Financial Businesses

Our first quarter 2005 result was the second-best quarterly performance on record. Net profit attributable to UBS shareholders (“attributable profit”) was CHF 2,427 million. Excluding goodwill amortization, it missed the record result achieved in first quarter 2004 by only CHF 1 million.

Recurring revenues from our wealth and asset management businesses compensated for the fall in income from trading activities, which benefited from very positive market conditions in first quarter 2004, particularly for fixed income. Net fee and commission income this quarter was particularly strong and made up more than 50% of our overall operating income. Brokerage fees could not match the particularly high levels reached in first quarter 2004, but that decrease was fully offset by record investment fund fees and strong portfolio management fees. The success of our growing US bank, UBS Bank USA, along with higher volumes in the Swiss mortgage business and the wealth management margin lending businesses, was also an important contributor to first quarter operating income. Personnel costs were practically flat, in line with revenue developments. General and administrative expenses were slightly lower than in first quarter 2004, reflecting our continued cost discipline. Our overall result was also helped by another quarter of credit loss recoveries.

Operating income

Total operating income was CHF 10,104 million in first quarter 2005, slightly lower than the record achieved in the buoyant trading conditions seen a year ago. Our wealth and asset management businesses profited from stronger market valuations, helping them to generate higher asset-based fees, which more than offset lower transaction-related fees. We also recorded higher credit loss recoveries compared to the year-earlier quarter. On the other hand, trading revenues decreased, with fixed income trading down 19%, foreign exchange 10%, and equities virtually flat.

Net interest income was CHF 2,690 million in first quarter 2005, against CHF 3,025 million in the same period a year earlier. Net trading income was CHF 1,936 million this quarter, down from CHF 1,974 million in first quarter 2004.

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 1,313 million, net income from interest margin products in first quarter 2005 was CHF 48 million higher than CHF 1,265 million a year earlier. The largest driver of the increase was the growth in lending to wealthy US clients through UBS Bank USA, whose loan book has grown by CHF 2.2 billion since the same time last year. Our domestic Swiss mortgage business and wealth management margin lending businesses have also grown since last year. Interest margins on cash and savings accounts increased as well. Offsets included lower income from our Swiss recovery portfolio, which dropped by CHF 1.9 billion compared to the year-earlier quarter, as well as falling interest revenues in Swiss franc terms from US dollar cash accounts.

Net income from trading activities, at CHF 3,138 million in first quarter 2005, was down by 13% or CHF 462 million from the all-time high achieved a year ago (CHF 3,600 million). At CHF 936 million, equities trading in first quarter 2005 was down CHF 10 million from CHF 946 million in the same period a year earlier, due in part to the weakening of the US dollar against the Swiss franc. January and February saw a strong upturn in market activity in European and Asian equities, cooling to more moderate levels in March. Strong trading performance in derivatives and equity finance was partially offset by lower cash trading and proprietary revenues. Fixed income trading revenues, at CHF 1,748 million in first quarter 2005, were down 19% from a record CHF 2,151 million a year ago. The decrease was driven by lower revenues in credit fixed income, in particular in distressed debt trading reflecting low liquidity in the market, which was accentuated by less favorable conditions for the structured credit products business. In the rates business, we posted lower revenues from swaps and options trading. Lower revenues from municipal bonds trading in Wealth Management USA further contributed to the decrease. We recorded an unrealized gain of CHF 91 million relating to Credit Default Swaps (CDSs) hedging existing credit exposure in the loan book, against a mark-to-market gain of CHF 53 million a year earlier. Foreign exchange trading revenues decreased by 10% to CHF 372 million in first quarter 2005 from CHF 414 million in the same quarter a year ago, reflecting lower performance in our derivative trading business, partially offset by higher proprietary revenues.

At CHF 175 million, net income from treasury and other activities in first quarter 2005 was up CHF 41 million or 31% from CHF 134 million a year earlier. The increase reflects the benefits of the diversification of our equity into currencies other than the Swiss franc. This positive impact was further accentuated by a timing effect due to cash flow hedge ineffectiveness related to derivatives hedging interest rate risk.

In first quarter 2005, net fee and commission income was CHF 5,155 million, up 3% from CHF 5,027 million a year earlier. The increase was driven by strong recurring asset-based fees, partially offset by lower net brokerage fees and corporate finance fees. Underwriting fees, at CHF 707 million, were only slightly lower (down 1%) than the CHF 711 million recorded in the year-earlier quarter. Fixed income underwriting rose 18% to a record high of CHF 370 million, but was offset by a 15% decrease in equity underwriting fees, which fell to CHF 337 million, mainly due to lower underwriting volumes for closed-end funds. At CHF 187 million, corporate finance fees in first quarter 2005 dropped 7% from CHF 200 million a year earlier. The deal pipeline of our Investment Bank, however, has trebled since first quarter 2004. According to Dealogic, we ranked fourth in the global fee pool with a market share of 5.4% in first quarter 2005, up from fifth place with a share of 5.1% for full-year 2004. Net brokerage fees fell 7% to CHF 1,253 million from the CHF 1,341 million recorded in first quarter 2004, reflecting a decline in institutional and private client equities activity from the exceptionally strong activity levels seen a year earlier. Investment fund fees, at CHF 1,250 million in first quarter 2005, were up 11% from the CHF 1,129 million posted in first quarter 2004. They were driven by increasing invested assets in both UBS and third-party mutual funds. Portfolio and other management fees increased by 13% to CHF 1,267 million in first quarter 2005 from CHF 1,123 million a year earlier. The increase is the result of rising invested asset levels driven by market valuations and strong net new money inflows, as well as improved performance fees. It also reflects the success of our managed account portfolios in our wealth management units, with their proportion within the Wealth Management USA product palette continuing to rise strongly.

Other income rose by 74% to CHF 186 million in first quarter 2005 from CHF 107 million in the same period a year ago. The increase was mainly driven by gains on a financial participation largely attributable to minority investors.

Operating expenses

Total operating expenses were CHF 6,877 million. The decrease of 3% from CHF 7,120 million reported a year earlier mainly reflects the discontinuation of goodwill amortization from 1 January 2005 onwards. If goodwill amortization expenses for first quarter 2004 are excluded, operating expenses decreased 1%, reflecting our continued efforts to tightly manage our cost base and focus on improving the efficiency of our businesses.

Personnel expenses fell slightly (CHF 15 million) to CHF 5,079 million in first quarter 2005 from CHF 5,094 million a year earlier. Higher salary expenses due to the continuous expansion of our business as well as increased expenses for contractors reflecting the integration of IT staff (details on the 'UBS Results' section and the 'Corporate Functions' section) were more than offset by lower accruals for performance-related payments and the absence of retention payments for Wealth Management USA key personnel, which ended in the middle of 2004. Personnel expenses are managed on a full-year basis with final fixing of annual performance-related payments in fourth quarter.

At CHF 1,455 million in first quarter 2005, general and administrative expenses decreased CHF 43 million from CHF 1,498 million in the same period a year ago. Provisions for legal costs and liability risk rose, along with marketing expenses and travel and entertainment costs. These increases were offset by savings in professional fees, occupancy, rent and maintenance. IT and other outsourcing-related expenses also went down, due to the shift of some IT infrastructure spending from outsourcing to staff cost (for more details, please refer to the 'UBS Results' section and the 'Corporate Functions' section of this report).

Depreciation was CHF 312 million in first quarter 2005, up 3% from CHF 303 million, reflecting the integration of previously outsourced IT infrastructure.

At CHF 31 million, amortization of intangible assets was down 31% from CHF 45 million a year earlier, due to the reclassification of certain intangible assets within the Wealth Management USA unit as of 1 January 2005. Under the new accounting rules, these assets are classified as goodwill, which is no longer amortized.