UBS - Strategy and structure

UBS clients and businesses UBS's competitive profile Managing UBS's business

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UBS is a global firm, working with corporate, institutional and private clients. Its strategy is to concentrate on three global core businesses – wealth management, asset management and investment banking and securities trading. It also focuses on retail and corporate banking in Switzerland. All the businesses are built to benefit from the same underlying fundamental trend – the growth of wealth. UBS operates as one firm and aims to deliver valuable advice, products and services to its clients while creating high quality sustainable earnings streams.

UBS clients and businesses

Global Wealth Management & Business Banking

In wealth management, UBS's services are designed for high net worth and affluent individuals around the world, whether investing internationally or in their home country. UBS provides them with tailored, unbiased advice and investment services – ranging from asset management to estate planning and from corporate finance to art banking. Its Swiss retail and corporate banking business provides a complete set of banking and securities services for domestic individual and corporate clients.

Global Asset Management

As an asset manager, UBS offers innovative investment management solutions in nearly every asset class to private, institutional and corporate clients, as well as through financial intermediaries. Investment capabilities comprise traditional assets (for instance equities, fixed income and asset allocation), alternative and quantitative investments (multi-manager funds, funds of hedge funds and hedge funds) and real estate.

Investment Bank

In the investment banking and securities businesses, UBS provides securities products and research in equities, fixed income, rates, foreign exchange, energy and metals. It also provides access to the world's capital markets for corporate, institutional, intermediary and alternative asset management clients.

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UBS's competitive profile

Client focus

UBS's purpose is to serve clients and give them confidence in making financial decisions. Whether it serves individual, corporate or institutional clients, UBS puts their success and interests first and strives to truly understand their goals. Client needs develop continuously, as does the financial services industry. UBS strives to systematically capture clients' feedback, in order to identify potential for improving processes, and then adapt its products and services accordingly.

Three businesses, one underlying trend: growth of wealth

Based on sustained social and economic trends, UBS's businesses are focused on areas with above-average growth rates. In addition, structural developments in various countries are creating broader regional client demand for new financial advice, structuring and execution.

The long-term creation of wealth is the fundamental trend that drives all three of UBS's businesses – Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank. The influence of this trend on UBS's businesses with private clients is direct. Private wealth, together with shifting demographics, also drives institutional growth. Taken together, these factors should result in growing capitalization levels in the global financial markets and higher demand for trading execution, financing solutions and risk intermediation.

A global and focused strategy

UBS's consistent strategic focus has led to the current business mix. The current business mix has emerged over fifteen years of development, internal growth initiative and acquisitions, reflecting the firm's core capabilities, strengths, culture and history. Since 1998, UBS has progressively divested non-core businesses and participations, helping it to invest in growing its core businesses and create a balanced reach worldwide.

UBS is the leading global wealth manager. It is one of the market leaders in both Europe and Asia Pacific, in fourth position in the US and the only firm of global scale focusing on wealth management as a core business. In mergers and acquisitions, and equity underwriting, UBS is among the top five firms globally, and the only global bulge bracket investment bank with roots outside the US. The asset management business is one of the leading active asset managers globally and is also one of the largest mutual fund managers in Europe.

In Switzerland, UBS is, and has been since 1998, the leading bank for retail and commercial banking. It serves around 2.7 million individual clients and 137,000 corporations, institutional investors, public entities and foundations. The bank has chosen to limit its Swiss retail and commercial banking business to the Swiss market, concentrating on domestic opportunities and growing selected market segments.

Growth through sustainable, client-driven revenue streams

The composition and structure of UBS's businesses is defined by the long-term needs of its clients. The optimal basis for building a high quality, sustainable earnings stream is a business mix that reflects these long-term needs. Because UBS takes this approach, the firm can grow without needing to change its strategic positioning or competitive profile. In order to fulfill the long-term needs of its clients, UBS:

– makes efficiency improvement a permanent task and a source of innovation, allowing investment spending to be directed to areas that will make the greatest difference for clients and investors;

– expands market share in existing businesses by attracting new clients in fast growth segments (for example, high net worth private clients) and increasing business volume through improved client segmentation and targeted solutions customized to client needs; and

– expands geographically, with a focus on regions with rapid economic and wealth growth, such as China, Brazil, Russia, India and the Middle East.

As UBS has significant scale in its areas of focus, with strong positions in large, mature markets as well as a growing presence in emerging markets, its main priority is to develop and grow organically. Acquisitions should accelerate and complement growth, and they must have an obvious strategic and cultural fit, while being financially attractive to shareholders.

"One firm" approach

The synergies between UBS's businesses create additional sustainable earnings opportunities, on top of their individual growth rates.

To UBS, the "one firm" approach means meeting client needs without expecting clients to worry about its internal organizational structures.

Many clients – particularly wealth management clients – are banking with UBS because it can offer a broad range of investment banking services along with its wealth management offering. Cooperation between businesses helps UBS to capture important trends such as the demand for structured products and alternative investments. In mid-2006, the investment banking department and the wealth management businesses launched a dedicated joint initiative focusing on the ultra-high net worth segment. In 2007, the cooperation between the investment banking department and wealth management in key regions has resulted in an inflow of approximately CHF 9 billion of net new money into the wealth management business and resulted in over 90 new mandates for the Investment Bank, generating around CHF 300 million in fees.

Overall, UBS estimates that, in 2007, around CHF 3.6 billion in incremental revenues were generated by its "one firm" approach – on margins kept in-house on proprietary products (mutual funds, structured products and alternative investments), on spreads and fees on client transactions and on cross-business client referrals.

Another advantage of the "one firm" approach is that it helps UBS to create synergies on cost and funding, which the firm estimates saves it around CHF 1 billion per year. UBS shares infrastructure and services between parts of its business, eliminating redundant structures, management and control functions and providing it with more purchasing power. All the businesses operate under one brand, increasing the efficiency of brand building efforts.

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Managing UBS's business

Board structure

The management and oversight structure of UBS is based on two separate boards – the Board of Directors (BoD) and the Group Executive Board (GEB).

The BoD is the more senior body, with ultimate responsibility for the strategy and management of the company, as well as the supervision of executive management. The BoD also defines UBS's risk framework, principles and overall risk-taking capacity. A clear majority of its members are non-executive and fully independent.

The GEB, on the other hand, assumes overall responsibility for the daily management of UBS, the implementation of strategy and the Group's business results. Together with the Chairman's Office of the BoD (which consists of the Chairman and the Vice Chairmen of the BoD), the GEB is responsible for developing UBS's strategies.

This dual board structure requires that the two boards are institutionally independent of one another, and therefore establishes a system of checks and balances. Furthermore, the functions of Chairman of the BoD and Chief Executive Officer (who is positioned within the GEB) are performed by two different people. No member of one board may be a member of the other.

Organizational structure

While UBS is structured into three business groups and a Corporate Center, it is managed as an integrated firm. Each business group is led by a member of the GEB.

Challenges in 2007 and the way forward

Last year was very difficult for UBS, with the sudden and unprecedented collapse in the US mortgage securitization market hitting UBS far worse than anticipated. Since the middle of 2007, UBS has concentrated on the immediate challenge of risk managing its exposure to the US real estate market, and on drawing the appropriate lessons for the firm as a whole.

With the approval of the capital improvement measures by UBS shareholders at the extraordinary general meeting in February 2008, UBS retained a strong capital position. These measures include:

– the issuance of mandatory convertible notes (MCNs) of CHF 13 billion to two long-term financial investors – the Government of Singapore Investment Corporation Pte. LTD (GIC) has subscribed for CHF 11 billion and an investor from the Middle East for 2 billion;

– the replacement of the cash dividend with a stock dividend; and

– the rededication of treasury shares previously bought for cancellation.

In addition to further developing its client businesses, UBS is currently placing a specific focus on pursuing the structural changes described below which began towards the end of 2007. These changes will address the weaknesses that led to the losses in 2007.

Closure of Dillon Read Capital Management and repositioning of fixed income, currencies and commodities

In May 2007, UBS announced the closure of Dillon Read Capital Management (DRCM) an alternative investment management venture established in June 2006 in order to allow outside investors access to the trading strategies managed by UBS. The core of DRCM was formed by the transfer of UBS's principal finance and commercial real estate trading business from the Investment Bank to Global Asset Management. DRCM's first outside investor fund was launched at the end of 2006.

The development of the business, however, did not meet original expectations. After a review of its prospects, the operational complexity of its business model and other factors, UBS's management decided to close DRCM. As a consequence, outside investor interests were redeemed and UBS's proprietary portfolios were returned from Global Asset Management to the Investment Bank, where the positions were integrated into the appropriate desks of the fixed income, currencies and commodities (FICC) business unit.

FICC's sizeable positions in the US mortgage market, including former DRCM portfolios and positions held by the Investment Bank, incurred significant losses in the second half of 2007, prompting UBS to restructure the business unit. The restructure was designed to strengthen its client-facing businesses, improve cooperation with other parts of UBS and introduce stronger risk discipline. The implementation of these measures was kicked off in January 2008.

As part of this effort, a workout group has been created for certain mortgage-backed securities and CDO portfolios. The remainder of FICC's real estate securitization business is being repositioned in order to focus on intermediating client flows, while scaling back origination efforts. Real estate finance will be increasingly aligned to the needs of investment banking and wealth management clients, in addition to providing commercial real estate financing solutions with the intention of distributing risk via the securitization or loan syndication market.

Overall, UBS is also strengthening risk discipline in FICC with a dedicated risk management position for real estate and securitization.

Besides this, exiting selected proprietary credit businesses in the US, Asia and Europe will help reduce risk and balance sheet utilization, allowing UBS to concentrate resources on client-driven businesses such as global syndicated finance and the flow credit businesses (investment grade, high yield trading and loans sales and trading).

Balance sheet management and funding framework

Until 2007, the Investment Bank's activities were substantially funded on a short-term basis and therefore at short-term rates. This allowed individual business lines in the Investment Bank to benefit from the low, short-term funding rates available to UBS as a whole and led to the build-up of sizeable trading inventories. Now, in order to encourage more disciplined use of UBS's balance sheet, the internal pricing applied for the Investment Bank reflects UBS's funding costs, plus an add-on to align the price more closely to the prices of defined peer firms. In addition, the Investment Bank's businesses are required to be term-funded, based on an assessment of the quality and liquidity of their assets by UBS's central treasury function.

Investment Bank will fund its assets at a rate that matches the liquidity of its assets as assessed by UBS's central treasury department. As a result of this change, the cost of funding in the Investment Bank now better reflects the liquidity of the underlying assets being funded and is comparable with the costs applicable to its peer group.

Improvements in risk management and control

The losses experienced in 2007 do not invalidate UBS's risk management and risk control principles, but it became evident that their implementation needs to be strengthened. In addition to the structural changes in the Investment Bank and its funding framework, risk management and valuation of US residential real estate related products have been refined, and will continue to be updated to reflect changes in projections for lifetime cumulative losses and market parameters. UBS is also applying more extensive limits, by asset class, based on gross values and risk sensitivities. Stress testing is being revisited to deliver a more diverse range of scenarios which better differentiate between the source of a stress event and its contagion effect. UBS plans to use more targeted analysis of the positions and vulnerabilities of each portfolio. Liquidity as well as price sensitivity will form another important aspect of stress testing.

Focus on profitable growth

UBS shareholders expect the firm to achieve profitable growth. As described in this section, fulfilling this expectation requires UBS to establish a set of earning streams that are based on true customer benefit, build a strong and growing client base and maintain its unique assets and capabilities that are hard for competitors to copy.

Efficiency in managing financial resources and risks is a prerequisite for all three of these requirements. By making continuous efficiency improvement – achieving the same or a better result or service with fewer resources a permanent task, UBS will enforce discipline in the way it manages costs. This will help to optimize spending across different economic and business cycles in such a way that it creates value for both clients and investors.

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