Credit Risk

UBS realized a net recovery of CHF 128 million in fourth quarter 2004, following net recoveries of CHF 14 million in third quarter 2004 and net credit loss expense of CHF 46 million in fourth quarter 2003. For full-year 2004, our net recoveries were CHF 276 million. This compares favorably to the credit loss expense of CHF 72 million a year earlier. Both the Wealth Management & Business Banking and Investment Bank Business Groups contributed to the improvement.

Wealth Management & Business Banking reported a net recovery of CHF 15 million in fourth quarter 2004, compared to net recoveries of CHF 39 million in third quarter 2004 and net credit loss expense of CHF 100 million in fourth quarter 2003, which was negatively impacted by the sudden default of Erb Group, a privately held Swiss conglomerate. For full-year 2004, it recorded a net recovery of CHF 91 million, compared to credit loss expense of CHF 67 million in 2003. In 2004, it experienced few new impairments despite relatively high corporate and private bankruptcy rates in the Swiss market.

The Investment Bank realized a net recovery of CHF 128 million in fourth quarter 2004, well above the third quarter 2004 and fourth quarter 2003 net recoveries of CHF 17 million and CHF 54 million respectively. This favorable fourth quarter result was helped by a significant release of a previously established provision relating to an international borrower which has experienced a successful turnaround.

For full-year 2004, the Investment Bank realized net recoveries of CHF 240 million, compared to net credit loss expense of CHF 4 million in 2003.

UBS’s gross loan portfolio decreased to CHF 270 billion on 31 December 2004 from CHF 276 billion on 30 September 2004. About half of this decrease resulted from reduced short-term interbank exposure held by the Investment Bank. The loan exposure of Business Banking Switzerland declined by CHF 2.6 billion, reflecting repayments of short-term corporate loans, seasonally lower demand and the continued reduction of our impaired loan portfolio. In fourth quarter, however, our mortgage loan portfolio experienced further growth.

Our impaired loans portfolio declined to CHF 4,861 million, down 10% from CHF 5,390 million in the previous quarter as very few new impaired positions were recorded in the period, leading to a further improvement in the impaired loans to total loans ratio, which fell to 1.8% from 2.0%.

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