UBS Product Day – Zurich UBS China

UBS Product Day – ZurichUBS China

1 June 2006

Rory Tapner, Chairman and CEO Asia Pacific

1

Q:\GROUP-COMMS\Investor Relations\4 Investor Day\Investor Day 2006\Presentations\Final_presos\Product Day\2_Preso_Tapner_NEW_VERSION.ppt

Rapid economic growthChina’s influence in the global economy will continue to grow

Source: IMF, UBS Public Policy Source: Virmani, Martin Wolf

Averaged annual GDP growth rate at 9.5%for the past 20+ years

4’493

USD

bn

2’221

883640 535 498 460 389 370 315 186 147 94 82 69

US

Ch

ina

Jap

an

Ind

ia UK

Ger

man

y

Sko

rea

Bra

zil

Mex

ico

Ru

ssia

Ind

on

esia

Thai

lan

d

Turk

ey

SA

rab

ia CH

Absolute real GDP growth to 2015 The world's dominant economies

0

10

20

30

40

50

60

70

80

1820 1870 1913 1950 1973 2001 2015 2025

China India Japan

United States Big 4 European%

GD

P at

PPP

2


Changing economic structureChina’s economic structure is changing from being dominatedby the state sector…

Industrial GDP: SOEs vs. Non-SOEs1

Source: China Statistical Yearbook, 2005

Fixed asset investment by ownership

…to being led by the private sector

0

10

20

30

40

50

60

70

80

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

State-Owned

Enterprises

Non-StateOwned

Enterprises

Notes:1 SOE = State-owned enterprises2 1 RMB= 0.125USD

%

0

20

40

60

80

100

120

140

160

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Non-SOEIndustrial

Output

SOEIndustrial

Output

RM

B2

bn

3


Financial sector challengesMisallocation of financial resources in the corporate sector…

Structure of financial assets

Source: Riedel, Jin and Gao, 2006, forthcoming; and China Statistical Yearbook, 2005

Distribution of bank lending byownership

…but the situation is improving

%To

tal F

inan

cial

Ass

ets

0

10

20

30

40

50

60

70

80

1999 2000 2001 2002 2003 2004

Equity DebtBank

0

20

40

60

80

100

1988-92 1993-97 1998-2002 2003

Privately-Owned EnterprisesCollectively-Owned EnterpriesState-Owned Enterprises

%

4


Financial sector challenges

Source: CEIC Source: IMF Statistics, Cerulli Associates

Property Market Index1 Mutual Fund and Savings Rate as% of GDP (2004)2

2. In local currencies as of end of 2004, GDP and Gross Savings seasonally adjusted

Overall Beijing Shanghai Shenzhen

80

90

100

110

120

130

140

150

160

170

1997 1998 1999 2000 2001 2002 2003 2004 2005

1. Year 1997 = 100

20%

13% 15%

20%

28%

45%48%

64%

24% 20%

9%

2%

0

10

20

30

40

50

60

70

Australia US UK Germany Japan China

Savings Rate(Gross Savings / GDP)

Mutual Funds / GDP

%

Lack of investment tools

5


Development of the equity market

Real GDP Growth vs SHSEand SZSE Price Index

Source: Riedel, Jin, Gao, 2006 forthcoming

P/E Ratios on SHSE and SZSE

Note: Shanghai Exchange Index (SHSE) encompasses 824 A-listed securities. Shenzhen Exchange Index (SZSE) encompasses 530 A-listed securities.

0

10

20

30

40

50

60

1994 1996 1998 2000 2002 2004

Shenzhen Exchange

Shanghai Exchange

0

500

1,000

1,500

2,000

2,500

1993 1996 1999 2002 2005

0

2

4

6

8

10

12

14

16

Shenzhen Exchange Index (left scale)

Shanghai Exchange Index (left scale)

Real GDP growth rate (right scale)

x

In its short 15 year history, China’s stock market hasexperienced a full boom/bust cycle

6


The next step—developing China’s financial marketsCapital market development is a critical determinant…Capital Market Reform

- the critical piece of the jigsaw…

China’s Population Age Structure

Source: Jonathan Anderson, UBS, 2005

…of China’s ability to meet pensionobligations and fully reform the banking sector

Bankingsectorrestructuring

SOEreform

NPLreduction

Socialsecuritysystemreform

CapitalMarketReform

0

300

600

900

1200

1500

1950 1970 1990 2010 2030 2050

0-14 15-59 60-79 80-plus

Population (millions)

♦ Clean up of SOE sector will improvesustainability of banking sectorrestructuring but will require thedevelopment of a social securitysystem.

♦ Social security system requiresdevelopment of capital market

7


Domestic market competitive landscape

Landscape for domestic banks

Fund ManagementBanking Securities

Pro

du

cts

& A

ctiv

itie

sIn

du

stry

Tr

end

s

♦ Restricted fromparticipating in thesecurities market byGlass Steagall

♦ Low level of productsophistication but strongdistribution and clientfootprint.

♦ Stated interest in WM.A number of retail banksare keen to target massaffluent sector

♦ Trend towards seekingpartnerships withforeign banks

♦ Domestic securities firmsare permitted to offerfull range of securitiesservices, including:♦ A-share, government &

corporate bondsunderwriting

♦ full secondary marketservices

♦ Asset Management

♦ Research

♦ Innovation licenseavailable to select few

♦ Major restructuring ofindustry underway

♦ Product offering limitedby asset class (listedsecurities) and vehicles(unit trusts)

♦ Other asset classes onlyavailable to securitiescompanies

♦ Industry small by globalstandards but expandingrapidly

8


Landscape for foreign banks

…China is on track to meet WTO commitments, but operatingenvironment remains complex

Fund ManagementBanking Securities

Pro

du

cts

&

Act

ivit

ies

Ind

ust

ry

Tren

ds

♦ Restrictions on offeringforeign currencyproducts lifted underWTO

♦ Permitted to offer fullrange of RMB productsby end of ‘06 under WTO

♦ Can offer banking-typeWM products

♦ A large number offoreign banks havetaken minority stakes indomestic banks

♦ Permitted activitieslimited to underwritingand secondary bondtrading.

♦ A-share trading is out ofscope

♦ Regulations governingAsset Management andResearch remain unclear

♦ No explicit WTOcommitments to furtheropening of market

♦ Foreign fund managerscan only access domesticmarket through JVs

♦ Increasing foreignparticipation – largenumber of JVs

♦ Limited by asset class(listed securities) andvehicle (unit trust)

♦ No explicit WTOcommitments to furtheropening of market

Foreign ownershiplimited to 20/25%

Foreign ownershipcapped at 33% ofJV

Foreign ownershipcapped at 49% ofJV

Domestic market competitive landscape

9


UBS in ChinaUBS is uniquely positioned to capture China’stremendous potential

QFII

UBS AG Hong KongBridge to ROW*

Cross-border activitiesM&A activities

QFII, QDII

UBS

Bank Branch- Beijing

Bank Rep Offices– Shanghai & Guangzhou

Securities Rep Offices– Beijing and Shanghai

*Rest of World

10


Multi-entity approach

BeijingSecurities

UBS SDIC(China Dragon)

UBS HKand ROW

UBS Beijingbranch

Multi-entity approach reflects regulatory restrictions & risksStr

uct

ure

♦ UBS 20%, IFC5%

♦ Domestic Con-sortium 42%

♦ Beijing City-related 33%

♦ Managementcontrol

♦ UBS 49%

♦ SDIC 51%

♦ UBS 100%(QFII – USD800m, NPL –USD 45m)

♦ UBS 100%

Bu

sin

ess

act

ivit

ies

♦ Fully licenseddomesticsecurities co.

♦ Full range ofdomesticservices for IB,WM, AM

♦ Focus on FMproductoriginationand realestate

♦ Internationalcross-borderactivity acrossall UBSbusinesses

♦ QFII♦ QDII

♦ Mainly fixedincome / FXCCTand WMbusiness

Bank ofChina

♦ UBS 1.6%(USD 500m)

♦ Commercialco-operation

♦ Commercialco-operationin IB&S andAM on case bycase basis

Co-ordination is key to deriving maximumlong-term benefits

11


Keys to successUBS has the resources…

Strong commitment from Group management

Top quality human resources

Strong PRC cultural know-how and sensitivity

Rigorous implementation of global best practice

Well considered risk management systems

…and the vision needed to succeed in China

12


Beijing Securities restructuring

♦ State Council approval—first of its kind/test case in securities market reform process

♦ First time a foreign firm has been permitted to directly invest in, and exercise management control over, a fullylicensed domestic securities firm

♦ Provides UBS with access to licenses to act in the domestic market for corporates, institutions and WM clients

– Head-start over competitors in building an integrated domestic business platform managed to global standards

– Expanded presence in China enhances UBS’ position in existing cross border business lines

– Unique position for UBS to capitalize on liberalization of the RMB

♦ Asset deal insulates legacy risk from Beijing Securities

♦ UBS to inject c.40 staff into key management, business and operational positions

♦ 6 branches and c.190 core staff from Beijing Securities will also transfer into the new operation

♦ UBS consideration RMB1.7bn (USD210m)

♦ UBS right to increase as and when law or regulations permit

UBS IFC Jianyin COFCO SDICBeijingAMC

NewCo(“UBS Securities”)

67%

Ground-breaking transaction with Beijing Securities…

…forms a core part of UBS’ overall China strategy

13


Newco operating structureUBS' management control ensures implementation of thehighest international standards

Formal structure

– Required given existence of othershareholders

– Shareholders meeting approves overallstrategic direction of the business

– BoD develops strategic vision for thebusiness, reviews managementperformance and sets targets

– Ex Com manages business developmentand runs day to day operations

– UBS representation on BoD and Ex Comare key

Management Committee

– Core management body

– 11 member committee– 5 members from Ex Com– 5 divisional business heads

(IBD, EQ, FIRC, WM and AM)– 1 CFO/head of financial control

– Responsible for overseeing the businessactivities of NewCo and makingrecommendations to Executive Committeeand Board

ShareholdersMeeting

Board ofDirectors(Chairman)

Front and back office support functions

Management Committee

Executive Committee

14


NewCo business overview

NewCo

InvestmentBanking Division

EquitiesFixed Income,

Rates andCurrencies

WealthManagement

Global AssetManagement

♦ ECM products

♦ DCM products

♦ M&A advisory

♦ ECM products

♦ Institutionalbrokerage

♦ Riskmanagementproducts

♦ Retailexecution

♦ DCM products

♦ Brokerage

♦ ProprietaryTrading

♦ Equities

♦ Fixed income

♦ Mutual funds

♦ Mandates

♦ Structuredproducts

♦ New assetmanagementproducts

♦ Distribution ofexisting assetmanagementproducts

Integrated business approach to capture cross-selling potential

15


Transaction process going forwardTimetable currently under review due to regulatory approvalprocess

Present

1 month

3 months

Soft launchof all

businesslines

StateCouncil

approvalreceived

PreliminaryCSRC

approvalexpected

Final CSRCapproval

expected –securitiesbusinesslicense

awarded

Jun 2006

T1 T1+ 3 months

Sept 2006

T1+ 6 months

Dec 2006

3 monthsOfficialpubliclaunch

Move tonew UBS-

stylepremises

Initial focus onIBD and ECM.

WM, FI and AMofferings to

ratchet up overthe following six

month period

16


SummaryUBS in China

China remains a complex operating environment for foreign financialinstitutions.

UBS’ long term commitment to China and our approach to executionplanning has enabled us to build a strong understanding with businesspartners and regulators.

We are confident that our multi-entity portfolio in China represents thebest operating structure available to any foreign player. It seemsunlikely that other foreign firms will be permitted to enter the domesticsecurities market on our terms in the near future.

UBS is well positioned to take full advantage of the continued evolutionof China’s financial markets.

17


Questions…

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UBS Product Day – Zurich UBS China

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