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UBS reports third quarter 2006 result of CHF 2,199 million

Zurich / Basel | | Quarterly Results

- Net profit attributable to UBS shareholders of CHF 2,199 million, down 21% from a year earlier. Net profit from continuing operations was down 15% - Financial businesses contributed CHF 2,114 million to attributable profit from continuing operations, down 16% from the same period a year earlier - Diluted EPS of CHF 1.07 in third quarter 2006, down 13%, or CHF 0.16 from CHF 1.23 a year earlier. Annualized ROE at 25.8% in first nine months of 2006, well above UBS's target of 20% minimum over the cycle - Overall net new money at very healthy CHF 41.9 billion in third quarter, with CHF 26.8 billion inflow from wealth management businesses worldwide - Financial businesses contributed CHF 8,194 million to attributable profit (from continuing operations) in nine months to September, up 20% from CHF 6,845 million a year earlier

UBS reports net profit attributable to its shareholders of CHF 2,199 million in third quarter 2006, down 21% from CHF 2,770 million in the same period a year earlier. Net profit from continuing operations was down 15%.

UBS's industrial holdings, which now comprise only the private equity portfolio, contributed CHF 81 million to third quarter attributable profit.

Financial businesses contributed CHF 2,114 million to attributable net profit from continuing operations. This is 30% lower than second quarter 2006 and 16% below the third quarter 2005 result. Operating income fell 13% from second quarter 2006, in the context of weaker markets and in the absence of disposal gains, which benefited results in second quarter.

"We felt the effects of the May and June market correction in the first part of this quarter as sentiment did not really improve until September -- which is why we were not able to match the very strong performance in the first half," said Clive Standish, Chief Financial Officer.

Compared to third quarter a year earlier, income was up 1%. Weaker revenues from trading activities, mainly in the equities and rates businesses in the Investment Bank, were offset by improvements in other areas, such as fee and commission income, which comprised 58% of overall operating income in third quarter 2006.

Asset-based fees increased in both wealth and asset management, reflecting strong net new money inflows and higher market levels. The Investment Bank generated strong revenues in its advisory and debt underwriting businesses. Debt capital markets recovered significantly from a year earlier. The mergers and acquisitions environment was vigorous.

Notable transactions included advising the world's leading iron ore miner, Companhia Vale do Rio Doce (CVRD), on its acquisition of Canadian-based nickel company Inco. In leveraged finance, where UBS was less strong in the past, it participated in a number of major capital market transactions, including the offering for Anadarko Petroleum in its acquisition of Kerr-McGee Corporation and Western Gas, and Blackstone's acquisition of Travelport.

Net income from interest margin products rose on higher margin lending volumes in the wealth management businesses and the continued growth of the Swiss mortgage business, as well as from wider spreads on client deposits.

Net income from trading activities was down 15% from a year ago. Equities trading income declined 25%, as markets in third quarter were relatively quiet in contrast to a year earlier - when they were exceptionally buoyant. Fixed income trading revenues decreased 15%, reflecting a fall in derivatives trading in the US and Europe, partly offset by resilient client-driven revenues in the rates business.

Total operating expenses were CHF 7,715 million in third quarter 2006, up 8% from a year earlier, due to higher general and administrative and personnel expenses, as UBS continued to expand its business and hire new people in key functions.

Personnel expenses rose on higher salary costs, with the continued hiring of new employees, partially offset by lower performance-related accruals. General and administrative expenses increased, as UBS recorded a provision of CHF 141 million related to a long-term lease on an office building in New Jersey. Professional fees rose from third quarter 2005. Costs for IT and outsourcing rose, reflecting both the expansion in business volumes compared with a year earlier, and the build-out of infrastructure. Increased levels of staff and business expansion led to higher spending on travel and entertainment, telecommunications and administration. Expenses for marketing and public relations were up as well.

The number of personnel in the financial businesses was 75,593 on 30 September 2006, up 6,024 from 69,569 on 31 December 2005, with staff levels increasing across all businesses. The international and Swiss wealth management business, continuing its growth strategy, added advisors and staff in most regions. The US wealth management business saw employee levels increase as a result of the integration of Piper Jaffray's branch network. The Swiss commercial and retail banking business saw a significant rise in personnel following the annual intake of apprentices. Staff levels at the Investment Bank rose in all businesses, with the majority of the increase in IT and finance functions and, to a lesser extent, in operations.

BIS Tier 1 ratio, risk-weighted assets

The BIS Tier 1 ratio was 12.3% on 30 September 2006, up marginally from 12.2% on 30 June 2006. Risk-weighted assets stood at CHF 331.7 billion on 30 September 2006, up CHF 15.8 billion from 30 June 2006, driven in particular by the appreciation of the US dollar against the Swiss franc.

Lending-related risk-weighted assets in Global Wealth Management & Business Banking grew as a result of the increase in collateralized lending and Swiss residential mortgages. The acquisition of ABN AMRO's futures and options business, drawdowns of credit facilities by Investment Bank clients and, to a lesser extent, higher lending to US mortgage originators also contributed to the increase. Risk-weighted assets driven by market risk were up, mostly related to the Investment Bank's US-based business. BIS Tier 1 capital on 30 September 2006 amounted to CHF 40.6 billion, up from CHF 38.4 billion on 30 June 2006, driven by the quarterly net profit and positive currency impacts.

Outlook

A discernible pick-up in market activity in September has carried over into a good start to the fourth quarter. Equity indices have climbed to new records. Short-term expectations for economic growth are positive, industry deal pipelines and investor confidence intact. UBS's competitive strength will allow it to capture revenue opportunities around the world while it continues to execute strategy and invest in its areas of focus.

Developments in the world's financial markets - which remain an important driver in many of UBS's businesses - are never fully predictable. Thanks to the strong performance in the first half of 2006 and the resilience of UBS's revenues through a difficult summer, results for the first nine months are significantly stronger than in the same period a year ago. Financial businesses net profit attributable to shareholders (from continuing operations) in the nine months to 30 September 2006 was CHF 8,194 million, up 20% from CHF 6,845 million a year earlier.

"At this point, it looks as though we will remember 2006 as another record year for UBS - in terms of both financial results and strategic progress," said Clive Standish.

Performance against targets

UBS focuses on four key performance indicators, designed to ensure the delivery of continuously improving returns to shareholders. All are calculated based on results from continuing operations. The first two, return on equity and diluted earnings per share, are based on the results of the entire firm. The cost/income ratio and net new money indicators are limited to the financial businesses. On this basis, performance indicators in third quarter 2006 show:

  • annualized return on equity was 25.8% in the first nine months of 2006, down from 27.4% in the same period a year earlier, but well above our target of 20% minimum over the cycle. The decrease was driven by the growth in the average equity base, only partially offset by higher annualized profit.

  • diluted earnings per share of CHF 1.07, down 13% or CHF 0.16 from CHF 1.23 in the same quarter a year earlier, reflecting the decrease in net profit, partly offset by a 2% reduction in the average number of shares outstanding following continued share buybacks.

  • a cost/income ratio in the financial businesses of 73.8%, up from 68.9% in the same quarter last year. Revenues remained practically flat, while costs rose, mainly on higher general and administrative expenses related to the expansion of the business and investment in support of further growth. Costs were also up on higher salary expenses.

  • net new money of CHF 41.9 billion, down from a record high of CHF 51.2 billion a year earlier. Inflows remained strong worldwide. The wealth management units recorded inflows of CHF 26.8 billion this quarter, down from CHF 31.1 billion in third quarter 2005. Inflows in the international and Swiss wealth management business rose to CHF 23.4 billion, driven by inflows from Asia and the Americas. Within this, net new money in European Wealth Management was CHF 2.7 billion in third quarter 2006, down from CHF 5.6 billion in third quarter 2005, as asset gathering slowed in July and August. Strong inflows in Italy and the UK were partly offset by small outflows in other European markets. Inflows into the domestic wealth management business in the US were CHF 3.4 billion in third quarter, down sharply from the record of CHF 9.9 billion a year earlier. Global Asset Management inflows fell to CHF 15.5 billion, down from the strong CHF 19.9 billion result a year earlier. Of the total, CHF 8.8 billion was into money market funds, which tend to experience larger quarterly swings than other asset classes. Additionally, inflows were seen in alternative and quantitative investments, fixed income, real estate, and multi-asset mandates. The Swiss retail banking business recorded net new money outflows of CHF 0.4 billion.

The inflow of UBS net new money in the first nine months of 2006 totaled CHF 126.2 billion, equivalent to 5% of the underlying asset base at year-end 2005.

Invested assets

Invested assets totaled CHF 2,879 billion at the end of September, up 8% from 30 June 2006, benefiting from rising financial markets, the inclusion of the Piper Jaffray branch network and the rise in the US dollar against the Swiss franc.

Results from the Financial Businesses

Global Wealth Management & Business Banking
Global Wealth Management & Business Banking pre-tax profit fell 12% to CHF 1,837 million in third quarter 2006, from CHF 2,094 million in second quarter 2006.

Pre-tax profit for Wealth Management International & Switzerland, at CHF 1,226 million, was down 4% from the record second quarter 2006 result. Total operating income fell 4%, as non-recurring income declined on significantly lower client activity levels. Recurring income rose, benefiting from the higher asset base.

Operating expenses were down 4% from second quarter 2006. Personnel expenses fell, mainly reflecting lower performance-related compensation, which declined with revenues. General and administrative expenses were up from second quarter on higher marketing and public relations expenses, in support of continued business expansion.

Income in the European wealth management business fell 1% to CHF 250 million in third quarter 2006. The business was profitable for the third consecutive quarter. The net new money inflow in the first three quarters of 2006 totaled CHF 16.4 billion, reflecting an annualized net new money growth rate of 19% of the underlying asset base at year-end 2005, with positive contributions from all five target markets.

In third quarter 2006, Wealth Management US reported pre-tax profit of CHF 43 million, down 76% compared with second quarter 2006. The decline mainly reflected the New Jersey office lease provision and Piper Jaffray integration costs.

Total operating income in third quarter 2006 was up 3% from second quarter 2006. In US dollar terms, operating income rose 2% from the second quarter. A record recurring income result offset the decline in commissions, reflecting lower client trading activity.

In third quarter 2006, Business Banking Switzerland reported a pre-tax profit of CHF 568 million, 10% lower than second quarter 2006. Total operating income in third quarter 2006 was down 4% from second quarter 2006. Net interest income fell, mostly reflecting the higher rates clients receive for saving accounts. Non-interest income declined, mainly due to lower client activity levels.

The loan portfolio, at CHF 143.5 billion on 30 September 2006, was CHF 0.3 billion above its level on 30 June 2006. Increased demand for private client mortgages more than offset the continuing workout of the recovery portfolio.

Global Asset Management
Global Asset Management's pre-tax profit was CHF 284 million in third quarter 2006, down 15% from second quarter 2006. The decrease was related mainly to Dillon Read Capital Management (DRCM), which was included in the business group's results for the full quarter for the first time. It also reflected lower wholesale intermediary fees, a result of the decline in the average asset base during the quarter. This was partly offset by higher management and performance fees from alternative and quantitative investments.

Investment Bank
The Investment Bank's pre-tax profit was CHF 1,083 million in third quarter 2006, down 22% from the same period a year earlier. Lower revenues in equities and fixed income, rates and currencies were partly offset by a significant increase in investment banking revenues. Expenses primarily rose on investments in IT infrastructure and business expansion initiatives.

Total operating income in third quarter 2006 was down 4% from the same quarter a year earlier.

Equities business revenues fell 13% from the same period in 2005. Most businesses, except for prime brokerage and exchange traded derivatives, reported declines. Overall, cash equities revenues decreased due to increased facilitation requirements by clients in the US and Europe. These movements were partly offset by higher commissions following increased volumes in global markets. Revenues in the derivatives business decreased primarily due to fewer business opportunities in Asia Pacific. Prime brokerage services continued to grow, reflecting the increase in client numbers and customer balances. Proprietary revenues fell in comparison to third quarter 2005. Compared with second quarter 2006, equities revenues were down 24% as most businesses, except for proprietary trading, reported declines. This mainly reflected the gains on the sale of participations recorded in second quarter 2006 and overall portfolio performance.

Fixed income, rates and currencies revenues were down 7% from the same quarter a year ago. Client-driven revenues in the rates business were resilient although UBS experienced lower revenues from derivatives trading in the US and Europe. Revenues in mortgage-backed securities and energy trading were up. Compared with last year, the credit businesses delivered a solid result, especially in the area of leveraged finance and structured credit, reflecting a high number of deals completed in third quarter. Municipal securities revenues were down compared with a year earlier. Foreign exchange and cash and collateral trading revenues increased, positively impacting performance. The business also benefited from increased revenues in the metals business. Compared with second quarter 2006, fixed income, rates and currencies revenues were down 25%, with lower rates and foreign exchange revenues partially offset by increases in the securitized products and municipal securities businesses.

Investment banking revenues rose 35% from third quarter 2005 - the best third quarter performance in the last five years. All regions, especially Europe and Asia Pacific, benefited from the positive environment for mergers and acquisitions. Revenues from the advisory business increased as clients took advantage of strategic opportunities. The capital markets business saw solid growth in debt capital markets and leveraged finance. Compared with second quarter 2006, investment banking revenues were essentially unchanged.

Total operating expenses in third quarter 2006 were up 3% from the same period last year. Personnel expenses were down 6% from a year earlier, as the rise in salary and recruitment costs due to increasing staff levels were more than offset by lower bonus accruals and the transfer of DRCM personnel from the Investment Bank to Global Asset Management. General and administrative expenses increased by 29%. IT costs were up due to the continued build out of the IT platform in support of recent and expected future business growth. Professional fees rose, due to legal and advisory fees related in particular to the transfer of DRCM to Global Asset Management while administration costs, along with travel and entertainment expenses, increased as a result of business expansion.

Market risk for the Investment Bank, as measured by the average 10-day 99% confidence Value at Risk (VaR), increased to CHF 453 million in third quarter 2006 from CHF 408 million in second quarter. VaR was reduced towards the end of the quarter to CHF 398 million, only slightly higher than the previous quarter-end level of CHF 390 million.

Cautionary statement regarding forward-looking statements

This communication contains statements that constitute "forward-looking statements", including, but not limited to, statements relating to the implementation of strategic initiatives and other statements relating to our future business development and economic performance. While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, (1) general market and macro-economic trends, (2) legislative developments, governmental and regulatory trends, (3) movements in local and international securities markets, currency exchange rates and interest rates, (4) competitive pressures, (5) technological developments, (6) changes in the financial position or creditworthiness of our customers, obligors and counterparties and developments in the markets in which they operate, (7) management changes and changes to our Business Group structure and (8) other key factors that we have indicated could adversely affect our business and financial performance which are contained in other parts of this document and in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this document and in documents furnished by UBS and filings made by UBS with the SEC, including UBS's Annual Report on Form 20-F for the year ended 31 December 2005. UBS is not under any obligation to (and expressly disclaims any such obligations to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

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