UBS Reports Second Quarter Result of CHF 5,622 million.* Net profit attributable to UBS UBS Union Bank of Switzerland UBS United Bible Societies UBS United Blood Services UBS United Buying Service UBS Used Bookstore UBS University Business Services UBS Universal Building Society (UK) UBS Ulaanbaatar Broadcasting System shareholders of CHF CHF In currencies, this is the abbreviation for the Swiss Franc. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. 5,622 million, up 79% from the same period a year earlier and 72% higher than first quarter 2007. * This includes a CHF 1,926 million post-tax gain from the sale of the 20.7% stake in Julius Baer and a charge of CHF 229 million after tax related to the closure of Dillon Read Capital Management (DRCM DRCM Dynamic Resource Configuration Manager DRCM Direct Response Call Management ) * Including these two items, attributable profit from the financial businesses from continuing operations continuing operations Parts of a business that are expected to be maintained as an ongoing segment of an overall business operation. Income and losses from continuing operations are reported separately if any segments have been discontinued during the was CHF 5,152 million, with return on equity at 33.0%, diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. EPS (Encapsulated PostScript) A PostScript file format used to transfer a graphic image between applications and platforms. EPS files contain PostScript code as well as an optional preview image in TIFF, WMF, PICT or EPSI, the latter being an ASCII-only format. of CHF 2.69, and a cost/income ratio of 62.0% * Excluding these two items, attributable profit from the financial businesses from continuing operations would have been CHF 3,455 million, up 14% from the same period a year earlier and 9% higher than the record first quarter 2007 performance * Excluding the same items, diluted EPS from continuing operations was CHF 1.84, return on equity 29.8% and the cost/income ratio 68.0% * Net new money inflows in second quarter 2007 remained strong. In the wealth management units, inflows totaled CHF 35.2 billion, with strong contributions from all regions ZURICH, Switzerland & BASEL, Switzerland -- UBS reports net profit attributable to shareholders of CHF 5,622 million in second quarter 2007. This quarter's results include two items that had a significant impact on performance. The first item is the CHF 1,926 million post-tax gain from the sale of the 20.7% stake in Julius Baer, a result of the disposal of Private Banks & GAM in 2005. As the stake was held as a financial investment available-for-sale in UBS's accounts, the gain from its sale is included in performance from continuing operations. It is, however, no longer part of the continuing business, and UBS believes that isolating i·so·late tr.v. i·so·lat·ed, i·so·lat·ing, i·so·lates 1. To set apart or cut off from others. 2. To place in quarantine. 3. its impact provides a clearer picture of performance. The second item is the charge of CHF 229 million after tax related to the closure of Dillon Read Capital Management (DRCM), recorded in Global Asset Management. Excluding these two items, attributable profit in UBS's core operational businesses (financial businesses' attributable profit from continuing operations) would have been CHF 3,455 million, up 14% from the same period a year earlier and 9% higher than the record first quarter 2007 performance. "Again, net fee and commission income was at a record high of CHF 8,099 million. This was 26% higher than in the same quarter of 2006, and driven by improvements in practically all fee categories. What is particularly pleasing is that it now represents 52% of operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. ," said Clive Standish, Chief Financial Officer. The investment banking business saw a very strong rise in M&A and corporate finance fees and higher equity and debt underwriting fees Underwriting fee The portion of the gross underwriting spread that compensates the securities firms that underwrite a public offering for their services. . One measure of the strength of UBS's market position is global market share. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Dealogic, this improved to 5.8% in first half 2007 from 4.9% a year earlier. UBS grew faster than the 21.3% rate of the overall fee pool and its rank rose to fourth from eighth. Market share gains were achieved in all regions and product lines. Invested asset levels rose to CHF 3.3 trillion One thousand times one billion, which is 1, followed by 12 zeros, or 10 to the 12th power. See space/time. (mathematics) trillion - In Britain, France, and Germany, 10^18 or a million cubed. In the USA and Canada, 10^12. , and, as a result, asset-based fees in the asset and wealth management businesses rose. Reflecting mixed market developments, the second quarter 2007 result from the trading businesses saw significant swings in both directions. Overall, net income from the trading businesses was CHF 3,106 million, down 9% from second quarter 2006. Equities revenues rose from the same quarter a year earlier, supported by positive market conditions and strength in European and emerging markets. The performance in fixed income, however, was not satisfactory. Continued difficulties in the US mortgage securities market led to lower revenues in the rates business and further losses on some of DRCM's former portfolios, which contributed net negative revenues of approximately CHF 230 million in second quarter 2007. These developments were partially offset by robust credit fixed income results, which rose on global credit trading and proprietary strategies. Total operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. rose 21% to CHF 9,695 million in second quarter 2007 from the same quarter a year earlier. Approximately a fourth of the cost rise was attributable to the closure of DRCM. For the other parts of UBS, accruals Accruals Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense. for performance-related payments increased in line with revenues. Personnel expenses rose due to higher numbers of personnel, partially related to acquisitions, including Piper Jaffray Piper Jaffray & Co. (NYSE: PJC), often shortened to just Piper Jaffray or PiperJaffray, is a U.S. middle-market investment banking firm based in Minneapolis, Minnesota and is a focused on delivering financial advice, investment products and transaction execution and McDonald Investments. General and administrative expenses rose, with administration costs up partly due the inclusion of the acquisition of Banco Pactual. Professional fees rose due to the closure costs related to DRCM and higher legal fees. The expansion of UBS's businesses and the related increases in personnel drove travel and entertainment costs and expenses for office space higher. IT and other outsourcing (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management. costs rose on the increased business volume. The number of personnel in the financial businesses was 81,557 on 30 June 2007, up 920 compared with the end of first quarter 2007, with staff levels increasing across most business groups. "We are working on a number of growth initiatives that are at various stages of implementation. Among them are the expansion of the European wealth management business, investment in the Investment Bank fixed income business and the growth of US wealth management. The underlying strategy of these initiatives remains unchanged. In implementing them, we need to balance revenue opportunities with operational and economic efficiency. Thus, while the direction and cornerstone cornerstone Ceremonial building block, dated or otherwise inscribed, usually placed in an outer wall of a building to commemorate its dedication. Often the stone is hollowed out to contain newspapers, photographs, or other documents reflecting current customs, with a view to of our strategy remain unchanged, the tactics involved in executing will continue to be adapted to varying market conditions," said Marcel Rohner Marcel Rohner (sometimes shown as Marcel Röhner, born 21 June 1964) is a Swiss bobsledder who competed in the 1990s. At the 1998 Winter Olympics in Nagano, he won a silver medal in the four-man event with teammates Markus Nüssli, Markus Wasser and Beat Seitz. , Chief Executive Officer. Closure of Dillon Read Capital Management In May, UBS announced that DRCM, an alternative investment venture launched in 2006, had not met expectations and, as a result, it had decided to close the business. This process has now been completed. UBS paid back CHF 1.5 billion in outside investor interests, with clients receiving a positive return on their original investment. The portfolios, plus UBS's own capital that was previously managed by DRCM, have moved to the Investment Bank and are now managed within the fixed income division in an integrated fashion. The closure of DRCM led to a charge against profits of CHF 384 million pre-tax (CHF 229 million after tax). This includes accelerated amortization of deferred compensation of former DRCM employees and, to a lesser extent, write-downs for DRCM office leasehold improvements Leasehold Improvement Improvements on a leased asset that increase the value of the asset. Notes: A leasehold improvement is classified as an asset that must be depreciated over time. . Moreover, 122 of the 230 DRCM employees were transferred from Global Asset Management to the Investment Bank. Outlook This quarter's downturn Downturn The transition point between a rising, expanding economy to a falling, contracting one. downturn A decline in security prices or economic activity following a period of rising or stable prices or activity. in credit and equity markets was a timely reminder of the nature of financial risk, and has continued into third quarter. The asset and wealth management businesses show sustained strength, and investment banking deal pipelines remain promising. However, markets are currently very volatile, and forecasting is even more difficult than usual. If the current turbulent conditions prevail throughout the quarter, UBS will probably see a very weak trading result in the Investment Bank, offset by predictable earnings from wealth and asset management. This makes it likely that profits in the second half of 2007 will be lower than in the second half of last year. Performance against targets UBS focuses on four key performance indicators Key Performance Indicators (KPI) are financial and non-financial metrics used to quantify objectives to reflect strategic performance of an organization. KPIs are used in Business Intelligence to assess the present state of the business and to prescribe a course of action. , designed to ensure the delivery of continuously improving returns to shareholders. All are calculated based on results from continuing operations. The first two, return on equity and diluted earnings per share diluted earnings per share An earnings measure calculated by dividing net income less preferred stock dividends for a period by the average number of shares of common stock that would be outstanding if all convertible securities were converted into shares of , are based on the results of the entire firm. The cost/income ratio and net new money indicators are limited to the financial businesses. On this basis, performance indicators in second quarter 2007 show: * annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. return on equity in first half 2007 of 33.0%. The increase compared to first half 2006 is primarily attributable to the post-tax gain of CHF 1,926 million (pre-tax CHF 1,950 million) from the sale of the stake in Julius Baer, partially offset by the costs related to the closure of DRCM (post-tax CHF 229 million, pre-tax CHF 384 million). Excluding these items, annualized return on equity would have been 29.8%, up from 29.3% in the same period a year earlier and well above UBS's target of a 20% minimum over the cycle. This increase relates to higher attributable net profit partially offset by the higher average equity base, which was driven by strong retained earnings Retained Earnings The percentage of net earnings not paid out in dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders equity on the balance sheet. . * diluted earnings per share for the second quarter of CHF 2.69, which was influenced by the same factors as return on equity. Excluding the gain from the sale of the Julius Baer stake and the costs of the closure of DRCM, diluted earnings per share would have been CHF 1.84, up 23% or CHF 0.35 from CHF 1.49 in the same quarter a year earlier, reflecting the increase in net profit and a 4% reduction in the average number of shares outstanding following further share repurchases Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. . * a quarterly cost/income ratio in the financial businesses of 62.0%, also impacted by the factors mentioned above. Adjusted for these, the cost/income ratio would have been 68.0%, up from the all-time low of 66.7% set in the same quarter last year. Income increased on higher fee and commission income but was more than offset by higher costs, which were up on increased personnel and general and administrative expenses related to the global expansion of UBS's business and further investments to support growth. Over the last year, UBS has added over 9,500 employees in areas with long-term strategic business potential. Of the total increase, over 2,500 came from the acquisition of Piper Jaffray, McDonald Investments, Banco Pactual and the ABN AMRO ABN AMRO Algemene Bank Nederland-Amsterdam Roterdam Bank (Dutch bank) global futures and options businesses. * net new money of CHF 34.0 billion in second quarter 2007, down from CHF 36.3 billion in the same period a year earlier. The wealth management units recorded inflows of CHF 35.2 billion this quarter, up from CHF 31.2 billion in second quarter 2006. Inflows in the international and Swiss wealth management businesses rose by CHF 2.2 billion to CHF 32.7 billion, with strong contributions from all regions. Net new money in European wealth management was CHF 2.6 billion in second quarter 2007, down from CHF 7.2 billion in second quarter a year earlier, reflecting lower contributions from all markets except Germany and Italy. Inflows into the domestic wealth management business in the US were CHF 2.5 billion in second quarter, up from CHF 0.7 billion a year earlier, but down from CHF 10.9 billion in first quarter 2007. The second quarter is usually the weakest of the year, associated with the timing of US tax payments by clients. The asset management business saw outflows of CHF 2.0 billion, down from an inflow in·flow n. 1. The act or process of flowing in or into: an inflow of water; an inflow of information. 2. of CHF 3.6 billion a year earlier. Institutional clients reported an outflow of CHF 2.5 billion, of which CHF 1.5 billion was related to the redemption of DRCM outside investor interests. Net outflows from equity mandates were partly offset by inflows into multi-asset mandates, alternative and quantitative investments and real estate. The wholesale intermediary Intermediary See: Financial intermediary intermediary See financial intermediary. business saw an inflow of CHF 0.5 billion, up from the same quarter a year earlier, which saw equities and fixed income outflows. Total money market funds, which tend to experience larger quarterly swings than other asset classes, recorded inflows of CHF 1.2 billion. The Swiss retail banking business recorded net new money inflows of CHF 0.8 billion in second quarter compared with CHF 1.5 billion in the same period a year earlier, mainly due to lower inflows from corporate clients. UBS net new money in first half 2007 was CHF 86.8 billion, up CHF 2.5 billion from the same period a year earlier, with the increase driven by higher inflows in the wealth management businesses (up CHF 15.2 billion), but partly offset by lower inflows from institutional clients in the asset management business (down CHF 11.8 billion). [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] Results from the Financial Businesses Global Wealth Management & Business Banking Global Wealth Management & Business Banking's pre-tax profit was a record CHF 2,341 million in second quarter 2007, an increase of 4% from first quarter 2007. Pre-tax profit for the Wealth Management International & Switzerland business, at an all-time high of CHF 1,543 million, was up 3% from first quarter. Total operating income rose 4% from first quarter, with recurring re·cur intr.v. re·curred, re·cur·ring, re·curs 1. To happen, come up, or show up again or repeatedly. 2. To return to one's attention or memory. 3. To return in thought or discourse. income benefiting from the higher asset base and non-recurring income up on higher client activity. Operating expenses increased 6% from first quarter, reflecting higher personnel levels as well as the full effect of annual salary increases. General and administrative expenses were up as travel and entertainment costs rose in line with global business expansion efforts. In the US wealth management business, pre-tax profit was CHF 161 million, down 6% from first quarter, affected by legal and litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. expenses (in US dollar terms, pre-tax profit decreased 5%). Total operating income was up 5% from first quarter 2007, reflecting broad growth in revenues, mostly due to rising financial markets. Total operating expenses were up 6% from first quarter, with personnel expenses increasing as a result of higher salary costs and increased financial advisor-related compensation. Non-personnel expenses rose 19% from first quarter 2007, with more than half of the rise being a result of an increase in legal and litigation expenses. Business Banking Switzerland's pre-tax profit was a record CHF 637 million, up 11% from the previous quarter. Total operating income rose from first quarter. Interest income rose 5% in the same period, partly reflecting the fact that second quarter had more days than first quarter. The increase was also due to higher loan volumes. Total operating expenses were CHF 769 million in second quarter 2007, up slightly from CHF 766 million a quarter earlier. Global Asset Management Pre-tax profit was CHF 66 million in second quarter 2007, a fall of 84%, because of costs of CHF 384 million related to the closure of Dillon Read Capital Management (DRCM). Excluding these costs, pre-tax profit would have been CHF 450 million, up CHF 46 million or 11% compared with the prior quarter. Stronger performance fees, particularly in alternative and quantitative investments and the Brazilian asset management business, contributed to the increase. Total operating income in second quarter 2007 rose 8% from the previous quarter. Institutional revenues were CHF 642 million in second quarter 2007, up from CHF 585 million in first quarter 2007, reflecting stronger performance fees from alternative and quantitative investments and the Brazilian asset management business. The closure of DRCM, and the effect of paying back outside investor interests, had a slight negative impact on revenues. Wholesale Intermediary revenues were CHF 436 million in second quarter 2007, up from CHF 412 million a quarter earlier, mainly a result of an increase in management fees, which strengthened on the higher average asset base, and strong performance fees from the Brazilian asset management business. Total operating expenses were CHF 1,012 million in second quarter 2007, including costs related to the closing of DRCM of CHF 384 million. Excluding these costs, operating expenses would have been CHF 628 million, up by CHF 35 million from a quarter earlier on higher incentive-based compensation and increased professional fees. Personnel expenses were CHF 778 million in second quarter 2007, with CHF 318 million relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc DRCM closure expenses that included both severance The act of dividing, or the state of being divided. The term severance has unique meanings in different branches of the law. Courts use the term in both civil and criminal litigation in two ways: first, when dividing a lawsuit into two or more parts, and second, when payments and accelerated amortization of deferred compensation to former DRCM employees. General and administrative expenses were CHF 162 million in second quarter 2007. Excluding DRCM closure costs, general and administrative expenses would have been CHF 124 million, slightly higher than CHF 115 million a quarter earlier, mostly due to higher professional fees, legal, travel and entertainment costs. Investment Bank The Investment Bank achieved another record pre-tax profit of CHF 1,815 million in second quarter 2007, up 3% from a year earlier. Total operating income in second quarter 2007 was CHF 6,217 million, up 9% from the same quarter a year earlier. The equities business saw revenues increasing 36% from the same period in 2006, with all business lines reporting stronger revenues. Cash equity revenues increased as stronger global volumes across all regions drove commission income higher. Prime brokerage Prime Brokerage A special group of services that many brokerages give to special clients. The services provided under prime brokering are securities lending, leveraged trade executions, and cash management, among other things. , experiencing a record quarter, showed positive results from its successful build-up build·up also build-up n. 1. The act or process of amassing or increasing: a military buildup; a buildup of tension during the strike. 2. , as client numbers and average balances increased significantly. Exchange-traded derivatives derivatives In finance, contracts whose value is derived from another asset, which can include stocks, bonds, currencies, interest rates, commodities, and related indexes. Purchasers of derivatives are essentially wagering on the future performance of that asset. also experienced a record quarter, driven by year-on-year increases in volumes and helped by the acquisition of ABN ABN Advance beneficiary notice, see there AMRO's futures and options business. Derivatives continued to be strong, predominantly pre·dom·i·nant adj. 1. Having greatest ascendancy, importance, influence, authority, or force. See Synonyms at dominant. 2. driven by growth in Europe and Asia where positive market sentiment Market Sentiment The feeling or tone of a market (i.e. crowd psychology). It is shown by the activity and price movement of the securities. Notes: For example, rising prices would indicate a bullish market sentiment. led to healthy structured product revenues. Significant growth was also seen in equity capital markets revenues, reflecting robust volumes in the Americas, in particular Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. , and Asia (excluding Japan). Fixed income, rates and currencies revenues were down 31% from the same quarter a year ago. Continued difficult market conditions in the US mortgage securities market led to further losses on the portfolios. Net revenues from DRCM's business activities were approximately negative CHF 230 million, compared with approximately negative CHF 150 million reported in first quarter 2007. Revenues from the other parts of the FIRC FIRC Flight Instructor Refresher Clinic (US FAA) FIRC Foreign Inward Remittance Certificate FIRC Flight Instructor Refresher Course (US FAA) FIRC Fixed Income Rates and Currencies FIRC Finite Impulse Response Channel business overall were flat compared with a year earlier. Credit fixed income had a record quarter, with growth across the business driven by leveraged finance, global credit trading and proprietary strategies. Emerging markets saw very strong increases, particularly in Latin America and Eastern Europe Eastern Europe The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991. . Performance in the rates business was down in government bonds and mortgage-backed securities Mortgage-backed securities (MSBs) Securities backed by a pool of mortgage loans. in the context of difficult market conditions caused by the US sub-prime market. This was only partially offset by increased rates derivatives revenues. Foreign exchange and money market revenues increased as volumes and market share continued to rise. Trading in emerging markets currencies and technical upgrades to the trading capabilities of the platforms, which increased efficiency, further enhanced revenues. Commodity revenues fell due to lower results posted in precious metals Precious Metals Valuable metals such as gold, iridium, palladium, platinum, and silver. Notes: Investing in precious metals can be done either by purchasing the physical asset, or by purchasing futures contracts for the particular metal. and natural gas, as both suffered from market corrections Market correction A relatively short-term drop in stock market prices, generally viewed as bringing overpriced stocks back to a level closer to companies' actual values. and the resulting low client activity levels. This was partially offset by a stronger performance in crude oil and commodities structured products. Investment banking rose to a record high and was 65% higher than in second quarter 2006. This extraordinary performance emphasizes the strong market position and the key roles played in a number of major transactions in second quarter. All regions recorded double-digit growth in revenues, with the largest increase coming from the Americas. Revenues from the advisory business increased significantly. The capital markets business also saw strong growth as did the leveraged finance franchise, demonstrating UBS's commitment to the business. Total operating expenses in second quarter 2007 were CHF 4,402 million, up 11% from the same period last year. Personnel expenses were CHF 3,233 million, up 8% from a year earlier, driven by the increase in staff recruited in 2006 to support growth strategies and due to the acquisitions of Pactual and ABN AMRO's futures and options business. Share-based compensation in second quarter 2007 was down 12% as the same period a year earlier included accelerated amortization of deferred compensation for good leavers. General and administrative expenses increased by 33%, reflecting an additional provision relating to the settlement of Enron litigation as well as increases in administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. related to the acquisition of Banco Pactual and higher occupancy costs Occupancy costs are the whole life costs of buildings and their associated land from occupancy until disposal. These costs may be incurred on a regular or irregular basis. Occupancy costs are those costs related to occupying a space including; rent, real estate taxes, personal related to the need for more office space. [TABLE OMITTED] Cautionary statement regarding forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. This communication contains statements that constitute "forward-looking statements", including, but not limited to, statements relating to the implementation of strategic initiatives and other statements relating to our future business development and economic performance. While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, (1) general market and macro-economic trends, (2) legislative developments, governmental and regulatory trends, (3) movements in local and international securities markets, currency exchange rates and interest rates, (4) competitive pressures, (5) technological developments, (6) changes in the financial position or creditworthiness Creditworthiness The condition in which the risk of default on a debt obligation by that entity is deemed low. Creditworthiness Eligibility of an individual or firm to borrow money. of our customers, obligors and counterparties Counterparties The parties on either side of an interest rate swap or a currency, equity or commodity swap, or to an options or futures position. and developments in the markets in which they operate, (7) management changes and changes to our Business Group structure and (8) other key factors that we have indicated could adversely affect our business and financial performance which are contained in other parts of this document and in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this document and in documents furnished fur·nish tr.v. fur·nished, fur·nish·ing, fur·nish·es 1. To equip with what is needed, especially to provide furniture for. 2. by UBS and filings made by UBS with the SEC, including UBS's Annual Report on Form 20-F for the year ended 31 December 2006. UBS is not under any obligation to (and expressly disclaims any such obligations to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise. [TABLE OMITTED] [TABLE OMITTED] |
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