UBS - Capital management

The approach we take to capital management is one of our hallmarks. We endeavour to maintain strong debt ratings and sound capital ratios (see capital strength box on the next page), as they help ensure our position as one of the best-capitalized financial services firms in the world. Being strongly capitalized allows us to invest in the growth of our businesses – whether organically or by acquisition. If we do not see opportunities to invest in growth, we return capital to our shareholders – while maintaining a high BIS Tier 1 ratio.

In managing our capital, we look at eligible and required capital and forecast their future development. Dividend payments and share buyback programs are the main tools by which we manage our capital base. That, along with the capital securities we issue, gives us the means to manage our Tier 1 and total capital ratios, helping us protect our strong capitalization and credit ratings while ensuring we continue to create sustainable value for shareholders.

Distribution of cash to shareholders in 2005

We transferred a total of CHF 6.7 billion in equity to our shareholders in 2005. The total amount was split between our dividend payment of CHF 3.1 billion made in April 2005 and the CHF 3.6 billion in shares we repurchased during 2005 for purposes of cancellation. For more details on our dividend payments, see page 92 of this section.

Capital securities

In 2005, UBS placed CHF 1.6 billion in euro denominated preferred shares and raised CHF 2.6 billion in subordinated debt in various currencies in the capital markets. Outstanding Tier 2 capital securities accounted for CHF 7.2 billion in eligible capital on 31 December 2005. In total, UBS has CHF 5.0 billion in preferred shares (outstanding), issued through trusts or subsidiaries and qualifying as Tier 1 capital under regulatory rules.

Capital requirement

The capital we are required to hold by our regulator, the Swiss Federal Banking Commission (SFBC), is determined by our balance sheet, off-balance sheet and market risk positions – risk-weighted according to defined criteria. For instance, counterparty-related risks are weighted according to type of counterparty instrument and collateral. Market risk positions are generally risk-weighted based on VaR (for more details please refer to note 28 to the financial statements). Most of our capital requirement arises from balance sheet assets. Off-balance sheet positions and market risk positions each represent less than 10% of risk-weighted assets and, correspondingly, of our total capital requirement. For the calculation of BIS capital adequacy, risk-weighted assets are related to capital eligible according to BIS rules.

The calculation of the capital requirement, as applicable to UBS under SFBC regulations, differs in certain respects from the calculation under the Basel Capital Accord (BIS guidelines). The most important differences are:

– where BIS guidelines apply a maximum risk weight of 100%, the SFBC applies risk weights above 100% to certain asset classes (for example real estate, fixed assets, intangibles, and non-trading equity positions)

– where the BIS guidelines apply a 20% risk weight to obligations of OECD banks, the SFBC applies risk weights of 25% to 75%, depending on maturity.

As a result of the differences in regulatory rules, UBS’s risk-weighted assets are higher, and our ratios of total capital and Tier 1 capital to risk-weighted assets, are lower, when calculated under the SFBC regulations than under BIS guidelines.

On 31 December 2005, risk-weighted assets were CHF 310.4 billion, up 17% from CHF 264.8 billion a year earlier. The increase was driven by the loan portfolio of the Investment Bank, and an increase in our mortgage lending activities.

Capital ratios

The ratios we report measure capital adequacy by comparing our eligible capital (Tier 1 and total) with total risk-weighted assets. UBS has always had total capital and Tier 1 capital well in excess of the minimum requirements of both the BIS and the SFBC.

BIS Tier 1 capital increased to CHF 39.9 billion on 31 December 2005 from CHF 31.6 billion a year earlier, reflecting the extraordinary gain from the disposal of Private Banks & GAM and a strong operational profit in 2005. As a result, our BIS Tier 1 ratio increased by 1 percentage point to 12.9% at the end of 2005 from 11.9% on 31 December 2004.

Capital adequacy

	As at
CHF million, except ratios	31.12.05	31.12.04	32.12.03
BIS Tier 1 capital	39,943	31,629	30,189
of which hybrid Tier 1 capital ¹	4,975	2,963	3,224
BIS total capital	43,917	36,444	34,005
of which hybrid Tier 2 capital
BIS Tier 1 capital ratio (%)	12.9	11.9	12.0
BIS total capital ratio (%)	14.1	13.8	13.5
Balance sheet assets	252,363	218,476	212,673
Off balance sheet and other positions	37,011	28,205	21,456
Market risk positions ²	21,035	18,151	18,269
Total BIS risk-weighted assets	310,409	264,832	252,398

¹ Preferred securities. ² BIS risk-weighted asset equivalent of market risk capital requirement.

Capital strength

Our financial stability stems from the fact that we are one of the best-capitalized banks in the world. We believe that this is a key part of our value proposition for both our clients and our investors.

In December 2005, Moody’s affirmed UBS’s Aa2 long-term, Prime-1 short-term, and B+ bank financial strength ratings and commented that “the ratings of UBS remain underpinned by its strong client franchises with leadership positions in the majority of its core businesses, resilient cross-cyclical revenue generation through diversification across products and regions, good growth prospects for most of its businesses, and strong economic and regulatory capital positions.”

In February 2006, the rating agency Standard & Poor’s affirmed UBS’s AA+ long-term, and A-1+ short-term ratings and commented: “The affirmation reflects UBS’ success in leveraging its strong and diverse franchise to produce robust profitability, coupled with solid capitalization and sound liquidity. UBS holds leading positions in its chosen markets. The key strengths of its business profile are the strong cash flow, high returns, and low capital requirements of its asset-gathering businesses.”

In December 2005, Fitch Ratings affirmed UBS’s AA+ / F1+ / A/B ratings and commented: “UBS’s ratings reflect its excellent private banking / wealth management franchise, diversified revenues, consistently good profitability, a cautious approach to risk, and strong capitalization.”

UBS’s ratings remain among the best of any major globally active financial institution. Well capitalized, with strong and balanced cash-flow generation, and a well-controlled risk profile, UBS is one of the soundest financial institutions worldwide.

UBS’s long-term credit ratings are shown in the table below. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency. A security rating is not a recommendation to buy, sell or hold securities and each rating should be evaluated independently of any other rating. There is no assurance that any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency’s judgment, circumstances so warrant.

Long-term ratings

	As at
	31.12.05	31.12.04	31.12.03
Fitch, London	AA+	AA+	AAA
Moody’s, New York	Aa2	Aa2	Aa2
Standard & Poor’s, New York	AA+	AA+	AA+