Targets

Initiatives and achievements

Senior executive appointments
In September, we announced a number of senior executive appointments and succession plans. Effective 2004, Joseph J. Grano Jr. will hand over his post as Chief Executive Officer of the Wealth Management USA business to Mark B. Sutton, currently President. Grano will leave UBS’s Group Executive Board, remaining with the firm as Chairman of the Business Group until the middle of 2004.

Clive Standish, currently Chairman and Chief Executive Officer Asia Pacific, will become UBS’s Chief Financial Officer (CFO) from 1 April 2004, a move which will significantly strengthen corporate leadership. As CFO, Standish will lead the finance, risk, treasury and strategy functions.

With the reintroduction of the CFO role, we also decided to re-establish the title of Chief Executive Officer with immediate effect.

Stephan Haeringer, currently Deputy President of the Group Executive Board, will be proposed for election to UBS’s Board of Directors as an Executive Vice Chairman at the Annual General Meeting on 15 April 2004. A year later,
in 2005, Marco Suter, currently Chief Credit Officer, will be proposed for election to the Board where he will succeed Alberto Togni (who reaches retirement age) as Executive Vice Chairman with a special focus on credit risk.

Use of options in compensation
We recently reviewed how UBS options should be awarded to employees from 2004 onwards. Our conclusion is that the targeted 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 make use of options, although our use of them will be more selective than before. From 2004 onwards, we will distribute options solely to match and hence encourage voluntary investments in UBS shares or as targeted discretionary incentives to top performers who make key contributions to our success.

As a result of these changes, the number and value of employee stock options awarded are likely to decrease from current levels for grants made in 2004 and thereafter.

Fair value disclosure of options
As part of our quarterly results discussion from now on, we will disclose the pro-forma expense for option awards, net of tax, which would have been incurred if recorded at fair value. In the first nine months of 2003, this expense was CHF 426 million, down from CHF 658 million for the same period a year ago, with the drop mainly attributable to lower share prices at grant.

The fair value of options granted in first half 2003 was CHF 406 million, compared to CHF 600 million in the same period a year ago. While most employee stock option grants are made in the first half of the year, the increase of CHF 20 million in third quarter reflects additional grants made under the Equity Plus program, an employee participation program under which voluntary investments in UBS shares are matched with option awards. We do not expect further significant grants for the remainder of this year. The final value of options granted in 2003 will be disclosed in our Fourth Quarter 2003 Report.

We expect the final International Financial Reporting Standard (IFRS) governing the future accounting treatment of employee stock options to be published in first quarter 2004. At that point, we will be in a position to plan how and when option expense will be recorded in our
profit and loss accounts.

Results

In third quarter 2003, UBS reported net profit of CHF 1,673 million, up 78% from CHF 942 million in the same quarter a year earlier. Before goodwill amortization, net profit rose 53% in the same period. It was our best quarterly result since 2000 and reflects continued cost management initiatives as well as our ability to capture revenue growth where opportunities arise. All our Business Groups showed an increase in pretax profit when compared to a year ago. Operating expenses were at their second lowest level since PaineWebber became part of UBS in fourth quarter 2000. Fee and commission income recovered in third quarter from a year earlier, reflecting improving financial markets, with private equity writedowns falling substantially over the same period.

Annualized return on equity for the first nine months of 2003 was 16.9%, compared to 11.8% a year earlier. Basic earnings per share were CHF 1.52 in third quarter, against CHF 0.79 in the same quarter a year earlier. The cost/income ratio was 75.1% in third quarter 2003, an improvement from 83.9% in the same period a year earlier.

UBS targets

UBS’s performance is reported in accordance with IFRS. Additionally, we provide comments and analysis on an adjusted basis which excludes from the reported amounts certain items we term significant financial events (SFEs). An additional adjustment we use in our results discussion is the exclusion of the amortization of goodwill and other acquired intangible assets.

These adjustments reflect our internal analysis approach where SFE-adjusted figures before the amortization of goodwill and intangibles are used to assess performance against peers and to estimate future growth potential. In particular, our financial targets have been set in terms of adjusted results, excluding SFEs and the amortization of goodwill and intangibles. All the analysis provided in our internal management accounting is based on operational SFE-adjusted performance. This helps us to illustrate the underlying operational performance of our business, insulated from the impact of individual gain or loss items that are not relevant to our management’s business planning decisions. A policy approved by the Group Executive Board defines which items may be classified as SFEs.

We focus on four key performance targets, designed to deliver continually improving returns to our shareholders. These targets are evaluated on this adjusted basis.

Accordingly, before goodwill and adjusted for SFEs:

Net new money in the wealth management businesses (Wealth Management and Wealth Management USA) remained very strong. Inflows in third quarter, at CHF 15.1 billion, were at their third highest level ever and significantly above the CHF 10.4 billion recorded in second quarter. The Wealth Management unit, buoyed by particularly strong results in our European wealth management business and in Asia, attracted a record net new money inflow of CHF 9.4 billion in third quarter. Our Wealth Management USA business, continuing to outperform peers, also saw a strong CHF 5.7 billion inflow in third quarter, up from CHF 3.9 billion in second quarter.