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.

Risk-weighted assets stood at CHF 300.6 billion on 30 June 2005, up from CHF 286.0 billion on 31 March 2005. The majority of the increase was driven by the strengthening of major currencies, such as the US dollar and UK sterling, against the Swiss franc. Capital requirements also increased because of higher lending in our wealth management businesses around the world. To a lesser extent, capital requirements also increased because of the growth in lending in our Swiss mortgage business and to mortgage originators through our Investment Bank’s mortgage-backed securities business. Much of the increased lending activity is collateralized but nonetheless carries relatively high risk weightings under BIS rules, in some cases as high as for unsecured loans.

BIS Tier 1 capital rose to CHF 36.7 billion on 30 June 2005 from CHF 32.8 billion on 31 March 2005. The increase reflects strong profitability in second quarter, combined with positive currency translation effects and the EUR 1 billion of perpetual preferred securities issued in April, more than offsetting our ongoing share buybacks for cancellation. Our BIS Tier 1 ratio increased to 12.2% at the end of June from 11.5% at the end of March.

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 were canceled on 8 July 2005.

We started a new buyback 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 runs 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. Under the new program, we repurchased 6,050,000 shares in second quarter 2005 at an average price of CHF 100.16, representing a total cost of CHF 606 million. No shares were purchased under the new program in first quarter 2005.

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 including treasury shares held in employee benefit trusts assigned to employees rose to 111,865,879, or 9.9% of shares issued, on 30 June 2005, from 103,890,943, or 9.2% of all issued, on 31 March 2005. The rise reflects 6,050,000 shares we purchased under the buyback program and a small increase of shares covering outstanding employee options.

Of the 111,865,879 held treasury shares, 45,985,094 were bought for cancellation whereas the other 65,880,785 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.

On 8 July 2005, our holding of own shares as calculated in accordance with the definitions under the Swiss Federal Act on Stock Exchanges and Securities Trading (without shares held in employee benefit trusts) fell to 60,855,443 or 5.6% of UBS shares, reflecting the abovementioned cancellation of shares bought back under the 2004 share buyback program.