 |  UBS 2002 net profit was CHF 3,535 million, down 29% from CHF 4,973 million in 2001. This full-year profit was impacted by several items we call significant financial events: the non-cash after-tax write down of the value of the PaineWebber brand, which reduced profit by 21%, and the impact of sales of subsidiaries, which added 6% to profit. Excluding these effects, and before goodwill amortization, net profit only fell by 12% between 2001 and 2002.
Income
Total operating income fell to CHF 34,121 million in 2002 from CHF 37,114 million in 2001. Adjusted for SFEs total operating income in 2002 was CHF 33,894 million, a drop of 9% from 2001. The decline was mainly due to the difficult market environment, less favorable trading conditions and a weakening of investor sentiment. Falling market levels affected asset-based revenues while our private equity business continued to record losses due to ongoing poor valuation and exit conditions.
Net interest income of CHF 10,546 million in 2002 was 31% higher than in 2001. Net trading income declined 37% from CHF 8,802 million in 2001 to CHF 5,572 million in 2002.
As well as income from interest margin based activities (loans and deposits), net interest income includes income earned as a result of trading activities (for example, coupon and dividend income). This component is volatile from period to period, depending on the composition of the trading portfolio. In order to provide a better explanation of the movements in net interest income and net trading income, we analyze the total according to the business activities that give rise to the income, rather than by the type of income generated.
Net income from interest margin products was CHF 5,275 million in 2002, down 7% from CHF 5,694 million a year earlier, mainly reflecting lower margins on savings, cash accounts and mortgages because of margin pressure that reflected the extremely low interest rate environment. This was accentuated by the decline of the US dollar, which caused the Swiss franc equivalent of US dollar interest rate revenues to drop.
Over the full-year, net income from trading activities fell by 8% from CHF 11,529 million in 2001 to CHF 10,605 million in 2002, as equity revenues declined, reflecting worsening market conditions and lower client activity. Fixed income trading revenues remained at strong levels although they were lower than a year earlier, when they benefited from a buoyant trading environment. Foreign exchange revenues rose slightly due to increased volumes and spreads.
Net income from treasury activities was CHF 1,667 million in 2002, an increase of 17%, reflecting higher income from our invested equity and a drop in funding costs.
Other net trading and interest income showed a loss of CHF 1,429 million compared to a loss of CHF 1,804 million in 2001. This drop was mainly due to lower goodwill funding costs, which reflected the weakening of the US dollar against the Swiss franc, lower funding costs for our private equity portfolio as well as the reclassification of some revenues previously reported as income from trading activities.
In 2002, credit loss expens amounted to CHF 206 million, compared to CHF 498 million in 2001.
Net fee and commission income for the full-year was CHF 18,221 million, a drop of 10% compared to a year earlier, reflecting a drop in most revenue categories, as brokerage and investment banking fees fell, due to much lower market and client activity, although underwriting fees remained resilient.
Other income showed a loss of CHF 12 million compared to a gain of CHF 558 million a year earlier. Higher impairment charges at UBS Capital's private equity investments and other financial investments gains from disposals of financial investments Klinik Hirslanden and Hyposwiss subsidiaries.
Expenses
Total operating expenses, at CHF 29,577 million, decreased by 3% from CHF 30,396 million in 2001 because of lower personnel expenses as well as falling general and administrative expenses, reflecting our ongoing cost initiatives and the ability to adjust our costs in line with revenue developments. This drop was partially offset by the writedown of the PaineWebber brand. Without the writedown, the drop in total operating expenses would have been 7%.
Full-year personnel expenses dropped by 7% to CHF 18,524 million reflecting much lower performance-related compensation expenses and lower salaries due to a reduction in headcount, especially in UBS PaineWebber and Business Banking Switzerland. The drop was further accentuated by lower recruitment, training and much lower contractor costs across the firm, reflecting our continued cost control initiatives. Finally, the result was helped by a weaker US dollar against the Swiss franc.
General and administrative expenses, at CHF 7,072 million, were down from CHF 7,631 million a year earlier. Strict cost control in all our businesses led to a drop in nearly all cost categories. The biggest declines were in telecommunication, IT, outsourcing and branding expenses. This was partially offset by higher legal and security provisions including a global settlement charge of CHF 111 million (USD 80 million) regarding equity research in the US.
At CHF 1,614 million in 2001, depreciation fell by 6% to CHF 1,521 million in 2002, mainly because of lower depreciation charges for machines and equipment.
Amortization of goodwill and other intangible assets increased from CHF 1,323 million in 2001 to CHF 2,460 million in 2002, due to the writedown of the PaineWebber brand name following our decision made in fourth quarter 2002 to move to a single brand.
We incurred a tax expense of CHF 678 million in 2002, down from CHF 1,401 million in 2001. This corresponds to an effective tax rate of 15% in 2001. Adjusted for significant financial events, our 2002 tax expense of CHF 917 million reflects an effective tax rate of 16.5%, well below 2001's rate of 21%. The decline is mainly driven by significantly lower progressive tax rates in Switzerland, the ability to benefit from tax loss carry forwards in the US and UK and a higher proportion of earnings generated in lower tax jurisdictions.
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