Wealth Management US

2005

Key performance indicators

The inflow of net new money in 2005 was a strong CHF 26.9 billion, up 49% from CHF 18.1 billion in 2004. Including interest and dividends, net new money in 2005 was CHF 45.2 billion, up from CHF 33.4 billion a year earlier. The increase in net new money was mainly due to the hiring of highly efficient financial advisors and inflows from ultra high net worth clients.

Wealth Management US had CHF 752 billion in invested assets on 31 December 2005, up 24% from CHF 606 billion on 31 December 2004. The increase was due to the strong appreciation of the year-end US dollar spot rate against the Swiss franc, the inflows of net new money as well as positive market movements. In US dollar terms, invested assets were 8% higher on 31 December 2005 than they were on the same date in 2004.

The gross margin on invested assets was 75 basis points in 2005, down from 77 basis points in 2004. The gross margin on invested assets before acquisition costs (net goodwill funding costs) was 78 basis points, down from 80 basis points in 2004. The increase in average invested asset levels (up 11%) outpaced the gain in revenues (up 9%) following a decrease in transactional revenues over the year.

The cost / income ratio before acquisition costs was 89.7% for 2005, compared to 88.3% in 2004. The increase in the cost / income ratio reflects higher expenses associated with litigation provisions and personnel expenses, partially offset by a rise in revenues due to higher recurring income.

In 2005, recurring income was CHF 2,834 million, up 21% from CHF 2,343 million a year earlier. Excluding the impact of currency fluctuations, recurring income was up 20% in 2005 from 2004, mainly due to higher levels of managed account fees on a record level of invested assets in US dollar terms, and increased net interest income from the lending business. Flows into managed account products were USD 16.7 billion in full-year 2005, comparing favorably to the USD 12.7 billion flow for full-year 2004. Recurring income represented about 55% of income in 2005 compared with 49% in 2004.

Revenues per advisor increased in 2005 to CHF 715,000 from CHF 655,000 in 2004 as practically the same number of financial advisors were able to produce higher recurring income than a year earlier. The number of financial advisors was almost flat compared to 2004, increasing by 1 advisor to 7,520 at the end of 2005. Increases in highly efficient financial advisors and trainees were offset by attrition among less productive advisors.

Results

In 2005, we reported a pre-tax profit of CHF 312 million compared to CHF 29 million in 2004. Excluding acquisition costs, profit was CHF 550 million in 2005 and CHF 571 million in 2004. This decrease reflects mainly higher litigation provisions. In US dollar terms, operational performance (excluding acquisition costs) in 2005 was 4% lower than in 2004.

Operating income

In 2005, total operating income was CHF 5,156 million, up 9% compared to CHF 4,736 million in 2004. The same holds true for the operating income before acquisition costs. On the same basis and excluding currency effects, operating income increased by 8% from 2004. The increase in operating income is primarily due to higher recurring income based on higher levels of assets, rising net interest income in UBS Bank USA, slightly offset by lower transactional revenues.

Operating expenses

Total operating expenses rose 3% to CHF 4,844 million in 2005 from CHF 4,707 million in 2004. Excluding acquisition costs, the increase was 11%. Excluding currency effects and acquisition costs, operating expenses were 10% higher. This reflects the impact of increased litigation provisions in second half 2005 which accounted for almost all the increase in non-personnel expenses.

Personnel expenses increased by CHF 140 million due to higher variable compensation, reflecting the higher level of income partially offset by a credit related to a change in the estimated service period used for the amortization of certain long-term employee benefits. Share based components decreased, reflecting less share and options awards. Excluding the currency translation effect, the increase in personnel expenses amounted to 3%. General and administrative expenses increased 37% to CHF 1,047 million in 2005 from CHF 767 million in 2004. In US dollar terms, they actually rose 35%, reflecting higher litigation provisions, partially offset by lower professional fees. Services from other business units decreased mainly due to lower charges in from ITI. Depreciation was also lower due to a drop in infrastructure charges (down CHF 2 million). The amortization of other intangibles was CHF 49 million in 2005, down 54% from CHF 107 million due to the reclassification of certain intangible assets. Under the new accounting rules, these assets are classified as goodwill, which is no longer amortized.

2004

In 2004, inflows of net new money were CHF 18.1 billion, CHF 3.8 billion higher than the CHF 14.3 billion reported in 2003. Including interest and dividends, net new money in 2004 was CHF 33.4 billion, higher than the CHF 29.4 billion reported in 2003.

Wealth Management US had CHF 606 billion in invested assets on 31 December 2004, up 1% from CHF 599 billion on 31 December 2003. The increase was due to inflows of net new money and the effects of market appreciation, partly offset by the weakening of the US dollar against the Swiss franc. In US dollar terms, invested assets were 10% higher on 31 December 2004 than they were on the same date in 2003.

The gross margin on invested assets was 77 basis points in 2004, down from 82 basis points in 2003. The gross margin on invested assets before acquisition costs (net goodwill funding costs) was 80 basis points, down from 86 basis points in 2003.

The cost / income ratio before acquisition costs was 88.3% for 2004, compared to 89.3% in 2003. The improvement in the cost / income ratio reflects our continuous cost control.

In 2004, recurring income was CHF 2,343 million, up 10% from CHF 2,124 million a year earlier. Excluding the impact of currency fluctuations, recurring income was up 19% in 2004 from 2003, mainly due to higher levels of managed account fees on a record level of invested assets in US dollar terms. Flows into managed account products were USD 12.7 billion in full-year 2004, comparing favorably to the USD 10.2 billion flow for full-year 2003.

Revenues per advisor increased in 2004 to CHF 655,000 from CHF 597,000 in 2003 as a lower number of financial advisors were able to produce roughly the same revenues as a year earlier. The number of financial advisors decreased to 7,519 in 2004 from 7,766 a year earlier due to attrition among less productive financial advisors.

Results

In 2004, we reported a pre-tax gain of CHF 29 million compared to a loss of CHF 293 million in 2003. The 2003 results include a pre-tax gain of CHF 161 million from the sale of Correspondent Services Corporation (CSC) in second quarter. After the exclusion of the CSC gain and before acquisition costs, operational performance showed profits of CHF 571 million in 2004 and CHF 364 million in 2003. In US dollar terms, operational performance (excluding the gain on sale of CSC) in 2004 was 69% higher than in 2003. This represents the best result since PaineWebber became part of UBS, reflecting record recurring income and increased net interest revenues benefiting from the first full-year impact of UBS Bank USA.

Operating income

In 2004, total operating income was CHF 4,736 million, almost unchanged compared to CHF 4,740 million in 2003. Before acquisition costs and excluding the sale of our CSC business, total operating income rose from a year earlier. On the same basis and excluding currency effects, operating income increased by 11% from 2003. The increase in operating income is primarily due to higher recurring income, rising net interest income due to UBS Bank USA, and higher transactional revenues.

Operating expenses

Total operating expenses decreased 6% to CHF 4,707 million in 2004 from CHF 5,033 million in 2003. Excluding acquisition costs, the drop was 2%, mainly due to the weakening of the US dollar against the Swiss franc. Excluding currency effects and acquisition costs, operating expenses were up 6%, primarily due to an increase in general and administrative expenses. Personnel expenses dropped to CHF 3,320 million in 2004, down 7% from CHF 3,555 million a year earlier. Excluding the effects of currency translation, personnel expenses were slightly higher than in 2003, reflecting higher bonus and broker compensation, which gained in line with performance, partially offset by lower retention payments, which ended in June. Non-personnel related expenses dropped 6% to CHF 1,387 million in 2004 from CHF 1,478 million in 2003. In US dollar terms, they actually rose 1%, reflecting higher legal fees and settlement charges and increased consulting fees related to key initiatives. This was partially offset by a declining goodwill amortization (down CHF 21 million) due to the sale of CSC.