Shareholders' Letter

Dear Shareholders,

Marcel Ospel & Peter Wuffli Click here to enlarge

We are pleased to report our most profitable quarter in three years. We have benefited from recovering equity markets and improving sentiment while securing substantial competitive gains – demonstrated most visibly by the CHF 20 billion in net new assets that clients have brought to UBS in third quarter. At the same time, we have retained our cost discipline, pushing our pre-goodwill cost / income ratio to its lowest since PaineWebber became part of UBS. In particular, we were able to significantly reduce costs in our Swiss domestic and US wealth management businesses.

Net profit for the quarter was CHF 1,673 million (up 78% from third quarter 2002). Before goodwill, net profit was CHF 1,911 million, up 53% from a year earlier. All our businesses have increased profits and improved their cost / income ratios compared to third quarter 2002. This strong business performance, combined with our continued share buybacks, has helped us significantly improve shareholder returns, with pre-goodwill return on equity for the year close to 20%.

Our wealth management businesses around the world reported total net new money inflows of CHF 15.1 billion, the strongest result for over two years. Our European wealth management business again excelled with net new money inflows of CHF 2.8 billion and revenues up 57% from a year earlier. We also recorded strong inflows from Asian clients, and in the US we again outperformed most peers.

Operating income was up 6% from third quarter last year, particularly benefiting from improved fee and commission income. Corporate finance fees increased, reflecting a pick-up in corporate activity, but more importantly, our competitive gains. Asset-based and investment fund fees are benefiting from recovering equity market valuations. Our Investment Bank’s Fixed Income, Rates and Currencies business has grown substantially over the last year. Although results were slightly lower compared to the exceptionally strong first two quarters of the year, it was a very positive performance in view of the turbulent bond markets in third quarter. Compared to third quarter 2002, private equity writedowns have significantly fallen.

Costs remained under tight control and were cut in almost all categories. Operating expenses fell 6% compared to third quarter 2002. Accruals for performance-related compensation rose in line with higher revenues, but were offset by lower salary expenses, reflecting a 5% year on year decrease in headcount. Lean structures and careful management of resources have proven to be a crucial success factor during the recent downturn in the financial services industry. We will therefore continue to streamline our processes across the firm and closely monitor our staffing levels, keeping productivity levels competitively high.

The performance of our credit portfolio reflects the initial signs of global economic recovery. We realized a net recovery of CHF 26 million this quarter, compared to a net credit loss expense of CHF 95 million a year ago.

The progress of our organic growth drive continues. In Asia, for example, we were the first financial services firm to offer clients direct access to the Chinese domestic financial market. This strategy of organic growth has been boosted by a series of small acquisitions that expand the presence of our core businesses. For example, our recently announced acquisition of Merrill Lynch’s German private client business will significantly enhance our profile in the German market for wealthy individuals. It is a further step in our systematic effort to expand in our European target markets following the acquisition of Lloyds TSB’s French wealth management business earlier this summer. At the same time, our Investment Bank continues to invest in growth areas, most clearly evidenced by our acquisition of ABN AMRO’s US prime brokerage operations in September.

The success of a company is not only due to pure commercial factors, but also depends on the quality of governance and management. We were therefore pleased when ethos, a Swiss investment foundation, and the Cantonal Bank of Zurich confirmed the quality of our governance structures and financial disclosure in two separate studies released recently which rated us top among Swiss companies. Continuous strengthening of our leadership and clear succession planning are also key priorities for us. In that context, we were pleased to announce the reintroduction of the Chief Financial Officer role with the appointment of current Asia Pacific CEO Clive Standish to that post, effective 1 April 2004. On 1 January 2004, Mark B. Sutton will succeed Joseph J. Grano, Jr. as CEO of Wealth Management USA. We are also proposing that Stephan Haeringer, currently Deputy CEO, be elected to the Board of Directors at the next Annual General Meeting, and that Chief Credit Officer Marco Suter be proposed to the Board a year later, in 2005, to succeed retiring Vice Chairman Alberto Togni. We have also re-established the title of Chief Executive Officer.

The use of employee stock options has been broadly debated in recent times – it is a discussion that you as investors may have been following closely. We recently reviewed the use of options in our compensation schemes. Our conclusion is that the selective use of stock options as an element in our overall compensation strategy gives employees an appropriate long-term incentive to pursue sustainable share price appreciation. Consequently, we will continue to use options, but from 2004 onwards we will be granting them far more selectively than before. We will use them solely to encourage voluntary
investments in UBS shares, or offer them as a targeted incentive to those who make key contributions to our long-term success.

Outlook – Throughout the year, market conditions have fluctuated, with trading opportunities shifting from one area to another. We have proven to be well positioned to capture those opportunities at the right times. Our diversified revenue mix, with its stable core of wealth and asset management income, has helped us contain market-driven volatility. Underlying these fluctuations, however, global economies and market conditions have been gradually improving. The stronger and more certain that recovery proves, the more positive the effect on our revenues.

Our successful track record in delivering consistently excellent results across different market challenges and environments gives us confidence that UBS will continue to offer first-class shareholder
returns.


11 November 2003

UBS AG