Financial Businesses Results

The net loss attributable to UBS shareholders from continuing operations ("attributable loss") in third quarter 2007 was CHF 1,086 million, down from a profit of CHF 2,114 million in the same period a year earlier.

The negative performance in third quarter 2007 reflected substantial losses in our Investment Bank's fixed income, currencies and commodities business (FICC).

Operating income

Total operating income was CHF 6,169 million in third quarter 2007, down 41% from the same quarter a year earlier.

Net interest income was CHF 1,663 million in third quarter 2007, a decline of 10% from CHF 1,838 million a year earlier. Net trading income fell to negative CHF 3,546 million this quarter from positive CHF 2,423 million in third 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 business activities that give rise to the income, rather than by the type of income generated.

Net income from trading businesses, ata negativeCHF 3,938 million in third quarter 2007, was down from a positive CHF 2,731 million a year ago. We recorded substantial losses in our Investment Bank in the context of severe market dislocations experienced during the quarter. Revenues in equities were heavily impacted by sharp drops in income from proprietary trading and the equities cash business. This was partially offset by growing revenues in other areas. Derivatives remained very strong, posting higher revenues in all regions on rising structured products revenues. Our prime services (prime brokerage and exchange-traded derivatives) posted very good results, driven by an increased client base and higher average client balances and volumes. The fixed income, currencies and commodities businesses lost money in the quarter. The rates business recorded significant losses in mortgage-backed and asset-backed securities, driven by markdowns in the collateralized debt obligation (CDO) portfolio and our residential mortgage trading business. Widening spreads on mortgage-related products also led to weakness in proprietary positions in our securitized products business. Credit fixed income recorded losses in US proprietary credit trading. Credit default swaps, which hedge certain loan exposures, recorded gains of CHF 140 million, compared with losses of CHF 61 million a year earlier. In the money markets, currencies and commodities (MCC) business, we recorded losses and markdowns in a portfolio that invested excess liquidity in AAA-rated asset-backed securities, mortgage-backed securities and commercial paper. Leveraged finance positions were also written down, albeit to a smaller extent. Despite the large losses, certain areas of FICC posted positive results. In the rates business, both the flow derivatives and government bonds businesses recorded strong client revenues and in the MCC business we saw a record result in our client-facing distribution business. Municipal securities recorded lower results as increasing yields drove issuers to the sideline. Commodities revenues declined due to a reduction in own trading positions, as well as low market volatility during the summer months, which led to decreased client flow in the power and gas markets. This, however, was partly offset by strong revenue growth in precious metals, crude oil and structured products.

Net income from interest margin businesses, atCHF 1,581 million in third quarter 2007, rose 11% or CHF 159 million from CHF 1,422 million a year ago. The improvement reflected an increase in spreads for Swiss, euro and US dollar deposits and growth in wealth management's collateralized lending business. The wealth management business in the US also benefited from increased levels of deposits.

At CHF 474 million, net income from treasury and other activities in third quarter 2007 increased significantly from CHF 108 million a year earlier. Cash flow hedges that were not fully effective generated a substantial increase in income due to drastic steepening of the Swiss franc yield curve. 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 as well. In addition, we saw interest income rise as a result of the growth in our capital base and experienced higher gains on currency options hedging UBS's US dollar exposure from future earnings.

In third quarter 2007, net fee and commission income was CHF 7,864 million, rising 29% from CHF 6,095 million a year earlier. Improvements were seen in nearly all fee categories. Underwriting fees, at CHF 857 million, were up 19% from CHF 722 million in the year-earlier quarter. The equity underwriting business rose 91% to CHF 557 million, driven by market share gains globally. Debt underwriting fees (down 30% at CHF 300 million) were affected by market turbulence in the US, negatively impacting the performance in global syndicated finance and debt capital markets. At CHF 841 million, M&A and corporate finance fees in third quarter 2007 increased 62% from CHF 519 million a year earlier as UBS grew its share of the fee pool in Americas and Europe regions in an active merger and acquisition market.

Net brokerage fees were CHF 2,069 million, up 52% from CHF 1,364 million in third quarter 2006, mainly reflecting a significant increase in client activity and higher fees from our exchange-traded derivatives, which were positively impacted by the acquisition of ABN AMRO's global futures and options business in 2006. Invested asset levels benefited from strong net new money inflows and higher markets, driving invested asset levels to a record high. This drove investment fund fees up 34% (CHF 1,876 million compared with CHF 1,401 million a year ago) from both UBS and third-party mutual funds. Investment fund fees from Banco Pactual, acquired at the end of 2006, also contributed to investment fund fees for the first time in a third quarter. Portfolio and other management fees increased 22% to CHF 1,990 million in third quarter 2007 from CHF 1,629 million a year earlier, mainly driven by the larger asset base.

Other income increased by 121% to CHF 203 million in third quarter 2007 from CHF 92 million in the same period a year ago. This was due to gains from the sale of our shares in the Chicago Mercantile Exchange, as well as income from the sale of other financial investments.

Operating expenses

Total operating expenses were CHF 7,123 million in third quarter 2007, down 8% from CHF 7,715 million a year earlier, mainly reflecting decreased performance-related personnel expenses.

Personnel expenses were CHF 4,790 million in third quarter 2007, down from CHF 5,337 million a year earlier. Cash components declined 12%, driven by lower performance-related accruals in the Investment Bank due to the trading losses this quarter. We manage personnel expenses on a full-year basis, with the final determination of annual performance-related payments in fourth quarter. This year, in the Investment Bank, we intend to pay a higher proportion of bonuses in the form of share-based compensation - especially to senior management in order to ensure alignment of their interests with our strategic goals.

Compared with third quarter 2006, salary expenses rose, reflecting acquisitions and the additional hiring of new employees across the firm in support of our group-wide business expansion.

Expenses for share-based compensation were up 5%, reflecting accelerated amortization of deferred compensation awarded to former senior managers while employed at UBS. In addition, increased share-based compensation as well as higher share price and option fair value for grants in 2006 and 2007 compared with 2005 also resulted in increased amortization.

At CHF 1,999 million in third quarter 2007, general and administrative expenses decreased CHF 37 million from CHF 2,036 million in the same period a year ago. The main reason for the decline was a provision recorded in third quarter 2006 related to a long-term lease of an office building in New Jersey. The reduction was partially offset by increased IT and other outsourcing costs, primarily in the Investment Bank and the Global Wealth Management & Business Banking business groups. The expansion of UBS's business and the related increase in personnel drove administration costs, as well as expenditures for occupancy and travel and entertainment, higher.

Depreciation was CHF 311 million in third quarter 2007, down CHF 4 million from a year ago, mainly due to lower costs related to IT and communication equipment, partially offset by an increase in occupancy reflecting business expansion.

At CHF 62 million, amortization of intangible assets rose 107% from CHF 30 million a year ago, mainly related to the acquisition of Pactual, and to a lesser extent, the inclusion of Piper Jaffray and ABN AMRO's global futures and options business.