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UBS AG 6-K 2009 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934 Date: August 4, 2009
UBS AG
(Registrant’s Name)
Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, and
Aeschenvorstadt 1, CH-4051 Basel, Switzerland (Registrant’s Address) Indicate by check mark whether the registrant files or will file annual reports under cover of Form
20-F or Form 40-F.
Form 20-F
þ
Form 40-F o
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Table of Contents
This Form 6-K consists of the Financial Reporting Second Quarter 2009, together with additional
information regarding supplemental guarantor information pursuant to Rule 3-10 of Regulation S-X
and ratio of earnings to fixed charges for UBS AG, which appear immediately following this page.
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quarterly report
1 | UBS Group
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UBS key figures
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UBS and its businesses UBS is a global firm providing financial services to private, corporate and institutional clients. Its strategy is to focus on international wealth management and the Swiss banking business alongside its global expertise in investment banking and asset management. Under Swiss company law, UBS is organized as a limited company, a corporation that has issued shares of common stock to investors. UBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank.
Wealth Management & Swiss Bank
Wealth Management Americas
Global Asset Management
Investment Bank
Corporate Center
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Second quarter 2009 report Dear shareholders, As previously communicated, turning around our business requires time and a steadfast commitment to the right strategy. While our second quarter results were clearly unsatisfactory, they show significant progress towards returning to profitability and restoring client trust.
In the second quarter, we recorded a net loss
attributable to shareholders of CHF 1,402 million
and an operating loss before tax of CHF 1,316
million. A CHF 582 million charge for
restructuring costs adversely affected our results
in the short term, but these costs were necessary
for the achievement of the longer-term cost
savings we have targeted. An even bigger driver of
our quarterly loss was a charge of CHF 1,213
million due to the reversal of own credit. While
this is accounted for as a charge to income, it
largely reflects the significant improvement in
our credit spreads during the quarter. The
reported result also reflects a further goodwill
impairment charge of CHF 492 million arising from
the announced sale of UBS Pactual, that is
expected to close in the third quarter. Excluding
these three items, an operating profit before tax
of CHF 971 million would have been recorded.
The operating performance of our businesses has improved compared with prior quarters. Group revenues were up 16%, mainly reflecting a marked reduction in losses from legacy risk positions in the fixed income business of the Investment Bank. Wealth Management & Swiss Bank saw a small increase in revenues, reflecting lower credit loss expenses and higher business volumes. Wealth Management Americas reported lower revenues than in the prior quarter, although revenues improved slightly on a US dollar basis. The Investment Bank’s equities business and investment banking department both showed significant improvements in their quarterly performance. The business division’s fixed income, currencies and commodities unit achieved a marked reduction in losses from legacy risk positions, but its underlying business remained weak. Global Asset Management reported improved revenues, primarily due to increased performance fees. Net outflows of client assets continued. Wealth Management & Swiss Bank recorded net outflows of CHF 16.5 billion in the quarter. These outflows were concentrated in the international business, whereas the Swiss domestic business was quite stable. Accordingly, we believe that the US cross-border issue and our exit from the US cross-border business are having a major influence on these results. We believe that this was also the major factor, directly or indirectly, in Wealth Management Americas’ net outflows of CHF 5.8 billion. Global Asset Management recorded net new money outflows of CHF 17.1 billion, mainly associated with clients moving away from money market investments and the follow-on effect of client withdrawals from our wealth management businesses. However, most of the lead investment performance indicators of this business division remained positive, and its equities unit saw the first net inflows in many quarters. We have continued to reduce our fixed cost base in line with our strategic positioning plan. We are on track with our plans to reduce annual fixed costs by CHF 3.5–4.0 billion compared with 2008’s run rate and to reduce total staff headcount to 67,500 by 2010. While expenses increased on a reported basis due to higher restructuring costs and higher personnel expenses, our fixed cost base declined and group headcount was down by 4,400 to just under 72,000. We experienced further large reductions in our balance sheet and risk exposures. Our consolidated balance sheet fell by over CHF 250 billion in the second quarter, driven mainly by a reduction in carrying values in the derivatives books in the Investment Bank. Our risk-weighted assets fell by CHF 30 billion in the quarter to CHF 248 billion. Credit loss expenses were significantly lower in the second quarter than they have been in recent periods, reflecting the considerable progress we have made in reducing risk in the Investment Bank in our legacy positions. We have continued to take advantage of opportunities to restructure our exposure to monoline insurers. Although we have materially reduced our overall exposure to this sector, it is the principal remaining legacy risk category of concern to management. Our capital base was strengthened by our recent share placement of approximately 293 million new shares from authorized capital, with our BIS tier 1 capital ratio increasing to 13.2% as of the end of June. Our quarter-end tier 1 capital ratio was considerably higher than that of most of our European peers. Taking into account the estimated effects from the announced sale of UBS Pactual, BIS tier 1 capital would increase by approximately CHF 1 billion and risk-weighted assets would be CHF 3 billion lower. Upon closing, UBS’s BIS tier 1 ratio is expected to increase by approximately 50 basis points, which would increase the 30 June 2009 pro forma ratio to 13.7%. As a result of our strengthened capital position and the further substantial reductions we have made to our balance sheet, the Group leverage ratio was 3.5%, exceeding the Swiss Financial Market Supervisory Authority’s (FINMA’s) 3% minimum. We look forward to a definitive resolution of the US cross-border matter. On 31 July, the US Government stat- 2
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ed that an agreement in principle had been reached on the major issues relating to the IRS’s John Doe Summons enforcement action, and that the parties expect to resolve the remaining issues shortly. This is a positive development in a matter that has adversely affected our efforts to regain the trust of our clients and to restore momentum to our businesses. Outlook – Market conditions improved steadily during the second quarter, with asset prices rising as investor confidence began to return in many credit and equity markets. In spite of these positive economic signs, the overall economic environment in most of the regions in which we operate remains recessionary. Sustainable recovery is not yet visible.
We have seen increased
activity levels among our wealth management
clients, whose investment behavior appears
progressively less risk averse. This should
improve the fee-earning potential of our wealth
and asset management businesses. For our
investment banking businesses, the current
positive momentum in the equity markets provides a
good
backdrop for improvement in our equities and
investment banking franchises. Credit markets are
also buoyant, but our restrictive allocation of
balance sheet and other resources to many of our
fixed income businesses reflects our conservative
view on risk taking as those businesses rebuild.
Overall, our outlook remains cautious, consistent
with our view that economic recovery will be
constrained by low credit creation and the
structural weaknesses in consumers’ and
governments’ balance sheets.
4 August 2009 Yours sincerely,
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Second quarter 2009 report Corporate calendar and information sources
Annual publications: Annual report (SAP no. 80531; German and English). Includes a letter to shareholders and a description of: UBS’s strategy, performance and responsibility; the strategy and performance of the business divisions and the Corporate Center; risk, treasury and capital management at UBS; corporate governance and executive compensation; and financial information, including the financial statements. Review (SAP no. 80530; English, German, French and Italian). The booklet contains key information on UBS’s strategy and financials. Compensation report (SAP no. 82307; English and German). Compensation of senior management and the Board of Directors. Quarterly publications: Letter to shareholders (English, German, French and Italian). The letter provides a quarterly update from UBS’s executive management on the firm’s strategy and performance. Financial report (SAP no. 80834; English). This report provides a detailed description of UBS’s strategy and performance for the respective quarter. How to order reports: The annual and quarterly publications are available in PDF format on the internet at www.ubs.com/ investors/topics in the reporting section. Printed copies can be ordered from the investor services section of the website. Alternatively, they can be ordered by quoting the SAP number and the language preference, where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland. The Investor Relations website: www.ubs.com/investors. This provides the following information on UBS: financial information (including results-related SEC filings); corporate information; UBS share price charts and data and dividend information; the UBS event calendar; and the latest presentations by management for investors and financial analysts. Available in English and German, with some sections also available in French and Italian. Results presentations: UBS’s quarterly results presentations are webcast live. A playback of the most recent presentation is downloadable at www.ubs.com/presentations. Messaging service / UBS news alert: On the www.ubs.com/newsalert website, it is possible to subscribe to receive news alerts about UBS via SMS or e-mail. Messages are sent in English, German, French or Italian and it is possible to state preferences for the theme of the alerts received. 4
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Market climate Market climate There were no clear signals of a return to positive global growth during the second quarter – the unemployment rate continued to rise across all regions and household spending remained conservative as consumers continued to reduce their debts. There was, however, a slowdown in the pace of economic deterioration in most economies. This reflected several key factors: the end of reductions in inventory in the industrial sector, the positive impact of significant monetary and fiscal stimulus in many economies (which started in 2008 and continued throughout the first half of 2009) and improved confidence in specific areas of the economy. Policy responses to the financial crisis are beginning to shift away from the initial emergency interventions to focus on tighter regulatory frameworks, and both the US and EU have announced plans for significant regulatory reforms. Swiss regulatory authorities are also considering what measures should be taken to reduce the systemic risk associated with Switzer-land’s two largest banks.
Signs of stabilization in the global economy
prompted an improvement in market climate and a
rally in stock prices, which began in March 2009,
continued during the second quarter. During this
period, the MSCI World Index recovered by 19.7% to
end the quarter positive year-to-date, the S&P 500
Index rose 15.2% and the Dow Jones STOXX 600 Index
climbed 23.2%. Emerging markets recovered very
significantly with a rise in stock prices of
33.6%, as measured by the MSCI Emerging Markets
Index.
The improved investment climate and increased
appetite for risk among investors were also
reflected in lower volatility in equity markets,
though volatility remained historically high.
Rising stock prices and reduced volatility
contributed to an increase in primary issuance of
equity as financial and non-financial companies
issued capital to restructure their
balance sheets. During the second quarter, the global deal value of equity issuances totaled USD 279 billion according to Dealogic, almost four times the first quarter amount. In the corporate bond sector, credit spreads
continued to contract from the historically high
levels seen towards the end of 2008. At the end of
second quarter 2009, credit spreads in the high
yield corporate sector were about 50% above their
historical average, compared with 200% higher in
December 2008. Fears of rising inflation due to
increasing public debt across the world
contributed to government bonds underperforming
corporate bonds in second quarter 2009, a reversal
from recent quarters. The increased attractiveness
of corporate debt among investors led to a
continued increase in corporate bond issuances
during the second quarter. According to Dealogic,
the global debt capital market deal value reached
USD 1,711 billion in second quarter 2009, in line
with the historically high levels seen in the
prior quarter.
Central banks kept short-term interest rates
at historically low levels during the second
quarter, signaling that these could remain low
until economic recovery materializes. Long-term
interest rates were more volatile during the
quarter, reflecting concerns about the
implications of government stimulus efforts on
future inflation expectations. The increased risk
appetite experienced during the quarter
contributed to a depreciation of the US dollar and
the Japanese yen against the Swiss franc, while
the British pound appreciated against the Swiss
franc. Against the euro, the Swiss currency
remained broadly stable during the second quarter
as the Swiss National Bank continued intervening
in the foreign exchange market. Commodity prices
rebounded strongly during the second quarter as
increasing optimism about the global economy,
particularly in emerging markets, contributed
towards a lift in price levels from earlier in the
year.
Equity indices
Major currencies against the Swiss franc
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Recent developments Recent developments On 25 June 2009, UBS placed 293,258,050 newly issued shares from authorized capital with a small number of large institutional investors at a price of CHF 13.00 per share. After deducting costs associated with the placement, the amount of new equity capital raised when the transaction was completed on 30 June 2009 was approximately CHF 3.8 billion. As a result of this transaction, and the
issuance of 10,685 shares to source equity-based
compensation plans, total UBS shares issued
increased to 3,225,849,284 at 30 June 2009 from
2,932,580,549 at 31 March 2009. Including the
outstanding mandatory convertible notes (MCNs) and
adjustments made to the terms of the MCNs
following the above-mentioned capital increase,
shares outstanding for earnings per share were
3,786,400,644 at 30 June 2009, up from
3,506,384,469 at 31 March 2009. Refer to the
“Capital management” section and “Note 8 Earnings
per share (EPS) and shares outstanding” in the
financial statements of this report for more
information.
Changes to the Group Executive Board On 25 June 2009, UBS announced the appointment of Chi-Won Yoon as the Chairman and CEO of Asia Pacific and a member of the Group Executive Board, with immediate effect. Chi-Won Yoon succeeds Rory Tapner who is leaving UBS. Update on the announced sale of UBS Pactual Transaction description Impact on UBS’s income statement and balance sheet In second quarter 2009, re-measurement of UBS
Pactual to “fair value less costs to sell” led to
the recognition of an additional goodwill
impairment charge of CHF 492 million. This
goodwill impairment charge included primarily the
effects from foreign exchange losses that were
previously deferred in equity and from the
translation of the US dollar-denominated sales
price into Swiss francs. The operational results
of UBS Pactual continued to be reported in the
business divisions Investment Bank, Global Asset
Management and Wealth Management Americas, and in
the Corporate Center. For management and segment
reporting purposes, the goodwill impairment charge
in second quarter 2009 was also presented in the
respective business division results in the
“Impairment of goodwill” line item. However,
consistent with UBS’s internal policy that foreign
exchange exposures related to investments in
subsidiaries are managed by Group Treasury and
related gains and losses are recognized in the
Corporate Center,
the goodwill impairment charge was then
charged through the “Services (to) / from other
business divisions” line item to the Corporate
Center. At 30 June 2009, and after this
impairment, the goodwill allocated to UBS Pactual
amounted to CHF 416 million. The net impact of UBS
Pactual on UBS’s second quarter results was a
pre-tax loss of CHF 428 million, including the
abovementioned goodwill impairment charge of CHF
492 million.
Upon the closing of the transaction, UBS
expects to realize an additional loss in the range
of CHF 300 million, predominantly attributable to
foreign currency translation effects that
accumulated in equity during the holding period of
UBS Pactual. Additionally, upon closing of the
transaction, UBS expects its BIS tier 1 capital to
increase by approximately CHF 1 billion and
risk-weighted assets to decrease by CHF 3 billion.
Upon closing, UBS’s BIS tier 1 ratio is expected
to increase by approximately 50 basis points,
which would increase the 30 June 2009 pro forma
ratio to 13.7%. Refer to UBS’s financial report
for first quarter 2009 and “Note 14 Changes in
organization” in the financial statements of this
report for more information.
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Accounting changes Accounting changes Accounting changes in second quarter 2009 IAS 1 (revised) Presentation of Financial Statements When implementing these amendments, UBS also
adjusted the format of its “Statement of changes
in equity” and replaced the “Statement of
recognized income and expense” with a “Statement
of comprehensive income”. Preferred securities
issued by consolidated trusts are reported as
“Equity attributable to minority interests”, as
they are equity instruments held by third parties.
As securities issued by consolidated trusts
comprise the largest part of UBS’s equity
attributable to minority interests, UBS discloses
movement information in a separate table.
UBS has also re-assessed its accounting
treatment of dividends from trust preferred
securities. In line with the classification of
trust preferred securities as equity instruments,
UBS now recognizes liabilities for the full
dividend payment obligation once a coupon payment
becomes mandatory, i.e. when it is triggered by a
contractually determined event. In the income
statement, the same amount is reclassified from
net profit attributable to UBS shareholders to net
profit attributable to minority interests.
The implementation of this policy as of 1
April 2009 resulted in the reclassification of
equity attributable to UBS shareholders of CHF 176
million and equity attributable to minority
interests of CHF 354 million to liabilities (total
CHF 530 million). Net profit attributable to UBS
shareholders decreased by CHF 176 million, and net
profit attributable to minority interests
increased correspondingly. Total net profit, BIS
capital and capital ratios were not impacted. At
transition date, 1 April 2009, year-to-date basic
earnings per share and diluted earnings per share
were both reduced by CHF 0.05 to CHF (0.61) and
CHF (0.62) from CHF (0.56) and CHF (0.57)
respectively.
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Key performance indicators Key performance indicators
1 For the definitions of UBS’s key performance indicators refer to the “Key performance indicators”
section on page 11 of UBS’s first quarter 2009 report. 2 Not meaningful if either the current
period or the comparison period is a loss period.
3 Excludes interest and dividend income.
4 Not
meaningful if operating income before credit loss
(expense) / recovery is negative.
5 Restatement
for netting of cash collateral in first quarter 2009 reduced adjusted assets by CHF 62 billion and
improved FINMA leverage ratio to 2.71% from 2.56%.
1 Excludes interest and dividend income.
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Group results Group results
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Net loss attributable to UBS shareholders was CHF 1,402 million compared with CHF 1,975 million. This was mainly driven by lower losses on risk positions from businesses now exited or in the process of being exited by the Investment Bank. Second quarter results were significantly affected by a charge of CHF 1,213 million on own credit for financial liabilities designated at fair value, restructuring charges of CHF 582 million and goodwill impairment charges of CHF 492 million in relation to the announced sale of UBS Pactual. Net loss from continuing operations was CHF 1,115 million compared with a net loss of CHF 1,852 million. Operating income: 2Q09 vs 1Q09 Total operating income increased to CHF 5,770 million from CHF 4,970 million. Net interest income and net trading income Net income from trading businesses The trading results of FICC were less
impacted by losses on risk positions from
businesses now exited or in the pro-
cess of being exited; however other FICC trading revenues were weaker, notably in the emerging markets and foreign exchange and money market distribution businesses. Within the Investment Bank’s equities businesses, decreases in derivatives revenues and equity-linked revenues were more than offset by increases in proprietary trading and prime brokerage. The Investment Bank recorded a loss on own
credit on financial liabilities designated at fair
value of CHF 1,213 million in net trading income,
compared with a gain of CHF 651 million in the
prior quarter. The own credit gain on financial
liabilities designated at fair value still held as
at 30 June 2009 amounted to CHF 2,412 million
life-to-date. Refer to “Note 11 Fair value of
financial instruments” in the financial statements
of this report for more information on own credit.
Net income from interest margin businesses Net income from treasury activities and other
1 Includes lending activities of the Investment Bank.
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Group results Credit loss expenses In the Investment Bank, credit loss expenses
in second quarter 2009 were CHF 369 million, of
which CHF 208 million related to assets-backed
securities that were reclassified in previous
quarters from “Held for trading” to “Loans and
receivables”. The remaining credit losses of CHF
161 million related to loans originated in the
ordinary course of business across a number of
different sectors. First quarter credit loss
expenses were mainly due to loan positions which
were entered into with the intent to syndicate or
distribute but where the syndication or
distribution markets became illiquid.
Wealth Management & Swiss Bank reported
credit loss expenses of CHF 20 million in second
quarter 2009, a significant decrease compared with
the CHF 119 million reported in the prior quarter.
This decrease was mainly due to the fact that
allowances made against lombard loans in prior
periods were released in the second quarter.
Refer to the “Risk management and control”
section of this report for more information on
credit risk.
Net fee and commission income
Other income Operating expenses: 2Q09 vs 1Q09 Total operating expenses increased 9% to CHF 7,093 million from CHF 6,528 million. Personnel expenses General and administrative expenses Depreciation, amortization and goodwill
impairment 12
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that was attributed to the business divisions (refer to the “Recent developments” section of this report for additional information on this transaction). UBS recognized a net income tax benefit of CHF 208 million in its income statement for second quarter 2009. This includes a deferred tax benefit of CHF 371 million, which mainly relates to a release of valuation allowances against deferred tax assets in respect of tax losses and temporary differences, taking into account latest forecasts of taxable profits. UBS recognized a net income tax expense of CHF 294 million for first quarter 2009, which mainly reflected a reduction in deferred tax assets recognized of CHF 312 million. Summary of business division performance: 2Q09 vs 1Q09 Wealth Management & Swiss Bank recorded a pre-tax profit of CHF 932 million, compared with CHF 1,077 million. Operating income was virtually flat, while restructuring charges of CHF 321 million in second quarter 2009 resulted in an increase in operating expenses. Excluding restructuring charges, pre-tax profit for second quarter 2009 would have increased 16% from the prior quarter. Wealth Management Americas recorded
a pre-tax loss of CHF 221 million compared with a
pre-tax loss of CHF 35 million. The second quarter
included restructuring charges of CHF 152 million,
whereas the first quarter included a goodwill
impairment charge of CHF 19 million related to the
announced sale of UBS Pactual. Excluding these
charges, the pre-tax loss for second quarter 2009
would have been CHF 69 million compared with a
first quarter pre-tax loss of CHF 16 million.
Global
Asset Management recorded a
pre-tax profit of CHF 82 million compared with a
pre-tax loss of CHF 59 million. Excluding a
goodwill impairment charge in the first quarter of
CHF 191 million in relation to the announced sale
of UBS Pactual and restructuring charges in both
quarters,
pre-tax profit in the second quarter would have decreased by CHF 30 million, or 22%. Increased performance fees were more than offset by higher personnel expenses. The Investment Bank recorded a
pre-tax loss of CHF 1,846 million compared with a
pre-tax loss of CHF 3,162 million. This change was
driven by lower losses on risk positions from
businesses now exited or in the process of being
exited. An own credit charge of CHF 1,213 million
on financial liabilities designated at fair value
was included in the second quarter result,
compared with an own credit gain of CHF 651
million in first quarter 2009. Operating expenses
were down from the prior quarter, despite higher
personnel expenses, as first quarter expenses
included a goodwill impairment charge of CHF 421
million related to the announced sale of UBS
Pactual.
The Corporate Center recorded a
pre-tax loss from continuing operations of CHF 270
million in second quarter 2009. This was mainly
due to a goodwill impairment charge of CHF 492
million related to the announced sale of UBS
Pactual, which was recorded by the business
divisions and charged to the Corporate Center. The
Corporate Center recorded a pre-tax profit from
continuing operations of CHF 621 million in first
quarter 2009.
Invested assets development: 2Q09 vs 1Q09 Net new money Wealth Management & Swiss Bank Wealth Management Americas
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Group results Global Asset Management Invested assets Net loss attributable to UBS shareholders decreased to CHF 3,376 million from CHF 12,012 million, driven by much lower losses on risk positions in businesses now exited or in the process of being exited by the Investment Bank. Operating expenses were down 15% from the first half of 2008 to CHF 13,621 million, driven by personnel expenses decreasing to CHF 8,542 million from CHF 9,887 million. UBS employed 71,806 people on 30 June 2009, down 4,400, or 6%, compared with 31 March 2009. In comparison with the prior quarter, staff levels for second quarter 2009 decreased by 1,103 in Wealth Management & Swiss Bank, 1,816 in Wealth Management Americas and 143 in Global Asset Management. Over the same period, Investment Bank staff levels decreased by 1,142 and Corporate Center staff levels decreased by 196. As announced on 15 April 2009, staff will be reduced to approximately 67,500 by 2010.
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Balance sheet Balance sheet Second quarter 2009 asset development
Second quarter 2009 development UBS reduced its balance sheet by a further CHF 261 billion during the quarter and held total assets of CHF 1,600 billion on 30 June 2009. Replacement values (RVs) decreased by a similar extent on both sides of the balance sheet, as market movements drove down positive replacement values by 28%, or CHF 211 billion, to CHF 543 billion and negative replacement values by 29%, or CHF 211 billion, to CHF 524 billion. In addition, lending assets fell by CHF 37 billion, collateral trading assets by CHF 12 billion and trading assets by CHF 4 billion. The balance sheet was slightly impacted by
currency movements affecting the Swiss franc
during the quarter (CHF 24 billion). Adjusted to
eliminate these currency effects, the balance
sheet would have declined by CHF 285 billion
during the quarter.
As in prior quarters, almost all reductions
in UBS’s total assets originated from reductions
to the Investment Bank’s balance sheet, which
declined by CHF 276 billion in the second quarter
to CHF 1,259 billion. The balance sheet of Wealth
Management & Swiss Bank grew by CHF 16 billion to
CHF 263 billion, following internal asset
re-allocations, which originated from the
Investment Bank. The balance sheet sizes remained
stable for both Wealth Management Americas and
Global Asset Management, ending the quarter at CHF
38 billion and CHF 22 billion respectively.
Lending largely due to the lower variation margins deposited for derivative instruments, though these were partly offset by current account increases. “Loans” were reduced by CHF 28 billion to CHF 316 billion on 30 June 2009. The second quarter decreases in lending occurred predominantly in the Investment Bank, where they were spread across all major products, including fixed-term loans which were reduced mainly due to the final transfers under the SNB transaction in early April. Although UBS was no longer at risk from these assets they were still held on UBS’s balance sheet at the end of the first quarter. In addition, variation margins deposited by UBS for derivative instruments and the de-leveraging in the prime brokerage business reduced the loan volume. The loan book of Wealth Management & Swiss Bank declined by CHF 3 billion to CHF 203 billion, with the majority of the decline in lombard lending. Borrowing Repurchase / reverse repurchase agreements and securities borrowing / lending In second quarter 2009, UBS increased its secured funding by CHF 5 billion to CHF 109 billion. 15
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Balance sheet The cash collateral on securities borrowed
and reverse repurchase agreements declined by CHF
12 billion to CHF 303 billion on 30 June 2009.
This was due to continued overall balance sheet
reduction measures.
The trading portfolio decreased by CHF 4 billion during the second quarter, ending the period at CHF 286 billion. The composition of the trading inventory changed slightly during the quarter. On the one hand, UBS reduced its traded loans (most of which were part of the last SNB StabFund transaction completed in early April 2009) and debt instruments by CHF 5 billion and CHF 4 billion respectively, while on the other hand liquid money market paper (mainly treasury bills) and equity instruments (resulting from general stock market gains) increased by CHF 4 billion and CHF 2 billion respectively. The positive and the negative replacement values (RVs) of derivative instruments developed in parallel and both decreased strongly, by CHF 211 billion, during second quarter 2009. They ended the quarter at CHF 543 billion and CHF 524 billion, respectively, mainly due to movements in interest rates, credit spreads and currencies. Decreases in positive RVs occurred mainly in interest rate contracts, which dropped by CHF 107 billion, while credit derivative contracts declined by CHF 59 billion and foreign exchange contracts declined by CHF 24 billion. Balance sheet trend
Shareholders’ equity Equity attributable to UBS shareholders was CHF 33.5 billion on 30 June 2009 – an increase of CHF 2.3 billion compared with 31 March 2009. UBS generated CHF 3.8 billion of shareholders’ equity through its private placement of authorized share capital towards the end of the second quarter, which was partly offset by the Group’s net loss of CHF 1.4 billion and by a debit to other comprehensive income recognized in equity of CHF 0.6 billion (refer to the statement of comprehensive income in the “Financial information” section of this report for more information). 16
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Off-balance sheet Off-balance sheet In the normal course of business, UBS enters into arrangements that, under International Financial Reporting Standards, lead to either de-recognition of financial assets and liabilities for which UBS has transferred substantially all risks and rewards, or the non-recognition of financial assets and liabilities received for which UBS has not assumed the related risks and rewards. UBS recognizes these types of arrangements on the balance sheet to the extent of its involvement, which, for example, may be in the form of derivatives, guarantees, financing commitments or servicing rights.
When UBS, through these arrangements, incurs an
obligation or becomes entitled to an asset, it
recognizes them on the balance sheet, with the
resulting loss or gain recorded in the income
statement. It should be noted that, in many
instances, the amount recognized on the balance
sheet does not represent the full gain or loss
potential inherent in such arrangements.
Generally, these arrangements either meet the
financial needs of customers or offer investment
opportunities through entities that are not
controlled by UBS.
UBS continually evaluates whether triggering
events require the reconsideration of the
consolidation conclusions made at the inception of
its involvement with special purpose vehicles,
especially securitization vehicles and
collateralized debt obligations (CDOs). Triggering
events generally include items such as major
restructurings, the vesting of potential rights
and the acquisition, disposal or expiration of
interests. In these instances, special purpose
entities may be
consolidated or de-consolidated depending on how the conditions have changed. If future consolidation of securitization vehicles is required by accounting standards, UBS does not expect this to have a significant impact on its risk exposure, capital, financial position or results of operations.
Off-balance sheet
arrangements include purchased and retained
interests, derivatives and other involvements in
non-consolidated entities and structures. UBS has
originated such structures and has acquired
interests in structures set up by third parties.
“Note 13 Commitments” in the financial
statements of this report presents committed
amounts of undrawn irrevocable credit facilities,
credit guarantees, performance guarantees,
documentary credits and similar instruments. The
“Risk management and control” section of this
report includes a discussion of commitments to
acquire auction rate securities from clients and
information about the RMBS Opportunities Master
Fund, LP, a special purpose entity managed by
BlackRock, Inc. to which UBS sold US-real
estate-related assets in second quarter 2008. The
repositioning of UBS’s Investment Bank in 2008 and
2009 included a substantial downsizing of UBS’s
real estate, securitization and proprietary
trading activities. The downsizing was
substantially advanced by a transfer of
significant securitized positions to the SNB
Stab-Fund in December 2008, in March and April
2009. The table below includes information about
derivative instruments. Refer to UBS’s restated
annual report for 2008 for more information about
UBS’s off-balance sheet commitments.
1 Replacement values based on International Financial Reporting Standards netting. Refer to “Note
23 Derivative instruments and hedge accounting” in the financial statements of UBS’s restated
annual report for 2008. 2 The impact of netting agreements (including cash collateral) with the
Swiss Financial Market Supervisory Authority (FINMA) for capital adequacy purposes was to reduce
positive replacement values to CHF 94 billion on 30 June 2009, CHF 128 billion on 31 March 2009 and
CHF 202 billion on 31 December 2008. 3 The impact of netting agreements (including cash collateral)
with FINMA for capital adequacy is to reduce negative replacement
values to CHF 85 billion on 30 June 2009, CHF 114 billion on 31 March
2009 and CHF 200 billion on 31 December 2008.
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Wealth Management & Swiss Bank Wealth Management & Swiss Bank
1 For definitions of UBS’s key performance indicators, refer to the “Key performance
indicators” section on page 11 of UBS’s first quarter 2009
report. 2 Excludes interest and dividend income. 3 Refer to the “Capital management” section of this report for more information about the
equity attribution framework.
Pre-tax profit for Wealth Management & Swiss Bank decreased to CHF 932 million from CHF 1,077 million. The primary reason for this change was charges of CHF 321 million recorded in second quarter 2009 in connection with the restructuring of the business. Excluding these charges, profit levels for the second quarter would have increased 16% as credit loss expenses and personnel expenses were strongly reduced in the second quarter. 20
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Operating income
Credit loss expenses were CHF 20 million, a
significant decrease from the CHF 119 million in
the first quarter, mainly due to the fact that
allowances made against lombard loans in prior
periods were released in the second quarter.
Operating expenses
General and administrative expenses increased
7% to CHF 434 million. This increase mainly
reflects the real estate-related part of the
restructuring charges booked in second quarter
2009, without which general and administrative
expenses would have been reduced 7% due to lower
operational provisions, travel and entertainment,
information technology (IT) and advertising
expenses in line with the implementation of cost
cutting measures. Expenses for services from other
businesses decreased CHF 13 million to CHF 149
million, reflecting lower charges for IT
infrastructure. Depreciation was at CHF 35
million, up CHF 3 million from the previous
quarter. The amortization of intangible assets was
up by CHF 3 million to CHF 6 million.
Invested assets development: 2Q09 vs 1Q09 Net new money Invested assets Gross margin on invested assets (only
international clients) Pre-tax profit decreased 47% to CHF 2,009 million from CHF 3,817 million. The decline in profit was driven by a 29% drop in operating income, which resulted from lower asset-based fees combined with decreased interest following margin pressure as well as increased internal funding-related interest charges, lower transaction income and higher credit loss expenses. This was only partly offset by a 13% reduction in operating expenses. Excluding restructuring costs, operating expenses would have decreased 20%. Personnel expenses decreased 12%, or 21% excluding the personnel-related part of the restructuring costs, due to lower accruals for performance-based compensation and a 10% reduction in personnel. In addition, general and administrative expenses were reduced 17%, mainly due to lower expenses for travel and entertainment, advertising and IT. Adjusted for the non-personnel-related part of the restructuring charges recorded in second quarter 2009, general and administrative expenses would have been down by 23%. Wealth Management & Swiss Bank employed 27,705 staff on 30 June 2009, down 1,103 from 28,808 on 31 March 2009 mainly through natural attrition, but also through the abovementioned restructuring measures. The number of client advisors in the international clients business was down by 299 to 3,593 as the business division adjusted its client-facing capacity to the current market environment. 21
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Wealth Management Americas Wealth Management Americas
1 For definitions of UBS’s key performance indicators, refer to the “Key performance indicators”
section on page 11 of UBS’s first quarter 2009 report. 2 Not meaningful if either the current
period or the comparison period is a loss period. 3 Excludes
interest and dividend income. 4 Refer
to the “Capital management” section of this report for more information about the equity
attribution framework. 5 For purposes of comparison with US peers.
22
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Wealth Management Americas recorded a pre-tax loss of CHF 221 million compared with a pre-tax loss of CHF 35 million. The second quarter included restructuring charges of CHF 152 million, whereas the first quarter included a goodwill impairment charge of CHF 19 million related to the announced sale of UBS Pactual. Excluding these charges, the pre-tax loss for second quarter 2009 would have been CHF 69 million compared with a first quarter pre-tax loss of CHF 16 million. Furthermore, the quarter was negatively impacted by a special assessment levied by the US Federal Deposit Insurance Corporation (FDIC) on the assets of every FDIC-insured depository institution, including UBS Bank USA in the amount of CHF 17 million, to ensure that the FDIC Deposit Insurance Fund retains a positive balance. As part of the business division’s restructuring efforts, the number of personnel was reduced by 9% from the prior quarter. Operating income
Recurring income fell 4% due primarily to
currency translation effects. In US dollar terms,
recurring income increased 1%, driven by higher
managed account fees, partly offset by lower
interest income due to lower spreads and the
above-mentioned special FDIC assessment fee.
Recurring income represented 58% of total
operating income in second quarter 2009, unchanged
from the prior quarter. Non-recurring income
decreased 1%, while up 5% in US dollar terms due
to higher client transactional income and lower
internal funding related interest charges, partly
offset by lower municipal trading income.
Operating expenses
Personnel expenses increased 7% to CHF 1,154
million from CHF 1,082 million. Personnel expenses
included CHF 71 million in restructuring charges
related to headcount reductions during the
quarter. Excluding restructuring charges,
personnel expenses would have been relatively
flat. In US dollar terms, personnel expenses
excluding restructuring charges increased 6%. This
increase was driven by higher revenue-based
financial advisor compensation, higher incentive
compensation accruals compared with unusually low
accruals in the first quarter, and increased expenses related to the hiring of financial advisors, reduced by cost savings related to staff reductions implemented during the quarter.
Non-personnel expenses (including general and
administrative expenses, depreciation and
amortization expenses, and services provided to
and received from other business divisions)
increased 20% to CHF 435 million. Excluding
restructuring charges of CHF 81 million primarily
related to real estate writedowns and the CHF 19
million goodwill impairment charges in first
quarter 2009 related to the announced sale of UBS
Pactual, non-personnel costs would have increased
3%. In US dollar terms, non-personnel costs
excluding restructuring and goodwill impairment
charges increased 9% due to higher service charges
from other business divisions and increases in
legal fees and provisions. The second quarter
included a goodwill impairment charge of CHF 15
million related to the announced sale of UBS
Pactual compared with a CHF 19 million charge in
the previous quarter. The second quarter charge
was accounted for through the “Services (to) / from other business divisions” line item to the
Corporate Center, and therefore had no effect on
Wealth Management Americas’ second quarter
results. Refer to the “Recent developments”
section of this report for more information.
Invested assets development: 2Q09 vs 1Q09 Net new money Invested assets Gross margin on invested assets 23
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Wealth Management Americas assets increased 4%. A four basis point decrease in the recurring income margin, to 46 basis points, corresponded with an equal decline in recurring income; and the non-recurring income margin decreased two basis points, to 34 basis points. In US dollar terms, the gross margin on invested assets of 81 basis points was unchanged from the prior quarter. Wealth Management Americas reported a pre-tax loss of CHF 256 million compared with a pre-tax loss of CHF 567 million. The 2009 performance through June was negatively impacted by the abovementioned restructuring charges of CHF 152 million and goodwill impairment charges of CHF 19 million in first quarter 2009 related to the announced sale of UBS Pactual, while the performance for the first half of 2008 was negatively impacted by a CHF 919 million provision made for the expected costs of the purchase of auction rate securities (ARSs) and related costs, including fines. Excluding the restructuring, goodwill impairment and ARS-related charges, pre-tax performance would have been a loss of CHF 85 million in the first six months of 2009 compared with a profit of CHF 352 million in the same period in 2008.
This decline in performance occurred in the
context of a challenging market climate marked by
a sharp decline in invested assets which resulted
in revenues declining at a faster rate than
expenses. Average invested assets for the first
half of 2009 fell 16% from the same period in
2008, leading to a 14% decrease in operating
income, including a 20% decrease in recurring
income and a 5% decline in non-recurring income.
Recurring income declined to 58% from 62% of
operating income. Operating expenses experienced
a decline of 20% from the first half of 2008, but
would have decreased 1% when excluding the
restructuring charges, the goodwill impairment
charges in first quarter 2009 related to the
announced sale of UBS Pactual and the ARS
provision. Personnel expenses were flat, but would
have declined 3% excluding restructuring charges
booked in second quarter 2009 due to lower
incentive compensation and lower revenue-based
financial advisor compensation, both of which were
partly offset by higher financial advisor-related
recruitment costs. Non-personnel expenses
decreased 49% from the first half of 2008.
Excluding restructuring charges, the goodwill
impairment charges in first quarter 2009 related
to the announced sale of UBS Pactual and the ARS
provision, non-personnel costs increased 6%, but
were down 4% in US dollar terms due to cost
control efforts in general and administrative
expenses and lower service charges from other
business divisions, partly offset by higher
depreciation costs.
Wealth Management Americas reduced staff by 9% during second quarter 2009 as part of the business division’s restructuring initiative. There were 18,146 personnel on 30 June 2009, a decrease of 1,816 from 31 March 2009. Non-financial advisor employees decreased by 995 to 10,207, primarily related to staff reductions across all business areas. Financial advisors decreased by 821 to 7,939. This reduction reflects, in part, planned reductions of lower producing financial advisors. The departures were partially offset by recruitment consistent with the business division’s strategy to attract highly productive financial advisors, although the pace of recruitment slowed compared with the prior quarter. 24
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Global Asset Management Global Asset Management
1 For definitions of UBS’s key performance indicators, refer to the “Key performance indicators”
section on page 11 of UBS’s first quarter 2009 report. 2 Not meaningful if either the current
period or the comparison period is a loss period. 3 Excludes
interest and dividend income. 4 Refer
to the “Capital management” section of this report for more information about the equity attribution framework.
25
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Global Asset Management Global Asset Management’s pre-tax result was a profit of CHF 82 million compared with a loss of CHF 59 million. Excluding a goodwill impairment charge in the first quarter of CHF 191 million in relation to the announced sale of UBS Pactual and restructuring charges in both quarters, pre-tax profit would have decreased by CHF 30 million, or 22%. Increased performance fees were more than offset by higher personnel expenses. Operating income Operating expenses
Personnel expenses were CHF 309 million, up
from CHF 226 million in the first quarter.
Personnel expenses for the second quarter included
restructuring charges of CHF 27 million (up from
CHF 7 million in the first quarter) and also
reflect higher accruals for incentive compensation
as a result of higher performance fee revenues.
First quarter 2009 personnel expenses were lower
due to a partial write-back of CHF 35 million from
incentive compensation accruals made in 2008. The
fixed personnel costs for second quarter 2009 are
not representative of those expected in the second
half of 2009. Around half of the headcount
reductions that have been communicated to
employees (including those associated with the
announced sale of UBS Pactual) had not rolled off
monthly expenses by the end of the second quarter.
Lower fixed personnel costs are expected to apply
downward pressure on the divisional cost / income
ratio by fourth quarter 2009, assuming all other
factors remain constant.
General and administrative expenses decreased
by CHF 2 million to CHF 93 million following
decreases in travel and entertainment expenses,
marketing costs and professional fees. A second
quarter goodwill impairment charge of CHF 149
million related to the announced sale of UBS
Pactual was charged through the “Services (to) / from other business divisions” line item to the
Corporate Center and therefore had no effect on
Global Asset Management’s second quarter results
(refer to the “Recent developments” section of
this
report for more information on the UBS Pactual transaction). Invested assets development: 2Q09 vs 1Q09 Net new money
Institutional net new money
outflows were CHF 6.6 billion compared with CHF
1.1 billion. Excluding money market flows, net
outflows slowed to CHF 3.4 billion from CHF 9.2
billion. Equities saw the first quarterly net
inflow since fourth quarter 2005 but net outflows
were reported in multi-asset, alternative and
quantitative investments, fixed income and real
estate funds.
Outflows of wholesale intermediary
net new money were CHF 10.6 billion compared with
CHF 6.6 billion. Excluding money market flows,
wholesale intermediary net outflows slowed to CHF
4.5 billion from CHF 8.7 billion. Outflows were
reported mainly in multi-asset, equities and fixed
income.
Invested assets Gross margin on invested assets Pre-tax profit decreased to CHF 24 million from CHF 682 million. Excluding the goodwill impairment charge in first quarter 2009 of CHF 191 million in relation to the announced sale 26
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of UBS Pactual and restructuring charges in first and second quarter 2009, pre-tax profit would have decreased 63% to CHF 249 million. Total operating income declined 35% to CHF 1,033 million from CHF 1,599 million. Institutional revenues declined to CHF 601 million from CHF 898 million due to lower management fees associated with lower market levels, the lower average invested assets base and lower performance fees in alternative and quantitative investments and real estate. Wholesale intermediary revenues declined to CHF 431 million from CHF 701 million due to lower management fees associated with lower market levels and the lower average invested assets base. Total operating expenses increased 10% to CHF 1,009 million from CHF 917 million. Excluding the goodwill impairment charge in first quarter 2009 and restructuring charges, operating expenses declined 15% to CHF 784 million. This reflected lower incentive compensation accruals and reduced general and administrative expenses, mainly in travel and entertainment expenses and marketing costs as a result of ongoing cost saving measures. The number of employees on 30 June 2009 was 3,574, a 4% decrease from 3,717 on 31 March 2009. The decrease in headcount was predominantly in non-investment areas and reflects action across the business division to reduce the cost base while maintaining appropriate resource levels. Investment capabilities and performance: 2Q09 The strong improvement in investment performance versus benchmark in many traditional strategies, which began in 2008 and gathered momentum in first quarter 2009, continued in the second quarter. The changes to investment teams and leadership made over the past two years have shown sustained positive results. Alternative strategies showed generally positive results in improving markets. Core/value equities Growth equities tion, and ended the quarter well ahead of their respective benchmarks year-to-date. Global ex-US all cap growth marginally outperformed its benchmark for the quarter. Meanwhile, US small cap and mid cap growth strategies were below their respective benchmarks for the quarter as both stock selection and sector allocation produced disappointing results. Fixed income Global investment solutions Alternative and quantitative investments Global real estate 27
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Global Asset Management direct fund designed as a bond alternative, continued to generate positive absolute returns. Performance of the Swiss composite (consisting of four Swiss listed real estate funds) was broadly in line with the market, while the J-REIT flagship fund (Japanese real estate investment trust managed in collaboration with joint venture partner Mitsubishi Corporation) outperformed its benchmark. The majority of the real estate securities strategies outperformed their benchmarks, including Asian, European, Swiss and US strategies. The global fund-of-funds strategy delivered moderately negative performance in absolute terms. Infrastructure and private equity Composite The table below represents approximately 16% of Global Asset Management’s invested assets at 30 June 2009.
(+) above benchmark; (–) under benchmark; (=) equal to benchmark. All are before the deduction of
investment management fees. Global composites are stated in USD terms; all others are in
appropriate local currencies (unless otherwise stated). A composite is an aggregation of one or
more portfolios in a single group that is representative of a particular strategy, style, or
objective. The composite is the asset-weighted average of the performance results of all the
portfolios it holds. Global Asset Management has been verified as compliant with the Global
Investment Performance Standards by Ernst & Young on a firm-wide basis to 31 December 2007.
1 Performance data for 5 years is for UBS AG, NY Branch Large Cap Select Growth Composite,
which is managed in a substantially similar manner to the US Large Cap Select Growth Equity
Composite. 2 Prior to 30 September 2005 returns for the FTSE EPRA / NAREIT Global Real Estate Index hedged
into CHF were based on published data; currency translation and hedging into CHF are calculated
internally. Thereafter, UBS contracted with FTSE, the index provider, to provide on a customized
request basis CHF hedged returns for the FTSE EPRA / NAREIT Global Real Estate Index. Starting on
23 March 2009 the Index changed its name to FTSE EPRA / NAREIT Developed Index. Reference index
returns are provided for reference purposes only.
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Investment Bank Investment Bank
1 Includes CHF 565 million for 1Q09 and CHF 265 million for 2Q09 in credit losses from impairment
charges on reclassified financial instruments. 2 Represents own credit changes of financial
liabilities designated at fair value through profit or loss. The life-to-date own credit gain for
such debt held at 30 June 2009 amounts to CHF 2,412 million. This gain has reduced the fair value
of financial liabilities designated at fair value through profit or loss recognized on UBS’s
balance sheet. Refer to “Note 11 Fair value of financial instruments” in the financial statements
of this report for more information. 3 For the definitions of UBS’s key performance indicators
refer to the “Key performance indicators” section on page 11 of UBS’s first quarter 2009 report. 4 Not
meaningful if either the current period or the comparison period is a loss period. 5 Neither
the cost / income nor the compensation ratio are meaningful if revenues in the Investment Bank are
negative. 6 Regulatory VaR. 7 Based on third-party view, i.e. without intercompany balances. 8 Refer
to the discussion of the equity attribution framework in the “Capital management” section of
this report. 9 The first quarter 2009 Investment Bank impaired lending portfolio as a % of total
lending portfolio (gross) was restated from 6.3% to 4.0% due to the implementation of a threshold
for designating a reclassified security as an “impaired loan”. Refer to the discussion on the gross
lending portfolio and impairments in the “Risk management and control” section of this report for
more information.
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Investment Bank The pre-tax result was negative CHF 1,846 million compared with negative CHF 3,162 million. The change was driven by lower losses on risk positions from businesses now exited or in the process of being exited – this includes areas such as the municipal securities, fixed income proprietary trading, real estate and securitization and complex structured products businesses. An own credit charge of CHF 1,213 million on financial liabilities designated at fair value was included in the second quarter result, compared with a gain of CHF 651 million in the first quarter. The equities and investment banking businesses saw increased revenues as they capitalized on improved market sentiment with increased activity in equity markets. However, underlying sales and trading revenues in the fixed income, currencies and commodities (FICC) area were weak as the business was being rebuilt following significant voluntary and involuntary staff turnover and management changes. Additionally, the deployment of resources to FICC reflected a conservative view on risk taking. Operating expenses were down from the prior quarter. Operating income Total operating income was positive CHF 532
million compared with negative CHF 661 million.
This was mainly due to lower losses on risk
positions from businesses now exited or in the
process of being exited.
Credit loss expenses Credit loss expenses were down significantly to
CHF 369 million from CHF 1,017 million. Of the
credit loss expenses for the second quarter, CHF
208 million related to asset-backed securities
that were reclassified from “Held for trading” to
“Loans and receivables” in previous quarters. The
remaining credit losses of CHF 161 million related
to loans originated in the ordinary course of
business across a number of different sectors.
These results are in contrast to the first quarter
credit loss expenses that were mainly due to loan
positions which were entered into with the intent
to syndicate or distribute but where the
syndication or distribution markets became
illiquid. Refer to the “Risk management and
control” section of this report for more
information on credit loss expenses and credit
risk.
Own credit Own credit losses on financial liabilities
designated at fair value were CHF 1,213 million.
This compares with a gain of CHF 651 million in
the first quarter. Refer to “Note 11 Fair value of
financial instruments” in the financial statements
of this report for more information on own credit.
Operating income by segment Investment banking Total revenues increased 136% to CHF 717 million
from CHF 304 million. Advisory revenues were down
2% to CHF 211 million, as activity was affected by
a continued slowdown in the global economy.
Capital markets revenues were up 60% to CHF 771
million, with a 67% increase in equity capital
markets revenues driven by higher follow-on
issuances across all regions and a 52% increase in
debt capital markets revenues. Other fee income
and risk management revenues were negative CHF 265
million compared with negative CHF 393 million,
and mainly relate to hedging losses on select
investment grade loans predominantly accounted for
on an accrual basis as credit spreads tightened
during the second quarter.
Sales and trading Total sales and trading revenues for equities and
FICC were positive CHF 1,397 million, compared
with negative CHF 599 million.
Equities Revenues increased 6% to CHF 1,456 million from
CHF 1,371 million. Cash revenues increased
modestly as a result of improved commissions and
trading revenues in Europe. Derivatives revenues
were down as an increase in the Americas was
offset by a decline in Asia Pacific due to lower
structured product volumes. Equity-linked revenues
were less than the prior quarter, despite a strong
performance in Asia Pacific. Prime brokerage
services were up as
financing revenues benefited from spread
improvements. Revenues from exchange-traded
derivatives also increased. Proprietary revenues
were positive and increased in all regions.
Fixed income, currencies and commodities FICC revenues were negative CHF 59 million
compared with negative CHF 1,970 million. The main
driver of this change was lower losses on risk
positions from businesses now exited or in the
process of being exited.
Revenues from the foreign exchange and money
markets and emerging markets businesses were down
from a stronger first quarter, impacted by reduced
business activity. Total credit revenues were
down, partly reflecting mark-to-market losses on
hedges carried at fair value but not offset by
corresponding gains on underlying loans accounted
for on an accrual basis. These losses were only
partly offset by strong results from credit sales
and trading, especially in European investment
grade instruments. The rates business (including
rates solutions) was down from the prior quarter
due to reduced customer flows and trading volumes.
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Exposure to credit default swaps (CDSs)
purchased from monoline insurers to hedge specific
positions contributed credit valuation adjustment
(CVA) related gains of CHF 0.5 billion in second
quarter 2009. This exposure has been substantially
reduced since the end of first quarter 2009,
including through the commutation of certain
trades with select monolines in second quarter
2009 and July 2009. Approximately two thirds of
the second quarter 2009 reduction in monoline CVAs
is attributable to second quarter 2009
commutations. Exposure to monolines contributed
losses of CHF 1.9 billion in the prior quarter.
Refer to the “Risk management and control” section
of this report for more information on exposure to
monolines.
Operating expenses Total operating expenses were CHF 2,378 million
compared with CHF 2,501 million.
Personnel
expenses increased to CHF 1,474 million from CHF
1,185 million, mainly due to higher accruals for
performance-related compensation and, to a lesser
extent, salary increases. Second quarter 2009
personnel expenses included a reversal of
restructuring charges of CHF 52 million, compared
with restructuring charges of CHF 174 million in
first quarter 2009.
General and administrative expenses declined
6% to CHF 602 million. A second quarter goodwill
impairment charge of CHF 328 million was incurred
relating to the announced sale of UBS Pactual, and
was charged to the Corporate Center through the
“Services (to) / from other business divisions”
line item. This charge therefore had no effect on
the Investment Bank’s second quarter results
(refer to the “Recent developments” section of
this report for more information on the UBS
Pactual transaction). A goodwill impairment charge
of CHF 421 million related to the announced sale
of UBS Pactual was recorded in first quarter 2009.
The pre-tax result was negative CHF 5,008 million compared with negative CHF 23,451 million. The change was mainly due to much lower losses on risk positions from businesses now exited or in the process of being exited within the FICC business area and reduced operating expenses. Total operating income was negative CHF 129 million compared with negative CHF 17,105 million. Investment banking and equities revenues were down year-on-year, mainly due to lower market activity. Total operating expenses decreased 23% to CHF 4,879 million from CHF 6,347 million, mainly due to lower personnel expenses. The Investment Bank employed 15,324 personnel on 30 June 2009, with the 7% decrease from the prior quarter-end spread across all businesses and support functions. Investment banking: market share and transaction information According to data from Dealogic, UBS ended the first half of 2009 with a market share of the global fee pool of 5.0% and a ranking of sixth, a year-on-year decline from 5.4% and a ranking of fifth. Worldwide advisory and M&A Thomson Reuters reported a 40% decline in the
volume of worldwide mergers and acquisitions, with
deal volumes decreasing to USD 941 billion in the
first half of 2009 from USD 1.6 trillion in the
first half of 2008. UBS recorded a 43% decline in
deal volumes during this period and slipped in
rank from sixth to eighth. Key UBS transactions
announced in second quarter 2009 included:
Equity underwriting There was a 12% decline in the global deal volume
of equity capital markets, comparing the first
half of 2009 with the first half of 2008,
according to Dealogic. During this period, UBS
reported a 2% increase in its deal volume for
global equity capital markets, at USD 22.7 billion
in the first half of 2009, and the firm increased
its rank to fifth from sixth. Key UBS transactions
for second quarter 2009 included:
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Investment Bank Fixed income underwriting Issuance volumes for global debt capital markets
increased 17% in first half 2009 compared with the
same period in 2008, according to Dealogic. UBS
saw a 24% decrease in transaction volume over this
period, participating in 599 transactions with a
total value of USD 111 billion. UBS was ranked
twelfth (down from sixth) overall for debt capital
markets globally with a market share of 3.3%, down
from 5.1% in the first half of 2008. Key UBS
transactions for second quarter 2009 included:
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Corporate Center Corporate Center
1 Includes expenses for the Company Secretary, Board of Directors and Group Internal Audit.
33
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Corporate Center The Corporate Center’s pre-tax result from continuing operations declined to negative CHF 270 million from positive CHF 621 million. The decline was primarily due to a goodwill impairment charge of CHF 492 million made in the second quarter in relation to the announced sale of UBS Pactual. This goodwill impairment charge was allocated to the Corporate Center through the “Services (to) / from other business divisions” line item. Refer to the “Recent developments” section of this report for more information. Operating income Total operating income decreased to CHF 425
million from CHF 827 million. The second quarter
result was driven by the following significant
items:
In comparison, first quarter 2009 included a gain of CHF 304 million on the buyback of subordinated debt. Operating expenses Total operating expenses increased to CHF 695
million from CHF 206 million, mainly due to the
abovementioned goodwill impairment charge of CHF
492 million. Excluding this charge, operating
expenses would have been CHF 203 million, down CHF
3 million. Personnel expenses increased 11% to CHF
284 million, largely due to increased
restructuring costs. General and administrative
expenses increased to CHF 281 million from CHF 269
million, mainly due to real estate-related
restructuring charges. This was partly offset by
reduced advertising and equipment costs. Excluding
the abovementioned goodwill impairment charge for
the announced sale of UBS Pactual, charges to
other businesses increased by CHF 11 million to
CHF 475 million.
The pre-tax profit from continuing operations declined to CHF 351 million from CHF 3,512 million. Total operating income decreased 69% to CHF 1,252 million, primarily due to the fact that first half 2008 included the gain of CHF 3,860 million related to the accounting treatment of the MCNs issued in March 2008. The gain recorded in the first half of 2009 related to the re-valuation of the call component of the MCNs issued in December 2008 was smaller, at CHF 602 million. Further, operating income was impacted by the abovementioned foreign exchange-related gain in second quarter 2009 and a gain of CHF 304 million on the buyback of subordinated debt in first quarter 2009.
Total operating expenses increased to CHF 901
million from CHF 530 million, mainly due to the
goodwill impairment charge of CHF 492 million
recorded in second quarter 2009 in relation to the
announced sale of UBS Pactual. Adjusted for this
impairment charge, operating expenses would have
decreased by CHF 121 million, mainly due to lower
personnel costs following lower staff levels and
reduced advertising and sponsoring expenditure.
These items were partly offset by higher
restructuring costs.
The Corporate Center had 7,057 employees on 30 June 2009, a decrease of 196 employees from 31 March 2009 mainly driven by reductions of 118 personnel in IT Infrastructure following cost saving initiatives, and a decrease of 61 personnel in Operational Corporate Center and 17 employees in Group Offshoring. 34
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Risk and treasury management Management report
During August 2009, UBS will publish an update to the Basel II Pillar 3 quantitative disclosures included in its restated annual report for 2008. The update will be as of 30 June 2009 and will include additional disclosures on capital management, credit risk, market risk and securitization. It should be read in conjunction with UBS’s financial report for second quarter 2009 and will be available in English as a standalone report at www.ubs.com/investors.
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Risk management and control Risk management and control Summary of key developments in second quarter 2009 UBS took the opportunity of more favorable markets to further reduce its risk exposures relating to businesses now exited or in the process of being exited by the Investment Bank. In second quarter and July 2009, UBS commuted trades with a notional value of USD 5.7 billion with three monoline insurers. This contributed to a reduction in UBS’s net exposure to monolines after credit valuation adjustments (CVAs) to USD 3.2 billion. The credit risk disclosures in this section of the report have been enhanced to provide more information on the composition of UBS’s key lending portfolios in the Wealth Management & Swiss Bank and the Investment Bank business divisions. Credit risk Credit risk is the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations. It arises on traditional banking products, such as loans and commitments, as well as derivatives and similar transactions. A form of credit risk also arises on securities and other obligations in tradable form, with their fair values affected when expectations change regarding the probability of failure to meet obligations and when actual failures occur. Where these instruments are held in connection with a trading activity, UBS views the risk as a market risk. UBS actively manages the credit risk in its
portfolios by taking collateral against exposures
and utilizing credit hedging with the aim of
reducing concentrations to specific
counterparties, sectors and portfolios.
Credit loss expenses UBS recorded credit loss expenses of CHF 388
million in second quarter 2009, compared with
1,135 million in first quarter 2009.
In the Investment Bank, credit loss expenses
in second quarter 2009 were CHF 369 million, of
which CHF 208 million related to asset-backed
securities that were reclassified
from “Held for trading” to “Loans and receivables” in previous quarters. The remaining credit losses of CHF 161 million related to loans originated in the ordinary course of business across a number of different sectors.
Wealth Management & Swiss Bank reported
credit loss expenses of CHF 20 million in second
quarter 2009, a significant decrease compared with
the CHF 119 million reported in the prior quarter.
This decrease was mainly due to the fact that
allowances made against lombard loans in prior
periods were released in the second quarter.
Gross lending portfolio and impairments The credit risk exposures reported in the
“Allowances and provisions for credit losses”
table on the next page represent the IFRS balance
sheet view of UBS’s gross lending portfolio, which
comprises “Due from banks” and “Loans”. The table
also shows the IFRS reported allowances for credit
losses and impairments as well as UBS’s impaired
lending portfolio. UBS’s gross lending portfolio
was CHF 370 billion on 30 June 2009, down from CHF
405 billion on 31 March 2009.
The level of UBS’s gross impaired lending
portfolio was CHF 8,383 million at the end of
second quarter 2009, a decrease compared with CHF
9,471 million at the prior quarter-end. The ratio
of the impaired lending portfolio to total gross
lending portfolio remained stable at 2.3% on 30
June 2009. Excluding the reclassified securities
the ratio decreased to 2.1% at the end of the
second quarter from 2.3% at the end of the first
quarter.
UBS periodically revises its estimated cash
flows associated with the portfolio of
reclassified securities backed by multiple assets
(i.e. predominantly asset-backed securities and
excluding reclassified leveraged finance
positions). Adverse revisions in cash flow
estimates are recognized in profit or loss as
credit loss expenses. Increases in estimated
future cash receipts as a result of increased
recoverability are recognized as an adjustment to
the effective interest rate on the loan from the
date of the change. Effective 1 April 2009, UBS
implemented a threshold for designating a
reclassified security as an “impaired loan”. Under
this policy, a reclassi-
1 Includes credit loss (expense) of CHF 57 million (31.3.09: CHF 447 million) related to
reclassified leveraged finance positions.
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fied security is considered impaired if the carrying value at balance sheet date is on a cumulative basis 5% or more below the carrying value at reclassification date adjusted for redemptions.
In order to provide quarter on quarter
comparability, UBS has restated its first quarter
2009 Investment Bank impaired lending portfolio by
CHF 4.0 billion to CHF 7.0 billion from CHF 11.0
billion, and the UBS Group gross impaired lending
portfolio by CHF 4.0 billion from CHF 13.5 billion
to CHF 9.5 billion. In first quarter 2009,
cumulative decreases in estimated cash flows of
approximately CHF 37 million can be attributed to
CHF 4.0 billion of reclassified securities that
were previously designated as impaired on 31 March
2009. The gross impaired lending portfolio as a
percentage of total gross lending portfolio at the
end of
first quarter 2009 was revised from 6.3% to 4.0% for the Investment Bank and to 2.3% from 3.3% for UBS Group.
In the second quarter, cumulative allowances of
approximately CHF 40 million related to CHF 4.0
billion of reclassified securities were reflected
in profit and loss but did not result in these
assets being considered impaired. This is
consistent with the policy for designating a
reclassified security as an “impaired loan”
mentioned above.
The total gross lending portfolio in the
Investment Bank was CHF 144 billion at the end of
second quarter 2009, down from CHF 176 billion on
31 March 2009. The decrease in the Investment
Bank’s loan book occurred across all major
products, in addition to a decrease in variation
margins posted by UBS for derivative instruments
and general deleveraging in the prime brokerage
business. Net of impairments, the
1 Includes Global Asset Management and Corporate Center. 2 This excludes reclassified loan
underwriting positions with a value of CHF 2,942 million at June 30 (31.3.09: CHF 3,264 million),
which are included in the risk view of loan exposures. 3 Excludes loans designated at fair value,
but includes margin accounts for exchange-traded derivatives transactions, cash collateral
delivered for OTC derivatives and cash current accounts from prime brokerage (cash leg) of total
CHF 71,620 million (of which due from banks: CHF 32,005 million, of which loans: CHF 39,615
million) (31.3.09: CHF 91,454 million of which due from banks: CHF 40,357 million, of which loans:
CHF 51,097 million). 4 Reconciles to the balance sheet carrying values of “Due from banks” and
“Loans”, which are reported net of allowances for credit losses. 5 Excludes reclassified
securities with adverse cash flow estimate revisions cumulatively below 5% of the carrying value at
reclassification date, adjusted for redemptions.
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Risk management and control Investment Bank held CHF 6.9 billion of monoline protected assets and CHF 3.3 billion of commercial real estate positions in its lending portfolio following their reclassification from “Held for trading” to “Loans and receivables” in fourth quarter 2008. The exposures related to monoline protected assets are included in the discussion of that asset class in the “Risk concentration” section of this report.
The Investment Bank’s gross impaired lending
portfolio decreased to CHF 6,208 million at the
end of second quarter 2009 from CHF 6,960 million
on a restated basis at the prior quarter-end.
In Wealth Management & Swiss Bank, the gross
lending portfolio was CHF 203 billion on 30 June
2009, down from CHF 206 billion reported at the
previous quarter-end. The gross impaired lending
portfolio decreased by CHF 328 million in second
quarter 2009 to CHF 2,154 million at quarter-end.
Further information on the composition and
credit quality of the Wealth Management & Swiss
Bank and the Investment Bank lending portfolios is
provided below.
Composition of UBS credit risk The tables in this section provide an update as at 30 June 2009 on the composition of UBS’s credit risk exposures in its key lending portfolios in the Wealth Management & Swiss Bank and Investment Bank business divisions. Wealth Management & Swiss Bank – lending portfolio The table below shows the composition of the
lending portfolio for Wealth Management & Swiss
Bank as detailed in the “Allowances and provisions
for credit losses” table which comprises “Due from
banks” and “Loans”. Approximately 90% of Wealth
Management & Swiss Bank’s lending portfolio is
secured by collateral.
Over half of the unsecured lending portfolio is
rated investment grade. Approximately 60% of
unsecured loans relate to cash flow-based lending
to corporate counterparties. In addition, 20% of
the unsecured loans relate to lending to central
or local governments.
Investment Bank – banking products The tables below show the composition of the
Investment Bank’s credit exposures in its banking
products portfolio based on UBS’s internal
management view of credit risk.
The first table provides a bridge from the total
lending portfolio (“Due from banks” and “Loans”)
as detailed in the “Allowances and provisions for
credit losses” table above to the total view of
banking products exposure
1 IFRS adjustments include the elimination of margin accounts for ETD transactions, cash collateral
posted by UBS against negative replacement values for OTC derivatives, cash / current accounts from
prime brokerage (cash legs) of total CHF 71,620 million (31.3.09: CHF 91,454 million) and valuation
differences caused by a different exposure treatment in Risk Control than in IFRS. 2 Includes
traded loans and funded risk participations. 3 Does not include other allowances for credit losses
for an amount of CHF 354 million (31.3.09: CHF 458 million). 4 Net of markdowns on fair value
loans.
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according to International Financial Reporting Standards (IFRS). The table shows the adjustments required to get from the IFRS view to the internal management view of banking products exposure. The main difference between these measures relates to the treatment of cash collateral posted by UBS against negative replacement values of derivative instruments. This is reported on a gross basis for IFRS purposes, whereas for internal management purposes UBS does not treat this posting of collateral as a loan but controls the risk profile of the derivative transactions with the counterparty taking into account the collateral posted. The first table also provides a further breakdown to derive the net banking products exposure to corporate and non- bank counterparties after credit hedges. The second table provides a breakdown of the rating and loss given default profiles of this portfolio, with additional granularity provided on the sub-investment grade component. The net banking products exposure after credit hedges decreased significantly to CHF
47.3 billion at the end of the second quarter compared with CHF 59.7 billion at the end of the
first quarter, mainly due to reductions in short-term deposits, loan repayments and foreign
exchange movements. 66% of the net banking products exposures after the application of credit
hedges are classified as investment grade. The vast majority of sub-investment grade exposures have
a loss given default of 0–50%.
As reported in second quarter
2008, UBS sold a portfolio of US
residential mortgage backed
securities (RMBSs) for proceeds
of USD 15 billion to the RMBS
Opportunities Master Fund, LP
(the “RMBS fund”), a special
purpose entity managed by
BlackRock, Inc. The RMBS fund
was capitalized with
approximately USD 3.75 billion
in equity raised by BlackRock
from third party investors and
an eight-year amortizing USD
11.25 billion senior
secured
loan provided by UBS. Refer to
the “Sale of US real
estate-related assets to
BlackRock fund” sidebar in UBS’s
financial report for second
quarter 2008 for more
information on this transaction.
Since its inception, the RMBS
fund has amortized the loan
through monthly payments which
have slowed moderately,
primarily due to declines in
floating rate interest payments
and increasing mortgage
defaults. As at
30 June 2009, the loan had a
balance outstanding of USD 8.1
billion. The RMBS fund is not
consolidated in UBS’s financial
statements. UBS continues to
monitor the development of the
RMBS fund’s performance and will
reassess the consolidation
status if events warrant and
deterioration of the underlying
RMBS mortgage pools indicates
that the equity investors in the
fund no longer receive the
majority of the risks and
rewards.
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Risk management and control Market risk Market risk is the risk of loss resulting from changes in market variables of two broad types: general market risk factors and idiosyncratic components. General market risk factors include interest rates, exchange rates, equity market indices, commodity prices and general credit spreads. Idiosyncratic components are specific to individual companies and affect the values of their securities and other obligations in tradable form, as well as derivatives referenced to those companies.
Most of UBS’s market risk comes from the
Investment Bank’s trading activities. Group
Treasury, part of the Corporate Center, assumes
foreign exchange and interest rate risk in
connection with its balance sheet, profit and
loss, and capital management responsibilities. The
wealth and asset management operations of UBS take
limited market risk in support of client business.
Value at Risk Value at Risk (VaR) is a statistical measure of
market risk, representing a loss greater in
absolute value than market risk losses realized
over a set time period at an established
probability. This assumes no change in the firm’s
trading positions. The tables on the next page
show this statistic calibrated to a 10-day horizon
and a 99% probability, using five years of
historical data. For both the Group and the
Investment Bank the tables also show VaR for a
1-day horizon and a 99% probability, using five
years of historical data.
For a variety of reasons, the actual realized
market risk loss may differ from that implied by
the VaR measures of UBS. For example, the
historical period used in creating the VaR measure
may have fluctuations in market rates and prices
that differ from those in the future; the firm’s
intra-period trading may mute or accentuate the
losses; and the impact on revenue of a market move
may differ from those assumed by the VaR model.
All VaR measures are subject to these limitations
to some extent and must be interpreted
accordingly. UBS continues to review the
performance of its VaR implementation and will
continue to enhance its VaR model in order to more
accurately capture the relationships between the
market risks associated with certain positions, as
well as the revenue impact of large market
movements for some trading positions.
As an essential complement to VaR, UBS runs
macro stress scenarios bringing together various
combinations of market moves to reflect the most
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