UBS - Strategy and structure

Our vision

We are determined to be the best global financial services company. We focus on wealth and asset management, and on investment banking and securities businesses. We continually earn recognition and trust from clients, shareholders, and staff through our ability to anticipate, learn and shape our future. We share a common ambition to succeed by delivering quality in what we do. Our purpose is to help our clients make financial decisions with confidence. We use our resources to develop effective solutions and services for our clients. We foster a distinctive, meritocratic culture of ambition, performance and learning as this attracts, retains and develops the best talent for our company. By growing both our client and our talent franchises, we add sustainable value for our shareholders.

Our strategy

We are, and have for many years been, a truly global firm, working with corporate, institutional and private clients around the world. Our strategy is to concentrate on wealth management, investment banking and securities and asset management, all on a global scale, as well as retail and corporate banking in Switzerland. This long-term commitment has helped us to become the successful, diversified firm we are today.

Business strategies

In the wealth management business, our services are designed for high net worth and affluent individuals around the world, whether investing internationally or in their home country. Many of our potential clients have become increasingly sophisticated in their financial needs – which we meet by providing them with premium wealth and asset management services, as they have more attractive margins than standardized services in retail or consumer finance. Individualized service and a wide range of choices are central to our client offering, with our in-house range of products enhanced by a quality-screened selection of third-party products.

In Asia Pacific, our reputation for wealth management is unmatched, helping us to capture a substantial share of the current growth in wealth. Another key region for growth is Europe. We have established a strong platform in all our five target markets – France, Germany, Italy, Spain and the UK – which we continue to develop by recruiting qualified advisory staff and making acquisitions. In the US, we continue to benefit from the strong presence of the former PaineWebber, which we acquired in 2000. In 2005, we made a key strategic step by fully integrating our international, Swiss and US-based wealth management businesses, accelerating the already significant progress we had made towards a consistent wealth management offering around the globe, making it even easier to fulfill clients’ individual needs with sophisticated products and services from across the firm. Our US-based wealth management business now operates alongside our international and Swiss business as part of one global wealth management franchise.

In the investment banking and securities businesses, we will continue to solidify and enhance our position as a top-ranked firm, maintaining the growth of our three main businesses while creating an even more diversified revenue base. Our ambition is to become a leading investment bank worldwide in terms of client recognition, market share and profitability – using our existing platform to grow organically while maintaining our reputation as focused managers of risk. We will continue to invest in our technological infrastructure in order to develop new systems that facilitate growth in complex businesses. Client demands change, so a current priority is to satisfy the broadening demand for multi-product solutions required by fast-growing segments such as financial sponsors, hedge funds and wealth managers. We will continue to focus on closing gaps in our existing businesses while targeting new business growth in emerging markets by establishing full onshore presences in countries such as China, India, Russia, Brazil and the Middle East.

As one of the world’s leading asset managers, we are competitively positioned in the institutional and wholesale asset management businesses. Our record of strong investment performance and our solid reputation will help us to benefit from the growth expected in institutional and wholesale markets because of the increased need for private savings to supplement public pension systems. We expect client demand to become increasingly polarized. There will be increasing pressure on fees for commoditized products, but there will also be clients willing to pay more for new or tailored products. As a major global manager with a wide range of traditional and alternative capabilities, we are well placed to benefit from this.

For the Swiss retail and corporate banking business, our strategy concentrates on strengthening our position as the country’s leading bank, taking advantage of business opportunities that arise in order to grow our share in selected market segments. We will continue, however, to limit our retail banking activities to the Swiss market.

Growth

Our future is one of growth, and our industry offers plenty of opportunities – some of which are set out in detail on page 14–16.

We will continue to grow, organically and through add-on acquisitions, without radically changing our strategic positioning or our competitive profile. Our strategy, focused on securing global leadership positions in selected areas with above-average growth potential, is both successful and distinctive. As we have significant scale in our areas of focus, we are in a position to concentrate on organic development, avoiding the execution risks and disruptions that large transactions entail. “Bolt-on” acquisitions that improve the position of our core businesses quickly and efficiently will continue to be part of our strategy.

Our leading wealth management franchise shows the success of our strategy. Since 1999, we have consistently invested in improving the quality of the advice we give clients, by developing products specifically tailored and segmented according to the particular needs of our clients. We also continuously improved our processes and practices – the most recent example being the shift in mid-2005 to a global wealth management organization that now includes our US-based business. Our recent organic growth efforts were complemented by a number of acquisitions – all painstakingly evaluated for business and cultural fit before purchase. The success of the policy is particularly evident in Europe, where assets invested by clients have grown to CHF 114 billion at the end of 2005 from CHF 16 billion in 2001. Our European wealth management business now represents 12% of our international and Swiss wealth management business – up from 3% in 2001, when we started to build it up.

In 2005, we took a key step in forming a new alternative investment management business, Dillon Read Capital Management (DRCM). Its core will be the principal finance and commercial real estate trading businesses from the fixed income, rates and currencies area of the Investment Bank, which will move to Global Asset Management. As a result, around 120 staff will be transferred during the first half of 2006, and the trading strategies managed by them will be opened up to co-investment from a limited number of clients, and then supplemented by further new investment products. DRCM will allow us to satisfy the increasing demand from clients for long-term alternative investment opportunities provided by strong industry leaders and will create a new stream of investment management fees from what has until now been a purely in-house trading activity.

Our brand, a key differentiating factor in the industry, is another critically important component in our growth strategy – and our efforts continue to pay off. In 2005, UBS moved up to 44th place in Business Week’s listing of the world’s top 100 brands, up one place from 2004, when we appeared in the ranking for the first time. The survey is widely regarded as the industry benchmark and is based on the methodology of Interbrand, a leading brand consultancy.

Growing in our areas of focus also implies that we will continue to divest non-core businesses and participations. In late August 2005, we signed agreements to sell our 55.6% stake in Motor-Columbus to a Swiss-led consortium for about CHF 1.3 billion. This will create an opportunity to build a significant Swiss-European energy company with Swiss majority ownership. The transaction is expected to close, subject to various regulatory approvals, in 2006. In December 2005, we also finalized the sale of Private Banks & GAM to Julius Baer, following the successful financing of the transaction and after receiving the necessary regulatory approvals. In 2003, we had created the unit as a platform for our separately branded wealth management businesses – as a way of helping them to grow and to create value. We continue to hold a 20.7% stake in the new group as a pure financial investment. The transaction should enable it to play a role in the consolidation of the Swiss private banking industry.

Our strategy in Asia Pacific

One of UBS’s main challenges in the next few years will be to deepen an already strong business footprint in the Asia Pacific region. That may sound like a prosaic matter of investing in new products and systems, and recruiting more staff. In the case of Asia Pacific, it is not. In a vast region where a flight between Mumbai and Sydney is two hours longer than it is between London and Hong Kong, global companies face numerous obstacles. The region is far from homogenous and boasts its own distinct mix of cultures. Language barriers, written and spoken, are substantial and time zones are awkward for companies with headquarters in Europe or North America. Many countries have a volatile economic and political history – with a significant number becoming democracies in the last two decades alone.

Still, the region, taken together, forms more than half the world’s population – while only contributing 24% of total global Gross Domestic Product (GDP), 26% of the global equity market capitalization and 27% of the investable liquid assets of the world’s affluent individuals. In short, it has massive growth potential. A clear example is China, which is expected to remain the primary driver of Asian growth, and, in the medium term, of the global economy. According to the International Monetary Fund (IMF), China’s GDP in 2000 was the seventh largest in the world – last year, it was fourth. By 2015, the IMF expects China’s economy to be second only to the US. The figures speak for themselves – and it is a reasonable projection that financial services markets in Asia Pacific, and China, will continue to become a larger percentage of the global total.

Operating in 14 countries, but with major hubs in Hong Kong, Singapore, Japan and Australia, UBS is one of the largest and fastest growing financial services firms in the region. During 2005, UBS staff numbers grew by over 20%, to around 8% of the global workforce. Roughly half of Asia’s billionaires are clients of UBS, and with invested assets of CHF 114 billion we are currently the leading wealth manager for high net worth individuals in the region. And we are growing fast – last year, for example, invested assets rose 45%. This reflects strong inflows of new client money, which totalled CHF 18.5 billion for the year, 78% more than a year earlier. Our Investment Bank regularly places in the top three in the merger and acquisitions, equity capital market and debt capital market segments while having fast growing fixed income, rates, and currencies businesses as well as strongly expanding in asset management. At the end of 2005, for instance, Dealogic ranked us as the number one investment bank in Asia Pacific (excluding Japan), with a market share of 7.6%. Including Japan, we have the leading equities franchise in Asia Pacific.

To achieve its aims, UBS will grow organically to fill business gaps, including strategic hires, through acquisitions, where suitable, and by joint venture, where necessary. Although investment will be in all countries in the region, the strategic emphasis is on Japan, China, and India – together with plans for accelerated growth in the domestic wealth management and asset management businesses.

By September 2005, a strategic cooperation agreement had been signed with the Bank of China and Beijing SASAC (State-owned Assets Supervision and Administration Commission), and UBS and The International Finance Corporation (IFC) had received State Council Approval of their plans to restructure Beijing Securities. What at first glance appears an unusually quick implementation of a high-level strategic decision is, in fact, the result of patient investment and a long-term approach. UBS was one of the first foreign firms to gain a foothold in China with the opening of a Beijing representative office in 1989, followed by another in Shanghai four years later. Last year, we also opened a representative office in Guangzhou. Today, UBS’s USD 800 million Qualified Foreign Institutional Investor (QFII) quota, which allows the firm to trade in domestic shares and bonds on behalf of non-Chinese clients, remains the largest of all QFII quotas. The Investment Bank’s relationship with China dates back to 1985 and it continues to advise or execute a string of landmark transactions, while the Beijing branch, which commenced operations in August 2004, offers corporate and institutional clients in China tailor-made solutions to manage interest rate and currency risks.

Japan remains a priority in all of our businesses. UBS re-launched its wealth management business in Tokyo in September 2004. In December 2005, we received approval to open a wealth management business office (sub-branch) in Osaka, Japan’s second largest city – an important step in further expanding our presence in the country. Japanese merger and acquisition activity has surged in recent years as well, with volumes rising from USD 43 billion and 1,014 deals in 2002 to USD 142 billion and 1,718 deals in 2005. Notable M&A transactions for UBS in Japan in 2005 include advisory roles for Sumitomo Trust & Banking on its acquisition of First Credit; for Sankyo on forming a joint venture company with Daiichi Pharmaceutical; to Nippon Shinpan on its merger with UFJ Card; and to Shinwa Bank on its formation of a non-performing loan workout joint venture with Orix Corporation.

In India, efforts are concentrated on investment banking advisory and securities trading services via our Mumbai securities company. Established in 1990, unlike many of our competitors, it does not rely on a joint venture partner. UBS executed a number of landmark advisory transactions in India last year, including the largest M&A transaction in the country’s electronics sector, the biggest acquisition by an Indian pharmaceutical company, the largest block trade, the biggest ADS (American Depositary Share) issue, as well as the largest IPO. UBS will open the UBS Service Centre – the firm’s first group-wide initiative in offshoring – in Hyderabad in 2006. Initially, the center will have a capacity for 500 employees capable of providing services to any UBS business.

In Australia, UBS’s business is perhaps the best example of the integrated business model. UBS is pre-eminent in investment banking and securities trading and has a growing asset management presence. The wealth management business has a strong position in a fragmented market, but plans to grow further by recruiting new employees, launching new products and upgrading technology platforms while capitalizing on the strength of the UBS brand in Australia.

Although the outlook for Asia Pacific activity is positive, competition remains intense. There are entrenched rivals in certain segments; some countries remain prone to political upheavals; and the regulatory environment is radically different across jurisdictions. Despite that, UBS remains extremely confident about the region’s future and the opportunities it presents. That is why UBS is doing everything possible to give its businesses in Asia Pacific the facilities, management, and resources they need to expand.