UBS Results

Operating income

In third quarter 2003, total operating income was CHF 8,490 million, up 6% from CHF 8,000 million in the same period a year ago. The increase was mainly due to higher fixed income trading revenues, as well as recovering fee and commission income, the latter reflecting the effect of the equity market recovery on our client asset base and higher client activity levels in our wealth and asset management businesses. Our result was also helped by the substantial decline in private equity writedowns. These positive developments, however, were partially offset by the decline of major currencies against the Swiss franc, led by the US dollar’s 9% drop and lower gains on financial investments.

Net interest income rose to CHF 3,357 million in third quarter, up from CHF 2,726 million in the same period a year earlier. Net trading income fell to CHF 642 million this quarter from CHF 1,027 million in third quarter 2002.

As well as income from interest margin based activities (loans and deposits), net interest income includes income earned as a result of trading activities (for example, coupon and dividend income). This component is volatile from period to period, depending on the composition of the trading portfolio. In order to provide a better explanation of the movements in net interest income and net trading income, we analyze the total according to the business activities that give rise to the income, rather than by the type of income generated.

At CHF 1,267 million, net income from interest margin products in third quarter 2003 was 2% higher than the CHF 1,238 million recorded in the same quarter a year ago. The slight increase reflects higher volumes of savings accounts and mortgages as well as higher revenues from our Investment Bank’s lending business, the latter reflecting higher interest margins. These factors were mostly offset by lower interest margins on cash and savings accounts, declining revenues from our reduced recovery portfolio as well as falling interest revenues in Swiss franc terms from US dollar cash accounts.

Net income from trading activities increased 8% to CHF 2,745 million in third quarter 2003 from CHF 2,542 million in the same quarter a year earlier. Equity trading income dropped by 8% from CHF 807 million in third quarter 2002 to CHF 743 million this quarter. The drop was due to the weakening of the US dollar against the Swiss franc. Excluding currency effects, equity trading income was actually stronger this quarter than a year earlier, reflecting improving market conditions and an increase in client activity levels. Fixed income trading income increased 13% to CHF 1,568 million in third quarter from CHF 1,389 million a year earlier. Revenues remained very strong, and particularly good results were reported by our Mortgage, Government Bonds, Investment Grade and High Yield trading businesses. Revenues, however, did not match the exceptionally strong results achieved in the buoyant markets of second quarter 2003 due to market-driven declines in Fixed Income and Principal Finance. Results were also pushed down by the continued narrowing of credit spreads, which led to negative revenues of CHF 192 million relating to Credit Default Swaps (CDSs) hedging existing credit exposure in the loan book. In the same quarter a year ago, we recorded a mark to market gain of CHF 321 million from these positions. At CHF 351 million in third quarter 2003, foreign exchange revenues increased by 22% from CHF 287 million a year earlier, reflecting the continued strong growth of our business, especially in online transactions.

Net income from treasury activities increased 2% to CHF 334 million in third quarter 2003 from CHF 328 million in the same period a year earlier. The increase was driven by higher hedging revenues, offset by lower income from invested equity due to a lower capital base reflecting our ongoing share buybacks.

In third quarter 2003, other net trading and interest income showed negative revenues of CHF 347 million compared to negative CHF 355 million in the same quarter last year. The improvement was due to lower goodwill funding costs relating to ongoing amortization, the writedown of the value of the PaineWebber brand, and lower funding needs for our private equity portfolio.

Net fee and commission income rose to CHF 4,386 million this quarter from CHF 4,299 million a year earlier. The increase was mainly due to higher corporate finance, portfolio and management, advisory and investment fund fees. These increases were partially offset by the strengthening of the Swiss franc against major currencies. Underwriting fees dropped by 7% to CHF 492 million in third quarter 2003 from CHF 528 million in the same period a year earlier. The drop was mostly due to the weakening of the US dollar and other major currencies against the Swiss franc. Equity underwriting revenues dropped by 13%, whereas fixed income underwriting revenues increased slightly by 1%. Corporate finance fees rose 13% to CHF 188 million in third quarter from CHF 167 million a year earlier. This reflects a slightly better environment for corporate finance activities, with the overall fee pool growing by 5% from the same quarter a year ago. It was also due to an increase in our US revenues. Net brokerage fees dropped 2% to CHF 1,075 million in third quarter 2003 from CHF 1,098 million in the same quarter a year ago. The drop was mainly related to currency fluctuations as well as due to the absence of revenues from our CSC business, which we sold last quarter. Excluding the impact of the Swiss franc’s strengthening, net brokerage fees would have increased by 2%, reflecting improving client activity levels. Investment fund fees increased 8% to CHF 1,031 million in third quarter, from CHF 951 million in the same quarter in 2002, mainly reflecting higher asset-based fees. At CHF 1,022 million in third quarter 2003, portfolio and other management and advisory fees were up by 9% from third quarter 2002. This increase was mainly due to higher performance and portfolio fees, which mirrored higher equity market levels.

Other income increased to CHF 79 million this quarter from CHF 43 million in third quarter 2002. The increase was mainly due to a CHF 361 million decline in impairments on private equity and other financial investments. This was partially offset by the absence of revenues due to the deconsolidation of Klinik Hirslanden (sold in fourth quarter 2002), as well as lower gains related to disposals of financial investments as third quarter 2002 included a gain from the sale of our participation in Clearstream, and lower income from private equity divestments.

Operating expenses

We continue to manage our cost base tightly. Stringent cost control measures remain in place and we continue to streamline processes and structures across the firm. Total operating expenses were at their second lowest since PaineWebber became part of UBS. In third quarter 2003, they fell 6% to CHF 6,353 million from CHF 6,788 million in the same period a year earlier. Almost all categories of costs dropped. General and administrative expenses dropped sharply by 17% to their second lowest level since 1999. Amortization expenses, down 22%, also decreased considerably and were at their lowest level since PaineWebber became a part of UBS. Overall, the decline in expenses was helped by the weakening of major currencies
against the Swiss franc and last year’s sale of Klinik Hirslanden. From a business perspective, the Business Banking Switzerland and Wealth Management USA businesses have led the way in cutting costs.

At CHF 4,372 million, personnel expenses dropped 1% from CHF 4,411 million in third quarter 2002. Salary expenses fell because of the 5% reduction in headcount over the period. That decline was nearly offset by higher accruals for performance-related compensation, which increased in line with higher revenues. It should be noted that our personnel expenses are managed on a full-year basis with final fixing of annual performance-related payments in fourth quarter.

In third quarter 2003, general and administrative expenses were at CHF 1,422 million, 17% lower than the CHF 1,720 million in third quarter 2002, reflecting our continued cost cutting initiatives as well as the weakening of major currencies against the Swiss franc. Declines were registered in all categories of costs except rent, maintenance and professional fees. Significant drops were registered in provisions, occupancy and in IT, outsourcing, telecommunication and administration costs.

Depreciation, at CHF 321 million, dropped by 9% from CHF 352 million in third quarter 2002, reflecting lower charges for IT and non-IT equipment.

At CHF 238 million in third quarter 2003, amortization of goodwill and other intangible assets dropped 22% from CHF 305 million, mainly due to lower amortization charges for intangible assets after writing down the PaineWebber brand in fourth quarter 2002. The drop was further reinforced by the decline of the US dollar against the Swiss franc.

Tax

In third quarter, UBS incurred a tax expense of CHF 383 million, reflecting an effective tax rate of 17.9% for the quarter and 21.2% for the first nine months of the year. Excluding the effect of the sale of CSC, our effective tax rate for the year to date is 19.1% compared to 2002’s full-year rate of 16.5% (before significant financial events). The particularly low 2002 rate was driven by lower progressive tax rates in Switzerland, the ability to benefit from tax losses in the US and UK and a high proportion of earnings generated in lower tax jurisdictions. The low third quarter tax rate was due to a shift in the regional profit mix, as well as the impact of the enactment of new tax legislation in Zurich on deferred tax liabilities. We believe that an underlying tax rate of around 19% (before significant financial events) is a reasonable indicator for fullyear 2003.

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