Capital Management

We are committed to being one of the best-capitalized financial services firms in the world with sound capital ratios and strong debt ratings. Our strong capitalization allows us to invest in the growth of our businesses by making acquisitions or by growing organically. But absent any such opportunities, we will continue to return any excess capital to our shareholders through share buybacks or dividends, while maintaining our BIS Tier 1 ratio at its high level. All numbers have been restated for the accounting changes mentioned in 'Changes in accounting and presentation in 2005'.

Risk-weighted assets were CHF 286.0 billion on 31 March 2005, up 8% from CHF 264.8 billion on 31 December 2004. Half of the increase was driven by higher capital requirements from our loan portfolio, driven by the Investment Bank and Wealth Management and Business Banking Business Groups in support of their growing client franchises. Higher capital requirements for lending at the Investment Bank were spread over a variety of business activities, among them equity finance and global syndicated finance. The Wealth Management and Business Banking rise reflected higher margin lending activities, an increase in mortgages and, to a lesser extent, lending growth in our Swiss corporate business. Much of the increased lending activity is collateralized (for example, margin lending and prime brokerage), but still, however, carries superior risk-weightings under BIS rules. The lending growth was accentuated by higher irrevocable commitments in our global syndicated finance business and higher capital requirements for our repo, forwards, swap and OTC option businesses, where business volumes rose. The strengthening of the US dollar against the Swiss franc contributed CHF 5 billion to the increase in risk-weighted assets.

BIS Tier 1 capital rose to CHF 32.8 billion on 31 March 2005 from CHF 31.6 billion on 31 December 2004. The increase in retained earnings and positive currency translation effects more than offset higher goodwill from the reclassification of value of the former PaineWebber workforce from an intangible asset. Our BIS Tier 1 ratio dropped to 11.5% at the end of March from 11.9% at the end of December.

Buyback program

We terminated our 2004 share buyback program on 4 March 2005, after repurchasing a total of 39,935,094 shares for an average price of CHF 88.72, representing a total cost of CHF 3,543 million. Following the approval at the Annual General Meeting on 21 April 2005, these shares will be canceled in July 2005.

We started a new program on 8 March 2005, which will again lead to a cancellation of the repurchased shares. The program will allow us to repurchase up to CHF 5 billion in shares and will run until 7 March 2006. We will seek approval for the cancellation of shares bought back under this program at the Annual General Meeting in April 2006. As of 31 March 2005, we had not yet bought back any shares under the new program.

Treasury shares

IFRS requires a company that holds its own shares for trading or non-trading purposes to record those shares as treasury shares and deduct them from shareholders’ equity.

Our holding of own shares decreased to 103,890,943 or 9.2% of shares issued on 31 March 2005, from 124,663,310 or 11.1% of shares issued on 31 December 2004. The decrease reflects shares we delivered to employees during the period as part of employee share or option programs.

Of the currently held treasury shares, 39,935,094 were bought for cancellation whereas the other 63,955,849 mainly cover employee share and option programs, and, to a limited extent, market-making activities at the Investment Bank. The Investment Bank acts as a market-maker in UBS shares, as well as in derivatives related to those shares, and may hold UBS shares as a hedge for derivatives issued to retail and institutional investors. Changes in the trading approach can lead to fluctuations in the size of our direct holding of UBS shares.

New preferred securities issue

In early April, we successfully placed EUR 1 billion of perpetual preferred securities, taking advantage of the low credit spreads for subordinated bank capital in the capital markets. The new issue of perpetual preferred securities is in line with our strategy to diversify the currency structure of our Tier 1 capital from Swiss francs into euros and US dollars, better reflecting the currency mix of our businesses.

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