UBS Results

Operating income

Total operating income, at its highest quarterly level ever, was CHF 10,295 million in first quarter 2004, up 33% from CHF 7,768 million in the same period a year earlier. The increase was driven by our ability to capture revenue opportunities in increasingly active financial markets. Higher revenues were recorded in all categories of our business. The increase in market levels positively impacted the asset base of our wealth and asset management businesses, prompting fee-based revenues to rise. Fee and brokerage income profited from the seasonally strong first quarter and a much improved market environment that helped to significantly increase the level of institutional and private client market activity. Both our equities and our fixed income businesses reported strong results, particularly in their trading activities. Private equity made a positive contribution, reflecting lower writedowns and higher divestment gains.

Net interest income rose to CHF 3,218 million in first quarter 2004, up from CHF 2,909 million in the same period a year earlier. Net trading income was CHF 1,785 million this quarter, up from CHF 1,221 million in first quarter 2003.

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 1,265 million, net income from interest margin products in first quarter 2004 was 2% lower than the CHF 1,285 million recorded a year earlier. This was mainly due to declining revenues from our contracting recovery portfolio, lower interest margins on client cash and savings accounts as well as falling revenues from US dollar-denominated accounts. Higher volumes of savings accounts and the successful growth of our mortgage business in Switzerland almost offset those declines.

Net income from trading activities was CHF 3,600 million in first quarter 2004, up 33% from CHF 2,707 million in the same quarter a year earlier. Equity trading income, at its highest level since first quarter 2001, rose to CHF 946 million in first quarter 2004 from CHF 319 million in the same quarter a year ago. The increase reflects a rapid expansion in market volumes, far higher client activity levels and therefore a significant improvement in trading opportunities. Proprietary trading revenues recovered sharply from the particularly weak first quarter a year ago. Fixed income trading revenues continued to perform strongly, rising 10% to CHF 2,151 million in first quarter 2004 from CHF 1,960 million a year earlier. The result was one of the best since 2001 and reflected high client activity as well as another quarter of favorable interest rates and yield curve configuration. Particular strength was seen in rates derivatives and mortgages, partially offset by a weaker result in investment grade trading. Positive revenues of CHF 53 million relating to Credit Default Swaps (CDSs) hedging existing credit exposure in the loan book compared to a mark to market loss of CHF 38 million a year ago. Foreign exchange saw strong sales volumes in cash and derivative transactions, helping trading revenues to rise 16% to CHF 414 million in first quarter 2004 from CHF 357 million a year earlier.

In first quarter 2004, net income from treasury activities was CHF 310 million, down 22% from CHF 398 million a year earlier. The drop was mainly due to lower income from currency hedging revenues with a partial reversal of the unrealized gain recorded in fourth quarter. Returns on invested equity fell as we continued to repurchase shares. The impact of falling interest rates was partially offset by the diversification of our invested equity into currencies other than the Swiss franc.

Other net trading and interest income showed negative revenues of CHF 172 million compared to negative CHF 260 million a year earlier. The improvement was mainly due to lower funding costs for goodwill as well as the contraction of our private equity portfolio.

Net fee and commission income was CHF 5,005 million in first quarter 2004, up 31% from first quarter 2003’s CHF 3,826 million, reflecting increases in nearly all categories, with major gains in asset-based, brokerage and underwriting fees. Underwriting fees, at their second highest-ever level, were CHF 711 million in first quarter 2004, up 63% from CHF 437 million in the same quarter a year ago. Both equity and fixed income underwriting rose. Compared to a year earlier, equity underwriting rose 190% to CHF 397 million and fixed income underwriting advanced 5% to CHF 314 million. Corporate finance fees, at CHF 200 million in first quarter, rose 75% from CHF 114 million a year earlier. We were able to benefit from the improved market environment for merger and acquisition activities as the global fee pool (according to Freeman) grew by 40%. We ranked fifth in the market with a market share of 5.1% in first quarter 2004, up from the eighth rank and 3.8% share a year earlier. Major gains were seen in all geographical regions. Net brokerage fees were CHF 1,341 million in first quarter 2004, up 50% from CHF 895 million a year earlier. This was the highest level seen since first quarter 2001, reflecting the improved markets and the resulting higher institutional as well as individual client activity. Investment fund fees, at their highest level ever, were CHF 1,131 million in first quarter 2004, up 28% from CHF 882 million a year earlier, mainly reflecting higher asset- and sales-based fees in our wealth and asset management businesses. Portfolio and other management and advisory fees rose 25% to CHF 1,122 million in first quarter from CHF 901 million a year earlier. The gain was due to higher management and performance fees in our asset management business and increased portfolio management and advisory fees in our wealth management businesses, resulting from rising invested asset levels.

At CHF 284 million, other income in first quarter 2004 was CHF 403 million higher than the loss of CHF 119 million a year earlier. The increase was mainly due to higher disposal gains from private equity investments as well as a CHF 171 million drop in impairment charges for private equity investments as well as other financial investments.

Operating expenses

We continue to manage costs closely and continue to look for ways to improve the efficiency of our businesses. Total operating expenses, at CHF 7,206 million in first quarter 2004, were 17% higher than CHF 6,174 million in first quarter 2003. The increase mainly reflects higher personnel expenses due to increasing accruals for performance-related compensation following the significant revenue gains in all our businesses. General and administrative expenses increased slightly although they remained under tight control and were at their third lowest level since 2000, with declines seen in several business units. The weakening of major currencies against the Swiss franc helped keep expenses down.

Personnel expenses increased 23% to CHF 5,171 million in first quarter 2004 from CHF 4,202 million in the same quarter a year earlier. The increase almost wholly reflects higher revenue-related accruals for performance-related compensation in all our Business Groups. This was slightly offset by lower contributions to retirement benefit plans, declining severance expenses at the Investment Bank and lower retention expenses at the Wealth Management USA business. Personnel expenses are managed on a full-year basis with final fixing of annual performance-related payments in fourth quarter.

General and administrative expenses were CHF 1,507 million in first quarter, up 8% from the record low of CHF 1,397 million a year earlier. Most categories of expenses registered slight increases. The largest increases were for occupancy (due to a provision for a sub-lease), professional fees (reflecting higher legal fees) and advertising expenses (because of our new global brand campaign). This was partially offset by lower telecommunication and postage expenses as well as declining rent and maintenance expenses.

At CHF 303 million, depreciation, also at its lowest level ever, dropped 9% from CHF 333 million in first quarter 2003. The decline reflected lower charges for IT depreciation, mainly at the Investment Bank.

Amortization of goodwill and other intangible assets dropped 7% to CHF 225 million in first quarter 2004 from CHF 242 million a year earlier, reflecting the strengthening of the Swiss franc against major currencies.

Tax

In first quarter, UBS incurred a tax expense of CHF 579 million, reflecting an effective tax rate of 18.8% for the quarter, compared to last year’s full-year rate of 17.8% (before significant financial events). The first quarter 2004 rate was positively influenced by a beneficial regional profit mix, as well as by strong profitability in entities with tax losses carried forward. The slight increase from the full-year rate reflects our stronger results and therefore slightly higher progressive tax rates in Switzerland. We continue to believe that an underlying tax rate of around 19% (before significant financial events) is a reasonable indicator for full-year 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 468 million (pre-tax: CHF 496 million) in first quarter 2004, up from CHF 358 million (pre-tax: CHF 470 million) in first quarter 2003. In line with our strategy to be more selective, we granted 40% fewer options in first quarter than in the same period a year earlier.

However, the higher UBS share price, a lower proforma tax benefit, and adjusted assumptions for the valuation of options (mainly longer expected option life and higher risk free rates) drove the after-tax cost higher.

Most stock options are granted in the first quarter of the year, with any further grants generally reflecting those made under the Equity Plus program, an ongoing employee participation program under which voluntary investments in UBS shares each quarter are matched with option awards.

Our valuation of options may change during the year due to further work we will undertake to implement the new IFRS 2 standard. For further details on the new standard, please refer to page 5.

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