Targets

Initiatives and achievements

Appointment of new board members
Shareholders at the 2004 Annual General Meeting (AGM) elected Stephan Haeringer, our former Deputy CEO, as Executive Vice Chairman of the Board of Directors. Helmut Panke and Peter Spuhler were elected as independent, non-executive members of the Board of Directors. Helmut Panke, a German citizen, is Chairman of the Board of Management of BMW AG. Peter Spuhler, a Swiss citizen, is the owner of Stadler Rail AG in Canton Thurgau, Switzerland. Sir Peter Davis, a member of the Board of Directors since 2001, was re-elected for another three-year term.

Two members stepped down from the Board of Directors at the 2004 AGM. As previously announced, Johannes A. de Gier resigned from the Board in order to focus on his role as Chairman of the holding company for the three UBS independent private banks and GAM. Hans Peter Ming reached the statutory retirement age and retired from the Board of Directors after completing his term of office. The UBS Board of Directors now has ten members – seven Swiss citizens, one UK citizen, one US citizen, and one German citizen.

Standish assumes role as CFO
On 1 April, Clive Standish assumed his new role as Chief Financial Officer and Head of Corporate Center. His responsibilities encompass the management of our finance, treasury, risk and strategy functions. He will also, together with CEO Peter Wuffli, oversee our relationships with regulators and investors.

Rory Tapner, formerly Joint Global Head of Investment Banking, succeeded Standish as Chairman and CEO of the Asia Pacific region on 1 May. He will report directly to Peter Wuffli.

Integration of IT infrastructure across the firm
As announced in fourth quarter 2003, we have started to build our integrated IT infrastructure unit (ITI). The new unit covers most of our IT infrastructure functions across the firm, and aims to serve our businesses in a client-focused and cost-efficient way.

The unit’s overall structure and senior management responsibilities have now been defined, and it started to operate in second quarter 2004. ITI will be housed within Corporate Center and approximately 2,400 employees were relocated from the Business Groups to ITI on 1 April 2004. The unit will charge the businesses for services through internal service level agreements (SLAs) leading to a reclassification of costs for the Business Groups.

All SLA charges will in future be shown in an additional cost line in the income statements of all business units. Before publication of second quarter results we will restate prior periods to reflect the headcount impact and the reclassification between expense lines. The restatement will neither affect UBS’s result as a whole nor the Business Group results previously reported.

Acquisition of majority stake in Motor-Columbus
In April, we announced the acquisition of a 20% stake in Motor-Columbus and a 1.23% stake in Atel from RWE, a German utility, for a total consideration of CHF 420 million. Motor-Columbus is a Swiss holding company whose most significant asset is a 58.5% ownership interest in Atel, a Swiss-based electricity company.

UBS already owned 35.6% of Motor-Columbus, a non-core participation which will rise to 55.6% following the announced acquisition. Being the majority shareholder will allow us to protect the value of our investment and puts us in a strong position to divest it in the future. Our intention is to create a long-term solution with industrial logic for both Motor-Columbus and Atel.

In accordance with the opt-out clause within the Motor-Columbus articles of association, UBS will not submit a takeover offer to other shareholders of Motor-Columbus. At the same time, the acquisition of a majority stake in Motor-Columbus indirectly gives us a controlling interest in Atel. We will therefore submit a mandatory offer to Atel’s shareholders. However, we expect only a small percentage of Atel shares to be tendered, given that most of these shares are held by energy companies with a strategic interest in their stake.

The transaction is subject to approval by the competition authorities. The Swiss Takeover Board will rule on whether UBS must make a separate takeover offer for Atel’s subsidiary Società Elettrica Sopracenerina. We are seeking an exemption from such an offer.

We expect to complete the transaction in July and to fully consolidate Motor-Columbus in the UBS financial statements in third quarter 2004, showing it within a separate Business Group.

New accounting standards and changes in accounting and presentation

Recently issued IFRS standards
In first quarter 2004, the International Accounting Standards Board (IASB) issued several new standards that apply to UBS. The two described below will have a significant influence on our financial statements.

IFRS 2 Share-based Payment, issued on 19 February 2004, governs the accounting of share-based payments. It will require us to recognize the fair value of all share-based payment transactions as compensation expense. Effective 1 January 2005, the new standard applies to equity-settled awards granted after 7 November 2002 that had not vested by 1 January 2005 and liabilities arising from cash-settled share-based awards that exist on 1 January 2005. Retrospective application to earlier awards is permitted. It is likely that the fair value of awards (options and shares) will be amortized over the service period, which is generally equal to the vesting period. This would represent a change from our current approach of expensing the share component of performance-related compensation upfront in the year of corresponding performance. We are currently evaluating the impact of the new standard, including whether we will adopt full retrospective application or only consider grants made after 7 November 2002. We will provide an update on the application of the new standard in our second quarter 2004 report.

In March 2004, the IASB issued IFRS 3 Business Combinations, along with the related revised IAS 36 Impairment of Assets, and revised IAS 38 Intangible Assets. IFRS 3 replaces IAS 22 and requires that all business combinations be accounted for under the purchase method. The pooling of interests method is eliminated. Under IFRS 3, goodwill will no longer be amortized and must be tested for impairment at least once a year. The new standard applies prospectively to all business combinations on or after 31 March 2004. Beginning in 2005, we will cease to amortize existing goodwill and will instead conduct an annual impairment test. Intangible assets with indefinite useful lives will also be tested for impairment. These changes will bring the treatment of goodwill and intangible assets in line with that under US GAAP. The adoption of the new standards will have a material impact on our financial statements as we, for example, recorded CHF 756 million of goodwill amortization expense in 2003.

Changes in accounting and presentationfrom 1 January 2004
On 22 April, we published restated figures for 2003 and 2002 that align our comparative prior periods to the changes we undertook in accounting and presentation on 1 January 2004.

The restatement reflected the following changes in accounting and presentation:

These changes lowered 2003 and 2002 net profit by CHF 146 million and CHF 5 million respectively. All figures and results presented in this report reflect these changes. More information on the changes can be found in Note 1 to the Financial Statements of this report and our restatement release issued on 22 April which you can find on the web at www.ubs.com/investors.

New disclosure starting this quarter
As part of our continuing effort to improve the transparency of our financial reporting and provide the best possible understanding of our business, we have made a number of enhancements to our disclosure this quarter.

From this report on, our underwriting fee results will be split to show both equity and fixed income contributions.

In our credit portfolio, we have introduced a new ratio to better explain our allowances. It shows the impact of collateral on the coverage ratio for impaired loans.

In our Business Banking Switzerland unit, we now split our revenues to show the breakdown between interest income and non-interest income, giving a more distinct picture of the unit’s sources of revenue.

At Wealth Management USA, we now indicate the split between private client and municipal finance revenues. We believe this will help to better explain the performance of the underlying core business. To that effect, we are also introducing a new key performance indicator (KPI) that shows the productivity per financial advisor.

Results

We reported our best quarterly result ever in first quarter 2004. Net profit was CHF 2,423 million, up 100% from CHF 1,209 million in the same quarter a year earlier. Before goodwill, net profit rose 82% from first quarter 2003. Our outstanding performance reflected clear success in capturing revenue opportunities and growing our business as major financial markets continued to recover. Operating income, up 33%, was also at an all-time record. At the same time, we continued to manage costs tightly as expenses, up 17%, rose far less than revenues. All our business units posted higher operating income and pre-tax profits in first quarter compared to a year earlier. Our Investment Bank reported a 115% gain in pre-tax profit, helped by the best fixed income and second best equity performance since 2000 with excellent trading returns rewarding increased levels of risk. Our wealth management and asset management businesses profited from growing asset bases and increased investor activity as individuals showed more willingness to enter the securities markets. For the first time since 2001, quarterly fee and commission income was over CHF 5 billion, making up almost half of total revenues. Wealth Management USA reported its best operating performance since joining UBS. Global Asset Management’s result was its best since 2000. Costs were kept under tight control in all our businesses, with general and administrative expenses up only 8% from first quarter 2003. The 23% overall rise in personnel expenses, however, was a direct reflection of our outstanding performance – prompting higher accruals for performance-related compensation.

Annualized return on equity for first quarter 2004 was 29.2%, compared to 13.2% a year earlier. Basic earnings per share were CHF 2.25 in first quarter 2004, against CHF 1.05 in the same quarter a year earlier. The cost/income ratio was 70.0% in first quarter 2004, down from 78.8% a year earlier.

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 are 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 significant financial events:

Our wealth management businesses had an excellent first quarter and continued to attract strong net new money inflows, spread across the globe. In first quarter 2004, inflows were at a record CHF 19.0 billion, up from CHF 11.1 billion in the same quarter a year ago. The Wealth Management unit attracted a record CHF 16.2 billion inflow in first quarter 2004, compared to CHF 7.4 billion a year earlier. The international clients business saw strong inflows into Asia, Eastern Europe and our domestic European wealth management business, which itself saw a record inflow of CHF 4.2 billion. In the US, net new money was CHF 2.8 billion in first quarter 2004, down slightly from CHF 3.7 billion a year earlier.