Shareholders' Letter

Marcel Ospel & Peter Wuffli

Dear Shareholders,

This quarter’s results showcase the strength of our asset gathering businesses. At a time when securities markets are offering less attractive trading returns, the fact that UBS has not only the world’s leading wealth management operation, but also one of the fastest growing, is crucial to our ability to deliver top-class returns to you, our shareholders.

Although our Investment Bank saw an anticipated slowdown in trading opportunities, its year-to-date performance is roughly 25% above the same period a year ago – and almost three times higher than in the first nine months of 2002. Elsewhere, the sheer scale of the assets entrusted to us by our clients (which rose to CHF 2.3 trillion this quarter) has been a major driver, producing, for example, the highest portfolio management fees we have ever reported. In third quarter, net new money for the firm as a whole was CHF 20.5 billion. Wealthy individual clients worldwide contributed CHF 16.7 billion; during the first nine months of this year, our wealth management businesses have gathered a total of CHF 46.1 billion in new assets, at an annualized growth rate of 5%. This leading rank in wealth management is a privileged strategic position to occupy, and we remain convinced that all our global areas of focus – including the investment banking, securities and asset management businesses – will deliver above average growth opportunities for UBS.

Before we look at our financial results in more detail, we should mention that this quarter, for the first time, they include the fully consolidated results of Motor-Columbus, a Swiss holding company whose only significant asset is a majority ownership interest in Swiss-based electricity provider Atel. Earlier this year, we increased our stake in Motor-Columbus to 55.6% in order to protect the value of our existing investment and put us in a stronger position, as majority shareholder, to divest it profitably in the future. In the meantime, the results of Motor-Columbus will be reported in a separate Industrial Holdings segment, helping us to preserve full continuity in the presentation of our core Financial Businesses. This quarter, Motor-Columbus contributed 1.0% to UBS’s overall net profit, 16.7% to operating income, and 20.6% to operating expenses.

Net profit in third quarter was CHF 1,671 million. Our Financial Businesses contributed CHF 1,654 million and our Industrial Holdings CHF 17 million. Low market activity and volatility led to a drop in all trading-related revenues, pushing the net profit of our Financial Businesses down 2% compared to third quarter last year and 16% compared to second quarter 2004. As a major player in the world’s securities markets, we accept that volatility in our Investment Bank’s revenues will reflect prevailing market opportunities, and we will not every quarter be able to deliver the peak levels of trading performance we saw earlier this year. All the more important, then, that this element is balanced with strong fee and commission revenues, which represent well over 50% of our overall operating income. Our earnings per share were CHF 1.86 (before goodwill amortization) in third quarter 2004, down from CHF 2.06 in second quarter 2004 but 7% above the CHF 1.74 reported in third quarter 2003. Costs are well under control, falling 9% from second quarter 2004 and 1% from third quarter last year, driven by lower bonus accruals – in line with the decline in revenues. Our cost/income ratio of 71.5% (before goodwill) is still near historically low levels and below the 72.2% recorded a year ago.

We use both add-on acquisitions and organic growth to expand our core businesses. In September, we announced the acquisition of Charles Schwab SoundView Capital Markets, the Capital Markets Division of Charles Schwab Corp. – a deal that provides us with fresh expertise and technology and reinforces our existing activities by providing additional scale. This deal will propel us to the front rank of NASDAQ stock traders, complementing our top-tier position on the New York Stock Exchange (NYSE). Our efforts to grow organically are also delivering tangible results. Since its launch in 2001, our European wealth management business has seen inflows coming in at an average annual rate of 40%. Revenues hit a record level as client investments rose to CHF 69 billion in third quarter. We also continue to expand our wealth management presence in Asia, with three new openings this quarter. We officially inaugurated a branch in Beijing on 2 August, marking a milestone in our long-term strategy for China. A month later, we re-entered the wealth management market in Japan with an office in Tokyo, and opened a new representative office in Kuala Lumpur, Malaysia.

Our continuing efforts to build our brand show how we deliver global financial resources through personal client relationships based on intimate understanding. We recently analyzed the first results from our major advertising campaign launched in March with the tagline “You & Us”. We found that awareness of UBS is rising in all regions, and is significantly higher in the US. Our target clients are seeing and remembering our advertising – an important step in building a distinct profile in our highly competitive industry. While these achievements are encouraging, brand building does not provide instant returns and does not only involve advertising. It is a long-term commitment requiring that we introduce more and more potential clients to the UBS way of doing business, delivering on our promise of pursuing their success above all.

As investors, you may have followed recent changes in International Financial Reporting Standards (IFRS). In 2005, two new accounting standards will have a significant impact on our financial results. First of all, IFRS will require us to recognize the fair value of all equity-based payments made to employees as compensation expense – including options, which we currently disclose on a pro-forma basis. Additionally, a new standard governing business combinations will lead to a new treatment for goodwill. From 2005 onwards, goodwill arising from acquisitions will no longer be amortized, but tested annually for impairment. The continuing evolution of accounting standards creates a certain degree of complexity for investors. On the other hand, these developments are necessary to keep pace with the changing nature of contemporary business. Adoption of IFRS across the EU is an important milestone. As more companies apply these standards and provide constructive input for further development, we hope for ever-increased momentum towards a credible global accounting language, providing more comparability and transparency to investors.

Outlook – In the first nine months of 2004, market conditions for our trading-related businesses have swung considerably – from an exceptionally favorable first quarter to the rather tough environment in third quarter. Across these varied conditions, our diversified business mix has paid off, helping us to capture the revenue opportunities when equity and fixed income markets were buoyant, with our wealth and asset management businesses giving us a counterbalance when trading conditions started to normalize.
While global economic fundamentals look rather positive, market participants are currently unsure about how long the current growth will last. This prevailing uncertainty continues to weigh on financial markets. In the short term, this may continue to dampen levels of investor activity – an important driver for many of our businesses. That said, it looks as though we will be able to look back on 2004 as one of UBS’s best years, and our focused strategy and success in attracting new clients give us a great deal of confidence for 2005 and beyond.

2 November 2004

UBS AG