Note 3 Net Interest and Trading Income

Accounting standards require separate disclosure of net interest income and net trading income (see the second and the third table). This required disclosure, however, does not take into account that net interest and trading income are generated by a range of different business activities. In many cases, a particular business activity can generate both net interest and trading income. Fixed income trading activity, for example, generates both trading profits and coupon income. UBS management therefore analyzes net interest and trading income according to the business activity generating it. The table below (labeled Breakdown by business activity) provides information that corresponds to this management view. For example, net income from trading activities is further broken down into the four sub-components of Equities, Fixed income, Foreign exchange and Other. These activities generate both types of income (interest and trading revenue) and therefore this analysis is not comparable to the breakdown provided in the table on the next page (Net trading income).


Net interest and trading income
	For the year ended			% change from
CHF million	31.12.05	31.12.04	31.12.03	31.12.04
Net interest income	9,528	11,744	12,261	(19)
Net trading income	7,996	4,902	3,670	63
Total net interest and trading income	17,524	16,646	15,931	5

Breakdown by business activity
		For the year ended		% change from
CHF million	31.12.05	31.12.04	31.12.03	31.12.04
Equities	3,928	3,098	2,445	27
Fixed income	5,741	6,264	6,474	(8)
Foreign exchange	1,458	1,467	1,436	(1)
Other	292	203	258	44
Net income from trading activities	11,419	11,032	10,613	4
Net income from interest margin products	5,355	5,070	5,000	6
Net income from treasury and other activities	750	544	318	38
Total net interest and trading income	17,524	16,646	15,931	5

Net interest income
	For the year ended			% change from
CHF million	31.12.05	31.12.04	31.12.03	31.12.04
Interest income
Interest earned on loans and advances	11,414	8,907	10,449	28
Interest earned on securities borrowed and reverse repurchase agreements	23,641	11,006	11,148	115
Interest and dividend income from financial investments	86	38	57	126
Interest and dividend income from trading portfolio	24,145	19,277	18,391	25
Total	59,286	39,228	40,045	51
Interest expense
Interest on amounts due to banks and customers	11,080	5,475	4,996	102
Interest on securities lent and repurchase agreements	20,626	10,014	9,623	106
Interest and dividend expense from trading portfolio	10,736	7,993	9,925	34
Interest on financial liabilities designated at fair value	2,390	1,168	751	105
Interest on debt issued	4,926	2,834	2,489	74
Total	49,758	27,484	27,784	81
Net interest income	9,528	11,744	12,261	(19)

Interest includes forward points on foreign exchange swaps used to manage short-term interest rate risk on foreign currency loans and deposits.


Net trading income ¹
	For the year ended			% change from
CHF million	31.12.05	31.12.04	31.12.03	31.12.04
Equities	3,900	2,254	1,660	73
Fixed income ²	1,256	131	369	859
Foreign exchange and other	2,840	2,517	1,614	13
Net trading income	7,996	4,902	3,670	63

1 Please refer to the table “Net Interest and Trading Income” on the previous page for the Equities, Fixed income, Foreign exchange and Other business results (for an explanation, read the corresponding introductory comment). 2 Includes commodities trading income.

Included in the Net trading income table are fair value changes of CHF (4,024) million for the year ended 31 December 2005, CHF (1,203) million for the year ended 31 December 2004, and CHF (115) million for the year ended 31 December 2003 related to financial liabilities designated as held at fair value through profit and loss. For 2005, CHF (4,277) million of the total fair value change was attributable to changes in fair value of embedded derivatives, while CHF 253 million was attributable to changes in LIBOR. For 2004, CHF (801) million of the total fair value change was attributable to changes in fair value of embedded derivatives, while CHF (402) million was attributable to changes in LIBOR. The exposure from embedded derivatives is economically hedged with derivatives whose change in fair value is also reported in Net trading income, offsetting the fair value changes related to financial liabilities designated as held at fair value.