Results

Investors were generally optimistic about economic and financial markets in third quarter, although latent concerns about inflation moderated their outlook. During the quarter, investor activity tailed off slightly, with average daily trading volumes down 2% because of a slowdown in July and August. The UBS Index of Investor Optimism fell in September from its level in June.

Because our business is almost entirely conducted in US dollars, comparisons of third quarter results to prior periods are affected by the movement of the US dollar against the Swiss franc.

In third quarter 2003, the pre-tax loss was CHF 43 million compared to pre-tax profit of 143 million in second quarter 2003 and a pre-tax loss of CHF 124 million in third quarter 2002. Second quarter 2003 results include a pre-tax gain of CHF 161 million from the sale of CSC to Fidelity Investments, which was treated as a significant financial event. Excluding acquisition costs and the divestment gain, pre-tax profit decreased 12% to CHF 170 million from CHF 193 million in second quarter 2003. On the same basis, but in US dollars, the operating result was 13% lower than the record US dollar performance achieved in second quarter, reflecting an industry-wide decline in the municipal securities business. The performance in the private clients business remained strong, despite a seasonal decrease in client activity levels. Compared to third quarter 2002, operating pre-tax profit in US dollars increased 16%.

The cost / income ratio was 103% in third quarter 2003; excluding acquisition costs and adjusted for the sale of CSC in second quarter, the ratio increased to 87% in third quarter from 86% in second quarter.

Operating income

Total operating income in third quarter 2003 was CHF 1,282 million. Excluding acquisition costs (net goodwill funding) and the gain from the CSC sale in second quarter, it was 1% lower than in second quarter 2003 and 4% lower than in third quarter 2002. On the same basis and in US dollar terms, operating income was 2% lower than in second quarter. This reflects lower revenues in the municipal securities business, due to an industry-wide decrease in underwriting volumes, and the loss of revenues from the CSC divestment as well as a seasonal slowdown in client transactions. This negative impact was compensated by an increase in recurring fees, now representing 38% of operating income, excluding acquisition costs. In US dollars, operating income rose 5% in third quarter from a year earlier.

Operating expenses

In third quarter 2003, total operating expenses were CHF 1,325 million, 1% higher than second quarter 2003. In US dollar terms and before acquisition costs, operating expenses were unchanged from second quarter.

Personnel expenses were CHF 970 million, up 5% from second quarter 2003. On a US dollar basis they increased 3% reflecting higher performance-related compensation in our private client business.

Non-personnel expenses, which include general and administrative, depreciation and amortization expenses, decreased 8% to CHF 355 million in third quarter 2003 from CHF 387 million in second quarter due to reduced provisions for legal costs and the effect of the CSC divestment.

Headcount

Headcount was 18,204 on 30 September 2003, a decrease of 362 from 30 June 2003. The decline reflects the decrease in number of financial advisors and a reduction of non-financial advisors headcount as a result of our continuing cost management initiatives. Non-financial advisor headcount fell by 79 during the quarter and is more than 5% lower than last year. Since becoming part of UBS, non-financial advisor headcount has decreased by 21%.