Capital Management

Our policy is to invest in the growth of our businesses by growing organically or with bolt-on acquisitions. Our strong balance sheet and high return on equity allow us to do this with internal resources. After exploiting opportunities to invest in growth, we will continue to return excess capital to our shareholders through dividends and, ultimately, through share buybacks, while maintaining our BIS Tier 1 ratio at a high level.

The BIS Tier 1 ratio was 12.3% on 30 June 2007, up from 11.7% on 31 March 2007. BIS risk-weighted assets stood at CHF 378.4 billion on 30 June 2007, up CHF 23.8 billion from 31 March 2007. The higher level of BIS risk-weighted assets was driven to a more or less equal extent by increases in the Investment Bank and Global Wealth Management & Business Banking businesses. The continued strong lending growth in our Global Wealth Management & Business Banking business, in particular collateralized loans, and the expansion in the Investment Bank's equities business (exchange-traded derivatives and prime brokerage) and fixed income business (real estate financing) led to larger lending risk-weighted assets. Furthermore, off-balance sheet risk-weighted assets, driven by temporary guarantees granted in the corporate clients business in Switzerland, and derivatives risk-weighted assets from higher credit risk on FX forwards and swaps, were up compared with 31 March 2007.

BIS Tier 1 capital on 30 June 2007 was CHF 46.6 billion, up CHF 5.1 billion from 31 March 2007. Strong quarterly net profit (including the sale of the Julius Baer investment), the first time adoption of the IFRS Fair Value Option for capital adequacy purposes (based on the Basel Committee on Banking Supervision's publication – "Supervisory guidance on the use of the fair value option for financial instruments by banks") and a positive foreign exchange impact were only partially offset by quarterly accruals for dividend and share-based compensation plans and shares bought back for cancellation. Total BIS capital was CHF 58.7 billion, up from CHF 52.1 billion, resulting in a total BIS capital ratio of 15.5%, up 0.8 percentage points from 31 March 2007.

Old 2006/2007 and new 2007/2010 buyback programs

Based on the approval of the Annual General Meeting (AGM) on 18 April 2007, we cancelled the shares repurchased under the 2006/2007 program on 29 June 2007. The cancelled shares had been purchased for an average price of CHF 73.14 per share and a total cost of CHF 2.4 billion. This was partially offset by the issuance of conditional capital to cover employee share options, reducing the number of UBS shares issued to 2,073,419,262 at the end of June from 2,106,123,317 at the end of March.

In March 2007, we launched a new three-year second-line repurchase program with a limit of 10% of shares issued (2,105,273,286 shares). As announced, we invested the capital gains from the sale of Julius Baer in further share buybacks, and we repurchased 11,820,000 in second quarter for an average price of CHF 75.69 a share, representing a total cost of CHF 895 million. The extended three-year buyback program underlines our continuous discipline, giving us the flexibility to manage capital in line with our main strategic priority, which is to provide shareholder returns. We will make add-on acquisitions if appropriate opportunities arise and we will continue to make disciplined investments in organic growth.

Treasury shares

Our holding of own shares declined to 143,759,722, or 6.9% of shares issued on 30 June 2007, from 165,758,986, or 7.9%, of shares issued on 31 March 2007. The quarterly movement was driven by the cancellation of shares bought back under the previous 2006/2007 buyback program and, to a lesser extent, by the delivery of shares for different compensation plans. This was partially offset by the purchase of new shares held for market making activities at the Investment Bank. The Investment Bank acts as a market maker in UBS shares and related derivatives. It issues derivatives to retail and institutional investors and may hold UBS shares to hedge these products. IFRS requires a company that holds its own shares for trading or non-trading purposes to record them as treasury shares and deduct them from shareholders' equity.