Shareholders' Letter

Dear Shareholders,

Marcel Ospel & Peter Wuffli

A natural characteristic of financial markets is change. We have seen clear evidence of this in the first half of the year. The first quarter was marked by a very favorable business environment, while the second saw a slowdown in pace as equity investors became less confident and rising rates and low volatility drove activity out of the fixed income markets.

In this context, our second quarter performance was strong, with CHF 1,974 million in net profit. It was our second-best quarterly performance since 2000, 19% down from the record first quarter. Our wealth management business performed particularly well with profit 34% up year-on-year as clients’ invested assets rose to CHF 750 billion, the highest level for three years. The quarter-to-quarter swing in market conditions reduced trading-related income by 22% as our Investment Bank reacted to the reduced opportunities by cutting market exposure, taking risk off the table.

Compared to second quarter 2003, net profit rose 28% – or 24%, once goodwill and the gain from the prior-year sale of our Correspondent Services Corporation (CSC) clearing subsidiary are excluded. Operating income grew 6% from a year earlier. Strong fee and commission income, again accounting for more than 50% of our total revenues, more than offset the drop in trading revenues. Our Investment Bank posted excellent results in its corporate advisory business as our clients took advantage of strategic opportunities and favorable financing terms. Asset-based revenues in our wealth and asset management businesses were particularly good, with record levels of investment fund fees. The total level of invested assets rose 7% to CHF 2.2 trillion, driven by the year-on-year recovery in financial markets as well as the CHF 85.7 billion inflow of net new money in the last 12 months. Inflows in second quarter totaled CHF 16.9 billion, with CHF 10.4 billion coming from our wealth management businesses. Our Asian franchise continued to perform strongly, as did our domestic European wealth management business. In addition, our previously troubled private equity business posted another positive quarter.

Our credit businesses benefited from the stable economic environment. They recorded a net recovery of CHF 131 million in the quarter, after net recoveries of CHF 3 million and CHF 1 million in first quarter 2004 and second quarter 2003, respectively.

Total operating expenses were up 2% in second quarter from a year earlier due to an increase in operational risk costs and provisions.

Performance was also strong against our other financial targets. Before goodwill, return on equity for the first half, at 29.2%, was well above our target range of 15-20%. Earnings per share in the quarter were CHF 2.06, up 32% from second quarter 2003.

Our strategy works. It is focused enough to provide us with a distinct profile concentrating on higher than average growth sectors. At the same time, it is broad enough to achieve resilient performance across varying business and market conditions. We have the global scale that is necessary for sustained competitive success, regardless of the path of ongoing consolidation in our industry. We continue to see exciting opportunities for further growth both through market expansion and increasing market share, and will continue to invest in developing our global franchises either through organic growth initiatives or through add-on acquisitions.

One of our major initiatives that encompasses the whole firm is our brand strategy, where our efforts and investments are starting to pay off. For the first time, UBS featured as one of the 100 top brands in the Global Brand Scoreboard, which was published in August by Business-Week. In the survey, which is widely regarded as the marketing industry’s benchmark, UBS ranked as the world’s 45th most valuable brand worth USD 6.5 billion, ahead of many household names.

Outlook – In 2003, our earnings deviated from their usual seasonality, featuring weaker results in the first half of the year. In contrast, the first quarter of this year saw excellent conditions, providing us with exceptional revenue opportunities. Such favorable combinations can’t last – opportunities have to be captured as they arise. However, our diversified business mix helps us to perform strongly across varying market conditions. In second quarter, for instance, strong asset-based fees have helped us to balance reduced trading-driven revenues.

While investor sentiment has recovered from the very low levels of last year, it still remains cautious. Combined with directionless markets and the expectation of rising interest rates, this may continue to dampen levels of market activity. Since many of our businesses, especially our Investment Bank, have this activity as an important driver, we should expect a return to a more normal seasonal pattern this year, with second half revenues not matching those in the first half.


10 August 2004

UBS AG