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Strategy and structure
UBS is a global firm providing financial services to private, corporate and institutional clients. Its strategy is to concentrate on three global core businesses - wealth management, asset management and investment banking - and to provide retail and corporate banking services in Switzerland. By delivering valuable advice, products and services to its clients, the firm aims to generate sustainable earnings and create value for its shareholders.
UBS strategy and business model
UBS has crafted its business strategy to benefit from one underlying global trend: the growth of wealth. Despite the current financial crisis, the firm believes that over the long term wealth creation will continue to be a prominent characteristic of the world economy. UBS's three core businesses of wealth management, asset management and investment banking are geared to take advantage of this trend.
Organizationally, UBS has operated throughout 2008 as a Group with three business divisions: Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank. As announced on 10 February 2009, Global Wealth Management & Business Banking has been divided into two business divisions: Wealth Management & Swiss Bank and Wealth Management Americas. Each business division is accountable for its own results, but co-operates to provide a broad palette of cross-business solutions for clients. UBS considers the breadth and depth of its offering to be one of its main strengths, and a key to its ability to create value for clients and shareholders.
Wealth Management & Swiss Bank
UBS's wealth management business caters to high net worth and affluent individuals around the world (except those served by Wealth Management Americas) whether they are investing internationally or in their home country. UBS offers these clients a complete range of tailored advice and investment services. Its Swiss Bank business provides a complete set of banking services for Swiss individual and corporate clients.
Wealth Management Americas
Wealth Management Americas offers sophisticated products and services specifically designed to address the needs of high net worth and affluent individuals. It includes Wealth Management US, domestic Canada, domestic Brazil and the international business booked in the United States.
Global Asset Management
As a worldwide asset manager, UBS offers innovative investment management solutions in nearly every asset class to private, corporate and institutional clients, as well as through financial intermediaries. Investment capabilities include 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 and metals. It also provides advisory services as well as access to the world's capital markets for corporate, institutional, intermediary and alternative asset management clients.
Refer to the "Reporting structure" and "UBS business divisions and Corporate Center" sections of this report for more information on UBS's business divisions and the Corporate Center
UBS competitive profile
UBS's current business mix is a result of many decades of development, internal growth initiatives and acquisitions. Since 1998, UBS has progressively divested non-core businesses and participations, and invested in growing its core businesses and creating a balanced reach worldwide.
UBS is now a leading global wealth manager: it is a market leader (by client assets) in both Europe and Asia Pacific, in sixth position in the US and one of the only firms of global scale focusing on wealth management as a core business. In 2008, UBS was among the top five firms globally in mergers and acquisitions based on deal volume. The asset management business is one of the leading active asset managers globally and one of the largest mutual fund managers in Europe based on assets under management.
In Switzerland, UBS is the leading firm for retail and commercial banking. It serves around 2.5 million individual clients and 133,500 corporations, institutional investors, public entities and foundations, collectively. The bank has chosen to limit its retail and commercial banking business to the Swiss market, concentrating on domestic opportunities and growing selected market segments.
UBS corporate governance
As mandated by Swiss banking law, UBS operates under a strict dual board structure comprising the Board of Directors (BoD) and the Group Executive Board (GEB).
The BoD is UBS's most senior body and is ultimately responsible for the firm's strategy and the supervision of its executive management. The BoD sets the mid- and long-term strategic direction of the Group, is responsible for appointments and dismissals at top management levels and for defining the firm's risk principles and risk capacity. A clear majority of its members are non-executive and fully independent.
The management of the business is delegated by the BoD to the GEB. Under the auspices of the Group CEO, the GEB has executive management responsibility for the Group and its businesses. It assumes overall responsibility for the development and the implementation of the Group's and the business divisions' strategies and for the exploitation of synergies across the firm.
The Executive Committee (EC) consists of the Group Chief Executive Officer (CEO), the Group Chief Financial Officer (CFO), the Group Chief Risk Officer (CRO) and the Group General Counsel, and is responsible for the allocation of the Group's financial resources to the business divisions. These resources include capital, funding, and risk capacity and parameters within the limits set by the BoD.
Refer to the "Corporate governance" section of this report for more information
UBS's strategic priorities
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. As client needs and the financial services industry constantly evolve, UBS makes a systematic effort to capture client feedback, identify potential for improvement and adapt its offerings accordingly.
Profitable growth and earnings quality
UBS shareholders expect the firm to achieve profitable growth. Fulfilling this expectation requires UBS to establish sustainable earning streams based on client benefit. It therefore strives to build a strong and growing client base and to continuously develop its unique assets and capabilities.
In order to fulfill these requirements, UBS needs to ensure that it efficiently manages its financial resources. By making continuous efficiency improvements - that is, by looking for ways to achieve the same or a better result or service with fewer resources - UBS strives both to manage costs in a disciplined manner and to optimize its spending across economic and business cycles.
Risk and capital management
Taking, managing and controlling risk is a core element of UBS's business activities. UBS's aim is not, therefore, to eliminate all risks, but to achieve an appropriate balance between risk and return. Risk reduction and capital measures taken in 2008 aimed at maintaining UBS's capital strength as a source of competitive advantage. Adapting risk exposures to the current market environment and managing UBS's balance sheet remain strategic priorities for the firm.
Refer to the "Risk and treasury management" section of this report for more information on risk and capital management
Business divisions' franchises
UBS continues to develop the platform and reach of the business divisions known since 10 February 2009 as Wealth Management & Swiss Bank and Wealth Management Americas. This includes the expansion of its global presence in international wealth management growth markets. UBS's leading position in Switzerland, both as a wealth manager and as the largest retail bank, will remain a cornerstone of UBS's strategy and a source of sustainable profit growth.
UBS also continues to develop the platform and reach of its Global Asset Management business division. This includes focusing on developing innovative products and managing toward sustainable investment performance.
The Investment Bank is in the process of repositioning itself toward client-driven growth, combined with a further reduction of its balance sheet and risk positions. This will allow the Investment Bank to build on its global coverage and distribution capability and to ensure maximum accountability for the creation of shareholder value. This repositioning includes the downsizing or exiting of certain businesses.
Refer to the "UBS business divisions and Corporate Center" section of this report for more information on UBS's business divisions and the Corporate Center
Measures taken
In August 2008, UBS launched a comprehensive program to re-engineer its businesses and to adjust to the new realities in the financial industry. It aims to capitalize on the strengths inherent in its leading client franchises across its business divisions, to further grow these franchises, and to address certain weaknesses in its business model that had become apparent both before and as a result of the financial crisis.
Executive governance
Controls have been improved and accountability and transparency increased at the level of top management. One result has been the creation of an Executive Committee to allocate and continuously monitor the use of capital and risk in each of the business divisions. Other wide-ranging changes to the Group's governance have been proposed and implemented. Refer to the "Corporate governance" section of this report for more information on corporate governance.
Liquidity and funding framework
The business divisions have been incentivized to manage their balance sheets with greater autonomy and responsibility. A new liquidity and funding concept has been approved and is being implemented. Refer to the "Liquidity and funding management" section of this report for more information on liquidity and funding.
Senior management compensation
Senior management compensation is now aligned to sustainable value creation within each manager's area of responsibility and a longer performance evaluation horizon has been introduced. UBS announced a new compensation model for senior executives in November 2008 (effective 1 January 2009). Refer to the "Compensation, shareholdings and loans" section of this report for more information on senior management compensation.
Transformation of UBS's wealth management business
As announced on 10 February 2009, Global Wealth Management & Business Banking has been divided into two new business divisions: Wealth Management & Swiss Bank and Wealth Management Americas.
| Key performance indicators: 2009 and beyond | ||
UBS uses key performance indicators (KPIs) to monitor the firm's performance and the delivery of returns to shareholders. Until the end of 2008, UBS focused on four KPIs at the Group level, as described in the discussion of performance measures in the "Measurement and analysis of performance" section of this report. In response to the changing market environment, UBS conducted a detailed review of its KPI framework in 2008. The objective of this review was to adjust these indicators - which are used by the firm to evaluate its economic performance as a whole and the contribution of individual employees to that performance - to more closely reflect the firm's strategic priorities. This review focused on the identification of the key drivers of total shareholder return (TSR) - defined as the change in the share price and any dividend yield - which represents the ultimate measure of performance for UBS shareholders. However, several factors driving TSR cannot be directly influenced by UBS management, such as valuation multiples and short-term market trends. Therefore, on a day-to-day basis, UBS management measures performance in the form of profitability after the cost of equity or economic profit. Consequently, the KPI framework has been designed to explicitly incorporate the drivers of economic profit at the Group and business division level. UBS manages its businesses based on its KPI framework, which is used for internal performance measurement to ensure management accountability and consistency. Both Group and business division KPIs are used to determine variable compensation of executives and staff. The Group and business division KPIs shown in the table below will be disclosed beginning in first quarter 2009 and going forward.
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Risk management in 2008
UBS entered 2008 with significant legacy risk positions which exceeded the firm's risk bearing capacity. While UBS incurred substantial writedowns on its risk positions, it pursued an active risk reduction program through sales in 2008. Significant transactions included the sale in May of US residential mortgage-backed securities to a fund managed by BlackRock for proceeds of USD 15 billion and the agreement reached in October with the Swiss National Bank (SNB) (see details below).
UBS identified significant weaknesses in its risk management and control organization. In order to address these weaknesses, UBS launched an extensive remediation plan, which included the overhaul of its risk governance, significant changes to risk management and control personnel, as well as improvements in risk capture, risk representation and risk monitoring. Implementation of this plan is ongoing and remains a high priority for UBS.
| Transaction with the Swiss National Bank |
As announced on 16 October 2008, the Swiss National Bank (SNB) and UBS reached an agreement to transfer illiquid securities and other positions from UBS's balance sheet to a fund owned and controlled by the SNB. From the originally agreed USD 60 billion, the transaction size has been reduced to USD 38.6 billion (including the effect of price adjustments so far totaling USD 0.7 billion). With this transaction, UBS caps future potential losses from these assets, reduces its risk-weighted assets, materially de-risks its balance sheet and is no longer exposed to the funding risk of the assets to be transferred. Transaction structure The SNB will finance the fund with a loan in the amount of 90% of the purchase price to be paid by the fund, secured by the assets of the fund. 10% of the purchase price will be financed through an equity contribution by the SNB. The loan will be non-recourse to UBS and will be priced at LIBOR plus 250 basis points. The fund and loan facility will terminate in eight years, but the termination date may be extended to 10 or 12 years. The cash flow from the assets, including interest, rental income, principal repayments and proceeds from asset sales (net of expenses and working capital requirements), will be applied to service the loan until full repayment. At the closing of each asset transfer, UBS will purchase, for an amount equal to the SNB's equity contribution on that date, an option to acquire the fund's equity once the loan has been fully repaid. The option exercise price will be USD 1 billion plus 50% of the amount by which the equity value exceeds USD 1 billion at the time of exercise. This option will be carried on UBS's balance sheet at its fair value. In the event of a change of control of UBS, the SNB will have the right but not the obligation to require UBS to purchase the outstanding loans at par plus accrued interest and to purchase the fund equity at 50% of its value at the time. If, upon the fund's termination, the SNB incurs a loss on the loan it has made to the fund, the SNB will be entitled to receive 100 million UBS ordinary shares against payment of the par value of those shares (currently CHF 0.10 per share). Governance In fourth quarter 2008, the fund was established under the name SNB StabFund as a Swiss limited partnership for collective investments. Its objective is to manage the acquired positions based on fundamental value considerations. The SNB StabFund is owned by a general partner and a limited partner, both of which are wholly owned by the SNB. The general partner has a board of directors with five members, of which three are designated by the SNB and two by UBS. UBS acts as the investment manager of the SNB StabFund, subject to the oversight of the board of directors of the general partner which must approve certain types of decisions. The board also retains the right to remove UBS as the investment manager of the SNB StabFund. Portfolio composition and size The overall portfolio valuation of positions already transferred or still expected to be transferred to the SNB StabFund is USD 38.6 billion, as shown in the table opposite, subject to any further pricing adjustments. The SNB StabFund acquired a first tranche of 2,042 securities positions from UBS on 16 December 2008 for USD 16.4 billion. The remaining positions identified for sale to the fund are planned to be transferred in March 2009 in one or more additional transfers. The purchase price for the securities transferred to the fund on 16 December 2008 was the value of these securities as of 30 September 2008 as determined by the SNB based on a valuation conducted by third-party valuation experts. On the same basis, the SNB has since determined the purchase price to be paid for a further USD 7.8 billion in securities and other positions that have not yet been transferred to the fund. So far, the determined purchase prices for securities and other positions transferred to or to be transferred to the fund were, in the aggregate, USD 0.7 billion lower than the value UBS assigned to these positions on 30 September 2008. All but approximately CHF 0.1 billion of this difference is accounted for in UBS’s results for 2008. Purchase prices have not yet been determined for the other positions not yet transferred to the fund, valued at USD 14.4 billion by UBS on 30 September 2008. Any difference between the purchase prices to be determined by the SNB and the value UBS assigned to these positions will affect UBS’s results in first quarter 2009.
Issuance of MCNs to the
Swiss Confederation
Implications for UBS’s 2008
income statement
|
Positions affected by the transfer to the Swiss National Bank StabFund | |||
Valuation as of 30 September 2008 | |||
USD billion | Priced | Not yet priced | Total |
US sub-prime | 4.0 | 1.6 | 5.6 |
US Alt-A | 1.5 | 0.8 | 2.4 |
US prime | 1.2 | 0.7 | 1.9 |
US reference-linked note program | 5.8 | 0.0) | 5.8 |
Commercial real estate | 3.4 | 2.3 | 5.7 |
Student loan-backed securities | 0.5 | 0.0 | 0.5 |
Other positions | 8.5 | 9.0 | 17.5 |
Price difference | (0.7) | 1 | (0.7) |
Total | 24.2 | 14.4 | 38.6 |
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| UBS has restated its annual report for 2008 on May 20, 2009, including the financial statements and other information. | | | | | |
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