Targets

Initiatives and achievements

Risk
Taking risk is an integral part of our business. Therefore, our overriding goal is not to minimize risk, but to achieve an appropriate balance between risk and return, limiting the scope for adverse variations in our earnings through exposure to major individual „stress” events.

With markets and investor sentiment starting to improve, and with our growing corporate client and trading franchises continuing to build their market share, our revenue opportunities are increasing all the time. Therefore, it is appropriate that our absolute market and credit risk levels should experience a gradual increase in coming quarters.

This does not represent a change to the approach that has served us so well in the past. We have no intention of changing our risk culture and will retain our overriding commitment to highquality earnings through diversification and liquidity of risk. As one example, we continue to believe that the quality of our advice will remain the principal driving factor in building our global investment banking franchise. That means that we will neither attempt to acquire new business through balance sheet strength alone nor substantially increase our appetite for purely proprietary trading.

With the growth in the competitiveness of our trading businesses, particularly in Fixed Income, we have already seen a gradual increase in our risk consumption, as measured by Value at Risk (VaR). Given the successful growth of our franchise, and the increased market opportunities we see, we have decided to raise the VaR limit for our Investment Bank, which has remained unchanged since 1999. From 2004 onwards, the limit for the Investment Bank will rise to CHF 600 million from CHF 450 million. Accordingly, the VaR limit for UBS as a whole, will increase to CHF 750 million from CHF 600 million.

Over the last six years, we have focused lending outside Switzerland on important advisory or underwriting clients, avoiding pure commercial lending and thereby substantially reducing our international credit exposure. Now, because of the ever-increasing strength of our franchise with exactly these core corporate clients, and the improvement in market conditions, we expect to selectively allocate moderately higher capital resources to support our business growth. Any increase in risk-weighted assets will be gradual and balanced across our lending business for core corporate clients, derivatives activity, and loan underwriting.

Integrating our IT infrastructure across the firm
A recent example of our „one firm” approach is our decision to integrate Information Technology Infrastructure (ITI) functions across UBS. During the year, we will create a new central ITI unit with an entrepreneurial mandate to service our businesses in a client-focused and cost-efficient way. This new unit, which will employ 3,000 people, will be housed within the Corporate Center and will cover almost all existing IT infrastructure functions across UBS – the management of data networks, telephone and other communications systems, IT security, distributed computing and servers, mainframes and data centers, market data services, user services and desktop computing.

Under the leadership of Scott Abbey, Chief Technology Officer – a newly created role, reporting to the CFO – the ITI unit will be mandated to provide an efficient, stable technology infrastructure that fully meets the needs of our businesses. It will look to streamline our ITI organization, leverage our combined purchasing power, and create a consistent technical architecture over the long term. The development of proprietary business applications will remain the responsibility of the Chief Information Officers in the business groups.

Annual Report 2003
Our Annual Report for 2003 will be published on 17 March 2004. We will release it as a package comprising three separate reports. The Financial Report will contain UBS’s audited results for 2003 and analysis thereof. The Handbook will provide a description of our strategy, businesses, risk approach, treasury processes, corporate governance, corporate responsibility and the performance of our shares. As in past years, the Annual Review, a condensed version of the other two reports, will give readers a close-up of our businesses and the teams that make UBS successful.

Results

Full-year 2003
In 2003, we recorded the second-best annual result since UBS and SBC merged in 1998. All our businesses reported a stronger set of results in 2003 than in the previous year. Our net profit in full-year 2003 was CHF 6,385 million, up from CHF 3,535 million in 2002 – an increase of 81%. Results in both 2002 and 2003 were influenced by individual items we call significant financial events. The first was the gain from our sale of private bank Hyposwiss in first quarter 2002. Then, in fourth quarter 2002, we wrote down the value of the PaineWebber brand and sold the Klinik Hirslanden hospital chain. In second quarter 2003, we sold the Correspondent Services Corporation (CSC) clearing business. Excluding these effects, and before goodwill amortization, net profit increased by 33% in 2003 from 2002. The increase was driven by our tight management of costs and our ability to build market share and capture revenues during the steady recovery in financial markets as the year progressed. In particular, our asset-based revenues recovered from the lows posted in 2002. Our result was further helped by much improved trading opportunities, a gradual improvement in investor sentiment and significantly lower writedowns in our Private Equity business. At the same time, expenses remained under tight control. We recorded reductions in all cost categories compared with a year ago, with non-personnel expenses falling below the year 2000 level.

Fourth quarter 2003
In fourth quarter 2003, UBS reported a net profit of CHF 1,859 million compared to a loss of CHF 101 million in the same period a year earlier. A year ago, our result included the aftertax writedown of CHF 953 million for the PaineWebber brand as well as the after-tax gain of CHF 60 million from the Klinik Hirslanden sale. Excluding these events and before goodwill, net profit increased by 94% or CHF 1,009 million. Indeed, it was our best quarterly result for more than three years, with all Business Groups reporting an increase in performance compared to a year earlier. The Investment Banking & Securities unit reported an exceptionally strong result with fixed income and equities revenues equally strong. Furthermore, our Private Equity business showed a positive result for the first time since 2000. Asset-based fees continued to benefit from rising markets and individual investors in the US started trading more frequently. Costs have been held down with a significantly lower compensation ratio for the year in our Investment Bank.

Return on equity in 2003 was 18.2%, compared to 8.9% a year earlier. Basic earnings per share were CHF 1.73 in fourth quarter, against negative CHF 0.09 in the same quarter a year earlier. The cost / income ratio was 72.8% in fourth quarter 2003.

UBS targets

UBS’s performance is reported in accordance with International Financial Reporting Standards (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 approach to analyzing our results and managing the company, in which 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 (GEB) 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:

Our wealth management businesses continue to show strong net new money inflows. Inflows in fourth quarter 2003 were CHF 14.2 billion compared to CHF 15.1 billion in third quarter. The Wealth Management unit attracted CHF 6.4 billion in fourth quarter 2003, compared to CHF 9.4 billion in third quarter. Strong inflows were seen in our domestic European business, Asia, and Eastern Europe. In the US, we again outperformed our peers, with net new money of CHF 7.8 billion in fourth quarter 2003, up from CHF 5.7 billion in third quarter.

In full-year 2003, the net new money inflows into our wealth management businesses totaled CHF 50.8 billion compared with CHF 36.2 billion in 2002. This is an increase of 40% and corresponds to an annual growth rate of 4.2%. Both the Wealth Management and Wealth Management USA businesses were able to attract more client money in 2003 than in 2002.