Financial Businesses

In fourth quarter 2005, net profit attributable to UBS shareholders was CHF 6,337 million. Private Banks & GAM, which was booked as a discontinued operation, contributed a net gain of CHF 3,740 million (which includes operating results until 2December2005,whenthesale closed). Attributableprofitfrom continuing operations, at CHF 2,597 million, was the best-ever performance reported in our core financial business in a fourth quarter. Excluding goodwill, the figure was up CHF 633 million, or 32%, from the result achieved in fourth quarter 2004.

Income grew on strong asset-based revenues in our wealth and asset management businesses, reflecting rising financial markets, especially towards the end of the year, and strong money inflows from clients. Fees from investment funds and portfolio management mandates also reached a record high. This, combined with strong bond and equity underwriting fees, boosted net fee and commission income to another record high. Overall, net fee and commission income made up 56% of operating income. In addition, our strengthened advisory capabilities combined with buoyant corporate activity levels prompted corporate finance fees to rise to a record level for a fourth quarter, traditionally a strong period for this business. Increasingly active financial markets lifted income from trading activities, and improvements were seen across all product lines. An increase in credit loss recoveries also helped results.

Personnel expenses in fourth quarter 2005 were up 20% from a year earlier, as performance-related payments rose in line with revenues and the number of people employed grew. General and administrative expenses were up, partly due to higher litigation provisions, particularly in the US.

Operating income

Total operating income was CHF 10,593 million in fourth quarter 2005, up by CHF 1,799 million from the same quarter a year ago.

Net interest income was CHF 2,210 million in fourth quarter 2005, down from CHF 3,172 million a year ago. Net trading income was CHF 2,251 million, up from CHF 750 million in the same quarter a year earlier.

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.

Net income from trading activities increased by 11% to CHF 2,810 million in fourth quarter 2005 from a year earlier. Equities trading revenues in fourth quarter 2005, at CHF 1,084 million, were up 23% from the same quarter in 2004. Revenues rose in the derivatives business, in particular in Asian structured products. They were also helped by the increase of volumes in exchange-traded derivatives. Prime brokerage revenues rose as we attracted new clients, further expanding our market share. Proprietary revenues, however, fell slightly. Fixed income trading revenues, at CHF 1,240 million, were down slightly from CHF 1,257 million reported in fourth quarter 2004. Revenues in our rates business were up, driven mainly by increased energy trading as well as stronger performances in the primary debt markets and leveraged finance businesses. This was offset by lower revenues in credit fixed income. Credit default swaps, which hedge certain loan exposures, recorded income of CHF 62 million, compared to a loss of CHF 52 million a year earlier. Foreign exchange trading revenues increased 13% to CHF 409 million in fourth quarter 2005 from CHF 362 million a year ago, mainly because of higher client volumes.

At CHF 1,397 million, net income from interest margin products in fourth quarter 2005 was up 8% from the same quarter a year earlier. This was the highest level reported since second half 2002, reflecting growth in collateralized lending to wealthy clients worldwide and the sustained success of UBS Bank USA. In our Swiss business, mortgage volumes again rose, although the improvement was partially offset by lower income from our recovery portfolio, which shrank another CHF 1.1 billion in size compared to the year-earlier quarter.

Net income from treasury and other activities in fourth quarter 2005 was CHF 254 million, up CHF 150 million from a year earlier. The strong increase reflects the benefits of the diversification of our capital base into currencies other than the Swiss franc in a way that matches the currency mix of risk-weighted assets. The higher equity base had a positive impact on treasury income as well, as did a positive timing effect related to cash flow hedging. We use derivatives to hedge the economic interest rate risk of accrual-accounted balance sheet items (for example, loans or money market and retail banking products). These are carried on the balance sheet at fair value, with changes in fair value recorded in equity, thereby avoiding volatility in the group income statement. In fourth quarter, the hedge was not perfectly effective, leading to a gain that was booked to profit and loss.

In fourth quarter 2005, net fee and commission income was CHF 5,947 million – the highest level recorded since early 2001 and up 24% from CHF 4,796 million a year earlier. Improvements were seen in practically all fee categories. Underwriting fees, at CHF 793 million, were up 23% from CHF 647 million a year ago, mostly driven by the growth of our fixed income underwriting business – where fees rose 42% to CHF 386 million. Equity underwriting fees increased by 8% to CHF 407 million. At CHF 509 million, corporate finance fees were up 24% from CHF 410 million in the same quarter a year earlier, reflecting our strengthening market presence. Net brokerage fees increased 25% to CHF 1,359 million in fourth quarter 2005 from CHF 1,090 million a year earlier, driven by higher volumes in the institutional equities business in Japan and Europe, and by increased private client activity. Increased invested asset levels and inflows of net new money in both UBS and third-party mutual funds drove investment fund fees 34% higher to CHF 1,313 million, up from CHF 981 million a year ago. Portfolio and other management fees rose 29% to a new record of CHF 1,474 million in fourth quarter 2005, up from CHF 1,142 million a year earlier. The increase is the result of rising asset levels, which were driven by rising markets and strong inflows of net new money, as well as higher performance fees from the alternative and quantitative investments business.

Other income increased by 179% to CHF 53 million in fourth quarter 2005 from CHF 19 million in the same period a year ago. The rise reflects gains on the disposal of financial assets available-for-sale. This was partially offset by lower equity income from certain O’Connor funds and other investments in associates.

Operating expenses

Total operating expenses were CHF 7,417 million in fourth quarter 2005, up 16% from CHF 6,413 million a year earlier. If goodwill amortization expenses for fourth quarter 2004 are excluded, operating expenses increased 18%, mainly because of higher personnel expenses.

Personnel expenses rose 20% to CHF 5,114 million in fourth quarter 2005 from CHF 4,247 million a year earlier. Accruals for performance-related payments increased in line with revenues. Personnel expenses are managed on a full-year basis, with the final determination of annual performance-related payments in fourth quarter. Expenses for salaries, insurance and social security contributions rose due to higher numbers of personnel across the firm. Share-based compensation was up 15% from the prior year, mainly reflecting the higher proportion of stock in bonuses granted in 2005.

At CHF 1,959 million in fourth quarter 2005, general and administrative expenses increased CHF 304 million from CHF 1,655 million in the same period a year ago. This was partly because of higher litigation provisions in our US wealth management business. Also, growth in all our core businesses required more personnel, driving occupancy, rent and travel costs up. Advertising and sponsoring costs increased as we made further investments in our brand.

Depreciation was CHF 314 million in fourth quarter 2005, down CHF 8 million from a year ago, reflecting lower depreciation of IT applications.

At CHF 33 million, amortization of other intangible assets fell 18% from CHF 40 million a year ago due to the reclassification of certain intangible assets within the Wealth Management US unit from 1 January 2005 onwards. Under new accounting rules, these assets are classified as goodwill, and they are no longer amortized.