss expense or recovery booked in
Corporate Center represents the difference
between the adjusted expected losses charged to
the business units and the actual credit loss rec-
ognized in the Group income statement. 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 mil-
lion in 2001, compared to a recovery of CHF
1,161 million in 2000.
73
Review of Business Group Performance
Corporate Center
Operating income decreased by CHF 510 mil-
lion from 2000 to CHF 1,036 million in 2001,
principally reflecting the swing in the credit loss
results, offset by higher income from treasury
activities.
Operating expenses
Total operating expenses were CHF 1,525 mil-
lion in 2001, 5% higher than in 2000.
In 2001 personnel expenses were CHF 592 mil-
lion, an increase of 21% compared to 2000,
driven by severance payments and the full-year
cost of senior management and other additional
personnel added through the PaineWebber merger.
General and administrative expenses for 2001,
at CHF 537 million, were CHF 67 million lower
than in 2000. This was due to lower corporate
real estate costs and lower professional fees con-
nected 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.
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 opportu-
nities for work experience overseas.
74
75
76
UBS Group Financial Statements
77
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
Net Interest and Trading Income
Net Fee and Commission Income
Other Income
Personnel Expenses
General and Administrative Expenses
Earnings per Share (EPS) and Shares Outstanding
Balance Sheet: Assets
9a
9b
9c
9d
10
Due from Banks and Loans
Allowances and Provisions for Credit Losses
Impaired Loans
Non-Performing Loans
Securities Borrowing, Securities Lending,
Repurchase and Reverse Repurchase Agreements
Trading Portfolio
Financial Investments
Investments in Associates
Property and Equipment
Goodwill and Other Intangible Assets
Other Assets
11
12
13
14
15
16
Balance Sheet: Liabilities
17
18
19
20
21
22
23
Due to Banks and Customers
Debt Issued
Other Liabilities
Provisions
Income Taxes
Minority Interests
Derivative Instruments
78
80
80
81
82
84
86
86
96
99
100
100
101
101
102
102
103
104
104
105
105
106
107
108
109
110
111
111
113
114
114
114
120
120
120
122
122
Off-Balance Sheet Information
24
25
26
Fiduciary Transactions
Commitments and Contingent Liabilities
Operating Lease Commitments
Additional Information
27
28
29
Pledged Assets
Litigation
Financial Instruments Risk Position
a) Market Risk
Interest Rate Risk
(a)(i) Overview
(a)(ii)
(a)(iii) Currency Risk
(a)(iv) Equity Risk
Issuer Risk
(a)(v)
b) Credit Risk
c)
Liquidity Risk
d) 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
30
31
32
33
34
35
36
37
38
39
40
Report of the Group Auditors
127
127
127
129
130
130
130
130
131
131
131
133
135
135
135
138
139
141
143
147
147
148
149
150
150
151
153
153
157
157
157
160
172
177
79
UBS Group Financial Statements
Financial Statements
Financial Statements
UBS Group Income Statement
CHF million, except per share data
For the year ended
Operating income
Interest income
Interest expense
Net interest income
Credit loss (expense) / recovery
Net interest income after credit loss expense
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)
Basic earnings per share before
goodwill (CHF) 1
Diluted earnings per share (CHF)
Diluted earnings per share before
goodwill (CHF) 1
Note
31.12.02
31.12.01
31.12.00
% change from
31.12.01
3
3
4
3
5
6
7
14
15
21
22
8
8
8
8
39,963
(29,417)
10,546
(206)
10,340
18,221
5,572
(12)
34,121
18,524
7,072
1,521
2,460
29,577
4,544
678
3,866
(331)
3,535
2.92
4.73
2.87
4.65
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
(24)
(33)
31
(59)
37
(10)
(37)
(8)
(7)
(7)
(6)
86
(3)
(32)
(52)
(27)
(4)
(29)
(26)
(5)
(24)
(3)
1 Excludes the amortization of goodwill and other intangible assets.
80
UBS Group Balance Sheet
CHF million
Note
31.12.02
31.12.01
% change from
31.12.01
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
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 1
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
9
10
10
11
23
9
12
13
14
15
16, 21
17
10
10
11
23
17
18
19, 20, 21
4,271
32,468
139,052
294,086
371,436
82,092
211,647
8,391
6,453
705
7,869
13,696
8,952
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
1,181,118
1,253,297
3,652
2,732
83,178
36,870
366,858
106,453
81,282
306,876
15,331
129,411
12,339
106,531
30,317
368,620
105,798
71,443
333,781
17,289
156,218
15,658
1,138,598
1,205,655
22
3,529
4,112
Shareholders’ equity
Share capital
Share premium account
Net gains / (losses) not recognized in the income statement,
net of tax
Retained earnings
Treasury shares
Total shareholders’ equity
1,005
12,638
(159)
32,638
(7,131)
38,991
3,589
14,408
(193 )
29,103
(3,377 )
43,530
Total liabilities, minority interests and shareholders’ equity
1,181,118
1,253,297
Total subordinated liabilities
10,102
13,818
1 The subordinated assets for 2001 have been restated to include the subordinated traded assets of CHF 2,325 million.
(80)
18
(15)
9
(7)
12
(7)
(71)
(15)
1
(9)
(28)
(9)
(6)
34
(22)
22
0
1
14
(8)
(11)
(17)
(21)
(6)
(14)
(72)
(12)
18
12
(111)
(10)
(6)
(27)
81
UBS Group Financial Statements
Financial Statements
UBS Group Statement of Changes in Equity
CHF million
For the year ended
31.12.02
31.12.01
31.12.00
Issued and paid up share capital
Balance at the beginning of the year
Issue of share capital
Capital repayment by par value reduction 1
Cancellation of second trading line treasury shares (2000 Program)
Cancellation of second trading line treasury shares (2001 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)
Cancellation of second trading line treasury shares (2001 Program)
Balance at the end of the year
3,589
6
(2,509)
(81)
1,005
14,408
157
282
(2,209)
12,638
Net gains / (losses) not recognized in the income statement, net of taxes
Foreign currency translation
Balance at the beginning of the year
Movements during the year 2
Subtotal – balance at the end of the year
(769)
(80)
(849)
Net unrealized gains / (losses) on available for sale investments, net of taxes
Balance at the beginning of the year
Change in accounting policy
Net unrealized gains / (losses) on available for sale investments
Impairment charges reclassified to the income statement
Gains reclassified to the income statement
Losses reclassified to the income statement
(144)
635
(600)
20
1,035
Subtotal – balance at the end of the year
946
4,309
135
4,444
12
(683 )
(184 )
3,589
4,444
20,885
80
(239 )
(2,502 )
(3,816 )
14,437
139
(391)
4,198
5,895
(3,393)
14,408
20,885
(687 )
(82 )
(769 )
0
1,5773
(139 )
47
(461 )
11
1,035
(442)
(245)
(687)
(687)
20,327
20,327
7,792
(3,928)
24,191
(8,023)
(16,330)
20,353
(4,000)
44,833
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
Net unrealized gains / (losses) on the revaluation of cash flow hedges
Net (gains) / losses reclassified to the income statement
(11)
214
0
(380)3
(316 )
237
(459)
1 On 16 July 2001, UBS made a distribution
to shareholders 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. On 10 July 2002
UBS made a distribution of CHF 2.00 to
shareholders which reduced the par value
from CHF 2.80 to CHF 0.80.
2
Included are gains and losses from match-
funding of net investments in foreign
entities as follows: CHF 849 million net
gain for 2002 and CHF 43 million net
loss for 2001.
3 Opening adjustments to reflect the
adoption of IAS 39 (see Note 1: Summary
of Significant Accounting Policies).
4 Dividends declared per share were
CHF 1.50 in 2000 and CHF 1.83 in 1999,
both paid in the year 2000.
82
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
Balance at the beginning of the year (restated)
Net profit for the year
Dividends paid 1, 4
(256)
(159)
29,103
29,103
3,535
(459 )
(193 )
24,191
(61)3
24,130
4,973
Balance at the end of the year
32,638
29,103
Treasury shares, at cost
Balance at the beginning of the year
Acquisitions
Disposals
Cancellation of second trading line treasury shares (2000 Program)
Cancellation of second trading line treasury shares (2001 Program)
Balance at the end of the year
Total shareholders’ equity
(3,377)
(8,313)
2,269
2,290
(7,131)
38,991
(4,000 )
(13,506 )
10,129
4,000
(3,377 )
43,530
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)
Cancellation of second trading line
treasury shares (2001 Program)
Number of shares
% change from
31.12.02
31.12.01
31.12.00
31.12.01
1,281,717,499
3,398,869
1,333,139,187
3,843,661
1,292,679,486
4,459,701
(4)
(12)
36,000,000
(55,265,349 )
(28,818,690)
Balance at the end of the year
1,256,297,678
1,281,717,499
1,333,139,187
(2)
Treasury shares
For the year ended
31.12.02
31.12.01
31.12.00
31.12.01
Number of shares
% change from
Balance at the beginning of the year
Acquisitions
Disposals
Cancellation of second trading line
treasury shares (2000 Program)
Cancellation of second trading line
treasury shares (2001 Program)
41,254,951
110,710,741
(25,965,908)
55,265,349
162,818,045
(121,563,094 )
110,621,142
257,121,477 1
(312,477,270) 1
(25)
(32)
(79)
(55,265,349 )
(28,818,690)
Balance at the end of the year
97,181,094
41,254,951
55,265,349
136
1 Number of shares in 2000 has been adjusted.
During the year a total of 28,818,690 shares acquired under the second trading line buyback pro-
gram 2001 were cancelled. At 31 December 2002, a maximum of 9,590,918 shares can be issued
against the exercise of options from former PaineWebber employee option plans. These shares are
shown as conditional share capital in the UBS AG (Parent Bank) disclosure. Out of the total number
of 97,181,094 treasury shares, 74,035,080 shares (CHF 5,416 million) were acquired under the sec-
ond trading line buyback program 2002 and are earmarked for cancellation. The Board of Directors
will propose to the Annual General Meeting on 16 April 2003 to reduce the issued number of shares
and the share capital by the number of shares purchased for cancellation. All issued shares are fully
paid.
83
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 / (benefit)
Net loss / (gain) from investing activities
Net (increase) / decrease in operating assets:
Net due from / to banks
Reverse repurchase agreements and
cash collateral on securities borrowed
Trading portfolio and net replacement values
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 in) / divestment of financial investments
Net cash flow from / (used in) investing activities
Cash flow from / (used in) financing activities
Net money market paper issued / (repaid)
Net movements in treasury shares and own equity derivative activity
Capital issuance
Capital repayment by par value reduction
Dividends paid
Issuance of long-term debt
Repayment of long-term debt
Increase in minority interests
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
31.12.02
31.12.01
31.12.00
3,535
4,973
7,792
1,521
2,460
206
(7)
(509)
986
1,614
1,323
498
(72 )
292
513
(22,382)
27,306
(944)
21,967
(11,537)
2,875
4,791
(4,754)
(572)
(2,364)
(60)
984
(1,763)
67
2,153
1,381
(26,206)
(5,605)
6
(2,509)
17,132
(14,911)
0
(377)
(32,470)
(462)
(33,915)
116,259
(60,536 )
(78,456 )
42,813
(424 )
80,006
(5,235 )
(1,742 )
12,873
(467 )
95
(2,021 )
380
(5,770 )
(7,783 )
24,226
(6,038 )
12
(683 )
18,233
(18,477 )
1,291
(461 )
18,103
(304 )
22,889
93,370
1,608
667
(130)
(58)
544
(730)
(915)
(81,054)
11,553
12,381
6,923
50,762
3,313
(959)
11,697
(9,729)
669
(1,640)
335
(8,770)
(19,135)
10,125
(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
Cash and cash equivalents, end of the year
82,344
116,259
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
4,271
46,183
31,890
82,344
20,990
69,938
25,331
116,259
1 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial investments. CHF 10,475 million,
CHF 29,895 million and CHF 28,395 million were pledged at 31 December 2002, 31 December 2001 and 31 December 2000, respectively.
84
UBS Group Statement of Cash Flows (continued)
Significant non-cash investing and financing activities
CHF million
For the year ended
31.12.02
31.12.01
31.12.00
Paine Webber Group, Inc. acquisition
Value of shares issued (121,741,710 shares issued)
Value of options issued (18,975,810 options issued)
Solothurner Bank SOBA, Solothurn, deconsolidation
Investments in associates
Property and equipment
Debt issued
Hyposwiss, Zurich, deconsolidation
Financial investments
Property and equipment
Debt issued
Hirslanden Holding AG, Zurich, deconsolidation
Financial investments
Property and equipment
Goodwill and other intangible assets
Consolidation of special purpose entities
Debt issued
0
0
0
0
0
53
18
63
3
718
15
2,322
0
0
0
0
0
0
0
0
0
0
0
0
10,246
992
1
77
493
0
0
0
0
0
0
0
85
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 Financial
Reporting Standards (“IFRS”) and stated in
Swiss francs (CHF), the currency of the country in
which UBS AG is incorporated. On 11 February
2003 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 information
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.
Subsidiaries 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 subsequent disposal, are recorded as
Financial investments.
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 acquisition. Investments in associates
for which significant influence is intended to be
temporary because the investments are acquired
and held exclusively with a view to their subse-
quent disposal, are recorded as Financial invest-
ments.
The Group sponsors the formation of compa-
nies, which may or may not be directly or indi-
rectly owned subsidiaries, for the purpose of
asset securitization transactions and structured
debt issuance, 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 consolidated in the Group’s Financial
Statements when the substance of the relation-
ship between the Group and the company indi-
cates that the company is controlled by the
Group. Certain transactions of consolidated enti-
86
ties meet the criteria for derecognition of finan-
cial 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 con-
solidation status of an entity.
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 securities
held for trading), or within Shareholder’s equity
if non-monetary financial assets are classified as
available-for-sale financial investments.
When preparing consolidated financial state-
ments, assets and liabilities of foreign entities are
translated at the exchange rates at the balance
sheet date, while income and expense items are
translated at weighted average rates for the
period. Differences resulting from the use of clos-
ing and weighted average exchange rates and
from revaluing a foreign entity’s opening net
asset balance at closing rate are recognized
directly in Foreign currency translation within
Shareholders’ equity.
e) Business and geographical segments
The Group is organized on a worldwide basis
into four Business Groups and the Corporate
Center. This organizational structure is the basis
upon which the Group reports its primary seg-
ment information.
Segment income, segment expenses and seg-
ment performance include transfers between
business segments and between geographical seg-
ments. Such transfers are accounted for at prices
in line with charges to unaffiliated customers 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.
g) Fee income
Brokerage fees earned from executing securities
transactions are recorded when the service has
been provided. Portfolio and other management,
advisory and other service fees are recognized
based on the terms of the applicable service
contracts. Asset management fees related to
investment 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 merg-
er and acquisition and other advisory services,
securities underwriting, fund raising, and from
other investment banking and similar services
that have a non-recurring character, are recog-
nized 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, plus accrued interest.
Securities borrowed and securities received as
collateral under securities lending transactions are
not recognized in the balance sheet unless control
of the contractual rights that comprise these secu-
rities received is gained. Securities lent and securi-
ties provided as collateral under securities borrow-
ing transactions are not derecognized from the
balance sheet unless control of the contractual
rights that comprise these securities transferred is
relinquished. The Group monitors the market
value of the securities borrowed and lent on a daily
basis and provides or requests additional collater-
al in accordance with the underlying agreements.
Fees and interest received or paid are recorded
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
87
UBS Group Financial Statements
Notes to the Financial Statements
sold under agreements to repurchase (repurchase
agreements) are generally treated as collateral-
ized financing transactions and are carried at the
amounts of cash advanced or received, plus
accrued interest.
Securities received under reverse repurchase
agreements and securities delivered under repur-
chase agreements are not recognized in the bal-
ance sheet or derecognized from the balance
sheet, unless control of the contractual rights that
comprise these securities is relinquished. The
Group monitors the market value of the securi-
ties received or delivered on a daily basis, and
provides or requests additional collateral in
accordance with the underlying agreements.
Interest earned on reverse repurchase agree-
ments and interest incurred on repurchase agree-
ments is recognized as interest income or interest
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.
j) Trading portfolio
Trading portfolio assets consist of money market
paper, other debt instruments, including traded
loans, equity instruments and precious metals
which are owned by the Group (“long” posi-
tions). Obligations to deliver trading securities
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.
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.
The Group uses settlement date accounting
when recording trading portfolio transactions. It
recognizes from the date the transaction is
entered into (trade date) in the income statement
any unrealized profits and losses arising from
revaluing that contract to fair value. Subsequent
to the trade date, when the transaction is con-
summated (settlement date) 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. When the Group
becomes party to a sales contract of a financial
asset classified in its trading portfolio it derecog-
nizes the asset on the day of its transfer.
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 bor-
rower, 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, provided it is funded on the date the loan
is originated by the lender. Purchased loans are
classified either as Financial investments avail-
able 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.
Interest on loans originated by the Group is
included in Interest earned on loans and advances
and is recognized on an accrual basis. Fees and
direct costs relating to loan origination, financing
or restructuring and to loan commitments are
deferred and amortized to Interest earned on loans
and advances over the life of the loan using the
straight-line method which approximates the effec-
tive interest rate method. Fees received for commit-
ments which are not expected to result in a loan are
included in Credit-related fees and commissions
over the commitment period. Loan syndication fees
where UBS does not retain a portion of the syndi-
cated loan are credited to commission income.
88
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 on a claim
according to the original contractual terms or the
equivalent value. A “claim” means a loan, a com-
mitment such as a letter of credit, guarantee or
commitment to extend credit, or a derivative or
other credit product.
An allowance for credit loss is reported as a
reduction of the carrying value of a claim on the
balance sheet, whereas for an off-balance sheet
item such as a commitment a provision for cred-
it loss is reported in Other liabilities. Additions to
the allowances and provisions for credit losses
are made through credit loss expense.
Allowances and provisions for credit losses
are evaluated at a counterparty-specific and/or
country-specific level based on the following
principles:
Counterparty-specific: A claim is considered
impaired when management determines that it is
probable that the Group will not be able to col-
lect all amounts due according to the original
contractual terms or the equivalent value.
Individual credit exposures are evaluated
based upon the borrower’s character, overall
financial condition, resources and payment
record; the prospects for support from any finan-
cially responsible guarantors; and, where appli-
cable, the realizable value of any collateral.
The estimated recoverable amount is the pres-
ent value of expected future cash flows which
may result from restructuring or liquidation.
Impairment is measured and allowances for cred-
it losses are established for the difference
between the carrying amount and its estimated
recoverable amount.
If there are indications of significant probable
losses in the portfolio that have not been specifi-
cally identified, allowances for credit losses
would also be provided for on a portfolio basis.
Upon impairment the accrual of interest
income based on the original terms of the claim is
discontinued, but the increase of the present
value of impaired claims due to the passage of
time is reported as interest income.
An impaired loan is classified as non-perform-
ing when the contractual payments of principal
and/or interest are in arrears for 90 days or more.
All impaired claims 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 or credited to credit loss expense.
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 claim
agreement.
A write-off is made when all or part of a
claim is deemed uncollectible or forgiven. Write-
offs are charged against previously established
allowances for credit losses or directly to credit
loss expense and reduce the principal amount of
a claim. Recoveries in part or in full of amounts
previously written off are credited to credit loss
expense.
Country-specific: Where, in management’s
opinion, it is probable that some claims may be
affected by systemic crisis, transfer restrictions or
non-enforceability, specific country allowances
for probable losses are established. They are
based on country-specific scenarios, taking into
consideration the nature of the individual expo-
sures, but excluding those amounts covered by
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-
purpose 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 subordinated
tranches, interest-only strips or other residual
interests (“retained interests”). Retained interests
are primarily recorded in Trading portfolio assets
and carried at fair value. The determination of
fair values of retained interest is generally based
on quoted market prices or to a lesser extent by
determining 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
89
UBS Group Financial Statements
Notes to the Financial Statements
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 classifi-
cation 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.
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.
If an available-for-sale investment is deter-
mined to be impaired, the cumulative unrealized
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 considered impaired if its cost
exceeds the recoverable amount. For non-quoted
equity investments, the recoverable amount is
determined by applying recognized valuation
techniques. The standard method applied is
based on multiple of earnings observed in the
market for comparable companies. For quoted
financial investments, the recoverable amount is
determined by reference to the market price.
They are considered impaired if objective
evidence indicates that the decline in market
price has reached a level that recovery of the cost
value cannot be reasonably expected within the
foreseeable 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.
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 prop-
erty held by the Group for use in the supply of
services or for administrative purposes whereas
investment property is defined as property held
by the Group to earn rentals and/or for capital
appreciation. If a property of the Group in-
cludes a portion that is bank-occupied and
another portion that is held to earn rentals or
for capital appreciation, 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-occupied property and
investment property, respectively. If the por-
tions cannot be sold separately, the whole prop-
erty 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.
Software development costs are capitalized
when they meet certain criteria relating to identi-
fiability, it is probable that future economic
benefits will flow to the enterprise, and the cost
can be measured reliably. Internally developed
software meeting these criteria and purchased
software are classified in Property 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:
90
Properties, excluding land
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.
When the cost model is applied, IAS 40,
Investment Property, requires the disclosure of
the investment property’s fair value (see Note 14)
and how fair value is determined. UBS employs
internal real estate experts who determine the
fair value of investment property by applying rec-
ognized valuation techniques. In cases where
prices of recent market transactions of compa-
rable objects are available, fair value is deter-
mined by reference to these transactions.
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 rec-
ognized 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 impairment
or changes in estimated future benefits. If such
indications exist an analysis is performed to
assess whether the carrying amount of goodwill
or other intangible assets is fully recoverable. A
write-down is made if the carrying amount
exceeds the recoverable amount.
q) Income taxes
Income tax payable on profits, based on the appli-
cable tax laws in each jurisdiction, is recognized as
an expense in the period in which profits arise. The
tax effects of income tax losses available for carry-
forward are recognized as an asset when it is prob-
able that future taxable profit will be available
against which those losses can be utilized.
Deferred tax liabilities are recognized for tem-
porary differences between the carrying amounts
of assets and liabilities in the Group balance sheet
and their amounts as measured for tax purposes,
which will result in taxable amounts in future
periods. Deferred tax assets are recognized for
temporary differences which will result in
deductible amounts in future periods, but only to
the extent it is probable that sufficient taxable
profits will be available against which these dif-
ferences can be utilized.
Deferred tax assets and liabilities are meas-
ured at the tax rates that are expected to apply 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 (i)
deferred taxes recognized or disposed of upon
the acquisition or disposal of a subsidiary, and
(ii) unrealized gains or losses on available for sale
investments and changes in fair value of deriva-
tive instruments designated as cash flow hedges,
which are recorded net of taxes in Gains or loss-
es not recognized in the income statement within
Shareholders’ equity.
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, credit instruments or indices are con-
sidered structured instruments. The embedded
derivative is separated from the host contract and
accounted for as a stand-alone derivative if the
criteria for separation are met. The host contract
is subsequently measured at amortized cost.
Debt instruments with embedded derivatives
that are related to UBS AG shares or to a deriv-
ative 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-
91
UBS Group Financial Statements
Notes to the Financial Statements
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 quoted 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 deriv-
ative related to UBS AG shares is cash settled or
the holder of the hybrid instrument has the right
to require cash settlement, then the separated
derivative is accounted for as a trading instru-
ment 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 certain
subordinated long-term notes issues, see Note
30a) and apply fair value hedge accounting. The
effect is such that when hedge accounting is
applied to fixed rate debt instruments, the carry-
ing value of debt issues is adjusted for changes in
fair value related to the hedged exposure rather
than carried at amortized cost. See v) Derivative
instruments for further discussion.
Own bonds held as a result of market making
activities or deliberate purchases in the market
are treated as a redemption of debt. A gain or loss
on redemption is recorded depending on whether
the repurchase price of the bond was lower or
higher than its carrying value in the books. A
subsequent sale of own bonds in the market is
treated as a re-issuance of debt.
Interest expense on debt instruments is includ-
ed 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-
tracts the proceeds received less cost (net of tax,
if any), are reported as Share premium.
Contracts on UBS AG shares that require net
cash settlement or provide the counterparty with
a choice of net cash settlement are classified as
trading instruments, with the changes in fair
value reported in the income statement.
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
actuarial method to determine the present value
of its defined benefit plans 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 actu-
arial 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 recog-
nized in the income statement over the expected
average remaining working lives of the employ-
ees participating in the plans.
If an excess of the fair value of the plan assets
over the present value of the defined benefit obli-
gation cannot be recovered fully through refunds
or reductions in future contributions, no gain is
recognized solely as a result of deferral of an
actuarial loss or past service cost in the current
period or no loss is recognized solely as a result
of deferral of an actuarial gain in the current
period.
u) Equity participation plans
The Group provides various equity participa-
tion plans in the form of stock plans and stock
option plans. UBS generally uses the intrinsic
92
value 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 grant 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 policy is to rec-
ognize compensation expense for equity awards
at the date of grant.
v) Derivative instruments and hedging
All derivative instruments of the Group are
carried at fair value on the balance sheet and are
reported as Positive or Negative replacement
values. Fair values are obtained from quoted
market prices, dealer price quotations, dis-
counted cash flow models and option pricing
models, which incorporate current market and
contractual prices for the underlying instrument,
time to expiry, yield curves and volatility of the
underlying. The Group offsets positive and nega-
tive replacement values with the same counter-
party for transactions covered by legally enforce-
able master netting agreements, as explained in
Note 23.
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, foreign
currency and credit risks, including exposures
arising from forecast transactions. The Group
applies either fair value or cash flow hedge
accounting when transactions meet the specified
criteria to obtain hedge accounting treatment.
At the time a financial instrument is desig-
nated as a hedge, the Group formally documents
the relationship between the hedging instru-
ment(s) and hedged item(s), including its risk
management objectives and its strategy in under-
taking the hedge transaction, which must be 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. Accordingly, the Group formally
assesses, both at the inception of the hedge and
on an ongoing basis, whether the hedging deriva-
tives have been “highly effective” in offsetting
changes in the fair value or cash flows of the
hedged items. A hedge is normally regarded as
highly effective if, at inception and throughout its
life, 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 instrument, and
actual results are within a range of 80% to
125%. In the case of hedging a forecast trans-
action, the transaction must be highly probable
and must present an exposure to variations in
cash flows that could ultimately affect reported
net profit or loss. 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; when the derivative expires, or is sold,
terminated, or exercised; when the hedged item
matures or is sold or repaid; or when a forecast
transaction is no longer deemed highly probable.
“Hedge ineffectiveness” represents the amount
by which the changes in the fair value of the
hedging derivative differ from changes in the fair
value of the hedged item or the amount by which
changes in the cash flow of the hedging derivative
differ from changes (or expected changes) in the
cash flow of the hedged item. Such gains and
losses are recorded in current period earnings, as
are gains and losses on components of a hedging
derivative that are excluded from assessing hedge
effectiveness.
For qualifying fair value hedges, the change in
fair value of the hedging derivative is recognized
in net profit and loss. Those changes in fair value
of the hedged item which are attributable to the
risks hedged with the derivative instrument are
reflected in an adjustment to the carrying value of
the hedged item, which is also recognized in net
profit or loss. If the hedge relationship is termi-
nated for reasons other than the derecognition of
the hedged item, the difference between the car-
rying value of the hedged item at that point and
the value at which it would have been carried had
the hedge never existed (the “unamortized fair
value adjustment”), is, in the case of interest
bearing instruments, amortized to net profit or
loss over the remaining term of the original
hedge, while for non-interest bearing instruments
that amount is immediately recognized in earn-
ings. If the hedged instrument is derecognized,
e.g. is sold or repaid, the unamortized fair value
adjustment is recognized immediately in net
profit and loss.
A fair valuation gain or loss associated with
the effective portion of a derivative designated as
a cash flow hedge is recognized initially in Share-
93
UBS Group Financial Statements
Notes to the Financial Statements
holders’ equity. When the cash flows that the
derivative is hedging (including cash flows from
transactions that were only forecast when the
derivative hedge was effected) materialize, result-
ing in income or expense, then the associated
gain or loss on the hedging derivative is simulta-
neously transferred from Shareholders’ equity to
the corresponding income or expense line item.
If a cash flow hedge for a forecast transaction
is deemed to be no longer effective, or the hedge
relationship is terminated, the cumulative gain or
loss on the hedging derivative previously report-
ed in Shareholders’ equity remains in Share-
holders’ equity until the committed or forecast
transaction occurs, at which point it is trans-
ferred from Shareholders’ equity to net trading
income.
Derivative instruments transacted as eco-
nomic hedges but not qualifying for hedge
accounting are treated in the same way as deriv-
ative instruments used for trading purposes, i. e.
realized and unrealized gains and losses are rec-
ognized in Net trading income. In particular, the
Group has entered into economic hedges of cred-
it risk within the loan portfolio using credit
default swaps to which it does not apply hedge
accounting. In the event that the Group recog-
nizes an impairment on a loan that is economi-
cally hedged in this way, the impairment is rec-
ognized in Credit loss expense whereas the gain
on the credit default swap is recorded in Net
trading income – see Note 23 for additional
information.
A derivative may be embedded in a “host con-
tract”. Such combinations are known as hybrid
instruments and arise predominantly from the
issuance of certain structured debt instruments. If
the host contract is not carried at fair value with
changes in fair value reported in net profit or
loss, the embedded derivative is separated from
the host contract and accounted for as a stand-
alone derivative instrument at fair value if, and
only if: the economic characteristics and risks of
the embedded derivative are not closely related to
the economic characteristics and risks of the host
contract and the embedded derivative actually
meets the definition of a derivative.
w) Earnings per Share (EPS)
Basic earnings per share is calculated by dividing
the net profit or loss for the period attributable to
ordinary shareholders by the weighted average
number of ordinary shares outstanding during
the period.
Diluted earnings per share is computed using
the same method as for basic EPS, but the deter-
minants are adjusted to reflect the potential dilu-
tion that could occur if options, warrants, con-
vertible debt securities or other contracts to issue
ordinary shares were converted or exercised into
ordinary shares.
x) Comparability
Amended IAS 19, Employee Benefits
The Group adopted in 2002 the amended stan-
dard IAS 19 “Employee Benefits”. The amend-
ments introduce an asset ceiling provision that
applies for defined benefit plans that have a sur-
plus of plan assets over benefit obligations. The
implementation of the amended standard had no
material impact.
IFRIC Interpretations
Interpretations of the International Financial
Reporting Interpretations Committee (IFRIC)
became effective during 2002 but had no impact
on the Group’s Financial Statements.
Segment Reporting
As at 1 January 2002, UBS PaineWebber was
separated from UBS Warburg and became a
stand-alone Business Group. Note 2 to these
Group Financial Statements reflects the new
Business Group structure. Comparative prior
year amounts have been restated to conform to
the current year presentation.
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
following adjustments or changes in classifica-
tion occurred:
Gains/losses not recognized in the income
statement is a new component of Shareholders’
94
equity as at 1 January 2001. It includes unreal-
ized gains and losses on available for sale finan-
cial 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 unrealized gain of
CHF 1,769 million (CHF 1,577 million 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 carried
at cost less write-downs for impairments in value.
Reductions of the carrying amount of available-
for-sale financial investments and private 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 classified as avail-
able-for-sale financial investments and carried at
fair value. Changes in fair value are reported in
Gains/losses not recognized in the income state-
ment within Shareholders’ equity until these
investments are disposed of. At the time an avail-
able-for-sale financial investment is determined to
be impaired, the cumulative unrealized loss previ-
ously recognized in Shareholders’ equity is includ-
ed 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 IAS 39.
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 reclassi-
fied accordingly.
95
UBS Group Financial Statements
Notes to the Financial Statements
Note 2a Segment Reporting by Business Group
Based on our integrated business model, UBS is
organized into the four Business Groups: UBS
Wealth Management & Business Banking, UBS
Global Asset Management, UBS Warburg and
UBS PaineWebber, and our Corporate Center.
UBS Wealth Management &
Business Banking
UBS Wealth Management & Business Banking
comprises two business units.
Private Banking offers a comprehensive range
of products and services individually tailored to
affluent international and Swiss clients, operat-
ing from offices around the world.
Business Banking Switzerland provides indi-
vidual and corporate clients in Switzerland with
a complete portfolio of banking and securities
services, focused on customer service excellence,
profitability and growth, by using a multi-chan-
nel distribution.
The two business units share technological
and physical infrastructure, and have joint
departments supporting major functions such
as e-commerce, financial planning and wealth
management, investment policy and strategy.
UBS Global Asset Management
UBS Global Asset Management provides invest-
ment products and services to institutional
investors and wholesale intermediaries around
the globe. Clients include corporate and public
pension plans, financial institutions and advisors,
central banks as well as charities, foundations
and individual investors.
UBS Warburg
UBS Warburg operates globally as a client-driven
investment banking and securities firm with two
business units.
Corporate and Institutional Clients provides
innovative products, research, advice and com-
plete access to the world’s capital markets for
intermediaries, governments, corporate and insti-
tutional clients and other parts of UBS.
UBS Capital is the private equity business unit
of UBS Warburg, investing UBS and third party
funds, primarily in unlisted companies.
UBS PaineWebber
UBS PaineWebber is a US financial services firm
providing sophisticated wealth management
services to affluent US clients through a highly
trained financial advisor network.
Corporate Center
Corporate Center ensures that the Business
Groups operate as a coherent and effective whole
with a common set of values and principles in
such areas as risk management, financial report-
ing, marketing and communications, funding,
capital and balance sheet management and man-
agement of foreign exchange earnings.
96
Note 2a Segment Reporting by Business Group
The Business Group results are presented on a management reporting basis. Internal charges and transfer pricing adjustments are
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 segment reporting for all peri-
ods reflects the changes in the structure implemented during 2002. Prior year amounts have been restated to conform to current year
presentation.
For the year ended 31 December 2002
CHF million
Income 1
Credit loss expense 2
Total operating income
Personnel expenses
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets 3
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
Other information as at 31 December 2002 4
Total assets
Total liabilities and minority interests
Capital expenditure
UBS Wealth
Management &
Business Banking
UBS
Global Asset
Management
UBS
Warburg
UBS
PaineWebber
Corporate
Center
UBS Group
12,928
(314 )
12,614
4,810
2,317
480
111
7,718
4,896
1,953
0
1,953
946
513
37
270
1,766
187
12,498
(128 )
12,370
7,878
2,378
382
364
11,002
1,368
5,561
(13 )
5,548
4,245
1,263
149
1,691
7,348
(1,800)
1,387
249
1,636
645
601
473
24
1,743
(107)
34,327
(206)
34,121
18,524
7,072
1,521
2,460
29,577
4,544
678
3,866
(331)
3,535
310,722
302,272
380
4,428
2,937
20
933,962
921,446
473
39,610
33,225
185
(107,604 )
(117,753 )
705
1,181,118
1,142,127
1,763
1 Impairments on private equity and other financial investments for the year ended 31 December 2002 were as follows: UBS Wealth Management & Business Banking CHF 32 million; UBS Global
2 In order to show the relevant Business Group performance over time, adjusted expected
Asset Management CHF 1 million; UBS Warburg CHF 1,703 million; Corporate Center CHF 208 million.
loss figures rather than the IFRS actual net credit loss expense are reported for each Business Group. The adjusted expected loss is the statistically derived actuarial expected loss which reflects
the inherent counterparty and country risks in the respective portfolios, plus the deferred releases representing the amortized historical differences between actual credit losses and actuarial
expected loss. The difference between the adjusted expected loss figures and the IFRS 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 206 million for the year ended 31 December 2002 is as follows:
UBS Wealth Management & Business Banking CHF 241 million expense, UBS Warburg CHF 35 million recovery, UBS PaineWebber CHF 15 million expense and Corporate Center CHF 15 million
4 The funding surplus or require-
recovery.
ment is reflected in each Business Group and adjusted in Corporate Center.
3 For further information about goodwill and other intangible assets by Business Group, please see Note 15: Goodwill and Other Intangible Assets.
97
UBS Group Financial Statements
Notes to the Financial Statements
For the year ended 31 December 2001
CHF million
Income 1
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
Tax expense
Net profit before minority interests
Minority interests
Net profit
Other information as at 31 December 2001 3
Total assets
Total liabilities and minority interests
Capital expenditure
UBS Wealth
Management &
Business Banking
UBS
Global Asset
Management
UBS
Warburg
UBS
PaineWebber
Corporate
Center
UBS Group
13,488
(604 )
12,884
4,825
2,434
616
109
7,984
4,900
2,218
0
2,218
1,038
569
46
286
1,939
279
14,715
(112 )
14,603
8,354
2,650
456
402
11,862
2,741
6,391
(18 )
6,373
5,019
1,441
124
502
7,086
(713)
800
236
1,036
592
537
372
24
1,525
(489)
37,612
(498)
37,114
19,828
7,631
1,614
1,323
30,396
6,718
1,401
5,317
(344)
4,973
313,800
304,988
540
6,335
4,367
37
1,005,397
992,272
337
39,747
31,556
296
(111,982 )
(123,416 )
811
1,253,297
1,209,767
2,021
1 Impairments on private equity and other financial investments for the year ended 31 December 2001 were as follows: UBS Wealth Management & Business Banking CHF 109 million; UBS Global
2 In order to show the relevant Business Group performance over time, adjusted expect-
Asset Management CHF 3 million; UBS Warburg CHF 1,143 million; Corporate Center CHF 39 million.
ed loss figures rather than the IFRS actual net credit loss expense are reported for each Business Group. The adjusted expected loss is the statistically derived actuarial expected loss which reflects
the inherent counterparty and country risks in the respective portfolios, plus the deferred releases representing the amortized historical differences between actual credit losses and actuarial
expected loss. The difference between the adjusted expected loss figures and the IFRS 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
3 The funding surplus or require-
Wealth Management & Business Banking CHF 123 million expense, UBS Warburg CHF 360 million expense and UBS PaineWebber CHF 15 million expense.
ment is reflected in each Business Group and adjusted in Corporate Center.
For the year ended 31 December 2000
CHF million
Income 1
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 Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
Other information as at 31 December 2000 3
Total assets
Total liabilities and minority interests
UBS Wealth
Management &
Business Banking
UBS
Global Asset
Management
UBS
Warburg
UBS
PaineWebber
Corporate
Center
UBS Group
14,355
(785 )
13,570
5,151
2,478
633
81
8,343
5,227
2,078
0
2,078
941
434
49
267
1,691
387
18,240
(243 )
17,997
9,451
2,755
564
192
12,962
5,035
1,214
(3 )
1,211
1,098
344
42
84
1,568
(357)
385
1,161
1,546
522
754
320
43
1,639
(93)
36,272
130
36,402
17,163
6,765
1,608
667
26,203
10,199
2,320
7,879
(87)
7,792
281,984
272,173
7,558
5,787
817,264
803,159
50,691
41,826
(69,945 )
(80,226 )
1,087,552
1,042,719
1 Impairments on private equity and other financial investments for the year ended 31 December 2000 were as follows: UBS Warburg CHF 442 million; Corporate Center CHF 65 million.
2 In
order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the IFRS actual net credit loss expense are reported for each Business Group. The
adjusted expected loss is the statistically derived actuarial expected loss which reflects the inherent counterparty and country risks in the respective portfolios, plus the deferred releases representing
the amortized historical differences between actual credit losses and actuarial expected loss. The difference between the adjusted expected loss figures and the IFRS 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 financial reporting purposes of
CHF 130 million for the year ended 31 December 2000 is as follows: UBS Wealth Management & Business Banking CHF 695 million recovery, UBS Warburg CHF 562 million expense and UBS
PaineWebber CHF 3 million expense.
3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center.
98
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 IFRS,
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 2002
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
14,307
6,837
11,055
1,909
13
34,121
42
20
32
6
0
174,878
256,110
669,823
78,270
2,037
15
22
56
7
0
885
199
635
44
0
51
11
36
2
0
100
1,181,118
100
1,763
100
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
Switzerland
Rest of Europe
Americas
Asia / Pacific
Africa / Middle East
Total
For the year ended 31 December 2001
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
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
99
UBS Group Financial Statements
Notes to the Financial Statements
Income Statement
Note 3 Net Interest and Trading Income
Net interest Income
CHF million
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
Interest income
Interest earned on loans and advances
Interest earned on securities borrowed and
reverse repurchase agreements
Interest and dividend income from financial investments
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
11,600
16,955
20,413
11,184
165
17,014
39,963
6,383
10,081
8,366
4,587
29,417
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
Net interest income
10,546
8,041
8,130
(32)
(39)
(64)
3
(24)
(55)
(31)
7
(41)
(33)
31
Net trading income
CHF million
For the year ended
Equities
Fixed income 1
Foreign exchange and other
Net trading income
1 Includes commodities trading income.
31.12.02
31.12.01
31.12.00
% change from
31.12.01
2,638
1,061
1,873
5,572
4,026
2,731
2,045
8,802
7,754
912
1,287
9,953
(34)
(61)
(8)
(37)
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
31.12.02
31.12.01
31.12.00
% change from
31.12.01
10,546
5,572
16,118
5,275
10,605
1,667
(1,429)
16,118
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
31
(37)
(4)
(7)
(8)
17
21
(4)
1 Principally external funding costs of the Paine Webber Group, Inc. acquisition.
100
Note 4 Net Fee and Commission Income
CHF million
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
Underwriting fees
Corporate finance fees
Brokerage fees
Investment fund fees
Fiduciary fees
Custodian fees
Portfolio and other management and advisory fees
Insurance-related and other fees
Total securities trading and investment activity fees
Credit-related fees and commissions
Commission income from other services
Total fee and commission income
Brokerage fees paid
Other
Total fee and commission expense
2,134
848
5,987
4,033
300
1,302
4,065
417
19,086
275
1,006
20,367
1,349
797
2,146
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
21,117
17,336
307
946
310
802
22,370
18,448
1,281
878
2,159
1,084
661
1,745
Net fee and commission income
18,221
20,211
16,703
(1)
(37)
(7)
(6)
(15)
(4)
(13)
(22)
(10)
(10)
6
(9)
5
(9)
(1)
(10)
Note 5 Other Income
CHF million
For the year ended
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
Total other income
31.12.02
31.12.01
31.12.00
% change from
31.12.01
228
0
228
273
457
(1,944)
(1,214)
90
7
877
(12)
3
0
3
454
256
(1,294 )
(584 )
68
72
999
558
57
26
83
919
162
(507 )
574
96
58
675
1,486
(40)
79
(50)
(108)
32
(90)
(12)
101
UBS Group Financial Statements
Notes to the Financial Statements
Note 6 Personnel Expenses
CHF million
For the year ended
Salaries and bonuses
Contractors
Insurance and social contributions
Retirement benefit expenses
Other personnel expenses
Total personnel expenses
31.12.02
31.12.01
31.12.00
% change from
31.12.01
14,219
579
939
676
2,111
18,524
15,238
729
984
603
2,274
19,828
13,523
725
959
475
1,481
17,163
(7)
(21)
(5)
12
(7)
(7)
Note 7 General and Administrative Expenses
CHF million
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
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
1,354
665
1,019
819
453
600
568
1,036
558
7,072
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
3
5
(16)
(10)
(21)
(14)
(15)
(15)
39
(7)
102
Note 8 Earnings per Share (EPS) and Shares Outstanding
For the year ended
31.12.02
31.12.01
31.12.00
% change from
31.12.01
Basic Earnings (CHF million)
Net profit
Amortization of goodwill and other intangible assets
Net profit before goodwill amortization 1
Diluted Earnings (CHF million)
Net profit
Less: profit on own equity derivative contracts
deemed dilutive
Net profit for diluted EPS
Amortization of goodwill and other intangible assets
3,535
2,1792
5,714
3,535
(20)
3,515
2,1792
Net profit for diluted EPS before goodwill amortization 1
5,694
4,973
1,323
6,296
7,792
667
8,459
4,973
7,792
(99 )
4,874
1,323
6,197
(14 )
7,778
667
8,445
Weighted average shares outstanding
Weighted average shares outstanding
Potentially dilutive ordinary shares resulting from
options and warrants outstanding 3
Weighted average shares outstanding for
diluted EPS
1,208,586,678
1,266,038,193
1,209,087,927
14,796,264
22,539,745
16,489,773
1,223,382,942
1,288,577,938
1,225,577,700
Earnings per share (CHF)
Basic EPS
Basic EPS before goodwill amortization 1
Diluted EPS
Diluted EPS before goodwill amortization 1
2.92
4.73
2.87
4.65
3.93
4.97
3.78
4.81
6.44
7.00
6.35
6.89
(29)
65
(9)
(29)
80
(28)
65
(8)
(5)
(34)
(5)
(26)
(5)
(24)
(3)
2 Includes an income tax benefit of CHF 281 million for the writedown
1 Excludes the amortization of goodwill and other intangible assets.
3 Total equivalent shares outstanding on options that were not dilutive for the respective periods but could
of the PaineWebber brandname.
potentially dilute earnings per share in the future were 75,385,368, 28,741,886 and 27,524,280 for the years ended 31 December 2002,
31 December 2001 and 31 December 2000, respectively.
Shares outstanding
As at
Total ordinary shares issued
Own shares to be delivered
Second trading line treasury shares
2000 program
2001 program
2002 first program
2002 second program
Other treasury shares
Total treasury shares
Shares outstanding
31.12.02
31.12.01
31.12.00
1,256,297,678
1,281,717,499
1,333,139,187
28,444,788
55,265,349
23,064,356
67,700,000
6,335,080
23,146,014
18,190,595
0
97,181,094
41,254,951
55,265,349
1,159,116,584
1,240,462,548
1,306,318,626
% change from
31.12.01
(2)
27
136
(7)
103
UBS Group Financial Statements
Notes to the Financial Statements
Balance Sheet: Assets
Note 9a Due from Banks and Loans
By type of exposure
CHF million
Banks
Allowance for credit losses
Net due from banks
Loans
Mortgages
Other loans
Subtotal
Allowance for credit losses
Net loans
Net due from banks and loans
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
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
31.12.02
31.12.01
32,911
(443)
32,468
127,869
88,590
216,459
(4,812)
211,647
244,115
115
31.12.02
151,604
38,131
48,412
10,002
1,221
249,370
(5,255)
244,115
31.12.02
129,525
26,769
12,398
80,678
249,370
(5,255)
244,115
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
104
Note 9b Allowances and Provisions for Credit Losses
CHF million
Specific
Country risk
allowances and allowances and
provisions
provisions
Total
31.12.02
Total
31.12.01
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
CHF million
As a reduction of Due from banks
As a reduction of Loans
Subtotal
Included in other liabilities related to commitments
and contingent liabilities
Total allowances and provisions for credit losses
7,212
(2,508)
63
365
(247)
4,885
1,006
(28)
7
(159)
(90)
736
8,218
(2,536)
70
206
(337)
5,621
10,581
(3,008)
81
498
66
8,218
31.12.02
31.12.01
443
4,812
5,255
366
5,621
735
7,178
7,913
305
8,218
Note 9c Impaired Loans
CHF million
Impaired loans 1, 2
Amount of allowance for credit losses related to impaired loans
Average impaired loans 3
31.12.02
31.12.01
10,365
4,892
12,623
14,629
7,294
16,555
1 All impaired loans have a specific allowance for credit losses.
million for 2001.
3 Average balances were calculated from quarterly data.
2 Interest income on impaired loans was CHF 428 million for 2002 and CHF 504
105
UBS Group Financial Statements
Notes to the Financial Statements
Note 9d Non-Performing Loans
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.
CHF million
31.12.02
31.12.01
Non-performing loans
Amount of allowance for credit losses related to non-performing loans
Average non-performing loans 1
1 Average balances are calculated from quarterly data.
CHF million
Non-performing loans at beginning of the 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
Mortgages
Other
Total loans
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
6,029
3,485
7,361
8,639
5,374
9,648
31.12.02
31.12.01
8,639
(509)
(2,101)
6,029
10,452
1,111
(2,924)
8,639
31.12.02
311
31.12.01
386
1,972
3,746
5,718
6,029
2,659
5,594
8,253
8,639
31.12.02
31.12.01
4,609
379
499
300
242
6,029
6,531
466
737
653
252
8,639
106
Note 10 Securities Borrowing, Securities Lending, Repurchase and
Reverse Repurchase Agreements
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 controls
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.
Balance sheet assets
CHF million
By counterparty:
Banks
Customers
Total
Balance sheet liabilities
CHF million
By counterparty:
Banks
Customers
Total
Cash collateral
on securities
borrowed
31.12.02
Reverse
Repurchase
agreements
31.12.02
Cash collateral
on securities
borrowed
31.12.01
122,764
16,288
139,052
201,269
92,817
294,086
155,214
7,724
162,938
Cash collateral
on securities
lent
31.12.02
Repurchase
agreements
31.12.02
Cash collateral
on securities
lent
31.12.01
29,748
7,122
36,870
200,904
165,954
366,858
27,640
2,677
30,317
Reverse
Repurchase
agreements
31.12.01
197,902
71,354
269,256
Repurchase
agreements
31.12.01
213,942
154,678
368,620
Under reverse repurchase and securities borrowing arrangements, the Group obtains securities on
terms which permit it to repledge or resell the securities to others. Amounts on such terms as at
31 December 2002 and 31 December 2001 were as follows:
CHF million
31.12.02
31.12.01
Securities received under reverse repurchase and / or securities borrowing arrangements
which can be repledged or resold
641,341
592,903
thereof repledged / transferred to others in connection with financing activities or
to satisfy commitments under short sale transactions
530,188
474,963
107
UBS Group Financial Statements
Notes to the Financial Statements
Note 11 Trading Portfolio
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 23 provides a description of the various classes of derivatives together with the related
notional amounts, whereas Note 10 provides further details about cash collateral on securities bor-
rowed and lent and repurchase and reverse repurchase agreements.
CHF million
Trading portfolio assets
Money market paper
thereof pledged as collateral with central banks
Debt instruments
Swiss government and government agencies
US Treasury and government agencies
Other government agencies
Corporate listed
Other unlisted
Total
thereof pledged as collateral
thereof can be repledged or resold by the counterparty
Equity instruments
Listed
Unlisted
Total
thereof pledged as collateral
thereof can be repledged or resold by the counterparty
Traded loans
Precious metals
31.12.02
31.12.01
45,310
10,475
1,140
71,884
50,296
73,268
39,613
236,201
132,221
92,460
66,150
4,841
70,991
18,614
17,905
11,533
7,401
63,164
29,895
1,246
95,203
18,811
108,114
26,642
250,016
153,464
101,517
67,772
6,367
74,139
21,264
19,939
6,139
4,428
Total trading portfolio assets
371,436
397,886
Trading portfolio liabilities
Debt instruments
Swiss government and government agencies
US Treasury and government agencies
Other government agencies
Corporate listed
Other unlisted
Total
Equity instruments
1,807
38,327
19,722
14,177
8,296
82,329
24,124
565
25,117
12,187
10,868
30,793
79,530
26,268
Total trading portfolio liabilities
106,453
105,798
108
Note 12 Financial Investments (available for sale)
CHF million
31.12.02
31.12.01
Money market paper
Other debt instruments
Listed
Unlisted
Total
Equity investments
Listed
Unlisted
Total
Private equity investments
Total financial investments
thereof eligible for discount at central banks
873
290
885
1,175
596
1,443
2,039
4,304
8,391
261
6,774
1,194
10,348
11,542
1,949
1,819
3,768
6,719
28,803
10,370
The following tables show the unrealized gains and losses not recognized in the income statement for the years ended 2002 and 2001.
CHF million
Fair value
Gross gains
Gross losses
Net, before tax
Tax effect
Net, after tax
Unrealized gains/losses not recognized in the income statement
31 December 2002
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
873
16
42
0
81
964
23
49
2,039
4,304
8,391
0
1
2
0
1
7
1
1
335
966
1,314
0
0
0
0
0
0
0
1
31
223
255
0
1
2
0
1
7
1
0
304
743
0
0
0
0
0
1
0
0
82
30
1,059
113
0
1
2
0
1
6
1
0
222
713
946
CHF million
Fair value
Gross gains
Gross losses
Net, before tax
Tax effect
Net, after tax
Unrealized gains/losses not recognized in the income statement
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
0
1
2
0
0
65
539
607
1
1
1
2
30
2
0
0
562
650
1,249
0
0
0
1
11
0
0
0
187
15
214
1
1
1
1
19
2
0
0
375
635
1,035
109
UBS Group Financial Statements
Notes to the Financial Statements
Note 12 Financial Investments (available for sale) (continued)
Contractual maturities of the investments in debt instruments1
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 2002
Swiss national government and agencies
Swiss local governments
Foreign governments and official institutions
Corporate debt securities
Mortgage-backed securities
Other debt securities
Total fair value
0
8
35
675
4
1
723
0.00
4.02
4.63
2.23
2.25
4.77
7
30
45
249
15
48
394
4.88
3.94
3.13
2.64
3.97
2.65
8
4
1
19
4
0
36
3.86
3.59
6.12
3.41
4.03
0.00
1
0
0
21
0
0
22
4.00
0.00
0.00
8.02
0.00
0.00
1 Money market papers have contractual maturities of less than one year.
Proceeds from sales and maturities of investment securities available for sale, excluding private equity, were as follows:
CHF million
Proceeds
Gross realized gains
Gross realized losses
Note 13 Investments in Associates
CHF million
Carrying amount at the beginning of the year
Additions
Disposals
Income
Write-offs
Dividend paid
Foreign currency translation
Carrying amount at the end of the year
31.12.02
1,820
479
(21)
31.12.01
27,910
223
(28)
31.12.02
31.12.01
697
51
(1)
24
(17)
(44)
(5)
705
880
11
(216)1
74
(2)
(48)
(2)
697
1 Includes a transfer of CHF 172 million to Financial Investments following a review of the level of influence by the bank over certain investees. The impact of this reclassification on net profit is
immaterial.
110
Note 14 Property and Equipment
CHF million
Historical cost
Balance at the beginning of the year
Additions
Disposals / write-offs 2
Reclassifications
Foreign currency translation
Balance at the end of the year
Accumulated depreciation
Balance at the beginning of the year
Depreciation
Disposals / write-offs 2
Reclassifications
Foreign currency translation
Balance at the end of the year
Bank-
occupied Investment
properties1
properties
IT, soft-
ware and
communi-
Other
machines
and
cation equipment
9,297
147
(62 )
(34 )
(41 )
9,307
4,039
224
(34 )
(10 )
(9 )
4,210
893
366
(747 )
50
(2 )
560
239
28
(100 )
44
0
211
349
5,146
811
(1,330 )
51
(339 )
4,3394
3,932
926
(1,316 )
(2 )
(300 )
3,240
1,099
4,143
439
(449 )
(53 )
(336 )
3,744
2,574
343
(336 )
3
(164 )
2,420
1,324
31.12.02
31.12.01
19,479
1,763
(2,588)
14
(718)
17,950
10,784
1,521
(1,786)
35
(473)
10,081
18,631
2,021
(715)
(482)
24
19,479
9,721
1,654
(403)
(189)
1
10,784
7,869
8,695
Net book value at the end of the year 3
5,097
1 The fair value of Investment properties was CHF 539 million at 31 December 2002 and CHF 990 million at 31 December 2001.
write-offs of fully depreciated assets.
4 Includes accumulated costs for projects in progress of CHF 234 million at 31 December 2002 (CHF 351 million at 31 December 2001).
2 Includes
3 Fire insurance value of property and equipment is CHF 14,221 million (2001: CHF 15,531 million).
Note 15 Goodwill and Other Intangible Assets
CHF million
Goodwill
Other intangible assets
Total
Brand-
name
Infra-
structure
Customer
lists
and other
Historical cost
Balance at the beginning of the year 16,819
9
Additions and reallocations
(98 )
Disposals and other reductions
Write-offs 1
0
(2,773 )
Foreign currency translation
13,957
Balance at the end of the year
Accumulated amortization
Balance at the beginning of the year
Amortization
Disposals
Write-offs 1
Foreign currency translation
Balance at the end of the year
2,241
930
(13 )
0
(382 )
2,776
1,293
281
0
(1,350 )
(224 )
0
76
1,306
0
(1,350 )
(32 )
0
1,293
0
0
0
(224 )
1,069
76
54
0
0
(14 )
116
2,387
0
(17 )
0
(374 )
1,996
314
170
(15 )
0
(35 )
434
Total
31.12.02
31.12.01
4,973
281
(17 )
(1,350 )
(822 )
3,065
466
1,530
(15 )
(1,350 )
(81 )
550
21,792
290
(115)
(1,350)
(3,595)
17,022
2,707
2,460
(28)
(1,350)
(463)
3,326
21,166
456
0
(247)
417
21,792
1,629
1,323
0
(247)
2
2,707
Net book value at
the end of the year
11,181
0
953
1,562
2,515
13,696
19,085
1 Represents write-offs of fully amortized goodwill and other intangible assets.
111
UBS Group Financial Statements
Notes to the Financial Statements
Note 15 Goodwill and Other Intangible Assets (continued)
The following table presents the disclosure of goodwill and other intangible assets by Business Group
for the year ended 31 December 2002.
CHF million
Goodwill
UBS Wealth Management &
Business Banking
UBS Global Asset Management
UBS Warburg
UBS PaineWebber
Corporate Center
UBS Group
Other Intangible Assets
UBS Wealth Management &
Business Banking
UBS Global Asset Management
UBS Warburg
UBS PaineWebber
Corporate Center
UBS Group
Balance
at the
beginning
of the year
Additions
and
reallo-
cations
1,305
2,926
4,950
5,390
7
14,578
65
2
390
3,942
108
4,507
0
0
0
0
9
9
0
0
0
281
0
281
Disposals
and
other
Balance
at the end
reductions Amortization translation of the year
Foreign
currency
(8 )
(5 )
(25 )
(33 )
(14 )
(85)
(2 )
0
0
0
0
(2)
(81 )
(269 )
(315 )
(264 )
(1 )
(930)
(30 )
(1 )
(49 )
(1,427 )
(23 )
(1,530)
(213 )
(467 )
(817 )
(894 )
0
1,003
2,185
3,793
4,199
1
(2,391)
11,181
0
0
(63 )
(662 )
(16 )
(741)
33
1
278
2,134
69
2,515
Until 31 December 2001, goodwill and other intangible assets relating to the merger of UBS and
PaineWebber were reported in the UBS Warburg Business Group. With the separation of UBS
PaineWebber from UBS Warburg at 1 January 2002, goodwill and other intangible assets have been
allocated to the Business Groups that have benefited from the merger with PaineWebber. For further
information about disclosure by Business Group, including the amortization of goodwill and other
intangible assets of previous years, please see Note 2a: Segment Reporting by Business Group.
The estimated, aggregated amortization expenses for Goodwill and Other intangible assets are as
follows:
CHF million
Estimated, aggregated amortization expenses for:
2003
2004
2005
2006
2007
2008 and thereafter
Total
Goodwill
Other
intangible assets
817
769
738
702
646
7,509
11,181
189
170
166
153
144
1,693
2,515
Total
1,006
939
904
855
790
9,202
13,696
112
Note 16 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
21
31.12.02
31.12.01
2,800
1,449
436
250
1,071
2,946
8,952
3,449
1,431
452
567
844
3,132
9,875
113
UBS Group Financial Statements
Notes to the Financial Statements
Balance Sheet: Liabilities
Note 17 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
31.12.02
83,178
76,884
229,992
306,876
390,054
31.12.01
106,531
67,782
265,999
333,781
440,312
Note 18 Debt Issued
The Group issues both CHF and non-CHF
denominated fixed and floating rate debt. Float-
ing rate debt generally 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 sen-
ior indebtedness and certain other obligations of
the Group. At 31 December 2002 and 31 De-
cember 2001, the Group had CHF 9,933 million
and CHF 13,571 million, respectively, in subor-
dinated debt. Subordinated debt usually pays
interest annually and provides for single prin-
cipal payments upon maturity. At 31 Decem-
ber 2002 and 31 December 2001, the Group had
CHF 46,678 million and CHF 43,641 million,
respectively, in unsubordinated debt (excluding
money market paper).
The Group issues debt with returns linked to
equity, interest rates, 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 2002 and 31 De-
cember 2001, the Group had CHF 1,389 million
and CHF 1,397 million, respectively, in convert-
ible and exchangeable debt on UBS shares and
notes with warrants attached on UBS shares out-
standing.
In addition the Group uses interest rate and
foreign exchange derivatives to manage the risks
inherent in certain debt issues. In the case of
interest rate risk management, the Group applies
hedge accounting as discussed in Note 1 –
Summary of Significant Accounting Policies and
Note 23 – Derivative Instruments. As a result
of applying hedge accounting, the carrying value
of debt issued is CHF 1,361 million higher
reflecting changes in fair value due to interest
rate movements.
114
Note 18 Debt Issued (continued)
CHF million
Money market paper issued
Bonds issued
Shares in bond issues of the Swiss Regional or
Cantonal Banks’ Central Bond Institutions
Medium-term notes
Total debt issued
31.12.02
72,800
51,872
517
4,222
129,411
31.12.01
99,006
51,061
934
5,217
156,218
The following table shows the split between fixed and floating rate debt issues based on the contrac-
tual 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 those of floating rate debt.
Contractual maturity date
UBS AG (Parent Bank)
Subsidiaries
CHF million
2003
2004
2005
2006
2007
2008–2010
Thereafter
Total
Fixed
rate
24,010
4,965
4,998
3,359
3,166
1,714
2,726
44,938
Floating
rate
244
609
726
790
1,564
1,048
6,672
11,653
Fixed
rate
52,095
1,432
907
8,000
1,105
2,476
269
66,284
Floating
rate
70
574
382
439
70
1,949
3,052
6,536
Total
31.12.02
76,419
7,580
7,013
12,588
5,905
7,187
12,719
129,411
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,
where applicable. As a result, the notional amount shown does not necessarily correspond to the car-
rying amount of the debt and the stated interest rate on the debt does not necessarily reflect the effec-
tive interest rate the Group is paying to service its debt after the separation of embedded derivatives
and the application of hedge accounting, where applicable.
Publicly placed bond issues of UBS AG (Parent Bank) outstanding as at 31.12.2002 1
Year of
issue
Interest
rate in %
2001
2002
2001
2002
1993
2001
2001
2002
2002
1997
1998
1993
1993
16.000
0.000
8.000
11.250
4.875
8.750
13.500
0.000
FRN
1.500
FRN
3.500
4.000
Remarks
Maturity
GOAL on Siemens
CLN Linked to GECC
GOAL on UBS
GOAL on Royal Dutch Petroleum
subordinated
GOAL on General Electric
GOAL on Nokia Oyj
Linked to 30yr OAT
CLN Linked to GECC
Indexed to UBS Currency Portfolio
Convertible into
UBS Dutch Corporate Basket
subordinated
subordinated
17.01.2003
18.02.2003
26.02.2003
28.02.2003
03.03.2003
07.03.2003
10.03.2003
11.03.2003
14.03.2003
14.03.2003
20.03.2003
31.03.2003
31.03.2003
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
CLN
Floating Rate Note
Credit Linked Note
Early
redemption
option
Currency
Notional
amounts
in millions
in local
currency
EUR
EUR
CHF
EUR
CHF
USD
EUR
GBP
USD
EUR
EUR
CHF
CHF
55
50
220
95
200
125
45
50
100
51
57
200
200
115
UBS Group Financial Statements
Notes to the Financial Statements
Note 18 Debt Issued (continued)
Publicly placed bond issues of UBS AG (Parent Bank) outstanding as at 31.12.20021
Year of
issue
Interest
rate in %
Remarks
Maturity
Early
redemption
option
Currency
Notional
amounts
in millions
in local
currency
2001
2001
2002
2001
2002
2001
2001
2001
1995
2001
2002
2002
2002
1993
2002
1994
2002
2002
2002
2002
2001
1991
1999
2001
1997
1995
1995
2002
2002
1995
2002
2002
2002
1995
2002
1998
1995
2002
1995
2002
1995
2002
1999
2001
1996
1996
2000
1996
2001
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
CLN
Floating Rate Note
Credit Linked Note
116
BULS on technology stock basket
BULS on Celestica and others
GOAL on UBS
GOAL on Deutsche Bank
GOAL on DJ Euro Stoxx 50 index
GOAL on Aventis
GOAL on Total SA
GOAL on E.ON AG
subordinated
GOAL on Pfizer
GOAL on SUEZ SA (Suez)
GOAL on Royal Dutch Petroleum
CLN Linked to Allianz AG
0.000
0.000
9.500
10.250
9.500
7.250
6.000
7.750
5.250
8.250
9.500
13.000
FRN
3.000
Linked to Basket of Common Stock
0.000
subordinated
6.250
7.750
GOAL on Novartis
5.125 GOAL on General Electric Company
GOAL on Unilever NV
6.000
6.250
GOAL on Nestlé AG
0.000 Cliquet GROI on NASDAQ 100 Index
4.250
subordinated
3.500
1.750
7.380
4.000
5.500
0.000
0.500
5.625
0.000
Exchangeable bonds on Yukos
subordinated
subordinated
Convertible into Nasdaq 100 Index
Equity GROI
Convertible into STOXX 50 Index
subordinated
GROI on FTSE 100 Index
Principal Protected Note Linked
to NASDAQ 100-Index
Exchangeable Bonds on Yukos
subordinated
GROI – Australian
Growth Guaranteed Fund II
subordinated
subordinated
Cliquet GROI – Units on SMI Index
subordinated
Exchangeable Bonds on Yukos
Exchangeable Bonds on Yukos
Straight Bond
Equity Exchangeables into
Euro. Insurance Basket
subordinated
Straight Bond
subordinated
BULS on S&P 500
0.000
0.000
8.750
0.000
6.750
5.250
0.000
5.000
0.125
4.500
0.250
3.500
1.000
4.250
4.000
2.500
7.250
0.000
10.04.2003
28.04.2003
22.05.2003
30.05.2003
02.06.2003
05.06.2003
11.06.2003
17.06.2003
20.06.2003
16.07.2003
04.09.2003
06.10.2003
24.10.2003
26.11.2003
02.12.2003
06.01.2004
28.01.2004
30.01.2004
06.02.2004
14.05.2004
27.05.2004
25.06.2004
01.07.2004
31.08.2004
26.11.2004
07.02.2005
10.02.2005
07.03.2005
21.03.2005
13.04.2005
25.04.2005
04.05.2005
19.06.2005
20.06.2005
21.06.2005
15.07.2005
18.07.2005
25.07.2005
24.08.2005
19.09.2005
21.11.2005
19.12.2005
26.01.2006
01.02.2006
06.02.2006
14.02.2006
29.03.2006
17.07.2006
01.09.2006
01.02.2004
USD
USD
CHF
EUR
EUR
EUR
EUR
EUR
CHF
USD
EUR
EUR
USD
CHF
USD
USD
CHF
USD
EUR
CHF
USD
CHF
EUR
USD
GBP
CHF
CHF
AUD
EUR
CHF
GBP
USD
USD
GBP
AUD
USD
CHF
CHF
CHF
USD
CHF
USD
EUR
EUR
CHF
CHF
CHF
USD
USD
78
40
110
40
50
75
45
40
200
70
35
35
150
200
63
300
100
75
40
100
42
300
250
310
250
150
150
233
75
150
46
46
120
249
67
200
200
53
250
120
300
160
650
100
250
200
250
500
54
Note 18 Debt Issued (continued)
Publicly placed bond issues of UBS AG (Parent Bank) outstanding as at 31.12.20021
Year of
issue
Interest
rate in %
Remarks
Maturity
Early
redemption
option
Currency
Notional
amounts
in millions
in local
currency
1996
2001
2001
2002
1995
2002
1996
2001
1997
1997
1997
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
1998
1997
2002
1995
1995
1997
1995
1995
1996
7.250
5.500
0.000
FRN
5.000
FRN
6.250
0.000
8.000
8.000
5.750
FRN
1.000
FRN
0.500
0.500
0.250
FRN
0.500
0.000
7.250
1.250
5.000
3.500
5.875
FRN
7.375
7.000
7.375
7.500
8.750
7.750
subordinated
GOAL on UBS
Cliquet GROI-Units
on Nasdaq 100-Index
Callable Daily Range Accrual Note
subordinated
Callable Daily Range Accrual Note
subordinated
Zero-rate Note O’Connor Fund
subordinated
subordinated
subordinated
Step-Up Callable
Daily Range Accrual Note
Exchangeable on DJ Euro Stoxx 50E
CLN
Exchangeable Bond
on the S&P 500 Index
Exchangeable Bond
on the DJ Euro STOXX 50
Exchangeable Bond on the SMI
Callable Daily Range Accrual Note
Exchangeable bond
on Royal Dutch Petroleum
Principal Protected Notes Linked
to the S&P 500 Index
GOAL on Royal Dutch Petroleum
Linked to Nikkei 225 Index
Linked to Nikkei 225 Index
subordinated
Callable Daily Range Accrual Note
subordinated
subordinated
subordinated
subordinated
subordinated
subordinated
01.09.2006
02.10.2006
19.10.2006
07.11.2006
07.11.2006
13.11.2006
06.12.2006
29.12.2006
08.01.2007
08.01.2007
12.03.2007
15.07.2007
23.07.2007
01.09.2007
05.09.2007
05.09.2007
05.09.2007
02.10.2007
30.10.2007
07.11.2007
14.11.2007
28.11.2007
19.12.2007
27.08.2008
18.08.2009
23.10.2012
15.07.2015
15.10.2015
15.06.2017
15.07.2025
18.12.2025
01.09.2026
07.02.2003
12.02.2003
15.01.2003
02.01.2003
23.01.2003
USD
CHF
USD
USD
CHF
USD
EUR
EUR
GBP
GBP
EUR
USD
EUR
USD
USD
EUR
CHF
USD
EUR
USD
EUR
JPY
JPY
CHF
EUR
USD
USD
USD
USD
USD
GBP
USD
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
CLN
Floating Rate Note
Credit Linked Note
150
106
39
56
250
40
254
40
242
302
204
67
50
50
40
35
75
61
100
52
150
7,742
5,537
300
305
64
150
300
300
350
149
300
117
UBS Group Financial Statements
Notes to the Financial Statements
Note 18 Debt Issued (continued)
Publicly placed bond issues of UBS subsidiaries outstanding as at 31.12.2002 1
Year of
issue
Interest
rate in %
Remarks
Maturity
Early
redemption
option
Currency
Brooklands Euro Referenced Linked Notes 2001-1 Ltd
2002
2002
2002
2002
2001
2001
2.594
3.480
3.293
3.893
FRN
FRN
15.12.2012
15.12.2012
23.12.2012
23.12.2012
20.12.2013
20.12.2013
Alpine Partners L.P.
2000
FRN
North Street
2000
2002
2002
2000
2000
2000
2002
2002
2002
2002
2002
2002
2001
2001
2001
2001
FRN
FRN
FRN
20.000
FRN
18.000
FRN
20.000
FRN
5.160
FRN
FRN
FRN
FRN
FRN
FRN
UBS Americas Inc. (former PaineWebber)
1993
2000
1998
1998
1999
1999
1995
1999
1993
1996
1998
1998
1998
1996
1999
1994
7.875
1.270
6.320
6.450
FRN
6.375
8.875
2.210
6.500
6.750
6.720
6.730
6.550
7.625
7.625
7.625
Eisberg Finance Ltd.
1998
1998
1998
FRN
FRN
FRN
08.10.2009
08.01.2003
20.08.2003
28.04.2011
28.04.2011
28.04.2011
28.04.2011
30.10.2011
30.10.2011
30.01.2016
30.01.2016
30.01.2016
30.01.2016
30.01.2016
20.08.2030
30.04.2031
30.04.2031
30.07.2031
30.07.2031
17.02.2003
13.03.2003
18.03.2003
01.12.2003
11.05.2004
17.05.2004
15.03.2005
15.03.2005
01.11.2005
01.02.2006
01.04.2008
03.04.2008
15.04.2008
15.10.2008
01.12.2009
17.02.2014
15.06.2004
15.06.2004
15.06.2004
10.10.2003
10.10.2003
10.10.2003
EUR
EUR
EUR
EUR
EUR
EUR
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
Notional
amounts
in millions
in local
currency
100
75
75
35
50
50
445
40
100
50
43
61
43
40
49
46
61
353
100
60
100
100
60
100
9,000
45
340
45
525
125
45
200
100
35
43
250
150
275
200
83
65
41
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
CLN
Floating Rate Note
Credit Linked Note
118
Note 18 Debt Issued (continued)
Publicly placed bond issues of UBS subsidiaries outstanding as at 31.12.2002 1
Year of
issue
Interest
rate in %
UBS Finance N.V., Curaçao
1997
1998
0.000
0.000
UBS Australia Holdings Ltd.
1999
5.000
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
2002
0.000
2002
0.000
2002
0.000
2002
0.000
2002
0.000
2002
0.000
2002
0.000
2002
0.000
2002
0.000
2002
0.000
2002
0.000
2001
0.000
2001
0.000
2001
0.000
2002
0.000
2002
0.000
2001
0.000
2001
0.000
2002
Remarks
Maturity
Early
redemption
option
Currency
Notional
amounts
in millions
in local
currency
Zero Coupons
Zero Coupons
29.01.2027
03.03.2028
03.03.2003
European commercial paper
25.02.2004
19.12.2005
30.06.2006
30.06.2006
31.07.2006
08.08.2006
30.09.2006
30.09.2006
31.12.2006
31.12.2006
31.12.2006
31.12.2006
31.12.2006
31.12.2006
31.12.2006
31.12.2006
31.12.2006
31.12.2006
31.12.2006
02.01.2007
02.01.2007
02.01.2007
30.03.2007
31.12.2007
30.09.2011
31.12.2011
28.09.2012
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
30.06.2003
31.03.2003
30.06.2003
30.06.2003
EUR
EUR
AUD
EUR
EUR
USD
EUR
EUR
USD
CHF
USD
EUR
USD
EUR
EUR
EUR
USD
EUR
CHF
USD
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
226
81
104
56
505
202
500
77
200
200
350
300
350
450
300
450
250
250
250
250
250
100
100
100
60
50
50
150
50
1 In this table only publicly placed bonds with a carrying value exceeding CHF 50 million (prior to the elimination of own bonds held) have been
disclosed. The total carrying amount of the bonds disclosed in this table is CHF 34,320 million. The total carrying amount of publicly placed bonds
of UBS Group (prior to the elimination of own bonds held) is CHF 44,759 million of the total bond issues.
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
CLN
Floating Rate Note
Credit Linked Note
119
UBS Group Financial Statements
Notes to the Financial Statements
Note 19 Other Liabilities
CHF million
Note
31.12.02
31.12.01
Provisions
Provision for commitments and contingent liabilities
Current tax liabilities
Deferred tax liabilities
VAT and other tax payables
Settlement and clearing accounts
Other payables
20
9b
21
1,375
366
2,079
2,239
613
1,354
4,313
1,748
305
1,799
2,827
622
4,473
3,884
Total other liabilities
12,339
15,658
Note 20 Provisions
CHF million
Operational
Litigation
Balance at the beginning of the year
New provisions charged to income
Recoveries
Provisions applied
Reclassifications
Foreign currency translation
Balance at the end of the year
1,036
210
16
(439 )
(9 )
(93 )
721
712
478
9
(463 )
9
(91 )
654
Total
31.12.02
Total
31.12.01
1,748
688
25
(902)
0
(184)
1,375
2,294
384
95
(1,115)
64
26
1,748
Note 21 Income Taxes
CHF million
For the year ended
Domestic
Current
Deferred
Foreign
Current
Deferred
Total income tax expense
31.12.02
31.12.01
31.12.00
938
(32)
249
(477)
678
563
231
546
61
1,401
1,325
233
451
311
2,320
The Group made net tax payments, including domestic and foreign taxes, of CHF 572 million,
CHF 1,742 million and CHF 959 million for the full years of 2002, 2001 and 2000, respectively.
120
Note 21 Income Taxes (continued)
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 and other
Change in deferred tax valuation allowance
Income tax expense
31.12.02
31.12.01
31.12.00
4,544
6,510
(1,966)
1,136
(341)
51
(349)
(378)
291
301
(122)
89
678
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
1,401
2,320
Significant components of the Group’s gross deferred income tax assets and liabilities are as follows:
CHF million
Deferred tax assets
Compensation and benefits
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
31.12.02
31.12.01
1,559
84
2,883
330
779
5,635
(2,835)
2,800
412
430
470
182
745
2,239
1,778
122
2,902
259
1,365
6,426
(2,977)
3,449
449
464
571
298
1,045
2,827
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.
Certain foreign branches and subsidiaries of the Group have deferred tax assets related to net
operating loss carry forwards and other items. Due to realization of these assets being uncertain,
the Group has established valuation allowances of CHF 2,835 million (CHF 2,977 million at
31 December 2001). For companies that suffered tax losses in either the current or preceding year an
amount of CHF 947 million (CHF 965 million at 31 December 2001) 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 Group 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 dis-
tributed, additional taxes of approximately CHF 40 million would be due.
121
UBS Group Financial Statements
Notes to the Financial Statements
Note 21 Income Taxes (continued)
At 31 December 2002 net operating loss carry forwards totaling CHF 6,572 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
Note 22 Minority Interests
CHF million
Balance at the beginning of the year
Issuance of trust preferred securities
Other increases
Decreases and dividend payments
Foreign currency translation
Minority interest in net profit
Balance at the end of the year
31.12.02
29
252
6,291
6,572
31.12.02
31.12.01
4,112
0
172
(377)
(709)
331
3,529
2,885
1,291
0
(461)
53
344
4,112
Note 23 Derivative Instruments
Type of derivatives
The Group uses the following derivative finan-
cial instruments for both trading and hedging
purposes:
Swaps are transactions in which two parties
exchange cash flows on a specified notional
amount for a predetermined period. The major
types of swap transaction undertaken by the
Group are as follows:
– Interest rate swap contracts generally entail
the contractual exchange of fixed and floating
rate interest payments in a single currency,
based on a notional amount and an interest
reference rate.
– Cross currency swaps involve the exchange
of interest payments based on two different
currency principal balances and interest refer-
ence rates and generally also entail exchange
of principal amounts at the start and / or end
of the contract.
– Credit default swaps (CDS) are the most com-
mon form of credit derivative, under which the
party buying protection makes one or more
payments to the party selling protection during
the life of the swap in exchange for an under-
taking by the seller to make a payment to the
buyer following a credit event, as defined in the
contract, with respect to a third party. Settle-
ment following a credit event may be a cash
amount, or cash in return for physical delivery
of one or more deliverable obligations of the
credit entity, as defined in the contract and is
made regardless of whether the protection
buyer has suffered a loss. After a credit event
and settlement, the contract is terminated.
– Total Rate of Return Swaps give the total
return receiver exposure to all of the cash flow
and economic benefits and risks of an under-
lying security without actually owning the
security, while the total return payer has a
synthetic short position in the underlying
reference security.
Forwards and futures are contractual obligations
to buy or sell financial instruments or commodi-
ties on a future date at a specified price. Forward
contracts are tailor-made agreements that are
transacted between counterparties in the over-
the-counter (OTC) market, whereas futures are
122
standardized contracts transacted on regulated
exchanges.
ments are explained in Note 1 v) where terms
used in the following sections are explained.
Options are contractual agreements under which
the seller (writer) grants the purchaser the right,
but not the obligation, either to buy (call option)
or to sell (put option) by or at a set date, a speci-
fied amount of a financial instrument or com-
modity at a predetermined price. The seller
receives a premium from the purchaser for this
right. Options may be traded OTC or on a
regulated exchange.
Derivatives transacted 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 competi-
tive prices to enable them to take, transfer,
modify or reduce current or expected risks.
Trading includes market-making, positioning
and arbitrage activities: market-making involves
quoting bid and offer prices to other market par-
ticipants with the intention of generating rev-
enues based on spread and volume; positioning
means managing market risk positions with the
expectation of profiting from favorable move-
ments in prices, rates or indices; arbitrage activ-
ities involve identifying and profiting from price
differentials between markets and products.
Derivatives transacted for hedging purposes
The Group enters into derivative transactions
which are designated and qualify as either fair
value or cash flow hedges for recognized assets or
liabilities or forecast transactions. It also enters
into derivative transactions which provide eco-
nomic hedges for risk exposures but do not meet
the accounting requirements for hedge account-
ing treatment. As stated in Note 1, Summary of
Significant Accounting Policies, part v) Deriva-
tive instruments and hedging, the Group uses
CDSs as economic hedges for credit risk expo-
sures in the loan and traded product portfolios
but cannot apply hedge accounting to such posi-
tions. Gains or losses on these CDSs have there-
fore been recorded in trading income.
Derivatives designated and accounted for
as hedging instruments
The Group’s accounting policies for derivatives
designated and accounted for as hedging instru-
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 2002, the
Group recognized a net loss of CHF 10 million
(reported as Net trading income in the Financial
Statements), which represents the ineffective
portion of fair value hedges.
As at 31 December 2002, the fair value of out-
standing derivatives designated as fair value
hedges was a CHF 1,925 million net positive
replacement value.
Cash flow hedges of individual variable
rate assets and liabilities
The Group uses interest rate swaps to protect
against changes in cash flows of certain variable rate
debt issues. For the year ended 31 December 2002,
there has been no material gain or loss associated
with ineffective portions of cash flow hedges.
Gains and losses on derivative contracts
designated as cash flow hedges are initially
recorded in Shareholders’ equity but are reclas-
sified to current period earnings when the
hedged cash flows occur, as explained in Note 1,
part v) Derivative instruments and hedging. As
at 31 December 2002, deferred net gains on
derivative instruments designated as cash flow
hedges accumulated in Shareholders’ equity
were CHF 2 million.
Cash flow hedges of forecast 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 resulting from the
impact of changes in market interest rates on
reinvestment or reborrowing of current balances
and expected future cash flows. The Group accu-
mulates information about financial assets and
liabilities, and thereby estimates and aggregates
the amounts and timing of future period cash
flows, based on the contractual terms of instru-
ments and other factors including estimates of
prepayments and defaults. The aggregate cash
flows form the basis for identifying the non-trad-
123
UBS Group Financial Statements
Notes to the Financial Statements
ing interest rate risk of the Group, which is
hedged with interest rate swaps, which extend
over a twenty-four-year period.
The schedule of forecast principal cash flows as
at 31 December 2002 is as follows:
CHF billion
< 1 year
1–3 years
3–5 years
5–10 years
over 10 years
Cash inflows (Assets)
Cash outflows (Liabilities)
Net cash flows
119
159
(40)
202
247
(45)
124
193
(69)
128
324
(196)
8
237
(229)
Gains and losses on derivatives designated as
cash flow hedges of forecast transactions are
initially recorded in Shareholders’ equity as
“Gains / losses not recognized in the income
statement” and transferred to current period
earnings when the forecast cash flows occur. As
at 31 December 2002, the fair value of outstand-
ing derivatives designated as cash flow hedges of
forecast transactions was a CHF 181 million net
unrealized loss. Amounts reclassified from
Gains / losses not recognized in the income state-
ment to current period earnings due to discontin-
uation of hedge accounting 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 a derivative’s under-
lying contract amount and is the basis upon
which changes in the value of derivatives are
measured. It provides an indication of the under-
lying volume of business transacted by the Group
but does not provide any measure of risk.
The majority of derivatives are negotiated as
to amount, tenor and price, between the bank
and its counterparty, whether other professionals
or customers (OTC). The rest are standardized
in terms of their amounts and settlement dates
and are bought and sold in organized markets
(exchange traded).
Positive replacement value represents the cost
to the Group of replacing all transactions with a
fair value in the Group’s favour if all the relevant
counterparties of the Group were to default at
the same time, and transactions could be re-
placed instantaneously. Negative replacement
value is the cost to the Group’s counterparties of
replacing all their transactions with the Group
where the fair value is in their favor if the Group
were to default. The total positive and negative
replacement values are included in the balance
sheet separately. For internal credit risk meas-
urement the potential evolution of the value of
the portfolio of trades with each counterparty is
also modelled over its life (potential future expo-
sure), taking into account legally enforceable
close out netting agreements where applicable
(see below).
Credit mitigation
The Group seeks, wherever possible, to enter into
master netting agreements with OTC derivative
counterparties. Where the Group has such an
agreement and it has a legal opinion that it is
enforceable by UBS in the event of insolvency of
the counterparty, positive and negative replace-
ment values of transactions covered by the agree-
ment are netted and a single payable or receivable
amount is included in the balance sheet. The
impact of master netting agreements as at
31 December 2002 is to reduce positive and
negative replacement values on OTC derivative
instruments by approximately CHF 167 billion.
The impact can change substantially over short
periods of time, because the exposure is affected
by each transaction subject to the arrangement.
In line with general market trends, the Group
has also entered into bilateral collateral agreements
with major market participants to mitigate the
potential concentrations of exposure arising from
industry consolidation and the continuing increase
in volumes of OTC derivatives traded. The figures
in the tables do not, however, reflect the risk miti-
gating effects of such collateral agreements.
124
Note 23 Derivative Instruments (continued)
As at 31 December 2002
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
3,785
2,862
338
4,127
3,778
706
93
9,451
1,143
121
8,127
1,488
141
78,413
4,216
333
76,244
5,484
33
55,377
3,905
8
4,589
4,052
51,917 146,103 140,066
12,142
9,602
4,464
Total
notional
amount
CHF bn
1,517.3
5,753.0
663.2
4
16
1
0
4
0
17
40.3
101.1
6,989
8,627
10,687
9,737
82,770
82,061
59,315
56,389 159,761 156,814
8,074.9
2
15
17
7
21
28
95
194
289
504
782
1,286
1,636
2,308
3,944
2,740
1,726
4,466
2,852
162
3,014
958
35
993
4,585
2,679
7,264
4,209
2,564
6,773
164.6
14.5
179.1
2,406
21,561
2,223
3,100
20,641
2,219
1,005
8,962
1,681
1,732
10,292
1,636
232
8,627
361
270
8,907
312
11
3,360
7
1
3,990
3,654
42,510
4,272
5,103
43,830
4,167
252.0
1,843.1
500.8
1
1
0
1
0
1
0.0
0.1
26,190
25,961
11,649
13,660
9,220
9,489
3,378
3,991
50,437
53,101
2,596.0
329
205
534
231
217
1
449
235
325
560
257
289
1
547
150
407
557
121
373
4
498
9
86
8
63
723
1,023
617
942
0
6
18.0
38.6
0.0
0.2
95
71
1,746
1,565
56.8
5,393
8,676
1,406
12,441
583
2,515
512
3,496
917
6,650
205
7,125
124
403
219
794
7,017
18,244
2,342
23,856
861
246
316
247
443
338
0
1,620
0
831
33.2
99.3
7.4
7.5
14,930
14,093
3,414
4,255
8,010
7,668
527
1,013
26,881
27,029
147.4
5
5
3
3
2,629
2,670
346
304
2,629
2,670
346
304
0
0
2,980
0
2,980
2,977
0
2,977
24.9
0.0
24.9
48,665
49,161
29,228
32,155 104,847 104,486
66,329
62,457 249,069 248,259
166,977 166,977
82,092
81,282
1 PRV: Positive replacement value.
2 NRV: Negative replacement value.
3 Exchange-traded products include proprietary trades only.
125
UBS Group Financial Statements
Notes to the Financial Statements
Note 23 Derivative Instruments (continued)
As at 31 December 2001
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
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
8
8
14
14
1
1
1
1
0
0
0
0
9
0
9
15
0
15
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
12.4
440.3
726.0
6.4
0.0
6.4
1 PRV: Positive replacement value.
2 NRV: Negative replacement value.
3 Exchange-traded products include proprietary trades only.
126
Off-Balance Sheet Information
Note 24 Fiduciary Transactions
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.
CHF million
Placements with third parties
Fiduciary credits and other fiduciary financial transactions
Total fiduciary transactions
31.12.02
31.12.01
43,440
774
44,214
58,466
1,136
59,602
The Group also acts in its own name as trustee or in fiduciary capacities for the account of third par-
ties. The assets managed in such capacities are not reported on the balance sheet unless they are
invested with UBS. UBS earns commission and fee income from such transactions and assets. These
activities potentially expose UBS to liability risks in cases of gross negligence with regard to non-com-
pliance of its fiduciary and contractual duties. The risks associated with this business are covered by
the standard UBS risk framework.
Note 25 Commitments and Contingent Liabilities
The Group utilizes various lending-related finan-
cial instruments in order to meet the financial
needs of its customers. The Group issues com-
mitments to extend credit, standby and other let-
ters of credit, guarantees, commitments to enter
into repurchase agreements, note issuance facil-
ities and revolving underwriting facilities.
Guarantees represent irrevocable assurances,
subject to the satisfaction of certain 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 com-
mitments 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 facilities and is monitored with the same risk
control processes and specific credit risk policies.
For the years ended 31 December 2002, 2001
and 2000 the Group recognized expense in the
income statement related to obligations incurred
for contingencies and commitments of CHF 13
million, CHF 25 million and CHF 1 million,
respectively.
The Group generally enters into sub-partici-
pations to mitigate the risks from the Group’s
commitments and contingencies. A sub-partici-
pation is an agreement with another party to
fund a portion 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-participant has only an indirect
relationship with the borrower. The Group will
only enter into sub-participation agreements
with banks whose rating is at least equal to or
higher than that of the borrower.
127
UBS Group Financial Statements
Notes to the Financial Statements
Note 25 Commitments and Contingent Liabilities (continued)
CHF million
31.12.02
31.12.01
Contingent liabilities
Credit guarantees and similar instruments 1
Sub-participations
Total
Performance guarantees and similar instruments 2
Sub-participations
Total
Irrevocable commitments under documentary credits
Sub-participations
Total
Gross contingent liabilities
Sub-participations
Net contingent liabilities
Irrevocable commitments
Undrawn irrevocable credit facilities
Sub-participations
Total
Liabilities for calls on shares and other equities
Gross irrevocable commitments
Sub-participations
Net irrevocable commitments
Gross commitments and contingent liabilities
Sub-participations
Net commitments and contingent liabilities
11,522
(650)
10,872
3,216
(348)
2,868
1,856
(259)
1,597
16,594
(1,257)
15,337
39,306
(446)
38,860
21
39,327
(446)
38,881
55,921
(1,703)
54,218
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
1 Credit guarantees in the form of bills of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit,
2 Bid bonds, performance bonds, builders’
endorsement liabilities from bills rediscounted, advance payment guarantees and similar facilities.
guarantees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and similar facilities.
CHF million
Overview of collateral
Gross contingent liabilities
Gross irrevocable commitments
Liabilities for calls on shares and other equities
Total 31.12.2002
Total 31.12.2001
Mortgage
collateral
Other
collateral
Unsecured
Total
275
1,084
1,359
1,711
8,254
14,956
23,210
25,625
8,065
23,266
21
31,352
48,857
16,594
39,306
21
55,921
76,193
Other commitments
The Group enters into commitments to fund
external private equity funds and investments,
which typically expire within five years. The com-
mitments themselves do not involve credit or mar-
ket risk as the funds purchase investments at mar-
ket value at the time the commitments are drawn.
The maximum amount available to fund these
investments at 31 December 2002 and 31 De-
cember 2001 was CHF 2,245 million and CHF
3,548 million, respectively.
128
Note 26 Operating Lease Commitments
At 31 December 2002, UBS was obligated under a number of non-cancellable operating leases for
premises and equipment used primarily for banking purposes. The significant premises leases usually
include renewal options and escalation clauses in line with general office rental market conditions as
well as rent adjustments based on price indices. However, the lease agreements do not contain
contingent rent payment clauses and purchase options. The leases also do not impose any restrictions
on UBS’s ability to pay dividends, engage in debt financing transactions or enter into further lease
agreements.
Our minimum commitments for non-cancellable leases of premises and equipment are presented
as follows:
CHF million
Operating leases due
2003
2004
2005
2006
2007
2008 and thereafter
Total commitments for minimum payments under operating leases
31.12.02
1,038
913
777
663
623
5,082
9,096
Operating expenses include CHF 1,193 million, CHF 1,092 million and CHF 816 million in respect
of operating lease rentals for the year ended 31 December 2002, 31 December 2001 and 31 Decem-
ber 2000, respectively.
129
UBS Group Financial Statements
Notes to the Financial Statements
Additional Information
Note 27 Pledged Assets
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. The following table shows additional
information about assets pledged or assigned as security for liabilities and assets subject to reser-
vation of title for the years ended 31 December 2002 and 31 December 2001. The securities present-
ed in the table below include securities pledged in respect of securities lending and repurchase agree-
ments.
Carrying
amount
31.12.02
808
50,945
129
2
51,884
Related
liability
31.12.02
506
37,038
33
0
37,577
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
CHF million
Mortgage loans
Securities
Property and equipment
Other
Total pledged assets
Note 28 Litigation
Due to the nature of their business, the bank and
other companies within the UBS Group are
involved in various claims, disputes and legal
proceedings, arising in the ordinary course of
business. The Group makes provisions for such
matters when, in the opinion of management and
its professional advisors, it is probable that a pay-
ment will be made by the Group, and the amount
can be reasonably estimated (see Note 20).
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 the management that such claims
are either without merit, can be successfully
defended or will not have a material adverse
effect on the Group’s financial condition, results
of operations or liquidity.
Note 29 Financial Instruments Risk Position
This section presents information about the
Group’s exposure to and its management and
control of risks, in particular the primary risks
associated with its use of financial instruments:
– market risk is exposure to observable market
variables such as interest rates, exchange rates
and equity markets
– credit risk is the risk of loss resulting from
client or counterparty default and arises on
credit exposure in all forms, including settle-
ment risk
– liquidity and funding risk is the risk that the
Group is unable to fund assets or meet obliga-
tions at a reasonable price or, in extreme situ-
ations, at any price.
This section also presents and explains the
Group’s regulatory capital position.
130
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk
(a)(i) Overview
Market risk is the risk of loss arising from move-
ments in observable market variables such as
interest rates, exchange rates and equity markets.
In addition to these and other general market risk
factors, the risk of price movements specific to an
individual issuer of securities is considered mar-
ket risk.
Market risk is incurred in UBS primarily
through trading activities which are centered in
the Corporate and Institutional Clients business
of UBS Warburg. It arises primarily from market
making, client facilitation and proprietary posi-
tions in equities, fixed income and interest rate
products, foreign exchange and, to a lesser extent,
precious metals and energy. Such activities are
mainly in OECD markets, with some business in
emerging markets.
Group Treasury assumes non-trading risk
positions that arise from its balance sheet man-
agement activities.
Further market risks arise, but to a much
lesser extent, in other businesses primarily from
the facilitation of customer business.
Market risk measures are applied to all for-
eign exchange, precious metal and energy posi-
tions, to the trading books of UBS Warburg, to
interest rate risk in the Group Treasury book and
the private banks, and to any other material mar-
ket risk arising.
The principal risk measures and controls on
market risk are Value at Risk (VaR) and stress
loss. VaR expresses the potential loss on the
current portfolio assuming a specified time hori-
zon before positions can be adjusted (holding
period), and measured to a specified level of con-
fidence, based on historical market movements.
Stress loss is assessed against a set of forward-
looking scenarios, approved by the Board of
Directors, using stress moves in market variables.
Complementary controls are also applied where
appropriate, to prevent undue concentrations,
including limits on exposure to individual market
risk variables, such as individual interest or
exchange rates, and limits on positions in the
securities of individual issuers. These controls are
set at levels which reflect variations in price
volatility and market depth and liquidity.
(a)(ii) Interest Rate Risk
Interest rate risk is the risk of loss resulting from
changes in interest rates. It is controlled primarily
through the limit structure described in (a)(i)
above. Exposure to interest rate movements can
be expressed for all interest rate sensitive posi-
tions, whether marked to market or subject to
accrual accounting, as the impact on their fair
values of a one basis point (0.01%) change in
interest rates. This sensitivity, analyzed by time
band, is set out below. Interest rate sensitivity is
one of the inputs to the VaR model.
It should be noted that, in management’s view,
any representation of interest rate risk at a spe-
cific date offers only a snapshot of the risks taken
by the Group, since both trading and non-trading
positions can vary significantly on a daily basis,
because they are actively managed. As such, it
may not be representative of the level of risk at
other times, either in general or in specific cur-
rencies or tenors. Furthermore, the presence in
the portfolio of option products means that only
limited inferences can be drawn about exposure
to larger movements in interest rates.
The table sets out the extent to which the
Group was exposed to interest rate risk at 31 De-
cember 2001 and 2002. It shows the net impact
of a one basis point (0.01%) increase in market
interest rates across all time bands on the fair val-
ues of interest rate sensitive positions, including
balance sheet assets and liabilities and deriva-
tives. The impact of such an increase in interest
rates depends on the net asset or net liability posi-
tion of the Group in each category, currency and
time band in the table. A negative amount in the
table reflects a potential reduction in fair value as
a result of an increase in interest rates, while a
positive amount reflects a potential increase in
fair value.
131
UBS Group Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (continued)
Interest rate sensitivity position
Interest rate sensitivity by time bands at 31.12.2002
CHF thousand
per basis point increase
Within 1
month
1 to 3
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
(10 )
(42 )
(93 )
26
114
(1 )
(78 )
(1 )
21
0
(46 )
0
211
(153 )
(256 )
(82 )
33
10
200
(6 )
12
1
(61 )
0
3 to 12
months
(287 )
(365 )
(1,021 )
(72 )
12
(2 )
(227 )
(39 )
(502 )
0
500
(4)-
1 to 5
years
(47 )
(6,504 )
(2,668 )
(927 )
(1,387 )
(86 )
(453 )
92
(249 )
18
(54 )
(1)
Interest rate sensitivity by time bands at 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 )
Over 5
years
(18 )
(5,119 )
2,445
(230 )
728
(193 )
(269 )
587
(204 )
(24 )
(286 )
(3 )
Over 5
years
(314 )
(6,030 )
(2,115 )
(15 )
(806 )
0
172
624
246
(4 )
369
(4)
Total
(151)
(12,183)
(1,593)
(1,285)
(500)
(272)
(827)
633
(922)
(5)
53
(8)
Total
(745)
(14,073)
(3,243)
(524)
(1,439)
136
(345)
735
(368)
(5)
207
(6)
Positions shown as “trading” are those which
contribute to market risk regulatory capital, i. e.
those considered “trading book” for regulatory
capital purposes (see section d). “Non-trading”
includes all other interest rate sensitive assets and
liabilities including derivatives designated as
hedges for accounting purposes (as explained in
Note 23). This distinction differs somewhat from
the accounting classification of trading and non-
trading assets and liabilities.
Details of money market paper and debt
instruments defined as trading portfolio for
accounting purposes are included in Note 11 and
of debt instruments defined as financial invest-
ments for accounting purposes in Note 12. Both
contribute to the interest rate sensitivity shown in
the table. Details of derivatives are shown in
Note 23 but it should be noted that interest rate
risk arises not only on interest rate contracts but
also on other forwards, swaps and options, and,
in particular, on forward foreign exchange con-
tracts.
Trading
The major part of this risk arises in UBS
Warburg’s fixed income securities, currency for-
wards and other derivatives, and money market
trading activities.
132
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (continued)
Non-trading
Interest rate risk is inherent in many of UBS’s
businesses and arises from factors such as differ-
ences in timing between contractual maturity or
re-pricing of assets, liabilities and derivative
instruments, and the difference in re-pricing
characteristics of floating rate indices, such as the
savings rate and six-month LIBOR.
Most non-trading interest rate risk is captured
at the point of business origination and trans-
ferred to a risk management unit – primarily the
Cash and Collateral Trading unit of UBS
Warburg or Group Treasury – where it is man-
aged within the market risk limits described in
(a)(i). The margin risks embedded in retail prod-
ucts remain and are subject to additional analysis
and control within the originating business
units.
Many client products have no contractual
maturity date or directly market-linked rate.
Their interest rate risk is transferred on a pooled
basis through “replication” portfolios – port-
folios of revolving transactions between the
originating business unit and Group Treasury at
market rates designed to approximate their aver-
age cash flow and re-pricing behavior. The struc-
ture and parameters of the replication portfolios
are set in accordance with long-term observa-
tions of market and client behavior, and are
reviewed periodically. The current extraordi-
narily low interest rate environment, especially in
Swiss franc rates, led, at the end of 2002, to some
temporary adjustment of the replication port-
folios for variable rate liabilities.
Interest rate risk also arises from balance sheet
items such as the financing of the Group’s real
estate and equity investments in associated com-
panies and, in particular, the investment of the
Group’s equity. These items are also transferred
to Group Treasury, through replicating portfolios
designed to approximate the investment or fund-
ing profile mandated by the Group Executive
Board.
The investment of the Group’s equity ac-
counts for CHF 14.2 million of the non-trading
interest rate sensitivity, with CHF 11.9 million
arising in CHF and the remainder mainly in
USD and a smaller amount in EUR. At 31
December 2002, the Group’s equity was invest-
ed in a portfolio of fixed-rate assets with an
average duration of three and a half years, in
line with the strategic investment targets set by
the Group Executive Board. The interest rate
sensitivity of these investments is directly relat-
ed to the chosen investment duration and it
should be recognized that, although investing in
significantly shorter maturities would lead to a
reduction in apparent interest rate sensitivity, it
would lead to higher volatility in the Group’s
interest earnings.
For the currencies EUR and GBP the addition-
al interest rate sensitivity arises mainly from sub-
ordinated note issues which are intentionally
unhedged as they are regarded as part of the
Group’s equity for asset and liability manage-
ment purposes. The additional interest rate sensi-
tivity in USD results predominantly from the
write-down of USD intangibles.
(a)(iii) Currency Risk
Currency risk is the risk of loss resulting from
changes in exchange rates.
Trading
UBS is an active participant in currency markets
and carries currency risk from these trading
activities, conducted primarily in UBS Warburg.
These trading exposures are subject to VaR,
stress and concentration limits as described in
(a)(i). Details of foreign exchange contracts, most
of which arise from trading activities and con-
tribute to currency risk, are shown in Note 23.
Non-trading
The Group’s reporting currency is the Swiss
franc but its assets, liabilities, income and
expense are denominated in many currencies,
with significant amounts in USD, EUR and GBP,
as well as CHF.
Reported profits or losses are exchanged
monthly into CHF, reducing volatility in the
Group’s earnings from changes in exchange rates.
Group Treasury proactively hedges significant
expected foreign currency earnings/costs (mainly
USD, EUR and GBP) within a time horizon of one
year, in accordance with the instructions of the
133
Breakdown of assets and liabilities by currencies
CHF billion
CHF
USD
31.12.02
31.12.01
Other
CHF
USD
UBS Group Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (continued)
Group Executive Board and subject to its VaR
limit. Economic hedging strategies employed
include a cost-efficient option strategy, providing
a safety net against unfavorable currency fluctua-
tions while preserving upside potential.
From late 2002 the Group has begun to diver-
sify the investment of its equity into CHF, USD
and EUR in proportion to the currencies of its
risk-weighted assets in order to protect its Tier 1
capital ratio against adverse exchange rate move-
ments against CHF. Other foreign currency assets
and liabilities of the business units are required
to be match-funded / invested in the relevant cur-
rency or otherwise hedged to avoid currency risk.
The table below shows the major currency
breakdown of the Group’s balance sheet.
2.4
5.2
0.1
1.9
6.1
10.4
147.8
1.1
0.5
0.7
5.6
0.7
1.4
183.9
7.6
0.0
17.8
3.7
10.1
123.5
1.9
11.4
5.4
0.0
39.0
0.1
11.4
126.7
164.6
247.6
8.1
39.5
5.0
4.0
0.0
1.3
12.7
5.0
626.0
48.0
21.6
260.8
68.6
7.1
111.5
8.1
96.1
4.1
3.4
0.0
EUR
0.6
7.4
2.7
61.0
51.7
0.8
11.5
1.5
0.3
0.0
0.1
0.0
1.0
1.2
8.5
9.5
66.5
66.0
62.8
12.8
0.8
1.7
0.0
0.9
0.3
1.6
138.6
232.6
13.8
5.2
51.9
11.3
0.7
43.6
0.9
14.3
0.9
0.0
0.0
13.8
10.1
36.4
22.9
63.5
28.2
4.3
7.6
1.9
0.1
0.0
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
Other
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
220.4
629.3
142.6
188.8
241.5
714.5
113.0
184.3
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
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
134
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (continued)
(a)(iv) Equity Risk
Equity risk is the risk of loss resulting from
changes in the levels of equity indices and values
of individual stocks.
UBS Warburg is a significant player in major
equity markets and carries equity risk from these
activities. These exposures are subject to VaR,
stress and concentration limits as described in
(a)(i) and, in the case of individual stocks, to
issuer risk controls as described in (a)(v).
Details of equity derivatives contracts (on
indices and individual equities), which arise pri-
marily from these activities, are shown in Note 23.
(a)(v) Issuer Risk
The values of tradable assets – equities, bonds and
other traded debt instruments – are affected by
factors specific to individual issuers as well as gen-
eral market moves. This can include short term
factors influencing price but also more fundamen-
tal causes including severe financial deterioration.
As an active trader and market maker in equi-
ties and bonds, UBS Warburg holds positions in
tradable assets, which are not only included in
VaR, but are also subject to concentration limits
on individual issuers, including positions arising
from derivatives as well as physical holdings.
b) Credit Risk
Credit risk represents the loss which UBS would
suffer if a client or counterparty failed to meet its
contractual obligations. It is inherent in tradi-
tional banking products – loans, commitments
to lend and other contingent liabilities, such as
letters of credit – and in foreign exchange and
derivatives contracts, such as swaps and options
(“traded products”).
To ensure a consistent and unified approach,
with appropriate checks and balances, all Busi-
ness Groups where material credit risk is taken
have independent credit risk control (CRC) func-
tions within which credit approval authority is
exercised by authorized credit officers. CRC has
authority over counterparty rating, credit risk
assessment and approval, and the establishment
of allowances and provisions.
The Group restricts its credit exposure to
both individual counterparties and counterparty
groups by credit limits. The size of limit depends
on the assessment of their financial strength, par-
ticularly the sustainable free cash flow to service
obligations, and on the economic environment,
industry position, and qualitative factors such
as management strength. Exposure against limits
is measured on a continuous basis and is subject
to standard exception reporting.
Exposure against limits for banking products
is measured at face value. For loans, this is shown
on the balance sheet and detailed in Note 9a),
and for commitments detailed in Note 25. Both
are included in the table below.
For all traded products, credit exposure is
measured for internal risk control purposes
based on not only the current replacement value
of contracts but also potential future changes in
replacement value, and credit limits are applied
on this basis. The replacement values of deriva-
tives are included in the balance sheet and in the
table below. For further information about deriv-
atives see Note 23. Securities borrowing and
lending transactions are represented on the bal-
ance sheet by the values of cash collateral placed
with or received from counterparties while
repo / reverse repo transactions are represented
by the amounts of the forward commitments –
for details see Note 10. The credit exposure is
generally only a small percentage of the balance
sheet amounts. The amounts shown in the table
below represent the mark to market values of
these transactions, i.e. the difference in value
between the cash or securities lent or given as col-
lateral by UBS and the value of cash or securities
borrowed or taken as collateral by UBS.
135
UBS Group Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
b) Credit Risk (continued)
Breakdown of credit exposure
Amounts for each product type are shown gross before allowances and provisions.
CHF million
31.12.02
31.12.01
Banking products
Loans and due from banks 1
Contingent liabilities (gross – before participations) 2
Undrawn irrevocable commitments (gross – before participations) 2
Traded products 3
Derivatives positive replacement values (before collateral but after netting) 4
Securities borrowing and lending, repos and reverse repos 5, 6
Allowances and provisions 7
Total credit exposure net of allowances and provisions 8
249,370
16,594
39,306
82,092
20,120
(5,621)
401,861
261,984
25,487
50,608
73,447
14,074
(8,218)
417,382
2 See Note 25 – Commitments and Contingent Liabilities for further information.
1 See Note 9a – Due from Banks and Loans and the section about the Information Required by Industry Guide 3 in the Additional Disclosures
3 Does
Required under SEC Regulations for further information.
not include future potential credit exposure arising from changes in value of products with variable value, i.e. traded products. Potential future
4 See Note 23 –
credit exposure is however included in internal measures of credit exposure for risk management and control purposes.
5 This figure represents the difference in value between the cash
Derivative Instruments: Positive Replacement Values for further information.
or securities lent or given as collateral to counterparties, and the value of cash or securities borrowed or taken as collateral from the same coun-
6 See Note 10 – Securities Borrowing, Securities Lending, Repurchase
terparties under stock borrow / lend and repo / reverse repo transactions.
7 See Note 9b – Allowances and Provisions for
and Reverse Repurchase Agreements for further information for these types of transactions.
8 The values of bonds, equities and other tradable obligations in the Group’s trading business area are
Credit Losses for further information.
also affected by credit events and default. They are not included in this table – exposure is controlled under the market risk control structure
described in Note 29 – Financial Instruments Risk Position, section a).
136
Note 29 Financial Instruments Risk Position (continued)
b) Credit Risk (continued)
The Group is an active user of credit derivatives
to hedge credit risk in banking and traded prod-
ucts. It also makes use of master netting agree-
ments where possible in its OTC derivatives trad-
ing and, in line with general market trends, UBS
Warburg has also entered into bilateral collateral
agreements with market participants. Further
information is given in Note 23.
Concentrations of credit risk exist if clients are
engaged in similar activities, or are located in the
same geographic region or have comparable eco-
nomic characteristics such that their ability to
meet contractual obligations would be similarly
affected by changes in economic, political or
other conditions. The Group therefore applies
stress measures to assess the impact of variations
in bankruptcy rates and asset values, taking into
account risk concentrations in each portfolio.
Stress loss limits are applied where considered
necessary, including limits on exposure to all but
the best rated countries.
The Group classifies a claim 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, or other payments due (for example
on derivatives transactions), and including liqui-
dation of collateral where available. Allowances
or provisions are established to ensure that the
carrying values of impaired claims are determined
in accordance with the principles of IAS 39. For
further information about accounting policy for
allowance and provision for credit losses see Note
1 l). For the amounts of allowance and provision
for credit losses and amounts of impaired and
non-performing loans, see Note 9 b), c) and d).
The occurrence of actual credit losses is erratic
in both timing and amount and those that arise
usually relate to transactions entered into in pre-
vious accounting periods. In order to make the
business ultimately accountable for any credit
losses they suffer but also to give them the incen-
tive to align their credit risk decisions and risk
adjusted pricing with the medium term risk pro-
file of their credit transactions, the Group uses
the concept of “expected loss” for management
purposes. Expected loss is a statistically based
measure intended to reflect the annual cost that
will arise, on average, over time, from transac-
tions that become impaired, and is a function of
the probability of default (given by the rating),
current and likely future exposure to the coun-
terparty and the likely severity of the loss should
default actually occur.
137
UBS Group Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
c) Liquidity Risk
The Group’s approach to liquidity management is
to ensure, as far as possible, that it will always have
sufficient liquidity to meet its liabilities when due,
without compromising its ability to respond quick-
ly to strategic market opportunities. The Group’s
centralized approach is based on an integrated
framework incorporating the assessment of expect-
ed cash flows and the availability of high-grade col-
lateral which could be used to secure additional
funding if required. The liquidity position is
assessed and managed under a variety of scenarios,
giving due consideration to stress factors. Scenarios
encompass both normal market conditions and
stressed conditions, including both UBS-specific
and general market crises. The impact on both
trading and client businesses is considered, taking
account of potential collateral with which funds
might be raised, and the possibility that customers
might seek to withdraw funds or draw down unuti-
lized committed credit lines.
The breakdown by contractual maturity of
assets and liabilities, which is the basis of the
“normal market conditions” scenario, at 31 De-
cember 2002 is shown in the table below.
Maturity analysis of assets and liabilities
CHF billion
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
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
Financial investments
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and other intangible assets
Other assets
Total 31.12.2002
Total 31.12.2001
4.3
10.5
0.0
0.0
371.4
82.1
0.0
5.9
6.5
0.0
0.0
0.0
9.0
489.7
529.7
Liabilities
10.7
Due to banks
0.0
Cash collateral on securities lent
0.0
Repurchase agreements
106.5
Trading portfolio liabilities
81.3
Negative replacement values
Due to customers
147.3
Accrued expenses and deferred income 15.3
0.0
Debt issued
12.3
Other liabilities
Total 31.12.2002
Total 31.12.2001
373.4
362.8
0.0
0.0
2.7
0.0
0.0
21.0
0.0
0.0
0.0
0.0
0.0
0.0
23.7
30.0
2.9
0.0
0.3
0.0
0.0
2.2
0.0
0.0
0.0
5.4
6.4
20.5
138.7
230.8
0.0
0.0
86.6
1.5
0.0
0.0
0.0
0.0
0.0
478.1
513.4
64.7
36.8
329.5
0.0
0.0
150.2
0.0
54.8
0.0
636.0
700.0
0.8
0.0
55.3
0.0
0.0
34.4
0.2
0.0
0.0
0.0
0.0
0.0
90.7
74.2
2.5
0.0
36.9
0.0
0.0
5.1
0.0
21.6
0.0
66.1
93.9
0.5
0.4
3.7
0.0
0.0
64.6
0.5
0.0
0.0
0.0
0.0
0.0
69.7
63.6
2.2
0.0
0.1
0.0
0.0
1.3
0.0
33.1
0.0
36.7
29.3
0.2
0.0
1.5
0.0
0.0
4.9
0.3
0.0
0.7
7.9
13.7
0.0
29.2
42.4
0.1
0.0
0.1
0.0
0.0
0.9
0.0
19.9
0.0
21.0
13.3
Total
4.3
32.5
139.1
294.0
371.4
82.1
211.5
8.4
6.5
0.7
7.9
13.7
9.0
1,181.1
1,253.3
83.1
36.8
366.9
106.5
81.3
307.0
15.3
129.4
12.3
1,138.6
1,205.7
1 Deposits without a fixed term, on which notice of withdrawal or termination has not been given (such funds may be withdrawn by the depos-
itor or repaid by the borrower subject to an agreed period of notice).
138
Note 29 Financial Instruments Risk Position (continued)
d) Capital Adequacy
The Group monitors the adequacy of its capital
using, among other measures, the rules and ratios
established by the Basel Committee on Banking
Supervision (“BIS rules / ratios”). The BIS ratios
compare the amount of the Group’s eligible
capital (in total and Tier 1) with the total of its
risk weighted assets (RWAs).
While the Group monitors and reports its cap-
ital ratios under BIS rules, it is the rules estab-
lished by the Swiss regulator, the EBK, which ulti-
mately determine the capital required to under-
pin its business, and these rules, on balance,
result in higher RWAs than the BIS rules. As a
result, UBS’s ratios are lower when calculated
under the EBK regulations than they would be if
calculated under the BIS guidelines.
The Group has complied with all BIS and
EBK regulatory capital rules for all periods
reported.
BIS Eligible capital
BIS eligible capital consists of two parts: Tier 1
capital comprises share capital, share premium,
retained earnings including current year profit,
foreign currency translation and minority inter-
ests, less accrued dividends, net long positions in
own shares and goodwill; Tier 2 capital includes
the Group’s subordinated long-term debt. Tier 1
capital is required to be at least 4% and Total eli-
gible capital at least 8% of RWAs.
BIS Risk-Weighted Assets (RWAs)
Three elements make up total RWAs – credit risk,
other assets and market risk, each of which is
described below.
The credit risk component consists of on and
off-balance sheet claims, measured according to
regulatory formulae outlined below, weighted
according to type of counterparty and collateral
at 0%, 20%, 50% or 100%. The least risky
claims, such as claims on OECD governments
and claims collateralized by cash, are weighted
at 0%, meaning that no capital support is
required, while the claims deemed most risky,
including unsecured claims on corporates and
private customers, are weighted at 100%, mean-
ing that 8% capital support is required.
Securities not held for trading are included as
claims, based on the net long position in the secu-
rities of each issuer, including both physical hold-
ings and positions derived from other transac-
tions such as options.
Claims arising from derivatives transactions
include not only the current positive replacement
value (shown in the table below under Balance
sheet assets), but also an “add-on” to reflect their
potential future exposure (shown in the table
below under Off-balance sheet and other posi-
tions – Forward and swap contracts, and Pur-
chased options).
Claims arising from contingent commitments
and irrevocable facilities granted are converted to
credit equivalent amounts based on specified per-
centages of nominal value.
There are other assets, most notably property
and equipment, investments and intangibles,
which, while not subject to credit risk, represent
a risk to the bank in respect of their potential for
write-down and impairment and which therefore
require capital underpinning. They are weighted
at 100% of book value under BIS rules but EBK
weightings are generally higher.
Capital is required to support market risk
arising in all foreign exchange, precious metals
and energy positions, and all positions held for
trading in interest rate instruments and equities,
including risks on individual equities, and traded
debt obligations such as bonds. UBS computes
this risk using a Value at Risk model approved in
1999 by the EBK, from which the market risk
capital requirement is derived. Unlike the calcu-
lations for credit risk and other assets, this pro-
duces the capital requirement itself rather than
the RWA amount. In order to compute a total
capital ratio, the market risk capital requirement
is therefore converted to a “RWA equivalent”
(shown in the table below as Market risk posi-
tions) such that the capital requirement is 8% of
this RWA equivalent, i. e. the market risk capital
requirement is multiplied by 12.5.
139
UBS Group Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
d) Capital Adequacy (continued)
Risk-weighted assets (BIS)
CHF million
Balance sheet assets
Due from banks and other collateralized lendings 1
Net positions in securities 2
Positive replacement values 3
Loans and other collateralized lendings 1
Accrued income and prepaid expenses
Property and equipment
Other assets
Off-balance sheet and other positions
Contingent liabilities
Irrevocable commitments
Forward and swap contracts 4
Purchased options 4
Market risk positions 5
Total risk-weighted assets
Balance
sheet /
notional
amount
31.12.02
356,501
9,096
82,092
320,752
6,453
10,384
8,952
16,594
39,327
9,455,928
298,800
Risk-
weighted
amount
31.12.02
8,877
8,193
21,680
147,703
3,025
10,149
5,774
8,224
4,622
4,253
1,023
15,267
238,790
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
3 Represents the mark to market values of Forward and swap contracts and Purchased options, where positive.
1 Includes securities lending and reverse repo transactions.
tions.
represents the “add-ons” for these contracts.
at Risk model, multiplied by 12.5 to give the “risk-weighted asset equivalent”.
2 Excluding positions in the trading book, which are included in Market risk posi-
4 Risk-weighted amount
5 Regulatory capital adequacy requirements for market risk, calculated using the approved Value
BIS capital ratios
Tier 1
of which hybrid Tier 1
Tier 2
Total BIS
Capital
CHF million
31.12.02
Ratio
%
31.12.02
Capital
CHF million
31.12.01
Ratio
%
31.12.01
27,047
3,182
5,962
33,009
11.3
1.3
2.5
13.8
29,322
3,848
8,149
37,471
11.6
1.5
3.2
14.8
The Tier 1 capital includes CHF 3,182 million (USD 2,300 million) trust preferred securities at
31 December 2002 and CHF 3,848 million (USD 2,300 million) at 31 December 2001.
140
Note 30 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 reflected
in the financial statements at fair value.
Fair value is the amount for which an asset
could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s-length
transaction. Market prices are used 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. Market prices are not, however, available
for a significant number of the financial assets and
liabilities held and issued by the Group. There-
fore, 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 tech-
niques 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 made 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 refer-
ence 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
techniques. 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
writedowns, are recorded in Shareholders’
equity until an asset is sold, collected or other-
wise disposed of;
(c) the carrying amount of liquid assets and
other assets maturing within 12 months is
assumed to approximate their fair value.
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 savings
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 be approximated
by their carrying amounts and, in the case of
loans, does not, therefore, reflect changes in
their credit quality as the impact of credit
risk is recognized separately by deducting the
amount of the allowance for credit losses
from both book and fair values;
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
separately 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.
141
UBS Group Financial Statements
Notes to the Financial Statements
Note 30 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
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
31.12.02
Fair Unrealized
value gain/(loss)
31.12.02
31.12.02
Carrying
value
31.12.01
Fair Unrealized
gain/(loss)
31.12.01
value
31.12.01
4.3
32.5
139.1
294.1
371.4
82.1
211.8
8.4
83.4
36.9
366.9
106.5
81.3
307.4
129.8
4.3
32.5
139.1
294.1
371.4
82.1
214.1
8.4
83.4
36.9
366.9
106.5
81.3
307.5
131.7
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
0.0
0.0
0.0
0.0
0.0
0.0
2.3
0.0
0.0
0.0
0.0
0.0
0.0
(0.1)
(1.9)
0.3
1.1
(0.3)
1.1
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)
The table does not reflect the fair values of non-
financial assets and liabilities such as property,
equipment, goodwill, prepayments and non-
interest accruals. Where applicable, the interest
accrued to date on financial instruments is includ-
ed, 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 resulting from interest rate
movements related to these commitments.
The fair values of the Group’s fixed rate loans,
long- and medium-term notes and bonds issued
are predominantly hedged by derivative instru-
ments, mainly interest rate swaps, as explained in
Note 23. The interest rate risk inherent in bal-
ance sheet positions with no specific maturity is
also hedged with derivative instruments based on
management’s view on the effective interest
repricing date of the products.
The hedging derivative instruments are carried
on the balance sheet at fair values, which are
included in the Positive or Negative replacement
values in the above table. When the interest rate
risk on a fixed rate financial instrument is hedged
with a derivative in a fair value hedge, the fixed
rate financial instrument (or hedged portion there-
of) is reflected in the above table at fair value only
in relation to the interest rate risk, not the credit
risk as explained in (f) above. Fair value changes
are recorded in net profit. The treatment of deriv-
atives designated as cash flow hedges is explained
in Note 1v). The amount shown in the table as
“derivative instruments designated as cash flow
hedges” is the net change in fair values on such
derivatives that is recorded in Shareholders’ equi-
ty and not yet transferred to income or expense.
The increase in the Net unrealized gains and
losses during 2002 of CHF 1.3 billion is mainly
attributable to the change in the unrealized gains
and losses of fixed rate long-term assets, which
have increased by CHF 2.0 billion from the prior
year as a result of declining interest rates during
2002. This was partially offset by an increase in
fair value loss from fixed rate long-term debt.
142
Note 31 Retirement Benefit Plans and Other Employee Benefits
Defined benefit plans
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 plan
The pension plan covers practically all employ-
ees in Switzerland and exceeds the minimum
benefit requirements under Swiss law. Con-
tributions to the pension plan are paid for by
employees and the Group. The employee contri-
butions 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 employees’ con-
tributions.
The pension plan formula is based on years of
contributions and final covered salary. The bene-
fits 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 2002, CHF
323 million (2001 CHF 0 million, 2000 CHF
100 million) of this asset was used to fund the
employer contributions and was recognized as
pension expenses.
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.
Post-retirement 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 fair value of
plan assets for those plans amounts to CHF 164
million as of 31 December 2002 (2001 CHF 142
million, 2000 CHF 111 million) and the total
accrued post-retirement cost to CHF 130 million
as of 31 December 2002 (2001 CHF 130 million,
2000 CHF 108 million). The net periodic post-
retirement costs for the years ended 31 December
2002, 31 December 2001 and 31 December 2000
were CHF 25 million, CHF 24 million and CHF
22 million, respectively.
Foreign pension plans
The foreign locations of UBS operate various
pension plans in accordance with local regula-
tions and practices. Among these plans are
defined contribution plans as well as defined
benefit plans. The locations with defined bene-
fit plans of a material nature are in the UK,
the US and Germany. The UK and the US
defined benefit plans are closed to new entrants
who are covered by defined contribution plans.
Defined contribution plans
The Group also sponsors a number of defined
contribution plans primarily in the UK and the
US. Certain plans permit employees to make con-
tributions and earn matching or other contribu-
tions from the Group. The contributions to these
plans recognized as expense for the years ended
31 December 2002, 31 December 2001 and
31 December 2000 were CHF 133 million, CHF
117 million and CHF 66 million, respectively.
143
UBS Group Financial Statements
Notes to the Financial Statements
Note 31 Retirement Benefit Plans and Other Employee Benefits
(continued)
Defined benefit plans
CHF million
31.12.02
31.12.01
31.12.00
31.12.02
31.12.01
31.12.00
Swiss
Foreign
Defined benefit obligation
at the beginning of the year
Service cost
Interest cost
Plan amendments
Special termination benefits
Actuarial gain / (loss)
Benefits paid
Curtailment / settlement
Acquisition of PaineWebber
Foreign currency translation
Other
Defined benefit obligation
at the end of the year
Fair value of plan assets
at the beginning of the year
Actual return on plan assets
Employer contributions
Plan participant contributions
Benefits paid
Acquisition of PaineWebber
Foreign currency translation
Other
Fair value of plan assets
at the end of the year
Funded status
Unrecognized net actuarial (gains) / losses
Unrecognized transition amount
Unrecognized prior service cost
Unrecognized asset
(17,879)
(554)
(699)
(17,712 )
(541 )
(674 )
(17,011 )
(545 )
(666 )
(3,553)
(108)
(210)
(209)
(681)
818
(262 )
421
889
(211 )
721
(177)
111
74
427
(3,406 )
(121 )
(204 )
(1 )
(345 )
107
(12 )
429
(2,444)
(165)
(162)
(3)
(99)
84
(740)
123
(19,204)
(17,879 )
(17,712 )
(3,436)
(3,553 )
(3,406)
18,289
(1,350)
236
209
(818)
19,074
(765 )
656
213
(889 )
18,565
535
490
205
(721 )
2,887
(240)
164
3,378
(220 )
258
(111)
(107 )
(318)
7
(429 )
2,880
13
23
(84)
676
(130)
16,566
18,289
19,074
2,382
2,887
3,378
(2,638)
3,892
410
961
1,362
(331 )
(1,054)
1,126
(666 )
673
(675 )
356
456
(590 )
490
356
(559)
236
356
(656 )
656
33
33
33
356
356
356
356
356
356
1
73
9
(83)
164
(17)
73
220
(147)
73
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)
(Accrued) / prepaid pension cost
33
356
(1,221)
(1,015 )
Movement in the net (liability) or asset
(Accrued) / prepaid pension cost
at the beginning of the year
Net periodic pension cost
Employer contributions
Acquisition of PaineWebber
Foreign currency translation
(Accrued) / prepaid pension cost
Amounts recognized in the Balance Sheet
Prepaid pension cost
Accrued pension liability
(Accrued) / prepaid pension cost
144
Note 31 Retirement Benefit Plans and Other Employee Benefits
(continued)
Defined benefit plans (continued)
CHF million
For the year ended
Swiss
Foreign
31.12.02
31.12.01
31.12.00
31.12.02
31.12.01
31.12.00
Components of net periodic pension cost
Current service cost
Interest cost
Expected return on plan assets
Adjustment to limit prepaid pension cost
Amortization of unrecognized prior service cost
Amortization of unrecognized net (gains) / losses
Curtailment / settlement
Employee contributions
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
554
699
(900)
206
209
(209)
559
(7.5)
3.8
5.0
2.5
1.5
541
674
(947 )
339
262
(213 )
656
(4.0 )
4.0
5.0
2.5
1.5
545
666
(927 )
300
211
(205 )
590
2.9
4.0
5.0
2.5
1.5
108
210
(199)
1
22
(59)
83
(8.7)
5.8
7.3
4.4
1.5
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
Additional details to fair value
of plan assets
UBS financial instruments and
UBS bank accounts
UBS AG shares 1
Securities lent to UBS
included in plan assets
Other assets used by UBS
included in plan assets
Swiss
31.12.02
31.12.01
31.12.00
814
206
2,645
90
476
305
824
104
920
291
3,432
179
1 The number of UBS AG shares were 3,072,500, 3,639,800 and 3,295,800 as of 31 December 2002, 31 December 2001 and 31 December
2000, respectively. The amount of capital repayment and dividend received on UBS AG shares for the years ended 31 December 2002, 31
December 2001 and 31 December 2000 were CHF 7 million, CHF 2 million and CHF 11 million, respectively.
145
UBS Group Financial Statements
Notes to the Financial Statements
Note 31 Retirement Benefit Plans and Other Employee Benefits
(continued)
Post-retirement medical and life plans
CHF million
31.12.02
31.12.01
31.12.00
Post-retirement benefit obligation at the beginning of the year
Service cost
Interest cost
Plan amendments
Actuarial gain / (loss)
Benefits paid
Acquisition of PaineWebber
Foreign currency translation
Post-retirement benefit obligation at the end of the year
Fair value of plan assets at the beginning of the year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at the end of the year
(145)
(8)
(9)
(3)
(31)
4
26
(166)
3
0
3
(4)
2
(115 )
(7 )
(9 )
(10 )
(6 )
4
(2 )
(145 )
4
0
3
(4 )
3
(117)
(6)
(8)
(7)
27
5
(9)
0
(115)
4
0
4
(4)
4
The assumed average health care cost trend rates used in determining post-retirement benefit expense
is assumed to be 10.4% for 2002 and to decrease to an ultimate trend rate of 5% in 2008. 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
4
17
(3)
(13)
146
Note 32 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 voluntary
plan replaced the Equity Investment Plan (EIP) in
2002 (see below). Prior to that time, it was only
available to UBS PaineWebber employees. EPP
gives eligible employees the opportunity to pur-
chase UBS shares at fair market value on the pur-
chase date and receive at no additional cost two
UBS options for each share purchased, up to a
maximum 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 restricted
from resale for two years from the time of pur-
chase, and the options granted have either a 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 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. The
discount is recorded as compensation expense.
Equity Ownership Plan (EOP): Selected per-
sonnel receive a mandatory portion of their per-
formance-related compensation in UBS shares or
options and are also awarded a matching contri-
bution in the form of UBS 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. EOP awards normally vest in
one-third increments over a three-year vesting
period. Under certain conditions, these awards
are fully forfeitable by the employee.
Key employee option plans: Under these plans,
key and high potential employees are granted UBS
options with a strike price not less than the fair
market value of the shares on the date the option
is granted. Some option grants have a three- to
five-year vesting period during which they cannot
be exercised. Other grants vest in one-third incre-
ments over a three-year period. Expiration of the
options is generally from six to ten and one-half
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-for-
feitability may occur if certain share appreciation
targets are met.
Other deferred compensation plans: UBS
sponsors other deferred compensation plans for
selected eligible employees. Generally, contribu-
tions are made on a tax deferred basis. Partici-
pants 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 discontin-
ued): 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, participants in
the plan received a matching contribution of
additional UBS shares or derivatives. Only the
UBS-matching contribution was forfeitable. The
last EIP vesting will take place in 2004. Staff who
had the possibility to take part in EIP are now
offered the opportunity to take part in EPP.
147
UBS Group Financial Statements
Notes to the Financial Statements
Note 32 Equity Participation Plans (continued)
b) UBS share awards
i) Stock compensation plans
Shares granted under the various equity participation plans are as follows:
Stock bonus plans
31.12.02
31.12.01
31.12.00
Unvested shares outstanding, at the beginning of the year
Shares awarded during the year
Vested during the year
Forfeited during the year
52,299,332
13,511,655
(16,333,832)
(1,340,594)
47,458,928
16,850,8591
(10,740,466)1
(1,269,989 )
14,418,646
39,188,5281
(5,215,503)
(932,743)
1
Unvested shares outstanding, at the end of the year
48,136,561
52,299,332
47,458,928
Weighted-average fair market value of
shares awarded (in CHF)
Fair market value of outstanding shares
at the end of the year (CHF billion)
1 Restated for shares granted and fully vested at grant date.
71
3.2
90
4.4
76
4.2
The stock bonus awards for 2000 include approximately 19.8 million shares granted under the reten-
tion agreements with key employees of UBS PaineWebber at the time of merger.
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 purchased
Weighted-average purchase price (in CHF) 1
31.12.02
3,822,907
63
31.12.01
2,922,515
63
31.12.00
1,264,725
44
1 Some of the shares purchased are denominated in US dollars and were converted into CHF for purposes of this table.
148
Note 32 Equity Participation Plans (continued)
c) UBS option awards
Movements in options granted under the various equity participation plans mentioned above 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
Expired unexercised
Outstanding, at the end of the year
Exercisable, at the end of the year
Weighted
average
exercise
price
(in CHF)
31.12.021
66
71
54
71
77
67
51
Number of
options
31.12.01
63,308,502
11,070,992
(10,083,075 )
(1,009,750 )
0
63,286,669
25,550,932
Weighted
average
exercise
price
(in CHF)
31.12.011
58
94
49
74
0
66
50
Number of
options
31.12.00
30,415,386
18,975,8102
21,248,0463
(5,390,307 )
(1,940,433 )
0
63,308,502
18,310,839
Weighted
average
exercise
price
(in CHF)
31.12.00
66
34
72
50
64
0
58
34
Number of
options
31.12.02
63,286,669
37,060,178
(9,595,133)
(2,082,356)
(505,131)
88,164,227
21,765,482
1 Some of the options in this table 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.
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.
employees of UBS PaineWebber, vesting over a 3-year period, subject to employee’s continued employment and other restrictions.
2 UBS AG
3 Includes options granted to key
The following table summarizes additional information about stock options outstanding at 31 December 2002:
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
55.01–66.08
6.34–66.08
18,132,696
25,733,308
5,565,873
49,431,877
3,986,289
2,340,754
2,870,675
222,175
27,328,610
1,983,847
38,732,350
CHF
63.02
77.99
98.51
74.81
USD
8.91
22.52
27.05
39.24
46.85
57.96
40.54
Years
2.3
7.1
5.2
5.1
Years
1.8
2.2
4.0
9.6
7.7
5.1
6.4
5,643,680
6,406,246
31,800
12,081,726
3,986,289
2,340,754
2,870,675
0
451,038
35,000
9,683,756
CHF
58.37
79.00
90.00
69.39
USD
8.91
22.52
27.05
0
47.72
57.80
19.56
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.
149
UBS Group Financial Statements
Notes to the Financial Statements
Note 32 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 rec-
ognized is equal to the intrinsic value of the instru-
ment at such date and is calculated as follows: 1)
For stock options, it is the difference between the
strike price and fair market 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. Management’s esti-
mate of the accrued expense before tax for share-
based compensation for the years ended 31
December 2002, 2001 and 2000 was CHF 592
million, CHF 974 million and CHF 1,749 mil-
lion, respectively. The accruals include awards
earned currently but issued in the following year.
e) Pro-Forma Net Income
The following table presents Net income and
Earnings per share for 2002, 2001 and 2000 as if
the Group had adopted the fair value method of
accounting for its equity participation plans,
rather than the intrinsic value method described
in paragraph d) above. In addition, the table
shows amounts already recorded in the Income
statement for equity participation plans and the
total expense that would have been recognized
had the fair value method been applied.
CHF million, except per share data
Net Income, as reported
Add: Equity-based employee compensation expense
included in reported net income, net of tax
Deduct: Total equity-based employee compensation expense
determined under the fair-value-based method for all awards,
net of tax
Net income, pro-forma
Earnings per share
Basic, as reported
Basic, pro-forma
Diluted, as reported
Diluted, pro-forma
31.12.02
3,535
31.12.01
4,973
493
769
(1,183)
2,845
2.92
2.35
2.87
2.31
(1,116 )
4,626
3.93
3.65
3.78
3.51
31.12.00
7,792
1,347
(1,505)
7,634
6.44
6.31
6.35
6.22
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)
31.12.02
31.12.01
31.12.00
35%
3.28%
4.65%
3.35%
4.5
30%
3.51%
5.81%
2.67%
4.5
30%
3.27%
5.66%
2.44%
4.4
The weighted-average fair value of options granted in 2002, 2001 and 2000 was CHF 20, CHF
23 and CHF 16 per share, respectively.
150
Note 33 Related Parties
For its 2002 Financial Statements, the Group
defines related parties as Associated companies,
private equity investees, the Board of Directors,
the Group Executive Board, close family mem-
bers and enterprises which are controlled by
these individuals through their majority share-
holding or their role as chairman and/or CEO in
those companies. In 2001 and 2000, the Group
Managing Board was also included in the above
definition.
Information Relating
The change in definition is due to the
“Directive on
to
Corporate Governance” issued by the SWX
Swiss Exchange, effective from 1 July 2002 for
all listed companies in Switzerland. Included in
the new rules are specific disclosure require-
ments for members of the Board of Directors
and “management board”. For UBS, the Group
Executive Board meets the definition of “man-
agement board” under the directive. Members
of the Group Managing Board, however, are
excluded from the new SWX requirements. The
modification is also a response to the expan-
sion of the Group Executive Board and the
Group Managing Board during 2002. The
number of Group Executive Board members
increased from six to ten and the Group
Managing Board members from thirty to fifty-
two.
Prior period figures and share and option
quantities are based on the definition applied for
2001 and 2000.
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. Total fees paid to these indi-
viduals for their services as external board mem-
bers amounted to CHF 3.5 million in 2002, CHF
3.3 million in 2001 and CHF 3.3 million in 2000.
The number of long-term stock options and
warrants outstanding to the executive members
of the Board of Directors and Group Executive
Board from equity participation plans was
5,410,172 (equivalent to the same number of
shares) and 24,558,529 (equivalent to 1,473,217
UBS shares) at 31 December 2002. The number
of long-term stock options and warrants to these
two groups plus the Group Managing Board
amounted to 8,366,103 (equivalent to the same
number of shares) and 60,578,417 (equivalent to
6,002,599 shares) at 31 December 2001. These
plans are further explained in Note 32 Equity
Participation Plans.
The total number of shares held by members
of the Board of Directors and the Group
Executive Board was 2,139,371 at 31 December
2002. The total number of shares held by these
two groups plus the Group Managing Board was
4,068,918 at 31 December 2001. No member of
the Board of Directors, Group Executive Board
or Group Managing Board is the beneficial
owner of more than 1% of the Group’s shares at
31 December 2002 and 31 December 2001.
a) Remuneration and equity holdings
The executive members of the Board of Directors
have top-management employment contracts
and receive pension benefits upon retirement.
Total remuneration to the executive members of
the Board of Directors and Group Executive
Board recognized in the income statement includ-
ing cash, shares and accrued pension benefits
amounted to CHF 131.8 million in 2002. Total
remuneration to the executive members of the
Board of Directors, Group Executive Board and
Group Managing Board including accrued pen-
sion benefits amounted to CHF 321.4 million in
2001 and CHF 272.3 million in 2000.
b) Loans and advances to Board of Directors
and senior executives
The outstanding balance of loans to the Board
of Directors and the Group Executive Board
amounted to CHF 28 million at 31 December
2002. The outstanding balance of loans to these
two groups plus the Group Managing Board
amounted to CHF 32 million at 31 December
2001. The 2001 amount only included mort-
gages. Loans and advances are granted with the
same terms and conditions that are available to
other employees. The terms and conditions are
based on those granted to third parties adjusted
for reduced credit risk.
151
UBS Group Financial Statements
Notes to the Financial Statements
Note 33 Related Parties (continued)
c) Loans, advances to and transactions with significant associated companies
CHF million
Balance at the beginning of the year
Additions
Reductions
Balance at the end of the year
31.12.02
31.12.01
65
10
(35)
40
0
65
0
65
All loans and advances to associated companies are transacted at arm’s length. At 31 December 2002
and 2001, there were trading exposures and guarantees to significant associated companies of CHF
136 million and CHF 306 million, respectively. In addition, the Group routinely receives services from
associated companies at arm’s length terms. For the years ended 31 December 2002 and 31 December
2001, the amount paid to significant associates for these services was CHF 60 million and CHF 98
million, respectively.
Note 35 provides a list of significant associates.
d) Loans, advances to and transactions with private equity investees
CHF million
Balance at the beginning of the year
Additions
Reductions
Balance at the end of the year
31.12.02
31.12.01
489
328
(479)
338
682
65
(258)
489
At 31 December 2002 and 31 December 2001 there were trading exposures and guarantees or
commitments to private equity companies of CHF 73 million and CHF 177 million, respectively.
In addition the Group purchased services from private equity companies at arm’s length terms for
the years ended 31 December 2002 and 31 December 2001 in the amount of CHF 116 million and
CHF 196 million, respectively.
e) Other related party transactions
During 2001 and 2002, UBS entered into the following transactions at arm’s length with companies
whose Chairman and/or CEO is an external member of UBS’ Board of Directors or of which an exter-
nal director is a controlling shareholder.
In 2001 these companies included Unisys (Switzerland), a wholly owned subsidiary of Unisys
Corporation (USA) and J Sainsbury plc. (UK). In 2002, in addition to those previously mentioned,
related parties included Serono Group and its various subsidiary companies and Bertarelli & Cie
(Switzerland).
CHF million
Goods sold and services provided by related parties to UBS
Services provided to related parties by UBS (fees received)
Loans granted to related parties by UBS
2002
54
13
140
2001
38
17
0
As part of its sponsorship of Team Alinghi, UBS paid CHF 12 million to AC 2003 SA during 2002.
AC 2003 SA, whose controlling shareholder is UBS board member Ernesto Bertarelli, is Team
Alinghi’s management company.
152
Note 34 Post-Balance Sheet Events
There have been no material post-balance sheet
events which would require disclosure or adjust-
ment to the 31 December 2002 Financial State-
ments.
Bond issues have decreased by CHF 850 million
from the balance sheet date to 11 February 2003.
On 11 February 2003, 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 16 April 2003 for
approval.
Note 35 Significant Subsidiaries and Associates
The legal entity group structure of UBS is
designed to support the Group’s businesses with-
in an efficient legal, tax, regulatory and funding
framework. Neither the Business Groups of UBS
(namely UBS Warburg, UBS PaineWebber, UBS
Wealth Management & Business Banking and
UBS Asset Management) nor Corporate Center
are replicated in their own individual legal enti-
ties 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
structure and facilitates efficient allocation and
use of capital, comprehensive risk management
and straightforward funding processes.
Where, usually due to local legal, tax or regu-
latory rules or due to additional legal entities
joining the UBS Group via acquisition, it is either
not possible or not efficient to operate out of the
parent 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 %
WB
Berne, Switzerland
WB
Zurich, Switzerland
WA
Rio de Janeiro, Brazil
WB
Basel, Switzerland
WB
Lugano, Switzerland
Singapore, Singapore
WB
George Town, Cayman Islands WA
WB
Zurich, Switzerland
Armand von Ernst & Cie AG
Aventic AG
Banco UBS Warburg SA
Bank Ehinger & Cie AG
BDL Banco di Lugano
BDL Banco di Lugano (Singapore) Ltd
Brunswick UBS Warburg Ltd
Cantrade Privatbank AG
Cantrade Private Bank
St. Helier, Jersey
Switzerland (CI) Limited
Zurich, Switzerland
Crédit Industriel SA
Zurich, Switzerland
EIBA AG
Zurich, Switzerland
Factors AG
Geneva, Switzerland
Ferrier Lullin & Cie SA
Zurich, Switzerland
Fondvest AG
GAM Holding AG
Zurich, Switzerland
Global Asset Management Limited, Bermuda Hamilton, Bermuda
IL Immobilien-Leasing AG
Noriba Bank BSC
PaineWebber Capital Inc
PT UBS Warburg Indonesia
PW Trust Company
SG Warburg & Co International BV
WB
WB
WA
WB
WB
AM
AM
AM
WB
Opfikon, Switzerland
WB
Manama, Bahrain
PW
Delaware, USA
WA
Jakarta, Indonesia
New Jersey, USA
PW
Amsterdam, the Netherlands WA
CHF
CHF
BRL
CHF
CHF
CHF
USD
CHF
GBP
CHF
CHF
CHF
CHF
CHF
CHF
USD
CHF
USD
USD
IDR
USD
GBP
5.0
30.0
52.9
6.0
50.0
22.5
25.02
10.0
0.7
10.0
1.4
5.0
30.0
4.3
200.0
2.0
5.0
10.0
25.82
11,000.0
4.42
40.5
100.0
100.0
100.0
100.0
100.0
100.0
50.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
85.0
99.6
100.0
153
Footnotes
1 WB: UBS Wealth Management &
Business Banking, AM: UBS Global Asset
Management, WA: UBS Warburg, PW:
UBS PaineWebber, CC: Corporate Center.
2 Share Capital and Share Premium.
UBS Group Financial Statements
Notes to the Financial Statements
Note 35 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
Jurisdiction
of incorporation
Business
Group 1
Share
capital
in millions
Equity
interest
accumul-
ated in %
Zurich, Switzerland
WB
Nassau, Bahamas
WB
Paris, France
WB
Milan, Italy
WB
Luxembourg, Luxembourg
WB
Monte Carlo, Monaco
WB
Sydney, Australia
WA
Tokyo, Japan
AM
Delaware, USA
WA
Delaware, USA
WA
Sydney, Australia
WA
Toronto, Canada
WB
Frankfurt, Germany
WA
Toronto, Canada
WA
St. Helier, Jersey
WA
Zurich, Switzerland
WA
WA
Delaware, USA
George Town, Cayman Islands WA
George Town, Cayman Islands WA
Amsterdam, the Netherlands WA
Delaware, USA
WA
George Town, Cayman Islands WA
WA
Delaware, USA
WA
London, Great Britain
WA
Milan, Italy
WB
Glattbrugg, Switzerland
CC
St. Helier, Jersey
WB
Madrid, Spain
Milan, Italy
WB
George Town, Cayman Islands CC
Willemstad, Netherlands Antilles CC
WA
Delaware, USA
CC
Zurich, Switzerland
AM
Luxembourg, Luxembourg
AM
Basel, Switzerland
Basel, Switzerland
AM
George Town, Cayman Islands AM
AM
Luxembourg, Luxembourg
AM
AM
AM
AM
Thesaurus Continentale
Effekten-Gesellschaft in Zürich
UBS (Bahamas) Ltd
UBS (France) SA
UBS (Italia) SpA
UBS (Luxembourg) SA
UBS (Monaco) SA
UBS (Sydney) Limited
UBS (Trust and Banking) Limited
UBS (USA) Inc
UBS Americas Inc
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 Americas Investments III Ltd
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 Employee Benefits Trust Limited
UBS España SA
UBS Fiduciaria SpA
UBS Finance (Cayman Islands) Ltd
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 (Cayman) Ltd
UBS Fund Services (Luxembourg) SA
UBS Global Asset Management (Americas) Inc Delaware, USA
UBS Global Asset Management (Australia) Ltd Sydney, Australia
UBS Global Asset Management (Canada) Co Halifax, Canada
UBS Global Asset Management (France) SA
UBS Global Asset Management
(Hong Kong) Limited
UBS Global Asset Management
(Italia) SIM SpA
UBS Global Asset Management (Japan) Ltd
UBS Global Asset Management
(New York) Inc
UBS Global Asset Management
(Singapore) Ltd
UBS Global Asset Management (Taiwan) Ltd
UBS Global Asset Management (US) Inc
Singapore, Singapore
Taipei, Taiwan
Delaware, USA
Milan, Italy
Tokyo, Japan
Hong Kong, China
New York, USA
Paris, France
CHF
USD
EUR
EUR
CHF
EUR
AUD
JPY
USD
USD
AUD
CAD
EUR
CAD
GBP
CHF
USD
USD
USD
EUR
USD
USD
USD
GBP
EUR
CHF
CHF
EUR
EUR
USD
USD
USD
CHF
CHF
CHF
CHF
USD
CHF
USD
AUD
CAD
EUR
30.0
4.0
10.0
22.2
150.0
9.2
12.7
10,900.0
315.0
4,490.82
50.0
20.7
398.8
33.3
226.0
5.0
130.02
61.02
5.0
104.12
2.62
113.02
378.52
6.7
25.8
40.0
–
85.3
0.2
0.5
0.1
37.32
10.0
42.0
18.0
1.0
5.6
2.5
–
8.0
117.0
1.5
AM
HKD
25.0
AM
AM
EUR
JPY
2.0
2,200.0
AM
USD
0.5
AM
AM
AM
SGD
TWD
USD
4.0
340.0
35.32
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
50.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
84.1
100.0
Footnotes
1 WB: UBS Wealth Management &
Business Banking, AM: UBS Global Asset
Management, WA: UBS Warburg, PW:
UBS PaineWebber, CC: Corporate Center.
2 Share Capital and Share Premium.
154
Note 35 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
UBS Global Asset Management Holding Ltd
UBS Global Trust Corporation
UBS Immoleasing AG
UBS International Holdings BV
UBS Invest Kapitalanlagegesellschaft mbH
UBS Investment Bank Limited
UBS Leasing AG
UBS Life AG
UBS Limited
UBS O’Connor LLC
UBS O’Connor Trading Limited
UBS PaineWebber Inc
UBS PaineWebber Incorporated of
Puerto Rico
UBS PaineWebber Life Insurance Company
UBS Portfolio LLC
UBS Preferred Funding Company LLC I
UBS Preferred Funding Company LLC II
UBS Preferred Funding Company LLC III
UBS Principal Finance LLC
UBS Private Banking (Belgium) SA
UBS Private Banking Deutschland AG
UBS Realty Investors LLC
UBS Trust (Canada)
UBS Trustees (Bahamas) Ltd
UBS Trustees (Cayman) Ltd
UBS Trustees (Jersey) Ltd
UBS Trustees (Singapore) Limited
UBS UK Holding Limited
UBS UK 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 Asia Limited
UBS Warburg
Australia Corporate Finance Ltd
UBS Warburg
Australia Corporation Pty Limited
UBS Warburg Australia Equities Ltd
UBS Warburg Australia Limited
UBS Warburg Derivatives Limited
UBS Warburg Hong Kong Limited
UBS Warburg International Ltd
UBS Warburg Investments Ltd
UBS Warburg LLC
UBS Warburg Ltd
UBS Warburg New Zealand Equities Ltd
UBS Warburg Private Clients Ltd
UBS Warburg Pte Ltd
UBS Warburg Real Estate Securities Inc
UBS Warburg Securities (España) SV SA
Jurisdiction
of incorporation
Business
Group 1
Share
capital
in millions
Equity
interest
accumul-
ated in %
AM
London, Great Britain
WB
St. John, Canada
WB
Zurich, Switzerland
CC
Amsterdam, the Netherlands
AM
Frankfurt, Germany
WA
London, Great Britain
WB
Brugg, Switzerland
WB
Zurich, Switzerland
WA
London, Great Britain
Delaware, USA
AM
George Town, Cayman Islands AM
PW
Delaware, USA
PW
Hato Rey, Puerto Rico
PW
California, USA
WA
New York, USA
WA
Delaware, USA
WA
Delaware, USA
WA
Delaware, USA
WA
Delaware, USA
WB
Brussels, Belgium
WB
Hamburg, Germany
AM
Massachusetts, USA
WB
Toronto, Canada
Nassau, Bahamas
WB
George Town, Cayman Islands WB
WB
St. Helier, Jersey
WB
Singapore, Singapore
WA
London, Great Britain
WA
London, Great Britain
WA
Paris, France
Milan, Italy
WA
George Town, Cayman Islands WA
WA
Kuala Lumpur, Malaysia
Amsterdam, the Netherlands WA
WA
Frankfurt, Germany
WA
Hong Kong, China
GBP
CAD
CHF
CHF
EUR
GBP
CHF
CHF
GBP
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
EUR
EUR
USD
CAD
USD
USD
GBP
SGD
GBP
GBP
EUR
EUR
JPY
MYR
EUR
EUR
HKD
8.02
0.1
3.0
13.8
6.4
10.0
10.0
25.0
10.0
1.0
350.0
1,707.52
31.62
39.32
0.1
–
–
–
0.1
7.3
51.0
–
12.5
2.0
2.0
0.7
3.3
5.0
609.0
22.9
1.9
50,000.0
0.5
10.9
155.7
20.0
Sydney, Australia
WA
AUD
–
Sydney, Australia
Sydney, Australia
Sydney, Australia
Hong Kong, China
Hong Kong, China
London, Great Britain
Sydney, Australia
Delaware, USA
London, Great Britain
Auckland, New Zealand
Melbourne, Australia
Singapore, Singapore
Delaware, USA
Madrid, Spain
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
AUD
AUD
AUD
HKD
HKD
GBP
AUD
USD
GBP
NZD
AUD
SGD
USD
EUR
50.42
190.02
571.52
20.0
30.0
18.0
0.1
948.1
17.5
7.5
53.9
55.0
0.4
15.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
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
155
Footnotes
1 WB: UBS Wealth Management &
Business Banking, AM: UBS Global Asset
Management, WA: UBS Warburg, PW:
UBS PaineWebber, CC: Corporate Center.
2 Share Capital and Share Premium.
UBS Group Financial Statements
Notes to the Financial Statements
Note 35 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
Jurisdiction
of incorporation
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
Sandton, South Africa
Bangkok, Thailand
London, Great Britain
Makati City, Philippines
Business
Group 1
Share
capital
in millions
WA
WA
WA
WA
WA
ZAR
THB
INR
GBP
PHP
87.1
400.0
237.8
140.0
150.0
Equity
interest
accumul-
ated in %
100.0
100.0
75.0
100.0
100.0
Consolidated companies: changes in 2002
Significant new companies
BDL Banco di Lugano (Singapore) Ltd – Singapore, Singapore
GAM Holding AG – Zurich, Switzerland
Noriba Bank BSC – Manama, Bahrain
UBS Fiduciaria SpA – Milan, Italy
UBS Private Banking (Belgium) SA – Brussels, Belgium
Deconsolidated companies
Significant deconsolidated companies
Reason for deconsolidation
Hirslanden Holding AG – Zurich, Switzerland
HYPOSWISS Schweizerische Hypotheken- und Handelsbank – Zurich, Switzerland
Sold
Sold
Significant associates
Company
SIS 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
32.9
49.9
35.6
33.3
21.0
CHF 26
EUR 15
CHF 253
CHF 45
GBP 18
None of the above investments carry voting rights that are significantly different from the propor-
tion of shares held.
156
Note 36 Acquisition of Paine Webber Group, Inc.
On 3 November 2000, UBS completed its acqui-
sition of 100% of the outstanding common
stock of the Paine Webber Group, Inc. (“Paine-
Webber”), 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 acqui-
sition. Under IFRS, the valuation of shares and
options issued was measured on the date of
acquisition, 3 November 2000.
Purchase consideration amounted to CHF
22.0 billion (USD 12.5 billion) consisting of
shares, options and cash. Total goodwill record-
ed in connection with the acquisition amounted
to CHF 12.8 billion (USD 7.3 billion) at 3 No-
vember 2000 and is being amortized using the
straight-line method over an estimated useful life
of 20 years. At 31 December 2002 and 2001, the
net book value of goodwill related to the Paine-
Webber acquisition amounted to CHF 9.0 billion
and CHF 11.6 billion respectively.
Note 37 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 ended
31.12.02
31.12.01
31.12.02
31.12.01
31.12.00
1.38
1.45
2.23
1.17
1.67
1.48
2.43
1.27
1.54
1.46
2.33
1.24
1.69
1.50
2.44
1.40
1.69
1.56
2.57
1.57
Note 38 Swiss Banking Law Requirements
The consolidated financial statements of UBS are
prepared in accordance with International
Financial Reporting Standards. Set out below are
the deviations which would result if the provi-
sions of the Banking Ordinance and the Guide-
lines of the Swiss Federal Banking Commission
governing financial statement reporting pursuant
to Article 23 through Article 27 of the Banking
Ordinance were applied in the preparation of the
consolidated financial statements of UBS.
1. Treasury shares
Under IFRS, treasury shares are presented in the
balance sheet as a deduction from Shareholders’
equity and accounted for at weighted average
cost. Contracts that require physical settlement
or net share settlement in UBS AG shares are
classified in Shareholders’ equity as Share pre-
mium and accounted for at weighted average
cost. The difference between the proceeds from
sales of treasury shares or contracts that require
physical settlement or contracts that require net
share settlement and their cost (net of tax) is
reported as Share premium. The par value of
shares repurchased and cancelled is debited to
the issued and paid up share capital for the par
value, with the remainder of the cost of the
repurchased shares debited to Share premium.
No dividends are paid on treasury shares.
Under Swiss law, own shares held for market-
making purposes are presented in the balance
sheet as Trading portfolio assets. Own shares
157
UBS Group Financial Statements
Notes to the Financial Statements
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 report-
ed 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 disposal, 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 repurchased and cancelled is
debited against Share capital for the par value,
with the remainder of the purchase cost debited
against General statutory reserve.
2. Financial investments
Under IFRS, 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 deter-
mined to be impaired, the cumulative unrealized
loss previously recognized in Shareholders’ equi-
ty is included in net profit or loss for the period.
On disposal of an available for sale investment,
the difference between the net disposal proceeds
and the carrying amount, including any previ-
ously recognized unrealized gain or loss arising
from a change in fair value reported within
Shareholders’ 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 disposal
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 IFRS, 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 unrealized gains or losses
on the effective portion of the derivative instru-
ments 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’ equi-
ty where under IFRS 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 IFRS, 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 related
to other accounting periods and/or not directly
related to the core business activities of the enter-
prise (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 IFRS and
Swiss banking law are as follows:
158
Note 38 Swiss Banking Law Requirements (continued)
CHF million
Differences in the Balance Sheet
Treasury shares
Trading portfolio
Financial investments
Due to banks
Negative replacement values
Other liabilities
Shareholders’ equity
Financial investments
Financial investments
Other liabilities
Shareholders’ equity
Cash flow hedges
Other liabilities
Shareholders’ equity
Differences in the Income Statement
Treasury shares
Net trading income
Other income
Personnel expenses
Tax expenses
Financial investments
Other income
Reclassification of extraordinary income and expense
Other income
Extraordinary income
Extraordinary expense
31.12.02
31.12.01
371
6,623
23
(2)
293
6,680
(1,314)
(113)
(1,201)
(256)
256
(70)
(269)
4
(53)
(255)
(350)
361
11
128
3,253
24
0
0
3,357
(1,856)
(215)
(1,641)
(459)
459
(70)
(231)
(71)
(607)
(95)
109
14
159
UBS Group Financial Statements
Notes to the Financial Statements
Note 39 Reconciliation of International Financial Reporting
Standards (IFRS) to United States Generally Accepted Accounting
Principles (US GAAP)
Note 39.1 Valuation and income recognition differences between
IFRS and US GAAP
The consolidated financial statements of the
Group have been prepared in accordance with
IFRS. The principles of IFRS 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
IFRS and US GAAP.
a. Purchase accounting (merger of Union Bank
of Switzerland and Swiss Bank Corporation)
Under IFRS, 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 adjust-
ments were made to the carrying values of the
assets and liabilities. Under US GAAP, the busi-
ness 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 acquisi-
tion is measured at fair value and the acquirer’s
interests in identifiable tangible assets and liabili-
ties of the acquiree are restated to fair values at the
date of acquisition. Any excess consideration 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.
On 1 January 2002, the Group adopted SFAS
141, “Business Combinations” and SFAS 142,
“Goodwill and Other Intangible Assets”. SFAS
141 requires reclassification of intangible assets to
goodwill which no longer meet the recognition cri-
teria under the new standard. SFAS 142 requires
that goodwill and intangible assets with indefinite
lives no longer be amortized but be tested annual-
ly for impairment. Identifiable intangible assets
with finite lives will continue to be amortized.
Upon adoption, the amortization charges
related to the 1998 business combination of
Union Bank of Switzerland and Swiss Bank Cor-
poration ceased to be recorded under US GAAP.
For the year ended 31 December 2002, these
charges would have been CHF 1,477 million.
In 2002 and 2001, goodwill recorded under US
GAAP was reduced by CHF 43 million and CHF 53
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. Reversal of IFRS goodwill amortization
Goodwill and intangible assets
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 was amor-
tized on a straight line basis using a weighted
average life of 13 years from 29 June 1998 to
31 December 2001.
The adoption of SFAS 142 “Goodwill and Intan-
gible Assets” resulted in two new reconciling items
1) Intangible assets on the IFRS Balance sheet with
a book value of CHF 1.8 billion at 31 December
2001 were reclassified to goodwill for US GAAP.
2) The amortization of IFRS goodwill and the
intangible assets reclassified to goodwill for
US GAAP (CHF 1,017 million for the year ended
31 December 2002) was reversed for US GAAP.
Under US GAAP until 31 December 2001,
goodwill acquired before 30 June 2001 was cap-
italized and amortized over its estimated useful
life with adjustments for any impairment.
Had the Group been required to adopt SFAS
142 for its US GAAP Financial Statements in
prior years, reported Net profit and Earnings per
share would have been as follows:
160
CHF million, except for per share data
For the year ended
Reported Net profit under US GAAP
Add back: SBC purchase accounting goodwill
Add back: Amortization of intangibles reclassified to goodwill
for US GAAP and / or IFRS goodwill
Adjusted net profit under US GAAP
Reported basic earnings per share under US GAAP
Add back: SBC purchase accounting goodwill
Add back: Amortization of intangibles reclassified to goodwill
for US GAAP and / or IFRS goodwill
Adjusted basic earnings per share under US GAAP
Reported diluted earnings per share under US GAAP
Add back: SBC purchase accounting goodwill
Add back: Amortization of intangibles reclassified to goodwill
for US GAAP and / or IFRS goodwill
Adjusted diluted earnings per share under US GAAP
31.12.02
31.12.01
31.12.00
5,546
0
0
5,546
4.59
0.00
0.00
4.59
4.51
0.00
0.00
4.51
3,234
1,657
886
5,777
2.58
1.32
0.71
4.61
2.46
1.30
0.70
4.46
4,437
1,679
315
6,431
3.70
1.40
0.26
5.36
3.64
1.38
0.26
5.28
The table below shows the estimated, aggregated amortization expenses for other intangible assets,
which are still subject to an annual amortization, on a US GAAP basis:
CHF million
Estimated, aggregated amortization expense for:
2003
2004
2005
2006
2007
2008 and thereafter
Total
c. Restructuring provision
Under IFRS, 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
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 IFRS prior to 2000. For US GAAP,
the aggregate CHF 7,300 million restructuring
provision was reversed. As a result of the busi-
ness combination with Swiss Bank Corporation
and the decision to combine and streamline
certain activities of the banks for the purpose
of reducing costs and improving efficiencies,
Union Bank of Switzerland recognized a restruc-
116
97
93
80
71
765
1,222
turing provision of CHF 1,575 million during
1998 for US GAAP. CHF 759 million of this pro-
vision related to estimated costs for restructuring
the operations and activities of Swiss Bank
Corporation, and that amount was recorded as a
liability 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 restructuring
provision under IFRS, but were not eligible for
recognition under US GAAP until 2001. The
restructuring plan was completed and the re-
maining 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 IFRS
and US GAAP had been fully utilized.
161
UBS Group Financial Statements
Notes to the Financial Statements
d. Derivative instruments
Derivative instruments held
or issued for hedging activities
Prior to 1 January 2001, the Group applied no
hedge accounting for derivative instruments
under US GAAP. As a result, all derivative instru-
ments were carried on the balance sheet at fair
value, with changes in fair value recorded in the
Income statement. Under IFRS, 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 methodology applied
to the underlying item hedged.
On 1 January 2001, the Group adopted IAS
39 for its IFRS Financial Statements 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
hedging 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 for
derivative instruments.
With the adoption of IAS 39 on 1 January
2001, an opening adjustment was made in 2001 to
reduce Retained earnings by CHF 61 million, con-
sisting of CHF 19 million reflecting the impact of
the new hedge accounting rules and CHF 42 mil-
lion 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.
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 finan-
cial assets, financial liabilities, and forward com-
mitments which is then used to estimate and aggre-
gate cash flows and to schedule the future periods
in which these cash flows are expected to occur.
Appropriate derivative instruments 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
recognized in Net trading income.
Since 1 January 2001, the Group’s derivative
hedging relationships have been treated the same
under both IFRS and US GAAP, except for
hedges of interest rate risk of forecasted cash
flows on a group basis as mentioned in the previ-
ous paragraph.
In addition, amounts deferred under previous
hedging relationships that now do not qualify as
hedges under IAS 39 are being amortized against
IFRS 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.
Derivative instruments indexed to UBS shares
US GAAP, like IFRS, generally 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 derivative con-
tract requires cash settlement or the counterpar-
ty may choose cash settlement, then the deriva-
tive must be classified as an asset or liability, with
changes in fair value recorded in income.
Asset or liability classification is also required
under US GAAP if a company may not have suffi-
cient issuable shares available to settle a contract in
its own shares. This is determined by the maximum
number of shares a company could be forced to
issue to settle a contract. Under IFRS, however, such
contracts are recorded in Shareholders’ equity.
In 2001 and 2000, the Group had no con-
tracts for which the accounting treatment under
US GAAP differed from IFRS, and there was no
reconciling item for these derivative instruments.
In 2002, however, the Group issued net-share
settled put options as part of its share repurchases
in 2002. Such contracts are recorded under IFRS
in Shareholders’ equity and under US GAAP as a
liability with changes in fair value reflected in
Net income. Such contracts increased US GAAP
Net income by CHF 12 million in 2002.
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 125 million under IFRS (CHF 137 million
under US GAAP) in 2002, CHF 261 million
under both IFRS and US GAAP in 2001 and CHF
162
42 million under both IFRS and US GAAP in
2000 was recorded in the financial statements
from trading in cash settled derivative instru-
ments indexed to UBS shares.
Bifurcation of embedded issuer calls out of
structured debt instruments
The Group issues certain structured debt instru-
ments that contain an embedded issuer call
option. If the embedded derivatives contained in
the structured debt are not clearly and closely
related to the host debt instrument, IFRS requires
that a combined derivative is separated, includ-
ing the issuer call, and accounted for as a stand
alone derivative contract. Under US GAAP, how-
ever, certain issuer calls must remain with the
host contract and are therefore not separated.
The impact of not separating these issuer call fea-
tures was to reduce US GAAP Net income by
CHF 55 million before tax at 31 December 2002.
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 IFRS. 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
impairments. Under US GAAP, the Group’s finan-
cial investments are classified as available for sale
(debt and marketable equity securities), and are
carried at fair value with changes in fair value
recorded in Other comprehensive income. Gains
and losses are recognized in Net profit in the peri-
od sold, and losses are recognized in the period of
impairment for IFRS and US GAAP. For the IFRS
to US GAAP reconciliation, debt and marketable
equity securities were adjusted 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
Financial investments available for sale
With the adoption of IAS 39 on 1 January 2001,
the accounting for financial investments avail-
able for sale generally became the same under
IFRS and US GAAP. Three exceptions exist, how-
ever: 1) Non-marketable equity financial invest-
ments (excluding private equity investments dis-
cussed below), which are classified as available
for sale and carried at fair value under IFRS, con-
tinue to be carried at cost less “other than tem-
porary” impairments under US GAAP. The open-
ing adjustment and subsequent changes in fair
value recorded directly in Shareholders’ equity
on non-marketable equity financial instruments
due to the implementation on IAS 39 have been
reversed under US GAAP to reflect the difference
between the two standards in measuring such
investments. 2) Write-downs on impaired assets
can be fully or partially reversed under IFRS if
the value of the impaired assets increases. Such
reversals of impairment write-downs are not
allowed under US GAAP. Reversals under IFRS
were not significant in 2002 or 2001. 3) Private
equity investments, as described below.
Private equity investments
Since the adoption of IAS 39 on 1 January 2001,
the Group has accounted for private equity invest-
ments as available for sale securities in its primary
Financial Statements under IFRS, with changes
in fair value recognized in Shareholders’ equity.
Under US GAAP, these investments continued to
be accounted for at cost less “other than tempo-
rary” impairments.
On 1 January 2002, the Group adopted the
provisions of Statement of Financial Accounting
Standards (“SFAS”) 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets” for
its US GAAP Financial Statements. The statement
primarily addresses financial accounting and
reporting for the impairment or disposal of long-
lived assets. In addition, SFAS 144 eliminated the
exception to consolidation for subsidiaries for
which control is likely to be temporary, as previ-
ously contained in Accounting Research Bulletin
51 “Consolidated Financial Statements” as
amended by SFAS 94 “Consolidation of All
Majority-Owned Subsidiaries”. Therefore, on
adopting SFAS 144, the Group changed its US
GAAP accounting for certain private equity invest-
ments by accounting for those investments held
within separate investment subsidiaries in accor-
dance with the “AICPA Audit and Accounting
Guide, Audits of Investment Companies”. The
effect of this change for US GAAP reporting pur-
163
UBS Group Financial Statements
Notes to the Financial Statements
poses is that certain private equity investments are
now recorded at fair value, with changes in fair
value recognized in US GAAP net profit. The
remaining private equity investments continue to
be accounted for at cost less impairment.
For the IFRS to US GAAP reconciliation, fair
value adjustments on certain private equity
investments recorded directly in Shareholders’
equity under IFRS had to be shown in the Income
statement for US GAAP purposes. At 1 January
2002, the date of adoption of SFAS 144, the
cumulative effect of this change in accounting
on US GAAP net profit was an increase of CHF
639 million, after tax. For the year ended 31 De-
cember 2002, the effect of applying the new stan-
dard on the reconciliation of IFRS net profit to
US GAAP was to increase US GAAP net profit by
an additional CHF 83 million, after tax.
The pro-forma Net profit assuming that the
change in accounting principle were applied
retroactively for all periods presented, would be
as follows:
CHF million, except for per share data
For the year ended
Net profit under US GAAP
Basic earnings per share
Diluted earnings per share
31.12.02
31.12.01
31.12.00
4,907
4.06
3.99
2,763
2.21
2.09
5,523
4.61
4.53
See Note 2 for information regarding impairment charges recorded for private equity investments.
g. Retirement benefit plans
Under IFRS, the Group recognizes pension ex-
pense based on a specific method of actuarial val-
uation used to determine the projected plan lia-
bilities 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 lia-
bilities. Under IFRS the recognition of a prepaid
asset is subject to certain limitations, and any
unrecognized prepaid asset is recorded as pen-
sion expense. US GAAP does not allow a limita-
tion on the recognition of prepaid assets record-
ed in the Balance Sheet.
Under US GAAP, pension expense is based on
the same actuarial method of valuation of liabil-
ities and assets as under IFRS. 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
Corporation.
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 income. The
additional minimum liability required under US
GAAP before tax amounts to CHF 1,225 million
and CHF 306 million as at 31 December 2002
and 2001, respectively. The amount recognized
in intangible assets was CHF 2 million and CHF
3 million and the amount recognized in Other
comprehensive income was CHF 1,223 million,
before taxes and CHF 303 million, before taxes
as at 31 December 2002 and 2001 respectively.
h. Other employee benefits
Under IFRS, the Group has recorded expenses
and liabilities for post-retirement, medical and life
insurance benefits, determined under a methodol-
ogy similar to that described above under retire-
ment 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 IFRS. 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.
164
i. Equity participation plans
IFRS does not specifically address the recognition
and measurement requirements for equity par-
ticipation 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
“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 IFRS,
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 396 million
and CHF 1,485 million, liabilities by CHF 429
million and CHF 1,607 million, and decrease
Shareholders’ equity by CHF 33 million and
CHF 122 million (for UBS AG shares held by the
trusts which are treated as treasury shares) at 31
December 2002 and 2001 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 the
option awards in the US GAAP reconciliation
for the years ended 31 December 2002, 2001
and 2000, is a CHF 51 million decrease in
compensation expense, CHF 30 million decrease
in compensation expense and CHF 85 million
increase in compensation expense, respectively.
In addition, certain of the Group’s share plans
have been deemed variable under APB No. 25 or
required a new expense measurement date due
to diversification or cash settlement of awards.
Additional expense was also recorded related to
social tax payments on exercised options record-
ed directly in Shareholders’ equity for IFRS. For
US GAAP, the net effect of these transactions is
a decrease to compensation expense of CHF 12
million, an increase to compensation expense of
CHF 41 million and an increase to compensa-
tion expense of CHF 82 million for the years
ended 31 December 2002, 2001 and 2000,
respectively.
j. Software capitalization
Under IFRS, effective 1 January 2000, certain
costs associated with the acquisitions or develop-
ment 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
software capitalization criteria in 1999 have been
reversed from Operating expenses and amortized
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. At 31 De-
cember 2002, this amount was fully utilized and
there is no longer a difference between IFRS and
US GAAP.
k. Recently issued US accounting standards
In April 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 145,
“Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and
Technical Corrections”. The new standard is
effective for fiscal years beginning after 15 May
2002. UBS will adopt the new standard for its
fiscal year 2003, but does not expect that it will
have a significant effect on the financial state-
ments.
In June 2002, the FASB issued SFAS No. 146,
“Accounting for Costs Associated with Exit or
Disposal Activities”. SFAS No. 146 addresses
primarily recognition and measurement of cost
for employee termination benefits, contract ter-
minations, closure or consolidation of facilities,
relocation, and similar items associated with exit
or disposal activities. The new standard requires
that a liability for such costs should be recog-
165
UBS Group Financial Statements
Notes to the Financial Statements
nized at its fair value in the period in which the
liability is incurred and not at the time an entity
commits to an exit or disposal plan. SFAS No.
146 is applicable prospectively for exit or dis-
posal activities initiated after 31 December
2002. UBS does not expect that the new stan-
dard will have a significant impact on its finan-
cial statements.
In December 2002, the FASB issued SFAS No.
148, “Accounting for Stock-based Compensa-
tion – Transition and Disclosure”, an amend-
ment of FASB Statement No. 123, which was
effective for financial years ending after 15 De-
cember 2002. UBS adopted SFAS No. 148 for the
year ended 31 December 2002. The new stan-
dard requires additional disclosures in respect to
pro-forma disclosures had the fair value based
method for valuing employee stock option
awards been applied. These additional disclo-
sures are included in Note 32. Other than addi-
tional disclosures, SFAS No. 148 currently has no
impact on the financial statements.
In January 2003, the FASB issued FASB
Interpretation (FIN) No. 46, “Consolidation of
Variable Interest Entities”, an interpretation of
Accounting Research Bulletin No. 51. FIN 46
applies to certain entities in which equity in-
vestors do not have the characteristics of a con-
trolling financial interest or do not have suffi-
cient equity at risk for the entity to finance its
activities without additional subordinated finan-
cial support from other parties. Such entities are
called variable interest entities (VIE) under the
new interpretation, which requires consolidation
of a VIE if the variable interest either absorbs the
majority of the expected losses, or receives the
majority of the expected gains, or both. FIN 46
applies to all VIEs created before 1 February
2003 no later than the beginning of the first inter-
im or annual reporting period beginning after 15
June 2003. The new interpretation applies imme-
diately to all VIEs created after 31 January 2003.
FIN 46 also establishes disclosure requirements
for VIEs that an enterprise will consolidate or in
which it will have a significant variable interest.
These disclosure requirements became effective
for financial statements issued after 31 January
2003 and are provided in Note 40.2.
In November 2002, the Emerging Issues Task
Force (EITF) reached a consensus on EITF Issue
No. 02-3, “Issues Involved in the Accounting for
Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and
Risk Management”. The consensus precludes
mark-to-market accounting for energy trading
contracts that are not derivatives pursuant to
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”. UBS has
adopted the provisions of EITF Issue 02-3 relat-
ed to energy trading contracts as at 1 January
2003 for contracts that existed on or before 25
October 2002, the date when this consensus was
issued. For contracts entered into after 25
October 2002, the consensus was applied with
immediate effect. The effect of adoption was not
material either for contracts entered into after or
those that existed on 25 October 2002.
Included in EITF Issue 02-3 is the FASB staff’s
view that an entity should not recognize an un-
realized gain or loss at inception of a derivative
instrument unless the fair value of that instru-
ment is obtained from a quoted market price
in an active market or is otherwise evidenced
by comparison to observable market data.
Management is in the process of completing the
evaluation of the impact of this view on the
Group’s financial condition and profit. As
required, the Group applied this view to trans-
actions entered into after the effective date of 21
November 2002. The impact was not signifi-
cant. The impact of this issue is dependent upon
the level of transactions executed that rely on
data not observable in the market. Accordingly,
it is not possible to project the impact this mat-
ter could have on the Group’s 2003 financial
statements.
166
Note 39.2 Reconciliation of IFRS Shareholders’ equity and
Net profit to US GAAP
CHF million
Note 39.1
Reference
Shareholders’ equity
Net profit
31.12.02
31.12.01
31.12.02
31.12.01
31.12.00
Amounts determined in accordance
with IFRS
Adjustments in respect of:
SBC purchase accounting goodwill and other
purchase accounting adjustments
Reversal of IFRS goodwill amortization
Restructuring provision
Derivative instruments
Financial investments (prior to the
adoption of IAS 39)
Financial investments and private equity
Retirement benefit plans
Other employee benefits
Equity participation plans
Software capitalization
Tax adjustments
38,991
43,530
3,535
4,973
7,792
a
b
c
d
e
f
g
h
i
j
15,285
1,017
0
(138)
0
(30)
621
(1)
(164)
0
(5)
15,413
0
0
(169 )
0
(709 )
1,714
(8 )
(186 )
60
(363 )
(128)
1,017
0
354
0
767
(156)
7
63
(60)
147
(1,614 )
0
(112 )
25
0
0
119
8
(12 )
(169 )
16
(1,669)
0
(238)
(1,353)
28
0
59
8
(167)
(160)
137
Total adjustments
16,585
15,752
2,011
(1,739 )
(3,355)
Amounts determined in accordance
with US GAAP
55,576
59,282
5,546
3,234
4,437
Note 39.3 Earnings per share
Under both IFRS and US GAAP, basic earnings per share (“EPS”) is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition,
gives effect to dilutive potential common shares that were outstanding during the period.
The computations of basic and diluted EPS for the years ended 31 December 2002, 31 December 2001 and 31 December 2000 are
presented in the following table.
31.12.02
31.12.01
31.12.00
For the year ended
US GAAP
IFRS
US GAAP
IFRS
US GAAP
IFRS
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)
5,546
5,520
1,208,055,132
1,222,862,165
4.59
4.51
3,535
3,515
1,208,586,678
1,223,382,942
2.92
2.87
3,234
3,135
1,251,180,815
1,273,720,560
2.58
2.46
4,973
4,874
1,266,038,193
1,288,577,938
3.93
3.78
4,437
4,423
1,198,680,193
1,215,169,966
3.70
3.64
7,792
7,778
1,209,087,927
1,225,577,700
6.44
6.35
167
UBS Group Financial Statements
Notes to the Financial Statements
Note 39.4 Presentation differences between IFRS and US GAAP
In addition to the differences in valuation and
income recognition, other differences, essentially
related to presentation, exist between IFRS and
US GAAP. Although there is no impact on IFRS
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 IFRS
financial statements.
1. Settlement date vs. trade date accounting
The Group’s transactions from securities activi-
ties are recorded under IFRS on the settlement
date. This results in recording a forward trans-
action during the period between the trade date
and the settlement date. Forward positions relat-
ing to trading activities are revalued to fair value
and any unrealized profits and losses are recog-
nized 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 IFRS, 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
When the Group acts as the lender in a securities
lending agreement and receives securities as collat-
eral that can be pledged or sold, it recognizes the
securities received and a corresponding obligation
to return them. These securities are reflected on
the US GAAP balance sheet in the line “Securities
received as collateral” on the asset side of the bal-
ance sheet. The offsetting liability is presented in
the line “Obligation to return securities received as
collateral”.
4. Reverse repurchase, repurchase, securities
borrowing and securities lending transactions
The Group enters into certain specific reverse
repurchase, repurchase, securities borrowing and
securities lending transactions that result in a dif-
ference between IFRS and US GAAP. Under IFRS,
they are considered borrowing and lending trans-
actions which are not reflected in the balance sheet
except to the extent of cash collateral advanced or
received. Under US GAAP, however, they are con-
sidered purchase and sale transactions due to the
fact that the contracts do not meet specific collat-
eral or margining requirements under SFAS 140.
Due to the different treatment of these transac-
tions under IFRS and US GAAP, interest income
and expense recorded under IFRS must be reclas-
sified to Net trading income or Other income for
US GAAP. Additionally under US GAAP, the secu-
rities received are recognized on the balance sheet
as a spot purchase (Trading portfolio assets) with
a corresponding forward sale transaction (Re-
placement values) and a receivable (Cash collater-
al on securities borrowed) is reclassified, as appli-
cable. The securities delivered are recognized as a
spot sale (Trading portfolio liabilities) with a cor-
responding forward repurchase transaction
(Replacement values) and a liability (Cash collat-
eral on securities lent) is reclassified, as applicable.
168
Note 39.5 Consolidated Income Statement
The following is a Consolidated Income Statement of the Group, for the years ended 31 December
2002, 31 December 2001 and 31 December 2000, restated to reflect the impact of valuation and
income recognition differences and presentation differences between IFRS 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)
31.12.02
31.12.01
31.12.00
Reference US GAAP
IFRS US GAAP
IFRS US GAAP
IFRS
a, d, 4
a, 4
39,679
(29,334)
39,963
(29,417)
51,907
(44,096 )
52,277
(44,236 )
51,565
(43,584 )
51,745
(43,615)
10,345
(206)
10,546
(206)
7,811
(498 )
8,041
(498 )
7,981
130
8,130
130
10,139
10,340
7,313
7,543
8,111
8,260
Net fee and commission income
Net trading income
Other income 1
d, 4
e, f, 4
18,221
6,031
96
18,221
5,572
(12)
20,211
8,959
534
20,211
8,802
558
16,703
8,597
1,514
16,703
9,953
1,486
Total operating income
34,487
34,121
37,017
37,114
34,925
36,402
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property
and equipment
Amortization of goodwill
Amortization of other
intangible assets
Restructuring costs
c, g, h, i
c
18,610
7,072
18,524
7,072
19,713
7,631
19,828
7,631
17,262
6,813
17,163
6,765
a, j
a, b
b
c
1,613
0
1,443
0
1,521
930
1,530
0
1,815
2,484
298
112
1,614
1,025
298
0
1,800
2,018
134
191
1,608
533
134
0
Total operating expenses
28,738
29,577
32,053
30,396
28,218
26,203
Operating profit / (loss)
before tax and minority interests
Tax expense / (benefit)
Net profit / (loss)
before minority interests
Minority interests
Change in accounting principle:
cumulative effect of adoption of “AICPA Audit
and Accounting Guide, Audits of
Investment Companies” on certain
financial investments, net of tax
f
5,749
4,544
511
678
4,964
1,386
6,718
1,401
6,707
2,183
10,199
2,320
5,238
3,866
3,578
5,317
4,524
7,879
(331)
(331)
(344 )
(344 )
(87 )
(87)
639
0
0
0
0
0
Net profit
5,546
3,535
3,234
4,973
4,437
7,792
1 CHF 108 million of the difference in Other income between IFRS and US GAAP at 31 December 2002 is due to the Group’s adoption of the
“AICPA Audit and Accounting Guide, Audits of Investment Companies” on certain private equity investments for its US GAAP financial
statements. This amount represents the increase in fair value of these investments during 2002.
Note: References above coincide with the discussions in Note 39.1 and Note 39.4. These references indicate which IFRS to US GAAP differences
affect an individual financial statement caption. Certain prior year amounts have been reclassified to conform to the current year’s presentation.
169
UBS Group Financial Statements
Notes to the Financial Statements
Note 39.6 Condensed Consolidated Balance Sheet
The following is a Condensed Consolidated Balance Sheet of the Group, as of 31 December 2002
and 31 December 2001, restated to reflect the impact of valuation and income recognition principles
and presentation differences between IFRS and US GAAP.
CHF million
Reference
US GAAP
IFRS
US GAAP
IFRS
31.12.02
31.12.01
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
(including assets pledged as collateral of
CHF 110,365 million at 31.12.02
and CHF 121,456 million at 31.12.01)
Positive replacement values
Loans
Financial investments
Securities received as collateral
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill
Other intangible assets
Private equity investments
Other assets
a, j
a, b
b, g
2
d, f, g, h, i, 1, 2
a
4
1, 4
1, 4
a, d
f, 2
3
4
4,271
32,481
139,073
294,086
441,845
83,757
211,755
2,846
16,308
6,462
705
8,358
28,127
1,222
4,328
21,314
4,271
32,468
139,052
294,086
371,436
82,092
211,647
8,391
6,453
705
7,869
11,181
2,515
8,952
20,990
27,550
162,566
269,256
455,406
73,474
226,747
20,676
10,931
7,545
697
9,276
29,255
4,510
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
14,578
4,507
9,875
Total assets
1,296,938
1,181,118
1,361,920
1,253,297
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
1, 4
3
1, 4
a, d
4
a, d
d, g, h, i, 1
Total liabilities
Minority interests
Total shareholders’ equity
Total liabilities, minority interests
and shareholders’ equity
83,178
36,870
366,858
117,721
16,308
132,354
306,872
15,330
129,527
32,815
83,178
36,870
366,858
106,453
81,282
306,876
15,331
129,411
12,339
106,531
30,317
368,620
119,528
10,931
116,666
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
1,237,833
1,138,598
1,298,526
1,205,655
3,529
55,576
3,529
38,991
4,112
59,282
4,112
43,530
1,296,938
1,181,118
1,361,920
1,253,297
Note: References above coincide with the discussions in Note 39.1 and Note 39.4. These references indicate which IFRS to US GAAP differences
affect an individual financial statement caption. Amounts have been adjusted to reflect the treatment of reverse repurchase, repurchase, securi-
ties borrowing and securities lending transactions on a consistent basis. See Note 39.4.4 for details.
170
Note 39.7 Comprehensive Income
Comprehensive income under US GAAP is defined as the change in Shareholders’ equity excluding transactions with shareholders.
Comprehensive income has two major components: Net profit, as reported in the income statement, and Other comprehensive income.
Other comprehensive income includes such items as foreign currency translation, unrealized gains / losses on available for sale securi-
ties, unrealized 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 on a US GAAP basis for the years ended
31 December 2002, 31 December 2001 and 31 December 2000 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 / (loss)
income / (loss)
Balance at 1 January 2000
Net profit
Other comprehensive income:
Foreign currency translation
Net 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
(442)
(245 )
Other comprehensive income / (loss)
Comprehensive income
16
456
(121 )
Balance at 31 December 2000
(687)
351
Net profit
Other comprehensive income:
Foreign currency translation
Net 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
Net 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, net of CHF 108 million tax
(82 )
Other comprehensive income / (loss)
Comprehensive income
109
(104 )
Balance at 31 December 2001
(769)
356
(80 )
Net profit
Other comprehensive income:
Foreign currency translation
Net unrealized gains on available for sale investments
arising during the year, net of CHF 34 million tax
Impairment charges reclassified to the income statement,
net of CHF 26 million tax
Reclassification adjustment for gains on available for sale
investments realized in net profit, net of CHF 102 million tax
Net unrealized losses on cash flow hedges arising during
the year, net of CHF 3 million tax
Reclassification adjustment for gains on cash flow
hedges realized in net profit, net of CHF 0 million tax
Additional minimum pension liability, net of CHF 93 million tax
Other comprehensive income / (loss)
Comprehensive income
109
95
(368 )
(426)
(245 )
456
(121 )
(336)
(82 )
109
(104 )
4
3
(195 )
(195 )
(195)
(601)
(80 )
109
95
(368 )
(1 )
(8 )
(827 )
(827 )
4
3
7
(1 )
(8 )
Balance at 31 December 2002
(849)
192
(2)
(1,022)
(1,681)
4,437
90
4,527
3,234
(265 )
2,969
5,546
(1,080 )
4,466
171
UBS Group Financial Statements
Notes to the Financial Statements
Note 40 Additional Disclosures Required under
US GAAP and SEC Rules
Note 40.1 Sales of financial assets in securitizations
During the years ended 31 December 2002 and
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-man-
ager. The Group’s continuing involvement in
these transactions was primarily limited to the
temporary retention of various security interests.
Proceeds received at the time of securitization
from residential mortgage, commercial mort-
gage and other financial asset securitizations
were CHF 143.5 billion, CHF 4.0 billion and
CHF 5.8 billion, respectively in 2002 and CHF
67.6 billion, CHF 4.1 billion and CHF 2.8 bil-
lion, respectively in 2001. Related pre-tax gains
(losses) recognized, including unrealized gains
(losses) on retained interests, at the time of secu-
ritization were CHF 523.9 million, CHF 206.4
million and CHF (4.5) million, respectively in
2002 and CHF 112.9 million, CHF 129.7 mil-
lion and CHF 20.6 million, respectively in 2001.
A significant portion of the securitization activi-
ties conducted in 2002 and 2001 were derived
from businesses acquired in the purchase of
PaineWebber Group Inc. in November 2000.
During 2000, the Group did not engage in sig-
nificant securitization transactions involving the
transfer of its financial assets.
At 31 December 2002 and 2001, the Group
retained CHF 5.2 billion and CHF 6.8 billion,
respectively in agency residential mortgage secu-
rities, backed by the Government National
Mortgage Association (GNMA), the Federal
National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation
(FHLMC). The fair value of retained interests in
residential mortgage securities is generally deter-
mined using observable market prices. Retained
interests in other residential mortgage, commer-
cial mortgage and other securities were not mate-
rial at 31 December 2002 and 2001.
Note 40.2 Variable interest entities
FASB interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, was issued on
17 January 2003 and provides guidance for deter-
mining whether or not such entities are subject to
consolidation. FIN 46 requires that control over
a special purpose entity be first assessed based on
voting interests, and only if voting interests do
not exist or differ significantly from economic
interests, the assessment of control is based on
variable interests. Such entities are referred to as
Variable Interest Entities. (“VIE’s”).
Variable interests are contractual, ownership,
or other pecuniary interests in an entity that vary
with changes in that entity’s net asset value,
including fee payments to decision makers and to
providers of guarantees (including writers of put
options and other instruments with similar
results) as well as the interests of related parties
(including management, employees, affiliates and
agents).
FIN 46 is effective after 31 January 2003 for
all newly acquired or created interests in VIE’s
and for periods beginning after 15 June 2003 for
all interests in VIE’s existing and owned prior to
1 February 2003. The table below includes infor-
mation for all entities where it is reasonably pos-
sible that UBS holds a significant interest which
will be characterized as a VIE.
172
Note 40.2 Variable interest entities (continued)
(in CHF million)
SPE category
Total assets
Notional amount
of derivatives
Description of primary assets
Maximum loss
exposure
Trust vehicles for awards to UBS employees
Private equity investments
Hedge fund products including
direct investment funds and funds of funds
Passive intermediary to a derivative transaction 2
Dispersion of risk in a pool of investments
Other credit protection vehicles
Other miscellaneous structures
Total 31.12.2002
4,624.6
784.6
4,970.6
2,131.1
2,689.1
1,639.0
205.3
17,044.3
37,717.0
0
8,665.0
37,248.2
8,125.6
2,922.5
205.3
94,883.6
UBS shares and derivatives thereon, alternative investments
Private equity investments
Bonds, equities, derivatives
and alternative investments
Cash / corporate securities
Debt securities, loan receivables and credit linked notes
Cash, debt securities,
asset-backed securities and credit default swaps
Corporate debt and equities
4,982.21
318.4
1,643.6
876.9
333.8
528.9
194.8
8,878.6
1 In connection with certain leveraged investment opportunities available to key employees, UBS has committed to provide up to CHF 440.8 million in loans to employee investment partnerships.
At 31 December 2002, a total of CHF 35.5 million in loans had actually been drawn down. Repayment of these loans is senior to the employees’ investment in the partnerships. The remaining
unfunded portion of these commitments is also included in Note 25. In addition, if employees default on their future investment commitments, the Group is obliged to assume the remaining
unfunded portion which amounted to CHF 137.7 million at 31 December 2002. In the event that all the investments made by these partnerships became worthless, UBS could be exposed to
2 The maximum loss exposure relating to SPE’s which function as
the loss of the entire committed amount of CHF 578.5 million which is included in the CHF 4,982.2 million in the table above.
a “Passive intermediary to a derivative transaction” is calculated as the discounted value of the Group’s gross contractual swap payment obligations pursuant to the underlying derivative contracts. In
calculating the maximum loss, the Group has not included the effect of positive or negative replacement values which are already reflected for the Group in total on the Balance sheet and further
discussed in Note 23.
The table above includes information for consol-
idated and non-consolidated special purpose
entities. Certain entities subject to the above dis-
closure have been consolidated in the Group’s
Financial Statements under IFRS and US GAAP
due to the Group’s significant economic interest.
However, in many special purpose entities UBS
has a less than significant variable interest, or
control is determined based on voting interest.
These entities are not included in the table.
In addition, the “maximum exposure to loss”
presented in the table represents worst-case sce-
narios and does not consider the offsetting effects
of hedges. It is the Group’s practice to hedge
interest rate, credit and other market risk expo-
sures. See Note 29 for a further discussion of the
Group’s risk mitigation strategies.
Some of the special purpose entities in the
table above function as passive intermediaries to
derivatives transactions and are generally estab-
lished to facilitate the transfer of credit risk on
portfolios to investors. The relevant size of such
entities is measured by the “notional amount” of
the derivatives’ underlying referenced assets;
i. e., the size of the portfolio for which credit risk
has been transferred. These notional amounts
are also included in Note 23, Derivative
Instruments.
173
UBS Group Financial Statements
Notes to the Financial Statements
Note 40.3 Supplemental Guarantor Information
Guarantee of PaineWebber securities
Following the acquisition of Paine Webber Group
Inc., UBS AG made a full and unconditional guar-
antee of the senior and subordinated notes and
trust preferred securities (“Debt Securities”) of
PaineWebber. Prior to the acquisition, Paine-
Webber was an SEC Registrant. Upon the acqui-
sition, PaineWebber was merged into UBS
Americas Inc., a wholly owned subsidiary of UBS.
Under the guarantee, if UBS Americas Inc. fails to
make any timely payment under the Debt
Securities agreements, the holders of the Debt
Securities or the Debt Securities trustee may
demand payment from UBS without first pro-
ceeding against UBS Americas Inc. UBS’s obliga-
tions under the subordinated note guarantee are
subordinated to the prior payment in full of the
deposit liabilities of UBS and all other liabilities of
UBS. At 31 December 2002, the amount of senior
liabilities of UBS to which the holders of the sub-
ordinated debt securities would be subordinated
is approximately CHF 1,129 billion.
The information presented in this note is
prepared in accordance with IFRS and should
be read in conjunction with the consolidated
financial statements of the Group of which this
information is a part. At the bottom of each col-
umn, Net profit and Shareholders’ equity has been
reconciled to US GAAP. See Note 39 for a detailed
reconciliation of the IFRS financial statements to
US GAAP for the Group on a consolidated basis.
Effective 1 January 2002, the ownership of all
major US subsidiaries of UBS AG was transferred to
UBS Americas Inc. through a capital contribution.
As a result, the current disclosure note is not com-
parable with those presented in previous periods.
Supplemental Guarantor Consolidating Income Statement
CHF million
For the year ended 31 December 2002
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
25,253
18,187
7,066
(134 )
6,932
6,841
4,420
(1,429 )
(131 )
16,693
14,273
2,420
(15 )
2,405
7,325
773
0
(26 )
Total operating income
16,633
10,477
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)
8,370
2,627
1,062
144
12,203
4,430
895
Net profit / (loss) before minority interests
3,535
Minority interests
Net profit / (loss)
Net profit / (loss) US GAAP 2
0
3,535
5,214
7,531
2,003
204
2,211
11,949
(1,472 )
(460 )
(1,012 )
0
(1,012 )
(65 )
4,520
3,460
1,060
(57 )
1,003
4,055
379
0
145
5,582
2,623
2,443
255
104
5,425
157
243
(86 )
(331 )
(417 )
397
(6,503 )
(6,503 )
0
0
0
0
0
1,429
0
1,429
0
0
0
0
0
1,429
0
1,429
0
1,429
0
39,963
29,417
10,546
(206)
10,340
18,221
5,572
0
(12)
34,121
18,524
7,073
1,521
2,459
29,577
4,544
678
3,866
(331)
3,535
5,546
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 IFRS.
2 Refer to Note 39 for a description of the differences between IFRS and US GAAP.
174
Supplemental Guarantor Consolidating Balance Sheet
CHF million
For the year ended 31 December 2002
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
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
3,609
65,992
32,248
197,168
197,184
82,087
252,625
1,613
2,343
9,730
6,144
128
3,989
854,860
85,634
35,800
136,797
56,105
89,135
339,787
7,779
58,704
6,933
816,674
0
38,186
7
14,205
139,424
150,717
148,430
3,249
25,904
1,684
3,143
20
731
12,946
4,009
504,469
89,815
32,625
295,885
43,784
3,524
19,957
6,580
7,111
2,604
501,885
55
2,529
655
82,384
1,056
40,725
25,823
17,168
14,796
5,094
1,458
81
994
622
3,603
0
(130,113 )
(33,676 )
(94,524 )
0
(20,413 )
(81,678 )
0
(491 )
(9,126 )
0
0
(2,649 )
4,271
32,468
139,052
294,086
371,437
82,091
211,647
8,391
6,453
705
7,869
13,696
8,952
194,459
(372,670 )
1,181,118
37,842
2,121
28,700
6,564
9,036
28,810
1,463
63,596
5,451
(130,113 )
(33,676 )
(94,524 )
0
(20,413 )
(81,678 )
(491 )
0
(2,649 )
83,178
36,870
366,858
106,453
81,282
306,876
15,331
129,411
12,339
183,583
(363,544 )
1,138,598
3,474
7,402
0
(9,126 )
3,529
38,991
854,860
504,469
194,459
(372,670 )
1,181,118
Total shareholders’ equity – US GAAP 2
44,852
3,176
7,548
0
55,576
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 IFRS.
2 Refer to Note 39 for a description of the differences between IFRS and US GAAP.
175
UBS Group Financial Statements
Notes to the Financial Statements
Supplemental Guarantor Consolidating Cash Flow Statement
CHF million
For the year ended 31 December 2002
UBS AG
UBS
Parent Bank1 Americas Inc.
Subsidiaries
UBS Group
Net cash flow from / (used in) operating activities
8,422
(927 )
(9,859 )
(2,364)
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 in)/divestment of financial investments
Net cash flow from / (used in) investing activities
Cash flow from / (used in) investing activities
Net money market paper issued/(repaid)
Net movements in treasury shares and
own equity derivative activity
Capital issuance
Capital repayment by par value reduction
Issuance of long-term debt
Repayment of long-term debt
Increase in minority interests
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 2
Due from banks maturing in less than three months
Total
(23 )
984
(1,019 )
22
931
895
(16 )
0
(189 )
28
307
130
(21 )
0
(555 )
17
915
356
(60)
984
(1,763)
67
2,153
1,381
(30,635 )
471
3,958
(26,206)
(5,605 )
6
(2,509 )
8,414
(11,099 )
0
0
2,775
(38,653 )
(2,608 )
(31,944 )
89,856
57,912
3,609
33,509
20,794
57,912
0
0
0
915
(2,780 )
0
0
(161 )
(1,555 )
1,919
(433 )
15,552
15,119
7
9,615
5,497
15,119
0
0
0
7,803
(1,032 )
0
(377)
(2,614 )
7,738
227
(1,538 )
10,851
9,313
655
3,059
5,599
9,313
(5,605)
6
(2,509)
17,132
(14,911)
0
(377)
0
(32,470)
(462)
(33,915)
116,259
82,344
4,271
46,183
31,890
82,344
1 UBS AG Parent Bank prepares its Financial Statements in accordance with Swiss Banking Law requirements. For the purpose of this disclosure,
2 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial
the accounts have been adjusted to IFRS.
investments. CHF 10,475 million was pledged at 31 December 2002.
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. UBS’s obligations under the trust
preferred securities guarantee are subordinated
to the prior payment in full of the deposit liabili-
ties of UBS and all other liabilities of UBS. At
31 December 2002, the amount of senior liabili-
ties of UBS to which the holders of the subordi-
nated debt securities would be subordinated is
approximately CHF 1,129 billion.
176
UBS Group Financial Statements
Report of the Group Auditors
177
178
UBS AG (Parent Bank)
179
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
Report of the Capital Increase Auditors
181
182
182
183
183
184
185
185
185
186
186
187
187
188
188
188
188
189
190
180
UBS AG (Parent Bank)
Parent Bank Review
Parent Bank Review
Income Statement
The Parent Bank UBS AG net profit increased
CHF 1,179 million from CHF 4,655 million to
CHF 5,834 million. Income from investments in
associates increased to CHF 3,417 million from
CHF 1,532 million in 2001 mainly due to higher
distribution received. Sundry expense from ordi-
nary activities was CHF 381 million, up from
CHF 139 million in 2001. This was mainly due to
higher net writedown of financial investments.
Depreciation and write-offs were CHF 3,025 mil-
lion, up from CHF 1,650 million in 2001 mainly
caused by higher writedown on investments in
associated companies. Extraordinary income con-
tains CHF 260 million (2001: CHF 87 million)
from the sale of subsidiaries.
Balance Sheet
Total assets increased by CHF 48 billion to CHF
1,064 billion by 31 December 2002. This move-
ment is mostly impacted by increased trading-
related assets where mainly trading balances
in securities and positive replacement values
have increased. Liquid assets have significantly
decreased due to reduction of deposits with the
Bank of Japan.
181
UBS AG (Parent Bank)
Financial Statements
Financial Statements
Income Statement
CHF million
For the year ended
Interest and discount income
Interest and dividend income from trading portfolio
Interest and dividend income from financial investments
Interest expense
Net interest income
Credit-related fees and commissions
Fee and commission income from securities and
investment business
Other fee and commission income
Fee and commission expense
Net fee and commission income
Net trading income
Net income from disposal of financial 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
31.12.02
31.12.01
% change from
31.12.01
20,059
7,074
23
(20,125)
7,031
252
7,249
515
(1,167)
6,849
4,634
125
3,417
50
1,908
(381)
5,119
23,633
8,916
4,379
13,295
10,338
3,025
1,053
6,260
265
7
684
5,834
29,967
8,089
185
(31,444 )
6,797
291
8,232
524
(1,176 )
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
(33)
(13)
(88)
(36)
3
(13)
(12)
(2)
(1)
(13)
(8)
733
123
(7)
61
174
94
6
(6)
(10)
(7)
29
83
(8)
20
179
0
4
25
182
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
31.12.02
31.12.01
% change from
31.12.01
3,609
33,671
265,106
165,938
117,677
199,546
8,377
10,275
4,633
2,342
249,064
3,734
20,215
54,384
252,226
173,690
117,706
185,306
17,253
11,331
5,624
3,231
171,798
3,725
Total assets
1,063,972
1,016,489
Total subordinated assets 1
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
4,717
218,915
22,131
303,023
76,687
274,431
4,220
67,759
7,846
256,278
3,281
4,177
1,005
12,392
6,623
18,285
5,834
4,219
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
Total liabilities
Total subordinated liabilities
Total amounts payable to Group companies
1,063,972
1,016,489
13,315
142,139
16,444
126,182
1 The subordinated assets for 2001 have been restated to include the subordinated traded assets of CHF 2,325 million.
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 2002 as per the Parent Bank’s Income Statement
Appropriation to general statutory reserve
Appropriation to other reserves
Proposed dividends
Total appropriation
Dividend Distribution
(82)
(38)
5
(4)
0
8
(51)
(9)
(18)
(28)
45
0
5
12
2
(58)
0
13
(5)
(19)
3
(10)
49
(43)
6
(72)
(15)
104
8
25
5
(19)
13
5,834
232
3,237
2,365
5,834
The Board of Directors will recommend to the Annual General Meeting on 16 April 2003 that UBS
should pay a dividend of CHF 2.00 per share of CHF 0.80 par value. If the dividend is approved, the
payment of CHF 2.00 per share, after deduction of 35% Swiss withholding tax would be made on
23 April 2003 for shareholders who hold UBS shares on 16 April 2003.
183
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
principally 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 Financial Reporting Standards are
described in Note 38 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 instruments.
Under IFRS, treasury shares are presented in the
balance sheet as a deduction from equity. No
gain or loss is recognized in the income statement
on the sale, issuance, acquisition, or cancellation
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 remeasurement of
treasury shares in the trading portfolio to market
value are included in the income statement.
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 ap-
propriate income or expense category. These
items are separately identified below.
184
Additional Income Statement Information
Net Trading Income
CHF million
For the year ended
Equities
Fixed income 1
Foreign exchange and other
Total
1 Includes commodities trading income.
31.12.02
31.12.01
% change from
31.12.01
2,208
565
1,861
4,634
2,435
829
1,751
5,015
(9)
(32)
6
(8)
Extraordinary Income and Expenses
Extraordinary income contains CHF 260 million
(2001: CHF 87 million) from the sale of subsi-
diaries and CHF 5 million (2001: CHF 8 million)
from other disposals. Extraordinary expenses
consist of immaterial items.
185
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)
Trading portfolio risks
Litigation risks
Operational risks
Capital and income taxes
Total allowance for general credit
losses and other provisions
Allowances deducted from assets
Balance at
31.12.01
8,032
2,133
528
1,264
901
12,858
8,899
Total provisions as per balance sheet
3,959
Provisions
applied in
accordance
with their
specified
purpose
(2,451 )
(235 )
(630 )
(394 )
Recoveries,
doubtful
interest,
currency
translation
differences
(310 )
(285 )
(39 )
(90 )
6
New
provisions
charged
to income
135
511
191
893
766
(3,710)
(718)
2,496
Balance at
31.12.02
5,406
2,359
445
1,437
1,279
10,926
6,749
4,177
186
Statement of Shareholders’ Equity
General
statutory
reserves:
Share
premium
17,370
(3,815 )
110
Share
capital
4,444
(683 )
(184 )
12
General
statutory
reserves:
Retained
earnings
Reserves
for own
shares
Total share-
holders’
equity
(before
Other distribution
of profit)
reserves
677
4,007
16,274
42,772
20
(165 )
4,655
754
(663)
(3,999)
122
0
4,655
0
165
(754 )
CHF million
As at 31.12.00 and 1.1.01
Par value reduction
Cancellation of own shares
Capital increase
Increase in reserves
Profit for the period
Changes in reserves for own shares
As at 31.12.01 and 1.1.02
3,589
13,665
842
3,253
21,538
42,887
Par value reduction
Cancellation of own shares
Capital increase
Increase in reserves
Profit for the period
Changes in reserves for own shares
(2,509 )
(81 )
6
(2,209 )
94
As at 31.12.02
1,005
11,550
842
117
5,834
(3,370 )
(2,392)
(2,290)
100
0
5,834
0
24,119
44,139
3,370
6,623
Share Capital
As at 31 December 2002
Issued and paid up
Conditional share capital
Par value
Ranking for dividends
No. of shares
Capital in CHF
No. of shares
Capital in CHF
1,256,297,678
1,005,038,142
1,182,262,598
945,810,078
9,590,918
7,672,734
0
0
187
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
31.12.02
31.12.01
Change in %
Book
value
10,475
808
2,495
13,778
Effective
liability
506
506
Book
value
29,893
1,239
5,224
36,356
Effective
liability
Book
value
Effective
liability
813
813
(65 )
(35 )
(52 )
(62 )
(38)
(38)
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
31.12.02
31.12.01
% change from
31.12.01
28,865
351
713
29,929
38,978
532
1,042
40,552
(26)
(34)
(32)
(26)
Due to UBS Pension Plans, Loans to Corporate Bodies / Related Parties
CHF million
Due to UBS pension plans and
UBS debt instruments held by pension plans
Securities borrowed from pension plans
Loans to directors, senior executives and auditors 1
31.12.02
31.12.01
% change from
31.12.01
814
2,645
28
476
824
32
71
221
(13)
1 Loans to directors, senior executives and auditors are loans to members of the Board of Directors, the Group Executive 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.
188
UBS AG (Parent Bank)
Report of the Statutory Auditors
189
UBS AG (Parent Bank)
Report of the Capital Increase Auditors
190
191
192
Additional Disclosure Required
under SEC Regulations
193
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
Loans by industry sector
Loss History Statistics
195
195
197
198
199
199
199
199
200
200
200
202
204
205
207
208
209
210
212
214
215
216
194
A – Introduction
The following pages contain additional disclo-
sure about UBS Group which is required under
SEC regulations.
Unless otherwise stated, UBS’s Financial
Statements have been prepared in accordance
with International Financial Reporting Stan-
dards (IFRS) 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).
B – Selected Financial Data
The tables below set forth, for the periods and dates indicated, information concerning the noon buy-
ing 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 2003 the noon buying rate was 0.7376 USD per 1 CHF.
Year ended 31 December
1998
1999
2000
2001
2002
Month
September 2002
October 2002
November 2002
December 2002
January 2003
February 2003
High
0.7731
0.7361
0.6441
0.6331
0.7229
High
0.6789
0.6760
0.6928
0.7229
0.7401
0.7411
Average rate1
Low (USD per 1 CHF)
At period end
0.6894
0.6605
0.5912
0.5910
0.6453
0.7281
0.6277
0.6172
0.5857
0.7229
0.6485
0.6244
0.5479
0.5495
0.5817
Low
0.6578
0.6605
0.6714
0.6736
0.7135
0.7275
1 The average of the noon buying rates on the last business day of each full month during the relevant period.
195
Additional Disclosure Required
under SEC Regulations
B – Selected Financial Data (continued)
CHF million, except where indicated
For the year ended
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
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
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
Basic earnings per share
before goodwill 2, 3
Diluted earnings per share 3
Diluted earnings per share
before goodwill 2, 3
Cash dividends declared per share (CHF) 4
Cash dividends declared per share (USD) 4
Dividend payout ratio (%) 4
Rates of return (%)
Return on shareholders’ equity 5
Return on shareholders’ equity
before goodwill 2, 5
Return on average equity
Return on average assets
39,963
29,417
10,546
(206)
10,340
18,221
5,572
(12)
34,121
29,577
4,544
678
(331)
3,535
86.2
79.0
2.92
4.73
2.87
4.65
2.00
68.49
8.9
14.4
7.6
0.24
52,277
44,236
8,041
(498 )
7,543
20,211
8,802
558
37,114
30,396
6,718
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
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
0.70
35,604
29,695
5,909
(956 )
4,953
12,607
7,719
3,146
28,425
20,532
7,893
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
904
5
2,972
79.2
77.7
2.44
2.72
2.40
2.68
1.67
1.10
68.21
10.7
12.0
9.0
0.28
3 For EPS calculation, see Note 8 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 Dividends are normally declared and paid in the year subse-
the calculation.
quent 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
distributed to shareholders in the form of a par value reduction, in respect of 2000. No dividend was paid out for the year 2001. A par value
reduction of CHF 2.00 per share was paid on 10 July 2002. A dividend of CHF 2.00 per share will be paid on 23 April 2003, subject to approval
5 Net profit / average Share-
by shareholders at the Annual General Meeting. The USD amount per share will be determined on 17 April 2003.
holders’ equity excluding dividends.
196
Shares
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
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
Balance sheet data
Total assets
Shareholders’ equity
Average equity to average assets (%)
1,181,118
38,991
3.14
1,253,297
43,530
3.49
1,087,552
44,833
3.17
Market capitalization
79,448
105,475
112,666
896,556
30,608
3.52
92,642
861,282
28,794
3.06
90,720
1,256,297,678
0
97,181,094
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
11.3
13.8
238,790
2,037
11.6
14.8
253,735
2,448
69,985
AAA
AA2
AA+
11.7
15.7
273,290
2,445
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) 1
69,061
Long-term ratings 2
Fitch, London
Moody’s, New York
Standard & Poor’s, New York
AAA
AA2
AA+
1 The Group headcount does not include Klinik Hirslanden headcount. Klinik Hirslanden was sold on 5 December 2002.
Handbook 2002 / 2003, page 10 to 11 for information about the nature of these ratings.
2 See the UBS
Balance Sheet Data
CHF million
As at
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
Assets
Total assets
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Positive replacement values
Loans
1,181,118
32,468
139,052
294,086
371,436
82,092
211,647
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Due to customers
Debt issued
Shareholders’ equity
83,178
36,870
366,858
106,453
81,282
306,876
129,411
38,991
1,253,297
27,526
162,938
269,256
397,886
73,447
226,545
106,531
30,317
368,620
105,798
71,443
333,781
156,218
43,530
1,087,552
29,147
177,857
193,801
315,588
57,875
244,842
82,240
23,418
295,513
82,632
75,923
310,679
129,635
44,833
896,556
29,907
113,162
132,391
211,932
62,957
234,858
76,365
12,832
196,914
54,638
95,786
279,960
120,987
30,608
861,282
68,495
91,695
141,285
159,179
90,511
247,926
85,716
19,171
137,617
47,033
125,847
274,850
102,310
28,794
197
Additional Disclosure Required
under SEC Regulations
B – Selected Financial Data (continued)
US GAAP Income Statement Data
Net interest income after credit loss (expense) / recovery
10,139
CHF million
For the year ended
Operating income
Interest income
Interest expense
Net interest income
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
Amortization of other intangible assets
Restructuring costs
Total operating expenses
Operating profit / (loss)
before tax and minority interests
Tax expense / (benefit)
Net profit / (loss) before minority interests
Minority interests
Change in accounting principle: cumulative effect
of adoption of “AICPA Audit and Accounting Guide,
Audits of Investment Companies” on certain
financial investments, net of tax
Net profit / (loss)
39,679
(29,334)
10,345
(206)
18,221
6,031
96
34,487
18,610
7,072
1,613
0
1,443
0
28,738
5,749
511
5,238
639
5,546
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
51,907
(44,096 )
51,565
(43,584 )
35,404
(29,660 )
29,136
(25,773)
7,811
(498 )
7,313
20,211
8,959
534
37,017
19,713
7,631
1,815
2,484
298
112
32,053
4,964
1,386
3,578
7,981
130
8,111
16,703
8,597
1,514
34,925
17,262
6,813
1,800
2,018
134
191
28,218
6,707
2,183
4,524
5,744
(956 )
4,788
12,607
7,174
3,182
27,751
12,483
6,664
1,619
1,793
42
750
23,351
4,400
1,509
2,891
3,363
(787)
2,576
8,925
455
725
12,681
7,938
6,259
1,439
936
28
1,089
17,689
(5,008)
(1,339)
(3,669)
4
0
(331)
(344 )
(87 )
(54 )
0
0
0
3,234
4,437
2,837
(3,665)
Note: Certain prior year amounts have been reclassified to conform to the current year’s presentation.
198
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 1
Loans
Goodwill
Other intangible assets
Other assets
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Obligation to return securities received as collateral
Negative replacement values 1
Due to customers
Accrued expenses and deferred income
Debt issued
Shareholders’ equity
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
1,296,938
1,361,920
1,124,554
893,525
899,589
32,481
139,073
294,086
441,845
83,757
211,755
28,127
1,222
21,314
83,178
36,870
366,858
117,721
16,308
132,354
306,872
15,330
129,527
55,576
27,550
162,566
269,256
455,406
73,474
226,747
29,255
4,510
36,972
106,531
30,317
368,620
119,528
10,931
116,666
333,766
17,289
156,462
59,282
29,182
177,857
193,801
318,788
57,775
245,214
31,016
4,710
27,955
82,240
23,418
295,513
87,832
0
75,423
310,686
21,038
129,750
62,960
29,954
113,162
132,391
228,230
62,294
235,401
21,163
265
18,717
76,363
12,832
173,840
52,658
0
95,004
279,971
12,040
120,704
51,833
68,554
91,695
141,285
178,130
90,520
248,657
21,455
252
29,398
85,716
19,127
136,824
47,772
0
125,857
274,861
11,232
101,973
54,761
1 Positive and negative replacement values represent the fair value of derivative instruments.
Note: 2001 amounts have been adjusted to reflect the treatment of reverse repurchase, repurchase, securities borrowing and securities lending
transactions on a consistent basis. See Note 39.4.4 for details.
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
presented as there were no preferred share dividends in any of the periods indicated.
For the year ended
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
IFRS 1
US GAAP 1, 2
1.14
1.18
1.14
1.10
1.23
1.15
1.25
1.14
1.11
0.80
1 The ratio is provided using both IFRS and US GAAP values, since the ratio is materially different under the two accounting standards.
2 The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 was CHF 5,319 million.
C – Information on the Company
Property, Plant and Equipment
At 31 December 2002, UBS operated about
1,800 offices and branches worldwide, of which
about 47% were in Switzerland, 10% in the rest
of Europe, 40% in the Americas and 2% in Asia.
28% of the offices and branches in Switzer-
land were owned directly by UBS with the
remainder, along with most of UBS’s offices out-
side Switzerland, being held under commercial
leases.
These premises are subject to continuous
maintenance and upgrading and are considered
suitable and adequate for our current and antici-
pated operations.
199
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 oper-
ations extracted from the Financial Statements.
Unless otherwise indicated, average balances for
the year ended 31 December 2002, 31 Decem-
ber 2001 and 31 December 2000 are calculated
from monthly data. Certain prior year balances
and figures have been reclassified to conform to
current year presentation. The distinction be-
tween domestic and foreign is generally based on
the booking location. For loans, this method is
not significantly different from an analysis based
on the domicile of the borrower.
D – Information Required by Industry Guide 3 (continued)
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 2002, 2001 and 2000.
CHF million, except where indicated
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
31.12.02
31.12.01
31.12.00
Assets
Due from banks
Domestic
Foreign
Cash collateral on securities borrowed and
reverse repurchase agreements
Domestic
Foreign
Trading portfolio assets
Domestic
Foreign – taxable
Foreign – non-taxable
Foreign – total
Loans
Domestic
Foreign
Financial investments
Domestic
Foreign – taxable
Foreign – non-taxable
Foreign – total
Total interest-earning assets
Net interest on swaps
Interest income and
average interest-earning assets
Non-interest-earning assets
Positive replacement values
Fixed assets
Other
Total average assets
200
11,753
15,528
1,055
1,823
9.0
11.7
13,366
16,994
1,273
2,280
9.5
13.4
12,534
17,603
388
634
5,471
573,576
7,812
373,810
1,720
375,530
170,641
55,199
3,794
8,781
0
8,781
1,230,941
235
10,949
269
16,714
31
16,745
6,987
1,789
60
105
0
105
38,161
1,802
3.1
3.6
4.3
1.9
3.4
4.5
1.8
4.5
4.1
3.2
1.6
1.2
0.0
1.2
7,868
474,295
12,940
332,126
1,450
333,576
177,404
72,176
4,598
39,252
0
39,252
3.1 1,149,390
563
17,774
307
16,183
42
16,225
8,017
3,090
90
363
0
363
49,307
2,970
7.2
3.7
2.4
4.9
2.9
4.9
4.5
4.3
2.0
0.9
0.0
0.9
4.3
8,383
348,395
20,800
255,399
1,206
256,605
181,646
67,528
3,440
22,529
0
22,529
939,686
558
18,530
244
11,560
38
11,598
10,985
3,813
105
297
0
297
49,683
2,062
6.7
5.3
1.2
4.5
3.2
4.5
6.0
5.6
3.1
1.3
0.0
1.3
5.3
1,230,941
39,963
3.2 1,149,390
52,277
4.5
939,686
51,745
5.5
190,063
12,532
53,293
1,486,829
153,687
13,376
46,954
1,363,407
135,762
9,660
32,925
1,118,033
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 – demand deposits
Domestic – savings deposits
Domestic – time deposits
Domestic – total
Foreign 1
Short-term debt
Domestic
Foreign
Long-term debt
Domestic
Foreign
Total interest-bearing liabilities
Non-interest-bearing liabilities
Negative replacement values
Other
Total liabilities
Shareholders’ equity
31.12.02
31.12.01
31.12.00
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
28,625
60,621
452
1,362
18,382
523,375
3,239
109,013
42,484
71,465
27,646
141,595
172,650
69
91,616
10,082
46,930
355
9,726
146
8,220
435
625
447
1,507
3,062
0
1,915
433
2,239
1.6
2.2
1.9
1.9
4.5
7.5
1.0
0.9
1.6
1.1
1.8
0.0
2.1
4.3
4.8
36,260
61,642
1,424
3,506
13,147
415,121
600
13,917
2,526
94,597
41,664
66,089
31,261
139,014
187,783
69
96,184
12,754
43,798
1
7,814
715
716
989
2,420
6,738
0
4,227
587
3,002
1,206,197
29,417
2.4 1,102,895
44,236
192,659
41,297
1,440,153
46,676
165,220
47,676
1,315,791
47,616
1,363,407
7.7
6.6
3.8
5.1
0.4
8.0
1.3
1.1
3.0
1.5
5.1
0.0
5.6
5.0
6.9
5.0
3.9
5.7
4.6
3.4
0.0
8.3
1.7
1.1
3.2
1.7
3.6
0.0
4.4
4.6
6.9
4.0
31,133
57,258
2,397
3,758
12,700
284,220
478
14,437
1,078
66,597
44,403
72,207
27,199
143,809
143,432
79
78,075
15,490
38,020
4
5,305
595
781
826
2,202
7,303
0
4,338
778
2,615
871,891
43,615
157,668
53,049
1,082,608
35,425
1,118,033
Total average liabilities and shareholders’ equity
1,486,829
Net interest income
Net yield on interest-earning assets
10,546
8,041
8,130
0.9
0.7
0.9
1 Due to customers in foreign offices consists mainly of time deposits.
The percentage of total average interest-earning
assets attributable to foreign activities was 84%
for 2002 (81% for 2001 and 76% for 2000). The
percentage of total average interest-bearing lia-
bilities attributable to foreign activities was 83%
for 2002 (82% for 2001 and 77% for 2000).
All assets and liabilities are translated into
CHF at uniform month-end rates. Interest in-
come and expense are translated at monthly
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 espe-
cially 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 there-
fore the impact from such income is negligible.
201
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 2002 compared to the year ended 31 December 2001, and for the year ended
31 December 2001 compared to the year ended 31 December 2000. 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. Refer to page 209 of Industry
Guide 3 for a discussion of the treatment of impaired, non-performing and restructured loans.
CHF million
2002 compared to 2001
2001 compared to 2000
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
70
243
Cash collateral on securities borrowed and
reverse repurchase agreements
(737)
(1,432)
(667)
(1,189)
(153 )
(196 )
(65 )
(261 )
(173)
3,673
(155)
(10,498)
(328)
(6,825)
(123)
2,043
8
2,051
(304)
(730)
(16)
(274)
0
(274)
85
(1,512)
(19)
(1,531)
(38)
531
(11)
520
(726)
(571)
(1,030)
(1,301)
(14)
16
0
16
(30)
(258)
0
(258)
(35 )
6,673
(94 )
3,456
8
3,464
(255 )
260
36
217
0
217
(218)
(457)
5
(756)
63
4,623
4
4,627
40
(7,429 )
157
1,167
(4 )
1,163
(2,713 )
(983 )
(2,968)
(723)
(51 )
(151 )
0
(151 )
(15)
66
0
66
(546)
4,963
(1,547)
(14,016)
(2,093)
(9,053)
(501 )
10,418
(2,632 )
(7,661 )
(3,133)
2,757
4,417
(15,563)
(11,146)
(1,168)
(12,314)
9,917
(10,293 )
(376)
908
532
Domestic
Foreign
Trading portfolio assets
Domestic
Foreign – taxable
Foreign – non-taxable
Foreign – total
Loans
Domestic
Foreign
Financial investments
Domestic
Foreign – taxable
Foreign – non-taxable
Foreign – total
Interest income
Domestic
Foreign
Total interest income from
interest-earning assets
Net interest on swaps
Total interest income
202
D – Information Required by Industry Guide 3 (continued)
Analysis of Changes in Interest Income and Expense (continued)
CHF million
2002 compared to 2001
2001 compared to 2000
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
(298)
(58)
(674)
(2,086)
(972)
(2,144)
395
289
(1,368 )
(541 )
(973)
(252)
Cash collateral on securities lent and
repurchase agreements
Domestic
Foreign
Trading portfolio liabilities
Domestic
Foreign
Due to customers
Domestic – demand deposits
Domestic – savings deposits
Domestic – time deposits
Domestic – total
Foreign
Short-term debt
Domestic
Foreign
Long-term debt
Domestic
Foreign
Interest expense
Domestic
Foreign
241
3,681
0
1,197
14
59
(116)
(43)
(545)
0
(201)
(123)
216
(486)
(7,872)
(245)
(4,191)
145
(791)
(294)
(150)
(426)
(870)
(3,131)
0
(2,111)
(31)
(979)
145
406
(280)
(91)
(542)
(913)
(3,676)
0
(2,312)
(154)
(763)
17
6,676
6
2,240
(36 )
(67 )
31
(72 )
2,262
0
1,014
(137 )
419
105
(7,196 )
(9 )
269
156
2
132
290
(2,827 )
0
(1,125 )
(54 )
(32 )
(223)
4,290
(1,916)
(16,970)
(2,139)
(12,680)
209
12,900
(1,036 )
(11,452 )
Total interest expense
4,067
(18,886)
(14,819)
13,109
(12,488 )
122
(520)
(3)
2,509
120
(65)
163
218
(565)
0
(111)
(191)
387
(827)
1,448
621
203
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 2002, 2001 and 2000. 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 43,914 million, CHF 54,095 million and CHF 45,815 million at
31 December 2002, 31 December 2001 and 31 December 2000, respectively.
CHF million, except where indicated
Average
deposit
Average
rate (%)
Average
deposit
Average
rate (%)
Average
deposit
Average
rate (%)
31.12.02
31.12.01
31.12.00
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
Interest bearing deposits 1
Total due to customers
1 Mainly time deposits.
3,524
9,010
12,534
17,603
30,137
42,484
71,465
27,646
141,595
172,650
314,245
0.7
1.7
1.4
2.2
1.9
1.0
0.9
1.6
1.1
1.8
1.5
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
At 31 December 2002, 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
27,456
8,202
768
44
110,053
26,821
2,766
859
36,470
140,499
204
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 2002, 2001 and 2000.
Money market paper issued
Due to banks
Repurchase agreements 1
CHF million, except where indicated
31.12.02 31.12.01 31.12.00 31.12.02 31.12.01 31.12.00 31.12.02 31.12.01 31.12.00
Period-end balance
Average balance
Maximum month-end balance
Average interest rate during the period (%)
Average interest rate at period-end (%)
72,800
91,685
108,463
2.1
1.5
99,006
96,253
117,022
4.4
2.6
74,780
78,154
89,821
5.6
6.0
48,780
59,109
77,312
3.1
2.0
77,312
70,621
85,808
7.0
2.2
51,245
58,031
73,355
7.0
4.1
464,020
509,572
593,786
1.8
1.7
462,316
400,648
502,578
3.2
2.9
330,857
278,601
342,427
4.8
4.8
1 For the purpose of this disclosure, balances are presented on a gross basis.
205
Additional Disclosure Required
under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Contractual Maturities of the Investments in Debt Instruments
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, except percentages
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Within 1 year
1 – 5 years
5 – 10 years
Over 10 years
31 December 20021
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
0
8
0
35
675
4
1
723
1 Money market papers have contractual maturities of less than one year.
0.00
4.02
0.00
4.63
2.23
2.25
4.77
7
30
0
45
249
15
48
394
4.88
3.94
0.00
3.13
2.64
3.97
2.65
8
4
0
1
19
4
0
36
3.86
3.59
0.00
6.12
3.41
4.03
0.00
1
0
0
0
21
0
0
22
4.00
0.00
0.00
0.00
8.02
0.00
0.00
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 20011
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
4.00
0.00
0.00
0.00
15.372
0.00
0.00
1
0
0
0
23
0
0
24
1 Money market papers have contractual maturities of less than one year.
not represent the yield through maturity since this is a floating rate debt instrument.
2 The yield presented is the current contractual yield based on current market rates at 31 December 2001, but may
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 2000
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 amortized cost
Total market value
2
1
0
2,451
16
20
21
2,511
2,514
6.90
6.11
0.00
1.62
5.20
6.02
6.57
16
27
0
1,236
917
5
56
2,257
2,272
5.13
5.19
0.00
1.80
6.02
6.54
4.33
16
18
0
1,165
206
22
11
1,438
1,434
6.45
4.43
0.00
0.85
2.21
14.46
3.68
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0
0
0
0
0
0
0
0
0
206
D – Information Required by Industry Guide 3 (continued)
Loans
Loans are widely dispersed over industry sectors both within and outside of Switzerland. With the
exceptions of private households (foreign and domestic) and banks and financial institutions outside
Switzerland and real estate and rentals in Switzerland, there is no material concentration of loans.
For further discussion of the loan portfolio, see the UBS Handbook 2002 / 2003. The following table
illustrates the diversification of the loan portfolio among industry sectors at 31 December 2002,
2001, 2000, 1999 and 1998. 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
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
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
1,029
2,838
4,301
2,655
7,237
95,295
5,529
13,573
7,172
10,237
1,738
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
151,604
158,996
164,645
183,944
187,223
Foreign 4
Banks
Chemicals
Construction
Electricity, gas and water supply
Financial institutions
Manufacturing 5
Mining
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services
Transport, storage and communication
Other 6
Total foreign
Total gross
31,882
519
153
1,105
18,378
2,300
868
33,063
2,628
616
1,367
1,654
676
2,557
97,766
249,370
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
102,988
261,984
119,871
284,516
24,983
65,000
69,087
94,070
278,014
78,741
143,741
330,964
1 Includes chemicals, food and beverages.
personal service activities.
classifications are available.
5 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 the years prior to the year 2000, no detailed industry
6 Includes hotels and restaurants.
207
Additional Disclosure Required
under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Loans (continued)
The following table analyzes the Group’s mortgage portfolio by geographic origin of the client and
type of mortgage at 31 December 2002, 2001, 2000, 1999 and 1998. Mortgages are included in the
industry categories mentioned above.
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
116,359
11,510
127,869
108,779
19,090
127,869
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
CHF million
Mortgages
Domestic
Foreign
Total gross mortgages
Mortgages
Residential
Commercial
Total gross mortgages
Loan Maturities
The following table discloses loans by maturity at 31 December 2002. The determination of maturi-
ties is based on contract terms. Information on interest rate sensitivities can be found in Note 29 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
969
57,875
24,905
83,749
31,285
10,711
52,447
94,443
60
55,676
7,534
63,270
373
688
1,492
2,553
0
2,808
1,777
4,585
224
111
435
770
1,029
116,359
34,216
151,604
31,882
11,510
54,374
97,766
178,192
65,823
5,355
249,370
208
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 – inter-
est payments, scheduled principal repayments or
other payments due (for example on derivative
transactions), and including liquidation of collat-
eral where available. Impaired obligations are
thus obligations where losses are foreseeable. An
allowance for credit loss is then made with
respect to the loan in question. Impaired loans
include non-performing loans, for which the con-
tractual payments of principal, interest or com-
mission are overdue by 90 days. When loans are
classified as non-performing, 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.
The gross interest income that would have
been recorded on non-performing loans was
CHF 201 million for the year ended 31 December
2002, CHF 336 million for the year ended 31 De-
cember 2001 and CHF 182 million for the year
ended 31 December 2000. The amount of inter-
est income that was included in net income for
those loans was CHF 174 million for the year
ended 31 December 2002 and 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. The table below
provides an analysis of the Group’s non-per-
forming loans, for further information see the
UBS Handbook 2002/2003.
CHF million
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
Non-performing loans:
Domestic
Foreign
Total non-performing loans
Foreign restructured loans 1
4,609
1,420
6,029
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
1 Include only performing foreign restructured loans. UBS does not, as a matter of policy, typically restructure loans to accrue interest at rates dif-
ferent 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 4,336 million,
CHF 5,990 million, CHF 8,042 million and CHF
9,383 million in “other impaired loans” for the
years ended 31 December 2002, 2001, 2000 and
1999, respectively. These are loans that are current,
or less than 90 days in arrears, with respect to pay-
ment of principal or interest; however, the Group’s
credit officers have expressed doubts as to the abil-
ity of the borrowers to repay the loans. As at 31
December 2002 specific allowances of CHF 1,407
million had been established against these loans.
209
Additional Disclosure Required
under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Cross-Border Outstandings
Cross-border outstandings consist of general
banking products such as loans (including unuti-
lized commitments) and deposits with third par-
ties, 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 information system. With the exception of
the 32 most developed economies, these expo-
sures are rigorously limited.
Claims that are secured by third-party guar-
antees are recorded against the guarantor’s coun-
try 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 Com-
mission.
The following tables list those countries
for which cross-border outstandings exceeded
0.75% of total assets at 31 December 2002, 2001
and 2000. At 31 December 2002, there were no
outstandings that exceeded 0.75% of total assets
in any country currently facing liquidity prob-
lems that the Group expects would materially
affect the country’s ability to service its obli-
gations.
For more information on cross-border expo-
sure, see the UBS Handbook 2002/2003.
210
D – Information Required by Industry Guide 3 (continued)
CHF million
United States
Germany
Italy
United Kingdom
France
Australia
Canada
Japan
Cayman Islands
Netherlands
CHF million
United States
United Kingdom
Germany
Japan
Italy
France
Canada
Netherlands
CHF million
United States
Japan
United Kingdom
Germany
Italy
France
Netherlands
Australia
31.12.02
Banking products
Banks Non-banks
Traded
products1
Tradable
assets2
% of total
assets
Total
1,083
2,590
1,139
4,161
2,077
133
130
312
7
289
698
4,732
296
606
1,805
535
872
88
1,175
1,548
27,617
13,101
7,229
5,437
5,710
4,514
4,964
1,766
5,054
4,110
95,046
9,104
14,852
12,106
11,403
6,651
5,115
7,816
3,387
3,313
124,444
29,527
23,516
22,310
20,995
11,833
11,081
9,982
9,623
9,260
10.5
2.5
2.0
1.9
1.8
1.0
0.9
0.8
0.8
0.8
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
Total
88,657
66,175
34,496
24,689
15,553
12,928
12,285
11,018
% of total
assets
8.2
6.1
3.2
2.3
1.4
1.2
1.1
1.0
1 Traded products consist of derivative instruments and repurchase agreements. In 2002, 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 exposures in the
2 Tradable assets consist of equity and fixed income finan-
prior years, which were measured based on Gross Replacement Values plus Add-on.
cial instruments held for trading purposes, which are marked to market on a daily basis and private equity investments at the lower of book or
market value.
211
Additional Disclosure Required
under SEC Regulations
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 set-
tlement of bankruptcy proceedings, the sale of the underlying assets and / or in case of debt forgive-
ness. Under Swiss law, a creditor can continue to collect from a debtor who has emerged from bank-
ruptcy, unless the debt has been forgiven through a formal agreement.
CHF million
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
Balance at beginning of year
8,218
10,581
13,398
14,978
16,213
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)
(2,682 )
(2,758 )
(2,063)
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
(148)
(103)
(48)
(275)
(536)
0
(357)
(101)
(155)
(49)
Total domestic write-offs
(1,772)
Foreign 4
Banks
Chemicals
Construction
Electricity, gas and water supply
Financial institutions
Manufacturing 5
Mining
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services
Transport, storage and communication
Other 6
Total foreign write-offs
(49)
0
0
(36)
(228)
(70)
(1)
(65)
(1)
(2)
(10)
(39)
(74)
(189)
(764)
0
(248 )
(51 )
(52 )
(109 )
(1,297 )
0
(317 )
(115 )
(93 )
(46 )
(2,328 )
(24 )
(2 )
(10 )
(63 )
(74 )
(119 )
(304 )
(5 )
0
(1 )
0
(30 )
0
(48 )
(680 )
(15 )
0
(13 )
(3 )
(33 )
(11 )
0
0
(4 )
0
(160 )
(8 )
(11 )
(55 )
(313 )
Total write-offs
Recoveries
Domestic
Foreign
Total recoveries
Net write-offs
Credit loss expense / (recovery)
Other adjustments 7
Balance at end of year
(2,536)
(3,008 )
(2,995 )
(517 )
(3,275 )
(261)
(2,324)
43
27
70
(2,466)
206
(337)
5,621
58
23
81
124
39
163
54
11
65
59
0
59
(2,927 )
(2,832 )
(3,210 )
(2,265)
498
66
8,218
(130 )
145
956
674
951
79
10,581
13,398
14,978
1 Includes chemicals, food and beverages.
personal service activities.
are available.
3 Includes mining and electricity, gas and water supply.
6 Includes hotels and restaurants.
2 Includes transportation, communication, health and social work, education and other social and
4 For years prior to 2000, no detailed industry classifications
7 See the following table for details.
5 Includes food and beverages.
212
D – Information Required by Industry Guide 3 (continued)
Summary of Movements in Allowances and Provisions for Credit Losses (continued)
CHF million
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
Doubtful interest
Net foreign exchange
Subsidiaries sold and other
Total adjustments
0
(269)
(68)
(337)
0
44
22
66
182
23
(60 )
145
409
351
(86 )
674
423
(98)
(246)
79
213
Additional Disclosure Required
under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Allocation of the Allowances and Provisions for Credit Losses
The following table provides an analysis of the allocation of the allowances and provisions for credit
loss by industry sectors and geographic location at 31 December 2002, 2001, 2000, 1999 and 1998.
For a description of procedures with respect to allowances and provisions for credit losses, see the
UBS Handbook 2002 / 2003.
CHF million
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
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 4
Banks 5
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 7
Total foreign,
net of country provisions
Country provisions
Total foreign 8
Total allowances and
provisions for credit losses
10
265
89
286
458
750
39
577
315
470
315
3,574
24
5
6
96
153
314
148
58
0
6
13
262
144
82
1,311
736
2,047
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
0
843
328
454
863
1,570
0
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
1,539
1,376
2,915
1,309
1,450
2,759
5,621
8,218
10,581
13,398
14,978
2 Includes transportation, communication, health and social work, education and other social and
1 Includes chemicals, food and beverages.
4 For years prior to 2000, no detailed industry classifications
personal service activities.
5 Counterparty allowances and provisions only. Country provisions with banking counterparties amounting to CHF 409 million
are available.
8 The 2002, 2001, 2000, 1999
are disclosed under country provisions.
and 1998 amounts include CHF 366 million, CHF 305 million, CHF 54 million, CHF 149 million and CHF 435 million respectively of provisions
and for unused commitments and contingent liabilities.
3 Includes mining and electricity, gas and water supply.
7 Includes hotels and restaurants.
6 Includes food and beverages.
214
D – Information Required by Industry Guide 3 (continued)
Loans by industry sector
The following table presents the percentage of loans in each industry sector and geographic location
to total loans. This table can be read in conjunction with the preceding table showing the breakdown
of the allowances and provisions for credit losses by industry sectors to evaluate the credit risks in
each of the categories.
in %
31.12.02
31.12.01
31.12.00
31.12.99
31.12.98
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 4
Banks
Chemicals
Construction
Electricity, gas and water supply
Financial institutions
Manufacturing 5
Mining
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services
Transport, storage and communication
Other 6
Total foreign
Total gross loans
0.4
1.1
1.7
1.1
2.9
38.2
2.2
5.5
2.9
4.1
0.7
60.8
12.8
0.2
0.1
0.4
7.4
0.9
0.3
13.3
1.1
0.2
0.5
0.7
0.3
1.0
39.2
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
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
24.8
33.8
100.0
23.8
43.4
100.0
1 Includes chemicals, food and beverages.
personal service activities.
classifications are available.
2 Includes transportation, communication, health and social work, education and other social and
4 For the years prior to 2000, no detailed industry
3 Includes mining and electricity, gas and water supply.
5 Includes food and beverages.
6 Includes hotels and restaurants.
215
Additional Disclosure Required
under SEC Regulations
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
31.12.02
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)
249,370
10,365
6,029
5,621
2,466
206
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
Ratios
Impaired loans as a percentage of gross loans
Non-performing loans as a percentage
of gross loans
Allowances 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
Average loans outstanding during the period
Allowances and provisions for credit losses
Allowances and provisions for credit
losses as multiple of net write-offs
4.2
2.4
2.3
54.2
93.2
47.2
57.8
1.0
1.1
43.9
2.28
5.6
3.3
3.1
56.2
95.1
49.9
62.2
1.1
1.2
35.6
2.81
6.5
3.7
3.7
57.2
101.2
52.4
60.63
1.0
1.1
26.8
3.74
8.1
4.7
4.8
59.7
102.5
55.5
66.3
1.2
1.2
24.0
4.17
8.0
4.9
4.5
56.6
93.0
51.4
62.1
0.7
0.8
15.1
6.61
1 Allowances relating to impaired loans only.
restated 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
216
Cautionary statement regarding
forward-looking statements
This communication contains statements that constitute
“forward-looking statements”, including, but not limited
to, statements relating to the implementation of strategic
initiatives, such as the implementation of our European
wealth management strategy, expansion of our corporate
finance presence in the US and worldwide, the develop-
ment of UBS Warburg’s energy trading operations, and
other statements relating to our future business develop-
ment and economic performance. While these forward-
looking statements represent our judgments and future
expectations concerning the development of our business,
a number of risks, uncertainties and other important fac-
tors 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 and developments in the markets in
which they operate, (6) legislative developments, (7) man-
agement changes and changes to our business group struc-
ture in 2001, 2002 and 2003 and (8) other key factors that
we have indicated could adversely affect our business and
financial performance which are contained in other parts of
this document and in our past and future filings and
reports, including those filed with the SEC. More detailed
information about those factors is set forth elsewhere in
this document and in documents furnished by UBS and fil-
ings made by UBS with the SEC, including UBS’s Annual
Report on Form 20-F for the year ended 31 December
2002. UBS is not under any obligation to (and expressly dis-
claims 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
Languages: English, German; SAP-R / 3 80531E-0301
ab
UBS AG
P.O. Box, CH-8098 Zurich
P.O. Box, CH-4002 Basel
www.ubs.com