Financial Businesses Results

In second quarter 2007, net profit attributable to UBS shareholders from continuing operations was CHF 5,152 million. As mentioned before, the results were impacted by a post-tax gain from the sale of our 20.7% stake in Julius Baer (CHF 1,926 million), booked in Corporate Center, and post-tax charges related to the closure of DRCM, recorded in Global Asset Management (CHF 229 million). Excluding these items, financial businesses' attributable profit from continuing operations would have been CHF 3,455 million in second quarter 2007.

Operating income

Total operating income was CHF 15,651 million in second quarter 2007, up by CHF 3,594 million from the same quarter a year ago.

Net interest income was CHF 829 million in second quarter 2007, down from CHF 1,308 million a year earlier. Net trading income was CHF 4,121 million, up by CHF 328 million from CHF 3,793 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 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.

Net income from trading businesses decreased by 9% to CHF 3,106 million in second quarter 2007 from a year earlier. Continued difficult conditions in the US mortgage securities market led to further losses in the portfolios of DRCM (including the former outside investor fund). Fixed income revenues decreased as performance in the rates business was down, especially in government bonds and mortgage-backed securities. This was partially offset by higher revenues in credit fixed income driven by global credit trading and proprietary strategies. Credit default swaps, which hedge certain loan exposures, recorded gains of CHF 35 million, compared with losses of CHF 30 million a year earlier. Money markets, currencies and commodities showed lower results. Declining revenues in metals and natural gas, driven by falling markets and the resulting lower levels of client activity, were only partially offset by higher gains in foreign exchange and money markets, the latter driven by higher volumes and market shares. Equities were up compared with the same quarter in 2006. Cash equities revenues were higher, with the quarter benefiting from positive market conditions, generating strong revenues in Europe. The derivatives business remained strong, predominantly driven by growth in Europe and Asia. The prime brokerage business benefited from a higher client base. Proprietary trading revenues also rose.

At CHF 1,546 million, net income from interest margin businesses in second quarter 2007 was up 8% from the same quarter a year earlier. This reflected the growth in collateralized lending to wealthy clients worldwide. It also reflected an increase in spreads for US dollar, euro and Swiss franc deposits and higher volumes of mortgages to private clients in Switzerland. The wealth management business in the US saw the levels of deposits and loans rise.

Net income from treasury and other activities in second quarter 2007 was CHF 298 million, up CHF 19 million from 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 or money market and retail banking products) positively affected income. In addition, we experienced higher gains on currency options hedging UBS's US dollar exposure from future earnings and saw interest income rise as a result of the growth in our capital base. Dividends from the Julius Baer stake also contributed to the result.

In second quarter 2007, net fee and commission income was at a record CHF 8,099 million, rising 26% from CHF 6,422 million a year earlier. Improvements were seen in practically all fee categories. Underwriting fees, at CHF 1,362 million, were up 46% from CHF 936 million a year ago. Growth in debt underwriting (up 65% at CHF 635 million) was driven by higher global syndicated finance fees. Equity underwriting fees rose 32% to CHF 727 million, reflecting the robust pipeline in the Americas, especially Latin America, and Asia (excluding Japan). At CHF 702 million, M&A and corporate finance fees were up 64% from CHF 429 million in the same quarter a year earlier, emphasizing UBS's strong franchise and the key role it played in a number of major transactions. Net brokerage fees increased 18% to CHF 1,864 million in second quarter 2007 from CHF 1,575 million a year earlier, driven by higher exchange-traded derivative fees after the inclusion of the recently acquired ABN AMRO global futures and options business as well as increased client activity. Fees from cash equities and equity derivatives rose as well, particularly in Asia. Increased invested asset levels in both UBS and third-party mutual funds drove investment fund fees 30% higher to CHF 1,921 million, up from CHF 1,475 million a year ago. Portfolio and other management fees rose 25% to CHF 1,925 million in second quarter 2007, up from CHF 1,539 million a year earlier. The increase is the result of higher asset levels, which were driven by rising markets and strong inflows of net new money, as well as performance fees from the alternative and quantitative investments business.

Other income increased by 422% to CHF 2,588 million in second quarter 2007 from CHF 496 million in the same period a year ago. The rise mainly reflects the income from the sale of our 20.7% stake in Julius Baer, which contributed CHF 1,950 million to other income. Gains from the Euronext stake and other revenues from the sale of financial investments available-for-sale were up slightly from second quarter 2006, when we sold our stake in the London Stock exchange.

Operating expenses

Total operating expenses were CHF 9,695 million in second quarter 2007, up 21% from CHF 8,017 million a year earlier.

Personnel expenses rose 20% to CHF 7,120 million in second quarter 2007 from CHF 5,937 million a year earlier. The closure of DRCM contributed CHF 318 million to this increase, with the majority due to the accelerated amortization of deferred compensation to former DRCM employees. Accruals for performance-related payments in other businesses 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. Salary expenses rose due to higher numbers of personnel, partially related to acquisitions, including Piper Jaffray and McDonald Investments. Share-based compensation was up 27% from the same period last year due to accelerated amortization of deferred compensation related to DRCM in second quarter 2007 and higher share price and option fair value for grants in 2006 and 2007 compared with 2005, resulting in higher amortization.

At CHF 2,266 million in second quarter 2007, general and administrative expenses increased CHF 512 million from CHF 1,754 million in the same period a year ago. Administration costs increased, partially related to the inclusion of the acquisition of Pactual. Professional fees rose due to the closure costs related to DRCM and higher litigation and legal fees. Provisions increased, reflecting an additional charge relating to Enron. The expansion of our businesses and the related increases in personnel drove travel and entertainment costs and expenses for office space higher. IT and other outsourcing costs rose on the increased business volume.

Depreciation was CHF 323 million in second quarter 2007, up CHF 27 million from a year ago, and was related to writedowns of DRCM office leasehold improvements, and only partially offset by lower depreciation for IT and communications equipment.

At CHF 64 million, amortization of intangible assets rose 100% from CHF 32 million a year ago, reflecting the charges following the acquisitions of Pactual, Piper Jaffray, McDonald Investments and the ABN AMRO futures and options business.