Balance sheet

31.12.08 vs 31.12.07:

UBS's total assets stood at CHF 2,015 billion on 31 December 2008, down from CHF 2,275 billion on 31 December 2007. These shifts were driven by deliberate reductions of CHF 462 billion in the trading portfolio and of CHF 236 billion in collateral trading, led by the Investment Bank. These substantial reductions were, however, partly offset by a significant rise in replacement values (increasing to a similar extent on both sides of the balance sheet as discussed under "Replacement values" below) during 2008, as market movements drove up positive replacement values by 99%, or CHF 426 billion, to reach CHF 854 billion at year-end. Excluding positive replacement values, UBS's total assets dropped CHF 686 billion in 2008.

Currency effects for 2008 included a strengthening of the Swiss franc against the British pound, US dollar and euro. These effects deflated the balance sheet, excluding positive replacement values, by CHF 74 billion, implying an underlying reduction of effectively CHF 612 billion.

Excluding positive replacement values, the Investment Bank significantly reduced its balance sheet assets by CHF 664 billion during 2008, and the positions of Global Wealth Management & Business Banking and Global Asset Management remained relatively stable at CHF 291 billion and CHF 25 billion, respectively.

Lending and borrowing

Lending

Cash and balances with central banks was CHF 33 billion on 31 December 2008, an increase of CHF 14 billion from the prior year-end. Due from banks and loans to customers both increased CHF 4 billion, rising to CHF 64 billion and CHF 340 billion, respectively. The customer loan increase stemmed mainly from the BlackRock collateralized funding transaction (a USD 11.25 billion eight-year amortizing loan; balance on 31 December 2008 USD 9.2 billion) in second quarter 2008 and the reclassification of illiquid trading assets from the trading portfolio in fourth quarter 2008, partially offset by lower volumes from the Investment Bank prime brokerage business and from lombard lending in Global Wealth Management & Business Banking. The Swiss loan portfolio remained stable during 2008 at around CHF 163 billion.

Borrowing

The reduction of the Investment Bank's assets led to lower unsecured borrowing needs during a continued difficult market environment for term debt issuance and decreasing client deposits. Money market paper issuance was CHF 112 billion in 2008, a considerable reduction of CHF 41 billion from the prior year, as UBS decreased its reliance on these funding sources (in line with the firm's lower overall funding needs) amid a reduced access to these markets for issuers in general. Financial liabilities designated at fair value stood at CHF 102 billion on 31 December 2008, a drop of CHF 90 billion from 31 December 2007, as a lower demand for structured debt was accompanied by declining market values, in particular of equity-linked notes as major stock indices fell. Long-term debt grew CHF 16 billion to CHF 86 billion as new issues of senior straight bonds, the CHF 6 billion MCN issuance to the Swiss Confederation and around CHF 2 billion of mortgage bonds issued via the Swiss Mortgage Bond Bank combined to outweigh maturing senior straight bonds. Interbank borrowing (due to banks) was CHF 126 billion on 31 December 2008, down CHF 20 billion from 31 December 2007. Customer deposits (due to customers) amounted to CHF 475 billion on 31 December 2008, a decrease of CHF 167 billion for the year, or CHF 134 billion, on a currency-adjusted basis. Global Wealth Management & Business Banking client deposits declined CHF 109 billion with reductions in fixed deposits, fiduciary investments and current accounts. Savings and personal accounts dropped CHF 10 billion over the course of 2008, though the last quarter recorded net inflows of CHF 3 billion. Investment Bank deposits declined CHF 58 billion, mainly driven by lower business funding needs and a decline in the prime brokerage business.

Repurchase / reverse repurchase agreements and securities borrowing / lending

Secured lending on the asset side of the balance sheet, the sums of cash collateral on securities borrowed and reverse repurchase agreements declined during 2008 to CHF 348 billion on 31 December 2008. The CHF 236 billion decline occurred almost entirely in the Investment Bank, where the matched book was reduced as part of its overall balance sheet reduction (the matched book is a repurchase agreement portfolio comprised of assets and liabilities with equal maturities and equal value so that the market risks substantially cancel each other out). Furthermore, as part of the Investment Bank's balance sheet reduction measures, its trading short positions were reduced CHF 102 billion, which resulted in lower short-coverings via reverse repurchase agreements and securities borrowing transactions.

A significant amount of trading assets are funded via repurchase agreements, so, in addition to the matched book reduction, the yearly decrease in trading assets also contributed to the drop in repurchase agreements. These reductions are reflected on the liability side of the balance sheet, where repurchase agreements and securities lent against cash collateral declined CHF 221 billion, standing at CHF 117 billion on 31 December 2008.

Trading portfolio

Significant reductions were achieved in the trading portfolio, which declined CHF 462 billion during 2008, or CHF 445 billion on a currency-adjusted basis. At the end of 2008, the trading portfolio stood at CHF 312 billion. The majority of the decrease related to the Investment Bank's overall balance sheet reductions and occurred within the fixed income, currencies and commodities (FICC) business area and the equities business area. In FICC, trading inventories in a number of areas, including real estate, securitization and commodities, were substantially reduced, including USD 16.4 billion of illiquid assets transferred to the Swiss National Bank StabFund and approximately CHF 26 billion (represents fair values at the reclassification dates) of trading assets reclassified in fourth quarter 2008 to banking book as "Loans and receivables". The reduction in equities inventories was mainly a result of stock market declines. Reductions occurred across all trading products, with debt instruments declining CHF 278 billion, equity instruments falling CHF 130 billion, traded loans falling CHF 35 billion and precious metals falling CHF 19 billion.

Replacement values

The positive and the negative replacement values (RVs) of derivative instruments developed in parallel, showing continued strong rises during 2008, driven by increased market valuations, while notional values declined 2% year-on-year. Positive RVs grew CHF 426 billion to CHF 854 billion in 2008, while the negative RVs of derivative instruments increased CHF 408 billion to CHF 852 billion. In both cases, the increases were largely driven by movements in currencies (for example, the weakening of the US dollar), lower interest rates and widening credit spreads. Increases occurred across almost all derivative products, with interest rate contracts growing by CHF 211 billion, foreign exchange contracts by CHF 123 billion and credit derivative contracts by CHF 92 billion.

Shareholders' equity

On 31 December 2008, equity attributable to UBS shareholders was CHF 32.5 billion, representing a decrease of CHF 4.3 billion compared with 31 December 2007.

The decline in 2008 reflects mainly the net loss attributable to shareholders of CHF 21.3 billion combined with other losses recognized directly in equity (including foreign currency translation) of CHF 3.2 billion. Refer to the "Statement of recognized income and expense" in the financial statements of this report for more information about the losses recognized directly in equity.

These equity reductions were largely offset by UBS's capital strengthening measures taken in 2008 (see the table below showing the impact by equity attributable to UBS shareholders accounts).