Results

Certain risk factors, including those described below, can impact our ability to carry out our business strategies and can directly affect our earnings. As a consequence, our revenues and operating profit have varied – and are likely to continue to vary – from period to period and revenues and operating profit for any particular period may not be indicative of sustainable results.

Performance in our industry depends on the economic climate – negative developments can adversely affect our business activities

The financial services industry prospers in conditions of economic growth, market liquidity and buoyancy and positive investor sentiment. An economic downturn, inflation or a severe financial crisis could negatively affect our revenues, and we would be unable to immediately adjust all our costs to the resulting deterioration in market or business conditions. A market downturn can be precipitated by geopolitical events, changes in monetary or fiscal policy, development of trade imbalances, natural disasters, pandemics and civil unrest, and war or terrorism. Because financial markets are global and highly interconnected, even local and regional events can have widespread impact well beyond their sources. A crisis could develop, regionally or globally, as a result of disruption in emerging markets, which are particularly susceptible to macro-economic and geopolitical developments, or as a result of the failure of a major market participant. As our presence and business in emerging markets increases, we may become more exposed to these risks. Adverse and extreme developments of this kind could affect our businesses in a number of ways:

– a general reduction in business activity and market volumes affects fees, commissions and margins from market-making and customerdriven transactions and activities. A market downturn may reduce the volume and valuations of assets we manage on behalf of clients, reducing our asset- and performance- based fees

– reduced market liquidity may limit trading and arbitrage opportunities or impede our ability to manage risks, impacting both trading income and performance-based fees

– the assets we hold for our own account as investments or trading positions may fall in value

– impairments and defaults on credit exposures and on trading and investment positions may increase. Losses may be exacerbated by falling collateral values

– if individual countries impose restrictions on cross-border payments or other exchange or capital controls we may suffer losses from enforced default by counterparties, we may be unable to access our own assets, or we may be impeded in – or prevented from – managing our risks.

We might be unable to identify or capture competitive opportunities

The financial services industry is characterized by intense competition, continuous innovation, detailed – and sometimes fragmented – regulation and ongoing consolidation. We face competition at the level of local markets and individual business lines, and from global financial institutions comparable to UBS in their size and breadth. Barriers to entry in individual markets are being eroded by new technology. We expect these trends to continue and competition to increase in the future. If we are unable to identify market trends and developments, do not respond to them by devising and implementing adequate business strategies, or are unable to attract or retain the qualified people to carry them out, our competitive strength and market position might be eroded.

Our risk management and control processes may not always protect us from loss

Risk-taking is a major part of the business of a financial services firm. We derive a substantial part of our revenue from market making and proprietary trading in cash and derivatives markets and credit is an integral part of many of our retail and investment bank activities. Interest rates, equity prices, foreign exchange levels and other market fluctuations can adversely affect our earnings. Some losses from risk-taking activities are inevitable but to be successful over time we must balance the risks we take with the returns we generate. We must therefore diligently identify, assess, manage and control our risks, not only in normal market conditions but also as they might develop under more extreme – ?stressed? – conditions, when concentrations of exposure can lead to severe losses. Our risk management and control culture, tools and processes for market and credit risk, including country risk, are described in the Risk Management chapter of our Handbook 2006 / 2007. We could, however, suffer losses if:

– we do not fully identify the risks in our portfolio, in particular risk concentrations and correlated risks

– our assessment of the risks we have identified, or our response to negative trends proves to be inadequate or incorrect

– markets move in ways that are unexpected in terms of their speed, direction, severity or correlation and our ability to manage risks in the resultant environment is restricted

– third parties to whom we have credit exposure or whose securities we hold for our own account or as collateral are severely affected by unexpected events and we suffer defaults and impairments beyond the level implied by our risk assessment

– collateral or other security provided by our counterparties proves inadequate to cover their obligations at the time of their default.

We also manage risk on behalf of our clients in our asset and wealth management businesses, and our performance in these activities could be harmed by the same factors. If clients suffer losses or our performance does not match that of our competitors, we may suffer reduced fee income and a decline in assets under management or withdrawal of mandates.

Liquidity and funding management are critical to our ongoing performance

A substantial part of our funding requirement is met using short-term unsecured funding sources, including wholesale and retail deposits and the regular issuance of money market paper. The volume of these funding sources is largely stable. If this situation were to change, we could be forced to liquidate assets, in particular from our trading portfolio, to meet maturing liabilities or deposit withdrawals. We might be forced to sell them at discounts that could adversely affect our profitability and our business franchises. A reduction in our credit rating could adversely affect our cost of borrowing, in particular from wholesale unsecured sources, and reduce our access to capital markets. It could also result in our having to make additional cash payments or post collateral, or in the premature termination of contracts with rating trigger clauses. Our approach to liquidity and funding management is described in the Treasury Management chapter of our Handbook 2006 / 2007.

Operational risks may affect our business

All our businesses are dependent on our ability to process a large number of complex transactions across many and diverse markets in different currencies and subject to many different legal and regulatory regimes. Our operational risk management and control systems and processes, which are described in the Risk Management chapter of our Handbook 2006 / 2007 under «Operational Risk», are designed to ensure that the risks associated with our activities, including those arising from process error, failed execution, fraud, systems failure, and failure of security and physical protection, are appropriately controlled. If these internal controls fail or prove ineffective in identifying and remedying such risks, we could suffer operational failures that might result in losses.

Legal claims may arise in the conduct of our business

In the ordinary course of our business we are involved in a variety of claims, disputes and legal proceedings in Switzerland and other jurisdictions where we are active, including the United States. Such legal proceedings may expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil penalties.

Our global presence exposes us to other risks

We operate in more than 50 countries, earn income and hold assets and liabilities in many different currencies and are subject to many different legal, tax and regulatory regimes. Changes in local tax laws or regulations may affect our clients' ability or willingness to do business with us or the viability of our strategies and business model. Because we prepare our accounts in Swiss francs while a substantial part of our assets, liabilities, revenues and expenses are denominated in other currencies, changes in foreign exchange rates – particularly between the Swiss franc and the US dollar (US dollar income representing the major part of our non-Swiss franc income) – may have an effect on our reported earnings. Our approach to management of this currency risk is explained in the Treasury Management chapter of our Handbook 2006 / 2007 under «Corporate currency management».