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, as well as derivatives and similar transactions. A form of credit risk also arises on securities and other obligations in tradable form when expectations about their probability of default change, affecting their fair value. Where these instruments are held in connection with a trading activity, UBS views the risk as a market risk.

Credit loss expenses

UBS recorded a credit loss expense of CHF 1,135 million in first quarter 2009, compared with 2,310 million in fourth quarter 2008.

In the Investment Bank, credit loss expenses in first quarter 2009 were CHF 1,017 million, of which CHF 828 million related to loan positions which were entered into with the intent to syndicate or distribute but where the syndication or distribution markets became illiquid. CHF 742 million of these credit loss expenses related to four loan positions. In fourth quarter 2008, credit loss expenses were CHF 1,939 million, of which CHF 1,329 million related to reclassified positions.

Wealth Management & Swiss Bank reported credit loss expenses of CHF 119 million in first quarter 2009, approximately one-third of which was due to forced liquidations of collateral held against lombard loans and the remaining two-thirds resulted from a rise in credit losses from exposures to small and medium-sized companies. This compared with CHF 354 million in the prior quarter.

Gross lending portfolio and impairments

UBS's gross lending portfolio was CHF 405 billion on 31 March 2009, down from CHF 408 billion on 31 December 2008.

The gross lending portfolio in the Investment Bank was CHF 176 billion at the end of first quarter 2009, up from CHF 169 billion on 31 December 2008, mainly due to the transfer of approximately CHF 10 billion of US auction rate securities positions from Wealth Management Americas to the Investment Bank. The Investment Bank held CHF 3.6 billion of commercial real estate positions and CHF 7.3 billion of monoline protected assets in its lending portfolio following their reclassification from "Held-for-trading" to "Loans and receivables" in fourth quarter 2008. The exposures related to monoline protected assets are included in the respective asset class disclosure in the "Risk concentrations" section of this report.

In Wealth Management & Swiss Bank, the gross lending portfolio was CHF 206 billion on 31 March 2009, compared with CHF 212 billion at the previous quarter-end, as client deleveraging continued in the lombard lending business.

UBS actively manages the credit risk in its portfolios by taking collateral against exposures and utilizing credit hedging with the aim of reducing concentrations in individual names, sectors and specific portfolios.

The level of the gross impaired lending portfolio of UBS was CHF 13.5 billion at the end of first quarter 2009, an increase compared with CHF 9.1 billion at the prior quarter end. The ratio of the impaired lending portfolio to total gross lending portfolio increased to 3.3% on 31 March 2009, up from 2.2% on 31 December 2008. Excluding the impact of impairments on assets that were reclassified in fourth quarter 2008, the ratio would have increased to 1.7% from 1.2%.

The Investment Bank's gross impaired lending portfolio increased significantly to CHF 11.0 billion at the end of first quarter 2009 from CHF 6.1 billion at the prior quarter end. CHF 2.7 billion of this resulted from approximately CHF 60 million of aggregate credit loss expense provisions primarily being taken against asset-backed securities that had been reclassified in fourth quarter 2008, which resulted in those assets ­being designated as impaired in first quarter 2009. A further CHF 2.2 billion ­increase in impaired assets related to asset-backed security warehouse financings and leveraged finance commitments which had not been successfully distributed. The credit quality of the Investment Bank lending portfolio is expected to be negatively impacted by further impairments and credit losses in the coming quarters as a result of the economic downturn and continued weaknesses in credit markets.

The gross impaired lending portfolio of Wealth Management & Swiss Bank decreased 16.1% in first quarter 2009 compared with the sharp increase experienced in fourth quarter 2008. Although the overall credit quality of the portfolio remained stable over the period, further impairments and credit losses are expected over the coming quarters as a consequence of the depressed economic environment in Switzerland.