Letter to shareholders

Marcel Ospel & Peter Wuffli

Dear Shareholders,

Our results this quarter show continued strength across the firm. Net profit attributable to you, our shareholders, was CHF 2,147 million. Our financial businesses contributed CHF 2,111 million, up 9% from a year earlier, but virtually flat pre-goodwill. In first half 2005, attributable profit from our financial businesses was CHF 4,538 million, in line with first half 2004.

Income in our financial businesses held up extremely well – rising to CHF 9,312 million, CHF 11 million higher than second quarter 2004. Strong asset-based revenues in our wealth and asset management businesses, record bond underwriting fees and resilient brokerage income helped us to offset the challenging markets facing our trading desks. Practically all major asset-based fee categories were up – in particular investment fund and portfolio management fees as markets rose and new client money flowed into UBS. Invested asset levels rose to CHF 2.6 trillion because of increasing market valuations and strong inflows of net new money of CHF 30 billion in second quarter. Net new money in our wealth management businesses was at a near record of CHF 19.2 billion, with particularly strong contributions into our domestic European business and from Asian clients. Our Investment Bank won several prestigious merger and acquisition mandates, clearly establishing itself as a preferred partner for major global corporations. In second quarter, for instance, we advised independent credit card issuer MBNA on its merger with Bank of America, and cable television company Adelphia Communications on its sale to Time Warner and Comcast.

This strong momentum drove our corporate finance fees to the highest level ever seen at this time of the year, improving our market share and competitive position vis-à-vis last year. According to independent data, we ranked fourth in terms of our share of the global fee pool at the end of June 2005 with a year-to-date market share of 5.3%, improving from a market share of 5.1% and seventh rank in the same period of 2004. Our credit fixed income and rates businesses were affected by a tough trading environment and low market volumes throughout the quarter. The equities business, subject to low activity and investor uncertainty in April and May, saw a significant improvement in June.

Positive business sentiment and sound credit fundamentals in both Swiss and international credit markets led to a low level of new defaults. Recoveries from previously established positions were CHF 69 million in second quarter compared to CHF 128 million in the same quarter a year earlier.

Operating expenses fell 4% year-on-year, helping our cost / income ratio to improve to 70.7%. General and administrative expenses decreased from a year ago when we had a particularly high level of operational risk costs. Personnel expenses rose 4% as we continued to expand our businesses.

Earnings per share stood at CHF 2.10, down marginally from CHF 2.14 (pre-goodwill) in the same quarter a year earlier. Return on equity in first half 2005 was 28.2%, well above our target range of 15% to 20%.

The beginning of July marked a strategic milestone for our firm. We announced the integration of our wealth management franchise around the world by bringing our US, Swiss and international units along with our Swiss corporate and retail banking unit into one Business Group titled Global Wealth Management & Business Banking, headed by Marcel Rohner. Raoul Weil, head of our wealth management business serving international clients, joined UBS’s Group Executive Board. Mark Sutton, previously Chairman and CEO of the Wealth Management USA business, has been appointed to the new position of Chairman and CEO, Americas, responsible for accelerating the development of UBS’s client base and integrating the work of UBS’s businesses in the region. While the relationships between advisors and their clients will not in any way be altered by the integration, we expect to benefit from economies of scale in bringing together functions supporting our advisors. The move will accelerate our progress towards a consistent wealth management offering across the globe, and will make it even easier to fulfill clients’ individual needs with sophisticated products and services from across UBS. With this integration, our highly successful municipal finance unit, previously located within the Wealth Management USA business, is being transferred to the Investment Bank’s fixed income area.

We also announced our plan to launch a new alternative investment management business – Dillon Read Capital Management. To start operating around the end of this year, its core will be formed from the transfer of our principal finance and commercial real estate trading businesses, currently part of our Investment Bank. These businesses, with their approximately 120 staff, will move to the new venture – which will be part of our Global Asset Management Business Group. Trading strategies managed by the team will be gradually opened up to co-investment from sophisticated long-term investors, and supplemented by further new offerings. This will allow us to satisfy the increasing demand from institutional clients for long-term alternative investment opportunities provided by strong global industry leaders. For UBS, it will create a new asset management revenue stream from what has until now been a purely in-house trading activity. We will retain our current direct investment in the relevant trading portfolios, with any incremental future investments subject to our usual risk control process. Dillon Read Capital Management will be headed by John Costas who will leave UBS’s Group Executive Board at the end of 2005, remaining non-executive Chairman of the Investment Bank. Huw Jenkins, previously head of the equities business, has succeeded John Costas as CEO of UBS’s Investment Bank, becoming a member of the Group Executive Board.

Outlook – UBS performed well through a mixed second quarter for global markets. The start of the quarter was challenging, but subsequently markets picked up noticeably. We believe this momentum should continue, at least in the short term.

While the natural seasonality in our industry tends to boost earnings in the first part of the year, we have every reason to believe this will be another year of strong results for UBS and our shareholders.


9 August 2005

UBS AG