UBS performance indicators

Measurement and analysis of performance

UBS’s performance is reported in accordance with International Financial Reporting Standards (IFRS). Additionally, our results discussion and analysis comments on the underlying operational performance of our business, focusing on continuing operations insulated from the impact of discontinued activities and individual gain or loss items that are not relevant to our internal approach to managing the company. This helps to better assess our performance against peers and to estimate future growth potential.

Items that we would not consider as indicative of our future potential performance and are therefore not included in our management’s business planning decisions, and which are event- and UBS-specific, rather than industry-wide.

In the last two years, one such item had a significant impact on our consolidated financial statements. In fourth quarter 2005, we sold our Private Banks & GAM unit to Julius Baer at a gain of CHF 3.7 billion after tax (pre-tax CHF 4.1 billion). The unit comprised the Banco di Lugano, Ehinger & Armand von Ernst and Ferrier Lullin private banks as well as specialist asset manager GAM. After the sale, we retained a stake of 20.7% in the new Julius Baer.

Up to and including 2004, we had provided comments and analysis on an adjusted basis that also excluded the amortization of goodwill and other acquired intangible assets.

With the introduction of IFRS 3, Business Combinations, at the beginning of 2005, we ceased amortizing goodwill, which had by far the largest impact on our results. In our 2005 reporting, our result and analysis commentary compares current results to the prior year on a pre-goodwill basis.

Performance against targets

For the last six years, we have consistently focused on a set of four long-term performance indicators that are valid through periods of varying market conditions and are designed to ensure that we deliver continuously improving returns to our shareholders. We have reported our performance against these indicators each quarter:

– We seek to increase the value of UBS by achieving a sustainable, after-tax return on equity of 15–20%

– We aim to increase shareholder value through double-digit average annual percentage growth in basic earnings per share (EPS)

– By cost reduction and earnings enhancement initiatives, we aim to reduce UBS’s cost / income ratio to a level that compares positively with best-in-class competitors

– We aim to achieve a clear growth trend in net new money in our wealth management units.

As we have been steadily exceeding our performance indicators for some time now, we have decided to modify three of them for 2006. Before the amortization of goodwill, our continuing operations in 2005 showed:

– Return on equity in full-year 2005 at 27.6%, up from 26.3% in 2004. The increase was driven by higher net profit, which was partially offset by an increase in average equity levels, reflecting the growth in retained earnings. From 2006 onwards, we aim to exceed 20% over periods of fluctuating market conditions.

– Basic earnings per share in 2005 at CHF 9.78, up 22% from CHF 8.02 a year ago, reflecting increased earnings and a slight reduction (-2%) in the average number of shares outstanding following share repurchases. Diluted earnings per share, our performance indicator from 2006 on, were at CHF 9.39 in 2005, up 23% from CHF 7.64 in 2004.

– A cost / income ratio of our financial businesses of 70.1% in 2005, down 1.3 percentage points from 71.4% a year ago. This reflects the increase in net fee and commission income and net income from trading activities, partly offset by higher costs related to personnel – all related to the expansion of our business volumes.

Our wealth management businesses continue to gather assets rapidly in all regions. In 2005, net new money totaled CHF 95.1 billion, up 57% from CHF 60.4 billion in 2004, corresponding to an annual growth rate of 6.9% of the asset base at the end of 2004. Wealth Management International & Switzerland recorded inflows of CHF 68.2 billion, driven by further growth in our five key European markets and Asia. Our US business contributed CHF 26.9 billion in net new money, CHF 8.8 billion above 2004 levels.

Starting in 2006, we will report net new money for all financial businesses. For the whole of 2005, net new money was CHF 148.0 billion, an all-time high, and up 80% from CHF 82.2 billion a year earlier. This amounts to an annual growth rate of 7% of the asset base at the end of 2004. All the figures above exclude Private Banks & GAM.