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 normally allow us to do this from 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 sound level.

The BIS Tier 1 ratio was 10.6% on 30 September 2007, down from 12.3% on 30 June 2007. BIS risk-weighted assets stood at CHF 390.3 billion on 30 September 2007, up CHF 11.9 billion from 30 June 2007. The higher level of BIS risk-weighted assets was driven by increases in the Investment Bank, partly offset by a slight decline in Global Wealth Management & Business Banking. High volatility in fixed income credit markets and exchange rate movements resulted in an increase in risk-weighted assets on derivative products. Structural changes seen in the mortgage-related and asset-backed securities markets have resulted in increased regulatory capital requirements for certain assets. The backtesting exceptions we experienced in the quarter also raised capital requirements.

BIS Tier 1 capital on 30 September 2007 was CHF 41.5 billion, down CHF 5.1 billion from 30 June 2007. The Tier 1 capital reduction resulted from the reported quarterly net loss, quarterly accruals for dividends, shares bought back for cancellation and for expected requirements for share compensation plans, and from the negative foreign exchange impact. Total BIS capital was CHF 53.1 billion, down from CHF 58.7 billion, resulting in a total BIS capital ratio of 13.6%, down 1.9 percentage points from 30 June 2007.

2007/2010 buyback program

We have a new, three-year second-line repurchase program that has been active since March 2007, with a maximum limit of 10% of shares issued (2,105,273,286 shares). The extended three-year buyback program underlines our commitment to continuous capital discipline, and gives us the flexibility to manage capital in line with our main strategic priorities. Since March 2007, shares purchased under the program have reached 36,400,000, representing a total cost of CHF 2,599 million. In third quarter, a total of 17,370,000 shares were purchased at an average price of CHF 69.35 for a total cost of CHF 1,205 million. Our repurchase activity under the buyback program depends on our profits and on the extent to which we use our excess equity for organic growth and acquisitions. The three-year program enables us to react flexibly should excess equity be created for which we cannot achieve a sufficient shareholder return. On the basis of current market and business conditions, we expect to be less active in buybacks in the near future.

Treasury shares

Our holding of own shares increased to 161,998,409 shares, or 7.8% of shares issued, on 30 September 2007, from 143,759,722, or 6.9% of shares issued, on 30 June 2007. The quarterly movement was driven by a rise in shares bought for cancellation, as well as an increase of holdings for market making activities at the Investment Bank. Shares held for compensation plans decreased slightly over the period. 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 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.