Measurement and analysis of performance

UBS's performance is reported in accordance with International Financial Reporting Standards (IFRS). Our results discussion and analysis comments on the underlying opera­tional performance of our business, focusing on continuing operations. As discontinued activities are no longer relevant to our management of the company, we do not consider them to be indicative of our future potential performance. They are therefore not included in our business planning decisions. This helps to better assess our performance against peers and to estimate future growth potential.

In the last three years, two discontinued operations 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 3,705 million after tax (pre-tax CHF 4,095 million). 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.

– On 23 March 2006, UBS sold its 55.6% stake in Motor-Columbus to a consortium representing Atel's Swiss minority shareholders, EOS Holding and Atel, as well as to French utility Electricité de France (EDF) for a sale price of approximately CHF 1,295 million, leading to an after-tax gain on sale of CHF 387 million.

Up to and including 2005, we 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 was by far the largest adjustment made to our results. In this Financial Report, comments related to 2004 include goodwill amortization.

Seasonal characteristics

Our main businesses do not generally show significant ­seasonal patterns, except for the Investment Bank, where revenues are impacted by the seasonal characteristics of general financial market activity and deal flows in investment banking.

When discussing quarterly performance, we therefore compare the Investment Bank's financial results of the ­reported quarter with those achieved in the same period of the previous year. Similarly, when considering the impact of the Investment Bank's performance on UBS's financial statements, we discuss our overall quarterly performance on a year-on-year basis – comparing the actual quarter with the same quarter in the previous year. Because of the volatile nature of market movements and the resulting business and trading opportunities, the market risk and balance sheet items in our Investment Bank are compared on a present quarter to previous quarter basis. For all other Business Groups and Units, recent quarterly results are compared with the previous quarter's, as they are only slightly impacted by seasonal components such as asset withdrawals in fourth quarter and lower client activity levels related to the end-of-year holiday season.

Performance measures

UBS performance indicators

For the last seven years, we have consistently assessed our performance against a set of four measures that were designed to ensure the delivery of continuously improving ­returns to our shareholders. In that time, UBS has evolved, and its business and client base have grown. By late 2005 we had arrived at a point where we were steadily exceeding the original targets.

That is why, starting in first quarter 2006, we modified our measures. On average through periods of varying market conditions, we:

– seek to increase the value of UBS by achieving a sustainable, after-tax return on equity of a minimum of 20% (we previously targeted a range of 15–20%).

– aim to achieve a clear growth trend in net new money for all our financial businesses, including Global Asset Management and Business Banking Switzerland (this measure was previously only applied to our wealth management units).

– use diluted earnings per share (EPS) instead of basic EPS as a reference for our EPS growth target that remains, as before, annual double-digit percentage growth.

– continue our unchanged objective to manage our Business Group / Business Unit cost / income ratios at levels that compare well with our competitors. Our cost / income ratio target is limited to our financial businesses.

Business Group Key Performance Indicators

At the Business Group or Business Unit level, our performance is measured by carefully chosen Key Performance ­Indicators (KPIs). They indicate the Business Group's or Business Unit's success in creating value for shareholders but do not disclose explicit targets. The KPIs show the key drivers of each unit's core business activities and include financial metrics, such as cost / income ratios and invested assets, along with non-financial metrics, such as the number of ­client advisors.

These Business Group KPIs are used for internal per­formance measurement and planning as well as external ­reporting. This ensures management accountability for performance by senior executives and consistency in external and internal performance measurement.

Client / invested assets reporting

Since 2001, we have reported two distinct metrics for client funds:

– Client assets are all client assets managed by or deposited with UBS including custody-only assets and assets held for purely transactional purposes.

– Invested assets is a more restrictive term and includes all client assets managed by or deposited with UBS for investment purposes.

Invested assets is our central measure and includes, for example, discretionary and advisory wealth management portfolios, managed institutional assets, managed fund ­assets and wealth management securities or brokerage ­accounts. It excludes all assets held for purely transactional and custody-only purposes as UBS only administers the ­assets and does not offer advice on how these assets should be invested. Since 1 January 2004, corporate client assets (other than pension funds) deposited with the Business Banking Switzerland unit have been excluded from invested assets, as we have a minimal advisory role for such clients and as asset flows are driven more by liquidity requirements than investment reasons. The same holds true for the corporate cash management business of the Wealth Management US unit, which we excluded from invested assets towards the end of 2005. Non-bankable assets (for example art collections) and deposits from third-party banks for funding or trading purposes are excluded from both measures.

Net new money in a reported period is the net amount of invested assets that are entrusted to the bank by new and existing clients less those withdrawn by existing clients and clients who terminate their relationship with UBS. Net new money is calculated using the direct method, by which in- and outflows to and from invested assets are determined at the client level based on transactions. Interest expenses clients pay on their loans are treated as net new money outflows. Interest and dividend income from invested assets is not counted as net new money inflow. Market and currency movements as well as fees and commissions are excluded from net new money, as are the effects resulting from any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invested assets and client assets as a result of a change in the service level delivered are treated as net new money flow.

When products are managed in one Business Group and sold in another, they are counted in both the investment management unit and the distribution unit. This results in double counting in UBS's total invested assets as both units provide an independent service to their respective client, add value and generate revenues. Most double counting arises where mutual funds are managed by the Global ­Asset Management business and sold by Global Wealth Management & Business Banking. Both businesses involved count these funds as invested assets. This approach is in line with industry practice and our open architecture ­strategy and ­allows us to accurately reflect the performance of each individual business. Overall, CHF 371 billion of invested assets were double counted in 2006 (CHF 332 billion in 2005).