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Financial Report 2003
Introduction
UBS Financial Highlights
UBS at a Glance
Sources of Information
Contacts
Overview
Preparation and Presentation of
Financial Information
Changes in Accounting and
Presentation in 2004
Measurement and
Analysis of Performance
Critical Accounting Policies
Risk Factors
UBS Results
Business Group Results
Wealth Management &
Business Banking
Global Asset Management
Investment Bank
Wealth Management USA
Corporate Center
Financial Statements
1
2
3
4
6
7
8
10
12
16
22
25
41
42
52
58
67
74
79
UBS AG (Parent Bank)
185
Additional Disclosure
Required under
SEC Regulations
197
Introduction
Our Financial Report forms an essential part of our annual report-
ing portfolio. It includes the audited Financial Statements of UBS
for 2002 and 2003, 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 and 2003, prepared according to Swiss Banking Law require-
ments. It also contains a discussion and analysis of the financial
and business performance of UBS and its Business Groups, and
additional disclosures required under Swiss and US regulations.
The Financial Report should be read in conjunction with the other
information published by UBS, described on page 4.
We sincerely hope that you will find our annual reports useful and
informative. We believe that UBS is one of the leaders in corporate
disclosure, although we would be very interested to hear your
views on how we might improve the content, information and
presentation of the reporting products that we publish.
Mark Branson
Chief Communication Officer
UBS AG
1
Introduction
UBS Financial Highlights
1 Operating expenses / operating income less credit
loss expense or recovery.
CHF million, except where indicated
For the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
2 For the EPS calculation, see Note 8 to the
Financial Statements.
3 Net profit / average shareholders’ equity less
dividends.
4
Includes hybrid Tier 1 capital, please refer to Note
29 in the Notes to the Financial Statements.
5 See the Capital strength section on page 74
of the Handbook 2003 / 2004.
6 Excludes the amortization of goodwill and other
intangible assets.
7 Details of significant financial events can be
found in this report on page 12.
8 Operating expenses less the amortization of
goodwill and other intangible assets and signifi-
cant financial events / operating income less
credit loss expense or recovery and significant
financial events.
9 Net profit less the amortization of goodwill and
other intangible assets and significant financial
events (after-tax) / weighted average shares out-
standing.
10 Net profit for diluted EPS less the amortization
of goodwill and other intangible assets and
significant financial events (after-tax) / weighted
average shares outstanding for diluted EPS.
11 Net profit less the amortization of goodwill and
other intangible assets and significant financial
events (after-tax) / average shareholders’ equity
less dividends.
Throughout this report, 2001 and 2002 segment
results have been restated to reflect the transfer
of the Private Banks & GAM to Corporate Center.
2
Income statement key figures
Operating income
Operating expenses
Operating profit before tax
Net profit
Cost / income ratio (%) 1
Per share data (CHF)
Basic earnings per share 2
Diluted earnings per share 2
Return on shareholders’ equity (%) 3
33,972
25,624
8,348
6,385
75.2
5.72
5.61
18.2
34,121
29,577
4,544
3,535
86.2
2.92
2.87
8.9
37,114
30,396
6,718
4,973
80.8
3.93
3.78
11.7
0
(13)
84
81
96
95
CHF million, except where indicated
As at
31.12.03
31.12.02
31.12.01
% change from
31.12.02
Balance sheet key figures
Total assets
Shareholders’ equity
Market capitalization
BIS capital ratios
Tier 1 (%) 4
Total BIS (%)
Risk-weighted assets
Invested assets (CHF billion)
Headcount (full-time equivalents)
Switzerland
Europe (excluding Switzerland)
Americas
Asia Pacific
Total
Long-term ratings 5
Fitch, London
Moody’s, New York
Standard & Poor’s, New York
1,386,000
35,446
1,181,118
38,991
1,253,297
43,530
95,401
79,448
105,475
11.8
13.3
251,901
2,209
26,662
9,906
25,511
3,850
65,929
AA+
Aa2
AA+
11.3
13.8
238,790
2,037
27,972
10,009
27,350
3,730
69,061
AAA
Aa2
AA+
11.6
14.8
253,735
2,448
29,163
9,650
27,463
3,709
69,985
AAA
Aa2
AA+
17
(9)
20
5
8
(5)
(1)
(7)
3
(5)
Earnings adjusted for significant financial events and pre-goodwill 6, 7
CHF million, except where indicated
For the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
Operating income
Operating expenses
Operating profit before tax
Net profit
Cost / income ratio (%) 8
Basic earnings per share (CHF) 9
Diluted earnings per share (CHF) 10
Return on shareholders’ equity (%) 11
33,811
24,681
9,130
7,326
72.7
6.56
6.43
20.9
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
0
(9)
35
33
44
43
UBS at a Glance
UBS is one of the world’s leading financial firms, serving a discerning global client base. As an organi-
zation, it combines financial strength with a global culture that embraces change. As an integrated
firm, UBS creates added value for clients by drawing on the combined resources and expertise of all
its businesses.
UBS is present in all major financial centers worldwide, with offices in 50 countries. UBS employs
65,929 people, 40% of whom are located in Switzerland, 39% in the Americas, 15% in Europe and
6% in Asia Pacific.
UBS is one of the best-capitalized financial institutions in the world, with a BIS Tier 1 ratio of
11.8%, invested assets of CHF 2.2 trillion, shareholders’ equity of CHF 35.4 billion and market
capitalization of CHF 95.4 billion on 31 December 2003.
Businesses
Wealth management
UBS is the world’s leading wealth management business. In the US, it is one of the biggest private
client businesses with a client base of nearly 2 million investors. Its American network of 7,766 finan-
cial advisors manages CHF 634 billion in invested assets and provides sophisticated services through
consultative relationships with affluent and high net worth clients. UBS also has more than 140 years
of private banking experience around the world, with an extensive global network of 168 offices and
CHF 701 billion in invested assets. Some 3,300 client advisors provide a comprehensive range of
services customized for wealthy individuals, ranging from asset management to estate planning and
from corporate finance to art banking.
Investment banking and securities
UBS is a global investment banking and securities firm with a strong institutional and corporate client
franchise. Consistently placed in the top tiers of major industry rankings, it is a leading player in the
global primary and secondary markets for equity, equity-linked and equity derivative products. In
investment banking, it provides first-class advice and execution capabilities to its corporate client base
worldwide. In fixed income, it is a first-rate global player. In foreign exchange, it places first in many
key industry rankings. All its businesses are sharply client-focused, providing innovative products,
top-quality research and comprehensive access to the world’s capital markets.
Asset management
UBS is a leading asset manager with invested assets of CHF 574 billion. It provides investment man-
agement solutions to private clients, financial intermediates and institutional investors across the
world.
Swiss corporate and individual clients
UBS holds roughly a quarter of the Swiss lending market, offering comprehensive banking and
securities services for 3.5 million individual and 150,000 clients in Switzerland.
Corporate Center
The Corporate Center partners with the Business Groups, ensuring that the firm operates as a
coherent and integrated whole with a common vision and set of values.
3
Introduction
Sources of Information
This Financial Report contains our audited Financial Statements for the year 2003 and the related detailed analysis. You can
find out more about UBS from the sources shown below.
Publications
Information tools for investors
This Financial Report is available in English and
German. (SAP no. 80531-0401).
Annual Review 2003
Our Annual Review contains a description of
UBS and our Business Groups, as well as a sum-
mary review of our performance in 2003. It is
available in English, German, French, Italian,
Spanish and Japanese. (SAP no. 80530-0401).
Handbook 2003 / 2004
The Handbook 2003 / 2004 contains a detailed
description of UBS, our strategy, organization,
and businesses, as well as our financial manage-
ment including credit, market and operational
risk, our treasury processes and details of our
corporate governance. It is available in English
and German. (SAP no. 80532-0401).
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, P.O. Box, CH-8098
Zurich, Switzerland.
Website
Our Analysts and
Investors website at
www.ubs.com / investors offers a wide range of
information about UBS, including financial infor-
mation (including SEC filings), corporate infor-
mation, share price graphs and data, an event cal-
endar, dividend information and recent presenta-
tions given by senior management to investors at
external conferences. Our internet-based infor-
mation is available in English and German, with
some sections in French and Italian as well.
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. Mes-
sages 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 2003 / 2004 contains a summary of
UBS environmental policies as part of the Corpo-
rate Responsibility section. More detailed informa-
tion is available at: www.ubs.com/environment
4
Form 20-F and other submissions to the
US Securities and Exchange Commission
We file periodic reports and submit other informa-
tion about UBS to the US Securities and Exchange
Commission (SEC). Principal among these filings
is the Form 20-F, our Annual Report filed pur-
suant 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 the Hand-
book 2003 / 2004 or to parts of this Financial
Report 2003. However, there is a small amount
of additional information in the Form 20-F,
which is not presented elsewhere, and is particu-
larly 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. Much of this additional
information may also be found on the UBS web-
site at www.ubs.com / investors, and copies of
documents filed with the SEC may be obtained
from UBS’s Investor Relations team, at the
addresses shown on the next 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 are:
Bahnhofstrasse 45, CH-8098 Zurich,
Switzerland, 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 (traded through its trading platform
virt-x), on the New York Stock Exchange and on
the Tokyo Stock Exchange.
5
Introduction
Contacts
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
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
Cate Lybrook
Oliver Lee
Fax
+41-1-234 4100
+41-1-234 4360
+41-1-234 2281
+41-1-234 2733
+41-1-234 3415
New York
Hotline
Christopher McNamee
Fax
+1-212-713 3641
+1-212-713 3091
+1-212-713 1381
UBS AG
Investor Relations
P.O. Box
CH-8098 Zurich, Switzerland
UBS Americas Inc.
Investor Relations
135 W. 50th Street, 10th Floor
New York, NY 10020, USA
sh-investorrelations@ubs.com
Media Relations
Our Media Relations team supports
global media and journalists 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
ubs-media-relations@ubs.com
mediarelations-ny@ubs.com
sh-mediarelations-ap@ubs.com
Shareholder Services
UBS Shareholder Services, a unit of
the Company Secretary, is responsible
for the registration of the Global
Registered Shares.
Hotline
Fax
+41-1-235 6202
+41-1-235 3154
US Transfer Agent
For all Global Registered Share-
related queries in the USA.
calls from the US
calls outside the US
Fax
+1-866-541 9689
+1-201-329 8451
+1-201-296 4801
www.melloninvestor.com
UBS AG
Shareholder Services
P.O. Box
CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
Mellon Investor Services
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660, USA
shrrelations@melloninvestor.com
6
Overview
7
Overview
Preparation and Presentation of
Financial Information
Standards and principles in
UBS financial reporting
Accounting principles
The UBS Financial Statements have been pre-
pared in accordance with International Financial
Reporting Standards (IFRS). As a US listed com-
pany, we also provide a description in Note 40 to
the Financial Statements of the significant dif-
ferences which would arise were our accounts to
be presented under the United States Generally
Accepted Accounting Principles (US GAAP), and
a detailed reconciliation of IFRS shareholders’
equity and net profit to US GAAP.
Except where clearly identified, all of UBS’s
financial information presented in this document
is presented on a consolidated basis under IFRS.
Pages 185 to 196 contain the Financial State-
ments for the UBS AG Parent Bank – the Swiss
company, including branches worldwide, which
owns all the UBS companies, directly or indirectly.
The Parent Bank’s financial statements are pre-
pared in order to meet Swiss regulatory require-
ments and in compliance with Swiss Federal
Banking Law. Except in those pages, or where
otherwise explicitly stated, all references to “UBS”
refer to the UBS Group and not to the Parent Bank.
All references to 2003, 2002 and 2001 refer to
the UBS Group and the Parent Bank’s fiscal years
ended 31 December 2003, 2002, and 2001. 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
81 and the Report of the Statutory Auditors on
page 195.
An explanation of the critical accounting poli-
cies applied in the preparation of our Financial
Statements is provided on page 16. The basis of
our accounting is given in Note 1 to the Financial
Statements on page 88.
Standards for management accounting
Our management reporting systems and policies
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 units on a
reasonable basis. Transactions between business
units are conducted at arm’s length. Inter-busi-
ness unit charges are recorded as a reduction to
general and administrative expenses in the busi-
ness unit providing the service. Corporate Center
expenses are allocated to the operating business
units to the extent that it is appropriate.
Net interest income is allocated to each busi-
ness unit based on their balance sheet positions.
Assets and liabilities of each business unit are
funded through / invested with the central treas-
ury departments, reflecting the net margin in the
results of each business unit. To complete the
allocation, the business units are credited with a
risk-free return on the 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 (per Swiss Federal Banking Com-
mission (SFBC) standards) 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 equity requirement. The remain-
ing equity, which mainly covers real estate, and
any other unallocated equity, remains at the
Corporate Center.
Headcount, which is expressed in terms of
full-time equivalents (FTE), is measured as a per-
centage of the standard hours normally worked
by permanent full-time staff and is used to track
the number of individuals employed by UBS. FTE
cannot exceed 1.0 for any particular individual.
Headcount includes all staff and trainees other
8
UBS Reporting Structure in 2003
Wealth Management
& Business Banking
Global Asset
Management
Investment
Bank
Wealth
Management USA
Corporate
Center
formerly “UBS Warburg”
formerly “UBS PaineWebber”
Wealth
Management
formerly “Private Banking”
Business Banking
Switzerland
Investment Banking
& Securities
formerly “Corp. & Institutional Clients”
Private
Equity
formerly “UBS Capital”
than short-term temporary workers (hired for
less than 90 calendar days) and contractors.
There were no other accounting changes dur-
ing 2003 that affected either the UBS Financial
Statements or our business unit reporting.
Disclosure principles and
additional financial information
Restatement of results
We are committed to maintaining the trans-
parency of UBS’s reported results and to ensuring
that analysts and investors can make meaningful
comparisons with previous periods. If there is a
major reorganization of our business units or if
changes to accounting standards or interpreta-
tions lead to a material change in our reported
results, we restate UBS’s results for previous
periods to show how they would have been
reported according to the new basis, and provide
clear explanations of all changes.
Changes to accounting presentation in 2003
Our segment reporting shown in Note 2 to the
Financial Statements has been restated to reflect
the change we made to our organizational struc-
ture in 2003.
Effective 1 January 2003, our independent
private banks – Ehinger & Armand von Ernst,
Banco di Lugano and Ferrier Lullin – and GAM,
our specialist asset management firm, were
transferred from the Wealth Management &
Business Banking and Global Asset Management
Business Groups into a separate new holding
company held by the Corporate Center. At the
same time, we added additional disclosure for
the new holding company, showing its perform-
ance before tax, net new money, invested assets
and headcount.
While this restructuring had no impact on the
UBS Financial Statements, we have restated all
prior periods for all business units affected to
reflect these changes.
Fair value disclosure of employee
stock options
In 2003, we started to disclose in our quarterly
result discussion the pro-forma expense, net of
tax, for stock options awarded to employees,
which would have been incurred if they were
recorded at fair value at grant date instead of
using the intrinsic value method.
Additionally, we disclose on an annual basis for
every business unit the compensation expense we
would have incurred had we recognized the fair
value of stock option grants made during that year.
In 2003, this expense would have been CHF
576 million (CHF 439 million after-tax), down
from CHF 827 million in 2002 (CHF 690 million
after-tax). This drop was mainly attributable to a
lower share price at grant date. Most of our
employee stock options are granted in the first
quarter of the year. For the other quarters, grants
are mainly made under the Equity Plus program,
an employee participation program under which
voluntary investments in UBS shares are matched
with option awards.
Further details on the accounting treatment of
equity-based compensation can be found in the
Critical accounting policies section on page 16
and in Note 32 to the Financial Statements.
PaineWebber merger-related costs
In 2003, UBS incurred amortization expenses of
CHF 606 million on goodwill and intangible assets
resulting from the acquisition of PaineWebber in
2000, while goodwill funding costs amounted to
CHF 754 million. The remaining goodwill and
intangible assets on our balance sheet amount to
CHF 9.3 billion on 31 December 2003.
9
Overview
Indicative Pre-goodwill Tax Rates
in %
For the year ended
Wealth Management & Business Banking
Wealth Management
Business Banking Switzerland
Global Asset Management
Investment Bank
Investment Banking & Securities
Private Equity
Wealth Management USA
31.12.03
31.12.02
31.12.01
18
16
20
20
32
30
3
38
19
18
20
22
38
31
3
37
20
18
22
22
39
31
4
37
As part of the merger, UBS agreed to make
retention payments to PaineWebber key function
holders, subject to these employees’ continued
employment and other restrictions. The pay-
ments vest over periods of up to four years from
November 2000 and the vast majority of them
are paid in the form of UBS shares. Personnel
expenses in 2003 include retention payments of
USD 196 million (CHF 263 million). In 2004, we
expect a final expense of approximately USD 80
million.
Changes in Accounting and Presentation in 2004
Effective 2004, we will make a number of
changes in accounting and presentation as
well as to our disclosure. They will require
us to restate comparative prior periods,
although not all of them will have an effect
on net profit or shareholders’ equity.
Because of the changes, we will release
restated interim and annual financial state-
ment figures for 2002 and 2003 before we
publish our first quarter 2004 report.
The following changes in accounting
and presentation will be made:
Early adoption of IAS 32 and 39
UBS has decided to adopt the revised Inter-
national Accounting Standards (IAS) 32
and 39 early, effective 1 January 2004.
Together they provide comprehensive guid-
ance on recognition, measurement, presen-
tation and disclosure of financial instru-
ments. For the first time, they allow us to
choose to carry non-trading financial
instruments (such as loans or issued debt)
at fair value, meaning that their change in
value will pass through the profit and loss
account.
Adopting the two standards will largely
eliminate the separation requirement for
derivatives embedded in the structured
notes we issue. It will reduce profit and loss
volatility generated by issuance of struc-
tured debt instruments (for example equity-
linked GOALs or credit-linked notes). Pre-
viously, such instruments had to be
accounted for on an accrual basis, while the
embedded derivative and related hedge
instruments were carried at fair value. The
revised standards now allow us to measure
both components of our structured notes at
fair value, with any changes in their value
directly recorded in the income statement –
just as we already do for the related hedg-
ing instruments. The change will, as an
example, eliminate unwanted volatility in
our net income from treasury activities
income line.
Positive and negative replacement val-
ues of derivative contracts where close-out
netting is legally enforceable in the case of
insolvency are currently offset when they
are recorded in our balance sheet. Revised
IAS 32 clarifies that netting is permitted
only if normal settlement is also intended
to take place on a net basis. In general,
that condition is not met and therefore
we will now separately record the replace-
ment values that were previously offset.
This will increase the gross value of the
assets and liabilities on our balance sheet
by approximately CHF 165 billion at
31 December 2003. There will be no effect
on net profit, shareholders’ equity, earn-
ings per share or regulatory capital from
this change.
The two new standards will prompt us
to restate results of the last two years in
order to reflect the current treatment. We
are currently assessing the exact effect that
the adoption of the two revised standards
will have on our financial statements.
Accounting for investment property
Effective 1 January 2004, we adopted a fair
value accounting model for our investment
property. Before that, we used a historical
cost less accumulated depreciation model.
This means that all changes in the fair value
of investment property will now be recog-
10
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 2003 on a stand-alone basis,
without the benefit of tax losses brought for-
ward from earlier years.
The indicative tax rates are presented pre-
goodwill. 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. 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 as a whole.
nized immediately in the profit and loss
account. Investment property is held exclu-
sively to earn rental income and benefit
from appreciation in value. That contrasts
bank property, which we use to supply
services or for administration purposes.
Carrying investment property at fair value
better reflects the business rationale behind
acquiring and managing these assets.
This change in accounting will lead to
restatement of the 2002 and 2003 compar-
ative financial years. The approximate
effects of the restatement will be:
– to credit retained earnings as of 1 Janu-
ary 2002 by CHF 202 million for the
then existing difference between book
value and fair value of the investment
property portfolio
– to reduce net profit for 2002 by CHF
117 million
– to reduce net profit for 2003 by CHF
64 million.
The reduction in net profits in 2002 and
2003 was due to the reversal of gains now
booked in 2002 opening retained earnings
that arose on sales of investment proper-
ties during those two years. Our current
investment property portfolio is valued at
CHF 236 million on 31 December 2003.
While this new treatment eliminates regu-
lar depreciation charges on investment
property, it is likely that the fair value
model will add some volatility to our
income statement.
Credit risk losses incurred on OTC
derivatives
Effective 1 January 2004, we also changed
the accounting for credit risk losses
incurred on over-the-counter (OTC) deriv-
atives. All such credit risk losses will now
be reported in net trading income and will
no longer be reported in credit loss
expense. This change better reflects how
the business is run, simplifying the current
treatment. It does not affect our net profit
or earnings per share results. The change
does, however, affect our segment report-
ing, as actual losses reported as credit loss
expense are deferred over a three-year
period in the Business Group accounts,
whereas actual losses in trading income
are not subject to such a deferral. In the
segment report, therefore, actual losses
on OTC derivatives will now be reported
as incurred. The changed accounting will
not have a material effect on the Invest-
ment Bank’s restated performance before
tax.
Change in treatment of
corporate client assets in Business
Banking Switzerland
Effective 1 January 2004, UBS re-classified
corporate client assets (other than pension
funds) in Business Banking Switzerland to
exclude them from invested assets. We are
making this change because we have a
minimal advisory role for such clients and
asset flows are erratic as they are often
driven more by liquidity requirements than
pure investment reasons. This change will
reduce Business Banking Switzerland’s
invested assets by approximately CHF
75 billion, but will leave client assets
unchanged. Net new money will increase
by approximately CHF 7.5 billion for
2003.
11
Overview
Measurement and Analysis of Performance
We analyze our quarterly and annual financial
performance on the basis of International Finan-
cial Reporting Standards (IFRS). Additionally,
we provide comments and analysis on an adjust-
ed basis which excludes from the reported
amounts certain items we term significant finan-
cial events (SFEs). Another 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 esti-
mate future growth potential. In particular, our
financial targets have been set in terms of adjust-
ed results, excluding SFEs and goodwill / intan-
gibles amortization, and all the analysis provided
in our management accounting is based on oper-
ational SFE-adjusted performance.
In our financial reporting, we clearly identify
all adjusted figures as such and provide a recon-
ciliation to the reported figures.
Significant financial events
The use of figures adjusted for significant finan-
cial events and goodwill / intangible amortization
for performance analysis helps us to illustrate the
underlying operational performance of our busi-
nesses, insulated from the individual gain or loss
items that are not indicative of future perfor-
mance and are related to specific events. This
provides a better basis for our internal perform-
ance 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 an SFE is:
– Event-specific
– Significant for the consolidated statements
of UBS
– UBS-specific, not industry-wide
– Not indicative of or relevant for future per-
formance.
The concept of analyzing our results on the
basis of excluding SFEs is to provide investors
with meaningful comments on all of our busi-
nesses as they will be continued, which will allow
them to better assess their future prospects. For
that reason, the concept is consistently applied to
all items that meet the above criteria regardless of
whether a particular item is a gain or a loss.
SFEs are not a recognized accounting concept
under IFRS or US GAAP, and are therefore not
reflected as such in our Financial Statements. In
our analysis, we clearly identify all adjusted fig-
ures as such, disclose a detailed reconciliation
showing the line item affected and disclose both
the pre-tax amount of each individual SFE, and
the net tax benefit or loss associated with all the
SFEs in each period.
There were no SFEs in 2001. In 2002 there
were three and in 2003 there was one – all of
them shown in the table on the next page and
described in more detail below.
– We realized a net gain of CHF 2 million (pre-
tax CHF 161 million) in second quarter 2003
from the sale of Wealth Management USA’s
Correspondent Services Corporation (CSC)
clearing business. A substantial portion of
CSC’s net assets comprised goodwill stem-
ming from the PaineWebber acquisition. After
deducting taxes of CHF 159 million (based on
the purchase price) and the writedown of the
goodwill associated with CSC, the net gain
from the transaction was CHF 2 million.
– In fourth quarter 2002, we recorded a non-
cash writedown of CHF 953 million (pre-tax
CHF 1,234 million) relating to the value of the
PaineWebber brand that was held as an intan-
gible asset on our balance sheet.
– In fourth quarter 2002, we realized a net gain
of CHF 60 million (pre-tax CHF 72 million)
from the sale of Klinik Hirslanden, a private
hospital group.
– In first quarter 2002, we realized a net gain of
CHF 125 million (pre-tax CHF 155 million)
from the sale of private bank Hyposwiss.
12
Significant Financial Events (SFE)
CHF million
For the year ended
Operating income
As reported
Less: Gain on disposal of
Correspondent Services Corporation
Less: Gain on disposal of Hyposwiss
Less: Gain on disposal of Klinik Hirslanden
Adjusted operating income
Operating expenses
As reported
Less: Writedown of PaineWebber brand name
Adjusted operating expenses
Operating profit / (loss) before
tax and minority interests
As reported
SFE adjustments, net
Adjusted operating profit / (loss)
before tax and minority interests
Net profit
As reported
SFE adjustments, net
Tax effect of significant financial events, net
Adjusted net profit
Amortization of goodwill and other intangible assets
Adjusted net profit before goodwill
Income Statement line affected
31.12.03
31.12.02
31.12.01
31.12.03
31.12.02
31.12.02
UBS
Wealth
Management
USA
Corporate
Center
Other income
Other income
Other income
33,972
34,121
37,114
5,182
5,548
2,676
161
161
155
72
155
72
33,811
33,894
37,114
5,021
5,548
2,449
25,624
29,577
30,396
5,187
7,348
2,399
Amortization of goodwill and
other intangible assets
1,234
25,624
28,343
30,396
5,187
1,234
6,114
2,399
8,348
(161)
4,544
1,007
6,718
(5 )
(161 )
(1,800 )
1,234
277
(227)
8,187
5,551
6,718
(166 )
(566 )
50
Tax expense / (benefit)
6,385
(161)
159
6,383
943
7,326
3,535
1,007
(239 )
4,303
1,226
5,529
4,973
4,973
1,323
6,296
Amortization of goodwill and
other intangibles
In addition, we discuss our consolidated result
excluding the amortization of goodwill and
other intangibles. The same adjustment is used
also for our financial targets, including earnings
per share. At UBS, we believe that our value
is driven by future cash flows. IFRS rules cur-
rently require that goodwill be amortized over
its estimated useful life regardless of whether
its economic value is maintained or even
increased. However, goodwill is not a wasting
asset that needs 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 identify all fig-
ures that exclude amortization charges for good-
will and other intangibles and refer to them as
pre-goodwill figures. Reported figures including
amortization charges are always disclosed and
precede pre-goodwill disclosure.
In first quarter 2004, the International
Accounting Standard Board (IASB) is expected to
issue a new standard regarding business combi-
nations, which would be effective for 2005. We
presume that the accounting for goodwill will
change to the model applicable under US GAAP,
which requires that goodwill is tested for impair-
ment rather than amortized over its estimated
life. Accordingly, goodwill amortization would
cease beginning in 2005 and eliminate a signifi-
cant reconciling item to US GAAP currently
included in Note 40.
13
Overview
Targets and performance measures
UBS targets
At UBS we focus on a consistent set of four long-
term financial targets defined across periods of
varying market conditions and designed to
ensure that we deliver continuously improving
returns to our shareholders. We report our per-
formance against these targets each quarter:
– 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 percent-
age growth in 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.
– We aim to achieve a clear growth trend in net
new money in our wealth management units.
The first three targets are all reported pre-
goodwill amortization, and adjusted for signifi-
cant financial events (see below).
Business Group key performance indicators
At the Business Group or business unit level,
performance is measured with carefully chosen
Key Performance Indicators
Business
All business units
Wealth Management
and Asset Management
businesses and Business
Banking Switzerland
Key performance
indicators
Cost / income ratio
before goodwill
Invested assets
Net new money
Wealth Management
and Asset Management
businesses
Gross margin on
invested assets
Definition
Total operating expenses excluding goodwill amortization /
total operating income before adjusted expected credit loss.
Assets managed by or deposited with UBS for investment
purposes only (for further details please refer to page 15).
Inflow of invested assets from new clients
– outflows due to client defection
+/– inflows / outflows from existing clients.
(for further details please refer to page 15)
Annualized operating income before adjusted expected
credit loss / average invested assets.
Wealth Management
Client advisors (CAs)
Expressed in full-time equivalents.
Business Banking
Switzerland
Non-performing loans (%)
Non-performing loans / gross loans.
Impaired loans (%)
Impaired loans / gross loans.
Investment Banking
& Securities
Compensation ratio
Personnel expenses / operating income before adjusted
expected credit loss.
Non-performing loans (%)
Non-performing loans / gross loans.
Impaired loans (%)
Impaired loans / gross loans.
Average VaR (10-day 99%)
Private Equity
Value creation
VaR expresses the potential loss on a trading portfolio assuming
a 10-day time horizon before positions can be adjusted, and
measured to a 99% level of confidence.
Value creation adds the increase in the unrealized portfolio
gains to realized gains / losses for the period.
Investment
Historical cost of investment made, less divestments
and impairments.
Wealth Management USA Recurring fees
Asset-based fees for portfolio management and fund
distribution, account-based and advisory fees (as opposed to
transactional fees).
Financial advisors (FAs)
Expressed in full-time equivalents.
14
key performance indicators (KPIs). These do not
carry explicit targets, but are indicators of the
business units’ success in creating value for share-
holders. They reflect the key drivers 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.
These key performance indicators are used for
internal performance measurement and planning
as well as external reporting. This ensures that
management has a clear responsibility to lead
businesses towards achieving success in the exter-
nally reported value drivers and avoid the risk of
managing to purely internal performance meas-
ures. SFEs and goodwill amortization are not
taken into account when calculating KPIs at the
business unit level.
Client / invested assets reporting
Since 2001 we report two distinct metrics for
client funds:
– Client assets are all client assets managed by
or deposited with UBS including custody-only
assets and assets held for purely transactional
purposes
– Invested assets is a more restrictive term and
includes all client assets managed by or
deposited with UBS for investment purposes.
Invested assets is our central measure and
excludes all assets held for purely transactional
and or custody-only purposes. It includes, for
example, discretionary and advisory wealth man-
agement portfolios, managed institutional assets,
managed fund assets and wealth management
securities or brokerage accounts, but excludes
custody-only assets, and transactional cash or
current accounts. Non-bankable assets (e. g. art
collections) and deposits from third-party banks
for funding or trading purposes 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, the
effects of market or currency movements as well
as acquisitions and divestments are excluded
from net new money. Interest expense on loans
results in net new money outflows.
When products are managed in one Business
Group and sold in another, they are counted in
both the investment management unit and the
distribution unit. This results in double counting
in UBS’s total invested assets as both units pro-
vide an independent service to their respective
client, add value and generate revenues. Most
double counting arises where mutual funds are
managed by the Global Asset Management busi-
ness or GAM and sold by a wealth management
unit (Wealth Management or Wealth Manage-
ment USA). Both business units involved count
these funds as invested assets. This approach is in
line with the overall industry and our open archi-
tecture strategy and allows us to accurately
reflect the performance of each individual busi-
ness. Overall, CHF 287 billion of invested assets
were double counted in 2003 (CHF 295 billion in
2002).
Seasonal characteristics
Of our main businesses, only Investment Banking
& Securities shows significant seasonal patterns.
Its revenues are impacted by the seasonal charac-
teristics of general financial market activity and
deal flows in investment banking. In our quar-
terly reporting, we therefore compare the Invest-
ment Bank’s results for the reported quarter with
those achieved in the same period of the previous
year. For all other business units, results are com-
pared with the previous quarter.
15
Overview
Critical Accounting Policies
Basis of preparation and selection of
policies
Recognition and measurement of
financial instruments – fair value
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). Where 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 esti-
mates in preparing our Financial Statements.
The more significant of these accounting treat-
ments are discussed 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 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 page 69 of the Handbook
2003/ 2004.
Assets and liabilities in our trading portfolio are
recorded at fair value on the balance sheet, with
changes in fair value recorded in net trading
income in the income statement. Key judgements
affecting this accounting policy relate to how we
determine fair value for such assets and liabilities.
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.
Our Quantitative Risk Models and Statistics unit
certifies all models before they are used, we
generally employ ‘backtesting’ procedures to
check model outputs against actual data and we
seek comparative market prices for additional
verification.
There are a variety of factors that are con-
sidered by our models, including time value and
volatility factors, counterparty credit quality,
activity in similar instruments in the market,
administrative costs over the life of the trans-
action, and liquidity considerations. Changes in
assumptions about these factors 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 reported fair
value of the portfolio as a whole.
As a result of the potential uncertainty 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
16
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 and reflective of the
underlying economics, based on a number of
controls and procedural safeguards we employ.
We apply our models consistently from one
period to the next, ensuring comparability and
continuity of the valuations over time.
Hedge accounting
IAS 39 allows a company to apply hedge account-
ing if it fully complies with specified hedge cri-
teria. One of the goals of a hedging program is to
reduce volatility of fair values by entering into a
hedging transaction where changes in fair value of
the hedging transaction offset changes in the fair
value of the hedged item. Due to cost and other
considerations, a transaction may not be hedged
over its entire life, or a dynamic hedging strategy
may be used whereby different transactions are
designated as the hedging transaction 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 impairment),
but the hedging instrument would normally be
accounted for at fair value, there could be sub-
stantial 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, non-application of
hedge accounting could lead to misinterpretations
of our results and financial position, since hedg-
ing transactions could have a material impact on
reported net profit in a particular period.
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 eco-
nomic effectiveness of the hedge. For our fair
value hedges, the net effect of not applying hedge
accounting would have resulted in a pre-tax loss
of CHF 555 million in 2003, 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 of the net effect
are a pre-tax gain of CHF 199 million in 2003, 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 Financial Statements for
further information on hedge accounting.
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
economically hedging selected credit risk expo-
sures with credit default swaps (CDS), the rela-
tionships between the risk exposures and the
CDSs are such that they do not qualify 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 apply-
ing hedge accounting may also add volatility to
net profit because changes in fair value of a CDS
and any credit loss expense relating to the hedged
exposure may well be recorded in different
periods. Typically, the credit rating of a company
that ultimately defaults on its obligations dete-
riorates 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 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 recognizing expense
for credit losses may introduce period-to-period
volatility in net profit. In addition, the positive
effect of CDSs on reducing credit losses is not
reflected as a reduction in reported credit loss
expense.
17
Overview
In 2003, UBS recorded mark to market losses
of CHF 678 million on CDSs that hedge existing
credit exposures, without recording a correspon-
ding credit loss expense recovery. The develop-
ment in 2003 is explained by improved credit rat-
ings of the hedged exposures, which means lower
probabilities of default and hence a decline in fair
value of the related CDSs. In 2002, the opposite
development occurred and UBS recorded mark to
market gains of CHF 226 million on CDSs that
hedge existing credit risk exposures without
recording a corresponding credit loss expense.
Had we been able to apply hedge accounting, we
could have deferred recognition of gains on the
CDSs until the underlying claim became
impaired. Unless we decide to settle CDSs pre-
maturely, and thus realize the mark to market
gains or losses, for example because we believe
that we will ultimately not incur a credit loss on
a hedged exposure, any 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.
Financial investments – available for sale
UBS has classified some of its financial assets,
including investments not held for trading pur-
poses, as available for sale. This classification is
based on our determination that these assets are
not held for the purpose of generating short-term
trading gains, but rather for mid-to-long-term
capital appreciation. If we had originally decided
that these were trading assets, or if we were to
reclassify these assets as trading assets, changes
in fair value would then have to be reflected in
income rather than shareholders’ equity. The
amount of unrealized gains or losses on the bal-
ance sheet date is disclosed in the statement of
changes in equity in the Financial Statements.
Companies held in our private equity port-
folio are not consolidated in the Financial State-
ments. This treatment has been determined after
considering such matters as liquidity, exit strate-
gies 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 direct-
ly in equity. However, unrealized losses that are
not expected to be recoverable within a reason-
able time period are recorded in our income
statement as impairment charges. Since quoted
market prices are generally unavailable for these
companies, fair value is determined by applying
recognized valuation techniques, which require
the use of assumptions and estimates. The valua-
tion of our investments is derived by application
of our valuation policy in a detailed quarterly
investment-by-investment review involving the
business and control functions. Our standard
valuation method is to apply multiples of earn-
ings that are observed for comparable compa-
nies. These multiples depend on a number of fac-
tors and may fluctuate over time. The geograph-
ic, stage and sector diversity of the portfolio
means that the valuations of these positions may
not move in line with the changing economic
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 over the whole port-
folio.
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
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 (e.g. goodwill and other intangibles)
for possible impairment indications. If impair-
ment indicators are identified, we make an
assessment about whether the carrying value of
such assets remains fully recoverable. When
making this assessment, we compare the carrying
value to the market value, if available, or the
value in use. Value in use is determined by dis-
counting expected future net cash flows gener-
18
ated by an asset or group of assets to present
value. Determination of the value in use requires
management to make assumptions and use esti-
mates. We believe that the assumptions and esti-
mates used are reasonable and supportable in the
existing market environment and commensurate
with the risk profile of the assets valued, but
different ones could be used which would lead to
different results.
The single most significant amount of good-
will relates to the acquisition of PaineWebber.
The valuation model used to determine the fair
value of the Wealth Management USA business –
one component of the former PaineWebber busi-
ness – 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 fourth quarter 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 –
loan interest payments, scheduled loan principal
repayments, or other payments due (for example
on guarantees), including liquidation of collat-
eral 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 available. Future cash
flows considered recoverable are discounted to
present value in accordance with IAS 39. A loan
loss allowance is then recorded for the probable
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
considered recoverable are
independently
approved by the Credit Risk Control function.
Although judgement is involved, we believe that
the estimates and assumptions made in deter-
mining provisions and allowances on each indi-
vidual impaired claim are reasonable and sup-
portable. Since there are no general estimates or
assumptions 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 pos-
sible to provide any meaningful estimate of the
impact on earnings of variations in assumptions
and estimates.
Further details on this subject are given in
Note 1(l) to the Financial Statements and in the
Risk Analysis section of the Handbook 2003 /
2004, on page 50.
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 we generally consolidate 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, is appropriate and that the SPEs and their
assets and liabilities are properly recorded, if
consolidated.
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.
19
Overview
Principal types of SPE used by UBS
Equity compensation
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. As an example, UBS
Alternative Portfolio AG 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 used for
securitization 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 used for securiti-
zation 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.
Currently IFRS does not specifically address the
recognition and measurement of equity-based
compensation plans, including employee option
plans. However, two basic methods, the intrinsic
value method and the fair value method, are
applied in practice. 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 intrinsic value are not recognized.
Had we recognized the fair value of stock
option grants on grant date as compensation
expense, net income would have been lower by
the following amounts: CHF 439 million in
2003, CHF 690 million in 2002, and CHF 347
million in 2001. Further information on UBS
equity compensation plans is disclosed in Note
32 to the Financial Statements. In February
2004, the International Accounting Standards
Board issued IFRS2, “Share-based payments”,
which will become effective 1 January 2005. We
are currently evaluating the effect of this new
standard on our Financial Statements.
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
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
20
Credit Loss Expense Charged to the Business Groups
CHF million
For the year ended 31.12.03
Actuarial expected loss
Deferred releases
Credit loss expense charged to
the Business Groups
Actual credit loss expense
Wealth
Management &
Business Banking
Wealth
Investment Management
USA
Bank
Corporate
Center1
(542 )
411
(131)
(75)
(94 )
(45 )
(139)
(40)
(8 )
0
(8)
(3)
(2 )
0
(2)
2
Balancing item charged as credit loss expense in Corporate Center
1 Includes Private Banks & GAM.
Total
(646)
366
(280)
(116)
164
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 pes-
simistic when forecasting future taxable profits,
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. An example of such might be a change in
tax legislation. See Note 21 to the 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. Credit loss
expense represents the charges to profit and loss
relating to amounts due to UBS from loans and
advances, other credit products and off-balance
sheet products that are considered impaired or
uncollectible. We determine the amount of credit
loss expense reported in the Group income state-
ment and in our segment reporting in Note 2a to
the Financial Statements based on the credit loss-
es actually incurred. Actual credit loss expense is
the total of net allowances and direct writeoffs
less recoveries. In our segment reporting we also
disclose a measure of credit loss expense using an
expected loss concept, which reflects the average
annual cost that is expected to arise on transac-
tions in the current portfolio which become
impaired in the future. Over the longer term, the
expected loss will equal actual loss, although the
latter is more erratic, in both timing and amount.
To hold the Business Groups accountable for
credit losses actually incurred and to encourage
risk adjusted pricing, we charge or refund them
with the difference between actual credit loss
expense and expected loss, amortized over a
three-year period. The sum of the expected loss
plus the amortization of the difference from actu-
al credit loss expense is charged to the Business
Groups as adjusted expected credit loss. To re-
Reconciliation of Credit Loss Expense Charged to the Business Groups to
Actual Credit Loss (Expense) / Recovery
CHF million
For the year ended
Credit loss charge
Actual credit loss (expense) / recovery
31.12.03
31.12.02
31.12.01
31.12.03
31.12.02
31.12.01
Wealth Management & Business Banking
Investment Bank
Wealth Management USA
Corporate Center
Total
Balancing item in Corporate Center
(131)
(139)
(8)
(2)
(280)
164
(312 )
(128 )
(13 )
(2 )
(455 )
249
(601 )
(112 )
(18 )
(3 )
(734 )
236
(75)
(40)
(3)
2
(116)
(238 )
35
(15 )
12
(206 )
(124)
(360)
(15)
1
(498)
21
Overview
concile the total of credit loss expense charged to
the Business Groups with the actual credit loss
expense reported in the consolidated income
statement, we record a balancing item in Corpo-
rate Center.
As a result of adopting the method described
above for charging credit loss expense to the
Business Groups, the segment result determined
on that basis may be materially different from the
result based on actual credit loss expense. While
the concept requires that each Business Group
over time bears the credit loss it actually incurs, a
timing difference is introduced.
Risk Factors
As a global financial services firm, we are
affected by the factors driving the markets
in which we operate. Different risk factors
can impact our ability to effectively carry
out our business strategies and can directly
affect our earnings. The factors described
below, as well as other influences beyond
our control, mean that our revenues and
operating profit have been and are likely to
continue to be subject to a measure of vari-
ability from period to period. Our revenues
and operating profit for any particular peri-
od may not, therefore, be indicative of sus-
tainable results, they may vary from year to
year and may affect our ability to achieve
UBS’s strategic objectives.
Interest rates, equity prices, foreign
exchange levels and other market fluc-
tuations may affect earnings
A substantial part of our business consists
in taking trading positions in the debt,
currency, equity, precious metal and ener-
gy markets as well as making investments
in private equity, real estate and other
assets. The value of these assets and liabil-
ities can be adversely affected by fluctua-
tions in financial markets. Our market
risks are subject to a control framework
and to portfolio and concentration limits.
We avoid undue concentrations of risk
and, where appropriate, hedge exposure
to stress events. Nevertheless, in the event
of sudden, severe or unexpected market
movements, we might suffer significant
losses. A description of our controls and
22
limits, including limits on our exposure to
a range of market stress events, is provid-
ed on page 45 of our Handbook 2003 /
2004.
Because we prepare our accounts in
Swiss francs while assets, liabilities, rev-
enues and expenses from certain businesses
are denominated in other currencies,
changes in foreign exchange rates, particu-
larly between the Swiss franc and the US
dollar (US dollar income representing the
major part of our non-Swiss franc income),
may have an effect on our reported earn-
ings. Our approach to currency manage-
ment is explained on page 71 of our Hand-
book 2003 / 2004.
Regulatory or political changes impact-
ing financial market structures can affect
our earnings – an example was the intro-
duction of the euro in 1999, which affected
European foreign exchange markets by
reducing the volume of foreign exchange
business, and prompted greater harmoniza-
tion between financial products. Move-
ments in interest rates can also affect our
net interest income and the value of our
fixed income trading portfolio, while
movements in equity markets can affect the
value of our equity trading portfolio.
Changes in both can affect the investment
performance of our asset management
businesses. Our fixed income and equity
trading portfolios and our asset manage-
ment businesses may also be impacted by
credit events, including defaults, related to
the issuers of bonds and equities.
Furthermore, income in businesses such
as investment banking, and wealth and
asset management is often directly related
to client activity levels. As a result, our
income can be susceptible to adverse effects
from sustained market downturns as well
as any 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, in themselves, be adversely
affected by deteriorating market valua-
tions.
Market levels and trading volumes may
be affected by a broad range of geopolitical
or regional issues or events beyond our
control, such as the possibility of war,
terrorism, or economic developments such
as low growth, inflation, recession or
depression.
Counterparty failure may lead to
credit loss
Credit is an integral part of many of our
business activities. The results of our
credit-related activities (including loans,
commitments to lend, contingent liabilities
such as letters of credit, and derivative
products such as swaps and options)
would be adversely affected by any dete-
rioration in the creditworthiness 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 down-
turn, lack of liquidity, or an unexpected
political event. Any of these events could
lead us to incur losses.
risks is provided on page 64 of our Hand-
book 2003 / 2004.
In general, we aim to avoid risk con-
centrations in our credit portfolio and we
make active use of credit protection. If our
risk management and control measures
prove inadequate or ineffective, then any
credit losses sustained might have a mate-
rial adverse effect on both our income
and the value of our assets. We believe
that any losses incurred would be ade-
quately covered by our allowances and
provisions.
A discussion of our approach to manag-
ing credit risk can be found on page 50
of our Handbook 2003 / 2004.
Operational risk may increase costs
and impact revenues
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. Our 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 such risks, we will be exposed
to operational failures that might result in
losses. A discussion of our approach to the
management and control of operational
Legal claims may arise in the conduct
of our business
Due to the nature of our business, we are
involved in various claims, disputes and
legal proceedings in Switzerland and in a
number of jurisdictions outside Switzer-
land, including the United States, arising in
the ordinary course of business. Such legal
proceedings may expose us to substantial
monetary damages and legal defense costs,
injunctive relief and criminal and civil
penalties.
Competitive forces may influence
business direction
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 broad
ranges of product and service offerings,
increased access to capital, and greater effi-
ciency 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 industry trends.
Our global presence exposes us to
other risks
We operate in over 50 countries, 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
regulations 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 local market
disruptions, currency crises, the break-
down of monetary controls or terrorism,
may adversely affect the ability of clients
or counterparties located in that country
or region to obtain foreign exchange or
credit and, therefore, to satisfy their obli-
gations towards us. As a truly global finan-
cial services company, we are also exposed
to economic instability in emerging mar-
kets. We have a system of controls and
procedures to mitigate this risk. A discus-
sion of our country risk controls is pro-
vided on page 57 of our Handbook 2003 /
2004. However, if our controls fail to fully
identify and respond to country risk, we
may suffer a negative impact on our results
and financial condition.
23
24
UBS Results
25
UBS Results
UBS Results
Performance Against Targets
For the year ended
31.12.03
31.12.02
31.12.01
RoE (%)
as reported 1
before goodwill and adjusted for significant financial events 2
Basic EPS (CHF)
as reported 3
before goodwill and adjusted for significant financial events 4
Cost / income ratio (%)
as reported 5
before goodwill and adjusted for significant financial events 6
Net new money, wealth management units (CHF billion) 7,8
Wealth Management
Wealth Management USA
18.2
20.9
5.72
6.56
75.2
72.7
29.7
21.1
50.8
8.9
13.9
2.92
4.57
86.2
79.5
17.7
18.5
36.2
11.7
14.8
3.93
4.97
80.8
77.3
23.2
33.2
56.4
Total
RoE
25%
20%
15%
10%
5%
0%
2001
2002
2003
As reported 1
Before goodwill and adjusted for significant financial events 2
Basic EPS (CHF)
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2001
2002
2003
As reported 3
Before goodwill and adjusted for significant financial events 4
1 Net profit / average shareholders’ equity less
dividends.
2 Net profit less the amortization of goodwill and
other intangible assets and significant financial
events (after-tax) / average shareholders’ equity
less dividends.
3 For the EPS calculation, see Note 8 to the
Financial Statements.
4 Net profit less the amortization of goodwill and
other intangible assets and significant financial
events (after-tax) / weighted average shares
outstanding.
5 Operating expenses / operating income less
credit loss expense or recovery.
6 Operating expenses less the amortization of
goodwill and other intangible assets and signifi-
cant financial events / operating income less
credit loss expense or recovery and significant
financial events.
7 Excludes interest and dividend income.
8 Wealth Management and Wealth Management
USA.
26
Cost / income ratio
90%
80%
70%
60%
50%
40%
2001
2002
2003
As reported 5
Before goodwill and adjusted for significant financial events 6
Net new money, wealth management units 7, 8
(CHF billion)
60
50
40
30
20
10
0
2001
2002
2003
Invested Assets and Net New Money
CHF billion
UBS
Wealth Management & Business Banking
Wealth Management
Business Banking Switzerland
Global Asset Management
Institutional
Wholesale Intermediary
Investment Bank
Wealth Management USA
Corporate Center
Private Banks & GAM
1 Excludes interest and dividend income.
2003
This time last year, we could not have antici-
pated that 2003 would turn out to be such a pos-
itive year for the financial services industry. It
was also an excellent year for UBS – the second
most profitable in our history. When conditions
were difficult at the outset of the year, our results
were resilient. As the year progressed, investor
sentiment turned increasingly positive and activ-
ity levels picked up along with stock market val-
uations. Helped by this improving environment,
we fully captured the resulting revenue oppor-
tunities.
At the same time, we continued to invest in
our domestic European wealth management
business, and started to reap significant benefits
from our expanded investment banking presence,
especially in the US and Asia. Another key
endorsement of UBS is the trust our clients con-
tinue to place in us – shown by the considerable
quantity of new assets they invested in our wealth
management businesses.
Overall, all our businesses reported excellent
results – despite the difficult market environment
in the first half of the year – by clearly focusing
on costs and risk while aggressively capturing the
revenue opportunities.
Net profit
In 2003, we recorded the second-best annual
result since UBS and SBC merged in 1998. All
businesses reported a stronger set of results in
Invested assets
Net new money 1
31.12.03 31.12.02 31.12.01
2,209
2,037
2,448
701
212
313
261
4
634
642
205
274
259
3
584
728
215
324
325
1
769
2003
61.6
29.7
(5.0)
12.7
(5.0)
0.9
21.1
2002
36.9
17.7
3.7
(1.4 )
(6.3 )
0.5
18.5
2001
102.0
23.2
9.2
6.4
24.5
0.1
33.2
84
70
86
7.2
4.2
5.4
2003 than in the previous year. Our net profit in
full-year 2003 was CHF 6,385 million, up from
CHF 3,535 million in 2002 – an increase of
81%. Results in both 2002 and 2003 were influ-
enced by individual items we call significant
financial events. The first was the gain from our
sale of private bank Hyposwiss in first quarter
2002. Then, in fourth quarter 2002, we wrote
down the value of the PaineWebber brand and
sold the Klinik Hirslanden hospital chain. In
second quarter 2003, we sold the Correspondent
Services Corporation (CSC) clearing business.
Excluding these effects, and before goodwill
amortization, net profit increased by 33% in
2003 from 2002. The increase was driven by our
tight management of costs and our ability to
build market share and capture revenues during
the steady recovery in financial markets as the
year progressed. In particular, our asset-based
revenues recovered from the lows posted in
2002. Our result was further helped by much
improved trading opportunities, a gradual
improvement in investor sentiment and signifi-
cantly lower writedowns in our Private Equity
business. At the same time, expenses remained
under tight control. We recorded reductions in
all cost categories compared with 2002, with
non-personnel expenses falling below the year
2000 level.
Return on equity in 2003 was 18.2%, com-
pared to 8.9% a year earlier. Basic earnings per
share were CHF 5.72 in 2003, against CHF
2.92 in 2002. The cost / income ratio was 75.2%
in 2003 compared to 86.2% in 2002.
27
UBS Results
Targets
As mentioned in the previous section (Measure-
ment and Analysis of Performance), we focus on
four key performance targets, designed to deliver
continually improving returns to our sharehold-
ers. These targets are evaluated before goodwill
and adjusted for SFEs:
– Our return on equity for 2003 was 20.9%, up
from 13.9% a year ago and above our target
range of 15% to 20%. This was the best result
since the very strong return of 24.3% in 2000.
The increase reflects our much improved net
profit combined with a lower average level of
equity resulting from our continued buyback
programs.
– Basic earnings per share (EPS) stood at the
highest level since 2000. In 2003, they were
CHF 6.56, an increase of CHF 1.99 or 44%
from 2002, reflecting the increase in profit as
well as the 8% reduction in average number of
shares outstanding due to our continued buy-
back activities. Without the buyback pro-
grams in place since 2000, our earnings per
share would now be 14% lower.
– The cost / income ratio was 72.7% in 2003, an
improvement from 79.5% in 2002. It stands
at its lowest level since PaineWebber became
part of UBS. The slight drop in income,
reflecting the difficult market environment in
first half 2003, was more than compensated
by a 9% decline in operating expenses due to
ongoing cost management initiatives and the
downward pressure on compensation ratios.
In full-year 2003, the net new money inflows
into our Wealth Management businesses totaled
CHF 50.8 billion compared with CHF 36.2 bil-
lion in 2002. This is an increase of 40% and cor-
responds to an annual growth rate of 4.2%. Both
the Wealth Management and Wealth Manage-
ment USA businesses were able to attract more
client money in 2003 than in 2002.
Results
Operating income
Total operating income fell slightly to CHF
33,972 million in 2003 from CHF 34,121 mil-
lion in 2002. Adjusted for the divestment gains of
CHF 227 million from the sale of Hyposwiss and
Klinik Hirslanden in 2002 and CHF 161 million
from the sale of Correspondent Services Corpo-
ration in 2003, total operating income in 2003
was CHF 33,811 million, compared to CHF
33,894 million in 2002. The drop was caused by
lower asset-based revenues impacted by the low
market levels in early 2003, which only started to
recover in the second half of the year. Operating
income was also affected by the weakening of
major currencies against the Swiss franc, includ-
ing the 13% drop of the US dollar. This was par-
tially offset by higher income from fixed income
trading and much lower private equity write-
downs.
Net interest income of CHF 12,299 million in
2003 was 17% higher than the CHF 10,546 mil-
lion in 2002. Net trading income, at CHF
3,883 million in 2003, declined 30% from CHF
5,572 million a year earlier.
As well as income from interest margin-based
activities (loans and deposits), net interest
income includes income earned as a result of
trading activities (for example, coupon and divi-
dend income). This component is volatile from
period to period, depending on the composition
of the trading portfolio. In order to provide a bet-
ter explanation of the movements in net interest
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
dropped by 4% to CHF 5,077 million in 2003
from CHF 5,275 million in 2002. The result
reflects lower interest margins on client savings
and cash accounts, and declining revenues from
our diminishing recovery portfolio in Switzer-
land as well as lower interest revenue on margin
loans in the US as we sold our Correspondent
Services Corporation (CSC) clearing business.
These effects were partially offset by higher
mortgages and saving accounts volumes in
Switzerland.
Over the full year, net income from trading
activities, at CHF 10,810 million in 2003, was up
2% from CHF 10,605 million a year earlier.
Equity trading income of CHF 2,464 million
was down 12% from CHF 2,794 million a year
earlier. The drop reflected the weakening of most
major currencies against the Swiss franc. Exclud-
ing currency fluctuations, equity trading rev-
enues increased as the business benefited from
improved trading opportunities that followed the
strong market recovery. Fixed income trading
28
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
31.12.03
31.12.02
31.12.01
12,299
3,883
16,182
10,546
5,572
16,118
8,041
8,802
16,843
% change from
31.12.02
17
(30)
0
CHF million
For the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
Net income from interest margin products
Equities
Fixed income
Foreign exchange
Other
Net income from trading activities
Net income from treasury activities
Other 1
Total net interest and trading income
1 Principally external funding costs of the Paine Webber Group, Inc. acquisition.
5,077
2,464
6,530
1,501
315
10,810
1,415
(1,120)
16,182
5,275
2,794
6,041
1,500
270
10,605
1,667
(1,429 )
16,118
5,694
3,661
6,294
1,490
84
11,529
1,424
(1,804 )
16,843
(4)
(12)
8
0
17
2
(15)
22
0
revenue was CHF 6,530 million in 2003, up 8%
from CHF 6,041 million in the same period a
year earlier. This increase was due to better per-
formances across our businesses with very strong
revenues in our Principal Finance, Mortgage-
backed Securities and Derivatives businesses.
However, results were also affected by the
US dollar’s decline against the Swiss franc and
negative revenues of CHF 678 million relating to
Credit Default Swaps (CDS) hedging existing
credit exposure in the loan book. In 2002, we
recorded a mark to market gain of CHF 226 mil-
lion on these CDS positions. Our use of CDSs as
hedging instruments for our loan book is only
one part of our overall management approach
to trading credit risk. The Critical accounting
policies section on page 16 in this report and
the Capital and Risk Management section of
our Handbook 2003 / 2004 contain further infor-
mation on how we use CDSs to hedge our
credit exposure. Over the full year, foreign
exchange trading revenues, at CHF 1,501 mil-
lion, remained virtually unchanged from CHF
1,500 million in 2002.
Net income from treasury activities, at CHF
1,415 million in 2003, was down 15% from
CHF 1,667 million a year earlier. The drop
mainly reflected lower income from our invested
equity as we continued to buy back shares, as
well as a further decline in interest rates. The
impact of falling interest rates was partially off-
set by the diversification of our invested equity
into currencies other than Swiss francs.
In 2003, other net trading and interest income
showed negative revenues of CHF 1,120 million
compared to negative CHF 1,429 million a year
earlier. The improvement was mainly due to lower
goodwill funding costs related to the writedown
Actual Credit Loss (Expense) / Recovery
CHF million
For the year ended
Wealth Management & Business Banking
Investment Bank
Wealth Management USA
Corporate Center
UBS
31.12.03
31.12.02
31.12.01
% change from
31.12.02
(75)
(40)
(3)
2
(116)
(238 )
35
(15 )
12
(206 )
(124 )
(360 )
(15 )
1
(498 )
68
80
(83)
44
29
UBS Results
of the value of the PaineWebber brand, and lower
funding needs for our private equity portfolio.
tainability remain, signs of a global economic
recovery have increased.
Total credit loss expense for UBS in 2003
amounted to CHF 116 million, compared to
CHF 206 million in 2002.
Net actual credit loss expense at Wealth Man-
agement & Business Banking amounted to CHF
75 million compared to CHF 238 million in
2002. This exceptionally strong result was
achieved despite the negative impact of the Erb
Group, a privately held Swiss conglomerate
which defaulted in fourth quarter 2003. Our
domestic credit portfolio demonstrated strong
resilience in a Swiss economic environment
which saw an increase in the number of corpo-
rate bankruptcies by 13.4% compared to 2002,
the highest annual increase in 10 years. The
measures taken in recent years to improve the
quality of our credit portfolio have resulted in
lower levels of new defaults, and our success in
managing the impaired portfolio has resulted in a
higher than anticipated level of recoveries. In
response to an improving economic and political
environment in some emerging markets, we were
also able to release country allowances relating
to our correspondent banking business.
Outside Switzerland, the global credit envi-
ronment gradually improved during 2003, espe-
cially in the second half of the year, reversing the
downward trend observed in the previous two
years. Although some concerns regarding sus-
The Investment Bank experienced net actual
credit loss expense of CHF 40 million, compared
to net credit loss recoveries of CHF 35 million in
2002 and credit loss expense of CHF 360 million
in 2001. This continued strong performance was
the result of minimal exposures to new defaults
plus the recovery of country provisions consistent
with the more favorable outlook for emerging
market economies. For further details on our risk
management approach, how we measure credit
risk and the development of our credit risk expo-
sures, please see the Capital and Risk Manage-
ment section in our Handbook 2003 / 2004.
At CHF 17,345 million, net fee and commis-
sion income in 2003 was 5% lower than CHF
18,221 million in 2002. The drop was mainly
due to the weakening of the US dollar and other
major currencies against the Swiss franc. Exclud-
ing currency effects, net fee and commission
income actually increased, with a record result in
our underwriting activities. However, our asset-
based revenues suffered from the low market
levels in early 2003 and only started to recover in
the second half of the year. Further, our broker-
age revenues only started to rebound as the year
progressed, following the gradual rise in market
activity levels. Underwriting fees, at their highest
level ever, increased 10% from CHF 2,134 mil-
lion in 2002 to CHF 2,354 million in 2003. Fixed
Net Fee and Commission Income
CHF million
For the year ended
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
31.12.03
2,354
761
5,608
3,895
241
1,201
3,855
355
18,270
249
1,087
19,606
1,483
778
2,261
31.12.02
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
31.12.01
2,158
1,339
6,445
4,276
355
1,356
4,650
538
21,117
307
946
22,370
1,281
878
2,159
Net fee and commission income
17,345
18,221
20,211
% change from
31.12.02
10
(10)
(6)
(3)
(20)
(8)
(5)
(15)
(4)
(9)
8
(4)
10
(2)
5
(5)
30
income and equities underwriting revenues
increased by 12% and 9% respectively compared
to a year earlier, reflecting the improved market
conditions. Corporate Finance fees dropped by
10% to CHF 761 million in 2003 from CHF
848 million in 2002, reflecting lower market
activity and a drop in overall size of the global
fee pool for merger and acquisitions, although
we were able to again improve our market
share. Net brokerage fees dropped 11% to CHF
4,125 million in 2003 from CHF 4,638 million
in 2002. The drop reflects the weakening of the
US dollar against the Swiss franc as well as lower
client activity, which only recovered in the second
half of the year as market activity levels started to
improve. The result was further impacted by the
sale of our Correspondent Service Corporation
(CSC) business. Investment fund fees dropped
just 3% to CHF 3,895 million in 2003 from
CHF 4,033 million in 2002, reflecting lower
asset-based fees. This was partially offset by
higher revenues due to the expansion of our
alternative and quantitative investment business.
Custodian fees, at CHF 1,201 million in 2003,
were down 8% from CHF 1,302 million in 2002,
principally due to lower market values and, con-
sequently, average asset levels. The 5% fall in
portfolio and other management and advisory
fees from CHF 4,065 million in 2002 to CHF
3,855 million in 2003 mainly reflects the drop of
the US dollar against the Swiss franc and lower
management fees resulting from the low market
levels at the outset of the year. This was partially
offset by higher performance fees. At CHF
355 million in 2003, insurance-related and other
fees decreased by 15% from a year earlier, main-
ly reflecting the weakening of the US dollar.
Other income was CHF 561 million in 2003
compared with a loss of CHF 12 million a year
earlier. The increase was mainly due to a drop in
private equity impairment charges, as well as
higher disposal gains from our private equity
investments. This was partially offset by a
reduction in divestment gains from other finan-
cial investments as well as a CHF 66 million
decline in gains from disposals of associates and
subsidiaries (the two 2002 gains of CHF 72 mil-
lion from Klinik Hirslanden and CHF 155 mil-
lion from Hyposwiss less 2003’s CSC gain of
CHF 161 million). Other income was further
impacted by the fall-off in income from Klinik
Hirslanden.
Operating expenses
We continued to manage our cost base tightly.
Strong cost control measures remain in place and
we further streamlined processes and structures
across the firm. Total operating expenses fell
below their level in 2000. In full-year 2003,
they were CHF 25,624 million, down 13% from
CHF 29,577 million a year earlier. The drop was
influenced by the writedown of the value of the
PaineWebber brand in fourth quarter 2002,
which resulted in an amortization expense of
CHF 1,234 million. Excluding the writedown,
expenses declined 10% with drops recorded in
all categories of costs. General and administra-
tive expenses fell 14%, reflecting our continuous
cost-cutting initiatives, while personnel expenses
dropped by 7%. Overall, the decline in expenses
was helped by the weakening of the US dollar
against the Swiss franc and last year’s sale of
Klinik Hirslanden.
Personnel expenses dropped by 7% to CHF
17,231 million in 2003 from CHF 18,524 mil-
lion in 2002. The drop was mainly due to the
weakening of the US dollar against the Swiss
franc. Salary expenses fell due to the 5% reduc-
tion in headcount over the period. The drop
was further accentuated by lower contractor
expenses and retention payments. This was par-
tially offset by higher performance-related com-
pensation expenses that increased in line with
our improving revenue, as well as slightly higher
contributions to retirement plans. Personnel
expenses are managed on a full-year basis with
final fixing of annual performance-related pay-
ments in the fourth quarter. Over the full year,
approximately 44% of this year’s personnel
expense was paid as bonus or other variable
compensation, up from 42% last year. Average
variable compensation per head in 2003 was 3%
higher than in 2002.
In full-year 2003, general and administrative
expenses, at CHF 6,086 million, were down 14%
from CHF 7,072 million a year earlier. Strict cost
control in all our businesses led to a drop in
nearly all cost categories. The biggest falls were
in overall provisions, with major declines in legal
and security provisions (2002 included the glob-
al charge of CHF 111 million (USD 80 million)
related to the US equity research settlement).
Administration, IT and telecommunication
expenses saw significant drops from our contin-
ued cost-saving initiatives, partially offset by
31
UBS Results
Headcount
(full-time equivalents)
31.12.03
31.12.02
31.12.01
% change from
31.12.02
Wealth Management & Business Banking
Wealth Management
Business Banking Switzerland
Global Asset Management
Investment Bank
Investment Banking & Securities
Private Equity
Wealth Management USA
Corporate Center
Total
26,796
9,176
17,620
2,689
15,550
15,500
50
18,016
2,878
65,929
27,841
9,399
18,442
2,733
16,037
15,964
73
19,563
2,887
69,061
28,138
8,918
19,220
2,704
15,690
15,562
128
20,413
3,040
69,985
(4)
(2)
(4)
(2)
(3)
(3)
(32)
(8)
0
(5)
slightly higher rent and maintenance expenses as
well as professional fees, the latter due to higher
project-related costs.
At CHF 1,521 million in 2002, depreciation
fell 10% to CHF 1,364 million in 2003, mainly
due to lower IT-related charges, as well as the
weakening of the US dollar against the Swiss
franc.
Amortization of goodwill and other intangible
assets decreased from CHF 2,460 million in 2002
to CHF 943 million in 2003. The main reason for
the drop was because, a year earlier, in 2002, we
wrote down the value of the PaineWebber brand
name. Excluding that charge, the drop would
have been 23%, reflecting the full amortization
of some businesses, as well as the strengthening
of the Swiss franc against the US dollar.
Tax
We incurred a tax expense of CHF 1,618 mil-
lion in 2003, up from CHF 678 million in 2002.
This corresponds to an effective tax rate of
19.4% in 2003. Excluding the effect of the sale
of CSC (sold in second quarter 2003), our effec-
tive tax rate for the full year is 17.8%, com-
pared to 2002’s full-year rate of 16.5% (before
significant financial events). The particularly
low 2002 rate was driven by lower progressive
tax rates in Switzerland, the ability to benefit
from tax losses in the US and UK and a high
proportion of earnings generated in lower tax
jurisdictions. The 2003 tax rate was positively
influenced by a continued favorable regional
profit mix and the successful conclusion of tax
audits. We believe that an underlying tax rate of
around 19–20% (before significant financial
events) continues to be a reasonable indicator
for 2004.
Headcount
Headcount, at 65,929 on 31 December 2003, was
5% lower than a year ago. While we have been
able to avoid major job cut programs in the last
three years, we have closely monitored our cost
structure and staffing needs. We have not needed
to maintain all our capacity during the recent mar-
ket downturn and we have continued to improve
efficiency and productivity. Therefore, we have
gradually reduced headcount across the firm
while, at the same time, expanding our capabili-
ties in areas with positive growth potential.
Dividend
The Board of Directors will recommend at the
Annual General Meeting on 15 April 2004 that
UBS should pay a dividend of CHF 2.60 per
share for the 2003 financial year, an increase of
30% or CHF 0.60 from the CHF 2.00 dividend
paid at the same time a year earlier for the 2002
financial year.
UBS
Headcount (in FTE): regional distribution
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Total:
69,985
5.3%
13.8%
39.2%
69,061
5.4%
14.5%
65,929
5.8%
15.0%
39.6%
38.7%
41.7%
40.5%
40.5%
31.12.01
31.12.02
As at
31.12.03
Asia Pacific
Europe (excluding Switzerland)
Americas
Switzerland
32
UBS
Headcount (in FTE): business unit distribution
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Total:
69,985
4.3%
3.9%
12.7%
22.4%
27.5%
29.2%
69,061
4.2%
4.0%
13.6%
23.2%
26.7%
65,929
4.4%
4.1%
13.9%
23.6%
26.7%
28.3%
27.3%
31.12.01
31.12.02
As at
31.12.03
Corporate Center
Global Asset Management
Wealth Management
Investment Bank
Business Banking Switzerland
Wealth Management USA
If the dividend is approved, the ex-dividend
date will be 16 April 2004, with payment on
20 April 2004 for shareholders of record on
15 April 2004.
Balance sheet
Total assets, at CHF 1,386 billion on 31 Decem-
ber 2003, increased by 17% from CHF 1,181 bil-
lion on 31 December 2002. The increase was
mainly due to higher overall trading activities
although that was partially offset by the weaken-
ing of the US dollar, which fell by 10% against
the Swiss franc in the period. Cash and balances
with central banks was CHF 3.6 billion on
31 December 2003, down slightly from CHF
4.3 billion on the same date a year earlier. The
drop was mainly due to a decline in our positions
held with the Swiss National Bank. Assets due
from banks decreased to CHF 31.7 billion on
31 December 2003 from CHF 32.5 billion on
31 December 2002, reflecting lower short-term
deposits with third-party banks. Trading-related
assets (cash collateral on securities borrowed,
trading portfolio assets and reverse repurchase
agreements) rose by CHF 191.7 billion between
31 December 2003 and the same date a year
earlier. This increase reflects higher trading
activities, mainly in the Fixed Income, Rates and
Currencies (FIRC) business, especially in the US.
Cash collateral on securities borrowed rose by
54% or CHF 74.9 billion in the same period,
reflecting an increase in securities lending acti-
vities, influenced by our acquisition of ABN
AMRO’s US prime brokerage business. Reverse
repurchase agreements increased by 9% or CHF
26.5 billion, reflecting higher client and market
making activity and a lower level of counterparty
netting. Trading portfolio assets increased by
24% or CHF 90.3 billion, mirroring higher posi-
tions in most products, particularly in mortgage-
backed securities and principal finance positions.
Loans, net of allowances for credit losses,
remained virtually unchanged in the period.
Financial investments fell to CHF 5.1 billion on
31 December 2003 from CHF 8.4 billion on the
same date a year earlier, mainly reflecting a
decrease in money market and debt positions,
and reduced equity investments and private
equity positions. Goodwill and other intangible
assets, at CHF 11.5 billion on 31 December
2003, fell 16% or CHF 2.2 billion from CHF
13.7 billion a year earlier. The drop was mainly
due to ongoing amortization, the sale of our CSC
clearing business in the US (with its goodwill
written down accordingly), as well as the decline
of the US dollar against the Swiss franc.
Total liabilities increased to CHF 1,346 bil-
lion on 31 December, up 18% from CHF
1,139 billion a year earlier. Liabilities due to
banks jumped by 53% or CHF 44.0 billion,
reflecting a high allocation in European Central
Bank repo funding at year-end. Trading-related
liabilities (cash collateral on securities lent,
repurchase agreements and trading portfolio lia-
bilities) increased by CHF 102.9 billion in 2003
from a year earlier, reflecting growth across
most sectors of the business. Amounts due to
customers increased by 13% or CHF 40.5 bil-
lion, as a result of the acquired customer
accounts from ABN AMRO’s US prime broker-
age business and the launch of UBS Bank USA,
where client cash balances previously swept into
money market funds are now redirected into
FDIC-insured deposit accounts. Debt issued
decreased by CHF 9.2 billion to CHF 120.2 bil-
lion on 31 December 2003, reflecting a decrease
in commercial paper issuance as the bank funded
more in the interbank market and on a collater-
alized basis. Our long-term debt rose to CHF
62.1 billion on 31 December 2003 from CHF
56.6 billion a year earlier, reflecting attractive
market conditions for new issuance of bonds
and structured funding products. We believe the
maturity profile of our long-term debt portfolio
balances well and matches the maturity profile
of our assets. For further details, please refer to
33
UBS Results
Note 18 to the Financial Statements. Minority
interests increased by 15% to CHF 4.1 billion on
31 December 2003 as we issued an additional
USD 300 million (CHF 372 million) in trust pre-
ferred securities.
Shareholders’ equity decreased by CHF
3.5 billion, or 9%, between 2003 and 2002, due
to the dividend payment and the increase in
treasury shares due to our continuous share
buyback programs offsetting retention of our
2003 net profit.
Contractual obligations
The table below summarizes our contractual
obligations as of 31 December 2003. All con-
tracts, with the exception of purchase obligations
(those where we are committed to purchase
determined volumes of goods and services), are
either recognized as liabilities on our balance
sheet or, in the case of operating leases, are dis-
closed in Note 26 to the Financial Statements.
The following liabilities recognized on the bal-
ance sheet are excluded from the table because
we do not consider these obligations as contrac-
tual: provisions, current and deferred tax liabili-
ties, liabilities to employees for equity participa-
tion plans, settlement and clearing accounts and
amounts due to banks and customers.
With purchase obligations, we have excluded
our obligation to employees under the manda-
tory notice period, during which we are required
to pay employees contractually agreed salaries.
We believe that these amounts are not included
in the definition of contractual purchase obli-
gations.
Off-balance sheet arrangements
In the normal course of business, UBS enters into
arrangements that, under IFRS, are not recog-
Contractual Obligations
nized on the balance sheet and do not affect the
income statement. These types of arrangements
are kept off-balance sheet as long as UBS does
not incur an obligation from them or become
entitled to an asset itself. As soon as an obligation
is incurred, it is recognized on the balance sheet,
with the resulting loss recorded in the income
statement. It should be noted, however, that the
amount recognized on the balance sheet does
not, in many instances, represent the full loss
potential inherent in such arrangements.
For the most part, the arrangements discussed
below either meet the financial needs of cus-
tomers or offer investment opportunities through
entities that are not controlled by UBS. The
importance of such arrangements to us, with
respect to liquidity, capital resources or market
and credit risk support, is minimal. We do not
rely on such arrangements as a major source of
revenue nor have we incurred significant expens-
es in the past and we do not expect to do so in the
future. The following paragraphs discuss four
distinct areas of off-balance sheet arrangements
as of 31 December 2003 and any potential obli-
gations that may arise from them.
Guarantees
In the normal course of business, we issue vari-
ous forms of guarantees to support our cus-
tomers. These guarantees are kept off-balance
sheet unless a provision is needed to cover
probable losses. The contingent liabilities aris-
ing from these guarantees are disclosed in
Note 25, Commitments and Contingent Liabili-
ties, to the Financial Statements. In 2003, the
level of our contingent liabilities from guaran-
tees fell compared to a year earlier. Fee income
earned from issuing guarantees is not material
to our total revenues. Losses incurred under
guarantees were insignificant for each of the last
three years.
CHF million
Long-term debt
Capital lease obligations
Operating leases
Purchase obligations
Other long-term liabilities
Total
Less than
1 year
7,598
64
876
937
267
9,742
Payment due by period
1–3 years
3–5 years
18,828
147
1,477
594
1
21,047
14,719
130
1,227
169
0
16,245
More than
5 years
20,977
0
3,992
11
6
24,986
34
Retained interests
UBS also sponsors the creation of Special Pur-
pose Entities (SPEs) that facilitate the securiti-
zation of acquired residential and commercial
mortgage loans and related securities. We also
securitize customers’ debt obligations in trans-
actions that involve SPEs which issue collater-
alized debt obligations. A typical securitization
transaction of this kind would involve the
transfer of assets into a trust or corporation in
return for beneficial interests in the form of
securities. Generally, the beneficial interests are
sold to third parties shortly after the securiti-
zation. We do not provide guarantees or other
forms of credit support to these SPEs. Assets
are no longer reported in our consolidated
financial statements as soon as their risk or
reward is transferred to a third party. For fur-
ther discussion of our securitization activities,
see Note 34, Sales of Financial Assets in Secu-
ritizations.
Derivative instruments recorded
in shareholders’ equity
We have no derivative contracts linked to our
own share that are accounted for as equity instru-
ments. All derivative contracts linked to our
share are accounted for as derivative instruments
and are carried at fair value on the balance sheet
under positive replacement values or negative
replacement values.
Variable Interest Entities (VIE)
Under US GAAP, VIEs are entities where the vot-
ing interests are not substantive, or differ signifi-
cantly from economic interests. If UBS, together
with its related parties (which includes all
employees of UBS), bears more than 20% of a
VIE’s expected residual losses, expected residual
gains, or both, it holds a significant variable
interest in that entity. If UBS bears the majority of
the expected residual losses or gains, it is consid-
ered to be the primary beneficiary. More detailed
information is provided in Note 41 to the Finan-
cial Statements.
Below is a summary of the obligations that
UBS bears in relation to such entities, in so far as
they are not consolidated in UBS’s primary con-
solidated Financial Statements under IFRS, using
‘maximum exposure to loss’ as a measure to
quantify the potential obligations arising out of
these arrangements.
VIEs in which UBS is the primary beneficiary
UBS has established VIEs prior to 1 February
2003, including entities which hold UBS shares or
derivatives on UBS shares for employee equity
compensation trusts and leveraged investments
available to key employees. The maximum expo-
sure to loss of these VIEs is approximately CHF 5.6
billion. This consists of the total assets of the VIEs
(which are not consolidated under IFRS or US
GAAP) of CHF 5.1 billion and an additional
amount of CHF 426 million which UBS might be
obligated to invest as part of the contractual obli-
gation to the leveraged investment of key employ-
ees. Since 31 January 2003, UBS has established
VIEs with total assets of approximately CHF 4.1
billion for which the maximum exposure to loss is
approximately CHF 481 million. We believe, how-
ever, that the probability of suffering the maximum
amount of loss from the above VIEs is remote.
VIEs in which UBS has a significant interest,
but is not the primary beneficiary
UBS has identified that it holds significant vari-
able interests in other VIEs. It is estimated that
the total assets of such VIEs amount to approxi-
mately CHF 1.9 billion, and that UBS has a max-
imum exposure to loss of approximately CHF
593 million in relation to these VIEs. The latter
amount relates only to amounts that UBS has
actually invested into the entities in question, as
there are no additional contractual obligations.
Again, we believe that the probability of suffer-
ing the maximum loss from these VIEs is remote.
VIEs in which UBS may hold a significant variable
interest, or be the primary beneficiary
In addition to the VIEs noted above, UBS has iden-
tified other VIEs established prior to 1 February
2003, which are still being assessed. UBS holds at
least a significant variable interest in these VIEs.
Once the assessment is complete, it may be deter-
mined that UBS is the primary beneficiary for a por-
tion of them. These VIEs are currently not consoli-
dated under IFRS or US GAAP. It is estimated that
the total assets of these VIEs amounts to CHF 4.5
billion, and that UBS has a maximum exposure to
loss of CHF 253 million in relation to these VIEs.
The latter amount relates only to amounts that UBS
has actually invested into the entities in question, as
there are no additional contractual obligations.
Again, we believe that the probability of suffering
the maximum loss from these VIEs is remote.
35
UBS Results
Cash flows
In the full year to 31 December 2003, cash and
cash equivalents decreased by CHF 9.0 billion,
principally as a result of financing activities,
which generated negative cash flows of CHF
13.3 billion. Significant cash outflows resulted
from CHF 14.7 billion in repayments of money
market paper, CHF 6.8 billion from movements
in treasury shares and derivative activity in own
equity, and CHF 2.3 billion from dividends paid.
Issuance of long-term debt of CHF 23.6 billion
and repayments of CHF 13.6 billion brought a
net cash inflow of CHF 10.0 billion. When com-
pared to 2002, cash outflows from financing
activities fell by approximately CHF 19 billion.
The main reasons for the reduced outflows were
an approximate CHF 12 billion decline in repay-
ments of money market paper and higher net
inflows of roughly CHF 8 billion in both issuance
and repayment of long-term debt. Increased buy-
backs of treasury shares in 2003, coupled with
a higher average price for our shares, resulted in
a higher cash outflow of approximately CHF
1.2 billion in 2003.
Operating cash inflows (before changes in
operating assets and liabilities and income taxes
paid) amounted to CHF 9.1 billion, an increase
of CHF 944 million from 2002. While net profit
in 2003 was CHF 2.9 billion higher than a year
earlier, we had considerably higher non-cash
expenses in 2002, which reduce net profit but do
not affect cash flow. Notably, amortization of
goodwill and intangible assets was CHF 1.5 bil-
lion higher in 2002 than in 2003. The main
reason was the writedown of the value of the
PaineWebber brand name of CHF 1,234 million,
but the US dollar exchange rate, which was
higher in 2002 against most currencies than it
was last year, also contributed to the difference.
The other two significant items were deferred tax
expense and gains or losses from investing activ-
ities included in net profit. In 2003, we had
deferred tax expenses of CHF 514 million, attrib-
utable to a range of sources generating taxable
temporary differences. In 2002, we had a
deferred tax benefit of CHF 509 million, to
which the release of deferred tax liabilities
related to the PaineWebber brand name was the
largest single contributor.
increase in operating liabilities generated cash
inflows of CHF 83.6 billion. The comparative
amounts in 2002 were much smaller, primarily
reflecting a pick-up in activities in 2003 related to
the rebound of the financial markets. Payments
to tax authorities were CHF 1.1 billion, an
increase of CHF 532 million compared to 2002.
Investing activities generated cash inflow of
CHF 1.5 billion. Divestments of financial invest-
ments contributed CHF 2.3 billion while the
sale of CSC clearing business and a few smaller
subsidiaries and associates generated CHF
834 million. Purchases of property and equip-
ment amounted to CHF 1.4 billion, of which the
largest portion was spent for IT, software
and communication equipment. Comparative
amounts in 2002 did not deviate materially from
the current year.
Outlook
Having successfully navigated the turbulent
down-markets of the last few years with no
unpredictable changes in our profitability, our
strategy, or our staffing levels, we now enter
what seem likely to be calmer waters with, we
believe, the full confidence of our clients, our
employees and our shareholders. Our businesses
are all performing extremely well. And while, of
course, we cannot predict with certainty whether
markets will continue in their friendly mood, we
are committed to again securing for our investors
the best possible returns in 2004.
2002
Net profit
UBS’s 2002 net profit was CHF 3,535 million, a
29% decline from CHF 4,973 million in 2001. In
2002, profit was affected by several items we
define as significant financial events (SFEs). They
comprised the non-cash after-tax writedown of
the value of the PaineWebber brand, which
reduced profit by 21%, and the impact from
sales of subsidiaries, which added 6% to profit.
Excluding these effects, and before goodwill
amortization, net profit fell 12% between 2002
and 2001.
Cash of CHF 88.2 billion was used to fund
the net increase in operating assets, while a net
Return on equity, also affected by the brand
writedown, was 8.9% in 2002, down from 11.7%
36
in 2001. In the same timeframe, basic earnings per
share were CHF 2.92, 26% lower than in 2001.
The cost / income ratio was 86.2% in 2002, an
increase of 5.4 percentage points from 2001.
UBS targets
Before goodwill and adjusted for significant
financial events:
– Our return on equity for 2002 was 13.9%,
down from 14.8% in 2001 and slightly below
our target range of 15–20%. The lower aver-
age level of equity, which was 6% lower
because of our ongoing share buyback pro-
grams, 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
earnings 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
private equity writedowns.
Net new money in the wealth management
units (Wealth Management and Wealth Manage-
ment USA) dropped from CHF 56.4 billion in
2001 to CHF 36.2 billion 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 trad-
ing conditions and a weakening of investor senti-
ment. Falling market levels affected asset-based
revenues while our private equity business con-
tinued to record losses due to poor valuation and
exit conditions in 2002.
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 bet-
ter explanation of the movements in net interest
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 in 2001, mostly reflecting
lower interest margins on savings and cash
accounts, as well as mortgages because of the
extremely low interest rate environment. This
was accentuated by the decline of the US dollar
and the euro, which caused the Swiss franc
equivalent of US dollar interest rate revenues
to drop.
In 2002, 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
2001, 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 in 2001, when they bene-
fited from a buoyant trading environment fol-
lowing coordinated interest rate cuts by major
central banks in 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 2002 trading result
of our fixed income business profited from un-
realized 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 instruments for our loan book
is only one part of our overall management
approach to trading credit risk. In 2002, our
foreign exchange trading revenues, at CHF
37
UBS Results
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% from
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 in 2002 compared to
a loss of CHF 1,804 million in 2001. This drop
was mainly due to lower goodwill funding costs,
reflecting the weakening of the US dollar against
the Swiss franc, lower funding costs for our pri-
vate equity portfolio as well as the reclassifica-
tion of some revenues previously reported as
income from trading activities.
the downward
In 2002, credit loss expenses totaled CHF
206 million compared to CHF 498 million in
2001. Throughout 2002, the global credit envi-
ronment continued
trend
observed in 2001. Concerns regarding the sus-
tainability of the global economic recovery
increased. The outlook for corporate profits
weakened that year as geopolitical tension rose.
Financial market developments were character-
ized by a heightened aversion to risk among
investors, an increasingly pronounced tiering of
credit quality, resulting in higher-risk corporate
and sovereign borrowers facing increasingly dif-
ficult financing conditions.
Net fee and commission income for 2002 was
CHF 18,221 million, a decline of 10% compared
to 2001, due to a drop in most revenue cate-
gories.
Underwriting fees, at CHF 2,134 million,
dropped only 1% from 2001, reflecting the
strong revenues from our fixed income business,
which increased by 67% compared to 2001.
However, this was offset by a much lower result
in our equity underwriting business due to the
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 in 2002
compared to 2001. Despite that, we were again
able to improve our market position, increasing
our 2002 share of the market to 5.0% from 4.4%
in 2001.
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
reflecting much lower markets, and 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.
The drop in portfolio and other management
and advisory fees from CHF 4,650 million in
2001 to CHF 4,065 million in 2002 reflected
lower average asset levels and third-party fees
resulting from the difficult market environment.
At CHF 417 million in 2002, insurance-
related and other fees decreased by 22% from
2001. This drop was mainly due to a decrease in
insurance sales volumes in Wealth Management
USA mirroring the more difficult market envi-
ronment.
Credit-related fees and commissions dropped
by 10% from CHF 307 million to CHF 275 mil-
lion 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 in
2001. Higher impairment charges for private
equity investments and other financial invest-
ments were only partially offset by gains from
disposals of financial investments and of the
Klinik Hirslanden and Hyposwiss subsidiaries.
Operating expenses
In 2002, total operating expenses, at CHF
29,577 million, decreased by 3% from CHF
30,396 million in 2001. The fall was because of
lower personnel expenses, as well as declining
general and administrative expenses, reflecting
our ability to adjust our costs in line with revenue
developments. 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%.
38
Personnel expenses dropped by 7% to
CHF 18,524 million in 2002 on much lower
performance-related compensation expenses and
lower salaries, and a reduction in headcount,
especially in Wealth Management USA and
Business Banking Switzerland. The drop was
further accentuated by lower recruitment, train-
ing and contractor costs across the firm, reflect-
ing our continued cost control initiatives. Finally,
the result was helped by a weaker US dollar
against the Swiss franc. In 2002, approximately
42% of personnel expenses were bonus or other
variable compensation, down from 43% in
2001. Average variable compensation per head in
2002 was 8% lower than in 2001. We did not
build up any significant overcapacity during the
peak of the last business cycle, and have therefore
been able to reduce headcount gradually as
economic conditions weakened – without resort-
ing to drastic cuts. UBS headcount dropped by
924 from 69,985 to 69,061, as we streamlined
processes and structures at the same time as we
expanded our capabilities in areas with positive
growth potential.
In 2002, general and administrative expenses,
at CHF 7,072 million, were down from CHF
7,631 million in 2001. Strict cost control in all
our businesses led to a drop in nearly all cost
categories. The biggest declines were in telecom-
munication, IT, outsourcing and branding
expenses. This was partially offset by higher legal
and security provisions including a global settle-
ment charge of CHF 111 million (USD 80 mil-
lion) regarding equity research in the US.
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 reflect-
ed an effective tax rate of 16.5%, well below
2001’s rate of 21%. The decline was mainly driv-
en 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 Paine-
Webber, 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
intangibles 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
On 23 April 2003, we paid a dividend of CHF
2.00 per share to our shareholders for the finan-
cial year 2002, a level on par with 2001’s CHF
2.00 distribution (which was distributed in a tax-
efficient way).
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
39
UBS Results
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.
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 Hirslanden
brought in CHF 984 million, both partially off-
setting the CHF 1,763 million of cash outflow for
the purchase of property and equipment.
40
Business Group Results
41
Review of Business Group Performance
Wealth Management & Business Banking
Wealth Management & Business Banking
In 2003, Wealth Management’s pre-tax profit was CHF 2,609 million, a 4% increase from 2002.
Strong inflows in most markets resulted in net new money rising to CHF 29.7 billion from
CHF 17.7 billion. Business Banking Switzerland’s profit before tax rose 9% to CHF 2,153 mil-
lion in 2003, with operating expenses falling a further 8% – to the lowest level since 1999.
Business Unit Reporting
CHF million, except where indicated
For the year ended
Income
Adjusted expected credit loss 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
amortization of goodwill and other intangible assets
Additional information
Regulatory equity allocated (average)
Cost / income ratio (%) 2
Cost / income ratio before goodwill (%) 3
Fair value of employee stock options granted 4
31.12.03
31.12.02
31.12.01
% change from
31.12.02
12,052
(131)
11,921
4,584
2,116
384
75
7,159
4,762
12,184
(312 )
11,872
4,596
2,251
448
97
7,392
4,480
12,782
(601 )
12,181
4,558
2,319
568
100
7,545
4,636
4,837
4,577
4,736
8,750
59
59
64
8,600
61
60
92
9,150
59
58
(1)
(58)
0
0
(6)
(14)
(23)
(3)
6
6
2
(30)
1 In management accounts, adjusted expected credit loss rather than net actual credit loss is reported for the Business Groups (see Note 2 to the Financial Statements).
2 Operating expenses / income.
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.
3 Operating expenses less the amortization of goodwill and other intangible assets / income.
Georges Gagnebin
Chairman, Wealth Management &
Business Banking
Marcel Rohner
CEO, Wealth Management &
Business Banking
42
Wealth Management
Business Unit Reporting
CHF million, except where indicated
For the year ended
Income
Adjusted expected credit loss 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
amortization of goodwill and other intangible assets
KPI’s
Invested assets (CHF billion)
Net new money (CHF billion) 2
Gross margin on invested assets (bps) 3
Cost / income ratio (%) 4
Cost / income ratio before goodwill (%) 5
Cost / income ratio before goodwill and
excluding the European wealth management initiative (%) 6
Client advisors (full-time equivalents)
3,300
3,001
2,681
International Clients
Income
Invested assets (CHF billion)
Net new money (CHF billion) 2
Gross margin on invested assets (bps) 3
4,734
491
29.7
101
European wealth management initiative (part of International Clients)
Income
267
31.12.03
31.12.02
31.12.01
% change from
31.12.02
6,797
(4)
6,793
1,944
2,083
82
75
4,184
2,609
2,684
701
29.7
101
62
60
52
6,690
(26 )
6,664
1,869
2,092
93
97
4,151
2,513
2,610
642
17.7
97
62
61
53
6,990
(34 )
6,956
1,680
1,923
103
100
3,806
3,150
3,250
728
23.2
96
54
53
47
4,640
447
20.2
98
186
28
7.6
551
4,792
492
21.8
98
140
16
5.6
370
46
10.8
672
2,063
2,050
2,198
210
0.0
102
195
(2.5 )
95
236
1.4
92
31.12.03
31.12.02
31.12.01
884
2,650
37
9,176
788
2,900
54
9,399
886
3,300
8,918
2
(85)
2
4
0
(12)
(23)
1
4
3
9
4
10
2
10
3
44
64
22
1
8
7
% change from
31.12.02
12
(9)
(31)
(2)
43
1
In management accounts, adjusted expected
credit loss rather than net actual credit loss is
reported for the Business Groups (see Note 2 to
the Financial Statements).
2 Excludes interest and dividend income.
3
Income / average invested assets.
4 Operating expenses / income.
5 Operating expenses less the amortization of
goodwill and other intangible assets / income.
6 Operating expenses less the amortization of
goodwill and other intangible assets and
expenses for the European wealth management
initiative / income less income for the European
wealth management initiative.
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.
Invested assets (CHF billion)
Net new money (CHF billion) 2
Client advisors (full-time equivalents)
Swiss Clients
Income
Invested assets (CHF billion)
Net new money (CHF billion) 2
Gross margin on invested assets (bps) 3
Additional information
As at
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 7
Headcount (full-time equivalents)
Review of Business Group Performance
Wealth Management & Business Banking
Components of operating income
Wealth Management derives its operating income prin-
cipally from:
– fees for financial planning and wealth management
services;
– fees for investment management services; and
– transaction-related fees.
Wealth Management’s fees are based on the market value
of invested assets and the level of transaction-related acti-
vity. As a result, operating income is affected by such fac-
tors as fluctuations in invested assets, changes in market
conditions, investment performance and inflows and out-
flows of client funds.
Significant financial events
Invested assets (CHF billion)
There were no significant financial events
that affected this business unit in 2003, 2002
or 2001.
2003
Key performance indicators
In full-year 2003, net new money inflows totaled
CHF 29.7 billion, up 68% from CHF 17.7 bil-
lion in 2002. The excellent performance was due
to strong inflows into our European wealth man-
agement business as well as significant inflows
from clients in Asia and Eastern Europe.
Net new money (CHF billion)
30
25
20
15
10
5
0
2001
2002
2003
Invested assets, at CHF 701 billion on 31 De-
cember 2003, were up 9% from CHF 642 billion
a year earlier, mainly due to the recovery in global
equity markets during the second half of the year,
as well as the strong inflows of net new money.
That more than compensated for the 10% fall in
the US dollar against the Swiss franc in 2003,
which had a direct impact on the value of Wealth
Management’s invested assets, 37% of which are
denominated in US dollars.
The average asset base in 2003 was lower in
comparison to 2002 as asset levels were unusu-
750
500
250
0
31.12.01
31.12.02
31.12.03
International Clients
Swiss Clients
ally depressed at the beginning of the year. In
contrast, revenues increased due to higher non-
recurring income, which was positively influ-
enced by higher trading and brokerage income
and a gain on disposal of our participation in
Deutsche Börse. The gross margin on invested
assets was 101 basis points in 2003, up 4 basis
points from 97 basis points a year earlier.
Gross margin on invested assets (bps)
110
100
90
80
70
60
2001
2002
2003
The pre-goodwill cost/income ratio declined
to 60% in 2003 from 61% a year earlier, reflect-
ing higher non-recurring revenues, more than
offsetting the increased costs from rising
personnel expenses. Excluding the European
wealth management business, the cost / income
ratio fell to 52% in 2003 from 53% a year
earlier.
44
Cost / income ratio
70%
65%
60%
55%
50%
45%
40%
2001
2002
2003
As reported
Adjusted for goodwill
European wealth management
Our European wealth management business con-
tinued to make significant progress. After three
years of intense effort, the total level of invested
assets in Germany, France, UK, Spain and Italy
reached CHF 46 billion.
With a particularly good performance in the
UK and Germany, the inflow of net new money
in 2003 was CHF 10.8 billion, up 42% from the
year-earlier intake of CHF 7.6 billion. The result
reflects an annual net new money inflow rate of
39% of the underlying asset base.
Net new money European wealth management
(CHF billion)
12
10
8
6
4
2
0
2001
2002
2003
The level of invested assets reached a record
CHF 46 billion on 31 December 2003, up from
CHF 28 billion a year earlier, reflecting healthy
inflows of net new money, our acquisition of
the French business of Lloyds TSB and positive
markets.
In full-year 2003, income from our European
wealth management business was CHF 267 mil-
lion, up 44% or CHF 81 million from a year
earlier, reflecting the growing asset and client base.
In 2003, the number of client advisors
increased by 121 (including 21 client advisors
Invested assets European wealth management
(CHF billion)
50
40
30
20
10
0
31.12.01
31.12.02
31.12.03
from the French business of Lloyds TSB), bringing
the total on 31 December 2003 to 672. We remain
committed to growing our presence in our Euro-
pean target markets and will continue to invest in
qualified advisory staff at a rate determined by the
market environment and business opportunities.
Results
Wealth Management’s full-year 2003 pre-tax
profit, at CHF 2,609 million, increased 4% from
2002 on the financial market recovery in the
second half of the year, which resulted in higher
revenues. Slightly higher operating expenses
partly offset this rise, which is why the cost /
income ratio remained unchanged at 62%.
Performance before tax (CHF million)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2001
2002
2003
Operating income
Full-year 2003 total operating income was CHF
6,793 million, up 2% from CHF 6,664 million in
2002. Recurring income decreased 2% on lower
asset-based revenues, reflecting the lower average
asset base in 2003. Non-recurring income
increased 11% on the Deutsche Börse disposal
gain and as trading and brokerage revenues went
up because of higher client activity levels in the
second half of the year.
45
Review of Business Group Performance
Wealth Management & Business Banking
Operating expenses
At CHF 4,184 million, full-year operating expens-
es for 2003 were up 1% from CHF 4,151 million
a year earlier, reflecting our investments in the
European wealth management business and high-
er personnel expenses. Personnel expenses rose
4% to CHF 1,944 million in 2003 compared to a
year earlier, mainly due to higher severance pay-
ments as well as slightly higher performance-
related compensation. General and administrative
expenses in 2003, at CHF 2,083 million, were
almost unchanged from 2002, as our ongoing
tight management of costs more than offset the
investments in our European wealth management
business. Full-year depreciation was CHF 82 mil-
lion in 2003, down 12% from a year earlier
because of lower charges for information technol-
ogy equipment, which is increasingly being leased
instead of bought. Goodwill amortization was
CHF 75 million in 2003, down 23% from 2002
mainly due to the weakening of the US dollar
against the Swiss franc.
Headcount
Headcount, at 9,176 on 31 December 2003,
decreased by 223 from 31 December 2002.
Although we continued to hire client advisors,
we reduced headcount in non-client facing areas
as we continued to streamline processes and
structures. In 2003, the number of client advisors
increased to 3,300, up 10% from a year earlier.
Headcount (full-time equivalents)
10,000
9,000
8,000
7,000
6,000
new money of CHF 20.2 billion in 2002, down
by only CHF 1.6 billion from 2001 despite the
Italian tax amnesty. This excellent underlying
result in these difficult markets was due to the
continued success of our European wealth man-
agement business as well as significant inflows
from clients in Asia and the Americas.
In the year to 31 December 2002, invested
assets fell 12% to CHF 642 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 39% of Wealth Manage-
ment’s invested assets were denominated in
US dollars.
Gross margin on invested assets remained
resilient and rose by 1 basis point to 97 basis
points. Assets as well as revenues fell in 2002
from the already depressed 2001 levels.
In full-year 2002, the pre-goodwill cost /
income ratio increased from 53% in 2001 to
61% in 2002, reflecting the ongoing investment
in our European wealth management business as
well as the strong decline in asset-based revenues.
Excluding the European wealth management
business, our cost / income ratio increased from
47% in 2001 to 53% in 2002.
European wealth management
Net new money inflow into our domestic Euro-
pean network for full-year 2002 was CHF
7.6 billion, up 36% from 2001’s intake of CHF
5.6 billion. The result in 2002 reflects an annual
net new money inflow rate of 48% of the under-
lying asset base. For full-year 2002, income from
our European wealth management business was
CHF 186 million, 33% or CHF 46 million above
the 2001 level. The number of client advisors
increased in 2002 by 181, bringing the total on
31 December 2002 to 551.
31.12.01
31.12.02
31.12.03
Results
2002
Key performance indicators
In 2002, net new money inflows totaled CHF
17.7 billion, down from the 2001 result of CHF
23.2 billion. International clients invested net
Wealth Management’s full-year 2002 pre-tax prof-
it, at CHF 2,513 million, fell 20% from 2001 due
to the steep decline in asset-based revenues which
could not be fully offset by cost reductions as we
continue to invest in our European wealth man-
agement business. Personnel as well as general and
administrative expenses increased due to this
strategic initiative. The cost / income ratio rose
accordingly from 54% in 2001 to 62% in 2002.
46
Operating income
Full-year 2002 total operating income was CHF
6,664 million, down 4% from CHF 6,956 mil-
lion in 2001. Both non-recurring transaction
revenues and recurring asset-based revenues fell
from 2001.
investments. Full-year depreciation fell in 2002
by 10% to CHF 93 million because of lower
charges for information technology equipment,
which is increasingly being leased instead of
bought, while goodwill amortization was CHF
97 million, down 3% from 2001.
Operating expenses
At CHF 4,151 million, full-year operating
expenses for 2002 rose 9% from 2001, reflecting
investments in our European wealth manage-
ment business. Both personnel expenses, which
rose 11% to CHF 1,869 million, as well as gen-
eral and administrative expenses, up 9% at CHF
2,092 million, increased chiefly because of these
Headcount
Headcount, at 9,399 on 31 December 2002,
increased by 481, mainly due to the hiring of
experienced client advisors for the build-up of
the European wealth management activities.
Overall, the number of client advisors increased
by 12% to 3,001 at the end of 2002.
47
Review of Business Group Performance
Wealth Management & Business Banking
Business Banking Switzerland
Business Unit Reporting
CHF million, except where indicated
For the year ended
Income
Adjusted expected credit loss 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
amortization of goodwill and other intangible assets
KPI’s
Invested assets (CHF billion)
Net new money (CHF billion) 2
Cost /income ratio (%) 3
Cost /income ratio before goodwill (%) 4
Non-performing loans /gross loans (%)
Impaired loans /gross loans (%)
31.12.03
31.12.02
31.12.01
% change from
31.12.02
5,255
(127)
5,128
2,640
33
302
0
2,975
2,153
5,494
(286 )
5,208
2,727
159
355
0
3,241
1,967
5,792
(567 )
5,225
2,878
396
465
0
3,739
1,486
2,153
1,967
1,486
212
(5.0)
57
57
3.2
4.6
205
3.7
59
59
3.6
6.0
215
9.2
65
65
4.8
7.7
(4)
(56)
(2)
(3)
(79)
(15)
(8)
9
9
3
Additional information
As at or for the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
Deferred releases included in credit loss expense 1
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 5
Headcount (full-time equivalents)
383
622
6,100
27
17,620
240
494
5,700
38
18,442
115
544
5,850
19,220
60
26
7
(29)
(4)
1 In management accounts, adjusted expected credit loss rather than net actual credit loss is reported for the Business Groups (see Note 2 to the Financial Statements).
2 Excludes interest and dividend income.
4 Operating expenses less the amortization of goodwill and other intangible assets / 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.
3 Operating expenses / 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, operating income is affected by movements in
interest rates, fluctuations in invested assets, client activi-
ty levels, investment performance, changes in market
conditions and the credit environment.
48
Significant financial events
Impaired loans / gross loans
There were no significant financial events that
affected this business unit in 2003, 2002 or 2001.
2003
Key performance indicators
In full-year 2003, the cost / income ratio was a
record low 57%, two percentage points below
the previous year’s ratio of 59%, reflecting total
operating expenses dropping to their lowest level
since 1999.
Cost / income ratio
65%
60%
55%
50%
45%
40%
2001
2002
2003
Invested assets rose to CHF 212 billion in
2003 from CHF 205 billion a year earlier as posi-
tive market developments were only partially
offset by the weakening of the US dollar against
the Swiss franc and outflows of net new money.
Net new money was negative CHF 5.0 billion in
2003 compared to an inflow of CHF 3.7 billion
in 2002, as corporate clients continued to make
transfers from short-term deposits to current
accounts, which are not classified as invested
assets. As mentioned on page 11, we will in
future no longer classify assets from corporate
clients (except for pension funds) as invested
assets. This change will reduce invested assets by
approximately CHF 75 billion.
Business Banking Switzerland’s loan portfolio
was CHF 139 billion on 31 December 2003,
unchanged from a year earlier, as an increase in
volumes of private client mortgages was offset by
declining volumes in the corporate clients area and
a further reduction in the recovery portfolio to
CHF 6.4 billion on 31 December 2003 from CHF
8.6 billion a year earlier. This positive development
was also reflected in the key credit quality ratios:
8%
6%
4%
2%
0%
31.12.01
31.12.02
31.12.03
the non-performing loan ratio improved to 3.2%
from 3.6%, while the ratio of impaired loans to
gross loans was 4.6% compared to 6.0% in 2002.
Full-year interest income in 2003 was below
2002, mainly due to lower interest margins on
savings and cash accounts as well as lower rev-
enues from our reduced recovery portfolio. This
was partially offset by higher mortgage and
saving account volumes.
Results
Performance before tax (CHF million)
2,500
2,000
1,500
1,000
500
0
2001
2002
2003
Full-year pre-tax profit in 2003 was a record
CHF 2,153 million, up 9% from 2002. The
result was achieved despite slightly lower rev-
enues in market conditions that were difficult at
the outset of the year but improved steadily
thereafter. This performance is also evidence of
the continued tight management of our cost base,
and lower credit loss expenses reflecting the
deferred benefit of the structural improvement in
our loan portfolio in recent years. In 2003, per-
sonnel expenses, general and administrative
expenses and depreciation all reached their
lowest levels since 1999.
Operating income
Full-year total operating income was CHF
5,128 million, down slightly from 2002’s level of
49
Review of Business Group Performance
Wealth Management & Business Banking
CHF 5,208 million. Interest income declined due
to continued pressure on the margins of liability
products and the decrease in the recovery port-
folio. Trading and fee income also declined,
reflecting the difficult market environment at the
beginning of the year. These developments were
mostly offset by lower credit loss expense, which
fell to CHF 127 million in 2003, down 56% from
CHF 286 million in 2002. The latter reflects the
deferred benefit of the structural improvement in
our loan portfolio in recent years.
Operating expenses
Full-year 2003 operating expenses were CHF
2,975 million, down 8% from CHF 3,241 mil-
lion in 2002. They were at their lowest level
since 1999. Personnel expenses, at CHF 2,640
million, were down 3% from CHF 2,727 million
in 2002, mainly due to lower salaries reflecting
the 4% drop in headcount. General and admin-
istrative expenses, at CHF 33 million in 2003,
continued to drop and were 79% or CHF 126
million lower than the CHF 159 million record-
ed in 2002. This reflects our continuous efforts
to control our costs tightly. Overall, this very
low level of general and administrative expenses
is explained by the integrated business model of
UBS, through which Business Banking Switzer-
land provides a significant number of services to
other business units, mainly Wealth Manage-
ment. In accounting terms, the costs for these
services are charged to the receiving unit as
general and administrative expenses, offset by
lower general and administrative expenses in
the provider unit. Depreciation for full-year
2003 dropped to CHF 302 million from CHF
355 million in 2002 as information technology
equipment is increasingly being leased instead
of bought.
Headcount (full-time equivalents)
20,000
19,000
18,000
17,000
16,000
15,000
31.12.01
31.12.02
31.12.03
Headcount
Business Banking Switzerland’s headcount was
17,620 on 31 December 2003, a decline of 822
or 4% from 31 December 2002, reflecting our
continued investment in technology and automa-
tion, as well as the ongoing streamlining of
processes and structures.
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 partial-
ly 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
at 59%, 6 percentage points below 2001’s ratio
of 65%, reflecting the drop in total operating
expenses.
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 De-
cember 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
2001’s mainly due to lower interest margins
on savings and cash accounts as well as lower
revenues from our reduced recovery portfolio.
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-
50
agement of our cost base and lower credit loss
expenses. Personnel expenses dropped due to
lower performance-related compensation as well
as a fall in headcount while general and adminis-
trative expenses declined due to our continued
cost management initiatives.
Operating income
Full-year 2002 operating income was CHF
5,208 million, almost unchanged from 2001’s
level of CHF 5,225 million. Interest income fell
because of continued pressure on margins of
liability products. Trading and fee income also
declined, reflecting the difficult market environ-
ment, although these developments were mostly
offset by lower credit loss expense, which fell
to CHF 286 million in 2002, down 50% from
CHF 567 million in 2001. This drop reflected the
continued success in improving the quality of our
loan portfolio through the implementation of
risk-adjusted pricing and the deferred benefit of
the structural improvement in our loan portfolio
in recent years.
Operating expenses
Full-year 2002 operating expenses decreased
13% from CHF 3,739 million in 2001 to CHF
3,241 million. Personnel expenses fell 5% from
CHF 2,878 million in 2001 to CHF 2,727 mil-
lion in 2002, due to lower headcount. General
and administrative expenses, at CHF 159 mil-
lion, continued to drop and were 60% lower
than the CHF 396 million recorded in 2001. This
decrease reflected our continuous efforts to con-
trol costs as well as higher usage of services,
mainly IT, provided to other business units.
Overall, this very low level of general and
administrative expenses is explained by the inte-
grated business model of UBS, through which
Business Banking Switzerland provides a signifi-
cant number of services to other business units,
mainly Wealth Management. 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 increasingly 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.
51
Review of Business Group Performance
Global Asset Management
Global Asset Management
Strong markets in the second half of the year, net new money inflows into equities, fixed
income and alternative investment mandates and ongoing cost control measures all con-
tributed towards a 2003 pre-tax profit of CHF 332 million, up by 52% from CHF 219 million in
2002. Money market fund outflows disguised strong inflows to higher-quality asset classes.
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
amortization of goodwill and other intangible assets
KPI’s
Cost /income ratio (%) 1
Cost /income ratio before goodwill (%) 2
Institutional
Invested assets (CHF billion)
of which: money market funds
Net new money (CHF billion) 3
of which: money market funds
Gross margin on invested assets (bps) 4
Wholesale Intermediary
Invested assets (CHF billion)
of which: money market funds
Net new money (CHF billion) 3
of which: money market funds
Gross margin on invested assets (bps) 4
31.12.03
31.12.02
31.12.01
% change from
31.12.02
922
815
1,737
816
407
29
153
1,405
332
865
790
1,655
774
447
29
186
1,436
219
1,154
809
1,963
886
498
38
196
1,618
345
485
405
541
81
72
313
14
12.7
(5.0)
32
261
87
(5.0)
(23.0)
31
87
76
274
19
(1.4 )
(1.8 )
29
259
106
(6.3 )
(6.9 )
27
82
72
324
23
6.4
12.0
37
325
134
24.5
2.5
26
7
3
5
5
(9)
0
(18)
(2)
52
20
14
(26)
10
1
(18)
15
Additional information
As at
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 5
Headcount (full-time equivalents)
31.12.03
31.12.02
31.12.01
574
1,000
41
2,689
533
1,100
43
2,733
649
1,050
2,704
% change from
31.12.02
8
(9)
(5)
(2)
1 Operating expenses / operating income.
dividend income.
For details on the fair value calculation, refer to Note 32e to the Financial Statements.
4 Income / average invested assets.
2 Operating expenses less the amortization of goodwill and other intangible assets / operating income.
3 Excludes interest and
5 For informational purposes only. These pre-tax amounts have not been recorded in the Income statement.
John A. Fraser
Chairman and CEO,
Global Asset Management
52
Components of operating income
Global Asset Management generates its revenue from the
asset management services it provides to private clients,
financial intermediaries and institutional investors. Fees
charged to institutional clients and wholesale interme-
diary clients are based on the market value of invested
assets and on successful investment performance. As a
result, 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 af-
fected this Business Group in 2003, 2002 or 2001.
strong market development in the second half of
the year and strong inflows of net new money.
The increase was partly offset by the weakening
of major currencies against the Swiss franc.
2003
Key performance indicators
For 2003, the pre-goodwill cost / income ratio was
72%, an improvement of 4 percentage points from
2002. This was a result of improvements in both
operating income and operating expenses. The
recovery in equity markets experienced in the
second half of the year resulted in higher invested
asset levels and, consequently, higher asset-based
revenues. Strong inflows of net new money
(excluding lower fee money market funds), com-
bined with improved investment performance,
especially in the alternative and quantitative plat-
form, helped revenues to rise. These developments
were supported by ongoing cost control initiatives
that drove operating expenses down by 2%.
Cost/income ratio
190%
180%
170%
160%
150%
140%
2001
2002
2003
As reported
Adjusted for goodwill
Institutional
Invested assets; Institutional (CHF billion)
350
300
250
200
150
100
50
0
31.12.01
31.12.02
31.12.03
Invested assets excluding money market funds
Money market funds
For full-year 2003, net new money inflows
were CHF 12.7 billion, up significantly from the
outflows of CHF 1.4 billion recorded in 2002.
Equity mandates and alternative and quantitative
investments experienced strong inflows, partially
offset by outflows from asset allocation man-
dates and money market funds.
Net new money;
Institutional (CHF billion)
20
15
10
5
0
–5
–10
2001
2002
2003
Money market funds
Non-money market funds
Institutional invested assets totaled CHF 313 bil-
lion on 31 December 2003, up 14% from CHF
274 billion on 31 December 2002, reflecting the
The full-year 2003 gross margin was 32 basis
points, up from 29 basis points a year earlier,
reflecting higher performance fees and an
improving asset mix.
53
Review of Business Group Performance
Global Asset Management
Gross margin on invested assets;
Institutional (bps)
40
35
30
25
20
15
10
5
0
2001
2002
2003
with the CHF 6.3 billion outflow in 2002. The
money market outflow in 2003 was CHF
23.0 billion, partially offset by inflows of CHF
17.1 billion into higher-margin equity and fixed
income mandates. The outflows in money mar-
ket funds were primarily in the Americas as a
result of the launch of UBS Bank USA.
The gross margin increased to 31 basis points
in 2003 from 27 basis points in 2002, reflecting
the change in the asset mix towards higher-
margin assets.
Wholesale Intermediary
Gross margin on invested assets;
Wholesale Intermediary (bps)
Invested assets were CHF 261 billion on 31 De-
cember 2003, up by CHF 2 billion from the same
date a year earlier. The impact of adverse cur-
rency movements and the launch of UBS Bank
USA, which prompted outflows from money
market funds, nearly offset the positive effect
from rising financial markets.
For full-year 2003, the net new money out-
flow amounted to CHF 5.0 billion compared
35
30
25
20
15
10
5
0
2001
2002
2003
Invested assets; Wholesale Intermediary (CHF billion)
Money market sweep accounts
350
300
250
200
150
100
50
0
31.12.01
31.12.02
31.12.03
Invested assets excluding money market funds
Money market funds
Net new money;
Wholesale Intermediary (CHF billion)
25
20
15
10
5
0
–5
–10
–15
–20
–25
2001
2002
2003
Money market funds
Non-money market funds
The majority of money market fund assets man-
aged by our US wholesale intermediary business
represents the cash portion of private client
accounts. In 2003, we saw outflows from money
market funds of CHF 16.0 billion. The primary
reason for the outflows was the launch of UBS
Bank USA in third quarter 2003. Before the bank’s
start, cash balances of private clients in the US
were swept into our money market funds. Now,
those cash proceeds are redirected automatically
into FDIC-insured deposit accounts at UBS Bank
USA. Although there was no one-time bulk trans-
fer of client money market assets to the bank, the
funds invested in our sweep accounts are being
used to complete client transactions and will there-
fore gradually deplete over time. Such funds are,
however, a low-fee component of invested assets.
Investment capabilities and performance
After three years of disappointing returns, equity
markets posted convincing gains in 2003 as the
global economy improved and corporate earn-
ings recovered. Cyclical industries, such as the
technology sector, led the rally. Fixed income
54
Composite
1 Year
3 Years
5 Years
10 Years
Global Equity Composite vs. MSCI World Equity (Free) Index
Global Bond Composite vs. Citigroup World Government Bond Index
Global Securities Composite vs. Global Securities Markets Index
–
+
+
+
+
+
+
–
+
+
–
+
Annualized
returns were more modest and constrained by
expectations of higher interest rates.
Within our core investment management plat-
form, relative equity performance was mixed in
2003 as a whole. Our actively managed Global
Equity composite lagged the benchmark across
these periods, reflecting our underweight posi-
tion in highly cyclical technology stocks, where
market prices already reflected robust future
earnings growth. Despite that, the long-term
track record of our Global Equity composite
remains strong.
Our Global Bond composite performed well
in 2003, due to both our currency and our inter-
est rate strategies.
Our asset allocation and currency strategy
made another positive contribution in full-year
2003. Portfolios benefited from an overweight
position in equities relative to bonds and from
being underweight in the US dollar, whose value
steadily depreciated throughout the year.
In the alternative and quantitative business,
strategies performed well across the board in
2003. All key equity-oriented strategies recorded
positive returns, and core strategies based on
macro-economic themes performed strongly over
the full year. Across the multi-manager groups,
strategies with exposure to the equity markets
performed exceptionally well, while more mar-
ket-neutral strategies also recorded solid returns.
Based on the latest available return informa-
tion, the global real estate business achieved strong
returns in the US, Switzerland, the UK and Japan.
Results
Global Asset Management reported a pre-tax
profit of CHF 332 million in 2003, an increase of
52% from 2002’s pre-tax profit of CHF 219 mil-
lion. The recovery in the second half of the year in
equity market valuations, coupled with strong
inflows into alternative investments, equities
and fixed income mandates, resulted in higher
invested asset levels and, consequently, increased
asset-based revenues. Performance-related fees,
(+) above benchmark; (–) under benchmark. All after fees.
especially in the alternative and quantitative busi-
ness, showed significant improvement over 2002.
Ongoing cost control initiatives that systemati-
cally reduced operating expenses contributed sig-
nificantly to improved profitability. General and
administrative expenses decreased due to lower
IT and premises costs. Amortization expenses fell
as the goodwill of some assets became fully amor-
tized. These developments were partially offset by
higher incentive-based compensation resulting
from the increase in operating income. Accord-
ingly, the cost / income ratio dropped from 87% in
2002 to 81% in 2003.
Performance before tax (CHF million)
400
300
200
100
0
2001
2002
2003
Operating income
In full-year 2003, operating income was CHF
1,737 million, up 5% from CHF 1,655 million,
reflecting the recovery in equity market valua-
tions in the second half of 2003, coupled with
strong inflows into alternative investments, equi-
ties and fixed income mandates, resulting in
higher invested asset levels and consequently
higher asset-based revenues. Performance-related
fees, especially in the alternative and quantitative
business, showed significant improvement over
2002. Institutional revenues increased to CHF
922 million in full-year 2003 from CHF 865 mil-
lion in 2002, driven by both the improved mar-
ket environment and the strong asset inflows,
especially in the alternative and quantitative
business. For full-year 2003, Wholesale Inter-
mediary revenues, at CHF 815 million, increased
from CHF 790 million in 2002, reflecting the
55
Review of Business Group Performance
Global Asset Management
recovery in the equity markets and an improve-
ment in the asset mix, both of which had a posi-
tive impact on our asset-based revenues.
Operating expenses
For full-year 2003, operating expenses declined to
CHF 1,405 million from CHF 1,436 million in
2002, primarily due to cost-saving initiatives and
lower goodwill amortization. Personnel expenses
were CHF 816 million in 2003, 5% above the
prior year, due to higher incentive-based compen-
sation reflecting the improved revenue. General
and administrative expenses fell to CHF 407 mil-
lion in 2003 from CHF 447 million in 2002. The
decrease is a result of ongoing cost-saving initia-
tives, resulting in a significant reduction of IT and
premises expenses. These savings were partly
offset by non-recurring operational provisions.
Depreciation, at CHF 29 million, remained un-
changed compared with a year earlier. Amortiza-
tion of goodwill decreased to CHF 153 million in
2003 from CHF 186 million a year earlier. The
drop was due both to the full amortization of the
goodwill of some businesses and to the US dollar’s
drop against the Swiss franc.
Headcount
Headcount was 2,689 on 31 December 2003,
down by 44 from 2,733 on 31 December 2002.
The decrease of 2% primarily reflects cost-
saving efforts in the core investment management
business.
Headcount (full-time equivalents)
3,000
2,500
2,000
1,500
1,000
500
0
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.
Institutional
Institutional invested assets, at CHF 274 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 2002, as well as the drop of the
US dollar against the Swiss franc over 2002.
For full-year 2002, the outflow of net new
money was CHF 1.4 billion. This was a disap-
pointing figure compared to the net new money
inflow of CHF 6.4 billion recorded in 2001.
Strong inflows into equity mandates were more
than offset by outflows from alternative asset
and fixed income mandates.
Full-year 2002 gross margin was 29 basis
points, a decrease of 8 basis points from 2001
due to lower performance fees and a lower pro-
portion of assets in alternative investments.
Wholesale Intermediary
Invested assets stood at CHF 259 billion on
31 December 2002, down from CHF 325 billion
on 31 December 2001. The decline was primarily
the result of negative currency impacts and
declining markets as well as negative net new
money.
For full-year 2002, the outflow of net new
money was CHF 6.3 billion compared to an
inflow of CHF 24.5 billion in 2001. The outflow
was largely due to CHF 6.9 billion in money mar-
ket funds, primarily in the Americas.
The gross margin rose to 27 basis points in
2002 from 26 basis points in 2001 thanks to a
shift in the asset mix towards higher-margin asset
classes.
31.12.01
31.12.02
31.12.03
Results
2002
Key performance indicators
For 2002, the pre-goodwill cost / income ratio
was 76%, up 4 percentage points from 2001. The
Global Asset Management reported for full-year
2002 a pre-tax profit of CHF 219 million, a
decrease of 37% from 2001’s pre-tax profit of
CHF 345 million. The declines in equity markets
experienced throughout 2002 resulted in lower
invested asset levels and, subsequently, lower
asset-based revenues. These developments were
partially offset by ongoing initiatives to control
56
costs. Over 2002, personnel expenses decreased
due to a decline in incentive compensation while
general and administrative expenses fell due to
lower IT and premises expenditures. However,
the drop in expenses could not compensate for the
drop in revenues. Therefore, the cost / income
ratio increased from 82% in 2001 to 87% in
2002.
Operating income
In full-year 2002, operating income fell 16%, to
CHF 1,655 million, primarily due to the declines
in financial markets during 2002 feeding through
to asset-based revenues. The decline was also due
to the US dollar’s weakening against the Swiss
franc. Institutional revenues fell to CHF 865 mil-
lion in full-year 2002 from CHF 1,154 million in
2001 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, Whole-
sale Intermediary revenues, at CHF 790 million,
decreased from CHF 809 million in 2001, reflect-
ing the difficult market environment in 2002.
Operating expenses
For full-year 2002, operating expenses declined
to CHF 1,436 million from CHF 1,618 million in
2001, primarily due to cost-saving initiatives.
Personnel expenses were CHF 774 million in
2002, 13% less than in 2001, reflecting lower
incentive-based compensation partially offset by
higher severance expenses. General and adminis-
trative expenses fell to CHF 447 million from
CHF 498 million in the same period, reflecting a
weaker US dollar, and lower project-related
expenses. Over 2002, depreciation decreased
from CHF 38 million to CHF 29 million as some
assets became fully depreciated. Amortization
declined 5% to CHF 186 million, reflecting the
drop in the US dollar against the Swiss franc.
Headcount
Headcount, at 2,733 on 31 December 2002, was
up from 2,704 on 31 December 2001. The
increase of 1% primarily reflected the reclas-
sification from contractors to employees at
O’Connor.
57
Review of Business Group Performance
Investment Bank
Investment Bank
In 2003, the Investment Bank as a whole posted pre-tax profit of CHF 3,889 million. The
Investment Banking & Securities business unit’s pre-tax profit was CHF 4,078 million, up 30%
from 2002. Private Equity reported a pre-tax loss of CHF 189 million in 2003 compared to a
loss of CHF 1,761 million in 2002. This improvement reflects much lower levels of writedowns
and a number of successful divestments.
Business Group Reporting
CHF million, except where indicated
For the year ended
Income
Adjusted expected credit loss 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
amortization of goodwill and other intangible assets
Additional information
Cost / income ratio (%) 2
Cost / income ratio before goodwill (%) 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 5
31.12.03
31.12.02
31.12.01
% change from
31.12.02
14,120
(139)
13,981
7,357
2,130
327
278
10,092
3,889
12,498
(128 )
12,370
7,878
2,378
382
364
11,002
1,368
14,715
(112 )
14,603
8,354
2,650
456
402
11,862
2,741
4,167
1,732
3,143
71
70
0.9
4
143
12,700
391
88
85
0.5
3
133
13,100
582
81
78
0.1
1
109
14,300
13
9
13
(7)
(10)
(14)
(24)
(8)
184
141
33
8
(3)
(32)
1 In management accounts, adjusted expected credit loss rather than net actual credit loss is reported for the Business Groups (see Note 2 to the Financial Statements).
2 Operating expenses / income.
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.
3 Operating expenses less the amortization of goodwill and other intangible assets / income.
John P. Costas
Chairman and CEO,
Investment Bank
58
Investment Banking & Securities
Business Unit Reporting
CHF million, except where indicated
For the year ended
Investment Banking
Equities
Fixed Income, Rates and Currencies
Income
Adjusted expected credit loss 1
Total operating income
Personnel expenses 2
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
amortization of goodwill and other intangible assets
KPI’s
Compensation ratio (%) 3
Cost / income ratio (%) 4
Cost / income ratio before goodwill (%) 5
Non-performing loans /gross loans (%)
Impaired loans /gross loans (%)
Average VaR (10-day 99%)
31.12.03
31.12.02
31.12.01
% change from
31.12.02
1,703
4,894
7,600
14,197
(139)
14,058
7,308
2,071
323
278
9,980
4,078
1,915
5,625
6,560
14,100
(128 )
13,972
7,784
2,314
381
364
10,843
3,129
2,541
6,422
6,624
15,587
(112 )
15,475
8,258
2,586
454
402
11,700
3,775
4,356
3,493
4,177
51
70
68
0.9
2.2
354
55
77
74
1.6
3.2
275
53
75
72
2.6
5.4
252
(11)
(13)
16
1
9
1
(6)
(11)
(15)
(24)
(8)
30
25
29
Additional information
As at or for the year ended
Deferred releases included in credit loss expense 1
Regulatory equity allocated (average)
Fair value of employee stock options granted 6
Headcount (full-time equivalents)
31.12.03
31.12.02
31.12.01
(45)
12,250
390
15,500
(2 )
12,550
567
15,964
38
13,600
15,562
% change from
31.12.02
(2)
(31)
(3)
1 In management accounts, adjusted expected credit loss rather than net actual credit loss is reported for the Business Groups (see Note 2 to the Financial Statements).
2 Includes retention payments in respect of the PaineWebber acquisition. 2002: CHF 54 million, 2001: CHF 46 million. There were no retention payments in 2003.
3 Personnel expenses / income.
6 For infor-
mational 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 Operating expenses less the amortization of goodwill and other intangible assets / income.
4 Operating expenses / income.
59
Review of Business Group Performance
Investment Bank
Components of operating income
The Investment Banking & Securities unit generates oper-
ating 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
loan portfolio; and
– gains and losses on market making, proprietary, and
arbitrage positions.
As a result, operating income is affected by movements in
market conditions, interest rate swings, the level of trad-
ing 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.
Significant financial events
There were no significant financial events
that affected this business unit in 2003, 2002 or
2001.
Our compensation ratio in 2003 was 51%,
down from 55% in 2002. The payout levels of
annual performance-related payments are driven
by the revenue mix across business areas and are
managed in line with market levels.
2003
Key performance indicators
In 2003, we performed strongly despite the diffi-
cult market environment at the start of the year.
As the year progressed, and the overall environ-
ment improved, we were able to profit from
market opportunities, capturing market share in
most of our businesses.
The pre-goodwill cost / income ratio decreased
to 68% in 2003 from 74% in 2002. The fall
reflects a slight increase in revenues, driven by
our Fixed Income, Rates and Currencies busi-
ness, set against the drop in operating expenses,
which reflected our disciplined cost control. Both
revenues and expenses were affected by the
weakening of major currencies, mainly the US
dollar, against the Swiss franc.
Cost / income ratio
Compensation ratio
60%
55%
50%
45%
40%
2001
2002
2003
Market risk, as measured by average 10-day
99% confidence Value at Risk (VaR), increased
to CHF 354 million in 2003 from CHF 275 mil-
lion a year earlier, reflecting primarily the
expanding activity level in the Fixed Income,
Rates and Currencies business area.
Average VaR (10-day 99%, CHF million)
400
350
300
250
200
150
100
50
0
2001
2002
2003
2001
2002
2003
As reported
Adjusted for goodwill
Total loans were CHF 55 billion on 31 De-
cember 2003, down 11% from CHF 62 billion a
year earlier, mainly due to the drop in the US
80%
70%
60%
50%
40%
60
dollar against the Swiss franc. Continued suc-
cessful recovery efforts led the ratio of impaired
loans to total loans to fall from 3.2% on 31
December 2002 to 2.2% at the end of 2003. The
non-performing loans to total loans ratio
declined from 1.6% to 0.9% in the same period.
Impaired loans / gross loans
6%
5%
4%
3%
2%
1%
0%
Results
31.12.01
31.12.02
31.12.03
Pre-tax profit was CHF 4,078 million in full-year
2003, up 30% from a year earlier. This result was
achieved despite the weakening of the US dollar
against the Swiss franc and reflects strong per-
formances in all our businesses. In particular, the
Fixed Income, Rates and Currencies business,
gaining 16% from a year earlier, posted a record
result, reflecting the breadth of our capabilities
and our expanding franchise. At the same time,
costs were tightly controlled. Both personnel
expenses and general and administrative ex-
penses fell because of currency fluctuations.
Excluding the impact of currency movements,
personnel expenses rose in 2003, reflecting
improved revenues, while general and adminis-
trative expenses remained largely unchanged
from the previous year’s level. Accordingly, our
cost / income ratio fell to 70% in 2003 from 77%
a year earlier.
Performance before tax (CHF million)
5,000
4,000
3,000
2,000
1,000
0
2001
2002
2003
Operating income
Full-year 2003 revenues were CHF 14,197 mil-
lion, up 1% from CHF 14,100 million a year
earlier. Investment Banking revenues, at CHF
1,703 million in 2003, dropped 11% from CHF
1,915 million a year earlier. Excluding the cur-
rency impact, revenues actually rose, reflecting
our increased share of the investment banking fee
pool. According to Freeman, we ranked fourth
for investment banking fees in 2003 with a mar-
ket share of 5.6%, up from seventh and a market
share of 4.8% a year earlier. Equities revenues in
full-year 2003 also reflected negative currency
impacts, falling to CHF 4,894 million from CHF
5,625 million in 2002. Excluding currency fluc-
tuations, equity results improved, reflecting
strong performances in the equity finance, pro-
prietary and primary businesses. In full-year
2003, the Fixed Income, Rates and Currencies
business posted a record result. Revenues, at
CHF 7,600 million in 2003, were up 16% from
CHF 6,560 million a year earlier. Revenues
increased in all businesses, but the gains were
particularly strong in Fixed Income, Principal
Finance, Mortgages and Foreign Exchange. The
positive result was somewhat offset by negative
revenues of CHF 678 million relating to Credit
Default Swaps (CDS) hedging existing credit
exposure in the loan book.
Income by business area (CHF million)
16,000
12,000
8,000
4,000
0
2001
2002
2003
Investment Banking
Equities
Fixed Income, Rates and Currencies
Operating expenses
Total operating expenses dropped 8% to CHF
9,980 million in 2003, mainly reflecting the
weakening of the US dollar against the Swiss
franc, although our continued tight management
of costs helped. Personnel expenses in 2003, at
CHF 7,308 million, fell 6% from 2002. Excluding
61
Review of Business Group Performance
Investment Bank
currency fluctuations, personnel expenses rose,
reflecting higher performance-related compensa-
tion, which increased along with revenues, and
higher severance expenses. Full-year general and
administrative expenses were CHF 2,071 million
in 2003, down 11% from 2002’s CHF 2,314 mil-
lion. Excluding the effect of currencies, expenses
rose slightly, reflecting provisions for vacant
space, higher professional fees in all businesses
and an increase in administration expenses.
Depreciation declined 15% to CHF 323 million
in 2003 from CHF 381 million in 2002. The
decrease is mainly due to lower depreciation on
workstations, servers and other equipment.
Amortization of goodwill and other intangibles,
at CHF 278 million in 2003, fell 24% from CHF
364 million a year earlier, reflecting the full
amortization of the goodwill of various business-
es in 2003.
Headcount
Headcount, at 15,500 on 31 December 2003, fell
3% from a year earlier. The drop reflects ongo-
ing, regular reviews of our cost structure and
staffing needs, taking into account productivity
gains and the automation of services. That was
partially offset by the acquisition of ABN AMRO’s
prime brokerage business and continued invest-
ment in specific areas, including our US investment
banking and Fixed Income, Rates and Currencies
businesses.
Headcount (full-time equivalents)
16,000
15,000
14,000
13,000
12,000
11,000
10,000
31.12.01
31.12.02
31.12.03
2002
Key performance indicators
Our performance in 2002 reflected the world-
wide downturn in market conditions. However,
as a result of our strong client franchise and con-
tinuing efforts to manage costs, results proved
relatively resilient.
Over 2002, the pre-goodwill cost / income
ratio increased slightly to 74% from 72% in
2001.
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.
Average Value at Risk (VaR) for the Invest-
ment Bank increased from CHF 252 million in
2001 to CHF 275 million in 2002, remaining
within the normal ranges.
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
partially offset by repayments from European
multinationals, reflecting the continued reduc-
tion of our non-core commercial lending activi-
ties, 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.
Results
The business unit Investment Banking &
Securities reported 2002 pre-tax profit of CHF
3,129 million, a decrease of 17% from 2001,
reflecting difficult economic conditions, parti-
cularly for the investment banking and equities
businesses. This was partially offset by the strong
result of our Fixed Income, Rates and Currencies
business. Over 2002, overall expenses dropped
by 7%, reflecting lower personnel expenses
driven by a reduction in incentive compensation,
as well as the success of our continued cost
containment initiatives. Our cost / income ratio
increased from 75% in 2001 to 77% in 2002.
Operating income
Full-year 2002 revenues of CHF 14,100 million
were 10% lower than in 2001. Investment Bank-
ing revenues for the full-year 2002 dropped by
25% from CHF 2,541 million to CHF 1,915 mil-
lion in 2002, due to much lower corporate activ-
62
ity, which translated into a 22% drop in the glob-
al fee pool compared to 2001. Equities revenues
for the full-year 2002 were also lower than in
2001, down from CHF 6,422 million to CHF
5,625 million, reflecting falling indices world-
wide and much lower market activity. Full-year
2002 primary revenues remained flat, because of
market share gains in the US and in Asia, which
compensated for the drop in overall market activ-
ity. In full-year 2002, Fixed Income, Rates and
Currencies revenues decreased 1% to CHF 6,560
million, primarily due to reductions in our Inter-
est Rates and Foreign Exchange business lines
and much lower revenues from our non-core
businesses. This was nearly offset by the substan-
tial growth in our Emerging Markets and Princi-
pal Finance businesses. Revenues related to gains
in credit default swaps hedging credit exposures
in the loan book also positively impacted the
result. Our Foreign Exchange business increased
volumes and spreads compared to 2001.
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 restructur-
ing of our Energy trading business. The under-
lying reduction of 9% from 2001’s expense levels
reflected the continuing success of our cost con-
tainment initiatives accentuated by the drop of
the US dollar against the Swiss franc. In total,
personnel expenses in 2002, at CHF 7,784 mil-
lion, were 6% lower than 2001, mainly driven by
a reduction in incentive compensation in line
with lower revenues and the weaker US dollar.
Full-year 2002 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, par-
ticularly travel, advertising costs and profession-
al fees. In full-year 2002, depreciation declined to
CHF 381 million from CHF 454 million in 2001,
reflecting our cost control initiatives, which
helped to lower charges for new computer work-
stations and other IT-related equipment. Amorti-
zation of goodwill and other intangibles fell 9%
for the full-year 2002, reflecting the fact that var-
ious 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 the Fixed Income,
Rates and Currencies area as well as the transfer
of the prime brokerage and Australian private
clients businesses from Wealth Management
USA.
63
Review of Business Group Performance
Investment Bank
Private Equity
Business Unit Reporting
CHF million, except where indicated
For the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
Total operating income
(77)
(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
amortization of goodwill and other intangible assets
49
59
4
0
112
(189)
94
64
1
0
159
96
64
2
0
162
(1,761 )
(1,034 )
(189)
(1,761 )
(1,034 )
KPI’s
Value creation (CHF billion)
(0.3)
(1.4 )
(1.4 )
95
(48)
(8)
300
(30)
89
89
79
As at
Investment (CHF billion) 1
Additional information
As at
Portfolio fair value (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 2
Headcount (full-time equivalents)
31.12.03
31.12.02
31.12.01
% change from
31.12.02
2.3
3.1
5.0
(26)
31.12.03
31.12.02
31.12.01
% change from
31.12.02
2.9
450
1
50
3.8
550
15
73
5.6
700
128
(24)
(18)
(93)
(32)
1 Historical cost of investments made, less divestments and impairments.
statement. For details on the fair value calculation, refer to Note 32e to the Financial Statements.
2 For informational purposes only. These pre-tax amounts have not been recorded in the Income
Components of operating income
Private Equity’s primary source of operating income is
capital 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 Private Equity 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 operating income.
64
Significant financial events
Results
There were no significant financial events that
affected this business unit in 2003, 2002 or 2001.
2003
Key performance indicators
The level of our private equity investments was
CHF 2.3 billion on 31 December 2003, a decline
of 26% from CHF 3.1 billion on 31 December
2002 reflecting writedowns made on direct invest-
ments and third-party funds, as well as successful
exits and currency fluctuations. Unfunded com-
mitments fell by 29% to CHF 1.5 billion on 31 De-
cember 2003 from CHF 2.1 billion a year ago.
Investment (CHF billion)
6
5
4
3
2
1
0
31.12.01
31.12.02
31.12.03
The fair value of the portfolio on 31 Decem-
ber 2003 was CHF 2.9 billion, down from CHF
3.8 billion on 31 December 2002, reflecting
divestments, value reductions on existing invest-
ments and currency fluctuations.
The level of net unrealized gains was CHF
0.6 billion on 31 December 2003, down from
CHF 0.8 billion on 31 December 2002, partially
reflecting successful divestments.
Value creation (CHF billion)
2001
2002
2003
0.0
–0.4
–0.8
–1.2
–1.6
In full-year 2003, Private Equity posted a pre-tax
loss of CHF 189 million – a marked improve-
ment on the pre-tax loss of CHF 1,761 million in
2002, reflecting lower levels of writedowns and a
number of successful exits. Writedowns in 2003
totaled CHF 353 million, compared to CHF
1.7 billion in 2002.
Total operating income for 2003 was negative
CHF 77 million, compared to negative CHF
1,602 million in 2002. The significant improve-
ment in performance was primarily driven by a
sharp fall in investment writedowns.
Operating expenses were CHF 112 million in
2003, 30% lower than a year earlier. Personnel
expenses in 2003 were CHF 49 million, down
from CHF 94 million in 2002, reflecting the drop
in headcount as well as lower incentive-based
compensation. General and administrative ex-
penses fell to CHF 59 million in 2003 from CHF
64 million in 2002 due to lower professional fees
as well as the drop of the US dollar against the
Swiss franc. This was partially offset by one-time
costs for vacant premises.
Performance before tax (CHF million)
2001
2002
2003
0
–250
–500
–750
–1,000
–1,250
–1,500
–1,750
–2,000
Headcount
Headcount levels dropped to 50 employees on
31 December 2003, down from 73 on 31 Decem-
ber 2002, reflecting the reduction of our port-
folio and the restructuring of some regional
investment teams.
Change in disclosure from 2004
From first quarter 2004 onwards, we will no
longer report Private Equity as a stand-alone
business unit. Results from the private equity
business will be reported as a separate revenue
65
Review of Business Group Performance
Investment Bank
line in the income statement of the Investment
Bank – just as we currently do for all the major
business areas. We will continue to disclose
Private Equity’s key performance indicators –
portfolio size, fair value, and the value created.
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 reflected writedowns made
on direct investments and third-party funds, as
well as successful executed exits. In full-year
2002, writedowns included in operating income
totaled CHF 1.7 billion, up from CHF 1.1 billion
in 2001.
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 unreal-
ized gains was CHF 0.8 billion on 31 December
2002, up from CHF 0.6 billion on 31 December
2001.
Results
Full-year 2002 results for our Private Equity
business unit reflected continued tough economic
conditions, impacting private equity valuations
across a range of sectors, a factor that was com-
pounded by the prolonged downturn in all major
equity markets. The challenging economic envi-
ronment adversely affected many of the compa-
nies in the portfolio while the continued hostile
climate for divestments restricted capital gains
from exit opportunities. Against this back-
ground, our Private Equity business unit posted a
pre-tax loss in 2002 of CHF 1,761 million, 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 led to deteriorating valuations in all mar-
kets and industries. The level of writedowns in
the portfolio was therefore high and there were
few divestment opportunities in 2002.
Personnel expenses in 2002 were CHF 94 mil-
lion, down from CHF 96 million in 2001. This
reflected falling headcount and lower perform-
ance-related incentive payments. General and
administrative expenses remained unchanged at
CHF 64 million.
66
Review of Business Group Performance
Wealth Management USA
Wealth Management USA
Joseph J. Grano, Jr.
Chairman, Wealth Management USA
Mark B. Sutton
CEO, Wealth Management USA
In 2003, Wealth Management USA’s pre-tax loss was CHF 5 million compared to a pre-tax loss
of CHF 1,800 million in 2002, when the value of the PaineWebber brand was written down.
Before acquisition costs, pre-tax profit increased 5% to CHF 664 million in 2003 from CHF
632 million a year earlier. On the same basis, but in US dollars, the operating result rose 21%.
Business Group Reporting
CHF million, except where indicated
For the year ended
Income
Adjusted expected credit loss 2
Total operating income
Personnel expenses 3
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets
Total operating expenses
31.12.03
31.12.02
31.12.01
% change from
31.12.02
5,1901
(8)
5,182
3,712
988
151
336
5,187
5,561
(13 )
5,548
4,245
1,263
149
1,6914
7,348
6,391
(18 )
6,373
5,019
1,441
124
502
7,086
(7)
(38)
(7)
(13)
(22)
1
(80)
(29)
Business Group performance before tax
(5)
(1,800 )
(713 )
(100)
Business Group reporting excluding acquisition costs and significant financial events
Total operating income
Add back: Net goodwill funding 6
Operating income excluding acquisition costs
Total operating expenses
Retention payments
Amortization of goodwill and other intangible assets
Operating expenses excluding acquisition costs
Business Group performance before tax and
excluding acquisition costs
5,0215
231
5,252
5,187
(263)
(336)
4,588
5,548
390
5,938
6,1147
(351 )
(457 )
5,306
6,373
468
6,841
7,086
(436 )
(502 )
6,148
664
632
693
(9)
(41)
(12)
(15)
25
26
(14)
5
1 Includes significant financial event: gain on disposal of Correspondent Services Corporation of CHF 161 million.
loss rather than net actual credit loss is reported for the Business Groups (see Note 2 to the Financial Statements).
PaineWebber acquisition.
gain on disposal of Correspondent Services Corporation of CHF 161 million.
ding equity allocated.
2 In management accounts, adjusted expected credit
3 Includes retention payments in respect of the
5 Excludes significant financial event:
6 Goodwill and intangible asset-related funding, net of risk-free return on the correspon-
4 Includes significant financial event: writedown of PaineWebber brand name of CHF 1,234 million.
7 Excludes significant financial event: writedown of PaineWebber brand name of CHF 1,234 million.
67
Review of Business Group Performance
Wealth Management USA
Wealth Management USA (continued)
KPI’s
CHF million, except where indicated
For the year ended
Invested assets (CHF billion)
Net new money (CHF billion) 1
Interest and dividend income (CHF billion) 2
Gross margin on invested assets (bps) 3
Gross margin on invested assets excluding
acquisition costs and SFEs (bps) 4
Cost / income ratio (%) 5
Cost / income ratio excluding acquisition costs and SFEs (%) 6
Recurring fees 7
Financial advisors (full-time equivalents)
31.12.03
31.12.02
31.12.01
% change from
31.12.02
634
21.1
15.8
86
87
100
87
1,927
7,766
584
18.5
17.9
82
88
132
89
2,199
8,857
769
33.2
21.5
84
90
111
90
2,366
8,718
9
(12)
5
(1)
(12)
(12)
Additional information
As at
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 8
Headcount (full-time equivalents)
31.12.03
31.12.02
31.12.01
690
5,700
62
18,016
650
7,450
73
19,563
841
8,550
20,413
% change from
31.12.02
6
(23)
(15)
(8)
1 Excludes interest and dividend income.
and less significant financial events / average invested assets.
intangible assets, retention payments and significant financial events / income, add back net goodwill funding and less significant financial events.
portfolio management and fund distribution, account-based and advisory fees.
Income statement. For details on the fair value calculation, refer to Note 32e to the Financial Statements.
4 Income, add back net goodwill funding
6 Operating expenses less the amortization of goodwill and other
7 Asset-based fees for
8 For informational purposes only. These pre-tax amounts have not been recorded in the
2 For purposes of comparison with US peers.
3 Income / average invested assets.
5 Operating expenses / income.
Components of operating income
Wealth Management USA 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, oper-
ating income is affected by such factors as fluctuations in
invested assets, change in market conditions, investment
performance and inflows and outflows of client funds, and
investor activity levels.
68
Significant financial events
Net new money (CHF billion)
The Business Group was affected by one signifi-
cant financial event in 2003 and one in 2002:
– In second quarter 2003, Wealth Management
USA realized a pre-tax gain of CHF 161 mil-
lion from the sale of its Correspondent Ser-
vices Corporation (CSC) business.
– In fourth quarter 2002, we recorded a non-
cash pre-tax writedown of CHF 1,234 million
of the value of the PaineWebber brand that
was held as an intangible asset on our balance
sheet. The writedown followed a strategic
decision announced in November 2002 to
move all our businesses to the single UBS
brand.
2003
Key performance indicators
Wealth Management USA had CHF 634 billion
in invested assets on 31 December 2003, up 9%
from CHF 584 billion on 31 December 2002.
The increase was due to inflows of net new
money and the effects of market appreciation.
In US dollar terms, invested assets were 21%
higher on 31 December 2003 than they were a
year earlier.
Invested assets (CHF billion)
800
700
600
500
400
300
200
100
0
31.12.01
31.12.02
31.12.03
We continue to report consistently strong
inflows of net new money. In 2003, inflows were
CHF 21.1 billion, 14% above the CHF 18.5 bil-
lion result reported for 2002. Including interest
and dividends, net new money in 2003 was CHF
36.9 billion, up from CHF 36.4 billion in 2002.
The gross margin on invested assets was
86 basis points for full-year 2003, up from
82 basis points in 2002. The gross margin on
35
30
25
20
15
10
5
0
2001
2002
2003
invested assets before acquisition costs (goodwill
and intangible asset amortization, net goodwill
funding costs and retention payments) was
87 basis points, down from 88 basis points
in 2002.
Gross margin on invested assets (bps)
100
90
80
70
60
50
2001
2002
2003
As reported
Adjusted for significant financial events and excluding acquisition costs
The cost / income ratio before acquisition costs
and significant financial events was 87% for full-
year 2003, compared to 89% in 2002. The
improvement in the cost / income ratio reflects our
continuous cost control as well as the excellent
performance of our core private client business.
Cost/income ratio
150%
125%
100%
75%
50%
2001
2002
2003
As reported
Adjusted for significant financial events and excluding acquisition costs
69
Review of Business Group Performance
Wealth Management USA
In 2003, recurring fees were CHF 1,927 mil-
lion, down from CHF 2,199 million a year ear-
lier, reflecting the weakening of the US dollar
against the Swiss franc. Excluding the impact of
currency fluctuations, recurring fees were up 1%
in 2003 from 2002, mainly as a result of in-
creased fees from mutual fund products as well as
rising asset-based fees that reflected higher asset
levels in managed account products. In addition,
the gain was accentuated by higher recurring fees
in the municipal securities business.
Recurring fees (CHF million)
2,500
2,000
1,500
1,000
500
0
2001
2002
2003
The number of financial advisors decreased
to 7,766 in 2003 from 8,857 a year earlier due to
the curtailment of our training program and an
increase in attrition rates among less experienced
and less productive financial advisors.
Financial advisors (full-time equivalents)
9,000
8,000
7,000
6,000
5,000
Results
Because our business is almost entirely con-
ducted in US dollars, comparisons of 2003 and
2002 results are affected by the depreciation of
the US dollar versus the Swiss franc.
In full-year 2003, Wealth Management USA
reported a pre-tax loss of CHF 5 million com-
pared to a loss of CHF 1,800 million a year
earlier. Both 2003 and 2002 results included the
significant financial events highlighted at the
beginning of this section. After their exclusion
and before acquisition costs, profit was CHF
664 million in 2003, up from CHF 632 million in
2002. In US dollar terms, profit in 2003 was
21% above that in 2002. This represents the best
result since PaineWebber became part of UBS,
reflecting higher recurring fee gains and im-
proved transactional revenues. Client activity
increased, with daily average trades rising 3%
above their 2002 level. In addition, conditions in
the municipal securities market remained
extremely buoyant, with new issues hitting an
all-time high this year. At the same time, we con-
tinued to benefit from cost-saving initiatives
started when we became a part of UBS. Accord-
ingly, the cost / income ratio dropped to 100% in
2003 from 132% in 2002. Excluding acquisition
costs, the ratio fell to 87% in 2003 from 89%
in 2002.
Performance before tax (CHF million)
1,000
500
0
2001
2002
2003
0
–500
–1,000
–1,500
–2,000
31.12.01
31.12.02
31.12.03
As reported
Adjusted for significant financial events and excluding acquisition costs
In the early part of the year, political, economic
and financial uncertainty adversely affected
investor activity. Conditions, however, started to
improve over the course of second quarter 2003
and continued to do so as the year progressed.
The UBS Index of Investor Optimism rose
steadily in 2003, reaching its highest level in
21 months by December.
Operating income
In 2003, total operating income was CHF
5,182 million compared to CHF 5,548 million
in 2002. Before acquisition costs and excluding
the sale of our CSC business, total operating
income was CHF 5,252 million, 12% lower com-
pared to a year earlier. Excluding the currency
effect, operating income actually increased by
2% from 2002. This increase was due to higher
70
recurring fees as well as higher transactional
revenue, reflecting the improved market condi-
tions. Further, revenues were accentuated by
much stronger revenues from our municipal
securities business.
Operating expenses
Total operating expenses decreased 29% to CHF
5,187 million in 2003 from CHF 7,348 million in
2002. Excluding acquisition costs and the write-
down of the PaineWebber brand in 2002, the
drop was 14%, mainly due to the weakening of
the US dollar against the Swiss franc. Excluding
currency effects, operating expenses were 1%
lower, reflecting lower general and administrative
expenses which were nearly offset by higher per-
compensation. Personnel
formance-related
expenses dropped 13% from CHF 4,245 million
in 2002 to CHF 3,712 million in 2003. Excluding
the effects of currency translation, personnel
expenses were actually slightly higher than in
2002, reflecting higher performance-related com-
pensation due to an increase in revenue partially
offset by lower retention payments. General and
administrative expenses fell 22% from CHF
1,263 million in 2002 to CHF 988 million in
2003. Excluding the impact of currency fluc-
tuations, general and administrative expenses
dropped 10% compared to 2002 due to the strict
cost management discipline that we have exerted
in the past three years. Operational provisions
also fell as 2002 included the equity research
settlement charge of CHF 21 million. The drop
was further accentuated by the sale of the CSC
business. Depreciation increased CHF 2 million
to CHF 151 million in 2003 from CHF 149 mil-
lion in 2002. Excluding currency movements, the
increase in depreciation of 16% was due to higher
charges for broker workstations purchased in
2003. Goodwill and other intangible amortiza-
tion decreased from CHF 1,691 million in 2002
to CHF 336 million in 2003. This decrease was
due to the prior-year writedown of the PaineWeb-
ber brand name, and the sale of CSC. Excluding
the writedown and the sale of CSC, amortization
charges dropped by 26% as a result of the weak-
ening US dollar against the Swiss franc.
Headcount
Wealth Management USA’s headcount decreased
8% during 2003 to 18,016, reflecting our con-
tinued cost management initiatives, curtailment
of the trainee program and the sale of CSC. Non-
financial advisor headcount was down by 456 or
4% compared to the end of 2002.
Headcount (full-time equivalents)
21,000
20,000
19,000
18,000
17,000
16,000
15,000
31.12.01
31.12.02
31.12.03
2002
Key performance indicators
At the end of 2002, Wealth Management USA
had CHF 584 billion in invested assets, com-
pared to CHF 769 billion on 31 December 2001.
This decline of 24% was partly due to the effect
of the US dollar’s weakening against the Swiss
franc. Excluding the impact of currency fluctua-
tions, invested assets fell 8% during full-year
2002, 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 reflected 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.
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 business which had a record
result in 2002.
The cost / income ratio before acquisition
costs was 89% for full-year 2002, compared to
90%
in the
cost / income ratio was a direct result of cost man-
in 2001. The
improvement
71
Review of Business Group Performance
Wealth Management USA
agement initiatives implemented in 2002, among
them reductions in non-financial advisor head-
count, professional fees, advertising and office-
related costs.
In 2002, recurring fees were CHF 2,199 mil-
lion compared to CHF 2,366 million in 2001
because of the weakening of the US dollar against
the Swiss franc. Excluding currency translation
effects, recurring fees rose 2% in 2002 from
2001. The increase was due to higher account-
based fees and higher recurring fees in the munic-
ipal securities business. These increases were
offset by lower asset-based fees, which fell in line
with the decline in asset levels.
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 attri-
tion rates among less experienced and less pro-
ductive financial advisors.
Results
In 2002, political, economic and financial uncer-
tainty continued to adversely affect investor
activity. The UBS Index of Investor Optimism
dropped significantly during 2002, with a low
in October. Daily average client transaction
volumes 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 full-year 2002, Wealth Management
USA reported a pre-tax loss of CHF 1,800 mil-
lion in 2002 compared to a loss of CHF 713 mil-
lion in 2001. The drop was mainly due to the
writedown of the PaineWebber brand. Perfor-
mance before tax and acquisition costs showed a
profit of CHF 632 million in 2002 compared to
CHF 693 million in 2001. Excluding the effects
of currency 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 follow-
ing further market drops, strict cost management
discipline enabled us to improve our full-year
2002 operating performance. Excluding the
USD 15 million (CHF 21 million) equity research
settlement charge, full-year 2002 results in USD
terms would have improved by 6% over 2001.
The cost / income ratio dropped from 111% in
2001 to 110% in 2002.
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 the Investment Bank and the closure of the
Japanese domestic private client business. These
declines were partially offset by increased rev-
enues in the municipal securities business.
Operating expenses
Total operating expenses increased 4% to CHF
7,348 million in 2002 from CHF 7,086 million in
2001. Excluding the brand writedown and the
effects of the weaker US dollar against the Swiss
franc, operating expenses declined 5% from
2001, reflecting lower performance-driven com-
pensation and lower retention expenses. In addi-
tion, cost management initiatives implemented
during the course of 2002, the transfer of the
prime brokerage business to the Investment Bank
and the closure of the Japanese domestic private
client businesses helped to reduce overall ex-
penses. Personnel expenses dropped 15% from
CHF 5,019 million in 2001 to CHF 4,245 mil-
lion in 2002. Excluding the effects of currency
translation, personnel expenses were 7% lower
than 2001, reflecting lower performance-driven
compensation due to a decline in revenues, a fall
in non-financial advisor headcount, the transfer
of the prime brokerage business to the Invest-
ment Bank, 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 transfer of prime
brokerage business to the Investment Bank and
the closure of the Japanese private client busi-
nesses. This was partially offset by the equity
research settlement charge of CHF 21 million.
72
Depreciation increased CHF 25 million to CHF
149 million in 2002 from CHF 124 million in
2001. Excluding currency movements, the in-
crease in depreciation of 32% was due to higher
technology equipment charges. Goodwill and
other intangible amortization increased from
CHF 502 million in 2001 to CHF 1,691 million
in 2002. This increase was entirely due to the
writedown of the PaineWebber brand name.
Excluding the writedown, amortization charges
would have dropped as a result of the weakening
US dollar against the Swiss franc.
Headcount
Wealth Management USA’s headcount decreased
4% during 2002 to 19,563, reflecting our con-
tinued cost management initiatives. Non-finan-
cial advisor 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 the
Investment Bank. At the same time we expanded
our financial advisor headcount by 139, reflect-
ing our continued aim to extend the reach of
our business.
73
Review of Business Group Performance
Corporate Center
Corporate Center
Business Group Reporting
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
Total operating expenses
Business Group performance before tax
31.12.03
31.12.02
31.12.01
% change from
31.12.02
989
162
1,151
762
445
473
101
1,781
(630)
2,4291
247
2,676
1,031
733
513
122
2,399
277
1,761
233
1,994
1,011
723
428
123
2,285
(291 )
1,994
2,285
(291 )
(168 )
198
297
86
5.4
(59)
(34)
(57)
(26)
(39)
(8)
(17)
(26)
(53)
(26)
(9)
(12)
20
(2)
Business Group reporting excluding significant financial events
Total operating income
Total operating expenses
Business Group performance before tax
Business Group performance before tax and
amortization of goodwill and other intangible assets
Private Banks & GAM
Performance before tax
Performance before tax and amortization of goodwill
and other intangible assets
Invested assets (CHF billion)
Net new money (CHF billion) 5
1,151
1,781
(630)
(529)
208
289
84
7.2
2,4493
2,399
50
172
2294
3274
70
4.2
Headcount (full-time equivalents)
1,672
1,702
1,908
Additional information
As at
Regulatory equity allocated (average)
Fair value of employee stock options granted 6
Total headcount (full-time equivalents)
31.12.03
31.12.02
31.12.01
9,150
18
2,878
10,250
37
2,887
9,300
3,040
% change from
31.12.02
(11)
(51)
0
1 Includes significant financial events: gain on disposal of Hyposwiss of CHF 155 million and gain on disposal of Klinik Hirslanden of CHF 72 million.
2 In order to show
the relevant Business Group performance over time, adjusted expected credit loss rather than the net actual credit loss expenses are reported for all Business Groups. The
difference between the adjusted expected credit loss and the net actual credit loss expenses recorded at Group level is reported in the Corporate Center (see
3 Excludes significant financial events: gain on disposal of Hyposwiss of CHF 155 million and gain on disposal of Klinik Hirslanden
Note 2 to the Financial Statements).
6 For informa-
of CHF 72 million.
tional 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 significant financial event: gain on disposal of Hyposwiss of CHF 155 million.
5 Excludes interest and dividend income.
74
Significant financial events
– In fourth quarter 2002, we realized a pre-tax
gain of CHF 72 million from the sale of Klinik
Hirslanden, a private hospital group.
– In first quarter 2002, we realized a pre-tax
gain of CHF 155 million from the sale of pri-
vate bank Hyposwiss.
There were no significant financial events in
Corporate Center in 2003 or 2001.
2003
Results
Corporate Center recorded a pre-tax loss of
CHF 630 million in full-year 2003, down from
the CHF 277 million profit reported a year
earlier.
Operating income
The credit loss expense or recovery booked in
Corporate Center represents the difference
between the expected
loss-based amounts
charged to the business units and the actual
credit loss expense recognized in the Financial
Statements. UBS recorded an actual credit loss
expense of CHF 116 million in 2003, compared
to a credit loss expense of CHF 206 million in
2002. In both periods, actual credit loss expense
was lower than the sums charged to the business
units, leading to a credit loss recovery of CHF
162 million in 2003 and CHF 247 million in
2002 in the Corporate Center.
Total operating income dropped by 57% from
CHF 2,676 million in 2002 to CHF 1,151 mil-
lion in 2003. Excluding the divestment gains of
CHF 227 million from Hyposwiss and Hirslan-
den in 2002, the drop was 53%. This was main-
ly due to a fall-off in income of Klinik Hirslan-
den, and lower gains from financial investments.
It also reflected lower interest income from our
treasury activities following a decrease in rev-
enues from our invested equity as we continued
to buy back shares and experienced low interest
rates. The impact of falling interest rates was par-
tially offset by the diversification of our invested
equity into currencies other than Swiss francs
which led to higher returns and increased curren-
cy hedging revenues. Results also reflected the
CHF 85 million fall in credit loss recoveries.
Operating expenses
Total operating expenses fell to CHF 1,781 mil-
lion in 2003, down from CHF 2,399 million
a year earlier. Personnel expenses declined 26%
from CHF 1,031 million in 2002 to CHF
762 million in 2003. The drop was due to the
deconsolidation of Klinik Hirslanden, but was
partially offset by higher expenses for perform-
ance-related compensation. In the same period,
general and administrative expenses fell to CHF
445 million from CHF 733 million. This was
mainly due to lower legal provisions, the disposal
of Klinik Hirslanden and lower project-related
expenses, partially offset by higher branding
costs. Depreciation dropped from CHF 513 mil-
lion in 2002 to CHF 473 million in 2003. The
decrease is mainly due to the absence of depreci-
ation expenses from Klinik Hirslanden and lower
depreciation in the Private Banks & GAM unit.
At CHF 101 million in 2003, amortization of
goodwill and other intangibles dropped by 17%
from CHF 122 million in 2002, reflecting the
drop of the US dollar against the Swiss franc.
Headcount
Corporate Center headcount, excluding Private
Banks & GAM, was 1,206 on 31 December
2003, an increase of 21 from the 1,185 on
31 December 2002. The increase was mainly
due to the first-time consolidation of Hotel
Widder as well as an increase in our human
resources and risk functions. This was nearly
offset by a decline in the number of trainees, a
transfer of some employees to the Business
Groups and lower headcount in the Chief Com-
munication Officer area.
Private Banks & GAM
Invested assets in Private Banks & GAM totaled
CHF 84 billion on 31 December 2003, up from
CHF 70 billion on 31 December 2002, reflecting
strong net new money inflows, and positive finan-
cial markets as well as the acquisition of Banque
Notz Stucki S.A. by Ferrier Lullin & Cie S.A.,
which was completed in December 2003.
Net new money was CHF 7.2 billion in 2003,
up from CHF 4.2 billion in 2002, driven by
excellent inflows into GAM.
Pre-tax profit, at CHF 208 million in 2003,
dropped by 9% from CHF 229 million a year
75
Review of Business Group Performance
Corporate Center
earlier, mainly reflecting higher legal provisions,
as well as restructuring costs related to the
merger of Cantrade, Bank Ehinger and Armand
von Ernst to form Ehinger & Armand von Ernst.
Headcount Private Banks & GAM
Headcount decreased by 30 to 1,672 on 31 De-
cember 2003 from 1,702 a year earlier, mainly
due to the rationalization within the individual
private banks. This was partially offset by the
acquisition of Banque Notz Stucki S.A. as well as
an increase in headcount at GAM due to the
growth of the business.
Headcount (full-time equivalents)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
31.12.01
31.12.02
31.12.03
Private Banks & GAM
Corporate Center excluding Private Banks & GAM
2002
Results
Corporate Center recorded a pre-tax gain of
CHF 277 million in 2002, compared to the pre-
tax loss of CHF 291 million in 2001.
Operating income
We recorded an actual credit loss of CHF
206 million in 2002 and CHF 498 million in
2001. The difference between expected loss-
based amounts charged to the business units and
the actual credit loss expense recognized in the
Financial Statements is booked as a 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 business units, resulting in a credit loss recov-
ery in Corporate Center of CHF 247 million,
compared to a credit loss recovery of CHF
233 million in 2001.
Full-year 2002 total operating income in-
creased by 34% from CHF 1,994 million in 2001
to CHF 2,676 million in 2002. This was prima-
rily due to the abovementioned divestment gains
of Klinik Hirslanden and Hyposwiss, higher
interest income at Group Treasury, gains from
the sale of financial investments and an unreal-
ized gain on derivatives used to economically
hedge interest rate risk related to structured notes
issued. These developments, however, were
partially offset by writedowns on financial
investments.
Operating expenses
Total operating expenses were CHF 2,399 mil-
lion in 2002, 5% higher than in 2001. Over full-
year 2002, personnel expenses increased by 2%
from CHF 1,011 million in 2001 to CHF 1,031
million in 2002, mainly reflecting higher expens-
es at Klinik Hirslanden, although that was par-
tially offset by lower performance-related com-
pensation. General and administrative expenses
for 2002, at CHF 733 million, were CHF 10 mil-
lion higher than in 2001. This was mainly due to
higher provisions for legal cases, advertising
expenditures and higher expenses at Klinik Hirs-
landen. At CHF 513 million in 2002, deprecia-
tion increased by 20% compared to 2001. This
was mainly due to higher software depreciation,
which was previously capitalized, as well as high-
er depreciation levels for Klinik Hirslanden.
Headcount
Corporate Center headcount, excluding Private
Banks & GAM, increased 5% during 2002 to
1,185 at 31 December 2002, reflecting new hires
in Human Resources and Controller areas as well
as transfers of staff from the Business Groups.
Private Banks & GAM
Invested assets were CHF 70 billion on 31 De-
cember 2002, down from CHF 86 billion a year
earlier, reflecting the drop in equity markets in
2002.
Net new money was CHF 4.2 billion in 2002,
slightly down from CHF 5.4 billion a year earlier.
The slight drop reflects the much more difficult
market environment in 2002 compared to a year
earlier.
Pre-tax profit increased from CHF 198 mil-
lion in 2001 to CHF 384 million in 2002.
Excluding the divestment gains of CHF 155 mil-
lion of Hyposwiss and after goodwill, the
76
increase was CHF 31 million or 16%. The
adjusted operating income was down CHF
73 million due to generally weaker income as a
result of unfavorable market conditions. On the
other hand, expenses were CHF 104 million
lower as a result of rigid cost control. The
decline in revenues and expenses includes the
divestment of Hyposwiss (two months of busi-
ness in 2002).
Headcount Private Banks & GAM
Headcount in Private Banks & GAM decreased
by 206 during 2002 to 1,702 at 31 December
2002, mainly reflecting the sale of Hyposwiss.
77
78
Financial Statements
79
Financial Statements
Table of Contents
Financial Statements
Table of Contents
Report of the Group Auditors
Financial Statements
UBS Income Statement
UBS Balance Sheet
UBS Statement of Changes in Equity
UBS 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 Due from Banks and Loans
Non-Performing Due from Banks and 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
80
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
Pension and Other Post-Retirement Benefit Plans
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
Sales of Financial Assets in Securitizations
Post–Balance Sheet Events
Significant Subsidiaries and Associates
Invested Assets and Net New Money
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
41
131
131
131
133
134
134
134
134
135
135
135
137
139
139
139
142
143
145
147
151
151
152
153
154
154
155
158
158
159
163
163
164
165
178
81
82
82
83
84
86
88
88
101
105
106
106
107
108
108
108
109
110
110
111
111
112
113
114
115
118
118
119
120
121
121
121
123
123
123
125
126
Financial Statements
Report of the Group Auditors
81
Financial Statements
Financial Statements
UBS 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)
Diluted earnings per share (CHF)
Note
31.12.03
31.12.02
31.12.01
% change from
31.12.02
3
3
4
3
5
6
7
14
15
21
22
8
8
40,159
(27,860)
12,299
(116)
12,183
17,345
3,883
561
33,972
17,231
6,086
1,364
943
25,624
8,348
1,618
6,730
(345)
6,385
5.72
5.61
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
2.87
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
3.78
0
(5)
17
(44)
18
(5)
(30)
0
(7)
(14)
(10)
(62)
(13)
84
139
74
4
81
96
95
82
UBS Balance Sheet
CHF million
Note
31.12.03
31.12.02
% change from
31.12.02
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
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
3,584
31,667
213,932
320,587
461,772
84,334
212,504
5,139
6,218
1,616
7,659
11,529
25,459
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
1,386,000
1,181,118
4,794
3,652
127,153
53,278
415,863
143,957
93,646
347,358
13,673
120,237
31,316
83,178
36,870
366,858
106,453
81,282
306,876
15,331
129,411
12,339
1,346,481
1,138,598
22
4,073
3,529
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
946
6,938
(983)
36,725
(8,180)
35,446
1,005
12,638
(159 )
32,638
(7,131 )
38,991
Total liabilities, minority interests and shareholders’ equity
1,386,000
1,181,118
Total subordinated liabilities
9,301
10,102
(16)
(2)
54
9
24
3
0
(39)
(4)
129
(3)
(16)
184
17
31
53
45
13
35
15
13
(11)
(7)
154
18
15
(6)
(45)
(518)
13
(15)
(9)
17
(8)
83
Financial Statements
UBS Statement of Changes in Equity
CHF million
For the year ended
31.12.03
31.12.02
31.12.01
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)
Cancellation of second trading line treasury shares (2002 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
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)
Cancellation of second trading line treasury shares (2002 Program)
Balance at the end of the year
1,005
2
(61)
946
12,638
92
(324)
(5,468)
6,938
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
(849)
(795)
Subtotal – balance at the end of the year
(1,644)
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
(108)
285
(340)
22
946
Subtotal – balance at the end of the year
805
3,589
6
(2,509 )
(81 )
4,444
12
(683)
(184)
1,005
3,589
14,408
157
282
(2,209 )
20,885
80
(239)
(2,502)
(3,816)
12,638
14,408
(769 )
(80 )
(849 )
1,035
(144 )
635
(600 )
20
946
(687)
(82)
(769)
0
1,5773
(139)
47
(461)
11
1,035
0
(380)3
(316)
237
(459)
(193)
24,191
(61)3
24,130
4,973
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
116
(4)
(256)
(11 )
214
(459 )
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
Balance at the end of the year
Treasury shares, at cost
Balance at the beginning of the year
Acquisitions
Disposals
Cancellation of second trading line treasury shares (2000 Program)
Cancellation of second trading line treasury shares (2001 Program)
Cancellation of second trading line treasury shares (2002 Program)
Balance at the end of the year
Total shareholders’ equity
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 per share
to shareholders which reduced the par value
from CHF 2.80 to CHF 0.80 per share. A divi-
dend of CHF 2.00 per share was paid out on
23 April 2003. There was no capital repayment
by par value reduction in 2003.
2
Included are gains and losses from match-fund-
ing of net investments in foreign entities as
follows: CHF 93 million net gain for 2003, CHF
849 million net gain for 2002 and CHF 43 mil-
lion net loss for 2001.
3 Opening adjustments to reflect the adoption
of IAS 39 (see Note 1: Summary of Significant
Accounting Policies).
84
(144)
(983)
(256 )
(159 )
32,638
29,103
29,103
3,535
32,638
6,385
(2,298)
36,725
(7,131)
(8,424)
1,846
5,529
(8,180)
35,446
32,638
29,103
(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 Statement of Changes in Equity (continued)
Shares issued
For the year ended
Balance at the beginning of the year
Issue of share capital
Cancellation of second trading line
treasury shares (2000 Program)
Cancellation of second trading line
treasury shares (2001 Program)
Cancellation of second trading line
treasury shares (2002 Program)
Number of shares
% change from
31.12.03
31.12.02
31.12.01
31.12.02
1,256,297,678
2,719,166
1,281,717,499
3,398,869
1,333,139,187
3,843,661
(2)
(20)
(55,265,349 )
(28,818,690 )
(75,970,080)
Balance at the end of the year
1,183,046,764
1,256,297,678
1,281,717,499
(6)
Treasury shares
For the year ended
31.12.03
31.12.02
31.12.01
31.12.02
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)
Cancellation of second trading line
treasury shares (2002 Program)
97,181,094
116,080,976
(25,931,298)
41,254,951
110,710,741
(25,965,908 )
55,265,349
162,818,045
(121,563,094)
136
5
0
(55,265,349 )
(28,818,690 )
(75,970,080)
Balance at the end of the year
111,360,692
97,181,094
41,254,951
15
During the year a total of 75,970,080 shares
acquired under the second trading line buyback
program 2002 were cancelled. At 31 December
2003, a maximum of 6,871,752 shares can be
issued against the exercise of options from for-
mer 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 111,360,692 treasury
shares, 56,707,000 shares (CHF 4,266 million)
were acquired under the second trading line
buyback program 2003 and are earmarked for
cancellation. The Board of Directors will pro-
pose to the Annual General Meeting on 15 April
2004 to reduce the outstanding number of
shares and the share capital by the number of
shares purchased for cancellation. All issued
shares are fully paid.
85
Financial Statements
Financial Statements
UBS 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 and 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 treasury share contract 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 1
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 and 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
31.12.03
31.12.02
31.12.01
6,385
3,535
4,973
1,364
943
116
(123)
514
(63)
1,521
2,460
206
(7 )
(509 )
986
1,614
1,323
498
(72)
292
513
42,921
(22,382 )
27,306
(101,381)
(52,264)
38,594
(16,100)
65,413
18,188
(1,104)
3,403
(428)
834
(1,376)
123
2,317
1,470
(14,737)
(6,810)
2
0
(2,298)
23,644
(13,615)
755
(278)
(13,337)
(524)
(8,988)
82,344
73,356
3,584
40,599
29,173
73,356
(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
82,344
116,259
4,271
46,183
31,890
82,344
20,990
69,938
25,331
116,259
1 Includes issuance of trust preferred securities of CHF 372 million for the year ended 31 December 2003 and CHF 1,291 million for the year ended 31 December 2001.
2 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial investments. CHF 6,430 million, CHF 10,475 million and CHF
29,895 million were pledged at 31 December 2003, 31 December 2002 and 31 December 2001, respectively.
86
UBS Statement of Cash Flows (continued)
Significant non-cash investing and financing activities
CHF million
For the year ended
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
Provisions for reinstatement costs
Property and equipment
31.12.03
31.12.02
31.12.01
0
0
0
0
0
0
0
137
53
18
63
3
718
15
2,322
0
0
0
0
0
0
0
0
0
87
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 ac-
counted for using the uniting of interests
method of accounting.
The consolidated financial statements of
UBS (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 4 Febru-
ary 2004 the Board of Directors approved them
for issue.
b) Use of estimates in the preparation of
Financial Statements
In preparing the Financial Statements, manage-
ment is required to make estimates and assump-
tions that affect reported income, expenses,
assets, liabilities and disclosure of contingent
assets and liabilities. Use of available informa-
tion and application of judgement are inherent
in the formation of estimates. Actual results in
the future could differ from such estimates and
the differences may be material to the Financial
Statements.
c) Consolidation
The Financial Statements comprise those of the
parent company (UBS AG), its subsidiaries and
certain special-purpose entities, presented as a
single economic entity. The effects of intra-
group transactions are eliminated in preparing
the Financial Statements. Subsidiaries and spe-
cial-purpose entities which are directly or indi-
rectly controlled by the Group are consolidated.
Subsidiaries acquired are consolidated from the
date control is transferred to the Group. Sub-
sidiaries 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 capaci-
ty are not assets of the Group and are not
reported in the Financial Statements.
Equity and net income attributable to minor-
ity interests are shown separately in the Balance
sheet and Income statement, respectively.
Investments in associates in which UBS has a
significant influence are accounted for under
the equity method of accounting. Significant
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 tempo-
rary because the investments are acquired and
held exclusively with a view to their subsequent
disposal, are recorded as Financial investments.
The Group sponsors the formation of com-
panies, which may or may not be directly or
indirectly owned subsidiaries, for the purpose
of asset securitization transactions and struc-
tured debt issuance, and to accomplish certain
narrow and well defined objectives. These com-
panies may acquire assets directly or indirectly
from UBS or its affiliates. Some of these compa-
nies 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
relationship between the Group and the compa-
ny indicates that the company is controlled by
the Group. Certain transactions of consolidated
entities meet the criteria for derecognition of
88
financial assets. Derecognition of a financial
asset takes place when the Group loses control
of the contractual rights that comprise the
financial asset, which is normally the case when
the asset is sold, or all the cash flows attribu-
table to the asset are passed through to an inde-
pendent third party. These transactions do not
affect the consolidation status of an entity.
d) Foreign currency translation
Foreign currency transactions are recorded at
the rate of exchange on the date of the transac-
tion. At the balance sheet date, monetary assets
and liabilities denominated in foreign currencies
are reported using the closing exchange rate.
Exchange differences arising on the settlement
of transactions at rates different from those at
the date of the transaction, and unrealized for-
eign exchange differences on unsettled foreign
currency monetary assets and liabilities, are
recognized in the income statement.
Unrealized exchange differences on non-
monetary financial assets (investments in equity
instruments) are a component of the change in
their entire fair value. For a non-monetary
financial asset classified as held for trading,
unrealized exchange differences are recognized
in the income statement. For non-monetary
Financial investments, which are classified as
available-for-sale, unrealized exchange differ-
ences are recorded directly in Shareholder’s
equity until the asset is sold.
When preparing consolidated financial state-
ments, assets and liabilities of foreign entities
are translated at the exchange rates at the bal-
ance sheet date, while income and expense items
are translated at weighted average rates for the
period. Differences resulting from the use of
closing 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) Segment reporting
UBS 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 segment
information.
Segment income, segment expenses and seg-
ment performance include transfers between
business segments and between geographic
segments. Such transfers are conducted at arm’s
length.
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 includ-
ed in Trading portfolio assets and Financial
investments.
g) Fee income
UBS earns fee income from a diverse range of
services it provides to its customers. Fee income
can be divided into two broad categories:
income earned from services that are provided
over a certain period of time, for which cus-
tomers are generally billed on an annual or
semi-annual basis, and income earned from
providing transaction-type services. Fees earned
from services that are provided over a certain
period of time are recognized ratably over the
service period. Fees earned from providing
transaction-type services are recognized when
the service has been completed. Fees or compo-
nents of fees that are performance linked are
recognized when the performance criteria are
fulfilled.
The following fee income is predominantly
earned from services that are provided over a
period of time: investment fund fees, fiduciary
fees, custodian fees, portfolio and other man-
agement and advisory fees, insurance-related
fees, credit-related fees and commission in-
come. Fees predominantly earned from provid-
ing transaction type services include underwrit-
ing fees, corporate finance fees, and brokerage
fees.
h) Securities borrowing and lending
Securities borrowing and securities lending
transactions are generally entered into on
a collateralized basis, with securities pre-
dominantly advanced or received as collateral.
Transfer of the securities themselves, whether
in a borrowing / lending transaction or as collat-
eral, is not reflected on the balance sheet unless
the risks and rewards of ownership are also
transferred. If cash collateral is advanced or
received, securities borrowing and lending
activities are recorded at the amount of cash
89
Financial Statements
Notes to the Financial Statements
collateral advanced (Cash collateral on securi-
ties borrowed) or received (Cash collateral on
securities lent).
UBS monitors the market value of the securi-
ties borrowed and lent on a daily basis and pro-
vides or requests additional collateral in accor-
dance with the underlying agreements.
Fees and interest received or paid are recog-
nized on an accrual basis and recorded as inter-
est income or interest expense.
i) Repurchase and reverse repurchase
transactions
Securities purchased under agreements to resell
(reverse repurchase agreements) and securities
sold under agreements to repurchase (repur-
chase agreements) are generally treated as col-
lateralized financing transactions. In reverse
repurchase agreements, the cash advanced,
including accrued interest, is recognized on the
balance sheet as Reverse repurchase agree-
ments. In repurchase agreements, the cash
received, including accrued interest, is recog-
nized on the balance sheet as Repurchase agree-
ments.
Securities received under reverse repurchase
agreements and securities delivered under
repurchase agreements are not recognized on or
derecognized from the balance sheet, unless
control of the contractual rights that comprise
these securities is relinquished. UBS monitors
the market value of the securities 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
agreements is recognized as interest income
or interest expense over the life of each agree-
ment.
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 mar-
ket paper, other debt instruments, including
traded loans, equity instruments and precious
metals which are owned by the Group (“long”
positions). Trading portfolio liabilities consist
of obligations to deliver trading securities such
as 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 active markets do not exist.
Gains and losses realized on disposal or
redemption and unrealized gains and losses
from changes in the fair value of trading port-
folio assets or liabilities are reported as Net
trading income. Interest and dividend income
and expense on trading portfolio assets or lia-
bilities 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) any unrealized profits
and losses arising from revaluing that contract
to fair value in the income statement. Sub-
sequent to the trade date, when the transaction
is consummated (settlement date) a resulting
financial asset or liability is recognized on the
balance sheet at the fair value of the considera-
tion given or received plus or minus the change
in fair value of the contract since the trade date.
When the Group becomes party to a sales con-
tract of a financial asset classified in its trading
portfolio, it derecognizes 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 or dealer price quotations from
active markets, valuation models (using as-
sumptions based on market 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 in the short term, which are
recorded as Trading portfolio assets. A partici-
pation in a loan from another lender is consid-
ered 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 available-for-sale, or as
Trading portfolio assets, as appropriate.
90
Loans originated by the Group are recog-
nized 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 subse-
quently 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 origina-
tion, re-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 effective interest rate
method. Fees received for commitments 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 syn-
dicated loan are credited to commission income.
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
commitment such as a letter of credit, a guaran-
tee, a commitment to extend credit, or other
credit product.
An allowance for credit losses 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
credit loss is reported in Other liabilities. Addi-
tions to the allowances and provisions for cred-
it 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
collect 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
financially responsible guarantors; and, where
applicable, the realizable value of any collateral.
The estimated recoverable amount is the
present value of expected future cash flows,
which may result from restructuring or liquida-
tion. Impairment is measured and allowances
for credit losses are established for the differ-
ence between the carrying amount and the esti-
mated recoverable amount.
If there are indications of significant prob-
able losses in the portfolio that have not been
specifically identified, allowances for credit
losses would also be provided for on a port-
folio 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.
All impaired claims are reviewed and ana-
lyzed at least annually. Any subsequent changes
to the amounts and timing of the expected
future cash flows compared to the prior esti-
mates 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 estab-
lished 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.
A loan is classified as non-performing when
the contractual payments of principal and / or
interest are in arrears for 90 days or more,
bankruptcy proceedings have been initiated or
concessionary terms have been granted in
restructuring procedures.
Country-specific: Where, in management’s
opinion, it is probable that some claims may
be affected by systemic crisis, transfer restric-
tions or non-enforceability, specific country
allowances for probable losses are established.
They are based on country-specific scenarios,
91
Financial Statements
Notes to the Financial Statements
taking into consideration the nature of the indi-
vidual exposures, but excluding those amounts
covered by counterparty-specific allowances.
m) Securitizations
UBS securitizes various consumer and commer-
cial financial assets, which generally results in
the sale of these assets to special-purpose enti-
ties, which, in turn issue securities to investors.
Financial assets are partially or wholly derecog-
nized when the Group gives up control of the
financial asset or portions thereof.
Interests in the securitized financial assets
may be retained in the form of senior or subor-
dinated tranches, interest-only strips or other
residual interests (“retained interests”). Re-
tained interests are primarily recorded in Trad-
ing portfolio assets and carried at fair value.
The determination of fair values of retained
interests 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 manage-
ment’s best estimates of critical assumptions
which may include credit losses, discount rates,
yield curves and other factors.
Gains or losses on securitization depend in
part on the carrying amount of the transferred
financial assets, allocated between the financial
assets derecognized and the retained interests
based on their relative fair values at the date of
the transfer. Gains or losses on securitization
are recorded in Net trading income.
n) Financial investments
Financial investments are classified as available-
for-sale and recorded on a settlement date basis.
Available-for-sale financial investments are
instruments which, in management’s opinion,
may be sold in response to or in anticipation of
needs for liquidity or changes in interest rates,
foreign exchange rates or equity prices. Finan-
cial investments consist of money market paper,
other debt instruments and equity instruments,
including private equity investments.
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 income
taxes, until such investments are sold, collected
or otherwise disposed of, or until such invest-
ment is determined to be impaired. On disposal
of an available-for-sale investment, the accumu-
lated unrealized gain or loss included in Share-
holders’ equity is transferred to net profit or
loss for the period and reported in Other
income. Gains and losses on disposal are deter-
mined 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.
The determination of fair values of available-
for-sale financial investments is generally based
on quoted market prices in active markets,
dealer price quotations or discounted expected
cash flows using market rates commensurate
with the credit quality and maturity of the
investment, or is based upon review of the in-
vestee’s financial results, condition and pros-
pects including comparisons to similar com-
panies 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 finan-
cial investment is considered impaired if its cost
exceeds the recoverable amount. For non-quot-
ed equity investments, the recoverable amount
is determined by applying recognized valuation
techniques. The standard method applied is
based on the multiple of earnings observed in
the market for comparable companies. Manage-
ment may adjust valuations determined in this
way based on its judgement. For quoted finan-
cial investments, the recoverable amount is
determined by reference to the market price.
They are considered impaired if objective evi-
dence indicates that the decline in market price
has reached such a level that recovery of the cost
value cannot be reasonably expected within the
foreseeable future.
o) Property and equipment
Property and equipment includes own-used
properties, investment properties, leasehold im-
provements, IT, software and communication,
and other machines and equipment.
Own-used property is defined as property
held by the Group for use in the supply of
services or for administrative purposes whereas
investment property is defined as property held
92
to earn rentals and / or for capital appreciation.
If a property of the Group includes a portion
that is own-used 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 the por-
tions of the property can be sold separately they
are accounted for as own-used property and
investment property. If the portions can not be
sold separately, the whole property is classified
as own-used property unless the portion used by
the bank is minor. The classification of proper-
ty is reviewed on a regular basis to account for
major changes in its usage.
Leasehold improvements are investments
made to customize buildings and offices occu-
pied under operating lease contracts to make
them suitable for the intended purpose. The
estimated reinstatement costs to bring a leased
property into its original condition at the end
of the lease, if required, is capitalized as part of
the total leasehold improvements costs. At the
same time, a corresponding liability is recog-
nized to reflect the obligation incurred. Rein-
statement costs are recognized in profit and
loss through depreciation of the capitalized
leasehold improvements over their estimated
useful life.
Software development costs are capitalized
when they meet certain criteria relating to iden-
tifiability, 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 equip-
ment on the balance sheet.
Property and equipment is carried at cost less
accumulated depreciation and accumulated
impairment losses. Property and equipment is
periodically reviewed for impairment.
Property and equipment is depreciated on a
straight-line basis over its estimated useful life
as follows:
Properties, excluding land
Not exceeding 50 years
Leasehold improvements
Residual lease term,
but not exeeding 10 years
Other machines and equipment Not exceeding 10 years
IT, software and communication
Not exceeding 5 years
the Group has decided to dispose of, and
foreclosed property are defined as Properties
held for resale and recorded in Other assets.
They are carried at the lower of cost or recover-
able value.
For investment property carried at cost less
accumulated depreciation, the investment prop-
erty’s fair value and details of how fair value
is determined are disclosed in Note 14. UBS
employs internal real estate experts who deter-
mine the fair value of investment property by
applying recognized valuation techniques. In
cases where prices of recent market transactions
of comparable properties are available, fair
value is determined by reference to these trans-
actions.
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 sep-
arately identifiable intangible items arising from
acquisitions and certain purchased trademarks
and similar items.
Goodwill and other intangible assets are rec-
ognized on the balance sheet at cost determined
at the date of acquisition and are amortized
using the straight-line method 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 esti-
mated 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 writedown is made
if the carrying amount exceeds the recoverable
amount.
q) Income taxes
Income tax payable on profits is recognized as
an expense based on the applicable tax laws in
each jurisdiction in the period in which profits
arise. The tax effects of income tax losses avail-
able for carry-forward are recognized as a
deferred tax asset if it is probable that future
taxable profit will be available against which
those losses can be utilized.
Property formerly own-used or leased to
third parties under an operating lease which
Deferred tax liabilities are recognized for
temporary differences between the carrying
93
Financial Statements
Notes to the Financial Statements
amounts of assets and liabilities in the balance
sheet and their amounts as measured for tax
purposes, which will result in taxable amounts
in future periods. Deferred tax assets are recog-
nized for temporary differences which will
result in deductible amounts in future periods,
but only to the extent it is probable that suffi-
cient taxable profits will be available against
which these differences 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
derivative instruments designated as cash flow
hedges, which are recorded net of taxes in gains
or losses 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
measurement 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 deriva-
tive instrument that has UBS AG shares as under-
lying are separated into a liability and an equity
component at issue date, if they require or pro-
vide UBS with a choice of physical settlement.
Initially, a portion of the net proceeds from issu-
ing the combined debt instrument are allocated
to the equity component based on its fair value
and reported in Share premium 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 allocated to the liability
component and reported as Debt issued. The lia-
bility component is subsequently measured at
amortized cost. However, if the combined instru-
ment or the embedded derivative 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 instrument with
changes in fair value recorded in income.
It is the Group’s policy to hedge the fixed
interest rate risk on debt issues (except for cer-
tain subordinated long-term note issues, see
Note 29a) and apply fair value hedge account-
ing. When hedge accounting is applied to fixed
rate debt instruments, the carrying values of
debt issues are adjusted for changes in fair value
related to the hedged exposure rather than car-
ried at amortized cost. See v) Derivative instru-
ments for further discussion.
Own bonds held as a result of market mak-
ing activities or deliberate purchases in the mar-
ket 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. A sub-
sequent sale of own bonds in the market is
treated as a re-issuance of debt.
Interest expense on debt instruments is
included in Interest on debt issued.
s) Treasury shares
UBS AG shares held by the Group are classified
in Shareholders’ equity as Treasury shares and
accounted for at weighted average cost. The dif-
ference between the proceeds from sales of
treasury 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 settle-
ment of such contracts the proceeds received
94
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 classi-
fied as trading instruments, with the changes in
fair value reported in the income statement.
t) Retirement benefits
UBS sponsors a number of retirement benefit
plans for its employees worldwide. These plans
include both defined benefit and defined contri-
bution plans and various other retirement bene-
fits such as post-employment medical benefits.
Contributions to defined contribution plans are
expensed when employees have rendered servic-
es in exchange for such contributions, 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 serv-
ice cost and, where applicable, past service cost.
The principal actuarial assumptions used by
the actuary are set out in Note 31.
The Group recognizes a portion of its actu-
arial gains and losses as income or expense if the
net cumulative unrecognized actuarial gains and
losses at the end of the previous reporting peri-
od 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
recognized in the income statement over the
expected average remaining working lives of the
employees participating in the plans.
If an excess of the fair value of the plan assets
over the present value of the defined benefit
obligations cannot be recovered fully through
refunds or reductions in future contributions,
no gain is recognized solely as a result of defer-
ral 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
UBS provides various equity participation plans
in the form of stock plans and stock option
plans. UBS generally uses the intrinsic value
method of accounting for such awards. Conse-
quently, compensation expense is measured as
the difference between the quoted market 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 recognize
compensation expense for equity awards at the
date of grant.
v) Derivative instruments and hedging
All derivative instruments 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, discounted 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 under-
lying. Inputs used in pricing models are gener-
ally market observable or can be derived from
market observable data. If market observable
data are not available, the initial increase in fair
value indicated by valuation techniques but
based on unobservable inputs is amortized to
income over the life of the transactions. The
Group offsets positive and negative replace-
ment values with the same counterparty for
transactions covered by legally enforceable
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
activities 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 docu-
ments the relationship between the hedging
instrument(s) and hedged item(s). Documenta-
tion includes its risk management objectives and
its strategy in undertaking the hedge transac-
95
Financial Statements
Notes to the Financial Statements
tion, 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 deriv-
atives 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, and actual results
indicate, changes in the fair value or cash flows
of the hedged item are 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 fore-
cast transaction, the transaction must have a
high probability of occurring 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 derivative is not, or
has ceased to be, highly effective as a hedge;
when the derivative expires, or is sold, termi-
nated, or exercised; when the hedged item
matures or is sold or repaid; or when a forecast
transaction is no longer deemed highly proba-
ble.
“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 effec-
tiveness.
For qualifying fair value hedges, the change
in fair value of the hedging derivative is recog-
nized in net profit and loss. Those changes in
fair value of the hedged item which are attribut-
able 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 rela-
tionship is terminated for reasons other than the
derecognition of the hedged item, the difference
between the carrying value of the hedged item at
that point and the value at which it would have
been carried had the hedge never existed (the
96
“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 bear-
ing instruments that amount is immediately rec-
ognized in earnings. If the hedged instrument is
derecognized, e.g. is sold or repaid, the unamor-
tized fair value adjustment is recognized imme-
diately 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
Shareholders’ 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,
resulting in income or expense, then the associ-
ated gain or loss on the hedging derivative is
simultaneously 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
reported in Shareholders’ equity remains in
Shareholders’ equity until the committed or
forecast transaction occurs, at which point it is
transferred from Shareholders’ equity to the
income statement.
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
credit risk within the loan portfolio using cred-
it default swaps to which it cannot 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 any 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
contract”. 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 charac-
teristics and risks of the embedded derivative
are not closely related to the economic charac-
teristics and risks of the host contract and the
embedded derivative actually meets the defini-
tion of a derivative.
w) Earnings per Share (EPS)
Basic earnings per share are calculated by divid-
ing the net profit or loss for the period attribut-
able to ordinary shareholders by the weighted
average number of ordinary shares outstanding
during the period.
Diluted earnings per share are computed
using the same method as for basic EPS, but the
determinants are adjusted to reflect the poten-
tial dilution that could occur if options, war-
rants, convertible debt securities or other con-
tracts to issue ordinary shares were converted or
exercised into ordinary shares.
x) Comparability
Amended IAS 19, Employee Benefits
UBS adopted in 2002 the amended standard
IAS 19 “Employee Benefits”. The amendments
introduce an asset ceiling provision that applies
for defined benefit plans that have a surplus of
plan assets over benefit obligations. The imple-
mentation of the amended standard had no
material impact.
Segment Reporting
As at 1 January 2003, the five private label
banks (three of which were subsequently
merged into one bank) owned by UBS were
transferred out of Wealth Management & Busi-
ness Banking into Corporate Center. At the
same time, GAM was transferred out of Global
Asset Management into Corporate Center. All
prior period comparative amounts of the affect-
ed Business Groups have been restated to con-
form to the current year presentation.
As at 1 January 2002, Wealth Management
USA was separated from Investment Bank 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 con-
form to the current year presentation.
IAS 39, Recognition and Measurement of
Financial Instruments
UBS adopted IAS 39 prospectively as at 1 Janu-
ary 2001. The standard provides comprehensive
guidance on accounting for financial instru-
ments.
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, Gains /
losses not recognized in the income statement is
a new component of Shareholders’ equity as at
1 January 2001. It includes unrealized gains and
losses on available-for-sale financial invest-
ments and on derivatives designated as cash
flow hedges as well as Foreign currency trans-
lation. The opening adjustment as at 1 January
2001 to financial investments recorded as avail-
able 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 mil-
lion (CHF 380 million net of taxes).
The opening adjustment to Retained earn-
ings, a net debit of CHF 61 million as at 1 Jan-
uary 2001, consisted of CHF 19 million reflect-
ing the impact of adopting the new hedge
accounting rules and CHF 42 million reflecting
the impact of remeasuring assets to either amor-
tized cost or fair value as required under IAS 39.
y) Recently issued International Financial
Reporting Standards
Revised IAS 32 and 39
In December 2003, the International Account-
ing Standards Board (IASB) issued revised
IAS 32, Financial Instruments: Disclosure and
Presentation, and IAS 39, Financial Instru-
ments: Recognition and Measurement. Both
standards are effective for financial years begin-
ning on or after 1 January 2005, with earlier
application of both standards together being
permitted. Together the two standards provide
comprehensive guidance on recognition, meas-
urement, presentation and disclosure of finan-
cial instruments. The standards are to be
applied retrospectively, with the exception of
portions of the guidance relating to derecogni-
97
Financial Statements
Notes to the Financial Statements
tion of financial assets and liabilities, which is
to be applied prospectively.
UBS decided to early adopt these revised
standards as of 1 January 2004. Therefore,
comparative prior years 2003 and 2002 pre-
sented in the 2004 financial statements will
need to be restated as if the revised standards
had always been in effect.
Revised IAS 39 permits any financial instru-
ment that is not a derivative or included in the
trading portfolio to be designated at inception,
or at adoption of this standard, as at fair value
through profit and loss. UBS has designated the
majority of its compound instruments issued as
at fair value through the income statement,
which will eliminate the requirement to separate
the embedded derivative instrument from the
host contract. Instead, the instrument in its
entirety will be carried at fair value, with
changes in fair value being recorded in income.
The guidance governing recognition and
derecognition of a financial asset is consider-
ably more complex under revised IAS 39 and
may require a multi-step decision process to
determine whether derecognition is appropri-
ate. The impact, if any, from the changed
accounting guidance is currently not expected
to be material to UBS.
Financial guarantees have to be recognized
on the balance sheet under revised IAS 39 at fair
value upon issuance. Previously, they were kept
off-balance sheet unless a provision had to be
recognized because a loss had been incurred.
Guarantees provided against a fee are now
initially recognized as a liability equal to the
amount of fee receivable over the contractual
life of the guarantee issued. They are subse-
quently carried at the higher of the initial
amount less cumulative amortization or, if it is
probable that a loss has been incurred, at the
estimated amount of that loss. This change in
accounting does not affect revenue recognition
related to guarantees, and the effect from restat-
ing prior periods is insignificant.
Under revised IAS 39, loan commitments
that can be settled net meet the definition of a
derivative. Additionally, any loan commitment
may be designated at inception as held at fair
value through profit and loss. If the loan is
subsequently funded, it must also be carried at
fair value. A loan commitment provided at a
below-market interest rate not designated as
held at fair value is initially recorded at fair
value (liability) and a loss has to be recognized.
The liability can subsequently be amortized to
income, as appropriate, unless a provision needs
to be recorded to cover an incurred loss. The
change in accounting will not have a material
impact on the financial statements as loan com-
mitments are generally issued at market condi-
tions.
Revised IAS 32 requires that certain deriva-
tive contracts linked to an entity’s own shares be
treated as assets or liabilities and not as equity
instruments. Obligations to repurchase own
shares against cash, for example through a for-
ward purchase contract, must be recognized as
a liability on the balance sheet by transferring
the fair value of the obligation out of share-
holders’ equity. Subsequently, the obligation is
accreted to the settlement amount through rec-
ognizing interest expense. All net share settled
contracts on own shares have to be accounted
for as derivatives, whereas under old IAS 32
they were classified as equity instruments. The
impact from restatement on our prior period net
profit, earnings per share and shareholders’
equity is insignificant.
Revised IAS 32 provides that netting is per-
mitted only if normal settlement is also intend-
ed to take place on a net basis. In general, that
condition is not met and therefore certain
replacement values that were previously offset
will be reported gross. This will increase the
total amount of assets and liabilities on our bal-
ance sheet by approximately CHF 165 billion at
31 December 2003. There will be no effect on
net profit, shareholders’ equity, earnings per
share or regulatory capital from the change.
UBS is currently completing the assessment
of the effect the adoption of the two revised
standards will have on its Financial Statements.
IASB Improvements Project
In December 2003, the IASB issued 13 revised
International Accounting Standards under its
Improvement Project in an attempt to clarify
language, to remove inconsistencies and to
achieve convergence with other accounting stan-
dards, notably US GAAP. All revised standards
are effective for financial years beginning on or
after 1 January 2005. Of these 13 improved
standards only two are expected to have a sig-
nificant influence on UBS. These are IAS 27,
98
Consolidated and Separate Financial State-
ments, and IAS 28, Investments in Associates.
IAS 27 has been amended to limit the exemp-
tion from consolidating a subsidiary over which
control is exercised temporarily to a twelve-
month period. UBS has several private equity
investments where it owns a controlling inter-
est. As they are held longer than a twelve-month
period, these investments need to be consol-
idated commencing 1 January 2005 with retro-
spective restatement of comparative prior years
2004 and 2003. The initial calculations of
the effect from consolidating these invest-
ments indicate that the balance sheet and
income statement impact could be material
and could lead to the addition of a new business
segment that comprises the operations of
these industrial and non-financial services busi-
nesses.
IAS 28 has been amended in the same way
as IAS 27 to limit the exemption from equity
method accounting to investments that are held
with a view to their disposal within twelve
months. Private equity investments, where UBS
exercises significant influence, need to be
accounted for using the equity method instead
of as financial investments available-for-sale.
UBS’s share in income or loss will be recog-
nized in profit and loss, whereas currently unre-
alized gains and losses from fair value changes
are directly recorded in shareholders’ equity,
unless an investment is impaired, in which case
the loss is recognized in income. UBS is current-
ly in the process of determining the effect this
change in accounting will have on its financial
statements.
All other revised standards under the Im-
provement Project will primarily affect presen-
tation and disclosure, but not recognition and
measurement of assets and liabilities, and will,
therefore, not have a material impact on the
financial statements.
IFRS 2 Share-based Payment
On 19 February 2004, the IASB issued IFRS 2
Share-based Payment, which governs the
accounting for share-based payments. When
share-based payments are made to employees,
for example through awards of shares or share
options, the fair value of these awards measured
at the date of grant must be recognized as com-
pensation expense. The new standard is effective
for financial years beginning on or after 1 Janu-
ary 2005 and applies to equity-settled awards
granted after 7 November 2002 that have not
vested at 1 January 2005 and to liabilities arising
from share-based awards that exist at the effec-
tive date. Comparative prior periods need to be
restated and the opening balance of retained
earnings at 1 January 2003 has to be adjusted.
UBS discloses the compensation expense attrib-
utable to share-based awards in Note 32, but the
amounts disclosed are based on the require-
ments under US generally accepted accounting
principles, which may differ from IFRS 2. UBS is
currently evaluating the impact the new stan-
dard will have on its financial statements.
z) Accounting changes effective in 2004
Investment Properties
Effective 1 January 2004, UBS changed its ac-
counting for investment property from histori-
cal cost less accumulated depreciation to the fair
value model. All changes in the fair value of
investment property will now be recognized in
the profit and loss account, and depreciation
expense will no longer be recorded for these
properties. Investment property is held exclu-
sively to earn rental income and benefit from
appreciation in value. Therefore, carrying
investment property at fair value better reflects
the business rationale behind acquiring and
managing these assets.
This change in accounting will lead to
restatement of the 2002 and 2003 comparative
financial years. The effects from restatement
will be:
– to credit (increase) retained earnings as of
1 January 2002 by CHF 202 million, net of
taxes of CHF 64 million, for the then exist-
ing difference between book value and fair
value of the investment property portfolio;
– to reduce net profit for 2003 by CHF 64 mil-
lion; and
– to reduce net profit for 2002 by CHF 117
million.
Credit risk losses incurred on OTC derivatives
Effective 1 January 2004, the accounting for
credit risk losses incurred on over-the-counter
(OTC) derivatives has been changed. All such
credit risk losses will now be reported in net
trading income and will no longer be reported
in credit loss expense. This change better
99
Financial Statements
Notes to the Financial Statements
reflects how the business is run and simplifies
the current treatment. It does not affect net
profit or earnings per share results. The change
will, however, affect segment reporting, as actu-
al losses reported as credit loss expense are cur-
rently deferred over a three-year period in the
Business Group accounts, whereas actual losses
in trading income are not subject to such a
deferral. In the segment report, therefore, actu-
al losses on OTC derivatives will now be report-
ed as incurred. The changed accounting will not
have a material effect on the Investment Bank’s
performance before tax for 2003.
Change in treatment of corporate client assets
Effective 1 January 2004, UBS re-classified cor-
porate client assets of Business Banking Switzer-
land (except for pension funds) to exclude them
from invested assets. This change was made
because UBS has a minimal advisory role for
such clients and asset flows are erratic as they
are often driven more by liquidity requirements
than pure investment reasons. This change will
reduce invested assets at 31 December 2003 by
approximately CHF 75 billion and increase net
new money for 2003 by CHF 7.5 billion.
100
Note 2a Segment Reporting by Business Group
Based on our integrated business model, UBS is
organized into the four Business Groups:
Wealth Management & Business Banking,
Global Asset Management, Investment Bank
and Wealth Management USA, and our Cor-
porate Center.
Effective 1 January 2003, our independent
private banks – Ehinger & Armand von Ernst
(formerly Ehinger, Armand von Ernst and
Cantrade), Banco di Lugano and Ferrier Lullin –
and GAM, our specialist asset management
firm, were transferred from Wealth Manage-
ment & Business Banking and Global Asset
Management into a separate new holding com-
pany held by the Corporate Center. While this
restructuring had no impact on the UBS Financial
Statements, we have restated all prior periods
for all Business Groups affected to reflect these
changes.
Wealth Management & Business Banking
Wealth Management & Business Banking com-
prises two business units.
Wealth Management offers a comprehensive
range of products and services individually tai-
lored to affluent international and Swiss clients,
operating 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 man-
agement, investment policy and strategy.
Global Asset Management
Global Asset Management provides investment
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 indi-
vidual investors.
Investment Bank
Investment Bank operates globally as a client-
driven investment banking and securities firm
with two business units.
Investment Banking & Securities 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.
Private Equity is the private equity business
unit of Investment Bank, investing UBS and
third-party funds, primarily in unlisted compa-
nies.
Wealth Management USA
Wealth Management USA is a US financial serv-
ices firm providing sophisticated wealth manage-
ment 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. It also
holds our private label banks and GAM, which
provide clients with a complete range of private
banking services in Switzerland and specialized
asset management services, respectively.
101
Financial Statements
Notes to the Financial Statements
Note 2a Segment Reporting by Business Group (continued)
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 con-
ducted at arm’s length.
For the year ended 31 December 2003
CHF million
Income 1
Actual credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets 2
Total operating expenses
Business Group contribution before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
Additional information 3
Total assets
Total liabilities and minority interests
Capital expenditure
Wealth
Management &
Business Banking
Global Asset
Management
Investment
Bank
Wealth
Management
USA
Corporate
Center
12,052
(75 )
11,977
4,584
2,116
384
75
7,159
4,818
1,737
0
1,737
816
407
29
153
1,405
332
14,120
(40 )
14,080
7,357
2,130
327
278
10,092
3,988
5,190
(3 )
5,187
3,712
988
151
336
5,187
0
989
2
991
762
445
473
101
1,781
(790)
UBS
34,088
(116)
33,972
17,231
6,086
1,364
943
25,624
8,348
1,618
6,730
(345)
6,385
312,520
303,382
436
21,928
20,917
17
1,151,750
1,138,133
424
46,837
41,732
68
(147,035 )
(153,610 )
436
1,386,000
1,350,554
1,381
For internal management reporting purposes we measure credit loss expense using an expected loss concept. The table below shows
Business Group performance consistent with the way in which our businesses are managed and the way Business Group performance is
measured. Expected credit loss reflects the average annual costs that are expected to arise from positions in the current portfolio that
become impaired in the future. The adjusted expected credit loss reported for each Business Group is the expected credit loss on its port-
folio, plus the difference between actual credit loss expense and expected credit loss, amortized over a three year period. The difference
between these adjusted expected credit loss figures and the actual net credit loss expense recorded at Group level for financial reporting
purposes is reported in the Corporate Center.
Wealth
Management &
Business Banking
Global Asset
Management
Investment
Bank
Wealth
Management
USA
Corporate
Center
12,052
(131 )
11,921
4,584
2,116
384
75
7,159
4,762
1,737
0
1,737
816
407
29
153
1,405
332
14,120
(139 )
13,981
7,357
2,130
327
278
10,092
3,889
5,190
(8 )
5,182
3,712
988
151
336
5,187
(5)
989
162
1,151
762
445
473
101
1,781
(630)
CHF million
Income 1
Adjusted expected credit loss
Total operating income
Personnel expenses
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets 2
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
UBS
34,088
(116)
33,972
17,231
6,086
1,364
943
25,624
8,348
1,618
6,730
(345)
6,385
1 Impairments on private equity and other financial investments for the year ended 31 December 2003 were as follows: Wealth Management & Business Banking CHF 18 million; Global Asset Management CHF 2 million;
2 For further information regarding goodwill and other intangible assets by Business Group, please see Note 15:
Investment Bank CHF 371 million; Wealth Management USA CHF 1 million; Corporate Center CHF 149 million.
Goodwill and Other Intangible Assets.
3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center.
102
For the year ended 31 December 2002
CHF million
Income 1
Actual credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets 2
Total operating expenses
Business Group contribution before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
Additional information 3
Total assets
Total liabilities and minority interests
Capital expenditure
Wealth
Management &
Business Banking
Global Asset
Management
Investment
Bank
Wealth
Management
USA
Corporate
Center
12,184
(238 )
11,946
4,596
2,251
448
97
7,392
4,554
1,655
0
1,655
774
447
29
186
1,436
219
12,498
35
12,533
7,878
2,378
382
364
11,002
1,531
5,561
(15 )
5,546
4,245
1,263
149
1,691
7,348
(1,802)
2,429
12
2,441
1,031
733
513
122
2,399
42
UBS
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
For internal management reporting purposes we measure credit loss expense using an expected loss concept. The table below shows
Business Group performance consistent with the way in which our businesses are managed and the way Business Group performance is
measured. Expected credit loss reflects the average annual costs that are expected to arise from positions in the current portfolio that
become impaired in the future. The adjusted expected credit loss reported for each Business Group is the expected credit loss on its port-
folio, plus the difference between actual credit loss expense and expected credit loss, amortized over a three year period. The difference
between these adjusted expected credit loss figures and the actual net credit loss expense recorded at Group level for financial reporting
purposes is reported in the Corporate Center.
Wealth
Management &
Business Banking
Global Asset
Management
Investment
Bank
Wealth
Management
USA
Corporate
Center
12,184
(312 )
11,872
4,596
2,251
448
97
7,392
4,480
1,655
0
1,655
774
447
29
186
1,436
219
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)
2,429
247
2,676
1,031
733
513
122
2,399
277
CHF million
Income 1
Adjusted expected credit loss
Total operating income
Personnel expenses
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets 2
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
UBS
34,327
(206)
34,121
18,524
7,072
1,521
2,460
29,577
4,544
678
3,866
(331)
3,535
1 Impairments on private equity and other financial investments for the year ended 31 December 2002 were as follows: Wealth Management & Business Banking CHF 32 million; Global Asset Management CHF 1 million;
2 For further information regarding goodwill and other intangible assets by Business Group, please see Note 15: Goodwill and Other Intangible Assets.
Investment Bank CHF 1,703 million; Corporate Center CHF 208 million.
3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center.
103
Financial Statements
Notes to the Financial Statements
For the year ended 31 December 2001
CHF million
Income 1
Actual credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets 2
Total operating expenses
Business Group contribution before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
Additional information 3
Total assets
Total liabilities and minority interests
Capital expenditure
Wealth
Management &
Business Banking
Global Asset
Management
Investment
Bank
Wealth
Management
USA
Corporate
Center
12,782
(124 )
12,658
4,558
2,319
568
100
7,545
5,113
1,963
0
1,963
886
498
38
196
1,618
345
14,715
(360 )
14,355
8,354
2,650
456
402
11,862
2,493
6,391
(15 )
6,376
5,019
1,441
124
502
7,086
1,761
1
1,762
1,011
723
428
123
2,285
(710)
(523)
UBS
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
For internal management reporting purposes we measure credit loss expense using an expected loss concept. The table below shows
Business Group performance consistent with the way in which our businesses are managed and the way Business Group performance is
measured. Expected credit loss reflects the average annual costs that are expected to arise from positions in the current portfolio that
become impaired in the future. The adjusted expected credit loss reported for each Business Group is the expected credit loss on its port-
folio, plus the difference between actual credit loss expense and expected credit loss, amortized over a three year period. The difference
between these adjusted expected credit loss figures and the actual net credit loss expense recorded at Group level for financial reporting
purposes is reported in the Corporate Center.
Wealth
Management &
Business Banking
Global Asset
Management
Investment
Bank
Wealth
Management
USA
Corporate
Center
12,782
(601 )
12,181
4,558
2,319
568
100
7,545
4,636
1,963
0
1,963
886
498
38
196
1,618
345
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
1,761
233
1,994
1,011
723
428
123
2,285
(713)
(291)
CHF million
Income 1
Adjusted expected credit loss
Total operating income
Personnel expenses
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets 2
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
UBS
37,612
(498)
37,114
19,828
7,631
1,614
1,323
30,396
6,718
1,401
5,317
(344)
4,973
1 Impairments on private equity and other financial investments for the year ended 31 December 2001 were as follows: Wealth Management & Business Banking CHF 109 million; Global Asset Management CHF 3 million;
2 For further information regarding goodwill and other intangible assets by Business Group, please see Note 15: Goodwill and Other Intangible Assets.
Investment Bank CHF 1,143 million; Corporate Center CHF 39 million.
3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center.
104
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 man-
aged on an integrated basis worldwide, with a
view to profitability by product line. The geo-
graphic 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 2003
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total
13,278
6,057
12,923
1,714
33,972
39
18
38
5
180,629
430,901
688,762
85,708
13
31
50
6
689
247
411
34
100
1,386,000
100
1,381
50
18
30
2
100
For the year ended 31 December 2002
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total
14,307
6,850
11,055
1,909
34,121
42
20
32
6
174,878
258,147
669,823
78,270
15
22
56
7
885
199
635
44
100
1,181,118
100
1,763
51
11
36
2
100
For the year ended 31 December 2001
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total
14,223
7,445
13,587
1,859
37,114
38
20
37
5
195,321
240,094
691,157
126,725
100
1,253,297
16
19
55
10
100
1,039
304
630
48
2,021
52
15
31
2
100
105
Financial Statements
Notes to the Financial Statements
Income Statement
Note 3 Net Interest and Trading Income
Accounting standards require separate disclosure
of net interest income and net trading income (see
the tables on the following page). This required
disclosure, however, does not take into account
that net interest and trading income are generat-
ed by a range of different business activities. In
many cases, a particular business activity can
generate both net interest and trading income.
Fixed income trading activity, for example, gen-
erates both trading profits and coupon income.
UBS management therefore analyzes net interest
and trading income according to the business
activity generating it. The table below provides
information that corresponds to this manage-
ment view. For example, net income from trading
activities is further broken down into the four
sub-components of Equities, Fixed income,
Foreign exchange and Other. These activities gen-
erate both types of income (interest and trading
revenue) and therefore this analysis is not com-
parable to the breakdown provided in the third
table on the next page (Net trading income only).
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
31.12.03
31.12.02
31.12.01
12,299
3,883
16,182
10,546
5,572
16,118
8,041
8,802
16,843
% change from
31.12.02
17
(30)
0
CHF million
For the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
Net income from interest margin products
Equities
Fixed Income
Foreign Exchange
Other
Net income from trading activities
Net income from treasury activities
Other 1
Total net interest and trading income
1 Principally external funding costs of the Paine Webber Group, Inc. acquisition.
5,077
2,464
6,530
1,501
315
10,810
1,415
(1,120)
16,182
5,275
2,794
6,041
1,500
270
10,605
1,667
(1,429 )
16,118
5,694
3,661
6,294
1,490
84
11,529
1,424
(1,804 )
16,843
(4)
(12)
8
0
17
2
(15)
22
0
106
Note 3 Net Interest and Trading Income (continued)
Net interest Income1
CHF million
For the year ended
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
Net interest income
Net trading income1
CHF million
For the year ended
Equities
Fixed income 2
Foreign exchange and other
Net trading income
31.12.03
31.12.02
31.12.01
% change from
31.12.02
10,542
11,600
16,955
11,148
75
18,394
40,159
5,093
9,623
10,101
3,043
27,860
12,299
11,184
165
17,014
39,963
6,383
10,081
8,366
4,587
29,417
10,546
18,337
453
16,532
52,277
14,088
14,517
7,815
7,816
44,236
8,041
(9)
0
(55)
8
0
(20)
(5)
21
(34)
(5)
17
31.12.03
31.12.02
31.12.01
% change from
31.12.02
1,679
452
1,752
3,883
2,638
1,061
1,873
5,572
4,026
2,731
2,045
8,802
(36)
(57)
(6)
(30)
1 Please refer to the table “Net Interest and Trading Income” on the previous page for the Equities, Fixed Income, Foreign exchange and Other business results (for an
explanation, read the corresponding introductory comment).
2 Includes commodities trading income.
Note 4 Net Fee and Commission Income
CHF million
For the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
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
2,354
761
5,608
3,895
241
1,201
3,855
355
18,270
249
1,087
19,606
1,483
778
2,261
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
21,117
307
946
22,370
1,281
878
2,159
Net fee and commission income
17,345
18,221
20,211
10
(10)
(6)
(3)
(20)
(8)
(5)
(15)
(4)
(9)
8
(4)
10
(2)
5
(5)
107
Financial Statements
Notes to the Financial Statements
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
31.12.03
31.12.02
31.12.01
% change from
31.12.02
160
2
162
352
90
(541)
(99)
75
123
300
561
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
(30)
(29)
29
(80)
72
92
(17)
(66)
Note 6 Personnel Expenses
CHF million
For the year ended
Salaries and bonuses
Contractors
Insurance and social contributions
Contribution to retirement plans
Other personnel expenses
Total personnel expenses
31.12.03
31.12.02
31.12.01
% change from
31.12.02
13,478
539
923
721
1,570
17,231
14,219
579
939
676
2,111
18,524
15,238
729
984
603
2,274
19,828
(5)
(7)
(2)
7
(26)
(7)
Note 7 General and Administrative Expenses
CHF million
For the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
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
1,304
708
864
599
398
526
589
844
254
6,086
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
(4)
6
(15)
(27)
(12)
(12)
4
(19)
(54)
(14)
108
Note 8 Earnings per Share (EPS) and Shares Outstanding
For the year ended
31.12.03
31.12.02
31.12.01
% change from
31.12.02
Basic Earnings (CHF million)
Net profit
Diluted Earnings (CHF million)
Net profit
Less: profit on own equity derivative contracts
deemed dilutive
Net profit for diluted EPS
6,385
3,535
4,973
6,385
1
6,386
3,535
(20 )
3,515
4,973
(99 )
4,874
Weighted average shares outstanding
Weighted average shares outstanding
Potentially dilutive ordinary shares resulting from
options and warrants outstanding 1
Weighted average shares outstanding for
diluted EPS
1,116,953,623
1,208,586,678
1,266,038,193
21,847,002
14,796,264
22,539,745
1,138,800,625
1,223,382,942
1,288,577,938
Earnings per share (CHF)
Basic EPS
Diluted EPS
5.72
5.61
2.92
2.87
3.93
3.78
81
81
82
(8)
48
(7)
96
95
1 Total equivalent shares outstanding on options that were not dilutive for the respective periods but could potentially dilute earnings per share in the future were
37,234,538, 75,385,368 and 28,741,886 for the years ended 31 December 2003, 31 December 2002 and 31 December 2001, respectively.
Shares outstanding
As at
Total ordinary shares issued
Second trading line treasury shares
2001 program
2002 first program
2002 second program
2003 program
Other treasury shares
Total treasury shares
Shares outstanding
31.12.03
31.12.02
31.12.01
% change from
31.12.02
1,183,046,764
1,256,297,678
1,281,717,499
(6)
23,064,356
67,700,000
6,335,080
56,707,000
54,653,692
23,146,014
18,190,595
111,360,692
97,181,094
41,254,951
1,071,686,072
1,159,116,584
1,240,462,548
136
15
(8)
109
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
Residential mortgages
Commercial mortgages
Other loans
Subtotal
Allowance for credit losses
Net loans
Net due from banks and loans
thereof subordinated
By geographic region (based on the location of the borrower)
CHF million
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
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
31.12.03
31.12.02
32,024
(357)
31,667
110,239
18,903
87,041
216,183
(3,679)
212,504
244,171
23
31.12.03
152,374
43,842
42,653
9,338
248,207
(4,036)
244,171
31.12.03
130,740
28,062
18,507
70,898
248,207
(4,036)
244,171
32,911
(443)
32,468
108,779
19,090
88,590
216,459
(4,812)
211,647
244,115
115
31.12.02
151,604
39,352
48,412
10,002
249,370
(5,255)
244,115
31.12.02
129,525
26,769
12,398
80,678
249,370
(5,255)
244,115
110
Note 9b Allowances and Provisions for Credit Losses
CHF million
Specific
Country risk
allowances and allowances and
provisions
provisions
Total
31.12.03
Total
31.12.02
Balance at the beginning of the year
Write-offs
Recoveries
Increase / (decrease) in credit loss allowance and provision
Foreign currency translation and other adjustments
Transfers 1
Balance at the end of the year
4,885
(1,413)
87
191
(28)
318
4,040
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
736
(23)
0
(75)
(34)
(318)
286
5,621
(1,436)
87
116
(62)
0
4,326
8,218
(2,536)
70
206
(337)
0
5,621
31.12.03
31.12.02
357
3,679
4,036
290
4,326
443
4,812
5,255
366
5,621
1 Transfer to identified counterparties of specifically allocated country provisions against rescheduled and / or defaulted sovereign and quasi-sovereign claims.
Note 9c Impaired Due from Banks and Loans
CHF million
Total gross impaired due from banks and loans 1, 2
Allowance for impaired due from banks
Allowance for impaired loans
Total allowances for credit losses related to impaired due from banks and loans
Average total gross impaired due from banks and loans 3
31.12.03
31.12.02
7,606
245
3,561
3,806
8,985
10,365
291
4,601
4,892
12,623
1 All impaired due from banks and loans have a specific allowance for credit losses.
2003 and CHF 428 million for 2002.
3 Average balances were calculated from quarterly data.
2 Interest income on impaired due from banks and loans was CHF 279 million for
CHF million
Total gross impaired due from banks and loans
Estimated liquidation proceeds of collateral
Net impaired due from banks and loans
Specific allowances and provisions
31.12.03
31.12.02
7,606
2,465
5,141
3,806
10,365
3,531
6,834
4,892
111
Financial Statements
Notes to the Financial Statements
Note 9d Non-Performing Due from Banks and Loans
A loan (included in due from banks or loans) is classified as non-performing when the payment of
interest, principal or fees is overdue by more than 90 days or – as required by Swiss regulatory
guidelines as at 31 December 2003 – when insolvency proceedings have commenced or obligations
have been restructured on concessionary terms. Prior year numbers have not been restated.
CHF million
31.12.03
31.12.02
Total gross non-performing due from banks and loans
Total allowances for credit losses related
to non-performing due from banks and loans
Average total gross non-performing due from banks and loans 1
1 Average balances are calculated from quarterly data.
4,959
2,815
5,482
6,029
3,485
7,361
CHF million
31.12.03
31.12.02
Non-performing due from banks and loans at the beginning of the year
Net additions / (reductions)
Write-offs and disposals
Non-performing due from banks and loans at the end of the year
6,029
346
(1,416)
4,959
8,639
(509)
(2,101)
6,029
By type of exposure
CHF million
Banks
Loans
Mortgages
Other
Total loans
Total non-performing due from banks and loans
By geographic region (based on the location of the borrower)
CHF million
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total non-performing due from banks and loans
31.12.03
253
31.12.02
311
1,470
3,236
4,706
4,959
1,972
3,746
5,718
6,029
31.12.03
31.12.02
4,012
488
366
93
4,959
4,609
621
499
300
6,029
112
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
31.12.03
Reverse
repurchase
agreements
31.12.03
Cash collateral
on securities
borrowed
31.12.02
172,783
41,149
213,932
237,212
83,375
320,587
122,764
16,288
139,052
Cash collateral
on securities
lent
31.12.03
Repurchase
agreements
31.12.03
Cash collateral
on securities
lent
31.12.02
39,587
13,691
53,278
263,905
151,958
415,863
29,748
7,122
36,870
Reverse
repurchase
agreements
31.12.02
201,269
92,817
294,086
Repurchase
agreements
31.12.02
200,904
165,954
366,858
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 2003 and 31 December 2002 were as follows:
CHF million
31.12.03
31.12.02
Securities received under reverse repurchase and /or securities borrowing arrangements
which can be repledged or resold
827,602
641,341
thereof repledged / transferred to others in connection with financing activities or
to satisfy commitments under short sale transactions
593,049
530,188
113
Financial Statements
Notes to the Financial Statements
Note 11 Trading Portfolio
The Group trades money market paper, debt and equity instruments, loans, precious metals and
derivatives to meet the financial needs of its customers and to generate revenue. Note 23 provides a
description of the various classes of derivatives together with the related notional amounts, while
Note 10 provides further details about cash collateral on securities borrowed and lent and repur-
chase 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
31.12.03
31.12.02
40,003
6,208
1,011
92,250
69,755
152,413
8,457
323,886
130,093
104,402
64,116
10,507
74,623
16,426
16,357
12,650
10,610
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
Total trading portfolio assets
461,772
371,436
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
Total trading portfolio liabilities
586
52,377
38,369
13,537
10,851
115,720
28,237
143,957
1,807
38,327
19,722
14,177
8,296
82,329
24,124
106,453
114
Note 12 Financial Investments (available-for-sale)
CHF million
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
31.12.03
31.12.02
596
189
72
261
387
630
1,017
3,265
5,139
196
873
290
885
1,175
596
1,443
2,039
4,304
8,391
261
115
Financial Statements
Notes to the Financial Statements
Note 12 Financial Investments (available-for-sale) (continued)
The following tables show the unrealized gains and losses not recognized in the income statement for the years 2003 and 2002:
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 2003
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
596
14
25
0
54
156
0
12
1,017
3,265
5,139
0
2
0
0
0
3
0
0
296
781
1,082
0
0
0
0
0
8
0
0
7
216
231
0
2
0
0
0
(5 )
0
0
289
565
851
0
0
0
0
0
1
0
0
58
0
59
0
2
0
0
0
(6 )
0
0
231
565
792
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
1,059
0
0
0
0
0
1
0
0
82
30
113
0
1
2
0
1
6
1
0
222
713
946
116
Note 12 Financial Investments (available-for-sale) (continued)
The unrealized losses not recognized in the income statement are considered to be temporary on the basis that the investments are intend-
ed to be held for a period of time sufficient to recover their cost, and UBS believes that the evidence indicating that the cost of the invest-
ments should be recoverable within a reasonable period of time outweighs the evidence to the contrary. This includes the nature of the
investments, valuations and research undertaken by UBS, the current outlook for each investment, offers under negotiation at favourable
prices, the duration of the unrealized losses, and the relationship of unrealized losses with unrealized gains on other investments.
The following table shows the duration of unrealized losses not recognized in the income statement for the year ended 2003:
CHF million
31 December 2003
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
Investments
with unrealized
loss less than
12 months
Fair Value
Investments
with unrealized
loss more than
12 months
0
0
0
0
0
0
0
0
6
98
104
0
0
0
0
0
0
0
0
44
359
403
Unrealized Losses
Investments
with unrealized
loss less than
12 months
Investments
with unrealized
loss more than
12 months
0
0
0
0
0
8
0
0
3
86
97
0
0
0
0
0
0
0
0
4
130
134
Total
0
0
0
0
0
0
0
0
50
457
507
Total
0
0
0
0
0
8
0
0
7
216
231
Contractual maturities of the investments in debt instruments 1
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 2003
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
3
5
45
81
0
4
138
1 Money market papers have contractual maturities of less than one year.
6.61
3.90
1.89
1.09
0.00
0.00
4
20
9
68
0
8
109
2.92
2.01
1.49
3.53
0.00
0.00
6
0
0
7
0
0
13
3.80
0.00
0.00
7.38
0.00
0.00
1
0
0
0
0
0
1
4.00
0.00
0.00
0.00
0.00
0.00
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
31.12.03
1379
112
(23)
31.12.02
1,820
479
(21)
117
Financial Statements
Notes to the Financial Statements
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
31.12.03
31.12.02
705
1,232
(285)1
123
0
(30)
(129)
1,616
697
51
(1)
24
(17)
(44)
(5)
705
1 CHF 123 million of the amount in disposals has been transferred to financial investments (available-for-sale) or relates to investments which have been fully consolidated at 31 December 2003.
Note 14 Property and Equipment
CHF million
Historical cost
Balance at the beginning of the year
Additions
Additions from acquired companies
Disposals / write-offs2
Reclassifications
Foreign currency translation
Balance at the end of the year
Accumulated depreciation
Balance at the beginning of the year
Depreciation
Disposals / write-offs2
Reclassifications
Foreign currency translation
Balance at the end of the year
Net book value at the end of the year3
Own-used
properties
Investment
properties1
Leasehold
improve-
IT, software
and com-
ments munication
Other
machines
and
equipment
Projects in
progress
31.12.03
31.12.02
9,307
297
3
(118 )
(46 )
(35 )
9,408
4,210
221
(114 )
49
(1 )
4,365
5,043
560
5
0
(89 )
(257 )
(1 )
218
211
14
(60 )
(145 )
0
20
198
1,312
83
14
(59 )
1,257
(62 )
2,545
757
184
(50 )
715
(36 )
1,570
975
4,105
674
3
(720 )
313
(134 )
4,241
3,240
859
(709 )
61
(117 )
3,334
907
2,432
120
4
(126 )
(928 )
(77 )
1,425
1,663
86
(63 )
(499 )
(22 )
1,165
260
234
178
0
(7 )
(125 )
0
280
0
0
0
4
0
4
276
17,950
1,357
24
(1,119)
214
(309)
18,117
10,081
1,364
(996)
185
(176)
10,458
7,659
19,479
1,763
0
(2,588)
14
(718)
17,950
10,784
1,521
(1,786)
35
(473)
10,081
7,869
1 The fair value of Investment properties was CHF 236 million at 31 December 2003 and CHF 539 million at 31 December 2002.
is CHF 14,021 million (2002: CHF 14,221 million).
2 Includes write-offs of fully depreciated assets.
3 Fire insurance value of property and equipment
118
Note 15 Goodwill and Other Intangible Assets
Goodwill
Other intangible assets
Total
Infra-
structure
Customer
relation-
ships
and other
CHF million
Historical cost
Balance at the beginning of the year
Additions and reallocations
Disposals and other reductions
Write-offs 1
Foreign currency translation
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
Net book value at the end of the year
13,957
241
(368 )
(508 )
(1,290 )
12,032
2,776
756
(68 )
(508 )
(272 )
2,684
9,348
1,069
0
0
0
(111 )
958
116
52
0
0
(16 )
152
806
1,996
99
(3 )
0
(177 )
1,915
434
135
(2 )
0
(27 )
540
Total
31.12.03
31.12.02
3,065
99
(3 )
0
(288 )
2,873
550
187
(2 )
0
(43 )
692
17,022
340
(371)
(508)
(1,578)
14,905
3,326
943
(70)
(508)
(315)
3,376
21,792
290
(115)
(1,350)
(3,595)
17,022
2,707
2,460
(28)
(1,350)
(463)
3,326
1,375
2,181
11,529
13,696
1 Represents write-offs of fully amortized goodwill and other intangible assets.
The following table presents the disclosure of goodwill and other intangible assets by Business Group
for the year ended 31 December 2003.
CHF million
Goodwill
Wealth Management & Business Banking
Global Asset Management
Investment Bank
Wealth Management USA
Corporate Center
UBS
Other Intangible Assets
Wealth Management & Business Banking
Global Asset Management
Investment Bank
Wealth Management USA
Corporate Center
UBS
Balance
at the
beginning
of the year
Additions
and
reallo-
cations1
Disposals
and
other
reductions
Amorti-
zation
Foreign
currency
Balance
at the end
translation of the year
1,003
2,185
3,793
4,199
1
11,181
33
1
278
2,134
69
2,515
(10 )
(525 )
218
(1 )
559
241
(8 )
0
99
0
8
99
(4 )
(1 )
(16 )
(270 )
(9 )
(300)
0
0
0
0
(1 )
(1)
(54 )
(152 )
(251 )
(220 )
(79 )
(756)
(21 )
(1 )
(27 )
(116 )
(22 )
(187)
(98 )
(106 )
(372 )
(393 )
(49 )
(1,018)
0
0
(26 )
(213 )
(6 )
(245)
837
1,401
3,372
3,315
423
9,348
4
0
324
1,805
48
2,181
1 Includes amounts reallocated due to the transfer of Private Banks & GAM to Corporate Center.
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.
119
Financial Statements
Notes to the Financial Statements
Note 15 Goodwill and Other Intangible Assets (continued)
The estimated, aggregated amortization expenses for Goodwill and Other intangible assets are as
follows:
CHF million
Estimated, aggregated amortization expenses for:
2004
2005
2006
2007
2008
2009 and thereafter
Total
Goodwill
Other
intangible assets
709
704
695
668
588
5,984
9,348
162
159
146
139
138
1,437
2,181
Total
871
863
841
807
726
7,421
11,529
If the IASB issues in 2004 a final standard following ED3 Business Combinations, as proposed,
goodwill amortization will cease as of 1 January 2005.
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
Receivables under life insurance policies
Other receivables
Total other assets
Note
21
31.12.03
31.12.02
2,276
2,874
338
862
754
13,544
4,811
25,459
2,800
1,449
436
250
1,071
0
2,946
8,952
120
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
31.12.03
127,153
94,914
252,444
347,358
474,511
31.12.02
83,178
76,884
229,992
306,876
390,054
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 senior
indebtedness and certain other obligations of the
Group. At 31 December 2003 and 31 December
2002, the Group had CHF 8,014 million and
CHF 9,933 million, respectively, in subordinated
debt. Subordinated debt usually pays interest
annually and provides for single principal pay-
ments upon maturity. At 31 December 2003
and 31 December 2002, the Group had CHF
54,108 million and CHF 46,678 million, respec-
tively, 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 report-
ed as stand-alone derivatives. The amount record-
ed within Debt Issued represents the host contract
after the separation of the embedded derivative.
At 31 December 2003 and 31 December 2002,
the Group had CHF 427 million and CHF 1,389
million, respectively, in bonds with attached war-
rants on UBS shares outstanding. At year end
2003 all warrants related to those bonds have
expired.
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 610 million higher
reflecting changes in fair value due to interest rate
movements.
121
Financial Statements
Notes to the Financial Statements
Note 18 Debt Issued (continued)
CHF million
Short-term debt: Money market paper issued
Long-term debt:
Bonds
Senior
Subordinated
Shares in bond issues of the Swiss Regional or
Cantonal Banks’ Central Bond Institutions
Medium-term notes
Subtotal long-term debt
Total debt issued
31.12.03
31.12.02
58,115
72,800
51,324
8,014
210
2,574
62,122
41,939
9,933
517
4,222
56,611
120,237
129,411
The following table shows the split between fixed and floating rate debt issues based on the contractual terms. However, it should be
noted that the Group uses interest rate swaps to hedge many of the fixed rate debt issues which changes their re-pricing characteristics
into that of floating rate debt.
Contractual maturity dates
CHF million, except where indicated
UBS AG Parent Bank
Senior debt
Fixed rate
Interest rates (range in %)
Floating rate
Subordinated debt
Fixed rate
Interest rates (range in %)
Floating rate
2004
2005
2006
2007
2008
2009–2013
Thereafter
28,981
0.00–20.00
65
4,299
0.00–19.00
339
5,958
0.00–16.50
138
4,419
0.00–11.00
179
3,702
0.00–20.00
791
1,446
0.00–13.50
2,236
1,036
4.25–7.38
0
1,505
4.00–8.75
0
1,772
4.25–7.25
0
1,430
5.75–8.00
0
0
0
525
5.88
0
377
0.00–8.50
7,941
1,199
0.00–8.75
506
Total
31.12.03
49,182
11,689
7,467
506
Subtotal
30,082
6,143
7,868
6,028
4,493
4,207
10,023
68,844
Subsidiaries
Senior debt
Fixed rate
Interest rates (range in %)
Floating rate
Subordinated debt
Fixed rate
Interest rates (range in %)
Floating rate
Subtotal
Total
35,336
0.00–10.00
199
535
0.00–10.00
592
2,377
0.00–10.00
1,360
1,237
0.00–10.00
25
2,712
0.00–10.00
236
1,135
0.00–35.00
1,689
247
0.00–20.00
3,672
23
6.90–8.06
0
35,558
65,640
0
0
1,127
7,270
0
0
3,737
11,605
0
0
1,262
7,290
0
0
2,948
7,441
0
0
2,824
7,031
18
9.00
0
3,937
13,960
43,579
7,773
41
0
51,393
120,237
The table above indicates fixed interest rates coupons ranging from 0 up to 35 percent on the Group’s bonds. These high or low coupons
generally relate to structured debt issues prior to the separation of embedded derivatives. As a result, the stated interest rate on such debt
issues generally does not reflect the effective interest rate the Group is paying to service its debt after the embedded derivative has been
separated and, where applicable, the application of hedge accounting.
122
Note 19 Other Liabilities
CHF million
Note
31.12.03
31.12.02
Provisions
Provision for commitments and contingent liabilities
Current tax liabilities
Deferred tax liabilities
VAT and other tax payables
Settlement and clearing account
Obligations under life insurance policies
Other payables
Total other liabilities
20
9b
21
1,361
290
1,754
2,214
544
2,608
13,544
9,001
31,316
1,375
366
2,079
2,239
613
1,354
0
4,313
12,339
Note 20 Provisions
CHF million
Operational
Litigation
Total
31.12.03
Total
31.12.02
Balance at the beginning of the year
New provisions charged to income
Capitalized reinstatement costs
Recoveries
Provisions applied
Reclassifications
Foreign currency translation
Balance at the end of the year
Note 21 Income Taxes
CHF million
For the year ended
Domestic
Current
Deferred
Foreign
Current
Deferred
Total income tax expense
721
136
155
17
(135 )
4
(43 )
855
654
194
23
(317 )
(4 )
(44 )
506
1,375
330
155
40
(452)
0
(87)
1,361
1,748
688
25
(902)
0
(184)
1,375
31.12.03
31.12.02
31.12.01
810
143
294
371
1,618
938
(32 )
249
(477 )
678
563
231
546
61
1,401
The Group made net tax payments, including domestic and foreign taxes, of CHF 1,104 million,
CHF 572 million and CHF 1,742 million for the full years of 2003, 2002 and 2001, respectively.
123
Financial Statements
Notes to the Financial Statements
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 are as
follows:
CHF million
For the year ended
Operating profit before tax
Domestic
Foreign
Income taxes at Swiss statutory rate of 24% in 2003
and 25% in 2002 and 2001, respectively
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
31.12.03
31.12.02
31.12.01
8,348
5,491
2,857
2,004
(250)
42
(291)
(366)
386
186
(191)
98
1,618
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
1,401
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
31.12.03
31.12.02
1,538
4
2,626
306
685
5,159
(2,883)
2,276
307
388
401
348
770
1,559
84
2,883
330
779
5,635
(2,835 )
2,800
412
430
470
182
745
Total deferred tax liabilities
2,214
2,239
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.
124
Note 21 Income Taxes (continued)
Certain foreign branches and subsidiaries of the Group have deferred tax assets related to net oper-
ating loss carry forwards and other items. Due to realization of these assets being uncertain,
the Group has established valuation allowances of CHF 2,883 million (CHF 2,835 million at
31 December 2002). For companies that suffered tax losses in either the current or preceding year an
amount of CHF 542 million (CHF 947 million at 31 December 2002) 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
distributed, additional taxes of approximately CHF 25 million would be due.
At 31 December 2003 net operating loss carry forwards totaling CHF 6,989 million (not recog-
nized as a deferred tax asset) 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
31.12.03
97
469
6,423
6,989
31.12.03
31.12.02
3,529
372
573
(357)
(389)
345
4,073
4,112
0
172
(377)
(709)
331
3,529
125
Financial Statements
Notes to the Financial Statements
Note 23 Derivative Instruments
Type of derivatives
The Group uses the following derivative financial
instruments for both trading and hedging pur-
poses:
Swaps are transactions in which two parties
exchange cash flows on a specified notional
amount for a predetermined period. The major
types of swap transactions 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 cur-
rency principal balances and interest reference
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
standardized contracts transacted on regulated
exchanges.
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 specified amount of a financial instrument or
commodity at a predetermined price. The seller
receives a premium from the purchaser for this
right. Options may be traded OTC or on a regu-
lated 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 competitive
prices to enable them to take, transfer, modify
or reduce current or expected risks. Trading
includes market-making, positioning and arbi-
trage activities: market-making involves quoting
bid and offer prices to other market participants
with the intention of generating revenues based
on spread and volume; positioning means man-
aging market risk positions with the expectation
of profiting from favorable movements in prices,
rates or indices; arbitrage activities involve iden-
tifying 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.
126
Derivatives designated and accounted
for as hedging instruments
The Group’s accounting policies for derivatives
designated and accounted for as hedging instru-
ments are explained in Note 1 v) where terms
used in the following sections are explained.
Gains and losses on derivative contracts desig-
nated as cash flow hedges are initially recorded in
Shareholders’ equity but are reclassified to cur-
rent period earnings when the hedged cash flows
occur, as explained in Note 1, v) Derivative
instruments and hedging.
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 2003, the
Group recognized a net gain of CHF 21 million
(reported as Net trading income in the Financial
Statements), which represents the ineffective
portion of fair value hedges.
As at 31 December 2003, the fair value of
outstanding derivatives designated as fair value
hedges was a CHF 797 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. During the year ended 31
December 2003, all hedged financial instruments
have matured and there has been no material
gain or loss associated with ineffective portions
of the cash flow hedges.
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 enter-
prise basis. The objective is to protect against
changes in future interest cash flows resulting
from the impact of changes in market interest
rates on the reinvestment or reborrowing of
current balances and expected future cash
flows. The Group accumulates information
about financial assets and liabilities, and there-
by estimates and aggregates the amounts and
timing of future period cash flows, based on the
contractual terms of instruments and other fac-
tors including estimates of prepayments and
defaults. The aggregate cash flows form the basis
for identifying the non-trading interest rate risk
of the Group, which is hedged with interest rate
swaps, which extend over a twenty-three-year
period.
The schedule of forecast principal cash flows
as at 31 December 2003 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
170
148
22
261
250
11
181
183
(2)
191
287
(96)
16
167
(151)
127
Financial Statements
Notes to the Financial Statements
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 trans-
ferred to current period earnings when the fore-
cast cash flows affect net profit or loss. As at
31 December 2003, the fair value of outstanding
derivatives designated as cash flow hedges of fore-
cast transactions was a CHF 871 million net neg-
ative replacement value. During the year, certain
CHF hedging interest rate swaps with a positive
replacement value of CHF 867 million were ter-
minated. At this year-end, the unrecognized
income of CHF 805 million associated with
swaps has remained deferred in shareholders’
equity to be removed from the equity when the
underlying previously hedged cash flows impact
net profit or 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 CHF 7 million
net gain which is recorded in net interest income.
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 favor if all the relevant
counterparties of the Group were to default
at the same time, and transactions could be
replaced 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 modeled 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 2003 is to reduce positive and neg-
ative replacement values on OTC derivative
instruments by approximately CHF 165 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 agree-
ments 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-mitigating effects of such collateral
agreements.
128
Note 23 Derivative Instruments (continued)
As at 31 December 2003
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
Total
notional
amount
CHF bn
1,128.4
8,064.4
815.4
243.7
63.4
Within 3 months
NRV2
PRV1
3–12 months
NRV
PRV
1–5 years
PRV
NRV
over 5 years
PRV
NRV
Total
PRV
Total
NRV
423
3,831
464
588
4,388
977
258
9,715
868
312
9,918
992
71
66,959
4,579
130
65,074
5,967
6
52,019
4,223
4
758
1,034
50,517 132,524 129,897
13,270
10,134
5,334
7
9
2
8
9
17
4,725
5,962
10,843
11,230
71,609
71,171
56,248
55,855 143,425 144,218 10,315.3
109
27
136
102
2
104
39
29
68
61
576
637
3,443
197
3,640
3,537
470
4,007
2,105
112
2,217
1,880
305
2,185
5,696
365
6,061
5,580
1,353
6,933
289.3
12.0
301.3
3,045
24,929
3,232
3,879
25,242
3,348
1,978
14,258
3,211
2,573
12,428
2,550
161
17,804
360
317
14,394
356
15
6,002
9
12
5,250
1
5,199
62,993
6,812
6,781
57,314
6,255
298.4
2,254.4
576.8
3
3
119
116
122
119
5.0
13.2
31,209
32,472
19,566
17,667
18,325
15,067
6,026
5,263
75,126
70,469
3,147.8
246
304
9
559
247
193
40
480
377
308
21
706
306
386
63
755
333
668
3
1,004
270
629
4
903
18
116
23
54
974
1,396
846
1,262
33
107
15.9
35.1
1.1
2.3
134
77
2,403
2,215
54.4
510
1,843
529
2,788
760
3,476
583
7,847
923
8,584
449
13,646
1,408
1,329
500
4,560
3,601
15,232
2,061
28,841
57.9
213.8
708
858
892
1,363
886
768
54
117
2,540
3,106
8.6
62.6
3,061
4,175
5,128
9,793
10,393
14,863
2,791
5,177
21,373
34,008
342.9
206
168
374
181
153
334
456
73
529
424
53
477
93
93
42
42
755
241
996
647
206
853
10.6
1.6
12.2
0
0
40,064
43,527
36,840
40,559 105,064 106,053
67,416
68,557 249,384 258,696
165,050 165,050
84,334
93,646
1 PRV: Positive replacement value.
2 NRV: Negative replacement value.
3 Exchange-traded products include proprietary trades only.
129
Financial Statements
Notes to the Financial Statements
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
Total
notional
amount
CHF bn
1,517.3
5,753.0
663.2
40.3
101.1
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
4
16
1
4
17
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
1
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
1,620
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.
130
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
31.12.03
31.12.02
37,851
74
37,925
43,440
774
44,214
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-
compliance with 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 facili-
ties and revolving underwriting facilities. Guar-
antees 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 par-
ties. The Group also enters into commitments to
extend credit in the form of credit lines which are
available to secure the liquidity needs of its
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 2003, 2002
and 2001 the Group recognized CHF 23 million
expense recovery, CHF 13 million expense and
CHF 25 million expense, respectively, in the
income statement related to obligations incurred
for contingencies and commitments.
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 rela-
tionship with the borrower. The Group will only
enter into sub-participation agreements with
banks whose rating is equal to or higher than that
of the borrower.
131
Financial Statements
Notes to the Financial Statements
Note 25 Commitments and Contingent Liabilities (continued)
CHF million
31.12.03
31.12.02
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
10,832
(765)
10,067
2,760
(276)
2,484
1,971
(373)
1,598
15,563
(1,414)
14,149
46,623
(235)
46,388
337
46,960
(235)
46,725
62,523
(1,649)
60,874
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
1 Credit guarantees in the form of bills of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit, endorsement liabilities from
2 Bid bonds, performance bonds, builders’ guarantees, letters of indemnity, other performance
bills rediscounted, advance payment guarantees and similar facilities.
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 31.12.2003
Total 31.12.2002
Mortgage
collateral
Other
collateral
Unsecured
Total
142
2,495
2,637
1,359
7,297
23,573
30,870
23,210
8,124
20,555
337
29,016
31,352
15,563
46,623
337
62,523
55,921
Other commitments
The Group enters into commitments to fund
external private equity funds and investments,
which typically expire within five years. The
commitments themselves do not involve credit or
market risk as the funds purchase investments at
market value at the time the commitments are
drawn. The maximum amount available to fund
these investments at 31 December 2003 and 31
December 2002 was CHF 1,537 million and
CHF 2,245 million, respectively.
132
Note 26 Operating Lease Commitments
At 31 December 2003, UBS was obligated under a number of non-cancellable operating leases for
premises and equipment used primarily for banking purposes. The significant premises leases usual-
ly 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
2004
2005
2006
2007
2008
2009 and thereafter
Subtotal commitments for minimum payments under operating leases
Less: Sublease rentals under non-cancellable leases
Net commitments for minimum payments under operating leases
31.12.03
876
770
707
632
595
3,992
7,572
645
6,927
Operating expenses for the year ended 31 December 2003 include CHF 1,233 million of gross oper-
ating lease rentals which were reduced by CHF 43 million of sublease income. Operating expenses
include CHF 1,193 million and CHF 1,092 million in respect of operating lease rentals for the years
ended 31 December 2002 and 31 December 2001, respectively.
133
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 reservation
of title for the years ended 31 December 2003 and 31 December 2002.
CHF million
Mortgage loans
Securities 1
Property and equipment
Other
Total pledged assets
Carrying
amount
31.12.03
428
157,639
0
0
158,067
Related
liability
31.12.03
209
121,984
0
0
122,193
Carrying
amount
31.12.02
808
50,945
129
2
51,884
Related
liability
31.12.02
506
37,038
33
0
37,577
1 Amounts for 2003 include securities pledged in respect of securities lending and repurchase agreements: assets CHF 125,411 million and liabilities CHF 121,939 million.
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 pro-
ceedings, arising in the ordinary course of busi-
ness. The Group makes provisions for such mat-
ters 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 UBS’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 settlement risk
– funding and liquidity risk is the risk that UBS
is unable to meet its payment obligations
when due, or that it is unable, on an ongoing
basis, to borrow funds in the market on an
unsecured, or even secured basis at an accept-
able price to fund actual or proposed commit-
ments.
This section also presents and explains the
Group’s regulatory capital position.
134
Note 29 Financial Instruments Risk Position
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.
The risk of price movements on securities result-
ing from general credit and country risk factors
and events specific to individual issuers is also
considered market risk.
Market risk is incurred in UBS primarily
through trading activities, which are centered in
the Investment Bank. It arises from market mak-
ing, client facilitation and proprietary positions
in equities, fixed income and interest rate prod-
ucts, foreign exchange and, to a lesser extent,
precious metals and energy.
Group Treasury assumes non-trading risk
positions that arise from its balance sheet and
capital management activities.
Market risks arise, but to a much lesser extent,
in other Business Groups primarily from the
facilitation of customer business.
Each Business Group has a Chief Risk Officer
(CRO), reporting functionally to the Group
CRO, responsible for independent risk control of
market risk.
Market risk measures are applied to all trad-
ing activities, to foreign exchange, precious metal
and energy exposures wherever they arise, and to
interest rate risk in the banking books of all busi-
ness groups including Group Treasury and the
independent private banks.
The principal risk measures and controls on
market risk are Value at Risk (VaR) and stress
loss. VaR expresses the potential loss on the cur-
rent portfolio from adverse market movements
assuming a specified time horizon before posi-
tions can be adjusted (holding period), and meas-
ured to a specified level of confidence, based on
historical market movements. Stress loss is
assessed against a set of forward-looking scenar-
ios using stress moves in market variables, which
are regularly reviewed. Complementary controls
are also applied, where appropriate, to prevent
undue concentrations, taking into account varia-
tions in price volatility and market depth and
liquidity. They include controls on exposure to
individual market risk variables, such as individ-
ual interest or exchange rates, and positions in
the securities of individual issuers (‘issuer risk’).
(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, since both trading and non-trading posi-
tions 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 UBS was
exposed to interest rate risk at 31 December
2003 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 values of
interest rate sensitive positions, including balance
sheet assets and liabilities and derivatives. The
impact of such an increase in interest rates
depends on UBS’s net asset or net liability posi-
tion in each category, currency and time band in
the table. A negative amount in the table reflects
a potential reduction in fair value, while a posi-
tive amount reflects a potential increase in fair
value.
135
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (continued)
Interest rate sensitivity position (continued)
Interest rate sensitivity by time bands at 31.12.2003
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
19
(38 )
(17 )
50
(84 )
4
24
0
59
(4 )
(43 )
(1 )
(185 )
(99 )
(690 )
(55 )
(206 )
6
31
(10 )
(326 )
3
22
0
(6 )
(359 )
(638 )
(92 )
398
(21 )
131
(55 )
(34 )
(1 )
80
(6 )
1 to 5
years
311
(4,288 )
(941 )
(2,213 )
(1,018 )
(131 )
(736 )
(40 )
410
(5 )
(464 )
(1 )
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)
Over 5
years
(91 )
(3,587 )
1,190
(1,702 )
649
(196 )
536
481
(273 )
(2 )
335
(3 )
Over 5
years
(18 )
(5,119 )
2,445
(230 )
728
(193 )
(269 )
587
(204 )
(24 )
(286 )
(3 )
Total
48
(8,371)
(1,096)
(4,012)
(261)
(338)
(14)
376
(164)
(9)
(70)
(11)
Total
(151)
(12,183)
(1,593)
(1,285)
(500)
(272)
(827)
633
(922)
(5)
53
(8)
Positions shown as ‘trading’ are those which con-
tribute 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, in particu-
lar on forward foreign exchange contracts.
Trading
The major part of this risk arises in the Invest-
ment Bank’s Fixed Income Rates and Currencies
business.
136
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 dif-
ferences in timing between contractual maturity
or re-pricing of assets, liabilities and derivative
instruments.
Most non-trading interest rate risk is captured
at the point of business origination and transferred
to a risk management unit – primarily the Cash
and Collateral Trading unit of the Investment
Bank or Group Treasury – where it is managed
within the market risk limits described in (a)(i).
The margin risks embedded in retail products
remain with, and are subject to additional analysis
and control by, 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 obser-
vations of market and client behavior, and are
reviewed periodically. In response to both the
extremely low domestic yield environment in
Switzerland in 2002 and 2003 and the increased
client demand for floating rate investment
accounts, temporary adjustments deviating from
long-term observations were made to the model
that replicates client behavior.
Interest rate risk also arises from balance sheet
items such as the financing of bank property and
investments in equity of associated companies,
and the investment of the Group’s equity. The
risk on these items is also transferred to Group
Treasury, through replicating portfolios designed
to approximate the desired investment or fund-
ing profile.
The Group’s equity is invested at longer-term
fixed interest rates in CHF, USD, EUR and GBP
with an average duration of approximately four
years, in line with strategic investment targets set
by the Group Executive Board (GEB).
These investments account for CHF 13.1 mil-
lion of the non-trading interest rate sensitivity,
with CHF 8.1 million arising in CHF, CHF 4.3
million in USD and the remainder in EUR and
GBP. The interest rate sensitivity of these invest-
ments is directly related to the chosen investment
duration and it should be recognized that,
although investing in significantly shorter matu-
rities would lead to a reduction in apparent inter-
est rate sensitivity, it would lead to higher volatil-
ity in interest earnings.
For the currencies EUR and GBP additional
interest rate sensitivity arises mainly from subordi-
nated note issues which are intentionally unhedged
as they are regarded as part of the Group’s equity
for asset and liability management purposes.
(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 activ-
ities, conducted primarily in the Investment Bank.
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 contribute
to currency risk, are shown in Note 23.
Non-Trading
UBS’s reporting currency is the Swiss franc but
its assets, liabilities, income and expense are
denominated in many currencies, with signifi-
cant 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 also, from time to time,
proactively hedges significant expected foreign
currency earnings / costs (mainly USD, EUR and
GBP) within a time horizon up to one year, in
accordance with the instructions of the 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 fluctuations
while preserving upside potential.
137
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (Continued)
The Group’s equity investment is managed in
order to reflect the currency distribution of its
risk-weighted assets and is diversified into CHF,
USD, EUR and GBP. This creates structural for-
eign currency exposures, the gains or losses on
which are recorded through equity, leading to
fluctuations in UBS’s capital base in line with the
fluctuations in risk-weighted assets, thereby pro-
tecting the BIS Tier 1 capital ratio.
The table below shows the major currency
breakdown of UBS’s balance sheet and net posi-
tion by currency at 31 December 2003.
Breakdown of assets and liabilities by currencies
CHF billion
CHF
USD
31.12.03
31.12.02
Other
CHF
USD
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
Other
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
EUR
0.8
8.2
7.3
73.8
77.6
0.8
12.9
1.2
1.8
0.0
0.1
0.0
1.8
0.3
7.1
13.4
83.2
86.4
61.3
10.7
0.9
1.1
0.0
0.5
0.3
17.1
0.1
11.8
192.5
162.4
288.9
7.6
39.2
2.4
3.0
1.1
1.2
11.1
4.2
725.5
186.3
282.3
1,210.5
1,936.0
604.5
790.8
871.2
1,153.5
5.8
0.1
17.9
2.4
15.8
137.1
2.0
10.0
6.6
0.0
35.4
(13.2)
58.7
35.4
277.8
90.8
7.0
126.4
7.1
68.1
5.3
3.9
0.0
10.2
39.2
6.8
76.4
20.3
0.4
51.8
0.8
21.0
2.9
0.1
0.0
1.3
23.5
11.0
43.7
30.5
70.4
32.1
3.8
21.1
16.5
0.1
0.0
1.7
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 balance sheet assets
Receivables from FX spot,
FX forwards, FX options and
currency swaps1
2.4
4.6
0.7
1.2
8.9
14.6
149.7
0.6
0.3
0.5
5.9
0.1
2.4
191.9
189.5
Total assets including FX derivatives1
381.4
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
Of which foreign currency
capital in subsidiaries
Total liabilities, minority interests
and shareholders’ equity
Payables from FX spot, FX forwards,
FX options and currency swaps1
Total liabilities, minority interests
and shareholders’ equity
including FX derivatives1
Net position by currency1
1 Information required by Swiss banking law for 2003 onwards. This information is not available for 2002.
138
219.9
690.7
221.0
254.4
220.4
629.3
142.6
188.8
160.6
1,246.2
569.7
899.2
380.5
0.9
1,936.9
(0.9)
790.7
0.1
1,153.6
(0.1)
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (Continued)
(iv) Equity Risk
Equity risk is the risk of loss resulting from
changes in the levels of equity indices and values
of individual stocks.
The Investment Bank 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
primarily from these activities, are shown in
Note 23.
(v) Issuer Risk
The values of tradable assets – equities, bonds
and other debt instruments held for trading – are
affected by factors specific to individual issuers
as well as general market moves. This can include
short-term factors influencing price but also
more fundamental causes including severe finan-
cial deterioration.
As an active trader and market maker in equi-
ties and bonds, the Investment Bank holds posi-
tions in tradable assets, which are not only
included in VaR, but are also subject to concen-
tration limits on individual issuers, including
positions arising from derivatives as well as phys-
ical 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 traded products – deriv-
ative contracts such as forwards, swaps and
options, and repo and securities borrowing and
lending transactions.
Reductions in the market values of tradable
assets (securities and other obligations in trad-
able form held for trading) resulting from
changes in the credit quality of individual oblig-
ors are considered market risk. This is explained
in a (v) above.
To ensure a consistent and unified approach,
with appropriate checks and balances, all Busi-
ness Groups taking material credit risk have
independent credit risk control functions headed
by Chief Credit officers (CCOs) reporting func-
tionally to the Group CCO. They are responsible
for counterparty ratings and credit risk assess-
ment.
Credit risk authority, including authority to
establish allowances and provisions for credit
loss, is exercised by the Chairman’s Office
(by delegation to an Executive Vice Chairman),
by the GEB (by delegation to the Group CCO)
and within the Business Groups.
UBS manages and controls concentrations of
credit risk wherever they are identified, in partic-
ular to individual counterparties and groups and
to industries and countries.
UBS sets limits on its credit exposure to both
individual counterparties and counterparty
groups. Exposure is measured for banking prod-
ucts as the face value amount. 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 not only on the current replacement value
of contracts but also on potential future changes
in replacement value, and credit limits are
applied on this basis. The replacement values of
derivatives are included in the balance sheet and
in the table below. For further information about
derivatives 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
139
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
b) Credit Risk (continued)
details see Note 10. The credit exposure is gener-
ally 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 collateral by
UBS and the value of cash or securities borrowed
or taken as collateral by UBS.
Breakdown of credit exposure
Amounts for each product type are shown gross before allowances and provisions.
CHF million
31.12.03
31.12.02
Banking products
Loans to customers 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
248,207
15,563
46,623
84,334
30,833
(4,326)
421,234
249,370
16,594
39,306
82,092
20,120
(5,621)
401,861
2 See Note 25 – Commitments and Contingent Liabilities for further information.
1 See Note 9a – Due from Banks and Loans for further information.
3 Does not include
future potential credit exposure arising from changes in value of products with variable value, i. e. traded products. Potential future credit exposure is however included in
5 This figure repre-
internal measures of credit exposure for risk management and control purposes.
sents the difference in value between the cash or securities lent or given as collateral to counterparties, and the value of cash or securities borrowed or taken as collateral
6 See Note 10 –- Securities Borrowing, Securities Lending, Repurchase
from the same counterparties under stock borrow / lend and repo / reverse repo transactions.
7 See Note 9b – Allowances and Provisions for Credit Losses for further
and Reverse Repurchase Agreements for further information about these types of transactions.
8 The values of bonds, equities and other tradable obligations in the Group’s trading business area are also affected by credit events and default. They are
information.
not included in this table – exposure is controlled under the market risk control structure described in Note 29 – Financial Instruments Risk Position, section a).
4 See Note 23 – Derivative Instruments for further information.
140
Note 29 Financial Instruments Risk Position (continued)
b) Credit Risk (continued)
UBS is an active user of credit derivatives to
hedge credit risk in banking and traded products.
It also makes use of master netting agreements
where possible in its OTC derivatives trading
and, in line with general market trends, 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. Stress measures are therefore
applied 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.
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 –
loan interest payments and scheduled principal
repayments, or other payments due, for example
on guarantees, and including liquidation of col-
lateral where available. Loans are further classi-
fied as non-performing where payment of inter-
est, principal or fees is overdue by more than
90 days or (as now required by Swiss regulatory
guidelines) when insolvency proceedings have
commenced or obligations have been restruc-
tured on concessionary terms. Allowances or
provisions are determined such that the carrying
values of impaired claims are consistent with the
principles of IAS 39. For further information
about accounting policy for allowance and pro-
vision for credit losses see Note 1 l). For the
amounts of allowance and provision for credit
losses and amounts of impaired and non-per-
forming 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 account for
average credit loss over time and to encourage
risk-adjusted pricing, UBS uses the concept of
‘expected loss’ for management purposes. Expect-
ed loss is a statistically based measure intended to
reflect the annual costs that will arise, on average,
over time, from positions that become impaired,
and is a function of the probability of default
(given by the counterparty rating), current and
likely future exposure to the counterparty and the
likely severity of the loss should default occur.
141
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
c) Liquidity Risk
UBS’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
quickly to strategic market opportunities. A cen-
tralized approach is adopted, based on an inte-
grated framework incorporating the assessment
of expected cash flows and the availability of
high-grade collateral which could be used to
secure additional funding if required. The liquidi-
ty position is assessed and managed under a vari-
ety 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 possi-
bility that customers might seek to withdraw
funds or draw down unutilized 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 2003 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 2
Positive replacement values 2
Loans
Financial investments
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and other intangible assets
Other assets
Total 31.12.2003
Total 31.12.2002
3.6
22.4
9.5
44.0
461.8
84.3
20.6
4.0
6.2
0.0
0.0
0.0
11.9
668.3
489.7
Liabilities
52.0
Due to banks
5.1
Cash collateral on securities lent
158.5
Repurchase agreements
Trading portfolio liabilities 2
144.0
Negative replacement values 2
93.6
Due to customers
146.3
Accrued expenses and deferred income 13.7
0.0
Debt issued
17.6
Other liabilities
Total 31.12.2003
Total 31.12.2002
630.8
373.4
0.8
166.2
35.1
0.0
0.0
44.9
0.0
0.0
0.0
0.0
0.0
13.6
260.6
23.7
4.6
46.8
13.2
0.0
0.0
109.7
0.0
0.0
13.7
188.0
5.4
6.0
37.4
193.7
0.0
0.0
33.5
0.6
0.0
0.0
0.0
0.0
0.0
271.2
478.1
66.3
1.4
186.0
0.0
0.0
83.1
0.0
1.7
0.0
338.5
636.0
0.9
0.7
43.0
0.0
0.0
37.8
0.2
0.0
0.0
0.0
0.0
0.0
82.6
90.7
3.4
0.0
57.8
0.0
0.0
5.3
0.0
63.9
0.0
130.4
66.1
1.4
0.1
3.7
0.0
0.0
66.8
0.2
0.0
0.0
0.0
0.0
0.0
72.2
69.7
0.8
0.0
0.3
0.0
0.0
1.8
0.0
33.6
0.0
36.5
36.7
0.2
0.0
1.1
0.0
0.0
8.9
0.1
0.0
1.6
7.7
11.5
0.0
31.1
29.2
0.1
0.0
0.0
0.0
0.0
1.2
0.0
21.0
0.0
22.3
21.0
Total
3.6
31.7
213.9
320.6
461.8
84.3
212.5
5.1
6.2
1.6
7.7
11.5
25.5
1,386.0
1,181.1
127.2
53.3
415.8
144.0
93.6
347.4
13.7
120.2
31.3
1,346.5
1,138.6
1 Deposits without a fixed term, on which notice of withdrawal or termination has not been given (such funds may be withdrawn by the depositor or repaid by the borrower
2 Trading and derivative positions are shown within ‘on demand’ which management believes most accurately reflects the short-
subject to an agreed period of notice).
term nature of trading activities. The contractual maturity of the instruments may however extend over significantly longer periods.
142
Note 29 Financial Instruments Risk Position (continued)
d) Capital Adequacy
The adequacy of UBS’s capital is monitored
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 eligible capital (in total
and Tier 1) with the total of risk-weighted assets
(RWAs).
While UBS monitors and reports its capital
ratios under BIS rules, it is the rules established
by the Swiss regulator, the EBK, which ultimately
determine the capital required to underpin 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 rules.
UBS has complied with all BIS and EBK regu-
latory 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
subordinated long-term debt. Tier 1 capital is
required to be at least 4% and Total eligible cap-
ital 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 cus-
tomers, are weighted at 100%, meaning 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 trans-
actions 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 types of asset, most notably
property and equipment 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.
Capital is required to support market risk aris-
ing 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 obli-
gations such as bonds. UBS computes this risk
using a Value at Risk model approved by the EBK,
from which the market risk capital requirement is
derived. Unlike the calculations for credit risk and
other assets, this produces the capital requirement
itself rather than the RWA amount. In order to
compute a total capital ratio, the market risk cap-
ital requirement is therefore converted to a ‘RWA
equivalent’ (shown in the table below as Market
risk positions) such that the capital requirement is
8% of this RWA equivalent, i.e. the market risk
capital requirement is multiplied by 12.5.
143
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, net of allowances for credit losses 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
31.12.03
441,662
6,755
84,334
337,028
6,218
9,840
25,459
15,563
46,960
11,746,880
1,183,708
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
31.12.03
8,565
6,182
22,324
153,537
4,284
9,614
7,670
8,167
6,863
4,710
1,716
18,269
251,901
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
3 Represents the mark
1 Includes securities lending and reverse repo transactions.
4 Risk-weighted amount represents the “add-ons” for these contracts.
to market values of Forward and swap contracts and Purchased options, where positive.
5 Regulatory capital adequacy requirements for market risk, calculated using the approved Value 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 positions.
BIS capital ratios
Tier 1
of which hybrid Tier 1
Tier 2
Total BIS
Capital
CHF million
31.12.03
Ratio
%
31.12.03
Capital
CHF million
31.12.02
Ratio
%
31.12.02
29,765
3,224
3,816
33,581
11.8
1.3
1.5
13.3
27,047
3,182
5,962
33,009
11.3
1.3
2.5
13.8
The Tier 1 capital includes CHF 3,224 million (USD 2,600 million) trust preferred securities at
31 December 2003 and CHF 3,182 million (USD 2,300 million) at 31 December 2002.
144
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 recognized stock exchange) exists, as it
is the best evidence of the fair value of a financial
instrument. Market prices are not, however,
available for a significant number of the financial
assets and liabilities held and issued by the
Group. Therefore, for financial instruments
where no market price is available, the fair values
presented in the following table have been esti-
mated using present value or other estimation
and valuation techniques based on market condi-
tions 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
otherwise 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 sepa-
rately by deducting the amount of the
allowance for credit losses from both book
and fair values.
The assumptions and techniques have been
developed to provide a consistent measurement
of fair value for the Group’s assets and liabilities
in the following table. However, because other
institutions may use different methods and
assumptions, such fair value disclosures in this
Note cannot necessarily be compared from one
financial institution to another.
145
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
31.12.03
Fair Unrealized
value gain / (loss)
31.12.03
31.12.03
Carrying
value
31.12.02
Fair Unrealized
gain / (loss)
31.12.02
value
31.12.02
3.6
31.7
213.9
320.6
461.8
84.3
212.5
5.1
127.2
53.3
415.9
144.0
93.6
347.3
120.2
3.6
31.7
213.9
320.6
461.8
84.3
213.8
5.1
127.2
53.3
415.9
144.0
93.6
347.3
121.5
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
0.0
0.0
0.0
0.0
0.0
0.0
1.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(1.3)
0.0
0.8
(0.2)
0.6
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
The table does not reflect the fair values of non-
financial assets and liabilities such as property,
equipment, goodwill, prepayments and non-inter-
est 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. According-
ly, 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 decrease in the Net fair value gains and
losses during 2003 of CHF 0.5 billion is mainly
attributable to the change in the unrealized gains
of fixed rate long-term assets, which have
decreased by CHF 1.0 billion from the prior year
as a result of higher interest rates in 2003. This
was partially offset by a decrease in unrealized
loss from fixed rate long-term debt.
146
Note 31 Pension and Other Post-Retirement Benefit Plans
a) 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.
The measurement date of these plans is the
31 December for each year presented.
The overall investment policy and strategy
for the Group’s defined benefit pension plans is
guided by the objective to achieve an investment
return which, together with the contributions
paid, is sufficient to maintain reasonable control
over the various funding risks of the plans. The
investment advisors appointed by plan trustees
are responsible for determining the mix of asset
types and target allocations which are reviewed
by the plan trustees on an ongoing basis. Actual
asset allocation is determined by a variety of
current economic and market conditions and in
consideration of specific asset class risk.
The expected long-term rates of return on
plan assets are based on long-term expected
inflation, interest rates, risk premiums and tar-
geted asset class allocations. These estimates take
into consideration historical asset class returns
and are determined together with the plans’
investment and actuarial advisors.
Swiss pension plan
The pension plan covers practically all employees
in Switzerland and exceeds the minimum benefit
requirements under Swiss law. Contributions to
the pension plan are paid for by employees and
the Group. The employee contributions are cal-
culated 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 vari-
able contribution that ranges between 150% and
220% of the sum of employees’ contributions.
The employer contributions expected to be made
in 2004 to the pension plan are CHF 350 million.
The computation of the benefits is based on
the final covered salary. The benefits covered
include retirement benefits, disability, death and
survivor pension.
In 1999, the Group recognized a prepaid
pension asset of CHF 456 million representing
excess employer contributions. In 2003, the
remaining CHF 33 million (2002 CHF 323 mil-
lion, 2001 CHF 0 million) of this asset was used
to fund the employer contributions and was rec-
ognized as a pension expense.
The accumulated benefit obligation (which is
the current value of accrued benefits without
allowance for future salary increases) was
CHF 16,817 million as of 31 December 2003
(2002 CHF 15,853 million, 2001 CHF 14,750
million).
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 benefit
plans of a material nature are in the UK, the US
and Germany. The UK and the US defined bene-
fit plans are closed to new entrants who are cov-
ered by defined contribution plans. The amounts
shown for foreign plans reflect the net funded
positions of the major foreign plans.
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 employer contributions
expected to be made in 2004 to these pension
plans are CHF 63 million. 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 accumulated benefit obligation for these
pension plans was CHF 3,609 million as of
31 December 2003 (2002 CHF 3,376 million,
2001 CHF 3,195 million).
For pension plans with an accumulated bene-
fit obligation in excess of plan assets, the aggre-
gate projected benefit obligation and accumulat-
ed benefit obligation was CHF 944 million and
CHF 930 million as of 31 December 2003 (2002
CHF 3,436 million and 3,376 million, 2001 CHF
1,411 million and 1,373 million). The fair value
of plan assets for these plans was 677 million as
of 31 December 2003 (2002 CHF 2,382 million,
2001 CHF 1,010 million).
147
Financial Statements
Notes to the Financial Statements
Note 31 Pension and Other Post-Retirement Benefit Plans
(continued)
b) 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
179 million as of 31 December 2003 (2002 CHF
164 million, 2001 CHF 142 million) and the total
accrued post-retirement cost to CHF 137 million
as of 31 December 2003 (2002 CHF 130 million,
2001 CHF 130 million). The net periodic post-
retirement costs for the years ended 31 December
2003, 31 December 2002 and 31 December 2001
were CHF 22 million, CHF 25 million and CHF
24 million, respectively.
c) 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
contributions and earn matching or other con-
tributions from the Group. The contributions to
these plans recognized as expense for the years
ended 31 December 2003, 31 December 2002
and 31 December 2001 were CHF 141 million,
CHF 133 million and CHF 117 million, respec-
tively.
a) Defined benefit plans
CHF million
31.12.03
31.12.02
31.12.01
31.12.03
31.12.02
31.12.01
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
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
Foreign currency translation
Other
Fair value of plan assets
at the end of the year
(19,204)
(564)
(703)
(17,879 )
(554 )
(699 )
(17,712 )
(541 )
(674 )
(3,436)
(91)
(197)
(3,553 )
(108 )
(210 )
(70)
1,395
930
(209 )
(681 )
818
(262 )
421
889
(201)
124
138
(177 )
111
74
427
(3,406)
(121)
(204)
(1)
(345)
107
(12)
429
(18,216)
(19,204 )
(17,879 )
(3,663)
(3,436 )
(3,553)
16,566
1,411
370
202
(930)
18,289
(1,350 )
236
209
(818 )
19,074
(765 )
656
213
(889 )
2,382
429
831
(124)
(116)
2,887
(240 )
164
(111 )
(318 )
3,378
(220)
258
(107)
7
(429)
17,619
16,566
18,289
3,402
2,382
2,887
Funded status
Unrecognized net actuarial (gains) / losses
Unrecognized prior service cost
Unrecognized asset
(597)
1,716
(2,638 )
3,892
410
961
(1,119)
(1,221 )
(1,015 )
(261)
970
1
(1,054 )
1,126
1
(666)
673
2
(Accrued) / prepaid pension cost
0
33
356
710
73
9
148
Note 31 Pension and Other Post-Retirement Benefit Plans
(continued)
a) Defined benefit plans (continued)
CHF million
31.12.03
31.12.02
31.12.01
31.12.03
31.12.02
31.12.01
Swiss
Foreign
33
(403)
370
356
(559 )
236
Movement in the net (liability) or asset
(Accrued) / prepaid pension cost
at the beginning of the year
Net periodic pension cost
Employer contributions
Foreign currency translation
(Accrued) / prepaid pension cost
Amounts recognized in the Balance Sheet
Prepaid pension cost
Accrued pension liability
(Accrued) / prepaid pension cost
0
0
CHF million
For the year ended
Components of net periodic pension cost
Service cost
Interest cost
Expected return on plan assets
Increase / (decrease) of unrecognized assets
Special termination benefits
Amortization of unrecognized prior service cost
Amortization of unrecognized net (gains) / losses
Curtailment / settlement
Employee contributions
Net periodic pension cost
564
703
(818)
(102)
70
188
(202)
403
Principal actuarial assumptions used (%)
Assumptions used to determine defined
benefit obligations at the end of the year
Discount rate
Expected rate of salary increase
Rate of pension increase
Assumptions used to determine net
periodic pension cost for the year ended
Discount rate
Expected rate of return on plan assets
Expected rate of salary increase
Rate of pension increase
Plan assets
Actual plan asset allocation (%)
Equity instruments
Debt instruments
Real estate
Other
Total
3.8
2.5
1.0
3.8
5.0
2.5
1.5
39
43
12
6
100
356
(656 )
656
356
356
356
541
674
(947 )
339
262
33
33
33
554
699
(900 )
206
209
(209 )
559
(213 )
656
3.8
2.5
1.5
4.0
5.0
2.5
1.5
35
47
13
5
100
4.0
2.5
1.5
4.0
5.0
2.5
1.5
45
39
13
3
100
73
(168)
831
(26)
710
862
(152)
710
91
197
(178)
58
168
5.7
4.6
1.9
5.8
7.1
4.4
1.5
52
30
1
17
100
9
(83 )
164
(17 )
73
220
(147 )
73
108
210
(199 )
1
22
(59 )
83
5.8
4.4
1.5
6.2
7.3
4.4
1.5
57
36
1
6
100
(153)
(97)
258
1
9
185
(176)
9
121
204
(228)
97
6.2
4.4
1.5
6.3
7.9
4.4
1.6
57
35
1
7
100
149
Financial Statements
Notes to the Financial Statements
Note 31 Pension and Other Post-Retirement Benefit Plans
(continued)
a) Defined benefit plans (continued)
Swiss
Foreign
31.12.03
31.12.02
31.12.01
31.12.03
31.12.02
31.12.01
Long-term target plan asset allocation (%)
Equity instruments
Debt instruments
Real estate
Other
Actual return on plan assets (%)
35–53
30–48
12–19
0
8.6
51–55
44–46
0–1
1–2
17.8
(7.5 )
(4.0 )
(8.7 )
(7.3)
CHF million
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
1,005
246
2,930
814
206
2,645
84
90
476
305
824
104
1 The number of UBS AG shares were 2,908,699, 3,072,500 and 3,639,800 as of 31 December 2003, 31 December 2002 and 31 December 2001, respectively.
The amount of capital repayment and dividend received on UBS AG shares for the years ended 31 December 2003, 31 December 2002 and 31 December 2001 were
CHF 7 million, CHF 7 million and CHF 2 million, respectively.
b) Post-retirement medical and life plans
CHF million
31.12.03
31.12.02
31.12.01
Post-retirement benefit obligation at the beginning of the year
Service cost
Interest cost
Plan amendments
Actuarial gain / (loss)
Benefits paid
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
(166)
(11)
(10)
(14)
6
16
(179)
2
0
4
(6)
0
(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
The assumed average health care cost trend rates used in determining post-retirement benefit expense
is assumed to be 10.3% for 2003 and to decrease to an ultimate trend rate of 5% in 2010. 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
5
25
(4)
(19)
150
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 (EP): This voluntary plan gives eli-
gible employees the opportunity to purchase UBS
shares at fair market value on the purchase date
and receive at no additional cost two UBS
options for each share purchased, up to a maxi-
mum annual limit. The options have a strike
price equal to the fair market value of the stock
on the date the option is granted. Share purchas-
es can be made annually from bonus compensa-
tion or quarterly based on regular deductions
from salary. Shares purchased under EP are
restricted from resale for two years from the time
of purchase, and the options granted have a two-
year vesting requirement and generally expire
from ten years to ten and one-half years after the
date of grant.
Discounted Purchase Plans: 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 on rank. Any such
shares purchased must be held for a specified
period of time. The discount is recorded as com-
pensation expense.
Equity Ownership Plan (EOP): Selected per-
sonnel receive a mandatory portion of their per-
formance-related compensation in UBS shares
and in some cases UBS options, and most are eli-
gible to receive a matching contribution 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 spon-
sored funds. EOP awards vest in one-third incre-
ments over a three-year vesting period. Under
certain conditions, these awards are fully for-
feitable 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. Option grants gener-
ally vest in one-third increments over a three-
year period. Expiration of the options is general-
ly from ten to ten and one-half years. One option
gives the right to purchase one registered UBS
share at the option’s strike price. In one out-
standing prior year grant, accelerated vesting or
non-forfeitability may occur if certain share
appreciation targets are met.
Other deferred compensation plans: UBS
sponsors other deferred compensation plans for
selected eligible employees. Generally, contri-
butions are made on a tax deferred basis, and
participants are allowed to invest in AIVs. No
additional company match is granted, and the
plan is generally not forfeitable. In addition,
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 EP.
151
Financial Statements
Notes to the Financial Statements
Note 32 Equity Participation Plans (continued)
b) UBS share awards
i) Stock compensation plans
Movements in shares granted under various equity participation plans mentioned on the previous
page are as follows:
Stock compensation plans
31.12.03
31.12.02
31.12.01
Unvested shares outstanding, at the beginning of the year
Shares awarded during the year
Vested during the year
Forfeited during the year
48,136,561
11,023,553
(26,915,860)
(860,364)
52,299,332
13,511,655
(16,333,832 )
(1,340,594 )
47,458,928
16,850,859
(10,740,466)
(1,269,989)
Unvested shares outstanding, at the end of the year
31,383,890
48,136,561
52,299,332
Weighted-average fair market value
of shares awarded (in CHF)
Fair market value of outstanding shares
at the end of the year (CHF billion)
ii) Stock purchase plans
61
2.7
71
3.2
90
4.4
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 through discounted purchase plans
Weighted-average purchase price (in CHF)
Share quantity purchased through EP at fair market value
Weighted-average purchase price (in CHF)
Weighted-average purchase price (in USD)
31.12.03
1,722,492
31
2,593,391
61
49
31.12.02
1,339,223
40
2,483,684
77
46
31.12.01
1,701,099
47
1,221,416
51
152
Note 32 Equity Participation Plans (continued)
c) UBS option awards
Movements in options granted under various equity participation plans mentioned on the previous page are as follows:
Outstanding, at the beginning of the year
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)
31.12.031
67
59
54
64
76
63
59
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
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
31.12.03
88,164,227
38,969,319
(14,782,471)
(2,721,970)
(589,079)
109,040,026
34,726,720
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.
The following table summarizes additional information about stock options outstanding at 31 December 2003:
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
53.37–70.00
70.01–85.00
85.01–106.00
53.37–106.00
USD
6.48–35.00
35.01–45.00
45.01–55.00
55.01–65.31
6.48–65.31
27,389,634
23,708,208
5,686,709
56,784,551
6,342,786
14,530,862
26,951,159
4,430,668
52,255,475
CHF
61.17
78.13
98.66
72.00
USD
19.32
43.15
47.30
59.11
43.75
Years
6.4
6.7
4.7
6.3
Years
2.0
9.1
7.1
7.4
7.1
10,496,007
8,845,007
420,348
19,761,362
6,342,786
79,679
8,500,619
42,274
14,965,358
CHF
63.76
78.52
87.56
70.87
USD
19.32
39.52
46.57
57.87
35.02
153
Financial Statements
Notes to the Financial Statements
Note 32 Equity Participation Plans (continued)
d) Compensation Expense
Generally under IFRS, for all equity participa-
tion instruments (shares, cash-settled warrants
and other cash-settled derivatives for which the
underlying is UBS shares) except options, UBS
accrues expense in the performance year and
determines the number of instruments granted to
employees based on the instrument’s market
price at the grant date, which is generally in
the year following the performance year. For
options, the amount of expense recognized is
equal to the intrinsic value at grant date (i. e. the
difference between the strike price and fair
market value of shares at the date of grant. This
difference is generally zero, as option strike
prices are generally at or above the market prices
of the shares). For discounted share plans, the
expense is equal to the difference between the
fair market value and the discounted value and
is accrued for in the performance year. Manage-
ment’s estimate of the accrued expense before
tax for share-based compensation for the years
ended 31 December 2003, 2002 and 2001 was
CHF 833 million, CHF 592 million and CHF
974 million, respectively.
e) Pro-Forma Net Income
The following table presents IFRS Net profit and
Earnings per share for 2003, 2002 and 2001 as if
UBS had applied the fair value method of
accounting for its equity participation plans. The
fair value method would recognize expense equal
to the fair value of option awards at grant, which
is higher than the intrinsic value because of the
time value of options.
CHF million, except per share data
Net Profit, 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 profit, pro-forma
Earnings per share
Basic, as reported
Basic, pro-forma
Diluted, as reported
Diluted, pro-forma
31.12.03
6,385
31.12.02
3,535
31.12.01
4,973
630
493
769
(1,069)
5,946
5.72
5.32
5.61
5.22
(1,183 )
2,845
2.92
2.35
2.87
2.31
(1,116)
4,626
3.93
3.65
3.78
3.51
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)
31.12.03
31.12.02
31.12.01
35%
1.70%
3.17%
4.43%
4.5
35%
3.28%
4.65%
3.35%
4.5
30%
3.51%
5.81%
2.67%
4.5
The weighted-average fair value of options granted in 2003, 2002 and 2001 was CHF 15, CHF
20 and CHF 23 per share, respectively.
154
Note 33 Related Parties
For its 2003 and 2002 Financial Statements, the
Group defines related parties as Associated com-
panies, private equity investees, the Board of
Directors, the Group Executive Board, close
family members and enterprises which are con-
trolled by these individuals through their major-
ity shareholding or their role as chairman and /
or CEO in those companies. In 2001, the Group
Managing Board was also included in the above
definition.
The change in definition is due to the “Direc-
tive on Information Relating to Corporate Gov-
ernance” issued by the SWX Swiss Exchange,
effective from 1 July 2002 for all listed compa-
nies in Switzerland. Included in the new rules are
specific disclosure requirements for members
of the Board of Directors and “management
board”. For UBS, the Group Executive Board
meets the definition of “management 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 expansion of the Group
Executive Board and the Group Managing
Board during 2002. The number of Group Exec-
utive Board members increased from six to ten
and the Group Managing Board members from
thirty to fifty-two.
Amounts and share and option quantities
for 2001 are based on the definition applied in
that year.
a) Remuneration and equity holdings
The executive members of the Board of Direc-
tors have top-management employment con-
tracts and receive pension benefits upon retire-
ment. Total remuneration to the executive
members of the Board of Directors and Group
Executive Board recognized in the income state-
ment including cash, shares and accrued pen-
sion benefits amounted to CHF 144.6 million in
2003 and CHF 131.8 million in 2002. Total
compensation numbers exclude merger-related
retention payments for the two ex-PaineWebber
executives of CHF 21.1 million (USD 17.0 mil-
lion) in 2003 and CHF 20.6 million (USD
14.9 million) in 2002. These retention pay-
ments were committed to at the time of the
merger in 2000 and fully disclosed at the time.
Total remuneration to the executive members of
the Board of Directors, Group Executive Board
and Group Managing Board including accrued
pension benefits amounted to CHF 321.4 mil-
lion in 2001.
The external members of the Board of Direc-
tors do not have employment or service con-
tracts 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
members amounted to CHF 5.4 million in 2003,
CHF 3.5 million in 2002 and CHF 3.3 million
in 2001.
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
6,218,011 (equivalent to the same number of
shares) and 120,264 (equivalent to 7,214 shares)
at 31 December 2003 and 5,410,172 (equivalent
to the same number of shares) and 24,558,529
(equivalent to 1,473,217 UBS shares) at 31 De-
cember 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 Participa-
tion Plans.
The total number of shares held by members
of the Board of Directors, the Group Executive
Board and parties closely linked to them was
3,150,217 at 31 December 2003 and 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 or
Group Executive Board is the beneficial owner of
more than 1% of the Group’s shares at 31 De-
cember 2003.
b) Loans and advances to Board of Directors
and senior executives
The outstanding balance of loans to the members
of the Board of Directors, the Group Executive
Board and close family members amounted to
CHF 25.2 million at 31 December 2003 and
CHF 28 million at 31 December 2002. In the
past, executive members of the Board and GEB
155
Financial Statements
Notes to the Financial Statements
Note 33 Related Parties (continued)
members were granted loans, fixed advances and
mortgages at the same terms and conditions that
are available to other employees, based on terms
and conditions granted to third parties adjusted
for reduced credit risk. New loans and mortgages
are now granted at general market conditions
with no preferential rates, following the US Sar-
banes-Oxley Act of 2002. Non-executive Board
members are granted loans and mortgages at
general market conditions.
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
31.12.03
31.12.02
40
48
(25)
63
65
10
(35)
40
All loans and advances to associated companies are transacted at arm’s length. At 31 December 2003
and 2002, there were trading exposures and guarantees to significant associated companies of CHF
35 million and CHF 136 million, respectively. In addition, the Group routinely receives services from
associated companies at arm’s length terms. For the years ended 31 December 2003, 31 December
2002 and 31 December 2001, the amount paid to significant associates for these services was CHF
106 million, CHF 60 million and CHF 98 million, respectively.
During 2003, UBS sold its VISA acquiring business to Telekurs Holding AG, an associated com-
pany. UBS realized a CHF 90 million gain from this divestment.
Note 36 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
31.12.03
31.12.02
338
153
(125)
366
489
328
(479)
338
At 31 December 2003 and 31 December 2002, there were trading exposures and guarantees or com-
mitments to private equity companies of CHF 23 million and CHF 73 million, respectively. In addi-
tion the Group purchased services from private equity companies at arm’s length terms for the years
ended 31 December 2003, 31 December 2002 and 31 December 2001 in the amount of CHF 14 mil-
lion, CHF 116 million and CHF 196 million, respectively.
156
Note 33 Related Parties (continued)
e) Other related party transactions
During 2003 and 2002, UBS entered into the following transactions at arm’s length with companies
whose Chairman and / or CEO is an external member of the Board of Directors of UBS or of which
an external director is a controlling shareholder.
In 2003 and 2002 these companies included Unisys (Switzerland), a wholly owned subsidiary of
Unisys Corporation (USA), J Sainsbury plc. (UK), Serono Group and its various subsidiary compa-
nies and Bertarelli & Cie (Switzerland). In 2003, in addition to those mentioned previously, related
parties included Sika AG (Switzerland), Kedge Capital Partners Ltd. (Jersey) and Team Alinghi SA
(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
2003
43
7
791
2002
54
13
140
1Includes guarantees, contingent liabilities and committed credit facilities of CHF 58.5 million, but excludes uncommitted working capital facilities of CHF 119.6 million.
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.
157
Financial Statements
Notes to the Financial Statements
Note 34 Sales of Financial Assets in Securitizations
During the years ended 31 December 2003, 2002 and 2001, UBS securitized (i.e., transformed owned
financial assets into securities through sales transactions) residential mortgage loans and securities,
commercial mortgage loans and other financial assets, acting as lead or co-manager. UBS's continu-
ing involvement in these transactions was primarily limited to the temporary retention of various
security interests.
Proceeds received at the time of securitization were as follows:
CHF billion
Residential mortgage securitizations
Commercial mortgage securitizations
Other financial asset securitizations
Proceeds Received
31.12.03
31.12.02
31.12.01
131
4
2
143
4
6
68
4
3
Related pre-tax gains (losses) recognized, including unrealized gains (losses) on retained interests, at
the time of securitization were as follows:
CHF million
Residential mortgage securitizations
Commercial mortgage securitizations
Other financial asset securitizations
Pre-tax gains / (losses) recognized
31.12.03
31.12.02
31.12.01
338
214
2
524
206
(5 )
113
130
21
At 31 December 2003 and 2002, UBS retained CHF 3.8 billion and CHF 5.2 billion, respectively in
agency residential mortgage securities, backed by the Government National Mortgage Association
(GNMA), the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mort-
gage Corporation (FHLMC). The fair value of retained interests in residential mortgage securities is
generally determined using observable market prices. Retained interests in other residential mortgage,
commercial mortgage and other securities were not material at 31 December 2003 and 2002.
Note 35 Post-Balance Sheet Events
There have been no material post-balance sheet
events which would require disclosure or adjust-
ment to the 31 December 2003 Financial State-
ments.
Bond issues have increased by CHF 697 million
from the balance sheet date to 4 February 2004.
On 4 February 2004, 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 15 April 2004 for
approval.
158
Note 36 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 Wealth Management & Business
Banking, Global Asset Management, Investment
Bank and Wealth Management USA) nor
Corporate Center are replicated in their own
individual legal entities but rather they generally
operate out of the parent bank, UBS AG,
through its Swiss and foreign branches.
The parent bank structure allows UBS to cap-
italize 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:
Share
capital
in millions
Equity
interest
accumu-
lated in %
Significant subsidiaries
Company
Aventic AG
Banco UBS SA
BDL Banco di Lugano
BDL Banco di Lugano (Singapore) Ltd
Brunswick UBS Ltd
Cantrade Private Bank
Switzerland (CI) Limited
Crédit Industriel SA
Ehinger & Armand von Ernst AG
Factors AG
Ferrier Lullin & Cie SA
GAM Holding AG
GAM Limited
Giubergia UBS SIM SpA
Noriba Bank BSC
PaineWebber Capital Inc
PT UBS Securities Indonesia
SBC Wealth Management AG
SBCI IB Limited
SG Warburg & Co International BV
Thesaurus Continentale
Effekten-Gesellschaft in Zürich
UBS (Bahamas) Ltd
UBS (France) SA
UBS (Italia) SpA
UBS (Luxembourg) SA
UBS (Monaco) SA
UBS (Trust and Banking) Limited
UBS Advisory and
Capital Markets Australia Ltd
UBS Americas Inc
UBS Asesores SA
UBS Australia Limited
UBS Bank (Canada)
UBS Bank USA
UBS Belgium SA / NV
UBS Beteiligungs-GmbH & Co KG
Footnotes
1 WM&BB: Wealth Management & Business
Banking, Global AM: Global Asset Management,
IB: Investment Bank, WM-US: Wealth
Management USA, CC: Corporate Center.
2 Share Capital and Share Premium.
Jurisdiction
of incorporation
Zurich, Switzerland
Rio de Janeiro, Brazil
Lugano, Switzerland
Singapore, Singapore
George Town, Cayman Islands
St. Helier, Jersey
Zurich, Switzerland
Zurich, Switzerland
Zurich, Switzerland
Geneva, Switzerland
Zurich, Switzerland
Hamilton, Bermuda
Milan, Italy
Manama, Bahrain
Delaware, USA
Jakarta, Indonesia
Zug, Switzerland
London, Great Britain
Amsterdam, the Netherlands
Business
Group 1
WM&BB
IB
CC
CC
IB
CC
WM&BB
CC
WM&BB
CC
CC
CC
IB
WM&BB
WM-US
IB
CC
IB
IB
CHF
BRL
CHF
SGD
USD
30.0
52.9
50.0
25.0
25.0
0.7
GBP
10.0
CHF
21.0
CHF
5.0
CHF
30.0
CHF
116.0
CHF
2.0
USD
15.1
EUR
10.0
USD
25.82
USD
IDR 25,000.0
290.1
CHF
100.0
GBP
40.5
GBP
Zurich, Switzerland
Nassau, Bahamas
Paris, France
Milan, Italy
Luxembourg, Luxembourg
Monte Carlo, Monaco
Tokyo, Japan
30.0
CHF
WM&BB
4.0
USD
WM&BB
10.7
EUR
WM&BB
42.0
EUR
WM&BB
150.0
CHF
WM&BB
9.2
EUR
WM&BB
Global AM JPY 10,900.0
Sydney, Australia
Delaware, USA
Panama, Panama
Sydney, Australia
Toronto, Canada
Utah, USA
Brussels, Belgium
Frankfurt am Main, Germany
IB
IB
WM&BB
IB
WM&BB
WM-US
WM&BB
IB
580.82
AUD
USD 4,490.82
–
USD
50.0
AUD
CAD
8.5
USD 1,700.02
EUR
14.5
398.8
EUR
100.0
100.0
100.0
100.0
50.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
50.0
100.0
100.0
93.4
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
159
Share
capital
in millions
Equity
interest
accumu-
lated in %
Financial Statements
Notes to the Financial Statements
Note 36 Significant Subsidiaries and Associates (continued)
IB
Sandton, South Africa
IB
Hong Kong, China
CC
St. Helier, Jersey
IB
Kuala Lumpur, Malaysia
WM&BB
Madrid, Spain
WM&BB
Milan, Italy
WM-US
New Jersey, USA
George Town, Cayman Islands
CC
Willemstad, Netherlands Antilles CC
Delaware, USA
Delaware, USA
IB
WM-US
Significant subsidiaries (continued)
Company
Jurisdiction
of incorporation
St. Helier, Jersey
Zurich, Switzerland
Delaware, USA
George Town, Cayman Islands
George Town, Cayman Islands
Amsterdam, the Netherlands
Delaware, USA
George Town, Cayman Islands
Delaware, USA
Milan, Italy
Glattbrugg, Switzerland
Milan, Italy
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 SpA
UBS Card Center AG
UBS Corporate Finance Italia SpA
UBS Corporate Finance
South Africa (Proprietary) Limited
UBS Derivatives Hong Kong Limited
UBS Employee Benefits Trust Limited
UBS Equity Research Malaysia Sdn Bhd
UBS España SA
UBS Fiduciaria SpA
UBS Fiduciary Trust Company
UBS Finance (Cayman Islands) Ltd
UBS Finance (Curação) NV
UBS Finance (Delaware) LLC
UBS Financial Services Inc.
UBS Financial Services
Hato Rey, Puerto Rico
Incorporated of Puerto Rico
Zurich, Switzerland
UBS Finanzholding AG
Delaware, USA
UBS Fund Advisor LLC
Luxembourg, Luxembourg
UBS Fund Holding (Luxembourg) SA
UBS Fund Holding (Switzerland) AG
Basel, Switzerland
UBS Fund Management (Switzerland) AG Basel, Switzerland
UBS Fund Services (Cayman) Ltd
UBS Fund Services (Luxembourg) SA
UBS Global Asset Management
(Americas) Inc
UBS Global Asset Management
(Australia) Ltd
UBS Global Asset Management
(Canada) Co
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
(Singapore) Ltd
UBS Global Asset Management
(Taiwan) Ltd
UBS Global Asset Management (US) Inc
UBS Global Asset Management Holding Ltd London, Great Britain
George Town, Cayman Islands
Luxembourg, Luxembourg
Taipei, Taiwan
Delaware, USA
Singapore, Singapore
Hong Kong, China
Sydney, Australia
Halifax, Canada
Delaware, USA
Tokyo, Japan
Paris, France
Milan, Italy
Business
Group 1
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
WM&BB
IB
GBP
CHF
USD
USD
USD
EUR
USD
USD
USD
EUR
CHF
EUR
226.0
5.0
130.02
61.12
5.0
118.82
2.62
113.02
378.52
25.8
40.0
1.9
ZAR
–
HKD
20.0
CHF
–
MYR
0.5
EUR
115.3
EUR
0.2
4.42
USD
USD
0.5
USD
0.1
37.32
USD
USD 1,672.32
USD
WM-US
CHF
CC
USD
WM-US
Global AM CHF
Global AM CHF
Global AM CHF
Global AM USD
Global AM CHF
Global AM USD
Global AM AUD
31.02
10.0
–
42.0
18.0
1.0
5.6
2.5
–
8.0
Global AM CAD
117.0
WM&BB
EUR
2.1
Global AM HKD
25.0
Global AM EUR
2.0
Global AM JPY
2,200.0
Global AM SGD
4.0
Global AM TWD
Global AM USD
Global AM GBP
340.0
35.22
8.0
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
99.6
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
84.1
100.0
100.0
Footnotes
1 WM&BB: Wealth Management & Business
Banking, Global AM: Global Asset Management,
IB: Investment Bank, WM-US: Wealth
Management USA, CC: Corporate Center.
2 Share Capital and Share Premium.
160
Share
capital
in millions
Equity
interest
accumu-
lated in %
Note 36 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
Jurisdiction
of incorporation
St. John, Canada
Amsterdam, the Netherlands
New York, USA
Dublin, Ireland
UBS Global Trust Corporation
UBS International Holdings BV
UBS International Inc
UBS International Life Limited
UBS Invest Kapitalanlagegesellschaft mbH Frankfurt am Main, Germany
Frankfurt am Main, Germany
UBS Investment Bank AG
Amsterdam, the Netherlands
UBS Investment Bank Nederland BV
Brugg, Switzerland
UBS Leasing AG
Zurich, Switzerland
UBS Life AG
London, Great Britain
UBS Limited
Delaware, USA
UBS Loan Finance LLC
Delaware, USA
UBS Mortgage Holdings LLC
Auckland, New Zealand
UBS New Zealand Limited
UBS O’Connor LLC
Delaware, USA
UBS PaineWebber Life Insurance Company California, USA
New York, USA
UBS Portfolio LLC
Delaware, USA
UBS Preferred Funding Company LLC I
Delaware, USA
UBS Preferred Funding Company LLC II
Delaware, USA
UBS Preferred Funding Company LLC III
Delaware, USA
UBS Preferred Funding Company LLC IV
Delaware, USA
UBS Principal Finance LLC
Melbourne, Australia
UBS Private Clients Australia Ltd
Delaware, USA
UBS Real Estate Investments Inc
Delaware, USA
UBS Real Estate Securities Inc
Connecticut, USA
UBS Realty Investors LLC
Bangkok, Thailand
UBS Securities (Thailand) Ltd
Hong Kong, China
UBS Securities Asia Limited
Sydney, Australia
UBS Securities Australia Ltd
UBS Securities Canada Inc
Toronto, Canada
UBS Securities España
Sociedad de Valores SA
UBS Securities France SA
UBS Securities Hong Kong Limited
UBS Securities India Private Limited
UBS Securities International Limited
UBS Securities Japan Ltd
UBS Securities Limited
UBS Securities LLC
UBS Securities Philippines Inc
UBS Securities Singapore Pte Ltd
UBS Securities South Africa
(Proprietary) Limited
UBS Trust (Canada)
UBS Trust Company National Association
UBS Trustees (Bahamas) Ltd
UBS Trustees (Cayman) Ltd
UBS Trustees (Jersey) Ltd
UBS Trustees (Singapore) Limited
UBS UK Holding Limited
UBS Wealth Management AG
Madrid, Spain
Paris, France
Hong Kong, China
Mumbai, India
London, Great Britain
George Town, Cayman Islands
London, Great Britain
Delaware, USA
Makati City, Philippines
Singapore, Singapore
IB
Sandton, South Africa
WM&BB
Toronto, Canada
WM-US
New York, USA
Nassau, Bahamas
WM&BB
George Town, Cayman Islands WM&BB
WM&BB
St. Helier, Jersey
WM&BB
Singapore, Singapore
IB
London, Great Britain
WM&BB
Hamburg, Germany
Business
Group 1
CAD
WM&BB
EUR
CC
USD
WM&BB
WM&BB
EUR
Global AM EUR
EUR
IB
EUR
IB
CHF
WM&BB
CHF
WM&BB
GBP
IB
USD
IB
USD
WM-US
IB
NZD
Global AM USD
USD
WM-US
USD
IB
USD
IB
USD
IB
USD
IB
USD
IB
USD
IB
AUD
IB
USD
IB
IB
USD
Global AM USD
THB
IB
HKD
IB
AUD
IB
CAD
IB
0.1
6.8
34.32
1.0
7.7
155.7
10.9
10.0
25.0
21.2
16.7
–
7.5
1.0
39.32
0.1
–
–
–
–
0.1
53.9
0.3
0.4
9.3
400.0
20.0
209.82
10.0
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
15.0
EUR
22.9
EUR
30.0
HKD
237.8
INR
GBP
18.0
JPY 50,000.0
GBP
140.0
USD 2,141.42
150.0
PHP
55.0
SGD
ZAR
CAD
USD
USD
USD
GBP
SGD
GBP
EUR
87.12
12.5
5.02
2.0
2.0
–
3.3
5.0
51.0
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
50.0
100.0
100.0
100.0
75.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
161
Footnotes
1 WM&BB: Wealth Management & Business
Banking, Global AM: Global Asset Management,
IB: Investment Bank, WM-US: Wealth
Management USA, CC: Corporate Center.
2 Share Capital and Share Premium.
Financial Statements
Notes to the Financial Statements
Note 36 Significant Subsidiaries and Associates (continued)
Consolidated companies: changes in 2003
Significant new companies
Giubergia UBS SIM SpA – Milan, Italy
SBC Wealth Management AG – Zug, Switzerland
UBS Bank USA – Utah, USA
UBS International Life Limited – Dublin, Ireland
UBS Preferred Funding Company LLC IV – Delaware, USA
Deconsolidated companies
Significant deconsolidated companies
Bank Ehinger & Cie AG – Basel, Switzerland
Cantrade Privatbank AG – Zurich, Switzerland
UBS (USA) Inc – Delaware, USA
Reason for deconsolidation
Merged
Merged
Merged
Significant associates
Company
Motor Columbus AG – Baden, Switzerland
SIS Swiss Financial Services Group AG – Zurich, Switzerland
Telekurs Holding AG – Zurich, Switzerland
O’Connor Global Convertible Portfolio –
Luxembourg, Luxembourg
UBS Currrency Portfolio Ltd –
George Town, Cayman Islands
UBS Global Equity Arbitrage Ltd –
George Town, Cayman Islands
UBS Neutral Alpha Strategies Ltd –
George Town, Cayman Islands
Volbroker.com Limited – London, Great Britain
1 For Hedge Funds Net Asset Value instead of share capital.
Industry
Electricity
Financial
Financial
Private Investment
Company
Private Investment
Company
Private Investment
Company
Private Investment
Company
Financial
Equity interest
in %
36
33
33
60
20
52
12
21
Share capital
in millions
CHF
CHF
CHF
253
26
45
USD
331
USD 1,7501
USD
8231
USD
GBP
6951
18
None of the above investments carry voting rights that are significantly different from the propor-
tion of shares held.
162
Note 37 Invested Assets and Net New Money
Invested assets include all client assets managed by
or deposited with UBS for investment purposes
only. They therefore exclude all assets held for
purely transactional purposes. Assets included are,
for example, managed fund assets, managed insti-
tutional assets, discretionary and advisory wealth
management portfolios, fiduciary deposits, time
deposits, savings accounts and wealth manage-
ment securities or brokerage accounts. Custody-
only assets and transactional cash or current
accounts as well as non-bankable assets (e. g. art
collections) and deposits from third-party banks
for funding or trading purposes are excluded.
Discretionary assets are defined as those
where the bank decides on how a client’s assets
are invested. Other invested assets are those
where the client decides on how the assets are
invested.
When a single product is created in one Busi-
ness Group and sold in another, it is counted in
both the Business Group that does the invest-
ment management and the one that distributes
it. This results in double counting within UBS
total invested assets, as both Business Groups
are providing a service independently to their
respective clients, and both add value and gener-
ate revenue.
Net new money is the net amount of invested
assets that are acquired by the bank from new
clients, invested assets that are lost when clients
terminate their relationship with UBS and the
inflows and outflows of invested assets from
existing UBS clients. Interest and dividend
income from invested assets is not included in
the net new money result. Market and currency
movements are also excluded, as are the effects
resulting from any acquisition or divestment
of a UBS subsidiary or business. Interest
expense on loans result in net new money
outflows.
CHF billion
Fund assets managed by UBS
Discretionary assets
Other invested assets
Total invested assets
thereof double count
Net new money
31.12.03
31.12.02
339
511
1,359
2,209
287
61.6
322
446
1,269
2,037
295
36.9
Note 38 Currency Translation Rates
The following table shows the principal rates used to translate the financial statements of foreign
entities into Swiss francs:
1 USD
1 EUR
1 GBP
100 JPY
Spot rate
As at
Average rate
Year ended
31.12.03
31.12.02
31.12.03
31.12.02
31.12.01
1.24
1.56
2.22
1.15
1.38
1.45
2.23
1.17
1.34
1.54
2.20
1.16
1.54
1.46
2.33
1.24
1.69
1.50
2.44
1.40
163
Financial Statements
Notes to the Financial Statements
Note 39 Swiss Banking Law Requirements
The consolidated financial statements of UBS are
prepared in accordance with International Finan-
cial Reporting Standards. Set out below are the
significant differences regarding recognition and
measurement between IFRS and the provisions of
the Banking Ordinance and the Guidelines of
the Swiss Banking Commission governing finan-
cial statement reporting pursuant to Article 23
through Article 27 of the Banking Ordinance.
1. Financial investments
Under IFRS, available-for-sale financial invest-
ments are carried at fair value. Changes in fair
value are recorded directly in 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 avail-
able-for-sale investment is determined to be
impaired, the cumulative unrealized loss pre-
viously recognized in Shareholders’ equity is
included in net profit or loss for the period. On
disposal of a financial investment, the difference
between the net disposal proceeds and the carry-
ing amount plus any attributable unrealized gain
or loss balance recognized in 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 below cost and
reversals of such reductions as well as gains and
losses on disposal are included in Other income.
2. Cash flow hedges
The Group uses derivative instruments to hedge
against the exposure from varying cash flows
receivable and payable. Under IFRS, when hedge
accounting is applied for these instruments, the
unrealized gain or loss on the effective portion of
the derivatives is recorded in Shareholders’
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 as assets or liabili-
ties. The deferred amounts are released to income
when the hedged cash flows occur.
164
Note 40 Reconciliation of International Financial Reporting
Standards (IFRS) to United States Generally Accepted Accounting
Principles (US GAAP)
Note 40.1 Valuation and income recognition differences between
IFRS and US GAAP
The consolidated financial statements of UBS
have been prepared in accordance with IFRS.
The principles of IFRS differ in certain respects
from United States Generally Accepted Account-
ing Principles (“US GAAP”). The following 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 1998 merger of Union Bank of
Switzerland and Swiss Bank Corporation was
accounted for under the uniting of interests
method. The balance sheets and income state-
ments of the banks were combined, and no
adjustments were made to the carrying values of
the assets and liabilities. Under US GAAP, the
business combination creating UBS AG is
accounted for under the purchase method with
Union Bank of Switzerland being considered the
acquirer. Under the purchase method, the cost of
acquisition is measured at fair value and the
acquirer’s interests in identifiable tangible assets
and liabilities of the acquiree are restated to fair
values at the date of acquisition. Any excess con-
sideration paid over the fair value of net tangible
assets acquired is allocated, first to identifiable
intangible assets based on their fair values, if
determinable, with the remainder allocated to
goodwill.
Goodwill 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.
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.
On 1 January 2002, UBS adopted SFAS 141,
“Business Combinations” and SFAS 142, “Good-
will 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 Corporation
ceased to be recorded under US GAAP.
In 2003 and 2002, goodwill recorded under US
GAAP was reduced by CHF 39 million and CHF
43 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
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 good-
will and the intangible assets reclassified to good-
will for US GAAP (CHF 831 million and CHF
1,017 million for the years ended 31 December
2003 and 31 December 2002, respectively) was
reversed for US GAAP.
Had UBS been required to adopt SFAS 142 for
its US GAAP Financial Statements in 2001,
reported Net profit and Earnings per share
would have been as follows:
165
Financial Statements
Notes to the Financial Statements
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
31.12.03
31.12.02
31.12.01
6,513
0
0
6,513
5.83
0.00
0.00
5.83
5.72
0.00
0.00
5.72
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
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:
2004
2005
2006
2007
2008
2009 and thereafter
Total
93
90
77
70
69
775
1,174
c. Restructuring provision
Under IFRS, restructuring provisions are recog-
nized when a legal or constructive obligation has
been incurred. In 1997, a CHF 7,000 million
restructuring provision was recognized to cover
personnel, IT, premises and other costs associat-
ed with combining and restructuring the merged
banks. A further CHF 300 million provision 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 cer-
tain activities of the banks for the purpose of
reducing costs and improving efficiencies, Union
Bank of Switzerland recognized a restructuring
provision of CHF 1,575 million during 1998 for
US GAAP. CHF 759 million of this provision
related to estimated costs for restructuring the
operations and activities of Swiss Bank Cor-
poration, and that amount was recorded as a lia-
bility of the acquired business. The remaining
CHF 816 million of estimated costs were charged
to restructuring expense during 1998. The
US GAAP restructuring provision was increased
by CHF 600 million and CHF 130 million in
1999 and 2000, respectively.
During 2001, CHF 112 million restructuring
costs were expensed as incurred under US GAAP.
These costs were already part of the restructuring
provision under IFRS, but were not eligible for
recognition under US GAAP until 2001. The
restructuring plan was completed and the
remaining balance of the US GAAP restructuring
provision was used substantially in accordance
with previously disclosed plans. At 31 December
2001, the restructuring provision for both IFRS
and US GAAP has been fully utilized.
166
d. Derivative instruments
Derivative instruments held
or issued for hedging activities
On 1 January 2001, UBS 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 introduced new
rules for the accounting and reporting of deriva-
tive instruments, including certain derivative
instruments embedded in other contracts, and of
hedging activities. The adoption of SFAS 133 did
not result in any transition items for UBS on
1 January 2001 as it 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,
consisting of CHF 19 million reflecting the
impact of the new hedge accounting rules and
CHF 42 million reflecting the impact of remeas-
uring 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 already recorded in
the Income statement prior to 1 January 2001)
and was reversed, and the second adjustment was
recorded in the Income statement.
Under IAS 39, UBS is permitted to hedge
interest rate risk based on forecast cash inflows
and outflows on a group basis. For this purpose,
UBS accumulates information about financial
assets and financial liabilities, which is then
used to estimate and aggregate 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 method-
ology. 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, UBS’s derivative hedg-
ing relationships have been treated the same
under both IFRS and US GAAP, except for
hedges of interest rate risk of forecast cash flows
on a group basis as mentioned in the previous
paragraph.
In addition, amounts deferred under previous
hedging relationships that now do not qualify as
hedges under IAS 39 are being amortized against
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 instruments indexed to a company’s
own shares be recorded as an equity instrument
in Shareholders’ equity if gross physical settle-
ment is required in its own shares or if the com-
pany has the choice to settle the instrument by
delivery or receipt of its own shares. If, however,
the instrument requires cash settlement or if
the counterparty may choose cash settlement,
then the instrument must be classified as a
derivative, with changes in fair value recorded
in income.
Derivative classification is also required under
US GAAP if a company may not have sufficient
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 as equity instruments
in Shareholders’ equity.
In 2003 and 2001, UBS had no instruments
indexed to its own shares for which the account-
ing treatment under US GAAP differed from
IFRS, so there was no reconciling item for these
derivative instruments. In 2002, however, UBS
issued net-share settled put options as part of its
share repurchases in 2002. Such contracts are
recorded under IFRS as equity instruments in
Shareholders’ equity and under US GAAP as
derivatives with changes in fair value reflected in
Net income. Such contracts increased US GAAP
Net income by CHF 12 million in 2002.
Trading income of CHF 22 million under both
IFRS and US GAAP in 2003, CHF 125 million
under IFRS (CHF 137 million under US GAAP)
in 2002 and CHF 261 million under both IFRS
and US GAAP in 2001 was recorded in the
financial statements from trading in potentially
cash settled derivative instruments indexed to
UBS shares.
167
Financial Statements
Notes to the Financial Statements
Bifurcation of embedded issuer calls out of
structured debt instruments
UBS issues certain structured debt instruments
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, including the issuer call,
and accounted for as a stand-alone derivative
contract. Under US GAAP, however, certain issuer
calls must remain with the host contract and are
therefore not separated. This results in different
values of the bifurcated derivatives and the relat-
ed host contracts. Because the host contract under
US GAAP includes the issuer call option, and
therefore, its fair value changes differently from
the host contract under IFRS, hedge effectiveness
criteria under US GAAP can generally not be met
for those contracts that are hedged under IFRS.
The impact of not separating these issuer call fea-
tures including the disallowance of the hedge
accounting was to increase US GAAP Net income
by CHF 14 million before tax at 31 December
2003 and to reduce US GAAP Net income by
CHF 55 million before tax at 31 December 2002.
e. 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 of IAS 39 have been
reversed under US GAAP to reflect the difference
between the two standards in measuring such
investments. 2) Writedowns on impaired assets
can be fully or partially reversed under IFRS if
the value of the impaired assets increases. Such
reversals of impairment writedowns are not
allowed under US GAAP. Reversals under IFRS
were not significant in 2003, 2002 or 2001. 3)
Private equity investments, as described below.
Private equity investments
Since the adoption of IAS 39 on 1 January 2001,
UBS has accounted for private equity investments
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, UBS adopted the provi-
sions of SFAS 144 “Accounting for the Impair-
ment or Disposal of Long-Lived Assets” for its US
GAAP Financial Statements. The statement prima-
rily 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 previously contained in
Accounting Research Bulletin 51 “Consolidated
Financial Statements” as amended by SFAS 94
“Consolidation of All Majority-Owned Sub-
sidiaries”. Therefore, on adopting SFAS 144, UBS
changed its US GAAP accounting for certain pri-
vate equity investments by accounting for those
investments held within separate investment sub-
sidiaries in accordance with the “AICPA Audit
and Accounting Guide, Audits of Investment
Companies”. The effect of this change for US
GAAP reporting purposes 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 invest-
ments continue to be accounted for at cost less
“other than temporary” impairment.
For the IFRS to US GAAP reconciliation, fair
value adjustments on certain private equity invest-
ments recorded directly in Shareholders’ equity
under IFRS had to be shown in the Income state-
ment 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 years ended 31 December 2003
and 31 December 2002, the effect of applying the
new standard on the reconciliation of IFRS net
profit to US GAAP was to decrease US GAAP net
profit by an additional CHF 19 million, after tax
and to increase US GAAP net profit by CHF 83
million, after tax, respectively.
The pro-forma Net profit assuming that the
change in accounting principle were applied
retroactively would be as follows:
168
CHF million, except for per share data
For the year ended
Net profit under US GAAP
Basic earnings per share
Diluted earnings per share
pro-forma
31.12.03
6,513
5.83
5.72
pro-forma
31.12.02
4,907
4.06
3.99
pro-forma
31.12.01
2,763
2.21
2.09
See Note 2 for information regarding impairment charges recorded for private equity investments.
f. Pension plans
Under IFRS, UBS recognizes pension expense
based on a specific method of actuarial valuation
used to determine the projected plan liabilities
for accrued service, including future expected
salary increases, and expected return on plan
assets. Plan assets are recorded at fair value and
are held in a separate trust to satisfy plan liabili-
ties. 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 (which is the current value of
accrued benefits without allowance for future
salary increases), an additional minimum liability
must be shown in the balance sheet. If an addi-
tional 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 comprehen-
sive income. The additional minimum liability
required under US GAAP amounts to CHF
306 million, CHF 1,225 million and CHF 306
million as at 31 December 2003, 2002 and 2001,
respectively. The amount recognized in intangible
assets was CHF 0 million, CHF 2 million and
CHF 3 million and the amount recognized in
Other comprehensive income before tax was
CHF 306 million, CHF 1,223 million and CHF
303 million as at 31 December 2003, 2002 and
2001, respectively.
g. Other post-retirement benefit plans
Under IFRS, UBS has recorded expenses and lia-
bilities for post-retirement, medical and life
insurance benefits, determined under a method-
ology similar to that described above under pen-
sion 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.
h. Equity participation plans
IFRS does not specifically address the recognition
and measurement requirements for equity partic-
ipation plans.
US GAAP permits the recognition of compen-
sation cost on the grant date for the estimated
fair value of equity instruments issued (SFAS
123) or based on the intrinsic value of equity
instruments issued (Accounting Principles Board
“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,
UBS recognizes only intrinsic values at the grant
date with subsequent changes in value not recog-
nized. Under US GAAP, UBS applies the APB No.
25 intrinsic value method, which requires adjust-
ments to intrinsic values subsequent to the grant
date in certain circumstances.
The shares and other diversified instruments
of UBS’s equity participation plans are held in
trusts on behalf of the participants. Certain of
these trusts are recorded on UBS’s balance sheet
for US GAAP presentation, the effect of which is
169
Financial Statements
Notes to the Financial Statements
to increase assets by CHF 460 million and CHF
396 million, liabilities by CHF 483 million and
CHF 429 million, and decrease Shareholders’
equity by CHF 23 million and CHF 33 million
(for UBS AG shares held by the trusts which are
treated as treasury shares) at 31 December 2003
and 2002 respectively.
For US GAAP, certain of UBS’s option
awards have been determined to be variable
pursuant to APB No. 25, primarily because they
may be settled in cash or because UBS 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 2003, 2002
and 2001, is a CHF 28 million increase in com-
pensation expense, CHF 51 million decrease in
compensation expense and CHF 30 million
decrease in compensation expense, respectively.
In addition, certain of UBS’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 equity instruments
recorded directly in Shareholders’ equity for
IFRS. For US GAAP, the net effect of these
transactions is an increase to compensation
expense of CHF 118 million, a decrease to com-
pensation expense of CHF 12 million, and an
increase to compensation expense of CHF 41
million for the years ended 31 December 2003,
2002 and 2001, respectively.
i. Software capitalization
Under IFRS, effective 1 January 2000, certain
costs associated with the acquisitions or devel-
opment of internal-use software had to be capi-
talized. Once the software was ready for its
intended use, the costs capitalized were amor-
tized to the Income statement over the estimated
life of the software. Under US GAAP, the same
principle applied, however this standard was
effective 1 January 1999. For US GAAP, the
costs associated with the acquisition or develop-
ment of internal-use software that met the US
GAAP software capitalization criteria in 1999
were reversed from Operating expenses and
amortized over a life of two years from the time
that the software was ready for its intended use.
From 1 January 2000, the only remaining recon-
ciliation item was the amortization of software
capitalized in 1999 for US GAAP purposes. At
31 December 2002, this amount was fully uti-
lized and there is no longer a difference between
IFRS and US GAAP.
j. Consolidation of Variable Interest Entities
(VIEs)
US GAAP, like IFRS, generally requires consoli-
dation of entities on the basis of controlling a
majority of voting rights. In certain situations,
control over the majority of voting rights is not a
reliable indicator of the need to consolidate, such
as when there are no voting rights, or when vot-
ing rights and exposure to risks and rewards are
largely disproportionate. However, there are dif-
ferences in the approach of IFRS and US GAAP
to those situations.
Under IFRS, the assessment of control over an
entity is based on controlling a majority of voting
rights, or, if control is exercised through other
means, consideration is given to the substance of
the relationship. Indicators of these situations
include: predetermination of the entity’s activi-
ties; the entity’s activities being conducted on
behalf of the enterprise; decision-making powers
being held by the enterprise; the right to obtain
the majority of the benefits or be exposed to the
risks inherent in the activities of the entity; or
retaining the majority of the residual or owner-
ship risks related to the entity’s assets in order to
obtain benefits from its activities.
US GAAP consolidation considerations are
subject to FASB interpretation FIN 46, “Consol-
idation of Variable Interest Entities”, an interpre-
tation of Accounting Research Bulletin No. 51,
which was issued on 17 January 2003. A revised
version of FIN 46 was issued in December 2003.
FIN 46 requires that control over an entity be
assessed first based on voting interests. If voting
interests do not exist or differ significantly from
economic interests, then an entity is considered
to be a “Variable Interest Entity” (“VIE”).
Specifically, VIEs are entities in which the equity
investors:
– do not have sufficient equity at risk for the
entity to finance its activities without addi-
tional subordinated financial support from
other parties
– do not have the characteristics of a controlling
financial interest
170
– have voting rights that are not proportionate
to their economic interests, and the activities
of the entity involve or are conducted on
behalf of an investor with disproportionately
small voting interest.
FIN 46 requires an enterprise – the “primary
beneficiary” – to consolidate a VIE if it has vari-
able interests that will absorb a majority of the
VIE’s “expected losses”, receive a majority of the
VIE’s “expected residual returns”, or both. In
addition, the primary beneficiary is required to
make certain disclosures in relation to the VIE.
FIN 46 requires an enterprise which is the
holder of a “significant variable interest” to pro-
vide certain disclosures in relation to its involve-
ment with the VIE. UBS considers its variable
interests to be significant if it expects to receive
more than 20% of a VIE’s expected losses,
expected residual returns, or both.
At 31 December 2003, FIN 46 applies to
UBS’s US GAAP financial statements with respect
to transitional disclosure requirements and the
consolidation and disclosure of VIEs created
after 31 January 2003, in which UBS is the pri-
mary beneficiary.
In many cases the assessment of consolidation
under IFRS and US GAAP is the same, however
the application of FIN 46 for US GAAP purpos-
es results in certain differences from IFRS. The
result of consolidating certain entities at 31 De-
cember 2003 for US GAAP purposes, which are
not otherwise consolidated in UBS’s primary con-
solidated Financial Statements under IFRS, has
been a CHF 4.1 billion increase in the US GAAP
Balance sheet.
A discussion of FIN 46 measurement require-
ments, the disclosure and consolidation in the
US GAAP Balance sheet of VIEs created after
31 January 2003 in which UBS is the primary
beneficiary, and FIN 46 transitional disclosures,
are set out in Note 41.1.
k. Recently issued US accounting standards
On 1 January 2003, UBS adopted SFAS 145,
Rescission of FASB Statements 4, 44, and 64,
Amendment of FASB Statement No. 13, and Tech-
nical Corrections. The adoption of this new ac-
counting standard did not affect the Financial
Statements for the year ended 31 December 2003.
On 1 January 2003, UBS adopted FASB Inter-
pretation No. (FIN) 45, Guarantor’s Accounting
and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recog-
nized at inception of certain guarantees equal to
the fair value of the obligation assumed, which
extends over the period of the guarantee. FIN 45
is applicable prospectively for certain guarantees
issued or modified after 31 December 2002. The
adoption of FIN 45 had no material impact on
the results of operations and financial position
of UBS.
In April 2003, the FASB issued SFAS 149,
Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. The new
standard amends Statement 133 for decisions
made as part of the Derivatives Implementation
Group process that effectively required amend-
ments to SFAS 133, but more importantly in rela-
tion to the definition of a derivative. SFAS 149 is
effective prospectively for contracts entered into
or modified after 30 June 2003, and for hedging
relationships designated after 30 June 2003. The
adoption of the new standard by UBS had no
material effect on the 2003 Financial Statements
prepared in accordance with US GAAP.
In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and
Equity. The new standard is applicable to free-
standing financial instruments which embody
obligations for the issuer and changes their clas-
sification from equity to liabilities or assets in the
following situations:
– for a financial instrument linked to an entity’s
own shares that embodies an obligation to
repurchase the equity shares or settle the obli-
gation by transferring assets.
– for an obligation that the entity must or may
settle by issuing a variable number of its
equity shares whereby the counterparty
receiving the equity shares has no or only little
exposure to changes in the entity’s share price.
– for an instrument whose fair value is inversely
related to the change in fair value of the enti-
ty’s equity shares, for example a written put
option that could be net share settled.
SFAS 150 does not apply to financial instru-
ments with embedded conversion features, con-
ditional redemption features or other embedded
features in financial instruments that are not
derivatives in their entirety. UBS has adopted
SFAS 150 as at 1 June 2003 for financial instru-
171
Financial Statements
Notes to the Financial Statements
ments entered into or modified after that date,
and adopted the standard as at 1 July 2003 for
financial instruments entered into on or before
31 May 2003.
At 31 December, 2003, UBS had no financial
instruments outstanding that were within the
scope of SFAS 150, nor had it entered into trans-
actions after 31 May 2003, that were settled on
or before 31 December 2003, and would have
been accounted for under the new standard.
Therefore, the adoption of SFAS 150 had no
impact on UBS’s 2003 Financial Statements pre-
pared in accordance with US GAAP.
In November 2003, the FASB’s Emerging
Issues Task Force (EITF) issued EITF 03-1,
The Meaning of Other-Than-Temporary Im-
pairment and Its Application to Certain Invest-
ments. The Task Force reached a consensus that
the following disclosures are required for debt
and marketable equity securities classified as
available-for-sale or held-to-maturity under
Statements 115 and 124 that are impaired at the
balance sheet date but for which an other-than-
temporary impairment has not been recognized.
For those investments with unrealized losses
that have not been recognized as other-than-
temporary impairments, the investor should
disclose:
a) Quantitative information, aggregated by
each category of financial investment that the
investor discloses in tabular form:
– the aggregate amount of unrealized losses
(that is, the amount by which cost or amor-
tized cost exceeds fair value) and
– the aggregate related fair value of investments
with unrealized losses.
The disclosures above should be segregated by
those investments that have been in a continuous
unrealized loss position for less than 12 months
and those that have been in a continuous unreal-
ized loss position for 12 months or longer.
b) Additional information, in narrative form,
that provides sufficient information to under-
stand the quantitative disclosures and the infor-
mation that the investor considered (both posi-
tive and negative) in reaching the conclusion that
the impairments are not other-than-temporary.
This disclosure could include:
– the nature of the investment(s)
– the cause(s) of the impairment(s)
– the number of investment positions that are in
an unrealized loss position
– the severity and duration of the impair-
ment(s)
– other evidence considered by the investor in
reaching its conclusion that the investment(s)
is not other-than-temporarily impaired, in-
cluding, for example, industry analyst reports,
sector credit ratings, volatility of the security’s
market price, and / or any other information
that the investor considers relevant.
EITF 03-1 is effective for financial years end-
ing after 15 December 2003. UBS has included
these additional disclosures in Note 12 Financial
Investments.
In December 2003, the FASB issued revised
SFAS 132, Employers’ Disclosures about Pen-
sions and Other Postretirement Benefits. Except
for some of the new disclosures, this revised
standard is effective for financial years ending
after 15 December 2003. Additional disclosures
required under the revised standard include
information about major categories of assets held
by benefit plans, a narrative description of the
investment strategy and how the expected long-
term rate of return on plan assets has been deter-
mined, the accumulated benefit obligation, bene-
fits expected to be paid in each of the next five
financial years and the aggregate for the five
financial years thereafter, the measurement dates
for the benefit plans, and the employer’s best
estimate of contributions expected to be paid to
the plan during the next financial year. Those
new disclosures which are effective for the year
ended 31 December 2003, are included in
Note 31 Pension and Other Post-Retirement
Benefit Plans. Revised SFAS 132 requires that
certain disclosures are made in interim financial
statements starting in 2004. The components of
periodic pension cost and employer’s contribu-
tion paid or expected to be paid during the cur-
rent fiscal year have to be disclosed.
In December 2003, the “Medicare Prescrip-
tion Drug, Improvement and Modernization Act
of 2003” was passed in the USA, which adds pre-
scription drug coverage for Medicare-eligible
employees. Since the Group sponsors post-retire-
ment health care plans in the USA, the Group has
a range of options for coordinating with the new
government-sponsored program, including sup-
plementing the government program on a sec-
ondary payer basis or accepting a direct subsidy
from the government to support a portion of the
cost of the employer’s program.
172
Pursuant to guidance included in FASB Staff
Position FAS 106-1, the Group has chosen to
defer recognition of the potential effects of the
Act. This decision was made largely due to the
number of open issues about various provisions
of the Act and a lack of authoritative accounting
guidance concerning certain technical matters.
Therefore, the retiree health obligation and cost
reported in these Financial Statements and the
accompanying notes as at and for the year ended
31 December 2003 do not yet reflect any poten-
tial impact of the Act. Specific authoritative guid-
ance on the accounting for the government sub-
sidy is pending and that guidance, when issued,
could require the Group to change previously
reported information. It is expected that a change
would decrease the obligation and cost attributa-
ble to post-retirement medical coverage.
Several other interpretations and FASB Staff
Positions were recently issued, none of which has
or is expected to have a material impact on UBS’s
Financial Statements.
Note 40.2 Reconciliation of IFRS Shareholders’ equity and
Net profit to US GAAP
CHF million
Note 40.1
Reference
Shareholders’ equity
Net profit
31.12.03
31.12.02
31.12.03
31.12.02
31.12.01
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 and private equity
Pension plans
Other post-retirement benefit plans
Equity participation plans
Software capitalization
Consolidation of variable interest entities (VIEs)
Tax adjustments
35,446
38,991
6,385
3,535
4,973
a
b
c
d
e
f
g
h
i
j
15,196
1,825
0
(94)
(84)
1,303
(1)
(112)
0
(10)
(295)
15,285
1,017
0
(138 )
(30 )
621
(1 )
(164 )
0
0
(5 )
(89)
808
0
188
(159)
(235)
0
(152)
0
(10)
(223)
128
(128 )
1,017
0
354
767
(156 )
7
63
(60 )
0
147
2,011
(1,614)
0
(112)
25
0
119
8
(12)
(169)
0
16
(1,739)
Total adjustments
17,728
16,585
Amounts determined in accordance
with US GAAP
53,174
55,576
6,513
5,546
3,234
Note 40.3 Earnings per share
Under both IFRS and US GAAP, basic earnings per share (“EPS”) are computed by dividing income available to common sharehold-
ers by the weighted-average number of common shares outstanding. Diluted EPS include the determinants of basic EPS and, in addi-
tion, 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 2003, 31 December 2002 and 31 December 2001 are
presented in the following table.
31.12.03
31.12.02
31.12.01
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)
6,513
6,514
1,116,602,289
1,138,800,625
5.83
5.72
6,385
6,386
1,116,953,623
1,138,800,625
5.72
5.61
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
173
Financial Statements
Notes to the Financial Statements
Note 40.4 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
useful to understand them to interpret the finan-
cial statements presented in accordance with
US GAAP. The following is a summary of pres-
entation differences that relate to the basic IFRS
financial statements.
1. Settlement date vs. trade date accounting
UBS’s transactions from securities activities are
recorded under IFRS on the settlement date. This
results in recording a forward transaction during
the period between the trade date and the settle-
ment date. Forward positions relating to trading
activities are revalued to fair value and any unre-
alized profits and losses are recognized in Net
profit.
Under US GAAP, trade date accounting is
required for spot purchases and sales of securi-
ties. Therefore, all such transactions with a trade
date on or before the balance sheet date with a
settlement date after the balance sheet date have
been recorded at trade date for US GAAP. This
has resulted in receivables and payables to bro-
ker-dealers and clearing organizations recorded
in Other assets and Other liabilities in the
US GAAP Balance sheet.
2. Financial investments
Under IFRS, UBS’s private equity investments
and non-marketable equity financial investments
are included in Financial investments. For US
GAAP presentation, non-marketable equity
financial investments are reclassified to Other
assets, and private equity investments are shown
separately on the Balance sheet.
3. Securities received as proceeds in a
securities for securities lending transaction
When UBS acts as the lender in a securities lend-
ing agreement and receives securities as collateral
that can be pledged or sold, it recognizes the
securities received and a corresponding obliga-
tion to return them. These securities are reflected
on the US GAAP Balance sheet in the line “Secu-
rities received as collateral” on the asset side of
the Balance sheet. The offsetting liability is pre-
sented in the line “Obligation to return securities
received as collateral”.
4. Reverse repurchase, repurchase, securities
borrowing and securities lending transactions
UBS enters into certain specific reverse repur-
chase, repurchase, securities borrowing and secu-
rities lending transactions that result in a differ-
ence between IFRS and US GAAP. Under IFRS,
they are considered borrowing and lending
transactions which are not reflected in the bal-
ance sheet except to the extent of cash collateral
advanced or received. Under US GAAP, however,
they are considered purchase and sale trans-
actions due to the fact that the contracts do not
meet specific collateral or margining require-
ments under SFAS 140. Due to the different treat-
ment of these transactions under IFRS and
US GAAP, interest income and expense recorded
under IFRS must be reclassified to Net trading
income or Other income for US GAAP. Addition-
ally under US GAAP, the securities received are
recognized on the balance sheet as a spot pur-
chase (Trading portfolio assets) with a corre-
sponding forward sale transaction (Replacement
values) and a receivable (Cash collateral on secu-
rities borrowed) is reclassified, as applicable. The
securities delivered are recognized as a spot sale
(Trading portfolio liabilities) with a correspon-
ding forward repurchase transaction (Replace-
ment values) and a liability (Cash collateral on
securities lent) is reclassified, as applicable.
174
Note 40.5 Consolidated Income Statement
The following is a Consolidated Income Statement of the Group, for the years ended 31 December
2003, 31 December 2002 and 31 December 2001, 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)
31.12.03
31.12.02
31.12.01
Reference US GAAP
IFRS US GAAP
IFRS US GAAP
IFRS
a, d, 4, j
a, 4
39,940
(27,700)
40,159
(27,860)
39,679
(29,334)
39,963
(29,417)
51,907
(44,096)
52,277
(44,236)
12,240
(116)
12,299
(116)
10,345
(206)
10,546
(206)
7,811
(498)
8,041
(498)
12,124
12,183
10,139
10,340
7,313
7,543
Net fee and commission income
Net trading income
Other income 1
d, 4, h, j
b, e, 4
17,345
4,065
380
17,345
3,883
561
18,221
6,031
96
18,221
5,572
(12)
20,211
8,959
534
20,211
8,802
558
Total operating income
33,914
33,972
34,487
34,121
37,017
37,114
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Amortization of goodwill
Amortization of other intangible assets
Restructuring costs
f, g, h
a, i
a, b
b
c
17,615
6,086
1,396
0
112
0
17,231
6,086
1,364
756
187
0
18,610
7,072
1,613
0
1,443
0
18,524
7,072
1,521
930
1,530
0
19,713
7,631
1,815
2,484
298
112
19,828
7,631
1,614
1,025
298
0
Total operating expenses
25,209
25,624
28,738
29,577
32,053
30,396
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
e
j
8,705
1,842
8,348
1,618
5,749
4,544
511
678
4,964
1,386
6,718
1,401
6,863
6,730
5,238
3,866
3,578
5,317
(350)
(345)
(331)
(331)
(344)
(344)
0
0
639
0
0
0
Net profit
6,513
6,385
5,546
3,535
3,234
4,973
1 The CHF 159 million loss and CHF 108 million gain included in US GAAP Other income at 31 December 2003 and 31 December 2002, respectively are due to UBS’s
adoption of the “AICPA Audit and Accounting Guide, Audits of Investment Companies” on certain private equity investments for its US GAAP financial statements. These
amounts represent the change in fair value of these investments during 2003 and 2002.
Note: References above coincide with the discussions in Note 40.1 and Note 40.4. These references indicate which IFRS to US GAAP differences affect an individual
financial statement caption.
175
Financial Statements
Notes to the Financial Statements
Note 40.6 Condensed Consolidated Balance Sheet
The following is a Condensed Consolidated Balance Sheet of the Group, as at 31 December 2003
and 31 December 2002, 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
31.12.03
31.12.02
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 125,411 million at 31.12.03
and CHF 110,365 million at 31.12.02)
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
4
1, 4, h, j
1, 4, j
a, d
e, 2
3
4, h
a
a, b
b
e, 2
d, e, f, h, j, l, 2
3,584
31,685
211,058
320,587
544,492
84,034
212,554
1,303
13,071
6,219
1,616
8,116
26,775
1,174
3,308
64,381
3,584
31,667
213,932
320,587
461,772
84,334
212,504
5,139
6,218
1,616
7,659
9,348
2,181
25,459
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
Total assets
1,533,957
1,386,000
1,296,938
1,181,118
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
4
1, 4
3
1, 4, j
a, d
4
a, d, j, 1
d, f, g, h, j, 1
127,385
51,157
415,863
149,380
13,071
161,086
347,358
13,673
123,259
74,044
127,153
53,278
415,863
143,957
93,646
347,358
13,673
120,237
31,316
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
Total liabilities
Minority interests
Total shareholders’ equity
Total liabilities, minority interests
and shareholders’ equity
1,476,276
1,346,481
1,237,833
1,138,598
j
4,507
53,174
4,073
35,446
3,529
55,576
3,529
38,991
1,533,957
1,386,000
1,296,938
1,181,118
Note: References above coincide with the discussions in Note 40.1 and Note 40.4. These references indicate which IFRS to US GAAP differences affect an individual
financial statement caption.
176
Note 40.7 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 2003, 31 December 2002 and 31 December 2001 are as follows:
Additional
minimum
pension
liability
Deferred
income
taxes
Accumu-
lated other
compre-
hensive
income /
(loss)
0
(112)
(336)
Compre-
hensive
income /
(loss)
3,234
CHF million
Unrealized
(losses) on
available-
for-sale
translation investments
Foreign
currency
gains / Unrealized
gains /
(losses) on
cash flow
hedges
Balance at 1 January 2001
Net profit
Other comprehensive income:
Foreign currency translation
Net unrealized gains on available-for-sale investments
Reclassification of gains on available-for-
sale investments realized in net profit
Net unrealized gains on cash flow hedges
Reclassification of losses on cash flow hedges realized in net profit
Additional minimum pension liability
(687)
463
(82 )
136
(130 )
Other comprehensive income / (loss)
(82 )
6
Comprehensive income
Balance at 31 December 2001
Net profit
Other comprehensive income:
Foreign currency translation
Net unrealized gains on available-for-sale investments
Impairment charges reclassified to the income statement
Reclassification of gains on available-for-
sale investments realized in net profit
Net unrealized losses on cash flow hedges
Reclassification of gains on cash flow
hedges realized in net profit
Additional minimum pension liability
(769)
469
(80 )
143
121
(470 )
0
5
4
9
9
(4 )
(8 )
Other comprehensive income / (loss)
(80 )
(206 )
(12 )
Comprehensive income
Balance at 31 December 2002
Net profit
Other comprehensive income:
Foreign currency translation
Net unrealized losses on available-for-sale investments
Impairment charges reclassified to the income statement
Reclassification of gains on available-for-
sale investments realized in net profit
Reclassification of losses on cash flow
hedges realized in net profit
Additional minimum pension liability
(795 )
(130 )
111
(69 )
Other comprehensive income / (loss)
(795)
(88 )
Comprehensive income
Balance at 31 December 2003
(1,644)
175
(27 )
26
(1 )
(1 )
108
105
(82 )
109
(104 )
4
3
(195 )
(265 )
(303 )
(303 )
(303)
(7)
(601)
(34 )
(26 )
102
3
0
93
138
(80 )
109
95
(368 )
(1 )
(8 )
(827 )
(1,080 )
(920 )
(920 )
49
(18 )
11
(1 )
(82 )
(41 )
(795 )
(81 )
93
(58 )
2
835
(4 )
917
917
(306)
90
(1,685)
3
3
0
(849)
263
(3)
(1,223)
131
(1,681)
(82)
109
(104)
4
3
(195)
(265)
2,969
5,546
(80)
109
95
(368)
(1)
(8)
(827)
(1,080)
4,466
6,513
(795)
(81)
93
(58)
2
835
(4)
6,509
177
Financial Statements
Notes to the Financial Statements
Note 41 Additional Disclosures Required under
US GAAP and SEC Rules
Note 41.1 Variable interest entities
FIN 46 was originally issued on 17 January
2003. Subsequently, in December 2003, the FASB
issued a revised version of FIN 46.
FIN 46 requires that control over an entity be
assessed first based on voting interests; if voting
interests do not exist, or differ significantly from
economic interests, then an entity is considered
to be a “Variable Interest Entity” (“VIE”), and
the assessment of control is based on its variable
interests. FIN 46 provides guidance for determin-
ing whether entities are considered to be VIEs,
and whether “variable interests” in such VIEs
result in an enterprise being the “primary benefi-
ciary”, or the holder of a “significant variable
interest”. UBS considers a variable interest to be
significant if it expects to receive more than 20%
of a VIE’s residual losses, residual gains, or both.
Variable interests are contractual, ownership,
or other pecuniary interests in an entity that
change with changes in the fair value of that enti-
ty’s net assets exclusive of variable interests.
Variable interests may include fee payments to
decision makers and to providers of guarantees
(including writers of put options and other
instruments with similar results). In assessing the
extent of an entity’s variable interests, FIN 46
requires that the interests of an enterprise’s relat-
ed parties (including management, employees,
affiliates and agents) be evaluated as if owned
directly by the enterprise.
When fully effective, FIN 46 requires that the
primary beneficiary of a VIE must consolidate
that VIE, requires certain disclosures by the
enterprise which is the primary beneficiary of
that VIE, and requires certain other disclosures
by any holder of a significant variable interest in
a VIE.
At 31 December 2003, FIN 46 has application
to UBS with respect to transitional disclosure
requirements, and the consolidation and disclo-
sure of VIEs created after 31 January 2003, in
which UBS is the primary beneficiary.
Measurement
Measurement of a VIE’s size is usually deter-
mined using the fair value of the VIE’s assets.
Some VIEs function as a passive intermediary to
a derivative transaction and are generally estab-
lished to facilitate the transfer of credit risk on
portfolios to investors. The size of such VIEs
may also be measured using the “notional
amount” of the derivatives’ underlying refer-
enced assets, i.e. the size of the portfolio for
which credit risk has been transferred. These
notional amounts are also included in Note 23.
In measuring the total size of VIEs quantified
below, the most appropriate measure has been
taken for each specific VIE on an individual
basis.
FIN 46 requires disclosures of UBS’s maxi-
mum exposure to loss as a result of its involve-
ment with VIEs in which it has a significant vari-
able interest. Generally, UBS’s maximum expo-
sure to loss is measured as its net investment in
the VIE, plus any additional amounts it may be
obligated to invest. In cases where the Group has
provided guarantees or other types of credit pro-
tection to a VIE it is measured as the notional
amount of the credit protection instruments or
derivatives. In cases where the Group is a non-
credit derivative counterpart to a VIE or has
received credit protection, it is measured as the
positive replacement value (if any) of the deriva-
tives. These measures of maximum exposure to
loss do not consider the offsetting effects of
hedges outside the VIE. It is UBS’s general prac-
tice to hedge interest rate risk, credit risk, and
other market risk exposures. See Note 29 for a
further discussion of UBS’s risk mitigation
strategies.
VIEs created after 31 January 2003
For VIEs created after 31 January 2003, FIN 46
is fully effective at 31 December 2003 regarding
consolidation treatment and disclosures. The
tables on the following page include information
for all such VIEs:
178
VIEs, created after 31 January 2003, for which UBS is the primary beneficiary 1
(CHF million)
Nature, purpose and activities of VIEs
Passive intermediary to a derivative transaction
Credit protection vehicles
Investment funds managed by UBS
Total 31.12.2003
Total assets
1,013
3,548
541
5,102
Consolidated assets that are collateral
for the VIEs’ obligations
Classification
Cash, corporate debt securities
Credit derivatives, corporate debt securities
Debt, equity
VIEs, created after 31 January 2003, in which UBS has a significant variable interest
(CHF million)
Nature, purpose and activities of VIEs
Credit protection vehicles
Total 31.12.2003
Total assets
Nature of involvement
281
281
SPE used for credit protection –
(UBS sells credit risk on portfolios to investors)
Creditors’
recourse
to UBS
0
0
0
0
Amount
494
2,795
428
3,717
Maximum
exposure
to loss
1
1
1 The above table of VIEs created after 31 January 2003, for which UBS is the primary beneficiary, includes VIEs with a total size of CHF 1,014 million which are already consolidated in UBS’s Financial Statements based on the
determination of exercise of control under IFRS, and VIEs with a total size of CHF 4,089 million which are not currently consolidated under IFRS.
VIEs created prior to 1 February 2003
For VIEs created prior to 1 February 2003, FIN
46 becomes fully effective from the first reporting
period beginning after 15 June 2003, regarding
both consolidation treatment and disclosures,
and is therefore not fully effective at 31 Decem-
ber 2003. Accordingly, with respect to VIEs cre-
ated prior to 1 February 2003, only the transi-
tional disclosure requirements are applicable to
UBS at 31 December 2003. Those transitional
disclosure provisions require assessment of cases
where it is “reasonably possible” that UBS will be
the primary beneficiary of a VIE, or be the hold-
er of a significant variable interest in a VIE, and
to make certain disclosures about such entities,
pending final evaluation and conclusions about
those entities. UBS has sought to determine the
extent of significant variable interests, and situa-
tions where it is the primary beneficiary in VIEs
created before 1 February 2003.
UBS expects the key impact to be the consoli-
dation of VIEs in which it is the primary benefi-
ciary for US GAAP purposes, which are not oth-
erwise consolidated in UBS’s primary consolidat-
ed Financial Statements under IFRS.
The total size of VIEs which are currently not
consolidated under IFRS, which may become
consolidated for US GAAP purposes, is estimated
to be in the order of CHF 5.1 billion total assets.
Of this amount, approximately CHF 4.6 billion
relates to employee equity compensation trusts
established to hold UBS shares, UBS share
options, and alternative investment vehicles;
approximately CHF 93 million relates to certain
leveraged investment opportunities available to
key employees, and approximately CHF 370 mil-
lion relates to other VIEs. UBS has a maximum
exposure to loss, according to the provisions of
FIN 46, of approximately CHF 4.6 billion in
relation to the employee equity compensation
trusts (see below), approximately CHF 503 mil-
lion in relation to the leveraged investment plans
(see below), and approximately CHF 370 million
in relation to other VIEs which may become con-
solidated. In addition to the above VIEs, UBS has
identified other VIEs which are still being
assessed, and which are discussed in more detail
below.
The CHF 4.6 billion size and maximum expo-
sure to loss mentioned above in relation to
employee equity compensation trusts does not
represent an exposure of UBS, as the assets are
held in trust for employees. The employees
would bear all exposure to loss, however the pro-
visions of FIN 46 treat employees as related par-
ties, and require that their variable interests be
added to those of UBS. The result is that UBS
expects to be treated as the primary beneficiary
of these trusts, and to consolidate them for US
GAAP purposes.
In connection with the leveraged investment
opportunities available to key employees, UBS
179
Financial Statements
Notes to the Financial Statements
has committed to provide up to CHF 394 million
in loans to employee investment partnerships. At
31 December 2003, a total of CHF 77 million in
loans had actually been drawn down. Repayment
of these loans is on a non recourse basis but is
senior to the employees’ investment in the part-
nerships. The remaining unfunded portion of
these commitments is also included in Note 25.
In addition, if employees default on their invest-
ment commitments, UBS is obliged to assume the
remaining unfunded portion, which amounted to
CHF 109 million at 31 December 2003. In the
event that all the investments made by these part-
nerships became worthless, UBS could be
exposed to the loss of the entire committed
amount of CHF 503 million which is included in
the CHF 503 million maximum exposure to loss
noted for these VIEs.
It should be noted that for most VIEs required
to be consolidated under US GAAP as mentioned
above, that in some cases the total figures above
may increase both total assets and total liabilities
of the US GAAP accounts, and in other cases may
result in a reclassification of existing assets or lia-
bilities to other types of assets or liabilities. In the
case of the employee equity compensation trusts,
the CHF 4.6 billion total size comprises assets of
approximately CHF 2.1 billion in UBS shares,
CHF 1.6 billion in UBS share options, and CHF
0.9 billion in alternative investment vehicles.
Depending on the impact of possible changes in
employee equity compensation expense account-
ing, the consolidation of these trusts would result
in a portion of these amounts being recognized as
changes to either shareholders’ equity or liabili-
ties.
A significant percentage of entities which may
meet the definition of a VIE under FIN 46 in
which UBS is the primary beneficiary are already
consolidated in UBS’s Financial Statements,
based on the determination of exercise of control
under IFRS. The total size of such VIEs is esti-
mated to be CHF 9.0 billion, which is measured
by fair value of assets except for CHF 50 million
measured by notional amounts of underlying
assets in relation to derivatives. UBS has a maxi-
mum exposure to loss of approximately CHF 1.8
billion in relation to these VIEs, which are used
primarily as credit protection vehicles, or passive
intermediaries to derivative transactions.
In certain cases an entity which has been con-
solidated under IFRS may be considered to be
non-consolidated under FIN 46. UBS has issued
trust preferred securities amounting to CHF 3.2
billion which in future periods would be de-con-
solidated for US GAAP purposes.
In addition to the primary beneficiary situa-
tions noted above, UBS has identified that it
holds significant variable interests in other VIEs.
It is estimated that the total assets of such VIEs
amount to approximately CHF 1.6 billion, and
that UBS has a maximum exposure to loss of
approximately CHF 592 million in relation to
these VIEs.
In addition to the VIEs noted above, UBS has
identified other VIEs which are still being
assessed. UBS holds at least a significant variable
interest in these VIEs. Once the assessment is
complete, it may be determined that UBS is the
primary beneficiary for a portion of them. These
VIEs are currently not consolidated under IFRS
or US GAAP. The total size of these VIEs is esti-
mated to be CHF 4.5 billion, which is measured
by fair value of assets. UBS has a maximum expo-
sure to loss of approximately CHF 253 million in
relation to these VIEs, which are used primarily
as credit protection vehicles, or passive interme-
diaries to derivative transactions.
As the guidance for FIN 46 has seen continued
development, UBS is still in the process of evalu-
ating the full impact FIN 46 may have on its US
GAAP financial position, results, and reporting,
including possible changes in employee equity
compensation expense accounting due to the
consolidation of certain of the employee equity
compensation trusts. Therefore it is not possible
to predict the impact of consolidation on the con-
solidated income statement under US GAAP, but
it is expected that additional volatility would be
introduced in future periods.
180
Note 41.2 Supplemental Guarantor Information
Guarantee of PaineWebber securities
Following the acquisition of Paine Webber
Group Inc., UBS AG made a full and uncondi-
tional guarantee of the senior and subordinated
notes and trust preferred securities (“Debt Secu-
rities”) of PaineWebber. Prior to the acquisition,
PaineWebber was an SEC Registrant. Upon the
acquisition, Paine Webber 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 2003, the amount of
senior liabilities of UBS to which the holders of
the subordinated debt securities would be subor-
dinated is approximately CHF 1,337 billion.
The information presented in this note is pre-
pared in accordance with IFRS and should be
read in conjunction with the Consolidated
Financial Statements of UBS of which this infor-
mation is a part. At the bottom of each column,
Net profit and Shareholders’ equity has been rec-
onciled to US GAAP. See Note 40 for a detailed
reconciliation of the IFRS financial statements to
US GAAP for UBS on a consolidated basis.
Supplemental Guarantor Consolidating Income Statement
CHF million
For the year ended 31 December 2003
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
28,749
20,033
13,091
10,292
8,716
(124 )
8,592
6,873
1,525
2,466
337
2,799
(12 )
2,787
6,711
1,540
0
230
Total operating income
19,793
11,268
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)
8,853
2,861
682
104
12,500
7,293
908
Net profit / (loss) before minority interests
6,385
Minority interests
Net profit / (loss)
Net profit / (loss) US GAAP 2
0
6,385
3,389
6,886
1,620
186
789
9,481
1,787
344
1,443
0
1,443
2,120
9,280
8,496
784
20
804
3,761
818
0
(6 )
5,377
1,492
1,605
496
50
3,643
1,734
366
1,368
(345 )
1,023
1,004
(10,961 )
(10,961 )
0
0
0
0
0
(2,466 )
0
(2,466 )
0
0
0
0
0
(2,466 )
0
(2,466 )
0
(2,466 )
0
40,159
27,860
12,299
(116)
12,183
17,345
3,883
0
561
33,972
17,231
6,086
1,364
943
25,624
8,348
1,618
6,730
(345)
6,385
6,513
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 40 for a description of the differences between IFRS and US GAAP.
181
Financial Statements
Notes to the Financial Statements
Supplemental Guarantor Consolidating Balance Sheet
CHF million
For the year ended 31 December 2003
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
2,894
76,780
75,609
197,765
248,999
111,612
234,356
826
3,665
14,077
5,891
218
5,194
977,886
139,525
59,356
112,245
79,714
125,925
343,297
7,034
64,264
11,222
942,582
0
35,304
8
12,106
190,993
149,507
182,346
849
23,001
739
1,868
11
787
11,270
3,356
576,841
83,193
46,313
337,030
55,351
1,157
34,530
6,026
7,331
1,873
572,804
42
3,995
682
109,713
76,773
219,444
30,427
25,474
40,420
3,574
3,391
594
981
41
19,958
531,472
71,367
77,052
212,717
8,892
20,165
54,804
3,319
48,642
21,270
518,228
4,031
9,213
0
(166,932 )
(129,443 )
(246,129 )
0
(53,601 )
(85,273 )
0
(2,706 )
(13,066 )
0
0
(3,049 )
3,584
31,667
213,932
320,587
461,772
84,334
212,504
5,139
6,218
1,616
7,659
11,529
25,459
(700,199 )
1,386,000
(166,932 )
(129,443 )
(246,129 )
0
(53,601 )
(85,273 )
(2,706 )
0
(3,049 )
127,153
53,278
415,863
143,957
93,646
347,358
13,673
120,237
31,316
(687,133 )
1,346,481
0
(13,066 )
4,073
35,446
977,886
576,841
531,472
(700,199 )
1,386,000
Total shareholders’ equity – US GAAP 2
38,129
5,471
9,574
0
53,174
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 40 for a description of the differences between IFRS and US GAAP.
182
Supplemental Guarantor Consolidating Cash Flow Statement
CHF million
For the year ended 31 December 2003
UBS AG
UBS
Parent Bank1 Americas Inc.
Subsidiaries
UBS Group
Net cash flow from / (used in) operating activities
(12,936)
1,366
14,973
3,403
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
treasury share contract activity
Capital issuance
Dividends paid
Issuance of long-term debt
Repayment of long-term debt
Increase in minority interests 2
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 3
Due from banks maturing in less than three months
Total
(428)
123
(862)
88
524
(555)
0
667
(338)
17
867
1,213
0
44
(176)
18
926
812
(428)
834
(1,376)
123
2,317
1,470
1,910
(333)
(16 314)
(14 737)
(6,810)
2
(2,298)
15,932
(8,324)
0
0
(773)
(361)
(751)
(14,603)
57,912
43,309
2,894
21,232
19,183
43,309
0
0
0
2,362
(1,254)
0
(8)
1,007
1,774
(661)
3,692
15,119
18,811
8
15,812
2,991
18,811
0
0
0
5,350
(4,037)
755
(270)
(234)
(14,750)
888
1,923
9,313
11,236
682
3,555
6,999
11,236
(6 810)
2
(2,298)
23,644
(13,615)
755
(278)
0
(13,337)
(524)
(8,988)
82,344
73,356
3,584
40,599
29,173
73,356
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
3 Money market paper is included in the Balance sheet under Trading portfolio
adjusted to IFRS.
assets and Financial investments. CHF 6,430 million was pledged at 31 December 2003.
2 Includes issuance of trust preferred securities of CHF 372 million.
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%). In May
2003, UBS issued USD 300 million of Floating
Rate Noncumulative Trust Preferred Securities
(CHF 390 million at issuance) at 0.7% above
one-month LIBOR of such securities. UBS AG
has fully and unconditionally guaranteed these
securities. UBS’s obligations under the trust pre-
ferred securities guarantee are subordinated to
the prior payment in full of the deposit liabilities
of UBS and all other liabilities of UBS. At
31 December 2003, the amount of senior liabili-
ties of UBS to which the holders of the subordi-
nated debt securities would be subordinated is
approximately CHF 1,337 billion.
183
184
UBS AG (Parent Bank)
185
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
187
188
188
189
189
190
191
191
191
192
192
193
193
194
194
194
194
195
196
186
UBS AG (Parent Bank)
Parent Bank Review
Parent Bank Review
Income Statement
Balance Sheet
The Parent Bank UBS AG net profit decreased
CHF 1,637 million from CHF 5,834 million to
CHF 4,197 million. Income from investments in
associates decreased to CHF 1,914 million from
CHF 3,417 million in 2002 mainly due to less dis-
tribution received. Depreciation and writeoffs
were CHF 919 million, down from CHF 3,025
million in 2002 mainly caused by lower writeoffs
on investments in associated companies. Extraor-
dinary income contains CHF 33 million (2002:
CHF 260 million) from the sale of associates and
CHF 59 million from release of provisions.
Total assets overall decreased by CHF 69 billion
to CHF 995 billion by 31 December 2003. This
reduction is mostly caused by the first-time
netting of the positive and negative replacement
values on the Parent Bank level in accordance
with the RRV-EBK requirement of CHF 141 bil-
lion in 2003 (netting impact in 2002 would have
been CHF 167 billion). This change was partial-
ly offset by the increased positions in due from
banks and trading balances in securities.
187
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 writeoffs 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
31.12.03
31.12.02
% change from
31.12.02
19,417
9,325
11
(20,034)
8,719
228
6,998
826
(1,180)
6,872
521
(69)
1,914
43
1,213
(96)
3,005
19,117
8,889
3,943
12,832
6,285
919
658
4,708
92
1
602
4,197
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
(3)
32
(52)
0
24
(10)
(3)
60
1
0
(89)
(44)
(14)
(36)
(75)
(41)
(19)
0
(10)
(3)
(39)
(70)
(38)
(25)
(65)
(86)
(12)
(28)
188
31.12.03
31.12.02
% change from
31.12.02
Balance Sheet
CHF million
Assets
Liquid assets
Money market paper
Due from banks
Due from customers
Mortgage loans
Trading balances in securities and precious metals
Financial investments
Investments in associated companies
Tangible fixed assets
Accrued income and prepaid expenses
Positive replacement values
Other assets
Total assets
Total subordinated assets
Total amounts receivable from Group companies
Liabilities
Money market paper issued
Due to banks
Due to customers on savings and deposit accounts
Other amounts due to customers
Medium-term bonds
Bond issues and loans from central mortgage institutions
Accruals and deferred income
Negative replacement values
Other liabilities
Value adjustments and provisions
Share capital
General statutory reserve
Reserve for own shares
Other reserves
Profit brought forward
Profit for the period
Total liabilities
Total subordinated liabilities
Total amounts payable to Group companies
2,895
21,233
321,796
130,814
131,900
236,096
8,955
14,757
4,367
3,666
111,612
6,585
994,676
4,450
397,410
23,879
377,447
84,360
274,408
2,403
45,968
7,060
127,885
6,802
3,894
946
7,212
8,024
20,191
4,197
994,676
12,471
257,955
3,609
33,671
265,106
165,938
117,677
199,546
8,377
10,275
4,633
2,342
249,064
3,734
1,063,972
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
1,063,972
13,315
142,139
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 2003 as per the Parent Bank’s Income Statement
Appropriation to general statutory reserve
Appropriation to other reserves
Proposed dividends
Total appropriation
Dividend Distribution
The Board of Directors will recommend to the Annual General Meeting on 15 April 2004 that UBS
should pay a dividend of CHF 2.60 per share of CHF 0.80 par value. If the dividend is approved, the
payment of CHF 2.60 per share, after deduction of 35% Swiss withholding tax, would be made on
20 April 2004 for shareholders who hold UBS shares on 15 April 2004.
189
(20)
(37)
21
(21)
12
18
7
44
(6)
57
(55)
76
(7)
(6)
82
8
25
10
0
(43)
(32)
(10)
(50)
107
(7)
(6)
(42)
21
10
(28)
(7)
(6)
81
4,197
288
980
2,929
4,197
UBS AG (Parent Bank)
Notes to the Financial Statements
Notes to the Financial Statements
Accounting Principles
The Parent Bank’s accounting policies are in
compliance with Swiss banking law. The ac-
counting policies are principally the same as for
the Group Financial Statements outlined in
Note 1, Summary of Significant Accounting
Policies. Major differences between the Swiss
banking law requirements and International
Financial Reporting Standards are described in
Note 39 to the Group Financial Statements.
In addition, the following principles are
applied for the Parent Bank:
in Note 1d). Assets and liabilities of foreign
branches are translated into CHF at the exchange
rates at the balance sheet date, while income and
expense items are translated at weighted average
rates for the period. Exchange differences arising
on the translation of each of these foreign
branches are credited to a provision account
(other liabilities) in case of a gain, while any loss-
es are firstly debited to that provision account
until such provision is fully utilized, and second-
ly to profit and loss.
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. Trea-
sury shares included in Financial investments are
carried at the lower of cost or market value.
Foreign currency translation
Foreign currency transactions and translation of
assets and liabilities denominated in foreign
currencies into the Parent Bank’s or a branch’s
reporting currency are accounted for as described
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, Summary of Significant Account-
ing Policies, of the Group Financial Statements.
Extraordinary income and expenses
Certain items of income and expense appear as
extraordinary within the Parent Bank Financial
Statements, whereas in the Group Financial
Statements they are considered to be operating
income or expenses and appear within the appro-
priate income or expense category. These items
are separately identified on page 191.
190
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.
31.12.03
31.12.02
% change from
31.12.02
1,708
(1,307)
120
521
2,208
565
1,861
4,634
(23)
(94)
(89)
Extraordinary Income and Expenses
Extraordinary income contains CHF 33 million (2002: CHF 260 million) from the sale of associates
and CHF 59 million from release of provisions (2002: CHF 5 million from other disposals).
Extraordinary expenses consist of immaterial items.
191
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
Total provisions as per balance sheet
Balance at
31.12.02
5,406
2,359
445
1,437
1,279
10,926
6,749
4,177
Provisions
applied in
accordance
with their
specified
purpose
Recoveries,
doubtful
interest,
currency
translation
differences
(1,372 )
(98 )
(332 )
(743 )
66
(221 )
(20 )
151
(96 )
New
provisions
charged
to income
118
585
65
615
678
(2,545)
(120)
2,061
-
-
-
Balance at
31.12.03
4,218
2,723
392
1,871
1,118
10,322
6,428
3,894
192
Statement of Shareholders’ Equity
General
statutory
reserves:
Share
premium
13,665
(2,209 )
94
Share
capital
3,589
(2,509 )
(81 )
6
CHF million
As at 31.12.01 and 1.1.02
Par value reduction
Cancellation of own shares
Capital increase
Increase in reserves
Profit for the period
Changes in reserves for own shares
As at 31.12.02 and 1.1.03
1,005
11,550
842
Par value reduction
Cancellation of own shares
Capital increase
Increase in reserves
Prior year dividend
Profit for the period
Changes in reserves for own shares
(61 )
2
(5,468 )
59
229
As at 31.12.03
946
6,141
1,071
General
statutory
reserves:
Retained
earnings
Reserves
for own
shares
Total share-
holders’
equity
(before
Other distribution
of profit)
reserves
842
3,253
21,538
42,887
117
5,834
(3,370 )
(2,392)
(2,290)
100
0
5,834
0
24,119
44,139
(5,529)
61
0
(2,298)
4,197
0
(229 )
(2,298 )
4,197
(1,401 )
24,388
40,570
3,370
6,623
1,401
8,024
Share Capital
As at 31 December 2003
Issued and paid up
Conditional share capital
Par value
Ranking for dividends
No. of shares
Capital in CHF
No. of shares
Capital in CHF
1,183,046,764
946,437,411
1,126,339,764
901,071,811
6,871,752
5,497,402
0
0
193
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 1
Total
31.12.03
31.12.02
Change in %
Book
value
6,225
428
96,065
102,718
Effective
liability
210
66,395
66,605
Book
value
10,475
808
2,495
13,778
Effective
liability
506
506
Book
value
(41)
(47)
646
Effective
liability
(58)
1 Amounts for 2003 include securities lending and repo transactions: book value CHF 92,628 million and effective liability CHF 66,395 million.
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
31.12.03
31.12.02
% change from
31.12.02
29,549
672
6
30,227
28,865
351
713
29,929
2
91
(99)
1
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
31.12.03
31.12.02
% change from
31.12.02
1,096
2,930
25
905
2,645
28
21
11
(11)
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.
194
UBS AG (Parent Bank)
Report of the Statutory Auditors
195
UBS AG (Parent Bank)
Report of the Capital Increase Auditors
196
Additional Disclosure Required
under SEC Regulations
197
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
Contractual maturities of the Investments
in Debt Instruments
Due from Banks and Loans (gross)
Due from Banks and Loan Maturities (gross)
Impaired, Non-performing and Restructured Loans
Cross-Border Outstandings
Summary of Movements in Allowances and
Provisions for Credit Losses
Allocation of the Allowances and
Provisions for Credit Losses
Due from Banks and Loans by Industry Sector (gross)
Loss History Statistics
199
199
201
202
203
203
203
203
204
204
204
206
208
209
210
211
212
213
214
216
218
219
220
198
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 27 February 2004 the noon buying rate was 0.7921 USD per 1 CHF.
Year ended 31 December
1999
2000
2001
2002
2003
Month
September 2003
October 2003
November 2003
December 2003
January 2004
February 2004
High
0.7361
0.6441
0.6331
0.7229
0.8189
High
0.7581
0.7618
0.7745
0.8069
0.8036
0.8152
Average rate1
Low (USD per 1 CHF)
At period end
0.6605
0.5912
0.5910
0.6453
0.7493
0.6277
0.6172
0.5857
0.7229
0.8069
0.6244
0.5479
0.5495
0.5817
0.7048
Low
0.7048
0.7468
0.7261
0.7709
0.7958
0.7891
1 The average of the noon buying rates on the last business day of each full month during the relevant period.
199
Additional Disclosure Required
under SEC Regulations
B – Selected Financial Data (continued)
CHF million, except where indicated
For the year ended
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
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
Per share data (CHF)
Basic earnings per share 2
Diluted earnings per share 2
Cash dividends declared per share (CHF) 3
Cash dividends equivalent in USD 3
Dividend payout ratio (%) 3
Rates of return (%)
Return on shareholders’ equity 4
Return on average equity
Return on average assets
40,159
27,860
12,299
(116)
12,183
17,345
3,883
561
33,972
25,624
8,348
1,618
(345)
6,385
75.2
5.72
5.61
2.60
45.45
18.2
17.1
0.41
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
2.92
2.87
2.00
1.46
68.49
8.9
8.3
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
3.93
3.78
0.00
0.00
11.7
11.3
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
6.44
6.35
1.50
0.86
23.28
21.5
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
5.07
5.02
1.83
1.10
36.18
22.4
18.6
0.65
1 Operating expenses / operating income before credit loss expense.
3 Dividends are normally declared
and paid in the year subsequent to the reporting period. In 2000, as part of the arrangements of the acquisition of PaineWebber, a dividend of CHF 1.50 was paid on
5 October 2000 in respect of the nine months ended 30 September 2000. Prior to the merger between Union Bank of Switzerland and Swiss Bank Corporation, each paid
dividends in accordance with its own dividend policies. In 2001 a further amount of CHF 1.60 per share was distributed to shareholders in the form of a par value reduc-
tion, 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 was paid on 23 April 2003, and a dividend of CHF 2.60 per share will be paid on 20 April 2004 subject to approval by shareholders at the Annual General Meeting.
The USD amount per share will be determined on 16 April 2004.
4 Net profit / average Shareholders’ equity excluding dividends.
2 For EPS calculation, see Note 8 to the Financial Statements.
200
B – Selected Financial Data (continued)
CHF million, except where indicated
As at
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
Balance sheet data
Total assets
Shareholders’ equity
Average equity to average assets (%)
1,386,000
35,446
2.38
1,181,118
38,991
3.14
1,253,297
43,530
3.49
1,087,552
44,833
3.17
Market capitalization
95,401
79,448
105,475
112,666
896,556
30,608
3.52
92,642
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)
Headcount (full-time equivalents)
Switzerland
Europe (excluding Switzerland)
Americas
Asia Pacific
Total
Long-term ratings 1
Fitch, London
Moody’s, New York
Standard & Poor’s, New York
1,183,046,764
0
111,360,692
1,256,297,678
0
97,181,094
1,281,717,499
0
41,254,951
1,333,139,187
28,444,788
55,265,349
1,292,679,486
0
110,621,142
11.8
13.3
251,901
2,209
26,662
9,906
25,511
3,850
65,929
AA+
Aa2
AA+
11.3
13.8
238,790
2,037
27,972
10,009
27,350
3,730
69,061
AAA
AA2
AA+
11.6
14.8
253,735
2,448
29,163
9,650
27,463
3,709
69,985
AAA
AA2
AA+
11.7
15.7
273,290
2,445
30,215
9,286
28,114
3,461
71,076
AAA
Aa1
AA+
10.6
14.5
273,107
1,744
32,843
7,892
5,025
3,298
49,058
AAA
Aa1
AA+
1 See the Handbook 2003 / 2004, page 74 for information about the nature of these ratings.
Balance Sheet Data
CHF million
As at
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
Assets
Total assets
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Positive replacement values
Loans
1,386,000
31,667
213,932
320,587
461,772
84,334
212,504
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Due to customers
Debt issued
Shareholders’ equity
127,153
53,278
415,863
143,957
93,646
347,358
120,237
35,446
1,181,118
32,468
139,052
294,086
371,436
82,092
211,647
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
201
Additional Disclosure Required
under SEC Regulations
B – Selected Financial Data (continued)
US GAAP Income Statement Data
Net interest income after credit loss (expense) / recovery
12,124
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 1
Net profit / (loss)
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
39,940
(27,700)
12,240
(116)
17,345
4,065
380
33,914
17,615
6,086
1,396
0
112
0
25,209
8,705
1,842
6,863
39,679
(29,334 )
10,345
(206 )
10,139
18,221
6,031
96
34,487
18,610
7,072
1,613
0
1,443
0
28,738
5,749
511
5,238
51,907
(44,096 )
51,565
(43,584 )
35,404
(29,660)
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
(350)
(331 )
(344 )
(87 )
(54)
0
6,513
639
5,546
0
0
0
3,234
4,437
2,837
1 Please refer to Note 40.1(e) to the Consolidated Financial Statements under the heading ˝Financial investments and private equity˝, for further information about this
item.
202
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
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
1,533,957
1,296,938
1,361,920
1,124,554
893,525
31,685
211,058
320,587
544,492
84,034
212,554
26,775
1,174
64,381
127,385
51,157
415,863
149,380
13,071
161,086
347,358
13,673
123,259
53,174
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
1 Positive and negative replacement values represent the fair value of derivative instruments.
Ratio of Earnings to Fixed Charges
The following table sets forth UBS’s ratio of earnings to fixed charges, for the periods indicated.
Ratios of earnings to combined fixed charges and preferred stock dividends requirements are not pre-
sented as there were no preferred share dividends in any of the periods indicated.
For the year ended
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
IFRS 1
US GAAP 1
1.28
1.29
1.14
1.18
1.14
1.10
1.23
1.15
1.25
1.14
1 The ratio is provided using both IFRS and US GAAP values, since the ratio is materially different under the two accounting standards.
C – Information on the Company
Property, Plant and Equipment
At 31 December 2003, UBS operated about
1,317 business locations worldwide, of which
about 50% were in Switzerland, 10% in the rest
of Europe, Middle East and Africa, 38% in the
Americas and 2% in Asia Pacific.
32% of the business locations in Switzerland
were owned directly by UBS with the remainder,
along with most of UBS’s offices outside Switzer-
land, 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.
203
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 2003, 31 December
2002 and 31 December 2001 are calculated from
monthly data. The distinction between domestic
and foreign is generally based on the booking
location. For loans, this method is not signifi-
cantly different from an analysis based on the
domicile of the borrower.
Average Balances and Interest Rates
The following table sets forth average interest-earning assets and average interest-bearing liabilities, along with the average rates,
for the years ended 31 December 2003, 2002 and 2001.
CHF million, except where indicated
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
31.12.03
31.12.02
31.12.01
11,417
20,997
200
1,035
6,576
582,152
7,990
407,867
1,668
409,535
165,397
51,457
1,988
4,798
0
4,798
200
10,948
222
18,151
21
18,172
6,437
1,805
40
35
0
35
1.8
4.9
3.0
1.9
2.8
4.5
1.3
4.4
3.9
3.5
2.0
0.7
0.0
0.7
5,471
573,576
7,812
373,810
1,720
375,530
170,641
55,199
3,794
8,781
0
8,781
12,534
17,603
388
634
11,753
15,528
1,055
1,823
9.0
11.7
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
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
235
10,949
269
16,714
31
16,745
6,987
1,789
60
105
0
105
38,161
1,802
1,262,307
39,094
1,065
3.1 1,230,941
3.1 1,149,390
1,262,307
40,159
3.2 1,230,941
39,963
3.2 1,149,390
52,277
4.5
250,871
11,643
40,104
1,564,925
190,063
12,532
53,293
1,486,829
153,687
13,376
46,954
1,363,407
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
204
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
31.12.03
31.12.02
31.12.01
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
28,719
72,757
150
1,751
23,287
515,665
3,252
127,104
55,496
81,963
21,125
158,584
161,942
64
73,193
6,413
52,216
295
9,328
156
9,945
100
527
395
1,022
2,170
0
1,015
188
1,840
0.5
2.4
1.3
1.8
4.8
7.8
0.2
0.6
1.9
0.6
1.3
0.0
1.4
2.9
3.5
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
1,223,196
27,860
2.3 1,206,197
29,417
2.4 1,102,895
44,236
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
257,075
47,410
1,527,681
37,244
192,659
45,217
1,444,073
42,756
1,486,829
165,220
51,308
1,319,423
43,984
1,363,407
12,299
10,546
8,041
1.0
0.9
0.7
Total average liabilities and shareholders’ equity
1,564,925
Net interest income
Net yield on interest-earning assets
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 85%
for 2003 (84% for 2002 and 81% for 2001).
The percentage of total average interest-bearing
liabilities attributable to foreign activities was
82% for 2003 (83% for 2002 and 82% for
2001). All assets and liabilities are translated
into CHF at uniform month-end rates. Interest
income and expense are translated at monthly
average rates.
Average rates earned and paid on assets and lia-
bilities can change from period to period based on
the changes in interest rates in general, but are also
affected by changes in the currency mix included
in the assets and liabilities. This is especially true
for foreign assets and liabilities. Tax-exempt
income is not recorded on a tax-equivalent basis.
For all three years presented, tax-exempt income
is considered to be insignificant and therefore the
impact from such income is negligible.
205
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 2003 compared to the year ended 31 December 2002, and for the year ended
31 December 2002 compared to the year ended 31 December 2001. 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 213 of Industry
Guide 3 for a discussion of the treatment of impaired, non-performing and restructured loans.
CHF million
2003 compared to 2002
2002 compared to 2001
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
(35)
122
Cash collateral on securities borrowed and
reverse repurchase agreements
(153)
279
(83)
(164)
(53)
(96)
(9)
(105)
(335)
136
9
(22)
0
(22)
(615)
124
(188)
401
70
243
(737 )
(1,432 )
(667)
(1,189)
(35)
(1)
(47)
1,437
(10)
1,427
(550)
16
(20)
(70)
0
(70)
(173 )
3,673
(123 )
2,043
8
2,051
(304 )
(730 )
(16 )
(274 )
0
(274 )
(155 )
(10,498 )
(328)
(6,825)
85
(1,512 )
(19 )
(1,531 )
(38)
531
(11)
520
(726 )
(571 )
(1,030)
(1,301)
(14 )
16
0
16
(30)
(258)
0
(258)
(840)
1,773
(546 )
4,963
(1,547 )
(14,016 )
(2,093)
(9,053)
48
163
6
1,533
(1)
1,532
(215)
(120)
(29)
(48)
0
(48)
(225)
1,649
1,424
(491)
933
(737)
196
4,417
(15,563 )
(11,146)
(1,168)
(12,314)
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
206
D – Information Required by Industry Guide 3 (continued)
Analysis of Changes in Interest Income and Expense (continued)
CHF million
2003 compared to 2002
2002 compared to 2001
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
2
267
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
Total interest expense
93
(146)
1
1,357
130
94
(104)
120
(193)
0
(387)
(158)
254
58
1,152
1,210
(304)
122
(153)
(252)
9
368
(465)
(192)
52
(605)
(699)
0
(513)
(87)
(653)
(302)
389
(298 )
(58 )
(674 )
(2,086 )
(972)
(2,144)
(60)
(398)
10
1,725
(335)
(98)
(52)
(485)
(892)
0
(900)
(245)
(399)
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)
(1,140)
(1,627)
(1,082)
(475)
(223 )
4,290
(1,916 )
(16,970 )
(2,139)
(12,680)
(2,767)
(1,557)-
4,067
(18,886 )
(14,819)
207
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 2003, 2002 and 2001. 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 92,858 million, CHF 43,914 million and CHF 54,095 million at
31 December 2003, 31 December 2002 and 31 December 2001, respectively.
CHF million, except where indicated
Average
deposit
Average
rate (%)
Average
deposit
Average
rate (%)
Average
deposit
Average
rate (%)
31.12.03
31.12.02
31.12.01
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.
3,836
7,581
11,417
20,997
32,414
55,496
81,963
21,125
158,584
161,942
320,526
0.0
0.6
0.4
2.4
1.7
0.2
0.6
1.9
0.6
1.3
1.0
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
At 31 December 2003, 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 6 months
6 to 12 months
1 to 5 years
Over 5 years
Total time deposits
Domestic
Foreign
22,382
1,492
1,335
483
94
122,522
3,354
2,384
2,172
1,241
25,786
131,673
208
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 2003, 2002 and 2001.
Money market paper issued
Due to banks
Repurchase agreements 1
CHF million, except where indicated
31.12.03 31.12.02 31.12.01 31.12.03 31.12.02 31.12.01 31.12.03 31.12.02 31.12.01
Period-end balance
Average balance
Maximum month-end balance
Average interest rate during the period (%)
Average interest rate at period-end (%)
58,115
73,257
92,605
1.4
1.3
72,800
91,685
108,463
2.1
1.5
99,006
96,253
117,022
4.4
2.6
89,303
69,062
96,694
2.8
1.5
48,780
59,109
77,312
3.1
2.0
77,312
70,621
85,808
7.0
2.2
500,592
498,679
593,738
1.8
1.3
464,020
509,572
593,786
1.8
1.7
462,316
400,648
502,578
3.2
2.9
1 For the purpose of this disclosure, balances are presented on a gross basis.
209
Additional Disclosure Required
under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Contractual Maturities of the Investments in Debt Instruments
CHF million, except percentages
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Within 1 year
1–5 years
5–10 years
Over 10 years
31 December 20031
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
3
5
45
81
0
4
138
1 Money market papers have contractual maturities of less than one year.
6.61
3.90
1.89
1.09
0.00
0.00
4
20
9
68
0
8
109
2.92
2.01
1.49
3.53
0.00
0.00
6
0
0
7
0
0
13
3.80
0.00
0.00
7.38
0.00
0.00
4.00
0.00
0.00
0.00
0.00
0.00
1
0
0
0
0
0
1
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.
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 not represent the yield through
210
D – Information Required by Industry Guide 3 (continued)
Due from Banks and Loans (gross)
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 Handbook 2003 / 2004. The following table illus-
trates the diversification of the loan portfolio among industry sectors at 31 December 2003, 2002,
2001, 2000 and 1999. The industry categories presented are consistent with the classification of
loans for reporting to the Swiss Federal Banking Commission and Swiss National Bank.
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
CHF million
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
619
2,175
4,009
2,440
6,478
102,181
5,251
12,449
6,062
9,493
1,217
152,374
31,405
245
84
249
23,493
2,421
1,114
21,194
1,224
473
1,880
7,983
3,658
410
95,833
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
151,604
158,996
164,645
183,944
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
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
69,087
94,070
278,014
248,207
249,370
1 Includes chemicals, food and beverages.
3 Includes mining and electricity, gas and water supply.
and restaurants.
2 Includes transportation, communication, health and social work, education and other social and personal service activities.
6 Includes hotels
4 For 1999, no detailed industry classifications are available.
5 Includes food and beverages.
211
Additional Disclosure Required
under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Due from Banks and Loans (gross) (continued)
The following table analyzes the Group’s mortgage portfolio by geographic origin of the client and
type of mortgage at 31 December 2003, 2002, 2001, 2000 and 1999. Mortgages are included in the
industry categories mentioned above.
CHF million
Mortgages
Domestic
Foreign
Total gross mortgages
Mortgages
Residential
Commercial
Total gross mortgages
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
122,069
7,073
129,142
110,239
18,903
129,142
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
Due from Banks and Loan Maturities (gross)
The following table discloses due from banks and loans by maturity at 31 December 2003. The
determination of maturities is based on contract terms. Information on interest rate sensitivities can
be found in Note 29 to the UBS Financial Statements.
CHF million
Domestic
Banks
Mortgages
Other loans
Total domestic
Foreign
Banks
Mortgages
Other loans
Total foreign
Total gross
Within 1 year
1 to 5 years
Over 5 years
Total
619
56,604
21,695
78,918
29,587
6,287
54,220
90,094
0
58,666
6,528
65,194
1,382
732
2,419
4,533
169,012
69,727
0
6,799
1,463
8,262
436
54
716
1,206
9,468
619
122,069
29,686
152,374
31,405
7,073
57,355
95,833
248,207
At 31 December 2003, the total amount of due from banks and loans due after one year granted at
fixed and floating rates are as follows:
CHF million
Fixed rate loans
Adjustable or floating rate loans
Total
1 to 5 years
Over 5 years
67,134
2,593
69,727
8,856
612
9,468
Total
75,990
3,205
79,195
212
D – Information Required by Industry Guide 3 (continued)
Impaired, Non-performing and Restructured Loans
A loan (included in due from banks and loans) is
classified as impaired if the book value of the
claim exceeds the present value of the cash flows
actually expected in future periods – interest pay-
ments, scheduled principal repayments, or other
payments due (for example on guarantees), and
including liquidation of collateral where avail-
able. Within this category, we further classify
loans as non-performing where payment of inter-
est, principal or fees is overdue by more than 90
days or – as required by Swiss regulatory guide-
lines as at 31 December 2003 – when insolvency
proceedings have commenced or obligations
have been restructured on concessionary terms.
The gross interest income that would have
been recorded on non-performing loans was
CHF 171 million for domestic loans and CHF
23 million for foreign loans for the year ended
31 December 2003, CHF 148 million for domes-
tic loans and CHF 53 million for foreign loans
for the year ended 31 December 2002, CHF
336 million for all non-performing loans for the
year ended 31 December 2001 and CHF 182 mil-
lion for all non-performing loans for the year
ended 31 December 2000. The amount of inter-
est income that was included in net income for
those loans was CHF 163 million for domestic
loans and CHF 8 million for foreign loans for the
year ended 31 December 2003, CHF 152 mil-
lion for domestic loans and CHF 22 million for
foreign loans for the year ended 31 December
2002 and CHF 201 million for all non-perform-
ing loans 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-performing loans, for further information
see the Handbook 2003 / 2004.
CHF million
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
Non-performing due from banks and loans:
Domestic
Foreign
4,012
947
4,609
1,420
6,531
2,108
7,588
2,864
11,435
1,638
Total non-performing
due from banks and loans
Foreign restructured
due from banks and loans 1
4,959
6,029
8,639
10,452
13,073
179
287
1 Include only performing foreign restructured loans. UBS does not, as a matter of policy, typically restructure loans to accrue interest at rates different from the original
contractual terms or reduce the principal amount of loans. Instead, specific loan allowances are established as necessary. Unrecognized interest related to foreign restruc-
tured loans was not material to the results of operations during these periods.
In addition to the non-performing due from banks
loans shown above, the Group had
and
CHF 2,647 million, 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 2003, 2002, 2001, 2000
and 1999, respectively. For the years ended
31 December 2002, 2001, 2000 and 1999, respec-
tively, these are loans that are current, or less than
90 days in arrears, with respect to payment of
principal or interest; and for the year ended
31 December 2003, these are loans not considered
“non-performing” in accordance with Swiss regu-
latory guidelines, however, the Group’s credit offi-
cers have expressed doubts as to the ability of the
borrowers to repay the loans. As at 31 December
2003 specific allowances of CHF 991 million had
been established against these loans.
213
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. Out-
standings 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
Commission.
The following tables list those countries
for which cross-border outstandings exceeded
0.75% of total assets at 31 December 2003,
2002 and 2001. At 31 December 2003, there
were no outstandings that exceeded 0.75% of
total assets in any country currently facing liq-
uidity problems that the Group expects would
materially affect the country’s ability to service
its obligations.
For more information on cross-border expo-
sure, see the Handbook 2003 / 2004.
214
D – Information Required by Industry Guide 3 (continued)
CHF million
United States
Italy
Germany
United Kingdom
France
Japan
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
31.12.03
Banking products
Banks Non-banks
Traded
products1
Tradable
assets2
% of total
assets
Total
916
1,041
1,928
4,223
441
7
288
967
3,814
525
1,505
300
17,470
8,714
13,307
4,374
4,450
1,622
108,050
14,547
5,605
11,112
8,320
11,548
126,724
25,269
24,654
20,234
14,716
13,477
9.1
1.8
1.8
1.5
1.1
1.0
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
1 Traded products consist of derivative instruments and repurchase agreements.
ing purposes, which are marked to market on a daily basis and private equity investments at the lower of book or market value.
2 Tradable assets consist of equity and fixed income financial instruments held for trad-
215
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
settlement of bankruptcy proceedings, the sale of the underlying assets and / or in case of debt for-
giveness. Under Swiss law, a creditor can continue to collect from a debtor who has emerged from
bankruptcy, unless the debt has been forgiven through a formal agreement.
CHF million
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
Balance at beginning of year
5,621
8,218
10,581
13,398
14,978
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
Total domestic write offs
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
0
(73)
(37)
(57)
(121)
(262)
(18)
(206)
(67)
(111)
(43)
(995)
(17)
0
0
0
(112)
(77)
(15)
(11)
0
(1)
(76)
(25)
(24)
(83)
(441)
0
(148 )
(103 )
(48 )
(275 )
(536 )
0
(357 )
(101 )
(155 )
(49 )
(1,772 )
(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 )
0
(261 )
(178 )
(193 )
(264 )
(640 )
0
(729 )
(160 )
(227 )
(30 )
(4)
(296)
(92)
(137)
(242)
(598)
0
(823)
(210)
(315)
(41)
(2,682 )
(2,758)
(15 )
0
(13 )
(3 )
(33 )
(11 )
0
0
(4 )
0
(160 )
(8 )
(11 )
(55 )
(313 )
Total write offs
(1,436)
(2,536 )
(3,008 )
(2,995 )
Recoveries
Domestic
Foreign
Total recoveries
Net write offs
Credit loss expense / (recovery)
Other adjustments 7
Balance at end of year
49
38
87
(1,349)
116
(62)
4,326
43
27
70
(2,466 )
206
(337 )
5,621
(517)
(3,275)
54
11
65
58
23
81
124
39
163
(2,927 )
(2,832 )
(3,210)
498
66
8,218
(130 )
145
956
674
10,581
13,398
1 Includes chemicals, food and beverages.
3 Includes mining and electricity, gas and water supply.
7 See the following table for details.
and restaurants.
2 Includes transportation, communication, health and social work, education and other social and personal service activities.
6 Includes hotels
4 For 1999, no detailed industry classifications are available.
5 Includes food and beverages.
216
D – Information Required by Industry Guide 3 (continued)
Summary of Movements in Allowances and Provisions for Credit Losses (continued)
CHF million
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
Doubtful interest
Net foreign exchange
Subsidiaries sold and other
Total adjustments
0
(57)
(5)
(62)
0
(269 )
(68 )
(337 )
0
44
22
66
182
23
(60 )
145
409
351
(86)
674
217
Additional Disclosure Required
under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Allocation of the Allowances and Provisions for Credit Losses (continued)
The following table provides an analysis of the allocation of the allowances and provisions for credit
losses by industry sectors and geographic location at 31 December 2003, 2002, 2001, 2000 and 1999.
For a description of procedures with respect to allowances and provisions for credit losses, see the
Handbook 2003 / 2004.
CHF million
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
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
158
137
214
327
511
9
383
201
549
241
10
265
89
286
458
750
39
577
315
470
315
2,740
3,574
256
5
0
0
168
359
19
48
69
7
51
32
195
91
1,300
286
1,586
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
10,483
1,539
1,376
2,915
4,326
5,621
8,218
10,581
13,398
1 Includes chemicals, food and beverages.
3 Includes mining and electricity, gas and water supply.
Country provisions with banking counterparties amounting to CHF 91 million are disclosed under country provisions.
and restaurants.
respectively of provisions and for unused commitments and contingent liabilities.
2 Includes transportation, communication, health and social work, education and other social and personal service activities.
5 Counterparty allowances and provisions only.
7 Includes hotels
8 The 2003, 2002, 2001, 2000 and 1999 amounts include CHF 290 million, CHF 366 million, CHF 305 million, CHF 54 million and CHF 149 million
4 For 1999, no detailed industry classifications are available.
6 Includes food and beverages.
218
D – Information Required by Industry Guide 3 (continued)
Due from Bank and Loans by Industry Sector (gross)
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 %
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
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
0.2
0.9
1.6
1.0
2.6
41.2
2.1
5.0
2.4
3.8
0.6
61.4
12.7
0.1
0.0
0.1
9.5
1.0
0.4
8.5
0.5
0.2
0.8
3.2
1.5
0.1
38.6
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
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
24.8
33.8
100.0
1 Includes chemicals, food and beverages.
3 Includes mining and electricity, gas and water supply.
and restaurants.
2 Includes transportation, communication, health and social work, education and other social and personal service activities.
6 Includes hotels
4 For 1999, no detailed industry classifications are available.
5 Includes food and beverages.
219
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 (relating to due from banks and loans).
CHF million, except where indicated
31.12.03
31.12.02
31.12.01
31.12.00
31.12.99
Gross loans
Impaired loans
Non-performing loans
Allowances and provisions for credit losses
Net write offs
Credit loss expense / (recovery)
248,207
7,606
4,959
4,326
1,349
116
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
Ratios
Impaired loans as a percentage of gross loans
Non-performing loans as a percentage
of gross loans
Allowance and provisions for
credit losses as a percentage of:
Gross loans
Impaired loans
Non-performing loans
Allocated allowances as a percentage
of impaired loans 1
Allocated allowances as a percentage
of non-performing loans 2
Net write offs as a percentage of:
Gross loans
Average loans outstanding during the period
Allowance and provisions for credit losses
Allowance and provisions for
credit losses as a multiple of net write offs
3.1
2.0
1.7
56.9
87.2
50.0
56.8
0.5
0.6
31.2
3.21
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
60.6
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
1 Allowances relating to impaired loans only.
2 Allowances relating to non-performing loans only.
220
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 the European wealth management strategy,
expansion of our corporate finance presence in the US and world-
wide, 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 factors could cause actual
developments and results to differ materially from our expecta-
tions. 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 pres-
sures, (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) management changes
and changes to our business group structure 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 else-
where in this document and in documents furnished by UBS and
filings made by UBS with the SEC, including UBS’s Annual
Report on Form 20-F for the year ended 31 December 2003. UBS
is not under any obligation to (and expressly disclaims any such
obligations to) update or alter its forward-looking statements
whether as a result of new information, future events, or otherwise.
Imprint
Publisher/ Copyright: UBS AG, Switzerland
Languages: English, German. SAP-No. 80531E-0401
ab
UBS AG
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