Results fourth quarter 2004

Our fourth quarter 2004 result was our second-best quarterly performance since 2000. It was driven by excellent securities trading results and the ongoing strength of all our wealth and asset management businesses. Despite the drop of the US dollar against the Swiss franc over the year, net profit in fourth quarter 2004 was CHF 1,993 million, up 10% from CHF 1,808 million for the year-earlier quarter. A 7% rise in total operating income outpaced a 4% increase in operating expenses. Our income profited from strong trading revenues in all asset classes, reflecting active financial markets at the close of the year. Fee and commission income benefited from increasing levels of recurring asset-based fees. Our result was further helped by another quarter of credit loss recoveries.

Operating income

Total operating income was CHF 9,167 million in fourth quarter 2004, up 7% from CHF 8,538 million in the same quarter a year earlier. Our trading-related businesses reported strong results, reflecting improved market activity levels following the clear outcome of the US elections in November. Trading revenues in equities (up 25%), fixed income (up 10%) and foreign exchange (up 13%) all showed strength. All our wealth and asset management businesses profited from higher market valuations, which pushed up asset-based revenues, leading to very strong portfolio management fees and record investment fund fees. A strong contribution from our investment banking business helped drive advisory revenues higher. We also recorded higher credit loss recoveries compared to the year-earlier quarter. This increase in revenues was partially offset by the weakening of the US dollar against the Swiss franc as well as lower private equity divestment gains, which were particularly high a year ago.

Net interest income was CHF 3,284 million in fourth quarter 2004, up from CHF 3,007 million in the same period a year earlier. Net trading income was CHF 683 million this quarter, up from CHF 578 million in fourth quarter 2003.

As well as income from interest margin-based activities (loans and deposits), net interest income includes income earned as a result of trading activities (for example, coupon and dividend income). This component is volatile from period to period, depending on the composition of the trading portfolio. In order to provide a better explanation of the movements in net interest income and net trading income, we analyze the total according to the business activities that give rise to the income, rather than by the type of income generated.

At CHF 1,306 million, net income from interest margin products in fourth quarter 2004 was CHF 73 million or 6% higher than CHF 1,233 million a year earlier. The largest driver of the increase was the growth in lending to wealthy US clients through our US bank, UBS Bank USA. Our domestic Swiss mortgage business and wealth management margin lending businesses also grew over the year. Interest margins from cash and savings accounts widened as rates rose from all-time lows. Offsets included lower income from our Swiss recovery portfolio, which dropped by CHF 2.0 billion compared to the year-earlier quarter, and falling interest revenues in Swiss franc terms from US dollar cash accounts.

Net income from trading activities was CHF 2,546 million in fourth quarter 2004, up by 13% or CHF 292 million from CHF 2,254 million a year ago. At CHF 878 million, equities trading in fourth quarter 2004 was up 25% or CHF 177 million from CHF 701 million in fourth quarter 2003. High levels of market activity after the US elections in November, along with strong merger and acquisition volumes, provided excellent trading conditions in which our proprietary trading strategies performed well. Equity finance revenues increased strongly, reflecting the successful integration of ABN Amro’s prime brokerage business. Fixed income trading revenues, at CHF 1,257 million in fourth quarter 2004, were up 10% from CHF 1,146 million a year ago. The increase was driven by improved results in our principal finance and fixed income businesses. Central bank rates action stimulated volatility and market activity during the quarter, generating good trading opportunities. We recorded an unrealized loss of CHF 52 million relating to Credit Default Swaps (CDSs) hedging existing credit exposure in the loan book, against a mark-to-market loss of CHF 105 million a year earlier. Foreign exchange trading revenues increased by 13% to CHF 362 million in fourth quarter 2004 from CHF 321 million in the same quarter a year ago, reflecting a strong performance in our derivative trading business due to higher market volatility and activity.

At CHF 270 million, net income from treasury activities in fourth quarter 2004 was CHF 56 million or 17% lower than CHF 326 million a year earlier. The drop was mainly due to a timing effect due to cash flow hedge ineffectiveness related to derivatives hedging interest rate risk for more details please refer to our second quarter 2004 report). This was accentuated by a drop in returns from invested equity as we continued to repurchase shares, which more than offset the positive impact on our revenues from the diversification of our equity into currencies other than the Swiss franc.

Other net trading and interest income was negative CHF 155 million in fourth quarter 2004 compared to negative CHF 228 million a year earlier. The improvement was due to lower goodwill funding costs, as well as declining funding costs for our private equity portfolio.

In fourth quarter 2004, net fee and commission income was CHF 5,037 million, up 5% from CHF 4,820 million a year earlier. The increase was driven by a strong contribution from recurring asset-based fees, rising corporate finance fees and higher net brokerage fees. This was partially offset by lower underwriting fees in comparison to a terrific quarter a year ago. These fees stood at CHF 649 million, down 16% from CHF 771 million a year earlier. Both equity and fixed income underwriting fees decreased. Fixed income underwriting was CHF 271 million, down 9% from CHF 297 million a year ago, and equity underwriting fell 20% to CHF 378 million. At CHF 410 million, corporate finance fees in fourth quarter 2004 rose 34% from CHF 306 million recorded a year earlier, as the market saw a burst of merger and acquisition activity. Net brokerage fees increased by 2% to CHF 1,116 million in fourth quarter 2004 from CHF 1,092 million in the same quarter a year earlier, driven by higher institutional and private client activity levels reflecting strongly rising equity markets at the end of the year. At CHF 1,158 million, investment fund fees in fourth quarter 2004 were up 10% from CHF 1,051 million in the same quarter a year earlier and now stand at a record level. Portfolio and other management fees increased by 15% to CHF 1,172 million in fourth quarter 2004 from CHF 1,021 million a year earlier. The increase is again the result of rising invested asset levels driven by market valuations and strong net new money inflows.

Other income dropped by 80% to CHF 35 million in fourth quarter 2004 from CHF 179 million in the same period a year ago. The drop was driven by significantly lower gains from private equity investments (down CHF 194 million) and a valuation adjustment to our real estate portfolio.

Operating expenses

We continue to tightly manage our cost base with a clear focus on improving the efficiency of our businesses. Total operating expenses increased by 4% to CHF 6,575 million in fourth quarter 2004 from CHF 6,303 million a year earlier.

Personnel expenses increased by CHF 290 million or 7% to CHF 4,328 million from CHF 4,038 million in the same period a year ago. The rise was driven by higher performance-related compensation, mainly at the Investment Bank, which increased in line with improving results. Personnel expenses are managed on a full-year basis with final fixing of annual performance-related payments in fourth quarter. Salary expenses reflected a 2% increase in headcount over the year. For 2004, approximately 49% of personnel expenses took the form of bonus or variable compensation, up from 44% last year. Average variable compensation per head in 2004 was 17% higher than in 2003.

At CHF 1,709 million in fourth quarter 2004, general and administrative expenses increased CHF 42 million from CHF 1,667 million in the same period a year ago. Small increases were seen across several expense categories. The biggest increases were in variable costs supporting business growth, for example, administration, IT and telecommunication expenses. Professional fees also increased due to higher legal and project costs.

Depreciation was CHF 328 million in fourth quarter 2004, down 12% from CHF 373 million in fourth quarter 2003, reflecting falling IT-related charges as well as lower writedowns of equipment at the Investment Bank.

At CHF 210 million, amortization of goodwill and other intangible assets was down 7% from CHF 225 million a year earlier, reflecting the weakening of the US dollar against the Swiss franc.