Risk categories

Credit risk is the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations. It arises on traditional banking products, such as loans and commitments, and on derivatives and similar transactions. A form of credit risk also arises on securities and other obligations in tradable form and their fair values are affected by changing expectations about the probability of failure to meet obligations as well as actual failures. Where these instruments are held in connection with a trading activity, UBS controls the risk as a market risk.

Credit loss expense

UBS recorded a credit loss expense of CHF 19 million in second quarter 2008, compared with CHF 311 million in first quarter 2008 and a recovery of CHF 14 million in second quarter 2007.

In second quarter 2008, the Investment Bank recorded a credit loss expense of CHF 10 million. In comparison, a credit loss expense of CHF 308 million was booked in first quarter 2008 and a recovery of CHF 3 million in second quarter 2007.

Global Wealth Management & Business Banking reported a CHF 8 million credit loss expense in second quarter 2008, compared with CHF 3 million in first quarter 2008 and net recoveries of CHF 11 million in second quarter 2007.

Gross lending portfolio

UBS's gross lending portfolio was CHF 398 billion on 30 June 2008, up from CHF 388 billion on 31 March 2008. In Global Wealth Management & Business Banking, the gross lending portfolio was CHF 250 billion on 30 June 2008, compared with CHF 245 billion at the previous quarter-end, with the increase driven by secured lending activities in the international wealth management units. The gross lending portfolio in the Investment Bank was CHF 147 billion, up from CHF 142 billion on 31 March 2008. Excluding the variability of inter-bank placements, the increase was driven by the collateralized term loan to a fund managed by BlackRock. For further details of the BlackRock transaction, please see the "Risk management and control" section of this report.

The ratio of the impaired lending portfolio to total gross lending portfolio remained unchanged at 0.6% on 30 June 2008. The level of the gross impaired lending portfolio was CHF 2,205 million on 30 June 2008, up by 0.6% from CHF 2,192 million on 31 March 2008. In the Investment Bank the impaired lending portfolio increased by CHF 157 million to CHF 573 million in second quarter 2008, largely driven by some loans to US commercial real estate companies being classified as defaulted. However, these loans are collateralized and the estimated liquidation proceeds of the collateral are considered to be sufficient to cover potential non-payment by the counterparties. An overall provisioning level of 19% of the Investment Bank's impaired lending portfolio was deemed to be sufficient due to the availability and quality of collateral. Global Wealth Management & Business Banking's impaired lending portfolio decreased by CHF 144 million from first quarter 2008 to CHF 1,632 million in second quarter 2008.

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