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AMNA Ubs

Filed: 10 Mar 09, 8:00pm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
   
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to                .
OR
   
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-15060
UBS AG
(Exact Name of Registrant as Specified in Its Charter)
Switzerland
(Jurisdiction of Incorporation or Organization)
Bahnhofstrasse 45
CH-8001 Zurich, Switzerland
and
Aeschenvorstadt 1
CH-4051 Basel, Switzerland

(Address of Principal Executive Offices)
Niall O’Toole
UBS AG
1285 Avenue of the Americas
New York, NY 10019
Telephone: (212) 713-3000
Fax: (212) 713-6211
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 


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Securities registered or to be registered pursuant to Section 12(b) of the Act:
Please see page 3.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Please see page 4.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Please see page 4.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of 31 December 2008:
Ordinary shares, par value CHF 0.10 per share: 2,932,580,549* ordinary shares (including 61,903,121 treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
   
Yesþ Noo
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
   
Yeso Noþ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
   
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check One):
     
Large accelerated filerþ Accelerated filero Non-accelerated filero
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
     
U.S. GAAPo International Financial Reporting Standards
as issued by the International Accounting
Standards Boardþ
 Othero
 
* As of December 31, 2008, UBS had two outstanding mandatory convertible notes (“MCNs”), one in the face amount of CHF 13 billion and the other CHF 6 billion. Upon their conversion or settlement, these MCNs are expected to lead to the issuance of 270,438,942 and a maximum of 329,447,681 new shares out of conditional capital, respectively.

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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
   
Item 17o Item 18o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
   
Yeso
 Noþ
 
 

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Securities registered or to be registered pursuant to Section 12(b) of the Act:
   
  Name of each exchange on
Title of each class which registered
Ordinary Shares (par value of CHF 0.10 each) New York Stock Exchange
   
$300,000,000 Floating Rate Noncumulative Trust Preferred Securities New York Stock Exchange
   
$300,000,000 Floating Rate Noncumulative Company Preferred Securities New York Stock Exchange*
   
$1,000,000,000 6.243% Noncumulative Trust Preferred Securities New York Stock Exchange
   
$1,000,000,000 6.243% Noncumulative Company Preferred Securities New York Stock Exchange*
   
Subordinated Guarantee of UBS AG with respect to each of the
Noncumulative Company Preferred Securities above
 New York Stock Exchange*
   
$9,000,000 PPNs due April 2009 NYSE Alternext US
   
$6,900,000 PPNs due May 2009 NYSE Alternext US
   
$5,100,000 PPNs due September 2009 NYSE Alternext US
   
$24,223,000 PPNs due October 2009 NYSE Alternext US
   
$30,000,000 PPNs due April 2010 NYSE Alternext US
   
$31,000,000 PPNs due May 2010 NYSE Alternext US
   
$23,000,000 PPNs due June 2010 NYSE Alternext US
   
$10,000,000 PPNs due July 2010 NYSE Alternext US
   
$7,750,000 PPNs due August 2010 NYSE Alternext US
   
$12,660,000 PPNs due September 2010 NYSE Alternext US
   
$8,000,000 PPNs due November 2010 NYSE Alternext US
   
$17,842,000 PPNs due October 2011 NYSE Alternext US
   
$100,000,000 E-TRACS UBS Bloomberg CMCI Food ETN due April 2038 NYSE Arca
   
$50,000,000 E-TRACS UBS Bloomberg CMCI Agriculture ETN due April 2038 NYSE Arca
   
$50,000,000 E-TRACS UBS Bloomberg CMCI Energy ETN due April 2038 NYSE Arca
   
$100,000,000 E-TRACS UBS Bloomberg CMCI ETN due April 2038 NYSE Arca
   
$100,000,000 E-TRACS UBS Bloomberg Gold ETN due April 2038 NYSE Arca
   
$50,000,000 E-TRACS UBS Bloomberg CMCI Industrial Metals due April 2038 NYSE Arca
   
$50,000,000 E-TRACS UBS Bloomberg CMCI Livestock ETN due April 2038 NYSE Arca
   
$50,000,000 E-TRACS UBS Bloomberg CMCI Silver ETN due April 2038 NYSE Arca
   
$50,000,000 E-TRACS UBS Long Platinum ETN due May 2018 NYSE Arca
   
$50,000,000 E-TRACS UBS Short Platinum ETN due May 2018 NYSE Arca
 
* Not for trading, but solely in connection with the registration of the corresponding Trust Preferred Securities. 

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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Auction Rate Securities Rights Series A-1, A-2, B-1, B-2, C-1, C-2 and G (non-transferable)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

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CONTENTS
     
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 EX-1.1: ARTICLES OF ASSOCIATION
 EX-1.2: ORGANIZATION REGULATIONS
 EX-7: STATEMENT REGARDING RATIO OF EARNINGS TO FIXED CHARGES
 EX-12: CERTIFICATIONS
 EX-13: CERTIFICATIONS
 EX-15: CONSENT OF ERNST & YOUNG LTD

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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 financial models generally; (5) the possible consequences of governmental investigations of certain of UBS’s past business activities, including the possibility that tax or regulatory authorities in various jurisdictions will focus on the cross-border wealth management services provided by UBS and other financial institutions; (6) the degree to which UBS is successful in implementing its remediation plans and strategic and organizational changes, and whether those plans and changes will have the effects anticipated; (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 new and more stringent capital requirements and of direct or indirect regulatory constraints on UBS’s business 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 competitive 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 elsewhere in this report and in documents furnished by UBS and other filings made by UBS with the SEC. 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.
The effect of future changes in accounting standards
     Included in the Notes to the Financial Statements is a description of the expected effect of IFRS accounting standards that have been issued but have not yet been adopted.
     Although we believe that description includes all significant matters that have been approved, the International Accounting Standards Board has a large number of projects in process that could result in significant new accounting standards or significant changes to existing standards.
     This increased level of activity includes normal ongoing development and efforts to improve the existing body of accounting standards, and also is in response to a number of perceived deficiencies in accounting standards exemplified by reported abuses by various companies.

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     We believe it is likely that several new accounting standards will be issued in the near future, and that those new standards could have a significant effect on our reported results of operations and financial position, but we cannot predict the precise nature or amounts of any such changes.

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PART I
Item 1. Identity of Directors, Senior Management and Advisors.
     Not required because this Form 20-F is filed as an annual report.
Item 2. Offer Statistics and Expected Timetable.
     Not required because this Form 20-F is filed as an annual report.
Item 3. Key Information.
A—Selected Financial Data.
     Please seeSelected Financial Dataon pages 394 to 397 andStatement of Changes in Equityon pages 258 to 260 of the Financial information report.
(a) Ratio of Earnings to Fixed Charges
     Please see page 397 of the Financial information report and Exhibit 7 to this Form 20-F.
B—Capitalization and Indebtedness.
     Not required because this Form 20-F is filed as an annual report.
C—Reasons for the Offer and Use of Proceeds.
     Not required because this Form 20-F is filed as an annual report.
D—Risk Factors.
     Please see pages 23 to 27 of the Strategy, performance and responsibility report.
Item 4. Information on the Company.
A—History and Development of the Company.
   
1-3 Please seeCorporate Informationon page 6 of the Annual Report 2008.
   
4-6 Please seeThe Making of UBSon page 18 andKey factors affecting UBS’s financial positions and results of operations in 2008on pages 29 to 30 of the Strategy, performance and responsibility report.
   
7 None.
B—Business Overview.
   
1, 2, 5, 7 Please refer to the UBS business divisions and Corporate Center report on pages 74 to 76 with respect to Global Wealth Management & Business Banking, pages 77 to 79 with respect to Wealth Management International & Switzerland, pages 83 to 85 with respect to Wealth Management US, pages 89 to 90 with respect to Business Banking Switzerland, pages 94 to 98 with respect to Global Asset Management, pages 102 to 104 with respect to the Investment Bank, and

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  pages 110 to 112 with respect to the Corporate Center. For a breakdown of revenues by category of activity and geographic market for each of the last three financial years, please refer to Notes 2a and 2b to the Financial information reportSegment Reporting by Business Divisionon pages 281 to 287 andSegment Reporting by Geographic Locationon page 288.
   
3 Please refer toSeasonal Characteristicson page 30 of the Strategy, performance and responsibility report.
   
4 Not applicable.
   
6 Please see Item 10.C of this Form 20-F.
   
8 Please seeRegulation and Supervisionon pages 218 to 220 of the Corporate governance and compensation report.
C—Organizational Structure.
     Please see Note 34 to the Financial StatementsSignificant Subsidiaries and Associateson pages 347 to 350 of the Financial information report.
D—Property, Plant and Equipment.
     Please seeProperty, Plant and Equipmenton page 398 of the Financial information report.
Information Required by Industry Guide 3
     Please seeInformation Required by Industry Guide 3on pages 399 to 413 of the Financial information report. See alsoSelected Financial Dataon pages 395 and 396 of the Financial information report for the return on equity attributable to UBS shareholders, return on average equity, return on average assets, dividend payout ratio and ratio of average equity to average assets.
Item 4.A. Unresolved Staff Comments.
     None.
Item 5. Operating and Financial Review and Prospects.
A—Operating Results.
     Please seeFinancial Performanceon pages 28 to 53 of the Strategy, performance and responsibility report. For a discussion of operating results by business division, please refer to the UBS business divisions and Corporate Center report, pages 80 to 82 with respect to Wealth Management International & Switzerland, pages 86 to 88 with respect to Wealth Management US, pages 91 to 93 with respect to Business Banking Switzerland, pages 99 to 101 with respect to Global Asset Management, pages 105 to 109 with respect to the Investment Bank and pages 113 to 115 with respect to the Corporate Center.
     For information regarding the impact of foreign currency fluctuations, seeCorporate currency managementon pages 160 to 161 of the Risk and treasury management report.
     Please also seeExposure to monoline insurers,Exposure to auction rate securitiesandExposure to leverage finance dealson pages 125 to 127 of the Risk and treasury management report.

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B—Liquidity and Capital Resources.
     We believe that our working capital is sufficient for the company’s present requirements. UBS liquidity and capital management is undertaken at UBS as an integrated asset and liability management function. For detailed discussion, please seeLiquidity and funding managementon pages 151 to 157 andCapital managementon pages 162 to 167 of the Risk and treasury management report.
     For a discussion of UBS’s borrowings and cash flows, please seeBalance sheeton pages 44 to 46 andCash flowson pages 52 to 53 of the Strategy, performance and responsibility report.
     Please see alsoInterest Rate and Currency Managementon pages 159 to 161 andShares and capital instrumentson pages 168 to 171 of the Risk and treasury management report and Note 19 to the Financial StatementsFinancial Liabilities Designated at Fair Value and Debt Issuedon pages 303 to 304 of the Financial information report.
     For a discussion of UBS’s long-term credit ratings, please seeCredit Ratingson page 158 of the Risk and treasury management report.
C—Research and Development, Patents and Licenses, etc.
     Not applicable.
D—Trend Information.
     Please seeCurrent Market Climate and Industry Driverson pages 20 to 22 of the Strategy, performance and responsibility report.
E—Off-balance Sheet Arrangements.
     Please seeOff-balance sheet arrangementson pages 47 to 51 of the Strategy, performance and responsibility report and Notes 24 and 25,Pledgeable off-balance sheet securitiesandOperating lease commitments,respectively, on pages 319 to 320 of the Financial information report.
F—Tabular Disclosure of Contractual Obligations.
     Please seeContractual obligationson page 47 of the Strategy, performance and responsibility report.
Item 6. Directors, Senior Management and Employees.
A—Directors and Senior Management.
   
1, 2, 3 Please see pages 199 to 202 and pages 206 to 209 of the Corporate governance and compensation report.
   
4 and 5 None.
B—Compensation.
   
1 Please see pages 225 to 234 ofCompensation, shareholdings and loansin the Corporate governance and compensation report and also Note 31 to the Financial StatementsEquity Participation and Other Compensation Planson pages 339 to

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  343 and Note 32 to the Financial StatementsRelated Partieson pages 344 to 346 of the Financial information report.
   
2 Please see Note 30 to the Financial StatementsPension and Other Post-Employment Benefits Planson pages 333 to 338 of the Financial information report.
C—Board Practices.
   
1 Please see pages 199 to 202 and pages 206 to 209 in the Corporate governance and compensation report.
   
2 Please see pages 226 to 228 ofCompensation, shareholdings and loansin the Corporate governance and compensation report and Note 32 to the Financial StatementsRelated Partieson pages 344 to 346 of the Financial Information report.
   
3 Please seeAudit committeeon page 203 andHuman resources and compensation committeeon pages 203 to 204 of the Corporate governance and compensation report.
D—Employees.
     Please seeUBS Employeeson pages 54 to 59 of the Strategy, performance and responsibility report.
E—Share Ownership.
     Please seeShares, options and loans for the Board of Directors and Group Executive Boardon pages 230 to 233 in the Corporate governance and compensation report, Note 31 of the Financial StatementsEquity Participation and Other Compensation Planson pages 339 to 343 of the Financial information report and “Equity holdings” in Note 32 to the Financial StatementsRelated Partieson pages 344 to 346 of the Financial information report.
Item 7. Major Shareholders and Related Party Transactions.
A—Major Shareholders.
     Please seeGroup structure and shareholderson pages 195 to 196 of the Corporate governance and compensation report. At December 31, 2008, the portion of UBS ordinary shares held in the United States was 275,845,594 by 1,039 record holders.
B—Related Party Transactions.
     Please seeLoanson page 236 ofCompensation, shareholdings and loansin the Corporate governance and compensation report and Note 32 to the Financial StatementsRelated Partieson pages 344 to 346 of the Financial information report.
C—Interests of Experts and Counsel.
     Not applicable because this Form 20-F is filed as an annual report.

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Item 8. Financial Information.
A—Consolidated Statements and Other Financial Information.
     Please see Item 18 of this Form 20-F. Please refer toDistributions to shareholderson pages 170 to 171 of the Risk and treasury management report for a description of UBS’s dividend policy.
B—Significant Changes.
     UBS is not aware of any significant change that has occurred since the date of the annual financial statements included in this Form 20-F. Please seeKey factors affecting UBS’s financial positions and results of operations in 2008on pages 29 to 30 of the Strategy, performance and responsibility report and Note 33 to the Financial StatementsPost-Balance Sheet Eventson page 347 of the Financial information report.
Item 9. The Offer and Listing.
A—Offer and Listing Details.
   
1, 2, 3, 5, 6, 7 Not required because this Form 20-F is filed as an annual report.
   
4 Please seeStock exchange priceson page 175 of the Risk and treasury management report.
B—Plan of Distribution.
     Not required because this Form 20-F is filed as an annual report.
C—Markets.
     UBS’s shares are listed on the SIX Swiss Exchange (but traded on SWX Europe), the New York Stock Exchange and the Tokyo Stock Exchange. The symbols are shown on page 172 of the Risk and treasury management report.
(a) Trading on SWX Europe
     Since July 2001, Swiss blue chip stocks have not been traded on the SIX Swiss Exchange (formerly SWX Swiss Exchange). All trading in the shares of members of the Swiss Market Index now takes place on SWX Europe, although these stocks remain listed on the SIX Swiss Exchange.
     SWX Europe is wholly owned by the SIX Group. It is a cross-border platform providing a pan-European blue-chip market. It addresses the increasing requirement for equity investment to be conducted on a sectoral basis across Europe rather than being limited to national markets.
     SWX Europe is a Recognized Investment Exchange supervised by the Financial Services Authority in the United Kingdom. It is delivered on the modern, scalable SIX trading platform.
     Trading is possible on all target days, as specified by the European Central Bank. The opening hours are 06:00 to 22:00 CET and the trading hours are 09:00 to 17:30 CET. During the after-hours trading phase from 17:30 to 22:00 CET and in the pre-trading phase from 06:00 to 09:00 CET, orders can be entered or deleted. From 09:00 CET, once the opening price is set, trading begins. Orders are executed automatically according to established rules that match bid and ask prices. Regardless of their size or origin, incoming orders are executed on a price/time priority, i.e., in the order of price (first priority) and

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time received (second priority). Depending on the type of transaction, the order and trade details are also transmitted to data vendors (Reuters, Bloomberg, Telekurs, etc.).
     In most cases, each trade triggers an automatic settlement instruction which is routed through one of three central securities depositories (CSD); SIS SegaInterSettle AG, CrestCo or Euroclear. Members can choose to settle from one or more accounts within these CSD’s and when counterparties have selected different CSD’s, settlement will be cross-border. Additionally, SWX Europe offers a choice of Central Counterparties (CCP) for cross-border trading.
     All trades executed through the order book settle on a uniform “T+3” basis, meaning that delivery and payment of exchange transactions occur three days after the trade date. The buyer is able to ask SWX Europe to enforce settlement if the seller has not delivered within three days of the intended settlement date.
     Any transaction executed under the rules of SWX Europe must be reported to SWX Europe. Order book executions are automatically reported by the trading system. There are separate provisions for the delayed reporting of certain qualifying trades. Individual elements of portfolio trades must be reported within one hour while block trades and enlarged risk trades must be reported when the business is substantially (80%) complete, or by the end of order book trading that day, unless the trade is agreed one hour or less before the market close, when the trade must be reported by the end of order book trading on the following market day. Block trades and enlarged risk trades are subject to minimum trade size criteria. During normal trading hours, all other transactions must be reported within three minutes. The enlarged risk trades provisions enable a member to protect a client’s interest while the member works a large trade on behalf of the client. The block trade provisions allow a member a publication delay when the member has executed a large transaction for a client; the delay gives the member time in which to offset the risk of the large trade.
     In the event of extraordinary situations such as large price fluctuations and other situations likely to hamper fair and orderly trading, SWX Europe may take whatever measures it deems necessary to maintain fair and orderly markets. A listed security may be suspended, the opening of trading in that security may be delayed or continuous trading may be interrupted.
(b) Trading on the New York Stock Exchange
     UBS listed its shares on the New York Stock Exchange (the “NYSE”) on May 16, 2000.
     As of 31 December 2008, the securities of over 3,500 corporations were listed on the NYSE, of which approximately 412 were non-U.S. issuers with a combined market valuation of approximately USD 15 trillion.
     The NYSE is open Monday through Friday, 9:30 A.M. to 4:00 P.M., EST.
     The NYSE is an agency auction market. Trading at the NYSE takes place by open bids and offers by Exchange members, acting as agents for institutions or individual investors. Buy and sell orders meet directly on the trading floor, and prices are determined by the interplay of supply and demand. In contrast, in the U.S. over-the-counter market, the price is determined by a dealer who buys and sells out of inventory.
     At the NYSE, each listed stock is assigned to a single post where the specialist manages the auction process. NYSE members bring all orders for NYSE-listed stocks to the Exchange floor either electronically or through a floor broker. As a result, the flow of buy and sell orders for each stock is funneled to a single location.

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     This heavy stream of diverse orders is one of the great strengths of the NYSE. It provides liquidity — the ease with which securities can be bought and sold without wide price fluctuations.
     When an investor’s transaction is completed, the best price will have been exposed to a wide range of potential buyers and sellers.
     Every transaction made at the NYSE is under continuous surveillance during the trading day. Stock Watch, a computer system that searches for unusual trading patterns, alerts the NYSE’s regulatory personnel to possible insider trading abuses or other prohibited trading practices. The NYSE’s other regulatory activities include the supervision of member firms to enforce compliance with financial and operational requirements, periodic checks on brokers’ sales practices, and the continuous monitoring of specialist operations.
(c) Trading on the Tokyo Stock Exchange
     The volume of UBS shares traded on the Tokyo Stock Exchange is negligible in comparison to the volume on SWX Europe or on the NYSE.
D—Selling Shareholders.
     Not required because this Form 20-F is filed as an annual report.
E—Dilution.
     Not required because this Form 20-F is filed as an annual report.
F—Expenses of the Issue.
     Not required because this Form 20-F is filed as an annual report.
Item 10. Additional Information.
A—Share Capital.
     Not required because this Form 20-F is filed as an annual report.
B—Memorandum and Articles of Association.
     Please see the Articles of Association of UBS AG and the Organization Regulations of UBS AG (Exhibits 1.1 and 1.2, respectively, of this Form 20-F).
     Set forth below is a summary of the material provisions of our Articles of Association, which we call the “Articles” throughout this document, Organization Regulations and the Swiss Code of Obligations relating to our shares. This description does not purport to be complete and is qualified in its entirety by references to Swiss law, including Swiss company law, and to the Articles and Organization Regulations.
     The shares are registered shares with a par value of CHF 0.10 per share. The shares are fully paid up.
     Each share carries one vote at our shareholders’ meetings. Voting rights may be exercised only after a shareholder has been recorded in our share register as a shareholder with voting rights. Registration with voting rights is subject to certain restrictions. See “— Transfer of Shares” and “—Shareholders’ Meeting”.

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     The Articles provide that we may elect not to print and deliver certificates in respect of registered shares. Shareholders may, however, request at any time that we print and deliver such certificates free of charge.
Transfer of Shares
     The transfer of shares is effected by corresponding entry in the books of a bank or depository institution following an assignment in writing by the selling shareholder and notification of such assignment to us by the bank or depository institution. The transfer of shares further requires that the purchaser file a share registration form in order to be registered in our share register as a shareholder. Failing such registration, the purchaser may not vote at or participate in shareholders’ meetings.
     A purchaser of shares will be recorded in our share register with voting rights upon disclosure of its name, citizenship and address. However, we may decline a registration with voting rights if the shareholder does not declare that it has acquired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a shareholder without voting rights.
     There is no limitation under Swiss law or our Articles on the right of non-Swiss residents or nationals to own or vote our shares.
Shareholders’ Meeting
     Under Swiss law, annual ordinary shareholders’ meetings must be held within six months after the end of our fiscal year, which is 31 December. Shareholders’ meetings may be convened by the Board of Directors (BoD) or, if necessary, by the statutory auditors, with twenty-days’ advance notice. The BoD is further required to convene an extraordinary shareholders’ meeting if so resolved by a shareholders’ meeting or if so requested by shareholders holding in aggregate at least 10% of our nominal share capital. Shareholders holding shares with an aggregate par value of at least CHF 62,500 have the right to request that a specific proposal be put on the agenda and voted upon at the next shareholders’ meeting. A shareholders’ meeting is convened by publishing a notice in the Swiss Official Commercial Gazette (Schweizerisches Handelsamtsblatt) at least twenty days prior to such meeting.
     The Articles do not require a minimum number of shareholders to be present in order to hold a shareholders’ meeting.
     Resolutions generally require the approval of an “absolute majority” of the votes cast at a shareholders’ meeting. Shareholders’ resolutions requiring a vote by absolute majority include:
  amendments to the Articles;
  elections of directors and statutory auditors;
  approval of the annual report and the consolidated statements of accounts;
  approval of the annual financial statements and the resolution on the use of the balance sheet profit (declaration of dividend);
  decisions to discharge directors and management from liability for matters disclosed to the shareholders’ meeting; and
  passing resolutions on matters which are by law or by the Articles reserved to the shareholders’ meeting (e.g., the ordering of an independent investigation into the specific matters proposed to the shareholders’ meeting).

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     Under the Articles, a resolution passed at a shareholders’ meeting with a supermajority of at least two thirds of the Shares represented at such meeting is required to:
  change the limits on BoD size in the Articles;
  remove one fourth or more of the members of the BoD; or
  delete or modify the above supermajority voting requirements.
     Under Swiss corporate law, a resolution passed by at least two thirds of votes represented and an absolute majority of the par value of the shares represented must approve:
  a change in our stated purpose in the Articles;
  the creation of shares with privileged voting rights;
  a restriction of transferability;
  an increase in authorized capital;
  an increase of capital out of equity against contribution in kind, for the purpose of acquisition and granting of special rights;
  changes to pre-emptive rights;
  a change of domicile of the corporation; or
  dissolution of the corporation without liquidation.
     At shareholders’ meetings, a shareholder can be represented by his or her legal representative or under a written power of attorney by another shareholder eligible to vote, by a corporate proxy, by the independent proxy or by a custodial proxy. Votes are taken electronically, by written ballot or by a show of hands. If a written ballot is requested by at least 3% of the votes present at the shareholders’ meeting or such ballot is ordered by the Chairman of the meeting, a written ballot will be conducted.
Net Profits and Dividends
     Swiss law requires that at least 5% of the annual net profits of a corporation must be retained as general reserves for so long as these reserves amount to less than 20% of the corporation’s nominal share capital. Any net profits remaining are at the disposal of the shareholders’ meeting, except that, if an annual dividend exceeds 5% of the nominal share capital, then 10% of such excess must be retained as general reserves.
     Under Swiss law, dividends may be paid out only if the corporation has sufficient distributable profits from previous business years or if the reserves of the corporation are sufficient to allow distribution of a dividend. In either event, dividends may be paid out only after approval by the shareholders’ meeting. The BoD may propose that a dividend be paid out, but cannot itself set the dividend. The auditors must confirm that the dividend proposal of the Board conforms with statutory law. In practice, the shareholders’ meeting usually approves the dividend proposal of the BoD.

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     Dividends are usually due and payable after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statue of limitations in respect of dividend payments is five years.
     U.S. holders of shares will receive dividend payments in U.S. dollars, unless they provide notice to our U.S. transfer agent, Mellon Investor Services, that they wish to receive dividend payments in Swiss francs. Mellon Investor Services will be responsible for paying the U.S. dollars or Swiss francs to registered holders, and for withholding any required amounts for taxes or other governmental charges. If Mellon Investor Services determines, after consultation with us, that in its judgment any foreign currency received by it cannot be converted into U.S. dollars or transferred to U.S. holders, it may distribute the foreign currency received by it, or an appropriate document evidencing the right to receive such currency, or in its discretion hold such foreign currency for the accounts of U.S. holders.
Preemptive Rights
     Under Swiss law, any share issue, whether for cash or non-cash consideration or for no consideration, is subject to the prior approval of the shareholders’ meeting. Shareholders of a Swiss corporation have certain preemptive rights to subscribe for new issues of shares in proportion to the nominal amount of shares held. The Articles or a resolution adopted at a shareholders’ meeting with a supermajority may, however, limit or suspend preemptive rights in certain limited circumstances.
Borrowing Power
     Neither Swiss law nor the Articles restrict in any way our power to borrow and raise funds. No shareholders’ resolution is required.
Conflicts of Interests
     Swiss law does not have a general provision on conflicts of interests. However, the Swiss Code of Obligations requires directors and members of senior management to safeguard the interests of the corporation and, as such, imposes a duty of care and a duty of loyalty on directors and officers. This rule is generally understood as disqualifying directors and senior officers from participating in decisions that directly affect them. Directors and officers are personally liable to the corporation for any breach of these provisions. In addition, Swiss law contains a provision under which payments made to a shareholder or a director or any person associated therewith, other than at arm’s length, must be repaid to us if the shareholder or director was acting in bad faith.
     In addition, our Organization Regulations prohibit any member of the BoD from participating in discussions and decision-making regarding a matter as to which he or she has a conflict of interest.
Repurchase of Shares
     Swiss law limits a corporation’s ability to hold or repurchase its own shares. We and our subsidiaries may only repurchase shares if we have sufficient free reserves to pay the purchase price and if the aggregate nominal value of the shares does not exceed 10% of our nominal share capital. Furthermore, we must create a special reserve on our balance sheet in the amount of the purchase price of the acquired shares. Such shares held by us or our subsidiaries do not carry any rights to vote at shareholders’ meetings.
Notices
     Notices to shareholders are made by publication in the Swiss Official Gazette of Commerce. The BoD may designate further means of communication for publishing notices to shareholders.

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     Notices required under the listing rules of the SIX Swiss Exchange will be published in two Swiss newspapers in German and French. We or the SIX Swiss Exchange may also disseminate the relevant information on the online exchange information systems.
Registration and Business Purpose
     We are registered as a corporation in the commercial registers of Canton Zurich and Canton Basle-City under the registration number CH-270.3.004.646-4 and have registered offices in Zurich and Basel, Switzerland.
     Our business purpose, as set forth in our Articles, is the operation of a bank, with a scope of operations extending to all types of banking, financial, advisory, trading and service activities in Switzerland and abroad.
Duration, Liquidation and Merger
     Our duration is unlimited.
     Under Swiss law, we may be dissolved at any time by a shareholders’ resolution which must be passed by (1) an absolute majority of the shares represented at the meeting in the event we are to be dissolved by way of liquidation, or (2) a supermajority of at least two thirds of the votes represented and an absolute majority of the par value of the shares represented at the meeting in other events (for example, in a merger where we are not the surviving entity). Dissolution by court order is possible if we become bankrupt.
     Under Swiss law, any surplus arising out of a liquidation (after the settlement of all claims of all creditors) is distributed to shareholders in proportion to the paid-up nominal value of shares held.
Disclosure of Principal Shareholders
     Under the applicable provisions of the new Swiss Stock Exchange Act, shareholders and shareholders acting in concert with third parties who reach, exceed or fall below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50% or 66 2/3% of the voting rights of a Swiss listed corporation must notify the corporation and the SIX Swiss Exchange on which such shares are listed of such holdings, whether or not the voting rights can be exercised. Following receipt of such notification, the corporation has the obligation to inform the public. The corporation must disclose in an attachment to the balance sheet the identity of any shareholders who own in excess of 5% of its shares.
Mandatory Tender Offer
     Under the Swiss Stock Exchange Act, shareholders and groups of shareholders acting in concert who acquire more than 33 1/3% of the voting rights of a listed Swiss company will have to submit a takeover bid to all remaining shareholders. A waiver from the mandatory bid rule may be granted by our supervisory authority. If no waiver is granted, the mandatory takeover bid must be made pursuant to the procedural rules set forth in the Swiss Stock Exchange Act and implementing ordinances.
Other
     Ernst & Young Ltd, Aeschengraben 9, CH-4051 Basel, Switzerland, have been appointed as statutory auditors and as auditors of the consolidated accounts of UBS. The auditors are subject to confirmation by the shareholders at the ordinary general meeting on an annual basis.

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     Please seeCapital structureon pages 197 and 198,Shareholders’ participation rightson pages 211 and 212 andElection and terms of officeon page 202 of the Corporate governance and compensation report.
C—Material Contracts.
     None.
D—Exchange Controls.
     There are no restrictions under UBS’s Articles of Association or Swiss law, presently in force, that limit the right of non-resident or foreign owners to hold UBS’s securities freely. There are currently no Swiss foreign exchange controls or other Swiss laws restricting the import or export of capital by UBS or its subsidiaries. In addition, there are currently no restrictions under Swiss law affecting the remittance of dividends, interest or other payments to non-resident holders of UBS securities.
E—Taxation.
     This section outlines the material Swiss tax and U.S. federal income tax consequences of the ownership of UBS ordinary shares by a U.S. holder (as defined below) who holds UBS ordinary shares as capital assets. It is designed to explain the major interactions between Swiss and U.S. taxation for U.S. persons who hold UBS shares.
     The discussion does not address the tax consequences to persons who hold UBS ordinary shares in particular circumstances, such as tax-exempt entities, banks, financial institutions, life insurance companies, broker-dealers, traders in securities that elect to mark to market, holders liable for alternative minimum tax, holders that actually or constructively own 10% or more of the voting stock of UBS, holders that hold UBS ordinary shares as part of a straddle or a hedging or conversion transaction or holders whose functional currency for U.S. tax purposes is not the U.S. dollar. This discussion also does not apply to holders who acquired their UBS ordinary shares through a tax-qualified retirement plan, nor generally to unvested UBS ordinary shares held under deferred compensation arrangements.
     The discussion is based on the tax laws of Switzerland and the United States, including the U.S. Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations under the Internal Revenue Code, published rulings and court decisions, as in effect on the date of this document, as well as the convention between the United States and Switzerland, which we call the “Treaty,” all of which may be subject to change or change in interpretation, possibly with retroactive effect.
     For purposes of this discussion, a “U.S. holder” is any beneficial owner of UBS ordinary shares that is for U.S. federal income tax purposes:
  a citizen or resident of the United States,
  a domestic corporation or other entity taxable as a corporation,
  an estate, the income of which is subject to U.S. federal income tax without regard to its source, or

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  a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
     The discussion does not generally address any aspects of Swiss taxation other than income and capital taxation or of U.S. taxation other than federal income taxation. Holders of UBS shares are urged to consult their tax advisors regarding the U.S. federal, state and local and the Swiss and other tax consequences of owning and disposing of these shares in their particular circumstances.
(a) Ownership of UBS Ordinary Shares-Swiss Taxation
Dividends and Distributions
     Dividends paid by UBS to a holder of UBS ordinary shares (including dividends on liquidation proceeds and stock dividends) are subject to a Swiss federal withholding tax at a rate of 35%. The withholding tax must be withheld from the gross distribution, and be paid to the Swiss Federal Tax Administration.
     A U.S. holder that qualifies for Treaty benefits may apply for a refund of the withholding tax withheld in excess of the 15% Treaty rate (or for a full refund in case of qualifying retirement arrangements). The claim for refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse 65, CH-3003 Berne, Switzerland no later than December 31 of the third year following the end of the calendar year in which the income subject to withholding was due. The form used for obtaining a refund is Swiss Tax Form 82 (82 C for companies; 82 E for other entities; 82 I for individuals; 82 R for regulated investment companies), which may be obtained from any Swiss Consulate General in the United States or from the Swiss Federal Tax Administration at the address above. The form must be filled out in triplicate with each copy duly completed and signed before a notary public in the United States. The form must be accompanied by evidence of the deduction of withholding tax withheld at the source.
     Mellon Investor Services, the registrar for UBS AG shares in the United States, is offering tax reclamation services for the cash dividends.
     Repayment of capital in the form of a par value reduction is not subject to Swiss withholding tax.
Transfers of UBS Ordinary Shares
     The purchase or sale of UBS ordinary shares, whether by Swiss resident or non-resident holders (including U.S. holders), may be subject to a Swiss securities transfer stamp duty of up to 0.15% calculated on the purchase price or sale proceeds if it occurs through or with a bank or other securities dealer in Switzerland as defined in the Swiss Federal Stamp Tax Act. In addition to the stamp duty, the sale of UBS ordinary shares by or through a member of a recognized stock exchange may be subject to a stock exchange levy.
     Capital gains realized by a U.S. holder upon the sale of UBS ordinary shares are not subject to Swiss income or gains taxes, unless such U.S. holder holds such shares as business assets of a Swiss business operation qualifying as a permanent establishment for the purposes of the Treaty. In the latter case, gains are taxed at ordinary Swiss individual or corporate income tax rates, as the case may be, and losses are deductible for purposes of Swiss income taxes.

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(b) Ownership of UBS Ordinary Shares-U.S. Federal Income Taxation
Dividends and Distribution
     Subject to the passive foreign investment company rules discussed below, U.S. holders will include in gross income the gross amount of any dividend paid, before reduction for Swiss withholding taxes, by UBS out of its current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, as ordinary income when the dividend is actually or constructively received by the U.S. holder. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a return of capital to the extent of the U.S. holder’s basis in its UBS ordinary shares and thereafter as capital gain.
     Dividends paid to a noncorporate U.S. holder in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to the holder at a maximum rate of 15%, provided that the holder has a holding period in the shares of more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends paid by UBS with respect to the shares will generally be qualified dividend income.
     For U.S. federal income tax purposes, a dividend will include a distribution characterized as a repayment of capital in the form of a par value reduction, if the distribution is made out of current or accumulated earnings and profits, as described above.
     Dividends will be income from sources outside the United States for foreign tax credit limitation purposes. Dividends paid in taxable years beginning before January 1, 2007 generally will be “passive income” or “financial services income,” and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for foreign tax credit limitation purposes. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% rate. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
     The amount of the dividend distribution included in income of a U.S. holder will be the U.S. dollar value of the Swiss franc payments made, determined at the spot Swiss franc/U.S. dollar rate on the date such dividend distribution is included in the income of the U.S. holder, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend distribution is included in income to the date such dividend distribution is converted into U.S. dollars will be treated as ordinary income or loss. Such gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
     Subject to U.S. foreign tax credit limitations, the nonrefundable Swiss tax withheld and paid over to Switzerland will be creditable against the U.S. holder’s U.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to a U.S. holder under the laws of Switzerland or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder’s U.S. federal income tax liability, whether or not the refund is actually obtained.
     Stock dividends to U.S. holders that are made as part of a pro rata distribution to all shareholders of UBS generally will not be subject to U.S. federal income tax. Whether a stock dividend is considered to be such a nontaxable pro rata distribution for U.S. federal income tax can be a complex inquiry. U.S. holders that received a stock dividend that is subject to Swiss tax but not U.S. tax may not have enough foreign income from other sources to receive the benefit of the foreign tax credit associated with that tax.

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Transfers of UBS Ordinary Shares
     Subject to the passive foreign investment company rules discussed below, a U.S. holder that sells or otherwise disposes of UBS ordinary shares generally will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount realized and the tax basis, determined in U.S. dollars, in the UBS ordinary shares. Capital gain of a non-corporate U.S. holder that is recognized in taxable years beginning before January 1, 2011 is generally taxed at a maximum rate of 15% if the UBS ordinary shares were held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
Passive Foreign Investment Company Rules
     UBS believes that UBS ordinary shares should not be treated as stock of a passive foreign investment company for U.S. federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change. In general, UBS will be a passive foreign investment company with respect to a U.S. holder if, for any taxable year in which the U.S. holder held UBS ordinary shares, either (i) at least 75% of the gross income of UBS for the taxable year is passive income or (ii) at least 50% of the value, determined on the basis of a quarterly average, of UBS’s assets is attributable to assets that produce or are held for the production of passive income (including cash). If UBS were to be treated as a passive foreign investment company, then unless a U.S. holder were to make a mark-to-market election, gain realized on the sale or other disposition of UBS ordinary shares would in general not be treated as capital gain. Instead, a U.S. holder would be treated as if the holder had realized such gain and certain “excess distributions” ratably over the holder’s holding period for the shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. In addition, dividends received from UBS would not be eligible for the preferential tax rate applicable to qualified dividend income if UBS were to be treated as a passive foreign investment company either in the taxable year of the distribution or the preceding taxable year, but would instead be taxable at rates applicable to ordinary income.
F—Dividends and Paying Agents.
     Not required because this Form 20-F is filed as an annual report.
G—Statement by Experts.
     Not required because this Form 20-F is filed as an annual report.
H—Documents on Display.
     UBS files periodic reports and other information with the Securities and Exchange Commission. You may read and copy any document that we file with the SEC on the SEC’s website, www.sec.gov, or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 (in the United States) or at +1 202 942 8088 (outside the United States) for further information on the operation of its public reference room. Much of this additional information may also be found on the UBS website at www.ubs.com/investors.
I—Subsidiary Information.
     Not applicable.

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Item 11. Quantitative and Qualitative Disclosures About Market Risk.
(a) Quantitative Information About Market Risk.
     Please seeMarket riskon pages 128 to 133 of the Risk and treasury management
report.
(b) Qualitative Information About Market Risk.
     Please seeMarket riskon pages 128 to 133 of the Risk and treasury management report.
(c) Interim Periods.
     Not applicable.
Item 12. Description of Securities Other than Equity Securities.
     Not required because this Form 20-F is filed as an annual report.

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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
     There has been no material default in respect of any indebtedness of UBS or any of its significant subsidiaries or any arrearages of dividends or any other material delinquency not cured within 30 days relating to any preferred stock of UBS AG or any of its significant subsidiaries.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
     Not applicable.
Item 15. Controls and Procedures.
(a) Disclosure Controls and Procedures.
     Please seeUS regulatory disclosure requirementson pages 216 and 217 of the Corporate governance and compensation report. See also Exhibit 12 to this Form 20-F.
(b) Management’s Annual Report on Internal Control over Financial Reporting.
     Please seeManagement’s Report on Internal Control over Financial Reportingon page 251 of the Financial information report.
(c) Attestation Report of the Registered Public Accounting Firm.
     Please seeReport of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting on pages 252 to 253 of the Financial information report.
(d) Changes in Internal Control over Financial Reporting.
   �� None.
Item 15.T. Controls and Procedures.
     Not applicable.
Item 16.A. Audit Committee Financial Expert.
     Please seeAudit committeeon page 203 andCompliance with New York Stock Exchange listing standards on corporate governanceon pages 221 to 222 of the Corporate governance and compensation report.
Item 16.B. Code of Ethics.
     Please see “Code of Business Conduct and Ethics” underIndependence of Directorson page 221 of the Corporate governance and compensation report. The code of business conduct and ethics is published on our website under http://www.ubs.com/1/e/about/cg/business_conduct.html.
Item 16.C. Principal Accountant Fees and Services.
     Please seeAuditorson pages 214 to 215 of the Corporate governance and compensation report. Fees for non-audit services approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X were CHF 45,000 and are included under Total Non-Audit Fees (of which CHF 29,000 audit-related fees and CHF 16,000 other non audit fees) in the table on page 214.

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Item 16.D. Exemptions from the Listing Standards for Audit Committee.
     Not applicable.
Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
     Please seeShare buyback programson page 169 of the Risk and treasury management report.
Item 16.F. Change in Registrant’s Certifying Accountant.
     Not applicable.
Item 16.G. Corporate Governance.
     Please seeCompliance with New York Stock Exchange listing standards on corporate governance on pages 221 to 222 of the Corporate governance and compensation report.
PART III
Item 17. Financial Statements.
     Not applicable.
Item 18. Financial Statements.
     Please see the Financial Statements and the Notes to the Financial Statements on pages 251 to 370 of the Financial information report.
Item 19. Exhibits.
   
Exhibit  
Number Description
1.1. Articles of Association of UBS AG.
   
1.2. Organization Regulations of UBS AG.
   
2(b). Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.

We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
   
7. Statement regarding ratio of earnings to fixed charges.
   
8. Significant Subsidiaries of UBS AG.

Please see Note 34 to the Financial StatementsSignificant Subsidiaries and Associateson pages 347 to 350 of the Financial information report.

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Exhibit  
Number Description
12. The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a)).
   
13. The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).
   
15. Consent of Ernst & Young Ltd.

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SIGNATURES
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
     
 UBS AG 
     
 /s/ Oswald Grübel 
 Name:  Oswald Grübel  
 Title:  Group Chief Executive Officer
     
   
Date: March 11, 2009 /s/ John Cryan 
 Name:  John Cryan  
 Title:  Group Chief Financial Officer  
 

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INDEX TO EXHIBITS
   
Exhibit  
Number Description
1.1. Articles of Association of UBS AG.*
   
1.2. Organization Regulations of UBS AG.*
   
2(b). Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.

We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
   
7. Statement regarding ratio of earnings to fixed charges.*
   
8. Significant Subsidiaries of UBS AG.

Please see Note 34 to the Financial StatementsSignificant Subsidiaries and Associateson pages 347 to 350 of the Financial information report.
   
12. The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a)).*
   
13. The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).*
   
15. Consent of Ernst & Young Ltd.*

* Filed as exhibit herewith

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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

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Annual Report 2008

Letter to shareholders

Dear Shareholders,

UBS recorded a net loss attributable to shareholders of CHF 20.9 billion in 2008. This extremely poor result stemmed primarily 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 positions. The loss has affected all stakeholders in UBS: in 2008, in US dollar terms, shareholders suffered a 58% fall in market capitalization, compared with the average 47% decline of the other members of the Dow Jones Banks Titans 30 Index; the total number of employees was reduced by 7%; and employee compensation was cut 36%. Clients have, understandably, expressed to us their disappointment about our losses, while at the same time stressing their appreciation for the advice and service levels they receive from their advisors.

For financial markets as a whole, 2008 was an extraordinary 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 included 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 resulted from complex relationships between our business divisions.

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 governance, risk management and control processes, the liquidity 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 Directors (BoD) and the Group Executive Board (GEB), the establishment 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 committee. 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 business 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 compensation model for senior executives that aligns compensation with the creation of sustainable results for shareholders. In addition, management compensation within business divisions will be based largely on divisional results and the responsible 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 divisions 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 reposition the Investment Bank as a client-orientated and fee- and commission-earning business – in other words, the Investment 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 concentrations 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 controlled 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 Agreement (DPA) with the DOJ and a Consent Order with the SEC.As part of these agreements, we will complete our previously announced exit of our US cross-border business and implement an enhanced program of internal controls to



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Annual Report 2008

ensure compliance with the Qualified Intermediary Agreement with the Internal Revenue Service. In addition, pursuant to an order issued by the Swiss Financial Market Supervisory 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 incentives 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, particularly 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 Management & Swiss Bank. Global Asset Management has also experienced further net outflows.

More generally, financial market conditions remain fragile as company and household cash flows continue to deteriorate, notwithstanding the very substantial measures governments 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 positions, 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

   
(-s- Peter Kurer)
 (-s- Oswald J. Gruebel)
Peter Kurer Oswald J. Gruebel
Chairman 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.

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UBS reporting at a glance

Annual 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 and the Corporate Center;
 risk, treasury and capital management at UBS;
 corporate governance and executive compensation; and
 financial information, including the financial statements.

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 discussed here. It is published in English and German.

Quarterly publications

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.

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.

How to order reports

The annual and quarterly publications are available in PDF format on the internet atwww.ubs.com/investors/topicsin the reporting section. Printed copies can be ordered from the services section of the website. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland.



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Annual Report 2008

Other sources of information

Website

The “Analysts & Investors” website atwww.ubs.com/investorsprovides the following information on UBS: financial information (including SEC documents); corporate information; UBS share price charts and data; the UBS event calendar and dividend information; and the latest presentations by management for investors and financial analysts. Information on the internet is available in English and German, with some sections in French and Italian.

Result presentations

UBS’s quarterly results presentations are webcast live. A
playback of the most recent presentation is downloadable
atwww.ubs.com/presentations.

Messaging service / UBS news alert

On thewww.ubs.com/newsalertwebsite, 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” document. 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 dialing 1-800-SEC-0330 for further information on the operation of its public reference room. Much of this additional information may also be found on the UBS website atwww.ubs. com/investors,and copies of documents filed with the SEC may be obtained from UBS’s Investor Relations 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 company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.

UBS AG is incorporated and domiciled in Switzerland and operates

under Swiss Company Law and Swiss Federal Banking Law as an Aktieng-esellschaft, 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).



 

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Contacts

Switchboards

       
For all general queries. Zurich +41-44-234 1111  
   
  London +44-20-7568 0000  
   
  New York +1-212-821 3000  
   
  Hong Kong +852-2971 8888  
   

Investor Relations

       
UBS’s Investor Relations team supports Hotline +41-44-234 4100 UBS AG
institutional, professional and retail  
investors from our offices in Zurich New York +1-212-882 5734 Investor Relations
and New York.  
  Fax (Zurich) +41-44-234 3415 P.O. Box
   
www.ubs.com/investors     CH-8098 Zurich, Switzerland
   
      sh-investorrelations@ubs.com
   

Media Relations

       
UBS’s Media Relations team supports Zurich +41-44-234 8500 mediarelations@ubs.com
global media and journalists from  
offices in Zurich, London, New York London +44-20-7567 4714 ubs-media-relations@ubs.com
and Hong Kong.  
  New York +1-212-882 5857 mediarelations-ny@ubs.com
   
www.ubs.com/media Hong Kong +852-2971 8200 sh-mediarelations-ap@ubs.com
   

Shareholder Services

       
UBS Shareholder Services, a unit of the Hotline +41-44-235 6202 UBS AG
Company Secretary, is responsible for  
the registration of the global registered Fax +41-44-235 3154 Shareholder Services
shares.  
      P.O. Box
   
      CH-8098 Zurich, Switzerland
   
      sh-shareholder-services@ubs.com
   

US Transfer Agent

       
For all global registered share-related Calls from the US +866-541 9689 BNY Mellon Shareowner Services
queries in the US.  
  Calls outside the US +1-201-680 6578 480 Washington Boulevard
   
www.melloninvestor.com Fax +1-201-680 4675 Jersey City, NJ 07310, USA
   
      sh-relations@melloninvestor.com
   

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Table of Contents

Strategy, performance and responsibility

Strategy, performance and responsibility

 

 

 

 

 

 

 

 

 

 

 

 

 


Table of Contents

   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

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 exposures to the current market environment and managing UBS’s balance sheet remain strategic priorities for the firm.

Measures taken in 2008

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 repositioning 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 reviewed.In November 2008, UBS announced the new compensation model that is directly aligned with sustainable value creation within each manager’s area of responsibility, and incorporates a longer performance evaluation horizon.

 



 


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UBS financial highlights 
  For the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Performance indicators from continuing operations
                
 
Diluted earnings per share (CHF)1
  (7.60)  (2.61)  4.64   (191)
 
Return on equity attributable to UBS shareholders (%)2
  (57.9)  (11.7)  23.9   (395)
 
Cost/income ratio (%)3
  680.4   111.0   70.5     
 
Net new money (CHF billion)4
  (226.0)  140.6   151.7     
 
                 
Group results
                
 
Operating income  1,201   31,721   47,484   (96)
 
Operating expenses  28,555   35,463   33,365   (19)
 
Operating profit before tax (from continuing and discontinued operations)  (27,155)  (3,597)  15,007   (655)
 
Net profit attributable to UBS shareholders  (20,887)  (5,247)  11,527   (298)
 
Personnel (full-time equivalents)5
  77,783   83,560   78,140   (7)
 
Invested assets (CHF billion)  2,174   3,189   2,989   (32)
 
                 
UBS balance sheet and capital management
                
 
Balance sheet key figures
                
 
Total assets  2,015,098   2,274,891   2,348,733   (11)
 
Equity attributable to UBS shareholders  32,800   36,875   51,037   (11)
 
Market capitalization6
  43,519   108,654   154,222   (60)
 
BIS capital ratios7
                
 
Tier 1 (%)  11.0   9.18  12.28    
 
Total BIS (%)  15.1   12.28  15.08    
 
Risk-weighted assets  302,273   374,4218  344,015   (19)
 
Long-term ratings
                
 
Fitch, London  A+  AA  AA+     
 
Moody’s, New York Aa2  Aaa  Aa2     
 
Standard & Poor’s, New York  A+  AA  AA+     
 
1Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report.    2Net profit attributable to UBS shareholders from continuing operations/average equity attributable to UBS shareholders.    3Operating expenses/operating income before credit loss expense or recovery.    4Excludes interest and dividend income.    5Excludes personnel from private equity (part of the Corporate Center).  6Refer to the “UBS shares in 2008” section of this report for 2008 for further information.    7Refer to the “Capital management” section of this report for further information.    8The 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 issued 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 cross-border case, as described in the “Settlement regarding the US cross-border case” sidebar in the “Wealth Management International & Switzerland” section of this report; and (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. The full effect of the settlement agreements, and all but approximately CHF 0.1 billion of the SNB pricing adjustment, are taken into account in UBS’s 2008 results and the balance sheet in this report. The total impact on net profit after tax was negative CHF 1,190 million.

 

 

 


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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 characteristic 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 Management & 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 business division is accountable for its own results, but co-operates to provide a broad palette of cross-business solutions for clients. UBS considers the breadth and depth of its offering 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 investment 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 investment management solutions in nearly every asset class to

private, corporate and institutional clients, as well as through financial intermediaries. Investment capabilities include traditional 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 markets for corporate, institutional, intermediary and alternative asset management clients.

 è 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 non-core businesses 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 market leader (by client assets) in both Europe and Asia Pacific, in sixth position in the US and one of the only firms of global scale focusing on wealth management as a core business. In 2008, UBS was among the top five firms globally in mergers and acquisitions based on deal volume. The asset management business is one of the leading active asset managers 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 commercial banking. It serves around 2.5 million individual clients 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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Strategy, performance and responsibility

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 non-executive and fully independent.
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 development 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.
 è 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, 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.

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 disciplined manner and to optimize its spending across economic 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.

 è 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 asWealth Management & Swiss BankandWealth 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 itsGlobal Asset Managementbusiness division. This includes focusing on developing innovative products and managing toward sustainable investment performance.
TheInvestment Bankis in the process of repositioning itself toward client-driven 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 includes the downsizing or exiting of certain businesses.
 è 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



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Strategy, performance and responsibility
Strategy and structure

Measures taken

In August 2008, UBS launched a comprehensive program to re-engineer 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 transparency increased at the level of top management. One result has been the creation of an Executive Committee to allocate and continuously monitor the use of capital and risk in each of the business divisions. Other wide-ranging changes to the Group’s governance have been proposed and implemented. 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 responsibility. A new liquidity and funding concept has been approved and is being implemented. Refer to the “Liquidity and funding management” section of this report for more information on liquidity and funding.

Senior management compensation
Senior management compensation is now aligned to sustainable value creation within each manager’s area of responsibility 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, shareholdings 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 Management & Business Banking has been divided into two new business divisions: Wealth Management & Swiss Bank and Wealth Management Americas.



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Strategy, performance and responsibility

 

Key performance indicators: 2009 and beyond

UBS uses key performance indicators (KPIs) to monitor the firm’s performance 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 “Measurement and analysis of performance” 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 identification 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 short-term market trends. Therefore, on a day-to-day basis, UBS management measures performance in the form of profitability after the cost of

equity or economic profit. Consequently, 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
  Wealth Management & Wealth Management    
Group Swiss Bank Americas Investment Bank Global Asset Management
 
Net profit growth
 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 Cost / income ratio
         
  Gross margin (RoIA)1 Gross margin (RoIA)   Gross margin (RoIA)
         
Return on equity (RoE)
     Return on attributed equity  
         
Return on assets, gross
     Return on assets, gross  
         
Return on risk-weighted assets, gross
        
         
FINMA leverage ratio2
        
         
  Impaired lending portfolio3   Value at Risk4  
         
Tier 1 ratio
        
         
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.

 

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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. Significant transactions included the sale in May of US residential mortgage-backed securities to a fund managed by BlackRock 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 management and control organization. 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.



 
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 transaction 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 risk-weighted assets, materially de-risks 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 contribution by the SNB. The loan will be non-recourse 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 considerations. 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 third-party valuation experts. On the same basis, the SNB has since determined the purchase price to



 

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Strategy, performance and responsibility

 

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 but approximately CHF 0.1 billion 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.

Implications for UBS’s 2008
income statement

The overall impact on UBS’s 2008 income statement of the SNB transaction 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 purchase 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.


Issuance of MCNs to the
Swiss Confederation

In connection with the transaction with the SNB, UBS raised CHF 6 billion 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.

             
Positions affected by the transfer to the Swiss National Bank StabFund
   Valuation as of 30 September 2008 
USD million Priced  Not yet priced  Total 
 
US sub-prime  4.0   1.6   5.6 
 
US Alt-A  1.5   0.8   2.4 
 
US prime  1.2   0.7   1.9 
 
US reference-linked note program  5.8   0.0   5.8 
 
Commercial real estate  3.4   2.3   5.7 
 
Student loan-backed securities  0.5   0.0   0.5 
 
Other positions  8.5   9.0   17.5 
 
Price difference  (0.7)   1  (0.7)
 
Total
  24.2   14.4   38.6 
 
1 To be determined.


 

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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 predecessor 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 operating mainly out of Switzerland. The two banks shared a similar vision: to become a world leader in wealth management and a global bulge-bracket 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 best-capitalized Swiss bank of its time, opted to pursue a strategy of organic growth, or expansion by internal means. In contrast, SBC, then the third-largest Swiss bank, decided to take another route by starting a joint venture with O’Connor, a leading US derivatives firm that was fully acquired by SBC in 1992. O’Connor was noted for its young, dynamic and innovative culture, meritocracy and its team orientation. It brought state-of-the-art risk management and derivatives technology to SBC. In 1994, SBC acquired Brinson Partners, one of the leading US-based 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 institutional 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 investment banking and wealth management, UBS needed to establish a significant presence in the key US market. UBS advanced 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 acquisitions 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 independent investment bank and asset manager, Banco Pactual. 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.
 è Refer to www.ubs.com/history for more information



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(ROAD MAP)

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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 financial 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 prices across most main asset classes, coupled with deleveraging, resulted in poorly functioning lending markets and a lack of inter-bank liquidity. Banks were forced to recapitalize, sometimes with the help of governments. Hopes that the crisis might be short-lived were dashed after the failure of one of the major US investment banks in mid-September, which resulted in very severe liquidity issues for many financial 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 recessions 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 expanded, 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 historically 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 industry to rebound quickly from this crisis.



Market capitalization of the components of the Dow Jones Banks Titans 30 Index, 2008 versus 20071

(BAR CHART)

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Stock market indices development
 

(GRAPH)

Industry drivers

A number of drivers are expected to have a significant impact on banks’ earnings and the structure of the financial services industry in the short to medium term. The most relevant factors are described below.

De-leveraging
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 de-leveraging process that lies at its heart. De-leveraging is the process through which households, 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 deflationary forces.

First, there is a reduction and restructuring of banks’ balance sheets, which may affect their capacity to lend money. Such a restructuring is already well under way, having started 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 consumer and capital spending and appetite for risk. This process has just started and may last several years, as households address the need to permanently increase their savings. It may be particularly long and painful in countries with historically low savings rates, such as the US.
While debt levels are lower among non-financial corporations 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 becomes increasingly scarce and more expensive.
The process of de-leveraging is expected to have, on balance, a negative impact on banks’ earnings. While increased

savings can provide opportunities for certain banks, risk aversion and the downward pressure it exerts on asset prices tend to reinforce each other.

Government intervention and re-regulation
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 increasingly attached conditions to the measures they have taken, providing them the opportunity to at least temporarily influence the business activities of certain banks.

At the same time, the financial industry and its regulators are analyzing the lessons learned and implementing measures to adjust their business practices and the regulatory framework. This will fundamentally impact and likely transform the industry. While many details of the regulatory response to the financial crisis are still to be worked out, new regulation will likely focus on ways of mitigating the negative 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 off-balance sheet exposure onto firms’ balance sheets; review of valuation and accounting practices; increased cooperation between stronger and better-equipped supervisors and central banks, especially from an international perspective; and alignment of compensation programs and pay levels with long-term, firm-wide 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 requirements 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 requirements and disclosure standards for investment products are also likely.



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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). However, 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 investment 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 products in general, especially as these proved to be more correlated with equity and credit markets than originally thought.
Internal UBS research shows that private clients’ risk appetite 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 destruction 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 following periods of financial distress. Therefore, capital preservation is likely to remain a priority for investors and most will seek to do this by holding cash before considering a diversification across a wider range of asset classes and products. On the other hand, an increase in savings by individuals, particularly in countries where household saving rates have been historically low, such as the US, represents an opportunity for banks.

Retirement provisions
The economic crisis does not fundamentally alter the private retirement industry’s growth drivers, namely the demographic 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 already 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 pension funds are comparatively more exposed to equity markets than in other countries), a pick-up 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 management, 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 previous 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 continued 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 attractiveness 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, balance-sheet restructuring 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 interconnections 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 benefit 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 above-average economic growth in these countries.



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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 markets 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 exposures, 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 quarter. However, UBS continues to hold positions identified as risk concentrations (refer to the “Risk concentrations” section of this report for more information on these positions, as well as positions in other asset classes that might be negatively 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 related instability of financial institutions and of the financial system 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 factors, the development of market conditions and the overall economic environment, as well as factors affecting particular 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 sub-prime, Alt-A and prime) was reduced dramatically in 2008, UBS remains exposed to that market, albeit on a reduced scale. In addition, certain of its monoline-insured positions are exposed to the US residential mortgage market as described below. The markets for most US mortgage-related securities have so far remained illiquid and it is impossible to determine

whether and how long current market conditions will persist, 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 over-the-counter (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 valuation 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 residential mortgage-linked 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 deteriorates further, UBS could record further credit valuation adjustments on the CDSs bought from monoline insurers.

UBS could also incur losses in connection with restructurings 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 monoline insurers, including CDSs, and the value of these securities 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 mark-to-market) 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 beyond US residential mortgages. In 2008, UBS recorded markdowns on other assets carried at fair value, including auction rate securities (ARS), leveraged finance commitments, commercial mortgages in the United States and non-US mortgage- and asset-backed 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 increase (see the previous risk factor on monoline exposures).



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Risk factors

UBS’s inventory of ARS is likely to increase in the future as a result of its commitment to repurchase client-owned 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 positions related to real estate markets in countries other than the United States on which it could also suffer losses. These include exposures to non-US residential and commercial real estate and mortgages and non-US 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 affected asset classes such as in its prime brokerage, reverse repo and lombard lending activities.

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 countries in which they occur. A crisis could develop, regionally or globally, as a result of disruption in emerging markets, which are particularly susceptible to macro-economic and geopolitical developments, or as a result of the failure of a major market 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 continue 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 market-making and customer-driven 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 performance-based fees;
 reduced market liquidity limits trading and arbitrage opportunities and impedes UBS’s ability to manage risks, impacting both trading income and performance-based fees;

 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 losses may be exacerbated by falling collateral values; and
 if individual countries impose restrictions on cross-border payments or other exchange or capital controls, UBS could suffer losses from enforced default by counterparties, 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.

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 risk-taking is a major part of the business of a financial 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 risk-taking activities are inevitable but, to be successful over time, UBS must balance the risks it takes with the returns it generates. It must therefore 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 sizeable 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 control, 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 particular risk concentrations and correlated risks;



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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;
 third-parties to whom UBS has credit exposure or whose securities it holds for its own account are severely affected by events not anticipated by UBS’s models and the bank accordingly suffers defaults and impairments beyond 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 management or withdrawal of mandates.
If UBS decided to support a fund or another investment sponsored by UBS in its asset or wealth management business 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 management” 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 environment, such price information is not available for certain 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 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 non-market observable inputs. “Note 27 Fair value 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 reviews and updates its valuation models to incorporate all factors 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 impact 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 long-term 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 particular 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 additional 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 reputation, both of which are described in greater detail in the risk factors below, UBS’s credit ratings contribute to maintaining 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 using short-term unsecured funding sources, including wholesale 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 assets, in particular from its trading portfolio, to meet maturing 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 levels 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 profitability.
 è Refer to the “Risk and treasury management” section of this report for more information on UBS’s approach to liquidity and funding management



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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) risk-weighted assets (RWAs) (balance sheet, off-balance sheet and other market and operational risk positions, measured and risk-weighted according to regulatory criteria) and (2) eligible capital.

Both RWAs and eligible capital are subject to change. Eligible 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 interpretation 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 (including, but not limited to, the definitions of assets allocated to the trading or the banking books), stronger foreign currencies, increased counter-party 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 multiple 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 management and control systems and processes, which are described 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 regulatory oversight and liability risk. It is involved in a variety of other claims, disputes and legal proceedings and government 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 government inquiries and investigations, and is involved in a number of litigations 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 valuations, disclosures, writedowns, underwriting and contractual obligations.

UBS has been in active dialogue with its regulators concerning remedial actions that it is taking to address deficiencies 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 accordingly will be subject to regulatory measures that might affect the implementation of its strategic plans.
UBS recently announced that it had entered into a Deferred Prosecution Agreement with the US Department of Justice and a Consent Order with the US Securities and Exchange Commission in connection with its cross-border private banking services provided to US private clients. The US Internal Revenue Service has issued a civil summons seeking information concerning UBS’s cross-border business, including 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 cross-border financial services and the application of Swiss financial privacy law, and this could adversely affect the future profitability of UBS’s cross-border 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 cross-border 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.
 è 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 sometimes fragmented) regulation and ongoing consolidation. UBS faces competition at the level of local markets and individual 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



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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 substantial funding or focus on proprietary trading.
Following the losses incurred in 2008, UBS very significantly 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 misconduct 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 soundness 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 therefore 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 completion 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 policies 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 management, revenues and expenses are denominated in other currencies, changes in foreign exchange rates, particularly between the Swiss franc and the US dollar (US dollar income represents the major part of UBS’s non-Swiss 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.



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Strategy, performance and responsibility
Financial performance

Financial performance

UBS’s performance is reported in accordance with International 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 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Performance indicators from continuing operations
                
 
Diluted earnings per share (CHF)1
  (7.60)  (2.61)  4.64   (191)
 
Return on equity attributable to UBS shareholders (%)2
  (57.9)  (11.7)  23.9   (395)
 
Cost/income ratio (%)3
  680.4   111.0   70.5     
 
Net new money (CHF billion)4
  (226.0)  140.6   151.7     
 
                 
Group results
                
 
Operating income  1,201   31,721   47,484   (96)
 
Operating expenses  28,555   35,463   33,365   (19)
 
Operating profit before tax (from continuing and discontinued operations)  (27,155)  (3,597)  15,007   (655)
 
Net profit attributable to UBS shareholders  (20,887)  (5,247)  11,527   (298)
 
Personnel (full-time equivalents)5
  77,783   83,560   78,140   (7)
 
Invested assets (CHF billion)  2,174   3,189   2,989   (32)
 
                 
UBS balance sheet and capital management
                
 
Balance sheet key figures
                
 
Total assets  2,015,098   2,274,891   2,348,733   (11)
 
Equity attributable to UBS shareholders  32,800   36,875   51,037   (11)
 
Market capitalization6
  43,519   108,654   154,222   (60)
 
BIS capital ratios7
                
 
Tier 1 (%)  11.0   9.18  12.28    
 
Total BIS (%)  15.1   12.28  15.08    
 
Risk-weighted assets  302,273   374,4218  344,015   (19)
 
Long-term ratings
                
 
Fitch, London  A+  AA  AA+     
 
Moody’s, New York Aa2  Aaa  Aa2     
 
Standard & Poor’s, New York  A+  AA  AA+     
 
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report.  2 Net profit attributable to UBS shareholders from continuing operations/average equity 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 information.  8 The calculation prior to 2008 is based on the Basel I approach.

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Strategy, performance and responsibility

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 negative revenues in the Investment Bank due to trading losses on risk positions. Refer to the “Risk concentrations” section 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 shareholders approved a proposal that UBS strengthen its shareholders’ equity by way of an ordinary capital increase. 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 mortgage-backed securities (RMBSs) for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP, a third-party entity managed by BlackRock, Inc. The portfolio had a notional value of approximately USD 22 billion and comprised primarily Alt-A and sub-prime related assets. The 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 (balance at year-end 2008 was USD 9.2 billion).
 As announced on 16 October 2008, the Swiss National Bank (SNB) and UBS have reached an agreement to transfer, 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 overall impact on UBS’s income statement of the SNB transaction 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 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.
 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 financial 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 accounted 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 decreases 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 outstanding fair valued debt would increase accordingly, resulting in the reversal of some or all of the gains on own credit recorded so far, unless UBS redeems own debt before maturity.
 Following the auction rate securities (ARS) settlement in August 2008, Wealth Management US recorded losses of CHF 1,524 million, of which CHF 1,464 million were in-


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Financial performance

  cluded in general and administrative expenses, and CHF 60 million were recognized as trading losses. Under the ARS settlement, 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 reclassified from provisions to negative replacement values in fourth quarter 2008, when ARS settlement rights, which are treated as derivative instruments, were issued to and accepted by clients. Losses incurred post-reclassification represented trading losses.
 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 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 cross-border 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 million 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 management 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 Motor-Columbus to a consortium representing Atel’s Swiss minority shareholders, EOS Holding, Atel and French utility Electricité de France (EDF) for a sale price of approximately CHF 1,295 million, leading to an after-tax gain on sale of CHF 387 million.

Seasonal characteristics

The main businesses of UBS do not generally show significant seasonal patterns, although the Investment Bank’s revenues 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 asset withdrawals that tend to occur in fourth quarter and lower client activity levels related to the end-of-year holiday season.

Performance measures

Key performance indicators (2008)
Until the end of 2008, UBS consistently assessed its performance against indicators designed to measure the delivery (on average and through periods of varying market conditions) of returns to its shareholders. At the Group level, these indicators were: after-tax 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.

 è A new key performance indicator framework was introduced 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 assetsare all client assets managed by or deposited with UBS, including custody-only assets and assets held for purely transactional purposes.
 Invested assetsis a more restrictive term and includes all client assets managed by or deposited with UBS for investment 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, managed fund assets and wealth management securities or brokerage accounts. It excludes all assets held for purely transactional and custody-only purposes as UBS only administers the assets and does not offer advice on how these assets should be invested. Non-bankable assets (for example, art collections) and deposits from third-party 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 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 invest-



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Business division / business unit key performance indicators (2008)
Business Key performance indicators Definition
 
Business divisions and business units (excluding Corporate Center)
 Cost/income ratio (%) Total operating expenses/total operating income
before credit loss (expense)/recovery
   
  Return on attributed equity (%) Performance before tax/average attributed equity
 
Wealth and asset management businesses and Business Banking Switzerland
 Invested assets (CHF billion) Client assets managed by or deposited with UBS for investment purposes only (for further details please see “Client/invested assets reporting”)
   
  Net new money (CHF billion) Inflow of invested assets from new clients
    + inflows from existing clients
    – outflows from existing clients
    – outflows due to client defection
 
Wealth and asset management businesses
 Gross margin on invested assets (bps) Total operating income before credit loss
(expense)/recovery/average invested assets
 
Wealth Management International & Switzerland
 Client advisors Expressed in full-time equivalents
   
  Revenues per advisor (CHF thousand) 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
   
  Invested assets per advisor (CHF thousand) Average invested assets/average number of client advisors
 
Wealth Management US
 Recurring income (CHF million) Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees (as opposed to transactional revenues)
   
  Revenues per advisor (CHF thousand) Total operating income before credit loss (expense)/recovery/average number of financial advisors
   
  Net new money per advisor (CHF thousand) Net new money/average number of financial advisors
   
  Invested assets per advisor (CHF thousand) 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 management unit and the distribution unit. This results in double counting within UBS’s total invested assets as both units provide an independent service to their respective client, add value and generate revenues. Most double counting arises where

mutual funds are managed by the Global Asset 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).



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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 Corporate 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 recorded 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 million in fourth quarter 2008.



UBS reporting structure in 2008

 
           
 Global Wealth Management &  Global Asset Management  Investment Bank  Corporate Center
 Business Banking         
           
 
Wealth Management
International & Switzerland

 

         
           
 
Wealth Management US
 
         
           
           
 
Business Banking Switzerland
         
 
 
         

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 commodities (FICC) business unit of the Investment Bank has exited several businesses including institutional municipal securities, proprietary trading, commodities (excluding

precious metals, exchange-traded 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 immediate impact on the Investment Bank’s or UBS’s reporting structure.



 

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Accounting changes

Share-based payments: revisions to International
Financial Reporting Standard 2

UBS adopted amended IFRS 2 on 1 January 2008. As a result, from 1 January 2008, UBS’s share-based awards that are not generally forfeited upon the employee leaving UBS are expensed in the performance year. In contrast, share-based awards featuring stringent forfeiture rules are amortized 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 expense 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 financial 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 19Employee 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 post-employment 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” section of this report for more information.

IAS 39Reclassification of financial instruments

The markets for many financial instruments began to dry up in 2007 and many instruments that previously traded in active and liquid markets ceased to trade actively by mid-2008. In an effort to address accounting concerns arising from the global credit crisis, the International Accounting Standards Board published an amendment to International Accounting Standard 39 (IAS 39Financial Instruments: Recognition and Measurement) on 13 October 2008.

Although the amendment could have been applied retrospectively from 1 July 2008, UBS decided at the end of October 2008 to apply the amendment prospectively with effect from 1 October 2008 following an assessment of the implications on its financial statements.
Subject to certain conditions being met, the amendments 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 “available-for-sale” 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 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 reclassified financial instruments. If reclassification had not occurred, the impairment charge would not have been recognized but a trading loss of CHF 4.8 billion would have been recorded in UBS’s fourth quarter income statement. In



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the fourth quarter, the operating profit before taxes would have been CHF 3.8 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 8Operating Segments, came into force on 1 January 2009 and replaced IAS 14Segment Reporting. The external segmental reporting is based on internal reporting within UBS to the Group Executive Board (or, the “chief operating decision 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 segments. 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 reportable 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 revenue-sharing agreements, the inter-segment 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 comprehensive 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 non-current assets based on the following new geographical breakdown: Switzerland, UK, Rest of Europe, USA, Asia Pacific and Rest of the World.



 

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Key performance indicators

Until the end of 2008, UBS focused on four key performance indicators: return on equity, diluted earnings per share, cost / income ratio and net new money. These indica-

Return on equity

(BAR CHART)

Diluted earnings per share

(BAR CHART)

tors are designed to monitor the returns UBS delivers to shareholders and are calculated using results from continuing operations.

Cost/income ratio

(BAR CHART)

 

 

Net new money

(BAR CHART)



             
Key performance indicators
 
 
  For the year ended 
  31.12.08  31.12.07  31.12.06 
 
Return on equity (RoE) (%)1
  (57.5)  (10.9)  25.7 
 
RoE from continuing operations (%)1
  (57.9)  (11.7)  23.9 
 
Diluted earnings per share (EPS) (CHF)2
  (7.55)  (2.43)  4.99 
 
Diluted EPS from continuing operations (CHF)2
  (7.60)  (2.61)  4.64 
 
Cost/income ratio (%)3
  680.4   111.0   70.5 
 
Net new money (CHF billion)4
  (226.0)  140.6   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.

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2008

The key performance indicators show:

 return on equity from continuing operations for full-year 2008 at negative 57.9%, down from negative 11.7% in 2007. The profits recorded by UBS’s wealth and asset management businesses were more than offset by substantial losses in the Investment Bank.
 negativediluted earnings per share from continuing operations of CHF 7.60, compared with negative CHF 2.61 in 2007.
 acost/income ratio of 680.4%, 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 outflows were most pronounced in the Global Wealth Management & Business Banking division, which recorded total 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 Latin America, Mediterranean, Middle East & Africa regions. Wealth Management US reported net new money outflows 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 third-party distribution channels. Institutional net outflows were observed in all categories except money market funds, infrastructure and real estate. Wholesale intermediary had total net outflows of CHF 47.4 billion, reflecting higher outflows mainly in multi-asset, equities and fixed income. Approximately three-fourths of the wholesale intermediary outflows were through UBS distribution channels.



             
Net new money1 
  For the year ended 
CHF billion 31.12.08  31.12.07  31.12.06 
 
Wealth Management International & Switzerland  (101.0)  125.1   97.6 
 
Wealth Management US  (10.6)  26.6   15.7 
 
Business Banking Switzerland  (11.4)  4.6   1.2 
 
Global Wealth Management & Business Banking
  (123.0)  156.3   114.5 
 
Institutional  (55.6)  (16.3)  29.8 
 
Wholesale intermediary  (47.4)  0.6   7.4 
 
Global Asset Management
  (103.0)  (15.7)  37.2 
 
UBS
  (226.0)  140.6   151.7 
 
1 Excludes interest and dividend income.
                 
Invested assets 
  As of  % change from 
CHF billion 31.12.08  31.12.07  31.12.06  31.12.07 
 
Wealth Management International & Switzerland  870   1,294   1,138   (33)
 
Wealth Management US  600   840   824   (29)
 
Business Banking Switzerland  129   164   161   (21)
 
Global Wealth Management & Business Banking
  1,599   2,298   2,123   (30)
 
Institutional  335   522   519   (36)
 
Wholesale intermediary  240   369   347   (35)
 
Global Asset Management
  575   891   866   (35)
 
UBS
  2,174   3,189   2,989   (32)
 

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2007

Key performance indicators show:

 return on equity from continuing operations for full-year 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 substantial losses in the Investment Bank;
 negativediluted earnings per share from continuing operations of CHF 2.61, compared with positive CHF 4.64 in 2006;
 acost/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 full-year outflows in Global Asset Management, 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 & Switzerland, particularly in Europe and Asia Pacific. Net new money inflows of CHF 26.6 billion in Wealth Management 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 performance indicators: 2009 and beyond”

sidebar in the “Strategy and structure” section of this report for more information on UBS’s new KPIs.



 

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Financial performance

UBS results

                 
Income statement 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Continuing operations
                
 
Interest income  65,890   109,112   87,401   (40)
 
Interest expense  (59,687)   (103,775)  (80,880)  (42)
 
Net interest income  6,203   5,337   6,521   16 
 
Credit loss (expense) / recovery  (2,996)   (238)  156     
 
Net interest income after credit loss expense  3,207   5,099   6,677   (37)
 
Net fee and commission income  22,929   30,634   25,456   (25)
 
Net trading income  (25,818)   (8,353)  13,743   (209)
 
Other income  884   4,341   1,608   (80)
 
Total operating income  1,201   31,721   47,484   (96)
 
Cash components  16,356   22,342   21,346   (27)
 
Share-based components  (94)   3,173   2,685     
 
Total personnel expenses  16,262   25,515   24,031   (36)
 
General and administrative expenses  10,498   8,429   7,942   25 
 
Depreciation of property and equipment  1,241   1,243   1,244   0 
 
Impairment of goodwill  341   0   0     
 
Amortization of intangible assets  213   276   148   (23)
 
Total operating expenses  28,555   35,463   33,365   (19)
 
Operating profit from continuing operations before tax  (27,353)   (3,742)  14,119   (631)
 
Tax expense  (6,837)   1,369   2,998     
 
Net profit from continuing operations  (20,517)   (5,111)  11,121   (301)
 
                 
Discontinued operations
                
 
Profit from discontinued operations before tax  198   145   888   37 
 
Tax expense  1   (258)  (11)    
 
Net profit from discontinued operations  198   403   899   (51)
 
                 
Net profit  (20,319)   (4,708)  12,020   (332)
 
Net profit attributable to minority interests  568   539   493   5 
 
from continuing operations  520   539   390   (4)
 
from discontinued operations  48   0   103     
 
Net profit attributable to UBS shareholders
  (20,887)   (5,247)  11,527   (298)
 
from continuing operations  (21,037)   (5,650)  10,731   (272)
 
from discontinued operations  150   403   796   (63)
 
                 
Earnings per share
                
 
Basic earnings per share (CHF)  (7.54)   (2.42)  5.19   (212)
 
from continuing operations  (7.60)   (2.61)  4.83   (191)
 
from discontinued operations  0.05   0.19   0.36   (74)
 
Diluted earnings per share (CHF)  (7.55)   (2.43)  4.99   (211)
 
from continuing operations  (7.60)   (2.61)  4.64   (191)
 
from discontinued operations  0.05   0.19   0.34   (74)
 
                 
Additional information
                
 
Personnel (full-time equivalents)1
  77,783   83,560   78,140   (7)
 
1Excludes personnel from private equity (part of the Corporate Center).

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2008

Results

2008 saw the unfolding of a global financial crisis that affected UBS deeply. While UBS’s wealth and asset management 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 overall negative result.

In 2008, UBS reported a Group net loss attributable to UBS shareholders (“attributable loss”) of CHF 20,887 million – a loss of CHF 21,037 million from continuing operations and a profit of CHF 150 million from discontinued operations. In 2007, UBS recorded an attributable loss of CHF 5,247 million.

Operating income

Total operating income was CHF 1,201 million in 2008, down from CHF 31,721 million in 2007.Net interest income at CHF 6,203 million was up 16% compared with CHF 5,337 million a year earlier.Net trading income was negative CHF 25,818 million, sharply down from negative CHF 8,353 million in 2007.

As well as income from interest margin-based activities (loans and deposits), net interest income includes income earned as a result of trading activities (for example, coupon and dividend income). The dividend income component of interest income is volatile from period to period, depending on the composition of the trading portfolio. In order to provide a better explanation of the movements in net 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 26,883 million for full-year 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-

Trading versus non-trading income

(BAR CHART)

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. Equity-linked saw negative revenues in difficult equity and credit markets. The exchange-traded derivatives business was up as it benefited from significant volatility in the market. Prime brokerage services had a solid performance but revenues were down overall from 2007 as clients deleveraged their positions. Proprietary 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 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Net interest income  6,203   5,337   6,521   16 
 
Net trading income  (25,818)   (8,353)  13,743   (209)
 
Total net interest and trading income
  (19,615)   (3,016)  20,264   (550)
 
                 
Breakdown by businesses
                
 
Net income from trading businesses1
  (26,883)   (10,658)  13,730   (152)
 
Net income from interest margin businesses
  6,160   6,230   5,718   (1)
 
Net income from treasury activities and other
  1,107   1,412   816   (22)
 
Total net interest and trading income
  (19,615)   (3,016)  20,264   (550)
 
1Includes lending activities of the Investment Bank.

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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 value 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 decrease was primarily due to lower income from mortgages.

Net income from treasury activities and other

Net income from treasury activities and other was CHF 1,107 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 full-year 2008, compared with a credit loss expense of CHF 238 million in full-year 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 lombard 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 expense 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.
 è 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 asset-based 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.
 Insurance-related 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 884 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 pre-tax gain, attributed to the Corporate Center. 2008 included a gain of CHF 168 million from the sale of a stake in Adams Street Partners in the third quarter and a gain of CHF 360 million on the sale of UBS’s stake in Bank of China in the fourth quarter.



                 
Credit loss (expense) / recovery
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Global Wealth Management & Business Banking  (421)   28   109     
 
Investment Bank  (1,246)   (266)  47   368 
 
Investment Bank – credit losses from reclassified financial instruments  (1,329)             
 
UBS
  (2,996)   (238)  156     
 

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Net fee and commission income 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Equity underwriting fees  1,138   2,564   1,834   (56)
 
Debt underwriting fees  818   1,178   1,279   (31)
 
Total underwriting fees
  1,957   3,742   3,113   (48)
 
Mergers and acquisitions and corporate finance fees  1,662   2,768   1,852   (40)
 
Brokerage fees  8,355   10,281   8,053   (19)
 
Investment fund fees  5,583   7,422   5,858   (25)
 
Fiduciary fees  301   297   252   1 
 
Custodian fees  1,198   1,367   1,266   (12)
 
Portfolio and other management and advisory fees  6,169   7,790   6,622   (21)
 
Insurance-related and other fees  317   423   449   (25)
 
Total securities trading and investment activity fees
  25,540   34,090   27,465   (25)
 
Credit-related fees and commissions  273   279   269   (2)
 
Commission income from other services  1,010   1,017   1,064   (1)
 
Total fee and commission income
  26,823   35,386   28,798   (24)
 
Brokerage fees paid  1,909   2,610   1,904   (27)
 
Other  1,984   2,142   1,438   (7)
 
Total fee and commission expense
  3,894   4,752   3,342   (18)
 
Net fee and commission income
  22,929   30,634   25,456   (25)
 

Operating expenses

Total operating expenses were down 19% to CHF 28,555 million from CHF 35,463 million. The decline was mainly due to significantly lower performance-related compensation, partly offset by provisions for auction rate securities and the provision made in connection with the US cross-border 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 performance-related compensation, mainly in the Investment Bank, as well as lower salary costs due to reduced staff levels. Full-year results for 2007 included accruals for share-based compensation for performance during the year. These are not reflected in full-year 2008 as, starting in 2009, they will be amortized 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 contractors employed, mainly at the Investment Bank. Insurance and social security contributions declined 45% to CHF 706 million in 2008, driven by lower performance-related compensation. Contributions to retirement benefit plans increased CHF 4 million 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 severance 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 increase was mainly due to provisions related to auction rate se-

curities of CHF 1,464 million, the provision of CHF 917 million made in connection with the US cross-border case and restructuring charges. These offset cost reductions in all other categories 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 million 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 full-year 2007.

Income tax

UBS recognized an income tax benefit in the income statement of CHF 6,837 million for 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 mainly relate 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.
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.



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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, reflecting the decrease in customer demand for complex derivatives transactions. Markdowns on leveraged finance commitments 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. Exchange-traded derivatives profited from the acquisition of ABN AMRO’s global futures and options business towards the end of 2006. Mark-to-market 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 proprietary 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 deposits 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 accrual-accounted balance sheet items (for example, 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 statement. Higher interest income was also recorded as a result of increased yield on a slightly higher average capital base.
In 2007, UBS experienced anet 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 sub-prime mortgage market during the second half of 2007 were the main reasons for the significant increase, mainly in the Investment Bank.
Net credit loss recovery at Global Wealth Management & Business Banking amounted to CHF 28 million in 2007 compared with a net credit loss recovery of CHF 109 million in 2006. The reduced level of credit loss recovery was a consequence of the continued reduction in the impaired lending portfolio and related allowances to a level such that recoveries realized from work-outs 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 securitization 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 million 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.



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 At CHF 2,768 million, mergers and acquisitions and corporate 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 increase in client activity in all client segments. Additionally, 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 asset-based fees for the wealth management businesses and higher management and performance 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 enlarged asset base.
 Portfolio and other management and advisory fees increased by 18% to CHF 7,790 million in 2007. The increase was again the result of rising invested asset levels and to a lesser extent higher management fees.
 Insurance-related 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 demutualization of UBS’s stake in Bovespa, the Brazilian stock exchange, 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 membership 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.

Operating expenses

Total operating expenses increased 6% to CHF 35,463 million 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

advisors. Performance-related compensation decreased, reflecting 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 reflecting accelerated amortization of deferred compensation awarded for senior managers who have left UBS. Contractors’ 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 contributions declined by 8% to CHF 1,290 million in 2007 compared with CHF 1,398 million in 2006, reflecting lower bonus 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 expenses 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 businesses. This increase was only partially offset by lower provisions.

Depreciation, amortization and impairment of goodwill

Depreciation was CHF 1,243 million in 2007, almost unchanged from CHF 1,244 million in 2006. Lower depreciation 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.

Income tax

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 sub-prime crisis. The US tax benefits recognized arose mainly as a result of the ability to carry back losses against US profits earned in the two prior years.



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Financial performance

Balance sheet

             
% change from 
CHF million 31.12.08  31.12.07  31.12.07 
 
             
Assets
            
 
Cash and balances with central banks  32,744   18,793   74 
 
Due from banks  64,451   60,907   6 
 
Cash collateral on securities borrowed  122,897   207,063   (41)
 
Reverse repurchase agreements  224,648   376,928   (40)
 
Trading portfolio assets  271,838   660,182   (59)
 
Trading portfolio assets pledged as collateral  40,216   114,190   (65)
 
Positive replacement values  854,100   428,217   99 
 
Financial assets designated at fair value  12,882   11,765   9 
 
Loans  340,308   335,864   1 
 
Financial investments available-for-sale  5,248   4,966   6 
 
Accrued income and prepaid expenses  6,141   11,953   (49)
 
Investments in associates  892   1,979   (55)
 
Property and equipment  6,706   7,234   (7)
 
Goodwill and intangible assets  12,935   14,538   (11)
 
Other assets  19,094   20,312   (6)
 
Total assets
  2,015,098   2,274,891   (11)
 
             
Liabilities
            
 
Due to banks  125,628   145,762   (14)
 
Cash collateral on securities lent  14,063   31,621   (56)
 
Repurchase agreements  102,561   305,887   (66)
 
Trading portfolio liabilities  62,431   164,788   (62)
 
Negative replacement values  851,803   443,539   92 
 
Financial liabilities designated at fair value  101,546   191,853   (47)
 
Due to customers  474,774   641,892   (26)
 
Accrued expenses and deferred income  10,196   22,150   (54)
 
Debt issued  197,254   222,077   (11)
 
Other liabilities  34,040   61,496   (45)
 
Total liabilities
  1,974,296   2,231,065   (12)
 
             
Equity
            
 
Share capital  293   207   42 
 
Share premium  25,250   12,433   103 
 
Net income recognized directly in equity, net of tax  (4,471)  (1,161)  (285)
 
Revaluation reserve from step acquisitions, net of tax  38   38   0 
 
Retained earnings  14,892   35,795   (58)
 
Equity classified as obligation to purchase own shares  (46)  (74)  38 
 
Treasury shares  (3,156)  (10,363)  70 
 
Equity attributable to UBS shareholders
  32,800   36,875   (11)
 
Equity attributable to minority interests  8,002   6,951   15 
 
Total equity
  40,802   43,826   (7)
 
Total liabilities and equity
  2,015,098   2,274,891   (11)
 

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2008 asset development

(BAR CHART)

31.12.08 vs 31.12.07:

UBS’s total assets stood at CHF 2,015 billion on 31 December 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 billion in collateral trading, led by the Investment Bank. These substantial reductions were, however, partly offset by a significant rise in replacement values (increasing to a similar extent on both sides of the balance sheet as discussed under “Replacement values” below) during 2008, as market movements drove up positive replacement values by 99%, or CHF 426 billion, to reach CHF 854 billion at year-end. 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 75 billion, implying an underlying reduction of effectively CHF 611 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 Management remained relatively stable at CHF 291 billion and CHF 25 billion, respectively.

Lending and borrowing

Lending

Cash and balances with central banks was CHF 33 billion on 31 December 2008, an increase of CHF 14 billion from the prior year-end. 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 eight-year amortizing loan; balance on 31 December 2008 USD 9.2 billion) in second quarter 2008 and the reclassification of illiquid trading assets from the trading portfolio in fourth quarter 2008, par-

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.

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 billion 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 equity-linked notes as major stock indices fell. Long-term 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 December 2008, a decrease of CHF 167 billion for the year, or CHF 134 billion, on a currency-adjusted 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 billion. Investment Bank deposits declined CHF 58 billion, mainly driven by lower business funding needs and a decline in the prime brokerage business.

Repurchase/reverse repurchase agreements
and securities borrowing/lending

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 billion on 31 December 2008. The CHF 236 billion decline occurred 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 agreement portfolio comprised of assets and liabilities with equal maturities and equal value so that the market risks substantially cancel each other out). Furthermore, as part of the Investment Bank’s balance sheet reduction measures, its trad-



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Financial performance

ing short positions were reduced CHF 102 billion, which resulted in lower short-coverings via reverse repurchase agreements and securities borrowing transactions.

A significant amount of trading assets are funded via repurchase agreements, so, in addition to the matched book reduction, the yearly decrease in trading assets also contributed to the drop in repurchase agreements. These reductions 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 billion on a currency-adjusted 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, currencies and commodities (FICC) business area and the equities business area. In FICC, trading inventories in a number of areas, including real estate, securitization and commodities, were substantially reduced, including USD 16.4 billion of illiquid 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, equity 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 continued strong rises during 2008, driven by increased market valuations, while notional values declined 2% year-on-year. Positive RVs grew CHF 426 billion to CHF 854 billion in 2008, while the negative RVs of derivative instruments increased CHF 408 billion to CHF 852 billion. In both cases, the increases were largely driven by movements in currencies (for example, the weakening of the US dollar), lower interest rates and widening credit spreads. Increases occurred 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 shareholders was CHF 32.8 billion, representing a decrease of CHF 4.1 billion compared with 31 December 2007.

The decline in 2008 reflects mainly the net loss attributable to shareholders of CHF 20.9 billion combined with other losses recognized directly in equity (including foreign currency translation) of CHF 3.3 billion. Refer to the “Statement of recognized income and expense” in the financial statements of this report for more information about the losses recognized directly in equity.
These equity reductions were largely offset by UBS’s capital strengthening measures taken in 2008 (see the table below showing the impact by equity attributable to UBS shareholders accounts).



Equity attributable to UBS shareholders development

  
          Net income          Equity 
          recognized          attributable 
      Share  directly  Retained  Treasury  to UBS 
CHF billion Share capital  premium  in equity  earnings  shares  shareholders 
 
Starting balance
  0.2   12.4   (1.2)  35.8   (10.4)  36.9 
 
Net loss attributable to UBS shareholders              (20.9)      (20.9)
 
of which: amount relates to MCNs issued in March 20081
              3.7         
 
of which: amount relates to MCNs issued in December 20082
              0.7         
 
Rights issue  0.1   15.5               15.6 
 
MCNs issued in March 20081
      7.0               7.0 
 
MCNs issued in December 20082
      (3.6)              (3.6)
 
Share-based compensation plans/sale of treasury shares      (6.6)          7.2   0.6 
 
Others      0.5   (3.3)          (2.8)
 
Ending balance
  0.3   25.2   (4.5)  14.9   (3.2)  32.8 
 
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.

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Off-balance sheet

Contractual obligations

The table below includes contractual obligations as of 31 December 2008.

All contracts included in the table below, with the exception 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 statements of this report), current and deferred tax liabilities (refer 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 contractually-agreed salaries).

Off-balance sheet arrangements

In the normal course of business, UBS enters into arrangements that, under International Financial Reporting Standards, lead to either de-recognition of financial assets and liabilities for which UBS has transferred substantially all risks and rewards, or the non-recognition of financial assets (and liabilities) received for which UBS has not assumed the related risks and rewards. UBS recognizes these types of arrangements on the balance sheet to the extent of its involvement, which, for example, may be in the form of derivatives, guarantees, financing commitments or servicing rights.

     When UBS, through these arrangements, incurs an obligation or becomes entitled to an asset, it recognizes them

on the balance sheet, with the resulting loss or gain recorded 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 inherent in such arrangements. Generally, these arrangements either meet the financial needs of customers or offer investment opportunities through entities that are not controlled by UBS.

Off-balance 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 off-balance sheet arrangements.

Risk positions

UBS’s main concentrations of risk and other relevant risk positions are disclosed in detail in the audited parts of the “Risk management and control” section of this report. These positions include monoline insurers, auction rate securities and leveraged finance deals. The quantitative summary about each of these risk positions includes exposures of on- and off-balance sheet arrangements.
The importance and the potential impact of such positions to UBS (with respect to liquidity, capital resources or market and credit risk support), including off-balance sheet structures, are also described in the “Risk and treasury management” 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 guarantees to structured investment vehicles, conduits and other types of special purpose entities (SPEs). Losses resulting from such obligations were not significant in 2008 and 2007.



                 
Contractual obligations 
  Payment due by period 
CHF million <1 year  1–3 years  3–5 years  >5 years 
 
Long-term debt  36,024   42,188   31,869   77,100 
 
Capital lease obligations  63   104   40   0 
 
Operating leases  1,034   1,799   1,405   2,573 
 
Purchase obligations  202   166   85   0 
 
Other liabilities  3,718   121   1,406   0 
 
Total
  41,041   44,378   34,805   79,673 
 

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Financial performance

      
 
 Off-balance sheet arrangements, risks,  Disclosure in the annual report 
 consolidation and fair value measurements    
  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  Financial statements, “Note 23 Derivative instruments and hedge accounting” 
  Leases  Financial statements, “Note 25 Operating lease commitments” 
  Non-consolidated securitization vehicles and collaterialized 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  Risk and treasury management, “Risk concentrations” section 
  Credit risk information  Risk and treasury management, “Credit risk” section 
  Market risk information  Risk and treasury management, “Market risk” section 
  Liquidity risk information  Risk and treasury management, “Liquidity and funding management” section 
  Consolidation  Financial statements, “Critical accounting policies” section 
  Fair value measurements, including sensitivity and level 3 impact on the income statement consolidation  Financial statements, “Note 27 Fair value of financial instruments” 
 

Non-consolidated securitization vehicles and collateralized debt obligations

UBS sponsored the creation of SPEs that facilitate the securitization of acquired residential and commercial mortgage loans, other financial assets and related securities. UBS also securitized customers’ debt obligations in transactions involving SPEs which issued collateralized debt obligations. A typical securitization 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 financial statements of UBS once their risks and rewards are transferred to a third-party, e.g. in a sales transaction. Refer to “Note 1 Summary of significant accounting policies” in the financial 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 retained interests could not be sold due to illiquid markets for certain instruments, mainly those linked to the US mortgage market.
The volume and size of interests held in securitization structures originated by UBS and asset-backed 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 mortgage-backed securities for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP, a third-party entity managed by BlackRock, Inc.
 Several other true sales of asset-backed securities portfolios 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 non-consolidated securitization vehicles and CDOs disclosed here are typically managed on a portfolio basis alongside hedges and other offsetting financial 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 commercial mortgage securities are backed by an agency of the US government – the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), or the Federal Home Loan Mortgage Corpora-


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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 consolidation 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 instances, SPEs may be consolidated or de-consolidated 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 decision-making rights became immediately vested in the super-senior 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 affected 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 concentrations, as well as risks associated with UBS’s involvement in consolidated and non-consolidated US mortgage securitization 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 operations. 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 
              Purchased and    
  Original  Current      retained interests, and    
  principal  principal  Delinquency  loans held by UBS2  Derivatives held by UBS
   
As of 31 December 2008 outstanding  outstanding  amounts  Fair value  Fair value  Nominal value 
 
Originated by UBS3
                        
 
CDOs and CLOs
                        
 
Residential mortgage  23.1   8.8   0.5   1.1   0.6   4.0 
 
Commercial mortgage  0.0   0.0   0.0   0.1   (0.5)  0.7 
 
Other ABS  0.5   0.5   0.0   0.0   0.1   0.1 
 
Securitizations
                        
 
Residential mortgage  57.3   43.1   2.3   0.0   (0.3)  12.7 
 
Commercial mortgage  21.2   17.3   1.4   0.2   0.0   0.0 
 
Other ABS  3.8   1.1   0.1   0.0   0.0   5.1 
 
Total
  105.9   70.8   4.3   1.4   (0.1)  22.6 
 
Not originated by UBS
                        
 
CDOs and CLOs
                        
 
Residential mortgage  330.8   169.5   17.1   3.4   1.9   8.7 
 
Commercial mortgage  6.7   1.3   0.0   0.6   0.1   0.9 
 
Other ABS  53.1   18.6   0.7   4.8   1.2   3.4 
 
Securitizations
                        
 
Residential mortgage  1,259.7   616.5   81.6   3.5   (2.4)  29.1 
 
Commercial mortgage  555.0   476.1   3.7   4.2   0.0   0.0 
 
Other ABS  301.7   142.8   5.5   3.4   0.0   2.2 
 
Total
  2,507.0   1,424.8   108.6   19.9   0.8   44.3 
 
1Includes 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 information 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.  2Loans 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.

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Financial performance

Support to non-consolidated investment funds

In the ordinary course of business, UBS issues investment cer-tificates to third parties that are linked to the performance of non-consolidated investment funds. Such investment funds are originated either by UBS or by third parties. For hedging purposes, UBS generally invests in the funds to which its obligations 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 de-leveraging by investors, UBS supported several non-consolidated investment funds that it manages in its wealth and asset management businesses. UBS provided this support primarily to facilitate redemption requests of fund investments 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 provided 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 third-parties in the context of these non-consolidated funds were immaterial at 31 December 2008. Losses incurred in 2008 as a result of such fund support were immaterial.
Acquired fund units and fund assets are generally accounted for as financial investments available-for-sale, 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 financial assets, predominately US RMBS, from investment funds managed by UBS. The total loss resulting from the purchases, writedowns and sales amounted to approximately USD 0.1 billion in 2007, of which the majority related to transactions 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 UBS-managed investment funds. This bridges time lags in fund unit redemptions and subscriptions. These bridge financings did not incur losses and are expected to be paid without significant losses.
Should UBS be required to consolidate previously unconsolidated investment funds in the future, it expects no significant 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 beyond, it is possible that UBS may decide to provide financial support to one or more of its investment funds. Such decisions will be taken on a case-by-case 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 extensive 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 issuance facilities; and revolving underwriting facilities. With the exception of related premiums, these guarantees and similar obligations are kept off-balance sheet unless a provision 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 guarantees 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 commitments 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 million; and for the years ended 31 December 2007 and 2006, the Group recognized net credit loss recoveries of CHF 3 million and CHF 10 million respectively, related to obligations incurred for contingencies and commitments. Provisions recognized for guarantees, documentary credits and similar instruments were CHF 31 million at 31 December 2008 and CHF 63 million at 31 December 2007.
The Group partially enters into sub-participations to mitigate 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 fulfilled by the obligor and, where applicable, to fund a part of



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the credit facility. The Group retains the contractual relationship with the obligor, and the sub-participant has only an indirect relationship. The Group will only enter into sub-participation 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 numerous transactions, such as asset securitizations.

Clearinghouse and future exchange memberships

UBS is a member of numerous securities and futures exchanges 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 insolvent. 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 guarantee and exposes UBS to additional risk which is not reflected 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 obligation 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 December 2008 and 31 December 2007 was CHF 0.5 billion and CHF 0.4 billion respectively. Equity underwriting commitments in the Investment Bank amounted to CHF 0.4 billion at 31 December 2008.



Commitments1

 

The table below shows the maximum committed amount of commitments.

                         
  31.12.08  31.12.07 
      Sub-          Sub-    
CHF million Gross  participations  Net  Gross  participations  Net 
 
Credit guarantees and similar instruments  13,124   (344)  12,780   13,381   (593)  12,788 
 
Performance guarantees and similar instruments  3,596   (446)  3,150   3,969   (464)  3,505 
 
Documentary credits  2,979   (415)  2,564   3,474   (517)  2,957 
 
Total commitments
  19,699   (1,205)  18,494   20,824   (1,574)  19,250 
 
Undrawn irrevocable credit facilities
  60,316   (1)  60,315   83,980   (2)  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 1,028 million (USD 964 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.

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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 77.2 billion in 2008 compared with a cash outflow of CHF 52.1 billion in 2007. Operating cash outflows (before changes in operating assets and liabilities and income taxes paid) totaled CHF 71.2 billion in 2008, an increase of CHF 67.5 billion from 2007. Net profit decreased CHF 15.6 billion compared with 2007.
Cash inflow of CHF 402.8 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 253.5 billion was reflected in the operating liabilities. The increase in cash was used to fund the operating liabilities. 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 available for sale was CHF 0.7 billion, whereas in 2007 the divestments 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 financial 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 long-term debt – the latter significantly outpacing long-term debt repayments, which totaled CHF 92.9 billion. That outflow was partly offset by inflows attributable to capital issuances of CHF 23.1 billion, including CHF 15.6 billion from rights issues and CHF 7.6 billion from

mandatory convertible notes. In 2007, UBS had a net cash inflow of CHF 74.6 billion from financing activities. The difference between the two years was mainly due to the fact that net long-term debt repayments and money market paper 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 billion in 2007 compared with a cash outflow of CHF 5.4 billion in 2006. Operating cash outflows (before changes in operating 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 liabilities. 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 billion. 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. Disposals 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 inflow of CHF 1.2 billion.



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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 paper of CHF 32.7 billion and the issuance of CHF 110.9 billion in long-term 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 movements 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 financing activities. The difference between the two years was mainly due to the fact that net long-term debt issuance and money market paper increased CHF 26.3 billion in 2007.


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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 high-value workforce 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 employees whether they are new hires, seasoned staff, key talent or senior managers. The graph below highlights the most important 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 December 2008 at 77,783, down 5,777 or 7% from year-end 2007. In 2008, UBS personnel worked in 60 countries, with about 38% of staff employed in the Americas, 34% in Switzerland, 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 increased slightly in 2008, with 1,285 employees moving to roles in a different region, versus 1,062 in 2007. The highest

Gender distribution by geographical region1

 
(BAR CHART)

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 & Africa. Cross-division mobility was lower in 2008 than in 2007, with 784 employees changing divisions during the course of



Investing in employees

 
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Personnel
Regional distribution

(BAR CHART)

Business unit distribution

(BAR CHART)

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 front-office to back-office staff. As UBS believes the long-term trends for wealth and asset management 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 hiring, retention and productivity of client advisors and front-office managers. More effective recruitment, integration, and skill and competency development processes are supported by line manager coaching.

To further improve the quality of all candidates, better match open jobs with the right candidate and more successfully integrate new hires, UBS standardized its approach to sourcing, selecting and “on-boarding” new hires globally in 2008. Additionally, Global Wealth Management & Business Banking launched an internal marketplace aimed at filling vacancies with internal candidates.
In regard to graduate recruitment, UBS developed a firm-wide campus recruiting strategy in 2008, creating a cross-division governance body and aligning marketing with the needs of “Generation Y” (20- to 30-year-olds) to enhance the UBS brand within this recruitment segment. A more interactive website and focused print materials support 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 overseas for UBS’s businesses in the Asia Pacific region. For the fourth straight year, global consultant Universum ranked UBS the number one employer for business students in Switzerland.
In 2008, UBS hired more than 1,100 university graduates for its undergraduate and MBA training programs. The UBS apprenticeship program in Switzerland hired 304 apprentices 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 category1

                         
 
On 31.12.08 Officers  Non-officers  Total
  Number  %  Number  %       
 
Male  30,788   75.0   18,337   48.1   49,125   62.1 
 
Female  10,283   25.0   19,758   51.9   30,041   37.9 
 
Total  41,071   100.0   38,095   100.0   79,166   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.

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Developing and sustaining a diverse workforce

A workforce of people from different backgrounds, cultures and experiences is indispensable in today’s global business environment, in part because it can help enhance understanding of regional markets and sensitivity to cultural 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 action, working with local business and HR leaders. In addition, more than 20 employee networks globally help to build cross-business relationships and strengthen UBS’s inclusive 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 performance 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 return to work after a career break. In 2008, four such programs were held in London, Philadelphia / New York, Singapore 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 recognized byWorking 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 employee-manager dialogue, with demonstrable performance as the basis for meritocracy. All employees therefore participate in a year-round performance management process that assesses individual achievements against specific objectives. This process supports 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 employees. 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 directly with its financial results. This is being achieved through a centrally managed change program that includes the development 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 long-term focus and is more closely aligned with the creation of value for the firm. (Refer to the “Compensation principles 2009 and beyond for UBS senior executives” section of this report for more information.)
UBS’s compensation programs are results-oriented and market-focused. Total compensation is linked to UBS’s business objectives, and pay and incentive programs are designed to pay for performance. UBS’s total compensation and benefits philosophy has five guiding principles which require UBS to:
 use carefully selected performance measures, rigorous performance management and a strict pay-for-performance relationship to support UBS’s business strategy;
 support reward opportunities by consistently communicating UBS’s business strategy and promoting a meritocratic culture;
 provide competitive total compensation opportunities to enable UBS to attract and retain talent;
 balance compensation components to meet short-term needs while focusing on mid- to long-term 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 ownership, believing accountability for decisions and actions is encouraged through equity-based awards that vest and / or become 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 equity-based program enables employees to purchase UBS shares at fair market value and generally receive 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 instead of cash. Select high-performing 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.



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On 31 December 2008, current UBS employees held an estimated 6% of UBS shares outstanding (including approximately 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 management and leadership development, understanding that both capabilities are important factors in ensuring high-quality client service and long-term business success.

In 2008, a Group-wide talent management architecture was established to align the firm’s identification and selection 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 Group-wide and divisional initiatives. A new framework created in 2008 centralizes development initiatives for managing directors and above within a Group-level learning organization. An organizational development and culture change initiative for the GEB, GMB and managing director populations, called “Leading our Future”, is being developed to engage and align the firm’s leadership with its vision, core values, 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 Group-wide initiatives to ensure consistency 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 long-term 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 activities 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 regulations and behaves in a principled way. UBS is self-aware 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 Group-wide initiative brings together senior client-facing employees from different divisions for a one-and-a-half-day 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 cross-division 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 client-facing participants together. Almost 400 cross-divisional client service opportunities were shared, ultimately bringing in more than USD 300 million in net new money to UBS.



 

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UBS employees

core set of questions across all divisions provides a comprehensive view of employee opinions.

48,205 employees, or 60% of UBS’s employee population, participated in the survey conducted in June / July 2008. Most measures declined compared with earlier years. For example, 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 expected of them (versus 83% in 2007). These overall satisfaction 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 senior management.
UBS and its business divisions take these results seriously. The GEB committed to increasing employee communication through employee events, intranet and e-mail. 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. Examples of this commitment can be found in the firm’s Employee Assistance Programs (EAPs) and the COACH and SOVIA programs 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 surrounding elder care, work performance and personal conflicts. In the UK, the program is part of a health and wellbeing 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 restructuring. COACH advisors provide support and assistance in finding new jobs, working closely with UBS’s internal recruitment center and outside employment services. During the COACH process employees retain full salary and benefits, and financial assistance is available for job-related training, 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 redundancies among employees whose jobs are subject to the Agreement 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.



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Employee representation

The UBS Employee Forum facilitates the exchange of information between employees and management on pan-European 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 arrangements 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, including health and safety issues, social security and pension issues. ERC employee representatives are elected to represent the interests of employees whose work contracts are governed by Swiss law and the Agreement on Conditions of Employment for Bank Staff. The ERC also fosters an open dialogue 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 Switzerland 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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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 employees, 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 addressing 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 anti-money laundering to community development and human rights to protecting the environment – UBS continued with a wide range of important and effective corporate responsibility-related activities during 2008. Even in difficult times, UBS remains convinced that corporate 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 standards, the environment and anti-corruption. 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 Swiss-based companies.

Labor standards and human rights

UBS has well established human resources policies and practices that address issues such as employment, diversity, equal opportunity and discrimination. Such policies also tackle human 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 respected.
In line with the firm’s endorsement of the UN Global Compact and its underlying principles, UBS adopted a statement 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 continued with the implementation of its human rights statement with the introduction of a responsible supply chain guide-



Operational corporate responsibility at UBS

 
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line. It also continued the development of industry sector guidelines to support the consistent identification and assessment of environmental and social risks in the firm’s banking activities.

 è Refer to the “UBS employees” section of this report for more information on labor standards and diversity programs
 è Refer to the discussion on supply chain management and environmental risk management below for more information on the responsible supply chain guidelines and on industry sector guidelines

Environment

In 1992, UBS was one of the first signatories of the UN Environment Program’s Bank Declaration (UNEP). This act committed the firm to integrating appropriate environmental measures within its activities. It has resulted in a well developed global environmental management system, certified to the ISO 14001 standard, which covers both banking activities and in-house operations. UBS acknowledges that climate change represents one of the most significant environmental 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 change-related products and services and to publish dedicated research reports. 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 towards achieving this target.
 è 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 risk-based approach to its internal anti-money 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 zero-tolerance 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 officials; the hiring of political advisers; guidance on engaging intermediaries; and anti-corruption 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 web-based 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 behavior 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.
 è 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 recognized, 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 sustainability-driven companies worldwide. UBS is also included in the FTSE4Good Index, which measures the performance of global companies in the areas of environmental 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 supports the BoD’s efforts to safeguard and advance UBS’s reputation 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 expectations of its stakeholders. It also has responsibility for monitoring the firm’s corporate responsibility policies and regulations, 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 documentation prepared by the committee chair and the corporate responsibility management function of UBS’s chief communication officer area.



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     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 representatives, 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 financing, sanctions and anti-bribery. It supports the Group General Counsel and the head of compliance in their functional responsibilities by providing, in conjunction with the compliance functions in the business divisions, reasonable assurance that UBS meets relevant regulatory and professional standards in its business conduct. It also defines, where appropriate, 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 regional issues, such as the regional diversity strategy and diversity 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 activities 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. General information is published on the firm’s intranet and in em-

ployee magazines. In 2008, 2,800 employees participated in training and awareness-raising activities dealing with corporate responsibility. Specific training is also given to staff working in the areas of AML and environmental management. It is mandatory for AML and compliance staff to complete 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 environmental issues, with 3,905 receiving general education on UBS’s environmental policy and programs, mostly in induction training, and 1,327 employees receiving specialist training 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 terrorist financing. These policies seek to protect the firm, and its reputation, from those who may intend to legitimize their ill-gotten gains through UBS.

The GMLPU leads UBS’s efforts to fight money laundering, 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 risk-based 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 businesses and specific AML exposures, while also seeking to streamline and increase consistency between business divisions by using consistent methodologies and tools (for ex-



UBS’s corporate responsibility governance process

 
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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 know-your-customer regulations, while at the same time not treating clientsa priorias criminals or undermining their right to privacy. Employees regularly undergo training in AML-related issues and new trends, be it through online training, awareness campaigns or seminars. UBS also utilizes advanced technology to assist in the identification of transaction patterns or unusual dealings.

Over the last few years, and as a core part of its risk-based approach, UBS has been particularly vigilant about enhancing controls with regard to regimes and countries with heightened risks. The need for increased vigilance has been underscored by the acknowledgement by the Financial Action Task Force (FATF) of the importance of country risk considerations in the risk-based approach, increasing international 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 policy, 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 implementation 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 completing and on 14 January 2009 publishing its own trade finance principles paper. Wolfsberg Group’s work is ongoing in the area of credit cards and stored value cards, the implementation 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 contractors 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 Group-wide guidance on identifying, assessing and monitoring supplier practices in the areas of human and labor rights, the environment and corruption. Examples of human rights issues that have been included are avoidance of child and forced labor, non-discrimination, 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 contracts. 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 well-being 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 volunteering, matched-giving schemes, in-kind 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 “empowerment through education” and “building a stronger community”.
Overall, in 2008, UBS and its affiliated foundations donated nearly CHF 46 million to support charitable causes. UBS employees, through their donations and volunteer efforts, 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 Switzerland. The associationA Helping Hand from UBS Employeeshelps disabled and disadvantaged people lead active, independent lives. UBS encouraged this employee involvement by matching the funds raised in 2008. TheUBS Cultural Foundationfosters creativity, appreciation of different forms of art, and contact between artists and society. The foundation provides financial support for fine arts, film, literature, music, preservation of historic buildings, archaeological projects and research in history and philosophy in Switzerland. In similar fashion, the purpose of theUBS Foundation for Social Issues and Educationis to support deprived communities in Switzerland in various forms. Non-profit, charitable organizations, 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 donations from UBS clients into a number of programs and



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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 non-profit sector will see a large turnover in its local and national executive leadership 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 firstCommunity Leadership Experience program at the India Service Centre in Hyderabad. This initiative aims to build the capacity of leaders from the non-profit 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 non-profit 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 forProcap Sport, an organization that promotes enthusiasm 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 aidKispex– 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 community. The Bridge Academy exemplifies UBS’s commitment to improving the provision of education and to supporting regeneration efforts in the London Borough of Hackney.
 è 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 managing 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.

UBS and the environment

Through its commitment to the environment, embodied in its environmental policy, UBS aims to create long-term 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 businesses, especially in lending, investment banking, advisory 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;

 seeking ways to reduce UBS’s direct environmental impact on air, soil and water from in-house operations, with a primary focus on reducing greenhouse gas emissions. UBS also assesses the environmental impact of its suppliers’ products and services;
 ensuring efficient implementation of UBS’s policy through a global environmental management system certified according to ISO 14001 – the international environmental management standard;
 integrating environmental considerations into internal communications and training.

Environmental management system

UBS’s environmental management system covers both its banking activities and in-house operations and has been certified under the ISO 14001 standard since 1999. ISO 14001 requires that the system be audited annually and recertified every three years. UBS successfully passed the extensive 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 well-performing environmental management system, integrated in the organization and suitable for manag-



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The five principles of UBS’s environmental policy

 
 
(CHART)

ing environmental risks and improving environmental performance 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 management, 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 markets 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 “best-in-class” practices and theme-based approaches. “Best-in-class” is an active equity management approach that is based on stock selection of companies that generate above-average environmental, social and economic performance. The “best-in-class” offering includes a global fund and a European fund. The theme-based approach focuses investment on segmented climate change, water and demographics strategies.

Additionally, UBS offers customized client portfolios in the form of segregated mandates / institutional accounts based on “negative” screening, which excludes certain controversial 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 tailor-made 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 services, UBS provides stock-broking and account management services to alternative energy and SRI fund managers.
Finally, UBS also offers SRI portfolio management solutions to selected private client segments. This offering pools internal and external SRI expertise and includes SRI-focused portfolios in Switzerland and SRI-managed accounts in the US. UBS’s open architecture approach also allows clients to invest in SRI bond, equity and microfinance products from third-party providers.
In the past years UBS experienced increased client demand for SRI and expanded its SRI product offering, resulting 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 equity markets (equities is the preferred asset class of UBS’s SRI products), but also due to asset outflows.



Socially responsible investments invested assets1

 
                  % change 
     For the year ended  from 
CHF billion, except where indicated
 GRI2   31.12.08   31.12.07   31.12.06   31.12.07 
 
UBS
      2,174   3,189   2,989   (32)
 
UBS SRI3 products and mandates
                    
 
positive criteria  FS11   2.12   5.20   1.84   (59)
 
exclusion criteria  FS11   14.05   33.33   16.17   (58)
 
Third-party
  FS11   1.85   1.08   N/A   72 
 
Total SRI invested assets
  FS11   18.03   39.61   18.01   (54)
 
Proportion of total invested assets (%)4
      0.83%  1.24%  0.60%    
 
1All figures are based on the level of knowledge as of January 2009.  2Global reporting initiative (GRI) (see also www.globalreporting.org). FS stands for the performance indicators defined in the GRI Financial Services Sector Supplement.  3Socially responsible investments (SRI).  4Total 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.



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Research

UBS’s SRI research teams analyze emerging socio-economic and environmental trends and assess their potential impact on investment markets and companies’ share prices. Identifying 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 nature of the competitive pressures facing firms in an industry; and how costs and benefits are (or will be) distributed between stakeholders.
The UBS SRI research teams were established in each of the firm’s divisions to serve their respective clients. In the Investment 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 sustainability research is provided by a dedicated team. In the asset management business, an internal SRI research team manages portfolios around themes such as climate change / energy efficiency, 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 climate 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 report “Mind over Matter”, which broadly examines the issue of resources efficiency, and makes the case that higher prices for basic necessities, urbanization, and more stringent climate change policies will eventually yield benefits to those who invest in efficiency upgrades.

Financing and advisory services

UBS’s renewable energy investment banking business arranges financing and provides strategic and financial advisory services for companies in the solar, wind, wave and other 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 largest 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 produce. Companies who are able to reduce their emissions below 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 contracts on EU ETS allowances (EUA), UN Certified Emissions Reductions (CER), Regional Greenhouse Gas Initiative allowances, 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 liability 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 procedures and tools for their identification, management and control. These environmental procedures and tools are integrated 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 assessment 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 issues 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 risk-based approach to environmental risk management and regularly analyzes 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, including its roughly 140,000 corporate clients in Switzerland. In the Investment Bank, the environmental risk framework covers all banking activities including debt and equity under-



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writing, financial advisory services and lending. For its part, Global Asset Management has put environmental due diligence processes in place for its real estate and infrastructure funds. If significant potential environmental risks are identified in a transaction, the risks are assessed. Wherever possible, UBS seeks to engage with the client to discuss possible mitigating measures. Where this is not possible or successful, the firm may decline the transaction altogether.

Global Wealth Management & Business Banking

The business division assesses its environmental risks in a three-stage process. Client advisors complete the first screenings, looking at financial risks linked to environmental aspects such as compliance with environmental legislation, 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 environmental risk undergo a detailed environmental assessment as a third step, a service provided by the business division’s environmental risk competence center. In 2008, 32 such detailed assessments took place and 134 client advisors and credit officers were trained.

Investment Bank

The Global Environmental Risk Guidelines apply to all transactions, services and activities within the Investment Bank. The guidelines are supported by an environmental risk framework that is integrated into the business division’s due diligence and approval processes. Investment Bank staff identify potential environmental risks in the initial due diligence phase and alert the Investment Bank’s environmental advisory group (EAG) in case of significant potential risks. Assessments 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 measures and direct further due diligence, as required. In this way the relevant senior business committee may fully consider the potential environmental risk in the course of its review of the transaction and / or client. The implementation of the environmental risk framework is supported by training and awareness-raising activities. In 2008, sector-specific training was provided to 443 bankers and support functions and high-level 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 developed by Global Real Estate for its direct investment vehicles were subject to a thorough environmental due diligence process, in accordance with local regulations and internal best practice guidance. Similar processes are in operation in Infrastructure Asset Management.

Environmental and CO2 footprints

UBS directly impacts the environment in a number of ways: its businesses consume electricity; employees travel for business 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 Group-wide CO2 emission reduction target of 40% below 2004 levels by 2012. UBS seeks to achieve this target by:
 adopting in-house 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 reduced by other means.

UBS’s CO2 footprint

(BAR CHART)



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     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 record of managing its energy consumption, with the firm establishing its first energy management function in the 1970s. Today, energy efficiency measures are an important component of UBS’s program for achievement of the Group-wide CO2 emission reduction target. Measures include investments in energy-efficient technology and encouraging good housekeeping measures. For example, a major IT server consolidation 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 sitting on multiple old servers to fewer, newer machines and the decommissioning of old applications. The resulting energy savings of 17 GWh contributed significantly to the total of 25 GWh of savings from IT activities since 2007 (representing 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 renewable 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 renewable 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, representing 85% of the total volume. In addition, UBS purchases renewable energy credits (RECs) in the US electricity markets, 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 greenhouse gas emissions. While the firm encourages its employees 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 business-related air travel, representing roughly 100,000 tons of CO2 per year, or about a quarter of its total annual CO2 emissions. Offsetting emissions means that UBS indirectly neutralizes its business air travel emissions by investing in third-party projects that reduce an equivalent amount of greenhouse gas emissions. UBS selected offsetting projects in Brazil, Russia, India, China, 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 environmental and social benefits.

Paper and waste

UBS continues to work towards achieving its firm-wide targets 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 sources. 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 targets 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 employees on environmental matters, helping them make the right choices and promoting sustainable behavior both at work and at home.
 è Refer to www.ubs.com/environment for more information on UBS’s environmental management system



Environmental indicators per full-time employee

                     
 
  Unit  2008  Trend  2007  2006 
 
Total direct and intermediate energy kWh / FTE   11,792   è   11,942   12,736 
 
Total business travel Pkm / FTE   10,281   ê   12,685   12,544 
 
Total paper consumption kg / FTE   167   ê   190   188 
 
Total waste kg / FTE   298   è   299   303 
 
Total water consumption m3 / FTE   28.1   ì   26.7   26.0 
 
CO2 footprint
 t / FTE   3.07r   ê   3.43   3.93 
 
Legend:FTE = full-time employee; kWh = kilo watt hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = ton

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Environmental indicators1

                         
 
          20082      20072  20062 
      
      Absolute  Data      Absolute  Absolute 
  GRI3  normalized4  quality5  Trend6  normalized4  normalized4 
 
Total direct and intermediate energy consumption7
     1,016 GWh   ***   è  981 GWh  951 GWh 
 
Total direct energy consumption8
 EN3  127 GWh   **   è  130 GWh  154 GWh 
 
natural gas      83.3%   **   è   83.3%   85.5% 
 
heating oil      12.2%   ***   è   12.1%   11.8% 
 
fuels (petrol, diesel, gas)      4.5%   ***   è   4.6%   2.7% 
 
renewable energy (solar power, etc.)      0.03%   ***   î   0.03%   0.03% 
 
Total intermediate energy purchased9
 EN4  890 GWh   ***   è  851 GWh  797 GWh 
 
electricity from gas-fired power stations      11.7%   **   è   12.3%   13.2% 
 
electricity from oil-fired power stations      3.7%   ***   ê   4.2%   4.5% 
 
electricity from coal-fired power stations      18.4%   **   è   18.6%   21.7% 
 
electricity from nuclear power stations      11.1%   **   î   13.6%   20.5% 
 
electricity from hydroelectric power stations      25.8%   ***   è   25.5%   21.4% 
 
electricity from other renewable resources      23.1%   ***   è   22.0%   12.7% 
 
district heating      6.2%   ***   é   3.8%   6.0% 
 
Share of renewable energy and district heating
      48%   ***   ì   45%   34% 
 
Total business travel
 EN29  886 m Pkm   ***   ê  1,042 m Pkm  936 m Pkm 
 
rail travel10
      3.5%   **   è   3.3%   4.1% 
 
road travel10
      0.6%   **   é   0.5%   0.6% 
 
air travel      96.0%   ***   è   96.2%   95.3% 
 
Number of flights (segments)
      398,369   ***   ê   446,274   402,629 
 
Total paper consumption
 EN1   14,403 t   ***   î   15,593 t   14,013 t 
 
post-consumer recycled  EN2   16.2%   ***   é   10.5%   6.2% 
 
new fibers FSC11
      16.6%   ***   é   10.7%   0.0% 
 
new fibers ECF + TCF11
      66.8%   ***   ê   78.6%   93.8% 
 
new fibers chlorine bleached      0.4%   **   é   0.2%   0.0% 
 
Total waste
 EN22   25,644 t   ***   è   24,589 t   22,631 t 
 
valuable materials separated and recycled      54.6%   ***   è   56.3%   58.2% 
 
incinerated      14.3%   ***   î   15.8%   12.7% 
 
landfilled      31.1%   **   ì   27.9%   29.1% 
 
Total water consumption
 EN8   2.42 m m3  **   ì   2.19 m m3  1.94 m m3
 
Total CO2 footprint12
      264,197 t   ***   î   281,705 t   293,169 t 
 
total direct CO2 emissions (GHG scope 1)13
  EN16   26,490 t   ***   è   26,701 t   31,519 t 
 
total indirect CO2 emissions (GHG scope 2)13
  EN16   204,344 t   **   è   218,681 t   230,015 t 
 
total other indirect CO2 emissions (GHG scope 3)13
  EN17   129,364 t   ***   ê   149,323 t   132,635 t 
 
total CO2e offsets (business air travel)14
      96,000 t   ***   ê   113,000 t   101,000 t 
 
Legend:GWh = giga watt hour; Pkm = person kilometer; t = ton; m3 = cubic meter; m = million
1All figures are based on the level of knowledge as of January 2009.  2Reporting period: 2008 (1 July 2007–30 June 2008), 2007 (1 July 2006–30 June 2007), 2006 (1 July 2005–30 June 2006).  
3Global reporting initiative (see also www.globalreporting.org). “EN” stands for the environmental performance indicators as defined in the GRI.  4Non-significant discrepancies from 100% are possible due to roundings.  5Specifies 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.  6Trend: at a *** / ** / * data quality, the respective trend is stable (è) if the variance equals 5 / 10 / 15%, low decreasing / increasing (î,ì) if it equals 10 / 20 / 30% and decreasing / increasing if the variance is bigger than 10 / 20 / 30% (ê,é).  7Refers to energy consumed within the operational boundaries of UBS.  8Refers to primary energy purchased which is consumed within the operational boundaries of UBS (oil, gas, fuels).  9Refers to energy purchased that is produced by converting primary energy and consumed within the operational boundaries of UBS (electricity and district heating).  10Rail and road travel: Switzerland only.  11Paper produced from new fibers. “FSC” stands for Forest Stewardship Council, “ECF” for elementary chlorine free and “TCF” for totally chlorine free.  12CO2 footprint equals total CO2 emissions (GHG scope 1, 2 and 3) minus CO2e offsets.  13Refers 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.  14Offsets from third-party GHG reduction projects measured in CO2 equivalents (CO2e). These offsets neutralize CO2 emissions from business air travel.

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(ASSURANCE STATEMENT)

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UBS business divisions and
Corporate Center

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 


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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 apre-tax profitof 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 moneyoutflows were CHF 101.0 billion compared with inflows of CHF 125.1 billion.Invested assetsdeclined to CHF 870 billion from CHF 1,294 billion. Thegross margin on invested assetsfell six basis points to 97 basis points. Thecost/income ratioincreased to 63.1% from 51.1%.

Wealth Management USrecorded apre-tax lossof CHF 698 million in 2008, compared with a pre-tax profit of CHF 674 million in 2007. 2008 included auction rate securities-related charges of CHF 1,524 million. During this period:

Net new moneyoutflows were CHF 10.6 billion compared with inflows of CHF 26.6 billion.Invested assetsdeclined to CHF 600 billion from CHF 840 billion. Thegross margin on invested assetsincreased seven basis points to 84 basis points. Thecost/income ratioincreased to 111.3% from 89.9%.Recurring incomedeclined 8% to CHF 3,835 million.Revenues per advisordecreased to CHF 735,000 from CHF 828,000.

Business Banking Switzerlandrecorded a pre-tax profit of CHF 2,449 million, up CHF 182 million from 2007. During this period:

Net new moneyoutflows were CHF 11.4 billion compared with inflows of CHF 4.6 billion.Invested assetsdeclined to CHF 129 billion compared with CHF 164 billion. Thecost/income ratiodecreased to 51.2% from 57.7%. Theloan portfoliodeclined 2% to CHF 143 billion. The ratio of theimpaired gross lending portfolioto the total gross lending portfolio improved to 1.0% from 1.2%.







                 
 UBS reporting structure in 2008 
 
                 
 
Global Wealth Management
& Business Banking
  Global Asset Management  Investment Bank   Corporate Center 
           
                 
 
Wealth Management
               
 
International & Switzerland
               
                 
                 
 
Wealth Management US
               
                 
                 
 
Business Banking Switzerland
               
                 
 
 
 
 

 


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Performance from continuing operations before tax 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Wealth Management International & Switzerland  3,601  6,310   5,197   (43)
 
Wealth Management US  (698)  674   542     
 
Business Banking Switzerland  2,449  2,267   2,281   8 
 
Global Wealth Management & Business Banking
  5,352  9,251   8,020   (42)
 
Global Asset Management
  1,333  1,454   1,320   (8)
 
Investment Bank
  (34,092)  (16,669)  5,568   (105)
 
Corporate Center
  54  2,222   (789)  (98)
 

Global Asset Management

Pre-tax profit decreased 8% to CHF 1,333 million in 2008 from CHF 1,454 million in 2007. During this period:

Net new moneyoutflows were CHF 103.0 billion compared with CHF 15.7 billion.Institutional invested assetsdeclined to CHF 335 billion compared with CHF 522 billion.Wholesale intermediary invested assetsfell to CHF 240 billion compared with CHF 369 billion. Thegross margin on institutional invested assets declined six basis points to 38 basis points. Thegross margin on wholesale intermediary invested assetsfell six basis points to 41 basis points. Thecost/income ratiowas 54.1% compared with 64.5%.

Investment Bank

Pre-tax loss of CHF 34,092 million in 2008, compared with a pre-tax loss of CHF 16,669 million in 2007. During this period:

Thecost/income ratioandcompensation 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 theimpaired gross lending portfolioto the total gross lending portfolio was 3.6%, up from 0.4%.

Corporate Center

The Corporate Center produced a slightly positive result of CHF 54 million in 2008 from continuing operations, compared with a gain of CHF 2,222 million in 2007. During this period,total operating incomedecreased to CHF 1,083 million from CHF 3,562 million andtotal operating expensesdeclined to CHF 1,029 million from CHF 1,340 million.



 


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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 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Income  21,802   24,841   21,775   (12)
 
Credit loss (expense)/recovery  (421)   28   109     
 
Total operating income
  21,381   24,869   21,884   (14)
 
Cash components  9,191   10,564   9,074   (13)
 
Share-based components1
  187   444   377   (58)
 
Total personnel expenses  9,378   11,008   9,451   (15)
 
General and administrative expenses  5,367   3,178   3,078   69 
 
Services (to)/from other business units  926   1,106   1,040   (16)
 
Depreciation of property and equipment  261   241   232   8 
 
Amortization of intangible assets  98   85   63   15 
 
Total operating expenses
  16,030   15,618   13,864   3 
 
Business division performance before tax
  5,352   9,251   8,020   (42)
 
                 
Key performance indicators
                
 
Cost/income ratio (%)2
  73.5   62.9   63.7     
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)3
  17.3             
 
Return on attributed equity (RoaE) (%)4
  31.0             
 
BIS risk-weighted assets (CHF billion)5
  89.2   169.7   155.2     
 
Return on BIS risk-weighted assets (%)6
  5.9   5.6   5.3     
 
Goodwill and intangible assets (CHF billion)7
  6.2   5.8   6.0     
 
                 
Additional information
                
 
Invested assets (CHF billion)  1,599   2,298   2,123   (30)
 
Net new money (CHF billion)8
  (123.0)   156.3   114.5     
 
Client assets (CHF billion)  2,393   3,554   3,337   (33)
 
Personnel (full-time equivalents)  49,541   51,243   48,200   (3)
 
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.

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Global Wealth Management & Business Banking business portfolio

()

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 developing a strong focus on high and ultra-high net worth clients;
 to position UBS as the universal bank of choice in Switzerland by strengthening its position across all client segments, 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 Switzerland, the focus is on maximizing productivity and profitability as the growth prospects are less high. For domestic businesses within the five biggest European economies, UBS aims to increase profitability. For the key domestic US presence, 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 business 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 Banking Switzerland, serving retail and corporate clients in Switzerland. Each of these business units is provided with infrastructure, 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 management business booked outside the Americas plus the Swiss private and corporate client business; and Wealth Management 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



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Current reporting structure (on 31 December 2008)

()
New reporting structure (from first quarter 2009 onwards)
 
()
1Includes “Swiss Bank” and “Corporate and Institutional Banking”.  2 Includes “Wealth Management International” and “Wealth Management Global”.

financial report for first quarter 2009. UBS will provide separate 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 Switzerland and all wealth management businesses of UBS’s other booking centers in Asia and Europe.

è 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.


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Wealth Management International & Switzerland
Business description

Business

Wealth management solutions are delivered via this business unit’s global branch network and through financial intermediaries. In addition to the specific wealth management products 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 complement UBS’s own product lines. On 31 December 2008, invested assets were CHF 870 billion.

Organizational structure

Throughout 2008, until the recent reorganization, this business unit comprised the following areas: Asia Pacific; Latin America, the Mediterranean, the Middle East and Africa; North, East and Central Europe; and Switzerland. The extensive 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 business 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 international 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 assets 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 investable assets of more than CHF 50 million. The business unit also provides financial intermediaries, both inside and outside Switzerland, with UBS’s wealth management solutions, 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

(INVESTED ASSETS BY ASSET CLASS)

Invested assets by currency

(INVESTED ASSETS BY CURRENCY)



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Loan penetration

(LOAN PENETRATION)

ing from cash accounts and savings accounts to credit cards, mortgages and securities-backed lending.

By aggregating private investment flows into institutional-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 delegate 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.

Invested assets by client domicile

(INVESTED ASSETS BY CLIENT DOMICILE)

Invested assets by client wealth

(INVESTED ASSETS BY CLIENT WEALTH)



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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 entering 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 million (CHF 917 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.
 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 expeditious 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 information 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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Business performance

                 
Business unit reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Income  10,819   12,893   10,827   (16)
 
Credit loss (expense) / recovery  (390)  (1)  1     
 
Total operating income
  10,429   12,892   10,828   (19)
 
Cash components  3,037   3,704   2,999   (18)
 
Share-based components1
  75   169   174   (56)
 
Total personnel expenses  3,112   3,873   3,173   (20)
 
General and administrative expenses  2,001   1,064   885   88 
 
of which: impact from US cross-border settlement
  917             
 
Services (to) / from other business units  1,581   1,531   1,479   3 
 
Depreciation of property and equipment  97   95   84   2 
 
Amortization of intangible assets  38   19   10   100 
 
Total operating expenses
  6,828   6,582   5,631   4 
 
Business unit performance before tax
  3,601   6,310   5,197   (43)
 
of which: impact from US cross-border settlement
  (917)            
 
of which: business unit performance before tax excluding US cross-border settlement
  4,518   6,310   5,197   (28)
 
                 
Key performance indicators
                
 
Invested assets (CHF billion)  870   1,294   1,138   (33)
 
Net new money (CHF billion)2
  (101.0)  125.1   97.6     
 
Gross margin on invested assets (bps)3
  97   103   103   (6)
 
Cost/income ratio (%)4
  63.1   51.1   52.0     
 
Client advisors (full-time equivalents)  5,755   5,774   4,742   0 
 
Client advisor productivity
                
 
Revenues per advisor (CHF thousand)5
  1,824   2,424   2,441   (25)
 
Net new money per advisor (CHF thousand)6
  (17,029)  23,516   22,008     
 
Invested assets per advisor (CHF thousand)7
  187,159   234,504   236,879   (20)
 
                 
International clients
                
 
Income  8,185   9,739   7,907   (16)
 
Invested assets (CHF billion)  682   1,013   862   (33)
 
Net new money (CHF billion)2
  (71.3)  115.6   90.8     
 
Gross margin on invested assets (bps)3
  94   101   101   (7)
 
                 
Swiss clients
                
 
Income  2,634   3,154   2,920   (16)
 
Invested assets (CHF billion)  189   281   276   (33)
 
Net new money (CHF billion)2
  (29.7)  9.5   6.8     
 
Gross margin on invested assets (bps)3
  110   111   110   (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.

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Business unit reporting (continued) 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)1
  6.1             
 
Return on attributed equity (RoaE) (%)2
  59.0             
 
BIS risk-weighted assets (CHF billion)3
  25.2   63.1   51.5     
 
Return on BIS risk-weighted assets (%)4
  12.3   10.5   10.8     
 
Goodwill and intangible assets (CHF billion)5
  1.9   1.8   1.7     
 
                 
Additional information
                
 
Recurring income6
  8,194   9,617   8,143   (15)
 
Client assets (CHF billion)  1,048   1,651   1,436   (37)
 
Personnel (full-time equivalents)  15,271   15,811   13,564   (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 attributed 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 advisory fees.

2008

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 turbulence and its impact on the firm’s operating performance and reputation. Outflows of net new money were most pronounced 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, mainly reflecting sharply lower equity markets and the strong decline of major currencies against the Swiss franc, as well as net new money outflows.
Thegross 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 client 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.
Thecost/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 provision 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 information). Excluding the impact of these costs, the cost / income ratio would have increased to 54.6% in 2008 from the previous year.

Results

In 2008, pre-tax profit fell 43% to CHF 3,601 million, compared with the record 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. Excluding the impact of these costs, the pre-tax result would have fallen 28%, mainly reflecting the lower asset base and client transaction activity.

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 operating 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 million 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.



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2007

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.
Thegross 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 activity was offset by a lower recurring margin. Overall, recurring 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.
Thecost/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 general and administrative expenses.

Results

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. Operating 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 nonrecurring revenues. Recurring income increased 18% on rising 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. Nonrecurring income rose 22% due to higher brokerage fees, reflecting 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 higher 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 performance-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 consumption. Depreciation was CHF 95 million in 2007, up 13% from CHF 84 million a year earlier because of continued business growth. Amortization of intangible assets was CHF 19 million, up CHF 9 million from 2006.



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Wealth Management US
Business description

Business

Wealth Management US provides wealth management services to US private clients. On 31 December 2008, the business unit had CHF 600 billion in invested assets.

Organizational structure

Wealth Management US is headquartered in Weehawken, New Jersey, where most corporate and operational functions 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 & Business 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:

 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 securities operations serving private clients transfer to Wealth Management US (following UBS’s decision in June 2008 that its Investment Bank would exit the institutional municipal securities business).

Legal structure

In the US, the business unit operates through direct and indirect subsidiaries of UBS. Securities and operations activities 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 Management US’s banking services include Federal Deposit Insurance Corporation (FDIC)-insured deposit accounts and enhanced collateralized lending services, which are conducted through UBS Bank USA, a federally regulated Utah bank.



Geographical presence in key markets

 

(GEOGRAPHICAL PRESENCE IN KEY MARKETS)

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Competitors

Wealth Management US competes with national full-service brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, registered investment advisors, commercial banks, trust companies and other financial services firms offering wealth management services to US private clients. In 2008, the financial crisis triggered consolidation within the industry that directly impacted 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 Global 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 services tailored to meet the needs of four distinct client segments: 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 improved profitability, enhancing the client experience and attracting 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 implementing a number of organic growth initiatives, infrastructure 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-segment specific offerings. Two additional private wealth management 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 management 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

(INVESTED ASSETS BY ASSET CLASS)

Invested assets by client wealth

(INVESTED ASSETS BY CLIENT WEALTH)



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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 investment needs of each client. Comprehensive planning supports clients through the various stages of their lives, including 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 planning, asset allocation, retirement and annuities, alternative investments, structured products, and banking and lending. They also have access to Wealth Management Research content to support investment decisions.

Products and services are designed to meet a wide variety 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 competitive 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 discretionary and non-discretionary investment advisory programs. While non-discretionary advisory programs enable the client to maintain control over all transactions in the account, clients with discretionary advisory programs direct investment professionals to manage a portfolio on their behalf. Depending 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 investments.


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Business performance

 
                 
Business unit reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Income  5,959   6,662   5,863   (11)
 
of which: ARS settlement impact
  (60)            
 
Credit loss (expense) / recovery  (25)      (2)  (1)
 
Total operating income
  5,933   6,660   5,862   (11)
 
Cash components  3,806   4,352   3,686   (13)
 
Share-based components1
  85   199   153   (57)
 
Total personnel expenses  3,891   4,551   3,839   (15)
 
General and administrative expenses  2,348   976   1,073   141 
 
of which: ARS settlement impact
  1,464             
 
Services (to) / from other business units  238   314   281   (24)
 
Depreciation of property and equipment  94   79   74   19 
 
Amortization of intangible assets  60   66   53   (9)
 
Total operating expenses
  6,631   5,986   5,320   11 
 
Business unit performance before tax
  (698)  674   542     
 
of which: ARS settlement impact
  (1,524)            
 
of which: business unit performance before tax excluding ARS settlement impact
  826   674   542   23 
 
 
Key performance indicators
                
 
Invested assets (CHF billion)  600   840   824   (29)
 
Net new money (CHF billion)2
  (10.6)  26.6   15.7     
 
Net new money including interest and dividend income (CHF billion)3
  11.7   51.5   37.9   (77)
 
Gross margin on invested assets (bps)4
  84   77   76   9 
 
Cost / income ratio (%)5
  111.3   89.9   90.7     
 
Recurring income6
  3,835   4,173   3,488   (8)
 
Financial advisor productivity
                
 
Revenues per advisor (CHF thousand)7
  735   828   776   (11)
 
Net new money per advisor (CHF thousand)8
  (1,307)  3,305   2,077     
 
Invested assets per advisor (CHF thousand)9
  87,876   107,719   101,922   (18)
 
 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)10
  7.3             
 
Return on attributed equity (RoaE) (%)11
  (9.5)            
 
BIS risk-weighted assets (CHF billion)12
  25.9   18.7   18.3     
 
Return on BIS risk-weighted assets (%)13
  (3.3)  3.6   3.0     
 
Goodwill and intangible assets (CHF billion)14
  4.3   4.0   4.3     
 
 
Additional information
                
 
Client assets (CHF billion)  636   917   909   (31)
 
Personnel (full-time equivalents)  18,929   19,347   18,557   (2)
 
Financial advisors (full-time equivalents)  8,182   8,248   7,880   (1)
 
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.
 

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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 reputation, 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 advisor recruiting and retention. Including interest and dividends, 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 ininvested assetson 31 December 2008, down 29% from CHF 840 billion on 31 December 2007. This was a result of declining markets over the year, net new money outflows and the negative impact of currency translation. In US dollar terms, invested assets decreased 24% compared with a year earlier.
Thegross margin on invested assetswas 84 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 increased one basis point to 30 basis points.
Thecost/income ratioincreased to 111.3% in 2008 from 89.9% in 2007. Following the auction rate securities (ARS) settlement in August 2008, Wealth Management US recorded losses of CHF 1,524 million, of which CHF 1,464 million were included in general and administrative expenses, and CHF 60 million were recognized as trading losses. Under the ARS settlement, 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 “Exposure to auction rate securities” sidebar in the “Risk concentration” section of this report for more information.
In 2008,recurring incomewas 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 65% of total operating income in 2008, compared with 63% in 2007.
Revenues per advisordecreased in 2008 to CHF 735,000 from CHF 828,000 in 2007. In US dollar terms, revenue per advisor increased 2% as higher recurring income was partly 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 698 million compared with a pre-tax profit of CHF 674 million in 2007. Driving the decline were total ARS-related charges of CHF 1,524 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 pretax performance would have increased 41% driven by resilient operating income growth during a challenging environment, coupled with a decline in expenses, including lower performance-based compensation accruals.

Operating income
In 2008, total operating income was CHF 5,933 million, down 11% from CHF 6,660 million in 2007. Excluding currency 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 compensation accruals, partly offset by higher severance costs related to staff reductions. Excluding ARS-related expenses, non-personnel costs (including general and administrative 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.



 

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2007

 

Key performance indicators

The inflow ofnet 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 experienced advisors. Including interest and dividends, net new money in 2007 was CHF 51.5 billion, up from CHF 37.9 billion in 2006.

Wealth Management US had CHF 840 billion ininvested assetson 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 currency translation. In US dollar terms, invested assets increased 10% compared with a year earlier.
Thegross margin on invested assetswas 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.
Thecost/income ratiowas 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 incomewas 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 advisorincreased 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 inclusion. 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 provisions 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.


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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 services 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 Switzerland 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 contracts 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 foreign 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, mortgages and other financial relationships. Through the client service 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
 

Invested assets by asset class

(INVESTED ASSETS BY ASSET CLASS)



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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, including the selection and design of investment products, assistance 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 addition, substantial business process support is available (ranging 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 payment, 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 relationship. The introduction of this model has resulted in a clear improvement in the risk profile of the business unit’s lending portfolio.

 è 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 recovery can be achieved through restructuring or through liquidation 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

(TOTAL LENDING PORTFOLIO BY CATEGORY, GROSS)

Development of UBS’s recovery portfolio, 2000-2008

(DEVELOPMENT OF UBS'S RECOVERY PORTFOIO, 2000-2008)



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Business performance

                 
Business unit reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Interest income  3,234   3,470   3,339   (7)
 
Non-interest income  1,790   1,816   1,746   (1)
 
Income  5,024   5,286   5,085   (5)
 
Credit loss (expense) / recovery  (5)  31   109     
 
Total operating income
  5,019   5,317   5,194   (6)
 
Cash components  2,348   2,508   2,389   (6)
 
Share-based components1
  27   76   50   (64)
 
Total personnel expenses  2,376   2,584   2,439   (8)
 
General and administrative expenses  1,018   1,138   1,120   (11)
 
Services (to) / from other business units  (893)  (739)  (720)  (21)
 
Depreciation of property and equipment  70   67   74   4 
 
Amortization of intangible assets  0   0   0     
 
Total operating expenses
  2,570   3,050   2,913   (16)
 
Business unit performance before tax
  2,449   2,267   2,281   8 
 
                 
Key performance indicators
                
 
Invested assets (CHF billion)  129   164   161   (21)
 
Net new money (CHF billion)2
  (11.4)  4.6   1.2     
 
Cost/income ratio (%)3
  51.2   57.7   57.3     
 
Impaired lending portfolio as a % of total lending portfolio, gross  1.0   1.2   1.7     
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)4
  3.8             
 
Return on attributed equity (RoaE) (%)5
  64.0             
 
BIS risk-weighted assets (CHF billion)6
  38.0   87.9   85.4     
 
Return on BIS risk-weighted assets (%)7
  6.1   2.6   2.7     
 
Goodwill and intangible assets (CHF billion)8
  0.0   0.0   0.0     
 
                 
Additional information
                
 
Client assets (CHF billion)  709   986   992   (28)
 
Personnel (full-time equivalents)  15,341   16,085   16,079   (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 equity.  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.

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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 reevaluation of banking relationships in the context of continuing global market turmoil.

Invested assets fell to CHF 129 billion in 2008 from CHF 164 billion a year earlier, driven by negative market developments and net new money outflows.
In 2008 thecost/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’sloan portfolio was CHF 143.0 billion on 31 December 2008, down 2% from the previous year.
The key credit quality ratio of theimpaired 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 deposit and loan volumes as well as lower margins on mortgages. 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 million in 2007, reflecting lower performance-related compensation 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 business 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 businesses. Depreciation in 2008 slightly increased to CHF 70 million from CHF 67 million in 2007.



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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 developments 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 Business Banking Switzerland business unit to the Wealth Management International & Switzerland business unit, reflecting the development of client relationships. In 2006, UBS transferred CHF 8.2 billion in client assets for the same reason.
In 2007 thecost/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 theimpaired 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 liabilities, 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 expenses, 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. Depreciation in 2007 decreased to CHF 67 million from CHF 74 million in 2006.



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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 including equities, fixed income, asset allocation, currency, risk management, hedge funds, real estate, infrastructure, private 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 business 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 segments: institutional (for example, corporate and public pension plans, governments and their central banks) and wholesale 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. Investors 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 offering 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

 

(FLOW CHART)

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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 Banco Pactual and renamed the asset management business UBS Pactual Asset Management. It is currently the seventh 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 proprietary 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 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 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 Centrale de Réescompte (CCR) Group in France from Commerzbank. The businesses of the CCR Group are being combined into the asset management and wealth management 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 Investments, AllianceBernstein Investments, BlackRock, JP Morgan 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 participants. 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.



Invested assets by client type

(BAR CHART)

Institutional/wholesale intermediary revenues

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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.

 Equitiesoffers 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 philosophy), growth investors (a quality global growth manager) and structured equities (strategies that employ proprietary analytics and quantitative methods).
 Fixed incomeoffers 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, complemented by extended strategies such as high-yield and emerging market debt.
 Alternative and quantitative investmentshas two primary business lines – multi-manager (or fund of funds) and single manager. The former constructs portfolios of hedge funds and other alternative investments operated by third-party managers, allowing clients diversified exposure to a range of hedge funds, private equity and infrastructure strategies. O’Connor is a key provider of single manager global hedge funds.
 Global real estateactively manages real estate investments in Asia, Europe and the US across all major sectors. Its capabilities include core, value-added and opportunistic 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 publicly traded real estate securities globally.
 Global investment solutionsoffers asset allocation, currency, 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 external portfolios.
 Infrastructure and private equityis involved in the origination and management of specialist funds that invest in infrastructure and other private assets globally.
 Fund services, the global fund administration business, provides 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 volatile market conditions, even in perceived lower risk sectors such as money markets. Across the asset management industry, this difficult environment led to a wide dispersion of investment 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 compared with peers. This notable improvement in relative performance 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

(BAR CHART)

1 Assets represented are totals for the Global Asset Management business division worldwide. The regional split is based on the client servicing location.

Institutional invested assets by asset class

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Investment capabilities and services

 
             
    Alternative and        
    quantitative Global Global investment Infrastructure and  
Equities Fixed income investments real estate solutions private equity Fund services
 
Core/value
 
 Global
 
 Single manager
hedge funds
 Global
 
 Global
 
 Direct infrastructure
investment
 Alternative funds
 
Global Country and regional   Country and regional Country and regional   Investment funds
 
            
Country and regional
 
 Sector specific
 
 Multi-manager
hedge funds
 Private strategies
 
 Asset allocation
 
 Listed infrastructure
securities
  
 
Emerging markets Emerging markets   Real estate securities Currency management    
 
            
Specialist
 
 High yield
 
 Quantitative
 
 Agriculture
 
 Return and risk targeted
 
 Direct private equity  
          investment
 
  
 
  
 
Growth investors
 
 Structured credit
 
 Infrastructure
fund of funds
  
 
 Structured portfolios
 
    
 
Global Liquidity/short duration     Risk management and Global and regional  
 
       advisory services    
Country and regional
 
 Indexed
 
 Private equity
fund of funds
  
 
  
 
  
 
  
 
Structured equities            
 
            
Systematic alpha            
 
            
Quantitative equities            
 
            
 
Portfolio construction            
solutions            
(including passive)            
 
             

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 performance of only modest overweights to banks and diversified 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 quarter 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

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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 markets. Some easing of financial market stress was evident towards 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 difference in yield versus government bonds) increased substantially. In the fourth quarter, central banks cut rates aggressively 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 structured credit exposure in some of these strategies was a factor, 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 outperformed. Money market funds continued to achieve their capital preservation objectives and Global Asset Management 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 composite, 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 currency 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 increased 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 positioning within equity markets. Currency strategy performed very strongly across all strategies for the year. Currency strategy 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 currency 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 globally. 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, performance was mixed: multi-strategy alpha was negative (but out performed many peers), while fundamental long/short neutral and currency and rates strategies were notably positive for the year.
Overall, invested assets in the global real estate business declined moderately against a background of falling property values and investor risk aversion. Investment performance 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 securities strategies suffered in absolute terms over the year but their long-term relative performance against benchmark began to see some recovery.
2008 was a significant year for the infrastructure and private equity business. The core global direct investment infrastructure 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 private equity fund initiatives were announced during 2008 with joint venture partners Abu Dhabi Investment Company and MerchantBridge respectively.



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Business performance

                 
Business division reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Institutional fees  1,6591  2,370   1,803   (30)
 
Wholesale intermediary fees  1,246   1,724   1,417   (28)
 
Total operating income
  2,904   4,094   3,220   (29)
 
Cash components  922   1,632   1,305   (44)
 
Share-based components2
  4   224   270   (98)
 
Total personnel expenses  926   1,856   1,575   (50)
 
General and administrative expenses  434   559   399   (22)
 
Services (to)/from other business units  150   153   (105)  (2)
 
Depreciation of property and equipment  29   53   27   (45)
 
Amortization of intangible assets  33   19   4   74 
 
Total operating expenses
  1,572   2,640   1,900   (40)
 
Business division performance before tax
  1,333   1,454   1,320   (8)
 
                 
Key performance indicators
                
 
Cost/income ratio (%)3
  54.1   64.5   59.0     
 
                 
Institutional
                
 
Invested assets (CHF billion)  335   522   519   (36)
 
of which: money market funds
  42   32   28   31 
 
Net new money (CHF billion)4
  (55.6)  (16.3)  29.8     
 
of which: money market funds
  6.0   6.7   11.0     
 
Gross margin on invested assets (bps)5
  38   44   38   (14)
 
                 
Wholesale intermediary
                
 
Invested assets (CHF billion)  240   369   347   (35)
 
of which: money market funds
  80   70   59   14 
 
Net new money (CHF billion)4
  (47.4)  0.6   7.4     
 
of which: money market funds
  15.2   4.8   (2.5)    
 
Gross margin on invested assets (bps)5
  41   47   43   (13)
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)6
  3.0             
 
Return on attributed equity (RoaE) (%)7
  44.4             
 
BIS risk-weighted assets (CHF billion)8
  8.5   3.8   2.7     
 
Return on BIS risk-weighted assets (%)9
  18.9   49.5   62.5     
 
Goodwill and intangible assets (CHF billion)10
  2.2   2.1   1.7     
 
                 
Additional information
                
 
Invested assets (CHF billion)  575   891   866   (35)
 
Net new money (CHF billion)4
  (103.0)  (15.7)  37.2     
 
Personnel (full-time equivalents)  3,786   3,625   3,436   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 expenses/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 attribution 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.

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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 asset management flows relating to Global Wealth Management & Business Banking clients – accounted for more than a third of these full year 2008 outflows and UBS reputational issues also impacted third-party flows.
Outflows ofinstitutional 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 income, equities and alternatives mandates.
Outflows ofwholesale 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. Outflows were mainly reported in multi-asset, equities and fixed income funds.

Invested assets

Institutional invested assets were CHF 335 billion on 31 December 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 currency fluctuations.
Wholesale intermediaryinvested assets were CHF 240 billion on 31 December 2008, down from CHF 369 billion on 31 December 2007, reflecting the negative impact of financial market developments and net new money outflows and, to a lesser extent, currency fluctuations.

Gross margin

The gross margin oninstitutional invested assets was 38 basis points compared with 44 basis points in 2007. The decline 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 asset-mix effect from a higher proportion of money market funds to total invested assets.
The gross margin onwholesale 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

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 related 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 dollar. Institutional revenues declined to CHF 1,659 million from CHF 2,370 million. Excluding the gain from the sale of the minority stake in Adams Street Partners, institutional revenues would have declined CHF 879 million due to lower performance fees (from alternative and quantitative investments and the Brazilian asset management business) and lower management 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% decline from CHF 2,640 million in 2007. Excluding CHF 212 million in DRCM restructuring costs in 2007, total operating expenses 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 results 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 million was down by CHF 24 million. Excluding the impact of the DRCM restructuring costs in 2007, depreciation of property 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

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 quantitative 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 driven 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 assets related to the acquisition of UBS Hana Asset Management in third quarter 2007, partly offset by negative currency translation impacts.

Gross margin

The gross margin oninstitutional 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 margin products.
The gross margin onwholesale intermediary invested assets was 47 basis points, up four basis points from 2006, largely driven by higher performance fees (mainly in the Brazilian 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 percentage points from 2006, primarily due to the CHF 212 million charge related to the closure of DRCM in second quarter 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-related 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 investment 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 offset 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 businesses and higher performance fees, mainly from the Brazilian asset management business.

Operating expenses

A 39% increase, to CHF 2,640 million from CHF 1,900 million in 2006, primarily reflected DRCM-related closure expenses 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 million in 2007 from CHF 399 million in 2006. In addition to the DRCM closure expenses, general and administrative expenses 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, compared with the net charge-outs to other business units of CHF 105 million a year earlier. Over the same period, depreciation increased by 96% to CHF 53 million, as a result of the DRCM closure.



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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, governments, financial intermediaries and alternative asset managers. The needs of private investors are met indirectly through working with UBS’s wealth management businesses and other private banks.

Strategy

The current crisis in the financial markets and the resulting dramatic changes in industry dynamics, and the losses incurred 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 income, 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, members 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 comprehensive 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 significantly restructured to concentrate on client service, simplify its operating model, strengthen risk management and focus on competitive strengths, including foreign exchange and flow businesses in credit and rates. The municipal securities business and fixed income proprietary trading businesses have been closed and certain commodities businesses 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 efficiency gains. The investment banking department will continue 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 market share.
These steps will require more efficient utilization of resources 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, implementation 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 addition to raising capital for companies and governments. Traditionally 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 organic development, its presence has been enhanced through acquisitions. 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 Securities, China.



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Legal structure

The Investment Bank operates through branches and subsidiaries 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. Market 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 international players such as Bank of America / Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan 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 products, 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 client relationship platforms, earning UBS recognition as a market leader in the provision of a number of electronic services 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 access 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 commission management services.
 Derivatives provides standardized products and customized investment solutions to clients. In addition to products with returns linked to equities or equity indices, it also offers derivative products linked to hedge funds, mutual 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-

Selected deals

   
 
Mergers and acquisitions (M&A)
 
Joint financial advisor, bookrunner and sponsor toLloyds 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 toGas Natural SDG, S.A. on its EUR 16.8 billion cash offer for Union Fenosa S.A.
 
Lead financial advisor toEli Lilly and Company on its USD 6.5 billion acquisition of Imclone Systems Inc.
 
Sole financial advisor toSt. 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) ofVisa 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 forCentrica 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 forWesfarmers Limited
 
Debt capital markets
 
Joint bookrunner on a USD 2.5 billion issue forWells Fargo & Co, its first institutional fixed income hybrid offering since November 2006
 
Joint bookrunner forChina 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 forKFW, the promotional bank of the Federal Republic of Germany, its first euro benchmark transaction in 2008
 
Joint lead arranger and joint bookrunner toVerizon 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
 



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  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, strategic and quantitative research.

Fixed income, currencies and commodities

The FICC business area delivers products and solutions to corporate, institutional and public sector clients in all major markets. In response to changes in global markets and client demand, FICC significantly restructured at the start of 2009 to improve client service, simplify its operating model, strengthen 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 macro, described below); certain commodities businesses (excluding 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 National 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 transaction. In first quarter 2009 additional risk positions will be isolated 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 functions 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 management solutions to institutional and private clients. Interest 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 distribution 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


(BAR CHART)
   
  tral and Eastern Europe, enabling it to offer local investors access to international markets and international investors an opportunity for local exposure.
 Client services is the global sales effort, unifying product specialist sales groups, including foreign exchange, money 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 institutions, financial sponsors, sovereign wealth funds and hedge funds. Its advisory group assists on complex transactions and advises on strategic reviews and corporate restructuring solutions, while UBS’s capital markets and leveraged finance teams arrange the execution of primary and secondary 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 matrix of country, sector and product banking professionals.
With the goal of creating a fully integrated primary business 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.



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Business performance

Business division reporting

                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Investment banking
  2,880   6,636   4,999   (57)
 
Advisory  1,609   2,697   1,821   (40)
 
Capital market revenues  1,844   4,261   3,631   (57)
 
equities  977   2,783   2,095   (65)
 
fixed income, currencies and commodities  866   1,478   1,536   (41)
 
Other fee income and risk management  (573)  (322)  (453)  (78)
 
Sales and trading
  (26,504)  (7,833)  16,727   (238)
 
Equities  5,184   9,004   8,387   (42)
 
Fixed income, currencies and commodities  (31,687)  (16,837)  8,340   (88)
 
Total Investment Bank income
  (23,624)  (1,197)  21,726     
 
Credit loss (expense) / recovery1
  (2,575)  (266)  47   (868)
 
Total Investment Bank operating income excluding own credit
  (26,199)  (1,463)  21,773     
 
Own credit2
  2,032   659   0   208 
 
Total Investment Bank operating income as reported
  (24,167)  (804)  21,773     
 
Cash components  5,173   8,902   9,788   (42)
 
Share-based components3
  (292)  2,384   1,898     
 
Total personnel expenses  4,882   11,286   11,686   (57)
 
General and administrative expenses  3,399   3,386   3,210   0 
 
Services (to) / from other business units  990   811   1,034   22 
 
Depreciation of property and equipment  231   210   203   10 
 
Impairment of goodwill  341   0   0     
 
Amortization of intangible assets  83   172   72   (52)
 
Total operating expenses
  9,925   15,865   16,205   (37)
 
Business division performance before tax
  (34,092)  (16,669)  5,568   (105)
 
                 
Key perfomance indicators
                
 
Compensation ratio (%)4
  N/A5  N/A5  53.8     
 
Cost / income ratio (%)6
  N/A5  N/A5  74.6     
 
Impaired lending portfolio as a % of total lending portfolio, gross  3.6   0.4   0.1     
 
Average VaR (10-day, 99% confidence, 5 years of historical data)7
  374   514   410   (27)
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)8
  26.8             
 
Return on attributed equity (RoaE) (%)9
  (127.4)            
 
BIS risk-weighted assets (CHF billion)10
  195.8   190.7   174.6     
 
Return on BIS risk-weighted assets (%)11
  (15.7)  (8.7)  3.5     
 
Goodwill and intangible assets (CHF billion)12
  4.6   5.3   5.5     
 
                 
Additional information
                
 
Personnel (full-time equivalents)  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 security 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 revenues 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 equity.  
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.

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Investment Bank

2008

Key performance indicators

As in 2007, neither thecost/income ratio nor thecompensation ratiowere meaningful in 2008 due to negative total operating income.

Average regulatory Value at Risk (VaR) (10-day, 99% confidence, five years of historical data) decreased to CHF 374 million, down from CHF 514 million in 2007. Year-end regulatory 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 Investment Bank’s VaR.
The Investment Bank’sgross 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 assets 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 categories 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 34,092 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 24,167 million, down from negative CHF 804 million a year earlier.

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 revenues 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 volatility, depressed client volumes, lack of liquidity and highly correlated markets impacted performance across all regions, particularly in the fourth quarter. Equity linked revenues were down, with most regions impacted by declines in valuations, falling equity markets and reduced liquidity. Prime brokerage services had a solid performance, but revenues 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 volatility in the market. Proprietary trading revenues were negative for the year, reflecting the significant change in market conditions.

Fixed income, currencies and commodities

Revenues were negative CHF 31,687 million, down from negative CHF 16,837 million a year earlier. Consequences of the global market crisis, including forced liquidations, government 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 markets 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 derivatives 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 interest rate business benefited from market movements to generate an exceptional result in 2008. The foreign exchange distribution 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 million 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 fromDealogic, UBS ended 2008 with a 5.6% market share of the global fee pool compared to 5.8%



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in 2007. However, UBS improved its rank from sixth in 2007 to fifth in 2008.

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, decreased 57% from a year earlier, driven by significantly lower performance-related compensation and lower salary costs, only partly offset by restructuring charges. Share-based compensation 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 period of these awards.
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-

cy costs due to real estate restructuring, and by legal provisions.
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 increased 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 Investment Bank was recognized in second quarter 2008. There was no goodwill impairment charge for full-year 2007.
Included in the 2008 expenses mentioned above is a restructuring 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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2007

Key performance indicators

Neither thecost/income ratio nor thecompensation ratio was meaningful in 2007 due to negative total operating income. In 2006, the cost / income ratio was 74.6% and the compensation ratio 53.8%.

Average regulatory Value at Risk (VaR) (10-day, 99% confidence, 5 years of historical data) increased to CHF 514 million, 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 significant 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’sgross 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 revenues. The investment banking department also had a record year in 2007, with all geographical regions showing double-digit growth. Operating expenses for the Investment Bank decreased from 2006, mainly reflecting lower performance-related bonus accruals and a change in the composition 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 million, down from positive CHF 21,773 million a year earlier. This change was driven by losses recorded on positions related 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

region, especially in the Americas. While the advisory and equity 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 challenging markets in the second half of 2007.

Sales and trading

Revenues declined to negative CHF 7,833 million from positive CHF 16,727 million, driven by negative revenues of CHF 16,837 in FICC that were only partly offset by a positive revenue 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 revenues 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 options revenues (ABN AMRO’s futures and options business was acquired on 30 September 2006). Prime brokerage services continued to grow as client numbers and balances increased. Equities proprietary trading revenues sharply declined compared to the prior year, related to the credit market dislocation in the US. The equity linked businesses also contributed 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-related positions. Credit recorded losses in both client and proprietary 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. Commodities revenues declined due to lower volumes and volatility, especially affecting power and gas and to a lesser extent precious metals.
These negative effects were only partially offset by positive 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 demutualization and mark-to-market gains on the stake in the Brazil Mercantile & Futures Exchange. The underlying foreign exchange spot business saw strong increases due to higher volumes. The foreign exchange distribution business also posted very good results, stemming from all geographical regions. The rates business was up, driven by higher results in European derivatives.



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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, decreased 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 expenditures 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 Management for management of the Investment Bank’s funds invested 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 additional office space in the Americas and Europe. The amortization 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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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 finance, 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 corporate governance processes, including compliance with relevant 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 activities 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 functions are managed by the Corporate Center executive committee.

Chief Operating Officer of the Corporate Center

The COO of the Corporate Center is responsible for its business planning and forecasting, as well as its human resources 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 responsible 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 reporting, planning, forecasting and controlling processes, as well as the provision of advice on financial aspects of strategic plans and mergers and acquisitions transactions. Further responsibilities include overseeing UBS’s tax and treasury functions. In coordination with the Group General Counsel, the Group CFO defines the standards for accounting, reporting and disclosure and, together with the Chief Executive Officer, provides external certifications under sections 302 and 404 of the US Sarbanes-Oxley Act of 2002. These duties are in addition to managing relations with investors and coordination of working relationships with internal 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 management and control principles, including the development of appropriate control frameworks for market, credit and operational risks throughout the Group. The Group and business division risk functions work together to manage the following: 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 compliance matters and for legal and compliance policies and processes. The position is responsible for defining the strategy, goals and organizational structure of the legal function, in addition to setting and monitoring the Group-wide quality standards for handling the legal affairs of the Group. Supported by the head of Group Compliance, the Group General Counsel is responsible for ensuring that UBS meets relevant regulatory and professional standards in the conduct of its business. Other responsibilities include supervision of the General Counsels of the business divisions and working closely with the Group CRO with regard to the operational risk aspects of legal



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and liability risk. Furthermore, the Group General Counsel represents UBS’s interests to policy-makers and, in close cooperation 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 treasury 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 policies to ensure proper management and efficient co-ordination 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 capitalization and ratings levels. The position manages UBS’s holdings of its own shares and recommends corporate actions 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 regulatory, financial and management accounts and reports. The Head of Group Controlling & Accounting communicates relevant 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 responsible 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 compliance with all applicable tax laws, regulations and other requirements. Group Tax also provides tax advice to the business 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 framework. The position manages relations with external auditors and accounting standards bodies.

Chief Communication Officer

The Chief Communication Officer is responsible for managing UBS’s communications with its various stakeholders. Another key responsibility is the development of the strategy, content and positioning of communications of corporate importance, 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 culture. 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 Communication provides independent advice to the GEB (collectively and individually) and the BoD on strategic matters and supports the business divisions in the execution of their strategies. The position coordinates cross-business division strategic 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 & Financial Communication also communicates with investors, analysts and rating agencies about developments at UBS and is responsible for preparing and publishing quarterly and annual reports.

Group Head Human Resources

The Group Head Human Resources has Group-wide responsibility for the management of human resources, the development of the relevant human capital strategies as well as the governance over their effective implementation. This includes shaping a meritocratic culture of ambition 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 innovative and competitive incentive frameworks on a firm-wide basis.

Chief Technology Officer

The Chief Technology Officer is the head of the information technology infrastructure unit (ITI). This unit encompasses all information technology infrastructure teams across UBS, covering management of data networks, telephone and other communications systems, IT security, dis-



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Center Corporate Center

tributed computing and servers, mainframes and data centers, market data services, user services and desktop computing. The unit focuses on serving all UBS’s businesses in a client-driven and cost-efficient way, as well as building towards a consistent technical architecture across UBS through the execution of the information technology infrastructure 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 physical and technical features meet UBS risk and quality standards and comply with the operational risk framework.



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Results

Corporate Center reporting

                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Total operating income
  1,083   3,562   607   (70)
 
Cash components  1,069   1,244   1,179   (14)
 
Share-based components1
  7   121   140   (94)
 
Total personnel expenses  1,076   1,365   1,319   (21)
 
General and administrative expenses  1,299   1,306   1,255   (1)
 
Services (to)/from other business units  (2,066)  (2,070)  (1,969)  0 
 
Depreciation of property and equipment  720   739   782   (3)
 
Amortization of intangible assets  0   0   9     
 
Total operating expenses2
  1,029   1,340   1,396   (23)
 
Performance from continuing operations before tax  54   2,222   (789)  (98)
 
Performance from discontinued operations before tax  198   145   888   37 
 
Performance before tax
  252   2,367   99   (89)
 
                 
Contributions from private equity/Industrial Holdings
                
 
Total operating income  22   689   313   (97)
 
Total operating expenses  54   163   67   (67)
 
Operating profit from continuing operations before tax  (32)  526   246     
 
Profit from discontinued operations before tax  155   138   884   12 
 
                 
Additional information
                
 
BIS risk-weighted assets (CHF billion)3
  8.8   10.2   11.5     
 
Personnel (full-time equivalents)4
  7,285   6,913   4,771   5 
 
Personnel for the Operational Corporate Center (full-time equivalents)  1,572   1,622   1,452   (3)
 
Personnel for ITI5 (full-time equivalents)
  4,066   4,343   3,055   (6)
 
Personnel for Group Offshoring (full-time equivalents)  1,646   948   264   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).

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Center Corporate Center

2008

Results

The Corporate Center recorded a result from continuing operations of CHF 54 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 3.5 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 acquisition of the equity purchase option, and the impact of the contingent issuance of UBS shares in connection with the transaction. 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 fluctuation 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 Investment 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 accelerated 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 1,083 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 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 addition, 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 decreased 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 compared to 2007, reflecting ongoing cost-cutting initiatives and foreign exchange movements. Average UBS staff levels decreased slightly to 81,382 in 2008 from 81,715 in 2007.



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2007

Results

The Corporate Center recorded a pre-tax profit from continuing 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 Industrial Holdings was CHF 689 million in 2007, compared with CHF 313 million in 2006.

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%

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 divisions. The Operational Corporate Center also booked higher expenses in all areas. This was partially offset by lower provisions (2006 included a small portion of the provision for subleasing 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 intangible assets was CHF 0 million in 2007, CHF 9 million below the level a year earlier.

Information technology infrastructure

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 increased only 8% during this period.



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Risk and treasury management

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: Presentationform 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.

 

 


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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.








Corporate governance and risk control

 

(FLOW CHART)

1For full listing of Board of Directors committees, refer to Annex C of the Organization Regulations of UBS AG.

 

 


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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

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 turbulence, 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.

Funding management

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 33.4 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 
  Basel II  Basel I 
CHF million, except where indicated 31.12.08  31.12.08  31.12.07 
 
BIS tier 1 capital  33,371   35,884   34,101 
 
of which hybrid tier 1 capital
  7,393   7,393   6,387 
 
BIS total capital  45,588   46,233   45,797 
 
BIS tier 1 capital ratio (%)  11.0   9.9   9.1 
 
BIS total capital ratio (%)  15.1   12.7   12.2 
 
Credit risk  222,563   326,608   323,345 
 
Non-counterparty related risk  7,411   8,826   8,966 
 
Market risk  27,614   27,614   42,110 
 
Operational risk  44,685   N/A   N/A 
 
Total BIS risk-weighted assets
  302,273   363,048   374,421 
 

 

 


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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 organization, as well as limitations in its traditional market risk, credit risk, liquidity risk and funding risk measures (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 culminating 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 volatility 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. Extreme market moves throughout the year caused a breakdown in the relationship between a number of trading positions 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 governments 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 mortgage-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 billion. 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 responsibilities 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 operational risk. Several other changes to senior personnel in the Investment Bank CRO organization were also made. The Corporate Center risk function was reorganized, resulting in the formation of a unit to focus on the control of portfolio and concentration risks and a combined function 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


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    the appointments in the Investment Bank of a new Chief Executive Officer and new heads of Fixed Income Currencies and Commodities.
   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 eliminate 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 significant portfolio and concentration risks, and there were weaknesses identified in risk systems and infrastructure). Delivery against this plan remains broadly in line with expectations and is a high priority for UBS.
 
(AUDITED) Risk management and control principles
 
 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 continuous 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 independent 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 interests of all stakeholders, including shareholders, clients and employees.
  Disclosure of risk. Comprehensive, transparent and objective risk disclosure is an essential component of the risk control process. This includes disclosure and periodic reporting to senior management, the BoD, shareholders, regulators, rating agencies and other stakeholders.
  Earnings protection. UBS aims to protect earnings by limiting 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 depends, among other things, on the effective management 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.
     
(AUDITED)      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.
 
 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 capacity are also determined by the BoD. A newly established 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 control 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 maintaining 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 determination of methodologies to measure and assess risk, and the development and operation of appropriate risk infrastructure (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 management and control frameworks in the areas of capital management, liquidity, funding and tax.
 
 


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Corporate governance and risk control

 

(FLOW CHART)

1  For full listing of Board of Directors committees, refer to Annex C of the Organization Regulations of UBS AG.

     
(AUDITED)  The Group General Counsel is responsible for implementing UBS’s risk management and control principles in the areas of legal and compliance.
 
  Risk management and control framework
 
  UBS’s risk management and c