Balance sheet and off-balance sheet

UBS's total assets stood at CHF 2,396.5 billion on 31 December 2006, up from CHF 2,058.3 billion on 31 December 2005. The increase was driven by the growth in the trading portfolio (up CHF 225 billion), collateral trading (up CHF 65 billion) and the loan portfolios (up CHF 33 billion), while positive and negative replacement values each were down CHF 5 billion. Currency movements against the Swiss franc (mainly the 7% depreciation of the US dollar) partially offset the rise. Total liabilities rose due to higher borrowing (up CHF 241 billion), collateral trading liabilities (up CHF 70 billion) and trading liabilities (up CHF 16 billion).

Lending and borrowing

Lending
Cash was CHF 3.5 billion on 31 December 2006, down CHF 1.9 billion from a year earlier, mainly from lower sight deposit balances held with central banks. At CHF 50.4 billion on 31 December 2006, the Due from banks line increased by CHF 16.8 billion, largely related to the integration of ABN AMRO's futures and options business, and higher lending by the cash and collateral trading business, which is the central funding instance of the bank. The increase was partially offset by lower current account balances in Industrial Holdings relating to the divestment of Motor-Columbus at the beginning of 2006. Our loans to customers stood at CHF 312.5 billion on 31 December 2006, up by CHF 32.6 billion from a year earlier, reflecting higher mortgage volumes in Switzerland and increased secured lending, mainly in our international wealth management businesses. This was further accentuated by a substantial increase in the Investment Bank's secured lending to prime brokerage clients and to a lesser extent by the integration of ABN AMRO's futures and options business. This was partially offset by lower secured lending balances to US mortgage originators.

Borrowing
The Due to banks line rose by CHF 79.4 billion mainly due to increased time deposits. Major movements in the Investment Bank's cash and collateral trading activities were related to a shift from repos to uncollateralized borrowing in connection with the funding of Dillon Read Capital Management (DRCM) assets and the accommodation of the firm's general growth. Further growth was driven by the integration of ABN AMRO's futures and options business. Total debt issued (including financial liabilities designated at fair value) increased to CHF 335.8 billion on 31 December 2006, up CHF 57.7 billion from a year earlier. Money market paper issuance increased by CHF 16.9 billion, mainly in ­Europe and the US. The amount of long-term debt issued (including ­financial liabilities designated at fair value) grew by CHF 40.9 billion to CHF 216.3 billion.

The Due to customers line was up CHF 103.7 billion, mainly reflecting larger time deposits from private clients in our wealth management franchise around the globe and in Switzerland for our retail banking business. Growth from our Investment Bank's prime brokerage and exchange ­traded derivative business related to the integration of ABN AMRO's futures and options business.

Repo and securities borrowing / lending

In 2006, cash collateral on securities borrowed and reverse repurchase agreements increased by CHF 65 billion or 9% to CHF 757 billion, while the sum of securities lent and repos grew by CHF 70 billion or 13% to CHF 609 billion. The increase stems primarily from the Investment Bank's matched book (a repo portfolio comprised of assets and liabilities with equal maturities and equal value, so that the risks substantially cancel each other out), and equity securities borrowing activities. Securities lending and repos rose, largely to finance the growth in trading inventory.

Trading portfolio

Trading assets increased by CHF 225 billion to CHF 879 billion on 31 December 2006 from CHF 654 billion on 31 December 2005. Increases were registered in debt instruments (up CHF 124 billion), mainly in asset-backed securities in our mortgage trading and securitized products business and in government securities (within the rates business). Assets in cash and collateral proprietary trading increased and were mostly pledged to central banks. Equity instruments were up by CHF 52 billion, largely driven by the derivatives business on the back of rising equity markets. Money market paper inventories rose in our fixed income, rates and currencies business by CHF 29 billion. Traded loans rose by CHF 11 billion, mainly in the securitization business, while precious metals grew by CHF 8 billion. Over the same period, short trading positions increased by CHF 16 billion to CHF 205 billion.

Replacement values

In 2006 positive and negative replacement values declined by CHF 5 billion to CHF 328 billion and CHF 333 billion respectively. This was the net result of increases in the Equities business from the integration of ABN Amro's futures and options business and movements in exchange rates in major currencies, slightly outweighed by the decline in replacement values driven by movements in interest rates.

Other assets / liabilities

Investments in associates decreased by 48%, to CHF 1.5 billion on 31 December 2006, mainly due to the sale of UBS's stake in Motor-Columbus. Property and equipment was down 27% to CHF 6.9 billion, mainly driven by write-offs, partially offset by new investments. Goodwill and other intangible assets, at CHF 14.8 billion on 31 December 2006, rose 10% from a year earlier, reflecting the acquisitions of several businesses during 2006, partially offset by a ­negative currency impact and the disposal of Motor-­Columbus.

Equity

At CHF 49.7 billion on 31 December 2006, equity attributable to UBS shareholders increased by CHF 5.7 billion from 2005. The increase reflects the attributable profit of CHF 12.3 billion, partially offset by dividend payments and share repurchases.

Equity attributable to minority interests decreased by 20% to CHF 6.1 billion on 31 December 2006 from CHF 7.6 billion on the same date a year ago, mainly reflecting the new issuance of preferred securities and the sale of Motor-Columbus.

Contractual obligations

The table below summarizes our contractual obligations as of 31 December 2006. All contracts, with the exception of purchase obligations (those where we are committed to ­purchasing determined volumes of goods and services), are either recognized as liabilities on our balance sheet or, in the case of operating leases, disclosed in note 27 to the Financial Statements.

The following liabilities recognized on the balance sheet are excluded from the table because we do not consider these obligations to be contractual: provisions, current and deferred tax liabilities, liabilities to employees for equity ­participation plans, settlement and clearing accounts and amounts due to banks and customers.

Within purchase obligations, we have excluded our obligation to employees under the mandatory notice period, during which we are required to pay employees contractually agreed salaries.

UBS has entered into firm commitments for the acquisition of certain businesses. The terms and conditions of these agreements are disclosed in Note 37 to the Financial Statements – Business Combinations.

Off-balance sheet arrangements

In the normal course of business, UBS enters into arrangements that, under IFRS, are not recognized on the balance sheet and do not affect the income statement. These types of arrangements are kept off-balance sheet as long as they do not become onerous, UBS does not incur an obligation from them or become entitled to a specific asset. As soon as such an obligation is incurred, it is recognized on the balance sheet, with the resulting loss recorded in the income statement. It should be noted, however, that the amount recognized on the balance sheet does not, in many instances, represent the full loss potential inherent in such arrangements.

For the most part, the arrangements discussed below either meet the financial needs of customers or offer investment opportunities through entities that are not controlled by UBS. The importance of such arrangements to us, with respect to liquidity, capital resources or market and credit risk support, is minimal. We do not rely on such arrangements as a major source of revenue. They have also not resulted in significant expenses for UBS and we do not expect them to do so in the future. The following paragraphs discuss three distinct areas of off-balance sheet arrangements and any potential obligations that may arise from them as of 31 December 2006.

Guarantees

In the normal course of business, we issue various forms of guarantees to support our customers. With the exception of related premiums, these guarantees are kept off-balance sheet unless a provision is needed to cover probable losses. The maximum claim subject to credit risk arising from these guarantees is disclosed in Note 26 to the Financial Statements. On 31 December 2006 the amount is slightly above the level of a year earlier. Fee income from issuing guarantees is not material to our total revenues. Losses incurred under guarantees and income from the release of related provisions were insignificant for each of the last three years.

Retained interests

UBS sponsors the creation of Special Purpose Entities (SPEs) that facilitate the securitization of acquired residential and commercial mortgage loans and related securities. We also securitize customers' debt obligations in transactions that ­involve SPEs which issue collateralized debt obligations. A typical securitization transaction of this kind would involve the transfer of assets into a trust or corporation in return for beneficial interests in the form of securities. Generally, the beneficial interests are sold to third parties shortly after securitization. We do not provide guarantees or other forms of credit support to these SPEs. Financial assets are no longer reported in our consolidated financial statements once their risks and rewards are transferred to a third party. For further discussion of our securitization activities, see Note 42.2 to the Financial Statements.

Derivative instruments recorded in equity

We have no derivative contracts linked to our own shares that are accounted for as equity instruments. With the exception of physically settled written put options (see Note 1 to the Financial Statements), derivative contracts linked to our shares are accounted for as derivative instruments and are carried at fair value on the balance sheet under positive replacement values or negative replacement values.