annual report
2008
1 | Strategy, performance and responsibility
2 | UBS business divisions and Corporate Center
3 | Risk and treasury management
4 | Corporate governance and compensation
5 | Financial information
Contents
Letter to shareholders
2
5 UBS reporting at a glance
6 Other sources of information
7 Contacts
1. Strategy, performance
and responsibility
Financial performance
12 Strategy and structure
18 The making of UBS
20 Current market climate and industry drivers
23 Risk factors
28
29 Measurement and analysis of performance
32 UBS reporting structure
33 Accounting changes
35 Key performance indicators
38 UBS results
44 Balance sheet
47 Off-balance sheet
52 Cash flows
54 UBS employees
60 Corporate responsibility
2. UBS business divisions and
Corporate Center
74 Global Wealth Management & Business Banking
77 Wealth Management International & Switzerland
83 Wealth Management US
89 Business Banking Switzerland
94 Global Asset Management
Investment Bank
102
110 Corporate Center
3. Risk and treasury
management
120 Risk management and control
125 Risk concentrations
128 Market risk
134 Credit risk
149 Operational risk
150 Treasury management
151
159
162 Capital management
168 Shares and capital instruments
172 UBS shares in 2008
176 Basel II Pillar 3
Liquidity and funding management
Interest rate and currency management
4. Corporate governance
and compensation
194 Corporate governance
195 Group structure and shareholders
197 Capital structure
199 Board of Directors
206 Group Executive Board
210 Senior leadership
211 Shareholders’ participation rights
213 Change of control and defense measures
214 Auditors
216
218 Regulation and supervision
221 Compliance with New York Stock Exchange
Information policy
listing standards on corporate governance
223 Compensation, shareholdings and loans
224 Compensation governance
225 2008 compensation for the Board of Directors
and Group Executive Board
230 Shares, options and loans for the Board of Directors and
Group Executive Board (at end of 2008)
237 Compensation principles 2009 and beyond
for UBS senior executives
5. Financial
information
Introduction
244
245 Accounting principles
246 Critical accounting policies
251 Consolidated financial statements
263 Notes to the consolidated financial statements
371 UBS AG (Parent Bank)
371 Parent Bank review
372 Parent Bank financial statements
374 Notes to the Parent Bank financial statements
393 Additional disclosure required
under SEC regulations
393 A – Introduction
394 B – Selected financial data
398 C – Information on the company
399 D – Information required by industry guide 3
1
Annual Report 2008
Letter to shareholders
Dear Shareholders,
UBS recorded a net loss attributable to shareholders of CHF
21.3 billion in 2008. This extremely poor result stemmed pri-
marily from the results of the fixed income trading business
of the Investment Bank, mainly due to losses and writedowns
on exposures related to US real estate and other credit posi-
tions. The loss has affected all stakeholders in UBS: in 2008,
in US dollar terms, shareholders suffered a 58% fall in mar-
ket capitalization, compared with the average 47% decline
of the other members of the Dow Jones Banks Titans 30 In-
dex; the total number of employees was reduced by 7%;
and employee compensation was cut 36%. Clients have, un-
derstandably, expressed to us their disappointment about
our losses, while at the same time stressing their apprecia-
tion for the advice and service levels they receive from their
advisors.
For financial markets as a whole, 2008 was an extraordi-
nary year in economic and financial history: world stock
markets fell 42% (the MSCI world index), interest rates
reached the lowest levels ever in the US and the UK, and a
major investment bank failed. Responses to the crisis includ-
ed the injection of new capital into many of the world’s
major financial institutions by governments. With hindsight,
it is clear that UBS was not prepared for this. Our balance
sheet was too large and the systems of risk control and risk
management that should have limited our exposure failed.
We placed too much emphasis on growth and not enough
on controlling risks and costs, particularly in regards to our
compensation systems, performance targets and indicators
and executive governance structures. Imponderable levels
of cross-subsidy and confusion about accountability result-
ed from complex relationships between our business divi-
sions.
In 2008, we focused on addressing our structural and
strategic weaknesses and on establishing the long-
term financial stability of UBS. Activities centered on the
key areas we identified as requiring change: corporate gov-
ernance, risk management and control processes, the liquid-
ity and funding framework and management compensation.
As a result, 2008 saw the introduction of new organization
regulations to clarify the responsibilities of the Board of Di-
rectors (BoD) and the Group Executive Board (GEB), the es-
tablishment of an Executive Committee (EC) to allocate and
monitor the use of capital and risk in each of the business
divisions, and the formation of a dedicated BoD risk commit-
tee. We also merged the credit and market risk functions of
the Investment Bank into a single unit led by the newly es-
tablished Chief Risk Officer position and a new liquidity and
funding framework was introduced that requires each busi-
ness division to be charged market-based rates for funding
from other UBS divisions. We will continue to make changes
in 2009, including the implementation of a new compensa-
tion model for senior executives that aligns compensation
with the creation of sustainable results for shareholders. In
addition, management compensation within business divi-
sions will be based largely on divisional results and the re-
sponsible and independent management of each division’s
resources and balance sheet.
Changes in our business divisions will play a vital role
in the transformation of our firm. As announced on 10
February 2009, UBS now operates with four business divi-
sions and a Corporate Center. The former Global Wealth
Management & Business Banking division has been split into
two business divisions: Wealth Management & Swiss Bank
and Wealth Management Americas. We will continue to re-
position the Investment Bank as a client-orientated and fee-
and commission-earning business – in other words, the In-
vestment Bank is moving away from the proprietary trading
business that adversely affected our capital. A new unit has
been established within the Investment Bank to manage the
positions of those fixed income businesses we have decided
to exit.
We took active steps to increase the financial stability
of UBS in 2008. The issuance of two Mandatory Convertible
Notes (MCNs) and a rights issue raised CHF 34.6 billion of
new capital. During the year, our total balance sheet was
reduced 11% to CHF 2,015 billion, risk-weighted assets fell
19% to CHF 302.3 billion and our identified risk concentra-
tions fell sharply – with these reductions assisted by an
agreement made in 2008 to sell a large portfolio of illiquid
securities and other positions to a fund owned and con-
trolled by the Swiss National Bank. Operating expenses fell
19% and the year-end tier 1 ratio was 11.0%, compared
with 9.1% for year-end 2007 under the different standards
that were then applicable under Basel I.
As announced on 18 February 2009, UBS settled a US
cross-border case with the US Department of Justice
(DOJ) and the US Securities and Exchange Commission
(SEC) by entering into a Deferred Prosecution Agree-
ment (DPA) with the DOJ and a Consent Order with the
SEC. As part of these agreements, we will complete our pre-
viously announced exit of our US cross-border business and
implement an enhanced program of internal controls to
2
3
Annual Report 2008
ensure compliance with the Qualified Intermediary Agree-
ment with the Internal Revenue Service. In addition, pursu-
ant to an order issued by the Swiss Financial Market Supervi-
sory Authority, information was transferred to the DOJ
regarding accounts of certain US clients as set forth in the
DPA, who, based on evidence available to UBS, committed
tax fraud or the like within the meaning of the Swiss-US
Double Taxation Treaty. The total cost for the settlement of
USD 780 million has been fully charged to our 2008 results.
This episode makes it particularly clear that our control
framework must be extremely robust and that employee in-
centives must be aligned with risk management and control
and the creation of long-term value for shareholders.
Outlook – The recent worsening of financial conditions and
UBS-specific factors have adversely affected our results, par-
ticularly in the Investment Bank. Even after substantial risk
reduction, our balance sheet remains exposed to illiquid and
volatile markets and our earnings will therefore remain at
risk for some time to come. Net new money remains positive
for our Wealth Management Americas division, but this is
being partially offset by net outflows in Wealth Manage-
ment & Swiss Bank. Global Asset Management has also ex-
perienced further net outflows.
More generally, financial market conditions remain fragile
as company and household cash flows continue to deterio-
rate, notwithstanding the very substantial measures govern-
ments are taking to ease fiscal and monetary conditions. Our
near-term outlook remains extremely cautious.
For 2009, we will continue to implement our program to
strengthen our financial position by reducing our risk posi-
tions, our overall balance sheet size, and our operating
costs. Management will also focus on securing and building
the firm’s core client businesses and on returning the Group
as soon as possible to a sustainable level of overall profit-
ability.
11 March 2009
UBS
Peter Kurer
Chairman
Oswald J. Gruebel
Group Chief Executive Officer
On 26 February 2009, Oswald J. Gruebel joined UBS in the capacity of Group Chief Executive Officer, replacing Marcel
Rohner. Mr. Gruebel brings to UBS his deep understanding of banking and the markets and proven management skills.
He also brings a strong determination to restore the bank’s sustained profitability and regain client trust. As announced on
4 March 2009, Peter Kurer, Chairman of the UBS Board of Directors, has decided not to stand for re-election at the annual
general meeting on 15 April 2009. The UBS Board of Directors is nominating Kaspar Villiger for the role of Chairman.
4
UBS reporting at a glance
Annual publications
Quarterly publications
Annual report (SAP no. 80531)
Published in both German and English, this single volume
report provides a letter to shareholder and a description of:
– UBS’s strategy, performance and responsibility;
– the strategy and performance of the business divisions
Letter to shareholders
The letter provides a quarterly update from UBS’s executive
management on the firm’s strategy and performance. The
letter is published in English, German, French and Italian.
and the Corporate Center;
– risk, treasury and capital management at UBS;
– corporate governance and executive compensation; and
– financial information, including the financial statements.
Financial report (SAP no. 80834)
This report provides a detailed description of UBS’s strategy
and performance for the respective quarter. It is published in
English.
Review (SAP no. 80530)
The booklet contains key information on UBS’s strategy and fi-
nancials. It is published in English, German, French and Italian.
Compensation report (SAP no. 82307)
Compensation of senior management and the Board of
Directors (executive and non-executive members) is dis-
cussed here. It is published in English and German.
How to order reports
The annual and quarterly publications are available in PDF
format on the internet at www.ubs.com/investors/topics in
the reporting section. Printed copies can be ordered from the
services section of the website. Alternatively, they can be or-
dered by quoting the SAP number and the language prefer-
ence where applicable, from UBS AG, Information Center,
P.O. Box, CH-8098 Zurich, Switzerland.
5
Annual Report 2008
Other sources of information
Website
The “Analysts & Investors” website at www.ubs.com/inves-
tors provides the following information on UBS: financial in-
formation (including SEC documents); corporate informa-
tion; UBS share price charts and data; the UBS event calendar
and dividend information; and the latest presentations by
management for investors and financial analysts. Informa-
tion on the internet is available in English and German, with
some sections in French and Italian.
Result presentations
UBS’s quarterly results presen tations are webcast live. A play-
back of the most recent presentation is downloadable at
www.ubs.com/presentations.
Messaging service / UBS news alert
On the www.ubs.com/newsalert website, it is possible to
subscribe to receive news alerts about UBS via SMS or e-mail.
Messages are sent in English, German, French or Italian and
it is possible to state preferences for the theme of the alerts
received.
Form 20-F and other submissions to the US Securities
and Exchange Commission
UBS files periodic reports and submits other information about
UBS to the US Securities and Exchange Commission (SEC).
Principal among these filings is the annual report on Form 20-
F, filed pursuant to the US Securities Exchange Act of 1934.
UBS’s Form 20-F filing is structured as a “wrap-around” doc-
ument. Most sections of the filing can be satisfied by referring
to parts of the annual report. 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.
Readers are encouraged to refer to this additional disclosure.
Any document that UBS files with the SEC is available to
read and copy on the SEC’s website, www.sec.gov, or at
the SEC’s public reference room at 100 F Street, N.E., Room
1580, Washington, DC, 20549. Please call the SEC by dial-
ing 1-800-SEC-0330 for further information on the opera-
tion of its public reference room. Much of this additional
information may also be found on the UBS website at
www.ubs.com/investors, and copies of documents filed
with the SEC may be obtained from UBS’s Investor Rela-
tions team, whose contact details are listed on the next
page of this report.
Corporate information
The legal and commercial name of
the company is UBS AG. The com-
pany 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 domi-
ciled in Switzerland and operates
under Swiss Company Law and Swiss
Federal Banking Law as an Aktien-
gesellschaft, a corporation that has
issued shares of common stock to
investors.
The addresses and telephone numbers
of UBS’s two registered offices are:
Bahnhofstrasse 45, CH-8001 Zurich,
Switzerland, phone +41-44-234 1111;
and Aeschenvorstadt 1,
CH-4051 Basel, Switzerland,
phone +41-61-288 2020.
UBS AG shares are listed on the
SIX Swiss Exchange (traded through
its trading platform SWX Europe,
formerly virt-x), on the New York
Stock Exchange (NYSE) and on
the Tokyo Stock Exchange (TSE).
6
Contacts
Switchboards
For all general queries.
Investor Relations
UBS’s Investor Relations team supports
institutional, professional and retail
investors from our offices in Zurich
and New York.
www.ubs.com/investors
Zurich
London
New York
Hong Kong
Hotline
New York
Fax (Zurich)
Media Relations
UBS’s Media Relations team supports
global media and journalists from
offices in Zurich, London, New York
and Hong Kong.
www.ubs.com/media
Zurich
London
New York
Hong Kong
Shareholder Services
UBS Shareholder Services, a unit of the
Company Secretary, is responsible for
the registration of the global registered
shares.
Hotline
Fax
+41-44-234 1111
+44-20-7568 0000
+1-212-821 3000
+852-2971 8888
+41-44-234 4100
+1-212-882 5734
+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
+866-541 9689
+1-201-680 6578
+1-201-680 4675
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
BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, NJ 07310, USA
sh-relations@melloninvestor.com
7
Strategy, performance and responsibility
Strategy and performance
– UBS is a global firm providing financial services to private, corporate and
institutional clients
– Its strategy is to concentrate on three global core businesses – wealth
management, asset management and investment banking – and retail
and corporate banking services in Switzerland
UBS’s strategic priorities
Measures taken in 2008
Client focus
UBS’s purpose is to serve clients and give them confidence
in making financial decisions. Whether it serves individual,
corporate or institutional clients, UBS puts their success and
interests first and strives to truly understand their goals. As
client needs and the financial services industry constantly
evolve, UBS makes a systematic effort to capture client
feedback, identify potential for improvement and adapt its
offerings accordingly.
Profitable growth and earnings quality
UBS shareholders expect the firm to achieve profitable
growth. Fulfilling this expectation requires UBS to establish
sustainable earning streams based on client benefit.
It therefore strives to build a strong and growing client
base and to continuously develop its unique assets and
capabilities.
Risk and capital management
Taking, managing and controlling risk is a core element of
UBS’s business activities. UBS’s aim is not, therefore, to
eliminate all risks, but to achieve an appropriate balance
between risk and return. Risk reduction and capital measures
taken in 2008 aimed at maintaining UBS’s capital strength
as a source of competitive advantage. Adapting risk expo-
sures to the current market environment and managing UBS’s
balance sheet remain strategic priorities for the firm.
In August 2008, UBS launched a comprehensive program
to help the firm adjust to the new realities in the financial
industry. It aims to capitalize on the strengths inherent in
its leading client franchises across its business divisions, to
further grow these franchises, and to address certain
weaknesses in its business model that had become
apparent both before and as a result of the financial crisis.
A significant reduction in risk exposures has been
achieved during the year. UBS reduced its risk positions
very significantly during the year, including through a
transaction with the Swiss National Bank. UBS also took
several measures to strengthen its risk organization.
The Investment Bank is in the process of reposition-
ing itself toward client-driven growth, combined
with a further reduction of its balance sheet and risk
positions.
UBS has implemented new corporate governance
guidelines, actively reinforcing a clear separation of the
roles and responsibilities of the Board of Directors and its
committees, from those of the Group Executive Board.
Senior management compensation has been re-
viewed. In November 2008, UBS announced the new
compensation model that is directly aligned with sustain-
able value creation within each manager’s area of respon
sibility, and incorporates a longer performance evaluation
horizon.
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UBS financial highlights
CHF million, except where indicated
Performance indicators from continuing operations
Diluted earnings per share (CHF) 1
Return on equity attributable to UBS shareholders (%) 2
Cost / income ratio (%) 3
Net new money (CHF billion) 4
Group results
Operating income
Operating expenses
Operating profit before tax (from continuing and discontinued operations)
Net profit attributable to UBS shareholders
Personnel (full-time equivalents) 5
Invested assets (CHF billion)
UBS balance sheet and capital management
Balance sheet key figures
Total assets
Equity attributable to UBS shareholders
Market capitalization 6
BIS capital ratios 7
Tier 1 (%)
Total BIS (%)
Risk-weighted assets
Long-term ratings
Fitch, London
Moody’s, New York
Standard & Poor’s, New York
For the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
(7.75)
(59.1)
753.0
(226.0)
796
28,555
(27,560)
(21,292)
77,783
2,174
(2.61)
(11.7)
111.0
140.6
31,721
35,463
(3,597)
(5,247)
83,560
3,189
4.64
23.9
70.5
151.7
47,484
33,365
15,007
11,527
78,140
2,989
2,014,815
2,274,891
2,348,733
32,531
43,519
11.0
15.0
302,273
A+
Aa2
A+
36,875
108,654
9.1 8
12.2 8
374,421 8
AA
Aaa
AA
51,037
154,222
12.2 8
15.0 8
344,015
AA+
Aa2
AA+
(197)
(97)
(19)
(666)
(306)
(7)
(32)
(11)
(12)
(60)
(19)
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report. 2 Net profit attribu table to UBS shareholders from continuing operations / average eq-
uity attributable to UBS shareholders. 3 Operating expenses / operating income before credit loss expense or recovery. 4 Excludes interest and dividend income. 5 Excludes personnel from private
equity (part of the Corporate Center). 6 Refer to the ”UBS shares in 2008” section of this report for 2008 for further information. 7 Refer to the “Capital management” section of this report for
further information. 8 The calculation prior to 2008 is based on the Basel I approach.
The 2008 results and the balance sheet in this report differ from those presented in UBS’s fourth quarter 2008 report is-
sued on 10 February 2009 due to: (1) the settlement agreements with the US Department of Justice and Securities and
Exchange Commission related to the US crossborder case, as described in the “Settlement regarding the US crossborder
case” sidebar in the “Wealth Management International & Switzerland” section of this report; (2) the determination by
the Swiss National Bank (SNB) of the 30 September 2008 valuation of approximately USD 7.8 billion of securities not yet
transferred by UBS to the SNB StabFund, as described in the “Transaction with the Swiss National Bank” sidebar in the
“Strategy and structure” section of this report; and (3) restatements to correct identified accounting errors related to the
2008 financial statements as described in the “Accounting changes” section of this report. The total impact of the above
items on net profit after tax was negative CHF 1,595 million.
11
Strategy, performance and responsibility
Strategy and structure
Strategy and structure
UBS is a global firm providing financial services to private, corporate and institutional clients. Its strategy is
to concentrate on three global core businesses – wealth management, asset management and investment
banking – and to provide retail and corporate banking services in Switzerland. By delivering valuable advice,
products and services to its clients, the firm aims to generate sustainable earnings and create value for its
shareholders.
UBS strategy and business model
UBS has crafted its business strategy to benefit from one
underlying global trend: the growth of wealth. Despite the
current financial crisis, the firm believes that over the long
term wealth creation will continue to be a prominent charac-
teristic of the world economy. UBS’s three core businesses of
wealth management, asset management and investment
banking are geared to take advantage of this trend.
Organizationally, UBS has operated throughout 2008 as a
Group with three business divisions: Global Wealth Manage-
ment & Business Banking, Global Asset Management and
the Investment Bank. As announced on 10 February 2009,
Global Wealth Management & Business Banking has been
divided into two business divisions: Wealth Management &
Swiss Bank and Wealth Management Americas. Each busi-
ness division is accountable for its own results, but cooper-
ates to provide a broad palette of crossbusiness solutions
for clients. UBS considers the breadth and depth of its offer-
ing to be one of its main strengths, and a key to its ability to
create value for clients and shareholders.
Wealth Management & Swiss Bank
UBS’s wealth management business caters to high net worth
and affluent individuals around the world (except those
served by Wealth Management Americas) whether they are
investing internationally or in their home country. UBS offers
these clients a complete range of tailored advice and invest-
ment services. Its Swiss Bank business provides a complete
set of banking services for Swiss individual and corporate
clients.
Wealth Management Americas
Wealth Management Americas offers sophisticated products
and services specifically designed to address the needs of
high net worth and affluent individuals. It includes Wealth
Management US, domestic Canada, domestic Brazil and the
international business booked in the United States.
Global Asset Management
As a worldwide asset manager, UBS offers innovative invest-
ment management solutions in nearly every asset class to
private, corporate and institutional clients, as well as through
financial intermediaries. Investment capabilities include tra-
ditional assets (for instance equities, fixed income and asset
allocation), alternative and quantitative investments (multi
manager funds, funds of hedge funds and hedge funds) and
real estate.
Investment Bank
In the investment banking and securities businesses, UBS
provides securities products and research in equities, fixed
income, rates, foreign exchange and metals. It also provides
advisory services as well as access to the world’s capital mar-
kets for corporate, institutional, intermediary and alternative
asset management clients.
➔ Refer to the “Reporting structure” and “UBS business
divisions and Corporate Center” sections of this report
for more information on UBS’s business divisions and
the Corporate Center
UBS competitive profile
UBS’s current business mix is a result of many decades of
development, internal growth initiatives and acquisitions.
Since 1998, UBS has progressively divested noncore busi-
nesses and participations, and invested in growing its core
businesses and creating a balanced reach worldwide.
UBS is now a leading global wealth manager: it is a mar-
ket leader (by client assets) in both Europe and Asia Pacific,
in sixth position in the US and one of the only firms of glob-
al scale focusing on wealth management as a core business.
In 2008, UBS was among the top five firms globally in merg-
ers and acquisitions based on deal volume. The asset man-
agement business is one of the leading active asset manag-
ers globally and one of the largest mutual fund managers in
Europe based on assets under management.
In Switzerland, UBS is the leading firm for retail and com-
mercial banking. It serves around 2.5 million individual cli-
ents and 133,500 corporations, institutional investors, public
entities and foundations, collectively. The bank has chosen
to limit its retail and commercial banking business to the
Swiss market, concentrating on domestic opportunities and
growing selected market segments.
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UBS corporate governance
As mandated by Swiss banking law, UBS operates under a
strict dual board structure comprising the Board of Directors
(BoD) and the Group Executive Board (GEB).
The BoD is UBS’s most senior body and is ultimately
responsible for the firm’s strategy and the supervision of its
executive management. The BoD sets the mid and long
term strategic direction of the Group, is responsible for
appointments and dismissals at top management levels and
for defining the firm’s risk principles and risk capacity. A clear
majority of its members are nonexecutive and fully inde
pendent.
The management of the business is delegated by the BoD
to the GEB. Under the auspices of the Group CEO, the GEB
has executive management responsibility for the Group and
its businesses. It assumes overall responsibility for the de
velopment and the implementation of the Group’s and
the business divisions’ strategies and for the exploitation of
synergies across the firm.
The Executive Committee (EC) consists of the Group Chief
Executive Officer (CEO), the Group Chief Financial Officer
(CFO), the Group Chief Risk Officer (CRO) and the Group
General Counsel, and is responsible for the allocation of the
Group’s financial resources to the business divisions. These
resources include capital, funding, and risk capacity and
parameters within the limits set by the BoD.
➔ Refer to the “Corporate governance” section of this
report for more information
UBS’s strategic priorities
Client focus
UBS’s purpose is to serve clients and give them confidence in
making financial decisions. Whether it serves individual, cor-
porate or institutional clients, UBS puts their success and in-
terests first and strives to truly understand their goals. As
client needs and the financial services industry constantly
evolve, UBS makes a systematic effort to capture client feed-
back, identify potential for improvement and adapt its offer-
ings accordingly.
Profitable growth and earnings quality
UBS shareholders expect the firm to achieve profitable growth.
Fulfilling this expectation requires UBS to establish sustainable
earning streams based on client benefit. It therefore strives to
build a strong and growing client base and to continuously
develop its unique assets and capabilities.
In order to fulfill these requirements, UBS needs to ensure
that it efficiently manages its financial resources. By making
continuous efficiency improvements – that is, by looking for
ways to achieve the same or a better result or service with
fewer resources – UBS strives both to manage costs in a dis-
ciplined manner and to optimize its spending across eco-
nomic and business cycles.
Risk and capital management
Taking, managing and controlling risk is a core element
of UBS’s business activities. UBS’s aim is not, therefore, to
eliminate all risks, but to achieve an appropriate balance
between risk and return. Risk reduction and capital measures
taken in 2008 aimed at maintaining UBS’s capital strength as
a source of competitive advantage. Adapting risk exposures
to the current market environment and managing UBS’s
balance sheet remain strategic priorities for the firm.
➔ Refer to the “Risk and treasury management” section
of this report for more information on risk and capital
management
Business divisions’ franchises
UBS continues to develop the platform and reach of the
business divisions known since 10 February 2009 as Wealth
Management & Swiss Bank and Wealth Management
Americas. This includes the expansion of its global presence
in international wealth management growth markets. UBS’s
leading position in Switzerland, both as a wealth manager
and as the largest retail bank, will remain a cornerstone of
UBS’s strategy and a source of sustainable profit growth.
UBS also continues to develop the platform and reach of
its Global Asset Management business division. This includes
focusing on developing innovative products and managing
toward sustainable investment performance.
The Investment Bank is in the process of repositioning
itself toward clientdriven growth, combined with a further
reduction of its balance sheet and risk positions. This will
allow the Investment Bank to build on its global coverage and
distribution capability and to ensure maximum accountability
for the creation of shareholder value. This repositioning in-
cludes the downsizing or exiting of certain businesses.
➔ Refer to the “UBS business divisions and Corporate Center”
section of this report for more information on
UBS’s business divisions and the Corporate Center
13
Strategy, performance and responsibility
Strategy and structure
Measures taken
In August 2008, UBS launched a comprehensive program to
reengineer its businesses and to adjust to the new realities
in the financial industry. It aims to capitalize on the strengths
inherent in its leading client franchises across its business
divisions, to further grow these franchises, and to address
certain weaknesses in its business model that had become
apparent both before and as a result of the financial crisis.
Executive governance
Controls have been improved and accountability and trans-
parency increased at the level of top management. One re-
sult has been the creation of an Executive Committee to al-
locate and continuously monitor the use of capital and risk
in each of the business divisions. Other wideranging chang-
es to the Group’s governance have been proposed and im-
plemented. Refer to the “Corporate governance” section of
this report for more information on corporate governance.
Liquidity and funding framework
The business divisions have been incentivized to manage
their balance sheets with greater autonomy and responsibil-
ity. A new liquidity and funding concept has been approved
and is being implemented. Refer to the “Liquidity and fund-
ing management” section of this report for more informa-
tion on liquidity and funding.
Senior management compensation
Senior management compensation is now aligned to sus-
tainable value creation within each manager’s area of re-
sponsibility and a longer performance evaluation horizon
has been introduced. UBS announced a new compensation
model for senior executives in November 2008 (effective
1 January 2009). Refer to the “Compensation, sharehold-
ings and loans” section of this report for more information
on senior management compensation.
Transformation of UBS’s wealth management business
As announced on 10 February 2009, Global Wealth Manage
ment & Business Banking has been divided into two new
business divisions: Wealth Management & Swiss Bank and
Wealth Management Americas.
14
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Key performance indicators: 2009 and beyond
UBS uses key performance indicators
(KPIs) to monitor the firm’s perfor-
mance and the delivery of returns to
shareholders. Until the end of 2008,
UBS focused on four KPIs at the Group
level, as described in the discussion of
performance measures in the “Mea-
surement and analysis of perfor-
mance” section of this report. In
response to the changing market
environment, UBS conducted a
detailed review of its KPI framework in
2008. The objective of this review was
to adjust these indicators – which are
used by the firm to evaluate its
economic performance as a whole and
the contribution of individual employ-
ees to that performance – to more
closely reflect the firm’s strategic
priorities.
This review focused on the identifica-
tion of the key drivers of total
shareholder return (TSR) – defined as
the change in the share price and any
dividend yield – which represents the
ultimate measure of performance for
UBS shareholders. However, several
factors driving TSR cannot be directly
influenced by UBS management,
such as valuation multiples and
shortterm market trends. Therefore,
on a daytoday basis, UBS manage-
ment measures performance in the
form of profitability after the cost of
equity or economic profit. Conse-
quently, the KPI framework has been
designed to explicitly incorporate the
drivers of economic profit at the
Group and business division level.
UBS manages its businesses based on
its KPI framework, which is used for
internal performance measurement
to ensure management accountability
and consistency. Both Group and
business division KPIs are used to
determine variable compensation of
executives and staff.
The Group and business division KPIs
shown in the table below will be
disclosed beginning in first quarter
2009 and going forward.
Key performance indicators
Group
Net profit growth
Cost / income ratio
Return on equity (RoE)
Return on assets, gross
Return on risk-weighted assets, gross
FINMA leverage ratio 2
Tier 1 ratio
Wealth Management &
Swiss Bank
Wealth Management
Americas
Investment Bank
Global Asset Management
Pre-tax profit growth
Pre-tax profit growth
Pre-tax profit growth
Pre-tax profit growth
Cost / income ratio
Cost / income ratio
Cost / income ratio
Cost / income ratio
Gross margin (RoIA) 1
Gross margin (RoIA)
Gross margin (RoIA)
Return on attributed equity
Return on assets, gross
Impaired lending portfolio 3
Value at Risk 4
Net new money rate
Net new money rate
Net new money rate
Net new money rate
Economic profit
1 For International clients segment only. RoIA: return on invested assets. 2 FINMA: Swiss Financial Market Supervisory Authority. 3 Impaired lending portfolio as a % of total lending portfolio. For
Swiss clients segment only. 4 Regulatory VaR.
15
Strategy, performance and responsibility
Strategy and structure
Risk management in 2008
UBS entered 2008 with significant legacy risk positions which
exceeded the firm’s risk bearing capacity. While UBS incurred
substantial writedowns on its risk positions, it pursued an
active risk reduction program through sales in 2008. Signifi-
cant transactions included the sale in May of US residential
mortgagebacked securities to a fund managed by Black-
Rock for proceeds of USD 15 billion and the agreement
reached in October with the Swiss National Bank (SNB) (see
details below).
UBS identified significant weaknesses in its risk manage-
ment and control organization. In order to address these
weaknesses, UBS launched an extensive remediation plan,
which included the overhaul of its risk governance, signifi-
cant changes to risk management and control personnel, as
well as improvements in risk capture, risk representation and
risk monitoring. Implementation of this plan is ongoing and
remains a high priority for UBS.
Transaction with the Swiss National Bank
As announced on 16 October 2008,
the Swiss National Bank (SNB) and
UBS reached an agreement to transfer
illiquid securities and other positions
from UBS’s balance sheet to a fund
owned and controlled by the SNB.
From the originally agreed USD 60
billion, the trans action size has been
reduced to USD 38.6 billion (including
the effect of price adjustments so far
totaling USD 0.7 billion).
With this transaction, UBS caps future
potential losses from these assets,
reduces its riskweighted assets,
materially derisks its balance sheet
and is no longer exposed to the
funding risk of the assets to be
transferred.
Transaction structure
The SNB will finance the fund with a
loan in the amount of 90% of the
purchase price to be paid by the fund,
secured by the assets of the fund.
10% of the purchase price will be
financed through an equity contri
bution by the SNB. The loan will be
nonrecourse to UBS and will be priced
at LIBOR plus 250 basis points. The
fund and loan facility will terminate in
eight years, but the termination date
may be extended to 10 or 12 years.
The cash flow from the assets,
including interest, rental income,
principal repayments and proceeds
from asset sales (net of expenses
and working capital requirements),
will be applied to service the loan until
full repayment.
At the closing of each asset transfer,
UBS will purchase, for an amount
equal to the SNB’s equity contribution
on that date, an option to acquire the
fund’s equity once the loan has been
fully repaid. The option exercise price
will be USD 1 billion plus 50% of the
amount by which the equity value
exceeds USD 1 billion at the time of
exercise. This option will be carried on
UBS’s balance sheet at its fair value.
In the event of a change of control of
UBS, the SNB will have the right but
not the obligation to require UBS to
purchase the outstanding loans at par
plus accrued interest and to purchase
the fund equity at 50% of its value at
the time.
If, upon the fund’s termination, the
SNB incurs a loss on the loan it has
made to the fund, the SNB will be
entitled to receive 100 million UBS
ordinary shares against payment of the
par value of those shares (currently
CHF 0.10 per share).
Governance
In fourth quarter 2008, the fund was
established under the name SNB
StabFund as a Swiss limited partnership
for collective investments. Its objective
is to manage the acquired positions
based on fundamental value consider-
ations. The SNB StabFund is owned by
a general partner and a limited partner,
both of which are wholly owned by the
SNB. The general partner has a board
of directors with five members, of
which three are designated by the SNB
and two by UBS.
UBS acts as the investment manager
of the SNB StabFund, subject to the
oversight of the board of directors
of the general partner which must
approve certain types of decisions. The
board also retains the right to remove
UBS as the investment manager of the
SNB StabFund.
Portfolio composition and size
The overall portfolio valuation of
positions already transferred or still
expected to be transferred to the
SNB StabFund is USD 38.6 billion, as
shown in the table opposite, subject
to any further pricing adjustments.
The SNB StabFund acquired a first
tranche of 2,042 securities positions
from UBS on 16 December 2008 for
USD 16.4 billion. The remaining
positions identified for sale to the fund
are planned to be transferred in
March 2009 in one or more additional
transfers.
The purchase price for the securities
transferred to the fund on 16 December
2008 was the value of these securities
as of 30 September 2008 as determined
by the SNB based on a valuation
conducted by thirdparty valuation
experts. On the same basis, the SNB has
since determined the purchase price to
16
Transaction with the Swiss National Bank
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be paid for a further USD 7.8 billion in
securities and other positions that have
not yet been transferred to the fund. So
far, the determined purchase prices for
securities and other positions transferred
to or to be transferred to the fund were,
in the aggregate, USD 0.7 billion lower
than the value UBS assigned to these
positions on 30 September 2008. All of
this difference is accounted for in UBS’s
results for 2008. Purchase prices have
not yet been determined for the other
positions not yet transferred to the
fund, valued at USD 14.4 billion by UBS
on 30 September 2008. Any difference
between the purchase prices to be
determined by the SNB and the value
UBS assigned to these positions will
affect UBS’s results in first quarter 2009.
Issuance of MCNs to the
Swiss Confederation
In connection with the transaction
with the SNB, UBS raised CHF 6 bil
lion of new capital in the form of
mandatory convertible notes (MCNs)
convertible into UBS registered
shares. These were placed with the
Swiss Confederation and issued on
9 December 2008. Refer to the
“Capital management” section of
this report and “Note 26 Capital
increases and mandatory convertible
notes” in the financial statements
of this report for more information.
Implications for UBS’s 2008
income statement
The overall impact on UBS’s 2008
income statement of the SNB
trans action and the placement of the
mandatory convertible notes (MCNs)
with the Swiss Confederation was
a net charge of CHF 4.5 billion.
This reflects a net loss arising from
the acquisition of the equity pur-
chase option, the loss referred to
above arising from valuation
differences determined to date on
securities sold or to be sold to the
SNB StabFund, losses on hedges that
were subject to trading restrictions
as a result of the SNB transaction,
and the impact of the contingent
issuance of UBS shares in connection
with the transaction. The fair
valuation impact of the issuance of
the MCNs, as described in “Note 26
Capital increases and mandatory
convertible notes” in the financial
statements of this report, is also
included in this total.
Positions affected by the transfer to the Swiss National Bank StabFund
USD billion
US sub-prime
US Alt-A
US prime
US reference-linked note program
Commercial real estate
Student loan-backed securities
Other positions
Price difference
Total
1 To be determined.
Valuation as of 30 September 2008
Priced
Not yet priced
Total
4.0
1.5
1.2
5.8
3.4
0.5
8.5
(0.7)
24.2
1.6
0.8
0.7
0.0
2.3
0.0
9.0
1
14.4
5.6
2.4
1.9
5.8
5.7
0.5
17.5
(0.7)
38.6
17
Strategy, performance and responsibility
The making of UBS
The making of UBS
All the firms that have come to make up today’s UBS look
back on a long and diverse history. Both the two Swiss pre-
decessor banks and PaineWebber Group Inc. (PaineWebber)
came into being in the second half of the 19th century, while
S.G. Warburg’s roots go back to 1934. But it was in the
1990s when UBS’s current identity began to form.
In the early 1990s, the two Swiss banks that came to
form the current UBS, Swiss Bank Corporation (SBC) and
Union Bank of Switzerland, were commercial banks operat-
ing mainly out of Switzerland. The two banks shared a simi-
lar vision: to become a world leader in wealth management
and a global bulgebracket investment bank with a strong
position in global asset management, while remaining an
important commercial and retail bank in Switzerland.
Union Bank of Switzerland, the largest and bestcapital-
ized Swiss bank of its time, opted to pursue a strategy of
organic growth, or expansion by internal means. In contrast,
SBC, then the thirdlargest Swiss bank, decided to take an-
other route by starting a joint venture with O’Connor, a lead-
ing US derivatives firm that was fully acquired by SBC in
1992. O’Connor was noted for its young, dynamic and in-
novative culture, meritocracy and its team orientation. It
brought stateoftheart risk management and derivatives
technology to SBC. In 1994, SBC acquired Brinson Partners,
one of the leading USbased institutional asset management
firms. Both the O’Connor and Brinson deals represented
fundamental steps in the development of the firm.
The next major move was in 1995, when SBC acquired
S.G. Warburg, the British merchant bank. The deal helped to
fill SBC’s strategic gaps in corporate finance, brokerage and
research and, most importantly, brought with it an institu-
tional client franchise, which is still crucial to today’s equities
business.
The 1998 merger of Swiss Bank Corporation and Union
Bank of Switzerland brought together these two leading
Swiss financial institutions, creating a leading global wealth
manager and improving the new firm’s chances of becoming
a global bulge bracket investment bank and a leading global
institutional asset manager.
Still, in order to become a truly global player in invest-
ment banking and wealth management, UBS needed to es-
tablish a significant presence in the key US market. UBS ad-
vanced towards this objective when it acquired PaineWebber
in 2000.
Since the acquisition of PaineWebber, UBS’s main priority
has been to develop and grow organically. Smaller acquisi-
tions have helped to accelerate and complement the firm’s
growth. In 2006, for instance, UBS enhanced its presence
in Brazil and Latin America by acquiring Brazil’s largest inde-
pendent investment bank and asset manager, Banco Pac
tual. Today, UBS has significant scale in its areas of focus,
with strong positions in large, mature markets as well as a
growing presence in emerging markets.
➔ Refer to www.ubs.com/history for more information
18
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1830
1840
1850
1860
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
1832
Schröder Münchmeyer Hengst & Co.
1895
Phillips & Drew
1997
1986
1863
Eidgenössische Bank
1862
Bank in Winterthur
1863
Toggenburger Bank
1945
1912 Union Bank of Switzerland
1872
Aargauische Kreditanstalt
1928
Interhandel
1919
1967
1832
Dillon Read & Co.
1863
Bank in Baden
1862
Basler Handelsbank
1856
Bankverein
1882
Basler
Depositenbank
1872
Basler
Bankverein
1895
Basler & Zürcher
Bankverein
1889
Zürcher
Bankverein
1889
Schweiz.
Unionbank
1915
1946
S.G. Warburg Group
1897 Swiss Bank Corporation
1945
1914
Blyth, Eastman Dillon & Co.
1919
Mitchell Hutchins, Inc.
1997
1995
1989
Brinson
Partners
1994
1977
O’Connor &
Associates
1992
1979
1977
ab
1998
1SS008_e
1880
Paine & Webber
1879
Jackson & Curtis
1942
Paine, Webber, Jackson & Curtis
1974 PaineWebber, Inc.
2000
19
Strategy, performance and responsibility
Current market climate and industry drivers
Current market climate and industry drivers
The current crisis and its aftermath will have profound implications for the financial services industry and
the world economy.
Market crisis and economic downturn
2008 was one of the most difficult years ever for the finan-
cial services industry. As the crisis deepened over the course
of the year, the problems in the financial industry spread to
other parts of the world economy. A precipitous drop in pric-
es across most main asset classes, coupled with deleverag-
ing, resulted in poorly functioning lending markets and a
lack of interbank liquidity. Banks were forced to recapitalize,
sometimes with the help of governments. Hopes that the
crisis might be shortlived were dashed after the failure of
one of the major US investment banks in midSeptember,
which resulted in very severe liquidity issues for many finan-
cial institutions. Banks experienced a scarcity of equity, credit
supply further contracted and numerous countries fell into
recession.
Recessions characterized by a simultaneous fall in prices
across asset classes, an increase in consumer savings rates
and contractions in lending caused by a shortage of bank
capital are very rare, and have always been severe. There
have in fact only been four recorded instances of such reces-
sions in the past century: the “bankers’ panic” in 1907, the
“great depression” in 1929–39, the Swedish economic crisis
in 1992, and most recently the “lost decade” in Japan from
1990–2000.
Changes in consumer demand drive capital expenditures
by companies and consequently affect capital goods indus-
tries, sometimes very rapidly. Even countries which have not
experienced high leverage growth and significant asset
price increases have been affected as investment spending
and exports dropped. In particular, countries which relied on
foreign capital inflows (either to the government or to the
private sector) are at risk of seeing foreign investment and
exports fall, which could in turn hurt the value of their
currency.
There were radical changes to monetary and fiscal policy
during 2008. Government borrowing and spending (through
“stimulus packages”, transfer payments, loans, guarantees
and purchases of bank capital) increased dramatically and
led to higher deficits. Central bank balance sheets expand-
ed, both as a result of traditional central bank activity and
through unconventional measures such as the purchase of
distressed assets from financial institutions (for example,
mortgage backed securities). Interest rates have fallen to his-
torically low levels in most countries as central banks attempt
to support private and corporate spending.
Macro economic perspectives
The macro economic outlook for 2009 is not positive. A
modest recovery can be expected only if the measures taken
by governments and central banks prove to be both effective
and efficient. Few observers expect the financial services in-
dustry to rebound quickly from this crisis.
Market capitalization of the components of the Dow Jones Banks Titans 30 Index, 2008 versus 2007¹
USD billion
200
150
100
50
0
20
31.12.07
31.12.08
UBS
1 Source: Bloomberg. Components of the Dow Jones Banks Titans 30 Index as of 28 February 2009.
1SS012_e
200
150
100
50
0
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Stock market indices development
In % (USD)
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08
savings can provide opportunities for certain banks, risk
aversion and the downward pressure it exerts on asset prices
tend to reinforce each other.
180
140
100
60
20
MSCI World
S&P 500
Dow Jones Euro STOXX Banks
Source: Bloomberg
Dow Jones Banks Titans 30 Index
Industry drivers
A number of drivers are expected to have a significant im-
pact on banks’ earnings and the structure of the financial
services industry in the short to medium term. The most rel-
evant factors are described below.
Deleveraging
The current downturn is different from previous ones not
only in terms of its severity and wide geographical reach, but
also in terms of the deleveraging process that lies at its
heart. Deleveraging is the process through which house-
holds, companies and the banks that intermediate between
them simultaneously attempt to sell real and financial assets
to pay back their debts. This unleashes two strong deflation-
ary forces.
First, there is a reduction and restructuring of banks’ bal-
ance sheets, which may affect their capacity to lend money.
Such a restructuring is already well under way, having start-
ed in 2007 when banks began recording losses on their asset
portfolios, disposing of assets and raising capital. This trend
gathered pace in the course of 2008 and has continued in
the early part of 2009 as several banks disclosed more losses
and raised further capital.
Second, household and corporate balance sheets are also
in effect being restructured and reduced, depressing con-
sumer and capital spending and appetite for risk. This pro-
cess has just started and may last several years, as house-
holds address the need to permanently increase their savings.
It may be particularly long and painful in countries with his-
torically low savings rates, such as the US.
While debt levels are lower among nonfinancial corpora-
tions than in previous recessions, these companies will also
have to restructure their balance sheets as they face falling
demand for their products and services, and funding be-
comes increasingly scarce and more expensive.
The process of deleveraging is expected to have, on bal-
ance, a negative impact on banks’ earnings. While increased
Government intervention and reregulation
The financial crisis has sparked heavy public intervention in
the global financial system. State intervention packages have
included a mix of capital injections by governments, public
guarantees for selected bank liabilities such as deposits and
commercial paper, and maximum loss guarantees for illiquid
assets held in banks’ balance sheets. Governments have in-
creasingly attached conditions to the measures they have
taken, providing them the opportunity to at least temporar-
ily influence the business activities of certain banks.
At the same time, the financial industry and its regulators
are analyzing the lessons learned and implementing mea-
sures to adjust their business practices and the regulatory
framework. This will fundamentally impact and likely trans-
form the industry. While many details of the regulatory re-
sponse to the financial crisis are still to be worked out, new
regulation will likely focus on ways of mitigating the nega-
tive effects of the business cycle through regulatory policy, as
well as on measures to increase the transparency of financial
markets and to strengthen their resilience. Regulators are
also likely to try to better identify and address systemic risks,
for example by adapting regulatory requirements to the size
and profile of certain financial institutions.
Specific measures are likely to include adjustments to the
following six broad areas of direct relevance to international
banks: higher capital requirements and the introduction of
leverage limitations; more robust liquidity buffers and risk
management; management and partial reintegration of
offbalance sheet exposure onto firms’ balance sheets;
review of valuation and accounting practices; increased co
operation between stronger and betterequipped super
visors and central banks, especially from an international
perspective; and alignment of compensation programs and
pay levels with longterm, firmwide profitability. Some
national regulators have moved quickly, including the
Swiss Financial Market Supervisory Authority (FINMA; until
31 December 2008 Swiss Federal Banking Commission),
which has already defined new transitional capital require-
ments for UBS and Credit Suisse.
Overall, the regulatory changes prompted by the current
market turmoil will have lasting effects on the industry in
terms of bank size, business portfolios, controls, capital
requirements, profitability and compensation. These will
result in significant changes to the competitive landscape.
At the product level, regulatory restrictions and greater
supervision in areas such as structured products, credit
default swaps, and securitization are likely to result in
lower margins for banks. Enhanced transparency require-
ments and disclosure standards for investment products are
also likely.
21
Strategy, performance and responsibility
Current market climate and industry drivers
Client behavior and demand
The relationship between financial firms and their clients has
seen accelerating change over the past couple of years, for
example with the rise of increasingly sophisticated clients
(such as leveraged finance investors and hedge funds). How-
ever, the corporate and institutional client segment as a
whole is expected to continue requiring innovative solutions
which cater to specific and unique needs, and span product
groups and geographies.
2008 has marked a turning point with regard to the in-
vestment behavior of many private clients, and fundamental
changes in this behavior are expected in the future. Returns
have been negative in most asset classes and many investors
have grown suspicious of hedge funds and complex prod-
ucts in general, especially as these proved to be more cor
related with equity and credit markets than originally
thought.
Internal UBS research shows that private clients’ risk ap-
petite is changing, moving towards more “traditional” asset
classes such as equities, bonds, cash or precious metals. This
trend is expected to have, on balance, a negative impact on
banks’ income as it results in lower gross margins.
Wealth preservation
The financial crisis has already resulted in a substantial de-
struction of wealth as the price of many real and financial
assets has fallen from the peaks of 2007. Many investors see
a risk of further wealth destruction in the current economic
climate. During this phase business opportunities for the
financial services industry will mostly be in the realm of value
preservation rather than return maximization.
Investors have reacted to the current crisis by selling
assets, paying back debt and accumulating cash or deemed
equivalent. History shows that investors generally need
several years to return to more risky asset allocations follow-
ing periods of financial distress. Therefore, capital preserva-
tion is likely to remain a priority for investors and most will
seek to do this by holding cash before considering a diversi-
fication across a wider range of asset classes and products.
On the other hand, an increase in savings by individuals, par-
ticularly in countries where household saving rates have
been historically low, such as the US, represents an oppor
tunity for banks.
Retirement provisions
The economic crisis does not fundamentally alter the private
retirement industry’s growth drivers, namely the demo-
graphic shift related to falling birth rates and aging and
the falling coverage provided by public pension schemes.
Despite the drop in the value of their assets in 2008, private
fully funded schemes will continue providing individuals
with the best investment tools to accumulate wealth for
retirement, and savings will continue to flow into them. The
ability of public pension schemes to fund themselves over
the long term may be limited as several countries are al-
ready heavily indebted and running large deficits, including
some driven by measures taken to help their economy in the
current downturn, while demographics indicate that the
ratio of workers to retirees will decrease in the foreseeable
future. In some countries, particularly those which have
experienced the largest destruction of accumulated wealth
due to the crisis (for example, the US and UK, where pen-
sion funds are comparatively more exposed to equity mar-
kets than in other countries), a pickup in individual savings
rates would provide additional funds, which will partly be
invested in private retirement schemes. This, combined with
continued demand for specialist advice in wealth manage-
ment, continues to represent an opportunity for wealth and
asset managers.
Corporate restructuring
The corporate sector is generally better equipped to deal
with the negative impact of a slowing economy than in pre-
vious downturns, mostly due to a relatively lower level of
debt. However, a sharp reduction in demand for goods and
services across developed and emerging markets and a con-
tinued lack of liquidity in credit markets will inevitably impact
the corporate sector. Over the medium term, default rates
are expected to rise from the historically low levels prevailing
before the crisis, and further major bankruptcies are likely.
The internationalization of business – particularly expansion
in emerging markets – is likely to slow down as the attrac-
tiveness of new markets remains subdued and cash flows
previously available for expansion are used to restructure
balance sheets. In such a corporate environment, most of
the opportunities for the banking sector are likely to arise
from simple financing requirements, balancesheet restruc-
turing and asset disposals.
Emerging markets
Strong growth in emerging markets has been a key feature
of the boom years in the global economy prior to the crisis,
and banks have benefited greatly from strong growth in
these markets. Growth in emerging markets is expected to
slow markedly in 2009, reflecting the increased interconnec-
tions between economies in the era of globalization. Export
surplus countries, including those relying on commodities
exports, are most vulnerable to a further deterioration in the
global economic environment, but also best placed to ben-
efit from a potential recovery. Over the long term, however,
banks which have built up a significant presence in emerging
markets and serve a wide range of institutional and private
clients are likely to continue benefiting from aboveaverage
economic growth in these countries.
22
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Strategy, performance and responsibility
Risk factors
Risk factors
Certain risks, including those described below, can impact
UBS’s ability to carry out its business strategies and directly
affect its business activities, financial condition, results of
operations and prospects. Because the business of a broad
based international financial services firm such as UBS is
inherently exposed to risks that only become apparent with
the benefit of hindsight, risks of which UBS is not presently
aware could also materially affect its business activities,
financial condition, results of operations and prospects. The
sequence in which the risk factors are presented below is not
indicative of their likelihood of occurrence or the potential
magnitude of their financial consequences.
Risks related to the current market crisis
UBS, like many other financial market participants, was
severely affected by the financial crisis that unfolded in 2007
and worsened in 2008. The deterioration of financial mar-
kets in 2008 was extremely severe by historical standards,
and UBS recorded substantial losses on legacy risk positions.
UBS has taken a series of measures to reduce its risk expo-
sures, including the sale of up to USD 38.6 billion of illiquid
and other positions to a fund owned and controlled by the
Swiss National Bank (SNB) as announced in the fourth quar-
ter. However, UBS continues to hold positions identified as
risk concentrations (refer to the “Risk concentrations” sec-
tion of this report for more information on these positions,
as well as positions in other asset classes that might be neg-
atively affected by the current market crisis). In addition, UBS
is exposed to the general systemic and counterparty risks
that are exacerbated by the ongoing market crisis and relat-
ed instability of financial institutions and of the financial sys-
tem as a whole.
UBS holds positions which may be adversely affected by the
ongoing financial crisis and economic climate
As discussed in the paragraphs below on general risk fac-
tors, the development of market conditions and the overall
economic environment, as well as factors affecting particu-
lar assets, may lead to reductions in the market or carrying
value of UBS’s assets. Although UBS’s exposure to the US
mortgage market (including residential subprime, AltA
and prime) was reduced dramatically in 2008, UBS remains
exposed to that market, albeit on a reduced scale. In addi-
tion, certain of its monolineinsured positions are exposed
to the US residential mortgage market as described below.
The markets for most US mortgagerelated securities have
so far remained illiquid and it is impossible to determine
whether and how long current market conditions will per-
sist, or whether they will further deteriorate.
UBS relies on credit protection from third parties, including
monoline insurers, that may not be effective
UBS’s business entails exposure to counterparty credit risk,
including to monoline insurers and other providers of credit
protection. UBS’s credit exposure to the monoline sector
arises from overthecounter (OTC) derivative contracts –
mainly credit default swaps (CDSs) which are carried at fair
value – in respect of mortgage related and “monoline
wrapped” securities. The fair value of these CDSs – and thus
UBS’s exposure to the counterparties – depends on the valu-
ation and the perceived credit risk of the instrument against
which protection has been bought. Monoline insurers have
been very adversely affected by their exposure to US residen-
tial mortgagelinked products, resulting in credit rating
downgrades and the need to raise additional capital. UBS
has recorded large credit valuation adjustments on its claims
against monoline counterparties. If the financial condition of
these counterparties or their perceived creditworthiness de-
teriorates further, UBS could record further credit valuation
adjustments on the CDSs bought from monoline insurers.
UBS could also incur losses in connection with restructur-
ings of monoline insurers, including possible losses on third
party hedge protection which UBS may incur as a result of
changes in the corporate structure of the insurers. UBS also
trades securities issued by and derivatives related to mono-
line insurers, including CDSs, and the value of these securi-
ties and derivatives is subject to market volatility.
UBS holds positions in asset classes that have been or might
be negatively affected by the current market crisis
In 2007 and 2008, UBS incurred substantial losses (realized
and marktomarket) on its holdings of securities related to the
US residential mortgage market. The market dislocation that
began in 2007 has been progressively felt in asset classes be-
yond US residential mortgages. In 2008, UBS recorded mark-
downs on other assets carried at fair value, including auction
rate securities (ARS), leveraged finance commitments, com-
mercial mortgages in the United States and nonUS mortgage
and assetbacked securities (ABSs). UBS has recorded and in
the future could record negative fair value adjustments on
these assets and on other asset classes which may be affected
by the crisis in the credit markets. Such securities may also be
wrapped by monoline insurers and therefore could give rise to
losses if the difficulties in the monoline sector persist or in-
crease (see the pre vious risk factor on monoline exposures).
23
Strategy, performance and responsibility
Risk factors
UBS’s inventory of ARS is likely to increase in the future as
a result of its commitment to repurchase clientowned ARS, as
further described in the “Risk management” section of this
report. UBS is also exposed to the risk of losses and write
downs on its leveraged finance commitments. UBS holds posi-
tions related to real estate markets in countries other than the
United States on which it could also suffer losses. These in-
clude exposures to nonUS residential and commercial real es-
tate and mortgages and nonUS ABS programs. For example,
as described in the “Credit risk” section of this report, UBS has
a very substantial Swiss mortgage portfolio which is booked in
Global Wealth Management & Business Banking. UBS is also
exposed to risk when it provides financing against the affect-
ed asset classes such as in its prime brokerage, reverse repo
and lombard lending activities.
– assets UBS holds for its own account as investments or
trading positions could continue to fall in value;
– impairments and defaults on credit exposures and on
trading and investment positions could increase, and
l osses may be exacerbated by falling collateral values;
and
– if individual countries impose restrictions on crossborder
payments or other exchange or capital controls, UBS
could suffer losses from enforced default by counter
parties, be unable to access its own assets, or be impeded
in – or prevented from – managing its risks.
The developments mentioned above can affect the
performance of both the Group and its business units. As
such, there is a risk that the carrying value of goodwill of a
business unit might suffer impairments.
Risk factors related to UBS’s business activity
Performance in the financial services industry depends
on the economic climate – negative developments can
adversely affect UBS’s business activities
The financial services industry prospers in conditions of economic
growth, stable geopolitical conditions, capital markets that are
transparent, liquid and buoyant and positive investor sentiment.
An economic downturn, inflation or a severe financial crisis (as
seen in 2008) can negatively affect UBS’s revenues and it may
be unable to immediately adjust all of its costs to the resulting
deterioration in market or business conditions.
A market downturn can be precipitated by a number of
factors, including geopolitical events, changes in monetary or
fiscal policy, trade imbalances, natural disasters, pandemics,
civil unrest, war or terrorism. Because financial markets are
global and highly interconnected, even local and regional
events can have widespread impact well beyond the coun-
tries in which they occur. A crisis could develop, regionally or
globally, as a result of disruption in emerging markets, which
are particularly susceptible to macroeconomic and geopoliti-
cal developments, or as a result of the failure of a major mar-
ket participant. As UBS’s presence and business in emerging
markets increases, it becomes more exposed to these risks.
Adverse and extreme developments of this kind have
affected UBS’s businesses in a number of ways, and may con-
tinue to have further adverse effect on the firm’s businesses:
– a general reduction in business activity and market
volumes affects fees, commissions and margins from
marketmaking and customerdriven transactions and
activities;
– a market downturn is likely to reduce the volume and
valuations of assets UBS manages on behalf of clients,
reducing its asset and performancebased fees;
– reduced market liquidity limits trading and arbitrage
opportunities and impedes UBS’s ability to manage risks,
impacting both trading income and performancebased
fees;
Due to its sizeable trading inventory, trading activities and
the counterparty credit risks in many of its businesses,
UBS is dependent upon its risk management and control
processes to avoid or limit potential losses
Controlled risktaking is a major part of the business of a fi-
nancial services firm. Credit is an integral part of many of
UBS’s retail, wealth management and Investment Bank
activities. This includes lending, underwriting and derivatives
businesses and positions.
Changes in interest rates, equity prices, foreign exchange
levels and other market fluctuations can adversely affect
UBS’s earnings. Some losses from risktaking activities are
inevitable but, to be successful over time, UBS must balance
the risks it takes with the returns it generates. It must there-
fore diligently identify, assess, manage and control its risks,
not only in normal market conditions but also as they might
develop under more extreme (“stressed”) conditions, when
concentrations of exposure can lead to severe losses.
As seen in 2008, UBS is not always able to prevent losses
arising from extreme or sudden market events that are not
anticipated by its risk measures and systems and affect size-
able inventory positions and therefore lead to serious losses.
Value at Risk (VaR), a statistical measure for market risk, is
derived from historical market data, and thus, by definition,
could not have predicted the losses seen in the stressed
conditions in 2008. Moreover, stress loss and concentration
controls, and the dimensions in which UBS aggregates risk
to identify potentially highly correlated exposures, proved to
be inadequate.
UBS’s tools and processes for market and credit risk con-
trol, including country risk, its approach to risk management
and control, and the steps UBS has taken to strengthen its
risk management and control framework are described in
the “Risk management” section of this report.
Notwithstanding such steps, UBS could suffer further
losses in the future if, for example:
– it does not fully identify the risks in its portfolio, in par-
ticular risk concentrations and correlated risks;
24
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– its assessment of the risks identified, or its response to
negative trends, proves to be inadequate or incorrect;
– markets move in ways that are unexpected – in terms of
their speed, direction, severity or correlation – and UBS’s
ability to manage risks in the resultant environment is
therefore restricted;
– thirdparties to whom UBS has credit exposure or whose
securities it holds for its own account are severely affect-
ed by events not anticipated by UBS’s models and the
bank accordingly suffers defaults and impairments be-
yond the level implied by its risk assessment; or
– collateral or other security provided by its counterparties
proves inadequate to cover their obligations at the time
of their default.
UBS also manages risk on behalf of its clients in its asset
and wealth management businesses. Its performance in
these activities could be harmed by the same factors. If
clients suffer losses or the performance of their assets held
with UBS is not in line with relevant benchmarks against
which clients assess investment performance, UBS may suffer
reduced fee income and a decline in assets under manage-
ment or withdrawal of mandates.
If UBS decided to support a fund or another investment
sponsored by UBS in its asset or wealth management busi-
ness it might, depending on the facts and circumstances,
incur charges that could increase to material levels. UBS does
not currently foresee the likelihood of material losses as a
result, but the possibility cannot be definitively ruled out.
Investment positions – such as equity holdings made as a
part of strategic initiatives and seed investments made at the
inception of funds managed by UBS – may also be affected
by market risk factors. These investments are often not liquid
and are generally intended or required to be held beyond a
normal trading horizon. They are subject to a distinct control
framework (described in the “Risk and treasury manage-
ment” section of this report). Deteriorations in the fair value
of these positions would have a negative impact on UBS’s
earnings.
The valuation of certain assets relies on models.
For some or all of the inputs to these models there
is no observable source
Where possible, UBS marks its trading book assets at their
quoted market price in an active market. In the current envi-
ronment, such price information is not available for certain
instruments and UBS applies valuation techniques to measure
such instruments. Valuation techniques use “market observ-
able inputs” where available, derived from similar assets in
similar and active markets, from recent transaction prices for
comparable items or from other observable market data. For
positions for which some or all of the reference data is not
observable or has limited observability, UBS uses valuation
models with nonmarket observable inputs. “Note 27 Fair val-
ue of financial instruments” in the financial statements of this
report provides detailed information on the determination of
fair value from valuation techniques. There is no single market
standard for valuation models in this area. Such models have
inherent limitations; different assumptions and inputs would
generate different results, and these differences could have a
significant impact on UBS’s financial results. UBS regularly re-
views and updates its valuation models to incorporate all fac-
tors that market participants would consider in setting a price,
including factoring in current market conditions. Judgment is
an important component of this process. Changes in model
inputs or in the models themselves could have a material im-
pact on UBS’s financial results.
Credit ratings and liquidity and funding management are
critical to UBS’s ongoing performance
Moody’s Investors Service, Fitch Ratings and Standard &
Poor’s all lowered their longterm credit rating of UBS, on
one or more times in 2008 and 2009. A further reduction in
UBS’s credit rating could increase its funding costs, in par-
ticular with regard to funding from wholesale unsecured
sources, and reduce access to capital markets. Some of these
ratings downgrades have resulted, and additional reductions
in the credit ratings would result, in UBS having to make ad-
ditional cash payments or post additional collateral. These
events may increase UBS’s need for funding to ensure that it
will always have sufficient liquidity to meet liabilities when
due, while reducing its ability to obtain such funding. UBS’s
credit ratings also have an impact on the performance of
UBS’s businesses. Along with UBS’s capital strength and rep-
utation, both of which are described in greater detail in the
risk factors below, UBS’s credit ratings contribute to main-
taining client and counterparty confidence in UBS.
Liquidity is essential to UBS’s businesses. A substantial
part of UBS’s liquidity and funding requirements are met us-
ing shortterm unsecured funding sources, including whole-
sale and retail deposits and the regular issuance of money
market securities. The volume of these funding sources has
generally been stable, but may change in the future due,
among other things, to general market disruptions. Any
such change could occur quickly and without notice. If such
a change were to occur, UBS could be forced to liquidate as-
sets, in particular from its trading portfolio, to meet matur-
ing liabilities or deposit withdrawals. Given the depressed
prices of many asset classes in current market conditions,
UBS might be forced to sell assets at discounts that could
adversely affect its profitability and its business franchises.
In 2008, UBS’s credit spreads increased substantially, in line
with the general trend for the financial services industry. If these
trends continue, or if UBS maintains substantially elevated lev-
els of liquidity for an extended period of time, the combination
of an increase in UBS’s borrowing costs and lower margins
could have an adverse impact on the firm’s pro fitability.
➔ Refer to the “Risk and treasury management” section of
this report for more information on UBS’s approach to
liquidity and funding management
25
Strategy, performance and responsibility
Risk factors
UBS’s capital strength is important to support its client
franchise
UBS’s capital position measured by the BIS capital ratios is
and has traditionally been strong, both in absolute terms
and relative to its competitors. Capital ratios are determined
by (1) riskweighted assets (RWAs) (balance sheet, offbal-
ance sheet and other market and operational risk positions,
measured and riskweighted according to regulatory criteria)
and (2) eligible capital.
Both RWAs and eligible capital are subject to change. Eli-
gible capital, for example, could experience a reduction in
case of financial losses, acquired goodwill or as a result of
foreign exchange movements. RWAs, on the other hand,
will be driven by UBS’s business activities and by changes in
the risk profile of these assets. They could furthermore be
subject to a change in regulatory requirements or the inter-
pretation thereof. For instance, substantial market volatility,
a widening of credit spreads (the major driver of UBS’s VaR),
a change in regulatory treatment of certain positions (includ-
ing, but not limited to, the definitions of assets allocated to
the trading or the banking books), stronger foreign curren-
cies, increased counterparty risk or a further deterioration in
the economic environment could result in a rise in RWAs or
a change in capital requirements and thereby potentially
reduce UBS’s capital ratios.
Operational risks may affect UBS’s business
All UBS’s businesses are dependent on the bank’s ability to
process a large number of complex transactions across mul-
tiple and diverse markets in different currencies, in addition
to being subject to the many different legal and regulatory
regimes of these countries. UBS’s operational risk manage-
ment and control systems and processes, which are de-
scribed in the “Operational risk” section of this report, are
designed to ensure that the risks associated with the bank’s
activities, including those arising from process error, failed
execution, unauthorized trading, fraud, systems failure and
failure of security and physical protection, are appropriately
controlled. If these internal controls fail or prove ineffective
in identifying and remedying such risks, UBS could suffer
operational failures that might result in losses.
Legal claims and regulatory risks and restrictions arise in
the conduct of UBS’s business
In the ordinary course of its business, UBS is subject to regu-
latory oversight and liability risk. It is involved in a variety of
other claims, disputes and legal proceedings and govern-
ment investigations in jurisdictions where UBS is active,
including the United States and Switzerland. These types of
proceedings expose UBS to substantial monetary damages
and legal defense costs, injunctive relief, criminal and civil
penalties and the potential for regulatory restrictions on
UBS’s businesses. The outcome of these matters cannot be
predicted and they could adversely affect UBS’s future busi-
ness. Currently, UBS is responding to a number of govern-
ment inquiries and investigations, and is involved in a num-
ber of litigations and disputes, related to the subprime crisis,
subprime securities, and structured transactions involving
subprime securities. These matters concern, among other
things, UBS’s valuations, disclosures, writedowns, underwrit-
ing and contractual obligations.
UBS has been in active dialogue with its regulators con-
cerning remedial actions that it is taking to address deficien-
cies in its risk management and control, funding and certain
other processes and systems. UBS will for some period be
subject to increased scrutiny by the Swiss Financial Market
Supervisory Authority and its other major regulators, and ac-
cordingly will be subject to regulatory measures that might
affect the implementation of its strategic plans.
UBS recently announced that it had entered into a De-
ferred Prosecution Agreement with the US Department of
Justice and a Consent Order with the US Securities and
Exchange Commission in connection with its crossborder
private banking services provided to US private clients. The
US Internal Revenue Service has issued a civil summons seek-
ing information concerning UBS’s crossborder business, in-
cluding records located in Switzerland, and recently filed a
petition for enforcement of this summons. It is possible that
this and other governmental actions will lead to changes
which could affect crossborder financial services and the
application of Swiss financial privacy law, and this could ad-
versely affect the future profitability of UBS’s crossborder
banking businesses. Following disclosure of the US cross
border matter, moreover, it is possible that tax or regulatory
authorities in various jurisdictions will focus on the crossbor-
der wealth management services provided by UBS and other
financial institutions. It is premature to speculate as to the
scope or effect of any such reviews.
➔ Refer to “Note 21 provisions and litigation” in the financial
statements of this report for more information on legal
proceedings in which UBS is involved
UBS might be unable to identify or capture revenue or
competitive opportunities, or retain and attract qualified
employees
The financial services industry is characterized by intense
competition, continuous innovation, detailed (and some-
times fragmented) regulation and ongoing consolidation.
UBS faces competition at the level of local markets and indi-
vidual business lines, and from global financial institutions
comparable to UBS in their size and breadth. Barriers to entry
in individual markets are being eroded by new technology.
UBS expects these trends to continue and competition to
increase in the future.
The competitive strength and market position of UBS
could be eroded if the firm is unable to identify market
trends and developments, does not respond to them by
devising and implementing adequate business strategies or
26
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is unable to attract or retain the qualified people needed to
carry them out.
In particular, the efforts required to address the current
market crisis and related challenges might diminish the
attention UBS devotes to managing other risks including
those arising from its competitive environment. The changes
recently introduced with regard to UBS’s balance sheet
management, funding framework and risk management
and control, as well as the repositioning of the fixed income,
currencies and commodities business, are likely to reduce the
revenue contribution of certain activities that require sub-
stantial funding or focus on proprietary trading.
Following the losses incurred in 2008, UBS very signifi-
cantly reduced the variable compensation granted to its
employees for that year. It is possible that, as a result of this
reduction or other factors, key employees will be attracted
by competitors and decide to leave UBS, or that UBS may be
less successful in attracting qualified employees.
UBS’s reputation is key to its business
UBS’s reputation is critical in maintaining its relationships
with clients, investors, regulators and the general public. The
reputation of UBS can be damaged, for instance, by miscon-
duct by its employees, by activities of business partners over
which UBS has limited or no control, by severe or prolonged
financial losses or by uncertainty about its financial sound-
ness and its reliability. This could result in client attrition in
different parts of UBS’s business and could negatively impact
its financial performance. Maintaining the firm’s reputation
and addressing adverse reputational developments are there-
fore key factors in UBS’s risk management efforts.
UBS’s global presence exposes the bank to other risks,
including currency fluctuation
UBS operates in more than 50 countries, earns income and
holds assets and liabilities in many different currencies and is
subject to many different legal, tax and regulatory regimes.
UBS’s ability to execute its global strategy depends on
obtaining and maintaining local regulatory approvals. This
includes the approval of acquisitions or other transactions
and the ability to obtain and maintain the necessary licenses
to operate in a local market. Changes in local tax laws or
regulations and their enforcement may affect the ability or
the willingness of UBS’s clients to do business with the bank,
or the viability of the bank’s strategies and business model.
In its financial accounts, UBS accrues taxes but the final
effect of taxes on earnings is only determined after comple-
tion of tax audits (which generally takes a number of years)
or the expiration of statutes of limitations. In addition,
changes in tax laws, judicial interpretation of tax laws or pol-
icies and practices of tax authorities could have a material
impact on taxes paid by UBS and cause the amount of taxes
ultimately paid by UBS to differ from the amount accrued.
Because UBS prepares its accounts in Swiss francs, while a
substantial part of its assets, liabilities, assets under manage-
ment, revenues and expenses are denominated in other cur-
rencies, changes in foreign exchange rates, particularly be-
tween the Swiss franc and the US dollar (US dollar income
represents the major part of UBS’s nonSwiss franc income)
have an effect on its reported income and shareholders’
equity. UBS’s approach to management of this currency risk is
explained in the “Treasury management” section of this
report.
27
Strategy, performance and responsibility
Financial performance
Financial performance
UBS’s performance is reported in accordance with Inter national Financial Reporting Standards (IFRS) as issued
by the International Accounting Standards Board. This section provides a discussion and analysis of UBS’s
results for 2008, commenting on the underlying operational performance of the business, with a focus on
continuing operations.
UBS financial highlights
CHF million, except where indicated
Performance indicators from continuing operations
Diluted earnings per share (CHF) 1
Return on equity attributable to UBS shareholders (%) 2
Cost / income ratio (%) 3
Net new money (CHF billion) 4
Group results
Operating income
Operating expenses
Operating profit before tax (from continuing and discontinued operations)
Net profit attributable to UBS shareholders
Personnel (full-time equivalents) 5
Invested assets (CHF billion)
UBS balance sheet and capital management
Balance sheet key figures
Total assets
Equity attributable to UBS shareholders
Market capitalization 6
BIS capital ratios 7
Tier 1 (%)
Total BIS (%)
Risk-weighted assets
Long-term ratings
Fitch, London
Moody’s, New York
Standard & Poor’s, New York
As of or for the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
(7.75)
(59.1)
753.0
(226.0)
796
28,555
(27,560)
(21,292)
77,783
2,174
(2.61)
(11.7)
111.0
140.6
31,721
35,463
(3,597)
(5,247)
83,560
3,189
4.64
23.9
70.5
151.7
47,484
33,365
15,007
11,527
78,140
2,989
2,014,815
2,274,891
2,348,733
32,531
43,519
11.0
15.0
302,273
A+
Aa2
A+
36,875
108,654
9.1 8
12.2 8
374,421 8
AA
Aaa
AA
51,037
154,222
12.2 8
15.0 8
344,015
AA+
Aa2
AA+
(197)
(97)
(19)
(666)
(306)
(7)
(32)
(11)
(12)
(60)
(19)
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report. 2 Net profit attribu table to UBS shareholders from continuing operations / average eq-
uity attributable to UBS shareholders. 3 Operating expenses / operating income before credit loss expense or recovery. 4 Excludes interest and dividend income. 5 Excludes personnel from private
equity (part of the Corporate Center). 6 Refer to the “UBS registered shares” section of this report for further information. 7 Refer to the “Capital management” section of this report for further in-
formation. 8 The calculation prior to 2008 is based on the Basel I approach.
28
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Measurement and analysis of performance
Key factors affecting UBS’s financial position and
results of operations in 2008
– In 2008, UBS continued to be severely affected by nega-
tive revenues in the Investment Bank due to trading losses
on risk positions. Refer to the “Risk concentrations” sec-
tion and “Note 3 Net interest and trading income” in the
financial statements of this report for more information
on risk positions and associated losses.
– UBS recorded a significant increase in credit losses from
CHF 238 million in the prior year to CHF 2,996 million.
This reflects the deteriorating economic environment and
impairment charges taken on reclassified financial assets
in fourth quarter 2008. Refer to the “Credit risk” section
of this report for more information.
– On 5 March 2008, UBS issued mandatory convertible
notes (MCNs) with a face value of CHF 13 billion to two
investors. This transaction resulted in an accounting gain
of CHF 3,860 million in first quarter 2008 and in an
increase in share premium of CHF 7.0 billion. Refer to
“Note 26 Capital increases and mandatory convertible
notes” in the financial statements of this report for more
information.
– On 23 April 2008, the annual general meeting of share-
holders approved a proposal that UBS strengthen its
shareholders’ equity by way of an ordinary capital in-
crease. The capital increase was completed in June 2008
by means of a rights offering and resulted in the issue of
760,295,181 new fully paid registered shares with a par
value of CHF 0.10 each. Net proceeds from the capital
increase were approximately CHF 15.6 billion. Refer to
“Note 26 Capital increases and mandatory convertible
notes” in the financial statements of this report for more
information.
– On 20 May 2008, UBS completed the sale of a portfolio
of US residential mortgagebacked securities (RMBSs) for
proceeds of USD 15 billion to the RMBS Opportunities
Master Fund, LP, a thirdparty entity managed by Black-
Rock, Inc. The portfolio had a notional value of approxi-
mately USD 22 billion and comprised primarily AltA and
subprime related assets. The fund was capitalized with
approximately USD 3.75 billion in equity raised by Black-
Rock from thirdparty investors and an eightyear amor-
tizing USD 11.25 billion senior secured loan provided by
UBS (balance at yearend 2008 was USD 9.2 billion).
– As announced on 16 October 2008, the Swiss National
Bank (SNB) and UBS have reached an agreement to trans-
fer, in one or more sales, up to USD 60 billion of illiquid
and other positions from UBS’s balance sheet to a sepa-
rate fund entity controlled and owned by the SNB. The
size of the transaction has since been reduced to USD
38.6 billion. This transaction allowed UBS to reduce its
exposure to certain asset classes and potential associated
losses. In parallel, UBS placed CHF 6 billion of MCNs with
the Swiss Confederation on 9 December 2008. The over-
all impact on UBS’s income statement of the SNB trans
action and the placement of the MCNs with the Swiss
Confederation was a net charge of CHF 4.5 billion. This
reflects a net loss arising from the acquisition of the equity
purchase option, a loss arising from valuation differences
determined to date on securities sold or to be sold to the
SNB StabFund, losses on hedges that were subject to
trading restrictions as a result of the SNB transaction, and
the impact of the contingent issuance of UBS shares in
connection with the transaction. The fair valuation im-
pact of the issuance of the MCNs, as described in “Note
26 Capital increases and mandatory convertible notes” in
the financial statements of this report, is also included in
this total.
– In 2008, the Investment Bank recorded a gain on own
credit from financial liabilities designated at fair value of
CHF 2,032 million, resulting from the widening of UBS’s
credit spread, which was partly offset by the effects of
redemptions and repurchases of such liabilities. The
cumulative own credit balance for such debt held at
31 December 2008 amounts to CHF 2,953 million. Refer
to “Note 27 Fair value of financial instruments” in the fi-
nancial statements of this report for more information.
Financial liabilities designated at fair value are liabilities
for which UBS applied the option granted by IFRS to fair
value them through profit or loss, predominately issued
structured products. The gain reflects an increase in the
difference between the market value of UBS’s debt ac-
counted for under the fair value option (which is presented
on the balance sheet line “Financial liabilities designated
at fair value”) and the amount it would cost UBS to issue
this debt at current market terms. As a general rule, the
market value of UBS’s outstanding debt de creases if UBS’s
own credit spread widens and increases if UBS’s credit
spread tightens. Therefore, if UBS’s credit spread were to
tighten again in the future, the market value of UBS’s out-
standing fair valued debt would increase accordingly, re-
sulting in the reversal of some or all of the gains on own
credit recorded so far, unless UBS redeems own debt be-
fore maturity.
– Following the auction rate securities (ARS) settlement in
August 2008, Wealth Management US recorded losses of
CHF 1,636 million, of which CHF 1,464 million were in-
29
Strategy, performance and responsibility
Financial performance
cluded in general and administrative expenses, and CHF
172 million were recognized as trading losses. Under the
ARS settlement, Wealth Management US agreed to pur-
chase ARS from clients at their par value. Up to fourth
quarter 2008, the ARS settlement liability represented a
provision. The liability was reclassified from provisions to
negative replacement values in fourth quarter 2008,
when ARS settlement rights, which are treated as deriva-
tive instruments, were issued to and accepted by clients.
Losses incurred postreclassification represented trading
losses.
– As announced on 18 February 2009, UBS settled the US
crossborder case with the US Department of Justice (DOJ)
and the US Securities and Exchange Commission (SEC), by
entering into a deferred prosecution agreement with the
DOJ and a consent order with the SEC. As part of these
settlement agreements, UBS agreed to pay an amount of
CHF 917 million (USD 780 million) to the United States.
Refer to the “Settlement regarding the US crossborder
case” sidebar in the “Wealth Management International &
Switzerland” section of this report for more information.
– UBS recognized an income tax benefit of CHF 6,837 mil-
lion in 2008, which mainly reflects the CHF 6,126 million
impact from the recognition of incremental deferred tax
assets on available tax losses. The incremental deferred
tax assets relate mainly to Swiss tax losses incurred during
2008 (primarily due to the writedown of investments in
US subsidiaries) but was reduced by a decrease in the
deferred tax assets recognized for US tax losses. Refer to
“Note 22 Income taxes” in the financial statements of
this report for more information.
Discontinued operations
As discontinued activities are no longer relevant to the man-
agement of the company, UBS does not consider them to be
indicative of its future potential performance and they are
therefore not included in its business planning decisions.
This assists in comparing UBS’s performance against that of
its peers, and in the estimation of future results. In the last
three years, one such item had a significant impact on UBS’s
consolidated financial statements: On 23 March 2006, UBS
sold its 55.6% stake in MotorColumbus to a consortium
representing Atel’s Swiss minority shareholders, EOS Hold-
ing, Atel and French utility Electricité de France (EDF) for a
sale price of approximately CHF 1,295 million, leading to an
aftertax gain on sale of CHF 387 million.
Seasonal characteristics
The main businesses of UBS do not generally show signifi-
cant seasonal patterns, although the Investment Bank’s rev-
enues have been affected in some years by the seasonal
characteristics of general financial market activity and deal
flows in investment banking. Other business divisions are
only slightly impacted by seasonal components, such as as-
set withdrawals that tend to occur in fourth quarter and
lower client activity levels related to the endofyear holiday
season.
Performance measures
Key performance indicators (2008)
Until the end of 2008, UBS consistently assessed its per
formance against indicators designed to measure the deliv-
ery (on average and through periods of varying market con-
ditions) of returns to its shareholders. At the Group level,
these indicators were: aftertax return on equity; net new
money; diluted earnings per share (EPS); and cost / income
ratio. Business division key performance indicators (KPIs)
were also used for internal performance measurement and
planning as well as external reporting.
➔ A new key performance indicator framework was intro-
duced in first quarter 2009 and will be used to measure
performance in 2009 and forward. Refer to the “Key
performance indicators: 2009 and beyond” sidebar in the
“Strategy and structure” section of this report for more
information
Client / invested assets reporting
UBS reports two distinct metrics for client funds:
– Client assets are all client assets managed by or deposited
with UBS, including custodyonly 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 in-
vestment purposes.
Of the two, invested assets is the central measure for UBS
and includes, for example, discretionary and advisory wealth
management portfolios, managed institutional assets, man-
aged fund assets and wealth management securities or bro-
kerage accounts. It excludes all assets held for purely trans-
actional and custodyonly purposes as UBS only administers
the assets and does not offer advice on how these assets
should be invested. Nonbankable assets (for example, art
collections) and deposits from thirdparty banks for funding
or trading purposes are excluded from both measures.
Net new money in a reported period is the net amount
of invested assets that are entrusted to UBS by new and
existing clients less those withdrawn by existing clients and
clients who terminate their relationship with UBS. Negative
net new money means that there are more outflows than
inflows. Interest and dividend income from invested assets
is not counted as net new money inflow. Market and cur-
rency movements as well as fees, commissions and interest
on loans charged are excluded from net new money, as are
the effects resulting from any acquisition or divestment of a
UBS subsidiary or business. Reclassifications between invest-
30
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Business division / business unit key performance indicators (2008)
Business
Business divisions and business units
(excluding Corporate Center)
Wealth and asset management businesses and
Business Banking Switzerland
Key performance indicators
Cost / income ratio (%)
Return on attributed equity (%)
Invested assets (CHF billion)
Net new money (CHF billion)
Wealth and asset management businesses
Gross margin on invested assets (bps)
Wealth Management International & Switzerland
Client advisors
Revenues per advisor (CHF thousand)
Definition
Total operating expenses / total operating income
before credit loss (expense)/recovery
Performance before tax / average attributed equity
Client assets managed by or deposited with UBS for
investment purposes only (for further details please
see “Client / invested assets reporting”)
Inflow of invested assets from new clients
+ inflows from existing clients
– outflows from existing clients
– outflows due to client defection
Total operating income before credit loss
(expense)/recovery / average invested assets
Expressed in full-time equivalents
Total operating income before credit loss
(expense)/recovery / average number of client
advisors
Net new money per advisor (CHF thousand)
Net new money / average number of client advisors
Wealth Management US
Recurring income (CHF million)
Invested assets per advisor (CHF thousand)
Revenues per advisor (CHF thousand)
Net new money per advisor (CHF thousand)
Invested assets per advisor (CHF thousand)
Average invested assets / average number of
client advisors
Interest, asset-based revenues for portfolio
management and account-based, distribution and
advisory fees (as opposed to transactional revenues)
Total operating income before credit loss
(expense)/recovery / average number of financial
advisors
Net new money / average number of financial
advisors
Average invested assets / average number of
financial advisors
Business Banking Switzerland
Impaired lending portfolio as a % of total
lending portfolio, gross
Impaired lending portfolio, gross / total lending
portfolio, gross
Investment Bank
Compensation ratio (%)
Personnel expenses / total operating income before
credit loss (expense)/recovery
Impaired lending portfolio as a % of total
lending portfolio, gross
Impaired lending portfolio, gross / total lending
portfolio, gross
Average regulatory VaR (10-day, 99% confidence,
based on 5 years of historical data)
Value at Risk (VaR) expresses maximum potential
loss measured to a 99% confidence level, over
a 10-day time horizon and based on 5 years of
historical data
ed assets and client assets as a result of a change in the
service level delivered are treated as net new money inflow
or outflow.
When products are managed in one business division and
sold in another, they are counted in both the investment man-
agement unit and the distribution unit. This results in double
counting within UBS’s total invested assets as both units pro-
vide an independent service to their respective client, add val-
ue and generate revenues. Most double counting arises where
mutual funds are managed by the Global Asset Management
business division and sold by Global Wealth Management &
Business Banking. Both businesses involved count these funds
as invested assets. This approach is in line with both finance
industry practices and UBS’s open architecture strategy and
allows the firm to accurately reflect the performance of each
individual business. Overall, CHF 273 billion of invested assets
were double counted in 2008 (CHF 392 billion in 2007).
31
Strategy, performance and responsibility
Financial performance
UBS reporting structure
Changes to reporting structure and
presentation in 2008
Industrial Holdings reported in the Corporate Center
As UBS has continuously reduced its private equity business
in Industrial Holdings over the last three years to a very low
level, it was decided to report these activities under the Cor-
porate Center from 2008 onwards.
Exiting of the municipal securities business by the
Investment Bank
In June 2008, UBS announced the closure of its Investment
Bank’s institutional municipal securities business. This hap-
pened with immediate effect and the retail operations of the
municipal securities business, including secondary market
activities, were transferred to Wealth Management US. A
goodwill impairment charge of CHF 341 million was record-
ed in second quarter 2008 in relation to the exiting of this
business and was attributed to the Investment Bank.
Exiting of certain commodities businesses by the
Investment Bank
In October 2008, UBS announced that the Investment Bank
would exit the commodities business, with the exception of
precious metals. This resulted in an expense of CHF 133 mil-
lion in fourth quarter 2008.
UBS reporting structure in 2008
Global Asset Management
Investment Bank
Corporate Center
Global Wealth Management &
Business Banking
Wealth Management
International & Switzerland
Wealth Management US
Business Banking Switzerland
1FP002_e
Industriebeteiligungen
Private Equity
Changes to the reporting structure in 2009
Wealth Management & Swiss Bank
and Wealth Management Americas
On 10 February 2009, UBS announced
with immediate effect the split of
Global Wealth Management &
Business Banking into two divisions:
Wealth Management & Swiss Bank
and Wealth Management Americas.
UBS will start reporting results based
on this new structure with the first
quarter 2009 results.
Investment Bank
As announced on 3 October 2008 and
reiterated on 10 February 2009, the
Investment Bank is being repositioned
to focus on its core franchises. The
fixed income, currencies and com-
modities (FICC) business unit of the
Investment Bank has exited several
businesses including institutional
municipal securities, proprietary
trading, commodities (excluding
precious metals, exchangetraded
derivatives and indices) and real estate
and securitization activities, as well
as exotic structured products. The
internal organization of the FICC
business unit has changed to reflect
this repositioning, but these changes
are not expected to have an immedi-
ate impact on the Investment Bank’s
or UBS’s reporting structure.
32
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Accounting changes
Restatements made to the financial statements 2008
This Annual Report 2008, including UBS’s Group financial
statements and other information, replaces the Annual Re-
port 2008 issued and filed with the US SEC on Form 20F on
11 March 2009.
UBS has restated its 2008 Group financial statements to
correct identified accounting errors related to the 2008
Group financial statements included in the Annual Report
2008 issued on 11 March 2009. These errors are not mate-
rial to the annual or quarterly 2008 financial statements, but
related corrections would have been material to first quarter
2009 financial statements. The restatement comprises three
items in excess of CHF 100 million as follows: increase in fair
value of auction rate securities purchase commitments at
31 December 2008 (charge to net trading income of Wealth
Management US of CHF 112 million), calculation of interest
income based on the effective interest rate method for as-
sets reclassified from “heldfortrading” to “loans and re-
ceivables” in fourth quarter 2008 (reduction of the interest
income of the Investment Bank by CHF 180 million), realiza-
tion of a foreign currency translation loss deferred in share-
holders’ equity due to the partial disposals of an investment
in a consolidated investment fund (reduction of other in-
come of Corporate Center by CHF 192 million). In addition,
a number of misstatements, individually below CHF 65 mil-
lion, were adjusted resulting in an increase of net profit at-
tributable to UBS shareholders by CHF 79 million.
The total net impact of all restated items on the 2008
results was a reduction of net profit and net profit attribut-
able to UBS shareholders of CHF 405 million, and a reduc-
tion of equity and equity attributable to UBS shareholders
of CHF 269 million. The BIS tier 1 capital decreased by CHF
217 million, the BIS total ratio decreased by 0.1% and
the BIS tier 1 ratio was not affected by the restatement.
2008 quarterly net profits attributable to UBS shareholders
were reduced by the following amounts: CHF 82 million in
the first quarter, CHF 37 million in the second quarter, CHF
13 million in the third quarter and CHF 273 million in the
fourth quarter.
over the shorter of the legal vesting period and the period
from grant through to the retirement eligibility date of the
employee.
UBS has fully restated the two prior years (2006 and
2007), with net profit attributable to UBS shareholders
declining by CHF 863 million in 2007 and declining by CHF
730 million in 2006. The net increase in compensation ex-
pense was CHF 797 million for 2007 and CHF 516 million for
2006, mainly affecting the Investment Bank. Refer to “Note
1 Summary of significant accounting policies” in the finan-
cial statements of this report for more information.
Recognition of a defined benefit asset for the
Swiss pension plan
In third quarter 2008, UBS concluded that it meets the
requirements of IAS 19 Employee Benefits for recognizing a
defined benefit asset associated with its Swiss pension plan.
Prior to this, it had been UBS policy to disclose only this
amount in “Note 30 Pension and other postemployment
benefit plans” in the financial statements of UBS’s annual
reports. UBS concluded that recognition of an asset should
also consider unrecognized net actuarial losses and past
service cost as permitted by IAS 19 as this results in a better
reflection of the corridor approach. At the end of third
quarter 2008, the measurement of the defined benefit
asset represented the total cumulative unrecognized net
actuarial losses plus unrecognized past service cost plus the
present value of economic benefits available in the form of
refunds of the plan or reductions in future contributions to
the plan.
The change in accounting policy resulted in the following
effects on the balance sheet for 30 September 2008, the
date on which the change in policy occurred, 31 December
2007 and 31 December 2006: an increase of approximately
CHF 2.1 billion in other assets, an increase of approximately
CHF 0.5 billion in deferred tax liabilities and an increase of
approximately CHF 1.6 billion in retained earnings. Refer to
“Note 1 Summary of significant accounting policies” in the
financial statements and the “Capital management” sec-
tion of this report for more information.
Share-based payments: revisions to International
Financial Reporting Standard 2
IAS 39 Reclassification of financial instruments
UBS adopted amended IFRS 2 on 1 January 2008. As a result,
from 1 January 2008, UBS’s sharebased awards that are not
generally forfeited upon the employee leaving UBS are ex-
pensed in the performance year. In contrast, sharebased
awards featuring stringent forfeiture rules are amortized
The markets for many financial instruments began to dry up
in 2007 and many instruments that previously traded in ac-
tive and liquid markets ceased to trade actively by mid2008.
In an effort to address accounting concerns arising from the
global credit crisis, the International Accounting Standards
33
Strategy, performance and responsibility
Financial performance
Board published an amendment to International Accounting
Standard 39 (IAS 39 Financial Instruments: Recognition and
Measurement) on 13 October 2008.
Although the amendment could have been applied retro-
spectively from 1 July 2008, UBS decided at the end of Octo-
ber 2008 to apply the amendment prospectively with effect
from 1 October 2008 following an assessment of the impli-
cations on its financial statements.
Subject to certain conditions being met, the amend-
ments to IAS 39 permit financial assets to be reclassified out
of the “held for trading” category if the firm has the intent
and ability to hold them for the foreseeable future or until
maturity. Eligible assets may be reclassified to the “loans
and receivables” category, carried at amortized cost less
impairment, or the “availableforsale” category, carried at
fair value through equity, with impairment recognized in
profit or loss. Assets designated at fair value through profit
or loss (“fair value option”) and derivatives may not be
reclassified.
Effective 1 October 2008, UBS reclassified eligible assets
which it intends to hold for the foreseeable future with a
fair value of CHF 17.6 billion on that date from “held for
trading” to the “loans and receivables” category. In addi-
tion, student loan auction rate securities (ARS) with a fair
value of CHF 8.4 billion have been reclassified as of 31 De-
cember 2008. In fourth quarter 2008, an impairment charge
of CHF 1.3 billion was recognized as credit loss expense on
reclassified financial instruments. If reclassification had not
occurred, the impairment charge would not have been rec-
ognized but a trading loss of CHF 4.8 billion would have
been recorded in UBS’s fourth quarter income statement. In
the fourth quarter, the operating profit before taxes would
have been CHF 3.6 billion lower if the reclassification had
not occurred. Refer to “Note 29 Measurement categories of
financial assets and liabilities” in the financial statements of
this report for more information on the reclassification of
financial assets in 2008.
Discontinuation of the adjusted expected
credit loss concept
In first quarter 2008, UBS ceased using the adjusted expected
credit loss concept in its internal management reporting and
began to book, in line with IFRS, actual credit losses (recoveries)
instead. Prior year results have been restated. This change
had no impact on the Group’s overall net profit.
Accounting changes in 2009
IFRS 8 Operating Segments
The new standard on segment
reporting, IFRS 8 Operating Segments,
came into force on 1 January 2009
and replaced IAS 14 Segment
Reporting. The external segmental
reporting is based on internal report-
ing within UBS to the Group Executive
Board (or, the “chief operating de
cision maker”) which makes decisions
on the allocation of resources and
assesses the performance of the
reportable segments. Based on the
new UBS structure which was
announced on 10 February 2009 and
following IFRS 8 guidance, UBS will
show in 2009 four reportable seg-
ments. The business divisions Wealth
Management & Swiss Bank, Wealth
Management Americas, Global Asset
Management and the Investment
Bank represent one reportable
segment each. The Corporate Center,
which does not meet the requirements
of an operating segment, will also
be shown separately. In addition, the
new standard requires UBS to provide
descriptive information about the
types of products and services from
which each reportable segment
derives its revenue. As UBS’s report-
able segment operations are mainly
financial, the total interest income and
expense for all reportable segments
will be presented on a net basis.
Based on the present arrangement
of revenuesharing agreements, the
intersegment revenue for UBS is
unlikely to be material. Going forward,
the segment assets and segment
liabilities will be disclosed without the
intercompany balances and this basis
is in line with the internal reporting.
An explanation of the basis on which
the segment information is prepared,
and reconciliations to the amounts
presented in the statement of com
prehensive income and the statement
of financial position are also required
by the new standard. UBS will be
providing geographical information
about total operating income and total
noncurrent assets based on the
following new geographical break-
down: Switzerland, UK, Rest of
Europe, USA, Asia Pacific and Rest of
the World.
34
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Key performance indicators
Until the end of 2008, UBS focused on four key perfor-
mance indicators: return on equity, diluted earnings per
share, cost / income ratio and net new money. These indica-
tors are designed to monitor the returns UBS delivers to
shareholders and are calculated using results from continu-
ing operations.
Return on equity
In %
Cost / income ratio
In %
2006
2007
2008
2006
2007
2008
40
20
0
–20
–40
–60
25.7
23.9
(11.7)
(10.9)
(59.1)
(58.7)
RoE from continuing operations
Return on equity (RoE)
800
600
400
200
0
Diluted earnings per share
CHF
Net new money
CHF billion
2006
2007
2008
6.00
3.00
0.00
–3.00
–6.00
–9.00
4.99
4.64
(2.61)
(2.43)
(7.75)
(7.69)
Diluted EPS from continuing operations
Diluted earnings per share (EPS)
160
80
0
–80
–160
–240
Key performance indicators
Return on equity (RoE) (%) 1
RoE from continuing operations (%) 1
Diluted earnings per share (EPS) (CHF) 2
Diluted EPS from continuing operations (CHF) 2
Cost / income ratio (%) 3
Net new money (CHF billion) 4
753.0
70.5
111.0
2006
151.7
2007
2008
140.6
(226.0)
For the year ended
31.12.08
31.12.07
31.12.06
(58.7)
(59.1)
(7.69)
(7.75)
753.0
(226.0)
(10.9)
(11.7)
(2.43)
(2.61)
111.0
140.6
25.7
23.9
4.99
4.64
70.5
151.7
1 Net profit attributable to UBS shareholders / average equity attributable to UBS shareholders less distributions (where applicable). 2 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in
the financial statements of this report for more information on EPS calculation. 3 Operating expenses / operating income before credit loss expense or recovery. 4 Excludes interest and dividend income.
35
40
-20
-40
-60
6
3
-3
-6
-9
40
20
0
-20
-40
-60
6
3
0
-3
-6
-9
20
0
0
800
600
400
200
0
160
80
0
-80
-160
-240
Strategy, performance and responsibility
Financial performance
2008
The key performance indicators show:
– return on equity from continuing operations for fullyear
2008 at negative 59.1%, down from negative 11.7% in
2007. The profits recorded by UBS’s wealth and asset
management businesses were more than offset by sub-
stantial losses in the Investment Bank.
– negative diluted earnings per share from continuing op-
erations of CHF 7.75, compared with negative CHF 2.61
in 2007.
– a cost / income ratio of 753.0%, compared with 111.0%
a year ago.
– net new money at negative CHF 226.0 billion, down from
positive CHF 140.6 billion in 2007. Net new money out-
flows were most pronounced in the Global Wealth Man-
agement & Business Banking division, which recorded to-
tal net new money outflows of CHF 123.0 billion. Wealth
Management International & Switzerland contributed to
the majority of this total with net outflows of CHF 101.0
billion, the most significant outflows occurring in the Lat-
in America, Mediterranean, Middle East & Africa regions.
Wealth Management US reported net new money out-
flows of CHF 10.6 billion, mainly due to net outflows in
the second and third quarters. The Swiss retail business
recorded net new money outflows of CHF 11.4 billion.
Global Asset Management saw total net outflows of CHF
103.0 billion. Of this, outflows in institutional were CHF
55.6 billion and occurred primarily via thirdparty distribu-
tion channels. Institutional net outflows were observed in
all categories except money market funds, infrastructure
and real estate. Wholesale intermediary had total net out-
flows of CHF 47.4 billion, reflecting higher outflows
mainly in multiasset, equities and fixed income. Approxi-
mately threefourths of the wholesale intermediary out-
flows were through UBS distribution channels.
Net new money 1
CHF billion
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Wealth Management & Business Banking
Institutional
Wholesale intermediary
Global Asset Management
UBS
1 Excludes interest and dividend income.
Invested assets
CHF billion
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Wealth Management & Business Banking
Institutional
Wholesale intermediary
Global Asset Management
UBS
36
For the year ended
31.12.08
31.12.07
31.12.06
(101.0)
(10.6)
(11.4)
(123.0)
(55.6)
(47.4)
(103.0)
(226.0)
125.1
26.6
4.6
156.3
(16.3)
0.6
(15.7)
140.6
97.6
15.7
1.2
114.5
29.8
7.4
37.2
151.7
31.12.08
As of
31.12.07
% change from
31.12.06
31.12.07
870
600
129
1,599
335
240
575
2,174
1,294
840
164
2,298
522
369
891
3,189
1,138
824
161
2,123
519
347
866
2,989
(33)
(29)
(21)
(30)
(36)
(35)
(35)
(32)
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2007
Key performance indicators show:
– return on equity from continuing operations for fullyear
2007 at negative 11.7%, down from positive 23.9% in
2006. The strong results posted by UBS’s wealth and asset
management businesses were more than offset by sub-
stantial losses in the Investment Bank;
– negative diluted earnings per share from continuing
operations of CHF 2.61, compared with positive CHF 4.64
in 2006;
– a cost / income ratio of 111.0%, compared with 70.5% in
the prior year;
– net new money at CHF 140.6 billion, down from a record
in 2006 of CHF 151.7 billion. The decrease was mostly
driven by fullyear outflows in Global Asset Manage-
ment, mainly in institutional which had net new money
outflows of CHF 16.3 billion. The net new money out-
flows in core / value equity mandates and, to a lesser
extent, in fixed income mandates were only partly offset
by net new money inflows into all other asset classes,
particularly alternative and quantitative investments and
money market funds. Record net new money inflows
were seen in Wealth Management International & Swit-
zerland, particularly in Europe and Asia Pacific. Net new
money inflows of CHF 26.6 billion in Wealth Mana
gement US reflected the recruitment of experienced
advisors and reduced outflows from existing clients. The
Swiss retail business recorded net new money inflows of
CHF 4.6 billion.
New key performance indicator framework
A new key performance indicator (KPI)
framework was introduced in first
quarter 2009 and will be used to
measure performance in 2009 and
forward. Refer to the “Key perfor-
mance indicators: 2009 and beyond”
sidebar in the “Strategy and structure”
section of this report for more
information on UBS’s new KPIs.
37
Strategy, performance and responsibility
Financial performance
UBS results
Income statement
CHF million, except where indicated
Continuing operations
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
Cash components
Share-based components
Total personnel expenses
General and administrative expenses
Depreciation of property and equipment
Impairment of goodwill
Amortization of intangible assets
Total operating expenses
Operating profit from continuing operations before tax
Tax expense
Net profit from continuing operations
Discontinued operations
Profit from discontinued operations before tax
Tax expense
Net profit from discontinued operations
Net profit
Net profit attributable to minority interests
from continuing operations
from discontinued operations
Net profit attributable to UBS shareholders
from continuing operations
from discontinued operations
Earnings per share
Basic earnings per share (CHF)
from continuing operations
from discontinued operations
Diluted earnings per share (CHF)
from continuing operations
from discontinued operations
Additional information
Personnel (full-time equivalents) 1
1 Excludes personnel from private equity (part of the Corporate Center).
38
As of or for the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
65,679
(59,687)
5,992
(2,996)
2,996
22,929
(25,820)
692
796
16,356
(94)
16,262
10,498
1,241
341
213
28,555
(27,758)
(6,837)
(20,922)
198
1
198
109,112
(103,775)
87,401
(80,880)
5,337
(238)
5,099
30,634
(8,353)
4,341
31,721
22,342
3,173
25,515
8,429
1,243
0
276
35,463
(3,742)
1,369
(5,111)
145
(258)
403
6,521
156
6,677
25,456
13,743
1,608
47,484
21,346
2,685
24,031
7,942
1,244
0
148
33,365
14,119
2,998
11,121
888
(11)
899
(20,724)
(4,708)
12,020
568
520
48
(21,292)
(21,442)
150
(7.69)
(7.74)
0.05
(7.69)
(7.75)
0.05
539
539
0
(5,247)
(5,650)
403
(2.42)
(2.61)
0.19
(2.43)
(2.61)
0.19
493
390
103
11,527
10,731
796
5.19
4.83
0.36
4.99
4.64
0.34
(40)
(42)
12
(41)
(25)
(209)
(84)
(97)
(27)
(36)
25
0
(23)
(19)
(642)
(309)
37
(51)
(340)
5
(4)
(306)
(280)
(63)
(218)
(197)
(74)
(216)
(197)
(74)
77,783
83,560
78,140
(7)
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2008
Results
2008 saw the unfolding of a global financial crisis that af-
fected UBS deeply. While UBS’s wealth and asset manage-
ment businesses contributed positively to UBS results despite
extremely difficult conditions, losses on the Investment
Bank’s risk positions were very significant and led to an over-
all negative result.
In 2008, UBS reported a Group net loss attributable to
UBS shareholders (“attributable loss”) of CHF 21,292 million
– a loss of CHF 21,442 million from continuing operations
and a profit of CHF 150 million from discontinued opera-
tions. In 2007, UBS recorded an attributable loss of CHF
5,247 million.
Trading versus non-trading income
CHF million
2006
2007
2008
45,000
42,617
30,000
33,598
31,080
13,730
15,000
0
–15,000
–30,000
(10,658)
(27,203)
Net income from interest margin, treasury businesses,
fees and commissions and other income
Net income from trading businesses
Operating income
Total operating income was CHF 796 million in 2008, down
from CHF 31,721 million in 2007. Net interest income at CHF
5,992 million was up 12% compared with CHF 5,337 million a
year earlier. Net trading income was negative CHF 25,820 mil-
lion, sharply down from negative CHF 8,353 million in 2007.
As well as income from interest marginbased activities
(loans and deposits), net interest income includes income
earned as a result of trading activities (for example, coupon
and dividend income). The dividend income component of
interest income is volatile from period to period, depending
on the composition of the trading portfolio. In order to pro-
vide a better explanation of the movements in net interest
income and net trading income, their total is analyzed below
under the relevant business activities.
Net income from trading businesses
Net income from trading businesses dropped to negative
CHF 27,203 million for fullyear 2008. This compares with
income of negative CHF 10,658 million in the prior year,
with the decline mainly due to losses on disclosed risk con-
centrations in the fixed income, currencies and commodities
(FICC) area of the Investment Bank in 2008.
Within FICC, trading losses were experienced in difficult
markets marked by a significant increase in volatility and an
extreme scarcity of liquidity which negatively affected many
trades and positions. Real estate and securitization, and credit
and proprietary strategies all had a significant negative impact
on FICC trading revenues. These losses obscured good results
in select areas, notably foreign exchange and money markets,
which had a strong year with revenues up from 2007. Rates
had positive revenues but were down from the prior year.
Trading revenues from the equities business were down
from the previous year, mainly as a result of lower revenues in
derivatives, especially in Europe and Asia. Equitylinked saw
negative revenues in difficult equity and credit markets. The
exchangetraded derivatives business was up as it benefited
from significant volatility in the market. Prime brokerage ser-
vices had a solid performance but revenues were down over-
all from 2007 as clients deleveraged their positions. Proprie-
tary trading contributed a limited loss for the year.
In 2008, the Investment Bank recorded a gain on own
credit from financial liabilities designated at fair value of CHF
Net interest and trading income
CHF million
Net interest income
Net trading income
Total net interest and trading income
Breakdown by businesses
Net income from trading businesses 1
Net income from interest margin businesses
Net income from treasury activities and other
Total net interest and trading income
1 Includes lending activities of the Investment Bank.
For the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
5,992
(25,820)
(19,828)
(27,203)
6,160
1,214
(19,828)
5,337
(8,353)
(3,016)
(10,658)
6,230
1,412
(3,016)
6,521
13,743
20,264
13,730
5,718
816
20,264
12
(209)
(557)
(155)
(1)
(14)
(557)
39
45000
30000
15000
0
-15000
-30000
Strategy, performance and responsibility
Financial performance
2,032 million, resulting from the widening of UBS’s credit
spread, which was partly offset by the effects of redemptions
and repurchases of such liabilities. Refer to “Note 27 Fair val-
ue of financial instruments” in the financial statements of
this report for more information. In 2007, the Investment
Bank recorded a gain of CHF 659 million on own credit.
Net income from interest margin businesses
Net income from interest margin businesses decreased 1%
to CHF 6,160 million from CHF 6,230 million. This slight de-
crease was primarily due to lower income from mortgages.
Net income from treasury activities and other
Net income from treasury activities and other was CHF 1,214
million compared with CHF 1,412 million. Gains from the
accounting treatment of the MCNs issued on 5 March 2008
and 9 December 2008 were offset by negative income from
the transaction with the SNB.
Credit loss expense
A credit loss expense of CHF 2,996 million was recorded in
fullyear 2008, compared with a credit loss expense of CHF
238 million in fullyear 2007. The difference mainly reflects
impairment charges taken on reclassified financial assets in
fourth quarter 2008 and a further deterioration of the credit
environment.
Net credit loss expense at Global Wealth Management &
Business Banking amounted to CHF 421 million in 2008
compared with a net credit loss recovery of CHF 28 million in
2007. This result was mainly due to provisions made for lom-
bard loans in 2008, particularly in the fourth quarter. The
Investment Bank recorded a net credit loss expense of CHF
2,575 million in 2008, compared with a net credit loss ex-
pense of CHF 266 million in 2007. This increase mainly re-
flects impairment charges taken on reclassified instruments
in fourth quarter 2008, of which the majority was related to
leveraged finance commitments.
➔ Refer to the “Risk management and control” section of
this report for more information on UBS’s risk management
approach, method of credit risk measurement and the
development of credit risk exposures
Net fee and commission income
Net fee and commission income was CHF 22,929 million,
down 25% from CHF 30,634 million. Income declined in all
major fee categories, as outlined below:
– Underwriting fees fell 48% to CHF 1,957 million, driven
by a 56% decline in equity underwriting fees and a 31%
decline in debt underwriting fees.
– Mergers and acquisitions and corporate finance fees fell
40% to CHF 1,662 million, in an environment of reduced
market activity and lower mandated deal volumes.
– Net brokerage fees fell 16% to CHF 6,445 million, mainly
due to lower client transaction volumes in the wealth
management businesses and the Investment Bank’s cash
equities and Asian equity derivatives business.
– Investment fund fees fell 25% to CHF 5,583 million due
to lower assetbased fees from the asset management
and wealth management businesses.
– Fiduciary fees increased 1% to CHF 301 million, reflecting
an increase in business volume.
– Custodian fees fell 12% to CHF 1,198 million, mainly due
to the lower asset base.
– Portfolio and other management and advisory fees fell
21% to CHF 6,169 million mainly due to the lower asset
base in the wealth management businesses and reduced
performance fees in the asset management business.
– Insurancerelated and other fees, at CHF 317 million in
2008, decreased by 25% from a year earlier mainly due
to lower commission income from life insurance products
at Wealth Management US.
Other income
Other income decreased to CHF 692 million from CHF 4,341
million. The main driver for this change was UBS’s sale of its
20.7% stake in Julius Baer during second quarter 2007,
which gave rise to the recognition in second quarter 2007 of
a CHF 1,950 million pretax gain, attributed to the Corpo-
rate Center. 2008 included a gain of CHF 168 million from
the sale of a stake in Adams Street Partners in the third quar-
ter and a gain of CHF 360 million on the sale of UBS’s stake
in Bank of China in the fourth quarter, partly offset by losses
of CHF 192 million due to currency translation differences on
partial disposals of an investment in a consolidated invest-
ment fund.
Credit loss (expense) / recovery
CHF million
Global Wealth Management & Business Banking
Investment Bank
Investment Bank – credit losses from reclassified financial instruments
UBS
40
For the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
(421)
(1,246)
(1,329)
(2,996)
28
(266)
(238)
109
47
156
368
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Net fee and commission income
CHF million
Equity underwriting fees
Debt underwriting fees
Total underwriting fees
Mergers and acquisitions and 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
Operating expenses
Total operating expenses were down 19% to CHF 28,555 mil-
lion from CHF 35,463 million. The decline was mainly due to
significantly lower performancerelated compensation, partly
offset by provisions for auction rate securities and the provi-
sion made in connection with the US crossborder case.
Personnel expenses
Personnel expenses decreased 36% to CHF 16,262 million from
CHF 25,515 million. This was primarily due to lower accruals on
performancerelated compensation, mainly in the Investment
Bank, as well as lower salary costs due to reduced staff levels.
Fullyear results for 2007 included accruals for sharebased
compensation for performance during the year. These are not
reflected in fullyear 2008 as, starting in 2009, they will be am-
ortized over the vesting period of these awards.
Contractors’ expenses, at CHF 423 million, were down
33% from 2007. This was due to a lower number of contrac-
tors employed, mainly at the Investment Bank. Insurance and
social security contributions declined 45% to CHF 706 million
in 2008, driven by lower performancerelated compensation.
Contributions to retirement benefit plans increased CHF 4 mil-
lion to CHF 926 million as changes in contributions to various
plans largely offset each other. At CHF 2,000 million in 2008,
other personnel expenses increased 2%, mainly due to sever-
ance payments relating to the reduction in staff levels.
General and administrative expenses
At CHF 10,498 million, general and administrative expenses
increased CHF 2,069 million from CHF 8,429 million. This in-
crease was mainly due to provisions related to auction rate se-
For the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
1,138
818
1,957
1,662
8,355
5,583
301
1,198
6,169
317
25,540
273
1,010
26,823
1,909
1,984
3,894
22,929
2,564
1,178
3,742
2,768
10,281
7,422
297
1,367
7,790
423
34,090
279
1,017
35,386
2,610
2,142
4,752
30,634
1,834
1,279
3,113
1,852
8,053
5,858
252
1,266
6,622
449
27,465
269
1,064
28,798
1,904
1,438
3,342
25,456
(56)
(31)
(48)
(40)
(19)
(25)
1
(12)
(21)
(25)
(25)
(2)
(1)
(24)
(27)
(7)
(18)
(25)
curities of CHF 1,464 million, the provision of CHF 917 million
made in connection with the US crossborder case and restruc-
turing charges. These offset cost reductions in all other catego-
ries during 2008. In absolute terms, the largest reductions came
from lower travel and entertainment expenses, reduced costs
from outsourcing of IT and other services and lower marketing
and public relations expenses.
Depreciation, amortization and impairment of goodwill
Depreciation of property and equipment declined CHF 2 mil-
lion to CHF 1,241 million. Amortization of intangible assets
declined to CHF 213 million from CHF 276 million.
A goodwill impairment charge of CHF 341 million was
recorded in second quarter 2008, relating to the Investment
Bank’s exit from the municipal securities business. There was
no goodwill impairment charge for fullyear 2007.
Income tax
UBS recognized an income tax benefit in the income state-
ment of CHF 6,837 million for 2008, which mainly reflects
the CHF 6,126 million impact from the recognition of incre-
mental deferred tax assets on available tax losses.
The incremental deferred tax assets mainly relate to Swiss
tax losses incurred during 2008 (primarily due to the writedown
of investments in US subsidiaries) but was reduced by a de-
crease in the deferred tax assets recognized for US tax losses.
The Swiss tax losses can be utilized to offset taxable
income in Switzerland arising in the seven years following
the year in which the losses are incurred.
UBS recognized a net income tax expense of CHF 1,369
million for full year 2007.
41
Strategy, performance and responsibility
Financial performance
2007
Results
In 2007, UBS reported a Group net loss attributable to UBS
shareholders (“attributable loss”) of CHF 5,247 million – a
loss of CHF 5,650 million from continuing operations and a
profit of CHF 403 million from discontinued operations. In
2006, UBS recorded a Group net profit attributable to UBS
shareholders (“attributable profit”) of CHF 11,527 million.
Operating income
Total operating income was CHF 31,721 million in 2007,
down 33% from CHF 47,484 million in 2006. Net interest
income at CHF 5,337 million was down 18% compared with
CHF 6,521 million a year earlier. Net trading income was
negative CHF 8,353 million, sharply down from positive CHF
13,743 million in 2006.
Net income from trading businesses
Net income from trading businesses was down significantly
from a positive CHF 13,730 million in 2006 to a negative
CHF 10,658 million in 2007. FICC results were very weak.
The credit business in FICC delivered negative revenues,
especially in proprietary strategies. Structured products
results were down, especially in Europe and the US, reflect-
ing the decrease in customer demand for complex deriva-
tives transactions. Markdowns on leveraged finance com-
mitments also had a negative impact. The result for
emerging markets was helped by gains from the sale of
UBS’s stake in Brazil Mercantile & Futures Exchange after
demutualization.
Revenues from the equities business were up, mainly as a
result of very strong gains in the derivatives business in
China. Equity capital markets and equity prime brokerage
revenues were up in Latin America following the acquisition
of Banco Pactual at the end of 2006. Exchangetraded de-
rivatives profited from the acquisition of ABN AMRO’s global
futures and options business towards the end of 2006.
Marktomarket gains on UBS’s stake in Bovespa, the Brazil-
ian stock exchange, helped the equities result. These positive
performances were partially offset by losses recorded in pro-
prietary trading as all regions were impacted by the market
dislocation.
As a result of the widening of UBS’s credit spread in 2007,
the Investment Bank recorded a gain on own credit of CHF
659 million on financial liabilities designated at fair value in
net trading income. Refer to “Note 27 Fair value of financial
instruments” in the financial statements of this report for
more information. No gain or loss was recorded on own
credit on financial liabilities designated at fair value in net
trading income in 2006.
Net income from interest margin businesses
Net income from interest margin businesses was CHF 6,230
million, up 9% from CHF 5,718 million in 2006, reflecting an
increase in spreads for Swiss franc, euro and US dollar de-
posits and growth in wealth management’s collateralized
lending business. Wealth Management US also benefited
from increased levels of deposits.
Net income from treasury activities and other
At CHF 1,412 million, net income from treasury activities
and other in 2007 was up CHF 596 million, or 73% higher
than the CHF 816 million of 2006. The accounting treatment
of interest rate swaps, which hedge the economic interest
rate risk of accrualaccounted balance sheet items (for ex-
ample, loans or money market and retail banking products),
positively affected income. They are carried on the balance
sheet at fair value and, if they qualify for cash flow hedge
accounting under IAS 39, changes in fair value are recorded
in equity, thereby avoiding volatility in the Group income
statement. In 2007, these hedges were not fully effective,
leading to a gain that was booked to UBS’s income state-
ment. Higher interest income was also recorded as a result of
increased yield on a slightly higher average capital base.
In 2007, UBS experienced a net credit loss expense of
CHF 238 million, compared to a net credit loss recovery of
CHF 156 million in 2006. The market dislocations stemming
from the US subprime mortgage market during the second
half of 2007 were the main reasons for the significant in-
crease, mainly in the Investment Bank.
Net credit loss recovery at Global Wealth Management &
Business Banking amounted to CHF 28 million in 2007 com-
pared with a net credit loss recovery of CHF 109 million in
2006. The reduced level of credit loss recovery was a conse-
quence of the continued reduction in the impaired lending
portfolio and related allowances to a level such that recover-
ies realized from workouts continue to trend lower and no
longer compensate for the ongoing need to establish new
allowances. The US mortgage market dislocation had no
impact on these figures.
The Investment Bank realized a net credit loss expense of
CHF 266 million in 2007, compared with a net credit loss
recovery of CHF 47 million in 2006. This mainly relates to
valuation adjustments taken in connection with the securiti-
zation of certain US commercial real estate assets.
Net fee and commission income
In 2007, net fee and commission income was CHF 30,634
million, up 20% or CHF 5,178 million from CHF 25,456 mil-
lion in 2006. Income increased in nearly all major categories,
as outlined below:
– Underwriting fees, at their highest level ever, were CHF
3,742 million, up 20% from 2006. Equity underwriting
fees were up significantly and offset a decrease in fixed
income underwriting fees.
42
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– At CHF 2,768 million, mergers and acquisitions and cor-
porate finance fees in 2007 were up significantly by 49%
compared with 2006, in a brisk merger and acquisition
environment.
– Net brokerage fees were CHF 7,671 million in 2007, up
25% from 2006, mainly driven by higher revenues in
Europe, the US and Asia, due to additional services from
a new equities trading platform, and a considerable in-
crease in client activity in all client segments. Addition-
ally, the equity derivatives business also posted higher
revenues due to increased business volume.
– Investment fund fees, at their highest level ever, were
CHF 7,422 million in 2007, up 27% from 2006, mainly
reflecting higher assetbased fees for the wealth manage-
ment businesses and higher management and perfor-
mance fees at Global Asset Management.
– Fiduciary fees increased 18% to CHF 297 million due to
an increase in business volume.
– At CHF 1,367 million, custodian fees in 2007 were up 8%
compared with 2006. This increase was due to an en-
larged asset base.
– Portfolio and other management and advisory fees in-
creased by 18% to CHF 7,790 million in 2007. The in-
crease was again the result of rising invested asset levels
and to a lesser extent higher management fees.
– Insurancerelated and other fees, at CHF 423 million in
2007, decreased by 6% from a year earlier.
Other income
Other income was up significantly in 2007 by CHF 2,733
million, or 170%, to CHF 4,341 million from CHF 1,608
million in 2006. This mainly related to the sale of a 20.7%
stake in Julius Baer in second quarter 2007. The demutual-
ization of UBS’s stake in Bovespa, the Brazilian stock ex-
change, and in the Brazil Mercantile & Futures Exchange
positively affected the other income line as well. In 2006
UBS recorded gains on its New York Stock Exchange mem-
bership seats, which were exchanged into shares when it
went public in March 2006. In the same year UBS sold its
stakes in the London Stock Exchange, Babcock & Brown
and EBS group.
advisors. Performancerelated compensation decreased, re-
flecting the losses incurred in the Investment Bank. Share
based components were up 18%, or CHF 488 million, to
CHF 3,173 million from CHF 2,685 million, mainly reflect-
ing accelerated amortization of deferred compensation
awarded for senior managers who have left UBS. Contrac-
tors’ expenses, at CHF 630 million, were CHF 192 million
below 2006 levels, mainly due to the transfer of contractors
into permanent staff. Insurance and social security contri-
butions declined by 8% to CHF 1,290 million in 2007 com-
pared with CHF 1,398 million in 2006, reflecting lower bo-
nus payments. Contributions to retirement benefit plans
rose 15% or CHF 120 million to CHF 922 million in 2007 as
a result of both higher salaries paid and the increased staff
levels. At CHF 1,958 million in 2007, other personnel ex-
penses increased by CHF 390 million from 2006, mainly
driven by severance payments relating to the reduction in
staff levels.
General and administrative expenses
At CHF 8,429 million in 2007, general and administrative
expenses increased 6% from CHF 7,942 million a year ago.
Administration costs increased due to elevated business
volumes in Latin America related to the acquisition of
Banco Pactual in 2006 and higher levels of UBS staff. The
increased number of employees pushed occupancy costs,
as well as travel and entertainment expenditures, higher.
Professional fees were up on higher legal fees and IT and
other outsourcing expenses were higher in all UBS busi-
nesses. This increase was only partially offset by lower pro-
visions.
Depreciation, amortization and impairment of goodwill
Depreciation was CHF 1,243 million in 2007, almost un-
changed from CHF 1,244 million in 2006. Lower deprecia-
tion on IT and communication equipment was offset by
higher real estate charges. At CHF 276 million, amortization
of intangible assets was up 86% from CHF 148 million a
year earlier, related to acquisitions made at the end of 2006,
mainly Banco Pactual. There was no goodwill impairment
charge in 2007 or 2006.
Operating expenses
Income tax
Total operating expenses increased 6% to CHF 35,463 mil-
lion in 2007 from CHF 33,365 million in 2006.
Personnel expenses
Personnel expenses increased CHF 1,484 million, or 6%, to
CHF 25,515 million in 2007 from CHF 24,031 million in
2006. The rise was driven by higher salaries due to the 7%
increase in personnel over the year, mainly in the wealth
management businesses which added client and financial
UBS recognized a tax expense in the income statement of
CHF 1,369 million for 2007, compared with a tax expense
for 2006 of CHF 2,998 million.
The tax charge for 2007 reflects tax expenses on profits
earned outside the US during the year, partially offset by US
and Swiss tax benefits on the writedowns related to the US
subprime crisis. The US tax benefits recognized arose main-
ly as a result of the ability to carry back losses against US
profits earned in the two prior years.
43
Strategy, performance and responsibility
Financial performance
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 available-for-sale
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and 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
Equity
Share capital
Share premium
Net income recognized directly in equity, net of tax
Revaluation reserve from step acquisitions, net of tax
Retained earnings
Equity classified as obligation to purchase own shares
Treasury shares
Equity attributable to UBS shareholders
Equity attributable to minority interests
Total equity
Total liabilities and equity
44
31.12.08
31.12.07
31.12.07
% change from
32,744
64,451
122,897
224,648
271,838
40,216
854,100
12,882
340,308
5,248
6,141
892
6,706
12,935
18,811
18,793
60,907
207,063
376,928
660,182
114,190
428,217
11,765
335,864
4,966
11,953
1,979
7,234
14,538
20,312
2,014,815
2,274,891
125,628
14,063
102,561
62,431
851,864
101,546
474,774
10,196
197,254
33,965
145,762
31,621
305,887
164,788
443,539
191,853
641,892
22,150
222,077
61,496
1,974,282
2,231,065
293
25,250
(4,335)
38
14,487
(46)
(3,156)
32,531
8,002
40,533
207
12,433
(1,161)
38
35,795
(74)
(10,363)
36,875
6,951
43,826
2,014,815
2,274,891
74
6
(41)
(40)
(59)
(65)
99
9
1
6
(49)
(55)
(7)
(11)
(7)
(11)
(14)
(56)
(66)
(62)
92
(47)
(26)
(54)
(11)
(45)
(12)
42
103
(273)
0
(60)
38
70
(12)
15
(8)
(11)
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Year of maturity
2400
2050
1700
1350
1000
2008 asset development
CHF billion
2,275
(462)
2,400
2,050
1,700
1,350
1,000
2,015
(236)
(11)
23
426
31.12.2007
Trading
portfolio
Collateral
trading
Other
assets
Lending
31.12.2008
Positive
replacement
values
31.12.08 vs 31.12.07:
UBS’s total assets stood at CHF 2,015 billion on 31 Decem-
ber 2008, down from CHF 2,275 billion on 31 December
2007. These shifts were driven by deliberate reductions of
CHF 462 billion in the trading portfolio and of CHF 236 bil-
lion in collateral trading, led by the Investment Bank. These
substantial reductions were, however, partly offset by a sig-
nificant rise in replacement values (increasing to a similar ex-
tent on both sides of the balance sheet as discussed under
“Replacement values” below) during 2008, as market move-
ments drove up positive replacement values by 99%, or CHF
426 billion, to reach CHF 854 billion at yearend. Excluding
positive replacement values, UBS’s total assets dropped CHF
686 billion in 2008.
Currency effects for 2008 included a strengthening of the
Swiss franc against the British pound, US dollar and euro.
These effects deflated the balance sheet, excluding positive
replacement values, by CHF 74 billion, implying an under
lying reduction of effectively CHF 612 billion.
Excluding positive replacement values, the Investment
Bank significantly reduced its balance sheet assets by CHF
664 billion during 2008, and the positions of Global Wealth
Management & Business Banking and Global Asset Manage-
ment remained relatively stable at CHF 291 billion and CHF
25 billion, respectively.
Lending and borrowing
tially offset by lower volumes from the Investment Bank
prime brokerage business and from lombard lending in
Global Wealth Management & Business Banking. The Swiss
loan portfolio remained stable during 2008 at around CHF
163 billion.
24.5
Borrowing
The reduction of the Investment Bank’s assets led to lower
unsecured borrowing needs during a continued difficult
market environment for term debt issuance and decreasing
client deposits. Money market paper issuance was CHF
112 billion in 2008, a considerable reduction of CHF 41 bil-
lion from the prior year, as UBS decreased its reliance on
these funding sources (in line with the firm’s lower overall
funding needs) amid a reduced access to these markets for
issuers in general. Financial liabilities designated at fair value
stood at CHF 102 billion on 31 December 2008, a drop of
CHF 90 billion from 31 December 2007, as a lower demand
for structured debt was accompanied by declining market
values, in particular of equitylinked notes as major stock
indices fell. Longterm debt grew CHF 16 billion to CHF
86 billion as new issues of senior straight bonds, the CHF
6 billion MCN issuance to the Swiss Confederation and
around CHF 2 billion of mortgage bonds issued via the Swiss
Mortgage Bond Bank combined to outweigh maturing
senior straight bonds. Interbank borrowing (due to banks)
was CHF 126 billion on 31 December 2008, down CHF
20 billion from 31 December 2007. Customer deposits (due
to customers) amounted to CHF 475 billion on 31 Decem-
ber 2008, a decrease of CHF 167 billion for the year, or CHF
134 billion, on a currencyadjusted basis. Global Wealth
Management & Business Banking client deposits declined
CHF 109 billion with reductions in fixed deposits, fiduciary
investments and current accounts. Savings and personal
accounts dropped CHF 10 billion over the course of 2008,
though the last quarter recorded net inflows of CHF 3 bil-
lion. Investment Bank deposits declined CHF 58 billion,
mainly driven by lower business funding needs and a de-
cline in the prime brokerage business.
Repurchase / reverse repurchase agreements and
securities borrowing / lending
Lending
Cash and balances with central banks was CHF 33 billion on
31 December 2008, an increase of CHF 14 billion from the
prior yearend. Due from banks and loans to customers
both increased CHF 4 billion, rising to CHF 64 billion and
CHF 340 billion, respectively. The customer loan increase
stemmed mainly from the BlackRock collateralized funding
transaction (a USD 11.25 billion eightyear amortizing loan;
balance on 31 December 2008 USD 9.2 billion) in second
quarter 2008 and the reclassification of illiquid trading as-
sets from the trading portfolio in fourth quarter 2008, par-
Secured lending on the asset side of the balance sheet, the
sums of cash collateral on securities borrowed and reverse
repurchase agreements declined during 2008 to CHF 348 bil-
lion on 31 December 2008. The CHF 236 billion decline oc-
curred almost entirely in the Investment Bank, where the
matched book was reduced as part of its overall balance
sheet reduction (the matched book is a repurchase agree-
ment portfolio comprised of assets and liabilities with equal
maturities and equal value so that the market risks substan-
tially cancel each other out). Furthermore, as part of the In-
vestment Bank’s balance sheet reduction measures, its trad-
45
Strategy, performance and responsibility
Financial performance
ing short positions were reduced CHF 102 billion, which
resulted in lower shortcoverings via reverse repurchase
agreements and securities borrowing transactions.
A significant amount of trading assets are funded via re-
purchase agreements, so, in addition to the matched book
reduction, the yearly decrease in trading assets also contrib-
uted to the drop in repurchase agreements. These reduc-
tions are reflected on the liability side of the balance sheet,
where repurchase agreements and securities lent against
cash collateral declined CHF 221 billion, standing at CHF 117
billion on 31 December 2008.
Trading portfolio
Significant reductions were achieved in the trading portfolio,
which declined CHF 462 billion during 2008, or CHF 445 bil-
lion on a currencyadjusted basis. At the end of 2008, the
trading portfolio stood at CHF 312 billion. The majority of the
decrease related to the Investment Bank’s overall balance
sheet reductions and occurred within the fixed income, cur-
rencies and commodities (FICC) business area and the equities
business area. In FICC, trading inventories in a number of ar-
eas, including real estate, securitization and commodities,
were substantially reduced, including USD 16.4 billion of illiq-
uid assets transferred to the Swiss National Bank StabFund
and approximately CHF 26 billion (represents fair values at the
reclassification dates) of trading assets reclassified in fourth
quarter 2008 to banking book as “Loans and receivables”.
The reduction in equities inventories was mainly a result of
stock market declines. Reductions occurred across all trading
products, with debt instruments declining CHF 278 billion, eq-
uity instruments falling CHF 130 billion, traded loans falling
CHF 35 billion and precious metals falling CHF 19 billion.
Replacement values
The positive and the negative replacement values (RVs) of
derivative instruments developed in parallel, showing con-
tinued strong rises during 2008, driven by increased market
valuations, while notional values declined 2% yearonyear.
Positive RVs grew CHF 426 billion to CHF 854 billion in
2008, while the negative RVs of derivative instruments in-
creased CHF 408 billion to CHF 852 billion. In both cases,
the increases were largely driven by movements in curren-
cies (for example, the weakening of the US dollar), lower
interest rates and widening credit spreads. Increases oc-
curred across almost all derivative products, with interest
rate contracts growing by CHF 211 billion, foreign exchange
contracts by CHF 123 billion and credit derivative contracts
by CHF 92 billion.
Shareholders’ equity
On 31 December 2008, equity attributable to UBS share-
holders was CHF 32.5 billion, representing a decrease of CHF
4.3 billion compared with 31 December 2007.
The decline in 2008 reflects mainly the net loss attribut-
able to shareholders of CHF 21.3 billion combined with oth-
er losses recognized directly in equity (including foreign cur-
rency translation) of CHF 3.2 billion. Refer to the “Statement
of recognized income and expense” in the financial state-
ments of this report for more information about the losses
recognized directly in equity.
These equity reductions were largely offset by UBS’s capi-
tal strengthening measures taken in 2008 (see the table be-
low showing the impact by equity attributable to UBS share-
holders accounts).
Equity attributable to UBS shareholders development
CHF billion
Starting balance
Net loss attributable to UBS shareholders
of which: amount relates to MCNs issued in March 2008 1
of which: amount relates to MCNs issued in December 2008 2
Rights issue
MCNs issued in March 2008 1
MCNs issued in December 2008 2
Share-based compensation plans / sale of treasury shares
Others
Ending balance
Share capital
0.2
Share
premium
12.4
Net income
recognized
directly
in equity
(1.2)
Treasury
shares
(10.4)
Retained
earnings
35.8
(21.3)
3.7
0.7
0.1
0.3
15.5
7.0
(3.6)
(6.6)
0.5
25.2
7.2
(3.2)
(4.3)
14.5
(3.2)
Equity
attributable
to UBS
shareholders
36.9
(21.3)
15.6
7.0
(3.6)
0.6
(2.7)
32.5
1 Of the CHF 13 billion MCN1, CHF 2.3 billion, being the outstanding coupon liability recorded in “Debt issued”. 2 Of the CHF 6 billion MCN2, a balance of CHF 8.8 billion was recorded as financial
liabilities on balance sheet.
46
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Off-balance sheet
Contractual obligations
The table below includes contractual obligations as of 31 De-
cember 2008.
All contracts included in the table below, with the excep-
tion of purchase obligations (those where UBS is committed to
purchasing determined volumes of goods and services), are
either recognized as liabilities on UBS’s balance sheet or, in the
case of operating leases, disclosed in “Note 25 Operating lease
commitments” in the financial statements of this report.
The following liabilities are recognized on the balance
sheet and excluded from the table: provisions (as disclosed in
“Note 21 Provisions and litigation” in the financial state-
ments of this report), current and deferred tax liabilities (re-
fer to “Note 22 Income taxes” in the financial statements of
this report for more information), liabilities to employees for
equity participation plans, settlement and clearing accounts
and amounts due to banks and customers.
Within purchase obligations, the obligation to employees
under the mandatory notice period is excluded (this is the
period in which UBS must pay employees leaving the firm
contractuallyagreed salaries).
Off-balance sheet arrangements
In the normal course of business, UBS enters into arrange-
ments that, under International Financial Reporting Stan-
dards, lead to either derecognition of financial assets and
liabilities for which UBS has transferred substantially all risks
and rewards, or the nonrecognition of financial assets (and
liabilities) received for which UBS has not assumed the re-
lated risks and rewards. UBS recognizes these types of ar-
rangements on the balance sheet to the extent of its involve-
ment, which, for example, may be in the form of derivatives,
guarantees, financing commitments or servicing rights.
When UBS, through these arrangements, incurs an obli-
gation or becomes entitled to an asset, it recognizes them
on the balance sheet, with the resulting loss or gain re-
corded in the income statement. It should be noted that in
many instances the amount recognized on the balance
sheet does not represent the full gain or loss potential in-
herent in such arrangements. Generally, these arrange-
ments either meet the financial needs of customers or offer
investment opportunities through entities that are not con-
trolled by UBS.
Offbalance sheet arrangements include purchased and
retained interests, derivatives and other involvements in non
consolidated entities and structures. UBS has originated such
structures and has acquired interests in structures set up by
third parties.
The following paragraphs discuss several distinct areas of
offbalance sheet arrangements.
Risk positions
UBS’s main concentrations of risk and other relevant risk po-
sitions are disclosed in detail in the audited parts of the “Risk
management and control” section of this report. These posi-
tions include monoline insurers, auction rate securities and
leveraged finance deals. The quantitative summary about
each of these risk positions includes exposures of on and
offbalance sheet arrangements.
The importance and the potential impact of such posi-
tions to UBS (with respect to liquidity, capital resources or
market and credit risk support), including offbalance sheet
structures, are also described in the “Risk and treasury man-
agement” section of this report.
Liquidity facilities and similar obligations
On 31 December 2008 and 31 December 2007, UBS had
no significant exposure through liquidity facilities and guar-
antees to structured investment vehicles, conduits and oth-
er types of special purpose entities (SPEs). Losses resulting
from such obligations were not significant in 2008 and
2007.
Contractual obligations
CHF million
Long-term debt
Capital lease obligations
Operating leases
Purchase obligations
Other liabilities
Total
Payment due by period
< 1 year
36,024
63
1,034
202
3,718
41,041
1–3 years
42,188
104
1,799
166
121
44,378
3–5 years
31,869
40
1,405
85
1,406
34,805
> 5 years
77,100
0
2,573
0
0
79,673
47
Strategy, performance and responsibility
Financial performance
Off-balance sheet arrangements, risks,
consolidation and fair value measurements
Disclosure in the annual report
Contractual obligations
Strategy, performance and responsibility, “Off-balance sheet” section
Credit guarantees, performance guarantees, undrawn irrevocable
credit facilities, and similar instruments
Strategy, performance and responsibility, “Off-balance sheet” section
Private equity funding commitments and equity underwriting commitments
Strategy, performance and responsibility, “Off-balance sheet” section
Derivative financial instruments
Financial statements, “Note 23 Derivative instruments and hedge accounting”
Credit derivatives
Leases
Financial statements, “Note 23 Derivative instruments and hedge accounting”
Financial statements, “Note 25 Operating lease commitments”
Non-consolidated securitization vehicles and collateralized debt obligations –
non-agency transactions
Strategy, performance and responsibility, “Off-balance sheet” section
Support to non-consolidated investment funds
Strategy, performance and responsibility, “Off-balance sheet” section
Securitizations (banking book only)
Risk and treasury management, “Basel II Pillar 3 disclosures” section
Risk concentrations
Credit risk information
Market risk information
Liquidity risk information
Consolidation
Fair value measurements, including sensitivity and
level 3 impact on the income statement consolidation
Risk and treasury management, “Risk concentrations” section
Risk and treasury management, “Credit risk” section
Risk and treasury management, “Market risk” section
Risk and treasury management, “Liquidity and funding management” section
Financial statements, “Critical accounting policies” section
Financial statements, “Note 27 Fair value of financial instruments”
Nonconsolidated securitization vehicles and collateralized
debt obligations
UBS sponsored the creation of SPEs that facilitate the securiti-
zation of acquired residential and commercial mortgage loans,
other financial assets and related securities. UBS also securi-
tized customers’ debt obligations in transactions involving SPEs
which issued collateralized debt obligations. A typical securiti-
zation transaction of this kind involved the transfer of assets
into a trust or corporation in return for beneficial interests in
the form of securities. Financial assets held by such trusts and
corporations are no longer reported in the consolidated finan-
cial statements of UBS once their risks and rewards are trans-
ferred to a thirdparty, e. g. in a sales transaction. Refer to
“Note 1 Summary of significant accounting policies” in the
fi nancial statements of this report for more information about
UBS’s accounting policies regarding securitization activities.
Generally, UBS intended to sell the beneficial interests to
third parties shortly after securitization but beginning in the
second half of 2007 and continuing in 2008, certain re-
tained interests could not be sold due to illiquid markets for
certain instruments, mainly those linked to the US mort-
gage market.
The volume and size of interests held in securitization
structures originated by UBS and assetbacked securities
purchased from third parties declined significantly in 2008,
mainly due to the following factors:
– Sale and expected sale of positions to a fund owned and
controlled by the Swiss National Bank (for a total volume
of USD 38.6 billion).
– Sale of a portfolio of US residential mortgagebacked se-
curities for proceeds of USD 15 billion to the RMBS Op-
portunities Master Fund, LP, a thirdparty entity managed
by BlackRock, Inc.
– Several other true sales of assetbacked securities portfo-
lios to third parties without recourse.
– In addition, UBS announced the repositioning of its fixed
income, currencies and commodities (FICC) business
around client servicing and facilitation. The repositioning
includes a substantial downsizing or exiting of real estate,
securitization, and proprietary trading activities.
UBS’s involvements in nonconsolidated securitization ve-
hicles and CDOs disclosed here are typically managed on a
portfolio basis alongside hedges and other offsetting finan-
cial instruments. The table on the next page does not include
these offsetting factors and does not represent a measure of
risk. Refer to the “Risk management and control” section of
this report for information on UBS’s risk positions and risks.
UBS’s involvement in vehicles whose residential and com-
mercial mortgage securities are backed by an agency of the
US government – the Government National Mortgage As-
sociation (GNMA), the Federal National Mortgage Associa-
tion (FNMA), or the Federal Home Loan Mortgage Corpora-
48
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tion (FHLMC) – is not included in the table below, due to the
comprehensive involvement of the US government in these
organizations and the significantly lower risk profile.
The numbers in the table are different to the numbers
disclosed on securitizations in the “Basel II Pillar 3” section,
predominately due to different scopes (for example Pillar 3
disclosures are on banking book positions only, and the con-
solidation status is different for several vehicles), and to some
extent due to a different measurement basis.
Consolidation of securitization vehicles and CDOs
UBS continually evaluates whether triggering events require
the reconsideration of the consolidation conclusions made at
the inception of its involvement with securitization vehicles
and CDOs. Triggering events generally include items such as
major restructurings, the vesting of potential rights and the
acquisition, disposition or expiration of interests. In these in-
stances, SPEs may be consolidated or deconsolidated in light
of the changed conditions. Starting in December 2007 and
during 2008, due to adverse market conditions, various non
consolidated vehicles in which UBS held a majority stake in
super senior securities were declared to have breached default
provisions pursuant to the entities’ governing documents. In
these instances, various contingent decisionmaking rights be-
came immediately vested in the supersenior class holders. As
a consequence, UBS determined that, in certain instances, the
rights arising from such events caused it to be in control of
these entities and therefore UBS had to consolidate the af-
fected entities. The consolidation had no material incremental
impact on UBS’s income statement and balance sheet.
Risks resulting from non-consolidated securitization
vehicles and CDOs
The “Risk management and control” section of this report
provides detailed disclosure of UBS’s main risk concentra-
tions, as well as risks associated with UBS’s involvement in
consolidated and nonconsolidated US mortgage securitiza-
tion vehicles and CDOs. If future consolidation of additional
securitization vehicles is required by accounting standards,
UBS does not expect this would have a significant impact on
its risk exposure, capital, financial position or results of op-
erations. Positions with significant impact on the income
statement are disclosed in “Note 3 Net interest and trading
income” in the financial statements of this report.
Non-consolidated securitization vehicles and collateralized debt obligations – non-agency transactions1
CHF billion
Total SPE assets
Involvements in non-consolidated SPEs held by UBS
As of 31 December 2008
Originated by UBS 3
CDOs and CLOs
Residential mortgage
Commercial mortgage
Other ABS
Securitizations
Residential mortgage
Commercial mortgage
Other ABS
Total
Not originated by UBS
CDOs and CLOs
Residential mortgage
Commercial mortgage
Other ABS
Securitizations
Residential mortgage
Commercial mortgage
Other ABS
Total
Original
principal
outstanding
Current
principal
outstanding
Delinquency
amounts
Purchased and
retained interests, and
loans held by UBS 2
Fair value
Derivatives held by UBS
Fair value
Nominal value
23.1
0.0
0.5
57.3
21.2
3.8
105.9
330.8
6.7
53.1
1,259.7
555.0
301.7
2,507.0
8.8
0.0
0.5
43.1
17.3
1.1
70.8
169.5
1.3
18.6
616.5
476.1
142.8
0.5
0.0
0.0
2.3
1.4
0.1
4.3
17.1
0.0
0.7
81.6
3.7
5.5
1.1
0.1
0.0
0.0
0.2
0.0
1.4
3.4
0.6
4.8
3.5
4.2
3.4
1,424.8
108.6
19.9
0.6
(0.5)
0.1
(0.3)
0.0
0.0
(0.1)
1.9
0.1
1.2
(2.4)
0.0
0.0
0.8
4.0
0.7
0.1
12.7
0.0
5.1
22.6
8.7
0.9
3.4
29.1
0.0
2.2
44.3
1 Includes all purchased and retained interests and derivatives held by UBS which are considered involvements in non-consolidated securitization vehicles and CDOs (under IFRS). This implies for example
that UBS would include an insignificant involvement in such a vehicle into the table (under “Involvements in non-consolidated SPEs held by UBS”), whereas the pool assets held by such vehicle would
be included under “Total SPE assets”. The size of the pool assets of such vehicle can be very high, but relates to third parties, if UBS’s involvement is insignificant. The “Total SPE assets” include informa-
tion which UBS could gather after making exhaustive efforts but excludes data which UBS was unable to receive (in sufficient quality), especially for structures originated by third parties. 2 Loans and
receivables have been included in this column with a carrying value of CHF 1.0 billion for structures originated by UBS and CHF 9.9 billion for structures not originated by UBS. 3 Structures originated
by UBS include transactions within the scope of US GAAP, Financial Accounting Standard 140, paragraph 17.
49
Strategy, performance and responsibility
Financial performance
Support to nonconsolidated investment funds
In the ordinary course of business, UBS issues investment cer-
tificates to third parties that are linked to the performance of
nonconsolidated investment funds. Such investment funds are
originated either by UBS or by third parties. For hedging pur-
poses, UBS generally invests in the funds to which its obliga-
tions from the certificates are linked. Risks resulting from these
contracts are considered minimal, as the full performance of
the funds is passed on to third parties. The Investment Bank is
involved in similar structures, such as those due to the issuance
of notes, index certificates and related hedging activities.
In 2008, as a result of the financial markets crisis which
caused declining asset values, market illiquidity and dele-
veraging by investors, UBS supported several nonconsoli-
dated investment funds that it manages in its wealth and
asset management businesses. UBS provided this support
primarily to facilitate redemption requests of fund invest-
ments by clients. Material support was provided in the form
of collateralized financing, direct acquisition of fund units
and purchases of assets from the funds. The support pro-
vided by UBS to these investment funds was made where
there are regulatory or other legal requirements or other
exceptional considerations. During 2008, material support
has been provided as follows: fund units were acquired in
the amount of CHF 0.8 billion; assets purchased from such
funds amounted to CHF 0.7 billion; and fully collateralized
financing provided to the funds was CHF 2.4 billion at 31
December 2008 and decreased significantly in early 2009.
Guarantees granted to thirdparties in the context of these
nonconsolidated funds were immaterial at 31 December
2008. Losses incurred in 2008 as a result of such fund sup-
port were immaterial.
Acquired fund units and fund assets are generally ac-
counted for as financial investments availableforsale, and
are included into the respective risk disclosures in the “Risk
management and control” section of this report. Financing
provided by UBS at 31 December 2008 was included in the
credit risk disclosures.
In 2007, UBS Global Asset Management purchased finan-
cial assets, predominately US RMBS, from investment funds
managed by UBS. The total loss resulting from the purchas-
es, writedowns and sales amounted to approximately USD
0.1 billion in 2007, of which the majority related to transac-
tions with a fund consolidated at 31 December 2007 and
2008 in UBS’s financial statements.
In addition, in the ordinary course of business, UBS’s
wealth and asset management businesses provide short
term funding facilities to UBSmanaged investment funds.
This bridges time lags in fund unit redemptions and subscrip-
tions. These bridge financings did not incur losses and are
expected to be paid without significant losses.
Should UBS be required to consolidate previously uncon-
solidated investment funds in the future, it expects no sig-
nificant impact on debt covenants, capital ratios, credit rat-
ings and dividends. However, future fund support itself,
depending on its size, could impact these measures.
Depending on market developments in 2009 and be-
yond, it is possible that UBS may decide to provide financial
support to one or more of its investment funds. Such deci-
sions will be taken on a casebycase basis depending upon
market and other circumstances pertaining at the time. The
risks incurred by providing such support will depend on the
type of support provided and the riskiness of the assets
held by the fund(s) in question. If UBS were to provide ex-
tensive financial support to some of its investment funds,
losses incurred as a result of such support could become
material.
Guarantees and similar obligations
UBS issues the following in the normal course of business:
various forms of guarantees; commitments to extend credit;
standby and other letters of credit to support its customers;
commitments to enter into repurchase agreements; note is-
suance facilities; and revolving underwriting facilities. With
the exception of related premiums, these guarantees and
similar obligations are kept offbalance sheet unless a provi-
sion to cover probable losses is required.
On 31 December 2008, the net exposure to credit risk
for credit guarantees and similar instruments, based on
IFRS numbers, was CHF 18.5 billion compared with CHF
19.3 billion one year earlier. Fee income from issuing guar-
antees is not material to total revenues.
Guarantees represent irrevocable assurances, subject to
the satisfaction of certain conditions, that the Group will
make payment in the event that customers fail to fulfill their
obligations to third parties. The Group also enters into com-
mitments to extend credit in the form of credit lines that are
available to secure the liquidity needs of customers but have
not yet been drawn on by them, the majority of which range
in maturity from one month to five years. If customers fail to
meet their obligations, the maximum amount at risk for the
Group is the contractual amount of these instruments. The
risk is similar to the risk involved in extending loan facilities
and is subject to the same risk management and control
framework. For the year ended 31 December 2008, the
Group recognized net credit loss recoveries of CHF 18 mil-
lion; and for the years ended 31 December 2007 and 2006,
the Group recognized net credit loss recoveries of CHF 3 mil-
lion and CHF 10 million respectively, related to obligations
incurred for contingencies and commitments. Provisions rec-
ognized for guarantees, documentary credits and similar in-
struments were CHF 31 million at 31 December 2008 and
CHF 63 million at 31 December 2007.
The Group partially enters into subparticipations to miti-
gate the risks from commitments and contingencies. A sub
participation is an agreement by another party to take a
share of the loss in the event that the obligation is not ful-
filled by the obligor and, where applicable, to fund a part of
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the credit facility. The Group retains the contractual relation-
ship with the obligor, and the subparticipant has only an
indirect relationship. The Group will only enter into subpar-
ticipation agreements with banks to which UBS ascribes a
credit rating equal to or better than that of the obligor.
Furthermore, UBS provides representations, warranties
and indemnifications to third parties in connection with nu-
merous transactions, such as asset securitizations.
Clearinghouse and future exchange memberships
UBS is a member of numerous securities and futures ex-
changes and clearinghouses. In connection with some of
those memberships, UBS may be required to pay a share of
the financial obligations of another member who defaults,
or otherwise be exposed to additional financial obligations
as a result. While the membership rules vary, obligations
generally would arise only if the exchange or clearinghouse
had exhausted its resources. UBS considers the probability of
a material loss due to such obligations to be remote.
Swiss deposit insurance
Swiss banking law and the deposit insurance system require
Swiss banks and securities dealers to jointly guarantee an
amount of up to CHF 6 billion for privileged client deposits in
the event that a Swiss bank or securities dealer becomes in-
solvent. For the period from 20 December 2008 to 30 June
2009, FINMA estimates UBS’s share in the deposit insurance
system to be CHF 1.2 billion. The deposit insurance is a guar-
antee and exposes UBS to additional risk which is not reflect-
ed in the “Exposure to credit risk – UBS Group” table in the
“Credit risk” section of this report. At 31 December 2008,
UBS considers the probability of a material loss from its obli-
gation to be remote.
Private equity funding commitments and equity
underwriting commitments
The Group enters into commitments to fund external private
equity funds and investments, which typically expire within
five to ten years. The commitments generally require the
Group to fund external private equity funds and investments
at market value at the time the commitments are drawn. The
amount committed to fund these investments at 31 Decem-
ber 2008 and 31 December 2007 was CHF 0.5 billion and
CHF 0.4 billion respectively. Equity underwriting commit-
ments in the Investment Bank amounted to CHF 0.4 billion
at 31 December 2008.
Commitments 1
The table below shows the maximum committed amount of commitments.
CHF million
Credit guarantees and similar instruments
Performance guarantees and similar instruments
Documentary credits
Total commitments
Undrawn irrevocable credit facilities
31.12.08
Sub-
participations
(344)
(446)
(415)
(1,205)
(1)
Gross
13,124
3,596
2,979
19,699
60,316
Net
12,780
3,150
2,564
18,494
60,315
31.12.07
Sub-
participations
(593)
(464)
(517)
(1,574)
(2)
Gross
13,381
3,969
3,474
20,824
83,980
Net
12,788
3,505
2,957
19,250
83,978
1 Includes only credit and performance guarantees and similar instruments, documentary credits, and undrawn irrevocable credit facilities. On 31 December 2008, the commitment to repurchase auction
rate securities was recognized on UBS’s balance sheet as a negative replacement value for CHF 1,140 million (USD 1,069 million). It is not included into this table. Refer to the “Exposure to auction rate
securities” sidebar in the “Risk concentrations” section of this report for more information.
51
Strategy, performance and responsibility
Financial performance
Cash flows
2008
At 31 December 2008, the level of cash and cash equivalents
rose to CHF 179.7 billion, up CHF 30.6 billion from CHF
149.1 billion at the end of 2007.
Operating activities
Operating activities generated a cash inflow of CHF 77.0 bil-
lion in 2008 compared with a cash outflow of CHF 52.1 bil-
lion in 2007. Operating cash outflows (before changes in
operating assets and liabilities and income taxes paid) to-
taled CHF 71.6 billion in 2008, an increase of CHF 67.9 bil-
lion from 2007. Net profit decreased CHF 16.0 billion com-
pared with 2007.
Cash inflow of CHF 403.1 billion was generated by the
net decrease in operating assets, while a cash outflow of
CHF 253.6 billion was reflected in the operating liabilities.
The increase in cash was used to fund the operating liabili-
ties. Payments to tax authorities were CHF 0.9 billion in
2008, down CHF 2.8 billion from a year earlier.
Investing activities
Net cash flow used in investing activities was CHF 1.7 billion
compared with an overall cash inflow of CHF 2.8 billion in
2007. The net cash outflow for investments in subsidiaries
and associates was CHF 1.5 billion, compared with CHF 2.3
billion in 2007, due to the acquisitions of Caisse Centrale de
Réescompte Group (CCR) and VermogensGroep and a net
increase in the purchase of property and equipment of CHF
1.1 billion. The net investment of financial investments avail-
able for sale was CHF 0.7 billion, whereas in 2007 the divest-
ments generated cash inflows of CHF 6 billion. Disposals of
subsidiaries and associates in 2008 generated a cash inflow
of CHF 1.7 billion. Refer to “Note 36 Business combinations”
and “Note 38 Reorganizations and disposals” in the finan-
cial statements of this report for more information about
UBS’s investing activities in 2008 and 2007.
Financing activities
In 2008, financing activities generated cash outflows of
CHF 5.6 billion. This reflected the net repayment of money
market paper of CHF 40.6 billion and the issuance of CHF
103.1 billion in longterm debt – the latter significantly out-
pacing longterm debt repayments, which totaled CHF 92.9
billion. That outflow was partly offset by inflows attribut-
able to capital issuances of CHF 23.1 billion, including CHF
15.6 billion from rights issues and CHF 7.6 billion from
52
mandatory convertible notes. In 2007, UBS had a net cash
inflow of CHF 74.6 billion from financing activities. The dif-
ference between the two years was mainly due to the fact
that net longterm debt repayments and money market pa-
per repaid, amounting to CHF 111.6 billion in 2008, were
only partially compensated by the cash increase due to the
capital issuances.
2007
At 31 December 2007, the level of cash and cash equivalents
rose to CHF 149.1 billion, up CHF 13.0 billion from CHF
136.1 billion at the end of 2006.
Operating activities
Net cash flow used in operating activities was CHF 52.1 bil-
lion in 2007 compared with a cash outflow of CHF 5.4 billion
in 2006. Operating cash outflows (before changes in operat-
ing assets and liabilities and income taxes paid) totaled CHF
3.7 billion in 2007, a decrease of CHF 18.2 billion from 2006.
Net profit decreased CHF 16.7 billion compared with 2006.
Cash inflow of CHF 218.9 billion was generated by the
net decrease in operating assets, while a cash outflow of
CHF 263.6 billion was reflected in the operating liabilities.
The increase in cash was used to fund the operating liabili-
ties. Payments to tax authorities were CHF 3.7 billion in
2007, up CHF 1.1 billion from a year earlier.
Investing activities
Investing activities generated a cash inflow of CHF 2.8 bil-
lion. The net cash outflow for investments in subsidiaries and
associates was CHF 2.3 billion due to the acquisitions of the
branch network of McDonalds Investments and 51% of
Daehan Investment Trust Management Company Ltd. and a
net increase in the purchase of property and equipment of
CHF 1.8 billion. The net divestment of financial investments
available for sale was CHF 6.0 billion, mainly due to UBS’s
sale of its 20.7% stake in Julius Baer for CHF 3.9 billion. Dis-
posals of subsidiaries and associates in 2007 generated a
cash inflow of CHF 0.9 billion. In 2006, the net cash inflow
from investing activities was CHF 4.4 billion. Cash inflows of
CHF 6.4 billion were offset by acquired new businesses
worth CHF 3.5 billion. Purchases of property and equipment
totaled CHF 1.8 billion and the net divestment of financial
investments available for sale was CHF 1.7 billion. Disposals
of subsidiaries and associates in 2006 generated a cash in-
flow of CHF 1.2 billion.
Financing activities
In 2007, financing activities generated cash flows of CHF 74.6
billion, which was used to finance the expansion of business
activities. This reflected the net issuance of money market pa-
per of CHF 32.7 billion and the issuance of CHF 110.9 billion
in longterm debt – the latter significantly outpacing long
term debt repayments, which totaled CHF 62.4 billion. That
inflow was partly offset by outflows attributable to net move-
ments in treasury shares and own equity derivative activity
(CHF 2.8 billion), and dividend payments (CHF 4.3 billion). In
2006, UBS had a net cash inflow of CHF 48.1 billion from fi-
nancing activities. The difference between the two years was
mainly due to the fact that net longterm debt issuance and
money market paper increased CHF 26.3 billion in 2007.
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53
Strategy, performance and responsibility
UBS employees
UBS employees
UBS relies on the expertise and commitment of its employees to meet clients’ needs. For employees,
UBS’s wide range of businesses, global career opportunities and an open and collaborative culture offer a
platform for individual success.
Investing in UBS employees
UBS relies on the expertise, talent and commitment of its
employees to meet clients’ needs and deliver results for the
firm. Engaging, developing and retaining a highvalue work-
force is therefore a priority, and in 2008 UBS continued to
judiciously invest in its personnel. This investment will help
ensure that the firm has the range of skills and experience
necessary to meet client needs now and to grow the firm
when market conditions improve. UBS invests in its employ-
ees whether they are new hires, seasoned staff, key talent or
senior managers. The graph below highlights the most im-
portant factors driving the value created by UBS personnel.
UBS workforce
Staff levels decreased in most UBS businesses over the course
of the year, with the number of people employed on 31 De-
cember 2008 at 77,783, down 5,777 or 7% from yearend
2007. In 2008, UBS personnel worked in 60 countries, with
about 38% of staff employed in the Americas, 34% in Swit-
zerland, 15% in Europe, the Middle East & Africa and 13%
in Asia Pacific.
Internal job mobility encourages business innovation and
individual career development. Mobility across regions in-
creased slightly in 2008, with 1,285 employees moving to
roles in a different region, versus 1,062 in 2007. The highest
Investing in employees
Gender distribution by geographical region1
On 31.12.08
Total: 30,068
10,428
5,046
26,144
7,480
40,000
30,000
20,000
11,706
10,000
18,362
0
4,441
5,987
2,088
2,958
9,385
16,759
Americas
Asia Pacific
Continental
Europe /
Middle East / Africa
Switzerland
2,421
5,059
United
Kingdom
1HR006_e
Male
Female
1 Calculated on the basis that a person (working full-time or part-time) is considered one
headcount in this graph only. This accounts for the total UBS end-2008 employee number
of 79,166 in this graph, which excludes staff from UBS card center, Hotel Seepark Thun,
Wolfsberg and Widder Hotel.
number of employees transferred from Switzerland, with
143 going to Asia Pacific, 92 going to the Americas, 63 to
the UK and 57 to locations in Europe, the Middle East & Af-
rica. Crossdivision mobility was lower in 2008 than in 2007,
with 784 employees changing divisions during the course of
Staffing
The right people
in the right place
> Recruitment
> Mobility
> Diversity
Performance
management
Managing people
effectively
Compensation and
incentives
Learning and
development
Effectiveness and
efficiency
Competence and
qualifications
> Performance planning
> Performance measurement
and management
> Compensation
> Employee share ownership
> Benefits
> Talent and leadership
development
> Business training
Retention
Commitment
Motivation and dedication
> UBS values
> Measuring employee satisfaction
> Employee assistance
> Employee representation
54
Value added
by increasing
workforce quality
1HR001_e
40000
30000
20000
10000
0
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75
50
25
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100
75
50
25
0
Personnel
Regional distribution(cid:31)
In %, except where indicated
31.12.06
31.12.07
31.12.08
Total1:
78,140
83,560
77,783
9.8
16.2
39.4
34.6
11.9
16.4
38.3
12.9
15.5
37.7
33.4
33.9
On
100
75
50
25
0
Switzerland
Americas
Rest of Europe /Middle East / Africa
Asia Pacific
Business unit distribution
In %, except where indicated
31.12.06
31.12.07
31.12.08
Total1:
78,140
83,560
77,783
6.1
4.4
23.7
27.8
20.6
17.4
8.3
4.3
23.2
26.1
19.2
18.9
9.4
4.9
24.3
22.1
19.7
19.6
On
100
75
50
25
0
Wealth Management International & Switzerland
Business Banking Switzerland
Investment Bank
Wealth Management US
Global Asset Management
Corporate Center
1 Total full-time equivalents.
the year, versus 903 in 2007. At 238 employees, transfers
from the Investment Bank to Global Wealth Management &
Business Banking were most common.
Recruiting staff
In 2008, UBS continued to recruit staff in the key markets in
which it operates, although the firm sought throughout the
year to reduce personnel costs, increase personnel efficiency
and improve the ratio of frontoffice to backoffice staff. As
UBS believes the longterm trends for wealth and asset man-
agement remain positive, particular emphasis was placed on
hiring client advisors in 2008. Among other things, a new
“Fast Forward” initiative was introduced to improve the hir-
ing, retention and productivity of client advisors and front
office managers. More effective recruitment, integration,
and skill and competency development processes are sup-
ported by line manager coaching.
To further improve the quality of all candidates, better
match open jobs with the right candidate and more success-
fully integrate new hires, UBS standardized its approach to
sourcing, selecting and “onboarding” new hires globally in
1HR002_e
2008. Additionally, Global Wealth Management & Business
Banking launched an internal marketplace aimed at filling
vacancies with internal candidates.
1 Total full-time equivalents (FTE).
In regard to graduate recruitment, UBS developed a
firmwide campus recruiting strategy in 2008, creating a
crossdivision governance body and aligning marketing
with the needs of “Generation Y” (20 to 30yearolds) to
enhance the UBS brand within this recruitment segment. A
more interactive website and focused print materials sup-
port a globally consistent candidate experience. UBS also
focused on enhancing relationships with target schools in
2008 through a new university relations strategy, while
global sourcing efforts targeted bilingual graduates over-
seas for UBS’s businesses in the Asia Pacific region. For the
fourth straight year, global consultant Universum ranked
1HR003_e
UBS the number one employer for business students in
Switzerland.
In 2008, UBS hired more than 1,100 university gradu-
ates for its undergraduate and MBA training programs. The
UBS apprenticeship program in Switzerland hired 304 ap-
prentices in 2008, up 9% from 2007. In Global Wealth
Management & Business Banking interns and graduate
trainees represent approximately 1% of the workforce. In
response to external market conditions, the Investment
Bank instituted a graduate deferral program for 2008, in
which 43 graduates postponed their start dates at UBS for
up to one year to engage in community service or pursue
educational opportunities.
Gender distribution by employee category 1
On 31.12.08
Male
Female
Total
Officers
Non-officers
Total
Number
30,788
10,283
41,071
%
75.0
25.0
100.0
Number
18,337
19,758
38,095
%
48.1
51.9
100.0
49,125
30,041
79,166
62.1
37.9
100.0
1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount in this table only. This accounts for the total UBS year-end 2008 employee number of 79,166 in this
table. Normally, UBS expresses employee numbers in terms of full-time equivalents (FTEs), which is measured as a percentage of the standard hours normally worked by permanent full-time staff. When
calculated according to FTEs, the year-end 2008 total is 77,783.
55
Strategy, performance and responsibility
UBS employees
Developing and sustaining a diverse workforce
A workforce of people from different backgrounds, cul-
tures and experiences is indispensable in today’s global
business environment, in part because it can help enhance
understanding of regional markets and sensitivity to cul-
tural norms and labor market issues. In 2008, the UBS
workforce included citizens of 153 countries. The scope of
UBS’s diversity initiatives is global, with 10 regional diversity
boards translating this global commitment into regional ac-
tion, working with local business and HR leaders. In addi-
tion, more than 20 employee networks globally help to
build crossbusiness relationships and strengthen UBS’s in-
clusive culture.
Over the past six years, UBS has promoted diversity in
three stages: raising basic awareness; integrating diversity
into management processes such as recruiting and perfor-
mance management; and ensuring that diversity ultimately
becomes a selfsustaining part of the workplace culture. In
2008, efforts continued to focus on making diversity self
sustaining by linking diversity to revenue generation. Among
other initiatives, UBS invited women clients and prospects in
China, Italy, Switzerland, the UK and the US to targeted
events designed to help UBS build market share among this
important client segment.
UBS also continued its program to help professionals re-
turn to work after a career break. In 2008, four such pro-
grams were held in London, Philadelphia / New York, Singa-
pore and Sydney. These programs have helped more than
300 professionals, primarily women, prepare to return to
work over the past two years. In addition, UBS was recog-
nized by Working Mother magazine as being among the
100 best companies for working mothers in the US for the
sixth consecutive year.
Performance management
UBS believes that the foundation of good performance
management is an ongoing employeemanager dialogue,
with demonstrable performance as the basis for meritoc-
racy. All employees therefore participate in a yearround
performance management process that assesses individual
achievements against specific objectives. This process sup-
ports staff development, links behavior to corporate values
and helps ensure that employees have the skills required to
meet their clients’ needs and implement their division’s
strategic goals. The performance management process the
senior executives is broadly the same as for other employ-
ees. Achieving specific financial targets plays a significant
role, with business leadership, client leadership, people
leadership and personal leadership also explicitly reviewed.
Compensation and incentives
On 12 August 2008, UBS announced the separation of its
business groups into business divisions, with incentives for
management and staff in each business division aligned di-
rectly with its financial results. This is being achieved through
a centrally managed change program that includes the de-
velopment of revised incentive systems to reward divisional
management and staff for shareholder value creation in their
own division. As part of this, beginning in 2009, UBS will
adopt a new compensation model for the BoD and the GEB
that has a longterm focus and is more closely aligned with
the creation of value for the firm. (Refer to the “Compensa-
tion principles 2009 and beyond for UBS senior executives”
section of this report for more information.)
UBS’s compensation programs are resultsoriented and
marketfocused. Total compensation is linked to UBS’s busi-
ness objectives, and pay and incentive programs are de-
signed to pay for performance. UBS’s total compensation
and benefits philosophy has five guiding principles which re-
quire UBS to:
– use carefully selected performance measures, rigorous
performance management and a strict payforperfor-
mance relationship to support UBS’s business strategy;
– support reward opportunities by consistently communi-
cating UBS’s business strategy and promoting a merito-
cratic culture;
– provide competitive total compensation opportunities to
enable UBS to attract and retain talent;
– balance compensation components to meet shortterm
needs while focusing on mid to longterm objectives; and
– encourage employee share ownership to strengthen the
alignment between employee and shareholder interests.
Employee share ownership
UBS is committed to the principle of employee share owner-
ship, believing accountability for decisions and actions is en-
couraged through equitybased awards that vest and / or be-
come unrestricted over time. Positions with a large scope of
responsibility and a significant potential impact on the firm
have higher equity exposure. UBS also has stringent share
ownership requirements for senior executives.
A voluntary equitybased program enables employees to
purchase UBS shares at fair market value and generally re-
ceive two free UBS options for each share purchased. Staff
with annual incentive awards above a certain threshold are
awarded a component in UBS shares or notional shares in-
stead of cash. Select highperforming employees are granted
stock options with a strike price not less than the fair market
value of the shares on the date the option is granted.
56
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On 31 December 2008, current UBS employees held an
estimated 6% of UBS shares outstanding (including approxi-
mately 3% in unvested / blocked shares), based on all known
share holdings from employee participation plans, personal
holdings and individual retirement plans. At the end of 2008,
an estimated 56% of all employees held UBS shares while
51% of all employees held UBS stock options.
Leadership development
UBS takes a structured approach to both talent manage-
ment and leadership development, understanding that both
capabilities are important factors in ensuring highquality cli-
ent service and longterm business success.
In 2008, a Groupwide talent management architecture
was established to align the firm’s identification and selec-
tion processes for “key talent”. All levels of employees with
the potential to take on substantially more senior roles in the
organization than they currently have may be considered key
talent. In 2008, about 4% of employees were placed in a key
talent pool where they can benefit from focused investment
in their career and professional development.
UBS’s leadership development activities are separated into
Groupwide and divisional initiatives. A new framework cre-
ated in 2008 centralizes development initiatives for manag-
ing directors and above within a Grouplevel learning organi-
zation. An organizational development and culture change
initiative for the GEB, GMB and managing director popula-
tions, called “Leading our Future”, is being developed to en-
gage and align the firm’s leadership with its vision, core val-
ues, strategy and leadership principles. A new leadership and
management development core curriculum will be designed
to strengthen the capabilities of senior leaders in their current
roles, while a key talent core curriculum will build leadership
capabilities among potential future senior leaders. Initiatives
for all other employees are managed within the divisions but
coordinated with the Groupwide initiatives to ensure consis-
tency and promote the sharing of best practices.
Commitment
While meeting the needs of clients is UBS’s ultimate purpose,
it is the firm’s corporate values that lay the foundation for its
longterm sustainable growth. These values are integrated
into decision making processes, management techniques
and the ways in which employees interact with each other in
the daily course of business. UBS’s values are clustered into
four categories:
– Focus on the client: The ultimate purpose of all UBS ac-
tivities is to increase client satisfaction;
– Lead yourself: Each individual takes responsibility for his
or her own motivation, development and success;
– Lead others: Everyone can lead others by being a role
model, appreciating others’ successes and supporting
one another’s endeavors. Leading others is about creating
a collaborative environment and developing people on
the basis of meritocracy and diversity;
– Act with integrity: UBS upholds the law, respects regula-
tions and behaves in a principled way. UBS is selfaware
and has the courage to face the truth. UBS maintains the
highest ethical standards.
Measuring employee perceptions
Employee engagement supports workforce retention and
performance. An annual employee survey assesses UBS’s
corporate culture and levels of employee engagement. A
The client leadership experience
Launched in February 2008, this
Groupwide initiative brings together
senior clientfacing employees from
different divisions for a oneanda
halfday workshop designed to
improve UBS’s ability to meet the
diverse needs of its clients and to
increase UBS’s share of business
with them. Participants learn about
relevant products and services in the
other divisions, build crossdivision
partnerships and learn how to work
more effectively across boundaries.
Seventeen regional workshops, each
focusing on a specific client segment
such as family offices, hedge funds
and financial institutions, or on a
specific region such as Western
Europe, brought nearly 500 senior
clientfacing participants together.
Almost 400 crossdivisional client
service opportunities were shared,
ultimately bringing in more than USD
300 million in net new money to UBS.
57
Strategy, performance and responsibility
UBS employees
core set of questions across all divisions provides a compre-
hensive view of employee opinions.
48,205 employees, or 60% of UBS’s employee popula-
tion, participated in the survey conducted in June / July 2008.
Most measures declined compared with earlier years. For ex-
ample, 67% of respondents were very satisfied with UBS as
a place to work (compared with 80% in 2007) and 77%
reported high motivation to contribute beyond what is ex-
pected of them (versus 83% in 2007). These overall satisfac-
tion ratings covering the period between June 2007 and
June 2008 show the continued dedication of UBS employees
despite the challenges. However, the survey results also
clearly revealed a perceived lack of communication from se-
nior management.
UBS and its business divisions take these results seriously.
The GEB committed to increasing employee communication
through employee events, intranet and email. Additionally,
dialogue with managing directors across UBS increased to
ensure they had accurate, updated information about UBS
to share with their teams.
Employee assistance
UBS is committed to being a conscientious employer. Exam-
ples of this commitment can be found in the firm’s Employee
Assistance Programs (EAPs) and the COACH and SOVIA pro-
grams in Switzerland.
EAPs are available in a number of locations globally. In the
US, the program provides information, referrals and ongoing
support for child care, academic services and issues sur-
rounding elder care, work performance and personal con-
flicts. In the UK, the program is part of a health and wellbe-
ing program including onsite medical specialists, emergency
childcare, counseling and referral services. In Switzerland,
UBS offers professional assistance for current and retired
employees, as well as family members, through its HR Social
Counseling and HR Retiree Service.
The COACH transfer and severance process was launched
in Switzerland in 2003 to help employees displaced by a re-
structuring. COACH advisors provide support and assistance
in finding new jobs, working closely with UBS’s internal re-
cruitment center and outside employment services. During
the COACH process employees retain full salary and bene-
fits, and financial assistance is available for jobrelated train-
ing, if needed.
Staff below the level of director are eligible for the new
Social Partnership Agreement for employees in Switzerland
(SOVIA) that became effective on 1 August 2008. SOVIA lays
out the terms and conditions for implementing redundan-
cies among employees whose jobs are subject to the Agree-
ment on Conditions of Employment for Bank Staff. SOVIA
now governs the requirements and procedures for internal
hiring, job transfers, and, when needed, severance. The aim
is to implement necessary job cuts and operational changes
in a responsible manner, making full use of the UBS internal
labor market, and to offer targeted, relevant support and
career advice to these employees.
58
Employee representation
The UBS Employee Forum facilitates the exchange of informa-
tion between employees and management on panEuropean
issues that have the potential to impact the performance and
prospects of UBS and, in particular, its operations in Europe.
This forum fulfills EU Directive 94 / 45 on the establishment of
a European Works Council. Local forums also exist in a number
of locations across Europe to address local issues such as health
and safety, changes to workplace conditions, pension arrange-
ments and collective redundancies. The UK Employee Forum,
for example, is made up of internal elected representatives for
each business area and division that has employees in the UK.
In Switzerland, Employee Representation Committee (ERC)
representatives partner with UBS management in the annual
salary negotiations and are involved in employee matters, in-
cluding health and safety issues, social security and pension
issues. ERC employee representatives are elected to represent
the interests of employees whose work contracts are gov-
erned by Swiss law and the Agreement on Conditions of Em-
ployment for Bank Staff. The ERC also fosters an open dia-
logue between management and employees. During late
2008 and early 2009, for example, the ERC and management
jointly hosted a program called “Trust is Key”. In total, around
1,100 employees gathered in seven UBS locations across Swit-
zerland for open forum events in which employees developed
and proposed measures to rebuild trust and confidence in
UBS. These measures can be implemented in employees’
working environments or by management.
Select 2008 awards
“100 Best Companies for Working Mothers in the US”
(Working Mother magazine 2003–2008)
“No. 1 employer of choice for business graduates in Switzerland”
(Universum Switzerland 2008)
“Top 100 Employers for Lesbian, Gay and Bisexual People in Britain”
(Stonewall Workplace Equality Index 2008)
“Best Graduate Recruitment and Development Program”
(UBS EXPLORE Graduate Program)
(Graduate Solutions 2008)
“UBS’s learning programs: awards in three categories”
(Corporate University Xchange 2008)
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59
Strategy, performance and responsibility
Corporate responsibility
Corporate responsibility
Corporate responsibility contributes to UBS’s goal of sustainable value creation.
As a leading global financial services firm, UBS is confronted
with the concerns and expectations of a wide and diverse
range of stakeholders. Along with clients, investors and em-
ployees, for example, various government regulators and
suppliers can also be said to have a stake in the company to
varying degrees. In a broader sense, the communities in
which UBS has a presence are stakeholders too.
UBS takes the term “corporate responsibility” to mean
the process of understanding, assessing, weighing and ad-
dressing the concerns and expectations of these groups. This
process supports UBS in its efforts to safeguard and advance
the firm’s reputation for responsible corporate conduct. In
very direct ways, responsible corporate conduct helps create
sustainable value for the company.
The crisis faced by the financial services industry made it
difficult for the firm to do as much as it would have liked to
fulfill its stakeholder expectations. Still, as can be seen from
the examples given below – from antimoney laundering to
community development and human rights to protecting the
environment – UBS continued with a wide range of important
and effective corporate responsibilityrelated activities during
2008. Even in difficult times, UBS remains convinced that cor-
porate responsibility makes good business sense.
Adherence to the United Nations Global Compact
initiative
In 2000, UBS became one of the first companies to sign the
United Nations (UN) Global Compact. This global corporate
responsibility initiative unites governments, business, labor
organizations and civil society, fostering adherence to 10
principles covering the areas of human rights, labor stan-
dards, the environment and anticorruption. UBS considers
the initiative, which had over 5,200 corporate participants at
the end of 2008, to be an important yardstick providing
guidance for its key corporate responsibility initiatives and
activities. In addition, by participating in the Swiss UN Global
Compact network, UBS contributes actively to important
corporate responsibility discussions across industrial sectors
among Swissbased companies.
Labor standards and human rights
UBS has well established human resources policies and prac-
tices that address issues such as employment, diversity, equal
opportunity and discrimination. Such policies also tackle hu-
man rights issues, as do policies relating to health and safety
practices. UBS’s human resources policies and practices are
regularly reviewed to ensure that labor standards are re-
spected.
In line with the firm’s endorsement of the UN Global
Compact and its underlying principles, UBS adopted a state-
ment supporting basic human rights in 2006. The “UBS
Statement on Human Rights” outlines important human
rights issues and sets out the firm’s position on the topic. In
2008, UBS reaffirmed its commitment to human rights by
supporting the UN Global Compact’s Chief Executive Officer
statement, which marked the 60th anniversary of the UN’s
Universal Declaration of Human Rights. In 2008, UBS contin-
ued with the implementation of its human rights statement
with the introduction of a responsible supply chain guide-
Operational corporate responsibility at UBS
Corporate responsibility
Workplace
Ethical business conduct
Environment
Community affairs
> Diversity
> Non-discrimination
> Health and safety
> UBS code
> Financial crime prevention
> Human rights
> Supply chain
> In-house ecology
> Banking activities
> ISO 14001
> Climate change
> Charitable donations
> Employee volunteering
Communications, training and awareness-raising
60
1CR001_e
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line. It also continued the development of industry sector
guidelines to support the consistent identification and as-
sessment of environmental and social risks in the firm’s bank-
ing activities.
➔ Refer to the “UBS employees” section of this report for
more information on labor standards and diversity
programs
➔ Refer to the discussion on supply chain management and
environmental risk management below for more informa-
tion on the responsible supply chain guidelines and on
industry sector guidelines
Environment
In 1992, UBS was one of the first signatories of the UN Envi-
ronment Program’s Bank Declaration (UNEP). This act com-
mitted the firm to integrating appropriate environmental
measures within its activities. It has resulted in a well devel-
oped global environmental management system, certified to
the ISO 14001 standard, which covers both banking activi-
ties and inhouse operations. UBS acknowledges that cli-
mate change represents one of the most significant environ-
mental challenges of current times. By offering relevant
products and services across businesses, UBS seeks to help
clients address risks and take advantage of opportunities
presented by climate change and the expected transition to
a lower carbon economy. With this in mind, UBS continued
in 2008 to expand its offering of climate changerelated
products and services and to publish dedicated research re-
ports. In addition, UBS seeks to lead by example by acting to
reduce its own environmental impact. To this end, in 2006
the Group Executive Board (GEB) set a target to reduce the
firm’s carbon emissions through 2012 by 40% from 2004
levels. UBS continued in 2008 to make good progress to-
wards achieving this target.
➔ Refer to www.ubs.com/environment for more information
on UBS’s environmental policies
Fighting corruption
UBS has long been committed to assisting the fight against
money laundering, corruption and terrorist financing.
The firm employs a vigorous riskbased approach to its
internal antimoney laundering (AML) process. (A “risk
based approach” means that the processes are continually
tested to prove their effectiveness against the risks they are
intended to address.) In early 2008 it also issued a revised
Group Policy Against Corruption, setting out its zerotoler-
ance stance towards corruption and strictly prohibiting all
forms of bribery by UBS and its employees, including so
called facilitation payments. At the same time, it issued more
detailed guidance papers to address the following topics:
guidance for employees who have connections to public of-
ficials; the hiring of political advisers; guidance on engaging
intermediaries; and anticorruption guidance in connection
with corrupt activity by clients. Implementation of the policy
against corruption by the business divisions is well under
way, and training materials developed by the Group Money
Laundering Prevention Unit (GMLPU) have formed the basis
for business division training modules that raise awareness
of new and revised topics. In some instances webbased
training programs have also been developed.
Although internal policies are an important support for
UBS’s high ethical standards, in practice the major risk for
the firm in relation to bribery is not so much employee be-
havior as the potential misuse of UBS systems by clients to
perpetrate bribery. Many firms, including UBS, continue to
face the legal, regulatory and reputational risk of being used
to collect, store or transfer corrupt funds. UBS’s efforts to
reduce the risk of misuse of its systems to perpetrate bribery
will continue in 2009 and beyond.
➔ Refer to the discussion on preventing money laundering
below for more information on UBS’s AML activities
External recognition
The firm’s corporate responsibility work has been widely rec-
ognized, and UBS has been included in many indexes that
track such efforts. It has, for example, been a component of
the Dow Jones Sustainability Indexes since their inception in
1999. These indexes track the financial performance of the
leading sustainabilitydriven companies worldwide. UBS is
also included in the FTSE4Good Index, which measures the
performance of global companies in the areas of environ-
mental sustainability, stakeholder relations and support for
human rights.
Corporate responsibility governance
The corporate responsibility committee was established in
2001 and, as a Board of Directors (BoD) committee, it sup-
ports the BoD’s efforts to safeguard and advance UBS’s repu-
tation for responsible conduct. As part of the governance
changes introduced by UBS in 2008, the committee’s charter
was revised and updated. Under the revised charter, the
committee is mandated to review and assess how UBS
should meet the evolving corporate responsibility expecta-
tions of its stakeholders. It also has responsibility for moni-
toring the firm’s corporate responsibility policies and regu
lations, as well as the implementation of its corporate
responsibility activities and commitments. Headed by the
Chairman of the BoD, the committee includes three other
BoD members. A new advisory panel to the committee has
also been established consisting of members of the GEB and
other senior managers. The panel participates in committee
meetings and implements its recommendations. Meetings
are held at least twice a year, with the agenda and documen-
tation prepared by the committee chair and the corporate
responsibility management function of UBS’s chief commu-
nication officer area.
61
Strategy, performance and responsibility
Corporate responsibility
The GEB is responsible for UBS’s environmental policy and
nominates a Group environmental representative, a function
currently held by the firm’s Chief Risk Officer. A committee,
comprising both Group and divisional environmental repre-
sentatives, is tasked with overseeing the implementation of
UBS’s environmental policy and providing guidance to the
different business divisions in their implementation of the
“UBS Statement on Human Rights”.
The GMLPU leads the Group’s overall efforts in all aspects
of money laundering prevention, including terrorism financ-
ing, sanctions and antibribery. It supports the Group Gen-
eral Counsel and the head of compliance in their functional
responsibilities by providing, in conjunction with the compli-
ance functions in the business divisions, reasonable assur-
ance that UBS meets relevant regulatory and professional
standards in its business conduct. It also defines, where ap-
propriate, uniformly applicable minimum standards for AML
as a whole. The GMLPU coordinates its work via various
committees and specialist networks with the core committee
being the global AML committee.
Regional diversity boards consider and decide on key re-
gional issues, such as the regional diversity strategy and di-
versity goals and measures. The boards are chaired by senior
managers and are also responsible for assessing the progress
made on relevant issues. UBS’s global community affairs ac-
tivities are governed in a decentralized fashion. Every region
has a dedicated community affairs function that coordinates
charitable commitments by UBS, its senior management and
employees within their region.
Corporate responsibility: training and
raising awareness
UBS strives to increase employee awareness of its corporate
responsibility processes, activities and commitments. Gener-
al information is published on the firm’s intranet and in em-
ployee magazines. In 2008, 2,800 employees participated in
training and awarenessraising activities dealing with corpo-
rate responsibility. Specific training is also given to staff
working in the areas of AML and environmental manage-
ment. It is mandatory for AML and compliance staff to com-
plete a training program every two years, and new joiners in
all UBS business divisions receive training in the issue of anti
corruption as part of their induction process. Furthermore, in
2008, 5,232 employees participated in training on environ-
mental issues, with 3,905 receiving general education on
UBS’s environmental policy and programs, mostly in induc-
tion training, and 1,327 employees receiving specialist train-
ing targeted at their area of expertise and impact.
Preventing money laundering, corruption and
terrorist financing
UBS takes its responsibility to preserve the integrity of the
financial system, and its own operations, very seriously. The
firm has developed extensive policies intended to prevent,
detect and report money laundering, corruption and terror-
ist financing. These policies seek to protect the firm, and its
reputation, from those who may intend to legitimize their
illgotten gains through UBS.
The GMLPU leads UBS’s efforts to fight money launder-
ing, corruption and the financing of terrorism. It does so by
continuously assessing the threats and risks that UBS faces
with respect to AML in all its businesses. It takes a riskbased
approach, ensuring the firm’s policies and procedures are
commensurate with those risks, and that relationships that
are classified as higher risk are dealt with appropriately. The
firm constantly engages with its business divisions to ensure
that these policies and procedures are adapted to their busi-
nesses and specific AML exposures, while also seeking to
streamline and increase consistency between business divi-
sions by using consistent methodologies and tools (for ex-
UBS’s corporate responsibility governance process
Corporate responsibility committee
Agenda
Documentation
Proposal for action
Advice
Mandate
for action
Corporate responsibility management
Corporate responsibility committee advisory panel
Network of
internal experts
Action
Investment
Bank
Global Wealth Management &
Business Banking
Global Asset
Management
Corporate
Center
1CR002_e
External
experts
62
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ample, the creation of a uniform country risk framework).
UBS also seeks to ensure its employees adhere to the firm’s
strict knowyourcustomer regulations, while at the same
time not treating clients a priori as criminals or undermining
their right to privacy. Employees regularly undergo training
in AMLrelated issues and new trends, be it through online
training, awareness campaigns or seminars. UBS also utilizes
advanced technology to assist in the identification of trans-
action patterns or unusual dealings.
Over the last few years, and as a core part of its riskbased
approach, UBS has been particularly vigilant about enhanc-
ing controls with regard to regimes and countries with
heightened risks. The need for increased vigilance has been
underscored by the acknowledgement by the Financial Ac-
tion Task Force (FATF) of the importance of country risk con-
siderations in the riskbased approach, increasing interna-
tional focus on corruption, and the need for the firm to
manage its global security risk activity. As a result of these
considerations, UBS has implemented a global sanctions pol-
icy, ceasing all business activities with a limited number of
countries.
In 2008, UBS continued its engagement with the public
sector and its peers to promote the development and imple-
mentation of AML standards for the financial industry as a
whole, thereby contributing to wider efforts against money
laundering. A notable achievement in this regard was made
by the Wolfsberg Group, where UBS actively contributed to
the FATF’s development of its Guidance Paper on Weapons
of Mass Destruction Proliferation Finance, as well as com-
pleting and on 14 January 2009 publishing its own trade fi-
nance principles paper. Wolfsberg Group’s work is ongoing
in the area of credit cards and stored value cards, the imple-
mentation of a new SWIFT message format to protect against
the abuse of cover payments and a review of the Group’s
2003 paper on monitoring, screening and searching.
Supply chain management
In 2008, UBS spent over CHF 6.9 billion purchasing a wide
range of products and services from suppliers and contrac-
tors around the world. UBS has established processes to
manage environmental and human rights issues in relevant
areas of its supply chain such as client gifts, IT equipment
and energy sourcing. In order to further incorporate these
issues into procurement processes, UBS has developed a
supply chain guideline, which provides Groupwide guid-
ance on identifying, assessing and monitoring supplier prac-
tices in the areas of human and labor rights, the environ-
ment and corruption. Examples of human rights issues that
have been included are avoidance of child and forced labor,
nondiscrimination, remuneration, hours of work, freedom
of association, humane treatment, and health and safety. In
2008, the guideline was gradually applied to new contracts
and contract renewals with suppliers. By the end of the year
around 100 suppliers had been screened according to the
guideline’s social and environmental criteria, and responsible
supply chain requirements were included in the contractual
arrangement with those suppliers who were awarded con-
tracts. Also, some 170 procurement and sourcing officers
were trained on the relevance and application of the new
guidelines.
Community investment
UBS, together with its employees, seeks to have a positive
influence on the social and environmental wellbeing of the
local communities in which it operates. The firm does this
through its community affairs program.
This program encompasses activities such as direct cash
donations to selected organizations, employee volunteer-
ing, matchedgiving schemes, inkind donations, disaster
relief efforts and / or partnerships with community groups,
educational institutions and cultural organizations. UBS has
dedicated teams around the world which work closely with
staff at all levels to build partnerships with organizations in
the communities, focusing on the key themes of “empow-
erment through education” and “building a stronger com-
munity”.
Overall, in 2008, UBS and its affiliated foundations do-
nated nearly CHF 46 million to support charitable causes.
UBS employees, through their donations and volunteer ef-
forts, also made significant contributions to the communities
they live in. Last year, almost 9,300 employees spent 84,700
hours volunteering. UBS supports their commitment by
matching their donations and offering up to two working
days a year for volunteering efforts.
UBS has also established a number of foundations and
associations that donate money to worthy causes in Switzer-
land. The association A Helping Hand from UBS Employees
helps disabled and disadvantaged people lead active, inde-
pendent lives. UBS encouraged this employee involvement
by matching the funds raised in 2008. The UBS Cultural
Foundation fosters creativity, appreciation of different forms
of art, and contact between artists and society. The founda-
tion provides financial support for fine arts, film, literature,
music, preservation of historic buildings, archaeological proj-
ects and research in history and philosophy in Switzerland. In
similar fashion, the purpose of the UBS Foundation for Social
Issues and Education is to support deprived communities in
Switzerland in various forms. Nonprofit, charitable organi-
zations, projects and initiatives aiming at improving social
welfare receive monetary assistance from these funds.
Client foundation
Besides the engagement of the firm and its employees, UBS
also provides its clients with the opportunity to contribute to
charitable causes. The UBS Optimus Foundation invests do-
nations from UBS clients into a number of programs and
63
Strategy, performance and responsibility
Corporate responsibility
Examples of UBS’s global community affairs in 2008
Americas: In partnership with
Northwestern University, UBS
launched a program to identify and
develop future leaders in the non
profit sector. According to the Donors
Forum of Chicago, the nonprofit
sector will see a large turnover in its
local and national executive leader-
ship in the next five years, with nearly
60% of executive directors set to
retire. This program produced its first
graduates in 2008 and four UBS
fellows took classes at Northwestern
and were mentored by a UBS senior
executive.
Asia Pacific: UBS launched the first
Community Leadership Experience
program at the India Service Centre in
Hyderabad. This initiative aims to build
the capacity of leaders from the
nonprofit sector using the expertise
and human resources of UBS and to
provide them with a platform for
dialogue, discussion, sharing and
learning. Modeled on UBS leadership
programs, it gave 20 promising young
leaders from the nonprofit sector a
chance to learn from UBS and external
speakers about topics related to
leadership, governance, strategic
planning, communication and
mentorship.
Switzerland: Twenty employees
volunteered for Procap Sport, an
organization that promotes enthusi-
asm for sport among people with
physical or mental disabilities.
Volunteers supported participants in a
broad range of sports activities. In
another volunteering project, 200 UBS
employees successfully participated at
the eighth Finance Forum charity run
to aid Kispex – a service providing
home care for very sick, disabled and
terminally ill children. UBS employees
came in first in terms of numbers of
participants and donations collected.
UK: UBS continues to support an
independent secondary school in
Hackney, newly established in 2007,
through the UK government’s
Academies program. A local school for
students of all abilities, The Bridge
Academy opened in September 2007
by welcoming 187 students, and by
2013 will cater to 1,150 students
including 250 sixth formers. The
school’s ambition is to create an
outstanding learning environment for
students, staff and the local commu-
nity. The Bridge Academy exemplifies
UBS’s commitment to improving the
provision of education and to
supporting regeneration efforts in the
London Borough of Hackney.
➔ Refer to www.ubs.com/
corporateresponsibility for more
information on UBS’s community
affairs program
organizations, focusing on the key themes of children and of
medical and biological research. The projects involve close
collaboration with respected partner organizations and are
selected by a team of specialists within the foundation, who
also closely monitor their implementation. The costs of man-
aging and administering the UBS Optimus Foundation are
borne by UBS, so that the full contribution of each client
reaches the projects. In 2008, the UBS Optimus Foundation
spent over CHF 17 million supporting 71 projects in Africa,
Asia Pacific, Europe and North and South America.
– seeking ways to reduce UBS’s direct environmental im-
pact on air, soil and water from inhouse operations, with
a primary focus on reducing greenhouse gas emissions.
UBS also assesses the environmental impact of its suppli-
ers’ products and services;
– ensuring efficient implementation of UBS’s policy through
a global environmental management system certified ac-
cording to ISO 14001 – the international environmental
management standard;
– integrating environmental considerations into internal
UBS and the environment
communications and training.
Environmental management system
Through its commitment to the environment, embodied in
its environmental policy, UBS aims to create longterm value
for the firm and its clients and the communities they live in.
The policy is based on five principles, under which the firm is
continuously:
– seeking to consider environmental risks in all UBS busi-
nesses, especially in lending, investment banking, advi-
sory and research, and UBS’s own investments;
– seeking to pursue opportunities in the financial markets
for environmentally friendly products and services, such
as socially responsible investments;
UBS’s environmental management system covers both its
banking activities and inhouse operations and has been
certified under the ISO 14001 standard since 1999. ISO
14001 requires that the system be audited annually and re
certified every three years. UBS successfully passed the ex-
tensive ISO 14001 recertification audit in 2008. Conducted
by Société Générale de Surveillance (SGS), 24 days of audits
involving 163 employees were undertaken. SGS confirmed
that a wellperforming environmental management sys-
tem, integrated in the organization and suitable for manag-
64
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The five principles of UBS’s environmental policy
Environmental policy
Environmental
risk management
Environmental
market opportunities
In-house ecology
Certified environmental management system
Training and communication
ing environmental risks and improving environmental per-
formance on a continual basis, is in place.
Environmental products and services
During the last ten years UBS has developed a range of
products and services that meet or anticipate clients’ needs
in environmental and socially responsible investments (SRI).
This offering currently stretches across UBS’s businesses in
wealth management, investment banking, asset manage-
ment, and retail and commercial banking. It includes SRI
funds, research and advisory services provided to private
and institutional clients, access to the world’s capital mar-
kets for renewable energy firms and, in Switzerland,
“green” mortgages.
Investment products and advisory
In 2008, UBS continued to expand its SRI offering in response
to growing demand from a number of markets, including
the launch of two new SRI products, the UBS (Lux) Equity
Sicav – Emerging Markets Innovators and the UBS Strategy
Certificate Energy Efficiency. UBS’s SRI offering is diverse and
includes products managed according to “bestinclass”
practices and themebased approaches. “Bestinclass” is an
active equity management approach that is based on stock
selection of companies that generate aboveaverage envi-
ronmental, social and economic performance. The “bestin
class” offering includes a global fund and a European fund.
The themebased approach focuses investment on segment-
ed climate change, water and demographics strategies.
Additionally, UBS offers customized client portfolios in
1CR003_e
the form of segregated mandates / institutional accounts
based on “negative” screening, which excludes certain con-
troversial stocks or sectors from the portfolio based on their
negative social or environmental impact as perceived by the
client. UBS’s global platform and investment research enable
the firm to offer such tailormade solutions. In the UK, the
asset management business seeks to influence the corporate
responsibility and corporate governance practices of the
companies it invests in. In addition to fund management ser-
vices, UBS provides stockbroking and account management
services to alternative energy and SRI fund managers.
Finally, UBS also offers SRI portfolio management solu-
tions to selected private client segments. This offering pools
internal and external SRI expertise and includes SRIfocused
portfolios in Switzerland and SRImanaged accounts in the
US. UBS’s open architecture approach also allows clients to
invest in SRI bond, equity and microfinance products from
thirdparty providers.
In the past years UBS experienced increased client de-
mand for SRI and expanded its SRI product offering, result-
ing in a significant increase in UBS SRI invested assets. In
2008 these SRI invested assets decreased significantly year
on year, primarily due to severe corrections in the global eq-
uity markets (equities is the preferred asset class of UBS’s SRI
products), but also due to asset outflows.
Socially responsible investments invested assets 1
For the year ended
% change
from
CHF billion, except where indicated
UBS
UBS SRI 3 products and mandates
positive criteria
exclusion criteria
Third-party
Total SRI invested assets
Proportion of total invested assets (%) 4
GRI 2 31.12.08
2,174
FS11
FS11
FS11
FS11
2.12
14.05
1.85
18.03
0.83%
31.12.07
31.12.06
31.12.07
3,189
2,989
5.20
33.33
1.08
39.61
1.24%
1.84
16.17
N/A
18.01
0.60%
(32)
(59)
(58)
72
(54)
1 All figures are based on the level of knowledge as of January 2009. 2 Global reporting initiative (GRI) (see also
www.global reporting.org). FS stands for the performance indicators defined in the GRI Financial Services Sector Supplement.
3 Socially responsible investments (SRI). 4 Total SRI / UBS’s invested assets.
Positive criteria: apply to the active selection of
companies, focusing on how a company’s strategies,
processes and products impact its financial success, the
environment and society. This includes best-in-class or
thematic investments.
Exclusion criteria: companies or sectors are excluded
based on environmental, social or ethical criteria, for
example, companies involved in weapons, tobacco,
gambling, or companies with high negative environmental
impacts. This also includes faith-based investing consistent
with principles and values of a particular religion.
Third-party: UBS’s open product platform gives clients
access to socially responsible investment products from
third-party providers. This includes both positive and
exclusion criteria, and microfinance investments.
65
Strategy, performance and responsibility
Corporate responsibility
Research
UBS’s SRI research teams analyze emerging socioeconomic
and environmental trends and assess their potential impact
on investment markets and companies’ share prices. Identi-
fying material SRI issues is challenging. Essentially, three
things help determine which environmental and social issues
are critical: society’s perception of what is important; the na-
ture of the competitive pressures facing firms in an industry;
and how costs and benefits are (or will be) distributed be-
tween stakeholders.
The UBS SRI research teams were established in each of the
firm’s divisions to serve their respective clients. In the Invest-
ment Bank, the equity research team writes recommendations
and reports for institutional investment clients on renewable
energy, the carbon markets and the impact of climate change
on companies in a wide range of sectors. SRI and sustainabil-
ity research is provided by a dedicated team. In the asset man-
agement business, an internal SRI research team manages
portfolios around themes such as climate change / energy ef-
ficiency, water and demographics. The SRI research team in
UBS’s wealth management business conducts SRI research and
provides advice to private clients on SRI investment solutions.
Client interest in some aspects of SRI – for instance cli-
mate change, demographics and water – has grown, and so
has research coverage. The SRI teams regularly collaborate
with analysts in other teams to write about emerging SRI
themes, and relevant research content is regularly published
by a growing number of specialists within the mainstream
research effort. In 2008, for example, UBS published the re-
port “Mind over Matter”, which broadly examines the issue
of resources efficiency, and makes the case that higher prices
for basic necessities, urbani zation, and more stringent cli-
mate change policies will eventually yield benefits to those
who invest in efficiency upgrades.
Financing and advisory services
UBS’s renewable energy investment banking business ar-
ranges financing and provides strategic and financial advi-
sory services for companies in the solar, wind, wave and oth-
er renewable energy sectors. Since 2006, UBS has led over
30 financing transactions in these sectors, raising over USD
7 billion for renewable energy companies worldwide. In
2008, to name just one example of such a transaction, UBS
acted as the joint global coordinator and joint bookrunner
for the EUR 1.8 billion initial public rights offering of the
wind generation company EDP Renováveis, one of the larg-
est wind generation companies in the world and a subsidiary
company of Portuguese utility Energias de Portugal (EDP).
Carbon trading
In cap and trade emissions markets, such as the EU Emissions
Trading Scheme (EU ETS), companies have annual caps on
the amount of emissions their facilities are allowed to pro-
duce. Companies who are able to reduce their emissions be-
low their cap have the ability to sell their unused quota to
other companies, thereby creating an emissions market.
Through the use of financial instruments, UBS is able to help
clients manage their exposure to the emissions markets. UBS
ETD (Exchange Traded Derivatives) is an active member of
and offers execution and full service clearing on the major
emission exchanges in Europe and North America for con-
tracts on EU ETS allowances (EUA), UN Certified Emissions
Reductions (CER), Regional Greenhouse Gas Initiative allow-
ances, CCX Carbon Financial Instruments (CFI) and Nitrogen
Oxide and Sulfur Dioxide.
Environmental risk management
UBS seeks to identify, manage and control environmental
risks in its business transactions. Examples of environmental
risk include the impairment of a client’s cash flow or assets
by environmental factors (such as inefficient processes or
property that is polluted or contaminated) or through liabil-
ity risk, such as when a bank takes environmentally unsound
collateral onto its own books. As environmental risks can
manifest themselves across the wide variety of risks inherent
in UBS’s business activities, including credit risks, liability risks
and reputational risks, UBS has designed environmental pro-
cedures and tools for their identification, management and
control. These environmental procedures and tools are inte-
grated into existing processes, such as due diligence on
transactions or investments and ongoing risk management.
UBS continues to develop and test internal industry sector
guidelines to support the consistent identification and as-
sessment of environmental and social risks in all its banking
activities. The sector guidelines cover industry sectors that
have a high potential for environmental and social risk and
summarize industry standards for dealing with potential is-
sues in the various life cycles of the sector.
Not all products and services provided by UBS have the
same risk potential: UBS therefore takes a riskbased ap-
proach to environmental risk management and regularly an-
alyzes its portfolio of products and services to assess their
respective potential environmental risk potential. With its
current business profile and operating environment, UBS’s
potential for material risk is greater within the context of its
lending and capital markets businesses, as well as its direct
real estate and infrastructure investments. As a result, Global
Wealth Management & Business Banking has introduced a
standardized environmental risk check to identify material
environmental risk in its lending to all relevant clients, includ-
ing its roughly 140,000 corporate clients in Switzerland. In
the Investment Bank, the environmental risk framework cov-
ers all banking activities including debt and equity under-
66
writing, financial advisory services and lending. For its part,
Global Asset Management has put environmental due dili-
gence processes in place for its real estate and infrastructure
funds. If significant potential environmental risks are identi-
fied in a transaction, the risks are assessed. Wherever possi-
ble, UBS seeks to engage with the client to discuss possible
mitigating measures. Where this is not possible or success-
ful, the firm may decline the transaction altogether.
Global Wealth Management & Business Banking
The business division assesses its environmental risks in a
threestage process. Client advisors complete the first
screenings, looking at financial risks linked to environmen-
tal aspects such as compliance with environmental legis
lation, workplace safety, contaminated sites and natural
hazards. In 2008, close to 100,000 lending transactions in
Switzerland were subject to such a screening. If the risks
cannot be fully ruled out during the first screening, a credit
officer initiates a second screening and decides whether
the risks identified are transparent enough for the credit
decision to be taken. Transactions entailing significant envi-
ronmental risk undergo a detailed environmental assess-
ment as a third step, a service provided by the business divi-
sion’s environmental risk competence center. In 2008, 32
such detailed assessments took place and 134 client advi-
sors and credit officers were trained.
Investment Bank
The Global Environmental Risk Guidelines apply to all trans-
actions, services and activities within the Investment Bank.
The guidelines are supported by an environmental risk frame-
work that is integrated into the business division’s due dili-
gence and approval processes. Investment Bank staff identify
potential environmental risks in the initial due diligence
phase and alert the Investment Bank’s environmental advi-
sory group (EAG) in case of significant potential risks. Assess-
ments by lawyers and / or external consultants are routinely
sought for certain sectors and products. The EAG works with
the relevant business and control functions (80 transactions
in 2008) to assess the risks, determine any mitigating mea-
sures and direct further due diligence, as required. In this
way the relevant senior business committee may fully con-
sider the potential environmental risk in the course of its re-
view of the transaction and / or client. The implementation of
the environmental risk framework is supported by training
and awarenessraising activities. In 2008, sectorspecific
training was provided to 443 bankers and support functions
and highlevel training to a further 107 employees.
Global Asset Management
The business division introduced a formal environmental risk
matrix in 2004 in order to assess the reputational and envi-
ronmental risks that investments made by UBS on behalf of
its clients might imply. The matrix is reviewed annually for
applicability and comprehensiveness and forms part of the
environmental management system employed within the
business division. In 2008, all properties acquired or devel-
oped by Global Real Estate for its direct investment vehicles
were subject to a thorough environmental due diligence pro-
cess, in accordance with local regulations and internal best
practice guidance. Similar processes are in operation in Infra-
structure Asset Management.
Environmental and CO2 footprints
UBS directly impacts the environment in a number of ways:
its businesses consume electricity; employees travel for busi-
ness purposes and use paper and generate waste in the
course of their work; and offices require heating and cooling
systems. Improving the use of these resources can reduce
costs and enhance environmental performance, and UBS
therefore has a series of measures to efficiently manage its
environmental impact.
CO2 strategy and emission reduction
The GEB decided in February 2006 to set a Groupwide CO2
emission reduction target of 40% below 2004 levels by
2012. UBS seeks to achieve this target by:
– adopting inhouse energy efficiency measures that reduce
energy consumption in buildings it operates;
– increasing the proportion of renewable energy used to
avoid emissions at source;
– offsetting and neutralizing emissions that cannot be re-
duced by other means.
UBS’s CO2 footprint
In tons CO2
Share of renewable energy (in %)
2004
2005
2006
2007
2008
Total:
360,502
372,184
293,169
281,705
264,197
400,000
300,000
200,000
100,000
0
45
48
34
24
23
100
75
50
25
0
emissions (oil, gas, fuels)
Indirect CO
²
emissions (electricity)
emissions (travel incl. offsetting, paper, waste)
Direct CO
²
Other indirect CO
²
Share of renewable energy (in %)
67
y
t
i
l
i
b
i
s
n
o
p
s
e
r
d
n
a
e
c
n
a
m
r
o
f
r
e
p
,
y
g
e
t
a
r
t
S
98,918
111,773
31,635
36,323
219,727
225,854
230,015
218,681
41,858
34,556
31,519
26,701
1CR006_e
100
75
50
500000
437500
375000
312500
250000
187500
125000
62500
0
25
0
Strategy, performance and responsibility
Corporate responsibility
These measures allowed UBS to further increase the share
of renewable energy it purchases, and to reduce its 2008
CO2 emissions by 27% compared with 2004, another step
toward achieving the 40% reduction target by 2012.
Energy consumption and energy efficiency
Energy consumption represents an important environmental
impact area for UBS and is the biggest contributor to its
overall greenhouse gas emissions. UBS has a long track re-
cord of managing its energy consumption, with the firm es-
tablishing its first energy management function in the 1970s.
Today, energy efficiency measures are an important compo-
nent of UBS’s program for achievement of the Groupwide
CO2 emission reduction target. Measures include invest-
ments in energyefficient technology and encouraging good
housekeeping measures. For example, a major IT server con-
solidation project has been under way since 2007 which has
reduced the total number of distributed servers at UBS by
2,200. The project focused on consolidating applications sit-
ting on multiple old servers to fewer, newer machines and
the decommissioning of old applications. The resulting en-
ergy savings of 17 GWh contributed significantly to the total
of 25 GWh of savings from IT activities since 2007 (repre-
senting around 3% of UBS’s global power consumption).
Renewable energy
In addition to its energy efficiency programs, UBS seeks to
improve the energy mix it purchases by including a higher
proportion of renewable energy. The percentage of renew-
able energy and district heating purchases rose from 24% in
2004 to 48% in 2008.
Since 2007, roughly 210 GWh or 90% of the electricity
supply for UBS’s buildings in Switzerland has come from re-
newable sources, such as water and solar power stations.
Similarly, in the UK, UBS purchases electricity backed by
100% renewable sources for all its major buildings, repre-
senting 85% of the total volume. In addition, UBS purchases
renewable energy credits (RECs) in the US electricity mar-
kets, which accounted for 16% of its electricity consumption
in the US in 2008.
Business travel and offsetting
Business travel is a significant contributor to UBS’s green-
house gas emissions. While the firm encourages its employ-
ees to use environmentally friendly alternatives to air and
road travel, for example video conferences, travel is essential
for a global financial services firm that strongly believes in
personalized client relationships. Therefore, since 2006, UBS
has offset emissions from businessrelated air travel, repre-
senting roughly 100,000 tons of CO2 per year, or about a
quarter of its total annual CO2 emissions. Offsetting emis-
sions means that UBS indirectly neutralizes its business air
travel emissions by investing in thirdparty projects that re-
duce an equivalent amount of greenhouse gas emissions.
UBS selected offsetting projects in Brazil, Russia, India, Chi-
na, Turkey and Germany, on the basis of their adherence to
international quality standards such as the Voluntary Carbon
Standard and the Gold Standard, and of their additional en-
vironmental and social benefits.
Paper and waste
UBS continues to work towards achieving its firmwide tar-
gets for paper use and waste reduction. This includes the
goal of reducing paper consumption per employee by 5%
for 2009 when compared with 2006 levels. UBS also aims
to have 20% of the paper it uses come from recycled sourc-
es. UBS has made steady progress towards achieving these
paper targets, for example by switching across Europe to a
100% recycled paper for all internal printing, and through
continuing improvements in electronic distribution of client
statements. At the same time, the firm seeks to improve its
environmental footprint by reducing waste per employee
(for example, plastic bottles or packaging) by 10% and by
sending 70% of waste to recycling sites. These latter tar-
gets are proving to be challenging in certain regions as they
heavily rely on behavioral changes rather than technical
measures or processes. UBS will continue to educate its em-
ployees on environmental matters, helping them make the
right choices and promoting sustainable behavior both at
work and at home.
➔ Refer to www.ubs.com/environment for more information
on UBS’s environmental management system
Environmental indicators per full-time employee
Total direct and intermediate energy
Total business travel
Total paper consumption
Total waste
Total water consumption
Unit
kWh / FTE
Pkm / FTE
kg / FTE
kg / FTE
m3 / FTE
2008
11,792
10,281
167
298
28.1
Trend
➙
➙
➚
CO2 footprint
Legend: FTE = full-time employee; kWh = kilo watt hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = ton
t / FTE
3.07
2007
11,942
12,685
190
299
26.7
3.43
2006
12,736
12,544
188
303
26.0
3.93
68
y
t
i
l
i
b
i
s
n
o
p
s
e
r
d
n
a
e
c
n
a
m
r
o
f
r
e
p
,
y
g
e
t
a
r
t
S
Environmental indicators 1
Total direct and intermediate energy consumption 7
Total direct energy consumption 8
natural gas
heating oil
fuels (petrol, diesel, gas)
renewable energy (solar power, etc.)
Total intermediate energy purchased 9
electricity from gas-fired power stations
electricity from oil-fired power stations
electricity from coal-fired power stations
electricity from nuclear power stations
electricity from hydroelectric power stations
electricity from other renewable resources
district heating
Share of renewable energy and district heating
GRI 3
Absolute
normalized 4
1,016 GWh
EN3
127 GWh
83.3%
12.2%
4.5%
0.03%
EN4
890 GWh
11.7%
3.7%
18.4%
11.1%
25.8%
23.1%
6.2%
48%
Total business travel
EN29
886 m Pkm
rail travel 10
road travel 10
air travel
Number of flights (segments)
Total paper consumption
post-consumer recycled
new fibers FSC 11
new fibers ECF + TCF 11
new fibers chlorine bleached
Total waste
valuable materials separated and recycled
incinerated
landfilled
Total water consumption
Total CO2 footprint 12
total direct CO2 emissions (GHG scope 1) 13
total indirect CO2 emissions (GHG scope 2) 13
total other indirect CO2 emissions (GHG scope 3) 13
total CO2e offsets (business air travel) 14
EN1
EN2
3.5%
0.6%
96.0%
398,369
14,403 t
16.2%
16.6%
66.8%
0.4%
EN22
25,644 t
54.6%
14.3%
31.1%
2.42 m m3
264,197 t
26,490 t
204,344 t
129,364 t
96,000 t
EN8
EN16
EN16
EN17
2008 2
Data
quality 5
***
**
**
***
***
***
***
**
***
**
**
***
***
***
***
***
**
**
***
***
***
***
***
***
**
***
***
***
**
**
***
***
**
***
***
Trend 6
➙
➙
➙
➙
➙
➘
➙
➙
➙
➘
➙
➙
➚
➙
➙
➘
➙
➙
➘
➚
➚
➘
➙
➙
2007 2
Absolute
normalized 4
981 GWh
2006 2
Absolute
normalized 4
951 GWh
130 GWh
154 GWh
83.3%
12.1%
4.6%
0.03%
85.5%
11.8%
2.7%
0.03%
851 GWh
797 GWh
12.3%
4.2%
18.6%
13.6%
25.5%
22.0%
3.8%
45%
13.2%
4.5%
21.7%
20.5%
21.4%
12.7%
6.0%
34%
1,042 m Pkm
936 m Pkm
3.3%
0.5%
96.2%
446,274
15,593 t
10.5%
10.7%
78.6%
0.2%
4.1%
0.6%
95.3%
402,629
14,013 t
6.2%
0.0%
93.8%
0.0%
24,589 t
22,631 t
56.3%
15.8%
27.9%
2.19 m m3
281,705 t
26,701 t
218,681 t
149,323 t
113,000 t
58.2%
12.7%
29.1%
1.94 m m3
293,169 t
31,519 t
230,015 t
132,635 t
101,000 t
Legend: GWh = giga watt hour; Pkm = person kilometer; t = ton; m3 = cubic meter; m = million
1 All figures are based on the level of knowledge as of January 2009. 2 Reporting period: 2008 (1 July 2007–30 June 2008), 2007 (1 July 2006–30 June 2007), 2006 (1 July 2005–30 June 2006).
3 Global reporting initiative (see also www.globalreporting.org). “EN” stands for the environmental performance indicators as defined in the GRI. 4 Non-significant discrepancies from 100% are pos-
sible due to roundings. 5 Specifies the estimated reliability of the aggregated data and corresponds approximately to the following uncertainty (confidence level 95%): up to 5% – ***, up to 15% – **,
up to 30% – *. “Uncertainty” is the likely difference between a reported value and a real value. 6 Trend: at a *** / ** / * data quality, the respective trend is stable (➙) if the variance equals 5 / 10 / 15%,
low decreasing / increasing (➘,➚) if it equals 10 / 20 / 30% and decreasing / increasing if the variance is bigger than 10 / 20 / 30% ( , ). 7 Refers to energy consumed within the operational boundaries
of UBS. 8 Refers to primary energy purchased which is consumed within the operational boundaries of UBS (oil, gas, fuels). 9 Refers to energy purchased that is produced by converting primary en-
ergy and consumed within the operational boundaries of UBS (electricity and district heating). 10 Rail and road travel: Switzerland only. 11 Paper produced from new fibers. “FSC” stands for Forest
Stewardship Council, “ECF” for elementary chlorine free and “TCF” for totally chlorine free. 12 CO2 footprint equals total CO2 emissions (GHG scope 1, 2 and 3) minus CO2e offsets.
13 Refers to ISO 14064 and the “GHG (greenhouse gas) protocol initiative” (www.ghgprotocol.org), the international standards for CO2 reporting: Scope 1 accounts for direct CO2 emissions by UBS;
Scope 2 accounts for indirect CO2 emissions associated with the generation of imported / purchased electricity, heat or steam; Scope 3 accounts for indirect CO2 emissions associated with business
travel, paper consumption and waste disposal. 14 Offsets from third-party GHG reduction projects measured in CO2 equivalents (CO2e). These offsets neutralize CO2 emissions from business air travel.
69
Strategy, performance and responsibility
Corporate responsibility
70
UBS business divisions and
Corporate Center
UBS business divisions and Corporate Center
– As announced on 10 February 2009, Global Wealth Management & Business
Banking has been divided into two business divisions: Wealth Management &
Swiss Bank and Wealth Management Americas.
– The Investment Bank underwent a detailed strategic review in 2008.
The result was a repositioning of the business division, personnel and cost
reductions and a refocusing of the business division’s activities and businesses.
Global Wealth Management & Business Banking
Wealth Management International & Switzerland
recorded a pre-tax profit of CHF 3,601 million in 2008, a
decrease from the record profit of CHF 6,310 million in
2007. This is partially due to a provision of CHF 917 million
in connection with the US cross-border case. During this
period:
Net new money outflows were CHF 101.0 billion compared
with inflows of CHF 125.1 billion. Invested assets declined
to CHF 870 billion from CHF 1,294 billion. The gross
margin on invested assets fell six basis points to 97 basis
points. The cost / income ratio increased to 63.1% from
51.1%.
Wealth Management US recorded a pre-tax loss of
CHF 810 million in 2008, compared with a pre-tax profit of
CHF 674 million in 2007. 2008 included auction rate
securities-related charges of CHF 1,636 million. During this
period:
Net new money outflows were CHF 10.6 billion compared
with inflows of CHF 26.6 billion. Invested assets declined to
CHF 600 billion from CHF 840 billion. The gross margin on
invested assets increased five basis points to 82 basis
points. The cost / income ratio increased to 113.4% from
89.9%. Recurring income declined 8% to CHF 3,835 million.
Revenues per advisor decreased to CHF 721,000 from
CHF 828,000.
Business Banking Switzerland recorded a pre-tax profit
of CHF 2,449 million, up CHF 182 million from 2007.
During this period:
Net new money outflows were CHF 11.4 billion compared
with inflows of CHF 4.6 billion. Invested assets declined
to CHF 129 billion compared with CHF 164 billion. The
cost / income ratio decreased to 51.2% from 57.7%. The
loan portfolio declined 2% to CHF 143 billion. The ratio of
the impaired gross lending portfolio to the total gross
lending portfolio improved to 1.0% from 1.2%.
UBS reporting structure in 2008
Global Asset Management
Investment Bank
Corporate Center
Global Wealth Management
& Business Banking
Wealth Management
International & Switzerland
Wealth Management US
Business Banking Switzerland
1FP002_e
Industriebeteiligungen
Private Equity
Performance from continuing operations before tax
CHF million
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Wealth Management & Business Banking
Global Asset Management
Investment Bank
Corporate Center
For the year ended
% change from
31.12.08
31.12.07
31.12.06
3,601
(810)
2,449
5,240
1,333
(34,300)
(31)
6,310
674
2,267
9,251
1,454
(16,669)
2,222
5,197
542
2,281
8,020
1,320
5,568
(789)
31.12.07
(43)
8
(43)
(8)
(106)
(101)
Global Asset Management
Investment Bank
Pre-tax profit decreased 8% to CHF 1,333 million in 2008
from CHF 1,454 million in 2007. During this period:
Pre-tax loss of CHF 34,300 million in 2008, compared with
a pre-tax loss of CHF 16,669 million in 2007. During this
period:
Net new money outflows were CHF 103.0 billion compared
with CHF 15.7 billion. Institutional invested assets declined
to CHF 335 billion compared with CHF 522 billion.
Wholesale intermediary invested assets fell to CHF 240
billion compared with CHF 369 billion. The gross margin on
institutional invested assets declined six basis points to 38
basis points. The gross margin on wholesale intermediary
invested assets fell six basis points to 41 basis points. The
cost / income ratio was 54.1% compared with 64.5%.
The cost / income ratio and compensation ratio remained
not meaningful due to negative overall results in both
years. Average regulatory Value at Risk (VaR) (10-day, 99%
confidence, five years of historical data) was CHF 374
million compared with CHF 514 million. The ratio of the
impaired gross lending portfolio to the total gross lending
portfolio was 3.6%, up from 0.4%.
Corporate Center
The Corporate Center produced a slightly negative result
of CHF 31 million in 2008 from continuing operations,
compared with a gain of CHF 2,222 million in 2007.
During this period, total operating income decreased to
CHF 998 million from CHF 3,562 million and total
operating expenses declined to CHF 1,029 million from
CHF 1,340 million.
UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
Global Wealth Management & Business Banking
Global Wealth Management & Business Banking is a leading global provider of financial services for wealthy
clients and the leading bank for individual and corporate clients in Switzerland.
Business division reporting
CHF million, except where indicated
Income
Credit loss (expense) / recovery
Total operating income
Cash components
Share-based components 1
Total personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Business division performance before tax
Key performance indicators
Cost / income ratio (%) 2
Attributed equity and risk-weighted assets
Average attributed equity (CHF billion) 3
Return on attributed equity (RoaE) (%) 4
BIS risk-weighted assets (CHF billion) 5
Return on BIS risk-weighted assets (%) 6
Goodwill and intangible assets (CHF billion) 7
Additional information
Invested assets (CHF billion)
Net new money (CHF billion) 8
Client assets (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
31.12.08
21,690
31.12.07
24,841
31.12.06
21,775
109
21,884
9,074
377
9,451
3,078
1,040
232
63
13,864
8,020
28
24,869
10,564
444
11,008
3,178
1,106
241
85
15,618
9,251
62.9
63.7
169.7
5.6
5.8
2,298
156.3
3,554
51,243
155.2
5.3
6.0
2,123
114.5
3,337
48,200
% change from
31.12.07
(13)
(14)
(13)
(58)
(15)
69
(16)
8
15
3
(43)
(30)
(33)
(3)
(421)
21,269
9,191
187
9,378
5,367
926
261
98
16,030
5,240
73.9
17.3
30.4
89.2
5.8
6.2
1,599
(123.0)
2,393
49,541
1 Includes social security contributions and expenses related to alternative investment awards. 2 Operating expenses / income. 3 Refer to the “Capital management” section of this report for more
information about the equity attribution framework, which was implemented in 2008. 4 Business division performance before tax / average attributed equity. 5 BIS risk-weighted assets (RWA) are
according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006. 6 Business division performance before tax / average BIS RWA. 7 2007 and 2006 represent goodwill and
intangible assets in excess of 4% of BIS tier 1 capital. 8 Excludes interest and dividend income.
74
Global Wealth Management & Business Banking business portfolio
Incremental profitability
Established
international
markets
Corporate &
retail banking
in Switzerland
Wealth
Management
Switzerland
Continue earnings growth to achieve
top peer profitability
Wealth Management Americas
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Continued investments to drive
top-line growth
International growth markets
Achieve break-even and subsequently
match peer profitability
Optimize break-even targets
European domestic markets
Other domestic markets, including start-ups
Market growth
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Business
A global branch network delivers comprehensive financial
services to wealthy private individuals around the world and
to private and corporate clients in Switzerland. All clients are
provided with the advice, financial products and tools that fit
their individual needs.
Strategy
The cornerstones of this business division’s strategy are:
– to strengthen its global leadership in wealth management
by actively investing in fast-growing markets and devel-
oping a strong focus on high and ultra-high net worth
clients;
– to position UBS as the universal bank of choice in Switzer-
land by strengthening its position across all client seg-
ments, as well as developing clients across segments and
therefore each client relationship to its full potential; and
– to maximize risk-adjusted profits by a balanced focus on
top-line growth, risk and efficiency.
UBS places great emphasis on differentiating strategies
for individual markets according to their profitability and
growth potential. In the international markets where UBS is
well established with a high market share and in Switzer-
land, the focus is on maximizing productivity and profitabil-
ity as the growth prospects are less high. For domestic busi-
nesses within the five biggest European economies, UBS
aims to increase profitability. For the key domestic US pres-
ence, UBS concentrates on continuing earnings growth and
achieving profitability comparable with the best of its peer
group. In those international markets which have been
expanding strongly (for example, Asia, Eastern Europe, Latin
America and the Middle East), UBS will continue to invest
actively in order to tap their long-term growth potential. In
addition, within the next seven to 10 years UBS plans to
establish a significant domestic presence in select markets
where its business is not yet mature.
Organizational structure
Formed on 1 July 2005, this business division encompassed
UBS’s global wealth management businesses and the Swiss
corporate and retail banking unit. Throughout 2008, until
the recent reorganization, it comprised the following busi-
ness units: Wealth Management International & Switzerland,
serving wealthy and affluent clients around the world, except
domestic clients in the US; Wealth Management US, serving
wealthy and affluent domestic US clients; and Business Bank-
ing Switzerland, serving retail and corporate clients in Swit-
zerland. Each of these business units is provided with infra-
structure, products and services by the business division’s
support functions, which also provide services to other UBS
business divisions under a transfer pricing mechanism.
On 10 February 2009, UBS announced a reorganization of
its global wealth management and Swiss business banking
businesses. Global Wealth Management & Business Banking
has been divided into two new business divisions: Wealth
Management & Swiss Bank, which comprises all wealth man-
agement business booked outside the Americas plus the
Swiss private and corporate client business; and Wealth Man-
agement Americas, including Wealth Management US, the
domestic Canadian and Brazilian businesses, as well as the
international business booked in the United States.
This new management structure will be the basis for the
business division’s segment reporting starting with UBS’s
75
UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
Current reporting structure (on 31 December 2008)
2BD033_e
Global Wealth Management & Business Banking
Business Banking Switzerland
Wealth Management
International & Switzerland
Wealth Management US
Swiss clients
International clients
New reporting structure (from first quarter 2009 onwards)
Wealth Management & Swiss Bank
Wealth Management Americas
Swiss clients1
International clients 2
Full profit and loss disclosure
Supplementary disclosure of revenue lines and selected key performance indicators
1 Includes “Swiss Bank” and “Corporate and Institutional Banking”. 2 Includes “Wealth Management International” and “Wealth Management Global”.
➔ Prior to publication of first quarter 2009 results, UBS
will publish restated business division results on
www.ubs.com/investors showing quarterly and annual
results for 2007 and 2008 under the new organizational
structure announced on 10 February 2009.
financial report for first quarter 2009. UBS will provide sepa-
rate segment reporting for Wealth Management & Swiss
Bank and Wealth Management Americas. UBS has chosen to
subdivide Wealth Management & Swiss Bank into Swiss and
international business areas for reporting purposes (income
data and key performance indicators):
– “Swiss clients” will cover services provided to Swiss retail,
wealth management and small businesses, as well as
corporate and institutional clients.
– “International clients” will encompass the international
wealth management business conducted out of Switzer-
land and all wealth management businesses of UBS’s
other booking centers in Asia and Europe.
76
Wealth Management International & Switzerland
Business description
Business
Wealth management solutions are delivered via this business
unit’s global branch network and through financial interme-
diaries. In addition to the specific wealth management prod-
ucts and services outlined below, clients benefit from UBS’s
entire range of resources, from asset management to estate
planning and corporate finance advice. An open product
platform gives clients access to a wide array of pre-screened,
top-quality products from third-party providers that comple-
ment UBS’s own product lines. On 31 December 2008, in-
vested assets were CHF 870 billion.
Organizational structure
Throughout 2008, until the recent reorganization, this busi-
ness unit comprised the following areas: Asia Pacific; Latin
America, the Mediterranean, the Middle East and Africa;
North, East and Central Europe; and Switzerland. The exten-
sive wealth management branch network consisted of 5,755
client advisors, around 110 offices in Switzerland and more
than 100 offices worldwide.
Competitors
Major competitors of this business unit include globally
active wealth managers, such as the wealth management
operations of Credit Suisse, HSBC and Citigroup. The busi-
ness unit also competes with private banks that operate
mainly within their respective domestic markets, such as
Coutts in the UK, Deutsche Bank AG and Sal. Oppenheim in
Germany, Unicredit in Italy, and Swiss banks focused on in-
ternational clients (such as Julius Baer and Pictet).
Clients and markets
The following client segments are offered sophisticated
products and services specifically designed to address their
needs: international core affluent clients with investable as-
sets of CHF 250,000 to CHF 2 million; high net worth clients
with investable assets of up to CHF 5 million; private wealth
management clients with investable assets of CHF 5 million
to CHF 50 million; and ultra-high net worth clients with in-
vestable assets of more than CHF 50 million. The business
unit also provides financial intermediaries, both inside and
outside Switzerland, with UBS’s wealth management solu-
tions, products and services.
Products and services
The business unit offers expert financial advice to support
clients throughout the different stages of their lives. Wealth
planning advice is also given on topics such as the funding of
education, gift giving, inheritance and succession. Corporate
finance advice is offered to support clients in the process of
disposing of corporate assets. Clients can also trade a full
range of financial instruments, from single securities, such as
equities and bonds, to structured products and alternative
investments. The business unit also fulfills the basic banking
needs of private clients with a wide variety of products, rang-
Invested assets by asset class
In %, except where indicated
Invested assets by currency
In %, except where indicated
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31.12.06
31.12.07
31.12.08
Total:
CHF 1,138 billion
CHF 1,294 billion
CHF 870 billion
7
21
18
18
14
22
7
23
18
16
13
23
6
22
15
14
17
26
On
100
75
50
25
0
Accounts, money markets , fiduciary investments
Bonds
UBS mutual funds
Equities
Other (including structured products and alternative investments)
External mutual funds
On
100
75
50
25
31.12.06
31.12.07
31.12.08
Total:
CHF 1,138 billion
CHF 1,294 billion
CHF 870 billion
7
7
17
33
36
10
6
15
33
36
8
5
16
35
36
0
2BD004_e
USD
EUR
CHF
GBP
Others
2BD005_e
77
100
75
50
25
0
100
75
50
25
0
UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
Loan penetration
CHF billion, except where indicated
Invested assets by client domicile
In %, except where indicated
On
100
75
50
25
0
31.12.06
31.12.07
31.12.08
On 31.12.08
Total: CHF 682 billion
6.5%
74
84
6.6%
8.2%
71
9.0%
4.5%
8
19
17
2BD003_e
0.0%
Wealth Management International
Europe
56
The Americas
Asia Pacific
Middle East / Africa
Loans
Loan penetration
2BD006_e
Invested assets by client wealth
In %, except where indicated
8.999991
8.249991
7.499992
6.749993
5.999994
5.249995
4.499995
3.749996
2.999997
2.249998
1.499998
0.749999
0.000000
26
On 31.12.08
46
17
11
Total: CHF 870 billion
< CHF 1 million
CHF 1–5 million
CHF 5–10 million
> CHF 10 million
99.999962
91.666632
83.333302
74.999971
66.666641
58.333311
49.999981
41.666651
33.333321
24.999990
16.666660
8.333330
0.000000
2BD007_e
ing from cash accounts and savings accounts to credit cards,
mortgages and securities-backed lending.
By aggregating private investment flows into institution-
al-size flows, the business unit is in a position to offer its
private clients access to investments that would otherwise
only be available to institutional clients. Expertise is sourced
either from within UBS or from the external market.
Both discretionary and non-discretionary mandates are
offered. Clients who opt for a discretionary mandate dele-
gate the management of their assets, including investment
decisions, to a team of professional portfolio managers who
work according to an agreed investment strategy. Clients
who prefer to be actively involved in the management of
their assets can choose a non-discretionary mandate, where
investment professionals provide analysis and monitoring of
portfolios, together with tailor-made proposals to support
investment decisions.
78
Settlement regarding the US cross-border case
As announced on 18 February 2009,
UBS settled the US cross-border
case with the US Department of
Justice (DOJ) and the US Securities and
Exchange Commission (SEC) by enter-
ing into a Deferred Prosecution
Agreement (DPA) with the DOJ and a
Consent Order with the SEC. As part
of these settlement agreements:
– UBS will pay a total of USD 780 mil-
lion (CHF 917 million) to the United
States, USD 380 million represent-
ing disgorgement of profits from
maintaining the US cross-border
business and USD 400 million
representing US federal backup
withholding tax required to be
withheld by UBS, together with
interest and penalties, and restitu-
tion for unpaid taxes associated
with certain account relationships
involving fraudulent sham and
nominee offshore structures and
otherwise as covered by the DPA.
– UBS will complete the exit of the
US cross-border business out of
non-SEC registered entities, as
announced in July 2008, which
these settlements now allow UBS to
do in a lawful, orderly and expedi-
tious manner.
– UBS will implement and maintain
an effective program of internal
controls with respect to compliance
with its obligations under its
Qualified Intermediary Agreement
(QIA) with the Internal Revenue
Service (IRS) as well as a revised
legal and compliance governance
structure in order to strengthen
independent legal and compliance
controls.
– Pursuant to an order issued by the
Swiss Financial Market Supervisory
Authority (FINMA), information has
been transferred to the DOJ
regarding accounts of certain US
clients as set forth in the DPA, who,
based on evidence available to UBS,
appear to have committed tax
fraud or the like within the
meaning of the Swiss-US Double
Taxation Treaty.
Under the DPA, the DOJ has agreed
that any prosecution of UBS be
deferred for a period of at least 18
months, which is subject to extension
under certain circumstances, such as
UBS needing more time to complete
the implementation of the exit of its
US cross-border business. If UBS
satisfies all of its obligations under the
DPA, the DOJ will refrain from
pursuing charges against UBS relating
to the investigation of its US cross-
border business.
Additionally, as published by FINMA
on 18 February 2009, FINMA has
concluded that UBS violated the
requirements for proper business
conduct, and it barred UBS from
providing services to US resident
private clients out of non-SEC
registered entities. Further, FINMA
ordered UBS to enhance its control
framework around its cross-border
businesses and announced that the
effectiveness of such a framework will
be audited. The order by FINMA in
support of the resolution achieved
with the DOJ was instrumental in
averting the imminent risk of further
negative implications and uncertainties
for the bank.
The cost for the settlement has been
fully charged to the year 2008, as
reflected in this report.
The settlement agreements do not
resolve issues concerning the pending
“John Doe” summons which the IRS
served on UBS in July 2008. The
summons seeks information regarding
a substantial number of undisclosed
accounts maintained by US persons at
UBS in Switzerland, whose informa-
tion is protected from disclosure by
Swiss financial privacy laws. As
announced on 19 February 2009, the
IRS has commenced a civil action,
seeking enforcement of the summons,
which UBS intends to challenge.
UBS believes it has substantial
defenses to the enforcement of the
summons and intends to vigorously
contest its enforcement in the civil
proceeding, as is permitted under the
terms of the DPA. Objections to the
enforcement of the summons are
based upon US law, the terms of UBS’s
QIA with the IRS, Swiss financial
privacy and other laws, and the
principles of international comity that
require US courts to take into account
foreign laws.
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79
UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
Business performance
Business unit reporting
CHF million, except where indicated
Income
Credit loss (expense) / recovery
Total operating income
Cash components
Share-based components 1
Total personnel expenses
General and administrative expenses
of which: impact from US cross-border case
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Business unit performance before tax
of which: impact from US cross-border case
business unit performance before tax excluding US cross-border case
Key performance indicators
Invested assets (CHF billion)
Net new money (CHF billion) 2
Gross margin on invested assets (bps) 3
Cost / income ratio (%) 4
Client advisors (full-time equivalents)
Client advisor productivity
Revenues per advisor (CHF thousand) 5
Net new money per advisor (CHF thousand) 6
Invested assets per advisor (CHF thousand) 7
International clients
Income
Invested assets (CHF billion)
Net new money (CHF billion) 2
Gross margin on invested assets (bps) 3
Swiss clients
Income
Invested assets (CHF billion)
Net new money (CHF billion) 2
Gross margin on invested assets (bps) 3
As of or for the year ended
31.12.07
12,893
(1)
12,892
31.12.06
10,827
1
10,828
3,704
169
3,873
1,064
1,531
95
19
6,582
6,310
6,310
1,294
125.1
103
51.1
5,774
2,999
174
3,173
885
1,479
84
10
5,631
5,197
5,197
1,138
97.6
103
52.0
4,742
2,424
23,516
234,504
2,441
22,008
236,879
9,739
1,013
115.6
101
3,154
281
9.5
111
7,907
862
90.8
101
2,920
276
6.8
110
31.12.08
10,819
(390)
10,429
3,037
75
3,112
2,001
917
1,581
97
38
6,828
3,601
(917)
4,518
870
(101.0)
97
63.1
5,755
1,824
(17,029)
187,159
8,185
682
(71.3)
94
2,634
189
(29.7)
110
% change from
31.12.07
(16)
(19)
(18)
(56)
(20)
88
3
2
100
4
(43)
(28)
(33)
(6)
0
(25)
(20)
(16)
(33)
(7)
(16)
(33)
(1)
1 Includes social security contributions and expenses related to alternative investment awards. 2 Excludes interest and dividend income. 3 Income / average invested assets. 4 Operating expenses / income.
5 Income / average number of client advisors. 6 Net new money / average number of client advisors. 7 Average invested assets / average number of client advisors.
80
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Business unit reporting (continued)
CHF million, except where indicated
Attributed equity and risk-weighted assets
Average attributed equity (CHF billion) 1
Return on attributed equity (RoaE) (%) 2
BIS risk-weighted assets (CHF billion) 3
Return on BIS risk-weighted assets (%) 4
Goodwill and intangible assets (CHF billion) 5
Additional information
Recurring income 6
Client assets (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
6.1
59.0
25.2
12.3
1.9
8,194
1,048
15,271
63.1
10.5
1.8
9,617
1,651
15,811
51.5
10.8
1.7
8,143
1,436
13,564
(15)
(37)
(3)
1 Refer to the “Capital management” section of this report for more information on the equity attribution framework, which was implemented in 2008. 2 Business unit performance before tax / average at-
tributed equity. 3 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006. 4 Business unit performance before tax / average BIS
RWA. 5 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital. 6 Interest, asset-based revenues for portfolio management and account-based, distribution and advi-
sory fees.
2008
Results
Key performance indicators
In 2008, net new money outflows amounted to CHF 101.0
billion, compared with inflows of CHF 125.1 billion in 2007.
This occurred in the context of continuing credit market tur-
bulence and its impact on the firm’s operating performance
and reputation. Outflows of net new money were most pro-
nounced in September and the first half of October.
Invested assets, at CHF 870 billion on 31 December 2008,
were down 33% from CHF 1,294 billion a year earlier, main-
ly reflecting sharply lower equity markets and the strong
decline of major currencies against the Swiss franc, as well as
net new money outflows.
The gross margin on invested assets was 97 basis points in
2008, down six basis points from a year earlier, as clients
increased their allocation of lower-margin cash products. A
further contributing factor was substantially lower levels of cli-
ent transaction activity. Overall, recurring income made up 74
basis points of the margin in 2008, down from 77 basis points
in 2007. Non-recurring income comprised 23 basis points of
the margin in 2008, down 3 basis points from 2007.
The cost / income ratio increased to 63.1% in 2008 from
51.1% a year earlier. This increase is primarily due to general
and administrative expenses from the recognition of a provi-
sion of CHF 917 million (USD 780 million) in connection with
the US cross-border case (refer to the “Settlement regarding
the US cross-border case” sidebar in this section for more in-
formation). Excluding the impact of these costs, the cost / in-
come ratio would have increased to 54.6% in 2008 from the
previous year.
In 2008, pre-tax profit fell 43% to CHF 3,601 million, com-
pared with the record CHF 6,310 million in 2007. This is par-
tially due to a provision of CHF 917 million in connection with
the US cross-border case. Excluding the impact of these costs,
the pre-tax result would have fallen 28%, mainly reflecting
lower asset base and client transaction activity.
the
Operating income
Total operating income in 2008 was CHF 10,429 million,
down 19% from CHF 12,892 million a year earlier. Recurring
income decreased 15% on lower asset-based fees. Non-
recurring income fell by 20% due to lower brokerage fees,
reflecting decreased client transaction activity levels.
Operating expenses
At CHF 6,828 million, operating expenses in 2008 were up
4% from CHF 6,582 million a year earlier. This is primarily due
to a provision of CHF 917 million in connection with the US
cross-border case. Excluding the impact of these costs, the op-
erating expenses would have decreased 10%, mainly due to
lower performance-related compensation. This resulted in
lower personnel expenses, which fell 20% to CHF 3,112 mil-
lion in 2008 compared with CHF 3,873 million a year earlier.
General and administrative expenses, at CHF 2,001 million,
were up by 88% from CHF 1,064 million a year earlier due to
the abovementioned provisions related to the US cross-border
case. Expenses for services from other business units, at CHF
1,581 million in 2008, were up 3% from CHF 1,531 million
the previous year, mainly reflecting increased consumption of
services. Depreciation was CHF 97 million in 2008, almost
unchanged from CHF 95 million a year earlier. Amortization of
intangible assets was CHF 38 million, up CHF 19 million from
2007 mainly reflecting an impairment charge.
81
UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
2007
Results
Key performance indicators
In 2007, net new money was a record CHF 125.1 billion,
compared with CHF 97.6 billion in 2006, representing an
annual growth rate of 11% of the underlying invested asset
base at year-end 2006. This outstanding result reflected
increases in all geographical regions throughout the year,
particularly in Asia Pacific and Americas, both a result of the
growth strategy.
Invested assets, at CHF 1,294 billion on 31 December
2007, were up 14% from CHF 1,138 billion a year earlier,
mainly reflecting the strong inflow of net new money and
rising financial markets. This increase was partially offset by
negative currency effects. The 7% fall of the US dollar
against the Swiss franc contributed to this decrease –
approximately 36% of invested assets were denominated in
US dollars at the end of 2007.
The gross margin on invested assets was 103 basis points
in 2007, unchanged from a year earlier, as the increase in
non-recurring margin following a sustained level of client ac-
tivity was offset by a lower recurring margin. Overall, recur-
ring income made up 77 basis points of the margin in 2007,
down from 78 basis points in 2006. Non-recurring income
comprised 26 basis points of the margin in 2007, up one
basis point from 2006.
The cost / income ratio improved to 51.1% in 2007 from
52.0% a year earlier. The cost / income ratio improved for the
fifth consecutive year despite the rise in costs in pursuit of
the global expansion strategy. This improvement reflected
the strong rise in income due to a higher asset base and
higher volumes in lombard lending, which more than offset
the increase in personnel expenses (mainly headcount
increase and performance-related compensation) and gen-
eral and administrative expenses.
In 2007, pre-tax profit, at a record CHF 6,310 million, rose
21% compared with 2006. Total operating income was up
19% in 2007, reflecting a higher asset base and increased
collateralized lending volumes and more client activity. Oper-
ating expenses, up 17% in 2007 from 2006, also rose as the
business expanded.
Operating income
Total operating income in 2007 was CHF 12,892 million, up
19% from CHF 10,828 million a year earlier. This was the
highest level ever, reflecting a rise in recurring as well as non-
recurring revenues. Recurring income increased 18% on ris-
ing asset-based fees, benefiting from strong net new money
inflows. This was accentuated by higher interest income due
to the expansion of lombard lending activities. Non-recur-
ring income rose 22% due to higher brokerage fees, reflect-
ing high client activity levels.
Operating expenses
At CHF 6,582 million, operating expenses in 2007 were up
17% from CHF 5,631 million a year earlier, reflecting high-
er personnel expenses and general and administrative
expenses as a result of ongoing business growth. Personnel
expenses rose 22% to CHF 3,873 million in 2007 compared
with CHF 3,173 million a year earlier, reflecting the increase
in salaries due to business expansion and higher perfor-
mance-related compensation. General and administrative
expenses, at CHF 1,064 million, were up 20% in 2007 from
CHF 885 million a year earlier due to increased expenses for
travel and entertainment, premises and professional fees –
all a consequence of continuous business expansion.
Expenses for services from other business units, at
CHF 1,531 million in 2007, were up 4% from CHF 1,479
million the previous year, mainly reflecting increased con-
sumption. Depreciation was CHF 95 million in 2007, up
13% from CHF 84 million a year earlier because of contin-
ued business growth. Amortization of intangible assets was
CHF 19 million, up CHF 9 million from 2006.
82
Wealth Management US
Business description
Business
Wealth Management US provides wealth management ser-
vices to US private clients. On 31 December 2008, the busi-
ness unit had CHF 600 billion in invested assets.
Organizational structure
Wealth Management US is headquartered in Weehawken,
New Jersey, where most corporate and operational func-
tions are located. The client-facing organization consists of
the branch network in the US and Puerto Rico, with more
than 8,100 financial advisors. The branch network is staffed
by regional managers, market area managers, branch office
managers, financial advisors and administrative support
staff.
Established as part of Global Wealth Management & Busi-
ness Banking in 2005, the business unit continues to evolve
to meet the specific needs of its client base. Key acquisitions
and transactions over the last three years included:
Geographical presence in key markets
– August 2006 acquisition of the private client services
branch network of Piper Jaffray.
– February 2007 acquisition of the McDonald Investments’
private client branch network.
– October 2008 saw the Investment Bank’s municipal secu-
rities operations serving private clients transfer to Wealth
Management US (following UBS’s decision in June 2008
that its Investment Bank would exit the institutional mu-
nicipal securities business).
Legal structure
In the US, the business unit operates through direct and
indirect subsidiaries of UBS. Securities and operations activi-
ties are conducted primarily through three registered broker-
dealers: UBS Financial Services Inc., UBS Financial Services
Inc. of Puerto Rico and UBS Services USA LLC. Wealth Man-
agement US’s banking services include Federal Deposit Insur-
ance Corporation (FDIC)-insured deposit accounts and
enhanced collateralized lending services, which are conduct-
ed through UBS Bank USA, a federally regulated Utah bank.
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ALASKA
WASHINGTON
MONTANA
NORTH DAKOTA
MINNESOTA
OREGON
IDAHO
WYOMING
SOUTH DAKOTA
WISCONSIN
NEBRASKA
IOWA
MICHIGAN
NEW YORK
NEVADA
UTAH
COLORADO
KANSAS
ILLINOIS
OHIO
INDIANA
PENNSYLVANIA
WEST
VIRGINIA
KENTUCKY
VIRGINIA
MISSOURI
NEW HAMPSHIRE
MASSACHUSETTS
RHODE ISLAND
CONNECTICUT
NEW JERSEY
DELAWARE
MARYLAND
WASHINGTON D.C.
VERMONT
MAINE
CALIFORNIA
ARIZONA
NEW MEXICO
OKLAHOMA
ARKANSAS
TENNESSEE
NORTH CAROLINA
SOUTH
CAROLINA
MISSISSIPPI
ALABAMA
GEORGIA
TEXAS
LOUISIANA
HAWAII
Wealth Management US offices:
<5
5–15
>15
FLORIDA
PUERTO RICO
83
2BD010_e
UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
Competitors
Wealth Management US competes with national full-service
brokerage firms, domestic and global private banks, regional
broker-dealers, independent broker-dealers, registered in-
vestment advisors, commercial banks, trust companies and
other financial services firms offering wealth management
services to US private clients. In 2008, the financial crisis trig-
gered consolidation within the industry that directly impact-
ed the business unit’s major competitors: Citi Global Wealth
Management, Merrill Lynch Global Wealth Management,
Morgan Stanley Global Wealth Management Group and
Wachovia Securities. Specifically, Merrill Lynch was acquired
by Bank of America, effective 1 January 2009 and Wachovia
Corporation was acquired by Wells Fargo, effective
31 December 2008. In January 2009, Morgan Stanley and Citi
announced an agreement to combine Morgan Stanley’s Glob-
al Wealth Management Group and Citi’s Smith Barney unit
into a joint venture called Morgan Stanley Smith Barney.
Clients and strategy
Wealth Management US is focused on the delivery of ser-
vices tailored to meet the needs of four distinct client seg-
ments: ultra-high net worth (more than USD 10 million in
investable assets), high net worth (USD 1 million to USD 10
million in investable assets), core affluent (USD 250,000 to
USD 1 million in investable assets) and the emerging affluent
(up to USD 250,000 in investable assets).
The business unit is committed to a number of strategic
priorities, including gaining market share, achieving im-
proved profitability, enhancing the client experience and at-
tracting and retaining key talent.
One long-term strategy is to ensure the delivery of a high-
quality and consistent client experience as defined by the
four steps of the “UBS Client Experience”: understanding
client needs, proposing appropriate solutions, agreeing on
and implementing them, and reviewing progress toward
client goals. To do so, the organization is focused on imple-
menting a number of organic growth initiatives, infrastruc-
ture enhancements and staff development programs, all
aimed at fundamentally improving the way financial advisors
serve clients. In 2008, Wealth Management US expanded its
services and capabilities by increasing its range of client-seg-
ment specific offerings. Two additional private wealth man-
agement offices were opened to service ultra-high net worth
clients in Houston, Texas, and Boston, Massachusetts. With
these openings, UBS has nine dedicated private wealth man-
agement offices across the US, with additional offices to be
opened in select markets through 2010. In June 2008, the
first group of UBS wealth advisors received accreditation
from a new and comprehensive development program
Invested assets by asset class
In %, except where indicated
Invested assets by client wealth
In %, except where indicated
31.12.06
31.12.07
31.12.08
On 31.12.08
Total: CHF 600 billion
Total:
CHF 824 billion
CHF 840 billion
CHF 600 billion
8
36
16
4
29
7
7
35
17
5
28
8
8
27
19
12
28
6
8
17
27
48
< CHF 1 million
CHF 1–5 million
CHF 5–10 million
> CHF 10 million
Accounts/money markets
External mutual funds
Bonds
Equities
UBS mutual funds
Other1
1 Includes structured products and alternative investments.
2BD011_e
2BD012_e
On
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designed by UBS for advisors focused on the high net worth
segment. In the first and third quarters of 2008, investment
centers in New Jersey and North Carolina were opened to
serve emerging affluent clients.
Products and services
Wealth Management US offers clients a full array of wealth
management services that focus on the individual invest-
ment needs of each client. Comprehensive planning sup-
ports clients through the various stages of their lives, includ-
ing education funding, charitable giving, tax management
strategies, estate strategies, insurance, retirement, and trusts
and foundations. Advisors work closely with consultants
who are subject-matter experts in areas such as wealth plan-
ning, asset allocation, retirement and annuities, alternative
investments, structured products, and banking and lending.
They also have access to Wealth Management Research con-
tent to support investment decisions.
Products and services are designed to meet a wide vari-
ety of investment objectives including capital appreciation,
income generation, diversifying portfolio concentration
and tax optimization. To address the full range of clients’
investment needs, Wealth Management US offers compet-
itive lending and cash management services, including the
Resource Management Account (RMA) product, credit
cards, FDIC-insured deposits, securities-backed lending and
mortgages. Additionally, through Corporate Employee
Financial Services, it provides stock option and other related
services to many of the largest US corporations and their
executives.
The business unit’s clients have the option of transaction-
based or asset-based pricing for their relationships. Clients
who choose asset-based pricing have access to both discre-
tionary and non-discretionary investment advisory programs.
While non-discretionary advisory programs enable the client
to maintain control over all transactions in the account, cli-
ents with discretionary advisory programs direct investment
professionals to manage a portfolio on their behalf. Depend-
ing on the type of discretionary program, the client can give
investment discretion to a qualified financial advisor, a team
of UBS investment professionals or a third-party investment
manager. Separately, mutual fund advisory programs are
also offered, where a financial advisor works with the client
to create a diversified portfolio of mutual funds guided by a
research-driven asset allocation framework.
Transaction-based pricing offers access to a broad range
of transaction products, including individual securities such
as equities and fixed income instruments. To complement
portfolio strategies, qualified clients may take advantage of
the offerings in structured products and alternative invest-
ments.
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UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
Business performance
Business unit reporting
CHF million, except where indicated
Income
of which: ARS settlement impact
Credit loss (expense) / recovery
Total operating income
Cash components
Share-based components 1
Total personnel expenses
General and administrative expenses
of which: ARS settlement impact
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Business unit performance before tax
of which: ARS settlement impact
business unit performance before tax excluding ARS settlement impact
Key performance indicators
Invested assets (CHF billion)
Net new money (CHF billion) 2
Net new money including interest and dividend income (CHF billion) 3
Gross margin on invested assets (bps) 4
Cost / income ratio (%) 5
Recurring income 6
Financial advisor productivity
Revenues per advisor (CHF thousand) 7
Net new money per advisor (CHF thousand) 8
Invested assets per advisor (CHF thousand) 9
Attributed equity and risk-weighted assets
Average attributed equity (CHF billion) 10
Return on attributed equity (RoaE) (%) 11
BIS risk-weighted assets (CHF billion) 12
Return on BIS risk-weighted assets (%) 13
Goodwill and intangible assets (CHF billion) 14
Additional information
Client assets (CHF billion)
Personnel (full-time equivalents)
Financial advisors (full-time equivalents)
As of or for the year ended
% change from
31.12.07
6,662
31.12.06
5,863
31.12.07
(12)
(2)
(1)
6,660
4,352
199
4,551
976
314
79
66
5,986
674
674
840
26.6
51.5
77
89.9
4,173
5,862
3,686
153
3,839
1,073
281
74
53
5,320
542
542
824
15.7
37.9
76
90.7
3,488
828
3,305
107,719
776
2,077
101,922
18.7
3.6
4.0
917
19,347
8,248
18.3
3.0
4.3
909
18,557
7,880
(13)
(13)
(57)
(15)
141
(24)
19
(9)
11
23
(29)
(77)
6
(8)
(13)
(18)
(31)
(2)
(1)
31.12.08
5,847
(172)
(25)
5,821
3,806
85
3,891
2,348
1,464
238
94
60
6,631
(810)
(1,636)
826
600
(10.6)
11.7
82
113.4
3,835
721
(1,307)
87,876
7.3
(11.1)
25.9
(3.8)
4.3
636
18,929
8,182
1 Includes social security contributions and expenses related to alternative investment awards. 2 Excludes interest and dividend income. 3 For purposes of comparison with US peers.
4 Income / average invested assets. 5 Operating expenses / income. 6 Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees. 7 Income / average
number of financial advisors. 8 Net new money / average number of financial advisors. 9 Average invested assets / average number of financial advisors. 10 Refer to the “Capital management”
section of this report for more information on the equity attribution framework, which was implemented in 2008. 11 Business unit performance before tax / average attributed equity. 12 BIS risk-
weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006. 13 Business unit performance before tax / average BIS RWA. 14 2007 and 2006
represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.
86
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2008
Key performance indicators
In 2008, net new money outflows amounted to CHF 10.6
billion compared with inflows of CHF 26.6 billion in 2007,
with net new money outflows concentrated in the second
and third quarters. This reflects the credit market turbulence
and its impact on the firm’s operating performance and repu-
tation, which led to an increase in financial advisor attrition
and clients diversifying assets away from the firm. Net new
money improved to positive levels in the fourth quarter, with
its strongest inflows occurring in December after financial ad-
visor recruiting and retention. Including interest and divi-
dends, net new money in 2008 was CHF 11.7 billion, down
from CHF 51.5 billion in 2007.
Wealth Management US had CHF 600 billion in invested
assets on 31 December 2008, down 29% from CHF 840 bil-
lion on 31 December 2007. This was a result of declining
markets over the year, net new money outflows and the neg-
ative impact of currency translation. In US dollar terms,
invested assets decreased 24% compared with a year earlier.
The gross margin on invested assets was 82 basis points
in 2008, up from 77 basis points in 2007. The increase is
mainly a result of a six basis point increase in the recurring
income margin to 54 basis points, while the non-recurring
margin decreased one basis point to 28 basis points.
The cost / income ratio increased to 113.4% in 2008 from
89.9% in 2007. Following the auction rate securities (ARS) set-
tlement in August 2008, Wealth Management US recorded
losses of CHF 1,636 million, of which CHF 1,464 million were
included in general and administrative expenses, and CHF 172
million were recognized as trading losses. Under the ARS settle-
ment, Wealth Management US agreed to purchase ARS from
clients at their par value. Up to fourth quarter 2008, the ARS
settlement liability represented a provision. The liability was re-
classified from provisions to negative replacement values in
fourth quarter 2008, when ARS settlement rights, which are
treated as derivative instruments, were issued and accepted by
clients. Losses incurred post-reclassification represented trading
losses. Excluding ARS-related charges, the cost / income ratio
improved to 85.8% due to lower expenses, including reduced
performance-based compensation accruals. Refer to the “Ex-
posure to auction rate securities” sidebar in the “Risk concen-
tration” section of this report for more information.
In 2008, recurring income was CHF 3,835 million, down
8% from CHF 4,173 million a year earlier. Excluding the
impact of currency fluctuations, recurring income increased
6% in 2008, driven by growth in net interest income from
increased deposit balances, while recurring fee income
declined slightly due to lower asset levels. Recurring income
represented 66% of total operating income in 2008, com-
pared with 63% in 2007.
Revenues per advisor decreased in 2008 to CHF 721,000
from CHF 828,000 in 2007. In US dollar terms, revenues per
advisor were on par as higher recurring income was offset
by lower transactional revenue. The number of financial
advisors at 31 December 2008 was 8,182, down 66 or 1%
from a year earlier. Turnover among financial advisors was
concentrated among lower producing advisors, including
trainees.
Results
For full-year 2008, Wealth Management US recorded a pre-
tax loss of CHF 810 million compared with a pre-tax profit of
CHF 674 million in 2007. Driving the decline were total ARS-
related charges of CHF 1,636 million taken during 2008.
Excluding these charges, the pre-tax result would have
increased 23%. In US dollar terms and excluding ARS-related
charges, the pre-tax performance would have increased 41%
driven by resilient operating income growth during a chal-
lenging environment, coupled with a decline in expenses,
including lower performance-based compensation accruals.
Operating income
In 2008, total operating income was CHF 5,821 million,
down 13% from CHF 6,660 million in 2007. Excluding cur-
rency effects and ARS related trading losses, operating
income increased 4% from 2007. The increase in operating
income reflects stronger net interest income related to an
increase in deposit balances, and a positive impact of the
new equity attribution framework introduced in first quarter
2008, partly offset by lower transactional revenue and an
increase in credit losses.
Operating expenses
Total operating expenses rose 11% to CHF 6,631 million in
2008 from CHF 5,986 million in 2007. Excluding ARS-related
expenses, operating expenses declined 14%. In US dollar
terms and excluding ARS-related expenses, operating
expenses declined 1%. On this basis, personnel expenses
decreased 2% driven by lower performance-based compen-
sation accruals, partly offset by higher severance costs relat-
ed to staff reductions. Excluding ARS-related expenses, non-
(including general and administrative
personnel costs
expenses, depreciation and amortization expenses, and
services provided to and received from other business units),
rose 2% in US dollar terms due to an increase in depreciation
costs, while total general and administrative expenses were
essentially flat from the prior year.
87
UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
2007
Key performance indicators
The inflow of net new money in 2007 was CHF 26.6 billion,
up from CHF 15.7 billion a year earlier, reflecting reduced
outflows from existing clients and the recruitment of experi-
enced advisors. Including interest and dividends, net new
money in 2007 was CHF 51.5 billion, up from CHF 37.9 bil-
lion in 2006.
Wealth Management US had CHF 840 billion in invested
assets on 31 December 2007, up 2% from CHF 824 billion
on 31 December 2006. This was a result of rising markets
over the year, net new money inflows and the first-time
inclusion of former McDonald Investments’ assets. These
increases were partly offset by the negative impact of cur-
rency translation. In US dollar terms, invested assets in-
creased 10% compared with a year earlier.
The gross margin on invested assets was 77 basis points
in 2007, up from 76 basis points in 2006. The increase is
mainly a result of a higher recurring income margin, while
the non-recurring margin decreased.
The cost / income ratio was 89.9% for 2007, compared
with 90.7% in 2006. The improvement in the cost / income
ratio reflects higher operating income due to strong growth
in recurring income, partially offset by a rise in expenses
mainly reflecting higher personnel expenses in support of
growth initiatives and the integration of the McDonald
Investments’ private client branch network.
In 2007, recurring income was a record CHF 4,173 million,
up 20% from CHF 3,488 million a year earlier. Excluding the
impact of currency fluctuations, recurring income was up
23% in 2007 from 2006. This increase mainly reflects higher
levels of managed account fees on a year-end record level of
invested assets, higher investment advisory fees and higher
net interest income. Recurring income represented 63% of
operating income in 2007, compared with 60% in 2006.
Revenues per advisor increased in 2007 to CHF 828,000
from CHF 776,000 in 2006 as a higher average number of
financial advisors was able to produce significantly higher
recurring income than a year earlier. The number of financial
advisors rose 5% compared with 2006, increasing by 368
advisors to 8,248 at the end of 2007, while recurring income
increased 20%.
Results
In 2007, Wealth Management US reported a pre-tax profit of
CHF 674 million, compared with CHF 542 million in 2006. In
US dollar terms, performance in 2007 was up 27% from
2006. Performance in 2007 benefited from record levels of
recurring income and lower general and administrative
expenses. This was partly offset by higher personnel expenses.
Operating income
In 2007, total operating income was CHF 6,660 million, up
14% from CHF 5,862 million in 2006. Excluding currency
effects, operating income increased 16% from 2006. The
increase in operating income reflected the record recurring
income (driven by increased asset levels in managed account
products) and increased transactional revenue.
Operating expenses
Total operating expenses rose 13% to CHF 5,986 million in
2007 from CHF 5,320 million in 2006. Excluding currency
effects, operating expenses were 15% higher.
Personnel expenses increased CHF 712 million or 19%,
with higher salaries as well as share-based compensation.
This reflects rising headcount due to organic growth and the
McDonald Investments’ private client branch network inclu-
sion. General and administrative expenses decreased 9% to
CHF 976 million in 2007 from CHF 1,073 million in 2006. In
US dollar terms, they fell 7%, primarily reflecting lower provi-
sions compared with 2006. Services from other business units
increased 12% from CHF 281 million in 2006 to CHF 314
million in 2007. Depreciation was higher due to leasehold
improvements. The amortization of intangibles was CHF 66
million in 2007, up 25% from CHF 53 million, mainly due to
the acquisition of the McDonald Investments’ private client
branch network and the full-year impact of the acquisition of
the Piper Jaffray’s private client services branch network.
88
Business Banking Switzerland
Business description
Business
Business Banking Switzerland is UBS’s retail and commercial
banking unit and the leading bank in Switzerland. At the
end of 2008, business banking Switzerland had CHF 129
billion in invested assets. UBS also leads the Swiss lending
and retail mortgage markets, with a total loan book of
CHF 143 billion on 31 December 2008.
Organizational structure
Business Banking Switzerland is home to the firm’s Swiss
branch network for corporate and individual clients. It is
organized in eight geographical regions. The customer ser-
vices network includes e-banking services, customer service
centers, 1,260 automated teller machines (ATMs) and 303
branches across Switzerland.
To meet the needs of private clients, which are changing
in line with technological advances, Business Banking Swit-
zerland pursues an integrated, multi-channel strategy. It
uses technology to complement, rather than replace, the
traditional physical branch network. Standard transactions
can be executed using one of the electronic channels,
enabling client advisors to focus on providing advice and
developing financial solutions. For basic products and
services, technology is used to ensure around-the-clock
availability. Customer service centers exist in five locations
and provide basic information and support 24 hours a day
via telephone. Additionally, in 65 of the UBS branches in
Switzerland, a two-zone concept has been implemented:
standard transactions are executed via ATMs, while client
advisors, sitting in an open plan desk area next to the ATMs,
focus on giving clients value- added advice. Clients make
extensive use of e-banking channels. On 31 December
2008, more than 600,000 clients had active e-banking con-
tracts and more than 80% of all payment orders were made
in 2008 through electronic channels.
Competitors
UBS’s major competitors are the banks that are active in the
retail and corporate banking market in Switzerland. This
group includes Credit Suisse, the country’s cantonal banks,
Raiffeisen Bank, other regional or local Swiss banks and for-
eign bank branches in Switzerland.
Clients and products
The business unit serves both retail and commercial clients,
including financial institutions.
Approximately 2.5 million individual Switzerland-based
clients are served through over 3 million accounts, mortgag-
es and other financial relationships. Through the client ser-
vice networks described above, individual clients can access
services such as a comprehensive selection of cash accounts,
savings products, advisory services, residential mortgages,
pensions and life insurance.
Of the approximately 135,000 corporate clients, about
200 are major companies with operations spanning a broad
range of markets and geographical regions and therefore
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Invested assets by asset class
In %, except where indicated
On
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31.12.06
31.12.07
31.12.08
Total:
CHF 161 billion
CHF 164 billion
CHF 129 billion
4
12
10
37
8
29
4
12
10
37
8
29
4
10
9
38
10
29
Accounts/money markets
Equities
Bonds
Other
UBS mutual funds
External mutual funds
2BD015_e
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50
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UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
require advanced financing and risk management skills as
well as comprehensive access to the capital markets for
funding needs; about 8,200 are large companies requiring
expertise in handling complex financial transactions, includ-
ing the selection and design of investment products, assis-
tance in complex mergers and acquisitions or provision of
structured financing; and some 126,000 are small- and
medium-sized enterprises requiring local market expertise
and access to a full range of products and services. In addi-
tion, substantial business process support is available (rang-
ing from transactional payments and securities services to
the facilitation of cross-border transactions with trade finance
products).
Global custody services offer institutional investors the
opportunity to consolidate multiple-agent bank relationships
into a single, cost-efficient global custodial relationship. This
simplifies their processing and administration arrangements
and allows them to take advantage of other services, such as
flexible consolidated performance reporting and powerful
portfolio management tools.
Payments, securities and custodial services are offered to
more than 3,000 financial institutions worldwide. Other
banks which lack UBS’s scale can also outsource their pay-
ment, security or custodial services in order to benefit from
UBS’s scale efficiencies.
Total lending portfolio, gross
On 31 December 2008, the total lending portfolio was CHF
143 billion, gross. Of this amount, mortgages comprised
CHF 116 billion, with 84% being residential mortgages.
Continued discipline in implementing risk-adjusted pricing
has resulted in a strengthened focus of origination efforts on
higher-quality exposures with an attractive risk / return rela-
tionship. The introduction of this model has resulted in a
clear improvement in the risk profile of the business unit’s
lending portfolio.
➔ Refer to the “Credit risk” section of this report for more
information on UBS’s credit portfolio.
Recovery portfolio
A dedicated team of recovery specialists assists clients that
are unable to meet their financial obligations. Economic re-
covery can be achieved through restructuring or through liq-
uidation of available collateral in order to limit the financial
loss on the loan. The recovery portfolio amounted to CHF
2.3 billion on 31 December 2008. Since the end of 1998,
successful recovery efforts have reduced the portfolio by
more than 91% and non-performing loans have decreased
from CHF 14.0 billion to CHF 1.5 billion, resulting in a ratio
of non-performing loans to total lending portfolio of 0.9%.
Total lending portfolio by category, gross
In %, except where indicated
Development of UBS’s recovery portfolio, 2000–2008
CHF billion
On
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90
31.12.06
31.12.07
31.12.08
Total:
CHF 143 billion
CHF 145 billion
CHF 143 billion
2
17
81
2
18
80
2
18
80
9
9
.
2
1
.
1
3
21
3 (9)
On
25
20
15
10
0
0
.
2
1
.
1
3
1
0
.
2
1
.
1
3
2
0
.
2
1
.
1
3
3
0
.
2
1
.
1
3
4
0
.
2
1
.
1
3
5
0
.
2
1
.
1
3
6
0
.
2
1
.
1
3
7
0
.
2
1
.
1
3
8
0
.
2
1
.
1
3
2 (5)
15
1 (4.4)
12
1.3 (3.5)
8.6
0.6 (2.6)
6.4
Mortgages
Commercial credits
Recovery portfolio
2BD016_e
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0
4.4 0.5 (1.6)
3.3 0.4 (1.1)
2.6
0.6 (0.7)
2.50.5(0.7)
2.3
Balance
New recovery loans added
Settlement of recovery loans outstanding
25
20
15
10
5
2BD017_e
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Business performance
Business unit reporting
CHF million, except where indicated
Interest income
Non-interest income
Income
Credit loss (expense) / recovery
Total operating income
Cash components
Share-based components 1
Total personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Business unit performance before tax
Key performance indicators
Invested assets (CHF billion)
Net new money (CHF billion) 2
Cost / income ratio (%) 3
Impaired lending portfolio as a % of total lending portfolio, gross
Attributed equity and risk-weighted assets
Average attributed equity (CHF billion) 4
Return on attributed equity (RoaE) (%) 5
BIS risk-weighted assets (CHF billion) 6
Return on BIS risk-weighted assets (%) 7
Goodwill and intangible assets (CHF billion) 8
Additional information
Client assets (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
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(7)
(1)
(5)
(6)
(6)
(64)
(8)
(11)
(21)
4
(16)
8
(21)
3,234
1,790
5,024
(5)
5,019
2,348
27
2,376
1,018
(893)
70
0
2,570
2,449
129
(11.4)
51.2
1.0
3.8
64.0
38.0
6.1
0.0
3,470
1,816
5,286
31
5,317
2,508
76
2,584
1,138
(739)
67
0
3,050
2,267
164
4.6
57.7
1.2
87.9
2.6
0.0
3,339
1,746
5,085
109
5,194
2,389
50
2,439
1,120
(720)
74
0
2,913
2,281
161
1.2
57.3
1.7
85.4
2.7
0.0
709
15,341
986
16,085
992
16,079
(28)
(5)
1 Includes social security contributions and expenses related to alternative investment awards. 2 Excludes interest and dividend income. 3 Operating expenses / income. 4 Refer to the “Capital
management” section of this report for more information about the equity attribution framework, which was implemented in 2008. 5 Business unit performance before tax / average attributed equi-
ty. 6 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006. 7 Business unit performance before tax / average BIS RWA. 8 2007
and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.
91
UBS business divisions and Corporate Center
Global Wealth Management & Business Banking
2008
Key performance indicators
Net new money outflows totaled CHF 11.4 billion in 2008,
compared with an inflow of CHF 4.6 billion in 2007. This
was mainly due to clients’ diversification of assets and re-
evaluation of banking relationships in the context of con-
tinuing global market turmoil.
Invested assets fell to CHF 129 billion in 2008 from CHF
164 billion a year earlier, driven by negative market develop-
ments and net new money outflows.
In 2008 the cost / income ratio stood at 51.2%, strongly
improved from 57.7% a year earlier due to a 16% decrease
in operating expenses reflecting cost-cutting measures.
Business Banking Switzerland’s loan portfolio was CHF
143.0 billion on 31 December 2008, down 2% from the
previous year.
The key credit quality ratio of the impaired lending portfolio,
gross, to the total lending portfolio, gross, improved to 1.0%
compared with 1.2% in 2007.
Results
Pre-tax profit in 2008 was a record CHF 2,449 million, CHF
182 million, or 8% above the result achieved in 2007 due to
a strong decrease in operating expenses reflecting stringent
cost-cutting measures as well as higher charges paid to this
business unit for services provided to other businesses.
Operating income
Total operating income in 2008 was CHF 5,019 million,
down from 2007’s level of CHF 5,317 million. Interest
income decreased 7% to CHF 3,234 million in 2008 from
CHF 3,470 million in 2007. This decrease reflects lower de-
posit and loan volumes as well as lower margins on mort-
gages. Non-interest income decreased CHF 26 million to
CHF 1,790 million in 2008 from CHF 1,816 million in 2007,
reflecting the lower asset base. Credit loss, at CHF 5 million
in 2008, deteriorated from credit loss recoveries of CHF 31
million in 2007.
Operating expenses
Operating expenses in 2008 were CHF 2,570 million, down
16% from CHF 3,050 million in 2007. Personnel expenses,
at CHF 2,376 million, were down 8% from CHF 2,584 mil-
lion in 2007, reflecting lower performance-related compen-
sation accruals. General and administrative expenses, at
CHF 1,018 million in 2008, were 11% lower than the CHF
1,138 million recorded in 2007. Net charges to other busi-
ness units continued to rise for the fourth consecutive year
to CHF 893 million in 2008 from CHF 739 million in 2007
because of higher consumption of services in other business-
es. Depreciation in 2008 slightly increased to CHF 70 million
from CHF 67 million in 2007.
92
2007
Key performance indicators
Net new money was CHF 4.6 billion in 2007, CHF 3.4 billion
higher than the inflow of CHF 1.2 billion in 2006. This was
due to an increase in inflows from existing clients.
Invested assets rose to CHF 164 billion in 2007 from CHF
161 billion a year earlier, driven by positive market develop-
ments and net new money inflows. This was slightly offset by
the transfer of assets to Wealth Management International &
Switzerland, which occurred over the course of 2007, when
UBS transferred CHF 9.2 billion in client assets from the Busi-
ness Banking Switzerland business unit to the Wealth Man-
agement International & Switzerland business unit, reflecting
the development of client relationships. In 2006, UBS trans-
ferred CHF 8.2 billion in client assets for the same reason.
In 2007 the cost / income ratio was 57.7%, compared
with 57.3% a year earlier.
Business Banking Switzerland’s gross lending portfolio
was CHF 145.5 billion on 31 December 2007, up 1% from
the previous year. This positive development was also reflect-
ed in the key credit quality ratio of the impaired lending
portfolio, gross, to the total lending portfolio, gross, which
was 1.2% compared with 1.7% in 2006.
Results
Pre-tax profit in 2007 was CHF 2,267 million, CHF 14 million
or 1% below the result achieved in 2006, as the increase in
operating expenses outpaced income growth. In 2007,
interest income rose on higher volumes and margin on liabil-
ities, while non-interest income rose due to higher asset-
based and brokerage fees.
Operating income
Total operating income in 2007 was CHF 5,317 million, up
from the 2006 level of CHF 5,194 million. Interest income
increased 4% to CHF 3,470 million in 2007 from CHF 3,339
million in 2006. The slight increase reflects the expansion of
the business unit’s loan portfolio and the higher margin on
liabilities. Non-interest income increased by CHF 70 million
to CHF 1,816 million in 2007 from CHF 1,746 million in
2006, reflecting a higher asset base as well as higher trading
income. Credit loss recoveries were CHF 31 million in 2007,
a decrease from recoveries of CHF 109 million in 2006.
Operating expenses
Operating expenses in 2007 were CHF 3,050 million, up 5%
from CHF 2,913 million in 2006. Personnel expenses, at CHF
2,584 million, were up 6% from CHF 2,439 million in 2006
due to higher salary costs for the employee pension plan in
Switzerland, related to its change from a defined benefit to
a defined contribution plan. General and administrative ex-
penses, at CHF 1,138 million in 2007, rose and were 2%
higher than the CHF 1,120 million recorded in 2006. Net
charges to other business units continued to rise to CHF 739
million in 2007 from CHF 720 million in 2006 because of
higher consumption of services in other business units. De-
preciation in 2007 decreased to CHF 67 million from CHF 74
million in 2006.
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UBS business divisions and Corporate Center
Global Asset Management
Global Asset Management
Business description
One of the world’s leading asset managers, Global Asset Management provides investment capabilities and
services to private clients, financial intermediaries and institutional investors.
Business
This business division offers a wide range of investment
capabilities and services across all major asset classes includ-
ing equities, fixed income, asset allocation, currency, risk
management, hedge funds, real estate, infrastructure, pri-
vate equity and fund administration. Invested assets totaled
CHF 575 billion on 31 December 2008, making Global Asset
Management one of the largest institutional asset managers
and hedge fund of funds managers in the world. This busi-
ness division is also one of the largest mutual fund managers
in Europe and the largest in Switzerland.
Revenues and key performance indicators are reported
according to two principal asset management client seg-
ments: institutional (for example, corporate and public pen-
sion plans, governments and their central banks) and whole-
sale intermediary (for example, financial intermediaries,
including Wealth Management, and selected third parties).
Strategy
The financial crisis of 2008 is likely to have a major adverse
impact on the immediate growth prospects of the asset
management industry. A key change that could depress
future growth in certain areas but provide opportunities in
others is increased aversion to risk among investors. Inves-
tors are considering risk not only in terms of volatility and the
possibility of underperformance in asset classes but also in
terms of the liquidity constraints related to the ability to
redeem investments as well as counterparty risks.
In the longer term, however the industry outlook remains
strong as fundamental drivers over the past two decades
have not changed and, indeed, have now been reinforced.
Strong growth has been driven by the recognition, both
within government and outside, of the need for increased
retirement savings as median populations age and pressures
on public finances correspondingly increase. This has created
a growing industry in both established markets and, more
recently, the new markets of the Middle East, South America
and Asia Pacific.
Global Asset Management’s diversified business model
will allow it to continue to service growth segments by offer-
ing a wide range of products from boutique-like capabilities
to various markets and distribution channels. Global Asset
Management’s wide spectrum of investment capabilities
puts it in a strong position to further develop a holistic range
of investment solutions including liability-driven investment
and retirement products. This business division is well posi-
Key focus areas
Investment capabilities are globally co-ordinated
but with boutique-like discretion wherever possible...
Equities
Fixed income
Alternative and
quantitative
investments
Global real estate
Global investment
solutions
Infrastructure and
private equity
Fund services
Europe, Middle East & Africa
Americas
Asia Pacific
…distribution is regionally organized…
Information
technology
Operations
Human resources
Legal, compliance
and risk control
Financial control
Strategic planning
Consultant relation-
ships and communi-
cations
...and supported by global functions
2BD019_e
94
tioned to capture opportunities with the move towards more
tangible asset classes such as infrastructure, real estate and
private equity. It will also continue to drive its third-party
wholesale initiative forward, particularly in Europe and the
Americas.
Organizational structure
This business division is headquartered in London, with other
main offices in Chicago, Frankfurt, Hartford, Hong Kong,
New York, Paris, Rio de Janeiro, Sydney, Tokyo, Toronto and
Zurich, and employs around 3,800 persons in 25 countries.
Significant recent acquisitions and business transfers
– In December 2006, UBS completed its acquisition of Ban-
co Pactual and renamed the asset management business
UBS Pactual Asset Management. It is currently the sev-
enth largest asset manager in Brazil with invested assets
of approximately CHF 19 billion on 31 December 2008.
– In May 2007, UBS announced the closure of Dillon Read
Capital Management (DRCM). The business was formed
in June 2005 and officially launched in June 2006. The
business had two arms – one managing existing proprie-
tary assets transferred from UBS Investment Bank, the
other established to manage outside investor assets. As
the development of the business did not meet original
expectations, it was closed in May 2007.
– In July 2007, UBS purchased a 51% stake in Daehan In-
vestment Trust Management Company Ltd. (DIMCO)
from Hana Daetoo Securities (formerly Daehan Invest-
ment & Securities Company Ltd.), a wholly owned subsid-
iary of Hana Financial Group. DIMCO was renamed UBS
Hana Asset Management Company Ltd. internationally
and Hana UBS Asset Management in Korea and is one of
the market leaders in the Korean asset management
industry, with invested assets of CHF 13 billion on 31
December 2008.
– In February 2008, UBS acquired 100% of the Caisse Cen-
trale de Réescompte (CCR) Group in France from Com-
merzbank. The businesses of the CCR Group are being
combined into the asset management and wealth man-
agement businesses of UBS in France. CCR Group had
invested assets of CHF 4 billion on 31 December 2008.
– In August 2008, UBS sold its 24.9% stake in Adams Street
Partners to its remaining shareholders. The transaction
closed on 6 August 2008.
Competitors
Global Asset Management’s competitors range from global
competitors in active investments (such as Fidelity Invest-
ments, AllianceBernstein Investments, BlackRock, JP Mor-
gan Asset Management, Deutsche Asset Management and
Goldman Sachs Asset Management) to those managed on
a regional or local basis or specializing in particular asset
classes. In the real estate, hedge fund, infrastructure and
regional private equity investment areas, competitors tend
to be specialist niche players who focus mainly on one asset
class.
It is likely that the current market turmoil will alter the
composition of the asset management industry and its par-
ticipants. Successful competitors are expected to be well-
diversified, large asset managers – structured as either multi-
boutiques or with a more traditional structure that can
benefit from economies of scale – with access to a wide
range of asset classes and a broad global distribution.
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Invested assets by client type
In %, except where indicated
Institutional /wholesale intermediary revenues
In %, except where indicated
31.12.06
31.12.07
31.12.08
Total:
CHF 866 billion
CHF 891 billion
CHF 575 billion
40
60
41
59
42
58
On
100
75
50
25
0
On
100
75
50
25
0
31.12.06
31.12.07
31.12.08
Total:
CHF 3,220 million
CHF 4,094 million
CHF 2,904 million
44
56
42
58
43
57
Institutional
Wholesale intermediary
2BD020_e
Institutional
Wholesale intermediary
2BD021_e
95
100
75
50
25
0
100
75
50
25
0
UBS business divisions and Corporate Center
Global Asset Management
Products and services
Investment management products and services are offered
in the form of segregated, pooled and advisory mandates
along with a range of more than 500 registered investment
funds, exchange-traded funds and other investment vehicles
across all major asset classes.
– Equities offers a full spectrum of investment styles with
varying risk and return objectives. It has three investment
pillars with distinct strategies – core / value (portfolios
managed according to a price to intrinsic value philoso-
phy), growth investors (a quality global growth manager)
and structured equities (strategies that employ proprie-
tary analytics and quantitative methods).
– Fixed income offers a diverse range of global, regional
and local market-based investment strategies that cover a
wide range of benchmarks. Its capabilities include “core”
government and corporate bond strategies, complement-
ed by extended strategies such as high-yield and emerg-
ing market debt.
– Alternative and quantitative investments has two primary
business lines – multi-manager (or fund of funds) and sin-
gle manager. The former constructs portfolios of hedge
funds and other alternative investments operated by
third-party managers, allowing clients diversified expo-
sure to a range of hedge funds, private equity and infra-
structure strategies. O’Connor is a key provider of single
manager global hedge funds.
– Global real estate actively manages real estate invest-
ments in Asia, Europe and the US across all major sectors.
Its capabilities include core, value-added and opportunis-
tic strategies on a global, regional and country basis, and
are offered through open and closed-end private funds,
funds of funds, individually managed accounts and pub-
licly traded real estate securities globally.
– Global investment solutions offers asset allocation, cur-
rency, risk management and advisory services. It manages
a wide array of domestic, regional and global balanced
portfolios, currency mandates, structured portfolios and
absolute return strategies which invest in internal and ex-
ternal portfolios.
– Infrastructure and private equity is involved in the origina-
tion and management of specialist funds that invest in
infrastructure and other private assets globally.
– Fund services, the global fund administration business, pro-
vides professional services, including legal set up, reporting
and accounting for retail and institutional investment funds,
for hedge funds and for other alternative funds.
Investment performance full-year 2008
The decline in almost all financial markets that began in the
latter half of 2007 continued in 2008 and accelerated
towards the end of the year. Investors became increasingly
risk averse and sensitive to news flow thus creating very vol-
atile market conditions, even in perceived lower risk sectors
such as money markets. Across the asset management indus-
try, this difficult environment led to a wide dispersion of in-
vestment performance.
Among equity strategies, a higher proportion equaled or
exceeded their benchmark for 2008 than for 2007, with
most strategies also improving their relative standings com-
pared with peers. This notable improvement in relative per-
formance followed the leadership and broader personnel
changes initiated during 2007. In core / value equities, the
strongest performance for the year was seen in European
Invested assets by region¹
In %, except where indicated
Institutional invested assets by asset class
In %, except where indicated
31.12.06
31.12.07
31.12.08
Total:
CHF 519 billion
CHF 522 billion
CHF 335 billion
31.12.06
31.12.07
31.12.08
Total:
CHF 866 billion
CHF 891 billion
CHF 575 billion
59
10
32
54
13
33
52
10
38
On
100
75
50
25
Americas
Asia Pacific
Europe, Middle East & Africa
1 Assets represented are totals for the Global Asset Management business division worldwide.
The regional split is based on the client servicing location.
0
2BD025_b_e
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20
21
35
18
6
23
23
29
19
6
23
20
22
22
13
2BD025_11_e
Money market
Fixed income
Equity
Multi-asset
Alternatives
100
75
50
25
0
100
75
50
25
0
Investment capabilities and services
Alternative and
quantitative
investments
Single manager
hedge funds
Multi-manager
hedge funds
Quantitative
Infrastructure
fund of funds
Private equity
fund of funds
Equities
Core/value
Global
Fixed income
Global
Country and regional
Country and regional
Sector specific
Emerging markets
Emerging markets
Specialist
High yield
Growth investors
Structured credit
Global
Liquidity /short duration
Country and regional
Indexed
Structured equities
Systematic alpha
Quantitative equities
Portfolio construction
solutions
(including passive)
Global
real estate
Global
Global investment
solutions
Infrastructure and
private equity
Global
Country and regional
Country and regional
Private strategies
Asset allocation
Real estate securities
Currency management
Agriculture
Return and risk targeted
Structured portfolios
Risk management and
advisory services
Direct infrastructure
investment
Listed infrastructure
securities
Direct private equity
investment
Global and regional
Fund services
Alternative funds
Investment funds
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2BD024_e
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and in Canadian and Australian equities. European equities
performance was particularly strong in the second half of the
year and, overall, sector positioning contributed positively,
especially overweights to telecoms and pharmaceuticals and
an underweight to materials. Global equity strategies showed
distinct performance improvement during the year, despite
some setbacks in the fourth quarter where a range of positive
contributors were insufficient to fully offset the drag on per-
formance of only modest overweights to banks and diversi-
fied financials. US equity strategies had a very difficult first
half, followed by a strong third quarter and a weaker fourth
quarter. Contributors to performance varied quarter by quar-
ter but, over the year as a whole, underweights to energy
and materials were the largest detractors. Overweights to
utilities and telecoms were positives, although the latter was
offset by weak stock selection in the sector.
Growth equities strategies posted mixed performance
results with the US large cap growth and US mid cap growth
strategies marginally outperforming their benchmarks while
other strategies underperformed for the year. The first and
second halves of the year delivered markedly different results.
At the end of the second quarter, all major strategies were
outperforming their respective benchmarks for the year to
date. The accelerated deleveraging of the second half of the
year saw an indiscriminate and broad-based sell-off in the
global equity markets that put significant pressure on growth
Wholesale intermediary invested assets by asset class
In %, except where indicated
On
100
75
50
25
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31.12.06
31.12.07
31.12.08
Total:
CHF 347 billion
CHF 369 billion
CHF 240 billion
3
30
27
23
17
4
31
27
19
19
5
24
18
20
33
Money market
Fixed income
Equity
Multi-asset
Alternatives
2BD025_12_e
97
100
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50
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UBS business divisions and Corporate Center
Global Asset Management
stocks and more than erased the outperformance of the first
half of the year. Longer-term returns from growth strategies
generally remain strong.
2008 was another dramatic year for global bond mar-
kets. Some easing of financial market stress was evident to-
wards the end of the first quarter but this was soon reversed
as the economic outlook deteriorated. Levels of stress in
money markets, government and corporate bond markets
increased dramatically during the third quarter, culminating
with the Lehman bankruptcy in September. Despite historic
levels of government and central bank intervention globally,
the third quarter saw a substantial flight to quality in fixed
income markets. Corporate bond yield spreads (the differ-
ence in yield versus government bonds) increased substan-
tially. In the fourth quarter, central banks cut rates aggres-
sively and combined with falling inflation expectations, this
led to substantial falls in yield in developed government
bond markets. Despite the announced bank bail-out plans,
yield spreads on financial sector bonds widened to record
levels. A combination of these factors and our portfolio
positioning led to significant underperformance of US, UK,
global aggregate and absolute return strategies. The struc-
tured credit exposure in some of these strategies was a fac-
tor, although less so as the year progressed as a result of
exposures being reduced. In contrast, European aggregate,
Australian, US municipal and high yield strategies outper-
formed. Money market funds continued to achieve their
capital preservation objectives and Global Asset Manage-
ment did not need to support its large funds, including its
US 2a7, Swiss or Luxembourg money market funds. Refer to
the disscusion on other types of support in the “Off-balance
sheet” section of this report for more information on UBS’s
support to non-consolidated funds in its wealth and asset
management businesses.
Multi-asset strategies, including the global securities com-
posite, underperformed their benchmarks in 2008, largely as
a result of asset allocation and bond selection in some of the
underlying portfolios. Equity selection was mixed and cur-
rency management was strongly positive. At the beginning
of 2008, the asset allocation position in equities was neutral.
As equity valuations became more favorable and there were
clear signals that the authorities were seeking to support the
financial system, exposure to equities was gradually in-
creased at the expense of government bonds. This market
positioning detracted from performance for the year but is
expected to contribute positively in the long term. Dynamic
alpha strategies posted significantly negative returns in 2008
due to the overall long exposure in equities built up over the
course of the year. Positive contributions came from the po-
sitioning within equity markets. Currency strategy performed
very strongly across all strategies for the year. Currency strat-
egy had been quite aggressively positioned against the large
exchange rate misevaluations that had resulted from the
popularity of carry trades (borrowing in a lower yielding cur-
rency to invest in a high yielding currency). The unwinding of
carry trades in more risk-averse markets meant that this
strategy paid off.
In alternative and quantitative investments, hedge fund
performance in 2008 reflected the unprecedented market
dislocations and asset price destruction that occurred glob-
ally. In the multi-manager business, the vast majority of funds
of funds posted losses in absolute terms as most hedge fund
strategies were affected by the extreme market conditions.
Among the O’Connor single manager hedge funds, perfor-
mance was mixed: multi-strategy alpha was negative (but
out performed many peers), while fundamental long / short
neutral and currency and rates strategies were notably posi-
tive for the year.
Overall, invested assets in the global real estate business
declined moderately against a background of falling prop-
erty values and investor risk aversion. Investment perfor-
mance for some of our direct real estate funds subsequently
came under pressure, notably in the UK and US. In contrast,
funds in certain markets, notably Germany and Switzerland,
achieved positive absolute returns. Global real estate securi-
ties strategies suffered in absolute terms over the year but
their long-term relative performance against benchmark be-
gan to see some recovery.
2008 was a significant year for the infrastructure and pri-
vate equity business. The core global direct investment infra-
structure fund (the UBS International Infrastructure Fund)
reached its final close in October, raising USD 1.52 billion.
The underlying investments are performing well, benefiting
from their defensive attributes and strong underlying cash
flows from operating companies. The fund itself is delivering
positive absolute returns. In contrast, global infrastructure
securities strategies suffered negative performance for the
year, in line with the wider equities markets. The launches of
complementary, regionally-focused infrastructure and pri-
vate equity fund initiatives were announced during 2008
with joint venture partners Abu Dhabi Investment Company
and MerchantBridge respectively.
98
Business performance
Business division reporting
CHF million, except where indicated
Institutional fees
Wholesale intermediary fees
Total operating income
Cash components
Share-based components 2
Total personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Business division performance before tax
Key performance indicators
Cost / income ratio (%) 3
Institutional
Invested assets (CHF billion)
of which: money market funds
Net new money (CHF billion) 4
of which: money market funds
Gross margin on invested assets (bps) 5
Wholesale intermediary
Invested assets (CHF billion)
of which: money market funds
Net new money (CHF billion) 4
of which: money market funds
Gross margin on invested assets (bps) 5
Attributed equity and risk-weighted assets
Average attributed equity (CHF billion) 6
Return on attributed equity (RoaE) (%) 7
BIS risk-weighted assets (CHF billion) 8
Return on BIS risk-weighted assets (%) 9
Goodwill and intangible assets (CHF billion) 10
Additional information
Invested assets (CHF billion)
Net new money (CHF billion) 4
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.07
31.12.06
31.12.07
31.12.08
1,659 1
1,246
2,904
922
4
926
434
150
29
33
1,572
1,333
2,370
1,724
4,094
1,632
224
1,856
559
153
53
19
2,640
1,454
54.1
64.5
335
42
(55.6)
6.0
38
240
80
(47.4)
15.2
41
3.0
44.4
8.5
18.9
2.2
575
(103.0)
3,786
522
32
(16.3)
6.7
44
369
70
0.6
4.8
47
3.8
49.5
2.1
891
(15.7)
3,625
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1,803
1,417
3,220
1,305
270
1,575
399
(105)
27
4
1,900
1,320
59.0
519
28
29.8
11.0
38
347
59
7.4
(2.5)
43
2.7
62.5
1.7
866
37.2
3,436
(30)
(28)
(29)
(44)
(98)
(50)
(22)
(2)
(45)
74
(40)
(8)
(36)
31
(14)
(35)
14
(13)
(35)
4
1 Includes a gain of CHF 168 million on the sale of a minority stake in Adams Street Partners. 2 Includes social security contributions and expenses related to alternative investment awards. 3 Operating ex-
penses / income. 4 Excludes interest and dividend income. 5 Operating income / average invested assets. 6 Refer to the “Capital management” section of this report for more information on the equity attribu-
tion framework, which was implemented in 2008. 7 Business division performance before tax / average attributed equity. 8 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to
the Basel I framework for 2007 and 2006. 9 Business division performance before tax / average BIS RWA. 10 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.
99
UBS business divisions and Corporate Center
Global Asset Management
2008
Key performance indicators
Net new money
Net new money outflows were CHF 103.0 billion for full-
year 2008, compared with outflows of CHF 15.7 billion for
full-year 2007. Flows through UBS channels – namely the as-
set management flows relating to Global Wealth Manage-
ment & Business Banking clients – accounted for more than
a third of these full year 2008 outflows and UBS reputation-
al issues also impacted third-party flows.
Outflows of institutional net new money were CHF 55.6
billion, up from CHF 16.3 billion. Excluding money market
flows, outflows increased to CHF 61.6 billion from CHF 23.0
billion. Net outflows were reported in multi-asset, fixed in-
come, equities and alternatives mandates.
Outflows of wholesale intermediary net new money were
CHF 47.4 billion, compared with an inflow of CHF 0.6 billion in
2007. Excluding money market flows, outflows of net new
money increased to CHF 62.6 billion from CHF 4.2 billion. Out-
flows were mainly reported in multi-asset, equities and fixed
income funds.
Invested assets
Institutional invested assets were CHF 335 billion on 31 De-
cember 2008, down from CHF 522 billion on 31 December
2007. This decrease reflects the negative impact of financial
market developments, net new money outflows and curren-
cy fluctuations.
Wholesale intermediary invested assets were CHF 240 bil-
lion on 31 December 2008, down from CHF 369 billion on
31 December 2007, reflecting the negative impact of finan-
cial market developments and net new money outflows and,
to a lesser extent, currency fluctuations.
Gross margin
The gross margin on institutional invested assets was 38 ba-
sis points compared with 44 basis points in 2007. The de-
cline in gross margin was mainly due to lower performance
fees from alternative and quantitative investments and the
Brazilian asset management business and to a negative as-
set-mix effect from a higher proportion of money market
funds to total invested assets.
The gross margin on wholesale intermediary invested assets
was down 6 basis points to 41 basis points, mainly due to
lower performance fees from the Brazilian asset management
business and a change in asset-mix to lower margin products.
Cost / income ratio
The cost / income ratio was 54.1% compared with 64.5% in
2007. This improvement was primarily due to the closure of
Dillon Read Capital Management (DRCM) in 2007, the sale of
100
a minority stake in Adams Street Partners in 2008 and lower
incentive compensation provisions combined with changes to
the forfeiture provisions of future share-based awards.
Results
Pre-tax profit for full year 2008 was CHF 1,333 million, an 8%
decrease from CHF 1,454 million in 2007. Excluding costs re-
lated to the closure of DRCM in 2007 and the gain from the
sale of the minority stake in Adams Street Partners in 2008,
full-year pre-tax profit would have decreased CHF 501 million.
Operating income
Total operating income declined 29% to CHF 2,904 million
from CHF 4,094 million, driven largely by a significant decline
in equity market valuations and relative strengthening of the
Swiss franc against the major currencies, especially the US dol-
lar. Institutional revenues declined to CHF 1,659 million from
CHF 2,370 million. Excluding the gain from the sale of the mi-
nority stake in Adams Street Partners, institutional revenues
would have declined CHF 879 million due to lower perfor-
mance fees (from alternative and quantitative investments and
the Brazilian asset management business) and lower manage-
ment fees (from the lower average invested assets base).
Wholesale intermediary revenues declined to CHF 1,246 million
from CHF 1,724 million due to lower management fees (from
the lower average invested assets base) and lower performance
fees (from the Brazilian asset management business).
Operating expenses
Total operating expenses were CHF 1,572 in 2008, a 40% de-
cline from CHF 2,640 million in 2007. Excluding CHF 212 mil-
lion in DRCM restructuring costs in 2007, total operating ex-
penses would have declined 35% or CHF 856 million. This
decline mainly reflects reduced incentive based compensation
accruals resulting from the lower revenues, the changes to the
forfeiture provisions of future share-based awards, and the re-
sults of the ongoing expenditure review, partly offset by the
first time inclusion of the acquisition in France of the CCR
Group and the full-year impact of the acquisition in Korea of
51% of Daehan Investment Trust Management Company Ltd.
General and administrative expenses were CHF 434 million,
down from CHF 559 million. The 22% decrease was due to
lower provisions and lower travel and entertainment expenses,
partly offset by higher IT costs, the inclusion of the acquisition
in France and the full-year impact of the acquisition in Korea.
Net charges from other business divisions were down
slightly, decreasing by CHF 3 million to CHF 150 million.
Depreciation of property and equipment at CHF 29 mil-
lion was down by CHF 24 million. Excluding the impact of
the DRCM restructuring costs in 2007, depreciation of prop-
erty and equipment increased slightly. This was mainly due
to the inclusion of the acquisition in France and the full-year
impact of the acquisition in Korea.
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2007
Results
Pre-tax profit increased to CHF 1,454 million from CHF 1,320
million in 2006, despite the CHF 212 million of DRCM-relat-
ed closure costs in second quarter 2007. This charge partly
offset the positive impacts of increased performance and
management fees in all business areas and the inclusion of
acquisitions in Brazil and Korea.
Operating income
Operating income was CHF 4,094 million, up 27% from
CHF 3,220 million in 2006. Institutional revenues increased
31% to CHF 2,370 million from CHF 1,803 million in 2006.
This was mainly due to higher management fees in all invest-
ment areas, as well as the full-year impact of the Brazilian
asset management business and the post-July impact of the
Korean asset management business. These were partly off-
set by higher provisions. Wholesale intermediary revenues
rose 22% to CHF 1,724 million from CHF 1,417 million in
2006, reflecting higher management fees across all busi-
nesses and higher performance fees, mainly from the Brazil-
ian asset management business.
Operating expenses
A 39% increase, to CHF 2,640 million from CHF 1,900 mil-
lion in 2006, primarily reflected DRCM-related closure ex-
penses and increased staff levels. Personnel expenses were
CHF 1,856 million, 18% above 2006, reflecting the closure
of DRCM, higher staff levels as well as the inclusion of the
Brazilian and Korean asset management business. General
and administrative expenses increased 40% to CHF 559 mil-
lion in 2007 from CHF 399 million in 2006. In addition to the
DRCM closure expenses, general and administrative expens-
es increased due to higher technology-related expenditure
and the full-year impact of the inclusion of the Brazilian asset
management business. Net charge-ins from other business
units were CHF 153 million, primarily due to DRCM, com-
pared with the net charge-outs to other business units of
CHF 105 million a year earlier. Over the same period, depre-
ciation increased by 96% to CHF 53 million, as a result of the
DRCM closure.
Key performance indicators
Net new money
Institutional net new money outflows were CHF 16.3 billion,
compared with net inflows of CHF 29.8 billion in 2006. Out-
flows in core / value equity mandates, and to a lesser extent
in fixed income mandates, were partly offset by inflows into
all other asset classes, particularly alternative and quantita-
tive investments and money markets.
Wholesale intermediary net new money inflows were
CHF 0.6 billion, compared with inflows of CHF 7.4 billion for
2006. Inflows, mainly into multi-asset and money market
funds, were partly offset by outflows from fixed income
funds.
Invested assets
Institutional invested assets were CHF 522 billion at year
end, up CHF 3 billion from 2006. The net increase was driv-
en by the positive impact of financial market valuations and
the inclusion of assets related to the acquisition in Korea in
third quarter 2007, which were only partly offset by net new
money outflows and negative currency translation impacts.
Wholesale intermediary invested assets were CHF 369
billion on 31 December 2007, up CHF 22 billion from 31
December 2006. This increase was primarily due to positive
financial markets valuation impacts and the inclusion of as-
sets related to the acquisition of UBS Hana Asset Manage-
ment in third quarter 2007, partly offset by negative cur-
rency translation impacts.
Gross margin
The gross margin on institutional invested assets was 44
basis points, up six basis points from 2006. The increase was
due to higher performance fees, mainly in alternative and
quantitative investments, as well as inflows into higher mar-
gin products.
The gross margin on wholesale intermediary invested
assets was 47 basis points, up four basis points from 2006,
largely driven by higher performance fees (mainly in the Bra-
zilian asset management business) as well as inflows into
higher margin products.
Cost / income ratio
The cost / income ratio was 64.5%, an increase of 5.5 per-
centage points from 2006, primarily due to the CHF 212
million charge related to the closure of DRCM in second
quarter 2007.
101
UBS business divisions and Corporate Center
Investment Bank
Investment Bank
Business description
UBS is a leading investment banking and securities firm, delivering comprehensive advice and execution to
clients across the world’s capital markets.
Business
The Investment Bank provides a broad range of products
and services to corporate and institutional clients, govern-
ments, financial intermediaries and alternative asset man-
agers. The needs of private investors are met indirectly
through working with UBS’s wealth management business-
es and other private banks.
Strategy
The current crisis in the financial markets and the resulting
dramatic changes in industry dynamics, and the losses in-
curred in 2007 and 2008, require the Investment Bank to
recalibrate its business in order to generate profitable and
sustainable growth. A number of senior leadership changes
took place within the Investment Bank in 2008: Jerker
Johansson joined UBS as Chairman and Chief Executive of
the Investment Bank in March 2008, Carsten Kengeter and
Jeffrey Mayer were appointed co-heads of the fixed in-
come, currencies and commodities (FICC) business area
and Tom Daula was appointed Chief Risk Officer to oversee
credit risk and market risk on a combined basis as well as
operational risk.
The Chairman and CEO of the Investment Bank, mem-
bers of the Group Executive Board and the UBS Board of
Directors have concluded a detailed strategic review. Based
on this, the Investment Bank is implementing a comprehen-
sive repositioning plan focused on client-driven growth, a
simplified organizational structure and a de-levered and de-
risked balance sheet. The FICC business area has signifi-
cantly restructured to concentrate on client service, simplify
its operating model, strengthen risk management and fo-
cus on competitive strengths, including foreign exchange
and flow businesses in credit and rates. The municipal secu-
rities business and fixed income proprietary trading busi-
nesses have been closed and certain commodities business-
es have been sold. Real estate and securitization businesses
and complex structured products have been substantially or
downsized or exited.
Equities will continue to leverage its global distribution
platform and product expertise, while seeking further effi-
ciency gains. The investment banking department will con-
tinue to provide corporate and institutional clients with advi-
sory services while leveraging its capital markets knowledge
to both deepen long-term client relationships and gain mar-
ket share.
These steps will require more efficient utilization of re-
sources and a continued emphasis on cost containment and
workforce productivity, and will bring costs down to a more
sustainable level. They are occurring in conjunction with an
aggressive effort to reduce the size of the balance sheet. In
addition, a new market-based funding model and robust risk
framework have been implemented. However, implementa-
tion of this strategy is inextricably linked to the talent and
expertise within the firm. The Investment Bank will therefore
continue to attract, develop and retain the best people and
foster a collaborative and meritocratic culture. Announced
headcount reductions have and will come predominantly
from the businesses being exited or downsized.
Organizational structure
The Investment Bank is headquartered in London and employs
approximately 17,000 people across 38 countries. It has three
distinct business areas which are run functionally on a global
basis: equities, FICC and the investment banking department.
The investment banking department is an industry leader and
provides advice on cross-border mergers and acquisitions in ad-
dition to raising capital for companies and governments. Tradi-
tionally one of the leaders in European corporate finance, the
Investment Bank has built strong franchises in the US and Asia
Pacific in recent years. An important partner for institutional
clients, the Investment Bank’s market-leading equities business
is complemented by its top-tier foreign exchange business and
broad product capabilities across fixed income markets.
Although the Investment Bank pursues a strategy of organ-
ic development, its presence has been enhanced through ac-
quisitions. Key acquisitions over the past three years include:
– the September 2006 acquisition of the global futures and
options business of ABN AMRO, which positioned UBS as
a market leader in futures and options as well as a global
provider of execution and clearing services.
– the December 2006 acquisition of the Brazilian financial
services firm Banco Pactual, which placed the Investment
Bank as a leader in its field in the Brazilian market.
– the April 2007 acquisition of a 20% stake in UBS Securi-
ties, China.
102
Legal structure
The Investment Bank operates through branches and subsid-
iaries of UBS AG. Securities activities in the US are conducted
through UBS Securities LLC, a registered broker-dealer.
Competitors
The competitive landscape changed significantly in 2008. Mar-
ket dislocation led UBS and its competitors to take significant
steps to strengthen their balance sheets, reduce costs and
maintain client confidence. Some governments and investors
also took significant stakes in select financial institutions in
2008. The Investment Bank competes against other major in-
ternational players such as Bank of America / Merrill Lynch, Cit-
igroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Mor-
gan Chase and Morgan Stanley.
Products and services
Equities
A leading participant in the global primary and secondary
markets for equity, equity-linked and equity derivative prod-
ucts, the equities business area distributes, trades, finances
and clears cash equity and equity-linked products. It also
structures, originates and distributes new equity and equity-
linked issues and provides research on companies, industry
sectors, geographical markets and macroeconomic trends. A
focus on technology has led to significant improvements in
business processes and client services. Investments have
been made in direct market access, prime brokerage and cli-
ent relationship platforms, earning UBS recognition as a
market leader in the provision of a number of electronic ser-
vices to clients. The business area also has a global footprint
with a strong presence in many local markets.
Business lines of the equities business and their functions
are listed below:
– Cash equities provides clients with expert advisory and
execution offerings with top-tier research, corporate ac-
cess and tailored investment ideas. With market-leading
trading execution for single stock and portfolio trading,
UBS provides capital commitment, full service and block
trading, advanced electronic trading strategies and tools,
state-of-the-art analytics and value-enhancing commis-
sion management services.
– Derivatives provides standardized products and custom-
ized investment solutions to clients. In addition to prod-
ucts with returns linked to equities or equity indices, it
also offers derivative products linked to hedge funds, mu-
tual funds, real estate and commodity indices in a variety
of formats such as over-the-counter, securitized, fund-
wrapped and exchange-traded.
– Prime services provides integrated global services, including
securities borrowing and lending, equity swaps execu-
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Selected deals
Mergers and acquisitions (M&A)
Joint financial advisor, bookrunner and sponsor to Lloyds TSB Group Plc
on its GBP 14.7 billion acquisition of HBOS Plc and GBP 5.5 billion
capital raising
Lead financial advisor, joint lead arranger and joint bookrunner to
Gas Natural SDG, S.A. on its EUR 16.8 billion cash offer for Union Fenosa S.A.
Lead financial advisor to Eli Lilly and Company on its USD 6.5 billion
acquisition of Imclone Systems Inc.
Sole financial advisor to St. George Bank Limited on its AUD 18.6 billion
merger with Westpac Banking Corporation
Equity capital markets
Advisor and joint bookrunner on the USD 19.7 billion initial public offering
(IPO) of Visa Inc. This was a landmark transaction representing the largest
IPO in US history, and the second largest IPO worldwide after the USD 21.9
billion IPO for Industrial & Commercial Bank of China in 2006
Joint bookrunner on the GBP 2.2 billion rights issue for Centrica Plc, the
second-largest UK equity issue in 2008 outside the financial sector
Joint lead manager and joint underwriter for the fully underwritten AUD
2.6 billion entitlement offer for Wesfarmers Limited
Debt capital markets
Joint bookrunner on a USD 2.5 billion issue for Wells Fargo & Co, its first
institutional fixed income hybrid offering since November 2006
Joint bookrunner for China Merchants Bank Co Ltd. on its USD 4.4 billion
domestic lower tier 2 bond, the largest bank capital deal in Asia Pacific since
2005 and voted the Best Local Currency Bond by FinanceAsia in 2008
Joint bookrunner on a EUR 5 billion benchmark issue for KFW, the
promotional bank of the Federal Republic of Germany, its first euro
benchmark transaction in 2008
Joint lead arranger and joint bookrunner to Verizon Wireless on a USD
17.0 billion bridge facility to finance the acquisition of Alltel Corp.
Selected awards
Investment Bank
No. 1 M&A Financial Advisor (ECM roles) – Thomson Reuters 2008
Corporate Broker of the Year – Acquisitions Monthly 2009
Equities
Asia Pacific Equity House of the Year – International Financial Review
2003, 2005–2008
No. 1 European Equity Research Firm – Institutional Investor 2002–2009
Fixed income currencies and commodities
Financial Bond House of the Year – International Financial Review 2008
No. 2 Foreign Exchange House – Euromoney 2008
103
UBS business divisions and Corporate Center
Investment Bank
tion, multi-asset-class prime brokerage and multi-asset-
class exchange-traded derivatives execution and clearing.
These services are provided to an expanding list of hedge
funds, banks, asset management and commodity trading
clients.
– Equity research provides independent assessments of the
prospects for over 3,400 companies across most industry
sectors and geographical regions (corresponding to 82%
of world market capitalization), as well as economic, stra-
tegic and quantitative research.
Fixed income, currencies and commodities
The FICC business area delivers products and solutions to cor-
porate, institutional and public sector clients in all major mar-
kets. In response to changes in global markets and client de-
mand, FICC significantly restructured at the start of 2009 to
improve client service, simplify its operating model, strength-
en risk management and focus on competitive strengths. The
real estate and securitization business will be exited (with the
exception of pass-through trading, which is now part of mac-
ro, described below); certain commodities businesses (ex-
cluding precious metals) have been sold, and the structured
products business significantly downsized. In December
2008, a significant proportion of FICC risk positions were
transferred to a fund owned and controlled by the Swiss Na-
tional Bank (SNB), and further positions are planned to be
transfered in March 2009. Refer to the “Transaction with the
Swiss National Bank” sidebar in the “Strategy and structure”
section of this report for more information on this transac-
tion. In first quarter 2009 additional risk positions will be iso-
lated in a specialist group whose mandate is to maximize
value while conducting an orderly exit of positions.
The business lines of the FICC business and their func-
tions are listed below:
– Macro consists of foreign exchange, money market and
interest rate risk management activities. It provides a
range of foreign exchange, treasury and liquidity man-
agement solutions to institutional and private clients. In-
terest rate activities include standardized rate-driven
products and services such as interest rate derivatives
trading, underwriting and trading of government and
agency securities.
– Credit is active in the origination, underwriting, and distri-
bution of primary cash and synthetic credit transactions.
It is also active in secondary trading and market-making
in high yield and investment grade bonds and loans in
both cash and derivative products.
– Emerging markets has local market presence in Latin
America through UBS Pactual, as well as in Asia and Cen-
Foreign exchange: Euromoney-eligible volumes1
Cash, CCT swap, derivatives, PB rolls
2001
2002
2003
2004
2005
2006
2007
2008
40
32
24
16
8
0
15.8
32.0
32.6
14.9
11.0
11.5
12.4
12.5
11.9
22.0
16.1
13.3
9.8
3.6
4.9
5.4
Volume (USD trillion)
Euromoney FX-poll market share (in %)
1 Eligible volumes not equal to reported UBS volumes.
20
16
12
8
4
0
tral and Eastern Europe, enabling it to offer local investors
access to international markets and international inves-
tors an opportunity for local exposure.
– Client services is the global sales effort, unifying product
specialist sales groups, including foreign exchange, mon-
ey market, rates and emerging markets products.
– Quantitative analysis provides tailored solutions for clients
as well as more broadly scalable solutions for the FICC
flow platforms.
– Research provides investors with analysis across a selected
range of issuers, products, markets and industries.
Investment banking
The investment banking department provides advice and a
range of execution services to corporate clients, financial in-
stitutions, financial sponsors, sovereign wealth funds and
hedge funds. Its advisory group assists on complex transac-
tions and advises on strategic reviews and corporate restruc-
turing solutions, while UBS’s capital markets and leveraged
finance teams arrange the execution of primary and second-
ary equity, as well as investment grade and non-investment
grade debt issues worldwide. With a presence in all major
financial markets, coverage is based on a comprehensive ma-
trix of country, sector and product banking professionals.
With the goal of creating a fully integrated primary busi-
ness to drive revenue growth and realize productivity gains,
the global groups for equity capital markets and debt capital
markets have been combined. The initial focus is on product
knowledge sharing, to enable teams to provide holistic advice
and innovative solutions across the entire capital structure.
104
SRBG009_e
20
15
10
5
0
40
30
20
10
0
Business performance
Business division reporting
CHF million, except where indicated
Investment banking
Advisory
Capital market revenues
equities
fixed income, currencies and commodities
Other fee income and risk management
Sales and trading
Equities
Fixed income, currencies and commodities
Total Investment Bank income
Credit loss (expense) / recovery 1
Total Investment Bank operating income excluding own credit
Own credit 2
Total Investment Bank operating income as reported
Cash components
Share-based components 3
Total personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Impairment of goodwill
Amortization of intangible assets
Total operating expenses
Business division performance before tax
Key perfomance indicators
Compensation ratio (%) 4
Cost / income ratio (%) 6
Impaired lending portfolio as a % of total lending portfolio, gross
Average VaR (10-day, 99% confidence, 5 years of historical data) 7
Attributed equity and risk-weighted assets
Average attributed equity (CHF billion) 8
Return on attributed equity (RoaE) (%) 9
BIS risk-weighted assets (CHF billion) 10
Return on BIS risk-weighted assets (%) 11
Goodwill and intangible assets (CHF billion) 12
Additional information
Personnel (full-time equivalents)
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As of or for the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
(57)
(40)
(57)
(65)
(41)
(78)
(241)
(42)
(89)
(868)
208
(42)
(57)
0
22
10
(52)
(37)
(106)
(27)
2,880
1,609
1,844
977
866
(573)
(26,712)
5,184
(31,895)
(23,832)
(2,575)
(26,407)
2,032
(24,375)
5,173
(292)
4,882
3,399
990
231
341
83
6,636
2,697
4,261
2,783
1,478
(322)
(7,833)
9,004
(16,837)
(1,197)
(266)
(1,463)
659
(804)
8,902
2,384
11,286
3,386
811
210
0
172
9,925
(34,300)
15,865
(16,669)
N/A 5
N/A5
3.6
374
26.8
(128.2)
195.8
(15.8)
4.6
N/A 5
N/A 5
0.4
514
190.7
(8.7)
5.3
4,999
1,821
3,631
2,095
1,536
(453)
16,727
8,387
8,340
21,726
47
21,773
0
21,773
9,788
1,898
11,686
3,210
1,034
203
0
72
16,205
5,568
53.8
74.6
0.1
410
174.6
3.5
5.5
17,171
21,779
21,733
(21)
1 2008 includes CHF 1,329 million in credit losses from impairment charges on reclassified financial instruments. 2 Represents own credit changes of financial liabilities designated at fair value through
profit or loss. The cumulative own credit gain for such debt held at 31 December 2008 amounts to CHF 2,953 million. This gain has reduced the fair value of financial liabilities designated at fair value
through profit or loss recognized on UBS’s balance sheet. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information. 3 Includes social secu-
rity contributions and expenses related to alternative investment awards. 4 Personnel expenses / income. 5 Neither the cost / income nor the compensation ratio are meaningful due to negative rev-
enues recorded in the Investment Bank. 6 Operating expenses / income. 7 Regulatory Value at Risk. In third quarter 2008, UBS changed from internal management VaR to regulatory VaR as the basis
for external disclosure. Refer to the “Value at Risk developments – treatment of CVA” sidebar in the “Market risk” section of this report for more information about this change. 8 Refer to the “Capital
management” section of this report for more information on the equity attribution framework, which was implemented in 2008. 9 Business division performance before tax / average attributed equi-
ty. 10 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006. 11 Business division performance before tax / average BIS
RWA. 12 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.
105
UBS business divisions and Corporate Center
Investment Bank
2008
Key performance indicators
As in 2007, neither the cost / income ratio nor the compen-
sation ratio were meaningful in 2008 due to negative total
operating income.
Average regulatory Value at Risk (VaR) (10-day, 99% con-
fidence, five years of historical data) decreased to CHF 374
million, down from CHF 514 million in 2007. Year-end regu-
latory VaR was also lower at CHF 485 million, compared with
CHF 552 million the previous year. Refer to the “Market risk”
section of this report for more information on the Invest-
ment Bank’s VaR.
The Investment Bank’s gross lending portfolio was CHF 169
billion, up from CHF 148 billion on 31 December 2007. The
ratio of the impaired gross lending portfolio to the total gross
lending portfolio was 3.6% at the end of 2008, up from 0.4%
at the end of 2007. Following the reclassification of certain as-
sets in fourth quarter 2008, impairment charges related to
these assets have been reflected in credit loss as opposed to
trading, contributing to this increase. Refer to the “Credit risk”
section of this report for more information on the Investment
Bank’s lending portfolio and “Note 29 Measurement catego-
ries of financial assets and financial liabilities” in the financial
statements of this report for more information on the reclas-
sification of certain assets in fourth quarter 2008.
Results
In 2008, the Investment Bank recorded a pre-tax loss of CHF
34,300 million compared with a pre-tax loss of CHF 16,669
million in 2007, primarily due to the losses on risk positions
within the fixed income, currencies and commodities (FICC)
area. For full-year 2008, equities and investment banking
revenues were down from a record year in 2007. A credit
loss expense of CHF 2,575 million was recorded in 2008,
mainly due to impairment charges taken on reclassified
financial assets, as mentioned above, compared with CHF
266 million in 2007. In 2008, the Investment Bank recorded
a gain on own credit from financial liabilities designated at
fair value of CHF 2,032 million, resulting from the widening
of UBS’s credit spread, which was partly offset by the effects
of redemptions and repurchases of such liabilities. Refer to
“Note 27 Fair value of financial instruments” in the financial
statements of this report for more information. Operating
expenses for the Investment Bank in 2008 decreased sig-
nificantly from 2007, mainly reflecting lower performance-
related compensation.
Operating income
Total operating income in 2008 was negative CHF 24,375
million, down from negative CHF 804 million a year earlier.
106
Equities
Revenues, at CHF 5,184 million in 2008, were down 42%
from CHF 9,004 million in 2007. 2008 was a demanding
year for equities with continued difficult market conditions
impacting overall business performance. Cash equity reve-
nues were marginally lower as declines in revenues across
Asia Pacific and Europe were only partially offset by growth
in the US. Derivatives revenues were down as market vola-
tility, depressed client volumes, lack of liquidity and highly
correlated markets impacted performance across all re-
gions, particularly in the fourth quarter. Equity linked reve-
nues were down, with most regions impacted by declines in
valuations, falling equity markets and reduced liquidity.
Prime brokerage services had a solid performance, but rev-
enues were down overall as a strong first half performance
was offset by deterioration in the second half. Exchange-
traded derivatives revenues increased, as it benefited from
strong first and fourth quarters driven by significant volatil-
ity in the market. Proprietary trading revenues were nega-
tive for the year, reflecting the significant change in market
conditions.
Fixed income, currencies and commodities
Revenues were negative CHF 31,895 million, down from
negative CHF 16,837 million a year earlier. Consequences of
the global market crisis, including forced liquidations, gov-
ernment bail-outs and consolidation in the banking sector,
negatively affected the majority of the FICC businesses in
2008. Credit recorded losses in both client and proprietary
trading as a result of the significant turbulence in the mar-
kets and subsequent severe lack of liquidity. The negative
emerging markets result was driven by losses in Asia Pacific.
These negative effects were only partially offset by positive
results in certain areas. Rates experienced a solid year, driven
by derivatives and government bonds in Europe and rates de-
rivatives in both Asia Pacific and the US. Foreign exchange and
money markets produced a strong year as it capitalized on
volatile markets and strong client flows. The short-term inter-
est rate business benefited from market movements to gener-
ate an exceptional result in 2008. The foreign exchange distri-
bution business posted very good results across all regions,
benefiting from strong client flows seeking to access liquidity
in the market. Structured products posted positive revenues
due to strong client interest in structured funding solutions.
Investment banking
Revenues of the investment banking department, at CHF
2,880 million in 2008, decreased 57% from CHF 6,636 mil-
lion the previous year. Market activity slowed significantly
during the year, resulting in reduced advisory revenues across
all regions. Market volatility in both equity and debt markets
led to lower capital markets revenues.
According to data from Dealogic, UBS ended 2008 with a
5.6% market share of the global fee pool compared to 5.8%
in 2007. However, UBS improved its rank from sixth in 2007
to fifth in 2008.
cy costs due to real estate restructuring, and by legal provi-
sions.
Operating expenses
Operating expenses declined by CHF 5,940 million to CHF
9,925 million in 2008, a 37% decrease from CHF 15,865
million the previous year.
Personnel expenses, at CHF 4,882 million in 2008, de-
creased 57% from a year earlier, driven by significantly lower
performance-related compensation and lower salary costs,
only partly offset by restructuring charges. Share-based com-
pensation was down significantly from 2007, mainly due to
lower performance-related compensation. Full-year results
for 2007 included accruals for share-based compensation
during the year. These are not reflected in full-year 2008 as,
starting in 2009, they will be amortized over the vesting pe-
riod of these awards.
Charges from other business units increased to CHF 990
million in 2008 from CHF 811 million in 2007. The increase
reflects the cessation of a private equity performance fee
received in 2007, an IT data center restructuring fee and in-
creased allocations from Global Wealth Management &
Business Banking reflecting higher operating volumes.
Depreciation rose 10%, to CHF 231 million in 2008 from
CHF 210 million in 2007, as the real-estate restructuring
charges mentioned above resulted in additional depreciation
costs. Amortization of intangible assets, at CHF 83 million in
2008, was down from CHF 172 million a year earlier. A
goodwill impairment charge of CHF 341 million relating to
the exiting of the municipal securities business by the Invest-
ment Bank was recognized in second quarter 2008. There
was no goodwill impairment charge for full-year 2007.
General and administrative expenses increased slightly to
CHF 3,399 million in 2008 from CHF 3,386 million in 2007.
Reductions in travel and entertainment and IT and other out-
sourcing costs were more than offset by increases in occupan-
Included in the 2008 expenses mentioned above is a re-
structuring charge of CHF 737 million recorded in fourth
quarter, consisting of CHF 435 million of personnel expenses
and CHF 302 million of costs related to real estate.
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107
UBS business divisions and Corporate Center
Investment Bank
2007
Key performance indicators
Neither the cost / income ratio nor the compensation ratio
was meaningful in 2007 due to negative total operating in-
come. In 2006, the cost / income ratio was 74.6% and the
compensation ratio 53.8%.
Average regulatory Value at Risk (VaR) (10-day, 99% con-
fidence, 5 years of historical data) increased to CHF 514 mil-
lion, up from CHF 410 million in 2006. Year-end regulatory
VaR was also higher at CHF 552 million, up from CHF 465
million the previous year. These increases reflect the signifi-
cant pick-up in market volatility in the second half of 2007.
Refer to the “Market risk” section of this report for more
information on the Investment Bank’s VaR.
The Investment Bank’s gross lending portfolio was CHF
148 billion, up from CHF 120 billion on 31 December 2006,
reflecting the expanding prime brokerage and exchange-
traded derivatives businesses. The gross impaired lending
portfolio to total gross lending portfolio ratio rose to 0.4%
in 2007 from 0.1% in 2006.
Results
In 2007 the Investment Bank recorded a pre-tax loss of CHF
16,669 million compared with a profit of CHF 5,568 million
in 2006, primarily due to losses recorded on positions related
to the US residential real estate market which more than
offset the solid performance in other areas.
For full-year 2007, equities posted record results with very
strong cash commissions, derivatives and prime services rev-
enues. The investment banking department also had a re-
cord year in 2007, with all geographical regions showing
double-digit growth. Operating expenses for the Investment
Bank decreased from 2006, mainly reflecting lower perfor-
mance-related bonus accruals and a change in the composi-
tion of bonus between cash and shares. This was partially
offset by higher salary and general and administrative costs,
driven by increased average staff levels over the year.
Operating income
Total operating income in 2007 was negative CHF 804 mil-
lion, down from positive CHF 21,773 million a year earlier.
This change was driven by losses recorded on positions re-
lated to the US residential real estate market.
Operating income by segment
Investment banking
Revenues of the investment banking department, at CHF
6,636 million in 2007, increased 33% from CHF 4,999 million
the previous year. This reflected growth in each geographical
108
region, especially in the Americas. While the advisory and eq-
uity capital markets businesses reported significant gains over
the prior year (up 48% and 33% respectively), the debt capital
markets business declined 4% as it was impacted by challeng-
ing markets in the second half of 2007.
Sales and trading
Revenues declined to negative CHF 7,833 million from posi-
tive CHF 16,727 million, driven by negative revenues of CHF
16,837 in FICC that were only partly offset by a positive rev-
enue contribution of CHF 9,004 from Equities.
Equities
Equities revenues, at CHF 9,004 million in 2007, were up 7%
from CHF 8,387 million in 2006. Overall, cash equity reve-
nues were higher, with strong volumes leading to record
commissions, partially offset by greater client facilitation
costs. Despite a slowdown in the second half of 2007, the
derivatives business posted its highest ever results following
strong growth in Asia Pacific and Europe, Middle East and
Africa. The exchange-traded derivatives business rose as it
benefited from a full year of ABN AMRO’s futures and op-
tions revenues (ABN AMRO’s futures and options business
was acquired on 30 September 2006). Prime brokerage ser-
vices continued to grow as client numbers and balances in-
creased. Equities proprietary trading revenues sharply de-
clined compared to the prior year, related to the credit market
dislocation in the US. The equity linked businesses also con-
tributed lower returns compared to 2006.
Fixed income, currencies and commodities
FICC revenues were negative CHF 16,837 million, down
from positive CHF 8,340 million a year earlier. The credit
market dislocation affected most of the FICC businesses in
the second half of 2007, leading to losses on mortgage-re-
lated positions. Credit recorded losses in both client and pro-
prietary trading in the context of extreme market disruption
and low liquidity at the end of 2007. Structured products
revenues were down compared to the previous year, largely
driven by the negative impact of the credit dislocation. Com-
modities revenues declined due to lower volumes and vola-
tility, especially affecting power and gas and to a lesser ex-
tent precious metals.
These negative effects were only partially offset by posi-
tive results in other areas. The emerging markets business
result was up as full-year revenues from Banco Pactual were
included. Positive results were also driven by the demutual-
ization and mark-to-market gains on the stake in the Brazil
Mercantile & Futures Exchange. The underlying foreign ex-
change spot business saw strong increases due to higher vol-
umes. The foreign exchange distribution business also post-
ed very good results, stemming from all geographical regions.
The rates business was up, driven by higher results in Euro-
pean derivatives.
Operating expenses
Operating expenses declined by CHF 340 million to CHF
15,865 million in 2007, a 2% decrease from CHF 16,205
million the previous year.
Personnel expenses, at CHF 11,286 million in 2007, de-
creased 3% from a year earlier, reflecting lower performance-
related compensation and a change in the composition of
bonuses between cash and shares. This was partially offset by
higher salary costs due to internal growth and acquisitions. In
addition, severance payments were made for redundancies
towards the end of the year. Share-based compensation was
up significantly from 2006, mainly reflecting a change in the
forfeiture rules of certain share-based awards.
General and administrative expenses were CHF 3,386
million in 2007, up 5% from CHF 3,210 million in 2006.
Professional fees were up due to higher legal-related expen-
ditures in all businesses. Occupancy costs in the Americas
and Asia Pacific, rent and maintenance of machines and
equipment and IT and other outsourcing costs rose due to
higher staff levels. Administration expenditures rose as well.
This was partially offset by lower provisions compared to
2006.
Charges from other business units decreased to CHF
811 million in 2007 from CHF 1,034 million in 2006. The
decline reflected lower charges by Global Asset Manage-
ment for management of the Investment Bank’s funds in-
vested in Dillon Read Capital Management (DRCM), which
were reintegrated into the Investment Bank in May 2007,
and as a result of a 2007 performance-related credit from
Industrial Holdings.
Depreciation rose slightly, by 3%, to CHF 210 million in
2007 from CHF 203 million in 2006. This was due to addi-
tional office space in the Americas and Europe. The amorti-
zation of intangible assets, at CHF 172 million in 2007, was
up 139% from CHF 72 million a year earlier due to the two
acquisitions – Banco Pactual and ABN AMRO’s futures and
options business. There was no goodwill impairment charge
for either full-year 2007 or 2006.
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109
UBS business divisions and Corporate Center
Corporate Center
Corporate Center
Description
The Corporate Center partners with the business divisions to ensure that UBS operates as an effective
and agile firm, responding effectively to trends in the financial industry according to a common vision
and set of values.
Aims and objectives
The Corporate Center assists UBS in managing its businesses
through provision of Group-level control in the areas of fi-
nance, risk, legal and compliance. It strives to maintain an
appropriate balance between risk and return in the firm’s
businesses while establishing and controlling UBS’s corpo-
rate governance processes, including compliance with rele-
vant regulations. Each functional head in the Corporate
Center has authority across UBS’s businesses for his or her
area of responsibility, including the authority to issue Group-
wide policies for that area, and is directly reported to by his
or her business division counterpart.
The Corporate Center is responsible for the following ac-
tivities in UBS: financial, tax and capital management; risk
control, legal and compliance activities; communicating with
all UBS stakeholders; branding; and positioning the firm as
an employer of choice. In addition, the Corporate Center
also assumes operational responsibility for certain business
units that provide shared services to the business divisions –
among them the information technology infrastructure and
offshoring units (including the service centers in India and
Poland).
Organizational structure
The Corporate Center consists of operational functions
plus the information technology infrastructure and Group
offshoring units. It is led by the Chief Operating Officer
(COO) of the Corporate Center and its operational func-
tions are managed by the Corporate Center executive com-
mittee.
Chief Operating Officer of the Corporate Center
The COO of the Corporate Center is responsible for its busi-
ness planning and forecasting, as well as its human resourc-
es core processes. The holder of this position is responsible
for information technology infrastructure, group offshoring
activities and the corporate real estate portfolio for UBS’s
own use.
Group Chief Financial Officer
The Group Chief Financial Officer (Group CFO) is responsi-
ble for ensuring transparency within the reporting of finan-
cial results for both the Group and its businesses. The role
also entails responsibility for the Group’s financial report-
ing, planning, forecasting and controlling processes, as
well as the provision of advice on financial aspects of stra-
tegic plans and mergers and acquisitions transactions. Fur-
ther responsibilities include overseeing UBS’s tax and trea-
sury functions. In coordination with the Group General
Counsel, the Group CFO defines the standards for account-
ing, reporting and disclosure and, together with the Chief
Executive Officer, provides external certifications under sec-
tions 302 and 404 of the US Sarbanes-Oxley Act of 2002.
These duties are in addition to managing relations with in-
vestors and coordination of working relationships with in-
ternal and external auditors.
Group Chief Risk Officer
The Group Chief Risk Officer (Group CRO) is responsible for
the development and implementation of UBS’s risk manage-
ment and control principles, including the development of
appropriate control frameworks for market, credit and op-
erational risks throughout the Group. The Group and busi-
ness division risk functions work together to manage the fol-
lowing: formulating and implementing risk policies and
control processes; developing risk quantification methods;
monitoring associated limits and controls; ensuring that risks
are completely and consistently recorded and aggregated;
and ensuring that exposures are continuously monitored,
controlled and remain within approved risk profiles. Each risk
officer exercises specific risk control authorities.
Group General Counsel
The Group General Counsel, supported by the head of Group
Compliance, has Group-wide responsibility for legal and com-
pliance matters and for legal and compliance policies and pro-
cesses. The position is responsible for defining the strategy,
goals and organizational structure of the legal function, in ad-
dition to setting and monitoring the Group-wide quality stan-
dards for handling the legal affairs of the Group. Supported
by the head of Group Compliance, the Group General Coun-
sel is responsible for ensuring that UBS meets relevant regula-
tory and professional standards in the conduct of its business.
Other responsibilities include supervision of the General Coun-
sels of the business divisions and working closely with the
Group CRO with regard to the operational risk aspects of legal
110
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and liability risk. Furthermore, the Group General Counsel
represents UBS’s interests to policy-makers and, in close coop-
eration with the Group CRO and Group CFO as appropriate,
establishes Group-wide management and control processes
for the Group’s relationship with regulators.
Group Treasurer
The Group Treasurer is responsible for the management of
UBS’s financial resources and financial infrastructure. The
position is responsible for Group-level governance of trea-
sury processes and transactions relating to UBS’s corporate
legal structure, regulatory capital, balance sheet, funding
and liquidity, and non-trading currency and interest rate
risk. Additional responsibilities include the issuance of poli-
cies to ensure proper management and efficient co-ordina-
tion of treasury processes on a Group-wide basis. The Group
Treasurer manages the Group’s equity, taking into account
financial ratios and regulatory capital requirements, with a
view to maintaining strategic flexibility and adequate capi-
talization and ratings levels. The position manages UBS’s
holdings of its own shares and recommends corporate ac-
tions to the Group Executive Board (GEB) and the Board of
Directors (BoD).
Head of Group Controlling & Accounting
The Head of Group Controlling & Accounting has UBS-wide
responsibility for financial control. The position is responsible
for the production and analysis of accurate and objective reg-
ulatory, financial and management accounts and reports. The
Head of Group Controlling & Accounting communicates rel-
evant financial and regulatory information to the BoD, the
GEB, the audit committee, internal and external auditors and
the CFOs of the business divisions. The position is also re-
sponsible for operating the UBS-wide quarterly and annual
SOX 302-certification process and supports the Group CFO in
the Group’s planning and forecasting process.
Head of Group Tax
The Head of Group Tax is responsible for managing the
bank’s corporate income tax affairs, in such a manner that
UBS achieves sustainable tax efficiency whilst acting in com-
pliance with all applicable tax laws, regulations and other
requirements. Group Tax also provides tax advice to the busi-
ness divisions in relation to their business activities, and acts
as a control function in the review of new business initiatives
and transactions requiring pre-approval.
Head of Group Accounting Policy
The Head of Group Accounting Policy establishes Group-
wide financial accounting policies and supports the business
divisions and the Corporate Center in their responsibility to
implement and enforce the Group accounting policy frame-
work. The position manages relations with external auditors
and accounting standards bodies.
Chief Communication Officer
The Chief Communication Officer is responsible for manag-
ing UBS’s communications with its various stakeholders. An-
other key responsibility is the development of the strategy,
content and positioning of communications of corporate im-
portance, emphasizing transparency, consistency, speed and
integrity. The Chief Communication Officer presents UBS
and its businesses to the media, enhancing and protecting
the firm’s reputation. To employees, the position promotes
understanding of the firm’s strategies, performance and cul-
ture. The Chief Communication Officer also coordinates
UBS’s approach to corporate responsibility.
Head of Group Strategic Advisory &
Financial Communication
The Head of Group Strategic Advisory & Financial Communi-
cation provides independent advice to the GEB (collectively
and individually) and the BoD on strategic matters and sup-
ports the business divisions in the execution of their strate-
gies. The position coordinates cross-business division strate-
gic initiatives, drives the implementation of challenging
Group strategic targets and measures progress towards
goals. Additionally, it monitors the competitive environment
and assesses the impact of opportunities and threats on
Group strategy. The Head of Group Strategic Advisory & Fi-
nancial Communication also communicates with investors,
analysts and rating agencies about developments at UBS and
is responsible for preparing and publishing quarterly and an-
nual reports.
Group Head Human Resources
The Group Head Human Resources has Group-wide re-
sponsibility for the management of human resources, the
development of the relevant human capital strategies as
well as the governance over their effective implementa-
tion. This includes shaping a meritocratic culture of ambi-
tion and performance, building UBS’s capacity to attract
and retain high-quality, diverse and mobile talent, as well
as creating an attractive and flexible work environment.
The position is ultimately and directly responsible for the
management of talent and development of leadership
within UBS’s senior management group. Additionally,
Group Human Resources is mandated to design, develop
and administer global compensation programs, to oversee
regional and local benefit strategies, and to establish in-
novative and competitive incentive frameworks on a firm-
wide basis.
Chief Technology Officer
The Chief Technology Officer is the head of the informa-
tion technology infrastructure unit (ITI). This unit encom-
passes all information technology infrastructure teams
across UBS, covering management of data networks, tele-
phone and other communications systems, IT security, dis-
111
UBS business divisions and Corporate Center
Corporate Center
tributed computing and servers, mainframes and data cen-
ters, market data services, user services and desktop
computing. The unit focuses on serving all UBS’s business-
es in a client-driven and cost-efficient way, as well as build-
ing towards a consistent technical architecture across UBS
through the execution of the information technology in-
frastructure strategy.
Head of Group Offshoring
The Head of Group Offshoring is responsible for delivering
offshoring services to the business divisions at appropriate
and competitive prices. The service centers, which are
operated by UBS staff in India and Poland, ensure that phys-
ical and technical features meet UBS risk and quality stan-
dards and comply with the operational risk framework.
112
Results
Corporate Center reporting
CHF million, except where indicated
Total operating income
Cash components
Share-based components 1
Total personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses 2
Performance from continuing operations before tax
Performance from discontinued operations before tax
Performance before tax
Contributions from private equity / Industrial Holdings
Total operating income
Total operating expenses
Operating profit from continuing operations before tax
Profit from discontinued operations before tax
Additional information
BIS risk-weighted assets (CHF billion) 3
Personnel (full-time equivalents) 4
Personnel for the Operational Corporate Center (full-time equivalents)
Personnel for ITI 5 (full-time equivalents)
Personnel for Group Offshoring (full-time equivalents)
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As of or for the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
998
1,069
7
1,076
1,299
(2,066)
720
0
1,029
(31)
198
167
22
54
(32)
155
8.8
7,285
1,572
4,066
1,646
3,562
1,244
121
1,365
1,306
(2,070)
739
0
1,340
2,222
145
2,367
689
163
526
138
10.2
6,913
1,622
4,343
948
607
1,179
140
1,319
1,255
(1,969)
782
9
1,396
(789)
888
99
313
67
246
884
11.5
4,771
1,452
3,055
264
(72)
(14)
(94)
(21)
(1)
0
(3)
(23)
(101)
37
(93)
(97)
(67)
12
5
(3)
(6)
74
1 Includes social security contributions and expenses related to alternative investment awards. 2 Includes expenses for the Company Secretary, Board of Directors and Group Internal Audit.
3 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006. 4 Personnel numbers exclude full-time equivalents from private equity
(part of the Corporate Center): 1 for 2008, 3,843 for 2007, 4,241 for 2006. 5 Information Technology Infrastructure (ITI).
113
UBS business divisions and Corporate Center
Corporate Center
2008
Results
The Corporate Center recorded a result from continuing opera-
tions of negative CHF 31 million in full-year 2008, down from
a gain of CHF 2,222 million in 2007. This decline was mainly
related to a charge of CHF 3.4 billion following a transaction
between UBS and the Swiss National Bank (SNB) in the fourth
quarter. This charge reflects a net loss arising from the acquisi-
tion of the equity purchase option, and the impact of the con-
tingent issuance of UBS shares in connection with the trans-
action. The total charge also includes the fair valuation impact
of the mandatory convertible notes (MCNs) placed with the
Swiss Confederation. The call component of the MCNs will be
revalued each quarter and UBS expects a corresponding fluc-
tuation in the results of the Corporate Center. This fluctuation
is subject to the expected volatility of the UBS share price and
will continue until the conversion of the MCNs into UBS shares.
The loss from the SNB transaction is reported in the Corporate
Center as it benefits the whole bank and not just the Invest-
ment Bank. At the 27 November 2008 extraordinary general
meeting, shareholders approved for this purpose the creation
of conditional capital in the maximum amount of 365 million
shares. Furthermore, 2008 was impacted by losses resulting
from cash flow hedge ineffectiveness, driven by the accelerat-
ed amortization of gains recorded until November 2007.
On the positive side, a gain of CHF 3,860 million due to
the accounting treatment of the MCNs in first quarter 2008
and a gain of CHF 174 million on UBS’s sale of its stake in
Bank of China in the fourth quarter assisted the 2008 result.
Operating income
Total operating income decreased to CHF 998 million in 2008
from CHF 3,562 million in 2007, largely driven by the above-
mentioned SNB transaction and fair valuation of the MCNs in
fourth quarter 2008, losses on swaps not fully eligible for
hedge accounting, losses of CHF 192 million due to currency
translation differences on partial disposals of an investment in
a consolidated investment fund, and a gain from UBS’s sale of
its stake in Bank of China. The 2007 result was driven by a
gain from the sale of UBS’s 20.7% stake in Julius Baer. In ad-
dition, the contribution from the former Industrial Holdings
decreased to CHF 22 million in 2008, compared with CHF 689
million in 2007.
Operating expenses
Total operating expenses were CHF 1,029 million in 2008,
down CHF 311 million from CHF 1,340 million in 2007. At
CHF 1,076 million in 2008, personnel expenses were down
21% from CHF 1,365 million in 2007, which reflected lower
bonus accruals and lower headcount, the latter being partly
offset by growth in the Offshoring Service Center headcount.
In the same period, general and administrative expenses de-
creased 1% to CHF 1,299 million from CHF 1,306 million.
This was related mainly to lower advertising and sponsoring
costs, a partial release of provisions and lower project costs as
well as decreased travel activities, and were partly offset by
higher real estate restructuring provisions. Other businesses
were charged CHF 2,066 million, compared with CHF 2,070
million in 2007. Depreciation decreased CHF 19 million, or
3%, to CHF 720 million as a result of management action to
reduce spending on IT equipment partly offset by a fair value
adjustment in corporate real estate.
Information technology infrastructure
In 2008, the average ITI cost per UBS employee was CHF
25,178, a CHF 1,953 decrease from CHF 27,131 the previous
year. This reflects an 8% cost reduction in ITI in 2008 com-
pared to 2007, reflecting ongoing cost-cutting initiatives and
foreign exchange movements. Average UBS staff levels de-
creased slightly to 81,382 in 2008 from 81,715 in 2007.
114
2007
Results
The Corporate Center recorded a pre-tax profit from con-
tinuing operations of CHF 2,222 million in full-year 2007.
This improvement, up from a loss of CHF 789 million in
2006, was related mainly to the CHF 1,950 million gained
from UBS’s sale of its 20.7% stake in Julius Baer. In addition,
positive cash flow hedges and higher treasury income also
assisted the 2007 result. While all these developments
helped operating income to rise, higher levels of credit loss
expenses in 2007 moderated the increase.
Operating income
Total operating income increased to CHF 3,562 million in
2007 from CHF 607 million in 2006. This mainly reflected
the gains from UBS’s sale of its 20.7% stake in Julius Baer,
positive impacts from cash flow hedges and higher treasury
income. In addition, the contribution from the former Indus-
trial Holdings was CHF 689 million in 2007, compared with
CHF 313 million in 2006.
from CHF 1,319 million in 2006, mainly reflecting the higher
personnel numbers in ITI, driven by higher business demand.
Accelerated amortization of share-based compensation to
certain terminated employees during their employment also
drove personnel costs up. In the same period, general and
administrative expenses increased 4% to CHF 1,306 million
from CHF 1,255 million. This was related mainly to higher ITI
expenses in support of higher staff levels in the business divi-
sions. The Operational Corporate Center also booked higher
expenses in all areas. This was partially offset by lower provi-
sions (2006 included a small portion of the provision for sub-
leasing office space in the US) and advertising expenditures.
Other businesses were charged CHF 2,070 million compared
with CHF 1,969 million, reflecting the business-driven cost
increases of ITI and the India Service Center. Depreciation of
property and equipment decreased CHF 43 million, or 5%,
to CHF 739 million as several software components came to
the end of their depreciation cycle. Amortization of intangi-
ble assets was CHF 0 million in 2007, CHF 9 million below
the level a year earlier.
Information technology infrastructure
Operating expenses
Total operating expenses were CHF 1,340 million in 2007,
down CHF 56 million from CHF 1,396 million in 2006. At
CHF 1,365 million in 2007, personnel expenses were up 3%
In 2007, the average ITI cost per UBS employee was CHF
27,131, a CHF 941 decrease from CHF 28,072 the previous
year. This reflected a 12% increase in average staff levels
from 72,885 in 2006 to 81,715 in 2007, while ITI costs in-
creased only 8% during this period.
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115
Risk and treasury management
Audited information according to IFRS 7 and IAS 1
Risk disclosures provided in line with the requirements of the International Financial Reporting Standard 7 (IFRS 7) Financial
Instruments: Disclosures, and disclosures on capital required by the International Accounting Standard 1 (IAS 1) Financial
Statements: Presentation form part of the financial statements audited by UBS’s independent registered public accounting
firm Ernst & Young Ltd., Basel. This information (the audited texts, tables and graphs) is marked by a bar on the left-hand side
throughout this report and is incorporated by cross-reference into the financial statements of this report.
Risk management
– UBS entered 2008 with significant legacy risk positions which exceeded the firm’s
risk bearing capacity. Risk reduction will remain a priority for UBS until risk exposure
is commensurate with the firm’s targeted risk appetite.
UBS incurred substantial writedowns on its risk
positions and actively reduced exposures through
sales. Significant transactions included the sale in May
2008 of US residential mortgage-backed securities to a
fund managed by BlackRock for proceeds of USD 15 billion
and the agreement reached in October 2008 to transfer
illiquid securities and other positions from UBS’s balance
sheet to a fund owned and controlled by the Swiss
National Bank (SNB).
In order to address weaknesses identified in its risk
management and control organization, UBS launched
an extensive remediation plan which included: the
overhaul of its risk governance; significant changes to risk
management and control personnel; and improvements in
risk capture, risk representation and risk monitoring.
(cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:73)(cid:81)(cid:88)(cid:71)(cid:84)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)
(cid:43)(cid:80)(cid:70)(cid:71)(cid:82)(cid:71)(cid:80)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)
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(cid:36)(cid:81)(cid:67)(cid:84)(cid:70)(cid:2)(cid:81)(cid:72)(cid:2)(cid:38)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:81)(cid:84)(cid:85) (cid:19)
(cid:35)(cid:87)(cid:70)(cid:75)(cid:86)(cid:2)(cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)
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Treasury management
– UBS’s treasury department is responsible for the management of the firm’s
financial resources. This includes the management of: liquidity and funding;
capital and balance sheet; and interest rate and currency risks arising from
balance sheet and capital management responsibilities.
Liquidity management
Funding management
Liquidity management remained challenging throughout
2008, as the financial and credit market crisis, which had
its origins in the US residential mortgage market in the
second half of 2007, spread and gained in intensity
throughout the year.
In anticipation of an extended period of market turbu-
lence, UBS proactively undertook several measures, starting
in 2007 and continuing in 2008, to further strengthen and
safeguard its liquidity position, including adjustment of
short-term funding targets and increased focus on balance
sheet asset reduction. Combined with the broad diversity
of its funding sources, its contingency planning processes
and its global scope, these additional measures have
enabled UBS to maintain a balanced asset / liability profile
throughout the current market dislocation.
Despite challenging market conditions in the second half of
2008, UBS was able to maintain access to funding,
primarily as a result of its broadly diversified funding base.
Risk-weighted assets and eligible capital
In 2008, risk-weighted assets declined from CHF 374.4
billion (Basel I) to CHF 302.3 billion. In this period, eligible
tier 1 capital decreased from CHF 34.1 billion to CHF 33.2
billion, reflecting the effects of losses incurred during 2008
and further negative impacts on equity, only partially offset
by the positive effects from issues of capital instruments.
Capital instruments
The following events occurred in 2008: issuance of CHF
13 billion of mandatory convertible notes to two long-term
financial investors in March; issuance of EUR 1 billion of
perpetual preferred securities as hybrid tier 1 capital in April;
net increase in capital of CHF 15.6 billion from the rights
issue in June; and issuance of CHF 6 billion of mandatory
convertible notes to the Swiss Confederation in December.
Capital adequacy
CHF million, except where indicated
BIS tier 1 capital
of which hybrid tier 1 capital
BIS total capital
BIS tier 1 capital ratio (%)
BIS total capital ratio (%)
Credit risk 1
Non-counterparty related risk
Market risk
Operational risk
Total BIS risk-weighted assets
Basel II
31.12.08
33,154
7,393
45,367
11.0
15.0
222,563
7,411
27,614
44,685
302,273
Basel I
31.12.08
35,671
7,393
46,012
9.8
12.7
326,608
8,826
27,614
N/A
363,048
31.12.07
34,101
6,387
45,797
9.1
12.2
323,345
8,966
42,110
N/A
374,421
1 Includes securitization exposures and equity exposures not part of the trading book and capital requirements for failed trades.
Risk and treasury management
Risk management and control
Risk management and control
UBS was severely affected by the financial crisis that unfolded in 2007 and worsened in 2008. UBS entered
2008 with significant legacy risk positions, particularly related to US real estate and other credit positions,
which exceeded the firm’s risk bearing capacity. As reported during 2008, UBS incurred significant losses on
these positions. Risk reduction will remain a priority for UBS until risk exposure is commensurate with the
firm’s targeted risk appetite. UBS identified significant weaknesses in its risk management and control orga-
nization, as well as limitations in its traditional market risk, credit risk, liquidity risk and funding risk mea-
sures (including the interplay between these measures). As a result of these weaknesses, the firm failed to
adequately assess correlated risks and risk concentrations. In order to address these weaknesses, UBS launched
an extensive remediation plan, which included the overhaul of its risk governance, significant changes to
risk management and control personnel, as well as improvements in risk capture, risk representation and
risk monitoring. Implementation of this plan is ongoing and remains a high priority for UBS. In addition, in
light of the continued dislocation in financial markets, UBS has placed less emphasis on statistical models
for the identification and management of risks, and more on its stress-based measures, particularly to identify
and manage those portfolios considered most at risk.
Market commentary in 2008
Market conditions deteriorated progressively in 2008 culmi-
nating with weak macroeconomic data in fourth quarter
2008 which confirmed the severe downturn in the global
economy. Credit markets worsened considerably over the
year with the market dislocation spreading from US real
estate-related markets to broader asset-backed security and
credit markets, especially after the market-wide liquidity
concerns engendered following the collapse of a major US
investment bank in September 2008. Levels of market vola-
tility were high throughout the year and peaked in fourth
quarter, as global deleveraging and a lack of liquidity in
global markets continued to distort asset prices, reducing
the effectiveness of some risk mitigation techniques. Ex-
treme market moves throughout the year caused a break-
down in the relationship between a number of trading posi-
tions and related hedges, particularly in credit and equity
markets. Hedge funds experienced significant redemptions
in the second half of the year as performance suffered. In
the last four months of the year, central banks and govern-
ments reacted with increasing urgency to the escalating
financial crisis with a series of measures which attempted to
stabilize financial markets and support specific financial
institutions.
Summary of key developments in 2008
The important developments that took place in 2008 with
regard to risk management and control include:
– UBS incurred substantial writedowns on its risk positions
and actively reduced exposures through sales. Significant
transactions included the sale in May of US residential mort-
gage-backed securities to a fund managed by BlackRock
for proceeds of USD 15 billion and the agreement reached
in October to transfer illiquid securities and other positions
from UBS’s balance sheet to a fund owned and controlled
by the SNB. From an originally agreed USD 60 billion, the
size of the transaction has been reduced to USD 38.6 bil-
lion. UBS will continue its program of active risk reduction.
– UBS strengthened the roles and responsibilities of its
Board of Directors (BoD) and executive management with
regard to risk management and control. The BoD has
been allocated responsibility for setting the highest-level
portfolio and concentration risk measures and limits,
while the Group Chief Executive Officer (Group CEO) is
authorized to apply these measures and limits to specific
transactions, positions and exposures. A new BoD risk
committee was established to take on some of the re-
sponsibilities of the former Chairman’s Office.
– UBS integrated its approach to risk control by merging
the market and credit risk functions of the Investment
Bank into a single unit. A new Chief Risk Officer (CRO)
was appointed in the Investment Bank to oversee credit
risk and market risk on a combined basis as well as opera-
tional risk. Several other changes to senior personnel in
the Investment Bank CRO organization were also made.
The Corporate Center risk function was reorganized, re-
sulting in the formation of a unit to focus on the control
of portfolio and concentration risks and a combined func-
tion to determine methodologies to measure and assess
market and credit risk. UBS also made a number of other
changes to senior personnel in order to strengthen its risk
management and control organization. These included
120
the appointments in the Investment Bank of a new Chief
Executive Officer and new heads of Fixed Income Curren-
cies and Commodities.
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The risk assessment and management performed by the
BoD is in line with the statutory requirements and so is the
related disclosure in this section.
– In the third quarter, the Swiss Financial Market Supervisory
Authority (FINMA, until 31 December 2008 Swiss Federal
Banking Commission) concluded its investigation into the
causes of the significant writedowns incurred by UBS. It
confirmed UBS’s own conclusions in all material aspects.
UBS developed a comprehensive and detailed plan to elimi-
nate the weaknesses it identified, including those related to
risk management and control (for example UBS’s market
and credit risk functions had failed to identify certain sig-
nificant portfolio and concentration risks, and there were
weaknesses identified in risk systems and infrastructure).
Delivery against this plan remains broadly in line with ex-
pectations and is a high priority for UBS.
Risk management and control principles
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Five key principles underpin UBS’s risk management and
control framework. These principles are intended to allow
the firm to achieve an appropriate balance between risk and
return. The five key principles are:
– Business management is accountable for risk. Business
management throughout the firm is accountable for all
the risks assumed or incurred by its business operations.
This means that each business is responsible for the con-
tinuous and active management of its risk exposures, as
well as for ensuring an appropriate balance between risk
and return.
– Independent control of risk. A control process indepen-
dent of the businesses is an integral part of UBS’s risk
management and control framework. Independent risk
control aims to provide an objective assessment of risk-
taking activities, helping senior management align the in-
terests of all stakeholders, including shareholders, clients
and employees.
– Disclosure of risk. Comprehensive, transparent and objec-
tive risk disclosure is an essential component of the risk
control process. This includes disclosure and periodic re-
porting to senior management, the BoD, shareholders,
regulators, rating agencies and other stakeholders.
– Earnings protection. UBS aims to protect earnings by lim-
iting the scope for losses and exposure to stress events.
Controls and limits are applied to individual exposures
and portfolios in each business, to aggregate risks across
all businesses, and to major risk types relative to the firm’s
risk capacity (the level of risk UBS is capable of absorbing,
based on its anticipated earnings power).
– Reputation protection. Protection of UBS’s reputation de-
pends, among other things, on the effective manage-
ment and control of the risks incurred in the course of its
business. All employees should make the protection of
UBS’s reputation an overriding concern.
Risk management and control responsibilities
Key roles and responsibilities related to risk management
and control are outlined below:
– The BoD has a strategic and supervisory function and is
responsible for determining UBS’s fundamental approach
to risk. The firm’s risk principles, risk appetite and risk ca-
pacity are also determined by the BoD. A newly estab-
lished BoD risk committee oversees the firm’s risk profile
and the implementation of risk management and control
principles.
– The GEB is responsible for the implementation of risk
management and control principles. Its newly established
Executive Committee (EC) allocates the Group’s total risk
capacity amongst the business divisions, controls the firm’s
overall risk profile and approves the core risk policies.
– In line with UBS’s dual board structure, the authority to
control risk is split between the BoD and the Group CEO.
The BoD has risk control authority for portfolio and
concentration limits, while the Group CEO has risk con-
trol authority for the firm’s transactions, positions and
exposures. These risk control authorities, however, are
partially delegated to the Group CRO and the CEOs
of each business division. Risk officers in the business
divisions may also be delegated certain risk control
authorities depending on their experience and portfolio
responsibility.
– The CEO of each business division is accountable for the
results and risks of his or her division as well as maintain-
ing an appropriate risk management structure.
– The Group CRO is responsible for the development and
implementation of appropriate control frameworks for
credit, market and operational risks with support from
the business divisions through their CROs. In addition,
risk functions within the Corporate Center support the
control of portfolio and concentration risks, the determi-
nation of methodologies to measure and assess risk, and
the development and operation of appropriate risk infra-
structure (including reporting).
– The CROs of the business divisions are responsible for the
independent control of risk in their respective business
divisions.
– The Group CFO is responsible for ensuring that UBS and
its business divisions disclose their financial performance
in a clear and transparent way, and that this reporting
and disclosure meets all regulatory requirements and
corporate governance standards. The Group CFO is also
responsible for the implementation of UBS’s risk manage-
ment and control frameworks in the areas of capital
management, liquidity, funding and tax.
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Risk and treasury management
Risk management and control
Corporate governance and risk control
Independent risk control
Board of Directors
Board of Directors 1
Audit committee
Risk committee
Group Executive Board
Corporate Center
Group Internal Audit
Risk management
Group Executive Board/Executive Committee
Group Chief Executive Officer
Group Chief Risk Officer
Group General Counsel
Group Chief Financial Officer
Portfolio Risk Control and Methodology
Head compliance
Operational risk
Risk Chief Operating Officer
Treasurer
Tax
Controlling and Accounting
Accounting Policy/SOX
Business division
Risk Control
(chief risk officers)
Legal and Compliance
(general counsels)
Finance
(chief financial officers)
Business division chief executive officers
Business management
Operations
1 For full listing of Board of Directors committees, refer to Annex C of the Organization Regulations of UBS AG.
Business division risk committees
3RM001_e
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– The Group General Counsel is responsible for implement-
ing UBS’s risk management and control principles in the
areas of legal and compliance.
Risk management and control framework
UBS’s risk management and control principles are imple-
mented via a detailed risk management and control frame-
work. The framework comprises both qualitative elements
such as policies and authorities, and quantitative compo-
nents including limits. With the risk management and con-
trols principles as its basis, the framework is continually
adapted and enhanced as UBS’s businesses and the market
environment evolve.
There are five key components in the independent risk
control framework:
– Risk policies and authorities to implement the firm’s risk
management and control principles (see above). These re-
flect UBS’s risk capacity and risk appetite, and may be
adapted to accommodate the firm’s evolving business re-
quirements.
– Risk identification through continuous monitoring of
portfolios, assessment of risks in new businesses and
complex or unusual transactions, and ongoing review of
the overall risk profile in the light of market developments
and external events and trends.
– Risk measurement using methodologies and models
which are independently verified and approved by spe-
cialists in the CRO organization. Appropriate risk mea-
sures are applied to portfolios and risk concentrations.
Risks that are not well reflected by standard measures are
subject to additional controls, which may include pre-ap-
proval of transactions and specific risk limits. Models to
quantify risk are generally developed by dedicated units
within the business divisions and the Corporate Center.
UBS requires that models addressing risks which could
impact its books and records be subjected to independent
verification and ongoing monitoring and control by the
CRO organization.
– Risk control by monitoring and enforcing compliance
with risk principles, policies and limits, as well as with reg-
ulatory requirements.
– Transparent risk reporting to stakeholders and to man-
agement at all levels, on all relevant aspects of the ap-
proved risk control framework, including limits. This in-
cludes daily reports on certain portfolio risk measures to
senior management. Monthly and quarterly reports are
also prepared by the business divisions and provide the
basis for consolidated reports to the Group CRO, EC,
BoD risk committee and the BoD as a whole. Periodic
reporting is made publicly available for the benefit of
other stakeholders.
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UBS has control processes to deal with the establishment
of new businesses or significant changes to existing busi-
nesses, and the execution of complex or unusual transac-
tions. These processes are designed to subject the business
or transaction in question to all the necessary control func-
tions – risk control, legal, compliance, treasury, finance, tax
and logistics – as necessary. A key aspect of this process is to
ensure that transactions are booked in a way that permits
appropriate ongoing risk management, measurement, con-
trol and reporting.
Risk categories
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The risks faced by UBS’s businesses can be broken down into
different categories.
On the most fundamental level there are business risks
arising from the commercial and economic risks inherent in
any business activity. It is business management’s responsibil-
ity to respond to changes in the economic environment and
competitive landscape. Business risks are not subject to inde-
pendent risk control but are factored into the firm’s strategic
planning process and the assessment of UBS’s risk appetite
and overall risk exposure.
Primary and operational risks which result from particular
business activities are, on the other hand, subject to inde-
pendent risk control.
Primary risks are:
– Credit risk – the risk of loss resulting from the failure of a
client or counterparty to meet its contractual obligations.
– Market risk – the risk of loss resulting from changes in
market variables. These can be categorized as overall
changes in market levels and rates (the “general” market
risk component), or relative changes with respect to spe-
cific companies or instruments (often referred to as the
“idiosyncratic” market risk component).
– Liquidity and funding risk – the risk that UBS might be un-
able to meet its payment obligations when due or to bor-
row funds in the market at an acceptable price to fund ac-
tual or proposed commitments.
Operational risk is the risk of loss resulting from inade-
quate or failed internal processes, people and systems (for
example failed IT systems, or fraud perpetrated by a UBS
employee), or from external causes, whether deliberate, ac-
cidental or natural.
➔ Refer to the “Market risk”, “Credit risk”, “Operational risk”
and “ Liquidity and funding management” sections of
this report for a description of the control frameworks
for these risk categories
Quantitative controls
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Expected loss is the loss that is expected to arise on aver-
age over time in connection with an activity (for example,
expected number of loan defaults under normal economic
conditions). It is an inherent cost of such activity, and must
be factored into business plans.
Statistical loss measures, such as Value at Risk (“VaR”),
estimate the amount by which actual losses in a portfolio
could exceed the expected loss over a specified time horizon,
measured to a specified level of confidence (probability).
Stress loss is the loss that could arise from extreme events,
typically beyond the confidence level of the statistical loss
estimate, and is normally a scenario-based measure.
These risk measures are typically applied at a portfolio
level. They are complemented by controls such as targeted
stress measures for concentrated exposures and vulnerable
portfolios, sub-portfolios or positions. Concentration risk
controls are generally applied where UBS identifies that
positions in different financial instruments or different port-
folios are affected by changes in the same risk factor or
group of correlated factors. Such concentrations can have
the potential for significant loss in the event of extreme but
plausible adverse developments. Identifying such develop-
ments and assessing their potential impact – in particular
the danger of aggregated losses from a single event through
concentrated exposures – is a critical component of the risk
control process.
➔ Refer to the “Risk concentrations”, section of this report
for more information on risk exposures and identified
risk concentrations
Qualitative controls
Although measurement of risk is clearly important, not all
risks are quantifiable. Due diligence, sound judgment, com-
mon sense and an appreciation of a wide range of potential
outcomes, including a willingness to challenge assumptions,
are key components of a strong risk culture for both risk
management and risk control. UBS has reinforced its qualita-
tive risk controls through changes to its risk management
and control organization, as described above in the sum-
mary of key developments in 2008 section, as well as through
education programs.
Earnings-at-risk and capital-at-risk
To complement its day-to-day operating controls, UBS has
developed the concepts of “earnings-at-risk” and “capital-
at-risk”. These are general measures designed to assess the
firm’s overall ability to absorb the potential losses inherent
across all its business lines and from all major sources in the
current economic cycle.
UBS quantifies potential future losses using three comple-
mentary risk measures: expected loss, statistical loss and
stress loss.
Earnings-at-risk focuses on UBS’s ability to absorb losses
through its current earnings. It is an integral part of the risk
control process and is monitored by the BoD, the BoD risk
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Risk and treasury management
Risk management and control
committee and the GEB as part of UBS’s monthly risk report-
ing. The concept reflects UBS’s view that the primary re-
source to absorb losses should be a firm’s earnings stream.
Earnings-at-risk has three elements – risk capacity, risk expo-
sure and risk appetite.
Risk capacity is the level of risk UBS considers itself capa-
ble of absorbing, based on its earnings power, without dam-
age to its dividend paying ability, its strategic plans and, ulti-
mately, its reputation and ongoing business viability. It is
based on a combination of budgeted, forecast and historical
revenues and costs, adjusted for variable compensation, div-
idends and related taxes.
Risk exposure is an estimate of potential loss based on
current and prospective risk positions across major risk cate-
gories – primary risks, operational risk and business risk. It
builds as far as possible on the statistical loss measures used
in the day-to-day operating controls, extending their time
horizons where necessary, with adjustments and supple-
ments determined by management to reflect known cover-
age gaps. Correlations are taken into account when aggre-
gating potential losses from risk positions in the various risk
categories to obtain an overall estimate of the risk exposure.
The risk exposure is assessed against a severe but plausible
constellation of events over a one-year time horizon to a
95% confidence level – in effect to assess the impact of a
“once in 20 years” event.
Risk appetite is established by the BoD, who set an upper
boundary on aggregate risk exposure. A comparison of risk
exposure with risk capacity serves as a basis for determining
if current or proposed risk limits are appropriate, and is one
of the tools available to management to guide decisions on
adjustments to the risk profile. It also provides an indication
of UBS’s ability to pay a cash dividend out of its current year
earnings.
UBS’s risk exposure should not normally exceed its risk ca-
pacity but in the extremely difficult market conditions that
persisted throughout 2008, this relationship has not held. For
2008 as a whole, UBS recorded a large net loss, showing that
the risk exposures remained greater than UBS’s risk capacity.
Risk exposure remained high as a result of a lack of liquid-
ity in the markets for securitized assets to which UBS had
significant exposures during a large part of the year, and due
to significantly increased volatility levels in global markets.
The reduction in risk exposure that was achieved through
sales (including transactions with BlackRock and the SNB) in
addition to the significant writedowns incurred on risk posi-
tions, was offset by a simultaneous decrease of risk capacity
due to downward revisions of earnings expectations as a
consequence of the deteriorating economic outlook.
Measured risk exposure is neither an expected nor a worst
case scenario and it can be significantly affected by many
external factors. Based on UBS’s assessment of the various
dimensions of its portfolio of risks and their potential devel-
opment, management has and will continue to reduce the
firm’s risk exposure to achieve an appropriate level relative to
its risk capacity. However, liquidity has been and remains
poor in many markets. As with any model, earnings-at-risk is
heavily dependent on assumptions and estimates. Measured
risk exposure must be understood in this context. During the
extremely difficult market conditions that prevailed in 2008,
a number of supplementary measures were added to the
statistical assessment of risk exposure. For example, observ-
able data were supplemented by judgments in several areas
including residential and commercial real estate, US munici-
pal and student loan markets, and potential defaults by
monoline insurers and certain corporate loan portfolios.
These supplementary measures were a result of extensive
consultation between risk management and control profes-
sionals and contributed materially to the overall risk expo-
sure that UBS recognized in 2008.
Capital-at-risk considers more extreme losses and their
potential to lead to a breach of minimum regulatory capital
requirements or even insolvency. Capital-at-risk is an input to
the capital management process, building on the earnings-
at-risk concept but assessing the potential for losses to ex-
ceed earnings capacity and erode capital. For capital-at-risk,
the analysis parallels that for earnings-at-risk but is measured
at two higher confidence levels. The first is in relation to
UBS’s minimum regulatory capital requirement and is set at a
99% confidence level or a “once in 100 years event”. The
second is in relation to the solvency of UBS and is set at a
confidence level exceeding 99.9%.
The capital-at-risk measures of aggregate risk exposure
are important considerations in the assessment of capital ad-
equacy. Like earnings-at-risk, capital-at-risk also relies on
day-to-day risk control measures.
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Risk concentrations
Risk concentrations
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A concentration of risk exists where: (i) a position or group
of positions in financial instruments is affected by changes in
the same risk factor or group of correlated factors; and
(ii) the exposure could, in the event of large but plausible
adverse developments, result in significant losses.
The identification of risk concentrations requires judg-
ment because potential future developments cannot be
predicted with certainty and may vary from period to period.
In determining whether a risk concentration exists, UBS con-
siders a number of elements, both individually and in combi-
nation. These elements include: the shared characteristics of
the instruments; the size of the position or group of posi-
tions; the sensitivity of the position or group of positions to
changes in risk factors and the volatility and correlations of
those factors. Also important in this assessment is the liquid-
ity of the markets where the instruments are traded and the
availability and effectiveness of hedges, as the value of a
hedge instrument may not always move in line with the posi-
tion being hedged. This is referred to as basis risk.
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port for more information on the risk categories to which UBS
is exposed. UBS has also bought and may be required to buy
securities and units from funds that UBS has sold to clients.
Such purchases, especially of illiquid assets such as interests in
hedge funds, could create a significant risk exposure for UBS.
If a risk concentration is identified, it is assessed to deter-
mine whether it should be reduced or mitigated, and the
available means to do so are also evaluated. Identified risk
concentrations are subject to increased monitoring.
Identified risk concentrations
Based on UBS’s assessment of its portfolios and asset classes
with potential for material loss in a stress scenario relevant to
the current environment, the firm believes the various expo-
sures shown below can be considered risk concentrations
according to the abovementioned definition.
UBS has significant lending, counterparty and country risk
exposures that could sustain significant losses if the current
economic conditions were to persist. Refer to the “Credit
risk” section of this report for more information.
UBS is exposed to price risk, basis risk, credit spread risk and
default risk, other idiosyncratic and correlation risks on both
equities and fixed income inventories, and to country risk in
many of its lending and trading activities. Refer to the “Market
risk”, “Credit risk” and “Operational risk” sections of this re-
It is possible that material losses could occur on asset
classes, positions and hedges other than those disclosed in
this section of this report, particularly if the correlations that
emerge in a stressed environment differ markedly from those
anticipated by UBS.
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Exposure to monoline insurers, by rating 1
USD million, unless otherwise stated
Notional amount 3
Column 1
Fair value of
underlying CDOs 4
Column 2
31.12.08
Fair value of CDSs
prior to credit
valuation
adjustment 5
Column 3 (=1–2)
Credit valuation
adjustment on
31.12.08
Fair value of CDSs
after credit
valuation
adjustment
Column 4
Column 5 (=3–4)
Credit protection on US RMBS CDOs 2
9,111
1,695
7,415
4,659
2,756
of which: from monolines rated AAA to A
on US sub-prime residential mortgage-backed
securities (RMBS) CDOs high grade
on US sub-prime RMBS CDOs mezzanine
on other US RMBS CDOs
of which: from monolines rated BBB and below
on US sub-prime residential mortgage-backed
securities (RMBS) CDOs high grade
on US sub-prime RMBS CDOs mezzanine
on other US RMBS CDOs
Credit protection on other assets 2
of which: from monolines rated AAA to A
of which: from monolines rated BBB and below
Total 31.12.08
Total 31.12.07 (USD billion)
23
0
0
23
9,088
6,222
1,092
1,774
12,424
2,399
10,025
21,535
24.2
12
0
0
12
1,683
952
28
703
7,509
1,568
5,941
9,204
19.7
11
0
0
11
7,404
5,269
1,064
1,071
4,914
830
4,084
12,329
4.5
4
0
0
4
4,655
2,961
897
797
2,335
334
2,001
6,994
0.9
6
0
0
6
2,750
2,308
167
275
2,579
496
2,083
5,335
3.6
1 Excludes the benefit of credit protection purchased from unrelated third parties. 2 Categorization based on the lowest insurance financial strength rating assigned by external rating agencies.
3 Represents gross notional amount of credit default swaps (CDSs) purchased as credit protection. 4 Collateralized debt obligations (CDOs). 5 Credit default swaps.
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Exposure to monoline insurers
The vast majority of UBS’s direct exposure to monoline insur-
ers arises from over-the-counter (OTC) derivative contracts,
mainly credit default swaps (CDSs), purchased to hedge spe-
cific positions. On 31 December 2008, the total fair value of
CDS protection purchased from monoline insurers against
these positions was USD 5.3 billion after cumulative credit
valuation adjustments (CVAs) of USD 7.0 billion. The level of
CVAs increased significantly in 2008 from USD 0.9 billion on
31 December 2007 reflecting the progressive deterioration
in both the fair value of the underlying CDOs and the credit
quality of the monoline insurers during the year.
Exposure under CDS contracts with monoline insurers is
calculated as the sum of the fair values of individual CDSs
after credit valuation adjustments. This, in turn, depends on
the valuation of the instruments against which protection
has been bought. A positive fair value, or a valuation gain,
on the CDS is recognized if the fair value of the instrument
it is intended to hedge decreases.
The table on the previous page shows the CDS protection
bought from monoline insurers to hedge specific positions. It
illustrates the notional amounts of the protection originally
bought, the fair value of the underlying instruments and the
fair value of the CDSs both prior to and after credit valuation
adjustments taken for these contracts. Refer to “Note 27
Fair value of financial instruments” in the financial state-
ments of this report for more information on CVA valuation
and sensitivities. The CVA as at 31 December 2008 was ad-
justed to take into account the anticipated economic impact
of commuting trades with certain monolines.
Other than credit protection bought on the positions de-
tailed in the table on the previous page, UBS held direct
derivative exposure to monolines of USD 437 million after
CVAs of USD 499 million on 31 December 2008. In its trad-
ing portfolio, UBS also had indirect exposure to monoline
insurers through securities which they have guaranteed
(“wrapped”) and which were issued primarily by US states
and municipalities and US student loan programs. These
Exposure to auction rate securities
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Auction rate securities held by UBS
Auction rate securities (ARS) are
long-term securities structured to
allow frequent reset of their coupon
and, at the same time, the possibility
for holders to sell their investment in a
periodic auction, giving the securities
some of the characteristics of a
short-term instrument in normal
market conditions. These are typically
issued by municipal entities and
student loan trusts, and may be
wrapped by monoline insurers.
Coupons paid on ARS are determined
by an auction at the beginning of each
interest reset period, the intention
being to allow investors to earn a
market rate of interest. In the past UBS
acted as broker-dealer for certain ARS
programs. Although it is not obligated
to do so, UBS has in the past provided
liquidity, from time to time, to these
markets by submitting bids to ARS
auctions and acquired ARS inventory
in the first half of 2008 as a result.
As described in the “Changes in 2008”
section of UBS’s fourth quarter report,
UBS and the Swiss National Bank (SNB)
agreed that UBS’s student loan ARS
positions will not be sold to the SNB
fund. UBS’s inventory of student loan
ARS was reclassified from “held for
trading” to “loans and receivables” on
31 December 2008 and the student
loan ARS repurchased from clients in
fourth quarter 2008 were also
Auction rate securities exposure
US student loan auction rate securities
US municipal auction rate securities
US taxable auction preferred securities
US tax-exempt auction preferred securities
Total
Net exposures on
31.12.08 1,2 (USD million)
8,362
Net exposures on
31.12.07 1 (USD billion)
4.5
451
782
3,167
12,763
1.4
5.9
1 Net exposure represents market value of gross exposure net of short positions and hedges considered effective. 2 On 31 Decem-
ber 2008, USD 4.6 billion of the US student loan auction rate securities were monoline wrapped.
classified as loans and receivables.
Under their new classification, all
student loan ARS positions held by UBS
are subject to an impairment test
which includes a detailed review of the
quality of the underlying collateral.
In fourth quarter 2008 UBS carried out
a fundamental analysis of its student
loan ARS inventory as well as client
positions included in the buy-back
program (refer to “Maximum exposure
to client auction rate securities” on the
next page for more information). The
majority of the collateral backing the
securities is backed by Federal Family
Education Loan Program (FFELP) which
is reinsured by the US Department of
Education.
Auction preferred stocks (APS) are
issued by closed-end mutual funds
with an underlying portfolio of
tax-exempt municipal bonds, common
stock, preferred stock, or taxable debt.
A closed-end fund is a publicly traded
investment company registered under
the Investment Company Act of 1940.
The Investment Company Act of 1940
requires significant over-collateraliza-
tion which benefits the APS holders.
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31 December 2008.
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Previously disclosed risk concentrations
Exposure to leveraged finance deals
UBS defines leveraged finance deals according to internal
credit ratings, which correspond with external corporate
credit ratings of BB– or worse at the point of reporting and
included underwritten positions that experienced a rating
downgrade in 2008. The net exposure to leveraged finance
commitments held by UBS was reduced significantly in 2008
to USD 4,009 million at 31 December 2008, of which USD
3,161 million was funded. Leveraged finance exposures on
31 December 2008 are shown net of cumulative gross writ-
edowns and impairment charges, as well as effective hedg-
es. Exposure to leveraged finance commitments, net of ef-
fective hedges, at 31 December 2007 was USD 11.4 billion,
of which USD 7.4 billion was funded. The net exposure at
this date, after deductions of cumulative gross markdowns,
was USD 11 billion.
In 2008, UBS significantly reduced its exposures to US resi
dential and commercial real estate-related positions and the
US reference-linked note (RLN) program. These reductions
were achieved both through sales and writedowns as well as
UBS’s agreement with the Swiss National Bank (SNB) in Octo-
ber 2008, which allows for the transfer of illiquid securities
and other positions from UBS to a fund owned and controlled
by the SNB. As a result of this agreement, UBS’s residual posi-
tions in these asset classes were no longer considered as con-
centrations of risk. Refer to the “Strategy and structure” sec-
tion of this report for more information on the SNB transaction.
UBS previously reported net exposures on 31 December 2007
to US sub-prime residential mortgages of USD 27.6 billion
and to US Alt-A residential mortgages of USD 26.6 billion. At
the same date UBS had net exposures to US commercial real
estate of USD 7.7 billion and to US RLN of USD 11.2 billion.
UBS also reported in third quarter 2008 net exposures of USD
6.1 billion on 30 June 2008 and USD 2.3 billion on 30 Sep-
tember 2008 to US prime residential mortgages.
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On 31 December 2008, UBS had
student loan ARS positions with a
carrying value totaling USD 8.4 billion,
of which approximately 66% of the
securities in the portfolio was backed
by FFELP guaranteed collateral.
On the same date, UBS had exposures
to US auction preferred securities of
USD 4.0 billion.
Maximum exposure to client
auction rate securities
UBS has committed to restore liquidity
to client holdings of ARS. This
commitment is in line with previously
announced agreements in principle
with various US regulatory agencies,
and the final settlements entered into
with the Massachusetts Securities
Division, the US Securities and
Exchange Commission, and the New
York Attorney General. On 7 October
2008, UBS filed a registration state-
ment with the US Securities and
Exchange Commission for Auction
Rate Securities Rights necessary to
offer clients the right to sell their ARS
to UBS at par value during their
buy-back period. The table below
shows the maximum required
repurchase amount at par of ARS,
which would occur over various time
periods between 31 October 2008
and 2 July 2012 according to client
type and security. UBS anticipates that
the maximum required repurchase
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amount is likely to decline over time as
issuers refinance their debt obligations
and UBS works with issuers, industry
peers and US government officials on
restructuring initiatives and redemp-
tion opportunities.
Approximately 88% of the USD 11.8
billion student loan ARS held by clients
are backed by FFELP guaranteed collat-
eral. Following the start of the
buy-back program in fourth quarter
2008, UBS repurchased approximately
USD 0.5 billion of US student loan
ARS, USD 0.2 billion of US municipal
ARS, USD 0.6 billion of US taxable
auction preferred securities (APS) and
USD 3.2 billion of US tax exempt APS
from clients.
Client holdings: auction rate securities
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Par value of maximum required
Buy-back period
Private clients
Institutional clients
USD million
US student loan auction rate securities
US municipal auction rate securities
US taxable auction preferred securities
US tax-exempt auction preferred securities
Total
purchase on 31.12.08
31.10.08 – 4.1.11
2.1.09 – 4.1.11
30.6.10 – 2.7.12
11,775
2,041
1,659
64
15,539
41
144
161
64
410
3,196
1,589
1,202
–
5,987
8,538
308
296
–
9,142
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Risk and treasury management
Risk management and control
Market risk
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Market risk is the risk of loss from changes in market variables.
There are two broad categories of changes: general market
risk factors and idiosyncratic components. General market risk
factors are driven by macroeconomic, geopolitical and other
market-wide considerations, independent of any instrument
or single issuer or counterparty. They include such things as
interest rates, the levels of equity market in dices, exchange
rates, commodities (including the price of energy and metals),
as well as general credit spreads. The associated volatility of
these risk factors and the correlations between them are also
considered to be general market risk factors. Idiosyncratic
components, on the other hand, are those that cannot be
explained by general market moves. Broadly they are the ele-
ments of the prices of debt and equity instruments, as well as
derivatives linked to them, which result from factors and
events specific to individual companies or entities.
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mitigation strategies. These strategies can expose UBS to risk
as the hedge instrument and the position being hedged may
not always move in parallel (often referred to as “basis risk”).
Senior management and risk controllers may also give in-
structions for risk to be reduced, even when limits are not
exceeded, if particular positions or the general levels of expo-
sure are considered inappropriate.
The asset management and wealth management busi-
nesses carry small trading positions, principally to support
client activity. The market risk from these positions is not
material to UBS as a whole. UBS has also bought and may be
required to buy securities and units from funds that UBS has
sold to clients, which may be exposed to market risk. These
positions are managed as investment positions. Refer to the
“Equity investments” section below for further information.
Sources of market risk
UBS takes both general and idiosyncratic market risks in its
trading activities, and some non-trading businesses are also
subject to general market risks.
Trading
Most of UBS’s trading activity is in the Investment Bank. Dur-
ing 2008 it included market-making, facilitation of client busi-
ness and proprietary position taking in the cash and derivative
markets for equities, fixed income, interest rates, foreign
exchange, energy, metals and commodities. How ever, the In-
vestment Bank is being repositioned to focus primarily on
client activities. In addition to the planned exit from munici-
pals, proprietary trading and commodities (excluding precious
metals) businesses, the Investment Bank will also largely exit
its remaining real estate and securitization activities as well as
the exotic structured products business. Refer to the “Invest-
ment Bank” section of this report for further information.
The largest contributor to market risk within the Invest-
ment Bank has been the fixed income trading area. This busi-
ness area has been progressively reducing risk positions.
Those that remain relate to coporate and consumer credit
markets, US municipal and student loan markets, as well as
significantly reduced positions in asset-backed securities (in-
cluding residential and commercial real estate).
The relative contribution from a market risk perspective
from equities, currencies and commodities has been modest
compared to that seen in the fixed income trading area.
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Trading businesses are subject to multiple market risk lim-
its. Traders are required to manage their risks within these
limits which in turn may involve employing hedging and risk
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Non-trading
In the Investment Bank, significant non-trading interest rate
risk and all non-trading foreign exchange risks are captured,
controlled and reported under the same risk management
and control framework as trading risk.
In the other business divisions, exposures to general market
risk factors – primarily interest rates and exchange rates – also
arise from non-trading activities (the largest items are the inter-
est rate risks in Global Wealth Management & Business Bank-
ing). These market risks are generally transferred to the Invest-
ment Bank or Group Treasury, which manage the positions as
part of their overall portfolios within their allocated limits.
Market risks that are retained by the other business divisions
are not significant relative to UBS’s overall risk, and exposures
are subject to market risk measures and controls. With the
exception of structural currency exposures which arise from
Group Treasury’s management of consolidated capital, non-
trading currency and commodity positions are subject to mar-
ket risk regulatory capital and are therefore captured in VaR,
although such positions do not contribute significantly to over-
all VaR.
Group Treasury also assumes market risk from its funding,
balance sheet and capital management responsibilities. For ex-
ample, it finances non-monetary balance sheet items such as
bank property and equity investments in associated companies.
It also manages interest rate and foreign exchange risks result-
ing from the deployment of UBS’s consolidated equity, from
structural foreign exchange positions and from non-Swiss franc
revenues and costs. The market risk limits allocated to Group
Treasury cover both the risks resulting from these responsibili-
ties, and those transferred from other business divisions.
➔ Refer to the “Treasury management” section of this report
for more information on Group Treasury’s risk manage-
ment activities.
Measuring market risk
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UBS has two major portfolio measures of market risk – VaR
and stress loss – which are common to all business divisions.
They are complemented by concentration and other supple-
mentary limits on portfolios, sub-portfolios, asset classes or
products for specific purposes where standard limits are not
considered to provide comprehensive control. They may also
be applied to complex products for which not all model
input parameters are observable, and which thus create
challenges for valuation and risk measurement. Operational
limits can take a variety of forms including values (market,
nominal or notional) or risk sensitivities (a measure of expo-
sure to a given risk factor such as interest rates or credit
spreads). These “operational limits” are intended to address
concerns about the extent of market liquidity, available op-
erational capacity or valuation uncertainty, for example.
Market risk limits are set for each of the business divisions
and Group Treasury. The limit framework in the Investment
Bank is clearly more detailed than the other divisions reflect-
ing the nature of the risks it takes and the capacity in which
it takes risks.
Value at Risk (VaR)
VaR is a statistical estimate of potential loss from adverse
movements in market risk factors. A single VaR model is
used for both internal limit purposes and for determining
market risk regulatory capital requirements. However, the
population of risk positions included in the internal manage-
ment VaR measure differs from the regulatory VaR measure,
largely due to required exclusions from regulatory VaR. UBS’s
internal management VaR includes interest rate risk from
banking book positions and credit spread sensitivities related
to counterparty exposures in the OTC derivatives portfolios
(referred to as credit valuation adjustment – CVA). The inclu-
sion of CVA in internal management VaR resulted in a mate-
rial difference between this measure and the regulatory VaR.
In third quarter 2008, UBS changed its VaR disclosure and
now presents both the regulatory and internal VaR.
UBS measures VaR using a 10-day time horizon for
regulatory and for internal purposes, while VaR backtesting
is based on a 1-day time horizon (refer to the discussion on
backtesting below for more information). VaR is calculated
daily, based on end-of-day positions, and is not subse quently
restated to reflect any retrospective adjustments to position
valuations. VaR models are based on historical data and thus
implicitly assume that market moves over the next 10 days or
one day will follow a similar pattern to those that have oc-
curred over 10-day and one-day periods in the past. UBS
uses a look-back period of five years which generally cap-
tures the cyclical nature of financial markets but may be slow
to react to periods of heightened volatility. UBS applies these
historical changes directly to current positions, a method
known as historical simulation.
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Realized market losses can differ from those implied by
the VaR measure for many reasons. All VaR measures are
subject to limitations and must be interpreted accordingly.
The losses experienced by UBS in 2008 highlight the limita-
tions of VaR as an absolute measure of risk and reinforce
the need for multiple views of risk exposure. As an essential
complement to VaR, UBS applies stress scenarios reflecting
different combinations of market moves intended to cap-
ture a range of potential stress events, and more targeted
stress tests for concentrated exposures and vulnerable
portfolios.
VaR developments in 2008
UBS made a number of changes to its VaR model in 2008,
while also changing the scope of the regulatory and internal
management VaR to better reflect the underlying risks. These
changes significantly inpacted the levels of VaR in 2008 com-
pared with 2007, and are summarized below.
– From 1 January 2008, UBS changed its approach to internal
risk control for illiquid US residential mortgage-related expo-
sures: US sub-prime and Alt-A residential mortgage-backed
securities (RMBS); super senior RMBS collateralized debt ob-
ligations (CDOs); the US reference-linked note program;
and related hedges. These positions were excluded from in-
ternal management VaR and related limits with new con-
trols were instituted directly over the volume of remaining
positions in these categories. As the regulatory capital treat-
ment changed from trading book to banking book, these
positions were also excluded from regulatory capital VaR.
– In second quarter 2008, positions in student loan auction
rate securities (ARS) were reclassified from trading book
to banking book for regulatory capital purposes and ex-
cluded from regulatory capital VaR and backtesting due
to the illiquidity of the positions.
– Enhancements to the VaR model were introduced at the
end of June 2008 to increase the granularity of credit
spread risk representation between single name CDS,
several CDS indices and cash positions.
– UBS increased the scope of its internal management VaR
in third quarter 2008 to more accurately represent risk
exposures and related hedges. Before these changes,
certain credit hedges were included in VaR but the under-
lying credit exposures were not, resulting in an inconsis-
tent treatment for risk monitoring and control. UBS there-
fore incorporated into its internal management VaR the
impact of changes in credit spread sensitivities relating to
counterparty exposures in its OTC derivatives portfolio.
However, when computing regulatory capital these credit
spread sensitivities are currently excluded. Refer to the
“Value at Risk developments – treatment of CVA” sidebar
in UBS’s third quarter 2008 financial report for more in-
formation.
– In fourth quarter 2008, UBS introduced additional granu-
larity between certain cost of funding measures – Libor
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Risk management and control
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and the overnight index swap (OIS) rate. In addition, UBS
excluded positions related to the asset and liability man-
agement (ALM) portfolio from its regulatory VaR. The
ALM desk is a treasury function within the Investment
Bank which manages the funding and liquidity exposures
of the Investment Bank and is not managed with trading
intent. The positions related to ALM this portfolio remain
in internal management VaR.
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– UBS continues to review the performance of its VaR im-
plementation and will continue to enhance its VaR model
to more accurately capture the relationships between
market risks associated with certain risk positions, as well
as the revenue of large market movements for some trad-
ing positions.
Backtesting
The accuracy of the VaR model is monitored by backtesting,
which compares the 1-day regulatory VaR calculated on
trading portfolios at close of each business day with the ac-
tual revenues arising on those positions on the next business
day. These backtesting revenues exclude non-trading com-
ponents such as commissions and fees as well as estimated
revenues from intraday trading. If backtesting revenues are
negative and exceed the 1-day regulatory VaR, this results in
a “backtesting exception”.
VaR based on a one-day horizon provides an estimate of
the range of daily mark-to-market revenues on trading
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positions under normal market conditions similar to those
experienced during the historical period used in the model.
As UBS’s VaR model uses a look-back period of five years it
does not respond quickly to periods of heightened volatility
as experienced in 2008. When 1-day regulatory VaR is
measured at a 99% confidence level, such an exception can
be expected, on average, to occur on one in a hundred busi-
ness days. More frequent backtesting exceptions may occur if
market moves are greater than those seen in the look-back
period, the frequency of large moves increases, or historical
correlations and relationships between markets or variables
break down (for example, in a period of extreme market dis-
ruption or an extreme stress event). Backtesting exceptions
are also likely to arise if the way positions are represented in
VaR does not adequately capture all their differentiating char-
acteristics or the relationships between them.
UBS experienced 50 backtesting exceptions in 2008 com-
pared with 29 backtesting exceptions in 2007.
The extreme market movements in a number of risk fac-
tors combined with a breakdown in traditional relationships
between trading positions and their corresponding hedges
(basis risk) were the primary contributors to the backtesting
exceptions experienced. These results highlight the limita-
tions of VaR and illustrate the need for multiple views of risk
exposure such as macro and more targeted stress scenarios.
Refer to the “Stress loss” section below for more informa-
tion. UBS will continue improving its VaR model to better
Investment Bank: backtesting revenue¹ distribution
Frequency in number of days
1 January 2008–31 December 2008
Source: management accounts
Investment Bank: analysis of negative
backtesting revenues1
CHF million
1 January 2008–31 December 2008
Source: revenues management accounts
80
60
40
20
0
> 180
150–180
120–150
90–120
60–90
30–60
0–30
(30)–0
(60)–(30)
(90)–(60)
(120)–(90)
(180)–(150)
)
0
0
3
(
<
)
0
5
2
(
–
)
0
0
3
(
)
0
0
2
(
–
)
0
5
2
(
)
0
5
1
(
–
)
0
0
2
(
)
0
0
1
(
–
)
0
5
1
(
)
0
5
(
–
)
0
0
1
(
0
–
)
0
5
(
0
5
–
0
0
0
1
–
0
5
0
5
1
–
0
0
1
0
0
2
–
0
5
1
0
5
2
–
0
0
2
0
0
3
–
0
5
2
0
0
3
>
Revenues in CHF million
1 Backtesting revenues exclude non-trading revenues, such as commissions and fees, and
revenues from intraday trading.
(210)–(180)
3RM35_e
(240)–(210)
(270)–(240)
(300)–(270)
< (300)
130
15
10
5
0
5
10
15
20
25
30
Frequency in number of days
Negative backtesting revenue less than VaR
Negative backtesting revenue greater than VaR
1 Backtesting revenues exclude non-trading revenues, such as commissions and
fees, and revenues from intraday trading. Analysis for loss days only.
3RM36_e
-15
-10
-5
0
5
20
25
30
80
60
40
20
0
10
15
capture all relevant risks in its trading portfolio.
The first histogram on the previous page shows daily
backtesting revenues in the Investment Bank for the whole
of 2008. In the second histogram, the daily backtesting
revenues are compared with the corresponding VaR over the
same 12-month period for days when backtesting revenues
were negative. A positive result in this histogram represents
a loss less than VaR while a negative result represents a loss
greater than VaR and therefore a backtesting exception.
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All backtesting exceptions and any exceptional revenues
on the profit side of the VaR distribution are investigated. In
addition all backtesting results are reported to senior business
management, the Group CRO and business division CROs.
Backtesting exceptions are also reported to internal and
external auditors and relevant regulators.
Stress loss
The purpose of stress testing is to quantify exposure to ex-
treme and unusual market movements. UBS’s VaR measure
is based on observed historical movements and correlations,
whereas its stress loss measures are informed by past events
but include forward looking elements. UBS’s objectives in
Investment Bank: Value-at-Risk (10-day, 99% confidence, 5 years of historical data) 1
CHF million
Risk type
Equities
Interest rates (including credit spreads)
Foreign exchange
Energy, metals and commodities
Diversification effect
Total regulatory VaR
Diversification effect (%)
Management VaR 1,3
Year ended 31.12.08
Year ended 31.12.07
Min.
Max.
Average
31.12.08
Min.
Max.
Average
31.12.07
82
217
12
14
2
240
185
659
58
60
2
601
239
499
131
397
28
30
(212)
374
(36%)
316
117
544
30
22
(229)
485
(32%)
424
147
260
9
24
2
276
291
415
858
73
90
2
820
836
209
450
28
51
(225)
514
(30%)
537
164
548
21
41
(223)
552
(29%)
614
1 From 1 January 2008, excludes US residential sub-prime and Alt-A mortgage-related exposures, super senior RMBS CDOs and the US reference-linked note program, and related hedges. 2 As the
minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. 3 Includes all positions subject to internal management VaR
limits (including CVAs since 3Q 2008).
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UBS Group: Value-at-Risk (10-day, 99% confidence, 5 years of historical data) 1
CHF million
Business divisions
Investment Bank 1
Global Asset Management
Global Wealth Management &
Business Banking
Corporate Center 2
Diversification effect
Total regulatory VaR
Diversification effect (%)
Management VaR 1, 4
Year ended 31.12.08
Year ended 31.12.07
Min.
Max.
Average
31.12.08
240
1
1
3
3
246
246
601
7
17
93
3
609
521
374
2
4
26
(34)
373
(8%)
320
485
6
16
10
(25)
492
(5%)
459
Min.
276
2
2
1
3
273
288
Max.
Average
31.12.07
820
10
5
87
3
814
833
514
4
3
18
(29)
509
(5%)
535
552
3
2
21
(29)
548
(5%)
588
1 From 1 January 2008, excludes US residential sub-prime and Alt-A mortgage-related exposures, super senior RMBS CDOs and the US reference-linked note program, and related hedges. 2 The Cor-
porate Center regu latory VaR only includes FX risk of Group Treasury. 3 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diver-
sification effect. 4 Includes all positions subject to internal management VaR limits (including CVAs since 3Q 2008).
UBS: Value-at-Risk (1-day, 99% confidence, 5 years of historical data) 1
CHF million
Investment Bank
UBS
Regulatory VaR 2
Management VaR 3
Regulatory VaR 2
Management VaR 3
Year ended 31.12.08
Year ended 31.12.07
Min.
96
101
97
101
Max.
Average
31.12.08
210
171
207
169
132
125
133
125
162
160
163
159
Min.
122
124
122
126
Max.
Average
31.12.07
249
253
249
254
160
164
159
165
134
149
136
152
1 10-day and 1-day Value at Risk (VaR) results are separately calculated from underlying positions and historical market moves. They cannot be inferred from each other. From 1 January 2008, excludes
US residential sub-prime and Alt-A mortgage-related exposures, super senior RMBS CDOs and the US reference-linked note program, and related hedges. 2 Backtesting is based on regulatory capital
VaR. 3 Includes all positions subject to internal management VaR limits (including CVAs since 3Q 2008).
131
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Risk and treasury management
Risk management and control
stress testing are to explore a wide range of possible out-
comes, to understand vulnerabilities, and to provide a con-
trol framework that is comprehensive, transparent and re-
sponsive to changing market conditions.
In light of the continued dislocation in financial markets,
UBS has placed less emphasis on statistical models such as
VaR for the identification and management of risks and
more on its stress-based measures, particularly to identify
and manage those portfolios considered most at risk.
In 2008, UBS continued to enhance its Group-wide stress
testing framework, with a particular focus on the develop-
ment of a range of concrete, detailed forward-looking stress
scenarios. Each scenario is based on the premise of a large
initial shock occurring in one part of the financial markets,
leading to a series of subsequent shocks in other markets.
The scenario specifications are explicitly intended to capture
the liquidity characteristics of different markets and posi-
tions. More frequent review of the range of scenarios in
the context of macroeconomic risk analysis has also been
initiated.
Standard scenarios are recalculated daily, allowing the
development of stress loss exposure to be tracked and com-
parisons made from one period to the next. Stress loss limits
approved by the Board of Directors are applied for all busi-
ness divisions. Additional requirements for stress scenario
calculation capabilities are being established for all Invest-
ment Bank trading systems.
Specific or “targeted” stress scenarios focusing on cur-
rent concerns and vulnerabilities are also used. These mea-
sures are adapted to changing market conditions, as well as
changes to UBS’s portfolios, sub-portfolios and positions.
The choice of scenarios depends on management’s view of
potential economic and market developments and their rel-
evance to UBS’s risk exposures. Targeted stress measures also
feed into UBS’s earnings-at-risk and capital-at-risk metrics.
The VaR results beyond the 99% confidence level are an-
alyzed to better understand the potential risks of the portfo-
lio and to help identify risk concentrations. The results of this
analysis are valuable in their own right and can also be used
to formulate position-centric stress tests. Although the stan-
dard scenarios incorporate generic elements of past market
crises, more granular detail of specific historical events is
provided by extreme VaR outcomes. The largest possible loss
arising from UBS’s daily VaR simulation using five years of
historical data is also monitored against limits as an addi-
tional stress scenario.
UBS applies country limits to all but the best-rated coun-
tries, covering market as well as credit risks. This includes
applying appropriate stress loss limits to emerging markets
in aggregate as well as to individual emerging market coun-
tries.
The market moves envisaged in stress scenarios, including
targeted stress scenarios, might prove to be less than the
moves actually seen in a stress event, and actual events may
differ significantly from those modeled in the stress scenarios.
Most major financial institutions employ stress tests, but
their approaches differ widely and there is no benchmark or
industry standard in terms of scenarios or the way they are
applied to an institution’s positions. The impact of a given
stress scenario, even if measured in the same way across in-
stitutions, depends entirely on the make-up of each institu-
tion’s portfolio, and a scenario that is relevant to one institu-
tion may have no relevance to another. Comparisons of
stress results between institutions can therefore be highly
misleading, and for this reason UBS, like most of its peers,
does not publish quantitative stress results.
Concentration limits and other controls
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UBS applies concentration limits on exposures to general
market risk factors and to single name exposures. The limits
take account of variations in price volatility and market depth
and liquidity.
In the Investment Bank, limits are placed on exposures to
individual risk factors. They are applied to general market
risk factors such as interest rates, credit spreads, equity indi-
ces and foreign exchange rates or groups of highly correlat-
ed factors based on assumed moves in the risk factors broad-
ly consistent with the terms of UBS’s VaR measure. Each
limit applies to exposures arising from all instrument types in
all trading businesses of the Investment Bank. The assumed
moves in risk factors are updated in line with the VaR his-
torical time series and the limits are reviewed annually or as
necessary to reflect market conditions. The effectiveness of
risk factor limits in controlling concentrations of risk depends
critically upon the way risk positions are represented. If long
and short positions are considered to be sensitive to the
same risk factor, potential gains and losses from changes in
that factor are netted. The steps UBS has taken in 2008 to
enhance the granularity of risk representation in its VaR mea-
sure are also relevant to its risk concentration controls as
underlying relationships between risk factors are more clear-
ly represented in VaR exposures.
UBS also applies volume-based limits to certain portfolios
and sub-portfolios. Additionally, UBS measures and limits the
potential impact of increased default rates on the value of its
portfolio of single name exposures.
The Investment Bank carries exposure to single names,
and therefore to event risk (including default risk). This risk is
measured across all relevant instruments (debt and equity in
physical form and from forwards, options, default swaps
and other derivatives including basket securities) as the ag-
gregate change in value resulting from an event affecting a
single name or group. The maximum amount that could be
lost if all underlying debt and equity of each name became
worthless is also tracked. Positions are controlled in the con-
132
text of the liquidity of the market in which they are traded,
and all material positions are monitored in light of changing
market conditions and information on individual names.
This form of single name exposure measure is most
appropriate to corporate issuers, financial institutions and
other entities, the value of whose equity and debt instru-
ments is dependent on their own assets, liabilities and capi-
tal resources.
Exposures arising from security underwriting commit-
ments are subject to the same measures and controls as
secondary market positions. There are also governance pro-
cesses for the commitments themselves, generally including
review by a commitment committee with representation
from business and control functions. Underwriting commit-
ments are approved under specific delegated risk manage-
ment and risk control authorities.
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lar monitoring and reporting. They are also included in earn-
ings-at-risk and capital-at-risk metrics.
Where investments are made as part of an ongoing busi-
ness they are also subject to standard controls, including
portfolio and concentration limits. Seed money and co-in-
vestments in UBS-managed funds made by Global Asset
Management are, for example, subject to a portfolio limit.
All investments must be explained and justified, approved
according to delegated authorities, and monitored and re-
ported to senior management throughout their life.
Private equity positions were, in the past, the major com-
ponent of equity investments, but the portfolio has been
managed down over recent years.
Under International Financial Reporting Standards (IFRS),
equity investments may be classified as “financial invest-
ments available-for-sale”, “financial assets designated at fair
value through profit or loss” or “investments in associates”.
Other applications of market risk measures
Market risk measurement tools may be selectively applied to
portfolios for which the primary controls are in other forms.
VaR can, for example, provide additional insight into the sen-
sitivity of investment positions to market risk factors, even
though some of the assumptions of VaR – in particular the
relatively short time horizon – may not be representative of
their full risk. The results can be used by business manage-
ment and risk controllers for information purposes or to trig-
ger action or review.
Equity investments
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UBS makes investments for a variety of purposes. Some are
made for revenue generation or as part of strategic initia-
tives, while others, such as exchange and clearing house
memberships, are held in support of UBS’s business activi-
ties. Investments may also be made in funds managed by
UBS to fund or “seed” them at inception or to demonstrate
alignment of UBS’s interests with those of investors. UBS has
also bought and may be required to buy securities and units
from funds that UBS has sold to clients. These include pur-
chases of illiquid assets such as interests in hedge funds.
UBS may make direct investments in a variety of entities
or buy equity holdings in both listed and unlisted companies.
Such investments tend to be illiquid. The fair values of equity
investments are generally dominated by factors specific to
the individual stocks, and the correlation of individual hold-
ings to equity indices varies. Furthermore, equity investments
are generally intended to be held for the medium- or long-
term and may be subject to lock-up agreements. For these
reasons, they are not directly controlled using the market risk
measures applied to trading activities. They are, however,
subject to controls, including pre-approval of new invest-
ments by business management and risk control, and regu-
Composition of equity investments
At 31 December 2008, UBS held equity investments totaling
CHF 3,653 million, of which CHF 1,681 million were classi-
fied as “financial investments available-for-sale”, CHF 1,079
million as “financial assets designated at fair value” and CHF
892 million as “investments in associates”. Within “financial
investments available-for-sale”, CHF 258 million are listed
equities.
At 31 December 2007, UBS held equity investments
totaling CHF 7,690 million, of which CHF 3,583 million
were classified as “financial investments available-for-sale”,
CHF 2,128 million as “financial assets designated at fair
value” and CHF 1,979 million as “investments in associ-
ates”. Within “financial investments available-for-sale”,
CHF 1,865 million are listed equities.
In December 2008, UBS disposed of its equity stake in
Bank of China through a placing of approximately 3.4 billion
Bank of China Limited H-shares to institutional investors for
a cash consideration of approximately CHF 887 million (HKD
6,519 million). UBS acquired the shares in 2005 in prepara-
tion for Bank of China’s IPO to the international market. The
investment in Bank of China was accounted for as a “finan-
cial investment available-for-sale”. The disposal resulted in a
gain of approximately CHF 360 million.
Within the total of CHF 1,079 million “financial assets des-
ignated at fair value”, CHF 1,058 million represents the assets
of trust entities associated with employee compensation
schemes. They are broadly offset by liabilities to plan partici-
pants included in “other liabilities”. The equivalent positions
at 31 December 2007 amounted to CHF 1,788 million.
➔ Refer to “Note 34 Significant subsidiaries and associates”
in the financial statements of this report for details of
significant associates
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Risk management and control
Credit risk
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Credit risk is the risk of financial loss resulting from failure by
a client or counterparty to meet its contractual obligations to
UBS. This can be caused by factors directly related to the
counterparty, such as business or management problems, or
from failures in the settlement process, for example on for-
eign exchange transactions where UBS has honored its obli-
gation but the counterparty fails to deliver the counter-value
(“settlement risk”). Alternatively, it can be triggered by eco-
nomic or political difficulties in the country in which the
counterparty or issuer of the security is based or where it has
substantial assets (“country risk”).
Sources of credit risk
Credit risk is inherent in traditional banking products such as
loans, commitments to lend and contingent liabilities (for ex-
ample, letters of credit) as well as in “traded products”: deriva-
tive contracts such as forwards, swaps and options; repur-
chase agreements (repos and reverse repos); and securities
borrowing and lending transactions. The risk control process-
es applied to these products are fundamentally the same, al-
though the accounting treatment varies, as they can be car-
ried at amortized cost or fair value, depending on the type of
instrument and, in some cases, the nature of the exposure.
Many of the business activities of Global Wealth Manage-
ment & Business Banking and the Investment Bank expose
UBS to credit risk, while credit risk exposure is a less material
concern to Global Asset Management. Global Wealth Man-
agement & Business Banking offers private and corporate cus-
tomers in Switzerland and wealth management clients inter-
nationally a variety of credit products, although the majority
of credit risks are well secured by financial collateral or other
assets. The Investment Bank gives corporate, institutional, in-
termediary and alternative asset management clients access
to a full range of credit and capital markets instruments across
all product classes, and engages with other professional coun-
terparties in its trading and risk management activities.
Credit risk control
Limits and controls
Concentrations of credit risk can arise if clients are engaged
in similar activities, or are located in the same geographical
region or have comparable economic characteristics such
that their ability to meet contractual obligations would be
similarly affected by changes in economic, political or other
conditions. To avoid, as far as possible, undue credit risk con-
centrations, UBS has established limits and operational con-
trols to constrain credit exposure to individual counterparties
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and counterparty groups. Where appropriate, it has also es-
tablished industry and country limits and guidelines at port-
folio and sub-portfolio levels.
At the level of the individual counterparty and counter-
party group, limits are established covering banking and
traded products. These limits put constraints not only on the
current outstanding amount but also on contingent commit-
ments and the potential future exposure of traded products.
Credit engagements may not be entered into without the
appropriate approvals and adherence to these limits.
In the Investment Bank, at a portfolio level a distinction is
made between those exposures which are to be held to ma-
turity (“take and hold exposures”) and those which will be
held only over the short term, pending distribution or risk
transfer (“temporary exposures”). Most limits and operational
controls constrain the credit exposure of a sub-portfolio, but
UBS also has limits that restrict the credit risk of a whole port-
folio using credit risk measures such as stress loss, as described
below. Such limits are applied for instance to the Investment
Bank’s leveraged lending portfolio, where the impact of varia-
tions in default rates and asset prices is considered, together
with market liquidity and UBS’s distribution capabilities.
Risk mitigation
Taking collateral is the most common way to mitigate credit
risk. Loans to wealth management clients (“lombard lend-
ing”) are made against the pledge of sufficient eligible mar-
ketable securities or cash. For real estate financing, a mort-
gage over the relevant property is taken to secure the claim.
The Investment Bank also takes financial collateral in the
form of marketable securities in much of its over-the-counter
(OTC) derivatives activities and in its securities financing busi-
ness (securities lending and borrowing or repurchase and re-
verse repurchase). To ensure with a high degree of certainty
that the collateral value will cover the exposure, discounts
(“haircuts”) are generally applied to the current market val-
ue. These reflect the quality, liquidity, volatility and, in some
cases, the complexity of the individual instruments. Expo-
sures and collateral values are continuously monitored, and
margin calls or close-out procedures are enforced, when the
market value of collateral falls below a predefined trigger
level. Concentrations within individual collateral portfolios
and across clients are also monitored where relevant and
may affect the discount applied to a specific collateral pool.
The OTC derivatives business is generally conducted under
bilateral master agreements, which typically allow for the
close-out and netting of all transactions in the event of de-
fault. UBS also has two-way collateral agreements with all
major market participants, under which either party can be
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required to provide collateral in the form of cash or market-
able securities when exposure exceeds a predefined level. The
OTC derivatives business with lower-rated counterparties is
generally conducted under one-way collateral agreements
where only the counterparty is required to provide UBS with
cash or very liquid collateral. For certain counterparties, like
hedge funds, UBS may use two-way collateral agreements.
UBS has policies for netting and collateral agreements, includ-
ing requiring a legal opinion that contracts are enforceable in
the case of insolvency in the relevant jurisdictions.
The Investment Bank also utilizes credit hedging to actively
manage the credit risk of its portfolios, with the goal of reduc-
ing concentrations in individual names, sectors or specific port-
folios. The Investment Bank utilizes a number of different hedg-
ing measures which include single name credit default swaps
(CDS), index CDS, credit linked notes and total return swaps.
Single name CDS are generally executed under bilateral netting
and collateral agreements, with high-grade market counterpar-
ties. For the purposes of monitoring against limits, UBS ob-
serves strict standards. Credit hedges are only recognized as a
risk mitigant if they are single name credit default swaps, total
return swaps or credit linked notes. They must cover potential
credit exposure increases to a high level of confidence, and of-
fer protection against a wide range of credit events. Other cred-
it risk mitigants such as proxy hedges (credit protection on a
correlated but different name) or index CDS are not recognized
for the purposes of monitoring against limits.
Buying credit protection creates credit exposure against
the hedge provider. The exposure to credit protection provid-
ers and thus the effectiveness of credit hedges is monitored
as part of the overall credit exposure against the relevant
names. Where there is significant correlation between the
counterparty and the hedge provider (so-called “wrong-way
risk”), UBS’s policy is not to recognize any benefit in credit
risk measures.
Credit risk measurement
Credit risk measurement is an essential component of the
credit risk control framework. The measurement of credit ex-
posure from a loan which is fully drawn is straightforward. By
contrast, the estimation of credit exposure on a traded prod-
uct, the value of which varies with changes in market vari-
ables, interim cash flows and the passage of time, is more
complex and requires the use of models. The assessment of
portfolio risk also entails estimations of the likelihood of de-
faults occurring, of the associated loss ratios if they do, and of
default correlations between counterparties.
UBS has developed tools to support the quantification of
the credit risk of individual counterparties, applying the three
generally accepted parameters: probability of default, expo-
sure at default and loss given default. Models are also used
to derive the portfolio risk measures expected loss, statistical
loss and stress loss.
Credit risk parameters
Three parameters are used to measure and control individual
counterparty credit risk:
– The probability of default is an estimate of the likelihood
of the client or counterparty defaulting on its contractual
obligations. This probability is assessed using rating tools
tailored to the various categories of counterparties. These
categories are also calibrated to the UBS 15-class Master-
scale (UBS’s proprietary credit rating scale) to ensure
consistency in the quantification of default probabilities
across counterparties. Besides their use for credit risk
measurement, ratings are an important element in setting
credit risk approval authorities.
– Exposure at default is derived from the current exposure
to the counterparty and its possible future development.
For traded products such as OTC derivatives, the exposure
at default is not a definitive number – it must be derived
by modeling the range of possible outcomes. In measur-
ing individual counterparty exposure against credit limits,
UBS considers the maximum likely exposure measured to
a high confidence level over the full life of all outstanding
obligations. However, when aggregating exposures to
different counterparties for portfolio risk measurement,
the expected exposure to each counterparty at a given
time horizon (usually one year) generated by the same
model is used.
– The loss given default is determined based on the likely
recovery rate of defaulted claims, which is a function of
the type of counterparty and any credit mitigation or sup-
port (such as security or guarantee).
These parameters are the basis for most internal mea-
sures of credit risk. They are also key inputs to the regulatory
capital calculation under the advanced Internal Rating Based
approach of the new Basel Capital Accord (Basel II), which
UBS adopted from 1 January 2008, when the accord came
into force.
➔ Refer to the discussion on rating system design and
estimation of credit risk parameters below for a more
detailed description of the three credit risk parameters
discussed above
Expected loss
Credit losses must be anticipated as an inherent cost of do-
ing business. But the occurrence of credit losses is erratic in
both timing and amount, and those losses that do arise usu-
ally relate to transactions entered into in previous accounting
periods. In order to reflect the fact that future credit losses
are implicit in today’s portfolio, UBS uses the concept of “ex-
pected loss”.
Expected loss is a statistical concept which is used to esti-
mate the annual costs that are expected to arise, on average,
from positions in the current credit portfolio that become
impaired. The expected loss for a given credit facility is a
function of the three components described above: proba-
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Risk management and control
bility of default, exposure at default and loss given default.
The expected loss figures for individual counterparties are
aggregated to derive the expected credit loss for the whole
portfolio.
Expected loss is the basis for quantifying credit risk in all
portfolios. It is an input used to value or price some prod-
ucts. Expected loss is also the starting point for the measure-
ment of portfolio statistical loss and stress loss.
➔ Refer to the discussion on credit loss expense below for
more information
Stress loss
Stress loss is a scenario-based measure which complements
the statistical model. It is used to assess potential loss in var-
ious extreme but plausible scenarios in which it is assumed
that one or more of the three key credit risk parameters de-
teriorates substantially according to a pattern that is typical
for the chosen scenario. Stress tests are run regularly, and on
an ad hoc basis as necessary, in order to identify adverse
portfolio situations, particularly risk concentrations. All sce-
nario results are monitored, and for certain portfolios and
segments, stress loss is subject to limits.
Statistical loss
UBS uses a statistical model – credit Value at Risk (“credit
VaR”) – to estimate the potential loss on the portfolio over
one year measured to a specified level of confidence. The
shape of the modeled loss distribution is driven by system-
atic default relationships amongst counterparties within and
between segments. The results of this analysis provide an
indication of the level of risk in the portfolio, and the way it
develops over time. It is also an important input to the over-
all risk measures earnings-at-risk and capital-at-risk.
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➔ Refer to the discussion on earnings-at-risk and capital-at-
risk in the “Risk management and control” section of this
report for more information
Composition of credit risk – UBS Group
The measures of credit risk used by UBS may differ depend-
ing on the purpose for which exposures are aggregated: fi-
nancial accounting under the International Financial Report-
ing Standards (IFRS); determination of regulatory capital; or
UBS’s own internal management view (i.e. the economic risk
of the credit portfolio which reflects how that risk is man-
aged by UBS). The table “Exposure to credit risk – UBS
Group” below begins with the IFRS view (“maximum expo-
sure to credit risk”), and shows the adjustments required to
reconcile to the internal management view (“Credit expo-
sure before hedges”).
Exposure to credit risk – UBS Group
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For the year ended
31.12.2008
31.12.2007
CHF million
Balances with central banks
Due from banks
Loans
Contingent claims
Undrawn irrevocable credit facilities
Banking products
Derivative instruments
Securities lending / borrowing
Repurchase / reverse repurchase agreements
IFRS 1 reported
values
Maximum
exposure to
credit risk 2
29,156
Adjustments:
Maximum
exposure
to internal
risk view
(45,419)
(68,627)
(807)
(3,326)
(118,179)
(626,448)
64,451
340,308
19,699
60,316
513,930
854,100
122,897
224,648
}
Credit
exposure
before
hedges 3
29,156
19,032
271,681
18,892
56,990
395,750
227,652
Credit
exposure
after
hedges 4
IFRS 1 reported
values
Maximum
exposure to
credit risk 2
16,433
Credit
exposure
before
hedges 3
16,434
Credit
exposure
after
hedges 4
347,900
60,907
26,304
335,864
285,093
20,824
83,980
518,008
428,217
207,063
376,928
20,347
80,971
429,149
184,809
58,896
}
377,622
(300,694)
46,851
Traded products
1,201,645
(927,142)
274,503
263,677
1,012,208
243,704
237,790
Financial assets designated at fair value – debt instruments
Financial Investments available-for-sale – debt intruments
Trading portfolio assets – debt instruments
Accrued income
Other assets
Irrevocable commitments to acquire ARS
Other products
Total at the year-end
5,153
3,567
224,862
3,238
6,189
16,571
259,580
4,116
1,383
376,928
9,200
12,874
N/A
404,501
1,975,155
(1,304,902)
670,253
611,577
1,934,717
672,853
615,412
1 International Financial Reporting Standards (IFRS). 2 These amounts are considered the best representation of “maximum exposure to credit risk” as defined by the IFRS, without taking into account
credit conversion factors for off-balance sheet positions. 3 Includes temporary exposure, before risk transfer, deduction of collateral and risk mitigation. 4 Exposure after risk transfer, deduction of
allowances, provisions, credit valuation adjustments, credit default swaps and credit linked notes.
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In the tables in this section the internal management view
of credit risk exposure is based on a revised measurement
methodology for traded products compared with 2007. The
2007 numbers have been restated accordingly. The method-
ology was refined to reflect the internal reporting methods
used in the business divisions.
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In general, the exposures shown in the tables are gross
and do not reflect the benefit of security held or other risk
mitigation employed, such as hedging and risk transfers. The
main differences between the internal management and
IFRS views of gross credit exposure are:
– Cash collateral posted by UBS against negative replace-
ment values of derivative instruments and other positions
is reported on a gross basis for IFRS purposes. For internal
management purposes these exposures are treated on a
net basis after factoring in an assessment of the counter-
party risk on the underlying positions.
– For internal management purposes netting is applied for
positive and negative replacement values with the same
counterparty, where the business is conducted under a le-
gally enforceable netting agreement. Under IFRS, netting is
applied on a more restrictive basis. Refer to “Note 1 Sum-
mary of significant accounting policies” in the financial state-
ments of this report for further information on IFRS netting.
– Under IFRS, securities lending / borrowing and repur-
chase / reverse repurchase transactions are shown on the
balance sheet as UBS’s full claim on the counterparty
without recognizing the counterclaim which the counter-
party has for return of cash or securities on the same
transactions. By contrast, for internal risk control purpos-
es, the claims on and counterclaims from each counter-
party are considered on each transaction on a net basis,
and further netted across transactions where such netting
is considered to be legally enforceable in insolvency.
– All positions that were reclassified in fourth quarter from
the “held for trading” to the “loans and receivables” cate-
gory are included as loans under the IFRS reported expo-
sures. Refer to the “Financial performance” section and
“Note 29 Measurement categories of financial assets and
liabilities” in the financial statements of this report for more
information. However, for the purposes of providing a
breakdown of UBS’s lending portfolios, only the loan un-
derwriting positions are included in the internal manage-
ment view of loan exposures. All reclassified positions are
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Gross credit exposure by UBS internal ratings – UBS Group
CHF million
UBS internal rating
0–1
2–3
4–5
6–8
9–13
Total 0–13 (net of past due)
Defaulted
Past due but not defaulted
Other 1
Total
1 Includes Global Asset Management and the Corporate Center.
Gross credit exposure by business division
Banking products
Traded products
Total exposure
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
27,462
128,763
108,963
89,865
27,327
21,367
157,221
121,940
81,959
40,913
55,729
150,364
42,055
14,933
2,852
382,380
423,400
265,933
6,909
7,622
3,526
2,222
2,468
2,268
1,013
60,463
144,317
23,394
12,300
2,123
242,597
1,013
83,191
279,127
151,018
104,798
30,180
648,313
14,531
3,526
3,883
81,830
301,538
145,334
94,259
43,036
665,997
3,481
2,268
1,107
1,661
94
395,750
429,149
274,503
243,704
670,253
672,853
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Global Wealth Management
& Business Banking
Investment Bank
Other 1
UBS
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
CHF million
Balances with central banks
Due from banks
Loans
Financial assets designated at fair value
Contingent claims
Undrawn irrevocable credit facilities
Banking products
Derivatives
Securities financing transactions
Traded products
Total credit exposure, gross
Net of impairment losses recognized
1 Includes Global Asset Management and the Corporate Center.
17,629
6,606
9,992
8,236
226,183
240,643
0
14,687
2,789
0
15,929
2,081
267,893
276,881
8,353
12,747
21,100
288,993
287,774
14,039
13,023
27,061
303,942
302,974
11,528
12,044
37,230
6,576
4,056
54,201
125,636
218,482
33,260
251,742
377,378
370,494
6,441
17,532
39,725
4,166
4,500
78,890
151,254
170,677
45,873
216,550
367,804
366,882
0
382
730
961
149
0
2,222
817
844
1,661
3,883
3,883
1
535
466
0
11
0
1,013
94
0
94
1,107
1,107
29,157
19,032
16,434
26,303
264,143
280,834
7,537
18,892
56,990
395,750
227,652
46,851
274,503
670,253
662,151
4,166
20,440
80,971
429,149
184,810
58,896
243,704
672,853
670,963
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Risk management and control
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subject to appropriate portfolio limits and risk controls, in-
cluding earnings-at-risk and capital-at-risk metrics.
The redesignated assets comprised: monoline protected
assets (USD 5.7 billion); US reference-linked program (USD
1.1 billion); US commercial real estate (USD 3.4 billion); lever-
aged finance (USD 2.3 billion); student loan auction rate se-
curities (USD 7.9 billion); and other assets (USD 2.3 billion).
Exposure amounts provided were the carrying values on 31
December 2008. The exposures relating to monoline-pro-
tected assets, leveraged finance and student loan auction
rate securities are included in the respective asset class disclo-
sures in the “Risk concentrations” section of this report.
Note that under US Generally Accepted Accounting Prin-
ciples (GAAP), a greater degree of netting is permitted than
under IFRS for OTC derivatives replacement values and for
securities lending / borrowing and repurchase / reverse repur-
chase transactions. UBS’s balance sheet figures for these
types of transactions are not directly comparable with those
of firms which report under US GAAP.
As explained in the credit risk measurement section, UBS
also measures, and generally applies limits to, credit exposures
to individual counterparties and counterparty groups. It also
measures risk across counterparties at various portfolio and
sub-portfolio levels. In these calculations UBS further consid-
ers the potential development of replacement values of trad-
ed products over time as market risk factors change, interim
payments are made and transactions mature, all of which can
significantly alter the risk exposure profile. These potential
developments are not reflected in the various tables in this
section, which reflect only the current exposures.
The credit risk exposure reported in the table “Exposure to
credit risk – UBS Group” in this section excludes UBS’s participa-
tion in the deposit insurance guarantee scheme under Swiss
banking law, according to which Swiss banks and securities
dealers are required to jointly guarantee an amount of up to CHF
6 billion for privileged client deposits in the event that another
Swiss bank or securities dealer becomes insolvent. For the period
20 December 2008 to 30 June 2009 FINMA has established
UBS’s share in the deposit insurance as CHF 1,192 million.
Total gross credit exposure amounted to CHF 670.3 billion
on 31 December 2008, a decrease of CHF 2.6 billion since
the end of the previous year. Banking products decreased by
CHF 33 billion mainly driven by reductions in loans and un-
drawn irrevocable commitments partially compensated by
higher balances with central banks, while the traded products
category increased by CHF 31 billion due to a significant
increase in the derivatives line of CHF 43 billion, partially com-
pensated by a reduction of CHF 12 billion for securities financ-
ing transactions. The reduction in loan exposure was mainly
due to a reduction in the collateralized lending activity in
Global Wealth Management & Business Banking. The Invest-
ment Bank continued to actively reduce credit risk.
The quality of the gross unimpaired credit portfolio im-
proved as the investment grade component (internal rating
grades 0–5) remained at 79%.
138
The table “Gross credit exposure by business division” on
the previous page shows the gross credit exposure (i. e. with-
out recognition of credit hedges, collateral or other risk mit-
igation) by business division.
The largest contributor to gross credit exposure at CHF
291 billion is the lending portfolio (due from banks CHF 19
billion, loans CHF 264 billion, and “financial assets desig-
nated at fair value” CHF 8 billion) which represents 43% of
total gross credit exposure and 73% of total banking prod-
ucts exposure. Within this lending portfolio, CHF 233 billion
(80%) is attributable to Global Wealth Management & Busi-
ness Banking. Traded products exposure is incurred predom-
inantly by the Investment Bank. The sections below provide
further details of products, industry and rating distributions
in the business division portfolios.
The property financing portfolio is diversified and limits
per counterparty ensure that no single property exposure
presents an undue concentration.
Exposure to providers of credit protection, usually in the
form of credit derivatives, is controlled by the overall credit
limit for the counterparty, which is typically a high-grade fi-
nancial institution.
Composition of credit risk (business divisions)
Global Wealth Management & Business Banking
The total gross banking products exposure of Global Wealth
Management & Business Banking was CHF 268 billion on
31 December 2008 down by CHF 9.0 billion or 3% from a
year earlier. The high quality of the banking products expo-
sure, with 64% in the investment grade category is demon-
strated by the rating distribution on the next page. The intro-
duction of a revised credit risk framework was aimed at
improving statistical credit risk measurement and reinforcing
the link between the credit assessment and pricing. This re-
sulted in a decrease in counterparty rating on average by one
rating class as shown in the table on the next page by the
increase in category 6 sub-investment grade exposures. The
distribution of the exposure across UBS’s internal rating and
Global Wealth Management & Business Banking:
composition of lending portfolio, gross
(excluding repurchased ARS positions)
In %
On 31.12.08
3
10
27
9
11
Due from banks
Unsecured loans
Commercial mortgages
Multi-family homes
Single family homes and apartments
Loans secured by marketable securities
40
3RM013_e
loss given default (LGD) buckets as displayed in the table on
the next page shows that the majority of the exposure is from
products attracting the lowest LGDs, demonstrating the con-
tinued improvement in the quality of this portfolio (refer to
the “UBS internal rating scale and mapping of external rat-
ings” table in the “Rating system design and estimation of
credit risk parameters” section for more information).
Global Wealth Management & Business Banking’s gross
len ding portfolio (due from banks and loans) on 31 De-
cember 2008 amounted to CHF 233 billion, of which CHF
142 billion (60%) was secured by real estate and CHF 62 bil-
lion (27%) by marketable securities. The pie chart on the
previous page shows that exposure to real estate is well
diversified, with 40% of the gross lending portfolio being
secured on single family homes and apartments, which gen-
erally have exhibited a low risk profile. The 11% of exposure
secured by residential multi-family homes consists of rented
apartment buildings. Loans and other credit engagements
with individual clients, excluding mortgages, amounted to
CHF 91 billion and are predominantly extended against the
pledge of marketable securities. The volume of collateralized
lending to private individuals decreased by CHF 16 billion or
20% from the previous year. This was mainly due to substan-
tial deleveraging by clients. As of 31 December 2008 more
Global Wealth Management & Business Banking: banking products, gross by UBS internal rating
As a % of Global Wealth Management & Business Banking’s banking products, gross
25
20
15
10
5
0
0 and 1
2
3
4
5
6
7
8
9
10
11
12
13
Investment grade
Sub-investment grade
14
Defaulted
3RM015_e
31.12.07
31.12.08
Global Wealth Management & Business Banking:
distribution of banking products exposure across UBS internal rating and loss given default (LGD) buckets
t
n
e
m
e
g
a
n
a
m
y
r
u
s
a
e
r
t
d
n
a
k
s
i
R
On 31.12.08
CHF million
UBS internal rating
Gross exposure
0–25%
Loss given default (LGD) buckets
0
1
2
3
4
5
6
7
8
9
10
11
12
13
Total non-defaulted
Investment grade
Sub-investment grade
Defaulted 1
Total banking products
1 Includes CHF 27 million of off-balance sheet items.
13,625
5,232
39,937
34,717
25,135
51,347
44,727
18,870
16,892
9,458
1,997
2,252
155
93
264,437
169,993
94,444
3,456
267,893
88
19
37,521
26,127
20,837
45,059
40,617
16,281
14,224
6,757
1,591
2,045
119
34
211,319
129,651
81,668
26–50%
13,537
5,193
2,115
8,064
3,659
5,597
3,371
2,395
2,090
1,671
402
206
36
59
48,395
38,165
10,230
211,319
48,395
51–75%
76–100%
20
301
526
639
691
736
193
567
13
3
1
3,690
2,177
1,513
3,690
3
1
11
1,017
1
1,033
1,033
1,033
Weighted
average
LGD (%)
39
39
20
22
14
13
13
15
17
23
20
19
19
30
18
139
25.00
18.75
12.50
6.25
0.00
Risk and treasury management
Risk management and control
Business Banking Switzerland: lending portfolio, gross (excluding mortgages) by industry sector
As a % of Business Banking Switzerland lending portfolio, gross (excluding mortgages)
40
30
20
10
0
Construction Banks and financial Hotels and
restaurants
institutions
Manufacturing
Private
households
Public
authorities
Real estate
and rentals
Retail and
wholesale
Services
Other
3RM017_e
31.12.07
31.12.08
than 80% of loans secured by marketable securities were
attributed to business outside Switzerland, of which nearly
one-third relates to Wealth Management US.
The Swiss lending portfolio (excluding mortgages) within
the Business Banking area amounted to CHF 23 billion, rep-
resenting 9% of Global Wealth Management & Business
Banking’s total gross banking products exposure. It is widely
spread across industries, with the majority of exposures being
to banks and financial institutions, followed by public author-
ities. The increase in exposures to banks and financial institu-
tions was driven by additional lending to UBS fund entities.
Investment Bank
A substantial majority of the Investment Bank’s gross credit
exposure falls into the investment grade category (internal
counterparty rating classes 0 to 5) both for gross banking
products (77%) and for traded products (91%). The counter-
parties are primarily banks and financial institutions, multina-
tional corporate clients and sovereigns. The increase in cate-
gory 3 resulted from the loan to the fund managed by
BlackRock. Refer to the “Loan to BlackRock fund” sidebar for
more information.
Banking products exposure
On 31 December 2008, the Investment Bank’s total gross
credit exposure from banking products amounted to CHF
125.6 billion or CHF 79.0 billion net, taking credit hedges into
account. This represents a significant reduction compared to
CHF 151.3 billion gross and CHF 100.7 billion net for 2007.
The exposure held for distribution also reduced significantly as
a consequence of the market deterioration, which resulted in
mark downs of existing commitments and a substantial re-
duction in new lending. The table “Investment Bank: banking
products” below shows the composition of the Investment
Bank’s gross banking products exposure, the hedges and oth-
er risk mitigation and the net exposure in total.
As described in the discussion on risk mitigation, the
Investment Bank has engaged in a substantial credit risk
hedging program and on 31 December 2008 had CHF 45
billion of credit hedges in place against banking products
exposure. In addition certain loans captured on an accrual
basis are hedged with mark-to-market hedges.
To illustrate the effects of credit hedging and other risk
mitigation, the first graph on the next page shows the expo-
sures by counterparty rating before and after application of
risk mitigation.
40
30
20
10
0
Investment Bank: banking products
On
CHF million
31.12.08
Investment
grade
Sub-
investment
grade
Impaired
and defaul-
ted loans
Total
Gross banking products exposure
Risk transfers 1
96,244
1,710
25,280
(1,764)
less: specific allowances for credit losses
and loan loss provisions
Net banking products exposure
97,953
23,516
54
(1,526)
2,640
4,112
125,636
31.12.07
Sub-
investment
grade
Impaired
and defaul-
ted loans
Investment
grade
103,848
2,901
46,755
(2,864)
Total
151,254
(126)
151,128
651
(37)
(126)
488
(1,526)
0
0
124,110
106,749
43,891
less: credit protection bought
(credit default swaps, credit-linked notes) 2
Net banking products exposure,
after application of credit hedges
of which: held for distribution
(38,388)
(6,690)
(28)
(45,106)
(43,012)
(7,391)
(29)
(50,432)
59,566
3,685
16,826
2,808
2,612
79,004
63,737
11,091
36,500
20,160
459
100,696
1 Risk transfers include unfunded risk participations. Risk participations are shown as a reduction in exposure to the original borrower and corresponding increase in exposure to the participant bank.
2 Notional amount of credit protection bought on net banking products exposure includes credit default swaps (CDSs) and the funded portion of structured credit protection purchased through the issu-
ance of credit-linked notes (CLNs).
140
Additionally, the matrix on page 142 shows the dis-
tribution of the Investment Bank’s net banking products
exposure after application of risk mitigants, across UBS inter-
nal rating classes and loss given default buckets. Mitigants
include risk participations and single name credit default
swaps. No offset is given for portfolio hedges. There is a con-
centration in the 26–50% bucket where most senior secured
and unsecured claims fall. Sub-investment grade exposure in
aggregate was reduced by CHF 3.3 billion (21%). It should
be noted that exposure distributions shown elsewhere in this
section refer only to gross or net exposure and do not take
recovery expectations into account (refer to the “UBS inter-
nal rating scale and mapping of external ratings” table in the
“Rating system design and estimation of credit risk parame-
ters” section below for more information).
Net banking products exposure after application of credit
hedges continues to be diversified across industry sectors. At
31 December 2008, the largest exposures were to regulated
banks (30%) and financial institutions (28%). The increase in
bank exposures resulted from higher nostro (a bank’s current
account with another bank) positions and the loan to the
fund managed by BlackRock resulted in an increase in the
financial institutions category. Refer to the “Loan to Black-
Rock fund” sidebar for more information.
Investment Bank: banking products exposure by UBS internal rating
As a % of Investment Bank banking products exposure
30
20
10
0
0 and 1
2
3
4
5
6
7
8
9
10
11
12
13
Investment grade
Sub-investment grade
31.12.07 Gross
31.12.07 Net after credit hedges
31.12.08 Gross
31.12.08 Net after credit hedges
14
Defaulted
3RM019_e
Investment Bank: banking products exposure¹ by industry sector
As a % of Investment Bank banking products exposure
30
20
10
0
Banks
Chemicals
Electricity, gas,
water supply
Financial
institutions
Manufacturing
Mining
Public
authorities
Retail and
wholesale
Transport, storage
and communication
Other
31.12.07
31.12.08
1 Net banking products exposure, after application of credit hedges.
Investment Bank: banking products exposure¹ by geographical region
As a % of Investment Bank banking products exposure
3RM021_e
t
n
e
m
e
g
a
n
a
m
y
r
u
s
a
e
r
t
d
n
a
k
s
i
R
60
45
30
15
0
Switzerland
Other Europe
North America
Latin America
Asia / Pacific
Africa / Middle East
31.12.07
31.12.08
1 Net banking products exposure, after application of credit hedges.
3RM021b_e
141
40
40
30
30
20
20
10
10
0
0
30.0
22.5
15.0
7.5
0.0
60
45
30
15
0
Risk and treasury management
Risk management and control
Investment Bank: distribution of net banking products exposure
across UBS internal rating and loss given default buckets
On 31.12.08
CHF million
UBS internal rating
0 and 1
2
3
4
5
6
7
8
9
10
11
12
13
Total non-defaulted
Investment grade
Sub-investment grade
Defaulted
Net banking products exposure
Exposure
8,291
16,292
22,223
9,068
3,692
2,254
2,321
1,419
3,811
1,682
4,430
687
221
76,391
59,566
16,826
2,612
79,004
Loss given default (LGD) buckets
0–25%
3,201
11,083
1,213
341
1,017
334
133
1,930
598
1,303
473
122
21,749
15,839
5,910
531
22,280
26–50%
8,291
10,675
9,360
6,604
2,306
732
1,499
948
1,473
707
2,705
128
99
45,528
37,237
8,291
1,520
47,048
51–75%
76–100%
776
630
943
821
427
388
285
223
293
205
82
5,073
3,169
1,903
467
5,539
1,641
1,150
307
224
78
100
53
184
85
217
3
4,042
3,321
721
95
4,137
Weighted
average
LGD (%)
49
45
30
35
48
32
37
34
19
34
21
23
21
39
39
26
37
36
Loan to BlackRock fund
As reported in second quarter 2008,
UBS sold a portfolio of US RMBSs for
proceeds of USD 15 billion to the
RMBS Opportunities Master Fund, LP
(the “RMBS fund”), a special purpose
entity managed by BlackRock, Inc. The
RMBS fund was capitalized with
approximately USD 3.75 billion in
equity raised by BlackRock from
third-party investors and an eight-year
amortizing USD 11.25 billion senior
secured loan provided by UBS.
Since its inception, the RMBS fund has
amortized the loan through monthly
payments in line with UBS’s original
expectations. On 31 December 2008,
the loan had a balance outstanding of
USD 9.2 billion. UBS does not consoli-
date the RMBS fund into its balance
sheet as the equity investors in the
RMBS fund continue to bear and
receive the majority of the risks and
rewards. UBS continues to monitor the
development of the RMBS fund’s
performance and would reassess the
consolidation status if deterioration of
the underlying mortgage pools related
to the RMBSs were to indicate that
UBS may not fully recover the loan
granted to the RMBS fund.
142
Settlement risk
Settlement risk arises in transactions involving exchange of
value when UBS must honor its obligation to deliver without
first being able to determine that the counter-value has been
received. UBS continues to reduce its actual settlement vol-
ume by the same proportions as in previous years through
the use of multilateral and bilateral agreements.
In 2008 settlement risk on 78% of gross settlement vol-
umes was eliminated through risk mitigation. The most sig-
nificant source of settlement risk is foreign exchange trans-
actions. UBS is a member of Continuous Linked Settlement
(CLS), a foreign exchange clearing house which allows trans-
actions to be settled on a delivery versus payment basis,
thereby significantly reducing foreign exchange-related set-
tlement risk relative to the volume of business. The propor-
tion of UBS’s overall gross volumes settled through CLS in-
creased to 55% during 2008 compared to 53% in 2007. In
2008 UBS’s CLS volume with other CLS settlement members
was 72%, which is comparable to 2007. While the number
of CLS settlement members is relatively stable, in 2008 the
number of third-party participants that UBS dealt with in-
creased considerably from 2007.
Risk reduction by other means – primarily account to ac-
count settlement and payment netting – fell correspondingly
to 23% of gross volumes in 2008 compared to 26% in
2007.
The avoidance of settlement risk through CLS and other
means does not, of course, eliminate the credit risk on for-
eign exchange transactions resulting from changes in ex-
change rates prior to settlement. Such counterparty risk on
forward foreign exchange transactions is measured and con-
trolled as part of the overall credit risk on OTC derivatives.
Country risk
UBS assigns ratings to all countries to which it has exposure.
Sovereign ratings express the probability of occurrence of a
country risk event that would lead to impairment of UBS’s
claims. The default probabilities and the mapping of external
ratings of the major rating agencies are the same as for
counterparty rating classes (as described under “Probability
of default”). In the case of country ratings, rating classes 10
Emerging markets exposure by
UBS internal rating category
In %
On 31.12.08
25
Investment grade
Sub-investment grade
75
to 13 are designated “very high risk” while the lowest rating
class 14 contains countries in outright default.
For all countries rated three and below, UBS sets country
risk ceilings approved by the Board of Directors or under del-
egated authority. The country risk ceiling applies to all UBS’s
exposures to clients, counterparties or issuers of securities
from the country, and to financial investments in that coun-
try. Country risk measures cover both cross-border transac-
tions and investments, and local operations undertaken by
all UBS branches as well as by subsidiaries in countries where
the risk is material. Extension of credit, transactions in traded
products and positions in securities may be denied on the
basis of a country ceiling, even if exposure to the name is
otherwise acceptable.
From a country risk control perspective, exposures to
emerging markets are considered the most relevant, there-
fore additional information is provided in this section cover-
ing exposure to countries that UBS groups under the emerg-
ing market category.
Losses due to counterparty or issuer default resulting from
multiple insolvencies (“systemic risk”) or general prevention of
payments by authorities (“transfer risk”) are the most signifi-
cant effects of a country crisis, but for internal measurement
and control of country risk UBS also considers the probable fi-
nancial impact of market disruptions arising prior to, during
and following a country crisis. These might take the form of a
severe deterioration in the country’s debt and equity markets
and asset prices, and a sharp depreciation of the currency.
Emerging markets exposure by major geographical area and product type
CHF million
On
Emerging Europe
Emerging Asia
Emerging America
Middle East / Africa
Total
Temporary exposures 1
Total
Banking products
Traded products
Financial investments
Tradable assets
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
3,706
16,460
6,802
5,747
32,715
738
5,439
22,039
8,778
5,007
41,263
3,049
1,454
3,594
1,491
1,338
7,877
1,590
5,653
1,486
2,414
1,177
7,059
2,157
3,980
1,071
6,210
2,288
1,603
211
879
167
0
11,143
14,373
11,172
1,257
151
2,123
150
0
2,424
864
4,928
2,987
429
9,208
2,627
8,053
4,854
990
16,524
1 Temporary exposures are loan underwritings which are held short-term, pending syndication, sale or hedging. They are not included in the regional sub-total or overall total.
143
3RM022_e
t
n
e
m
e
g
a
n
a
m
y
r
u
s
a
e
r
t
d
n
a
k
s
i
R
Risk and treasury management
Risk management and control
The potential financial impact of severe emerging mar-
kets crises is assessed by stress testing. This entails identify-
ing countries that might be subject to a potential crisis event
and determining potential loss and making conservative as-
sumptions about potential recovery rates depending on the
types of transaction involved and their economic importance
to the affected countries.
Country risk exposure
Exposure to emerging market countries amounted to CHF
32.7 billion on 31 December 2008, compared with CHF 41.3
billion on 31 December 2007. Of this amount, CHF 24.6 bil-
lion or 75% was to investment grade countries based on
UBS’s internal ratings-based approach. The reduction of CHF
8.5 billion in total emerging markets exposure arose to a
large extent in Asia.
The pie chart on the previous page shows UBS’s emerging
market country exposures (excluding those which are tem-
porary exposures) on 31 December 2008, based on the main
country rating categories. The table on the previous page
analyzes emerging market country exposures by major geo-
graphical area and product type on 31 December 2008
compared with 31 December 2007. Temporary exposures
arising from loan underwriting in these markets are shown
separately in the table.
Impairment and default – distressed claims
d
e
t
i
d
u
A
UBS has a number of classifications for distressed claims. A
loan carried at amortized cost is considered to be “past due”
when a significant payment has been missed. Any claim, re-
gardless of accounting treatment, is classified as “impaired” if
UBS considers it probable that a loss will result on that claim
due to the obligor’s inability to meet its obligations according
to the contractual terms, and after realization of any available
collateral. “Obligations” in this context include interest pay-
ments, principal repayments or other payments due, for ex-
ample under an OTC derivative contract or a guarantee.
The recognition of impairment in the financial statements
depends on the accounting treatment of the claim. For prod-
ucts carried at amortized cost, impairment is recognized
through the creation of an allowance or provision, which is
charged to the income statement as credit loss expense. For
products recorded at fair value such as derivatives, impair-
ment is recognized through a credit valuation adjustment,
which is charged to the income statement through the “Net
trading income” line.
UBS has policies and processes to ensure that the carrying
values of impaired claims are determined in compliance with
IFRS on a consistent and fair basis, especially for those im-
paired claims for which no market estimate or benchmark for
the likely recovery value is available. The credit controls ap-
plied to valuation and workout are the same for both amor-
tized cost and fair-valued credit products. Each case is assessed
d
e
t
i
d
u
A
on its merits, and the workout strategy and estimation of cash
flows considered recoverable are independently approved.
Credit officers monitor derivative counterparties for de-
fault or impairment using generally the same principles and
processes as used for loans. In the event that a derivatives
counterparty defaults on its obligations a specific credit valu-
ation adjustment (CVA) is established by the credit officer.
Portfolios of claims carried at amortized cost with similar
credit risk characteristics are also assessed for collective im-
pairment. A portfolio is considered impaired on a collective
basis if there is objective evidence to suggest that it contains
impaired obligations but the individual impaired items can-
not yet be identified. Portfolios considered impaired on a
collective basis are not included in the totals of impaired
loans in the tables shown in the discussion of the composi-
tion of credit risk for business divisions in the “Credit risk”
section of this report.
The assessment of collective impairment differs depend-
ing on the nature of the underlying obligations. In UBS’s re-
tail businesses, where delayed payments are routinely seen,
UBS typically reviews individual positions for impairment
only after they have been in arrears for a certain time. To
cover the time lag between the occurrence of an impairment
event and its identification, collective loan loss allowances
are established, based on the expected loss measured for the
portfolio over the average period between trigger events
and their identification for individual impairments. Collective
loan loss allowances of this kind are not required for corpo-
rate and investment banking businesses because individual
counterparties and exposures are continuously monitored
and impairment events are identified at an early stage.
Additionally, for all portfolios, UBS assesses each quarter
– or on an ad hoc basis if necessary – whether there have
been any previously unforeseen developments which might
result in impairments that cannot be immediately identified
individually. Such events could be stress situations such as a
natural disaster or a country crisis, or they could result from
structural changes in, for example, the legal or regulatory en-
vironment. To determine whether an event-driven collective
impairment exists, a set of global economic drivers is regularly
assessed for the most vulnerable countries and, on a case- by-
case basis, the impact of specific potential impairment events
since the last assessment is reviewed. Again, the expected loss
parameters of the affected sub-portfolios are the starting
point for determining the collective impairment, adjusted as
necessary to reflect the severity of the event in question.
Past due but not impaired loans
Past due but not impaired loans have suffered missed pay-
ments but are not considered impaired because UBS expects
ultimately to collect all amounts due under the contractual
terms of the loans or with equivalent value.
Compared with 31 December 2007, the past due expo-
sure decreased CHF 0.5 billion at 31 December 2008.
144
Past due but not impaired loans
d
e
t
i
d
u
A
CHF million
1–10 days
11–30 days
31–60 days
61–90 days
> 90 days
Total
On
31.12.08
31.12.07
522
89
272
331
547
1,761
515
1,381
74
36
262
2,268
Impaired loans, allowances and provisions
The table below shows that allowances and provisions for
credit losses increased 184%, to CHF 2,927 million on
31 December 2008 from CHF 1,031 million on 31 December
2007. Refer to “Note 9b Due from banks and loans” in the
financial statements of this report for more information on
the changes in allowances and provisions for credit losses
during the year.
The gross impaired lending portfolio increased signifi-
cantly to CHF 9,145 million on 31 December 2008 from
CHF 2,392 million on 31 December 2007. This was largely
driven by the reclassification of certain financial instruments,
some of which carried impairments, in addition to various
real estate-related positions that were also considered im-
paired during the year. Refer to “Note 29 measurement
d
e
t
i
d
u
A
categories of financial assets and liabilities” in the financial
statements and the “Financial performance” sections of this
report for more information.
The ratio of the impaired lending portfolio to the total
lending portfolio (both measured gross) deteriorated to
2.2% on 31 December 2008 from 0.6% on 31 December
2007.
Loans or receivables with a carrying amount of CHF 224
million and CHF 126 million were reclassified from impaired to
performing during 2008 and 2007 respectively. This reclassifi-
cation was made either because the loans had been renegoti-
ated and the new terms and conditions met normal market
criteria for the quality of the obligor and type of loan, or be-
cause there had been an improvement in the financial posi-
tion of the obligor, enabling it to repay any past due amounts
Allowances and provisions for credit losses 1
CHF million
On
Due from banks
Loans
Total lending portfolio, gross 3
Allowances for credit losses
Total lending portfolio, net
Impaired lending portfolio, gross
Estimated liquidation proceeds of
collateral for impaired loans
Impaired lending portfolio, net of collateral
Allocated allowances for impaired lending portfolio
Other allowances and provisions
Total allowances and provisions for
credit losses in lending portfolio
Allowances and provisions for
credit losses outside of lending portfolio
Ratios
Allowances and provisions as a %
of total lending portfolio, gross
Impaired lending portfolio as a %
of total lending portfolio, gross
Allocated allowances as a %
of impaired lending portfolio, gross
Allocated allowances as a %
of impaired lending portfolio, net of collateral
Global Wealth Management &
Business Banking
Investment Bank
Other 2
UBS
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
6,606
230,684
237,290
8,237
240,641
248,878
57,485
111,798
169,282
52,164
95,760
147,924
(1,195)
(908)
(1,733)
(123)
382
730
1,113
0
534
466
1,000
64,473
343,213
407,685
60,935
336,867
397,802
0
(2,927)
(1,031)
236,095
247,970
167,550
147,801
1,113
1,000
404,758
396,771
2,998
1,820
6,147
(1,594)
1,404
1,171
24
1,195
24
0.5
1.3
39.1
83.4
(740)
1,080
874
34
908
60
0.4
0.7
48.0
80.9
(2,336)
3,811
1,733
0
1,733
119
1.0
3.6
28.2
45.5
572
(364)
208
123
0
123
73
0.1
0.4
21.5
59.1
0
0
0
0
0
0
0
0.0
0.0
0.0
0.0
0
0
0
0
0
0
0
0.0
0.0
0.0
0.0
9,145
2,392
(3,930)
5,215
2,904
24
(1,104)
1,288
997
34
2,927
1,031
143
133
0.7
2.2
31.8
55.7
0.3
0.6
41.7
77.4
145
1 Figures reflect IFRS reported values. 2 Includes Global Asset Management and the Corporate Center. 3 Excludes loans designated at fair value.
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Impaired assets by type of financial instrument
CHF million
Impaired loans
Impaired contingent claims
Defaulted derivatives contracts
Defaulted securities financing transactions
Total 31.12.08
Total 31.12.07
such that future principal and interest are deemed to be fully
collectible in accordance with the original contractual terms.
Collateral held against the impaired loans portfolio con-
sists in most cases of real estate. It is UBS policy to dispose of
foreclosed real estate as soon as practicable. The carrying
amount of foreclosed property recorded in the balance sheet
under “Other assets” at the end of 2008 and 2007 amount-
ed to CHF 280 million and CHF 122 million respectively.
UBS seeks to liquidate collateral in the form of financial
assets in the most expeditious manner, at prices considered
fair. This may require that it purchases assets for its own ac-
count, where permitted by law, pending orderly liquidation.
The table “Impaired assets by type of financial instru-
ment” above includes not only impaired loans, but also im-
paired off-balance sheet claims and defaulted derivatives
and repurchase / reverse repurchase contracts, which are
subject to the same workout and recovery processes.
The impaired assets of CHF 15.7 billion increased signifi-
cantly as a consequence of the market turbulence in 2008.
After deducting allocated specific allowances, provisions
and credit valuation adjustments of CHF 7.2 billion and the
estimated liquidation proceeds of collateral of CHF 3.9 billion,
net impaired assets amounted to CHF 4.5 billion in 2008.
Credit loss expense
UBS’s financial statements are prepared in accordance with
IFRS. Under IFRS the credit loss expense charged to the in-
come statement in any period is the sum of net allowances
and direct write-offs minus recoveries arising in that period,
i.e. the credit losses actually experienced.
In 2008, UBS experienced a net credit loss expense of CHF
2,996 million, of which CHF 1,329 million was due to impair-
ment charges taken on reclassified financial instruments in the
Investment Bank. This was mainly due to an impairment
charge taken against a client in the petrochemical industry,
excluding any benefit from hedges. In comparison, UBS re-
corded a net credit loss expense of CHF 238 million in 2007.
The Investment Bank recorded a net credit loss expense of
CHF 2,575 million for 2008, compared with a net credit loss
expense of CHF 266 million in 2007. Excluding the credit loss
expense from reclassified financial instruments of CHF 1,329
146
Estimated
liquidation
proceeds of
collateral
(3,930)
(3,930)
(1,104)
Specific
allowances,
provisions and
credit valuation
adjustments
(2,916)
(20)
(4,205)
(111)
(7,252)
(1,914)
Net impaired
exposure
2,299
21
1,958
198
4,476
390
Impaired exposure
9,145
41
6,163
309
15,658
3,408
million, the credit loss expense amounted to CHF 1,246 mil-
lion, mainly driven by new allowances on securities financing
transactions, real estate loan positions and asset backed se-
curities as a consequence of the deteriorations in the finan-
cial markets.
Global Wealth Management & Business Banking reported
a net credit loss expense of CHF 370 million for 2008, com-
pared with a CHF 28 million net credit loss recovery for 2007.
This significant increase in credit loss expenses was mainly due
to collateral shortfalls against lombard lending resulting from
the turmoil in the financial markets in the fourth quarter of
2008 with sharp moves in securities prices and an unprece-
dented decrease in the liquidity of certain asset categories.
Rating system design and estimation of
credit risk parameters
Probability of default
UBS assesses the likelihood of default of individual counter-
parties using rating tools tailored to the various counterparty
segments. Probability of default is summarized in the UBS
internal rating scale and mapping of external ratings (Mas-
terscale), shown on the next page, which segments clients
into 15 rating classes (0 to 14), one of which is reserved for
default. The UBS Masterscale reflects not only an ordinal
ranking of counterparties, but also the range of default
probabilities defined for each rating class. Also, in order to
ensure consistency in determining default probabilities, all
rating tools must be calibrated to the common Masterscale.
This approach means that clients migrate between rating
classes as UBS’s assessment of their probability of default
changes. The performance of rating tools, including their
predictive power with regard to default events, is regularly
validated and model parameters are adjusted as necessary.
External ratings, where available, are used to benchmark
UBS’s internal default risk assessment. The ratings of the ma-
jor rating agencies shown in the table are linked to the inter-
nal rating classes based on the long-term average one-year
default rates for each external grade. Observed defaults per
agency rating category vary from year to year, especially over
an economic cycle, and therefore UBS does not expect the
actual number of defaults in its equivalent rating band in any
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UBS
Rating
Description
Moody’s Investor
Services equivalent
Standard & Poor’s
equivalent
0 and 1
Investment grade
Aaa
Aa1 to Aa3
A1 to A3
AAA
AA+ to AA–
A+ to A–
2
3
4
5
6
7
8
9
10
11
12
13
14
Sub-investment grade
Baa1 to Baa2
BBB+ to BBB
Baa3
Ba1
Ba2
Ba2
Ba3
B1
B2
B3
BBB–
BB+
BB
BB
BB–
B+
B
B–
Defaulted
Caa to C
D
CCC to C
D
given period to equal the rating agency average. UBS moni-
tors the long-term average default rates associated with ex-
ternal rating classes. If these long-term averages were ob-
served to have changed in a material and permanent way,
their mapping to the Masterscale would be adjusted.
At the Investment Bank, rating tools are differentiated by
broad segments. Current segments include banks, sovereigns,
corporates, funds, hedge funds, commercial real estate and
several more specialized businesses. The design of these tools
follows a common approach. The selection and combination
of relevant criteria (financial ratios and qualitative factors) are
determined through a structured analysis by credit officers
with expert knowledge of each segment, supported by statis-
tical modeling techniques where sufficient data are available.
The Swiss banking portfolio includes exposures to both
large and small- to medium-sized enterprises, and the rating
tools vary accordingly. For segments where sufficient default
data are available, rating tool development is primarily based
on statistical models. Typically, these “score cards” consist of
eight to 12 criteria combining financial ratios with qualitative
and behavioral factors which have proven good indicators of
default in the past, are accepted by credit officers and are
easy to apply. For smaller risk segments with few observed
defaults the approach relies more on judgment and exper-
tise, similar to that applied at the Investment Bank. For the
Swiss commercial real estate segment and for lombard lend-
ing, which is part of the retail segment, the probability of
default is derived from simulation of potential changes in the
value of the collateral and the probability that it will fall be-
low the loan amount.
Default expectations for the Swiss residential mortgage
segment are based on the internal default and loss history,
where the major differentiating factor is the loan-to-value
ratio (i.e. the amount of the outstanding obligation ex-
pressed as a percentage of the value of the collateral).
Exposure at default
Exposure at default represents the amounts UBS expects to
be owed at the time of default.
For outstanding loans, the exposure at default is the
drawn amount or face value. For loan commitments and for
contingent liabilities, it includes any amount already drawn
plus any additional amount which is expected to be drawn at
the time of default, should it occur. This calculation is based
on a “credit conversion factor” – a fixed percentage per
product type derived from historical experience of drawings
under commitments by counterparties within the year prior
to their default.
For traded products, the estimation of exposure at de-
fault is more complex, since the current value of a contract
or portfolio of contracts can change significantly over time
and may, at the time of a future default, be considerably
higher or lower than the current value. For repurchase and
reverse repurchase agreements and for securities borrow-
ing and lending transactions, the net amount which could
be owed to or by UBS is assessed, taking into account the
impact of market moves over the time it would take to
close out all transactions (“closeout exposure”). For ex-
change-traded derivatives (ETDs), the exposure at default is
derived from the difference between the initial margin and
the current variation margin. Exposure at default on OTC
derivative transactions is determined by modeling the po-
tential evolution of the replacement value of the portfolio
of trades with each counterparty over the lifetime of all
transactions (“potential credit exposure”), taking into ac-
count legally enforceable closeout netting agreements
where applicable.
For traded products, excluding ETDs, the exposure at de-
fault is derived from a Monte Carlo simulation (a statistical
technique involving a large number of simulations) of poten-
tial market moves in all relevant risk factors, such as interest
rates and exchange rates, based on estimated correlations
between the risk factors. This ensures a scenario-consistent
estimation of market value across all traded products at
counterparty and portfolio level. The randomly simulated
sets of risk factors are then used as inputs to product- specific
valuation models to generate valuation paths, taking into
account the impact of maturing contracts and changing col-
lateral values.
The resultant distribution of future valuation paths sup-
ports various exposure measures. All portfolio risk measures
are based on the expected exposure profile. By contrast, in
controlling individual counterparty exposures UBS limits the
potential “worst case” exposure over the full tenor of all
transactions, and therefore applies the limits to the “maxi-
mum likely exposure” generated by the same simulations,
measured to a specified high confidence level.
Cases where there is material correlation between the
factors driving a counterparty’s credit quality and the factors
driving the future path of traded products exposure (“wrong-
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way risk”) require special treatment. In such cases, the po-
tential credit exposure generated by the standard model is
overridden by a calculation from a customized exposure
model that explicitly takes this correlation into account. For
portfolios where this risk is inherently present, for instance
for the hedge funds portfolio, UBS has established special
controls to capture these wrong-way risks.
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The performance of exposure models is monitored by
backtesting and benchmarking whereby model outcomes
are compared against actual outcomes, based on UBS’s in-
ternal as well as external historical experience.
Loss given default
Loss given default or loss severity represents UBS’s expecta-
tion of the extent of loss on a claim should default occur. It
is expressed as a percentage loss per unit of exposure and
typically varies by type of counterparty, type and seniority of
claim and the availability of collateral or other credit mitiga-
tion. Loss given default estimates cover loss of principal, in-
terest and other amounts due (including workout costs), and
also consider the costs of carrying the impaired position dur-
ing the workout process.
At the Investment Bank loss given default estimates are
based on expert assessment of the risk drivers (country, indus-
try, legal structure, collateral and seniority), supported by em-
pirical evidence from internal loss data and external bench-
mark information where available. In the Swiss portfolio, loss
given default differs by counterparty and collateral type and is
statistically estimated using internal loss data. For the residen-
tial mortgage portfolio, a further differentiation is derived by
statistical simulation based on loan-to-value ratios.
Debt investments
Debt investments classified for IFRS as “financial investments
available-for-sale” can be broadly categorized as money
market instruments and debt securities, which are mainly
held for statutory, regulatory or liquidity reasons. Debt in-
vestments also include non-performing loans, which were
purchased in the secondary market by the Investment Bank.
The risk control framework applied to debt instruments
classified as “Financial investments available-for-sale” varies
depending on the nature of the instruments and the pur-
pose for which they are held.
Where applicable, debt investments are reflected in re-
ports to senior management of consolidated credit expo-
sures and in “large exposure” reports to FINMA.
Composition of debt investments
On 31 December 2008, debt financial investments classified
as “Financial investments available-for-sale” consisted of
money market paper of CHF 2,165 million and other debt
investments of CHF 1,402 million. The increase in money
market instruments is due to UK Treasury Gilts held in UBS
Ltd.
At 31 December 2007, the equivalent positions were CHF
349 million money market instruments and CHF 1,034 mil-
lion other debt investments.
148
Operational risk
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems (for example
failed IT systems, or fraud perpetrated by a UBS employee),
or from external causes, whether deliberate, accidental or
natural. It is inherent in all of UBS’s activities. Operational
risks are monitored and, to the extent possible, controlled
and mitigated. UBS’s approach to operational risk is not de-
signed to eliminate risk altogether but, rather, to contain
risks within levels deemed acceptable by senior manage-
ment. The Group Chief Risk Officer (Group CRO), supported
by the Group Head of Operational Risk, is responsible for the
effective design of the operational risk framework.
Operational risk framework
All UBS functions, whether business, control or logistics
functions, must manage the operational risks that arise from
their activities. Operational risks are pervasive, as a failure in
one area may have a potential impact on several other areas.
Each business division has therefore established a cross-func-
tional body to actively manage operational risk as part of its
governance structure.
To ensure the integrity of risk management decisions,
each business division also has an Operational Risk Control
unit, the head of which reports functionally to the Group
Head of Operational Risk. The primary remit of these units is
to confirm the effective implementation of the operational
risk framework and to perform independent oversight of the
design and conclusions regarding operating effectiveness
reached by management.
The foundation of the operational risk framework is that all
functions have adequately defined their roles and responsibili-
ties. The functions can then collectively ensure that there is
adequate segregation of duties, complete coverage of risks
and clear accountability. From this analysis, they develop con-
trol objectives and standards to manage UBS’s tangible and
intangible assets, based on the types of operational risk events
that might arise, ranging from daily reconciliation problems to
potentially severe events such as fraud. UBS recognizes that it
cannot eliminate all risks, because errors and accidents will al-
ways happen, and that even where it is possible to eliminate
certain risks it is not always cost effective to do so.
The functions use their controls to monitor compliance and
assess their operating effectiveness in several ways, including
self-certification by staff, tracking of a wide range of metrics
(for example, the number and characteristics of client com-
plaints, deal cancellations and corrections, unreconciled items
on cash and customer accounts, and systems failures), and the
analysis of internal and external audit findings.
As major financial and non-financial operational risk
events occur, UBS assesses their causes and the implications
for its control framework. This includes events affecting third
parties that are relevant to the firm’s business, provided that
sufficient information is publicly available.
The totality of this information is reviewed by functional
managers to assess their operational risk exposure and the
actions needed to address specific issues. These issues are
formally captured in a risk inventory, which forms the basis
of operational risk reporting to senior management. Regular
reports are provided both within the business divisions and
to the Group CRO to allow senior management to assess the
overall operational risk profile of the firm.
Operational risk measurement
UBS has developed a model for the quantification of opera-
tional risk which meets the regulatory capital standard spec-
ified by the Basel II Advanced Measurement Approach
(AMA). The model has two main components:
– The historical component is based on UBS’s own internal
losses and is used primarily to determine the expected
loss portion of the capital requirement. UBS has been col-
lecting operational risk event data (both profits and loss-
es) since 2002.
– The scenario component is used primarily to determine
the unexpected loss portion of the capital requirement. It
is based on a set of generic scenarios that represent cat-
egories of operational risks which UBS is exposed to. The
scenarios themselves are generated from an analysis of
internal and external event information, the current busi-
ness environment and UBS’s own internal control environ-
ment. The scenarios are reviewed at least annually by ex-
perts to ensure their validity and may be updated based
on material new information or events. During 2008, sce-
narios were adjusted for a number of industry-wide
events including unauthorized trading losses and disputes
over client practices.
UBS calculates its operational risk regulatory capital re-
quirement using the AMA model for the consolidated Group
and the parent bank in accordance with the requirements of
FINMA. For regulated subsidiaries the standardized ap-
proaches are adopted as agreed with local regulators. Cur-
rently, UBS does not reflect mitigation through insurance in
its AMA model.
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Treasury management
UBS’s treasury department is responsible for the management of the firm’s financial resources. This includes
the management of: liquidity and funding; capital and balance sheet; and interest rate and currency risks aris-
ing from balance sheet and capital management responsibilities. UBS aims to maintain sound capital ratios
at all times – to ensure strong external credit ratings and to remain one of the best-capitalized firms in the
international financial sector.
UBS: funding by currency
In %
As of 31.12.08
UBS: funding by product type
In %
As of 31.12.08
Retail savings/deposits
Demand deposits
Fiduciary
14
Time deposits
Long-term debt
Securities lending
6
Repurchase agreements
Interbank
17
Money market paper
3CM003_e
15
15
11
10
CHF
EUR
USD
22
Other
48
UBS: BIS capital ratios¹
In %
Basel I
Basel II
18
15
12
9
6
4
0
Q
1
4
0
Q
2
4
0
Q
3
4
0
Q
4
5
0
Q
1
5
0
Q
2
5
0
Q
3
5
0
Q
4
6
0
Q
1
6
0
Q
2
6
0
Q
3
6
0
Q
4
7
0
Q
1
7
0
Q
2
7
0
Q
3
7
0
Q
4
8
0
Q
1
8
0
Q
2
8
0
Q
3
8
0
Q
4
14.2
13.9
13.9
14.1
13.4
12.8
12.5
12.1
12.3
11.9
14.2
12.6
14.5 14.5
12.8 13.3
13.3
11.6
15.5
14.8
15.0 15.0
15.8
12.6
12.7
12.2 12.0
12.7
13.9
11.0
16.2
15.0
15.0
12.2
11.1
12.2
11.0
11.0
9.1
7.4
BIS tier 1 capital ratio
BIS total capital ratio
1 Prior to and including 4Q07 the capital ratios above are based on Basel I capital
regulations, thereafter on Basel II rules.
12
10
1
19
3CM004_e
3CM010_e
150
11.25
11.25
7.50
7.50
3.75
3.75
15.00
15.00
0.00
0.00
Liquidity and funding management
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UBS defines liquidity risk as the risk of being unable to raise
funds to meet payment obligations when they fall due.
Funding risk is the risk of being unable, on an ongoing basis,
to borrow funds in the market at an acceptable price to fund
actual or proposed commitments and thereby support UBS’s
current business and desired strategy. Liquidity and funding
are not the same, but they are closely related. Both are finite
resources that are critical for a financial institution.
Liquidity must be continuously managed to ensure that
the firm can survive a crisis, whether it is a general market
event, a localized difficulty affecting a smaller number of in-
stitutions, or a problem unique to an individual firm. An in-
stitution that is unable to meet its liabilities when they fall
due may collapse, even though it is not insolvent, because it
is unable to borrow sufficient funds on an unsecured basis,
or does not have sufficient good quality assets to borrow
against or liquid assets to sell to raise immediate cash.
Market liquidity overview: 2008
The financial and credit market crisis, which had its origins in
the US residential mortgage market in the second half of
2007, spread and gained in intensity throughout 2008, as a
broader economic crisis developed and pointed towards a
severe global downturn. A precipitous fall in trading volumes
in some previously highly liquid markets accompanied a
sharp reduction in asset market values. After the failure of
one of the major US investment banks in mid-September,
the tenor of the interbank lending market was dramatically
reduced. Although other short-term funding remained avail-
able at this time, it was largely limited to tenors within one
month, while in secured funding markets certain assets were
subjected to significantly higher haircuts and in some cases
were no longer accepted as collateral. Access to other lon-
ger-term wholesale funds was also severely constrained, as
the level of credit spreads surged, and companies’ financing
costs reached new heights.
In an attempt to contain the sustained and growing crisis,
which resulted in significant bank failures or forced restruc-
turings of several major financial institutions throughout the
year, central banks and governments were induced to inter-
vene on a large scale to support both specific institutions and
the global financial system as a whole. These public sector
initiatives included a series of restructurings, recapitalizations
– both direct and indirect – and the introduction, then subse-
quent expansion, of broad-based credit and liquidity support
facilities. New policies were implemented in many major
economies to permit direct government investment in banks,
loan and bank debt guarantees, as well as the provision of
large volumes of additional liquidity to their financial systems
via extraordinary financing facilities. Certain major banks be-
came majority-owned by their governments. Several coun-
tries announced that they would insure all domestic bank de-
posits and others substantially increased the insurance
protection for their deposits and bank debts, pressuring the
deposits and debts of banks covered by weaker protection
schemes. In the fourth quarter, the Swiss government an-
nounced a number of steps to support its banking system,
including a strengthening of the country’s bank deposit insur-
ance scheme and a willingness to guarantee interbank liabili-
ties if and when deemed necessary. Throughout most of the
fourth quarter, public bond market issuance was largely lim-
ited to banks whose debt was government-guaranteed.
UBS’s response to the ongoing crisis
Despite the very challenging conditions, UBS maintained its
access to funding at all times, primarily as a result of its
broadly diversified funding base. In addition, in anticipation
of an extended period of market turbulence, UBS proactively
undertook several measures starting in 2007 and continuing
in 2008 to further strengthen and safeguard its liquidity po-
sition. Short-term funding targets were adjusted, and in-
creased focus was placed on asset reduction. Combined
with the broad diversity of its funding sources, its contin-
gency planning processes and its global scope, these addi-
tional measures have enabled UBS to maintain a balanced
asset / liability profile. UBS also maintains a substantial multi-
currency portfolio of unencumbered high-quality short-term
assets and has available and unutilized collateralized liquidity
facilities at several major central banks.
Like many other major financial institutions, UBS saw de-
creased access to wholesale term funding and a decline in
client deposits during 2008. This was counterbalanced by
ongoing asset reductions – mostly in the Investment Bank –
which reduced UBS’s overall funding needs. As part of these
asset reductions, the trading portfolio was pared back by
CHF 462 billion compared with year-end 2007.
The transaction with the SNB, which was announced in
fourth quarter 2008, further bolsters the firm’s liquidity and
funding position by reducing overall funding requirements.
Liquidity and funding risk management framework
A new liquidity and funding risk management framework
was approved by the Board of Directors (BoD) of UBS in
2008. This new framework outlines the principles, roles and
responsibilities, models, methodologies and tools UBS uses
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to manage liquidity and funding risk. The framework de-
scribes a target state; many of these measures have already
been, or are in the process of being implemented. The ben-
efits of the new framework are the following:
– First, sustainable profits will be achieved through alloca-
tion of the real costs of funding to the business that gen-
erates the funding requirement. There will be no more
cross-subsidization of one business division by another,
allowing an unbiased and more accurate view of the
firm’s profitability.
– Second, liquidity and funding risk are being reduced as
UBS limits the size of its balance sheet, funds illiquid as-
sets long-term and reduces reliance on short-term unse-
cured funding.
– Finally, UBS is establishing best practice liquidity and fund-
ing risk management processes. The new framework is
designed to keep the firm in line with industry best prac-
tice, and prepare it for further changes in regulatory re-
quirements and oversight.
The approach taken by UBS will proceed in parallel: tacti-
cally addressing a number of key initiatives in the short term,
while developing the framework into a target liquidity and
funding model to be strategically integrated into each busi-
ness division, region and entity within the Group.
Liquidity approach
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UBS’s approach to liquidity management, which covers all
branches and subsidiaries, aims to ensure that it will always
have sufficient liquidity to meet liabilities when due, under
both normal and stressed conditions, without incurring un-
acceptable losses or risking sustained damage to its various
business franchises.
Central to the integrated framework is an assessment of
all material, known and expected cash flows and the level of
high-grade collateral that could be used to raise additional
funding. It entails both careful monitoring and control of the
daily liquidity position, and regular liquidity stress testing.
Limits are set at Group level by the BoD risk committee, while
the Executive Committee of the Group Executive Board (GEB)
is responsible for the allocation of resources to the business
divisions and sets limits for each of the business divisions.
These limits are monitored by Group Treasury, who reports
the results and trends on a regular basis to the BoD risk com-
mittee and the Executive Committee of the GEB. Contin-
gency plans for a liquidity crisis are incorporated into UBS’s
wider crisis management process.
The liquidity position and asset and liability profile are con-
tinuously tracked. This involves monitoring the balance sheet
contractual and behavioral maturity profiles and projecting
and modeling the liquidity exposures of the firm under a
variety of potential scenarios – encompassing both normal
and stressed market conditions. UBS considers the possibility
that its access to markets could be impacted by a stress event
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affecting some part of its business or, in the extreme case, if
it was to suffer a severe rating downgrade combined with a
period of general market uncertainty. The results are factored
into the overall contingency plans of UBS.
UBS’s major sources of liquidity are channeled through
entities that are fully consolidated.
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Liquidity management
UBS manages its liquidity position in order to be able to ride
out a crisis without damaging the ongoing viability of its
business. This is complemented by the firm’s funding risk
management which aims to achieve the optimal liability
structure to finance its businesses cost-efficiently and reli-
ably. The long-term stability and security of UBS’s funding in
turn helps protect its liquidity position in the event of a UBS-
specific crisis.
The firm’s business activities generate asset and liability
portfolios which are intrinsically highly diversified with re-
spect to market, product and currency. This reduces UBS’s
exposure to individual funding sources, and also provides a
broad range of investment opportunities, which in turn re-
duces liquidity risk.
UBS adopts a centralized approach to liquidity and fund-
ing management to exploit these advantages to the full. The
liquidity and funding process is undertaken jointly by Group
Treasury and the foreign exchange and money market
(FX&MM) unit within the Investment Bank’s fixed income,
currencies and commodities (FICC) business area. Group
Treasury establishes a comprehensive control framework,
while FX&MM undertakes operational cash and collateral
management within the established parameters.
This centralization permits close control of both UBS’s
global cash position and its stock of highly liquid securities.
The central treasury process also ensures that the firm’s gen-
eral access to wholesale cash markets is concentrated in
FX&MM. Funds raised externally are largely channeled into
FX&MM including the proceeds of debt securities issued by
UBS, an activity for which Group Treasury is responsible.
FX&MM in turn meets all internal demands for funding by
channeling funds from units generating surplus cash to
those requiring finance. In this way, UBS reduces its external
borrowing and use of available credit lines, and presents a
consistent and coordinated face to the market.
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Liquidity modeling and contingency planning
For the purpose of monitoring its liquidity situation, UBS em-
ploys the following main measures:
– A cash ladder, which is used by FX&MM to manage the
firm’s funding requirements on a daily basis within limits
that are set by the BoD risk committee and controlled by
Group Treasury. This cumulative cash ladder shows the
daily liquidity position – the net cumulative funding re-
quirement for a specific day – projected for each business
day from the current day forward six months.
152
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– A contractual maturity gap analysis of UBS’s assets and
liabilities.
– A behavioral maturity gap analysis under an assumed se-
vere liquidity crisis scenario.
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– A cash capital model which measures the amount of sta-
ble funding in relation to the amount and composition of
its assets.
The breakdown of the contractual maturity of UBS’s as-
sets and liabilities serves as a starting point for stress testing
analyses. One such breakdown is shown in the “Maturity
analysis” table at the end of this section. This maturity analy-
sis is an accounting view. It does not fully represent a liquid-
ity risk management perspective, which would also include
behavioral stress analyses and a more detailed breakdown of
asset and liability types.
The aforementioned liquidity crisis scenario combines a
firm-specific crisis with market disruption and focuses on a
time horizon starting with overnight and extending up to
one year. This UBS-specific scenario envisages large draw-
downs on otherwise stable client deposits, an inability to re-
new or replace maturing unsecured wholesale funding and
limited capacity to generate liquidity from trading assets. Li-
quidity crisis scenario analysis supports the liquidity manage-
ment process so that immediate corrective measures, such as
the use of a liquidity buffer to absorb potential sudden li-
quidity shortfalls, can be put into effect.
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Since a liquidity crisis could have a myriad of causes, UBS
focuses on a scenario that encompasses all potential stress
effects across all markets, currencies and products.
The assessment includes the likelihood of maturing assets
and liabilities being rolled over in a UBS-specific crisis within
an otherwise stressed market environment, and gauges the
extent to which the potential crisis-induced shortfall could
be covered by available funding. This would be raised on a
secured basis against available collateral, which includes se-
curities eligible for pledging at the major central banks, or by
selling liquid inventory. In both cases UBS applies crisis-level
discounts to the value of the assets. It assumes that it would
be generally unable to renew any of the Group’s wholesale
unsecured debt, including all its maturing money market pa-
per (outstanding volume CHF 112 billion on 31 December
2008) and that no contingency funding could be raised on
an unsecured basis. Since liquidity needs may also result
from commitments and contingencies, including credit lines
extended to secure the liquidity needs of customers, UBS
regularly monitors undrawn committed credit facilities and
other latent liquidity risks and factors these potential liquid-
ity outflows into the scenario analysis. Particular emphasis is
placed on potential drawdowns of committed credit lines.
verse movements in the replacement value of its over-the-coun-
ter (OTC) derivative transactions which are subject to collateral
arrangements and includes potential outflows in its crisis sce-
nario. Given the diversity of UBS’s derivatives business and that
of its counterparties, there is not necessarily a direct correlation
between the factors influencing net replacement values with
each counterparty and a firm-specific crisis scenario.
Liquidity limits and controls
Liquidity and funding limits are set by senior management,
taking into consideration UBS’s business model and strategy,
the prevailing market conditions and the firm’s tolerance for
risk. Structural limits focus on the composition and profile of
the balance sheet, while supplementary limits are designed
to drive the utilization and allocation of funding resources.
The supplementary limits, which consist of three categories
– operational, funding and regulatory – are monitored and
performance is regularly communicated to senior manage-
ment. Operational limits focus on structural liquidity risk for
terms from intra-day out to one year including stress testing,
while funding limits focus on the liability mix. The principles
underlying UBS’s limit framework aim to maximize and sus-
tain the value of its business franchise and appropriately bal-
ance the asset / liability structure in light of prevailing market
conditions. Group Treasury is responsible for the control and
oversight of the liquidity and funding limits.
To complement and support the limit framework, region-
al teams monitor the markets in which UBS operates for po-
tential threats and regularly report any significant findings to
Group Treasury.
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UBS has also developed detailed contingency plans for li-
quidity crisis management, the cornerstone of which is the
Group’s substantial liquidity reserves, including a large multi-
currency portfolio of unencumbered high-quality and short-
term assets as well as available and unutilized liquidity facili-
ties at several major central banks.
The liquidity contingency plan is an integral part of the
global crisis management concept, which covers all types of
crisis events. Its implementation falls under the responsibility of
a core crisis team with representatives from Group Treasury,
from FX&MM and from related areas including the functions
responsible for payments and settlements, market and credit
risk control, collateral and margin management, and informa-
tion technology and infrastructure. FX&MM’s centralized glob-
al management model lends itself naturally to efficient liquidity
crisis management. Should a crisis require contingency fund-
ing measures to be invoked, Group Treasury takes responsibil-
ity for coordinating liquidity generation together with repre-
sentatives from FX&MM and the relevant business areas.
If UBS’s credit rating were to be downgraded, “rating trig-
ger” clauses, especially in derivative contracts, could result in an
immediate cash outflow due to the unwinding of derivative
positions, or the need to deliver additional collateral. UBS also
analyzes the potential impact on its net liquidity position of ad-
UBS manages its relationships with the major central
banks as part of its general policy, which is to base contin-
gency plans on having sufficient liquidity reserves at its dis-
posal and to raise contingency funding on a secured basis
against provision of collateral.
153
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Risk and treasury management
Treasury management
Funding
UBS’s domestic retail and global wealth management busi-
nesses continue to be valuable, cost-efficient and reliable
sources of funding. These businesses contributed CHF 340
billion, or 72% of the CHF 475 billion total customer depos-
its shown in the UBS asset funding diagram below. Com-
pared with the CHF 340 billion of net loans as of 31 Decem-
ber 2008, customer deposits provided 140% coverage. In
terms of secured funding, i.e. repurchase agreements and
securities lent against cash collateral received, UBS borrows
less cash on a collateralized basis than it lends, leading to a
surplus of net securities sourced (and rehypothecable) –
shown as the CHF 231 billion cash-equivalent surplus in the
diagram below. Furthermore, through the establishment of
short-, medium- and long-term funding programs in Europe,
the US and Asia, UBS can provide specialized investments to
its customers through which it can efficiently raise funds
globally from both institutional and private investors, mini-
mizing its dependence on any particular source. A maturity
breakdown of UBS’s long-term straight debt portfolio of CHF
58 billion is shown further below.
Through broad diversification of its funding sources
(by market, product and currency), UBS maintains a well-
balanced portfolio of liabilities, which generates a stable
flow of financing and provides protection in the event of
market disruptions. This, together with its centralized fund-
ing management, enables UBS to efficiently fund its busi-
ness activities.
UBS asset funding
Net replacement values (RVs)
As of 31.12.08
Cash, balances with central
banks and due from banks
Loans
Due to Banks
Time deposits
140%
coverage
Demand deposits
Trading portfolio assets
Cash collateral on securities
borrowed and
reverse repurchase agreements
Other assets (including net RVs)
Assets
CHF
231 billion
surplus
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Retail savings/deposits
Fiduciary
Long-term debt and financial
liabilities designated at fair value
Money market paper issued
Trading portfolio liabilities
Cash collateral on securities lent
and repurchase agreements
Other liabilities
Equity
Liabilities and equity
Funding approach
Medium- and long-term funding activities are planned by
assessing the overall funding profile of the balance sheet,
taking due account of the effective maturity of the asset
base and the amount of maturing debt that will have to be
154
replaced. The ability to continue to fund ongoing business
activities through periods of difficult market conditions is
also factored in. Prior to the outbreak of the current crisis,
at the beginning of 2007, UBS decided to further strength-
en its funding profile through public issuance of senior,
straight, long-term debt and to thereby enhance the overall
diversification of its funding sources. Despite the persistent
turbulence prevailing in the capital markets throughout the
year, UBS raised CHF 24 billion of proceeds through public
senior debt issuance during 2008 (compared with CHF 15
billion during 2007). Two recent examples of this funding
diversification effort were the inaugural Samurai domestic
Japanese Yen issuance (totaling JPY 91.5 billion) in June
2008 and the approximately CHF 2 billion Swiss covered
bond (Pfandbrief) issuance via the Swiss Mortgage Bond
Bank in December 2008.
In addition, the extraordinary capital strengthening mea-
sures implemented during 2008 in response to the losses
incurred during the current crisis – such as the CHF 13.0 bil-
lion mandatory convertible notes (MCNs) issued in March
2008, the EUR 1 billion proceeds from the issue of perpetual
preferred securities in April 2008, the net proceeds from the
June 2008 rights issue of CHF 15.6 billion and the issue of
CHF 6.0 billion MCNs to the Swiss Confederation in Decem-
ber 2008 – contributed funding to UBS.
➔ Refer to the “Shares and capital instruments” section of
this report for more information about capital instruments
To ensure that a well-balanced and diversified liability
structure is preserved, Group Treasury routinely monitors
UBS’s funding status and reports its findings on a monthly
basis to the GEB. A key measure employed among UBS’s
main analysis tools is an assessment of its “cash capital“.
This concept is designed to ensure that illiquid assets are be-
ing financed by long-term sources of funding.
UBS seeks to run a cash capital surplus (i.e. an excess of
cash capital supply over cash capital consumption). The cash
capital supply consists of long-term sources of funds: unse-
cured funding with remaining time to maturity of at least
one year; shareholders’ equity; and core deposits (the por-
tion of customer deposits deemed to have a “behavioral“
maturity of at least one year). Cash capital consumption re-
flects the illiquid portion of the assets, which is defined as
the portion of assets that could only be transformed into
cash by sale or secured funding in more than one year. In the
case of secured funding, the illiquid portion is the difference
(the “haircut“) between the carrying value of an asset on the
balance sheet and its effective cash value when given as col-
3CM014c_e
lateral. The potential funding needs that could arise from
off-balance sheet exposures, such as undrawn committed
credit lines that UBS has sold, are also included in the total
cash capital consumption.
UBS also regularly monitors its main funding portfolios
for any concentration risks – including an assessment by in-
dividual counterparty.
1200
900
600
300
0
UBS: funding by product and currency
In %
Securities lending
Repurchase agreements
Interbank
Money market paper
Retail savings / deposits
Demand deposits
Fiduciary
Time deposits
Long-term debt 1
Total
1 Including financial liabilities designated at fair value.
All currencies
CHF
EUR
USD
Others
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
31.12.08
31.12.07
1.4
10.1
12.4
11.0
9.9
13.8
6.0
17.0
18.4
2.1
19.9
9.5
9.9
7.1
11.7
6.0
16.9
17.0
0.0
0.9
0.8
0.3
6.0
2.8
0.3
1.6
2.7
0.0
1.5
0.5
0.3
4.6
2.2
0.3
2.3
1.4
0.4
1.6
4.9
1.0
1.0
2.8
2.0
2.9
5.9
0.2
2.5
1.8
0.9
0.8
2.4
1.8
1.9
4.7
0.6
6.6
4.9
8.5
3.0
6.5
3.0
9.1
5.0
1.5
12.2
4.5
7.3
1.6
5.3
3.1
9.5
6.2
0.4
1.0
1.8
1.2
0.0
1.7
0.7
3.5
4.8
0.4
3.7
2.8
1.3
–
1.8
0.8
3.1
4.7
100.0
100.0
15.3
13.2
22.4
17.0
47.2
51.2
15.1
18.6
Funding position and diversification
UBS continues to maintain a balanced portfolio of liabilities
that is broadly diversified by market, product and currency.
The vast product offerings and global scope of the firm’s
business activities are the primary reasons for funding stabil-
ity. Funding is provided through numerous short-, medium-,
and long-term funding programs in Europe, the US and Asia,
which provide specialized investments to institutional and
private clients. UBS’s domestic retail and global wealth man-
agement businesses are also a valuable source of funding.
The overall composition of UBS’s funding sources, as il-
lustrated in the graphs below, has remained stable. These
sources amount to CHF 1,016 billion on the balance sheet
comprising repurchase agreements, securities lending against
cash collateral received, due from banks, money market pa-
per issued, due to customers and long-term debt (including
financial liabilities at fair value). In terms of currencies, 48%
of these funds are denominated in US dollars, while 22% are
in euros and 15% in Swiss francs.
The proportion of funding raised on a secured basis, pri-
marily through repurchase agreements (and to a lesser ex-
tent through cash collateral received for securities lent), has
dropped to 11% from 22% since year-end 2007, primarily
due to continued asset reductions (in particular trading as-
sets and reverse repurchases / securities borrowed that were
financed through repurchase agreements).
UBS’s unsecured funding base remains well diversified. At
year-end 2008, savings and demand deposits amounted to
24% of UBS’s funding sources, up from 19% a year earlier.
The proportion of funding raised through long-term debt
was stable, accounting for 18% of funding sources (up
slightly from 17% a year ago), as was the proportion of
money market paper, which was likewise marginally higher,
at 11% (up from 10%). Compared with year-end 2007, the
proportion of funding from time deposits remained con-
stant, at 17%, as did fiduciary deposits, at 6%. The relative
share of short-term interbank borrowing was 12%, up from
9% a year earlier.
UBS, like many other major financial institutions, experi-
enced decreased access to medium- and longer-term funds in
the wholesale debt markets during 2008. Moreover, UBS did
not raise any public long-term debt during fourth quarter 2008
as public issuance was practically limited to banks with govern-
ment-guaranteed debt. While this contributed to a shortening
of the maturity profile of UBS’s debt issued during 2008, this
was compensated by UBS’s sale of a significant volume of il-
liquid positions during the year (to the fund managed by Black
Rock, the SNB StabFund and to the market in general).
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UBS: funding by currency
In %
As of 31.12.08
UBS: funding by product type
In %
As of 31.12.08
15
15
11
10
CHF
EUR
USD
22
Other
48
12
10
1
19
3CM004_e
Retail savings/deposits
Demand deposits
Fiduciary
14
Time deposits
Long-term debt
Securities lending
6
Repurchase agreements
Interbank
17
Money market paper
3CM003_e
155
Risk and treasury management
Treasury management
Credit ratings
As of 31.12.08
Long-term rating
Short-term rating
Financial strength rating / Individual
Moody’s
Standard & Poor’s
Fitch Ratings
Rating
Outlook
Aa2
P–1
B–
stable
stable
stable
Rating
A+
A–1
Outlook
stable
stable
Rating
Outlook
A+
F1+
B / C
stable
stable
stable 1
1 Fitch’s Individual rating was changed to C, rating watch negative, on 21 January 2009.
UBS Ratings
The table above summarizes UBS’s long- and short-term
debt ratings as of 31 December 2008 (refer to the “Credit
ratings” sidebar).
Maturity breakdown of long-term straight debt portfolio
The graph below shows a contractual maturity breakdown
of the portion of UBS’s long-term debt portfolio consisting of
straight debt (and therefore excluding all structured debt,
which is predominately booked as “financial liabilities desig-
nated at fair value”). This amounted to CHF 55 billion on
31 December 2008, and is accounted for on the balance
sheet as part of the CHF 197 billion shown on the “Debt is-
sued” line (which in addition includes money market paper
issued and the December 2008 MCN issuance). UBS’s long-
term straight debt portfolio is composed of CHF 42 billion of
senior debt (including both publicly and privately placed
notes and bonds as well as Swiss cash bonds) and CHF 13
billion of subordinated debt. CHF 5 billion, or 9%, of the
positions mature during 2009.
Long-term straight debt – contractual maturities
CHF billion
As of 31.12.08
23.0
24.5
2009
2010
2011
2012–13
2014–18
2019–28
after 2028
Year of maturity
3CM004c_e
Senior debt
Subordinated debt
24
18
12
6
0
156
19.200001
14.400001
9.600000
4.800000
0.000000
Maturity analysis
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CHF billion
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets 1
Trading portfolio assets pledged as collateral 1
Positive replacement values 1
Financial assets designated at fair value 2
Loans
Financial investments available-for-sale
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and other intangible assets
Other assets
Total 31.12.08
Total 31.12.07
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities 1
Negative replacement values 1
Financial liabilities designated at fair value 3
Due to customers
Accrued expenses and deferred income
Debt issued
Other liabilities
Total 31.12.08
Total 31.12.07
Off-balance sheet
Undrawn irrevocable facilities 4
On-demand and trading instruments
Instruments
at cost and at
fair value /
level 1
Instruments
at fair value /
level 2
Instruments
at fair value /
level 3
Due
within
1 month
Due
between
1 and 3
months
Due
between
3 and 12
months
Due
between
1 and 5
years
Due after
5 years
32.7
54.6
77.8
28.0
128.1
25.4
5.1
1.1
71.4
0.0
0.0
0.0
0.0
0.0
0.0
424.1
676.4
55.1
12.6
8.6
33.9
4.9
0.0
208.6
0.0
0.0
13.1
336.7
501.9
0.0
0.0
0.0
0.0
128.4
13.2
811.2
0.1
0.0
0.5
0.0
0.0
0.0
0.0
0.0
953.5
787.5
0.0
0.0
0.0
27.5
812.0
0.0
0.0
0.0
0.0
0.0
839.5
465.0
0.0
0.0
0.0
0.0
15.3
1.6
37.8
0.0
0.0
1.1
0.0
0.0
0.0
0.0
0.0
55.9
75.7
0.0
0.0
0.0
1.0
35.0
0.0
0.0
0.0
0.0
0.0
36.0
16.8
0.0
5.3
43.7
179.6
0.0
0.0
0.0
1.5
0.0
1.1
1.4
8.7
0.0
0.0
0.0
0.5
0.0
1.4
0.0
6.8
0.0
0.0
0.0
1.0
0.0
1.7
0.0
0.8
0.0
0.0
0.0
4.0
0.0
0.4
0.0
0.7
0.0
0.0
0.0
4.7
71.8
33.1
32.6
80.5
50.9
1.4
6.1
0.0
0.0
0.0
18.8
328.2
438.5
52.3
1.5
82.6
0.0
0.0
0.6
206.1
10.2
83.6
20.9
457.8
671.4
0.8
0.0
0.0
0.0
0.0
0.0
45.5
80.9
12.2
0.0
5.7
0.0
0.0
7.8
34.3
0.0
20.7
0.0
80.6
190.7
0.2
0.0
0.0
0.0
0.0
0.0
42.1
76.1
4.9
0.0
5.1
0.0
0.0
20.7
16.2
0.0
13.9
0.0
60.7
0.1
0.0
0.0
0.0
0.0
0.0
87.1
79.9
0.8
0.0
0.3
0.0
0.0
37.2
0.5
0.0
37.1
0.0
75.9
1.1
0.0
0.9
6.7
12.9
0.0
78.3
59.8
0.4
0.0
0.3
0.0
0.0
35.3
9.1
0.0
41.9
0.0
87.0
167.8
106.5
111.0
2,231.1
Total
32.7
64.5
122.9
224.6
271.8
40.2
854.1
12.9
340.3
5.2
6.1
0.9
6.7
12.9
18.8
2,014.8
2,274.9
125.6
14.1
102.6
62.4
851.9
101.5
474.8
10.2
197.3
34.0
1,974.3
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59.9
0.0
0.0
0.2
0.0
0.1
0.1
0.0
60.3
1 Trading and derivative positions are presented in the first three columns of the table: “Instruments at cost and fair value / Level 1,” “Instruments at fair value / Level 2” and “Instruments at fair value /
Level 3.” Management believes that such presentation most accurately reflects the short-term nature of trading activities. The contractual maturity of the instruments may, however, extend over signifi-
cantly longer periods. The breakdown of these positions into the fair value measurement categories of levels 1, 2 and 3 indicates the liquidity of the markets in which the financial instruments are traded
and the availability of market observable inputs to measure these instruments (refer to “Note 27 Fair value of financial instruments” in the financial statements of this report). Contractual maturities of
trading portfolio liabilities are: CHF 61.2 billion due within one month; and CHF 1.2 billion due between one month and one year. 2 The contractual redemption amount at maturity of financial assets
designated at fair value approximates the carrying value as of 31 December 2008 and 31 December 2007. 3 Non-trading and non-derivative financial liabilities are categorized based on the earliest
date on which UBS can be required to pay. 4 Excludes commitments from contingent claims (credit guarantees, performance guarantees and similar instruments, and documentary credits) of CHF
18,494 million and commitments to acquire auction rate securities (ARS) of CHF 16,571 million on 31 December 2008. Refer to the “Exposure to auction rate securities” sidebar in the “Risk concentra-
tions” section of this report for more information.
157
Risk and treasury management
Treasury management
Credit ratings
Despite a 2008 full-year loss of slightly
above CHF 20 billion, UBS maintained
a sound and strong capital position as
it believes that this is a key part of its
value proposition for both clients and
investors.
In July 2008, Moody’s Investors Service
downgraded from “B” to “B–” the
bank financial strength rating (BFSR)
and from “Aa1” to “Aa2” the senior
debt and deposit ratings of UBS AG,
with a stable outlook for both ratings.
In its comments, the agency said:
“This downgrade reflects the chal-
lenges still facing the bank’s manage-
ment team to return UBS to a position
of stability following the losses in its
investment banking division. The
bank’s financial performance and risk
management since the onset of the
financial crisis have been below the
level expected of a B (BFSR) / Aa1
(deposit & debt) rated bank.” Moody’s
further said that “the bank has
initiated many changes to senior
management, risk management, and,
more recently, corporate governance,
but it is not yet clear whether these
changes will be effective considering
the complexity of the task. Moody’s
considers the core wealth manage-
ment franchise to be resilient, and
although the bank’s high profile
difficulties have led to some outflows
of assets under management,
Moody’s considers that the bank’s
franchise has not been permanently
affected.”
In October 2008, Moody’s affirmed
both the ratings of UBS AG and the
stable outlook.
In December 2008, Standard & Poor’s
Ratings Services (S&P’s) lowered its
long-term counterparty credit rating on
UBS AG to “A+” from “AA–”,
following S&P’s global review of major
mature-market financial institutions.
The agency commented that the
“rating actions on UBS reflect changes
in our view of the level of risk associ-
ated with the range of activities
158
pursued by major financial institutions.
Moreover, we view the current
downturn as being potentially longer
and deeper than we had previously
considered. Therefore, for UBS and
most of its peers, we view asset quality
as likely to weaken materially more
than we had previously believed. In
addition, the downgrade of the
counterparty credit ratings on UBS
reflects the outstanding challenges we
believe it faces, which include:
restoring its reputation, particularly
among private banking clients;
completing the repositioning of the
investment bank; resolving regulatory
and legal cases, particularly the US
governmental investigation into
cross-border private banking services
provided to US clients; and managing
down risk concentrations not included
in the transaction with the SNB,
particularly the exposure to monoline
bond insurers. The ratings on UBS
recognize both the Group’s intrinsic
credit profile and extraordinary external
support from the Swiss government
and the SNB. Specifically, the long-term
issuer credit rating incorporates a
two-notch uplift from UBS’s stand-
alone credit profile in recognition of
the significantly beneficial external
support provided to it. We expect that
additional external support would be
extended, if required, reflecting UBS’s
high systemic importance within
Switzerland.” S&P’s further commented
that the ratings on UBS remain
underpinned by a number of factors:
“the asset-gathering businesses remain
strongly cash-generative; having started
earlier than most peers, UBS appears
more advanced in deleveraging and
managing costs in its investment bank;
UBS appears committed to a strong
regulatory capital position, and its
recent CHF 6 billion issue of mandatory
convertible notes (MCNs) to the Swiss
Confederation offsets the dilutive
effect on the tier 1 ratio of the SNB
transaction; UBS’s funding and liquidity
position has, in our view, remained
relatively robust, and is further
enhanced by the cash received from
the SNB transaction.”
In February 2009, S&P’s affirmed the
ratings of UBS AG and the stable
outlook.
In October 2008, Fitch Ratings
downgraded UBS AG’s long-term
issuer default ratings (IDRs) from
“AA–” to “A+” and UBS’s individual
rating from “B” to “B / C”, comment-
ing: “the stable outlooks and affirma-
tion of the short-term IDRs reflect
Fitch’s belief that the measures taken
to de-risk and recapitalize the bank
should enable UBS to draw a line
under the problems that have taken
their toll over the past 15 months.
Nevertheless, management faces
challenges in reshaping the investment
bank and delivering stable and
sustainable earnings in difficult market
conditions with a refocused, lower-risk
strategy.”
In January 2009, Fitch Ratings
downgraded UBS AG’s individual
rating to “C” from “B / C” and placed
it on rating watch negative (RWN),
while the bank’s long-term IDR and
short-term IDR have been affirmed at
“A+” and “F1+” respectively.
On 5 March 2009, Fitch Ratings
affirmed the long-term and short-
term IDRs of UBS AG (UBS) at “A+”
and “F1+” respectively. The IDR
outlooks are stable, reflecting Fitch’s
view of continued official support
being available. The agency has
downgraded UBS’s individual rating to
“D” from “C” reflecting Fitch’s
concerns over the medium-term
earnings outlook for the bank amid
persistently challenging market
conditions, and the impact
of ongoing reputational and litigation
issues on the stability of UBS’s key
private banking and wealth manage-
ment franchise. The rating watch
negative (RWN) on the individual
rating has been removed.
Interest rate and currency management
Management of non-trading interest rate risk
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UBS’s largest non-trading interest rate exposures arise with-
in the Global Wealth Management & Business Banking
business division. These risks are transferred from the origi-
nating business into one of two centralized interest rate risk
management units: Group Treasury or the Investment
Bank’s foreign exchange and money market (FX&MM) unit.
These units manage the risks on an integrated basis, ex-
ploiting the full netting potential across risks from different
sources.
Risks from fixed-maturity, short-term Swiss franc and all
non-Swiss franc transactions are generally transferred to
FX&MM. Risks from Swiss franc transactions with fixed ma-
turities greater than one year are transferred to Group Trea-
sury by individual back-to-back transactions. These fixed-rate
products do not contain embedded options such as early
prepayment that would allow customers to prepay at par. All
prepayments are therefore subject to market-based unwind-
ing costs.
Current and savings accounts and many other retail prod-
ucts of Global Wealth Management & Business Banking
have no contractual maturity date or direct market-linked
rate, and therefore their interest rate risk cannot be trans-
ferred by simple back-to-back transactions. Instead, they are
transferred on a pooled basis via “replicating” portfolios. A
replicating portfolio is a series of loans or deposits at market
rates and fixed terms between the originating business unit
and Group Treasury, structured to approximate, on average,
the interest rate cash flow and repricing behavior of the
pooled client transactions. The portfolios are rebalanced
monthly. Their structure and parameters are based on long-
term market observations and client behavior, and are regu-
larly reviewed and adjusted as necessary. The originating
business units are thus immunized as far as possible against
market interest rate movements, but retain and manage
their product margin.
A significant amount of interest rate risk also arises from
the financing of non-monetary related balance sheet items,
such as the financing of bank property and equity invest-
ments in associated companies. These risks are generally
transferred to Group Treasury through replicating portfolios
which, in this case, are designed to approximate the funding
profile mandated by senior management.
Group Treasury manages its residual open interest rate
exposures, taking advantage of any offsets that arise be-
tween positions from different sources, within its approved
market risk limits (Value at Risk (VaR) and stress loss). The
preferred risk management instrument is interest rate swaps,
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for which there is a liquid and flexible market. All transac-
tions are executed via the Investment Bank – Group Treasury
does not directly access the external market.
➔ Refer to the “Market risk” section of this report for further
details on UBS’s market risk measures and controls
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Market risk arising from management of
consolidated capital
UBS is required, by international banking regulations (Bank
for International Settlements regulations), to hold a mini-
mum level of capital against assets and other exposures (risk-
weighted assets). The relationship between UBS’s capital and
its risk-weighted assets, the BIS tier 1 ratio, is monitored by
regulators and analysts and is a key indicator of its financial
strength.
The majority of UBS’s capital and many of its assets are
denominated in Swiss francs, but the Group also holds risk-
weighted assets and some eligible capital in other curren-
cies, primarily US dollar, euro, UK sterling and Brazilian real.
Any significant depreciation of the Swiss franc against these
currencies would adversely impact the Group’s BIS tier 1 ra-
tio. Group Treasury’s mandate is therefore to minimize ad-
verse currency impacts on this ratio and to generate an in-
come flow from the capital. This mandate determines a
currency, tenor and product mix – a target profile – against
which Group Treasury manages the Group’s capital.
On an overall Group basis, Group Treasury’s target profile
is based on a currency mix which broadly reflects the cur-
rency distribution of the consolidated risk-weighted assets,
using products and tenors which generate the desired in-
come stream. As the Swiss franc depreciates (or appreciates)
against these currencies, the consolidated risk-weighted as-
sets increase (or decrease) relative to UBS’s capital. These
currency fluctuations also lead to translation gains (or losses)
on consolidation, which are recorded through equity. Thus,
UBS’s consolidated equity rises or falls in line with the fluc-
tuations in the risk-weighted assets, protecting the tier 1 ra-
tio. The capital of the parent bank itself is held predomi-
nantly in Swiss francs in order to avoid any significant effects
of currency fluctuations on its standalone financial results.
The capital of the parent bank and its subsidiaries is
placed in the form of interest-bearing cash deposits inter-
nally within the Group, primarily with the Investment Bank’s
FX&MM unit. Where necessary, Group Treasury also executes
derivatives (mainly interest rate swaps) through the Invest-
ment Bank’s trading desks to achieve the target profile.
FX&MM and the derivative trading units manage the resul-
tant cash and market risk positions as part of their normal
159
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Risk and treasury management
Treasury management
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business activities and, in the case of FX&MM, within the ap-
proved liquidity and funding risk framework.
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➔ Refer to the “Liquidity and funding management” section
of this report for details on UBS’s liquidity and funding risk
framework
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For the purposes of measuring and managing Group Trea-
sury’s market risk position, the Group’s consolidated equity is
represented in the treasury book by replicating portfolios (lia-
bilities) with the target currency and interest rate profile. The
interest rate positions created by Group Treasury’s deposits
with FX&MM or other units, and the associated derivatives,
generally offset the interest rate risk of the replicating portfo-
lios. Any mismatches between the two are managed, togeth-
er with other non-trading interest rate risk positions, within
Group Treasury’s market risk limits (VaR and stress loss).
The structural foreign currency exposures are controlled by
senior management but are not subject to internal market risk
limits and are not included in Group Treasury’s reported VaR.
Group Treasury interest rate risk development
In measuring Group Treasury’s interest rate risk – expressed
as VaR – both the representation of the consolidated equity
(replicating portfolios) and the deployment of the equity de-
scribed above are included in the calculations.
On 31 December 2008, UBS’s consolidated equity was de-
ployed as follows: in Swiss francs (including most of the capi-
tal of the parent bank) with an average duration of approxi-
mately three years and an interest rate sensitivity of CHF 7.9
million per basis point; in US dollars with an average duration
of approximately four years and a sensitivity of CHF 8.0 million
per basis point; in euro with an average duration of approxi-
mately three years and a sensitivity of CHF 0.7 million per basis
point; and in UK sterling with a duration of approximately
three years and a sensitivity of CHF 0.4 million per basis point.
The interest rate sensitivity of these positions is directly related
to the chosen duration – targeting significantly shorter ma-
turities would reduce the apparent interest rate sensitivity but
would lead to greater fluctuations in interest income.
Corporate currency management
UBS’s corporate currency management activities are de-
signed to reduce the impact of adverse currency fluctuations
on its reported financial results, given regulatory constraints.
UBS specifically focuses on three principal areas of currency
risk management: match funding / investment of non-Swiss
franc assets / liabilities; sell-down of non-Swiss franc profit
and loss; and selective hedging of anticipated non-Swiss
franc profit and loss.
Group Treasury: Value-at-Risk (10-day, 99% confidence, 5 years of historical data)
CHF million
Interest rates
Foreign exchange
Diversification effect
Total management VaR
Year ended 31.12.08
Year ended 31.12.07
Min.
Max.
Average
31.12.08
Min.
Max.
Average
31.12.07
8
3
1
10
54
93
1
97
19
26
(10)
34
26
10
(14)
28
9
1
1
10
55
87
1
92
17
18
(10)
25
54
21
(14)
61
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.
160
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Match funding and investment of non-Swiss franc
assets and liabilities
As far as it is practical and efficient to do so, UBS follows the
principle of matching the currency of its assets with the cur-
rency of the liabilities which fund them – thus a US dollar
asset is typically funded in US dollars, a euro liability is offset
by an asset in euros, etc. This avoids profits and losses arising
from retranslation at the prevailing exchange rates to the
Swiss franc at each quarter end.
Sell-down of reported profits and losses
For accounting purposes, reported profits and losses are
translated each month from the original transaction cur-
rencies into Swiss francs at the exchange rate prevailing at
the end of the month. Group Treasury centralizes profits or
losses in foreign currencies that arise in the parent bank,
and sells or buys them for Swiss francs in order to eliminate
earnings volatility which would arise from retranslation at
different exchange rates of previously reported non-Swiss
franc profits and losses. Other UBS operating entities fol-
low a similar monthly sell-down process into their own re-
porting currencies. Profits retained in operating entities
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with a reporting currency other than the Swiss franc are
managed as part of UBS’s consolidated equity, as described
earlier.
Hedging of anticipated future reported profits and losses
The monthly sell-down process cannot protect UBS’s earn-
ings from swings caused by a sustained depreciation against
the Swiss franc of one of the main currencies in which UBS
earns net revenues or by an appreciation of one in which it
incurs significant net costs.
The firm’s corporate currency management executes a
dynamic and cost-efficient rollover hedge strategy on a por-
tion of the profits or losses that UBS anticipates for the next
three months, on a rolling one-month basis.
Although intended to hedge future earnings, these trans-
actions are considered open currency positions. They are
therefore subject to internal market risk VaR and stress loss
limits.
In public segmental reporting, the profits and losses aris-
ing from the hedge strategy are shown as Corporate Center
items, while the business division results are fully exposed to
exchange rate fluctuations.
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161
Risk and treasury management
Treasury management
Capital management
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Sufficient capital must be in place to support business activi-
ties, according to both UBS’s own internal assessment and the
requirements of its regulators, in particular its lead regulator
the Swiss Financial Market Supervisory Authority (FINMA; un-
til 31 December 2008 Swiss Federal Banking Commission).
UBS aims to maintain sound capital ratios at all times, and
it therefore considers not only the current situation but also
projected developments in both its capital base and capital
requirements. The main tools by which UBS manages the
supply side of its capital ratios are active management of
shares, capital instruments and dividend payments.
Capital adequacy management
Ensuring compliance with minimum regulatory capital re-
quirements and targeted capital ratios is central to capital
adequacy management. In this ongoing process, UBS man-
ages towards tier 1 and total capital target ratios. In the tar-
get setting process UBS takes into account the regulatory
minimum capital requirements, regulators’ expectations that
UBS holds additional capital above minimum requirements,
UBS’s internal assessment of aggregate risk exposure in
terms of capital-at-risk (refer to “Earnings-at-risk and capi-
tal-at-risk” in the “Risk management and control” section of
this report), the views of rating agencies, and comparison
with peer institutions considering UBS’s business mix and
market presence.
Regulatory requirements
On 1 January 2008, UBS adopted the Basel II capital frame-
work of the Basel Committee on Banking Supervision of the
Bank for International Settlements (BIS). (Refer to the “Gen-
eral description of risk exposure measures and capital re-
quirements” in the “Basel II Pillar 3” section of this report for
details regarding UBS’s implementation of Basel II.) The intro-
duction of Basel II led to a decrease in UBS’s overall capital
requirements, as measured by risk-weighted assets (RWA).
Eligible capital calculations have also been modified by the
introduction of new deductions from tier 1 capital and total
capital, resulting in lower eligible capital.
To allow for comparability, published RWA are determined
according to the rules of the BIS Basel II framework. UBS’s
regulatory capital requirements are based on the regulations
of FINMA, which lead to higher risk-weighted assets com-
pared with BIS guidelines (refer to the additional capital
management disclosure in the “Basel II Pillar 3” section of
this report). Eligible capital is the same under BIS guidelines
and FINMA regulations.
In 2008, UBS complied with all externally imposed capital
requirements.
Developments
As publicly announced, in fourth quarter 2008 FINMA en-
hanced the capital requirements under Basel II, Pillar 2, for
UBS and Credit Suisse. The new regulatory measures will
have to be implemented progressively until full applicability
on 1 January 2013.
First, FINMA will increase the capital buffer (the regula-
tory excess capital expected to be held over and above the
regulatory minimum requirement) from 20% to 50%–100%
over the cycle. At the same time, FINMA will allow for en-
larged recognition of hybrid capital.
Second, FINMA will introduce a minimum leverage ratio,
defining the minimum amount of tier 1 capital required for
a given balance sheet size. For this calculation, the IFRS bal-
ance sheet is adjusted for a number of factors: replacement
values determined according to the rules of IFRS are substi-
tuted by the corresponding values under Swiss Generally Ac-
cepted Accounting Principles (Swiss GAAP), allowing for in-
creased recognition of netting benefits, similar to US GAAP.
Moreover, the Swiss loan book, certain cash and balances
with central banks and specified reverse repurchase agree-
ments where the repurchase price is payable in Swiss francs
will be excluded from the balance sheet. Furthermore, a
number of adjustments will be made to avoid double-count-
ing of assets that are already deducted from tier 1 capital,
most notably goodwill and intangible assets. FINMA will re-
quire a minimum leverage ratio of 3% on Group level, with
an expectation that the ratio will be well above the minimum
requirements in normal times.
The table on the next page shows the calculation of the
FINMA consolidated leverage ratio as of 31 December 2008.
In January 2009, the Basel Committee on Banking Super-
vision issued consultative documents on proposed revisions to
the Basel II market risk framework. Broadly, the committee
aims to address perceived shortcomings of the current Value at
Risk (VaR) framework, most notably by enhancing capital re-
quirements to incorporate effects of “stressed VaR” and by
introducing new capital charges for price risks that are incre-
mental to any default and event risks already captured by VaR
models used by banks. Furthermore, the Basel Committee also
plans to update – for regulatory capital purposes – the prudent
valuation guidance for illiquid positions accounted for at fair
value. It is envisaged that the revised requirements will have
to be implemented by the end of 2009 and 2010, respectively.
Finally, in January 2009 the Basel Committee issued a
consultative document on further enhancements to the Ba-
162
sel II framework, with revised requirements for securitization
exposures and, in particular, higher risk weights for re-secu-
ritization positions.
Capital ratios
The BIS ratios compare the amount of eligible capital (in total
and tier 1) with the total of risk-weighted assets.
At year-end 2008, the BIS tier 1 ratio amounted to
11.0% and the total capital ratio to 15.0%, compared with
9.1% and 12.2%, respectively, under Basel I rules at year-
end 2007. In this period, risk-weighted assets declined
from CHF 374.4 billion (Basel I) to CHF 302.3 billion, while
tier 1 capital decreased from CHF 34.1 billion to CHF 33.2
billion.
Eligible capital and capital ratios were restated following
a change in accounting policy on pension and other post-
retirement benefit plans (refer to “Note 30 Pension and oth-
er post-retirement benefit plans” in the financial statements
of this report for more information). Due to this restatement,
tier 1 capital and total capital increased by approximately
CHF 1.6 billion and the corresponding capital ratios by 40
basis points at year-end 2007.
Capital requirements
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UBS’s capital requirements are generally based on its consoli-
dated financial statements in accordance with IFRS. Under
IFRS, subsidiaries and special purpose entities that are directly
or indirectly controlled by UBS must be consolidated, where-
as for regulatory capital purposes, different consolidation
principles apply. For example, subsidiaries that are not active
in the banking and finance business are excluded.
➔ Refer to the additional capital management disclosure in
UBS: BIS capital ratios¹
In %
Basel I
Basel II
18
15
12
9
6
4
0
Q
1
4
0
Q
2
4
0
Q
3
4
0
Q
4
5
0
Q
1
5
0
Q
2
5
0
Q
3
5
0
Q
4
6
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1
6
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2
6
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3
6
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4
7
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1
7
0
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2
7
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3
7
0
Q
4
8
0
Q
1
8
0
Q
2
8
0
Q
3
8
0
Q
4
14.2
13.9
13.9
14.1
13.4
12.8
12.5
12.1
12.3
11.9
14.2
12.6
14.5 14.5
12.8 13.3
13.3
11.6
15.5
14.8
15.0 15.0
15.8
12.6
12.7
12.2 12.0
12.7
13.9
11.0
16.2
15.0
15.0
12.2
11.1
12.2
11.0
11.0
9.1
7.4
BIS tier 1 capital ratio
BIS total capital ratio
1 Prior to and including 4Q07 the capital ratios above are based on Basel I capital
regulations, thereafter on Basel II rules.
On 31 December 2008 risk-weighted assets were CHF
302.3 billion, compared with CHF 374.4 billion (Basel I) at
year-end 2007. Figures by component are as follows:
Credit risk
Risk-weighted assets for credit risk amounted to CHF 222.6
billion at 31 December 2008, compared with CHF 323.3 bil-
lion under Basel I on 31 December 2007. The introduction of
Basel II led to considerably lower risk-weighted assets for cred-
it risk. However, the impact on individual business divisions
varied: Global Wealth Management & Business Banking saw
lower risk-weighted assets for customer loans, mortgages and
lombard lending, while the Investment Bank was subject to
higher capital requirements for over-the-counter (OTC) deriva-
tives and repo-style transactions (i.e. repurchase / reverse re-
purchase and securities, lending and borrowing transactions).
➔ Refer to the “Credit risk” section of this report for more
the “Basel II Pillar 3” section of this report
information
3CM010_e
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FINMA1 adjusted assets for leverage ratio calculation
CHF billion, except where indicated
Total assets (IFRS) 2 prior to deductions
Less: difference between IFRS and Swiss GAAP positive replacement values 3
Less: loans to Swiss clients (excluding banks)
Less: cash and balances with central banks
Less: Other 4
Total adjusted assets
FINMA consolidated leverage ratio (%)
Average fourth quarter 2008
2,212
(653)
(165)
(27)
(20)
1,347
2.46
1 Swiss Financial Market Supervisory Authority (FINMA). 2 International Financial Reporting Standards. 3 The netting difference is disclosed in the «Off-balance sheet» section of this report. 4 Refer
to the “Capital components” table for more information on deductions of assets from tier 1 capital.
163
11.25
11.25
7.50
7.50
3.75
3.75
15.00
15.00
0.00
0.00
Risk and treasury management
Treasury management
Non-counterparty related assets
Risk-weighted assets for non-counterparty related assets
amounted to CHF 7.4 billion at 31 December 2008, com-
pared with CHF 9.0 billion under Basel I on 31 December
2007.
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Market risk
In 2008, risk-weighted assets for market risk decreased by
CHF 14.5 billion to CHF 27.6 billion on 31 December 2008,
due to lower regulatory VaR. The decrease resulted primarily
from the transfer of certain illiquid assets from the trading
book to the banking book on 1 January 2008 and was par-
tially offset by increases in VaR following higher market vola-
tility and enhancements made to the VaR model.
➔ Refer to the “Market risk” section of this report for further
information
Operational risk
The new Basel II capital requirement for operational risk
amounted to risk-weighted assets of CHF 44.7 billion on
31 December 2008.
➔ Refer to the “Operational risk” section of this report for
further information
Eligible capital
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The capital available to support risk-weighted assets – eligi-
ble capital – consists of tier 1 and tier 2 capital. Tier 1 capital
is required to be at least 4% of risk-weighted assets and to-
tal capital (tier 1 plus tier 2) at least 8%. To determine eligi-
ble tier 1 and total capital, adjustments have to be made to
shareholders’ equity as defined under IFRS, most notably by
deducting goodwill and investments in unconsolidated enti-
ties engaged in banking and financial activities.
Tier 1 capital / UBS shares
On 31 December 2008, the regulatory eligible tier 1 capital
was CHF 33.2 billion, down CHF 0.9 billion compared with
year-end 2007. This is the net effect of: CHF 21.3 billion in
losses incurred during 2008; reversal for capital purposes of
CHF 4.5 billion gains recognized under IFRS related to the
accounting for the mandatory convertible notes (MCNs) is-
sued in March and December 2008 (refer to the “IFRS equity
to BIS tier 1 capital” section below for more information);
CHF 3.8 billion reductions of capital related to own shares;
CHF 2.9 billion losses recognized directly in equity; addition-
al deductions of CHF 2.6 billion for intangible assets and
other Basel II deductions; and the reversal of CHF 2.3 billion
of gains on own credit for capital purposes. These negative
effects were compensated by the issue of CHF 13.0 billion
MCNs on 5 March 2008, proceeds of EUR 1.0 billion from
the issuance of perpetual preferred securities on 11 April
2008, the net proceeds from the rights issue of CHF 15.6 bil-
lion on 17 June 2008, and the issuance of CHF 6.0 billion
MCNs on 9 December 2008.
Hybrid tier 1 capital
Hybrid tier 1 instruments are perpetual instruments that
can only be redeemed if they are called by the issuer. The
payment of interest is subject to compliance with minimum
capital ratios and any payment missed is non-cumulative.
As of 31 December 2008, UBS’s hybrid tier 1 instruments
amounted to CHF 7.4 billion. Under IFRS, these instruments
are accounted for as equity attributable to minority inter-
ests.
Tier 2 capital
Tier 2 capital consists mainly of subordinated long-term debt
that ranks senior to both UBS shares and hybrid tier 1 instru-
Capital adequacy
CHF million, except where indicated
BIS tier 1 capital
of which hybrid tier 1 capital
BIS total capital
BIS tier 1 capital ratio (%)
BIS total capital ratio (%)
Credit risk 1
Non-counterparty related risk
Market risk
Operational risk
Total BIS risk-weighted assets
Basel II
31.12.08
33,154
7,393
45,367
11.0
15.0
222,563
7,411
27,614
44,685
302,273
Basel I
31.12.08
35,671
7,393
46,012
9.8
12.7
326,608
8,826
27,614
N/A
363,048
31.12.07
34,101
6,387
45,797
9.1
12.2
323,345
8,966
42,110
N/A
374,421
1 Includes securitization exposures and equity exposures not part of the trading book and capital requirements for failed trades.
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ments but is subordinated to all senior obligations of UBS.
Tier 2 capital accounted for CHF 12.2 billion in total capital
as of year-end 2008.
➔ Refer to the “Shares and capital instruments” section of
this report for details about UBS’s issuance of capital
securities during 2008, including hybrid tier 1 instruments
and tier 1 instruments
Intragroup transfer of capital
UBS enters into intragroup transactions in order to manage
funding and capital of individual UBS entities. As at 31 De-
cember 2008, UBS was not aware of any material restric-
tions, or other major impediments, concerning the transfer
of funds or regulatory capital within the Group apart from
those which apply to these entities by way of local laws and
regulations.
IFRS equity to BIS tier 1 capital
The key adjustments made to IFRS equity attributable to
shareholders to determine tier 1 eligible capital result from:
– An increase in IFRS share premium of CHF 7.0 billion
and retained earnings of CHF 3.8 billion from the rec-
ognition of CHF 13.0 billion MCNs issued in March
2008, versus an increase of tier 1 capital (recognized in
BIS share premium) by CHF 13.0 billion. Refer to “Note
26 Capital increases and mandatory convertible notes”
in the financial statements of this report for more infor-
mation.
– The different treatment of MCNs placed with the Swiss
Confederation in December 2008 for IFRS and regulatory
capital purposes: IFRS equity attributable to UBS share-
holders decreased overall by CHF 2.9 billion, which re-
flects the net effect of a reduction to share premium of
CHF 3.6 billion and a positive impact on retained earnings
of CHF 0.7 billion. In contrast, tier 1 capital increased by
CHF 6.0 billion. Refer to “Note 26 Capital increases and
mandatory convertible notes” in the financial statements
of this report for more information.
– A negative impact on BIS share premium of CHF 0.9 bil-
lion from adjustments for the recognition of interest pay-
ments on both MCNs for capital purposes.
– The inability to recognize, for tier 1 capital, fair value
changes recorded directly in equity under IFRS from finan-
cial investments available-for-sale and cash flow hedges
(reduction of CHF 1.3 billion).
– Further corrections in retained earnings for gains on own
credit of CHF 3.0 billion relating to the application of the
fair value option under International Accounting Stan-
dard (IAS) 39 for capital adequacy purposes.
Capital components
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Core capital prior to deductions
of which: paid-in share capital
of which: share premium, retained earnings, currency translation differences and other elements
of which: non-innovative capital instruments
of which: innovative capital instruments
Less: treasury shares / deduction for own shares 1
Less: goodwill & intangible assets 3
Less: other Basel II deductions 4
Total eligible tier 1 capital
Upper tier 2 capital
Lower tier 2 capital
Less: other Basel I deductions 5
Less: other Basel II deductions 4
Total eligible capital
Basel II
31.12.08
48,758
293
41,072
1,810
5,583
(1,488) 2
(12,950)
(1,167)
33,154
1,090
12,290
N/A
(1,167)
45,367
Basel I
31.12.08
48,758
293
41,072
1,810
5,583
(1,488)
(11,600)
N/A
35,671
69
12,290
(2,018)
N/A
46,012
31.12.07
51,437
207
44,842
340
6,047
(4,133)
(13,203)
34,101
301
13,770
(2,375)
45,797
1 Consists of: i) net long position in own shares held for trading purposes; ii) own shares bought for cancellation (second trading line) and for unvested or upcoming share awards; iii) other treasury share
positions net of delta-weighted obligations out of employee stock options granted prior to August 2006. 2 Netting of own shares with share-based payment obligations is subject to a grandfathering
agreement with the Swiss Financial Market Supervisory Authority. 3 Includes under Basel I only goodwill and the portion of intangible assets exceeding 4% of tier 1 capital. 4 Positions to be de-
ducted as 50% from tier 1 and 50% from total capital mainly consist of: net long position of non-consolidated participations in the finance sector, first loss positions from securitization exposures, excess
of expected losses above general provisions (AIRB), expected loss for equities (simple risk weight method). 5 Consists of the net long position of non-consolidated participations in the finance sector
and first loss positions from securitization exposures.
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Risk and treasury management
Treasury management
– Removing minority interests of entities not consolidated
for regulatory capital purposes, causing a further reduc-
tion of regulatory capital by CHF 0.5 billion.
– A positive adjustment of CHF 1.7 billion primarily for the
ability to net, for capital purposes, treasury shares held as
hedges against obligations from employee stock options
granted prior to August 2006.
Equity attribution framework
In first quarter 2008, UBS implemented a new framework
for attributing equity capital to its businesses. This reflects
UBS’s overarching objectives of maintaining a strong capital
base and guiding businesses towards activities with the best
balance among profit potential, risk and capital usage. In
this framework, the Group Executive Board (GEB) attributes
equity to the businesses after considering their risk expo-
sure, asset size, goodwill and intangible assets.
The design of the equity attribution framework enables
UBS to:
– Calculate and assess return on attributed equity (RoaE) in
each of its businesses. With effect from first quarter 2008,
RoaE and return on BIS risk-weighted assets (RoRWA) are
disclosed for all business groups and units and replace the
previously disclosed “return on allocated regulatory capi-
tal” measure.
– Integrate Group-wide capital management activities with
those at business group and business unit level.
– Measure performance in a consistent manner across busi-
ness divisions and business units.
– Make better comparisons between the Group’s business-
es and those of competitors.
The framework operates as follows: First, each business is
attributed an amount of equity equal to the average book
value of goodwill and intangible assets, as reported for that
business division or business unit according to IFRS. Next, the
GEB considers a number of factors that drive required capi-
tal, including:
– Equity requirements based on aggregated risk exposure,
including the potential for losses exceeding UBS’s earn-
ings capacity as defined by the firm’s “capital-at-risk”
concept.
– Regulatory capital requirements which are based on risk-
weighted asset usage of the businesses and also take into
account the different market standards for tier 1 ratios
associated with “pure-play” competitors of each of the
businesses.
– The asset size of the businesses.
After reviewing the results of this formulaic approach,
the GEB makes adjustments to the final tangible equity at-
tribution to reflect the amount of equity it believes is ap-
propriate for each business. This assessment is based on the
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Reconciliation of International Financial Reporting Standards equity to BIS tier 1 capital
CHF million
Share capital
Share premium
Net income recognized directly in equity, net of tax
Revaluation reserve from step acquisitions, net of tax
Retained earnings
Equity classified as obligation to purchase own shares
Equity attributable to minority interests
Treasury shares / deduction for own shares
Mandatory convertible notes (MCNs) to the Swiss Confederation
Total equity / gross tier 1 including MCNs and hybrid tier 1 instruments
Less: goodwill, intangible assets and other Basel II deduction items
Eligible tier 1 capital
IFRS 1 view
293
25,250
(4,335)
38
14,487
(46)
8,002
(3,156)
0 3
40,533
31.12.08
Basel II
Reconciliation
items
Basel I
BIS view
BIS view
0
8,500
(1,265)
0
(7,716)
46
(495)
1,668 2
6,000
6,738
293
33,750
(5,600)
38
6,771
0
7,507
(1,488)
6,000
47,271
(14,117) 4
33,154
293
33,750
(5,600)
38
6,771
0
7,507
(1,488)
6,000
47,271
(11,600) 5
35,671
1 International Financial Reporting Standards (IFRS). 2 Generally, treasury shares are fully deducted from equity under IFRS, whereas for capital adequacy purposes only the following positions in own
shares are deducted: i) net long position in own shares held for trading purposes; ii) own shares bought for cancellation (second trading line) and for unvested or upcoming share awards; and iii) other
treasury share positions net of delta-weighted obligations out of employee stock options granted prior to August 2006, subject to an interim agreement with the Swiss Financial Market Supervisory
Authority. 3 Under IFRS, the recognition of the MCNs to the Swiss Confederation reduced the share premium CHF 3.6 billion and increased retained earnings CHF 0.7 billion. 4 “Other Basel II deduc-
tion items” includes primarily 50% of the deductions for net long position of non-consolidated participations in the finance sector, first loss positions from securitization exposures, excess of expected
losses above general provisions (AIRB), expected loss for equities (simple risk weight method). 5 Equals to goodwill and the intangible assets exceeding 4% of tier 1 capital.
166
expectations of the business’s clients and the business envi-
ronment, including allowing for sufficient capital to sup-
port the business’s underlying risks and sustain extreme
stress scenarios. The amount of equity attributed to all the
businesses corresponds to the amount that UBS believes is
required to maintain a strong capital base and support its
businesses adequately. If the total equity attributed to the
businesses differs from the Group’s actual equity during a
particular period, the surplus or deficit is shown in the Cor-
porate Center.
As reflected in the table below, during 2008, the amount
of average equity attributed to the Investment Bank was re-
duced by CHF 2 billion due to lower risk exposures. In the
fourth quarter, the average equity attributed to Global
Wealth Management & Business Banking grew by CHF 1 bil-
lion, mainly reflecting actual and projected increases in capi-
tal needs for operational risks in Wealth Management US.
Global Asset Management’s average attributed equity was
CHF 3 billion during 2008.
In the table below, equity attributable to UBS sharehold-
ers includes the CHF 13 billion nominal value of the MCNs
issued in March 2008. However, the CHF 6 billion nominal
value of the MCNs issued in December 2008 will be included
in this figure only when the notes will be converted or if cer-
tain other conditions are met which make it appropriate to
include the December 2008 MCNs in equity.
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Average equity attributed
CHF billion
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Wealth Management & Business Banking
Global Asset Management
Investment Bank
Corporate Center
Equity attributable to UBS shareholders
2008
6.1
7.3
3.8
17.3
3.0
26.8
(10.7)
36.3
4Q08
3Q08
6.0
8.3
3.7
18.0
3.0
26.0
(7.5)
39.5
5.9
7.6
3.5
17.0
3.0
26.0
0.2
46.2
2Q08
6.2
6.8
4.0
17.0
3.0
27.0
(15.0)
32.0
1Q08
6.3
6.6
4.1
17.0
3.0
28.0
(20.5)
27.5
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Risk and treasury management
Treasury management
Shares and capital instruments
Shares
UBS shares and tier 1 capital
The majority of UBS’s tier 1 capital comprises share premi-
um and retained earnings attributed to UBS shareholders.
As of 31 December 2008, total IFRS equity attributable to
UBS shareholders amounted to CHF 32,531 million and
was represented by a total of 2,932,580,549 issued UBS
shares, of which 61,903,121 (2.1%) were held by UBS.
Each outstanding share has a par value of CHF 0.10 and
entitles the holder to one vote at the shareholders’ meeting
and to a proportionate share of the dividend that is distrib-
uted. There are no preferential rights for shareholders and
no other classes of shares are issued by the parent bank
(UBS AG) directly.
In 2008, as part of UBS’s shareholder-approved recapital-
ization measures, the outstanding shares were increased by
a total of 859,033,205 reflecting mainly the issuance of
newly created shares for the stock dividend (98,698,754
shares) and for the capital increase by means of a rights of-
fering (760,295,181 shares). For the stock dividend, each
share held on 25 April 2008 was allocated one entitlement.
Twenty of those entitlements gave the holder the right to
receive one UBS share for free on 19 May 2008. For the sub-
sequent capital increase by means of a rights offering, share-
holders were allotted one subscription right per share held
on 26 May 2008. For every 20 of those rights, shareholders
were entitled to buy seven shares at CHF 21.00 on 17 June
2008. As a result of the latter rights offering, a net total of
CHF 15.6 billion of new capital was received. At the time of
issuance this was equal to an increase of approximately 4.8%
in UBS’s tier 1 ratio.
Shares
Number of shares
Balance at the beginning of the year
Issue of shares for stock dividend
Issue of shares for capital increase (rights offering)
Issue of shares for employee options
Balance at the end of the year
Shareholder-approved issuance of shares
Authorized capital
Stock dividend 2007 (not used)
Conditional capital
March 2008 MCNs
December 2008 MCNs
Employee equity participation plans of UBS AG
Employee stock ownership plan of former PaineWebber
1 Mandatory convertible notes.
168
For the year ended
31.12.08
2,073,547,344
98,698,754
760,295,181
39,270
2,932,580,549
Maximum number
of shares to be
issued
Year approved by
shareholder
general meeting
% of shares issued
(including MCNs 1)
31.12.08
5,001,246
277,750,000
365,000,000
149,994,296
100,415
2008
2008
2008
2006
2000
13.99
7.77
10.21
4.20
0.00
Holding of UBS shares
UBS holds its own shares for three main purposes: Group
Treasury holds shares to cover employee share and option
programs; it repurchases shares on a second trading line,
where they are earmarked for cancellation purposes (the lat-
ter activity is temporarily suspended); and the Investment
Bank holds shares, to a limited extent, for trading purposes
where it engages in market-making activities in UBS shares
and related derivative products.
The holding of treasury shares on 31 December 2008
decreased to 61,903,121 or 2.1% of shares issued, from
158,105,524 or 7.6% on the same date one year prior.
In 2008, a total of 3.7 million employee options were ex-
ercised and an additional 63.0 million new options were
granted. As of 31 December 2008, UBS was holding approx-
imately 48.9 million shares in Group Treasury and an addi-
tional 150 million unissued shares in conditional share capi-
tal that can be used to cover future employee option
exercises, of which a total of 236 million were outstanding
on 31 December 2008. At year-end 2008, the shares avail-
able covered all exercisable employee options.
The presentation in the table below shows the purchase
of UBS shares by Group Treasury under buy-back programs
at the stock exchange and does not include activities of the
Investment Bank in UBS shares.
Treasury shares held by the Investment Bank
The Investment Bank, acting as liquidity provider to the
equity index futures market and as a market maker in UBS
shares and derivatives, has issued derivatives linked to UBS
stock. Most of these instruments are classified as cash-set-
tled derivatives and are held for trading purposes only. To
hedge the economic exposure, a limited number of UBS
shares are held by the Investment Bank.
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Share buy-back programs
Program
Announcement
Beginning
Expiration Cancellation
2000/2001
2001/2002
2002/2003
2002/2003
2003/2004
2004/2005
2005/2006
2006/2007
2007/2010 5
14.12.99
17.1.00
22.2.01
14.2.01
9.10.02
18.2.03
10.2.04
8.2.05
14.2.06
13.2.07
5.3.01
6.3.02
11.10.02
6.3.03
8.3.04
8.3.05
8.3.06
8.3.07
2.3.01
5.3.02
8.10.02
5.3.03
5.3.04
7.3.05
7.3.06
7.3.07
8.3.10
13.7.01
5.7.02
10.7.03
10.7.03
30.6.04
8.7.05
13.7.06
29.6.07
Maximum
volume (in
CHF billion)
Maximum
volume
(in millions
of shares)
Amount
(CHF billion)
Total shares
purchased
Average
price
(in CHF)
Unutilized
volume
(CHF billion)
Unutilized
volume
(in millions
of shares)
4.0
5.0
5.0
3.0
5.0
6.0
5.0
5.0
210.5 3
4.0
2.3
5.0
0.5
4.5
3.5
4.0
2.4
2.6 4
110,530,698 1, 2 36.18 1, 2
39.73 2
36.92 2
32.04 2
37.97 2
44.36 2
54.26 2
73.14 2
71.41 4
57,637,380 2
135,400,000 2
16,540,160 2
118,964,000 2
79,870,188 2
74,200,000 2
33,020,000 2
36,400,000 4
0
2.7
0
2.5
0.5
2.5
1.0
2.6
174.1 3
1 Restated to reflect 3:1 stock split on 16 July 2001. 2 Restated to reflect 2:1 stock split on 10 July 2006. 3 The 2007/2010 program was approved for a maximum of 210,527,328 shares, equal to
10% of the outstanding shares on 31 December 2006. On 31 December 2007, the unutilized number of shares (174.1 million) multiplied by the prevailing market price of UBS shares of CHF 52.40 per
share equaled an unutilized volume of approximately CHF 9.1 billion. 4 In 2007, 36,400,000 shares were repurchased under the 2007/2010 program for CHF 2.6 billion (at an average price of CHF 71.41
per share). On 10 December 2007 the UBS Board of Directors communicated its decision that these shares will not be cancelled but will be rededicated as a measure to strengthen UBS’s capital. 5 This
program is currently suspended.
169
Risk and treasury management
Treasury management
Capital instruments
Mandatory convertible notes
As part of the measures taken to strengthen its capital base
in 2008, UBS issued two mandatory convertible notes
(MCNs), with principal amounts of CHF 13 billion (MCN1)
and CHF 6 billion (MCN2) respectively, in private placements
to large institutional investors and the Swiss Confederation.
To allow for the delivery of shares upon conversion of the
MCNs, separate extraordinary general meetings of UBS
shareholders were held on 27 February and 27 November
2008 to approve the creation of conditional capital for this
purpose. The shareholders approved a maximum number of
277.8 million UBS shares to be delivered under the first is-
sued MCN and 365 million UBS shares to be delivered under
the second MCN. The initial investors in the MCNs are al-
lowed to sell or transfer the instruments without restrictions
to other investors. The share capital will be increased upon
voluntary or mandatory conversion of the MCNs. The future
mandatory capital increase allows the full proceeds to be
counted as tier 1 capital for regulatory capital purposes from
the date of issuance.
MCNs are a special type of equity-linked security that will
never be redeemed in cash but rather, upon maturity or ear-
ly conversion, will automatically convert into shares of the
note issuer or an affiliated company. The number of shares
to be delivered depends on the conversion price, and will
vary according to the precise terms (see below). The MCNs
issued by UBS contain provisions allowing early conversion at
the option either of the holders or of UBS.
Throughout the lifetime of the MCNs, the holders will re-
ceive an annual coupon based on the nominal value of the
MCNs. This annual coupon not only reflects the cost of capi-
tal but also compensates the noteholders for the value of
options embedded in the structure, for instance for bearing
the risk of a share price deterioration before conversion if the
share price falls below the reference price described below,
and for the fact that MCN holders only participate in the
benefit of an increasing share price once the share price ex-
ceeds 117% of the reference price. The MCNs can be con-
verted at the earliest after a period of six months has elapsed
following their issuance and they must be converted at the
latest by maturity of the notes.
As of year end, holders of the March 2008 MCNs (or
MCN1) are expected to receive in aggregate a fixed number
of 270.4 million UBS shares at conversion or settlement inde-
pendently of the UBS share price development, whereas un-
der the terms of the second issuance (the December 2008
MCNs or MCN2) holders will receive a variable number of
shares. At or below a UBS share price of CHF 18.21, the De-
cember 2008 MCNs will be converted into a maximum of
329.4 million UBS shares. Should the UBS share price rise
above this level, the holders would receive a lower number of
shares and the minimum would be reached with a share price
of CHF 21.31. Thereafter, a further increase in price leads to
an incremental increase in shares delivered, provided however
that the total number of shares to be issued will not exceed
the maximum number of shares (see the graphs on the next
page).
Hybrid tier 1 capital
Hybrid tier 1 instruments represent innovative and non-inno-
vative perpetual instruments and made up approximately
21.5% of adjusted core capital on 31 December 2008. They
are accounted for under minority interests in the IFRS equity.
In 2008, UBS raised EUR 1 billion of capital preferred securi-
ties issued by UBS Capital Securities (Jersey) Ltd. The instru-
ment bears an 8.836% coupon and is callable in 2013. As of
31 December 2008, UBS had issued a total of CHF 7,393
million of such instruments in various currencies. Hybrid tier
1 instruments are perpetual instruments which can only be
redeemed if they are called by the issuer. If such a call is not
exercised at the respective call date, the terms might include
a change from fixed to floating coupon payments and, in the
case of innovative instruments only, a limited step-up of the
interest rate. Non-innovative instruments do not have a step-
up of the interest rate and are therefore viewed as having a
higher equity characteristic for regulatory capital purposes.
The instruments are issued either through trusts or subsidiar-
ies of UBS and rank senior to UBS shares in dissolution. Pay-
ments under the instruments are subject to adherence to
minimum capital ratios by UBS. Any payment missed is non-
cumulative.
Tier 2 capital
The major element in tier 2 capital consists of subordinated
long-term debt. Tier 2 instruments have been issued in vari-
ous currencies and with a range of maturities across capital
markets globally. They accounted for CHF 12,290 million in
total capital as of year-end 2008. Tier 2 instruments rank
senior to both UBS shares and to hybrid tier 1 instruments
but are subordinated to all senior obligations of UBS.
Distributions to shareholders
The decision whether to pay a dividend and the level of the
dividend are dependent on UBS’s targeted capital ratios and
its cash flow generation. The decision on dividend payments
is proposed by the Board of Directors (BoD) to the sharehold-
ers and is subject to their approval at the annual general
meeting. The BoD has decided not to propose any dividend
for the financial year 2008.
Distribution to shareholders in 2008 – stock dividend
At the extraordinary general meeting of 27 February 2008,
the shareholders approved distribution of a stock dividend
offering the opportunity to obtain sale proceeds comparable
with the cash dividend paid in previous years. One entitle-
170
ment was allocated to each share outstanding after the close
of business on the record date of 25 April 2008. Twenty en-
titlements gave the holder the right to receive one additional
UBS share for free.
This stock dividend was tax-efficient for many sharehold-
ers resident in Switzerland and those in many other coun-
tries. Unlike a cash dividend, where the Swiss withholding
tax of 35% is deducted from the gross amount payable, the
stock dividend was allocated to shareholders without deduc-
tion of Swiss withholding tax.
Compared with the cash dividend, a stock dividend is also
more beneficial for UBS’s (tier 1) capital base. Cash dividend
payments are deducted from the firm’s net profits and retained
earnings, which are major components of its core (tier 1) capi-
tal. In contrast, by issuing new shares in lieu of a dividend cash
payment, the level of UBS’s (tier 1) capital base is maintained.
Conversion price and number of shares
MCN 1
MCN 2
Coupon
9%
12.50%
Amount
(CHF billion)
13.0
6.0
Issuance date
Conversion period / maturity
5.3.08
9.12.08
6.9.08
9.6.09
5.3.10
9.6.11
Conversion price per
UBS share (CHF)
48.07 1
18.21 2
21.31 2
additional shares
if above 21.31
Conversion into
numbers of UBS shares
270,438,942
329,447,681
281,579,096
3
1 Adjusted for dilution effects on the capital increase. 2 Conversion price between CHF 18.21 and CHF 21.31 (rounded) results in a variable number of shares between 329,447,681 and
281,579,096. 3 Approxi mately CHF 48 million countervalue in additional UBS shares per CHF 1 increase in the UBS share price.
Number of shares to be delivered
Number of shares in million
Value of shares
Value in CHF million
340
320
300
280
260
10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
18,000
14,000
10,000
6,000
2,000
10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
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UBS share price (CHF)
UBS share price (CHF)
MCN1
MCN2
3CM029_a_e
MCN1
MCN2
3CM029_b_e
Number of shares to be delivered
Number of shares in million
Value of shares
Value in CHF million
610
590
570
550
530
10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
30,000
23,000
16,000
9,000
2,000
10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
UBS share price (CHF)
UBS share price (CHF)
MCN1 +MCN2
3CM029_c_e
MCN1 +MCN2
3CM029_d_e
171
18000
14800
11600
8400
5200
2000
30000
24400
18800
13200
7600
2000
340
324
308
292
276
260
610
594
578
562
546
530
Risk and treasury management
Treasury management
UBS shares in 2008
UBS share price versus Dow Jones Banks Titans 30 Index
In %
1 January 2006–31 December 2008
Source: Bloomberg
150
100
50
0
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
UBS registered shares (CHF)
Dow Jones Banks Titans 30 Index (CHF)
Note: For current share price refer to: www.ubs.com/quotes
3CM022_e
UBS shares are listed on the SIX Swiss Exchange (traded on
SWX Europe), the New York Stock Exchange and the Tokyo
Stock Exchange.
➔ Refer to the “Capital structure“ section of this report for
more information on UBS shares including par value, type
and rights of security
2008 saw the unfolding of a global financial crisis and a
marked global economic slowdown, with falling prices in
nearly every asset class. Concerns that the deterioration in
the US housing market seen in 2007 would spread to the
general consumer area materialized as consumer confidence
reached new lows and several western economies fell into
recession. Government central banks and regulators joined
forces in a global policy response to stabilize and provide li-
quidity to a financial system that, in the opinion of many,
nearly collapsed in the second part of the year. Capital injec-
tions, the partial or full nationalization of several financial
institutions and sharp reductions in interest rates did not,
however, restore confidence and liquidity in the short term
and credit markets remained paralyzed for most of 2008.
Emerging markets suffered and commodities prices saw a
sharp reversal and falling prices in the second half of 2008.
Corporate earnings deteriorated at a fast pace during
2008 and entire segments of the economy entered 2009
with a very uncertain outlook. Worldwide stock markets
dropped significantly during the year, with the financial sec-
tor most hit: the Dow Jones Banks Titans 30 Index dropped
58%, the MSCI World index closed down 42%, the Dow
Jones Industrial Average closed down 34% and the S&P 500
closed down 38%.
Market capitalization
CHF billion
2001
2002
2003
2004
2005
2006
2007
20081
154
132
109
105
104
95
79
Ticker symbols
Trading exchange
SWX Europe
New York Stock Exchange
Tokyo Stock Exchange
Bloomberg
Reuters
UBSN VX
UBS US
8657 JP
UBSN.VX
UBS.N
8657.T
Security identification codes
ISIN
44
CH0024899483
2.489.948
CINS H89231 33 8
1 Market capitalization calculated based on the total UBS ordinary shares issued times the
UBS share price at period end. The total UBS ordinary shares as at 31 December 2008 does
not reflect the 270.4 million UBS shares and the maximum of 329.4 million UBS shares to
be issued through the conversion of mandatory convertible notes in the future. Refer to
“Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of
this report for details on shares outstanding for EPS.
Valoren
Cusip
3CM023_e
160
120
80
40
0
172
150.0
112.5
75.0
37.5
0.0
160
120
80
40
0
First quarter 2008
Fourth quarter 2008
2008 continued in the same vein as the closing months of
2007, with growing concerns over contagion from real es-
tate losses to the real economy. At the end of January, UBS
pre-announced its fourth quarter 2007 results as a loss of
CHF 12.5 billion. In March, UBS’s peer Bear Stearns ap-
proached bankruptcy as it suffered a liquidity crisis in the
wake of speculation over growing losses. This put further
pressure on industry stock prices as the quarter ended. The
global banking sector and the broader global indices de-
clined by 13% and 10% respectively, while UBS underper-
formed the market with its shares declining 45%.
Second quarter 2008
The Bear Stearns bankruptcy and acquisition by JPMorgan
announced in March proved somewhat purgative for the
markets in the second quarter, which remained steady as
expectations of a deep global recession were tempered. In
the banking sector, however, reported losses mounted lead-
ing to capital-raising by a number of large international
banks including UBS. Alongside the pre-anouncement of the
first quarter results, a rights issue to raise approximately
CHF 15 billion was announced together with a number of
measures to reduce risks and costs and stabilize per formance.
UBS performed in line with the global banking sector, down
16% in the quarter while the broader indices remained gen-
erally flat.
Third quarter 2008
The third quarter of 2008 proved to be one of the most tu-
multuous in banking history. The collapse of Lehman Brothers
in September triggered a series of banking failures and gov-
ernment rescues which brought the global banking system
close to breaking point. Despite posting modest losses for the
second quarter in August, UBS shares declined 14% in the
quarter and underperformed the global banking sector, down
2% in the wake of the failure of Lehman Brothers.
The fourth quarter commenced with persistent concerted ef-
forts by central banks to maintain liquidity and, shortly after-
wards, a series of government-led programs to stabilize the
banking system. As the prospect of a deep global recession
loomed, central banks united to deliver their first ever coordi-
nated rate cut. UBS announced a further material risk reduction
of its balance sheet through the transfer of risk assets to the
Swiss National Bank as well as further strengthening its capital
base through the issue of CHF 6 billion in mandatory convertible
notes to the Swiss Confederation. UBS reported a modest prof-
it for the third quarter. Market volatility remained extreme with
a slew of profit warnings and losses reported across the banking
sector. UBS shares closed the quarter down 20%, outperform-
ing the global banking sector which fell 41% as well as the
broader indices which declined by more than 20% on average.
Over the course of 2008 UBS shares declined 68%, un-
derperforming the global banking sector (down 58%), the
MSCI and the S&P (down 42% and 38% respectively).
Share liquidity
During 2008, daily average volume in UBS shares on SWX
Europe was 28.5 million shares. On the New York Stock
Exchange (NYSE), it was 2.1 million shares.
Because of the greater volume on SWX Europe, trading of
UBS shares there is expected to remain the main factor
determining the movement in UBS’s share price.
During the hours in which both SWX Europe and NYSE
are simultaneously open for trading (currently 3:30 p.m. to
5:30 p.m. Central European Time), price differences are like-
ly to be arbitraged away by professional market-makers. The
NYSE price will therefore typically be expected to depend on
both the SWX Europe price and the prevailing US dol-
lar / Swiss franc exchange rate. When SWX Europe is closed
for trading, traded volumes will typically be lower. However,
the specialist firm making a market in UBS shares on the
NYSE, Van der Moolen, is required to facilitate sufficient
liquidity and an orderly market in UBS shares.
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173
Risk and treasury management
Treasury management
UBS share data
Registered shares
Total ordinary shares issued
Treasury shares
Weighted average shares (for basic EPS 1 calculations)
Weighted average shares (for diluted EPS calculations)
CHF
EPS
Basic EPS
Basic EPS from continuing operations
Diluted EPS
Diluted EPS from continuing operations
1 Earning per share.
UBS shares and market capitalization
31.12.08
As of
31.12.07
31.12.06
2,932,580,549
2,073,547,344
2,105,273,286
61,903,121
158,105,524
164,475,699
2,769,575,922
2,165,301,597
2,221,591,786
2,770,727,478
2,166,768,923
2,309,834,516
For the year ended
31.12.08
31.12.07
31.12.06
(7.69)
(7.74)
(7.69)
(7.75)
(2.42)
(2.61)
(2.43)
(2.61)
5.19
4.83
4.99
4.64
31.12.08
As of
31.12.07
% change from
31.12.06
31.12.07
Share price (CHF) 1
Market capitalization (CHF million) 2
1 Historical share price adjusted for the rights issue and stock dividend. 2 Market capitalization calculated based on the total UBS ordinary shares issued times the UBS share price at period end.
The total UBS ordinary shares as at 31 December 2008 does not reflect the 270.4 million UBS shares and the maximum of 329.4 million UBS shares to be issued through the conversion of mandatory
convertible notes in the future. Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report for details on shares outstanding for EPS.
154,222
108,654
43,519
14.84
65.86
46.60
(68)
(60)
Source: Bloomberg
31.12.08
7,174,486
28,584
539,856
2,134
For the year ended
31.12.07
4,079,863
16,451
304,446
1,213
31.12.06
2,731,841
10,884
214,912
853
Source: Reuters
Trading volumes
1000 shares
SWX total (SWX Europe)
SWX daily average (SWX Europe)
NYSE total
NYSE daily average
174
Stock exchange prices1
SIX Swiss Exchange
New York Stock Exchange
High (CHF)
Low (CHF)
Period end (CHF)
High (USD)
Low (USD)
Period end (USD)
2008
Fourth quarter 2008
December
November
October
Third quarter 2008
September
August
July
Second quarter 2008
June
May
April
First quarter 2008
March
February
January
2007
Fourth quarter 2007
Third quarter 2007
Second quarter 2007
First quarter 2007
2006
Fourth quarter 2006
Third quarter 2006
Second quarter 2006
First quarter 2006
2005
Fourth quarter 2005
Third quarter 2005
Second quarter 2005
First quarter 2005
2004
Fourth quarter 2004
Third quarter 2004
Second quarter 2004
First quarter 2004
45.98
24.00
16.28
19.90
24.00
25.76
25.76
24.40
24.44
35.11
27.14
35.11
34.48
45.98
30.65
41.16
45.98
71.95
61.05
66.88
71.55
71.95
71.06
71.06
66.52
66.97
64.05
56.39
56.39
49.84
45.68
46.70
43.76
42.81
40.68
43.76
43.14
10.67
10.67
12.63
10.67
14.20
15.18
15.18
19.43
17.52
20.96
20.96
24.60
25.44
21.52
21.52
30.10
33.65
42.69
42.69
53.67
63.72
59.76
53.23
62.88
53.23
54.31
55.60
41.19
46.52
43.60
41.37
41.19
35.52
37.09
35.52
39.06
37.40
14.84
14.84
14.84
15.15
19.35
18.46
18.46
24.14
20.38
21.44
21.44
25.10
32.68
25.67
25.67
30.56
39.42
46.60
46.60
55.67
65.46
64.21
65.86
65.86
66.52
59.32
63.39
55.38
55.38
48.69
44.27
44.71
42.21
42.21
38.91
39.06
41.65
46.40
21.30
14.30
17.85
21.30
23.07
22.59
22.17
23.07
36.02
25.72
35.21
36.02
46.40
32.24
42.42
46.40
66.26
58.01
62.34
66.26
64.30
63.39
63.39
59.77
61.70
55.55
49.30
49.30
43.49
43.06
45.10
42.29
42.29
36.28
38.09
39.70
8.33
8.33
10.89
8.33
12.28
12.22
12.22
18.62
17.90
20.41
20.41
23.58
30.87
22.33
22.33
32.20
38.05
43.50
43.50
49.84
58.73
55.40
48.34
58.50
48.34
49.36
48.66
38.47
40.73
38.55
38.47
39.61
32.31
34.94
32.31
34.05
33.35
1 Historical share price adjusted for the rights issue and stock dividend 2008.
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14.30
14.30
14.30
12.74
16.90
17.54
17.54
21.89
19.39
20.66
20.66
23.66
33.59
28.80
28.80
32.34
41.29
46.00
46.00
53.25
60.01
59.43
60.33
60.33
59.31
54.85
54.99
47.58
47.58
42.75
38.93
42.20
41.92
41.92
35.17
35.53
37.25
175
Risk and treasury management
Basel II Pillar 3
Basel II Pillar 3
UBS publishes Basel II Pillar 3 disclosures on a semi-annual basis. Year-end disclosures are contained within this
report. Disclosure elements not covered in the “Risk management and control” and “Treasury management”
sections are shown below.
Introduction
On 1 January 2008, UBS adopted the revised capital frame-
work of the Basel Committee on Banking Supervision – Basel II
– which introduced new and amended capital requirements
for the different risk types and revised the calculation of eli-
gible capital.
The aim of Basel II Pillar 3 is to encourage market disci-
pline by allowing market participants to assess key pieces of
information regarding the capital adequacy of banks via a
set of disclosure requirements.
This section presents UBS’s Basel II Pillar 3 disclosures as of
31 December 2008 and consists mainly of quantitative disclo-
sures complemented with explanatory text where needed.
➔ Qualitative disclosures related to the bank’s risk manage-
ment and control, definitions and risk exposures as well as
capital management can be found in the “Risk manage-
ment and control” and “Treasury management” sections of
this report
Overview of disclosures
The following table provides an overview of UBS’s Basel II Pillar 3 disclosures:
Basel II Pillar 3 requirement
Disclosure in the annual report
Capital structure
Capital adequacy
“Capital management” section of this report
“Capital management” and “Basel II Pillar 3” sections of this report
Risk management objectives, policies and methodologies (qualitative disclosures)
“Risk management and control” section of this report
Credit risk
Investment positions
Market risk
Securitization
Operational risk
“Basel II Pillar 3” section of this report
“Basel II Pillar 3” section of this report
“Risk management and control” section of this report
“Basel II Pillar 3” section of this report
“Risk management and control” section of this report
General description of risk exposure measures and
capital requirements
Measures of risk exposure may differ depending on the
purpose for which exposures are calculated: financial
accounting under International Financial Reporting Stan-
dards (IFRS) determination of regulatory capital, or UBS’s
internal management. UBS’s Basel II Pillar 3 disclosures are
based on the measures of risk exposure that are used to
calculate the regulatory capital that is required to underpin
those risks.
Under the advanced Internal Ratings Based (IRB) approach
applied by UBS for the majority of its businesses, credit risk
weights are determined by reference to internal counterpar-
ty ratings and loss-given default estimates. UBS uses internal
models, approved by FINMA, to measure the credit risk ex-
posures to third parties on over-the-counter derivatives and
repurchase-style (repo-style) transactions. For a subset of its
credit portfolio, UBS applies the standardized approach (SA-
BIS), based on external ratings.
Securitization exposures in the banking book are treated
under the Ratings Based Approach (RBA), applying risk-
176
Detailed segmentation of required capital
CHF million
Credit risk
Sovereigns
Banks
Corporates
Residential mortgages
Other retail
Failed trades from non-delivery-versus-payment (non-DvP) transactions
Securitization exposures
Non-counterparty related risk
Equity exposures outside trading book
Settlement risk
Market risk
Operational risk
Total BIS risk weighted assets
Additional risk-weighted assets according to FINMA regulations 7
Total FINMA 8 risk weighted assets
Basel II
31.12.08
Advanced
156,187 1
9,393
Standardized
52,309 2
803
23,924
104,180
13,150
5,510
30
6,202
7,646 4
27,614 5
44,685 6
242,334
4,286
43,882 3
1,499
1,833
7
7,411
219
59,939
Total
208,496
10,196
28,209
148,062
14,650
7,342
37
6,202
7,411
7,646
219
27,614
44,685
302,273
32,620
334,893 9
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1 Advanced Internal Ratings Based approach (AIRB). 2 BIS defined standardized approach. 3 RWA for corporate exposures under the standardized approach include lombard loans from Wealth Management
International & Switzerland and certain traded products, primarily relating to derivatives, from the Investment Bank. 4 Simple risk weight method. 5 Value-at-Risk approach. 6 Advanced measurement approach
(AMA). 7 Reflects an additional charge of 10% on risk-weighted assets (RWA) for credit risk for exposures treated under the standardized approach, a FINMA surcharge of 200% for RWA of non-counterparty
related assets and additional FINMA capital requirements for market risk. 8 Swiss Financial Market Supervisory Authority (FINMA). 9 On 31 December 2008, the FINMA tier 1 ratio amounted to 9.9% and the
FINMA total capital ratio to 13.5%. Taking into account the effects from the transitional provisions of the capital floor, which require that during the year 2008 Basel II capital requirements had to amount to at least
90% of Basel I capital requirements, FINMA RWA would have increased CHF 67.7 billion, resulting in a FINMA tier 1 ratio of 8.2% and a FINMA total capital ratio of 11.3%.
weights based on external ratings. Non-counterparty related
assets such as UBS premises, other properties and equip-
ment require capital underpinning according to prescribed
regulatory risk weights.
For market risk positions, UBS derives its regulatory capi-
tal requirement from its internal Value-at-Risk (VaR) model,
which is approved by FINMA.
UBS has developed a model to quantify operational risk,
which meets the regulatory capital standard under the Basel
II Advanced Measurement Approach (AMA).
Basel II requires deduction of some positions from eligible
capital, most notably goodwill, intangible assets (excluding
software), net long positions in non-consolidated participa-
tions in financial institutions and certain positions in securiti-
zation exposures.
The naming conventions for the “Exposure segments”
used in the following tables are based on the BIS rules and
differ from those under Swiss and EU regulations. “Sover-
eigns” under the BIS naming convention equate to “Central
governments and central banks” as used under the Swiss
and EU regulations. Similarly “Banks” equate to “Institu-
tions” and “Residential mortgages” equate to “Claims se-
cured on residential real estate”.
Additional capital management disclosures
Although UBS determines published risk-weighted assets
(RWA) according to the Basel II Capital Accord (BIS guide-
lines), the calculation of UBS’s regulatory capital requirement
is based on the regulations of FINMA, leading to higher
RWA.
Generally, the scope of consolidation for purposes of cal-
culating these regulatory capital requirements follows the
IFRS consolidation rules for subsidiaries directly or indirectly
controlled by UBS AG which are active in the banking and
finance business, but excludes subsidiaries in other sectors.
The significant operating subsidiary companies in the Group
consolidated for IFRS purposes are listed in “Note 34 Signifi-
cant subsidiaries and associates” in the financial statements
of this report. More specifically, the main differences in the
basis of consolidation for IFRS and regulatory capital pur-
poses relate to the following entity types and apply regard-
less of UBS’s level of control:
– Real estate and commercial companies as well as collec-
tive investment schemes are not consolidated for regula-
tory capital purposes but are risk-weighted.
– Insurance companies are not consolidated for regulatory
capital purposes but are deducted from capital.
– Securitization vehicles are not consolidated for regulatory
capital purposes but are treated under the securitization
framework.
– Joint ventures that are controlled by two ventures are fully
consolidated for regulatory capital purposes, whereas they
are valued under equity method accounting for IFRS.
The “Detailed segmentation of required capital” table above
provides a granular breakdown of UBS’s capital requirements.
177
Risk and treasury management
Basel II Pillar 3
Credit risk
UBS’s Pillar 3 disclosure presents the details on the parame-
ters and input data used in its regulatory capital calculation.
Although the parameters applied under the advanced IRB
approach are generally determined using the same method-
ologies, data and systems as UBS uses for internal risk quan-
tification, there are nevertheless several differences due to
regulatory floors, multipliers, eligibility criteria and exposure
definitions that cause the figures presented in this section to
deviate from the information disclosed within the “Risk
management and control” section of this report. The regula-
tory capital calculation of credit risk exposure also differs
from that required under IFRS.
The Probability of Default (PD) and Loss Given Default
(LGD) estimates applied in the regulatory capital calculation
are the same as those used for internal risk quantification,
with the regulatory prescribed exceptions of a PD floor of
0.03% for non-sovereign exposures, an LGD floor of 10%
for residential mortgages and a downturn LGD addressing a
potential worsening of the economic cycle. However, be-
cause the regulatory exposure definitions are different from
the internally applied exposure definitions for traded prod-
ucts, the rating and LGD distributions presented in this sec-
tion deviate from the information presented in the “Risk
management and control” section of this report.
For banking products, there are no differences in the Ex-
posure at Default (EAD) calculation between the regulatory
and the internal management views. However, due to some
differences in the scope of consolidation and segmentation,
the regulatory exposure reported for Pillar 3 purposes differs
from the internal management view of credit exposures
which is reported in the “Risk management and control”
section of this report.
The regulatory exposure for traded products is predomi-
nantly calculated on the same systems using the same mod-
els that are used for internal risk quantification. However,
whereas in the “Risk management and control” section of
this report the maximum likely exposure is shown, this sec-
tion reports the respective regulatory exposure measures.
For securities financing exposures, this is the Close-Out VaR
measure as defined in paragraphs 178 to 181 of the Basel II
framework. For derivative exposures, UBS has received ap-
proval from FINMA to apply the Effective Expected Positive
Exposure (EPE) as defined in Annex 4 to the Basel II frame-
work. For a minor part of the portfolio, UBS also applies the
Comprehensive Approach or the Current Exposure Method.
In the tables in this section, the regulatory net credit ex-
posure shows the Basel II EAD after all collateral, netting and
other eligible risk mitigants have been applied as specified by
the relevant regulation. Certain Pillar 3 tables also require a
regulatory gross credit exposure view, which differs for bank-
Derivation of risk-weighted assets
CHF million
Cash and balances with central banks
Due from banks
Loans
Financial assets designated at fair value
Off-balance sheet 4
Banking products
Derivatives
Securities financing
Traded products
Trading portfolio assets
Financial investments available-for-sale 5
Accrued income and prepaid expenses
Other assets
Other products
Total 31.12.08
Exposure
Less: regulatory
credit risk offsets
and adjustments 1
(70)
(5,125)
(21,117)
(6,153)
(581)
(33,046)
(68)
26
(28)
(70)
(33,116)
Regulatory gross
credit exposure
22,872
33,884
295,395
11,803
45,589
409,542
190,047
63,825
253,872
32,916
3,027
5,011
10,696
51,650
715,064
Regulatory net
credit exposure
22,802
28,759
274,278
5,649
45,008
376,496
190,047
63,825
253,872
32,848
3,027
5,036
10,668
51,579
681,947
Average regulatory
risk-weighting 2
Risk-weighted
assets 3
6%
25%
24%
20%
34%
24%
42%
16%
35%
40%
15%
93%
82%
53%
31%
1,349
7,066
66,547
1,123
15,105
91,191
79,663
10,404
90,067
13,255
467
4,665
8,814
27,201
208,459
1 Regulatory credit risk offsets and adjustments mainly include margin accounts for derivatives. 2 The derivation of risk-weighted assets (RWA) is based on the various credit risk parameters of the
advanced Internal ratings-based approach and the standardized approach respectively. 3 Failed trades are excluded (RWA of CHF 37 million). 4 Includes contingent claims and undrawn irrevocable
credit facilities. 5 Financial investments available-for-sale exclude equity positions.
178
ing products in that cash balances in margin accounts are
not offset with the corresponding traded products expo-
sures. This section also presents information on impaired and
defaulted assets in a segmentation which is consistent with
the regulatory capital calculation.
The table “Derivation of risk-weighted assets” on the
previous page shows the derivation of risk-weighted assets
from the regulatory gross credit exposure.
Regulatory gross credit exposure by geographical region
Africa /
Middle
East
Total regulatory
gross credit
exposure
Total regulatory
net exposure
CHF million
Cash and balances with central banks
Due from banks
Loans
Financial assets designated at fair value
Off-balance sheet
Banking products
Derivatives
Securities financing
Traded products
Switzer-
land
6,015
898
163,351
73
6,000
Other
Europe
8,957
15,253
31,579
2,317
10,533
North
America 1
2,309
12,512
76,661
9,144
25,791
176,337
68,639
126,417
10,659
16,645
79,629
18,033
80,127
26,030
Latin
America
35
126
Asia /
Pacific
5,555
4,648
5,312
15,251
24
905
6,402
1,468
124
219
1,884
27,556
15,423
2,931
448
3,242
25
475
4,190
2,740
62
27,304
97,662
106,157
1,592
18,354
2,803
Trading portfolio assets
Financial investments available-for-sale 2
Accrued income and prepaid expenses
Other assets
Other products
48
30
464
4,593
5,135
12,485
17,977
2,226
1,429
1,852
570
2,797
3,736
17,992
25,080
658
8
82
145
893
1,542
3
218
363
2,126
Total regulatory gross credit exposure 31.12.08
208,777
184,294
257,654
8,887
48,037
1 North America includes the Caribbean. 2 Financial investments available-for-sale exclude equity positions.
206
190
20
6
422
7,415
22,872
33,884
295,395
11,803
45,589
409,542
190,047
63,825
253,872
32,916
3,027
5,011
10,696
51,650
715,064
22,802
28,759
274,278
5,649
45,008
376,496
190,047
63,825
253,872
32,848
3,027
5,036
10,668
51,579
681,947
Regulatory gross credit exposure by counterparty type
CHF million
Private individuals
Corporates 1
Public entities
(including
sovereigns and
central banks)
Banks and
multilateral
institutions
Total regulatory
gross credit
exposure
Total regulatory
net exposure
22,402
758
8,430
29
1,057
32,675
27,929
5,256
33,185
21,168
2,304
30
265
23,767
470
33,127
5,290
1,623
40,510
45,555
26,229
71,784
448
181
205
3,280
4,114
22,872
33,884
295,395
11,803
45,589
409,542
190,047
63,825
253,872
32,916
3,027
5,011
10,696
51,650
22,802
28,759
274,278
5,649
45,008
376,496
190,047
63,825
253,872
32,848
3,027
5,036
10,668
51,579
157,265
2,905
160,170
1,422
882
2,304
5
742
1,795
2,542
129,701
6,484
40,003
176,188
115,140
31,458
146,598
11,301
536
4,033
5,356
21,226
Cash and balances with central banks
Due from banks
Loans
Financial assets designated at fair value
Off-balance sheet
Banking products
Derivatives
Securities financing
Traded products
Trading portfolio assets
Financial investments available-for-sale 2
Accrued income and prepaid expenses
Other assets
Other products
Total regulatory gross credit
exposure 31.12.08
165,016
344,012
89,627
116,408
715,064
681,947
1 Includes corporates and non-banks financial institutions. 2 Financial investments available-for-sale exclude equity positions.
179
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Risk and treasury management
Basel II Pillar 3
The “Regulatory gross credit exposure by geographical re-
gion” table on the previous page provides a breakdown of
UBS’s portfolio by major types of credit exposure according
to classes of financial instruments and also by geographical
regions. The latter distribution is based on the legal domicile
of the customer.
The table “Regulatory gross credit exposure by counter-
party type” on the previous page provides a breakdown of
UBS’s portfolio by major types of credit exposure according
to classes of financial instruments and also by counterparty
type. The classification of counterparty type applied here is
also used for the grouping of the balance sheet. Refer to the
financial statements in this report for more information. The
counterparty type is different from the Basel II defined expo-
sure segments used in certain other tables in this section.
The “Regulatory gross credit exposure by residual contrac-
tual maturity” table on the next page provides a breakdown
of UBS’s portfolio by major types of credit exposure according
to classes of financial instruments and also by maturity. The
latter distribution is based on the residual contractual tenor.
The “Regulatory gross credit exposure covered by guar-
antees and credit derivatives” table on the next page provides
a breakdown of collateral information, showing exposures
covered by guarantees and those covered by credit deriva-
tives, according to Basel II defined exposure segments. These
are defined as follows:
– Corporates: consists of all exposures that do not fit into
any of the other exposure segments below. Mostly, it
includes private commercial entities such as corporations,
partnerships or proprietorships, insurance companies,
funds, exchanges and clearing houses.
– Sovereigns (“Central governments and central banks”
under Swiss and EU regulations): consists of exposures
relating to sovereign states and their central banks, the
Bank for International Settlement (BIS), the International
Monetary Fund (IMF), the European Union including the
European Central Bank and eligible multilateral develop-
ment banks (MDB).
– Banks (“Institutions” under Swiss and EU regulations):
consists of exposures towards banks, i. e. legal entities
holding a banking license. It also includes those securities
firms that are subject to supervisory and regulatory ar-
rangements comparable to those applied to banks ac-
cording to the Basel II Revised Framework, including, in
particular, risk-based capital requirements. Basel II also
defines this regulatory exposure segment such that it con-
tains exposures to public sector entities with tax raising
power or whose liabilities are fully guaranteed by a public
entity.
– Residential mortgages (“Claims secured on residential
real estate” under Swiss and EU regulations): consists of
residential mortgages, regardless of exposure size, if the
obligor owns and occupies or rents out the mortgaged
property.
– Other retail: consists of exposures to small businesses,
private clients and other retail customers without mort-
gage financing. Notably, this includes the lombard loan
portfolio.
The collateral amounts in the table reflect the values used
for determining regulatory capital. However, UBS has en-
gaged in a substantial credit hedging program to reduce
concentrated exposure to individual names or sectors or in
specific portfolios, which is not fully reflected in the regula-
tory numbers in this section.
The “Derivation of regulatory net credit exposure” table
on the next page provides a derivation of the regulatory net
credit exposure from the regulatory gross credit exposure ac-
cording to the advanced IRB approach and the Standardized
approach. The table also provides a breakdown according to
Basel II defined exposure segments.
180
Regulatory gross credit exposure by residual contractual maturity
CHF million
Cash and balances with central banks
Due from banks
Loans
Financial assets designated at fair value
Off-balance sheet
Banking products
Derivatives
Securities financing
Traded products
Trading portfolio assets
Financial investments available-for-sale 2
Accrued income and prepaid expenses
Other assets
Other products
Total regulatory gross credit exposure 31.12.08
Due in
1 year or less
Due over
1–5 years
Due over
5 years
377
44,905
4,664
1,859
51,805
69,412
719
70,131
3,043
621
2,240
118,100
2,677
10,541
1,638
78,699
3,987
32,112
133,559
116,436
47,130
8
47,138
7,891
94
73,386
17,511
90,897
21,051
2,312
85
23,448
247,904
Total
regulatory
gross credit
exposure
22,872
33,884
Total
regulatory
net credit
exposure
22,802
28,759
295,395
274,278
11,803
45,589
409,542
190,047
63,825
253,872
32,916
3,027
5,011
10,696
51,650
5,649
45,008
376,496
190,047
63,825
253,872
32,848
3,027
5,036
10,668
51,579
Other 1
22,872
29,629
53,690
475
1,077
107,743
120
45,586
45,706
931
5,011
10,611
16,553
7,985
3,664
171,558
125,600
170,001
715,064
681,947
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1 Includes positions without an agreed residual contractual maturity, for example loans without a fixed term, on which notice of termination has not been given. 2 Financial investments available-for-
sale exclude equity positions.
Regulatory gross credit exposure covered by guarantees and credit derivatives
CHF million
Exposure segment
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Total regulatory gross credit exposure 31.12.08
1 Includes guarantees and stand-by-letters of credit provided by third-parties, mainly banks.
Derivation of regulatory net credit exposure
CHF million
Total regulatory gross credit exposure
Less: regulatory credit risk offsets and adjustments 2
Total regulatory net credit exposure
Breakdown of the regulatory net credit exposure by exposure segment
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Total regulatory net credit exposure
1 Internal ratings-based. 2 Regulatory credit risk offsets and adjustments mainly include margin accounts for derivatives.
Total regulatory
gross credit
exposure
Of which: exposure
covered by
guarantees 1
Of which: exposure
covered by credit
derivatives
338,370
71,953
121,776
118,703
64,262
715,064
28,156
6
206
3,373
183
563
13
169
4,302
28,368
Advanced IRB 1
approach
Standardized
approach
618,333
(26,226)
592,107
237,704
45,270
130,493
116,539
62,101
592,107
96,731
(6,891)
89,841
48,618
24,818
11,979
2,001
2,424
89,841
Total
31.12.08
715,064
(33,116)
681,947
286,321
70,089
142,473
118,540
64,525
681,947
181
Risk and treasury management
Basel II Pillar 3
Advanced IRB approach
The upper part of the table “Advanced internal ratings-based
approach: regulatory net credit exposure by UBS-internal rat-
ing” below provides a breakdown of the regulatory net credit
exposure of UBS’s credit portfolio using the advanced IRB
approach according to UBS-internal rating classes.
The middle part of the table “Advanced IRB approach:
exposure-weighted average loss given default by UBS-inter-
nal rating” provides a breakdown of the net exposure-
weighted average loss given default for UBS’s credit portfolio
exposures calculated using the advanced IRB approach,
according to UBS-internal rating classes.
The lower part of the table “Advanced IRB approach: ex-
posure-weighted average risk-weight by UBS-internal rat-
ing” provides a breakdown of the net exposure-weighted
average risk-weight for UBS’s credit portfolio exposures cal-
culated using the advanced IRB approach according to UBS-
internal rating classes.
Advanced internal ratings-based approach: regulatory net credit exposure by UBS-internal rating
Investment grade
Sub-investment grade
Defaulted 1
UBS-internal rating
CHF million
Regulatory net credit
exposure-weighted
average PD
Exposure segment
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Total 31.12.08
0 / 1
2 / 3
4 / 5
6 – 8
9 –13
0.011%
0.064%
0.269%
0.929%
5.376%
19,978
30,321
11,390
3
102,563
14,730
89,216
6,803
47,797
47,706
86
27,330
51,922
7,039
43,562
88
1,748
52,723
4,529
61,691
261,108
134,083
102,651
17,694
37
509
4,883
1,807
24,929
6,202
8
299
206
928
7,644
1 Values of defaulted derivative contracts are based on replacement values, including “add-ons” used in the calculation of regulatory capital.
Total
regulatory
net credit
exposure
31.12.08
0.484%
237,704
45,270
130,493
116,539
62,101
592,107
Advanced internal ratings-based approach: exposure-weighted average loss given default by UBS-internal rating
CHF million
0 / 1
2 / 3
4 / 5
6 – 8
9 –13
UBS-internal rating
Investment grade
Sub-investment grade
Regulatory net credit
exposure-weighted
average LGD 1 (%)
31.12.08
Regulatory net credit exposure-weighted average LGD (%)
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Average 31.12.08
1 Loss given default.
24
26
22
10
25
33
61
25
10
15
28
42
36
32
10
22
26
34
37
36
11
13
21
32
20
15
11
15
26
35
37
26
11
16
26
Advanced internal ratings-based approach: exposure-weighted average risk-weight by UBS-internal rating
CHF million
0 / 1
2 / 3
4 / 5
6 – 8
9 –13
UBS-internal rating
Investment grade
Sub-investment grade
Regulatory net credit
exposure-weighted
average risk-weight (%)
31.12.08
Regulatory net credit exposure-weighted average risk-weight (%)
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Average 31.12.08
182
11
5
9
1
8
14
47
11
2
3
13
53
38
29
5
15
28
61
69
100
13
16
35
108
81
125
30
30
87
39
19
17
10
8
24
Standardized approach
The standardized approach is generally applied where it is
not possible – usually for technical reasons – to use the ad-
vanced IRB approach and / or where an exemption from the
advanced IRB has been granted by FINMA. The standardized
approach requires banks to use risk assessments prepared by
External Credit Assessment Institutions (ECAI) or Export
Credit Agencies to determine the risk weightings applied to
rated counterparties.
ECAI risk assessments are used by UBS to determine the
risk weightings for the following classes of exposure:
– Central governments and central banks;
– Regional governments and local authorities;
– Multilateral development banks;
– Institutions; and
– Corporates.
UBS has selected three FINMA-recognized external credit
assessment institutions for this purpose - Moody’s Investors
Service, Standard and Poor’s Ratings Group and Fitch Group.
The mapping of external ratings to the standardized ap-
proach risk weights is determined by FINMA and published
on its website.
The “Regulatory gross and net credit exposure by risk
weight under the standardized approach” table below pro-
vides a breakdown of the regulatory gross and net credit
exposure by risk-weight for UBS’s credit portfolio exposures
treated under the standardized approach, according to Basel
II defined exposure segments.
The “Eligible financial collateral recognized under stan-
dardized approach” table below provides a breakdown of
the financial collateral, which is eligible for recognition in the
regulatory capital calculation under the standardized ap-
proach, according to Basel II defined exposure segments.
Regulatory gross and net credit exposure by risk weight under the standardized approach1
Total exposure
CHF million
0% >0% – 35% 36% – 75% 76% – 100%
150%
31.12.08
Regulatory gross credit exposure
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Total 31.12.08
Regulatory net credit exposure 2
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Total 31.12.08
23,884
6,538
149
8,086
23,884
14,773
23,884
6,538
149
7,478
23,884
14,165
671
26
4,492
1,068
2,476
8,732
671
26
3,425
1,004
2,424
7,550
44,840
825
1,068
997
1,602
1
8
47,731
1,612
39,807
758
1,068
997
1,602
1
8
42,630
1,611
53,651
24,885
13,654
2,065
2,476
96,731
48,618
24,818
11,979
2,001
2,424
89,841
1 The risk-weights are based on regulatory values or external ratings. 2 For traded products, the regulatory gross credit exposure is equal to the regulatory net credit exposure.
Eligible financial collateral recognized under standardized approach
CHF million
Exposure segment
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Total 31.12.08
Regulatory net credit exposure
under standardized approach
Eligible financial collateral
recognized in capital
calculation1
48,618
24,818
11,979
2,001
2,424
89,841
8,911
1,148
5,942
64
648
16,713
1 The eligible financial collateral reflects the impact of the application of regulatory haircuts. For traded products, it is the difference between the International Financial Reporting Standards’ reported
values and the regulatory net credit exposure.
183
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Risk and treasury management
Basel II Pillar 3
Impairment, default and credit loss
The “Impaired assets by geographical region” table below
provides a breakdown of credit exposures arising from im-
paired assets and allowances / provisions by geographical
region, based on the legal domicile of the customer. Im-
paired asset exposures include loans, off-balance sheet
claims, securities financing transactions and derivative con-
tracts.
The “Impaired assets by exposure segment” table on the
next page shows a breakdown of credit exposures arising
from impaired assets and allowances / provisions according
to Basel II defined exposure segments. Impaired asset expo-
sures include loans, off-balance sheet claims, securities fi-
nancing transactions, and derivative contracts.
The “Changes in allowances, provisions and specific
credit valuation adjustments” table on the next page pro-
vides a breakdown of movements in the specific and collec-
tive allowances and provisions for impaired assets, including
changes in the credit valuation allowance for derivatives.
The “Total credit loss at year-end 2008” table on the next
page provides a breakdown of the credit loss amount
charged against UBS’s income statement in 2008 according
to Basel II defined exposure segments of the advanced
IRB approach.
Impaired assets by geographical region
CHF million
Switzerland
Other Europe
North America 2
Latin America
Asia / Pacific
Africa / Middle East
Total 31.12.08
Regulatory gross
credit exposure
208,777
184,294
257,654
8,887
48,037
7,415
715,064
Impaired assets 1
1,534
2,334
10,053
206
1,387
145
15,658
Specific
allowances,
provisions and
credit valuation
adjustments
Exposure net
of specific
allowances,
provisions and
credit valuation
adjustments
(849)
(1,138)
(4,808)
(56)
(361)
(41)
(7,252)
684
1,196
5,245
150
1,027
104
8,406
Total
allowances,
provisions and
specific credit
valuation
adjustments
(873)
(1,138)
(4,808)
(56)
(361)
(41)
(7,275)
Collective
allowances and
provisions
(23)
(23)
1 Values of defaulted derivative contracts (CHF 6,048 million) are based on replacement values and do not include “add-ons” used in the calculation of regulatory capital. 2 North America includes the
Caribbean.
184
Impaired assets by exposure segment
CHF million
Corporates
Sovereigns
Banks
Residential mortgages
Other retail
Not allocated segment 4
Total 31.12.08
Regulatory
gross credit
exposure
Of which
impaired
assets 1
Specific
allowances,
provisions
and credit
valuation
adjustments
Collective
allowances
and
provisions 2
338,370
71,953
121,776
118,703
64,262
13,855
(6,777)
16
139
352
1,296
(12)
(20)
(103)
(340)
715,064
15,658
(7,252)
(23)
(23)
Total
allowances,
provisions
and specific
credit
valuation
adjust-
ments2
(6,777)
(12)
(20)
(103)
(340)
(23)
Write-offs 3
(714)
(2)
(122)
(30)
(7,275)
(868)
1 Values of defaulted derivative contracts (CHF 6,048 million) are based on replacement values and do not include “add-ons” used in the calculation of regulatory capital. 2 Collective credit valuation
adjustments of CHF 6.1 billion are partially included in the upper tier 2 capital and therefore not included in this table. 3 The write-offs refer to the period from 1 January 2008 to 31 December
2008. 4 Collective loan loss allowances and provisions are not allocated to individual counterparties and thus also not to exposure segments.
Changes in allowances, provisions and specific credit valuation adjustments
CHF million
Balance at the beginning of 2008
Write-offs
Recoveries (on written-off positions)
Increase / (decrease) in credit loss allowances, provisions
and specific credit valuation adjustments1
Foreign currency translations and other adjustments
Transfers
Balance at year-end 2008
Specific allowances
and provisions for
banking products
and securities
financing
1,130
(868)
44
3,006
(42)
(223)
3,047
Specific credit
valuation
adjustments for
derivatives
818
4,550
(825)
(337)
4,205
Total specific
allowances,
provisions and
credit valuation
adjustments
1,948
(868)
44
7,556
(867)
(561)
7,252
Collective
allowances and
provisions 2
34
(11)
23
Total
1,981
(868)
44
7,545
(867)
(561)
7,276
1 Total credit loss (credit loss expense and changes in specific credit valuation adjustments). 2 Collective credit valuation adjustments of CHF 6.1 billion are partially included in the upper tier 2 capital
and therefore not included in this table.
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Total credit loss at year-end 2008
CHF million
Corporates 1
Sovereigns
Banks
Residential mortgages
Other retail
Not specified 2
Total
Credit loss expense
Specific credit valuation
adjustmens for
defaulted derivates
Total credit loss
2,564
114
(1)
342
(24)
2,996
4,117
433
4,550
1 Includes credit losses from reclassified financial instruments, which amounted to CHF 1,329 million. 2 Includes collective loan loss allowances and provisions.
6,681
547
(1)
342
(24)
7,545
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Risk and treasury management
Basel II Pillar 3
Other credit risk tables
The “Credit exposure of derivatives instruments” table be-
low provides an overview of UBS’s credit exposures arising
from derivatives. Exposures are provided based on the bal-
ance sheet carrying values of derivatives as well as regulatory
net credit exposures. The net balance sheet credit exposure
differs from the regulatory net credit exposures because of
differences in valuation methods and the netting and collat-
eral deductions used for accounting and regulatory capital
purposes. Specifically, net current credit exposure is derived
from gross positive replacement values, whereas regulatory
net credit exposures is calculated using UBS internal credit
valuation models.
The “Credit derivatives” table below provides an over-
view of UBS’s credit derivative portfolio by product group
using notional values. The table also provides a breakdown
of credit derivative positions used to risk manage UBS’s own
credit portfolio (banking book for regulatory purposes) and
those arising through intermediation activities (trading book
for regulatory capital purposes).
Credit exposure of derivative instruments
CHF million
Gross positive replacement values
Netting benefits recognized1
Collateral held
Net current credit exposure
Regulatory net credit exposure (total counterparty credit risk) 2
of which treated with internal models (effective expected positive exposure (EPE)) 2
of which treated with supervisory approaches (current exposure method) 2
Breakdown of the collateral held
Cash collateral
Securities collateral and debt instruments collateral (excluding equity)
Equity instruments collateral
Other collateral
Total collateral held
31.12.08
860,943
(651,756)
(51,765)
157,422
190,047
164,707
25,340
46,967
4,246
121
430
51,765
1 Derivatives exposure based on accounting definition (consolidation scope for capital) measured as gross positive replacement values with netting benefits from negative replacement values with the
same counterparty. 2 Derivatives exposure is defined as regulatory net credit risk exposure.
Credit derivatives
Notional amounts, CHF million
Credit default swaps
Total return swaps
Total 31.12.08
Regulatory banking book
Regulatory trading book
Total
Protection
bought
26,297
26,297
Protection
sold
1,030
1,166
2,196
Total
27,326
1,166
28,492
Protection
bought
Protection
sold
Total
31.12.08
2,120,407
1,469,723
3,590,130
3,617,457
15,060
7,819
22,879
24,044
2,135,468
1,477,542
3,613,009
3,641,502
1 Notional amounts of credit derivatives are based on accounting definitions and do not include any netting benefits. For capital underpinning of the counterparty credit risk of derivative positions, the
effective expected positive exposure (or current exposure method) is taken.
186
Investment positions
The “Equities disclosure for banking book positions” table
below provides an overview of UBS equity investments held
in the banking book for regulatory capital purposes. The cal-
culation of equity investment exposure for financial account-
ing under IFRS differs from that required for regulatory capi-
tal purposes. The table illustrates these two measures of
exposure as well as the key differences between them.
The IFRS view differs from the regulatory capital view pri-
marily due to: (i) differences in the basis of valuation, that is
IFRS is based on “fair value accounting” whereas the “lower
of cost or market value” (LOCOM) and “cost less impairment”
is used for regulatory capital purposes; (ii) positions that may
be treated under a different framework for regulatory capital
purposes, for example tradable assets treated under Market
Risk VaR; and (iii) differences in the scope of consolidation for
IFRS, for example, special purpose entities consolidated for
IFRS but not for regulatory capital purposes.
Also disclosed in the table are realized and unrealized gains
and losses. There were no unrealized gains and losses that
were not recognized either on the balance sheet or in the
statement of income relating to “available for sale” invest-
ments designated at fair value. In addition there was no sig-
nificant disparity between the share prices of investment posi-
tions held in publicly quoted entities and their fair value.
Equities disclosure for banking book positions
CHF million
Equity investments
Financial investments available-for-sale
Financial assets designated at fair value
Investments in associates
Total equity investments under IFRS
Realized gains and (losses), net
Unrealized gains and (losses), net
Consolidation scope adjustment
Capital view adjustments
Total equity exposure regulatory capital view under BIS
of which: to be risk weighted
publicly traded
privately held
of which: deducted from equity
Capital requirement
Total simple risk weight method
Unrealized gains included in tier 2
t
n
e
m
e
g
a
n
a
m
y
r
u
s
a
e
r
t
d
n
a
k
s
i
R
Book value 31.12.08
1,681
1,079
892
3,653
815
421
(80)
405
3,978
1,423
1,681
874
612
69
187
Risk and treasury management
Basel II Pillar 3
Securitization
Sources and control of risks resulting from securitization
structures
Historically UBS was involved in many aspects of the origina-
tion of securitization structures. This ranged from warehous-
ing assets as principal and for clients, the creation of securi-
tization vehicles, as well as underwriting, market-making
and managing securitized assets. UBS retained securitization
exposures in the form of senior or subordinated tranches
(including first loss positions) and interest only strips. UBS
also purchased third-party securitization positions as part of
its trading activities. UBS has not, however, provided any ma-
terial liquidity facilities for securitization structures and has
not acted as a sponsor of securitization schemes to purchase
exposures from third-party entities.
UBS significantly reduced its exposures to securitization
related assets in 2008 through a combination of asset sales
and writedowns. As announced in October 2008 and Febru-
ary 2009, UBS is repositioning its Investment Bank to focus
primarily on client activities. As part of this repositioning, the
Investment Bank will largely exit its real estate and securitiza-
tion activities. Refer to the “Investment Bank” section of this
report for more information. Remaining positions at 31 De-
cember 2008 that are treated under the securitization frame-
work for regulatory capital purposes include the global refer-
ence-linked note programs. These positions are subject to
appropriate portfolio limits and risk controls.
During 2008, UBS acquired student loan auction rate se-
curities (ARS) from its provision of liquidity to these markets
by submitting bids to ARS auctions and from its commit-
ment to restore liquidity to client holdings of ARS. Refer to
the “Exposure to auction rate securities” sidebar in the
“Risk management and control” section of this report for
more information. For regulatory capital purposes, expo-
sures from these positions are also treated as securitizations
and are subject to appropriate portfolio limits and risk
controls.
Regulatory treatment of securitization
UBS generally treated exposures from securitization posi-
tions under market risk regulatory capital and any remaining
securitization exposures that are still subject to this treat-
ment do not form part of this disclosure. Exposures from the
global reference-linked note programs and certain originat-
ed traditional securitizations were treated under the securiti-
zation approach for regulatory capital and are therefore in-
cluded in this disclosure.
In first quarter 2008 certain securitization exposures relat-
ing to illiquid US real estate positions (specifically super se-
nior US RMBS CDOs, sub prime and Alt A RMBS, and related
hedges) were excluded from internal management and reg-
ulatory VaR and were therefore no longer treated under
market risk regulatory capital. Refer to “VaR developments
in 2008” in the “Risk management and control” section of
this report for more information. These positions are treated
under the standardized approach as agreed with FINMA and
are therefore not included in this disclosure.
UBS generally applies the Ratings Based Approach to se-
curitization exposures in the banking book using Moody’s,
Standard & Poor’s and Fitch’s Ratings for all securitization
exposures. Unrated tranches for which no rating can be in-
ferred are deducted from eligible capital. Under the Ratings
Based Approach the amount of capital is capped at the cap-
ital requirement that would be assessed against the underly-
ing assets had they not been securitized. On 31 December
2008 such exposures mainly included the student loan ARS
positions (including purchase commitments) and the global
reference-linked note programs.
Interest rate or foreign currency derivatives with securiti-
zation vehicles are treated under the advanced Internal Rat-
ings Based approach.
Accounting Policies
For IFRS purposes, UBS treats originated securitized expo-
sures as sales, i.e. they are derecognized from UBS’s balance
sheet provided that specific derecognition criteria are met
and UBS does not consolidate the transferee (as described in
“Note 1 Summary of significant accounting policies” in the
financial statements of this report). A gain or loss on sale is
recognized when the exposures are derecognized. Deriva-
tives used for synthetic securitizations are accounted for in
line with the abovementioned note.
Securitization positions that are classified as trading as-
sets for IFRS purposes are valued at fair value as described in
“Note 27 Fair value of financial instruments” in the financial
statements of this report. Securitization positions that have
been redesignated from trading assets to loans and receiv-
ables are valued at cost less impairment as described in
“Note 1 Summary of significant accounting policies” in the
financial statements of this report.
Good practice guidelines
On 18 December 2008 the European Banking Federation,
the London Investment Banking Association, the European
Savings Banks Group and the European Association of Public
Banks and Funding Agencies published the “Industry good
practice guidelines on Pillar 3 disclosure requirement for se-
curitization”. UBS is in compliance with material aspects of
these guidelines.
188
Securitization activity during 2008
The first table below shows exposures that have been secu-
ritized by UBS via a traditional securitization during the year.
It also shows any gains or losses recognized on sales into
these traditional securitization structures for regulatory capi-
tal purposes. The exposure values disclosed are based on the
transaction date and were accounted for at fair value pre-
securitization (the resulting gain or loss is not significant).
UBS retained securitization positions for all traditional secu-
ritization made in 2008. No synthetic securitizations oc-
curred during 2008.
Total outstanding exposures securitized –
synthetic securitizations
The second table below provides a breakdown of the inven-
tory of the total outstanding exposures that have been secu-
ritized by UBS via synthetic securitizations prior to 2008 as
part of its global reference linked note program. Historically,
UBS retained securitization positions from its synthetic secu-
ritizations. The exposure values disclosed are calculated on
the basis of their regulatory exposure value. Due to the trans-
fer of assets to the SNB fund, however, UBS no longer holds
securitization positions of all synthetic securitizations.
Amount of impaired / past due assets securitized –
synthetic securitizations
The third table below provides a breakdown of the inventory
of outstanding impaired or past due exposures that have
been securitized by UBS via a synthetic securitization. The
exposure values are based on the amounts referenced in the
transaction and are included into the below disclosure once
a credit event has occurred.
Securitization activity during 2008 – traditional securitizations
CHF million
For year ended
Residential mortgages
Commercial mortgages
Other
Total
Total outstanding exposures – synthetic securitizations
CHF million
For year ended
Residential mortgages
Commercial mortgages
Other 1
Total
Amount of exposures
securitized
Recognized gain or loss
on sale
31.12.08
31.12.08
577
964
0
1,541
(13)
13
0
0
Amount of exposures securitized
31.12.08
433
596
9,657
10,686
t
n
e
m
e
g
a
n
a
m
y
r
u
s
a
e
r
t
d
n
a
k
s
i
R
1 Contains securitization structures comprising various exposure types, e.g. residential mortgages, commercial mortgages, credit card receivables and trading receivables.
Amount of impaired / past due assets securitized – synthetic securitizations
CHF million
For year ended
Residential mortgages
Commercial mortgages
Other
Total
Amount of exposures impaired / past due
31.12.08
22
0
190
212
189
Risk and treasury management
Basel II Pillar 3
Losses recognized on originated transactions in 2008
The table below provides a breakdown of losses recognized
by UBS on securitization tranches purchased or retained that
result from a securitization originated by UBS, after taking
into account the offsetting effects of any credit protection
that is an eligible risk mitigation instrument for the retained
or repurchased tranche. UBS partially reports such exposures
on a fair value and partially on a cost less impairment basis.
These losses mainly include losses related to the global refer-
ence-linked note program.
Securitization exposures retained or purchased
The table below provides a breakdown of securitization ex-
posures purchased or retained by UBS, irrespective of its role
in the securitization transaction. The exposure values dis-
closed are calculated on the basis of their regulatory expo-
sure value.
Capital charge for securitization exposures retained or
purchased
The table below provides a breakdown of securitization ex-
posures purchased or retained by UBS, irrespective of its role
in the securitization transaction as well as a breakdown of
the related capital requirement.
Losses recognized on originated transactions in 2008
CHF million
For year ended
Residential mortgages
Commercial mortgages
Other
Total
Securitization exposures retained or purchased
Exposure type
CHF million
For year ended
Residential mortgages
Commercial mortgages
Other 1
Total
Amounts of losses recognized
31.12.08
789
153
291
1,233
Exposure amount
31.12.08
592
583
33,960
35,135
1 Contains securitization structures comprising various exposure types, for example, residential mortgages, commercial mortgages, credit card receivables and trading receivables. Includes also student
loan auction rate securities positions (including purchase commitments).
Capital charge for securitization exposures retained or purchased
Exposure amount
Capital charge
CHF million
> 0–20%
> 20–35%
> 35–50%
> 50–75%
> 75–100%
> 100–150%
> 150–250%
> 250–300%
> 300–350%
> 350–375%
> 375–400%
> 400–625%
> 625–1250%
Deducted from capital
Total
190
31.12.08
32,576
464
253
321
1,181
–
24
–
–
–
–
10
–
306
35,135
332
13
11
19
100
–
5
–
–
–
–
4
13
306
803
Corporate governance and compensation
Information according to articles 663b bis and 663c (paragraph three)
of the Swiss Code of Obligations
Disclosures provided in line with the requirements of articles 663b bis and 663c (paragraph three) of the Swiss Code of
Obligations’ “Supplementary disclosures for companies whose shares are listed on a stock exchange: compensations and
participations” are also included in the audited financial statements of this report. This information is marked by a bar on
the left-hand side throughout this section.
Corporate governance
– UBS implemented new corporate governance guidelines in 2008, actively
reinforcing a clear separation of the roles and responsibilities of the Board of
Directors and its committees from those of the Group Executive Board
The firm believes that shareholder interests are
served by good corporate governance. At the
extraordinary general meetings (EGM) held in 2008,
shareholders approved the following:
On 27 February, shareholders approved the creation of a
maximum of CHF 10,370,000 in authorized capital,
allowing the distribution of a stock dividend. Shareholders
also approved the creation of conditional capital allowing
two financial investors to subscribe to an issue of
CHF 13 billion of mandatory convertible notes (MCNs).
On 27 November, shareholders approved the creation of
conditional share capital for the issuance of MCNs in the
amount of CHF 6 billion to the Swiss Confederation.
The dual-board structure achieves a clear
separation of power:
The Board of Directors (BoD) is responsible for the firm’s
strategic direction as well as the monitoring and supervision
of the business. All members are independent with the
exception of its full-time Chairman. Dissolution of the
Chairman’s Office in 2008 streamlined the management
process, with its duties and responsibilities spread amongst
existing and newly established committees.
The Group Executive Board is responsible for the executive
management of the firm and must account to the BoD for
the firm’s financial results. It is led by the Group Chief
Executive Officer and supported by the newly established
Executive Committee.
The following events strengthened UBS’s
leadership capacity during 2008:
The position of senior independent director was established
to facilitate direct communication between shareholders
and the BoD, as well as between BoD members and their
Chairman.
The term of office for all BoD members was reduced to one
year. This was approved at the annual general meeting held
in April and is effective for all elections and re-elections
held from 2008 onwards.
Compensation, shareholdings and loans
– UBS’s compensation principles for senior executives were extensively reviewed in 2008
– New compensation principles are effective from 2009 onwards
Compensation for 2008
Total senior executive compensation decreased
77% in 2008.
No incentive award or discretionary stock options were
granted to the Chairman and executive members of the
Board of Directors nor to the members of the Group
Executive Board in reflection of UBS’s negative financial
performance for the year.
Compensation principles 2009
These will align compensation with the creation of sustain-
able shareholder returns through sound risk taking;
promote a performance-driven culture with a long-term
view to results and shareholder interests; and support the
firm’s focused business strategy.
These principles include a “malus” system for cash awards
as well as performance conditions for equity awards.
A non-binding vote on executive compensation will be held
at the annual general meeting to be held in April 2009.
Compensation authorities
Recipients
Compensation recommendations
developed by
Approved by
Communicated by
Chairman of the BoD
Chairman of the HRCC 1
Group CEO
Chairman of the BoD
Members of the GEB
Group CEO
Independent BoD members
(remuneration system and fees)
Chairman of the BoD / HRCC
1 The human resources and compensation committee.
HRCC
HRCC
HRCC
BoD
HRCC
HRCC
Group CEO
Chairman of the BoD
Corporate governance and compensation
Corporate governance
Corporate governance
The corporate governance principles of UBS are designed to lead the firm towards sustainable growth and
protect the interests of its shareholders, as well as to create value for shareholders and stakeholders.
UBS uses the term “corporate governance” to refer to the organizational structure and operational practices
of its leadership and management.
UBS is subject to, and fully complies with, the following reg-
ulatory requirements regarding corporate governance: the
SIX Swiss Exchange’s (SIX) “Directive on Information Relating
to Corporate Governance”; the Swiss Code of Obligations
(CO) articles 663b bis and 663c (paragraph three) regarding
transparency of compensation paid to members of the Board
of Directors (BoD) and senior management; and the stan-
dards established in the Swiss Code of Best Practice for
Corporate Governance, including the appendix on executive
compensation.
In addition, as UBS is listed on the New York Stock Ex-
change (NYSE) as a foreign listed company, the firm must
meet all corporate governance standards applicable to for-
eign listed companies. UBS meets these standards, and ad-
ditionally complies with the majority of NYSE standards for
US domestic issuers.
This section of UBS’s annual report provides the informa-
tion required by the following regulatory requirements:
– The SIX “Directive on Information Relating to Cor-
porate Governance”, with regard to: Group structure
and shareholders; capital structure; BoD; Group Ex-
ecutive Board (GEB); compensation, shareholdings and
loans; shareholders’ participation rights; change of
control and defense measures; auditors and informa-
tion policy.
– Articles 663b bis and 663c (paragraph three) of the CO
“Supplementary disclosures for companies whose shares
are listed on a stock exchange: compensations and par-
ticipations”, with regard to share and option ownership
and loans.
– The NYSE “Corporate Governance Listing Standards”
with regard to foreign listed companies, independence of
directors, BoD committees and differences from the NYSE
standards applicable to US domestic issuers.
In addition to the regulatory requirements mentioned
above, this section of the report also summarizes the regula-
tory and supervisory environment of UBS in its principal loca-
tions, and provides a list of all members of UBS’s senior lead-
ership, including the vice chairmen of the business divisions.
Updates have been made to the sections discussing the BoD,
GEB and compensation, shareholdings and loans. These up-
dates follow an overhaul of the “Organization Regulations
of UBS AG” (“organization regulations”), which was con-
ducted by the BoD following the annual general meeting,
and the findings of the review of the executive governance
structure conducted in late 2008.
194
Group structure and shareholders
UBS Group legal entity structure
d
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u
A
all shares issued on 31 December 2008, compared with
7.99% at year-end 2007 and 8.81% at year-end 2006.
Under Swiss company law, UBS is organized as a limited
company, a corporation that has issued shares of common
stock to investors. UBS AG is the parent company of the UBS
Group (Group).
The legal entity structure of UBS is designed to support
its businesses within an efficient legal, tax, regulatory and
funding framework. Neither the business divisions of UBS
nor its Corporate Center are separate legal entities: they
primarily operate out of the parent bank, UBS AG, through
its branches worldwide. This structure is designed to capital-
ize on the increased business opportunities and cost effi-
ciencies offered by the use of a single legal platform and to
enable the flexible and efficient use of capital. Where it is
neither possible nor efficient to operate out of the parent
bank, businesses operate through local subsidiaries. Instan-
ces of this are usually due to local legal, tax or regulatory
rules or a result of additional legal entities joining the Group
through acquisition.
Operational Group structure
On 31 December 2008, the operational structure of the
Group comprised the Corporate Center and the three busi-
ness divisions: Global Wealth Management & Business
Banking, Global Asset Management and the Investment
Bank. In this report, performance is reported according to
this structure. However, on 10 February 2009, UBS an-
nounced that Global Wealth Management & Business Bank-
ing had been divided into two new business divisions:
Wealth Management & Swiss Bank and Wealth Manage-
ment Americas. Refer to the “Strategy and structure” sec-
tion of this report for more information on the restructuring
of the business divisions.
Listed and non-listed companies belonging to the
Group (consolidated entities)
The Group includes a number of subsidiaries, none of which,
however, are listed companies.
➔ Refer to “Note 34 Significant subsidiaries and associates”
in the financial statements of this report for details of
significant operating subsidiary companies of the Group
Significant shareholders
d
e
t
i
d
u
A
Chase Nominees Ltd., London, acting in its capacity as a
nominee for other investors, was registered with 7.19% of
DTC (Cede & Co.), New York, The Depository Trust Com-
pany, a US securities clearing organization, was registered as
a shareholder for a large number of beneficial owners with
9.89% of all shares issued on 31 December 2008 (14.15%
on 31 December 2007).
According to UBS’s “Regulation on the Registration of
Shares”, voting rights of nominees are restricted to 5%, but
clearing and settlement organizations are exempt from this
restriction. On 31 December 2008, no other shareholder had
reported holding 3% or more of all voting rights. Ownership
of UBS shares is widely spread. The tables on the next page
provide information about the distribution of UBS sharehold-
ers by category and geography. This information relates only
to registered shareholders and cannot be assumed to be rep-
resentative of the entire UBS investor base. Only sharehold-
ers registered in the share register as “shareholders with vot-
ing rights” are entitled to exercise voting rights.
Under the Swiss Stock Exchange Act, anyone holding
shares in a company listed in Switzerland, or derivative rights
related to shares of such a company, has to notify the com-
pany and the stock exchange if the holding attains, falls
below or exceeds one of the following thresholds: 3, 5, 10,
15, 20, 25, 33 1/3, 50, or 66 2⁄3% of the voting rights, wheth-
er they are exercisable or not. The detailed disclosure re-
quirements and the methodology for calculating the thresh-
olds are defined in the “Ordinance of the Swiss Financial
Market Supervisory Authority on Stock Exchanges and Se-
curities Trading” (disclosure of shareholdings). In particular,
the ordinance prohibits the netting of so-called acquisition
positions (i.e. in particular shares, conversion rights and ac-
quisition rights or obligations) with disposal positions (i.e.
rights or obligations to sell). It further requires that each
such position be calculated separately and reported as soon
as it reaches a threshold.
In addition to the notification requirements according to
Swiss law, as of 16 May 2008, shareholders of UBS also have
notification obligations with regard to major shareholdings in
shares of UBS under the German Securities Trading Act (Wert-
papierhandelsgesetz, WpHG). These obligations arise due to
the fact that UBS has chosen Germany as its home member
state within the meaning of the European Union’s “Prospectus
Directive”. The obligations came into force with the first filing
of the listing application for the new shares created as a result
of the stock dividend by UBS on SWX Europe, a regulated mar-
ket in the EU. According to the WpHG, anyone whose share-
holding in UBS attains, exceeds or falls below the thresholds of
3, 5, 10, 15, 20, 25, 30, 50 or 75% of the voting rights has to
195
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
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c
n
a
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r
e
v
o
g
e
t
a
r
o
p
r
o
C
Corporate governance and compensation
Corporate governance
notify, without undue delay, such change simultaneously to
UBS and the German Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht; BaFin). The detailed disclosure
requirements and the methodology for calculating the thresh-
olds are defined in paragraphs 21 et seq. of the WpHG.
sisted mainly of 8.91% of voting rights attached to employee
options, 9.22% of voting rights attached to the mandatory
convertible notes issued by UBS in March 2008 and 11.23% of
voting rights attached to the mandatory convertible notes is-
sued by UBS in December 2008.
At year-end 2008, UBS held a stake of UBS registered shares
corresponding to less than 3% of the total share capital of UBS
AG. At the same time, UBS had disposal positions relating to
891,230,556 voting rights of UBS AG and these corresponded
to 30.39% of the total voting rights of UBS AG. These con-
Cross shareholdings
UBS has no cross shareholdings in excess of a reciprocal 5%
of capital or voting rights with any other company.
Distribution of UBS shares
On 31 December 2008
Number of shares registered
1–100
101–1,000
1,001–10,000
10,001–100,000
100,001–1,000,000
1,000,001–5,000,000
5,000,001–29,325,805 (1%)
1–2%
2–3%
3–4%
4–5%
Over 5%
Total registered
Unregistered 2
Total shares issued
Shareholders registered
Shares registered
Number % of shares issued
Number
39,458
200,945
92,559
6,280
500
99
31
1
3
0
0
2 1
339,878
%
11.6
59.1
27.2
1.9
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2,279,778
89,228,454
242,151,755
145,370,413
148,881,546
200,105,606
324,972,121
38,551,136
202,408,105
0
0
500,789,047
100.0
1,894,737,961
1,037,842,588
2,932,580,549 3
0.1
3.0
8.2
5.0
5.1
6.8
11.1
1.3
6.9
0.0
0.0
17.1
64.6
35.4
100.0
1 On 31 December 2008, DTC (Cede & Co.), New York, the US securities clearing organization, was registered with 9.89% of all shares issued. Chase Nominees Ltd., London, was entered as a
trustee / nominee holding 7.19% of all shares issued. 2 Shares not entered in the share register on 31 December 2008. 3 211,917,438 registered shares do not carry voting rights.
Shareholders: type and geographical distribution
Shareholders
Shares
Number
330,226
9,063
589
%
97.1
2.7
0.2
Number
460,037,591
433,384,170
1,001,316,200
1,037,842,588
%
15.7
14.8
34.1
35.4
339,878
100.0
2,932,580,549
100.0
310,284
20,060
2,505
7,029
91.3
5.9
0.7
2.1
802,619,576
625,650,671
400,179,323
66,288,391
1,037,842,588
27.4
21.3
13.6
2.3
35.4
339,878
100.0
2,932,580,549
100.0
On 31 December 2008
Individual shareholders
Legal entities
Nominees, fiduciaries
Unregistered
Total
Switzerland
Europe
North America
Other countries
Unregistered
Total
196
Capital structure
Capital
Under Swiss company law, shareholders must approve in a
shareholders’ meeting any increase in the total number of is-
sued shares, which may arise from an ordinary share capital
increase or the creation of conditional or authorized capital. At
year-end 2008, 2,932,580,549 shares were issued with a par
value of CHF 0.10 each, leading to ordinary share capital of
CHF 293,258,054.90 (including shares issued for the capital
increase out of authorized and conditional capital in 2008).
Conditional share capital
At year-end 2008, conditional share capital of CHF
15,009,471.10 was available to settle employee option exer-
cises, corresponding to a maximum of 150,094,711 shares.
Conditional capital was created in 2000 in connection
with the acquisition of PaineWebber Group Inc. (PaineWeb-
ber) to cover option rights previously granted by PaineWeb-
ber to its employees. Additionally, at the annual general
meeting (AGM) held in 2006, shareholders approved condi-
tional capital in the amount of 150 million UBS shares to be
used for employee option grants limited to a period of three
years. Options under both plans are exercisable at any time
between their vesting and the expiry date. Shareholders’
pre-emptive rights are excluded. In 2008, options with re-
spect to 39,270 shares were exercised under the PaineWeb-
ber option plans, and 4,653 options expired without being
exercised. No options were settled with conditional capital
shares in 2008 under the UBS employee stock option plans.
At the extraordinary general meeting (EGM) held on
27 February 2008, UBS shareholders approved the creation
of conditional capital through the issuance of 277,750,000
shares to satisfy the settlement in shares of CHF 13 billion in
mandatory convertible notes (MCNs) with maturity 5 March
2010 placed with two financial investors.
At the 27 November 2008 EGM, UBS shareholders ap-
proved the creation of conditional capital through the issu-
ance of 365,000,000 shares to satisfy the settlement in
shares of CHF 6 billion in MCNs with maturity 9 June 2011
issued to the Swiss Confederation.
Authorized share capital
At the 27 February 2008 EGM, UBS shareholders approved
the creation of authorized capital for a maximum amount of
CHF 10,370,000 or 103,700,000 new shares (approximately
5% of the issued share capital at year-end 2007). A total of
98,698,754 new shares were issued on the basis of entitle-
ments alloted. The authorized capital created was used to
replace the cash dividend for the financial year 2007 with a
stock dividend paid in 2008.
Changes of shareholders’ equity
According to International Financial Reporting Standards
(IFRS), equity attributable to UBS shareholders amounted to
CHF 32.5 billion on 31 December 2008.
➔ Refer to the “Statement of changes in equity” in the
financial statements of this report for more information on
changes in shareholders’ equity over the last three years
Shares, participation and bonus certificates,
capital securities
UBS shares are issued in registered form, traded and settled
as so-called global registered shares. Each registered share
has a par value of CHF 0.10 and carries one vote. Voting
rights may, however, only be exercised if the holder expressly
declares that he or she acquired these shares in his or her
own name and for his or her own account. Global registered
shares provide direct and equal ownership for all sharehold-
ers, irrespective of the country and stock exchange in which
they are traded. Refer to the “Shareholders’ participation
rights” section of this report for more information.
On 31 December 2008, 1,682,820,523 shares carried
voting rights, 211,917,438 shares were entered in the share
register without voting rights, and 1,037,842,588 shares
were not registered. All 2,932,580,549 shares were fully
Ordinary share capital
On 31 December 2007
Issue of shares for stock dividend
Issue of shares for capital increase (rights offering)
Issue of shares out of employee options exercised from conditional capital
On 31 December 2008
Share capital
in CHF
Number
of shares
207,354,734
2,073,547,344
9,869,875
76,029,518
3,927
98,698,754
760,295,181
39,270
293,258,055
2,932,580,549
Par value
in CHF
0.10
0.10
0.10
0.10
0.10
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Corporate governance
paid up and eligible for dividends. There are no preferential
rights for shareholders.
UBS did not issue any participation certificates or bonus
certificates in 2008.
In 2008, UBS Capital Securities (Jersey) Ltd. raised EUR
1 billion hybrid tier 1 capital in the form of preferred securi-
ties. Additionally, UBS increased an existing CHF 350 million
subordinated bond issue maturing in 2017 by CHF 50 million.
At year-end 2008, UBS had outstanding CHF 7,393 million in
preferred securities, which count as hybrid tier 1 capital
under regulatory rules. Outstanding tier 2 capital securities
accounted for CHF 12,290 million in total capital on 31 De-
cember 2008.
Limitation on transferability and nominee registration
UBS does not apply any restrictions or limitations on the
transferability of its shares. Shares registered in the share
register with voting rights may be voted without any restric-
tions, according to the provisions of the “Articles of Associa-
tion of UBS AG” (which require an express declaration of
beneficial ownership).
UBS has special provisions for the registration of fiducia-
ries and nominees. Fiduciaries and nominees are entered in
the share register with voting rights up to a total of 5% of all
shares issued, if they agree to disclose, upon request from
the firm, beneficial owners holding 0.3% or more of all UBS
shares. An exception to the 5% rule exists for securities
clearing organizations such as The Depository Trust Compa-
ny in New York.
Convertible bonds and options
On 31 December 2008, there were 236 million employee
options outstanding, of which 124 million were exercisable.
UBS satisfies share delivery obligations under its option-
based participation plans either by purchasing UBS shares in
the market on grant date or shortly thereafter, or through
the issuance of new shares out of conditional capital. At ex-
ercise, shares held in treasury or newly issued shares are de-
livered to the employee against receipt of the strike price. On
31 December 2008, UBS held approximately 48.9 million
shares in treasury and an additional 150 million unissued
shares in conditional share capital, which were available to
be used for future employee option exercises. The shares
available cover all vested (i.e. exercisable) employee options.
The Investment Bank, acting as liquidity provider to the
equity futures market and as a market-maker in UBS shares
and derivatives, issues derivatives linked to UBS stock. Most
of these instruments are classified as cash-settled derivatives
and are held for trading purposes only. To hedge the eco-
nomic exposure, a limited number of UBS shares are held by
the Investment Bank.
On 5 March 2008, UBS issued CHF 13 billion of MCNs as
approved at the 27 February 2008 EGM. The notes were
placed with two financial investors (Government of Singa-
pore Investment Corporation and one other investor) and
will pay a coupon of 9% until conversion into UBS shares,
which must take place on or before a date two years after
issuance. The MCNs contain market-standard provisions al-
lowing for early conversion at the option of either UBS or the
MCN holders. Early conversion is only possible from the date
six months after issuance of the MCNs. The conversion of
the MCNs is expected to increase the number of shares is-
sued by 270,438,942, reflecting adjustments due to the or-
dinary capital increase approved by UBS shareholders at the
23 April 2008 AGM, subject to no further dilutive events oc-
curring until conversion. The terms of the MCNs contain
standard market provisions for the adjustment of the con-
version price if any dilutive events occur between issuance
and maturity, such as capital increases at a discount, divi-
dends in cash or in specie in excess of CHF 2.05 per share per
financial year, and similar events.
On 9 December 2008, in order to enable UBS to retain a
strong tier 1 capital ratio after giving effect to the transac-
tion with the Swiss National Bank, UBS issued CHF 6 billion
of MCNs, following the 27 November 2008 EGM. The notes
were placed with the Swiss Confederation and have a matu-
rity date 30 months after the issue date (i.e. 9 June 2011).
Until maturity of the MCNs, the holders will receive an an-
nual coupon of 12.5% of their nominal value. The conver-
sion of the MCNs is expected to increase the number of
shares issued by 9.3%, depending on the development of
the UBS share price and the absence of dilutive events (such
as any dividend payments). The terms of the MCNs contain
standard market provisions allowing for early conversion at
the option of either UBS or MCN holders and for the adjust-
ment of the conversion price if any dilutive events occur be-
tween issuance and maturity.
➔ Refer to the discussion on shares and capital instruments in
the “Treasury management” section of this report for more
information on the MCNs
198
Board of Directors
The Board of Directors (BoD) is ultimately responsible for the firm’s strategy and the supervision of its executive
management. It also approves the financial statements for issue. Shareholders elect each member of the BoD,
which in turn appoints its Chairman, at least one vice chairman and the members of its various committees.
Members of the Board of Directors
This section provides information on the composition of the
BoD on 31 December 2008. It shows each member’s func-
tions in UBS, nationality, year of initial appointment to the
BoD and current term of office, professional history and edu-
cation, date of birth and other activities and functions, such
as mandates on boards of important corporations, organiza-
tions and foundations, permanent functions for important
interest groups and official functions and political mandates.
At the annual general meeting (AGM) held on 23 April
2008, Peter R. Voser and Lawrence A. Weinbach were re-
elected as their term of office expired. Marcel Ospel did not
stand for re-election. Peter Kurer and David Sidwell were
elected to their first term on the BoD, and Peter Kurer re-
placed Marcel Ospel as full-time Chairman of the BoD. Steph-
an Haeringer, Rolf Meyer, Peter Spuhler and Lawrence A.
Weinbach tendered their resignations effective 2 October 2008.
At the extraordinary general meeting (EGM) held on 2 Oc-
tober 2008, Sally Bott, Rainer-Marc Frey, Bruno Gehrig and
William G. Parrett were elected to the BoD for the first time.
On 31 December 2008, with the exception of its executive
Chairman, Peter Kurer, all members of the BoD were consid-
ered independent by the BoD.
As announced on 4 March 2009, Peter Kurer has decided
not to stand for re-election at the AGM on 15 April 2009. The
UBS BoD is nominating Kaspar Villiger as a candidate for the
role of Chairman.
Peter Kurer
Address
Function(s) in UBS
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Chairman of the Board
of Directors (BoD) /
chair of the corporate
responsibility committee /
chair of the strategy
committee
Nationality
Year of initial appointment
Swiss
2008
Current term of office runs until 2009
Sergio Marchionne
Address
Function(s) in UBS
Nationality
Fiat S.p.A.
Via Nizza 250
I-10126 Turin
Independent vice
chairman and senior
independent director /
member of the gover-
nance and nominating
committee / member of
the strategy committee
Canadian and Italian
Year of initial appointment
2007
Current term of office runs until 2010
Professional history, education and date of birth
Peter Kurer was elected to the BoD at the annual general meeting (AGM) held in 2008 and thereafter
appointed Chairman of the BoD. He chairs the corporate responsibility committee and the strategy com-
mittee. Mr. Kurer had served as Group General Counsel of UBS since 2001, when he joined the firm. He
also served as a member of UBS’s Group Executive Board (GEB) from 2002 until his election to the BoD
in April 2008. Between 1991 and 2001, Mr. Kurer was a partner at the law firm Homburger AG in Zurich.
Between 1980 and 1990, he was with the Zurich office of Baker & McKenzie law firm, first as associate
and later as partner. He was a law clerk at the District Court of Zurich from 1977 to 1979. Mr. Kurer
graduated as doctor iuris from the University of Zurich and was admitted as attorney-at-law at the Zurich
Bar. He holds an LL.M. from the University of Chicago. He was born on 28 June 1949.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Peter Kurer is a member of the board of Avenir Suisse as well as a member of the visiting committee of
the University of Chicago’s Law School. He is also a member of the board of trustees of a foundation
which acts as an advisory board to the University of St. Gallen’s program for law and economics, and a
member of the committee of continuing education, Executive School of Management, Technology and
Law, University of St. Gallen.
Professional history, education and date of birth
Sergio Marchionne serves as Chief Executive Officer (CEO) of Fiat S.p.A., Turin, and Fiat Group Automobiles.
Mr. Marchionne began his professional career in 1983 as a chartered accountant and tax specialist for
Deloitte & Touche in Canada. Two years later, he became Group controller and then director of corporate
development at Lawson Mardon Group of Toronto. In 1989 and 1990, he served as executive vice presi-
dent of Glenex Industries. In the following two years Mr. Marchionne acted as vice president of finance
and Chief Financial Officer (CFO) at Acklands Ltd. He returned to Lawson Mardon Group in 1992 as vice
president of legal and corporate development and CFO. The company was acquired by Alusuisse Lonza in
1994. After the acquisition, having become CEO in 1996, he held various positions of increasing respon-
sibility until 2000. Upon completion of the merger of Alusuisse with Alcan, he acted as CEO and Chairman
of the spin-off Lonza Group Ltd. until 2002. In 2002, Mr. Marchionne was appointed CEO of the Société
Générale de Surveillance (SGS) Group of Geneva. He has been a member of the supervisory board of Fiat
S.p.A. since 2003 and has served as CEO of the company since June 2004. Mr. Marchionne studied phi-
losophy at the University of Toronto (Canada), business at the University of Windsor (Canada) and law at
Osgoode Hall Law School in Toronto (Canada) and is a lawyer and chartered accountant. He was born on
17 June 1952.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Sergio Marchionne is Chairman of SGS and a member of the BoD of Philip Morris International Inc., New
York. He is also a member of Acea (European Automobile Manufacturers Association) and Chairman of
CNH Case New Holland Global N.V.
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Corporate governance
Ernesto Bertarelli
Address
Function(s) in UBS
Bemido SA
Avenue Giuseppe-
Motta 31–33
PO Box 145
CH-1211 Geneva 20
Member of the gover-
nance and nominating
committee / member of
the human resources
and compensation
committee
Nationality
Year of initial appointment
Swiss
2002
Current term of office runs until 2009
Sally Bott
Address
Function(s) in UBS
BP p.l.c.
1 St. James’s Square
GB-London SW1Y 4PD
Member of the human
resources and compensa-
tion committee / member
of the corporate
responsibility committee
Nationality
American (US)
Year of initial appointment
2008
Current term of office runs until 2009
Rainer-Marc Frey
Address
Function(s) in UBS
Horizon21
Poststrasse 4
CH-8808 Pfaeffikon
Member of the risk
committee / member of
the strategy committee
Nationality
Year of initial appointment
Swiss
2008
Current term of office runs until 2009
Bruno Gehrig
Address
Function(s) in UBS
Swiss Life
General-Guisan-Quai 40
Postfach
CH-8022 Zurich
Member of the
audit committee
Nationality
Year of initial appointment
Swiss
2008
Current term of office runs until 2009
Professional history, education and date of birth
Ernesto Bertarelli was CEO of Serono International SA, Geneva, between 1996 and 2007. The company
was sold to Merck KGaA, Germany, on 5 January 2007. He started his career with Serono in 1985 and
held several positions in sales and marketing. Prior to his appointment as CEO, he served for five years
as deputy CEO. Mr. Bertarelli was also the vice chairman of the BoD of Serono SA, Coinsins (Switzerland)
and the Chairman of SeroMer Biotech SA, Chéserex (Switzerland), until 5 January 2007. Mr. Bertarelli
holds a Bachelor of Science from Babson College, Boston and an MBA from Harvard University. He was
born on 22 September 1965.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Ernesto Bertarelli is Chairman of Team Alinghi SA (winner of the America’s Cup 2003 and 2007), Ecublens
(Switzerland), and of Alinghi Holdings Ltd. Jersey. He is the Chairman of Kedge Capital Partners Ltd.,
Jersey and of Kedge Capital Holdings (Jersey) Ltd., Switzerland. He was awarded two extraordinary na-
tional honors: the Légion d’honneur by President Chirac of France, and the Cavaliere di Gran Croce by
Carlo Azeglio Ciampi, former President of the Italian Republic. He is a member of the strategic advisory
board of Ecole Polytechnique Fédérale de Lausanne (EPFL) and holds various board mandates in profes-
sional organizations of the biotech and pharmaceutical industries.
Professional history, education and date of birth
Sally Bott serves as Group HR Director of BP plc, which she joined in early 2005, and is a member of its
Group Executive Committee. Ms. Bott spent most of her career in financial services. Between 2000 and
2005, she was a Managing Director at Marsh & McLennan, a US-based global risk and insurance ser-
vices business, and head of global HR for Marsh, Inc. She was at Barclays Bank from 1994 to 2000, first
as BZW HR director and then Group HR director from 1997 to 2000. In 1970, she joined Citibank out of
college as a research analyst in the economics department. She was credit trained and in the Finance
Function. She joined HR in 1978 and worked as a HR director in most of the wholesale bank and invest-
ment banking businesses during the next 15 years. She was the Global HR Director of the wholesale
bank from 1990 to 1993. Ms. Bott has a BS in economics from Manhattanville College, USA. She was
born on 11 November 1949.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Sally Bott is a member of the board of the Royal College of Music in London and the Carter Burden
Center for the Aged in NYC.
Professional history, education and date of birth
Rainer-Marc Frey is the founder and Chairman of Horizon21, an investment management company
which takes long-term investment views on various megatrends in the investment management industry.
In 1992, he founded RMF Investment Group (RMF), one of the first hedge fund groups in Europe, and
became CEO. RMF was acquired by Man Group Plc in 2002. Between 2002 and 2004, he held a number
of senior roles within Man Group Plc and was the largest individual shareholder. From 1989 to 1992,
prior to founding RMF, Mr. Frey served as a director at Salomon Brothers Inc. in Zurich, Frankfurt and
London, where he was involved mainly with equity derivatives. Between 1987 and 1989, he worked for
Merrill Lynch Inc. covering equity, fixed income and swaps markets. He holds a degree in economics from
the University of St. Gallen. Mr. Frey was born on 10 January 1963.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Rainer-Marc Frey is a member of the BoD of DKSH Group, Zurich, and a member of the advisory board of
Invision Private Equity AG, Zug. He is a member of the BoD of the Frey Charitable Foundation, Freienbach.
Professional history, education and date of birth
Bruno Gehrig has been Chairman of Swiss Life Holding since 2003 and will resign on 7 May 2009 from
this position. Between 1996 and 2003, he served at the Swiss National Bank, starting as a member of
the governing board and becoming vice chairman in 2000. From 1992 to 1996, he was a professor of
banking and finance at the University of St. Gallen and concurrently served as a member of the Swiss
Federal Banking Commission (FINMA since 1 January 2009). Between 1989 and 1991, he held the posi-
tion of CEO at Cantrade Private Banking Group. Mr. Gehrig worked for the former Union Bank of
Switzerland (UBS) between 1981 and 1989, where he started as chief economist before assuming re-
sponsibility for securities sales and trading. He studied economics at the University of Berne, where he
also did his PhD studies. He completed postgraduate studies at the University of Rochester, New York. He
was assistant professor at the University of Berne and received his Dr. h.c. from the University of
Rochester, New York. Mr. Gehrig was born on 26 December 1946.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Bruno Gehrig is the vice chairman of the BoD of Roche Holding AG, Basel, and the Chairman of the Swiss
Air Transport Foundation, Zug.
200
Gabrielle Kaufmann-Kohler
Address
Function(s) in UBS
Lévy Kaufmann-Kohler
3-5, rue du
Conseil-Général
CH-1205 Geneva
Chair of the governance
and nominating
committee / member of
the corporate responsi-
bility committee
Nationality
Year of initial appointment
Swiss
2006
Current term of office runs until 2009
Professional history, education and date of birth
Gabrielle Kaufmann-Kohler has been arbitrator and partner with Lévy Kaufmann-Kohler since 1 January
2008, and a professor of private international law, including international arbitration, at the University
of Geneva Law School since 1997. Between 1996 and 2007, she worked as a practicing attorney at the
Schellenberg Wittmer law firm, Geneva, where she was a partner. Ms. Kaufmann-Kohler was adjunct
professor for private international law at the University of Geneva Law School from 1993 to 1996. From
1985 to 1995, she was with Baker & McKenzie law firm, first as associate and then as partner. She is a
member of the Geneva Bar (since 1976) and of the New York State Bar (since 1981) and is known
worldwide for her expertise in international arbitration. In 1980, she worked for the UBS New York
Branch as a legal advisor. Ms. Kaufmann-Kohler completed her legal studies at the University of Geneva
in 1977 and received her doctorate from the University of Basel in 1979. She was born on 3 November
1952.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Gabrielle Kaufmann-Kohler is a member of the board of the American Arbitration Association.
Helmut Panke
Address
Function(s) in UBS
BMW AG
Petuelring 130
D-80788 Munich
Member of the human
resources and compensa-
tion commit tee / member
of the risk committee
Nationality
Year of initial appointment
German
2004
Current term of office runs until 2010
William G. Parrett
Address
Function(s) in UBS
Nationality
433 Country Club Rd. W.
New Canaan,
Ct. 06840 USA
Member of the
audit committee
American (US)
Year of initial appointment
2008
Current term of office runs until 2009
David Sidwell
Address
Function(s) in UBS
Apartment 26-O
25 Central Park West
New York
N.Y. 10023 USA
Chair of the risk
committee / member of
the corporate responsi-
bility committee
Nationality
American (US) and British
Year of initial appointment
2008
Current term of office runs until 2009
Professional history, education and date of birth
Between 2002 and 2006, Helmut Panke was Chairman of the board of management of BMW AG,
Munich. In 1982, he joined as head of planning and controlling in the research and development divi-
sion. He subsequently assumed management functions in corporate planning, organization and corpo-
rate strategy. Before his appointment as Chairman, he was a member of BMW’s board of management
from 1996. Between 1993 and 1996, he was Chairman and CEO of BMW Holding Corporation in the
US. Mr. Panke graduated from the University of Munich with a PhD in physics and was assigned to the
University of Munich and the Swiss Institute for Nuclear Research before joining McKinsey & Co in
Dusseldorf and Munich as a consultant. He was born on 31 August 1946.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Helmut Panke is a member of the BoD of Microsoft Corporation, Redmond, WA (USA) and is also a
member of the supervisory board of Bayer AG (Germany). He is a member of the BoD of the American
Chamber of Commerce in Germany and a member of the international advisory board for Dubai
International Capital’s “Global Strategic Equities Fund”.
Professional history, education and date of birth
William G. Parrett served his entire career with Deloitte Touche Tohmatsu, a global organization of
member firms that operates with 160,000 people in nearly 140 countries. He was CEO from 2003 until
his retirement in 2007. Between 1999 and 2003, he was a managing partner of Deloitte & Touche USA
LLP and served on Deloitte’s Global Executive Committee. Mr. Parrett founded the US National Financial
Services Industry Group (1995) and the Global Financial Services Industry Group (1997) of Deloitte, both
of which he led as Chairman. In his 40 years of experience in professional services, Mr. Parrett served
public, private, governmental, and state-owned clients worldwide in order to help Deloitte achieve supe-
rior financial performance and growth. Mr. Parrett has a Bachelors degree in accounting from St. Francis
College, New York, and is a certified public accountant. He was born on 4 June 1945.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
William Parrett is an independent director of Eastman Kodak Co., Blackstone Group LP, and Thermo
Fisher Scientific Inc., USA. He is also the Chairman of the BoD of the United States Council for
International Business and of United Way of America, a member of the board of trustees of Carnegie Hall,
and a member of the Executive Committee of the International Chamber of Commerce.
Professional history, education and date of birth
David Sidwell was executive vice president and CFO of Morgan Stanley in New York between March
2004 and October 2007. Before joining Morgan Stanley he was with JPMorgan Chase & Co. He joined
JPMorgan Chase & Co. in 1984 in New York where he held a number of different positions during his 20
years of service, including controller and CFO of the Investment Bank. Prior to this he was with
PricewaterhouseCoopers LLP in both London and New York. Mr. Sidwell graduated from Cambridge
University in England and is a chartered accountant qualifying in the Institute of Chartered Accountants
in England and Wales. He was born on 28 March 1953.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
David Sidwell is a director of the Federal National Mortgage Association Fannie Mae. He is a trustee of the
International Accounting Standards Committee Foundation, London and the Chairman of the BoD of Village
Care of New York, a not-for-profit organization, as well as director of the National Council on Aging.
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Corporate governance
Peter R. Voser
Address
Function(s) in UBS
Royal Dutch Shell plc
2501 AN NL-The Hague
Chair of the audit
committee / member of
the strategy committee
Nationality
Year of initial appointment
Swiss
2005
Current term of office runs until 2009
Joerg Wolle
Address
Function(s) in UBS
Nationality
DKSH Holding AG
Wiesenstrasse 8
CH-8034 Zurich
Chair of the human
resources and compensa-
tion committee / member
of the governance and
nominating committee
German and Swiss
Year of initial appointment
2006
Current term of office runs until 2009
Professional history, education and date of birth
Peter R. Voser has been CFO and an executive BoD member of Royal Dutch Shell plc in London since
2004. Between 2002 and 2004, he was CFO of Asea Brown Boveri (ABB) in Switzerland. Between 1982
and 2002, he worked for the Royal Dutch / Shell Group, holding various assignments in Switzerland, the
UK, Argentina and Chile. Mr. Voser graduated from the University of Applied Sciences, Zurich. He was
born on 29 August 1958.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Voser is a member of the BoD of the Swiss Federal Auditor Oversight Authority.
Professional history, education and date of birth
Joerg Wolle has been president and CEO of DKSH Holding Ltd. since 2002. From 2000 until the merger
with Diethelm Keller in 2002, he was president and CEO of SiberHegner Holding AG. He completed his
studies in engineering in 1983 and received his doctorate in 1987 from the Technical University of
Chemnitz in Germany. Mr. Wolle was born on 19 April 1957.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Joerg Wolle is a member of the BoD of Diethelm Keller Holding Ltd., Zurich. He is also the Chairman of
the BoD of BURU Holding Ltd., Cham, and a member of the BoD of OAV (German Asia-Pacific Business
Association), Hamburg.
Elections and terms of office
Organizational structure
In accordance with the new article 19 (paragraph one) of the
“Articles of Association of UBS AG” approved at the 23 April
2008 AGM, all BoD members are to be elected on an indi-
vidual basis for a one-year term of office. As a result, by
2010 at the latest, shareholders must confirm the entire
membership of the BoD on a yearly basis at the AGM.
BoD members are normally expected to serve for a mini-
mum of three years. No BoD member can continue to serve
beyond the AGM held in the calendar year following his or
her sixty-fifth birthday. The BoD may, in exceptional circum-
stances, propose to the AGM that a BoD member be re-
elected despite having reached this age limit. However, no
BoD member may hold office beyond the age of 70.
The boxes on the previous pages list the following for all
BoD members: year of first appointment to the BoD and the
expiry of their current mandate.
Organizational principles
The BoD has ultimate responsibility for the mid- and long-
term strategic direction of the UBS Group (Group), for ap-
pointments and dismissals at top management level and for
the definition of the firm’s risk principles and risk capacity.
Following each AGM, the BoD meets to elect or appoint its
Chairman, one or more vice chairmen, the senior indepen-
dent director and the members and chairs of its committees.
The BoD appoints a company secretary who acts as secretary
to the BoD and its committees.
There were significant changes to the organizational
structure of the BoD in 2008, including the dissolution of the
Chairman’s Office as of 1 July 2008, which was composed of
the Chairman and the vice chairman / vice chairmen. The du-
ties and responsibilities of the former Chairman’s Office were
allocated to a number of BoD committees, including the
new risk committee and the new strategy committee. In ad-
dition, the duties and responsibilities of the governance and
nominating committee (formerly the nominating committee)
and the human resources and compensation committee
(formerly the compensation committee) have been expand-
ed. The duties and responsibilities of the committees of the
BoD are described below. Moreover, the position of a senior
independent director has been established and is currently
held by Sergio Marchionne, in addition to his role as the
firm’s vice chairman.
According to the Articles of Association, the BoD meets
as often as business requires, but at least six times a year. A
202
total of 47 meetings were held in 2008, of which 17 includ-
ed Group Executive Board (GEB) members, 26 were without
GEB participation, and four were independent BoD meetings
held without the presence of its Chairman. On average,
91% of BoD members were present at BoD meetings and
83% at the BoD meetings without GEB participation.
Each committee chair provides the BoD with regular up-
dates on the current activities of his or her committee and on
important committee issues.
At least once per year, the BoD reviews its own perfor-
mance as well as the performance of each of its committees.
This review is based on an assessment conducted by the gov-
ernance and nominating committee and seeks to determine
whether the BoD and its committees are functioning effec-
tively and efficiently.
The BoD is organized as follows:
Chairman’s Office
UBS had a Chairman’s Office until 30 June 2008. Since then,
the duties and responsibilities of the dissolved Chairman’s
Office have been allocated to a number of BoD committees.
Audit committee
The audit committee comprises at least three independent
BoD members, with all members having been determined by
the BoD as being fully independent and financially literate.
Peter R. Voser, the committee’s chair, as well as the other
two members, have accounting and financial management
expertise and are “financial experts” according to the rules
established by the US Sarbanes-Oxley Act of 2002.
The committee operates under the audit committee char-
ter, as described in the “Organization Regulations of UBS
AG” (organization regulations) and its annexes. The commit-
tee does not itself perform audits, but supervises the work of
the auditors. Its primary responsibility is to assist the BoD in:
(i) monitoring the integrity of the financial statements of UBS
and compliance with legal and regulatory requirements; and
(ii) reviewing the organization and efficiency of internal con-
trols and financial reporting processes. On behalf of the BoD,
the committee monitors the qualification, independence
and performance of UBS’s external auditors and their lead
partners. It prepares proposals for the BoD regarding the
appointment or removal of UBS’s external auditors. The BoD
then submits these proposals to the AGM.
The committee also reviews the financial statements of
UBS and UBS Group, and makes proposals as to whether the
annual financial statements of UBS and UBS Group should
be submitted to the AGM for approval.
On 31 December 2008, Peter R. Voser chaired the commit-
tee with Bruno Gehrig and William G. Parrett as its additional
members. The committee met six times in 2008, with the head
of Group Internal Audit, the representatives of the external
auditors, the Group Chief Financial Officer (CFO), the head of
Group Controlling and Accounting and the head of Group Ac-
counting Policy participating. The six meetings included regu-
lar separate sessions with these representatives. In addition,
the Group General Counsel attended one meeting. A special
session was organized with the Group CFO to discuss the an-
nual financial results. Participation at the meetings averaged
94% and all were held with external auditors present.
The committee reports back to the BoD about its discus-
sions with UBS’s external auditors. Once per year, the lead
partners take part in a BoD meeting, presenting the long-
form report of UBS’s external auditors, as required by the
Swiss Financial Market Supervisory Authority (until 31 De-
cember 2008, Swiss Federal Banking Commission).
Corporate responsibility committee
The corporate responsibility committee supports the BoD in
fulfilling its duty to safeguard and advance the Group’s repu-
tation for responsible corporate conduct and to assess devel-
opments in stakeholder expectations and their possible con-
sequences for UBS. The committee comprises at least three
BoD members and, on 31 December 2008, Peter Kurer
chaired the committee with Sally Bott, Gabrielle Kaufmann-
Kohler and David Sidwell as its additional members. The
committee is advised and supported by a number of senior
business representatives. The committee met twice in 2008,
with an average participation of 63%.
➔ Refer to the “Corporate responsibility” section of this
report for more information on corporate responsibility
Governance and nominating committee
The governance and nominating committee supports the
BoD in fulfilling its duty to establish best practices in corpo-
rate governance across the Group, to conduct a self-assess-
ment of the full BoD, in consultation with the Chairman of
the BoD, to establish and maintain a process for appointing
new BoD members and to manage the succession of the
Group Chief Executive Officer (Group CEO). The committee
comprises at least three independent BoD members and, on
31 December 2008, Gabrielle Kaufmann-Kohler chaired the
committee with Ernesto Bertarelli, Sergio Marchionne and
Joerg Wolle as its additional members. In 2008, 14 meetings
were held with an average participation of 95%. Of these
14 meetings, eight were held with external advisors.
Human resources and compensation committee
The human resources and compensation committee has the
following functions: (i) to support the BoD in fulfilling its
duty to set guidelines on compensation and benefits; (ii) to
approve the total individual compensation for the Chairman
of the BoD, the non-independent BoD members and the
GEB members; (iii) together with the Chairman of the BoD,
to provide the BoD with a proposal for total individual com-
pensation for the independent BoD members; and (iv) to
scrutinize the performance of the executives and supervise
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Corporate governance and compensation
Corporate governance
and approve the succession planning for all executives (other
than the Group CEO). The human resources and compen-
sation committee also reviews the compensation disclosure
included in this report. The committee operates under the
human resources and compensation committee charter, as
described in the organization regulations and its annexes.
The Group CEO must provide this committee with an an-
nual report on the effectiveness of UBS’s human resources
polices and suggest modifications and supply regular up-
dates regarding the results of employee and executive sur-
veys and leadership processes.
The committee comprises at least three independent BoD
members and, on 31 December 2008, Joerg Wolle chaired
the committee with Sally Bott, Helmut Panke and Ernesto
Bertarelli as its additional members. Eight meetings were
held in 2008, with an average participation of 93%. Of
those meetings, four were held with external advisors.
➔ Refer to the “Compensation, shareholdings and loans”
section of this report for more information on the
BoD human resources and compensation committee’s
decision-making procedures
Risk committee
The risk committee became effective on 1 July 2008 and
took over many responsibilities of the former Chairman’s Of-
fice. The function of the committee is to support the BoD in
fulfilling its duty to supervise and to set appropriate risk
management and control principles in the areas of: (i) risk
management and control, including credit, market and op-
erational risk; (ii) treasury and capital management, includ-
ing funding and liquidity; and (iii) balance sheet manage-
ment, including in each case any consequent reputational
risk. For these purposes, the committee will receive all rele-
vant information from the GEB. The Group CEO, the Group
CFO, the Group CRO and the Executive Committee are re-
sponsible for assessing and managing the risks of the Group
and are ultimately accountable to the BoD with regard to
their activities.
The committee comprises at least three independent BoD
members and, on 31 December 2008, David Sidwell chaired
the committee with Rainer-Marc Frey and Helmut Panke as
its additional members. The committee has met eight times
since its formation on 1 July 2008, with an average participa-
tion of 87%. Three of these meetings were held with exter-
nal advisors. A special session was held with the Governing
Board of the Swiss National Bank, and will continue to be
held on an annual basis.
Strategy committee
The strategy committee became effective on 1 July 2008.
The functions of the strategy committee are: (i) to work with
the Group CEO to initiate, at least once per year, a review of
the firm’s strategy and its implementation by the GEB, with
a view to submitting presentations to the BoD to facilitate its
decisions on the Group’s strategy; (ii) to monitor the imple-
mentation of the Group’s current strategy and report results
to the BoD; (iii) to consider, in conjunction with the risk com-
mittee, the Group’s strategy to deal with anticipated or exist-
ing high-level risks; and (iv) to validate the Group’s current
strategy with external experts where the committee consid-
ers such external advice to be appropriate.
The committee comprises at least three independent BoD
members and, on 31 December 2008, Peter Kurer chaired
the committee with Rainer-Marc Frey, Sergio Marchionne
and Peter R. Voser as its additional members. All members
were present at the six committee meetings held in 2008,
with one meeting held as a strategy seminar and external
advisors present at two.
Roles and responsibilities of the Chairman of
the Board of Directors
Peter Kurer, the Chairman, has entered into a full-time em-
ployment contract with UBS in connection with his service
on the BoD and is entitled to receive pension benefits upon
retirement. He assumes clearly defined management respon-
sibilities.
The Chairman takes a leading role in mid- and long-term
strategic planning, the selection and supervision of the
Group CEO and the GEB members, mid-term succession
planning and developing and shaping compensation princi-
ples. In addition, the Chairman actively supports major client
and transaction initiatives.
As leader of the BoD, the Chairman is responsible for en-
suring that the BoD is effective and correctly balances its
focus between its strategic and supervisory functions. In ad-
dition, the Chairman presides over the AGMs and EGMs and
works with the committee chairs to coordinate the work of
all committees. Together with the Group CEO, the Chairman
is responsible for ensuring effective communication with
shareholders and other stakeholders, including government
officials and regulators. This is in addition to establishing and
maintaining a close working relationship with the Group
CEO and the other GEB members, providing advice and sup-
port while respecting the fact that day-to-day management
responsibility is delegated to the GEB.
Roles and responsibilities of the senior
independent director
At least once per year, the senior independent director orga-
nizes and leads a meeting of the independent BoD members
without the presence of the Chairman. The senior indepen-
dent director reports to the Chairman of the BoD on the
evaluation of the Chairman’s performance. The senior inde-
pendent director acts as a contact point for shareholders
wishing to engage in discussions with an independent BoD
member.
204
Important business connections of independent
members of the Board of Directors with UBS
UBS, as a global financial services provider and a major bank
in Switzerland, has business relationships with many large
companies including those in which UBS BoD members as-
sume management or independent board responsibilities.
The nature of the relationships between UBS and companies
whose chair or chief executive is a member of UBS’s BoD is
not considered to compromise the BoD members’ capacity
for independent judgment. Furthermore, no independent
BoD member has personal business relationships with UBS
that could compromise his or her independence.
All relationships and transactions with UBS BoD members
and their affiliated companies are conducted in the ordinary
course of business and are on the same terms as those pre-
vailing at the time for comparable transactions with non-af-
filiated persons.
Checks and balances: Board of Directors and
Group Executive Board
Effective 1 July 2008, the separation of responsibilities be-
tween the BoD and executive management has been clari-
fied. The BoD has a clear strategy-setting responsibility and
will supervise and monitor the business, whereas the GEB,
headed by the Group CEO, has executive management re-
sponsibility. UBS operates under a strict dual board structure,
as mandated by Swiss banking law. The functions of Chair-
man of the BoD and Group CEO are assigned to two differ-
ent people, thus ensuring a separation of powers. This struc-
ture establishes checks and balances and preserves the
institutional independence of the BoD from the day-to-day
management of the firm, for which responsibility is delegat-
ed to the GEB under the leadership of the Group CEO. No
member of one board may be a member of the other.
Supervision and control of executive management re-
mains with the BoD. The authorities and responsibilities of
the two bodies are governed by the “Articles of Association
of UBS AG” and “Organization Regulations of UBS AG”,
including the latter document’s “Annex B - Responsibilities
and authorities”.
➔ Refer to www.ubs.com/governance for more details on
checks and balances for the BoD and GEB
Information and control instruments vis-à-vis
the Group Executive Board
The BoD is kept informed of the activities of the GEB in vari-
ous ways. The minutes of the GEB meetings are made avail-
able to the BoD members. At BoD meetings, the Group CEO
and the GEB members regularly update the BoD on impor-
tant issues.
At BoD meetings, BoD members may request from BoD
or GEB members any information about any matters con-
cerning UBS that they require to fulfill their duties. Outside
meetings, BoD members may request information from oth-
er BoD members and GEB members, in which case such re-
quests must be approved by the Chairman of the BoD.
Group Internal Audit monitors the compliance of busi-
ness activities with legal and regulatory requirements and all
internal regulations, policies and guidelines. This internal au-
dit organization, which is independent from management,
reports significant findings to the Chairman of the BoD, the
risk committee and the audit committee.
For the first time in February 2008, UBS’s internal compli-
ance function provided an annual compliance report to
the BoD. This report is required by sections 109 and 112 of
circular 08 / 24 of the Swiss Financial Market Supervisory
Authority on the supervision and internal controls at banks.
➔ Refer to the “Risk management and control” section
of this report for more information
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205
Corporate governance and compensation
Corporate governance
Group Executive Board
UBS operates under a strict dual board structure, as man-
dated by Swiss banking law. The management of the busi-
ness is delegated by the Board of Directors (BoD) to the
Group Executive Board (GEB).
Members of the Group Executive Board on
28 February 2009
The text in the boxes below provides information on the
composition of the GEB on 28 February 2009. It shows each
member’s function in UBS, nationality, year of initial appoint-
ment to the GEB, professional history and education, date of
birth and other activities and functions, such as mandates on
boards of important corporations, organizations and founda-
tions, permanent functions for important interest groups as
well as official functions and political mandates.
Changes in 2008
On 23 April 2008, Peter Kurer stepped down as Group
General Counsel (Group GC) and was replaced by Markus
U. Diethelm on 1 September 2008. In the meantime, David
Aufhauser, Neil Stocks and Bernhard Schmid acted as inter-
im co-General Counsels while Peter Kurer retained an overall
supervisory role over the team of the three General Coun-
sels. This was accepted by the Swiss Financial Market Super-
visory Authority as a transitional arrangement.
On 1 September 2008, Marco Suter stepped down as
Group Chief Financial Officer (Group CFO) and John Cryan
replaced him as Group CFO.
On 4 November 2008, Joe Scoby stepped down as Group
Chief Risk Officer (Group CRO) and Philip J. Lofts replaced
him as Group CRO.
On 12 November 2008, Marten Hoekstra assumed the
duties on an interim basis of Raoul Weil, Chairman and Chief
Executive Officer (CEO) of Global Wealth Management &
Business Banking, who relinquished his duties on that date.
Currently Raoul Weil is a member of the GEB but does not
hold a function.
Changes in 2009
Francesco Morra and Juerg Zeltner have been appointed as
CEOs of Wealth Management & Swiss Bank and as CEO Swit-
zerland and CEO Wealth Management Global, respectively.
They assumed their roles on 10 February 2009 and became
members of the GEB at this date. As CEO Switzerland, Fran-
cesco Morra will head the wealth management business for
domestic Swiss wealth management and private clients. As
CEO Wealth Management Global, Juerg Zeltner will lead all
UBS domestic wealth management businesses outside of
Switzerland and the Americas. Marten Hoekstra heads the
business division Wealth Management Americas and no lon-
ger assumes the role of deputy Chairman and CEO of Global
Wealth Management & Business Banking. Oswald J. Gruebel
was named Group CEO on 26 February 2009, replacing Marcel
Rohner who stepped down as Group CEO on that date.
Oswald J. Gruebel 1
Address
Function(s) in UBS
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Group Chief Executive
Officer
Nationality
Year of initial appointment
German
2009
1 Oswald J. Gruebel was named Group CEO on 26 February 2009,
replacing Marcel Rohner who stepped down as Group CEO on that
date.
Professional history, education and date of birth
Oswald J. Gruebel was named UBS Group Chief Executive Officer (Group CEO) on 26 February 2009.
Before joining UBS he was the CEO of Credit Suisse Group and of Credit Suisse and stepped down from
this role in May 2007. He was CEO of Credit Suisse Financial Services from 2002 to 2004 and was addi-
tionally Co-CEO of Credit Suisse Group from 2003 until 2004. Mr. Gruebel was a member of the Credit
Suisse Group Executive Board (GEB) between 1997 and 2001 and again from 2002 to 2007. From 1991
until 1997 he was member of the Executive Board of Credit Suisse, responsible for equities, fixed income,
global foreign exchange, money markets and asset/liability management in Zurich. Before that he was a
member of the GEB, Financière Credit Suisse First Boston in Zug. In 1970 Mr. Gruebel joined White Weld
Securities and became its CEO in 1978. From 1961 to 1970 he worked for Deutsche Bank AG. He was
born on 23 November 1943.
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John Cryan
Address
Function(s) in UBS
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Group Chief Financial
Officer (Group CFO)
Professional history, education and date of birth
John Cryan, formerly global head of the financial institutions group at UBS’s Investment Bank, was ap-
pointed Group CFO in September 2008. As an alumnus of Arthur Andersen & Co, Mr. Cryan joined S.G.
Warburg in London in 1987. Since 1992, he has specialized in providing strategic and financial advice to
a wide range of companies in the financial services sector globally. In recent months, he has played an
active role in advising UBS’s Board of Directors (BoD) and Group Executive Board (GEB) on issues related
to the current financial crisis. Mr. Cryan graduated in 1981 and holds an MA Hons from the University of
Cambridge. He was born on 16 December 1960.
Nationality
Year of initial appointment
British
2008
Markus U. Diethelm
Address
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBS
Group General Counsel
Nationality
Year of initial appointment
Swiss
2008
John A. Fraser
Address
Function(s) in UBS
Nationality
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Chairman and
CEO Global Asset
Management
Australian
Year of initial appointment
2002
Marten Hoekstra
Address
Function(s) in UBS
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Deputy CEO Global
Wealth Management &
Business Banking and
Head Wealth
Management US
Nationality
American (US)
Year of initial appointment
2008
Professional history, education and date of birth
Markus U. Diethelm was appointed Group General Counsel of UBS on 1 September 2008. From 1998 to
2008, he worked for Swiss Re. He started his career in 1983 with Bär & Karrer, a Zurich law firm. In 1988, he
joined Paul, Weiss, Rifkind, Wharton & Garrison in New York as a foreign associate. As of 1989, he practiced
with New York’s Shearman & Sterling, specializing in mergers and acquisitions. In 1992 he joined the Los
Angeles-based law firm Gibson, Dunn & Crutcher, focusing on corporate matters, securities transactions, liti-
gation and regulatory investigations while operating out of the firm’s Brussels and Paris offices. He joined
Swiss Re in 1998 as Group Chief Legal Officer and was appointed to its GEB effective 1 January 2007. Mr.
Diethelm holds a law degree from the University of Zurich and a Masters degree and PhD from the law
school at Stanford University. He is a qualified attorney-at-law in Switzerland and admitted to the New York
Bar. He was born on 22 October 1957.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Markus U. Diethelm is the Chairman of the legal committee of the Swiss American Chamber of
Commerce.
Professional history, education and date of birth
John A. Fraser was appointed Chairman and CEO of the Global Asset Management division in late 2001.
Prior to that, he was President and COO of UBS Asset Management and Head of Asia Pacific. In 208, he
became Chairman of UBS Saudi Arabia. From 1994 to 1998, he was Executive Chairman and CEO of The
Australia Funds Management business. Before joining UBS, Mr. Fraser spent over 20 years in various
positions at the Australian Treasury, including two international postings to Washington D.C., first, at the
International Monetary Fund and, second, as Minister (Economic) at the Australian Embassy. From 1990
to 1993, he was Deputy Secretary (Economic) of the Australian Treasury from 1990 to 1993. Mr. Fraser
graduated from Monash University in Australia in 1972 and holds a first-class honors degree in econom-
ics. He was born on 8 August 1951.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
John A. Fraser is a member of the Board of Governors of the Marymount International School at Kingston-
upon-Thames in the UK.
Professional history, education and date of birth
On 12 November 2008, Marten Hoekstra assumed the duties of Raoul Weil, as Chairman and CEO
Global Wealth Management & Business Banking, on an interim basis. He was appointed head of Wealth
Management US in July 2005 and Deputy CEO Global Wealth Management & Business Banking in
November 2007. Between 2001 and 2005, he assumed different management roles in Global Wealth
Management & Business Banking, including head of market strategy and development, and in July 2002
became a member of the Group Managing Board. Previously, from 1983 to 2000, he held various roles
with PaineWebber, including that of financial advisor. Mr. Hoekstra graduated with a BA in political
science from the University of North Dakota and received his MBA from the Kellogg Graduate School of
Management at Northwestern University. He was born on 21 May 1961.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Marten Hoekstra is a member of the BoD of Prisoner Fellowship Ministries and of the Zurich International
School Foundation, both non-profit organizations. He is also a member of the BoD of the Securities
Industry & Financial Markets Association (SIFMA).
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Corporate governance and compensation
Corporate governance
Jerker Johansson
Address
Function(s) in UBS
Nationality
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Chairman and
CEO of the UBS
Investment Bank
Swedish
Year of initial appointment
2008
Professional history, education and date of birth
Jerker Johansson joined UBS and was named Chairman and CEO of the UBS Investment Bank on
13 February 2008. Previously he was vice chairman of Morgan Stanley Europe, and a member of its
management committee. From 2005 to 2007, he was head of Morgan Stanley’s institutional equity divi-
sion. In 2005, he was also named co-head of the combined sales and trading business, consisting of the
institutional equity division and the fixed income division. In 2007, he became co-head of sales and trad-
ing with responsibility for clients and services, continuing his responsibility for prime brokerage and be-
coming solely responsible for the sales and trading side of capital markets. Mr. Johansson joined Morgan
Stanley in 1985 as a summer associate and held various positions including head of equity capital markets
Europe before being promoted in 1997 to COO, institutional equity division Europe. He was also a mem-
ber of the European management committee. From 2002 to 2005, he was head of the institutional eq-
uity division in Europe. Before joining Morgan Stanley, Mr. Johansson was part of Bankers Trust’s Graduate
Training Program, and also worked for Chase Manhattan Bank. He holds a Masters degree in economics
from Stockholm University and an MBA from Stanford. He was born on 19 May 1956.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Jerker Johansson is a member of the Stanford Business School advisory board, a trustee of Tower Hamlets
Educational Business Partnership and a Business Leader at Community Links, London.
Philip J. Lofts
Address
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Professional history, education and date of birth
Philip J. Lofts, formerly deputy Group CRO and Group risk Group chief operating officer, was appointed
Group CRO as of November 2008. He has been with UBS for over 20 years. In 2008, he became Group
risk chief operating officer after having previously been Group chief credit officer for three years. Before
this, Mr. Lofts worked for the Investment Bank in a number of business and risk control positions in
Europe, Asia Pacific and the US. He was born on 9 April 1962.
Function(s) in UBS
Group CRO
Nationality
Year of initial appointment
British
2008
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Lofts is a member of the foundation board of the University of Connecticut.
Francesco Morra
Address
Function(s) in UBS
Nationality
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
CEO Switzerland
Swiss and Italian
Year of initial appointment
2009 1
1 Appointed on 10 February 2009.
Walter H. Stuerzinger
Address
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBS
COO Corporate Center
Nationality
Year of initial appointment
Swiss
2005
Rory Tapner
Address
Function(s) in UBS
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Chairman and
CEO Asia Pacific
Nationality
Year of initial appointment
British
2006
208
Professional history, education and date of birth
Francesco Morra was appointed CEO Switzerland and became a member of the GEB in February 2009.
In November 2007, he was appointed Head of Wealth Management Western Europe, Mediterranean,
Middle East & Africa. In addition, as of September 2008, he was also responsible for the business unit
Latin America, Caribbean & Canada. Francesco Morra joined UBS in 2005 as Head of Wealth Management
Italy and as a member of the Group Managing Board. Before joining UBS, he held various management
positions at The Boston Consulting Group Inc. between 1992 and 2005. He holds a PhD in economics
from the University of St. Gallen (Switzerland). He was born on 31 August 1967.
Professional history, education and date of birth
Walter H. Stuerzinger was appointed COO Corporate Center in October 2007. Prior to that, he was
Group CRO from 2001 until 2007 and head of Group Internal Audit from 1998 until 2001. Before the
merger with SBC, he was head of Group Internal Audit at the former Union Bank of Switzerland.
Previously he worked with Credit Suisse on various assignments in the controlling and auditing areas. Mr.
Stuerzinger holds a Swiss banking diploma and is a member of the Institute of Chartered Accountants.
He was born on 6 July 1955.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Walter H. Stuerzinger is a member of the foundation board of the UBS Pension Fund.
Professional history, education and date of birth
Rory Tapner was appointed Chairman and CEO Asia Pacific in May 2004. Previously he was Joint Global
Head of Investment Banking. From 1983 to 1998 he was with S.G. Warburg and Warburg Dillon Read as
global head of equity capital markets, joint head of UK corporate finance and head of the UK capital
markets team. He was also a member of the Warburg Dillon Read executive board. Mr. Tapner has a law
degree from Kings College, London University and went to Lancaster Gate Law School. Mr. Tapner was
born on 30 September 1959.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Rory Tapner is the treasurer and Chairman of the financial committee of Council of Kings College, London
University.
Alexander Wilmot-Sitwell
Address
Function(s) in UBS
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Joint Global Head of
Investment Banking,
Chairman and CEO of
UBS Group Europe,
Middle East & Africa
Nationality
Year of initial appointment
British
2008
Robert Wolf
Address
Function(s) in UBS
Nationality
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Chairman and
CEO of UBS Group
Americas,
President of the
UBS Investment Bank
American (US)
Year of initial appointment
2008
Juerg Zeltner
Address
Function(s) in UBS
UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
CEO Wealth
Management Global
Nationality
Year of initial appointment
1 Appointed on 10 February 2009.
Swiss
2009 1
Professional history, education and date of birth
In January 2008, Alexander Wilmot-Sitwell became Joint Global Head of Investment Banking and
Chairman and CEO of UBS Group Europe, Middle East & Africa. In 2006, Mr. Wilmot-Sitwell became a
member of the Group managing board. He joined the firm in 1996 as head of corporate finance in South
Africa and moved to London in 1998 as head of UK investment banking. Prior to joining Warburg Dillon
Read, he was head of corporate finance at SBC Warburg in South Africa, SBC Warburg. Mr. Wilmot-Sitwell
graduated from Bristol University with a degree in modern history. He was born on 16 March 1961.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Alexander Wilmot-Sitwell is vice president of the “Save the Children Fund”, London.
Professional history, education and date of birth
Robert Wolf was appointed President of the UBS Investment Bank in 2007 and was COO of the UBS
Investment Bank from 2004 to 2008. Since 2006, he has also served as Chairman and CEO of UBS
Group Americas. Prior to this, Mr. Wolf served as global head of fixed income from 2002 to 2004 and
held the position of global head of credit trading, research & distribution from 1998 to 2001. He joined
the firm in 1994, after spending approximately 10 years at Salomon Brothers in fixed income. Mr. Wolf
graduated from the Wharton School at the University of Pennsylvania with a Bachelors of Science in
economics in 1984. He was born on 8 March 1962.
Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Robert Wolf is a member of the undergraduate executive board of Wharton School, of the athletics board
of overseers of UPENN and of the Financial Services Round Table. Mr. Wolf is a member of the Council
on Foreign Relations and of the committee encouraging corporate philanthropy. He is in the executive
leadership council of the Multiple Myeloma Research Foundation, Norwalk, CT, and on the board of
trustees of the Children’s Aid Society, New York.
Professional history, education and date of birth
Juerg Zeltner was appointed CEO Wealth Management Global and became a member of the GEB in
February 2009. In November 2007, he was appointed Head of Wealth Management North, East &
Central Europe and became a member of the Group Managing Board in the same year. From 2005 to
2008, he was CEO of UBS Deutschland AG, Frankfurt and became CEO of all UBS business in Benelux,
Germany and Central Europe in 2007. Prior to that, he held various management positions in the Private
Banking Division of UBS. Between 1987 and 1998, Juerg Zeltner was with SBC in various roles within
the Private and Corporate Client Division in Bern, New York and Zurich. He graduated from the School of
Economics and Business Administration in Bern and completed the Advanced Management Program at
Harvard Business School. He was born on 4 May 1967.
Establishment of the Executive Committee
Responsibilities, authorities and organizational
principles of the GEB
The Executive Committee (EC) was established on 1 Janu-
ary 2009. The EC consists of the Group CEO, the Group
CFO, the Group CRO and the Group GC. Under the leader-
ship of the Group CEO, the EC is responsible for the alloca-
tion of the UBS Group’s financial resources to the business
divisions – i.e. the capital, the terms and availability of
funding and the risk capacity and parameters, in each case
within the limits set by the BoD. Additionally, the EC sets
the performance targets of the business divisions and then
monitors and evaluates them. Under the auspices of the
Group CEO, the EC prepares proposals for approval by the
BoD and supports the BoD in its decision-making process.
The EC has overall responsibility for implementing UBS’s
risk management and control principles, allocating risk ca-
pacity to the business divisions and controlling the firm’s
overall risk profile.
Under the leadership of the Group CEO, the GEB has executive
management responsibility for the Group and its business. The
GEB assumes overall responsibility for the development and
implementation of strategies for the Group and business divi-
sions. The GEB, in particular the Group CEO, is responsible for
the implementation and results of the firm’s business strate-
gies. The GEB plays a key role in defining the human resources
policy and the compensation principles of the Group.
➔ Refer to the “Organization Regulations of UBS AG”, which
are available at www.ubs.com/governance, for more
information on the authorities of the GEB
Management contracts
UBS has not entered into management contracts with any
third parties.
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Corporate governance and compensation
Corporate governance
Senior leadership
The Group Managing Board (GMB) comprises members of
business division and Corporate Center management and
individuals assuming special Group functions. In the first half
of 2009, the GMB will be dissolved and replaced by a new
group of senior leaders reflecting the responsibilities at
Group, divisional and regional levels.
210
Shareholders’ participation rights
UBS is committed to shareholder participation in its decision-
making process and aims to make such participation as easy
as possible. More than 300,000 directly registered share-
holders, as well as some 90,000 US shareholders registered
via nominee companies, regularly receive written informa-
tion about the firm’s activities and performance and are per-
sonally invited to shareholder meetings. Refer to the “Infor-
mation policy” section of this report for further information
on these documents.
Relationships with shareholders
UBS fully subscribes to the principle of equal treatment of all
shareholders, who range from large investment institutions
to individual investors, and regularly informs them about the
development of the company of which they are co-owners.
The annual general meeting (AGM) offers shareholders
the opportunity to raise any questions regarding the devel-
opment of the company and the events of the year under
review. Members of the Board of Directors (BoD) and Group
Executive Board (GEB), as well as the internal and external
auditors, are present to answer these questions.
Voting rights, restrictions and representation
UBS places no restrictions on share ownership and voting
rights. Nominee companies and trustees, which normally
represent a large number of individual shareholders, may
hold an unlimited number of shares, but voting rights are
limited to a maximum of 5% of outstanding UBS shares in
order to avoid the risk of unknown shareholders with large
stakes being entered in the share register. Securities clearing
organizations, such as The Depository Trust Company in
New York, are not subject to the 5% voting limit.
In order to be recorded in the share register with voting
rights, shareholders must confirm that they acquired UBS
shares in their own name and for their own account. Nomi-
nee companies and trustees are required to sign an agree-
ment with UBS confirming their willingness to disclose to the
company, upon its request, individual beneficial owners
holding more than 0.3% of all issued shares.
All shareholders registered with voting rights are entitled
to participate in shareholder meetings. If they do not wish to
attend in person, they can issue instructions to accept, reject
or abstain on each individual item on the meeting agenda
either by giving instructions to an independent proxy desig-
nated by UBS (as required under Swiss company law) or by
appointing UBS, another bank or another registered share-
holder of their choice to vote on their behalf. Nominee com-
panies normally submit the proxy material to the beneficial
owners and transmit the collected votes to UBS.
Statutory quorums
Shareholder resolutions, the election and re-election of
members of the BoD and the appointment of the Group
and statutory auditors are decided at the AGM by an abso-
lute majority of the votes cast, excluding blank and invalid
ballots. Swiss company law requires that for certain specific
issues a majority of two-thirds of the votes represented at
the meeting vote in favor of the resolution. These issues in-
clude, among others, the introduction of voting shares, the
introduction of restrictions on the transferability of regis-
tered shares, conditional and authorized capital increases,
and restrictions or exclusion of shareholders’ pre-emptive
rights.
The “Articles of Association of UBS AG” also require a
two-thirds majority of votes represented for any change to
its provisions regarding the number of BoD members and
any decision to remove one-fourth or more of the members
of the BoD.
Votes and elections are normally conducted electronically
to ascertain clearly the exact number of votes cast. Voting by
a show of hands remains possible if a clear majority is pre-
dictable. Shareholders representing at least 3% of the votes
represented may still request, however, that a vote or elec-
tion take place electronically or by written ballot. In order to
allow shareholders to clearly express their views on all indi-
vidual topics, each item on the agenda is put to vote sepa-
rately and BoD elections are made on a person-by-person
basis.
Convocation of general meetings of shareholders
The AGM normally takes place in April each year, but in any
case within six months of the close of the financial year. A
personal invitation including a detailed agenda and explana-
tion of each motion is sent to every registered shareholder at
least 20 days ahead of the scheduled meeting. The meeting
agenda is also published in various Swiss and international
newspapers and on the internet at www.ubs.com/agm.
Extraordinary general meetings (EGMs) may be convened
whenever the BoD or the statutory auditors consider it nec-
essary. Shareholders individually or jointly representing at
least 10% of the share capital may, at any time, ask in writ-
ing that an EGM be convened to deal with a specific issue
put forward by them. Such a request may also be brought
forward during the AGM.
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Corporate governance and compensation
Corporate governance
Placing of items on the agenda
mulates an opinion on the proposals, which is published to-
gether with the motions.
Shareholders individually or jointly representing shares with
an aggregate par value of CHF 62,500 may submit proposals
for matters to be placed on the agenda for consideration at
the shareholders’ meeting.
UBS publishes the deadline for submitting such proposals
in the Swiss Official Gazette of Commerce and on its website
(www.ubs.com/agm). Requests for items to be placed on the
agenda must include the actual motions to be put forward,
together with a short explanation, if necessary. The BoD for-
Registrations in the share register
The general rules for being entered with voting rights in the
Swiss or US share registers of UBS also apply before general
meetings of shareholders. There is no “closing of the share reg-
ister” in the days ahead of the meeting. Registrations, including
the transfer of voting rights, are processed for as long as techni-
cally possible, normally until two days before the meeting.
212
Change of control and defense measures
UBS refrains from restrictions that would hinder develop-
ments initiated in or supported by the financial markets. It
also does not have any specific defenses in place to prevent
hostile takeovers.
Duty to make an offer
An investor who acquires more than 33 1⁄3% of all voting
rights (directly, indirectly or in concert with third parties),
whether they are exercisable or not, has to submit a take-
over offer for all shares outstanding, according to Swiss
stock exchange law. UBS has not elected to change or opt
out of this rule.
Clauses on changes of control
The service agreements and employment contracts of the
Chairman of the Board of Directors (BoD) and of the mem-
bers of the Group Executive Board (GEB) and the Group
Managing Board (GMB) do not generally contain clauses
triggered by a change of control. For 2008, employment
contracts contain employment notice periods of 12 months
for GEB members and six to 12 months for GMB members,
depending on local market practice. From 2009, employ-
ment contracts for GEB members will have a reduced notice
period of six months. During this notice period they are en-
titled to salary and pro rata discretionary incentive awards.
The human resources and compensation committee of
the BoD may, however, accelerate the vesting of restricted
shares and amend the vesting date or lapse date of options
for all employees in case of a change of control.
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Corporate governance and compensation
Corporate governance
Auditors
Audit is an integral part of corporate governance. While retain-
ing their independence, the external auditors and Group Inter-
nal Audit closely coordinate their work. The risk committee, the
audit committee and ultimately the Board of Directors (BoD)
supervise the adequacy of audit work.
External, independent auditors
At the annual general meeting (AGM) in 2008, Ernst & Young
Ltd., Basel, (Ernst & Young) were re-elected as auditors for
the UBS Group (Group) for a further one-year term of office.
Ernst & Young assume all auditing functions according to
laws, regulatory requests and the “Articles of Association of
UBS AG”. The Ernst & Young lead partners in charge of the
UBS audit are Andrew McIntyre and Andreas Blumer (since
2005 and 2004, respectively). Ernst & Young will be proposed
for re-election at the AGM in 2009.
At the AGM in 2006, BDO Visura, Zurich, was appointed
as special auditor for a three-year term of office. The special
auditors provide audit opinions in connection with capital
increases independently from the Group auditors. BDO Vi-
sura will be proposed for re-election at the AGM in 2009.
Fees paid to external independent auditors
The fees (including expenses) paid by UBS to its auditors are
listed in the following table. In addition, Ernst & Young re-
ceived CHF 31,561,000 in 2008 (CHF 31,050,000 in 2007)
for audit and tax work performed on behalf of UBS invest-
ment funds, many of which have independent fund boards
or trustees.
Audit work includes all services necessary to perform the
audit in accordance with applicable laws and generally ac-
cepted auditing principles as well as other assurance ser-
vices that generally only the principal auditor can provide.
This includes statutory and regulatory audits, attest servic-
es, and reviews of documents to be filed with regulatory
bodies.
Audit-related work comprises assurance and related ser-
vices that are traditionally performed by the principal audi-
tors, such as letters of comfort, internal control reviews, at-
testation services related to financial reporting, consultation
concerning financial accounting and reporting standards as
well as investment performance reports.
Tax work performed by Ernst & Young’s tax division
encompasses routine preparation of draft original and
amended tax returns, general tax planning and advice on tax
compliance matters.
Other services are approved on an exceptional basis only.
In 2007 and 2008, they mainly comprised on-call advisory
services.
Pre-approval procedures and policies
To ensure their independence, all services provided by Ernst
& Young have to be pre-approved by the audit committee of
the BoD. A pre-approval may be granted either for a specific
mandate or in the form of a general pre-approval authoriz-
ing a limited and well-defined type and amount of services.
The audit committee has delegated pre-approval authority
to its chair; hence the Group Chief Financial Officer submits
all proposals for services by Ernst & Young to the chair of the
Fees paid to external auditors
UBS paid the following fees (including expenses) to its external auditors Ernst & Young Ltd.:
In CHF thousand
Audit
Global audit fees
Additional services classified as audit (services required by law or statute,
including work of a non-recurring nature mandated by regulators)
Total audit
Non-audit
Audit-related fees
Tax advisory
Other
Total non-audit
214
For the year ended
31.12.08
31.12.07
45,848
9,918
55,766
8,430
504
1,246
10,180
49,000
12,718
61,718
9,779
1,892
1,699
13,370
audit committee for approval. At each quarterly meeting, the
committee is informed of the approvals granted by its chair.
Group Internal Audit
With 331 staff members worldwide at 31 December 2008,
Group Internal Audit supports the BoD and its committees by
independently assessing the effectiveness of UBS’s system of
internal controls and the firm’s compliance with statutory, le-
gal and regulatory requirements. All key issues raised by
Group Internal Audit are communicated to the management
responsible, to the Group Chief Executive Officer (Group CEO)
and to the Chairman of the BoD via formal audit reports. In
addition, the BoD’s risk and audit committees are regularly
informed about important issues. Group Internal Audit closely
cooperates with internal and external legal advisors and risk
control units on investigations into major control issues.
To maximize its independence from management, the
head of Group Internal Audit, Ian Overton, reports directly to
the Chairman of the BoD and to the risk committee. Group
Internal Audit has unrestricted access to all accounts, books
and records and must be provided with all information and
data needed to fulfill its auditing duties. The risk committee
may order special audits to be conducted. BoD members,
BoD committees or the Group CEO may submit requests for
such audits to the risk committee.
Coordination and close cooperation with the auditors en-
hance the efficiency of Group Internal Audit’s work.
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215
Corporate governance and compensation
Corporate governance
Information policy
UBS provides regular information to its shareholders and to
the financial community.
Financial results will be published as follows
First quarter
Second quarter
Third quarter
Fourth quarter
5 May 2009
4 August 2009
3 November 2009
9 February 2010
The annual general meeting of shareholders will take
place as follows
2009
2010
15 April 2009
14 April 2010
UBS meets with institutional investors worldwide throughout
the year. It regularly holds results presentations, special inves-
tor seminars, road shows, individual and group meetings.
Where possible, meetings involve senior management as well
as members of the investor relations team. UBS makes use of
diverse technologies such as webcasting, audio links and
cross-location video-conferencing to widen its audience and
maintain contact with shareholders around the world.
Once a year, unless they explicitly choose not to, registered
shareholders receive a summary of UBS’s annual report in the
form of an annual review. It provides an overview of the firm
and its activities during the year as well as key financial infor-
mation. Each quarter, shareholders are mailed a brief update
on the firm’s quarterly financial performance. Shareholders
can also request UBS’s complete financial reports, produced
on a quarterly and annual basis, free of charge.
To ensure fair access to and dissemination of its financial
information, UBS makes its publications available to all
shareholders at the same time.
➔ Refer to www.ubs.com/investors for a complete set of
published reporting documents, access to recent webcasts
and a selection of senior management industry conference
presentations
Financial disclosure principles
Based on discussions with analysts and investors, UBS be-
lieves that the market rewards companies that provide clear,
consistent and informative disclosure about their business.
Therefore, UBS aims to communicate its strategy and results
in a manner that allows shareholders and investors to gain a
full and accurate understanding of how the company works,
what its growth prospects are and what risks the strategy
and results might entail. Feedback from analysts and inves-
tors is continually assessed and, where relevant, reflected in
the firm’s quarterly and annual reports. To continue to
achieve these goals, UBS applies the following principles in
its financial reporting and disclosure:
– Transparency in disclosure enhances understanding of the
economic drivers and, as with the provision of detailed
business results, builds trust and credibility.
– Consistency in disclosure within each reporting period
and between reporting periods.
– Simplicity in disclosure allows readers to gain the appro-
priate level of understanding of the performance of the
firm’s businesses.
– Relevance in disclosure avoids information overload by
focusing on what is relevant to UBS’s stakeholders or re-
quired by regulation or statute.
– Best practice in line with industry norms, leading the way
to improved standards where possible.
Financial reporting policies
UBS reports its results after the end of every quarter, includ-
ing a breakdown of results by business divisions and exten-
sive disclosures relating to credit and market risk.
UBS’s financial statements are prepared according to In-
ternational Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board. Refer to
“Note 1 Summary of significant accounting policies” in the
financial statements of this report for a detailed explanation
of the basis of UBS’s accounting.
UBS is committed to maintaining the transparency of its
reported results and to ensuring that analysts and investors
can make meaningful comparisons with previous periods. If
there is a major reorganization of its business divisions, or if
changes to accounting standards or interpretations lead to a
material change in the Group’s reported results, UBS’s results
are restated for previous periods when required by applica-
ble accounting standards to show how they would have
been reported according to the new basis and provide clear
explanations of all relevant changes. Prior to publication of
first quarter 2009 results, UBS will publish restated business
division results on www.ubs.com/investors showing quarter-
ly and annual results for 2007 and 2008 under the new or-
ganizational structure announced on 10 February 2009.
US regulatory disclosure requirements
As a reporting company under the US federal securities laws
(a foreign private issuer), UBS must file or submit certain re-
ports and other information, including certain financial re-
216
In accordance with Section 404 of the US Sarbanes-Oxley
Act of 2002, the management of UBS is responsible for es-
tablishing and maintaining adequate internal control over
financial reporting. The financial statements of this report
contain management’s assessment of the effectiveness of in-
ternal control over financial reporting as of the time of the
report’s publication. The external auditors’ report on this as-
sessment is also included.
ports, with the US Securities and Exchange Commission
(SEC). UBS files an annual report on Form 20-F with the SEC,
and submits to the SEC its quarterly financial reporting un-
der cover of Form 6-K.
As of the end of the period covered by this annual report,
an evaluation was carried out under the supervision of man-
agement, including the Group Chief Executive Officer (CEO)
and Group Chief Financial Officer (CFO), of the effectiveness
of UBS’s disclosure controls and procedures (as defined in
Rule 13a–15e) under the US Securities Exchange Act of
1934. Based upon that evaluation, the Group CEO and
Group CFO concluded that these disclosure controls and
procedures were effective as of the end of the period cov-
ered by this annual report. No significant changes were
made in UBS’s internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.
➔ These reports and filings, as well as materials sent
to shareholders in connection with annual and
extraordinary general meetings, are all available at
www.ubs.com/investors
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Corporate governance and compensation
Corporate governance
Regulation and supervision
As a Swiss-registered company, UBS’s home country regula-
tor is the Swiss Financial Market Supervisory Authority (FIN-
MA). However, UBS’s operations are global and are therefore
regulated and supervised by the relevant authorities in each
of the jurisdictions in which it conducts business. This section
describes the regulation and supervision of UBS’s business in
Switzerland, the firm’s home market. The regulatory and su-
pervisory environments in the US and the UK, UBS’s next two
largest areas of operations, are also discussed.
Regulation and supervision in Switzerland
FINMA, the successor organization of the Swiss Federal Bank-
ing Commission (SFBC), commenced operations on 1 January
2009. On that date, the Federal Act on the Swiss Financial Mar-
ket Supervisory Authority, which the Swiss Parliament approved
on 22 June 2007, went into full legal force. The effect of the
Act is to merge three bodies – the Swiss Federal Banking Com-
mission (SFBC), the Federal Office of Private Insurance, and the
Anti-Money Laundering Control Authority – into FINMA. In ad-
dition to a new organizational framework which will also im-
pact supervisory activity, the Act streamlines and harmonizes
the sanctions regime applicable to financial institutions.
Swiss federal legislation
The legislation most relevant to UBS is that enacted by the
Swiss Parliament and the Swiss Federal Council.
In this respect, UBS is regulated by the Swiss Federal Law
relating to Banks and Savings Banks of 8 November 1934,
as amended, and the related Implementing Ordinance of
17 May 1972, as amended, which are together known as the
Federal Banking Law. Depending on the license obtained un-
der this law, banks in Switzerland may engage in a full range
of financial services activities, including commercial banking,
investment banking and asset management. Banking groups
may also engage in insurance activities, but these must be
undertaken through a separate subsidiary. The Federal Bank-
ing Law establishes a framework for supervision by FINMA.
Switzerland implemented the internationally agreed capi-
tal adequacy rules of the Basel Capital Accord (Basel II) by
means of the Capital Adequacy Ordinance of 29 September
2006 and subsequent FINMA circulars. Switzerland imposes
a more differentiated and tighter regime than the interna-
tionally agreed rules, including more stringent risk weights.
➔ Refer to the “Capital management” section of this report
for more details about capital requirements
requirements issued at the end of 2008 increased the risk-based
buffer and complemented it with a leverage ratio requirement,
i.e. a minimum ratio of capital and balance sheet.
The Federal Act of 10 October 1997 on the Prevention of
Money Laundering in the Financial Sector (Anti-Money Laun-
dering Act, AMLA) lays down a common standard for due
diligence obligations for the whole financial sector which
must be met in order to prevent money laundering.
In its capacity as a securities broker, UBS is governed by
the Swiss Federal Law on Stock Exchanges and Securities
Trading of 24 March 1995, as amended. FINMA is the com-
petent supervisory authority.
Regulation by FINMA
FINMA is strongly involved in the shaping of the legislative frame-
work for banks, especially through the following mechanisms:
– First, FINMA has substantial influence on the drafting of
Swiss federal legislation (for example, the specific ordi-
nance concerning the prevention of money laundering of
18 December 2002, as amended).
– On a more technical level, FINMA is empowered to issue
circulars, 44 of which are presently effective. These in-
clude, for example, FINMA circular 08 / 38 on market be-
havior and FINMA circular 08 / 24 on supervision and in-
ternal controls at banks.
Self-regulation by the SIX Swiss Exchange and the Swiss
Bankers Association
Certain aspects of securities brokering, such as the organi-
zation of trading, are subject to self-regulation through the
SIX Swiss Exchange (SIX), under the overall supervision of
FINMA. Examples are:
– the Listing Regulations of 24 January 1996, as amended,
and the General Conditions dated 7 September 2007 (the
Listing Regulations are currently under review and amend-
ments may go into force on 1 July 2009); and
– the Directive on the Disclosure of Management Trans-
actions of 1 July 2005.
FINMA also officially endorses self-regulatory guidelines
issued by the banking industry (through the Swiss Bankers
Association), making them an integral part of banking regu-
lation. Examples are:
– Agreement on the Swiss banks’ code of conduct with re-
gard to the exercise of due diligence, 2008.
– Directives on the independence of financial research, 2008.
– Guidelines on the simplified prospectus for structured
products, 2007.
Capital requirements for the two large banks, UBS and Cred-
it Suisse, exceed the Swiss minimum due to a mandatory capital
buffer under Pillar 2 of Basel II. The revised decree on capital
– Agreement of Swiss Banks on Deposit Insurance, 2005.
– Guidelines on the handling of dormant accounts, custody
accounts and safe-deposit boxes held in Swiss banks, 2000.
218
Two-tier system of supervision and direct supervision of UBS
and Credit Suisse
Generally, supervision in Switzerland is based on a division of
tasks between FINMA and a number of authorized audit
firms. Under this two-tier supervisory system, FINMA has the
responsibility for overall supervision and enforcement mea-
sures while the authorized audit firms carry out official du-
ties on behalf of and subject to sanctions imposed by FIN-
MA. The responsibility of external auditors encompasses the
audit of financial statements, the reviewing of banks’ com-
pliance with all prudential requirements and on-site audits.
Due to their major role in the Swiss financial system,
FINMA subjects UBS and Credit Suisse to its direct supervi-
sion. The regime of direct supervision is regulated by the
FINMA 08 / 9 circular on the supervision of large banking
groups. Supervisory tools include an intensive schedule of
meetings with bank management and provision of manage-
ment information encompassing all control and business
areas, direct audits (on-site examinations), on-site visits to
the banks’ operations in foreign jurisdictions and coordinat-
ed action and exchange with important host supervisors.
FINMA assigns to each of the two large banking groups a
team responsible for monitoring their risk situation on an
ongoing basis. The analyses produced by these supervisory
teams are combined and supplemented with those of two
cross-institutional specialist groups focusing on specific as-
pects of investment banking, wealth management and asset
management.
Disclosures to the Swiss National Bank
While Switzerland’s banks are primarily supervised by FINMA,
compliance with liquidity rules is monitored by the Swiss
National Bank (SNB). The SNB also takes a direct interest in
the stress testing practice of both big banks. Liquidity regula-
tion is currently being reformed.
Regulation and supervision in the US
Banking regulation
UBS’s operations in the US are subject to a variety of regula-
tory regimes. It maintains branches in California, Connecti-
cut, Illinois, New York and Florida. UBS’s branches located in
California, New York and Florida are federally licensed by the
Office of the Comptroller of the Currency. US branches lo-
cated in Connecticut and Illinois are licensed by the state
banking authority of the state in which the branch is located.
Each US branch is subject to regulation and examination by
its licensing authority. UBS also maintains state and federally
chartered trust companies and other limited purpose banks,
which are regulated by state regulators or the Office of the
Comptroller of the Currency. In addition, the Board of Gov-
ernors of the Federal Reserve System exercises examination
and regulatory authority over UBS’s state-licensed US branch-
es. Only the deposits of UBS’s subsidiary bank located in the
state of Utah are insured by the Federal Deposit Insurance
Corporation. The regulation of the firm’s US branches and
subsidiaries imposes restrictions on the activities of those
branches and subsidiaries, as well as prudential restrictions,
such as limits on extensions of credit to a single borrower,
including UBS subsidiaries and affiliates.
The licensing authority of each US branch has the author-
ity, in certain circumstances, to take possession of the busi-
ness and property of UBS located in the state of the office it
licenses. Such circumstances generally include violations of
law, unsafe business practices and insolvency. As long as
UBS maintains one or more federal branches, the Office of
the Comptroller of the Currency also has the authority to
take possession of the US operations of UBS AG under simi-
lar circumstances, and this federal power may pre-empt the
state insolvency regimes that would otherwise be applicable
to UBS’s state-licensed branches. As a result, if the Office of
the Comptroller of the Currency exercised its authority over
the US branches of UBS AG pursuant to federal law in the
event of a UBS insolvency, all of UBS’s US assets would most
likely be applied first to satisfy creditors of its US branches as
a group, and then made available for application pursuant to
any Swiss insolvency proceeding.
In addition to the direct regulation of its US banking of-
fices, UBS is subjected to oversight regulation by the Board
of Governors of the Federal Reserve System under various
laws (including the International Banking Act of 1978 and
the Bank Holding Company Act of 1956) because it operates
US branches. On 10 April 2000, UBS AG was designated a
“financial holding company” under the Bank Holding Com-
pany Act of 1956. Financial holding companies may engage
in a broader spectrum of activities than bank holding com-
panies or foreign banking organizations that are not finan-
cial holding companies, including underwriting and dealing
in securities. To maintain its financial holding company sta-
tus, (1) UBS, its US subsidiary federally chartered trust com-
pany and its US subsidiary bank located in Utah are required
to meet certain capital ratios, (2) UBS’s US branches, its US
subsidiary federally chartered trust company, and its US sub-
sidiary bank located in Utah are required to meet certain ex-
amination ratings, and (3) UBS’s subsidiary bank in Utah is
required to maintain a rating of at least “satisfactory” unter
the Community Reinvestment Act of 1997. A major focus of
US governmental policy relating to financial institutions in
recent years has been aimed at fighting money laundering
and terrorist financing. Regulations applicable to UBS and its
subsidiaries impose obligations to maintain appropriate poli-
cies, procedures and controls to detect, prevent and report
money laundering and terrorist financing and to verify the
identity of their customers. Failure of a financial institution to
maintain and implement adequate programs to combat
money laundering and terrorist financing could have serious
consequences for the firm, both in legal terms and in terms
of its reputation.
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Corporate governance
US regulation of other US operations
In the US, UBS Securities LLC and UBS Financial Services Inc.,
as well as UBS’s other US-registered broker-dealer entities,
are subject to regulations that cover all aspects of the securi-
ties business, including: sales methods; trade practices
among broker-dealers; use and safekeeping of customers’
funds and securities; capital structure; record-keeping; the
financing of customers’ purchases; and the conduct of direc-
tors, officers and employees.
These entities are regulated by a number of different gov-
ernment agencies and self-regulatory organizations, includ-
ing the Securities and Exchange Commission (SEC) and the
Financial Industry Regulatory Authority (FINRA). Depending
upon the specific nature of a broker-dealer’s business, it may
also be regulated by some or all of the New York Stock Ex-
change (NYSE), the Municipal Securities Rulemaking Board,
the US Department of the Treasury, the Commodities Futures
Trading Commission and other exchanges of which it may
be a member. In addition, the US states, provinces and ter-
ritories have local securities commissions that regulate and
monitor activities in the interest of investor protection. These
regulators have a variety of sanctions available, including the
authority to conduct administrative proceedings that can re-
sult in censure, fines, the issuance of cease-and-desist orders
or the suspension or expulsion of the broker-dealer or its di-
rectors, officers or employees.
Created in July 2007 through the consolidation of the Na-
tional Association of Securities Dealers (NASD) and the mem-
ber regulation, enforcement and arbitration functions of the
NYSE, FINRA is dedicated to investor protection and market
integrity through effective and efficient regulation and com-
plementary compliance and technology-based services.
FINRA covers a broad spectrum of securities businesses, in-
cluding: registering and educating industry participants; exam-
ining securities firms; writing rules; enforcing those rules and
the federal securities laws; informing and educating the invest-
ing public; providing trade reporting and other industry utili-
ties; and administering a dispute resolution forum for investors
and registered firms. It also performs market regulation under
contract for the NASDAQ Stock Market, the American Stock
Exchange and the Chicago Climate Exchange.
Regulation and supervision in the UK
UBS’s operations in the UK are regulated by the Financial
Services Authority (FSA), which establishes a regime of rules
and guidance governing all relevant aspects of financial ser-
vices businesses.
The FSA has established a risk-based approach to supervi-
sion and has a wide variety of supervisory tools available to
it, including regular risk assessments, on-site inspections
(which may relate to an industry-wide theme or be firm-spe-
cific) and the ability to commission reports by skilled persons
(who may be the firm’s auditors, IT specialists, lawyers or
other consultants as appropriate). The FSA also has an ex-
tremely wide set of sanctions which it may impose under the
Financial Services and Markets Act 2000, broadly similar to
those available to US regulators.
Some of UBS’s subsidiaries and affiliates are also regulat-
ed by the London Stock Exchange and other UK securities
and commodities exchanges of which UBS is a member. The
business is also subject to the requirements of the UK Panel
on Takeovers and Mergers where relevant.
Financial services regulation in the UK is conducted in ac-
cordance with European Union directives which require,
among other things, compliance with certain capital ade-
quacy standards, customer protection requirements and
conduct of business rules (such as MiFID). These directives
apply throughout the European Union and are reflected in
the regulatory regimes of the various member states. The
standards, rules and requirements established under these
directives are broadly comparable in scope and purpose to
the regulatory capital and customer protection requirements
imposed under applicable US law.
220
Compliance with New York Stock Exchange listing standards
on corporate governance
As a Swiss company listed on the New York Stock Exchange
(NYSE), UBS complies with the NYSE corporate governance
standards for foreign private issuers. In addition, UBS has
voluntarily adopted the majority of NYSE governance rules
for US companies.
Independence of directors
Based on the listing standards of the NYSE, UBS’s BoD has es-
tablished specific criteria for defining the independence of its
external members. Each external director has to personally
confirm his or her compliance with the criteria, which are pub-
lished on the firm’s website under www.ubs.com/governance.
All current external members have been confirmed by the
BoD as having no material relationship with UBS, either directly
or as a partner, controlling shareholder or executive officer of a
company that has a relationship with UBS. These members are:
Ernesto Bertarelli, Sally Bott, Rainer-Marc Frey, Bruno Gehrig,
Gabrielle Kaufmann-Kohler, Sergio Marchionne, Helmut Panke,
William G. Parrett, David Sidwell, Peter R. Voser and Joerg
Wolle. Each of them has also met all other BoD and NYSE re-
quirements with respect to independence, with the exception
of Ernesto Bertarelli. He does not satisfy one of the indepen-
dence requirements because UBS holds the basic sponsorship
rights to Team Alinghi and Ernesto Bertarelli is the owner of
Team Alinghi SA. Otherwise he fully satisfies the NYSE indepen-
dence requirements. The BoD considers that UBS’s compensa-
tion for these basic sponsorship rights to Team Alinghi does not
impair Ernesto Bertarelli’s independence in any way.
The NYSE has more stringent independence requirements
for members of audit committees. All three members of
UBS’s audit committee are external BoD members who, in
addition to satisfying the above criteria, do not: receive, di-
rectly or indirectly, any consulting, advisory or other compen-
satory fees from UBS other than in their capacity as directors;
hold, directly or indirectly, UBS shares in excess of 5% of the
outstanding capital; or serve on the audit committees of
more than two other public companies. These members are
Peter R. Voser, William G. Parrett and Bruno Gehrig and all
three have been determined by the BoD as financially literate
and “financial experts” according to the definitions estab-
lished by the US Sarbanes-Oxley Act of 2002. The NYSE
guidelines allow for an exemption for audit committee mem-
bers to sit on more than three audit committees, provided
that all members of the BoD determine that the candidate
has the time and the availability to fulfill his or her obliga-
tions. Considering the credentials of William G. Parrett, and
the fact that he has retired from his executive functions, the
BoD granted this exemption.
Board of Directors and its committees
UBS operates under a strict dual board structure mandated
by Swiss banking law. No member of the Group Executive
Board (GEB) may also be a member of the BoD and vice versa.
This structure ensures the institutional independence of the
entire BoD from the day-to-day management. UBS has estab-
lished committees for the following BoD mandates: audit;
human resources and compensation; governance and nomi-
nating; risk; strategy and corporate responsibility. Refer to
the “Board of Directors” section of this report for further in-
formation on these committees – including their mandates,
responsibilities and authorities – as well as their activities dur-
ing 2008. In addition, the BoD elects at least one vice chair-
man who must be independent and who acts as the senior
independent director. Sergio Marchionne has assumed this
role. The BoD may elect another vice chairman who need not
be independent, but has not done so at this time. More
details about the vice chairman function can be found in the
“Organization Regulations of UBS AG” and its annexes,
which are published on www.ubs.com/governance.
The BoD has adopted organization regulations that consti-
tute UBS’s corporate governance guidelines, which include all
matters required by the NYSE rules. The BoD has also adopted
a “Code of Business Conduct and Ethics” with an addendum
for principal executive, financial and accounting officers or
controllers, as required by the US Sarbanes-Oxley Act. Both the
organization regulations and the “Code of Business Conduct
and Ethics” are available on the UBS website at www.ubs.
com/governance. In addition, the audit committee has estab-
lished rules for the handling of complaints related to accounting
and auditing matters in addition to the internal policies on
“Whistleblowing Protection for Employees” and on “Compli-
ance with Attorney Standards of Professional Conduct”.
Differences from corporate governance standards
relevant to US listed companies
According to the NYSE listing standards on corporate gover-
nance, foreign private issuers have to disclose any significant
ways in which their corporate governance practices differ
from those to be followed by domestic companies.
Responsibility of the audit committee for appointment,
compensation, retention and oversight of the independent
auditors
UBS’s audit committee has been assigned all the abovemen-
tioned responsibilities, except for appointment of the inde-
pendent auditors, which is required to be voted upon by
shareholders as per Swiss company law. The audit commit-
221
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Compensation, shareholdings and loans
tee assesses the performance and qualification of the exter-
nal auditors and submits its proposal for appointment, re-
appointment or removal to the full BoD, which brings this
proposal to the shareholders for vote at annual general
meetings (AGM).
Discussion of risk assessment and risk management policies
by the audit committee
In accordance with UBS’s organization regulations, the BoD
risk committee has the authority to define the firm’s risk
principles and risk capacity. The committee is responsible for
monitoring UBS’s adherence to those risk principles and for
monitoring whether business and control units run appropri-
ate systems for the management and control of risks.
Assistance by audit committee of the internal audit function
Both the Chairman and risk committee of the BoD have the
responsibility for and authority to supervise the internal audit
function.
Responsibility of the human resources and compensation
committee for oversight of management and evaluation
by the Board of Directors
Performance evaluations of UBS’s senior management, com-
prising the Group Chief Executive Officer and the members of
the GEB, are completed by the Chairman of the BoD and the
human resources and compensation committee and reported
to the full BoD. All BoD committees perform a self-assessment
of their activities and report back to the full BoD. The BoD has
direct responsibility and authority to evaluate its own perfor-
mance, without preparation by a BoD committee.
Proxy statement reports of the audit and human resources
and compensation committees
Under Swiss company law, all reports addressed to share-
holders are provided and signed by the full BoD, which has
ultimate responsibility vis-à-vis shareholders. The commit-
tees submit their reports to the full BoD.
Shareholders’ votes on equity compensation plans
Swiss company law authorizes the BoD to approve compen-
sation plans. Though Swiss law does not allocate such au-
thority to the AGM, it requires that Swiss companies deter-
mine capital in their articles of association and therefore
each increase of capital is required to be submitted for share-
holders’ approval. This means that, if equity-based compen-
sation plans result in a need for a capital increase, AGM ap-
proval is mandatory. If, however, shares for such plans are
purchased in the market, shareholders do not have the au-
thority to vote on their approval.
222
Compensation, shareholdings and loans
The principles of compensation for UBS senior executives are designed to align their interests with those
of shareholders – the creation of long-term value and sustainable shareholder returns. These principles are
established by the human resources and compensation committee of the Board of Directors.
Letter from the human resources and compensation
committee of the Board of Directors
Dear shareholders,
The global financial services industry is
facing challenges of a magnitude not
seen for decades. These challenges had
a clear and widespread impact on the
industry in 2008 and UBS and its peers
were no exception. Executive compen-
sation is always a high-profile issue
and, during 2008, this was debated by
the public, media and regulators to a
greater extent than ever before.
During 2008, UBS was very proactive in
addressing the current issues surround-
ing executive compensation. The UBS
Board of Directors (BoD) established a
new human resources and compensa-
tion committee in July 2008. This
committee is responsible for the
supervision of executive performance,
the structure of employment agree-
ments for senior executives and
succession planning for members of
the BoD and the Group Executive Board
(GEB). Shortly after its creation, the
committee commissioned an extensive
review of all incentive systems used
throughout the UBS Group (Group).
The review was accelerated following
UBS’s transaction with the Swiss
National Bank in October and the
principles of UBS’s new compensation
model were published the following
month for implementation in 2009. In
parallel with this review, UBS held
extensive discussions with the Swiss
Financial Market Supervisory Authority
(FINMA) on a range of compensation
matters, including the new compensa-
tion model and the amount of variable
compensation to be paid to employees
for 2008.
Although the financial services industry
is facing a difficult period, competition
for the very best talent remains fierce
and competitive pay remains a vital
tool in attracting and retaining
executives. Variable compensation, in
both a cash and equity form, remains a
core component of UBS’s new
compensation model, though the final
amount awarded to executives
depends on their achievement of
performance targets linked to long-
term, risk-adjusted value creation. As
part of this change, awards granted
under the performance equity plan will
be directly linked to company perfor-
mance for an initial period of three
years. In addition, executives will be
required to keep a minimum of 75%
of all shares awarded to them (after
taxes) for a further five years. To
strengthen this clear and direct link
between shareholder value and
compensation expense, UBS has
announced the implementation of a
three-year deferral period and a bonus-
malus, or “claw-back”, structure for all
executive cash awards for 2009 and
beyond.
The firm explicitly sought to “alter the
UBS corporate culture” through its
design of the new compensation
model. All members of the human
resources and compensation committee
strongly believe the new compensation
model will play a central role in the
firm’s future success. Furthermore, due
to its explicit goals for long-term value
creation, the model inherently considers
and promotes the best interests of both
shareholders and the Group alike. Given
its commitment to shareholder input,
the BoD will introduce a non-binding
vote on the principles of executive
compensation for senior executives at
its annual general meeting for 2009.
Materials relating to this vote are
located in the “Compensation prin-
ciples 2009 and beyond for UBS senior
executives” section of this report. Please
consider the relevant documentation
and take part in implementing this
pioneering approach to executive
compensation practices.
Joerg Wolle
Chair of the human resources and
compensation committee
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Compensation, shareholdings and loans
Compensation governance
Human resources and compensation committee
The human resources and compensation committee is com-
posed of four independent members of the Board of Direc-
tors (BoD). On 31 December 2008, the members were Joerg
Wolle (committee chair), Ernesto Bertarelli, Sally Bott and
Helmut Panke. The following external advisors supported
the committee in 2008: Hostettler & Partner with regard to
the design of UBS’s new senior executive compensation pro-
gram, PricewaterhouseCoopers for the design of the perfor-
mance equity plan and Towers Perrin for market data.
Authorities and responsibilities
UBS is committed to the highest standards of corporate gov-
ernance. The human resources and compensation commit-
tee is responsible for reviewing UBS’s principles on total
compensation and benefits for submission to the BoD. Ad-
ditionally, on behalf of the BoD, the committee oversees five
key areas of responsibility:
– reviewing and approving the design of the total compen-
sation framework, including compensation programs and
plans;
– determining the relationship between pay and perfor-
mance;
– approving base salaries and annual incentive awards for
senior executives;
– reviewing and approving individual employment agree-
ments; and
– reviewing and approving the terms and conditions for
GEB members who relinquish their positions.
Authorities for compensation-related decisions are gov-
erned by the “Organization Regulations of UBS AG”, “An-
nex B – Responsibilities and authorities”, and “Annex C –
Charter for the committees of the Board of Directors of UBS
AG”. The structure is shown below.
Grant policy and decision-making process
The committee decides the target amount of variable cash
and equity compensation to be awarded to each senior ex-
ecutive based on Group, business division and individual per-
formance, combined with market data.
Individual performance is assessed formally each year by
measuring achievement against pre-defined personal objec-
tives. Personal objectives will be focused on areas such as the
following: contribution to Group and business division re-
sults; exceptional contributions to cross-business co-opera-
tion; strategic leadership skills and potential; outstanding
professional and technical expertise; commitment to UBS;
adherence to corporate values and principles; active risk
management and the creation of shareholder value.
The 2009 non-binding vote on executive compensation
UBS places value upon the opinions of its shareholders. At
the annual general meeting (AGM) to be held in April 2009,
the firm will provide shareholders with an opportunity to ex-
press their views through a vote on the compensation prin-
ciples for senior executives for 2009 and beyond. Refer to
the “Compensation principles 2009 and beyond for UBS se-
nior executives” section of this report for the relevant mate-
rials. As the ultimate decision on executive compensation is
legally within the powers of the BoD, such a vote is non-
binding and advisory in nature. UBS believes that this vote
presents an innovative and sensible means of including
shareholder participation in compensation matters.
Compensation authorities
Recipients
Compensation recommendations
developed by
Approved by
Communicated by
Chairman of the BoD
Chairman of the HRCC 1
Group CEO
Chairman of the BoD
Members of the GEB
Group CEO
Independent BoD members
(remuneration system and fees)
Chairman of the BoD / HRCC
1 The human resources and compensation committee.
HRCC
HRCC
HRCC
BoD
HRCC
HRCC
Group CEO
Chairman of the BoD
224
2008 compensation for the Board of Directors and
Group Executive Board
Board of Directors remuneration
Chairman of the Board of Directors and executive members
of the Board of Directors
The new compensation model was not yet applicable in 2008
and the Chairman of the Board of Directors (BoD) was therefore
eligible, in principle, to receive a variable incentive award fully
dependent on the Group’s financial performance. However, as
announced in the compensation report published on 17 No-
vember 2008, the human resources and compensation commit-
tee decided against granting any variable compensation award
to the Chairman of the BoD for 2008. The total compensation
awarded to the Chairman of the BoD, Peter Kurer, for the 2008
financial year was CHF 1,565,647. This amount made him the
highest-paid member of the BoD for 2008 and consisted of
eight months salary as Chairman of the BoD. This amount does
not include the four months of salary he received as a member
of the Group Executive Board (GEB).
Under both the new and old compensation models, the
decision process to determine the overall compensation of
the Chairman of the BoD includes an annual performance
assessment by the full BoD and the human resources and
compensation committee. Pay levels for comparable func-
tions outside of UBS are also taken into account.
Remuneration for former executive members and the
former Chairman of the Board of Directors
Marcel Ospel, former Chairman of the BoD, did not stand for
re-election at the AGM of 23 April 2008. Stephan Haeringer,
former executive vice chairman of the BoD, retired from the BoD
on 2 October 2008. Marco Suter, formerly an executive member
of the BoD, stepped down from the BoD on 1 October 2007
and thereafter acted as Group Chief Financial Officer (Group
CFO) and as a member of the GEB until his stepping down from
this role on 31 August 2008. While Marcel Ospel has retired
from UBS as of April 2008, Stephan Haeringer and Marco Suter
agreed with UBS to continue their services for UBS until their
termination dates of 30 September 2009 and 31 August 2009
respectively.
All three persons were contractually entitled to receive a
base salary, a payment based on their average remuneration
over the last three years and certain employment benefits
until the expiry of their 12-month notice period.
For the fiscal years 2007 and 2008, Marcel Ospel, Stephan
Haeringer and Marco Suter did not receive any incentive
awards. Furthermore, on 25 November 2008, Marcel Ospel,
Stephan Haeringer and Marco Suter announced that they vol-
untarily relinquished substantial parts of the payments to which
they were entitled during their periods of employment with
UBS. The total amount waived or repaid was CHF 33 million.
The remaining contractual obligations to all three former
BoD members, consisting of those due in 2008 and those
upcoming in 2009, net of the CHF 33 million voluntarily
waived or repaid, amounted to CHF 10 million. This amount
has been fully accrued in 2008 and is reflected in the firm’s
2008 income statement. Of this amount, CHF 2.3 million
was for Marcel Ospel, CHF 3.9 million for Stephan Haeringer
and CHF 3.8 million for Marco Suter.
Independent members of the Board of Directors
Reflecting their independent status, the remuneration of in-
dependent members of the BoD includes no variable compo-
nent and is therefore not dependent on the financial perfor-
mance of the UBS Group (Group). Fees for independent
d
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u
A
Compensation details and additional information for executive members of the BoD
CHF, except where indicated a
Name, function 1
Peter Kurer, Chairman
Marcel Ospel, Chairman
Stephan Haeringer,
Executive Vice Chairman
Marco Suter, Executive Vice Chairman
For the
year ended
2008
2007
2008
2007
2008
2007
2008
2007
Base salary
1,333,333
666,667
2,000,000
1,125,000
1,500,000
1,125,000
Annual incentive
award (cash)
0
0
0
0
0
0
Annual incentive
award (shares
– fair value) b
0
Discretionary
award (options
– fair value) c
0
Benefits
in kind d
58,267
Contributions
to retirement
benefits plans e
174,047
Total
1,565,647
0
0
0
0
0
0
0
0
0
0
80,755
307,310
108,846
111,808
87,023
834,445
261,069
2,568,379
195,802
1,429,648
261,069
1,872,877
70,820
155,252
1,351,072
1 2008: Peter Kurer was the only executive member in office on 31 December; Marcel Ospel did not stand for re-election in April 2008 and Stephan Haeringer stepped down during the year as a member
of the BoD. Both their payments are pro-rata for the four respective nine-month periods served in their functions. 2007: Marco Suter stepped down during the year as a member of the BoD. His 2007
payment was pro-rata for the nine-month period served as Executive Vice Chairman.
225
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member 2
Gabrielle Kaufmann-
Kohler, member
Sergio Marchionne,
senior independent
director, vice chairman
Rolf A. Meyer,
member 2
Helmut Panke,
member
William G. Parrett,
member 2
David Sidwell,
member
Peter Spuhler,
member 2
Peter R. Voser,
member
Lawrence A. Weinbach,
member 2
Joerg Wolle,
member
Total 2008
Total 2007
M
M
C
M
M
C
M
M
M
M
M
2008/2009
325,000
2007/2008
325,000
2008/2009
162,500
200,000
150,000
75,000
2007/2008
M
M 2008/2009
162,500
150,000
2007/2008
2008/2009
162,500
100,000
2007/2008
2008/2009
325,000
2007/2008
325,000
M 2008/2009
325,000
2007/2008
325,000
2008/2009
162,500
2007/2008
325,000
M
2008/2009
325,000
2007/2008
325,000
2008/2009
162,500
2007/2008
250,000
250,000
200,000
200,000
150,000
650,000
300,000
250,000
100,000
M
C
2008/2009
325,000
450,000
2007/2008
2008/2009
162,500
2007/2008
325,000
M 2008/2009
325,000
2007/2008
325,000
2008/2009
162,500
2007/2008
325,000
2008/2009
325,000
2007/2008
325,000
0
200,000
400,000
300,000
100,000
600,000
300,000
150,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Share
percent-
age 3
100
Number of
shares 4,5
51,596
100
50
14,677
12,280
Total
525,000
475,000
237,500
312,500
50
16,158
262,500
50
13,572
575,000
0
575,000
250,000 6 775,000
525,000
312,500
975,000
625,000
575,000
262,500
50
50
100
100
50
50
50
50
50
29,731
9,349
76,228
16,226
16,158
15,853
32,316
9,349
13,572
775,000
50
40,072
100
100
50
50
50
50
50
100
15,945
16,226
37,487
10,162
13,572
15,040
32,316
14,677
162,500
525,000
725,000
625,000
262,500
925,000
625,000
475,000
6,437,500
5,675,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Legend: C = Chairman of the respective committee; M = Member of the respective committee
1 There were 11 independent BoD members in office on 31 December 2008. David Sidwell was appointed at the AGM on 23 April 2008 and Rolf A. Meyer, Peter Spuhler and Lawrence A. Weinbach stepped
down from the BoD at the EGM on 2 October 2008. Sally Bott, Rainer-Marc Frey, Bruno Gehrig and Bill G. Parrett were appointed at the EGM on 2 October 2008. 2 Remunerations is for six months only, as
such members either stepped down or were appointed on 2 October 2008. 3 Fees are paid 50% in cash and 50% in restricted UBS shares. However, independent BoD members can elect to have 100% of
their remuneration paid in restricted UBS shares. 4 For 2008, shares valued at CHF 11.38 (average price of UBS shares at SWX Europe over the last 10 trading days of February 2009), attributed with a price
discount of 15%, discount price CHF 9.67. The shares are blocked for four years. For 2007, shares valued at CHF 36.15 (average price of UBS shares at SWX Europe over the last 10 trading days of February
2008), attributed with a price discount of 15%, discount price CHF 30.75. The shares are blocked for four years. 5 Number of shares is reduced in case of the 100% election to deduct social security contribu-
tion. All remuneration payments are submitted to social security contribution/taxes at source. 6 This payment is associated with the newly created function of a senior independent director.
In addition, one-off cash payments were made to the chair of the risk committee (CHF 500,000), the governance and nominating committee (CHF 300,000) and the human resources and compensation
committee (CHF 200,000). These payments reflect the substantial workload of setting up the new risk committee, and expanding the mandate of the governance and nominating committee and the
human resources and compensation committee.
Total payments to all members of the BoD
d
e
t
i
d
u
A
CHF, except where indicated a
Aggregate of all members of the BoD
Aggregate of all members of the BoD
226
For the
year ended
2008
2007
Total
10,267,240
11,467,328
members are reviewed annually by the Chairman of the BoD
and the human resources and compensation committee for
approval by the BoD. None of the independent members of
the BoD has any contract with UBS providing for benefits
upon the termination of their term of office at the BoD.
The BoD substantially reduced the fees payable to members
of its committees for 2008. This decision was made following
consideration of market practice in comparable global finan-
cial services and other relevant companies in Switzerland.
The table on the prior page shows remuneration for indepen-
dent members of the BoD between the 2008 and 2009 AGMs.
Group Executive Board compensation
In 2008, total compensation for members of the GEB was
reduced significantly from the prior year. The reduction oc-
curred because, due to the overall negative Group result, no
variable compensation was granted to GEB members for the
performance year 2008. The total compensation for the
highest-paid member of the GEB, Marcel Rohner, amounted
to CHF 1,814,702 for the financial year 2008.
Base salary
Base salaries are established to be appropriate for the role of
each senior executive on an individual basis. Base salaries con-
sist of a fixed amount of compensation and any adjustments
are limited to significant changes in job responsibility.
Due to the variability of annual incentive awards, the ratio
of base salary to total compensation can vary significantly from
year to year. Since no variable incentive awards were paid for
the financial year 2008, base salaries for senior executives and
employers contribution to retirement benefit plans amounted
to 93.7% of total compensation compared with 20.6% in
2007. The remainder of 6.3% reflects benefits in kind.
Benefits
In order to help attract and retain the best employees in each
local market where it operates, UBS provides employee ben-
efits that are competitive within each of these markets.
Changes, terminations and the introduction of new benefits
are governed by the procedures contained in the “Organiza-
tion Regulations of UBS AG”. UBS considers benefits to be a
supplemental element of total compensation and the bene-
fits offered may vary substantially from location to location.
Generally there are no special benefits for senior execu-
tives; they receive the same benefits as all other employees
in the location and business where they work.
In Switzerland, senior UBS executives share the same re-
tirement plan benefits as all other employees. The firm’s gen-
eral pension plan is made up of two defined contribution
elements: one plan covering base salary and the other cover-
ing variable compensation.
Outside Switzerland, senior UBS executives participate in
appropriately-designed local pension plans (in which other
employees also participate) which do not provide special pro-
visions for senior executives. In the US, senior executives can
choose to participate in a 401K-defined contribution plan
which is open to all employees. In addition, some executives
participate in legacy defined benefit plans which were avail-
able to other employees but are no longer available to new
hires. In the UK, senior executives either participate in a pen-
sion plan operated on a defined contribution basis or partici-
pate in a legacy defined benefit plan which was open to all
employees but is closed to participation for new hires. No
special pension schemes are offered to senior executives.
➔ Refer to “Note 30 Pension and other post-retirement
benefit plans” in the financial statements of this report for
details on the various retirement benefit plans established
in Switzerland and other major markets
d
e
t
i
d
u
A
Total compensation for all members of the GEB
CHF, except where indicated a
Name, function
For the
year ended
Base salary
Annual
incentive
award (cash)
Annual
incentive
award
(shares;
fair value) b
Discretionary
award
(options;
fair value) c
Marcel Rohner, Group Chief Executive Officer
(highest-paid)
2008
Rory Tapner, Chairman &
CEO Asia Pacific (highest-paid)
Aggregate of all members of the GEB who
were in office on 31 December 2008 1
Aggregate of all members of the GEB who
were in office on 31 December 2007 1
Aggregate of all members of the GEB who
stepped down during 2008 2
Aggregate of all members of the GEB who
stepped down during 2007 2
2007
2008
2007
2008
2007
1,500,000
0
0
1,291,960
4,501,900
4,501,904
7,815,943
0
0
6,995,885
15,305,667
15,305,708
1,614,871
0
0
2,511,947
23,042,376
6,750,036
0
0
0
0
0
0
Contributions
to retirement
benefits
plans e
Benefits
in kind d
Total
161,768
152,934
1,814,702
10,256
900
10,306,920
457,652
817,315
9,090,911
532,706
912,974
39,052,939
234,838
258,423
2,108,132
406,567
275,635
32,986,561
1 Number and distribution to senior executives: 2008: 12 GEB members in office on 31 December. 2007: eight GEB members in office on 31 December. 2 Number and distribution of senior executives:
2008: includes four months in office as a GEB member for Peter Kurer, eight months in office for Marco Suter and 10 months for Joe Scoby. 2007: includes nine months in office for Huw Jenkins and Clive
Standish and six months for Peter Wuffli.
227
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
Corporate governance and compensation
Compensation, shareholdings and loans
Cash and equity incentives
“Pay for performance” is the guiding principle of the UBS
executive compensation policy. As discussed above, the hu-
man resources and compensation committee decided not to
grant any variable cash or equity compensation to GEB
members for 2008. This decision recognizes the overall poor
performance of the Group and the failure to achieve key
performance targets despite some highly successful busi-
nesses within each of the business divisions.
price of CHF 28.10, as well as a cash amount of CHF 370,000.
In line with market practice, these awards were granted as a
replacement for compensation and benefits forfeited from
their previous employment as a result of joining UBS.
Employment contracts
There were no material changes to employment agreements
for existing GEB members during 2008 and the 12-month no-
tice period remained unchanged for the financial year 2008.
Replacement of forfeited awards for former employer
compensation
Jerker Johansson and Markus Diethelm joined UBS during
2008. In total, they were granted 574,432 shares with a grant
date fair market value of CHF 10.7 million, 700,000 options
with a strike price of CHF 36.46 and 7,420 options with a strike
Compensation to former members of the Board of
Directors and Group Executive Board
Compensation and benefits in kind paid to former members
of the BoD and the GEB reflect legacy agreements still hon-
ored by UBS.
d
e
t
i
d
u
A
Compensation paid to former members of the BoD and GEB1
CHF, except where indicated a
Name, function
Georges Blum, former member of the BoD
(Swiss Bank Corporation)
Franz Galliker, former member of the BoD
(Swiss Bank Corporation)
Walter G. Frehner, former member of the BoD
(Swiss Bank Corporation)
Hans (Liliane) Strasser, former member of the BoD
(Swiss Bank Corporation)
Robert Studer, former member of the BoD
(Union Bank of Switzerland)
Alberto Togni, former member of the BoD
(UBS)
Philippe de Weck, former member of the BoD
(Union Bank of Switzerland)
Aggregate of all former members of the GEB 2
Aggregate of all former members of the BoD and GEB
For the
year ended
Compensation
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
Benefits in
kind
Total
101,579
101,579
90,803
69,596
62,174
74,663
73,061
32,673
42,311
126,208
260,162
427,949
502,478
109,703
129,701
171,180
257,791
90,803
69,596
62,174
74,663
73,061
32,673
42,311
126,208
260,162
746,410
820,879
109,703
129,701
171,180
257,791
318,461
318,401
0
0
318,461
318,401
1,113,551
1,418,481
1,432,012
1,736,882
1 Compensation or remuneration that is connected with the former members’ activity on the BoD or GEB, or that is not at market conditions. 2 Includes two former GEB members.
228
d
e
t
i
d
u
A
Explanations of compensation details for executive members of the BoD and members of the GEB:
a. Local currencies are converted into CHF using the exchange rates as detailed in “Note 39 Currency translation rates” in the financial statements
of this report.
b. Values per share at grant: CHF 36.15 / USD 33.55 for shares granted in 2008 related to the performance year 2007. CHF prices are the average
price of UBS shares at SWX Europe over the last 10 trading days of February, and USD prices are the average price of UBS shares at the NYSE
over the last 10 trading days of February in the year in which they are granted.
c. No options were granted in 2009 for the performance year 2008.
d. Benefits in kind – car leasing, company car allowance, staff discount on banking products and services, health and welfare benefits and gen-
eral expense allowances – are all valued at market price.
e. Swiss senior executives participate in the same pension plan as all other employees. Under this plan, employees receive a company contribution
to the plan which covers compensation up to CHF 820,800. The retirement benefits consist of a pension, a bridging pension and a one-off
payout of accumulated capital. Employees must also contribute to the plan. This figure excludes the mandatory employer’s social security
contributions (AHV, ALV) but includes the portion attributed to the employer’s portion of the legal BVG requirement. The employee contribu-
tion is included in the base salary and annual incentive award components.
In both the US and the UK, senior executives participate in the same plans as all other employees. In the US there are two different plans, one
of which operates on a cash balance basis, which entitles the participant to receive a company contribution based on compensation limited to
USD 250,000. This plan is no longer available to new hires. US senior executives may also participate in the UBS 401K-defined contribution
plan (open to all employees), which provides a company matching contribution for employee contributions. In the UK, senior executives par-
ticipate in either the principal pension plan, which is limited to an earnings cap of GBP 100,000, or a grandfathered defined benefit plan which
provides a pension on retirement based on career average base salary (uncapped).
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
229
Corporate governance and compensation
Compensation, shareholdings and loans
Shares, options and loans for the Board of Directors and
Group Executive Board (at end of 2008)
d
e
t
i
d
u
A
Share and option ownership of members of the BoD at 31 December 2007/2008
Name, function 1
Peter Kurer, Chairman
For the
year ended
2008
Number of
shares held
416,088
Voting rights
in %
0.025
Number of
options held
372,995
Potentially conferred
voting rights in % 2
0.022
2007
292,762
0.026
350,000
0.031
Type and quantity
of options 3
85 256
95 913
95 913
95 913
xxx:
xxxv:
xli:
xlv:
xxx:
xxxv:
xli:
xlv:
80 000
90 000
90 000
90 000
Sergio Marchionne,
senior independent director, vice chairman
Ernesto Bertarelli, member
Sally Bott, member
Rainer-Marc Frey, member
Bruno Gehrig, member
Gabrielle Kaufmann-Kohler, member
Helmut Panke, member
William G. Parrett, member
David Sidwell, member
Peter R. Voser, member
Joerg Wolle, member
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
87,926
45,800
89,434
48,411
1
0
3,000
18,713
3,303
31,971
13,206
4,000
1
30,823
11,580
41,509
7,709
0.005
0.004
0.005
0.004
0.000
0.000
0.000
0.001
0.000
0.002
0.001
0.000
0.000
0.002
0.001
0.002
0.001
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
1 This table includes vested, unvested, blocked and unblocked shares and options held by members of the BoD including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 31
Equity participation and other compensation plans” in the financial statements of this report for more information.
Group Executive Board
Senior executive share ownership policy
Share ownership policies are in place to ensure that the in-
terests of management are aligned with those of sharehold-
ers. Up to and including 2008, senior executives were re-
quired to accumulate and hold UBS shares with an aggregate
value of five times the amount of the last three years’ aver-
age cash component of their total compensation (base salary
plus cash incentive award). Due to changes in the compen-
sation model, the share ownership policy will be changed
from 2009 onwards (refer to the “Compensation principles
2009 and beyond for UBS senior executives” section of this
report for more information). Senior executives are not per-
mitted to enter into any transaction which hedges, mitigates
or otherwise transfers the risk of price movements of un-
vested UBS shares, notional shares or stock options granted
under UBS compensation plans.
230
d
e
t
i
d
u
A
Share and option ownership of members of the GEB at 31 December 2007/2008
Name, function 1
Marcel Rohner,
Group Chief Executive Officer
For the
year ended
2008
Number of
shares held
711,366
Voting rights
in %
0.042
Number of
options held
1,055,043
Potentially conferred
voting rights in % 2
0.063
2007
501,846
0.044
990,000
0.088
John Cryan,
Group Chief Financial Officer
2008
235,929
0.014
382,673
0.023
Markus U. Diethelm,
Group General Counsel
John A. Fraser,
Chairman and CEO
Global Asset Management
2007
2008
2007
2008
112,245
0.007
0
583,812
0.035
1,144,808
0.000
0.068
2007
461,764
0.041
1,074,232
0.095
Marten Hoekstra,
Deputy CEO Global Wealth
Management & Business Banking
and Head Wealth Management US
2008
245,397
0.015
684,168
0.041
Type and quantity
of options 3
31,971
213,140
277,082
319,710
213,140
xxv:
xxx:
xxxv:
xli:
xlv:
xxv:
xxx:
xxxv:
xli:
xlv:
v:
vi:
vii:
xii:
xiii:
xiv:
xvii:
xviii:
xix:
xxi:
xxii:
xxiii:
xxvii:
xxviii:
xxix:
xxxii:
xxxiii:
xxxiv:
xxxviii:
xxxix:
xl:
xlii:
xliii:
xliv:
xlvi :
i:
viii:
xv:
xx:
xxxi:
xxxvi:
xli:
xlv:
i:
viii:
xv:
xx:
xxxi:
xxxvi:
xli:
xlv:
ii:
iii:
iv:
ix:
x:
xi:
xxvi:
xxxi:
xxxvi:
xli:
xlv:
xlvii:
30,000
200,000
260,000
300,000
200,000
21,362
20,731
20,725
5,454
5,294
5,292
23,626
23,620
23,612
5,526
5,524
5,524
17,072
17,068
17,063
14,210
14,210
14,207
5,330
5,328
5,326
17,762
17,762
17,760
53,285
0
56,013
76,380
127,884
127,884
170,512
202,483
213,140
170,512
52,560
71,672
120,000
120,000
160,000
190,000
200,000
160,000
8,679
8,421
8,421
8,823
12,825
8,561
42,628
53,285
53,285
85,256
154,931
239,053
n
o
i
t
a
s
n
e
p
m
o
c
d
n
a
e
c
n
a
n
r
e
v
o
g
e
t
a
r
o
p
r
o
C
Jerker Johansson,
Chairman and CEO Investment Bank
2007
2008
2007
521,544
0.031
753,410
0.045
xlviii:
xlix:
745,990
7,420
1 This table includes vested and unvested shares and options held by members of the GEB including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 31 Equity participation
and other compensation plans” in the financial statements of this report for more information.
231
Corporate governance and compensation
Compensation, shareholdings and loans
d
e
t
i
d
u
A
Share and option ownership of members of the GEB on 31 December 2007/2008 (continued)
Name, function 1
Philip J. Lofts,
Group Chief Risk Officer
For the
year ended
2008
Number of
shares held
186,434
Voting rights
in %
0.011
Number of
options held
577,723
Potentially conferred
voting rights in % 2
0.034
Walter Stuerzinger,
Chief Operating Officer,
Corporate Center
2007
2008
296,886
0.018
372,995
0.022
2007
209,442
0.019
350,000
0.031
Rory Tapner,
Chairman and CEO Asia Pacific
2008
827,809
0.049
1,379,533
0.082
Raoul Weil,
Chairman and CEO Global Wealth
Management & Business Banking,
relinquished his duties on
an interim basis
Alexander Wilmot-Sitwell,
Chairman and CEO, UBS Group EMEA
and Joint Global Head IB Department
Robert Wolf,
Chairman and CEO, UBS Group
Americas / President Investment Bank
2007
514,365
0.046
1,294,486
0.115
2008
315,698
0.019
432,409
0.026
2007
212,934
0.019
405,752
0.036
2008
304,655
0.018
353,807
0.021
827,307
0.049
948,473
0.056
2007
2008
2007
Type and quantity
of options 3
v:
vi:
vii:
xii:
xiii:
xiv:
xvii:
xviii:
xix:
xxi:
xxii:
xxiii:
xxvii:
xxviii:
xxix:
xxxv:
xli:
xlv:
xlvii:
xvi:
xxx:
xxxv:
xli:
xlv:
xvi:
xxx:
xxxv:
xli:
xlv:
vii:
xv:
xxiv:
xxx:
xxxv:
xli:
xlv:
vii:
xv:
xxiv:
xxx:
xxxv:
xli:
xlv:
xv:
xxxv:
xli:
xlv:
xv:
xxxv:
xli:
xlv:
xxxiv:
xxxvii:
xxxviii:
xxxix:
xl:
xlv:
xlvii:
xx:
xxxi:
xxxvi:
xli:
xlv:
xlvii:
11,445
11,104
11,098
1,240
5,464
1,199
9,985
9,980
9,974
1,833
1,830
1,830
35,524
35,524
35,521
117,090
117,227
85,256
74,599
31,971
63,942
85,256
95,913
95,913
30,000
60,000
80,000
90,000
90,000
281,862
213,140
213,140
170,512
159,855
170,512
170,512
264,486
200,000
200,000
160,000
150,000
160,000
160,000
53,285
102,281
127,884
148,959
50,000
95,976
120,000
139,776
53,282
2,130
35,524
35,524
35,521
106,570
85,256
287,739
213,140
127,884
106,570
106,570
106,570
1 This table includes vested and unvested shares and options held by members of the GEB including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 31 Equity participation
and other compensation plans” in the financial statements of this report for more information.
232
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Total of all blocked and unblocked shares held by non-executive members of the BoD 1
Total Of which non-restricted
Of which blocked until
Shares held on 31 December 2008
307,378
177,027
Shares held on 31 December 2007
296,533
134,808
1 Includes related parties.
No individual board member holds 1% or more of all shares issued.
2009
12,126
2008
30,602
2010
13,592
2009
43,096
2011
30,193
2010
35,874
2012
74,440
2011
52,153
Total of all vested and unvested shares held by the executive members of the BoD and members of the GEB1
Shares held on 31 December 2008
5,585,170
2,977,807
1,058,881
595,638
461,376
319,776
171,692
Total
Of which vested
Of which vesting
2009
2010
2011
2012
2013
Shares held on 31 December 2007
6,396,479
3,831,550
796,533
653,726
526,425
362,709
225,536
2008
2009
2010
2011
2012
1 Includes related parties.
No individual BoD or GEB member holds 1% or more of all shares issued.
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Corporate governance and compensation
Compensation, shareholdings and loans
Vested and unvested options held by independent members of the BoD and
by members of the GEB on 31 December 2007 / 2008
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Type
Number of options
Year of grant
Vesting date
Expiry date
Subscription ratio
56,013
8,679
8,421
8,421
32,807
31,835
313,685
76,380
8,823
12,825
8,561
6,694
10,758
6,491
394,309
31,971
33,611
33,600
33,586
415,623
7,359
7,354
7,354
213,140
31,971
42,628
52,596
52,592
52,584
532,850
436,937
14,210
14,210
67,489
837,477
383,652
2,130
40,854
40,852
40,847
1,332,125
17,762
17,762
17,760
1,348,276
53,285
505,478
745,990
7,420
2001
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2004
2004
2004
2004
2004
2005
2005
2005
2005
2005
2005
2006
2006
2006
2006
2007
2007
2007
2007
2008
2008
2008
2008
20.02.2004
31.01.2002
31.01.2004
31.01.2005
31.01.2003
31.01.2004
31.01.2005
31.01.2005
28.02.2002
29.02.2004
28.02.2005
28.02.2003
28.02.2004
28.02.2005
28.06.2005
28.06.2005
01.03.2004
01.03.2005
01.03.2006
31.01.2006
01.03.2004
01.03.2005
01.03.2006
31.01.2006
31.01.2006
31.01.2006
01.03.2005
01.03.2006
01.03.2007
28.02.2007
01.03.2007
01.03.2006
01.03.2007
01.03.2008
01.03.2008
01.03.2008
04.03.2007
01.03.2007
01.03.2008
01.03.2009
01.03.2009
01.03.2008
01.03.2009
01.03.2010
01.03.2010
01.03.2011
01.03.2011
01.03.2011
01.03.2011
20.02.2009
31.07.2012
31.07.2012
31.07.2012
31.01.2012
31.01.2012
31.01.2012
31.01.2012
28.08.2012
28.08.2012
28.08.2012
28.02.2012
28.02.2012
28.02.2012
28.06.2012
28.12.2012
31.01.2013
31.01.2013
31.01.2013
31.01.2013
28.02.2013
28.02.2013
28.02.2013
31.01.2013
31.07.2013
31.07.2013
27.02.2014
27.02.2014
27.02.2014
27.02.2014
27.02.2014
28.02.2015
28.02.2015
28.02.2015
28.02.2015
28.02.2015
04.03.2015
28.02.2016
28.02.2016
28.02.2016
28.02.2016
28.02.2017
28.02.2017
28.02.2017
28.02.2017
28.02.2018
28.03.2018
07.04.2018
06.06.2018
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
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1:1
1:1
1:1
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1:1
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ii
iii
iv
v
vi
vii
viii
ix
x
xi
xii
xiii
xiv
xv
xvi
xvii
xviii
xix
xx
xxi
xxii
xxiii
xxiv
xxv
xxvi
xxvii
xxviii
xxix
xxx
xxxi
xxxii
xxxiii
xxxiv
xxxv
xxxvi
xxxvii
xxxviii
xxxix
xl
xli
xlii
xliii
xliv
xlv
xlvi
xlvii
xlviii
xlix
234
Strike price
CHF 46.92
USD 21.24
USD 21.24
USD 21.24
CHF 36.49
CHF 36.49
CHF 36.49
USD 21.24
USD 21.70
USD 21.70
USD 21.70
CHF 36.65
CHF 36.65
CHF 36.65
CHF 37.90
CHF 37.90
CHF 27.81
CHF 27.81
CHF 27.81
USD 22.53
CHF 26.39
CHF 26.39
CHF 26.39
CHF 30.50
CHF 30.50
USD 22.53
CHF 44.32
CHF 44.32
CHF 44.32
CHF 48.69
USD 38.13
CHF 47.58
CHF 47.58
CHF 47.58
CHF 52.32
USD 44.81
CHF 47.89
CHF 65.97
CHF 65.97
CHF 65.97
CHF 72.57
CHF 67.00
CHF 67.00
CHF 67.00
CHF 73.67
CHF 32.45
CHF 35.66
CHF 36.46
CHF 28.10
Transactions in 2008
In accordance with applicable rules and regulations, man-
agement transactions in UBS shares by members of the
Board of Directors (BoD) and the Group Executive Board
(GEB) are publicly disclosed. On 16 May 2008, persons close-
ly associated with them also have such reporting obligations.
Transactions which require reporting are those involving all
types of financial instruments whose price is primarily influ-
enced by UBS shares. As a consequence of the issuance of
new UBS shares in connection with the stock dividend ap-
proved by the extraordinary general meeting on 27 February
2008, the grandfathering of Swiss rules ended on 16 May
2008, and the EU requirements (paragraph 15a of the Ger-
man Securities Trading Act) regarding the reporting of man-
agement transactions are now applicable.
From 1 January to 15 May 2008, four purchases were
disclosed with a total value of CHF 5,525,205, as well as two
sales with a total value of CHF 847,332. Individuals’ names
and transactions made by closely associated persons were
not required to be disclosed.
From 16 May until 31 December 2008, seven share pur-
chases were disclosed with a total value of CHF 5,022,563 and
USD 27,228, as well as three share sales with a total value of
CHF 18,302,528 and USD 757,457 – of which CHF 17,736,100
were due to a single sale. Such disclosures contained the indi-
viduals’ names. There were no share purchases or sales made
by closely associated persons.
Due to the capital increase with a rights issue in June 2008,
there were 29 exercises of subscription rights with a total value
of CHF 27,447,987, seven purchases of subscription rights
with a total amount of CHF 54,430 and 24 sales of subscrip-
tion rights with a total value of CHF 3,076,438 and USD 52.
These disclosures contained the individuals’ names. Two close-
ly associated parties exercised subscription rights, one sold
subscription rights.
Until 2008, UBS executives generally received a majority
of their compensation in UBS shares or options. For this rea-
son, management transactions, in general, see sales out-
weighing purchases. Blackout periods and synchronized
dates for unblocking or vesting of shares or options granted
as compensation may lead to transactions being concentrat-
ed in short time periods.
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Corporate governance and compensation
Compensation, shareholdings and loans
Loans
As a global financial services provider and major Swiss do-
mestic bank, UBS typically has business relationships with
many large companies. Members of UBS’s BoD often as-
sume management or independent board responsibilities in
many of these companies. Moreover, the granting of loans
to both individuals and companies is part of UBS’s ordinary
business. The members of UBS’s BoD and GEB are granted
loans, fixed advances and mortgages at arm’s length market
terms.
In 2008, loans granted to companies related to seven inde-
pendent members of the BoD amounted to CHF 667.3 million,
including guarantees, contingent liabilities and unused com-
mitted credit facilities. Refer to “Note 32 Related parties” in
the financial statements of this report for more information.
Loans granted to former members of the Board of Directors
and to the Group Executive Board
In 2008, all loans granted to former members of the BoD
and GEB, or to their related parties, were on at arm’s length
market terms.
Loans granted to members of the BoD at 31 December 2007/2008
CHF, except where indicated a
Name, function 1
Peter Kurer, Chairman 2
Sergio Marchionne, Senior Independent Director, Vice Chairman
Ernesto Bertarelli, member
Sally Bott, member
Rainer-Marc Frey, member
Bruno Gehrig, member 2
Gabrielle Kaufmann-Kohler, member
Helmut Panke, member
William G. Parrett, member 2
David Sidwell, member
Peter R. Voser, member
Joerg Wolle, member
For the
year ended
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
Secured loans
1,261,000
0
0
0
0
0
0
798,000
0
0
0
0
1,167,659
0
0
0
0
0
Aggregate of all members of the BoD
3,226,659
Other loans
granted
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1 No loans have been granted to related parties of the members of the BoD at conditions not customary in the market. 2 Secured loans granted prior to their election to the BoD.
Loans granted to members of the GEB at 31 December 2007/2008
CHF, except where indicated a
Name, function 1
Markus U. Diethelm, Group General Counsel
Joe Scoby, Group Chief Risk Officer 3
Aggregate of all members of the GEB 4
Aggregate of all members of the GEB
For the
year ended
2008
2007
2008
2007
Secured loans
3,900,000
0
7,740,562
3,487,000
Other loans
granted 2
0
3,145,796
0
3,145,796
Total
1,261,000
0
0
0
0
0
0
798,000
0
0
0
0
1,167,659
0
0
0
0
0
3,226,659
Total
3,900,000
3,145,796
7,740,562
6,632,796
1 No loans have been granted to related parties of the members of the GEB at conditions not customary in the market. 2 Guarantees. 3 Joe Scoby stepped down as Group Chief Risk Officer on
4 November 2008. 4 Including those members of the GEB who stepped down during 2008.
236
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Advisory vote
Compensation principles 2009 and beyond
for UBS senior executives
During 2008, the UBS Board of Directors (BoD) reviewed the
incentive systems of the UBS Group (Group) and examined
their level of alignment with the firm’s values and long-term
orientation. Towards the end of the year, UBS announced that
a new compensation model would apply from 2009 onwards.
At the annual general meeting (AGM) to be held in 2009,
shareholders will be invited to participate in an advisory vote on
the principles of this new compensation model. This section of
this report outlines these principles and explains how the new
model will apply to the Chairman of the BoD, independent BoD
members and Group Executive Board (GEB) members.
Compensation policy
The Chairman of the UBS BoD receives a fixed base salary that
comprises cash and a pre-determined, fixed number of shares. 1
The Chairman is not entitled to any variable compensation.
The independent BoD members receive fixed remunera-
tion fees. Independent BoD members are not entitled to any
variable compensation.
Compensation for members of the GEB comprises a fixed
salary, variable cash compensation and variable equity com-
pensation. Variable compensation awarded to GEB members:
– is based on long-term performance: Variable compensa-
tion remains an important component of the new model,
but it is based on clear, long-term performance measures
that take business risk into account. Two variable compen-
sation schemes – one in cash (“cash balance plan”), one in
equity (“performance equity plan”) – have been defined
for the members of the GEB. The results of the senior ex-
ecutive’s business division will be a key factor in determin-
ing the amount of variable cash compensation to be
awarded. In unprofitable years no new variable cash com-
pensation will be paid. In the performance equity plan, the
final number of shares that each senior executive will re-
ceive can be determined only after three years, and will be
based on achievement against two performance measures:
economic profit and relative total shareholder return.
– addresses risk management: Pay that depends upon long-
term performance increases risk awareness. Economic
profit used to determine vesting of the performance eq-
uity plan is a market-recognized standard for measuring
risk-adjusted profit taking into account the cost of equity
capital, while the new cash plan no longer pays out im-
mediately, but holds compensation at risk, subject to fu-
ture business performance.
– incorporates a “malus” system: A maximum of one-third of
a senior executive’s variable cash incentive will be paid out
at the beginning of the following year. Should certain mate-
rial adverse events occur, a “malus” or negative award may
be applied to the cash balance plan. Separately, the perfor-
mance equity plan will deliver between zero and two times
each senior executive’s target award. Failure to achieve
threshold economic profit targets or a reasonable level of
total shareholder return can result in a share delivery that is
considerably below target or even zero.
Compensation components
Chairman of the Board of Directors
From January 2009, the Chairman of the BoD receives a
fixed base salary comprising cash and a pre-determined fixed
number of UBS shares. These shares vest after four years and
are subject to a “malus” in loss-making years over the vest-
ing period. This compensation package does not include any
variable, performance-dependent component, but does
keep the Chairman’s pay aligned with long-term, sustainable
value creation through its share component.
Independent members of the Board of Directors
The independent members of the BoD receive fixed remu-
neration only. Fees are paid 50% in cash and 50% in blocked
Compensation structure
Element of compensation
Chairman of the BoD
Independent members of BoD
Members of the GEB
Fixed pay
Base salary in cash and a fixed number
of restricted share awards
Fixed fee (min. 50%; max. 100%
in restricted share awards)
Base salary in cash
Variable cash compensation
Variable equity compensation
No
No
No
No
Cash balance plan
Performance equity plan
Share retention policy
Yes (vesting four years after grant)
Yes (blocked for 4 years)
Yes
1 Pending Kaspar Villiger’s election as Chairman of the BoD this renumeration structure would not be applicable to him (but rather a fixed base salary only).
237
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Corporate governance and compensation
Compensation, shareholdings and loans
UBS shares. However, members can elect to have 100% of
their remuneration paid in blocked UBS shares. These shares
are attributed with a price discount of 15% and restricted
from sale for four years from the date they are granted.
Group Executive Board
Members of the GEB are entitled to a fixed salary. In addi-
tion, they may receive variable compensation under either
the cash balance plan or the performance equity plan or a
combination of both (these plans are discussed below).
Base salary
Members of the GEB receive a fixed base salary that is deter-
mined according to the skills, experience and knowledge
they bring to their role in the relevant market segment.
Cash balance plan
The cash balance plan rewards long-term profitability by link-
ing variable cash compensation to sustained business perfor-
mance. The plan allows for a maximum of one-third of a se-
nior executive’s variable cash incentive to be paid out at the
beginning of the following year, with the entire cash incen-
tive in question to be paid out over a three-year period. As
such, the plan provides a multi-year reflection of performance
and compensation. This is designed to ensure that the finan-
cial impact of decisions and actions taken in one period im-
pacts the variable compensation over a longer period of time.
The system is significantly strengthened through inclusion of
a bonus - malus system, which allows for the application of a
“malus” or negative award to the balance of variable com-
pensation. Circumstances in which this could occur include:
incurring of a financial loss; material restatement of the
Group’s financial statements; substantial underachievement
of individual performance targets; or the taking of excessive
risk or causing of harm to UBS. If a senior executive leaves
UBS, the cash balance will be kept at risk for the remaining
life of the plan in order to capture any tail risk events.
Performance equity plan
The performance equity plan is forward-looking and depen-
dent on results produced over a three-year time period. At the
start of each performance period, senior executives are ad-
vised of a potential quantity of restricted performance shares
that, subject to the achievement of pre-defined business tar-
gets, is expected to vest after three years. A final decision on
the actual number of shares that will vest and transfer to the
senior executive is only possible after the end of the three-year
period, depending upon the level of performance achieved. If
UBS’s performance over the three-year period is below target,
the number of shares that vest is reduced and may be zero.
Should UBS’s performance over the three-year period be
above target, the actual number of shares may be adjusted up
to two times the original target. Performance measurement
for the first award will begin in 2009, with the first possible
vesting in 2012. Performance shares are not eligible for divi-
dends during the three-year measurement period.
The final number of shares that will actually vest depends
on cumulative achievement against two performance metrics:
– Economic profit (EP) is an internal measure for value cre-
ation that reflects both profitability and the equity re-
quired to support business risk. It is calculated by sub-
tracting the cost of equity capital from the annual net
profit attributable to UBS shareholders. EP is only realized
when the return on capital achieved is greater than the
firm’s cost of capital. In order to offset accounting entries
which distort the economic perspective, the EP calcula-
tion is adjusted for items not reflected in business perfor-
mance. The three-year EP targets for the performance
equity plan are based on the UBS strategic business plan
and analyst expectations. Threshold, target and stretch
performance goals have been defined for the 2009 –
2011 performance period based on expected EP perfor-
mance and consideration of the expected market value
associated with those EP performance levels. However,
the human resources and compensation committee may
revise the performance target if an exceptional event oc-
curs that makes this either necessary or advisable.
– Total shareholder return (TSR) is an external measurement
of value creation that measures the total return on a UBS
share, i.e. both the dividend yield and the capital appre-
ciation of the share price. UBS measures TSR over a three-
year period relative to banking industry performance as
Performance Equity Plan: basic design
year 1
year 2
year 3
year 4
year 5
year 6
year 7
year 8
Performance period: 3 years
Grant
year 1
Vesting
year 4
Share retention period ¹
# Performance shares (# performance shares xvesting multiple [0% –200%] ²= # vested UBS shares)
1 Refer to the description of UBS’s share retention policy for the Chairman of the BoD and GEB members shown in this section of this report.
2 Cumulative EP- and TSR-driven vesting multiple (min. 0%; max. 200%).
238
4CP025_e
Advisory vote
Historic TSR ranking
Performance period
UBS TSR
# peer companies 1
UBS rank /
1.4.99–1.4.02
1.4.00–1.4.03
1.4.01–1.4.04
1.4.02–1.4.05
1.4.03–1.4.06
1.4.04–1.4.07
1.4.05–1.4.08
4%
(4%)
6%
10%
39%
18%
(14%)
16 / 27
11 / 27
9 / 28
9 / 30
10 / 30
19 / 30
28 / 30
Vesting matrix
3 years’ cumulative EP
< Threshold¹
0%
Threshold
Target
Stretch
100%
200%
1 Current constituents of the Dow Jones Banks Titans 30 Index.
Under-
performance
Median-
performance
Out-
performance
TSR performance: rank within Dow Jones Banks Titans 30 Index
4CP026_e
1 But limited vesting if TSR rank 1–10.
indicated by the components of the Dow Jones Banks Ti-
tans 30 Index©. This global index comprises the top 30
companies in the banking sector, as defined by Dow
Jones, and has been chosen for its relevance to UBS
(banking), for transparency (known listed companies), for
sector coverage (30 leading global banks assessed by
market capitalization, revenues, and net profit) and for
independence (managed by Dow Jones). For greater
transparency and consistent with best practice, the TSR
for all companies in the index will be measured in a com-
mon currency (Swiss franc).
Cumulative EP is the primary and most important perfor-
mance measure, with relative TSR performance able to ei-
ther increase or reduce the award indicated by the EP
achievement. Both performance conditions will be pre-de-
fined for each three-year performance period. A shortfall in
value creation during the performance period, as measured
by cumulative EP and relative TSR performance, may result in
a “malus” or the vesting of shares below target (this could
be as low as zero). However, in case of outperformance
against both the EP target and the TSR index, the actual
numbers of shares may be adjusted up to two times the orig-
inal target award. If a senior executive leaves UBS before the
vesting of an award, the quantity of shares received will be
pro-rated to the actual service period as well as being depen-
dent upon the full three-year performance conditions.
Awards may be forfeited under certain circumstances.
Employment contracts
All GEB members will receive new employment agreements
during 2009, under which notice periods will be reduced
from 12 months to six months. Furthermore, any discretion-
ary variable compensation paid to senior executives who
leave UBS will, as per the new employment agreements, be
based on Group, business division and personal perfor-
mance. Any amounts paid would be pro-rated to the end of
the notice period and would use only variable cash compen-
sation as a basis. Furthermore, any payments would gener-
ally be made under the cash balance plan, with two-thirds of
any variable cash award being kept “at risk” for the remain-
der of the three-year performance cycle in order to capture
any tail risk events. “Golden parachutes” (in the sense of ex
gratia payments made to senior executives due to termina-
tion of employment) do not exist at UBS.
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Advisory vote
Corporate governance and compensation
Compensation, shareholdings and loans
Share retention policy
Effective 1 January 2009, the Chairman of the BoD and all
GEB members are required to retain 75% of all vested shares
(after payment of taxes) during their time in office and for a
period of eight years from the date of grant. This rule ap-
plies for all mandatory share-based compensation plans, in-
cluding the performance equity plan. For example, perfor-
mance equity plan shares granted in 2009 will continue to
be restricted after vesting until 2017 unless the executive
leaves UBS.
All shares granted to independent members of the BoD are
blocked for a period of four years from the date of grant.
Share retention policy
year 1
year 2
year 3
year 4
year 5
year 6
year 7
year 8
Restricted share awards
Blocked shares
Share retention policy
Performance period
Share retention policy
Chairman of the BoD
Independent members of the BoD
Members of the GEB
4CP029_e
240
Financial information
Financial information
Table of contents
244
245
246
Introduction
Accounting principles
Critical accounting policies
251
Consolidated financial statements
251 Management’s report on internal control
302
17 Other assets
over financial reporting
Report of independent registered public accounting
firm on internal control over financial reporting
Report of the statutory auditor and the independent
registered public accounting firm on the consolidated finan-
cial statements
Income statement
Balance sheet
Statement of changes in equity
Statement of recognized income and expense
Statement of cash flows
Notes to the consolidated financial statements
1 Summary of significant accounting policies
2a Segment reporting
2b Segment reporting by geographic location
Income statement notes
3 Net interest and trading income
4 Net fee and commission income
5 Other income
6 Personnel expenses
7 General and administrative expenses
8 Earnings per share (EPS) and shares outstanding
Balance sheet notes: assets
9a Due from banks and loans
9b Allowances and provisions for credit losses
10 Securities borrowing, securities lending, repurchase
and reverse repurchase agreements
11 Trading portfolio
12 Financial assets designated at fair value
13 Financial investments available-for-sale
14 Investments in associates
15 Property and equipment
16 Goodwill and intangible assets
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330
Balance sheet notes: liabilities
18 Due to banks and customers
19 Financial liabilities designated at fair value and debt issued
20 Other liabilities
21 Provisions and litigation
22 Income taxes
23 Derivative instruments and hedge accounting
Off-balance sheet-information
24 Pledgeable off-balance-sheet securities
25 Operating lease commitments
Additional information
26 Capital increases and mandatory convertible notes
27 Fair value of financial instruments
28 Pledged assets and transferred financial assets
which do not qualify for derecognition
331
29 Measurement categories of financial assets
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351
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and financial liabilities
30 Pension and other post-employment benefit plans
31 Equity participation and other compensation plans
32 Related parties
33 Post-balance-sheet events
34 Significant subsidiaries and associates
35 Invested assets and net new money
36 Business combinations
37 Discontinued operations
38 Reorganizations and disposals
39 Currency translation rates
40 Swiss banking law requirements
41 Supplemental guarantor information required
under SEC rules
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371
UBS AG (Parent Bank)
393
Additional disclosure required under SEC regulations
371
Parent Bank review
393
A – Introduction
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392
Parent Bank financial statements
Income statement
Balance sheet
Statement of appropriation of retained earnings
Notes to the Parent Bank financial statements
Accounting policies
Additional income statement information
Net trading income
Extraordinary income and expenses
Additional balance sheet information
Allowances and provisions
Statement of shareholders’ equity
Share capital
Off-balance sheet and other information
Assets pledged or assigned as security for own
obligations and assets subject to reservation of title
Commitments and contingent liabilities
Derivative instruments
Fiduciary transactions
Due to UBS pension plans
Personnel
Significant shareholders
Corporate governance and compensation report
Compensation details and additional information for
executive members of the Board of Directors
Remuneration details and additional information for
independent members of the Board of Directors
Total payments to all members of the Board of Directors
Total compensation for all members of
the Group Executive Board
Share and option ownership of members of
the Board of Directors
Compensation paid to former members of the Board
of Directors and Group Executive Board
Share and option ownership of members of
the Group Executive Board
Vested and unvested options held by independent members
of the Board and by members of the Group Executive Board
Loans granted to members of the Board of Directors
Loans granted to members of the Group Executive Board
Report of the statutory auditor on the financial statements
Confirmation of the auditors concerning conditional
capital increase
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401
403
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B – Selected financial data
Key figures
Income statement data
Balance sheet data
Ratio of earnings to fixed charges
C – Information on the company
Property, plant and equipment
D – 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 investments in debt instruments,
available-for-sale
Due from banks and loans (gross)
Due from banks and loan maturities (gross)
Impaired and non-performing 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
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Financial information
Introduction
Financial information 2008
This comprises the audited consolidated financial statements
of UBS Group for 2008, 2007 and 2006, prepared according
to International Financial Reporting Standards (IFRS) as issued
by the International Accounting Standards Board (IASB). It
also includes the audited financial statements of UBS AG
(the Parent Bank) for 2008 and 2007, prepared according to
Swiss banking law. Additional disclosure required by Swiss
and US regulations is included where appropriate.
244
Accounting principles
UBS’s consolidated Financial Statements have been prepared
in accordance with International Financial Reporting Stan-
dards (IFRS) as issued by the International Accounting Stan-
dards Board (IASB) and stated in Swiss francs (CHF). Until
2006, UBS also reconciled its Financial Statements to US
Generally Accepted Accounting Principles (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 371 to 392 contain the fi-
nancial 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 fi-
nancial statements are prepared in order to meet Swiss regu-
latory requirements and in compliance with Swiss Banking
Law. Except in those pages, or where otherwise explicitly
stated, all references to “UBS” refer to the UBS Group and
not to the Parent Bank. Pages 393 to 413 include additional
disclosures required under SEC rules.
All references to 2008, 2007 and 2006 refer to the UBS
Group and the Parent Bank’s fiscal years ended 31 December
2008, 2007 and 2006. 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 UBS’s Financial Statements is
provided in the next section. The basis of UBS’s accounting is
described in Note 1 to the Financial Statements.
The UBS Group financial statements 2008 included in
this Annual Report 2008 replace the Group financial state-
ments 2008 included in the Annual Report 2008 issued and
filed with the US SEC on Form 20-F on 11 March 2009. Re-
fer to Note 1b to the financial statements of this report for
details.
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Financial information
Critical accounting policies
Basis of preparation and selection of policies
UBS prepares its Financial Statements in accordance with
IFRS as issued by the International Accounting Standards
Board. The application of certain of these accounting prin-
ciples requires considerable judgment based upon esti-
mates 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 treat-
ments where significant assumptions and estimates are
used are discussed in this section, as a guide to understand-
ing how their application affects the reported results. A
broader and more detailed description of the accounting
policies UBS employs is shown in Note 1 to the Financial
Statements.
The application of assumptions and estimates means that
any selection of different assumptions would cause the re-
ported results to differ. UBS believes that the assumptions it
has made are appropriate, and that UBS’s Financial State-
ments therefore present the financial position and results
fairly, in all material respects. The alternative outcomes dis-
cussed below are presented solely to assist the reader in
understanding UBS’s Financial Statements, and are not in-
tended to suggest that other assumptions would be more
appropriate.
Many of the judgments UBS makes when applying ac-
counting principles depend on an assumption, which UBS
believes to be correct, that UBS maintains sufficient liquid-
ity to hold positions or investments until a particular trading
strategy matures – i. e. that UBS does not need to realize
positions at unfavorable prices in order to fund immediate
cash needs. Liquidity is discussed in more detail in the
“Liquidity and funding management” section of this re-
port.
Fair value of financial instruments
Financial assets and financial liabilities in UBS’s trading port-
folio, financial assets and liabilities designated at fair value,
derivative instruments, and financial assets available-for-sale
are recorded at fair value on the balance sheet. Changes in
the fair value of these financial instruments are recorded in
Net trading income in the income statement, except for fi-
nancial assets available-for-sale, for which changes in fair
value are recorded directly in equity until realized or the as-
sets are considered impaired. Key judgments affecting this
accounting policy relate to how UBS determines fair value
for such assets and liabilities.
Where no active market exists, or where quoted prices
are not otherwise available, UBS determines fair value using
valuation techniques. In these cases, fair values are esti mated
from observable data in respect of similar financial instru-
ments, using models to estimate the present value of expec-
ted future cash flows or other valuation techniques, using
inputs existing at the balance sheet dates. If available, mar-
ket observable inputs are applied to valuation models (level
2). In cases where market observable inputs are not available
for all significant valuation parameters, they are estimated
based on appropriate assumptions (level 3). At 31 December
2008, financial assets categorized as level 2 amounted to
CHF 965 billion (31 December 2007: CHF 799 billion) and
those categories as level 3 amounted to CHF 57 billion
(31 December 2007: CHF 76 billion). At 31 December 2008,
financial liabilities categorized as level 2 amounted to CHF
931 billion (31 December 2007: CHF 615 billion) and level 3
to CHF 46 billion (31 December 2007: CHF 59 billion).
Valuation models are used primarily to value derivatives
transacted in the over-the-counter market, including credit
derivatives, unlisted equity and debt securities (including
those with embedded derivatives), and other debt instru-
ments for which markets were or have become illiquid in
2008. All valuation models are validated before they are
used as a basis for financial reporting, and periodically
reviewed thereafter, by qualified personnel independent
of the area that created the model. Wherever possible,
UBS compares valuations derived from models with prices
of similar financial instruments, and with actual values
when realized, in order to further validate and calibrate
UBS’s models.
A variety of factors are incorporated in UBS’s models, in-
cluding actual or estimated market prices and rates, such as
time value and volatility, and market depth and liquidity.
Where available, UBS uses market observable prices and
rates derived from market verifiable data. Where such fac-
tors are not market observable, changes in assumptions
could affect the reported fair value of financial instruments.
UBS generally applies its models consistently from one peri-
od to the next, ensuring comparability and continuity of val-
uations over time. However, models are changed or adapted
to market developments in situations where peviously used
models have limitations and are assessed to be inadequate.
Estimating fair value inherently involves a signi ficant degree
of judgment. Management therefore establishes valuation ad-
justments to cover the risks associated with the estimation of
unobservable input parameters and the assumptions within
the models themselves. Valuation adjustments are also made
to reflect such elements as deteriorating creditworthiness (in-
246
cluding country-specific risks), concentrations in specific types
of instruments and market risk factors (interest rates, curren-
cies, etc.), and market depth and liquidity. Although a signifi-
cant degree of judgment is, in some cases, required in estab-
lishing fair values, management believes that the fair values
recorded in the balance sheet and the changes in fair values
recorded in the income statement are reflective of the underly-
ing economics, based on UBS’s established fair value and mod-
el governance policies and the related controls and proce dural
safeguards UBS employs. For a description of the valuations of
UBS’s positions related to the US student loan auction rate se-
curities, monolines, leveraged finance transactions, US and
non-US reference linked notes, US commercial mortgage
backed securities and other instruments which were deter-
mined relevant for specific disclosure refer to Note 27.
Uncertainties associated with the use of model-based
valuations (both level 2 and level 3) are predominantly ad-
dressed through the use of model reserves. These reserves
reflect the amounts that UBS estimates are appropriate to
deduct from the valuations produced directly by the models
to reflect uncertainties in the relevant modeling assumptions
and inputs used. In arriving at these estimates, UBS considers
the range of market practice and how it believes other mar-
ket participants would assess these uncertainties. Model
reserves are periodically reassessed in light of information
from market transactions, pricing utilities, and other relevant
sources. The level of these model reserves is, nevertheless, to
a large extent a matter of judgment.
To estimate the potential effect on the Financial State-
ments from the use of alternative valuation techniques or
assumptions, UBS makes use of the model reserve amounts
described above, by scaling the level of the model reserves
higher and lower, to assess the impact on valuation of in-
creasing or decreasing the amount of model-related uncer-
tainty considered.
The potential effect of using reasonably possible alter native
valuation assumptions has been quantified as follows:
– Scaling the model reserve amounts upward in line with
less favorable assumptions would reduce fair value by ap-
proximately CHF 2.5 billion at 31 December 2008, by
approximately CHF 2.7 billion at 31 December 2007 and
approximately CHF 1.0 billion at 31 December 2006.
– Scaling the model reserve amounts downward in line with
more favorable assumptions would increase fair value by
approximately CHF 1.4 billion at 31 December 2008, ap-
proximately CHF 2.2 billion at 31 December 2007, and ap-
proximately CHF 1.0 billion at 31 December 2006.
Refer to Note 27 for additional sensitivity information for se-
ve ral relevant products.
Goodwill impairment test
The ongoing crisis in the financial markets dramatically
changed industry dynamics and the related decrease in mar-
ket capitalization of UBS made it necessary to monitor close-
ly whether there was indication that goodwill allocated to its
cash-generating units was impaired. At 31 December 2008,
equity attributable to UBS shareholders stood at CHF 33 bil-
lion. UBS’s market capitalization, excluding the shares to be
issued upon conversion of the MCNs, amounted to CHF 44
billion at 31 December 2008. On the basis of the impairment
testing methodology described in Note 16, UBS concluded
that the year-end 2008 balances of goodwill allocated to all
its segments remain recoverable. Goodwill allocated to the
Investment Bank at 31 December 2008 amounted to CHF 4.3
billion (CHF 5.2 billion at 31 December 2007), to Wealth
Management US CHF 3.7 billion, Wealth Management Inter-
national & Switzerland CHF 1.6 billion and Global Asset Man-
agement CHF 2.0 billion. The assessment of the goodwill in
the Investment Bank, which is most affected by the financial
market crises, was a key focus.
In its review of the year-end 2008 goodwill balance, UBS
considered the performance outlook of its Investment Bank
division and the underlying business operations to resolve
whether the recoverable amount for this unit covers its car-
rying amount. Based on the estimated cash flows the Invest-
ment Bank will generate from its businesses, discounted
back to their present value using a discount rate that reflects
the risk profile of the Investment Bank’s activities, UBS con-
cluded that goodwill allocated to the Investment Bank re-
mained recoverable on 31 December 2008. The conclusion
was reached on the basis of the forecast results of those
activities which management expects to generate positive
cash flows in future years. The forecasts are based on an ex-
pectation that the economic environment will gradually im-
prove over the next three years and reach an average growth
level thereafter. The fair value obtained from the model cal-
culation was subject to a stress test by decreasing forecast
cash flows by one third and at the same time increasing the
discount rate by 3.5 percentage points to 16.5%. The stress
value covered the book value of the Investment Bank. How-
ever, if the conditions in the financial markets and banking
industry further deteriorate and turn out to be worse than
anticipated in UBS’s performance forecasts, the goodwill car-
ried in the Investment Bank business division may need to be
impaired in future periods.
The same model is applied to all segments carrying good-
will. It is most sensitive to changes in the forecast earnings
available to shareholders in year one to five, the estimated
247
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Financial information
return on equity, the underlying equity, the cost of equity
and to changes in the long-term growth rate. The applied
long-term growth rate is based on long-term risk-free inter-
est rates. Earnings available to share holders are estimated
based on forecast results, business ini tiatives and planned
capital investments and returns to shareholders. Valuation
parameters used within the Group’s impairment test model
are linked to external market in formation, where applicable.
Management believes that reasonable changes in key as-
sumptions used to determine the recoverable amounts of all
segments will not result in an impairment situation.
Reclassification of financial instruments
The International Accounting Standards Board published an
amendment to International Accounting Standard 39 (IAS 39
Financial Instruments: Recognition and Measurement) on
13 October 2008, under which eligible financial assets, sub-
ject to certain conditions being met, may be reclassified out
of the “held for trading” category if the firm has the intent
and ability to hold them for the foreseeable future or until
maturity.
Although the amendment could have been applied retro-
spectively from 1 July 2008, UBS decided at the end of Octo-
ber 2008 to apply the amendment with effect from 1 October
2008 following an assessment of the implications on its finan-
cial statements.
Effective 1 October 2008, UBS reclassified eligible assets
which it intends to hold for the foreseeable future with a fair
value of CHF 17.6 billion on that date from “held for trad-
ing” to the “loans and receivables” category. In addition,
student loan auction rate securities (ARS) with a fair value of
CHF 8.4 billion have been reclassified as of 31 December
2008. In fourth quarter 2008, an impairment charge of CHF
1.3 billion was recognized as credit loss expense on reclassi-
fied financial instruments. If reclassification had not oc-
curred, the impairment charge would not have been recog-
nized but an additional trading loss of CHF 4.8 billion would
have been recorded in UBS’s fourth quarter income state-
ment. Net interest income after reclassification increased by
CHF 0.1 billion. Refer to Note 29 for details.
Consolidation of Special Purpose Entities
UBS sponsors the formation of Special Purpose Entities
(SPEs) primarily to allow clients to hold investments in sepa-
rate legal entities, to allow clients to jointly invest in alter-
native assets, for asset securitization transactions and for
buying or selling credit protection. In accordance with IFRS,
UBS does not consolidate SPEs that it does not control. In
order to determine whether UBS control an SPE or not, UBS
has to make judgments about risks and rewards and assess
the ability to make operational decisions for the SPE in
question. In many instances, elements are present that,
considered in isolation, indicate control or lack of control
over an SPE, but when considered together make it difficult
to reach a clear conclusion. When assessing whether UBS
has to consolidate an SPE it evaluates a range of factors,
including whether (a) the activities of the SPE are being
conducted on UBS’s behalf according to its specific business
needs so that UBS obtains the benefits from the SPE’s op-
erations, or (b) UBS has decision-making powers to obtain
the majority of the benefits of the activities of the SPE, or
UBS has delegated these decision-making powers by set-
ting up an autopilot mechanism, or (c) UBS has the rights to
obtain the majority of the benefits of the activities of an SPE
and therefore may be exposed to risks arising from the ac-
tivities of the SPE, or (d) UBS retains the majority of the re-
sidual or ownership risks related to the SPE or its assets in
order to obtain the benefits from its activities. UBS consoli-
dates a SPE if its assessment of the relevant factors indi-
cates that UBS controls the SPE.
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 man-
ager, custodian or in some other function. Many of these
SPEs are single-investor or family trusts while others allow a
broad number of investors to invest in a diversified asset
base through a single share or certificate. These latter SPEs
range from mutual funds to trusts investing in real estate.
The majority of UBS’s SPEs are created for client investment
purposes and are not consolidated. However, UBS consoli-
dates investment funds in cases where it provides or have a
moral obligation to provide financial support to a fund. In
these instances UBS generally assumes the majority or a sig-
nificant portion of the risks of the fund, which, combined
with UBS’s role as investment manager, makes the party that
can exercise control over the entity.
SPEs used to allow clients to jointly invest in alternative
assets, e. g. feeder funds, for which generally no active
markets exist, are often in the form of limited partnerships.
Investors are the limited partners and contribute all or the
majority of the capital, whereas UBS serves as the general
partner. In that capacity, UBS is the investment manager and
248
have sole discretion over investment and other administra-
tive decisions, but have no or only a nominal amount of cap-
ital invested. UBS typically receives service and commission
fees for UBS’s services as general partner but do not, or only
to a minor extent, participate in the risks and rewards of the
vehicle, which reside with the limited partners. In most in-
stances, limited partnerships are not consolidated under IFRS
because UBS’s legal and contractual rights and obligations
indicate that UBS does not have the power to govern the
financial and operating policies of these entities and concur-
rently do not have the objective of obtaining benefits from
its activities through such power.
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 mainly on whether UBS retains the ma-
jority of the benefits or risks of the assets in the SPE.
UBS does not consolidate SPEs for securitization if it has
no control over the assets and no longer retain any signifi-
cant ex posure (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 secu-
rities would clearly be owners of the asset, while if the SPE
were to go bankrupt the securities holders would have no
recourse to UBS.
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 pro-
tection to it. The SPE in turn has investors who provide it
with capital and participate in the risks and rewards of the
credit events that it insures. UBS generally consolidates SPEs
used for credit protection.
Equity compensation
IFRS 2 requires that shares and share options awarded to
employees are recognized as compensation expense based
on their fair value at grant date. In valuing share awards, the
employee’s entitlement to receive dividends during the vest-
ing period and post-vesting sale and hedge restrictions and
non-vesting conditions are taken into account. The share op-
tions UBS issue to its employees have features that make
them incomparable to options on UBS’s shares traded in ac-
tive markets. Accordingly, UBS cannot determine fair value
by reference to a quoted market price, but UBS rather esti-
mates it using an option valuation model. The model, a
Monte Carlo simulation, requires inputs such as interest
rates, expected dividends, volatility measures and specific
employee exercise behavior patterns based on statistical
data.
Some of the model inputs UBS uses are not market ob-
servable and have to be estimated or derived from available
data. Use of different estimates would produce different op-
tion values, which in turn would result in higher or lower
compensation expense recognized.
Several recognized models for the valuation of options
exist but none can be singled out as the best or most correct.
The model UBS applys has been selected because it is able to
handle some of the specific features included in the options
granted to UBS’s employees. If UBS was to use a different
model, the option values produced would be different, even
if it used the same inputs.
Using both different inputs and a different valuation
model could have a significant impact on the fair value of
employee share options, which could be either higher or
lower than the values produced by the model UBS applys
and the inputs it has used.
On 1 January 2008, UBS adopted an amendment to
IFRS 2 Share-based Payment: Vesting Conditions and Cancel-
lations and restated the two comparative prior years. The
amended standard no longer considers non-compete condi-
tions to establish a service requirement in order to earn the
share-based awards. Accordingly, UBS changed its expense
recognition for compensation awards that contain non-com-
pete conditions from the stated vesting period to the period
over which the employee is required to provide active service
in order to earn the award. Post-vesting sale and hedge re-
strictions and other non-vesting conditions are considered
when determining the fair value of an award at grant date.
The adoption of these IFRS 2 amendments had the effect
that the compensation expense for share and option awards
containing non-compete provisions was recognized retro-
spectively in the year for which the award was granted. Ad-
ditional compensation expense of CHF 797 million was rec-
ognized for 2007 and CHF 516 million for 2006. In 2008,
management decided that most of the share-based awards
to be granted in March 2009 for the year 2008 will be for-
feited if the employee terminates employment with UBS
prior to vesting and eliminated the non-compete conditions.
Compensation expense for these awards will be recognized
over the stated vesting period that commences on 1 March
2009. The adoption of the amendments to IFRS 2 and the
large reduction in variable compensation for 2008 resulting
in a small number of share grants related to 2008 signifi-
cantly reduced share-based compensation expense for 2008.
249
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Further information on UBS equity compensation plans is
disclosed in Note 1a) 22) and Note 31 to the Financial State-
ments.
Deferred taxes
Deferred tax assets arise from a variety of sources, the most
significant being: a) tax losses that can be carried forward to
be utilized against profits in future years; and b) expenses
recognized in the books but disallowed in the tax return un-
til the associated cash flow occurs.
UBS records a valuation allowance to reduce its deferred
tax assets to the amount which can be recognized in line
with the relevant accounting standards. The level of deferred
tax asset recognition is influenced by management’s assess-
ment of UBS’s future profitability profile. At each balance
sheet date, existing assessments are reviewed and, if neces-
sary, revised to reflect changed circumstances. In a situation
where recent losses have been incurred, the relevant ac-
counting standards require convincing evidence that there
will be sufficient future profitability.
At 31 December 2008, recognized deferred tax assets
amount to CHF 8.9 billion. Recognized deferred tax assets
include an amount related to tax loss carry-forwards of
CHF 8.1 billion, mainly relating to tax losses incurred in UBS
AG, Switzerland, that can be utilized to offset taxable in-
come in Switzerland in future years. The losses mainly re-
sulted from the write-down of investments in US subsi diaries.
At 31 December 2007, recognized deferred tax assets
amounted to CHF 3.2 billion.
Swiss tax losses can be carried forward for seven years. The
deferred tax assets recognized at 31 December 2008 have
been based on future profitability assumptions over a five
year horizon. The level of assets recognized may, however,
need to be adjusted in the future in the event of changes to
those profitability assumptions. Refer to Note 22 for further
details.
250
Financial information
Consolidated financial statements
Consolidated financial statements
Management’s report on internal control over financial reporting
The Board of Directors and management of UBS AG (UBS)
are responsible for establishing and maintaining adequate
internal control over financial reporting. UBS’s internal con-
trol over financial reporting is designed to provide reason-
able assurance regarding the preparation and fair presenta-
tion of published financial statements in accordance with
International Financial Reporting Standards (IFRS) as issued
by the International Accounting Standards Board.
UBS’s internal control over financial reporting includes
those policies and procedures that:
– Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispo-
sitions of assets;
– Provide reasonable assurance that transactions are re-
corded as necessary to permit preparation and fair pre-
sentation of financial statements, and that receipts and
expenditures of the company are being made only in ac-
cordance with authorizations of UBS management; and
– Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or dis-
position of the company’s assets that could have a mate-
rial effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become in-
adequate because of changes in conditions, or that the de-
gree of compliance with the policies or procedures may de-
teriorate.
UBS management assessed the effectiveness of UBS’s
internal control over financial reporting as of 31 December
2008 based on the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on
this assessment, management believes that, as of 31 Decem-
ber 31 2008, UBS’s internal control over financial reporting
was effective.
The effectiveness of UBS’s internal control over financial
reporting as of 31 December 2008 has been audited by Ernst
& Young Ltd, UBS’s independent registered public accounting
firm, as stated in their report appearing on pages 252 to
253, which expressed an unqualified opinion on the effec-
tiveness of UBS’s internal control over financial reporting as
of 31 December 2008.
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Financial information
Consolidated financial statements
252
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Financial information
Consolidated financial statements
254
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Financial information
Consolidated financial statements
Income statement
CHF million, except per share data
Note
31.12.08
31.12.07
31.12.06
31.12.07
For the year ended
% change from
3
3
3
4
3
5
6
7
15
16, 38
22
37
22
8
8
65,679
(59,687)
5,992
(2,996)
2,996
22,929
(25,820)
692
796
16,262
10,498
1,241
341
213
28,555
(27,758)
(6,837)
(20,922)
198
1
198
109,112
(103,775)
87,401
(80,880)
5,337
(238)
5,099
30,634
(8,353)
4,341
31,721
25,515
8,429
1,243
0
276
35,463
(3,742)
1,369
(5,111)
145
(258)
403
6,521
156
6,677
25,456
13,743
1,608
47,484
24,031
7,942
1,244
0
148
33,365
14,119
2,998
11,121
888
(11)
899
(20,724)
(4,708)
12,020
568
520
48
(21,292)
(21,442)
150
(7.69)
(7.74)
0.05
(7.69)
(7.75)
0.05
539
539
0
(5,247)
(5,650)
403
(2.42)
(2.61)
0.19
(2.43)
(2.61)
0.19
493
390
103
11,527
10,731
796
5.19
4.83
0.36
4.99
4.64
0.34
(40)
(42)
12
(41)
(25)
(209)
(84)
(97)
(36)
25
0
(23)
(19)
(642)
(309)
37
(51)
(340)
5
(4)
(306)
(280)
(63)
(218)
(197)
(74)
(216)
(197)
(74)
Continuing operations
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
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Impairment of goodwill
Amortization of intangible assets
Total operating expenses
Operating profit from continuing operations before tax
Tax expense
Net profit from continuing operations
Discontinued operations
Profit from discontinued operations before tax
Tax expense
Net profit from discontinued operations
Net profit
Net profit attributable to minority interests
from continuing operations
from discontinued operations
Net profit attributable to UBS shareholders
from continuing operations
from discontinued operations
Earnings per share
Basic earnings per share (CHF)
from continuing operations
from discontinued operations
Diluted earnings per share (CHF)
from continuing operations
from discontinued operations
256
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 available-for-sale
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and 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
Equity
Share capital
Share premium
Net income recognized directly in equity, net of tax
Revaluation reserve from step acquisitions, net of tax
Retained earnings
Equity classified as obligation to purchase own shares
Treasury shares
Equity attributable to UBS shareholders
Equity attributable to minority interests
Total equity
Total liabilities and equity
Note
31.12.08
31.12.07
31.12.07
% change from
9
10
10
11
11
23
12
9
13
14
15
16
17, 22
18
10
10
11
23
19
18
19
20, 21, 22
32,744
64,451
122,897
224,648
271,838
40,216
854,100
12,882
340,308
5,248
6,141
892
6,706
12,935
18,811
18,793
60,907
207,063
376,928
660,182
114,190
428,217
11,765
335,864
4,966
11,953
1,979
7,234
14,538
20,312
2,014,815
2,274,891
125,628
14,063
102,561
62,431
851,864
101,546
474,774
10,196
197,254
33,965
145,762
31,621
305,887
164,788
443,539
191,853
641,892
22,150
222,077
61,496
1,974,282
2,231,065
293
25,250
(4,335)
38
14,487
(46)
(3,156)
32,531
8,002
40,533
207
12,433
(1,161)
38
35,795
(74)
(10,363)
36,875
6,951
43,826
2,014,815
2,274,891
74
6
(41)
(40)
(59)
(65)
99
9
1
6
(49)
(55)
(7)
(11)
(7)
(11)
(14)
(56)
(66)
(62)
92
(47)
(26)
(54)
(11)
(45)
(12)
42
103
(273)
0
(60)
38
70
(12)
15
(8)
(11)
257
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Financial information
Consolidated financial statements
Statement of changes in equity
CHF million
Share capital
Balance at the beginning of the year
Issue of share capital
Capital repayment by par value reduction
Cancellation of second trading line treasury shares
Balance at the end of the year attributable to UBS shareholders
Share premium
Balance at the beginning of the year
Change in accounting policy
Premium on shares issued and warrants exercised
Net premium / (discount) on treasury share and own equity derivative activity
Employee share and share option plans
Tax benefits from deferred compensation awards
Transaction costs related to share issuances, net of tax
Balance at the end of the year attributable to UBS shareholders
Balance at the end of the year attributable to minority interests
Balance at the end of the year
Net income recognized directly in equity, net of tax
Foreign currency translation
Balance at the beginning of the year
Change in accounting policy
Movements during the year
Subtotal – balance at the end of the year attributable to UBS shareholders 1
Balance at the end of the year attributable to minority interests
Subtotal – balance at the end of the year
Net unrealized gains / (losses) on financial investments available-for-sale, net of tax
Balance at the beginning of the year
Net unrealized gains / (losses) on financial investments available-for-sale
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 attributable to UBS shareholders
Balance at the end of the year attributable to minority interests
Subtotal – balance at the end of the year
Changes in fair value of derivative instruments designated as cash flow hedges, net of tax
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 attributable to UBS shareholders
Balance at the end of the year attributable to minority interests
Subtotal – balance at the end of the year
Net income recognized directly in equity, net of tax – attributable to UBS shareholders
Net income recognized directly in equity – attributable to minority interests
Balance at the end of the year
Revaluation reserve from step acquisitions, net of tax
Balance at the beginning of the year
Movements during the year
Balance at the end of the year attributable to UBS shareholders
For the year ended
31.12.08
31.12.07
31.12.06
207
86
0
0
293
8,884
3,549
20,003
(4,626)
(1,961)
(176)
(423)
25,250
417
25,667
(2,627)
27
(3,709)
(6,309)
(1,095)
(7,404)
1,471
(648)
42
(524)
6
347
2
349
(32)
1,780
(121)
1,627
0
1,627
(4,335)
(1,093)
(5,428)
38
0
38
211
0
0
(4)
207
9,870
2,770
12
(560)
898
(557)
0
12,433
556
12,989
(1,618)
4
(986)
(2,600)
(480)
(3,080)
2,876
1,213
14
(2,638)
6
1,471
32
1,503
(443)
239
172
(32)
0
(32)
(1,161)
(448)
(1,609)
38
0
38
871
1
(631)
(30)
211
9,992
2,325
46
(271)
(56)
604
0
12,640
461
13,101
(432)
(14)
(1,168)
(1,614)
(208)
(1,822)
931
2,574
19
(649)
1
2,876
30
2,906
(681)
1
237
(443)
0
(443)
819
(178)
641
101
(63)
38
1 Net of CHF (17) million, CHF 39 million and CHF 83 million of related taxes for the years ended 31.12.08, 31.12.07 and 31.12.06 respectively.
258
Statement of changes in equity (continued)
CHF million
Retained earnings
Balance at the beginning of the year
Change in accounting policy
Net profit attributable to UBS shareholders for the year
Dividends paid 1
Cancellation of second trading line treasury shares
Balance at the end of the year attributable to UBS shareholders
Balance at the end of the year attributable to minority interests
Balance at the end of the year
Equity classified as obligation to purchase own shares
Balance at the beginning of the year
Movements during the year
Balance at the end of the year attributable to UBS shareholders
Treasury shares
Balance at the beginning of the year
Acquisitions
Disposals
Cancellation of second trading line treasury shares
Balance at the end of the year attributable to UBS shareholders
Minority interests – preferred securities
Total equity attributable to UBS shareholders
Total equity attributable to minority interests
Total equity
1 Stock dividend of 20-for-1 was distributed in April 2008, cash dividends of CHF 2.20 per share and CHF 1.60 per share were paid on 23 April 2007 and 24 April 2006 respectively.
Additional information: Equity attributable to minority interests
CHF million
Balance at the beginning of the year
Issuance of preferred securities
Other increases
Decreases and dividend payments
Foreign currency translation
Minority interest in net profit
Balance at the end of the year
31.12.08
6,951
1,618
12
(532)
(615)
568
8,002
For the year ended
31.12.07
6,089
996
101
(502)
(272)
539
6,951
For the year ended
31.12.08
31.12.07
31.12.06
38,081
(2,286)
(21,292)
(16)
0
14,487
234
14,721
(74)
28
(46)
(10,363)
(367)
7,574
0
(3,156)
8,444
32,531
8,002
40,533
49,151
(1,423)
(5,247)
(4,275)
(2,411)
35,795
16
35,811
(185)
111
(74)
(10,214)
(7,169)
4,605
2,415
(10,363)
6,827
36,875
6,951
43,826
44,105
(693)
11,527
(3,214)
(3,997)
47,728
(25)
47,703
(133)
(52)
(185)
(10,739)
(8,314)
4,812
4,027
(10,214)
5,831
51,037
6,089
57,126
31.12.06
7,619
1,219
131
(3,191)
(182)
493
6,089
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259
Financial information
Consolidated financial statements
Statement of changes in equity (continued)
Number of shares
Shares issued
Balance at the beginning of the year
Issuance of share capital
Cancellation of second trading line treasury shares
Balance at the end of the year
Treasury shares
Balance at the beginning of the year
Acquisitions
Disposals
Cancellation of second trading line treasury shares
Balance at the end of the year
For the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
2,073,547,344
2,105,273,286
2,177,265,044
859,033,205
1,294,058
2,208,242
(33,020,000)
(74,200,000)
2,932,580,549
2,073,547,344
2,105,273,286
158,105,524
13,398,118
(109,600,521)
164,475,699
102,074,942
(75,425,117)
(33,020,000)
208,519,748
117,160,339
(87,004,388)
(74,200,000)
61,903,121
158,105,524
164,475,699
(2)
100
41
(4)
(87)
(45)
100
(61)
On 31 December 2008, a maximum of 100,415 shares can be
issued against the future exercise of options from former Pain-
eWebber employee option plans. These shares are shown as
conditional share capital in the UBS AG (Parent Bank) disclo-
sure. During 2006, shareholders approved the creation of con-
ditional capital of up to a maximum of 150 million shares to
fund UBS's employee share option programs. In 2008 and
2007, zero and 5,704 shares had been issued under this pro-
gram. The remaining conditional capital to fund UBS’s employ-
ee share option programs amounts to 149,994,296 shares.
On 27 February 2008 the extraordinary general meeting
of shareholders approved the creation of a maximum of
CHF 10,370,000 in authorized capital, allowing the distri-
bution of a stock dividend. Additionally, on 23 April 2008,
the Annual General Meeting of shareholders (AGM) ap-
proved a capital increase that resulted in the issuance
of 760,295,181 fully paid registered shares. In addition dur-
ing 2008, shareholders approved the creation of condi-
tional capital in a maximum amount of 642,750,000 shares
for the two issuances of mandatory convertible notes
(MCNs). For further information refer to “Note 26 Capital
increases and mandatory convertible notes” in the finan cial
statements.
All issued shares are fully paid.
Statement of recognized income and expense
31.12.08
Attributable to
UBS
Share-
holders
Minority
interests
Total
31.12.07
Attributable to
UBS
Share-
holders
Minority
interests
31.12.06
Attributable to
UBS
Share-
holders
Minority
interests
Total
(1,465)
(30)
(1,495)
(1,825)
0
2,180
541
2
0
(1,823)
2,610
541
332
9
0
Total
2,619
332
(615)
(4,307)
(1,025)
(272)
(1,297)
(1,251)
(182)
(1,433)
0
(196)
329
0
329
(676)
(645)
(3,818)
568 (20,724)
(77)
(24,542)
(1,980)
(5,247)
(7,227)
(270)
(2,250)
1,015
539
269
(4,708)
11,527
(6,958)
12,542
0
(173)
493
320
(676)
842
12,020
12,862
2,180
(3,692)
(196)
(3,173)
(21,292)
(24,465)
For the year ended
CHF million
Net unrealized gains / (losses) on financial investments
available-for-sale, before tax
Changes in fair value of derivative instruments designated
as cash flow hedges, before tax
Foreign currency translation
Tax on items transferred to / (from) equity
Net income recognized directly in equity, net of tax
Net income recognized in the income statement
Total recognized income and expense
260
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:
31.12.08
For the year ended
31.12.07
31.12.06
(20,724)
(4,708)
12,020
Depreciation of property and equipment
Impairment / amortization of goodwill and intangible assets
Credit loss expense (recovery)
Share of net profits 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, net replacement values and financial assets designated at fair value
Loans / due to customers
Accrued income, prepaid expenses and other assets
Net increase / (decrease) in operating liabilities:
Repurchase agreements, cash collateral on securities lent
Accrued expenses and other liabilities
Income taxes paid
Net cash flow from / (used in) operating activities
Cash flow from / (used in) investing activities
Investments in subsidiaries and associates
Disposal of subsidiaries and associates
Purchase of property and equipment
Disposal of property and equipment
Net (investment in) / divestment of financial investments available-for-sale
Net cash flow from / (used in) investing activities
Cash flow from / (used in) financing activities
Net money market paper issued / (repaid)
Net movements in treasury shares and own equity derivative activity
Capital issuance
Capital repayment by par value reduction
Dividends paid
Issuance of long-term debt, including financial liabilities designated at fair value
Repayment of long-term debt, including financial liabilities designated at fair value
Increase in minority interests 1
Dividends paid to / decrease in minority interests
Net cash flow from / (used in) financing activities
Effects of exchange rate differences
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, at the end of the year
Cash and cash equivalents comprise:
Cash and balances with central banks
Money market paper 2
Due from banks with original maturity of less than three months
Total
1,241
554
2,996
6
(7,020)
(797)
(47,906)
(16,588)
236,497
350,099
(174,443)
7,512
(220,935)
(32,625)
(887)
76,980
(1,502)
1,686
(1,217)
69
(712)
(1,676)
(40,637)
623
23,135
0
0
103,087
(92,894)
1,661
(532)
(5,557)
(39,186)
30,561
149,105
179,666
32,744
86,732
60,190
179,666
1,253
282
238
(120)
(371)
(4,085)
3,779
(60,762)
173,433
60,729
47,955
(2,408)
(271,060)
7,430
(3,663)
(52,078)
(2,337)
885
(1,910)
134
5,981
2,753
32,672
(2,771)
0
0
(4,275)
110,874
(62,407)
1,094
(619)
74,568
(12,228)
13,015
136,090
149,105
18,793
77,215
53,097
149,105
1,325
196
(156)
(117)
(303)
(2,092)
3,659
80,269
(61,382)
(177,087)
64,029
(4,263)
66,370
14,755
(2,607)
(5,384)
2,856
1,154
(1,793)
499
1,723
4,439
16,921
(3,179)
1
(631)
(3,214)
97,675
(59,740)
1,331
(1,072)
48,092
(2,099)
45,048
91,042
136,090
3,495
87,144
45,451
136,090
1 Includes issuance of preferred securities of CHF 1,617 million, CHF 996 million and CHF 1,219 million for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 respectively.
2 Money market paper is included in the balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 3,853 million, CHF 3,364 million and CHF 7,183 million were
pledged at 31 December 2008, 31 December 2007 and 31 December 2006 respectively.
261
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Financial information
Consolidated financial statements
Statement of cash flows (continued)
CHF million
Additional information
Cash received as interest
Cash paid as interest
Cash received as dividends on equities (incl. Associates, see Note 14)
Significant non-cash investing and financing activities
Private equity investments, deconsolidation
Property and equipment
Goodwill and intangible assets
Minority interests
Motor-Columbus, deconsolidation
Financial investments available-for-sale
Property and equipment
Goodwill and intangible assets
Debt issued
Minority interests
Acquisition of ABN AMRO’s Global Futures and Options Business
Property and equipment
Goodwill and intangible assets
Acquisition of Banco Pactual
Financial investments available-for-sale
Property and equipment
Goodwill and intangible assets
Debt issued
Acquisition of Piper Jaffray
Goodwill and intangible assets
Acquisition of McDonald Investments branch network
Property and equipment
Goodwill and intangible assets
Acquisition of Daehan Investment Trust Management Company
Property and equipment
Goodwill and intangible assets
Minority interests
Acquisition of Caisse Centrale de Réescompte Group (CCR)
Property and equipment
Goodwill and intangible assets
Debt issued
Acquisition of VermogensGroep
Property and equipment
Goodwill and intangible assets
262
For the year ended
31.12.08
31.12.07
31.12.06
79,805
76,109
4,839
264
62
178
2,229
951
718
2,057
13
428
36
9
2,218
1,496
605
68,239
61,681
2,779
33
22
103,828
97,358
5,313
24
3
262
2
224
60
5
405
114
2
173
Financial information
Notes to the consolidated financial statements
Notes to the consolidated financial statements
Note 1 Summary of significant accounting policies
a) Significant accounting policies
1) 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
and brokerage on a global level, and retail banking in Swit-
zerland. The Group was formed on 29 June 1998 when
Swiss Bank Corporation and Union Bank of Switzerland
merged. The merger was accounted for using the uniting of
interests method of accounting.
The consolidated financial statements of UBS (the “Finan-
cial Statements”) are prepared in accordance with Interna-
tional Financial Reporting Standards (IFRS), as issued by the
International Accounting Standards Board (IASB), and stated
in Swiss francs (CHF), the currency of Switzerland where UBS
AG is incorporated. On 5 March 2009, the Board of Directors
approved them for issue.
Disclosures under IFRS 7 Financial Instruments: Disclosures
about the nature and extent of risks and Capital disclosures
under IAS 1 Presentation of Financial Statements have been
included in the audited parts of the “Risk and treasury man-
agement” section.
2) 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 re-
ported income, expenses, assets, liabilities and disclosure of
contingent assets and liabilities. Use of available information
and application of judgment 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.
3) Subsidiaries, associates and jointly controlled entities
The Financial Statements comprise those of the parent com-
pany (UBS AG) and its subsidiaries including certain special
purpose entities, presented as a single economic entity. The
effects of intra-group transactions are eliminated in prepar-
ing the Financial Statements. Subsidiaries including special
purpose entities that are directly or indirectly controlled by
the Group are consolidated. UBS controls an entity if it has
the power to govern the financial and operating policies so
as to obtain benefits from the entity’s activities. Subsidiaries
acquired are consolidated from the date control is trans-
ferred to the Group. Subsidiaries to be divested are consoli-
dated up to the date of disposal (i. e. loss of control).
Equity attributable to minority interests is presented in the
consolidated balance sheet within equity, separately from equity
attributable to UBS shareholders. Net profit attributable to mi-
nority interests is shown separately in the income statement.
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 de-
fined objectives. These companies may acquire assets directly
or indirectly from UBS or its affiliates. Some of these compa-
nies are bankruptcy-remote entities whose assets are not avail-
able 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 com-
pany is controlled by the Group. UBS also has employee ben-
efit trusts that are used in connection with share-based pay-
ment arrangements and deferred com pensation schemes.
Pursuant to the criteria set out in SIC 12 Consolidation – Spe-
cial Purpose Entities, an interpretation of IAS 27, UBS consoli-
dates these trusts if it controls such entities.
Investments in associates in which UBS has a significant in-
fluence are accounted for under the equity method of ac-
counting. Significant influence is normally evidenced when
UBS owns 20% or more of a company’s voting rights. Invest-
ments in associates are initially recorded at cost, and the carry-
ing amount is increased or decreased to recognize the Group’s
share of the investee’s net profit or loss (including net profit or
loss recognized directly in equity) after the date of acquisition.
Interests in jointly controlled entities, in which UBS and one
or more third parties have joint control, are accounted for un-
der the equity method. A jointly controlled entity is subject to
a contractual agreement between UBS and one or more third
parties, which establishes joint control over its economic ac-
tivities. Interests in such entities are reflected under Invest-
ments in associates on the balance sheet and the related dis-
closures are included in the disclosures for associates. UBS
holds certain interests in jointly controlled real estate entities.
Assets and liabilities of subsidiaries, investments in asso-
ciates and interests in jointly controlled entities are classified
as “held for sale” if their carrying amount will be recovered
principally through a sale transaction rather than through
continuing use – see parts 17) and 26). Major lines of busi-
ness and subsidiaries that were acquired exclusively with the
intent for resale are presented as discontinued operations
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in the income statement in the period when the sale oc-
curred or it becomes highly probable that a sale will occur
within 12 months – see part 26).
4) Recognition and derecognition of financial instruments
UBS recognizes financial instruments on its balance sheet
when the Group becomes a party to the contractual provi-
sions of the instrument.
UBS enters into transactions where it transfers financial as-
sets recognized on its balance sheet but retains either all risks
and rewards of the transferred financial assets or a portion of
them. If all or substantially all risks and rewards are retained,
the transferred financial assets are not derecognized from the
balance sheet. Transfers of financial assets with retention of all
or substantially all risks and rewards include, for example, se-
curities lending and repurchase transactions described in this
Note under parts 12) and 13). They further include transac-
tions where financial assets are sold to a third party with a
concurrent total rate of return swap on the transferred assets
to retain all their risks and rewards. These types of transac-
tions are accounted for as secured financing transactions.
In transactions where substantially all of the risks and rewards
of ownership of a financial asset are neither retained nor trans-
ferred, UBS derecognizes the financial asset if control over the
asset is lost. The rights and obligations retained in the transfer
are recognized separately as assets and liabilities as appropriate.
In transfers where control over the financial asset is retained, the
Group continues to recognize the asset to the extent of its con-
tinuing involvement, determined by the extent to which it is ex-
posed to changes in the value of the transferred asset. Examples
of such transactions are transfers of financial assets involving
guarantees, writing put options, acquiring call options, or spe-
cific types of swaps linked to the performance of the asset.
UBS removes a financial liability from its balance sheet
when it is extinguished, i. e. when the obligation specified in
the contract is discharged or cancelled or expires.
Assets held in an agency or fiduciary capacity are not assets
of the Group and are not reported in the balance sheet, pro-
vided the recognition criteria of IFRS are not satisfied.
5) Determination of fair value
For an overview of financial assets and financial liabilities ac-
counted for at fair value, refer to the IAS 39 measurement
categories presented in Note 29: financial assets and finan-
cial liabilities held for trading (including derivatives), financial
assets and financial liabilities designated at fair value through
profit or loss, and financial investments available-for-sale.
For details on the determination of fair value, including those
on fair value measurements for US student loan auction rate
securities, monolines, leveraged finance transactions, US
and non-US reference linked notes, US commercial mort-
gage backed securities and other instruments which were
determined relevant for specific disclosure refer to Note 27.
For financial instruments traded in active markets, the
determination of fair values of financial assets and financial lia-
bilities is based on quoted market prices or dealer price quota-
tions. For all other financial instruments, fair value is determined
using valuation techniques. Valuation techniques include net
present value techniques, the discounted cash flow method,
comparison to similar instruments for which market observable
prices exist and valuation models. UBS uses widely recognized
valuation models for determining fair values of non-standard-
ized financial instruments of lower complexity like options or
interest rate and currency swaps. For these financial instru-
ments, inputs into models are generally market observable.
For more complex instruments, UBS uses internally devel-
oped models, which are usually based on valuation methods
and techniques generally recognized as standard within the
industry. Valuation models are used primarily to value deriva-
tives transacted in the over-the-counter market, including
credit derivatives, unlisted equity and debt securities (in cluding
those with embedded derivatives), and other debt instruments
for which markets were or have become illiquid in 2008.
Some of the inputs to these models may not be market ob-
servable and are therefore estimated based on assumptions.
The impact on Net profit of financial instrument valuations
reflecting non-market observable inputs (level 3 profit and
loss) is disclosed in Note 27. When entering into a transaction
where model inputs are not market observable, the financial
instrument is initially recognized at the transaction price,
which is generally the best indicator of fair value. This may dif-
fer from the value obtained from the valuation model. The
timing of the recognition in income of this initial difference in
fair value (“Deferred day 1 profit or loss”) depends on the in-
dividual facts and circumstances of each transaction but is
never later than when the market data become observable.
Refer to Note 27 for details on deferred day 1 profit or loss.
The output of a model is always an estimate or approxima-
tion of a value that cannot be determined with certainty, and
valuation techniques employed may not fully reflect all factors
relevant to the positions UBS holds. Valuations are therefore
adjusted, where appropriate, to allow for additional factors
including model risks, liquidity risk and counterparty credit
risk. Based on the established fair value and model gover-
nance policies and related controls and procedures applied,
management believes that these valuation adjustments are
necessary and appropriate to fairly state the values of financial
instruments carried at fair value on the balance sheet.
A breakdown of fair values of financial instruments mea-
sured on the basis of quoted market prices in active markets
(level 1), valuation techniques reflecting market observable in-
puts (level 2), and valuation techniques reflecting significant
non-market-observable inputs (level 3) is provided in Note 27.
6) Trading portfolio assets and liabilities
Trading portfolio assets consist of debt instruments (including
those in the form of securities, money market paper, traded
corporate and bank loans), equity instruments (including
264
those in the form of securities), precious metals and other
commodities owned by the Group (“long” positions). Trading
portfolio liabilities consist of obligations to deliver financial in-
struments such as debt and equity instruments which the
Group has sold to third parties but does not own (“short”
positions). The trading portfolio includes non-derivative finan-
cial instruments (including those with embedded derivatives)
and commodities. Financial instruments which are considered
derivatives in their entirety are presented on balance sheet as
Positive and Negative replacement values, refer to part 14).
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 and liabilities are reported as Net trading in-
come. Interest and dividend income and expense on trading
portfolio assets or liabilities are included in Interest and divi-
dend income or Interest and dividend expense.
An acquired non-derivative financial asset or liability is
classified at acquisition as held for trading and presented in
the trading portfolio, if it is (a) acquired or incurred princi-
pally for the purpose of selling or repurchasing it in the near
term; or (b) part of a portfolio of identified financial instru-
ments that are managed together and for which there is evi-
dence of a recent actual pattern of short-term profit-taking.
The Group uses settlement date accounting when recording
trading financial asset transactions. From the date the purchase
transaction is entered into (trade date), UBS recognizes any un-
realized profits and losses arising from revaluing that contract to
fair value in Net trading income. The corresponding receivable or
payable is presented on the balance sheet as a positive or nega-
tive replacement value. When the transaction is consummated
(settlement date), a resulting financial asset is recognized on the
balance sheet at the fair value of the consideration given or re-
ceived plus or minus the change in fair value of the contract since
the trade date. When the Group becomes party to a sales con-
tract of a financial asset classified in its trading portfolio, unreal-
ized profits and losses are no longer recognized from the date
the sales transaction is entered into (trade date) and it derecog-
nizes the asset on the day of its transfer (settlement date).
Trading portfolio assets transferred to external parties
that do not qualify for derecognition (see part 4)) are reclas-
sified on UBS‘s balance sheet from Trading portfolio assets to
Trading portfolio assets pledged as collateral, if the transfer-
ee has received the right to sell or repledge them.
Following an amendment to IAS 39 in 2008 (refer to Note 1b
and Note 29), subject to certain conditions being met, financial
assets may be reclassified out of the “held for trading” category
to the “loans and receivables” category if the firm has the intent
and ability to hold them for the foreseeable future or until ma-
turity. UBS has applied this option in fourth quarter 2008 and
reclassified several illiquid financial instrument positions to the
category “loans and receivables”, which requires these instru-
ments are no longer fair valued through profit or loss but rather
accounted for at amortized cost less impairment.
7) Financial assets and Financial liabilities designated at fair
value through profit or loss (“Fair Value Option”)
A financial instrument may only be designated at fair value
through profit or loss at inception and this designation can-
not subsequently be changed. Financial assets and financial
liabilities designated at fair value are presented in separate
lines on the face of the balance sheet.
The conditions for applying the fair value option are met
on the basis that
a) they are hybrid instruments which consist of a debt host
and an embedded derivative component, or
b) they are items that are part of a portfolio which is risk
managed on a fair value basis and reported to senior
management on that basis, or
c) the application of the fair value option reduces or elimi-
nates an accounting mismatch that would otherwise arise.
Hybrid instruments which fall under criterion a) above
include i) bonds and compound debt liabilities issued, ii) com-
pound debt liabilities – OTC, and iii) hybrid financial assets
from reverse repurchase agreements. Bonds and compound
debt liabilities issued and OTC generally include embedded de-
rivative components which refer to an underlying, e. g. equity
price, interest rate, commodities price or index. UBS has desig-
nated most of its issued hybrid debt instruments as Financial
liabilities designated at fair value through profit or loss.
Besides hybrid instruments, the fair value option is also
applied to certain loans and loan commitments which are
substantially hedged with credit derivatives. The application
of the fair value option to these instruments reduces an ac-
counting mismatch, as loans would have been otherwise
accounted for at amortized cost or as financial investments
available-for-sale (refer to part 8)), whereas the hedging
credit protection is accounted for as a derivative instrument
at fair value through profit or loss. Loan commitments other
than onerous loan commitments are only recognized on bal-
ance sheet if the fair value option has been applied.
UBS has also applied the fair value option to a hedge fund
investment which is part of a portfolio managed on a fair
value basis. Fair value changes related to financial instru-
ments designated at fair value through profit or loss are
recognized in Net trading income.
Interest income and interest expense on financial assets
and liabilities designated at fair value through profit or loss
are included in Interest income on financial assets designat-
ed at fair value or Interest on financial liabilities designated
at fair value. Refer to Note 3.
UBS applies the same recognition and derecognition prin-
ciples to financial instruments designated at fair value as for
financial instruments held for trading (refer to parts 4) and
6)).
8) Financial investments available-for-sale
Financial investments available-for-sale are non-derivative fi-
nancial assets that are not classified as held for trading, des-
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ignated at fair value through profit or loss, or loans and re-
ceivables. They are recognized on a settlement date basis.
Financial investments available-for-sale include strategic
equity investments as well as instruments that, in manage-
ment’s opinion, may be sold in response to or in anticipation
of needs for liquidity or changes in interest rates, foreign
exchange rates or equity prices. Financial investments avail-
able-for-sale consist mainly of equity instruments, including
certain private equity investments. In addition, certain debt
instruments and non-performing loans acquired in the
secondary market are classified as financial investments
available-for-sale.
Financial investments available-for-sale are carried at fair
value. Lock-in periods for equity investments are considered
when determining fair value. Unrealized gains or losses are
reported in Equity, net of applicable income taxes, until such
investments are sold, collected or otherwise disposed of, or
until any such investment is determined to be impaired. On
disposal of an investment, the accumulated unrealized gain
or loss included in Equity is transferred to Net profit for the
period and reported in Other income. Gains and losses on
disposal are determined using the average cost method.
Interest and dividend income on financial investments
available-for-sale are included in Interest and dividend in-
come from financial investments available-for-sale.
If a financial investment available-for-sale is determined
to be impaired, the cumulative unrealized loss previously rec-
ognized in Equity is included in Net profit for the period and
reported in Other income. UBS assesses at each balance
sheet date whether there is objective evidence that a finan-
cial investment available-for-sale is impaired. In case of such
evidence, it is considered impaired if its cost exceeds the re-
coverable amount. The recoverable amount for a quoted fi-
nancial investment available-for-sale is determined by refer-
ence to the market price. A quoted financial investment
available-for-sale is 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 reasonably
expected within the foreseeable future. For a non-quoted
financial investment available-for-sale (debt and equity in-
struments), the recoverable amount is determined by apply-
ing recognized valuation techniques. The standard method
applied for non-quoted equity instruments is based on the
multiple of earnings observed in the market for comparable
companies. Management may adjust valuations determined
in this way based on its judgment. For non-quoted debt in-
struments, UBS typically determines the recoverable amount
by applying the discounted cash flow method.
After the recognition of impairment on a financial invest-
ment available-for-sale, a) increases in fair value of equity
instruments are reported in Equity and b) increases in fair
value of debt instruments up to original cost are recognized
in Other income, provided the fair value increase has been
triggered by a specific event (as defined by IFRS).
9) Loans and receivables
For an overview of financial assets and financial liabilities
accounted for as “loans and receivables”, refer to the IAS 39
measurement categories presented in Note 29.
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 quot-
ed in an active market and for which no intention of im-
mediate or short-term resale exists. Originated and pur-
chased loans that are intended to be sold in the short term
are generally recorded as Trading portfolio assets. Certain
purchased non-performing loans are recognized as financial
investments available-for-sale. In addition, in fourth quarter
2008, UBS has reclassified certain debt financial assets from
the category “held-for-trading” to “loans and receivables”,
mainly due to illiquid markets for these instruments (refer to
Note 1b and Note 29). At 31 December 2008, a significant
portion of auction rate securities, including those acquired
by UBS from clients was classified as “loans and receviables”.
Refer to Note 9.
Loans are recognized when cash is advanced to borrow-
ers. They are initially recorded at fair value, which is the cash
given to originate or purchase the loan, plus 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 di-
rect costs relating to loan origination, refinancing 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
that 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.
Commitments
Letters of credit, guarantees and similar instruments commit
UBS to make payments on behalf of third parties under spe-
cific circumstances. These instruments, as well as undrawn
irrevocable credit facilities, carry credit risk and are included
in the exposure to credit risk table, in the audited “Credit
risk” section of Risk and treasury management, with their
gross maximum exposure to credit risk.
10) Allowance and provision for credit losses
An allowance or provision for credit losses is established if
there is objective evidence that the Group will be unable to
collect all amounts due on a claim according to the original
contractual terms or the equivalent value. A “claim” means
a loan or receivable carried at amortized cost, or a commit-
ment such as a letter of credit, a guarantee, a commitment
to extend credit or other credit products.
266
An allowance for credit losses is reported as a reduction
of the carrying value of a claim on the balance sheet. For an
off-balance sheet item, such as a commitment, a provision
for credit loss is reported in Other liabilities. Additions to al-
lowances 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 on the
borrower’s character, overall financial condition, resources
and payment record; the prospects for support from any fi-
nancially 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, including amounts that may result from
restructuring or the liquidation of collateral. Impairment is
measured and allowances for credit losses are established for
the difference between the carrying amount and the esti-
mated 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 generally reviewed and analyzed at
least annually. Any subsequent changes to the amounts and
timing of the expected future cash flows compared with the
prior estimates result in a change in the allowance for credit
losses and are charged or credited to Credit loss expense.
An allowance for impairment is reversed only when the
credit quality has improved to such an extent that there is
reasonable assurance of timely collection of principal and in-
terest in accordance with the original contractual terms of
the claim or equivalent value.
A write-off is made when all or part of a claim is deemed
uncollectible or forgiven. Write-offs are charged against pre-
viously 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 writ-
ten 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 it will be made good by
later payments or the liquidation of collateral, insolvency
proceedings have commenced against the firm, or when ob-
ligations have been restructured on concessionary terms.
Collectively: All loans for which no impairment is identi-
fied on a counterparty-specific level are grouped into sub-
portfolios with similar credit risk characteristics to collectively
assess whether impairment exists within a portfolio. Allow-
ances from collective assessment of impairment are recog-
nized as Credit loss expense and result in an offset to the
aggregated loan position. As the allowance cannot be allo-
cated to individual loans, the loans are not considered to be
impaired and interest is accrued on each loan according to
its contractual terms.
11) Securitizations
UBS securitizes various financial assets, which generally results
in the sale of these assets to special purpose entities, which in
turn issue securities to investors. UBS’s involvement in securiti-
zation structures significantly declined in 2008. UBS applies
the policies set out in part 3) in determining whether the re-
spective special purpose entity must be consolidated and
those set out in part 4) in determining whether derecognition
of transferred financial assets is appropriate. The following
statements mainly apply to financial asset transfers which are
considered true sales to non-consolidated entities.
Interests in the securitized financial assets may be retained
in the form of senior or subordinated tranches, interest-only
strips or other residual interests (“retained interests”). Re-
tained interests are primarily recorded in Trading portfolio
assets and carried at fair value. Gains or losses on securitiza-
tion are recognized in Net trading income, which is gener-
ally when the derecognition criteria are satisfied. Typically,
the Group seeks to exit its risk in retained interests shortly
after close of the securitization. Synthetic securitization
structures typically involve derivative financial instruments
for which the principles set out in part 14) apply. Purchased
asset-backed securities (ABS), including mortgage-backed
securities (MBS), originated by third parties are recognized as
financial assets held for trading, or in a minority of cases, as
Financial investments available-for-sale. In 2008, certain il-
liquid ABS were reclassified to the category “loans and re-
ceivables” and several student loan auction rate securities,
which are considered securitized instruments, are classified
as loans and receivables after acquiring them from clients.
UBS acted as structurer and placement agent in various
MBS and other ABS securitizations. In such capacity, UBS
purchased collateral on its own behalf or on behalf of cus-
tomers during the period prior to securitization. UBS typi-
cally sold the collateral into designated trusts at the close of
the securitization and underwrites the offerings to inves-
tors. UBS earns fees for its placement and structuring ser-
vices. Consistent with the valuation of similar inventory, fair
value of retained tranches is initially and subsequently de-
termined using market price quotations where available or
internal pricing models that utilize variables such as yield
curves, prepayment speeds, default rates, loss severity, in-
terest rate volatilities and spreads. The assumptions used for
pricing are based on observable transactions in similar secu-
rities and are verified by external pricing sources, where
available.
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12) Securities borrowing and lending
Securities borrowing and securities lending transactions are
generally entered into on a collateralized basis. In such trans-
actions, UBS typically lends or borrows securities in exchange
for securities or cash collateral. Additionally, UBS borrows
securities from its clients’ custody accounts in exchange for
a fee. The majority of securities lending and borrowing
agreements involve shares, and the remainder typically in-
volve bonds and notes. The transactions are conducted un-
der standard agreements employed by financial market par-
ticipants and are undertaken with counterparties subject to
UBS’s normal credit risk control processes. UBS monitors the
market value of the securities received or delivered on a dai-
ly basis and requests or provides additional collateral or re-
turns or recalls surplus collateral in accordance with the un-
derlying agreements.
The securities which have been transferred, whether in a
borrowing / lending transaction or as collateral, are not recog-
nized on or derecognized from the balance sheet unless the
risks and rewards of ownership are also transferred. In such
transactions where UBS transfers owned securities and where
the borrower is granted the right to sell or repledge them, the
securities are reclassified on the balance sheet from Trading
portfolio assets to Trading portfolio assets pledged as collat-
eral. Cash collateral received is recognized with a correspond-
ing obligation to return it (Cash collateral on securities lent).
Cash collateral delivered is derecognized with a correspond-
ing receivable reflecting UBS’s right to receive it back (Cash
collateral on securities borrowed). Securities received in a
lending or borrowing transaction are disclosed as off-balance
sheet items if UBS has the right to resell or repledge them,
with securities that UBS has actually resold or repledged also
disclosed separately (see Note 24). Additionally, the sale of
securities received in a borrowing or lending transaction trig-
gers the recognition of a trading liability (short sale).
Consideration exchanged in financing transactions (i. e.
interest received or paid) is recognized on an accrual basis
and recorded as Interest income or Interest expense.
13) 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. Nearly all repurchase
and reverse repurchase agreements involve debt instru-
ments, such as bonds, notes or money market paper. The
transactions are conducted under standard agreements em-
ployed by financial market participants and are undertaken
with counterparties subject to UBS’s normal credit risk con-
trol processes. UBS monitors the market value of the securi-
ties received or delivered on a daily basis and requests or
provides additional collateral or returns or recalls surplus col-
lateral in accordance with the underlying agreements.
In a reverse repurchase agreement, the cash delivered is
derecognized and a corresponding receivable, including ac-
crued interest, is recorded in the balance sheet line Reverse
repurchase agreements, recognizing UBS’s right to receive it
back. In a Repurchase agreement, the cash received is recog-
nized and a corresponding obligation, including accrued
interest, is recorded in the balance sheet line Repurchase
agreements. Securities received under reverse repurchase
agreements and securities delivered under repurchase agree-
ments are not recognized on or derecognized from the bal-
ance sheet, unless the risks and rewards of ownership are ob-
tained or relinquished. In repurchase agreements where UBS
transfers owned securities and where the recipient is granted
the right to resell or repledge them, the securities are reclassi-
fied in the balance sheet from Trading portfolio assets to Trad-
ing portfolio assets pledged as collateral. Securities received in
a reverse repurchase agreement are disclosed as off-balance
sheet items if UBS has the right to resell or repledge them,
with securities that UBS has actually resold or repledged also
disclosed separately (see Note 24). Additionally, the sale of
securities received in reverse repurchase transactions triggers
the recognition of a trading liability (short sale).
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 re-
purchase agreements with the same counterparty, maturity,
currency and Central Securities Depository (CSD) for transac-
tions covered by legally enforceable master netting agree-
ments when net or simultaneous settlement is intended.
14) Derivative instruments and hedge accounting
All derivative instruments are carried at fair value on the bal-
ance sheet and are reported as Positive replacement values
or Negative replacement values. Where the Group enters
into derivatives for trading purposes, realized and unrealized
gains and losses are recognized in Net trading income.
Credit losses incurred on over-the-counter (OTC) deriva-
tives are also reported in Net trading income.
Hedge accounting
The Group also uses derivative instruments as part of its
asset and liability management activities to manage expo-
sures to interest rate, foreign currency and credit risks, in-
cluding exposures arising from forecast transactions. The
Group applies either fair value or cash flow hedge account-
ing 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 be-
tween the hedging instrument(s) and hedged item(s), includ-
ing the risk management objectives and strategy in under-
taking the hedge transaction, together with the methods
that will be used to assess the effectiveness of the hedging
268
relationship. Accordingly, the Group assesses, both at the
inception of the hedge and on an ongoing basis, whether
the hedging derivatives have been “highly effective” in off-
setting changes in the fair value or cash flows of the hedged
items. UBS regards a hedge as highly effective only if the fol-
lowing criteria are met: a) at inception of the hedge and
throughout its life, the hedge is expected to be highly effec-
tive in achieving offsetting changes in fair value or cash flows
attributable to the hedged risk, and b) actual results of the
hedge are within a range of 80% to 125%. In the case of
hedging a forecast transaction, the transaction must have a
high probability of occurring and must present an exposure
to variations in cash flows that could ultimately affect the
reported net profit or loss. The Group discontinues hedge
accounting when it determines that a derivative is not, or
has ceased to be, highly effective as a hedge; when the de-
rivative expires or is sold, terminated or exercised; when the
hedged item matures, 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 present value of cash flows
of the hedging derivative differ from changes (or expected
changes) in the present value of cash flows of the hedged
item. Such ineffectiveness is recorded in current period earn-
ings in Net trading income.
Fair value hedges
For qualifying fair value hedges, the change in fair value of
the hedging derivative is recognized in the income state-
ment. Those changes in fair value of the hedged item that
are attributable to the risks hedged with the derivative in-
strument are reflected in an adjustment to the carrying value
of the hedged item, which is also recognized in the income
statement. The fair value change of the hedged item in a
portfolio hedge of interest rate risks is reported separately
from the hedged portfolio in Other assets or Other liabilities
as appropriate. 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 existed (the “unamortized fair
value adjustment”) is, in the case of interest-bearing instru-
ments, amortized to the income statement over the remain-
ing term of the original hedge, while for non-interest-bear-
ing instruments that amount is immediately recognized in
earnings. If the hedged item is derecognized, e. g. due to
sale or repayment, the unamortized fair value adjustment is
recognized immediately in profit or loss.
Cash flow hedges
A fair value gain or loss associated with the effective portion
of a derivative designated as a cash flow hedge is recognized
initially in 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 simul-
taneously transferred from Equity to the corresponding in-
come or expense line item.
If a cash flow hedge for a forecast transaction is deemed
to be no longer effective, or if the hedge relationship is ter-
minated, the cumulative gain or loss on the hedging deriva-
tive previously reported in Equity remains there until the
committed or forecast transaction occurs or is no longer
expected to occur, at which point it is transferred to profit
or loss.
Economic hedges which do not qualify for hedge accounting
Derivative instruments which are transacted as economic
hedges but do not qualify 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 except that, in certain
cases, the forward points on short duration foreign ex-
change contracts are reported in Net interest income. Ad-
ditionally, the Group has entered into economic hedges of
credit risk within the loan portfolio using credit default
swaps to which it cannot apply hedge accounting. In the
event that the Group recognizes an impairment 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. Where UBS designates
an economically hedged item at fair value through profit or
loss, all fair value changes, including impairments, on both
the hedged item and the hedging instrument are reflected
in Net trading income (refer to part 7)). Credit losses in-
curred on over-the-counter (OTC) derivatives are reported
in Net trading income.
Embedded derivatives
A derivative may be embedded in a “host contract”. Such
combinations are known as hybrid instruments and arise
predominantly from the issuance of certain structured debt
instruments. If the host contract is not carried at fair value
with changes in fair value reported in the income statement,
the embedded derivative is generally required to be sepa-
rated from the host contract and accounted for as a stand-
alone derivative instrument at fair value through profit or
loss if the economic characteristics and risks of the embed-
ded derivative are not closely related to the economic char-
acteristics and risks of the host contract, and is the embed-
ded derivative actually meets the definition of a derivative.
Bifurcated embedded derivatives are presented on the same
balance sheet line as the host contract, and are shown in
Note 29 in the “Held for trading” category, reflecting the
measurement and recognition principles applied.
Typically, UBS applies the fair value option to hybrid in-
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bedded derivative component is not required.
statement costs are recognized in profit and loss through
depreciation of the capitalized leasehold improvements over
their estimated useful life.
15) Cash and cash equivalents
Cash and cash equivalents consist of Cash and balances with
central banks, balances included in Due from banks with
original maturity of less than three months, and Money mar-
ket paper included in Trading portfolio assets and Financial
investments available-for-sale.
16) Physical commodities
Physical commodities (precious metals, base metals, energy
and other commodities) held by UBS as a result of its broker-
trader activities are accounted for at fair value less costs to sell
and recognized within the Trading portfolio. Changes in fair
value less costs to sell are recorded in Net trading income.
17) Property and equipment
Property and equipment includes own-used properties, in-
vestment properties, leasehold improvements, IT, software
and communication, plant and manufacturing equipment,
and other machines and equipment.
With the exception of investment properties, Property
and equipment is carried at cost, less accumulated deprecia-
tion and accumulated impairment losses, and is periodically
reviewed for impairment. The useful life of property and
equipment is estimated on the basis of the economic utiliza-
tion of the asset.
Classification for own-used property
Own-used property is defined as property held by the Group
for use in the supply of services or for administrative pur-
poses, whereas investment property is defined as property
held to earn rental income 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 rental income or for
capital appreciation, the classification is based on whether or
not these portions can be sold separately. If the portions of
the property can be sold separately, they are separately ac-
counted for as own-used property and investment property.
If the portions cannot be sold separately, the whole property
is classified as own-used property unless the portion used by
the Group is minor. The classification of property is reviewed
on a regular basis to account for major changes in its usage.
Leasehold improvements
Leasehold improvements are investments made to custom-
ize 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 required, is capitalized as part of the total leasehold
improvements costs. At the same time, a corresponding lia-
bility is recognized to reflect the obligation incurred. Rein-
Software
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
cost can be measured reliably. Internally developed software
meeting these criteria and purchased software are classified
within IT, software and communication.
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
Not exceeding 50 years
Residual lease term,
but not exceeding 10 years
Not exceeding 10 years
Not exceeding 5 years
Property held for sale
Non-current property formerly own-used or leased to third
parties under an operating lease and equipment the Group
has decided to sell and for which the sale within 12 months
is highly probable are classified as non-current assets held for
sale and recorded in Other assets. Upon classification as held
for sale, they are no longer depreciated and are carried at
the lower of book value or net realizable value. Foreclosed
properties and other properties classified as current assets
are included in Properties held for sale and recorded in Other
assets. They are carried at the lower of book value and net
realizable value.
Investment property
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 to determine
the fair value of investment property by applying recognized
valuation techniques. In cases where prices of recent market
transactions of comparable properties are available, fair value
is determined by reference to these transactions.
18) Goodwill and 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.
Goodwill is not amortized; it is tested yearly for impairment,
and, additionally, when a reasonable indication of impair-
ment exists. The impairment test is conducted at the seg-
ment level as reported in Note 2a. The segment has been
determined as the cash-generating unit for impairment
testing purposes as this is the level at which the perfor-
mance of investments is reviewed and assessed by manage-
ment. Refer to Note 16 for details.
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Intangible assets comprise separately identifiable intangi-
ble items arising from business combinations and certain pur-
chased trademarks and similar items. Intangible assets are
recognized at cost. The cost of an intangible asset acquired in
a business combination is its fair value at the date of acquisi-
tion. Intangible assets with a definite useful life are amortized
using the straight-line method over their estimated useful
economic life, generally not exceeding 20 years. Intangible
assets with an indefinite useful life are not amortized. Gener-
ally all identified intangible assets of UBS have a definite use-
ful life. At each balance sheet date, intangible assets are re-
viewed for indications of impairment or changes in estimated
future benefits. If such indications exist, the intangible assets
are analyzed to assess whether their carrying amount is fully
recoverable. An impairment loss is recognized if the carrying
amount exceeds the recoverable amount.
Intangible assets are classified into two categories: a) in-
frastructure, and b) customer relationships, contractual rights
and other. Infrastructure consists of an intangible asset rec-
ognized in connection with the acquisition of PaineWebber
Group, Inc. Customer relationships, contractual rights and
other includes mainly intangible assets for client relation-
ships, non-compete agreements, favorable contracts, propri-
etary software, trademarks and trade names acquired in busi-
ness combinations.
19) 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 de-
ferred tax asset if it is probable that future taxable profit will
be available against which those losses can be utilized.
Deferred tax liabilities are recognized for temporary dif-
ferences between the carrying amounts of assets and liabi-
lities in the balance sheet and their amounts as measured for
tax purposes, which will result in taxable amounts in future
periods. Deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future
periods, but only to the extent it is probable that sufficient
taxable profits will be available against which these differ-
ences 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.
Tax assets and liabilities of the same type (current or de-
ferred) are offset when they arise from the same tax report-
ing group, they relate to the same tax authority, the legal
right to offset exists, and they are intended to be settled net
or realized simultaneously.
Current and deferred taxes are recognized as income tax
benefit or expense except for current and deferred taxes
recognized (i) upon the acquisition of a subsidiary, (ii) for un-
realized gains or losses on financial investments available-
for-sale, for changes in fair value of derivative instruments
designated as cash flow hedges, and for certain foreign cur-
rency translations of foreign operations, (iii) for certain tax
benefits on deferred compensation awards, and (iv) for gains
and losses on the sale of treasury shares. Deferred taxes rec-
ognized in a business combination (item (i)) are considered
when determining goodwill. Items (ii), (iii) and (iv) are re-
corded in Net income recognized directly in equity.
20) Debt issued
Short-term debt
Short-term money market paper issued is initially measured
at fair value, which is the consideration received, net of
transaction costs incurred. Subsequent measurement is at
amortized cost, using the effective interest rate method to
amortize cost at inception to the redemption value over the
life of the debt.
Long-term senior and subordinated debt
without embedded derivative
Issued debt instruments without embedded derivatives are
accounted for at amortized cost. However, it is the Group’s
policy to apply fair value hedge accounting to its fixed-rate
debt instruments when the interest rate risk is managed on
a mark-to-market basis. When fair value hedge accounting is
applied to fixed-rate debt instruments, the carrying values of
debt issues are adjusted for changes in fair value related to
the hedged exposure rather than carried at amortized cost
– refer to part 14) for further discussion.
Long-term debt with embedded derivative
(related to UBS AG shares)
Debt instruments with embedded derivatives that are related
to UBS AG shares (e. g. mandatory convertible notes) are
separated into a liability and an equity component at issue
date if they require physical settlement. When the hybrid
debt instrument is issued, a portion of the net proceeds is
allocated to the debt component based on its fair value. The
determination of fair value is generally based on quoted
market prices for UBS debt instruments with comparable
terms. The debt component is subsequently measured at
amortized cost or at fair value through profit or loss, if the
fair value option is applied. The remaining amount of the net
proceeds is allocated to the equity component and reported
in Share premium. Subsequent changes in fair value of the
separated equity component are not recognized. However, if
the hybrid debt instrument or the embedded derivative re-
lated to UBS AG shares is to be cash settled or if it contains
a settlement alternative, then the separated derivative is
accounted for as a freestanding derivative, with changes in
fair value recorded in Net trading income unless the entire
hybrid debt instrument is designated at fair value through
profit or loss (“Fair Value Option”) – refer to part 7).
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Other long-term debt with embedded derivative (not
related to UBS AG shares)
Debt instruments with embedded derivatives that are related
to non-UBS AG equity instruments, foreign exchange, credit
instruments or indices are considered structured debt instru-
ments. UBS has designated most of its structured debt in-
struments at fair value through profit or loss (“Fair Value
Option”) – see part 7). If such instruments have not been
designated at fair value through profit or loss, the embed-
ded derivative is separated from the host contract and ac-
counted for as a standalone derivative if the criteria for sepa-
ration are met. The host contract is subsequently measured
at amortized cost. The fair value option is not applied to cer-
tain hybrid instruments which contain bifurcatable embed-
ded derivatives with references to foreign exchange rates
and precious metal prices and which are not hedged by de-
rivative instruments. Those hybrids are still subject to bifurca-
tion of the embedded derivative.
Bonds issued by UBS held as a result of market making
activities or deliberate purchases in the market are treated as
redemption of debt. A gain or loss on redemption is recorded
depending on whether the repurchase price of the bond is
lower or higher than its carrying value. A subsequent sale of
own bonds in the market is treated as a reissuance of debt.
Interest expense on debt instruments is included in Inter-
est on debt issued.
21) Post-employment benefits
UBS sponsors a number of post-employment benefit plans
for its employees worldwide which include both defined
benefit and defined contribution plans and other retirement
benefits such as post-employment medical benefits. Contri-
butions to defined contribution plans are expensed when
employees have rendered services in exchange for such con-
tributions, generally in the year of contribution.
UBS uses the projected unit credit method to determine
the present value of its defined benefit obligations and the
related current service cost and, where applicable, past ser-
vice cost.
The principal actuarial assumptions used are set out in
Note 30.
UBS recognizes a portion of its actuarial gains and losses as
income or expense if the net cumulative unrecognized actu-
arial gains and losses at the end of the previous reporting
period are outside the corridor defined as the greater of:
a) 10% of present value of the defined benefit obligation at that date
(before deducting the fair value of 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
statement over the expected average remaining working
lives of the employees participating in the plans.
If the defined benefit liability is negative (i. e. a defined
benefit asset) measurement of the asset is limited to the low-
er of the defined benefit asset and the total of cumulative
unrecognized net actuarial losses plus unrecognized past ser-
vice cost plus the present value of economic benefits available
in the form of refunds of the plan or reductions in future con-
tributions to the plan. However, no gain is recognized solely
as a result of an actuarial loss or past service cost in the cur-
rent period, and no loss is recognized solely as a result of an
actuarial gain in the current period. Refer also to Note 1b.
UBS recognizes curtailments on its defined benefit plans
when the reductions in expected future service and in the de-
fined benefit obligation are 10% or more. Reductions in ex-
pected future service and in the defined benefit obligation of
between 5% and 10% are recognized if deemed material,
and reductions of less than 5% are generally not recognized.
22) Equity participation and other compensation plans
Equity participation plans
UBS provides various equity participation plans to employees
in the form of share plans and share option plans. UBS rec-
ognizes the fair value of share and share option awards, de-
termined at the date of grant, as compensation expense
over the period that the employee is required to provide
active services in order to earn the award. Plans containing
voluntary termination non-compete provisions (i. e. good
leaver clause) and no vesting conditions are considered
vested in substance at the grant date because no future ser-
vice is required. The related compensation expense is recog-
nized during the performance year, which is generally the
period prior to the grant date. The awards remain forfeitable
until the legal vesting date if certain conditions are not met.
Forfeiture of awards after the grant date does not result in a
reversal of compensation expense as the related services
have been received. Plans containing vesting conditions typ-
ically have a three-year tiered vesting structure which means
awards vest in one-third increments over that period. Such
awards may contain provisions that shorten the required ser-
vice period due to retirement eligibility. In such instances,
UBS recognizes compensation expense over the shorter of
the legal vesting period and the period from grant to the
retirement eligibility date of the employee. Forfeiture of
these awards results in a reversal of compensation expense.
The fair value of share awards is equal to the average UBS
share price at the date of grant adjusted for an employee’s
non-entitlement to dividends during the vesting period (if
applicable) and, any post-vesting sale and hedge restrictions
and non-vesting conditions. The fair value of share option
awards is determined by means of a Monte Carlo simulation
which takes into account the specific terms and conditions
under which the share options are granted.
Equity settled awards are classified as equity instruments
and are not remeasured subsequent to the grant date, unless
an award is modified such that its fair value immediately after
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modification exceeds its fair value immediately prior to modi-
fication. Any increase in fair value resulting from a modifica-
tion is recognized as compensation expense, either over the
remaining service period or immediately for vested awards.
Cash settled awards are classified as liabilities and re-
measured to fair value at each balance sheet date as long as
they are outstanding. Decreases in fair value reduce compen-
sation expense, and no compensation expense, on a cumu-
lative basis, is recognized for awards that expire worthless or
remain unexercised.
Refer to Note 1b for the adoption of IFRS 2 Share-based
Payment: Vesting Conditions and Cancellations on 1 January
2008.
Other compensation plans
UBS sponsors other deferred compensation plans which can
be in the form of fixed or variable deferred cash compensa-
tion. Expense is recognized over the service period, which is
the period the employee is obligated to work in order to be-
come entitled to the compensation.
Fixed deferred cash compensation is generally awarded in
the form of sign-on bonuses and employee forgiveable
loans. The grant date fair value is fixed at the grant date.
Variable deferred cash compensation is generally award-
ed in the form of Alternative Investment Vehicles (AIV’s). The
grant date fair value is based on the fair value of the under-
lying assets (i. e. money market funds, UBS and non-UBS
mutual funds and other UBS sponsored funds) on grant date
and is subsequently marked-to-market at each reporting
date until the award is distributed. Forfeiture of these awards
results in the reversal of expense.
23) Amounts due under unit-linked investment contracts
UBS Global Asset Management’s financial liabilities from unit-
linked contracts are presented as Other Liabilities (refer to
Note 20) on the balance sheet. These contracts allow investors
to invest in a pool of assets through investment units issued by
a UBS subsidiary. The unit holders receive all rewards and bear
all risks associated with the reference asset pool. The financial
liability represents the amount due to unit holders and is equal
to the fair value of the reference asset pool.
24) Provisions
Provisions are recognized when UBS has a present obligation
(legal or constructive) as a result of a past event, and it is
probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reli-
able estimate can be made of the amount of the obligation.
Provisions are reflected under Other liabilities on the balance
sheet. Refer to Note 21.
The majority of UBS’s provisions relate to operational risks,
including litigation. When a provision is recognized, its amount
needs to be estimated as the exact amount of the obligation is
generally unknown. The estimate is based on all available in-
formation and reflects the amount that has the highest prob-
ability of being paid. UBS revises existing provisions up or down
as soon as it is able to quantify the amounts more accurately.
25) Equity, treasury shares and contracts on UBS shares
UBS AG shares held
UBS AG shares held by the Group are classified in Equity as Trea-
sury 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 reported as Share premium.
Contracts with gross physical settlement
Contracts that require gross physical settlement in UBS AG
shares are classified in Equity as Share premium (provided a
fixed amount of shares are exchanged against a fixed amount
of cash) and accounted for at cost. Upon settlement of such
contracts, the difference between the proceeds received and
their cost (net of tax, if any) are reported as Share premium.
Contracts with net cash settlement or settlement option for
counterparty
Contracts on UBS AG shares that require net cash settlement
or provide the counterparty with a choice of settlement are
generally classified as trading instruments, with changes in
fair value reported in the income statement.
Physically settled written put options and forward share
purchase contracts
Physically settled written put options and forward share pur-
chase contracts, including contracts where physical settlement
is a settlement alternative, result in the recognition of a finan-
cial liability. At inception of the contract, the present value of
the obligation to purchase own shares in exchange for cash is
transferred out of Equity and recognized as a liability. The liabil-
ity 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
the contract, the liability is derecognized, and the amount of
equity originally recognized as a liability is reclassified within
Equity to Treasury shares. The premium received for writing
put options is recognized directly in Share premium.
Minority interests
Net profit and Equity are presented including minority inter-
ests. Net profit is split into Net profit attributable to UBS
shareholders and Net profit attributable to minority interests.
Equity is split into Equity attributable to UBS shareholders
and Equity attributable to minority interests.
Trust preferred securities issued
UBS has issued trust preferred securities through consolidat-
ed preferred funding trusts which hold debt issued by UBS.
UBS AG has fully and unconditionally guaranteed all of these
securities. UBS’s obligations under these guarantees are sub-
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Notes to the consolidated financial statements
ordinated to the prior payment in full of the deposit liabilities
of UBS and all other liabilities of UBS. The trust preferred se-
curities represent equity instruments which are held by third
parties and treated as minority interests in UBS’s consolidated
financial statements with dividends paid also reported in
Equity attributable to minority interests. UBS bonds held by
preferred funding trusts are eliminated in consolidation.
26) Discontinued operations and non-current
assets held for sale
UBS classifies individual non-current non-financial assets and
disposal groups as held for sale if such assets or disposal
groups are available for immediate sale in their present con-
dition subject to terms that are usual and customary for sales
of such assets or disposal groups, management is committed
to a plan to sell such assets and is actively looking for a buy-
er, the assets are being actively marketed at a reasonable
sales price in relation to their fair value, the sale is expected
to be completed within one year, and their sale is considered
highly probable. These assets (and liabilities in the case of
disposal groups) are measured at the lower of their carrying
amount and fair value less costs to sell and presented in Oth-
er assets and Other liabilities (see Notes 17 and 20). Netting
of assets and liabilities is not permitted.
UBS presents discontinued operations in a separate line in
the income statement if an entity or a component of an entity
has been disposed of or is classified as held for sale and a) rep-
resents a separate major line of business or geograph-ical area
of operations, b) is part of a single co-ordinated plan to dis-
pose of a separate major line of business or geographical area
of operations, or c) is a subsidiary acquired exclusively with a
view to resale (e. g., certain private equity investments). Net
profit from discontinued operations includes the net total of
operating profit and loss before tax from operations including
net gain or loss on sale before tax or measurement to fair value
less costs to sell and discontinued operations tax expense. A
component of an entity comprises operations and cash flows
that can be clearly distinguished, operationally and for finan-
cial reporting purposes, from the rest of UBS’s operations and
cash flows. If an entity or a component of an entity is classified
as a discontinued operation, UBS restates prior periods in the
income statement – see part 3). Refer to Note 37 for details.
27) Leasing
UBS enters into lease contracts, predominantly of premises
and equipment, as a lessor as well as a lessee. The terms
and conditions of these contracts are assessed and the leas-
es are classified as operating leases or finance leases ac-
cording to their economic substance. When making such
an assessment, the Group focuses on the following aspects:
a) transfer of ownership of the asset to the lessee at the
end of the lease term; b) existence of a bargain purchase
option held by the lessee; c) whether the lease term is for
the major part of the economic life of the asset; d) whether
the present value of the minimum lease payments is sub-
stantially equal to the fair value of the leased asset at incep-
tion of the lease term; and e) whether the asset is of a
specialized nature that only the lessee can use without
major modifications being made. If one or more of the con-
ditions are met, the lease is generally classified as a finance
lease, while the non-existence of such conditions normally
leads to a classification as an operating lease.
Lease contracts classified as operating leases where UBS is
the lessee are disclosed in Note 25. These contracts include
non-cancellable long-term leases of office buildings in most
UBS locations. Lease contracts classified as operating leases
where UBS is the lessor, and finance lease contracts where
UBS is the lessor or the lessee, are not material. Contractual
arrangements which are not considered leases in their entirety
but which include lease elements are not material to UBS.
UBS recognizes a provision for a lease contract of office
space, if the unavoidable costs of a contract exceed the bene-
fits to be received under it, which requires that a lease contract
is considered onerous it its entirety. A provision for onerous
lease contracts often includes significant vacant rental space.
28) 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
providing transaction-type services. Fees earned from services
that are provided over a certain period of time are recognized
ratably over the service period. Fees earned from providing
transaction-type services are recognized when the service has
been completed. Performance-linked fees or fee components
are recognized when the recognition criteria are fulfilled. Loan
commitment fees on lending arrangements where the initial ex-
pectation is that the loan will be drawn down at some point, are
deferred until the loan is drawn down, and then recognized as
an adjustment to the effective yield over the life of the loan.
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 commissions received up-front. Fees predom-
inantly earned from providing transaction-type services include
underwriting fees, corporate finance fees and brokerage fees.
29) Foreign currency translation
Foreign currency transactions are initially recorded at the
spot exchange rate on the date of the transaction. At the
balance sheet date, all monetary assets and liabilities and
non-monetary assets and liabilities measured at fair value
through profit or loss are translated using the closing ex-
change rate. Non-monetary assets and liabilities not mea-
sured at fair value through profit or loss are translated using
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the historical exchange rate. Realized foreign exchange dif-
ferences resulting from the sale of assets or settlement of li-
abilities are recognized in Net trading income.
mine the revenues and expenses directly attributable to each
business unit. Internal charges and transfer pricing adjustments
are reflected in the performance of each business unit.
Unrealized exchange rate differences on monetary assets
and liabilities are recorded in Net trading income. Unrealized
exchange rate differences on non-monetary financial assets
held for trading and non-monetary financial assets designated
at fair value through profit or loss are recognized in Net trad-
ing income. Unrealized exchange rate differences on non-
monetary financial investments available-for-sale are recorded
directly in Equity until the asset is sold or becomes impaired.
Upon consolidation, assets and liabilities of foreign enti-
ties are translated at the closing exchange rate at the balance
sheet date, and income and expense items are translated at
the weighted average rate for the period. Differences result-
ing from the use of closing and weighted average exchange
rates and from revaluing a foreign entity’s net asset balance
at the closing rate are recognized directly in Foreign currency
translation within Equity.
30) Earnings per share (EPS)
Basic earnings per share are calculated by dividing the net
profit or loss for the period attributable to ordinary share-
holders by the weighted average number of ordinary shares
outstanding during the period.
Diluted earnings per share are calculated using the same
method as for basic EPS and adjusting the net profit or loss for
the period attributable to ordinary shareholders and the weight-
ed average number of ordinary shares outstanding to reflect
the potential dilution that could occur if options, warrants, con-
vertible debt securities or other contracts to issue ordinary
shares were converted or exercised into ordinary shares.
31) Segment reporting
In 2008, UBS’s businesses were organized on a worldwide basis
into three business divisions and the Cor porate Center. Each
business division is comprised of individual business units.
Global Wealth Management & Business Banking consists of
three business segments: Wealth Management International &
Switzerland, Wealth Management US and Business Banking
Switzerland. The business divisions Investment Bank and Global
Asset Management constitute one segment each. In total, UBS
has reported five business segments. Corporate Center includes
all corporate functions and elimination items, and is not consid-
ered a business segment under IFRS. The presentation of the
business segments reflects UBS’s organizational structure and
management responsibilities. In February 2009, UBS announced
that, going forward, it will divide its business division Global
Wealth Management & Business Banking into two new busi-
ness divisions: Wealth Management & Swiss Bank, comprising
all non-Americas wealth management businesses as well as the
Swiss private and corporate client business; and the business
division Wealth Management Americas.
UBS’s management reporting systems and policies deter-
Inter-business unit revenues and expenses: Revenue-shar-
ing agreements are used to allocate external customer reve-
nues to business units on a reasonable basis. Inter-business
unit charges are predominantly reported in the line “Services
(to) / from other business units” for both business units con-
cerned. Transactions between business units are conducted
at internally agreed transfer prices or at arm’s length. Corpo-
rate Center expenses are allocated to the operating business
units to the extent appropriate.
Net interest income is allocated to the business units
based on their balance sheet positions. Assets and liabili-
ties of the business divisions 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 allocation, Corporate Center transfers interest income
earned from managing UBS’s consolidated equity back to
the segments based on the average equity attributed, a con-
cept which was introduced in 2008. Prior to 2008, Corpo-
rate Center transferred interest income earned from manag-
ing UBS’s consolidated equity back to the segments based
primarily on regulatory capital requirements. For detailed
discussion on the equity attribution framework, refer to the
“Capital management” section of the annual report.
Commissions are credited to the business unit with the
corresponding customer relationship, with revenue-sharing
agreements for the allocation of customer revenues where
several business units are involved in value creation.
Segment assets and Segment liabilities: Both segment as-
sets and segment liabilities are reported in the management
reporting system and shown before the elimination of inter-
company balances. Due to the central treasury approach,
equity must be allocated to the segments. The allocation ba-
sis is average equity attributed, a concept which was intro-
duced in 2008 (for a detailed discussion on the equity attri-
bution framework, refer to the section “Capital management”
of this report). Total segment assets and total segment liabil-
ities are derived by taking into account any remaining fund-
ing surplus or requirements in each business division. Prior to
2008, the equity was allocated to the segments based pri-
marily on regulatory capital requirements. Refer to Note 2a.
32) Netting
UBS nets assets and liabilities in its balance sheet if it has a le-
gally enforceable right to set off the recognized amounts and
intends either to settle on a net basis, or to realize the asset
and settle the liability simultaneously. UBS nets the positive and
negative replacement values of OTC interest rate swaps trans-
acted with London Clearing House. The positions are netted
by currency and across maturities. Furthermore, amounts in-
cluded in Loans and Due to customers related to the Prime
Brokerage Business have been netted, where possible.
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b) Changes in accounting policies, comparability and other adjustments
Effective in 2008
Restatements made to the financial statements 2008
These financial statements 2008 replace the financial state-
ments 2008 included in the Annual Report 2008 issued and
filed with the US SEC on Form 20-F on 11 March 2009.
UBS has restated its 2008 financial statements to correct
identified accounting errors related to the 2008 financial
statements, predominately to the fourth quarter 2008 finan-
cial statements. These errors are not material to the annual
or quarterly 2008 financial statements, but related correc-
tions would have been material to first quarter 2009 finan-
cial statements. The restatement comprises three items in
excess of CHF 100 million as follows:
– The fair value of auction rate securities purchase commit-
ments at 31 December 2008, which are recognized as
negative replacement values on UBS’s balance sheet, was
increased by CHF 112 million, resulting in a correspond-
ing charge to net trading income.
– For certain assets reclassified from “held-for-trading” to
“loans and receivables” in fourth quarter 2008, recogni-
tion of interest income based on the effective interest rate
method was reduced by CHF 180 million. Other assets
were reduced accordingly as of 31 December 2008.
– The partial disposals of an investment in a consolidated
investment fund in 2008 gave rise to the realization of
the related foreign currency translation loss deferred in
shareholders’ equity. This adjustment reduced other in-
come for the year 2008 by CHF 192 million but did not
have a net impact on UBS’s equity.
In addition to the abovementioned items, a number of
misstatements individually below CHF 65 million were ad-
justed. The aggregate net effect of these items was an in-
crease of net profit attributable to shareholders of CHF 79
million. The total net impact of all restated items on the
2008 results was a reduction of net profit and net profit at-
tributable to UBS shareholders of CHF 405 million, a reduc-
tion of equity and equity attributable to UBS shareholders of
CHF 269 million, and a reduction of basic and diluted earn-
ings per share by CHF 0.15 and CHF 0.14 respectively. There
was no effect on income tax expense. Periods prior to 2008
were not affected by the restatement. 2008 quarterly net
profits attributable to UBS shareholders were reduced by the
following amounts: CHF 82 million in first quarter, CHF 37
million in second quarter, CHF 13 million in third quarter,
and CHF 273 million in fourth quarter.
In addition, guarantees and other collateral held for loans
to banks and customers at 31 December 2008 disclosed in
Note 9a were reduced by CHF 11,511 million to CHF 113,032
million with a corresponding increase of unsecured loans to
CHF 98,003 million. In note 19, senior long-term debt at 31
December 2008 was increased by CHF 3,199 million to CHF
67,298 million, whereas subordinated long-term debt was
reduced by this amount to CHF 12,769 million. In the “Risk
management and control” section, chapter on credit risk,
past due but not impaired loans at 31 December 2008 were
reduced by CHF 1,827 million to CHF 1,761 million. These
adjustments did not impact UBS’s income statement, bal-
ance sheet or earnings per share.
IFRS 2 Share-based Payment: Vesting Conditions and
Cancellations
On 1 January 2008, UBS adopted an amendment to IFRS 2
Share-based Payment: Vesting Conditions and Cancellations
and fully restated the two comparative prior years. The
amended standard clarifies the definition of vesting condi-
tions and the accounting treatment of cancellations. Under
the amended standard, UBS is required to distinguish be-
tween vesting conditions (such as service and performance
conditions) and non-vesting conditions.
The amended standard no longer considers vesting con-
ditions to include certain non-compete provisions.
The impact of this change is that UBS compensation
awards are expensed over the period that the employee is
required to provide active services in order to earn the award.
Post-vesting sale and hedge restrictions and non-vesting con-
ditions are considered when determining grant date fair val-
ue. The effect of the restatement on the opening balance
sheet at 1 January 2006 was as follows: reduction of retained
earnings by approximately CHF 2.3 billion, increase of share
premium by approximately CHF 2.3 billion, increase of liabili-
ties (including deferred tax liabilities) by approximately CHF
0.5 billion, and increase of deferred tax assets by approxi-
mately CHF 0.5 billion. Net profit attributable to UBS share-
holders declined by CHF 863 million in 2007 and by CHF 730
million in 2006. Additional compensation expenses of CHF
797 million and CHF 516 million was recognized in 2007 and
2006, respectively. These additional compensation expenses
include awards granted in 2008 for the performance year
2007. The impact of the restatement on total equity as of 31
December 2007 was a decrease of CHF 366 million. Retained
earnings at 31 December 2007 decreased by approximately
CHF 3.9 billion, share premium increased by approximately
CHF 3.5 billion, liabilities (including deferred tax liabilities) in-
creased by approximately CHF 0.6 billion and deferred tax
assets increased by approximately CHF 0.2 billion. The re-
statement decreased basic and diluted earnings per share for
the year ended 31 December 2007 by CHF 0.40 each and for
the year ended 31 December 2006 by CHF 0.33 and CHF
0.31, respectively. In order to provide comparative informa-
tion, these amounts also reflect the retrospective adjustments
to shares outstanding in 2007 due to the capital increase and
the share dividend paid in 2008.
The additional compensation expense is attributable to the
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acceleration of expenses related to share-based awards as
well as for certain alternative investment vehicle awards and
deferred cash compensation awards which contain non-com-
pete provisions and sale and hedge restrictions that no longer
qualify as vesting conditions under the amended standard.
proximately CHF 0.5 billion in Deferred tax liabilities and an
increase of approximately CHF 1.6 billion in Retained earn-
ings. There was no material impact to the income statements
or earnings per share for these periods.
Reclassifications of financial instruments
The International Accounting Standards Board published an
amendment to International Accounting Standard 39 (IAS 39
Financial Instruments: Recognition and Measurement) on 13
October 2008, under which eligible financial assets, subject to
certain conditions being met, may be reclassified out of the
“held for trading” category if the firm has the intent and abil-
ity to hold them for the foreseeable future or until maturity.
Although the amendment could have been applied re-
trospectively from 1 July 2008, UBS decided at the end of
October 2008 to apply the amendment with effect from
1 October 2008 following an assessment of the implications
on its financial statements.
Effective 1 October 2008, UBS reclassified eligible assets
which it intends to hold for the foreseeable future with a
fair value of CHF 17.6 billion on that date from “held for
trading” to the “loans and receivables” category. In addi-
tion, student loan auction rate securities (ARS) with a fair
value of CHF 8.4 billion have been reclassified as of 31 De-
cember 2008. In fourth quarter 2008, an impairment charge
of CHF 1.3 billion was recognized as a credit loss expense on
reclas sified financial instruments. If reclassification had not
occurred, the impairment charge would not have been rec-
ognized but an additional trading loss of CHF 4.8 billion
would have been recorded in UBS’s income statement. Net
interest income after reclassification increased by CHF 0.1
billion. Refer to Note 29 for details.
Recognition of a defined benefit asset for
the Swiss pension plan
In third quarter 2008, UBS concluded that it meets the re-
quirements in IAS 19 Employee Benefits to recognize a de-
fined benefit asset associated with its Swiss pension plan.
Prior to this, it had been UBS policy to only disclose this
amount in the Note “Pension and Other Post-Employment
Benefit Plans” of UBS’s Annual Report. UBS concluded that
recognition of an asset should also consider unrecognized
net actuarial losses and past service costs as permitted by
IAS 19 as this results in a better reflection of the corridor ap-
proach.
UBS considered this a change in accounting policy to
be applied retrospectively as required by IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors. The
change in accounting policy resulted in the following effects
on the balance sheets for 1 January 2007, 31 December
2007, and 30 September 2008, which is the date the change
in accounting policy was effective: an increase of approxi-
mately CHF 2.1 billion in Other assets, an increase of ap-
Revenues from Industrial Holdings and Goods and materials
purchased
The income statement no longer includes the lines Revenues
from Industrial Holdings and Goods and materials purchased,
as the last consolidated industrial private equity investment in
Industrial Holdings was sold in first quarter 2008 and is classi-
fied as a discontinued operation in UBS’s income statement.
Prior periods have been restated to reflect this classification.
Changes to segment reporting
UBS has continuously reduced its private equity business in
Industrial Holdings over the last three years. The business no
longer includes consolidated industrial private equity invest-
ments. Starting first quarter 2008, UBS is reporting the re-
maining activities from this business, mainly financial invest-
ments available-for-sale, under Corporate Center.
Trading portfolio assets pledged as collateral
The balance sheet line Trading portfolio assets pledged as col-
lateral includes financial assets held for trading which UBS has
transferred to third parties with the right of rehypothecation.
Financial assets held for trading which UBS has transferred to
third parties without the right of rehypothecation are present-
ed under Trading portfolio assets. In order to apply this pre-
sentation policy consistently, financial instruments have been
reclassified from Trading portfolio assets pledged as collateral
to Trading portfolio assets in the amount of CHF 50.1 billion
as at 31 December 2007. The reclassification did not impact
the income statements or earnings per share.
IFRIC 13 Customer Loyalty Programmes
IFRIC 13 was issued on 28 June 2007 and is effective for
annual periods beginning on or after 1 July 2008. IFRIC 13
addresses how companies that grant their customers loyalty
award credits when buying goods or services should account
for their obligation to provide free or discounted goods and
services, if and when the customers redeem the points. IFRIC
13 requires entities to allocate some of the proceeds of the
initial sale to the award credits and recognize these proceeds
as revenue only when they have fulfilled their obligations to
provide goods or services. This interpretation had no signifi-
cant impact on UBS’s Financial Statements.
IFRIC 14 The Limit on a Defined Benefit Asset Minimum
Funding Requirements and their Interaction – IAS 19
IFRIC 14 was issued on 5 July 2007 and is effective for annual
periods beginning on or after 1 January 2008. IFRIC 14 pro-
vides guidance regarding the circumstances under which re-
funds and future reductions in contributions from a defined
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benefit plan can be regarded as available to an entity for the
purpose of recognizing a net defined benefit asset. Addition-
ally, in jurisdictions where there is both a minimum funding re-
quirement and restrictions on the amounts that companies can
recover from the plan, either as refunds or reductions in contri-
butions, additional liabilities may need to be recognized. This
interpretation had no impact on UBS’s Financial Statements.
IAS 23 Borrowing Costs
The IASB issued a revised version of IAS 23 on 29 March
2007. The revised Standard is effective for annual periods
beginning 1 January 2009. UBS earlier adopted the revised
standard early from 1 January 2008 on a prospective basis,
as permitted by the Standard. The revisions require that bor-
rowing costs attributable to the acquisition, construction or
production of a qualifying asset be capitalized as part of the
cost of that asset. The adoption of the revised standard did
not have a material impact on UBS’s Financial Statements.
Effective in 2007 and earlier
IFRS 7 Financial Instruments: Disclosures
On 1 January 2007, UBS adopted the disclosure requirements
for financial instruments under IFRS 7. The new standard has
no impact on recognition, measurement and presentation of
financial instruments. Accordingly, the first-time adoption of
IFRS 7 had no effect on Net profit and Equity. Rather, it re-
quires UBS to provide disclosures in its financial statements
that enable users to evaluate: a) the significance of financial
instruments for the entity’s financial position and performance
(refer to the notes to the Financial Statements), and b) the
nature and extent of credit, market and liquidity risks arising
from financial instruments (including details about concentra-
tions of such risks) during the period and at the reporting
date, and how UBS manages those risks (refer to the audited
sections in Risk and treasury management). The disclosure
principles of IFRS 7 complement the principles for recognizing,
measuring and presenting financial assets and financial liabili-
ties in IAS 32 Financial Instruments: Presentation and IAS 39
Financial Instruments: Recognition and Measurement.
Netting
In second quarter 2007, UBS concluded that it meets the
criteria to offset Positive and Negative replacement values of
OTC interest rate swaps transacted with London Clearing
House (LCH). Under IFRS, positions are netted by currency
and across maturities. The amount of replacement values
netted was CHF 35,470 million at 31 December 2006. Fur-
thermore, amounts included in Loans and Due to customers
related to the Prime Brokerage business have been netted.
At 31 December 2006, amounts netted were CHF 14,679
million. In both cases, the application of netting had no im-
pact on UBS’s income statement, Earnings per share, credit
exposure and regulatory capital.
Syndicated finance revenues
In fourth quarter 2007, UBS revised the presentation of certain
syndicated finance revenues in its income statement. Reve-
nues which relate to syndicated loan commitments designated
at fair value through profit or loss are now presented in Net
trading income rather than as Debt underwriting fees in Net
fee and commission income. Prior periods have been adjusted
to conform to this presentation. The adjustments resulted in a
reduction of Net fee and commission income of CHF 425 mil-
lion for 2006 and a corresponding increase in Net trading in-
come in this period. The change in presentation had no impact
on UBS’s Net profit and Earnings per share for 2006. The
adoption of the following new interpretations on 1 January
2007 had no material impact on UBS’s Financial Statements.
IFRIC 7 Applying the Restatement Approach under IAS 29
Financial Reporting in Hyperinflationary Economies
This interpretation provides guidance on how to apply the
requirements of IAS 29 in a reporting period in which an en-
tity (this could be a subsidiary) identifies the existence of hy-
perinflation in the economy of its functional currency, when
that economy was not hyperinflationary in the prior period,
and the entity therefore restates its financial statements in
accordance with IAS 29. UBS has no subsidiaries operating in
a hyperinflationary economy.
IFRIC 8 Scope of IFRS 2
This IFRIC addresses whether IFRS 2 applies to transactions in
which the entity cannot identify specifically some or all of
the goods or services received. The interpretation requires
that IFRS 2 be applied to transactions in which goods or ser-
vices are received, such as transactions in which an entity
receives goods or services as consideration for equity instru-
ments of the entity. This includes transactions in which the
entity cannot identify specifically some or all of the goods or
services received. The unidentifiable goods or services re-
ceived (or to be received) should be measured as the differ-
ence between the fair value of the share-based payment and
the fair value of any identifiable goods or services received
(or to be received). Measurement of the unidentifiable goods
or services received should take place at the grant date.
However, for cash-settled transactions, the liability should be
remeasured at each reporting date until it is settled.
IFRIC 9 Reassessment of Embedded Derivatives
The interpretation clarifies that an entity should not reassess
whether an embedded derivative needs to be separated
from the host contract after the initial hybrid contract is rec-
ognized, unless there is a change in the terms of the contract
that significantly modifies the cash flows that otherwise
would be required under the contract, in which case re-
assessment is required. This interpretation did not have an
impact on UBS’s Financial Statements.
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IFRIC 10 Interim Financial Reporting and Impairment
The new interpretation of IAS 39 and IAS 36 requires that
impairment losses recognized in a previous interim period in
respect of goodwill or an investment in either an equity in-
strument or a financial asset carried at cost must not be re-
versed at a subsequent balance sheet date. This interpreta-
tion did not have an impact on UBS’s Financial Statements.
IFRIC 11 IFRS 2: Group and Treasury Share Transactions
IFRIC 11 provides guidance on (a) how to account for share-
based payment arrangements between entities within the
same group; (b) determining whether a transaction should
be accounted for as equity-settled or cash-settled when an
entity either chooses or is required to buy equity instru-
ments (i. e. treasury shares) from another party to satisfy its
obligations to its employees; and (c) determining whether a
transaction should be accounted for as equity-settled or
cash-settled when an entity’s employees are granted rights
to equity instruments of the entity (e. g. share options), ei-
ther by the entity itself or by its shareholders, and the share-
holders of the entity provide the equity instruments need-
ed. The interpretation requires that share-based payment
transactions in which an entity receives services as consider-
ation for its own equity instruments be accounted for as an
equity-settled transaction. This applies regardless of wheth-
er the entity chooses or is required to buy those equity in-
struments from another party to satisfy its obligations to its
employees under the share-based payment arrangement.
IAS 39 Financial Instruments: Recognition and Measure-
ment – Amendment to the Fair Value Option
UBS adopted the revised IAS 39 fair value option on 1 Janu-
ary 2006. On the transition date of the revised standard,
1 January 2006, UBS did not apply the fair value option to
any previously recognized financial asset or financial liability
for which the fair value option had not been used under the
previous fair value option guidance.
Staff Accounting Bulletin (SAB) 108
In response to the release of the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) 108, Con-
sidering the Effects of Prior Year Misstatements when Quan-
tifying Misstatements in Current Year Financial Statements,
UBS elected to adopt a modified quantitative framework for
assessing whether the financial statement effect of a mis-
statement is material because it renders a better evaluation
of those effects. This method, which UBS adopted in Decem-
ber 2006, uses a dual approach for quantifying the effect of
a misstatement that considers both the carryover and revers-
ing effects of prior year misstatements.
c) International Financial Reporting Standards and Interpretations to be adopted in 2009 and later
Effective in 2009
IFRS 8 Operating Segments
IFRS 8 Operating Segments is effective on 1 January 2009
and will replace IAS 14 Segment Reporting. Under the re-
quirements of the new standard, UBS’s external segmental
reporting will be based on the internal reporting to the
Group Executive Board (or, the “chief operating decision
maker”) which makes decisions on the allocation of re-
sources and assesses the performance of the reportable
segments. Based on the new UBS structure which was an-
nounced in February 2009 and following IFRS 8 guidance,
UBS will report four operating segments in 2009. The busi-
ness divisions, Wealth Management & Swiss Bank, Wealth
Management Americas, Global Asset Management and In-
vestment Bank represent one reportable segment each.
Corporate Center does not meet the requirements of an
operating segment and will be shown separately. In addi-
tion, the new standard requires UBS to provide descriptive
information about the types of products and services from
which each reportable segment derives its revenue. As UBS’s
reportable segment operations are mainly financial, the to-
tal interest income and expense for all reportable segments
will be presented on a net basis. Based on the present ar-
rangement of revenue-sharing agreements, the inter-seg-
ment revenue for UBS is unlikely to be material. Going for-
ward, the segment assets and segment liabilities will be
disclosed without the intercompany balances which are in
line with the internal reporting. An explanation of the basis
on which the segment information is prepared and recon-
ciliations to the amounts presented in the income statement
and balance sheet are also required by the new standard. In
addition, UBS will be providing geographical information
about total operating income and total non-current assets
based on the following new geographical breakdown, Swit-
zerland, UK, Rest of Europe, USA, Asia Pacific and Rest of
the World.
IAS 1 (revised) Presentation of Financial Statements and IAS
32 (revised) Financial Instruments: Presentation
IAS 1 (revised), Presentation of Financial Statements, was is-
sued in September 2007 and is effective on 1 January 2009.
The revised standard affects the presentation of owner
changes in equity and of comprehensive income: UBS will
continue presenting owner changes in equity in the state-
ment of changes in equity, but the detailed information re-
lated to non-owner changes in equity will be removed from
the statement of changes in equity and presented in the
statement of comprehensive income. The revised standard
does not change the recognition, measurement or disclosure
of specific transactions addressed in other IFRSs.
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In addition, the IASB issued a further amendment to IAS
1 and an amendment to IAS 32 regarding puttable financial
instruments and obligations arising on liquidation in Febru-
ary 2008. The IAS 32 amendment clarifies under which cir-
cumstances puttable financial instruments and obligations
arising on liquidation have to be treated as equity instru-
ments. The amendment is limited in scope and is restricted
to the accounting for such instruments under IAS 1, IAS 32,
IAS 39 and IFRS 7. The amendment to IAS 1 requires addi-
tional information about puttable financial instruments and
obligations arising on liquidations which have to be treated
as equity instruments. UBS will adopt the two amendments
on 1 January 2009. It is not expected that these amendments
will have a significant impact on UBS’s Financial Statements.
Amendments to IFRS 1 First-time Adoption of International
Financial Reporting Standards and IAS 27 Consolidated
and Separate Financial Statements – Cost of an Investment
in a Subsidiary, Jointly Controlled Entity or Associate
The amendments to IFRS 1 and IAS 27 were issued on 22 May
2008 and are effective for annual periods beginning on 1 July
2009 (which is 1 January 2010 for UBS) and 1 January 2009,
respectively. The amendments to IFRS 1 allow a first-time
adopter, at its date of transition to IFRSs in its separate finan-
cial statements, to use a deemed cost to account for an in-
vestment in a subsidiary, jointly controlled entity or associate.
The amendments to IAS 27 remove the definition of “cost
method” and require all dividends from a subsidiary, jointly
controlled entity or associate to be recognized as income in
the separate financial statements of the investor when the
right to receive the dividend is established and provides guid-
ance on the formation of a new parent entity. These amend-
ments have no impact on UBS’s Financial Statements.
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 15 was issued on 3 July 2008 and is effective for an-
nual periods beginning on or after 1 January 2009. IFRIC 15
provides guidance on the accounting for agreements for the
construction of real estate where entities enter into agree-
ments with buyers before construction has been completed
and the timing of revenue recognition. UBS does not expect
this interpretation to have a significant impact on its Finan-
cial Statements.
IFRIC 16 Hedges of a Net Investment in a Foreign Operation
IFRIC 16 was issued on 1 October 2008 and is effective for
annual periods beginning on or after 1 October 2008. IFRIC
16 provides guidance in determining which foreign exchange
risks arising from net investments in foreign operations of
subsidiaries, associates, joint ventures or branches qualify for
hedge accounting in accordance with IAS 39 Financial In-
struments: Recognition and Measurement. IFRIC 16 clarifies
that net investment hedging can only be applied when the
net assets of the foreign operation are recognized in the en-
tity’s consolidated financial statements. UBS is currently as-
sessing the impact of this interpretation on its Financial
Statements.
Effective in 2010, if not adopted early
Amendments to IAS 39 Financial Instruments: Recognition
and Measurement – Eligible Hedged Items
The amendment to IAS 39 was issued on 31 July 2008 and is
effective for annual periods beginning on or after 1 July
2009. The amendments provide additional guidance on the
designation of a hedged item. The amendment clarifies how
the existing principles underlying hedge accounting should
be applied in two particular situations: a) a one-sided risk in
a hedged item and b) inflation in a financial hedged item.
UBS does not expect these amendments to have a significant
impact on its Financial Statements.
IFRIC 17 Distributions of Non-cash Assets to Owners
IFRIC 17 was issued on 27 November 2008 and is effective
for annual periods beginning on or after 1 July 2009. IFRIC
17 clarifies when a dividend payable should be recognized,
how the dividend payable should be measured and how to
account for the difference between the carrying amount of
the asset distributed and the carrying amount of the divi-
dend payable once the dividend payable is settled. UBS is
currently assessing the impact of this interpretation on its
Financial Statements.
IFRIC 18 Transfers of Assets from Customers
IFRIC 18 was issued on 29 January 2009 and is effective,
prospectively, for transfers of assets from customers re-
ceived on or after 1 July 2009. The IFRIC clarifies how to
account for transfers of items of property, plant and equip-
ment by entities that receive such transfers from their cus-
tomers. The interpretation also applies to agreements in
which an entity receives cash from a customer when that
amount of cash must be used only to construct or acquire
an item of property, plant and equipment and the entity
must then use that item to provide the customer with on-
going access to a supply of goods and / or services. UBS is
currently assessing the impact of this interpretation on its
Financial Statements.
IFRS 3 Business Combinations and IAS 27 Consolidated and
Separate Financial Statements
In January 2008, the IASB issued a revised Standard of IFRS 3
Business Combinations and amendments to IAS 27 Consoli-
dated and Separate Financial Statements. The most signifi-
cant changes under revised IFRS 3 are as follows:
− Contingent consideration will be recognized at fair value
as part of the consideration transferred at the acquisition
date. Currently contingent consideration is only recog-
nized once it meets the probability and reliably measur-
able criteria.
280
− Non-controlling interests in an acquiree will either be
measured at fair value or as the non-controlling interest’s
proportionate share of the fair value of net identifiable
assets of the entity acquired. The option is available on a
transaction-by-transaction basis.
− Transaction costs incurred by the acquirer will no longer
be part of the acquisition cost but will have to be ex-
pensed as incurred.
The revised IFRS 3 is effective for annual periods begin-
ning on or after 1 July 2009 and has to be applied prospec-
tively from the date of adoption to business combinations
consummated after that date. Business combinations con-
summated prior to that date will not be impacted.
The amendments to IAS 27 reflect changes in the account-
ing for non-controlling interests and deal primarily with the ac-
counting for changes in ownership interests in subsidiaries after
control is obtained, the accounting for the loss of control over
subsidiaries, and the allocation of profit or loss to controlling
and non-controlling interests in a subsidiary. IAS 27 requires
that certain amendments be applied retrospectively whereas
others are applied prospectively. UBS is currently assessing the
impact of the Standard on its Financial Statements.
The revised IFRS 3 and the amendments to IAS 27 are ef-
fective for annual periods beginning on or after 1 July 2009
and must be adopted together. UBS will adopt IFRS 3 and
the amendments to IAS 27 from 1 January 2010.
Note 2a Segment reporting
In 2008, UBS’s businesses were organized on a worldwide
basis into three business divisions and a Corporate Center.
The business division Global Wealth Management & Busi-
ness Banking consists of three segments: Wealth Manage-
ment International & Switzerland, Wealth Management US
and Business Banking Switzerland. The business divisions In-
vestment Bank and Global Asset Management constitute
one segment each. In total, UBS reports five business seg-
ments and a Corporate Center in 2008. The Corporate Cen-
ter includes all corporate functions, elimination items as well
as the remaining industrial holdings activities and is not con-
sidered a business segment. Refer to Note 1 of this report for
information about UBS’s new segment structure, effective as
of first quarter 2009.
Global Wealth Management & Business Banking
In 2008, Global Wealth Management & Business Banking
comprised three segments. Wealth Management Interna-
tional & Switzerland offers a comprehensive range of prod-
ucts and services individually tailored to affluent interna-
tional and Swiss clients and operates from offices around the
world. Wealth Management US provides wealth manage-
ment services to affluent US clients through a highly trained
financial advisor network. Business Banking Switzerland pro-
vides individual and corporate clients in Switzerland with a
complete portfolio of banking and securities services, fo-
cused on customer service excellence, profitability and
growth, using a multi-channel distribution. The segments
share technological and physical infrastructure, and have
joint departments supporting major functions such as e-
commerce, financial planning and wealth management, in-
vestment policy and strategy. Refer to Note 1 of this report
for the changes to the structure of this business division, ef-
fective first quarter 2009.
Global Asset Management
The business division Global Asset Management provides in-
vestment products and services to institutional investors and
wholesale intermediaries around the globe. Clients include
corporate and public pension plans, financial institutions and
advisors, central banks, charities, foundations and individual
investors.
Investment Bank
The business division Investment Bank operates globally as a
client-driven investment banking and securities business pro-
viding innovative products, research, advice and complete
access to the world’s capital markets for intermediaries,
governments, corporate and institutional clients and other
parts of UBS.
Corporate Center
The Corporate Center ensures that all business divisions
operate as a coherent and effective whole with a common
set of values and principles in such areas as risk management
and control, financial reporting, marketing and communi-
cations, funding, capital and balance sheet management,
management of foreign currency earnings, information
technology infrastructure and service centers. In addition,
Corporate Center holds the remaining activities from the
industrial holding business, mainly financial investments
available-for-sale.
281
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Notes to the consolidated financial statements
Note 2a Segment reporting (continued)
For the year ended 31 December 2008
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 division on a reasonable basis. Transactions between
business divisions are conducted at internally agreed transfer prices or at arm’s
length.
CHF million
Income 1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Impairment of goodwill
Amortization of intangible assets 2
Total operating expenses
Performance from continuing operations before tax
Performance from discontinued operations before tax
Performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit
Additional information 3
Total assets
Total liabilities
Capital expenditure
Global Wealth Management &
Business Banking
Global Asset
Management
Investment Bank
Corporate Center
Wealth Management
International &
Switzerland
Wealth
Business Banking
Management US
Switzerland
10,819
(390)
10,429
3,112
2,001
1,581
97
0
38
6,828
3,601
3,601
5,847
(25)
5,821
3,891
2,348
238
94
0
60
6,631
(810)
(810)
5,024
(5)
5,019
2,376
1,018
(893)
70
0
0
2,570
2,449
2,449
2,904
0
2,904
926
434
150
29
0
33
1,572
1,333
1,333
(21,800)
(2,575)
(24,375)
4,882
3,399
990
231
341
83
9,925
(34,300)
(34,300)
998
0
998
1,076
1,299
(2,066)
720
0
0
1,029
(31)
198
167
UBS
3,792
(2,996)
796
16,262
10,498
0
1,241
341
213
28,555
(27,758)
198
(27,560)
(6,837)
1
(20,724)
248,355
242,390
83
61,433
53,218
135
240,212
236,504
34
33,684
30,684
95
1,752,500
1,726,708
33
(321,369)
(315,222)
929
2,014,815
1,974,282
1,309
1 Impairments of financial investments available-for-sale for the year ended 31 December 2008 were as follows: Global Wealth Management & Business Banking CHF 19 million; Global Asset Manage-
ment CHF 22 million; Investment Bank CHF 121 million; Corporate Center CHF 40 million. 2 Refer to Note 16 of this report for further information regarding goodwill and other intangible assets by
business division. 3 The funding surplus or requirement is reflected in each business division and adjusted in Corporate Center.
282
Note 2a Segment reporting (continued)
For the year ended 31 December 2008
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 division on a reasonable basis. Transactions between
business divisions are conducted at internally agreed transfer prices or at arm’s
length.
CHF million
Income 1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Impairment of goodwill
Amortization of intangible assets 2
Total operating expenses
Performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit
Additional information 3
Total assets
Total liabilities
Capital expenditure
Performance from continuing operations before tax
Performance from discontinued operations before tax
Global Wealth Management &
Business Banking
Global Asset
Management
Investment Bank
Corporate Center
Wealth Management
International &
Switzerland
Wealth
Management US
Business Banking
Switzerland
10,819
(390)
10,429
3,112
2,001
1,581
97
0
38
6,828
3,601
3,601
5,847
(25)
5,821
3,891
2,348
238
94
0
60
6,631
(810)
(810)
5,024
(5)
5,019
2,376
1,018
(893)
70
0
0
2,570
2,449
2,449
2,904
0
2,904
926
434
150
29
0
33
1,572
1,333
1,333
(21,800)
(2,575)
(24,375)
4,882
3,399
990
231
341
83
9,925
(34,300)
(34,300)
998
0
998
1,076
1,299
(2,066)
720
0
0
1,029
(31)
198
167
UBS
3,792
(2,996)
796
16,262
10,498
0
1,241
341
213
28,555
(27,758)
198
(27,560)
(6,837)
1
(20,724)
248,355
242,390
83
61,433
53,218
135
240,212
236,504
34
33,684
30,684
95
1,752,500
1,726,708
33
(321,369)
(315,222)
929
2,014,815
1,974,282
1,309
1 Impairments of financial investments available-for-sale for the year ended 31 December 2008 were as follows: Global Wealth Management & Business Banking CHF 19 million; Global Asset Manage-
ment CHF 22 million; Investment Bank CHF 121 million; Corporate Center CHF 40 million. 2 Refer to Note 16 of this report for further information regarding goodwill and other intangible assets by
business division. 3 The funding surplus or requirement is reflected in each business division and adjusted in Corporate Center.
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Financial information
Notes to the consolidated financial statements
Note 2a Segment reporting (continued)
For the year ended 31 December 2007
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 division on a reasonable basis. Transactions between
business divisions are conducted at internally agreed transfer prices or at arm’s
length.
CHF million
Income 1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets 3
Total operating expenses
Performance from continuing operations before tax
Performance from discontinued operations before tax
Performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit
Additional information 4
Total assets
Total liabilities
Capital expenditure
Global Wealth Management &
Business Banking
Global Asset
Management
Investment
Bank
Corporate Center
Wealth Management
International &
Switzerland
Management
Business Banking
Switzerland
Corporate Center
Industrial Holdings
Wealth
US
6,662
(2)
6,660
4,551
976
314
79
66
5,986
674
674
12,893
(1)
12,892
3,873
1,064
1,531
95
19
6,582
6,310
6,310
5,286
31
5,317
2,584
1,138
(739)
67
0
3,050
2,267
2,267
4,094
0
4,094
1,856
559
153
53
19
2,640
1,454
1,454
(538)
(266)
(804)
11,286
3,386
811
210 2
172
15,865
(16,669)
(16,669)
2,873
0
2,873
1,334
1,298
(2,194)
739
0
1,177
1,696
7
1,703
689
0
689
31
8
124
0
0
163
526
138
664
UBS
31,959
(238)
31,721
25,515
8,429
0
1,243
276
35,463
(3,742)
145
(3,597)
1,369
(258)
(4,708)
349,849
344,662
106
71,570
66,637
254
296,199
291,001
26
51,471
49,099
319
1,984,134
1,965,773
88
(478,833)
(487,766)
1,326
501
1,659
19
2,274,891
2,231,065
2,138
1 Impairments of financial investments available-for-sale for the year ended 31 December 2007 were as follows: Global Wealth Management & Business Banking CHF 11 million; Global Asset Manage-
ment CHF 39 million; Investment Bank CHF 22 million; Corporate Center CHF (1) million and Industrial Holdings CHF 3 million. 2 Includes CHF 34 million for impairments of leasehold improvements
and other machines and equipment. 3 Refer to Note 16 of this report for further information regarding goodwill and other intangible assets by business division. 4 The funding surplus or requirement
is reflected in each business division and adjusted in Corporate Center.
284
Note 2a Segment reporting (continued)
For the year ended 31 December 2007
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 division on a reasonable basis. Transactions between
business divisions are conducted at internally agreed transfer prices or at arm’s
length.
CHF million
Income 1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets 3
Total operating expenses
Performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit
Additional information 4
Total assets
Total liabilities
Capital expenditure
Performance from continuing operations before tax
Performance from discontinued operations before tax
Global Wealth Management &
Business Banking
Global Asset
Management
Investment
Bank
Corporate Center
Wealth Management
International &
Switzerland
Wealth
Management
US
Business Banking
Switzerland
Corporate Center
Industrial Holdings
12,893
(1)
12,892
3,873
1,064
1,531
95
19
6,582
6,310
6,310
6,662
(2)
6,660
4,551
976
314
79
66
5,986
674
674
5,286
31
5,317
2,584
1,138
(739)
67
0
3,050
2,267
2,267
4,094
0
4,094
1,856
559
153
53
19
2,640
1,454
1,454
(538)
(266)
(804)
11,286
3,386
811
210 2
172
15,865
(16,669)
(16,669)
2,873
0
2,873
1,334
1,298
(2,194)
739
0
1,177
1,696
7
1,703
689
0
689
31
8
124
0
0
163
526
138
664
UBS
31,959
(238)
31,721
25,515
8,429
0
1,243
276
35,463
(3,742)
145
(3,597)
1,369
(258)
(4,708)
349,849
344,662
106
71,570
66,637
254
296,199
291,001
26
51,471
49,099
319
1,984,134
1,965,773
88
(478,833)
(487,766)
1,326
501
1,659
19
2,274,891
2,231,065
2,138
1 Impairments of financial investments available-for-sale for the year ended 31 December 2007 were as follows: Global Wealth Management & Business Banking CHF 11 million; Global Asset Manage-
ment CHF 39 million; Investment Bank CHF 22 million; Corporate Center CHF (1) million and Industrial Holdings CHF 3 million. 2 Includes CHF 34 million for impairments of leasehold improvements
and other machines and equipment. 3 Refer to Note 16 of this report for further information regarding goodwill and other intangible assets by business division. 4 The funding surplus or requirement
is reflected in each business division and adjusted in Corporate Center.
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Financial information
Notes to the consolidated financial statements
Note 2a Segment reporting (continued)
For the year ended 31 December 2006
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 division on a reasonable basis. Transactions between
business divisions are conducted at internally agreed transfer prices or at arm’s
length.
CHF million
Income 1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Performance from continuing operations before tax
Performance from discontinued operations before tax
Performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit
Additional information 3
Total assets
Total liabilities
Capital expenditure
Global Wealth Management &
Business Banking
Global Asset
Management
Investment
Bank
Corporate Center
Wealth Management
International &
Switzerland
Management
Business Banking
Switzerland
Corporate Center
Industrial Holdings
Wealth
US
5,863
(1)
5,862
3,839
1,073
281
74
53
5,320
542
542
10,827
1
10,828
3,173
885
1,479
84
10
5,631
5,197
5,197
5,085
109
5,194
2,439
1,120
(720)
74
0
2,913
2,281
2,281
3,220
0
3,220
1,575
399
(105)
27
4
1,900
1,320
1,320
21,726
47
21,773
11,686
3,210
1,034
2032
72
16,205
5,568
5,568
294
0
294
1,273
1,242
(1,978)
783
9
1,329
(1,035)
4
(1,031)
313
0
313
46
13
9
(1)
0
67
246
884
1,130
UBS
47,328
156
47,484
24,031
7,942
0
1,244
148
33,365
14,119
888
15,007
2,998
(11)
12,020
286,334
281,328
257
63,260
58,007
273
211,837
205,749
14
48,616
46,672
498
2,059,019
2,039,225
593
(322,221)
(342,778)
1,385
1,888
3,404
97
2,348,733
2,291,607
3,117
1 Impairments of financial investments available-for-sale for the year ended 31 December 2006 were as follows: Global Wealth Management & Business Banking CHF 8 million; Global Asset Management
CHF 1 million; Investment Bank CHF 5 million; Corporate Center CHF (2) million and Industrial Holdings CHF 23 million. 2 Includes a CHF 34 million software impairment. 3 The funding surplus or
requirement is reflected in each business division and adjusted in Corporate Center.
286
Note 2a Segment reporting (continued)
For the year ended 31 December 2006
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 division on a reasonable basis. Transactions between
business divisions are conducted at internally agreed transfer prices or at arm’s
length.
CHF million
Income 1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit
Additional information 3
Total assets
Total liabilities
Capital expenditure
Performance from continuing operations before tax
Performance from discontinued operations before tax
Global Wealth Management &
Business Banking
Global Asset
Management
Investment
Bank
Corporate Center
Wealth Management
International &
Switzerland
Wealth
Management
US
Business Banking
Switzerland
Corporate Center
Industrial Holdings
10,827
1
10,828
3,173
885
1,479
84
10
5,631
5,197
5,197
5,863
(1)
5,862
3,839
1,073
281
74
53
5,320
542
542
5,085
109
5,194
2,439
1,120
(720)
74
0
2,913
2,281
2,281
3,220
0
3,220
1,575
399
(105)
27
4
1,900
1,320
1,320
21,726
47
21,773
11,686
3,210
1,034
2032
72
16,205
5,568
5,568
294
0
294
1,273
1,242
(1,978)
783
9
1,329
(1,035)
4
(1,031)
313
0
313
46
13
9
(1)
0
67
246
884
1,130
UBS
47,328
156
47,484
24,031
7,942
0
1,244
148
33,365
14,119
888
15,007
2,998
(11)
12,020
286,334
281,328
257
63,260
58,007
273
211,837
205,749
14
48,616
46,672
498
2,059,019
2,039,225
593
(322,221)
(342,778)
1,385
1,888
3,404
97
2,348,733
2,291,607
3,117
1 Impairments of financial investments available-for-sale for the year ended 31 December 2006 were as follows: Global Wealth Management & Business Banking CHF 8 million; Global Asset Management
CHF 1 million; Investment Bank CHF 5 million; Corporate Center CHF (2) million and Industrial Holdings CHF 23 million. 2 Includes a CHF 34 million software impairment. 3 The funding surplus or
requirement is reflected in each business division and adjusted in Corporate Center.
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Notes to the consolidated 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
are based on the location of the office in which the trans-
actions and assets are recorded. Because of the global nature
of financial markets, the Group's business is managed on an
integrated basis worldwide, with a view to profitability by
product line. The geographical analysis of operating income,
total assets and capital expenditure is provided in order to
comply with IFRS and does not reflect the way the Group is
managed. Management believes that analysis by business
division, as shown in Note 2a, is a more meaningful repre-
sentation of the way in which the Group is managed.
For the year ended 31 December 2008
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
11,564
(9,219)
6,132
1,453
(1,158)
770
(10,519)
(1,321)
3,122
(284)
796
392
(36)
100
230,554
466,317
341,107
637,302
201,743
137,792
11
23
17
32
10
7
556
71
138
407
105
32
43
5
11
31
8
2
2,014,815
100
1,309
100
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
18,787
(1,671)
2,541
880
6,393
4,791
59
(5)
8
3
20
15
224,679
404,506
358,504
822,825
257,991
206,386
10
18
16
36
11
9
436
261
117
923
318
83
20
12
5
44
15
4
31,721
100
2,274,891
100
2,138
100
Total operating income
Total assets
Capital expenditure
CHF million
Share % CHF million
Share % CHF million
Share %
12,964
6,863
5,553
15,295
4,988
1,821
47,484
27
14
12
32
11
4
213,689
373,219
314,642
1,066,647
206,027
174,509
9
16
13
46
9
7
100
2,348,733
100
650
314
70
723
328
1,032
3,117
21
10
2
23
11
33
100
Switzerland
United Kingdom
Rest of Europe
United States
Asia Pacific
Rest of the world
Total
For the year ended 31 December 2007
Switzerland
United Kingdom
Rest of Europe
United States
Asia Pacific
Rest of the world
Total
For the year ended 31 December 2006
Switzerland
United Kingdom
Rest of Europe
United States
Asia Pacific
Rest of the world
Total
288
Income statement notes
Note 3 Net interest and trading income
Accounting standards require separate disclosure of net in-
terest income and net trading income (see the tables on this
and the next page). This required disclosure, however, does
not take into account that net interest and trading income
are generated by a range of different businesses. In many
cases, a particular business can generate both net interest
and trading income. Fixed income trading activity, for ex-
ample, generates both trading profits and coupon income.
UBS management therefore analyzes net interest and trad-
ing income according to the businesses that drive it. The sec-
ond table below (labeled Breakdown by businesses) provides
information that corresponds to this management view. Net
income from trading businesses includes both interest and
trading income generated by the Group’s trading businesses
and the Investment Bank’s lending activities. Net income
from interest margin businesses comprises interest income
from the Group’s loan portfolio. Net income from treasury
and other activities reflects all income from the Group’s cen-
tralized treasury function.
CHF million
Net interest and trading income
Net interest income
Net trading income
Total net interest and trading income
Breakdown by businesses
Net income from trading businesses 1
Net income from interest margin businesses
Net income from treasury activities and other
Total net interest and trading income
Net interest income 2
Interest income
Interest earned on loans and advances 3
Interest earned on securities borrowed and reverse repurchase agreements
Interest and dividend income from trading portfolio
Interest income on financial assets designated at fair value
Interest and dividend income from financial investments available-for-sale
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
31.12.08
31.12.07
31.12.06
31.12.07
5,992
(25,820)
(19,828)
(27,203)
6,160
1,214
(19,828)
20,213
22,521
22,397
404
145
5,337
(8,353)
(3,016)
(10,658)
6,230
1,412
(3,016)
21,263
48,274
39,101
298
176
65,679
109,112
18,150
16,123
9,162
7,298
8,954
59,687
5,992
29,318
40,581
15,812
7,659
10,405
103,775
5,337
6,521
13,743
20,264
13,730
5,718
816
20,264
15,266
39,771
32,211
25
128
87,401
20,024
34,021
14,533
4,757
7,545
80,880
6,521
12
(209)
(557)
(155)
(1)
(14)
(557)
(5)
(53)
(43)
36
(18)
(40)
(38)
(60)
(42)
(5)
(14)
(42)
12
1 Includes lending activities of the Investment Bank. 2 Interest includes forward points on foreign exchange swaps used to manage short-term interest rate risk on foreign currency loans and depos-
its. 3 Includes interest income on impaired loans and advances of CHF 99 million for 2008, CHF 110 million for 2007 and CHF 158 million for 2006.
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289
Financial information
Notes to the consolidated financial statements
Note 3 Net interest and trading income (continued)
Net trading income 1
CHF million
Equities
Fixed income
Foreign exchange and other 2
Net trading income
thereof net gains / (losses) from financial assets designated at fair value
thereof net gains / (losses) from financial liabilities designated at fair value 3
thereof net gains / (losses) from own credit changes of
financial liabilities designated at fair value 4
For the year ended
% change from
31.12.08
4,694
(37,361)
6,846
(25,820)
(974)
44,284
3,993
31.12.07
9,048
(20,949)
3,548
(8,353)
(30)
(3,779)
659
31.12.06
31.12.07
(48)
(78)
93
(209)
7,064
2,755
3,924
13,743
(397)
(3,659)
0
506
1 Refer to the table “Net interest and trading income” on the previous page for the Net income from trading businesses (for an explanation, read the corresponding introductory comment). 2 Includes
trading from money markets, currencies and commodities. 3 Financial liabilities designated at fair value are to a large extent economically hedged with derivatives and other instruments whose change
in fair value is also reported in Net trading income. 4 Refer to Note 27.
Significant impacts on net trading income1
US sub-prime residential mortgage market
US Alt-A residential mortgage market
US prime residential mortgage market
Credit valuation adjustments for monoline credit protection
US commercial mortgage market
US reference linked notes (RLN)
Leveraged finance
US student loans
Subtotal
Mandatory convertible notes 3
SNB transaction 4
Total
For the year ended 31.12.08
For the year ended 31.12.07
USD billion
CHF billion
USD billion
CHF billion
(8.1)
(7.4)
(1.8)
(7.6)
(0.3)
(2.6)
(1.2)
(1.6)
(30.6)
(8.2)
(7.6)
(1.9)
(8.2)
(0.4)
(2.7)
(1.3)
(1.6)
(31.9)
4.6
(5.2)
(32.6)
(14.6)
(2.0)
(0.8)
(1.3)
(16.6)
(2.3)
(0.9)
(1.5)
(18.7) 2
(21.3) 2
(21.3)
1 The positions disclosed in this table are reflected in Net trading income as shown in the table above. Includes mainly positions (previously) considered risk concentrations (refer to the section “Risk
management and control”). Certain positions have been reclassified from “held for trading” to “loans and receivables” in fourth quarter 2008. Refer to Note 29. The profit or loss after reclassification
resulting from these positions is included in net interest income and, if applicable, credit loss (expense) / recovery. 2 Includes only positions disclosed in the Annual Report 2007. 3 Refer to Note 26.
4 Refer to Note 38.
290
Note 4 Net fee and commission income
CHF million
Equity underwriting fees
Debt underwriting fees
Total underwriting fees
M&A and 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
Note 5 Other income
CHF million
Associates and subsidiaries
Net gains from disposals of consolidated subsidiaries
Net gains from disposals of investments in associates
Share of net profits of associates
Total
Financial investments available-for-sale
Net gains from disposals
Impairment charges
Total
Net income from investments in property 3
Net gains from investment properties 4
Other income from Industrial Holdings
Other
Total other income
For the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
1,138
818
1,957
1,662
8,355
5,583
301
1,198
6,169
317
25,540
273
1,010
26,823
1,909
1,984
3,894
22,929
2,564
1,178
3,742
2,768
10,281
7,422
297
1,367
7,790
423
34,090
279
1,017
35,386
2,610
2,142
4,752
30,634
1,834
1,279
3,113
1,852
8,053
5,858
252
1,266
6,622
449
27,465
269
1,064
28,798
1,904
1,438
3,342
25,456
(56)
(31)
(48)
(40)
(19)
(25)
1
(12)
(21)
(25)
(25)
(2)
(1)
(24)
(27)
(7)
(18)
(25)
For the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
(184)
199 1
(6)
9
615 1
(202)
413
88
0
0
183
692
(70)
28
145
103
3,338 2
(71)
3,267
108
31
689
143
4,341
(11)
21
106
116
921
(12)
909
61
5
313
204
1,608
(163)
611
(91)
(82)
(185)
(87)
(19)
(100)
(100)
28
(84)
1 Refer to Note 38 for details. 2 Includes a pre-tax gain of CHF 1,950 million from UBS’s sale of its 20.7% stake in Julius Baer. 3 Includes net rent received from third parties and net operating
expenses. 4 Includes unrealized and realized gains from investment properties at fair value.
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291
Financial information
Notes to the consolidated financial statements
Note 6 Personnel expenses
CHF million
Salaries and bonuses
Contractors
Insurance and social security contributions
Contribution to retirement plans
Other personnel expenses
Total personnel expenses
Note 7 General and administrative expenses
CHF million
Occupancy
Rent and maintenance of IT and other equipment
Telecommunications and postage
Administration
Marketing and public relations
Travel and entertainment
Professional fees
Outsourcing of IT and other services
Other
Total general and administrative expenses
31.12.08
12,207
423
706
926
2,000
16,262
For the year ended
31.12.07
20,715
630
1,290
922
1,958
25,515
31.12.06
19,441
822
1,398
802
1,568
24,031
% change from
31.12.07
(41)
(33)
(45)
0
2
(36)
For the year ended
31.12.08
1,516
31.12.07
1,569
31.12.06
1,415
669
888
926
408
728
1,085
1,029
3,249 1
10,498
701
948
991
585
1,029
1,106
1,233
267
8,429
648
906
781
601
934
919
1,090
648
7,942
% change from
31.12.07
(3)
(5)
(6)
(7)
(30)
(29)
(2)
(17)
25
1 Included in the year ended 31 December 2008 is an amount of CHF 1,464 million for the expected costs associated with the repurchase of auction rate securities from clients and CHF 917 million in
connection with UBS’s US cross-border case. Refer to Note 21 “Provisions and litigation” and Note 23 “Derivative instruments and hedge accounting”.
292
Note 8 Earnings per share (EPS) and shares outstanding
For the year ended
% change from
31.12.08
31.12.07
31.12.06
31.12.07
Basic earnings (CHF million)
Net profit attributable to UBS shareholders
from continuing operations
from discontinued operations
Diluted earnings (CHF million)
Net profit attributable to UBS shareholders
Less: (profit) / loss on equity derivative contracts
Net profit attributable to UBS shareholders for diluted EPS
from continuing operations
from discontinued operations
Weighted average shares outstanding
Weighted average shares outstanding
Potentially dilutive ordinary shares resulting from unvested exchangeable shares,
options and warrants outstanding 1
Weighted average shares outstanding for diluted EPS
Earnings per share (CHF)
Basic
from continuing operations
from discontinued operations
Diluted
from continuing operations
from discontinued operations
Shares outstanding
Total ordinary shares issued
Second trading line treasury shares
2006 program
Other treasury shares
Total treasury shares
Shares outstanding
Retrospective adjustments for stock dividend 3
Retrospective adjustments for rights issue 2
Mandatory convertible notes and exchangeable shares 4
Shares outstanding for EPS
(21,292)
(21,442)
150
(21,292)
(28)
(21,320)
(21,470)
150
(5,247)
(5,650)
403
(5,247)
(16)
(5,263)
(5,666)
403
11,527
10,731
796
11,527
(8)
11,519
10,723
796
2,769,575,922
2,165,301,597
2,221,591,786
1,151,556
2,770,727,478
1,467,326 2
2,166,768,923
88,242,730 2
2,309,834,516
(7.69)
(7.74)
0.05
(7.69)
(7.75)
0.05
(2.42)
(2.61)
0.19
(2.43)
(2.61)
0.19
5.19
4.83
0.36
4.99
4.64
0.34
(306)
(280)
(63)
(306)
(75)
(305)
(279)
(63)
28
(22)
28
(218)
(197)
(74)
(216)
(197)
(74)
31.12.08
As of
31.12.07
% change from
31.12.06
31.12.07
2,932,580,549
2,073,547,344
2,105,273,286
61,903,121
61,903,121
158,105,524
158,105,524
22,600,000
141,875,699
164,475,699
2,870,677,428
1,915,441,820
1,940,797,587
95,772,091
97,039,879
141,850,917
143,728,676
41
(61)
(61)
50
600,557,453
518,711
139,561
3,471,234,881
2,153,583,539
2,181,705,703
61
1 Due to UBS’s losses, 28 million and 54 million potential ordinary shares from unexercised employee shares and options are not considered as they have an anti-dilutive effect for the years ended
31 December 2008 and 31 December 2007. Total equivalent shares outstanding on out-of-the-money options that were not dilutive for the respective periods but could potentially dilute earnings per
share in the future were 283,263,330; 119,309,645; and 37,229,136 for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 respectively. An additional 100 million ordinary
shares related to the SNB transaction were not dilutive for the year ended 31 December 2008 but could potentially dilute earnings per share in the future. 2 Shares outstanding and potentially dilutive
ordinary shares are increased by 7.053% due to the rights issue. 3 Shares outstanding are increased by 5% to reflect the 1:20 ratio of the stock dividend. 4 31 December 2008 includes 329,447,681
shares for the mandatory convertible notes issued to the Swiss Confederation in December 2008 and 270,438,942 shares for the mandatory convertible notes issued to two investors in March 2008,
adjusted for the dilution effect of the rights issue; remaining amounts related to exchangeable shares (31 December 2007 and 31 December 2006 have been adjusted for the stock dividend and rights
issue).
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293
Financial information
Notes to the consolidated financial statements
Balance sheet notes: assets
Note 9a Due from banks and loans (held at amortized cost)
By type of exposure
CHF million
Banks
Allowance for credit losses
Net due from banks
Loans
Residential mortgages
Commercial mortgages
Other loans
Debt instruments traditionally not classified as loans and receivables 1
Subtotal
Allowance for credit losses
of which: Debt instruments traditionally not classified as loans and receivables
Net loans
Net due from banks and loans (held at amortized cost)
By geographical region (based on the location of the borrower)
Switzerland
United Kingdom
Rest of Europe
United States
Asia Pacific
Rest of the world
Subtotal
Allowance for credit losses
Net due from banks, loans (held at amortized cost) and loans designated at fair value 2
By type of collateral
Secured by real estate
Collateralized by securities
Guarantees and other collateral
Unsecured
Subtotal
31.12.08
64,473
(22)
64,451
121,811
21,270
170,099
30,033
343,213
(2,905)
(1,329)
340,308
404,759
166,798
30,540
47,724
105,907
23,279
38,590
412,838
(2,927)
409,911
145,491
56,312
113,032
98,003
412,838
31.12.07
60,935
(28)
60,907
122,435
21,058
193,374
–
336,867
(1,003)
–
335,864
396,771
166,435
29,796
43,966
70,962
27,843
62,916
401,918
(1,031)
400,887
145,927
96,306
79,936
79,749
401,918
Allowance for credit losses
Net due from banks, loans (held at amortized cost) and loans designated at fair value 2
1 Includes student loan auction rate securities (ARS) of CHF 8.4 billion and other debt instruments of CHF 17.1 billion (before impairment) reclassified from the category “held for trading” to “loans and
receivables” and ARS acquired from clients of CHF 4.5 billion. 2 Includes loans designated at fair value of CHF 5,153 million on 31 December 2008 and CHF 4,116 million on 31 December 2007. For
further details refer to “Note 12 Financial Assets Designated at Fair Value”.
409,911
400,887
(2,927)
(1,031)
294
Note 9b Allowances and provisions for credit losses
CHF million
Balance at the beginning of the year
Write-offs
Recoveries
Increase / (decrease) in credit loss allowances and provisions
Disposals
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 securities borrowed
Subtotal
Included in other liabilities related to provisions for contingent claims
Total allowances and provisions for credit losses
Specific allowances
and provisions
Collective loan
loss allowances
and provisions
Total 31.12.08
Total 31.12.07
1,130
(868)
44
3,007
(223)
(43)
3,047
34
0
0
(11)
0
0
23
1,164
(868)
44
2,996
(223)
(43)
3,070
1,332
(321)
55
238
(131)
(9)
1,164
Specific allowances
and provisions
Collective loan
loss allowances
and provisions
Total 31.12.08
Total 31.12.07
22
2,882
112
3,016
31
3,047
0
23
0
23
0
23
22
2,905
112
3,039
31
3,070
28
1,003
70
1,101
63
1,164
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 credit
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
returned to the Group when deemed necessary.
Balance sheet assets
CHF million
By counterparty
Banks
Customers
Total
Balance sheet liabilities
CHF million
By counterparty
Banks
Customers
Total
Cash collateral on
Reverse repurchase
securities borrowed
31.12.08
agreements
31.12.08
Cash collateral on
securities borrowed
31.12.07
Reverse repurchase
agreements
31.12.07
17,523
105,374
122,897
110,254
114,393
224,648
48,480
158,583
207,063
221,575
155,353
376,928
Cash collateral on
securities lent
31.12.08
Repurchase
agreements
31.12.08
Cash collateral on
securities lent
31.12.07
Repurchase
agreements
31.12.07
12,181
1,881
14,063
36,088
66,473
102,561
29,512
2,109
31,621
139,156
166,731
305,887
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n
a
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295
Financial information
Notes to the consolidated financial statements
Note 11 Trading portfolio
The Group trades in debt instruments (including money
market paper and tradable loans), equity instruments, pre-
cious metals, other commodities and derivatives to meet the
financial needs of its customers and to generate revenue.
Refer to Note 23 for derivative instruments. The table below
represents a pure accounting view. It does not reflect hedges
and other risk-mitigating factors and the amounts must
therefore not be considered risk exposures.
CHF million
Trading portfolio assets
Debt instruments
Government and government agencies
Switzerland
United States
Japan
Other
Banks
Listed 1
Unlisted
Corporates
Listed 1
Unlisted
Total debt instruments
thereof pledged as collateral with central banks
thereof pledged as collateral (excluding central banks)
thereof pledged as collateral and can be repledged or resold by counterparty
Equity instruments
Listed 1
Unlisted
Total equity instruments
thereof pledged as collateral
thereof can be repledged or resold by counterparty
Precious metals and other commodities 2
Total trading portfolio assets
Trading portfolio liabilities
Debt instruments
Government and government agencies
Switzerland
United States
Japan
Other
Banks
Listed 1
Unlisted
Corporates
Listed 1
Unlisted
Total debt instruments
Equity instruments
Total trading portfolio liabilities
31.12.08
31.12.07
121
31,366
46,049
38,160
12,450
10,725
41,690
44,301
224,862
5,541
56,612
30,903
70,713
6,545
77,258
15,849
9,312
9,934
312,054
129
18,914
2,344
12,656
4,235
119
8,961
1,984
49,342
13,089
62,431
437
86,684
51,137
52,993
28,923
13,594
153,416
150,768
537,952
3,252
152,704
88,866
181,034
25,968
207,002
26,870
25,325
29,418
774,372
171
50,659
13,557
27,335
8,806
873
15,076
3,949
120,426
44,362
164,788
1 Includes financial instruments which are exchanged in representative markets, as defined by Art. 4d of the ordinance concerning capital adequacy and risk diversification for banks and securities traders
(“Eigenmittelverordnung”, ERV), issued by the Swiss Financial Market Supervisory Authority (FINMA). 2 Other commodities predominantly consist of energy.
296
Note 12 Financial assets designated at fair value
CHF million
Loans
Structured loans
Reverse repurchase and securities borrowing agreements
Banks
Customers
Other financial assets
Total financial assets designated at fair value
31.12.08
4,500
653
4,321
2,329
1,079
12,882
31.12.07
3,633
483
4,289
1,232
2,128
11,765
The maximum exposure to credit loss of all items in the
above table except for Other financial assets is equal to the
fair value (CHF 11,803 million at 31 December 2008 and
CHF 9,637 million at 31 December 2007). Other financial
assets are generally comprised of equity investments and are
not directly exposed to credit risk. The maximum exposure to
credit loss at 31 December 2008 and 31 December 2007
is mitigated by collateral of CHF 6,335 million and CHF
5,830 million, respectively.
The amount by which credit derivatives or similar instru-
ments mitigate the maximum exposure to credit loss of loans
and structured loans designated at fair value is as follows:
CHF million
Notional amount of loans and structured loans
Credit derivatives related to loans and structured loans – notional amounts 1
Credit derivatives related to loans and structured loans – fair value 1
Additional Information
31.12.08
31.12.07
6,186
4,314
547
4,166
3,351
59
For the year ended
Cumulative from inception until
the year ended
CHF million
31.12.08
31.12.07
31.12.08
31.12.07
Change in fair value of loans and structured loans designated at
fair value, attributable to changes in credit risk 2
Change in fair value of credit derivatives and similar instruments
which mitigate the maximum exposure to credit loss of loans and
structured loans designated at fair value 2
(668)
486
(87)
58
(659)
547
(98)
59
1 Credit derivatives and similar instruments include credit default swaps, credit linked notes, total return swaps, put options, and similar instruments. These are generally used to manage credit risk when
UBS has a direct credit exposure to the counterparty, which has not otherwise been collateralized. 2 Current and cumulative changes in the fair value of loans attributable to changes in their credit risk
are only calculated for those loans oustanding at balance sheet date. Current and cumulative changes in the fair value of credit derivatives hedging such loans include all the derivatives which have been
used to mitigate credit risk of these loans since designation at fair value. For loans reported under the fair value option, changes in fair value due to changes in the credit standing of the borrower are
calculated using counterparty credit information obtained from independent market sources.
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297
Financial information
Notes to the consolidated financial statements
Note 13 Financial investments available-for-sale
CHF million
Money market paper
Other debt instruments
Listed 1
Unlisted
Total
Equity instruments
Listed 1
Unlisted
Total
Total financial investments available-for-sale
Net unrealized gains (losses) – before tax
Net unrealized gains (losses) – after tax
31.12.08
2,165
31.12.07
349
322
1,080
1,402
258
1,423
1,681
5,248
403
349
317
717
1,034
1,865
1,718
3,583
4,966
1,900
1,503
1 Includes financial instruments which are exchanged in representative markets, as defined by Art. 4d of the ordinance concerning capital adequacy and risk diversification for banks and securities traders
(“Eigenmittelverordnung”, ERV), issued by the Swiss Financial Market Supervisory Authority (FINMA).
Note 14 Investments in associates
CHF million
Carrying amount at the beginning of the year
Additions
Disposals
Transfers
Income
Impairments
Dividends paid
Foreign currency translation
Carrying amount at the end of the year
31.12.08
1,979
807
(1,307)
(422)
12
(18)
(34)
(125)
892
31.12.07
1,523
1,656
(846)
(367)
137
(17)
(42)
(65)
1,979
Significant associated companies of the Group had the following balance sheet and income statement totals on an aggre-
gated basis, not adjusted for the Group's proportionate interest. Refer to Note 34 for a list of significant associates.
31.12.08
31.12.07
4,272
3,448
1,211
198
9,189
2,524
1,228
321
CHF million
Assets
Liabilities
Revenues
Net profit
298
Note 15 Property and equipment
At historical cost less accumulated depreciation
CHF million
Historical cost
Own-used
properties
Leasehold
improve-
ments
IT, software
and com-
munication
Other
machines and
equipment
Plant and
manu-
facturing
equipment
Projects in
progress
31.12.08
31.12.07
Balance at the beginning of the year
9,242
3,297
4,604
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 2
Disposals / write-offs 1
Reclassifications
Foreign currency translation
Balance at the end of the year
Net book value at the end of the year 3
196
0
(21)
(28)
(101)
9,289
265
1
(138)
289
(321)
3,393
5,121
1,969
332
(7)
(160)
(14)
5,272
4,017
312
(88)
(4)
(159)
2,031
1,362
334
6
(523)
84
(419)
4,086
4,022
497
(520)
0
(387)
3,612
475
885
75
0
(80)
53
(67)
867
540
100
(54)
0
(40)
546
321
29
0
0
(31)
0
2
0
27
0
(28)
0
2
0
0
666
311
0
0
(620)
(40)
317
0
0
0
0
0
0
317
18,723
1,181
7
(792)
(222)
(945)
18,477
1,727
6
(1,008)
(76)
(403)
17,952
18,723
11,679
1,241
(697)
(164)
(598)
11,461
6,491
11,578
1,253
(873)
(14)
(266)
11,678
7,045
1 Includes write-offs of fully depreciated assets. 2 In 2008, amounts include CHF 103 million impairments of own-used property, CHF 13 million impairments of leasehold improvements, CHF 1 million
impairments of IT, software and communication and CHF 14 million impairments of other machines and equipment. 3 Fire insurance value of property and equipment is CHF 14,166 million (2007: CHF
14,689 million).
Investment properties at fair value
CHF million
Balance at the beginning of the year
Additions
Sales
Revaluations
Foreign currency translation
Balance at the end of the year
31.12.08
31.12.07
189
37
0
(6)
(5)
215
14
182
0
7
(14)
189
n
o
i
t
a
m
r
o
f
n
i
l
a
i
c
n
a
n
i
F
299
Financial information
Notes to the consolidated financial statements
Note 16 Goodwill and intangible assets
At 31 December 2008, the following four segments carried
goodwill: Wealth Management International & Switzerland
(CHF 1.6 billion), Wealth Management US (CHF 3.7 billion),
Global Asset Management (CHF 2.0 billion), and Investment
Bank (CHF 4.3 billion). For the purpose of testing goodwill
for impairment, UBS considers each of these segments as a
separate cash-generating unit, and determines the re cov-
erable amount of a segment on the basis of value in use.
The ongoing crisis in the financial markets dramatically
changed industry dynamics, and the related decrease in mar-
ket capitalization of UBS made it necessary during 2008 to
review whether there was indication that goodwill allocated
to its cash generating units was impaired. At 31 December
2008, equity attributable to UBS shareholders stood at CHF
33 billion. UBS’s market capitalization, excluding the impact
of the issued MCNs, amounted to CHF 44 billion at 31 De-
cember 2008. On the basis of the impairment testing meth-
odology described below, UBS concluded that the year-end
2008 balances of goodwill allocated to all its segments re-
main recoverable.
Methodology for goodwill impairment testing
The recoverable amount is determined using a proprietary
model based on discounted cash flows, which has been
adapted to give effect to the special features of the banking
business and its regulatory environment. The recoverable
amount is determined by estimating streams of earnings
available to shareholders in the next five years, discounted to
their present values. The terminal value reflecting all periods
beyond the fifth year is calculated on the basis of the esti-
mated individual return on equity for each segment, which is
derived from the forecast fifth-year profit, the underlying
equity, the cost of equity and the long-term growth rate. The
recoverable amount of a segment is the sum of earnings
available to shareholders from the first five years and the
terminal value. In 2007, the recoverable amount was based
on the discounted estimated streams of earnings determined
in a rolling forecast process for the next four quarters and
the terminal value. The five-year period for the cash flow
projections applied in 2008 is considered a more appropriate
measure, given the currently volatile market environment
and the uncertainties in the short-term outlook.
Assumptions
The model is most sensitive to changes in the forecast earn-
ings available to shareholders in years one to five, the esti-
mated return on equity, the underlying equity, the cost of
equity and to changes in the long-term growth rate. The ap-
plied long-term growth rate is based on long-term risk-free
interest rates. Earnings available to shareholders are estimat-
ed based on forecast results, which takes into account busi-
ness initiatives and planned capital investments, and returns
to shareholders. Valuation parameters used within the
Group’s impairment test model are linked to external market
information, where applicable. Management believes that
reasonable changes in key assumptions used to determine
the recoverable amounts of all segments will not result in an
impairment situation.
Discount rate
In %
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Asset Management
Investment Bank
31.12.08
31.12.07
9.5
11.5
9.5
11.0
13.0
9.0
10.5
9.0
10.5
11.5
300
Investment Bank
On 31 December 2008, the reassessment of the goodwill of
UBS’s Investment Bank, which has been most affected by the
implications of the financial market crises, was a key focus.
Goodwill allocated to the Investment Bank amounted to
CHF 4.3 billion at 31 December 2008 (CHF 5.2 billion at 31
December 2007). The reduction is due to an impairment of
CHF 341 million of goodwill related to the US Municipal Se-
curities Business, which was closed in June 2008 (refer to
Note 38 for details) and foreign currency translation effects.
In its review of the year-end 2008 goodwill balance, UBS
considered the performance outlook of its Investment Bank
division and the underlying business operations to resolve
whether the recoverable amount for this unit covers its
carrying amount, based on the methodology described
above. On this basis, UBS concluded that goodwill allocated
to the Investment Bank remains recoverable on 31 Decem-
ber 2008. The conclusion was reached based on the forecast
results which include those activities that are expected to
generate positive cash flows in future years. The forecasts
are based on an expectation that the economic environment
will gradually improve over the next three years and reach an
average growth level thereafter. The fair value obtained from
the model calculation was subject to a stress test by decreas-
ing forecast cash flows by one third and at the same time
increasing the discount rate by 3.5 percentage points to
16.5%. The stress value covered the book value of the In-
vestment Bank. However, if the conditions in the financial
markets and banking industry further deteriorate and turn
out to be worse than anticipated in UBS’s performance fore-
casts, the goodwill carried in the Investment Bank business
division may need to be impaired in future quarters.
Recognition of any impairment of goodwill would reduce
IFRS Equity attributable to UBS shareholders and Net profit
but it would not impact cash flows, as well as the BIS Tier 1
capital, BIS total capital, and capital ratios of the UBS Group,
as goodwill is required to be deducted from capital under
the Basel II capital framework.
CHF million
Historical cost
Balance at the beginning of the year
Additions and reallocations
Disposals
Write-offs 1
Foreign currency translation
Balance at the end of the year
Accumulated amortization and impairment
Balance at the beginning of the year
Amortization
Impairment of goodwill and intangible assets
Disposals
Write-offs 1
Foreign currency translation
Balance at the end of the year
Goodwill
Total
Infrastructure
Intangible assets
Customer
relationships,
contractual
rights and other
12,829
495
(20)
(356)
(1,364)
11,585
0
0
341
0
(356)
15
0
876
0
0
0
(52)
824
315
42
0
0
0
(19)
337
487
1,619
90
(13)
(116)
(272)
1,308
471
152
20
(7)
(116)
(76)
444
864
Net book value at the end of the year
11,585
1 Represents write-offs of fully amortized intangible assets and impaired goodwill for disposed business activities.
Total
31.12.08
31.12.07
2,495
15,324
15,493
90
(13)
(116)
(324)
2,131
786
193
20
(7)
(116)
(95)
781
585
(33)
(472)
(1,688)
13,716
786
193
361
(7)
(472)
(80)
781
612
(3)
(175)
(603)
15,324
720
282
0
(3)
(175)
(38)
786
1,350
12,935
14,538
n
o
i
t
a
m
r
o
f
n
i
l
a
i
c
n
a
n
i
F
301
Financial information
Notes to the consolidated financial statements
Note 16 Goodwill and intangible assets (continued)
The following table presents the disclosure of goodwill and intangible assets by business unit for the year ended 31 Decem-
ber 2008.
CHF million
Goodwill
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Asset Management
Investment Bank
Corporate Center
UBS
Intangible assets
Wealth Management International & Switzerland
Wealth Management US
Business Banking Switzerland
Global Asset Management
Investment Bank
Corporate Center
UBS
Balance at
the beginning
of the year
Additions
and
reallocations
Disposals Amortization
Impairment
Foreign
currency
translation
Balance
at the end
of the year
1,697
3,907
0
2,000
5,207
18
12,829
288
729
0
264
422
6
1,709
157
0
0
338
1
0
495
58
0
0
32
0
0
90
0
0
0
0
0
(20)
(20)
0
0
0
0
0
(6)
(6)
0
0
0
0
(341)
0
(341)
(20)
0
0
0
0
0
(205)
(228)
0
(356)
(590)
1
1,648
3,678
0
1,982
4,277
0
(1,379)
11,585
(57)
(43)
0
(77)
(52)
0
251
626
0
186
286
0
(18)
(60)
0
(33)
(83)
0
(193)
(20)
(229)
1,350
The estimated, aggregated amortization expenses for intangible assets are as follows:
CHF million
Estimated, aggregated amortization expenses for:
Intangible assets
168
153
145
125
103
656
1,350
Note
22
31.12.08
31.12.07
8,880
1,203
330
2,922
981
4,495
18,811
3,220
6,370
454
3,009
1,145
6,114
20,312
2009
2010
2011
2012
2013
2014 and thereafter
Total
Note 17 Other assets
CHF million
Deferred tax assets
Settlement and clearing accounts
VAT and other tax receivables
Prepaid pension costs
Properties held for sale
Other receivables
Total other assets
302
Balance sheet notes: liabilities
Note 18 Due to banks and customers
CHF million
Due to banks
Due to customers in savings and investment accounts
Other amounts due to customers
Total due to customers
Total due to banks and customers
Note 19 Financial liabilities designated at fair value and debt issued
Financial liabilities designated at fair value
CHF million
Bonds and compound debt instruments issued
Compound debt instruments – OTC
Loan commitments 1
Total
31.12.08
125,628
100,647
374,127
474,774
600,402
31.12.07
145,762
109,128
532,764
641,892
787,654
31.12.08
92,446
7,468
1,632
101,546
31.12.07
183,143
8,251
459
191,853
1 Loan commitments recognized as Financial liabilities designated at fair value, until drawn down and recognized as loans. See Note 1a) 7) for additional information.
At 31 December 2008, the contractual redemption amount
at maturity of Financial liabilities designated at fair value
through profit or loss was CHF 12.2 billion higher than the
carrying value. At 31 December 2007, the contractual re-
demption amount at maturity of such liabilities approximat-
ed the carrying value. Refer to Note 1a) 7) for details.
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 Bank’ Central Bond Institutions
Medium-term notes
Subtotal long-term debt
Total
31.12.08
111,619
31.12.07
152,256
67,298
12,769
2,418
3,150
85,635
197,254
52,265
14,129
199
3,228
69,821
222,077
n
o
i
t
a
m
r
o
f
n
i
l
a
i
c
n
a
n
i
F
303
Financial information
Notes to the consolidated financial statements
Note 19 Financial liabilities designated at fair value and debt issued (continued)
The Group uses interest rate and foreign exchange deriva-
tives to manage the risks inherent in certain debt issues (held
at amortized cost). In the case of interest rate risk manage-
ment, the Group applies hedge accounting as discussed in
Note 1a) 14) and Note 23 – Derivative Instruments and
Hedge Accounting. As a result of applying hedge account-
ing, at 31 December 2008 and 31 December 2007, the car-
rying value of debt issued was CHF 904 million higher and
CHF 138 million higher, respectively, reflecting changes in
fair value due to interest rate movements.
The Group issues both CHF and non-CHF denominated
fixed-rate and floating-rate debt.
Subordinated debt securities are unsecured obligations of
the Group that are subordinated in right of payment to all
present and future senior indebtedness and certain other
obligations of the Group. At 31 December 2008 and 31 De-
cember 2007, the Group had CHF 12,769 million and CHF
14,129 million, respectively, in subordinated debt. Subordi-
nated debt usually pays fixed interest annually or floating
rate interest based on three-month or six-month London
Interbank Offered Rate (LIBOR) and provides for single prin-
cipal payments upon maturity.
At 31 December 2008 and 31 December 2007, the Group
had CHF 165,312 million and CHF 238,835 million, respec-
tively, in unsubordinated debt (excluding money market pa-
per, compound debt instruments – OTC and loan commit-
ments designated at fair value).
The following table shows the split between fixed-rate
and floating-rate debt issues based on the contractual terms.
However, it should be noted that the Group uses interest
rate swaps to hedge many of the fixed-rate debt issues,
which changes their repricing characteristics into those of
floating-rate debt.
Contractual maturity dates
CHF million, except where indicated
2009
2010
2011
2012
2013
2014–2018
Thereafter
31.12.08
Total
Total
31.12.07
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
49,415
0–9.90
33,808
465
6.0–6.0
11,706
0–9.70
4,939
6,041
6,626
0–9.955 0–9.66375
3,979
6,455
10,994
0–9.75
4,683
17,170
0–9.90
7,881
1,627
103,579
155,432
0–9.75
19,255
81,000
131,714
83,688
16,645
10,020
13,081
15,677
5,665
2,745
8,875
9,789
2.375–7.375
4.5–8.75
3,820
34,536
3,820
4,340
23,627
197,274
301,275
60,092
0–9.03
3,505
2,904
0–9.0
2,548
8,459
813
0–8.375
0–8.495
2,000
1,033
377
0–9.0
783
1,010
9,348
83,003
76,863
0–9.494
0–9.829
4,303
4,277
18,449
35,792
74
6.25–6.25
74
0
63,671
5,452
147,359
22,097
10,459
20,479
1,846
1,160
5,313
13,625
101,526
14,927
16,837
39,849
37,252
298,800
0
0
112,655
413,930
The table above indicates fixed interest rate coupons ranging
from 0 up to 9.955% on the Group’s bonds. The high or low
coupons generally relate to structured debt issues prior to
the separation of embedded derivatives. As a result, the stat-
ed interest rate on such debt issues generally does not reflect
the effective interest rate the Group is paying to service its
debt after the embedded derivative has been separated and,
where applicable, the application of hedge accounting.
304
Note 20 Other liabilities
CHF million
Provisions
Provisions for contingent claims
Current tax liabilities
Deferred tax liabilities
VAT and other tax payables
Settlement and clearing accounts
Amounts due under unit-linked investment contracts
Other payables 1
Total other liabilities
Note
31.12.08
31.12.07
21
9b
22
2,727
31
1,192
1,470
1,022
3,089
13,051
11,384
33,965
1,716
63
2,000
2,429
1,079
7,476
27,455
19,278
61,496
1 The most significant individual items included in other payables are third party interests of consolidated limited partnerships of CHF 3.1 billion, contingent payments for the acquisition of Pactual in
2006, and liabilities from cash-settled employee compensation plans.
n
o
i
t
a
m
r
o
f
n
i
l
a
i
c
n
a
n
i
F
305
Financial information
Notes to the consolidated financial statements
Note 21 Provisions and litigation
CHF million
Balance at the beginning of the year
Additions from acquired companies
Increase in provisions recognized in the income statement
Release of provisions recognized in the income statement
Provisions used in conformity with designated purpose
Capitalized reinstatement costs
Disposal of subsidiaries
Reclassifications
Foreign currency translation
Balance at the end of the year
Operational 1
298
Litigation 2,3
474
0
473
(182)
(318)
0
0
0
(1)
270
1
3,069
(143)
(990)
0
0
(980)
(13)
1,418
Other 4
944
0
460
(203)
(73)
(21)
0
1
(69)
1,039
Total
31.12.08
1,716
1
4,002
(528)
(1,381)
(21)
0
(979)
(83)
2,727
Total
31.12.07
1,703
0
742
(216)
(570)
6
(16)
155
(88)
1,716
1 Includes provisions for litigation resulting from security risks and transaction processing risks. 2 Includes litigation resulting from legal, liability and compliance risks. 3 In 2008 Global Wealth
Management and Business Banking made a provision of CHF 1,464 million (USD 1,363 million) for the expected costs of the repurchase of auction rate securities (ARS), including fines. In the fourth
quarter, after the provision was partially applied for repurchases of ARS, an amount of CHF 968 million (USD 908 million), excluding fines, was reclassified to Negative replacement values (refer to
Note 23 for details). In addition a provision of CHF 917 million (USD 780 million) was made in connection with UBS’s US cross-border case. 4 Includes reinstatement of costs for leasehold improvement
which amounted to CHF 167 million on 31 December 2008 (CHF 233 million on 31 December 2007), provisions for onerous lease contracts, provisions for employee benefits (service anniversaries and
sabbatical leaves) and other items.
Litigation
UBS Group operates in a legal and regulatory environment
that exposes it to potentially significant litigation risks. As a
result, UBS is involved in various disputes and legal proceed-
ings, including litigation, arbitration, and regulatory and
criminal investigations. Such cases are subject to many un-
certainties, and their outcome is often difficult to predict,
including the impact on the operations or financial state-
ments, particularly in the earlier stages of a case. In certain
circumstances, to avoid the expense and distraction of legal
proceedings, UBS may, based on a cost-benefit analysis,
enter into a settlement even though UBS denies any wrong-
doing. The Group makes provisions for cases brought against
it only when after seeking legal advice, in the opinion of
management, it is probable that a liability exists, and the
amount can be reasonably estimated. No provision is made
for claims asserted against the Group that in the opinion of
management are without merit and where it is not likely that
UBS will be found liable.
At 31 December 2008, UBS is involved in the following
legal proceedings which could be material to the Group:
a) Tax Shelter Investigation: In connection with a criminal in-
vestigation of tax shelters, the United States Attorney’s
Office for the Southern District of New York (US Attorney’s
Office) continues to examine certain tax-oriented transac-
tions in which UBS and others engaged between 1996 and
2000. UBS is continuing to cooperate in this investigation.
b) Municipal Bond: In November 2006, UBS and others
received subpoenas from the US Department of Justice,
Antitrust Division, and the US Securities and Exchange
Commission (SEC) seeking information relating to deriva-
tive transactions entered into with municipal bond issuers
and to the investment of proceeds of municipal bond
issuances. Both investigations are ongoing, and UBS is
cooperating. In addition, various state Attorneys General
have issued subpoenas seeking similar information. In the
SEC investigation, on 4 February 2008, UBS received a
“Wells notice” advising that the SEC staff is considering
recommending that the SEC bring a civil action against
UBS AG in connection with the bidding of various finan-
cial instruments associated with municipal securities. Un-
der the SEC’s Wells process, UBS will have the opportu-
nity to set forth reasons of law, policy or fact why such an
action should not be brought.
c) HealthSouth: UBS is defending itself in two putative secu-
rities class actions brought in the US District Court of the
Northern District of Alabama by holders of stock and
bonds in HealthSouth Corp. In October 2008, UBS agreed
to settle derivative litigation brought on behalf of Health-
South in Alabama State Court. Due to existing insurance
coverage this settlement has no impact on UBS’s result in
2008.
d) Parmalat: UBS has been facing multiple proceedings
arising out of the Parmalat insolvency. In June 2008, UBS
settled all civil claims brought by Parmalat in its capacity
as Assumptor in composition with creditors and Mr. Bondi
(Extraordinary Commissioner of Parmalat S.p.A. and other
Parmalat companies under extraordinary administration)
for EUR 185 million. Other civil claims by third parties
have automatically terminated as a result of termination
of criminal proceedings in Milan (with the exception of
some costs issues which are the subject of appeals to
Court of Cassation) and will also do so in Parma when the
time for filing an appeal expires, unless an appeal has
been lodged in the meantime.
306
Note 21 Provisions and litigation (continued)
e) Auction Rate Securities: UBS was sued by three state regu-
latory authorities and was the subject of investigations
by the SEC and other regulators, relating to the marketing
and sale of Auction Rate Securities (ARS) to clients and to
UBS’s role and participation in ARS auctions. UBS also has
been named in several putative class actions and individual
civil suits and a large number of individual arbitrations. The
regulatory actions and investigations and the class actions
followed the disruption in the markets for these securities
and related auction failures since mid-February 2008.
Plaintiffs and the regulators are generally seeking rescis-
sion, i. e., for UBS to purchase the ARS that UBS sold to
them at par value, as well as compensatory damages, dis-
gorgement of profits and in some cases penalties. In May
2008, UBS entered into a settlement with the Massachu-
setts Attorney General in which UBS agreed to buy back
USD 36 million in auction rate securities that had been sold
to general purpose municipal accounts but were impermis-
sible investments for those accounts. On 8 August 2008,
UBS entered into settlements in principle with the SEC,
the New York Attorney General (NYAG) and other state
agencies represented by the North American Securities Ad-
ministrators Association (NASAA), including the Massa-
chusetts Securities Division (MSD), whereby UBS agreed to
offer to buy back ARS from eligible customers within cer-
tain time frames, and to pay penalties of USD 150 million
(USD 75 million to the NYAG, USD 75 million to the other
states). On 2 October 2008, UBS finalized its settlement
with the MSD, on 11 December 2008 with the SEC and
the NYAG, and UBS is continuing to finalize agreements
with the other state regulators. UBS’s offer to purchase
back ARS was done by a registered securities offering
effective 7 October 2008. UBS’s settlement is largely in line
with similar industry regulatory settlements; however, UBS
is the only firm of its major competitors that offered to
purchase ARS from institutional clients before a date cer-
tain. UBS’s settlement with the SEC and MSD requires
UBS to offer to buy eligible ARS from eligible institutional
clients by no later than 30 June 2010. Settlements with the
other NASAA states are being worked out. The NYAG set-
tlement does not reference a date certain, but contains
language similar to other industry settlements requiring
that UBS make ‘best efforts’ to provide liquidity solutions
for institutional investors. The NYAG and SEC continue to
investigate individuals affiliated with UBS who traded in
ARS or who had responsibility for disclosures. On 7 Octo-
ber 2008, the NYAG announced a settlement with the for-
mer Investment Bank Global General Counsel relating to
his trading of ARS allegedly in violation of New York’s
Martin Act. The former Investment Bank Global General
Counsel neither admitted nor denied the state’s allega-
tions, but agreed to certain penalties and sanctions.
f) US Cross-Border: UBS AG has been responding to a num-
ber of governmental inquiries and investigations relating
to its cross-border private banking services to US private
clients during the years 2000–2008. In particular, the US
Department of Justice (DOJ) has been examining whether
certain US clients sought, with the assistance of UBS client
advisors, to evade their US tax obligations by avoiding
restrictions on their securities investments imposed by the
Qualified Intermediary Agreement (QIA) UBS entered into
with the US Internal Revenue Service (IRS) in 2001. DOJ
and IRS are also have been examining whether UBS AG
has been compliant with withholding obligations in rela-
tion to sales of non-US securities under the Deemed Sales
and Paid In US tax regulations. A former UBS AG client
advisor pleaded guilty to one count of conspiracy to de-
fraud the United States and the IRS in connection with
providing investment and other services to a US person
who is alleged to have evaded US income taxes on income
earned on assets maintained in, among other places, a
former UBS AG account in Switzerland. In November
2008, the CEO of Global WM&BB was indicted by a US
federal grand jury sitting in the Southern District of Flori-
da on one count of conspiring to defraud the IRS in viola-
tion of US law. Among other things, the indictment al-
leges that the CEO of Global WM&BB had involvement in
the operation and maintenance of the US cross-border
business while knowing that such business was being
conducted in violation of certain US laws. The District At-
torney for the County of New York has issued a request
for information seeking information located in the US
concerning UBS’s cross-border business, including any in-
formation located in the US relating to clients of that
business. Further, the IRS has delivered to UBS AG a no-
tice concerning alleged violations of the QIA which UBS is
responding to under the applicable cure process. The SEC
has been examining whether Swiss-based UBS client advi-
sors engaged in activities in relation to their US-domiciled
clients that triggered an obligation for UBS Switzerland
to register with the SEC as a broker- dealer and / or invest-
ment adviser. Finally, the Swiss Financial Market Supervi-
sory Authority (FINMA) investigated UBS’s cross-border
servicing of US private clients under Swiss Banking Super-
visory legislation. The investigations also have been fo-
cused on the management supervision and control of the
US cross-border business and the practices at issue. UBS
has been working to respond in an appropriate and re-
sponsible manner to all of these investigations in an effort
to achieve a satisfactory resolution of these matters. As
announced on 17 July 2008, UBS will no longer provide
securities and banking services to US-resident private
clients (including non-operating entities with US benefi-
ciaries) except through its SEC-registered affiliates. On
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Notes to the consolidated financial statements
Note 21 Provisions and litigation (continued)
18 February 2009, UBS announced that it had entered
into a Deferred Prosecution Agreement (DPA) with the
DOJ and a Consent Order with the SEC. These agree-
ments resolve the above-described criminal and regula-
tory investigations by these authorities. As part of these
settlement agreements, among other things: (i) UBS will
pay a total of USD 780 million to the United States, USD
380 million representing disgorgement of profits from
maintaining the US cross-border business and USD 400
million representing US federal backup withholding tax
required to be withheld by UBS, together with interest
and penalties, and restitution for unpaid taxes associated
with certain account relationships involving fraudulent
sham and nominee offshore structures and otherwise as
covered by the DPA; (ii) UBS will complete the exit of the
US cross-border business out of non-SEC registered enti-
ties, as announced in July 2008, which these settlements
permit UBS to do in a lawful, orderly and expeditious
manner; (iii) UBS will implement and maintain an en-
hanced program of internal controls with respect to com-
pliance with its obligations under its Qualified Intermedi-
ary (QI) Agreement with the Internal Revenue Service
(IRS), as well as a revised Legal and Compliance gover-
nance structure in order to strengthen independent legal
and compliance controls; and (iv) pursuant to an order is-
sued by FINMA, information was transferred to the DOJ
regarding accounts of certain US clients as set forth in the
DPA who, based on evidence available to UBS, appear to
have committed tax fraud or the like within the meaning
of the Swiss-US Double Taxation Treaty. Pursuant to the
DPA, DOJ has agreed that any further prosecution of UBS
will be deferred for a period of at least 18 months, sub-
ject to extension under certain circumstances such as UBS
needing more time to complete the implementation of
the exit of its US cross-border business. If UBS satisfies all
of its obligations under the DPA, the DOJ will refrain
permanently from pursuing charges against UBS relating
to the investigation of its US cross-border business. As
part of the SEC resolution, the SEC filed a Complaint
against UBS in Federal District Court in Washington, D.C.,
charging UBS with acting as an unregistered broker-deal-
er and investment advisor in connection with maintaining
its US cross-border business. Pursuant to the Consent
Order, UBS did not admit or deny the allegations in that
Complaint, and consented to the entry of a final judg-
ment that provides, among other things, that: (i) UBS will
pay USD 200 million to the SEC, representing disgorge-
ment of profits from the US cross-border business (this
amount is included within, and not in addition to, the
USD 780 million UBS is paying to the United States as
described above); and (ii) UBS will complete its exit of
the US cross-border business and will be permanently
enjoined from violating the SEC registration requirements
by providing broker-dealer or investment advisory services
to US persons through UBS entities not registered with
the SEC.
The DOJ and SEC agreements do not resolve issues con-
cerning the pending “John Doe” summons which the IRS
served on UBS in July 2008. In this regard, on 19 February
2009, the Civil Tax Division of the DOJ filed a civil petition
for enforcement of this summons in US Federal District
Court in Miami, through which it seeks an order directing
UBS to produce information located in Switzerland re-
garding US clients who have maintained accounts with
UBS in Switzerland without providing a Form W-9. On
24 February 2009, the District Court issued a scheduling
order pursuant to which a hearing will be held on 13 July
2009. The DPA preserves UBS’s ability to defend fully its
rights in connection with the IRS’s enforcement effort.
UBS believes that it has substantial defenses, including
that complying with the summons would constitute a vio-
lation of Swiss financial privacy laws, and intends to vig-
orously contest the enforcement of the summons. The
resolution of the summons litigation could result in the
imposition of substantial fines, penalties and / or other
remedies. In addition, pursuant to the DPA, should UBS
fail to comply with a final US court order directing it to
comply with the summons after fully exhausting all rights
to appeal, the DOJ may, after certain conditions have
been satisfied, choose to pursue various remedies avail-
able for breach of the DPA. This may include charging
UBS with conspiracy to commit tax fraud.
Also on 18 February 2009, the FINMA published the re-
sults of the now concluded investigation conducted by
the Swiss Federal Banking Commission (SFBC). The SFBC
concluded, among other things, that UBS violated the
requirements for proper business conduct under Swiss
banking law and issued an order barring UBS from pro-
viding services to US resident private clients out of non-
SEC registered entities. Further, the SFBC ordered UBS to
enhance its control framework around its cross-border
businesses, and announced that the effectiveness of such
framework will be audited.
g) Sub-prime-related Matters: UBS is responding to a number
of governmental inquiries and investigations, and is in-
volved in a number of litigations, arbitrations and disputes,
related to the sub-prime crisis, sub-prime securities, and
structured transactions involving sub-prime securities.
These matters concern, among other things, UBS’s valua-
tions, disclosures, write-downs, underwriting, and contrac-
tual obligations. In particular, UBS has been in regular com-
munication with, and responding to inquiries by FINMA, its
home country consolidated regulator, as well as the SEC
and the United States Attorney’s Office for the Eastern Dis-
308
Note 21 Provisions and litigation (continued)
trict of New York (USAO), regarding some of these issues
and others, including the role of internal control units, gov-
ernance and processes around risk control and valuation of
sub-prime instruments, compliance with public disclosure
rules, and the business rationales for the launching and the
reintegration of Dillon Read Capital Management (DRCM).
While FINMA concluded its investigation in October 2008,
the investigation by the SEC and the USAO are ongoing. In
addition, a consolidated class action was filed against UBS
and a number of senior directors and officers in the South-
ern District of New York alleging securities fraud in connec-
tion with the firm’s valuations and disclosures relating to
sub-prime and asset-backed securities. UBS and a number
of senior officers and directors have also been sued in a
consolidated class action brought on behalf of holders of
UBS ERISA retirement plans in which there were purchases
of UBS stock. Both class actions are in their early stages.
h) Madoff: In relation to the Madoff investment fraud, UBS,
UBS (Luxembourg) SA and certain other UBS subsidiaries
are responding to inquiries by a number of regulators,
including FINMA and the Luxembourg Commission de
surveillance du secteur financier (CSSF). CSSF has made
inquiries concerning two third party funds established
under Luxembourg law the assets of which were man-
aged by Bernard L. Madoff Investment Securities LLC, and
which now face severe losses. The documentation estab-
lishing both funds suggests that UBS entities act in vari-
ous capacities including custodian, administrator, man-
ager, distributor and promoter, and that UBS employees
serve as board members. On 25 February 2009, the CSSF
issued a communiqué with respect to the larger of the
two funds, stating that UBS (Luxembourg) SA had failed
to comply with its due diligence responsibilities as custo-
dian bank. The CSSF ordered UBS (Luxembourg) SA to
review its infrastructure and procedures relating to its
supervisory obligations as custodian bank, but did not or-
der it to compensate investors. To date, very few investor
claims have been filed, and most have related to unsatis-
fied redemption requests delivered to these funds prior to
the revelation of the Madoff scheme. Further, certain cli-
ents of UBS Sauerborn (the KeyClient segment of UBS
Deutschland AG) are exposed to Madoff-managed posi-
tions through third party funds and funds administered
by UBS Sauerborn.
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Financial information
Notes to the consolidated financial statements
Note 22 Income taxes
CHF million
Tax expense from continuing operations
Domestic
Current
Deferred
Foreign
Current
Deferred
Total income tax expense from continuing operations
Tax expense from discontinued operations
Domestic
Foreign
Total income tax expense from discontinued operations
Total income tax expense
For the year ended
31.12.08
31.12.07
31.12.06
(336)
(7,282)
519
262
(6,837)
1
0
1
(6,836)
409
(25)
1,061
(76)
1,369
(258)
0
(258)
1,111
1,759
(107)
1,533
(187)
2,998
(12)
1
(11)
2,987
Of the deferred tax benefit in the income statement of CHF
7,020 million, CHF 6,126 million relates to the recognition of
incremental net deferred tax assets in respect of available tax
losses. The incremental deferred tax assets mainly relate to
Swiss tax losses incurred during the year (primarily due to the
writedown of investments in US subsidiaries). The tax benefit
was reduced by a decrease in the deferred tax asset recog-
nized for US tax losses.
estimated basis during the year, part of which are expected
to be repaid because the final tax liability for the year is an-
ticipated to be less than the amounts paid.
The current tax expense for 2008 is net of tax benefits
related to prior years of CHF 446 million. There were also
deferred tax benefits related to prior years of CHF 44 mil-
lion giving total tax benefits relating to prior years of CHF
490 million.
The Group made net tax payments, including domestic
and foreign taxes, of CHF 887 million, CHF 3,663 million,
CHF 2,607 million in 2008, 2007 and 2006 respectively. The
tax payments in 2008 include installment payments paid on
The components of operating profit before tax, and the
differences between income tax expense reflected in the Fi-
nancial Statements and the amounts calculated at the Swiss
statutory rate, are as follows:
CHF million
Operating profit from continuing operations before tax
Domestic
Foreign
Income taxes at Swiss statutory rate of 22% for 2008, 2007 and 2006
Increase / (decrease) resulting from:
Applicable tax rates differing from Swiss statutory rate
Tax effects of losses not recognized
Previously unrecorded tax losses now utilized
Lower taxed income
Non-deductible goodwill and intangible asset amortization
Other non-deductible expenses
Adjustments related to prior years
Change in deferred tax valuation allowance
Other items
31.12.08
(27,758)
3,269
(31,027)
(6,107)
(7,056)
7,412
(10)
(773)
160
737
(490)
(692)
(17)
For the year ended
31.12.07
(3,742)
10,337
(14,079)
(823)
(3,054)
6,327
(257)
(1,587)
15
227
(72)
279
314
Income tax expense from continuing operations
(6,837)
1,369
31.12.06
14,119
5,503
8,616
3,106
799
21
(676)
(941)
21
183
316
(192)
361
2,998
310
Note 22 Income taxes (continued)
Significant components of the Group’s gross deferred income tax assets and liabilities are as follows:
CHF million
Deferred tax assets
Compensation and benefits
Tax loss carry-forwards
Trading assets
Other
Total
Valuation allowance
Deferred tax assets recognized
Deferred tax liabilities
Compensation and benefits
Property and equipment
Financial investments and associates
Trading assets
Goodwill and intangible assets
Other
Deferred tax liabilities
31.12.08
31.12.07
1,534
32,834
608
258
35,234
(26,354)
8,880
111
29
206
244
289
591
3,370
10,385
163
859
14,777
(11,557)
3,220
470
175
690
498
173
424
1,470
2,429
The change in the balance of net deferred tax assets and
deferred tax liabilities does not equal the deferred tax
expense in those years. This is mainly due to the effects of
exchange rate changes on tax assets and liabilities denom-
inated in currencies other than CHF. For the above purpos-
es, the valuation allowance represents amounts that are
not expected to provide future benefits, either because
they are offset against potential tax adjustments or due to
insufficiency of future taxable income. The deferred tax as-
sets recognized at 31 December 2008 were as follows:
Compensation and benefits: CHF 321 million; Tax loss
carry- forwards: CHF 8,126 million; Trading assets: CHF 243
million; and Other: CHF 190 million.
UBS AG Switzerland and certain overseas branches and
subsidiaries of the Group have deferred tax assets related to
tax loss carry-forwards and other items. Because the realiza-
tion of these assets is uncertain, the Group has established
valuation allowances of CHF 26,354 million (CHF 11,557
million at 31 December 2007) mainly relating to US tax loss-
es. For entities that incurred losses in either the current or
preceding year, an amount of CHF 8,463 million is recog-
nized as deferred tax assets at 31 December 2008 (CHF
2,363 million at 31 December 2007). These deferred tax as-
sets mainly relate to Swiss tax losses (primarily due to the
writedown of investments in US subsidiaries) and US tax
losses. Swiss tax losses can be carried forward for seven years
and US federal tax losses for 20 years. The agreement which
UBS entered into to transfer certain illiquid securities and
other positions to a fund owned and controlled by the Swiss
National Bank (refer to Note 38) materially reduced the
Group’s exposures to US real estate related assets and hence
provided additional evidence that future US taxable profits
will be available against which part of the Group’s unused
US tax losses can be utilized. A deferred tax asset has been
recognized in respect of that portion of the US tax losses.
The deferred tax assets recognized at 31 December 2008
in respect of tax losses have been based on profitability as-
sumptions over a five-year horizon. The expected future
profitability is based on business plan assumptions taking
into consideration uncertainties arising from the current ad-
verse economic environment. If the business plan earnings
and assumptions in following quarters substantially deviate
from the current assumptions, the amount of existing de-
ferred tax assets may need to be adjusted. The Group pro-
vides for deferred income taxes on undistributed earnings of
subsidiaries except to the extent that those earnings are in-
definitely invested. At 31 December 2008, CHF 413 million
of such earnings were treated as indefinitely invested.
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Financial information
Notes to the consolidated financial statements
Note 22 Income taxes (continued)
At 31 December 2008, tax losses totalling CHF 71,214 million which are not recognized as deferred tax assets are available
to be offset against potential tax adjustments or future taxable income.
The tax losses expire as follows:
CHF million
Within 1 year
From 2 to 4 years
After 4 years
Total
31.12.08
1
19
71,195
71,214
Note 23 Derivative instruments and hedge accounting
A derivative is a financial instrument, the value of which is
derived from the value of another (“underlying”) financial
instrument, an index or some other variable. Typically, the
underlying 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
(over-the-counter (OTC) contracts).
Other derivative contracts are standardized in terms of
their amounts and settlement dates and are bought and sold
on organized exchanges (exchange-traded contracts).
The notional amount of a derivative is generally the quan-
tity of the underlying instrument on which the derivative
contract is based and is the basis upon which changes in the
value 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),
except for futures and exchange-traded options with daily
margining, which are presented as receivables and payables.
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
replaced instantaneously. Negative replacement values rep-
resent 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 transactions are with the same counterparty, are de-
nominated in the same currency, and the cash flows will be
settled on a net basis. Changes in replacement values of de-
rivative instruments are recognized in the income statement
unless they meet the criteria for certain hedge accounting
relationships, as explained in Note 1a) 14) Derivative instru-
ments and hedge accounting.
Types of derivative instruments
The Group uses the following derivative financial instru-
ments 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 on the
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 contract-
ual exchange of fixed-rate and floating-rate interest pay-
ments 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
payments based on two different currency principal bal-
ances and reference interest rates and generally also en-
tail exchange of principal amounts at the start and / or
end of the contract.
– Credit default swaps (CDSs) are the most common form
of a credit derivative, under which the party buying pro-
312
Note 23 Derivative instruments and hedge accounting (continued)
tection makes one or more payments to the party selling
protection in exchange for an undertaking by the seller to
make a payment to the buyer following a credit event (as
defined in the contract) with respect to a third-party credit
entity (as defined in the contract). 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 and is made regardless of whether the
protection buyer has actually suffered a loss. After a credit
event and settlement, the contract is terminated.
– Total rate of return swaps give the total return receiver
exposure to all of the cash flows and economic benefits
and risks of an underlying asset, without having to own
the asset, in exchange for a series of payments, often
based on a reference interest rate, e. g. LIBOR. The total
return payer has an equal and opposite position.
– Metal swaps (precious metal swaps and base metal
swaps) involve the purchase and sale of specific metals.
A precious metal swap involves the purchase and sale of
a specified metal with fixed notional amount and fixed
price but different settlement dates. A base metal swap
is the simultaneous purchase and sale of a specified met-
al with same settlement dates but different pricing
terms.
Options are contractual agreements under which, typically,
the seller (writer) grants the purchaser the right, but not
the obligation, either to buy (call option) or to sell (put op-
tion) by or at a set date, a specified quantity of a financial
instrument or commodity at a predetermined price. The
purchaser pays a premium to the seller for this right. Op-
tions 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 (war-
rant).
Credit derivatives
UBS’s credit derivative portfolio consists of credit default
swaps and total return swaps. The total notional value of
protection bought and sold during 2008 was CHF 2,136 bil-
lion and CHF 1,474 billion, respectively.
Commitment to acquire auction rate securities
In 2008, Wealth Management US recognized provisions of
CHF 1,464 million, presented as general and administrative
expenses in the income statement, for the expected cost of
the repurchase of auction rate securities (ARSs) and related
costs, including fines. The estimate of the expected cost was
based on assumptions relating to the timing of the repur-
chase, the restructuring of the securities as well as the fair
values of such securities.
In October, UBS proceeded with the implementation of
the settlement agreements by registering with the US Secu-
rities and Exchange Commission the offering of ARS rights
(in the legal form of securities) to clients. The issued ARS
rights provide eligible clients the right to sell ARS (put op-
tion), while UBS stipulated a right to call ARS from clients
(as well as a litigation release from institutional clients). Pur-
suant to the issuance of the ARS rights, the commitment to
repurchase ARS from clients was treated as a derivative. As
a result, the provision, excluding fines, was reclassified to
Negative replacement value. After reclassification, changes
in the fair value of the commitment resulted in an addi-
tional CHF 172 million loss in Net trading income. As of
31 December 2008, the fair value of the commitment rec-
ognized as negative replacement value was CHF 1,140 mil-
lion.
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 activities include market making, positioning and arbi-
trage activities. Market making involves quoting bid and offer
prices to other market participants with the intention of gen-
erating revenues based on spread and volume. Positioning
means managing market risk positions with the expectation
of profiting from favorable movements in prices, rates or indi-
ces. Arbitrage activities involve identifying and profiting from
price differentials between the same product in different mar-
kets or the same economic factor in different products.
Derivatives transacted for hedging purposes
The Group enters into derivative transactions for the pur-
poses 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. These are described under the corresponding
headings in this note. The Group’s accounting policies for
derivatives designated and accounted for as hedging instru-
ments are explained in Note 1a) 14) Derivative instruments
and hedge accounting, where terms used in the following
sections are explained.
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Notes to the consolidated financial statements
Note 23 Derivative instruments and hedge accounting (continued)
The Group has entered into CDSs that provide economic
hedges for credit risk exposures in the loan and traded prod-
uct portfolios but do not meet the requirements for hedge
accounting treatment.
The Group has also entered into a limited volume of inter-
est rate swaps and other interest rate derivatives (e. g. fu-
tures) for day-to-day economic interest rate risk manage-
ment purposes, but without applying hedge accounting. The
fair value changes of such swaps are booked to Net trading
income.
Fair value hedges
The Group’s fair value hedges principally consist of interest
rate swaps that are used to protect against changes in the
fair value of fixed-rate instruments (e. g. long-term-fixed
rate debt issues) due to movements in market interest rates.
The fair values of outstanding interest rate derivatives des-
ignated as fair value hedges were a CHF 883 million net
positive replacement value at 31 December 2008 and a
CHF 125 million net positive replacement value at 31 De-
cember 2007.
Fair value hedges of interest rate risk
CHF million
Gains / (losses) on hedging instruments
Gains / (losses) on hedged items attributable to the hedged risk
Net gains / (losses) representing ineffective portions of fair value hedges
For the year ended
31.12.08
31.12.07
31.12.06
778
(796)
(18)
15
(11)
4
(28)
11
(17)
In addition, the Group entered into a fair value hedge ac-
counting relationship in 2005 using foreign exchange deriv-
atives to protect a certain portion of equity investments
available-for-sale from foreign currency exposure. The time
value associated with the FX derivatives is excluded from the
evaluation of hedge ineffectiveness. The hedging relation-
ship was terminated in 2008 as a result of UBS’s disposal of
its foreign currency investment, which was the hedged item
in this hedge accounting relationship. The fair value of out-
standing FX derivatives designated as fair value hedges at 31
December 2008 and 31 December 2007 was CHF 0 million
for both years.
Fair value hedges of foreign exchange risk
CHF million
Gains / (losses) on hedging instruments
Gains / (losses) on hedged items attributable to the hedged risk
Net gains / (losses) representing ineffective portions of fair value hedges
For the year ended
31.12.08
31.12.07
31.12.06
0
0
0
42
(44)
(2)
49
(44)
5
Fair value hedges of portfolio interest rate risk
The Group also applies fair value hedge accounting of port-
folio interest rate risk. The change in fair value of the
hedged items is recorded separately from the hedged item
on the balance sheet. The fair value of derivatives desig-
nated for this hedge method at 31 December 2008 was a
CHF 765 million net negative replacement value and at
31 December 2007 was a CHF 41 million net negative re-
placement value.
During 2008, UBS expanded the use of its method to
hedge portfolio interest rate risk to include other Swiss mort-
gage loan portfolios.
Fair value hedge of portfolio of interest rate risk
CHF million
Gains / (losses) on hedging instruments
Gains / (losses) on hedged items attributable to the hedged risk
Net gains / (losses) representing ineffective portions of fair value hedges
For the year ended
31.12.08
31.12.07
31.12.06
(644)
688
44
(37)
30
(7)
(7)
7
0
314
Note 23 Derivative instruments and hedge accounting (continued)
Cash flow hedges of forecast transactions
The Group is exposed to variability in future interest cash
flows on non-trading assets and liabilities that bear interest
at variable rates or are expected to be refunded or reinvested
in the future. The amounts and timing of future cash flows,
representing both principal and interest flows, are projected
for each portfolio of financial assets and liabilities, based on
contractual terms and other relevant factors including esti-
mates 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 19 years.
The schedule of forecast principal balances on which the
expected interest cash flows arise as of 31 December 2008 is
shown below.
Forecasted cash flows
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
247
69
178
443
129
314
309
101
208
250
85
165
19
2
17
Gains and losses on the effective portions of derivatives des-
ignated as cash flow hedges of forecast transactions are ini-
tially recorded in Equity as Net income recognized directly in
equity 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 rec-
ognized immediately in the income statement. A CHF 108
million loss, a CHF 443 million gain and a CHF 36 million loss
were recognized in 2008, 2007 and 2006, respectively, due
to hedge ineffectiveness.
As of 31 December 2008 and 2007, the fair values of
outstanding derivatives designated as cash flow hedges of
forecast transactions were a CHF 2,539 million net positive
replacement value and a CHF 99 million net positive replace-
ment value, respectively. At the end of 2008 and 2007, un-
recognized income of CHF 86 million and CHF 135 million
associated with de-designated hedging swaps remained de-
ferred in Equity. It will be removed from Equity when the
hedged cash flows have an impact on net profit or loss, or
when the forecasted cash flows are no longer expected to
take place. In fourth quarter 2008, due to reductions in the
volume of short term financial instruments, some of the
forecasted cash flows previously included in the hedge rela-
tionships have been determined to no longer be expected to
occur. Amounts reclassified from Net income recognized di-
rectly in Equity to current period earnings due to discontinu-
ation of hedge accounting were a CHF 49 million net gain in
2008, a CHF 79 million net gain in 2007 and a CHF 132 mil-
lion net gain in 2006. These amounts were recorded in Net
interest income.
Risks of derivative instruments
Derivative instruments are transacted in many trading port-
folios, which generally include several types of instruments,
not just derivatives. The market risk of derivatives is man-
aged and controlled as an integral part of the market risk of
these portfolios. The Group’s approach to market risk is de-
scribed in the audited “Market risk” section of this report.
Derivative instruments are transacted with many differ-
ent counterparties, most of whom are also counterparties
for other types of business. The credit risk of derivatives is
managed and controlled in the context of the Group’s over-
all credit exposure to each counterparty. The Group’s ap-
proach to credit risk is described in the audited “Credit risk”
section of this report. 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 a counterparty are
rarely an adequate reflection of the Group’s credit exposure
on its derivatives business with that counterparty. This is be-
cause, 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
netting agreements and bilateral collateral arrangements
with counterparties. Both the exposure measures used by
the Group internally to control credit risk and the capital
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Financial information
Notes to the consolidated financial statements
Note 23 Derivative instruments and hedge accounting (continued)
requirements imposed by regulators reflect these additional
factors.
The replacement values presented on UBS’s balance sheet
and in the tables on the next two pages include netting in
accordance with IFRS requirements (refer to Note 1), which
is more restrictive than netting guidance provided by the
Swiss Financial Market Supervisory Authority (FINMA). The
main difference of Swiss GAAP to IFRS is that Swiss GAAP
netting is generally based on close-out netting arrangements
which are enforceable in case of insolvency. The impact of
such netting agreements on the gross replacement values
shown in the tables on the next two pages is to reduce both
positive and negative replacement values by CHF 652 billion
and CHF 292 billion at 31 December 2008 and 2007, respec-
tively. As a result, positive replacement values after netting
for UBS Group were CHF 202 billion at 31 December 2008
and CHF 136 billion at 31 December 2007.
316
Note 23 Derivative instruments and hedge accounting1 (continued)
As of 31 December 2008
Term to maturity
CHF billion
Interest rate contracts
Over-the-counter (OTC) contracts
Forward contracts
Swaps
Options
Exchange-traded contracts 4
Futures
Options
Total
Credit derivative contracts
Over-the-counter (OTC) contracts
Credit default swaps
Total rate of return swaps
Total
Foreign exchange contracts
Over-the-counter (OTC) contracts
Forward contracts
Interest and currency swaps
Options
Exchange-traded contracts 4
Futures
Options
Total
Equity / index contracts
Over-the-counter (OTC) contracts
Forward contracts
Options
Exchange-traded contracts 4
Futures
Options
Total
Precious metals contracts
Over-the-counter (OTC) contracts
Forward contracts
Options
Exchange-traded contracts 4
Futures
Options
Within 3 months
NRV 3
PRV 2
3–12 months
NRV
PRV
1–5 years
PRV
NRV
over 5 years
NRV
PRV
Total
PRV
Notional
value
Total
NRV
Notional
value
2.1
9.5
4.0
2.2
9.9
3.7
3.8
23.6
6.6
4.1
24.3
7.0
0.3
152.1
14.3
0.4
140.5
15.7
0.0
142.9
16.5
6.2
330.0
37.4
1,544.9
9,065.4
498.4
6.7
317.6
43.0
1,584.5
22,739.9
595.5
144.8
12.6
0.8
16.4
0.8
16.6
0.5
34.5
0.5
36.0
0.1
166.8
0.1
156.7
157.4
159.5
219.8
6.4
375.1 11,334.9
1.4
307.8
8.7
368.7 25,236.4
1.4
0.5
3.4
3.9
21.0
72.1
7.5
0.3
0.4
0.7
22.8
74.5
7.6
3.4
0.2
3.6
8.4
36.2
10.0
3.5
0.1
3.6
10.6
33.8
9.1
95.4
3.1
98.4
1.6
34.9
2.1
91.2
0.5
91.7
1.1
39.2
1.8
89.8
1.6
91.4
0.1
27.1
88.2
0.5
88.8
189.1
8.3
197.4
1,856.1
31.2
1,887.2
183.3
1.5
184.8
1,754.0
12.6
1,766.7
0.1
26.5
0.0
31.2
170.3
19.7
468.1
2,047.4
610.1
34.5
173.9
18.6
485.6
1,868.4
524.8
0.2
101.0
0.3
105.2
0.0
54.6
0.0
53.5
38.7
42.1
27.2
26.6
0.2
221.5
12.8
3,138.3
0.3
227.3
1.7
6.1
2,886.5
1.9
1.7
5.0
8.6
0.8
0.5
0.1
1.3
1.6
3.2
2.0
4.8
1.8
7.4
2.2
4.7
2.0
8.5
5.2
10.0
5.3
12.1
6.7
16.0
4.8
11.7
5.6
16.1
0.7
0.6
0.6
1.3
0.1
1.4
0.1
1.9
0.5
1.3
0.2
2.0
3.2
1.2
0.5
1.8
0.0
2.3
1.4
0.8
0.4
1.5
0.0
1.9
1.2
0.8
0.2
1.7
0.9
2.9
0.0
0.2
0.3
4.0
1.2
5.5
0.1
0.2
0.3
0.4
0.9
0.0
1.0
0.0
6.4
12.9
16.1
35.3
1.8
3.8
0.1
5.8
8.2
2.4
68.5
108.9
15.3
97.9
290.5
13.1
30.6
4.7
48.4
26.1
5.7
13.5
69.9
115.2
5.7
23.0
18.7
47.4
1.7
3.7
0.3
5.7
7.1
2.4
8.4
17.9
851.9 8
1.1
40.1
106.1
18.2
110.5
275.0
14.1
35.8
0.6
9.5
60.0
19.0
6.6
0.0
86.1
111.8
16.6
Total
Commodities contracts, excluding precious metals contracts
Over-the-counter (OTC) contracts
2.2
0.3
1.7
0.4
3.7
1.3
Forward contracts
Options
Exchange-traded contracts 4
Futures
Options
Total
Total derivative instruments 5,6
thereof commitments to repurchase auction rate securities
2.0
4.5
135.7
2.0
4.1
138.1
3.7
8.8
115.5
3.7
8.1
119.2
2.7
4.8
322.8
2.7
4.6
313.1
1.1
0.9
280.0
1.0
281.6
8.4
19.0
854.1 7
1 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from the table. Payables and receivables resulting from the valuation of regular way
purchases and sales of financial assets between trade and settlement date are recognized as replacement values and therefore included in the table. PRVs and NRVs are categorized in the different time
bands on the basis of the maximal duration of the derivative contract. 2 PRV: Positive replacement value. 3 NRV: Negative replacement value. 4 Exchange-traded products include own account
trades only. 5 Total PRV and total NRV include approximately CHF 462 million and CHF 1,649 million, respectively for the option to purchase the SNB StabFund equity. Refer to Note 38. 6 Total NRVs
include approximately CHF 1,058 million for the derivative component of the mandatory convertible notes issued to the Swiss Confederation in December 2008. Refer to Note 26. 7 The impact of
netting agreements accepted by the Swiss Financial Market Supervisory Authority (FINMA) for capital adequacy calculations is to reduce positive replacement values to CHF 202,351 million. 8 The
impact of netting agreements accepted by the FINMA for capital adequacy calculations is to reduce negative replacement values to CHF 200,055 million.
317
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Notes to the consolidated financial statements
Note 23 Derivative instruments and hedge accounting1 (continued)
As of 31 December 2007
Term to maturity
CHF billion
Interest rate contracts
Over-the-counter (OTC) contracts
Forward contracts
Swaps
Options
Exchange-traded contracts 4
Futures
Options
Total
Credit derivative contracts
Over-the-counter (OTC) contracts
Credit default swaps
Total rate of return swaps
Total
Foreign exchange contracts
Over-the-counter (OTC) contracts
Forward contracts
Interest and currency swaps
Options
Exchange-traded contracts 4
Futures
Options
Total
Equity / index contracts
Over-the-counter (OTC) contracts
Forward contracts
Options
Exchange-traded contracts 4
Futures
Options
Total
Precious metals contracts
Over-the-counter (OTC) contracts
Forward contracts
Options
Exchange-traded contracts 4
Futures
Options
Forward contracts
Options
Exchange-traded contracts 4
Futures
Options
Total
Total derivative instruments
Within 3 months
NRV 3
PRV 2
3–12 months
NRV
PRV
1–5 years
PRV
NRV
over 5 years
NRV
PRV
Total
PRV
Notional
value
Total
NRV
Notional
value
0.7
4.9
0.4
0.6
6.5
0.2
0.4
0.6
0.8
5.4
0.3
0.6
7.0
0.2
0.3
0.6
0.1
7.9
0.2
0.3
8.5
6.5
0.1
6.6
0.1
8.1
0.6
0.3
9.2
6.0
0.2
6.2
8.2
26.9
4.8
8.8
28.2
4.4
2.6
15.8
5.9
2.9
13.6
5.5
0.0
52.4
3.4
0.0
55.1
4.8
77.3
15.8
69.0
17.3
0.8
142.4
19.8
759.7
12,527.7
621.9
0.9
137.6
22.9
775.1
15,835.8
783.1
0.0
55.9
0.0
59.9
93.0
86.3
367.7
39.0
163.9 14,316.0
0.9
1,705.0
50.9
162.4 19,149.9
0.9
30.9
3.2
34.1
94.4
10.9
105.3
2,509.7
56.6
2,566.3
99.6
6.6
106.2
2,662.6
131.7
2,794.3
60.9
2.5
63.3
0.9
19.4
1.3
62.5
2.8
65.3
0.6
21.9
1.3
26.8
7.9
34.7
0.0
12.5
0.1
0.0
11.6
0.1
0.1
40.0
0.1
41.4
0.0
24.2
0.0
22.0
21.6
23.9
12.5
11.7
2.4
3.1
2.0
4.2
1.7
4.7
1.0
9.1
0.6
5.4
0.7
12.1
6.1
11.6
6.2
12.4
7.9
14.3
8.7
18.9
6.5
12.5
7.2
20.0
0.5
0.5
1.0
1.0
0.9
1.1
0.7
1.1
0.2
2.0
1.6
1.2
1.0
1.8
0.0
2.9
1.9
0.9
0.5
1.7
0.0
2.2
1.8
1.0
0.1
1.2
0.2
1.5
0.0
0.2
0.1
3.5
0.3
3.9
0.1
0.1
0.2
0.2
1.1
0.1
1.2
0.1
Total
Commodities contracts, excluding precious metals contracts
Over-the-counter (OTC) contracts
0.1
1.1
0.1
2.1
0.2
2.2
2.4
0.5
2.4
0.5
1.6
0.9
11.7
74.5
12.1
0.1
98.4
4.8
14.5
20.8
40.0
2.4
3.6
0.4
6.4
7.0
2.4
635.0
2,457.9
759.2
1.5
0.0
3,853.6
103.1
113.5
20.5
158.6
395.7
16.8
36.6
18.5
71.9
59.0
11.4
0.4
88.7
159.5
687.2
2,414.0
747.7
10.5
4.5
3,863.9
72.7
177.9
35.1
166.9
452.6
23.1
42.5
0.2
9.5
75.3
52.5
13.5
169.9
92.6
328.5
12.3
75.3
11.3
0.1
99.0
3.9
28.9
22.4
55.1
2.2
4.0
0.4
6.6
6.9
2.8
4.5
14.3
443.56
1.6
4.5
64.4
1.5
4.3
67.8
2.3
4.8
60.6
2.3
5.1
63.3
1.0
3.8
160.0
0.7
3.5
174.8
1.2
143.2
1.3
137.6
4.9
14.2
428.25
1 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from the table. Payables and receivables resulting from the valuation of regular way
purchases and sales of financial assets between trade and settlement date are recognized as replacement values and therefore included in the table. PRVs and NRVs are categorized in the different time
bands on the basis of the maximal duration of the derivative contract. 2 PRV: Positive replacement value. 3 NRV: Negative replacement value. 4 Exchange-traded products include own account
trades only. 5 The impact of netting agreements accepted by the Swiss Financial Market Supervisory Authority (FINMA) for capital adequacy calculations is to reduce positive replacement values to CHF
135,846 million. 6 The impact of netting agreements accepted by the FINMA for capital adequacy calculations is to reduce negative replacement values to CHF 151,168 million.
318
Off-balance-sheet information
Note 24 Pledgeable off-balance-sheet securities
The Group obtains securities which are not recorded on the balance sheet with the right to sell or repledge them as shown
in the table below.
CHF million
Fair value of securities received which can be sold or repledged
as collateral under reverse repurchase, securities borrowing and lending arrangements,
derivative transactions and other transactions
in unsecured borrowings
thereof sold or repledged
in connection with financing activities
to satisfy commitments under short sale transactions
in connection with derivative and other transactions
31.12.08
651,380
621,981
29,399
430,670
343,252
62,431
24,987
31.12.07
1,491,567
1,396,768
94,799
1,118,305
924,795
164,788
28,722
Note 25 Operating lease commitments
At 31 December 2008, UBS was obligated under a number
of non-cancellable operating leases for premises and equip-
ment used primarily for banking purposes. The significant
premises leases usually include renewal options and escala-
tion clauses in line with general office rental market condi-
tions 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 divi-
dends, engage in debt financing transactions or enter into
further lease agreements.
The minimum commitments for non-cancellable leases of
premises and equipment are presented as follows:
CHF million
Operating leases due
2009
2010
2011
2012
2013
2014 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
31.12.08
1,034
950
848
772
634
2,573
6,811
578
6,233
319
319
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Financial information
Notes to the consolidated financial statements
Note 25 Operating lease commitments (continued)
CHF million
Gross operating lease expense
from continuing operations
from discontinued operations
Sublease rental income from continuing operations
Net operating lease expense
from continuing operations
from discontinued operations
31.12.08
31.12.07
31.12.06
1,215
1,215
0
50
1,165
1,165
0
1,251
1,233
18
54
1,197
1,179
18
1,170
1,137
33
56
1,114
1,081
33
Operating lease contracts include non-cancellable long-term
leases of office buildings in most UBS locations. At 31 De-
cember 2008, the minimum lease commitments for each
of 12 office locations exceeded CHF 100 million and non-
cancellable minimum lease commitments for each of two
office locations in New Jersey and New York exceeded CHF
500 million.
320
Additional information
Note 26 Capital increases and mandatory convertible notes
Share capital increase
On 23 April 2008, the Annual General Meeting of share-
holders (AGM) approved a proposal that UBS strengthen its
shareholders’ equity by way of an ordinary capital increase.
The capital increase, completed in June 2008, was effected
by granting existing shareholders rights to subscribe to seven
new shares for 20 old shares at a price of CHF 21 per share.
The capital increase was fully underwritten and resulted in
the issue of 760,295,181 new fully paid registered shares
with a par value of CHF 0.10 each. Net proceeds from the
capital increase were approximately CHF 15.6 billion. The
newly issued shares ranked pari passu in all respects with the
existing registered shares immediately upon issue.
Issuance of mandatory convertible notes (MCNs)
March 2008 issuance
On 9 December 2007, UBS entered into an agreement with
the Government of Singapore Investment Corporation Pte
Ltd and an investor from the Middle East to issue mandatory
convertible notes (MCNs) with a face value of CHF 13 billion.
The MCNs were issued on 5 March 2008 after the share-
holders approved, at the Extraordinary General Meeting held
on 27 February 2008, the creation of conditional capital in a
maximum amount of 277,750,000 shares to be issued upon
conversion of the MCNs. The MCNs counted as Tier 1 capital
for regulatory capital purposes from the date of issue.
The MCNs have a coupon of 9% per annum and are
convertible into UBS shares after two years, with earlier
conversion options for the investors and UBS. The terms of
the MCNs initially linked conversion to the share price at the
date of conversion, with the minimum conversion price
set at CHF 51.48 and the maximum conversion price at
CHF 60.23 per share. Conversion prices were subject to
anti- dilution adjustments in the event of certain corporate
actions.
As a result of anti-dilution adjustments triggered by the
June 2008 capital increase, the initial conversion prices were
adjusted and the MCNs will be converted into a fixed num-
ber of 270,438,942 shares.
Under IFRS, the commitment to issue the MCNs to the
two investors entered into by UBS on 9 December 2007 was
subject to derivative accounting between the date the com-
mitment was entered into and the date of issuance on
5 March 2008. The total change in the fair value of such
commitment of approximately CHF 3,860 million was recog-
nized as a gain in 2008.
Pursuant to the adjustments to the conversion prices, the
accounting treatment for the MCNs changed. Upon issu-
ance, the MCNs had been initially treated as a compound
financial instrument consisting of a debt host and an embed-
ded equity component. After the adjustments to the conver-
sion prices, the MCNs have been treated as an equity instru-
ment, which resulted in the reclassification of CHF 12,382
million from liability to Share premium in equity. In 2008,
Share premium increased by approximately CHF 6,969 mil-
lion due to the MCNs and interest expense incurred was
approximately CHF 126 million. As of 31 December 2008, a
liability representing the present value of the 9% coupon
payments due on 5 March 2009 and 2010, respectively, was
recorded for approximately CHF 2,297 million. Interest at a
rate of 2.78% per annum continues to be accrued on the
remaining liability.
December 2008 issuance
On 15 October 2008, UBS entered into an agreement with
the Swiss Confederation to issue mandatory convertible
notes (MCNs) with a face value of CHF 6 billion. The MCNs
were issued on 9 December 2008 after the shareholders
approved, at the Extraordinary General Meeting held on
27 November 2008, the creation of conditional capital in a
maximum amount of 365,000,000 shares to be issued upon
conversion of the MCNs. The MCNs counted as Tier 1 capital
for regulatory capital purposes from the date of issue.
The MCNs pay a coupon of 12.5% per annum and are
convertible into UBS shares after 30 months, with earlier
conversion options for the note holders and UBS. Conver-
sion is linked to the share price at the time of conversion,
with the minimum conversion price set at CHF 18.21 and the
maximum conversion price set at CHF 21.31 per share. If the
share price is at or below CHF 18.21, conversion will result in
the issuance of the maximum number of shares which is
329,447,681. If the share price is at or above CHF 21.31,
conversion will result in issuance of a minimum number of
shares of 281,579,096 plus an additional variable number of
shares, provided however that the total number of shares to
be issued will not exceed the maximum number of shares. If
the share price is between the minimum and maximum con-
version prices, the MCNs will be converted into a variable
number of shares by dividing CHF 6 billion by the market
price determined immediately before conversion. Conver-
sion prices are subject to anti-dilution adjustments in the
event of certain corporate actions.
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Notes to the consolidated financial statements
Note 26 Capital increases and mandatory convertible notes (continued)
Under IFRS, the commitment to issue the MCNs entered
into by UBS on 15 October 2008 was subject to derivative
accounting between the date the commitment was entered
into and the date of issuance. Changes in the fair value of
the commitment between 15 October 2008 and 9 Decem-
ber 2008 resulted in a gain of approximately CHF 329 million
in 2008. The commitment was attributable to the equity
component and was reclassified as a reduction to Share pre-
mium upon issuance of the MCNs.
Upon issuance, the MCNs were treated as a compound
financial instrument consisting of a debt host and embedded
equity and derivative components. The debt host was recog-
nized as a liability initially measured at fair value and ac-
counted for at amortized cost. The fair value of the debt host
on 9 December 2008 was estimated at approximately CHF
7,733 million. At 31 December 2008, the carrying value of
the liability was approximately CHF 7,740 million and inter-
est expense recognized in 2008 amounted to approximately
CHF 8 million. The fair value of the derivative component
was determined to be approximately CHF 1,425 million, rec-
ognized as a negative replacement value. Subsequent chang-
es in the fair value of the derivative component resulted in a
gain of approximately CHF 367 million in 2008. The equity
component was attributed a fair value of approximately CHF
3,158 million, recorded in equity as a reduction to Share
premium. The value of the equity component is not re-
measured to fair value after 9 December 2008.
Note 27 Fair value of financial instruments
a) Fair value measurements
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. Refer to Note 1a)
5) for an overview on the determination of fair value.
Determination of fair values from quoted market prices or valuation techniques
CHF billion
Trading portfolio assets
Trading portfolio assets pledged as collateral
Positive replacement values
Financial assets designated at fair value
Financial investments available-for-sale
Total assets
Trading portfolio liabilities
Negative replacement values
Financial liabilities designated at fair value
Total liabilities
31.12.08
Level 1
Level 2
Level 3
128.1
25.4
5.1
1.1
2.4
162.1
33.9
4.9
38.8
128.4
13.2
811.2
11.2
1.2
965.2
27.5
812.0
91.2
930.7
15.3
1.6
37.8
0.6
1.6
57.0
1.0
35.0
10.3
46.3
Total
271.8
40.2
854.1
12.9
5.2
1,184.3
62.4
851.9
101.5
Level 1
277.2
57.4
6.8
1.8
1.2
344.4
119.9
6.6
1,015.8
126.5
31.12.07
Level 2
Level 3
330.7
48.5
407.4
10.0
2.4
799.0
44.9
420.1
149.5
614.5
52.3
8.3
14.0
1.4
75.9
16.8
42.4
59.2
Total
660.1
114.2
428.2
11.8
5.0
1,219.3
164.8
443.5
191.9
800.2
Financial instruments accounted for at fair value
For trading portfolio assets and liabilities, financial assets and
liabilities designated at fair value and financial investments
available-for-sale which are listed or otherwise traded in an
active market, for exchange-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 (level 1).
For financial instruments which do not have quoted mar-
ket prices directly available from an active market, fair values
are estimated using valuation techniques or models, based
wherever possible on assumptions supported by observable
market prices or rates prevailing at the balance sheet date
(level 2). This is the case for the majority of OTC derivatives,
and for many unlisted and listed instruments which are not
traded in active markets.
For some types of financial instruments, fair values can-
not be obtained directly from quoted market prices, or in-
directly using valuation techniques or models supported by
observable market prices or rates. This is generally the case
for certain complex or structured financial instruments and
for private equity investments. In addition, the illiquidity of
a broad range of financial instruments linked to the US res-
idential mortgage market, as well as US student loan ARSs,
monolines, leveraged finance and others required an ex-
tended use of valuations based on partially or fully non-
market observable market inputs in the second half of 2007
and 2008. In these cases, fair value is estimated indirectly
322
Note 27 Fair value of financial instruments (continued)
a) Fair value measurements (continued)
using valuation techniques or models for which the inputs
are reasonable assumptions, based on market conditions
(level 3).
In its valuations, UBS uses indices, where and to the ex-
tent appropriate. The most frequently applied pricing mod-
els and valuation techniques include forward pricing and
swap models using present value calculations, option mod-
els 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 tech-
niques are significantly affected by the choice of valuation
model and the underlying assumptions made concerning
factors such as the amounts and timing of future cash flows,
discount rates, volatility and credit risk. Accrued interest is
recognized as part of the fair value of financial instruments
accounted for at fair value. Lock-up periods for equity invest-
ments are considered when determining fair value.
Refer to the description below of the impact from UBS’s
own credit movements on financial liabilities accounted for
at fair value. For the deferral and recognition of day 1 profit
or loss, refer to Note 27d. For a description of the valuations
of UBS’s positions related to the US student loan auction rate
securities (which were reclassified to “loans and receivables”
per 31 December 2008), monolines, US and non-US refer-
ence linked notes, and other instruments which were deter-
mined relevant for specific disclosure refer to Note 27c.
Reflection of counterparty credit risk in the valuation of
traded debt instruments and derivative instruments
UBS incorporates the counterparty credit risk inherent in
over-the-counter (OTC) derivatives transactions and traded
debt instruments into its fair value estimates via the credit
valuation adjustment (CVA). This amount represents the es-
timated market value of protection required to hedge credit
risk from counterparties in UBS’s OTC derivatives portfolio
and traded debt instruments, taking into account expected
future exposures, collateral, and netting arrangements. The
most significant component of the overall CVA is the portion
related to monolines, discussed further below.
issued by a riskless intermediary, relative to the market value
of those obligations issued by UBS, as judged from the per-
spective of the holders of those obligations. Own credit
changes were calculated based on a senior long-term debt
curve generated from observed external pricing for funding
associated with new senior debt issued by the Group, or rel-
evant secondary market transactions in senior long-term
UBS debt. In the absence of issued debt, credit default swap
spreads would be considered as well.
Disclosures on own credit for financial liabilities
designated at fair value
At 31 December 2008, the own credit gain for financial lia-
bilities designated at fair value still held at reporting date,
predominantly issued structured products, amounts to CHF
2,032 million (year-to-date) and CHF 2,953 million (life-to-
date). The life-to-date amount reduced the fair value of fi-
nancial liabilities designated at fair value at 31 December
2008. Included in these amounts is the overall quantification
of changes in fair value attributable to changes in UBS’s
credit spread during the periods. In addition, it includes the
credit effect of period changes in fair values attributable to
factors other than credit spreads, including benchmark inter-
est rates, prices of financial instruments issued by third par-
ties, commodity prices, foreign exchange rates or index pric-
es or rates (i.e. credit effect of volume changes). The
year-to-date 2008 own credit profit and loss including only
the change in credit spread but excluding the credit effect of
volume changes was a gain of CHF 3,993 million.
Reflection of market illiquidity in fair value determinations
Fair value estimates incorporate the effects of illiquidity in
the relevant markets. Where trading prices are observable in
such markets, these prices invariably include a liquidity or
risk premium relative to what could be concluded on the
basis of an actuarial assessment of credit loss potential. Valu-
ations based on models similarly incorporate liquidity or risk
premiums either implicitly (e. g, by calibrating to market pric-
es that incorporate such premiums) or explicitly.
UBS’s own credit risk in the valuations of financial liabilities
at fair value, including derivative liabilities
The Group’s own credit changes are reflected in valuations
for those financial liabilities at fair value, including derivative
liabilities, where the Group’s own credit risk would be con-
sidered by market participants and excludes fully collateral-
ized transactions and other instruments for which it is estab-
lished market practice not to include an entity-specific
adjustment for own credit. This amount represents the esti-
mated difference in the market value of identical obligations
Valuation processes
There may be uncertainty about the accuracy of a valuation,
resulting from the choice of the valuation technique or mod-
el used, the assumptions embedded in these models, the
extent to which inputs are not market observable, or as a
result of other elements affecting the valuation technique.
Valuation adjustments, including model reserves, are applied
to reflect these uncertainties and are deducted from the fair
values produced by the models or other valuation tech-
niques. All models used for valuation undergo an internal
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Notes to the consolidated financial statements
Note 27 Fair value of financial instruments (continued)
a) Fair value measurements (continued)
validation process before they are approved for use. Uncer-
tainties associated with the use of model-based valuations
(both level 2 and level 3) are predominantly addressed
through the use of model reserves. These reserves reflect the
amounts that UBS estimates are appropriate to deduct from
the valuations produced directly by the models to reflect un-
certainties in the relevant modeling assumptions and inputs
used.
Based on UBS’s established fair value and model gover-
nance policies and the related controls and procedural safe-
guards the Group employs, management believes the result-
ing 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.
Financial instruments accounted for at amortized cost
The following table reflects the estimated fair values for the
Group’s instruments accounted for at amortized cost. Refer
to Note 29 for an overview of financial assets classified as
“loans and receivables” and financial liabilities accounted
for at amortized cost.
CHF billion
Assets
Loans to banks and customers
Cash collateral on securities borrowed and reverse repurchase agreements
Accrued income and prepaid expenses, other assets
Liabilities
Due to banks and customers
Cash collateral on securities lent and repurchase agreements
Debt issued
Accrued expenses and deferred income, other liabilities
31.12.08
Carrying value
Fair value
403.0
347.5
9.1
600.4
116.6
201.2
22.8
402.6
347.7
9.1
600.4
116.6
199.7
22.8
The fair values included in the table above were calculated
for disclosure purposes only. The valuation techniques and
assumptions described below provide a measurement of
fair value of UBS’s financial instruments accounted for at
amortized cost. However, because other institutions may
use different methods and assumptions for their fair value
esti mation, such fair value disclosures cannot necessarily be
compared from one financial institution to another. UBS
applies significant judgments and assumptions to arrive at
these fair values, which are more holistic and less sophisti-
cated than UBS’s established fair value and model gover-
nance policies and processes applied for financial instru-
ments accounted for at fair value, whose fair values impact
UBS’s balance sheet and net profit. Debt instruments reclas-
sified in fourth quarter 2008 from “held for trading” to
“loans and receivables” followed the same fair value mea-
surement principles and governance policies as financial in-
struments accounted for at fair value. The following prin-
ciples were applied when determing fair value estimates for
financial instruments accounted for at amortized cost:
– For short-term financial instruments with remaining
maturities of one year or less, the carrying amount,
which is net of credit loss allowances, is generally con-
sidered a reasonable estimate of fair value. The follow-
ing financial instruments accounted for at amortized
cost have remaining maturities of one year or less:
100% of cash collateral on securities borrowed and re-
verse repurchase agreements; 97% of loans due from
banks; 61% of loans to customers; 98% of amounts
due to banks and customers; 99% cash collateral on
securities lent and repurchase agreements; 60% of debt
issued. Refer to the chapter “Liquidity and funding
management” in the “Risk and treasury management”
section of this report.
– The fair value of variable-interest bearing financial instru-
ments accounted for at amortized cost is assumed to be
approximated by their carrying amounts, which are net of
credit loss allowances, and does not reflect fair value
changes in the credit quality of counterparties respectively
UBS’s own credit movements.
– For fixed-interest bearing financial instruments with re-
maining maturities above one year, fair value was estimat-
ed by discounting contractual cash flows using current
rates at which similar loans would be transacted to bor-
rowers with similar credit ratings and/or collateral and for
the same remaining maturities. These estimates generally
include adjustments for counterparty credit respectively
UBS’s own credit.
– The fair value estimates for repurchase and reverse repur-
chase agreements with variable and fixed interest rates,
for all maturities, include the valuation of the interest rate
component of these instrument. Credit and debit valua-
324
Note 27 Fair value of financial instruments (continued)
a) Fair value measurements (continued)
tion adjustments have not been included into the valua-
tion due to the short-term nature of these instruments.
– For loans to customers from Global Wealth Management
& Business Banking, mainly reflecting the impact of the
Swiss Mortgage loan portfolio with a fixed rate of interest,
an excess of fair value over the carrying amount of CHF
3.0 billion was determined. This amount is largely attribut-
able to the current CHF interest rate movements, which
are significantly below the average levels over the last de-
cade. The fair values of UBS’s Investment Bank’s loans to
customers were CHF 3.4 billion below their carrying val-
ues, mainly reflecting credit valuation adjustments for
debt instruments reclassified from “held for trading” to
“loans and receivables” in fourth quarter 2008.
– For debt issued with remaining maturites greater than one
year, the fair value was determined from quoted market
prices, where available. Where quoted market prices were
not available the fair value was derived by discounting
contractual cash flows by using rates at which UBS could
issue debt with similar remaining maturities. Adjustments
for own credit movements have been included into fair
value estimation.
The fair value of loans to banks and customers measured
at amortized cost at 31 December 2007 was CHF 392.3 bil-
lion (carrying value: CHF 395.3 billion). The fair value of debt
issued measured at amortized cost at 31 December 2007
was CHF 222.7 billion (carrying value: CHF 222.0 billion).
The fair values of UBS’s fixed rate loans, long- and medi-
um-term notes and bonds issued are predominantly hedged
by derivative instruments. Refer to Note 23 and Note 1. The
interest rate risk inherent in balance sheet positions with no
specific maturity may also be hedged with derivative instru-
ments based on management’s view of their average cash
flow and repricing behavior.
b) Fair value measurements involving significant unobservable inputs (level 3)
Level 3 instruments at year-end
As of 31 December 2008, financial instruments measured
with valuation techniques using significant non-market ob-
servable inputs (level 3) mainly include structured rates and
credit trades, bespoke collateralized debt obligations (CDOs),
instruments linked to the US sub-prime residential, US com-
mercial and non-US real estate markets and leveraged finance
instruments. Level 3 financial liabilities also include hybrid
financial liabilities from structured products issuances.
Material changes in level 3 instruments for the year
Level 3 instruments recognized as Trading portfolio assets
(including those pledged as collateral) were reduced by ap-
proximately CHF 44 billion compared to 2007. The decline
mainly relates to the following events and transactions: re-
classifications of approximately CHF 13 billion from the IAS
39 category “held for trading” to the category “loans and
receivables”, the sale of US RMBS to a fund managed by
BlackRock of approximately CHF 4 billion and the sale of po-
sitions (mainly products linked to US residential and com-
mercial real estate markets) of approximately CHF 6 billion to
the fund owned and controlled by the Swiss National Bank.
The balance of approximately CHF 30 billion mainly reflects
writedowns, other sales, deconsolidations, amortizations,
and foreign exchange movements. The reductions were par-
tially offset by net reclassifications from level 2 to level 3 of
approximately CHF 9 billion as valuation inputs became less
observable during 2008. Reclassifications into level 3 mainly
included student loan ARS, leveraged finance deals, and US
real estate products.
Derivatives classified as level 3 increased at the end of
2008 by approximately CHF 24 billion (Positive replacement
values) and approximately CHF 18 billion (Negative replace-
ment values), predominantly driven by widening credit
spreads impacting fair value of structured rates and credit
trades, and bespoke CDOs. In addition, reclassifications into
level 3 increased positive replacement values by approxi-
mately CHF 8 billion and negative replacement values by ap-
proximately CHF 8 billion as valuation inputs became less
observable during 2008.
The decrease of level 3 financial liabilities designated at
fair value of approximately CHF 32 billion at the end of 2008
was due mainly to hybrid and other financial liabilities desig-
nated at fair value of approximately CHF 15 billion which
was included in level 3 as of 31 December 2007, although
these financial liabilities were related to level 1 and level 2
valuations. Other factors which contributed to the decrease
of level 3 financial liabilities designated at fair value during
2008 were expiries of trades, foreign exchange movements,
disposals of instruments linked to the US sub-prime mort-
gage market and redemptions of hybrid financial liabilities.
The transfer of further level 3 instruments to the SNB
fund in 2009 will lead to more reductions in level 3 trading
assets, positive and negative replacement values.
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Notes to the consolidated financial statements
Note 27 Fair value of financial instruments (continued)
b) Fair value measurements involving significant unobservable inputs (level 3) (continued)
Level 3 profit or loss
Total Net trading income / (loss) for the years ended 31 De-
cember 2008, 31 December 2007 and 31 December 2006
was CHF (25.8) billion, CHF (8.4) billion and CHF 13.7 bil-
lion, respectively, which represents the net result from a
range of products traded across different business activi-
ties, including the effect of the foreign currency translation
of monetary assets and liabilities and including both real-
ized and unrealized income. Unrealized income is deter-
mined from changes in fair values, using quoted prices in
active markets when available, and otherwise estimated us-
ing valuation techniques with market observable and / or
non-market observable inputs.
Net trading income includes net losses of CHF 11.5 bil-
lion, net losses of CHF 11.6 billion and net gains of CHF 0.4
billion from unrealized fair value changes of financial instru-
ments for which fair value is calculated on the basis of valu-
ation techniques with significant non-market observable in-
puts (level 3) for the years ended 31 December 2008, 2007
and 2006.
Such valuation techniques reflecting significant non-mar-
ket observable inputs (level 3) include mainly models for more
complex financial instruments and for financial instruments
for which markets were illiquid at the balance sheet date.
They require the use of reasonable assumptions and esti-
mates based on market conditions at the balance sheet
date.
Net trading income is often generated from transactions
involving several financial instruments or subject to hedging
or other risk management techniques. This may result in dif-
ferent portions of the transaction being priced using differ-
ent methods. In many cases, the amounts estimated using
valuation techniques with non-market observable inputs
were offset or partially offset by changes in fair value of oth-
er financial instruments or transactions, for which quoted
market prices or rates were available, or on which the gain
or loss has been realized. Consequently, the changes in fair
value which were estimated using valuation techniques with
non-market observable inputs and have been recognized in
profit or loss during the period represent only a portion of
Net trading income.
Sensitivity information
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 market observable prices or rates.
There may be uncertainty about a valuation, resulting
from the choice of valuation technique or model used, the
assumptions embedded in those models, the extent to which
inputs are not market observable, or as a result of other ele-
ments affecting the valuation technique. Valuation adjust-
ments, including model reserves, are applied to reflect such
uncertainties and are deducted from the fair values produced
by the models or other valuation techniques.
All models used for valuation undergo an internal valida-
tion process before they are approved for use.
Based on UBS’s established fair value and model gover-
nance policies and the related controls and procedural safe-
guards the Group employs, management believes the result-
ing 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.
Uncertainties associated with the use of model-based val-
uations (both level 2 and level 3) are predominantly ad-
dressed through the use of model reserves. These reserves
reflect the amounts that UBS estimates are appropriate to
deduct from the valuations produced directly by the models
to reflect uncertainties in the relevant modeling assumptions
and inputs used. In arriving at these estimates, UBS considers
the range of market practice and how it believes other mar-
ket participants would assess these uncertainties. Model re-
serves are periodically reassessed in light of information from
market transactions, pricing utilities, and other relevant
sources. The level of these model reserves is, nevertheless, to
a large extent a matter of judgment.
To estimate the potential effect on the Financial State-
ments from the use of alternative valuation techniques or
assumptions, UBS makes use of the model reserve amounts
described above, by scaling the level of the model reserves
higher and lower, to assess the impact on valuation of in-
creasing or decreasing the amount of model-related uncer-
tainty considered.
The potential effect of using reasonably possible alterna-
tive valuation assumptions has been quantified as follows:
– Scaling the model reserve amounts upward in line with
less favorable assumptions would reduce fair value by ap-
proximately CHF 2.5 billion at 31 December 2008, by ap-
proximately CHF 2.7 billion at 31 December 2007, and
approximately CHF 1.0 billion at 31 December 2006.
– Scaling the model reserve amounts downward in line with
more favorable assumptions would increase fair value by
approximately CHF 1.4 billion at 31 December 2008, by
approximately CHF 2.2 billion at 31 December 2007, and
approximately CHF 1.0 billion at 31 December 2006.
Please refer to Note 27c below for the instrument catego-
ries which are deemed to be relevant for specific sensitivity
disclosure per 31 December 2008, and which are included in
the sensitivity numbers provided above.
326
Note 27 Fair value of financial instruments (continued)
c) Valuation techniques and inputs by product
Where possible, financial instruments are marked at prices
quoted in active markets. In the current market environ-
ment, such price information is typically not available for all
financial instruments, and UBS applies valuation techniques
to measure such instruments. Valuation techniques use
“market-observable inputs”, where available, derived from
similar assets in similar and active markets, from recent trans-
action prices for comparable items or from other observable
market data. For positions where observable reference data
are not available for some or all parameters, UBS calibrates
the non-market-observable inputs used in its valuation mod-
els based on a combination of judgment, historical experi-
ence and knowledge of current market conditions.
US super senior RMBS CDOs
All material super senior RMBS CDO tranches still held by UBS
are covered by corresponding monoline credit protection ref-
erencing the specific position held by UBS. Where liquidation
of the RMBS CDO is deemed imminent, valuation is based on
the estimated aggregate proceeds of the liquidation (using
current fair value estimates of the underlying instruments)
less any estimated expenses associated with the liquidation.
For the remainder of the super senior RMBS CDO population,
a model that projects losses on the underlying mortgage
pools and applies the implications of these projected lifetime
losses through to the RMBS and then to the CDO structure is
applied. The loss projection is calibrated separately for each
RMBS CDO so that the model recovers the estimated market
value of the underlying collateral pool. At 31 December
2007, a similar model was applied, with loss projection esti-
mates calibrated such that the model valued relevant ABX
market indices consistently with their observed levels in the
market. The model has been adjusted in 2008 to better re-
flect the prevailing market conditions and illiquidity.
Credit valuation adjustments on monoline credit protection
Credit valuation adjustments (CVAs) for monoline credit protec-
tion are based on a methodology that uses credit default swap
spreads on the monolines as a key input in determining an im-
plied level of expected loss. Where a monoline has no observ-
able credit default swap spread, a judgment is made on the
most comparable monoline or combination of monolines and
the corresponding spreads are used instead. Credit valuation
adjustments are intended to achieve a fair value of the underly-
ing contracts and are normally based on publicly available infor-
mation. In 2008, in some cases where UBS has had knowledge
of potential restructurings that may result in economic out-
comes more adverse than those implied by CDS market spreads,
UBS had determined to modify CVA amounts accordingly. At
31 December 2007, a similar methodology was applied. The
methodology was re-calibrated in 2008 to reflect prevailing
market conditions, in particular the greater prevalence of CDS
trading with up-front cash exchanges and declines in potential
recovery rates implied by recovery swap contract pricing.
To assess the sensitivity of the CVA calculation to alterna-
tive assumptions, the impact of a 10% increase in monoline
credit default swap spreads (e.g. from 2,000 basis points to
2,200 basis points for a specific monoline) is considered. At 31
December 2008, such an increase would have resulted in an
increase in the monoline credit valuation adjustment of ap-
proximately USD 206 million (CHF 220 million). The sensitivity
of the monoline credit valuation adjustment to a decrease of
one percentage point in the monoline recovery rate assump-
tions (e.g. from 30% to 29% for a specific monoline; condi-
tional on default occurring) is estimated at USD 58 million
(CHF 62 million).
In addition, the credit valuation adjustments related to
transactions referencing RMBS CDOs are sensitive to the es-
timated market value of the underlying collateral pool. Hold-
ing all other parameters constant, the sensitivity of the
monoline credit valuation adjustment to a 10% adverse
change in the aggregate value of the collateral pools under-
lying the referenced RMBS CDOs is estimated at USD 106
million (CHF 113 million).
Refer to the section “Risk management and control” for
details on UBS’s exposure to monolines.
Student loan auction rate securities (ARSs)
Student loan ARSs held by UBS’s Investment Bank of USD
7.9 billion (CHF 8.4 billion), previously classified as “held for
trading”, were reclassified to the category “loans and receiv-
ables” per 31 December 2008. This implies that, going for-
ward, these positions will be accounted for at amortized cost
and tested for impairment, rather than being subject to fair
value accounting through profit or loss. These ARS positions
have been fair valued for the last time at 31 December 2008,
applying the following principles. The applied method sepa-
rates various factors and risks influencing fair value of ARSs
and allows calibrating the result to market transactions
whenever they become available. The methodology relies on
four key components: (a) fundamental cash flow modeling
to estimate the level and timing of potential credit losses on
a given portfolio of student loans backing the ARS, (b) use of
forward yields embedded in market term structure to esti-
mate expected required coupon payments, c) discounted
cash flow projections calibrated to observed ARS market
transactions to correct for any model drift, and (d) liquidity
penalties that impose a further discount to reflect market
conditions. Each of these inputs is calculated and then ag-
gregated in order to arrive at the fair value for each individ-
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Notes to the consolidated financial statements
Note 27 Fair value of financial instruments (continued)
c) Valuation techniques and inputs by product (continued)
ual security. At 31 December 2007, these instruments were
not classified as level 3, as auctions had not failed at this
time. After the failure of auctions due to lack of investor de-
mand in first quarter 2008 up to third quarter 2008, UBS
valued student loan ARSs by comparing them to the student
loan floating rate notes (FRNs), but adopted the model de-
scribed above for 31 December 2008, consistent with the
belief that it provides a better and more granular approach
to fair value estimation.
Refer to the section “Risk management and control” for
Non-US reference linked notes (Non-US RLNs)
The same valuation model and the same approach to cal-
culation of fair value adjustments is applied for the non-US
RLN credit protection as for the US RLN credit protection de-
scribed above, except spread is shocked by 10% for Euro-
pean corporate names. As of 31 December 2008, the fair
value of the non-US RLN credit protection is approximately
USD 1,971 million (CHF 2,102 million). The fair value adjust-
ments (up and down) calculated by applying the shocks de-
scribed above are USD 155 million (CHF 165 million).
details on UBS’s student loan ARS exposures.
US reference linked notes (US RLNs)
The US RLN consists of a series of transactions whereby UBS
purchases credit protection, predominantly in note form, on
a portfolio of fixed income assets. It is described in detail in
the Annual Report 2007, “Risk, Treasury and Capital Man-
agement” section, page 13. The referenced assets are com-
prised of USD ABSs (primarily home equity) and/or corporate
bonds and loans across all rating categories. UBS’s direct ex-
posure to these assets has been reduced via transactions in-
cluding the transaction with the SNB.
The credit protection embodied in the RLN notes is fair
valued using a market standard approach to the valuation
of portfolio credit protection (Gaussian copula). This ap-
proach effectively simulates correlated defaults within the
portfolio, where the expected losses and defaults of the
individual assets are closely linked to the observed market
prices (spread levels) of those assets. Key assumptions of
the model include correlations and recovery rates. UBS ap-
plies fair value adjustments related to potential uncertainty
in each of these parameters, which are only partly observ-
able. In addition, UBS applies fair value adjustments for un-
certainties associated with the use of observed spread lev-
els as the primary inputs.
These fair value adjustments are calculated by applying
shocks to the relevant parameters and revaluing the credit
protection. These shocks for correlation, recovery, and spreads
are set to various levels depending on the asset type and / or
region. Correlation and recovery shocks are generally in the
range of 5 to 15 percentage points. Spread shocks vary more
widely and also depend on whether the under lying protec-
tion is funded or unfunded to reflect cash / synthetic basis
effects. As of 31 December 2008, the fair value of the US
RLN credit protection (pre-reserve) is approxima tely USD
3,284 million (CHF 3,502 million). The fair value adjustments
calculated by applying the shocks described above are USD
299 million (CHF 319 million).
Leveraged finance
A significant proportion of UBS’s leveraged finance exposures
have been reclassified from the category “held for trading” to
the category “loans and receivables” in fourth quarter 2008.
The leveraged finance exposures in the “held for trading” cat-
egory at 31 December 2008 are predominantly classified as
level 3. Fair value estimates for these positions rely on market
knowledge and expert judgment, including judgmental deter-
minations based on the terms of the relevant instrument and
various other factors. These other factors may include, with-
out limitation, observable pricing for other debt of the rele-
vant issuer or debt of issuers of comparable credit quality,
credit default swap spreads and estimated loss severity fac-
tors, and prevailing interest rate levels.
Option to acquire equity of the SNB StabFund
Under IFRS, the option to purchase the SNB StabFund’s eq-
uity is recognized on the balance sheet as a derivative at fair
value with changes in fair value recognized in profit and loss.
At 31 December 2008, the fair value of the call option held
by UBS was approximately CHF 1,100 million.
This fair value is calculated using a standard option pric-
ing model, where the asset pool is treated as the underlying
asset. Key assumptions relate to the level of volatility as-
sumed and to the interest rate assumed. At 31 December
2008, UBS assigned a volatility of 11.3% to the underlying
asset pool. Decreasing or increasing this assumption by 10%
(i. e. 11.3% to 10.2% and 11.3% to 12.4%) would have
decreased / increased the fair value at 31 December 2008
by approximately minus USD 156 million (CHF 166 million) /
plus USD 156 million (CHF 166 million) respectively. At
31 December 2008, UBS applied an interest rate based on
an assumed term funding rate for the asset pool of LIBOR
+ 250 bp. Decreasing or increasing this assumption by 100
bp would have decreased / increased the estimated fair value
at 31 December 2008 by minus USD 246 million (CHF 262
million) / plus USD 290 million (CHF 309 million).
328
Note 27 Fair value of financial instruments (continued)
c) Valuation techniques and inputs by product (continued)
Derivatives embedded in MCN December issuance
The MCNs issued in December 2008 include embedded eq-
uity and derivative components with UBS shares as underly-
ing, which are bifurcated and treated as one derivative ac-
counted for at fair value with fair value changes recognized
in profit or loss. Refer to Note 26 for more information. The
fair value amounted to negative CHF 1,058 million at 31 De-
cember 2008. A 10% reduction in UBS’s share price from
CHF 14.84 to CHF 13.35, holding all other variables con-
stant, would have resulted in a fair value of negative CHF
826 million, whereas an increase of UBS’s share price to CHF
16.32 would have led to a fair value of negative CHF 1,314
million. There are no impacts on UBS’s financial resources, as
the embedded equity and derivative components will be set-
tled in newly issued UBS shares.
d) Deferred day 1 profit or loss
The table reflects financial instruments for which fair value
is determined using valuation models where not all inputs
are market observable. Such financial instruments are ini-
tially recognized at their transaction price although the val-
ues obtained from the relevant valuation model on day 1
may differ. The table shows the aggregate difference yet to
be recognized in profit or loss at the beginning and end of
the period and a reconciliation of changes in the balance
of this difference (movement of deferred day 1 profit or
loss).
CHF million
Balance at the beginning of the year
Deferred profit / (loss) on new transactions
Recognized (profit) / loss in the income statement
Revision to fair value estimates
Foreign currency translation
Balance at the end of the year
For the year ended
31.12.08
31.12.07
550
588
(459)
0
(52)
627
951
1,259
(1,383)
(224)
(53)
550
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329
Financial information
Notes to the consolidated financial statements
Note 28 Pledged assets and transferred financial assets which do not qualify for derecognition
Financial assets are mainly pledged in securities borrowing
and lending transactions, in repurchase and reverse repur-
chase transactions, under collateralized credit lines with cen-
tral banks, against loans from mortgage institutions, in con-
nection with derivative transactions and for security deposits
relating to stock exchange and clearinghouse memberships.
Pledged assets
CHF million
Financial assets pledged:
Financial assets pledged to third parties for liabilities with and without the right of rehypothecation
thereof: Financial assets pledged to third parties with right of rehypothecation
Mortgage loans
Other 1
Total financial assets pledged
Other assets pledged
Precious metals and other commodities
Carrying amount
31.12.08
31.12.07
78,002
40,216
3,699
21,040
182,827
114,190
200
0
102,741
183,027
780
8,628
1 Includes financial instruments of CHF 16 billion reclassified from trading portfolio to loans and receivables. On 31 December 2007 it was presented in the line Financial assets pledged to third parties
for liabilities with and without the right of rehypothecation.
The following table presents details of financial assets which
have been sold or otherwise transferred, but which do not
qualify for derecognition. Criteria for derecognition are dis-
cussed in Note 1a) 4).
Transfer of financial assets which do not qualify for derecognition
CHF billion
Nature of transaction
Securities lending agreements
Repurchase agreements
Other financial asset transfers
Total
Continued asset recognition in full – Total assets
31.12.08
31.12.07
22.0
13.1
46.6
81.7
59.7
51.3
75.9
186.9
The transactions are mostly conducted under standard
agreements employed by financial market participants and
are undertaken with counterparties subject to UBS’s normal
credit risk control processes. The resulting credit exposures
are controlled by daily monitoring and collateralization of
the positions. The financial assets which continue to be
recognized are typically transferred in exchange for cash or
other financial assets. The associated liabilities can therefore
be assumed to be approximately the carrying amount of the
transferred financial assets.
UBS retains substantially all risks and rewards of the trans-
ferred assets in each situation of continued recognition in
full. These include credit risk, settlement risk, country risk
and market risk.
Repurchase agreements and securities lending agree-
ments are discussed in Notes 1a) 12) and 1a) 13). Other
financial asset transfers include sales of financial assets while
concurrently entering into a total rate of return swap with
the same counterparty and sales of financial assets involving
guarantees.
Transferred financial assets which are subject to partial
continued recognition were immaterial in 2008 and 2007.
The carrying amounts of the partially recognized transferred
financial assets are included in the table.
330
Note 29 Measurement categories of financial assets and financial liabilities
a) Measurement categories of financial assets and financial liabilities
The following table provides information about the carrying
amounts of individual classes of financial instruments within
the measurement categories of financial assets and financial
liabilities as defined in IAS 39. Only those assets and liabilities
which are deemed to be financial instruments are included
in the table below, which may cause certain balances to dif-
fer from those presented on the balance sheet.
See the Critical accounting policies for a discussion on
how fair value of financial instruments is determined. See
also Note 1a) 5)–9).
Financial assets
Held for trading
Trading portfolio assets
Trading portfolio assets pledged as collateral
Debt issued 1,2
Positive replacement values
Total
Fair value through profit or loss, other
Financial assets designated at fair value
Cash, loans and receivables
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Loans
Accrued income and prepaid expenses
Other assets
Total
Available-for-sale
Financial investments available-for-sale
Total financial assets
Financial liabilities
Held for trading
Trading portfolio liabilities
Debt issued 1
Negative replacement values
Total
Fair value through profit or loss, other
Financial liabilities designated at fair value
Amounts due under unit-linked contracts
Total
Financial liabilities at amortized cost
Due to banks
Cash collateral on securities lent
Repurchase agreements
Due to customers
Accrued expenses and deferred income
Debt issued
Other liabilities
Total
Total financial liabilities
1 Embedded derivatives presented on the balance sheet line Debt issued. 2 On 31 December 2007, respective amounts have been included in the line Positive replacement values.
31.12.08
31.12.07
261,904
40,216
4,152
854,100
1,160,372
630,764
114,190
428,217
1,173,171
12,882
11,765
32,744
64,451
122,897
224,648
338,520
3,238
5,901
18,793
60,907
207,063
376,928
334,367
9,200
12,874
792,399
1,020,132
5,248
1,970,901
4,966
2,210,034
62,431
185
851,864
914,480
101,546
13,051
114,597
125,628
14,063
102,561
474,774
10,012
201,221
12,765
941,024
1,970,101
164,788
74
443,539
608,401
191,853
27,455
219,308
145,762
31,621
305,887
641,892
21,665
222,003
25,302
1,394,132
2,221,841
331
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Financial information
Notes to the consolidated financial statements
Note 29 Measurement categories of financial assets and financial liabilities (continued)
b) Reclassification of financial assets
Pursuant to the amendment to IAS 39 and IFRS 7, “Reclas-
sification of Financial Assets”, UBS reclassified certain finan-
cial assets out of Trading portfolio assets to Loans and re-
ceivables. Although the amendment could have been applied
retrospectively from 1 July 2008, UBS decided at the end of
October 2008 to apply the amendment with effect from 1
October 2008 following an assessment of the implications
on its financial statements. The financial assets were reclassi-
fied using their fair value on the date of the reclassification
which became their new cost basis at that date. The reclas-
sification of these financial assets reflects UBS’s change in
intent and ability to hold these financial assets for the fore-
seeable future rather than for trading in the near term.
The table below shows the fair values of the reclassified
financial assets as of their reclassification date and their car-
rying values and fair values as of 31 December 2008:
CHF billion
Trading portfolio assets reclassified to Loans on 1.10.08
Trading portfolio assets reclassified to Loans on 31.12.08
Total financial assets reclassified to Loans and receivables
1.10.08
31.12.08
Fair value
Carrying value
Fair value
17.6
17.6
15.8
8.4
24.2
12.4
8.4
20.8
Reclassified financial assets primarily relate to student loan
ARSs and other debt instruments.
As of the reclassification date, estimated effective interest
rates on the reclassified financial assets ranged on average
from 6% to 15% with expected recoverable cash flows of
CHF 50.2 billion.
For the years ended 31 December 2008 and 31 December
2007, fair value losses of CHF 4.1 billion and CHF 0.6 billion,
prior to reclassification, were recognized in the income state-
ment on the reclassified financial assets.
If the financial assets had not been reclassified, the change
in their fair values, after actual reclassification, would have
resulted in additional fair value losses of CHF 4.8 billion in the
income statement for the year ended 31 December 2008.
After reclassification, the contribution of the reclassified
financial assets to UBS’s income statement was an increase
in Net interest income of CHF 0.1 billion, less a Credit loss
expense of CHF 1.3 billion, resulting in a net negative impact
on operating profit before tax of CHF 1.2 billion for the year
ended 31 December 2008.
332
Note 30 Pension and other post-employment benefit plans
a) Defined benefit plans
The Group has established various pension plans inside and
outside of Switzerland. The major plans are located in Swit-
zerland, the UK, the US and Germany. Independent actuarial
valuations are performed for the plans in these locations.
The measurement date of these plans is 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 of
achieving an investment return which, together with the
contributions paid, is sufficient to maintain reasonable con-
trol over the various funding risks of the plans. The invest-
ment advisors appointed by plan trustees are responsible for
determining the mix of asset types and target allocations
which are reviewed by the plan trustees on an ongoing ba-
sis. Actual asset allocation is determined by a variety of cur-
rent economic and market conditions and in consideration
of specific asset class risk.
The expected long-term rates of return on plan assets are
based on long-term expected inflation, interest rates, risk
premiums and targeted asset class allocations. These esti-
mates take into consideration historical asset class returns
and are determined together with the plans’ investment and
actuarial advisors.
Swiss pension plans
The pension plan of UBS covers all UBS employees in Swit-
zerland and exceeds the minimum benefit requirements un-
der Swiss law. The Swiss plan was amended on 1 January
2007 to change the definition of retirement benefits from a
final covered salary to a retirement savings approach and on
1 January 2008 to allow employees a choice in the level of
annual contributions paid by the employee. The pension
plan provides benefits which are based on annual contribu-
tions as a percentage of salary and accrue at an interest rate
that is defined annually by the plan trustees.
calculated as a percentage of covered salary and are deduct-
ed monthly. The percentages deducted from salary for the
full standard level of benefit coverage (including risk bene-
fits) depend on age and vary between 1% and 9% of cov-
ered base salary and 3% and 8% of covered variable com-
pensation. The employer pays a contribution that ranges
between 100% and 375% of employees’ contributions for
the standard level of benefit coverage. The benefits covered
include retirement benefits; disability, death and survivor
pensions; and employment termination benefits.
The employer contributions expected to be made in 2009
to the Swiss pension plan are CHF 520 million.
UBS recognized a defined benefit asset associated with its
Swiss pension plan in 2008 and restated prior periods. Refer
to Note 1b).
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
benefit plans. The locations with defined benefit plans of a
material nature are in the UK, the US and Germany. The UK
and the US defined 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 2009 to these pension plans are CHF 96 million.
The funding policy for these plans is consistent with local
government and tax requirements.
The assumptions used in foreign plans take into account
Contributions to the pension plan of UBS are paid by em-
ployees and the employer. The employee contributions are
local economic conditions.
Refer also to Note 1a) 21).
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Financial information
Notes to the consolidated financial statements
Note 30 Pension and other post-employment benefit plans (continued)
a) Defined benefit plans (continued)
CHF million
For the year ended
Swiss
Foreign
31.12.08
31.12.07
31.12.06
31.12.08
31.12.07
31.12.06
Defined benefit obligation at the beginning of the year
(20,877)
(21,506)
(20,972)
(4,928)
(5,207)
(5,020)
(336)
(710)
(233)
0
(288)
1,158
(25)
(367)
(633)
(236)
(414)
1,508
792
(21)
(347)
(611)
(221)
(125)
(265)
723
(17)
0
0
329
(21,311)
22,181
990
(3,820)
603
233
(1,158)
0
19,029
(2,282)
4,405
0
0
2,123
2,123
(603)
603
(20,877)
21,336
1,067
(250)
584
236
(792)
0
22,181
1,304
2,123
0
(1,304)
2,123
1,953
(414)
584
(21,506)
20,229
998
447
492
221
(723)
(328)
21,336
(170)
2,123
0
0
1,588
(127)
492
2,123
2,123
1,953
2,123
2,123
1,953
2,123
2,123
1,953
(63)
(251)
318
148
0
0
0
0
1,134
(3,642)
4,579
282
(1,027)
194
(88)
(264)
236
151
0
(54)
0
0
298
(4,928)
4,602
313
(97)
200
(76)
(242)
(120)
149
0
0
186
0
(84)
(5,207)
4,288
283
40
66
(148)
(151)
(149)
(1,014)
2,866
(776)
1,324
0
(288)
4,579
(349)
975
0
74
4,602
(605)
1,237
1
626
(69)
194
0
0
(203)
548
798
(250)
548
633
(97)
200
(54)
0
(56)
626
887
(261)
626
491
(103)
66
0
170
9
633
815
(182)
633
1,953
548
626
633
Service cost
Interest cost
Plan participant contributions
Amendments
Actuarial gain / (loss)
Benefits paid
Termination benefits
Acquisitions
Settlements
Curtailments
Foreign currency translation
Defined benefit obligation at the end of the year
Fair value of plan assets at the beginning of the year
Expected return on plan assets
Actuarial gain / (loss)
Employer contributions
Plan participant contributions
Benefits paid
Settlements
Curtailments
Foreign currency translation
Fair value of plan assets at the end of the year
Funded status
Unrecognized net actuarial (gains) / losses
Unrecognized past 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
Settlement
Foreign currency translation
(Accrued) / prepaid pension cost
Amounts recognized in the balance sheet
Prepaid pension cost
Accrued pension liability
(Accrued) / prepaid pension cost
334
Defined benefit obligation from funded plans
(21,311)
(20,877)
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
Note 30 Pension and other post-employment benefit plans (continued)
Immediate recognition of net actuarial (gains) / losses in current period
1,826
(1,258)
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
Amortization of unrecognized net (gains) / losses
Amortization of unrecognized past service cost
Immediate recognition of past service cost in current period
Termination benefits
Settlements
Curtailments
Limit of defined benefit asset
Net periodic pension cost
Funded and unfunded plans
CHF million
Plan assets
Surplus / (deficit)
Experience gains / (losses) on plan liabilities
Experience gains / (losses) on plan assets
CHF million
Defined benefit obligation from funded plans
Defined benefit obligation from unfunded plans
Plan assets
Surplus / (deficit)
Experience gains / (losses) on plan liabilities
Experience gains / (losses) on plan assets
Swiss
Foreign
31.12.08
31.12.07
31.12.06
31.12.08
31.12.07
31.12.06
336
710
(990)
0
0
367
633
(1,067)
0
0
0
25
0
(1,304)
603
414
21
0
1,304
414
19,029
(2,282)
0
(3,820)
22,181
1,304
0
(250)
63
251
(282)
37
88
264
(313)
58
76
242
(283)
68
0
69
0
97
0
103
347
611
(998)
25
125
0
0
17
0
0
127
Swiss
(20,972)
20,229
(743)
(20,225)
18,575
(1,650)
(21,506)
21,336
(170)
(265)
447
Foreign
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
(3,402)
(240)
2,866
(776)
62
(1,027)
(4,654)
(274)
4,579
(349)
(32)
(97)
(5,002)
(205)
4,602
(605)
(11)
40
(4,635)
(385)
4,288
(732)
(3,815)
(327)
3,580
(562)
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Financial information
Notes to the consolidated financial statements
Note 30 Pension and other post-employment benefit plans (continued)
a) Defined benefit plans (continued)
Principal weighted average actuarial assumptions used (%)
Assumptions used to determine defined benefit obligations at the end of the year
Swiss
Foreign
31.12.08
31.12.07
31.12.06
31.12.08
31.12.07
31.12.06
Discount rate
Expected rate of salary increase
Rate of pension increase
Assumptions used to determine net periodic pension cost for the year ended
Discount rate
Expected rate of return on plan assets
Expected rate of salary increase
Rate of pension increase
Plan assets (weighted average)
Actual plan asset allocation (%)
Equity instruments
Debt instruments
Real estate
Other
Total
Long-term target plan asset allocation (%)
Equity instruments
Debt instruments
Real estate
Other
Actual return on plan assets (%)
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
3.3
2.5
0.5
3.5
4.5
2.5
0.8
26
55
13
6
100
20–48
37–63
10–20
0-5
(12.8)
782
55
0
148
6.0
4.5
1.9
5.8
7.1
4.8
2.4
46
35
3
16
100
5.8
4.8
2.4
5.2
7.0
4.6
2.1
50
38
4
8
100
5.2
4.6
2.1
5.0
6.7
4.4
1.9
53
38
4
5
100
45–48
37–38
3–7
10–12
(18.2)
49–52
38–44
4–6
1–3
4.8
49–53
37–44
4–6
1–5
7.8
3.5
2.5
0.8
3.0
5.0
2.5
0.8
38
47
11
4
100
33–51
31–50
10–19
0
3.9
336
128
9,379
111
3.0
2.5
0.8
3.0
5.0
2.5
0.8
41
45
11
3
100
33–51
31–50
10–19
0
7.2
684
193
7,169
69
1 The number of UBS AG shares was 3,734,000; 2,436,257; and 2,600,417 as of 31 December 2008, 31 December 2007 and 31 December 2006, respectively.
Mortality tables and life expectancies for major plans
Mortality table
BVG 2000
PA 92
Dr. K. Heubeck 2005 G
RP 2000 with projections
Mortality table
BVG 2000
PA 92
Dr. K. Heubeck 2005 G
RP 2000 with projections
Life expectancy at age 65 for a male member currently
aged 65
31.12.07
17.8
21.9
18.9
18.3
31.12.06
31.12.08
aged 45
31.12.07
31.12.06
17.8
21.8
18.7
17.9
17.8
25.6
21.8
18.4
17.8
23.0
21.6
18.3
17.8
23.0
21.5
17.9
Life expectancy at age 65 for a female member currently
aged 65
31.12.07
21.1
24.8
23.0
20.5
31.12.06
31.12.08
aged 45
31.12.07
31.12.06
21.1
24.7
22.8
20.3
21.1
26.4
25.7
20.6
21.1
25.8
25.6
20.5
21.1
25.8
25.5
20.3
31.12.08
17.8
22.7
19.0
18.4
31.12.08
21.1
24.5
23.1
20.6
Country
Switzerland
UK
Germany
US
Country
Switzerland
UK
Germany
US
336
Note 30 Pension and other post-employment benefit plans (continued)
b) Post-retirement medical and life plans
In the US and the UK, the Group offers retiree medical
benefits that contribute to the health care coverage of em-
ployees and beneficiaries after retirement. In addition to re-
tiree medical benefits, the Group in the US also provides
retiree life insurance benefits. The UK plan is closed to new
entrants. The benefit obligation in excess of fair value of
plan assets for those plans amounts to CHF 159 million as
of 31 December 2008 (2007: CHF 190 million; 2006: CHF
219 million) and the total accrued post-retirement cost
amounts to CHF 164 million as of 31 December 2008 (2007:
CHF 181 million; 2006: CHF 176 million). The net periodic
post-retirement costs for the years ended 31 December
2008, 31 December 2007 and 31 December 2006 were CHF
9 million (including a curtailment gain of CHF 11 million),
CHF 26 million and CHF 24 million, respectively.
The employer contributions expected to be made in
2009 to the post-retirement medical and life plans are CHF
7 million.
CHF million
31.12.08
31.12.07
31.12.06
Post-retirement benefit obligation at the beginning of the year
Service cost
Interest cost
Plan participant contributions
Actuarial gain / (loss)
Amendments
Benefits paid
Curtailments
Foreign currency translation
Post-retirement benefit obligation at the end of the year
Fair value of plan assets at the beginning of the year
Employer contributions
Plan participant contributions
Benefits paid
Fair value of plan assets at the end of the year
CHF million
Defined benefit obligation
Plan asset
Surplus / (deficit)
Experience gains / (losses) on plan liabilities
(190)
(8)
(11)
(0)
14
0
7
9
20
(159)
0
6
1
(7)
0
(219)
(12)
(11)
(1)
39
(8)
8
0
14
(216)
(10)
(11)
(1)
1
(1)
9
0
10
(190)
(219)
0
7
1
(8)
0
0
8
1
(9)
0
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
(159)
0
(159)
3
(190)
0
(190)
8
(219)
0
(219)
1
(216)
0
(216)
(3)
(166)
0
(166)
0
The assumed average health care cost trend rate used in de-
termining post-retirement benefit expense is assumed to be
10% for 2008 and to decrease to an ultimate trend rate of
5% in 2014. On a country-by-country basis, the same dis-
count rate is used for the calculation of the post-retirement
benefit obligation from medical and life plans as for the de-
fined benefit obligations arising from pension plans.
Assumed health care cost trend rates have a significant
effect on the amounts reported for health care plans. A one
percentage point change in the assumed health care cost
trend rates would change the US post-retirement benefit ob-
ligation and the service and interest cost components of the
net periodic post-retirement benefit costs as follows:
CHF million
Effect on total service and interest cost
Effect on the post-retirement benefit obligation
1% increase
1% decrease
3
19
(2)
(16)
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Financial information
Notes to the consolidated financial statements
Note 30 Pension and other post-employment benefit plans (continued)
c) Defined contribution plans
The Group also sponsors a number of defined contribution
plans primarily in the UK and the US. Certain plans permit
employees to make contributions and earn matching or
other contributions from the Group. The contributions to
these plans recognized as expense for the years ended
31 December 2008, 31 December 2007 and 31 December
2006 were CHF 312 million, CHF 285 million and CHF
229 million, respectively.
d) Related party disclosure
UBS is the principal bank for the pension fund of UBS in
Switzerland. In this function, UBS is engaged to execute
most of the pension fund’s banking activities. These activities
also include, but are not limited to, trading and securities
lending and borrowing. All transactions have been executed
at arm’s length conditions.
The foreign UBS pension funds do not have a similar
banking relationship with UBS, but they may hold and trade
UBS shares and / or securities.
In 2008, UBS sold to its Swiss pension fund certain
bank-occupied properties for proceeds of approximately
CHF 186 million and recognized a gain of approximately
CHF 97 million. UBS and its Swiss pension fund entered si-
multaneously into lease-back arrangements for some of the
properties with 25-year lease terms and two renewal options
for ten years each. At 31 December 2008 the minimum
commitment towards the Swiss pension fund under the
related leases is approximately CHF 41 million.
The following fees and interest have been received or
paid by UBS:
Related party disclosure
CHF million
Received by UBS
Fees
Paid by UBS
Interest
Dividends and capital repayments
The transaction volumes in UBS shares and other UBS securities are as follows:
Transaction volumes – related parties
Financial instruments bought by pension funds
UBS AG shares (in thousands of shares)
UBS financial instruments (nominal values in CHF million)
Financial instruments sold by pension funds or matured
UBS AG shares (in thousands of shares)
UBS financial instruments (nominal values in CHF million)
For the year ended
31.12.08
31.12.07
31.12.06
44
1
4
58
2
38
53
2
33
For the year ended
31.12.08
31.12.07
31.12.06
6,925
78
1,881
10
1,728
950
1,930
976
1,793
8
2,752
14
UBS has also leased buildings from its pension funds. The
rent paid by UBS under these leases amounted to CHF 7 mil-
lion in 2008, CHF 6 million in 2007 and CHF 4 million in
2006.
There were no financial instruments due from UBS pen-
sion plans outstanding as of 31 December 2008 (2007: CHF
0 million; 2006: CHF 120 million). The amounts due to UBS
defined benefit pension plans are contained in the addition-
al details to the fair value of plan assets. Furthermore, UBS
defined contribution plans hold 17,866,949 UBS shares with
a market value of CHF 272 million as of 31 December 2008
(2007: 14,121,239 shares with a market value of CHF 736
million; 2006: 14,158,961 shares with a market value of
CHF 1,043 million).
338
Note 31 Equity participation and other compensation plans
a) Plans offered
UBS has established several equity participation plans to
further align the interests of executives, managers and staff
with the interests of shareholders. The plans are offered to
eligible employees in approximately 50 countries and are
designed to meet the complex legal, tax and regulatory
requirements of each country in which they are offered. The
explanations below provide a general description of the
terms of the most significant plans offered, however specific
plan rules may vary by country. Refer to Note 1a) 22) for a
description of the accounting policy related to equity partici-
pation and other compensation plans. Refer also to Note 1b
for a description of the restatement impact of adopting
IFRS 2 Share-based Payment: Vesting Conditions and Can-
cellations on 1 January 2008.
Equity participation plans
Equity Plus Plan (Equity Plus): This voluntary plan gives eli-
gible employees the opportunity to purchase UBS shares at
fair market value and generally receive at no additional cost
two UBS options for each share purchased, up to a maxi-
mum annual limit. Share purchases can be made annually
from bonus compensation and / or quarterly based on regu-
lar deductions from salary. Shares purchased under Equity
Plus are restricted from sale for two years from the time of
purchase. The options have a strike price equal to the fair
market value of a UBS share on the date the option is grant-
ed, a two-year vesting period and generally expire ten years
from the date of grant. The options are forfeitable in certain
circumstances and are settled in equity, except in countries
where this is not permitted for legal reasons. Compensation
expense related to the UBS options is recognized over the
shorter of the legal vesting period and the period from grant
to the retirement eligibility date of the employee.
Equity Ownership Plan (EOP): Selected employees receive
between 10% and 45% of their annual performance-relat-
ed compensation in UBS shares or notional UBS shares in-
stead of cash, on a mandatory basis (on-cycle awards). Up
to and including 2004, certain employees were eligible to
receive a portion of their EOP award in Alternative Invest-
ment Vehicles (AIVs) or UBS options. Since 2005, options
have not been granted as part of EOP and awards have
been generally made in UBS shares, with less than 2% be-
ing made in AIVs to selected employee groups. The awards
granted in UBS shares or notional UBS shares are settled in
equity, except in countries where this is not permitted for
legal reasons. Awards granted in the form of AIVs are
settled in cash. EOP awards generally vest in one-third
increments over a three-year vesting period. In certain cir-
cumstances, these awards are forfeitable. Compensation
expense for on-cycle awards is generally recognized during
the performance year, which is generally the period prior to
the grant date.
During 2008, UBS granted to certain employees on-cycle
EOP awards with a nine-month vesting period. Compensa-
tion expense for these awards was fully recognized in 2007.
Beginning with on-cycle awards granted in 2009 for the
performance year 2008, compensation expense will be rec-
ognized over the shorter of the legal vesting period and the
period from grant to the date the employee satisfies certain
retirement eligibility requirements. This change in account-
ing treatment is the result of the vesting provisions being
amended to require forfeiture upon voluntary termination of
employment rather than upon violation of non-compete
provisions.
EOP awards are also granted to selected employees when
joining UBS or in other special circumstances (off-cycle
awards). Off-cycle awards have the same terms and condi-
tions as on-cycle awards, except that the forfeiture condi-
tions are more stringent. Compensation expense for off-
cycle awards is generally recognized over the shorter of the
legal vesting period and the period from grant to the retire-
ment eligibility date of the employee.
Senior Executive Equity Ownership Plan (SEEOP): Senior
executives receive between 25% and 50% of their perfor-
mance-related compensation in UBS shares or notional UBS
shares instead of cash, on a mandatory basis. The awards
granted in UBS shares or notional UBS shares are settled in
equity. SEEOP awards generally vest in one-fifth increments
over a five-year vesting period. These awards are forfeitable
if certain conditions are not met. Compensation expense for
all SEEOP awards is recognized during the performance year,
which is generally the period prior to the grant date. During
2008, UBS granted to certain employees SEEOP awards with
a nine-month vesting period. Compensation expense for
these awards was fully recognized in 2007.
Key Employee Stock Option Plan (KESOP): Key and high
potential employees are granted discretionary UBS options
with a strike price not less than the fair market value of a
UBS share on the date the option is granted. One option
gives the right to acquire one registered UBS share at the
option’s strike price. The awards are settled in equity, except
in countries where this is not permitted for legal reasons.
Options granted prior to 2008 generally vest in one-third
increments over a three-year vesting period and generally
expire ten years from the grant date. Options granted
from 2008 vest in full following a three-year vesting period
and generally expire ten years from the grant date. These
awards are generally forfeitable upon termination of
employment with UBS. Compensation expense is recog-
nized over the shorter of the legal vesting period and the
339
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Financial information
Notes to the consolidated financial statements
Note 31 Equity participation and other compensation plans (continued)
a) Plans offered (continued)
period from grant to the retirement eligibility date of the
employee.
Senior Executive Stock Option Plan (SESOP): Senior execu-
tives may be granted discretionary UBS options with a strike
price set at 110% of the fair market value of a UBS share on
the date the option is granted. One option gives the right to
acquire one registered UBS share at the option’s strike price.
The awards are settled in equity. Options vest in full follow-
ing a three-year vesting period and generally expire ten years
from the grant date. These awards are forfeitable if certain
conditions are not met. Compensation expense for all SESOP
awards is recognized during the performance year, which is
generally the period prior to the grant date.
Global WM&BB Partner Plus Plan (PPP): UBS grants no-
tional UBS shares to certain client advisers, which vest in 20%
increments 6 to 10 years after the grant date. The awards are
generally settled in equity, except in countries where this is
not permitted for legal reasons, and are forfeitable in certain
circumstances. Compensation expense is recognized over the
shorter of the legal vesting period and the period from grant
to the retirement eligibility date of the employee. The first
grants made under this plan were in 2007.
Other compensation plans
Executive Capital Accumulation Plan (ECAP): UBS sponsors
a voluntary deferred compensation plan for selected eligi-
ble employees. Under this plan, participants are allowed to
notionally invest a portion of their cash bonus in money
market funds, UBS and non-UBS mutual funds and other
UBS sponsored funds. No additional company match is
granted, the awards are generally not forfeitable and are
settled in cash. This plan does not result in compensation
expense for UBS.
WMUS Partner Plus Plan: WM US sponsors a compulsory
deferred compensation plan for selected eligible employees.
Under this plan, UBS awards amounts based on a predefined
formula during the performance year. Participants are also
allowed to voluntarily contribute additional amounts earned
during the year into the plan up to a percentage of UBS’s
contributions. The amounts awarded earn an above-market
rate of interest during a four-year period and a market rate
of interest thereafter. Partner Plus awards vest in 20% incre-
ments 6 to 10 years after the grant date. The UBS contribu-
tions and all interest earned are forfeitable in certain circum-
stances. Compensation expense is recognized over the
shorter of the vesting period and the period from the perfor-
mance year to the date that the employee is eligible to leave
UBS and retain their award.
UBS satisfies share delivery obligations under its option-
based participation plans either by purchasing UBS shares in
the market or through the issuance of new shares. At exer-
cise, shares held in treasury or newly issued shares are deliv-
ered to the employee against receipt of the strike price. As of
31 December 2008, UBS was holding approximately 49 mil-
lion shares in treasury and an additional 150 million unissued
shares in conditional share capital, which are available and
can be used for future employee option exercises. The shares
available cover all vested (i.e. exercisable) employee options.
b) Effect on income statement and balance sheet
The total share-based compensation expense recognized
for the years ended 31 December 2008, 31 December 2007
and 31 December 2006 was negative CHF 94 million, CHF
3,173 million and CHF 2,685 million, respectively. The de-
crease in compensation expense in 2008 as compared to
prior years is primarily a result of UBS adopting the amend-
ment to IFRS 2 Share-based Payment: Vesting Conditions
and Cancellations on 1 January 2008. Furthermore, UBS
amended the EOP plan rules for awards to be granted in
2009 for the year 2008 for which compensation expense
related to these awards will be recognized over the vesting
period rather than in the performance year. For the years
ended 31 December 2008, 31 December 2007 and 31 De-
cember 2006, the compensation expense recognized for
share-based payments was primarily related to equity-settled
plans. At 31 December 2008, total compensation expense
related to non-vested awards not yet recognized in the in-
come statement is CHF 648 million, which is expected to be
recognized in Personnel expenses over a weighted average
period of 3.2 years.
Payments to participants of cash-settled share-based and
AIV plans for the years ended 31 December 2008, 31 Decem-
ber 2007 and 31 December 2006 were CHF 80 million, CHF
42 million and CHF 177 million, respectively. The total carry-
ing amount of the liability related to these cash-settled plans
amounted to CHF 207 million as of 31 December 2008.
340
Note 31 Equity participation and other compensation plans (continued)
c) UBS share awards
Movements in shares granted under the equity participation plans described in Note 31a) are as follows:
Forfeitable, at the beginning of the year
Shares awarded during the year
Distributions during the year
Forfeited during the year
Forfeitable, at the end of the year
of which: shares vested for accounting purposes
Weighted
average
grant date
fair value CHF
66
32
61
54
53
Number of
shares
31.12.08
59,102,580
90,895,594 1,2
(60,105,109)
(5,156,131)
84,736,935
65,767,017
Weighted
average
grant date
fair value CHF
58
70
55
66
66
Number of
shares
31.12.07
56,141,102
30,271,820
(25,031,819)
(2,278,523)
59,102,580
47,700,903
Weighted
average
grant date
fair value CHF
46
69
43
56
58
Number of
shares
31.12.06
53,725,186
26,652,070
(22,712,566)
(1,523,588)
56,141,102
47,345,901
1 The number of shares awarded during the year include 4,260,681 of reinvested dividends as a result of the stock dividend, for which new shares were issued on 19 May 2008. There was no impact to
the weighted average grant date fair value and no additional compensation expense was recognized. 2 As a result of the rights offering in June 2008, UBS adjusted the number of notional shares which
were unvested at the date of the rights offering. This was done to prevent any dilution impact to holders of these notional shares. The total number of shares awarded during the year include an addi-
tional 1,806,071 notional shares as a result of this anti-dilution adjustment. No additional compensation expense was recognized.
Prior to 2008, UBS estimated the grant date fair value of
shares awarded during the year by using the average UBS
share price on the grant date as quoted on the SWX Europe.
The grant date fair value of notional UBS shares without
dividend entitlements includes a deduction for the present
value of future expected dividends to be paid between grant
date and distribution. The market value of shares vested was
CHF 1,385 million, CHF 1,737 million, and CHF 1,587 million
for the years ended 31 December 2008, 31 December 2007,
and 31 December 2006, respectively.
For share awards granted beginning in 2008, UBS mea-
sures compensation cost based on the average market price
of the UBS share on the grant date less a discount for post-
vesting sale and hedge restrictions and non-vesting con-
ditions, in accordance with IFRS 2 Share-based Payment:
Vesting Conditions and Cancellations. The grant date fair
value of notional UBS shares without dividend entitlements
also includes a deduction for the present value of future
expected dividends to be paid between grant date and distri-
bution. The fair value of the share awards subject to post-
vesting sale and hedge restrictions is discounted based upon
the duration of the post-vesting restriction. The weighted
average discount for share awards granted in 2008 is
approximately 19% of the market price of the UBS share.
Discounts for non-vesting conditions are based on the prob-
ability that the non-vesting conditions will be achieved and
the award will become exercisable. The fair value of share-
based awards granted prior to 2008 was not discounted for
post-vesting sale and hedge restrictions, as there was no dis-
tinction between vesting and non-vesting conditions until
the IASB amended IFRS 2 effective for UBS January 2008
Share-based Payment: Vesting Conditions and Cancellations.
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341
Financial information
Notes to the consolidated financial statements
Note 31 Equity participation and other compensation plans (continued)
d) UBS option awards
Movements in options granted under the equity participation plans described in Note 31a) are as follows:
Outstanding, at the beginning of the year
Granted during the year
Exercised during the year
Forfeited during the year
Expired unexercised
Outstanding, at the end of the year
Exercisable, at the end of the year
Number of
options
31.12.08 1
198,213,092
62,973,879
(3,673,657)
(6,732,080)
(14,725,689)
236,055,545
124,054,442
Weighted
average
exercise price
CHF 1,2
52
30
26
52
46
47
46
Number of
options
31.12.07 1
188,393,473
48,094,483
(34,331,511)
(3,650,942)
(292,411)
198,213,092
96,396,428
Weighted
average exercise
price CHF 1,2
47
67
36
62
58
52
39
Number of
options
31.12.06 1
193,707,056
48,507,481
(50,279,072)
(3,520,009)
(21,983)
188,393,473
85,589,034
Weighted
average exercise
price CHF 1,2
39
67
34
52
38
47
34
1 As a result of the rights offering in June 2008, UBS adjusted the number of options and exercise price for vested and unvested employee options which were unexercised at the date of the rights offering.
This was done to prevent any dilution impact to holders of these options. No additional compensation expense was recognized. This resulted in an increase to the number of options awarded in 2008 of
3,881,320 and an increase to the prior year outstanding balance of 2,400,143. 2 Some of the options in this table have exercise prices denominated in USD which have been converted into CHF at
the year-end spot exchange rate for the purposes of this table.
The weighted average share price at the time when the
options were exercised during the year was CHF 34, CHF 72,
and CHF 71 for the years ended 31 December 2008, 31 De-
cember 2007, and 31 December 2006, respectively. The fol-
lowing table provides additional information about option
awards:
Intrinsic value of options exercised during the year (CHF million)
Weighted average grant date fair value of options granted (CHF)
31.12.08
31.12.07
31.12.06
29
7.53
1,046
10.43
1,660
11.63
The following table summarizes additional information about options outstanding and options exercisable at 31 Decem-
ber 2008:
Options outstanding
Options exercisable
Number of
options
outstanding
Weighted
average
exercise price
(CHF / USD)
Aggregate
intrinsic value
(CHF / USD
million)
Weighted
average
remaining
contractual
term (years)
Number of
options
exercisable
Weighted
average
exercise price
(CHF / USD)
Aggregate
intrinsic value
(CHF / USD
million)
Weighted
average
remaining
contractual
term (years)
Range of exercise price per share
CHF
14.47–25.00
25.01–35.00
35.01–45.00
45.01–55.00
55.01–65.00
65.01–75.00
14.47–75.00
USD
4.74–20.00
20.01–30.00
30.01–40.00
40.01–53.50
4.74–53.50
342
9,612,902
49,437,156
27,821,969
26,011,919
5,398,949
76,929,095
195,211,990
108,301
15,864,689
9,821,977
15,048,584
40,843,551
18.31
31.08
39.23
49.18
60.31
67.85
49.32
13.49
21.60
34.03
41.40
31.86
1.7
0.0
0.0
0.0
0.0
0.0
1.7
0.3
0.0
0.0
0.0
0.3
9.8
8.3
5.9
6.0
8.0
7.7
7.5
1.2
3.7
5.3
6.2
5.0
0
8,966,563
19,023,570
22,846,437
2,208,584
30,294,459
83,339,613
108,301
15,864,689
9,821,977
14,919,862
40,714,829
0.00
28.22
40.68
48.63
61.30
66.34
51.39
13.49
21.60
34.03
41.36
31.82
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.0
0.0
0.0
0.3
4.3
4.3
5.7
7.4
7.5
5.9
1.2
3.7
5.3
6.1
5.0
Note 31 Equity participation and other compensation plans (continued)
e) Valuation
The fair value of options is determined by means of a Monte
Carlo simulation. The simulation technique uses a mix of
implied and historic volatility and specific employee exercise
behavior patterns based on statistical data, taking into
account the specific terms and conditions under which the
options are granted, such as the vesting period, forced exer-
cises during the lifetime, and gain- and time-dependent ex-
ercise behavior. The expected term of each option is calcu-
lated as the probability-weighted average period of the time
between grant and exercise. The term structure of volatility
is derived from the implied volatilities of traded UBS options
in combination with the observed long-term historic share
price volatility. Dividends are assumed to grow at a fixed rate
over the term of the option.
The fair value of options granted in 2008, 2007 and 2006
was determined using the following assumptions:
Expected volatility (%)
Risk-free interest rate (%)
Expected dividend (CHF)
Strike price (CHF)
Share price (CHF)
Expected volatility (%)
Risk-free interest rate (%)
Expected dividend (CHF)
Strike price (CHF) 1
Share price (CHF) 1
1 Not adjusted for stock dividend and rights offering in 2008.
Expected volatility (%)
Risk-free interest rate (%)
Expected dividend (CHF)
Strike price (CHF) 2
Share price (CHF) 2
31.12.08
CHF awards
range low
range high
33.86
2.83
1.85
30.11
28.05
30.00
1.74
1.10
14.47
14.47
49.32
3.27
2.57
46.02
43.61
31.12.07
CHF awards
range low
range high
23.86
2.58
3.13
71.31
70.25
22.51
2.46
2.20
55.48
55.48
29.23
3.27
4.56
78.80
78.80
CHF awards 1
25.38
2.15
2.26
71.19
70.16
31.12.06
range low
range high
22.51
1.96
1.76
65.13
65.13
27.18
2.68
2.83
77.33
76.25
1 Less than 1% of awards in 2006 were granted in USD. These have been combined with CHF awards for purposes of this disclosure. 2 Not adjusted for stock dividend and rights offering in 2008.
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343
Financial information
Notes to the consolidated financial statements
Note 32 Related parties
The Group defines related parties as associated companies,
post-employment benefit plans for the benefit of UBS em-
ployees, key management personnel, close family members
of key management personnel and enterprises which are,
directly or indirectly, controlled by, jointly controlled by or
significantly influenced by or in which significant voting
power resides with key management personnel or their close
family members. Key management personnel is defined as
members of the Board of Directors (BoD) and Group Execu-
tive Board (GEB). This definition is based on the requirements
of IAS 24 Related Party Disclosures.
a) Remuneration of key management personnel
The non-independent members of the BoD have top man-
agement employment contracts and receive pension bene-
fits upon retirement. Total remuneration of the non-inde-
pendent members of the BoD and GEB including those who
stepped down during 2008 is as follows:
CHF million
Base salaries and other cash payments
Incentive awards – cash
Employer’s contributions to retirement benefit plans
Benefits in kind, fringe benefits (at market value)
Equity compensation benefits 1
Total
31.12.08
31.12.07
31.12.06
12
0
2
1
0
15
14
38
2
2
22
78
16
107
1
2
113
239
1 Expense for shares and options granted is measured at grant date and allocated over the vesting period, generally 3 years for options and 5 years for shares.
Marcel Ospel, former Chairman of the BoD, did not stand for
re-election at the AGM of 23 April 2008. Stephan Haeringer,
former executive vice chairman of the BoD, retired from the
BoD on 2 October 2008. Marco Suter, formerly an executive
member of the BoD, stepped down from the BoD on 1 Octo-
ber 2007 and thereafter acted as Group Chief Financial
Officer (Group CFO) and as a member of the GEB until his
stepping down from this role on 31 August 2008. While
Marcel Ospel has retired from UBS as of April 2008, Stephan
Haeringer and Marco Suter agreed with UBS to continue
their services for UBS until their termination dates of 30 Sep-
tember 2009 and 31 August 2009 respectively.
All three persons were contractually entitled to receive
base salary, a payment based on their average remuneration
over the last three years and certain employment benefits
until the expiry of their 12-month notice period.
For the fiscal years 2007 and 2008, Marcel Ospel, Stephan
Haeringer and Marco Suter did not receive any incentive
awards. Furthermore, on 25 November 2008, Marcel Ospel,
Stephan Haeringer and Marco Suter announced that they
voluntarily relinquished substantial parts of the payments to
which they were entitled during their periods of employ-
ment with UBS. The total amount waived or repaid was CHF
33 million.
The remaining contractual obligations to all three former
BoD members, consisting of those due in 2008 and those
upcoming in 2009, net of the CHF 33 million voluntarily
waived or repaid, amounted to CHF 10 million. This amount
has been fully accrued in 2008 and is reflected in the firm’s
2008 income statement. Of this amount, CHF 2.3 million
was for Marcel Ospel, CHF 3.9 million for Stephan Haeringer
and CHF 3.8 million for Marco Suter.
The independent members of the BoD do not have em-
ployment or service contracts with UBS, and thus are not
entitled to benefits upon termination of their service on the
BoD. Payments to these individuals for their services as exter-
nal board members amounted to CHF 6.4 million in 2008,
CHF 5.7 million in 2007 and CHF 5.9 million in 2006.
344
Note 32 Related parties (continued)
b) Equity holdings
Number of stock options from equity participation plans held by non-independent members of the BoD
and the GEB 1
Number of shares held by members of the BoD, GEB and parties closely linked to them
1 Further information about UBS’s equity participation plans can be found in Note 31.
31.12.08
31.12.07
31.12.06
8,458,037
5,892,548
6,828,152
6,693,012
10,886,798
7,974,724
Of the share totals above, at 31 December 2008, 31 Decem-
ber 2007 and 31 December 2006, 15,878 shares, 4,852 shares
and 7,146 shares respectively were held by close family
members of key management personnel and 103,841 shares,
2,200,000 shares and 2,200,000 shares respectively were held
by enterprises which are directly or indirectly controlled by,
jointly controlled by or significantly influenced by or in which
significant voting power resides with key management per-
sonnel or their close family members. Further information
about UBS’s equity participation plans can be found in Note
31. No member of the BoD or GEB is the beneficial owner of
more than 1% of the Group’s shares at 31 December 2008.
c) Loans, advances and mortgages to key management personnel
Non-independent members of the BoD and GEB members
have been granted loans, fixed advances and mortgages on
the same terms and conditions that are available to other
employees, based on terms and conditions granted to third
parties adjusted for reduced credit risk. Independent BoD
members are granted loans and mortgages at general mar-
ket conditions.
Movements in the loan, advances and mortgage balances
are as follows:
CHF million
Balance at the beginning of the year
Additions
Reductions
Balance at the end of the year
31.12.08
31.12.07
15
8
(12)
11
19
0
(4)
15
No unsecured loans were granted to key management personnel as of 31 December 2008 and 31 December 2007.
d) Associated companies
Movements in loans to associated companies are as follows:
CHF million
31.12.08
31.12.07
Balance at the beginning of the year
Additions
Reductions
Credit loss (expense) / recovery
Foreign currency translation
Balance at the end of the year
thereof unsecured loans
thereof allowances for credit losses
All loans to associated companies are transacted at arm’s length.
220
171
(77)
0
(13)
301
82
3
375
60
(215)
0
0
220
56
4
345
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Notes to the consolidated financial statements
Note 32 Related parties (continued)
d) Associated companies (continued)
Other transactions with associated companies transacted at arm’s length are as follows:
CHF million
Payments to associates for goods and services received
Fees received for services provided to associates
Commitments and contingent liabilities to associates
Note 34 provides a list of significant associates.
e) Other related party transactions
For the year ended or as of
31.12.08
31.12.07
31.12.06
90
6
40
87
20
33
58
79
32
During 2008 and 2007, UBS entered into transactions at
arm’s length with enterprises which are directly or indirectly
controlled by, jointly controlled by or significantly influenced
by or in which significant voting power resides with key
management personnel or their close family members. In
2008 and 2007 these companies included Aebi + Co. AG
(Switzerland), AC Management SA, (Switzerland), Bertarelli
Family (Switzerland), Bertarelli Investment Ltd (Jersey) (dis-
solved in December 2007), DKSH Holding AG (Switzerland),
Fiat Group (Italy), Kedge Capital Selected Funds Ltd. (Jersey),
Lévy Kaufmann-Kohler (Switzerland), Limonares Ltd (Jersey)
(dissolved in December 2007), Löwenfeld AG (Switzerland),
Martown Trading Ltd. (Isle of Man), Omega Fund I Ltd (Jer-
sey), Omega Fund II Ltd (Jersey), Omega Fund III Ltd (Jersey),
Omega Fund IV Ltd (Jersey), Royal Dutch Shell plc (UK), SGS
Société Générale de Surveillance SA (Switzerland), Stadler
Rail Group (Switzerland), Team Alinghi (Switzerland), Team
Alinghi (Spain) and Walo Group (Switzerland).
Movements in loans to other related parties are as follows:
CHF million
Balance at the beginning of the year
Additions
Reductions
Balance at the end of the year 1
31.12.08
31.12.07
31.12.06
688
206
220
674
872
301
485
688
919
34
81
872
1 In 2008 includes loans, guarantees and contingent liablitites of CHF 192 million and unused committed facilities of CHF 482 million but excludes unused uncommitted working capital facilities and
unused guarantees of CHF 691 million. In 2007 includes loans, guarantees and contingent liabilities of CHF 270 million and unused committed facilities of CHF 418 million but excludes unused un-
committed working capital facilities and unused guarantees of CHF 205 million. In 2006 includes loans, guarantees and contingent liabilities of CHF 128 million and unused committed facilities of
CHF 744 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 173 million.
Other transactions with these related parties include:
CHF million
Goods sold and services provided to UBS
Fees received for services provided by UBS
31.12.08
31.12.07
31.12.06
1
22
8
16
8
8
As part of its sponsorship of Team Alinghi, UBS paid CHF
828,090 (EUR 538,000) in basic sponsoring fees for 2008.
Team Alinghi’s controlling shareholder is UBS board member
Ernesto Bertarelli.
f) Additional information
UBS also engages in trading and risk management activities
(e. g. swaps, options, forwards) with various related parties
mentioned in previous sections. These transactions 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.
346
Note 33 Post-balance-sheet events
On 18 February 2009, UBS announced that it settled its US
cross-border case with the US Department of Justice and the
US Securities and Exchange Commission. Refer to “Note 21
Provisions and litigation” for details.
The Swiss National Bank (SNB) determined the purchase
price to be paid for certain positions that have not yet been
transferred into the fund owned and controlled by the SNB.
Refer to “Note 38 Reorganizations and disposals” for details.
Both events above meet the definition of an adjusting
event after the reporting period as defined in IAS 10 Events
after the Reporting Period and have been considered in the
financial statements as of 31 December 2008. The total im-
pact on net profit after tax was negative CHF 1,203 million.
On 19 January 2009, UBS announced that it had entered
into an agreement to acquire the commodity index business
of AIG Financial Product Corp. Refer to “Note 36 Business
combinations” for details.
There have been no further material post-balance-sheet
events which would require disclosure or adjustment to the
31 December 2008 Financial Statements.
On 5 March 2009, the Board of Directors reviewed the
Financial Statements and authorized them for issue. These
Fi nancial Statements were submitted to the Annual General
Meeting of Shareholders on 15 April 2009 for approval.
Note 34 Significant subsidiaries and associates
The legal entity group structure of UBS is designed to support
the Group’s businesses within an efficient legal, tax, regula-
tory and funding framework. Neither the business divisions
of UBS (namely Investment Bank, Global Wealth Manage-
ment & Business Banking and Global Asset Management)
nor Corporate Center are replicated in their own individual
legal entities, but rather they generally operate out of UBS
AG (Parent Bank) 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 divisions. It provides for the most cost-efficient
and flexible structure and facilitates efficient allocation and
use of capital, comprehensive risk management and control
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 businesses. The significant operating subsidiary compa-
nies in the Group are listed below:
Share capital
in millions
Equity interest
accumulated in %
Significant subsidiaries
Company
Banco UBS Pactual S.A.
Caisse Centrale de Réescompte
CCR Actions S.A.
CCR Gestion S.A.
Fondcenter AG
OOO UBS Bank
PT UBS Securities Indonesia
UBS (Bahamas) Ltd.
UBS (France) S.A.
Jurisdiction of incorporation
Rio de Janeiro, Brazil
Business division 1
IB
Paris, France
Paris, France
Paris, France
Zurich, Switzerland
Moscow, Russia
Jakarta, Indonesia
Nassau, Bahamas
Paris, France
Global AM
Global AM
Global AM
Global AM
IB
IB
Global WM&BB
Global WM&BB
UBS (Grand Cayman) Limited
George Town, Cayman Islands
IB
UBS (Italia) S.p.A.
UBS (Luxembourg) S.A.
UBS (Monaco) S.A.
Milan, Italy
Luxembourg, Luxembourg
Monte Carlo, Monaco
UBS Alternative and Quantitative Investments Limited
London, Great Britain
UBS Alternative and Quantitative Investments LLC
UBS Americas Inc
UBS Asesores SA
UBS Bank (Canada)
Delaware, USA
Delaware, USA
Panama, Panama
Toronto, Canada
Global WM&BB
Global WM&BB
Global WM&BB
Global AM
Global AM
IB
Global WM&BB
Global WM&BB
BRL
EUR
EUR
EUR
CHF
RUB
IDR
USD
EUR
USD
EUR
CHF
EUR
GBP
USD
USD
USD
CAD
349.6
106.3
1.1
2.2
0.1
1,250.0
118,000.0
4.0
50.7
25.0
60.0
150.0
9.2
0.3
0.1
0.0
0.0
8.5
UBS Bank Mexico, S.A. Institucion de Banca Multiple,
UBS Grupo Financiero
Mexico City, Mexico
IB
MXN
639.4
1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center.
100.0
100.0
100.0
100.0
100.0
100.0
98.6
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
347
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Notes to the consolidated financial statements
Note 34 Significant subsidiaries and associates (continued)
Significant subsidiaries (continued)
Company
UBS Bank USA
UBS Bank, S.A.
UBS Belgium SA / NV
UBS Capital (Jersey) Ltd
UBS Capital B.V.
UBS Card Center AG
Jurisdiction of incorporation
Utah, USA
Madrid, Spain
Brussels, Belgium
St. Helier, Jersey
Amsterdam, the Netherlands
Business division 1
Global WM&BB
Global WM&BB
Global WM&BB
IB
IB
Glattbrugg, Switzerland
Global WM&BB
UBS Clearing and Execution Services Limited
London, Great Britain
UBS Convertible Securities (Jersey) Limited
UBS Derivatives Hong Kong Limited
St. Helier, Jersey
Hong Kong, China
IB
CC
IB
UBS Deutschland AG
UBS Factoring AG
UBS Fiduciaria S.p.A.
UBS Finance (Cayman Islands) Ltd.
UBS Finance (Curação) N.V.
UBS Finance (Delaware) LLC
UBS Financial Services Inc.
Frankfurt am Main, Germany
Global WM&BB
Zurich, Switzerland
Milan, Italy
Global WM&BB
Global WM&BB
George Town, Cayman Islands
Willemstad, Netherlands Antilles
Delaware, USA
Delaware, USA
CC
CC
IB
Global WM&BB
Global WM&BB
Global WM&BB
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
CC
IB
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global AM
Global WM&BB
Global WM&BB
IB
Global AM
UBS Financial Services Incorporated of Puerto Rico
Hato Rey, Puerto Rico
UBS Fund Advisor, L.L.C.
UBS Fund Holding (Luxembourg) S.A.
UBS Fund Holding (Switzerland) AG
UBS Fund Management (Switzerland) AG
UBS Fund Services (Cayman) Ltd
UBS Fund Services (Ireland) Limited
Delaware, USA
Luxembourg, Luxembourg
Basel, Switzerland
Basel, Switzerland
George Town, Cayman Islands
Dublin, Ireland
UBS Fund Services (Luxembourg) S.A.
Luxembourg, Luxembourg
UBS Fund Services (Luxembourg) S.A. Poland Branch
Zabierzow, Poland
UBS Futures Singapore Ltd.
UBS Global Asset Management (Americas) Inc
UBS Global Asset Management (Australia) Ltd
UBS Global Asset Management (Canada) Co
Singapore, Singapore
Delaware, USA
Sydney, Australia
Toronto, Canada
UBS Global Asset Management (Deutschland) GmbH
Frankfurt am Main, Germany
UBS Global Asset Management (Hong Kong) Limited
Hong Kong, China
UBS Global Asset Management (Italia) SGR SpA
UBS Global Asset Management (Japan) Ltd
Milan, Italy
Tokyo, Japan
UBS Global Asset Management (Singapore) Ltd
Singapore, Singapore
UBS Global Asset Management (Taiwan) Ltd
Taipei, Taiwan
UBS Global Asset Management (France) S.A.
Paris, France
Global WM&BB
UBS Global Asset Management (UK) Ltd
UBS Global Asset Management (US) Inc
UBS Global Asset Management Funds Ltd
UBS Global Asset Management Holding Ltd
UBS Global Asset Management Life Ltd
UBS Global Life AG
UBS Global Trust Corporation
UBS Grupo Financiero, S.A. de C.V.
UBS Hana Asset Management Company Ltd
UBS International Holdings B.V.
UBS International Inc.
UBS International Life Limited
UBS Investment Management Canada Inc.
London, Great Britain
Delaware, USA
London, Great Britain
London, Great Britain
London, Great Britain
Vaduz, Liechtenstein
St. John, Canada
Mexico City, Mexico
Seoul, South Korea
Amsterdam, the Netherlands
CC
New York, USA
Dublin, Ireland
Toronto, Canada
Global WM&BB
Global WM&BB
Global WM&BB
Share capital
in millions
Equity interest
accumulated in %
USD
EUR
EUR
GBP
EUR
CHF
USD
CHF
HKD
EUR
CHF
EUR
USD
USD
USD
USD
USD
USD
CHF
CHF
CHF
USD
EUR
CHF
PLN
USD
USD
AUD
CAD
EUR
EUR
HKD
EUR
JPY
SGD
TWD
GBP
USD
GBP
GBP
GBP
CHF
CAD
MXN
KRW
EUR
USD
EUR
CAD
1,700.0
77.2
23.0
119.0
8.9 2
0.1
50.0
50.0
880.0
176.0
5.0
0.2
0.5
0.1
37.3 2
2,005.8 2
31.0 2
0.0
42.0
18.0
1.0
5.6
1.3
2.5
0.1
39.8 2
0.0
8.0
117.0
7.7
2.3
25.0
3.1
2,200.0
4.0
340.0
68.0
23.2 2
19.0
86.0
5.0
5.0
0.1
851.8
45,000.0
6.8
44.3 2
1.0
0.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
51.0
100.0
100.0
100.0
100.0
1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center. 2 Share capital and share premium.
348
Share capital
in millions
Equity interest
accumulated in %
Note 34 Significant subsidiaries and associates (continued)
Significant subsidiaries (continued)
Company
UBS Investments Philippines, Inc.
Jurisdiction of incorporation
Makati City, Philippines
UBS Italia SIM SpA
UBS Leasing AG
UBS Life AG
UBS Life Insurance Company USA
UBS Limited
UBS Loan Finance LLC
UBS Menkul Degerler AS
UBS New Zealand Limited
UBS O’Connor Limited
UBS O’Connor LLC
UBS Pactual Asset Management S.A. DTVM
UBS Preferred Funding Company LLC I
UBS Preferred Funding Company LLC II
UBS Preferred Funding Company LLC IV
UBS Preferred Funding Company LLC V
UBS Real Estate Kapitalanlagegesellschaft mbH
UBS Real Estate Securities Inc
UBS Realty Investors LLC
Milan, Italy
Zurich, Switzerland
Zurich, Switzerland
California, USA
London, Great Britain
Delaware, USA
Istanbul, Turkey
Auckland, New Zealand
London, Great Britain
Delaware, USA
Rio de Janeiro, Brazil
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Munich, Germany
Delaware, USA
Massachusetts, USA
Business division 1
IB
IB
Global WM&BB
Global WM&BB
Global WM&BB
IB
IB
IB
IB
Global AM
Global AM
Global AM
CC
CC
CC
CC
Global AM
IB
Global AM
UBS Sauerborn Private Equity Komplementär GmbH
Bad Homburg, Germany
Global WM&BB
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 S.A.
UBS Securities Hong Kong Limited
UBS Securities India Private Limited
UBS Securities International Limited
UBS Securities Japan Ltd
UBS Securities LLC
UBS Securities Malaysia Sdn. Bhd.
UBS Securities Philippines Inc
UBS Securities Pte. Ltd.
UBS Securities Pte. Ltd. Seoul Branch
UBS Service Centre (India) Private Limited
UBS Service Centre (Poland) Sp. z o.o.
UBS Services USA LLC
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
Delaware, USA
Kuala Lumpur, Malaysia
Makati City, Philippines
Singapore, Singapore
Seoul, South Korea
Mumbai, India
Krakow, Poland
Delaware, USA
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
CC
CC
Global WM&BB
UBS South Africa (Proprietary) Limited
Sandton, South Africa
IB
UBS Swiss Financial Advisers AG
UBS Trustees (Bahamas) Ltd
UBS Trustees (Cayman) Ltd
UBS Trustees (Jersey) Ltd.
UBS Trustees (Singapore) Ltd
UBS UK Holding Limited
UBS UK Properties Limited
UBS Wealth Management (UK) Ltd
UBS Wealth Management Australia Ltd
UBS Trust Company National Association
Vermogens Advies Holding B.V.
Zurich, Switzerland
Nassau, Bahamas
Global WM&BB
Global WM&BB
George Town, Cayman Islands
Global WM&BB
St. Helier, Jersey
Singapore, Singapore
London, Great Britain
London, Great Britain
London, Great Britain
Melbourne, Australia
New York, USA
Global WM&BB
Global WM&BB
IB
IB
Global WM&BB
Global WM&BB
Global WM&BB
Amsterdam, the Netherlands
Global WM&BB
PHP
EUR
CHF
CHF
USD
GBP
USD
TRY
NZD
GBP
USD
BRL
USD
USD
USD
USD
EUR
USD
USD
EUR
THB
HKD
AUD
CAD
EUR
EUR
HKD
INR
GBP
JPY
USD
MYR
PHP
SGD
KRW
INR
PLN
USD
ZAR
CHF
USD
USD
GBP
SGD
GBP
GBP
GBP
AUD
USD
EUR
360.0
15.1
10.0
25.0
39.3 2
63.3
16.7
30.0
7.5
8.8
1.0
73.2
0.0
0.0
0.0
0.0
7.5
950.4 2
9.3
0.0
400.0
20.0
209.8 2
10.0
15.0
22.9
430.0
668.3
18.0
60,000.0
22,205.6 2
75.0
190.0
311.5
150,000.0
1,249.6
0.1
0.1
0.0
1.5
2.0
2.0
0.0
3.3
5.0
132.0
2.5
53.9
105.0 2
0.3
1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center. 2 Share capital and share premium.
99.4
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
51.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
349
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Notes to the consolidated financial statements
Note 34 Significant subsidiaries and associates (continued)
Consolidated companies: changes in 2008
Significant new companies
Caisse Centrale de Réescompte – Paris, France
CCR Actions S.A. – Paris, France
CCR Gestion S.A. – Paris, France
UBS Convertible Securities (Jersey) Limited – St. Helier, Jersey
UBS Preferred Funding Company LLC V – Delaware, USA
UBS Service Center (India) Private Limited – Mumbai, India
Vermogens Advies Holding B.V. – Amsterdam, the Netherlands
Deconsolidated companies
Significant deconsolidated companies
Crédit Industriel Société Anonyme in Liquidation – Zurich, Switzerland
Thesaurus Continentale Effekten-Gesellschaft in Zurich in Liquidation – Zurich, Switzerland
UBS Fiduciary Trust Company – New Jersey, USA
Significant associates
Company
SIX Group AG – Zurich, Switzerland
UBS Securities Co. Limited – Beijing, China
Williamsburg Edge LLC – Delaware, USA
219 West 81st LLC – Delaware, USA
Reason for deconsolidation
Liquidated
Liquidated
Sold
Industry
Financial
Financial
Real Estate
Real Estate
Equity interest in %
17.3
20.0
50.0
50.0
350
Note 35 Invested assets and net new money
Invested assets include all client assets managed by or de-
posited with UBS for investment purposes. For example,
invested assets include managed fund assets, managed insti-
tutional assets, discretionary and advisory wealth manage-
ment portfolios, fiduciary deposits, time deposits, savings
accounts and wealth management securities or brokerage
accounts. All assets held for purely transactional purposes
and custody-only assets, including corporate client assets
held for cash management and transactional purposes, are
excluded from invested assets as the Group only administers
the assets and does not offer advice on how the assets
should be invested. Also excluded are non-bankable assets
(e. g. art collections) and deposits from third-party banks for
funding or trading purposes.
Discretionary assets are defined as client assets for which
UBS decides how to invest them. Other invested assets are
those where the client ultimately decides how the assets are
invested. When a single product is created in one business
division and sold in another, it is counted in both the busi-
ness division that manages the investment and the one that
distributes it. This results in double counting within UBS total
invested assets, as both business divisions are providing a
service independently to their respective clients, and both
add value and generate revenue.
Net new money in a period is the net amount of invested
assets that are entrusted to UBS by new and existing clients
less those withdrawn by existing clients and clients who ter-
minate their relationship with UBS.
Net new money is calculated using the direct method, by
which inflows and outflows to / from invested assets are de-
termined at the client level based on transactions. Interest
and dividend income from invested assets is not counted as
net new money inflow. Market and currency movements as
well as fees, commissions and interest on loans charged are
excluded from net new money, as are the effects resulting
from any acquisition or divestment of a UBS subsidiary or
business. Reclassifications between invested assets and cli-
ent assets as a result of a change in the service level delivered
are treated as net new money flows.
CHF billion
Fund assets managed by UBS
Discretionary assets
Other invested assets
Total invested assets (double counts included)
thereof double count
thereof acquisitions (divestments)
Net new money (double counts included)
On or for the year ended
31.12.08
31.12.07
339
528
1,307
2,174
273
19.1
(226.0)
509
877
1,803
3,189
392
50.5
140.6
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351
Financial information
Notes to the consolidated financial statements
Note 36 Business combinations
Business combinations completed in 2008
Caisse Centrale de Réescompte Group
In February 2008, UBS completed the acquisition in France of
100% of Caisse Centrale de Réescompte Group (CCR) from
Commerzbank. The cost of the business combination, includ-
ing directly attributable transaction costs, amounted to ap-
proximately CHF 613 million (EUR 387 million) and was paid
in cash. The cost of the business combination included ap-
proximately EUR 133 million for the excess capital in CCR at
closing. The cost of the business combination has been allo-
cated to intangible assets reflecting customer relationships of
CHF 36 million (EUR 23 million), net assets of CHF 209 mil-
lion (EUR 131 million) and goodwill of CHF 368 million (EUR
233 million). The business of CCR, which included EUR 13.3
billion of invested assets as of 31 December 2007 and ap-
proximately 190 employees, was integrated into UBS’s asset
management and wealth management businesses in France.
Caisse Centrale de Réescompte Group (CCR) 2008
Book Value
Step-up to fair value
Fair Value
CHF million
Assets
Intangible assets
Property and equipment
Goodwill
All other assets
Total assets
Liabilities
Total liabilities
Net assets
Total liabilities and equity
0
5
0
513
518
297
221
518
36
0
368
1
405
13
392
405
36
5
368
514
923
310
613
923
Total
36
368
On the acquisition date, intangible assets and goodwill were allocated to the divisions as follows:
Caisse Centrale de Réescompte Group (CCR) 2008
Global Wealth Management &
Business Banking
Global Asset
Management
10
37
26
331
CHF million
Assets
Intangible assets
Goodwill
352
Note 36 Business combinations (continued)
VermogensGroep
In August 2008, UBS completed the acquisition of 100% of
VermogensGroep, an independent Dutch wealth manager.
The cost of the business combination, including directly
attributable transaction costs, amounted to approximately
CHF 171 million (EUR 105 million) out of which approxi-
mately CHF 81 million (EUR 50 million) were paid in cash
upon closing. The remaining cost of the business combina-
tion is expected to be paid in installments over the next
3 years. The cost of the business combination was alloc-
ated to intangible assets of CHF 49 million (EUR 30 million),
net liabilities of CHF 2.1 million (EUR 1.3 million) and good-
will of CHF 124 million (EUR 77 million). VermogensGroep
serves wealthy private clients, foundations and institutions
in the Dutch market and managed client assets of approxi-
mately EUR 4 billion at the time of the transaction. Vermo-
gensGroep was integrated into UBS’s wealth management
business.
VermogensGroep 2008
CHF million
Assets
Intangible assets
Property and equipment
Goodwill
All other assets
Total assets
Liabilities
Total liabilities
Net assets
Total liabilities and equity
Book Value
Step-up to fair value
Fair Value
0
2
0
10
12
2
10
12
49
0
124
0
173
12
161
173
49
2
124
10
185
14
171
185
Acquisition announced after the balance sheet date
Acquisition of the commodity index business of AIG
Financial Products Corp.
On 19 January 2009, UBS announced that its investment
bank had entered into a binding agreement to purchase the
commodity index business of AIG Financial Products Corp.,
including AIG’s rights to the DJ-AIG Commodity index. The
purchase price for the transaction is USD 15 million, payable
upon closing, and additional payments of up to USD 135 mil-
lion over the following 18 months, based upon future earn-
ings of the purchased business. Closing of the transaction,
expected by May 2009, is subject to a number of regulatory
and other conditions. No assurance can be given that any
such conditions will be satisfied.
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353
Financial information
Notes to the consolidated financial statements
Note 36 Business combinations (continued)
Business combinations completed in 2007
During 2007, UBS completed two material acquisitions that
were accounted for as business combinations.
McDonald Investments’ branch network
In February 2007, UBS completed the acquisition of the
branch network of McDonald Investments, a unit of Key-
Corp. The cost of the business combination consisted of
CHF 269 million (USD 220 million) for the business opera-
tions including directly attributable transaction costs, and of
CHF 70 million (USD 58 million) for the net loans to cus-
tomer portfolios of McDonald Investments, resulting in a
total cash consideration paid of CHF 339 million (USD 278
million). The cost of the business combination was allocated
to an intangible asset reflecting customer relationships of
CHF 57 million (USD 47 million), remaining net assets of
CHF 77 million (USD 63 million) including the net loans to
customer portfolios, and goodwill of CHF 205 million (USD
168 million). The unit provides comprehensive wealth man-
agement services to affluent and high net worth individuals,
including estate planning, retirement planning and asset
management, and has been integrated into Wealth Man-
agement US.
McDonald Investments’ branch network 2007
CHF million
Assets
Intangible assets
Property and equipment
Deferred tax assets
Goodwill
All other assets
Total assets
Liabilities
Total liabilities
Net assets
Total liabilities and equity
Book Value
Step-up to fair value
Fair Value
0
4
0
0
70
74
6
68
74
57
(1)
10
205
0
271
0
271
271
57
3
10
205
70
345
6
339
345
Daehan Investment Trust Management Company
In July 2007, UBS completed the acquisition of 51% of Dae-
han Investment Trust Management Company Ltd. (DIMCO)
from Hana Daetoo Securities (formerly Daehan Investment &
Securities Company Ltd.), a wholly owned subsidiary of Hana
Financial Group. DIMCO was integrated into UBS’s Global
Asset Management business and renamed as UBS Hana Asset
Management Company Ltd. internationally, and as Hana UBS
Asset Management in Korea. The estimated cost of the busi-
ness combination amounted to approximately CHF 238 mil-
lion (KRW 180 billion) in total and was paid in cash. The pur-
chase price is subject to an earn-out clawback of up to CHF
40 million (KRW 30 billion) over the next three to five years.
The acquisition costs had been allocated to intangible assets
reflecting customer relationships of CHF 54 million, net assets
of CHF 74 million and goodwill of CHF 170 million. On the
acquisition date, equity attributable to minority interests
was CHF 60 million. At closing, DIMCO managed around
CHF 26.4 billion of assets (KRW 19.9 trillion).
In 2008, the purchase price allocation was finalized and
resulted in intangible assets of CHF 52 million and goodwill
of CHF 188 million.
Daehan Investment Trust Management Company 2007
CHF million
Assets
Intangible assets
Goodwill
All other assets
Total assets
Liabilities
Total liabilities
Net assets attributable to minority interests
Net assets attributable to UBS shareholders
Total liabilities and equity
354
Book Value
Step-up to fair value
Fair Value
0
0
87
87
13
36
38
87
52
188
0
240
14
22
204
240
52
188
87
327
27
58
242
327
Note 36 Business combinations (continued)
Business combinations announced in 2007
Standard Chartered’s mutual funds management business
in India
Following the expiry of the Sale and Purchase Agreement
between UBS and Standard Chartered Bank executed in
January 2007, UBS announced in December 2007 that it will
not proceed with its planned acquisition of Standard Char-
tered Bank’s mutual funds management business in India.
Acquisition of significant associates in 2007
UBS Securities
In April 2007, UBS completed the acquisition of an equity
stake of 20% in the newly established UBS Securities Co. Ltd.
(UBSS) in China for a total consideration of approximately
Pro-forma information (unaudited)
CHF 369 million (RMB 2.4 billion). The cost of the acquisition
consisted of cash payments of approximately CHF 324 million
(RMB 2.1 billion) including transaction costs and liabilities set-
tled as well as the assumption of liabilities of approximately
CHF 45 million (RMB 0.3 billion). On the basis of its current
rights and obligations, UBS has significant influence and ap-
plies the equity method of accounting. Following approvals
by Chinese regulators, UBSS commenced operations in De-
cember 2006 on the basis of a comprehensive set of securities
licenses. UBSS is active in both primary and secondary domes-
tic equities and fixed income busi nesses, in discretionary asset
management, corporate advisory and mergers and acquisi-
tions services, and in wealth management.
The following pro-forma information shows UBS’s total op-
erating income, net profit attributable to UBS shareholders
and basic earnings per share as if all of the acquisitions com-
pleted in 2008 had been made as of 1 January 2007 and all
acquisitions completed in 2007, had been made as of 1 Jan-
uary 2006. Adjustments have been made to reflect additional
amortization and depreciation of assets and liabilities, which
have been assigned fair values different from their carryover
bases in purchase accounting.
Pro-forma information (unaudited)
CHF million, except where indicated
Total operating income
Net profit
Basic earnings per share (CHF)
For the year ended
31.12.08
31.12.07
31.12.06
819
(21,286)
(7.69)
31,932
(5,233)
(2.42)
48,928
11,887
5.35
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355
Financial information
Notes to the consolidated financial statements
Note 37 Discontinued operations
2008
2006
Motor-Columbus
On 23 March 2006, UBS sold its 55.6% stake in Motor-
Columbus to a consortium representing Atel’s Swiss minority
shareholders (EBM, EBL, the Canton of Solothurn, IB Aarau,
AIL Lugano and WWZ Zug), EOS Holding and Atel, as well as
to the French utility Electricité de France (EDF) following the
receipt of relevant regulatory approvals by the Swiss and
international authorities. In total, UBS sold 281,535 Motor-
Columbus shares, at a price of CHF 4,600 per share, result-
ing in a sale price of approximately CHF 1,295 million, which
was fully paid in cash. A pre-tax gain on sale of CHF 364 mil-
lion is reported in the Industrial Holdings segment. From
1 January to 23 March 2006, Motor-Columbus had a net
profit from operations of CHF 71 million. Together with the
after-tax gain on sale of CHF 387 million, the net profit from
discontinued operations is CHF 458 million in 2006.
Other Industrial holdings
In 2006, private equity investments contributed CHF 437 mil-
lion to UBS’s net profit from discontinued operations, which
includes after-tax gains on sale of CHF 424 million and an
after-tax operating profit of CHF 13 million.
Industrial holdings
In 2008, private equity investments, including the sale of one
equity investment and subsequent gains on private equity
investments sold in prior years, contributed CHF 155 million
to UBS’s net profit from discontinued operations, which
includes after-tax gains on sale of CHF 120 million and an
after-tax operating profit of CHF 34 million. The cash consid-
eration received for the equity investment sold in 2008
amounted to CHF 141 million. These private equity invest-
ments were held within the Industrial Holdings, integrated
within Corporate Center since the beginning of 2008, and
were sold in line with UBS’s strategy to exit the private equity
business.
2007
Industrial holdings
In 2007, private equity investments, including the sale of
two private equity investments as well as subsequent gains
on private equity investments sold in prior years, contributed
CHF 138 million to UBS’s net profit from discontinued
operations, which includes after-tax gains on sale of CHF
102 million and an after-tax operating profit of CHF 36 mil-
lion. The cash consideration received for the two investments
sold in 2007 amounted to CHF 14 million. These private
equity investments were all held within the Industrial Hold-
ings segment and were sold in line with UBS’s strategy to exit
the private equity business.
Private banks & GAM
The tax benefit on gain from sales of CHF 258 million in-
cludes the release of a deferred tax liability of approximately
CHF 275 million to the profit and loss account, which was
recognized upon the sale of UBS’s 20.7% stake in Julius Baer
in 2007. This deferred tax liability had been recognized in
connection with the receipt of Julius Baer shares on the sale
of Private Banks & GAM in December 2005, but was not ul-
timately incurred due to the manner of realization of the
Julius Baer investment. The tax expense from the recognition
of the deferred tax liability was booked in discontinued op-
erations in 2005, and therefore the release has also been
reflected in discontinued operations.
356
Note 37 Discontinued operations (continued)
CHF million
Operating income
Operating expenses
Operating profit from discontinued operations before tax
Pre-tax gain on sale
Profit from discontinued operations before tax
Tax expense on operating profit from discontinued operations before tax
Tax expense on gain from sale
Tax expense from discontinued operations
Net profit from discontinued operations
Net cash flows from
operating activities
investing activities
financing activities
For the year ended 31.12.08
Private Banks & GAM 1
0
0
0
44
44
0
1
1
43
0
0
0
Industrial Holdings
19
(15)
34
120
155
0
0
0
155
(1)
3
0
1 Gain resulting from a purchase price adjustment related to the sale of Private Banks & GAM in 2005. Included in Corporate Center in Note 2a.
CHF million
Operating income
Operating expenses
Operating profit from discontinued operations before tax
Pre-tax gain on sale
Profit from discontinued operations before tax
Tax expense on operating profit from discontinued operations before tax
Tax expense on gain from sale
Tax expense from discontinued operations
Net profit from discontinued operations
Net cash flows from
operating activities
investing activities
financing activities
1 Included in Corporate Center in Note 2a.
CHF million
Operating income
Operating expenses
Operating profit from discontinued operations before tax
Pre-tax gain on sale
Profit from discontinued operations before tax
Tax expense on operating profit from discontinued operations before tax
Tax expense on gain from sale
Tax expense from discontinued operations
Net profit from discontinued operations
Net cash flows from
operating activities
investing activities
financing activities
1 Pre-tax gain on sale includes CHF 4 million related to Private Banks & GAM, which is included in Corporate Center in Note 2a.
For the year ended 31.12.07
Private Banks & GAM 1
0
0
0
7
7
0
(258)
(258)
265
0
0
0
Industrial Holdings
394
358
36
102
138
0
0
0
138
32
(1)
(42)
For the year ended 31.12.06
Motor-Columbus
2,494
2,412
82
364
446
11
(23)
(12)
458
1
(52)
(22)
Other Industrial Holdings 1
993
979
14
428
442
1
0
1
441
16
73
(88)
357
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Financial information
Notes to the consolidated financial statements
Note 38 Reorganizations and disposals
Reorganizations
Closure of the US municipal securities business
In June 2008, UBS closed its Investment Bank’s institutional
municipal securities business. The retail operations of the
municipal securities business, including secondary market
activities, were transferred to Wealth Management US. As a
result, approximately 70 employees and municipal bonds
with a fair value of approximately CHF 0.4 billion (USD
0.4 billion) were transferred from the Investment Bank to
Wealth Management US.
In 2008, restructuring costs of CHF 56 million (USD
55 million) and a goodwill impairment loss of CHF 341 mil-
lion (USD 334 million) were recognized in the income
statement in relation to this closure. The restructuring costs
mainly relate to termination costs for office space rental
contracts and vendor contracts, and severance payments to
employees.
Repositioning of the investment bank
In connection with the repositioning of the Investment Bank
announced in October 2008, restructuring costs of approxi-
mately CHF 737 million were incurred in fourth quarter 2008.
These costs consisted of approximately CHF 435 million of
personnel expenses, mainly severance payments and other
compen sation, and approximately CHF 302 million of costs
related to real estate, including impairment losses on proper-
ties and equipment of CHF 100 million and costs for unused
prem ises of CHF 202 million.
Disposals
Sale of US residential mortgage-backed securities to
BlackRock fund
On 20 May 2008, UBS completed the sale of a portfolio of
US residential mortgage-backed securities (RMBS) for pro-
ceeds of USD 15 billion to the RMBS Opportunities Master
Fund, LP (the “fund”), a third-party fund managed by Black-
Rock, Inc. The portfolio had a notional value of approxi-
mately USD 22 billion and comprised primarily Alt-A and
sub-prime related assets, and a limited amount of prime
securities. Based on fair value at the time of the transaction,
approximately three-quarters of the assets sold consisted of
2006 and 2007 vintages.
The fund was capitalized with approximately USD 3.75
billion in equity raised by BlackRock from third-party inves-
tors. The equity investors will absorb any losses sustained by
the fund up to a maximum of their equity investment. UBS
provided an eight-year amortizing USD 11.25 billion senior
secured loan to the fund, collateralized by the RMBS assets
held by the fund. The loan bears a commercial rate of inter-
est with debt service being met from principal and interest
received from the underlying mortgage pools. UBS does not
retain any equity interest in the fund.
358
The USD 15 billion proceeds were approximately in line
with the fair value of the assets recorded by UBS at 31 March
2008.
Since its inception, the fund has amortized the loan
through monthly payments in line with UBS’s original expec-
tations. As at 31 December 2008, the loan had a balance
outstanding of USD 9.2 billion. UBS does not consolidate the
fund into its balance sheet as the equity investors in the fund
continue to bear and receive the majority of the risks and
rewards. UBS continues to monitor the development of the
fund’s performance and would reassess the consolidation
status if deterioration of the underlying mortgage pools re-
lated to the RMBS were to indicate that UBS may not fully
recover the loan granted to the fund.
Sale of assets to a third-party fund controlled by the
Swiss National Bank (SNB)
As announced on 16 October 2008, UBS entered into
an agreement with the Swiss National Bank (SNB) to trans-
fer certain illiquid securities and other positions to the
SNB StabFund limited partnership for collective investments
(the “fund”), which is fully owned and controlled by the
SNB.
For each transfer of assets, the SNB finances 90% of the
purchase price by providing a loan to the fund and the re-
maining 10% by making an equity contribution to the fund.
Upon each asset transfer, UBS purchases, for an amount
equal to the SNB’s equity contribution to the fund on that
date, an option to purchase the fund’s equity (all such op-
tions referred to collectively as the “call option”). The exer-
cise price of the call option is set at USD 1 billion plus 50%
of the fund’s equity value that exceeds USD 1 billion at the
time of exercise. The call option will be exercisable upon
repayment in full of the loan provided by the SNB. The loan
is secured by the assets of the fund and bears interest at a
rate of one month LIBOR of the underlying currency plus 250
basis points. Service of the loan will be made from the cash
flows generated by the fund’s assets.
In the event of a change of control of UBS, the SNB has
the right but not the obligation to request that UBS purchase
the SNB’s loan to the fund at its outstanding principal amount
plus accrued interest and the fund’s equity for 50% of its
value at the time (the “put option”).
If, upon termination of the fund, the SNB incurs a loss on
its loan, it will be entitled to receive 100 million UBS ordinary
shares, subject to anti-dilution adjustments, in exchange for
payment of the par value of these shares (the “contingent
share issue”).
The positions are transferred to the fund at market value
(net exposure) determined at 30 September 2008. The posi-
tions transferred to the SNB are priced at the lower of UBS’s
estimated market value as of 30 September 2008 and the
Note 38 Reorganizations and disposals (continued)
value determined as of that date by the SNB based on a
valuation conducted by third party valuation agents.
Compared with the initial announcement on 16 Octo-
ber 2008, the originally agreed size of the portfolio of USD
60 billion to be transferred has been reduced. UBS has trans-
ferred or identified for transfer positions totalling a market
value (net exposure) of USD 38.6 billion (including the effect
of price adjustments so far totalling USD 0.7 billion). Posi-
tions identified for transfer include approximately USD 21.9
billion of positions pre viously disclosed as risk concentrations,
primarily US real estate-related securities and assets from the
US reference-linked note program (RLN), and approximately
USD 17.5 billion of other positions, mainly non-US real es-
tate-related securities as well as other asset-backed securi-
ties, prior to the price difference of USD 0.7 billion on the
positions for which the SNB already determined the pur-
chase price.
On 16 December 2008, UBS completed the sale of a first
tranche of securities positions for approximately USD 16.4
billion consisting primarily of US and European residential
and commercial mortgage-backed securities and other asset-
backed securities. The remaining positions identified for sale
to the fund are planned to be transferred in March 2009 in
one or more additional transfers.
The purchase price for the securities transferred to the
fund on 16 December 2008 was the value of these securities
as of 30 September 2008 as determined by the SNB based
on a valuation conducted by third-party valuation experts.
On the same basis, the SNB has since determined the pur-
chase price to be paid for a further USD 7.8 billion of posi-
tions that have not yet been transferred to the fund. So far,
the determined purchase prices for positions transferred
to or to be transferred to the fund were, in the aggregate,
USD 0.7 billion lower than the value UBS assigned to these
positions on 30 September 2008. All of this difference is
accounted for in UBS’s results for 2008. Overall, the aggre-
gate price difference represents approximately 3% of UBS’s
market value (net exposure) for these positions and reflects
the inherent judgement involved in the valuation of illiquid
assets.
Under IFRS, the call option is recognized on the balance
sheet as a derivative at fair value with changes in fair value
recognized in profit or loss. The portion of the call option al-
ready purchased is reflected as Positive replacement value.
The portion of the call option yet to be purchased upon fu-
ture transfers is reflected as Negative replacement value to-
gether with the amount payable to the SNB for such option.
The put option was evaluated as a contingent liability that
has been deemed remote.
The contingent share issue is treated as an equity instru-
ment and was recognized at fair value in equity as an in-
crease to Share premium and an expense in Net trading
income. The fair value of the contingent share issue was
estimated at approximately CHF 607 million and will not
hereafter be re-measured to fair value.
Overall, the impact of the transaction on the income
statement was a loss of approximately CHF 5,232 million in
2008. This reflects a net loss on the call option of approxi-
mately CHF 3,511 million and the expense of approximately
CHF 607 million associated with the contingent share issue
as well as a CHF 771 million loss due to the recognized price
difference and CHF 343 million losses on hedges that were
subject to trading restrictions as a result of the transaction.
The remaining market value (net exposure) of the posi-
tions already transferred or still to be transferred to the fund
amounts to USD 39.4 billion excluding the effect of price
adjustments so far totalling USD 0.7 billion. Of these posi-
tions USD 31.3 billion of market value (net exposure) repre-
sents financial assets, predominantly Trading portfolio as-
sets, with a corresponding balance sheet amount of USD
31.1 billion per 30 September 2008. USD 8.1 billion of mar-
ket value (net exposure) relate to financial liabilities, exclu-
sively Negative replacement values from derivative contracts,
with a balance sheet amount of USD 10.8 billion at the same
date. Market values (net exposure) represent the remaining
loss potential or economic risk from a position and may dif-
fer from the balance sheet carrying amount, particularly for
derivative contracts which are represented on the balance
sheet by replacement values.
Disposal of equity interest in Adams Street Partners
In August 2008, UBS Global Asset Management closed the
sale of its 24.9% equity interest in Adams Street Partners
(ASP) to the remaining shareholders of ASP for a cash con-
sideration of approximately CHF 184 million (USD 167 mil-
lion). UBS’s interest in ASP was accounted for using the
equity method. The sale resulted in a gain of approximately
CHF 168 million. ASP was formed in January 2001 in con-
nection with a management buyout of that business from
Global Asset Management, with UBS retaining the now sold
24.9% stake. Global Asset Management will continue its
close collaboration with ASP under an existing sub-advisory
agreement in place since 2001.
Disposal of financial investment in Bank of China
In December 2008, UBS disposed of its equity stake in Bank
of China through a placing of approximately 3.4 billion Bank
of China Limited H-shares to institutional investors for a
cash consideration of approximately CHF 887 million (HKD
6,519 million). UBS acquired the shares in 2005 in prepara-
tion for Bank of China’s IPO to the international market. The
investment in Bank of China was accounted for as a financial
investment available-for-sale. The disposal resulted in a gain
of approximately CHF 360 million.
359
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Financial information
Notes to the consolidated financial statements
Note 39 Currency translation rates
The following table shows the principal rates used to translate the financial statements of foreign entities into Swiss francs:
1 USD
1 EUR
1 GBP
100 JPY
Spot rate
As of
Average rate
Year ended
31.12.08
31.12.07
31.12.08
31.12.07
31.12.06
1.07
1.49
1.56
1.17
1.13
1.65
2.25
1.02
1.06
1.58
1.96
0.98
1.22
1.65
2.31
1.02
1.25
1.58
2.31
1.08
Note 40 Swiss banking law requirements
The consolidated Financial Statements of UBS are prepared
in accordance with International Financial Reporting Stan-
dards (IFRS). The Guidelines of the Swiss Financial Market
Supervisory Authority (FINMA) require banks which present
their financial statements under IFRS to provide a narrative
explanation of the main differences between IFRS and Swiss
GAAP (FINMA circular 08/2) and the Banking Ordinance. In-
cluded in this note are the significant differences in regard to
recognition and measurement between IFRS and the provi-
sions of the Banking Ordinance and the Guidelines of the
FINMA governing financial statement reporting pursuant to
Article 23 through Article 27 of the Banking Ordinance. The
differences outlined in points two through nine also apply to
the Parent Bank stat utory accounts.
1. Consolidation
Under IFRS, all entities which are controlled by the Group are
consolidated.
Under Swiss law, only entities that are active in the field
of banking and finance and real estate entities are subject to
consolidation. Entities which are held temporarily are gener-
ally recorded as financial investments.
2. Financial investments available-for-sale
Under IFRS, Financial investments available-for-sale are
carried at fair value. Changes in fair value are recorded
directly in 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 Equity is included in net profit or
loss for the period. On disposal of a financial investment
available-for-sale, the cumulative unrecognized gain or loss
previously recognized in Equity is recognized in the income
statement.
Under Swiss law, financial investments are carried either
at the lower of cost or market or at amortized cost less
impairment with changes in measurement recorded in the
income statement. Reductions to market value below cost
and reversals of such reductions up to original cost as well as
gains and losses on disposal are included in Other income.
Equity investments that are considered permanent are car-
ried on the balance sheet at cost less impairment with
impairment losses recorded in the income statement. Perma-
nent investments are classified on the balance sheet as in-
vestments in associated companies.
3. Cash flow hedges
The Group uses derivative instruments to hedge the expo-
sure from varying cash flows. Under IFRS, when hedge
accounting is applied the fair value gain or loss on the effec-
tive portion of the derivative designated as a cash flow hedge
is recognized in Equity. When the hedged cash flows materi-
alize, the accumulated unrecognized gain or loss is realized
and released to income.
Under Swiss law, the effective portion of the fair
value change of the derivative instrument used to hedge
cash flow exposures is deferred on the balance sheet
as other assets or other liabilities. The deferred amounts
are released to income when the hedged cash flows mate-
rialize.
4. Investment property
Under IFRS, investment property is carried at fair value, with
changes in fair value recognized in the income statement.
Under Swiss law, investment property is carried at amor-
tized cost less any accumulated depreciation less impairment
losses unless the investment property is classified as held for
sale. Investment property classified as held for sale is carried
at the lower of cost or market.
360
Note 40 Swiss banking law requirements (continued)
5. Fair value option
Under IFRS, the Group applies the fair value option to certain
financial assets and financial liabilities, mainly to hybrid debt
instruments. As a result, the entire hybrid instrument is ac-
counted for at fair value with changes in fair value reflected
in net trading income. Furthermore, UBS designated certain
loans, loan commitments and fund investments as financial
assets designated at fair value through profit and loss.
Under Swiss accounting rules, the fair value option is not
available. Hybrid instruments are bifurcated: the embedded
derivative is marked to market through net trading income
and the host contract is accounted for on an accrued cost
basis. No own credit adjustments are booked for hybrid
instruments. Generally, loans are accounted for at amortized
cost less impairment, loan commitments stay off-balance
sheet and fund investments are accounted for as financial
investments.
6. Goodwill and intangible assets
Under IFRS, goodwill acquired in a business combination is
not amortized but tested annually for impairment. Intangible
assets acquired in a business combination with an indefinite
useful life are also not amortized but tested annually for
impairment.
Under Swiss law, goodwill and intangible assets with in-
definite useful lives are amortized over a period not exceed-
ing five years, unless a longer useful life, which may not
exceed twenty years, can be justified.
7. Discontinued operations
Under certain conditions, IFRS requires that non-current as-
sets or disposal groups be classified as held for sale. Disposal
groups that meet the criteria of discontinued operations are
presented in the income statement in a single line as net
income from discontinued operations.
Under Swiss law, no such reclassification takes place.
8. Extraordinary income and expense
Certain items of income and expense are classified as
extraordinary items under Swiss law, whereas in the Group
Income Statement the amounts are classified as operating
income or expense or are included in net profit from discon-
tinued operations, if required.
9. Netting of replacement values
Under IFRS, replacement values are reported on a gross basis,
unless certain restrictive requirements are met. Under Swiss
law, replacement values are reported on a net basis, provid-
ed the netting agreements are legally enforceable.
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Financial information
Notes to the consolidated financial statements
Note 41 Supplemental guarantor information required under SEC rules
Guarantee of PaineWebber securities
Following the acquisition of Paine Webber Group Inc., UBS
made a full and unconditional guarantee of the senior and
subordinated notes and trust preferred securities (“Debt
S ecurities”) of PaineWebber. Prior to the acquisition, Paine-
Webber was a SEC Registrant. Upon the acquisition, Paine-
Webber was merged into UBS Americas Inc., a wholly owned
subsidiary of UBS.
Under the guarantee, if UBS Americas Inc. fails to make
any timely payment under the Debt Securities agreements,
the holders of the Debt Securities or the Debt Securities
trustee may demand payment from UBS without first pro-
ceeding against UBS Americas Inc. UBS’s obligations under
the subordinated note guarantee are subordinated to the
prior payment in full of the deposit liabilities of UBS and all
other liabilities of UBS.
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.
Supplemental Guarantor Consolidating Income Statement
CHF million
For the year ended 31 December 2008
UBS AG
Parent Bank 1
UBS
Americas Inc.
Subsidiaries
Entries
UBS Group
Consolidating
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
Income from subsidiaries
Other income
Total operating income
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Impairment of goodwill
Amortization of intangible assets
Total operating expenses
Operating profit from continuing operations before tax
Tax expense
Net profit from continuing operations
Net profit from discontinued operations
Net profit
Net profit attributable to minority interests
Net profit attributable to UBS shareholders
49,699
(48,686)
1,013
(861)
152
9,709
(8,129)
(19,882)
2,836
(15,314)
8,738
3,918
770
0
1
13,427
(28,741)
(7,407)
(21,335)
43
(21,292)
0
(21,292)
21,343
(17,436)
3,907
(2,050)
1,857
7,910
(19,847)
0
1,058
(9,022)
5,169
4,604
205
341
93
10,412
(19,434)
(4)
(19,430)
0
(19,430)
(9)
(19,421)
27,354
(26,282)
1,072
(85)
987
5,310
2,156
0
(3,202)
5,251
2,355
1,976
266
0
119
4,716
535
574
(39)
155
116
577
(461)
(32,717)
32,717
0
0
0
0
0
19,882
0
19,882
0
0
0
0
0
0
19,882
0
19,882
0
19,882
0
19,882
65,679
(59,687)
5,992
(2,996)
2,996
22,929
(25,820)
0
692
796
16,262
10,498
1,241
341
213
28,555
(27,758)
(6,837)
(20,922)
198
(20,724)
568
(21,292)
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.
362
Note 41 Supplemental guarantor information required under SEC rules (continued)
Supplemental guarantor consolidating balance sheet
CHF million
As of 31 December 2008
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 available-for-sale
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and 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
Equity attributable to UBS shareholders
Equity attributable to minority interests
Total equity
Total liabilities and equity
UBS AG
Parent Bank 1
UBS
Americas Inc.
Subsidiaries
Entries
UBS Group
Consolidating
27,030
111,563
48,874
206,087
183,303
33,445
862,459
5,120
326,548
1,237
3,684
66,255
5,093
250
15,541
332
11,490
109,783
79,178
54,973
5,240
18,215
7,755
53,774
638
2,700
58
971
9,393
3,905
5,382
192,206
16,914
145,851
50,638
1,531
293,896
12,741
35,193
3,373
2,666
50
642
3,292
6,849
0
(250,808)
(52,674)
(206,468)
(17,076)
0
(320,470)
(12,734)
(75,207)
0
(2,909)
(65,473)
0
0
(7,484)
32,744
64,451
122,897
224,648
271,838
40,216
854,100
12,882
340,308
5,248
6,141
892
6,706
12,935
18,811
1,896,489
358,405
771,224
(1,011,303)
2,014,815
196,723
25,248
30,988
51,034
855,005
88,505
422,688
7,417
127,408
12,598
1,817,614
78,875
0
78,875
1,896,489
68,213
32,884
140,197
17,086
16,792
1,716
70,242
2,584
2,439
4,313
356,466
(1,097)
3,036
1,939
111,500
8,605
137,844
11,387
300,537
24,059
57,051
3,104
67,407
24,538
746,032
20,226
4,966
25,192
(250,808)
(52,674)
(206,468)
(17,076)
(320,470)
(12,734)
(75,207)
(2,909)
0
(7,484)
(945,830)
(65,473)
0
(65,473)
125,628
14,063
102,561
62,431
851,864
101,546
474,774
10,196
197,254
33,965
1,974,282
32,531
8,002
40,533
358,405
771,224
(1,011,303)
2,014,815
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.
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363
Financial information
Notes to the consolidated financial statements
Note 41 Supplemental guarantor information required under SEC rules (continued)
Supplemental guarantor consolidating cash flow statement
CHF million
For the year ended 31 December 2008
Net cash flow from / (used in) operating activities
UBS AG
Parent Bank 1
69,772
UBS
Americas Inc.
Subsidiaries
UBS Group
(438)
7,646
76,980
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 available-for-sale
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
Issuance of long-term debt, including financial liabilities designated at fair value
(1,502)
1,686
(819)
37
330
(268)
(52,815)
623
23,135
91,961
0
0
(258)
27
156
(75)
0
0
(140)
5
(1,198)
(1,333)
914
11,264
0
0
0
Repayment of long-term debt, including financial liabilities designated at fair value
(62,822)
(14,500)
Increase in minority interests
Dividends paid to / decrease in 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 with original maturity of less than three months
Total
0
0
(11,978)
(11,896)
(33,963)
23,645
109,110
132,755
27,030
62,777
42,948
132,755
842
(112)
21,816
8,960
442
8,889
15,532
24,421
332
19,875
4,214
24,421
(1,502)
1,686
(1,217)
69
(712)
(1,676)
(40,637)
623
23,135
103,087
(92,894)
1,661
(532)
0
(5,557)
(39,186)
30,561
149,105
179,666
32,744
86,732
60,190
179,666
0
0
11,126
(15,572)
819
(420)
(9,838)
(2,621)
(5,665)
(1,973)
24,463
22,490
5,382
4,080
13,028
22,490
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS. 2 Money
market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 3,853 million was pledged at 31 December 2008.
364
Note 41 Supplemental guarantor information required under SEC rules (continued)
Supplemental guarantor consolidating income statement
CHF million
For the year ended 31 December 2007
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) / recovery
Net interest income after credit loss expense
Net fee and commission income
Net trading income
Income from subsidiaries
Other income
Total operating income
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Operating profit from continuing operations before tax
Tax expense
Net profit from continuing operations
Net profit from discontinued operations
Net profit
Net profit attributable to minority interests
Net profit attributable to UBS shareholders
77,306
(74,689)
2,617
11
2,628
12,852
3,467
464
(4,273)
15,138
13,239
5,684
930
3
19,856
(4,718)
794
(5,512)
265
(5,247)
0
(5,247)
47,747
(46,420)
1,327
(234)
1,093
10,119
(9,932)
0
8,369
9,649
8,329
3,446
138
101
12,014
(2,365)
(486)
(1,879)
0
(1,879)
18
(1,897)
51,985
(50,592)
1,393
(15)
1,378
7,663
(1,888)
0
245
7,398
3,947
(701)
175
172
3,593
3,805
1,061
2,744
138
2,882
521
2,361
(67,926)
67,926
109,112
(103,775)
0
0
0
0
0
(464)
0
(464)
0
0
0
0
0
(464)
0
(464)
0
(464)
0
(464)
5,337
(238)
5,099
30,634
(8,353)
0
4,341
31,721
25,515
8,429
1,243
276
35,463
(3,742)
1,369
(5,111)
403
(4,708)
539
(5,247)
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.
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Financial information
Notes to the consolidated financial statements
Note 41 Supplemental guarantor information required under SEC rules (continued)
Supplemental guarantor consolidating balance sheet
CHF million
On 31 December 2007
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 available-for-sale
Accrued income and prepaid expenses
Investments in associates
Property and equipment
Goodwill and 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
Equity attributable to UBS shareholders
Equity attributable to minority interests
Total equity
Total liabilities and equity
UBS AG
Parent Bank 1
UBS
Americas Inc.
Subsidiaries
Consolidating
Entries
UBS Group
8,530
154,138
117,312
292,839
297,100
161,071
436,271
5,510
370,274
2,611
7,379
28,049
5,352
276
15,848
1,902,560
246,977
45,055
105,750
111,955
456,631
146,701
555,694
13,276
168,266
19,524
1,869,829
32,731
0
32,731
1,902,560
109
16,530
166,479
106,775
170,977
55,842
16,770
7,149
41,398
980
4,369
139
959
10,516
5,135
604,127
114,066
64,281
238,880
51,904
16,333
14,947
87,534
8,242
3,478
5,511
605,176
(3,373)
2,324
(1,049)
604,127
10,154
200,488
53,672
266,470
84,884
4,498
192,144
8,421
43,584
1,375
4,883
150
923
3,746
4,951
0
(310,249)
(130,400)
(289,156)
107,221
(107,221)
(216,968)
(9,315)
(119,392)
0
(4,678)
(26,359)
0
0
(5,622)
18,793
60,907
207,063
376,928
660,182
114,190
428,217
11,765
335,864
4,966
11,953
1,979
7,234
14,538
20,312
880,343
(1,112,139)
2,274,891
94,968
52,685
250,413
929
187,543
39,520
118,056
5,310
50,333
42,083
841,840
33,876
4,627
38,503
880,343
(310,249)
(130,400)
(289,156)
0
(216,968)
(9,315)
(119,392)
(4,678)
0
(5,622)
(1,085,780)
(26,359)
0
(26,359)
(1,112,139)
145,762
31,621
305,887
164,788
443,539
191,853
641,892
22,150
222,077
61,496
2,231,065
36,875
6,951
43,826
2,274,891
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.
366
Note 41 Supplemental guarantor information required under SEC rules (continued)
Supplemental guarantor consolidating cash flow statement
CHF million
For the year ended 31 December 2007
Net cash flow from / (used in) operating activities
UBS AG
Parent Bank 1
(65,749)
UBS
Americas Inc.
19,670
Subsidiaries
(5,999)
UBS Group
(52,078)
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 available-for-sale
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
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
Dividends paid to / decrease in 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 with original maturity of less than three months
Total
(2,337)
885
(1,022)
40
4,027
1,593
35,017
(2,771)
(4,275)
105,197
(54,251)
0
0
871
79,788
(9,070)
6,562
102,548
109,110
8,530
60,266
40,314
109,110
0
0
(581)
28
34
(519)
(1,426)
0
0
1,022
(7,022)
32
(665)
(6,627)
(14,686)
(3,062)
1,403
14,129
15,532
109
13,202
2,221
15,532
0
0
(307)
66
1,920
1,679
(919)
0
0
4,655
(1,134)
1,062
46
5,756
9,466
(96)
5,050
19,413
24,463
10,154
3,747
10,562
24,463
(2,337)
885
(1,910)
134
5,981
2,753
32,672
(2,771)
(4,275)
110,874
(62,407)
1,094
(619)
0
74,568
(12,228)
13,015
136,090
149,105
18,793
77,215
53,097
149,105
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS. 2 Money
market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 3,364 million was pledged at 31 December 2007.
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Financial information
Notes to the consolidated financial statements
Note 41 Supplemental guarantor information required under SEC rules (continued)
Supplemental guarantor consolidating income statement
CHF million
For the year ended 31 December 2006
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) / recovery
Net interest income after credit loss expense
Net fee and commission income
Net trading income
Income from subsidiaries
Other income
Total operating income
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation of property and equipment
Amortization of intangible assets
Total operating expenses
Operating profit from continuing operations before tax
Tax expense
Net profit from continuing operations
Net profit from discontinued operations
Net profit
Net profit attributable to minority interests
Net profit attributable to UBS shareholders
60,057
(56,020)
4,037
167
4,204
11,646
10,306
3,086
(450)
28,792
12,480
2,805
979
14
16,278
12,514
1,499
11,015
512
11,527
0
11,527
42,667
(41,049)
1,618
(6)
1,612
8,590
1,634
0
1,637
13,473
8,287
3,362
133
83
11,865
1,608
1,018
590
0
590
527
63
39,269
(38,403)
866
(5)
861
5,220
1,803
0
421
8,305
3,264
1,775
132
51
5,222
3,083
481
2,602
387
2,989
(34)
3,023
(54,592)
54,592
87,401
(80,880)
0
0
0
0
0
(3,086)
0
(3,086)
0
0
0
0
0
(3,086)
0
(3,086)
0
(3,086)
0
(3,086)
6,521
156
6,677
25,456
13,743
0
1,608
47,484
24,031
7,942
1,244
148
33,365
14,119
2,998
11,121
899
12,020
493
11,527
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.
368
Note 41 Supplemental guarantor information required under SEC rules (continued)
Supplemental guarantor consolidating cash flow statement
CHF million
For the year ended 31 December 2006
Net cash flow from / (used in) operating activities
UBS AG Parent
Bank 1 UBS Americas Inc.
(14,984)
(2,215)
Subsidiaries
UBS Group
11,815
(5,384)
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 available-for-sale
Net cash flow from / (used in) investing activities
Cash flow from / (used in) financing activities
Net money market paper issued / (repaid)
Net movements in treasury shares and own equity derivative activity
Capital issuance
Capital repayment by par value reduction
Dividends paid
Issuance of long-term debt, including financial liabilities designated at fair value
Repayment of long-term debt, including financial liabilities designated at fair value
Increase in minority interests
Dividends paid to / decrease in 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 with original maturity of less than three months
Total
2,856
1,154
(1,292)
298
90
3,106
17,526
(3,179)
1
(631)
(3,214)
79,358
(48,748)
0
0
(8,410)
32,703
406
34,000
68,548
102,548
2,660
73,431
26,457
102,548
0
0
(255)
47
433
225
0
0
(246)
154
1,200
1,108
1,039
(1,644)
0
0
0
0
10,881
(447)
85
2,441
3,229
17,228
(1,871)
598
13,531
14,129
78
11,488
2,563
14,129
0
0
0
0
7,436
(10,545)
1,246
(3,513)
5,181
(1,839)
(634)
10,450
8,963
19,413
757
2,225
16,431
19,413
2,856
1,154
(1,793)
499
1,723
4,439
16,921
(3,179)
1
(631)
(3,214)
97,675
(59,740)
1,331
(1,072)
0
48,092
(2,099)
45,048
91,042
136,090
3,495
87,144
45,451
136,090
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS. 2 Money
market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 7,183 million was pledged at 31 December 2006.
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369
Financial information
Notes to the consolidated financial statements
Note 41 Supplemental guarantor information required under SEC rules (continued)
Guarantee of other securities
UBS AG, acting through wholly-owned finance subsidiaries, issued the following trust preferred securities:
USD billion, unless otherwise indicated
Issuing Entity
UBS Preferred Funding Trust I
UBS Preferred Funding Trust II
UBS Preferred Funding Trust IV
UBS Preferred Funding Trust V
Type of security
Trust preferred securities
Trust preferred securities 1
Floating rate noncumulative trust
preferred securities
Trust preferred securities
Outstanding on 31.12.08
Date issued
Interest (%)
Amount
October 2000
June 2001
8.622
7.247
May 2003
May 2006
one-month LIBOR
+ 0.7%
6.243
1.5
0.5
0.3
1.0
1 In June 2006, USD 300 million (at 7.25%) of Trust preferred securities also issued in June 2001 were redeemed.
UBS AG has fully and unconditionally guaranteed these se-
curities. 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 2008, the amount of senior liabilities of UBS to
which the holders of the subordinated debt securities would
be subordinated is approximately CHF 1,959 billion.
370
Financial information
UBS AG (Parent Bank)
UBS AG (Parent Bank)
Parent Bank review
Income statement
The Parent Bank UBS AG net loss increased by CHF 32,238
million from a loss of CHF 4,251 million in the previous year
to a loss of CHF 36,489 million.
Income from investments in associated companies in-
creased to CHF 3,763 million from CHF 2,592 million in 2007,
mainly due to higher dividend distributions received.
Personnel expenses were down to CHF 6,707 million from
CHF 13,505 million in 2007, mainly due to lower accruals on
performance-related compensation and recognition of a de-
fined pension asset.
Losses resulting from the US market had a significant im-
pact on the following income statement lines:
– Depreciation increased from CHF 8,660 million in 2007 to
CHF 26,900 million in 2008, mainly reflecting writedowns
of investments in associated US companies.
– Net trading income decreased from positive CHF 2,767
million in 2007 to negative CHF 9,466 million in 2008.
This mainly reflects losses in the fixed-income business
and the charges associated with the SNB transaction.
The decrease in Extraordinary income and increase in
Extraordinary expenses are explained on page 376.
Balance sheet
In 2008, UBS’s overall balance sheet reduction initiatives also led
to lower Parent Bank total assets. In particular UBS subsidiaries
in the Americas reduced their assets and therefore their funding
needs from the Parent Bank. The Parent Bank total assets stood
at CHF 1,189 billion on 31 December 2008, a drop of CHF 409
billion from CHF 1,598 billion on 31 December 2007.
The reductions occurred in trading balances, which
declined by CHF 254 billion, interbank lending (loans and
collateral trading) dropped CHF 171 billion, with customer
loans and collateral trading down CHF 83 billion and oth-
er assets down CHF 5 billion. These declines, however,
were partially offset by higher positive replacement values
of CHF 78 billion and liquid assets of CHF 19 billion. Mort-
gage loans remained stable in 2008 at CHF 141 billion.
The above mentioned write-downs of investments in as-
sociated US companies have been offset during the year
by capital injections.
Interbank lending
During 2008, due from banks on time declined by CHF 40
billion, predominantly due to lower funding needs of UBS
bank subsidiaries in the Americas. Due from banks on de-
mand declined slightly by CHF 4 billion, as lower funding to
bank subsidiaries in the European Region outweighed the
increase to non-UBS related banks in the Americas and
Japan. In addition, interbank collateral trading declined by
CHF 127 billion, with roughly two thirds attributable to lower
trading volumes with UBS subsidiaries, and one third due to
reductions in trading volumes with third party clients.
Customer lending
The customer loan drop of CHF 55 billion was mainly the
result of lower funding needs of UBS subsidiaries (non-
banks), predominantly in the Americas region.
In addition, customer collateral trading declined CHF 28
billion, of which two thirds was attributable to third party
clients in the Americas and Europe and one third to UBS sub-
sidiaries in the Americas.
Financial investments
Compared with the previous year, the increase of CHF 10 bil-
lion is mainly due to the reclassification from Trading balances
in securities to Financial investments in fourth quarter 2008.
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371
Financial information
UBS AG (Parent Bank)
Parent Bank 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
Profit / (loss) for the period
372
For the year ended
% change from
31.12.08
31.12.07
31.12.07
37,825
12,014
76
(49,022)
893
208
11,668
610
(2,849)
9,637
(9,466)
176
3,763
29
3,384
(2,767)
4,584
5,648
6,707
5,822
12,528
(6,880)
26,900
3,071
(36,852)
1,002
482
157
(36,489)
58,674
19,003
58
(75,179)
2,556
205
15,468
686
(3,269)
13,090
2,767
178
2,592
27
3,352
(3,223)
2,926
21,339
13,505
5,191
18,696
2,643
8,660
2,780
(8,797)
4,665
4
115
(4,251)
(36)
(37)
31
(35)
(65)
1
(25)
(11)
(13)
(26)
(1)
45
7
1
(14)
57
(74)
(50)
12
(33)
211
10
(319)
(79)
37
(758)
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 and equity
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
Allowances and provisions
Share capital
General statutory reserve
Reserve for own shares
Other reserves
Profit / (loss) for the period
Total liabilities and equity
Total subordinated liabilities
Total amounts payable to Group companies
31.12.08
31.12.07
% change from
31.12.07
27,030
62,777
355,679
191,308
141,328
158,741
11,085
22,001
5,032
3,877
201,801
8,697
8,530
60,266
527,081
274,510
141,381
412,977
1,685
21,228
5,273
7,221
124,244
13,676
1,189,356
1,598,072
3,924
435,721
52,063
292,730
61,872
388,338
3,150
143,589
7,895
193,108
14,181
2,724
293
40,910
2,877
22,115
(36,489)
1,189,356
21,228
271,434
6,293
602,667
104,878
491,102
72,303
521,189
3,228
189,023
17,368
145,445
15,576
3,970
207
8,775
9,441
19,818
(4,251)
1,598,072
21,114
330,567
217
4
(33)
(30)
0
(62)
558
4
(5)
(46)
62
(36)
(26)
(38)
(28)
(50)
(40)
(14)
(25)
(2)
(24)
(55)
33
(9)
(31)
42
366
(70)
12
(758)
(26)
1
(18)
Statement of appropriation of retained earnings
The Board of Directors proposes to the Annual General Meeting (AGM) on 15 April 2009 to approve the following appropriation:
CHF million
Profit / (Loss) for the financial year 2008 as per the Parent Bank's Income Statement
Appropriation to other reserves
Appropriation to general statutory reserves: Retained earnings
Appropriation to general statutory reserves: Share premium
(36,489)
(22,115)
(2,472)
(11,901)
373
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Financial information
UBS AG (Parent Bank)
Notes to the Parent Bank financial statements
Accounting Policies
The Parent Bank Financial Statements are prepared in accor-
dance with Swiss Federal banking law. The accounting poli-
cies are principally the same as for the Group Financial State-
ments outlined in Note 1, Summary of Significant Accounting
Policies. Major differences between the Swiss Federal bank-
ing law requirements and International Financial Reporting
Standards (IFRS) are described in Note 40 to the financial
statements. The accounting policies applied for the statutory
accounts of the Parent Bank are discussed below. The risk
management of UBS AG is described in the context of the
risk management for UBS Group. For the statutory required
risk assessment refer to the “Risk and treasury manage-
ment” section of this report.
Treasury shares
Treasury shares are own equity instruments held by an entity.
Under Swiss law, treasury shares are recognized in the balance
sheet as trading balances. Short positions in treasury shares are
recognized in Due to banks. Treasury shares recognized as
trading balances and short positions in treasury shares are
measured at fair value with unrealized gains or losses from
remeasurement to fair value included in the income statement.
Realized gains and losses on the sale or acquisition of treasury
shares are recognized in the income statement.
A reserve for own shares must be created in equity equal
to the cost value of the treasury shares held. The reserve for
own shares is not available for distribution to shareholders.
Foreign currency translation
Assets and liabilities of foreign branches are translated into
CHF at the spot exchange rate at the balance sheet date.
Income and expense items are translated at weighted aver-
age exchange rates for the period. Gains resulting from
exchange differences on the translation of each of these
foreign branches are credited to a provision account (other
liabilities). Losses resulting from exchange differences are
debited, firstly, to the aforementioned provision account
until such provision is fully utilized, and, secondly, to profit
and loss.
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 include all directly held subsidiar-
ies and are carried at cost less impairment, if applicable.
Deferred taxes
Deferred tax assets are not recognized in the Parent Bank
Financial Statements. Deferred tax liabilities are recognized
for all taxable temporary differences. The change in the de-
ferred tax liability is recognized in profit or loss.
Equity participation and other compensation plans
Equity participation plans
Under Swiss law, employee share awards are recognized as
compensation expense and accrued over the performance
year, which is generally the period prior to the grant date.
Employee option awards which do not contain voluntary
termination non-compete provisions are recognized as
compensation expense on the grant date. If the award is
performance based and contains substantive future ser-
vice / vesting period, compensation expense is recognized
over the performance period. Employee option awards
which contain voluntary termination non-compete provi-
sions (i. e. good leaver clause) are recognized as compensa-
tion expense over the performance year. Equity- and cash-
settled awards are classified as liabilities. The employee share
option awards are remeasured to fair value at each balance
sheet date. However, for employee share options that UBS
intends to settle in shares from condi tional capital, there is
no impact on the income statement and no liability is recog-
nized. Upon exercise of employee options, cash received for
payment of the strike price is credited against share capital
and general statutory reserve.
Other compensation plans
Fixed and variable deferred cash compensation is recognized
as compensation expense over the performance year. If the
award is performance based and contains substantive future
service / vesting period, compensation expense is recognized
over the performance period.
374
Changes in accounting policies, comparability and
other adjustments
Equity participation plans
In 2008, UBS revised the measurement methodology for
the liability under employee share option awards settled with
treasury shares. The measurement of the liability was previ-
ously based on the higher of grant date fair value and intrin-
sic value of the underlying options, whereas following the
revision, it is based on fair value. This change resulted in rev-
enues of CHF 1.2 billion.
In 2006, UBS adopted the policy to decide at grant
whether to use conditional capital or treasury shares to sat-
isfy employee option delivery obligations in UBS shares. In
2008, UBS changed this policy to allow it to use treasury
shares up to the number of treasury shares held, with the
excess of employee option delivery obligations satisfied from
conditional capital. As a result, UBS recognized an additional
expense of CHF 298 million before tax in the income state-
ment in 2008.
Post-employment benefits
In 2008, UBS concluded that it meets the requirements to
recognize a defined benefit asset associated with its Swiss
pension plan consistent with the consolidated financial state-
ments. The change in accounting policy resulted in the fol-
lowing effects on the balance sheet and income statement
for 31 December 2008: an increase of approximately CHF
2.1 billion in Other assets and a corresponding decrease in
Personnel expenses.
Reclassification of trading securities
UBS decided at the end of October to reclassify securities
from “trading balances in securities and precious metals” to
“financial investments” with effect from 1 October 2008.
The securities have been reclassified on the basis of their fair
value on the reclassification date and are now accounted for
on an amortized cost basis. An impairment charge of CHF
0.3 billion was recognized on the reclassified financial in-
struments. If the reclassification had not occurred, the im-
pairment charge would not have been recognized but a
trading loss of CHF 1.9 billion would have been recorded.
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375
Financial information
UBS AG (Parent Bank)
Additional income statement information
Net trading income
CHF million
Equities
Fixed income
Foreign exchange and other1
Total
1 Includes commodities trading income.
Extraordinary income and expenses
For the year ended
% change from
31.12.08
31.12.07
31.12.07
3,930
(15,505)
2,109
(9,466)
7,867
(7,679)
2,579
2,767
(50)
(102)
(18)
Extraordinary income includes a gain from the sale of the
Bank of China investment of approximately CHF 360 million
in 2008, whereas 2007 included a gain on the sale of UBS’s
20.7% stake in Julius Baer of CHF 3,180 million. Further,
2008 includes a release of provisions of CHF 72 million, a
release on reserves on investments in subsidiaries of CHF
490 million and a writeup of investments in associated com-
panies of CHF 30 million (2007: CHF 409 million). Amounts
in 2007 include a release on reserves on own properties of
CHF 824 million and for lapsed employee options of CHF
165 million.
In 2008, extraordinary expenses include CHF 478 million
related to an overstatement of trading income in 2007.
Extraordinary expenses in 2007 were immaterial.
376
Additional balance sheet information
Allowances and provisions
CHF million
Default risks (credit and country risk)
Trading portfolio risks 1
Litigation risks 2
Operational risks
Retirement benefit plans
Deferred taxes
Other 3
Total allowances and provisions
Allowances deducted from assets
Total provisions as per balance sheet
Balance at
31.12.07
1,036
4,554
158
164
107
31
3,446
9,496
5,526
3,970
Provisions
applied in
accordance
with their
specified purpose Reclassifi cations
Recoveries,
doubtful interest,
currency
translation
differences
Provisions
released to
income
New
provisions
charged to
income
Balance at
31.12.08
(481)
(457)
(203)
(2)
(2,672)
(3,815)
3
(3)
187
(49)
2
(68)
72
(506)
(33)
(280)
(14)
(244)
(1,077)
1,504
10,304
1,460
289
52
3
871
14,483
(47)
(47)
1,556
14,858
1,078
157
94
36
1,333
19,112
16,388
2,724
1 The increase was mainly in the area of Fixed Income, Currencies and Commodities (FICC) in the Investment Bank. 2 Includes the movements of provisions for auction rate securities (ARS): provisions
have been assumed by UBS AG from a subsidiary of CHF 922 million (USD 865 million), new provisions of CHF 407 million have been expensed; the provisions have been partially applied, and the residual
amount of CHF 968 million was reclassified to Negative replacement values. In addition a provision of CHF 917 million (USD 780 million) was made in connection with UBS’s US cross-border case. Refer
to “Note 21 Provisions and litigations”). 3 The 31 December 2008 balance includes provisions for capitalization commitments of subsidiaries that have a capital deficit of approximately CHF 592 million
and provisions were applied for the writeoff of investments in subsidiaries of CHF 2,629 million. In addition, provisions for reinstatement costs for leasehold improvements, provisions for employee
benefits (service anniversaries and sabbatical leaves) are mainly included in this line.
Statement of shareholders’ equity
CHF million
As of 31.12.06 and 1.1.07
Cancellation of own shares
Capital increase
Increase in reserves
Prior year dividend
Profit / (loss) for the period
Changes in reserves for own shares
As of 31.12.07 and 1.1.08
Cancellation of own shares
Capital increase 1
Capital increase related to MCNs
Increase in reserves
Prior year dividend
Profit / (loss) for the period
Changes in reserves for own shares
Transfers 2
As of 31.12.08
General statutory
reserves:
Share premium
General statutory
reserves:
Retained earnings
Reserves for own
shares
6,280
2,015
9,114
Share capital
211
(4)
457
2,472
23
6,303
15,911
16,223
(11,901)
26,536
(2,472)
0
207
86
293
327
9,441
(6,564)
2,877
1 Includes stock dividend. 2 Subject to approval by the Annual General Meeting on 15 April 2009.
Other
reserves
27,288
(2,411)
(457)
(4,275)
(4,251)
(327)
15,567
(15)
(36,489)
6,564
14,373
0
Total
shareholders’
equity (before
distribution
of profit)
44,908
(2,415)
23
(4,275)
(4,251)
33,990
15,982
16,223
0
0
(36,489)
0
0
29,706
377
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Financial information
UBS AG (Parent Bank)
Share capital
As of 31.12.08
Issued and paid up
Conditional share capital
As of 31.12.07
Issued and paid up
Conditional share capital
Par value
Ranking for dividends
No. of shares
Capital in CHF
No. of shares
Capital in CHF
2,932,580,549
293,258,055
2,932,580,549
293,258,055
792,844,711
79,284,471
2,073,547,344
207,354,734
2,073,547,344
207,354,734
150,138,634
15,013,863
On 31 December 2008, a maximum of 100,415 shares can
be issued against the future exercise of options from former
PaineWebber employee option plans. These shares are
shown as conditional share capital in the UBS AG (Parent
Bank) disclosure.
During 2006, shareholders approved the creation of con-
ditional capital of up to a maximum of 150 million shares to
fund UBS’s employee share option programs. In 2007, 5,704
shares had been issued under this program. The remaining
conditional capital to fund UBS’s employee share option pro-
grams amounts to 149,994,296 shares.
On 27 February 2008 the extraordinary general meeting of
shareholders approved the creation of a maximum of CHF
10,370,000 in authorized capital, allowing the distribution of a
stock dividend. Additionally, on 23 April 2008, the Annual Gen-
eral Meeting of shareholders (AGM) approved a capital increase
that resulted in the issuance of 760,295,181 fully paid regis-
tered shares. In addition, during 2008, shareholders approved
the creation of conditional capital in a maximum amount of
642,750,000 shares for the two issuances of mandatory con-
vertible notes (MCNs). For further information, refer to Note 26
to the financial statements.
378
Off-balance sheet and other information
Assets pledged or assigned as security for own obligations and assets subject to reservation of title
CHF million
Money market paper
Mortgage loans
Securities
Other
Total
31.12.08
31.12.07
Change in %
Book value
Effective liability
Book value
Effective liability
Book value
Effective liability
7,429
3,699
50,223
8,149
69,500
1,300
2,418
37,083
0
40,801
12,792
200
99,821
8,628
121,441
2,372
199
49,397
51,968
(42)
(50)
(6)
(43)
(45)
(25)
(21)
Financial assets are mainly pledged in securities borrowing and
lending transactions, in repurchase and reverse repurchase
transactions, under collateralized credit lines with central
banks, against loans from mortgage institutions, in connection
with derivative transactions and for security deposits relating
to stock exchange and clearinghouse memberships.
Commitments and contingent liabilities
CHF million
Contingent liabilities
Irrevocable commitments
Liabilities for calls on shares and other equities
Confirmed credits
31.12.08
286,451
68,660
145
2,079
31.12.07
223,105
104,784
145
2,630
% change from
31.12.07
28
(34)
0
(21)
UBS AG is jointly and severally liable for the value added tax
(VAT) liability of Swiss subsidiaries that belong to its VAT
group.
UBS has an obligation to deliver 100 million ordinary UBS
shares, subject to anti dilution adjustments, in exchange for
payment of the par value of these shares, if the SNB incurs a
loss on its loan provided to the SNB StabFund upon termina-
tion of this fund. If UBS would be required to deliver those
shares, UBS intends to settle this obligation using conditional
capital (subject to shareholders’ approval).
Derivative instruments
CHF million
Interest rate contracts
Credit derivative contracts
Foreign exchange contracts
Precious metal contracts
Equity / Index contracts
Commodities contracts, excluding precious metals contracts
Total derivative instruments
Replacement value netting
Replacement values after netting
1 PRV: Positive replacement value. 2 NRV: Negative replacement value.
31.12.08
31.12.07
Notional
amount
CHF bn
36,476
3,712
6,005
108
473
160
46,934
PRV 1
377,307
202,357
222,178
5,804
28,502
27,055
863,203
661,402
201,801
NRV 2
370,346
187,216
229,656
5,697
36,208
25,387
854,510
661,402
193,108
PRV 1
167,334
111,898
99,494
6,363
30,400
21,181
436,670
312,426
124,244
NRV 2
164,325
116,128
99,613
6,569
49,985
21,251
457,871
312,426
145,445
Notional
amount
CHF bn
33,545
5,451
7,725
147
760
484
48,112
379
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Financial information
UBS AG (Parent Bank)
Fiduciary transactions
CHF million
Deposits:
with other banks
with group banks
Total
Due to UBS pension plans
CHF million
Due to UBS pension plans and UBS debt instruments held by pension plans
Securities borrowed from pension plans
31.12.08
31.12.07
% change from
31.12.07
36,452
2,738
39,190
46,074
2,186
48,260
(21)
25
(19)
For the year ended
% change from
31.12.08
31.12.07
31.12.07
876
0
443
9,379
98
(100)
Personnel
Parent Bank personnel was 40,998 on 31 December 2008 and 45,102 on 31 December 2007.
Significant shareholders
Chase Nominees Ltd., London, acting in its capacity as a
nominee for other investors, was registered with 7.19% of
all shares issued on 31 December 2008, compared with
7.99% at year-end 2007 and 8.81% at year-end 2006. DTC
(Cede & Co.), New York, The Depository Trust Company,
a US securities clearing organization, was registered as a
shareholder for a large number of beneficial owners with
9.89% of all shares issued on 31 December 2008 (14.15%
on 31 December 2007).
380
Corporate governance and compensation report
Compensation details and additional information for executive members of the BoD
CHF, except where indicated a
Name, function 1
Peter Kurer, Chairman
Marcel Ospel, Chairman
Stephan Haeringer,
Executive Vice Chairman
Marco Suter, Executive Vice Chairman
For the
year ended
2008
2007
2008
2007
2008
2007
2008
2007
Base salary
1,333,333
666,667
2,000,000
1,125,000
1,500,000
1,125,000
Annual incentive
award (cash)
0
0
0
0
0
0
Annual incentive
award (shares
– fair value) b
0
Discretionary
award (options
– fair value) c
0
Benefits
in kind d
58,267
Contributions
to retirement
benefits plans e
174,047
Total
1,565,647
0
0
0
0
0
0
0
0
0
0
80,755
307,310
108,846
111,808
87,023
834,445
261,069
2,568,379
195,802
1,429,648
261,069
1,872,877
70,820
155,252
1,351,072
1 2008: Peter Kurer was the only executive member in office on 31 December; Marcel Ospel did not stand for re-election in April 2008 and Stephan Haeringer stepped down during the year as a member
of the BoD. Both their payments are pro-rata for the four respective nine-month periods served in their functions. 2007: Marco Suter stepped down during the year as a member of the BoD. His 2007
payment was pro-rata for the nine-month period served as Executive Vice Chairman.
Explanations of compensation details for executive members of the BoD and members of the GEB:
a. Local currencies are converted into CHF using the exchange rates as detailed in “Note 39 Currency translation rates” in the financial statements
of this report.
b. Values per share at grant: CHF 36.15 / USD 33.55 for shares granted in 2008 related to the performance year 2007. CHF prices are the average
price of UBS shares at SWX Europe over the last 10 trading days of February, and USD prices are the average price of UBS shares at the NYSE
over the last 10 trading days of February in the year in which they are granted.
c. No options were granted in 2009 for the performance year 2008.
d. Benefits in kind – car leasing, company car allowance, staff discount on banking products and services, health and welfare benefits and gen-
eral expense allowances – are all valued at market price.
e. Swiss senior executives participate in the same pension plan as all other employees. Under this plan, employees receive a company contribution
to the plan which covers compensation up to CHF 820,800. The retirement benefits consist of a pension, a bridging pension and a one-off
payout of accumulated capital. Employees must also contribute to the plan. This figure excludes the mandatory employer’s social security
contributions (AHV, ALV) but includes the portion attributed to the employer’s portion of the legal BVG requirement. The employee contribu-
tion is included in the base salary and annual incentive award components.
In both the US and the UK, senior executives participate in the same plans as all other employees. In the US there are two different plans, one
of which operates on a cash balance basis, which entitles the participant to receive a company contribution based on compensation limited to
USD 250,000. This plan is no longer available to new hires. US senior executives may also participate in the UBS 401K-defined contribution
plan (open to all employees), which provides a company matching contribution for employee contributions. In the UK, senior executives par-
ticipate in either the principal pension plan, which is limited to an earnings cap of GBP 100,000, or a grandfathered defined benefit plan which
provides a pension on retirement based on career average base salary (uncapped).
381
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Financial information
UBS AG (Parent Bank)
Remuneration details and additional information for independent members of the BoD
CHF, except where indicated a
&
e
c
n
a
n
r
e
v
o
G
e
e
t
t
i
m
m
o
c
g
n
i
t
a
n
m
o
n
i
e
e
t
t
i
m
m
o
c
e
t
a
r
o
p
r
o
C
y
t
i
l
i
b
i
s
n
o
p
s
e
r
e
e
t
t
i
m
m
o
c
e
e
t
t
i
m
m
o
c
y
g
e
t
a
r
t
S
k
s
i
R
e
t
t
i
e For the
period
AGM to
AGM
m
m
o
c
Base fee
Committee
retainer(s)
Benefits
in kind
Additional
payments
e
e
t
t
i
m
m
o
c
t
i
d
u
A
&
R
H
M
M
M
M
C
M
M
C
n
o
i
t
a
s
n
e
p
m
o
c
M
M
M
M
C
M
M
C
Name, function 1
Ernesto Bertarelli,
member
Sally Bott,
member 2
Rainer-Marc Frey,
member 2
Bruno Gehrig,
member 2
Gabrielle Kaufmann-
Kohler, member
Sergio Marchionne,
senior independent
director, vice chairman
Rolf A. Meyer,
member 2
Helmut Panke,
member
William G. Parrett,
member 2
David Sidwell,
member
Peter Spuhler,
member 2
Peter R. Voser,
member
Lawrence A. Weinbach,
member 2
Joerg Wolle,
member
Total 2008
Total 2007
M
M
C
M
M
C
M
M
M
M
M
2008/2009
325,000
2007/2008
325,000
2008/2009
162,500
200,000
150,000
75,000
2007/2008
M
M 2008/2009
162,500
150,000
2007/2008
2008/2009
162,500
100,000
2007/2008
2008/2009
325,000
2007/2008
325,000
M 2008/2009
325,000
2007/2008
325,000
2008/2009
162,500
2007/2008
325,000
M
2008/2009
325,000
2007/2008
325,000
2008/2009
162,500
2007/2008
250,000
250,000
200,000
200,000
150,000
650,000
300,000
250,000
100,000
M
C
2008/2009
325,000
450,000
2007/2008
2008/2009
162,500
2007/2008
325,000
M 2008/2009
325,000
2007/2008
325,000
2008/2009
162,500
2007/2008
325,000
2008/2009
325,000
2007/2008
325,000
0
200,000
400,000
300,000
100,000
600,000
300,000
150,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Share
percent-
age 3
100
Number of
shares 4,5
51,596
100
50
14,677
12,280
Total
525,000
475,000
237,500
312,500
50
16,158
262,500
50
13,572
575,000
0
575,000
250,000 6 775,000
525,000
312,500
975,000
625,000
575,000
262,500
50
50
100
100
50
50
50
50
50
29,731
9,349
76,228
16,226
16,158
15,853
32,316
9,349
13,572
775,000
50
40,072
100
100
50
50
50
50
50
100
15,945
16,226
37,487
10,162
13,572
15,040
32,316
14,677
162,500
525,000
725,000
625,000
262,500
925,000
625,000
475,000
6,437,500
5,675,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Legend: C = Chairman of the respective committee; M = Member of the respective committee
1 There were 11 independent BoD members in office on 31 December 2008. David Sidwell was appointed at the AGM on 23 April 2008 and Rolf A. Meyer, Peter Spuhler and Lawrence A. Weinbach stepped
down from the BoD at the EGM on 2 October 2008. Sally Bott, Rainer-Marc Frey, Bruno Gehrig and Bill G. Parrett were appointed at the EGM on 2 October 2008. 2 Remunerations is for six months only, as
such members either stepped down or were appointed on 2 October 2008. 3 Fees are paid 50% in cash and 50% in restricted UBS shares. However, independent BoD members can elect to have 100% of
their remuneration paid in restricted UBS shares. 4 For 2008, shares valued at CHF 11.38 (average price of UBS shares at SWX Europe over the last 10 trading days of February 2009), attributed with a price
discount of 15%, discount price CHF 9.67. The shares are blocked for four years. For 2007, shares valued at CHF 36.15 (average price of UBS shares at SWX Europe over the last 10 trading days of February
2008), attributed with a price discount of 15%, discount price CHF 30.75. The shares are blocked for four years. 5 Number of shares is reduced in case of the 100% election to deduct social security contribu-
tion. All remuneration payments are submitted to social security contribution/taxes at source. 6 This payment is associated with the newly created function of a senior independent director.
In addition, one-off cash payments were made to the chair of the risk committee (CHF 500,000), the governance and nominating committee (CHF 300,000) and the human resources and compensation
committee (CHF 200,000). These payments reflect the substantial workload of setting up the new risk committee, and expanding the mandate of the governance and nominating committee and the
human resources and compensation committee.
382
Total payments to all members of the BoD
CHF, except where indicated a
Aggregate of all members of the BoD
Aggregate of all members of the BoD
For the
year ended
2008
2007
Total
10,267,240
11,467,328
Total compensation for all members of the GEB
CHF, except where indicated a
Name, function
For the
year ended
Base salary
Annual
incentive
award (cash)
Annual
incentive
award
(shares;
fair value) b
Discretionary
award
(options;
fair value) c
Marcel Rohner, Group Chief Executive Officer
(highest-paid)
2008
Rory Tapner, Chairman &
CEO Asia Pacific (highest-paid)
Aggregate of all members of the GEB who
were in office on 31 December 2008 1
Aggregate of all members of the GEB who
were in office on 31 December 2007 1
Aggregate of all members of the GEB who
stepped down during 2008 2
Aggregate of all members of the GEB who
stepped down during 2007 2
2007
2008
2007
2008
2007
1,500,000
0
0
1,291,960
4,501,900
4,501,904
7,815,943
0
0
6,995,885
15,305,667
15,305,708
1,614,871
0
0
2,511,947
23,042,376
6,750,036
0
0
0
0
0
0
Contributions
to retirement
benefits
plans e
Benefits
in kind d
Total
161,768
152,934
1,814,702
10,256
900
10,306,920
457,652
817,315
9,090,911
532,706
912,974
39,052,939
234,838
258,423
2,108,132
406,567
275,635
32,986,561
1 Number and distribution to senior executives: 2008: 12 GEB members in office on 31 December. 2007: eight GEB members in office on 31 December. 2 Number and distribution of senior executives:
2008: includes four months in office as a GEB member for Peter Kurer, eight months in office for Marco Suter and 10 months for Joe Scoby. 2007: includes nine months in office for Huw Jenkins and Clive
Standish and six months for Peter Wuffli.
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383
Financial information
UBS AG (Parent Bank)
Share and option ownership of members of the BoD at 31 December 2007/2008
Name, function 1
Peter Kurer, Chairman
For the
year ended
2008
Number of
shares held
416,088
Voting rights
in %
0.025
Number of
options held
372,995
Potentially conferred
voting rights in % 2
0.022
2007
292,762
0.026
350,000
0.031
Type and quantity
of options 3
85 256
95 913
95 913
95 913
xxx:
xxxv:
xli:
xlv:
xxx:
xxxv:
xli:
xlv:
80 000
90 000
90 000
90 000
Sergio Marchionne,
senior independent director, vice chairman
Ernesto Bertarelli, member
Sally Bott, member
Rainer-Marc Frey, member
Bruno Gehrig, member
Gabrielle Kaufmann-Kohler, member
Helmut Panke, member
William G. Parrett, member
David Sidwell, member
Peter R. Voser, member
Joerg Wolle, member
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
87,926
45,800
89,434
48,411
1
0
3,000
18,713
3,303
31,971
13,206
4,000
1
30,823
11,580
41,509
7,709
0.005
0.004
0.005
0.004
0.000
0.000
0.000
0.001
0.000
0.002
0.001
0.000
0.000
0.002
0.001
0.002
0.001
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
1 This table includes vested, unvested, blocked and unblocked shares and options held by members of the BoD including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 31
Equity participation and other compensation plans” in the financial statements of this report for more information.
384
Compensation paid to former members of the BoD and GEB1
CHF, except where indicated a
Name, function
Georges Blum, former member of the BoD
(Swiss Bank Corporation)
Franz Galliker, former member of the BoD
(Swiss Bank Corporation)
Walter G. Frehner, former member of the BoD
(Swiss Bank Corporation)
Hans (Liliane) Strasser, former member of the BoD
(Swiss Bank Corporation)
Robert Studer, former member of the BoD
(Union Bank of Switzerland)
Alberto Togni, former member of the BoD
(UBS)
Philippe de Weck, former member of the BoD
(Union Bank of Switzerland)
Aggregate of all former members of the GEB 2
Aggregate of all former members of the BoD and GEB
For the
year ended
Compensation
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
Benefits in
kind
Total
101,579
101,579
90,803
69,596
62,174
74,663
73,061
32,673
42,311
126,208
260,162
427,949
502,478
109,703
129,701
171,180
257,791
90,803
69,596
62,174
74,663
73,061
32,673
42,311
126,208
260,162
746,410
820,879
109,703
129,701
171,180
257,791
318,461
318,401
0
0
318,461
318,401
1,113,551
1,418,481
1,432,012
1,736,882
1 Compensation or remuneration that is connected with the former members’ activity on the BoD or GEB, or that is not at market conditions. 2 Includes two former GEB members.
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385
Financial information
UBS AG (Parent Bank)
Share and option ownership of members of the GEB at 31 December 2007/2008
Name, function 1
Marcel Rohner,
Group Chief Executive Officer
For the
year ended
2008
Number of
shares held
711,366
Voting rights
in %
0.042
Number of
options held
1,055,043
Potentially conferred
voting rights in % 2
0.063
2007
501,846
0.044
990,000
0.088
John Cryan,
Group Chief Financial Officer
2008
235,929
0.014
382,673
0.023
Markus U. Diethelm,
Group General Counsel
John A. Fraser,
Chairman and CEO
Global Asset Management
2007
2008
2007
2008
112,245
0.007
0
583,812
0.035
1,144,808
0.000
0.068
2007
461,764
0.041
1,074,232
0.095
Marten Hoekstra,
Deputy CEO Global Wealth
Management & Business Banking
and Head Wealth Management US
2008
245,397
0.015
684,168
0.041
Type and quantity
of options 3
31,971
213,140
277,082
319,710
213,140
xxv:
xxx:
xxxv:
xli:
xlv:
xxv:
xxx:
xxxv:
xli:
xlv:
v:
vi:
vii:
xii:
xiii:
xiv:
xvii:
xviii:
xix:
xxi:
xxii:
xxiii:
xxvii:
xxviii:
xxix:
xxxii:
xxxiii:
xxxiv:
xxxviii:
xxxix:
xl:
xlii:
xliii:
xliv:
xlvi :
i:
viii:
xv:
xx:
xxxi:
xxxvi:
xli:
xlv:
i:
viii:
xv:
xx:
xxxi:
xxxvi:
xli:
xlv:
ii:
iii:
iv:
ix:
x:
xi:
xxvi:
xxxi:
xxxvi:
xli:
xlv:
xlvii:
30,000
200,000
260,000
300,000
200,000
21,362
20,731
20,725
5,454
5,294
5,292
23,626
23,620
23,612
5,526
5,524
5,524
17,072
17,068
17,063
14,210
14,210
14,207
5,330
5,328
5,326
17,762
17,762
17,760
53,285
0
56,013
76,380
127,884
127,884
170,512
202,483
213,140
170,512
52,560
71,672
120,000
120,000
160,000
190,000
200,000
160,000
8,679
8,421
8,421
8,823
12,825
8,561
42,628
53,285
53,285
85,256
154,931
239,053
Jerker Johansson,
Chairman and CEO Investment Bank
2007
2008
2007
521,544
0.031
753,410
0.045
xlviii:
xlix:
745,990
7,420
1 This table includes vested and unvested shares and options held by members of the GEB including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 31 Equity participation
and other compensation plans” in the financial statements of this report for more information.
386
Share and option ownership of members of the GEB on 31 December 2007/2008 (continued)
Name, function 1
Philip J. Lofts,
Group Chief Risk Officer
For the
year ended
2008
Number of
shares held
186,434
Voting rights
in %
0.011
Number of
options held
577,723
Potentially conferred
voting rights in % 2
0.034
Walter Stuerzinger,
Chief Operating Officer,
Corporate Center
2007
2008
296,886
0.018
372,995
0.022
2007
209,442
0.019
350,000
0.031
Rory Tapner,
Chairman and CEO Asia Pacific
2008
827,809
0.049
1,379,533
0.082
Raoul Weil,
Chairman and CEO Global Wealth
Management & Business Banking,
relinquished his duties on
an interim basis
Alexander Wilmot-Sitwell,
Chairman and CEO, UBS Group EMEA
and Joint Global Head IB Department
Robert Wolf,
Chairman and CEO, UBS Group
Americas / President Investment Bank
2007
514,365
0.046
1,294,486
0.115
2008
315,698
0.019
432,409
0.026
2007
212,934
0.019
405,752
0.036
2008
304,655
0.018
353,807
0.021
827,307
0.049
948,473
0.056
2007
2008
2007
Type and quantity
of options 3
v:
vi:
vii:
xii:
xiii:
xiv:
xvii:
xviii:
xix:
xxi:
xxii:
xxiii:
xxvii:
xxviii:
xxix:
xxxv:
xli:
xlv:
xlvii:
xvi:
xxx:
xxxv:
xli:
xlv:
xvi:
xxx:
xxxv:
xli:
xlv:
vii:
xv:
xxiv:
xxx:
xxxv:
xli:
xlv:
vii:
xv:
xxiv:
xxx:
xxxv:
xli:
xlv:
xv:
xxxv:
xli:
xlv:
xv:
xxxv:
xli:
xlv:
xxxiv:
xxxvii:
xxxviii:
xxxix:
xl:
xlv:
xlvii:
xx:
xxxi:
xxxvi:
xli:
xlv:
xlvii:
11,445
11,104
11,098
1,240
5,464
1,199
9,985
9,980
9,974
1,833
1,830
1,830
35,524
35,524
35,521
117,090
117,227
85,256
74,599
31,971
63,942
85,256
95,913
95,913
30,000
60,000
80,000
90,000
90,000
281,862
213,140
213,140
170,512
159,855
170,512
170,512
264,486
200,000
200,000
160,000
150,000
160,000
160,000
53,285
102,281
127,884
148,959
50,000
95,976
120,000
139,776
53,282
2,130
35,524
35,524
35,521
106,570
85,256
287,739
213,140
127,884
106,570
106,570
106,570
1 This table includes vested and unvested shares and options held by members of the GEB including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 31 Equity participation
and other compensation plans” in the financial statements of this report for more information.
387
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Financial information
UBS AG (Parent Bank)
Vested and unvested options held by independent members of the BoD and
by members of the GEB on 31 December 2007 / 2008
Type
Number of options
Year of grant
Vesting date
Expiry date
Subscription ratio
56,013
8,679
8,421
8,421
32,807
31,835
313,685
76,380
8,823
12,825
8,561
6,694
10,758
6,491
394,309
31,971
33,611
33,600
33,586
415,623
7,359
7,354
7,354
213,140
31,971
42,628
52,596
52,592
52,584
532,850
436,937
14,210
14,210
67,489
837,477
383,652
2,130
40,854
40,852
40,847
1,332,125
17,762
17,762
17,760
1,348,276
53,285
505,478
745,990
7,420
2001
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2003
2003
2003
2003
2003
2003
2003
2003
2003
2003
2004
2004
2004
2004
2004
2005
2005
2005
2005
2005
2005
2006
2006
2006
2006
2007
2007
2007
2007
2008
2008
2008
2008
20.02.2004
31.01.2002
31.01.2004
31.01.2005
31.01.2003
31.01.2004
31.01.2005
31.01.2005
28.02.2002
29.02.2004
28.02.2005
28.02.2003
28.02.2004
28.02.2005
28.06.2005
28.06.2005
01.03.2004
01.03.2005
01.03.2006
31.01.2006
01.03.2004
01.03.2005
01.03.2006
31.01.2006
31.01.2006
31.01.2006
01.03.2005
01.03.2006
01.03.2007
28.02.2007
01.03.2007
01.03.2006
01.03.2007
01.03.2008
01.03.2008
01.03.2008
04.03.2007
01.03.2007
01.03.2008
01.03.2009
01.03.2009
01.03.2008
01.03.2009
01.03.2010
01.03.2010
01.03.2011
01.03.2011
01.03.2011
01.03.2011
20.02.2009
31.07.2012
31.07.2012
31.07.2012
31.01.2012
31.01.2012
31.01.2012
31.01.2012
28.08.2012
28.08.2012
28.08.2012
28.02.2012
28.02.2012
28.02.2012
28.06.2012
28.12.2012
31.01.2013
31.01.2013
31.01.2013
31.01.2013
28.02.2013
28.02.2013
28.02.2013
31.01.2013
31.07.2013
31.07.2013
27.02.2014
27.02.2014
27.02.2014
27.02.2014
27.02.2014
28.02.2015
28.02.2015
28.02.2015
28.02.2015
28.02.2015
04.03.2015
28.02.2016
28.02.2016
28.02.2016
28.02.2016
28.02.2017
28.02.2017
28.02.2017
28.02.2017
28.02.2018
28.03.2018
07.04.2018
06.06.2018
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
1:1
i
ii
iii
iv
v
vi
vii
viii
ix
x
xi
xii
xiii
xiv
xv
xvi
xvii
xviii
xix
xx
xxi
xxii
xxiii
xxiv
xxv
xxvi
xxvii
xxviii
xxix
xxx
xxxi
xxxii
xxxiii
xxxiv
xxxv
xxxvi
xxxvii
xxxviii
xxxix
xl
xli
xlii
xliii
xliv
xlv
xlvi
xlvii
xlviii
xlix
388
Strike price
CHF 46.92
USD 21.24
USD 21.24
USD 21.24
CHF 36.49
CHF 36.49
CHF 36.49
USD 21.24
USD 21.70
USD 21.70
USD 21.70
CHF 36.65
CHF 36.65
CHF 36.65
CHF 37.90
CHF 37.90
CHF 27.81
CHF 27.81
CHF 27.81
USD 22.53
CHF 26.39
CHF 26.39
CHF 26.39
CHF 30.50
CHF 30.50
USD 22.53
CHF 44.32
CHF 44.32
CHF 44.32
CHF 48.69
USD 38.13
CHF 47.58
CHF 47.58
CHF 47.58
CHF 52.32
USD 44.81
CHF 47.89
CHF 65.97
CHF 65.97
CHF 65.97
CHF 72.57
CHF 67.00
CHF 67.00
CHF 67.00
CHF 73.67
CHF 32.45
CHF 35.66
CHF 36.46
CHF 28.10
Loans granted to members of the BoD at 31 December 2007/2008
CHF, except where indicated a
Name, function 1
Peter Kurer, Chairman 2
Sergio Marchionne, Senior Independent Director, Vice Chairman
Ernesto Bertarelli, member
Sally Bott, member
Rainer-Marc Frey, member
Bruno Gehrig, member 2
Gabrielle Kaufmann-Kohler, member
Helmut Panke, member
William G. Parrett, member 2
David Sidwell, member
Peter R. Voser, member
Joerg Wolle, member
For the
year ended
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
Secured loans
1,261,000
0
0
0
0
0
0
798,000
0
0
0
0
1,167,659
0
0
0
0
0
Aggregate of all members of the BoD
3,226,659
Other loans
granted
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1 No loans have been granted to related parties of the members of the BoD at conditions not customary in the market. 2 Secured loans granted prior to their election to the BoD.
Loans granted to members of the GEB at 31 December 2007/2008
CHF, except where indicated a
Name, function 1
Markus U. Diethelm, Group General Counsel
Joe Scoby, Group Chief Risk Officer 3
Aggregate of all members of the GEB 4
Aggregate of all members of the GEB
For the
year ended
2008
2007
2008
2007
Secured loans
3,900,000
0
7,740,562
3,487,000
Other loans
granted 2
0
3,145,796
0
3,145,796
Total
1,261,000
0
0
0
0
0
0
798,000
0
0
0
0
1,167,659
0
0
0
0
0
3,226,659
Total
3,900,000
3,145,796
7,740,562
6,632,796
1 No loans have been granted to related parties of the members of the GEB at conditions not customary in the market. 2 Guarantees. 3 Joe Scoby stepped down as Group Chief Risk Officer on
4 November 2008. 4 Including those members of the GEB who stepped down during 2008.
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389
Financial information
UBS AG (Parent Bank)
390
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391
Financial information
UBS AG (Parent Bank)
392
Additional disclosure required
under SEC regulations
A – Introduction
The following pages contain additional disclosures about
UBS Group which are required under SEC regulations.
UBS’s consolidated Financial Statements have been pre-
pared in accordance with International Financial Reporting
Standards (IFRS) as issued by the International Accounting
Standards Board (IASB) and are denominated in Swiss francs
(CHF), the reporting currency of the Group.
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393
Financial information
Additional disclosure required under SEC regulations
B – Selected financial data
The tables below set forth, for the periods and dates indicated, information concerning the noon buying rate for the Swiss
franc, expressed in United States dollars, or USD, per one Swiss franc. The noon buying rate is the rate in New York City for
cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.
On 27 February 2009 the noon buying rate was 0.8568 USD per 1 CHF.
Year ended 31 December
2004
2005
2006
2007
2008
Month
September 2008
October 2008
November 2008
December 2008
January 2009
February 2009
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
0.8059
0.8039
0.8034
0.8381
0.9298
0.8712
0.7606
0.8200
0.8827
0.9369
High
0.8843
0.8721
0.8396
0.9087
1.0142
High
0.9248
0.8921
0.8616
0.9602
0.9359
0.8757
Low
0.7601
0.7544
0.7575
0.7978
0.8171
Low
0.8776
0.8570
0.8172
0.8171
0.8599
0.8465
394
Key figures
CHF million, except where indicated
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
For the year ended
Balance sheet data
Total assets
Equity attributable to UBS shareholders
Average equity to average assets (%)
Market capitalization
Shares
Registered ordinary shares
Treasury shares
BIS capital ratios
Tier 1 (%)
Total BIS (%)
Risk-weighted assets
Invested assets (CHF billion)
Personnel (full-time equivalents)
Switzerland
United Kingdom
Rest of Europe
Middle East / Africa
United States
Rest of Americas
Asia Pacific
Total
Long-term ratings 2
Fitch, London
Moody’s, New York
Standard & Poor’s, New York
2,014,815
2,274,891
2,348,733
2,001,099
1,703,647
32,531
1.5
43,519
36,875
1.8
108,654
51,037
2.0
154,222
45,633
1.9
131,949
35,161
1.9
103,638
2,932,580,549
2,073,547,344
2,105,273,286
2,177,265,044
2,253,716,354
61,903,121
158,105,524
164,475,699
208,519,748
249,326,620
11.0
15.0
302,273
2,174
26,406
7,071
4,817
145
27,362
1,984
9,998
77,783
A+
Aa2
A+
9.1 1
12.2 1
374,421 1
3,189
27,884
8,813
4,776
139
29,921
2,054
9,973
83,560
AA
Aaa
AA
12.2 1
15.0 1
344,015 1
2,989
27,022
8,243
4,338
102
29,076
1,743
7,616
78,140
AA+
Aa2
AA+
13.3 1
14.5 1
312,532 1
2,652
26,029
7,135
3,759
112
25,999
1,137
5,398
69,569
AA+
Aa2
AA+
12.3 1
14.1 1
266,955 1
2,217
25,990
7,180
3,461
107
25,180
1,051
4,438
67,407
AA+
Aa2
AA+
1 The calculation prior to 2008 is based on the Basel I approach. 2 Refer to the “Credit risk” section of this report for information about the nature of these ratings.
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395
Financial information
Additional disclosure required under SEC regulations
Income statement data
CHF million, except where indicated
31.12.08
Interest income
Interest expense
Net interest income
Credit loss (expense) / recovery
Net interest income after credit loss (expense) / recovery
Net fee and commission income
Net trading income
Other income
Total operating income
Total operating expenses
Operating profit from continuing operations before tax
Tax expense
Net profit from continuing operations
Net profit from discontinued operations
Net profit
Net profit attributable to minority interests
Net profit attributable to UBS shareholders
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) 3,4
Cash dividend declared per share (USD) 3,4
Dividend payout ratio (%) 3,4
Rates of return (%)
Return on equity attributable to UBS shareholders 5
Return on average equity
Return on average assets
65,679
(59,687)
5,992
(2,996)
2,996
22,929
(25,820)
692
796
28,555
(27,758)
(6,837)
(20,922)
198
(20,724)
568
(21,292)
753.0
(7.69)
(7.69)
(10.02)
N/A
N/A
N/A
(58.7)
(60.6)
(0.9)
For the year ended
31.12.07
109,112
(103,775)
31.12.06
87,401
(80,880)
31.12.05
59,286
(49,758)
5,337
(238)
5,099
30,634
(8,353)
4,341
31,721
35,463
(3,742)
1,369
(5,111)
403
(4,708)
539
(5,247)
111.0
(2.42)
(2.43)
(1.73)
N/A
N/A
N/A
(10.9)
(10.6)
(0.2)
6,521
156
6,677
25,456
13,743
1,608
47,484
33,365
14,119
2,998
11,121
899
12,020
493
11,527
70.5
5.19
4.99
6.36
2.20
1.83
42.4
25.7
24.0
0.5
9,528
375
9,903
21,184
8,248
1,135
40,470
28,533
11,937
2,270
9,667
4,526
14,193
661
13,532
71.2
5.98
5.74
5.27
1.60
1.26
26.8
36.7
34.4
0.7
31.12.04
39,228
(27,484)
11,744
241
11,985
18,310
5,098
875
36,268
26,840
9,428
2,073
7,355
629
7,984
454
7,530
74.5
3.25
3.10
4.07
1.50
1.27
46.2
23.1
21.3
0.4
1 Operating expenses / operating income before credit loss expense. 2 For EPS calculation, refer to Note 8 in the Financial Statements. 3 Additionally, in July 2006, a par value reduction of CHF 0.30
(USD 0.24) per share was distributed. Dividends are normally declared and paid in the year subsequent to the reporting period. 4 For the business year 2007 a stock dividend was distributed for which
98,698,754 new shares were issued on 19 May 2008 to UBS shareholders with an exchange ratio of 20:1. 5 Net profit attributable to UBS shareholders / average equity attributable to UBS sharehold-
ers less distributions.
396
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
Equity attributable to UBS shareholders
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
For the year ended
2,014,815
2,274,891
2,348,733
2,001,099
1,703,647
64,451
122,897
224,648
271,838
40,216
854,100
340,308
125,628
14,063
102,561
62,431
851,864
101,546
474,774
197,254
32,531
60,907
207,063
376,928
660,182
114,190
428,217
335,864
145,762
31,621
305,887
164,788
443,539
191,853
641,892
222,077
36,875
50,426
351,590
405,834
648,346
230,168
292,975
297,842
203,689
63,088
545,480
204,773
297,063
145,687
555,886
190,143
51,037
33,644
288,435
404,432
499,297
154,759
273,889
279,910
124,328
59,938
478,508
188,631
277,770
117,401
466,907
160,710
45,633
35,419
210,606
357,164
389,487
159,115
248,664
241,803
120,026
51,301
422,587
171,033
267,799
65,756
386,320
117,856
35,161
Ratio of earnings to fixed charges
The following table sets forth UBS’s ratio of earnings to fixed charges on an IFRS basis for the periods indicated. The ratios
are calculated based on earnings from continuing operations. Ratios of earnings to combined fixed charges and preferred
stock dividend requirements are not presented as there were no preferred share dividends in any of the periods indicated.
31.12.08
0.53
31.12.07
0.96
31.12.06
1.17
31.12.05
1.23
31.12.04
1.32
For the year ended
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397
Financial information
Additional disclosure required under SEC regulations
C – Information on the company
Property, plant and equipment
At 31 December 2008, UBS operated about 1,166 business
and banking locations worldwide, of which about 36% were
in Switzerland, 47% in the Americas, 12% in the rest of
Europe, Middle East and Africa and 4% in Asia-Pacific. 36%
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 com-
mercial leases.
These premises are subject to continuous maintenance
and upgrading and are considered suitable and adequate for
current and anticipated operations.
398
D – Information required by industry guide 3
Selected statistical information
The tables below set forth selected statistical information
regarding the Group’s banking operations extracted from
the Financial Statements. Unless otherwise indicated, aver-
age balances for the years ended 31 December 2008, 31 De-
cember 2007 and 31 December 2006 are calculated from
monthly data. The distinction between domestic and foreign
is generally based on the booking location. For loans, this
method is not significantly different from an analysis based
on the domicile of the borrower.
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 2008, 2007 and 2006.
Average
balance
31.12.08
Interest
Average
rate (%)
Average
balance
31.12.07
Interest
Average
rate (%)
Average
balance
31.12.06
Interest
Average
rate (%)
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
7,243
58,287
421
1,559
31,642
669,010
1,208
21,313
15,104
520
522,804
21,494
8,070
383
530,874
21,877
945
11,024
0
404
188,950
147,034
6,840
8,304
Financial investments available-for-sale
Domestic
Foreign taxable
Foreign non-taxable
Foreign total
1,599
3,370
0
3,370
Total interest-earning assets
1,665,082
72
73
73
62,591
3,088
Net interest on swaps
Interest income and average
interest-earning assets
Non-interest-earning assets
Positive replacement values
Fixed assets
Other
Total average assets
5.8
2.7
3.8
3.2
3.4
4.1
4.7
4.1
3.7
3.6
5.6
4.5
2.2
2.2
3.8
11,784
46,049
664
2,344
31,473
977,302
11,866
861,923
5,754
1,693
46,581
696
38,206
199
867,677
38,405
588
9,114
187,073
146,040
3,930
2,934
0
2,934
0
298
6,565
9,359
66
110
110
2,295,830
106,781
2,331
5.6
5.1
5.4
4.8
5.9
4.4
3.5
4.4
3.3
3.5
6.4
1.7
3.7
3.7
4.7
10,800
29,814
587
1,490
27,147
926,575
17,976
707,432
4,438
1,333
38,393
651
31,433
127
711,870
31,560
42
2,325
0
70
181,186
105,362
5,784
6,284
4,126
3,171
0
3,171
2,020,394
28
100
0
100
86,280
1,121
5.4
5.0
4.9
4.1
3.6
4.4
2.9
4.4
3.0
3.2
5.9
0.7
3.2
3.2
4.3
1,665,082
65,679
3.9
2,295,830
109,112
4.8
2,020,394
87,401
4.3
600,073
7,091
82,357
2,354,603
373,229
7,090
82,739
2,758,888
278,733
7,445
68,894
2,375,466
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Financial information
Additional disclosure required under SEC regulations
Average balances and interest rates (continued)
CHF million, except where indicated
Liabilities and equity
Due to banks
Domestic
Foreign
Cash collateral on securities lent and
repurchase agreements
Domestic
Foreign
Trading portfolio liabilities
Domestic
Foreign
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
51,027
88,798
1,503
3,423
31,269
397,453
1,026
15,097
5,525
132,901
1,444
151,324
56,730
68,213
35,575
160,518
401,421
1,735
134,920
5,766
74,531
256
8,906
69
7,229
495
604
1,081
2,180
11,044
63
6,216
148
2,527
Total interest-bearing liabilities
1,638,632
59,687
Non-interest-bearing liabilities
Negative replacement values
Other
Total liabilities
Total equity
Total average liabilities and equity
Net interest income
Net yield on interest-earning assets
605,990
67,066
2,311,688
42,915
2,354,603
1 Due to customers in foreign offices consists mainly of time deposits.
Average
balance
31.12.08
Interest
Average
rate (%)
Average
balance
31.12.07
Interest
Average
rate (%)
Average
balance
31.12.06
Interest
Average
rate (%)
2.9
3.9
3.3
3.8
4.6
6.7
4.8
4.8
0.9
0.9
3.0
1.4
2.8
3.6
4.6
2.6
3.4
3.6
60,858
146,286
2,477
8,008
47,041
752,616
1,902
38,680
5,561
328
214,326
15,484
1,503
173,162
64,568
78,775
41,056
184,399
426,130
2,228
144,546
4,235
70,079
79
7,580
736
502
1,206
2,444
16,388
98
8,643
115
1,549
2,232,970
103,775
382,115
88,191
2,703,276
55,612
2,758,888
4.1
5.5
4.0
5.1
5.9
7.2
5.3
4.4
1.1
0.6
2.9
1.3
3.8
4.4
6.0
2.7
2.2
4.6
46,544
108,885
1,583
5,261
46,224
751,617
1,589
32,432
4,408
283
202,263
14,250
58
4,699
534
392
639
1,565
11,500
115
5,934
82
1,529
80,880
1,864
127,458
70,981
86,631
28,876
186,488
314,788
1,973
110,418
3,957
57,899
1,964,786
278,903
77,304
2,320,993
54,473
2,375,466
3.4
4.8
3.4
4.3
6.4
7.0
3.1
3.7
0.8
0.5
2.2
0.8
3.7
5.8
5.4
2.1
2.6
4.1
5,992
5,337
6,521
0.4
0.2
0.3
The percentage of total average interest-earning assets at-
tributable to foreign activities was 85% for 2008 (89% for
2007 and 88% for 2006). The percentage of total average
interest-bearing liabilities attributable to foreign activities
was 84% for 2008 (86% for 2007 and 85% for 2006). All
assets and liabilities are translated into CHF at uniform
month-end rates. Interest income and expense are translat-
ed at monthly average rates.
Average rates earned and paid on assets and liabilities can
change from period to period based on the changes in interest
rates in general, but are also affected by changes in the cur-
rency mix included in the assets and liabilities. This is espe-
cially true for foreign assets and liabilities. Tax-exempt income
is not recorded on a tax-equivalent basis. For all three years
presented, tax-exempt income is considered to be insignificant
and the impact from such income is therefore negligible.
400
Analysis of changes in interest income and expense
The following tables allocate, by categories of interest-earn-
ing assets and interest-bearing liabilities, the changes in in-
terest income and expense due to changes in volume and
interest rates for the year ended 31 December 2008 com-
pared with the year ended 31 December 2007, and for the
year ended 31 December 2007 compared with the year end-
ed 31 December 2006. 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 the
appropriate section of Industry Guide 3 for a discussion of
the treatment of impaired and non-performing loans.
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 available-for-sale
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
2008 compared with 2007
2007 compared with 2006
Increase / (decrease)
due to changes in
Increase / (decrease)
due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
(254)
624
11
(1,409)
(243)
(785)
9
(494)
(485)
(14,798)
(10,470)
(25,268)
191
(367)
(176)
(14,921)
(1,791)
(16,712)
81
103
184
(14,840)
(1,688)
(16,528)
0
63
66
64
(40)
16
0
16
(28)
(28,871)
(28,899)
0
43
209
0
106
275
(1,119)
(1,055)
46
(53)
0
(53)
(595)
(14,696)
(15,291)
6
(37)
0
(37)
(623)
(43,567)
(44,190)
757
(43,433)
53
812
212
2,080
(220)
6,798
38
6,836
0
204
188
2,441
(1)
(8)
0
(8)
24
42
148
6,108
265
(25)
34
9
0
24
593
634
39
18
0
18
232
12,365
12,597
1,069
6,835
7,904
77
854
360
8,188
45
6,773
72
6,845
0
228
781
3,075
38
10
0
10
1,301
19,200
20,501
1,210
21,711
401
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Financial information
Additional disclosure required under SEC regulations
Analysis of changes in interest income and expense (continued)
2008 compared with 2007
2007 compared with 2006
Increase / (decrease)
due to changes in
Increase / (decrease)
due to changes in
Average
volume
Average
rate
Net
change
Average
volume
Average
rate
Net
change
(403)
(3,162)
(571)
(1,423)
(974)
(4,585)
487
1,795
(631)
(245)
(876)
(18,113)
(5,470)
(23,583)
(2)
(5,863)
(3)
(961)
(86)
(63)
(159)
(308)
(939)
(22)
(578)
41
98
(70)
(715)
(7)
610
(155)
165
34
44
(72)
(6,578)
(10)
(351)
(241)
102
(125)
(264)
(13)
(35)
(1,849)
(2,427)
(8)
880
33
978
(1,328)
(29,518)
(30,846)
(870)
(12,372)
(13,242)
(2,198)
(41,890)
(44,088)
(4,405)
(5,344)
4,120
407
952
285
6,205
(29)
390
32
1,190
253
149
299
701
768
(32)
866
27
(297)
1,391
10,074
11,465
894
2,747
313
6,248
45
1,234
21
2,881
202
110
567
879
4,888
(17)
2,709
33
20
2,168
20,727
22,895
28
43
74
844
(11)
1,691
(51)
(39)
268
178
15
1,843
6
317
777
10,653
11,430
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
402
Deposits
The following table analyzes average deposits and the average rates on each deposit category listed below for the years
ended 31 December 2008, 2007 and 2006. 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 51,228 million CHF 81,243 million and CHF
78,234 million at 31 December 2008, 31 December 2007 and 31 December 2006, respectively.
CHF million, except where indicated
31.12.08
31.12.07
31.12.06
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.
2,341
4,902
7,243
58,287
65,530
56,730
68,213
35,575
160,518
401,421
561,939
0.5
3.8
2.7
3.9
3.7
0.9
0.9
3.0
1.4
2.8
2.4
2,474
9,310
11,784
46,049
57,833
64,568
78,775
41,056
184,399
426,130
610,529
0.6
5.1
4.2
5.5
5.2
1.1
0.6
2.9
1.3
3.8
3.1
2,024
8,776
10,800
29,814
40,614
70,981
86,631
28,876
186,488
314,788
501,276
0.2
4.5
3.7
4.8
4.5
0.8
0.5
2.2
0.8
3.7
2.6
At 31 December 2008, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies,
was as follows:
CHF million
Within 3 months
3 to 6 months
6 to 12 months
1 to 5 years
Over 5 years
Total time deposits
Domestic
38,052
2,216
1,495
648
231
Foreign
186,590
9,387
4,617
1,532
235
42,642
202,361
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403
Financial information
Additional disclosure required under SEC regulations
Short-term borrowings
The following table presents the period-end, average and maximum month-end outstanding amounts for short-term bor-
rowings, along with the average rates and period-end rates at and for the years ended 31 December 2008, 2007 and
2006.
CHF million, except where indicated
31.12.08
31.12.07
31.12.06
31.12.08
31.12.07
31.12.06
Money market paper issued
Due to banks
Repurchase agreements 1
31.12.07
31.12.06
31.12.08
Period-end balance
Average balance
Maximum month-end balance
Average interest rate during the period (%)
Average interest rate at period-end (%)
111,619
136,655
170,503
4.6
2.9
152,256
146,774
167,637
6.0
6.1
119,584
112,391
123,108
5.4
4.0
61,155
74,295
87,233
3.5
2.3
84,826
153,231
140,039
149,311
175,233
114,815
404,512
153,231
591,005
5.1
4.5
4.4
4.1
3.5
1.4
487,455
739,138
848,401
5.0
4.9
754,623
717,542
777,010
4.4
5.0
1 For the purpose of this disclosure, balances are presented on a gross basis.
404
Contractual maturities of investments in debt instruments available-for-sale 1,2
CHF million, except percentages
31 December 2008 3
Swiss national government and agencies
Swiss local governments
US Treasury and agencies
Foreign governments and official institutions
Corporate debt securities
Mortgage-backed securities
Other debt instruments
Total fair value
CHF million, except percentages
31 December 2007 3
Swiss national government and agencies
Swiss local governments
US Treasury and agencies
Foreign governments and official institutions
Corporate debt securities
Mortgage-backed securities
Other debt instruments
Total fair value
CHF million, except percentages
31 December 2006
Swiss national government and agencies
Swiss local governments
US Treasury and agencies
Foreign governments and official institutions
Corporate debt securities
Mortgage-backed securities
Other debt instruments
Total fair value
Within 1 year
1–5 years
5–10 years
Over 10 years
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
0.00
0.00
0.00
1.31
23.35
0.00
9.06
0
0
0
33
3
0
188
224
3.46
0.00
0.00
0.00
3.38
0.00
13.47
2
0
0
0
88
0
3
93
0
0
0
33
38
42
0
113
0.00
0.00
0.00
2.81
3.12
4.00
0.00
1
0
0
34
12
455
37
539
4.00
0.00
0.00
5.22
1.74
5.28
7.42
Within 1 year
1–5 years
5–10 years
Over 10 years
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
0
0
0
50
50
0
14
114
0.00
0.00
0.00
1.87
5.66
0.00
4.20
2.02
0.00
0.00
2.54
4.11
0.00
12.41
2
0
0
2
44
0
216
264
0.00
0.00
0.00
4.48
0.00
4.48
0.00
0
0
0
75
0
3
0
78
1
0
0
0
0
561
0
562
4.00
0.00
0.00
0.00
0.00
5.28
0.00
Within 1 year
1–5 years
5–10 years
Over 10 years
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
2.22
0.00
0.00
1.48
7.00
0.00
0.00
2
0
0
38
26
0
0
66
0
0
0
2
0
0
233
235
0.00
0.00
0.00
1.89
0.00
0.00
9.28
0.00
0.00
0.00
4.47
0.00
4.48
0.00
0
0
0
57
2
10
0
69
1
0
0
0
0
150
0
151
4.00
0.00
0.00
0.00
0.00
5.10
0.00
1 Money market paper has a contractual maturity of less than one year and is not included in the table. 2 Average yields are calculated on an amortized cost basis. 3 Debt instruments available-for-sale
recognized on UBS’s balance sheet of CHF 1,402 million CHF 1,034 million for 2008 and 2007, respectively and disclosed in Note 13 include CHF 433 million and CHF 16 million of instruments without
fixed maturity for 2008 and 2007, respectively. Such instruments are not reflected in the table.
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405
Financial information
Additional disclosure required under SEC regulations
Due from banks and loans (gross)
The Group’s lending portfolio is widely diversified across in-
dustry sectors with no significant concentrations of credit
risk. CHF 152.5 billion (37% of the total) consists of loans to
thousands of private households, predominantly in Switzer-
land, and mostly secured by mortgages, financial collateral
or other assets. Exposure to Banks and Financial institutions
amounted to CHF 174.3 billion (42% of the total). This in-
cludes cash posted as collateral by UBS against negative re-
placement values on derivatives or other positions, which,
from a risk perspective, is not considered lending but is a key
component of the measurement of counterparty risk taken
in connection with the underlying products. Exposure to
banks includes money market deposits with highly rated in-
stitutions. Excluding Banks and Financial institutions, the
largest industry sector exposure is CHF 16.3 billion (4% of
the total) to Real estate and rentals. For further discussion of
the loan portfolio, see the Risk and treasury management
section on Credit risk.
The following table illustrates the diversification of the
loan portfolio among industry sectors at 31 December 2008,
2007, 2006, 2005 and 2004. The industry categories pre-
sented are consistent with the classification of loans for re-
porting to the Swiss Financial Market Supervisory Authority
(FINMA) 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
Total domestic
Foreign
Banks 1
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
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
1,734
1,377
8,113
1,811
4,020
119,285
4,042
12,097
4,818
6,172
3,329
1,237
1,393
5,525
1,824
3,887
121,536
4,734
11,691
5,138
6,170
3,300
561
1,535
5,542
1,957
3,643
117,852
4,972
11,356
4,569
6,758
4,345
1,407
1,816
4,213
2,044
4,134
111,549
5,494
11,792
4,808
8,088
3,119
1,406
1,943
4,332
2,269
5,485
105,160
5,460
11,466
4,908
9,110
591
166,798
166,435
163,090
158,464
152,130
63,708
2,816
448
2,995
100,779
5,026
4,394
33,242
11,094
4,240
2,515
9,816
3,894
1,073
246,040
412,838
60,333
635
624
1,888
96,370
4,678
4,509
42,828
4,172
5,056
2,239
9,294
1,752
1,105
50,124
1,321
522
951
67,676
3,006
3,177
35,031
2,175
4,360
1,815
16,436
1,528
564
32,287
2,716
295
1,637
62,344
3,784
3,431
38,283
1,686
2,707
1,257
5,593
1,419
272
34,269
366
122
745
45,095
2,758
1,695
30,237
1,228
940
1,102
8,002
762
318
235,483
401,918
188,686
351,776
157,711
316,175
127,639
279,769
1 Includes Due from banks and Loans from Industrial Holdings of CHF 27 million at 31 December 2007, CHF 93 million at 31 December 2006, CHF 728 million at 31 December 2005, CHF 909 million
at 31 December 2004. 2 Includes chemicals, food and beverages. 3 Includes transportation, communication, health and social work, education and other social and personal service activities.
4 Includes mining and electricity, gas and water supply. 5 Includes food and beverages. 6 Includes hotels and restaurants.
The table above also includes loans designated at fair value.
406
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 2008, 2007, 2006, 2005 and 2004. Mortgages are included in the industry categories mentioned on the
previous page.
CHF million
Mortgages
Domestic
Foreign
Total gross mortgages
Mortgages
Residential
Commercial
Total gross mortgages
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
134,700
8,381
143,081
121,811
21,270
143,081
135,341
8,152
143,493
122,435
21,058
143,493
134,468
10,069
144,537
124,548
19,989
144,537
130,880
15,619
146,499
127,990
18,509
146,499
124,496
12,185
136,681
117,731
18,950
136,681
Due from banks and loan maturities (gross)
CHF million
Domestic
Banks
Mortgages
Other loans
Total domestic
Foreign
Banks
Mortgages
Other loans
Total foreign
Total gross
Within 1 year
1 to 5 years
Over 5 years
Total
1,733
52,324
23,538
77,595
60,703
5,533
116,217
182,453
260,048
1
60,308
5,224
65,533
1,671
2,249
13,112
17,032
82,565
22,068
1,530
23,598
365
599
40,511
41,475
65,073
1,734
134,700
30,292
166,726
62,739
8,381
169,840 1
240,960
407,686
1 Includes student loan auction rate securities (ARS) of CHF 8.4 billion and other debt instruments of CHF 17.1 billion reclassified from the category “held for trading” to “loans and receivables” and
ARS acquired from clients of CHF 4.5 billion.
At 31 December 2008, the total amount of Due from banks and Loans due after one year granted at fixed and floating rates
are as follows:
CHF million
Fixed-rate loans
Adjustable or floating-rate loans
Total
1 to 5 years
Over 5 years
79,225
3,340
82,565
33,479
31,594
65,073
Total
112,704
34,934
147,638
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407
Financial information
Additional disclosure required under SEC regulations
Impaired and non-performing 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.
CHF million
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
Gross interest income that would have been recorded on non-performing loans:
Domestic
Foreign
Interest income included in Net profit for non-performing loans:
Domestic
Foreign
16
3
32
4
39
4
40
2
50
10
56
8
81
8
72
9
107
17
106
8
The table below provides an analysis of the Group’s non-performing loans. For further information see the Risk and treasury
management section on Credit risk.
CHF million
Non-performing loans:
Domestic
Foreign
Total non-performing 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.
For more information refer to the “Credit risk” section of
this report. Instead, specific loan allowances are established
as necessary. Unrecognized interest related to restructured
loans was not material to the results of operations in 2008,
2007, 2006, 2005 or 2004.
In addition to the non-performing loans shown above,
the Group has CHF 4,442 million, CHF 911 million, CHF 710
million, CHF 1,071 million and CHF 1,144 million in “other
impaired loans” for the years ended 31 December 2008,
2007, 2006, 2005 and 2004, respectively.
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
1,431
3,272
4,703
1,349
132
1,481
1,744
174
1,918
2,106
257
2,363
2,772
783
3,555
Other impaired loans are loans where the Group’s credit
officers have expressed doubts as to the ability of the bor-
rowers to repay the loans. For the years ended 31 December
2008, 2007, 2006, 2005 and 2004, they are loans not con-
sidered “non-performing” in accordance with Swiss regula-
tory guidelines. As of 31 December 2008, 31 December
2007, 31 December 2006, 31 December 2005 and 31 De-
cember 2004, specific allowances of CHF 941 million, CHF
124 million, CHF 106 million, CHF 200 million, CHF 241 mil-
lion, respectively, had been established against these loans.
408
Cross-border outstandings
Cross-border outstandings consist of general banking prod-
ucts such as loans and deposits with third parties, credit
equivalents of over-the-counter (OTC) derivatives and securi-
ties financing, and the market value of the inventory of debt
securities. Outstandings are monitored and reported on an
ongoing basis by the credit risk control organization with a
dedicated country risk information system. With the excep-
tion of the 33 most developed economies, these exposures
are rigorously limited. The following analysis excludes Due
from banks and Loans from Industrial Holdings.
Claims that are secured by third-party guarantees are
recorded against the guarantor’s country of domicile. Out-
standings that are secured by collateral are recorded against
the country where the asset could be liquidated. This follows
the “Guidelines for the Management of Country Risk”,
which are applicable to all banks that are supervised by the
Swiss Financial Market Supervisory Authority (FINMA).
The following tables list those countries for which cross-
border outstandings exceeded 0.75% of total assets at
31 December 2008, 2007 and 2006. At 31 December 2008,
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 abil-
ity to service its obligations.
For more information on country exposure, see the Risk
and treasury management section on Credit risk.
CHF million
United States
Japan
Germany
France
United Kingdom
Luxembourg
CHF million
United States
Japan
Germany
United Kingdom
Cayman Islands
France
CHF million
United States
Japan
United Kingdom
Germany
Banks
Private Sector
Public Sector
Total % of total assets
31.12.08
13,869
2,093
19,098
11,469
9,599
2,883
Banks
13,110
1,761
21,384
6,624
173
10,620
Banks
7,692
2,283
11,149
15,240
71,584
13,159
10,418
7,048
8,608
17,586
14,234
38,922
6,010
6,807
2,625
0
31.12.07
99,687
54,174
35,526
25,324
20,832
20,469
4.9
2.7
1.8
1.3
1.0
1.0
Private Sector
Public Sector
Total % of total assets
192,049
12,883
12,354
14,647
27,715
7,075
16,545
36,717
2,249
8,552
74
4,605
31.12.06
221,704
51,361
35,988
29,823
27,963
22,300
9.8
2.3
1.6
1.3
1.2
1.0
Private Sector
Public Sector
Total % of total assets
208,200
8,263
16,098
8,080
22,574
30,158
559
1,574
238,466
40,704
27,806
24,894
10.2
1.7
1.2
1.1
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Financial information
Additional disclosure required under SEC regulations
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.
UBS writes off loans against allowances only on 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
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
Recoveries
Domestic
Foreign
Total recoveries
Net write-offs
Increase / (decrease) in credit loss allowance and provision
Collective loan loss provisions
Other adjustments 6
Balance at end of year
Net foreign exchange
Other adjustments
Total adjustments
31.12.08
1,164
31.12.07
1,332
31.12.06
1,776
31.12.05
2,802
31.12.04
3,775
0
(6)
(37)
(3)
(31)
(112)
0
(10)
(4)
(7)
0
(210)
(13)
(1)
0
0
(623)
(6)
0
(5)
(2)
0
0
0
(7)
(1)
(658)
(868)
43
1
44
(824)
3,007
(11)
(266)
3,070
(43)
(223) 7
(266)
0
(9)
(8)
(7)
(45)
(68)
(1)
(27)
(62)
(20)
(21)
0
(14)
(11)
(16)
(40)
(89)
0
(44)
(20)
(47)
(2)
(268)
(283)
(1)
0
0
0
(15)
(21)
0
(14)
(2)
0
0
0
0
0
(53)
(321)
52
3
55
(266)
242
(4)
(140)
1,164
(9)
(131)
(140)
(3)
0
0
0
0
(11)
(1)
(7)
(58)
0
0
0
0
0
(80)
(363)
51
11
62
(301)
(108)
(48)
13
1,332
10
3
13
0
(16)
(14)
(26)
(39)
(131)
0
(56)
(25)
(35)
(4)
(346)
(164)
0
0
0
(50)
(8)
(23)
(21)
(22)
(3)
(9)
0
0
(5)
(305)
(651)
53
10
63
(588)
(298)
(76)
(64)
1,776
50
(114)
(64)
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
(21)
(128)
(856)
54
5
59
(797)
(216)
(25)
65
2,802
2
63
65
1 Includes chemicals, food and beverages. 2 Includes transportation, communication, health and social work, education and other social and personal service activities. 3 Includes mining and electric-
ity, gas and water supply. 4 Includes food and beverages. 5 Includes hotels and restaurants. 6 See the table below for details. 7 An allowance was utilized as a result of foreclosure of certain loans
in return for underlying collateral received.
410
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 2008, 2007, 2006, 2005 and 2004. For a description of procedures with respect
to allowances and provisions for credit losses, see the Risk and treasury management section on Credit risk.
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
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
16
39
18
8
71
121
1
50
262
78
92
756
6
960
8
2
542
25
4
233
19
208
80
19
185
0
2,291
23
3,070
10
43
52
10
113
190
1
57
247
112
76
911
18
1
1
3
112
20
0
15
20
8
4
4
1
12
219
34
1,164
10
72
61
27
155
187
3
99
311
113
107
10
91
75
49
174
262
8
168
330
196
61
10
112
82
98
224
333
9
250
363
222
188
1,145
1,424
1,891
20
4
2
8
9
37
0
26
21
4
4
7
1
6
35
5
2
16
8
57
1
30
72
3
1
27
0
8
149
38
1,332
265
86
1,775
246
4
1
15
140
112
14
48
66
5
95
32
1
(75)
704
207
2,802
1 Includes chemicals, food and beverages. 2 Includes transportation, communication, health and social work, education and other social and personal service activities. 3 Includes mining, electricity,
gas and water supply. 4 Counterparty allowances and provisions only. Country provisions with banking counterparties amounting to CHF 0 million, CHF 0 million, CHF 0 million, CHF 37 million, and
CHF 17 million are disclosed under Collective loan loss provisions for 2008, 2007, 2006, 2005 and 2004, respectively. 5 Includes food and beverages. 6 Includes hotels and restaurants. 7 The 2008,
2007, 2006, 2005 and 2004 amounts include CHF 0, CHF 0 million, CHF 0 million, CHF 48 million and CHF 161 million, respectively, of country provisions. 8 The 2008, 2007, 2006, 2005 and 2004
amounts include CHF 31 million, CHF 63 million, CHF 76 million, CHF 109 million, CHF 214 million, respectively, of provisions for unused commitments and contingent liabilities.
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411
Financial information
Additional disclosure required under SEC regulations
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 losses 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 1
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
31.12.08
31.12.07
31.12.06
31.12.05
31.12.04
0.4
0.3
2.0
0.4
1.0
28.9
1.0
2.9
1.2
1.5
0.8
40.4
15.4
0.7
0.1
0.7
24.4
1.2
1.1
8.1
2.7
1.0
0.6
2.4
0.9
0.3
0.3
0.3
1.4
0.5
1.0
30.2
1.2
2.9
1.3
1.5
0.8
41.4
15.0
0.2
0.2
0.5
24.0
1.2
1.1
10.7
1.0
1.3
0.6
2.3
0.4
0.1
0.2
0.4
1.6
0.6
1.0
33.5
1.4
3.2
1.3
1.9
1.3
46.4
14.2
0.4
0.1
0.3
19.2
0.9
0.9
10.0
0.6
1.2
0.5
4.7
0.4
0.2
0.4
0.6
1.3
0.6
1.3
35.3
1.7
3.7
1.5
2.6
1.1
50.1
10.2
0.9
0.1
0.5
19.7
1.2
1.1
12.1
0.5
0.9
0.4
1.8
0.4
0.1
0.5
0.7
1.5
0.8
2.0
37.6
2.0
4.1
1.7
3.3
0.2
54.4
12.3
0.1
0.0
0.3
16.1
1.0
0.6
10.8
0.4
0.3
0.4
2.9
0.3
0.1
59.6
100.0
58.6
100.0
53.6
100.0
49.9
100.0
45.6
100.0
1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 0 for 2008, CHF 27 million for 2007, CHF 93 million for 2006, CHF 728 million for 2005 and CHF 909 million for
2004. 2 Includes chemicals, food and beverages. 3 Includes transportation, communication, health and social work, education and other social and personal service activities. 4 Includes mining and
electricity, gas and water supply. 5 Includes food and beverages. 6 Includes hotels and restaurants.
412
Loss history statistics
The following is a summary of the Group’s loan loss history (relating to Due from banks and Loans). The table below does
not include loans designated at fair value.
CHF million, except where indicated
Gross loans 1
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
Allowance and provisions for credit losses as a multiple of net
write-offs
31.12.08
407,685
9,145
4,703
3,070
824
(2,996)
31.12.07
397,802
2,392
1,481
1,164
266
(238)
31.12.06
349,524
2,628
1,918
1,332
301
156
2.2
1.2
0.8
33.6
65.3
31.8
41.8
0.2
0.2
26.8
3.73
0.6
0.4
0.3
48.7
78.6
41.7
58.9
0.1
0.0
22.9
4.38
0.8
0.5
0.4
50.7
69.4
46.3
58.0
0.1
0.1
22.6
4.43
31.12.05
315,210
3,434
2,363
1,776
588
375
1.1
0.7
0.6
51.7
75.2
46.4
59.0
0.2
0.1
33.1
3.02
31.12.04
279,769
4,699
3,555
2,802
797
241
1.7
1.3
1.0
59.6
78.8
51.6
61.4
0.3
0.2
28.4
3.52
1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 0 for 2008, CHF 27 million for 2007, CHF 93 million for 2006, CHF 728 million for 2005 and CHF 909 million for
2004. 2 Includes Collective loan loss provisions. 3 Allowances relating to impaired loans only. 4 Allowances relating to non-performing loans only.
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Cautionary Statement Regarding Forward-Looking Statements | This report contains statements that constitute “forward-looking statements”, including but not
limited to statements relating to the anticipated effect of transactions described herein, risks arising from the current market crisis and other risks specific to UBS’s business,
strategic initiatives, future business development and economic performance. While these forward-looking statements represent UBS’s judgments and expectations concerning
the development of its business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s
expectations. These factors include, but are not limited to: (1) the extent and nature of future developments in the market segments that have been or may be affected by
the current market crisis and their effect on UBS’s assets and exposures, including UBS’s remaining net and gross exposures related to the United States mortgage market;
(2) developments affecting the availability of capital and funding to UBS and other financial institutions, including any changes in UBS’s credit spreads and ratings; (3) other
market and macroeconomic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates;
(4) changes in internal risk control and limitations in the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of finan-
cial models generally; (5) the possible consequences of efforts to enforce the US Internal Revenue Service’s “John Doe” summons and of pending or future inquiries concerning
UBS’s cross-border banking businesses by tax or regulatory authorities in other jurisdictions; (6) the degree to which UBS is successful in implementing its remediation plans
and strategic and organizational changes, including the recently announced cost and headcount reductions, and whether those plans and changes will have the effects an-
ticipated; (7) changes in the financial position or creditworthiness of UBS’s customers, obligors and counterparties, and developments in the markets in which they operate,
including possible failures resulting from the current market crisis and adverse economic environment; (8) management changes and changes to the internal or overall structure
of UBS’s business divisions; (9) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures; (10) legislative, governmental and regulatory
developments, including the effect of more stringent capital requirements and of regulatory constraints on UBS’s activities; (11) changes in accounting standards or policies,
and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other assets or other matters; (12) changes in and the effect of com-
petitive pressures, including the possible loss of key employees as a result of compensation issues or for other reasons; (13) technological developments; and (14) the impact
of all such future developments on positions held by UBS, on its short-term and longer-term earnings, on the cost and availability of funding and on UBS’s capital ratios. In
addition, these results could depend on other factors that we have previously indicated could adversely affect our business and financial performance which are contained in
our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth in documents furnished by UBS and filings
made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2008. UBS is not under any obligation to (and expressly disclaims
any obligation to) update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.
Rounding | Numbers presented throughout this report may not add up precisely to the totals provided in the tables. Percentages and percent changes are calculated based on
rounded figures displayed in the tables and text and may not precisely reflect the percentages and percent changes that would be derived based on figures that are not rounded.
Imprint | Publisher: UBS AG, P.O. Box, CH-8098 Zurich, Switzerland; CH-4002 Basel, P.O. Box, Switzerland; www.ubs.com | Language: English / German | SAP-No. 80531E-0901
© UBS 2009. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.