Financial Report 1998
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ab Combinations produce synergies and open new perspectives. Financial Report 1998. UBS Group Financial Highlights CHF million (except where indicated) 1998 1997 Income statement key figures Operating income 22,328 24,880 Operating expenses before restructuring 18,258 18,636 Operating profit before restructuring and taxes 4,070 6,244 Net profit / (loss) 3,030 ( 667) Per share data (CHF) Basic earnings per share 1 14.31 23.05 Diluted earnings per share 1 14.23 23.02 Dividends proposed 10.00 n/a At year end Total assets 944,116 1,086,414 Shareholders’ equity 32,395 30,927 Market capitalization 90,720 n/a Ratios (%) Return on shareholders’ equity 2 10.3 14.5 Return on risk-weighted assets 3 1.0 1.3 Cost / income ratio 4 78.4 71.2 BIS Capital ratios 5 Tier 1 capital (%) 9.8 8.3 Total capital (Tier 1 and Tier 2) (%) 14.0 12.6 Risk-weighted assets 288,296 345,904 Assets under management (CHF billion) Total assets under management 1,572 1,512 Headcount Total headcount 48,011 55,176 of which: Switzerland 32,706 36,638 of which: Rest of world 15,305 18,538 Long-term ratings Moody’s, New York Aa1 Fitch / IBCA, London AAA Standard & Poor’s, New York AA+ BankWatch, New York AA 1 For EPS calculation, see Note 10 to the Financial Statements. For this disclosure 1997 is adjusted for impact of restructuring including taxes thereon. 2 Net profit / (loss) / average shareholders’ equity excluding dividends from parent bank. 1997 loss and shareholders’ equity adjusted for impact of restructuring including taxes thereon. 3 Net profit / (loss) / average BIS risk-weighted assets. 1997 loss adjusted for impact of restructuring including taxes thereon. 4 Operating expenses before restructuring / operating income before credit loss expenses of CHF 951 m in 1998 and CHF 1,278 m in 1997. 5 For BIS ratio calculations, see Note 34e to the Financial Statements. Contents Letter to Shareholders 2 Review of Businesses 7 UBS Segment Reporting 8 Private Banking 10 Warburg Dillon Read 14 Private and Corporate Clients 20 UBS Brinson 24 UBS Capital 28 Corporate Center 30 Review of Risk Management and Control 31 The UBS Risk Framework 32 Credit Risk 35 Market Risk 40 Operational Risks 42 Review of Asset and Liability Management 45 Funding and Liquidity Management 46 Interest Rate Management 46 Currency Management 47 Capital Management 48 UBS Group Financial Statements 49 Group Financial Review 52 Financial Statements 56 Notes to the Financial Statements 60 Report of the Group Auditors 106 UBS AG (Parent Bank) 107 UBS Corporate Governance 117 UBS Group Human Resources 123 Glossary 125 UBS Share Information 129 1 Letter to Shareholders Dear Shareholders, – The gainof CHF 1 billion arising from the divest- ment of BSI-Banca della Svizzera Italiana. This resulted from a condition laid down by the Swiss Competition Commission in the context of the merger. – The provision of CHF 0.8 billion for the settle- ment reached regarding dormant accounts and World War II-related claims. – Losses on pre-merger positions resulting from third-quarter market volatility totaling approx- imately CHF 1.9 billion by the end of 1998. These related to the loss from UBS’s engage- ment in Long Term Capital Management and significant value adjustments on pre-merger equity derivative positions. Analysis of 1998 results A review of the UBS Group 1998 results leads to an ambivalent conclusion. On the one hand, With the execution of the largest European net profit after tax and minorities of CHF 3.0 bank merger, 1998 was a year in which UBS firm- billion falls short of expectations and is there- ly shaped its own destiny. 1998 was also a difficult fore disappointing. On the other hand, despite a year for the banking industry and one in which highly unusual combination of very difficult UBS, in particular, was buffeted by an unusual events which compounded the challenge of the combination of exceptional events. The settlement merger, the UBS Group made significant progress. regarding the role of Swiss banks during and after This is clear on closer analysis: World War II, combined with the consequences of – If adjusted for the non-recurring items set out third-quarter 1998 financial market turbulence, above, 1998 net profit would have been CHF had a severe impact on UBS’s otherwise healthy 4.4 billion compared to CHF 4.8 billion for financial performance. This mixture of events had 1997 (excluding the restructuring reserve). This a clear impact on the UBS share price, which post- is clearly in line with management’s expecta- ed a high of CHF 657 in July 1998 and a low of tions of a 10% decline in net profit as stated in CHF 270 only two months later. In view of the December 1997. underlying strength of the bank, the Board of – Furthermore, if revenues are adjusted for total Directors of UBS recommends to shareholders a non-recurring third-quarter losses and divest- dividend of CHF 10 per registered share for 1998. ments, then the decline in 1998 was again well The difficult conditions of 1998 are reflected in within the 10% decline which had been forecast the Group’s results. For 1998, UBS reports a pre- at the time of the merger. tax profit of CHF 4.1 billion, compared to the – Finally, if total 1998 operating expenses are pre-tax profit of CHF 6.2 billion in 1997 (exclud- adjusted for the provision against the settle- ing the CHF 7.0 billion restructuring provision, ment regarding dormant accounts and the established in the context of the merger). Earn- divestment of BSI, operating expenses declined ings per share (on a post-tax basis) were down by by 6%, or about CHF 1.1 billion, year-on-year. around 38% from CHF 23.05 in 1997 (again This is better than expectations set out at the excluding the restructuring provision) to CHF announcement of the merger, especially con- 14.31 in 1998. At the same time, taking into con- sidering that the merger only became legally sideration the difficult conditions in the latter effective in the second half of the year. half of the year, UBS still was able to achieve a respectable return on equity of 10.3%. Private Banking most significant The pre-tax impact of the major non-recurring contributor to earnings factors influencing UBS’s 1998 result is set out On a divisional basis, Private Banking, with below: a pre-tax result of CHF 4.3 billion, was the 2 Letter to Shareholders most important contributor to the UBS Group’s ities deemed not to be attractive on a risk / return result. Its profit was influenced most significant- basis – such as global trade finance, internation- ly by the CHF 1 billion divestment proceeds from al lending to clients in excess of revised limits and the sale of BSI. Operating financial performance certain segments of the fixed-income business – was primarily driven by asset growth due to per- will be reduced. Finally, the review reconfirmed formance. However, we were able to offset the course set at the time of the merger to reduce client attrition arising from the merger to a sig- risk appetite with regard to both market and nificant extent by successful marketing, which counterparty risk. resulted in a net inflow of new assets under man- agement. Outside Switzerland, Private Banking Substantial increase in Private and Corporate has completed the merger integration; domesti- Clients profitability in Switzerland cally, the full integration of the information tech- Private and Corporate Clients contributed nology platforms is still underway and is expect- CHF 0.9 billion pre-tax to the Group’s result, up ed to be concluded in 1999. Importantly, the by 20% against restated 1997 results. For this division successfully launched a major initia- division, the year was marked by intense and tive to grow domestic private banking outside successful merger integration efforts. Significant Switzerland in core markets, such as Germany, progress was achieved by aligning both predeces- Italy, France, Spain, Australia and Japan. We are sor banks’ client services, activities, products and highly satisfied with initial indications of prof- organizations. Plans to migrate the technical plat- itability. forms are on track and will be completed in 1999, thereby facilitating significant operational Total commitment to investment banking synergies and cost savings. At the same time, risk- Warburg Dillon Read, the investment banking adjusted pricing in the credit area has been imple- arm of UBS, was naturally most sensitive to the mented and technology-based banking business- market turbulence of the third quarter 1998 and es have expanded significantly, with approxi- consequently achieved a disappointing pre-tax mately 160,000 Telebanking (Internet/ Videotex) loss of CHF 1 billion. Two factors stand out: part clients and with 230,000 brokerage transactions of the Global Equity Derivatives Portfolio, which and 14.5 million payment transactions executed is difficult to hedge and has a potential for signi- via Telebanking in 1998. ficant variance, and the losses resulting from our involvement with Long-Term Capital Manage- UBS Brinson posts steady growth ment. Excluding these positions, the pre-tax result UBS Brinson’s pre-tax earnings were up 11% would have been a significant reduction from the from CHF 403 million to CHF 448 million 1997 result, but in line with industry trends. Here despite the impact of market volatility in 1998. the demands of the merger should also be borne Positive results from the UBS Brinson business in mind. area were to some extent offset by a decline in Warburg Dillon Read successfully implement- revenue due to short-term performance issues ed the merger with a reduction in headcount and a very competitive UK marketplace for the of approximately 5,000 and also undertook a Phillips & Drew business area.