Balance sheet

31.12.08 vs 30.9.08 and 31.12.07

UBS continued its deliberate balance sheet reductions during fourth quarter 2008 and reduced significantly its trading portfolio and collateral trading assets by a further CHF 269 billion (mainly in the Investment Bank). These large reductions were, however, masked by a significant rise in replacement values (increasing to a similar extent on both sides of the balance sheet), as market movements drove up positive replacement values 51%, or CHF 290 billion in fourth quarter alone, to reach CHF 854 billion at year-end 2008.

As a result, UBS's total assets increased marginally in the fourth quarter, by CHF 19 billion, to stand at CHF 2,016 billion on 31 December 2008. This represents a drop of CHF 259 billion from CHF 2,275 billion on 31 December 2007. Excluding positive replacement values, UBS's total assets dropped in the fourth quarter by CHF 272 billion and by CHF 686 billion for the year.

Currency effects in fourth quarter 2008 - a strengthen-ing of the Swiss franc against the British pound, US dollar and Euro - deflated the balance sheet excluding positive replacement values by CHF 51 billion, implying an underlying reduction of effectively CHF 220 billion.

The trading portfolio is the main driver for balance sheet reduction when compared with year-end 2007, dropping by CHF 462 billion, or by CHF 445 billion when adjusted for currency effects. In addition, UBS reduced its collateral trading volumes by CHF 236 billion, or by CHF 203 billion when adjusted for currency effects.

While the Investment Bank continued to significantly pare back its balance sheet assets excluding positive replacement values by CHF 253 billion in the fourth quarter, and by CHF 664 billion since year-end 2007, the positions of Global Wealth Management & Business Banking (CHF 291 billion) and Global Asset Management (CHF 25 billion) remained relatively stable compared with both 30 September 2008 and year-end 2007.

Lending and borrowing

Lending

Cash and balances with central banks increased CHF 17 billion compared with 30 September 2008 and stood at CHF 33 billion on 31 December 2008. Due from banks decreased by CHF 6 billion in fourth quarter, largely due to the variability of interbank placements (fixed term and current accounts), and partially offset by increased variation margin deposited for derivative instruments. Loans to customers decreased to CHF 340 billion on 31 December 2008, a drop of CHF 6 billion since 30 September 2008. The fourth quarter decreases stemmed mainly from UBS's prime brokerage business in the Investment Bank and to a lesser extent from lower lombard lending in Global Wealth Management & Business Banking, partially offset by the reclassification of trading assets to loans.

Borrowing

The reduction of the Investment Bank's assets (excluding positive replacement values) led to lower unsecured borrowing needs. Financial liabilities designated at fair value stood at CHF 102 billion on 31 December 2008, a drop of CHF 33 billion from 30 September 2008. In particular the mark-to-market value of equity-linked notes dropped as major stock indices fell. Long-term debt rose by CHF 3 billion to CHF 86 billion at 31 December 2008. The CHF 6 billion mandatory convertible notes placed with the Swiss Confederation and around CHF 2 billion of mortgage bonds being issued via the Swiss Mortgage Bond Bank outweighed currency-related declines and maturing senior straight bonds. Money market paper issuance volume at CHF 112 billion remained stable, despite the general difficulties experienced in the US commercial paper market in particular during fourth quarter 2008. Customer deposits (due to customers) amounted to CHF 475 billion on 31 December 2008, a decrease of CHF 45 billion during the fourth quarter, or CHF 22 billion on a currency-adjusted basis. CHF 16 billion of the currency-adjusted drop occurred in the Investment Bank, predominantly from prime brokerage clients and to a lesser extent on fixed-term deposits. Global Wealth Management & Business Banking client deposits declined slightly (CHF 7 billion on a currency-adjusted basis) and recorded in the last two months of the fourth quarter slight net inflows in savings and personal accounts. Due to banks was net CHF 126 billion on 31 December 2008, down CHF 9 billion from 30 September 2008. The quarterly decrease was driven by the firm's central funding entity, the Investment Bank's foreign exchange and money market desk, partially offset by increased margin calls.

Repurchase / reverse repurchase agreements and securities borrowing / lending

The amount of cash lent out on a secured basis (through the receipt of securities in return) via securities borrowed and reverse repurchase agreements declined by CHF 124 billion during the fourth quarter, almost entirely in the Investment Bank, to stand at CHF 348 billion on 31 December 2008. As part of the Investment Bank's overall balance sheet reduction, a portion of this largely offsetting ("matched book") secured funding and lending activity was pared back. Additionally, a significant amount of trading portfolio assets are funded via repurchase agreements, so the decrease in trading portfolio assets also contributed to the fourth-quarter drop in repurchase agreements. These reductions are reflected on the liability side of the balance sheet, where repurchase agreements and securities lent against cash collateral declined by another CHF 104 billion during the fourth quarter, standing at CHF 117 billion on 31 December 2008. The Investment Bank covers its trading short positions (liabilities) by borrowing the necessary securities against the provision of cash collateral via reverse repurchase agreements and securities borrowed transactions. The drop in trading liabilities by CHF 40 billion during the fourth quarter therefore contributed an equivalent reduction of reverse repurchase agreements and securities borrowed on the asset side of the balance sheet.

Trading portfolio

Significant reductions were again achieved in the trading portfolio, which fell by CHF 145 billion during fourth quarter 2008, or CHF 133 billion on a currency-adjusted basis, bringing the trading portfolio down to CHF 312 billion at the end of fourth quarter. Reductions occurred across all trading products, with debt instruments declining CHF 92 billion during fourth quarter 2008, equity instruments falling by CHF 39 billion, traded loans by CHF 9 billion and precious metals by CHF 5 billion. The majority of the decrease was related to the Investment Bank's overall balance sheet reductions and included the initial USD 16.4 billion asset transfer of illiquid assets to the Swiss National Bank StabFund in December and approximately CHF 21 billion of reclassified trading assets to loans. The reduction in equities inventories was mainly driven by lower stock market valuations.

Replacement values

The positive and negative replacement values (RVs) of derivative instruments developed in parallel, showing continued strong increases during fourth quarter 2008 exceeding the increases seen in third quarter 2008. Positive RVs grew by CHF 290 billion to CHF 854 billion in fourth quarter 2008, while negative RVs of derivative instruments increased by CHF 278 billion to CHF 852 billion. In both cases, the increases were largely driven by movements in currencies, interest rate and credit spreads. Increases occurred mainly within interest rate contracts, which grew by CHF 205 billion, followed by foreign exchange contracts with CHF 54 billion and credit derivative contracts with CHF 47 billion.

Shareholders' equity

On 31 December 2008, equity attributable to UBS shareholders was CHF 34.1 billion, representing a decrease of CHF 12.3 billion compared with 30 September 2008.

The decline in the fourth quarter reflects mainly the net loss attributable to UBS shareholders of CHF 8.1 billion and a reduction in share premium of CHF 5.4 billion. Remaining movements are mainly attributable to treasury shares and share-based compensation. The share premium decline resulted mainly from the negative impact of the MCNs placed with the Swiss Confederation in December of CHF 3.6 billion and the realized losses on treasury shares and warrant activities of CHF 2.0 billion (refer to note 14 of this report for more information on the MCNs).

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