UBS Results

Operating income

Total operating income was CHF 8,598 million in fourth quarter 2003, an increase of 14% from CHF 7,524 million in the same quarter a year earlier. Excluding the sale of Klinik Hirslanden in fourth quarter 2002, the increase would have been 15%. The improvement was partly due to a strong recovery in our fee and commission income as a result of higher market levels, positively influencing our invested asset base and, therefore, our fee-based revenues. The improved environment also had a positive effect on the activity levels of our institutional and private clients, which in turn buoyed trading opportunities, leading to equally good equity and fixed income performances. The result was additionally helped by our private equity business, which reported its first positive result since 2000, reflecting lower writedowns and significant divestment gains. These positive developments, however, were partially offset by the decline of major currencies against the Swiss franc, led by the US dollar’s 10% drop. Credit losses also returned to a more normal level, and low interest rates drove down margins and returns from our
invested equity.

Net interest income rose to CHF 3,007 million in fourth quarter 2003, up from CHF 2,697 million in the same period a year earlier. Net trading income fell to CHF 647 million this quarter from CHF 666 million in fourth 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 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.

Net income from interest margin products dropped by 5% to CHF 1,233 million in fourth quarter 2003 from CHF 1,296 million in the same quarter a year earlier. The result reflects lower interest margins on client cash and savings accounts, declining revenues from our diminishing recovery portfolio in Switzerland and lower revenues from US dollar-denominated accounts. These effects were partially offset by higher volumes of deposits, saving accounts and mortgages in Switzerland.

At CHF 2,306 million, net income from trading activities in fourth quarter 2003 was 17% higher than the CHF 1,971 million a year earlier. Equity trading income increased 35% to CHF 706 million in fourth quarter 2003 from CHF 522 million a year earlier. The increase reflected rising market volumes which resulted in improved trading opportunities. Fixed income trading income rose by 11% to CHF 1,168 million in fourth quarter 2003 from CHF 1,050 million in the same period a year earlier. The strong performance in this quarter was due to particularly good results in our Principal Finance, Derivatives and Mortgage-backed securities businesses, partially offset by lower bond trading revenues as the trading environment normalized somewhat. Results were also affected by negative revenues of CHF 105 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 loss of CHF 163 million from these positions. At the end of 2003, cumulative unrealized CDS losses stood at CHF 678 million. Foreign exchange trading revenues, at CHF 361 million in fourth quarter 2003, increased by 10% from CHF 328 million in the same period a year earlier, as we took opportunities driven by rising market volumes and our higher market share.

Net income from treasury activities dropped by 21% to CHF 343 million in fourth quarter 2003 from CHF 435 million in the same period a year earlier. The drop mainly reflects a decline in income from our invested equity due to lower interest rates, and our lower capital base, following continued share buybacks, which were partially compensated by higher currency hedging revenues.

In fourth quarter 2003, other net trading and interest income showed negative revenues of CHF 228 million compared to negative CHF 339 million in the same quarter a year ago. The improvement was mainly due to lower goodwill funding costs relating to gradual amortization, the writedown of the value of the PaineWebber brand and lower funding needs for our private equity portfolio. The improvement was also helped by the weakening of the US dollar against the Swiss franc.

At CHF 4,820 million, net fee and commission income in fourth quarter 2003 was 14% higher than CHF 4,236 million in the same quarter a year earlier, with an increase in almost all categories, although gains were particularly seen in underwriting as well as asset-driven investment fund fees and portfolio and other management fees. Brokerage revenues also showed some recovery. These increases were partially offset by the weakening of major currencies against the Swiss franc. Underwriting fees increased by 46% to a record level of CHF 771 million in fourth quarter 2003 compared with CHF 528 million a year ago. Equity and fixed income underwriting revenues increased by 65% and 23% respectively. Equity underwriting revenues rose to a level not seen for three years. Corporate finance fees increased by 21% to CHF 306 million in fourth quarter 2003 from CHF 252 million a year earlier. We benefited from the improved market environment for merger and acquisition activity, with the global fee pool (according to Freeman) growing by 16% from the same period a year ago. In addition, we improved our full-year global market share to 5.6% (ranking fourth compared to seventh a year earlier), with major gains in the US and Asia. Net brokerage fees increased by 7% to CHF 1,092 million in fourth quarter 2003 from CHF 1,020 million in the same quarter a year earlier. The increase was mainly due to higher institutional and individual client activity levels, reflecting the improvement in market conditions compared to a year earlier. Investment fund fees increased by 17% to CHF 1,051 million in fourth quarter 2003 from CHF 898 million in the same period a year earlier, reflecting a rise in asset-based fees in our wealth management businesses as well as higher sales of UBS funds, mainly in the US. At CHF 1,021 million in fourth quarter 2003, portfolio and other management and advisory fees were up by 9% from fourth quarter 2002. The increase reflects higher portfolio fees in our wealth management businesses, as a result of higher invested asset levels.

Other income increased to CHF 186 million in fourth quarter 2003 compared with a loss of CHF 86 million a year earlier. The increase was mainly due to a CHF 328 million drop in impairment charges, as well as significant disposal gains from our private equity investments. This was partially offset by the absence of the fourth quarter 2002 divestment gain of CHF 72 million and corresponding fall-off in income from Klinik Hirslanden.

Operating expenses

Expenses were at their second-lowest level since PaineWebber became part of UBS. At CHF 6,306 million, total operating expenses in fourth quarter 2003 were 19% lower than the CHF 7,776 million recorded in the same quarter a year ago. The drop was mainly due to the writedown of the PaineWebber brand in fourth quarter 2002, which resulted in an amortization expense of CHF 1,234 million. Excluding the writedown, total operating expenses would have dropped by 4%, with the decline coming mainly from tight control of general and administrative expenses across all our businesses. The decline in expenses was additionally helped by the weakening of major currencies against the Swiss franc and last year’s sale of Klinik Hirslanden.

Personnel expenses remained virtually unchanged at CHF 4,038 million in fourth quarter 2003 compared to CHF 4,021 million in the same quarter a year ago, despite significantly higher revenues. Salary expenses dropped because of the 5% reduction in headcount. Performance-related compensation increased, but much less than revenues. Personnel expenses are managed on a full-year basis with final fixing of annual performance-related payments in fourth quarter. The reduction of the Investment Bank compensation ratio from the accrued 56% to the final 51% resulted in a sharp downward correction to personnel expenses this quarter. Over the full year, approximately 44% of personnel expenses took the form of bonus or variable compensation, up from 42% last year. Average variable compensation per head in 2003 was 3% higher than in 2002.

General and administrative expenses, at CHF 1,667 million, dropped by 9% from CHF 1,840 million in fourth quarter 2002, reflecting lower provisions as well as our ongoing cost-cutting initiatives. The drop was further accentuated by the weakening of major currencies against the Swiss franc. Most categories registered declines with the biggest drops in provisions, administration and telecommunication expenses. The drop in provisions was mainly due to the prior year USD 80 million charge relating to the US equity research settlement.

At CHF 376 million in fourth quarter 2003, depreciation dropped by 6% from CHF 398 million in the same quarter a year earlier. The decline mainly reflected lower IT-related charges, as well as the weakening of major currencies against the Swiss franc.

Amortization of goodwill and other intangible assets dropped 85% to CHF 225 million in fourth quarter 2003 from CHF 1,517 million a year earlier, mainly reflecting the prior year writedown of CHF 1,234 million relating to the PaineWebber brand. Excluding this charge, the drop would have been 20%, reflecting the full amortization of the goodwill of some businesses, as well as the strengthening of the Swiss franc against almost all major currencies.

Tax

In fourth quarter 2003, UBS incurred a tax expense of CHF 333 million, reflecting an effective tax rate of 14.5% for the quarter and 19.4% for full-year 2003. The low fourth quarter 2003 tax rate was due to the release of a tax provision following the successful conclusion of tax audits, as well as a continued favorable regional profit mix. Excluding the effect of the sale of Correspondent Services Corporation (sold in second quarter 2003), our effective tax rate for the full year was 17.8%, 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. We believe that an underlying tax rate of around 19–20% (before significant financial events) continues to be a reasonable indicator for 2004.

Fair value disclosure of options

The proforma expense for options awarded, net of tax, which would have been incurred if recorded at fair value was CHF 439 million in 2003, down from CHF 690 million in 2002. The drop was mainly attributable to lower share prices at grant.

Most stock options are granted in the first half of the year. The increase of CHF 12 million in fourth quarter mainly reflected grants under the Equity Plus program, an ongoing employee participation program under which voluntary investments in UBS shares each quarter are matched with option awards.

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