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Financial Report 2004
Introduction
Our Financial Report forms an essential part of our annual
reporting portfolio. It includes the audited financial statements
of UBS for 2004 and 2003, prepared according to Interna-
tional 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 2004 and 2003, prepared according
to Swiss Banking Law requirements. It also contains a discus-
sion 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
Introduction
UBS financial highlights
UBS at a glance
Sources of information
Contacts
Presentation of Financial Information
UBS reporting structure
Measurement and analysis of performance
Changes in accounting and
presentation in 2005
UBS
Results
Risk factors
UBS Targets
Financial Businesses
Results
Wealth Management &
Business Banking
Global Asset Management
Investment Bank
Wealth Management USA
Corporate Center
Industrial Holdings
Balance Sheet and Cash Flows
Balance sheet and off-balance sheet
Cash flows
Accounting Standards and Policies
Accounting principles
Critical accounting policies
Financial Statements
UBS AG (Parent Bank)
Additional Disclosure Required
under SEC Regulations
1
2
3
4
6
7
8
9
10
15
16
16
19
23
24
32
41
47
52
58
65
67
68
71
73
74
76
81
191
205
1
Introduction
UBS financial highlights
UBS Income Statement
CHF million, except where indicated
Net profit
Basic earnings per share (CHF) 1
Diluted earnings per share (CHF) 1
Return on shareholders’ equity (%) 2
KPI’s adjusted for significant financial events and pre-goodwill 3, 4
Basic earnings per share (CHF) 5
Return on shareholders’ equity (%) 6
Financial Businesses 7
Operating income
Operating expenses
Net profit
Cost / income ratio (%) 8
Net new money, wealth management businesses (CHF billion) 9
Headcount (full-time equivalents)
Earnings adjusted for significant financial events and pre-goodwill 3, 4
Operating income
Operating expenses
Net profit
Cost / income ratio (%) 8
UBS balance sheet and capital management
CHF million, except where indicated
Balance sheet key figures
Total assets
Shareholders’ equity
Market capitalization
BIS capital ratios
Tier 1 (%) 10
Total BIS (%)
Risk-weighted assets
Invested assets (CHF billion)
Long-term ratings
Fitch, London
Moody’s, New York
Standard & Poor’s, New York
For the year ended
31.12.04
8,089
31.12.03
6,239
31.12.02
3,530
7.68
7.47
24.7
8.60
27.7
37,402
26,935
8,044
72.6
59.4
67,424
37,402
26,048
8,931
70.2
5.59
5.48
17.8
6.43
20.5
33,790
25,613
6,239
75.6
50.8
65,929
33,629
24,670
7,180
73.2
2.92
2.87
8.9
4.57
13.9
34,107
29,570
3,530
86.4
36.2
69,061
33,880
27,110
5,524
79.7
% change from
31.12.03
30
37
36
34
11
5
29
2
11
6
24
31.12.04
As at
31.12.03
% change from
31.12.02
31.12.03
1,734,784
1,550,056
1,346,678
34,978
103,638
11.8
13.6
264,125
2,250
AA+
Aa2
AA+
35,310
95,401
11.8
13.3
251,901
2,133
AA+
Aa2
AA+
38,952
79,448
11.3
13.8
238,790
1,959
AAA
Aa2
AA+
12
(1 )
9
5
5
1 For the EPS calculation, see note 8 to the financial statements.
4 Details of significant financial events can be found in the measurement and analysis of performance section on page 9.
significant financial events (after-tax) / weighted average shares outstanding.
average shareholders’ equity less dividends.
Management and Wealth Management USA. Excludes interest and dividend income.
3 Excludes the amortization of goodwill and other intangible assets.
5 Net profit less the amortization of goodwill and other intangible assets and
6 Net profit less the amortization of goodwill and other intangible assets and significant financial events (after-tax) /
9 Includes Wealth
10 Includes hybrid Tier 1 capital, please refer to note 29 to the financial statements.
8 Operating expenses / operating income less credit loss expense or recovery.
2 Net profit / average shareholders’ equity less dividends.
7 Excludes results from Industrial Holdings.
From third quarter 2004 onwards, Motor-Columbus has been fully consolidated in UBS’s Financial Statements. The reporting
structure is split into two components: Financial Businesses and Industrial Holdings.
2
UBS at a glance
UBS is one of the world’s leading financial firms, serving a
discerning global client base. As an organization, 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 67,424 people, 39% in
the Americas, 38% in Switzerland, 16% in Europe and 7%
in the Asia Pacific time zone.
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 2.25 trillion, shareholders’ equity of CHF 35.0 billion and
market capitalization of CHF 103.6 billion on 31 December 2004.
Businesses
Wealth management
With more than 140 years of experience, an extensive global
network of around 180 offices and almost CHF 800 billion in
invested assets, UBS is the world’s leading wealth management
business. Some 3,700 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. In the US, UBS is one of the biggest pri-
vate client businesses with a client base of nearly 2 million. Its
American network of around 7,500 financial advisors manages
roughly CHF 640 billion in invested assets and provides sophis-
ticated services to affluent and high net worth clients.
tently 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
fixed income, it is a first-rate global player. In foreign ex-
change, it places first in many key industry rankings. In invest-
ment banking, it provides first-class advice and execution
capabilities to its corporate client base worldwide. 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, a leading asset manager with invested assets of slightly
more than CHF 600 billion, provides a broad base of inno-
vative capabilities stretching from traditional to alternative
investment solutions for, among other clients, financial inter-
mediaries and institutional investors across the world.
Swiss corporate and individual clients
Depending on segment, UBS holds roughly a quarter and a
third of the Swiss banking market. It offers comprehen-
sive banking and securities services for approximately 3.5 mil-
lion individual and around 143,000 corporate clients,
including institutional investors, public entities and foun-
dations based in Switzerland, as well as 3,000 financial insti-
tutions worldwide. With a total loan book of nearly CHF
140 billion, UBS leads the Swiss lending and retail mortgage
markets.
Investment banking and securities
UBS is a global investment banking and securities firm with
a strong institutional and corporate client franchise. Consis-
Corporate Center
The Corporate Center partners with the businesses, 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 2004 and the related detailed
analysis. You can find out more about UBS from the sources shown below.
Publications
This Financial Report is available in English and German.
(SAP no. 80531-0501).
Annual Review 2004
Our Annual Review contains a description of UBS and our
Business Groups, as well as a summary review of our per-
formance in 2004. It is available in English, German, French,
Italian, Spanish and Japanese. (SAP no. 80530-0501).
Handbook 2004 / 2005
The Handbook 2004 / 2005 contains a detailed description
of UBS, our strategy, organization, and businesses, as well
as our financial management including credit, market and
operational risk, our capital management approach and
details of our corporate governance. It is available in English
and German. (SAP no. 80532-0501).
Quarterly reports
We provide detailed quarterly financial reporting and analy-
sis, including comment on the progress of our businesses and
key strategic initiatives. These quarterly reports are available
in English.
The compensation report
Our compensation report provides detailed information on
the compensation paid in 2004 to the members of UBS’s
Board of Directors (BoD) and the Group Executive Board
(GEB). The report is available in English and German. (SAP
no. 82307-0501). The same information can also be read in
the Corporate Governance chapter of the Handbook 2004 /
2005.
The making of UBS
A brochure published in early 2005 outlines the series of trans-
formational mergers and acquisitions that created today’s
UBS. It also includes brief profiles of the firm’s antecedent
companies and their historical roots. It is available in English
and German. (SAP no. 82252).
How to order reports
Each of these reports is available on the internet at:
www.ubs.com/investors, in the Financials section. Alterna-
tively, printed copies can be ordered, quoting the SAP num-
ber and the language preference where applicable, from
UBS AG, Information Center, P.O. Box, CH-8098 Zurich,
Switzerland.
Information tools for investors
Website
Our Analysts and Investors website at www.ubs.com/investors
offers a wide range of information about UBS, financial infor-
mation (including SEC filings), corporate information, share
price graphs and data, an event calendar, dividend informa-
tion and recent presentations given by senior management to
investors at external conferences. Our information on the in-
ternet is available in English and German, with some sections
in French and Italian as well.
Messaging service
On the Analysts and Investors website, you can register to
receive news alerts about UBS via Short Messaging System
(SMS) or e-mail. Messages are sent in either English or
German and users are able to state their preferences for the
topics of the alerts received.
Results presentations
Senior management presents UBS’s results every quarter.
These presentations are broadcast live over the internet, and
can be downloaded on demand. The most recent result
webcasts can be found in the Financials section of our
Investors and Analysts website.
Form 20-F and other submissions to the US Securities
and Exchange Commission
We file periodic reports and submit other information about
UBS to the US Securities and Exchange Commission (SEC).
Principal among these filings is Form 20-F; our Annual Report
filed pursuant to the US Securities Exchange Act of 1934.
Our Form 20-F filing is structured as a “wrap-around”
document. Most sections of the filing are satisfied by
referring to parts of the Handbook 2004 / 2005 or to parts
of this Financial Report 2004. However, there is a small
amount of additional information in Form 20-F which is not
presented elsewhere, and is particularly targeted at readers
in the US. You are encouraged to refer to this additional
disclosure.
4
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 website at www.ubs.com/investors, and copies of docu-
ments filed with the SEC may be obtained from UBS’s Investor
Relations team, at the addresses shown on the next page.
Corporate information
The legal and commercial name of the
company 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 +41-44-234 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.
Investor Relations
Our Investor Relations team supports
institutional, professional and retail
investors from our office in Zurich.
www.ubs.com/investors
Media Relations
Our Media Relations team supports
global media and journalists from
offices in Zurich, London, New York
and Hong Kong.
www.ubs.com/media
Shareholder Services
UBS Shareholder Services, a unit
of the Company Secretary, is
responsible for the registration of
the Global Registered Shares.
Zurich
London
New York
Hong Kong
Zurich
Hotline
Matthew Miller
Patrick Zuppiger
Caroline Ryton
Fax
Zurich
London
New York
Hong Kong
Hotline
Fax
+41-44-234 1111
+44-20-7568 0000
+1-212-821 3000
+852-2971 8888
+41-44-234 4100
+41-44-234 4360
+41-44-234 3614
+41-44-234 2281
+41-44-234 3415
+41-44-234 8500
+44-20-7567 4714
+1-212-882 5857
+852-2971 8200
+41-44-235 6202
+41-44-235 3154
US Transfer Agent
For all Global Registered Share-
related queries in the US.
www.melloninvestor.com
Calls from the US
Calls outside the US
Fax
+1-866-541 9689
+1-201-329 8451
+1-201-296 4801
6
UBS AG
Investor Relations
P.O. Box
CH-8098 Zurich, Switzerland
sh-investorrelations@ubs.com
mediarelations@ubs.com
ubs-media-relations@ubs.com
mediarelations-ny@ubs.com
sh-mediarelations-ap@ubs.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
sh-relations@melloninvestor.com
Presentation of Financial Information
Presentation of Financial Information
UBS reporting structure
Changes to reporting structure in 2004
We implemented a new reporting structure during 2004, un-
der which we separate the analysis of our financial businesses
from the impact of our industrial holdings. We adopted this new
reporting structure on assuming majority ownership of the
holding company Motor-Columbus after purchasing an addi-
tional 20% stake on 1 July 2004. Motor-Columbus’s only
significant asset is a 59.3% interest in the Atel Group. Atel,
based in Olten, Switzerland, is an energy provider focused on
domestic and international power generation, electricity trans-
mission, energy services as well as electricity trading and mar-
keting. Due to the increased complexity that the consolidation
of this energy utility adds to our financial reporting, we have
split the commentary of our results into two parts. We have pro-
vided commentary and analysis of our financial businesses –
which include all our pre-existing business units – separately
from the new industrial holdings unit, housing Motor-
Columbus. In this way, we aim for complete continuity in the
presentation and analysis of our core businesses. The new
reporting structure is shown in detail in the diagram below.
We also decided in 2004 to increase the transparency of
our Corporate Center by splitting it into two business units:
Corporate Functions and Private Banks & GAM, showing
separately the performance of the holding company which
contains our independently branded private banks and the
specialist asset manager GAM.
None of the above changes had an impact on our consoli-
dated financial statements, but we have restated our segment
reporting for prior periods for all business units affected to
reflect these changes.
Changes to accounting in 2004
At the start of 2004, we implemented the following changes
in accounting:
– early adoption of revised IAS 32 Financial Instruments:
Disclosure and Presentation and revised IAS 39 Financial
Instruments: Recognition and Measurement.
– change in the accounting for investment property from his-
torical cost less accumulated depreciation to the fair value
method.
– change in accounting for credit losses on over-the-
counter (OTC) derivatives which are now reported
as incurred in net trading income and no longer charged
to credit loss expense (and deferred over three years
for internal management reporting and in the results
discussion).
– exclusion from invested assets of corporate client assets in
the Business Banking Switzerland unit (except for pension
fund assets).
These changes lowered 2003 and 2002 net profit by
CHF 146 million and CHF 5 million respectively. All figures
and results presented in this report reflect these changes.
Other new disclosures
As part of our continuing effort to improve the transparency
of our financial reporting and provide the best possible
understanding of our business, we have made a number of
enhancements to our disclosure.
In the results discussion, we split our underwriting fee
results to show equity and fixed income contributions
separately.
In our Business Banking Switzerland unit, we split our
revenues to show the breakdown between interest income
and non-interest income, giving a more distinct picture of the
unit’s sources of revenue.
In the Wealth Management USA Business Group, we
now indicate the split between private client and municipal
finance revenues, better explaining the performance of the
business. To that end, we have also introduced a new key
performance indicator (KPI) that shows the productivity per
financial advisor.
With the launch of our IT infrastructure unit (ITI), we have
also started to show a new line called ‘Services to / from
other business units’. This line is a net figure consisting of all
inter-business services, the majority of which relate to ITI.
UBS Reporting Structure
Financial Businesses
Industrial Holdings
Wealth Management
& Business Banking
Global Asset
Management
Investment Bank
Wealth
Management USA
Corporate Center
Motor-Columbus
Wealth Management
Business Banking
Switzerland
8
Private Banks & GAM
Corporate Functions
Measurement and analysis of performance
UBS’s performance is reported in accordance with Interna-
tional Financial Reporting Standards (IFRS). Additionally, for
several years, we have provided comments and analysis on an
adjusted basis which excludes from the reported amounts
certain items we term significant financial events (SFEs). An
additional adjustment we have used in our results discussion
is the exclusion of the amortization of goodwill and other
acquired intangible assets.
We will in future change this approach as accounting
standards no longer require the amortization of goodwill, by
far the largest adjustment we have been making. From 2005
onwards, we will no longer present current results on this
adjusted basis.
The adjustments we have made up to and including this
2004 report reflect our internal approach to analyzing our re-
sults and managing the company, in which SFE-adjusted
figures before the amortization of goodwill and intangibles
have been used to assess performance against peers and to
estimate future growth potential. In particular, our financial
targets have been set in terms of adjusted results, excluding
SFEs and the amortization of goodwill and intangibles. All the
analysis provided in our internal management accounting has
been based on operational SFE-adjusted performance. This
has helped us to illustrate the underlying operational perform-
ance of our business, insulated from the impact of individual
gain or loss items that are not relevant to our management’s
business planning decisions. A policy approved by the Group
Executive Board (GEB) defines which items have been classi-
fied as SFEs.
Items have been treated as SFEs when they are event-
specific, significant for the consolidated financial statements
of UBS, UBS-specific, rather than industry-wide, and not in-
dicative of or relevant for future performance.
Reflecting that definition, we had no SFEs in 2004, one in
2003, and three in 2002. The relevant SFEs were:
– A net gain of CHF 2 million (pre-tax CHF 161 million)
in second quarter 2003 from the sale of the Wealth
Management USA Business Group’s Correspondent
Services Corporation (CSC) clearing business. A substan-
tial portion of CSC’s net assets comprised goodwill
stemming from the PaineWebber acquisition. After de-
ducting 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 mil-
lion.
– In fourth quarter 2002, 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
intangible asset on our balance sheet.
– In fourth quarter 2002, 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, a net gain of CHF 125 million
(pre-tax CHF 155 million) from the sale of private bank
Hyposwiss.
Seasonal characteristics
Our main businesses do not generally show significant sea-
sonal patterns – except for the Investment Bank Business
Group, where revenues are impacted by the seasonal charac-
teristics of general financial market activity and deal flows in
investment banking.
When discussing quarterly performance, we therefore
compare the Investment Bank’s results of the reported quar-
ter with those achieved in the same period of the previous
year. Similarly, when considering the impact of the Investment
Bank’s performance on UBS’s financial statements, we discuss
our overall quarterly performance on a year-on-year basis –
comparing the actual quarter with the same quarter in the
previous year. For all other Business Groups, results are com-
pared with the previous quarter as they are only slightly
impacted by seasonal components (e. g. asset withdrawals
in fourth quarter or lower client activity levels during the
holiday season).
Targets and performance measures
UBS targets
At UBS we focus on a consistent set of four long-term finan-
cial targets defined across periods of varying market condi-
tions 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 percentage growth in basic earnings
per share (EPS), across periods of varying market condi-
tions.
– Through cost reduction and earnings enhancement initia-
tives, 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 amorti-
zation, and adjusted for significant financial events.
9
Presentation of Financial Information
Key performance indicators
Business
Financial businesses
Key performance indicators
Definition
Cost / income ratio
Total operating expenses / total operating income before adjusted expected credit loss.
Cost / income ratio before goodwill
Wealth and asset management businesses
and Business Banking Switzerland
Invested assets
Net new money
Total operating expenses excluding amortization of goodwill and intangible
assets / 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 11).
Inflow of invested assets from new clients
– outflows due to client defection
+/– inflows / outflows from existing clients.
(for further details please refer to page 11).
Wealth and asset management businesses Gross margin on invested assets
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.
Investment Bank
Impaired loans (%)
Compensation ratio (%)
Non-performing loans (%)
Impaired loans (%)
Average VaR (10-day 99%)
Value creation (private equity)
Impaired loans / gross loans.
Personnel expenses / operating income before adjusted expected credit loss.
Non-performing loans / gross loans.
Impaired loans / gross loans.
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 / (losses) to realized
gains / (losses) for the period.
Investment (private equity)
Historical cost of investment made, less divestments and impairments.
Portfolio fair value (private equity)
Wealth Management USA
Recurring fees
The fair value of a portfolio is the estimated amount for which the assets could be
exchanged between willing buyers and willing sellers in an arm’s length transaction
after an orderly sale process where the parties each act knowledgeably, prudently
and without compulsion.
Asset-based fees for portfolio management and fund distribution, account-based
and advisory fees (as opposed to transactional fees).
Financial advisor productivity
Private client revenues divided by average number of financial advisors.
Changes in accounting and presentation in 2005
Effective 2005, we will make a number
of changes in accounting and disclo-
sure – some are driven by changes in
accounting standards, others concern
the presentation of our financial
results.
The International Accounting Stan-
dards Board (IASB) issued revisions to
15 of its 32 International Accounting
Standards (IAS) in December 2003 in
an effort to clarify and simplify them
and make them more compatible with
other accounting standards, notably
US GAAP. All 15 revisions became ef-
fective on 1 January 2005. We decided
to adopt two of the revisions, IAS 32
and 39, early, at the beginning of 2004.
Together these two revisions provide
comprehensive guidance on recogni-
tion, measurement, presentation and
disclosure of financial instruments.
We adopted the remaining revisions at
the beginning of 2005. As a result,
we will make a number of changes to
our accounting, presentation and
disclosure in 2005. The IASB now calls
new standards International Financial
Reporting Standards (IFRS).
Several of the changes will require us
to restate comparative prior periods,
although not all of them will have an
effect on net profit or shareholders’
equity. We will release restated
interim and annual financial state-
ment figures for 2004 and 2003
before we publish our first quarter
2005 report.
Accounting treatment and presenta-
tion of private equity investments
In the past we treated all our private
equity investments as “Financial
investments available-for-sale”. The
revised IAS 27 and 28 will require
us to change this approach, with
some investments no longer exempt
from consolidation.
Depending on the size of our stake,
these investments will have to be
treated according to one of the three
following methods:
10
Business Group key performance indicators
At the Business Group or business unit level, performance is
measured with carefully chosen 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 busi-
ness activities and include both financial metrics, such as the
cost / income ratio, and non-financial metrics, such as invest-
ed assets or the number of client advisors.
These KPIs 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 externally reported value
drivers, avoiding the risk of management to purely internal
performance measures.
Client / invested assets reporting
Since 2001, we have reported 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 invest-
ment 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 management 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. Since 1 January 2004,
corporate client assets (other than pension funds) deposited
with the Business Banking Switzerland unit have been
excluded, as we have a minimal advisory role for such clients
and as asset flows are driven more by liquidity requirements
than investment reasons. Non-bankable assets (e. g. art col-
lections) 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 acqui-
sitions and divestments are excluded from net new money.
The use of invested assets to fund interest expense on clients’
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
provide 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 Man-
agement business or GAM and sold by a wealth management
business (Wealth Management or Wealth Management USA).
Both businesses involved count these funds as invested assets.
This approach is in line with industry practice and our open
architecture strategy and allows us to accurately reflect the
performance of each individual business. Overall, CHF 294 bil-
lion of invested assets were double counted in 2004 (CHF
283 billion in 2003).
– full consolidation (according to
IAS 27) for investments in which
we have a controlling interest
– equity method accounting (accord-
ing to IAS 28) for investments in
which we have significant influence
– treatment as “Financial investments
available-for-sale” for all remaining
private equity investments.
Under the old method, all investments
were accounted for as “available-
for-sale”. That means that even if the
value of an investment rose or fell,
corresponding gains or losses were
only recognized in the income state-
ment on sale, unless an impairment
occurred. Changes in the fair value of
the investment were booked directly in
equity for the time that we held it.
Once an investment was sold, the gain
or loss recognized was the difference
between the value of the investment
at the time that it was purchased
(adjusted for any impairments) and its
selling price. The introduction of
revised IAS 27 and 28 requires that we
adopt a new approach. Now, for an
investment where we have a control-
ling interest or a significant influence,
we will record our share of its net
profit or loss directly through our
income statement. Doing that will
prompt corresponding changes to the
carrying value of the investment –
meaning its value on the balance sheet
will be updated according to the accu-
mulated profits and losses. Then, at
the time of sale, any gain or loss we
record will be based on the difference
between the latest carrying value and
the selling price.
Full consolidation according to IAS 27
The revision of IAS 27 requires compa-
nies to fully consolidate subsidiaries
even when control over them is only
temporary. As a result, from 2005
onwards we will consolidate line by line
those private equity investments in
which we have a controlling interest –
in total 12 investments. As a conse-
11
Changes in accounting and presentation in 2005 (continued)
quence, we will debit approximately
CHF 723 million to our equity (includ-
ing minority interests) as at 1 January
2003. The move will add CHF 1.7 bil-
lion and CHF 2.9 billion in assets to our
balance sheet for year-end 2004 and
2003 respectively. It will increase total
operating income in 2004 and 2003
by approximately CHF 3.8 billion and
CHF 4.1 billion respectively. It will
also add approximately CHF 92 million
and CHF 86 million to 2004 and 2003
in operating net profit.
In our restatement for 2004 and 2003,
we will also have to reflect the impact
on the sale of these types of invest-
ments in accordance with IFRS 5
(explained in detail below). Seven of
the private equity investments in which
we had a controlling interest on 1 Jan-
uary 2003 were sold during 2003 or
2004 and will therefore be presented
as discontinued operations in the
restated financial results for these
years. Under the revised accounting
method, the additional net profit / (loss)
from these exits, which is not included
in the changes to operating profit men-
tioned above, totaled CHF 55 million in
2004 and CHF (8) million in 2003.
Under the old method, the correspond-
ing figures were CHF 90 million and
CHF 194 million.
Equity method according to IAS 28
Investments in companies in which we
have a significant influence must now
be accounted for under the equity
method, even if they are held exclu-
sively for future sale. From 2005
onwards we will therefore account for
15 private equity investments in which
we have a stake between 20% and
50% using the equity method. As a
consequence, we will debit CHF
266 million to our equity as at 1 Janu-
ary 2003. That debit is the difference
between the carrying value of those
private equity investments under the
new and the old methods. The restat-
ed carrying values will be CHF 248 mil-
lion and CHF 393 million on 31 De-
cember 2004 and 2003 respectively,
which include equity in income of
CHF (55) million and CHF 10 million
recognized in the income statement in
2004 and 2003 respectively.
During 2004 and 2003, we exited five
of these private equity investments
accounted for using the equity
method. Under the new accounting
method, the gains on sale were
CHF 1 million and zero in 2004 and
2003 respectively, compared to
CHF 70 million and CHF 34 million
in 2004 and 2003 respectively under
the old method.
Changes in presentation
From first quarter 2005, our private
equity business including all its invest-
ments will be reported as part of the
Industrial Holdings segment. This is in
line with our ongoing strategy of dis-
continuing this business. The fair value
of the private equity portfolio was
CHF 2.7 billion at end-December 2004,
compared to CHF 6.9 billion at the end
of 2000 – when it was at its highest.
Current management will continue to
look after the portfolio.
IFRS 2 Share-based payment
IFRS 2 will require entities to recognize
the fair value of share-based payments
made to employees as compensation
expense, recognized over the service
period, which is generally equal to the
vesting period. The new treatment
differs from our current practice in two
ways. First, option awards will be
expensed over their vesting period
whereas currently UBS discloses the
pro-forma impact of expensing the fair
value of such awards at grant. Second,
share awards, which are currently
expensed in the performance year
(generally the year before grant), will
in future be expensed from the date of
grant over the vesting period. We will
apply the new requirements to all prior
period awards that impact income
statements from 2003 onwards. This
includes all unvested or outstanding
awards as at 1 January 2003. The
opening balance of retained earnings
on 1 January 2003 will be adjusted
by a credit of CHF 559 million after-tax
for the effects these awards have on
income statements prior to 2003. With
regard to our income statement, we
will record zero and CHF 558 million as
additional compensation expense for
2004 and 2003 respectively. The sig-
nificantly lower impact on the 2004
income statement is due to the fact
that we have substantially raised the
12
proportion of bonus payments made
in the form of restricted stock rather
than cash. The CHF 1,406 million
expense related to these stock awards
shifts under IFRS 2 from 2004 to
the vesting period starting in 2005,
and significantly exceeds the impact
of prior year stock grants on 2004
expenses.
We will also introduce an updated
option valuation model to determine
the fair value of share options granted
in 2005 and beyond. The new model
will better reflect observed exercise
behavior. This will reduce the value
of an option and accordingly the new
model will result in lower average
values per option – other factors being
equal. The new model will not affect
the valuation of share options granted
in 2004 and earlier.
UBS also has employee benefit trusts
that are used in connection with
share-based payment arrangements
and deferred compensation schemes.
Henceforth, we will be required to
consolidate these trusts. This will
result in us recognizing assets of CHF
1.1 billion and CHF 1.3 billion and
liabilities of CHF 1.1 billion and CHF
1.3 billion on our year-end 2004
and 2003 balance sheets respectively.
The weighted average number of
treasury shares held by these trusts
was 22,995,954 in 2004 and
30,792,147 in 2003. The new stan-
dard will lower the weighted average
number of shares outstanding used
to calculate basic earnings per share.
There will be no impact on diluted
earnings per share.
The net impact of IFRS 2 and the trust
consolidation on shareholder’s equity
is a debit of CHF 166 million as at
31 December 2004 and a debit of
CHF 674 million as at 31 December
2003.
IFRS 3 Business Combinations,
IAS 36 Impairment of Assets and
IAS 38 Intangible Assets
IFRS 3 requires that all business com-
binations be accounted for under
the purchase method. The pooling-of-
interests method is eliminated. Under
the new accounting standard, we will
cease to amortize existing goodwill
beginning in 2005 and will instead
conduct annual impairment tests.
Goodwill from business combinations
entered into on or after 31 March
2004 – including, for UBS, the Motor-
Columbus transaction – has already
been accounted for under the new
guidance and has not been amortized
during 2004. Goodwill from business
combinations closed prior to 31 March
2004 continued to be amortized
until 31 December 2004. We recorded
goodwill amortization expense of
CHF 713 million in 2004, and CHF
756 million in 2003. There will be no
restatement of prior years with regard
to this standard.
Following the new standard, we have
also reclassified the net book value
of the former PaineWebber trained
workforce intangible asset to goodwill
(book value CHF 1.0 billion). On 1 Jan-
uary 2005, we held CHF 2.3 billion
in total intangible assets and we antici-
pate recording approximately CHF
300 million in related amortization
expense in 2005.
IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations
The IASB issued this new standard on
31 March 2004. It requires that sub-
sidiaries that are acquired exclusively
for future sale be presented as discon-
tinued operations at the time a sale
is highly likely to occur. As certain of
our private equity investments meet
the criteria as discontinued opera-
tions, we will reclassify them accord-
ingly. Although the impact from IFRS 5
on our financial statements will not
be material, our income statement
will be divided into two sections – net
income from continuing operations
and net income from discontinued
operations.
Minority interests
Beginning in 2005, the revision of
IAS 1 will require the presentation
of net profit and equity to include
minority interests. Net profit will be
allocated to net profit attributable
to UBS shareholders and net profit
attributable to minority interests.
Earnings per share and all our analysis
of UBS performance will continue
to be presented based on net profit
attributable to UBS shareholders.
13
14
UBS
UBS
Results
In 2004, UBS reported net profit of CHF 8,089 million, up
30% from CHF 6,239 million a year earlier and up 129% from
CHF 3,530 million in 2002.
Our financial businesses achieved a record result in 2004,
contributing CHF 8,044 million to net profit, up 29% from
CHF 6,239 million a year earlier. Our industrial holdings made
a CHF 45 million contribution to 2004 net profit.
Dividend
The Board of Directors will recommend at the Annual General
Meeting on 21 April 2005 that UBS should pay a dividend of
CHF 3.00 per share for the 2004 financial year, an increase of
15% or CHF 0.40 from the CHF 2.60 dividend paid for the
2003 financial year and up 50% or CHF 1.00 from the CHF
2.00 dividend paid for the 2002 financial year.
If the dividend is approved, the ex-dividend date will be
22 April 2005, with payment on 26 April 2005 for share-
holders of record on 21 April 2005.
Risk factors
As a global financial services firm, we
are affected by the factors driving
the markets in which we operate. Dif-
ferent risk factors can impact our abil-
ity 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 variability from period to
period. Our revenues and operating
profit for any particular period may
not, therefore, be indicative of sustain-
able 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
fluctuations may affect earnings
A substantial part of our business con-
sists in taking trading positions in the
interest rate, debt, currency, equity,
precious metal and energy markets.
The value of these assets and liabilities
can be adversely affected by fluctua-
tions in financial markets. Our market
risks are subject to a control frame-
work and to portfolio and concentra-
tion limits. We avoid undue concentra-
tions of risk and, where appropriate,
16
hedge exposure to stress events.
Nevertheless, in the event of sudden,
severe or unexpected market move-
ments, we might suffer significant
losses. A description of our controls
and limits, including limits on our
exposure to a range of market stress
events, is provided on page 43 of our
Handbook 2004 / 2005.
Because we prepare our accounts in
Swiss francs while assets, liabilities,
revenues and expenses from certain
businesses are denominated in other
currencies, changes in foreign ex-
change rates, particularly between the
Swiss franc and the US dollar (US dol-
lar income representing the major part
of our non-Swiss franc income), may
have an effect on our reported earn-
ings. Our approach to currency man-
agement is explained on page 64 of
our Handbook 2004 / 2005.
Regulatory or political changes impact-
ing financial market structures can
affect our earnings – an example was
the introduction of the euro in 1999,
which affected European foreign
exchange markets by reducing the
volume of foreign exchange business,
and prompted greater harmonization
between financial products. Move-
ments in interest rates can 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 management
businesses may also be impacted by
credit events, including defaults, relat-
ed to the issuers of bonds and equi-
ties. Our private equity and commer-
cial real estate investments can be
adversely affected by economic, busi-
ness and general market conditions.
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 suscep-
tible to adverse effects from sustained
market downturns as well as any sig-
nificant deterioration of investor senti-
ment. Asset-based revenues generated
in our wealth and asset management
businesses depend on the levels of
client assets which can, in themselves,
be adversely affected by deteriorating
market valuations.
Market levels and trading volumes
may be affected by a broad range of
geopolitical or regional issues or
events beyond our control, such as
Risk factors (continued)
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, contin-
gent liabilities such as letters of credit,
and derivative products such as swaps
and options) would be adversely af-
fected by any deterioration 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
downturn, lack of liquidity, or an
unexpected political event. Any of
these events could lead us to incur
losses. We believe that impairments
in the portfolio at the balance sheet
date are adequately covered by our
allowances and provisions. In general,
we aim to avoid risk concentrations
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 material adverse effect on both our
income and the value of our assets.
A discussion of our approach to man-
aging credit risk can be found on
page 47 of our Handbook 2004 / 2005.
Operational risk may increase costs
and impact revenues
All our businesses are dependent on
our ability to process a large number
of complex transactions across many
and diverse markets in different cur-
rencies 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, and failure of
security and physical protection, are
appropriately controlled. However,
if our system of internal controls is
ineffective in identifying and remedy-
ing 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 risks is provided on
page 67 of our Handbook 2004 / 2005.
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 out-
side Switzerland, 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 business we compete, both
domestically and internationally, with
asset managers, retail and commer-
cial banks, and private banking, invest-
ment banking, brokerage 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 compa-
rable 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 efficiency and pricing
power. We expect these trends to con-
tinue and competition to increase in
the future. Our competitive strength
will depend on the ability of our busi-
nesses 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 dis-
ruptions, currency crises, the break-
down of monetary controls or ter-
rorism, may adversely affect the ability
of clients or counterparties located
in that country or region to obtain
foreign exchange or credit and, there-
fore, to satisfy their obligations
towards us. As a truly global financial
services company, we are also exposed
to economic instability in emerging
markets. We have a system of controls
and procedures to mitigate this risk.
A discussion of our country risk con-
trols is provided on page 54 of our
Handbook 2004 / 2005. 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.
17
18
UBS Targets
UBS Targets
Performance against targets
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 of the financial businesses (%) 5
as reported 6
before goodwill and adjusted for significant financial events 7
Net new money, wealth management businesses (CHF billion) 8
Wealth Management
Wealth Management USA
For the year ended
31.12.04
31.12.03
31.12.02
24.7
27.7
7.68
8.60
72.6
70.2
42.3
17.1
59.4
17.8
20.5
5.59
6.43
75.6
73.2
29.7
21.1
50.8
8.9
13.9
2.92
4.57
86.4
79.7
17.7
18.5
36.2
Total
RoE
in %
28
21
14
7
0
2004
27.7
24.7
2002
2003
20.5
17.8
13.9
8.9
Cost / income ratio of the financial businesses 5
in %
2002
2003
2004
86.4
79.7
75.6
73.2
72.6
70.2
90
80
70
60
50
As reported 1
Before goodwill and adjusted for significant financial events 2
As reported 6
Before goodwill and adjusted for significant financial events 7
Basic EPS
CHF
10.00
7.50
5.00
2.50
0.00
Net new money, wealth management businesses 8
CHF billion
2002
2003
2004
2002
2003
8.60
7.68
6.43
5.59
4.57
2.92
60
45
30
15
0
50.8
36.2
2004
59.4
As reported 3
Before goodwill and adjusted for significant financial events 4
2 Net profit less the amortization of goodwill and other intangible assets and significant financial events (after-tax) / average shareholders’
1 Net profit / average shareholders’ equity less dividends.
equity less dividends.
4 Net profit less the amortization of goodwill and other intangible assets and significant
financial events (after-tax) / weighted average shares outstanding.
6 Operating expenses / operating income less credit loss expense or recovery.
7 Operating expenses less the amortization of goodwill and other intangible assets and significant financial events / operating income less credit loss expense or recovery and significant financial events.
8 Excludes interest and dividend income.
3 Details of the EPS calculation can be found in note 8 to the financial statements.
5 Excludes results from Industrial Holdings.
20
2004
We focus on four key performance targets, designed to de-
liver continually improving returns to our shareholders. These
targets are evaluated before goodwill and adjusted for signif-
icant financial events.
This is the first time that, on an annual basis, we have
split the commentary of our results between financial business-
es and industrial holdings. The first two of our four targets, re-
turn on equity and earnings per share, are calculated on a full
UBS basis. Our cost / income ratio target is limited to our finan-
cial businesses, to avoid the distortion from industrial holdings,
which operates at a cost / income ratio of around 90%.
Before goodwill and adjusted for significant financial
events:
– For full-year 2004, our return on equity was 27.7%, up
from 20.5% in 2003, well above our target range of 15%
to 20% and at a record level. The increase, exceeding net
profit growth, reflects the combined effects of our contin-
ued buyback programs and dividend outpacing increased
retained earnings.
– Basic earnings per share (EPS) stood at CHF 8.60, up 34%
or CHF 2.17 from CHF 6.43 in 2003. This was the highest
level ever, reflecting the increase in net profit as well as the
6% reduction in average number of shares outstanding
due to our continuing repurchase programs.
– The cost / income ratio of our financial businesses stood at
70.2% in 2004, an improvement from 73.2% in 2003.
Strong asset-based revenues drove fee and commission
income higher, demonstrating the inherent operating lever-
age in our wealth and asset management businesses.
Our wealth management businesses continued to show
strong inflows of net new money. For full-year 2004, net new
money inflows into our wealth management businesses to-
taled CHF 59.4 billion, up 17% from CHF 50.8 billion in 2003,
corresponding to an annual growth rate of 4.4% of the as-
set base at the end of 2003. Wealth Management attracted
CHF 42.3 billion in 2004, compared to CHF 29.7 billion in
2003. This excellent performance saw gains in all geograph-
ical areas, especially from Asian clients, and a particularly
strong CHF 13.7 billion inflow into our European wealth man-
agement business. In our Wealth Management USA business,
Invested assets
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
Net new money 1
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.
31.12.04
2,250
As at
31.12.03
2,133
31.12.02
1,959
778
140
344
257
0
639
92
701
136
313
261
4
634
84
31.12.04
88.9
42.3
2.6
23.7
(4.5)
0.0
17.1
7.7
642
127
274
259
3
584
70
For the year ended
31.12.03
69.1
29.7
2.5
12.7
(5.0 )
0.9
21.1
7.2
% change from
31.12.03
5
11
3
10
(2 )
(100 )
1
10
31.12.02
36.9
17.7
3.7
(1.4 )
(6.3 )
0.5
18.5
4.2
21
UBS Targets
net new money was CHF 17.1 billion, down from CHF 21.1 bil-
lion a year earlier, reflecting a slow asset-gathering perform-
ance at the beginning of the year as well as the US dollar’s
weakening against the Swiss franc.
number of shares outstanding due to continued buyback
activities. Without the buyback programs, which have
been in place since 2000, our earnings per share would be
14% lower.
2003
Before goodwill and adjusted for significant financial events:
– Our return on equity for 2003 was 20.5%, up from 13.9%
a year earlier, and above the target range of 15% to 20%.
The increase reflects much improved net profit combined
with a lower average level of equity resulting from con-
tinued buyback programs.
– Basic earnings per share (EPS) were CHF 6.43 in 2003, an
increase of CHF 1.86 or 41% from 2002, reflecting the
increase in profit as well as the 8% reduction in average
– The cost / income ratio was 73.2% in 2003, an improve-
ment from 79.7% in 2002. The slight drop in income, re-
flecting the difficult market environment in first half 2003,
was more than compensated by a 9% decline in operat-
ing expenses due to ongoing cost management initiatives
and the downward pressure on compensation ratios.
In full-year 2003, net new money inflows into our wealth
management businesses totaled CHF 50.8 billion compared
with CHF 36.2 billion in 2002. This is an increase of 40% and
corresponded to an annual growth rate of 4.2%. Both the
Wealth Management and Wealth Management USA bus-
nesses were able to attract more client money in 2003 than
in 2002.
22
Financial Businesses
Financial Businesses
Results
Results
Income statement 1
CHF million, except where indicated
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
Additional information
Headcount (full-time equivalents)
1 Excludes results from Industrial Holdings.
2004
Results
Our 2004 result was the best ever. The first quarter saw an
all-time performance record and the year ended with our best-
ever fourth quarter. Net profit in 2004 was CHF 8,044 million,
up by 29% from CHF 6,239 million in 2003. Before goodwill
and excluding the sale of our Correspondent Services Corpo-
ration (CSC) clearing subsidiary, completed in second quarter
2003, net profit rose by 24%. The increase was driven by
higher revenues in all categories, clearly outpacing cost
growth. Our asset-based revenues showed particular strength,
reflecting improved market valuations as well as strong inflows
of net new money into our wealth and asset management
businesses. Overall, we attracted CHF 88.9 billion in net new
money in 2004, up 29% from CHF 69.1 billion in 2003. As a
24
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
39,398
(27,538)
11,860
276
12,136
19,416
4,972
878
37,402
18,189
6,577
1,282
887
26,935
10,467
2,086
8,381
(337)
8,044
40,159
(27,860 )
12,299
(72 )
12,227
17,345
3,756
462
33,790
17,231
6,086
1,353
943
25,613
8,177
1,593
6,584
(345 )
6,239
39,963
(29,417 )
10,546
(115 )
10,431
18,221
5,451
4
34,107
18,524
7,072
1,514
2,460
29,570
4,537
676
3,861
(331 )
3,530
(2 )
(1 )
(4 )
(1 )
12
32
90
11
6
8
(5 )
(6 )
5
28
31
27
(2 )
29
31.12.04
67,424
As at
31.12.03
65,929
31.12.02
69,061
% change from
31.12.03
2
result, our invested asset base rose to CHF 2.25 trillion. We
also saw a strong increase in brokerage, corporate finance and
underwriting fees. Overall fee and commission income now
contributes 52% to total operating income. Trading income
also contributed to the growth, as improved market conditions
boosted opportunities, particularly in the first and fourth
quarters. We also saw improving results in our private equity
business, which recorded positive revenues for the first time
in three years on higher divestment gains and lower write-
downs. We also reported record credit loss recoveries. Per-
formance-related compensation rose in line with revenues.
Higher general and administrative expenses were driven by
higher legal provisions, and operational risk costs.
Operating income
Total operating income was CHF 37,402 million in 2004, up
11% from CHF 33,790 million in 2003. This was the highest
level ever. The increase was driven by our ability to capture
opportunities in increasingly active financial markets. The in-
crease in market levels positively impacted the asset base
of our wealth and asset management businesses, prompting
fee-based revenues to rise. Trading and brokerage income
also profited from the improved market environment that
boosted institutional and private client transaction activity.
Private equity made a positive contribution, reflecting lower
writedowns and higher divestment gains. We also recorded
higher credit loss recoveries in 2004. The overall rise in 2004’s
revenues, however, was partially offset by the weakening of
the US dollar against the Swiss franc.
Net interest income was CHF 11,860 million in 2004, down
from CHF 12,299 million in the same period a year earlier.
Net trading income was CHF 4,972 million, up from CHF
3,756 million in 2003.
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
dividend income). This component is volatile from period to
period, depending on the composition of the trading port-
folio. In order to provide a better 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.
At CHF 5,139 million, net income from interest margin
products in 2004 was 1% higher than CHF 5,077 million a
year earlier. The increase was driven by the growth in lending
to wealthy US clients through our US bank, UBS Bank USA.
Our domestic Swiss mortgage business and wealth manage-
ment margin lending business also grew over the year. This
increase was nearly offset by lower income from our shrink-
ing Swiss recovery portfolio, which dropped by CHF 2.0 bil-
lion compared to year-end 2003, reduced interest margin on
client cash and savings accounts, as well as declining revenues
from US dollar-denominated accounts.
Net income from trading activities was CHF 11,102 million
in 2004, up by 4% or CHF 421 million from CHF 10,681 mil-
lion a year ago. At CHF 3,098 million, equities trading income
in 2004 was up 27% or CHF 653 million from CHF 2,445 mil-
lion in 2003. The increase reflects expansion in market volumes
and, hence, improved trading opportunities, especially during
the particularly strong first quarter and after the US elections
in November. Our proprietary trading strategies performed
well. Equity finance revenues increased strongly, reflecting the
successful integration of ABN Amro’s prime brokerage busi-
ness. Fixed income trading revenues, at CHF 6,264 million in
2004, were down 3% from CHF 6,474 million in 2003. The
drop was driven by declines in our principal finance, commer-
cial real estate and fixed income businesses, partially offset by
improved revenues in our rates business. Compared to 2003,
last year’s market environment saw rising interest rates and
lower volatility, which drove activity from the market. We re-
corded an unrealized loss of CHF 62 million relating to Credit
Default Swaps (CDSs) hedging existing credit exposure in the
loan book, against a mark to market loss of CHF 678 million
a year earlier. Foreign exchange trading revenues increased by
2% to CHF 1,467 million in 2004 from CHF 1,436 million a
year earlier, reflecting an outstanding performance in our
derivative trading business as well as strong sales volumes.
At CHF 1,298 million, net income from treasury activities in
2004 was CHF 119 million or 8% lower than CHF 1,417 million
in 2003. The drop was mainly due to lower returns on invested
equity as we continued to repurchase shares. The impact of
falling interest rates was partially offset by the diversification of
our invested equity into currencies other than the Swiss franc.
Net interest and trading income
CHF million
Net interest income
Net trading income
Total net interest and trading income
Breakdown by business activity
CHF million
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 Includes external funding costs of the PaineWebber Group, Inc. acquisition.
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
11,860
4,972
16,832
12,299
3,756
16,055
10,546
5,451
15,997
(4 )
32
5
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
5,139
3,098
6,264
1,467
273
11,102
1,298
(707)
16,832
5,077
2,445
6,474
1,436
326
10,681
1,417
(1,120 )
16,055
5,275
2,777
5,977
1,506
245
10,505
1,646
(1,429 )
15,997
1
27
(3 )
2
(16 )
4
(8 )
37
5
25
Financial Businesses
Results
Credit loss (expense) / recovery
CHF million
Wealth Management & Business Banking
Wealth Management
Business Banking Switzerland
Investment Bank
Wealth Management USA
Corporate Center
Private Banks & GAM
Corporate Functions
UBS
For the year ended
31.12.04
31.12.03
31.12.02
91
(1)
92
240
3
(58)
(58)
0
276
(67 )
4
(71 )
(4 )
(3 )
2
2
0
(72 )
(238 )
1
(239 )
126
(15 )
12
(3 )
15
(115 )
Other net trading and interest income was negative CHF
707 million in 2004 compared to negative CHF 1,120 million
a year earlier. The improvement was due to lower goodwill
funding costs, as well as declining costs for funding our pri-
vate equity portfolio.
In 2004, we experienced a net credit loss recovery of
CHF 276 million, compared to net credit loss expense of CHF
72 million in 2003 and CHF 115 million in 2002. This favor-
able result was achieved in a period which saw a very sanguine
environment for credit markets globally. Economic expansion
in the US provided a strong stimulus for growth worldwide.
Almost without exception, credit spreads contracted in all
the major developed and emerging capital markets, as healthy
expansion of cash flows allowed the corporate sector to de-
leverage and build liquidity.
Net credit loss recovery at Wealth Management & Business
Banking amounted to CHF 91 million in 2004 compared to
net credit loss expenses of CHF 67 million in 2003 and CHF
238 million in 2002. Our domestic credit portfolio demon-
strated strong resilience in a Swiss economic environment
which saw a 9.2% increase in corporate bankruptcies com-
pared to 2003. 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.
The Investment Bank experienced a net credit loss recov-
ery of CHF 240 million in 2004, compared to net credit loss
expense of CHF 4 million in 2003 and credit loss recovery of
CHF 126 million in 2002. This continued strong performance
was the result of minimal exposure to new defaults and strong
recoveries of previously established allowances and provi-
sions. Releases in country allowances and provisions were due
partly to exposure reductions in the affected countries and
partly to a more favorable outlook for emerging market
economies. There was also a partial release of a sizeable
allowance for a corporate counterparty which managed a
turnaround during 2004.
For further details on our risk management approach, how
we measure credit risk and the development of our credit risk
exposures, please see the “Financial Management” chapter
of our Handbook 2004/2005.
In 2004, net fee and commission income was CHF 19,416
million, up 12% from CHF 17,345 million a year earlier. The
increase was driven by a strong contribution from recurring
asset-based fees, higher net brokerage fees, rising corporate
finance fees as well as an increase in underwriting fees.
Underwriting fees, at their highest level ever, were CHF
2,544 million in 2004, up 8% from CHF 2,354 million in
2003. Both equity and fixed income underwriting fees
increased. Fixed income underwriting was CHF 1,114 million
in 2004, up 3% from CHF 1,084 million in 2003. Equity
underwriting increased 13% to CHF 1,430 million in the
same period. At CHF 1,078 million, corporate finance fees in
2004 were up 42% from CHF 761 million a year earlier. We
were able to benefit from the pick-up in merger and acqui-
sition activity, and our strengthened advisory business, par-
ticularly in the US. Net brokerage fees were CHF 4,517 mil-
lion in 2004, up 10% or CHF 392 million from CHF 4,125
million in 2003, reflecting the improved markets and the re-
sulting higher institutional and individual client activity – es-
pecially in the first and fourth quarters of 2004. Investment
fund fees, at their highest level ever, were CHF 4,588 million
in 2004, up 18% from CHF 3,895 million in 2003, mainly
reflecting higher asset-based fees for our wealth and asset
management businesses. At CHF 1,261 million, custodian
fees in 2004 were up 5% from CHF 1,201 million in 2003.
This increase was entirely due to an enlarged asset base. In-
surance-related and other fees, at CHF 342 million in 2004,
decreased by 4% from a year earlier. Excluding the effect of
the weakening dollar, insurance-related and other fees were
actually slightly higher compared to 2003. Credit-related
fees and commissions increased by 7% to CHF 266 million
in 2004 from CHF 249 million in 2003, reflecting improved
market conditions which brought higher volumes. Portfolio
and other management and advisory fees increased by 20%
to CHF 4,611 million in 2004 from CHF 3,855 million in 2003.
The increase is again the result of rising invested asset levels
driven by market valuations and strong net new money
inflows, as well as an increase in performance fees.
26
Net fee and commission income
CHF million
Equity underwriting fees
Bond underwriting fees
Total 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
Net fee and commission income
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
1,430
1,114
2,544
1,078
5,916
4,588
220
1,261
4,611
342
20,560
266
988
21,814
1,399
999
2,398
19,416
1,270
1,084
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
17,345
1,166
968
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
18,221
13
3
8
42
5
18
(9 )
5
20
(4 )
13
7
(9 )
11
(6 )
28
6
12
Other income increased by 90% to CHF 878 million in 2004
from CHF 462 million in 2003. The increase was driven by high-
er disposal gains from private equity investments (up CHF 205
million) and lower impairment charges (down CHF 318 million).
This was partially offset by lower gains from the divestment of
associates and subsidiaries which dropped by nearly 50% to
CHF 84 million in 2004 (the major disposal being the Noga
Hilton hotel in Geneva) from CHF 162 million in 2003 (the ma-
jor disposal being Correspondent Services Corporation (CSC)).
Operating expenses
We continue to tightly manage our cost base with a clear
focus on improving the efficiency of our businesses. Total
operating expenses increased by 5% to CHF 26,935 million
in 2004 from CHF 25,613 million in 2003.
Personnel expenses increased by CHF 958 million or 6%
to CHF 18,189 million in 2004 from CHF 17,231 million in
2003. The rise was driven by higher performance-related
compensation reflecting the better performance in most of
our businesses. Personnel expenses are managed on a full-year
basis with final fixing of annual performance-related payments
in fourth quarter. Salary expenses rose due to the 2% increase
in headcount over the year. Contractor’s expenses increased
to CHF 572 million in 2004, up 6% from CHF 539 million in
2003, reflecting higher usage, mainly in our Investment Bank
in support of increased business flows. At CHF 1,299 million
in 2004, other personnel expenses dropped CHF 271 million
from CHF 1,570 million in 2003 due to the end of retention
payments in the Wealth Management USA business and
lower severance payments. For 2004, approximately 49% of
personnel expenses took the form of bonus or variable com-
pensation, up from 44% in 2003. Average variable compen-
sation per head in 2004 was 17% higher than in 2003.
At CHF 6,577 million in 2004, general and administrative
expenses increased CHF 491 million from CHF 6,086 million
in the same period a year ago. The increase was driven by
higher provisions (up CHF 252 million) which rose due to
specific operational and legal provisions (including the civil
penalty levied by the Federal Reserve Board relating to our
banknote trading business), higher IT and other outsourcing
expenses as well as professional fees, the latter due to higher
legal and project costs. This was partially offset by savings in
telecommunication, rent and maintenance expenses.
Depreciation was CHF 1,282 million in 2004, down 5%
from CHF 1,353 million in 2003. This was the lowest level ever,
reflecting falling IT-related charges as well as lower write-
downs of equipment.
At CHF 887 million, amortization of goodwill and other
intangible assets was down 6% from CHF 943 million a year
earlier, reflecting lower amortization charges and the weak-
ening of the US dollar against the Swiss franc.
Tax
In 2004, we incurred a tax expense of CHF 2,086 million, re-
flecting an effective tax rate of 19.9% for full-year 2004, com-
pared to last year’s full-year rate of 17.9% (before significant
financial events). The 2003 tax rate was positively influenced
by a favorable regional profit mix. The higher rate for 2004
has been driven by an increase in profitability in higher tax
jurisdictions, mainly the US. We believe that a similar under-
lying tax rate is a reasonable indicator for 2005.
27
Financial Businesses
Results
Indicative pre-goodwill tax rates for financial businesses
in %
Wealth Management & Business Banking
Wealth Management
Business Banking Switzerland
Global Asset Management
Investment Bank
Wealth Management USA
For the year ended
31.12.04
31.12.03
31.12.02
18
18
19
21
30
37
18
16
20
20
32
38
19
18
20
22
38
37
Business Group tax rates
Indicative Business Group and business unit tax rates are cal-
culated on an annual basis based on the results and statuto-
ry tax rates of the financial year. These rates are approximate
calculations, based upon the application to the year’s adjust-
ed earnings of statutory tax rates for the locations in which
the Business Groups operated. These tax rates, therefore,
give guidance on the tax cost to each Business Group of do-
ing business during 2004 on a stand-alone basis, without the
benefit of tax losses brought forward 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, calculated on the above basis,
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 necessarily indica-
tive of future tax rates for the businesses or UBS as a whole.
Headcount
Headcount in our financial businesses was 67,424 on 31 De-
cember 2004, up 1,495 from 65,929 on 31 December 2003.
The increase was driven by the expansion of UBS’s wealth
management and securities businesses around the globe.
Fair value disclosure of options
(pre-tax: CHF 576 million) in the same period a year ago. The
after-tax increase was driven by a higher UBS share price, a
lower pro-forma tax benefit, and adjusted assumptions for the
valuation of options. In fact, significantly fewer option grants
were made in 2004 (down nearly 40% from 2003), in line with
our strategy of granting options more selectively.
Our option valuation model will change for 2005 due to
work we are undertaking in connection with the implemen-
tation of the new IFRS 2 standard. For further details, please
refer to page 12.
Outlook
A record result is always challenging to beat. As every year, our
investment banking and securities business will have to contend
with the somewhat unpredictable rise and fall of the world’s
financial markets. But 2004 showed that our wealth and asset
Headcount (in FTE)1: regional distribution
in %, except where indicated
As at
31.12.02
31.12.03
31.12.04
Total1:
69,061
5.4
65,929
5.8
67,424
6.6
39.6
14.5
40.5
38.7
15.0
40.5
38.9
16.0
38.5
100
75
50
25
0
The fair value of options granted in 2004 was CHF 508 mil-
lion (pre-tax: CHF 543 million) compared to CHF 439 million
Switzerland
Europe (excluding Switzerland)
Americas
Asia Pacific
1 Total full-time equivalents (FTE).
Headcount financial businesses
Full-time equivalents
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total
28
31.12.04
25,990
10,764
26,232
4,438
67,424
As at
31.12.03
26,662
9,906
25,511
3,850
65,929
% change from
31.12.02
31.12.03
27,972
10,009
27,350
3,730
69,061
(3 )
9
3
15
2
Headcount (in FTE1): Business Unit distribution
in %, except where indicated
As at
31.12.02
31.12.03
31.12.04
Total1:
69,061
65,929
67,424
5.1
2.4
3.9
5.4
2.5
4.0
5.3
2.4
3.9
13.6
22.9
24.6
27.5
13.9
23.2
24.5
26.5
15.0
24.6
23.0
25.8
100
75
50
25
0
Wealth Management USA
Business Banking Switzerland
Investment Bank
Wealth Management
Global Asset Management
Private Banks & GAM
Corporate Functions
1 Total full-time equivalents (FTE).
management businesses can provide both growth momentum
and earnings quality, even if trading conditions fluctuate. We
will continue re-investing in our growth businesses and expect
2005 to be the next exciting step on a journey we believe will
be very rewarding for our long-term investors.
2003
Results
In 2003, all businesses reported stronger results compared to
2002. Our net profit in full-year 2003 was CHF 6,239 million,
up from CHF 3,530 million in 2002 – an increase of 77%. In
2002, our results were negatively influenced by the CHF 953
million writedown of the value of the PaineWebber brand. At
the same time, they benefited from the sale of private bank Hy-
poswiss, which resulted in a net gain of CHF 125 million, and
the divestment of Klinik Hirslanden, a private hospital group,
which contributed a net gain of CHF 60 million. Excluding these
items and before the amortization of goodwill and other intan-
gibles, net profit increased 30% between 2002 and 2003. The
gain reflected our tight management of costs and ability to build
market share and capture revenues as financial markets steadi-
ly recovered as the year progressed. In particular, 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 significantly
lower writedowns in our private equity business. At the same
time, expenses remained under tight control. We recorded re-
ductions in all cost categories compared to 2002, with non-per-
sonnel expenses falling below their level in 2000.
Operating income
Total operating income, at CHF 33,790 million in 2003, was
down slightly from CHF 34,107 million in 2002. Excluding the
divestment gains of CHF 227 million from the sale of Hypo-
swiss and Klinik Hirslanden in 2002 and CHF 161 million from
the sale of Correspondent Services Corporation in 2003, to-
tal operating income fell 1%. The drop was caused by lower
asset-based revenues, which were impacted by low market
levels in early 2003 (they only started to recover in second
half). Operating income was also affected by the weakening
of major currencies against the Swiss franc, including the 13%
drop of the US dollar. This was partially offset by higher rev-
enue from fixed income trading and a significant decline in
private equity writedowns.
Net interest income, at CHF 12,299 million in 2003, was
17% higher than the CHF 10,546 million in 2002. Net trad-
ing income, at CHF 3,756 million in 2003, declined 31% from
CHF 5,451 million a year earlier.
Net income from interest margin products dropped 4% to
CHF 5,077 million in 2003 from CHF 5,275 million in 2002.
The result reflected lower interest margins on client savings
and cash accounts, and declining revenues from our dimin-
ishing recovery portfolio in Switzerland as well as lower inter-
est revenue on margin loans in the US as we sold our Cor-
respondent Services Corporation (CSC) clearing business.
These effects were partially offset by higher mortgages and
saving accounts volumes in Switzerland.
In 2003, net income from trading activities, at CHF 10,681
million, rose 2% from CHF 10,505 million a year earlier.
Equity trading income, at CHF 2,445 million, fell 12% from
CHF 2,777 million a year earlier. The drop reflected the
weakening of most major currencies against the Swiss franc.
Excluding currency fluctuations, equity trading revenues
increased as the business benefited from improved trading
opportunities following the strong market recovery. Fixed
income trading revenue was CHF 6,474 million in 2003, up
8% from CHF 5,977 million in the same period a year
earlier. This increase was due to better performances across
our businesses, with very strong revenues in our principal
finance, mortgage-backed securities and derivatives busi-
nesses. 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 (CDSs) hedging
existing credit exposure in the loan book. In 2002, we record-
ed a mark to market gain of CHF 226 million on these CDS
positions. Our use of CDSs as hedging instruments for our
loan book is only one part of our overall management ap-
proach to trading credit risk. Over the full year, foreign
exchange trading revenues, at CHF 1,436 million, were
slightly lower than CHF 1,506 million in 2002.
Net income from treasury activities, at CHF 1,417 million
in 2003, was down 14% from CHF 1,646 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 offset by the diversification of our
invested equity into currencies other than Swiss francs.
29
Financial Businesses
Results
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 of the value of the PaineWebber brand, and
lower funding needs for our private equity portfolio.
Total credit loss expense for UBS in 2003 amounted to
CHF 72 million, compared to CHF 115 million in 2002. Net
credit loss expense at Wealth Management & Business Bank-
ing amounted to CHF 67 million compared to CHF 238 mil-
lion in 2002. This exceptionally strong result was achieved de-
spite 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 corporate bankruptcies by 13.4% compared
to 2002. Measures taken in recent years to improve the qual-
ity of our credit portfolio resulted in lower levels of new de-
faults, and our success in managing the impaired portfolio
resulted in a higher than anticipated level of recoveries. Be-
cause of the improving economic and political environment
in some emerging markets, we released country allowances
relating to our correspondent banking business. Outside
Switzerland, the global credit environment gradually im-
proved during 2003, especially in the second half of the year,
reversing the downward trend observed in the previous two
years. Although some concerns regarding sustainability
remained, signs pointing to a global economic recovery
increased. The Investment Bank experienced net credit loss
expense of CHF 4 million, compared to net credit loss
recoveries of CHF 126 million in 2002 and credit loss expense
of CHF 187 million in 2001. This continued strong perform-
ance 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.
At CHF 17,345 million, net fee and commission 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. Excluding
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
second half. Further, our brokerage 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 million in 2002
to CHF 2,354 million in 2003. Fixed income and equities
underwriting revenues increased by 12% and 9%, respec-
tively, 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 mergers and acquisitions, although
we were able to again improve our market share. Net bro-
kerage fees dropped 11% to CHF 4,125 million in 2003 from
CHF 4,638 million in 2002. The drop reflects the weaken-
ing of the US dollar against the Swiss franc as well as low-
er 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 Correspon-
dent 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 low-
er market values and, consequently, average asset levels.
Portfolio and other management and advisory fees, at CHF
3,855 million in 2003, fell 5% from CHF 4,065 million in
2002. They mostly reflected the drop of the US dollar against
the Swiss franc as well as declining management fees from
the low market levels at the outset of the year. This was par-
tially offset by higher performance fees. At CHF 355 million
in 2003, insurance-related and other fees decreased 15%
from a year earlier, mainly reflecting the weakening of the
US dollar.
Other income was CHF 462 million in 2003 compared with
CHF 4 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
financial investments as well as a decline in gains from dis-
posals of associates and subsidiaries and a fall-off in income
from Klinik Hirslanden.
Operating expenses
In 2003, we continued to manage our cost base tightly. Strong
cost control measures remained 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 25,613 million, down 13% from CHF
29,570 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 de-
clined 10%, with drops recorded in all categories of costs.
General and administrative expenses fell 14%, reflecting our
continuous cost-cutting initiatives, while personnel expenses
dropped by 7%. The weakening of the US dollar against the
Swiss franc and last year’s sale of Klinik Hirslanden helped
expenses to decline.
Personnel expenses dropped by 7% to CHF 17,231 million
in 2003 from CHF 18,524 million 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% reduction in head-
count over the period. Lower contractor’s expenses and reten-
30
tion payments accentuated the drop. This was partially offset
by higher performance-related compensation 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 payments in 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.
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 over-
all provisions, with major declines in legal and security pro-
visions (the 2002 result included the global charge of CHF
111 million (USD 80 million) related to the US equity research
settlement). Administration, IT and telecommunication ex-
penses saw significant drops from our continued cost-saving
initiatives, partially offset by slightly higher rent and mainte-
nance expenses as well as professional fees, the latter due to
higher project-related costs.
At CHF 1,353 million in 2003, depreciation fell 11% from
1,514 million in 2002, 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 de-
creased from CHF 2,460 million in 2002 to CHF 943 million
in 2003. The main reason for the drop was the writedown of
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 strengthen-
ing of the Swiss franc against the US dollar.
Tax
We incurred a tax expense of CHF 1,593 million in 2003, up
from CHF 676 million in 2002. This corresponded to an
effective tax rate of 19.5% in 2003. Excluding the effect of
the sale of CSC (sold in second quarter 2003), our effective
tax rate for the full year was 17.9%, compared 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.
31
Financial Businesses
Wealth Management & Business Banking
Wealth Management & Business Banking
In 2004, Wealth Management’s pre-tax profit was CHF 3,435 million, a 32% increase from 2003. Strong
inflows from most markets resulted in net new money rising to CHF 42.3 billion from CHF 29.7 billion
a year earlier. Business Banking Switzerland’s 2004 pre-tax profit fell 5% to CHF 2,045 million, reflecting
lower interest income.
Business Group reporting
CHF million, except where indicated
Income
Adjusted expected credit loss 1
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
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
31.12.04
12,764
(33)
12,731
4,473
1,706
862
135
75
7,251
5,480
5,555
9,400
56.8
56.2
127
For the year ended
31.12.03
12,044
(131 )
11,913
4,350
1,694
870
170
75
7,159
4,754
4,829
8,750
59.4
58.8
64
31.12.02
12,184
(312 )
11,872
4,338
1,922
837
198
97
7,392
4,480
4,577
8,600
60.7
59.9
92
% change from
31.12.03
6
75
7
3
1
(1 )
(21 )
0
1
15
15
7
98
1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the financial statements).
3 Operating expenses less the amortization of goodwill and other intangible assets / income.
For details on the fair value calculation, refer to note 32e 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.
Marcel Rohner | Chairman & CEO
Wealth Management & Business Banking
32
Wealth Management
Business Unit reporting
CHF million, except where indicated
Income
Adjusted expected credit loss 1
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
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
KPIs
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 business (%) 6
Client advisors (full-time equivalents)
International clients
Income
Invested assets (CHF billion)
Net new money (CHF billion) 2
Gross margin on invested assets (bps) 3
European wealth management (part of international clients)
Income
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
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 7
Headcount (full-time equivalents)
For the year ended
% change from
31.12.04
7,701
(8)
31.12.03
6,797
(4 )
7,693
2,080
642
1,395
66
75
4,258
3,435
3,510
778
42.3
103
55.3
54.3
46.6
3,744
5,429
562
40.4
102
437
82
13.7
838
2,272
216
1.9
106
6,793
1,944
604
1,479
82
75
4,184
2,609
2,684
701
29.7
101
61.6
60.5
52.1
3,300
4,734
491
29.7
101
267
46
10.8
672
2,063
210
0.0
102
31.12.02
31.12.03
6,690
(26 )
6,664
1,869
617
1,475
93
97
4,151
2,513
2,610
642
17.7
97
62.0
60.6
53.3
3,001
4,640
447
20.2
98
186
28
7.6
551
2,050
195
(2.5 )
95
13
(100 )
13
7
6
(6 )
(20 )
0
2
32
31
11
2
13
15
14
1
64
78
25
10
3
4
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
972
3,150
81
10,093
884
2,650
37
9,176
788
2,900
54
9,399
10
19
119
10
1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the financial statements).
income.
the amortization of goodwill and other intangible assets and expenses for the European wealth management business / income less income for the European wealth management business.
informational purposes only. These pre-tax amounts have not been recorded in the income statement. For details on the fair value calculation, refer to note 32e to the financial statements.
5 Operating expenses less the amortization of goodwill and other intangible assets / income.
2 Excludes interest and dividend
6 Operating expenses less
7 For
3 Income / average invested assets.
4 Operating expenses / income.
33
Financial Businesses
Wealth Management & Business Banking
Components of operating income
Wealth Management derives its operating income principally from:
– fees for financial planning and wealth management services;
– fees for investment management services;
– transaction-related fees; and
– net interest income.
Wealth Management’s fees are based on the market value of invested
assets and the level of transaction-related activity. As a result, operat-
ing income is affected by factors such as fluctuations in invested
assets, changes in market conditions, investment performance and
inflows and outflows of client funds.
Significant financial events
Invested assets
CHF billion
There were no significant financial events that affected this
business unit in 2004, 2003 or 2002.
2004
Key performance indicators
In 2004, net new money inflows totaled CHF 42.3 billion, up
42% from CHF 29.7 billion in 2003, representing an annual
growth rate of 6% of the underlying invested asset base at
end-2003. This excellent performance was driven by gains in
all geographical areas, especially from Asian clients, and a par-
ticularly strong CHF 13.7 billion inflow into our European
wealth management business.
Net new money
CHF billion
2002
2003
2004
42.3
29.7
17.7
48
36
24
12
0
Invested assets, at CHF 778 billion on 31 December 2004,
were up 11% from CHF 701 billion a year earlier, mainly reflect-
ing the strong inflow of net new money and CHF 22.6 billion
in new assets gained from acquisitions we integrated in 2004.
Rising equity markets also had a positive impact on asset lev-
els, helping to compensate for the negative effect of the US dol-
lar’s weakening against the Swiss franc. 35% of invested assets
were denominated in US dollars at the end of 2004.
The gross margin on invested assets was 103 basis points
in 2004, up 2 basis points from 101 basis points a year
earlier, as revenues increased more than the average asset
base. Overall, recurring income made up 76 basis points of
the margin in 2004, up from 71 basis points in 2003. Non-
recurring income comprised 27 basis points of the margin in
2004, against 30 basis points in 2003.
34
31.12.02
31.12.03
31.12.04
195
447
210
491
216
562
800
600
400
200
0
International Clients
Swiss Clients
Gross margin on invested assets
bps
2002
2003
2004
97
101
103
110
95
80
65
50
The pre-goodwill cost / income ratio improved to 54.3% in
2004 from 60.5% a year earlier, reflecting the strong rise in
total operating income, which more than offset the gain in
performance-related compensation. Excluding the European
Cost / income ratio
in %
2002
2003
2004
62.0
60.6
61.6
60.5
55.3
54.3
65
60
55
50
45
As reported
Adjusted for goodwill and significant financial events
wealth management business, the 2004 cost / income ratio fell
to 46.6% from 52.1% a year earlier.
European wealth management
Our European wealth management business continued to make
significant progress. With a particularly good performance in
the UK and Germany, the inflow of net new money in 2004 was
CHF 13.7 billion, up 27% from the previous year’s intake of CHF
10.8 billion. The result reflects an annual net new money in-
flow rate of 30% of the underlying asset base at year-end 2003.
Net new money European wealth management
CHF billion
2002
2003
2004
16
12
8
4
0
13.7
10.8
7.6
The level of invested assets was a record CHF 82 billion on
31 December 2004, almost double the CHF 46 billion a year
earlier, with the gain reflecting healthy inflows of net new mon-
ey, and the integration of acquisitions made during the year.
Invested assets European wealth management
CHF billion
31.12.02
31.12.03
31.12.04
100
75
50
25
0
82
46
28
In 2004, income from our European wealth management
business was CHF 437 million, up 64% from a year earlier,
reflecting our growing asset and client base.
In 2004, the number of client advisors increased by 166,
including 144 client advisors who joined us through the var-
ious acquisitions made during the year.
Results
In 2004, pre-tax profit, at CHF 3,435 million, was up 32%
from 2003. This increase reflects the recovery in major finan-
cial markets that started in mid-2003, driving a 13% increase
in revenues through higher asset-based fees. Rising interest
income, a reflection of the expansion of our margin lending
activities, also bolstered revenues. At the same time, our
expenses, up 2% in 2004 from 2003, were kept under tight
control. Personnel expenses, up 7%, rose at a slower pace
than income.
2004
3,435
Performance before tax
CHF million
2002
2003
2,513
2,609
3,600
2,700
1,800
900
0
Operating income
Total operating income in 2004 was CHF 7,693 million, up
13% from CHF 6,793 million a year earlier. This was the
highest level ever, reflecting a rise in recurring as well as in
non-recurring revenues. Recurring income increased 19% on
rising asset-based fees, benefiting from gains in asset levels.
This was accentuated by higher interest income due to the
expansion of our margin lending activities. Non-recurring in-
come rose due to higher brokerage fees, reflecting an increase
in client activity levels, which were particularly strong in the
first and fourth quarters of the year. These positive effects
were somewhat offset by the weakening of the US dollar
against the Swiss franc as well as lower divestment gains (in
2003 we sold a stake in Deutsche Börse).
Operating expenses
At CHF 4,258 million, operating expenses in 2004 were up
2% from CHF 4,184 million a year earlier, reflecting higher
personnel expenses as well as the ongoing investment in our
growth initiatives. Personnel expenses rose 7% to CHF 2,080
million in 2004 compared to CHF 1,944 million a year earlier,
reflecting higher performance-related compensation as well
as an increase in salaries due to the expansion of our business.
General and administrative expenses, at CHF 642 million,
were up 6% in 2004 from CHF 604 million due to higher
legal and operational provisions, an increase in travel and
entertainment expenses as well as a rise in marketing costs.
Expenses for services from other business units, at CHF 1,395
million in 2004, were down 6% from CHF 1,479 million the
previous year, mainly due to lower charges for insurance and
IT services. Depreciation was CHF 66 million in 2004, down
20% from CHF 82 million a year earlier because of lower
charges for information technology equipment. Goodwill
35
Financial Businesses
Wealth Management & Business Banking
amortization was CHF 75 million in 2004, unchanged from
the previous year.
from rising personnel expenses. Excluding the European
wealth management business, the cost / income ratio fell to
52.1% in 2003 from 53.3% a year earlier.
Headcount
Headcount, at 10,093 on 31 December 2004, increased by
917 from 31 December 2003. One of the major reasons lies
in the integration of acquisitions we made last year, which
added 379 employees. In 2004, the number of client advisors
increased to 3,744, up 13% or 444 advisors from a year earlier.
31.12.02
31.12.03
31.12.04
9,399
9,176
10,093
Headcount
full-time equivalents
11,000
10,000
9,000
8,000
7,000
2003
European wealth management
Our European wealth management business continued to
make significant progress. After three years of intense effort,
the total level of invested assets in Germany, France, the 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.
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 2003, income from our European wealth management
business was CHF 267 million, up 44% or CHF 81 million from
a year earlier, reflecting the growing asset and client base.
The number of client advisors increased by 121 (including
21 client advisors from the French business of Lloyds TSB),
bringing the total on 31 December 2003 to 672.
Key performance indicators
Results
In 2003, net new money inflows totaled CHF 29.7 billion,
up 68% from CHF 17.7 billion in 2002. The excellent per-
formance was due to strong inflows into our European wealth
management business as well as significant inflows from
clients in Asia and Eastern Europe.
Invested assets, at CHF 701 billion on 31 December 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 over 2003, which had a di-
rect impact on the value of Wealth Management’s invested
assets, 37% of which were denominated in US dollars at
end-2003.
The average asset base in 2003 was lower in comparison
to 2002 as asset levels were unusually depressed at the be-
ginning of the year. In contrast, revenues increased due to
higher non-recurring income, which was positively influenced
by higher trading and brokerage income and a gain on dis-
posal 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.
The pre-goodwill cost / income ratio declined to 60.5%
in 2003 from 60.6% a year earlier, reflecting higher non-
recurring revenues, more than offsetting the increased costs
Wealth Management’s 2003 pre-tax profit, at CHF 2,609 mil-
lion, increased 4% from 2002 on the financial market recov-
ery in the second half of the year, which resulted in higher
revenues.
Operating income
Total operating income in 2003 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 av-
erage 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 activi-
ty levels in the second half of the year.
Operating expenses
At CHF 4,184 million, operating expenses for 2003 were up
1% from CHF 4,151 million a year earlier, reflecting our invest-
ments in the European wealth management business and
higher personnel expenses. Personnel expenses rose 4% to
CHF 1,944 million in 2003 compared to a year earlier, main-
ly due to higher severance payments as well as slightly
higher performance-related compensation. General and ad-
ministrative expenses in 2003, at CHF 604 million, were down
2% as our ongoing tight management of costs more than
offset the investments in our European wealth management
business. Expenses for services from other business units
36
remained virtually unchanged at CHF 1,479 million in 2003
compared to CHF 1,475 million in 2002. Depreciation was
CHF 82 million in 2003, down 12% from a year earlier be-
cause of lower charges for information technology equip-
ment, 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 dol-
lar 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 further streamlined processes and structures. In 2003, the
number of client advisors increased to 3,300, up 10% from
a year earlier.
37
Financial Businesses
Wealth Management & Business Banking
Business Banking Switzerland
Business Unit reporting
CHF million, except where indicated
Interest income
Non-interest income
Income
Adjusted expected credit loss 1
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
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
KPIs
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 (%)
Additional information
Deferral (included in adjusted expected credit loss)
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 5
Headcount (full-time equivalents)
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
3,390
1,673
5,063
(25)
5,038
2,393
1,064
(533)
69
0
2,993
2,045
2,045
140
2.6
59.1
59.1
2.3
3.0
3,542
1,705
5,247
(127 )
5,120
2,406
1,090
(609 )
88
0
2,975
2,145
2,145
136
2.5
56.7
56.7
3.2
4.6
3,677
1,817
5,494
(286 )
5,208
2,469
1,305
(638 )
105
0
3,241
1,967
1,967
127
3.7
59.0
59.0
3.6
6.0
(4 )
(2 )
(4 )
80
(2 )
(1 )
(2 )
12
(22 )
1
(5 )
(5 )
3
As at or for the period ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
411
655
6,250
46
15,508
383
622
6,100
27
16,181
240
494
5,700
38
16,967
7
5
2
70
(4 )
1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the financial statements).
income.
not been recorded in the income statement. For details on the fair value calculation, refer to note 32e to the financial statements.
4 Operating expenses less the amortization of goodwill and other intangible assets / income.
3 Operating expenses / income.
2 Excludes interest and dividend
5 For informational purposes only. These pre-tax amounts have
Components of operating income
Business Banking Switzerland derives its operating income principally
from:
– net interest income from its loan portfolio and customer deposits;
– fees for investment management services; and
– transaction fees.
As a result, operating income is affected by movements in interest
rates, fluctuations in invested assets, client activity levels, investment
performance, changes in market conditions and the credit environ-
ment.
38
Significant financial events
There were no significant financial events that affected this
business unit in 2004, 2003 or 2002.
2004
Key performance indicators
Net new money was CHF 2.6 billion in 2004, slightly higher
than the inflow of CHF 2.5 billion in 2003.
Invested assets rose to CHF 140 billion in 2004 from CHF
136 billion a year earlier as positive market developments and
net new money inflows were only partially offset by the weak-
ening of the US dollar against the Swiss franc and the trans-
fer of assets to our Wealth Management business. During the
course of 2004, we transferred CHF 7 billion in assets from
the Business Banking Switzerland unit to the Wealth Manage-
ment unit, reflecting the increasing needs of clients.
The cost / income ratio was 59.1%, 2.4 percentage points
above the ratio of 56.7% in 2003, reflecting falling interest
income in the low interest rate environment.
Cost / income ratio
in %
2002
2003
2004
59.0
59.1
56.7
60
55
50
45
40
Business Banking Switzerland’s loan portfolio was CHF
137 billion on 31 December 2004, down CHF 2 billion from
the previous year. An increase in volumes of private client
mortgages was offset by lower credit demand from corporate
Impaired loans / gross loans
in %
31.12.02
31.12.03
31.12.04
8
6
4
2
0
6.0
4.6
3.0
clients and a further reduction in the recovery portfolio, which
fell to CHF 4.4 billion on 31 December 2004 from CHF 6.4
billion a year earlier. This positive development was also re-
flected in the key credit quality ratios: the non-performing loan
ratio improved to 2.3% from 3.2%, while the ratio of impaired
loans to gross loans was 3.0% compared to 4.6% in 2003.
Results
Pre-tax profit in 2004 was CHF 2,045 million, only CHF 100
million or 5% lower than the record result achieved in 2003.
It was achieved despite a CHF 184 million fall in income, driv-
en mainly by lower interest income. The result shows the
continued tight management of our cost base, with lower
credit loss expenses reflecting the structural improvement
in our loan portfolio in recent years. In 2004, personnel ex-
penses and depreciation reached their lowest levels since
the UBS-SBC merger in 1998.
Performance before tax
CHF million
2002
2003
2004
2,145
2,045
1,967
2,250
2,000
1,750
1,500
1,250
Operating income
Total operating income in 2004 was CHF 5,038 million, down
slightly from 2003’s level of CHF 5,120 million. Interest income
declined by 4% to CHF 3,390 million in 2004 from CHF 3,542
million in 2003. The decline reflects lower revenues from our
reduced recovery portfolio, as well as lower interest margins
on savings and cash accounts. This was partially offset by
higher private client mortgage volumes. Non-interest income
dropped by CHF 32 million to CHF 1,673 million in 2004 from
CHF 1,705 million in 2003, reflecting lower client activity
levels, partially offset by the gain from the sale of a partici-
pation in the Noga Hilton hotel. Adjusted expected credit loss
expenses, at CHF 25 million in 2004, decreased by 80% from
CHF 127 million in 2003. This fall reflects the deferred bene-
fit of the structural improvement in our loan portfolio in re-
cent years.
Operating expenses
Operating expenses in 2004 were CHF 2,993 million, up 1%
from CHF 2,975 million in 2003. Personnel expenses, at CHF
2,393 million, were down 1% from CHF 2,406 million in
2003, as falling salary costs reflected the 4% drop in head-
39
Financial Businesses
Wealth Management & Business Banking
count, partly offset by an increase in performance-related
compensation. General and administrative expenses, at
CHF 1,064 million in 2004, continued to drop and were 2%
lower than the CHF 1,090 million recorded in 2003, reflect-
ing our continuous tight cost controls. Drops were seen
mainly in professional fees. Net charges to other business units
fell to CHF 533 million in 2004 from CHF 609 million in 2003
because of lower charge-outs for IT services. Depreciation
in 2004 dropped to CHF 69 million from CHF 88 million in
2003 due to lower expenses for information technology
equipment.
Headcount
Business Banking Switzerland’s headcount was 15,508 on 31
December 2004, a decline of 673 from 31 December 2003,
reflecting our continued investment in technology and au-
tomation, as well as the ongoing streamlining of processes
and structures.
31.12.02
31.12.03
31.12.04
16,967
16,181
15,508
Headcount
full-time equivalents
17,500
16,500
15,500
14,500
13,500
2003
Key performance indicators
Net new money was CHF 2.5 billion in 2003 compared with
an inflow of CHF 3.7 billion in 2002.
Invested assets rose to CHF 136 billion in 2003 from CHF
127 billion a year earlier as positive market developments and
positive inflows of net new money were only partially offset
by the weakening of the US dollar against the Swiss franc.
In 2003, the cost / income ratio was 56.7%, 2.3 percent-
age points below the ratio of 59.0% in 2002, reflecting low-
er total operating expenses.
Business Banking Switzerland’s loan portfolio was CHF
139 billion on 31 December 2003, unchanged from a year
earlier. 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, which fell to CHF
40
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: 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 with 6.0% in 2002.
Results
Pre-tax profit in 2003 was CHF 2,145 million, up 9% from
2002. The result was achieved despite slightly lower revenues
in difficult market conditions. This performance is also evi-
dence of the continued tight management of our cost base,
and lower credit loss expenses reflecting the deferred bene-
fit of the structural improvement in our loan portfolio in re-
cent years.
Operating income
Operating income was CHF 5,120 million in 2003, down
slightly from 2002’s level of CHF 5,208 million. Interest income
declined by 4% to CHF 3,542 million in 2003 from CHF 3,677
million in 2002. The decline reflects lower interest margins on
savings and cash accounts as well as lower revenues from
our reduced recovery portfolio. This was partially offset by
higher mortgage and saving account volumes. Non-interest
income dropped by CHF 112 million to CHF 1,705 million in
2003 from CHF 1,817 million in 2002, reflecting the difficult
market environment at the beginning of the year. This was
partially offset by lower adjusted expected credit loss ex-
penses, which fell to CHF 127 million in 2003, down 56%
from CHF 286 million in 2002.
Operating expenses
Operating expenses in 2003 were CHF 2,975 million, down 8%
from CHF 3,241 million in 2002. Personnel expenses, at CHF
2,406 million, were down 3% from CHF 2,469 million in
2002, mainly due to lower salary costs reflecting the 5% drop
in headcount. General and administrative expenses, at CHF
1,090 million in 2003, continued to drop and were 16% low-
er than the CHF 1,305 million recorded in 2002. This reflects
our continuous efforts to control our costs tightly. Net charges
to other business units dropped to CHF 609 million in 2003
from CHF 638 million in 2002 due to lower charge-outs to oth-
er business units. Depreciation for 2003 dropped to CHF 88
million from CHF 105 million in 2002 as information technol-
ogy equipment is increasingly being leased instead of bought.
Headcount
Business Banking Switzerland’s headcount was 16,181 on 31
December 2003, a decline of 786 from 31 December 2002,
reflecting our continued investment in technology and au-
tomation, as well as the ongoing streamlining of processes
and structures.
Financial Businesses
Global Asset Management
Global Asset Management
Pre-tax profit was CHF 544 million, an increase of 64% from the 2003 pre-tax profit of CHF 332 million. The
increase was driven by higher operating income, which rose 16%, reflecting strong net new money inflows,
a continuing change in asset mix towards higher-margin products, and a rise in market valuations resulting
in increased asset levels and revenues.
Business Group reporting
CHF million, except where indicated
Institutional fees
Wholesale intermediary fees
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
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
KPIs
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
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
1,085
937
2,022
901
299
126
23
129
1,478
544
673
73.1
66.7
344
17
23.7
(1.2)
32
922
815
1,737
806
265
156
25
153
1,405
332
485
80.9
72.1
313
14
12.7
(5.0 )
32
865
790
1,655
763
301
164
22
186
1,436
219
405
86.8
75.5
274
19
(1.4 )
(1.8 )
29
18
15
16
12
13
(19 )
(8 )
(16 )
5
64
39
10
21
0
1 Operating expenses / operating income.
4 Operating income / average invested assets.
2 Operating expenses less the amortization of goodwill and other intangible assets / operating income.
3 Excludes interest and dividend income.
John A. Fraser | Chairman and CEO
Global Asset Management
41
Financial Businesses
Global Asset Management
Global Asset Management (continued)
Wholesale intermediary
Invested assets (CHF billion)
of which: money market funds
Net new money (CHF billion) 1
of which: money market funds
Gross margin on invested assets (bps) 2
Additional information
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 3
Headcount (full-time equivalents)
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
257
64
(4.5)
(20.6)
36
261
87
(5.0 )
(23.0 )
31
259
106
(6.3 )
(6.9 )
27
(2 )
(26 )
16
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
601
950
43
2,665
574
1,000
41
2,627
533
1,100
43
2,668
5
(5 )
5
1
1 Excludes interest and dividend income.
For details on the fair value calculation, refer to note 32e to the financial statements.
2 Operating income / average invested assets.
3 For informational purposes only. These pre-tax amounts have not been recorded in the Income statement.
Components of operating income
Global Asset Management generates its revenue from the asset
management and fund administration services it provides to financial
intermediaries and institutional investors. Fees charged to institutional
clients and wholesale intermediary 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 invest-
ment performance.
Significant financial events
There were no significant financial events that affected this
Business Group in 2004, 2003 or 2002.
2004
Key performance indicators
For 2004, the pre-goodwill cost / income ratio was 66.7%, a
decrease of 5.4 percentage points from 2003. This was a
result of improving operating income combined with modest
cost growth. Higher market valuations coupled with strong
net new money inflows resulted in increased invested asset
levels and, subsequently, higher asset-based fees. The con-
tinuing change in asset mix towards higher-margin products
increased operating income and overall profitability.
Institutional
Institutional invested assets were CHF 344 billion on 31 De-
cember 2004 – at their highest level since 2000, and up 10%
from CHF 313 billion on 31 December 2003, reflecting both
strong net new money and rising financial markets. This in-
crease was partly offset by the weakening of the US dollar
against the Swiss franc.
For full-year 2004, net new money inflows were CHF 23.7
billion, up significantly from the CHF 12.7 billion recorded in
Cost / income ratio
in %
Invested assets, institutional
CHF billion
2002
86.8
75.5
2003
2004
31.12.02
31.12.03
31.12.04
80.9
72.1
73.1
66.7
400
300
200
100
0
14
299
17
327
19
255
As reported
Adjusted for goodwill
Invested assets excluding money market funds
Money market funds
90
80
70
60
50
42
2003. Alternative and quantitative investments, equity and
fixed income mandates experienced strong inflows, partially
offset by outflows from asset allocation mandates and
money market funds.
The money market outflow in 2004 was CHF 20.6 billion.
This was partly offset by positive inflows of CHF 16.1 billion,
recorded mainly in fixed income mandates (inflow of CHF 7.7
billion) and to a lesser extent in asset allocation and equity
funds.
Net new money, institutional
CHF billion
2002
2003
2004
30
20
10
0
–10
24.9
17.7
0.4
(1.8)
(5.0)
(1.2)
Money market funds
Non-money market funds
Net new money, wholesale intermediary
CHF billion
2002
2003
2004
30
15
0
–15
–30
0.6
(6.9)
18.0
16.1
(23.0)
(20.6)
The gross margin for full-year 2004 was 32 basis points,
on a par with full-year 2003.
Gross margin on invested assets, institutional
bps
2002
2003
2004
Money market funds
Non-money market funds
The 2004 gross margin was 36 basis points, up by 5 basis
points from a year earlier, reflecting the significant improve-
ment of wholesale intermediary fees as a result of the contin-
uing shift to higher-margin products.
32
32
Gross margin on invested assets,
wholesale intermediary
bps
29
2002
2003
2004
35
30
25
20
15
Wholesale intermediary
Invested assets were CHF 257 billion on 31 December 2004,
down by CHF 4 billion from 31 December 2003. For full-year
2004, the net new money outflow was CHF 4.5 billion com-
pared with a CHF 5.0 billion outflow in 2003.
Invested assets, wholesale intermediary
CHF billion
31.12.02
31.12.03
31.12.04
300
225
150
75
0
106
153
87
174
64
193
Invested assets excluding money market funds
Money market funds
36
31
27
40
30
20
10
0
Money market sweep accounts
Some of the money market fund assets managed by our US
wholesale intermediary business represent the cash portion of
private client accounts. Before launching UBS Bank USA in
2003, the cash balances of private clients in the US were swept
into our money market funds. Since the bank’s launch, those
cash proceeds have been automatically redirected into its
FDIC-insured deposit accounts. Although there was no one-
time bulk transfer of client money market assets to the bank,
the funds invested in our sweep accounts are being used to
complete client transactions and will therefore gradually
deplete over time. Such funds are a low-fee component of
invested assets. Full-year money market outflows in our US
wholesale intermediary business were CHF 13.6 billion, of
which approximately CHF 11 billion related to UBS Bank USA.
43
Financial Businesses
Global Asset Management
We do not expect further major outflows from our money
market funds into UBS Bank USA in 2005.
Investment capabilities and performance
Financial markets experienced greater volatility in 2004 than
in the previous year due to rising oil prices and continued
geopolitical instability. Still, equity markets made progress,
with strong gains during fourth quarter. Most of our actively
managed global and regional equity strategies outperformed
their benchmarks, with particularly strong performances in Eu-
ropean and US asset classes. The Global Equity composite per-
formed marginally below benchmark (after fees) for the year.
Bond markets in the major industrialized countries were
surprisingly resilient in 2004, posting solid returns. European
bonds were the best performers as investors saw the surge in
oil prices as a potential drag on economic growth rather than
raising inflationary expectations. A positive economic environ-
ment supported corporate bonds and drove spreads to very
narrow levels. Overall, our active interest rate strategies con-
tinued to outperform their benchmarks, particularly in the US;
however, our Global Bond composite performed just below
its benchmark (after fees) in 2004.
Asset allocation portfolios outperformed their benchmarks
by significant amounts, with market allocation providing much
of the added value. Stock selection was positive in US and
emerging equities and US bonds. Longer-term returns against
benchmarks remain positive.
In alternative and quantitative investments, performance
was generally positive in 2004. All key equity-oriented strate-
gies recorded positive returns, while a difficult macroeco-
nomic environment contributed to slightly negative returns for
our core “macro” trading strategy. Despite ongoing political
and economic uncertainty, the multi-manager teams were
able to generate positive returns from most strategies. Over-
all, funds of hedge funds performance was positive, buoyed
by strong fourth quarter performance.
Real estate portfolios in the US, UK and Japan continued
to perform strongly during 2004. In publicly traded real es-
tate equities, excellent performance was achieved, with assets
doubling in Europe due to a combination of inflows and per-
formance.
Results
We reported a very strong full-year result in 2004. Pre-tax
profit was CHF 544 million, an increase of 64% from the 2003
Composite
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
44
pre-tax profit of CHF 332 million. The increase was driven by
higher operating income, which rose 16%, reflecting strong
net new money inflows, a continuing change in asset mix to-
wards higher-margin products, and a rise in market valuations
resulting in increased asset levels and revenues. This was
only partially offset by a slight rise in operating expenses,
mainly due to higher incentive-based compensation as a
result of the higher revenues.
Performance before tax
CHF million
2002
2003
2004
544
332
219
600
450
300
150
0
Operating income
In full-year 2004, operating income was CHF 2,022 million,
up 16% from CHF 1,737 million a year earlier. The increase
reflects higher financial market valuations and strong inflows
into alternative and quantitative investments, and equities and
fixed income mandates, resulting in higher invested asset
levels and, consequently, higher asset-based revenues. Per-
formance-related fees, especially in alternative and quantita-
tive investments, remained at the strong levels seen in 2003.
Institutional revenues increased to CHF 1,085 million in full-
year 2004 from CHF 922 million in 2003, driven by both the
improved market environment and strong asset inflows.
Wholesale intermediary revenues rose to CHF 937 million in
2004 from CHF 815 million in 2003, reflecting higher market
valuations and an improvement in the asset mix – as low-
margin money market outflows were mostly offset by inflows
into higher-margin products.
Operating expenses
In 2004, operating expenses increased to CHF 1,478 million
from CHF 1,405 million in 2003, primarily due to higher in-
centive-based compensation as a result of increased profita-
bility. Personnel expenses were CHF 901 million in 2004, 12%
above 2003. General and administrative expenses increased
by 13% to CHF 299 million in 2004 from CHF 265 million in
1 year
3 years
–
–
+
–
+
+
Annualized
5 years
+
+
+
10 years
+
+
+
(+) above benchmark; (–) under benchmark. All after fees.
2003. This increase was mainly due to a restructuring provi-
sion in our business in the Americas booked in third quarter
2004 and the damage caused by Hurricane Ivan in the Cay-
man Islands. Travel and entertainment costs, IT expenses and
professional fees increased year-on-year. Net charges from
other business units decreased by CHF 30 million to CHF 126
million in 2004 from CHF 156 million in 2003, partly due to
higher charge-outs to the wealth management businesses
reflecting the increase in the distribution of alternative invest-
ment products. Over the same period, depreciation remained
virtually unchanged at CHF 23 million, down by only CHF
2 million. Amortization of goodwill decreased to CHF 129 mil-
lion in 2004 from CHF 153 million a year earlier, due to the
full amortization of the goodwill of some businesses and the
US dollar’s decline against the Swiss franc.
Headcount
Headcount was 2,665 on 31 December 2004, up by 38 from
2,627 on 31 December 2003. The increase of 1% is mainly
attributable to our expansion of the European real estate busi-
ness as well as our growing businesses in alternative and quan-
titative investments and fund services.
31.12.02
31.12.03
31.12.04
2,668
2,627
2,665
Headcount
full-time equivalents
3,000
2,250
1,500
750
0
2003
Key performance indicators
For 2003, the pre-goodwill cost / income ratio was 72.1%,
an improvement of 3.4 percentage points from 2002. This was
a result of improving operating income and operating ex-
penses. The recovery in equity markets experienced in the
second half of 2003 resulted in higher invested asset levels
and, consequently, higher asset-based revenues. Strong in-
flows of net new money (excluding lower fee money market
funds), combined with improved investment performance,
especially in the alternative and quantitative platform, helped
revenues to rise. These developments were supported by on-
going cost control initiatives that drove operating expenses
down by 2%.
Institutional
Institutional invested assets totaled CHF 313 billion on 31 De-
cember 2003, up 14% from CHF 274 billion on 31 Decem-
ber 2002, reflecting the strong market development in the
second half of 2003 and strong inflows of net new money.
The increase was partly offset by the weakening of major
currencies against the Swiss franc.
For full-year 2003, net new money inflows were CHF
12.7 billion, up significantly from the outflows of CHF 1.4 bil-
lion recorded in 2002. Equity mandates and alternative and
quantitative investments experienced strong inflows, partial-
ly offset by outflows from asset allocation mandates and
money market funds.
The full-year 2003 gross margin was 32 basis points, up
from 29 basis points in 2002, reflecting higher performance
fees and an improving asset mix.
Wholesale intermediary
Invested assets were CHF 261 billion on 31 December 2003,
up by CHF 2 billion from 31 December 2002. The impact
of adverse currency 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 outflow amounted
to CHF 5.0 billion compared with the CHF 6.3 billion out-
flow in 2002. The money market outflow in 2003 was CHF
23.0 billion, partially offset by inflows of CHF 17.1 billion in-
to higher-margin equity and fixed income mandates. The out-
flows in money market 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.
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 million. The recovery in the second half of
2003 in equity market valuations, coupled with strong inflows
into alternative investments, equities and fixed income man-
dates, resulted in higher invested asset levels and, con-
sequently, increased asset-based revenues. Performance-
related fees, especially in the alternative and quantitative
business, showed significant improvement over 2002. On-
going cost control initiatives that systematically reduced
operating expenses contributed significantly to improved
profitability. Lower IT and premises costs prompted general
and administrative expenses to decline. Amortization ex-
penses 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.
45
Financial Businesses
Global Asset Management
Operating income
In full-year 2003, operating income was CHF 1,737 million,
up 5% from CHF 1,655 million a year earlier. It reflected the
recovery in equity market valuations in second half 2003, cou-
pled with strong inflows into alternative investments, equities
and fixed income mandates, resulting in higher invested as-
set 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 million in 2002, driven by both
the improved market environment and strong asset inflows,
especially in the alternative and quantitative business. For full-
year 2003, Wholesale intermediary revenues, at CHF 815 mil-
lion, increased from CHF 790 million in 2002, reflecting the
recovery in the equity markets and an improvement in the as-
set mix, both of which had a positive impact on our asset-
based revenues.
saving initiatives and lower goodwill amortization. Personnel
expenses were CHF 806 million in 2003, 6% above 2002, due
to higher incentive-based compensation reflecting improved
revenues. General and administrative expenses fell to CHF
265 million in 2003 from CHF 301 million in 2002. The de-
crease is a result of ongoing cost-saving initiatives, resulting
in a significant reduction of IT and premises expenses. These
savings were partly offset by non-recurring operational pro-
visions. Charges from other business units decreased by CHF
8 million to CHF 156 million in 2003. Depreciation, at CHF
25 million, increased by CHF 3 million from 2002. 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
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-
Headcount was 2,627 on 31 December 2003, down by 41
from 2,668 on 31 December 2002. The decrease of 2% pri-
marily reflects cost-saving efforts in the traditional invest-
ments business.
46
Financial Businesses
Investment Bank
Investment Bank
In 2004, the Investment Bank’s pre-tax profit was CHF 4,540 million, up 18% from a year earlier. Results were
driven by strong performances across all businesses and fueled by a pick-up in market activity.
Business Group reporting
CHF million, except where indicated
Investment banking
Equities
Fixed income, rates and currencies
Private equity
Income
Adjusted expected credit loss 1
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
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
KPIs
Compensation ratio (%) 2
Cost / income ratio (%) 3
Cost / income ratio before goodwill (%) 4
Non-performing loans / gross loans (%)
Impaired loans / gross loans (%)
Average VaR (10-day 99%)
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
1,909
5,906
7,912
257
15,984
(7)
15,977
8,156
2,535
219
239
288
11,437
4,540
4,828
51
71.6
69.8
0.6
0.8
358.0
1,703
4,875
7,490
(77 )
13,991
(55 )
13,936
7,303
2,074
180
246
278
10,081
3,855
4,133
52
72.1
70.1
0.8
1.4
294.8
1,915
5,608
6,498
(1,602 )
12,419
(90 )
12,329
7,815
2,359
140
320
364
10,998
1,331
1,695
63
88.6
85.6
1.5
2.5
12
21
6
14
87
15
12
22
22
(3 )
4
13
18
17
21
1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the Business Groups (see note 2 to the financial statements).
3 Operating expenses / income.
4 Operating expenses less the amortization of goodwill and other intangible assets / income.
2 Personnel expenses / income.
John P. Costas | Chairman and CEO
Investment Bank
47
Financial Businesses
Investment Bank
Investment Bank (continued)
Private equity
Value creation (CHF billion)
Investment (CHF billion) 1
Portfolio fair value (CHF billion)
Additional information
Deferral (included in adjusted expected credit loss)
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 2
Headcount (full-time equivalents)
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
0.6
1.9
2.7
(0.3 )
2.3
2.9
(1.4 )
3.1
3.8
(17 )
(7 )
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
85
147
14,100
258
16,568
29
143
12,700
391
15,277
8
133
13,100
582
15,791
193
3
11
(34 )
8
1 Historical cost of investments made, less divestments and impairments.
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 statement. For details on the
Components of operating income
The Investment Bank generates operating income from:
– commissions on agency transactions and spreads or markups on
principal transactions;
– fees from debt and equity capital markets transactions, leveraged
finance, and the structuring of derivatives and complex transactions;
– mergers and acquisitions and other advisory fees;
– interest income on principal transactions and from the loan port-
folio; 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 trading activity in
primary and secondary markets and the extent of merger and acqui-
sition 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 Group in 2004, 2003 or 2002.
2004
Key performance indicators
The pre-goodwill cost / income ratio improved to 69.8% in
2004 from 70.1% a year earlier. It reflected a strong revenue
performance in all businesses.
Our compensation ratio in 2004 was 51%, down from
52% in 2003, reflecting the completion of our aggressive
investment banking hiring program. Payout levels are driven
by the revenue mix across business areas and are managed in
line with market levels.
Total loans were CHF 69 billion on 31 December 2004,
up 25% from CHF 55 billion a year earlier, reflecting our
strengthened business franchise. Continued successful
recovery efforts led the ratio of impaired loans to total loans
to fall to 0.8% at the end of 2004 from 1.4% on 31 Decem-
ber 2003. The non-performing loans to total loans ratio fell
to 0.6% from 0.8% in the same period.
The level of our private equity investments stood at CHF
Cost / income ratio
in %
Compensation ratio
in %
2003
2004
2002
2003
2004
2002
88.6
85.6
72.1
70.1
71.6
69.8
As reported
Adjusted for goodwill
90
80
70
60
50
48
65
60
55
50
45
63
52
51
Impaired loans / gross loans
in %
31.12.02
31.12.03
31.12.04
2.8
2.1
1.4
0.7
0.0
2.5
1.4
0.8
1.9 billion on 31 December 2004, a decline of 17% from
CHF 2.3 billion on 31 December 2003, reflecting writedowns
and successful divestments. Unfunded commitments fell by
47% to CHF 0.8 billion on 31 December 2004 from CHF 1.5
billion a year ago. The fair value of the portfolio on 31 De-
cember 2004 was CHF 2.7 billion, down from CHF 2.9 billion
on 31 December 2003, driven by exits and revaluations.
31.12.02
31.12.03
31.12.04
3.1
2.3
1.9
Investment
CHF billion
4
3
2
1
0
Results
Pre-tax profit was CHF 4,540 million in 2004, up 18% from
a year earlier and at its highest level since 2000. Our result was
achieved despite the significant weakening of the US dollar
against the Swiss franc and reflects revenue growth across all
our businesses. In particular, our fixed income, rates and cur-
Performance before tax
CHF million
2002
2003
2004
5,000
3,750
2,500
1,250
0
4,540
3,855
1,331
rencies business posted a record result, up 6% from 2003,
while the equities business reported a 21% increase in rev-
enues on the strong improvement in market conditions. Pri-
vate equity also contributed to our result, recording revenues
of CHF 257 million, a significant improvement. At the same
time, costs increased as our businesses continued to expand,
with specific operational provisions also a factor.
Operating income
Total operating income in 2004 was CHF 15,977 million, up
15% from CHF 13,936 million a year earlier, reflecting strong
improvements in all businesses.
Equities revenues, at CHF 5,906 million in 2004, were up
21% from CHF 4,875 million in 2003. Growth in revenues
occurred around the globe, but was particularly strong in the
US and Europe. Significant increases were seen in secondary
cash commissions and proprietary trading revenues. Prime
brokerage saw an impressive revenue gain following the ac-
quisition of ABN Amro’s prime brokerage business in the US.
Fixed income, rates and currencies revenues were CHF
7,912 million, up 6% from CHF 7,490 million a year earlier.
Strong gains were seen in the rates business, mainly due to
the structured LIBOR and mortgage businesses. Fixed income
was driven by credit derivatives, emerging markets and glob-
al syndicated finance businesses, foreign exchange and cash
and collateral trading. The positive result was slightly offset
by negative revenues of CHF 62 million relating to Credit
Default Swaps (CDSs) hedging existing credit exposure in the
loan book – significantly lower than 2003’s negative revenues
of CHF 678 million.
Investment banking revenues, at CHF 1,909 million in
2004, increased 12% from CHF 1,703 million a year earlier.
Excluding currency fluctuations and hedging costs, revenues
were up 32%, reflecting improving corporate activity levels.
It was a record year for our global advisory business, with dou-
ble-digit growth seen in Europe, the US and Asia. According
to a Dealogic survey1, we ranked fifth for investment bank-
ing fees in 2004 with a market share of 5.3%, up from sixth
and a market share of 5.0% a year earlier.
Private equity also contributed to our result, recording rev-
enues of CHF 257 million in 2004, a significant improvement
compared to the negative revenues of CHF 77 million a year
earlier, as market conditions allowed for successful divest-
ments and lower writedowns.
Operating expenses
Higher personnel costs and general and administrative expens-
es prompted total operating expenses in 2004 to rise to CHF
11,437 million, a 13% increase from CHF 10,081 million a
year earlier. Personnel expenses, at CHF 8,156 million in 2004,
increased 12% from a year earlier, reflecting higher perform-
ance-related compensation which rose due to higher rev-
1 Financial Times, 26 January 2005. Table: Global fee ranking 2004
49
Financial Businesses
Investment Bank
Income by business area
CHF million
2002
2003
1,915
5,608
6,498
1,703
4,875
7,490
16,000
12,000
8,000
4,000
0
–4,000
2004
1,909
5,906
7,912
Headcount
Headcount, at 16,568 on 31 December 2004, was up 8%
from a year earlier. Staffing increases were driven by contin-
ued business expansion and included the impact of integrat-
ing personnel from the Charles Schwab Capital Markets divi-
sion and the hiring of additional operational risk management
and compliance staff.
2003
(1,602)
(77)
257
Key performance indicators
Private equity
Equities
Fixed income, rates and currencies
Investment banking
enues, as well as an increase in salaries reflecting the 8%
additional headcount. General and administrative expenses
were CHF 2,535 million in 2004, up 22% from 2003’s CHF
2,074 million. The increase reflected higher operational pro-
visions, rising professional fees and raised IT spending. This
was partially offset by a drop in administration and occupan-
cy expenses. Services from other business units increased to
CHF 219 million in 2004 from CHF 180 million in 2003. De-
preciation eased 3% to CHF 239 million in 2004 from CHF
246 million in 2003 on a decline in writeoffs. Amortization of
goodwill and other intangibles, at CHF 288 million in 2004,
was up 4% from CHF 278 million a year earlier, reflecting the
ABN Amro acquisition.
31.12.02
31.12.03
31.12.04
16,568
15,791
15,277
Headcount
full-time equivalents
17,000
16,000
15,000
14,000
13,000
The pre-goodwill cost / income ratio decreased to 70.1% in
2003 from 85.6% in 2002. The fall reflects an increase in rev-
enues, driven by our fixed income, rates and currencies busi-
ness and our private equity business, set against the drop in
operating expenses, which reflected our disciplined cost con-
trol. Both revenues and expenses were affected by the weak-
ening of major currencies, mainly the US dollar, against the
Swiss franc.
Our compensation ratio in 2003 was 52%, down from
63% in 2002. The payout levels of annual performance-
related payments are driven by the revenue mix across busi-
ness areas and are managed in line with market levels.
Total loans were CHF 55 billion on 31 December 2003,
down 11% from CHF 62 billion a year earlier, mainly due
to the drop in the US dollar against the Swiss franc. Contin-
ued successful recovery efforts led the ratio of impaired loans
to total loans to fall from 2.5% on 31 December 2002 to
1.4% at the end of 2003. The non-performing loans to
total loans ratio declined from 1.5% to 0.8% in the same
period.
The level of our private equity investments was CHF 2.3 bil-
lion on 31 December 2003, down from CHF 3.1 billion a year
earlier. The decrease was mainly due to successful divestments
alongside further writedowns. The decline in the level of
investments was accentuated by exchange rate movements.
Driven by exits and revaluations, the fair value of the port-
folio decreased to CHF 2.9 billion on 31 December 2003 from
CHF 3.8 billion a year earlier. Unfunded commitments con-
tinued to fall, totaling CHF 1.5 billion at end-2003, down
from CHF 2.1 billion a year earlier.
Shift to industrial holdings
From first quarter 2005, our private equity investments will
be reported within the Industrial Holdings segment.
This matches our strategy of de-emphasizing and reducing
exposure to this asset class while capitalizing on orderly
exit opportunities when they arise. Current management
will continue to look after the portfolio.
50
Results
Pre-tax profit was CHF 3,855 million in full-year 2003, up
190% from a year earlier. This result was achieved despite the
weakening of the US dollar against the Swiss franc and reflects
strong performances in all our businesses. In particular, the
private equity business showed a marked improvement of
CHF 1.5 billion, 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. This was
accentuated by a strong result in our fixed income, rates and
currencies business, gaining 15% from 2002, 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 expenses fell because
of currency fluctuations. Excluding the impact of currency
movements, personnel expenses rose in 2003, reflecting im-
proved revenues, while general and administrative expenses
remained largely unchanged from 2002.
Operating income
Full-year 2003 total operating income was CHF 13,936 mil-
lion, up 13% from CHF 12,329 million in 2002. 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 the expansion
of our capabilities. Equities revenues in full-year 2003 also
reflected negative currency impacts, falling to CHF 4,875 mil-
lion from CHF 5,608 million in 2002. Excluding currency
fluctuations, equity results improved, reflecting strong per-
formances in the equity finance, proprietary and primary
businesses. In full-year 2003, the fixed income, rates and cur-
rencies business posted an excellent result. Revenues, at CHF
7,490 million in 2003, were up 15% from CHF 6,498 million
in 2002. 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 re-
lating to Credit Default Swaps (CDSs) hedging existing cred-
it exposure in the loan book. Private equity income for 2003
was negative CHF 77 million, compared to negative CHF
1,602 million in 2002. The significant improvement in per-
formance was primarily driven by a sharp fall in investment
writedowns.
Operating expenses
Total operating expenses dropped 8% to CHF 10,081 million
in 2003, mainly reflecting the weakening of the US dollar
against the Swiss franc, although our continued tight man-
agement of costs helped. Personnel expenses in 2003, at CHF
7,303 million, fell 7% from 2002. Excluding currency fluctu-
ations, personnel expenses rose, reflecting higher perform-
ance-related compensation, which increased along with rev-
enues, and higher severance expenses. Full-year general and
administrative expenses were CHF 2,074 million in 2003,
down 12% from 2002’s CHF 2,359 million. Excluding the ef-
fect of currencies, expenses rose slightly, reflecting provisions
for vacant space, higher professional fees in all businesses and
an increase in administration expenses. Services from other
business units increased to CHF 180 million in 2003 from
CHF 140 million in 2002. Depreciation declined 23% to CHF
246 million in 2003 from CHF 320 million in 2002. The de-
crease 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 businesses in 2003.
Headcount
Headcount, at 15,277 on 31 December 2003, fell 3% from a
year earlier. The drop reflects ongoing, regular reviews of our
cost structure and staffing needs, taking into account produc-
tivity gains and the automation of services. That was partial-
ly offset by the acquisition of ABN Amro’s prime brokerage
business and continued investment in specific areas, includ-
ing our US investment banking and fixed income, rates and
currencies businesses.
51
Financial Businesses
Wealth Management USA
Wealth Management USA
In 2004, Wealth Management USA reported a pre-tax gain of CHF 179 million compared to a loss of CHF
5 million in 2003. In US dollar terms, operational performance excluding acquisition costs was the best since
PaineWebber became part of UBS, reflecting record recurring fees and increased net interest revenue.
Business Group reporting
CHF million, except where indicated
Private client revenues
Municipal finance revenues
Net goodwill funding
Income
Adjusted expected credit loss 2
Total operating income
Personnel expenses 3
General and administrative expenses
Services to / from other business units
Depreciation
Amortization of goodwill and other intangible assets
Total operating expenses
Business Group performance before tax
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
4,906
372
(180)
5,098
(5)
5,093
3,437
800
302
71
304
4,914
179
4,959 1
462
(231 )
5,190
(8 )
5,182
3,627
719
433
72
336
5,187
(5 )
5,471
480
(390 )
5,561
(13 )
5,548
4,158
926
492
81
1,691 4
7,348
(1,800 )
(1 )
(19 )
22
(2 )
38
(2 )
(5 )
11
(30 )
(1 )
(10 )
(5 )
Business Group reporting excluding acquisition costs and significant financial events
CHF million, except where indicated
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 acquisition costs
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
5,093
180
5,273
4,914
(99)
(304)
4,511
762
5,021 5
231
5,252
5,187
(263 )
(336 )
4,588
664
5,548
390
5,938
6,114 7
(351 )
(457 )
5,306
632
1
(22 )
0
(5 )
62
10
(2 )
15
1 Includes significant financial event: gain on disposal of Correspondent Services Corporation of CHF 161 million.
expense is reported for the Business Groups (see note 2 to the financial statements).
payments after second quarter 2004.
Correspondent Services Corporation of CHF 161 million.
event: writedown of PaineWebber brand name of CHF 1,234 million.
2 In management accounts, adjusted expected credit loss rather than credit loss
3 Includes retention payments in respect of the PaineWebber acquisition. There have been no further retention
5 Excludes significant financial event: gain on disposal of
7 Excludes significant financial
6 Goodwill and intangible asset-related funding, net of risk-free return on the corresponding equity allocated.
4 Includes significant financial event: writedown of PaineWebber brand name of CHF 1,234 million.
Mark B. Sutton | Chairman and CEO
Wealth Management USA
52
Business Group reporting excluding acquisition costs and significant financial events (continued)
KPIs
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 advisor productivity (CHF thousand) 8
Additional information
Client assets (CHF billion)
Regulatory equity allocated (average)
Fair value of employee stock options granted 9
Headcount (full-time equivalents)
Financial advisors (full-time equivalents)
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
639
17.1
16.0
79
81
96.4
85.5
2,057
655
634
21.1
15.8
86
87
99.9
87.2
1,927
579
584
18.5
17.9
82
88
132.1
89.2
2,199
639
1
1
(8 )
(7 )
7
13
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
679
5,100
101
17,388
7,519
690
5,700
62
17,435
7,766
650
7,450
73
19,029
8,857
(2 )
(11 )
63
0
(3 )
1 Excludes interest and dividend income.
events / average invested assets.
events / income, add back net goodwill funding and less significant financial events.
client revenues less significant financial events / average number of financial advisors.
For details on the fair value calculation, refer to note 32e to the financial statements.
2 For purposes of comparison with US peers.
5 Operating expenses / income.
3 Income / average invested assets.
4 Income, add back net goodwill funding and less significant financial
6 Operating expenses less the amortization of goodwill and other intangible assets, retention payments and significant financial
8 Private
9 For informational purposes only. These pre-tax amounts have not been recorded in the income statement.
7 Asset-based fees for portfolio management and fund distribution, account-based and advisory fees.
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;
– transaction-related fees; and
– interest income from client loans.
These fees are based on the market value of invested assets, the level
of transaction-related activity and the size of the loan book. As a
result, operating income is affected by such factors as fluctuations
in invested assets, changes in market conditions, investment per-
formance, inflows and outflows of client funds, and investor activity
levels.
53
Financial Businesses
Wealth Management USA
Significant financial events
Net new money
CHF billion
There were no significant financial events in 2004. There was
one in 2003 and one in 2002.
– In second quarter 2003, a net gain of CHF 2 million (pre-
tax CHF 161 million) from the sale of Wealth Management
USA’s Correspondent Services Corporation (CSC) clearing
business. A substantial portion of CSC’s net assets com-
prised goodwill stemming from the PaineWebber acquisi-
tion. 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, 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
intangible asset on our balance sheet.
2004
Key performance indicators
2002
2003
2004
–12% in US dollar
21.1
18.5
17.1
22
20
18
16
14
on invested assets before acquisition costs (net goodwill fund-
ing costs) was 81 basis points, down from 87 basis points in
2003. The increase in average invested asset levels (up 7%)
outpaced the gain in revenues (up 1% excluding the sale of
CSC) as higher private client revenues were mostly offset by
lower municipal finance revenues.
Gross margin on invested assets
bps
Wealth Management USA had CHF 639 billion in invested
assets on 31 December 2004, up 1% from CHF 634 billion
on 31 December 2003. The increase was due to inflows of
net new money and the effects of market appreciation,
partly offset by the weakening of the US dollar against the
Swiss franc. In US dollar terms, invested assets were 10%
higher on 31 December 2004 than they were on the same
date in 2003.
90
80
70
60
50
2002
2003
2004
88
82
87
86
81
79
Invested assets
CHF billion
700
600
500
400
300
31.12.02
31.12.03
31.12.04
+10% in US dollar
634
639
584
As reported
Adjusted for significant financial events and excluding acquisition costs
The cost / income ratio before acquisition costs was 85.5%
for 2004, compared to 87.2% in 2003. The improvement in
the cost / income ratio reflects our continuous cost control as
well as the excellent performance of our core private clients’
business.
Cost / income ratio
in %
We continue to report strong inflows of net new money
compared to peers. In 2004, inflows were CHF 17.1 billion,
CHF 4 billion lower than the CHF 21.1 billion reported in 2003.
Including interest and dividends, net new money in 2004 was
CHF 33.1 billion, lower than the CHF 36.9 billion reported in
2003. The decline in net new money mainly occurred in a slow
first half-year, when investor confidence lagged.
The gross margin on invested assets was 79 basis points in
2004, down from 86 basis points in 2003. The gross margin
135
120
105
90
75
54
2002
132.1
2003
2004
99.9
89.2
87.2
96.4
85.5
As reported
Adjusted for significant financial events and excluding acquisition costs
In 2004, recurring fees were CHF 2,057 million, up 7%
from CHF 1,927 million a year earlier. Excluding the impact of
currency fluctuations, recurring fees were up 15% in 2004
from 2003, mainly due to higher levels of managed account
fees on a record level of invested assets in US dollar terms.
Flows into managed account products were USD 12.4 billion
in full-year 2004, comparing favorably to the USD 10.2 bil-
lion flow for full-year 2003. Recurring fees combined with the
net interest income, principally from our lending business,
now represent around half of our total revenues.
2002
2003
2004
2,199
+15% in US dollar
2,057
1,927
Recurring fees
CHF million
2,250
2,000
1,750
1,500
1,250
Productivity per advisor increased in 2004 to CHF 655,000
from CHF 579,000 in 2003 as a lower number of financial
advisors were able to produce roughly the same revenues as
a year earlier. The number of financial advisors decreased to
7,519 in 2004 from 7,766 a year earlier due to attrition
among less productive financial advisors. In the second half
of 2003, we resumed our trainee program and we continued
to recruit financial advisors throughout 2004, with our focus
primarily on talented and highly productive advisors. As a re-
sult, we expect renewed growth in our advisor force.
Financial advisors
full-time equivalents
31.12.02
31.12.03
31.12.04
8,857
7,766
7,519
9,000
8,500
8,000
7,500
7,000
Results
In 2004, we reported a pre-tax gain of CHF 179 million com-
pared to a loss of CHF 5 million in 2003. The 2003 results
include a pre-tax gain of CHF 161 million from the sale of
Correspondent Services Corporation (CSC) in second quarter.
After the exclusion of the CSC gain and before acquisition
costs, operational performance showed profits of CHF 762 mil-
lion in 2004 and CHF 664 million in 2003. As our business is
almost entirely conducted in US dollars, comparisons of 2004
and 2003 results are affected by the depreciation of the US dol-
lar versus the Swiss franc. In US dollar terms, operational per-
formance (excluding acquisition costs and SFEs) in 2004 was
24% higher than in 2003. This represents the best result since
PaineWebber became part of UBS, reflecting record recurring
fees and increased net interest revenue benefiting from the first
full-year impact of UBS Bank USA. In municipal finance, rev-
enues fell due to lower transaction and underwriting volumes
and reduced derivative activity. Still, a Bloomberg article report-
Performance before tax
CHF million
2002
2003
2004
762
179
664
(5)
+24% in US dollar
800
0
–800
–1,600
–2,400
632
(1,800)
As reported
Adjusted for significant financial events and excluding acquisition costs
ed that we became the top-ranked firm in lead-managed ne-
gotiated underwriting volume in 2004 by increasing our mar-
ket share to 14.2%, up from last year’s 12.5%.
Operating income
In 2004, total operating income was CHF 5,093 million, down
2% compared to CHF 5,182 million in 2003. Before acquisi-
tion costs and excluding the sale of our CSC business, total
operating income was largely the same as a year earlier. On
the same basis and excluding the currency effect, operating
income increased by 8% from 2003. The increase in operat-
ing income is primarily due to higher recurring fees, rising
net interest income due to UBS Bank USA, and higher trans-
actional revenue in the private client business. The increase is
partially offset by lower municipal finance revenue due to a
drop in secondary trading performance, decreased underwrit-
ing volume and lower derivatives activity.
Operating expenses
Total operating expenses decreased 5% to CHF 4,914 million
in 2004 from CHF 5,187 million in 2003. Excluding acquisi-
tion costs, the drop was 2%, mainly due to the weakening of
the US dollar against the Swiss franc. Excluding currency
effects and acquisition costs, operating expenses were 6%
higher, primarily due to an increase in general and adminis-
55
800
-800
-1600
-2400
0
Financial Businesses
Wealth Management USA
trative expenses as well as higher personnel expenses. Person-
nel expenses dropped to CHF 3,437 million in 2004, down 5%
from CHF 3,627 million a year earlier. Excluding the effects of
currency translation, personnel expenses were slightly higher
than in 2003, reflecting higher bonus and broker compensa-
tion, which gained in line with performance, partially offset
by lower retention payments, which ended in June. Non-per-
sonnel related expenses dropped 5% to CHF 1,477 million in
2004 from CHF 1,560 million in 2003. In US dollar terms, they
actually rose 2%, reflecting higher legal fees and settlement
charges and increased consulting fees related to key initiatives
in the private client business. This was partially offset by low-
er depreciation due to a drop in infrastructure charges (down
CHF 1 million) as well as a decline in goodwill amortization
due to the sale of CSC (down CHF 32 million).
Headcount
Our headcount decreased by 47 during 2004 to 17,388 as
financial advisor headcount fell 3% to 7,519, principally re-
flecting attrition among lower producing financial advisors.
Non-financial advisor headcount increased 200 or 2% in
2004 from a year earlier due to additional personnel to sup-
port key initiatives within the private clients area.
31.12.02
31.12.03
31.12.04
19,029
17,435
17,388
Headcount
full-time equivalents
20,000
19,000
18,000
17,000
16,000
2003
Key performance indicators
The gross margin on invested assets was 86 basis points for
2003, up from 82 basis points in 2002. The gross margin on
invested assets before acquisition costs (net goodwill funding
costs) was 87 basis points, down from 88 basis points in 2002.
The cost / income ratio before acquisition costs and signif-
icant financial events was 87.2% for 2003, compared to
89.2% 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.
In 2003, recurring fees were CHF 1,927 million, down from
CHF 2,199 million a year earlier, 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 increased 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.
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.
Results
As our business is almost entirely conducted in US dollars,
comparisons of 2003 and 2002 results are affected by the
depreciation of the US dollar versus the Swiss franc.
In 2003, Wealth Management USA reported a pre-tax loss
of CHF 5 million compared to a loss of CHF 1,800 million a
year earlier. This change includes the writedown of the value
of the PaineWebber brand in 2002 and the CSC disposal in
2003. After their exclusion and before acquisition costs, per-
formance improved 5%. On this basis and in US dollar terms,
performance in 2003 was 21% above that in 2002, reflect-
ing higher recurring fee gains and improved transactional rev-
enues. Client activity increased, with daily average trades ris-
ing 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 continued to benefit from cost-saving initiatives started
when we became a part of UBS.
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 dol-
lar terms, invested assets were 21% higher on 31 December
2003 than they were at the same time in 2002.
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 billion result reported for 2002. Includ-
ing interest and dividends, net new money in 2003 was CHF
36.9 billion, up from CHF 36.4 billion in 2002.
Operating income
In 2003, total operating income was CHF 5,182 million com-
pared to CHF 5,548 million in 2002. Before acquisition costs
and excluding the sale of our CSC business, total operating
income was 12% lower compared to a year earlier. Excluding
the currency effect and acquisition costs, operating income
actually increased by 2% from 2002. This increase was due
to higher recurring fees as well as higher transactional rev-
enue, reflecting the improved market conditions. Further,
revenues were accentuated by much stronger revenues from
our municipal securities business.
56
Operating expenses
Total operating expenses decreased 29% to CHF 5,187 mil-
lion in 2003 from CHF 7,348 million in 2002. Excluding ac-
quisition costs and the writedown 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 off-
set by higher performance-related compensation. Personnel
expenses dropped 13% from CHF 4,158 million in 2002 to
CHF 3,627 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 low-
er retention payments. General and administrative expenses
fell 22% from CHF 926 million in 2002 to CHF 719 million in
2003. Excluding the impact of currency fluctuations, general
and administrative expenses dropped 11% compared to 2002
due to the strict cost management discipline that we have ex-
erted 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. Services rendered from other business
units decreased by 12% to CHF 433 million in 2003 from
CHF 492 million in 2002. Depreciation decreased CHF 9 million
to CHF 72 million in 2003 from CHF 81 million in 2002. Good-
will and other intangible amortization decreased from CHF
1,691 million in 2002 to CHF 336 million in 2003. This de-
crease was due to the writedown of the PaineWebber brand
name in 2002, and the sale of CSC. Excluding the writedown
and the sale of CSC, amortization charges dropped by 26%
as a result of the weakening US dollar against the Swiss franc.
Headcount
Wealth Management USA’s headcount decreased 8% during
2003 to 17,435, reflecting continued cost management ini-
tiatives, the curtailment of the trainee program, and the sale
of CSC. Non-financial advisor headcount was down by 503
or 5% compared to the end of 2002.
57
Financial Businesses
Corporate Center
Corporate Center
Corporate Center reported a pre-tax loss of CHF 276 million in 2004, compared to a loss of CHF 759 million
in 2003.
Business Group reporting
CHF million, except where indicated
Income
Credit loss (expense) / recovery 2
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
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
Business Group reporting adjusted for significant financial events
CHF million, except where indicated
Income
Credit loss (expense) / recovery 2
Total operating income
Total operating expenses
Business Group performance before tax
Business Group performance before tax and amortization of goodwill and other intangible assets
Additional information
Fair value of employee stock options granted 4
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
1,258
321
1,579
1,222
1,237
(1,509)
814
91
1,855
(276)
(185)
900
122
1,022
1,145
1,334
(1,639 )
840
101
1,781
(759 )
(658 )
2,403 1
300
2,703
1,450
1,564
(1,633 )
893
122
2,396
307
429
40
163
55
7
(7 )
8
(3 )
(10 )
4
64
72
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
1,258
321
1,579
1,855
(276)
(185)
900
122
1,022
1,781
(759 )
(658 )
2,176 3
300
2,476
2,396
80
202
40
163
55
4
64
72
For the year ended
% change from
31.12.04
14
31.12.03
18
31.12.02
37
31.12.03
(22 )
2 In order to show the relevant Business Group
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.
performance over time, adjusted expected credit loss rather than credit loss expense is reported for all Business Groups. The difference between the adjusted expected credit loss and credit loss recorded
at Group level is reported in the Corporate Functions (see note 2 to the financial statements).
3 Excludes significant financial events: gain on disposal of Hyposwiss of CHF 155 million and gain on
disposal of Klinik Hirslanden of CHF 72 million.
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.
Clive Standish | UBS Chief Financial Officer
Head, Corporate Center
58
Private Banks & GAM
Business Unit reporting
CHF million, except where indicated
Income
Adjusted expected credit loss 2
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
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
KPIs
Invested assets (CHF billion)
Net new money (CHF billion) 3
Cost / income ratio (%) 4
Business Unit reporting adjusted for significant financial events
CHF million, except where indicated
Income
Adjusted expected credit loss 2
Total operating income
Total operating expenses
Business Unit performance before tax
Business Unit performance before tax and amortization of goodwill and other intangible assets
31.12.04
1,145
(6)
1,139
432
160
10
20
74
696
443
517
92
7.7
60.8
31.12.04
1,145
(6)
1,139
696
443
517
For the year ended
% change from
31.12.03
31.12.02
31.12.03
880
(2 )
878
381
169
11
28
81
670
208
289
84
7.2
76.1
1,038 1
(2 )
1,036
386
120
12
40
98
656
380
478
70
4.2
63.2
30
(200 )
30
13
(5 )
(9 )
(29 )
(9 )
4
113
79
10
For the year ended
% change from
31.12.03
31.12.02
31.12.03
880
(2 )
878
670
208
289
883 5
(2 )
881
656
225
323
30
(200 )
30
4
113
79
KPIs
Cost / income ratio excluding goodwill and SFEs (%) 6
54.3
66.9
63.2
Additional information
CHF million, except where indicated
Regulatory equity allocated (average)
Headcount (full-time equivalents)
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
650
1,649
700
1,672
850
1,702
(7 )
(1 )
1 Includes significant financial event: gain on disposal of Hyposwiss of CHF 155 million.
Business Units (see note 2 to the financial statements).
of CHF 155 million.
3 Excludes interest and dividend income.
6 Operating expenses less the amortization of goodwill and other intangible assets / income less significant financial events.
2 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the
5 Excludes significant financial event: gain on disposal of Hyposwiss
4 Operating expenses / income.
59
Financial Businesses
Corporate Center
Significant financial events
– In first quarter 2002, we realized a pre-tax gain of CHF
155 million from the sale of the private bank Hyposwiss.
There were no significant financial events in Private
Banks & GAM in 2004 or 2003.
2004
Key performance indicators
In 2004, Private Banks & GAM reported a record net new
money inflow of CHF 7.7 billion, up from the previous record
of CHF 7.2 billion in 2003. Performance was driven by GAM’s
continued business strength.
Invested assets on 31 December 2004 were CHF 92 billion,
up by 10% from CHF 84 billion on 31 December 2003, re-
flecting the overall market recovery.
Results
Pre-tax profit was a record CHF 443 million in 2004, up 113%
from CHF 208 million a year earlier, reflecting improved mar-
ket conditions, which produced a 10% growth in the asset
base, and resulted in higher asset-based revenues. Results
were helped by a 9% decline in non-personnel costs, which
continued to be tightly controlled.
Total operating income, at CHF 1,139 million in 2004, in-
creased CHF 261 million or 30% from 2003. The result was
due to record revenues from GAM, alongside growth in the
private banks’ transactional revenues.
Operating expenses were CHF 696 million in 2004, up 4%
from CHF 670 million in 2003. The increase was driven by
higher personnel expenses, up CHF 51 million to CHF 432 mil-
lion in 2004 from CHF 381 million in 2003, reflecting higher
performance-related compensation. This was partially offset
by a drop in non-personnel related expenses, down 9%. Gen-
eral and administrative expenses dropped 5% to CHF 160 mil-
lion in 2004 from CHF 169 million in 2003, reflecting lower
restructuring costs than in 2003, which saw the merger of the
three private banks Cantrade, Bank Ehinger and Armand von
Ernst. Depreciation dropped by 29%, mainly reflecting IT-
related declines. Amortization of goodwill fell 9% because of
the weakening of the US dollar against the Swiss franc.
Headcount
Headcount was 1,649 on 31 December 2004, down 1% from
1,672 on 31 December 2003.
31.12.02
31.12.03
31.12.04
1,702
1,672
1,649
Headcount
full-time equivalents
1,750
1,700
1,650
1,600
1,550
2003
Key performance indicators
Invested assets in Private Banks & GAM totaled CHF 84 bil-
lion on 31 December 2003, up from CHF 70 billion on 31 De-
cember 2002, reflecting strong net new money inflows, and
positive financial markets as well as the acquisition of Banque
Notz Stucki S.A. by Ferrier Lullin & Cie S.A., which was com-
pleted 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.
Results
Pre-tax profit, at CHF 208 million in 2003, dropped by 45%
from CHF 380 million a year earlier.
Total operating income dropped to CHF 878 million in 2003
from CHF 1,036 million in 2002. This was mainly due to the
divestment gain of CHF 155 million due to the sale of Hypo-
swiss in 2002. Excluding the sale, total operating income
remained virtually unchanged.
Total operating expenses increased to CHF 670 million in
2003, up 2% from CHF 656 million in 2002. The increase
mainly reflected higher legal provisions, as well as restructur-
ing costs related to the merger of Cantrade, Bank Ehinger and
Armand von Ernst to form Ehinger & Armand von Ernst.
Headcount
Headcount decreased by 30 to 1,672 on 31 December 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.
60
Corporate Functions
Business Unit reporting
CHF million, except where indicated
Income
Credit loss (expense) / recovery 2
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
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
Business Unit reporting adjusted for significant financial events
CHF million, except where indicated
Income
Credit loss (expense) / recovery
Total operating income
Total operating expenses
Business Unit performance before tax
Business Unit performance before tax and amortization of goodwill and other intangible assets
Additional information
CHF million, except where indicated
Regulatory equity allocated (average)
Headcount (full-time equivalents)
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
113
327
440
790
1,077
(1,519)
794
17
1,159
(719)
(702)
20
124
144
764
1,165
(1,650 )
812
20
1,111
(967 )
(947 )
1,365 1
302
1,667
1,064
1,444
(1,645 )
853
24
1,740
(73 )
(49 )
465
164
206
3
(8 )
8
(2 )
(15 )
4
26
26
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
113
327
440
1,159
(719)
(702)
20
124
144
1,111
(967 )
(947 )
1,293 3
302
1,595
1,740
(145 )
(121 )
465
164
206
4
26
26
As at or for the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
6,950
3,553
8,450
3,561
9,400
3,505
(18 )
0
1 Includes significant financial event: 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 credit loss expense is reported for all Business Groups. The difference between the adjusted expected credit loss and credit loss recorded at Group level is reported in the Corporate Functions (see
note 2 to the financial statements).
3 Excludes significant financial event: gain on disposal of Klinik Hirslanden of CHF 72 million.
61
Financial Businesses
Corporate Center
Significant financial events
– 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.
There were no significant financial events in Corporate
Functions in 2004 or 2003.
2004
Results
Corporate Functions recorded a pre-tax loss of CHF 719 mil-
lion in full-year 2004, compared to a loss of CHF 967 million
a year earlier. The improvement was driven by a CHF 93 mil-
lion rise in income and significantly higher credit loss recov-
eries (up CHF 203 million). Operating expenses increased CHF
48 million, reflecting higher personnel expenses. There were
lower charges to other business units, reflecting cost savings
at the Information Technology Infrastructure unit (ITI) and
lower insurance premiums.
Operating income
Total operating income increased to CHF 440 million in 2004
from CHF 144 million in 2003. The result was driven by
higher credit recoveries as well as higher revenues. Income
increased by CHF 93 million to CHF 113 million in 2004
mainly due to lower writedowns of financial investments (in
2003 we recorded a writedown in our stake in Swiss Inter-
national Airlines Ltd.). This was partially offset by lower in-
terest income from invested equity as we continue to repur-
chase shares.
Credit loss recoveries were up in 2004 from 2003. The
credit loss expense or recovery booked in Corporate Functions
represents the difference between the adjusted expected
credit losses charged to the business units and the credit loss
recognized in the UBS financial statements. In 2004, UBS
recorded a credit loss recovery of CHF 276 million, compared
to a credit loss expense of CHF 72 million in 2003. In both
years, credit loss expense was lower than the adjusted expect-
ed credit loss charged to the business units, resulting in cred-
it loss recoveries in Corporate Functions of CHF 327 million
in 2004 and CHF 124 million in 2003.
Operating expenses
Total operating expenses were CHF 1,159 million in 2004,
up CHF 48 million from CHF 1,111 million in 2003. At CHF
790 million in 2004, personnel expenses were up 3% from
CHF 764 million in 2003, reflecting higher performance-relat-
ed compensation. In the same period, general and administra-
tive expenses dropped 8% to CHF 1,077 million from CHF
1,165 million. This was mainly due to falling IT costs related to
infrastructure cost savings as well as lower legal provisions.
62
Other business units were charged CHF 1,519 million for serv-
ices provided by Corporate Functions in 2004, compared to
CHF 1,650 million in 2003. This drop was due to reduced
charges reflecting cost savings at our ITI unit as well as lower
project-related charges. Depreciation dropped to CHF 794
million in 2004 from CHF 812 million in 2003, reflecting low-
er IT-related charges, partially offset by higher costs for real
estate. Amortization of goodwill and other intangible assets
was CHF 17 million in 2004, down by CHF 3 million from 2003
due to the weakening of the US dollar against the Swiss franc.
Headcount
Corporate Functions headcount outside the ITI unit was
1,199 on 31 December 2004, down by 7 from 1,206 on 31 De-
cember 2003. Over the same period, ITI headcount dropped
1 to 2,354.
31.12.02
31.12.03
31.12.04
3,561
3,553
3,505
Headcount
full-time equivalents
3,600
3,450
3,300
3,150
3,000
2003
Results
Corporate Functions recorded a pre-tax loss of CHF 967 mil-
lion in full-year 2003, against a CHF 73 million loss a year
earlier.
Operating income
Total operating income dropped by 91% from CHF 1,667 mil-
lion in 2002 to CHF 144 million in 2003. Excluding the divest-
ment gains of CHF 72 million from Hirslanden in 2002, the
drop was 91%. This was mainly due to a fall-off in income of
Klinik Hirslanden, and lower gains from financial investments.
It also reflected lower interest income from our treasury
activities following a decrease in revenues 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 currency hedging revenues. Results also reflect-
ed the CHF 178 million fall in credit loss recoveries.
The credit loss expense or recovery booked in Corporate
Functions represents the difference between the adjusted
expected credit losses charged to the business units and the
credit loss recognized in the UBS financial statements. We
recorded a credit loss expense of CHF 72 million in 2003, com-
pared to a credit loss expense of CHF 115 million in 2002. In
both periods, credit loss expense was lower than the adjust-
ed expected credit loss charged to the business units, leading
to a credit loss recovery of CHF 124 million in 2003 and CHF
302 million in 2002 in Corporate Functions.
related expenses, partially offset by higher branding costs.
Services rendered to other business units remained virtually
flat at CHF 1,650 million in 2003, up CHF 5 million from
2002. Depreciation dropped from CHF 853 million in 2002
to CHF 812 million in 2003. The decrease is mainly due to
the absence of depreciation expenses from Klinik Hirslanden.
At CHF 20 million in 2003, amortization of goodwill and
other intangibles dropped by 17% from CHF 24 million in
2002, reflecting the drop of the US dollar against the
Swiss franc.
Operating expenses
Total operating expenses fell to CHF 1,111 million in 2003,
down from CHF 1,740 million in 2002. Personnel expenses de-
clined 28% from CHF 1,064 million in 2002 to CHF 764 mil-
lion in 2003. The drop was due to the deconsolidation of Klinik
Hirslanden, but was partially offset by higher expenses for
performance-related compensation. In the same period, gen-
eral and administrative expenses fell to CHF 1,165 million from
CHF 1,444 million. This was mainly due to lower legal pro-
visions, the disposal of Klinik Hirslanden, and lower project-
Headcount
Corporate Functions headcount was 3,561 on 31 December
2003, an increase of 56 from the 3,505 on 31 December
2002. The increase was mainly due to the first-time consoli-
dation of Hotel Widder as well as an increase in our human
resources and risk functions. This was nearly offset by a de-
cline in the number of trainees, a transfer of some employees
to the Business Groups, and lower headcount in the Chief
Communication Officer area.
63
64
Industrial Holdings
Industrial Holdings
Industrial Holdings
Income statement 1
CHF million, except where indicated
Income 3
Total operating income
Personnel expenses
General and administrative expenses
Depreciation
Amortization of goodwill and other intangible assets
Goods and materials purchased
Total operating expenses
Operating profit before tax and minority interests
Tax expense
Net profit before minority interests
Minority interests 4
Net profit
Additional information
Headcount (full-time equivalents)
For the year ended
31.12.04 2
3,667
3,667
326
126
70
77
2,861
3,460
207
49
158
(113)
45
As at
31.12.04
8,020
2 Results shown for the
1 Industrial Holdings consists of Motor-Columbus, a Swiss holding company, whose only significant asset is a 59.3% interest in Atel, a Swiss-based European energy provider.
six month period beginning on 1 July 2004.
3 Includes equity in income of associates of CHF 19 million.
4 Reflects minority interests in Motor-Columbus plus minority interests in Atel.
Major participations
Results
The Industrial Holdings segment is a new segment, currently
made up of UBS’s majority stake in Motor-Columbus, a finan-
cial holding company whose only significant asset is a 59.3%
interest in the Atel Group (Aare-Tessin Ltd. for Electricity). Atel,
based in Olten, Switzerland, is a European energy provider
focused on electricity trading and marketing, domestic and
international power generation, electricity transmission and
energy services. Motor-Columbus also holds several other
finance and property companies.
Transfer of private equity stakes
In first quarter 2005, our private equity investments, cur-
rently part of the Investment Bank, will be reported within the
Industrial Holdings segment. This matches our strategy of
de-emphasizing and reducing exposure to this asset class while
capitalizing on orderly exit opportunities when they arise.
Current management will continue to look after the portfolio.
UBS’s consolidation of Motor-Columbus into its accounts at
the beginning of third quarter 2004 resulted in a revaluation
of the latter’s assets and liabilities. These are no longer com-
parable with those previously published in Motor-Columbus’s
separate consolidated financial statements. The comparative
analysis provided here is based on unaudited proforma 2003
results.
For the six months ending 31 December 2004, our share
of Motor-Columbus’s net profit was CHF 45 million.
Total operating income for the six months ending 31 De-
cember 2004 was CHF 3,667 million, significantly higher than
in the same period a year earlier. The gain was due to the first-
time availability of production capacity in Southern Europe.
Over the same period, total operating expenses, at CHF 3,460
million, rose at a slower pace than operating income because
costs for energy purchased from third parties fell in the period
as internal power production could be run at near full capac-
ity. Expense levels also benefited from lower project costs.
66
Balance Sheet and Cash Flows
Balance Sheet and Cash Flows
Balance sheet and off-balance sheet
Balance sheet and off-balance sheet
UBS’s total assets stood at CHF 1,734.8 billion on 31 Decem-
ber 2004, up from CHF 1,550.1 billion on 31 December 2003.
The increase in total assets was the net result of growth in the
trading portfolio (up CHF 67.6 billion), collateral trading as-
sets (up CHF 43.0 billion), derivatives (up CHF 36.4 billion) and
the loan book (up CHF 19.7 billion). Total liabilities rose due
to higher borrowings (up CHF 80.8 billion), derivatives (up CHF
48.9 billion), trading portfolio liabilities (up CHF 27.1 billion)
and collateral trading liabilities (up CHF 15.0 billion).
tially offset by early redemptions, repurchases and cancelled
bonds totaling CHF 24.7 billion. 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 note 18 to the financial statements. The due
to customers line was up CHF 29.4 billion, in connection with
both prime brokerage and wealth management business
growth, especially in the US (additional FDIC-insured deposits
of CHF 7.7 billion), Europe and Asia.
Motor-Columbus
The first-time full consolidation of Motor-Columbus in third
quarter 2004 had a small net impact on our end of year bal-
ance sheet, adding assets of CHF 7.3 billion (0.4% of UBS’s
total assets) and total liabilities of CHF 6.0 billion. The con-
solidation also added financial instruments measured at fair
value of CHF 0.7 billion.
Lending and borrowing
Lending
Cash increased by CHF 2.5 billion to CHF 6.0 billion on 31 De-
cember 2004 from a year earlier as we preferred to keep com-
fortable balances with different central banks towards the end
of the year.
At CHF 35.3 billion on 31 December 2004 the due from
banks line increased by CHF 3.5 billion, driven by the first time
consolidation of Motor-Columbus as well as increased bal-
ances in the private label banks. Our loans to customers in-
creased to CHF 232.4 billion on 31 December 2004, up by CHF
19.7 billion from the level on 31 December 2003 as a result
of higher secured lending, mainly in our Wealth Management
businesses, both domestic and international. This was further
accentuated by an increase in secured lending in our Invest-
ment Bank’s mortgage-backed securities and prime brokerage
businesses.
Borrowing
The due to banks line declined by CHF 8.1 billion due to a
lower proportion of funding secured through the European
Central Bank repo market. Total debt issued increased to CHF
183.6 billion on 31 December 2004, up by CHF 59.5 billion,
reflecting additional outstanding positions in money market
paper (CHF 21.3 billion, primarily US commercial paper). The
long-term debt line (including financial instruments designat-
ed at fair value) rose by CHF 38.1 billion to CHF 104.1 billion.
We issued new long-term debt of CHF 51.2 billion as a con-
sequence of attractive market conditions for new issuance of
bonds and structured funding products. This increase was par-
Repo and securities borrowing / lending
During 2004, cash collateral on securities borrowed and re-
verse repurchase agreements combined increased by CHF
43.0 billion or 8% to CHF 577.4 billion, while the sum of se-
curities lent and repos grew by CHF 15.0 billion or 3% to CHF
484.1 billion. The matched book (a repo portfolio comprised
of assets and liabilities with equal maturities and equal value,
so that substantially all the risks cancel each other out) grew,
reflecting a favorable spread environment. Securities borrow-
ing and lending increased due to the growth of our prime
brokerage business.
Trading portfolio
Trading assets increased by CHF 67.6 billion to CHF 529.4 bil-
lion on 31 December 2004 from CHF 461.8 billion on 31 De-
cember 2003. Over the same period, short trading positions
increased by CHF 27.1 billion to CHF 171.0 billion. A net in-
crease was recorded in structured equity instruments, due to
higher client demand for these products. This was accompa-
nied by a net increase in fixed income instruments, mainly in
credit derivatives and investment grade bonds.
Replacement values
In 2004 positive replacement values (mainly derivative instru-
ments) increased by CHF 36.4 billion to CHF 284.6 billion,
while negative replacement values increased by CHF 48.9 bil-
lion up to CHF 303.7 billion over the same period. Three main
factors contributed to this development: a decline in long-term
interest rates in all major markets, the appreciation of the
Swiss franc against major currencies, and higher trading vol-
umes.
Other assets / liabilities and minority interests
Investment in associates increased by 50% to CHF 2.4 billion
on 31 December 2004, while property and equipment was up
by 14% to CHF 8.7 billion, both mainly due to the consoli-
dation of Motor-Columbus. Goodwill and other intangible
assets at CHF 12.1 billion on 31 December 2004 were up
by 5% from the same date a year ago, reflecting the acquisi-
68
tion of several wealth management businesses, the acqui-
sition of the capital market business of Charles Schwab as
well as the consolidation of Motor-Columbus. This was only
partially offset by amortization charges of CHF 964 million
during 2004.
Minority interests increased by 31% to CHF 5.3 billion on
31 December 2004 from CHF 4.1 billion at the same date a
year ago, reflecting the full consolidation of Motor-Columbus.
This was partially offset by a currency-driven drop in the val-
ue of issued trust preferred securities as well as the full acqui-
sition of the previous joint venture UBS Brunswick Moscow.
Shareholders’ equity
At CHF 35.0 billion on 31 December 2004, shareholders’
equity declined by CHF 0.3 billion from a year earlier. The
decline was due to dividend payments, share repurchases,
and the weakening of the US dollar against the Swiss franc,
mostly offset by strong retained earnings.
Contractual obligations
The table below summarizes our contractual obligations as of
31 December 2004. All contracts, with the exception of pur-
chase obligations (those where we are committed to purchase
determined volumes of goods and services), are either recog-
nized as liabilities on our balance sheet or, in the case of op-
erating leases, are disclosed in note 26 to the financial state-
ments.
The following liabilities recognized on the balance sheet are
excluded from the table because we do not consider these ob-
ligations as contractual: provisions, current and deferred tax
liabilities, liabilities to employees for equity participation plans,
settlement and clearing accounts and amounts due to banks
and customers.
Within purchase obligations, we have excluded our obli-
gation to employees under the mandatory notice period, dur-
ing which we are required to pay employees contractually
agreed salaries.
Off-balance sheet arrangements
In the normal course of business, UBS enters into arrange-
ments that, under IFRS, are not recognized 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 recog-
nized 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 customers or offer invest-
ment 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 through
them significant expenses in the past and we do not expect
to do so in the future. The following paragraphs discuss three
distinct areas of off-balance sheet arrangements as of 31 De-
cember 2004 and any potential obligations that may arise
from them.
Guarantees
In the normal course of business, we issue various forms of
guarantees to support our customers. These guarantees, with
the exception of related premiums, are kept off-balance sheet
unless a provision is needed to cover probable losses. The con-
tingent liabilities arising from these guarantees are disclosed
in note 25 to the financial statements. In 2004, our contin-
gent liabilities from guarantees are slightly below the level
compared to a year earlier. Fee income earned from issuing
guarantees is not material to our total revenues. Losses in-
curred under guarantees were insignificant for each of the last
three years.
Retained interests
UBS sponsors the creation of Special Purpose Entities (SPEs)
that facilitate the securitization of acquired residential and
commercial mortgage loans and related securities. We also
securitize customers’ debt obligations in transactions that
involve SPEs which issue collateralized debt obligations. A
typical securitization transaction of this kind would involve
the transfer of assets into a trust or corporation in return for
Contractual obligations
CHF million
Long-term debt
Capital lease obligations
Operating leases
Purchase obligations
Other long term liabilities
Total
Payment due by period
Less than 1 year
17,847
104
886
10,580
173
29,590
1–3 years
26,978
163
1,524
5,545
2
34,212
3–5 years More than 5 years
23,805
44
1,231
2,075
959
28,114
31,402
0
4,060
9,398
0
44,860
69
Balance Sheet and Cash Flows
Balance sheet and off-balance sheet
beneficial interests in the form of securities. Generally, the
beneficial interests are sold to third parties shortly after
the securitization. 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 further
discussion of our securitization activities, see note 34 to
the financial statements.
Derivative instruments recorded in shareholders’ equity
We have no derivative contracts linked to our own shares that
are accounted for as equity instruments. With the exception
of physically settled written put options (see note 1 to the
financial statements), derivative contracts linked to our shares
are accounted for as derivative instruments and are carried at
fair value on the balance sheet under positive replacement
values or negative replacement values.
70
Balance Sheet and Cash Flows
Cash flows
Cash flows
At end-2004, the level of cash and cash equivalents rose
to CHF 82.8 billion, up CHF 9.4 billion from 73.4 billion at
end-2003.
2003, and because we issued CHF 21.4 billion in money
market paper in 2004 after repaying CHF 14.7 billion a year
earlier.
Operating activities
Net cash flow from operating activities was negative CHF 27.9
billion in 2004 compared to positive CHF 3.4 billion in 2003.
Operating cash inflows (before changes in operating assets
and liabilities and income taxes paid) totaled CHF 10.8 billion
in 2004, an increase of CHF 1.8 billion from 2003. While our
net profit rose by CHF 1.9 billion between 2004 and 2003,
we had considerably higher non-cash expenses in 2003, which
reduce net profit but do not affect cash flows. With our adop-
tion of IAS 39 in 2004, we started to account for some of our
debt issues at fair value, leading to the recognition of an ad-
ditional non-cash expense item of CHF 1.2 billion, essentially
comprising an add-back to operating cash flows.
Cash of CHF 71.4 billion was used to fund the net increase
in operating assets, while a net increase in operating liabili-
ties generated cash inflows of CHF 34.0 billion. The compar-
ative amounts in 2003 were higher, primarily reflecting a
pick-up in activities in 2003 related to the recovery seen in
the financial markets. Payments to tax authorities were CHF
1.3 billion in 2004, up CHF 232 million from a year earlier, re-
flecting the increase in net profit between 2003 and 2002.
Investing activities
Investing activities generated a cash outflow of CHF 1.5 bil-
lion, mainly due to our acquisition of new businesses, which
totaled CHF 1.7 billion net of disposals. By contrast, in 2003,
we saw a net cash inflow of CHF 3.1 billion, mainly from
our divestments of financial investments and the sale of the
Correspondent Services Corporation. Disposals of property
and equipment were CHF 581 million higher in 2004.
Financing activities
The overall increase in cash inflows seen in 2004 is attributa-
ble to our financing activities, which generated positive cash
flows of CHF 39.8 billion. This reflected the net issuance of
money market paper of CHF 21.4 billion and the issuance of
CHF 51.2 billion in long-term debt – the latter significantly out-
pacing long-term debt repayments, which totaled CHF 24.7
billion. That inflow was partly offset by outflows attributable
to net movements in treasury shares and own equity deriva-
tive activity (CHF 5.0 billion), and dividend payments (CHF
2.8 billion). In contrast, in 2003, we had experienced a neg-
ative cash flow of CHF 13.3 billion from our financing activi-
ties. The difference between the two years was mainly due to
the fact that long-term debt issuance more than doubled from
2003
In the full year to 31 December 2003, cash and cash equiva-
lents 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 ac-
tivity 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 bil-
lion. When compared to 2002, cash outflows from financing
activities fell by approximately CHF 19 billion. The main rea-
sons for the reduced outflows were an approximate CHF
12 billion decline in repayments of money market paper and
higher net inflows of roughly CHF 8 billion in both issuance
and repayment of long-term debt. Increased buybacks of
treasury shares in 2003, coupled with a higher average price
for our shares, resulted in a higher cash outflow of approxi-
mately CHF 1.2 billion in 2003.
Operating cash inflows (before changes in operating as-
sets and liabilities and income taxes paid) amounted to CHF
9.0 billion, an increase of CHF 1.4 billion from 2002. While
net profit in 2003 was CHF 2.7 billion higher than a year ear-
lier, 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
billion 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 in
2003, also contributed to the difference. The other two sig-
nificant items were deferred tax expense and gains or losses
from investing activities included in net profit. In 2003, we
had deferred tax expenses of CHF 489 million, attributable
to a range of sources generating taxable temporary differ-
ences. In 2002, we had a deferred tax benefit of CHF 511 mil-
lion, to which the release of deferred tax liabilities related to
the PaineWebber brand name was the largest single contrib-
utor.
Cash of CHF 88.1 billion was used to fund the net increase
in operating assets, while a net increase in operating liabili-
ties generated cash inflows of CHF 83.6 billion. The com-
parative amounts in 2002 were much smaller, primarily re-
71
Balance Sheet and Cash Flows
Cash flows
flecting 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 bil-
lion. Divestments of financial investments contributed CHF
2.3 billion while the sale of the CSC clearing business and
a few smaller subsidiaries and associates generated CHF
834 million. Purchases of property and equipment 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 2003.
72
Accounting Standards and Policies
Accounting Standards and Policies
Accounting principles
Accounting principles
The UBS financial statements have been prepared in accor-
dance with International Financial Reporting Standards (IFRS).
As a US listed company, we also provide a description in note
41 to the financial statements of the significant differences
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 infor-
mation presented in this document is presented on a con-
solidated basis under IFRS.
Pages 191 to 203 contain the financial statements 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 prepared in order to meet Swiss regulatory require-
ments and in compliance with Swiss Banking Law. Except
in those pages, or where otherwise explicitly stated, all ref-
erences to “UBS” refer to the UBS Group and not to the
Parent Bank.
All references to 2004, 2003 and 2002 refer to the UBS
Group and the Parent Bank’s fiscal years ended 31 December
2004, 2003 and 2002. The financial statements for the UBS
Group and the Parent Bank have been audited by Ernst &
Young Ltd.
An explanation of the critical accounting policies applied
in the preparation of our financial statements is provided
below. The basis of our accounting is given in note 1 to the
financial statements.
Standards for management accounting
Our management reporting systems and policies deter-
mine the revenues and expenses directly attributable to
each business unit. Internal charges and transfer pricing
adjustments are reflected in the performance of each busi-
ness 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-
business unit charges are reported in the line “Services to /
from other business units” for both business units concerned.
Corporate Functions expenses are allocated to the operating
business units to the extent that it is appropriate.
Net interest income is allocated to each business unit based
on their balance sheet positions. Assets and liabilities of the
financial businesses are funded through and invested with the
central treasury departments, with the net margin reflected
in the results of each business unit. To complete the alloca-
tion, the financial businesses are credited with a risk-free
return on the regulatory equity they use.
Commissions are credited to the business unit with the cor-
responding customer relationship, with revenue-sharing
agreements for the allocation of customer revenues where
several business units are involved in value creation.
For internal management reporting purposes and in the
results discussion, we measure credit loss using an expected
loss concept. The table below shows the adjusted expected
credit loss charged to the Business Groups. Expected credit loss
reflects the average annual costs that are expected to arise
over time from positions in the current portfolio that become
impaired. The adjusted expected credit loss reported for each
Business Group is the expected credit loss on its portfolio plus
the difference between credit loss expense and expected
credit loss, amortized over a three-year period (shown as ‘de-
ferral’ in the table). The difference between these adjusted ex-
pected credit loss figures and credit loss expenses recorded at
Group level for financial reporting purposes is booked in
Corporate Functions.
Regulatory equity is allocated to business units based on
their average regulatory capital requirement (per Swiss Feder-
al Banking Commission (SFBC) standards) during the period.
Only utilized equity is taken into account, although we add an
Credit loss expense charged to the business groups
CHF million
For the year ended 31.12.04
Expected credit loss
Deferral
Adjusted expected credit loss
Credit loss (expense) / recovery
Wealth Management &
Business Banking
Investment
Bank
Wealth
Management
USA
Wealth
Management
Business
Banking CH
(45 )
37
(8 )
(1 )
(436 )
411
(25 )
92
(92 )
85
(7 )
240
(8 )
3
(5 )
3
Corporate
Center
Private Banks
& GAM
(2 )
(4 )
(6 )
(58 )
Balancing item charged as credit loss (expense) / recovery in Corporate Functions
74
Total
(583)
532
(51)
276
327
additional buffer of 10% above the individually determined
business unit regulatory equity requirement. The remaining
equity, which mainly covers real estate, and any other unallo-
cated equity, remains reported in the Corporate Functions unit.
Headcount, which is expressed in terms of full-time equiv-
alents (FTE), is measured as a percentage 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. Head-
count includes all staff and trainees other than short-term
temporary workers (hired for less than 90 calendar days) and
contractors.
75
Accounting Standards and Policies
Critical accounting policies
Critical accounting policies
Basis of preparation and selection of policies
We prepare our financial statements in accordance with IFRS,
and provide a reconciliation to US GAAP. The application of
certain of these accounting principles requires a significant
amount of judgment based upon estimates and assumptions
that involve significant uncertainty at the time they are made.
Changes in assumptions may have a significant impact on the
financial statements in the periods where assumptions are
changed. Accounting treatments where significant assump-
tions and estimates are used are discussed in this section, as
a guide to understanding how their application affects our
reported results. A broader and more detailed description of
the accounting policies we employ is shown in note 1 to the
financial statements.
The application of assumptions and estimates means that
any selection of different assumptions would cause our report-
ed results to differ. We believe that the assumptions we have
made are appropriate, and that our financial statements there-
fore present our financial position and results fairly, in all
material 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 assumptions would be more appropriate.
Many of the judgements we make when applying ac-
counting principles depend on an assumption, which we
believe to be correct, that UBS maintains sufficient liquidity to
hold positions or investments until a particular trading strat-
egy matures – i. e. that we do not need to realize positions
at unfavorable prices in order to fund immediate cash needs.
Liquidity is discussed in more detail on pages 65 to 66 of the
Handbook 2004 /2005.
Fair value of financial instruments
Assets and liabilities in our trading portfolio, financial assets
and liabilities designated as held at fair value, and derivative
instruments are recorded at fair value on the balance sheet,
with changes in fair value recorded in net trading income in
the income statement. Key judgments affecting this account-
ing policy relate to how we determine fair value for such as-
sets and liabilities.
Where no active market exists, or where quoted prices are
not otherwise available, we determine fair value using a vari-
ety of valuation techniques. These include present value meth-
ods, models based on observable input parameters, and mod-
els where some of the input parameters are unobservable.
Valuation models are used primarily to value derivatives
transacted in the over-the-counter market, including credit
derivatives and unlisted securities with embedded derivatives.
All valuation models are validated before they are used as a
basis for financial reporting, and periodically reviewed there-
after, by qualified personnel independent of the area that
created the model. Wherever possible, we compare valuations
derived from models with quoted prices of similar financial
instruments, and with actual values when realized, in order
to further validate and calibrate our models.
A variety of factors are incorporated into our models,
including actual or estimated market prices and rates, such
as time value and volatility, and market depth and liquidity.
Where available, we use market observable prices and rates
derived from market verifiable data. Where such factors are
not market observable, changes in assumptions could affect
the reported fair value of financial instruments. We apply our
models consistently from one period to the next, ensuring
comparability and continuity of valuations over time, but
estimating fair value inherently involves a significant degree
of judgment. Management therefore establishes valuation
adjustments to cover the risks associated with the estima-
tion of unobservable input parameters and the assumptions
within the models themselves. Valuation adjustments are al-
so made to reflect such elements as aged positions, deteri-
orating creditworthiness (including country-specific risks),
concentrations in specific types of instruments and market
risk factors (interest rates, currencies etc), and market depth
and liquidity. Although a significant degree of judgment is,
in some cases, required in establishing fair values, manage-
ment believes the fair values recorded in the balance sheet
and the changes in fair values recorded in the income state-
ment are prudent and reflective of the underlying econom-
ics, based on the controls and procedural safeguards we em-
ploy. Nevertheless, we have estimated the effect that a
change in assumptions to reasonably possible alternatives
could have on fair values where model inputs are not mar-
ket observable. To estimate that effect on the financial state-
ments, we recalculated the model valuation adjustments at
higher and lower confidence levels than originally applied.
For all financial instruments carried at fair value which rely
on assumptions for their valuation, we estimate that fair
value could lie in a range from CHF 579 million lower to
CHF 927 million higher than the fair values recognized in the
financial statements.
Fair value option
We adopted revised IAS 32 and revised IAS 39 early (at 1 Jan-
uary 2004). We restated the two comparative prior years.
Revised IAS 39 permits an entity to designate any financial
76
asset or financial liability as held at fair value and to recognize
fair value changes in profit and loss. We apply the fair value
option primarily to compound debt instruments, which per-
mits us to fair value the entire instrument instead of separat-
ing the embedded derivative from the host contract and car-
rying the host contract at amortized cost. In addition, financial
assets and financial liabilities designated at fair value are pre-
sented in the balance sheet in separate lines. At 31 Decem-
ber 2004, we carried compound debt instruments designat-
ed as held at fair value in the amount of CHF 65,756 million
on the balance sheet. In 2004, the change in fair value of these
instruments was an expense of CHF 1,203 million, of which
CHF 402 million was attributable to changes in LIBOR and
CHF 801 million was due to changes in fair value of embed-
ded derivatives.
Recognition of deferred Day 1 Profit and Loss
We have entered into transactions, some of which will ma-
ture after more than ten years, where we determine fair val-
ue using valuation models for which not all inputs are market
observable prices or rates. We initially recognize a financial in-
strument at the transaction price, which is the best indicator
of fair value, although the value obtained from the relevant
valuation model may differ. Such a difference between the
transaction price and the model value is commonly referred
to as “Day 1 profit and loss”. In accordance with applicable
accounting literature, we do not recognize that initial differ-
ence, usually a gain, immediately in profit and loss. While ap-
plicable accounting literature prohibits immediate recognition
of Day 1 profit and loss, it does not address when it is appro-
priate to recognize Day 1 profit in the income statement. It
also does not address subsequent measurement of these
instruments.
Our decisions regarding recognizing deferred Day 1 prof-
it and loss are based on the principle of prudence and are
made after careful consideration of facts and circumstances
to ensure we do not prematurely release a portion of the de-
ferred profit to income. For each transaction, we determine
individually the appropriate method of recognizing the Day 1
profit and loss amount in the income statement. Deferred Day
1 profit and loss is amortized over the life of the transaction,
deferred until fair value can be determined using market
observable inputs, or realized through settlement. In all in-
stances, any unrecognized Day 1 profit and loss is immediate-
ly released to income if fair value of the financial instrument
in question can be determined either by using market observ-
able model inputs or by reference to a quoted price for the
same product in an active market.
After entering into a transaction, we measure the finan-
cial instrument at fair value, adjusted for the deferred Day 1
profit and loss. Subsequent changes in fair value are recog-
nized immediately in the income statement without reversal
of deferred Day 1 profits and losses.
Securitizations and Special Purpose Entities
UBS sponsors the formation of Special Purpose Entities (SPEs)
primarily to allow clients to hold investments, for asset secu-
ritization transactions, and for buying or selling credit protec-
tion. In accordance with IFRS we do not consolidate SPEs that
we do not control. As it can sometimes be difficult to deter-
mine whether we exercise control over an SPE, we have to
make judgments about risks and rewards as well as our abil-
ity to make operational decisions for the SPE. In many in-
stances, elements are present that, considered in isolation,
indicate control or lack of control over an SPE, but when con-
sidered together make it difficult to reach a clear conclusion.
When assessing whether we have to consolidate an SPE we
evaluate a range of factors, including whether (a) we will
obtain the majority of the benefits of the activities of an SPE,
(b) we retain the majority of the residual ownership risks
related to the assets in order to obtain the benefits from its
activities, (c) we have decision-making powers to obtain the
majority of the benefits, or (d) the activities of the SPE are
being conducted on our behalf according to our specific busi-
ness needs so that we obtain the benefits from the SPE’s
operations. We consolidate an SPE if our assessment of the
relevant factors indicates that we obtain the majority of the
benefits of its activities.
SPEs used to allow clients to hold investments are struc-
tures that allow one or more clients to invest in an asset or set
of assets which are generally purchased by the SPE in the open
market and not transferred from UBS. The risks and rewards
of the assets held by the SPE reside with the clients. Typically,
UBS will receive service and commission fees for creation of
the SPE, or because it acts as investment manager, custodian
or in some other function.
These SPEs range from mutual funds to trusts investing in
real estate. As an example, UBS Alternative Portfolio AG pro-
vides a vehicle for investors to invest in a diversified range of
alternative investments through a single share. The majority
of our SPEs fall into this category. SPEs created for client
investment purposes are not consolidated.
SPEs used for securitization. SPEs for securitization are
created when UBS has assets (for example a portfolio of
loans) which it sells to an SPE, and the SPE in turn sells inter-
ests in the assets as securities to investors. Consolidation of
these SPEs depends on whether UBS retains the majority of
the benefits of the assets in the SPE.
We do not consolidate SPEs used for securitization if UBS
has no control over the assets and no longer retains any sig-
nificant exposure (for gain or loss) to the income or investment
returns on the assets sold to the SPE or the proceeds of their
liquidation. This type of SPE is a bankruptcy-remote entity –
if UBS were to go bankrupt the holders of the securities
would clearly be owners of the asset, while if the SPE were
to go bankrupt the securities holders would have no recourse
to UBS.
77
Accounting Standards and Policies
Critical accounting policies
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, which may or may not be held by
UBS, to investors. They exist primarily 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 capi-
tal and participate in the risks and rewards of the credit events
that it insures. SPEs used for credit protection are generally
consolidated.
we believe that the estimates and assumptions made in de-
termining the fair value of each investment are reasonable
and supportable.
In addition, the determination of when a decline in fair
value below cost is not recoverable within a reasonable time
period is judgmental 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 immediate loss recognition.
Allowances and provisions for credit losses
Financial investments – available-for-sale
UBS has classified some of its financial assets, including invest-
ments not held for trading purposes, as available-for-sale,
where they are not held for the purpose of generating short-
term trading gains, but rather for mid-to-long-term capital ap-
preciation. Changes in fair value of these financial assets are
reflected in shareholders’ equity rather than income. The
amount of unrealized gains or losses on the balance sheet date
is disclosed in the statement of changes in equity in the finan-
cial statements.
Companies held in our private equity portfolio are not cur-
rently consolidated in the financial statements. This treatment
has been determined after considering such matters as liquid-
ity, exit strategies and degree and timing of our influence and
control over these investments. With the adoption of revised
IAS 27 as of 1 January 2005, majority-owned entities will be
consolidated retrospectively as of 1 January 2003. The effects
of this consolidation on our financial statements are disclosed
in note 1(ab).
We currently classify our private equity investments as
financial investments available-for-sale, and carry them on the
balance sheet at fair value, with changes in fair value being
recorded directly in equity. However, unrealized losses that are
not expected to be recoverable within a reasonable time pe-
riod 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 valuation of our investments
is derived by application of our valuation policy in a detailed
quarterly investment-by-investment review involving the busi-
ness and control functions. Our standard valuation method is
to apply multiples of earnings that are observed for compa-
rable companies. These multiples depend on a number of
factors and may fluctuate over time. The geographic and
sector diversity of the investments in the portfolio and their
varying stages in the investment cycle mean that the valua-
tions of these positions may not move in line with the chang-
ing economic environment. Although judgement is involved,
Assets accounted for at amortized cost are evaluated for im-
pairment and required allowances and provisions are estimat-
ed in accordance with IAS 39. Impairment exists if the book
value of a claim or a portfolio of claims exceeds the present
value of the cash flows actually expected in future periods.
These cash flows include scheduled interest payments, prin-
cipal repayments, or other payments due (for example on
guarantees), including liquidation of collateral where available.
The total allowance and provision for credit losses consists
of two components: specific counterparty allowances and
provisions, and collectively assessed allowances. The specific
counterparty component applies to claims evaluated individ-
ually for impairment and is based upon management’s best
estimate of the present value of the cash flows which are ex-
pected to be received. In estimating these cash flows, manage-
ment makes judgments about a counterparty’s financial situ-
ation and the net realizable value of any underlying collateral
or guarantees in our favor. Each impaired asset 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. Collectively assessed credit risk
allowances cover credit losses inherent in portfolios of claims
with similar economic characteristics where there is objective
evidence to suggest that they contain impaired claims but the
individual impaired items cannot yet be identified. A compo-
nent of collectively assessed allowances is for country risks. In
assessing the need for collective loan loss allowances, manage-
ment considers factors such as credit quality, portfolio size, con-
centrations, and economic factors. In order to estimate the
required allowance, we make assumptions both to define the
way we model inherent losses and to determine the required
input parameters, based on historical experience and current
economic conditions.
The accuracy of the allowances and provisions we make
depends on how well we estimate future cash flows for
specific counterparty allowances and provisions and the
model assumptions and parameters used in determining col-
lective allowances. While this necessarily involves judgment,
we believe that our allowances and provisions are reasonable
and supportable.
78
Further details on this subject are given in note 1(q) to the
financial statements and in the risk analysis section of the
Handbook 2004 / 2005, on pages 47 to 57.
Equity compensation
The IFRS requirements applicable to our financial statements
have not previously specifically addressed the recognition and
measurement of equity-based compensation plans, including
employee option plans. IFRS 2, Share-based Payment, ad-
dresses the accounting for share-based employee compensa-
tion and was adopted by UBS on 1 January 2005 on a fully
retrospective basis. Until the end of 2004, we recognized com-
pensation expense for awards issued to employees as part of
annual bonuses during the year of corresponding perform-
ance, aligning with the revenue produced. Subsequent
changes in intrinsic value were not recognized. For share
awards, we recognized compensation expense in the amount
of the fair value of the share at the grant date. For option
awards granted, the exercise price is generally set either equal
to or slightly higher than the fair value of the underlying
share at the grant date. Accordingly, these options have
no intrinsic value when granted, and therefore, we did not
recognize compensation expense for these awards. Had we
recognized the fair value of stock option grants on grant date
as compensation expense, net income would have been low-
er by CHF 508 million in 2004, CHF 439 million in 2003, and
CHF 690 million in 2002.
IFRS 2 requires recognition of all equity-based awards in the
financial statements based on the fair value measured at the
grant date. Compensation cost will be recognized over the
service period, which is consistent with the vesting period,
starting at grant date of an award. As we are adopting this
standard on a fully retrospective basis, we will reverse compen-
sation expense recognized for share awards in 2003 and 2004
and replace it with compensation expense for the fair value of
share and share option awards determined in accordance with
IFRS 2. The effect of applying IFRS 2 is disclosed in note 1 (ab)
to the financial statements, and further information on UBS
equity compensation plans is disclosed in note 32.
79
80
Financial Statements
Financial Statements
Table of Contents
Financial Statements
Table of Contents
Report of the Group Auditors
Financial Statements
Income Statement
Balance Sheet
Statement of Changes in Equity
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 (available-for-sale)
Investments in Associates
Property and Equipment
Goodwill and Other Intangible Assets
Other Assets
11
12
13
14
15
16
Balance Sheet: Liabilities
17
18
Due to Banks and Customers
Financial liabilities designated
at fair value and debt issued
Other Liabilities
Provisions
19
20
82
83
84
84
85
86
88
90
90
101
108
109
109
110
111
111
111
112
113
113
114
114
115
116
117
118
120
120
121
122
123
123
123
125
125
21
22
23
Income Taxes
Minority Interests
Derivative Instruments
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
e)
Financial Instruments Risk Position in
Motor-Columbus
30
31
32
33
34
35
36
37
38
39
40
41
42
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
Business Combinations
Currency Translation Rates
Swiss Banking Law Requirements
Reconciliation to US GAAP
Additional Disclosures Required under
US GAAP and SEC Rules
125
127
127
132
132
132
134
135
135
135
135
136
136
136
138
138
138
139
141
142
144
145
150
155
155
156
157
157
158
159
161
161
162
166
167
170
171
172
183
Financial Statements
Report of the Group Auditors
83
Financial Statements
Financial Statements
Income Statement
CHF million, except per share data
Note
31.12.04
31.12.03
31.12.02
31.12.03
For the year ended
% change from
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
Income from industrial holdings
Total operating income
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Amortization of goodwill and other intangible assets
Goods and materials purchased
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)
3
3
4
3
5
6
7
14
15
21
22
8
8
39,398
(27,538)
11,860
276
12,136
19,416
4,972
897
3,648
41,069
18,515
6,703
1,352
964
2,861
30,395
10,674
2,135
8,539
(450)
8,089
7.68
7.47
40,159
(27,860 )
12,299
(72 )
12,227
17,345
3,756
462
39,963
(29,417 )
10,546
(115 )
10,431
18,221
5,451
4
33,790
34,107
17,231
6,086
1,353
943
18,524
7,072
1,514
2,460
25,613
29,570
8,177
1,593
6,584
(345 )
6,239
5.59
5.48
4,537
676
3,861
(331 )
3,530
2.92
2.87
(2 )
(1 )
(4 )
(1 )
12
32
94
22
7
10
0
2
19
31
34
30
30
30
37
36
84
Balance Sheet
CHF million
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Trading portfolio assets pledged as collateral
Positive replacement values
Financial assets designated at fair value
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
Financial liabilities designated at fair value
Due to customers
Accrued expenses and deferred income
Debt issued
Other liabilities
Total liabilities
Minority interests
Shareholders’ equity
Share capital
Share premium account
Net gains / (losses) not recognized in the income statement, net of tax
Revaluation reserve from step acquisitions
Retained earnings
Equity classified as obligation to purchase own shares
Treasury shares
Total shareholders’ equity
Note
31.12.04
31.12.03
31.12.03
% change from
9
10
10
11
11
23
9
12
13
14
15
16, 21
17
10
10
11
23
18
17
18
19, 20, 21
6,036
35,264
220,242
357,164
370,259
159,115
284,577
653
232,387
5,049
5,876
2,427
8,736
12,149
34,850
3,584
31,740
213,932
320,499
341,013
120,759
248,206
0
212,679
5,139
6,218
1,616
7,683
11,529
25,459
1,734,784
1,550,056
118,901
61,545
422,587
171,033
303,712
65,756
376,083
14,685
117,828
42,342
127,012
53,278
415,863
143,957
254,768
35,286
346,633
13,673
88,843
31,360
1,694,472
1,510,673
22
5,334
4,073
901
7,348
(1,644)
90
37,455
(96)
(9,076)
34,978
946
6,935
(983 )
0
36,641
(49 )
(8,180 )
35,310
68
11
3
11
9
32
15
9
(2 )
(6 )
50
14
5
37
12
(6 )
16
2
19
19
86
8
7
33
35
12
31
(5 )
6
(67 )
2
(96 )
(11 )
(1 )
12
85
Total liabilities, minority interests and shareholders’ equity
1,734,784
1,550,056
Financial Statements
Statement of Changes in Equity
CHF million
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 (2001 program)
Cancellation of second trading line treasury shares (2002 program)
Cancellation of second trading line treasury shares (2003 program)
Balance at the end of the year
Share premium
Balance at the beginning of the year, restated
Premium on shares issued and warrants exercised
Net premium / (discount) on treasury share and own equity derivative activity
Employee stock option plan
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
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
Subtotal – balance at the end of the year
Net unrealized gains / (losses) on available-for-sale investments, net of taxes
Balance at the beginning of the year
Net unrealized gains / (losses) on available-for-sale investments
Impairment charges reclassified to the income statement
Realized gains reclassified to the income statement
Realized losses reclassified to the income statement
Subtotal – balance at the end of the year
Change in fair value of derivative instruments designated as cash flow hedges, net of taxes
Balance at the beginning of the year
Net unrealized gains / (losses) on the revaluation of cash flow hedges
Net realized (gains) / losses reclassified to the income statement
Subtotal – balance at the end of the year
Balance at the end of the year
Revaluation reserve from step acquisitions, net of taxes
New acquisitions
Balance at the end of the year
Retained earnings
Balance at the beginning of the year, restated
Net profit for the year
Dividends paid 1
Cancellation of second trading line treasury shares (2003 program) 2
Balance at the end of the year
Equity classified as obligation to purchase own shares
Balance at the beginning of the year, restated
Net movements
Balance at the end of the year
For the year ended
31.12.04
31.12.03
31.12.02
946
2
(47)
901
6,935
379
26
8
7,348
(1,644)
(818)
(2,462)
805
474
192
(353)
22
1,140
(144)
(223)
45
(322)
(1,644)
90
90
36,641
8,089
(2,806)
(4,469)
37,455
(49)
(47)
(96)
1,005
2
(61 )
946
12,641
92
(330 )
(5,468 )
6,935
(849 )
(795 )
(1,644 )
946
(108 )
285
(340 )
22
805
(256 )
116
(4 )
(144 )
(983 )
32,700
6,239
(2,298 )
3,589
6
(2,509 )
(81 )
1,005
14,408
157
285
(2,209 )
12,641
(769 )
(80 )
(849 )
1,035
(144 )
635
(600 )
20
946
(459 )
(11 )
214
(256 )
(159 )
29,103
3,597
36,641
32,700
(104 )
55
(49 )
(104 )
(104 )
1 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. Dividends of CHF 2.00 per share and CHF 2.60 per
2 The cancellation of second trading line treasury shares is now made against retained earnings. In prior years it was made against
share were paid on 23 April 2003 and 20 April 2004, respectively.
the share premium account.
86
Statement of Changes in Equity (continued)
CHF million
Treasury shares, at cost
Balance at the beginning of the year
Acquisitions
Disposals
Cancellation of second trading line treasury shares (2001 program)
Cancellation of second trading line treasury shares (2002 program)
Cancellation of second trading line treasury shares (2003 program)
Balance at the end of the year
Total shareholders’ equity
Shares issued
Number of shares
Balance at the beginning of the year
Issue of share capital
For the year ended
31.12.04
31.12.03
31.12.02
(8,180)
(8,813)
3,401
4,516
(9,076)
34,978
(7,131 )
(8,424 )
1,846
5,529
(8,180 )
35,310
(3,377 )
(8,313 )
2,269
2,290
(7,131 )
38,952
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
1,183,046,764
1,256,297,678
1,281,717,499
3,293,413
2,719,166
3,398,869
(6 )
21
Cancellation of second trading line treasury shares (2001 program)
Cancellation of second trading line treasury shares (2002 program)
(28,818,690 )
(75,970,080 )
Cancellation of second trading line treasury shares (2003 program)
(59,482,000)
Balance at the end of the year
1,126,858,177
1,183,046,764
1,256,297,678
(5 )
Treasury shares
Number of shares
Balance at the beginning of the year
Acquisitions
Disposals
Cancellation of second trading line treasury shares (2001 program)
Cancellation of second trading line treasury shares (2002 program)
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
111,360,692
97,181,094
41,254,951
96,139,004
116,080,976
110,710,741
(44,492,725)
(25,931,298 )
(25,965,908 )
(28,818,690 )
(75,970,080 )
15
(17 )
(72 )
100
(7 )
Cancellation of second trading line treasury shares (2003 program)
(59,482,000)
Balance at the end of the year
103,524,971
111,360,692
97,181,094
During the year a total of 59,482,000 shares acquired under
the second trading line buyback program 2003 were cancelled.
On 31 December 2004, a maximum of 3,533,012 shares
can be issued against the exercise of options from former
PaineWebber employee option plans. These shares are shown
as conditional share capital in the UBS AG (Parent Bank) dis-
closure. Out of the total number of 103,524,971 treasury
shares, 39,935,094 shares (CHF 3,543 million) have been re-
purchased for cancellation. The Board of Directors will propose
to the Annual General Meeting on 21 April 2005 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.
87
Financial Statements
Statement of Cash Flows
CHF million
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 loss / (gain) from financing 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
For the year ended
31.12.04
31.12.03
31.12.02
8,089
6,239
3,530
1,352
964
(276)
(65)
3
(475)
1,203
(11,679)
(42,975)
(19,834)
10,035
(6,927)
14,991
19,032
(1,336)
(27,898)
(2,511)
800
(1,149)
704
686
(1,470)
1,353
943
72
(123 )
489
(63 )
115
42,921
(101,381 )
(52,197 )
38,638
(16,100 )
65,413
18,188
(1,104 )
3,403
(428 )
834
(1,376 )
123
2,317
1,470
1,514
2,460
115
(7 )
(511 )
986
(446 )
(22,382 )
(944 )
22,427
(11,446 )
2,875
4,791
(4,754 )
(572 )
(2,364 )
(60 )
984
(1,763 )
67
2,153
1,381
88
Statement of Cash Flows (continued)
CHF million
Cash flow from / (used in) financing activities
Net money market paper issued / (repaid)
Net movements in treasury shares and own equity derivative activity
Capital issuance
Capital repayment by par value reduction
Dividends paid
Issuance of long-term debt, including financial liabilities designated at fair value
Repayment of long-term debt, including financial liabilities designated at fair value
Increase in minority interests 1
Dividend payments to / purchase from minority interests
Net cash flow from / (used in) financing activities
Effects of exchange rate differences
Net increase / (decrease) in cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents comprise:
Cash and balances with central banks
Money market paper 2
Due from banks maturing in less than three months
Total
Significant non-cash investing and financing activities
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
Motor-Columbus, Baden, from valuation at equity to full consolidation
Financial investments
Investments in associates
Property and equipment
Goodwill and other intangible assets
Debt issued
Minority interests
Investment funds transferred to other liabilities according to IAS 32
Minority interests
For the year ended
31.12.04
31.12.03
31.12.02
(26,206 )
(5,605 )
6
(2,509 )
17,132
(14,911 )
(377 )
(32,470 )
(462 )
(33,915 )
116,259
82,344
4,271
46,183
31,890
82,344
53
18
63
3
718
15
2,322
(14,737 )
(6,810 )
2
(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
137
21,379
(4,999)
2
(2,806)
51,211
(24,717)
102
(332)
39,840
(1,052)
9,420
73,356
82,776
6,036
45,409
31,331
82,776
644
261
2,083
1,194
727
1,742
336
1 Includes issuance of trust preferred securities of CHF 372 million for the year ended 31 December 2003.
Financial investments. CHF 13,242 million, CHF 6,430 million and CHF 10,475 million were pledged at 31 December 2004, 31 December 2003 and 31 December 2002, respectively.
2 Money market paper is included in the balance sheet under Trading portfolio assets and
Cash paid for interest during 2004 was CHF 18,614 million.
89
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,
underwriting, financing, market-making, asset management,
brokerage, and retail banking on a global level. The Group was
formed on 29 June 1998 when Swiss Bank Corporation and
Union Bank of Switzerland merged. The merger was account-
ed for using the uniting of interests method of accounting.
The consolidated financial statements of UBS (the “Finan-
cial Statements”) are prepared in accordance with Internation-
al Financial Reporting Standards ("IFRS"), issued by the Inter-
national Accounting Standards Board (IASB), and stated in
Swiss francs (CHF), the currency of the country in which UBS
AG is incorporated. On 3 February 2005, the Board of Direc-
tors approved them for issue.
b) Use of estimates in the preparation of Financial Statements
In preparing the Financial Statements, management is re-
quired to make estimates and assumptions that affect report-
ed income, expenses, assets, liabilities and disclosure of con-
tingent assets and liabilities. Use of available information and
application of judgement are inherent in the formation of
estimates. Actual results in the future could differ from such
estimates and the differences may be material to the Finan-
cial Statements.
c) Consolidation
The Financial Statements comprise those of the parent compa-
ny (UBS AG), its subsidiaries and certain special purpose enti-
ties, presented as a single economic entity. The effects of intra-
group transactions are eliminated in preparing the Financial
Statements. Subsidiaries and special purpose entities which are
directly or indirectly controlled by the Group are consolidated,
with the exception of certain employee benefit trusts (see also
section ab). Subsidiaries acquired are consolidated from the date
control is transferred to the Group. Subsidiaries to be divested
are consolidated up to the date of disposal. Temporarily con-
trolled entities that are acquired and held with a view to their
subsequent disposal, are recorded as Financial investments.
Assets held in an agency or fiduciary capacity are not assets
of the Group and are not reported in the Financial Statements.
Equity and net income attributable to minority interests are
shown separately in the balance sheet and income state-
ment, respectively.
Investments in associates in which UBS has a significant
influence are accounted for under the equity method of ac-
counting. Significant influence is normally evidenced when
90
UBS owns 20% or more of a company’s voting rights. Invest-
ments in associates are initially recorded at cost and the car-
rying amount is increased or decreased to recognize the
Group’s share of the investee’s profits or losses after the date
of acquisition. Investments in associates for which significant
influence is intended to be temporary because the investments
are acquired and held exclusively with a view to their subse-
quent disposal, are recorded as Financial investments.
The Group sponsors the formation of entities, which may
or may not be directly or indirectly owned subsidiaries, for the
purpose of asset securitization transactions and structured
debt issuance, and to accomplish certain narrow and well
defined objectives. These companies may acquire assets
directly or indirectly from UBS or its affiliates. Some of these
companies are bankruptcy-remote entities whose assets are
not available to satisfy the claims of creditors of the Group or
any of its subsidiaries. Such companies are consolidated in the
Group’s Financial Statements when the substance of the
relationship between the Group and the company indicates
that the company is controlled by the Group. Certain trans-
actions of consolidated entities meet the criteria for derecog-
nition of financial assets, see section d) below. These trans-
actions do not affect the consolidation status of an entity.
d) Derecognition
UBS enters into transactions where it transfers assets recog-
nized on its balance sheet, but retains either all risks and
rewards of the transferred assets or a portion of them. If all or
substantially all risks and rewards are retained, the transferred
assets are not derecognized from the balance sheet. Transfers
of assets with retention of all or substantially all risks and
rewards include, for example, securities lending and repurchase
transactions described under paragraphs f) and g) below. An-
other example of a transaction where all risks and rewards are
retained is where assets are sold to a third party with a con-
current total rate of return swap on the transferred assets.
These types of transactions are accounted for as secured
financing transactions similar to repurchase agreements.
In transactions where UBS neither retains nor transfers sub-
stantially all the risks and rewards of ownership of a financial
asset, it derecognizes the asset if control over the asset is lost.
The rights and obligations retained in the transfer are recog-
nized separately as assets and liabilities as appropriate. In
transfers where control over the asset is retained, the Group
continues to recognize the asset to the extent of its continu-
ing involvement, determined by the extent to which it is
exposed to changes in the value of the transferred asset.
In certain transactions, UBS retains rights to service a trans-
ferred financial asset for a fee. The transferred asset is dere-
cognized in its entirety, if it meets the derecognition criteria.
An asset or liability is recognized for the servicing rights, de-
pending on whether the servicing fee is more than adequate
to cover servicing expenses (asset) or is less than adequate for
performing the servicing (liability).
e) Securitizations
UBS securitizes various consumer and commercial financial
assets, which generally results in the sale of these assets to
special-purpose entities, which, in turn issue securities to
investors. Interests in the securitized financial assets may be
retained in the form of senior or subordinated tranches,
interest-only strips or other residual interests (“retained inter-
ests”). Retained interests are primarily recorded in Trading
portfolio assets and carried at fair value. 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.
f) Securities borrowing and lending
Securities borrowing and securities lending transactions are
generally entered into on a collateralized basis, with securi-
ties predominantly advanced or received as collateral. Trans-
fer of the securities themselves, whether in a borrowing / lend-
ing transaction or as collateral, is not reflected on the balance
sheet unless the risks and rewards of ownership are also
transferred. If cash collateral is advanced or received, securi-
ties borrowing and lending activities are recorded at the
amount of cash collateral advanced (Cash collateral on secu-
rities borrowed) or received (Cash collateral on securities lent).
UBS monitors the market value of the securities borrowed
and lent on a daily basis and provides or requests additional
collateral in accordance with the underlying agreements.
Fees and interest received or paid are recognized on an
accrual basis and recorded as interest income or interest expense.
g) Repurchase and reverse repurchase transactions
Securities purchased under agreements to resell (reverse re-
purchase agreements) and securities sold under agreements
to repurchase (repurchase agreements) are generally treated
as collateralized 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, includ-
ing accrued interest, is recognized on the balance sheet as
Repurchase agreements.
Securities received under reverse repurchase agreements
and securities delivered under repurchase agreements are not
recognized on or derecognized from the balance sheet, un-
less control of the contractual rights that comprise these se-
curities is obtained or 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 agreements and
interest incurred on repurchase agreements is recognized
as interest income or interest expense over the life of each
agreement.
The Group offsets reverse repurchase agreements and
repurchase agreements with the same counterparty for trans-
actions covered by legally enforceable master netting agree-
ments when net or simultaneous settlement is intended.
h) Segment reporting
UBS’s financial businesses are organized on a worldwide
basis into four Business Groups and the Corporate Center.
Wealth Management & Business Banking is segregated into two
segments, Wealth Management and Business Banking Switzer-
land. The Corporate Center also consists of two segments, Pri-
vate Banks & GAM and Corporate Functions. The Industrial
Holdings segment holds all industrial operations controlled by
the Group. In total, UBS now reports eight business segments.
Segment income, segment expenses and segment per-
formance include transfers between business segments and
between geographical segments. Such transfers are conduct-
ed at arm’s length.
i) Foreign currency translation
Foreign currency transactions are recorded at the rate of
exchange on the date of the transaction. At the balance sheet
date, monetary assets and liabilities denominated in foreign
currencies are reported using the closing exchange rate. Ex-
change differences arising on the settlement of transactions
at rates different from those at the date of the transaction,
and unrealized foreign exchange differences on unsettled
foreign 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 finan-
cial asset classified as held for trading, unrealized exchange dif-
ferences are recognized in the income statement. For non-
monetary Financial investments which are classified as
available-for-sale, unrealized exchange differences are record-
ed directly in Shareholder’s equity until the asset is sold.
When preparing consolidated financial statements, assets
and liabilities of foreign entities are translated at the exchange
rates at the balance sheet date, while income and expense
items are translated at weighted average rates for the period.
Differences resulting from the use of 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.
91
Financial Statements
Notes to the Financial Statements
j) Cash and cash equivalents
Cash and cash equivalents consist of Cash and balances with
central banks, balances included in Due from banks that
mature in less than three months, and Money market paper
included in Trading portfolio assets and Financial investments.
k) 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 cat-
egories: income earned from services that are provided over a
certain period of time, for which customers are generally billed
on an annual or semi-annual basis, and income earned from pro-
viding 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 complet-
ed. Fees or components 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
management and advisory fees, insurance-related fees, credit-
related fees and commission income. Fees predominantly
earned from providing transaction-type services include under-
writing fees, corporate finance fees, and brokerage fees.
l) Determination of fair value
The determination of fair values of financial assets and finan-
cial liabilities is based on quoted market prices or dealer price
quotations for financial instruments traded in active markets.
For all other financial instruments fair value is determined by
using valuation techniques. Valuation techniques include net
present value techniques, the discounted cash flow method,
comparison to similar instruments for which market observ-
able prices exist, and valuation models. UBS uses widely rec-
ognized valuation models for determining fair value of com-
mon and more simple financial instruments like options and
interest rate and currency swaps. For these financial instru-
ments, inputs into models are market observable.
For more complex instruments, UBS uses proprietary mod-
els, which usually are developed from recognized valuation
models. Some or all of the inputs into these models may not
be market observable, and are derived from market prices or
rates or estimated based on assumptions. When entering
into a transaction, the financial instrument is initially recog-
nized at the transaction price, which is the best indicator of
fair value, although the value obtained from the valuation
model may differ from the transaction price. This initial dif-
ference, usually an increase, in fair value indicated by valua-
tion techniques is recognized in income depending upon the
individual facts and circumstances of each transaction and not
later than when the market data becomes observable.
The value produced by a model or other valuation technique
is adjusted to allow for a number of factors as appropriate, be-
cause valuation techniques cannot appropriately reflect all fac-
tors market participants take into account when entering in-
to a transaction. Valuation adjustments are recorded to allow
for model risks, bid-ask spreads, liquidity risks, as well as oth-
er factors. Management believes that these valuation adjust-
ments are necessary and appropriate to fairly state financial in-
struments carried at fair value on the balance sheet.
m) Trading portfolio
Trading portfolio assets consist of money market paper,
other debt instruments, including traded loans, equity instru-
ments, precious metals and commodities which are owned by
the Group (“long” positions). Trading portfolio liabilities con-
sist 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. Gains and
losses realized on disposal or redemption and unrealized gains
and losses from changes in the fair value of trading portfolio
assets or liabilities are reported as Net trading income. Inter-
est and dividend income and expense on trading portfolio as-
sets or liabilities are included in Interest and dividend income
or Interest and dividend expense, respectively.
The Group uses settlement date accounting when record-
ing trading portfolio transactions. It recognizes from the date
the transaction is entered into (trade date) any unrealized prof-
its and losses arising from revaluing that contract to fair
value in the income statement. Subsequent to the trade date,
when the transaction is consummated (settlement date) a
resulting financial asset or liability is recognized on the bal-
ance sheet at the fair value of the consideration 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
contract of a financial asset classified in its trading portfolio
it derecognizes the asset on the day of its transfer.
n) Financial instruments designated as held at
fair value through profit and loss
UBS has a substantial portion of its compound debt instru-
ments classified as held at fair value through profit and loss.
These liabilities are presented in a separate line on the face of
the balance sheet. A small amount of financial assets has also
been classified as held at fair value through profit and loss, and
they are likewise presented in a separate line. A financial in-
strument may be designated at inception as held at fair value
through profit and loss and can subsequently not be changed.
The fair value designation was made possible as part of the
transition to the revised IAS 39, which UBS adopted on 1 Jan-
uary 2004. The Group designated approximately CHF 35.3 bil-
lion of existing compound debt instruments as held at fair val-
ue through profit and loss at 1 January 2004. All fair value
changes related to financial instruments held at fair value
through profit and loss are recognized in Net trading income.
92
o) Derivative instruments and hedging
All derivative instruments are carried at fair value on the bal-
ance sheet and are reported as Positive or Negative replace-
ment values. Where the Group enters into derivatives for trad-
ing purposes, realized and unrealized gains and losses are
recognized in Net trading income.
The Group also uses derivative instruments as part of its as-
set and liability management activities to manage exposures to
interest rate, foreign currency and credit risks, including expo-
sures 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 designated as a hedge,
the Group formally documents the relationship between the
hedging instrument(s) and hedged item(s). Documentation
includes its risk management objectives and its strategy in
undertaking the hedge transaction, together with the methods
that will be used to assess the effectiveness of the hedging re-
lationship. Accordingly, the Group formally assesses, both at the
inception of the hedge and on an ongoing basis, whether the
hedging derivatives 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 in-
dicate, that changes in the fair value or cash flows of the hedged
item are effectively offset by the changes in the fair value or cash
flows of the hedging instrument, and actual results are within a
range of 80% to 125%. In the case of hedging a forecast trans-
action, the transaction must 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 dis-
continues hedge accounting when it is determined that: a de-
rivative is not, or has ceased to be, highly effective as a hedge;
when the derivative expires, or is sold, terminated, or exercised;
when the hedged item matures or is sold or repaid; or when a
forecast transaction is no longer deemed highly probable.
Hedge ineffectiveness represents the amount by which the
changes in the fair value of the hedging derivative differ from
changes in the fair value of the hedged item or the amount
by which changes in the cash flow of the hedging derivative
differ from changes (or expected changes) in the cash flow of
the hedged item. Such gains and losses are recorded in current
period earnings in Net trading income, as are gains and losses
on components of a hedging derivative that are excluded from
assessing hedge effectiveness.
For qualifying fair value hedges, the change in fair value of
the hedging derivative is recognized in net profit and loss.
Those changes in fair value of the hedged item which are
attributable to the risks hedged with the derivative instrument
are reflected in an adjustment to the carrying value of the
hedged item, which is also recognized in net profit or loss. If
the hedge relationship is 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 ex-
isted (the ”unamortized fair value adjustment“), is, in the case
of interest bearing instruments, amortized to net profit or loss
over the remaining term of the original hedge, while for non-
interest bearing instruments that amount is immediately rec-
ognized in earnings. If the hedged instrument is derecog-
nized, e.g. is sold or repaid, the unamortized fair value
adjustment is recognized immediately in net profit and loss.
A fair value gain or loss associated with the effective por-
tion of a derivative designated as a cash flow hedge is recog-
nized initially in Shareholders’ equity. When the cash flows
that the derivative is hedging materialize, resulting in income
or expense, then the associated 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 termi-
nated, the cumulative gain or loss on the hedging derivative
previously reported in Shareholders’ equity remains in Share-
holders’ 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 economic hedges but
not qualifying for hedge accounting are treated in the same
way as derivative instruments used for trading purposes, i. e.
realized and unrealized gains and losses are recognized in Net
trading income. In particular, the Group has entered into eco-
nomic hedges of credit risk within the loan portfolio
using credit default swaps to which it can not apply hedge
accounting. In the event that the Group recognizes an impair-
ment on a loan that is economically hedged in this way, the
impairment is recognized 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 compound 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 embed-
ded derivative is separated from the host contract and
accounted for as a standalone derivative instrument at fair val-
ue if, and only if, the economic characteristics and risks of the
embedded derivative are not closely related to the economic
characteristics and risks of the host contract and the embed-
ded derivative actually meets the definition of a derivative.
p) Loans
Loans include loans originated by the Group where money is
provided directly to the borrower, participation in a loan from
another lender and purchased loans that are not quoted in
an active market and for which no intention of immediate or
short-term resale exists. Originated and purchased loans which
are intended to be sold in the short term are recorded as Trad-
ing portfolio assets.
93
Financial Statements
Notes to the Financial Statements
Loans are recognized when cash is advanced to borrow-
ers. They are initially recorded at fair value, which is the cash
given to originate the loan, including any transaction costs,
and are subsequently measured at amortized cost using the
effective interest rate method.
Interest on loans is included in Interest earned on loans and
advances and is recognized on an accrual basis. Fees and
direct costs relating to loan origination, re-financing or restruc-
turing 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 syndicated loan are credited to commission income.
q) Allowance and provision for credit losses
An allowance for credit losses is established if there is objec-
tive evidence that the Group will be unable to collect all
amounts due on a claim according to the original contrac-
tual terms or the equivalent value. A “claim” means a loan,
a commitment such as a letter of credit, a guarantee, a com-
mitment 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 provi-
sion for credit loss is reported in Other liabilities. Additions to
the allowances and provisions for credit losses are made
through credit loss expense.
Allowances and provisions for credit losses are evaluated
at a counterparty-specific level and collectively 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,
using the loan’s original effective interest rate, of expected
future cash flows, which may result from restructuring or liq-
uidation. Impairment is measured and allowances for credit
losses are established for the difference between the carrying
amount and the estimated recoverable amount.
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 analyzed at least an-
nually. Any subsequent changes to the amounts and timing
of the expected future cash flows compared to the prior
estimates will result in a change in the allowance for credit
losses and be charged or credited to credit loss expense.
An allowance for an impairment is reversed only when the
credit quality has improved such that there is reasonable
assurance of timely collection of principal and interest in
accordance with the original contractual terms of the claim
agreement.
A write-off is made when all or part of a claim is deemed
uncollectible or forgiven. Write-offs are charged against
previously established allowances for credit losses or directly
to credit loss expense and reduce the principal amount of
a claim. Recoveries in part or in full of amounts previously
written off are credited to credit loss expense.
A loan is classified as non-performing when the payment
of interest, principal or fees is overdue by more than 90 days
and there is no firm evidence that they will be made good by
later payments or the liquidation of collateral, or when insol-
vency proceedings have commenced, or when obligations
have been restructured on concessionary terms.
Collectively: all loans for which no impairment is identified
on a counterparty-specific level are grouped into economical-
ly homogeneous portfolios to collectively assess whether im-
pairment exists within a portfolio. Allowances from collective
assessment of impairment are recognized as credit loss
expense and result in an offset to the loan position. As the
allowance cannot be allocated to individual loans, interest is
accrued on all loans according to contractual terms.
Where, in management’s opinion, it is probable that some
claims may be affected by systemic crisis, transfer restrictions
or non-enforceability, country allowances and provisions for
probable losses are established. They are based on country-
specific scenarios, taking into consideration the nature of the
individual exposures, but excluding those amounts covered by
counterparty-specific allowances and provisions. Such coun-
try allowances and provisions are part of the collectively as-
sessed loan loss allowances and provisions.
r) 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 liq-
uidity or changes in interest rates, foreign exchange rates or eq-
uity prices. Financial investments consist of money market pa-
per, 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 invest-
ments are reported in Shareholders’ equity, net of applicable
income taxes, until such investments are sold, collected or
otherwise disposed of, or until such investment is determined
to be impaired. On disposal of an available-for-sale invest-
ment, the accumulated unrealized gain or loss included in
94
Shareholders’ equity is transferred to net profit or loss for the
period and reported in Other income. Gains and losses on dis-
posal are determined using the average cost method.
cost can be measured reliably. Internally developed software
meeting these criteria and purchased software are classified
within IT, software and communication.
Interest and dividend income on available-for-sale financial
investments is included in Interest and dividend income from
financial investments.
If an available-for-sale investment is determined to be im-
paired, the cumulative unrealized loss previously recognized
in Shareholders’ equity is included in net profit or loss for the
period and reported in Other income. A financial investment
is considered impaired if its cost exceeds the recoverable
amount. For non-quoted equity investments, the recoverable
amount is determined by applying recognized valuation tech-
niques. The standard method applied is based on the multiple
of earnings observed in the market for comparable compa-
nies. Management may adjust valuations determined in this
way based on its judgement. For quoted financial invest-
ments, the recoverable amount is determined by reference to
the market price. They are considered impaired if objective
evidence indicates that the decline in market price has reached
such a level that recovery of the cost value cannot be reason-
ably expected within the foreseeable future.
s) Property and equipment
Property and equipment includes own-used properties, invest-
ment properties, leasehold improvements, IT, software and
communication, plant and manufacturing equipment, 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 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 separate-
ly. If the portions of the property can be sold separately they are
accounted for as own-used property and investment property. If
the portions cannot be sold separately, the whole property is clas-
sified as own-used property unless the portion used by the bank
is minor. The classification of property is reviewed on a regular
basis to account for major changes in its usage.
Leasehold improvements are investments made to cus-
tomize buildings and offices occupied under operating lease
contracts to make them suitable for the intended purpose. The
present value of estimated reinstatement costs to bring a leased
property into its original condition at the end of the lease, if re-
quired, is capitalized as part of the total leasehold improvements
costs. At the same time, a corresponding liability is recognized
to reflect the obligation incurred. Reinstatement costs are rec-
ognized in profit and loss through depreciation of the capital-
ized leasehold improvements over their estimated useful life.
Software development costs are capitalized when they
meet certain criteria relating to identifiability, it is probable that
future economic benefits will flow to the enterprise, and the
Plant and manufacturing equipment include primarily ther-
mal and hydro power plants and power transmission grids and
equipment. The useful life is estimated based on the econom-
ic utilization of the asset, or for power plants on the end of
operating life.
With the exception of investment properties, 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
Leasehold improvements
Other machines and equipment
IT, software and communication
Plant and manufacturing equipment:
– Power plants
– Transmission grids and equipment
Not exceeding 50 years
Residual lease term,
but not exceeding 10 years
Not exceeding 10 years
Not exceeding 5 years
25 to 80 years
15 to 40 years
Property formerly own-used or leased to third parties un-
der an operating lease, which the Group has decided to dis-
pose 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 recoverable value.
Investment property is carried at fair value with changes in
fair value recognized in the income statement in the period
of change. UBS employs internal real estate experts who de-
termine the fair value of investment property by applying rec-
ognized valuation techniques. In cases where prices of recent
market transactions of comparable properties are available,
fair value is determined by reference to these transactions.
t) 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 separately iden-
tifiable intangible items arising from acquisitions and certain
purchased trademarks and similar items.
Goodwill and other intangible assets are recognized on the
balance sheet at cost determined at the date of acquisition and
are amortized using the straight-line method over their esti-
mated 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 estimat-
ed future benefits. If such indications exist, an analysis is per-
formed to assess whether the carrying amount of goodwill or
other intangible assets is fully recoverable. A write-down is
made if the carrying amount exceeds the recoverable amount.
95
Financial Statements
Notes to the Financial Statements
With the introduction of IFRS 3 Business Combinations
goodwill acquired in business combinations entered into af-
ter 31 March 2004 is not amortized, but tested annually for
impairment. The impairment test is conducted at the segment
level as reported in Note 2. The segment has been determined
as the cash generating unit for impairment testing purposes
as this is the level at which the performance of an investment
is reviewed and assessed by management. During 2004, UBS
recorded goodwill of CHF 631 million from business combi-
nations entered into after 31 March 2004.
Intangible assets are classified into two categories: Infra-
structure, and Customer relationships, contractual rights and
other. Infrastructure includes one intangible asset recognized
in connection with the acquisition of PaineWebber Group, Inc.
Customer relationships, contractual rights and other include
customer relationship intangibles from acquisition of financial
services businesses as well as from the acquisition of Motor-
Columbus, where other contractual rights from delivery and
supply contracts were identified. These contractual rights are
amortized over the remaining contract terms, which are up
to 25 years. The most significant contract, however, is amor-
tized over its remaining contract life of seven years, which is
the shortest remaining life of all contractual rights recognized.
u) 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 available for carry-forward are recognized as a deferred
tax asset if it is probable that future taxable profit will be avail-
able against which those losses can be utilized.
Deferred tax liabilities are recognized for temporary differ-
ences between the carrying 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 peri-
ods. Deferred tax assets are recognized for temporary differ-
ences which will result in deductible amounts in future peri-
ods, but only to the extent it is probable that sufficient taxable
profits will be available against which these differences can
be utilized.
Deferred tax assets and liabilities are measured 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 as well as deferred tax assets and liabilities are off-
set 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 invest-
ments and changes in fair value of derivative instruments
designated as cash flow hedges, which are recorded net of
taxes in Net gains or losses not recognized in the income state-
ment within Shareholders’ equity.
v) Debt issued
Debt issued is initially measured at fair value, which is the con-
sideration received, net of transaction costs incurred. Subse-
quent 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.
Compound debt instruments that are related to non-UBS
AG equity instruments, foreign exchange, credit instruments
or indices are considered structured instruments. If such in-
struments have not been designated at fair value through
profit and loss, the embedded derivative is separated from the
host contract and accounted for as a standalone derivative if
the criteria for separation are met. The host contract is sub-
sequently measured at amortized cost. For most of its struc-
tured debt instruments, UBS has designated them as held at
fair value through profit and loss, see section n).
Debt instruments with embedded derivatives that are relat-
ed to UBS AG shares or to a derivative instrument that has UBS
AG shares as underlying are separated into a liability and an
equity component at issue date, if they require physical
settlement. Initially, a portion of the net proceeds from issuing
the compound debt instrument is allocated to the debt com-
ponent based on its fair value. The determination of fair value
is generally based on quoted market prices for UBS debt instru-
ments with comparable terms. The liability component is sub-
sequently measured at amortized cost. The remaining amount
is allocated to the equity component and reported in Share pre-
mium account. Subsequent changes in fair value of the sepa-
rated equity component are not recognized. However, if the
compound instrument or the embedded derivative related to
UBS AG shares is cash settled or if it contains a settlement al-
ternative, then the separated derivative is accounted for as a
trading instrument with changes in fair value recorded in in-
come or the entire compound instrument is designated as held
at fair value through profit and loss.
It is the Group’s policy to hedge the fixed interest rate risk
on debt issues (except for certain subordinated long-term note
issues, see Note 30a), and apply fair value hedge accounting.
When hedge accounting is applied to fixed rate debt instru-
ments, the carrying values of debt issues are adjusted for
changes in fair value related to the hedged exposure rather
than carried at amortized cost. See o) Derivative instruments
and hedging for further discussion.
Own bonds held as a result of market making activities or
deliberate purchases in the market are treated as a redemp-
tion of debt. A gain or loss on redemption is recorded depend-
ing on whether the repurchase price of the bond was lower
or higher than its carrying value. A subsequent sale of own
bonds in the market is treated as a re-issuance of debt.
Interest expense on debt instruments is included in Inter-
est on debt issued.
96
w) Treasury shares and contracts on UBS shares
UBS AG shares held by the Group are classified in Share-
holders’ equity as Treasury shares and accounted for at
weighted average cost. The difference 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 in UBS AG shares
are classified as Shareholders’ equity and reported as Share pre-
mium. Upon settlement of such contracts the proceeds received,
less cost (net of tax, if any), are reported as Share premium.
Contracts on UBS AG shares that require net cash settle-
ment or provide for a choice of settlement are classified as
trading instruments, with the changes in fair value reported
in the income statement.
An exception to this treatment is physically settled written put
options and forward share purchase contracts, including con-
tracts where physical settlement is a settlement alternative. In
both cases the present value of the obligation to purchase own
shares in exchange for cash is transferred out of Shareholders’
equity and recognized as a liability at inception of a contract. The
liability is subsequently accreted, using the effective interest rate
method, over the life of the contract to the nominal purchase
obligation by recognizing interest expense. Upon settlement of
a contract, the liability is derecognized and the amount of equi-
ty originally transferred to liability is reclassified within Sharehold-
ers’ equity to Treasury shares. The premium received for writing
put options is recognized directly in Share premium.
x) Retirement benefits
UBS sponsors a number of retirement benefit plans for its em-
ployees worldwide. These plans include both defined benefit
and defined contribution plans and various other retirement
benefits such as post-employment medical benefits. Contri-
butions to defined contribution plans are expensed when em-
ployees have rendered services in exchange for such contri-
butions, 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 service 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 actuarial gains and
losses as income or expense if the net cumulative unrecog-
nized actuarial gains and losses at the end of the previous
reporting period exceeded the greater of:
a) 10% of present value of the defined benefit obligation at that date (before
deducting plan assets); and
b) 10% of the fair value of any plan assets at that date.
The unrecognized actuarial gains and losses exceeding the
greater of these two values are recognized in the income state-
ment 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 pres-
ent value of the defined benefit obligation cannot be recov-
ered fully through refunds or reductions in future contribu-
tions, no gain is recognized solely as a result of deferral of an
actuarial loss or past service cost in the current period or no
loss is recognized solely as a result of deferral of an actuarial
gain in the current period.
y) Equity participation plans
UBS provides various equity participation plans in the form of
stock plans and stock option plans. UBS generally uses the in-
trinsic 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 in the performance year.
z) Earnings per share (EPS)
Basic earnings per share is calculated by dividing the net prof-
it or loss for the period attributable to ordinary shareholders
by the weighted average number of ordinary shares out-
standing during the period.
Diluted earnings per share is computed using the same
method as for basic EPS, but the determinants are adjusted to
reflect the potential dilution that could occur if options, war-
rants, convertible debt securities or other contracts to issue or-
dinary shares were converted or exercised into ordinary shares.
aa) Changes in accounting policies and comparability
Financial instruments
On 1 January 2004, UBS adopted revised IAS 32 Financial
Instruments: Disclosure and Presentation and revised IAS 39 Fi-
nancial Instruments: Recognition and Measurement which were
applied retrospectively to all financial instruments affected with-
in the context of the two standards with the exception of the
guidance relating to derecognition of financial assets and liabil-
ities and, in part, recognition of Day 1 profit and loss, which were
applied prospectively. As a result of adopting the revised stan-
dards, UBS has restated prior period comparative information.
Revised IAS 32 amended the accounting for certain deriva-
tive contracts linked to an entity’s own shares. Physically settled
written put options and forward purchase contracts with UBS
shares as underlying are recorded as liabilities, see section w). UBS
currently has physically settled written put options linked to own
shares that are now accounted for as liabilities. Liabilities of CHF
96 million at 31 December 2004, and CHF 49 million at 31 De-
cember 2003 were debited to Shareholders’ equity due to writ-
ten options. The impact on the income statement of all periods
presented is insignificant. All other existing derivative contracts
linked to own shares are accounted for as derivative instruments
and are carried at fair value on the balance sheet under Positive
replacement values or Negative replacement values.
97
Financial Statements
Notes to the Financial Statements
Revised IAS 32 provides that netting is permitted only if, in
addition to all other netting conditions, normal settlement is
intended to take place on a net basis. In general, that condi-
tion is not met for derivative instruments and therefore
replacement values are now reported on a gross basis. In the
31 December 2003 balance sheet, replacement values of CHF
165,050 million that were previously offset are now reported
gross.
Revised IAS 39 permits any financial instrument to be
designated at inception, or at adoption of revised IAS 39, as
carried at fair value through profit and loss. Upon adoption
of revised IAS 39, UBS made that designation for the majori-
ty of its compound instruments issued. Previously, UBS sepa-
rated the embedded derivative from the host contract and
accounted for the separated derivative as a trading instru-
ment. The amounts are now included on the balance sheet
within the line item Financial liabilities designated at fair val-
ue, with amounts of CHF 65,756 million at 31 December 2004
and CHF 35,286 million at 31 December 2003 being report-
ed in that new line. Also, at 31 December 2004 assets in the
amount of CHF 653 million are reported in the new line
Financial assets designated at fair value. At 31 December
2003, no financial assets were designated as held at fair
value.
The guidance governing recognition and derecognition of
a financial asset is considerably more complex under revised
IAS 39 than previously and requires a multi-step decision
process to determine whether derecognition is appropriate.
See section d) for a discussion of the accounting policies re-
garding derecognition. As a result, certain transactions are
now accounted for as secured financing transactions instead
of purchases or sales of trading portfolio assets with an ac-
companying swap derivative. The provisions of this guidance
were applied prospectively as of 1 January 2004.
The effect of restating the income statement due to the
adoption of revised IAS 32 and 39 on the comparative prior
periods is a reduction of net profit by CHF 82 million for 2003
and a reduction of CHF 24 million for 2002.
Investment properties
Effective 1 January 2004, UBS changed its accounting policy for
investment property from historical cost less accumulated de-
preciation to the fair value model. All changes in the fair value
of investment property are now recognized in the income state-
ment, and depreciation expense is no longer recorded. Invest-
ment property is defined as property held exclusively to earn
rental income and benefit from appreciation in value. Fair val-
ue of investment property is determined by appropriate valua-
tion techniques employed in the real estate industry, taking in-
to account the specific circumstances for each item. This change
required restatement of the 2003 and 2002 comparative finan-
cial years. The effects of the restatement were a reduction of
net profit by CHF 64 million in 2003, and an increase of net prof-
it by CHF 19 million in 2002.
Credit losses incurred on OTC derivatives
Effective 1 January 2004, the method of accounting for
credit losses incurred on over the counter (OTC) derivatives has
been changed. All such credit losses are now reported in net trad-
ing income and are no longer reported in credit loss expense.
This change did not affect net profit or earnings per share re-
sults. It did, however, affect segment reporting, as losses report-
ed as credit loss expense were previously deferred over a three-
year period in the Business Group segment reporting, whereas
under the changed method of accounting, losses in trading in-
come are not subject to such a deferral. In the segment report,
therefore, losses on OTC derivatives are now reported as they
are incurred. This change in accounting method affected, to a
minor extent, certain balance sheet lines at 31 December 2003,
which have been restated to conform to the current year pres-
entation. The changed method of accounting had the follow-
ing impact on the performance before tax of our Business
Groups: In 2003, it reduced Wealth Management & Business
Banking’s pre-tax performance by CHF 8 million. It raised the In-
vestment Bank’s by CHF 37 million while Corporate Functions’
fell by CHF 29 million. In 2002, the changed method lowered
the Investment Bank’s pre-tax performance by CHF 28 million
and raised Corporate Functions’ by CHF 28 million.
Segment reporting
On 1 July 2004, UBS purchased an additional 20% interest in
Motor-Columbus AG, which increased its overall ownership
stake to 55.6% percent. Motor-Columbus has been consoli-
dated as of 1 July 2004, when UBS gained control over the
company. Due to its size and nature of business – production,
distribution and trading of electricity – a new business seg-
ment, Industrial holdings, was added, in which Motor-Colum-
bus is reported.
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 & Business
Banking into Corporate Center. At the same time, GAM was
transferred out of Global Asset Management into Corporate
Center. The two businesses formed the Private Banks & GAM
segment, whereas the remainder of Corporate Center is
reported as the Corporate Functions segment. Also, Wealth
Management & Business Banking is reported as two segments,
Wealth Management and Business Banking Switzerland. As at
1 January 2002, Wealth Management USA was separated from
Investment Bank and became a standalone Business Group.
Note 2 to these Group Financial Statements reflects the new
segment reporting structure. In all applicable instances, prior pe-
riod comparative amounts of the affected Business Groups have
been restated to conform to the current year presentation.
Business combinations
On 1 April 2004, UBS adopted IFRS 3 Business Combinations
for all business combinations entered into after 31 March
2004. Subsequent to the adoption of the new standard, UBS
98
has entered into and completed a number of business com-
binations that were all accounted for under the new standard.
The most significant change under the new standard is that
goodwill is no longer amortized over its estimated useful life
but instead tested annually for impairment. Accordingly, no
amortization expense has been recognized for goodwill of
CHF 631 million recognized on the balance sheet related to
business combinations entered into after 1 April 2004. Intan-
gible assets may be assigned an indefinite useful life, if sup-
portable based on facts and circumstances. These intangibles
are not amortized, but tested periodically for impairment.
In a step acquisition, where control over a subsidiary is
achieved in stages, or where additional shares of a subsidiary
are purchased from minority owners, all assets and liabilities
of that entity, excluding goodwill, are remeasured to fair
value as of the acquisition date of the latest share transaction.
The revaluation difference on the existing ownership interest
from the carrying value to the newly established fair value is
recorded directly in Shareholders’ equity. As a consequence of
remeasuring all assets and liabilities to fair value, minority
interests are also carried at fair value of net assets excluding
goodwill. Previously, only the percentage of assets and liabili-
ties was increased to fair value by which the ownership inter-
est was increased. Existing ownership interests were kept at
their carryover basis. Other relevant changes in accounting for
business combinations are that liabilities incurred for restruc-
turing and integration of newly acquired businesses must be
expensed as incurred, unless they were a pre-acquisition con-
tingency of the acquired business. Previously, liabilities incurred
for restructuring and integration could be recognized in pur-
chase accounting, if they met certain criteria, increasing good-
will recognized. Contingent liabilities of an acquired business
have to be recognized on the balance sheet at their fair value
in purchase accounting, if fair value is determinable. Previous-
ly, contingent liabilities were not recognized.
The accounting for business combinations entered into be-
fore 31 March 2004 was not affected by the new standard.
Amended IAS 19, Employee Benefits
UBS adopted in 2002 the amended standard IAS 19 Em-
ployee Benefits. The amendments introduce an asset ceiling
provision that applies for defined benefit plans that have a sur-
plus of plan assets over benefit obligations. The implementa-
tion of the amended standard had no material impact.
Change in treatment of corporate client assets
Effective 1 January 2004, UBS re-classified corporate client
assets of Business Banking Switzerland (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 often driven more by liquidity requirements
than pure investment reasons. This change reduced invested
assets at 31 December 2003 by approximately CHF 76 billion
and increased net new money for 2003 by CHF 7.5 billion.
ab) International Financial Reporting Standards to be
adopted in 2005
IASB Improvements Project
In December 2003, the IASB issued 15 revised International
Accounting Standards under its Improvement Project in an
attempt to clarify language, to remove inconsistencies and
to achieve convergence with other accounting standards, no-
tably US GAAP. All revised standards are effective for finan-
cial years beginning on or after 1 January 2005. Two of these
15 improved standards, IAS 32 and IAS 39, were adopted ear-
ly at the beginning of 2004. Two of the remaining 13 im-
proved standards will have a significant impact on UBS, which
are IAS 27 Consolidated and Separate Financial Statements
and IAS 28 Investments in Associates.
IAS 27 has been amended to eliminate the exemption from
consolidating a subsidiary where control is exercised temporar-
ily. UBS has several private equity investments where it owns a
controlling interest, which are classified and accounted for as
Financial investments available-for-sale, which will be required
to be consolidated. UBS will adopt IAS 27 on 1 January 2005
with retrospective restatement of comparative prior years 2004
and 2003. The effect of the adoption and consolidating these
investments will be as follows: At 1 January 2003, equity includ-
ing minority interests are reduced by CHF 723 million, repre-
senting the difference between the carrying value as Financial
investments available-for-sale and the value on a consolidated
basis. Consolidation will lead to recognition of total assets in
the amount of CHF 1.7 billion and CHF 2.9 billion at 31 Decem-
ber 2004 and 2003, respectively. Significant balance sheet line
items affected will include Property and equipment, Intangible
assets, Goodwill and Other assets. These investments gener-
ated additional income of CHF 3.8 billion and CHF 4.1 billion
in 2004 and 2003, respectively and additional net profit of CHF
92 million and CHF 86 million in 2004 and 2003, respectively.
IAS 28 has been amended in the same way as IAS 27 to elim-
inate the exemption from equity method accounting for invest-
ments that are held exclusively for disposal. UBS will adopt the
IAS 28 amendment on 1 January 2005 with retrospective re-
statement of comparative prior years 2004 and 2003. Certain
private equity investments where UBS has a significant influence
will be equity accounted for commencing 1 January 2005. Ap-
plying the equity method of accounting for these investments
will have the following effects: At 1 January 2003, equity is deb-
ited by CHF 266 million, representing the difference between
the carrying value as Financial investments available-for-sale ver-
sus the value on an equity method basis. The carrying value of
these equity method investments will be CHF 248 million and
CHF 393 million at 31 December 2004 and 2003, respectively,
which includes equity in losses of CHF 55 million and gains of
CHF 10 million recognized in the income statement in 2004 and
2003, respectively. Gains on sale recognized in 2004 and 2003
will be CHF 1 million and zero, respectively. When accounted
for as Financial investments, gains on sale recognized were CHF
70 million in 2004 and CHF 34 million in 2003.
99
Financial Statements
Notes to the Financial Statements
In 2005, these entities, along with all other investments
made by the Private Equity business unit, will be reclassified
from the Investment Bank segment to the Industrial Holdings
segment. In addition, seven of the newly consolidated invest-
ments held at 1 January 2003 were sold during 2003 and
2004 and will be presented as discontinued operations in the
restated comparative prior periods in accordance with IFRS 5
which is discussed below. Gain on sale in the amount of CHF
90 million and CHF 194 million have been reported related to
private equity investments sold in 2004 and 2003, respective-
ly. On a restated basis, the net profit from discontinued oper-
ations related to these entities will be CHF 145 million and CHF
186 million in 2004 and 2003, respectively.
UBS also has employee benefit trusts that are used in connec-
tion with share-based payment arrangements and deferred com-
pensation schemes. In connection with the issuance of IFRS 2,
the IFRIC amended SIC 12 Consolidation – Special Purpose En-
tities, an interpretation of IAS 27, to eliminate the scope exclu-
sion for equity compensation plans. Therefore, pursuant to the
criteria set out in SIC 12, an entity that controls an employee ben-
efit trust (or similar entity) set up for the purposes of a share-based
payment arrangement will be required to consolidate that trust.
Consolidating these trusts will have the following effects: At 1
January 2003, no adjustment to opening retained earnings is
made as assets and liabilities of the trust are equal. Consolida-
tion will lead to recognition of total assets in the amount of CHF
1.1 billion and CHF 1.3 billion and liabilities of CHF 1.1 billion and
CHF 1.3 billion at 31 December 2004 and 2003, respectively. The
amount of treasury shares will increase by CHF 2,029 million and
CHF 1,474 million at 31 December 2004 and 2003, respective-
ly. The weighted average number of treasury shares held by these
trusts was 22,995,954 in 2004 and 30,792,147 in 2003, thus
decreasing the numerator to calculate basic earnings per share.
The reduction in weighted average shares outstanding will in-
crease basic earnings per share, but have no impact on diluted
earnings per share, as the additional treasury shares will be fully
added back for calculating diluted earnings per share.
All other revised standards under the Improvement Project will
primarily affect presentation and disclosure, but not recognition
and measurement of assets and liabilities, and will therefore not
have a material impact on the financial statements. The two most
significant presentation differences relate to minority interests
and earnings per share. Beginning 2005, Net profit and Equity
will be presented including minority interests. Net profit will be
allocated to net profit attributable to UBS shareholders and at-
tributable to minority interests on the face of the income state-
ment. Earnings per share will continue to be presented based
on net profit attributable to UBS shareholders, but will be allo-
cated to earnings per share from continuing operations and from
discontinued operations.
IFRS 2 Share-based Payment
In February 2004, the IASB issued IFRS 2 Share-based Payment,
which requires share-based payments made to employees and
non-employees to be recognized in the financial statements
based on the fair value of these awards measured at the date
of grant. UBS will adopt the new standard on 1 January 2005
and fully restate the two comparative prior years. In accordance
with IFRS 2, UBS will apply the new requirements of the stan-
dard to all prior period awards that impact income statements
commencing 2003. This includes all unvested equity settled
awards and all outstanding cash settled awards at 1 January
2003. The effects of restatement are as follows: The opening
balance of retained earnings at 1 January 2003 will be credit-
ed by CHF 559 million. Additional compensation expense of
zero and CHF 558 million will be recognized in 2004 and 2003,
respectively. The change in compensation expense is attribut-
able to the first-time recognition of compensation expense for
the fair value of share options, as well as the recognition of ex-
pense for share awards over the vesting period. Previously,
share awards were recognized as compensation expense in the
performance year, which is generally the year prior to grant.
The reason for the zero impact in 2004 is that a significantly
higher amount of bonus payments were made in the form of
restricted stock rather than cash. The reversal of compensation
expense attributable to these share payments offset the effect
from recognizing options at fair value and share awards made
prior to 2004 over the vesting period.
UBS will introduce a new valuation model to determine the
fair value of share options granted in 2005 and later. Share op-
tions granted in 2004 and earlier will not be affected by this
change in valuation model. As part of the implementation of IFRS
2, UBS thoroughly reviewed the option valuation model em-
ployed in the past by comparing it to alternative models. As a re-
sult of this review, a valuation model was identified that better
reflects the exercise behavior of employees and the specific terms
and conditions under which the share options are granted. Con-
current with the introduction of the new model, UBS will use im-
plied instead of historic volatility as input into the new model.
IFRS 3 Business Combinations, IAS 36 Impairment of
Assets and IAS 38 Intangible Assets
On 31 March 2004, the IASB issued IFRS 3 Business Combina-
tions, revised IAS 36 Impairment of Assets, and revised
IAS 38 Intangible Assets. UBS adopted the standards on
1 April 2004. Under the transitional requirements of IFRS 3,
goodwill recognized in business combinations after 31 March
2004 will no longer be amortized over its estimated useful life
but be tested annually for impairment. Goodwill existing at 31
March 2004 will cease to be amortized as of 1 January 2005
and reviewed annually for impairment. UBS recorded goodwill
amortization expense of CHF 713 million in 2004 and CHF 756
million in 2003. Intangible assets acquired in a business com-
bination must be recognized separately from goodwill, if they
meet the recognition criteria. UBS will reclassify the trained
workforce intangible recognized in connection with the acqui-
sition of PaineWebber with a book value of CHF 1,010 million
to Goodwill at 1 January 2005.
100
IFRS 4 Insurance Contracts
On 31 March 2004, the IASB issued IFRS 4 Insurance Contracts.
The standard applies to all insurance contracts written and to
reinsurance contracts held. It requires that insurance contracts
that include a deposit component, are separated into the de-
posit and the insurance component. UBS will adopt the new
standard as of 1 January 2005 and apply it to its insurance con-
tracts. The new standard will not have a material effect on the
financial statements.
IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
On 31 March 2004, the IASB issued IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations. The standard re-
quires that non-current assets or disposal groups be classified
as held for sale if their carrying amount is recovered principal-
ly through a sale transaction rather than through continuing
use. Such assets are measured at the lower of carrying amount
and fair value less costs to sell and are classified separately from
other assets in the balance sheet. Netting of assets and liabil-
ities is not permitted. Discontinued operations are presented
on the face of the income statement as a single amount com-
prising the total of the net profit or loss of discontinued oper-
ations and the after tax gain or loss recognized on the sale or
the measurement to fair value less costs to sell of the net as-
sets constituting the discontinued operations.
IFRS 5 provides certain criteria to be met for a component
of an entity to be defined as a discontinued operation. Cer-
tain private equity investments meet this definition and will
be reclassified as discontinued operations. UBS will adopt the
new standard on 1 January 2005 and restate comparative
prior years 2004 and 2003. While the impact on the financial
statements will not be material, the income statement will be
divided into two sections; net income from continuing oper-
ations and net income from discontinued operations.
Note 2a Segment Reporting by Business Group
UBS’s financial businesses are organized on a worldwide
basis into four Business Groups and the Corporate Center.
Wealth Management & Business Banking is segregated into two
segments, Wealth Management and Business Banking Switzer-
land. The Corporate Center also consists of two segments, Pri-
vate Banks & GAM and Corporate Functions. The Industrial
Holdings segment holds all industrial operations controlled by
the Group. In total, UBS now reports eight business segments.
Wealth Management & Business Banking
Wealth Management & Business Banking comprises two seg-
ments. Wealth Management offers a comprehensive range of
products and services individually tailored to affluent interna-
tional and Swiss clients, operating from offices around the
world. Business Banking Switzerland provides individual 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-channel
distribution. The two segments share technological and phys-
ical infrastructure, and have joint departments supporting
major functions such as e-commerce, financial planning and
wealth management, investment policy and strategy.
ucts, research, advice and complete access to the world’s cap-
ital markets for intermediaries, governments, corporate and
institutional clients and other parts of UBS. Investment Bank
also manages the private equity business, investing UBS and
third-party funds, primarily in unlisted companies.
Wealth Management USA
Wealth Management USA is a US financial services firm pro-
viding sophisticated wealth management services to affluent
US clients through a highly trained financial advisor network.
Corporate Center
Corporate Center comprises two segments. Corporate Functions
ensures that the Business Groups operate as a coherent and ef-
fective whole with a common set of values and principles in such
areas as risk management and control, financial reporting, mar-
keting and communications, funding, capital and balance sheet
management, management of foreign exchange earnings and
information technology infrastructure. Private Banks & GAM
holds our private label banks and GAM, which provide clients
with a complete range of private banking services in Switzer-
land and specialized asset management services, respectively.
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 pen-
sion plans, financial institutions and advisors, central banks as
well as charities, foundations and individual investors.
Investment Bank
Investment Bank operates globally as a client-driven invest-
ment banking and securities firm providing innovative prod-
Industrial Holdings
The Industrial Holdings segment was established in third quar-
ter 2004 to house the non-financial businesses of UBS. At this
stage, results include Motor-Columbus, in which UBS acquired
an additional 20% stake on 1 July 2004, bringing the total
stake to 55.6%. Motor-Columbus is a financial holding com-
pany whose only significant asset is a 59.3% interest in the Atel
Group. Atel is a European energy provider focused on domes-
tic and international power generation, electricity transmission,
energy services as well as electricity trading and marketing.
101
Financial Statements
Notes to the Financial Statements
Note 2a Reporting by Business Group (continued)
For the year ended 31 December 2004
Internal charges and transfer pricing adjustments are reflected in the performance
of each business. Revenue-sharing agreements are used to allocate external cus-
tomer revenues to a Business Group on a reasonable basis. Transactions between
Business Groups are conducted at arm’s length.
Management reporting based on expected credit loss
For internal management reporting purposes, we measure credit loss using an ex-
pected loss concept. This table shows Business Group performance consistent with
the way in which our businesses are managed and the way Business Group per-
formance is measured. Expected credit loss reflects the average annual costs that
are expected to arise from positions in the current portfolio that become impaired.
The Adjusted expected credit loss reported for each Business Group is the expect-
ed credit loss on its portfolio plus the difference between Credit loss expense and
expected credit loss, amortized over a three year period. The difference between
these Adjusted expected credit loss figures and the Credit loss expense recorded
at Group level for reporting purposes is reported in Corporate Functions.
CHF million
Income 2
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
Depreciation
Amortization of goodwill and other intangible assets 3
Goods and materials purchased
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
Additional information 4
Total assets
Total liabilities and minority interests
Capital expenditure
Income 2
Adjusted expected credit loss
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
Depreciation
Amortization of goodwill and other intangible assets 3
Goods and materials purchased
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
102
Financial Businesses
Industrial
Holdings1
UBS
Wealth Management &
Business Banking
Corporate Center
Wealth Management
Business Banking
Switzerland
Global Asset
Management
Wealth
Investment Bank Management USA
Private
Banks & GAM
Corporate
Functions
7,701
(1 )
7,700
2,080
642
1,395
66
75
4,258
3,442
5,063
92
5,155
2,393
1,064
(533 )
69
0
2,993
2,162
2,022
0
2,022
901
299
126
23
129
1,478
544
15,984
240
16,224
8,156
2,535
219
239
288
11,437
4,787
5,098
3
5,101
3,437
800
302
71
304
4,914
187
164,720
161,046
304
210,133
204,479
212
29,334
28,501
8
1,473,726
1,459,757
322
51,850
47,259
50
7,701
(8 )
7,693
2,080
642
1,395
66
75
4,258
3,435
5,063
(25 )
5,038
2,393
1,064
(533 )
69
0
2,993
2,045
2,022
0
2,022
901
299
126
23
129
1,478
544
15,984
(7 )
15,977
8,156
2,535
219
239
288
11,437
4,540
5,098
(5 )
5,093
3,437
800
302
71
304
4,914
179
1,145
(58 )
1,087
432
160
10
20
74
696
391
8,043
7,480
19
1,145
(6 )
1,139
432
160
10
20
74
696
443
113
0
113
790
1,077
(1,519 )
794
17
1,159
(1,046)
(210,909 )
(216,342 )
599
113
327
440
790
1,077
(1,519 )
794
17
1,159
(719)
3,667
0
3,667
326
126
70
77
2,861
3,460
207
7,887
7,626
50
3,667
3,667
326
126
70
77
2,861
3,460
207
40,793
276
41,069
18,515
6,703
0
1,352
964
2,861
30,395
10,674
2,135
8,539
(450)
8,089
1,734,784
1,699,806
1,564
40,793
276
41,069
18,515
6,703
0
1,352
964
2,861
30,395
10,674
2,135
8,539
(450 )
8,089
1 Results shown for the six-month period beginning on 1 July 2004.
2 Impairments on private equity and other financial investments for the year ended 31 December 2004 were as follows: Wealth
Management & Business Banking CHF 10 million; Global Asset Management CHF 4 million; Investment Bank CHF 170 million; Wealth Management USA CHF 39 million; Corporate Center CHF 0 million.
4 The funding surplus or requirement is reflected
3 For further information regarding goodwill and other intangible assets by Business Group, please see Note 15: Goodwill and Other Intangible Assets.
in each Business Group and adjusted in Corporate Center.
103
Financial Statements
Notes to the Financial Statements
Note 2a Reporting by Business Group (continued)
For the year ended 31 December 2003
Internal charges and transfer pricing adjustments are reflected in the performance
of each business. Revenue-sharing agreements are used to allocate external cus-
tomer revenues to a Business Group on a reasonable basis. Transactions between
Business Groups are conducted at arm’s length.
Management reporting based on expected credit loss
For internal management reporting purposes, we measure credit loss using an ex-
pected loss concept. This table shows Business Group performance consistent with
the way in which our businesses are managed and the way Business Group per-
formance is measured. Expected credit loss reflects the average annual costs that
are expected to arise from positions in the current portfolio that become impaired.
The Adjusted expected credit loss reported for each Business Group is the expect-
ed credit loss on its portfolio plus the difference between Credit loss expense and
expected credit loss, amortized over a three year period. The difference between
these Adjusted expected credit loss figures and the Credit loss expense recorded
at Group level for reporting purposes is reported in Corporate Functions.
CHF million
Income1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
Depreciation
Amortization of goodwill and other intangible assets2
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
Additional information3
Total assets
Total liabilities and minority interests
Capital expenditure
Income1
Adjusted expected credit loss
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
Depreciation
Amortization of goodwill and other intangible assets2
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
104
Wealth Management &
Business Banking
Corporate Center
Wealth Management
Business Banking
Switzerland
Global Asset
Management
Investment Bank
Wealth
Management USA
Private
Banks & GAM
Corporate
Functions
6,797
4
6,801
1,944
604
1,479
82
75
4,184
2,617
5,247
(71 )
5,176
2,406
1,090
(609 )
88
0
2,975
2,201
150,285
147,479
167
192,517
186,185
261
6,797
(4 )
6,793
1,944
604
1,479
82
75
4,184
2,609
5,247
(127 )
5,120
2,406
1,090
(609 )
88
0
2,975
2,145
1,737
0
1,737
806
265
156
25
153
1,405
332
21,929
20,917
17
1,737
0
1,737
806
265
156
25
153
1,405
332
13,991
(4 )
13,987
7,303
2,074
180
246
278
10,081
3,906
1,316,897
1,303,281
518
13,991
(55 )
13,936
7,303
2,074
180
246
278
10,081
3,855
5,190
(3 )
5,187
3,627
719
433
72
336
5,187
0
46,837
41,732
68
5,190
(8 )
5,182
3,627
719
433
72
336
5,187
(5)
880
2
882
381
169
11
28
81
670
212
9,084
8,406
17
880
(2 )
878
381
169
11
28
81
670
208
20
0
20
764
1,165
(1,650 )
812
20
1,111
(1,091)
UBS
33,862
(72 )
33,790
17,231
6,086
0
1,353
943
25,613
8,177
1,593
6,584
(345)
6,239
(187,493 )
(193,254 )
427
1,550,056
1,514,746
1,475
20
124
144
764
1,165
(1,650 )
812
20
1,111
(967)
33,862
(72 )
33,790
17,231
6,086
0
1,353
943
25,613
8,177
1,593
6,584
(345 )
6,239
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; Investment Bank CHF 371 million; Wealth Management USA CHF 1 million; Corporate Center CHF 149 million.
2 For further information regarding
goodwill and other intangible assets by Business Group, please see Note 15: Goodwil and Other Intangible Assets.
3 The funding surplus or requirement is reflected in each Business Group
and adjusted in Corporate Center.
105
Financial Statements
Notes to the Financial Statements
Note 2a Reporting by Business Group (continued)
For the year ended 31 December 2002
Internal charges and transfer pricing adjustments are reflected in the performance
of each business. Revenue-sharing agreements are used to allocate external cus-
tomer revenues to a Business Group on a reasonable basis. Transactions between
Business Groups are conducted at arm’s length.
Management reporting based on expected credit loss
For internal management reporting purposes, we measure credit loss using an ex-
pected loss concept. This table shows Business Group performance consistent with
the way in which our businesses are managed and the way Business Group per-
formance is measured. Expected credit loss reflects the average annual costs that
are expected to arise from positions in the current portfolio that become impaired.
The Adjusted expected credit loss reported for each Business Group is the expect-
ed credit loss on its portfolio plus the difference between Credit loss expense and
expected credit loss, amortized over a three year period. The difference between
these Adjusted expected credit loss figures and the Credit loss expense recorded
at Group level for reporting purposes is reported in Corporate Functions.
CHF million
Income1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
Depreciation
Amortization of goodwill and other intangible assets2
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
Additional information3
Total assets
Total liabilities and minority interests
Capital expenditure
Income1
Adjusted expected credit loss
Total operating income
Personnel expenses
General and administrative expenses
Services to / from other business units
Depreciation
Amortization of goodwill and other intangible assets2
Total operating expenses
Business Group performance before tax
Tax expense
Net profit before minority interests
Minority interests
Net profit
106
Wealth Management &
Business Banking
Corporate Center
Wealth Management
Business Banking
Switzerland
Global Asset
Management
Investment Bank
Wealth
Management USA
Private
Banks & GAM
Corporate
Functions
6,690
1
6,691
1,869
617
1,475
93
97
4,151
2,540
5,494
(239 )
5,255
2,469
1,305
(638 )
105
3,241
2,014
189,061
186,346
156
121,661
115,926
224
6,690
(26 )
6,664
1,869
617
1,475
93
97
4,151
2,513
5,494
(286 )
5,208
2,469
1,305
(638 )
105
3,241
1,967
1,655
0
1,655
763
301
164
22
186
1,436
219
4,428
2,937
20
1,655
1,655
763
301
164
22
186
1,436
219
12,419
126
12,545
7,815
2,359
140
320
364
10,998
1,547
1,099,410
1,087,019
473
12,419
(90 )
12,329
7,815
2,359
140
320
364
10,998
1,331
5,561
(15 )
5,546
4,158
926
492
81
1,691
7,348
(1,802)
39,610
33,225
466
5,561
(13 )
5,548
4,158
926
492
81
1,691
7,348
(1,800)
1,038
(3 )
1,035
386
120
12
40
98
656
379
7,004
6,270
37
1,038
(2 )
1,036
386
120
12
40
98
656
380
1,365
15
1,380
1,064
1,444
(1,645 )
853
24
1,740
(360)
UBS
34,222
(115 )
34,107
18,524
7,072
0
1,514
2,460
29,570
4,537
676
3,861
(331 )
3,530
(114,496 )
(123,997 )
668
1,346,678
1,307,726
2,044
1,365
302
1,667
1,064
1,444
(1,645 )
853
24
1,740
(73)
34,222
(115 )
34,107
18,524
7,072
0
1,514
2,460
29,570
4,537
676
3,861
(331 )
3,530
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; Investment Bank CHF 1,703 million; Corporate Center CHF 208 million.
2 For further information regarding goodwill and other intangible assets by
Business Group, please see Note 15: Goodwill and Other Intangible Assets.
3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center.
107
Financial Statements
Notes to the Financial Statements
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 finan-
cial markets the Group’s business is managed on an integrat-
ed basis worldwide, with a view to profitability by product line.
The geographical analysis of operating income, total assets,
and capital expenditure is provided in order to comply with
IFRS, and does not reflect the way the Group is managed. Man-
agement believes that analysis by Business Group, as shown
in Note 2a to these Financial Statements, is a more meaning-
ful representation of the way in which the Group is managed.
For the year ended 31 December 2004
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total
For the year ended 31 December 2003
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total
For the year ended 31 December 2002
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
14,949
10,379
13,615
2,126
41,069
37
25
33
5
189,019
564,336
829,845
151,584
11
32
48
9
799
388
293
84
51
25
19
5
100
1,734,784
100
1,564
100
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
13,176
5,977
12,923
1,714
33,790
39
18
38
5
182,280
535,501
738,189
94,086
12
34
48
6
689
242
510
34
47
16
35
2
100
1,550,056
100
1,475
100
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
14,327
6,816
11,055
1,909
34,107
42
20
32
6
176,544
363,706
719,703
86,725
13
27
54
6
885
199
916
44
43
10
45
2
100
1,346,678
100
2,044
100
108
Income Statement
Note 3 Net Interest and Trading Income
Accounting standards require separate disclosure of net inter-
est income and net trading income (see the second and the
third table). This required disclosure, however, does not take
into account that net interest and trading income are gener-
ated 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 manage-
ment therefore analyzes net interest and trading income ac-
cording to the business activity generating it. The first table be-
low (labeled Net interest and trading income) provides infor-
mation that corresponds to this management view. For exam-
ple, net income from trading activities is further broken down
into the four sub-components of Equities, Fixed income, For-
eign exchange and Other. These activities generate both types
of income (interest and trading revenue) and therefore this
analysis is not comparable to the breakdown provided in the
third table on the next page (Net trading income only).
Net interest and trading income
CHF million
Net interest income
Net trading income
Total net interest and trading income
Breakdown by business activity
CHF million
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 Includes external funding costs of the PaineWebber Group, Inc. acquisition.
Net interest income
CHF million
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 financial liabilities designated at fair value
Interest on debt issued
Total
Net interest income
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
11,860
4,972
16,832
12,299
3,756
16,055
10,546
5,451
15,997
(4 )
32
5
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
5,139
3,098
6,264
1,467
273
11,102
1,298
(707)
16,832
5,077
2,445
6,474
1,436
326
10,681
1,417
(1,120 )
16,055
5,275
2,777
5,977
1,506
245
10,505
1,646
(1,429 )
15,997
1
27
(3 )
2
(16 )
4
(8 )
37
5
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
9,021
11,006
93
19,278
39,398
5,529
10,014
7,993
1,168
2,834
27,538
11,860
10,542
11,148
75
18,394
40,159
5,072
9,623
9,925
751
2,489
27,860
12,299
11,600
11,184
165
17,014
39,963
6,383
10,081
8,226
341
4,386
29,417
10,546
(14 )
(1 )
24
5
(2 )
9
4
(19 )
56
14
(1 )
(4 )
109
Financial Statements
Notes to the Financial Statements
Note 3 Net Interest and Trading Income (continued)
Net trading income1
CHF million
Equities
Fixed income 2
Foreign exchange and other
Net trading income
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
2,254
131
2,587
4,972
1,660
396
1,700
3,756
2,621
997
1,833
5,451
36
(67 )
52
32
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.
Included in the Net trading income table are fair value changes
of CHF (1,203) million for the year ended 31 December 2004,
CHF (115) million for the year ended 31 December 2003, and
CHF 446 million for the year ended 31 December 2002 relat-
ed to financial liabilities designated as held at fair value
through profit and loss. For 2004, CHF (801) million of the to-
tal fair value change was attributable to changes in fair value
of embedded derivatives, while CHF (402) million was attrib-
utable to changes in LIBOR. The exposure from embedded de-
rivatives is economically hedged with derivatives whose
change in fair value is also reported in Net trading income, off-
setting the fair value changes related to financial liabilities des-
ignated as held at fair value.
Note 4 Net Fee and Commission Income
CHF million
Equity underwriting fees
Bond underwriting fees
Total 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
Net fee and commission income
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
1,430
1,114
2,544
1,078
5,916
4,588
220
1,261
4,611
342
20,560
266
988
21,814
1,399
999
2,398
19,416
1,270
1,084
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
17,345
1,166
968
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
18,221
13
3
8
42
5
18
(9 )
5
20
(4 )
13
7
(9 )
11
(6 )
28
6
12
110
Note 5 Other Income
CHF million
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 1
Equity in income of associates
Gains / (losses) from investment properties 2
Other
Total other income
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
83
1
84
557
46
(223)
380
65
65
11
292
897
160
2
162
352
90
(541 )
(99 )
75
123
(42 )
243
462
228
0
228
273
457
(1,944 )
(1,214 )
90
7
17
876
4
(48 )
(50 )
(48 )
58
(49 )
59
(13 )
(47 )
20
94
1 Includes net rent received from third parties and net operating expenses.
2 Includes unrealized and realized profit from investment properties at fair value.
Note 6 Personnel Expenses
CHF million
Salaries and bonuses
Contractors
Insurance and social contributions
Contribution to retirement plans
Other personnel expenses
Total personnel expenses
31.12.04
14,835
572
1,093
707
1,308
18,515
For the year ended
31.12.03
13,478
539
923
721
1,570
17,231
31.12.02
14,219
579
939
676
2,111
18,524
% change from
31.12.03
10
6
18
(2 )
(17 )
7
Note 7 General and Administrative Expenses
For the year ended
% change from
CHF million
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
31.12.04
1,274
31.12.03
1,304
686
835
660
442
634
705
953
514
708
864
599
398
526
589
844
254
Total general and administrative expenses
6,703
6,086
31.12.02
31.12.03
1,354
665
1,019
819
453
600
568
1,036
558
7,072
(2 )
(3 )
(3 )
10
11
21
20
13
102
10
111
Financial Statements
Notes to the Financial Statements
Note 8 Earnings per Share (EPS) and Shares Outstanding
For the year ended
% change from
31.12.04
31.12.03
31.12.02
31.12.03
Basic earnings (CHF million)
Net profit
Diluted earnings (CHF million)
Net profit
Less: Profit on equity derivative contracts
Net profit for diluted EPS
Weighted average shares outstanding
Weighted average shares outstanding
8,089
6,239
3,530
8,089
(5)
8,084
6,239
1
6,240
3,530
(20 )
3,510
1,052,914,417
1,116,953,623
1,208,586,678
Potentially dilutive ordinary shares resulting from options and warrants outstanding 1
29,046,943
21,847,002
14,796,264
Weighted average shares outstanding for diluted EPS
1,081,961,360
1,138,800,625
1,223,382,942
Earnings per share (CHF)
Basic
Diluted
7.68
7.47
5.59
5.48
2.92
2.87
30
30
30
(6 )
33
(5 )
37
36
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 18,978,199, 37,234,538 and
75,385,368 for the years ended 31 December 2004, 31 December 2003 and 31 December 2002, respectively.
Shares outstanding
Total ordinary shares issued
Second trading line treasury shares
2002 first program
2002 second program
2003 program
2004 program
Other treasury shares
Total treasury shares
Shares outstanding
31.12.04
As at
31.12.03
% change from
31.12.02
31.12.03
1,126,858,177
1,183,046,764
1,256,297,678
(5 )
39,935,094
63,589,877
56,707,000
54,653,692
103,524,971
111,360,692
67,700,000
6,335,080
23,146,014
97,181,094
1,023,333,206
1,071,686,072
1,159,116,584
16
(7 )
(5 )
112
Balance Sheet: Assets
Note 9a Due from Banks and Loans
By type of exposure
CHF million
Banks 1
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
1 Includes due from banks from Industrial Holdings in the amount of CHF 764 million.
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
31.12.04
35,520
(256)
35,264
117,731
18,950
98,081
234,762
(2,375)
232,387
267,651
31.12.04
152,433
45,712
61,751
10,386
270,282
(2,631)
267,651
31.12.04
138,692
38,872
18,973
73,745
270,282
(2,631)
267,651
31.12.03
32,024
(284 )
31,740
109,980
19,162
86,829
215,971
(3,292 )
212,679
244,419
31.12.03
152,358
43,842
42,653
9,142
247,995
(3,576 )
244,419
31.12.03
130,740
28,062
18,295
70,898
247,995
(3,576 )
244,419
113
Financial Statements
Notes to the Financial Statements
Note 9b Allowances and Provisions for Credit Losses
CHF million
Balance at the beginning of the year1
Write-offs
Recoveries
Increase / (decrease) in credit loss allowance and provision
Foreign currency translation and other adjustments
Balance at the end of the year
CHF million
As a reduction of Due from banks
As a reduction of Loans
As a reduction of other balance sheet positions
Subtotal
Included in other liabilities related to commitments
and contingent liabilities
Total allowances and provisions for credit losses
Specific allowances
and provisions
Collective loan
loss provision
Total
31.12.04
3,692
(854)
59
(251)
30
2,676
262
(3)
(25)
(27)
207
3,954
(857)
59
(276)
3
2,883
Total
31.12.03 2
5,232
(1,436 )
87
72
(1 )
3,954
31.12.04
31.12.03
256
2,375
41
2,672
211
2,883
284
3,292
88
3,664
290
3,954
1 Includes country provisions of CHF 183 million and CHF 262 million at 31 December 2004 and 31 December 2003 respectively.
derivatives to the trading portfolio as a reduction of fair value, following the revised treatment of OTC derivatives credit losses.
2 Restated to reflect transfers of allowances and provisons for OTC
31.12.04
31.12.03
4,861
239
2,266
2,505
6,038
7,209
245
3,213
3,458
8,594
2 Interest income on impaired due from banks and loans was CHF 172 million for 2004 and CHF 279 million for
31.12.04
31.12.03
4,861
1,758
3,103
2,505
7,209
2,465
4,744
3,458
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
1 All impaired due from banks and loans have a specific allowance for credit losses.
2003.
3 Average balances were calculated from quarterly data.
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
114
Note 9d Non-Performing Due from Banks and Loans
A loan (included in due from banks or loans) is classified as
non-performing: 1) when the payment of interest, principal
or fees is overdue by more than 90 days and there is no firm
evidence that they will be made good by later payments or
CHF million
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.
CHF million
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
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 borrower)
CHF million
Switzerland
Rest of Europe / Africa / Middle East
Americas
Asia Pacific
Total non-performing due from banks and loans
the liquidation of collateral; 2) when insolvency proceedings
have commenced; or 3) when obligations have been restruc-
tured on concessionary terms.
31.12.04
31.12.03
3,696
2,264
4,338
4,901
2,764
5,410
31.12.04
31.12.03
4,901
(496)
(709)
3,696
6,000
317
(1,416 )
4,901
31.12.04
242
31.12.03
253
1,011
2,443
3,454
3,696
31.12.04
2,772
607
220
97
3,696
1,470
3,178
4,648
4,901
31.12.03
4,012
488
366
35
4,901
115
Financial Statements
Notes to the Financial Statements
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 securi-
ties 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 cred-
it risk associated with these activities by monitoring counter-
party credit exposure and collateral values on a daily basis and
requiring additional collateral to be deposited with or re-
turned 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
31.12.04
Reverse repurchase
agreements
31.12.04
Cash collateral on
securities borrowed
31.12.03
Reverse repurchase
agreements
31.12.03
167,567
52,675
220,242
243,890
113,274
357,164
172,783
41,149
213,932
Cash collateral on
securities lent
31.12.04
Repurchase
agreements
31.12.04
Cash collateral on
securities lent
31.12.03
40,580
20,965
61,545
252,151
170,436
422,587
39,587
13,691
53,278
237,148
83,351
320,499
Repurchase
agreements
31.12.03
263,905
151,958
415,863
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 2004 and 31 December 2003 were
as follows:
CHF million
Securities received under reverse repurchase and / or securities borrowing arrangements which can be repledged or resold
thereof repledged / transferred to others in connection with financing activities or
to satisfy commitments under short sale transactions
31.12.04
949,570
639,865
31.12.03
827,602
593,049
116
Note 11 Trading Portfolio
The Group trades in debt instruments (including money mar-
ket paper and tradeable loans), equity instruments, precious
metals, commodities and derivatives to meet the financial
needs of its customers and to generate revenue. Note 23 pro-
vides a description of the various classes of derivatives togeth-
er with the related notional amounts, while Note 10 provides
further details about cash collateral on securities borrowed
and lent and repurchase and reverse repurchase agreements.
CHF million
Trading portfolio assets
Money market paper
thereof pledged as collateral with central banks
thereof pledged as collateral and can be repledged or resold by counterparty
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 counterparty
Equity instruments
Listed
Unlisted
Total
thereof pledged as collateral
thereof can be repledged or resold by counterparty
Traded loans
Precious metals, commodities 1
Total trading portfolio assets
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
1 Commodities basically consist of energy.
31.12.04
31.12.03
44,842
4,706
12,580
776
92,330
79,340
140,500
35,646
348,592
147,525
120,317
90,594
18,119
108,713
27,140
26,218
16,077
11,150
40,003
6,208
0
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
529,374
461,772
511
54,848
49,512
27,413
2,600
134,884
36,149
171,033
586
52,377
38,369
13,537
10,851
115,720
28,237
143,957
117
Financial Statements
Notes to the Financial Statements
Note 12 Financial Investments (available-for-sale)
CHF million
Money market paper
Other debt instruments
Listed
Unlisted
Total
Equity instruments
Listed
Unlisted
Total
Private equity investments
Total financial investments
thereof eligible for discount at central banks
31.12.04
31.12.03
567
261
21
282
504
687
1,191
3,009
5,049
86
596
189
72
261
387
630
1,017
3,265
5,139
196
The following tables show the unrealized gains and losses not recognized in the income statement for the years ended 2004
and 2003:
CHF million
31 December 2004
Money market paper
Debt securities issued by 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
CHF million
31 December 2003
Money market paper
Debt securities issued by 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
Unrealized gains / losses not recognized in the income statement
Fair value
Gross gains
Gross losses Net, before tax
Tax effect
Net, after tax
567
10
20
0
40
140
72
0
1,191
3,009
5,049
0
1
1
0
0
7
0
0
455
979
1,443
0
0
0
0
0
(4 )
0
0
(5 )
(44 )
(53)
0
1
1
0
0
3
0
0
0
0
0
0
0
0
0
0
0
1
1
0
0
3
0
0
450
935
1,390
(83 )
(89 )
(172)
367
846
1,218
Unrealized gains / losses not recognized in the income statement
Fair value
Gross gains
Gross losses Net, before tax
Tax effect
Net, after tax
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
118
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 invest-
ments are intended to be held for a period of time sufficient
to recover their cost, and UBS believes that the evidence in-
dicating that the cost of the investments should be recover-
able within a reasonable period of time outweighs the evi-
dence 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 and the duration of the unrealized losses.
The following table shows the duration of unrealized
losses not recognized in the income statement for the year
ended 2004:
Fair Value
Unrealized Losses
Investments
Investments
with unrealized with unrealized
loss more than
12 months
loss less than
12 months
CHF million
31 December 2004
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
0
0
0
0
0
0
0
0
1
424
425
0
0
0
0
0
0
0
0
24
82
106
Investments
Investments
with unrealized with unrealized
loss more than
12 months
loss less than
12 months
0
0
0
0
0
0
0
0
(1 )
(5 )
(6)
0
0
0
0
0
(4 )
0
0
(4 )
(39 )
(47)
Total
0
0
0
0
0
0
0
0
25
506
531
Total
0
0
0
0
0
(4 )
0
0
(5 )
(44 )
(53)
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 2004
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
1
10
36
57
3
0
107
5.50
3.97
2.13
2.74
2.50
0
2
10
4
50
0
0
66
4.29
4.14
1.25
2.92
0
0
6
0
0
0
5
0
11
3.80
0
0
0
3.21
0
1
0
0
33
64
0
98
4.00
0
0
0
4.36
0
1 Money market papers have contractual maturities of less than one year.
Proceeds from sales and maturities of investment securities available-for-sale, excluding private equity, were as follows:
CHF million
Proceeds
Gross realized gains
Gross realized losses
31.12.04
31.12.03
277
49
(4)
1,379
112
(23 )
119
Financial Statements
Notes to the Financial Statements
Note 13 Investments in Associates
CHF million
Carrying amount at the beginning of the year
Additions
Disposals
Transfers
Income
Dividend paid
Foreign currency translation
Carrying amount at the end of the year
1 Additions of CHF 1,022 million due to the consolidation of Motor-Columbus.
31.12.04
31.12.03
1,616
1,896 1
(684)
(378)
65
(32)
(56)
2,427
705
88
(142 )
1,001
123
(30 )
(129 )
1,616
Note 14 Property and Equipment
CHF million
Historical cost
Balance at the beginning of the year
Additions
Additions from acquired companies
Disposals / write-offs 1
Reclassifications
Foreign currency translation
Balance at the end of the year
Accumulated depreciation
Balance at the beginning of the year
Depreciation
Disposals / write-offs 1
Reclassifications
Foreign currency translation
Balance at the end of the year
Fair value
Net book value at the end of the year 2
Own used
properties
Investment
properties
Leasehold IT, software
and com-
improve-
ments munication
Other
machines
and
equipment
Plant and
manu-
facturing
equipment
Projects in
progress
31.12.04
31.12.03
9,408
232
179
(436 )
(60 )
6
9,329
4,365
247
(7 )
(42 )
0
4,563
4,766
2,545
4,241
1,425
235
0
(175 )
85
(100 )
2,590
460
0
(619 )
5
(107 )
3,980
0
29
1,880
(11 )
0
38
123
0
(46 )
(63 )
(40 )
1,399
1,936
1,570
3,334
1,165
201
(53 )
2
(61 )
775
(636 )
0
(98 )
68
(43 )
1
(21 )
1,659
3,375
1,170
0
61
(10 )
0
2
53
266
149
34
(52 )
(153 )
(2 )
242
4
0
(4 )
0
0
17,885
1,228
2,093
17,390
1,352
24
(1,339)
(1,030 )
(186)
(205)
457
(308 )
19,476
17,885
10,438
1,352
(749)
(43)
(178)
9,870
1,353
(936 )
330
(179 )
10,820
10,438
41
41
931
605
229
1,883
39
281
80
8,736
236
7,683
1 Includes write-offs of fully depreciated assets.
2 Fire insurance value of property and equipment is CHF 15,873 million (2003: CHF 14,021 million).
120
Note 15 Goodwill and Other Intangible Assets
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
Goodwill
Other intangible assets
Total
Infrastructure
Customer
relationships,
contractual
rights and other
Total
31.12.04
31.12.03
12,032
960
(62 )
(105 )
(966 )
11,859
2,684
713
(9 )
(105 )
(271 )
3,012
8,847
958
0
0
0
(78 )
880
152
53
0
0
(21 )
184
696
1,915
1,531
14
(1 )
(154 )
3,305
540
198
0
(1 )
(38 )
699
2,873
1,531
14
(1 )
(232 )
4,185
692
251
0
(1 )
(59 )
883
2,606
3,302
14,905
2,491
(48)
(106)
(1,198)
16,044
3,376
964
(9)
(106)
(330)
3,895
12,149
17,022
340
(371 )
(508 )
(1,578 )
14,905
3,326
943
(70 )
(508 )
(315 )
3,376
11,529
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 unit for the year ended
31 December 2004.
CHF million
Goodwill
Wealth Management
Business Banking Switzerland
Global Asset Management
Investment Bank
Wealth Management USA
Private Banks & GAM
Corporate Functions
Industrial Holdings
UBS
Other intangible assets
Wealth Management
Business Banking Switzerland
Global Asset Management
Investment Bank
Wealth Management USA
Private Banks & GAM
Corporate Functions
Industrial Holdings
UBS
Balance at
the beginning
of the year
Additions and
reallocations
Disposals and
other reductions
Amortization
Foreign currency
translation
Balance at
the end
of the year
837
0
1,401
3,372
3,315
421
2
0
9,348
4
0
0
324
1,805
4
44
0
2,181
486
0
2
352
0
0
0
120
960
169
0
0
158
0
0
0
1,204
1,531
(5 )
0
(1 )
(16 )
(16 )
(15 )
0
0
(53)
0
0
0
0
0
15
0
(1 )
14
(67 )
0
(129 )
(252 )
(197 )
(68 )
0
0
(713)
(8 )
0
0
(36 )
(107 )
(6 )
(17 )
(77 )
(251)
(75 )
0
(84 )
(257 )
(250 )
(27 )
(2 )
0
(695)
(6 )
0
0
(28 )
(138 )
1
(3 )
1
(173)
1,176
0
1,189
3,199
2,852
311
0
120
8,847
159
0
0
418
1,560
14
24
1,127
3,302
For further information about disclosure by Business Group, including the amortization of goodwill and other intangible as-
sets of previous years, please see Note 2a: Segment Reporting by Business Group.
121
Financial Statements
Notes to the Financial Statements
Note 15 Goodwill and Other Intangible Assets (continued)
The estimated, aggregated amortization expenses for other intangible assets are as follows:
CHF million
Estimated, aggregated amortization expenses for:
2005
2006
2007
2008
2009
2010 and thereafter
Total
Other intangible assets
284
273
264
252
219
1,000
2,292
Due to the issuance of IFRS 3 Business Combinations, good-
will amortization will cease from 1 January 2005. In addition,
certain intangible assets will be reclassified to goodwill at
1 January 2005 and have been excluded for the purpose of
calculating estimated (aggregated) amortization expenses for
Other intangible assets. See Notes 1aa) and 1ab) for further
details.
Note
21
31.12.04
31.12.03
2,663
4,747
326
804
534
19,224
6,486
66
34,850
2,276
2,874
338
862
754
13,544
4,811
0
25,459
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
Life insurance assets
Other receivables
Accounts receivable trade
Total other assets
122
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
31.12.04
118,901
101,081
275,002
376,083
494,984
31.12.03
127,012
94,914
251,719
346,633
473,645
Note 18 Financial liabilities designated at fair value and debt issued
The Group issues both CHF and non-CHF denominated fixed
and floating rate debt. Floating rate debt generally pays in-
terest based on the three-month or six-month London Inter-
bank Offered Rate (LIBOR).
Subordinated debt securities are unsecured obligations of
the Group and are subordinated in right of payment to all pres-
ent and future senior indebtedness and certain other obliga-
tions of the Group. At 31 December 2004 and 31 December
2003, the Group had CHF 8,605 million and CHF 8,061 mil-
lion, respectively, in subordinated debt. Subordinated debt
usually pays interest annually and provides for single principal
payments upon maturity.
At 31 December 2004 and 31 December 2003, the Group
had CHF 91,427 million and CHF 57,953 million, respective-
ly, in unsubordinated debt (excluding money market paper).
The Group issues debt with returns linked to equity, in-
terest rates, foreign exchange and credit instruments or in-
dices. As described in Note 1m), most of these debt instru-
ments have been designated as held at fair value through
profit and loss and are presented in a separate line in the bal-
ance sheet. For compound debt instruments not designat-
ed as held at fair value, derivatives embedded in these in-
struments are separated from the host debt contract and re-
ported as stand alone derivatives, as described in Note 1o).
The amount recorded within Debt Issued represents the
host contract after the separation of the embedded deriva-
tive. At 31 December 2004 and 31 December 2003, the
Group had CHF 148 million and CHF 427 million, respective-
ly, in bonds with attached warrants on UBS shares outstand-
ing. All warrants related to those bonds issued in prior years
have expired.
In addition, the Group uses interest rate and foreign ex-
change 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 account-
ing, at 31 December 2004 and 31 December 2003, the
carrying value of debt issued is CHF 349 million higher and
CHF 411 million higher, respectively, reflecting changes in fair
value due to interest rate movements.
The contractual redemption amount at maturity of finan-
cial liabilities designated at fair value approximates the car-
rying value at 31 December 2004.
123
Financial Statements
Notes to the Financial Statements
Note 18 Financial Liabilities Designated at Fair Value and Debt Issued (continued)
Financial liabilities designated at fair value
CHF million
Unsecuritized compound debt instruments
Bonds and compound debt instruments
Total
Debt issued (held at amortized cost)
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
31.12.04
31.12.03
4,110
61,646
65,756
0
35,286
35,286
31.12.04
79,442
31.12.03
58,115
28,035
8,605
60
1,686
38,386
117,828
19,883
8,061
210
2,574
30,728
88,843
The following table shows the split between fixed and float-
ing rate debt issues based on the contractual terms. How-
ever 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
2005
2006
2007
2008
2009 2010–2014
Thereafter
UBS AG Parent Bank
Senior debt
Fixed rate
Interest rates (range in %)
Floating rate
Subordinated debt
Fixed rate
Interest rates (range in %)
Floating rate
Subtotal
Subsidiaries
Senior debt
Fixed rate
Interest rates (range in %)
Floating rate
Subordinated debt
Fixed rate
Interest rates (range in %)
Floating rate
Subtotal
Total
35,193
0–19
6,662
7,220
0–16.5
1,369
1,488
1,573
4–8.75
4.25–7.25
0
0
8,879
0–11
1,047
1,379
5.75–8
0
4,367
0–20
527
5,239
0–13.5
1,622
7,405
0–15
2,435
0
0
524
5.88
0
1,902
3.13–4.5
0
1,110
0–10
8,923
1,381
7–8.75
342
43,343
10,162
11,305
4,894
7,385
11,742
11,756
100,587
Total
31.12.04
Total
31.12.03
69,413
52,174
22,585
12,542
8,247
7,514
342
506
72,736
53,099
0–10
718
0
0
3,632
0–10
265
0
0
1,418
0–10
314
0
0
5,628
0–10
810
4,671
0–18.5
426
0
0
0
0
1,532
0–35
2,121
0
0
1,010
0–35
3,227
16
9
0
70,990
43,579
7,881
7,773
16
0
41
0
53,817
97,160
3,897
14,059
1,732
13,037
6,438
11,332
5,097
12,482
3,653
15,395
4,253
78,887
51,393
16,009
179,474
124,129
The table above indicates fixed interest rate 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 re-
flect 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.
124
Note 19 Other Liabilities
CHF million
Provisions
Provision for commitments and contingent liabilities
Current tax liabilities
Deferred tax liabilities
VAT and other tax payables
Settlement and clearing accounts
Obligations under life insurance policies
Accounts payable
Other payables
Total other liabilities
Note 20 Provisions
CHF million
Balance at the beginning of the year
Additions from acquired companies
New provisions charged to income
Capitalized reinstatement costs
Recoveries
Provisions applied
Foreign currency translation
Balance at the end of the year
Note
31.12.04
31.12.03
20
9b
21
1,947
211
2,298
2,984
520
2,185
22,057
1,241
8,899
42,342
1,361
290
1,754
2,208
544
2,608
13,544
0
9,051
31,360
Operational / Other 1
Litigation
855
698
127
66
14
(270 )
(37 )
1,453
506
0
414
0
26
(415 )
(37 )
494
Total
31.12.04
1,361
Total
31.12.03
1,375
698
541
66
40
(685)
(74)
1,947
0
330
155
40
(452 )
(87 )
1,361
1 Comprises provisions for: contract risk related to international electricity trading business; annual cost liabilities related to power purchases from joint venture companies where production costs exceed
market prices; reinstatement costs; subleases; and transaction process losses.
Note 21 Income Taxes
CHF million
Domestic
Current
Deferred
Foreign
Current
Deferred
Total income tax expense
For the year ended
31.12.04
31.12.03
31.12.02
1,336
37
796
(34)
2,135
810
118
294
371
1,593
938
(34 )
249
(477 )
676
The Group made net tax payments, including domestic and foreign taxes, of CHF 1,336 million, CHF 1,104 million and
CHF 572 million for the full years of 2004, 2003 and 2002, respectively.
125
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
Operating profit before tax
Domestic
Foreign
Income taxes at Swiss Statutory rate of 24% in 2004, 24% in 2003 and 25% in 2002, 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
31.12.04
10,674
6,219
4,455
2,561
139
103
(249)
(660)
262
219
(296)
56
For the year ended
31.12.03
31.12.02
8,177
5,384
2,793
1,962
(233 )
42
(291 )
(366 )
386
186
(191 )
98
4,537
6,542
(2,005 )
1,134
(341 )
51
(349 )
(378 )
291
301
(122 )
89
676
2,135
1,593
Significant components of the Group’s gross deferred income tax assets and liabilities are as follows:
CHF million
Deferred tax assets
Compensation and benefits
Allowance for credit losses
Net operating loss carry forwards
Trading assets
Other
Total
Valuation allowance
Net deferred tax assets
Deferred tax liabilities
Property and equipment
Investments
Other provisions
Trading assets
Other
Total deferred tax liabilities
31.12.04
31.12.03
1,716
12
2,246
483
874
5,331
(2,668)
2,663
773
343
313
408
1,147
2,984
1,538
4
2,626
306
685
5,159
(2,883 )
2,276
307
390
401
348
762
2,208
The change in the balance of net deferred tax assets and de-
ferred tax liabilities does not equal the deferred tax expense
in those years. This is mainly due to the impact of the acqui-
sition of Motor-Columbus, as well as the effect of foreign cur-
rency rate changes on tax assets and liabilities denominated
in currencies other than CHF.
126
Note 21 Income Taxes (continued)
Certain foreign branches and subsidiaries of the Group have de-
ferred tax assets related to net operating loss carry forwards and
other items. Due to realization of these assets being uncertain,
the Group has established valuation allowances of CHF 2,668
million (CHF 2,883 million at 31 December 2003). For compa-
nies that suffered tax losses in either the current or preceding
year an amount of CHF 431 million (CHF 542 million at 31 De-
cember 2003) has been recognized as deferred tax assets based
on expectations that sufficient taxable income will be generat-
ed in future years to utilize the tax loss carry forwards.
The Group provides deferred income taxes on undistrib-
uted 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 18 million would be due.
At 31 December 2004 net operating loss carry forwards to-
taling CHF 5,832 million (not recognized as a deferred tax
asset) are available to reduce taxable income of certain branch-
es 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
1 Includes 1,742 million CHF related to the acquisition of Motor-Columbus.
Note 23 Derivative Instruments
31.12.04
46
106
5,680
5,832
31.12.03
3,529
372
573
(357 )
(389 )
345
4,073
31.12.04
4,073
0
1,922 1
(668)
(443)
450
5,334
A derivative is a financial instrument, the value of which is de-
rived from the value of another (‘underlying’) financial instru-
ment, an index or some other variable. Typically, the underly-
ing is a share, commodity or bond price, an index value or an
exchange or interest rate.
The majority of derivative contracts are negotiated as to
amount (‘notional’), tenor and price between UBS and its
counterparties, 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 mar-
kets (exchange traded).
The ‘notional’ amount of a derivative is generally the quan-
tity of the underlying instrument on which the derivative con-
tract is based and is the basis upon which changes in the val-
ue of the contract are measured. It provides an indication of
the underlying volume of business transacted by the Group
but does not provide any measure of risk.
Derivative instruments are carried at fair value, shown in
the balance sheet as separate totals of Positive replacement
values (assets) and Negative replacement values (liabilities).
Positive replacement values represent 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, assuming transactions could be re-
placed instantaneously. Negative replacement values represent
the cost to the Group’s counterparties of replacing all their
transactions with the Group with a fair value in their favor if
the Group were to default. Positive and negative replacement
values on different transactions are only netted if the trans-
actions are with the same counterparty and the cash flows will
127
Financial Statements
Notes to the Financial Statements
be settled on a net basis. Changes in replacement values of
derivative instruments are recognized in trading income un-
less they qualify as hedges for accounting purposes, as ex-
plained in Note 1 Summary of Significant Accounting Policies,
section o) Derivative instruments and hedging.
Types of derivative instruments
The Group uses the following derivative financial instruments
for both trading and hedging purposes:
Forwards and futures are contractual obligations to buy or
sell financial instruments or commodities on a future date at
a specified price. Forward contracts are tailor-made agree-
ments that are transacted between counterparties in the over-
the-counter (OTC) market, whereas futures are standardized
contracts transacted on regulated exchanges.
Swaps are transactions in which two parties exchange
cash flows on a specified notional amount for a predetermined
period. Most swaps are traded OTC. The major types of swap
transactions undertaken by the Group are as follows:
– Interest rate swap contracts generally entail the contrac-
tual exchange of fixed and floating rate interest payments
in a single currency, based on a notional amount and a
reference interest rate, e. g. LIBOR.
– Cross currency swaps involve the exchange of interest pay-
ments based on two different currency principal balances
and reference interest rates and generally also entail
exchange of principal amounts at the start and / or end
of the contract.
– Credit default swaps (CDSs) are the most common form of
credit derivative, under which the party buying protection
makes one or more payments to the party selling protection
in exchange for an undertaking by the seller to make a pay-
ment to the buyer following a credit event (as defined in the
contract) with respect to a third party. Settlement following
a credit event may be a net cash amount, or cash in return
for physical delivery of one or more obligations of the credit
entity (as defined in the contract) and is made regardless of
whether the protection buyer has actually suffered a loss. Af-
ter a credit event and settlement, the contract is terminated.
– Total rate of return swaps give the total return receiver ex-
posure to all of the cash flows and economic benefits and
risks of an underlying asset, without having to own the as-
set, in exchange for a series of payments, often based on
a reference interest rate, e. g. LIBOR. The total return pay-
er has an equal and opposite position.
Options are contractual agreements under which, typical-
ly, 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 quantity of a financial instru-
ment or commodity at a predetermined price. The purchaser
pays a premium to the seller for this right. Options involving
more complex payment structures are also transacted. Options
may be traded OTC or on a regulated exchange, and may be
traded in the form of a security (warrant).
Derivatives transacted for trading purposes
Most of the Group’s derivative transactions relate to sales and
trading activities. Sales activities include the structuring and
marketing of derivative products to customers to enable them
to take, transfer, modify or reduce current or expected risks.
Trading includes market-making, positioning and arbitrage ac-
tivities. 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
managing market risk positions with the expectation of prof-
iting from favorable movements in prices, rates or indices. Ar-
bitrage activities involve identifying and profiting from price
differentials between the same product in different markets
or the same economic factor in different products.
Derivatives transacted for hedging purposes
The Group enters into derivative transactions for the purpos-
es of hedging assets, liabilities, forecast transactions, cash
flows and credit exposures. The accounting treatment of
hedge transactions varies according to the nature of the
instrument hedged and whether the hedge qualifies as such
for accounting purposes.
Derivative transactions may qualify as hedges for account-
ing purposes if they are fair value hedges or cash flow hedges.
These are described under the corresponding headings below.
The Group’s accounting policies for derivatives designated and
accounted for as hedging instruments are explained in Note
1 o), Derivative instruments and hedging, where terms used
in the following sections are explained.
The Group also enters into derivative transactions which
provide economic hedges for credit risk exposures but do not
meet the requirements for hedge accounting treatment: the
Group uses CDSs as economic hedges for credit risk exposures
in the loan and traded product portfolios but cannot apply
hedge accounting to such positions.
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 val-
ue of fixed rate long-term debt due to movements in market
interest rates. For the year ended 31 December 2004, the
Group recognized a net gain of CHF 22 million and in 2003
a net gain of CHF 21 million, representing the ineffective por-
tions, as defined in Note 1 o), of fair value hedges. The fair
values of outstanding derivatives designated as fair value
hedges were a CHF 438 million net positive replacement val-
ue at 31 December 2004 and a CHF 797 million net positive
replacement value at 31 December 2003.
Cash flow hedges of forecast transactions
The Group is exposed to variability in future interest cash
flows on non-trading assets and liabilities which bear inter-
est at variable rates or which are expected to be re-funded
or reinvested in the future. The amounts and timing of fu-
128
ture cash flows, representing both principal and interest
flows, are projected for each portfolio of financial assets and
liabilities, based on their contractual terms and other relevant
factors including estimates of prepayments and defaults.
The aggregate principal balances and interest cash flows
across all portfolios over time form the basis for identifying
the non-trading interest rate risk of the Group, which is
hedged with interest rate swaps, the maximum maturity of
which is twenty-two years.
The schedule of forecast principal balances on which the
expected interest cash flows arise as at 31 December 2004 is
as follows.
CHF billion
Cash inflows (Assets)
Cash outflows (Liabilities)
Net cash flows
< 1 year
1–3 years
3–5 years
5–10 years
over 10 years
135
88
47
255
142
113
180
87
93
153
91
62
8
72
(64)
Gains and losses on the effective portions of derivatives des-
ignated as cash flow hedges of forecast transactions are ini-
tially recorded in Shareholders’ equity as Gains / losses not rec-
ognized in the income statement and are transferred to
current period earnings when the forecast cash flows affect
net profit or loss. The gains and losses on ineffective portions
of such derivatives are recognized immediately in the income
statement. In 2004, a gain of CHF 13 million was recognized
due to hedge ineffectiveness, whereas in 2003 and 2002 no
gains or losses from hedge ineffectiveness arose.
As at 31 December 2004 and 2003, the fair values of out-
standing derivatives designated as cash flow hedges of fore-
cast transactions were a CHF 818 million net negative replace-
ment value and a CHF 871 million net negative replacement
value, respectively. Swiss franc hedging interest rate swaps ter-
minated during 2003 had a positive replacement value of CHF
867 million. No interest rate swaps designated as cash flow
hedges were terminated during 2004. At year-end 2004, un-
recognized income of CHF 501 million associated with these
swaps has remained deferred in Shareholders’ equity. It will
be removed from equity when the hedged cash flows impact
net profit or loss. Amounts reclassified from Realized gains /
losses not recognized in the income statement to current
period earnings due to discontinuation of hedge accounting
were a CHF 304 million net gain in 2004 and a CHF 7 million
net gain in 2003. These amounts were recorded in net inter-
est income.
Risks of derivative instruments
Derivative instruments are transacted in many trading portfo-
lios, which generally include several types of instruments, not
just derivatives. The market risk of derivatives is managed and
controlled as an integral part of the market risk of these port-
folios. The Group’s approach to market risk is described in
Note 29, Financial Instruments Risk Position, part a) Market
risk.
Derivative instruments are transacted with many different
counterparties, most of whom are also counterparties for oth-
er types of business. The credit risk of derivatives is managed
and controlled in the context of the Group’s overall credit ex-
posure to each counterparty. The Group’s approach to cred-
it risk is described in Note 29, Financial Instruments Risk Po-
sition, part b) Credit Risk. It should be noted that although
the positive replacement values shown on the balance sheet
can be an important component of the Group’s credit expo-
sure, the positive replacement values for any one counterpar-
ty are rarely an adequate reflection of the Group’s credit ex-
posure on its derivatives business with that counterparty. This
is because, on the one hand, replacement values can increase
over time (‘potential future exposure’), while on the other
hand, exposure may be mitigated by entering into master net-
ting agreements and bilateral collateral arrangements with
counterparties. Both the exposure measures used by the
Group internally to control credit risk and the capital require-
ments imposed by regulators reflect these additional factors.
In Note 29, part b) Credit Risk, the Derivatives positive re-
placement values shown under Traded products, and in Note
29 part d) Capital Adequacy, the Positive replacement values
shown under Balance sheet assets are lower than those
shown in the balance sheet and in the tables on the next two
pages because they reflect legally enforceable close-out net-
ting arrangements. Conversely, there are additional capital
requirements shown in Note 29 part d) Capital Adequacy
under off-balance sheet and other positions as Forward and
swap contracts and Purchased options, which reflect the
additional potential future exposure.
129
Financial Statements
Notes to the Financial Statements
Note 23 Derivative Instruments (continued)
As at 31 December 2004
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
Within 3 months
3–12 months
1–5 years
Over 5 years
PRV 1
NRV 2
PRV
NRV
PRV
NRV
PRV
NRV
Total
PRV
Total
NRV
Total
notional
amount
CHF bn
440
4,305
806
495
112
144
58
34
90
166
700
839
843.6
4,002
11,015
11,921
65,419
64,487
76,470
75,287 157,209 155,697
9,871.0
722
1,845
2,239
6,553
8,292
5,942
6,479
15,146
17,732
1,181.4
86
87
133
103
5
5
224
195
817.9
5,637
5,306
13,105
14,407
72,035
72,818
82,502
81,932 173,279 174,463 14,786.9
2,073.0
7
31
38
10
15
25
51
57
108
99
69
3,819
433
168
4,252
5,409
1,076
6,485
2,401
376
1,501
6,278
272
897
2,777
1,773
7,175
7,019
1,432
8,451
639.2
27.1
666.3
Forward contracts
3,496
4,585
807
1,316
186
449
68
240
4,557
6,590
355.6
Interest and currency swaps
27,587
28,094
15,101
14,907
20,897
15,484
7,189
7,240
70,774
65,725
2,811.4
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
2,224
2,202
2,809
2,553
508
503
4
4
5,545
5,262
559.2
9
9
81
79
11
10
101
98
2.9
5.9
33,316
34,890
18,798
18,855
21,602
16,446
7,261
7,484
80,977
77,675 3,735.0
130
156
215
501
113
115
237
465
150
281
195
626
201
251
447
683
259
711
18
1,148
192
615
33
840
9
34
24
28
736
530
1,154
1,009
428
529
13.5
43.4
0.8
2.5
43
52
2,318
2,068
60.2
795
2,017
506
7,807
572
2,057
419
7,245
1,912
7,367
928
16,290
1,212
4,024
1,040
9,353
947
1,142
1,711
1,979
3,576
8,806
10,990
19,197
129
455
98
682
24
3,408
1,877
2,144
11,896
33,486
109
3,968
4,270
2,277
19,272
39,633
338
76
414
343
73
416
519
85
604
491
79
570
420
118
538
379
57
436
1,277
1,213
279
209
0
0
1,556
1,422
103.6
223.6
8.1
401.6
736.9
35.4
4.7
40.1
Total derivative instruments
43,930
50,455
36,817
43,517 110,565 116,222
93,265
93,518 284,577 303,712
1 PRV: Positive replacement value.
2 NRV: Negative replacement value.
3 Exchange-traded products include proprietary trades only.
130
Note 23 Derivative Instruments (continued)
As at 31 December 2003
Term to maturity
Within 3 months
3–12 months
1–5 years
Over 5 years
PRV 1
NRV 2
PRV
NRV
PRV
NRV
PRV
NRV
Total
PRV
Total
NRV
Total
notional
amount
CHF bn
CHF million
Interest rate contracts
Over the counter (OTC) contracts
Forward contracts
Swaps
Options
Exchange-traded contracts 3
Futures
Options
Total
Credit derivative contracts
Over the counter (OTC) contracts
Credit default swaps
Total rate of return swaps
Total
Foreign exchange contracts
Over the counter (OTC) contracts
424
3,831
464
586
4,388
978
258
8,698
868
312
71
130
5
4
758
1,032
1,128.4
5,991
64,216
65,075
52,019
50,517 128,764 125,971
8,065.4
992
4,686
5,967
4,223
5,334
10,241
13,271
815.4
7
9
2
8
9
17
243.7
63.4
4,726
5,961
9,826
7,303
68,973
71,172
56,247
55,855 139,772 140,291 10,316.3
109
27
136
102
2
104
39
29
68
61
576
637
3,443
197
3,536
470
1,928
112
1,880
5,519
305
365
3,640
4,006
2,040
2,185
5,884
5,579
1,353
6,932
289.3
12.0
301.3
Forward contracts
3,045
3,879
1,978
2,573
161
317
15
12
5,199
6,781
298.4
Interest and currency swaps
24,929
25,242
14,258
12,428
17,780
14,394
6,002
5,250
62,969
57,314
2,254.4
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
3,232
3,348
3,211
2,550
513
356
9
1
6,965
6,255
576.8
3
3
119
116
122
119
5.0
13.2
31,209
32,472
19,566
17,667
18,454
15,067
6,026
5,263
75,255
70,469 3,147.8
246
304
9
559
247
193
40
480
377
308
21
706
305
386
333
668
63
754
3
1,004
270
629
4
903
18
116
23
54
974
845
1,396
1,262
33
107
15.9
35.1
1.1
2.3
134
77
2,403
2,214
54.4
509
1,841
529
2,788
763
3,482
583
917
449
7,847
11,111
13,646
1,408
1,328
501
3,597
2,062
4,560
17,762
28,841
708
858
892
1,363
883
768
54
117
2,537
3,106
57.9
213.8
8.6
62.6
3,058
4,175
5,137
9,793
12,911
14,863
2,790
5,178
23,896
34,009
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
Total derivative instruments
40,062
43,526
35,832
36,631 105,075 106,053
67,237
68,558 248,206 254,768
1 PRV: Positive replacement value.
2 NRV: Negative replacement value.
3 Exchange-traded products include proprietary trades only.
131
Financial Statements
Notes to the Financial Statements
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
31.12.04
39,588
57
39,645
31.12.03
37,851
74
37,925
The Group also acts in its own name as trustee or in fiduciary capacities for the account of third parties. 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 financial instru-
ments in order to meet the financial needs of its cus-
tomers. The Group issues commitments to extend credit,
standby and other letters of credit, guarantees, commitments
to enter into repurchase agreements, note issuance facilities
and revolving underwriting facilities. Guarantees represent
irrevocable assurances, subject to the satisfaction of certain
conditions, that the Group will make payment in the event
that the customer fails to fulfill its obligation to third parties.
The Group also enters into commitments to extend credit in
the form of credit lines which are available to secure the liq-
uidity needs of our customers, but not yet drawn upon by
them, the majority of which range in maturity from 1 month
to 5 years.
The contractual amount of these instruments is the maxi-
mum 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 2004, 2003 and 2002 the Group recog-
nized a CHF 31 million credit loss expense, CHF 23 million
credit loss recovery and CHF 13 million credit loss expense, re-
spectively, related to obligations incurred for contingencies
and commitments.
The Group generally enters into sub-participations to mit-
igate the risks from commitments and contingencies. A sub-
participation is an agreement with another party to fund a por-
tion of the credit facility and to take a share of the loss in the
event that the borrower fails to fulfill its obligations. The
Group retains the contractual relationship with the borrower
and the sub-participant has only an indirect relationship with
the borrower. The Group will only enter into sub-participation
agreements with banks whose rating is at least equal to or
higher than that of the borrower.
132
Note 25 Commitments and Contingent Liabilities (continued)
CHF million
Contingent liabilities
Credit guarantees and similar instruments 1
Sub-participations
Total
Performance guarantees and similar instruments 2
Sub-participations
Total
Irrevocable commitments and 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
Market value guarantees in form of written put options
31.12.04
31.12.03
10,252
(621)
9,631
2,536
(415)
2,121
2,106
(272)
1,834
14,894
(1,308)
13,586
53,168
(7)
53,161
19
53,187
(7)
53,180
68,081
(1,315)
66,766
352,509
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
218,638
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 bills rediscounted, advance
payment guarantees and similar facilities.
2 Bid bonds, performance bonds, builders’ guarantees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and
similar facilities.
As part of its trading and market-making activities, UBS writes
put options on a broad range of underlyings. For writing put
options, UBS receives a premium, which is recognized as neg-
ative replacement value on the balance sheet. The contract
volume of a written put option, which is the number of units
of the underlying multiplied by the exercise price per unit, is
considered a market price guarantee issued, because the op-
tion holder is entitled to make UBS purchase the underlying
at the stated exercise price. The fair value of all written put
options is recognized on the balance sheet as negative replace-
ment value, which is significantly lower than the underlying
total contract volume that represents the maximum potential
payment UBS could be required to make upon exercise of the
puts. The exposure from writing put options is managed
through UBS’s standard risk management process at a level
that is within the set risk limits. Accordingly, neither the un-
derlying total contract volume nor the negative replacement
value are indicative of the actual risk exposure arising from
written put options.
133
Financial Statements
Notes to the Financial Statements
Note 25 Commitments and Contingent Liabilities (continued)
CHF million
Overview of collateral
Gross contingent liabilities
Gross irrevocable commitments
Liabilities for calls on shares and other equities
Total 31.12.04
Total 31.12.03
Mortgage collateral
Other collateral
Unsecured
Total
347
3,252
0
3,599
2,637
7,661
22,384
0
30,045
30,870
6,886
27,532
19
34,437
29,016
14,894
53,168
19
68,081
62,523
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 2004
and 31 December 2003 was CHF 1,019 million and CHF 1,537 million, respectively.
Note 26 Operating Lease Commitments
At 31 December 2004, UBS was obligated under a number of non-cancellable operating leases for premises and equipment
used primarily for banking purposes. The significant premises leases usually include renewal options and escalation clauses
in line with general office rental market conditions as well as rent adjustments based on price indices. However, the lease
agreements do not contain contingent rent payment clauses and purchase options. The leases also do not impose any
restrictions on UBS’s ability to pay dividends, engage in debt financing transactions or enter into further lease agreements.
Our minimum commitments for non-cancellable leases of premises and equipment are presented as follows:
CHF million
Operating leases due
2005
2006
2007
2008
2009
2010 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
31.12.04
886
805
719
647
584
4,060
7,701
547
7,154
Operating expenses include CHF 1,214 million and CHF 1,233 million of gross operating lease rentals which were reduced
by CHF 43 million and CHF 43 million of sublease income for the years ended 31 December 2004 and 31 December 2003,
respectively. Operating expenses for the year ended 31 December 2002 include CHF 1,193 million in respect of operating
lease rentals.
134
Additional Information
Note 27 Pledged Assets
Assets are pledged as collateral for collateralized credit lines with central banks, loans from central mortgage institutions, de-
posit guarantees for savings banks, security deposits relating to stock exchange membership and mortgages on the
Group’s property. No financial assets are pledged for contingent liabilities. 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 2004 and 31 December 2003.
CHF million
Mortgage loans
Securities
Property and equipment
Total pledged assets
Note 28 Litigation
Carrying amount Related liability
31.12.04
31.12.04
Carrying amount
31.12.03
Related liability
31.12.03
175
193,028
320
193,523
60
131,462
0
131,522
428
157,639
0
158,067
209
121,984
0
122,193
Due to the nature of their business, the bank and other com-
panies within the UBS Group are involved in various claims,
disputes and legal proceedings, arising in the ordinary course
of business. The Group makes provisions for such matters
when, in the opinion of management and its professional ad-
visors, it is probable that a payment 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 (part a) is exposure to market variables such as
interest rates, exchange rates and equity markets
– credit risk (part b) is the risk of loss resulting from client or
counterparty default and arises on credit exposure in all
forms, including settlement risk
– liquidity and funding risk (part c) is the risk that UBS is un-
able to meet its payment obligations when due, or that it
is unable, on an ongoing basis, to borrow funds in the mar-
ket on an unsecured, or even secured basis at an accept-
able price to fund actual or proposed commitments.
Part d) presents and explains the Group’s regulatory capi-
tal position.
Sections a) to d) generally refer only to UBS’s financial busi-
nesses, while section e) covers the financial instruments risk
positions of the industrial holding Motor-Columbus through
its operating subsidiary Atel. The tables in this note which are
based on risk information include only the financial business-
es of the Group. Those which present an analysis of the whole
balance sheet include the positions of Motor-Columbus.
It should be noted that, in management’s view, any repre-
sentation of risk at a specific date offers only a snapshot of
the risks taken, since both trading and non-trading positions
can vary significantly on a daily basis, because they are active-
ly managed. As such, it may not be representative of the lev-
el of risk at other times.
135
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk
(i) Overview
Market risk is the risk of loss arising from movements in mar-
ket variables including observable variables such as interest
rates, exchange rates and equity markets, and others which
may be only indirectly observable such as volatilities and cor-
relations. The risk of price movements on securities and oth-
er obligations in tradable form resulting 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 ac-
tivities, which are centered in the Investment Bank but also
arise, to a much lesser extent, in the Wealth Management
businesses. It arises from market making, client facilitation and
proprietary positions in equities, fixed income and interest rate
products, foreign exchange and, to a lesser extent, precious
metals and energy.
Additionally, Group Treasury assumes material non-trading
market risk positions that arise from its balance sheet and cap-
ital management activities. There are also smaller non-trad-
ing market risk positions, predominantly interest rate risks, in
the other Business Groups.
Each Business Group has a Chief Risk Officer (CRO), report-
ing functionally to the Group CRO, responsible for independ-
ent risk control of market risk.
Market risk authority, including both approval of market
risk limits and approval of market risks in large or complex
transactions and securities underwritings, is exercised by the
Chairman’s Office and the GEB and is further delegated on
an ad personam basis to the Group CRO and Market Risk Of-
ficers within the Business Groups.
Market risk measures and controls are applied to all trad-
ing activities, to foreign exchange, precious metal and ener-
gy exposures wherever they arise, and to interest rate risk in
the banking books of all Business Groups including Group
Treasury and the independent private banks.
The principal portfolio risk measures and limits on market
risk are Value at Risk (VaR) and stress loss. VaR is an estimate
of the potential loss on the current portfolio from adverse mar-
ket movements, based on historical market movements, as-
suming a specified time horizon before positions can be ad-
justed (holding period), and expressed as the maximum
potential loss that, with a specified level of confidence (prob-
ability), will not be exceeded. Stress loss is assessed against a
set of forward-looking scenarios using stress moves in mar-
ket variables, which are regularly reviewed. Complementary
controls are also applied, where appropriate, to prevent un-
due concentrations, taking into account variations in price
volatility and market depth and liquidity. They include controls
on exposure to individual market risk variables, such as indi-
vidual interest or exchange rates, and on positions in the se-
curities of individual issuers (’issuer risk’).
(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 struc-
ture described in (a) (i) above. Exposure to interest rate move-
ments can be expressed for all interest rate sensitive positions,
whether marked to market or subject to amortized cost ac-
counting, 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.
The table sets out the extent to which UBS was exposed
to interest rate risk at 31 December 2004 and 2003. It shows
the net impact of a one basis point (0.01%) increase in mar-
ket interest rates across all time bands on the fair values of in-
terest rate sensitive positions, both on- and off-balance sheet.
The impact of such an increase in interest rates depends on
UBS’s net asset or net liability position in each category, cur-
rency 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.
136
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (continued)
Interest rate sensitivity position 1
Interest rate sensitivity by time bands at 31.12.04
CHF thousand gain / (loss) per basis point increase
Within 1
month
1 to 3
months
CHF
USD
EUR
GBP
JPY
Other
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
65
(203 )
49
30
192
(8 )
(19 )
(1 )
(17 )
(1 )
75
(1 )
69
(13 )
(236 )
(158 )
(276 )
1
52
(7 )
630
1
(121 )
1
3 to 12
months
(83 )
(313 )
(1,184 )
(121 )
342
(22 )
60
(34 )
1 to 5
years
24
(3,575 )
886
(2,010 )
(366 )
(180 )
(380 )
(290 )
(562 )
(1,804 )
(1 )
(8 )
1
(4 )
5
(1 )
Over 5
years
120
(2,641 )
127
(2,472 )
(814 )
(200 )
(32 )
270
781
(1 )
145
(2 )
Interest rate sensitivity by time bands at 31.12.03
CHF thousand gain / (loss) per basis point increase
Within 1
month
1 to 3
months
3 to 12
months
CHF
USD
EUR
GBP
JPY
Other
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
Trading
Non-trading
1 Positions in Industrial Holdings are excluded.
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 )
Over 5
years
(91 )
(3,587 )
1,190
(1,702 )
649
(196 )
536
481
(273 )
(2 )
335
(3 )
Total
195
(6,745)
(358)
(4,731)
(922)
(409)
(319)
(62)
(972)
(6)
96
(2)
Total
48
(8,371)
(1,096)
(4,012)
(261)
(338)
(14)
376
(164)
(9)
(70)
(11)
Positions shown as ’trading’ are those which contribute to
market risk regulatory capital, i. e. those considered ’trading
book’ for regulatory capital purposes (see section d). ’Non-
trading’ includes all other interest rate sensitive assets and
liabilities including derivatives designated as hedges for ac-
counting purposes (as explained in Note 23) and off balance
sheet commitments on which an interest rate has been
fixed. This distinction differs somewhat from the account-
ing classification of trading and non-trading assets and lia-
bilities.
Details of money market paper and debt instruments de-
fined as trading portfolio for accounting purposes are includ-
ed in Note 11 and of debt instruments defined as financial
investments for accounting purposes in Note 12. Details of de-
rivatives are shown in Note 23, but it should be noted that in-
terest rate risk arises not only on interest rate contracts but
also on other forwards, swaps and options, in particular on
forward foreign exchange contracts. Off-balance sheet com-
mitments on which an interest rate has been fixed are prima-
rily forward starting fixed term loans.
Trading
The major part of this risk arises in the Investment Bank’s Fixed
Income Rates and Currencies business.
Non-trading
Interest rate risk is inherent in many of UBS’s businesses and
arises from factors such as differences in timing between
contractual maturity or re-pricing of assets, liabilities and de-
rivative 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 In-
vestment Bank or Group Treasury – where it is managed with-
137
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
a) Market Risk (continued)
in the market risk limits described in (a)(i). The margin risks em-
bedded in retail products remain with, and are subject to ad-
ditional 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 – portfo-
lios of revolving transactions between the originating business
unit and Group Treasury at market rates designed to approx-
imate their average cash flow and re-pricing behavior. The
structure and parameters of the replication portfolios are set
in accordance with long-term observations of market and
client behavior, and are reviewed periodically.
Interest rate risk also arises from balance sheet items such
as the financing of bank property and investments in equity
of associated companies, and from the investment of the
Group’s equity. The risk on these items is also transferred to
Group Treasury, through replicating portfolios designed to ap-
proximate the desired funding or investment profile.
The Group’s equity is invested at longer-term fixed interest
rates in CHF, USD, EUR and GBP with an average duration of
between three and four years, in line with strategic investment
targets set by the Group Executive Board (GEB). These invest-
ments account for CHF 12.6 million of the non-trading inter-
est rate sensitivity, with CHF 6.6 million arising in CHF, CHF
5.0 million in USD and the remainder in EUR and GBP. The in-
terest rate sensitivity of these investments is directly related
to the chosen investment duration and it should be recognized
that, although investing in significantly shorter maturities
would lead to a reduction in apparent interest rate sensitivi-
ty, it would lead to higher volatility in interest earnings.
(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 cur-
rency risk from these trading activities, conducted primarily in
the Investment Bank. These trading exposures are subject to
VaR, stress and concentration limits as described in (a)(i). De-
tails 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, lia-
bilities, income and expense are denominated in many cur-
rencies, with significant amounts in USD, EUR and GBP, as well
as CHF.
Reported profits or losses are exchanged monthly into
CHF, reducing volatility in the Group’s earnings from subse-
138
quent 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 instruc-
tions of the GEB and subject to its VaR limit. Economic hedg-
ing strategies employed include a cost-efficient option strat-
egy, providing a safety net against unfavorable currency
fluctuations while preserving upside potential.
The Group’s equity is invested in a diversified portfolio
broadly reflecting the currency distribution of its risk-weight-
ed assets in CHF, USD, EUR and GBP. This creates structural
foreign currency exposures, the gains or losses on which are
recorded through equity, leading to fluctuations in UBS’s cap-
ital base in line with the fluctuations in risk-weighted assets,
thereby protecting the BIS Tier 1 capital ratio.
At 31 December 2004, the largest combined trading and
non-trading currency exposures against the Swiss franc were
in USD (short USD 224 million), EUR (short EUR 664 million)
and GBP (long GBP 221 million). At 31 December 2003 the
largest exposures were in USD (short USD 723 million), EUR
(long EUR 71 million) and GBP (short GBP 40 million).
(iv) Equity Risk
Equity risk is the risk of loss resulting from changes in the lev-
els of equity indices and values of individual stocks.
The Investment Bank is a significant player in major equi-
ty 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 equities defined as trading portfolio for account-
ing purposes are given in Note 11. Details of equity deriva-
tives contracts (on indices and individual equities), which arise
primarily from the Investment Bank’s trading activities, are
shown in Note 23.
(v) Issuer Risk
The values of tradable assets – equities, bonds and other
debt instruments (including money market paper and trad-
able loans) held for trading – are affected by factors specif-
ic to individual issuers as well as general market moves. This
can include short-term factors influencing price but also
more fundamental causes including severe financial deteri-
oration.
As an active trader and market maker in equities, bonds
and other securities, the Investment Bank holds positions in
tradable assets, which are not only included in VaR but also
subject to concentration limits on exposure to individual is-
suers. This includes both exposures arising from physical
holdings, and exposures from derivatives based on such
assets.
Note 29 Financial Instruments Risk Position (continued)
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 traditional banking products – loans, commitments
to lend and other contingent liabilities, such as letters of cred-
it – and in traded products – derivative contracts such as for-
wards, swaps and options, and repo and securities borrowing
and lending transactions. Some of these products are account-
ed for on an amortized cost basis while others are recorded in
the financial statements at fair value. Banking products are
generally carried at amortized cost, but loans which have been
originated by the Group for subsequent syndication or distri-
bution through the cash markets, are carried at fair value. With-
in traded products, OTC derivatives are carried at fair value,
while repos and securities borrowing and lending transactions
are accounted for on an amortized cost basis. Regardless of
the accounting treatment, all banking and traded products are
controlled under the same credit risk framework.
All Business Groups taking material credit risk have inde-
pendent credit risk control functions headed by Chief Credit
Officers (CCOs) reporting functionally to the Group CCO. They
are responsible for the independent control of credit risk in-
cluding counterparty ratings and credit risk assessment. Cred-
it risk authority, including authority to establish allowances and
provisions and credit valuation adjustments for impaired
claims, is exercised by the Chairman’s Office and the GEB and
is further delegated on an ad personam basis to the Group
CCO and to Credit Officers within the Business Groups.
For credit control purposes, credit exposure is measured for
banking products as the face value amount. For traded prod-
ucts, credit exposure is measured as the current replacement
value of contracts plus potential future changes in replace-
ment value, taking account of master netting agreements with
individual counterparties where they are considered enforce-
able in insolvency. UBS is an active user of credit derivatives
to hedge credit risk on individual names and on a portfolio
basis in banking and traded products. In line with general mar-
ket trends, UBS has also entered into bilateral collateral agree-
ments with market participants to mitigate credit risk on OTC
derivatives. Individual hedges and collateral arrangements are
reflected in our internal credit exposure measurement, and
credit limits are applied on this basis.
In the table, the amounts shown as credit exposure differ
somewhat from the internal credit view. For banking products,
they are based on the accounting view, which, for example,
does not reflect risk reduction resulting from credit hedges and
collateral received, but does include cash collateral posted by
UBS against negative replacement values on derivatives. For
traded products, positive and negative replacement values are
shown net only where permitted for regulatory capital purpos-
es (consistent with the table in part d) Capital Adequacy), and
potential future exposure is not included. This in turn differs
from the accounting treatment of traded products in several
respects. OTC derivatives are represented on the balance sheet
by positive and negative replacement values, which are netted
only if the cash flows will actually be settled net, which is not
generally the case – for details see Note 23. Securities borrow-
ing and lending transactions are represented on the balance
sheet by the gross values of cash collateral placed with or re-
ceived from counterparties while repos / reverse repos are rep-
resented by the gross amounts of the forward commitments
– for details see Note 10 – the credit exposure generally being
only a small percentage of these balance sheet amounts.
Breakdown of credit exposure 1
Amounts for each product type are shown gross before allowances and provisions.
CHF million
Banking products
Loans to customers and due from banks 2
Contingent liabilities (gross – before participations) 3
Undrawn irrevocable credit facilities (gross – before participations) 3
Traded products 4
Derivatives positive replacement values (before collateral but after netting) 5
Securities borrowing and lending, repos and reverse repos 6, 7
Allowances and provisions 8
Total credit exposure net of allowances and provisions
31.12.04
31.12.03
269,518
14,894
53,168
78,317
24,768
(2,883)
437,782
247,995
15,563
46,623
84,334
30,833
(3,954 )
421,394
1 Positions in Industrial Holdings are excluded.
3 See Note 25 – Commitments and Contingent Liabilities for further information.
4 Does not include potential future credit exposure arising from changes in value of products with variable value. Potential future credit exposure is, however, included in internal measures of credit
exposure for risk management and control purposes.
5 Replacement values are shown net where netting is permitted for regulatory capital purposes. See also Note 23 – Derivative Instruments for
further information.
6 This figure represents 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 from the same counterparties under stock borrow / lend and repo / reverse repo transactions.
7 See Note 10 – Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase
Agreements for further information about these types of transactions.
8 See Note 9b – Allowances and Provisions for Credit Losses for further information.
2 See Note 9a – Due from Banks and Loans for further information.
139
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
b) Credit Risk (continued)
UBS manages and controls concentrations of credit risk wher-
ever they are identified, in particular to individual counterpar-
ties and groups, and to industries and countries. UBS sets lim-
its on its credit exposure to both individual counterparties and
counterparty groups. Concentrations of credit risk exist if
clients are engaged in similar activities, or are located in the
same geographic region or have comparable economic char-
acteristics such that their ability to meet contractual obliga-
tions would be similarly affected by changes in economic, po-
litical or other conditions. Stress measures are applied to
assess the impact of variations in default rates and asset val-
ues, taking into account risk concentrations in each portfo-
lio. Stress loss limits are applied where considered necessary,
including limits on credit exposure to all but the best-rated
countries. With the exceptions of private households (CHF
135,397 million), banks and financial institutions (CHF 75,311
million) and real estate and rentals in Switzerland (CHF 11,466
million), there are no material concentrations of loans at 31
December 2004, and the vast majority of those to private
households and to real estate and rentals are secured. Deriv-
atives exposure is predominantly to investment grade banks
and financial institutions.
Impaired claims
UBS classifies a claim as impaired if it considers that it will suf-
fer a loss on that claim as a result of the obligor’s inability to
meet its commitments (including interest payments, principal
repayments or other payments due, for example on a deriva-
tive product or under a guarantee) according to the contrac-
tual terms, and after realization of any available collateral.
Loans are further classified as non-performing where payment
of interest, principal or fees is overdue by more than 90 days
and there is no firm evidence that they will be made good by
later payments or the liquidation of collateral, or where insol-
vency proceedings have commenced or obligations have been
restructured on concessionary terms.
The recognition of impairment in the financial statements
depends on the accounting treatment of the claim. For prod-
ucts accounted for on an amortized cost basis, impairment is
recognized through the creation of a provision or allowance,
which is charged to the income statement as credit loss ex-
pense. Allowances or provisions are determined such that the
carrying values of impaired claims are consistent with the prin-
ciples of IAS 39. For products recorded at fair value, impair-
ment is recognized through a credit valuation adjustment,
which is charged to the income statement through the net
trading income line.
UBS also assesses portfolios of claims with similar credit risk
characteristics for collective impairment in accordance with
IAS 39 (amortized cost products only). A portfolio is consid-
ered impaired on a collective basis if there is objective evidence
to suggest that it contains impaired obligations but the indi-
vidual impaired items cannot yet be identified.
For further information about accounting policy for al-
lowances and provisions for credit losses see Note 1q). For the
amounts of allowance and provision for credit losses and
amounts of impaired and non-performing loans, see Note 9
b), c) and d). It should be noted that allowances and provi-
sions for collective impairment are included in the total of al-
lowances and provisions in the table on the previous page, and
in notes 9a and 9b, but that portfolios against which collec-
tive loan loss provisions have been established are not includ-
ed in the totals of impaired loans in Note 9c.
The occurrence of credit losses is erratic in both timing and
amount and those that arise usually relate to transactions en-
tered into in previous accounting periods. In order to reflect
the fact that future credit losses are implicit in the current port-
folio, and to encourage risk-adjusted pricing for products car-
ried at amortized cost, UBS uses the concept of ’expected loss’
for management purposes. Expected loss is a forward look-
ing, statistically based concept which is used to estimate the
annual costs that will arise, on average over time, from posi-
tions in the current portfolio that become impaired. It is de-
rived from the probability of default (given by the counterpar-
ty rating), current and likely future exposure to the
counterparty and the likely severity of the loss should default
occur. Note 2a includes two tables: the first shows Credit loss
expense, as recorded in the Financial Statements, for each
Business Group; the second reflects an ’Adjusted expected
credit loss’ for each Business Group, which is the expected
credit loss on its portfolio, plus the difference between Cred-
it loss expense and expected credit loss, amortized over a
three-year period. The difference between the total of these
Adjusted expected credit loss figures and the Credit loss ex-
pense recorded at Group level for financial reporting is report-
ed in Corporate Functions.
140
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 central-
ized approach is adopted, based on an integrated frame-
work 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 liquidity
position is assessed and managed under a variety of scenar-
ios, giving due consideration to stress factors. Scenarios en-
compass not only normal market conditions but also stressed
conditions, including both UBS-specific and general market
crises. The impact on both trading and client businesses is
considered, taking account of potential collateral with which
funds might be raised, and the possibility that customers
might seek to withdraw funds or draw down unutilized
credit lines.
The breakdown by contractual maturity of assets and lia-
bilities, which is the basis of the “normal market conditions”
scenario, at 31 December 2004 is shown in the table below.
Maturity analysis of assets and liabilities
CHF billion
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets 2
Trading portfolio assets pledged as collateral
Positive replacement values 2
Financial assets designated at fair value
Loans
Financial investments
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and other intangible assets
Other assets
Total 31.12.04
Total 31.12.03
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities 2
Negative replacement values 2
Financial liabilities designated at fair value
Due to customers
Accrued expenses and deferred income
Debt issued
Other liabilities
Total 31.12.04
Total 31.12.03
On
demand
Subject
to notice 1
Due
within
3 months
Due
between
3 and
12 months
Due
between
1 and
5 years
Due after
5 years
6.0
20.0
0.0
0.0
370.3
159.1
284.6
0.7
23.1
4.1
5.9
0.0
0.0
0.0
15.6
889.4
832.4
30.8
0.0
0.0
171.0
303.7
0.0
119.1
14.7
0.0
20.3
659.6
795.0
0.4
186.0
49.6
0.0
0.0
0.0
0.0
35.8
0.0
0.0
0.0
0.0
0.0
19.2
291.0
260.6
6.5
51.7
20.2
0.0
0.0
0.0
112.0
0.0
0.0
22.1
212.5
188.0
10.5
32.0
255.0
0.0
0.0
0.0
0.0
47.3
0.6
0.0
0.0
0.0
0.0
0.0
345.4
271.2
77.8
9.8
363.2
0.0
0.0
2.3
135.4
0.0
74.9
0.0
663.4
338.5
1.1
2.1
46.0
0.0
0.0
0.0
0.0
30.2
0.1
0.0
0.0
0.0
0.0
0.0
79.5
82.6
1.5
0.0
37.8
0.0
0.0
9.0
5.2
0.0
12.1
0.0
65.6
130.4
2.1
0.1
5.5
0.0
0.0
0.0
0.0
79.6
0.2
0.0
0.0
0.0
0.0
0.0
87.5
72.2
1.9
0.0
1.2
0.0
0.0
46.4
1.5
0.0
5.0
0.0
56.0
36.5
1.2
0.0
1.1
0.0
0.0
0.0
0.0
16.4
0.1
0.0
2.4
8.7
12.1
0.0
42.0
31.1
0.4
0.0
0.2
0.0
0.0
8.1
2.9
0.0
25.8
0.0
37.4
22.3
Total
6.0
35.3
220.2
357.2
370.3
159.1
284.6
0.7
232.4
5.1
5.9
2.4
8.7
12.1
34.8
1,734.8
1,550.1
118.9
61.5
422.6
171.0
303.7
65.8
376.1
14.7
117.8
42.4
1,694.5
1,510.7
1 Deposits without a fixed term, on which notice of withdrawal or termination has not been given (such funds may be withdrawn by the depositor or repaid by the borrower subject to an agreed period
of notice which can be from 2 days to 6 months).
2 Trading and derivative positions are shown within ’on demand’ which management believes most accurately reflects the short-term nature of trading
activities. The contractual maturity of the instruments may however extend over significantly longer periods.
141
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
d) Capital Adequacy
The adequacy of UBS’s capital is monitored using, among oth-
er 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 regulatory 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 under
the BIS rules.
BIS Eligible capital
BIS eligible capital consists of two parts. Tier 1 capital com-
prises share capital, share premium, retained earnings includ-
ing current year profit, foreign currency translation and mi-
nority interests less accrued dividends, net long positions in
own shares and goodwill. Certain adjustments are made to
IFRS-based profit and reserves, in line with BIS recommenda-
tions, as prescribed by the EBK. Tier 2 capital includes subor-
dinated long-term debt. Tier 1 capital is required to be at least
4% and Total eligible capital at least 8% of RWAs.
BIS Risk-Weighted Assets (RWAs)
Total RWAs are made up of three elements – credit risk, oth-
er 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 out-
lined below, and weighted according to type of counterpar-
ty and collateral at 0%, 20%, 50% or 100%. The least risky
claims, such as claims on OECD governments and claims col-
lateralized by cash, are weighted at 0%, meaning that no cap-
ital 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 sup-
port is required.
Securities not held for trading are included as claims, based
on the net long position in the securities of each issuer, includ-
ing both physical holdings and positions derived from other
transactions such as options. UBS’s investment in Motor-
Columbus is treated for regulatory capital purposes as a po-
sition in a security not held for trading.
Claims arising from derivatives transactions include two
components: the current positive replacement values and ’add-
ons’ to reflect their potential future exposure. Where UBS has
entered into a master netting agreement which is accepted by
the EBK as being legally enforceable in insolvency, positive and
negative replacement values with individual counterparties
can be netted and therefore the on-balance sheet component
of RWAs for derivatives transactions shown in the table on the
next page (Positive replacement values) is less than the balance
sheet value of Positive replacement values. The add-ons com-
ponent of the RWAs is shown in the table on the next page
under Off-balance sheet exposures and other positions – For-
ward and swap contracts, and Purchased options.
Claims arising from contingent commitments and irrevo-
cable facilities granted are converted to credit equivalent
amounts based on specified percentages of nominal value.
There are other types of asset, most notably property and
equipment and intangibles, which, while not subject to cred-
it risk, represent a risk to the bank in respect of their poten-
tial for writedown and impairment and which therefore re-
quire capital underpinning.
Capital is required to support market risk arising in all for-
eign exchange, precious metals and commodity (including en-
ergy) positions, and all positions held for trading in interest rate
instruments and equities, including risks on individual equities
and traded debt obligations such as bonds. UBS computes this
risk using a Value at Risk (VaR) 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 or-
der to compute a total capital ratio, the market risk capital re-
quirement is converted to a ’RWA equivalent’ (shown in the
table as Market risk positions) such that the capital requirement
is 8% of this RWA equivalent, i.e. the market risk capital require-
ment derived by VaR is multiplied by 12.5.
142
Note 29 Financial Instruments Risk Position (continued)
d) Capital Adequacy (continued)
Risk-weighted assets (BIS)
CHF million
Balance sheet exposures
Due from banks and other collateralized lendings 2
Net positions in securities 3, 4
Positive replacement values 5
Loans, net of allowances for credit losses and other collateralized lendings 2
Accrued income and prepaid expenses
Property and equipment
Other assets
Off-balance sheet exposures
Contingent liabilities
Irrevocable commitments
Forward and swap contracts 6
Purchased options 6
Market risk positions 7
Total risk-weighted assets
Exposure
31.12.04
Risk-weighted
amount
31.12.04
Exposure 1
31.12.03
Risk-weighted
amount
31.12.03
556,947
8,227
78,317
429,186
5,790
8,772
32,725
14,894
53,187
14,419,106
2,306,605
531,098
7,277
84,334
359,154
6,218
9,611
24,918
15,563
46,960
11,746,880
1,183,708
7,820
6,914
17,121
164,620
3,573
8,772
8,949
7,569
11,764
8,486
386
18,151
264,125
8,565
6,182
22,324
153,537
4,284
9,611
7,673
8,167
6,863
4,710
1,716
18,269
251,901
1 Prior year numbers have been adjusted to conform with current year’s presentation.
trading assets. These positions have not been included in the market risk position.
not consolidated for capital adequacy purposes.
contracts and Purchased options, where positive but after netting, where applicable.
calculated using the approved Value at Risk model, multiplied by 12.5 to give the “risk-weighted asset equivalent”.
4 Excluding positions in the trading book, which are included in market risk positions.
6 Represents the “add-ons” for these contracts.
2 Includes gross securities borrowing and reverse repo exposures, as well as traded loans which are included in
3 Includes security positions which are not included in the market risk position, including Motor-Columbus, which is
5 Represents the mark to market values of Forward and swap
7 Regulatory capital adequacy requirements for market risk,
BIS capital ratios
Tier 1
of which hybrid Tier 1
Tier 2
Total BIS
Capital
CHF million
31.12.04
31,051
2,963
4,815
35,866
Ratio
%
31.12.04
11.8
1.1
1.8
13.6
Capital
CHF million
31.12.03
29,765
3,224
3,816
33,581
Ratio
%
31.12.03
11.8
1.3
1.5
13.3
The Tier 1 capital includes CHF 2,963 million (USD 2,600 million) in trust preferred securities at 31 December 2004 and
CHF 3,224 million (USD 2,600 million) at 31 December 2003.
143
Financial Statements
Notes to the Financial Statements
Note 29 Financial Instruments Risk Position (continued)
e) Financial Instruments Risk Position in Motor-Columbus
The Atel Group, the operating arm of Motor-Columbus, is ex-
posed to electricity price risk, interest rate risk, currency risk,
credit risk, and other business risks.
Risk limits are allocated to individual risk categories and
compliance with these limits is continuously monitored, the
limits being periodically adjusted in the broad context of the
company’s overall risk capacity.
A risk policy has been established and is monitored by a
risk committee composed of executive management. It was
approved by the Board of Directors of Atel and is reviewed and
ratified by them annually. The policy sets out the principles for
Atel’s business. It specifies requirements for entering into,
measuring, managing and limiting risk in its business and the
organization and responsibilities of risk management. The ob-
jective of the policy is to provide a reasonable balance between
the business risks entered into and Atel’s earnings and risk-
bearing shareholders’ equity.
A financial risk policy sets out the context of financial risk
management in terms of content, organization and systems,
with the objective of reducing financial risk, balancing the
costs of hedging and the risks assumed. The responsible units
manage their financial risks within the framework of this pol-
icy and limits defined for their area.
Energy price risk
Price risks in the energy business arise from, among others,
price volatility, changing market prices and changing correla-
tions between markets and products. Derivative financial in-
struments are used to hedge underlying physical transac-
tions, subject to the risk policy.
Interest rate risk
Interest rate swaps are permitted to hedge capital markets in-
terest rate exposure, with changes in fair value being report-
ed in the income statement.
Currency risks
To minimize currency risk, Atel tries to offset operating income
and expenses in foreign currencies. Any surplus is hedged
through currency forwards and options within the framework
of the financial risk policy.
Net investment in foreign subsidiaries is also subject to ex-
change rate movements, but differences in inflation rates tend
to cancel out these changes over the longer term and for this
reason Atel does not hedge investment in foreign subsidiaries.
Credit risk
Credit risk management is based on assessment of the cred-
itworthiness of new contracting parties before entering into
any transaction, giving rise to credit exposure, and continu-
ous monitoring of creditworthiness and exposures thereafter.
In the energy business, Atel only enters into transactions lead-
ing to credit exposure with counterparties that fulfill the cri-
teria laid out in the risk policy. Concentration risk is minimized
by the number of customers and their geographical distribu-
tion.
Financial assets reported in the balance sheet represent the
maximum loss to Atel in the event of counterparty default at
the balance sheet date.
144
Note 30 Fair Value of Financial Instruments
30a Fair Value of Financial Instruments
The following table presents the fair value of financial instruments, including those not reflected in the financial statements
at fair value. It is accompanied by a discussion of the methods used to determine fair value for financial instruments.
CHF billion
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Trading portfolio assets pledged as collateral
Positive replacement values
Financial assets designated at fair value
Loans
Financial investments
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Financial liabilities designated at fair value
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
31.12.04
Fair
value
31.12.04
Unrealized
gain / (loss)
31.12.04
Carrying
value
31.12.03
Fair
value
31.12.03
Unrealized
gain / (loss)
31.12.03
6.0
35.3
220.2
357.1
370.3
159.1
284.6
0.7
232.4
5.0
118.9
61.5
422.6
171.0
303.7
65.8
376.1
117.8
6.0
35.3
220.2
357.1
370.3
159.1
284.6
0.7
233.8
5.0
118.9
61.5
422.6
171.0
303.7
65.8
376.1
118.9
3.6
31.7
213.9
320.5
341.0
120.8
248.2
0.0
212.7
5.1
127.0
53.3
415.9
144.0
254.8
35.3
346.6
88.8
3.6
31.7
213.9
320.5
341.0
120.8
248.2
0.0
214.0
5.1
127.0
53.3
415.9
144.0
254.8
35.3
346.6
90.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(1.1)
0.3
1.4
(0.4)
1.3
0.0
0.0
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
0.0
(1.2 )
0.1
0.8
(0.2 )
0.7
Fair value is the amount for which an asset could be ex-
changed, or a liability settled, between knowledgeable, will-
ing parties in an arm’s length transaction. For financial instru-
ments carried at fair value, market prices or rates are used to
determine fair value where an active market exists (such as a
recognized stock exchange), as it is the best evidence of the
fair value of a financial instrument.
Market prices are not, however, available for certain finan-
cial assets and liabilities held and issued by UBS. Therefore,
where no active market price or rate is available, fair values
are estimated using present value or other valuation tech-
niques, using inputs based on market conditions existing at
the balance sheet dates.
Valuation techniques are generally applied to OTC deriva-
tives, unlisted trading portfolio assets and liabilities, and un-
listed financial investments. The most frequently applied pric-
ing models and valuation techniques include forward pricing
and swap models using present value calculations, option
models such as the Black-Scholes model or generalizations of
it, and credit models such as default rate models or credit
spread models.
The values derived from applying these techniques are sig-
nificantly affected by the choice of valuation model used and
the underlying assumptions made concerning factors such as
the amounts and timing of future cash flows, discount rates,
volatility, and credit risk.
The following methods and significant assumptions have
been applied in determining the fair values of financial instru-
ments presented in the above table, both for financial instru-
ments carried at fair value, and those carried at cost (for which
fair values are provided as a comparison):
(a) trading portfolio assets and liabilities, trading portfolio as-
sets pledged as collateral, financial assets and liabilities
designated at fair value, derivatives, and other transactions
145
Financial Statements
Notes to the Financial Statements
Note 30 Fair Value of Financial Instruments (continued)
30a Fair Value of Financial Instruments (continued)
undertaken for trading purposes are measured at fair val-
ue by reference to quoted market prices when available.
If quoted market prices are not available, then fair values
are estimated on the basis of pricing models, or other rec-
ognized valuation techniques. Fair value is equal to the car-
rying amount for these items;
(b) financial investments classified as available-for-sale are
measured at fair value by reference to quoted market
prices when available. If quoted market prices are not
available, then fair values are estimated on the basis of
pricing models or other recognized valuation techniques.
Fair value is equal to the carrying amount for these items,
and unrealized gains and 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 ma-
turing 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 assumed to be the amount
payable on demand at the balance sheet date;
(f)
(e) the fair value of variable rate financial instruments is as-
sumed 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 carrying and fair
values;
the fair value of fixed rate loans and mortgages carried
at amortized cost is estimated by comparing market in-
terest 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 im-
pact of credit risk is recognized separately by deducting
the amount of the allowance for credit losses from both
carrying and fair values.
Where applicable, for the purposes of the fair value disclosure
on the previous page, the interest accrued to date on finan-
cial instruments is included in the carrying value of the finan-
cial instruments.
These valuation techniques and assumptions provide a
consistent measurement of fair value for UBS’s assets and li-
abilities as shown in the table. However, because other insti-
tutions may use different methods and assumptions when es-
timating fair value using a valuation technique, and when
estimating the fair value of financial instruments not carried
at fair value, such fair value disclosures cannot necessarily be
compared from one financial institution to another.
The table does not reflect the fair values of non-financial
assets and liabilities such as property, equipment, goodwill,
prepayments and non-interest accruals.
Substantially all of UBS’s commitments to extend credit are
at variable rates. Accordingly, UBS has no significant exposure
to fair value fluctuations resulting from interest rate move-
ments related to these commitments.
The fair values of UBS’s fixed rate loans, long- and medi-
um-term notes and bonds issued are predominantly hedged
by derivative instruments, mainly interest rate swaps, as ex-
plained in Note 23. The interest rate risk inherent in balance
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.
Derivative instruments used for hedging are carried on the
balance sheet at fair values, which are included in the Positive
or Negative replacement values in the table. When the interest
rate risk on a fixed rate financial instrument is hedged with a de-
rivative in a fair value hedge, the fixed rate financial instrument
(or hedged portion thereof) is reflected in the table at fair value
only in relation to the interest rate risk, not the credit risk, as ex-
plained in (f). Fair value changes are recorded in net profit. The
treatment of derivatives designated as cash flow hedges is ex-
plained in Note 1o). The amount shown in the table as “Deriv-
ative instruments designated as cash flow hedges” is the net
change in fair values on such derivatives that is recorded in Share-
holders’ equity and not yet transferred to income or expense.
146
Note 30 Fair Value of Financial Instruments (continued)
30b Determination of Fair Values from Quoted Market Prices or Valuation Techniques
For trading portfolio securities and financial investments
which are listed or otherwise traded in an active market, for ex-
change traded derivatives, and for other financial instruments
for which quoted prices in an active market are available, fair
value is determined directly from those quoted market prices.
For financial instruments which do not have directly avail-
able quoted market prices, fair values are estimated using val-
uation techniques, or models, based wherever possible on as-
sumptions supported by observable market prices or rates
existing at the balance sheet date. This is the case for the ma-
jority of OTC derivatives, most unlisted instruments, and oth-
er items which are not traded in active markets.
For a small portion of financial instruments, fair values can-
not be obtained directly from quoted market prices, or indi-
rectly using valuation techniques or models supported by ob-
servable market prices or rates. This is generally the case for
private equity investments in unlisted securities, and for cer-
tain exotic or structured financial instruments. In these cases
fair value is estimated indirectly using valuation techniques or
models for which the inputs are reasonable assumptions,
based on market conditions.
The following table presents the valuation methods used
to determine fair values of financial instruments carried at fair
value:
CHF billion
Trading portfolio assets
Trading portfolio assets pledged as collateral
Positive replacement values
Financial assets designated at fair value
Financial investments
Total assets
Trading portfolio liabilities
Negative replacement values
Financial liabilities designated at fair value
Total liabilities
Quoted market price
Valuation technique –
market observable inputs
Valuation technique – non-
market observable inputs
209.6
156.0
6.2
0.7
1.1
373.6
161.3
9.8
0.0
171.1
159.7
3.1
265.2
0.0
0.4
428.4
9.7
270.1
65.8
345.6
1.0
0.0
13.2
0.0
3.5
17.7
0.0
23.8
0.0
23.8
Total
370.3
159.1
284.6
0.7
5.0
819.7
171.0
303.7
65.8
540.5
30c Sensitivity of Fair Values to Changing Significant Assumptions to Reasonably Possible Alternatives
Included in the fair value of financial instruments carried at
fair value on the balance sheet are those estimated in full or
in part using valuation techniques based on assumptions that
are not supported by observable market prices or rates. Mod-
els used in these situations undergo an internal validation
process before they are certified for use. Any related model
valuation uncertainty is quantified, and deducted from the fair
values produced by the models. Based on the controls and pro-
cedural safeguards we employ, management believes the re-
sulting estimated fair values recorded in the balance sheet and
the changes in fair values recorded in the income statement
are reasonable, and are the most appropriate at the balance
sheet date.
The potential effect of using reasonably possible alterna-
tive assumptions as inputs to valuation models from which the
fair values of these financial instruments are determined
has been quantified as a reduction of approximately CHF 579
million using less favorable assumptions, and an increase of
approximately CHF 927 million using more favorable assump-
tions.
The determination of reasonably possible alternative
assumptions is itself subject to considerable judgment, but for
this purpose was determined using the same technique as for
the model valuation adjustments. This was based on increas-
ing and decreasing the confidence level applied to determine
the original model valuation adjustments. The resulting effect
on fair values reflects the application of less favorable and
more favorable assumptions. In changing the assumptions it
was assumed that the impact of correlation between differ-
ent financial instruments and models is minimal.
147
Financial Statements
Notes to the Financial Statements
Note 30 Fair Value of Financial Instruments (continued)
30d Changes in Fair Value Recognized in Profit or Loss during the Period which were Estimated using Valuation
Techniques
Total Net trading income for the year ended 31 December
2004 was CHF 4,972 million, which represents the net result
from a range of products traded across different business ac-
tivities, including the effect of foreign currency translation, and
including both realized and unrealized income. Unrealized in-
come is determined from changes in fair values, using quot-
ed prices in active markets when available, and is otherwise
estimated using valuation techniques.
Included in the unrealized portion of Net trading income
are net losses from changes in fair values of CHF 7,123 mil-
lion on financial instruments for which fair values were esti-
mated using valuation techniques. These valuation techniques
included models such as those described above, which range
from relatively simple models with market observable inputs,
to those which are more complex and require the use of as-
sumptions or estimates based on market conditions.
Net trading income is often generated in transactions in-
volving several financial instruments, or subject to hedging or
other risk management techniques, which may result in dif-
ferent portions of the transaction being priced using differ-
ent methods.
Consequently, the changes in fair value recognized in
profit or loss during the period which were estimated using
valuation techniques represent only a portion of Net trading
income, and in many cases these amounts were offset by oth-
er financial instruments or transactions, which were priced
in active markets using quoted market prices or rates, or
which have been realized. The amount of such income in the
current year, including the effect of foreign currency transla-
tion on unrealized transactions, was a gain of CHF 12,095
million.
Changes in fair value estimated using valuation techniques
are also recognized in net profit, in situations of unrealized
impairments on financial investments available-for-sale. The
total of such impairment amounts recognized in net profit
during the period was CHF 218 million.
148
Note 30 Fair Value of Financial Instruments (continued)
30e Continuing Involvement in Assets that have been Transferred
The following table presents details of assets which have been sold or otherwise transferred, but which continue to be rec-
ognized, either in full or to the extent of UBS’s continuing involvement:
CHF billion
Nature of transaction
Securities lending agreements
Repurchase agreements
Other collateralized securities trading
Total 31.12.04
Continued asset recognition in full
Total assets
Associated liability
37.3
121.8
2.9
162.0
13.8
117.6
2.1
133.5
The assets in the above table continue to be recognized to
the extent shown, due to transactions which do not qualify for
derecognition of the assets from the balance sheet. Derecog-
nition criteria are discussed in more detail in Notes 1 d) and aa).
In each situation of continued recognition, whether in full,
or to the extent of continuing involvement, UBS retains the
risks of the relevant portions of the retained assets. These in-
clude credit risk, settlement risk, country risk, and market risk.
In addition, the nature of an associated transaction which
gives rise to the continued involvement may modify existing
risks, or introduce risks such as credit exposure to the coun-
terparty to the associated transaction.
The majority of retained assets relate to repurchase agree-
ments and securities lending agreements. Repurchase agree-
ments are nearly always concluded with debt instruments,
such as bonds, notes or money market paper; the majority of
securities lending agreements are concluded with shares, and
the remainder typically with bonds and notes. Both types of
transactions are transacted using standard agreements em-
ployed by financial market participants, and are undertaken
with counterparties subject to UBS’s normal credit approval
processes. The resulting credit exposures are controlled by dai-
ly monitoring and collateralization of the positions. The
amounts for repurchase agreements and securities lending
agreements are shown in the above table.
A small portion of retained assets relate to transactions in
which UBS has transferred assets, but continues to have in-
volvement in the transferred assets, for example through pro-
viding a guarantee, writing put options, acquiring call options,
or entering into a total return swap or other type of swap
linked to the performance of the asset. If control is retained
due to these types of associated transactions, UBS continues
to recognize the transferred asset in its entirety, otherwise to
the extent of its continuing involvement.
In particular, transactions involving the transfer of assets in
conjunction with entering into a total rate of return swap are
accounted for as secured financing transactions, instead of
sales of trading portfolio assets with an accompanying swap
derivative. These transactions are included in the above table
within Trading portfolio assets.
149
Financial Statements
Notes to the Financial Statements
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 Switzer-
land, the UK, the US and Germany. The pension funds of Atel
Ltd. and some of its Group companies in Switzerland and Ger-
many are included in the disclosure as of 31 December 2004.
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 con-
tributions 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 de-
termining the mix of asset types and target allocations which
are reviewed by the plan trustees on an ongoing basis. Ac-
tual asset allocation is determined by a variety of current eco-
nomic and market conditions and in consideration of specif-
ic 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 targeted asset class allocations. These estimates
take into consideration historical asset class returns and are
determined together with the plans’ investment and actuar-
ial advisors.
Swiss pension plans
The pension fund of UBS covers practically all UBS employees
in Switzerland and exceeds the minimum benefit requirements
under Swiss law. Contributions to the pension fund of UBS
are paid for by employees and the employer. For the main
plan, the employee contributions are calculated as a percent-
age of insured annual salary and are deducted monthly. The
percentages deducted from salary for full benefit coverage (in-
cluding risk benefits) depend on age and vary between 7%
and 10%. The employer pays a variable contribution that
ranges between 150% and 220% of the sum of employees’
contributions. The computation of the benefits is based on the
final covered salary. The benefits covered include retirement
benefits, disability, death and survivor pensions, and employ-
ment termination benefits.
Additional employee and employer contributions are made
to the other plans of the pension fund of UBS. These plans
provide benefits which are based on annual contributions as
a percentage of salary and accrue at a minimum interest rate
annually.
The employer contributions expected to be made in 2005
to the Swiss pension plans are CHF 385 million. The accumu-
lated benefit obligation (which is the current value of accrued
benefits without allowance for future salary increases) for
these pension plans was CHF 18,566 million as of 31 Decem-
ber 2004 (2003 CHF 16,817 million, 2002 CHF 15,853 million).
Foreign pension plans
The foreign locations of UBS operate various pension plans in
accordance with local regulations and practices. Among these
plans are defined contribution plans as well as defined bene-
fit plans. The locations with defined benefit plans of a mate-
rial nature are in the UK, the US and Germany. The UK and
the US defined benefit plans are closed to new entrants who
are covered by defined contribution plans. 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 re-
tirement, death, disability or employment termination. The
plans’ retirement benefits depend on age, contributions and
level of compensation. The principal plans are financed in full
by the Group. The employer contributions expected to be
made in 2005 to these pension plans are CHF 55 million. The
funding policy for these plans is consistent with local govern-
ment 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 4,118 million as of 31 December 2004 (2003 CHF
3,609 million, 2002 CHF 3,376 million).
For pension plans with an accumulated benefit obligation
in excess of plan assets, the aggregate projected benefit ob-
ligation and accumulated benefit obligation was CHF 3,755
million and CHF 3,735 million as of 31 December 2004 (2003
CHF 944 million and CHF 930 million, 2002 CHF 3,436 mil-
lion and CHF 3,376 million). The fair value of plan assets for
these plans was CHF 3,166 million as of 31 December 2004
(2003 CHF 677 million, 2002 CHF 2,382 million).
150
Note 31 Pension and Other Post-Retirement Benefit Plans (continued)
a) Defined benefit plans
CHF million
31.12.04
31.12.03
31.12.02
31.12.04
31.12.03
31.12.02
Defined benefit obligation at the beginning of the year
(18,216)
(19,204 )
(17,879 )
(3,663)
(3,436 )
(3,553 )
Swiss
Foreign
Service cost
Interest cost
Special termination benefits
Actuarial gain / (loss)
Benefits paid
Curtailment / settlement
Acquisitions
Foreign currency translation
(564 )
(703 )
(70 )
1,395
930
(554 )
(699 )
(209 )
(681 )
818
(548)
(672)
(35)
(1,392)
910
(272)
(83)
(212)
(296)
125
(159)
146
Defined benefit obligation at the end of the year
(20,225)
(18,216 )
(19,204 )
(4,142)
Fair value of plan assets at the beginning of the year
Actual return on plan assets
Employer contributions
Plan participant contributions
Benefits paid
Acquisitions
Foreign currency translation
17,619
980
411
203
(910)
272
16,566
1,411
370
202
(930 )
18,289
(1,350 )
236
209
(818 )
Fair value of plan assets at the end of the year
18,575
17,619
16,566
3,402
370
65
(91 )
(197 )
(201 )
124
138
(3,663 )
2,382
429
831
(108 )
(210 )
(177 )
111
74
427
(3,436 )
2,887
(240 )
164
(125)
(124 )
(111 )
(132)
3,580
(562)
1,046
1
(116 )
3,402
(261 )
970
1
Funded status
Unrecognized net actuarial (gains) / losses
Unrecognized prior service cost
Unrecognized asset
(Accrued) / prepaid pension cost
Movement in the net (liability) or asset
(Accrued) / prepaid pension cost at the beginning of the year
Net periodic pension cost
Employer contributions
Acquisitions
Foreign currency translation
(Accrued) / prepaid pension cost
Amounts recognized in the Balance Sheet
Prepaid pension cost
Accrued pension liability
(Accrued) / prepaid pension cost
(1,650)
3,006
(597 )
1,716
(2,638 )
3,892
(1,356)
(1,119 )
(1,221 )
0
0
(411)
411
0
0
0
33
485
710
33
(403 )
370
356
(559 )
236
0
0
33
33
33
710
(105)
65
(159)
(26)
485
805
(320)
485
73
(168 )
831
(26 )
710
862
(152 )
710
(318 )
2,382
(1,054 )
1,126
1
73
9
(83 )
164
(17 )
73
220
(147 )
73
151
Financial Statements
Notes to the Financial Statements
Note 31 Pension and Other Post-Retirement Benefit Plans (continued)
a) Defined benefit plans (continued)
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
Principal weighted average 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
Swiss
Foreign
31.12.04
31.12.03
31.12.02
31.12.04
31.12.03
31.12.02
548
672
(878)
237
35
(203)
411
3.3
2.5
1.0
3.8
5.0
2.5
1.0
564
703
(818 )
(102 )
70
188
(202 )
403
3.8
2.5
1.0
3.8
5.0
2.5
1.5
554
699
(900 )
206
209
(209 )
559
3.8
2.5
1.5
4.0
5.0
2.5
1.5
935
951
967
990
1,015
5,252
43
41
12
4
100
39
43
12
6
100
35
47
13
5
100
83
212
(248)
91
197
(178 )
58
58
105
168
5.5
4.4
1.9
5.7
7.2
4.6
1.9
116
112
121
131
140
864
54
41
2
3
100
5.7
4.6
1.9
5.8
7.1
4.4
1.5
52
30
1
17
100
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
Discount rate
Expected rate of return on plan assets
Expected rate of salary increase
Rate of pension increase
CHF million
Expected future benefit payments
2005
2006
2007
2008
2009
2010–2014
Plan assets
Actual plan asset allocation (%)
Equity instruments
Debt instruments
Real estate
Other
Total
152
Note 31 Pension and Other Post-Retirement Benefit Plans (continued)
a) Defined benefit plans (continued)
Long-term target plan asset allocation (%)
Equity instruments
Debt instruments
Real estate
Other
Actual return on plan assets (%)
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
Swiss
Foreign
31.12.04
31.12.03
31.12.02
31.12.04
31.12.03
31.12.02
49–55
44–47
1–2
0–6
10.8
17.8
(8.7 )
34–49
30–53
12–19
0
5.5
1,239
238
3,778
73
8.6
(7.5 )
1,005
246
2,930
84
814
206
2,645
90
1 The numbers of UBS AG shares were 2,493,173, 2,908,699 and 3,072,500 as of 31 December 2004, 31 December 2003 and 31 December 2002, respectively. The amounts of capital repayment and
dividend received on UBS AG shares for the years ended 31 December 2004, 31 December 2003 and 31 December 2002 were CHF 7 million for each year.
b) Post-retirement medical and life plans
In the US and the UK the Group offers retiree medical bene-
fits that contribute to the health care coverage of employees
and beneficiaries after retirement. In addition to retiree med-
ical benefits, the Group in the US also provides retiree life in-
surance benefits.
The benefit obligation in excess of fair value of plan assets
for those plans amounts to CHF 166 million as of 31 Decem-
ber 2004 (2003 CHF 179 million, 2002 CHF 164 million) and
the total accrued post-retirement cost to CHF 136 million as
of 31 December 2004 (2003 CHF 137 million, 2002 CHF 130
million). The net periodic post-retirement costs for the years
ended 31 December 2004, 31 December 2003 and 31 De-
cember 2002 were CHF 16 million, CHF 22 million and CHF
25 million, respectively.
The employer contributions expected to be made in 2005
to the post-retirement medical and life plans are CHF 7 mil-
lion. The expected future benefit payments are CHF 7 million
for each of the years 2005, 2006 and 2007, CHF 8 million for
each of the years 2008 and 2009 and CHF 46 million in total
for the years 2010–2014.
153
Financial Statements
Notes to the Financial Statements
Note 31 Pension and Other Post-Retirement Benefit Plans (continued)
b) Post-retirement medical and life plans
CHF million
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
31.12.04
31.12.03
31.12.02
(179)
(6)
(9)
8
8
12
(166)
0
0
8
(8)
0
(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
The assumed average health care cost trend rate used in determining post-retirement benefit expense is assumed to be 11%
for 2004 and to decrease to an ultimate trend rate of 5% in 2011. Assumed health care cost trend rates have a significant ef-
fect 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 peri-
odic post-retirement benefit costs as follows:
CHF million
Effect on total service and interest cost
Effect on the post-retirement benefit obligation
1% increase 1% decrease
3
22
(3)
(18)
c) Defined contribution plans
The Group also sponsors a number of defined contribution
plans primarily in the UK and the US. Certain plans permit em-
ployees to make contributions and earn matching or other
contributions from the Group. The contributions to these
plans recognized as expense for the years ended 31 Decem-
ber 2004, 31 December 2003 and 31 December 2002 were
CHF 187 million, CHF 141 million and CHF 133 million, respec-
tively.
154
Note 32 Equity Participation Plans
a) Equity Participation Plans Offered
UBS has established several equity participation plans to fur-
ther align the long-term interests of executives, managers,
staff and shareholders. The plans are offered to eligible em-
ployees 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 be-
low describe the most significant plans in general, but specif-
ic plan rules and investment offerings may vary by country.
Equity Plus (EP): This voluntary plan gives eligible employ-
ees the opportunity to purchase UBS shares at fair market val-
ue on the purchase date and receive at no additional cost two
UBS options for each share purchased, up to a maximum an-
nual limit. The options have a strike price equal to the fair mar-
ket value of the stock on the date the option is granted. Share
purchases can be made annually from bonus compensation
or quarterly based on regular deductions from salary. Shares
purchased under Equity Plus are restricted from sale 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: Selected employees in Switzer-
land are entitled to purchase a specified number of UBS
shares at a predetermined discounted 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 compensation expense. The
last share purchase opportunity will take place in 2005.
Equity Ownership Plan (EOP): Selected personnel receive
between 10% and 45% of their performance-related com-
pensation in UBS shares or notional UBS shares instead of
cash, on a mandatory basis. Up to and including 2004, par-
ticipants in certain countries were eligible to receive a por-
tion of their award in UBS shares with a matching contribu-
tion in UBS options or in Alternative Investment Vehicles
(AIVs) (generally money market funds, UBS and non-UBS mu-
tual funds and other UBS sponsored funds). In 2002 and
2003, certain employees received UBS options instead of UBS
shares for a portion of their EOP award. In 2005, AIVs and
options will no longer be granted as part of EOP. EOP awards
vest in one-third increments over a three-year vesting peri-
od. 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 generally vest
in one-third increments over a three-year period. Expiration
of the options is generally 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.
Other deferred compensation plans: UBS sponsors other
deferred compensation plans for selected eligible employees.
Generally, contributions are made on a tax deferred basis, and
participants are allowed to notionally invest in AIVs. No addi-
tional company match is granted, and the plan is generally not
forfeitable. In addition, UBS also grants deferred compensa-
tion awards to new recruits, senior management and other
key employees in the form of UBS shares or options.
155
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
Unvested shares outstanding, at the beginning of the year
Shares awarded during the year
Vested during the year
Forfeited during the year
Unvested shares outstanding, at the end of the year
Weighted-average fair market value of shares awarded (in CHF)
Fair market value of outstanding shares at the end of the year (CHF billion)
31.12.04
31,383,890
11,713,406
31.12.03
48,136,561
11,023,553
31.12.02
52,299,332
13,511,655
(17,996,498)
(26,915,860 )
(16,333,832 )
(463,979)
(860,364 )
(1,340,594 )
24,636,819
31,383,890
48,136,561
95
2.3
61
2.7
71
3.2
ii) Stock purchase plans
The following table shows the shares awarded and the weighted-average fair value per share for the Group’s stock purchase
plans.
Stock purchase plans
Share quantity purchased 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)
31.12.04
1,035,079
45
31.12.03
1,722,492
31
31.12.02
1,339,223
40
2,448,231
2,593,391
2,483,684
93
73
61
49
77
46
156
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:
Weighted-
average
exercise
price
(in CHF)
31.12.04 1
Number of
options
31.12.04
Outstanding, at the beginning of the year
109,040,026
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
24,113,252
(29,396,959)
(2,692,824)
(156,141)
100,907,354
37,941,280
63
91
58
66
76
69
65
Weighted-
average
exercise
price
(in CHF)
31.12.03 1
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)
31.12.02 1
66
71
54
71
77
67
51
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 the purposes of this table.
The following table summarizes additional information about stock options outstanding at 31 December 2004:
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
85.01–103.75
53.37–103.75
USD
7.65–35.00
35.01–45.00
45.01–55.00
55.01–81.97
7.65–81.97
18,600,149
16,437,141
17,577,171
52,614,461
3,185,982
11,460,304
19,076,401
14,570,206
48,292,893
d) Compensation Expense
CHF
61.19
78.01
96.82
78.35
USD
21.00
43.13
47.57
71.11
51.86
Years
6.7
6.6
7.7
7.0
Years
1.6
8.1
6.2
8.7
7.1
6,781,903
8,820,175
5,277,876
20,879,954
3,185,982
1,868,770
10,590,462
1,416,112
17,061,326
CHF
63.74
77.90
99.54
78.77
USD
21.00
43.33
47.41
58.13
42.92
Generally under IFRS, for all equity participation instruments
(shares, cash-settled warrants and other cash-settled deriva-
tives for which the underlying is UBS shares) except options,
UBS accrues expense in the performance year and deter-
mines 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 op-
tions, the amount of expense recognized is equal to the in-
trinsic 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 gen-
erally at or above the market prices of the shares). For dis-
counted purchase 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. Management’s esti-
mate of the accrued expense before tax for share-based com-
pensation for the years ended 31 December 2004, 2003 and
2002 was CHF 1,406 million, CHF 833 million and CHF 592
million, respectively.
157
Financial Statements
Notes to the Financial Statements
Note 32 Equity Participation Plans (continued)
e) Pro-Forma Net Income
The following table presents IFRS Net profit and Earnings per share for 2004, 2003 and 2002 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
31.12.04
8,089
31.12.03
6,239
31.12.02
3,530
1,131
630
493
(1,639)
(1,069 )
(1,183 )
7,581
5,800
2,840
7.68
7.20
7.47
7.00
5.59
5.19
5.48
5.09
2.92
2.35
2.87
2.31
The fair value of options granted was determined using a proprietary option pricing model, substantially 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)
31.12.04
31.12.03
31.12.02
34%
2.03%
3.70%
3.87%
5.6
35%
1.70%
3.17%
4.43%
4.5
35%
3.28%
4.65%
3.35%
4.5
The weighted-average fair value of options granted in 2004, 2003 and 2002 was CHF 25, CHF 15 and CHF 20 per share,
respectively.
158
Note 33 Related Parties
The Group defines related parties as Associated companies,
private equity investees, the Board of Directors, the Group Ex-
ecutive Board, close family members and enterprises which are
controlled by these individuals through their majority share-
holding or their role as chairman and / or CEO in those com-
panies. This definition is based on the requirements of the “Di-
rective on Information Relating to Corporate Governance”
issued by the SWX Swiss Exchange and effective from 1 July
2002 for all listed companies in Switzerland.
a) Remuneration and equity holdings
The executive members of the Board of Directors have top-
management employment contracts and receive pension ben-
efits upon retirement. Total remuneration to the executive
members of the Board of Directors and Group Executive Board
recognized in the income statement including cash, shares and
accrued pension benefits amounted to CHF 165.3 million in
2004, CHF 144.6 million in 2003 and CHF 131.8 million in
2002. Total compensation numbers exclude merger-related re-
tention payments for the two ex-PaineWebber executives of
CHF 21.1 million (USD 17.0 million) in 2003 and CHF 20.6 mil-
lion (USD 14.9 million) in 2002. These retention payments
were committed to at the time of the merger in 2000 and ful-
ly disclosed at the time. No additional payments were due in
2004.
The external members of the Board of Directors do not
have employment or service contracts with UBS, and thus are
not entitled to benefits upon termination of their service on
the Board of Directors. Total fees paid to these individuals for
their services as external board members amounted to CHF
5.7 million in 2004, CHF 5.4 million in 2003 and CHF 3.5 mil-
lion in 2002.
The number of long-term stock options outstanding to the
executive members of the Board of Directors and Group Ex-
ecutive Board from equity participation plans was 6,004,997
(equivalent to the same number of shares) at 31 December
2004, 6,218,011 options (equivalent to the same number of
shares) and 120,264 warrants (equivalent to 7,214 shares) at
31 December 2003 and 5,410,172 options (equivalent to the
same number of shares) and 24,558,529 warrants (equivalent
to 1,473,217 UBS shares) at 31 December 2002. These plans
are further explained in Note 32, Equity Participation 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 3,506,610 at 31 December 2004,
3,150,217 at 31 December 2003 and 2,139,371 at 31 Decem-
ber 2002. No member of the Board of Directors or Group Ex-
ecutive Board is the beneficial owner of more than 1% of the
Group’s shares at 31 December 2004.
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 mem-
bers amounted to CHF 15.8 million at 31 December 2004 and
CHF 25.2 million at 31 December 2003. Executive members
of the Board and GEB members have been granted loans, fixed
advances and mortgages at the same terms and conditions that
are available to other employees, based on terms and condi-
tions granted to third parties adjusted for reduced credit risk.
In 2002, a thorough review of outstanding loans to senior ex-
ecutives was performed to ensure compliance with the US Sar-
banes-Oxley Act of 2002. Non-executive Board members are
granted loans and mortgages at general market conditions.
159
Financial Statements
Notes to the Financial Statements
Note 33 Related Parties (continued)
c) Loans to significant associated companies
CHF million
Balance at the beginning of the year
Additions
Reductions
Balance at the end of the year
31.12.04
31.12.03
63
38
(36)
65
40
48
(25 )
63
All loans to associated companies are transacted at arm’s length. At 31 December 2004 and 2003, there were commitments
and contingent liabilities to significant associated companies of CHF 55 million and CHF 14 million, respectively. In addition,
the Group routinely receives services from associated companies at arm’s length terms. For the years ended 31 December
2004, 31 December 2003 and 31 December 2002, the amount paid to significant associates for these services was CHF 248
million, CHF 106 million and CHF 60 million, respectively. Fees received for services provided to associated companies for the
years ended 31 December 2004, 31 December 2003 and 31 December 2002 was CHF 180 million, CHF 122 million and CHF
2 million, respectively.
During 2003, UBS sold its VISA acquiring business to Telekurs Holding AG, an associated company. UBS realized a CHF 90
million gain from this divestment.
Note 36 provides a list of significant associates.
d) Loans to private equity investees
CHF million
Balance at the beginning of the year
Additions
Reductions
Balance at the end of the year
31.12.04
31.12.03
366
46
(222)
190
338
153
(125 )
366
At 31 December 2004 and 31 December 2003, there were commitments and contingent liabilities to private equity compa-
nies of CHF 36 million and CHF 23 million, respectively. In addition the Group purchased services from private equity compa-
nies at arm’s length terms for the years ended 31 December 2004, 31 December 2003 and 31 December 2002 in the amount
of CHF 0 million, CHF 14 million and CHF 116 million, respectively.
e) Other related party transactions
During 2004 and 2003, 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 2004 and 2003 these companies included Bertarelli & Cie. (Switzerland), Kedge Capital Partners Ltd. (Jersey), J. Sains-
bury plc. (UK), Serono Group (Switzerland), Team Alinghi (Switzerland), Unisys Corporation (USA). In addition to those men-
tioned, related parties in 2004 also included BMW Group (Germany) and Stadler Rail Group (Switzerland). In 2003, related
parties also included Sika AG (Switzerland).
Other related party transactions
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 UBS1
2004
34
10
294
2003
43
7
79
1 In 2004, includes loans, guarantees and contingent liabilities of CHF 32 million and unused committed facilities of CHF 262 million but excludes unused uncommitted working capital facilities and
unused guarantees of CHF 110 million. In 2003, includes loans, 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, defender for the “America’s Cup 2007”, UBS paid CHF 8.5 million (EUR 5.5 mil-
lion) as sponsoring fee for 2004 and CHF 1.4 million (EUR 0.9 million) as sponsoring fee for the UBS Trophy in New Port, RI,
USA. Team Alinghi’s controlling shareholder is UBS board member Ernesto Bertarelli.
UBS also engages in trading and risk management activities (e.g. swaps, options, forwards) with related parties. These trans-
actions may give rise to credit risk either for UBS or for a related party towards UBS. As part of its normal course of business,
UBS is also a market maker in equity and debt instruments and at times may hold positions in instruments of related parties.
160
Note 34 Sales of Financial Assets in Securitizations
During the years ended 31 December 2004, 2003 and 2002, UBS securitized (i.e., transformed owned financial assets into
securities through sales transactions) residential mortgage loans and securities, commercial mortgage loans and other finan-
cial assets, acting as lead or co-manager. UBS’s continuing involvement in these transactions was primarily limited to the tem-
porary 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
31.12.04
31.12.03
31.12.02
91
3
9
131
4
2
143
4
6
Related pre-tax gains (losses) recognized, including unrealized gains (losses) on retained interests, at the time of securitiza-
tion were as follows:
CHF million
Residential mortgage securitizations
Commercial mortgage securitizations
Other financial asset securitizations
Pre-tax gains / (losses) recognized
31.12.04
31.12.03
31.12.02
197
141
21
338
214
2
524
206
(5 )
At 31 December 2004 and 2003, UBS retained CHF 2.4 billion and CHF 3.8 billion, respectively, in agency residential mort-
gage securities, backed by the Government National Mortgage Association (GNMA), the Federal National Mortgage Associ-
ation (FNMA) and the Federal Home Loan Mortgage 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 2004 and 2003.
Note 35 Post-Balance Sheet Events
There have been no material post-balance sheet events which
would require disclosure or adjustment to the 31 December
2004 Financial Statements.
Bond issues have increased by CHF 991 million from the
balance sheet date to 3 February 2005.
On 3 February 2005, the Board of Directors reviewed the
Financial Statements and authorized them for issue. These Fi-
nancial Statements will be submitted to the Annual General
Meeting of Shareholders to be held on 21 April 2005 for ap-
proval.
161
Financial Statements
Notes to the Financial Statements
Note 36 Significant Subsidiaries and Associates
The legal entity group structure of UBS is designed to support the Group’s businesses within an efficient legal, tax, regulato-
ry and funding framework. Neither the Business Groups of UBS (namely Investment Bank, Wealth Management USA, Wealth
Management & Business Banking and Global Asset Management) nor Corporate Center are replicated in their own individ-
ual legal entities but rather they generally operate out of the parent bank, UBS AG, through its Swiss and foreign branches.
The parent bank structure allows UBS to capitalize on the advantages offered by the use of one legal platform by all the
Business Groups. It provides for the most cost efficient and flexible structure and facilitates efficient allocation and use of cap-
ital, comprehensive risk management and straightforward funding processes.
Where, usually due to local legal, tax or regulatory rules or due to additional legal entities joining the UBS Group via
acquisition, it is either not possible or not efficient to operate out of the parent bank, then local subsidiary companies host
the appropriate businesses. The significant operating subsidiary companies in the Group are listed below:
Significant subsidiaries
Company
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 Alternative and Quantitative Investments LLC
UBS Americas Inc
UBS Asesores SA
UBS Australia Limited
UBS Bank (Canada)
UBS Bank USA
UBS Belgium SA / NV
Jurisdiction
of incorporation
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
Zurich, Switzerland
Nassau, Bahamas
Paris, France
Milan, Italy
Luxembourg, Luxembourg
Monte Carlo, Monaco
Tokyo, Japan
Sydney, Australia
Delaware, USA
Delaware, USA
Panama, Panama
Sydney, Australia
Toronto, Canada
Utah, USA
Brussels, Belgium
UBS Beteiligungs-GmbH & Co KG
Frankfurt am Main, Germany
UBS Capital (Jersey) Ltd
UBS Capital AG
St. Helier, Jersey
Zurich, Switzerland
Business
Group 1
IB
CC
CC
IB
CC
WM&BB
CC
WM&BB
CC
CC
CC
IB
WM&BB
WM-US
IB
CC
IB
IB
WM&BB
WM&BB
WM&BB
WM&BB
WM&BB
WM&BB
Global AM
IB
Global AM
IB
WM&BB
IB
WM&BB
WM-US
WM&BB
IB
IB
IB
Share
capital
in millions
Equity
interest
accumulated in %
BRL
CHF
SGD
USD
GBP
CHF
CHF
CHF
CHF
CHF
USD
EUR
USD
USD
IDR
CHF
GBP
GBP
CHF
USD
EUR
EUR
CHF
EUR
JPY
AUD
USD
USD
USD
AUD
CAD
USD
EUR
EUR
GBP
CHF
52.9
50.0
25.0
25.0
0.7
10.0
21.0
5.0
30.0
50.0
2.0
15.1
10.0
25.8 2
50,000.0
290.1
100.0
40.5
0.1
4.0
10.7
42.0
150.0
9.2
11,150.0
580.8 2
0.0
4,550.8 2
0.0
50.0
8.5
1,700.0 2
16.0
498.8
226.0
5.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
51.7
100.0
100.0
96.7
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
1 WM&BB: Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, WM-US: Wealth Management USA, CC: Corporate Center, IH: Industrial Holdings.
2 Share Capital and Share Premium.
162
Business
Group 1
Share
capital
in millions
Equity
interest
accumulated in %
Note 36 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
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
Jurisdiction
of incorporation
Delaware, USA
George Town, Cayman Islands
George Town, Cayman Islands
Amsterdam, the Netherlands
Delaware, USA
George Town, Cayman Islands
Delaware, USA
Milan, Italy
IB
IB
IB
IB
IB
IB
IB
IB
Glattbrugg, Switzerland
WM&BB
UBS Corporate Finance Italia SpA
Milan, Italy
UBS Corporate Finance South Africa (Proprietary) Limited
Sandton, South Africa
UBS Derivatives Hong Kong Limited
UBS Employee Benefits Trust Limited
UBS Energy Canada Ltd.
UBS Energy LLC
Hong Kong, China
St. Helier, Jersey
Calgary, Canada
Delaware, USA
UBS Equity Research Malaysia Sdn Bhd
Kuala Lumpur, Malaysia
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.
Madrid, Spain
Milan, Italy
New Jersey, USA
George Town, Cayman Islands
Willemstad, Netherlands Antilles
Delaware, USA
Delaware, USA
UBS Financial Services Incorporated of Puerto Rico
Hato Rey, Puerto Rico
UBS Fund Advisor LLC
UBS Fund Holding (Luxembourg) SA
UBS Fund Holding (Switzerland) AG
UBS Fund Management (Switzerland) AG
UBS Fund Services (Cayman) Ltd
UBS Fund Services (Ireland) Limited
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
Delaware, USA
Luxembourg, Luxembourg
Basel, Switzerland
Basel, Switzerland
George Town, Cayman Islands
Dublin, Ireland
Luxembourg, Luxembourg
Delaware, USA
Sydney, Australia
Toronto, Canada
Paris, France
UBS Global Asset Management (Hong Kong) Limited
Hong Kong, China
UBS Global Asset Management (Italia) SIM SpA
UBS Global Asset Management (Japan) Ltd
Milan, Italy
Tokyo, Japan
UBS Global Asset Management (Singapore) Holdings Pte Ltd
Singapore, Singapore
UBS Global Asset Management (Taiwan) Ltd
UBS Global Asset Management (US) Inc
UBS Global Asset Management Holding Ltd
UBS Global Life AG
UBS Global Trust Corporation
UBS International Holdings BV
UBS International Inc
UBS International Life Limited
Taipei, Taiwan
Delaware, USA
London, Great Britain
Vaduz, Liechtenstein
St. John, Canada
Amsterdam, the Netherlands
New York, USA
Dublin, Ireland
IB
IB
IB
CC
IB
IB
IB
WM&BB
WM&BB
WM-US
CC
CC
IB
WM-US
WM-US
WM-US
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
WM&BB
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
WM&BB
WM&BB
CC
WM&BB
WM&BB
USD
USD
USD
EUR
USD
USD
USD
EUR
CHF
EUR
ZAR
HKD
CHF
USD
USD
MYR
EUR
EUR
USD
USD
USD
USD
USD
USD
USD
CHF
CHF
CHF
USD
EUR
CHF
USD
AUD
CAD
EUR
HKD
EUR
JPY
SGD
TWD
USD
GBP
CHF
CAD
EUR
USD
EUR
130.0 2
61.1 2
5.0
118.8 2
2.6 2
113.0 2
378.5 2
0.8
40.0
1.9
0.0
60.0
0.0
11.3
0.0
0.5
54.2
0.2
4.4 2
0.5
0.1
37.3 2
1,672.3 2
31.0 2
0.0
42.0
18.0
1.0
5.6
0.5
2.5
0.0
8.0
117.0
2.1
25.0
2.0
2,200.0
4.0
340.0
35.2 2
33.0
5.0
0.1
6.8
34.3 2
1.0
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
97.1
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1 WM&BB: Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, WM-US: Wealth Management USA, CC: Corporate Center, IH: Industrial Holdings.
2 Share Capital and Share Premium.
163
Financial Statements
Notes to the Financial Statements
Note 36 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
UBS Invest Kapitalanlagegesellschaft mbH
UBS Investment Bank AG
UBS Investment Bank Nederland BV
UBS Laing and Cruickshank Limited
UBS Leasing AG
UBS Life AG
UBS Limited
UBS Loan Finance LLC
UBS Mortgage Holdings LLC
UBS New Zealand Limited
UBS O’Connor LLC
UBS PaineWebber Life Insurance Company
UBS Portfolio LLC
UBS Preferred Funding Company LLC I
UBS Preferred Funding Company LLC II
UBS Preferred Funding Company LLC III
UBS Preferred Funding Company LLC IV
UBS Principal Finance LLC
UBS Private Clients Australia Ltd
UBS Real Estate Investments Inc
UBS Real Estate Securities Inc
UBS Realty Investors LLC
UBS Securities (Thailand) Ltd
UBS Securities Asia Limited
UBS Securities Australia Ltd
UBS Securities Canada Inc
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 Limited Seoul Branch
UBS Securities LLC
UBS Securities Philippines Inc
UBS Securities Singapore Pte Ltd
UBS Services USA LLC
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
Jurisdiction
of incorporation
Frankfurt am Main, Germany
Frankfurt am Main, Germany
Amsterdam, the Netherlands
London, Great Britain
Brugg, Switzerland
Zurich, Switzerland
London, Great Britain
Delaware, USA
Delaware, USA
Auckland, New Zealand
Delaware, USA
California, USA
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Business
Group 1
Global AM
IB
IB
WM&BB
WM&BB
WM&BB
IB
IB
WM-US
IB
Global AM
WM-US
IB
CC
CC
CC
CC
IB
Melbourne, Australia
WM&BB
Delaware, USA
Delaware, USA
Connecticut, USA
Bangkok, Thailand
Hong Kong, China
Sydney, Australia
Toronto, Canada
Madrid, Spain
Paris, France
Hong Kong, China
Mumbai, India
London, Great Britain
George Town, Cayman Islands
London, Great Britain
Seoul, South Korea
Delaware, USA
Makati City, Philippines
Singapore, Singapore
Delaware, USA
Sandton, South Africa
Toronto, Canada
New York, USA
Nassau, Bahamas
George Town, Cayman Islands
St. Helier, Jersey
Singapore, Singapore
London, Great Britain
Frankfurt, Germany
IB
IB
Global AM
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
WM-US
IB
WM&BB
WM-US
WM&BB
WM&BB
WM&BB
WM&BB
IB
WM&BB
Share
capital
in millions
7.7
155.7
10.9
2.5
10.0
25.0
21.2
16.7
0.0
7.5
1.0
39.3 2
0.1
0.0
0.0
0.0
0.0
0.1
53.9
0.3
0.4
9.3
400.0
20.0
209.8 2
10.0
15.0
22.9
230.0
237.8
18.0
60,000.0
140.0
0.0
2,141.4 2
150.0
55.0
0.0
87.1 2
12.5
5.0 2
2.0
2.0
0.0
3.3
5.0
51.0
EUR
EUR
EUR
GBP
CHF
CHF
GBP
USD
USD
NZD
USD
USD
USD
USD
USD
USD
USD
USD
AUD
USD
USD
USD
THB
HKD
AUD
CAD
EUR
EUR
HKD
INR
GBP
JPY
GBP
KRW
USD
PHP
SGD
USD
ZAR
CAD
USD
USD
USD
GBP
SGD
GBP
EUR
Equity
interest
accumulated in %
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
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
100.0
100.0
1 WM&BB: Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, WM-US: Wealth Management USA, CC: Corporate Center, IH: Industrial Holdings.
2 Share Capital and Share Premium.
164
Note 36 Significant Subsidiaries and Associates (continued)
Significant subsidiaries (continued)
Company
Motor-Columbus AG
Aare-Tessin AG für Elektrizität 3
Atel Energia S. r. l. 3
Atel Installationstechnik AG 3
Entrade GmbH 3
GAH Beteiligungs AG 3
Società Elettrica Sopracenerina SA 3
Jurisdiction
of incorporation
Baden, Switzerland
Olten, Switzerland
Milan, Italy
Olten, Switzerland
Schaffhausen, Switzerland
Heidelberg, Germany
Locarno, Switzerland
Business
Group 1
IH
IH
IH
IH
IH
IH
IH
Share
capital
in millions
Equity
interest
accumulated in %
CHF
CHF
EUR
CHF
CHF
EUR
CHF
253.0
303.6
20.0
30.0
0.4
25.0
27.5
55.6
33.0
32.3
33.0
24.7
33.0
19.6
1 WM&BB: Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, WM-US: Wealth Management USA, CC: Corporate Center, IH: Industrial Holdings.
2 Share Capital and Share Premium.
3 Not wholly owned subsidiary controlled by Motor-Columbus which itself is only 55.6% owned by UBS.
Consolidated companies: changes in 2004
Significant new companies
UBS Alternative and Quantitative Investments LLC – Delaware, USA
UBS Energy Canada Limited – Calgary, Canada
UBS Energy LLC – Delaware, USA
UBS Fund Services (Ireland) Limited – Dublin, Ireland
UBS Global Life AG – Vaduz, Liechtenstein
UBS Laing and Cruickshank Limited – London, Great Britain
UBS Securities Limited Seoul Branch – Seoul, South Korea
UBS Services USA LLC – Delaware, USA
Motor-Columbus AG – Baden, Switzerland
Aare-Tessin AG für Elektrizität – Olten, Switzerland
Atel Energia S.r.l. – Milan, Italy
Atel Installationstechnik AG – Olten, Switzerland
Entrade GmbH – Schaffhausen, Switzerland
GAH Beteiligungs AG – Heidelberg, Germany
Società Elettrica Sopracenerina SA – Locarno, Switzerland
Deconsolidated companies
Significant deconsolidated companies
UBS Finanzholding AG – Zurich, Switzerland
Aventic AG – Zurich, Switzerland
Significant associates
Company
Electricité d’Emosson SA – Martigny, Switzerland
Engadiner Kraftwerke AG – Zernez, Switzerland
Kernkraftwerk Gösgen-Däniken AG – Däniken, Switzerland
Kernkraftwerk Leibstadt AG – Leibstadt, Switzerland
SIS Swiss Financial Services Group AG – Zurich, Switzerland
Telekurs Holding AG – Zurich, Switzerland
Azienda Energetica Municipale S.p.A. – Milan, Italy
UBS Currency Portfolio Ltd – George Town, Cayman Islands
UBS Global Equity Arbitrage Ltd – George Town, Cayman Islands
O’Connor Proprietary Series – Currency and Rates, Fundamental Long / Short and
Convertible Arbitrage Limited – George Town, Cayman Islands
O’Connor Proprietary Series – Currency and Rates, Fundamental Long / Short and
Convertible Arbitrage (EURO) Limited – George Town, Cayman Islands
Volbroker.com Limited – London, Great Britain
1 Thereof paid in CHF 290.0 millions.
2 For Hedge Funds Net Asset Value instead of share capital.
Industry
Electricity
Electricity
Electricity
Electricity
Financial
Financial
Electricity
Private Investment Company
Private Investment Company
Private Investment Company
Private Investment Company
Financial
Reason for deconsolidation
Merged
Merged
Equity interest
in %
Share capital
in millions
16
7
13
9
33
33
2
18
37
44
51
21
CHF
CHF
CHF
CHF
CHF
CHF
EUR
140
140
350 1
450
26
45
930
USD 1 ,831 2
USD
929 2
USD
506 2
EUR
GBP
153 2
18
165
Financial Statements
Notes to the Financial Statements
Note 37 Invested Assets and Net New Money
Invested assets include all client assets managed by or deposit-
ed with UBS for investment purposes only. They therefore ex-
clude all assets held for purely transactional purposes. Assets
included are, for example, managed fund assets, managed in-
stitutional assets, discretionary and advisory wealth manage-
ment portfolios, fiduciary deposits, time deposits, savings ac-
counts and wealth management securities or brokerage
accounts. Custody-only assets and transactional cash or cur-
rent accounts as well as non-bankable assets (e. g. art collec-
tions) 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 Business
Group and sold in another, it is counted in both the Business
Group that does the investment 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 generate 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 results 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
31.12.04
31.12.03
354
570
1,326
2,250
294
88.9
339
507
1,287
2,133
283
69.1
166
Note 38 Business Combinations
During 2004, UBS completed several acquisitions that were ac-
counted for as business combinations. Except Motor-Colum-
bus, which is discussed separately, none of the acquisitions was
individually significant to the financial statements, and there-
fore, they are presented aggregated per Business Group.
Wealth Management
In the first quarter of 2004, UBS acquired the private banking
operations of Lloyds Bank S.A., France, and the private client
business of Merrill Lynch in Germany and Austria. The two
businesses together had invested assets of approximately CHF
3.3 billion at the date of acquisition. Both businesses have
been integrated into the local UBS Wealth Management op-
erations and helped to significantly increase the client base in
France and Germany.
In the second quarter of 2004, UBS acquired Laing &
Cruickshank and Scott Goodman Harris, both British firms.
Laing & Cruickshank, acquired for a consideration of approx-
imately CHF 363 million, provides comprehensive wealth man-
agement services to high net worth investors and charities. 75
client advisors looked after invested assets of approximately
CHF 11.4 billion, which doubled the size of UBS’s wealth man-
agement operations in the United Kingdom. Scott Goodman
Harris provides advice on pension and retirement benefit
products, serving primarily executives and company directors
with 28 employees. Subsequent to the acquisition both firms
have been integrated into the UBS wealth management op-
erations in the UK.
In fourth quarter 2004, UBS acquired Sauerborn Trust AG
(Sauerborn), an independent German firm providing financial
advisory services to individuals in the ultra-high net worth seg-
ment. Sauerborn has approximately CHF 9.4 billion of assets
under management. UBS has merged its ultra-high net worth
segment within the German wealth management business
with the operations of Sauerborn to provide an expanded
range of services and products to its clients and reap the ben-
efits of synergies. UBS paid a cash consideration of approxi-
mately CHF 140 million (EUR 91 million) at closing, and will
pay a further CHF 65 million (EUR 42 million) in three equal
installments over the next two years.
The aggregate purchase price for the five acquisitions is ap-
proximately CHF 696 million and has been allocated to ac-
quired net assets at fair value of CHF 175 million. The differ-
ence of CHF 521 million to the purchase price has been
recognized as goodwill. Details of assets and liabilities recog-
nized are as follows:
CHF million
Assets
Intangible assets
Property and equipment
Financial Investments
Goodwill
All other assets
Total assets
Liabilities
Provisions
Deferred tax liabilities
All other liabilities
Total liabilities
Net assets
Total liabilities and equity
Book value
Step-up to
fair value
Fair value
0
3
5
0
260
268
5
0
178
183
85
268
162
(1 )
0
521
2
684
19
54
0
73
611
684
162
2
5
521
262
952
24
54
178
256
696
952
Intangible assets recognized relate to the businesses’ existing customer relationships and have been assigned useful lives of
twenty years, over which they will be amortized.
167
Financial Statements
Notes to the Financial Statements
Note 38 Business Combinations (continued)
Investment Bank
In fourth quarter 2004, UBS acquired Charles Schwab Sound-
View Capital Markets, the capital markets division of Charles
Schwab Corp. (Schwab), for an aggregate cash consideration
of approximately CHF 304 million. The business comprises eq-
uities trading and sales, including a third-party execution busi-
ness, along with Schwab’s NASDAQ trading system. This busi-
ness handles over 200 million shares a day in trade volume
and makes a market in over 11,000 stocks. As part of the ac-
quisition, UBS and Schwab have entered into multi-year exe-
cution service agreements for the handling of Schwab’s equi-
ties and listed options orders. The business was integrated in
the Equities business of UBS’s Investment Bank.
Also in fourth quarter 2004, UBS acquired Brunswick Cap-
ital’s 50% stake in Brunswick UBS, an equity brokerage and
trading, investment banking and custody joint venture in Rus-
sia in which UBS and Brunswick Capital were equal partners.
The total purchase price has been estimated at approximate-
ly CHF 203 million, of which UBS paid at closing a cash con-
sideration to the sellers of CHF 113 million (USD 99 million)
and will pay a further CHF 75 million (USD 66 million) at the
end of 2005 plus 20% of Brunswick UBS’s net profits for 2005.
Formed in 1997, Brunswick UBS has developed a significant
franchise in the Russian securities market, employing 120 peo-
ple in Moscow. UBS has already consolidated Brunswick, so
that the effects of this acquisition on the financial statements
are minor.
The aggregate purchase price for the two businesses is ap-
proximately CHF 507 million, a portion of which includes a de-
ferred component linked to future results of operations. Ac-
cordingly, a revision of the current purchase price estimate will
be made, if necessary, once final payments have been deter-
mined. The purchase price has been allocated to net assets
acquired of CHF 198 million, which includes a revaluation of
CHF 27 million related to UBS’s existing interest in Brunswick.
The difference of CHF 336 million to the purchase price has
been recognized as goodwill. Details of assets and liabilities
recognized are as follows:
CHF million
Assets
Intangible assets
Property and equipment
Financial investments
Deferred tax assets
Goodwill
All other assets
Total assets
Liabilities
Deferred tax liabilities
All other liabilities
Total liabilities
Minority interests
Equity
Total liabilities, minority interests and equity
Book value
Step-up to
fair value
Fair value
21
20
99
37
–
361
538
–
364
364
40
134
538
133
(13 )
(2 )
(37 )
336
(1 )
416
23
32
55
(39 )
400
416
154
7
97
–
336
360
954
23
396
419
1
534
954
Intangible assets recognized relate to the businesses’ existing customer relationships and have been assigned useful lives of
five years in the case of Brunswick and eight years in the case of Schwab over which they will be amortized.
168
Note 38 Business Combinations (continued)
Notz Stucki
In the first quarter of 2004, Ferrier Lullin, one of UBS’s private
label banks, acquired Notz Stucki & Co., a small private bank
in Geneva. The activities have been integrated into the oper-
ations of Ferrier Lullin. The purchase price of CHF 42 million
was allocated to net tangible assets of CHF 22 million, and
Notz Stucki’s customer base of CHF 21 million, less deferred
taxes of CHF 5 million. The difference of CHF 4 million to the
purchase price was recognized as goodwill.
Motor-Columbus
On 1 July 2004, UBS acquired from RWE, a German utilities
company, its 20% ownership interest in Motor-Columbus AG
(Motor-Columbus) for a cash consideration, including inciden-
tal acquisition costs, of approximately CHF 379 million. UBS
now holds a 55.6% majority interest in Motor-Columbus, a
Swiss holding company whose most significant asset is an ap-
proximate 59.3% ownership interest in Aare-Tessin AG für
Elektrizität (Atel), a Swiss group engaged in the production,
distribution and trading of electricity.
UBS now consolidates Motor-Columbus and treated the
acquisition of the 20% ownership interest as a business com-
bination. The purchase price was allocated to acquired net as-
sets of approximately CHF 260 million and the difference of
CHF 119 million to the purchase price was recognized as
goodwill. In accordance with IFRS 3, the existing 35.6% in-
terest in Motor-Columbus was revalued to the valuation ba-
sis established at 1 July 2004, resulting in a revaluation amount
of approximately CHF 81 million (CHF 63 million net of de-
ferred tax liabilities), which was recorded directly in equity. The
minority interests were also revalued to the new valuation ba-
sis, so that assets acquired and liabilities assumed are carried
at full fair value. Details of assets, liabilities and minority in-
terests, for which a step-up to fair value was recognized in pur-
chase accounting, and all other assets and liabilities recog-
nized at carryover basis are as follows:
CHF million
Assets
Intangible assets
Property and equipment
Investments in associates
Financial investments
Deferred tax assets
All other assets
Total assets
Liabilities
Provisions
Debt issued
Deferred tax liabilities
All other liabilities
Total liabilities
Minority interests
Equity
Total liabilities, minority interests and equity
The CHF 75 million step-up to fair value of provisions relates
to contingent liabilities arising from guarantees and certain
contractual obligations. UBS’s share in the equity at fair value
of CHF 1,299 million is CHF 723 million, while the remaining
CHF 576 million is recognized as additional minority interests,
bringing total minority interest as of the acquisition date to
CHF 1,742 million.
Book value
Step-up to
fair value
Fair value
444
1,939
655
621
113
2,629
6,401
835
700
293
3,045
4,873
784
744
6,401
750
144
367
19
67
–
1,347
75
27
308
–
410
382
555
1,347
1,194
2,083
1,022
640
180
2,629
7,748
910
727
601
3,045
5,283
1,166
1,299
7,748
Useful economic lives between 4 and 25 years have been
assigned to amortizable and depreciable assets based on con-
tractual lives, where applicable, or estimates of the period dur-
ing which the assets will benefit the operations.
169
Financial Statements
Notes to the Financial Statements
Note 38 Business Combinations (continued)
Pro-forma information (unaudited)
The following pro-forma information shows UBS’s total oper-
ating income, net profit and basic earnings per share as if all
of the above acquisitions had been made as at 1 January 2004
and 2003, respectively. Adjustments have been made to re-
flect additional amortization and depreciation of assets and
liabilities, which have been assigned fair values different from
their carryover basis in purchase accounting.
CHF million, except where indicated
Total operating income
Net profit
Basic earnings per share (CHF)
Note 39 Currency Translation Rates
For the year ended
31.12.04
44,812
8,112
7.71
31.12.03
39,536
6,277
5.62
The following table shows the principal rates used to translate the financial statements of foreign entities into Swiss francs:
Spot rate
As at
Average rate
Year ended
31.12.04
31.12.03
31.12.04
31.12.03
31.12.02
1.14
1.55
2.19
1.11
1.24
1.56
2.22
1.15
1.24
1.54
2.27
1.15
1.34
1.54
2.20
1.16
1.54
1.46
2.33
1.24
1 USD
1 EUR
1 GBP
100 JPY
170
Note 40 Swiss Banking Law Requirements
The consolidated financial statements of UBS are prepared in
accordance with International Financial Reporting Standards.
Set out below are the significant differences regarding recog-
nition and measurement between IFRS and the provisions of the
Banking Ordinance and the Guidelines of the Swiss Banking
Commission governing financial statement reporting pursuant
to Article 23 through Article 27 of the Banking Ordinance.
1. Consolidation
Under IFRS, entities which are directly or indirectly controlled
by the Group are consolidated. Temporarily controlled entities
that are acquired and held with a view to their subsequent
disposal, are recorded as Financial investments.
der IFRS, when hedge accounting is applied for these instru-
ments, the unrealized gain or loss on the effective portion of
the derivatives is recorded in 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 ef-
fective portion of the derivative instruments used to hedge
cash flow exposures are deferred on the balance sheet as as-
sets or liabilities. The deferred amounts are released to income
when the hedged cash flows occur.
4. Investment property
Under IFRS, investment properties are carried at fair value.
Under Swiss law, only entities that are active in the field of
banking and finance as well as real estate entities are subject
to consolidation. Entities which are held temporarily are
recorded as Financial investments.
Under Swiss law, investment properties are carried at the
lower of cost less accumulated depreciation or market value.
Depreciations on investment properties are continued until a
sale is executed.
2. Financial investments
Under IFRS, available-for-sale financial investments 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 available-for-sale investment
is determined to be impaired, the cumulative unrealized loss
previously recognized in Shareholders’ equity is included in net
profit or loss for the period. On disposal of a financial invest-
ment, the difference between the net disposal proceeds and
the carrying 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 be-
low cost and reversals of such reductions as well as gains and
losses on disposal are included in Other income.
3. Cash flow hedges
The Group uses derivative instruments to hedge against the
exposure from varying cash flows receivable and payable. Un-
5. Fair value option
Under IFRS, the Group applies the fair value option to hybrid
instruments issued. As a result the embedded derivative as
well as the host contract related to the hybrid instrument are
marked to market.
Under Swiss law, the fair value option is not available. Hy-
brid instruments are bifurcated: while the embedded deriva-
tive is marked to market, the host contract is accounted for
on an accrued cost basis.
6. Goodwill
Under IFRS, goodwill acquired in business combinations en-
tered into after 31 March 2004 is not amortized, but tested
annually for impairment. Intangible assets acquired in business
combinations entered into after 31 March 2004 to which an
indefinite useful life has been assigned, are not amortized but
tested annually for impairment.
Under Swiss law, goodwill and intangible assets with in-
definite useful lives must be amortized over a period not ex-
ceeding five years, unless a longer useful life, which may not
exceed twenty years, can be justified.
171
Financial Statements
Notes to the Financial Statements
Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally
Accepted Accounting Principles (US GAAP)
Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP
The consolidated financial statements of UBS have been pre-
pared in accordance with IFRS. The principles of IFRS differ in
certain respects from United States Generally Accepted Ac-
counting Principles (“US GAAP”). The following is a summa-
ry of the relevant significant accounting and valuation differ-
ences between IFRS and US GAAP.
a. Purchase accounting (merger of Union Bank of
Switzerland and Swiss Bank Corporation)
due to recognition of deferred tax assets of Swiss Bank Cor-
poration which had previously been subject to valuation re-
serves.
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.
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
statements 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 pur-
chase method, the cost of acquisition is measured at fair val-
ue 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 consideration paid over the fair
value of net tangible assets acquired is allocated, first to iden-
tifiable intangible assets based on their fair values, if deter-
minable, with the remainder allocated to goodwill.
Goodwill and intangible assets
For US GAAP purposes, the excess of the consideration paid
for Swiss Bank Corporation over the fair value of the net tan-
gible assets received has been recorded as goodwill and was
amortized 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 ac-
quired before 30 June 2001 was capitalized and amortized
over its estimated useful life with adjustments for any impair-
ment.
On 1 January 2002, UBS adopted SFAS 141, “Business
Combinations” and SFAS 142, “Goodwill and Other Intan-
gible Assets”. SFAS 141 requires reclassification of intangi-
ble assets to goodwill which no longer meet the recognition
criteria under the new standard. SFAS 142 requires that
goodwill and intangible assets with indefinite lives no longer
be amortized but be tested annually for impairment. Identi-
fiable intangible assets with finite lives will continue to be
amortized. Upon adoption, the amortization charges relat-
ed to the 1998 business combination of Union Bank of
Switzerland and Swiss Bank Corporation ceased to be record-
ed under US GAAP.
In 2004 and 2003, goodwill recorded under US GAAP was
reduced by CHF 78 million and CHF 39 million respectively,
b. Reversal of IFRS goodwill amortization
The adoption of SFAS 142 “Goodwill and Intangible 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
1 January 2002 were reclassified to Goodwill for US GAAP;
2) The amortization of IFRS Goodwill and the Intangible as-
sets reclassified to Goodwill for US GAAP (CHF 778 million,
CHF 831 million and CHF 1,017 million for the years ended
31 December 2004, 31 December 2003 and 31 December
2002, respectively) was reversed.
With the adoption of IFRS 3 Business Combinations, UBS
will cease amortizing pre-existing Goodwill under IFRS begin-
ning 1 January 2005. Goodwill will be subject to an annual
impairment test as it is under US GAAP, and there will no
longer be a difference between the two sets of standards re-
garding goodwill amortization. Goodwill from business com-
binations entered into on or after 31 March 2004 has already
been accounted for under the provisions of IFRS 3, and no
Goodwill amortization has been recorded for these transac-
tions under IFRS or US GAAP.
c. Purchase accounting under IFRS 3 and FAS 141
With the adoption of IFRS 3 on 31 March 2004, the account-
ing for business combinations generally converged with US
GAAP with the exception of the measurement of minority in-
terests and the recognition of a revaluation reserve in the case
of a step acquisition.
Under IFRS, minority interests are recognized at the per-
centage of fair value of identifiable net assets acquired at the
acquisition date whereas under US GAAP they are recognized
at the percentage of book value of identifiable net assets ac-
quired at the acquisition date. In most cases, minority inter-
ests would tend to have a higher measurement value under
IFRS than under US GAAP.
Furthermore, IFRS requires that in a step acquisition the ex-
isting ownership interest in an entity be revalued to the new
valuation basis established at the time of acquisition. The in-
crease in value is recorded directly in equity as a revaluation
172
reserve. Under US GAAP, the existing ownership interest re-
mains at its original valuation.
d. Derivative instruments
Under IAS 39, UBS hedges interest rate risk based on forecast
cash inflows and outflows on a Group basis. For this purpose,
UBS accumulates information about non-trading financial as-
sets 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 de-
rivative instruments are then used to hedge the estimated fu-
ture cash flows against repricing risk. SFAS 133 does not per-
mit hedge accounting for hedges of future cash flows
determined by this methodology. Accordingly, for US GAAP
such hedging instruments continue to be carried at fair value
with changes in fair value recognized in Net trading income.
In addition, amounts deferred under hedging relationships
prior to the adoption of IAS 39 on 1 January 2001 that do not
qualify as hedges under current requirements under IFRS are
amortized to income over the remaining life of the hedging
relationship. Such amounts have been reversed for US GAAP
as they have never been treated as hedges.
e. Financial investments and private equity
Financial investments available-for-sale
Three exceptions exist between IFRS and US GAAP in account-
ing for financial investments available-for-sale: 1) Non-mar-
ketable equity financial investments (excluding private equi-
ty investments discussed below), which are classified as
available-for-sale and carried at fair value under IFRS, contin-
ue to be carried at cost less “other than temporary” impair-
ments under US GAAP. The opening adjustment and subse-
quent 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 debt
instruments can be fully or partially reversed under IFRS if the
value of the impaired assets increases. Such reversals of im-
pairment writedowns are not allowed under US GAAP. Rever-
sals under IFRS were not significant in 2004, 2003 or 2002.
3) Private equity investments, as described in the next section.
Private equity investments
UBS accounts for private equity investments as available-for-
sale securities in its primary Financial Statements under IFRS,
with changes in fair value recognized in Shareholders’ equi-
ty. Under US GAAP, all of these investments were accounted
for at cost less “other than temporary” impairments prior to
1 January 2002.
On 1 January 2002, UBS adopted the provisions of SFAS
144 “Accounting for the Impairment or Disposal of Long-Lived
Assets” for its US GAAP Financial Statements. The statement
primarily addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. In addition, SFAS
144 eliminated the exception to consolidation for subsidiaries
for which control is likely to be temporary, as previously con-
tained in Accounting Research Bulletin 51 “Consolidated Fi-
nancial Statements” as amended by SFAS 94 “Consolidation
of All Majority-Owned Subsidiaries”. Therefore, on adopting
SFAS 144, UBS changed its US GAAP accounting for certain
private equity investments by accounting for those invest-
ments held within separate investment subsidiaries in accor-
dance with the “AICPA Audit and Accounting Guide, Audits
of Investment Companies”. The effect of this change for US
GAAP reporting purposes is that certain private equity invest-
ments are now recorded at fair value, with changes in fair val-
ue recognized in US GAAP net profit. The remaining private
equity investments continue to be accounted for at cost less
“other than temporary” impairment.
For the IFRS to US GAAP reconciliation, fair value adjust-
ments on certain private equity investments recorded direct-
ly in Shareholders’ equity under IFRS had to be shown in the
income statement for US GAAP purposes. At 1 January 2002,
the date of adoption of SFAS 144, the cumulative effect of
this change in accounting on US GAAP net profit was an in-
crease of CHF 639 million, after tax. For the years ended 31
December 2004, 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 increase US GAAP net
profit by CHF 154 million after tax, decrease US GAAP net
profit by CHF 119 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 ac-
counting principle were applied retroactively would be as fol-
lows:
CHF million, except for per share data
For the year ended
Net profit under US GAAP
Basic earnings per share
Diluted earnings per share
31.12.04
31.12.03
8,818
8.56
8.15
6,513
5.83
5.72
Pro-forma
31.12.02
4,907
4.06
3.99
See Note 2 for information regarding impairment charges recorded for private equity investments.
173
Financial Statements
Notes to the Financial Statements
f. Pension plans
Under IFRS, UBS recognizes pension expense based on a spe-
cific method of actuarial valuation used to determine the pro-
jected plan liabilities for accrued service, including future ex-
pected salary increases, and expected return on plan assets.
Plan assets are recorded at fair value and are held in a sepa-
rate trust to satisfy plan liabilities. Under IFRS the recognition
of a prepaid asset is subject to certain limitations, and any un-
recognized prepaid asset is recorded as pension expense. US
GAAP does not allow a limitation on the recognition of pre-
paid assets recorded in the balance sheet.
Under US GAAP, pension expense is based on the same ac-
tuarial method of valuation of liabilities 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 benefit obligation (which is the cur-
rent value of accrued benefits without allowance for future salary
increases), an additional minimum liability must be shown in the
balance sheet. If an additional minimum liability is recognized,
an equal amount will be recognized as an intangible asset up to
the amount of any unrecognized prior service cost. Any amount
not recognized as an intangible asset is reported in Other com-
prehensive income. The additional minimum liability required un-
der US GAAP amounts to CHF 1,125 million, CHF 306 million
and CHF 1,225 million as at 31 December 2004, 2003 and 2002,
respectively. The amount recognized in intangible assets was CHF
0 million, CHF 0 million and CHF 2 million and the amount rec-
ognized in Other comprehensive income before tax was CHF
1,125 million, CHF 306 million and CHF 1,223 million as at 31
December 2004, 2003 and 2002, respectively.
g. Other post-retirement benefit plans
Under IFRS, UBS has recorded expenses and liabilities for
post-retirement medical and life insurance benefits, deter-
mined under a methodology similar to that described above
under pension plans.
Under US GAAP, expenses and liabilities for post-retirement
medical and life insurance benefits are determined under the
same methodology as under IFRS. Differences in the levels of ex-
penses and liabilities have occurred due to different transition date
rules and the treatment of the merger of Union Bank of Switzer-
land and Swiss Bank Corporation under the purchase method.
h. Equity participation plans
As of the reporting date, IFRS does not have any standard in
effect that specifically addresses the recognition and measure-
ment requirements for equity participation plans.
US GAAP permits the recognition of compensation cost
based on the grant date fair value of equity instruments is-
sued (SFAS 123) or based on the intrinsic value of equity in-
struments issued (Accounting Principles Board “APB” No.
25). If an entity elects to apply the APB 25 intrinsic value
method they must provide pro forma disclosures of net prof-
it and earnings per share, as if the fair value based method
described in SFAS 123 had been applied. Under IFRS, UBS rec-
ognizes the intrinsic value of equity instruments issued meas-
ured at the grant date. No subsequent changes in value are
recognized. Under US GAAP, UBS applies the APB No. 25 in-
trinsic value method, which requires adjustments to intrinsic
values subsequent to the grant date in certain circumstances.
Prior to January 2004, certain equity compensation trusts
were consolidated under US GAAP. With the adoption of FIN
46-R, “Consolidation of Variable Interest Entities” on 1 Jan-
uary 2004, the remaining unconsolidated employee equity
compensation trusts formed before 1 February 2003 were
consolidated for US GAAP purposes for the first time. The ef-
fect of the trust consolidations is to increase assets by CHF
1,175 million and CHF 460 million and liabilities by CHF 1,175
million and CHF 483 million at 31 December 2004 and 31 De-
cember 2003 respectively.
With the consolidation of the additional trusts under FIN
46-R, UBS has re-evaluated its accounting for share-based
compensation plans under APB 25 by taking into considera-
tion the settlement methods and activities of the trusts. Based
on this review, most share plans issued prior to 2001 are now
treated as variable awards under APB 25. There were no
changes to the accounting for option plans. On 1 January
2004, a CHF 6 million expense reduction was recorded as a
cumulative adjustment due to a change in accounting. For the
year ended 31 December 2004, CHF 67 million in expense was
recorded in the US GAAP income statement for these variable
plans.
In addition, prior to the adoption of FIN 46-R, certain of
UBS’s option awards had been determined to be variable pur-
suant 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 these op-
tion awards in the US GAAP reconciliation for the years end-
ed 31 December 2004, 2003 and 2002, is a CHF 10 million
increase in compensation expense, CHF 28 million increase in
compensation expense and CHF 51 million decrease in com-
pensation expense, respectively. In addition, certain of UBS’s
share plans have been deemed variable under APB No. 25. Ad-
ditional expense was also recorded related to social tax pay-
ments on equity instruments recorded directly in Sharehold-
ers’ equity for IFRS. For US GAAP, the net effect of these
transactions is an increase to compensation expense of CHF
27 million, an increase to compensation expense of CHF 118
million and a decrease to compensation expense of CHF 12
million, for the years ended 31 December 2004, 2003 and
2002, respectively.
174
i. Software capitalization
Under IFRS, effective 1 January 2000, certain costs associat-
ed with the acquisitions or development of internal-use soft-
ware had to be capitalized. Once the software was ready for
its intended use, the costs capitalized were amortized to the
income statement over the estimated life of the software. Un-
der US GAAP, the same principle applied, however this stan-
dard was effective 1 January 1999. For US GAAP, the costs as-
sociated with the acquisition or development of internal-use
software that met the US GAAP software capitalization crite-
ria in 1999 were reversed from Operating expenses and amor-
tized over a life of two years from the time that the soft-
ware was ready for its intended use. From 1 January 2000, the
only remaining reconciliation item was the amortization of
software capitalized in 1999 for US GAAP purposes. At
31 December 2002, this amount was fully utilized and there
is no longer a difference between IFRS and US GAAP.
j. Consolidation of Variable Interest Entities (VIEs) and
deconsolidation of trust preferred securities
IFRS and US GAAP generally require consolidation of entities
on the basis of controlling a majority of voting rights. How-
ever, in certain situations, there are no voting rights, or con-
trol of a majority of voting rights is not a reliable indicator of
the need to consolidate, such as when voting rights are sig-
nificantly disproportionate to risks and rewards. There are dif-
ferences in the approach of IFRS and US GAAP to those situ-
ations.
Under IFRS, when control is exercised through means oth-
er than controlling a majority of voting rights, the consolida-
tion assessment is based on the substance of the relationship.
Indicators of control in these situations include: predetermi-
nation of the entity’s activities; the entity’s activities being con-
ducted 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 ac-
tivities of the entity; or retaining the majority of the residual
or ownership risks related to the entity’s assets in order to ob-
tain benefits from its activities.
Under US GAAP, consolidation considerations are subject
to FASB interpretation No. 46, “Consolidation of Variable In-
terest Entities (revised December 2003)”, an interpretation of
Accounting Research Bulletin No. 51 (FIN 46-R). FIN 46-R re-
quires that when voting interests do not exist, or differ signif-
icantly from economic interests, an entity is considered to be
a “Variable Interest Entity” (“VIE”). An enterprise holding vari-
able interests that will absorb a majority of a VIE’s “expected
losses”, receive a majority of a VIE’s “expected residual re-
turns”, or both, is known as the “primary beneficiary”, and
must consolidate the VIE.
From 1 January 2004 UBS has fully applied FIN 46-R con-
solidation requirements to its US GAAP financial statements.
At 31 December 2003, the consolidation requirements of
the predecessor standard, FIN 46, only applied to VIEs created
after 31 January 2003.
In many cases the assessment of consolidation under IFRS
and US GAAP is the same, however, there are certain differ-
ences.
The entities consolidated for US GAAP purposes at 31 De-
cember 2004, which were not otherwise consolidated in
UBS’s primary consolidated Financial Statements under IFRS,
are mostly investment fund products, securitization VIEs, and
employee equity compensation trusts. These are discussed in
more detail in Note 42.1.
The entities not consolidated for US GAAP purposes, which
UBS consolidates under IFRS, are certain trusts which have is-
sued trust preferred securities. Under IFRS these are equity in-
struments held by third parties and are treated as minority in-
terests, with dividends paid also reported in minority interests;
under US GAAP the securities are treated as debt, with inter-
est paid reported in interest expense.
A discussion of FIN 46-R measurement requirements and
disclosures is set out in Note 42.1.
k. Financial liabilities held at fair value through profit
and loss
Revised IAS 39 provides the election to designate at initial
recognition any financial asset or liability as held at fair value
through profit and loss. UBS applies this fair value designa-
tion election to a significant portion of its issued debt. Many
debt issues are in the form of hybrid instruments, consisting
of a debt host with an embedded derivative. Regular debt in-
struments as well as hybrid instruments are carried in their en-
tirety at fair value with all changes in fair value recorded in
profit and loss. Under US GAAP, debt instruments have to be
carried at amortized cost. Derivatives embedded in hybrid in-
struments are separated from the debt hosts and accounted
for as if they were freestanding derivatives.
l. Physically settled written puts
With the adoption of revised IAS 32 and IAS 39 at 1 January
2004, the accounting for physically settled written put options
on UBS shares changed. Previously, such put options were ac-
counted for as derivatives whereas now the present value of
the contractual amount is recorded as a liability, while the pre-
mium received is credited to equity. Subsequently, the liabili-
ty is accreted over the life of the put option to its contractu-
al amount recognizing interest expense in accordance with the
effective interest method. Under US GAAP, physically settled
written put options on UBS shares continue to be accounted
for as derivative instruments. All other outstanding derivative
contracts, except written put options with the UBS share as
underlying, are treated as derivative instruments under both
sets of accounting standards.
175
Financial Statements
Notes to the Financial Statements
m. Investment properties
As at 1 January 2004, UBS changed its accounting for in-
vestment properties from the cost less depreciation method
to the fair value method. Under the fair value method,
changes in fair value are recognized in the income statement,
and depreciation is no longer recognized. Under US GAAP, in-
vestment properties continue to be carried at cost less accu-
mulated depreciation.
Note 41.2 Recently Issued US Accounting Standards
In December 2003, the “Medicare Prescription Drug, Im-
provement and Modernization Act of 2003” (the Act) was
passed in the US. Commencing 1 January 2006, the Act in-
troduces a prescription drug benefit for individuals eligible un-
der Medicare (Medicare Part D) as well as a federal subsidy
equal to 28% of certain post-65 prescription drug claims for
sponsors of retiree health care plans with drug benefits that
are at least actuarially equivalent to those to be offered un-
der Medicare Part D.
Pursuant to the guidance included in FASB Staff Position
FAS 106-1 (FSP 106-1), the Group chose to defer recognition
of the potential effects of the Act in its 2003 Financial State-
ments due to the lack of authoritative accounting guidance
concerning certain technical matters.
In May 2004, the FASB issued FASB Staff Position FAS 106-
2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (FSP 106-2) which supersedes FSP 106-1. FSP106-
2 requires plan sponsors to account for the effect of the sub-
sidy on benefits attributable to past service as an unrecognized
actuarial gain and as a reduction of the service cost compo-
nent of the net periodic post-retirement costs for amounts at-
tributable to current service if prescription drug benefits avail-
able under the plan are actuarially equivalent to those under
Medicare Part D for 2006. UBS believes that the US health care
plans will be eligible for the subsidy and prospectively adopt-
ed FSP 106-2 on 1 July 2004. The adoption of FSP 106-2 did
not have a material effect on UBS’s Financial Statements.
In December 2003, the FASB issued revised SFAS 132 “Em-
ployers’ Disclosures about Pensions and Other Postretirement
Benefits” (SFAS 132-R). SFAS 132-R retains the disclosure re-
quirements included in SFAS 132, Employers’ Disclosures
about Pensions and Other Postretirement Benefits, which it
replaces. SFAS 132-R requires additional disclosures to those
in SFAS 132 regarding the assets, obligations, cash flows and
net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. Except for certain
disclosures relating to foreign plans and disclosures regarding
the estimated future benefit payments prescribed in SFAS
132-R, SFAS 132-R was effective for financial statements with
fiscal years ending after 15 December 2003. The remaining
additional disclosures regarding foreign plans and the estimat-
ed future benefit payments disclosures are effective for finan-
cial statements with fiscal years ending after 15 June 2004.
176
UBS elected to adopt early the additional disclosures required
for foreign plans as well as the prescribed SFAS 132-R disclo-
sures in its 2003 Financial Statements. Pursuant to the tran-
sitional disclosure requirements, UBS included the disclosure
of the estimated future benefit payments for the year ended
31 December 2004 in Note 31, Pension and Other Post-Re-
tirement Benefit Plans.
In November 2003, the FASB’s Emerging Issues Task Force
(EITF) issued EITF 03-1, “The Meaning of Other-Than-Tempo-
rary Impairment and Its Application to Certain Investments”.
The EITF reached a consensus regarding certain qualitative and
quantitative disclosures for debt and marketable equity secu-
rities classified as available-for-sale or held to maturity under
SFAS 115 and 124 that are impaired at the balance sheet date
but for which an other-than-temporary impairment has not
been recognized. UBS provided the required EITF 03-1 disclo-
sures in Note 12 of the 2003 Financial Statements.
In March 2004, the EITF reached a consensus on an other-
than-temporary impairment model for debt and equity secu-
rities classified as available-for-sale or held to maturity under
SFAS 115 and 124 and equity securities held under the cost
method. This EITF consensus would have been effective for
interim and annual reporting periods beginning after 15 June
2004. In September 2004, the FASB staff issued FSP 03-1-1,
“Effective Date of Paragraphs 10-20 of EITF 03-1, The Mean-
ing of Other Than Temporary Impairment”, which delayed the
effective date for the recognition and measurement guidance
included in EITF 03-1. The EITF 03-1 disclosure requirements
were not delayed and are included in Note 12.
In December 2003, the FASB issued FASB Interpretation No.
46 “Consolidation of Variable Interest Entities (revised Decem-
ber 2003), an Interpretation of ARB No. 51” (FIN 46-R) which
addresses how an enterprise should evaluate whether it has
a controlling financial interest in an entity through means oth-
er than voting rights and accordingly wether it should consol-
idate the entity. This consolidation evaluation under FIN 46-R
reduces the impact of a decision maker in the calculation of
expected losses and expected residual returns compared to the
consolidation evaluation under the original FIN 46. FIN 46-R
also changed the definition of a variable interest.
As an SEC foreign registrant, UBS applied the consolida-
tion requirements for VIEs created before 1 February 2003 for
the first time on 1 January 2004. To VIEs created after 31 Jan-
uary 2003, the original FIN 46 was applied for the first time
at 31 December 2003. Under FN 46-R, at 1 January 204, sev-
eral of UBS’s employee equity compensation trusts were con-
solidated for the first time, while trust preferred security ve-
hicles were deconsolidated.
The adoption of FIN 46-R is discussed in more detail in Note
42.
Recently issued US accounting standards not yet adopted
In December 2004, the FASB issued SFAS 123 (revised 2004),
“Share-Based Payment”, (SFAS 123-R) which is a revision of
SFAS 123, “Accounting for Stock-Based Compensation”
(SFAS 123) and supersedes APB Opinion 25, “Accounting for
Stock Issued to Employees” (APB Opinion 25). SFAS 123-R re-
quires all share-based payments to employees, including
grants of employee stock options, to be recognized in the in-
come statement based on their fair values at date of grant,
eliminating the pro-forma disclosure alternative. Further, SFAS
123-R introduces the notion of a requisite service period,
which indicates that the service period for awards with future
vesting may not be defined as a prior period. For UBS this will
result in a change in the expense attribution period for awards.
SFAS 123-R is effective for interim or annual reporting pe-
riods beginning after 15 June 2005 with earlier application
permitted. UBS will adopt SFAS 123-R effective 1 January 2005
using the modified prospective method. Under this method,
SFAS 123-R applies only to new awards that are granted, mod-
ified or settled after the Standard is adopted. Compensation
cost for prior awards shall be based on the grant date fair val-
ue and expense attribution method used for recognition or
disclosure purposes under SFAS 123. Prior periods will not be
restated.
UBS currently accounts for share-based payments using the
intrinsic value method under APB 25, and as such, generally
recognizes no compensation cost for employee stock op-
tions. Under this approach UBS recognized the fair value of
share awards granted as part of annual bonuses in the year
of corresponding performance, aligning with the revenue
produced. For disclosure purposes, UBS recognized the fair val-
ue of option awards on the date of grant. Thus, for recogni-
tion and disclosure purposes, expense for share and option
awards issued prior to but outstanding at the date of adop-
tion of SFAS 123-R has been fully attributed to prior periods.
Further, share awards issued in 2005 as part of the 2004 per-
formance year, have been fully recognized in 2004. Therefore
under SFAS 123-R, only option awards and certain share
awards granted, modified or settled after the effective date
are to be recognized in the 2005 financial statements. These
awards will be recognized over the requisite service period as
newly defined in SFAS 123-R, which is expected to result in a
ramp-up of compensation expense over the next several years
as these awards move through their vesting periods. There-
fore, compensation expense is expected to decrease in 2005
compared to 2004 as the ramp-up effect for the share awards
will offset the first-time recognition of the fair value of option
awards. However, compensation cost will increase as awards
to which the new measurement and attribution requirements
apply move through their vesting period. Once these initial
awards are fully vested (generally three years), compensation
expense under SFAS 123-R is not expected to be materially dif-
ferent than what would be disclosed in the pro-forma disclo-
sures under SFAS 123.
In 2005 UBS will be introducing a new valuation model to
determine the fair value of share options granted. Share op-
tions granted in 2004 and earlier will not be affected by this
change in valuation model. This new valuation model better
reflects the exercise behavior of employees and the specific
terms and conditions under which the share options are
granted. Concurrent with the introduction of the new mod-
el, UBS will use implied instead of historic volatility as input
into the new model.
177
Financial Statements
Notes to the Financial Statements
Note 41.3 Reconciliation of IFRS Shareholders’ Equity and Net profit to US GAAP
CHF million
Amounts determined in accordance with IFRS
Adjustments in respect of:
SBC purchase accounting goodwill and other purchase accounting adjustments
Reversal of IFRS goodwill amortization
Purchase accounting under IFRS 3 and FAS 141
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) and
deconsolidation of trust preferred securities
Financial liabilities held at fair value through profit and loss
Physically settled written puts
Investment properties
Other adjustments
Tax adjustments
Total adjustments
Amounts determined in accordance with US GAAP
Note 41.4 Earnings per Share
Note 41.1
Shareholders’ equity
Reference
31.12.04
31.12.03
31.12.04
34,978
35,310
8,089
Net profit
31.12.03
6,239
31.12.02
3,530
a
b
c
d
e
f
g
h
i
j
k
l
m
15,152
2,603
(88)
(75)
(266)
372
(1)
(80)
0
47
197
93
(8)
(50)
(206)
15,196
1,825
0
(94 )
(84 )
1,303
(1 )
(112 )
0
(10 )
117
48
(24 )
0
(300 )
17,690
52,668
17,864
53,174
(44)
778
3
(217)
304
(110)
0
(98)
0
18
100
9
14
(50)
22
729
8,818
(89 )
808
0
188
(159 )
(235 )
0
(152 )
0
(10 )
78
5
88
0
(248 )
274
6,513
(128 )
1,017
0
342
767
(156 )
7
63
(60 )
0
39
3
(23 )
0
145
2,016
5,546
Under both IFRS and US GAAP, basic earnings per share (“EPS”) is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding. Diluted EPS includes the determinants of
basic EPS and, in addition, gives effect to dilutive potential common shares that were outstanding during the period.
The computations of basic and diluted EPS for the years ended 31 December 2004, 31 December 2003 and 31 Decem-
ber 2002 are presented in the following table.
For the year ended
Net profit available for ordinary shares (CHF million)
Net profit for diluted EPS (CHF million)
Weighted average shares outstanding
31.12.04
31.12.03
31.12.02
US GAAP
8,818
8,813
IFRS
8,089
8,084
US GAAP
6,513
6,514
IFRS
6,239
6,240
US GAAP
5,546
5,520
IFRS
3,530
3,510
1,029,895,610 1,052,914,417 1,116,602,289 1,116,953,623 1,208,055,132 1,208,586,678
Diluted weighted average shares outstanding
1,081,961,360 1,081,961,360 1,138,800,625 1,138,800,625 1,222,862,165 1,223,382,942
Basic earnings per share (CHF)
Diluted earnings per share (CHF)
8.56
8.15
7.68
7.47
5.83
5.72
5.59
5.48
4.59
4.51
2.92
2.87
178
Note 41.5 Presentation Differences between IFRS and US GAAP
In addition to the differences in valuation and income recog-
nition, 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 financial statements presented in accor-
dance with US GAAP. The following is a summary of presen-
tation differences that relate to the basic IFRS financial state-
ments.
1. Settlement date vs. trade date accounting
UBS’s transactions from securities activities are recorded un-
der IFRS on the settlement date. This results in recording a for-
ward transaction during the period between the trade date
and the settlement date. Forward positions relating to trad-
ing activities are revalued to fair value and any unrealized prof-
its and losses are recognized in Net profit.
Under US GAAP, trade date accounting is required for spot
purchases and sales of securities. Therefore, all such transac-
tions 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 re-
ceivables and payables to broker-dealers and clearing organ-
izations recorded in Other assets and Other liabilities in the
US GAAP balance sheet.
liability is presented in the line “Obligation to return securi-
ties received as collateral”.
4. Reverse repurchase, repurchase, securities borrowing and
securities lending transactions
UBS enters into certain types of reverse repurchase, repurchase,
securities borrowing and securities lending transactions that re-
sult in a difference between IFRS and US GAAP. Under IFRS, they
are considered borrowing and lending transactions which are not
reflected in the balance sheet except to the extent of cash col-
lateral advanced or received. Under US GAAP, however, they are
considered purchase and sale transactions due to the fact that
the contracts do not meet specific collateral or margining require-
ments under SFAS 140. Due to the different treatment of these
transactions under IFRS and US GAAP, interest income and ex-
pense recorded under IFRS must be reclassified to Net trading
income for US GAAP. Additionally under US GAAP, the securi-
ties received are recognized on the balance sheet as a spot pur-
chase (Trading portfolio assets) with a corresponding forward
sale transaction (Replacement values) and a receivable (Cash col-
lateral on securities borrowed) is reclassified, as applicable. The
securities delivered are recognized as a spot sale (Trading port-
folio liabilities) with a corresponding forward repurchase trans-
action (Replacement values) and a liability (Cash collateral on se-
curities lent) is reclassified, as applicable.
2. Financial investments
Under IFRS, UBS’s private equity investments and non-mar-
ketable equity financial investments are included in Financial
investments. For US GAAP presentation, non-marketable eq-
uity financial investments are reclassified to Other assets, and
private equity investments are shown separately on the bal-
ance sheet.
3. Securities received as proceeds in a securities for
securities lending transaction
When UBS acts as the lender in a securities lending agreement
and receives securities as collateral that can be pledged or sold,
it recognizes the securities received and a corresponding ob-
ligation to return them. These securities are reflected on the
US GAAP balance sheet in the line “Securities received as col-
lateral” on the asset side of the balance sheet. The offsetting
5. Recognition/derecognition of financial assets
The guidance governing recognition and derecognition of a
financial asset is considerably more complex under revised IAS
39 than previously and requires a multi-step decision process
to determine whether derecognition is appropriate. UBS dere-
cognizes financial assets for which it transfers the contractu-
al rights to the cash flows and no longer retains any risk or re-
ward coming from them nor maintains control over the
financial assets. The provisions of this guidance were applied
prospectively as at 1 January 2004. As a result of the new re-
quirements, certain transactions are now accounted for as se-
cured financing transactions instead of purchases or sales of
trading portfolio assets with an accompanying swap deriva-
tive. Under US GAAP, these transactions continue to be shown
as purchases and sales of trading portfolio assets and were
reclassified accordingly.
179
Financial Statements
Notes to the Financial Statements
Note 41.6 Consolidated Income Statement
The following is a Consolidated Income Statement of the Group, for the years ended 31 December 2004, 31 December 2003
and 31 December 2002, 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)
Net fee and commission income
Net trading income
Other income 1
Income from Industrial Holdings
Total operating income
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Amortization of goodwill
Amortization of other intangible assets
Goods and materials purchased
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
Cumulative adjustment of accounting for certain equity
based compensation plans as cash settled, net of tax
31.12.04
31.12.03
31.12.02
Reference
US GAAP
IFRS
US GAAP
IFRS
US GAAP
IFRS
a, d, j, 4, 5
a, j, k, 4, 5
39,124
39,398
(27,306)
(27,538)
11,818
11,860
276
12,094
19,416
4,879
1,188
3,648
276
12,136
19,416
4,972
897
3,648
d, h, j, k, l, 4, 5
b, c, e, j, m
39,940
(27,700 )
12,240
(72 )
12,168
17,345
4,021
380
40,159
(27,860 )
12,299
(72 )
12,227
17,345
3,756
462
39,679
(29,334 )
10,345
(115 )
10,230
18,221
5,940
96
39,963
(29,417 )
10,546
(115 )
10,431
18,221
5,451
4
41,225
41,069
33,914
33,790
34,487
34,107
f, g, h
18,729
18,515
j
a, i, m
b
b
6,705
1,385
0
186
2,861
29,866
11,359
2,112
9,247
6,703
1,352
713
251
2,861
30,395
10,674
2,135
8,539
j
(435)
(450)
0
6
0
0
17,615
6,086
1,396
0
112
0
17,231
6,086
1,353
756
187
0
18,610
7,072
1,613
0
1,443
0
18,524
7,072
1,514
930
1,530
0
25,209
25,613
28,738
29,570
8,705
1,842
6,863
(350 )
0
0
8,177
1,593
6,584
(345 )
0
0
5,749
511
5,238
(331 )
639
0
5,546
4,537
676
3,861
(331 )
0
0
3,530
Net profit
8,818
8,089
6,513
6,239
1 The CHF 304 million gain, CHF 159 million loss and CHF 108 million gain included in US GAAP Other income at 31 December 2004, 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 2004, 2003 and 2002.
Note: References above coincide with the discussions in Note 41.1 and Note 41.5. These references indicate which IFRS to US GAAP differences affect an individual financial statement caption. Certain
prior year US GAAP amounts in 2003 and 2002 have been adjusted to conform to the current year’s presentation.
180
Note 41.7 Condensed Consolidated Balance Sheet
The following is a Condensed Consolidated Balance Sheet of the Group, as at 31 December 2004 and 31 December 2003,
restated to reflect the impact of valuation and income recognition principles and presentation differences between IFRS and
US GAAP.
CHF million
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Trading portfolio assets pledged as collateral
Positive replacement values
Financial assets designated at fair value
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
Total 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
Financial liabilities designated at fair value
Due to customers
Accrued expenses and deferred income
Debt issued
Other liabilities
Total liabilities
Minority interests
Total shareholders’ equity
Reference
US GAAP
IFRS
US GAAP
IFRS
31.12.04
31.12.03
h, j
4
c, h, j,1, 4, 5
j, k, 1, 4, 5
c
a, j, 5
e, j, 2
3
h, j
c
a, c, m
a, b
b, c
2
6,036
35,286
218,414
357,164
449,389
159,115
284,468
228,968
1,455
12,950
5,882
2,153
9,045
26,977
1,722
3,094
6,036
35,264
220,242
357,164
370,259
159,115
284,577
653
232,387
5,049
5,876
2,427
8,736
8,847
3,302
c, d, f, h, j, 1, 2, 5
101,068
1,903,186
34,850
1,734,784
h, 1
4
j
j, 1, 4, 5
3
j, k, l, 1, 4, 5
j, k, 5
j, 5
j
a, c, d, j, k, 1
c, d, f, g, h, j, l, m, 1
119,021
57,792
423,513
190,907
12,950
360,345
386,913
14,830
164,744
117,743
118,901
61,545
422,587
171,033
303,712
65,756
376,083
14,685
117,828
42,342
3,584
31,758
211,058
320,499
423,733
120,759
248,924
212,729
1,303
13,071
6,219
1,616
8,116
26,775
1,174
3,308
64,381
1,699,007
127,385
51,157
415,863
149,380
13,071
326,136
347,358
13,673
123,259
74,044
3,584
31,740
213,932
320,499
341,013
120,759
248,206
212,679
5,139
6,218
1,616
7,683
9,348
2,181
25,459
1,550,056
127,012
53,278
415,863
143,957
254,768
35,286
346,633
13,673
88,843
31,360
1,848,758
1,694,472
1,641,326
1,510,673
c ,j
1,760
52,668
5,334
34,978
4,507
53,174
4,073
35,310
Total liabilities, minority interests and shareholders’ equity
1,903,186
1,734,784
1,699,007
1,550,056
Positive and Negative replacement values under US GAAP are presented on a gross basis for all periods presented.
Note: References above coincide with the discussions in Note 41.1 and Note 41.5. These references indicate which IFRS to US GAAP differences affect an individual financial statement caption.
181
Financial Statements
Notes to the Financial Statements
Note 41.8 Comprehensive Income
Comprehensive income under US GAAP is defined as the change in shareholders’ equity excluding transactions with share-
holders. 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 securities, 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 2004, 31 December 2003 and 31 December 2002 are as
follows:
Unrealized
gains /
(losses) on
available-
for-sale
translation investments
Foreign
currency
Unrealized
gains /
(losses) on
cash flow
hedges
Additional
minimum
pension
liability
Accumu-
lated other
compre-
hensive
income /
(loss)
Deferred
income
taxes
Compre-
hensive
income /
(loss)
(769)
469
9
(303)
(7)
(601)
CHF million
Balance at 1 January 2002
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
Other comprehensive income / (loss)
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
Other comprehensive income / (loss)
Comprehensive income
Balance at 31 December 2003
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
Additional minimum pension liability
Other comprehensive income / (loss)
Comprehensive income
Balance at 31 December 2004
182
5,546
(80 )
109
95
(368 )
(1 )
(8 )
(827 )
(1,080 )
4,466
6,513
(795 )
(81 )
93
(58 )
2
835
(4 )
6,509
8,818
(80 )
143
121
(470 )
(4 )
(8 )
(80 )
(206 )
(12 )
(920 )
(920 )
(34 )
(26 )
102
3
0
93
138
(80 )
109
95
(368 )
(1 )
(8 )
(827 )
(1,080 )
(849)
263
(3)
(1,223)
131
(1,681)
(795 )
(130 )
111
(69 )
(795 )
(88 )
(1,644)
175
(818 )
(818 )
32
10
(5 )
37
(2,462)
212
3
3
0
0
0
49
(18 )
11
(1 )
(82 )
(41 )
(795 )
(81 )
93
(58 )
2
835
(4 )
917
917
(306)
90
(1,685)
(818 )
(818 )
(15 )
(2 )
1
21
5
95
17
8
(4 )
(798 )
(1,595 )
(3,280)
17
8
(4 )
(798 )
(1,595 )
7,223
(819 )
(819 )
(1,125)
Note 42 Additional Disclosures Required under US GAAP and SEC Rules
Note 42.1 Variable interest entities
Introduction
For the financial year 2004 UBS fully applied Financial Ac-
counting Standards Board (FASB) Interpretation No. 46, “Con-
solidation of Variable Interest Entities (revised December
2003)”, an interpretation of Accounting Research Bulletin No.
51 (FIN 46-R). At 31 December 2003 the predecessor stan-
dard, FIN 46, had application to UBS only with respect to tran-
sitional disclosure requirements, and consolidation require-
ments for certain VIEs created after 31 January 2003.
Identification of variable interest entities (VIEs) and
measurement of variable interests
Qualifying special purpose entities (QSPEs) per Statement of
Financial Accounting Standards (SFAS) No. 140 “Accounting
for Transfers and Servicing of Financial Assets and Extinguish-
ments of Liabilities” are excluded from the scope of FIN 46-
R. In most other cases, FIN 46-R requires that control over an
entity be assessed for US GAAP first based on voting interests;
if voting interests do not exist, or differ significantly from eco-
nomic interests, the entity is considered a VIE, and control is
assessed based on its variable interests. Specifically, VIEs are
entities in which no equity investors exist, or the equity in-
vestors:
– do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial sup-
port from other parties; or
– do not have the characteristics of a controlling financial in-
terest; or
– have voting rights that are not proportionate to their eco-
nomic interests, and the activities of the entity involve or
are conducted on behalf of investors with disproportion-
ately small or no voting interests.
Variable interests are interests held in a VIE that change
with changes in the fair value of a VIE’s net assets, exclusive
of variable interests. Interests of related parties (including
management, employees, affiliates and agents) are included
in the evaluation as if owned directly by the enterprise.
A primary beneficiary is an enterprise which absorbs a ma-
jority of a VIE’s expected losses, expected residual returns, or
both – it must consolidate the VIE and provide certain disclo-
sures. The holder of a significant variable interest in a VIE is
required to make disclosures only. UBS treats variable inter-
ests of more than 20% of a VIE’s expected losses, expected
residual returns, or both, as significant.
The FASB Emerging Issues Task Force (EITF) has summarized
four different general approaches to the application of FIN 46-
R in EITF issue No. 04-7. In applying FIN 46-R, UBS has adopt-
ed a quantitative approach, particularly for derivatives, which
is known as “View A”, and is based on variability in the fair
value of the net assets in the VIE, exclusive of variable inter-
ests.
Under View A, investments or derivatives in a VIE either cre-
ate (increase), or absorb (decrease) variability in the fair value
of a VIE’s net assets. The VIE counterparty is a risk creator (risk
maker), or risk absorber (risk taker), respectively. Only risk ab-
sorption (risk taker) positions are assessed; risk creation inter-
ests are deemed not to be variable interests.
VIEs often contain multiple risk factors, such as credit, eq-
uity, foreign currency and interest rate risks, which require
quantification by variable interest holders. UBS analyzes these
risks into components, identifies the parties absorbing them,
and uses models to quantify and compare them. These mod-
els are based on internally approved valuation models and in
some cases require the use of Monte Carlo simulation tech-
niques. They are applied when UBS first becomes involved
with a VIE, or after a major restructuring.
Measurement of maximum exposure to loss
Maximum exposure to loss is disclosed for VIEs in which UBS
has a significant variable interest.
UBS’s maximum exposure to loss is generally measured as
its net investment in the VIE, plus any additional amounts it
may be obligated to invest. If UBS receives credit protection
from credit derivatives it is measured as any positive replace-
ment value of the derivatives. If UBS has provided guarantees
or other types of credit protection to a VIE it is measured as
the notional amount of the credit protection instruments or
credit derivatives. In other derivative transactions exposing
UBS to potential losses, there is no theoretical limit to the max-
imum loss which could be incurred before considering offset-
ting positions or hedges entered into outside of the VIE. How-
ever, UBS’s general risk management process involves the
hedging of risk exposures for VIEs, on the same basis as for
non-VIE counterparties. See Note 29 for a further discussion
of UBS’s risk mitigation strategies.
VIEs in which UBS is the primary beneficiary
VIEs in which UBS is the primary beneficiary require consoli-
dation, which may increase both total assets and liabilities of
the US GAAP financial statements, or in other cases may re-
sult in a reclassification of existing assets or liabilities.
In certain cases, an entity not consolidated under IFRS, is
consolidated under FIN 46-R because UBS is the primary ben-
eficiary. Significant groups of these include CHF 4.3 billion of
investment fund products, and CHF 1.1 billion of securitiza-
tion VIEs, which includes some third-party VIEs mentioned be-
low.
The other significant group of VIEs consolidated for US
GAAP, but not under IFRS, are employee equity compensation
trusts, for which UBS is the primary beneficiary because of the
variable interests of employees. These trusts have a total size
prior to US GAAP consolidation of approximately CHF 2.8 bil-
183
Financial Statements
Notes to the Financial Statements
lion, including approximately CHF 2.0 billion in UBS shares and
CHF 0.8 billion in alternative investment vehicles. Upon con-
solidation, the UBS shares are treated as treasury shares,
which increases the weighted average number of treasury
shares at 31 December 2004 by 23 million shares, and de-
creases the basic EPS denominator by 2%.
UBS has reviewed the population of potential third-party
VIEs it is involved with. Those identified in which UBS is the
primary beneficiary, and are consolidated for US GAAP pur-
poses, have combined assets of approximately CHF 5.5 billion
and are included in the table below.
Many entities consolidated under US GAAP due to FIN 46-R
are already consolidated under IFRS, based on the determina-
VIEs in which UBS is the primary beneficiary
(CHF million)
Nature, purpose and activities of VIEs
Total assets
Securitizations
Investment fund products
Investment funds managed by UBS
Passive intermediary to a derivative transaction
Trust vehicles for awards to UBS employees
Private equity investments
Other miscellaneous structures
Total 31.12.04
1,363
4,648
4,303
174
2,798
300
36
13,622
tion of exercise of control under IFRS. The total size of this
population is approximately CHF 4.7 billion, mostly compris-
ing investment funds managed by UBS, other investment
fund products, and securitization vehicles.
Certain VIEs in which UBS is the primary beneficiary, but
for which UBS also holds a majority voting interest, are con-
solidated, but do not require disclosure in the table below. In
most cases such VIEs, or their financial position and perform-
ance, are already consolidated under IFRS.
The creditors or beneficial interest holders of VIEs in which
UBS is the primary beneficiary do not have any recourse to the
general credit of UBS.
Consolidated assets that are collateral
for the VIEs’ obligations
Classification
Amount
Loan receivables, government debt securities, corporate debt securities
1,363
Investment funds
Debt, equity
Loan receivables, corporate debt securities
UBS shares and alternative investment vehicles
Private equity investments
–
4,648
4,270
174
2,798
152
–
13,405
Entities which are de-consolidated for US GAAP purposes
In certain cases, an entity consolidated under IFRS is not con-
solidated under FIN 46-R. UBS consolidates under IFRS sever-
al trusts that have issued trust preferred securities amounting
to CHF 3.0 billion, which are de-consolidated for US GAAP
purposes. Under IFRS the trust preferred securities are treat-
ed as minority interests, with dividends paid reported in mi-
nority interests; under US GAAP the securities are treated as
debt, with interest paid reported in interest expense.
VIEs in which UBS holds a significant variable interest
VIEs in which UBS holds a significant variable interest are most-
ly used in securitizations, or as investment fund products, in-
cluding funds managed by UBS.
UBS has reviewed the population of potential third party
VIEs it is involved with. Those identified in which UBS holds a
significant variable interest have combined assets of approx-
imately CHF 11.7 billion, for which UBS has a maximum ex-
posure to loss of approximately CHF 4.4 billion. Disclosures for
these are included in the table below.
VIEs in which UBS holds a significant variable interest
(CHF million)
Nature, purpose and activities of VIEs
Securitizations
Investment fund products
Investment funds managed by UBS
Credit protection vehicles
Other miscellaneous structures
Total 31.12.04
Total assets
Nature of involvement
Maximum exposure
to loss
7,075
4,863
1,978
1,449
114
15,479
UBS acts as swap counterparty
UBS holds notes or units
UBS acts as investment manager
SPE used for credit protection –
UBS sells credit risk on portfolios to investors
UBS acts as swap counterparty
2,700
1,744
742
800
54
6,040
184
Third-party VIEs not otherwise classified
FIN 46-R requires UBS to consider all VIEs for consolidation,
including VIEs which UBS has not created, but in which it holds
variable interests as a third-party counterparty, either through
direct or indirect investment, or through derivative trans-
actions.
UBS has identified that it holds variable interests in 56 third-
party VIEs that in some cases could result in UBS being con-
sidered the primary beneficiary, but the information necessary
to make this determination or perform the accounting re-
quired to consolidate the VIE, was held by third parties, and
was not available to UBS. Additional disclosures for these VIEs
are provided in the table below.
VIEs not originated by UBS – information unavailable from third parties
(CHF million)
Nature, purpose and activities of VIEs
Securitizations
Investment fund products
Total 31.12.04
Total assets
Nature of involvement
4,083
480
4,563
UBS acts as swap counterparty
UBS acts as swap counterparty
Net income
from VIE in
current period
114
24
138
Maximum
exposure
to loss
3,561
457
4,018
Future developments
As the guidance for FIN 46-R has seen considerable contin-
ued development, it is possible UBS may be required to apply
a different approach in the future, which would impact the
US GAAP financial position, results, and reporting. However,
it is not possible at this time to predict the impact this might
have.
185
Financial Statements
Notes to the Financial Statements
Note 42.2 Industrial Holdings’ Income Statement1
Following an additional percentage acquisition of Motor-Columbus, UBS now holds a majority ownership interest in the com-
pany. As a result, UBS has fully consolidated Motor-Columbus in its financial statements, housing it within a separate seg-
ment. “Industrial Holdings” consists of Motor-Columbus, a Swiss holding company, whose most significant asset is a 59.3%
interest in Atel, a Swiss-based European energy provider. The following table provides information required by Regulation
S-X for commercial and industrial companies, including a condensed income statement and certain additional balance sheet
information:
CHF million
Operating income
Net sales
Operating expenses
Cost of products sold
Marketing expenses
General and administrative expenses
Other intangible assets amortization
Other operating expenses
Total operating expenses
Operating profit
Non-operating profit
Interest income
Interest expense
Other non-operating income, net
Non-operating profit
Net profit before tax and minority interests
Income taxes
Net profit before minority interests
Equity in income of associates, net of tax
Minority interests
Net profit
Accounts receivables trade, gross
Allowance for doubtful receivables
Accounts receivables trade, net
31.12.04 2
3,632
3,200
44
131
77
8
3,460
172
4
(38)
50
16
188
47
141
17
(113)
45
1,681
(18)
1,663
1 Industrial Holdings consists of Motor-Columbus, a Swiss holding company, whose most significant asset is a 59.3% interest in Atel, a Swiss-based European energy provider.
six-month period beginning on 1 July 2004.
2 Results shown for the
186
Note 42.3 Indemnifications
In the normal course of business, UBS provides representa-
tions, warranties and indemnifications to counterparties in
connection with numerous transactions. These provisions are
generally ancillary to the business purposes of the contracts
in which they are embedded. Indemnification clauses are
generally standard contractual terms related to the Group’s
own performance under a contract and are entered into
based on an assessment that the risk of loss is remote. Indem-
nifications may also protect counterparties in the event that
additional taxes are owed due either to a change in applica-
ble tax laws or adverse interpretations of tax laws. The pur-
pose of these clauses is to ensure that the terms of a contract
are met at inception.
The most significant business where UBS provides repre-
sentations and warranties are asset securitizations. UBS gen-
erally represents that certain securitized assets meet specific
requirements, for example documentary attributes. UBS may
be required to repurchase the assets and/or indemnify the pur-
chaser of the assets against losses due to any breaches of such
representations or warranties. Generally, the maximum
amount of future payments the Group would be required to
make under such repurchase and/or indemnification provi-
sions would be equal to the current amount of assets held by
such securitization-related SPEs as at 31 December 2004,
plus, in certain circumstances, accrued and unpaid interest on
such assets and certain expenses. The potential loss due to
such repurchase and/or indemnity is mitigated by the due dili-
gence UBS performs to ensure that the assets comply with the
requirements set forth in the representations and warranties.
UBS receives no compensation for representations and war-
ranties, and it is not possible to determine their fair value be-
cause they rarely, if ever, result in a payment. Historically, loss-
es incurred on such repurchases and/or indemnifications have
been insignificant. Management expects the risk of material
loss to be remote. No liabilities related to such representations,
warranties, and indemnifications are included in the balance
sheet at 31 December 2004 and 2003.
Note 42.4 Supplemental Guarantor Information
Guarantee of PaineWebber securities
Following the acquisition of Paine Webber Group Inc., UBS AG
made a full and unconditional guarantee of the senior and
subordinated notes and trust preferred securities (“Debt Se-
curities”) of PaineWebber. Prior to the acquisition, PaineWeb-
ber was an SEC Registrant. Upon the acquisition, Paine Web-
ber 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 proceeding
against UBS Americas Inc. UBS’s obligations under the subor-
dinated 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 2004, the amount of senior liabili-
ties of UBS to which the holders of the subordinated debt se-
curities would be subordinated is approximately CHF 1,685
billion.
The information presented in this note is prepared in ac-
cordance with IFRS and should be read in conjunction with
the Consolidated Financial Statements of UBS of which this
information is a part. At the bottom of each column, Net prof-
it and Shareholders’ equity has been reconciled to US GAAP.
See Note 41 for a detailed reconciliation of the IFRS financial
statements to US GAAP for UBS on a consolidated basis.
187
Financial Statements
Notes to the Financial Statements
Supplemental Guarantor Consolidating Income Statement
CHF million
For the year ended 31 December 2004
UBS AG
Parent Bank 1
UBS
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
Income from industrial holdings
Total operating income
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Amortization of goodwill and other intangible assets
Goods and materials purchased
Total operating expenses
Operating profit / (loss) before tax and minority interests
Tax expense / (benefit)
Net profit / (loss) before minority interests
Minority interests
Net profit / (loss)
Net profit / (loss) US GAAP 2
29,423
21,732
7,691
334
8,025
7,830
4,204
1,364
449
0
13,364
10,009
3,355
1
3,356
7,119
386
0
737
0
21,872
11,598
9,699
1,994
769
46
0
12,508
9,364
1,275
8,089
0
8,089
6,426
6,577
2,719
155
750
0
10,201
1,397
153
1,244
(35 )
1,209
1,977
14,486
13,672
(17,875 )
(17,875 )
814
(59 )
755
4,467
382
0
(289 )
3,648
8,963
2,239
1,990
428
168
2,861
7,686
1,277
707
570
(415 )
155
415
0
0
0
0
0
(1,364 )
0
0
(1,364 )
0
0
0
0
0
0
(1,364 )
0
(1,364 )
0
(1,364 )
0
39,398
27,538
11,860
276
12,136
19,416
4,972
0
897
3,648
41,069
18,515
6,703
1,352
964
2,861
30,395
10,674
2,135
8,539
(450 )
8,089
8,818
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.
41 for a description of the differences between IFRS and US GAAP.
2 Refer to Note
188
Supplemental Guarantor Consolidating Balance Sheet
UBS AG
Parent Bank 1
UBS
Americas Inc.
Subsidiaries
Consolidating
Entries
UBS Group
CHF million
For the year ended 31 December 2004
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Trading portfolio assets pledged as collateral
Positive replacement values
Financial assets designated at fair value
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
Financial liabilities designated at fair value
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
Total shareholders’ equity – US GAAP 2
4,152
94,881
87,198
213,080
205,075
107,944
287,786
0
252,342
839
3,129
28,915
5,475
528
8,536
7
11,194
185,741
171,447
138,015
39,998
1,985
0
29,440
937
1,846
14
511
9,664
3,728
1,299,880
594,527
157,889
85,053
119,826
98,019
309,809
47,116
366,762
7,588
56,658
9,378
1,258,098
0
41,782
1,299,880
29,116
87,736
45,362
332,513
59,867
2,105
0
47,265
6,233
5,214
2,442
588,737
144
5,646
594,527
7,760
1,877
132,730
95,334
229,558
27,169
11,173
138,451
653
36,509
3,273
3,546
1,307
2,750
1,957
24,922
711,209
76,817
79,161
227,169
13,147
135,443
18,640
47,960
3,509
55,956
32,858
690,660
5,190
15,359
711,209
15,792
0
(203,541 )
(148,031 )
(256,921 )
0
0
(143,645 )
0
(85,904 )
0
(2,645 )
(27,809 )
0
0
(2,336 )
(870,832 )
(203,541 )
(148,031 )
(256,921 )
0
(143,645 )
0
(85,904 )
(2,645 )
0
(2,336 )
(843,023 )
0
(27,809 )
(870,832 )
0
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.
41 for a description of the differences between IFRS and US GAAP.
6,036
35,264
220,242
357,164
370,259
159,115
284,577
653
232,387
5,049
5,876
2,427
8,736
12,149
34,850
1,734,784
118,901
61,545
422,587
171,033
303,712
65,756
376,083
14,685
117,828
42,342
1,694,472
5,334
34,978
1,734,784
52,668
2 Refer to Note
189
Financial Statements
Notes to the Financial Statements
Supplemental Guarantor Consolidating Cash Flow Statement
CHF million
For the year ended 31 December 2004
Net cash flow from / (used in) operating activities
Cash flow from / (used in) investing activities
Investments in subsidiaries and associates
Disposal of subsidiaries and associates
Purchase of property and equipment
Disposal of property and equipment
Net (investment in) / divestment of financial investments
Net cash flow from / (used in) investing activities
Cash flow from / (used in) financing activities
Net money market paper issued / (repaid)
Net movements in treasury shares and own equity derivative activity
Capital issuance
Dividends paid
Issuance of long-term debt, including financial liabilities designated at fair value
Repayment of long-term debt, including financial liabilities designated at fair value
Increase in minority interests
Dividend payments to / purchase from minority interests
Net activity in investments in subsidiaries
Net cash flow from / (used in) financing activities
Effects of exchange rate differences
Net increase / (decrease) in cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents comprise:
Cash and balances with central banks
Money market paper 2
Due from banks maturing in less than three months
Total
UBS AG
Parent Bank 1
(6,652 )
UBS
Americas Inc.
Subsidiaries
UBS Group
(1,636 )
(19,610 )
(27,898 )
(2,511 )
800
(555 )
64
39
(2,163 )
5,758
(4,999 )
2
(2,806 )
35,426
(11,944 )
0
0
(4,799 )
16,638
(1,282 )
6,541
43,309
49,850
4,152
31,262
14,436
49,850
0
0
(164 )
249
145
230
199
0
0
0
(26 )
(1,869 )
(969 )
(1 )
866
(1,800 )
401
(2,805 )
18,811
16,006
7
13,450
2,549
16,006
0
0
(430 )
391
502
463
15,422
0
0
0
15,811
(10,904 )
1,071
(331 )
3,933
25,002
(171 )
5,684
11,236
16,920
1,877
697
14,346
16,920
(2,511 )
800
(1,149 )
704
686
(1,470 )
21,379
(4,999 )
2
(2,806 )
51,211
(24,717 )
102
(332 )
0
39,840
(1,052 )
9,420
73,356
82,776
6,036
45,409
31,331
82,776
2 Money
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.
market paper is included in the Balance sheet under Trading portfolio assets and Financial investments. CHF 13,242 million was pledged at 31 December 2004.
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 is-
sued an additional USD 800 million (CHF 1.3 billion at is-
suance) 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 Secu-
rities (CHF 390 million at issuance) at 0.7% above one-month
LIBOR of such securities. UBS AG has fully and uncondition-
ally guaranteed these securities. UBS’s obligations under the
trust preferred 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 2004, the amount of
senior liabilities of UBS to which the holders of the subordi-
nated debt securities would be subordinated is approximate-
ly CHF 1,685 billion.
190
UBS AG (Parent Bank)
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
Commitments and Contingent Liabilities
Derivative Instruments
Fiduciary Transactions
Due to UBS Pension Plans, Loans to
Corporate Bodies / Related Parties
Headcount
Report of the Statutory Auditors
Report of the Capital Increase Auditors
193
194
194
195
196
197
198
198
198
199
199
199
199
200
200
200
200
201
201
201
202
203
192
UBS AG (Parent Bank)
Parent Bank Review
Parent Bank Review
Income Statement
Balance Sheet
The Parent Bank UBS AG net profit increased by CHF 1,749
million from CHF 4,197 million to CHF 5,946 million. Income
from investments in associates decreased to CHF 461 million
from CHF 1,914 million in 2003 mainly due to less distribu-
tion received. The increase in Extraordinary income and ex-
penses is explained on page 198.
Total assets increased by CHF 141 billion to CHF 1,136 billion
at 31 December 2004. This movement is mainly caused by in-
creased positions in Due from banks of CHF 28 billion and Due
from customers of CHF 29 billion. A considerable increase re-
sulted in Trading balances in securities and precious metals of
CHF 52 billion (thereof debt instruments CHF 25 billion and
equities CHF 37 billion) as well as in Positive replacement val-
ues of CHF 17 billion. The decrease in financial investments
of CHF 4.5 billion is mainly due to the reclassification of own
shares to Trading balances in securities and precious metals.
The Investments in associated companies expanded by almost
CHF 6 billion which is mainly due to new investments or ad-
ditional financing of subsidiaries abroad, the establishment of
new fund companies and the step acquisition of Motor-
Columbus.
193
UBS AG (Parent Bank)
Financial Statements
Financial Statements
Income Statement
CHF million
Interest and discount income
Interest and dividend income from trading portfolio
Interest and dividend income from financial investments
Interest expense
Net interest income
Credit-related fees and commissions
Fee and commission income from securities and investment business
Other fee and commission income
Fee and commission expense
Net fee and commission income
Net trading income
Net income from disposal of financial investments
Income from investments in associated companies
Income from real estate holdings
Sundry income from ordinary activities
Sundry ordinary expenses
Other income from ordinary activities
Operating income
Personnel expenses
General and administrative expenses
Operating expenses
Operating profit
Depreciation and write-offs on investments in associated companies and fixed assets
Allowances, provisions and losses
Profit before extraordinary items and taxes
Extraordinary income
Extraordinary expenses
Tax expense / (benefit)
Profit for the period
194
For the year ended
% change from
31.12.04
31.12.03
31.12.03
18,902
10,457
13
19,417
9,325
11
(21,659)
(20,034 )
7,713
228
8,002
735
(1,135)
7,830
3,469
87
461
46
1,418
(26)
1,986
20,998
9,699
3,833
13,532
7,466
1,021
184
6,261
1,016
49
1,282
5,946
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
(3 )
12
18
(8 )
(12 )
0
14
(11 )
4
14
566
(76 )
7
17
73
(34 )
10
9
(3 )
5
19
11
(72 )
33
113
42
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
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 for the period
Total liabilities
Total subordinated liabilities
Total amounts payable to Group companies
31.12.04
31.12.03
% change from
31.12.03
4,152
31,262
350,055
159,988
132,941
288,170
4,503
20,547
4,212
3,129
128,300
8,550
1,135,809
4,970
446,850
29,637
428,371
83,976
316,467
1,686
60,125
7,588
158,811
5,951
3,929
901
7,572
9,056
15,793
5,946
1,135,809
12,695
357,311
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
43
47
9
22
1
22
(50 )
39
(4 )
(15 )
15
30
14
12
12
24
13
0
15
(30 )
31
7
24
(13 )
1
(5 )
5
13
(22 )
42
14
2
39
195
UBS AG (Parent Bank)
Financial Statements
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 2004 as per the Parent Bank’s Income Statement
Appropriation to general statutory reserve
Appropriation to other reserves
Proposed dividends
Total appropriation
Dividend Distribution
5,946
322
2,363
3,261
5,946
The Board of Directors will recommend to the Annual General Meeting on 21 April 2005 that UBS should pay a dividend of
CHF 3.00 per share of CHF 0.80 par value. If the dividend is approved, the payment of CHF 3.00 per share, after deduction
of 35% Swiss withholding tax, would be made on 26 April 2005 for shareholders who hold UBS shares on 21 April 2005.
196
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 accounting policies are principally
the same as for the Group Financial Statements outlined in
Note 1, Summary of Significant Accounting Policies. Major dif-
ferences between the Swiss banking law requirements and
International Financial Reporting Standards are described in
Note 40 to the Group Financial Statements.
In addition, the following principles are applied for the
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 aver-
age 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 losses are firstly debited to that provision account until
such provision is fully utilized, and secondly to profit and loss.
Parent Bank:
Treasury shares
Treasury shares is the term used to describe when an enter-
prise 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 bal-
ance 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 re-measurement of treas-
ury shares in the trading portfolio to market value are includ-
ed in the income statement. Treasury shares included in
Financial investments are carried at the lower of cost or mar-
ket value.
Foreign currency translation
Transactions and translation of assets and liabilities denomi-
nated in foreign currencies into the Parent Bank’s or a branch’s
reporting currency are accounted for as described in Note 1i).
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, fix-
tures and fittings is recognized on a straight-line basis over the
estimated useful lives of the related assets. The useful lives of
Property and equipment are summarized in Note 1, Summa-
ry of Significant Accounting Policies, of the Group Financial
Statements.
Extraordinary income and expenses
Certain items of income and expense appear as extraordinary
within the Parent Bank Financial Statements, whereas in the
Group Financial Statements they are considered to be oper-
ating income or expenses and appear within the appropriate
income or expense category. These items are separately iden-
tified on page 198.
197
UBS AG (Parent Bank)
Notes to the Financial Statements
Additional Income Statement Information
Net Trading Income
CHF million
Equities
Fixed income 1
Foreign exchange and other
Total
1 Includes commodities trading income.
Extraordinary Income and Expenses
For the year ended
% change from
31.12.04
31.12.03
31.12.03
2,262
(266)
1,473
3,469
1,708
(1,307 )
120
521
32
80
566
Extraordinary income contains CHF 609 million first-time adop-
tion impact as at 1 January 2004 from changing the valuation
method for treasury shares from lower of cost or market to the
mark to market method. It further includes CHF 72 million
(2003: CHF 33 million) from the sale of investments in associ-
ates and CHF 334 million from release of provisions (2003: CHF
59 million). Extraordinary expenses contain CHF 48 million loss
from the liquidation of investments in associates in 2004.
198
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
31.12.03
4,218
2,723
392
1,871
1,118
10,322
6,428
3,894
Provisions
applied in
accordance
with their
specified purpose
Recoveries,
doubtful interest,
currency
translation
differences
(814 )
(312 )
(580 )
(819 )
(2,525)
(292 )
413
15
164
24
324
Provisions
released
to income
(962 )
(77 )
(137 )
(1,176)
New
provisions
charged
to income
627
201
215
190
1,535
2,768
Balance at
31.12.04
2,777
3,337
233
1,508
1,858
9,713
5,784
3,929
Statement of Shareholders’ Equity
CHF million
Share capital
General statutory
reserves:
Share premium
General statutory
reserves:
Retained earnings
As at 31.12.02 and 1.1.03
Cancellation of own shares
Capital increase
Increase in reserves
Prior year dividend
Profit for the period
Changes in reserves for own shares
As at 31.12.03 and 1.1.04
Cancellation of own shares
Capital increase
Increase in reserves
Prior year dividend
Profit for the period
Changes in reserves for own shares
1,005
(61 )
2
11,550
(5,468 )
59
842
229
946
(47 )
2
6,141
1,071
72
288
As at 31.12.04
901
6,213
1,359
Reserves for
own shares
6,623
1,401
8,024
1,032
9,056
Total Shareholders’
equity (before
Other reserves distribution of profit)
24,119
(229 )
(2,298 )
4,197
(1,401 )
24,388
(4,469 )
(288 )
(2,806 )
5,946
(1,032 )
21,739
44,139
(5,529)
61
(2,298)
4,197
40,570
(4,516)
74
(2,806)
5,946
39,268
Share Capital
As at 31.12.04
Issued and paid up
Conditional share capital
As at 31.12.03
Issued and paid up
Conditional share capital
Par value
Ranking for dividends
No. of shares
Capital in CHF
No. of shares
Capital in CHF
1,126,858,177
901,486,542
1,086,923,083
869,538,466
3,533,012
2,826,410
1,183,046,764
946,437,411
1,126,339,764
901,071,811
6,871,752
5,497,402
199
UBS AG (Parent Bank)
Notes to the Financial Statements
Off-Balance Sheet and Other Information
Assets Pledged or Assigned as Security for Own Obligations, Assets Subject to Reservation of Title
CHF million
Money market paper
Mortgage loans
Securities
Total
31.12.04
31.12.03
Change in %
Book value
Effective liability
Book value
Effective liability
Book value
Effective liability
16,022
175
102,726
118,923
5,063
60
55,126
60,249
6,225
428
96,065
102,718
210
66,395
66,605
157
(59 )
7
16
(71 )
(17 )
(10 )
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.
Commitments and Contingent Liabilities
CHF million
Contingent liabilities
Irrevocable commitments
Liabilities for calls on shares and other equities
Confirmed credits
31.12.04
123,429
50,552
104
1,820
31.12.03
122,555
42,708
97
1,592
% change from
31.12.03
1
18
7
14
Derivative Instruments
CHF million
Interest rate contracts
Credit derivative contracts
Foreign exchange contracts
Precious metal contracts
Equity / index contracts
Commodity contracts
31.12.2004
NRV 2
183,210
9,353
79,046
1,590
44,107
1,616
Notional amount
CHF bn
15,398
671
3,729
61
721
41
PRV 1
174,995
7,895
81,377
1,919
20,487
1,739
Total derivative instruments
288,412
318,922
20,621
1 PRV: Positive replacement values prior to netting.
2 NRV: Negative replacement values prior to netting.
31.12.2003
NRV
149,972
7,679
70,658
2,176
37,613
895
268,993
Notional amount
CHF bn
10,321
315
3,131
55
346
11
14,179
PRV
141,654
7,085
75,229
2,382
25,362
1,025
252,737
200
Fiduciary Transactions
CHF million
Deposits:
with other banks
with Group banks
Loans and other financial transactions
Total
31.12.04
31.12.03
% change from
31.12.03
30,581
740
6
31,327
29,549
672
6
30,227
3
10
0
4
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
31.12.04
31.12.03
% change from
31.12.03
1,329
3,778
16
1,096
2,930
25
21
29
(36 )
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.
Headcount
Parent Bank headcount was 35,542 on 31 December 2004 and 33,949 on 31 December 2003.
201
UBS AG (Parent Bank)
Report of the Statutory Auditors
202
UBS AG (Parent Bank)
Report of the Capital Increase Auditors
203
204
Additional Disclosure Required
under SEC Regulations
Additional Disclosure Required under SEC Regulations
Table of Contents
Additional Disclosure Required
under SEC Regulations
Table of Contents
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
207
207
209
210
211
211
211
211
212
212
212
214
216
217
218
219
220
221
222
223
225
226
227
A
B
C
D
206
A – Introduction
The following pages contain additional disclosure about the
UBS Group which is required under SEC regulations.
Unless otherwise stated, UBS’s Financial Statements have
been prepared in accordance with International Financial Re-
porting Standards (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 Unit-
ed States Generally Accepted Accounting Principles (US GAAP).
Comparative figures for 2001 and 2000 have not been re-
stated.
B – Selected Financial Data
The tables below set forth, for the periods and dates indicat-
ed, information concerning the noon buying rate for the
Swiss franc, expressed in United States dollars, or USD, per one
Swiss franc. The noon buying rate is the rate in New York City
for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York.
On 28 February 2005 the noon buying rate was 0.8632
USD per 1 CHF.
Year ended 31 December
2000
2001
2002
2003
2004
Month
September 2004
October 2004
November 2004
December 2004
January 2005
February 2005
1 The average of the noon buying rates on the last business day of each full month during the relevant period.
Average rate 1
(USD per 1 CHF)
At period end
0.5912
0.5910
0.6453
0.7493
0.8059
0.6172
0.5857
0.7229
0.8069
0.8712
High
0.6441
0.6331
0.7229
0.8189
0.8843
High
0.8026
0.8371
0.8781
0.8843
0.8712
0.8632
Low
0.5479
0.5495
0.5817
0.7048
0.7601
Low
0.7865
0.7908
0.8315
0.8616
0.8381
0.8182
207
Additional Disclosure Required under SEC Regulations
B – Selected Financial Data (continued)
CHF million, except where indicated
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
Income from Industrial Holdings
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
Operating profit before tax per share
Cash dividends declared per share (CHF) 3
Cash dividend equivalent in USD 3
Dividend payout ratio (%) 3
Rates of return (%)
Return on Shareholders’ equity 4
Return on average equity
Return on average assets
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
For the year ended
39,398
(27,538)
11,860
276
12,136
19,416
4,972
897
3,648
41,069
30,395
10,674
2,135
(450)
8,089
72.6
7.68
7.47
10.14
3.00
39.1
24.7
22.9
0.44
40,159
(27,860 )
12,299
(72 )
12,227
17,345
3,756
462
33,790
25,613
8,177
1,593
(345 )
6,239
75.6
5.59
5.48
7.32
2.60
2.00
46.5
17.8
16.8
0.40
39,963
(29,417 )
10,546
(115 )
10,431
18,221
5,451
4
34,107
29,570
4,537
676
(331 )
3,530
86.4
2.92
2.87
3.75
2.00
1.46
68.5
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
5.31
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
8.44
1.50
0.86
23.3
21.5
22.0
0.70
1 Operating expenses / operating income before credit loss expense for Financial Businesses.
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. In 2001 a further amount of CHF 1.60 per share was distributed to shareholders in the form of a par value reduction, in respect of 2000. No dividend was paid out for the
year 2001. A par value reduction of CHF 2.00 per share was paid on 10 July 2002. A dividend of CHF 2.00 per share was paid on 23 April 2003 and CHF 2.60 on 20 April 2004. A dividend of CHF 3.00
per share will be paid on 26 April 2005 subject to approval by shareholders at the Annual General Meeting. The USD amount per share will be determined on 22 April 2005.
4 Net profit / average
Shareholders’ equity excluding dividends.
2 For EPS calculation, see Note 8 to the Financial Statements.
208
B – Selected Financial Data (continued)
CHF million, except where indicated
31.12.04
31.12.03
As at
31.12.02
31.12.01
31.12.00
Balance sheet data
Total assets
Shareholders’ equity
Average equity to average assets (%)
Market capitalization
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 Financial Businesses (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
1,734,784
1,550,056
1,346,678
1,253,297
1,087,552
34,978
1.93
103,638
35,310
2.38
95,401
38,952
2.87
79,448
43,530
3.49
105,475
44,833
3,17
112,666
1,126,858,177
1,183,046,764
1,256,297,678
1,281,717,499
1,333,139,187
0
0
0
0
103,524,971
111,360,692
97,181,094
41,254,951
28,444,788
55,265,349
11.8
13.6
264,125
2,250
25,990
10,764
26,232
4,438
67,424
AA+
Aa2
AA+
11.8
13.3
251,901
2,133
26,662
9,906
25,511
3,850
65,929
AA+
Aa2
AA+
11.3
13.8
238,790
1,959
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+
1 See the Handbook 2004/2005, page 48 for information about the nature of these ratings.
Balance Sheet Data
CHF million
Assets
Total assets
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Trading portfolio assets pledged as collateral
Positive replacement values
Loans
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Financial liabilities designated at fair value
Due to customers
Debt issued
Shareholders’ equity
31.12.04
31.12.03
As at
31.12.02
31.12.01
31.12.00
1,734,784
1,550,056
1,346,678
1,253,297
1,087,552
35,264
220,242
357,164
370,259
159,115
284,577
232,387
118,901
61,545
422,587
171,033
303,712
65,756
376,083
117,828
34,978
31,740
213,932
320,499
341,013
120,759
248,206
212,679
127,012
53,278
415,863
143,957
254,768
35,286
346,633
88,843
35,310
32,516
139,049
294,067
261,071
110,365
247,421
211,740
83,178
36,870
366,858
106,453
247,206
14,516
306,876
114,446
38,952
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
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
209
Additional Disclosure Required under SEC Regulations
B – Selected Financial Data (continued)
US GAAP Income Statement Data
CHF million
Operating income
Interest income
Interest expense
Net interest income
Credit loss (expense) / recovery
Net interest income after credit loss (expense) / recovery
Net fee and commission income
Net trading income
Other income
Income from Industrial Holdings
Total operating income
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Amortization of goodwill
Amortization of other intangible assets
Goods and materials purchased
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
Cumulative adjustment of accounting for certain equity
based compensation plans as cash settled, net of tax
Net profit / (loss)
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
For the year ended
39,124
(27,306)
11,818
276
12,094
19,416
4,879
1,188
3,648
41,225
18,729
6,705
1,385
0
186
2,861
0
29,866
11,359
2,112
9,247
(435)
6
8,818
39,940
(27,700 )
12,240
(72 )
12,168
17,345
4,021
380
39,679
(29,334 )
10,345
(115 )
10,230
18,221
5,940
96
51,907
(44,096 )
7,811
(498 )
7,313
20,211
8,959
534
51,565
(43,584 )
7,981
130
8,111
16,703
8,597
1,514
33,914
34,487
37,017
34,925
17,615
6,086
1,396
0
112
0
25,209
8,705
1,842
6,863
(350 )
18,610
7,072
1,613
0
1,443
0
28,738
5,749
511
5,238
(331 )
639
19,713
7,631
1,815
2,484
298
112
32,053
4,964
1,386
3,578
(344 )
17,262
6,813
1,800
2,018
134
191
28,218
6,707
2,183
4,524
(87 )
6,513
5,546
3,234
4,437
1 Please refer to Note 41.1 (e) to the Consolidated Financial Statements, under the heading “Financial investments and private equity”, for further information about this item.
Certain prior year US GAAP amounts in 2003 and 2002 have been adjusted to conform to the current year’s presentation.
210
B - Selected Financial Data (continued)
US GAAP Balance Sheet Data
CHF million
Assets
Total assets
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Trading portfolio assets pledged as collateral
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
31.12.04
31.12.03
As at
31.12.02
31.12.01
31.12.00
1,903,186
1,699,007
1,296,938
1,361,920
1,124,554
35,286
218,414
357,164
449,389
159,115
284,468
228,968
26,977
1,722
101,068
119,021
57,792
423,513
190,907
12,950
360,345
386,913
14,830
164,744
52,668
31,758
211,058
320,499
423,733
120,759
248,924
212,729
26,775
1,174
64,381
127,385
51,157
415,863
149,380
13,071
326,136
347,358
13,673
123,259
53,174
32,481
139,073
294,086
331,480
110,365
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
1 Positive and negative replacement values represent the fair value of derivative instruments. From 2003 onwards, they are presented on a gross basis under US GAAP.
Ratio of Earnings to Fixed Charges
The following table sets forth UBS AG’s ratio of earnings to fixed charges, for the periods indicated. Ratios of earnings to
combined fixed charges and preferred stock dividends requirements are not presented as there were no preferred share
dividends in any of the periods indicated.
IFRS 1
US GAAP 1
For the year ended
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
1.36
1.39
1.27
1.29
1.14
1.18
1.14
1.10
1.23
1.15
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 2004, UBS Financial Businesses operated
about 1,044 business and banking locations worldwide, of
which about 42% were in Switzerland, 11% in the rest of Eu-
rope, Middle East and Africa, 45% in the Americas and 2%
in Asia Pacific. 39% of the business and banking locations in
Switzerland were owned directly by UBS with the remainder,
along with most of UBS’s offices outside Switzerland, being
held under commercial leases.
At 31 December 2004, the Industrial Holdings segment op-
erated about 212 business locations in Europe, of which 33%
were in Switzerland and 67% in the rest of Europe. 81% of
all business locations in Switzerland and the rest of Europe
were held under commercial leases.
These premises are subject to continuous maintenance
and upgrading and are considered suitable and adequate for
our current and anticipated operations.
211
Additional Disclosure Required under SEC Regulations
D – Information Required by Industry Guide 3
Selected Statistical Information
The tables below set forth selected statistical information re-
garding the Group’s banking operations extracted from the
Financial Statements. Unless otherwise indicated, average
balances for the years ended 31 December 2004, 31 Decem-
ber 2003 and 31 December 2002 are calculated from month-
ly data. The distinction between domestic and foreign is gen-
erally based on the booking location. For loans, this method
is not significantly different from an analysis based on the
domicile of the borrower.
Average Balances and Interest Rates
The following table sets forth average interest-earning assets and average interest-bearing liabilities, along with the average
rates, for the years ended 31 December 2004, 2003 and 2002.
Average
balance
31.12.04
Interest
Average
rate (%)
Average
balance
31.12.03
Interest
Average
rate (%)
Average
balance
31.12.02
Interest
Average
rate (%)
12,463
23,648
183
389
17,969
457
710,065
10,549
10,122
337
494,692
18,914
2,309
27
497,001
18,941
196
0
0
0
168,456
60,382
5,401
1,813
1,132
4,122
0
4,122
27
66
0
66
38,163
1,235
1.5
1.6
2.5
1.5
3.3
3.8
1.2
3.8
3.2
3.0
2.4
1.6
0.0
1.6
2.5
11,417
21,118
200
1,035
6,576
200
582,066
10,948
7,990
222
407,867
18,151
1,668
21
409,535
18,172
0
0
0
0
165,397
51,457
6,437
1,805
1,988
4,798
0
4,798
1,262,342
40
35
0
35
39,094
1,065
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
3.1
12,534
17,668
388
634
5,471
235
573,526
10,949
7,812
269
373,810
16,714
1,720
31
375,530
16,745
0
0
0
0
170,641
55,199
6,987
1,789
3,794
8,781
0
8,781
1,230,956
60
105
0
105
38,161
1,802
3.1
3.6
4.3
1.9
3.4
4.5
1.8
4.5
4.1
3.2
1.6
1.2
0.0
1.2
3.1
1,505,556
39,398
2.6
1,262,342
40,159
3.2
1,230,956
39,963
3.2
246,952
7,840
68,925
1,829,273
249,155
11,710
40,104
1,563,311
188,462
12,625
53,293
1,485,336
CHF million, except where indicated
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
Financial assets designated at fair value
Domestic
Foreign
Loans
Domestic
Foreign
Financial investments
Domestic
Foreign – taxable
Foreign – non-taxable
Foreign – total
Net interest on swaps
Interest income and
average interest-earning assets
Non-interest-earning assets
Positive replacement values
Fixed assets
Other
Total average assets
212
Total interest-earning assets
1,505,556
D – Information Required by Industry Guide 3 (continued)
Average
balance
31.12.04
Interest
Average
rate (%)
Average
balance
31.12.03
Interest
Average
rate (%)
Average
balance
31.12.02
Interest
Average
rate (%)
452
1,362
355
9,726
146
8,080
0
341
435
625
447
1,507
3,062
0.5
2.4
1.3
1.8
4.8
7.7
28,625
60,621
18,382
523,375
3,239
109,013
0
3.3
10,905
42,484
71,465
27,646
141,595
172,650
0.2
0.6
1.9
0.6
1.3
0.0
1.4
2.9
4.2
2.3
69
0
91,616
1,915
10,082
35,958
433
2,038
1,206,130
29,417
191,183
45,337
1,442,650
42,686
1,485,336
1.6
2.2
1.9
1.9
4.5
7.4
3.1
1.0
0.9
1.6
1.1
1.8
0.0
2.1
4.3
5.7
2.4
0.9
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
Financial liabilities designated at fair value
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
31,129
94,747
416
1,575
33,846
614,295
3,717
161,286
489
9,525
180
7,813
85
1
49,234
1,167
67,005
84,112
19,052
170,169
192,992
167
414
280
861
2,677
1.3
1.7
1.4
1.6
4.8
4.8
1.2
2.4
0.2
0.5
1.5
0.5
1.4
28,719
72,712
23,287
515,665
3,252
127,104
0
22,445
55,496
81,963
21,125
158,584
161,723
150
1,751
295
9,328
156
9,769
0
751
100
527
395
1,022
2,149
246
0
64
0
79,902
1,338
1.7
73,193
1,015
Total interest-bearing liabilities
1,470,209
27,538
7,639
30,922
168
1,328
Non-interest-bearing liabilities
Negative replacement values
Other
Total liabilities
Shareholders’ equity
260,629
63,065
1,793,903
35,370
Total average liabilities and shareholders’ equity
1,829,273
Net interest income
Net yield on interest-earning assets
1 Due to customers in foreign offices consists mainly of time deposits.
2.2
4.3
1.9
6,413
30,775
188
1,286
1,223,936
27,860
254,819
47,391
1,526,146
37,165
1,563,311
11,860
12,299
10,546
0.8
1.0
The percentage of total average interest-earning assets attrib-
utable to foreign activities was 86% for 2004 (85% for 2003
and 84% for 2002). The percentage of total average interest-
bearing liabilities attributable to foreign activities was 84% for
2004 (82% for 2003 and 83% for 2002). All assets and lia-
bilities are translated into CHF at uniform month-end rates.
Interest income and expense are translated at monthly aver-
age rates.
Average rates earned and paid on assets and liabilities can
change from period to period based on the changes in inter-
est rates in general, but are also affected by changes in the cur-
rency mix included in the assets and liabilities. This is especial-
ly 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.
213
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 2004 compared to the
year ended 31 December 2003, and for the year ended 31 December 2003 compared to the year ended 31 December 2002.
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 221 of Industry Guide 3 for a
discussion of the treatment of impaired, non-performing and restructured loans.
2004 compared to 2003
2003 compared to 2002
Increase / (decrease)
due to changes in
Increase / (decrease)
due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
19
124
342
2,432
60
3,907
8
(36)
(770)
(85)
(2,831)
55
(3,144)
(2)
3,915
(3,146)
0
0
119
312
(17)
(5)
0
(5)
0
0
(4)
36
0
36
523
6,778
7,301
(1,217)
(7,015)
(8,232)
(17)
(646)
257
(399)
115
763
6
769
0
0
(13)
31
0
31
(694)
(237)
(931)
170
(761)
(35 )
124
48
162
6
1,533
(1 )
1,532
0
0
(215 )
(120 )
(29 )
(48 )
0
(48 )
(225 )
1,650
1,425
(153 )
277
(83 )
(163 )
(53 )
(96 )
(9 )
(105 )
0
0
(335 )
136
9
(22 )
0
(22 )
(615 )
123
(492 )
(188 )
401
(35 )
(1 )
(47 )
1,437
(10 )
1,427
0
0
(550 )
16
(20 )
(70 )
0
(70 )
(840 )
1,773
933
(737 )
196
(1,155)
(304)
(1,036)
8
CHF million
Interest income from interest-earning 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
Financial assets designated at fair value
Domestic
Foreign
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
214
D – Information Required by Industry Guide 3 (continued)
Analysis of Changes in Interest Income and Expense (continued)
CHF million
Interest expense on interest-bearing liabilities
Due to banks
Domestic
Foreign
Cash collateral on securities lent and repurchase agreements
Domestic
Foreign
Trading portfolio liabilities
Domestic
Foreign
Financial liabilities designated at fair value
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
2004 compared to 2003
2003 compared to 2002
Increase / (decrease)
due to changes in
Increase / (decrease)
due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
12
529
137
1,775
22
2,632
0
884
23
13
(39)
(3)
406
0
94
36
6
254
(705)
57
(1,578)
2
266
(176)
194
197
24
(4,588)
(1,956)
1
(468)
44
(126)
(76)
(158)
122
0
229
(56)
36
1
416
67
(113)
(115)
(161)
528
0
323
(20)
42
304
(626)
(322)
204
6,326
6,530
100
(6,952)
(6,852)
2
266
93
(146 )
1
1,339
0
358
130
94
(104 )
120
(197 )
0
(387 )
(158 )
(295 )
58
938
996
(304 )
123
(153 )
(252 )
9
350
0
52
(465 )
(192 )
52
(605 )
(716 )
0
(513 )
(87 )
(457 )
(302 )
389
(60 )
(398 )
10
1,689
0
410
(335 )
(98 )
(52 )
(485 )
(913 )
0
(900 )
(245 )
(752 )
(1,140 )
(1,413 )
(2,553 )
(1,082 )
(475 )
(1,557 )
215
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 2004, 2003 and 2002. 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 49,699 million, CHF 49,857 million
and CHF 43,914 million at 31 December 2004, 31 December 2003 and 31 December 2002, respectively.
CHF million, except where indicated
31.12.04
31.12.03
31.12.02
Average
deposit
Average
rate (%)
Average
deposit
Average
rate (%)
Average
deposit
Average
rate (%)
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.
7,770
4,693
12,463
23,648
36,111
67,005
84,112
19,052
170,169
192,992
363,161
0.1
1.7
0.7
1.7
1.3
0.2
0.5
1.5
0.5
1.4
1.0
3,836
7,581
11,417
21,118
32,535
55,496
81,963
21,125
158,584
161,723
320,307
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
17,668
30,202
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
At 31 December 2004, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies,
was as follows:
Domestic
30,107
1,392
882
932
215
Foreign
128,027
3,470
662
2,627
2,843
33,528
137,629
CHF million
Within 3 months
3 to 6 months
6 to 12 months
1 to 5 years
Over 5 years
Total time deposits
216
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 2004, 2003 and
2002.
Money market paper issued
Due to banks
Repurchase agreements 1
CHF million, except where indicated
31.12.04
31.12.03
31.12.02 31.12.04
31.12.03
31.12.02 31.12.04
31.12.03
31.12.02
Period-end balance
Average balance
Maximum month-end balance
Average interest rate during the period (%)
Average interest rate at period-end (%)
79,442
80,148
94,366
1.7
2.1
58,115
73,257
92,605
1.4
1.3
72,800
91,685
83,381
89,765
108,463
115,880
2.1
1.5
1.6
2.0
89,089
68,896
96,694
2.8
1.5
48,732
557,892
500,592
464,020
59,044
587,988
498,679
509,572
77,312
637,594
593,738
593,786
3.1
2.0
1.5
2.0
1.8
1.3
1.8
1.7
1 For the purpose of this disclosure, balances are presented on a gross basis.
217
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
31 December 20041
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
1 Money market papers have contractual maturities of less than one year.
CHF million, except percentages
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
1 Money market papers have contractual maturities of less than one year.
CHF million, except percentages
31 December 20021
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
1 Money market papers have contractual maturities of less than one year.
Within 1 year
1–5 years
5–10 years
Over 10 years
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
1
10
36
57
3
0
107
5.50
3.97
2.13
2.74
2.50
0.00
4.29
4.14
1.25
2.92
0.00
0.00
2
10
4
50
0
0
66
3.80
0.00
0.00
0.00
3.21
0.00
6
0
0
0
5
0
11
4.00
0.00
0.00
0.00
4.36
0.00
1
0
0
33
64
0
98
Within 1 year
1–5 years
5–10 years
Over 10 years
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
3
5
45
81
0
4
138
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
3.80
0.00
0.00
7.38
0.00
0.00
6
0
0
7
0
0
13
4.00
0.00
0.00
0.00
0.00
0.00
1
0
0
0
0
0
1
Within 1 year
1–5 years
5–10 years
Over 10 years
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
0
8
35
675
4
1
723
0.00
4.02
4.63
2.23
2.25
4.77
7
30
45
249
15
48
394
4.88
3.94
3.13
2.64
3.97
2.65
3.86
3.59
6.12
3.41
4.03
0.00
8
4
1
19
4
0
36
4.00
0.00
0.00
8.02
0.00
0.00
1
0
0
21
0
0
22
218
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
2004 / 2005. The following table illustrates the diversification of the loan portfolio among industry sectors at 31 December
2004, 2003, 2002, 2001 and 2000. The industry categories presented are consistent with the classification of loans for re-
porting to the Swiss Federal Banking Commission and Swiss National Bank.
CHF million
Domestic
Banks 1
Construction
Financial institutions
Hotels and restaurants
Manufacturing 2
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services 3
Other 4, 5
Total domestic
Foreign
Banks
Chemicals
Construction
Electricity, gas and water supply
Financial institutions
Manufacturing 6
Mining
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services
Transport, storage and communication
Other 5, 7
Total foreign
Total gross
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
1,406
1,943
4,332
2,269
5,485
105,160
5,460
11,466
4,908
9,110
894
619
2,175
4,009
2,440
6,478
102,181
5,251
12,449
6,062
9,493
1,201
1,029
2,838
4,301
2,655
7,237
95,295
5,529
13,573
7,172
10,237
1,722
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
152,433
152,358
151,588
158,996
164,645
34,114
31,405
366
122
745
35,459
2,758
1,695
30,237
1,228
940
1,102
8,002
762
319
245
84
249
23,493
2,421
1,114
21,194
1,224
473
1,880
7,983
3,658
214
31,882
519
153
1,105
18,378
2,300
868
33,063
2,628
616
1,367
1,654
676
2,304
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
117,849
270,282
95,637
247,995
97,513
249,101
102,988
261,984
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
119,871
284,516
3 Includes transportation, communication, health and social
1 Includes Due from banks from Industrial Holdings of CHF 764 million at 31 December 2004.
work, education and other social and personal service activities.
5 31 December 2003 and 31 December 2002 amounts include a change in
accounting treatment of credit risk losses on OTC derivatives as at 1 January 2004, which are now recorded under Net trading income. As a consequence, the underlying gross exposure is no longer
reported as “Due from Banks and Loans (gross)”. Years prior to 2002 have not been restated.
4 Includes mining and electricity, gas and water supply.
2 Includes chemicals, food and beverages.
7 Includes hotels and restaurants.
6 Includes food and beverages.
219
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 2004, 2003, 2002, 2001 and 2000. Mortgages are included in the industry categories mentioned above.
CHF million
Mortgages
Domestic
Foreign
Total gross mortgages
Mortgages
Residential
Commercial
Total gross mortgages
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
124,496
12,185
136,681
117,731
18,950
136,681
122,069
7,073
129,142
109,980
19,162
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
96,181
24,373
120,554
Due from Banks and Loan Maturities (gross)
The following table discloses loans by maturity at 31 December 2004. The determination of maturities is based on contract
terms. Information on interest rate sensitivities can be found in Note 29 to the Financial Statements.
CHF million
Domestic
Banks
Mortgages
Other loans
Total domestic
Foreign
Banks
Mortgages
Other loans
Total foreign
Total gross 1
Within 1 year
1 to 5 years
Over 5 years
Total
812
48,428
18,818
68,058
32,285
10,691
59,198
102,174
170,232
594
67,205
5,960
73,759
1,442
1,314
6,581
9,337
83,096
0
8,863
1,753
10,616
387
180
5,771
6,338
16,954
1,406
124,496
26,531
152,433
34,114
12,185
71,550
117,849
270,282
At 31 December 2004, the total amounts 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 Includes Due from banks from Industrial Holdings of CHF 764 million at 31 December 2004.
1 to 5 years
Over 5 years
78,623
4,473
83,096
14,828
2,126
16,954
Total
93,451
6,599
100,050
220
D – Information Required by Industry Guide 3 (continued)
Impaired, Non-performing and Restructured Loans
A loan (included in Due from banks or loans) is classified as non-performing, 1) when the payment of interest, principal or
fees is overdue by more than 90 days and there is no firm evidence that they will be made good by later payments or the
liquidation of collateral; 2) when insolvency proceedings have commenced; or 3) when obligations have been restructured
on concessionary terms.
The gross interest income that would have been recorded on non-performing loans was CHF 107 million for domestic
loans and CHF 17 million for foreign loans for the year ended 31 December 2004, CHF 171 million for domestic loans and
CHF 23 million for foreign loans for the year ended 31 December 2003, CHF 148 million for domestic loans and CHF 53 mil-
lion for foreign loans for the year ended 31 December 2002, CHF 336 million for all non-performing loans for the year end-
ed 31 December 2001 and CHF 182 million for all non-performing loans for the year ended 31 December 2000. The amount
of interest income that was included in net income for those loans was CHF 106 million for domestic loans and CHF 8 mil-
lion for foreign loans for the year ended 31 December 2004, CHF 163 million for domestic loans and CHF 8 million for for-
eign loans for the year ended 31 December 2003, CHF 152 million for domestic loans and CHF 22 million for foreign loans
for the year ended 31 December 2002 and CHF 201 million for all non-performing 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 2004 / 2005.
CHF million
Non-performing loans:
Domestic
Foreign
Total non-performing loans
Foreign restructured loans 1
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
2,772
924
3,696
4,012
889
4,901
4,609
1,391
6,000
6,531
2,108
8,639
7,588
2,864
10,452
179
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 restructured loans was not material to the results of operations during
these periods.
In addition to the non-performing loans shown above, the Group had CHF 1,165 million, CHF 2,308 million, CHF 3,933 mil-
lion, CHF 5,990 million and CHF 8,042 million in “other impaired loans” for the years ended 31 December 2004, 2003, 2002,
2001 and 2000, respectively. For the years ended 31 December 2002, 2001 and 2000, these are loans that are current, or
less than 90 days in arrears, with respect to payment of principal or interest; and for the years ended 31 December 2004 and
2003, these are loans not considered “non-performing” in accordance with Swiss regulatory guidelines, but where the Group’s
credit officers have expressed doubts as to the ability of the borrowers to repay the loans. As at 31 December 2004 and
31 December 2003 specific allowances of CHF 241 million and CHF 694 million respectively had been established against
these loans.
221
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 unutilized commitments) and deposits
with third parties, credit equivalents of over the counter (OTC) derivatives and repurchase agreements, and the market value
of the inventory of securities. Outstandings are monitored and reported on an ongoing basis by the credit risk management
and control organization with a dedicated country risk information system. With the exception of the 32 most developed
economies, these exposures are rigorously limited. The following analysis excludes Due from banks from Industrial Holdings.
Claims that are secured by third-party guarantees are recorded against the guarantor’s country of domicile. Outstandings
that are secured by collateral are recorded against the country where the asset could be liquidated. This follows the “Guide-
lines for the Management of Country Risk”, which are applicable to all banks that are supervised by the Swiss Federal Bank-
ing Commission.
The following tables list those countries for which cross-border outstandings exceeded 0.75% of total assets at 31 De-
cember 2004, 2003 and 2002. At 31 December 2004, there were no outstandings that exceeded 0.75% of total assets in
any country currently facing liquidity problems that the Group expects would materially affect the country’s ability to service
its obligations.
For more information on cross-border exposure, see the Handbook 2004 / 2005.
Private Sector
Public Sector
Total % of total assets
31.12.04
114,202
5,977
2,699
10,409
11,929
6,835
132,085
31,994
24,090
21,247
20,578
15,170
9,150
7,351
16,803
9,472
328
2,776
31.12.03
7.6
1.8
1.4
1.2
1.2
0.9
Private Sector
Public Sector
Total % of total assets
108,461
2,233
5,884
11,344
5,604
7,845
126,724
25,269
24,654
20,234
14,716
13,477
8,138
18,289
1,270
550
4,271
4,001
31.12.02
8.2
1.6
1.6
1.3
0.9
0.9
Private Sector
Public Sector
Total % of total assets
105,375
6,038
1,955
11,963
7,640
4,114
3,044
7,958
5,857
17,071
345
8,138
2,285
5,851
124,444
29,528
23,515
22,310
20,996
11,834
11,081
9.2
2.2
1.7
1.7
1.6
0.9
0.8
Banks
8,733
18,666
4,588
1,366
8,321
5,559
Banks
10,125
4,747
17,499
8,340
4,841
1,630
Banks
11,111
17,633
4,490
10,001
5,218
5,435
2,186
CHF million
United States
Germany
Italy
Japan
United Kingdom
France
CHF million
United States
Italy
Germany
United Kingdom
France
Japan
CHF million
United States
Germany
Italy
United Kingdom
France
Australia
Canada
222
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. The following analysis
includes Due from banks from Industrial Holdings.
UBS writes off loans against allowances only upon final settlement of bankruptcy proceedings, the sale of the underlying
assets and / or in case of debt forgiveness. 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
Balance at beginning of year
31.12.04
3,954
31.12.03
5,232
31.12.02
8,218
31.12.01
10,581
31.12.00
13,398
Domestic
Write-offs
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
Write-offs
Banks
Chemicals
Construction
Electricity, gas and water supply
Financial institutions
Manufacturing 4
Mining
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services
Transport, storage and communication
Other 5
Total foreign write-offs
Total write-offs
1 Includes chemicals, food and beverages.
electricity, gas and water supply.
4 Includes food and beverages.
0
(49)
(24)
(101)
(77)
(208)
0
(109)
(68)
(83)
(9)
(728)
(21)
(1)
(3)
0
(34)
(23)
(8)
(8)
(2)
0
0
(7)
0
(22)
(129)
(857)
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 )
(1,436 )
0
(148 )
(103 )
(48 )
(275 )
(536 )
0
(357 )
(101 )
(155 )
(49 )
0
(248 )
(51 )
(52 )
(109 )
(1,297 )
0
(317 )
(115 )
(93 )
(46 )
0
(261 )
(178 )
(193 )
(264 )
(640 )
0
(729 )
(160 )
(227 )
(30 )
(1,772 )
(2,328 )
(2,682 )
(49 )
0
0
(36 )
(228 )
(70 )
(1 )
(65 )
(1 )
(2 )
(10 )
(39 )
(74 )
(189 )
(764 )
(2,536 )
(24 )
(2 )
(10 )
(63 )
(74 )
(119 )
(304 )
(5 )
0
(1 )
0
(30 )
0
(48 )
(680 )
(3,008 )
(15 )
0
(13 )
(3 )
(33 )
(11 )
0
0
(4 )
0
(160 )
(8 )
(11 )
(55 )
(313 )
(2,995 )
2 Includes transportation, communication, health and social work, education and other social and personal service activities.
3 Includes mining and
5 Includes hotels and restaurants.
223
Additional Disclosure Required under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Summary of Movements in Allowances and Provisions for Credit Losses (continued)
CHF million
Recoveries
Domestic
Foreign
Total recoveries
Net write-offs
Increase / (decrease) in credit loss allowance and provision
Collective loan loss provisions
Other adjustments 1
Balance at end of year
1 See the table below for details.
Doubtful interest
Net foreign exchange
Subsidiaries sold and other adjustments
Total adjustments
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
54
5
59
(798)
(251)
(25)
3
2,883
0
2
1
3
49
38
87
(1,349 )
72
(1 )
3,954
0
(57 )
56
(1 )
43
27
70
(2,466 )
115
(635 )
5,232
0
(269 )
(366 )
(635 )
58
23
81
(2,927 )
498
66
8,218
0
44
22
66
124
39
163
(2,832 )
(130 )
145
10,581
182
23
(60 )
145
224
D – Information Required by Industry Guide 3 (continued)
Allocation of the Allowances and Provisions for Credit Losses
The following table provides an analysis of the allocation of the allowances and provisions for credit loss by industry sector
and geographic location at 31 December 2004, 2003, 2002, 2001 and 2000. For a description of procedures with respect to
allowances and provisions for credit losses, see the Handbook 2004 / 2005. The following analysis includes Due from banks
from Industrial Holdings.
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
Banks 4
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
Collective loan loss provisions 7
Total allowances and provisions for credit losses 8
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
10
112
82
98
224
333
9
250
363
222
188
10
158
137
214
327
511
9
383
201
549
150
10
265
89
286
458
750
39
577
315
470
225
1,891
2,649
3,484
230
4
1
15
140
112
14
48
66
5
95
32
1
22
785
207
2,883
256
5
0
0
168
359
19
48
69
7
51
32
195
(166 )
1,043
262
3,954
24
5
6
96
153
314
148
58
0
6
13
262
144
(177 )
1,052
696
5,232
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
8,218
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
10,581
1 Includes chemicals, food and beverages.
electricity, gas and water supply.
provisions for 2004.
million, CHF 1,006 million and CHF 1,292 million respectively of country provisions.
305 million and CHF 54 million respectively of provisions for unused commitments and contingent liabilities.
3 Includes mining and
4 Counterparty allowances and provisions only. Country provisions with banking counterparties amounting to CHF 17 million are disclosed under collective loan loss
7 The 2004, 2003, 2002, 2001 and 2000 amounts include CHF 161 million, CHF 262 million, CHF 696
8 The 2004, 2003, 2002, 2001 and 2000 amounts include CHF 211 million, CHF 290 million, CHF 366 million, CHF
2 Includes transportation, communication, health and social work, education and other social and personal service activities.
6 Includes hotels and restaurants.
5 Includes food and beverages.
225
Additional Disclosure Required under SEC Regulations
D – Information Required by Industry Guide 3 (continued)
Due from Banks 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 loss-
es by industry sectors to evaluate the credit risks in each of the categories.
in %
Domestic
Banks 1
Construction
Financial institutions
Hotels and restaurants
Manufacturing 2
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services 3
Other 4
Total domestic
Foreign
Banks
Chemicals
Construction
Electricity, gas and water supply
Financial institutions
Manufacturing 5
Mining
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services
Transport, storage and communication
Other 6
Total foreign
Total gross
31.12.04
31.12.03
31.12.02
31.12.01
31.12.00
0.5
0.7
1.6
0.8
2.0
38.9
2.0
4.2
1.8
3.4
0.5
56.4
12.6
0.1
0.0
0.3
13.1
1.0
0.6
11.2
0.5
0.3
0.4
3.0
0.3
0.2
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
0.4
1.1
1.7
1.1
2.9
38.3
2.2
5.4
2.9
4.1
0.8
60.9
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
0.9
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
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
43.6
100.0
38.6
100.0
39.1
100.0
39.3
100.0
42.1
100.0
1 Includes Due from banks from Industrial Holdings in the amount of CHF 764 million.
education and other social and personal service activities.
4 Includes mining and electricity, gas and water supply.
5 Includes food and beverages.
2 Includes chemicals, food and beverages.
3 Includes transportation, communication, health and social work,
6 Includes hotels and restaurants.
226
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
Gross loans
Impaired loans
Non-performing loans
Allowances and provisions for credit losses 2
Net write-offs
Credit loss (expense) / recovery
Ratios
Impaired loans as a percentage of gross loans
Non-performing loans as a percentage of gross loans
Allowances and provisions for credit losses as a percentage of:
Gross loans
Impaired loans
Non-performing loans
Allocated allowances as a percentage of impaired loans 3
Allocated allowances as a percentage of non-performing loans 4
Net write-offs as a percentage of:
Gross loans
Average loans outstanding during the period
Allowances and provisions for credit losses
Allowances and provisions for credit losses as a multiple of net write-offs
31.12.04
270,282 1
4,861
3,696
2,883
798
276
1.8
1.4
1.1
59.3
78.0
51.5
61.3
0.3
0.3
27.7
3.61
31.12.03
247,995
7,209
4,901
3,954
1,349
(72 )
2.9
2.0
1.6
54.8
80.7
48.0
56.4
0.5
0.5
34.1
2.93
31.12.02
249,101
9,933
6,000
5,232
2,466
(115 )
31.12.01
261,984
14,629
8,639
8,218
2,927
(498 )
4.0
2.4
2.1
52.7
87.2
45.7
57.6
1.0
1.0
47.1
2.12
5.6
3.3
3.1
56.2
95.1
49.9
62.2
1.1
1.2
35.6
2.81
31.12.00
284,516
18,494
10,452
10,581
2,832
130
6.5
3.7
3.7
57.2
101.2
52.4
60.6
1.0
1.1
26.8
3.74
1 Includes Due from banks from Industrial Holdings of CHF 764 million.
performing loans only.
2 Includes collective loan loss provisions.
3 Allowances relating to impaired loans only.
4 Allowances relating to non-
227
228
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 European wealth management business, and other statements relating to our future business development and economic
performance. While these forward-looking statements represent our judgments and future expectations concerning the develop-
ment of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to
differ materially from our expectations. These factors include, but are not limited to, (1) general market, macro-economic, govern-
mental and regulatory trends, (2) movements in local and international securities markets, currency exchange rates and interest
rates, (3) competitive pressures, (4) technological developments, (5) changes in the financial position or creditworthiness 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 and (8) other key factors that we have indicated could adversely
affect our business and financial performance which are contained in other parts of this document and in our past and future
filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this
document and in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F
for the year ended 31 December 2004. 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-0501
ab
UBS AG
P.O. Box, CH-8098 Zurich
P.O. Box, CH-4002 Basel
www.ubs.com