Financial businesses results

Income statement ¹

Results

Our 2005 result was the best ever, with all our financial businesses reporting stronger performances than a year earlier. Attributable net profit in 2005 was CHF 13,517 million, of which discontinued operations contributed CHF 4,075 million, reflecting the impact of the sale of Private Banks & GAM. Attributable profit from continuing operations was CHF 9,442 million, and there was no goodwill charge. This was up 18% from CHF 8,003 million before goodwill in 2004.

Operating income

Total operating income was CHF 39,896 million in 2005, up 11% from 2004. This was the highest level ever.

Net interest income was CHF 9,528 million in 2005, down from CHF 11,744 million in the same period a year earlier. Net trading income was CHF 7,996 million, up from CHF 4,902 million in 2004.

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).

Net income from trading activities increased by 4% to CHF 11,419 million in 2005. At CHF 3,928 million, equities trading income in 2005 was up 27% from 2004. Last year saw a large increase in derivatives and prime brokerage revenues around the globe. These gains were partially offset by lower revenues in our equity cash business. Fixed income trading revenues were down 8%, driven by declines in credit fixed income and fixed income, partially offset by increased revenues in our rates, principal finance and commercial real estate business. At CHF 1,458 million, revenues from foreign exchange trading were stable in 2005.

Net income from interest margin products increased 6% to CHF 5,355 million. This was driven by the growth in lending to wealthy US clients through our US bank, UBS Bank USA. Our domestic Swiss mortgage business and wealth management collateralized lending business also grew during the year although this increase was partially offset by lower income from our shrinking Swiss recovery portfolio.

At CHF 750 million, net income from treasury and other activities in 2005 was 38% higher than in 2004. The increase reflects the benefits of the diversification of our capital base into currencies other than the Swiss franc. The higher equity base had a positive impact on treasury income as well.

In 2005, we experienced a net credit loss recovery of CHF 375 million, compared to net credit loss recovery of CHF 241 million in 2004. Releases in country allowances and provisions reflected the generally positive macro-economic environment in key emerging markets.

In 2005, net fee and commission income was CHF 21,436 million, up 16% from a year earlier. The increase was driven by a strong contribution from recurring asset-based fees, higher investment fund fees and net brokerage fees, rising corporate finance fees as well as an increase in underwriting fees.

Other income decreased by 3% to CHF 561 million in 2005, mainly due to both lower net gains from disposal of associates and subsidiaries and from investments in property. This was partially offset by higher net gains from disposals of investment in financial assets-available-for-sale.

Operating expenses

Total operating expenses increased by 6% to CHF 27,704 million in 2005.

Personnel expenses increased by 12% to CHF 19,903 million in 2005. The rise was driven by higher performance-related compensation, reflecting better performances in all our businesses. It was also because of the 6% rise in the number of employees across the financial businesses (excluding the staff of Private Banks & GAM). For 2005, 50% of personnel expenses took the form of bonus or other variable compensation, up from 49% a year earlier. Average variable compensation per head in 2005 was 10% higher than in 2004. Salary expenses rose due to the increase in personnel over the year. Share-based components increased by 17%, due to an increase in the UBS share price and a higher proportion of stock in bonuses granted in 2005, partially offset by lower option expenses. Contractor’s expenses increased 45% from 2004, mainly related to the integration of former Perot employees into our central ITI function. The rise also reflects higher usage, mainly in our Investment Bank in support of increased business flows. Insurance and social security contributions rose by 23% in 2005, reflecting higher salary and bonus payments.

At CHF 6,448 million in 2005, general and administrative expenses increased CHF 61 million from 2004. The increase was driven by travel and entertainment expenses, and additional administration costs, reflecting higher employee levels and further increases in business activity. Marketing costs increased due to continued investment in our brand. This was partially offset by lower provisions and reduced expenses for IT outsourcing and professional fees, as well as lower rent and maintenance of machines and equipment.

Depreciation was CHF 1,240 million in 2005, down 2% from 2004. This was the lowest level ever, reflecting falling IT-related charges, partially offset by higher depreciation on real estate.

Since the beginning of 2005, goodwill stopped being amortized. Amortization of other intangible assets decreased 24% due to the reclassification of the Wealth Management US workforce to goodwill.

We incurred a tax expense of CHF 2,296 million, resulting in an effective tax rate of 18.8%, down from the full-year 2004 tax rate of 21.4% (20.1% pre-goodwill).

Personnel

The number of personnel in our financial businesses was 69,569 on 31 December 2005, up 2,162 from 67,407 on 31 December 2004. Without the impact of the sale of Private Banks & GAM, UBS would have seen an increase of 3,811 related to our growth strategy around the globe in all our key businesses, and a rise of 1,042 in Switzerland.