Capital management

On 17 June 2008, a capital increase was completed, following approval of the issuance of a maximum of 1,250,000,000 UBS shares by shareholders at the annual general meeting on 23 April 2008.

Based on this approval, UBS's Board of Directors decided on 21 May 2008 to increase the share capital of UBS AG by means of a rights offering through the issuance of of 760,295,181 fully paid-in registered shares, leading to net proceeds of CHF 15.6 billion.

Shareholders were allotted one subscription right for each share they owned. For every 20 of those rights, shareholders were entitled to buy seven shares at CHF 21.00 on 17 June 2008. Subscription rights received by shareholders were tradable on SWX Europe and the New York Stock Exchange (NYSE).

Subscription rights for 755,466,901 new shares were exercised in the offering, representing 99.4% of all new shares offered. 4,828,280 new shares for which subscription rights were not validly exercised have been sold by UBS Investment Bank in open market transactions.

The equity attribution framework introduced in first quarter 2008 reflects UBS's overarching objectives of maintaining a strong capital base and guiding businesses towards activities with the best balance between profit potential, risk and capital usage.

Its design enables UBS to calculate and assess return on attributed equity (RoaE) in each of its businesses and integrate Group-wide capital management activities with those at business group and business unit level.

The framework operates as follows. First, each business is attributed an amount of equity equal to the average book value of goodwill and intangible assets, as reported for that business group or unit according to the International Financial Reporting Standards. Next, the Group Executive Board (GEB) considers a number of factors, including capital-at-risk, regulatory capital requirements, and asset size, as well as adjustments made by the GEB based on its judgments regarding equity requirements.

As a result, the amount of equity attributed to all of the businesses corresponds to the amount that UBS believes is required to maintain a strong capital base and support its businesses adequately. If the total equity attributed to the businesses differs from the Group's actual equity during a particular period, the surplus or deficit is shown in Corporate Center.

As reflected in the table below, there are no major changes in equity attribution at business group level in comparison to first quarter 2008. While Global Wealth Management & Business Banking and Global Asset Management remained at their first quarter levels, the amount of equity attributed to the Investment Bank is CHF 1 billion less than the amount attributed for first quarter 2008. This reduction was due to a lower risk exposure in the Investment Bank.

UBS shareholders' equity was CHF 44.3 billion as of 30 June 2008. As reflected in the table below, CHF 47.0 billion of equity was attributed to the business groups during second quarter 2008. Therefore, on a spot basis, the deficit in Corporate Center was CHF 2.7 billion. This sharp reduction in the Corporate Center deficit from the CHF 22.2 billion figure shown for first quarter 2008 occurred as a result of the measures taken to restore UBS's capital position - the mandatory convertible notes (issued in March 2008 and included in shareholders' equity in second quarter 2008) and the rights issue, which was successfully completed in June 2008.

The table below shows a reduction in the Corporate Center deficit from CHF 22.2 billion in first quarter 2008 to CHF 16.7 billion in second quarter 2008. These are average figures for each quarter. This averaging process, by its nature, reflects the reduction in the Corporate Center deficit more slowly than is shown by the 30 June 2008 spot figure of CHF 2.7 billion noted above.

Corporate Center continues to transfer interest income earned from managing UBS's consolidated capital back to the businesses. The over-allocation of equity in second quarter 2008 resulted in a charge to Corporate Center exceeding the interest income earned. For further information regarding the impact of interest income on the operating income of the business groups and units, refer to the respective sections of this report.

Also, RoaE for the individual business groups and units is disclosed in the respective sections of this report.