Letter to shareholders

Marcel Ospel & Peter Wuffli

Dear Shareholders,

Our quarterly messages provide you with an update on your firm. We believe they should not only tell you how we are doing financially, they should also give you some insight into how we approach new opportunities and new markets. Like China, for example. This market could become a key source of revenue growth – but it will not happen overnight. We have been patiently investing in our franchise in China for almost two decades now, and will continue to do so. An example of that is our new joint venture fund management company, established last month together with the State Development Investment Corporation. Together, we will launch new China-based mutual funds, strengthening their existing fund offerings. Our Investment Bank’s business momentum in China is also extremely strong – and is the subject of one of the features in our quarterly report. We hope you will take the opportunity to read it.

Looking at our financials in first quarter – net profit attributable to you, our shareholders, was CHF 2,625 million. Our industrial holdings, now including the private equity portfolio previously reported as part of the Investment Bank, contributed CHF 198 million. Our financial businesses contributed CHF 2,427 million, the second-best quarterly performance on record. In fact, we missed by only CHF 1 million the record pre-goodwill result achieved in first quarter 2004.

Revenues held up extremely well – even if our securities trading performance did not match the peak level achieved in buoyant markets a year ago. In another clear illustration of the diversity of our income stream, the strength of recurring revenues in our wealth and asset management businesses compensated for the slowdown in trading returns. This recurring revenue growth was in large part driven by our invested asset base, which grew to CHF 2.4 trillion this quarter, as clients once again trusted us with significant new assets. Net fee and commission income was almost at its all-time high, making up more than 50% of our overall operating income, and including the highest investment fund fees we have ever reported. Our total inflow of net new money was CHF 32.3 billion this quarter, with wealthy individual clients contributing CHF 21.2 billion. Our European wealth management business alone had an intake of CHF 5.6 billion. Although this is a business we started building just four years ago, it already has a proven track record of attracting clients and growing revenue. Interest income from lending to private clients also rose, driven mainly by lending to wealthy US clients and higher mortgage volumes in Switzerland.

Our results this quarter were also helped by our continued cost discipline and another quarter of credit loss recoveries. The low level of our cost/income ratio – at 69.0%, marginally higher than 68.5% (pre-goodwill) in first quarter 2004 – reflects our continued efforts to improve the efficiency of our business. Earnings per share and return on equity, at CHF 2.60 and 32.4% respectively, both reached their all-time highs.

Excellence in managing our daily operations creates value. It starts with robust business processes. It continues with stable, reliable and efficient information technology. An example of this is our Swiss Strategic Solution Program (SSP). Operational since the end of last year, it will be completed by the end of 2005. A wholly new technology platform replacing an earlier generation of systems, it creates a technical framework that will help us increase the quality and flexibility of our systems – as well as the service we provide to our clients. It will allow for real-time processing around the clock, helping us gain effectiveness while lowering costs.

Technological sophistication, combined with ever-increasing scale and complexity, increases our exposure to operational risk. Regulators have also become ever less tolerant of mistakes. Unfortunately, operational hazards are implicit in our business. That’s why we are investing significantly in the processes for identifying, managing and controlling our exposure to potential operational risks. Effective operational risk management ensures that we can focus on what we are supposed to do – creating value for our shareholders and our clients, while minimizing the time, energy and attention paid to preventable “fire fighting” exercises.

We cannot sacrifice the way we manage risks for the sake of growth. With our latest leadership appointments, we have enhanced the roles of the key individuals responsible for building the firm’s risk control success over the last few years. On 1 March, Walter Stuerzinger, our Chief Risk Officer since 2001, joined UBS’s Group Executive Board, assuming firmwide responsibility for market, operational and credit risk control.

At our Annual General Meeting on 21 April, our shareholders elected Marco Suter, former Chief Credit Officer, to the Board of Directors. As Executive Vice Chairman, he will be responsible for overseeing risk policy and controls, replacing Alberto Togni, who retired after reaching the statutory age limit. Our shareholders also elected an external, independent member to the Board, Peter Voser, Chief Financial Officer of The Royal Dutch / Shell Group of Companies, who adds extensive international financial management experience.

Outlook – As always, it is hard to predict at this early stage how the year will turn out. History shows that there is a natural seasonality boosting first quarter performance, and market activity has ebbed as the year has progressed. However, we have designed our diversified business mix to deliver sustainably strong results across a whole variety of market conditions.


3 May 2005

UBS AG

Sadly, at the end of March, we lost a truly remarkable colleague, Eric Roll, who died at the age of 97. After eminent careers in government and academia, Lord Roll began his banking career at S.G. Warburg & Co in 1966, later becoming its chairman. We will remember him as a pivotal individual who helped shape our Investment Bank of today. As a senior advisor, Lord Roll attended the office every morning until the week in which he died. His wealth of experience was a major asset to all of us, and we will greatly miss him. Lord Roll had a passion for innovation that did not diminish with his advanced years – a passion that has become deeply embedded in our culture. In the end, it is the values we inherit and preserve from remarkable employees that make us the firm that we are now.