Docoh
Loading...

AMNA Ubs

Filed: 14 Mar 11, 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, 2010

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)
Sarah M. Starkweather
UBS AG
677 Washington Boulevard
Stamford, CT 06901
Telephone: (203) 719-3000
Fax: (203) 719-0680
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
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 2010:

 


Table of Contents

Ordinary shares, par value CHF 0.10 per share: 3,830,840,513 ordinary shares (including 38,892,031 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 205 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
   
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
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
 
 

2


Table of Contents

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*
   
$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 Total Return 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
   
$100,000,000 E-TRACS UBS S&P 500 Gold Hedged Index ETN due January 2040 NYSE Arca
   
$100,000,000 E-TRACS Dow Jones-UBS Commodity Index Total Return ETN due October 2039 NYSE Arca
$100,000,000 E-TRACS Linked to the Alerian MLP Infrastructure Index due April 2, 2040 NYSE Arca

3


Table of Contents

   
  Name of each exchange on
Title of each class which registered
$100,000,000 1xMonthly Short E-TRACS Linked to the Alerian MLP Infrastructure Total Return Index due October 1, 2040 NYSE Arca
   
$100,000,000 2xMonthly Leveraged Long E-TRACS Linked to the Alerian MLP Infrastructure Index due July 9, 2040 NYSE Arca
   
$100,000,000 E-TRACS Linked to the Alerian Natural Gas MLP Index due July 9, 2040 NYSE Arca
   
$100,000,000 E-TRACS Linked to the Wells Fargo® MLP Index due October 29, 2040
 NYSE Arca
   
$100,000,000 E-TRACS Daily Long-Short VIX ETN due November 30, 2040 NYSE Arca
* Not for trading, but solely in connection with the registration of the corresponding Trust Preferred Securities.
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

4


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that constitute “forward-looking statements”, including but not limited to management’s outlook for UBS’s financial performance and statements relating to the anticipated effect of transactions and strategic initiatives on UBS’s business and future development. While these forward-looking statements represent UBS’s judgments and expectations concerning the matters described, 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) future developments in the markets in which UBS operates or to which it is exposed, including movements in securities prices or liquidity, credit spreads, currency exchange rates and interest rates and the effect of economic conditions and market developments on the financial position or creditworthiness of UBS’s clients and counterparties; (2) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings; (3) the ability of UBS to retain earnings and reduce its risk-weighted assets in order to comply with recommended Swiss capital requirements without adversely affecting its business; (4) changes in financial regulation in Switzerland, the US, the UK and other major financial centers which may impose constraints on or necessitate changes in the scope and location of UBS’s business activities and in its legal and booking structures, including the imposition of more stringent capital and liquidity requirements, incremental tax requirements and constraints on remuneration, some of which may affect UBS in a different manner or degree than they affect competing institutions; (5) the liability to which UBS may be exposed due to legal claims and regulatory investigations, including those stemming from market dislocation and losses incurred by clients and counterparties during the financial crisis; (6) the outcome and possible consequences of pending or future inquiries or actions concerning UBS’s cross-border banking business by tax or regulatory authorities in various jurisdictions; (7) the degree to which UBS is successful in effecting organizational changes and implementing strategic plans, and whether those changes and plans will have the effects intended; (8) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control its businesses; (9) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other matters; (10) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (11) changes in the size, capabilities and effectiveness of UBS’s competitors, including whether UBS will be successful in keeping pace with competitors in updating its technology, particularly in trading businesses; and (12) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures, either within UBS or within a counterparty. Our business and financial performance could be affected by other factors identified in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2010. 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.

5


Table of Contents

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 406 to 409 andStatement of changes in equityon pages 268 to 270 of the Annual Report 2010 of UBS AG (the “Annual Report”) which is annexed hereto and forms an integral part hereof.
     The noon purchase rate for the Swiss franc on 28 February 2011 was 1.0747 USD per 1 CHF. See page 406 of the Annual Report for additional exchange rate information.
Ratio of Earnings to Fixed Charges.
     Please see page 409 of the Annual 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 25 to 30 of the Annual 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.
 
 4-6 Please seeThe making of UBSon page 18 andKey factors affecting our financial position and results of operations in 2010on pages 32 to 33 of the Annual Report.
 
 7 Not applicable.
B—Business Overview.
 1,2,5,7 Please refer to the Annual Report on pages 75 to 77 (as to Wealth Management) and pages 81 to 82 (as to Retail & Corporate) with respect to Wealth Management & Swiss Bank, pages 85 to 87 with respect to Wealth Management Americas, pages 92 to 96 with respect to Global Asset

6


Table of Contents

   Management, pages 102 to 103 with respect to the Investment Bank, and pages 109 to 110 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 consolidated financial statements (the “Financial Statements”) contained in the Annual Report,Segment reporting on pages 293 to 296 andSegment reporting by geographic locationon page 297, respectively.
 
 3 Please refer toSeasonal characteristicson page 33 of the Annual Report.
 
 4 Not applicable.
 
 6 None.
 
 8 Please seeRegulation and supervisionon pages 215 to 217 of the Annual Report.
C—Organizational Structure.
     Please see Note 34 to the Financial Statements,Significant subsidiaries and associates,on pages 362 to 365 of the Annual Report.
D—Property, Plant and Equipment.
     Please seeProperty, plant and equipmenton page 410 of the Annual Report.
Information Required by Industry Guide 3
     Please seeInformation required by industry guide 3on pages 411 to 424 of the Annual Report. See alsoSelected financial dataon pages 406 to 409 of the Annual 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 4A.   Unresolved Staff Comments.
     No material unresolved comments.
Item 5.   Operating and Financial Review and Prospects.
A—Operating Results.
     Please seeFinancial performanceon pages 31 to 53 of the Annual Report. For a discussion of operating results by business division, please refer to the Annual Report, page 74 and pages 78 to 80 (as to Wealth Management) and pages 83 to 84 (as to Retail & Corporate) with respect to Wealth Management & Swiss Bank, pages 88 to 91 with respect to Wealth Management Americas, pages 97 to 101 with respect to Global Asset Management, pages 104 to 108 with respect to the Investment Bank and pages 110 to 111 with respect to the Corporate Center.
     For information regarding the impact of foreign currency fluctuations, seeCorporate currency managementon page 154 of the Annual Report.
B—Liquidity and Capital Resources.
     We believe that our working capital is sufficient for the company’s present requirements. Liquidity and capital management is undertaken at UBS as an integrated asset and liability management

7


Table of Contents

function. For a detailed discussion, please seeLiquidity and funding managementon pages 147 to 152 andCapital managementon pages 155 to 159 of the Annual Report.
     For a discussion of UBS’s borrowings and cash flows, please seeBalance sheeton pages 44 to 47 andCash flowson page 53 of the Annual Report.
     Please see alsoInterest rate and currency managementon pages 153 to 154 andShares and capital instrumentson pages 160 to 162 of the Annual Report and Note 19 to the Financial Statements,Financial liabilities designated at fair value and debt issued,on pages 312 to 313 of the Annual Report.
C—Research and Development, Patents and Licenses, etc.
     Not applicable.
D—Trend Information.
     Please seeCurrent market climate and industry driverson pages 20 to 21 of the Annual Report.
E—Off-balance Sheet Arrangements.
     Please seeOff-balance sheet arrangementson pages 48 to 52 of the Annual Report and Notes 24 and 25 to the Financial Statements,Pledgeable off-balance-sheet securitiesandOperating lease commitments,respectively, on page 329 of the Annual Report.
F—Tabular Disclosure of Contractual Obligations.
     Please seeContractual obligationson page 52 of the Annual Report.
Item 6.   Directors, Senior Management and Employees.
A—Directors and Senior Management.
 1,2,3 Please see pages 198 to 201 and pages 205 to 209 of the Annual Report.
 
 4,5 None.
B—Compensation.
 1 Please see pages 240 to 250 of the Annual Report and also Note 31 to the Financial Statements,Equity participation and other compensation plans,on pages 351 to 358 and Note 32 to the Financial Statements,Related parties,on pages 359 to 361 of the Annual Report.
 
 2 Please see Note 30 to the Financial Statements,Pension and other post-employment benefits plans, on pages 345 to 350 of the Annual Report.
C—Board practices.
 1 Please see pages 198 to 209 of the Annual Report.
 
 2 Please see pages 240 to 250 of the Annual Report and Note 32 to the Financial Statements,Related parties,on pages 359 to 361 of the Annual Report.

8


Table of Contents

 3 Please seeAudit committeeon page 201 andHuman Resources and Compensation Committeeon page 202 of the Annual Report.
D—Employees.
     Please seeOur employeeson pages 54 to 58 of the Annual Report.
E—Share Ownership.
     Please see pages 243 to 250 in the Annual Report, Note 31 to the Financial Statements,Equity participation and other compensation plans,on pages 351 to 358 of the Annual Report and “Equity holdings” in Note 32 to the Financial Statements,Related parties,on page 359 of the Annual Report.
Item 7.   Major Shareholders and Related Party Transactions.
A—Major Shareholders.
     Please seeGroup structure and shareholderson page 191 of the Annual Report. At December 31, 2010, the portion of UBS ordinary shares held in the United States was 265,029,075 by 1,128 record holders.
B—Related Party Transactions.
     Please seeLoanson page 241 of the Annual Report, Note 32 to the Financial Statements,Related parties,on pages 359 to 361 of the Annual Report andLoans granted to members of the BoD on 31 December 2009/2010andLoans granted to members of the GEB on 31 December 2009/2010on page 399 of the Annual Report.
The aforementioned loans (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (c) did not involve more than the normal risk of collectability or present other unfavorable features.
C—Interests of Experts and Counsel.
     Not applicable because this Form 20-F is filed as an annual report.
Item 8.   Financial Information.
A—Consolidated Statements and Other Financial Information.
 1,2,3,4,5,6 Please see Item 18 of this Form 20-F.
 
 7 Information on material legal and regulatory proceedings is in Note 21 to the Financial Statements,Provisions and contingent liabilities, on pages 314 to 319 of the Annual Report. For developments during the year, please see also the Financial Information section in each of our quarterly reports: First Quarter 2010 Report, filed on Form 6-K dated May 4, 2010 (Note 15,Litigation); Second Quarter 2010 Report, filed on Form 6-K dated July 27, 2010 (Note 15,Litigation); Third Quarter 2010 Report, filed on Form 6-K dated October 26, 2010 (Note 15,Litigation and regulatory matters); and Fourth Quarter 2010 Report, filed on Form 6-K dated February 8, 2011 (Note 14,Litigation and regulatory matters,and Note 15,Other contingent liabilities). The Notes in each such Quarterly Report speak only as of their respective dates.

9


Table of Contents

 8 Please refer toDistributions to shareholderson page 162 of the Annual 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 our financial position and results of operations in 2010on pages 32 to 33 of the Annual Report and Note 33 to the Financial Statements,Events after the reporting period,on page 362 of the Annual 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 165 of the Annual 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 and traded on the SIX Swiss Exchange and the New York Stock Exchange. The symbols are shown on page 163 of the Annual Report.
(a) Trading on SIX Swiss Exchange
     From 2001 to 2009, Swiss blue chip stocks were traded on the SWX Europe (formerly virt-x) in London, a subsidiary wholly owned by the SIX Group, although these stocks remained listed on the SIX Swiss Exchange. In 2009, trading of blue chip stocks and ETFs was repatriated to Switzerland.
     SIX Swiss Exchange is a Recognized Overseas Investment Exchange supervised by FINMA. It is delivered on the modern, scalable SIX trading platform.
     SIX Swiss Exchange is open from Monday to Friday, except on Swiss public holidays. Exchange days are also clearing days. This means that trading takes place and that trades can be forwarded to the central counterparty (CCP) or central securities depository (CSD) for clearing and settlement. Exchange hours are 6 a.m. to 10 p.m. CET. Clearing hours are 8 a.m. to 6:15 p.m. CET.
     All trades executed through the order book settle on a uniform “T+3” basis, meaning that delivery and payment of exchange transactions occur three business days after the trade date. The buyer is able to ask SIX Swiss Exchange to enforce settlement if the seller has not delivered within three business days of the intended settlement date.
     Any transaction executed under the rules of SIX Swiss Exchange must be reported to SIX Swiss Exchange. Order book executions are automatically reported by the trading system. There are separate provisions for the delayed publication of certain qualifying trades. 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, SIX Swiss Exchange may take whatever measures it deems necessary

10


Table of Contents

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 2010, the securities of more than 2,300 operating corporations with a total combined market valuation of approximately USD 16.3 trillion were listed on the NYSE, including 519 non-U.S. issuers from 47 countries.
     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.
     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.
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.

11


Table of Contents

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, to 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”.
     The Articles provide that we may elect not to print and deliver certificates in respect of registered shares. Shareholders may, however, following registration in the share register, request at any time that we issue a written statement in respect of their shares.
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 financial 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

12


Table of Contents

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).
     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 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 on transferability;
  An increase in authorized capital;
  An increase in 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

13


Table of Contents

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 BoD conforms with statutory law. In practice, the shareholders’ meeting usually approves the dividend proposal of the BoD.
     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 Interest
     Swiss law does not have a general provision on conflicts of interest. 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.

14


Table of Contents

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.
     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.

15


Table of Contents

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.
     Please seeCapital structureon pages 193 to 195,Shareholders’ participation rightson pages 196 to 197 andElection and terms of officeon page 202 of the Annual 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 use a mark-to-market method of accounting for securities holdings, 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 of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, which we call the “Treaty,” all of which may be subject to change or change in interpretation, possibly with retroactive effect.

16


Table of Contents

     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
  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 in principle subject to a Swiss federal withholding tax at a rate of 35%.
     Until the end of 2010, the Par Value Principle was applicable. Under the Par Value Principle any distribution, which was not a repayment of the par value of the shares, was subject to Swiss withholding tax.
     Starting 1 January 2011, the Par Value Principle was replaced by the Capital Contribution Principle. Under the Capital Contribution Principle, the repayment of capital contributions, including share premiums made by the shareholders after December 31, 1996 is in principle no longer subject to Swiss withholding tax if certain requirements regarding the booking of these capital contributions are met. The Swiss Federal Tax Administration issued guidelines on how the Capital Contribution Principle has to be applied. Nevertheless certain aspects are still unclear and disputed respectively.
     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.
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%

17


Table of Contents

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 Switzerland or the Principality of Liechtenstein. 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.
(b) Ownership of UBS Ordinary Shares-U.S. Federal Income Taxation
Dividends and Distributions
     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, 2013 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 generally be income from sources outside the United States for foreign tax credit limitation purposes, and will, depending on the holder’s circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to the holder. 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 includible 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 and will not be eligible for the special tax rate applicable to qualified dividend income. 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 or deductible 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

18


Table of Contents

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. See “(a) Ownership of UBS Ordinary Shares—Swiss Taxation” above, for the procedures for obtaining a tax refund.
     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. In order for U.S. holders that receive a stock dividend subject to Swiss tax but not U.S. tax to receive the benefit of the foreign tax credit associated with that tax, such holder must have other foreign source income.
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, 2013 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 with respect to the UBS ordinary shares, 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 three preceding taxable years or, if shorter, 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. With certain exceptions, a holder’s UBS ordinary shares will be treated as stock in a passive foreign investment company if UBS was a passive foreign investment company at any time during the holder’s holding period in the UBS ordinary shares. 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.

19


Table of Contents

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.
Item 11.   Quantitative and Qualitative Disclosures About Market Risk.
(a) Quantitative Information About Market Risk.
     Please seeMarket riskon pages 134 to 140 of the Annual Report.
(b) Qualitative Information About Market Risk.
     Please seeMarket riskon pages 134 to 140 of the Annual 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.
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 213 to 214 of the Annual Report. See also Exhibit 12 to this Form 20-F.

20


Table of Contents

(b) Management’s Annual Report on Internal Control over Financial Reporting.
     Please seeManagement’s report on internal control over financial reportingon page 259 of the Annual Report.
(c) Attestation Report of the Registered Public Accounting Firm.
     Please seeReport of independent registered public accounting firm on internal control over financial reportingon pages 260 to 261 of the Annual Report.
(d) Changes in Internal Control over Financial Reporting.
     None.
Item 15T.   Controls and Procedures.
     Not applicable.
Item 16A.   Audit Committee Financial Expert.
     Please seeAudit committeeon page 202 andCompliance with NYSE listing standards on corporate governanceon pages 218 to 219 of the Annual Report.
Item 16B.   Code of Ethics.
     The Code of Business Conduct and Ethics (the “Code”) was substantially rewritten in January 2010. As rewritten, the Code is strengthened and updated based on international standards and best practices. It sets up clear requirements rather than merely statements of intention. It contains new provisions on cross-border business and tax compliance, as well as expanded provisions to improve corporate responsibility—fair dealing and fair competition, diversity and equal opportunity, health and safety, protecting the environment, respecting human rights, and community investment. Finally, the Code includes new requirements for training, annual certification and disciplinary consequences for all employees.
     The code of business conduct and ethics is published on our website underhttp://www.ubs.com/1/e/investors/corporategovernance/business_conduct.html.
Item 16C.   Principal Accountant Fees and Services.
     Please seeAuditorson pages 211 to 212 of the Annual Report. None of the non-audit services disclosed in the table on page 211 were approved by the Audit Committee pursuant to paragraph (c) (7)(i)(C ) of Rule 2-01 of Regulation S-X.
Item 16D.   Exemptions from the Listing Standards for Audit Committees.
     Not applicable.
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
     Please seeTreasury share activitieson page 161 of the Annual Report. The 2007/2010 share buyback program had been suspended since 2008, and expired on 8 March 2010 without being replaced by a new program. Throughout 2010 and at the time of expiration of the program, the unutilized volume of shares under the program was 174.1 million shares.

21


Table of Contents

Item 16F.   Changes in Registrant’s Certifying Accountant.
     Not applicable.
Item 16G.   Corporate Governance.
     Please seeCompliance with NYSE listing standards on corporate governanceon pages 218 to 219 of the Annual 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 259 to 378 of the Annual Report.
Item 19.   Exhibits.
   
Exhibit  
Number Description
1.1 Articles of Association of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed October 5, 2010)
   
1.2 Organization Regulations of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed August 4, 2010)
   
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.
   
4.1 Deferred Prosecution Agreement between the United States of America and UBS AG, dated February 18, 2009 (incorporated by reference to Exhibit 4.1 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009).
   
7 Statement regarding ratio of earnings to fixed charges.

22


Table of Contents

   
Exhibit  
Number Description
8 Significant Subsidiaries of UBS AG.
   
  Please see Note 34 to the Financial StatementsSignificant subsidiaries and associates,on pages 362 to 365 of the Annual 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.

23


Table of Contents

SIGNATURES
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused the undersigned to sign this annual report on its behalf.
     
 UBS AG
 
 
 /s/ Oswald Grübel   
 Name:  Oswald Grübel  
 Title:  Chief Executive Officer  
 
   
 /s/ John Cryan   
 Name:  John Cryan  
 Title:  Chief Financial Officer  
 
March 15, 2011

24


Table of Contents

INDEX TO EXHIBITS
   
Exhibit  
Number Description
1.1 Articles of Association of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed October 5, 2010)
   
1.2 Organization Regulations of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed August 4, 2010)
   
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.
   
4.1 Deferred Prosecution Agreement between the United States of America and UBS AG, dated February 18, 2009 (incorporated by reference to Exhibit 4.1 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009).
   
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 associates,on pages 362 to 365 of the Annual 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.

25


Table of Contents


Table of Contents

    
(UBS LOGO)
   Annual Report 2010

(KEY GRAPHIC)

Ourperformance in 2010

 


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Contents



1  


Table of Contents

Annual Report 2010
Letter to shareholders

Dear Shareholders,

2010 was a year of substantial improvement for us.We achieved a net profit attributable to UBS shareholders of CHF 7.5 billion1, compared with a loss of CHF 2.7 billion in 2009. Our return on equity for 2010 improved to 16.7% from negative 7.8% at the end of 2009. We believe that providing outstanding levels of execution and delivering sustainable profitability are the cornerstones on which we can build a successful future, and that the progress we made during 2010 has enhanced our reputation with stakeholders.

Sustaining this progress will require us to continue to act with discipline and integrity, and to maintain a sharp focus on achieving our targets.During the year we increased revenues by CHF 9 billion compared with 2009, while at the same time reducing overall risk levels. We maintained discipline over our cost base, achieving our targeted fixed costs of less than CHF 20 billion. Our clients have once again entrusted us with net new money, with net inflows stabilizing in the second half of the year. Profits for 2010 were a key driver of the increase in our Basel II tier 1 capital ratio, which stood at an industry-leading 17.8% at the year-end. While our results for 2010 showed a marked improvement, we have far greater ambitions. In 2011 we will continue to build further on our achievements.

Most of our business divisions showed an improvement compared with 2009.InWealth Management,client confidence remained subdued in volatile markets, affecting overall transaction volumes. Market rates of interest also remained low during the year. Against this backdrop, Wealth Management’s pre-tax profit increased to CHF 2,308 million compared with CHF 2,280 million in 2009, mainly as a result of reduced operating expenses. Total operating income declined marginally on lower interest income reflecting the interest rate environment as well as the effects of foreign exchange on our results, particularly the decrease in the value of the euro and US dollar against the Swiss franc. Fee income decreased on a lower average asset base, but trading income increased reflecting the work we have done to further strengthen our advisory relationship with clients. Invested assets declined by 7% as foreign exchange movements and outflows more than offset positive investment performance. Operating expenses declined by 3% mainly reflecting reduced personnel and restructuring costs.

InRetail & Corporate,pre-tax profit increased by 9% to CHF 1,772 million compared with 2009. Total operating income remained broadly stable, with net interest income impacted by low market interest rates. Operating expenses were reduced by 8%, reflecting cost-cutting measures initiated in 2009.

Wealth Management Americasreported a pre-tax loss of CHF 130 million compared with a pre-tax profit of CHF 32 million in 2009. The result belies the considerable operational progress made during the year, the benefits of which were more than offset by a significant increase in litigation provisions. We believe the restructuring of this business over the past year will allow us to leverage our strong competitive positioning going forward. Retaining talent within the business is key, and we are encouraged that financial advisors with us for more than one year delivered a strong performance, especially in the fourth quarter. Operating income was flat, with improved managed account fees and higher mutual fund revenues offset by a decrease in municipal trading income. Net new money trends in the business are encouraging, with the business delivering positive net new money in the second half of the year.

In 2010,Global Asset Managementcontinued to build on its already sound investment track record with a pre-tax profit of CHF 516 million, an increase of 18% compared with 2009. This was achieved despite a decrease in invested assets as positive investment performance and net new money inflows were more than offset by negative currency effects. Operating income was down by 4% due to lower performance fees and lower revenues also reflecting the sale of UBS Pactual. Operating expenses decreased by 9%.

OurInvestment Bankcontributed most to the improvement in our 2010 results, recording a pre-tax profit of CHF 2,197 million compared with a pre-tax loss of CHF 6,081 million in 2009. This was primarily due to a reversal of losses in our fixed income, currencies and commodities business and reflects the rebuild of our credit business where revenues rose significantly. In 2010 we recorded considerably lower net credit loss expenses and lower own credit losses, partly offset by an increase in operating expenses.

We continued to maintain tight control over our risks and balance sheet alongside improvements in profitability over the year.Risk-weighted assets were reduced by 4% during the year to CHF 199 billion, and, on 31 December 2010, our balance sheet stood at CHF 1,317 billion, down 2% compared with the prior year. The increase in our regulatory capital, together with a reduction in risk-weighted assets, led to an improvement of our BIS tier 1 capital ratio to 17.8% compared with 15.4% at the end of 2009.

During 2010 the regulatory landscape shifted substantially with the expectation of more stringent regulatory requirements becoming a reality.New global regulatory pro-



 
1 Our 2010 results were adjusted after the issuance of our fourth quarter 2010 report. The adjustment, which increased the net profit attributable to UBS shareholders by CHF 373 million, is explained in Note 33 to the financial statements included in our Annual Report 2010.

2


Table of Contents

(PHOTO OF KASPER VILLIGER AND OSWALD J. GRUBEL)

Kaspar VilligerChairman of the Board of Directors     Oswald J. GrübelGroup Chief Executive Officer

posals were finalized by the Basel Committee on Banking Supervision early this year, and the Swiss Federal Council published draft legislation for Swiss banks based on the recommendations of the Swiss Expert Commission and designed to address the “too big to fail” issue. These proposals are due to be debated in the Swiss Parliament later this year. We will continue to evaluate the impacts of these changes, especially the effect that they may have on the profitability of our businesses, and, where necessary, we will take appropriate action. As previously stated, we will retain earnings in order to meet the recommended future capital requirements.

Recent quarters have demonstrated that our results for certain divisions, and for the Group as a whole, are highly sensitive to regulatory, legal and tax developments.In 2011, we believe that we may have opportunities to recognize further deferred tax assets in our results. We also expect that provisions for litigation and other contingencies will continue to affect us, although the timing and magnitude of these developments are not predictable.

In the current environment it is more important than ever that we focus on our clients’ needs.During the year we continued to implement our global and integrated bank strategy. We



3


Table of Contents

Annual Report 2010
Letter to shareholders

improved the way in which we deliver our products and services to clients, which in turn should help us achieve further revenue growth. As part of this strategy we established our Investment Products and Services unit. We believe that this unit will play a crucial role, ensuring that our clients receive fast and efficient access to products and services tailored to their individual needs. Alongside this we set up our Global Family Office Group, catering to the often complex needs of many of the world’s wealthiest families.

We continued our tradition of supporting the local communities in which we live and work.We believe that our success stems not only from our employees’ skills and resources and from our relationships with our clients, but also from a healthy social environment. All over the world, our regional Community Affairs teams organize a wide variety of charitable activities in addition to direct donations made by the firm. Across all of our business regions, our employees continue to play a very active role in our community investment efforts, in particular through their volunteering activities. In 2010, our employees spent nearly 81,000 hours volunteering. We support their commitment by offering up to two working days a year for volunteering efforts, and also match employee donations to selected charities. In 2010 we also announced our support of the UBS Kids Cup, an athletics competition in Switzerland involving up to 70,000 children aged 7 to 15, helping to promote health and well-being.

During the year there were signs of improved client confidence in UBS.Building on this momentum, in August we launched our new brand campaign, our first global campaign for two years. The “We will not rest” campaign conveys our commitment to and focus on our clients at every level of the organization.

The ultimate responsibility for the firm’s strategy and the supervision of its executive management rests with the Board of Directors.We welcome the announcement that Joseph Yam, founder and former Chief Executive of the Hong Kong Monetary Authority, has been nominated for election to the Board. His expected appointment following the 2011 Annual General Meeting should further strengthen UBS’s Board of Directors, allowing us to benefit from his considerable experience. We recently announced that Sally Bott has resigned from the Board. We would like to express our gratitude to Sally for her outstanding contributions and great commitment during the past two and a half years.

2010 was a year of substantial improvement in our financial performance and our financial condition, and we would like to take this opportunity to thank you, our shareholders, for your continued support, and all of our employees for their hard work and commitment.In 2011, we are confident that we can consolidate the progress already made throughout the firm, helping to deliver our goal of long-term sustainable profitability for our shareholders.

15 March 2011

Yours sincerely,

UBS

   
(-s- Villiger)
 (-s- Grubel)
Kaspar Villiger Oswald J. Grübel
Chairman of the Group Chief
Board of Directors Executive Officer



4


Table of Contents

Information sources

Reporting publications

Annual publications:Annual report (SAP no. 80531): Published in both English and German, this single volume report provides a description of: our UBS Group strategy, performance and responsibility; the strategy and performance of the business divisions and the Corporate Center; risk and treasury management; corporate governance and senior management and Board of Directors compensation; and financial information, including the financial statements.Review (SAP no. 80530): The booklet contains key information on our strategy and financials. It is published in English, German, French and Italian.Compensation Report (SAP no. 82307): The report discusses compensation for senior management and the Board of Directors (executive and non-executive members). It is published in English and German.

Quarterly publications:Letter to shareholders: The letter provides a quarterly update from executive management on our strategy and performance. The letter is published in English, German, French and Italian.Financial report (SAP no. 80834): The quarterly financial report provides an update on our 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 “Financial information” section. Printed copies can be ordered from the same website by accessing the order / subscribe panel on the left-hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, F2AL-AUL, P.O. Box, CH-8098 Zurich, Switzerland.

Other information

Website: The “Analysts & Investors” section atwww.ubs.com/ investorsprovides the following information on UBS: financial in-

formation (including SEC results-related filings); corporate information, including UBS share price charts and data and dividend information; the UBS event calendar; and 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: Our quarterly results presentations are webcast live. A playback of most presentations is downloadable atwww.ubs.com/presentations.

Messaging service / UBS news alert: On thewww.ubs.com/ newsalertswebsite, 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 theme preferences for the alerts received.

Form 20-F and other submissions to the US Securities and Exchange Commission: We file periodic reports and submit other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is the annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934. The filing of Form 20-F is structured as a “wraparound” 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 we file 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 results-related filings with the SEC may be obtained from our Investor Relations team atwww.ubs.com/investors.



5


Table of Contents

Annual Report 2010

Corporate information
The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.
UBS AG is incorporated and domiciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.
The addresses and telephone numbers of our two registered offices are: Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 11 11; and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 50 50.

UBS AG shares are currently listed on the SIX Swiss Exchange and the New York Stock Exchange.



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

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

Office of the Company Secretary

The Company Secretary receives queries on compensation and related issues addressed to members of the Board of Directors.
UBS AG, Office of the Company Secretary
P.O. Box, CH-8098 Zurich, Switzerland
sh-company-secretary@ubs.com
Hotline +41-44-234 3628
Fax +41-44-234 6603

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

US Transfer Agent

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



Corporate calendar

Publication of first quarter 2011 results
Tuesday, 26 April 2011
Annual General Meeting
Thursday, 28 April 2011
Publication of second quarter 2011 results
Tuesday, 26 July 2011
Publication of third quarter 2011 results
Tuesday, 25 October 2011

Imprint

   
Publisher: UBS AG, Zurich and Basel, Switzerland | www.ubs.com
Languages: English/German | SAP-No. 80531E
 
© UBS 2011. The key symbol and UBS are among the registered
and unregistered trademarks of UBS. All rights reserved.
 
Printed in Switzerland on chlorine-free paper with mineral
oil-reduced inks. Paper production from socially responsible and
ecologically sound forestry practices.
 (MYCLIMATE LOGO)



6


Table of Contents

Strategy, performance and responsibility

 

 

 

 

 

 

 

 

 

 

 

 

Information assured according to the Global Reporting Initiative (GRI)

Content of the sections “Our employees” and “Corporate responsibility” has been assured by SGS Société Générale de Surveillance SA (SGS) using the GRI Sustainability Reporting Guidelines, as evidenced in the SGS Assurance Statement on page 70. The assurance by SGS also covered text and data on the website of UBS. Both the relevant text in the Annual Report 2010 and on the website are referenced in the GRI Index (www.ubs.com/gri), which defines the scope of the assurance. SGS has confirmed the level of assurance as GRI A+.

 


Table of Contents

Strategy and performance

 

 We are a client-focused financial services firm that offers a strong combination of wealth management, asset management and investment banking services on a global and regional basis.
   
 We aim to generate sustainable earnings and create value for our shareholders.

 

 

Our strategic priorities

We are concentrating on:

 further strengthening our position as a leading bank for high net worth and ultra high net worth clients around the world;
 continuing our leadership across all client segments in Switzerland;
 attaining a top-tier position in the growth regions in which we choose to operate; and
 remaining a leading investment bank with a client-centric business model, focusing on flow trading and advice, leveraging our traditional strengths and maximizing our scope by working in close conjunction with our wealth management and asset management businesses.

Re-focusing the business portfolio

We will further foster collaboration between our wealth management, asset management and investment banking businesses, reflecting our commitment to serve our clients comprehensively across all segments. We believe this will improve our operating and financial results and will generate more shareholder value. From a geographic perspective, we want to leverage our strong existing global footprint. We are continuously investing in our Asia Pacific businesses as well as other growth markets such as the Middle East and Latin America.

 

Transforming the way we operate

Our transformation is geared towards exploiting the full potential of our strengths based on our three strategic guidelines of reputation, integration and execution.

Our reputation is our most valuable asset. It is ultimately defined by the actions and decisions we take every day. In order to restore and safeguard our reputation, we have introduced more disciplined and effective governance processes.

Integration is a key factor in serving our clients and driving efficiencies across our businesses, and is essential to our ability to achieve our financial targets. Integration is being achieved through a series of measures, including several dedicated client-related initiatives around the globe, and related improvements in client coverage and management processes.

We are committed to execution at the highest standards, ensuring consistent high-quality delivery to clients as well as within the firm. Furthermore, we are further developing our performance-oriented culture to help us to attract, develop and retain top industry talent.

 



 


Table of Contents

             
UBS key figures 
  As of or for the year ended 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08 
 
             
Group results
            
 
Operating income  31,994   22,601   796 
 
Operating expenses  24,539   25,162   28,555 
 
Operating profit from continuing operations before tax  7,455   (2,561)  (27,758)
 
Net profit attributable to UBS shareholders  7,534   (2,736)  (21,292)
 
Diluted earnings per share (CHF)1
  1.96   (0.75)  (7.63)
 
             
Key performance indicators, balance sheet and capital management2
            
 
Performance
            
 
Return on equity (RoE) (%)  16.7   (7.8)  (58.7)
 
Return on risk-weighted assets, gross (%)  15.5   9.9   1.2 
 
Return on assets, gross (%)  2.3   1.5   0.2 
 
Growth
            
 
Net profit growth (%)3
  N/A   N/A   N/A 
 
Net new money (CHF billion)4
  (14.3)  (147.3)  (226.0)
 
Efficiency
            
 
Cost / income ratio (%)  76.5   103.0   753.0 
 
Capital strength
            
 
BIS tier 1 ratio (%)5
  17.8   15.4   11.0 
 
FINMA leverage ratio (%)5
  4.45   3.93   2.45 
 
Balance sheet and capital management
            
 
Total assets  1,317,247   1,340,538   2,014,815 
 
Equity attributable to UBS shareholders  46,820   41,013   32,531 
 
BIS total ratio (%)5
  20.4   19.8   15.0 
 
BIS risk-weighted assets5
  198,875   206,525   302,273 
 
BIS tier 1 capital5
  35,323   31,798   33,154 
 
             
Additional information
            
 
Invested assets (CHF billion)  2,152   2,233   2,174 
 
Personnel (full-time equivalents)  64,617   65,233   77,783 
 
Market capitalization6
  58,803   57,108   43,519 
 
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report.  2 For the definitions of our key performance indicators refer to the “Measurement and analysis of performance” section of this report.  3 Not meaningful if either the current period or the comparison period is a loss period.  4 Excludes interest and dividend income.  5 Refer to the “Capital management” section of this report.  6 Refer to the “UBS shares in 2010” section of this report.

 

The 2010 results and the balance sheet in this report differ from those presented in our fourth quarter 2010 report issued on 8 February 2011. The net impact of adjustments made subsequent to the publication of the unaudited fourth quarter 2010 financial report on net profit attributable to UBS shareholders was a gain of CHF 373 million, which increased basic and diluted earnings per share by CHF 0.10.

è Refer to “Note 33 Events after the reporting period” in the “Financial information” section of this report for more information

 


Table of Contents

Strategy, performance and responsibility
Strategy and structure

Strategy and structure

UBS draws on its 150-year heritage to serve private, institutional and corporate clients worldwide, as well as retail clients in Switzerland. We combine our wealth management, investment banking and asset management businesses with our Swiss operations to deliver superior financial solutions. Headquartered in Zurich and Basel, Switzerland, UBS has offices in more than 50 countries, including all major financial centers, and employs approximately 65,000 people. Under Swiss company law, UBS is organized as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.

UBS business model and aspiration

UBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank.

In aspiring to be a leading client-focused financial services firm, we are concentrating on:
 further strengthening our position as a leading bank for high net worth and ultra high net worth clients around the world;
 continuing our leadership across all client segments in Switzerland;
 attaining a top-tier position in the growth regions in which we choose to operate; and
 remaining a leading investment bank with a client-centric business model, focusing on flow trading and advice, leveraging our traditional strengths and maximizing our scope by working in close conjunction with our wealth management and asset management businesses.

Wealth Management & Swiss Bank
Wealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra high net worth individuals around the world – except to those served by

Wealth Management Americas – as well as private and corporate clients in Switzerland. Our Wealth Management business unit provides clients in over 40 countries, including Switzerland, with financial advice, products and tools to fit their individual needs. Our Retail & Corporate business unit provides individual and business clients with an array of banking services, such as deposits and lending, and maintains a leading position across its client segments in Switzerland.

Wealth Management Americas
Wealth Management Americas provides advice-based solutions through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth, high net worth and core affluent individuals and families. It includes the domestic United States business (Wealth Management US), the domestic Canadian business and international business booked in the United States.

Global Asset Management
Global Asset Management is a large-scale asset manager with businesses diversified across regions, capabilities and distribution channels. It offers investment capabilities and styles across all major traditional and alternative asset classes including equities, fixed income, currency, hedge fund, real estate and infrastructure that can also be combined into multi-asset strategies. The fund



10


Table of Contents

Strategy, performance and responsibility

services unit provides legal fund set-up and accounting and reporting for retail and institutional funds.

Investment Bank

The Investment Bank provides securities and other financial products and research in equities, fixed income, rates, foreign exchange and commodities. It also provides advisory services and access to the world’s capital markets for corporate and institutional clients, sovereign and governmental bodies, financial intermediaries, alternative asset managers and private investors.

Corporate Center

The Corporate Center provides and manages support and control functions for the Group in such areas as risk control, finance, legal and compliance, funding, capital and balance sheet management, management of non-trading risk, communication and branding, human resources, information technology, real estate, procurement, corporate development and service centres. Most costs and personnel of the Corporate Center are allocated to the business divisions.
è Refer to the “Accounting and reporting structure changes” and “UBS business divisions and Corporate Center” sections of this report for more information on our businesses

UBS’s competitive profile

Our business mix reflects decades of continuous development, organic growth and acquisitions. As a leader in the wealth management industry in terms of total invested assets, we offer a combination of wealth management, investment banking and asset management and services in local and regional markets. Specifically, we are a leading wealth manager in Switzerland, Europe, and the Asia Pacific region and are well positioned in

main growth markets such as the Middle East and Latin America. In the US, we are a leading wealth management service provider and are the biggest foreign-owned wealth manager. Furthermore, we have the largest ultra high net worth business globally in terms of invested assets. Our Investment Bank maintains a strong presence among global corporate and institutional clients, and holds leading positions in equities, foreign exchange, money markets, mergers and acquisitions and financial advisory services. In the Asia Pacific region, we operate leading investment banking, wealth management and asset management businesses.

UBS’s strategy

At the end of 2009, we established strategic objectives to improve our financial performance and reposition the firm in order to generate sustainable profitability and increased shareholder value. These strategic objectives and the related medium-term financial targets were reiterated at our Investor Day in November 2010. Our strategy is built on two primary pillars: re-focusing our business portfolio to fully capitalize on our strengths, and transforming the way we operate, exploiting the full potential of our strengths based on our three strategic guidelines of reputation, integration and execution. We are delivering against this strategy and have made progress in improving our financial performance during 2010.

Re-focusing the business portfolio

We will further foster collaboration between our wealth management, asset management and investment banking businesses, reflecting our commitment to serve our clients comprehensively across all segments. We believe this will improve our operating and financial results and will generate more shareholder value.



11


Table of Contents

Strategy, performance and
responsibility Strategy and structure

 

The Investment Bank’s strategy is centered on an aligned and integrated client-centric business model, built around flow trading and advice, and is supported by a disciplined risk control framework. The existing capabilities in equities and fixed income, currencies and commodities have been unified into one integrated securities platform to better serve our clients. We will continue to review the Investment Bank’s business mix to take into account changes in law affecting certain businesses, increased capital requirements and market developments.
In Wealth Management, we are focusing on capturing growth opportunities in Asia, the emerging markets and the ultra high net worth segment, while transforming our cross-border business and building on our onshore presence in key markets. Our Retail & Corporate business unit aims to further strengthen our leading position in Switzerland, working together with our other businesses.
The geographic and stylistic diversification of Global Asset Management is at the core of our efforts to deliver superior investment performance for clients and capture growth opportunities. Additionally, we are working to expand on our strong third-party institutional business.
In Wealth Management Americas, we have shifted from a scale-driven model to one based on advice, led by our financial advisors and focused on high net worth and ultra high net worth
clients. We believe this shift in strategy will lead to sustainable profitability.
From a geographic perspective, we want to leverage our strong existing global footprint. We are continuously investing in our Asia Pacific businesses as well as other growth markets such as the Middle East and Latin America. For example, in April 2010, we announced that we would acquire the Brazilian brokerage firm, Link Investimentos (subject to regulatory approval), a key milestone in our efforts to re-build our presence in Brazil and expand our footprint in Latin America.
è Refer to the “UBS business divisions and Corporate Center” section of this report for more information on the business division strategies

Transforming the way we operate

Our transformation is geared towards exploiting the full potential of our strengths based on our three strategic guidelines of reputation, integration and execution.
Our reputation is our most valuable asset. It is ultimately defined by the actions and decisions we take every day. In order to restore and safeguard our reputation, we have introduced more disciplined and effective governance processes. The resolution of the US-cross-border issue in November 2010 was one important



 
UBS Switzerland

We are committed to our Swiss home market. Switzerland is the only country in which retail, corporate and institutional banking, wealth and asset management as well as investment banking are present. We strive to be the leading bank with regard to client satisfaction, employee engagement and sustainable profitability. Within the Swiss market, we maintain a leading position in all of our businesses.

Through our network of over 300 branches including around 4,700

client-facing staff, we reach approximately 80% of Swiss wealth. We serve every third household, every third wealthy individual and almost half of all Swiss companies.

Our strategy leverages our strengths and leading position in Switzerland and our integrated bank model allows us to offer a very broad range of products and services to our clients. For example, we can offer our private clients banking products and services needed throughout

their lives, ensuring the stability and continuity of the relationship. The same holds true for our corporate and institutional clients. We also offer our clients in Switzerland access to our global asset gathering and investment banking expertise.

UBS Switzerland operates with an integrated management team consisting of the heads of all Swiss business segments and support functions.



 

12


Table of Contents

Strategy, performance and responsibility

step in this process. Also, we launched a new corporate identity program in 2010, including the world-wide brand campaign “We will not rest”, and a corresponding sponsorship strategy to raise our brand awareness.

Integration is a key factor in serving our clients and driving efficiencies across our businesses and is essential to our ability to achieve our financial targets. Integration is being achieved through a series of measures, including several dedicated client-related initiatives around the globe, and related improvements in client coverage and management processes. For example, we have established our Investment Products and Services (IPS) unit, bringing together experts from Wealth Management & Swiss Bank, Global Asset Management and the Investment Bank under one roof. IPS efficiently delivers high quality investment content and channels market and product ideas to our client advisors and clients in a prompt and efficient way, raising the quality of service for our Wealth Management clients.
We are committed to execution at the highest standards, ensuring consistent high-quality delivery to clients as well as within the firm. Furthermore, we are further developing our performance-oriented culture to help us to attract, develop and retain top industry talent. As part of this effort, we have introduced new performance review tools and processes that allow us to identify problem areas and to initiate corrective measures.



 

13


Table of Contents

Strategy, performance and responsibility
Strategy and structure

Board of Directors

(PHOTO 1 OF BOARD OF DIRECTORS)

(KEY TO PHOTOS OF BOARD OF DIRECTORS)

1 Kaspar VilligerChairman of the Board of Directors, Chairperson of the Corporate Responsibility Committee and Governance and Nominating Committee  2 Michel DemaréIndependent Vice Chairman, member of the Audit Committee and Governance and Nominating Committee  3 Axel P. LehmannMember of the Risk Committee  4 Rainer-Marc FreyMember of the Audit Committee and Risk Committee  5 Bruno GehrigMember of the Governance and Nominating Committee and Human Resources and Compensation Committee  6 Ann F. GodbehereMember of the Audit Committee and Corporate Responsibility Committee  7 William G. ParrettChairperson of the Audit Committee  8 Helmut Panke Ad-interim Chairperson of the Human Resources and Compensation Committee and member of the Risk Committee  9 Wolfgang MayrhuberMember of the Corporate Responsibility Committee and Human Resources and Compensation Committee  10 David SidwellSenior Independent Director, Chairperson of the Risk Committee

14


Table of Contents

Strategy, performance and responsibility

(PHOTO 2 OF BOARD OF DIRECTORS)

 

The Board of Directors (BoD) is our most senior body. Under the leadership of the Chairman, it determines the strategy of the Group based upon the recommendations of the Group Chief Executive Officer (Group CEO). It exercises ultimate supervision of management and is responsible for the appointment and dismissal of all Group Executive Board (GEB) members, the Company Secretary and the head of Group Internal Audit as well as supervising and setting appropriate risk management and control principles for the firm. With the exception of its current Chairman, Kaspar Villiger, all members of the BoD are independent.

è Refer to the “Corporate governance” section of this report for more information about the BoD



15


Table of Contents

Strategy, performance and responsibility
Strategy and structure

Group Executive Board

(PHOTO 1 OF GROUP EXECUTIVE BOARD)

(KEY TO PHOTOS OF BOARD OF DIRECTORS)

1 Oswald J. GrübelGroup Chief Executive Officer  2 John CryanGroup Chief Financial Officer and ad-interim Chairman and CEO of UBS Group Europe, Middle East & Africa  3 Markus U. DiethelmGroup General Counsel  4 John A. FraserChairman and CEO of Global Asset Management  5 Maureen MiskovicGroup Chief Risk Officer  6 Chi-Won Yoonco-Chairman and co-CEO of UBS Group Asia Pacific  7 Ulrich KörnerGroup Chief Operating Officer and CEO of Corporate Center  8 Robert J. McCannCEO of Wealth Management Americas  9 Lukas GähwilerCEO of UBS Switzerland and co-CEO of Wealth Management & Swiss Bank  10 Carsten KengeterChairman and CEO of the Investment Bank  11 Alexander Wilmot-Sitwellco-Chairman and co-CEO of UBS Group Asia Pacific  12 Jürg ZeltnerCEO of UBS Wealth Management and co-CEO of Wealth Management & Swiss Bank  13 Philip J. LoftsCEO of UBS Group Americas

16


Table of Contents

Strategy, performance and responsibility

(PHOTO 2 OF GROUP EXECUTIVE BOARD)

 

Management of the firm is delegated by the BoD to the GEB. Under the leadership of the Group CEO, the GEB has executive management responsibility for the Group and its businesses. It assumes overall responsibility for the development of the Group and business division strategies and the implementation of approved strategies.

è Refer to the “Corporate governance” section of this report for more information about the GEB



17


Table of Contents

Strategy, performance and responsibility
The making of UBS

The making of UBS

When, in 1998, the Union Bank of Switzerland and the Swiss Bank Corporation (SBC) merged to form UBS, they could look back on a long and illustrious history. By 1962, the Union Bank of Switzerland had already celebrated its 100th anniversary, as Bank in Winterthur, its first forebear, was founded in 1862. SBC passed its centenary in 1972, tracing its origins back to the Basler Bankverein founded in 1872. The historical roots of PaineWebber, acquired by UBS in 2000, go back to 1879, while S. G. Warburg, one of the major pillars upon which today’s Investment Bank was built, commenced operations in 1946, with its roots going back to 1934.
In the early 1990s, SBC and Union Bank of Switzerland were both 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 team-oriented approach. 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 transactions 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 SBC fill a strategic gap 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 combination of SBC and Union Bank of Switzerland into the firm we know today created a leading global wealth manager and improved the new firm’s prospects 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 United States. UBS advanced toward this objective when it acquired PaineWebber in 2000.
Since the acquisition of PaineWebber, UBS’s main priority has been to develop and grow organically, but smaller acquisitions have helped to accelerate and complement the firm’s growth. 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


18


Table of Contents

Strategy, performance and responsibility

(FLOWCHART)

19


Table of Contents

Strategy, performance and responsibility
Current market climate and industry drivers

Current market climate and industry drivers

The quest for greater systemic stability continues and its resilience has been tested once again by the euro crisis.

Emergence from the financial crisis amid continued
uncertainties

Global growth accelerated in the first half of 2010, as companies restocked their inventories and improved consumer confidence kick-started spending. Monetary policies remained expansionary in nature given the continuing fragility of the economic recovery. Emerging economies exited the crisis relatively unscathed and with improved economic, financial and fiscal positions in comparison with developed economies. Re-leveraging started across emerging markets at a time when de-leveraging was the norm in most developed markets, and China overtook Japan as the biggest Asian economy.

Following turbulence in some emerging market bond markets earlier in the year, renewed macro concerns in the second half of 2010 largely revolved around European sovereign credit risks. At their November meeting in Seoul, G20 leaders failed to reconcile their differences with respect to exchange rate policy and the fiscal route map going forward, limiting their agreement to “indicative guidelines” on how to rein in current account imbalances.
Although re-regulation aimed at increasing the stability of the global financial system remained a major topic of discussion throughout the year, the G20 moved more slowly and cautiously than expected, mainly due to the differing views among members. The main achievement was the agreement on Basel III rules and the endorsement of the Financial Stability Board’s route map for the regulation of systemically important financial institutions.
Macro uncertainties continued to overshadow the guardedly optimistic banking sector fundamentals that appeared to be recovering faster than anticipated in the first half of 2010. Market conditions in the second half of 2010 deteriorated, particularly with respect to client activity levels and fixed income businesses. As the global economy readjusted to tempered growth, financial markets continued their rollercoaster ride. During 2010, the hoarding of cash, which resulted in record highs at the end of the crisis, had somewhat reversed.

Euro crisis
Europe’s sovereign debt crisis resulted in a major dip in confidence in the euro. The situation had its origins as much in the establish-

ment and subsequent development of the common currency itself as in the effects of the financial market crisis. When the global recession struck in 2008, much of the debt accumulated mostly (but not exclusively) in the private sectors of some European Monetary Union (EMU) countries became unsustainable. The governments faced falling tax revenues, rising social outlays and costs for supporting their economies and their failing financial institutions. Public debt-to-gross domestic product (GDP) ratios in the EMU rose by around 20 percentage points on average. The weaker and most severely affected countries saw their annual public deficits swell to double-digit levels as a percentage of GDP. Holders of government bonds grew increasingly nervous about their investments, triggering today’s sovereign debt crisis in Europe.

The response to the Greek crisis included a EUR 110 billion rescue loan package to prevent a debt default, fiscal austerity measures to regain investors’ confidence and structural reforms to improve competitiveness. Defaulting and restructuring debt was not seriously considered for fear of spreading Greece’s problems to other high-debt / high-deficit countries and the western European banking sector.
The crisis flared up again in November – in Ireland. In contrast to Greece, Ireland’s fiscal profile had been among the soundest in the Eurozone. But low interest rates sparked a veritable credit binge and one of the world’s biggest housing bubbles, financed in large part by Irish banks. Since this bubble burst in 2008, the Irish banking system has been in serious disarray. Holders of Irish debt became increasingly nervous about the situation, and the country agreed to a loan program totaling EUR 85 billion.
The immediate market reaction to the Irish rescue package was anything but reassuring. In fact, the markets’ concern spread not only to the more obvious candidates like Portugal and Spain, but also to Italy, Belgium and even France. Only at the start of 2011 did a closing of ranks among the EU political leaders allow the containment of the immediate euro crisis, although the underlying fundamental issues remain.

Macroeconomic perspectives

The global recovery, while weak, appears to be increasingly self-sustaining. We believe that the global economy has the potential



20


Table of Contents

Strategy, performance and responsibility

to grow at between 3% and 4% in the medium term, a moderate rate of growth compared with previous recovery years. However, this global figure masks distinct regional discrepancies. The US is likely to show slower growth than during the period 1982–2007. Among the factors responsible for this are the de-leveraging of the private sector, re-regulation of financial intermediaries, the surge of public debt and the subsequent need to repair the public sector balance sheet. A subdued recovery remains the most likely US scenario as the stimulus-induced boom has come to a definite end. Generally, spare capacity in the western world will only be slowly re-absorbed, keeping inflation rates in most countries subdued (with the notable exception of the UK), while requiring further monetary easing, including via asset purchases (i.e. quantitative easing).

In Europe, we are seeing decoupling between regions as well as fragmentation within them. Germany and other northern European countries have benefited most from the global recovery and the euro’s depreciation, while the south is lagging behind and is under austerity pressure. This major divergence will likely continue to challenge the euro.
In Asia, some developments seem to flag potential risks, such as incipient asset bubbles in specific market segments and an acceleration of inflation in some countries. Most Asian countries have started to tighten their monetary and credit policies. Other large emerging markets (e.g. Brazil) can rely on robust domestic demand in order to maintain stable growth, though some risk of overheating exists as a result.

Industry drivers

A number of drivers have a significant impact on banks’ earnings as well as the structure of the financial services industry. The most relevant factor over the coming years will be the new business environment arising out of regulatory reform. This is likely to have far reaching and transformational consequences for markets, firm structures and business models.

è Refer to the “Regulatory developments” section for more information

Changing business models
Changes in regulation are expected to have a profound effect on banks’ business models. In view of the pressure that the new capital requirements and other regulatory principles, as stipulated by the Basel Committee and other bodies, will put on asset inventory-based future returns, the industry is currently reassessing its business portfolios and models. This is particularly true in the case of fixed income. However, structural changes are unlikely to happen in the short term.

Increasing role of emerging market banks
Emerging market banks came out of the global financial crisis in much better shape than their peers in developed markets, given their limited exposure to the US sub-prime market. As such, their capital position, on average, is already well above the Basel minimal requirement for 2019. Global emerging market banks are also strongly funded with deposits, which, together with a mostly supportive macro outlook, make them well positioned to capture future growth. In 2010, a number of emerging market countries enacted additional regulations for local banks. These include higher reserve requirements (China, India, Indonesia, and Turkey), more stringent provisioning (India, Indonesia and Mexico), compulsory lending (Korea), banking taxes (Hungary) and mortgage restrictions (China, Hong Kong, India, Malaysia, Poland and Thailand).

Demographics
The demographic dividend brought by a fall in child dependency and a rise in the share of the working population has been exhausted in western countries, and will soon be exhausted in a few developing countries (e.g. China). For most of the developing world this point lies 20–30 years ahead. Countries that have lost the demographic dividend will confront fiscal and social stresses from increases in the old age dependency ratio. In Japan, today there are 3.4 people working for every person over 65. By 2050, it is estimated the ratio will be 1.3. In Western Europe the ratio would fall from nearly four to two. Many pension funds – particularly pay-as-you-go public pensions – are underfunded, leaving many with insufficient retirement income. As baby-boomers retire, they will roll over trillions of assets from defined contribution plans and individual retirement accounts to other accounts. The need for stable income will increase the demand for fixed income investments and target date funds.

Development of major currencies versus the Swiss franc

(GRAPH)



21


Table of Contents

Strategy, performance and responsibility
Regulatory developments

Regulatory developments

Banking sector re-regulation remained high on the agenda throughout 2010. The pace of regulatory reform often varies among countries, raising the prospect of an uneven playing field among banks. Regulatory reforms will have a significant impact on capital levels, future revenue and earnings, and ultimately investment returns for the banking sector as a whole. In particular, the impact will be felt in certain business areas, such as fixed income.

Global capital and liquidity standard – Basel III

The enhanced Basel II framework (increased weighting of market risks) and Basel III capital requirements mandate that banking businesses will have to be underpinned by a higher quantity and quality of capital going forward. The definition of core tier 1 capital (common equity) will be more restrictive. Risk-weighted assets (RWA) will rise significantly, notably at banks with large trading portfolios, due to the introduction of additional charges as well as increased calibration percentages. It will take some time to implement fully the Basel reforms and global standards, and, as a result, the focus is on local regulations and their comparison. It is apparent that the pace of regulatory change varies considerably from country to country, and it is likely that there will be different rules in different jurisdictions.

On 26 July 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision (BCBS), reached a broad agreement on the overall design of the capital and liquidity reform package proposed by the Basel Committee. On 12 September 2010, proposed strengthened capital requirements as well as the introduction of a global liquidity standard were announced.
On 16 December, the BCBS followed up with the publication of four comprehensive documents. The new proposed rules seek to strengthen the banking sector’s resilience under financial and economic stress, improve risk management and governance and enhance transparency. Also, guidance on the countercyclical capital buffer was provided for national authorities (up to 2.5% in the form of common equity), which aims to protect the banking sector from periods of excess aggregate credit growth. On 13 January 2011, the BCBS followed up with additional criteria for tier 1 and tier 2 capital to ensure that all classes of capital absorb losses at the point of non-viability.
The minimum common equity tier 1 ratio will be 4.5%, the minimum tier 1 capital ratio 6% and the minimum total capital ratio 8%. In addition, banks will be required to hold a capital conservation buffer of 2.5% and a countercyclical buffer of up to 2.5% in the form of common equity to withstand future periods of stress. Therefore the total capital requirement includ-

ing buffers amounts 10.5–13%.These requirements will be phased-in from 2013 to the end of 2018. The risk-based capital requirements are supplemented by a tier 1 leverage ratio of 3% that will be tested from 2013 to 2016, with a view to perform a final calibration and implementation as of 1 January 2018.

Regarding liquidity, the BCBS proposes two metrics: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). Both the LCR and the NSFR will be subject to an observation period and will include a review clause to address any unintended consequences. Observation periods for the LCR and NSFR will start in 2011 and 2012, with minimum standards to be introduced in 2015 and 2018, respectively. The two ratios are conceptually in line with our internal frameworks. The LCR is broadly consistent with the metric in the liquidity regime as introduced by the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) as of mid 2010.

Basel II market risk framework

Further to the publication of the enhanced Basel II market risk framework in July 2009, the BCBS has issued certain adjustments to the revision in June 2010. For a transition period of two years, the capital charges for non-correlation trading securitization positions may be based on the larger of the capital charges for net long and net short positions instead of the sum of net long and net short positions. Also, for correlation trading securitization positions, banks applying an internally developed model are subject to a floor of at least 8% of the capital charge for specific risk according to the standardized measurement method. Finally, the BCBS agreed to a coordinated start-date of not later than 31 December 2011.

è Refer to the “Treasury management” section of our 2009 Annual Report for the 2009 developments of the Basel II market risk framework

Systemically important financial institutions

Regulatory attention is clearly focused on the question of systemically important financial institutions. However, at present, an in-



22


Table of Contents

Strategy, performance and responsibility

ternationally agreed framework does not exist. The Financial Stability Board, in cooperation with the BCBS and national authorities, is expected to provide more detail over the course of 2011 according to the roadmap submitted to the G20 leaders in November 2010. Examples of measures include more demanding capital and liquidity rules and resolution frameworks to ensure that all financial institutions can be dissolved without destabilizing the system and without exposing taxpayers to the risk of loss. They also include a cross-border coordination framework and more intense supervisory oversight.

Swiss Commission of Experts on “Too big to fail”
and public consultation

Of special relevance for UBS is the “too big to fail” discussion in Switzerland. On 4 October 2010, the Commission of Experts appointed by the Swiss Federal Council presented its final report, proposing measures to be applied to systemically relevant banks, with recommendations for increased capital requirements (including a leverage ratio) and organizational measures aimed at safeguarding the continuation of important Swiss banking services at the point of a bank’s non-viability. These measures are supplemented by strict liquidity requirements and a limitation of interdependencies and concentration risks in the financial sector. The proposals include:

1. Capital: Common equity of at least 10% of RWA and additional capital equivalent instruments (contingent convertibles [CoCos]) of 9% of RWA. The CoCos would automatically convert into common equity in the event that the capital ratios of the issuing bank fall below certain predefined thresholds (trigger levels). Of the 9% capital equivalent instruments, the Commission of Experts recommended that 3% consist of CoCos with a trigger at a 7% common equity capital ratio. Alternatively, this 3% may also be held in the form of common equity. The remaining 6% would be issued as CoCos with a lower trigger, set at a 5% common equity capital ratio. This progressive component would be variable, based on the bank’s degree of systemic importance, and depend on market share in Swiss systemic functions and total balance sheet size of the bank. These proposed capital requirements exceed the proposed Basel III minimum standards. The calibration of the three components was based on the assumption that RWA would increase to approximately CHF 400 billion under Basel III. The 6% progressive component, calibrated as at the end of 2009, is based on a balance sheet total of approximately CHF 1,500 billion and a market share of around 20%. Furthermore, the Commission recommended a leverage ratio (minimum capital level as a proportion of the balance sheet) as an additional capital rule. The timeframe for the imple-

  mentation of the Swiss capital requirements is the same as it is for the Basel III standards.
2. Liquidity: Proposals concerning liquidity requirements largely correspond to the FINMA principles that were effective as of 30 June 2010. It has been proposed that the agreed-upon FINMA principles should be given legal form. The FINMA liquidity regulations require banks to hold a balance of highly liquid assets sufficient to offset the projected outflows under the stress scenario for a period of 30 days. Similar to the FINMA liquidity regime, our established internal liquidity stress tests consider a severe stress scenario. We believe that our internal model enables us to sustain our business in stress conditions for a period substantially beyond the minimum regulatory horizon.
3. Risk diversification: The measures presented by the Commission to improve risk diversification are similar to the adjustments envisaged in other jurisdictions, notably the European Union. One objective of these measures is to reduce the degree of interconnectedness within the banking sector, and thus limit the dependence of other banks on systemically important banks.
4. Organization: The Commission stressed that it is the responsibility of a systemically important bank to organize itself in such a way that maintenance of the Swiss systemically important functions would be guaranteed in the event of a crisis. No specific structural measures were recommended by the Commission for systemically important banks.
       On 22 December 2010, the Swiss Federal Council launched a consultation on the “too big to fail” legislative proposals. The draft contains the measures recommended by the Commission of Experts which form the heart of the proposals. There were two additional elements compared with the Commission’s final report: (i) proposed legal changes to grant tax relief for the Swiss capital market, and (ii) a paragraph that empowers the Federal Council to rule on variable compensation for bank employees in case of future government support for a bank. The consultation is scheduled to end on 23 March 2011 and, after consolidation, the papers will enter the parliamentary process with a view to conclude the debate in 2011. The Swiss administration took strides to further clarify the measures stipulated by the Commission, while the abovementioned four main pillars remained in place.
       The revised legislation would require each systemically relevant institution such as UBS to develop a plan to ensure the continuation of systemically relevant functions within Switzerland in the event that the institution approaches insolvency. It would empower FINMA to impose far-reaching structural changes, including among other things the separation of lines of business into separate legal entities and restrictions on intragroup funding and guarantees, should any such institution be deemed to have failed to develop an adequate plan.


23


Table of Contents

Strategy, performance and responsibility
Regulatory developments

Regulatory developments in other jurisdictions

Other notable regulatory initiatives include the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US, which impacts the financial services industry by addressing, among other issues, systemic risk oversight, bank capital standards, the liquidation of failing systemically significant financial institutions, over-the-counter derivatives, the ability of deposit-taking banks to engage in proprietary trading activities and invest in hedge funds and private equity (the so-called Volcker rule), consumer and investor protection, hedge fund registration, securitization, investment advisors, shareholder “say on pay,” the role of credit-rating agencies, and more. The details of these regulations will depend on the final regulations ultimately adopted by various agencies and oversight boards in 2011.

The European Commission ran a consultation on technical details of a possible EU framework for bank recovery and resolution until 3 March 2011. The Commission intends to proceed gradually towards a comprehensive EU framework for troubled and failing banks in the following phases: legislative proposal for a harmonized EU regime for crisis prevention and bank recovery and

resolution; further harmonization of bank insolvency regimes; and creation of an integrated resolution regime. The consultation paper runs through the lifecycle of a financial institution, detailing conditions for prevention, early intervention and resolution.
The landscape for banking in the UK will be shaped by the findings of the Independent Commission on Banking (ICB), which was tasked with finding ways to promote financial stability and competition, and is expected to publish an interim report in spring before submitting its final report in September 2011. The UK re-emphasized its “living will” instrument and, after having assessed documents established by six pilot banks, rolled out a comprehensive list of required items in phase two. The regulations include a bridge bank tool for deposit-taking banks and a special administration regime that focuses on the recovery or wind-down of the whole group in the case of investment banks. The UK government’s proposed bank levy is intended to encourage banks to move to less risky forms of funding. The levy will not become law until later in 2011 but it is proposed to take effect from 1 January 2011. Having applied the draft legislation to UBS’s 31 December 2010 balance sheet position, we estimate that the levy would result in a charge of approximately CHF 75 million to 100 million per annum.


24


Table of Contents

Strategy, performance and responsibility

Risk factors

Certain risks, including those described below, may impact our ability to execute our strategy and directly affect our 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 we are not presently aware could also materially affect our 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.

Regulatory changes may adversely affect our business and ability to execute our strategic plans

In the wake of the recent financial crisis, regulators and legislators have proposed and adopted, or continue to actively consider, a wide range of measures designed to address the perceived causes of the crisis and to limit the systemic risks posed by major financial institutions. These measures include:

 significantly higher regulatory capital requirements
 changes in the definition and calculation of regulatory capital, including in the capital treatment of certain capital instruments issued by UBS and other banks
 changes in the calculation of risk-weighted assets
 new or significantly enhanced liquidity requirements
 requirements to maintain liquidity and capital in multiple jurisdictions where activities are conducted
 limitations on principal trading activities
 limitations on risk concentrations and maximum levels of risk
 taxes and government levies that would effectively limit balance sheet growth
 a variety of measures constraining, taxing or imposing additional requirements relating to compensation
 requirements to adopt structural and other changes designed to reduce systemic risk and to make major financial institutions easier to wind down or disassemble
 outright size limitations

A number of measures have been adopted (or in the case of Basel III, the framework established) and will be implemented in the next several years, or in some cases are subject to legislative action or to further rulemaking by regulatory authorities before final implementation. As a result, there is a high level of uncertainty regarding a number of the measures described above. The timing and implementation of changes could have a material and adverse effect on our business.

Notwithstanding attempts by regulators to coordinate their efforts, the proposals differ by jurisdiction and therefore enhanced

regulation may be imposed in a manner that makes it more difficult to manage a global institution. The absence of a coordinated approach is also likely to disadvantage certain banks, such as UBS, as they attempt to compete with less strictly regulated peers based in other jurisdictions.

Swiss authorities have expressed concern about the systemic risks posed by the two largest Swiss banks, particularly in relation to the size of the Swiss economy and governmental resources. Swiss regulatory change efforts are generally proceeding more quickly than those in other major jurisdictions, and the Swiss Financial Market Supervisory Authority (FINMA), the Swiss National Bank (SNB) and the Swiss Federal Council have proposed requirements that would be more onerous and restrictive for major Swiss banks, such as UBS, than those adopted, proposed or publicly espoused by regulatory authorities in other major global banking centers. Following the July 2010 announcement of the broad agreement reached by the Basel Committee on Banking Supervision on total risk-based capital requirements amounting to 10.5%, the Commission of Experts appointed by the Swiss Federal Council issued a report in October 2010 recommending total risk-based capital of 19% for the two big Swiss banks. The measures recommended by the Commission of Experts, which also included requirements designed to reduce interconnectedness in the banking sector and organizational requirements, have now been incorporated into legislative proposals that are scheduled to be considered in 2011 by the Swiss Parliament. The organizational measures included in the draft legislation would require each systemically relevant institution to develop a plan to ensure the continuation of systemically relevant functions within Switzerland, in the event that the institution approaches insolvency. It would empower FINMA to impose more far-reaching structural changes, such as the separation of lines of business into dedicated legal entities and restrictions on intra-group funding and guarantees, should any institution be deemed to have failed to develop an adequate plan. Senior Swiss regulatory officials have made public statements suggesting that broader structural changes of this kind should be adopted or at least seriously considered by the two big Swiss banks in any event.
This may lead to more burdensome regulations applicable to major banks headquartered in Switzerland in comparison with those based elsewhere. The potential regulatory and legislative developments in Switzerland and in other jurisdictions in which we have operations may have a material adverse effect on our ability to execute our strategic plans, on the profitability or viability of certain business lines globally or in particular locations, and on our ability to compete with other financial institutions. They could also have an impact on our legal structure or our business model.



25


Table of Contents

Strategy, performance and responsibility
Risk factors

Our reputation is critical to the success of our business

Damage to our reputation can have fundamental negative effects on our business and prospects. As the events of the past few years have demonstrated, our reputation is critical to the success of our strategic plans. Reputational damage is difficult to reverse. The process is slow and success can be difficult to measure. This was demonstrated in recent years as our very large losses during the financial crisis, the US cross-border matter and other matters seriously damaged our reputation. This was an important factor in our loss of clients and client assets across our asset-gathering businesses, and to a lesser extent in our loss of and difficulty in attracting staff. These developments had short-term and also more lasting adverse effects on our financial performance. We recognized that restoring our reputation would be essential to maintaining our relationships with clients, investors, regulators and the general public, as well as with our employees. Although there is evidence that the steps we have taken in the past couple of years to restore our reputation have been effective, our reputation has not been fully restored, and we remain vulnerable to the risk of further reputational damage. Any further reputational damage could have a material adverse effect on our operational results and financial condition and on our ability to achieve our strategic goals and financial targets.

Our capital strength is important in supporting our client franchise; changes in capital requirements are likely to constrain certain business activities in our Investment Bank

Our capital position, as measured by the BIS tier 1 and total capital ratios, is determined by (i) risk-weighted assets (RWA) (balance sheet, off-balance sheet and other market and operational risk positions, measured and risk-weighted according to regulatory criteria) and (ii) eligible capital. Both RWA and eligible capital are subject to change. Eligible capital would be reduced if we experience net losses, as determined for the purpose of the regulatory capital calculation. Eligible capital can also be reduced for a number of other reasons, including certain reductions in the ratings of securitization exposures, adverse currency movements directly affecting the value of equity and prudential adjustments that may be required due to the valuation uncertainty associated with certain types of positions. RWA, on the other hand, are driven by our business activities and by changes in the risk profile of our exposures. For instance, substantial market volatility, a widening of credit spreads (the major driver of our value-at-risk), a change in regulatory treatment of certain positions, adverse currency movements, increased counterparty risk or a deterioration in the economic environment could result in a rise in RWA. Any such reduction in eligible capital or increase in RWA could potentially reduce our capital ratios, and such reductions could be material.

The required levels and calculation of our regulatory capital and the calculation of our RWA are also subject to changes in regulatory requirements or the interpretation thereof.

We are subject to regulatory capital requirements imposed by FINMA, under which we have higher RWA than would be the case under BIS guidelines. Forthcoming changes in the calculation of RWA under Basel III and FINMA requirements will significantly increase the level of our RWA and therefore have an adverse effect on our capital ratios. We have identified steps that we can take to mitigate the effects of the changes in the RWA calculation, but there is a risk that we will not be successful in doing so, either because we are unable to carry out fully the actions we have planned or because other business or regulatory developments counteract the benefit of these mitigating steps. We have also announced that we intend to build our capital base by retaining earnings and by not paying dividends either in 2010 or for some time to come, but there is a risk that we will not have sufficient earnings to increase the level of our capital as quickly as we have planned or as may be necessary to satisfy new capital requirements.
In addition to the risk-based capital requirements, FINMA has introduced a minimum leverage ratio, which must be achieved by 1 January 2013 at the latest. The leverage ratio operates separately from the risk-based capital requirements, and accordingly under certain circumstances could constrain our business activities even if we are able to satisfy the risk-based capital requirements.
Changes in the Swiss requirements for risk-based capital or leverage ratios, whether pertaining to the minimum levels required for large Swiss banks or to the calculation thereof (including changes made to implement the recent recommendations of the Swiss Commission of Experts), could have a material adverse effect on our business and ability to execute our strategic plans or pay dividends in the future. This is particularly the case if our plans to take mitigating actions to reduce risk-weighted assets and to satisfy future capital requirements through retained earnings are not successful. Moreover, changes in the calculation and level of capital requirements, coupled in some cases with other regulatory changes, are likely to render uneconomic certain capital-intensive businesses conducted in our Investment Bank, or to make their effective returns so low that they might no longer be viable. If some business activities of the Investment Bank are significantly reduced or discontinued, this could adversely affect our competitive position, particularly if competitors are subject to different requirements under which those activities would remain sustainable.

We hold risk positions that may be adversely affected by conditions in the financial markets

UBS, like other financial market participants, was severely affected by the financial crisis that began in 2007. The deterioration of financial markets since the beginning of the crisis was extremely severe by historical standards, and we recorded substantial losses on fixed income trading positions, particularly in 2008 and to a lesser extent in 2009. We have drastically reduced our risk exposures from 2008 through 2010, in part through transfers in 2008 and 2009 to a fund controlled by the Swiss National Bank. We do, however, continue to hold legacy risk positions that are exposed to the general systemic and counterparty risks that were exacerbated by the financial crisis.



26


Table of Contents

Strategy, performance and responsibility

The continued illiquidity of most of these legacy risk positions makes it increasingly difficult to reduce our legacy risk exposures.

During the financial crisis, we incurred large losses (realized and mark to market) on our holdings of securities related to the US residential mortgage market. Although our exposure to that market was reduced dramatically from 2008 through 2010, we remain exposed to a smaller degree to such losses, most notably through monoline-insured positions.
The financial crisis also caused market dislocations that affected, and to a degree still affect, other asset classes. In 2008 and 2009, we recorded markdowns on other assets carried at fair value, including auction rate securities (ARS), leveraged finance commitments, commercial mortgages in the US and non-US mortgage-backed and asset-backed securities (ABS). We have a very large inventory of ARS which is subject to changes in market values. The portion of our ARS inventory that has been reclassified as loans and receivables is subject to possible impairment due to changes in market interest rates and other factors. We hold positions related to real estate in countries other than the US, including a very substantial Swiss mortgage portfolio, and we could suffer losses on these positions. In addition, we are exposed to risk in our prime brokerage, reverse repo and lombard lending activities, as the value or liquidity of the assets against which we provide financing may decline rapidly.

Performance in the financial services industry depends on the economic climate

The financial services industry prospers in conditions of economic growth, stable geopolitical conditions, transparent, liquid and buoyant capital markets and positive investor sentiment. An economic downturn, inflation or a severe financial crisis (as seen in the last few years) can negatively affect our revenues and ultimately our capital base.

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 impacts well beyond the countries in which they occur. A crisis could develop, regionally or globally, as a result of disruptions in emerging markets which are susceptible to macroeconomic and political developments, or as a result of the failure of a major market participant. We have material exposures to certain emerging market economies, both as a wealth manager and as an investment bank. As our presence and business in emerging markets increases, and as our strategic plans depend more heavily upon our ability to generate growth and revenue in the emerging markets, we become more exposed to these risks. The bond market dislocations affecting the sovereign debt of certain European countries, particularly in 2010, demonstrate that such developments even in more developed markets can have similarly unpredictable and destabilizing effects. Adverse developments of these kinds have affected our businesses in a number of ways, and may continue to have further adverse effects on our businesses as follows:

 a general reduction in business activity and market volumes would affect fees, commissions and margins from market-making and client-driven transactions and activities;
 a market downturn is likely to reduce the volume and valuations of assets we manage on behalf of clients, reducing our asset- and performance-based fees;
 reduced market liquidity limits trading and arbitrage opportunities and impedes our ability to manage risks, impacting both trading income and performance-based fees;
 assets we own and account for as investments or trading positions could 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, we could suffer losses from enforced default by counterparties, be unable to access our own assets, or be impeded in – or prevented from – managing our risks.

Because UBS has very substantial exposures to other major financial institutions, the failure of any such institution could have a material effect on UBS.

The developments mentioned above can materially affect the performance of our business units and of UBS as a whole. There is also a related risk that the carrying value of goodwill of a business unit might suffer impairments and deferred tax assets levels may need to be adjusted.

Our global presence subjects us to risk from currency fluctuations

We prepare our consolidated financial statements in Swiss francs. However, a substantial portion of our assets, liabilities, invested assets, revenues and expenses are denominated in other currencies, particularly the US dollar, the euro and the British pound. Accordingly, changes in foreign exchange rates, particularly between the Swiss franc and the US dollar (US dollar revenue represents the major part of our non-Swiss franc revenue) have an effect on our reported income and invested asset levels. During 2010, a strengthening of the Swiss franc, especially against the US dollar and euro, had an adverse effect on our revenues and invested assets. Since exchange rates are subject to constant change, sometimes from completely unpredictable reasons, our results are subject to risks associated with changes in the relative values of currencies.

We are dependent upon our risk management and control processes to avoid or limit potential losses in our trading and counterparty credit businesses

Controlled risk-taking is a major part of the business of a financial services firm. Credit is an integral part of many of our retail, wealth management and Investment Bank activities. This includes



27


Table of Contents

Strategy, performance and responsibility
Risk factors

lending, underwriting and derivatives businesses and positions. Changes in interest rates, credit spreads, equity prices, foreign exchange levels and other market fluctuations can adversely affect our earnings. Some losses from risk-taking activities are inevitable, but to be successful over time, we must balance the risks we take against the returns we generate. We must therefore diligently identify, assess, manage and control our risks, not only in normal market conditions but also as they might develop under more extreme (stressed) conditions, when concentrations of exposures can lead to severe losses.

As seen during the recent market crisis, we are not always able to prevent serious losses arising from extreme or sudden market events that are not anticipated by our risk measures and systems. Value-at-risk, 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 during the financial crisis. Moreover, stress loss and concentration controls and the dimensions in which we aggregate risk to identify potentially highly correlated exposures proved to be inadequate. Notwithstanding the steps we have taken to strengthen our risk management and control framework, we could suffer further losses in the future if, for example:
 we do not fully identify the risks in our portfolio, in particular risk concentrations and correlated risks;
 our assessment of the risks identified or our response to negative trends proves to be inadequate or incorrect;
 markets move in ways that we do not expect – in terms of their speed, direction, severity or correlation – and our ability to manage risks in the resultant environment is therefore affected;
 third parties to whom we have credit exposure or whose securities we hold for our own account are severely affected by events not anticipated by our models, and we accordingly suffer defaults and impairments beyond the level implied by our risk assessment; or
 collateral or other security provided by our counterparties proves inadequate to cover their obligations at the time of their default.

We also manage risk on behalf of our clients in our asset and wealth management businesses. Our performance in these activities could be harmed by the same factors. If clients suffer losses or the performance of their assets held with us is not in line with relevant benchmarks against which clients assess investment performance, we may suffer reduced fee income and a decline in assets under management or withdrawal of mandates.

If we decide to support a fund or another investment that we sponsor in our asset or wealth management business (such as the property fund to which Wealth Management & Swiss Bank has exposure), we might, depending on the facts and circumstances, incur charges that could increase to material levels.
Investment positions, such as equity holdings made as a part of strategic initiatives and seed investments made at the inception of funds that we manage, 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. Deteriorations in the fair value of these positions would have a negative impact on our earnings.

Valuations of certain assets rely on models. For some
of the inputs to these models there is no observable source

Where possible, we mark our trading book assets at their quoted market price in an active market. Such price information may not be available for certain instruments and we therefore apply 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. In the case of positions for which some or all of the reference data are not observable or have limited observability, we use valuation models with non-market observable inputs. There is no single market standard for valuation models of this type. Such models have inherent limitations; different assumptions and inputs would generate different results, and these differences could have a significant impact on our financial results. We regularly review and update our 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, or failure to make the changes necessary to reflect evolving market conditions, could have a material adverse effect on our financial results.

We are exposed to possible further reduction in client
assets in our wealth management and asset management
businesses

In 2008 and 2009, we experienced substantial net outflows of client assets in our wealth management and asset management businesses. Our wealth management businesses continued to experience net outflows in the first half of 2010, albeit at significantly reduced levels. The net outflows resulted from a number of different factors, including our substantial losses, the damage to our reputation, the loss of client advisors, difficulty in recruiting qualified client advisors and developments concerning our cross-border private banking business. Some of these factors have been successfully addressed, but others, such as the long-term changes affecting the cross-border private banking business model, will continue to affect client flows for an extended period of time. If we again experience material net outflows of client assets, the results of our wealth management and asset management businesses are likely to be adversely affected.

Liquidity and funding management are critical to
our ongoing performance

Reductions in our credit ratings can increase our funding costs, in particular with regard to funding from wholesale unsecured



28


Table of Contents

Strategy, performance and responsibility

sources, and can affect the availability of certain kinds of funding. In addition, as we experienced in 2008 and 2009, ratings downgrades can require us to post additional collateral or make additional cash payments under master trading agreements relating to our derivatives businesses. Our credit ratings also contribute, together with our capital strength and reputation, to maintaining client and counterparty confidence.

A substantial part of our liquidity and funding requirements is 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 could change in the future due, among other things, to general market disruptions. Any such change could occur quickly.
Due to recent changes in Swiss regulatory requirements, and due to liquidity requirements imposed by certain jurisdictions in which we operate, we have been required to maintain substantially higher levels of liquidity overall than had been our usual practice in the past. Like increased capital requirements, higher liquidity requirements make certain lines of business, particularly in the Investment Bank, less attractive and may reduce our overall ability to generate profits.
è Refer to the “Risk and treasury management” section of this report for more information on our approach to liquidity and funding management

Operational risks may affect our business

All of our businesses are dependent on our ability to process a large number of complex transactions across multiple and diverse markets in different currencies, and to comply with the requirements of the many different legal and regulatory regimes to which we are subject. Our operational risk management and control systems and processes are designed to help ensure that the risks associated with our activities, including those arising from process error, failed execution, unauthorized trading, fraud, system failures and failure of security and physical protection, are appropriately controlled. If our internal controls fail or prove ineffective in identifying and remedying such risks, we could suffer operational failures that might result in material losses.

Legal claims and regulatory risks and restrictions
arise in the conduct of our business

Due to the nature of our business, we are subject to regulatory oversight and liability risk. We are involved in a variety of claims, disputes, legal proceedings and government investigations in jurisdictions where we are active. These types of proceedings expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil penalties, in addition to potential regulatory restrictions on our businesses. The outcome of these matters cannot be predicted and they could adversely affect our future business. We continue to be subject to government inquiries and investigations, and are involved in a number of liti-

gations and disputes, many of which arose out of the financial crisis. These matters concern, among other things, our valuations, accounting classifications, disclosures, writedowns and contractual obligations. We are also subject to potentially material exposure in connection with claims relating to US RMBS and mortgage loan sales, the Madoff investment fraud, Lehman principal protection notes and other matters.

We have been in active dialogue with our regulators concerning the remedial actions that we are taking to address deficiencies in our risk management and control, funding and certain other processes and systems. We continue to be subject to increased scrutiny by FINMA and our other major regulators, and accordingly are subject to regulatory measures that might affect the implementation of our strategic plans.
è Refer to “Note 21 Provisions and contingent liabilities” in the “Financial information” section of this report for more information on legal proceedings and regulatory matters

We 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. We face competition at the level of local markets and individual business lines, and from global financial institutions that are comparable to UBS in their size and breadth. Barriers to entry in individual markets are being eroded by new technology. We expect these trends to continue and competition to increase in the future.

Our competitive strength and market position could be eroded if we are unable to identify market trends and developments, do not respond to them by devising and implementing adequate business strategies or are unable to attract or retain the qualified people needed to carry them out. The changes recently introduced in our balance sheet management, funding framework and risk management and control, as well as possible new or enhanced regulatory requirements, may constrain the revenue contribution of certain lines of business. For example, parts of the Investment Bank’s fixed income, currencies and commodities business may be affected as they require substantial funding and are capital-intensive.
The amount and structure of our employee compensation are affected not only by our business results but also by competitive factors and regulatory guidance. Constraints on the amount of employee compensation, higher levels of deferral and claw-backs and performance conditions may adversely affect our ability to retain and attract key employees, and may in turn negatively affect our business performance. For the performance years 2009 and 2010, the portion of variable compensation granted in the form of deferred shares was much higher than in the past, and the percentage of compensation deferred was higher than that of many of our competitors. We continue to be subject to the risk that key employees will be attracted by competitors and decide to



29


Table of Contents

Strategy, performance and responsibility
Risk factors

leave UBS, or that we may be less successful than our competitors in attracting qualified employees. Although changes in regulatory requirements and pressure from regulators and other stakeholders affect not only UBS but also the other major international banks, the constraints and pressures differ by jurisdiction, and this may give some of our peers a competitive advantage.

We are exposed to risks arising from the different
regulatory, legal and tax regimes applicable to our
global businesses

We operate in more than 50 countries, earn income and hold assets and liabilities in many different currencies and are subject to many different legal, tax and regulatory regimes. Our ability to execute our 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 local markets. Changes in local tax laws or regulations and their enforcement may affect the ability or the willingness of our clients to do business with the bank, or the viability of our strategies and business model.

The effects of taxes on our financial results are significantly
influenced by changes in our deferred tax assets
and final determinations on audits by tax authorities

The deferred tax assets we have recognized on our balance sheet as of 31 December 2010 in respect of prior years’ tax losses are based on profitability assumptions over a five-year horizon. If the business plan earnings and assumptions in future periods sub-

stantially deviate from the current outlook, the amount of deferred tax assets may need to be adjusted in the future. This could include write-offs of deferred tax assets through the income statement if actual results come in substantially below the business plan forecasts and/or if future business plan forecasts are substantially revised downwards.

In the coming years, our effective tax rate will be highly sensitive both to our performance and to the development of new business plan forecasts. Currently unrecognized deferred tax assets in the UK and especially the US could be recognized if our actual and forecasted performance in those countries is strong enough to justify further recognition of deferred tax assets under the governing accounting standard. Our results in recent periods have demonstrated that changes in the recognition of deferred tax assets can have a very significant effect on our reported results. If, for example, the Group’s performance in the UK and especially in the US is strong, we could be expected to write up additional US and/or UK deferred tax assets in the coming years. The effect of doing so would reduce the Group’s effective tax rate, possibly to zero or below. Conversely, if our performance in those countries does not justify additional deferred tax recognition, but nevertheless supports our maintaining current deferred tax levels, we expect the Group’s effective tax rate to be in the range of 20% or slightly higher.
Additionally, the final effect of income taxes we accrue in the accounts is often only determined after the completion of tax audits (which generally takes a number of years) or the expiry of statutes of limitations. In addition, changes to, and judicial interpretation of, tax laws or policies and practices of tax authorities could cause the amount of taxes ultimately paid by UBS to materially differ from the amount accrued.



30


Table of Contents

Strategy, performance and responsibility

Financial performance

Our performance is reported in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. This section provides a discussion and analysis of our results for 2010, commenting on the underlying operational performance of the business, with a focus on continuing operations.

UBS key figures

             
  As of or for the year ended
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08 
 
             
Group results
            
 
Operating income  31,994   22,601   796 
 
Operating expenses  24,539   25,162   28,555 
 
Operating profit from continuing operations before tax  7,455   (2,561)  (27,758)
 
Net profit attributable to UBS shareholders  7,534   (2,736)  (21,292)
 
Diluted earnings per share (CHF)1
  1.96   (0.75)  (7.63)
 
             
Key performance indicators, balance sheet and capital management2
            
 
Performance
            
 
Return on equity (RoE) (%)  16.7   (7.8)  (58.7)
 
Return on risk-weighted assets, gross (%)  15.5   9.9   1.2 
 
Return on assets, gross (%)  2.3   1.5   0.2 
 
Growth
            
 
Net profit growth (%)3
  N/A   N/A   N/A 
 
Net new money (CHF billion)4
  (14.3)  (147.3)  (226.0)
 
Efficiency
            
 
Cost / income ratio (%)  76.5   103.0   753.0 
 
Capital strength
            
 
BIS tier 1 ratio (%)5
  17.8   15.4   11.0 
 
FINMA leverage ratio (%)5
  4.45   3.93   2.45 
 
Balance sheet and capital management
            
 
Total assets  1,317,247   1,340,538   2,014,815 
 
Equity attributable to UBS shareholders  46,820   41,013   32,531 
 
BIS total ratio (%)5
  20.4   19.8   15.0 
 
BIS risk-weighted assets5
  198,875   206,525   302,273 
 
BIS tier 1 capital5
  35,323   31,798   33,154 
 
             
Additional information
            
 
Invested assets (CHF billion)  2,152   2,233   2,174 
 
Personnel (full-time equivalents)  64,617   65,233   77,783 
 
Market capitalization6
  58,803   57,108   43,519 
 
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report.  2 For the definitions of our key performance indicators refer to the “Measurement and analysis of performance” section of this report.  3 Not meaningful if either the current period or the comparison period is a loss period.  4 Excludes interest and dividend income.  5 Refer to the “Capital management” section of this report.  6 Refer to the “UBS shares in 2010” section of this report.

31


Table of Contents

Strategy, performance and responsibility
Financial performance

Measurement and analysis of performance

Key factors affecting our financial position and results
of operations in 2010

 In 2010, we generated a net profit attributable to UBS shareholders of CHF 7.5 billion, a significant improvement over the net loss of CHF 2.7 billion in 2009. This increase was primarily due to a significant improvement in fixed income, currencies and commodities revenues from a loss in 2009. In addition, a reduction in credit loss expense, as well as significantly lower own credit losses on financial liabilities designated at fair value supported the result. Operating expenses were slightly lower than in 2009, when we recorded higher restructuring costs and a goodwill impairment charge related to the sale of UBS Pactual. Further, we reduced fixed costs excluding bonus and significant non-recurring items to CHF 19.9 billion in 2010, in line with our communicated target of below CHF 20 billion, despite increased costs for litigation provisions compared with 2009. Diluted earnings per share were CHF 1.96 in 2010, compared with negative CHF 0.75 in 2009.
 We recognized a net income tax benefit of CHF 381 million for 2010. This mainly reflects the recognition of additional deferred tax assets in respect of losses and temporary differences in a number of foreign locations, taking into account updated forecast taxable profit assumptions over the five-year horizon used for recognition purposes. This was partly offset by a Swiss net deferred tax expense as Swiss tax losses for which deferred tax assets have previously been recognized were used against profits for the year, which was itself partly offset by an upward revaluation of Swiss deferred tax assets taking into account revised forecast profit assumptions. In 2009, the net income tax benefit was CHF 443 million.
è Refer to “Note 22 Income taxes” in the “Financial information” section of this report for more information
 As our credit spreads continued to tighten in 2010, the Investment Bank incurred an own credit charge on financial liabilities designated at fair value of CHF 548 million compared with a charge of CHF 2,023 million recognized in 2009.
è Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information
 In 2010, we recorded a gain on our option to acquire the equity of the SNB StabFund of CHF 745 million compared with CHF 117 million in 2009, following higher asset valuations supporting a higher valuation of the SNB StabFund.
 In January 2010, UBS closed the sale of its investments in several associated entities owning office space in New York. A significant portion of the office space is leased by the Group until 2018. The sales price was CHF 187 million with a resulting

  gain on sale of CHF 180 million recorded in the first quarter. In the fourth quarter, we recognized a gain of CHF 158 million from the sale of a property in Zurich.
 In 2010, we incurred a credit loss expense of CHF 66 million, of which CHF 64 million occurred in Wealth Management & Swiss Bank. The net credit loss expense in the Investment Bank was nil. In 2009, we recorded an overall credit loss expense of CHF 1,832 million, mainly in the Investment Bank.
è Refer to the “Risk and treasury management” section of this report for more information
 During 2010, we incurred net restructuring charges of CHF 113 million compared with CHF 791 million in 2009.
è Refer to “Note 38 Reorganizations and disposals” in the “Financial information” section of this report for more information
 Charges related to the UK Bank Payroll Tax in 2010 amounted to CHF 200 million.
 Other comprehensive income attributable to UBS shareholders was negative CHF 1,659 million in 2010 due to: (1) losses in the currency translation account of CHF 909 million (net of tax) mainly related to the Swiss franc carrying value of investments in US, Eurozone and British subsidiaries; (2) fair value losses on financial investments available-for-sale of CHF 607 million (net of tax) predominantly relating to our fixed-interest bearing long-term bond portfolio, which consists of US and UK government bonds; and (3) changes in the replacement values of interest rate swaps designated as hedging instruments of negative CHF 143 million (net of tax).
è Refer to the “Statement of comprehensive income” in the “Financial information” section of this report for more information
 At the end of 2010, our invested asset base was CHF 2,152 billion, down from CHF 2,233 billion at year-end 2009. This decline was mainly due to unfavorable currency effects, as both the US dollar and the euro fell sharply in value against the Swiss franc. In local currencies, the overall market performance was positive. During 2010, net new money stabilized, and over the last two quarters we achieved net inflows for the overall Group. Wealth Management & Swiss Bank recorded net new money outflows of CHF 10.0 billion in full-year 2010, compared with net outflows of CHF 89.8 billion in 2009; Wealth Management Americas’ net new money outflows declined to CHF 6.1 billion in 2010 from CHF 11.6 billion in 2009; Global Asset Management full year net new money flows turned positive to CHF 1.8 billion, compared with net outflows of CHF 45.8 billion in 2009.
 We ended 2010 with an industry-leading Basel II tier 1 capital ratio of 17.8%, up from 15.4% at the end of 2009. Our BIS tier 1 capital increased by CHF 3.5 billion during 2010 to CHF


32


Table of Contents

Strategy, performance and responsibility

  35.3 billion, due to the CHF 7.5 billion net profit attributable to UBS shareholders and the reversals of own credit losses of CHF 0.5 billion. These effects were partially offset by a redemption of hybrid tier 1 capital of CHF 1.5 billion, increased tier 1 deductions of CHF 1.0 billion, negative effects relating to share-based compensation net of tax of CHF 0.9 billion, as well as currency effects of CHF 0.6 billion and other effects of CHF 0.5 billion. Risk-weighted assets decreased by CHF 7.7 billion during 2010 to CHF 198.9 billion as of 31 December 2010.
 Our total balance sheet assets stood at CHF 1,317 billion on 31 December 2010, down CHF 23 billion compared with year-end 2009. Our funded asset volume, which excludes positive replacement values, remained relatively unchanged, declining by CHF 3 billion in 2010.
è Refer to the “Risk and treasury management” section of this report for more information
 On 5 March 2010, the mandatory convertible notes with a notional value of CHF 13 billion issued in March 2008 to the Government of Singapore Investment Corporation Pte. Ltd. and an investor from the Middle East were converted into UBS shares. The notes were converted at a price of CHF 47.68 per share. As a result, UBS issued 272,651,005 new shares with a nominal value of CHF 0.10 each from existing conditional capital.
è Refer to “Note 26 Capital increase and mandatory convertible notes” in the “Financial information” section of this report for more information

Seasonal characteristics

Our main businesses 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 the fourth quarter and by lower client activity levels related to the summer and end-of-year holiday seasons.

Performance measures

Key performance indicators

Our key performance indicators (KPI) framework focuses on key drivers of total shareholder return (TSR), which measures the total return of a UBS share, i.e. both the dividend yield and the capital appreciation of the share price. The KPI framework is reviewed by our senior management on a regular basis to ensure that it is always aligned to the changing business conditions.
The Group and business divisions are managed based on this KPI framework, which emphasizes risk awareness, effective risk and capital management, sustainable profitability, and client focus. Both Group and business division KPI are taken into account in

determining variable compensation of executives and personnel.
è Refer to the “Compensation” section of this report for more information on total shareholder return
The Group and business division KPI are explained in the “Group/business division key performance indicators” table.
Retail & Corporate no longer reports “Net new money” as a key performance indicator. As net new money does not assist the assessment of the performance of this business, our senior management does not consider it to be a meaningful KPI.

Client/invested assets reporting
We report two distinct metrics for client funds:

 The measure “client assets” encompasses all client assets managed by or deposited with us, including custody-only assets and assets held for purely transactional purposes.
 The measure “invested assets” is a more restrictive term and includes all client assets managed by or deposited with us for investment purposes.

     Of the two, invested assets is our central measure 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 we only administer the assets and do 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 amount of invested assets that are entrusted to us by new or existing clients less those withdrawn by existing clients or clients who terminated their relationship with us. 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. However, in Wealth Management Americas we show net new money including interest and dividend income only from the Wealth Management US business for purposes of comparison with US peers. Market and currency movements, as well as fees, commissions and interest on loans charged, are excluded from net new money as are the effects of any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invested assets and client assets as a result of a change in the service level delivered are treated as net new money inflows or outflows. The Investment Bank does not track invested assets and net new money. However, when a client is transferred from the Investment Bank to another business division, this produces net new money even though client assets were already with UBS.
When products are managed in one business division and sold by another, they are counted in both the investment management unit and the distribution unit. This results in double counting within our total invested assets, as both units provide an indepen-



33


Table of Contents

Strategy, performance and responsibility
Financial performance

dent service to their respective client, add value and generate revenues. Most double counting arises when mutual funds are managed by Global Asset Management and sold by Wealth Management & Swiss Bank and Wealth Management Americas. The business divisions involved count these funds as invested assets. This approach is in line with both finance industry practices
and our open architecture strategy, and allows us to accurately reflect the performance of each individual business. Overall, CHF 225 billion of invested assets were double counted in 2010 (CHF 254 billion in 2009).
è Refer to “Note 35 Invested assets and net new money” in the “Financial information” section of this report for more information


Group / business division key performance indicators

               
      Wealth Management &      
      Swiss Bank      
          Wealth Global  
      Wealth Retail & Management Asset Investment
Key performance indicators Definition Group Management Corporate Americas Management Bank
 
Net profit growth (%)
 Change in net profit attributable to UBS shareholders from continuing operations between current and comparison periods / net profit attributable to UBS shareholders from continuing operations of comparison period l          
 
Pre-tax profit growth (%)
 Change in business division performance before tax between current and comparison periods / business division performance before tax of comparison period   l l l l l
 
Cost / income ratio (%)
 Operating expenses / operating income before credit loss (expense) or recovery l l l l l l
 
Return on equity (%)
 Net profit attributable to UBS shareholders on a year-to-date basis (annualized as applicable) / average equity attributable to UBS shareholders (year-to-date basis) l          
 
Return on attributed equity (%)
 Business division performance before tax on a
year-to-date basis (annualized as applicable) / average
attributed equity (year-to-date basis)
           l
 
Return on assets, gross (%)
 Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable) / average total assets (year-to-date basis) l         l
 
Return on risk-weighted assets, gross (%)
 Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable) /average risk-weighted assets (year-to-date basis) l          
 
FINMA leverage ratio (%)
 BIS tier 1 capital / average adjusted assets as per
definition by FINMA
 l          
 
BIS tier 1 ratio (%)
 BIS tier 1 capital / BIS risk-weighted assets l          
 
Net new money (CHF billion)1
 Inflow of invested assets from new and existing clients less outflows from existing clients or due to client defection l l   l l  
 
Gross margin on
invested assets
 Operating income before credit loss (expense) or recovery (annualized as applicable) / average invested assets   l   l l  
 
Impaired lending portfolio as a % of total lending portfolio, gross
 Impaired lending portfolio, gross / total lending
portfolio, gross
     l      
 
Average management VaR (1-day, 95% confidence, five years of historical data)
 Value-at-risk (VaR) expresses maximum potential loss measured to a 95% confidence level, over a 1-day time horizon and based on five years of historical data           l
 
1 Retail & Corporate no longer reports “Net new money” as a KPI.

34


Table of Contents

Strategy, performance and responsibility

Accounting and reporting structure changes

Wealth Management & Swiss Bank reorganization

From 2010 onwards, the internal reporting of Wealth Management & Swiss Bank to the Group Executive Board was revised in order to better reflect the management structure and responsibilities. Segregated financial information is now reported for:

 “Wealth Management”, encompassing all wealth management business conducted out of Switzerland and in our Asian and European booking centers;
 “Retail & Corporate”, including services provided to Swiss retail private clients, small and medium enterprises and corporate and institutional clients.

In line with this revised internal reporting structure and IFRS 8Operating Segments, Wealth Management and Retail & Corporate are now presented in our external financial reports as separate business units and reportable segments. Prior periods presented have been restated to conform to the new presentation format.

Allocation of additional Corporate Center costs to reportable segments

From 2010 onwards, almost all costs incurred by the Corporate Center related to shared services and control functions are allocated to the reportable segments, which directly and indirectly receive the value of the services, either based on a full cost recovery or on a periodically agreed flat fee. The allocated costs are shown in the respective expense lines of the reportable segments in “Note 2a Segment reporting” in the “Financial information” section, and in the “UBS business divisions and Corporate Center” section of this report.

Up to and including 2009, certain costs incurred by the Corporate Center were presented as Corporate Center expenses and not charged to the business divisions. This change in allocation policy has been applied prospectively and prior year numbers have not been restated.
The incremental charges to the business divisions made in 2010 mainly relate to control functions. If figures for each quarter of 2009 had been presented on the basis of the allocation methodology applied for 2010, the estimated impact on operating ex-

penses and performance before tax would have been as shown in the table below.

The “Corporate Center” column of the table in “Note 2a Segment reporting” has been renamed “Treasury activities and other corporate items”.
è Refer to “Note 1a) 33) Segment reporting” in the “Financial information” section of this report for more details

Cash collateral from derivative transactions and prime brokerage receivables and payables

From 2010 onwards, we have changed the presentation of cash collateral from derivative transactions and prime brokerage receivables and payables to improve transparency.

Cash collateral receivables and payables on derivatives are presented in the new balance sheet linesCash collateral receivables on derivative instrumentsandCash collateral payables on derivative instrumentsby transferring the amounts out ofDue from banksandLoans, andDue to banksandDue to customers, respectively. Prime brokerage receivables and prime brokerage payables have been transferred out ofDue from banksandLoanstoOther assets, and out ofDue to banksandDue to customerstoOther liabilities, respectively. These changes in presentation impacted neither our income statement nor total assets and liabilities. The respective tables, notes and other information in the “Financial information” section of this report were adjusted accordingly.
The table on the next page shows the reclassifications for 2009 and 2008.

Personnel expenses

In 2010, we reclassified certain elements ofOther personnel expensestoVariable compensation – otherin order to align the presentation with the new FINMA definition of variable compensation.

In addition, amounts previously reported underSalaries and variable compensationare presented for the first time on the following separate lines:Salaries, Variable compensation – discretionary bonus, Variable compensation – otherandWealth Management Americas: financial advisor compensation.



                             
Corporate Center cost allocation impact on 2009 figures 
          Wealth          Total    
  Wealth Management &  Management  Global Asset  Investment  business  Corporate 
  Swiss Bank Americas  Management  Bank  divisions  Center 
  Wealth  Retail &                     
CHF million Management  Corporate                     
 
Estimated increase in 2009 operating expenses and decrease in performance before tax  128   96   84   44   288   640   (640)
 

35


Table of Contents

Strategy, performance and responsibility
Financial performance

                         
Cash collateral from derivative transactions and prime brokerage receivables and payables 
  31.12.09 31.12.08 
  Before      After  Before      After 
CHF million reclassification  Reclassification  reclassification  reclassification  Reclassification  reclassification 
 
Due from banks  46,574   (29,770)  16,804   64,451   (46,757)  17,694 
 
Cash collateral receivables on derivatives instruments  0   53,774   53,774   0   85,703   85,703 
 
Loans  306,828   (40,351)  266,477   340,308   (48,852)  291,456 
 
Other assets  7,336   16,347   23,682   9,931   9,906   19,837 
 
Due to banks  65,166   (33,244)  31,922   125,628   (48,806)  76,822 
 
Cash collateral payables on derivatives instruments  0   66,097   66,097   0   92,937   92,937 
 
Due to customers  410,475   (71,212)  339,263   465,741   (103,102)  362,639 
 
Other liabilities  33,986   38,359   72,344   42,998   58,971   101,969 
 

Furthermore, we reclassified the pension costs related to bonus toPension and other post-employment benefit plans. Previously, those amounts were reported underSocial security. Prior period amounts have been adjusted accordingly. The change in the presentation did not impact our personnel expenses. The related amounts are disclosed in the footnotes to “Note 6 Personnel expenses” in the “Financial information” section of this report.

IFRS 9 Financial Instruments

In November 2009, the International Accounting Standards Board (IASB) issued IFRS 9Financial Instruments, which includes revised guidance on the classification and measurement of financial assets. In October 2010, the IASB updated IFRS 9Financial Instrumentsto include guidance on financial liabilities and derecognition of financial instruments and amended IFRS 7Financial Instruments: Disclosureto include disclosures about transferred financial assets. The publication of IFRS 9Financial Instrumentsrepresents the completion of the first part of a multi-stage project to replace IAS 39Financial Instruments: Recognition and Measurement.

The standard requires all financial assets to be classified on the basis of the entity’s business model for managing the financial assets, and the contractual cash flow characteristics of the financial asset. A financial asset is to be accounted for at amortized cost only if the following criteria are met: (i) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows; and (ii) the contractual cash flows under the instrument solely represent payments of principal and interest. If a financial asset meets the criteria to be measured at amortized cost, it can be designated at fair value through profit or loss under the fair value option, if doing so would significantly reduce or eliminate an accounting mismatch. Non-traded equity

instruments may be accounted for at fair value through other comprehensive income (OCI). Such a designation is available on initial recognition on an instrument-by-instrument basis and is irrevocable. There is no subsequent recycling of realized gains or losses from OCI to profit or loss. All other financial assets are measured at fair value through profit or loss.

The accounting for and presentation of financial liabilities and for derecognition of financial instruments have been transferred from IAS 39Financial Instruments:Recognition and Measurementto IFRS 9Financial Instruments. The guidance is unchanged with one exception: the accounting for financial liabilities designated at fair value through profit or loss. The requirements stipulated in IAS 39Financial Instruments: Recognition and Measurementregarding the classification and measurement of financial liabilities have been retained, including the related application and implementation guidance. The two existing measurement categories for financial liabilities remain unchanged. The criteria for designating a financial liability at fair value through profit or loss also remain unchanged. For financial liabilities designated at fair value through profit or loss, changes in fair value due to changes in an entity’s own credit risk are directly recognized in OCI instead of in profit or loss. There is no subsequent recycling of realized gains or losses from OCI to profit or loss. For financial liabilities that are required to be measured at fair value through profit or loss, i.e. all derivatives and trading portfolio liabilities, all fair value movements will continue to be recognized in profit or loss.
We are currently assessing the impact of the new standard on our financial statements. The effective date for mandatory adoption is 1 January 2013, with early adoption permitted. The IFRS 7Financial Instruments: Disclosureamendments are applicable for annual accounting periods beginning on or after 1 July 2011. We did not adopt IFRS 9Financial Instrumentsfor the year ended 31 December 2010.



36


Table of Contents

Strategy, performance and responsibility

UBS results

                 
Income statement 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
                 
Continuing operations
                
 
Interest income  18,872   23,461   65,679   (20)
 
Interest expense  (12,657)  (17,016)  (59,687)  26 
 
Net interest income  6,215   6,446   5,992   (4)
 
Credit loss (expense) / recovery  (66)  (1,832)  (2,996)  96 
 
Net interest income after credit loss expense  6,149   4,614   2,996   33 
 
Net fee and commission income  17,160   17,712   22,929   (3)
 
Net trading income  7,471   (324)  (25,820)    
 
Other income  1,214   599   692   103 
 
Total operating income  31,994   22,601   796   42 
 
Personnel expenses  16,920   16,543   16,262   2 
 
General and administrative expenses  6,585   6,248   10,498   5 
 
Depreciation of property and equipment  918   1,048   1,241   (12)
 
Impairment of goodwill  0   1,123   341   (100)
 
Amortization of intangible assets  117   200   213   (42)
 
Total operating expenses  24,539   25,162   28,555   (2)
 
Operating profit from continuing operations before tax  7,455   (2,561)  (27,758)    
 
Tax expense / (benefit)  (381)  (443)  (6,837)  14 
 
Net profit from continuing operations  7,836   (2,118)  (20,922)    
 
                 
Discontinued operations
                
 
Profit from discontinued operations before tax  2   (7)  198     
 
Tax expense  0   0   1     
 
Net profit from discontinued operations  2   (7)  198     
 
                 
Net profit  7,838   (2,125)  (20,724)    
 
Net profit attributable to non-controlling interests  304   610   568   (50)
 
from continuing operations  303   600   520   (50)
 
from discontinued operations  1   10   48   (90)
 
Net profit attributable to UBS shareholders
  7,534   (2,736)  (21,292)    
 
from continuing operations  7,533   (2,719)  (21,442)    
 
from discontinued operations  1   (17)  150     
 
                 
Performance by business division
                
 
Wealth Management  2,308   2,280   3,631   1 
 
Retail & Corporate  1,772   1,629   2,382   9 
 
Wealth Management & Swiss Bank  4,080   3,910   6,013   4 
 
Wealth Management Americas  (130)  32   (823)    
 
Global Asset Management  516   438   1,333   18 
 
Investment Bank  2,197   (6,081)  (34,300)    
 
Treasury activities and other corporate items  793   (860)  19     
 
Operating profit from continuing operations before tax
  7,455   (2,561)  (27,758)    
 

37


Table of Contents

Strategy, performance and responsibility
Financial performance

2010

Results

In 2010, we reported a Group net profit attributable to shareholders of CHF 7,534 million, a profit before tax from continuing operations of CHF 7,455 million and a profit before tax from discontinued operations of CHF 2 million. In 2009, we recorded a net loss attributable to shareholders of CHF 2,736 million.

Operating income

Total operating income was CHF 31,994 million in 2010, up from CHF 22,601 million in 2009. Net interest income was CHF 6,215 million compared with CHF 6,446 million in the prior year. Net trading income was positive CHF 7,471 million compared with negative CHF 324 million in 2009.

Net interest income includes income from interest margin-based activities (loans and deposits) as well as income earned as a result of trading activities (for example, coupon and dividend income). The dividend income component of interest income is volatile, depending on the composition of the trading portfolio. Net interest and trading income is analyzed below under the relevant business activities in order to provide a more comprehensive explanation of the movements.

Net income from trading businesses
Net income from trading businesses, including lending activities of the Investment Bank, was CHF 7,508 million for full-year 2010 compared with CHF 382 million in the prior year.

The Investment Bank’s fixed income, currencies and commodities’ (FICC) trading revenues improved due to an increase in credit trading revenues, which was partially offset by decreases in trading revenues in our macro and emerging markets businesses. A major part of the improvement was due to de-risking and reduction of the residual positions portfolio. Equities trading revenues, excluding own credit, decreased compared with the previous year, primarily in the derivatives and equity-linked business.
An own credit loss on financial liabilities designated at fair value of CHF 548 million was recorded in 2010, compared with a CHF 2,023 million loss in 2009. This was due to continuing but comparatively less tightening of our credit spreads in 2010. Debit valuation adjustments on derivatives in the Investment Bank’s FICC business were positive CHF 155 million compared with negative CHF 1,882 million in 2009. This resulted from the widening of overall credit spreads in the second quarter, partially offset by a tightening of the credit spreads in the third and fourth quarters.
è Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit

Net income from interest margin businesses
Net income from interest margin businesses was CHF 4,624 million compared with CHF 5,053 million in the prior year. This de-

crease was primarily attributable to lower margins and negative currency effects.

Net income from treasury activities and other
Net income from treasury activities and other was CHF 1,554 million compared with CHF 687 million in 2009. Income from treasury activities was nearly unchanged from last year. A CHF 745 million gain on the valuation of our option to acquire the SNB StabFund’s equity was recorded in 2010, compared with a CHF 117 million gain in the prior year. Additionally, 2009 included a net gain of CHF 297 million (including interest expenses) on the valuation of the mandatory convertible notes (MCN) issued in December 2008 and converted in August 2009.

Credit loss expenses
In 2010, we reported net credit loss expenses of CHF 66 million. This included CHF 172 million of impairment charges taken on reclassified and acquired securities, partially offset by recoveries on certain loan positions. The net credit loss expenses in 2009 amounted to CHF 1,832 million.

The net credit loss expenses of the Investment Bank were nil in 2010, compared with net credit loss expenses of CHF 1,698 million in 2009. Credit loss expenses of CHF 172 million in relation to reclassified and acquired securities were primarily related to impairments on our student loan auction rate securities inventory, offset by recoveries on certain loan positions.
Wealth Management & Swiss Bank reported net credit loss expenses of CHF 64 million for 2010, compared with CHF 133 million in 2009.
è Refer to the “Risk management and control” section of this report for more information on our 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 17,160 million, compared with CHF 17,712 million in the previous year. Income declined slightly in all major fee categories except for portfolio management and advisory fees, as outlined below:

 Underwriting feeswere CHF 1,912 million compared with CHF 2,386 million in the prior year, due to a decline in both equity and debt underwriting fees. The decrease in equity underwriting fees resulted from an overall market slowdown. Debt underwriting fees declined due to lower revenues in the Investment Bank’s debt capital market business.
 Mergers and acquisitions and corporate finance fees were CHF 857 million, a decrease from CHF 881 million in the prior year. This was due to reduced market activity as deal appetite remained subdued in the first half of 2010.
 Net brokerage feesfell 8% to CHF 3,837 million mainly due to low transaction volumes and margin compression in 2010.
 Investment fund feeswere CHF 3,898 million, a 3% decrease compared with the prior year. Lower asset based commission



38


Table of Contents

Strategy, performance and responsibility
                 
Net interest and trading income 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
                 
Net interest and trading income
                
 
Net interest income  6,215   6,446   5,992   (4)
 
Net trading income  7,471   (324)  (25,820)    
 
Total net interest and trading income
  13,686   6,122   (19,828)  124 
 
                 
Breakdown by businesses
                
 
Net income from trading businesses1
  7,508   382   (27,203)    
 
Net income from interest margin businesses  4,624   5,053   6,160   (8)
 
Net income from treasury activities and other  1,554   687   1,214   126 
 
Total net interest and trading income
  13,686   6,122   (19,828)  124 
 
1 Includes lending activities of the Investment Bank.
                 
Credit loss (expense) / recovery 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
Wealth Management  11   45   (388)  (76)
 
Retail & Corporate  (76)  (178)  (4)  (57)
 
Wealth Management & Swiss Bank  (64)  (133)  (392)  (52)
 
Wealth Management Americas  (1)  3   (29)    
 
Investment Bank  01  (1,698)  (2,575)  (100)
 
of which: related to reclassified securities2
  (133)   (425)  (125)  (69)
 
of which: related to acquired securities
  (39)   (18)  0   117 
 
Treasury activities and other corporate items  0   (5)  0   (100)
 
UBS
  (66)  (1,832)  (2,996)  (96)
 
1 Credit loss expenses related to reclassified and acquired securities were offset by recoveries on certain loan positions.  2 Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report.
                 
Net fee and commission income 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
Equity underwriting fees  1,157   1,590   1,138   (27)
 
Debt underwriting fees  755   796   818   (5)
 
Total underwriting fees
  1,912   2,386   1,957   (20)
 
M&A and corporate finance fees  857   881   1,662   (3)
 
Brokerage fees1
  4,930   5,400   7,150   (9)
 
Investment fund fees  3,898   4,000   5,583   (3)
 
Portfolio management and advisory fees  5,959   5,863   7,667   2 
 
Insurance-related and other fees  361   264   317   37 
 
Total securities trading and investment activity fees
  17,918   18,794   24,335   (5)
 
Credit-related fees and commissions  448   339   273   32 
 
Commission income from other services  850   878   1,010   (3)
 
Total fee and commission income
  19,216   20,010   25,618   (4)
 
Brokerage fees paid1
  1,093   1,231   1,164   (11)
 
Other1
  964   1,068   1,524   (10)
 
Total fee and commission expense
  2,057   2,299   2,689   (11)
 
Net fee and commission income
  17,160   17,712   22,929   (3)
 
of which: net brokerage fees1
  3,837   4,169   5,985   (8)
 
1 In 2010, we corrected the amounts presented in previous periods on the lines Brokerage fees, Brokerage fees paid, Other and Net brokerage fees. Amounts previously disclosed have been decreased as follows: Brokerage fees by CHF 817 million and CHF 1,059 million for the years ended 31 December 2009 and 31 December 2008, respectively; Brokerage fees paid by CHF 517 million and CHF 599 million for the years ended 31 December 2009 and 31 December 2008, respectively; Other and Net brokerage fees by CHF 300 million and CHF 460 million for the years ended 31 December 2009 and 31 December 2008, respectively. The total of Net fee and commission income and consequently Net profit attributable to UBS shareholders are not affected by this correction.

39


Table of Contents

Strategy, performance and responsibility
Financial performance

  fees on UBS funds were partly offset by higher fees on third-party funds and sales-based commission income.
 Portfolio management and advisory feesincreased 2% to CHF 5,959 million, mainly due to higher portfolio management fees in our Wealth Management Americas business division. This was partly offset by lower portfolio management fees in Global Asset Management, primarily resulting from lower performance fees in its alternative and quantitative investments business, and by lower portfolio management and advisory fees in Wealth Management & Swiss Bank and the Investment Bank.
 Other commission expensefell 10% to CHF 964 million, mainly due to lower commissions paid for payment transactions, other services and management advisory.

Other income

Other income was CHF 1,214 million in 2010, compared with CHF 599 million in the previous year. Other income in 2010 included a CHF 180 million gain from the sale of investments in associates owning real estate in New York, a gain of CHF 158 million from the sale of a property in Zurich, CHF 324 million gains from the disposal of loans and receivables (including sales and issuer redemptions of auction rate securities), a CHF 69 million demutualization gain from our stake in the Chicago Board Options Exchange, and a negative CHF 45 million valuation adjustment on a property fund held by Wealth Management & Swiss Bank.
è Refer to “Note 5 Other income” in the “Financial information” section of this report for more information

Operating expenses

Total operating expenses were CHF 24,539 million in 2010, compared with CHF 25,162 million in 2009. Operating expenses in 2010 included CHF 113 million of net restructuring charges, while operating expenses in 2009 included goodwill impairment charges of CHF 1,123 million and restructuring charges of CHF 791 million.

Personnel expenses

Personnel expenses were CHF 16,920 million, up from CHF 16,543 million in the prior year. Personnel expenses recorded in 2010 included discretionary variable compensation expenses of CHF 4.1 billion, of which CHF 1.5 billion relates to variable compensation brought forward from prior years. The discretionary bonus pool granted to employees for the performance year 2010 was CHF 4.2 billion, 11% lower than in the previous year. Of this amount, CHF 2.6 billion is recognized in the income statement in 2010, and CHF 1.6 billion will be deferred to future periods. Other personnel expenses in 2010 included a charge of CHF 0.2 billion for the UK Bank Payroll Tax.
Other variable compensation was CHF 310 million in 2010 compared with CHF 830 million in 2009. The decrease was mainly due to restructuring-related severance costs recognized in 2009.
è Refer to the “Compensation” section of this report for more information

è Refer to the “Accounting and reporting structure changes” section and to “Note 6 Personnel expenses” in the “Financial information” section of this report for more information on the changes in presentation of certain personnel expenses in 2010 and related adjustment of prior periods’ amounts

General and administrative expenses

General and administrative expenses were CHF 6,585 million in 2010 compared with CHF 6,248 million in 2009. Marketing and public relations expenses increased primarily due to the costs associated with sponsoring and branding campaigns related to the global re-launch of the UBS brand. Other general and administrative expenses increased due to higher litigation provisions, partially offset by lower restructuring provisions. Costs of outsourcing IT and other services as well as travel and entertainment were higher compared with the prior year. These increases were partly offset by reduced spending on occupancy, rent and maintenance of IT and other equipment, telecommunications and postage, administration and professional fees.
è Refer to “Note 7 General and administrative expenses” in the “Financial information” section of this report for more information

Depreciation, amortization and impairment of goodwill

Depreciation was CHF 918 million in 2010, compared with CHF 1,048 million in 2009. Amortization of intangible assets was CHF 117 million compared with CHF 200 million in the prior year. No goodwill impairment charges were recorded in 2010. A goodwill impairment charge of CHF 1,123 million relating to the sale of UBS Pactual was recorded in 2009.

Income tax

We recognized a net income tax benefit in our income statement of CHF 381 million for 2010. This included a deferred tax benefit of CHF 605 million and current tax expenses of CHF 224 million.

The deferred tax benefit reflects the recognition of additional deferred tax assets in respect of tax losses and temporary differences in a number of foreign locations including the US (tax benefit of CHF 1,161 million) and Japan (tax benefit of CHF 98 million), taking into account updated taxable profit forecast assumptions over the five-year time horizon used for recognition purposes. This was partly offset by a Swiss net deferred tax expense. Swiss tax losses, for which deferred tax assets have previously been recognized, were used against profits for the year (tax expenses of CHF 1,409 million). This was partly offset by an upward revaluation of Swiss deferred tax assets taking into account revised profit forecast assumptions (tax benefit of CHF 741 million).
The current tax expenses relate to tax expenses in respect of taxable profits of Group entities, partially offset by tax benefits arising from the agreement on prior year positions with tax authorities in various locations.
The tax benefit for the year in the income statement is CHF 320 million higher than that in our fourth quarter 2010 report issued on 8 February 2011.



40


Table of Contents

Strategy, performance and responsibility

è Refer to “Note 33 Events after the reporting period” in the “Financial information” section of this report for more information
During 2009, we recognized a net income tax benefit in our income statement of CHF 443 million. This reflected a deferred tax benefit mainly relating to the recognition of additional deferred tax assets in respect of tax losses, partly offset by current tax expenses relating to taxable profits of Group entities.

Net profit attributable to non-controlling interests

Net profit attributable to non-controlling interests for 2010 was CHF 304 million, compared with CHF 610 million for 2009. This decrease was primarily the consequence of the attribution in 2009, rather than in 2010, of CHF 132 million of net profit to non-controlling interests in connection with certain dividends payable in 2010 on hybrid capital instruments classified as non-owner equity. This attribution was made out of 2009’s net profit following a determination that a triggering event had occurred that caused the 2010 dividend payments to become obligatory under the terms of these hybrid capital instruments. The triggering event was the cash payment made by UBS in 2009 to the Swiss Confederation in consideration of the Confederation’s waiver of its right to receive future coupon payments on the mandatory convertible notes due in 2011.

Had the 2010 dividend payments been applied to net profit in 2010 rather than in 2009, the net profit attributed to non-controlling interests would have been CHF 478 million in 2009 and CHF 436 million in 2010.

Comprehensive income attributable to UBS shareholders

Comprehensive income attributable to UBS shareholders includes all changes in equity (including net profit) attributed to UBS shareholders during a period, except those resulting from investments by and distributions to shareholders as well as equity settled share-based payments. Items included in comprehensive income, but not in net profit, are reported under other comprehensive income (OCI). Most of those items will be recognized in net profit when the underlying item is sold or realized.

Comprehensive income attributable to UBS shareholders in 2010 was CHF 5,875 million, including net profit attributable to UBS shareholders of CHF 7,534 million, partially offset by other comprehensive income attributable to UBS shareholders of negative CHF 1,659 million.

OCI attributable to UBS shareholders was negative in 2010 due to: (1) losses in the currency translation account of CHF 909 million (net of tax) related to the Swiss franc carrying value of investments in subsidiaries whose reporting currencies are other than Swiss francs; (2) fair value losses on financial investments available-for-sale of CHF 607 million (net of tax); and (3) changes in the replacement values of interest rate swaps designated as hedging instruments of negative CHF 143 million (net of tax). Foreign currency translation-related OCI losses attributable to UBS shareholders of CHF 1,501 million (net of tax) in 2010 largely resulted from the strengthening of the Swiss franc against the US dollar, British pound and euro. We have foreign operations conducted through entities with these functional currencies. These losses in foreign currency translation were partially offset by an out-of-period credit of CHF 592 million resulting from the correction of prior period misstatements. Fair value losses on financial investments available-for-sale predominantly relate to our fixed-interest bearing long-term bond portfolio, which consists of US and UK government bonds. During the fourth quarter, the fair value of this portfolio decreased, mostly due to rising market interest rates. On a net basis, the fair value movement of US dollar, euro and British pound fix-receiver and fixed-payer interest rate swaps designated in cash flow hedges was slightly negative during the year.
è Refer to the “Statement of comprehensive income” section and “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information

Invested assets

Total invested assets were CHF 2,152 billion on 31 December 2010, a decrease of 4% from CHF 2,233 billion on 31 December 2009. Positive market developments were more than offset by negative currency effects and net new money outflows.



                 
Invested assets 
  As of % change from 
CHF billion 31.12.10  31.12.09  31.12.08  31.12.09 
 
Wealth Management  768   825   833   (7)
 
Retail & Corporate  136   135   122   1 
 
Wealth Management & Swiss Bank
  904   960   955   (6)
 
Wealth Management Americas
  689   690   644   0 
 
Traditional investments  487   502   493   (3)
 
Alternative and quantitative investments  34   41   41   (17)
 
Global real estate  36   39   40   (8)
 
Infrastructure  1   1   1   0 
 
Global Asset Management
  559   583   575   (4)
 
Total
  2,152   2,233   2,174   (4)
 

41


Table of Contents

Strategy, performance and responsibility
Financial performance

2009

Results

In 2009, we reported a Group net loss attributable to shareholders of CHF 2,736 million, a loss before tax of CHF 2,561 million from continuing operations and a loss before tax of CHF 7 million from discontinued operations. In 2008, we recorded a net loss attributable to shareholders of CHF 21,292 million.

Operating income

Total operating income was CHF 22,601 million in 2009, up from CHF 796 million in 2008. Net interest income at CHF 6,446 million was up 8% compared with CHF 5,992 million a year earlier. Net trading income was negative CHF 324 million compared with negative CHF 25,820 million in 2008.

In 2009, we reviewed our approach to calculating and booking of own credit on derivative liabilities and financial liabilities designated at fair value. As of the transition date of 1 January 2009, changes resulting from this review led to an increase in our 2009 net trading income of CHF 143 million, made up of a CHF 365 million credit tonet income from trading businessesand a charge of CHF 222 million tonet income from treasury activities and other.

Net income from trading businesses

Net income from trading businesses, including lending activities of the Investment Bank, was positive CHF 382 million for the full-year 2009, compared with negative CHF 27,203 million in 2008. The improvement was mainly due to lower losses on residual risk positions in the Investment Bank’s fixed income, currencies and commodities (FICC) business in 2009.
Trading revenues from the FICC business improved from 2008, due to lower losses on residual risk positions as mentioned above.
Equities trading revenues (excluding own credit) improved from 2008. Equity-linked revenues increased significantly as all regions benefitted from improvements in valuations and liquidity. Proprietary trading revenues improved with a strong performance recorded across all geographical regions.
In 2009, the Investment Bank recorded a loss on own credit from financial liabilities designated at fair value of CHF 2,023 million as our credit spread narrowed in 2009, compared with a gain of CHF 2,032 million in 2008. This was partially affected by the abovementioned change in the approach to calculating and booking of own credit.
è Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of our Annual Report 2009 for more information on own credit

Net income from interest margin businesses

Net income from interest margin businesses decreased 18% to CHF 5,053 million in 2009 from CHF 6,160 million in 2008. This

decrease was primarily attributable to lower margins on loans and liabilities.

Net income from treasury activities and other

Net income from treasury activities and other was CHF 687 million in 2009 compared with CHF 1,214 million in 2008 due to a net gain of CHF 297 million (including interest expenses) on the valuation of the mandatory convertible notes (MCN) issued in December 2008 and converted in August 2009, and a gain of CHF 117 million on the revaluation of our option to acquire the SNB Stab-Fund’s equity. In comparison, 2008 included an accounting gain of CHF 3,860 million related to the MCN issued in March 2008, which was offset by the CHF 3.4 billion negative impact of the transaction with the Swiss National Bank and the abovementioned MCN issued in December 2008, resulting in a total gain of CHF 0.4 billion.

Credit loss expenses

In 2009, we experienced net credit loss expenses of CHF 1,832 million, of which CHF 425 million were due to impairment charges taken on reclassified securities in the Investment Bank. In comparison, we recorded net credit loss expenses of CHF 2,996 million in 2008.
The Investment Bank recorded net credit loss expenses of CHF 1,698 million in 2009, compared with net credit loss expenses of CHF 2,575 million in 2008. Excluding the credit loss expenses from reclassified securities of CHF 425 million, the net credit loss expenses amounted to CHF 1,273 million in 2009.
Wealth Management & Swiss Bank reported net credit loss expenses of CHF 133 million for 2009, compared with CHF 392 million in 2008. Releases of allowances against lombard loans in 2009 contributed to this positive development.
è Refer to the “Risk management and control” section of our Annual Report 2009 for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures in 2009

Net fee and commission income

Net fee and commission income was CHF 17,712 million in 2009, down 23% from CHF 22,929 million in 2008. Income declined in all major fee categories except for underwriting fees, as outlined below:
 Underwriting feesincreased 22% to CHF 2,386 million, due to a 40% increase in equity underwriting fees, offset by a 3% decrease in debt underwriting fees.
 Mergers and acquisitions and corporate finance fees fell 47% to CHF 881 million due to reduced market activity as deal appetite remained subdued.
 Net brokerage feesfell 30% to CHF 4,169 million mainly due to a reduction in equity trading volumes.
 Investment fund feesfell 28% to CHF 4,000 million as a result of lower asset-based fees on both own and third-party funds.



42


Table of Contents

Strategy, performance and responsibility

 Portfolio management and advisory feesfell 24% to CHF 5,863 million, mainly due to the decreased average asset base, especially in the wealth management businesses.
 Other commission expensefell 30% to CHF 1,068 million, mainly due to lower commissions paid to distribution partners.

Other income

Other income was CHF 599 million in 2009 compared with CHF 692 million in 2008. Other income in 2009 included a loss of CHF 498 million related to the sale of UBS Pactual, foreign exchange gains of CHF 430 million on other divestments of subsidiaries, a gain of CHF 304 million on the buyback of subordinated debt and impairment charges of financial investments available-for-sale of CHF 349 million.
è Refer to “Note 5 Other income” in the “Financial information” section of our Annual Report 2009 for more information

Operating expenses

Total operating expenses were down 12% to CHF 25,162 million in 2009 from CHF 28,555 million in 2008.

Total restructuring charges of CHF 791 million were incurred in 2009, including CHF 491 million in personnel expenses, mainly for severance payments, CHF 256 million in general and administrative expenses, primarily for real-estate related costs, and CHF 45 million of depreciation and impairment losses on property and equipment.

Personnel expenses

Personnel expenses were CHF 16,543 million in 2009 compared with CHF 16,262 million in 2008. Headcount reductions were partially offset by salary increases. Discretionary variable compensation recognized in the income statement in 2009 was CHF 2.8 billion. Discretionary variable compensation of CHF 3.0 billion for 2009 and brought forward from prior years was partially recognized in the income statement in 2010 and the remaining part will be recognized in future periods, subject to the vesting conditions of the respective awards granted. It included a charge for performance (and retention) awards that were to be granted, or were expected to be granted, in 2010 in relation to the 2009 performance year but which, as of the balance sheet date, had in fact not been granted. The 2009 results did not include a provision for bank payroll tax in the UK.
Contractors’ expenses, at CHF 275 million, were down 35% from 2008. This was due to a substantial reduction of employed contractors and a favorable foreign exchange impact. Social security increased 22% to CHF 804 million in 2009, due to our equity compensation plan. Pension and other post-employment benefit plans increased CHF 16 million to CHF 988 million. Other personnel expenses decreased 21%, mainly due to headcount reduction and lower training, recruitment and travelling costs.

General and administrative expenses

General and administrative expenses declined 40% to CHF 6,248 million in 2009. All general and administrative expense categories decreased in 2009 primarily as a result of our cost reduction programs. Furthermore, 2008 included provisions for auction rate securities of CHF 1,464 million and provisions in relation to the US cross-border matter of CHF 917 million. The largest reductions in absolute terms were in travel and entertainment expenses, and in professional fees.
è Refer to “Note 21 Provisions and litigation” in the “Financial information” section of our Annual Report 2009 for more information about provisions

Depreciation, amortization and impairment of goodwill

Depreciation of property and equipment declined 16% to CHF 1,048 million in 2009. Amortization of intangible assets was CHF 200 million compared with CHF 213 million in 2008.
A goodwill impairment charge of CHF 1,123 million was recorded in 2009, relating to the sale of UBS Pactual. In 2008 a goodwill impairment charge of CHF 341 million was recorded relating to the Investment Bank’s exit from the municipal securities business.

Income tax

We recognized a net income tax benefit in our income statement of CHF 443 million for the full-year 2009. This included a deferred tax benefit of CHF 960 million, which reflected the recognition of additional deferred tax assets in respect of tax losses and temporary differences in certain locations, including the US (CHF 373 million) and Japan (CHF 127 million), taking into account updated profit forecast assumptions over the five-year time horizon used for recognition purposes. In addition, it reflected the release of a deferred tax liability of CHF 243 million relating to UBS Pactual prior to its sale during 2009. This deferred tax benefit was partially offset by a tax charge of CHF 517 million, which mainly related to entities with taxable profits.

During 2008, we recognized a net income tax benefit in our income statement of CHF 6,837 million, which mainly reflected a CHF 6,126 million impact from the increase in deferred tax assets on tax losses.

Invested assets

Total invested assets were CHF 2,233 billion on 31 December 2009, an increase of 3% from CHF 2,174 billion on 31 December 2008. Positive market developments were nearly offset by net new money outflows, a reduction of invested assets related to divestments, and negative currency translation effects.



43


Table of Contents

Strategy, performance and responsibility
Financial performance

Balance sheet

Balance sheet

 
             
% change from 
CHF million 31.12.10  31.12.09  31.12.09 
  
Assets
            
 
Cash and balances with central banks  26,939   20,899   29 
 
Due from banks  17,133   16,804   2 
 
Cash collateral on securities borrowed  62,454   63,507   (2)
 
Reverse repurchase agreements  142,790   116,689   22 
 
Trading portfolio assets  167,463   188,037   (11)
 
Trading portfolio assets pledged as collateral  61,352   44,221   39 
 
Positive replacement values  401,146   421,694   (5)
 
Cash collateral receivables on derivative instruments  38,071   53,774   (29)
 
Financial assets designated at fair value  8,504   10,223   (17)
 
Loans  262,877   266,477   (1)
 
Financial investments available-for-sale  74,768   81,757   (9)
 
Accrued income and prepaid expenses  5,466   5,816   (6)
 
Investments in associates  790   870   (9)
 
Property and equipment  5,467   6,212   (12)
 
Goodwill and intangible assets  9,822   11,008   (11)
 
Deferred tax assets  9,522   8,868   7 
 
Other assets  22,681   23,682   (4)
 
Total assets
  1,317,247   1,340,538   (2)
 
             
Liabilities
            
 
Due to banks  41,490   31,922   30 
 
Cash collateral on securities lent  6,651   7,995   (17)
 
Repurchase agreements  74,796   64,175   17 
 
Trading portfolio liabilities  54,975   47,469   16 
 
Negative replacement values  393,762   409,943   (4)
 
Cash collateral payables on derivative instruments  58,924   66,097   (11)
 
Financial liabilities designated at fair value  100,756   112,653   (11)
 
Due to customers  332,301   339,263   (2)
 
Accrued expenses and deferred income  7,738   8,689   (11)
 
Debt issued  130,271   131,352   (1)
 
Other liabilities  63,719   72,344   (12)
 
Total liabilities
  1,265,384   1,291,905   (2)
 
             
Equity
            
 
Share capital  383   356   8 
 
Share premium  34,393   34,824   (1)
 
Cumulative net income recognized directly in equity, net of tax  (6,534)  (4,875)  (34)
 
Retained earnings  19,285   11,751   64 
 
Equity classified as obligation to purchase own shares  (54)  (2)    
 
Treasury shares  (654)  (1,040)  37 
 
Equity attributable to UBS shareholders
  46,820   41,013   14 
 
Equity attributable to non-controlling interests  5,043   7,620   (34)
 
Total equity
  51,863   48,633   7 
 
Total liabilities and equity
  1,317,247   1,340,538   (2)
 

44


Table of Contents

Strategy, performance and responsibility

2010 asset development

(BAR CHART)

1 Including cash collateral receivables on derivative instruments.

Balance sheet development

31.12.10 vs. 31.12.09
Our total assets stood at CHF 1,317 billion on 31 December 2010, down CHF 23 billion (2%) from CHF 1,341 billion on 31 December 2009. The reduction occurred mainly in replacement values (RV), which decreased to a similar extent on both sides of the balance sheet, as market and currency movements drove down positive RV 5% to CHF 401 billion, and negative RV by 4% to CHF 394 billion. Our funded asset volume, which excludes positive RV, remained relatively unchanged, declining by CHF 3 billion in 2010. Nevertheless, our asset composition changed as cash collateral receivables on derivative instruments dropped by CHF 16 billion to CHF 38 billion, financial investments available-for-sale fell by CHF 7 billion to CHF 75 billion, and trading portfolio assets declined by CHF 3 billion to CHF 229 billion. These declines were partially

Balance sheet development – assets

(BAR CHART)

1 Total balance sheet excluding positive replacement values.  2 Including cash collateral receivables on derivative instruments.

2010 liabilities and equity development

(BAR CHART)

1 Including cash collateral payables on derivative instruments.

offset by increases in collateral trading assets, which rose by CHF 25 billion to CHF 205 billion, while lending assets remained stable around CHF 315 billion.

Currency effects for 2010 included the strengthening of the Swiss franc against the euro, British pound, and the US dollar, and weakening of the Swiss franc against the Japanese yen. These effects deflated our balance sheet, excluding positive RV, by roughly CHF 70 billion.
To a large extent, the total asset reduction occurred in the Investment Bank, as the abovementioned change in positive replacement values and lower balances in current accounts arising from collateralized derivative over-the-counter (OTC) transactions (variation margins) contributed significantly to the business division’s CHF 25 billion decline to CHF 967 billion. Wealth Management’s balance sheet assets fell by CHF 16 billion to CHF 94 billion. Global Asset Management’s balance sheet assets decreased by

Balance sheet development – liabilities and equity

(BAR CHART)

1 Total balance sheet excluding negative replacement values.  2 Percentages based on total balance sheet size excluding negative replacement values.  3 Including cash collateral payables on derivative instruments.  4 Including financial liabilities designated at fair value.

45


Table of Contents

Strategy, performance and responsibility
Financial performance

CHF 4 billion to CHF 16 billion, and Wealth Management Americas’ balance sheet assets decreased by CHF 3 billion to CHF 50 billion. The balance sheet asset size of Retail & Corporate increased by CHF 15 billion to CHF 153 billion. Treasury activities and other corporate items rose by CHF 10 billion to CHF 37 billion.

Balance sheet positions disclosed in this section represent year-end positions. Intra-quarter balance sheet positions may be different.
è Refer to the table “FINMA leverage ratio calculation” in the “Capital management” section of this report for our average month-end balance sheet size for the fourth quarter 2010 and 2009

Lending and borrowing

Lending

Cash and balances with central banks was CHF 27 billion on 31 December 2010, an increase of CHF 6 billion from the prior year-end, related to an increase in overnight deposits with central banks. Loans to customers decreased CHF 4 billion to CHF 263 billion due to currency effects, which lowered our loan portfolio by CHF 10 billion. On a currency adjusted basis, loans to customers increased CHF 6 billion, predominantly in our wealth management businesses, where they grew by CHF 12 billion. Volume growth occurred across all major products, including lombard lending, fixed-term loans, and current accounts. This was partly offset by a reduction of student loan auction rate securities and our loan to the RMBS Opportunities Master Fund, LP (BlackRock).
è Refer to the “Risk and treasury management” section for more information

Borrowing

Overall, our unsecured borrowing declined by CHF 10 billion to CHF 605 billion. Financial liabilities designated at fair value stood at CHF 101 billion on 31 December 2010, a drop of CHF 12 billion from 31 December 2009, mainly due to currency effects, which reduced the outstanding balance of equity-linked and credit-linked notes. Customer deposits (due to customers) amounted to CHF 332 billion, a decrease of CHF 7 billion compared with 2009, however, grew by CHF 17 billion on a currency-adjusted basis, mainly related to an increase in our wholesale deposits. Our wealth management businesses cash deposits grew by CHF 3 billion on a currency-adjusted basis, with inflows/shifts into current accounts, savings and personal accounts, and pension fund investment accounts from fiduciary investments and fixed-term deposits. Interbank borrowing (due to banks) was CHF 41 billion on 31 December 2010, up CHF 10 billion from 31 December 2009, to an almost equal extent due to our short-term wholesale and our Retail & Corporate business. Money market paper issuance was CHF 56 billion at year-end

2010, an increase of CHF 4 billion from the prior year-end, while long-term debt declined by CHF 6 billion to CHF 74 billion, mainly related to currency effects, which contributed to a reduction of CHF 8 billion.
è Refer to the “Liquidity and funding management” section for more information on long-term debt issuance

Repurchase / reverse repurchase agreements and
securities borrowing / lending

Cash collateral on securities borrowed and reverse repurchase agreements increased year-on-year by CHF 25 billion to CHF 205 billion on 31 December 2010. This increase was partly due to increased trading balances in the matched book and to higher short-coverings via reverse repurchase agreements and securities borrowing transactions. In a matched book, the dealer reverses collateral from one customer and repos it to another customer at a different rate generating additional profit from mismatching maturities.

A significant amount of trading assets is funded via repurchase agreements. Therefore, in addition to the increase in the matched book, the increase in the Investment Bank’s trading assets also contributed to the rise in repurchase agreements. These increases are reflected on the liability side of the balance sheet, where repurchase agreements and securities lent against cash collateral grew by CHF 9 billion in 2010 and stood at CHF 81 billion on 31 December 2010.

Trading portfolio

Trading portfolio assets declined by CHF 3 billion to stand at CHF 229 billion on 31 December 2010. The majority of this decrease is related to currency effects and trading inventory held for regulatory requirements within our wealth management business. The Investment Bank’s trading portfolio grew by CHF 9 billion, primarily as a result of an increase in holdings of money market papers (mainly treasury bills) of CHF 11 billion and precious metals (mainly silver and palladium) of CHF 2 billion, partially offset by debt instruments, which declined by CHF 5 billion (mainly US government paper and corporate debt).

Replacement values

The positive and the negative replacement values (RV) of derivative instruments developed roughly in parallel, decreasing by CHF 21 billion (5%) and CHF 16 billion (4%), respectively, and ending 2010 at CHF 401 billion and CHF 394 billion, respectively. Decreases in positive RV occurred in credit derivative contracts, which declined by CHF 23 billion due to a tightening of credit



46


Table of Contents

Strategy, performance and responsibility

spreads. Interest rate contracts dropped by CHF 11 billion due to a steepening in interest rate yield curves, specifically those denominated in euro and British pound. These declines were partially offset by foreign exchange contracts, which grew by CHF 16 billion, related to the strengthening of the Swiss franc against major currencies.

Financial investments available-for-sale

Financial investments available-for-sale declined by CHF 7 billion to CHF 75 billion in 2010, reflecting currency effects. The majority of these instruments include highly liquid short-term securities issued by governments and government-controlled institutions in various currencies, mainly US dollars, euro and British pound. It also includes a portfolio of US and UK government bonds with a face amount of CHF 15 billion and a weighted average maturity of approximately eight years.

Other assets / other liabilities

Commencing in the fourth quarter of 2010, UBS has changed the presentation of prime brokerage receivables and payables and cash collateral from derivative transactions to improve transparency. Prime brokerage receivables and prime brokerage payables have been transferred out ofDue from banksandLoanstoOther assets, and out ofDue to banks andDue to customerstoOther liabilities, respectively.Cash collateral receivables and payables on derivatives are presented in the new balance sheet linesCash collateral receivables on derivative instrumentsandCash collateral payables on derivative instrumentsby transferring the amounts out ofDue from banksandLoans, andDue to banksandDue to customers, respectively. In the aforementioned waterfall graphs,Cash collateral receivable and payable on derivative instrumentsare shown inOther assetsandOther liabilities. Comparative periods have been adjusted accordingly.

è Refer to the “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information

Shareholders’ equity

On 31 December 2010, equity attributable to UBS shareholders was CHF 46.8 billion, representing an increase of CHF 5.8 billion compared with 31 December 2009. The increase in 2010 reflects a net profit of CHF 7.5 billion, partially offset by negative effects recognized in equity (including currency translation effects) of CHF 1.7 billion.

è Refer to the “Shares and capital instruments” section of this report for more information



47


Table of Contents

Strategy, performance and responsibility
Financial performance

Off-balance sheet

Off-balance sheet arrangements

Off-balance sheet arrangements include purchased and retained interests and derivatives, as well as other involvements in non-consolidated entities and structures originated by us or set up by third parties. Generally, these arrangements either meet the financial needs of clients or offer investment opportunities through entities that are not controlled by us.

In the normal course of business, we enter into arrangements that, under IFRS, lead to de-recognition of financial assets and liabilities for which we have transferred substantially all risks and rewards (financial assets), or for which the financial liabilities are extinguished.
In addition, we enter into arrangements where the financial assets (and liabilities) received are not recognized on the balance sheet

because we have not assumed the related risks and rewards (financial assets) and/or because we did not become party to the contractual provisions of the financial instruments. We recognize these types of arrangements on the balance sheet only to the extent of their involvement, which, for example, may be in the form of derivatives, guarantees, financing commitments or servicing rights.

When we, through these arrangements, incur an obligation or become entitled to an asset, we recognize them on the balance sheet. 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.
The following paragraphs discuss several distinct areas of off-balance sheet arrangements. Additional disclosure on certain areas of off-balance sheet arrangements can be found in other sections of this report, as indicated in the table below.



      
 
Off-balance sheet arrangements, risks, consolidation and fair value measurements
  Disclosure in the annual report 
 Contractual obligations  Strategy, performance and responsibility, section “Off-balance sheet” 
 Credit guarantees, performance guarantees, loan commitments, underwriting commitments, forward starting transactions and similar instruments  Strategy, performance and responsibility, section “Off-balance sheet” 
 Guarantees issued by UBS AG to subsidiaries  Financial information, “Note 41 Supplemental guarantor information required under SEC rules” 
 Other contingent liabilities  Financial information, “Note 21 Provisions and contingent liabilities” 
 Derivative financial instruments  Financial information, “Note 23 Derivative instruments and hedge accounting”
Risk and treasury management, section “Basel II Pillar 3 disclosures”
 
 Credit derivatives  Financial information, “Note 23 Derivative instruments and hedge accounting”
Risk and treasury management, section “Basel II Pillar 3 disclosures”
 
 Leases  Financial information, “Note 25 Operating lease commitments” 
 Non-consolidated securitization vehicles – non-agency transactions  Strategy, performance and responsibility, section “Off-balance sheet” 
 Support to non-consolidated investment funds  Strategy, performance and responsibility, section “Off-balance sheet” 
 Securitizations (banking book only)  Risk and treasury management, section “Basel II Pillar 3 disclosures” 
 Risk concentrations  Risk and treasury management, section “Risk concentrations” 
 Credit risk information  Risk and treasury management, section “Credit risk” 
 Market risk information  Risk and treasury management, section “Market risk” 
 Liquidity risk information  Risk and treasury management, section “Liquidity and funding management” 
 Consolidation  Financial information, “Note 1 Summary of significant accounting policies” 
 Fair value measurements  Financial information, “Note 27 Fair value of financial instruments” 
 

48


Table of Contents

Strategy, performance and responsibility

Risk positions

Our risk concentrations and other relevant risk positions are disclosed in detail in the audited parts of the “Risk management and control” section of this report. As of 31 December 2010 these positions included exposures to monoline insurers and student loan auction rate securities.
The importance and the potential impact of such risk positions (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 2010 and 2009, we had no significant exposure through liquidity facilities and guarantees to structured investment vehicles, conduits and other similar types of special purpose entities (SPE). Losses resulting from such obligations were not significant in 2010 and 2009.

Non-consolidated securitization vehicles and collateralized
debt obligations

Up to and including 2008, we sponsored the creation of SPE that facilitate the securitization of acquired residential and commercial mortgage loans, other financial assets and related securities. We also securitized clients’ debt obligations in transactions involving SPE which issued collateralized debt obligations (CDO), which typically refer to a security that is collateralized by a pool of bonds, loans, equity, derivatives or other assets. A securitization transaction of this kind generally involves the transfer of assets into a trust or corporation in return for the receipt of beneficial interests in the form of securities. Financial assets held by such trusts and corporations are no longer reported in our consolidated financial statements once their risks and rewards are transferred to a third-party.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on accounting policies regarding securitization activities



                         
Non-consolidated securitization vehicles and collateralized debt obligations – non-agency transactions1 
CHF billion Total SPE assets Involvements in non-consolidated SPE held by UBS 
              Purchased and    
              retained interests    
  Original principal  Current principal  Delinquency  held by UBS2  Derivatives held by UBS 
As of 31 December 2010 outstanding  outstanding  amounts  Carrying value  Fair value  Nominal value 
 
                         
Originated by UBS
                        
 
CDOs
                        
 
Residential mortgage  5.3   3.9   0.0   0.7   0.0   0.9 
 
Commercial mortgage  0.0   0.0   0.0   0.0   0.1   1.3 
 
Other ABS  0.0   0.0   0.0   0.0   0.0   0.1 
 
Securitizations
                        
 
Residential mortgage  2.9   1.7   0.1   0.1   0.0   2.4 
 
Commercial mortgage  22.1   19.3   2.1   0.1   0.0   0.0 
 
Other ABS  0.9   1.0   0.0   0.0   0.0   0.0 
 
Total
  31.2   25.9   2.2   0.9   0.0   4.6 
 
                         
Not originated by UBS
                        
 
CDOs
                        
 
Residential mortgage  43.7   20.1   0.1   0.4   0.0   0.1 
 
Commercial mortgage  13.4   8.8   0.0   0.8   0.0   0.0 
 
Other ABS  78.9   64.7   0.0   5.5   0.3   2.3 
 
Securitizations
                        
 
Residential mortgage  625.1   212.6   38.4   1.3   (1.1)  4.1 
 
Commercial mortgage  608.4   515.5   63.7   2.3   0.0   0.0 
 
Other ABS  946.0   607.7   20.1   3.5   0.0   0.0 
 
Total
  2,315.5   1,429.4   122.3   13.8   (0.7)  6.4 
 
1 The total pool assets held by non-consolidated investment vehicles where UBS is involved are reflected under “Total SPE assets”. The involvement of UBS in these vehicles is disclosed under the column “Involvements in non-consolidated SPE held by UBS”. UBS involvement may be in the form of purchased and retained interests or derivatives. “Total SPE assets” include information which UBS could gather after making exhaustive efforts but excludes data which UBS was unable to obtain (in sufficient quality), especially for structures originated by third parties.  2 Includes loans and receivables measured at amortized cost in the amount of CHF 0.8 billion originated by UBS and CHF 7.8 billion for structures not originated by UBS and trading assets measured at fair value in the amount of CHF 6.0 billion for structures not originated by UBS.

49


Table of Contents

Strategy, performance and responsibility
Financial performance

We did not sponsor the creation of any abovementioned SPE, and did not issue or sponsor the issue of new CDO in transactions involving SPE in 2009 and 2010. Certain retained interests relating to 2008 and earlier issuances (mainly instruments linked to the mortgage market) could not be sold and continued to be retained in 2010. However, the volume and size of retained interests were further reduced as of 31 December 2010, compared with the prior year.
Our involvements in non-consolidated securitization vehicles and CDO disclosed in this section are typically managed on a portfolio basis alongside hedges and other offsetting financial instruments. The “Non-consolidated securitization vehicles and collateralized debt obligations – non-agency transactions” table does not include these offsetting factors, and does not represent a measure of risk.
Our involvement in vehicles whose residential and commercial mortgage securities are backed by an agency of the US government – for example the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation – is not included in the above-mentioned table, due to the comprehensive involvement of the US government in these organizations and their significantly lower risk profile.
The numbers in the table are different from the numbers disclosed on securitizations in the “Basel II Pillar 3” section of this report, predominantly 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 collateralized debt
obligations

We continually evaluate whether triggering events require reconsideration of the consolidation conclusions made at the inception of our involvement with securitization vehicles and CDO.
As of 31 December 2010 there were no holdings which required reconsideration of the consolidation assessment.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for further information on consolidation of securitization vehicles and CDO

Risks resulting from non-consolidated securitization vehicles
and collateralized debt obligations

The “Risk management and control” section of this report provides detailed disclosure of our risk concentrations, as well as risks associated with our involvement in consolidated and non-consolidated mortgage securitization vehicles and CDO.

Support to non-consolidated investment funds

In the ordinary course of business, we issue investment certificates to third parties that are linked to the performance of non-consolidated investment funds. Such investment funds are originated either by us or by third parties. For hedging purposes, we generally invest in the funds to which our obligations from the certifi-

cates are linked. Risks resulting from these contracts are considered minimal, as the full performance of the funds is passed on to third parties.
In 2009 and 2008, as a result of the financial markets crisis which caused declining asset values, market illiquidity and de-leveraging by investors, we supported several non-consolidated investment funds that we manage in our wealth and asset management businesses. We 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 we provided to these investment funds was made where there were regulatory or other legal requirements or other exceptional considerations.
Acquired fund units and fund assets are generally accounted for as financial investments available-for-sale, and are included in the respective risk disclosures in the “Risk management and control” section of this report.
As a result of the recovery in financial markets, direct acquisitions of fund units were immaterial in 2010. Purchases of assets from the funds that we manage and guarantees granted to third parties in the context of such non-consolidated funds were also immaterial. Collateralized financing provided to such funds was CHF 0.8 billion as of 31 December 2010. Losses incurred on fund units accounted as financial investments available-for-sale amounted to CHF 73 million in 2010.
In addition, in the ordinary course of business, our wealth and asset management businesses provide short-term funding facilities to investment funds that we manage. This bridges time lags in fund unit redemptions and subscriptions. These bridge financings did not incur in 2010 and are not expected to incur material losses in the future.
It is possible that we may decide in future to provide financial support to one or more of our investment funds. Such a decision would be taken on a case-by-case basis and would be based on legal or regulatory requirements or extraordinary circumstances prevailing at the time. The risks incurred by providing such support will depend on the type of support and the riskiness of the assets held by the fund(s) in question. If we were to provide extensive financial support to some of our investment funds, losses incurred as a result of such support could become material.

Guarantees and similar obligations

In the normal course of business we issue: various forms of guarantees; commitments to extend credit; standby and other letters of credit to support our clients; commitments to enter into forward starting transactions; note issuance facilities; and revolving underwriting facilities. With the exception of related premiums, generally these guarantees and similar obligations are kept as off-balance sheet items unless a provision to cover probable losses is required.
On 31 December 2010, the exposure to credit risk (gross values less sub-participations) for credit guarantees and similar instruments was CHF 15.4 billion compared with CHF 16.0 billion one year earlier. Fee income from issuing guarantees is not material to total revenues.



50


Table of Contents

Strategy, performance and responsibility

Guarantees represent irrevocable assurances, subject to the satisfaction of certain conditions, that we will make payment in the event that clients fail to fulfill their obligations to third parties. We also enter into commitments to extend credit in the form of credit lines that are available to secure the liquidity needs of clients. The majority of these unutilized credit lines range in maturity from one month to five years. If customers fail to meet their obligations, our maximum amount at risk 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 2010, we recognized net credit losses of CHF 43 million (CHF 4 million for the year ended 31 December 2009) related to obligations incurred for contingencies and commitments. Provisions recognized for guarantees, documentary credits and similar instruments were CHF 130 million as of 31 December 2010 and CHF 90 million as of 31 December 2009.
We enter into partial 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 the credit facility. We retain the contractual relationship with the obligor, and the sub-participant has only an indirect relationship. We will only enter into sub-participation agreements with banks to which we ascribe a credit rating equal to or better than that of the obligor.
Furthermore, we provide representations, warranties and indemnifications to third parties in connection with numerous transactions, such as asset securitizations.

Clearinghouse and future exchange memberships

We are a member of numerous securities and futures exchanges and clearinghouses. In connection with some of those memberships, we 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. We consider 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 1 July 2010 to 30 June 2011, FINMA estimates our share in the deposit insurance system to be CHF 1.0 billion. The deposit insurance is a guarantee and exposes us to additional risk which is not reflected in the “Maximum exposure to credit risk” table in “Note 29c Measurement categories of financial assets and financial liabilities” in the “Financial information” section of this report. As of 31 December 2010, we consider the probability of a material loss from our obligation to be remote.

Private equity funding commitments, equity and debt
underwriting commitments

We enter into commitments to fund external private equity funds and investments, which typically expire within one to five years. The commitments generally require us to fund external



                         
Financial liabilities not recognized on balance sheet 
                         
The table below shows the maximum irrevocable amount of guarantees, commitments and forward starting transactions. 
       
  31.12.10 31.12.09 
      Sub-          Sub-    
CHF million Gross  participations  Net  Gross  participations  Net 
 
Guarantees
                        
 
Credit guarantees and similar instruments  8,612   (401)  8,212   11,180   (222)  10,958 
 
Performance guarantees and similar instruments  3,362   (506)  2,856   3,484   (582)  2,902 
 
Documentary credits  4,561   (255)  4,306   2,406   (288)  2,117 
 
Total guarantees
  16,535   (1,162)  15,374   17,070   (1,092)  15,977 
 
Commitments
                        
 
Loan commitments  56,851   (1,475)  55,376   59,328   (1,793)  57,534 
 
Underwriting commitments  404   (196)  208   2,251   (556)  1,695 
 
Total Commitments
  57,255   (1,671)  55,584   61,579   (2,349)  59,229 
 
Forward starting transactions1
                        
 
Reverse repurchase agreements  39,036           43,020         
 
Securities borrowing agreements  454           904         
 
Repurchase agreements  22,468           18,044         
 
Securities lending agreements  783           47         
 
1 From 2010 onwards, collateralized forward starting transactions (cash to be paid in the future by either UBS or the counterparty) are presented in this table; the comparative period has been adjusted accordingly.

51


Table of Contents

Strategy, performance and responsibility
Financial performance

private equity funds and investments at market value at the time the commitments are drawn. The amount committed to fund these investments on 31 December 2010 and 31 December 2009 was CHF 0.1 billion and CHF 0.3 billion, respectively. Equity underwriting commitments in the Investment Bank on 31 December 2010 and 31 December 2009 amounted to CHF 0.2 billion and CHF 1.7 billion, respectively. Debt underwriting commitments entered into by Wealth Management Americas were not material.

Contractual obligations

The table below includes contractual obligations as of 31 December 2010.

All contracts included in this table, with the exception of purchase obligations (those where we are committed to purchasing

determined volumes of goods and services), are either recognized as liabilities on our balance sheet or, in the case of operating leases, disclosed in “Note 25 Operating lease commitments” in the “Financial information” section 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 contingent liabilities” in the “Financial information” section of this report), current and deferred tax liabilities (refer to “Note 22 Income taxes” in the “Financial information” section 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 we must pay to employees leaving the firm contractually-agreed salaries).


                 
Contractual obligations 
  Payment due by period 
CHF million < 1 year  1-3 years  3-5 years  > 5 years 
 
Long-term debt obligations  36,742   47,582   32,387   58,279 
 
Finance lease obligations  46   55         
 
Operating lease obligations  862   1,387   1,018   1,818 
 
Purchase obligations  438   376   191   36 
 
Other liabilities  484   1         
 
Total
  38,572   49,401   33,596   60,133 
 

52


Table of Contents

Strategy, performance and responsibility

Cash flows

2010

As of 31 December 2010, the level of cash and cash equivalents declined to CHF 140.8 billion, down CHF 24.2 billion from CHF 165.0 billion at the end of 2009.

Operating activities

Operating activities generated a cash inflow of CHF 12.0 billion in 2010 compared with a cash inflow of CHF 54.5 billion in 2009. Operating cash inflows (before changes in operating assets and liabilities and income taxes paid, net of refunds) totaled CHF 8.8 billion in 2010, a decrease of CHF 1.0 billion from 2009. Net profit improved CHF 10.0 billion compared with 2009.

Cash inflow of CHF 2.4 billion was generated by the net decrease in operating assets; a cash inflow of CHF 1.2 billion was reflected in the operating liabilities. Net payments to tax authorities related to income taxes were CHF 0.5 billion in 2010, almost unchanged from the previous year.

Investing activities

Net cash flow used in investing activities was CHF 25.7 billion compared with cash flow used in investing activities of CHF 20.6 billion in 2009.

The net cash outflow for the purchase and disposal of property and equipment was CHF 0.3 billion. The net investment in financial investments available-for-sale was CHF 25.6 billion. Disposals of subsidiaries and associates in 2010 generated a cash inflow of CHF 0.3 billion.
è Refer to “Note 36 Business combinations” and “Note 38 Reorganizations and disposals” in the “Financial information” section of this report for more information about our investing activities

Financing activities

In 2010, financing activities generated net cash inflows of CHF 1.8 billion. This reflected the cash outflow for redemptions and dividends paid for preferred securities reflected in non-controlling interests of CHF 2.1 billion, the issuance of CHF 78.4 billion of long-term debt and the long-term debt repayments, which totaled CHF 77.5 billion. The money market papers issued generated a net cash inflow of CHF 4.5 billion. In 2009, UBS had a net cash outflow of CHF 54.2 billion from financing activities.

2009

As of 31 December 2009, the level of cash and cash equivalents declined to CHF 165.0 billion, down CHF 14.7 billion from CHF 179.7 billion at the end of 2008.

Operating activities

Operating activities generated a cash inflow of CHF 54.5 billion in 2009 compared with a cash inflow of CHF 77.0 billion in 2008. Operating cash inflows (before changes in operating assets and liabilities and income taxes paid, net of refunds) totaled CHF 9.9 billion in 2009, an increase of CHF 81.5 billion from 2008. Net profit improved CHF 18.6 billion compared with 2008.

Cash inflow of CHF 127.7 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 82.5 billion was reflected in the operating liabilities. Net payments to tax authorities related to income taxes were CHF 0.5 billion in 2009, down CHF 0.4 billion from the previous year.

Investing activities

Net cash flow used in investing activities was CHF 20.6 billion compared with cash flow used in investing activities of CHF 1.7 billion in 2008.

The net cash outflow for the purchase and disposal of property and equipment was CHF 0.7 billion. The net investment in financial investments available-for-sale was CHF 20.1 billion, an increase due to our strategic decision to rebalance our liquidity reserve which led to a shift from reverse repurchase agreements and trading portfolio. Disposals of subsidiaries and associates in 2009 generated a cash inflow of CHF 0.3 billion mainly related to the sale of UBS Pactual.

Financing activities

In 2009, financing activities generated net cash outflows of CHF 54.2 billion. This reflected the net repayment of money market paper of CHF 60.0 billion, the issuance of CHF 67.1 billion of long-term debt and the long-term debt repayments, which totaled CHF 65.0 billion. That outflow was partly offset by inflows attributable to capital issuances of CHF 3.7 billion. In 2008, UBS had a net cash outflow of CHF 5.6 billion from financing activities.



53


Table of Contents

Strategy, performance and responsibility
Our employees

Our employees

The excellence, inspiration and commitment of our employees are critical to implementing our business strategy and to meeting the needs of our clients. Our commitment to our employees is reflected in the investment we make in managing talent, and in the development of our performance-oriented culture and our leadership.

Our workforce

In 2010, we focused on enhancing integration across the firm and investing in our workforce by making a number of improvements to the way we managed our employees. For example, we instituted measures to further develop our performance-oriented culture and revised our Code of Business Conduct and Ethics (the Code) to clearly set out the principles and practices we expect all our employees to follow. Additionally, we launched a corporate university to provide more training opportunities and promote continuous development.

During 2010, our employees were responsible for helping to rebuild our businesses and were fully engaged in regaining client trust. We judiciously invested in recruiting, managing, training and retaining talented employees who have the skills, experience and drive to meet our clients’ needs and grow our businesses.

Internal mobility encourages integration, collaboration and business innovation, and supports individual career development. We continue to support employee mobility across regions and business divisions. In 2010, 489 employees moved to roles in a different region, compared with 910 in 2009. During the course of the year, 1,290 employees transferred between business divisions, compared with 993 in 2009.
Employee turnover, or terminations as a percentage of average overall headcount, was 14.6% in 2010. Employee-initiated turnover was 8.9%, down 0.8% from 2009. In general, employee levels stabilized over the course of the year, with the number of people employed on 31 December 2010 at 64,617, down 616 or 1% from year-end 2009. In 2010, our employees worked in 57 countries, with approximately 36% of our staff employed in the Americas, 36% in Switzerland, 17% in Europe, the Middle East and Africa and 11% in Asia Pacific.


                 
Personnel by region 
  As of % change from 
Full-time equivalents 31.12.10  31.12.09  31.12.08  31.12.09 
 
Switzerland  23,284   24,050   26,406   (3)
 
UK  6,634   6,204   7,071   7 
 
Rest of Europe  4,122   4,145   4,817   (1)
 
Middle East /Africa  137   134   145   2 
 
USA  22,031   22,702   27,362   (3)
 
Rest of Americas  1,147   1,132   1,984   1 
 
Asia Pacific  7,263   6,865   9,998   6 
 
Total
  64,617   65,233   77,783   (1)
 
                 
Personnel by business division 
  As of % change from 
Full-time equivalents 31.12.10  31.12.09  31.12.08  31.12.09 
 
Wealth Management  15,663   15,408   17,910   2 
 
Retail & Corporate  12,089   12,140   13,105   0 
 
Wealth Management & Swiss Bank
  27,752   27,548   31,016   1 
 
Wealth Management Americas
  16,330   16,925   20,623   (4)
 
Global Asset Management
  3,481   3,471   3,914   0 
 
Investment Bank
  16,860   15,666   19,132   8 
 
Treasury activities and other corporate items
  194   1,624   3,098   (88)
 
Total
  64,617   65,233   77,783   (1)
 
of which: personnel managed centrally
  19,406   19,993   23,997   (3)
 

54


Table of Contents

Strategy, performance and responsibility

Recruiting new employees

We are committed to retaining and developing highly qualified employees and to actively recruiting new talent to build our businesses. In 2010, our recruiting efforts focused on meeting the growing demand for staff while continuing to reduce the cost of hiring through increased emphasis on internal hiring, greater efficiency in recruiting operations and reductions in external recruiting costs. Positions we desire to fill increased 145% from 2009, with 136% growth in the number of positions that were actually filled in 2010.
We strive to create a timely, professional and positive experience for candidates. In 2010, we filled 9,101 positions across the firm. Hiring was most visible in the Investment Bank, with 2,360 positions filled in 2010. A top priority for 2010 was to hire experienced client and financial advisors across our strategic growth areas. In 2010, Wealth Management & Swiss Bank hired around 300 client advisors globally, while 278 experienced financial advisors were hired in Wealth Management Americas.
In 2010, 773 university graduates joined UBS as part of our undergraduate and MBA graduate training programs. An additional 988 interns were hired globally over the course of the year, while our apprenticeship program in Switzerland hired 287 apprentices.
Several new recruiting initiatives were launched in 2010 to ensure there is a continuous and visible presence on our target campuses, consistent with our commitment to graduate hiring. We continue to provide unique educational opportunities for graduates that include business-specific activities.

Strengthening and sustaining our diverse workforce

A workforce of individuals from widely different backgrounds, cultures and life experiences is essential in today’s global business environment. This is in part because having a diverse employee base and inclusive work environment increases the performance and engagement of our employees. In 2010, our workforce was comprised of citizens from 147 countries; the average age of our employees was 38 years; and the average length of employment with the firm was 8.6 years. Diversity in gender, ethnicity, age and other factors supports first-hand understanding of regional markets, sensitivity to local customs and awareness of other personal preferences. We believe that we also gain a competitive advantage from more subtle differences in background, experience and thought. These elements provide the perspective from which our employees can anticipate needs and generate solutions for our increasingly diverse client base worldwide. In the end, our long-term success depends on equal employment opportunity and having the best people in the right roles.
Building and maintaining a workforce of highly talented individuals demands an open-minded, inclusive and respectful work-

ing culture, merit-based career advancement and a sense of individual contribution. In recent years, we have promoted diversity in three stages: (i) raising basic awareness; (ii) integrating diversity into the employee experience through recruiting, performance management and retention; and (iii) working to ensure that diversity ultimately becomes a self-sustaining part of our culture.

The scope of our diversity strategy and initiatives is both global and regional. As part of our global top-down accountability strategy in 2010, senior management and Human Resources (HR) jointly developed divisional diversity goals relating to representation, retention and work environment/culture. While it is premature to quantify accomplishments, particularly in the first year after the firm’s restructuring, quantitative and qualitative methods will be used to monitor progress in 2011.
Regional diversity teams translate our global commitment into action by working with local business and HR leaders on business-aligned plans linked to regional talent strategies. In 2010, initiatives that were previously launched in Europe, the US and several other regions made progress in creating a culture in which men and women thrive equally in their careers, where gender differences are an asset, and where different working styles and practices enable us to improve our service to clients. In one initiative piloted in the UK, France and Germany, we focused on hiring and developing talented professional women, working with them to create individual development plans, assigning sponsors and providing educational opportunities. Other regional diversity initiatives included a US Women’s Leadership Conference, where approximately 300 women employees participated in an all-day workshop focusing primarily on individual career development.

Gender distribution by geographical region1

(BAR GRAPH)
1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount in this graph only. This accounts for the total UBS end-2010 employee number of 66,782 in this graph, which excludes staff from UBS card center, Hotel Seepark Thun, Wolfsberg and Widder Hotel.



55


Table of Contents

Strategy, performance and responsibility
Our employees

                         
Gender distribution by employee category1 
  Officers Non-officers Total 
As of 31.12.10 Number  %  Number  %  Number  % 
 
Male  32,068   72.0   9,680   43.5   41,748   62.5 
 
Female  12,474   28.0   12,560   56.5   25,034   37.5 
 
Total  44,542   100.0   22,240   100.0   66,782   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 end-2010 employee number of 66,782 in this table, which excludes staff from UBS card center, Hotel Seepark Thun, Wolfsberg and Hotel Widder.

Global network guidelines enable employees to set up or join employee networks / affinity groups in any of our operating regions. We have more than 20 employee networks to help build cross-business relationships and strengthen our inclusive culture.

Regarding the role of equal employment opportunity, our HR policies and processes have global coverage and outline our commitment to non-discrimination and equal opportunity for all employees.
In 2010, we received a 100% rating in the Human Rights Campaign Foundation’s 2010 Corporate Equality Index (US), Top 25 Most LGBT Friendly Corporations in the World in the International Gay & Lesbian Chamber of Commerce (IGLCC) Index 2010, the National Black MBA-WGC “Corporate Sponsor” award (US), the Equal Opportunity for Women in the Workplace Agency (EOWA) Employer of Choice For Women citation (Australia), and UBS Japan was awarded “Qualified Employer who Supports the Growth of the Future Generations” (through 2012).

Managing performance

Helping employees perform at their highest level is a year-round process that plays a key role in strengthening our performance-oriented culture. We believe employees are better motivated, more committed and more productive if they participate in effective performance management processes. Since 1996, we have employed a process that assesses demonstrated results and behaviors and is supported by ongoing employee-manager dialogue.

Our approach to people management

(CHART)

In 2010, we made a number of critical changes to our performance management process. There are two fundamentally new elements: an evaluation process that clearly differentiates an employee’s performance relative to peers and allocates compensation accordingly, and significantly more transparent communication to employees about all of our performance management processes. Notably, an employee’s overall compensation will now be more transparently linked with the value of their individual contributions. These changes are expected to drive even stronger performance at all levels, enable better delivery of our strategy and ultimately contribute to our long-term sustainable profitability. In 2010, 97% of eligible employees participated in this process.
Performance management for our most senior executives is even more rigorous than for other employees. Input from peers is required, and a more comprehensive evaluation is completed based on key achievements, business performance, risk management, leadership skill and specific financial targets. In 2010, we enhanced our performance management procedures for key risk takers/controllers. By the nature of their role, these individuals have been determined to be able to materially commit, deliver or control the firm’s resources and/or exert significant influence over UBS’s risk profile. We now ensure that a holistic evaluation is conducted by relevant control functions on an annual basis. A sample of senior management and key risk-taker performance objectives are also reviewed annually.
We have Group-wide ranks (Non-Officer, Authorized Officer, Associate Director, Director, Executive Director and Managing Director) and salary ranges that are applicable to all employees. In 2010, we standardized our rank and role classification model, with all business divisions and the Corporate Center following the same model. Global role profiles now form the basis for all of our HR processes and enable us to create and implement more clearly defined career paths for all employees.

Compensation

We strive to provide our employees with market-competitive pay and incentives. Our approach recognizes the need to compensate individuals for their business performance within the context of increasingly competitive market conditions, a fast-changing commercial environment and evolving regulatory oversight. At the same time, ensuring the long-term success of the firm is our foremost priority.
Our compensation structure is designed to be appropriately balanced between fixed and variable elements. Emphasis is



56


Table of Contents

Strategy, performance and responsibility

placed on the variable component as an incentive to excel and to foster a performance-driven culture, while supporting appropriate and controlled risk taking. Our Total Reward Principles are the foundation of our compensation programs. We always take a holistic view of employee compensation within a total reward framework that takes into account base salary, discretionary incentives and benefits.

è Refer to the “Compensation” section for more information

Employee share ownership

We support employee share ownership in principle because we believe that personal accountability for business actions and decisions can be encouraged through equity-based awards that vest and/or become unrestricted over time. In 2010, we changed some terms of Equity Plus, our voluntary equity-based program. Under the new program terms, employees are able to purchase shares at market price and receive one free share for every three shares purchased. These free shares vest within three years, subject to continued employment at UBS.
On 31 December 2010, current employees held an estimated 6% of UBS shares outstanding (including approximately 4% in unvested/blocked shares), based on all known share holdings from employee participation plans, personal holdings and individual retirement plans. At the end of 2010, an estimated 55% of all employees held UBS shares, while an estimated 50% held UBS stock options.

Education and talent development

We take a structured approach to both leadership development and business education to ensure our employees have the knowledge and skills required to meet our business needs and support our strategic goals. In January 2010, we launched the UBS Business University, a global and largely virtual corporate university that integrates our learning activities under one umbrella. The Business University effectively aligns all training and education elements across the firm and promotes a culture of continuous development. Having one Group-wide learning organization also leverages the expertise within our various former learning organizations, increases efficiency, eliminates duplication and significantly reduces training costs, while focusing on positively impacting business results.

One of the Business University’s primary goals is to enhance the ability of our senior leaders and key talent to build a unique and effective leadership culture and put our strategy into practice. A series of leadership development offerings, executive coaching and new hire programs equip our current and future leaders to deliver results to clients and colleagues.
A comprehensive business education offering is provided through more than 70 role-specific learning pathways. These learning pathways consist of a structured sequence of activities that help ensure consistent training across similar job roles worldwide. Client-facing staff participate in specialized advisory and sales training that enables them to more effectively meet clients’ needs. They also engage in training that fosters cross-divisional collaboration so that clients can benefit from solutions reflecting all our business divisions. Programs like these help drive our one-firm approach and leverage our unique product offerings.
All of our employees can access a broad range of professional development training, including learning modules on understanding, managing and controlling risk, general finance and mandatory legal and compliance topics.
In 2010, our employees participated in a total of 453,000 training experiences across all of the Business University’s offerings, averaging almost seven training experiences per employee.
We also invest in talent development and succession planning for the most critical roles across the firm. An annual firm-wide talent review helps to identify and build the skills and competencies of employees who are recognized to have leadership potential. In addition, potential successors for senior leadership roles are identified and tracked on a firm-wide basis.

Building a leadership culture

In 2010, the UBS Business University worked closely with the Group Executive Board (GEB) and the business divisions to put our new strategy into practice, and to further develop our leadership culture. The Business University also supported the design, development and roll out of our GEB-sponsored “Leading UBS forward” employee training program (which will continue into 2011). The program raises awareness and understanding of our strategy and identity, our values and our strategic principles. Face-to-face workshops open to all employees are led by “ambassadors” who are nominated senior employees from across the firm.



 
UBS values

Truth

Accuracy | Authenticity | Certainty
We behave with respect and integrity | We are accurate, realistic and accountable | We always act fairly and abide by the law

Clarity

Ease | Simplicity | Directness
We make it easy to do business with UBS | We are concise, precise and to the point | We are reliable and consistent

Performance

Achievement | Execution | Attainment
We will always give our best | We will perform to the highest professional standards | We will lead the market through superior service and execution



 

57


Table of Contents

Strategy, performance and responsibility
Our employees

These sessions provide an opportunity for everyone to better understand key components of our strategy, commit to changing our culture, and embed our values in their daily work.

Commitment

Meeting the needs of clients is a core objective for UBS, and relationships based on respect, trust and mutual understanding are the foundation for our success. The Code sets out the principles and practices that all employees are expected to follow. It also underscores the critical importance of responsible corporate behavior. In 2010, we put in place a process to affirm the Code and provided training to all employees. We are committed to upholding our corporate values of truth, clarity and performance. They are integrated into our corporate decision making and people management processes, and are aimed at shaping the daily actions of our employees.

Employee assistance

We are dedicated to being an attractive and supportive employer. Employee benefits such as insurance, pension, retirement and time off are competitive in our local markets. We also offer additional, innovative benefits to employees where practical. One example is that we encourage and support our employees’ efforts to volunteer in the many communities in which we operate.
To help employees better manage life and work issues, we offer employee assistance programs (EAP) in a number of locations. In the UK, the EAP provides access to specialist support on topics such as finances, family, bereavement and legal / consumer rights. A health and well-being program provides an on-site general practitioner, physiotherapist and dentist as well as occupational health services and an emergency back-up childcare and eldercare facility.
In the US, the EAP, known as the Work / Life Assistance Program, provides around-the-clock counseling and referral services to employees and their families to assist them in resolving issues that may affect their health, personal life, or job performance. The program also provides information about work-life effectiveness and offers referral services for child care, prenatal care, summer care, adoption, academic services and adult care. We also provide on-site childcare at our Stamford, Connecticut site and emergency / back-up child care in most other US locations.
Employee assistance initiatives in Asia Pacific are generally conducted on a country-by-country basis. In Hong Kong, for example, consultants from an external EAP provider work with employees and their immediate family members on issues of work and life stress, family, mental health, personal development or other personal or work-related challenges.
In Switzerland, assistance for current and retired employees, as well as family members, is provided through our HR Social Counseling and HR Retiree Services functions. Services include counseling for personal issues, difficulties in the workplace, sickness, financial difficulties and retirement. As an additional, complementary service for employees, an internal Ombudsman’s Office was opened in July 2010. HR Health Care considers local health and safety matters and coordinates the UBS Care Team. Work days

lost to accident or illness are tracked, with 18,915 and 103,635 days respectively accounted for in 2010.

In Switzerland, we have a long-standing initiative called COACH to help redeploy employees within UBS, or help them find jobs outside the firm in the event of a restructuring. Advisors in the COACH transfer and severance process provide support and assistance in finding a new job by working closely with our 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 Director level are eligible for the Social Partnership Agreement for employees in Switzerland (SOVIA CH). SOVIA CH 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 CH 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 our internal labor market, and to offer targeted, relevant support and career advice to these employees.

Employee representation

As part of our commitment to being a responsible employer, we partner with all of our employee representation bodies to create an active dialogue between employees and management. In 2010, we worked with the European works councils to implement changes in our performance management processes, entering into local consultations where appropriate.
The UBS Employee Forum (UBSEF) was established in 2002, and has representation from 18 countries across Europe, notably Austria, France, Germany, Luxembourg, Switzerland and the UK. The UBSEF facilitates the open exchange of views and information on pan-European issues that have the potential to impact our regional performance, prospects and operations, and fulfills EU Directive 94/45 on the establishment of a European Works Council. Local forums exist across Europe to address issues such as health and safety, changes to workplace conditions, pension arrangements and consultation on collective redundancies and business transfers.
In Switzerland, for example, the Employee Representation Committee (ERC) partners with UBS management in annual salary negotiations, and represents employee interests on specific topics outlined in the collaboration and co-determination clauses of personnel regulations. It also fosters an open dialogue between employees and management through a variety of channels and activities. ERC representatives are elected to represent employees whose work contracts are governed by Swiss law and the Agreement on Conditions of Employment for Bank Staff. The UK Employee Forum (UKEF), which is formed from elected representatives from all of our UK businesses and appointed management representatives, focuses on local economic, financial and social activities of concern to UK employees. It may also be used for defining workforce agreements affecting UK employees.
Collectively, the UBSEF, including the ERC and UKEF, represents over 40% of our global workforce.



58


Table of Contents

Strategy, performance and responsibility

Corporate responsibility

In 2010, we took strides to enhance our performance in all areas of corporate responsibility. An important foundation for this progress was the revision of our Code of Business Conduct and Ethics. It underscores the critical importance of responsible corporate behavior, and defines how we are to behave when dealing with our stakeholders.

In 2010, we made major steps in delivering on our commitment to our key principles, including our values of truth, clarity, and performance; our strategic principles of reputation, integration, and performance; and our financial objectives. We continued to address our societal commitments and responsibilities by contributing to the fight against money laundering, corruption and terrorist financing (AML), executing our environmental management program, implementing our human rights statement and by undertaking community investment activities. Under the guidance of the UBS Corporate Responsibility Committee (CRC), a Board of Directors (BoD) committee, various initiatives were initiated pertaining to the implementation of our Code of Business Conduct and Ethics (the Code). The CRC, which directed revisions to the Code in 2009, monitored its subsequent introduction and implementation across the firm, including mandatory employee certification and web-based training processes.

è Refer to www.ubs.com/responsibility for more information on the contents of this section

Governance, strategy, and commitments

Corporate responsibility governance

The CRC continually reviews stakeholders’ expectations of our firm with regard to corporate responsibility. Having assessed the potential consequences for the Group, the Committee recommends the appropriate actions to take in order to meet those ex-

pectations. The CRC thus supports the BoD’s efforts to ensure and advance our reputation for responsible corporate conduct. Headed by the Chairman of the BoD, the committee included three other BoD members. It is advised by a panel consisting of members of the Group Executive Board (GEB) and other senior managers. The members of the advisory panel participate in committee meetings and implement its recommendations.

As a key element of its mandate, the CRC reviews and oversees our corporate responsibility policies and guidelines, as well as the implementation of our corporate responsibility activities and commitments. The GEB is responsible for the development of our Group and business division strategies, as well as implementing approved new strategies. These include strategies pertaining to corporate responsibility, while various committees or boards are concerned with tasks and activities pertaining to particular aspects of corporate responsibility.
One example is the Environmental & Human Rights Committee, which is made up of, among others, both Group and divisional environmental representatives. They oversee the adoption of our environmental policy and provide guidance to our business divisions in supporting the “UBS Statement on Human Rights”. In 2010, this committee reviewed a number of significant environmental and social issues, and oversaw the development of our position on certain controversial activities (see below).
è Refer to www.ubs.com/environment for more information on our environmental and human rights governance



Corporate Responsibility at UBS

(CHART)

59


Table of Contents

Strategy, performance and responsibility
Corporate responsibility

Led by the Head of Global AML Compliance, our efforts to fight money laundering, corruption and terrorist financing are supported by a network of expert global business teams. We are streamlining our policies and processes to enhance consistency between business divisions, as well as to assess threats and risks within the business. We have developed extensive policies intended to prevent, detect and report money laundering, corruption and terrorist financing. These policies seek to protect the firm and our reputation from those who may be intending to use UBS to legitimize illicit assets.

è Refer to the discussion on combating financial crime below for more information on our AML activities

The global diversity team supports senior management and HR business partners in developing diversity-related strategies and goals for each business division. The implementation of these strategies and goals is monitored by the GEB. The global diversity team also coordinates regional efforts and integration into the HR process. Regional diversity heads, along with senior business managers, consider and design diversity and business-aligned plans that are linked to regional and divisional business and talent strategies. They also provide regional support for divisional management in assessing the progress made on relevant diversity objectives. Additionally, regional diversity heads support our numerous employee networks, including the development and coordination of diversity-related events which support regional diversity initiatives.

è Refer to the “Our employees” section of this report for more information on labor standards and diversity programs

Community affairs at UBS are founded on a global strategy defined by the GEB, and are based on a global community affairs guideline. Activities are governed by a central framework and regional guidelines and embedded in UBS’s regional structures. Every region has a dedicated community affairs team which coordinates charitable commitments by our firm and our employees. The Corporate Center ensures global coordination of these activities and also provides a central reporting structure to collate community investment data from across UBS as a whole.

è Refer to the discussion on community investment below for more information on our charitable and related activities

External commitments and initiatives

In implementing environmental and social standards and conventions into our business practices, we benefit from participating in various external initiatives, including the UN Global Compact and its local network in Switzerland; the Wolfsberg Group; the UNEP Finance Initiative (UNEP FI); the UN Principles for Responsible Investment (UNPRI); and the VfU (Association for Environmental Management and Sustainability in Financial Institutes). In November 2010, we hosted the annual UNEP FI / VfU Roundtable, which took place in Switzerland for the first time. At the event, key sustainability topics such as climate change and human rights as well as related topics, ranging from environmental, social and governance (ESG) ratings to sustainability education at universities, were considered and discussed among representatives from financial institutions and various stakeholders.
In June 2010, UBS participated in the triennial UN Global Compact Leaders Summit which, chaired by the UN Secretary-General, brought together 1,200 representatives from companies and civil society, government and the United Nations to explore the role of responsible business in achieving more sustainable and inclusive markets.
As part of expanding our external commitments, we concluded a three-year partnership with the Smith School of Enterprise and the Environment at Oxford University. The partnership supports our work towards achieving our own environmental commitments, as well as enhances our focus on the client-related aspects of climate change and other global environmental challenges we face. In particular, we will continue to fund and participate in the Smith School’s multi-year research project on low-carbon mobility.

External ratings, assurance and awards

Our performance and efforts were reflected in key external ratings and rankings, which take into account sustainability issues. We were named an index component for the Dow Jones Sustainability Index (DJSI) World, and are a member of the FTSE4Good index series. We have been a continuous member of both indices



Our corporate responsibility governance process

(CHART)

60


Table of Contents

Strategy, performance and responsibility

since their inception. In 2010, we increased our total score for the DJSI World, mainly due to substantially improved performance in the economic dimension and an increased performance in the environmental dimension.

We also featured in the Carbon Disclosure Project’s Carbon Performance Leadership Index (CPLI) for 2010. The CPLI comprises 48 companies within the FTSE Global Equity Index Series (Global 500) that have demonstrated commitment to strategy, governance, stakeholder communications, and, above all, emissions reduction in their disclosures to the Carbon Disclosure Project. The companies featured in the CPLI have the distinction of having the leading carbon performance scores among all Global 500 companies, indicating both high degrees of maturity in their climate change initiatives and achievement of their objectives. Our inclusion in the CPLI reflects the success of our climate change strategy, which was launched in 2006.
In 1999, we were the first bank to obtain ISO 14001 certification for our worldwide environmental management system. The management system covers the entire scope of our products, services and in-house operations, which may give rise to an environmental impact. It is audited annually and re-certified every three years by SGS, a leading inspection, verification, testing and certification company. These comprehensive audits verify that appropriate policies and processes are in place to manage environmental issues, and that they are executed in day-to-day practice. In 2010, SGS confirmed that a well-performing environmental management system, integrated in the organization and suitable for managing environmental risks and improving environmental performance on a continual basis, is in place.
We earned top-three places in each of the key rankings for brokerage firms in the 2010 Thomson Reuters Extel and UKSIF Socially Responsible Investing & Sustainability Survey: “Socially Responsible Investment (SRI) Research”, “Long-Term Thematic Research”, “Corporate Governance Research”, “Renewable Energy Research”, and “Integrated Research on Climate Change”.
In January 2010, our UK operations were awarded the Carbon Trust Standard for “reducing CO2 emissions year-on-year”. In the US, our building at 1285 Avenue of the Americas in New York City was awarded Leadership in Energy and Environmental Design for Existing Buildings CI Gold certification for their fit-out of the 12th floor. In Chicago, we improved our standard at 1 North Wacker to Silver certification.
Finally, in late 2010, we ranked fourth globally and second in Switzerland in the annual CSR Online Awards. The global survey examines the websites of 91 DJSI member companies, to see how they are used as platforms for communicating corporate social responsibility. According to the survey results, our adoption of web-based reporting, where our corporate responsibility website serves as our sustainability report, allows us to present vast and detailed corporate social responsibility information to stakeholders who wish to gain a comprehensive understanding of our corporate responsibility efforts.
è Refer to the “Our employees” section of this report for information on diversity awards

Stakeholder dialogue and capacity building

Dialogue with external parties is an important contributor in our understanding and approach to corporate responsibility. In 2010, communications with experts and stakeholders covered a series of topics ranging from broad (e.g. implementation of the Code) to more specific issues, including, for instance, discussions with non-governmental organizations on the topic of human rights.
Input on the corporate responsibility strategy and activities we pursue is also regularly sought from employees. An internal, cross-divisional network of experts plays a particularly important role, with its members providing critical input on stakeholder expectations and concerns. These contributions are provided to the CRC and add valuable features to the information gathered through other established monitoring channels.

Training and awareness-raising

Through education offerings and broader awareness-raising activities we ensure that our employees are aware of the importance of UBS’s social commitments. General information is published on our intranet and on the corporate responsibility website. In 2010, training and awareness-raising activities focused on the Code (notably a mandatory web-based training), and ensured that all employees were made aware of the firm’s corporate responsibility strategy and activities. Furthermore, some 10,000 employees participated in training on environmental issues, with over 8,600 receiving general education on our environmental policy and programs, and nearly 1,400 employees receiving specialist training targeted within their area of expertise and impact. Employee speaker sessions, exhibitions and lunchtime training sessions have been delivered in all regions alongside specific technical training for the environmental team. Employees are also required to undergo regular training in AML-related issues, which includes online training, awareness campaigns and seminars.

Responsible banking

We are focused on earning the trust of our stakeholders, aiming for sustainable earnings and creating long-term shareholder value. In ensuring that banking activities are undertaken in a responsible manner, and that products and services are suited to the needs and requirements of our clients, we aim to fulfill the heightened expectations of clients and stakeholders.

Combating financial crime

We believe it is of utmost importance to actively prevent potentially irresponsible or harmful actions. First and foremost, this means that our employees must uphold the law, adhere to relevant regulations, and behave in a responsible and principled manner.
In 2010, we continued to strengthen our efforts to both prevent and combat financial crime. By taking responsibility to preserve the integrity of the financial system, and our own operations, we are committed to assisting in the fight against money laundering, corruption and terrorist financing. We employ a rigorous risk-based approach to ensure our policies and procedures



61


Table of Contents

Strategy, performance and responsibility
Corporate responsibility

correspond with those risks, and that relationships which are classified as higher risk are dealt with appropriately. We adhere to strict know-your-clients regulations, which do not, however, seek to undermine clients’ legitimate right to privacy. Ongoing due diligence and monitoring is undertaken to assist in the identification of suspicious activities, including using advanced technology to assist in the identification of transaction patterns or unusual dealings which, if discovered, are promptly escalated to management or control functions. As part of our extensive and ongoing efforts to prevent money laundering, corruption and terrorist financing, enhancements to address more specific risks in relation to corruption and terrorist financing were implemented globally in 2010.

We are a founding member of the Wolfsberg Group, an association of 11 global banks established in 2000, which aims to develop financial services industry standards and related products for Know-Your-Customer, Anti-Money Laundering and Counter Terrorist Financing policies. The Group continues to update existing publications it has produced over the last nine years, and a revised version of the Trade Finance Principles will be published in 2011. Together with the other members of the Group, we continue to engage actively with the Financial Action Task Force (FATF), an inter-governmental body that develops and promotes national and international policies to combat money laundering and terrorist financing in the context of its consultation processes with the private sector. At the end of 2010, the FATF announced that it is reviewing the 40+9 FATF Recommendations, and the Wolfsberg Group will provide comments and feedback within the consultation process, which will extend into early 2011.

Managing environmental and social risks

Environmental and social risk is broadly defined as the potential reputational or financial damage resulting from transactions, products, services or investments that involve a party associated with environmentally or socially sensitive activities, or potential exposure to risks relating to environmental liabilities, human rights infringements, or changes in regulations.

Our environmental policy

(CHART)

We identify, manage and control these environmental and social risks in our business transactions. However, not all products and services we provide have the same risk potential. Therefore, we take a risk-based approach to environmental and social risk management, and regularly analyze our portfolio of products and services to assess their respective environmental and social risk potential. With our current business profile and operating environment, our potential for material risk is greater within the context of our lending, capital markets and mergers businesses, as well as our direct real estate and infrastructure investments. For these products and services, we have designed procedures and tools for the identification, assessment and management of environmental and social risks. These procedures and tools are integrated in the business divisions’ standard risk management processes, such as due diligence on transactions or investments, and ensuring that material environmental and social risks are identified, assessed and escalated in a timely fashion.
In terms of approval processes, the business divisions are responsible for the identification and assessment of risk, and for determining whether the identified risks are acceptable (in 2010, the business divisions referred 194 transactions to their environmental risk functions for a detailed environmental assessment). In the event that any such identified risks are also determined to create potential firm-wide reputational risk, they are escalated to the Group environmental representative for approval. We believe that our commitment to our clients and to society requires us to search for solutions whenever possible. We seek to help clients to move towards more environmentally and socially responsible practices by engaging with them. This can benefit their business and decrease financial and reputational risk. However, where engagement is not possible or successful, we may decline the transaction altogether.
Some of our clients operate in sectors characterized by ongoing environmental and social challenges. To support the consistent identification and assessment of such risks, we developed internal industry sector guidelines in 2009. The guidelines currently cover six sectors: chemicals, forestry products and biofuels, infrastructure, metals and mining, oil and gas, and utilities. These guidelines have been adopted by each of our business divisions in transactional and client due diligence processes.
In 2010, we decided to further strengthen our environmental and social risk management (including human rights) by identifying controversial activities where we will not do business, or only do business under stringent pre-established guidelines. Therefore we will not knowingly provide financial services to corporate clients, nor will we purchase goods or services from suppliers, where the use of proceeds, primary business activity, or acquisition target involves the following environmental and social risks:
Extractive industries, heavy infrastructure, forestry and plantations operations that risk severe environmental damage to or through:
 Endangered species of wild flora and fauna listed in Appendix 1 of the Convention on International Trade in Endangered Species;


62


Table of Contents

Strategy, performance and responsibility

 High conservation value forests as defined by the six categories of the Forestry Stewardship Council (FSC);
 Illegal use of fire: uncontrolled and/or illegal use of fire for land clearance;
 Illegal logging including purchase of illegal harvested timber (logs or roundwood);
 Palm oil production unless a member in good standing of the Roundtable on Sustainable Palm Oil and actively seeking to enhance certification of its production;
 Wetlands: on the RAMSAR list; and
 World heritage sites as classified by UNESCO.

All commercial activities that engage in, or threaten:

 Child labor: according to ILO-conventions 138 (minimum age) and 182 (worst forms);
 Forced labor: according to ILO-convention 29;
 Indigenous peoples’ rights in accordance with IFC Performance Standard 7; and
 Diamond mining and trading of rough diamonds unless Kimberly Process certified.

We also require enhanced due diligence and approval processes in certain other areas, such as coal mining practices that use mountain top removal (MTR) in the US Appalachian Mountains as an extraction method. As part of this review, we assess to what extent companies rely on MTR mining for their revenue generation, and we need to be satisfied that the client is committed to reducing its exposure to this form of mining over time.

Finally, Global Asset Management decided not to invest in companies involved in the production of weapons banned under the 2010 Convention on Cluster Munitions and the 2008 Convention on Anti-Personnel Mines. The policy applies and has been implemented for its actively managed Switzerland and Luxemburg domiciled retail and institutional funds.

Products and services

Equally important to managing environmental and social issues is providing financial products and services, which help clients manage their environmentally and socially-related business opportunities and risks. We seek to help investors benefit from related market opportunities, and by integrating environmental and social considerations, where relevant, in research and investment analysis. This offering currently stretches across our businesses in wealth management, investment banking, asset management, 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, “eco” mortgages.
Taking ESG issues into account in investment processes is of increasing interest to clients and consultants across all of our investment areas. Since 2009, Global Asset Management has demonstrated commitment to ESG as a signatory to the UN Principles for Responsible Investment (UNPRI). The Principles provide a voluntary framework by which all investors can incorporate ESG is-

sues into their decision-making and ownership practices to better align their objectives with those of society at large.
As part of a holistic service offering, our Wealth Management & Swiss Bank and Wealth Management Americas business divisions have established combined teams for philanthropy and values-based investing/SRI. The teams provide thought leadership, advice, products and solutions to assist our clients and prospects in delivering positive change through their philanthropy and investments.
Building on our existing SRI practice, we experienced increased client demand and have expanded our SRI offering by providing investment management and screening services. These services include sustainability-focused alternatives to conventional products, mission-related investing for donor-advised funds and private foundations, values-based portfolio management, such as mandate solutions for private clients with a strong focus on sustainability across all asset classes, portfolio review and proposals for the integration of sustainability into stock or bond selection.
Finally, our senior scientific advisor, Sir David King, continued to advise on all scientific matters with particular emphasis on global climate change and the challenges it poses to sustainable economic growth. Our clients benefit from Sir David’s expertise, and can get further insight into a variety of timely scientific topics through a quarterly series of science-focused bulletins. In 2010, these bulletins included briefs on climate change and air travel.

Investment products and advisory

In 2010, we continued to offer SRI funds and segregated mandates in response to sustained demand from a number of markets globally. The offering is diverse and includes products managed according to ESG criteria and theme-based approaches, which are focused on innovative companies providing solutions to the challenges of climate change, water scarcity and demographic change. We offer a range of products focusing on each individual theme and the flagship UBS (Lux) Equity Fund Global Innovators, which spans all three themes.
Additionally, we offer customized client portfolios in the form of segregated mandates/institutional accounts based on “negative” screening, which exclude certain controversial stocks or sectors based on their negative social or environmental impact, as perceived by the client. Our global platform and investment research capabilities enable us to offer such tailor-made solutions. In addition to fund management services, we provide stock-broking and account management services to alternative energy and SRI fund managers.
Finally, this offering includes SRI-managed accounts in the US, where ESG criteria are embedded into the fundamental investment process, or where clients have the ability to identify and exclude securities from ownership based on issue-oriented screens. This allows private clients to customize mandates to their particular social policy criteria. In addition, our open architecture approach also allows clients to invest in SRI bond, equity and microfinance products from leading third-party providers.



63


Table of Contents

Strategy, performance and responsibility
Corporate responsibility

In past years, we experienced increasing client demand for SRI and expanded our SRI product offering. As per 31 December 2010, SRI invested assets were CHF 25.7 billion, representing 1.2% of our total invested assets.

Engagement and voting rights

The Global Asset Management SRI team in Switzerland engages in dialogue with companies represented in the SRI funds they manage. The analysts and portfolio managers provide positive and negative feedback on relevant ESG issues that may impact investment performance, as part of regular communication with corporate management teams. When controversial information on the company’s environmental and social performance is received, the SRI analysts contact the company and provide management with a chance to demonstrate what measures have been taken to solve the issues. If the company can demonstrate how it is dealing with the problem, and what progress has already been achieved, an investment is possible. These engagement activities are, in addition to the positive screening processes, applied to the SRI funds.
We believe that voting rights have economic value and should be treated accordingly. Global Asset Management, wherever possible, seeks to influence the corporate responsibility and corporate governance practices of the companies it invests in. Where we have been given the discretion to vote on behalf of our clients, we will exercise our delegated fiduciary responsibility by voting in a manner we believe will most favorably impact the value of their investments. Good corporate governance should, in the long term, lead towards both better corporate performance and improved shareholder value. As such, we expect board members of companies in which we have invested to act in the service of their shareholders, view themselves as stewards of the company, exercise appropriate judgment and practice diligent oversight of the management of the company.
In 2010, Global Asset Management in Switzerland launched UBS Voice, a free service enabling holders of Swiss institutional funds to express voting preferences ahead of the shareholders’ assembly of major Swiss corporations, to be used as additional input in the voting decision of the funds management company.

Research

Our SRI research teams focus on a range of ESG issues, with a view to understanding what impact developing secular trends such as demographics, resource constraints, and other potential environmental and social constraints might have upon the sectors and companies covered by our analysts.
Our SRI research teams were established in each of our business divisions to serve their respective clients. In the Investment Bank, the equity research team launched major UBS publications on water in 2006, climate change in 2007, and corporate governance in 2008. In 2010, the team launched the ESG Analyzer, a publication that helps clients take ESG issues into consideration at every stage of the investment process. 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 our 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.

Financing and advisory services

In 2010, we announced the formation of the Renewable Energy and Cleantech Group (RECG) within the investment banking department and the environmental markets group (EMG) within global capital markets to further focus our efforts and build upon our successes in this important sector. RECG provides capital raising and strategic advisory services to renewable energy and cleantech companies around the world, including those in the solar, wind and biofuels sectors. EMG will work with cleantech, utility, and industrial clients on the application of environmental policy analytics to financial decision making.
Since 2006, we have led over 35 financing transactions, raising more than USD 20 billion, and advised on over a dozen strategic



                     
Socially responsible investments invested assets1 
                  % change 
     For the year ended from 
CHF billion, except where indicated
 GRI2   31.12.10   31.12.09   31.12.08   31.12.09 
 
UBS
      2,152   2,233   2,174   (4)
 
UBS SRI products and mandates
                    
 
positive criteria  FS11   2.00   2.72   2.12   (36)
 
exclusion criteria  FS11   21.27   22.44   14.05   (6)
 
Third-party3
  FS11   2.40   1.69   1.85   30 
 
Total SRI invested assets
  FS11   25.674  26.85   18.03   (5)
 
Proportion of total invested assets (%)5
      1.19   1.20   0.83     
 
1 The terms Socially Responsible Investing and Values-Based Investing are used interchangeably. All figures are based on the level of knowledge as of January 2011.  2 Global Reporting Initiative (see also www.globalreporting.org). FS stands for the Performance Indicators defined in the GRI Financial Services Sector Supplement.  3 SRI products from third-party providers apply either positive or exclusion criteria or a combination thereof.  4 2.4% of reported assets have newly been included in 2010 due to adjustments in the reporting boundaries.  5 Total SRI / UBS’s invested assets.

Socially responsible investments:are products that consider environmental, social or ethical criteria alongside financial returns. SRI can take various forms, including positive screening, exclusion or engagement.
 
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:one or several 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.



64


Table of Contents

Strategy, performance and responsibility

transactions for renewable energy and cleantech companies. During 2010, we led the USD 644 million initial public offering of China Datang Renewable Power Company, China’s second largest wind power generation company; advised Hanwha Chemical Corporation on their USD 370 million acquisition of a 49.9% stake in Solar-fun, one of the world’s leading manufacturers of solar modules; and led equity financings totaling USD 355 million for GT Solar, a major provider of manufacturing equipment to the solar sector.

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 that are able to reduce their emissions below their cap have the ability to sell their unused quota to other entities, thereby creating an emissions market. Through the use of financial. instruments, we are able to help clients manage their exposure to the emissions markets. UBS Exchange Traded Derivatives is an active member of the major emission exchanges in Europe and North America, and offers execution and full service clearing for contracts on EU ETS allowances, UN Certified Emissions Reductions, Regional Greenhouse Gas Initiative allowances, and permits for nitrogen oxide and sulfur dioxide.

Corporate responsibility in operations

We continue to build on a long heritage of managing our internal environmental impact, which, since the 1970s, has focused on increasing energy efficiency, reducing consumption of paper and other resources, actively managing waste volumes and encouraging our employees to replace air travel with more sustainable options. Now delivering the program through a network of global, regional and local environmental specialists, we manage an environmental management system accredited to ISO 14001 and have greenhouse gas emissions data externally verified to ISO 14064.

Environmental and CO2 footprints

We directly impact the environment in a number of ways: our businesses consume electricity and fossil fuels; employees travel for business purposes, 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; therefore, we have a series of measures to efficiently manage our environmental impact.

CO2 strategy and emission reduction

In February 2006, the GEB decided to set a Group-wide CO2 emission reduction target of 40% below 2004 levels by 2012. We seek to achieve this target by:
 adopting in-house energy efficiency measures that reduce energy consumption in the buildings we operate;
 increasing the proportion of renewable energy used limiting emissions at source; and

 off setting CO2 emissions that cannot be reduced by other means (i.e. business air travel).
   
As a result, we further reduced our 2010 CO2 emissions, with an overall global reduction now reaching 33.5% below 2004 levels, another step toward achieving our 2012 target.

Energy consumption and efficiency

Energy consumption represents an important environmental impact area, and is the biggest contributor to our overall greenhouse gas emissions. In line with our wider business strategy, improvements in energy efficiency have helped to reduce both emissions and costs. Energy consumption is down year-on-year through a combination of building portfolio management, more dynamic building controls, data center efficiency and improved employee housekeeping. Our IT-driven initiatives contributed significantly to these energy savings, most notably through a server consolidation program, and the early phase of our Desktop Transformation Program that is deploying the latest in business PC hardware and software.

Renewable energy

In addition to our energy efficiency programs, we are reducing our use of carbon-intensive energy by including a high proportion of renewable energy. The percentage of renewable energy and district heating purchases was 43% in 2010.

Business travel and offsetting CO2 emissions

Having experienced a significant reduction (approximately 40%) in business-related travel in 2009 due to difficult market conditions and focus on reducing costs, it is encouraging to see that, despite an improving business landscape, employee air travel in 2010 has remained low and not returned to 2008 levels. We continue to actively promote audio and video conferencing, investing in the latest ‘telepresence’ technology to further improve quality and user experience. Recognizing the benefits of face-to-face meetings in a sector where building lasting client relationships is essential, we

Our greenhouse gas (GHG) footprint

(BAR CHART)



65


Table of Contents

Strategy, performance and responsibility
Corporate responsibility

Environmental indicators per full-time employee

                     
 
  Unit   2010 Trend   2009   2008 
 
Direct and intermediate energy kWh / FTE   12,633  ì   11,986   11,792 
 
Business travel Pkm / FTE   8,743  é   7,016   10,281 
 
Paper consumption kg / FTE   119  î   130   167 
 
Waste kg / FTE   251  î   265   298 
 
Water consumption m3 / FTE   33.3  è   31.9   28.1 
 
CO2 footprint
 t / FTE   3.66  é   3.12   3.07 
 
Legend:FTE = full-time employee; kWh = kilowatt hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = ton

continue to encourage employees to blend travel and technology to optimize work-life balance and environmental impact.

For travel within Europe, we see a continued shift towards high speed rail travel in preference to air. The marketing and events team have adopted the environmental guidelines for client conferences and now consider the impact of delegate travel, hotels, venue features and catering as part of their logistics and planning.
Once again in 2010, we have offset CO2 emissions resulting from business travel. Working with reputable intermediaries and a panel of internal specialists, we select projects which meet our carbon volume requirements while providing positive community benefits. Schemes selected include a gold standard wind power project in Turkey and a hydro power project in Brazil.

Paper and waste

We are making a conscious effort to continuously reduce our paper consumption and waste generation. Double sided printing and copying is now default in many of our offices and, combined with an ongoing shift towards the distribution of electronic documents, has resulted in a reduction in paper used per employee of 37% since 2006. The share of office paper from Forest Stewardship Council or recycled sources has increased to 43%, with a new target for this to exceed 50% by the end of 2012. The waste recycling ratio remained flat at 54%. The implementation of bin-less offices in many larger locations will contribute to achieving our ambitious 2012 target of 70%.

Supply chain management

In 2010, we spent over CHF 7.3 billion purchasing products and services ranging from office maintenance across IT infrastructure to components such as stationery. Responsible supply chain management (RSCM) principles continue to embed UBS ethics and values with our suppliers, contractors, service partners and project teams. As part of this commitment we are continuing to improve our ability to identify, assess and monitor supplier practices in the areas of human and labor rights, the environment and corruption. In 2010, 265 suppliers were screened according to social and environmental criteria, 114 procurement and sourcing officers were trained, and responsible supply chain requirements were included in the arrangement with relevant suppliers who were awarded contracts. Also in 2010, we integrated RSCM principles into our global supply chain policy and into the centralized Supply & Demand Management organization.

Community investment

We are continuing the well-established tradition of supporting the advancement and empowerment of organizations and individuals within the communities we do business in. From an early focus on direct cash donations, we have progressed to a position where our community investment program encompasses employee volunteering, matched-giving schemes, in-kind donations, disaster relief efforts and / or partnerships with community groups, educational institutions and cultural organizations in all of our business regions.

Community affairs

In 2010, direct cash donations by UBS and our affiliated foundations to carefully selected non-profit partner organizations and charities totaled CHF 27.6 million. These donations were assigned, primarily, to our continuing Community Affairs key themes, “Empowerment through Education” and “Building Stronger Communities”, with some contributions to other activities, in particular disaster relief. In response to the devastating earthquake in Haiti, UBS and its employees donated over CHF 3 million to a number of organizations providing disaster relief. The funds have been used to rebuild schools and hospitals, as well as provide basic needs to many Haitians. These donations combined with other significant activities, notably the volunteering activities of employees, have continued to provide substantial benefit to projects and people around the world (as highlighted in the examples below).
Across all business regions, our employees continue to play a very active role in our community investment efforts, in particular, through their volunteering activities. In 2010, over 11,300 employees spent nearly 81,000 hours volunteering. We support their commitment by offering up to two working days a year for volunteering efforts, and also match employee donations to selected charities.
In Switzerland, our community investment efforts are also advanced by the UBS Culture Foundation, the UBS Foundation for Social Issues and Education, and the association A Helping Hand from UBS Employees. In 2010, these organizations have again made valuable contributions to important social causes, including fostering humanities and the creative arts, supporting communities in need, and helping disabled and disadvantaged people.



66


Table of Contents

Strategy, performance and responsibility

Environmental indicators1

                         
 
           20102       20092  20082
 
      Absolute  Data      Absolute  Absolute 
  GRI3  normalized4  quality5  Trend6  normalized4  normalized4 
 
Total direct and intermediate energy consumption7
     859 GWh   ***   ê  957 GWh  1,016 GWh 
 
Total direct energy consumption8
  EN3  137 GWh   **   è  132 GWh  127 GWh 
 
natural gas      82.6%   **   è   84.6%   83.3% 
 
heating oil      15.0%  ***   é   10.9%   12.2% 
 
fuels (petrol, diesel, gas)      2.3%   ***  ê   4.5%   4.5% 
 
renewable energy (solar power, etc.)      0.02%   ***  ê   0.05%   0.03% 
 
Total intermediate energy purchased9
  EN4  722 GWh   ***  ê  825 GWh  890 GWh 
 
electricity from gas-fired power stations      16.3%   **   é   10.6%   11.7% 
 
electricity from oil-fired power stations      4.1%   ***   é   2.9%   3.7% 
 
electricity from coal-fired power stations      17.1%   **   è   17.5%   18.4% 
 
electricity from nuclear power stations      11.5%   **   é   9.5%   11.1% 
 
electricity from hydroelectric power stations      29.1%   ***   è   28.0%   25.8% 
 
electricity from other renewable resources      13.5%   ***   ê   23.6%   23.1% 
 
district heating      8.5%   ***   ì   7.8%   6.2% 
 
Share of renewable energy and district heating
      43%   ***   ê   51%   48% 
 
Total business travel
  EN29  595 m Pkm  ***   ì  560 m Pkm  886 m Pkm 
 
rail travel10
      1.9%  ***   ê   3.7%   3.5% 
 
road travel10
      0.5%   **   ê   1.0%   0.6% 
 
air travel      97.6%   ***   è   95.3%   96.0% 
 
Number of flights (segments)
      258,766   ***   è   258,396   398,369 
 
Total paper consumption
  EN1   8,076 t   ***   ê   10,349 t   14,403 t 
 
post-consumer recycled  EN2   21.9%   ***   é   16.7%   16.2% 
 
new fibers FSC11
      20.9%   ***   é   17.1%   16.6% 
 
new fibers ECF +TCF11
      57.0%   ***   ê   65.9%   66.8% 
 
new fibers chlorine bleached      0.3%   **   ê   0.4%   0.4% 
 
Total waste
  EN22   17,053 t   ***   ê   21,183 t   25,644 t 
 
valuable materials separated and recycled      53.7%   ***   è   54.4%   54.6% 
 
incinerated      18.1%   ***   é   12.5%   14.3% 
 
landfilled      28.2%   **   î   33.1%   31.1% 
 
Total water consumption
  EN8   2.27 m m3   **   î   2.55 m m3  2.42 m m3
 
Greenhouse Gas (GHG) Emissions in CO2e
                        
 
Direct GHG emissions (Scope 1)12
  EN16   27,153 t   **   è   25,723 t   26,490 t 
 
Gross indirect GHG emissions (Gross Scope 2)12
  EN16   253,556 t   ***   ê   298,338 t   313,582 t 
 
Gross other indirect GHG emissions (Gross Scope 3)12
 EN17   89,957 t   ***   è   87,867 t   129,364 t 
 
Total Gross GHG Emissions
      370,666 t   ***   ê   411,928 t   469,436 t 
 
GHG reductions from renewable energy13
      61,889 t   ***   ê   99,248 t   109,238 t 
 
CO2e offsets (business air travel)14
      69,152 t   ***   ì   63,579 t   96,000 t 
 
Total Net GHG Emissions (GHG Footprint)15
      239,624 t   ***   è   249,101 t   264,197 t 
 
Legend:GWh = gigawatt hour; Pkm = person kilometer; t = ton; m3 = cubic meter; m = million; CO2e = CO2 equivalents

1 All figures are based on the level of knowledge as of January 2011.2 Reporting period: 2010 (1 July 2009–30 June 2010), 2009 (1 July 2008–30 June 2009), 2008 (1 July 2007–30 June 2008).3 Global Reporting Initiative (see also www.globalreporting.org). EN stands for the Environmental Performance Indicators as defined in the GRI.4 Non-significant discrepancies from 100% are possible due to roundings.5 Specifies the estimated reliability of the aggregated data and corresponds approximately to the following uncertainty (confidence level 95%): up to 5%–***, up to 15%–**, up to 30%–*. Uncertainty is the likely difference between a reported value and a real value.6 Trend: at a ***/**/* data quality, the respective trend is stable (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% (é,ê).7 Refers to energy consumed within the operational boundaries of UBS.8 Refers to primary energy purchased which is consumed within the operational boundaries of UBS (oil, gas, fuels).9 Refers to energy purchased that is produced by converting primary energy and consumed within the operational boundaries of UBS (electricity and district heating).10 Rail and road travel: Switzerland only.11 Paper produced from new fibers. FSC stands for Forest Stewardship Council, ECF for Elementary Chlorine Free and TCF for Totally Chlorine Free.12 Refers to ISO 14064 and the “GHG (greenhouse gas) Protocol Initiative” (www.ghgprotocol.org), the international standards for GHG reporting: scope 1 accounts for direct GHG emissions by UBS; gross scope 2 accounts for indirect GHG emissions associated with the generation of imported/purchased electricity (grid average emission factor), heat or steam; gross scope 3 accounts for other indirect GHG emissions associated with business travel, paper consumption and waste disposal.13 GHG savings by consuming electricity from renewable sources.14 Offsets from third-party GHG reduction projects measured in CO2 equivalents (CO2e). These offsets neutralize GHG emission from our business air travel.15 GHG footprint equals gross GHG emissions minus GHG reductions from renewable energy and CO2e offsets.

67


Table of Contents

Strategy, performance and responsibility
Corporate responsibility

Client foundation

Charitable organizations and projects across the globe – usually in regions where UBS does not maintain a business presence – also benefit from the support of the UBS Optimus Foundation, a nonprofit charitable organization which offers UBS clients a broad range of options for engaging in humanitarian activities. In 2010, the Foundation’s tenth anniversary year, Optimus can look back with justifiable pride on a success story of growth and continuous development. Now one of Switzerland’s largest charitable foun-

dations, it has contributed over CHF 80 million to more than 170 projects in over 60 countries. All of the projects which it supports are dedicated to improving the lives of children around the world. Employing a sophisticated funding strategy, it plays a key role in bringing about positive social change in the areas which it targets: “global health” and “education and protection”. As UBS bears all the administrative costs related to Optimus, clients can be sure that 100% of every donation they make goes directly to the projects themselves.



68


Table of Contents

Strategy, performance and responsibility

 
Examples of UBS’s community investment activities across the globe

Americas– In 2010, we launched two unique programs. UBS brought the Big Apple Circus to Stamford, Connecticut. The non-profit circus is committed to invigorating the communities it serves by sharing the joys of a classical circus, and providing a range of community and educational outreach programs to local hospitals and schools. UBS clients, employees and their friends and families, as well as local residents, enjoyed 25 performances over the summer. Leveraging our long-standing Art Basel Miami Beach (ABMB) sponsorship, we launched miART, an art education program created to support the local Miami community year-round. MiART engaged more than 150 middle school students in ABMB through interactive activities, and will bring art education to underserved youth artists through a year-long mentoring program. The creation of a fundraising website to benefit miART and art supply drives in local UBS branches provided employees with the opportunity to support this program.

One of our signature volunteer efforts is the annual Building Brighter Futures’ Community Engagement Month in October in the US. More than 25 communities participated in 2010, with the goal of supporting community needs in the areas of education, the economy and the environment. Over 1,300 UBS employees participated in locally-driven volunteer activities. Additionally, we have longstanding volunteer partnerships with the Special Olympics and the Power Lunch reading program, which operates in four US cities. According to Maryellen Frank, an eleven-year veteran Power Lunch volunteer, “there are some days when it

doesn’t feel possible to break away from the office and change your focus, but when you walk into the room and your young reading partner’s face lights up, it’s all worthwhile. Spending that hour truly giving yourself has its own benefits. I usually return to the desk refreshed and ready for action.”

Asia Pacific– Building upon our ground-breaking Community Leadership Experience, developed in partnership with Charities Aid Foundation India in 2008, UBS subsequently developed and launched a program for Singapore non-profit sector leaders in partnership with the Centre for Non-Profit Leadership in 2009. Now in its second year, the Experience program combines a two-day residential retreat workshop with one-to-one partnering between UBS senior executives and executives of non-governmental organizations. The opportunity for both sets of leaders to interact and share experiences has proven to be highly successful, resulting in a deeper understanding of the challenges faced by the community in Singapore. Additional workshops focusing on common human resource issues, such as talent recruitment and retention, have also been organized as part of the Experience program.

Europe, Middle East and Africa– Throughout the region, we continue to support education and regeneration efforts, particularly in areas close to where we conduct our business. In Poland, over 75% of staff were engaged in support for low income and disadvantaged communities, and entered into an innovative arrangement with col-

leagues in Luxembourg to increase our contribution. In the UK, this year the firm was amongst a very small number of firms to receive three Business in the Community National Big Tick Awards for our Community Affairs program; our flagship EMEA partnership with the Bridge Academy – a local secondary school sponsored by UBS; and our employee volunteering regeneration partnership through Project Shoreditch (in Hackney, East London). In addition, a long-standing community partnership dating back to 1992 was awarded the prestigious Dragon Award by the Lord Mayor of London. The partnership reflects UBS’s overall commitment to corporate responsibility, encompassing financial contributions, employee expertise, capacity building and creating links to other community initiatives. It has led to a significant impact on the economy of a disadvantaged area of the UK, encouraging inward investment of GBP 1.5 million.

Switzerland– In October, more than 180 employees participated in the traditional Finance Forum sponsored walk on the shores of Lake Zurich. They were joined by 1,100 colleagues from other Swiss financial and IT firms. With CHF 50,000 raised in just two hours, our employees achieved the highest amount of all participating companies. The total amount raised by the walk (CHF 187,000) was donated to the Swiss Multiple Sclerosis Society which supports research into this disease and advises and helps families of afflicted children free of charge.

è Refer to www.ubs.com/community for more information on our community investment activities



 

69


Table of Contents

Strategy, performance and responsibility
Corporate responsibility

   
(SGS LOGO)
 ASSURANCE STATEMENT

SGS STATEMENT ON ASSURANCE OF UBS GRI Sustainability Disclosure 2010

SCOPE

SGS was commissioned by UBS to conduct an independent assurance of the GRI based Sustainability Disclosure for 2010. The scope of our engagement was limited to the GRI disclosure requirements and indicators as contained in the GRI index published atwww.ubs.com/gri. The scope of the assurance, based on the SGS Sustainability Report Assurance methodology, included all text and 2010 data in accompanying tables, contained in the printed Annual Report 2010 and referenced information on the webpage of UBS as quoted in the GRI index. Earlier data were not included in this assurance process.

CONTENT

The information in the report and on the webpage and its presentation are the responsibility of the directors or governing body and the management of the organization. SGS has not been involved in the preparation of any of the material included in the GRI index and acted as an independent assuror of the data and text using the Global Reporting Initiative Sustainability Reporting Guidelines 2006 as a standard. The content of this Assuror’s Statement and the opinion(s) it gives is the sole responsibility of SGS.

ASSUROR INDEPENDENCE AND COMPETENCIES

The SGS Group of companies is the world leader in inspection, testing and verification, operating in more than 140 countries and providing services including management systems and service certification; quality, environmental, social and ethical auditing and training; environmental, social and sustainability report assurance. SGS affirm our independence from UBS, being free from bias and conflicts of interest with the organization, its subsidiaries and stakeholders. The assurance team was assembled based on their knowledge, experience and qualifications for this assignment.

METHODOLOGY

The SGS Group has developed a set of protocols for the Assurance of Sustainability Reports based on current best practice guidance provided in the Global Reporting Initiative Sustainability Reporting Guidelines (2006). In a separate engagement, SGS has certified the environmental management system in accordance with ISO 14001:2004 and verified the greenhouse gas emissions in accordance with ISO 14064. The assurance comprised a combination of pre-assurance research; interviews with relevant employees; documentation and record review and validation with external bodies and/or stakeholders where relevant. Financial data drawn directly from independently audited financial accounts has not been checked back to its source as part of this assurance process.

OPINION

On the basis of the methodology described, we are satisfied that nothing has come to our attention that causes us not to believe that the information and data contained within the Disclosure referenced in the GRI index 2010 is accurate, reliable and provides a fair and balanced representation of UBS’s sustainability activities in 2010. We are satisfied that the Sustainability Disclosure as referenced in the GRI index meets the requirements of level A+ of the GRI (2006), as declared. At the same time it fulfills the requirements for Communication on Progress (COP) under the UN Global Compact. Recommendations regarding the further development of the sustainability disclosure and management system at UBS were communicated to the firm in an internal report.

SIGNED FOR AND ON BEHALF OF SGS

   
(-s- DR. CHRISTINE JASCH)
 (-s- ELVIRA BIERI)
Dr. Christine Jasch Elvira Bieri
Lead auditor, SGS Lead auditor, SGS
   
Zurich, 18 February 2011 WWW.SGS.COM


 

70


Table of Contents

UBS business
divisions and
Corporate Center

 

 

 

 

 

 

 

 

 

 

 

 

 


Table of Contents

UBS business divisions and
Corporate Center

 

  Starting from 2010, external reporting of Wealth Management & Swiss Bank was revised to better reflect management structure and responsibilities, and was split into two business units: Wealth Management and Retail & Corporate. 
     
  The Investment Products and Services (IPS) unit was created to provide comprehensive service to Wealth Management clients with complex needs using the capabilities and expertise of the entire firm. 
     
  In the Investment Bank, the implementation of the securities platform to unify our capabilities in equities and fixed income, currencies and commodities combined previously distinct trading and sales activities into a holistic business with the goal of improving our market position and overall client service. 
     
  In the first half of the year, we took an important step to expand our presence into emerging markets by agreeing to acquire Link Investimentos, one of the largest independent broker-dealers in Brazil. 
     
  The Global Family Office unit was established as a joint venture between Wealth Management and the Investment Bank to provide a cross-divisional platform for the delivery of integrated products and services. 

 

                 
Performance from continuing operations before tax 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
Wealth Management  2,308   2,280   3,631   1 
 
Retail & Corporate  1,772   1,629   2,382   9 
 
Wealth Management & Swiss Bank  4,080   3,910   6,013   4 
 
Wealth Management Americas  (130)  32   (823)    
 
Global Asset Management  516   438   1,333   18 
 
Investment Bank  2,197   (6,081)  (34,300)    
 
Treasury activities and other corporate items  793   (860)  19     
 
Operating profit from continuing operations before tax
  7,455   (2,561)  (27,758)    
 

 

 


Table of Contents

Wealth Management & Swiss Bank

Wealth Management –In 2010, pre-tax profit increased 1% to CHF 2,308 million from CHF 2,280 million in 2009, mainly due to a 3% decrease in operating expenses. Total operating income in 2010 was CHF 7,356 million, down 2% from CHF 7,471 million a year earlier. Operating expenses declined 3% to CHF 5,049 million from CHF 5,191 million.

During 2010, net new money outflows declined to CHF 12.1 billion from CHF 87.1 billion in 2009. International wealth management net new money outflows declined significantly to CHF 12.9 billion from CHF 79.9 billion. While Europe saw ongoing net outflows, net inflows were recorded in the Asia Pacific region as well as globally from ultra high net worth clients. Swiss wealth management reported net inflows of CHF 0.8 billion in 2010 compared with CHF 7.2 billion net outflows the year before.

Retail & Corporate –In 2010, pre-tax profit increased 9% to CHF 1,772 million compared with CHF 1,629 million in 2009, mainly due to a decrease in operating expenses. Total operating income in 2010 was CHF 3,870 million, down 1% from CHF 3,918 million a year earlier. Operating expenses declined 8% to CHF 2,098 million from CHF 2,289 million as a result of cost-cutting measures initiated in 2009.

Wealth Management Americas

Wealth Management Americas reported a pre-tax loss of CHF 130 million in 2010 compared with a pre-tax profit of CHF 32 million in 2009, due to higher litigation provisions. Operating income of CHF 5,564 million was essentially flat compared with CHF 5,550 million in 2009, but increased 4% in US dollar terms. In 2010, operating expenses increased 3% to CHF 5,694 million from CHF 5,518 million, and included CHF 162 million in restructuring charges compared with CHF 152 million in restructuring charges in 2009.

Net new money outflows for Wealth Management Americas were CHF 6.1 billion in 2010 compared with CHF 11.6 billion in the prior year. The Wealth Management US business saw net new money outflows of CHF 5.5 billion in 2010 compared with CHF 9.8 billion in 2009. We experienced net new money outflows during the first half of 2010, but reported net new money inflows in the second half of 2010 due to improved financial advisor retention and improved net new money inflows from financial advisors employed with UBS for more than one year.

Global Asset Management

Pre-tax profit for 2010 was CHF 516 million compared with CHF 438 million in 2009. Excluding a net goodwill impairment charge of CHF 191 million related to the sale of UBS Pactual in 2009, the pre-tax profit for 2010 would have decreased by CHF 113 million compared with 2009. Total operating income was CHF 2,058 million in 2010, compared with CHF 2,137 million in 2009. Total operating expenses were CHF 1,542 million in 2010, compared with CHF 1,698 million in 2009.

Net new money inflows were CHF 1.8 billion in 2010 compared with net outflows of CHF 45.8 billion in 2009. Net inflows from third parties were CHF 18.2 billion in 2010 compared with net outflows of CHF 5.1 billion in 2009. Net outflows from clients of our wealth management businesses were CHF 16.4 billion in 2010 compared with net outflows of CHF 40.7 billion in 2009.

Investment Bank

In 2010, we recorded a pre-tax profit of CHF 2,197 million compared with a pre-tax loss of CHF 6,081 million in 2009, primarily as a result of increased revenues in fixed income, currency and commodities, a significant reduction in net credit loss expenses and lower own credit losses. Total operating income in 2010 was CHF 12,010 million compared with CHF 3,135 million in the prior year. Net credit loss expense in 2010 was nil compared with net credit loss expense of CHF 1,698 million in 2009. Total operating expenses were CHF 9,813 million in 2010, compared with CHF 9,216 million in 2009.

Investment banking revenues were CHF 2,414 million in 2010, marginally down from CHF 2,466 million in the previous year. Revenues in equities were CHF 4,469 million, down 9% from CHF 4,937 million in 2009. Revenues in the fixed income, currencies and commodities business were positive CHF 5,675 million in 2010 compared with negative CHF 547 million in 2009, when the business was materially affected by losses on residual risk positions.

Corporate Center

The Corporate Center allocates operating expenses to the business divisions according to service consumption. In 2010, the Corporate Center had a cost base excluding variable compensation of just below CHF 7.5 billion. The Corporate Center has improved Group-wide cost management, and has implemented simple service delivery models with clear responsibilities. At the end of 2010, across all shared services functions, the Corporate Center had approximately 19,400 employees.



 

 


Table of Contents

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

Wealth Management & Swiss Bank

                 
Business division reporting 
  As of or for the year ended % change from 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08  31.12.09 
 
Income  11,291   11,523   15,413   (2)
 
Credit loss (expense) / recovery  (64)  (133)  (392)  (52)
 
Total operating income
  11,226   11,390   15,021   (1)
 
Personnel expenses  4,778   5,197   5,430   (8)
 
General and administrative expenses  2,101   2,017   3,295   4 
 
of which: impact from US cross-border case
          917     
 
Services (to) / from other business divisions  (61)  (90)  (73)  32 
 
Depreciation of property and equipment  309   289   323   7 
 
Amortization of intangible assets  19   67   33   (72)
 
Total operating expenses
  7,147   7,480   9,008   (4)
 
Business division performance before tax
  4,080   3,910   6,013   4 
 
of which: impact from US cross-border case
          (917)    
 
of which: business division performance before tax excluding US cross-border case
  4,080   3,910   6,930   4 
 
                 
Key performance indicators1
                
 
Pre-tax profit growth (%)  4.3   (35.0)  (29.6)    
 
Cost / income ratio (%)  63.3   64.9   58.4     
 
Net new money (CHF billion)2
  (10.0)  (89.8)  (107.1)    
 
                 
Additional information
                
 
Average attributed equity (CHF billion)3
  9.0   9.0   9.5   0 
 
Return on attributed equity (RoaE) (%)  45.3   43.4   63.3     
 
BIS risk-weighted assets (CHF billion)  43.4   48.6   62.3   (11)
 
Return on BIS risk-weighted assets, gross (%)  24.3   21.7   22.3     
 
Goodwill and intangible assets (CHF billion)  1.5   1.6   1.7   (6)
 
Invested assets (CHF billion)  904   960   955   (6)
 
Client assets (CHF billion)  1,799   1,844   1,711   (2)
 
Personnel (full-time equivalents)  27,752   27,548   31,016   1 
 
1 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  2 Excludes interest and dividend income.  3 Refer to the “Capital management” section of this report for more information about the equity attribution framework.

74


Table of Contents

UBS business divisions and
Corporate Center

Wealth Management
Business description

With a presence in over 40 countries and headquartered in Switzerland, Wealth Management provides clients with financial advice, products and tools to fit their individual needs.

Business

Wealth Management delivers comprehensive financial services to wealthy private clients around the world – except those served by Wealth Management Americas. Our clients benefit from the entire spectrum of UBS resources, ranging from asset management to estate planning and corporate finance advice, in addition to the specific wealth management products and services outlined below. An open product platform provides clients with access to a wide array of products from third-party providers that complement our product lines.

With CHF 768 billion of invested assets at the end of 2010, we are one of the largest wealth managers in the world.

Strategy and clients

Our goal is to be the bank of choice for wealthy individuals worldwide. We offer sophisticated products and services to private clients, focusing in particular on the ultra high net worth and high net worth client segments. In addition, we also provide wealth management solutions, products and services to financial intermediaries.

We believe we are well positioned to capture growth opportunities in all markets, particularly in Asia, emerging markets and the global ultra high net worth segment, all areas where we expect to see the fastest market growth. Due to our strong local presence in leading global financial centers, we are in an excellent position to respond to increasing client demand for providing services in more than one jurisdiction (multi-shoring). Given our posi-

tion as one of the largest banks for ultra high net worth and high net worth clients, we aim to grow faster than the average global wealth market, while increasing our profitability through enhanced gross margins and targeted investments.
We continue to build on our integrated client service model to identify investment opportunities that are tailored to individual client needs, and we intend to continue growing our client advisor base as we target 4,700 advisors in the medium term, especially in growth regions. In an increasingly complex regulatory environment, we will pursue the highest levels of compliance through extensive employee training and investment in risk management processes and standards.
In our cross-border business, we are concentrating on areas with the greatest market potential. In Asia Pacific, we continue to focus on Hong Kong and Singapore, the leading financial centers in the region. In emerging markets, we are focusing on the Middle East, Latin America and Central and Eastern Europe. To capture the full opportunity these markets present, we have organized emerging markets as a dedicated business and enhanced our local presence with several new Wealth Management offices. In Europe, we continue to support our cross-border business by focusing on the quality of our client service delivery and country-specific product offerings.
In our onshore business, we continue to enhance our already strong domestic presence in the key European and Asian markets. In Switzerland we are strengthening our position by consistently implementing our structured advisory process. We understand the distinct needs of our clients and aim to deliver superior service.


Invested assets by client domicile

(CHART)

Invested assets by client wealth

(CHART)



75


Table of Contents

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

We have made substantial progress towards managing our non-Swiss European locations for profitability. In the Asia Pacific region, we will further invest in our well-established presences in Hong Kong, Singapore, Taiwan, Australia and Japan. In addition, we are focusing on long-term growth opportunities in locations such as China, where we are making use of UBS’s distinct market presence, which includes a stake in the fully licensed brokerage house, UBS Securities Co. Limited.
Our overall long-term industry outlook for growth within the global wealth market is positive. From a regional perspective, Asia, Latin America, Central and Eastern Europe and the Middle East are expected to grow the fastest, based on economic development and entrepreneurial wealth creation, depending however on political stability. In the established European markets, we expect the onshore business to grow faster than the cross-border business. Finally, the ultra high net worth market segment shows the potential for the strongest growth rate of all client segments.

Organizational structure

Wealth Management is headquartered in Switzerland with a presence in 44 countries and approximately 200 wealth management and representative offices, half of which are outside Switzerland, mostly in Europe, Asia Pacific, Latin America and the Middle East. As of the end of 2010, Wealth Management employed more than 15,500 personnel worldwide, including approximately 4,200 client advisors. The Wealth Management business unit is governed by an executive committee, and is primarily organized along regional lines with the business areas Asia Pacific, Europe, Global Emerging Markets, Global Established Markets, Switzerland and Global Ultra High Net Worth Clients – supported by a global Investment Products and Services unit and central functions.

Competitors

Our major global competitors include Credit Suisse, Julius Baer, HSBC, BNP/Fortis, Barclays and Citigroup. In domestic markets, we compete primarily with the private banking operations of large local banks such as Coutts in the UK, Deutsche Bank in Germany and Unicredit in Italy.

Products and services

As a global integrated firm, UBS has the necessary expertise to identify appropriate investment opportunities for clients and the local presence to provide them. We have brought together experts from our Investment Bank, Global Asset Management and Wealth Management & Swiss Bank business divisions to create a new unit called Investment Products and Services (IPS), with approximately 2,150 employees at the end of 2010. IPS provides access to UBS’s services and expertise for clients and client advisors through an integrated and efficient organization. In addition, IPS develops investment products and services, based on the capabilities of the entire firm, to satisfy our clients’ needs. Wealth Management thus leverages the knowledge and product and service offerings from Global Asset Management and the Investment Bank to provide expert financial advice that supports clients throughout the different stages of their lives. By aggregating private investment flows into institutional-size flows, we are in a position to offer our Wealth Management clients access to investments that would otherwise only be available to institutional clients. Expertise is sourced either from within UBS or from approved third-party providers.

The recent financial crisis fundamentally altered financial market dynamics and client expectations. As a result, clients are demanding a more active relationship with their client advisor, and investment performance has significantly gained importance. To accommodate the needs of our clients, we are able to offer services across a full



Invested assets by asset class

(CHART)
1 Including structured products and alternative investments.

Invested assets by currency

(CHART)



76


Table of Contents

UBS business divisions and
Corporate Center

investment spectrum from execution only to discretionary mandates. Clients who opt for a discretionary mandate delegate the management of their assets to a team of professional portfolio managers. Clients who prefer to be actively involved in the management of their assets can choose an advisory mandate, in which investment professionals provide analysis and monitoring of portfolios, together with tailor-made proposals to support investment decisions. Our clients can trade the full range of financial instruments from single securities, such as equities and bonds, to various investment funds, structured products and alternative investments. Additionally, we offer structured lending, corporate finance and wealth planning advice on client needs such as funding for education, gift giving, inheritance and succession. For our ultra high net worth clients, we are able to offer institutional-like servicing with special access to our Investment Bank and Global Asset Management offerings.

Our integrated client service model allows client advisors to analyze their client’s financial situation, and develop and implement systematic tailored investment strategies. These strategies are regularly reviewed and based on individual client profiles, which comprise all important investment criteria such as the client’s life cycle needs, risk appetite and performance expectations. To ensure that the best solutions are presented to our clients, we continuously train our client advisors and provide them with ongoing support.
With the objective to further optimize our clients’ financial returns the new function of a Chief Investment Officer (CIO) has been established as of 1 March 2011. The CIO reports directly to the Wealth Management CEO and is mandated to oversee our global investment strategy and policy in close collaboration with IPS as well as Global Asset Management and the Investment Bank. The CIO function will be responsible for defining and proposing appropriate investment allocations and strategies and for communicating them across the global Wealth Management organization, especially to our client advisors and product managers.

The foundations of our client service platform

(CHART)



77


Table of Contents

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

Business performance

                 
Business unit reporting 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
Recurring income  5,411   5,696   8,061   (5)
 
Non-recurring income  1,934   1,731   2,440   12 
 
Income  7,345   7,427   10,502   (1)
 
Credit loss (expense) / recovery  11   45   (388)  (76)
 
Total operating income
  7,356   7,471   10,114   (2)
 
Personnel expenses  3,153   3,360   3,503   (6)
 
General and administrative expenses  1,264   1,182   2,357   7 
 
of which: impact from US cross-border case
          917     
 
Services (to) / from other business divisions  449   428   409   5 
 
Depreciation of property and equipment  163   154   181   6 
 
Amortization of intangible assets  19   67   33   (72)
 
Total operating expenses
  5,049   5,191   6,483   (3)
 
Business unit performance before tax
  2,308   2,280   3,631   1 
 
of which: impact from US cross-border case
          (917)    
 
of which: business unit performance before tax excluding US cross-border case
  2,308   2,280   4,548   1 
 
                 
Key performance indicators1
                
 
Pre-tax profit growth (%)  1.2   (37.2)  (40.5)    
 
Cost / income ratio (%)  68.7   69.9   61.7     
 
Net new money (CHF billion)2
  (12.1)  (87.1)  (96.0)    
 
Gross margin on invested assets (bps)3
  92   91   99   1 
 
                 
Swiss wealth management
                
 
Income  1,543   1,488   2,081   4 
 
Net new money (CHF billion)2
  0.8   (7.2)  (23.0)    
 
Invested assets (CHF billion)  137   140   137   (2)
 
Gross margin on invested assets (bps)  112   110   120   2 
 
                 
International wealth management
                
 
Income  5,802   5,939   8,420   (2)
 
Net new money (CHF billion)2
  (12.9)  (79.9)  (73.0)    
 
Invested assets (CHF billion)  631   685   697   (8)
 
Gross margin on invested assets (bps)3
  88   88   95   0 
 
                 
Additional information
                
 
Average attributed equity (CHF billion)4
  4.4   4.4   5.1   0 
 
Return on attributed equity (RoaE) (%)  52.5   51.8   71.5     
 
BIS risk-weighted assets (CHF billion)  16.9   17.9   25.1   (6)
 
Return on BIS risk-weighted assets, gross (%)  41.4   37.4   35.0     
 
Goodwill and intangible assets (CHF billion)  1.5   1.6   1.7   (6)
 
Invested assets (CHF billion)  768   825   833   (7)
 
Client assets (CHF billion)  920   1,005   1,010   (8)
 
Client advisors (full-time equivalents)  4,172   4,286   5,435   (3)
 
Personnel (full-time equivalents)  15,663   15,408   17,910   2 
 
1 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  2 Excludes interest and dividend income.  3 Excludes negative valuation adjustments on a property fund (2010: CHF 45 million, 2009: CHF 155 million, 2008: CHF 9 million).  4 Refer to the “Capital management” section of this report for more information about the equity attribution framework.

78


Table of Contents

UBS business divisions and
Corporate Center

2010

Results

In 2010, pre-tax profit increased 1% to CHF 2,308 million from CHF 2,280 million in 2009, mainly due to a 3% decrease in operating expenses. Operating income was down 2% as the result was negatively affected by low market interest rates and the strengthening of the Swiss franc against major currencies.

Operating income

Total operating income in 2010 was CHF 7,356 million, down 2% from CHF 7,471 million a year earlier. Recurring income decreased 5% on lower asset-based fees, reflecting a 4% lower average asset base. Interest income was down due to pressure from the low interest rate environment and the decrease in value of the euro and US dollar against the Swiss franc in 2010. This was partly offset by a shift of treasury-related revenues from Retail & Corporate to Wealth Management from second quarter 2010 onwards, impacting interest and trading income.
Non-recurring income increased 12% to CHF 1,934 million from CHF 1,731 million as trading income increased and as 2009 included higher revaluation adjustments on a property fund. Credit loss recoveries were CHF 11 million in 2010, down from CHF 45 million in 2009.

Operating expenses

Operating expenses declined 3% to CHF 5,049 million from CHF 5,191 million. Personnel expenses decreased 6% reflecting a reduction of average personnel levels by 9% and restructuring expenses of CHF 190 million in 2009. General and administrative expenses, at CHF 1,264 million, were up CHF 82 million from CHF 1,182 million a year earlier, mainly due to a CHF 40 million charge to reimburse the Swiss government for costs incurred in connection with the US cross-border matter, increased litigation provisions, and higher sponsoring and branding costs related to the global re-launch of the UBS brand. Charges for services from other business divisions, at CHF 449 million in 2010, were slightly up from CHF 428 million in the previous year. Depreciation was CHF 163 million in 2010, compared with CHF 154 million a year earlier. Amortization of intangible assets was CHF 19 million, down from CHF 67 million in 2009, mainly reflecting the impair-

ment of intangible assets related to invested asset outflows in UBS (Bahamas) Ltd. in 2009.

è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010

Development of invested assets

Net new money

During 2010, all regions and client segments saw an improvement of their net new money situation and net outflows declined to CHF 12.1 billion compared with CHF 87.1 billion in 2009. International wealth management net new money outflows declined significantly to CHF 12.9 billion from CHF 79.9 billion. While Europe saw ongoing net outflows, partially due to discussions regarding tax treaties, net inflows were recorded in the Asia Pacific region as well as globally from ultra high net worth clients. Swiss wealth management reported net inflows of CHF 0.8 billion in 2010 compared with CHF 7.2 billion net outflows the year before. Net new money for 2010 includes inflows of CHF 3.7 billion resulting from transfers of Investment Bank clients to Wealth Management, as part of the Global Family Office initiative.

Invested assets

Invested assets were CHF 768 billion on 31 December 2010, a decrease of CHF 57 billion from 31 December 2009, as positive equity market performance was more than offset by adverse currency effects with a 16% decline in value of the euro and an 11% decline in value of the US dollar against the Swiss franc, and net new money outflows in 2010. In Wealth Management, 31% of invested assets were denominated in euros and 31% in US dollars at the end of 2010.

Gross margin on invested assets

The gross margin on invested assets increased 1 basis point to 92 basis points. The computation of the gross margin excludes the negative valuation adjustments on a property fund. The recurring income margin was down 1 basis point to 68 basis points, due to lower interest income reflecting ongoing pressure from the low interest rate environment. The non-recurring income margin was up 2 basis points to 24 basis points, mainly due to higher brokerage fees following higher client activity.



79


Table of Contents

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

2009

Results

In 2009, pre-tax profit fell 37% to CHF 2,280 million, compared with CHF 3,631 million in 2008. The decline in profit was due to a 26% reduction in operating income, which was only partially compensated by a 20% cut in operating expenses resulting from cost-cutting measures. A provision of CHF 917 million in relation to the US cross-border case was included in the results for 2008.

Operating income

Total operating income in 2009 was CHF 7,471 million, down 26% from CHF 10,114 million a year earlier. Recurring income decreased 29% on lower asset-based fees, reflecting a 22% lower average asset base. Interest income was down due to pressure from the low interest rate environment.
Non-recurring income fell 29% due to lower brokerage fees, reflecting reduced client activity. Income was also impacted by higher internal funding-related interest charges and revaluation adjustments of CHF 155 million on a property fund. Credit loss expenses improved significantly to net recoveries of CHF 45 million from CHF 388 million net credit losses in 2008, which included provisions made for lombard loans.

Operating expenses

In 2009, operating expenses declined 20% to CHF 5,191 from CHF 6,483 million one year earlier, as a result of cost-cutting measures. Excluding the restructuring charges of CHF 254 million booked in 2009, and the abovementioned provision in 2008 relating to the US cross-border case, operating expenses declined 11%. Personnel expenses decreased 10% excluding restructuring charges, due to a 14% reduction of overall personnel, which mostly took place towards the end of 2009. General and administrative expenses, at CHF 1,182 million, were down significantly from CHF 2,357 million a year earlier, mainly due to the abovementioned 2008 provision related to

the US cross-border case. Charges for services from other business divisions, at CHF 428 million in 2009, were slightly up from CHF 409 million in the previous year. Depreciation was CHF 154 million in 2009, compared with CHF 181 million a year earlier. Amortization of intangible assets was CHF 67 million, up from CHF 33 million in 2008, mainly reflecting the impairment of intangible assets related to invested asset outflows in UBS (Bahamas) Ltd.

Development of invested assets

Net new money

Net new money outflows in 2009 were CHF 87.1 billion compared with CHF 96.0 billion in the previous year. Aside from the effects of the financial market turbulence, these outflows mainly reflected reputational issues, client advisor attrition and proposed tax treaties.
Outflows from Swiss wealth management declined significantly in 2009 to CHF 7.2 billion from CHF 23.0 billion in 2008. Outflows from international clients were CHF 79.9 billion compared with CHF 73.0 billion in 2008.

Invested assets

Invested assets were CHF 825 billion on 31 December 2009, a decrease of CHF 8 billion from 31 December 2008, as positive market performance was more than offset by net new money outflows, and a 3% decrease of the US dollar against the Swiss franc in the course of 2009. In Wealth Management, 36% of invested assets were denominated in euros and 31% in US dollars at the end of 2009.

Gross margin on invested assets

The gross margin on invested assets declined 8 basis points to 91 basis points. The computation of the gross margin excludes negative valuation adjustments on a property fund. The recurring income margin was down 7 basis points to 69 basis points, as deposit margins and volumes as well as lombard loan volume decreased. The non-recurring income margin was also down, decreasing 1 basis point to 22 basis points, mainly due to lower brokerage fees reflecting decreased client transaction activity levels.



80


Table of Contents

UBS business divisions and
Corporate Center

Retail & Corporate
Business description

Through our network of 300 branches in Switzerland, we deliver comprehensive financial services to retail, corporate and institutional clients.

Business

Retail & Corporate delivers comprehensive financial services to retail, corporate and institutional clients in Switzerland. With CHF 879 billion in client assets at the end of 2010, we are the leading bank in Switzerland for retail, corporate and institutional clients. We are market leaders in the retail and corporate loan market in Switzerland, with a highly collateralized loan book of CHF 135 billion on 31 December 2010 as shown in the “Loan portfolio, gross” chart.

The Retail & Corporate business is closely embedded within the integrated bank delivery model of UBS Switzerland, covering also Wealth Management, Asset Management and Investment Banking in Switzerland.
è Refer to the “Strategy and structure” section of this report for more information on UBS Switzerland

Strategy and clients

Our goal is to be the bank of choice for retail clients in Switzerland by delivering value-added services. We serve one out of three households in Switzerland with over 300 branches, 1,250 automated teller machines and self-service terminals, e-banking services and customer service centers. We are continuously refining our suite of life-cycle based offerings, which offer our clients dedicated products and services to fulfill their evolving requirements. We will continue to invest in our physical and electronic channels in order to improve the client experience – we use technology to complement, rather than replace, the traditional physi-

cal branch network. We are refurbishing our branches by introducing new concepts to welcome and serve customers as well as to reflect our new brand identity.

In Switzerland, our corporate and institutional clients (CIC) are comprised of multinationals, corporations, institutional clients and financial institutions, as well as small and medium enterprises (SME). We strive to be their preferred partner for all of their complex needs and contribute to their long-term success. As a leading CIC business, we serve almost one of two Swiss companies, more than 85% of the 1000 largest corporates as well as one out of every three pension funds in Switzerland, including 75 of the largest 100. Combining the integrated bank approach with our local market expertise across all Swiss regions, we are able to serve our clients best by offering the expertise of the entire bank while generating opportunities to cross-sell and increase referrals.

Organizational structure

Retail & Corporate is a core element of UBS Switzerland’s integrated bank delivery model which allows us to extend the expertise of the entire bank to our Swiss retail, corporate and institutional clients.

To ensure consistent delivery throughout Switzerland, we have aligned the regional organization structures of our different business segments. In July 2010, the Swiss network was organized into ten geographical regions. Each region is aligned across the different business segments, and is led by management teams who are also responsible for delivering the integrated bank locally.

Loan portfolio, gross

(PIE CHART)



81


Table of Contents

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

Competitors

In the Swiss retail banking business, our competitors are Credit Suisse, Raiffeisen, the cantonal banks, PostFinance, as well as other regional and local Swiss banks.

In the Swiss corporate and institutional business, our main competitors are Credit Suisse, the cantonal banks, and foreign banks in Switzerland.

Products and services

Our retail clients have access to services such as a comprehensive selection of cash accounts, payments, savings and retirement products, investment fund solutions, residential mortgages, life insurance and advisory services. These services can be

tailored to clients’ individual life-cycle solutions in combination with financial advice. We offer our Swiss corporate and institutional clients a comprehensive set of products and services. In Switzerland, we are a leading provider of financing solutions, as we offer access to capital markets (equity and debt capital), syndicated and structured credit, private placements, trade finance, factoring, leasing and traditional financing solutions. By providing access to global sector specialists within the Investment Bank, we can provide strategic advice in the field of mergers and acquisitions. Additionally, we advise company owners on succession planning, and provide professional support in liquidity and cash management. Finally, we offer global custody services for institutional clients who want to consolidate multiple-agent bank custodies into a single, cost-efficient global custodial relationship.



82


Table of Contents

UBS business divisions and
Corporate Center

Business performance

                 
Business unit reporting 
  As of or for the year ended % change from 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08  31.12.09 
 
Net interest income  2,422   2,681   3,207   (10)
 
Non-interest income  1,524   1,415   1,704   8 
 
Income  3,946   4,096   4,911   (4)
 
Credit loss (expense) / recovery  (76)  (178)  (4)  (57)
 
Total operating income
  3,870   3,918   4,907   (1)
 
Personnel expenses  1,625   1,836   1,927   (11)
 
General and administrative expenses  836   835   938   0 
 
Services (to) / from other business divisions  (509)  (518)  (482)  2 
 
Depreciation of property and equipment  146   136   142   7 
 
Amortization of intangible assets  0   0   0     
 
Total operating expenses
  2,098   2,289   2,524   (8)
 
Business unit performance before tax
  1,772   1,629   2,382   9 
 

Key performance indicators1

                
 
Pre-tax profit growth (%)  8.8   (31.6)  (2.5)    
 
Cost / income ratio (%)  53.2   55.9   51.4     
 
Impaired lending portfolio as a % of total lending portfolio, gross (%)  0.9   1.1   1.2     
 

Additional information

                
 
Average attributed equity (CHF billion)2
  4.6   4.6   4.4   0 
 
Return on attributed equity (RoaE) (%)  38.5   35.4   53.8     
 
BIS risk-weighted assets (CHF billion)  26.5   30.8   37.1   (14)
 
Return on BIS risk-weighted assets, gross (%)  13.7   12.3   12.5     
 
Goodwill and intangible assets (CHF billion)  0.0   0.0   0.0     
 
Net new money (CHF billion)3
  2.0   (2.7)  (11.1)    
 
Invested assets (CHF billion)  136   135   122   1 
 
Client assets (CHF billion)  879   840   701   5 
 
Personnel (full-time equivalents)  12,089   12,140   13,105   0 
 
1 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  2 Refer to the “Capital management” section of this report for more information about the equity attribution framework.  3 Excludes interest and dividend income.

83


Table of Contents

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

2010

Results

In 2010, pre-tax profit increased 9% to CHF 1,772 million compared with CHF 1,629 million in 2009, mainly due to an 8% decrease in operating expenses. Operating income was slightly lower compared with the previous year as reduced interest income was only partly offset by lower credit loss expenses.

Operating income

Total operating income in 2010 was CHF 3,870 million, down 1% from CHF 3,918 million a year earlier. Interest income was down 10%, mainly as low market interest rates continued to exert downward pressure on interest margins. In addition, interest income decreased as approximately 30% of treasury related revenues were allocated from Retail & Corporate to Wealth Management from second quarter 2010 onwards. These effects were only partially compensated by higher volumes in certain products and improved margins on new mortgage loans.
Non-interest income went up 8% as higher client activity increased brokerage fees and commission income as well as brokerage-related foreign exchange trading income. Net credit loss expenses were CHF 76 million in 2010, a decline of CHF 102 million compared with 2009.

Operating expenses

Operating expenses declined 8% to CHF 2,098 million from CHF 2,289 million, a result of cost-cutting measures initiated in 2009. Personnel expenses decreased 11%, reflecting a 4% reduction in average personnel levels and related restructuring expenses in 2009. General and administrative expenses were stable at CHF 836 million. Net charges to other business divisions, at CHF 509 million in 2010, were down 2% from CHF 518 million the previous year, largely due to business realignments between Wealth Management and Retail & Corporate. Depreciation was CHF 146 million in 2010 compared with CHF 136 million in 2009.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010

Development of invested assets

Invested assets

Invested assets were CHF 136 billion on 31 December 2010, an increase of CHF 1 billion from 31 December 2009, reflecting higher equity markets and net new money inflows, partly offset by adverse currency effects.

2009

Results

In 2009, pre-tax profit fell 32% to CHF 1,629 million compared with CHF 2,382 million in 2008. The decline in profit was due to a 17% decline in revenues and higher credit loss expenses. This was only partly compensated by a 9% reduction in operating expenses from cost-cutting measures.

Operating income

Total operating income in 2009 was CHF 3,918 million, down 20% from CHF 4,907 million a year earlier. Interest income decreased 16% as low market interest rates exerted downward pressure on deposit interest margins.
Non-interest income fell 17%, partly as a result of lower client activity affecting brokerage fees and commission income as well as brokerage related foreign exchange trading income. Net credit loss expenses increased to CHF 178 million from CHF 4 million in the previous year, mainly reflecting credit losses with a small number of corporate clients.

Operating expenses

At CHF 2,289 million, operating expenses in 2009 declined 9% from CHF 2,524 million one year earlier as a result of cost-cutting measures. Personnel expenses decreased 5%, reflecting a 7% reduction in average personnel levels, which mostly took place towards the end of the year. General and administrative expenses, at CHF 835 million, were down 11% from CHF 938 million one year earlier due to cost-cutting measures. Net charges to other business divisions, at CHF 518 million in 2009, were up 7% from CHF 482 million the previous year. Depreciation was CHF 136 million in 2009, down CHF 6 million from CHF 142 million a year earlier.

Development of invested assets

Invested assets

Invested assets were CHF 135 billion on 31 December 2009, an increase of CHF 13 billion from 31 December 2008, reflecting higher equity markets.



84


Table of Contents

UBS business divisions and
Corporate Center

UBS business divisions and Corporate Center
Wealth Management Americas

Wealth Management Americas

Business description

Wealth Management Americas provides advice-based relationships through its financial advisors, who deliver a fully-integrated set of wealth management solutions designed to address the needs of high net worth and ultra high net worth individuals and families.

Business

Wealth Management Americas is among the leading wealth managers in the Americas based on invested assets, and includes the Wealth Management US business, the domestic Canadian business and the international business booked in the United States. On 31 December 2010, the business division had CHF 689 billion in invested assets.

Strategy and clients

Our vision is to be the best wealth management business in the Americas. In order to achieve this goal, we must be both client-focused and advisor-centric. Due to our competitive positioning, we believe we are large enough to be relevant and small enough

to be nimble, enabling us to combine the advantages of both large and boutique players. By partnering with financial advisors serving high net worth and ultra high net worth clients, our goal is to become a trusted, differentiated and superior provider of financial solutions.

We deliver a fully-integrated set of advice-based wealth management solutions through our financial advisors to meet the needs of our target client segments: high net worth clients (USD 1 million to USD 10 million in investable assets) and ultra high net worth clients (more than USD 10 million in investable assets), while also serving the needs of the core-affluent (USD 250,000 to USD 1 million in investable assets) where appropriate. We are committed to providing advice to our clients by employing the best professionals in the industry, delivering the highest standard of execution and running a streamlined and efficient business.



Geographical presence in key markets

(MAP)

85


Table of Contents

UBS business divisions and Corporate Center
Wealth Management Americas

Organizational structure

Wealth Management Americas consists of branch networks in the US, Puerto Rico and Canada, with 6,796 financial advisors as of 31 December 2010. Most corporate and operational functions of the business division are located in the home office in Weehawken, New Jersey.

In the US and Puerto Rico, Wealth Management Americas operates through direct and indirect subsidiaries of UBS AG. Securities and operations activities are conducted primarily through two registered broker-dealers, UBS Financial Services Inc. and UBS Financial Services Incorporated of Puerto Rico. Our banking services in the US include those conducted through the UBS AG branches and UBS Bank USA, a federally-regulated Utah bank, which provides Federal Deposit Insurance Corporation (FDIC)- insured deposit accounts, enhanced collateralized lending services and mortgages.
The business division’s Canadian wealth management and banking operations are conducted through UBS Bank (Canada).
Significant recent acquisitions and business transfers include:
 March 2009: agreement to sell 56 branches to Stifel, Nicolaus
  & Company, Incorporated. The sale was completed in four separate closings in the second half of 2009.
 September 2009: completed the sale of UBS’s Brazilian financial services business, UBS Pactual, to BTG Investments, LP.
 October 2010: transfer of investment management responsibility for the US hedge funds business from Wealth Management Americas to Global Asset Management’s alternative and quantitative investments business. This formed part of a new joint venture between the two business divisions, which aims to deliver attractive hedge fund and fund of hedge funds solutions to Wealth Management Americas’ clients.

Competitors

Wealth Management Americas competes with national full-service brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, registered investment advisors, trust companies and other financial services firms offering wealth management services to US and Canadian private clients, as well as foreign non-resident clients seeking wealth management services within the US. Our main competitors include the wealth management businesses of Bank of America, Morgan Stanley, and Wells Fargo.

Products and services

Wealth Management Americas offers clients a full array of solutions that focus on the individual financial 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 with corresponding product offerings for each stage. Our advisors work closely with internal consultants in areas such as wealth planning, portfolio strategy, retirement and annuities, alternative investments, managed accounts, structured products, banking and lending, equities, and fixed income. Clients also benefit from our dedicated Wealth Management Research team, which provides research guidance to help support the clients’ investment decisions.

Our offerings are designed to meet a wide variety of investment objectives, including wealth accumulation and preservation, income generation and portfolio diversification. To address the full range of our clients’ investment needs, we also offer competitive lending and cash management services such as the Re-



Invested assets by asset class

(BAR CHART)
1Includes structured products and alternative investments.

Invested assets by client wealth

(PIE CHART)



86


Table of Contents

UBS business divisions and
Corporate Center

source Management Account (RMA), FDIC-insured deposits, securities-backed lending, mortgages and credit cards.

Additionally, Corporate Employee Financial Services provides comprehensive, personalized stock benefit plan and related services to many of the largest US corporations and their executives. For corporate and institutional clients, we offer a robust suite of solutions, including equity compensation, administration, investment consulting, defined benefit and contribution programs and cash management services.
Our clients can choose the type of relationship they prefer to have with us via asset-based pricing, transaction-based pricing or a combination of both. Asset-based accounts have access to both discretionary and non-discretionary investment advisory programs. Non-discretionary advisory programs enable the client to maintain control over all account transactions, while 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 our investment professionals or a third-party investment manager. Separately, mutual fund advisory programs are also offered, whereby a financial advisor works with the client to create a diversified portfolio of mutual funds guided by a research-driven asset allocation framework.
For clients who favor individual securities, we offer a broad range of equity and fixed income instruments. In addition, qualified clients may take advantage of structured products and alternative investment offerings to complement their portfolio strategies.
All of these solutions are supported by a dedicated markets execution group. This group partners with the Investment Bank and Global Asset Management in order to access the resources of the entire firm as well as third-party investment banks and asset management firms.



87


Table of Contents

UBS business divisions and Corporate Center
Wealth Management Americas

Business performance

                 
Business division reporting 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
Recurring income  3,472   3,256   4,076   7 
 
Non-recurring income  2,093   2,290   2,201   (9)
 
Income  5,565   5,546   6,278   0 
 
of which: ARS settlement impact
          (172)    
 
Credit loss (expense) / recovery  (1)  3   (29)    
 
Total operating income
  5,564   5,550   6,249   0 
 
Personnel expenses  4,225   4,231   4,271   0 
 
Financial advisor compensation1
  2,068   1,828   2,130   13 
 
Compensation commitments and advances related to recruited FAs2
  599   599   305   0 
 
Salaries and other personnel costs  1,558   1,804   1,836   (14)
 
General and administrative expenses  1,223   1,017   2,558   20 
 
of which: ARS settlement impact
          1,464     
 
Services (to) / from other business divisions  (6)  4   16     
 
Depreciation of property and equipment  198   170   162   16 
 
Impairment of goodwill  0   34   0   (100)
 
Amortization of intangible assets  55   62   65   (11)
 
Total operating expenses
  5,694   5,518   7,072   3 
 
Business division performance before tax
  (130)  32   (823)    
 
of which: ARS settlement impact
          (1,636)    
 
of which: business division performance before tax excluding ARS settlement impact
  (130)  32   813     
 
                 
Key performance indicators3
                
 
Pre-tax profit growth (%)4
  N/A   N/A   N/A     
 
Cost / income ratio (%)  102.3   99.5   112.6     
 
Net new money (CHF billion)5
  (6.1)  (11.6)  (15.9)    
 
Gross margin on invested assets (bps)  80   81   82   (1)
 
                 
Additional information
                
 
Average attributed equity (CHF billion)6
  8.0   8.8   7.8   (9)
 
Return on attributed equity (RoaE) (%)  (1.6)  0.4   (10.6)    
 
BIS risk-weighted assets (CHF billion)  23.8   22.8   26.9   4 
 
Return on BIS risk-weighted assets, gross (%)  23.8   23.5   28.9     
 
Goodwill and intangible assets (CHF billion)  3.7   4.2   4.5   (12)
 
Invested assets (CHF billion)  689   690   644   0 
 
Client assets (CHF billion)  738   737   682   0 
 
Personnel (full-time equivalents)  16,330   16,925   20,623   (4)
 
Financial advisors (full-time equivalents)  6,796   7,084   8,607   (4)
 
                 
Additional information (only Wealth Management US)
                
 
Net new money (CHF billion)5
  (5.5)  (9.8)  (11.4)    
 
Net new money including interest and dividend income (CHF billion)7
  13.1   10.0   11.9     
 
                 
Business division reporting excluding PaineWebber acquisition costs8
                
 
Business division performance before tax
  (21)  155   (689)    
 
Cost / income ratio (%)  100.4   97.3   110.4     
 
Average attributed equity (CHF billion)  4.6   5.2   4.2   (12)
 
1 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables.  2 Compensation commitments and advances related to recruited financial advisors (FAs) represents costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements.  3 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  4 Not meaningful if either the current period or the comparison period is a loss period.  5 Excludes interest and dividend income.  6 Refer to the “Capital management” section of this report for more information about the equity attribution framework.  7 For purposes of comparison with US peers.  8 Acquisition costs represent goodwill and intangible assets funding costs and intangible asset amortization costs related to UBS’s 2000 acquisition of the PaineWebber retail brokerage business.

88


Table of Contents

UBS business divisions and
Corporate Center

2010

Results

Wealth Management Americas reported a pre-tax loss of CHF 130 million in 2010 compared with a pre-tax profit of CHF 32 million in 2009. In 2010, Wealth Management Americas incurred restructuring charges of CHF 162 million, while 2009 included restructuring charges of CHF 152 million and net goodwill impairment charges of CHF 19 million related to the sale of UBS Pactual. Excluding these items, pre-tax performance would have declined to a profit of CHF 32 million in 2010 from CHF 203 million in 2009, primarily resulting from a significant increase in litigation provisions in 2010 to CHF 320 million from CHF 54 million in 2009.

Operating income

Operating income of CHF 5,564 million was essentially flat compared with CHF 5,550 million in 2009, but increased 4% in US dollar terms. Recurring income increased 7% to CHF 3,472 million due to higher revenues from managed accounts and mutual funds related to higher average invested assets. Recurring income increased to 62% of operating income from 59% in 2009. Non-recurring income decreased 9% to CHF 2,093 million due to lower municipal trading income, partly offset by higher commission income and a demutualization gain from Wealth Management Americas’ stake in the Chicago Board Options Exchange.

Operating expenses

Operating expenses increased 3% to CHF 5,694 million from CHF 5,518 million. In 2010, operating expenses included CHF 162 million in restructuring charges compared with CHF 152 million in restructuring charges in 2009. Additionally, 2009 included CHF 34 million in goodwill impairment charges related to the sale of UBS Pactual (of which CHF 15 million was charged to the Corporate Center, as this was related to foreign exchange exposures managed by Group Treasury).
Personnel expenses were CHF 4,225 million in 2010, down slightly from CHF 4,231 million in the previous year. In US dollar terms, personnel expenses increased 4%. Excluding CHF 35 million in restructuring charges in 2010 and CHF 71 million in restructuring charges in 2009, personnel expenses would have increased 1% from the previous year. This increase was due primarily to higher financial advisor compensation related to higher revenue production and the introduction of the GrowthPlus incentive compensation program in 2010, partly offset by lower salaries and other per-

sonnel costs, resulting from restructuring initiatives in 2010 and 2009. Expenses for compensation commitments and advances related to recruited financial advisors were flat from 2009, but increased 4% in US dollar terms. Compensation advance balances were CHF 3,112 million as of 31 December 2010, down 4% from 31 December 2009, but increased 7% in US dollar terms.

Non-personnel expenses increased 14% to CHF 1,470 million from CHF 1,287 million in 2009, principally due to higher litigation provisions, which increased to CHF 320 million in 2010 from CHF 54 million in 2009. Non-personnel expenses included CHF 127 million in restructuring charges in 2010 related to real estate writedowns, while 2009 included restructuring charges of CHF 82 million and the abovementioned goodwill impairment charges. In addition, non-personnel costs included a shift of expenses from the Corporate Center to the business divisions in 2010.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010

Development of invested assets

Net new money

Net new money outflows for Wealth Management Americas were CHF 6.1 billion in 2010 compared with CHF 11.6 billion in the prior year.
The Wealth Management US business saw net new money outflows of CHF 5.5 billion in 2010 compared with CHF 9.8 billion in 2009. We experienced net new money outflows during the first half of 2010, mainly due to financial advisor attrition and limited recruiting of experienced financial advisors. Net new money turned positive in the second half of 2010 due to improved financial advisor retention and improved net new money inflows from financial advisors employed with UBS for more than one year. Including interest and dividend income, net new money inflows for the Wealth Management US business improved to CHF 13.1 billion from CHF 10.0 billion in 2009. Including interest and dividend income only from Wealth Management US, Wealth Management Americas had net new money inflows of CHF 12.5 billion in 2010, compared with CHF 8.2 billion in 2009.
In 2010, Wealth Management Americas recorded CHF 2.2 billion of net new money inflows related to the inclusion of invested assets of certain retirement plan assets not custodied at UBS, as discussed below in the “Invested assets” section.



89


Table of Contents

UBS business divisions and Corporate Center
Wealth Management Americas

Invested assets

Invested assets were CHF 689 billion on 31 December 2010, essentially flat from CHF 690 billion on 31 December 2009. In US dollar terms, invested assets increased 12% primarily due to positive market performance in the second half of 2010. During the course of the year, Wealth Management Americas conducted a review of its invested assets reporting and determined that, going forward, certain retirement plan assets custodied away from UBS should be included in invested assets. As a result, invested assets increased by CHF 22 billion at year end and net new money inflows increased by CHF 2.2 billion.

Gross margin on invested assets

The gross margin on invested assets was 80 basis points in 2010, down from 81 basis points in 2009, the result of a slight increase in income compared with a 2% increase in average invested assets. The recurring income margin increased 2 basis points to 50 basis points due to higher fees from managed accounts and mutual funds. The non-recurring margin decreased 3 basis points to 30 basis points due to a decrease in municipal trading income.



90


Table of Contents

UBS business divisions and
Corporate Center

2009

Results

Wealth Management Americas reported a pre-tax profit of CHF 32 million in 2009 compared with a pre-tax loss of CHF 823 million in 2008. The 2009 results included restructuring charges of CHF 152 million and a net goodwill impairment charge of CHF 19 million related to the sale of UBS Pactual. Our performance in 2008 included CHF 1,636 million in charges and trading losses related to auction rate securities (ARS). Excluding these items, pre-tax performance would have been a profit of CHF 203 million in 2009 compared with a profit of CHF 813 million in 2008.

Operating income

In 2009, operating income decreased 11% to CHF 5,550 million from CHF 6,249 million in 2008. Excluding ARS-related trading losses of CHF 172 million in 2008, operating income would have declined 14%. Recurring income decreased 20% to CHF 3,256 million, due to lower managed account fees related to an 11% decrease in average invested assets, while interest income declined resulting from lower interest spreads. Recurring income declined to 59% of operating income from 65% in 2008. Non-recurring income increased 4% due to a CHF 35 million interest credit from the Investment Bank, resulting from a change in the UBS Bank USA investment portfolio strategy and higher municipal trading income, partly offset by lower commission revenue related to reduced transactional activity. In addition, 2008 included the abovementioned trading losses related to ARS.

Operating expenses

Operating expenses decreased 22% to CHF 5,518 million from CHF 7,072 million. In 2009, operating expenses included CHF 152 million in restructuring charges and CHF 34 million in goodwill impairment charges related to the sale of UBS Pactual (of which CHF 15 million was charged to the Corporate Center, as this was related to foreign exchange exposures managed by Group Treasury), while 2008 expenses included CHF 1,464 million in charges related to the ARS settlement. Excluding these charges, operating expenses would have decreased 5%. Personnel expenses were CHF 4,231 million in 2009, down 1% from CHF 4,271 million in the previous year. Excluding CHF 71 million in restructuring charges in 2009, personnel expenses would have decreased 3% from the previous year. This was a result of reduced salaries related to a decrease in headcount and lower financial advisor compensation related to lower revenue. This decrease was partly offset by an increase in costs for compensation commitments and advances related to recruited financial advisors, as a result of increased financial advisor recruiting in the second half of 2008 through the first quarter of 2009. Accordingly, compensation advance balances related to recruited financial advisors increased 61% to CHF 3,253 million at 31 De-

cember 2009 from 31 December 2008. Non-personnel expenses declined 54% to CHF 1,287 million from CHF 2,801 million in 2008, but would have decreased 11% excluding CHF 82 million in restructuring costs that were mainly related to real estate writedowns, the abovementioned goodwill impairment charges and ARS-related charges in 2008. The decline was also due to cost-cutting measures in general, including reduced general and administrative expenses.

Development of invested assets

Net new money

In 2009, net new money outflows for Wealth Management Americas were CHF 11.6 billion compared with CHF 15.9 billion in the prior year. The Wealth Management US business’ net new money outflows were CHF 9.8 billion in 2009, compared with CHF 11.4 billion in 2008. Following strong net new money inflows in first quarter 2009 due to recruitment of experienced financial advisors, Wealth Management US experienced net new money outflows during the remainder of the year due to financial advisor attrition and limited recruiting of experienced financial advisors as a result of reputational issues. Including interest and dividends, net new money inflows for the Wealth Management US business in 2009 were CHF 10.0 billion, compared with CHF 11.9 billion in 2008. Including interest and dividend income only from Wealth Management US, Wealth Management Americas had net new money inflows of CHF 8.2 billion in 2009, compared with CHF 7.4 billion in 2008.

Invested assets

Invested assets were CHF 690 billion on 31 December 2009, up 7% from CHF 644 billion on 31 December 2008. This increase was principally due to positive market performance, and was partly offset by a reduction of CHF 24 billion related to the sale of branches to Stifel, Nicolaus & Company, Incorporated and the sale of UBS Pactual, as well as net new money outflows. In addition, invested assets were impacted by negative currency translation effects due to a 3% depreciation of the US dollar versus the Swiss franc.

Gross margin on invested assets

The gross margin on invested assets was 81 basis points in 2009, down from 82 basis points in 2008. The decrease was a result of a 12% decline in income compared with an 11% decrease in average invested assets. The recurring income margin declined 5 basis points to 48 basis points, corresponding to a 20% decrease in recurring income. The non-recurring margin increased 4 basis points to 33 basis points, due to an increase in municipal trading income and a CHF 35 million interest credit from the Investment Bank (attributed to a change in the UBS Bank USA investment portfolio strategy), while 2008 included the abovementioned trading losses related to ARS.



91


Table of Contents

UBS business divisions and Corporate Center
Global Asset Management

Global Asset Management

Business description

Global Asset Management is a large-scale asset manager with businesses well-diversified across regions, capabilities and distribution channels. We offer investment capabilities and styles across all major traditional and alternative asset classes. These include equities, fixed income, currency, hedge fund, real estate and infrastructure investment capabilities which can be combined into multi-asset strategies. The fund services unit provides professional services including legal fund set-up, accounting and reporting for traditional investment funds and alternative funds.

Business

Global Asset Management offers a diverse range of investment capabilities and services from a boutique-like structure, encompassing all major asset classes, including equities, fixed income, currency, hedge funds, real estate and infrastructure as well as asset allocation, risk management and fund administration services. Invested assets totaled CHF 559 billion on 31 December 2010, making Global Asset Management one of the larger global asset managers. We are among the largest hedge fund of funds and real estate investment managers in the world, one of the biggest mutual fund managers in Europe and the largest in Switzerland. The “Business structure” chart shows the investment, distribution and support structure of the business division.

Revenues and key performance indicators are reported according to Global Asset Management’s business lines: traditional investments (equities, fixed income and multi-asset (global investment solutions)), alternative and quantitative investments, global real estate, infrastructure and fund services. The bar charts on the following pages show the breakdown of invested assets across these segments, as well as by regions and channels.

Strategy

Global Asset Management is focused on delivering consistent long-term investment performance and capitalizing on the expected growth opportunities within the asset management industry. The industry outlook remains strong with three main drivers: the financial crisis has reduced the assets of both the retired and the working population, creating a pressing need for increased savings rates; emerging markets will continue to drive the growth of the mutual funds industry and retirement schemes in these markets; and as governments focus on reducing deficits, they will need to reduce support for benefits and pensions and will face increased pressure for privatizing infrastructure assets.

The diversification of our business places us in a good position to benefit from shifting market dynamics and provides a solid foundation for capturing these growth opportunities.
Our key strategic objective is to monetize our good long-term investment performance, both through gaining new client assets and improving our retention of existing client assets.
We are working to build on our strong third party institutional business, while launching intensified third party wholesale



Business structure

(CHART)
1 Works in close coordination with region heads and the Pan Asia Institutional team.  2 Reports to UBS Group functional head.

92


Table of Contents

UBS business divisions and
Corporate Center

initiatives in the Americas and in Europe. Through increased collaboration with UBS’s wealth management businesses, we expect to benefit from their return to growth. We continue to capitalize on our established positions in emerging markets, notably in China, South Korea and the Middle East and will build our presence in Brazil following the completion of the acquisition of Link Investimentos.

Organizational structure

Our business division has main offices in London, Chicago, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo and Zurich, and employs around 3,500 personnel in 24 countries. Global Asset Management operates through UBS AG, or through its subsidiaries.

Significant recent acquisitions and business transfers

 In February 2008, UBS acquired 100% of the Caisse Centrale de Réescompte (CCR) Group in France from Commerzbank. The asset management business of CCR currently operates as CCR Asset Management.
 In August 2008, UBS sold its 24.9% stake in Adams Street Partners to its remaining shareholders.
 In September 2009, UBS completed the sale of its Brazilian financial services business, UBS Pactual, including its asset management business, UBS Pactual Asset Management.
 In December 2009, the real estate investment management business of Wealth Management & Swiss Bank was transferred to Global Asset Management.
 In April 2010, UBS announced that it had agreed to acquire Link Investimentos, one of the largest independent broker-dealers in Brazil.
 In October 2010, UBS increased its holding from 51.0% to 94.9% in UBS Real Estate Kapitalanlagegesellschaft mbH (KAG), a Global Asset Management joint venture with Siemens in Munich, Germany. We purchased our original stake in Siemens’ real estate business in January 2005.
 In October 2010, investment management responsibility for the US hedge fund business was transferred from Wealth Management Americas to Global Asset Management’s alternative and quantitative investments business. This formed part of a new joint venture between the two business divisions, which aims to deliver attractive hedge fund and fund of hedge funds solutions to Wealth Management Americas’ clients.

Invested assets by region1

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

Competitors

Our competitors include global firms with wide-ranging capabilities, such as Fidelity Investments, AllianceBernstein Investments, BlackRock, JP Morgan Asset Management, Deutsche Asset Management and Goldman Sachs Asset Management. Many of our other competitors are regional or local specialist niche players who focus mainly on one asset class, particularly in the real estate, hedge fund or infrastructure investment areas.

The asset management industry is becoming increasingly polarized into either large-scale firms or niche specialists. Large-scale firms, like Global Asset Management, offer well-diversified investment capabilities across all major asset classes and have a global presence as well as a broad distribution network.

Products and services

The “Investment capabilities and services” chart illustrates our offering, which can be delivered 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.



93


Table of Contents

UBS business divisions and Corporate Center
Global Asset Management

             
Investment capabilities and services
    Alternative and Global Global investment    
Equities
 Fixed income quantitative investments real estate solutions Infrastructure Fund services
             
Core/value Global Single-manager
hedge funds
 Global Global Direct investment Alternative funds
 
           
Global Country and regional  Country and regional Country and regional   Investment funds
 
            
Country and regional Sector specific Multi-manager
hedge funds
 Income, core, value-added
and opportunistic strategies
 Asset allocation    
 
          
Emerging markets Emerging markets   Currency management    
 
            
Specialist High yield Quantitative Multi-manager funds Return and risk targeted    
 
            
Long / short Structured credit Infrastructure
fund of funds
 Listed securities Structured portfolios    
 
           
HALO Liquidity / short duration  Farmland Risk management and
advisory services
    
 
           
Growth Indexed Private equity
fund of funds
       
 
           
Global           
 
            
Country and regional   Active commodities,
multi-manager
        
 
           
Structured           
 
            
Structured alpha            
 
            
Structured beta and
indexing
            
            
            
             

 Equitiesoffers a full spectrum of investment styles with varying risk and return objectives. It has three investment pillars with distinct strategies, including core / value (portfolios managed according to a price to intrinsic value philosophy), growth (portfolios of quality growing companies that we believe to be undervalued in the market) and structured equities (strategies that employ proprietary analytics and quantitative methods, including passive).
 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 to have 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, as well as across the major real estate sectors. Its capabilities are focused on core and value-added strategies but also include other strategies across the risk/return spectrum. It offers direct investment, fund of funds and real estate securities strategies.
 Global investment solutionsoffers asset allocation, currency, manager research and risk management services. It manages a wide array of domestic, regional and global balanced portfolios, currency mandates, structured portfolios, multi-manager and absolute return strategies. Through its strategic investment advisory services, it supports clients in a wide range of investment-related functions, including investment policy setting, integrated asset liability solutions, multi-manager approaches, investment outsourcing and fiduciary management.
 Infrastructureoriginates and manages specialist strategies that invest directly in infrastructure assets globally.
 Fund services,the global fund administration business, provides professional services, including legal setup, reporting and accounting for retail and institutional investment funds, hedge funds and other alternative funds.


94


Table of Contents

UBS business divisions and
Corporate Center

Clients

Global Asset Management has a client base located throughout the world. As of 31 December 2010, approximately 60% of invested assets originated from institutional clients (for example, corporate and public pension plans, governments and their central banks), with the remainder from wholesale clients (financial intermediaries, including UBS’s wealth management businesses, and third parties).

Distribution of our capabilities and services to both client segments relies upon our regional business structure, as detailed in the “Business structure” chart (Americas, Asia Pacific, Switzerland and Europe). Through regional distribution, we are able to leverage the full resources of our global investment platforms and functions to provide clients with relevant investment management products and services, client servicing and reporting at a local level. In October 2010, a Global Sovereign Markets group was established to deliver an integrated global approach to this client segment and ensure that sovereign institutions receive the dedicated advisory, investment and training solutions they require.

Investment performance 2010

Investment markets were volatile in 2010 yet two-thirds of our key actively-managed traditional strategies delivered strong results, further improving their long-term records. By contrast, some of our actively managed equity strategies faced the greatest head-winds as many equity markets, notably the US, became highly sentiment-driven. This created a difficult environment for our active managers focusing on fundamental analysis to seek to generate outperformance.

After performing well in 2009, core / value large cap equity strategies struggled to match their gains in 2010, a year when the best returning stocks were typically less responsive to com-

pany fundamentals than to broad economic factors. As a result, core / value large cap strategies such as US, pan-European, emerging markets, Asia (ex-Japan) and Australia underperformed their benchmarks and peers, although the margin of underperformance was much smaller than the margin of outperformance in 2009. Both UK value and Canadian large cap equity strategies also underperformed in 2010. Some large cap core / value strategies did extend their favorable performance into 2010, including global, global ex-US, a high alpha emerging markets strategy and global and European concentrated alpha strategies. Swiss large cap equities performed positively as well. Small cap strategies in the core / value pillar tended to perform extremely well, especially European, US and Swiss small cap strategies. Still, on a three-year basis, well over half of key core / value strategies were ahead of their benchmarks – most of them by a notable margin.

The majority of growth equities strategies extended their solid 2009 performance by exceeding their benchmarks in 2010. Notable leaders versus peers were European and small cap (both US and ex-US) growth strategies. After a very strong 2009, US large cap select growth trailed modestly by comparison in 2010, but not nearly to the extent of its outperformance in 2009. Outperformance on a since-inception basis remains across the entire range of growth strategies with long-term (three-year plus) records.
In structured equities, strategies relying strongly on input from fundamental stock analysis, which performed extremely well in 2009, underperformed benchmarks in 2010. While US fundamental equity market neutral had a disappointing year, it remained ahead of peers on a since-inception basis. Conversely, strategies relying specifically on quantitatively-derived insights performed ahead of benchmarks in 2010, and many also outperformed on a three-year or since-inception basis. Passive / exchange traded funds (ETF) strategies met their objectives in 2010.



Invested assets by business line

(BAR CHART)

Invested assets by channel

(BAR CHART)



95


Table of Contents

UBS business divisions and Corporate Center
Global Asset Management

In global fixed income markets, yields generally fell over the year, leading to high total returns for most bond markets. Our fixed income strategies performed very well, and a large majority of key strategies outperformed their benchmark indices for the year and improved their longer-term records. This outperformance for the year was consistent across regions and strategies, and was evident in the traditional strategies (such as global sovereign), in local bond strategies (such as Australian, Canadian, Euro, Japanese, Swiss, UK and US), in higher alpha and newer strategies (such as emerging markets and Asian bonds) and in absolute return strategies (such as currency alpha and fixed income opportunities). Two thirds of our key strategies were also ahead of or in line with peers for the year. Money market funds continued to achieve their capital preservation objectives.
The performance of multi-asset strategies was positive in 2010, building on a strong 2009 and improving longer-term records. Benchmarked strategies finished the year in line with or above their reference indices overall, comparing favorably with peers’ performance. Dynamic alpha absolute return strategies turned positive towards the end of the year. Multi-asset strategies had been positioned for a recovery in risky assets such as equities, leading to a strong result in the final quarter following a period of more volatile markets. These strategies benefited from strong currency and asset allocation, while stock selection results were mixed overall. The stand-alone active currency strategy posted strong returns throughout the year. Similarly strong performance came from global and regional convertible bond strategies, which ended the year well ahead of benchmarks. The majority of multi-manager investment solutions also delivered positive returns relative to benchmark over the year. Strategic investment advisory services, including investment outsourcing, asset liability investment solutions and strategic alternatives advisory gained further traction and brought in new clients during the year.
In alternative and quantitative investments, hedge funds continued to produce attractive absolute and risk adjusted returns, building on the strong performance rebound seen in 2009. The O’Connor single manager funds posted positive returns across its core strategies, outperforming most peers on a risk adjusted basis. In the multi-manager business, positive returns were posted across virtually all strategies, with particularly strong performance versus peers from the funds managed by the alternative investment solutions team.
Performance of the direct real estate funds generally improved in 2010. The flagship UK strategy achieved strong absolute returns and markedly improved performance relative to benchmark. Returns of the European core flagship strategies remained positive. The Swiss composite (consisting of five UBS Swiss listed real estate funds) outperformed its benchmark. The US core fund delivered very strong absolute returns for 2010 and outperformed its benchmark for the year. The flagship J-REIT (managed in partnership with Mitsubishi Corporation) also produced positive absolute returns and outperformed versus benchmark by a wide margin. The performance of real estate securities strategies was mixed versus benchmarks. The fund of funds strategies continued to gather momentum, delivering positive returns for the year.
The flagship UBS International Infrastructure Fund made significant progress investing its capital during the year. In March 2010, the fund acquired the right to develop Collgar Wind Farm Pty Ltd, a greenfield renewable energy project in Australia. The project is under construction and was ahead of schedule at the end of the year. An additional transaction announced in April 2010 – Njord Gas Infrastructure, that was formed to hold a stake in Gassled, which owns the Norwegian gas transport infrastructure, the world’s largest offshore gas transmission system – has received government approval and is expected to reach financial close in 2011.


96


Table of Contents

UBS business divisions and
Corporate Center

Business performance

                 
Business division reporting 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
Net management fees1
  1,918   1,904   2,756   1 
 
Performance fees  141   233   149   (39)
 
Total operating income2
  2,058   2,137   2,904   (4)
 
Personnel expenses  1,096   996   946   10 
 
General and administrative expenses  400   387   462   3 
 
Services (to) / from other business divisions  (5)  (74)  88   93 
 
Depreciation of property and equipment  43   36   44   19 
 
Impairment of goodwill  0   340   0   (100)
 
Amortization of intangible assets  8   13   33   (38)
 
Total operating expenses
  1,542   1,698   1,572   (9)
 
Business division performance before tax
  516   438   1,333   18 
 
                 
Key performance indicators3
                
 
Pre-tax profit growth (%)  17.8   (67.1)  (8.3)    
 
Cost / income ratio (%)  74.9   79.5   54.1     
 
                 
Information by business line
                
 
Income
                
 
Traditional investments  1,259��  1,319   1,859   (5)
 
Alternative and quantitative investments  325   405   430   (20)
 
Global real estate  258   185   277   39 
 
Infrastructure  14   13   15   8 
 
Fund services  202   214   322   (6)
 
Total operating income
  2,058   2,137   2,904   (4)
 
                 
Gross margin on invested assets (bps)
                
 
Traditional investments  25   26   29   (4)
 
Alternative and quantitative investments  88   102   69   (14)
 
Global real estate  68   47   63   45 
 
Infrastructure  130   114   218   14 
 
Total gross margin
  36   37   39   (3)
 
                 
Net new money (CHF billion)4
                
 
Traditional investments  4.2   (40.6)  (88.9)    
 
Alternative and quantitative investments  (3.2)  (6.7)  (14.8)    
 
Global real estate  0.6   1.4   (0.3)    
 
Infrastructure  0.1   0.1   1.0     
 
Total net new money
  1.8   (45.8)  (103.0)    
 
                 
Invested assets (CHF billion)
                
 
Traditional investments  487   502   493   (3)
 
Alternative and quantitative investments  34   41   41   (17)
 
Global real estate  36   39   40   (8)
 
Infrastructure  1   1   1   0 
 
Total invested assets
  559   583   575   (4)
 
1 Net management fees include transaction fees, fund administration revenues (including interest and trading income from lending business and foreign exchange hedging as part of the fund services offering), gains or losses from seed money and co-investments, funding costs and other items that are not performance fees.  2 Includes a gain of CHF 168 million on the sale of a non-controlling interest in Adams Street Partners in 2008.  3 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  4 Excludes interest and dividend income.

97


Table of Contents

UBS business divisions and Corporate Center
Global Asset Management

                 
Business division reporting (continued) 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
                 
Assets under administration by fund services
                
 
Assets under administration (CHF billion)1
  390   406   425   (4)
 
Net new assets under administration (CHF billion)2
  (0.8)  (59.7)  (61.1)    
 
Gross margin on assets under administration (bps)  5   5   6   0 
 
                 
Additional information
                
 
Average attributed equity (CHF billion)3
  2.5   2.8   3.0   (11)
 
Return on attributed equity (RoaE) (%)  20.6   15.9   44.4     
 
BIS risk-weighted assets (CHF billion)  3.5   4.1   8.5   (15)
 
Return on BIS risk-weighted assets, gross (%)  56.8   37.7   41.2     
 
Goodwill and intangible assets (CHF billion)  1.5   1.7   2.2   (12)
 
Personnel (full-time equivalents)  3,481   3,471   3,914   0 
 
1 This includes UBS and third-party fund assets, for which the fund services unit provides legal fund set-up and registration services, valuation, accounting and reporting and shareholder services.  2 Inflows of assets under administration from new and existing funds less outflows from existing funds or fund defection.  3 Refer to the “Capital management” section of this report for more information about the equity attribution framework.

2010

Results

Pre-tax profit for 2010 was CHF 516 million compared with CHF 438 million in 2009. Excluding a net goodwill impairment charge of CHF 191 million related to the sale of UBS Pactual in 2009, the pre-tax profit for 2010 would have decreased by CHF 113 million compared with 2009.

Operating income

Total operating income was CHF 2,058 million in 2010, compared with CHF 2,137 million in 2009. Lower performance fees and revenues following the sale of UBS Pactual were partly offset by reduced co-investment losses in real estate and lower operational losses.

Operating expenses

Total operating expenses were CHF 1,542 million in 2010, compared with CHF 1,698 million in 2009. Excluding the abovementioned goodwill impairment and restructuring charges of CHF 48 million during the year 2009, operating expenses would have increased by CHF 83 million in 2010, mainly due to increased personnel expenses. The increase was partly offset by reduced non-personnel expenses as a result of cost-saving initiatives in 2009 and lower expenses following the sale of UBS Pactual. In addition, non-personnel costs included an additional allocation of expenses to the business divisions from the Corporate Center in 2010.
Personnel expenses were CHF 1,096 million in 2010 compared with CHF 996 million in 2009, mainly due to increased expenses for prior years’ deferred variable compensation, partly offset by lower fixed compensation costs as a result of headcount reductions in 2009 and reduced expenses following the sale of UBS Pactual.

General and administrative expenses were CHF 400 million in 2010, compared with CHF 387 million in 2009, mainly due to higher sponsoring and branding costs related to the global re-launch of the UBS brand. The increase was partly offset by lower expenses following the sale of UBS Pactual.
Net charges to other business divisions were CHF 5 million in 2010, compared with CHF 74 million in 2009. Excluding a charge to the Corporate Center of CHF 149 million in 2009, we would have recorded net charges from other business divisions of CHF 75 million. The total 2009 goodwill impairment charge related to the sale of UBS Pactual was CHF 340 million, of which CHF 149 million was charged to the Corporate Center, as this was related to foreign exchange exposures managed by Group Treasury.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010

Development of invested assets

Net new money

Net new money inflows were CHF 1.8 billion in 2010 compared with net outflows of CHF 45.8 billion in 2009. Net inflows from third parties were CHF 18.2 billion in 2010 compared with net outflows of CHF 5.1 billion in 2009. Net outflows from clients of our wealth management businesses were CHF 16.4 billion in 2010 compared with net outflows of CHF 40.7 billion in 2009. Net new money in 2010 included CHF 2.5 billion resulting from a transfer of investment management responsibility for the US hedge fund business from Wealth Management Americas to Global Asset Management’s alternative and quantitative investments business.



98


Table of Contents

UBS business divisions and
Corporate Center

Excluding money market flows, net new money inflows were CHF 8.2 billion in 2010 compared with net outflows of CHF 33.6 billion in 2009. Net inflows from third parties were CHF 16.2 billion in 2010 compared with net outflows of CHF 6.8 billion in 2009. Net outflows from clients of our wealth management businesses were CHF 8.1 billion in 2010 compared with net outflows of CHF 26.9 billion in 2009.
Some of the inflows and outflows relating to clients of our wealth management businesses are also reported as net new money in- and outflows for the Wealth Management & Swiss Bank and Wealth Management Americas business divisions.

Invested assets

Total invested assets were CHF 559 billion on 31 December 2010, compared with CHF 583 billion on 31 December 2009. Negative currency effects were only partly offset by positive market movements and net new money inflows.

Gross margin on invested assets

The gross margin was 36 basis points in 2010 compared with 37 basis points in 2009, reflecting lower performance fees primarily in alternative and quantitative investments, partly offset by lower co-investment losses in real estate and lower operational losses.

Results by business line

Traditional investments

Revenues were CHF 1,259 million compared with CHF 1,319 million, as lower operational losses were more than offset by decreased revenues following the sale of UBS Pactual in 2009.
Thegross marginwas 25 basis points compared with 26 basis points in the prior year, mainly due to lower performance fees and decreased revenues following the sale of UBS Pactual.
Net new money inflows were CHF 4.2 billion compared with net outflows of CHF 40.6 billion in the prior year. Excluding money market flows, net new money inflows were CHF 10.6 billion compared with net outflows of CHF 28.4 billion in the prior year. Equities saw net inflows of CHF 7.5 billion compared with net outflows of CHF 8.2 billion. Fixed income saw net inflows of CHF 9.7 billion compared with net outflows of CHF 5.6 billion. Multi-asset saw net outflows of CHF 6.3 billion compared with net outflows of CHF 14.5 billion.
Invested assets were CHF 487 billion on 31 December 2010, compared with CHF 502 billion on 31 December 2009. The net decrease reflects negative currency effects, partly offset by positive market movements and net new money inflows.

Alternative and quantitative investments

Revenues were CHF 325 million compared with CHF 405 million due to lower performance fees, which also resulted in agross marginof 88 basis points compared with 102 basis points.
Net new money outflows were CHF 3.2 billion compared with net outflows of CHF 6.7 billion. Net new money in 2010 included CHF 2.5 billion related to the transfer of investment management responsibility for US hedge fund business from Wealth Management Americas to alternative and quantitative investments. Note that these are reported as invested assets in both business divisions as Wealth Management Americas continues to advise the clients of these funds.
Invested assets were CHF 34 billion on 31 December 2010, compared with CHF 41 billion on 31 December 2009 due to negative currency effects and net new money outflows, partly offset by positive market movements.

Global real estate

Revenues were CHF 258 million compared with CHF 185 million, mainly due to lower co-investment losses and higher performance fees.
Consequently, thegross marginwas 68 basis points compared with 47 basis points.
Net new money inflows were CHF 0.6 billion compared with net inflows of CHF 1.4 billion.
Invested assets were CHF 36 billion on 31 December 2010, a decrease of CHF 3 billion from 31 December 2009, due to negative currency effects and market movements, partly offset by net new money inflows.

Infrastructure

Revenues were CHF 14 million compared with CHF 13 million.
Net new money inflows were CHF 0.1 billion, unchanged from the prior year.
Invested assets were CHF 1 billion on 31 December 2010, mostly unchanged from 31 December 2009.

Fund services

Revenueswere CHF 202 million compared with CHF 214 million, mainly due to lower administrative fees due to lower average assets under administration and lower interest income.
Thegross margin on assets under administration was 5 basis points, unchanged from the prior year.
Net new assets under administration outflows were CHF 0.8 billion compared with net outflows of CHF 59.7 billion in 2009.
Totalassets under administration were CHF 390 billion compared with CHF 406 billion, due to negative currency effects and net new assets outflows, partly offset by positive market movements.



99


Table of Contents

UBS business divisions and Corporate Center
Global Asset Management

2009

Results

Pre-tax profit for full year 2009 was CHF 438 million compared with CHF 1,333 million in 2008. Excluding a net goodwill impairment charge in 2009 of CHF 191 million related to the sale of UBS Pactual, restructuring costs in 2009 of CHF 48 million and a gain of CHF 168 million from the sale of our non-controlling interest in Adams Street Partners in 2008, pre-tax profit would have decreased 42% to CHF 677 million.

Operating income

Total operating income was CHF 2,137 million in 2009 compared with CHF 2,904 million in 2008 due to lower management fees associated with a lower average invested assets base and reduced income following the sale of UBS Pactual in 2009. This was partly offset by higher performance fees in alternative and quantitative investments as well as lower operational losses. Additionally, 2008 revenues included a gain of CHF 168 million from the sale of our non-controlling interest in Adams Street Partners.

Operating expenses

Total operating expenses were CHF 1,698 million in 2009 compared with CHF 1,572 million in 2008. Excluding a net goodwill impairment charge in 2009, and restructuring charges during the whole period, operating expenses would have declined 7% to CHF 1,459 million. This resulted from lower general and administrative expenses, partly offset by higher accruals for performance-related compensation due to higher performance fees in alternative and quantitative investments. In 2009, operating expenses included CHF 340 million in goodwill impairment charges related to the sale of UBS Pactual (of which CHF 149 million was charged to the Corporate Center as this was related to foreign exchange exposures managed by Group Treasury).
General and administrative expenses were CHF 387 million in 2009 compared with CHF 462 million in 2008, mainly due to lower entertainment expenses, marketing costs, IT costs and professional fees as a result of ongoing cost-saving measures and reduced expenses following the sale of UBS Pactual.
Net charges to other business divisions were CHF 74 million in 2009, compared with a net charge from other business divisions of CHF 88 million in 2008. Excluding the abovementioned charge to the Corporate Center of CHF 149 million, allocated costs were down by CHF 13 million, or 15%, from 2008 mainly due to lower allocated costs from service providers as a result of ongoing cost-saving measures and reduced charges following the sale of UBS Pactual.
Depreciation of property and equipment was CHF 36 million in 2009, down by CHF 8 million as a result of lower depreciation charges on premises, IT and software.

Development of invested assets

Net new money

Net new money outflows were CHF 45.8 billion for 2009 compared with outflows of CHF 103.0 billion for 2008. Excluding money market flows, net new money outflows were CHF 33.6 billion in 2009 compared with CHF 124.2 billion in 2008. Net outflows from clients of our wealth management businesses were CHF 40.7 billion in 2009 compared with CHF 47.1 billion in 2008. Some of the inflows and outflows relating to clients of our wealth management businesses are also reported as net new money in- and outflows for the Wealth Management & Swiss Bank and Wealth Management Americas business divisions.

Invested assets

Total invested assets were CHF 583 billion on 31 December 2009 compared with CHF 575 billion on 31 December 2008. The net increase reflected the positive impact of financial market developments, positive currency fluctuations and CHF 4.2 billion related to the transfer of the real estate investment management business from Wealth Management & Swiss Bank and was partly offset by the exclusion of UBS Pactual assets coupled with net new money outflows.

Gross margin on invested assets

The gross margin was 37 basis points in 2009, compared with 39 basis points in 2008. The calculation of 2008 gross margin included a CHF 168 million gain from the sale of our non-controlling interest in Adams Street Partners in 2008. The 2009 gross margin was supported by higher performance fees, primarily in alternative and quantitative investments, and lower operational losses, partly offset by reduced income following the sale of UBS Pactual.

Results by business line

Traditional investments

Revenues were CHF 1,319 million in 2009 compared with CHF 1,859 million in 2008 due to lower management fees associated with a lower average invested assets base and reduced income following the sale of UBS Pactual in 2009, partly offset by lower operational losses in 2009. Revenues in 2008 also included a gain of CHF 168 million from the sale of our non-controlling interest in Adams Street Partners.
Thegross marginwas 26 basis points compared with 29 basis points in the prior year. The 2008 gross margin included the abovementioned gain from the sale of our non-controlling interest in Adams Street Partners. The 2009 gross margin was also favorably impacted by lower operational losses.
Net new money outflows were CHF 40.6 billion compared with net outflows of CHF 88.9 billion in the prior year. Excluding money market flows, net new money outflows were CHF 28.4



100


Table of Contents

UBS business divisions and
Corporate Center

billion compared with net outflows of CHF 110.1 billion in the prior year. Equities saw net outflows of CHF 8.2 billion compared with net outflows of CHF 31.5 billion. Fixed income saw net outflows of CHF 5.6 billion compared with net outflows of CHF 30.9 billion. Multi-asset saw net outflows of CHF 14.5 billion compared with net outflows of CHF 48.6 billion.

Invested assets were CHF 502 billion on 31 December 2009, compared with CHF 493 billion on 31 December 2008. The net increase reflects the positive impact of financial market developments and positive currency fluctuations, partly offset by the exclusion of UBS Pactual assets coupled with net new money outflows.

Alternative and quantitative investments

Revenues were CHF 405 million compared with CHF 430 million due to lower net management fees associated with a lower average invested assets base. Performance fees were up by CHF 87 million.
Thegross marginwas 102 basis points compared with 69 basis points primarily due to higher performance fees.
Net new money outflows were CHF 6.7 billion compared with net outflows of CHF 14.8 billion.
Invested assetswere CHF 41 billion on 31 December 2009, unchanged from 31 December 2008. The positive impact of financial market developments was offset by net new money outflows and negative currency fluctuations.

Global real estate

Revenues were CHF 185 million compared with CHF 277 million due to losses from co-investments and lower management fees associated with a lower average invested assets base.

This also resulted in a lowergross marginof 47 basis points compared with 63 basis points.
Net new money inflows were CHF 1.4 billion compared with net outflows of CHF 0.3 billion.
Invested assets were CHF 39 billion, a decrease of CHF 1 billion from 31 December 2008 due to the negative impact of market developments, mostly offset by CHF 4.2 billion related to the transfer of the real estate investment management business from Wealth Management & Swiss Bank and net new money inflows.

Infrastructure

Revenues were CHF 13 million, down by CHF 2 million from the prior year, predominantly a result of swings in exchange rates.
Net new money inflows were CHF 0.1 billion compared with net inflows of CHF 1.0 billion.
Invested assets were CHF 1 billion on 31 December 2009, unchanged from 31 December 2008.

Fund services

Revenues were CHF 214 million compared with CHF 322 million, mainly due to a lower average base of assets under administration and lower interest income.
Thegross margin on assets under administration was 5 basis points compared with 6 basis points.
Net new assets under administration outflows were CHF 59.7 billion compared with net outflows of CHF 61.1 billion.
Totalassets under administration were CHF 406 billion compared with CHF 425 billion due to net new assets outflows and negative currency fluctuations, partly offset by positive impact of financial market developments.



101


Table of Contents

UBS business divisions and Corporate Center
Investment Bank

Investment Bank

Business description

The Investment Bank provides a broad range of products and services to corporate and institutional clients, sovereign and governmental bodies, financial intermediaries, alternative asset managers and private investors. Products and services offered include securities sales, trading and execution, capital raising, advisory services and investment research across all major capital markets.

Business

The Investment Bank has three distinct and aligned business areas:

 equities
 fixed income, currencies and commodities (FICC)
 the investment banking department (IBD)
The equities and FICC businesses are organized under the securities business area to foster a higher degree of alignment and co-operation across our sales and trading businesses. Together, equities and FICC offer access to the primary and secondary securities markets, foreign exchange and prime brokerage services as well as research on equities, fixed income, commodities, and economic, strategic and quantitative research. IBD provides advice on mergers and acquisitions and restructurings, and raises capital for corporate, institutional and sovereign clients in the debt and equity markets. Additionally, IBD plays a lead role in marketing the Group to corporates, leveraging its senior client relationships.

Strategy

Our strategy is centered on an aligned and integrated client-centric business model built around flow and advice, and is supported by a disciplined risk control framework. Our business involves risk-taking to facilitate and intermediate client transactions. However, our trading strategies are subject to tight balance sheet and risk limits, which are controlled by our risk framework.

In supporting our strategy, we have created a securities platform to unify our capabilities in equities and FICC. Our securities strategy is focused on delivering performance across asset classes, giving clients easier access to the entire firm and creating value in the process. We continued to grow our credit, rates and emerging markets businesses, leveraging both existing and new talent as part of our rebuild in FICC. On a selective basis, and marked against hurdle rates and strict criteria, we have re-entered certain businesses relevant to our strategy. We also developed further capabilities in the commodities business. In equities, in addition to enhancing our position in cash equities, we are targeting growth in equity derivatives, exchange-traded derivatives and prime brokerage.
In IBD, we are focused on strengthening our market position in the Americas, while we continue to be among the leaders in Europe, the Middle East and Africa, and Asia Pacific regions.

Organizational structure

The Investment Bank is comprised of the three business areas described above. Additionally, the global capital markets business is a joint venture between securities and IBD, which consists of two separate areas: equity capital markets and debt capital markets. Global leveraged finance is a joint venture between IBD and FICC and includes the global syndicated finance business. We employ approximately 17,000 personnel in over 30 countries.

We operate through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer.

Significant recent acquisitions, disposals and business transfers

Key acquisitions and business transfers over the past three years include:
 the sale of our Brazilian financial services business, UBS Pactual in 2009; and
 the agreement to acquire Link Investimentos, a Brazilian financial services firm, announced in 2010.

Competitors

Our main competitors continue to be the major global investment banks, including Bank of America / Merrill Lynch, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley.

Products and services

Securities

The implementation of the securities organizational structure combined previously distinct trading and sales activities into a holistic business with the goal of improving our market position and overall client service. We aligned certain sales functions across equities and FICC products, resulting in a coordinated securities distribution platform with enhanced cross-asset delivery and specialist skills. Across securities, we also aligned some of our key capabilities, including global capital markets, quantitative analysis and prime services activity as well as a central treasury and trading function for the securities business. Securities research provides in-depth investment analysis across various asset classes on more than 3,000 companies worldwide, or about 80% of the global



102


Table of Contents

UBS business divisions and
Corporate Center

market capitalization across 55 markets. In addition, we have a specialist research function offering quantitative analysis, socially responsible investing, alternative research, valuation and accounting, and special situations analysis.

Equities

We are a leading participant in the world’s primary and secondary markets for equity, equity-linked and equity derivative products. We distribute, trade, finance and clear cash equity and equity-linked products. We also distribute new equity and equity-linked issues, and provide research on companies, sectors, geographic markets and macroeconomic trends as part of securities research. Equities has the technology required to support multi-instrument electronic execution for direct market access trading. We have aligned the prime brokerage, exchange-traded derivatives and fixed income clearing businesses within an integrated prime services organization, to provide a more seamless client relationship experience, improve service efficiency and position our business for increased transparency and regulatory changes in over-the-counter (OTC) derivative products.
Equities has global product and functional management, multi-regional operations and strongly embedded local expertise in all major developed and developing markets. The main business lines of the equities business area are:
 Cash equities provides clients with investment advisory, trade execution offerings and related consultancy services, together with comprehensive access to the primary markets, corporate management and subject matter expertise. We provide full-service trade execution for single stocks and portfolios, deliver capital commitment, block trading, small cap execution services, commission management services, and a full suite of advanced electronic trading strategies, platforms and analytical tools.
 Derivatives and equity-linked provide exchange-traded and structured or customized solutions to our clients. In addition to products with returns linked to equities or indices, we offer products linked to hedge funds, mutual funds, and real estate and commodity indices in a variety of formats such as over-the-counter, securitized, fund-wrapped and exchange-traded. We also offer a full range of convertible products, synthetic and structured products, and global access to primary and secondary markets.
 Prime services offers an integrated global prime brokerage business, including multi-asset class clearing and custody, capital consultancy, securities lending and equity swaps execution. The exchange-traded derivatives business is part of this product suite, including execution and clearing services and access to 70 global exchanges. These services are provided through a client-centric service model to hedge funds, banks, asset management and other financial services clients, including corporations, commodity traders, wealth management firms and aggregators.

Fixed income, currencies and commodities

The FICC business area delivers products and solutions to corporate, institutional and public sector clients in all major markets, as well as to private clients via targeted intermediaries. In 2010, to add product diversity and better service clients across the entire

fixed income product suite, we selectively re-entered the market in certain (previously exited) products, including several commodities products. The main business lines of the FICC business area are:
 Macro consists of the foreign exchange, money market and interest rate sales and trading businesses, as well as cash and collateral trading. We provide a range of foreign exchange, precious metals, treasury, and liquidity management solutions to institutional and private clients via targeted intermediaries. 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 sales and trading encompasses the origination, under-writing, trading and distribution of cash and synthetic products across the credit spectrum – bonds, derivatives, notes and loans. We are active across all major markets in secondary trading and market-making of flow and structured credit instruments, securitized products and loans, and are focused on providing tailored solutions for our clients. In partnership with IBD, we also provide capital markets debt financing and liability risk management solutions to corporates and institutions.
 Theemerging markets business offers investors in Central and Eastern Europe, the Middle East, Latin America and selected Asian countries access to international markets, and provides international investors with an opportunity to add exposure via our onshore presence in key locations. We also provide liquidity in the local markets across foreign exchange, credit, rates and structured products.

Investment banking department

IBD provides strategic advice and a range of capital markets execution services to corporate clients, financial institutions, financial sponsors, sovereign clients, wealth funds and hedge funds. With a presence in all major financial markets, investment banking coverage is based on a wide ranging matrix of country, sector and product banking professionals.
The main business lines of the IBD business area are:
 Theadvisory group assists in acquisitions and sale processes, and also advises on strategic reviews and corporate restructuring solutions.
 Global capital markets is a joint venture with the securities business. It offers financing and advisory services that cover all forms of capital raising as well as risk management solutions. It comprises the equity capital markets business, aligned with equities, whose products include initial public offerings, secondary offerings and equity-linked transactions; and the debt capital markets business, aligned with FICC, whose products include commercial paper, medium-term notes, senior debt, high-yield debt, subordinated debt and hybrid capital. All our financing products are provided alongside risk management solutions, which include derivatives, structured finance, ratings advisory services and liability management.
 Global leveraged finance provides event-driven (acquisition, leveraged buyout) loans, and bond and mezzanine leveraged finance to corporate customers and financial sponsors.



103


Table of Contents

UBS business divisions and Corporate Center
Investment Bank

Business performance

                 
Business division reporting 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
Investment banking
  2,414   2,466   2,880   (2)
 
Advisory revenues  846   858   1,609   (1)
 
Capital market revenues  1,994   2,514   1,844   (21)
 
Equities  1,020   1,609   977   (37)
 
Fixed income, currencies and commodities  974   904   866   8 
 
Other fee income and risk management  (426)  (906)  (573)  53 
 
Securities
  10,144   4,390   (26,712)  131 
 
Equities  4,469   4,937   5,184   (9)
 
Fixed income, currencies and commodities  5,675   (547)  (31,895)    
 
Total income
  12,558   6,856   (23,832)  83 
 
Credit loss (expense) / recovery1
  0   (1,698)  (2,575)  (100)
 
Total operating income excluding own credit
  12,558   5,158   (26,407)  143 
 
Own credit2
  (548)  (2,023)  2,032   73 
 
Total operating income as reported
  12,010   3,135   (24,375)  283 
 
Personnel expenses  6,743   5,568   5,182   21 
 
General and administrative expenses  2,693   2,628   3,830   2 
 
Services (to) / from other business divisions  64   (147)  41     
 
Depreciation of property and equipment  278   360   447   (23)
 
Impairment of goodwill  0   749   341   (100)
 
Amortization of intangible assets  34   59   83   (42)
 
Total operating expenses
  9,813   9,216   9,925   6 
 
Business division performance before tax
  2,197   (6,081)  (34,300)    
 
                 
Key performance indicators3
                
 
Pre-tax profit growth (%)4
  N/A   N/A   N/A     
 
Cost / income ratio (%)5
  81.7   190.7   N/A     
 
Return on attributed equity (RoaE) (%)  8.7   (24.1)  (128.2)    
 
Return on assets, gross (%)  1.2   0.4   (1.2)    
 
Average VaR (1-day, 95% confidence, 5 years of historical data)  56   55   79   2 
 
                 
Additional information
                
 
Total assets (CHF billion)6
  966.9   992.0   1 680.3   (3)
 
Average attributed equity (CHF billion)7
  25.3   25.3   26.8   0 
 
BIS risk-weighted assets, gross (CHF billion)  119.3   122.4   195.8   (3)
 
Return on BIS risk-weighted assets, gross (%)  9.7   3.1   (10.0)    
 
Goodwill and intangible assets (CHF billion)  3.2   3.5   4.6   (9)
 
Compensation ratio (%)5
  56.1   115.2   N/A     
 
Impaired lending portfolio as a % of total lending portfolio, gross (%)  5.5   8.0   6.0     
 
Personnel (full-time equivalents)  16,860   15,666   19,132   8 
 
1 Includes CHF 172 million in credit losses related to reclassified and acquired securities in 2010.  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 2010 amounts to CHF 0.2 billion. This gain has reduced the fair value of financial liabilities designated at fair value through profit or loss recognized on our balance sheet. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information.  3 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  4 Not meaningful if either the current period or the comparison period is a loss period.  5 Neither the cost / income nor the compensation ratio are meaningful if revenues in the Investment Bank are negative.  6 Based on third-party view, i.e. without intercompany balances.  7 Refer to the “Capital management” section of this report for more information about the equity attribution framework.

104


Table of Contents

UBS business divisions and
Corporate Center

2010

Results

In 2010, we recorded a pre-tax profit of CHF 2,197 million compared with a pre-tax loss of CHF 6,081 million in 2009, primarily as a result of increased revenues in FICC, a significant reduction in net credit loss expenses and lower own credit losses on financial liabilities designated at fair value.

Operating income

Total operating income in 2010 was CHF 12,010 million compared with CHF 3,135 million in the prior year. This was mainly a result of increased revenues in the FICC business, a significant reduction in net credit loss expense and lower own credit losses on financial liabilities designated at fair value, and was partly offset by lower revenues in the equities business.

Credit loss expense / recovery

The net credit loss expense in 2010 was nil compared with net credit loss expense of CHF 1,698 million in 2009. In 2010, we recorded CHF 172 million credit loss expenses related to reclassified and acquired securities which were offset by recoveries on certain legacy leveraged finance and asset backed loan positions.
è Refer to the “Risk management and control” section of this report for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures

Own credit

The own credit on financial liabilities designated at fair value reduced significantly to a loss of CHF 548 million from a loss of CHF 2,023 million. While our credit spreads tightened in both years, the effect in 2010 was less pronounced than in 2009.
è Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit

Operating income by business segment

Investment banking

Investment banking revenues were CHF 2,414 million in 2010, marginally down from CHF 2,466 million in the previous year.
Advisory revenues decreased slightly to CHF 846 million from CHF 858 million. While the overall market fee pool increased year on year, our market share declined.
Capital markets revenues were down 21% to CHF 1,994 million from CHF 2,514 million. Equity capital markets revenues were CHF 1,020 million, down 37% from CHF 1,609 million due to reduced market activity in the first half of 2010 following uncertainty over sovereign risk in Europe, and lower revenues in Asia Pacific as domestic Chinese banks took a greater share of fees than in 2009. Fixed income capital market revenues were CHF

974 million, up 8% from CHF 904 million, mainly due to a strong leverage capital market fees pool and market share gain.

Other fee income and risk management revenues were negative CHF 426 million compared with negative CHF 906 million, primarily due to the absence in 2010 of large losses as recorded in 2009, due to an overall stabilization of the credit markets.

Securities

Securities revenues were CHF 10,144 million, compared with CHF 4,390 million in 2009. Revenues of Equities and FICC are analyzed in the respective sections below.

Equities

Revenues in equities were CHF 4,469 million, down 9% from CHF 4,937 million in 2009.
Cash revenues were CHF 1,776 million, compared with CHF 1,959 million due to lower commission income as a result of decreased client activity in the US, offsetting stronger performance in EMEA.
Derivatives and equity-linked revenues were CHF 1,580 million, in line with last year. Derivatives revenues were up as a result of improved client flows and structured products performance in Asia Pacific, partly offset by lower revenues in EMEA due to the sovereign debt crisis, creating a lack of both liquidity and client flow. Equity-linked revenues were down after a strong performance in 2009.
Within the prime services business, revenues were CHF 1,036 million compared with CHF 1,058 million. Prime brokerage revenues declined due to lower average spreads whilst exchange-traded derivatives revenues marginally improved.
Other equities revenues were CHF 77 million compared with CHF 341 million, largely due to lower proprietary trading revenues partially offset by reduced funding and hedging costs.

Fixed income, currencies and commodities

Revenues were positive CHF 5,675 million in 2010 compared with negative CHF 547 million in 2009, when the FICC business was materially affected by losses on residual risk positions.
In credit, revenues rose significantly to positive CHF 2,304 million, up from negative CHF 1,932 million. The turnaround was largely due to the rebuild across the trading and sales businesses, particularly in structured credit and client solutions, as well as lowering of negative revenues from the legacy risk portfolio (the exposure to which was also reduced during this period), and the selective re-entry into previously exited products.
In macro, revenues of CHF 2,249 million were down from CHF 2,933 million in 2009. The decrease mainly stemmed from lower revenues in the rates and foreign exchange businesses, which were affected by a significant decline in market spreads, low interest rate volatility, reduced client activity and general de-risking, particularly in the second half of 2010.
Emerging markets revenues decreased to CHF 521 million from CHF 1,162 million as divesture of UBS Pactual, spread compres-



105


Table of Contents

UBS business divisions and Corporate Center
Investment Bank

sion experienced across foreign exchange and credit markets, and uncertainties over European sovereign debt impacted liquidity and overall client volumes.

Other FICC revenues were positive CHF 601 million compared with negative CHF 2,710 million. The 2010 revenues included CHF 737 million from residual risk positions due to a reduced credit valuation adjustment requirement and net gains on sale.

Operating expenses

Operating expenses increased 6% to CHF 9,813 million in 2010 from CHF 9,216 million in the previous year.
Personnel expenses increased 21% to CHF 6,743 million from CHF 5,568 million, mainly due to increased variable compensation as a result of amortization of prior years’ awards, increased number of employees and a UK Bank Payroll Tax charge of CHF 190 million.
General and administrative expenses increased to CHF 2,693 million in 2010 from CHF 2,628 million in 2009. This was largely due to an increase in legal provisions as well as higher sponsoring and branding costs related to the global re-launch of the UBS

brand. These costs were partially offset by a reduction in professional fees.

Net charges from other business divisions were CHF 64 million, compared with a net charge to other business divisions of CHF 147 million.
Depreciation reduced 23% to CHF 278 million in 2010 from CHF 360 million in 2009. Depreciation in 2009 included costs associated with a restructuring charge.
Goodwill impairment charges were nil in 2010 compared with a charge of CHF 749 million in 2009, related to the sale of UBS Pactual.
Amortization of intangible assets was CHF 34 million compared with CHF 59 million in 2009.
In addition, non-personnel costs included an additional allocation of expenses from the Corporate Center to the business divisions in 2010.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010



106


Table of Contents

UBS business divisions and
Corporate Center

2009

Results

In 2009, we recorded a pre-tax loss of CHF 6,081 million compared with a pre-tax loss of CHF 34,300 million in 2008, primarily due to a reduction in losses on residual risk positions.

Operating income

Total operating income in 2009 was positive CHF 3,135 million, up from negative CHF 24,375 million in 2008, mainly due to substantially reduced losses on risk positions within the FICC business.

Credit loss expense / recovery

We recorded net credit loss expenses of CHF 1,698 million for 2009, compared with net credit loss expenses of CHF 2,575 million in 2008. Excluding the credit loss expenses from reclassified securities of CHF 425 million, our net credit loss expenses amounted to CHF 1,273 million in 2009.
è Refer to the “Risk management and control” section of this report for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures

Own credit

The own credit loss on financial liabilities designated at fair value was CHF 2,023 million as our credit spreads narrowed in 2009, compared with a CHF 2,032 million gain in 2008.
è Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit

Operating income by business segment

Investment banking

Revenues of the investment banking department were CHF 2,466 million in 2009, down 14% from CHF 2,880 million in the previous year primarily due to reduced advisory revenues partially offset by increases in capital market revenues.
Mergers and acquisitions activity remained subdued during the year with global volumes reaching their lowest annual total since 2004, according to Thomson Reuters. As a result, advisory revenues decreased 47% to CHF 858 million across all regions.
Capital market revenues improved 36% in 2009. Equity capital markets revenues were up 65% to CHF 1,609 million with Europe, the Middle East, Africa and the Asia Pacific region performing well, as investors turned to the equity market for financing, increasing total market volumes by 42% compared with 2008, according to Dealogic. Fixed income capital markets revenues increased 4% to CHF 904 million as global issuance levels rose in 2009 by 38% compared with 2008, based on Dealogic’s debt capital markets classification.

Securities

Securities revenues were CHF 4,390 million compared with negative CHF 26,712 million in 2008. Revenues of Equities and FICC are analyzed in the respective sections below.

Equities

Revenues in equities were CHF 4,937 million in 2009, down 5% from CHF 5,184 million in 2008. Equity market conditions were difficult in 2009, impacting our overall business performance, as did the loss of some key personnel in the first part of the year. We made a number of strategic hires during the second half of the year.
Cash equity revenues were impacted by lower market volumes and a loss in market share.
Derivatives and equity-linked revenues were up compared with 2008. Equity-linked revenues increased significantly as all regions benefited from improvements in valuations and liquidity, partly offset by lower derivatives revenues.
Within the prime services business, revenues in both prime brokerage and exchange-traded derivatives declined. Reductions in prime brokerage revenues were due to a weaker dividend season and lower client balances in the first half of 2009. Declines in exchange-traded derivatives were due to weaker volumes and less favorable interest and margin balances.
Other equities revenues, including proprietary trading, improved with a strong performance recorded across all geographical regions.

Fixed income, currencies and commodities

Revenues were negative CHF 547 million in 2009, up from negative CHF 31,895 million a year earlier. The FICC result continued to be affected by losses on residual risk positions, which had a material impact particularly in the first half of 2009, but decreased significantly in the second half of the year. Despite the overall loss, the core FICC businesses contributed positive revenues in 2009 as the businesses were rebuilt, funding costs were normalized, and liquidity improved.
Credit revenues improved in 2009 as key hires were engaged and residual risk positions were steadily reduced.
In macro, rates business was impacted by movements in our credit spreads on the valuation of our derivative positions. Foreign exchange and money markets revenues were in line with 2008.
Emerging markets revenues increased despite the sale of UBS Pactual, as all regions continued to perform well, most notably in Eastern Europe, the Middle East and Africa.
As we continued to reduce our residual risk positions, we incurred losses related to the liquidation of these positions. Losses on credit valuation adjustments for exposure to monoline insurers arising from purchased credit default protection totaled CHF 0.8 billion in 2009. Losses from credit valuation adjustments incurred in the first quarter of 2009 were only partially offset by gains in the rest of the year, resulting from commutation of a number of



107


Table of Contents

UBS business divisions and Corporate Center
Investment Bank

trades in the second and third quarters. Other areas which incurred losses in first quarter 2009 had a less material impact on the remainder of the year.

Operating expenses

Operating expenses declined to CHF 9,216 million in 2009, from CHF 9,925 million in 2008.
Personnel expenses were CHF 5,568 million in 2009, a 7% increase from the previous year primarily due to higher variable compensation. Salary increases were partly offset by headcount reductions and reduced restructuring costs.
General and administrative expenses decreased to CHF 2,628 million in 2009 from CHF 3,830 million in 2008. This was largely due to reduced legal provisions and real estate restructuring provisions, along with continuing reductions in professional fees, travel and entertaining and market data services resulting from headcount reductions and cost-cutting measures.

Net charges to other business divisions were CHF 147 million in 2009, compared with a net charge from other business divisions in 2008 of CHF 41 million.
Depreciation reduced 19% to CHF 360 million in 2009 from CHF 447 million in 2008, as real estate restructuring charges were lower in 2009. Amortization of intangible assets was CHF 59 million in 2009 compared with CHF 83 million in the prior year. A goodwill impairment charge of CHF 749 million related to the sale of UBS Pactual was incurred in 2009 (of which CHF 328 million was charged to the Corporate Center as this was related to foreign exchange exposures managed by Group Treasury), compared with a CHF 341 million goodwill impairment charge relating to the exit of the municipal securities business in 2008.
Included in the 2009 operating expenses is a restructuring charge of CHF 226 million, consisting of CHF 102 million of personnel expenses and CHF 123 million of costs related to real estate.


108


Table of Contents

UBS business divisions and
Corporate Center

UBS business divisions and Corporate Center
Corporate Center

Corporate Center

Business description

The Corporate Center seeks to ensure that UBS operates as a coherent and effective whole, by providing and managing support and control functions for the business divisions and the Group, in the areas of risk, finance (including funding, capital and balance sheet management and management of non-trading risk), legal and compliance, information technology, human resources, real estate, procurement, communication and branding, corporate development, security and service centers.

Aims and objectives

The Corporate Center assists our business divisions through provision of Group-level control in the areas of finance, risk and legal and compliance, as well as through a global corporate shared services organization comprising support and logistics functions. We strive to maintain an appropriate balance between risk and return, and control our corporate governance processes, including compliance with relevant regulations. Each functional head in the Corporate Center has authority over all businesses in their area of responsibility, including the authority to issue Group-wide policies for that area.

The integration of Group-wide shared service functions (information technology, human resources, real estate, procurement, communication and branding, corporate development, security and offshoring) into the Corporate Center was successfully completed in 2009. The focus in 2010 was on centralization, governance and the set-up of business-aligned shared services. The result was a new global corporate shared services organization supporting the business divisions under the leadership of the Group Chief Operating Officer (COO). In parallel, the control functions were centralized under the Group Chief Financial Officer (CFO), the Group Chief Risk Officer (CRO), and the Group General Counsel (GC).

As a result, we have moved further towards sustainable efficiency improvements, effective execution and increased service quality. We have improved our cost management for global and Group-wide cost responsibilities, and have implemented simple service delivery models with clear responsibilities. A new investment governance process is in place to provide oversight, review and approval of programs in the investment portfolio, and those in the pipeline. This is part of a global service level agreement framework, ensuring alignment of investments with the Group’s strategic priorities.
At the end of 2010, across all shared services functions, the Corporate Center had approximately 19,400 employees. Almost all headcount and costs of the centralized functions are re-allocated to the business divisions for which the respective services are performed. The new governance process ensures cost transparency and consistency across service providers and consumers (the business divisions).
The integration of the control and support functions into the Corporate Center creates the foundation for superior Group-wide effectiveness and efficiency, as the operating models of individual functions and cross-functional synergies are optimized. Overall, the integrated structure helps us to maintain a strong, independent control function and provides a strong platform from which we can increase efficiency, create synergies for revenue growth and enhance shareholder value.


109


Table of Contents

UBS business divisions and Corporate Center
Corporate Center

Organizational structure

The Corporate Center consists of the control functions Group Finance, Group Risk, and Group General Counsel, in addition to the shared services functions.

Group Chief Financial Officer (Group CFO)

The Group CFO is responsible for transparency in, and appraisal of, the financial performance of the UBS Group (Group) and business divisions, the Group’s financial reporting, forecasting, planning and controlling processes, and for providing advice on financial aspects of strategic projects and transactions in collaboration with Corporate Development. The Group CFO manages the divisional and Group financial control functions. The Group CFO manages and controls our tax affairs and treasury and capital management, including management and control of funding and liquidity risk as well as regulatory capital ratios. After consultation with the Audit Committee, the Group CFO makes proposals to the Board of Directors (BoD) regarding the standards for accounting we have adopted, and defines the standards for financial reporting and disclosure. Together with the Group Chief Executive Officer (CEO), the Group CFO provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act 2002, and in coordination with the Group CEO, manages relations with analysts, investors and the rating agencies.

Group Chief Operating Officer (Group COO)

The Group COO is responsible for the management and performance of the shared service functions of the Group, including the management and control of Group-wide information technology, procurement, real estate and corporate administrative services, human resources, strategy, communications and branding as well as for physical and information security and offshoring services of

UBS. In addition, the Group COO supports the Group CEO in strategy development and key strategic issues. The Group COO also acts as the CEO of the Corporate Center, and oversees the business and strategic planning of the shared services.

Group Chief Risk Officer (Group CRO)

The Group CRO is responsible for developing and implementing principles and appropriate independent control frameworks for credit, market, country and operational risks within the Group. In particular, the Group CRO formulates and implements the frameworks for risk capacity / appetite, risk measurement, portfolio controls and risk reporting; and has management responsibility over the divisional and firm-wide risk control functions. The Group CRO implements the risk control mechanisms as determined by the BoD, the BoD Risk Committee or the Group CEO. In addition, the Group CRO approves transactions, positions, exposures, portfolio limits and provisions in accordance with the delegated risk control authorities, and monitors and challenges the firm’s risk-taking activities.

Group General Counsel (Group GC)

The Group GC has Group-wide responsibility for legal and compliance matters, policies and processes and for managing the legal and compliance function. The Group GC is responsible for establishing a Group-wide management and control process for our relationship with regulators, in close cooperation with the Group CRO and the Group CFO where relevant, and for maintaining the relationships with our key regulators with respect to legal and compliance matters. The Group GC is further responsible for reporting legal and compliance risks and material litigation, for managing litigation and special and regulatory investigations, and for ensuring that we meet relevant regulatory and professional standards in the conduct of our business.



 
Corporate Center cost savings

The Corporate Center allocates operating expenses to the business divisions according to service consumption.

In 2010, the Corporate Center had a cost base excluding variable compensation of just below CHF 7.5 billion which includes personnel costs of CHF 3.2 billion. The retained total operating expenses relate to Group governance functions and

Group items which cannot be allocated to specific business divisions.

As mentioned in the text describing the Corporate Center, the integration of the control and support functions has created a superior foundation for Group-wide efficiencies. In 2010, the Corporate Center was able to reduce its cost base excluding variable compensation before

allocation by CHF 605 million from the previous year, primarily as a result of lower personnel costs in IT and lower real estate-related costs.

The business divisions fully benefited from the reduced cost base through lower allocations.



 

110


Table of Contents

Results

Treasury activities and other corporate items reporting

From 2010 onwards, almost all costs incurred by the Corporate Center related to shared services and control functions are allocated to the reportable segments, which directly and indirectly receive the value of the services, either based on a full cost recovery or on a periodically agreed flat fee.

è Refer to “Note 1a 33) Segment reporting” and “Note 1b Allocation of additional Corporate Center costs to reportable segments” in the “Financial information” section of this report for more information
The allocated costs are shown in the respective expense lines of the reportable segments in “Note 2a Segment reporting” in the “Financial information” section, and in the “UBS business divisions and Corporate Center” section of this report.
The Corporate Center reporting table was renamed to “Treasury activities and other corporate items” to reflect the changes

in presentation of the Corporate Center information. It predominantly includes the results of treasury activities, e.g. from the management of structural foreign exchange risks and interest rate risks, residual operating expenses such as those associated with the functioning of the Group Executive Board and the Board of Directors, other costs related to organizational management, as well as a limited number of specifically defined items. These items include the valuation of UBS’s option to acquire the SNB StabFund’s equity and expenses such as capital taxes, as well as the difference between actually incurred Corporate Center costs and periodically agreed flat fees charged to the business divisions.

è Refer to the discussion of “Net income from treasury activities and other” in the “UBS results” section of this report for more information on significant items and treasury-related income



                 
  As of or for the year ended % change from 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08  31.12.09 
 
Income  1,135   394   998   188 
 
Credit loss (expense) / recovery  0   (5)  0   (100)
 
Total operating income
  1,135   389   998   192 
 
Personnel expenses  78   551   433   (86)
 
General and administrative expenses  168   199   353   (16)
 
Services (to) / from other business divisions  8   306   (73)  (97)
 
Depreciation of property and equipment  89   193   265   (54)
 
Amortization of intangible assets  0   0   0     
 
Total operating expenses
  343   1,250   979   (73)
 
Performance from continuing operations before tax  793   (860)  19     
 
Performance from discontinued operations before tax  2   (7)  198     
 
Performance before tax
  795   (867)  217     
 

Additional information

                
 
BIS risk-weighted assets (CHF billion)  8.9   8.5   8.8   5 
 
Personnel (full-time equivalents)  194   1,624   3,097   (88)
 

111


Table of Contents

 


Table of Contents

  Risk and treasury
  management

 

 

 

 

 

 

 

 

 

 

 

 

 

Audited information according to IFRS 7 and IAS 1

Risk disclosures provided in line with the requirements of theInternational Financial Reporting Standard 7 (IFRS 7) Financial Instruments: Disclosures,and disclosures on capital required by theInternational Accounting Standard 1 (IAS 1) Financial Statements: Presentation form part of the financial statements audited by our 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.

 



 


Table of Contents

 

    Risk management and control

 

  Disciplined risk management and control are essential to our success. In 2010, we continued to make significant investments in our infrastructure, processes, methodologies and people to ensure that our risk frameworks are sufficiently robust to support our risk appetite and business aspirations. 
     
  Our risk appetite is established within our risk capacity as determined by a complementary set of firm-wide risk metrics, and is approved under Board of Directors (BoD) authority. It is administered and enforced by a detailed limit framework of portfolio and position limits at both UBS Group (Group) and business division levels. 

 

 

In 2010, increased risk taking was authorized for incremental trading activity, particularly to support client flow activity, and also for loan underwriting. Outside of these two areas, the core risk profile of the firm remained largely unchanged.

Reduction of our residual risk positions remained a priority in 2010. We further reduced our exposures to monoline insurers, student loan auction rate securities and certain restructured legacy leveraged finance positions, thereby decreasing our impaired loan portfolio.

 



 


Table of Contents

 

    Treasury management

 

  We continued to maintain focus on asset quality and building up capital by increasing our tier 1 capital by CHF 3.5 billion and to further strengthen and safeguard our liquidity position by raising over CHF 15 billion equivalent of public benchmark bonds. 
     
  We have re-defined treasury interactions between business divisions and desks, improved tools and reporting, and introduced a new Group-wide funds transfer pricing process. 

 

 

Our total assets stood at CHF 1,317 billion on 31 December 2010, down CHF 23 billion (2%) from CHF 1,341 billion on 31 December 2009. The reduction occurred mainly in replacement values as market and currency movements drove down positive replacement values by CHF 21 billion (to CHF 401 billion). Our funded asset volume, which excludes positive replacement values, remained relatively unchanged, declining by CHF 3 billion in 2010.

In 2010, we continued to maintain a sound liquidity position and a diversified portfolio of funding sources, despite the potential uncertain impact of developments in financial regulatory reforms and the significant market volatility caused by uncertainties regarding the global macroeconomic environment, including certain European fiscal and sovereign debt concerns.

Over the course of 2010, as investors became gradually more risk tolerant, credit spreads and incremental funding costs for most global financial Institutions, including UBS, generally narrowed throughout the yield curve. We raised over CHF 15 billion equivalent of public benchmark bonds with an average maturity of 5.5 years. This exceeded the combined amount of public benchmark bonds and other long-term straight debt which matured, or was redeemed, during 2010. Our customer cash deposits in our wealth and asset management business divisions at year-end 2010 were stable compared with the prior year-end when adjusted for currency effects.

In response to the prolonged low yields, treasury supported and implemented measures to improve Wealth Management & Swiss Bank’s margin income through income-generating fixed receiver swap and bond portfolios.

Group Treasury continued to earn interest income on equity through its portfolio of interest rate products and managed the currency effects on equity and key ratios. Profits and losses in foreign currencies were hedged to protect shareholder value.

At year-end 2010, our BIS tier 1 ratio was 17.8%, and the BIS total capital ratio was 20.4%. While overall BIS risk-weighted assets declined by CHF 7.7 billion to CHF 198.9 billion, our BIS tier 1 capital increased by CHF 3.5 billion to CHF 35.3 billion. Our financial stability allowed us to call and redeem tier 1 and tier 2 instruments in 2010. Nevertheless, the BoD has decided to further bolster capital and has therefore not proposed any dividend for the financial year 2010.

We continued to use the equity attribution framework to guide our businesses in the allocation of resources to opportunities that are expected to provide the best risk-adjusted profitability contributions.

As of 31 December 2010, we had a total of 3.8 billion shares issued, an increase of 273 million shares compared with 31 December 2009. The conversion of CHF 13 billion in mandatory convertible notes on 5 March 2010 led to an issuance of 273 million shares from conditional capital.

 



 


Table of Contents

Risk and treasury management
Risk management and control

Risk management and control

Disciplined risk management and control are essential to our success. In 2010 we continued to make significant investments in our infrastructure, processes, methodologies and people to ensure that our risk frameworks are sufficiently robust to support our risk appetite and business aspirations. Our risk appetite is established within our risk capacity as determined by a complementary set of firm-wide risk metrics, and is approved under Board of Directors authority. It is administered and enforced by a detailed limit framework of portfolio and position limits at both Group and business division levels. Each element of our risk control framework plays a key role in the decision-making processes within the firm. All material risks are reported to the respective authority holders at least monthly. In 2010, increased risk-taking was authorized for incremental trading activity, particularly to support client flow activity, and also for loan underwriting. Outside of these two areas, the core risk profile of the firm remained largely unchanged. Reduction of our residual risk positions remained a priority in 2010. We further reduced our exposures to monoline insurers, student loan auction rate securities and certain restructured legacy leveraged finance positions, thereby decreasing our impaired loan portfolio.

Summary of key developments in 2010

The most important developments that took place in 2010 with regard to risk management and control include:

 On a net basis (new credit loss expenses minus recoveries), credit losses at the Group level were CHF 66 million, significantly down from CHF 1,832 million in 2009. Our Swiss and international loan portfolios were materially unchanged.
 Our impaired loan portfolio decreased by CHF 2.7 billion, primarily due to sales of certain restructured legacy leveraged finance positions, without the incurrence of any meaningful incremental costs to the firm.
 During the second half of the year, our market risk profile increased moderately from previously low levels (on both an absolute basis and a relative basis to our peers) in line with our previously communicated growth plans in the Investment Bank. This is reflected in the development of our value-at-risk (VaR) and market risk related risk-weighted assets (RWA).
 After repurchasing USD 7.6 billion at par value of outstanding client holdings of student loan auction rate securities (ARS) in 2010, our remaining purchase commitment at the end of the year was immaterial with a par value of USD 63 million. Despite the material buy-backs, our inventory of student loan ARS decreased by net USD 0.6 billion to USD 9.8 billion, as a result of significant redemptions and sales in the secondary market.
 We commuted several trades with monoline insurers, which along with an increase in the fair values or the remaining insured assets resulted in a reduction of our net exposure to monoline insurers after credit valuation adjustments (CVA) to USD 1.6 billion. Based on fair values, only 2% of our remaining portfolio of assets hedged with monoline insurers related to US residential mortgage-backed securities collateralized debt obligations (RMBS CDO). Approximately 73% of the remaining assets were collateralized loan obligations (CLO), the vast majority of which were rated AA and above.

 Our sovereign exposures are subject to limits and are actively managed under an established country risk control framework. As a result, sovereign exposures are commensurate with the rating of each country and the size of each economy. Sovereign exposures of industrialized European countries rated AA and below were materially reduced on a gross and net basis during the year. In addition, we do not have material sovereign risk exposures in the Middle East and North African region.
 We have made further significant enhancements to our firm-wide risk measures and tools. Our stress testing framework has continued to evolve, including the development of new scenarios to capture our risk exposure to extreme market events and macroeconomic developments.
 Since the start of 2009, the Swiss Financial Market Supervisory Authority (FINMA) has conducted regular stress tests on the two large Swiss banks. In July 2010, FINMA carried out a stress test which assumed a severe global recession and very sharp, specific shocks for certain European countries. FINMA’s analysis showed that UBS “would have a tier 1 ratio of at least 8% under the stress events tested.”
 In anticipation of the enhanced Basel II framework, we further enhanced our risk appetite framework by making it more comprehensive and relevant to the current financial environment. New measures supplementing the current market risk capital have been introduced, enabling compliance with the enhanced Basel II requirements.
 Over the last two years, we took comprehensive steps to help ensure that our compensation plans and processes were redesigned and implemented in such a way to ensure appropriate risk-taking. Risk awareness, assessment and management were integrated into our compensation framework. They now form a basis for designing our compensation plans, determining the overall bonus pool, allocating individual bonuses, and identifying and monitoring performance and compensation of key risk takers and controllers across the organization.


116


Table of Contents

Risk and treasury management

       
   We made significant investments in our risk IT platforms during 2010, particularly in the Investment Bank, where we are designing and building a new platform for risk aggregation. Key improvements being introduced include enhanced data quality and detail, automated reporting with ad-hoc analysis and drilldown capability, and re-engineered analytics for more accurate VaR calculations. Work in this area is ongoing.
   In order to standardize methodology, processes and tools for credit monitoring across our wealth management locations, we began global deployment of a new monitoring solution for this business. Additionally, in our Global Asset Management business, we commenced deployment of a third-party risk measurement application, which will facilitate improved reporting and provide our portfolio managers with enhanced risk management models.
    è Refer to the “Credit risk”, “Market risk”, “Operational risk”, “Risk concentrations” and “Liquidity and funding management” sections of this report for more information
    è Refer to the “Compensation” section of this report for more information on our compensation practices
       
  Risk management and control principles
       
(Audited) We have five key principles that support the firm in achieving an appropriate balance between risk and return:
  Protection of financial strength by controlling our overall risk exposures and assessing potential risk concentrations at position and portfolio levels, as well as across all risk types and business divisions.
   Reputation protection, which depends on a sound risk culture characterized by a holistic and integrated view of risk, performance and reward, including effectively managing and controlling risks. Our risk culture demands that all employees make protecting the firm’s reputation a priority.
   Management is accountable for all risks in their business, and is responsible for the continuous and active management of their respective risk exposures to ensure that risk and return are balanced.
   Independent control functions oversee the risk-taking activities of the business, the effectiveness of risk management in the business and the mitigation of operational risks.
   Disclosure of risk to provide comprehensive and transparent reporting to senior management, the Board of Directors (BoD), shareholders, regulators, rating agencies and other stakeholders.
       
      Our risk management and control principles are implemented through a risk management and control framework. This framework comprises qualitative elements such as policies and authorities, and quantitative components including risk measurement methodologies and risk limits.
      In addition, the framework is dynamic and continuously adapted as our businesses and the market environment evolve. It includes clearly defined processes to deal with new business initiatives as well as large and complex transactions.
       
  Risk management and control responsibilities
       
(Audited) Key roles and responsibilities for risk management and control are:
  The BoD is responsible for determining the firm’s risk principles, risk appetite and major portfolio limits, including their allocation to the business divisions. The BoD is supported by a BoD Risk Committee (RC), which monitors and oversees the firm’s risk profile and the implementation of the risk framework as established by the BoD. The BoD RC also assesses and approves the firm’s key risk measurement methodologies.
   The Group Executive Board (GEB) implements the risk framework, controls the firm’s risk profile and approves all major risk policies.
   The Group Chief Executive Officer (Group CEO) is responsible for the results of the firm, has risk authority over transactions, positions and exposures, and also allocates portfolio limits approved by the BoD within the business divisions.
   The divisional CEOs are accountable for the results of their business divisions including actively managing their risk exposures, and ensuring that risks and returns are balanced.
   The Group Chief Risk Officer (Group CRO) reports directly to the Group CEO and has functional and management authority over risk control throughout the firm. Risk Control provides independent oversight of risk and is responsible for implementing the risk control processes for credit, country, market, investment and operational risks. This includes establishing methodologies to measure and assess risk, setting risk limits and developing and operating an appropriate risk control infrastructure. The risk control process is supported by a framework of policies and authorities, which are delegated to Risk Control Officers, corresponding to their experience and scope of responsibilities.
   The Group Chief Financial Officer (Group CFO) is responsible for ensuring that disclosure of our financial performance is clear and transparent and meets regulatory requirements and corporate governance standards. The Group CFO is also responsible for implementing the risk management and control frameworks for capital management, liquidity, funding and tax.
   The Group General Counsel (Group GC) is responsible for implementing the firm’s risk management and control principles for legal and compliance matters.
       
  Risk categories
       
  The risks faced by our businesses can be broken down into three different categories: primary risks, consequential risks and business risks. Primary and consequential risks result from our business activities and are subject to independent risk control. Primary risks consist of credit risk, country risk, market risk (including issuer risk) and investment risk. Consequential risks consist of operational risk, which includes legal, compliance and tax risks, and liquidity and funding risks. Definitions of primary and consequential risks are provided below:


117


Table of Contents

Risk and treasury management
Risk management and control

       
(Audited)  Credit risk: the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations.
  Country risk: the risk of loss resulting from country-specific events. It includes transfer risk, whereby a country’s authorities prevent or restrict the payment of an obligation, as well as systemic risk events arising from country-specific political or macroeconomic developments.
   Market risk and investment risks: the risk of loss resulting from changes in market variables, whether to our trading positions or financial investments.
   Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external causes, whether deliberate, accidental or natural. This includes risks related to legal, compliance and tax matters.
   Liquidity and funding risks: the risk that we might be unable to either meet our payment obligations when due or to borrow funds in the market at an acceptable price to fund actual or proposed commitments.
       
      Finally, business risks arise from the commercial, strategic and economic risks inherent in our business activities. It is management’s responsibility to manage these risks.
    è Refer to the “Credit risk”, “Market risk”, “Operational risk” and “Liquidity and funding management” sections of this report for a description of the control frameworks for these risk categories
       
  Risk measurement
       
(Audited) A variety of methodologies and measurements are applied to quantify the risks of our portfolios and risk concentrations. Risks that are not properly reflected by standard measures are subject to additional controls, which may include pre-approval of transactions and specific restrictions. Models to quantify risk are generally developed by dedicated units within the firm-wide and business division-facing control functions. We require that valuations and risk models which could impact the firm’s books and records be independently verified and subjected to ongoing monitoring and control by the Group CRO and Group CFO organizations.
       
  Statistical loss and stress loss
       
  We assess potential future losses using two complementary types of risk measures: statistical loss and stress loss.
       
  Statistical loss
  Statistical loss measures include VaR, expected loss (EL) and earnings-at-risk (EaR). VaR estimates the losses which could potentially be realized over a set time period at an established level of confidence. EL is used to measure the average annual costs that are expected to arise from our credit portfolios and from operational risks. EaR is comprised of core statistical measures overlaid with management judgment, and measures the potential shortfall

 

in our earnings, which could potentially be realized over a set time period at an established level of confidence.
è Refer to the “Credit risk”, “Market risk” and “Operational risk” sections of this report for a description of our key statistical loss measures

Stress loss

To complement our statistical loss measures and better understand our risk capacity and appetite, we also perform stress testing. Stress loss is the loss that could result from extreme events under specified scenarios. We use stress testing to quantify our exposures to plausible yet extreme and unusual market movements, and to enable us to identify, understand and manage our potential vulnerabilities and risk concentrations. Our stress testing framework incorporates a comprehensive range of portfolio-specific stress tests as well as combined firm-wide stress tests.
Portfolio-specific stress tests are measures that focus on risks of specific portfolios within the business divisions. Our portfolio stress loss measures are characterized by past events but also include forward-looking elements. The stress scenarios for trading risks capture the liquidity characteristics of different markets and positions. Our stress frameworks include a scenario which reflects the extreme market conditions that were experienced at the height of the financial crisis in the fourth quarter of 2008.
Combined stress testing (CST) captures firm-wide exposure to a number of global systemic events, including a severe global recession. These stress tests are based on forward-looking macroeconomic and market event scenarios calibrated to different levels of severity. The evolution of economic variables and market indicators under these scenarios is defined and applied to our entire risk portfolio. The impact of primary, consequential and business risks is assessed with the aim of calculating the loss and capital implications should these stress scenarios be realized.
Stress test results are included in risk reporting and are important inputs for the risk control, risk appetite and business planning processes of the firm. Our firm-wide stress testing, which captures all major risks across our business divisions, is one of the key inputs for discussions between senior management, the BoD and regulators with regard to our risk profile. We continue to provide detailed stress analyses to FINMA in accordance with their requirements.
The stress scenarios are reviewed, updated and expanded regularly in the context of the macroeconomic and geopolitical environment by a committee comprised of representatives from the business divisions, Risk Control and Economic Research. Our stress testing therefore attempts to provide a control framework that is forward-looking and responsive to changing market conditions. However, the market moves experienced in real stress events may differ from moves envisaged in our scenario specifications.
Most major financial firms employ stress tests, but their approaches vary significantly, and there are no industry standards



118


Table of Contents

Risk and treasury management

defining stress scenarios or the way they are applied to a firm’s positions. Consequently, comparisons of stress results between firms can be misleading and, therefore, like most of our peers, we do not publish quantitative stress test results.

è Refer to the “Credit risk” and “Market risk” sections of this report for a description of our key stress loss measures

Group risk appetite framework

Our risk appetite framework establishes risk appetite objectives in respect of earnings and capital levels that we seek to maintain, even after experiencing severe losses over a defined time horizon. In order to monitor our risk profile against our risk appetite, we use our two complementary firm-wide risk measurement frameworks: EaR (together with its extension, capital-at–risk (CaR)) and CST. Both frameworks capture risks across all of our business divisions and from all major risk categories, including primary risks, consequential risks and business risks. These measures are significant components of our risk control, capital management and business planning processes, which are described in more detail below.

 EaR is measured as the potential shortfall in earnings at a 95% confidence level and is evaluated over both three-month and one-year periods.
 CaR extends EaR to consider the impact on BIS tier 1 capital of a more severe earnings shortfall and is measured at confidence levels from 95% to 99.9%.
 CST supplements EaR and CaR. As described in the “Stress loss” section above, our firm-wide stress tests evaluate the impact across our risk portfolios, and thereby on our earnings and capital, based on specified macroeconomic stress scenarios.

    Our risk appetite is approved by the BoD. Risk appetite is based on our risk capacity, which is in turn based on our capital and forecasted earnings resources. Our overall risk appetite is set as an upper limit covering the aggregate risk exposure for each risk appetite objective, taking into account inherent limitations in the precision of risk exposure measures that focus on extreme market and economic events. Comparison of the firm’s risk exposure with our risk capacity under prevailing operating conditions as well as prospective business plans serves as an input to the risk limit framework. This comparison is also a key tool to support management decisions on potential adjustments to the risk profile of our firm.

è Refer to the “Credit risk”, “Market risk” and “Risk concentration” sections of this report for more information on our risk exposures

Risk disclosures

The measures of risk exposure that we use may differ depending on the purposes for which exposures are calculated: financial accounting under International Financial Reporting Standards (IFRS), determination of our required regulatory capital or our internal management. The exposures detailed in the “Credit risk” and “Market risk” sections are typically based on our internal management view of risk exposure.

è Refer to the “Basel II Pillar 3” section of this report for further information on the exposures we use in the determination of our required regulatory capital



119


Table of Contents

Risk and treasury management
Risk management and control

Credit risk

   
(AUDITED)
 Credit risk is the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations to UBS. This can be caused by factors directly related to the counterparty, such as business or management problems, which cause failures in the settlement process, for example, in foreign exchange transactions where we have fulfilled our obligation but the counterparty fails to deliver the counter-value (settlement risk). Alternatively, it can be triggered by economic or political difficulties in the country in which a counterparty or issuer of a security is based or where it has substantial assets (country risk).
   
  Sources of credit risk
   
(AUDITED)
 Credit risk arises from traditional banking products such as loans, loan commitments and guarantees (for example, letters of credit). Credit risk also arises from traded products including over-the-counter (OTC) derivative transactions, exchange-traded derivatives, as well as securities financing transactions such as repurchase agreements (repos and reverse repos) and securities borrowing and lending transactions. The risk control processes applied to these products are generally the same, although the accounting treatment may vary as products can be carried at amortized cost (loans and receivables), at fair value through profit and loss (instruments held for trading, instruments designated at fair value) or at fair value through other comprehensive income (available-for-sale instruments) depending on the product type and the nature of the exposure. A form of credit risk also arises on securities and other obligations in tradable form, as their fair values are affected by changing expectations regarding the probability of issuers failing to meet these obligations or when actual failures occur. Where these securities and obligations are held in connection with a trading activity, we view the risk as a market risk. Debt securities not held in connection with a trading activity are reported as debt investments at the end of this section. Many of the business activities of Wealth Management & Swiss Bank and the Investment Bank expose us to credit risk, while credit risk exposures from Wealth Management Americas and Global Asset Management are less material.
   
  Credit risk control
   
  Limits and controls
(AUDITED)
 Limits are established for individual counterparties and their counterparty groups covering banking and traded products, as well as settlement amounts. These limits apply not only to the current outstanding amount, but also to contingent commitments and the potential future exposure of traded products. Credit engagements may not be entered into without the appropriate approvals and adherence to limits.
   
(AUDITED)
      In the Investment Bank, a distinction is made between exposures intended to be held to maturity (take-and-hold exposures) and those which are intended to be held for a short term, pending distribution or risk transfer (temporary exposures).
     Credit risk concentrations can arise if clients are engaged in similar activities, are located in the same geographical region or have comparable economic characteristics, for example, if their ability to meet contractual obligations would be similarly affected by changes in economic, political or other conditions. To avoid credit risk concentrations, we establish limits and/or operational controls to constrain risk concentrations at portfolio and sub-portfolio levels with regard to sector exposures, country risk and specific product exposures.
   
  Risk mitigation
(AUDITED)
 We actively manage the credit risk in our portfolios by taking collateral against exposures and utilizing credit hedging. In Wealth Management & Swiss Bank, the majority of loans are extended on a secured basis. For real estate financing, a mortgage over the property is taken to secure the claim. Commercial loans may also be secured by mortgages on business premises or other real estate. We apply measures to evaluate collateral and determine maximum loan-to-value ratios including an assessment of income cover.
     Lombard loans are made against the pledge of eligible marketable securities or cash. The Investment Bank also takes collateral in the form of marketable securities and cash in its OTC derivatives and securities financing businesses. Discounts (haircuts) are generally applied to the market value of the collateral reflecting the quality, liquidity and value volatility of the underlying collateral. Exposure and collateral values are continuously monitored, and margin calls or close-out procedures are enforced when the market value of collateral falls below a predefined trigger level. Concentrations within individual collateral portfolios and across clients are also monitored where relevant and may affect the haircut applied to a specific collateral pool.
     Our OTC derivatives trading is generally conducted under bilateral International Swaps and Derivatives Association (ISDA), or ISDA-equivalent, master trading agreements, which allow for the close-out and netting of all transactions in the event of default. We also have two-way collateral agreements with major market participants under which either party can be required to provide collateral in the form of cash or marketable securities when the exposure exceeds a predefined level. Our OTC derivatives activity with lower-rated counterparties is typically conducted under one-way collateral agreements where only the counterparty is required to provide us with collateral. For certain counterparties, like hedge funds, we may also use two-way collateral agreements. We have clearly defined processes for entering into netting and collateral


120


Table of Contents

Risk and treasury management

     
(Audited) agreements, including the requirement to have a legal opinion on the enforceability of contracts in relevant jurisdictions in the case of insolvency.
     Primarily in the Investment Bank, we actively manage the credit risk of our portfolios with the aim of reducing its concentrations toward specific counterparties, sectors or portfolios. Hedging measures include single-name credit default swaps (CDS), index CDS, credit-linked notes and total return swaps. Single-name CDS are generally executed under bilateral netting and collateral agreements with high-grade market counterparties. We observe strict standards for recognizing credit hedges; for example, we usually do not recognize credit risk mitigants such as proxy hedges (credit protection on a correlated but different name) or index CDS for the purposes of monitoring exposures against limits. Buying credit protection creates credit exposure against the hedge provider. We monitor our exposures to credit protection providers and the effectiveness of credit hedges as part of