Financial Businesses Results

Net profit attributable to UBS shareholders ("attributable profit") from continuing operations in first quarter 2007 was CHF 3,182 million. This is the best UBS quarterly performance on record and reflects growth in our business with customers as well as the beneficial impact of rising financial markets on our trading businesses and the growing asset base in the wealth and asset management businesses.

Net fee and commission income, which comprised 55% of our overall operating income in first quarter, remained very strong, showing improvements in all fee categories compared with first quarter 2006. Net income from trading businesses rose due to higher results in our equities, fixed income, foreign exchange and cash collateral trading businesses. Net income from our interest margin businesses ­benefited from higher private client collateralized lending volumes and wider spreads on Swiss franc, US dollar and euro deposits in the wealth management businesses. Personnel expenses rose on higher salary costs and performance-­related accruals, which increased with revenues. General and administrative expenses were nearly flat compared with the same period a year earlier.

Operating income

Total operating income was CHF 13,347 million in first quarter 2007, 8% higher than the same quarter a year earlier.

Net interest income was CHF 1,308 million in first quarter 2007, down from CHF 1,850 million a year earlier. Net trading income was CHF 4,535 million this quarter, up 23% or CHF 834 million from CHF 3,701 million in first quarter 2006.

As well as income from interest margin-based activities (loans and deposits), net interest income includes income earned on trading positions (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 businesses that give rise to the income, rather than by the type of income generated.

At CHF 4,142 million, net income from trading businesses in first quarter 2007 was 6% higher than CHF 3,923 million a year earlier. Equities were positively impacted by the favorable market conditions seen in Europe and Asia Pacific. This boosted net interest and trading income from proprietary trading and derivatives and equity-linked products. Our prime services (prime brokerage and exchange-traded derivatives) business benefited from increased client balances. Fixed income improved compared with the same quarter last year as revenues benefited from strong performance in structured credit, global credit strategies and syndicated finance. Credit default swaps hedging our loan exposure recorded gains of CHF 41 million, compared with losses of CHF 95 million a year ago. In our rates business, derivatives and government bonds fell due to a flat yield curve and low volatility, partially offset by the strong performance of mortgage-backed securities in Europe and Japan. Foreign exchange and cash collateral trading was very strong across the board, driven by higher volumes. Emerging markets, base metals, fixed income-centered prime services and structured products all had a very strong quarter marked by significant growth. Difficult market conditions in US mortgage securities prompted the business activities managed by DRCM on behalf of the Investment Bank to record a sharp decline in revenues.

Net income from interest margin businesses, at CHF 1,466 million in first quarter 2007, was also up by 6% or CHF 86 million from CHF 1,380 million a year ago. The improvement reflected an increase in spreads for US dollar, Swiss franc and euro deposits and growth in wealth management's collateralized lending business. Our domestic Swiss mortgage business grew, although it experienced downward pressure on interest margins. The wealth management business also benefited from increased deposit and loan volumes, driven by organic growth and acquisitions. This was partially offset by lower income from our shrinking Swiss recovery portfolio, which dropped by CHF 0.5 billion compared with the year-earlier quarter.

At CHF 235 million, net income from treasury activities and other in first quarter 2007 was down CHF 13 million or 5% from CHF 248 million a year earlier. The accounting treatment of interest rate swaps, which hedge the economic interest rate risk of accrual-accounted balance sheet items (for example, loans, money market and retail banking products), led to lower income compared with the previous quarter. Cash flow hedges that were not fully effective also prompted income to decline. This was partially offset by the increased benefits of the higher capital base, which generated more interest revenues.

In first quarter 2007, net fee and commission income was CHF 7,396 million – the highest level recorded since early 2001 and up 19% from CHF 6,229 million a year earlier. Improvements were seen in all fee categories. Underwriting fees, at CHF 955 million, were up 38% from CHF 693 million recorded in the year-earlier quarter. The equity underwriting business was up 44% to CHF 481 million, driven by market share gains in the Americas and Asia Pacific. Debt underwriting fees (up 32% at CHF 474 million) benefited from a strong performance in global syndicated finance and a global market share gain in debt capital markets. At CHF 450 million, corporate finance fees in first quarter 2007 increased 29% from CHF 349 million a year earlier as UBS grew its share of the fee pool in all regions in a buoyant merger and acquisition market.

Net brokerage fees increased 14% to CHF 1,883 million from CHF 1,656 million in first quarter 2006, mainly reflecting the significant volume increase in cash equities, particularly in Asia, Australia and Europe. Higher fees from our exchange-traded derivatives further enhanced the result, due to the positive effect of the acquisition of ABN AMRO's global futures and options business, completed in September 2006. Invested asset levels were positively impacted by strong net new money inflows and higher markets, driving our invested asset levels to a record high. This drove our investment fund fees up 21% to CHF 1,749 million from CHF 1,448 million a year ago from both UBS and third-party mutual funds. The acquisition of Pactual also had a positive impact on investment fund fees. Portfolio and other management fees increased 22% to CHF 1,932 million in first quarter 2007 from CHF 1,586 million a year earlier, mainly driven by the larger asset base. To a lesser extent, the increase was positively influenced by improved performance fees from DRCM outside investor funds.

Other income decreased by 79% to CHF 107 million in first quarter 2007 from CHF 517 million in the same period a year ago, as the gains in first quarter 2006 were mainly driven by the sale of our New York Stock Exchange (NYSE) membership seats, which were exchanged into shares when it went public in March 2006.

Operating expenses

Total operating expenses were CHF 9,091 million in first quarter 2007, up 8% from CHF 8,405 million a year earlier, mainly reflecting increased personnel expenses.

Personnel expenses were CHF 6,809 million in first quarter 2007, up from CHF 6,200 million a year earlier. Cash components rose 10%, mainly due to higher performance-related accruals and increased salary expenses reflecting acquisitions and the additional hiring of new employees across the firm in support of our group-wide business expansion. We manage personnel expenses on a full-year basis, with the final determination of annual performance-related payments in fourth quarter.

Expenses for share-based compensation were up 3%, ­reflecting a higher number of shares granted and a rise in the share price, partly offset by a decrease in the number of options granted.

At CHF 1,900 million in first quarter 2007, general and administrative expenses decreased CHF 4 million from CHF 1,904 million in the same period a year ago. The main reason for the decline were the legal risk provisions recorded in first quarter 2006 – among them the Sumitomo settlement for CHF 112 million. The reduction was partially offset by increased IT and other outsourcing costs, primarily in our ­Investment Bank and in Global Wealth Management & ­Business Banking business groups. Rent and maintenance costs related to IT hardware and software supporting business growth also rose. Higher staff levels resulted in increased costs for occupancy, travel and entertainment and telecommunications.

Depreciation was CHF 300 million in first quarter 2007, up CHF 30 million from a year ago, mainly driven by higher purchases of hard and software, partially offset by lower depreciation of internally developed software.

At CHF 84 million, amortization of intangible assets rose 147% from CHF 34 million a year ago, mainly related to the acquisition of Pactual, and to a lesser extent, the inclusion of the Piper Jaffray and ABN AMRO global futures and options businesses.