S&P Assigns AA+/A-1+ Cntrprty Rtgs to UBS AG.

LONDON--(BUSINESS WIRE)--S&P CreditWire--June 29, 1998--Standard & Poor's today assigned its double-'A'-plus/'A-1'-plus counterparty credit rating to UBS AG (the newly merged Union Bank of Switzerland and Swiss Bank Corp.). The outlook is stable.

The ratings of UBS AG reflect the strength of the merged banks. Swiss Bank Corp. and Union Bank of Switzerland both enjoyed strong market positions and franchises across a wide range of private banking and international securities activities. At both banks these supported solid underlying profitability and excellent liquidity. These factors will be strongly enhanced by the merger which, in addition, will enable the adoption of powerful strategies for the long-term growth of the key businesses.

The merger has created one of the largest banks in the world -- pro forma assets at end-1997 were SFr 1.026 billion (US$675 billion). On the same basis, it is also one of the world's leading asset managers with US$1 trillion under management across its divisions. In investment banking,it is one of the leading international players, especially in Europe and Asia. This new status will give UBS critical mass in its core businesses.

There will also be important cost savings, particularly in private banking, investment banking, and consumer and corporate banking. Staff numbers across the group are forecast by management to fall by 13,000 (23% of the current total) over the next four years; these and other cost savings are expected to amount to SFr3.5 billion per year (about 20% of the pro forma cost base) by that time. Provisions of SFr 7.0 billion to cover the cost of restructuring were established in 1997.

Dislocation caused by the restructuring could -- according to management -- result in a short-term profits dilution of up to 10%. However, by 2002, the return on equity is expected to be 15%-20%. The early prognosis is good; first-quarter net profits of Sfr 1.3 billion were above expectations, with management "cautiously optimistic" for the full year. Capitalization remains solid, with a pro forma tier 1 ratio at end-1997 of 8.3% (despite the adverse impact of the restructuring provisions). Retained earnings and efficient use of the balance sheet are expected to rebuild this ratio strongly.

The integration process is well under way. The divisions' organizational structures have been determined, along with many detailed measures including: segmentation of private banking clients by assets managed and of business clients by credit lines; staff restructuring at Brinson and in retail banking; risk positions transferred to SBC market risk management systems; harmonization of accounting and credit policies. The total process is expected to take three to four years.

UBS AG's broad strategic objective is to achieve international pre-eminence in private banking, institutional asset management, investment banking, and private equity, while underpinning the profitability of the domestic retail operation. In addition to the direct synergy-based strategies referred to above, UBS intends to re-deploy capital resources into a number of areas: onshore private banking, international distribution of mutual funds, international expansion of consumer and private banking, US investment banking, and private equity.

Standard & Poor's is satisfied that the integration process is going broadly to plan. Given the potential synergies and the long-term growth strategy, management's financial targets are achievable.

OUTLOOK: STABLE The limitation of income erosion (as a result, potentially, of merging client bases) and the swift implementation of cost savings are crucial in restricting the dilutive impact on the earnings base. In particular, the simultaneous additional pressure on resources exerted by "Year 2000" considerations needs to be resisted.

With markets generally at, or close to, long-term highs, the demands of the merger could be exacerbated by poor market conditions, especially in investment banking and asset management businesses. It is also crucial that there continues to be stabilization in Swiss credit quality.

Finally, it is important that there is an orderly disposal of businesses which have no future in the merged organization. Some of these (for example, Banca della Svizzera Italiana, as well as a number of Swiss branches) relate to requirements imposed in the merger approval process. Standard & Poor's is confident that another directive issued in connection with this process -- to maintain credit relationships with small and mid-size Swiss companies -- will not compromise credit quality. -- CreditWire

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     INDUSTRY KEYWORD:  BANKING