Investment Bank

In first quarter 2008, the Investment Bank recorded a loss of CHF 18,228 million. In contrast, the Investment Bank recorded a pre-tax profit of positive CHF 1,539 million in first quarter 2007.

Operating income

Total operating income in first quarter 2008 was negative CHF 14,813 million, compared with total operating income of positive CHF 6,238 million in first quarter 2007.

In the first three months of 2008, the Investment Bank recorded gains of CHF 2,103 million in net trading income attributable to the observable impact on the market's widening of UBS's own credit spread.

Credit loss expense for first quarter 2008 was CHF 308 million, of which CHF 306 million was in respect of securities financing positions that have either been liquidated or are in the process of being liquidated.

Investment banking revenues, at CHF 557 million in first quarter 2008, fell 58% from first quarter 2007 related to a contraction in global fee volume. Advisory revenues decreased by 14% to CHF 376 million in line with the industry trend of a decline in mandated deals. Capital markets revenues were impacted by reduced market volumes in all regions, falling 72%. Equity capital markets revenues decreased 80% and capital market revenues from fixed income, currencies and commodities (FICC) decreased 61%. Other fee income and risk management were negative CHF 98 million, compared with a negative CHF 83 million a year earlier. Compared with fourth quarter 2007, investment banking revenues in first quarter 2008 were down 67% with decreases in all products.

Sales and trading revenue in first quarter 2008 was negative CHF 17,165 million, driven by a negative revenue of CHF 19,113 million in FICC, which was partly offset by a positive revenue contribution of CHF 1,948 million from equities.

The equities business posted revenues of CHF 1,948 million in first quarter 2008, down 32% from the record result achieved in the buoyant conditions of first quarter 2007. First quarter 2008 was dominated by difficult trading con- ditions, with continued market volatility and limited market liquidity. Despite this, cash equities posted increased revenues with record commissions, partially offset by greater client facilitation costs. Prime brokerage revenues grew strongly during the quarter, driven primarily by client financing revenues from growth in average client balances and an increase in securities lending. Exchange-traded derivatives revenues were at a record level, through increased volumes and revenues from new clients who were acquired in 2007. Derivatives revenues fell as lower European revenues were only partially offset by increases in the Americas and Asia Pacific. Proprietary trading revenues declined considerably across all regions. Equity-linked revenues continued to suffer from reduced liquidity levels.

Compared with fourth quarter 2007, equities revenues were down 3% as higher cash, derivatives and prime services revenues were more than offset by lower equity-linked and proprietary revenues.

Fixed income, currencies and commodities (FICC) revenues were negative CHF 19,113 million in first quarter 2008, down from positive CHF 2,055 million in first quarter 2007. Income in first quarter 2008 was impacted by losses on exposures to the US residential mortgage market (for details, please refer to Note 3). In addition to securities related to sub-prime and Alt-A mortgages, losses were also recorded on positions related to prime mortgages where, on 31 March 2008, UBS had an exposure of USD 0.6 billion in super senior CDOs and of USD 8.8 billion in RMBS. Total prime exposure was down by approximately 30% from year-end 2007. Losses were also recorded on US commercial mortgages and the US reference-linked note program. UBS marked down its holdings in US student loan asset-backed securities and certain leveraged finance commitments. Further credit valuation adjustments were made on protection bought from monoline insurers. During the quarter, UBS accelerated the reduction of European asset-backed positions and, as a result, experienced losses from disposals and the negotiated termination of deals.

Overall, the market environment in first quarter 2008 remained very difficult. Credit recorded losses in proprietary strategies and saw a decline in credit trading, driven by high market volatility, lack of liquidity and deleveraging. Additionally, losses were recorded on credit proprietary positions which suffered from a lack of liquidity in the overall bond and loan market. Credit default swaps hedging loan exposures recorded gains of CHF 261 million in first quarter 2008, compared with CHF 41 million in first quarter 2007. Revenues in structured products fell due to lower customer demand and mark-to-market losses, net of hedging.

These negative effects could only be partially offset by strong results posted by the foreign exchange, rates and commodities businesses. These core client franchises saw increased volumes and good client flows on the back of increased market volatility. Foreign exchange and money markets had a record quarter. The rates business also had a strong start to the year, driven by the European swaps and options business as well as record revenues from trading government bonds. The commodities business performed well and was flat against a very strong first quarter 2007, driven by a good result, especially in metals, partially offset by lower revenues in energy.

Compared with negative revenues of CHF 15,954 million in fourth quarter 2007, FICC results in first quarter 2008 were lower due to further writedowns in US real estate- related portfolios.

Operating expenses

Total operating expenses in first quarter 2008 were CHF 3,415 million, down 27% from the same period in 2007.

Personnel expenses decreased 44% from first quarter 2007 to CHF 2,041 million in first quarter 2008, reflecting lower accruals of performance-related compensation. Salary costs also fell in first quarter 2008 compared with first quarter 2007, reflecting the reduced level of staff (down by 859 full-time equivalents). Severance costs increased as a result of restructuring measures. Share-based compensation was a credit in first quarter 2008. This occurred because of a decline in currencies (particularly the US dollar and the British pound) against the Swiss franc and a decline of the UBS share price, which resulted in a credit for performance payments from fourth quarter 2007 following the restatement made in relation to the amended International Financial Reporting Standard 2 (IFRS 2). This more than offset first quarter accruals for performance year 2008.

General and administrative expenses increased by 46% from first quarter 2007 to CHF 1,121 million, mainly related to increases in legal provisions. Professional fees also increased due to higher legal-related expenditures. These costs could only be partially offset by reduced expenditures across other cost lines, mainly travel and entertainment and IT and other outsourcing.

Charges from other businesses declined by 7% from first quarter 2007 to CHF 180 million in first quarter 2008, mainly due to a credit that Industrial Holdings made to compensate the Investment Bank for its help in disposing of private equity investments.

Depreciation expense in first quarter 2008 was CHF 51 million, down 6% from first quarter 2007.

Amortization of intangible assets decreased by 59% to CHF 22 million in first quarter 2008 as a number of assets relating to Banco Pactual were fully depreciated during 2007.