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Slide 1: ANNUAL REPORT 1999/2000 www.credit-suisse.com
Slide 2: Share performance 400 350 300 250 200 150 100 Swiss Market Index Credit Suisse Group 1996 1997 1998 1999 2000 Market capitalisation as at 31 December CHF bn 80 70 60 50 40 30 20 10 0 90 91 92 93 94 95 96 97 98 99 Share data 1999 1998 Change +/-% Number of shares issued at 31 December Shares ranking for dividend at 31 December Average Shares ranking for dividend at 31 March 2000/1999 Market capitalisation at year-end (CHF m) Earnings per share (CHF) Earnings per share fully diluted (CHF) Book value per share (CHF) Share price (CHF) at year-end for inclusion in Swiss tax returns year high year low Dividend (CHF) * proposal of the Board of Directors to the AGM 272,206,488 272,206,488 271,310,760 273,842,638 269,086,369 269,086,369 267,542,466 272,101,488 1 1 1 1 86,153 19.24 19.11 119.84 57,854 11.47 11.40 96.02 49 68 68 25 316.5 302 316.5 212 7* 215 214 382 149.5 5 47 41 –17 42 40
Slide 3: FINANCIAL HIGHLIGHTS 1999 Consolidated income statement 1999 in CHF m 1998 in CHF m Change +/–% REVENUE COMPOSITION 1999 Revenue Gross operating profit Net profit Cashflow ROE 227,870 9,132 5,221 7,983 21,700 6,641 3,068 6,066 28 38 70 32 Change +/–% 18% 19% in % in % 24% Credit Suisse Group Banking business Insurance business Consolidated balance sheet 18.2 22.1 11.0 31 Dec. 1999 in CHF m 11.7 10.0 10.3 31 Dec. 1998 in CHF m 56 121 7 Change +/–% 39% Balance sheet business Commission and service fees Trading Insurance Total assets Total shareholders’ equity – of which minority interests Total risk-weighted assets (BIS) BIS tier 1 capital – of which non-cumulative preferred stock BIS total capital Assets under management Total assets under management – of which advisory – of which discretionary BIS ratios 722,746 34,368 1,747 213,298 28,261 200 40,843 31 Dec. 1999 in CHF bn 652,437 28,162 2,325 202,078 24,198 0 36,000 31 Dec. 1998 in CHF bn 11 22 –25 6 17 – 13 Change +/–% 1,180 604 576 938 523 415 26 15 39 Change +/–% in % in % BIS tier 1 ratio Credit Suisse Credit Suisse First Boston Credit Suisse Group BIS total capital ratio Credit Suisse Group Staff numbers at year-end 6.8 9.9 13.2 19.1 7.1 8.4 12.0 17.8 –4 18 10 7 Change +/–% 1999 1998 Total staff – of which in Switzerland banking business insurance business – of which outside Switzerland banking business insurance business 663,963 20,885 6,569 17,249 19,260 61,580 20,625 6,827 15,753 18,375 4 1 –4 10 5 Financial calendar 2000 Annual General Meeting Dividend payment Publication of 2000 interim results Publication of 2000 annual results 2001 Annual General Meeting Friday, 26 May 2000 Friday, 2 June 2000 Thursday, 31 August 2000 Tuesday, 13 March 2001 Friday, 1 June 2001 1
Slide 4: HEAD OFFICE OF CREDIT SUISSE GROUP IN ZURICH Renovation has restored the head office of Credit Suisse Group in Zurich to its former glory. This impressive building, which incorporates both Renaissance and Baroque elements, was designed by Jakob Friedrich Wanner and built between 1873 and 1876. 2
Slide 5: TO OUR SHAREHOLDERS RAINER E. GUT, CHAIRMAN OF THE BOARD OF DIRECTORS (RIGHT), AND LUKAS MÜHLEMANN, CHIEF EXECUTIVE OFFICER Dear Shareholders We can look back on 1999 as a very good year. Credit Suisse Group increased its net profit by 70% to CHF 5.2 bn and posted a 26% growth in assets under management to CHF 1,180 bn, CHF 62 bn of which were net inflows of new assets. All business units contributed to the Group’s overall performance with record results. Net operating income rose to CHF 27.9 bn, an increase of 28% on the previous year. Especially gratifying was the 31% increase in commission and service fee income to CHF 10.9 bn, which includes income from all areas of asset management. Operating expenses increased by 24% to CHF 18.7 bn. This included a 28% rise in personnel expenses to CHF 13.5 bn, largely as a result of higher staff incentive payments. The increase in other operating expenses was attributable primarily to growth and e-commerce initiatives. The cost/income ratio was improved from just over 72% to 71% and consolidated return on equity (ROE) rose from 11.7% to 18.2%. The results of the individual business units were as follows: Credit Suisse more than doubled its net profit to CHF 451 m. Its return on equity improved from 4.8% to 10.3%. 3
Slide 6: Credit Suisse Private Banking posted a net profit of CHF 1.9 bn, an improvement of 14%, and assets under management increased by CHF 74 bn – or 18% – to CHF 477 bn. Credit Suisse First Boston regained its earnings strength and, by consistently building its lower-risk client business, achieved a net profit of CHF 1.9 bn and a return on equity of 19%. Credit Suisse Asset Management reported a 5% increase in net profit to CHF 235 m, while cash earnings, which have become an accepted profit measure for the asset management business, rose by 19% to CHF 279 m. Winterthur posted a 22% rise in net profit to CHF 1.1 bn, with both life and non-life insurance contributing to this good result. 1999 saw the launch of innovative products and services on the Internet by all business units. We are making intensive efforts in the area of e-commerce, which we regard as a driver of fundamental change both in the ‘business-to-business’ and ‘business-to-consumer’ areas of the financial services sector. Timely recognition by Credit Suisse Group of the importance of e-commerce will enable it to capitalise on the resultant opportunities in all of its activities. Since the restructuring which began in 1996, Credit Suisse Group has achieved a sound basis for sustained and profitable growth. Between 1996 – before the new organisation came into effect – and 1999, Group revenues increased by 19% p.a. Assets under management grew by 22% p.a. Excluding the mergers with Winterthur, Warburg Pincus Asset Management and other acquisitions, growth in assets under management was 17% p.a. Based on the 1996 Group operating results, net earnings per share (EPS) have grown by 32% p.a. to CHF 19 for 1999, and return on equity (ROE) has increased from 10% to 18%. Book value per share has increased by 14% p.a. since 1996. 4
Slide 7: In the same period, the Credit Suisse business unit achieved revenue growth of 10% p.a., during a highly successful restructuring phase. Credit Suisse Private Banking recorded revenue growth of 15% p.a. and growth in assets under management of 14% p.a., reflecting changes to the traditional business model as well as the launch of innovative products and services. Revenue growth of 29% p.a. at Credit Suisse First Boston reflects success in the execution of its strategy to focus on customer businesses and to close the gap with its three large global competitors. In the last three years, Credit Suisse Asset Management has posted revenue growth of 22% p.a., with 26% growth in assets under management, while building a consolidated global business. Winterthur has achieved net profit growth of 29% p.a. and growth in assets under management of 14% p.a., reflecting its concentration on its core businesses, restructuring efforts and market success. The creation of the new ‘Financial Services’ management division on 1 April 2000 is aimed at further accelerating the Group’s growth and advancing the ‘Personal Financial Services Europe’ project – already successfully running in our pilot market, Italy – with a view to expanding our asset management business in Europe under even better conditions. The new structure will also pave the way for the closer integration of banking, insurance and e-commerce with a view to developing new customer service models as well as innovative products and services. We wish to thank our customers and you, our shareholders, for the trust you have placed in our company. We also extend our warmest thanks to our employees for their valuable contribution to the success of Credit Suisse Group. Rainer E. Gut Chairman of the Board of Directors Lukas Mühlemann Chief Executive Officer 5
Slide 8: THE STRUCTURE OF CREDIT SUISSE GROUP Credit Suisse Group is one of the world’s leading international financial services companies. The Group goes back to 1856. It employs around 64,000 staff and is listed on the SWX Swiss Exchange, Frankfurt and Tokyo stock exchanges. The Group comprises the Financial Services management division, incorporating Credit Suisse (corporate and individual customers in Switzerland), Winterthur (worldwide insurance business) and Personal Financial Services Europe (affluent private clients in Europe); the Group also includes Credit Suisse Private Banking (private investors) and Credit Suisse Asset Management (institutional investors), which are responsible for asset management, and Credit Suisse First Boston, the global investment bank. In parallel to its conventional distribution channels, Credit Suisse Group also offers a wide range of e-commerce services across all its business areas. Private Banking Financial Services Investment Banking Asset Management Personal Financial Services Europe Services for private investors in Switzerland and abroad 51 locations in Switzerland 36 locations internationally Corporate and individual customers in Switzerland 239 locations in Switzerland Financial services for affluent customers in Europe 5 locations in Italy, with another 15 to follow in the course of the year 2000 Worldwide insurance business Global investment banking Services for institutional and mutual fund investors worldwide 7 locations in Switzerland 16 locations internationally About 630 locations in Switzerland, present in over 30 countries 4 locations in Switzerland 51 locations internationally Subsidiaries Bank Leu* Clariden Bank* Bank Hofmann* Credit Suisse Trust* Credit Suisse Fides* Banca di Gestione Patrimoniale* Subsidiaries Neue Aargauer Bank* (98.6%) Subsidiaries Winterthur Life Winterthur International DBV-Winterthur Group Winterthur Holding Italia Hispanowin S.A. Winterthur (UK) Holdings Winterthur U.S. Holdings Subsidiaries Credit Suisse First Boston International Credit Suisse First Boston Corp. Credit Suisse First Boston (Europe) Ltd. Subsidiaries Credit Suisse Asset Management, LLC Credit Suisse Trust & Banking Credit Suisse Asset Management (Australia) Credit Suisse Asset Management Ltd. Credit Suisse legal entity Winterthur legal entity Credit Suisse First Boston legal entity * direct holding of Credit Suisse Group 6
Slide 9: THE SIX BUSINESS UNITS OF CREDIT SUISSE GROUP CREDIT SUISSE Credit Suisse serves corporate and individual customers in Switzerland through a multichannel strategy and an efficient branch network covering all major locations. Thanks to an innovative range of products and services, especially in direct and Internet banking, it ranks among the market leaders in its segment. CREDIT SUISSE PRIVATE BANKING Credit Suisse Private Banking is one of the world’s largest private banks and has a strong presence in both the Swiss and international markets. It specialises in providing personal investment counselling and professional asset management for a sophisticated international clientele. CREDIT SUISSE FIRST BOSTON Credit Suisse First Boston is a leading global investment banking firm, providing financial advisory and capital raising services, sales and trading, and financial products for users and suppliers of capital around the world. CREDIT SUISSE ASSET MANAGEMENT Credit Suisse Asset Management is a leading global asset manager focusing on institutional and mutual fund investors, providing first-class international management through domestic operations. WINTERTHUR Winterthur Group is one of the leading insurance companies in Europe and one of the largest internationally active insurance companies in the world. It offers private and corporate customers tailor-made insurance and pension solutions at a local and international level. PERSONAL FINANCIAL SERVICES EUROPE The Personal Financial Services Europe initiative targets affluent private clients in selected European markets, offering a wide range of Credit Suisse Group and third-party products, personalised advice and Internet content, and seamless service through a combination of traditional and electronic channels. 7
Slide 10: CREDIT SUISSE GROUP BUSINESS REVIEW AND CONSOLIDATED RESULTS Credit Suisse Group posted a net profit of CHF 5.2 bn, 70% higher than in the previous year, and an increase in revenue of 28%. All business units achieved record results and strong growth. The Group’s ROE increased to 18.2%. Assets under management grew by CHF 242 bn or 26% to CHF 1,180 bn. As of 1 April 2000, the Group established the new ‘Financial Services’ management division, with the aim of advancing the integration of banking, insurance and e-commerce and supporting dynamic business development. REVENUE CONTRIBUTION BY BUSINESS UNIT 16% 4% 12% 17% 51% CS CSPB CSFB CSAM Winterthur STAFF NUMBERS BY BUSINESS UNIT 25,829 11,404 8,371 Credit Suisse Group’s net operating income rose to CHF 27.9 bn, an increase of 28% on the previous year. Commission and service fee income, which includes income from asset management products and services, rose by 31% to CHF 10.9 bn. After last year’s setback, income from trading rose by 177% to CHF 6.6 bn. Interest income rose by 2% to CHF 5.3 bn. Insurance business contributed CHF 5.1 bn (1998: CHF 5.4 bn) to the Group’s net operating income. Operating expenses rose by 24% to CHF 18.7 bn. Personnel expenses climbed 28% to CHF 13.5 bn, mainly as a result of the 68% increase in performance-related staff incentive payments to CHF 5.2 bn. Other operating expenses rose by 17% to CHF 5.2 bn, primarily as a result of investment in growth and e-commerce initiatives. The cost/income ratio improved from just over 72% to 71%. Gross operating profit went up by 38% to CHF 9.1 bn. Depreciation, valuation adjustments and losses decreased by 33% to CHF 2.6 bn. The overall tax bill doubled to CHF 1.1 bn, reflecting higher income. After deducting minority interests of CHF 118 m, Credit Suisse Group posted a net profit of CHF 5.2 bn, 70% higher than in 1998, with no extraordinary events having a material impact on the result. Total assets under management grew by CHF 242 bn, or 26%, to CHF 1,180 bn, of which CHF 62 bn, or 7%, were net new assets. At year-end, total equity amounted to CHF 34.4 bn, up 22%. Consolidated return on equity (ROE) improved from 11.7% to 18.2%. Book value per share rose by 25% to CHF 119.84, while net profit per share (EPS) came to CHF 19.24 (up 68%). At the Annual General Meeting on 26 May 2000 the Board of Directors will propose an increase in dividend from CHF 5 to CHF 7 per registered share. As at 31 December 1999, Credit Suisse Group had 63,963 employees (1998: 61,580), of which 27,454 were in Switzerland (1998: 27,452). Strong growth in all business units Credit Suisse more than doubled its net profit to CHF 451 m. Its return on equity rose from 4.8% to 10.3%. Total revenue increased by 8%, while operating expenses rose by 1%. The cost/income ratio improved further from 71% to 67%. Assets under management rose by CHF 21 bn, or 18%, to 2,000 CS CSPB CSFB CSAM Winterthur 15,185 8
Slide 11: CHF 141 bn, of which CHF 14 bn, or 12%, was accounted for by net new assets. In e-commerce, Credit Suisse continues to take a leading position in Switzerland: the number of online banking customers more than doubled to over 212,000 by the end of the first quarter of 2000. Youtrade, which became the first direct brokerage service in Switzerland when it was launched in April 1999, had around 16,000 customers by endMarch 2000. Around 47% of all securities transactions at Credit Suisse are executed online. Credit Suisse Private Banking posted a net profit of CHF 1.9 bn in 1999, a 14% PROFIT CONTRIBUTION BY BUSINESS UNIT 19% 8% 4% 35% 34% CS CSPB CSFB CSAM Winterthur increase on the previous year. Total revenue rose by 10%, while operating expenses increased by 11%, mainly owing to higher personnel expenses (up 13%) and investment in new technologies. The cost/income ratio remained at 47%. Assets under management expanded by CHF 74 bn or 18% to CHF 477 bn, of which CHF 20 bn (1998: CHF 17 bn) were net new assets. Lugano-based Banca di Gestione Patrimoniale, founded in the second half of 1999, opened its doors for business in midFebruary 2000. Zurich-based Bank für Handel und Effekten will, during the second quarter of 2000, be integrated into Bank Hofmann, a Zurich-based independent private bank under the umbrella of Credit Suisse Private Banking. With this step, Bank Hofmann will expand its asset base, while adding credit expertise to its range of services. With new products in e-commerce (e.g. Fund Lab; Derivatives, IPOs and Bond Issues; Insurance Lab), the business unit continued to be an innovator in the electronic delivery of private banking products and services. Credit Suisse First Boston regained its earnings strength, posting a net profit of USD 1.3 bn (CHF 1.9 bn). The firm has consistently applied its strategy of growing client business involving less capital and risk, and simultaneously achieved good increases in market share in equities and improved its ranking in fixed income, as well as in mergers and acquisitions. Total revenue rose by 45% on a USD basis, or by 51% on a CHF basis, with strong contributions from equities business (up 94%/102%), fixed income and derivatives business (up 63%/70%) and investment banking (up 22%/27%). Operating expenses went up by 35% (USD) or by 40% (CHF), reflecting higher bonus accruals in line with revenue growth, investment in growth and e-commerce initiatives, as well as the significant shift in the business mix. 9
Slide 12: Credit Suisse Asset Management posted a net profit of CHF 235 m (up 5%). Cash earnings, which have become an accepted profit measure for the asset management business, increased by 19% to CHF 279 m. Revenue increased by 35%, while operating expenses rose by 44%, mainly reflecting investments in information technology and European retail infrastructure, as well as the acquisition of Warburg Pincus Asset Management. Discretionary assets under management grew by CHF 112 bn, or 53%, to CHF 324 bn, of which CHF 18.5 bn (9%) was attributable to net new assets, CHF 57.5 bn (27%) to market gains and CHF 36 bn (17%) to the acquisition of Warburg Pincus. Total assets under management amounted to CHF 425 bn (up 43%). Winterthur achieved a net profit of CHF 1.1 bn, up 22%, with both non-life and life business contributing to the overall result. Gross premiums in non-life grew by 3%. Following 1998’s tax-driven surge in Switzerland, life insurance premiums fell by 1%; the compounded annual growth between 1997 and 1999 was 10%. Total premiums grew by 1%, and assets under management grew by 16% to CHF 132 bn. The strength of Winterthur’s insurance operations permitted a significant reduction in realised capital gains (investment return was 6.3%). As a result of this investment strategy, which is in line with the current market environment, total reported equity went up by 20%. Through a series of acquisitions, Winterthur increased its customer base to more than 13 m clients in 14 European countries. With regard to e-commerce, it is offering transaction capabilities for household contents, motor, travel and life insurance in six European countries under the brand name ‘webinsurance’, with more to follow. In Italy – the pilot market for ‘Personal Financial Services Europe’ – Credit Suisse (Italy) is already successfully operating with 250 Personal Bankers and its own Call Center. Assets under management have more than doubled since 1998 to CHF 4 bn (EUR 2.5 bn). The fifth Investment Center was opened in Milan at the end of March and another fifteen are to follow over the course of the year. Since April 2000, clients have also had direct access to comprehensive financial and product information and various advisory tools over the Internet. In parallel with these developments, preparations are currently underway for a pan-European e-commerce platform. During the second half of the year, Credit Suisse Group will start to offer online financial services, including brokerage, on the major European and overseas stock exchanges via a Group company domiciled in Luxembourg. Personal Financial Services Europe Credit Suisse Group is fully focused on e-commerce, which it regards as a driver of fundamental change in both the ‘business-to-business’ and ‘business-toconsumer’ areas. The Group is offering a variety of e-commerce services as an alternative to existing channels, as seen with Direct Net at Credit Suisse, webinsurance at Winterthur and PrimeTrade at Credit Suisse First Boston. It has also used e-commerce as a means E-commerce 10
Slide 13: to offer new products and attract new customer groups, such as with youtrade, yourhome, Fund Lab and many others. Lastly, the Group is undertaking efforts which fundamentally transform existing business concepts through start-ups such as the ‘Personal Financial Services Europe’ project and other initiatives. Credit Suisse Group’s strategy is to capitalise on its strong brand, on its product and service capabilities and on the interplay between traditional and new distribution paradigms. Its goal is to have full e-commerce capabilities in all its primary businesses by the end of this year and to be in a position to move forward as one of the most successful established e-commerce market participants in financial services. Outlook In the first months of the current year, all business units have posted excellent results and are maintaining their strong growth momentum. Credit Suisse Group expects the operating environment to remain volatile and challenging, but it is confident of achieving further improvements in performance. New ‘Financial Services’ management division As of 1 April 2000 Credit Suisse Group adapted the organisational structure which was introduced at the beginning of 1997 in line with the altered market environment, in order to accelerate the Group’s growth further. Credit Suisse (corporate and individual customers in Switzerland), Winterthur (worldwide insurance business) and ‘Personal Financial Services Europe’ (affluent private clients in Europe) will be combined to form the new ‘Financial Services’ management division led by Thomas Wellauer, but will continue to appear in the market as independent business units. Thomas Wellauer will remain Chief Executive Officer of Winterthur. The creation of the ‘Financial Services’ management division will pave the way for the closer integration of banking, insurance and e-commerce with a view to developing new customer service models as well as innovative products and services. The focusing of strengths will facilitate the rapid and large-scale expansion of e-commerce activities, the development of new business models in Switzerland and the exploitation of additional business opportunities, especially in Europe. 11
Slide 14: OVERVIEW OF BUSINESS UNIT RESULTS 1999 in CHF m Credit Suisse Credit Suisse Private Banking Credit Suisse First Boston Credit Suisse Asset Management Winterthur Non-life Winterthur Life Adjustments including Corporate Centre Credit Suisse Group REVENUE 3,478 1,401 866 4,715 1,418 768 14,532 7,999 2,714 1,149 467 377 3,016 2) 1,239 2) 783 2) 1,564 2) 509 2) 422 2) – 584 476 –701 27,870 13,509 5,229 Personnel expenses Other operating expenses TOTAL OPERATING EXPENSES GROSS OPERATING PROFIT 2,267 1,211 51 610 2,186 2,529 46 55 10,713 3,819 439 786 844 305 44 0 2,022 994 41 0 931 633 75 0 –225 – 359 349 89 18,738 9,132 1,045 1,540 Depreciation and write-offs on non-current assets Valuation adjustments, provisions and losses1) PROFIT BEFORE EXTRAORDINARY ITEMS/TAXES 550 51 17 130 2,428 40 22 516 2,594 0 0 713 261 0 2 24 953 0 0 340 558 –797 2 111 1) – 574 6,547 93 152 1,149 Extraordinary income Extraordinary expenses Taxes NET PROFIT BEFORE MINORITY INTERESTS 454 3 1,930 19 1,881 1 235 0 1,171 90 – 332 5 5,339 118 – of which minority interests NET PROFIT (after minority interests) 451 4,411 10.3% 4,611 1,911 2,771 n/a 2,875 1,880 9,925 19.0% 10,494 235 540 n/a 1,054 1,081 11,618 10.1% 12,607 – 337 5,221 Average allocated equity capital Return on average equity capital Equity capital allocation as of 1 January 2000 1) 2) net of allocation (–)/release (+) of reserves for – 68 – 31 0 general banking risks defined as premiums earned (net), less claims incurred and expenses for processing claims as well as actuarial provisions, less commissions (net), plus investment income from insurance business; expenses from the handling of both claims and investments are allocated to revenue; personnel expenses non-life: CHF 365 m, life: CHF 253 m, other operating expenses non-life: CHF 275 m, life: CHF 212 m. OVERVIEW OF ASSETS UNDER MANAGEMENT 31 Dec. 1999 in CHF bn Credit Suisse Credit Suisse Private Banking Credit Suisse Asset Management Winterthur Group Credit Suisse Group CASH & TIME DEPOSITS SECURITIES ACCOUNTS 65 38 6 4 112 Fixed income, equity and balanced safekeeping accounts – of which fixed income – of which equities – of which balanced Investment funds – of which Credit Suisse Asset Management investment funds Other TOTAL SECURITIES ACCOUNTS FIDUCIARY TIME DEPOSITS TOTAL 34 9 25 – 32 28 7 304 140 164 – 68 50 4 386 146 163 77 – – 31 102 66 36 – 5 – 22 825 361 387 77 105 78 64 73 3 141 139 2 376 63 477 365 112 417 1 425 100 324 128 – 132 – 132 994 68 1 174 604 570 6 – of which advisory – of which discretionary Private Equity TOTAL INCL. PRIVATE EQUITY 1,180 12
Slide 15: BUSINESS UNIT ACCOUNTING PRINCIPLES Unless stated below, Group accounting and valuation principles apply. BUSINESS UNIT FINANCIAL STATEMENTS The Credit Suisse Group financial statements reflect the organisational structure during 1999 and show the results of all business units as if they were legal entities operating independently. Financial information for the Corporate Centre includes income and expenses for the Corporate Centre as well as all consolidation adjustments. Corporate Centre costs attributable to operating business have been allocated to the respective business units. The business unit financial results include operating financial information only. For further details please refer to the relevant sections. MATERIAL CHANGES DURING 1999 The following changes are reported for the individual business units (for details see page 59): Credit Suisse Private Banking BGP Banca di Gestione Patrimoniale SA, Lugano Credit Suisse Asset Management Warburg Pincus Asset Management, New York DBV Winterthur Holding National Insurance and Guarantee Corp. Plc (NIG), London Credit Suisse First Boston INCOME STATEMENT General Winterthur Group Credit Suisse First Boston International To reconcile business unit accounts with legal entity accounts, certain adjustments have been made in the Corporate Centre (included in the ‘Adjustments including Corporate Centre’ column). Items such as restructuring costs are reflected in the Corporate Centre only. Expenses relating to projects sponsored by Credit Suisse Group that are not charged out to the business units are included in the ‘Adjustments including Corporate Centre’ column. Inter-business unit revenue splits Responsibility for each of our products is allocated to one of the business units. When one business unit contributes to the performance of another, revenue allocations have been established to compensate for such efforts. Revenue allocations are shown in the relevant income statement line. 13
Slide 16: Inter-business unit cost allocations Certain administrative and IT tasks (‘services’) may be concentrated in one business unit, which acts as a provider for the other business units. Such services are compensated for on the basis of service level agreements and transfer payments (which include personnel and other operating expenses). These are reflected in the ‘Other operating expenses’ line of the income statement. Real estate used by the bank All real estate in Switzerland, mainly bank premises, is managed centrally. The costs reflect market rent, plus an additional charge if actual costs exceed market rent. These costs are included in ‘Other operating expenses’. Provisions for credit risk Actual credit provisions exceeding the anticipated credit provision derived from statistically expected losses are booked against the ‘Reserves for general banking risks’ held at Group level and netted in the business unit ‘Valuation adjustments, provisions and losses’ income statement line. If the actual credit provisions are below the anticipated credit losses, the remaining amount is allocated to the ‘Reserves for general banking risks’. Taxes Taxes are calculated for individual business units based on average tax rates across their geographical range. The difference between these and actual tax expenses has been adjusted in the ‘Adjustments including Corporate Centre’ column. BALANCE SHEET General The balance sheets of the banking business units include the appropriate proportion of bank premises occupied in Switzerland and abroad. Equity allocation Available equity is allocated to the business units on the basis of average regulatory capital required during the period. KEY PERFORMANCE INDICATORS Ratios per head have not been calculated because some Group-wide services are provided centrally by one or other of the business units, meaning that staffing required for services received is not reflected in the recipient business unit’s headcount. ASSETS UNDER MANAGEMENT Assets under management include client-related on and off-balance-sheet assets. Where two business units share responsibility for managing funds (such as investment funds), the assets under management are included in both business units. 14
Slide 17: REPORT OF THE GROUP’S AUDITORS ON THE BUSINESS UNIT FINANCIAL STATEMENTS OF CREDIT SUISSE GROUP, ZURICH We have performed certain procedures enumerated below in relation to the 1999 business unit financial statements of Credit Suisse Group and its subsidiary undertakings (‘the business unit financial statements’) for which the Directors of Credit Suisse Group are solely responsible. The business unit financial statements, which have been prepared for illustrative purposes only, are set out on pages 12 – 34 of the annual report. We have performed limited review procedures with regard to the business unit financial statements as follows: – reviewed the methodology for preparation of the business unit financial statements as described therein and their proper application; – given the methodology for preparation, reviewed the consistent application of the accounting policies; and – reviewed the reconciliation between the business unit financial statements and the consolidated Group results presented in the audited financial statements for the year. Nothing has come to our attention as a result of the foregoing limited review procedures that would lead us to believe that the business unit financial statements have not been properly compiled on the basis of the preparation set out therein or are materially misstated. KPMG Klynveld Peat Marwick Goerdeler SA Brendan R. Nelson Chartered Accountant Auditors in Charge Zurich, 9 March 2000 Peter Hanimann Certified Accountant 15
Slide 18: CORPORATE AND INDIVIDUAL CUSTOMERS IN SWITZERLAND 1999 was a very successful year for Credit Suisse. Net profit more than doubled to CHF 451 m compared to the previous year. The bank’s return on equity rose from 4.8% to 10.3%. Total revenue increased by 8.4%, while operating expenses increased modestly – up 0.6%. The cost/income ratio improved from 71.2% to 66.6%. During 1999, Credit Suisse continued to improve its profitability through strong revenue growth. Lendings increased by 7.1% or CHF 6.0 bn, with mortgage growth accounting for 5.2%, or CHF 4.4 bn. This growth was achieved without compromising lending policy or the strict application of risk-adjusted pricing. Assets under management rose by more than 17.5% or CHF 21 bn to CHF 141 bn, of which 11.7% or CHF 14 bn was net new business. Credit Suisse also further grew its market share in the investment fund business. Assets under management held in investment funds grew by 34% to CHF 32.2 bn. In individual customer business, the trend towards greater savings through investment in securities continued. In pensions business, the volume of security investments rose by over 70% to CHF 1.6 bn. Further progress was made in expanding bancassurance activities. The travel insurance package launched with Winterthur at the beginning of June was well received, selling 14,000 units. In credit card business, a 35% increase in cards issued and the purchase of about 340,000 cards from Europay’s Eurocard portfolio enabled Credit Suisse to double its market share to 24%. RATIOS/KEY PERFORMANCE INDICATORS 1999 1998 Average allocated equity capital CHF m Allocated equity capital CHF m (1 January 2000/1999) Cost/income ratio – excl. amortisation of goodwill Return on average equity capital Number of employees at 31 Dec. Pre-tax margin Personnel expenses/total expenses Personnel expenses/total income Number of branches at 31 Dec. Net interest margin Loan growth at 31 Dec. Deposit/loan ratio at 31 Dec. Assets under management CHF bn at 31 Dec. 4,411 4,611 66.6% 66.3% 10.3% 11,404 16.8% 61.8% 40.3% 239 2.35% 7.8% 71.4% 141 4,230 4,450 71.2% 71.1% 4.8% 11,568 7.6% 62.6% 44.0% 241 2.21% 10.4% 71.8% 120 16
Slide 19: In corporate customer business, lendings in the low and medium risk classes grew 4.9%. Above-average growth was recorded in lendings to small and medium-sized enterprises (SME), with venture capital financing and consultancy services for structured financing contributing to this success. Trade financing volumes were up 30%, with Credit Suisse’s wider range of services and high level of commitment in this area both having a positive impact. Market share in foreign exchange trading was further expanded, reflecting the range of comprehensive, tailor-made hedging solutions on offer. Direct banking saw the number of online customers more than double to over 212,000 by the end of the first quarter of 2000. Youtrade, the first discount brokerage service via telephone and the Internet in Switzerland, launched in April 1999, proved a great success, with around 16,000 customers by the end of March 2000. 47% of all securities transactions at Credit Suisse are now executed online via Direct Net and youtrade. Yourhome is another innovative package of Internet-based services from Credit Suisse. It is aimed at people looking to buy a home and offers a full range of relevant products and services both from Credit Suisse and from external partners. E-commerce services will be expanded continuously. Lafferty Internet Ratings recently named Credit Suisse the best Internet bank in Europe for the second year running. INCOME STATEMENT Net interest income Net commission and service fee income Net trading income Other ordinary income REVENUE 1999 in CHF m 1998 in CHF m Change in % 2,227 946 230 75 3,478 1,401 866 2,267 1,211 51 13 610 550 51 17 130 454 3 451 – 68 2,096 845 220 48 3,209 1,412 842 2,254 955 30 4 666 259 36 51 43 201 –4 205 11 6 12 5 56 8 –1 3 1 27 70 225 –8 112 42 – 67 202 126 – 120 Personnel expenses Other operating expenses TOTAL OPERATING EXPENSES GROSS OPERATING PROFIT Depreciation and write-offs on non-current assets – of which amortisation of goodwill Valuation adjustments, provisions and losses* PROFIT BEFORE EXTRAORDINARY ITEMS AND TAXES Extraordinary income Extraordinary expenses Taxes NET PROFIT – of which minority interests NET PROFIT (after minority interests) * net of allocation (–)/release (+) of reserves for general banking risks 17
Slide 20: Total revenue increased 8.4% to CHF 3,478 m. An increase in lending volumes and an improved overall interest margin owing to lower interest arrears from nonperforming loans resulted in a 6% increase in interest income. Commission and service fee income rose by 12%, with securities (including investment fund commissions) and service fee business contributing in equal parts to this growth. Trading income generated from revenues from customers’ foreign exchange, foreign banknotes and precious metals business rose 5%, despite the introduction of the euro. Operating expenses increased modestly (0.6%), resulting in gross operating profit of CHF 1,211 m, up 27%. As a result, the cost/income ratio improved a further 4.6 percentage points to 66.6%. At CHF 99.9 bn, total assets were up 7% over 31 December 1998. Lending volumes increased by 7.1% to CHF 90.8 bn over the same period, while customer deposits grew by 6.4% to CHF 64.9 bn. Valuation adjustments, provisions and losses amounted to CHF 610 m. This figure includes statistically determined credit risk costs of CHF 600 m and CHF 10 m in other provisions. Actual valuation adjustments on credit exposure decreased by 20% compared with 1998 and were CHF 68 m below the statistically anticipated value. Overall, the risk profile of the credit portfolio improved substantially. Net profit for the year was CHF 451 m, which represents an ROE of 10.3%, more than double the result for the previous year. 1999 results 18
Slide 21: BALANCE SHEET Cash and other liquid assets Money market claims Due from banks Due from other business units Due from customers Mortgages Securities and precious metals trading portfolio Financial investments Participations Tangible fixed assets Accrued income and prepaid expenses Other assets TOTAL ASSETS 31 Dec. 1999 in CHF m 31 Dec.1998 * in CHF m Change in % 1,374 489 654 1,080 27,816 63,024 21 1,711 31 2,237 292 1,174 99,903 1,938 16,689 36,330 28,530 3,883 5,563 504 1,501 135 4,830 13 99,903 869 563 633 1,187 26,245 58,596 54 1,873 49 2,278 194 894 93,435 1,888 13,101 37,429 23,517 5,841 5,399 548 903 169 4,640 10 93,435 58 –13 3 –9 6 8 – 61 –9 – 37 –2 51 31 7 3 27 –3 21 – 34 3 –8 66 –20 4 30 7 Due to banks Due to other business units Due to customers, in savings and investment accounts Due to customers, other Medium-term notes Bonds and mortgage-backed bonds Accrued expenses and deferred income Other liabilities Valuation adjustments and provisions Capital – of which minority interests TOTAL LIABILITIES * On the basis of the changes to the accounting principles, the accounting for securities lending and borrowing transactions was changed in 1999. Using the revised accounting rules, the 1998 balance sheet total would have been reduced by CHF 166 m. 19
Slide 22: SERVICES FOR PRIVATE INVESTORS IN SWITZERLAND AND ABROAD In 1999 Credit Suisse Private Banking improved on its excellent performance in 1998. Net profit before minority interests increased by 14% to CHF 1,911 m and assets under management grew by 18% to CHF 477 bn. The growth was the result of innovative product offerings, very strong investment performance and the acquisition of new portfolios. Credit Suisse Private Banking was thus able to further strengthen its position as one of the world’s leading private banks. At the same time, it consolidated its position as one of the most dynamic providers of Internet banking services. In 1999, Credit Suisse Private Banking produced strong growth and very good results in an increasingly competitive environment, and invested heavily in its business activities. In three areas, the bank faced particularly large challenges: new client groups with different requirements, increasing performance pressure, and price pressure caused by the deployment of new technologies. In all three areas, Credit Suisse Private Banking tackled the challenges head on and came up with innovative solutions. INCOME STATEMENT Net interest income Net commission and service fee income Net trading income Other ordinary income REVENUE 1999 in CHF m 1998 in CHF m Change in % 898 3,115 592 110 4,715 1,418 768 2,186 2,529 46 7 55 2,428 40 22 516 1,930 19 1,911 – 31 852 2,713 551 159 4,275 1,250 712 1,962 2,313 39 5 177 2,097 60 35 435 1,687 16 1,671 25 5 15 7 – 31 10 13 8 11 9 18 40 – 69 16 – 33 – 37 19 14 19 14 Personnel expenses Other operating expenses TOTAL OPERATING EXPENSES GROSS OPERATING PROFIT Depreciation and write-offs on non-current assets – of which amortisation of goodwill Valuation adjustments, provisions and losses* PROFIT BEFORE EXTRAORDINARY ITEMS AND TAXES Extraordinary income Extraordinary expenses Taxes NET PROFIT – of which minority interests NET PROFIT (after minority interests) * net of allocation (–)/release (+) of reserves for general banking risks 20
Slide 23: In traditional private banking, where the relationship manager plays the central role, the trend away from product-focused portfolio management and towards comprehensive financial advice intensified. Credit Suisse Private Banking responded by expanding the breadth and depth of individual investment consulting services, offering its clients added value through comprehensive solutions to complex problems. One of Credit Suisse Private Banking’s main goals last year was to substantially increase the quality of its products and services. It managed to do this by implementing the following measures: specialisation in the products and services area, greater use of new technologies for the benefit of clients, and selling its own and other companies’ products with the aim of offering its clients the best products on the market. The clearest demonstration of these fundamental changes in strategy and positioning came with the wide range of online services that Credit Suisse Private Banking launched at www.cspb.com in 1999. These services have helped to make the market much more transparent for users: – Fund Lab, launched in March 1999, made it possible for the first time to compare and purchase mutual funds from a wide selection of European, American and Asian providers. By the end of the year, more than 700 investment funds from 28 providers were available through Fund Lab. All products – the bank’s own and those of other companies – are, with a few exceptions, offered at uniform issuing rates. – In April, youtrade was launched in conjunction with Credit Suisse. This service offers investors the opportunity to trade in securities directly, quickly, securely and on favourable terms via the Internet and by telephone. – Since June, Investors’ Circle has allowed clients to access relevant market and research information specifically designed for private clients. – During October, three additional Internet services were launched: Investment Proposal Online, an interactive advisory program, generates an investment proposal based on the investor’s personal risk profile; a second database gives an overview of the latest IPOs, derivatives and bond issues from leading issuing houses, whilst an information service from Reuters provides market quotes and news. – Launched in December, Insurance Lab enables clients to compare life insurance products from different companies and select interactively the insurance product best suited to their individual needs. 21
Slide 24: Fund Lab demonstrates the importance of the new Internet services to the bank’s overall success. In 1999 it contributed substantially to the massive and sustained increase in sales of proprietary and third-party funds. Every week Credit Suisse Private Banking receives requests from external fund companies wanting to have their funds included in Fund Lab. The database registers more than 50,000 hits per day. The innovative qualities of Fund Lab won Credit Suisse Private Banking the ‘Global Fund Leader of the Year 1999’ award from a leading UK investment fund publication. The creation of a new bank and two acquisitions added to Credit Suisse Private Banking’s progress in 1999. In the second half of the year, a new private bank, Banca di Gestione Patrimoniale, was founded in Lugano. As an independent private bank, it fills a strategic gap in the Italian-speaking market. The new bank opened for business in the middle of February 2000. Outside Switzerland, Credit Suisse Private Banking made two acquisitions in Spain during 1999. In March it bought Gestión Integral and in July it acquired the private banking business of ABN AMRO. These purchases strengthened Credit Suisse Private Banking’s position as one of the leading foreign financial institutions in the strategically important Spanish market. New representative offices in Beirut, Athens and Istanbul were opened during 1999 and Credit Suisse Trust Limited was established in the Bahamas. Bank für Handel und Effekten will, during the second quarter of 2000, be integrated into Bank Hofmann, an independent private bank under the umbrella of Credit Suisse Private Banking. Bank Hofmann will thus expand its asset base while adding credit expertise to its range of services. At the end of 1999 Credit Suisse Private Banking had a total of 51 Swiss branches and a further 36 offices outside Switzerland. BALANCE SHEET INFORMATION 31 Dec. 1999 31 Dec.1998* in CHF m in CHF m Total assets Due from customers – of which secured by mortgages – of which secured by other collateral 99,651 31,902 7,667 22,731 83,913 22,544 6,505 14,042 * On the basis of the changes to the accounting principles, the accounting for securities lending and borrowing transactions was changed in 1999. Using the revised accounting rules, the 1998 balance sheet total would have been reduced by CHF 6,515 m. 22
Slide 25: In a turbulent market characterised by inflationary fears, low bond yields and resurgent equity markets, Credit Suisse Private Banking was able to repeat its strong first-half performance in the second half of the year. Assets under management grew by CHF 74 bn, or 18%, compared with 1998, of which CHF 20 bn, or 5%, was net new business. At year-end, assets under management totalled CHF 477 bn. Total revenue rose by 10.3%, with most of the growth attributable to a 14.8% improvement in commission and service fee income. Trading income and interest income were also up, by 7.4% and 5.4% respectively. Operating expenses increased by 11.4%, the two main drivers being greater investment in new technologies and performance-related remuneration (+13.4%). Staff numbers decreased slightly – from 8,399 to 8,371. The cost/income ratio was virtually unchanged on last year’s level at 47%. There was a significant reduction in valuation adjustments, provisions and losses (down 69% at CHF 55 m), reflecting improved risk management and much lower provisions. Net profit increased by 14.3% to CHF 1,911 m. The ratio of net profit to average assets under management rose from 42 bp to 44 bp. 1999 results KEY PERFORMANCE INDICATORS 1999 1998 Average allocated equity capital CHF m Allocated equity capital CHF m (1 January 2000/1999) Cost/income ratio – excl. amortisation of goodwill Number of employees at 31 Dec. Pre-tax margin Fee income/total income Fee income/operating expenses Assets under management CHF bn at 31 Dec. Growth in assets under management at 31 Dec. – of which volume – of which performance After-tax profit/Ø assets under management 2,771 2,875 47.3% 47.2% 8,371 51.9% 66.1% 142.5% 477 18.4% 5.0% 13.4% 44 bp 2,596 2,200 46.8% 46.7% 8,399 49.6% 63.5% 138.3% 403 5.9% 4.5% 1.4% 42 bp 23
Slide 26: GLOBAL INVESTMENT BANKING 1999 was a year of strong achievement and robust financial results at Credit Suisse First Boston. Revenues rose to record levels, up 45% to USD 9.8 bn (CHF 14.5 bn), while net profit was USD 1.3 bn (CHF 1.9 bn), producing a 19% return on equity. Credit Suisse First Boston gained market share worldwide in almost all its client business areas for the third successive year. It aims to cement its position as one of the world’s leading global investment banks through additional investment in expanding client business, modernising infrastructure and strengthening e-commerce activities. Credit Suisse First Boston is positioned at the forefront of its industry in harnessing change for clients and in its own activities – key attributes for success in the ‘new economy’. Credit Suisse First Boston’s strategy since 1997 has been to strengthen its global special bracket position through targeted growth of client business and consolidation of the more capital-intensive Fixed Income & Derivatives businesses in which the firm remains a market leader. This emphasis was accentuated following the losses in 1998. In 1999, further progress was made in moderating value at risk and balance sheet utilisation. The new ‘Strategic Risk Management’ function made a strong contribution, especially to improving the quality of risk assessment and focusing on risk concentrations. Credit Suisse First Boston has come through a demanding period with excellent earnings recovery, underpinned by market share advances and further investment in the future. Stable staff numbers, strategic direction and investment have supported this achievement. CSFB has been distributing fixed income securities electronically since 1993. During 1999 significant effort was expended on ‘e-nabling’ numerous aspects of our interaction with securities clients. Through our affiliation with TradeWeb (which was founded by CSFB), and our proprietary PrimeTrade offering, clients can purchase US government bonds, commercial paper, repurchase agreements, deposits, new issue debt offerings, FX and futures electronically. Indications of interest for equity IPOs can be submitted via the web at ‘IPOs@CSFB’ while clients may execute orders through CSFB’s alliances with e*offering and TD Waterhouse. RATIOS/KEY PERFORMANCE INDICATORS 1999 1998 Average allocated equity capital CHF m Allocated equity capital CHF m (1 January 2000/1999) BIS tier 1 ratio* Cost/income ratio – excl. amortisation of goodwill Return on average equity capital Number of employees at 31 Dec. Pre-tax margin Personnel expenses/total expenses Personnel expenses/total income * applies to the Credit Suisse First Boston bank 9,925 10,176 10,494 9.9% 9,340 8.4% 76.7% 82.5% 76.3% 82.4% 19.0% –2% 15,185 14,126 17.9% 0.5% 74.7% 69.8% 55.0% 55.5% 24
Slide 27: Significant enhancements will be implemented this coming year in the web-based distribution of equity and fixed income research (‘Research_View’). CSFB has created a dedicated investment pool to invest in new business models that might impact our institutional businesses, with six investments having been made to date, including Redibook (US), Tradepoint (UK) and Brokertec (US & UK). 1999 results Overall, conditions on the financial markets were good, although they deteriorated in the second half for most fixed income segments. Strong revenue growth (45% on a USD basis) reflects market share gains in most areas, as well as a recovery in Fixed Income & Derivatives versus 1998. The firm’s quality of earnings improved, with revenue diversification in favour of Equities and Investment Banking and the client segments of Fixed Income & Derivatives businesses. Precautionary credit and related reserves increased in view of a cautious medium-term outlook. The firm’s business mix moved to greater client orientation, reflecting a less capital-intensive, more peopleintensive strategy. Consequently, average allocated equity for 1999 declined 6% compared to 1998 in USD terms, whilst a strong 9.9%* BIS tier 1 ratio (legal entity) was maintained. The pre-tax margin reflects this mix change, with employee numbers up * applies to the Credit Suisse First Boston bank INCOME STATEMENT Fixed Income & Derivatives Equity Investment Banking Private Equity Other REVENUE 1999 in CHF m 1998 in CHF m Change in % 1999 in USD m 1998 in USD m Change in % 6,290 4,786 3,262 191 3 14,532 7,999 2,714 10,713 3,819 439 62 786 2,594 0 0 713 1,881 1 1,880 0 3,699 2,366 2,561 745 229 9,600 5,332 2,307 7,639 1,961 279 11 1,566 116 15 81 221 –171 50 –221 306 70 102 27 –74 – 99 51 50 18 40 95 57 464 – 50 – –100 –100 223 n/a n/a n/a 4,221 3,212 2,189 129 2 9,753 5,368 1,822 7,190 2,563 295 42 527 1,741 0 0 479 1,262 0 1,262 0 2,586 1,655 1,791 521 160 6,713 3,728 1,613 5,341 1,372 195 8 1,095 82 11 57 155 –119 35 –154 214 63 94 22 –75 – 99 45 44 13 35 87 51 425 – 52 – –100 –100 209 n/a n/a n/a Personnel expenses Other operating expenses TOTAL OPERATING EXPENSES GROSS OPERATING PROFIT Depreciation and write-offs on non-current assets – of which amortisation of goodwill Valuation adjustments, provisions and losses** PROFIT BEFORE EXTRAORDINARY ITEMS AND TAXES Extraordinary income Extraordinary expenses Taxes NET PROFIT/LOSS – of which minority interests NET PROFIT/LOSS (after minority interests) ** net of allocation(-)/release(+) of reserves for general banking risks The business unit income statement differs from the Group’s legal accounts in presenting brokerage, execution and clearing expenses as part of operating expenses in common with US competitors, rather than netted against revenues. 25
Slide 28: 7.5% over the last twelve months. Operating expenses (excluding compensation) rose 13%, owing to the headcount increase, Y2K costs and other infrastructure expenditure. Total compensation expenses rose as a result of revenue increases, business mix and competitor remuneration. In geographic terms, Credit Suisse First Boston’s unique balance was again reflected by revenues split 42% North America, 35% Europe and 23% the rest of the world. The individual divisions performed as follows (percentages reflect dollar figures): Revenues increased 94%, with ROE significantly exceeding 30% despite continued investment in people for further growth. For the first time Equities’ net profit exceeded that of FID. The ‘cash’ businesses boosted revenues by over 100% from the previous year’s level, while derivatives and other equity businesses also saw strong gains. Growth came from all geographic regions. Excellent gains in primary and secondary market shares and in research rankings around the world underpin this success. The positive impact of Credit Suisse First Boston’s leading position in technology industry activities particularly benefited Equities (and Investment Banking). Equity Fixed Income & Derivatives (FID) Despite market conditions that deteriorated during the year, FID recovered well from 1998’s difficulties with revenues up 63%. Management successfully tackled the challenges of integrating Credit Suisse Financial Products (following the repurchase of the 20% minority stake from Swiss Re in April 1999) and restructuring the division to accommodate tighter risk disciplines and capital profitability. Despite more challenging market conditions in the second half, reduced profit potential following risk reduction and real estate losses, a 16% ROE was achieved. The merged activities in Credit Products enjoyed excellent growth and Emerging Markets’ results were strong. An outstanding performance in Latin America offset the Russian gap and complemented good results from other regions. A recovery in Distressed Securities’ performance compensated for declines in Foreign Exchange and Money Markets. Real Estate products registered losses, reflecting a reduction in risk concentration and increased precautionary provisioning levels. Credit Suisse First Boston’s debt capital markets underwriting position strengthened further to number four in the global rankings. Investment Banking (IBD) Revenues increased 22% despite further reductions in net interest income owing to a smaller loan book. Capital employed in lending has been reduced by 66% since 1997 and has now reached the target range of below USD 1 bn. Underlying growth is excellent, with M&A and capital markets’ gross revenues up 42% on 1998. Credit Suisse First Boston has expanded its client coverage capacity in IBD substantially during the last 24 months. While this heavy investment implies an initial drag on profits, the resultant market share gains, complementing those of Equities, enhance Credit Suisse First Boston’s prospects for growth and diversified earnings. 26
Slide 29: Private Equity The investment of Credit Suisse First Boston’s globally managed pri- vate equity funds, totalling USD 3.6 bn, is now accelerating. The current level of revenues reflects limited harvesting of previous investments. The organisation was strengthened further, mainly in Europe. BALANCE SHEET Cash Money market paper Due from banks – of which securities lending and reverse repurchase agreements Due from other business units Due from customers – of which securities lending and reverse repurchase agreements Mortgages Securities and precious metals trading portfolio Financial investments Participations Tangible fixed assets Goodwill Accrued income and prepaid expenses Other assets – of which replacement value of derivatives TOTAL ASSETS TOTAL ASSETS 31 Dec. 1999 in CHF m 31 Dec. 1998 * in CHF m Change in % 1,161 22,893 169,030 134,406 2,478 54,132 23,783 7,352 122,837 6,354 1,023 2,515 1,128 5,823 43,055 39,413 439,781 1,175 18,860 138,726 78,303 1,894 61,522 28,634 7,178 100,963 10,072 436 1,947 535 6,845 49,555 46,347 399,708 290,696 19,923 185,335 74,915 16,350 180 71,157 22,714 33,464 8,844 53,007 49,481 1,638 9,810 399,708 290,696 –1 21 22 72 31 –12 –17 2 22 – 37 135 29 111 –15 –13 –15 10 –5 51 20 –10 – 42 – 39 –2 38 3 18 –10 –18 44 27 10 –5 in USD m 275,224 30,118 222,802 67,150 9,536 110 69,550 31,357 34,478 10,410 47,956 40,644 2,366 12,455 439,781 Money market liabilities Due to banks – of which securities borrowing and repurchase agreements Due to other business units Due to customers, in savings and investment deposits Due to customers, other – of which securities borrowing and repurchase agreements Bonds and mortgage-backed bonds Accrued expenses and deferred income Other liabilities – of which replacement value of derivatives Valuation adjustments and provisions Capital TOTAL LIABILITIES TOTAL LIABILITIES in USD m 275,224 * On the basis of the changes to the accounting principles, the accounting for securities lending and borrowing transactions was changed in 1999. Using the revised accounting rules, the 1998 balance sheet total would have been reduced by CHF 9.8 bn. 27
Slide 30: SERVICES FOR INSTITUTIONAL AND MUTUAL FUND INVESTORS WORLDWIDE Performance in 1999 was strong with discretionary assets under management increasing 53% over 1999 and revenue increasing 35%. Total assets under management, including advisory, amounted to CHF 425 bn at 31 December 1999. Among the strategic achievements was the acquisition of Warburg Pincus Asset Management in July 1999, which significantly enhanced Credit Suisse Asset Management’s US franchise. 1999 growth in assets under management demonstrated Credit Suisse Asset Management’s continued success in achieving internal growth as well as growth through acquisitions. Discretionary assets under management totalled CHF 324 bn, up CHF 112 bn or 52.8% over 1998; CHF 18.5 bn (8.7%) was due to net new business, CHF 57.5 bn (27.1%) came from market appreciation and CHF 36 bn (17.0%) was due to the acquisition of WPAM. Mutual funds grew by 63.5% to CHF 121 bn globally. Particularly strong were the performances in the Luxembourg (+31%) and Swiss (+54%) mutual fund families and Swiss institutional business. In Australia, growth in assets under management was also strong (+66%), buoyed by strong investment performance and a very successful entry into the retail market. RATIOS/KEY PERFORMANCE INDICATORS 1999 1998 Average allocated equity capital CHF m Allocated equity capital CHF m (1 January 2000/1999) Cost/income ratio – excl. amortisation of goodwill After-tax profit/average assets under management Number of employees at 31 Dec. Pre-tax margin Personnel expenses/total expenses Personnel expenses/total income Total assets under management CHF bn at 31 Dec. Total discretionary funds CHF bn at 31 Dec. Total mutual funds distributed CHF bn at 31 Dec. Total advisory assets CHF bn at 31 Dec. Growth in discretionary assets under management – of which volume – of which performance – of which acquisition 540 1,054 77.3% 75.4% 6.6 bp 2,000 22.5% 55.3% 40.6% 425 324 121 100 52.8% 8.7% 27.1% 17.0% 180 170 70.2% 70.1% 7.9 bp 1,577 29.7% 56.1% 38.6% 297 212 74 85 20.0% 14.0% 6.0% n /a 28
Slide 31: Acquisition of Warburg Pincus Asset Management On 6 July, CSAM closed the acquisition of Warburg Pincus Asset Management for an initial purchase price of USD 450 m. This acquisition significantly enhances CSAM’s US franchise, increasing total assets under management in the United States by USD 23 bn at the date of acquisition. The addition of Warburg Pincus significantly bolsters CSAM’s presence in the US retail market through Warburg Pincus Mutual Funds and also gives CSAM access to the US high net worth market. Warburg Pincus adds to CSAM’s growing strength in equity products and as of 31 December 1999, equity and balanced products represented 57% of CSAM’s total discretionary assets under management globally. 1999 results Revenue increased by 35% to CHF 1,149 m. The growth in revenue was exceeded by growth in assets under management, as the 1999 financial results reflect only six months of results of the WPAM business. Operating expenses were CHF 844 m versus CHF 586 m, up 44%, reflecting significant investments in information technology and European retail infrastructure, as well as the half-year effect of the WPAM business, including CHF 21 m of one-off acquisition-related expenses. Gross operating profit was CHF 305 m, an increase of 15% over 1998. The increase in the depreciation of non-current assets primarily reflects the amortisation of goodwill associated with the acquisition. Cash earnings, which include the add-back of non-cash charges, increased by 19% to CHF 279 m. INCOME STATEMENT Management and advisory fees Net mutual fund fees Other revenues REVENUE 1999 in CHF m 1998 in CHF m Change in % 757 330 62 1,149 467 377 844 305 44 22 0 261 0 2 24 235 0 235 279 595 206 51 852 329 257 586 266 12 1 0 254 0 1 30 223 0 223 235 27 60 22 35 42 47 44 15 267 – 0 3 0 100 –20 5 0 5 19 Personnel expenses Other operating expenses TOTAL OPERATING EXPENSES GROSS OPERATING PROFIT Depreciation and write-offs on non-current assets – of which amortisation of goodwill Valuation adjustments, provisions and losses PROFIT BEFORE EXTRAORDINARY ITEMS AND TAXES Extraordinary income Extraordinary expenses Taxes NET PROFIT – of which minority interests NET PROFIT (after minority interests) Cash earnings 29
Slide 32: INSURANCE FOR PRIVATE AND CORPORATE CUSTOMERS WORLDWIDE Winterthur Group achieved a strong result in 1999 as net operating income increased 22% to CHF 1.1 bn. Within this result the increasing strength of Winterthur’s insurance operations permitted a 137 basis point reduction in realised capital gains, resulting in a remarkable 6.3% reported return on invested assets. Winterthur registered premium growth in nearly all markets, and total premiums grew by 1% to CHF 28.3 bn. The continued expansion of bancassurance activities within Credit Suisse Group supported both the efficiency and top-line growth improvements. Total assets under management grew 16% to CHF 132 bn, while Winterthur’s total reported equity rose 20% to CHF 11.2 bn. Winterthur’s non-life and life business both contributed strongly to the overall result. Severe weather-related losses in Switzerland and neighbouring European countries partially masked the scope of the performance improvement in non-life business. The actual impact of these catastrophe losses was nevertheless contained through Winterthur’s global risk management programmes. Through restructuring of local operations and improvements in process management, Winterthur continued to improve its efficiency as total costs, including new investments, were held constant. Having reformulated its business strategy in 1998 with a clear focus on the European markets, Winterthur announced a series of targeted acquisitions in 1999 in the UK and Eastern Europe, building its retail customer base to more than 13 million clients in 14 European countries. In addition, Winterthur’s controlling investment in DBV-Winterthur was consolidated through the acquisition of Commerzbank’s 23% stake in DBV Winterthur Holding AG, to reach 69%. DBVWinterthur’s partnership with Commerzbank ended in the middle of February 2000, with no great impact anticipated on future performance. In 1999 Winterthur expanded its e-business initiatives, registering the ‘webinsurance.com’ domain in all key European countries. Winterthur currently has business-to-consumer transaction capabilities in six countries for household contents, motor, travel and life insurance. In addition, Winterthur has secured preferred provider status on a number of relevant portals and sites, including one of Europe’s emerging e-commerce auto businesses. Business-to-business transactions, typically supporting intermediaries but also allowing corporate customers to tailor cover via the Internet, are active in four countries. Winterthur will continue to invest in and promote the wide array of agent, broker, bank and direct channels it has built up in the European markets, while reinforcing its leadership position in the pan-European Internet distribution of insurance products. Life business In Italy, Spain, France and Portugal Winterthur achieved double-digit growth rates in life premiums, with DBV-Winterthur also showing strong growth in Germany. In Switzerland, life premiums fell from their tax-driven surge in 1998 and, with historically low interest rates in the first half of 1999 and the prevalent price level in the market, Winterthur chose not to underwrite policies which impair shareholder value. The Swiss life business nonetheless registered an average 10% annual growth between 1997 and 1999. Winterthur was able to further strengthen its market position in 30
Slide 33: pension business in Central and Eastern Europe. With major pension market shares in Hungary (15%) and the Czech Republic (9%), it now ranks among the top five pension funds in these two countries. Winterthur also had a good start in the Polish pension market, achieving a top-ten position in its first year. In Asia Winterthur focused its retail activities on the asset accumulation and life insurance business. In Hong Kong, Winterthur’s largest Asian market, life premiums more than doubled. Winterthur also entered the Japanese life insurance market by acquiring Nicos Life, an insurance company offering sophisticated asset accumulation products to private clients through professional sales consultants. Though not included in 1999 results, Nicos Life is expected to produce gross premiums of over CHF 400 m in 2000. Non-life business In its non-life business, Winterthur successfully managed an extraordinary set of natural catastrophes in Switzerland and neighbouring countries, as well as continued slow growth and intense price competition in many European markets. Major restructuring programmes in local units around the world reduced absolute expenses by CHF 180 m (5% of total non-life expenses), positioning Winterthur’s nonlife business to continue adding value in difficult market conditions. In the UK, Churchill expanded its market position and multi-distribution capacity by acquiring the personal insurance broker Devitt and the National Insurance and Guarantee Corp. Plc, adding a million clients and CHF 1 bn in premiums. Churchill reported a very strong 1999 performance and continues to set the standard for customer service and profitability. Strong growth was also recorded in non-life business in Italy, France, Portugal and the Netherlands. Non-life growth in Spain was contained as aggressive FINANCIAL HIGHLIGHTS Gross premiums Net investment income Operating profit before taxes/minority interests Taxes Net operating profit – of which minority interests NET OPERATING PROFIT (after minority interests) 1999 in CHF m 1998 * in CHF m Change in % 28,257 7,807 1,511 340 1,171 90 1,081 27,930 8,019 1,302 307 995 111 884 1 –3 16 11 18 –19 22 31 Dec. 1999 in CHF m 31 Dec. 1998 in CHF m Change in % Total assets under management Technical provisions Debentures outstanding Shareholders’ equity (excl. minority interests) 132,000 107,560 164 11,194 114,200 96,652 465 9,358 16 11 – 65 20 31 Dec. 1999 31 Dec. 1998 Change in % Staff numbers * adjusted for the sale of reinsurance business 25,829 25,202 2 31
Slide 34: pricing and underwriting measures were implemented to counter a continuing market deterioration. The German operations continued to shape their market with launches of tailored customer-segment products. Soft pricing conditions in Swiss non-life lines left premium volume roughly unchanged, and the division began a major reorganisation to further lower its expense base. The North American operations reported a 5% increase in premiums. They achieved consistent improvements in their operating ratios and continued to profit from strict adherence to their regional company business strategy. The 1999 passage of the Financial Services Modernization Act increased flexibility for Winterthur and Credit Suisse Group in conducting their business in the US. BALANCE SHEET Investments – non-life – life – unit-linked Policy loans Deposits with reinsured companies Cash at bank and in hand Receivables from insurance companies Receivables from agents and policyholders Sundry debtors Accrued income and prepaid expenses Office and IT equipment Other assets Total other assets TOTAL ASSETS 31 Dec. 1999 in CHF m 31 Dec. 1998 in CHF m Change in % 126,446 30,790 88,954 6,702 708 101 864 965 3,121 1,560 2,203 375 915 10,812 137,258 107,560 23,041 77,796 6,723 2,019 583 164 824 2,833 2,027 2,025 6,617 1,412 11,194 137,258 111,505 27,327 79,587 4,591 878 697 524 1,181 2,811 1,915 2,287 243 680 11,216 122,721 96,652 21,463 70,535 4,654 266 1,253 465 1,271 3,468 2,420 1,497 4,104 1,967 9,358 122,721 13 13 12 46 –19 – 86 65 –18 11 – 19 –4 54 35 –4 12 11 7 10 44 659 – 53 – 65 – 35 –18 –16 35 61 – 28 20 12 Technical provisions – non-life – life – unit-linked Due to banks Deposits received from reinsurance ceded Convertible bonds and warrant issues Payable to insurance companies Payables to agents and policyholders Sundry creditors Accrued expenses and deferred income Other liabilities Minority interests Shareholders’ equity after minority interests TOTAL LIABILITIES 32
Slide 35: The market for large corporate risks continued to be difficult, although firmer prices were found in some markets. Serving large corporate clients, Winterthur International continued its investments in building global risk management and service capabilities. As anticipated, the changeover to the new millennium led to only a small number of minor claims across Winterthur Group. 1999 results Winterthur Group’s pre-tax /minorities operating profit increased by 16% to CHF 1,511 m despite a 3% decrease in investment income, as the Group reduced its dependency on realised capital gains. The actual tax rate fell slightly, from 23% to 22%. Net operating profits rose by 22% to CHF 1,081 m. Assets under management rose by 16% to CHF 132 bn. As Winterthur’s invested equity capital (paid-in capital plus retained earnings, adjusted for dividends and goodwill) increased a modest 6% to CHF 6.5 bn, the return on invested equity rose to 18.0%, from 16.6% in 1998. Winterthur’s total reported equity increased by CHF 1.8 bn, or 20%, owing to a significant increase in unrealised gains, and now stands at CHF 11.2 bn. Results from non-life business Gross premiums from non-life business grew by 3% in 1999. Despite the extraordinary weather-related losses in Switzerland and neighbouring countries (CHF –260 m gross, CHF –170 m net), the overall non-life loss ratio improved slightly, and the expense ratio improved more than 2 points. The combined ratio (sum of the claims and expense ratios) improved from 107.5% to 105.2% (including dividends paid to policyholders, from 110.4% to 107.8%). Net investment income was 14% lower at CHF 1.9 bn, but the overall result from non-life business (before taxes and minority interests) increased 7% to CHF 953 m. Results from life business Life insurance premiums, following 1998’s tax-driven surge in Switzerland, fell by 1% year-on-year: the compounded annual growth between 1997 and 1999 was 10%. Total life expenses, measured as a percentage of premiums, were 10.9%, up from 1998 but the same as 1997 in spite of significant investments in the emerging markets and a new European life platform. Actual expenses measured against technical provisions improved from 1.28% in 1998 to 1.20% in 1999. Benefits and claims incurred rose by 10%, while the change in actuarial provisions was reduced by 12%. Net investment income increased 2% to CHF 5.9 bn, while net profits (before taxes and minority interests) grew 34% to CHF 558 m. 33
Slide 36: NON-LIFE BUSINESS Gross premiums Net premiums Premiums earned, net Claims incurred, net Dividends to policyholders incurred, net Operating expenses, net (including commissions paid) UNDERWRITING RESULT, NET 1999 in CHF m 1998 * in CHF m Change in % 13,993 12,678 12,102 – 9,144 – 312 – 3,591 – 945 1,942 70 –75 – 39 953 30,790 23,041 105.2% 75.6% 29.7% 190.4% 13,520 11,994 11,538 – 8,712 – 335 – 3,686 –1,195 2,261 140 –108 –211 887 27,327 21,463 107.5% 75.5% 32.0% 181.9% 3 6 5 5 –7 –3 –21 –14 – 50 – 31 – 82 7 13 7 Net investment income Interest on deposits and bank accounts Other interest paid Other income and expenses (including exchange rate differences) PROFIT (before extraordinary items, taxes, minority interests) Investments as at 31 Dec. Technical provisions as at 31 Dec. Combined ratio (excl. dividends to policyholders) Claims ratio Expense ratio Insurance reserve ratio LIFE BUSINESS Gross premiums Net premiums Premiums earned, net Claims incurred, net Change in actuarial provision, net Allocation to participation, net Operating expenses, net (including commissions paid) Net investment income Interest on deposits and bank accounts Interest on bonuses credited to policyholders Other interest paid Other income and expenses (including exchange rate differences) PROFIT (before extraordinary items, taxes, minority interests) 1999 in CHF m 1998 * in CHF m Change in % 14,264 14,170 14,101 –7,726 – 8,092 –1,846 –1,535 5,865 124 –130 –217 14 558 95,656 84,519 10.9% 112.2% 14,410 14,484 14,485 – 6,691 – 9,204 –1,918 –1,438 5,758 207 –117 – 312 – 355 415 84,178 75,189 9.9% 109.7% –1 –2 –3 15 –12 –4 7 2 – 40 11 – 30 –104 34 14 12 Investments as at 31 Dec. Technical provisions as at 31 Dec. Expense ratio Claims incurred and change in technical provision * adjusted for the sale of reinsurance business 34
Slide 37: PERSONAL FINANCIAL SERVICES EUROPE ‘Personal Financial Services Europe’, the strategy announced in March 1999, was launched successfully. In Italy – the pilot market for PFS – assets under management have more than doubled since 1998. Additionally the pan-European e-commerce platform is progressing towards a launch in late 2000. Changing client needs, increased use of electronic communications channels and the emergence of a pan-European market have given rise to new opportunities for financial institutions. ‘Personal Financial Services Europe’, the strategy announced in March 1999, represents a new business model to address these opportunities. With ‘Personal Financial Services Europe’, Credit Suisse Group aims to strengthen its local presence in selected European markets and to extend its leading position in e-commerce in Switzerland to the rest of Europe. The initiative targets affluent private clients with bankable assets of CHF 80,000 (EUR 50,000) upwards, who are offered a wide range of both Credit Suisse Group and third-party products, a tailored combination of personalised advice and Internet content, and seamless service. In Italy – the pilot market – Credit Suisse (Italy) is already operating successfully with 250 Personal Bankers and its own Call Center. Assets under management have more than doubled since 1998 to CHF 4 bn (EUR 2.5 bn). The fifth Investment Center was opened in Milan at the end of March and another fifteen are due to follow over the course of the year. Since April 2000, clients have also had direct access via the Internet to comprehensive financial and product information and a range of advisory tools. Additionally, preparations are currently underway for a pan-European e-commerce platform to be launched in late 2000. During the second half of the year, Credit Suisse Group will start to offer processing of online financial transactions, including brokerage, on the major European and overseas stock exchanges via a Group company domiciled in Luxembourg. This service will be adapted to suit the specific requirements of each of the national markets in which the Group intends to establish similar operations as in Italy by means of a greenfield approach and/or alliances and acquisitions. With its multinational presence in Europe, its well-known brand and its comprehensive range of products for wealth creation and protection, Credit Suisse Group is in an excellent position from which to implement its ‘Personal Financial Services Europe’ strategy successfully. Channels Personal Bankers Investment Centers Call Centers E-commerce Italy Country 2 Country 3 Alliances Content & advice Customer access Technology Pan-European • Value proposition and branding • Product offer • E-commerce channel • Customer database and reporting • IT platform • Back-office operations Product providers Stock exchanges CSG products Third-party products 35
Slide 38: CREDIT SUISSE GROUP IN SOCIETY Credit Suisse Group is well aware of its obligations to society as a whole. All of its activities are based on a responsible, respectful and professional approach. This applies both to its actual business operations and to its dealings with other stakeholders. Attractive employer The world of financial services is currently characterised by innovation and far-reaching change. As an internationally active company, Credit Suisse Group offers a wide range of interesting professional opportunities. Targeted training and development programmes are used to ensure that our staff remain in a position to meet the challenges of the future. In Switzerland alone, 200 university and college graduates, 1,200 trainees and 120 high school graduates are being trained within Credit Suisse Group. In order to meet the increasing need for computer specialists, the Group offers a number of IT training programmes for professionals from other specialist disciplines. The creation of the new ‘Personal Financial Services Europe’ entails an intensive recruitment campaign throughout Europe. New jobs in e-commerce are being created all over the Group all the time. Credit Suisse Group is particularly concerned about ensuring equal opportunities, a commitment that is borne out by the continually increasing proportion of women in management positions. Acknowledged achievements on the environmental front What began in 1989 with the creation of the post of environmental officer has now grown into a comprehensive environmental management system certified under ISO-14001. Re-certification and the incorporation into the system of locations outside Switzerland are scheduled for the year 2000. The results of the Group’s efforts in the area of operational ecology are described in the latest Environmental Report. Credit Suisse Group’s 1999 report was commended as the second best of any large Swiss company. Respected rating agencies consider Credit Suisse Group to be among the best in the world in terms of its attitude and activities on the environmental and social front. Credit Suisse Group is included in the Dow Jones Sustainability Index as a ‘leading sustainability company’ in the banking sector; the Canadian/US Innovest organisation has awarded the Group an AAA rating; and the German rating agency œkom found Credit Suisse to have the second best environmental performance of the 26 banks under scrutiny. These citations by independent bodies make Credit Suisse Group an attractive proposition for investors focusing on sustainability. Credit Suisse Group is represented in ten portfolios run by investment funds and foundations that focus on ecological/ethical issues and sustainability. Social and charitable commitments Every year Credit Suisse Group devotes around CHF 15 m to helping various organisations and institutions. The Jubilee Foundation focuses on supporting charitable projects in the social domain. By concentrating on choice projects, which are selected from almost a thousand applications received each year or which it initiates itself, the Foundation can provide substantial financial support, help to give new momentum or the initial push needed to get new ideas off the ground. In collaboration with the ‘Young Swiss Researchers’ project, for instance, the Foundation conducted study weeks for those researching topics in the financial field. Another example is the significant contribution made to the success of the 6th World Skiing Championships for the Disabled held at the end of January 2000 in Anzère and Crans-Montana. 36
Slide 39: In 1999, the CSFB Foundation Trust supported over 600 charitable organisations around the world, concentrating mainly on educational initiatives and social programmes for young people in major cities, especially New York. In addition, many Credit Suisse First Boston employees helped the disadvantaged by doing voluntary work with community organisations, community centres and neighbourhood associations. Sponsorship The main focus of Credit Suisse’s sports sponsorship is football – including its role as sponsor of the Swiss national team and the Swiss Football Association’s youth development programme – and equestrian sports. 1999 saw the end of Credit Suisse’s many years of support for cycle racing. In the cultural arena, Credit Suisse concentrates on music and fashion. The bank appears as a headline sponsor at all of Switzerland’s major fashion events. Credit Suisse Private Banking supports various significant cultural and sporting institutions and events. Highlights of the 1999 cultural sponsorship calendar included the ‘Chagall, Kandinsky, Malevich and the Russian Avant Garde’ exhibition at Zurich’s Museum of Fine Art, and a series of gala concerts featuring soloist Anne-Sophie Mutter. Sporting highlights included the White Turf horse races in St. Moritz, and two golf tournaments: the PGA European Seniors Tour event in Bad Ragaz and the Canon European Masters in Crans-Montana. Winterthur is a sponsorship partner of the Pfadi Winterthur handball club, the Swiss Gymnastics Association and – together with Credit Suisse – of the Swiss Football Association. In the cultural sphere, Winterthur supports the Swiss Youth Symphony Orchestra. The Arosa Humour Festival, where Winterthur was headline sponsor, marked the launch of comedy as a new key area for sponsorship by the company. The ‘Wincare’ hearing protection service, which involves handing out about a million sets of earplugs at rock concerts and techno parties, proved extremely popular. As part of its sponsorship partnership with the concert promoter Good News, Winterthur also helped to arrange special seating for disabled people at numerous events. The company’s ‘Foundation for the Prevention of Accidents’ continued its successful campaigns to improve road safety for children and to promote safety in sports. Credit Suisse Group is contributing its own special project to the Swiss national exhibition, ‘Expo.02’. The Internet virtual identity game, ‘cyberhelvetia.ch’, is currently in development and will be launched in advance of the actual exhibition. Ever since the debate about the conduct of the Swiss banks during and after the Second World War, Credit Suisse Group has been committed to making amends both morally and financially. The review of the banking issues involved was brought to a close with the publication of the Volcker Committee final report. The report came to the conclusion that the banks carried out their business activities with great professional diligence. There was no evidence of systematic discrimination against victims of Nazi persecution, nor of systematic concealment of assets or withholding of assets from their rightful owners. However, the report did document some extremely regrettable cases of human error and insensitivity. The dormant accounts discovered as part of the Volcker Committee’s research are an element in the comprehensive settlement reached by Credit Suisse Group, UBS, the plaintiffs and the Jewish organisations in the 1998 class action brought in the USA. The fact that this settlement represented a responsible, conclusive and comprehensive solution was confirmed – subject to final judicial approval – by the Fairness Hearing convened by US Federal Judge Edward Korman on 29 November 1999 in New York. The Swiss banks and the Second World War 37
Slide 40: CREDIT SUISSE GROUP RISK MANAGEMENT Credit Suisse Group pursues a disciplined, comprehensive and integrated approach to risk management throughout its business units. Significant personnel and technological resources are focused on ensuring that Credit Suisse Group remains a leader in risk management. By means of a proactive risk management culture and the appropriate qualitative and quantitative tools, the Group aims to minimise the potential for undesired risk exposures and optimise the allocation of capital throughout the Group to the benefit of shareholders and other stakeholders. Financial services consist of four basic elements: information, transactions, capital and risk. Information today is instant, ubiquitous and increasingly cheap. Simply owning information is not enough – only by packaging and interpreting information intelligently and providing value-enhancing advice and decisionmaking support can a company differentiate itself from the competition. The volume of transactions has grown dramatically in recent years on a global basis, and new technologies are expanding rapidly, making it even more important that in-house and outsourced processes are cost effective. On today’s open, deregulated capital markets, basic access to capital is no longer an issue for well-run established companies. The challenge is to allocate the capital optimally to the different activities within the organisation. The ability to assess and manage risks effectively has always been important in the world of finance. The increasing pace and complexity of economic development in recent years has turned this ability into a decisive competitive edge. The primary objectives of Credit Suisse Group’s risk management strategy are to preserve the Group’s capital base by controlling its risk exposures, to optimise the allocation of capital and to foster a disciplined risk culture. This is where risk management adds value. Credit Suisse Group differentiates between seven major risk categories (see chart on page 39). Market, credit, insurance underwriting, commission and fee income and operational risks are already quantifiable or are increasingly becoming so, while strategy and reputation/brand risks must be made transparent by means of other methods. The Group’s structure as a series of distinct business units, introduced in 1996/97, is – among other things – designed to enhance transparency and a systematic approach; it allows us to regroup risk types, focus on major risk types and concentrate expertise on specific risk classes with the help of tailor-made management tools. It is our ambition to establish the global benchmark with regard to structures, processes and methods. This is a continuous, never-ending task. Overview of risk management Risk culture Risk management is a multi-faceted process that extends well beyond an organisation’s formal risk management structure, standards or processes. The mathematical/statistical quantification of risks and consequent setting of appropriate, common-sense limits represents only part of the integrated approach to risk management. Integrated risk management must also include the development and maintenance of an appropriate risk and control culture as part of an overall corporate culture. This aspect is at least as important as the most sophisticated quantitative risk models. 38
Slide 41: The key factor in risk management is discipline. Credit Suisse Group encourages a disciplined culture by promoting integrity and high ethical standards, clear lines of responsibility and accountability, segregation of duties, appropriate supervision by senior management, and strong control systems. The Group’s monitoring systems are based on a comprehensive set of internal controls, with activities such as approvals, authorisations, compliance checks, and follow-ups on non-compliance clearly defined at every level of the business. Internal and external auditors are recognised by the Board as critically important agents, providing an independent check on the information received from line management. The chief auditor reports directly to the Board of Directors’ Audit Committee. The issues unearthed by the internal and external auditors must be addressed comprehensively. If a financial services group is to achieve sustained success, confidence and trust built up over many years are vital. An excellent reputation is hard to gain, but easy to lose. Knowledge, expertise, experience, integrity, intellectual honesty, but also the daily conduct of each member of management and each employee, are the truly crucial elements that contribute to an institution’s reputation. Code of Conduct One of the strengths of Credit Suisse Group is the competence and diverse skills of the people that work for it around the world. In spite of this global diversity, however, our corporate culture has to be based on common denominators and shared values. This was the major reason for introducing an internal group-wide Code of Conduct at the beginning of 2000. Especially in such fast-changing times, common values help to give the individual a sense of focus; they create identity and a sense of belonging. Both the Board of Directors and the Group Executive Board have The added value of risk management Factors shaping an organisation’s risk disposition Scope and challenge of an integrated firm-wide risk management Effective risk manangement provides control over seven major business risks Values, society & politics Com peti tion Perc ep tio Strategy risk Building on the organisation’s 10 ‘S’s’: • • • • • Strategy Structure System Speed Safety • • • • • Staff Skills Style Shared values Symbol Market risk Credit risk Insurance underwriting risk Ensuring a risk culture with: • • • • • modern methods proactive risk management control attitude continuous training/learning discipline as to corrective action Commission and fee income risk Operational risk gy nolo tech on & ns vati ti o Inno ta ec Facts n Ex p Knowledge Clie nts ur Ex pe rie n Action and reaction by management and staff ce & cies Poli Be ha v io ions ulat reg Markets & economy Reputation/brand risk 39
Slide 42: approved the new Code of Conduct. Spelling out our twelve core values and guiding principles, the Code of Conduct extends and supplements existing, more specific compliance manuals, directives, guidelines and policies. Credit Suisse Group’s risk management governance structure begins with the Board of Directors, which is responsible for determining the general risk policy, the strategic risk management organisation and the Group’s overall appetite for risk. The Board of Directors meets at least five times a year. The Chairman’s Committee of the Board of Directors is responsible for reviewing the Group’s major risk exposure on a quarterly basis. The Board of Directors delegates certain risk management and control responsibilities to the Group Executive Board, the Group Risk Coordination Committee and the Group Chief Risk Officer (GCRO). The Group Executive Board’s Risk Management Committee includes all Board members and is chaired by the GCRO. It reviews the Group’s exposure to different categories of risk, assesses potential opportunities and risks and initiates corrective actions to mitigate undesired risk exposures. The Group Risk Coordination Committee, also chaired by the GCRO, meets four times a year, defines overall Group risk policies and approves general instructions, processes and standards concerning risk management at the business unit level. It also reviews Credit Suisse Group’s capital management process. The Group Chief Risk Officer is responsible for the development, implementation and monitoring of limits, risk reporting, risk management strategy, standards and procedures. Group Risk Management supports the GCRO in harmonising approaches to the management of different risk types across the business units and monitors the implementation of the Group’s risk management strategy in collaboration with the risk management units at the individual business units. Risk management governance As the main operating units, the business units of Credit Suisse Group are responsible for implementing the Group’s overall risk management strategy. Each business unit has a specialised risk management structure in place – including risk committees, appropriate tools, systems, procedures and controls – that is specially tailored to cope with the risks taken in its particular line of business. While most business units are exposed to all risk types, their relative significance varies. Trading book market risks are concentrated at Credit Suisse First Boston, while credit risks are most important at Credit Suisse and Credit Suisse First Boston. Insurance underwriting risks are concentrated at Winterthur, while commission income risks dominate at Credit Suisse Private Banking and Credit Suisse Asset Management. All business units are exposed to operational, reputational and strategy risks. Business unit risk management Market risk Market risk is the risk of loss arising from changes in the value of financial instruments. Credit Suisse Group units active in trading use a comprehensive set of tools to identify, measure and control these risks. These tools include techniques such as Value at Risk modelling, scenario analysis, and backtesting, as well as risk limit setting and monitoring. The majority of Credit Suisse Group’s market risk is concentrated in the Credit Suisse First Boston business unit, the Group’s global provider of wholesale financial services (see chart on page 41). 40
Slide 43: Market risk within CSFB Credit Suisse First Boston devotes considerable resources to ensuring that market risk is comprehensively captured and effectively managed. In 1999, CSFB established a Strategic Risk Management (SRM) function to provide comprehensive analysis of the firm’s overall risk profile and to recommend corrective action where appropriate. SRM and Credit Suisse Group Risk Management (GRM) were heavily involved in implementing the transition to a lower overall risk profile in 1999. Credit Suisse First Boston’s independent Risk Measurement and Management (RMM) department is responsible for the measurement and reporting of all credit risk and market risk on a daily basis. The core tools used to measure and manage market risk exposures include the following: – the Value at Risk method (VaR method) estimates the potential loss arising from a given portfolio for a predetermined probability and holding period – scenario analysis estimates the potential loss after stressing market parameters – in addition, RMM has developed several models to measure gap risk, default risk and economic risk capital. It is expected that the use of these models will grow in the future. 1999 DISTRIBUTION OF TRADING RISKS 6.4% 0.4% 93.2% CSFB CSPB CS Gap and default risk Credit Suisse First Boston has used a VaR methodology to model market risk since 1995. Credit Suisse First Boston’s VaR is defined as the 99th percentile greatest loss that may be incurred on a given portfolio over a ten-day holding period. Credit Suisse First Boston currently uses a combination of variance-covariance and historical simulation methodologies. The methodology is subject to continuous review to ensure that it captures all significant risks and meets or exceeds regulatory and industry standards. The parameters and procedures currently used meet the qualitative and quantitative requirements prescribed by the Basle Committee on Banking Supervision and the Swiss Federal Banking Commission, which has approved Credit Suisse First Boston’s internal VaR models for use in the calculation of market risk capital as at 30 June 1998. Market risk limits are structured at multiple levels – from trading desks up to the business unit level. Limits at lower levels can be regarded as internal risk flags that are used to identify potential risk concentrations. The level of market risk versus the formal limits is a regular focus of senior management review. The ‘Average market risk at CSFB’ chart shows the distribution of average market risks since 1997 and indicates that interest rate risks have lost importance relative to other risk categories. The chart on the following page illustrates the relationship between daily trading profit and loss and one-day VaR over the course of 1999. This type of backtesting is a method of assessing the performance of the internal VaR model and complies with the recommendations issued by the Basle Committee on Banking Supervision. Backtesting is performed at two levels: the overall level (Credit Suisse First Boston) and the individual business line level. Results of the process at the aggregate level show no exceptions during 1999. This confirms that Credit Suisse First Boston’s VaR model is in the ‘Green Zone’, as defined by the Basle Committee on Banking Supervision (see separate box). In fact, CSFB has never had a bank-level exception in three years of using the approved model, which indicates a significant degree of conservatism in its approach to measuring market risk. Value at Risk Gap and default risk is designed to capture risks that occur on a less frequent basis than those captured within the standard VaR model. There are several types of gap and default risk, including the risk of large moves in equity prices or foreign exchange rates, the risk of bond issuers failing to pay, as well as the risk of substantial changes in real estate prices. A different modelling process is required to capture these risks and a longer time horizon is required (generally one year), compared with VaR analysis. AVERAGE MARKET RISK AT CSFB 100 % 80 % 60 % 40 % 20 % 0% 1997 1998 1999 Total cross risk Total commodities Total equity Total foreign exchange Total interest rates 41
Slide 44: Backtesting zones The Basle Committee on Banking Supervision has defined three zones that assess the statistical quality of a VaR model using backtesting results. The zones are: Zone Number of exceptions (per 250 observations) Green 0–4 Yellow 5 –9 Red 10 and more Models in the Green Zone are statistically acceptable, those in the Yellow Zone require further investigation and analysis, whilst those in the Red Zone almost certainly require improvement. CSFB has never had an exception in three years of using the approved model. During 1999, CSFB undertook a firm-wide initiative to reduce its overall risk profile whilst maintaining good returns. The 1999 VaR statistics for CSFB are given in the table below. As the table shows, CSFB’s 1999 average VaR was down 21.5% on the 1998 average (in USD terms, 8.7% in CHF terms). Risk reductions in CHF terms were smaller because of the significant weakening of the CHF during 1999. 1999 in CHF m 1998 in CHF m 1999 in USD m 1998 in USD m Year-end (31 Dec.) Average Maximum Minimum 241.7 280.7 423.6 191.0 300.4 307.6 382.2 206.3 151.2 175.7 265.1 119.6 218.4 223.7 277.9 150.0 Note that when comparing the VaR figures calculated by different banks, the methodologies, assumptions and valuation methods used may differ, so a simple comparison may be misleading. Specifically, differences in VaR figures may not only reflect different levels of market risk exposure, but also factors such as differences in the model assumptions and the underlying data. DISTRIBUTION OF CSFB’S DAILY TRADING REVENUE 1999 versus 1998 in CHF m No. of days By contrast, the average daily trading revenue improved to CHF 42.3 m in 1999, compared to CHF 14.3 m in 1998. Credit Suisse First Boston’s frequency distribution of daily trading revenue for 1999 and for 1998 is illustrated in the ‘Distribution of CSFB’s daily trading revenue’ chart. The combination of transition to a lower risk profile and more stable financial markets in 1999 resulted in a significantly narrower range of trading profit and loss in 1999 than in 1998. Scenario analysis Scenario analysis is an essential component of Credit Suisse First Boston’s market risk measurement framework. This technique assesses the bank’s sensitivity to various financial market environments by revaluing all of its major portfolios under various potential market crisis conditions. For example, the bank analyses the potential impact of a number of extreme macroeconomic events which have occurred in the past. Scenarios include large moves in yield curves, credit spreads, emerging market bond prices, exchange rates, equity indices and stock prices, commodity prices and changes in volatilities and correlations. Reports are produced for senior management and traders for a range of scenarios at least on a monthly basis. 40 35 30 25 20 15 10 5 0 –150 –120 –80 0 1998 80 120 150 1999 RELATIONSHIP BETWEEN DAILY REVENUE AND VaR ESTIMATE FOR CSFB * CHF m 150 100 50 0 –50 –100 –150 –200 –250 –300 –350 –400 –450 1st quarter 1999 Daily revenue One-day VaR (99%) * Conversion of USD figures into CHF based on year-end exchange rate 2nd quarter 1999 3rd quarter 1999 4th quarter 1999 42
Slide 45: The balance sheet interest rate risk is monitored and managed by the individual business units within specifically designated centres of competence; responsibility lies with the respective Asset and Liability Management Committees. The management of interest rate risk is primarily based on mark-to-market methods. Swaps, forward rate agreements and options are used as hedging instruments. Asset and liability management 1999 ACP AND CREDIT PROVISIONS CHF m 800 700 600 500 400 300 Credit risk is the risk that a borrower (or counterparty) is unable to meet its financial obligations. In the event of a default, a bank generally incurs a loss equal to the amount owed by the borrower, less a recovery amount resulting from foreclosure, liquidation or restructuring of the company. The majority of Credit Suisse Group’s credit risk is concentrated in the Credit Suisse and Credit Suisse First Boston business units. Credit Suisse Group implemented a new Credit Risk Management Framework for the banking business units in December 1996. As this framework is used for management information purposes only, it is not reflected in the statutory financial statements. The new Credit Risk Management Framework is being refined continuously and simultaneously covers all business areas which are exposed to credit risk. Credit Suisse Group’s Credit Risk Management Framework comprises four core components: (i) an individual credit limit system, (ii) country and regional concentration limits, (iii) a credit risk provisioning methodology and (iv) a pricing methodology. A system of individual credit limits is the traditional means of managing credit risk and preventing risk concentrations. A comprehensive set of country and regional limits is in place to address concentration issues in the portfolio (see country risk). The third aspect of the Credit Risk Management Framework is an appropriate credit risk provisioning methodology. Annual credit provisions (ACP) equal expected credit losses derived from actual historical average losses. The chart top right shows the ACP of the four banking units in 1999 and the respective credit provisions. Actual losses which occur in any one year may be higher or lower than these provisions, depending on the economic environment and interest rates. In addition to the expected loss, an indicative worst-case default loss, shown in the chart on the right, is calculated using CREDITRISK +, the credit risk measurement and management tool Credit risk 200 100 0 CS CSPB CSFB CSAM* CSG 1999 ACP 1999 credit provisions * Included in ACP/ICP methodology in April 1999. Both ACP and credit provisions are well below CHF 1 m for 1999 99TH PERCENTILE WORST-CASE DEFAULT LOSS CHF m 2250 2000 1750 1500 1250 1000 750 500 250 0 CS 1996 * CSPB* CSFB CSAM** CSG*** 1997 1998 1999 developed by Credit Suisse Financial Products. The 99th percentile worst-case default loss shown in the chart on the right is based on the 99th percentile of the full credit default loss distribution. The difference between the 99th percentile worst-case default loss and the ACP reflects the unexpected loss level. The fourth aspect of the Credit Risk Management Framework is the pricing and optimisation of the portfolio and the consideration of risk and reward. Credit Suisse Group’s Credit Risk Management Framework is a vital tool for managing the Group’s credit risk on an ongoing basis. The framework allows us to price transactions involving credit risk more correctly by performing a risk/return calculation. The current implementation of the Credit Risk Management Framework covers virtually all of the credit exposures of Credit Suisse, Credit Suisse Private Banking and Credit Suisse Asset Management, as well as the majority of Credit Suisse First Boston’s credit-related exposures. The remaining portion of Credit Suisse First Boston’s credit-related exposures is covered by either the VaR methodology, or by applying credit risk adjustments. Worst case loss in 1996 jointly calculated for CS and CSPB and shown under CS. ** Included in April 1999 (worst case loss for 1999 below CHF 3 m). *** Based on combined portfolio. 43
Slide 46: CSFB EXPOSURE TO SELECTED EMERGING MARKETS as at year-end 1999 CHF m 8000 7000 6000 5000 4000 3000 2000 1000 0 Asia Provisions Latin America Eastern Europe Net exposure COUNTRY EXPOSURE BY CSFB RATING (EXCLUSIVE OF PROVISIONS) as at year-end 1999 CHF bn 160 140 120 100 80 60 40 20 0 N1 N2 AAA AA N3 N4 N5 A BBB BB N6 N7 B/ <CC CCC Country risk is the risk of a substantial, systemic loss of value in the financial assets of a country or group of countries, which may be caused by the inability or unwillingness of a sovereign to meet contractual obligations and/or the imposition of controls on capital flows. Given the international character of their activities, all business units of Credit Suisse Group are exposed to country risk, although the largest portion is held at Credit Suisse First Boston. Country ratings and country limits are the two primary instruments used by the bank to manage its country risk. Country ratings provide a quantitative, model-based assessment of the risk of sovereign default. They are periodically updated by the independent Credit Risk Management department (CRM) in cooperation with Economic Research. Country limits cap Credit Suisse Group’s exposure to individual countries. They are supplemented by regional limits, which restrict the maximum exposure to a specific region in order to limit the impact of contagion. Both country and regional limits are approved by the Chairman’s Committee. Within Credit Suisse First Boston these limits are periodically reviewed by the Credit Policy Committee and Capital Allocation and Risk Management Committee (CPC/CARMC). The measurement of exposures against country limits is undertaken by the independent department, RMM. RMM and CRM provide independent supervision to ensure that the divisions operate within their limits. CRM also assumes responsibility for actively adjusting these limits to reflect changing credit fundamentals. Country risk Operational risk Operational risk is the risk of direct and indirect loss arising from inadequate business processes, procedures or security, as well as the risk of losses due to human error and external factors affecting business processes. At Credit Suisse Group, operational risk is divided into five classes (see ‘Operational risk classes’ on page 45). CSFB: funded loans and related exposures (incl. exposures to trading counterparties) Internal ratings N1–N7 are approximately equivalent to the respective external ratings. All business units of Credit Suisse Group have their own dedicated Operational Risk Management teams that are sponsored by Senior Management and are in close contact with Group Risk Management. Knowledge and experience is shared throughout the Group to ensure a coordinated approach. All business lines take responsibility for their own operational risks. Structure Operational risk management information Credit Suisse Group is currently implementing a management information system in all the business units to capture a consistent and comprehensive set of operational risk data. These data are used for reporting and help to quantify operational risks. 44
Slide 47: The reporting tool will enable line managers to act swiftly on issues before they escalate and provide senior management with a better overview of operational risks within the business units. Another purpose of collecting operational risk data is the Group’s aim to quantify operational risks – where feasible and relevant – for internal management purposes such as economic capital allocation and risk-adjusted performance measurement. Operational risk is managed through effective and comprehensive staff training, specific policies and procedures, a system of internal controls and meticulous due diligence. Such controls include the full segregation of duties, the use of risk management information and computer systems, communication networks and fraud detection. Independent pricing controls are in place and technical and organisational control mechanisms ensure that all transactions are processed promptly and correctly. Management Winterthur’s risk management framework Operational risk classes Human: Risks arising from human-related issues such as recruitment, skills, training, conduct, fraud and illness. Organisational: Risks arising from organisational factors such as change management, data flow, communication, coordination and allocation of responsibilities. Policy and processes: Risks arising from weaknesses or noncompliance with policies and critical processes such as policies on documentation, due diligence, adherence to credit limits, settlement and payment processes. Technology: Risks arising from technological dependencies such as information technology and telecommunications infrastructure. E-commerce activities are also very significant here. Operating environment and external factors: Risks arising from external factors and the Group’s operating environment such as fraud, litigation, physical threats to the institution or its representatives, business disruption and regulatory changes. Winterthur is a business unit with many years of experience and success in the insurance business. It has developed outstanding skills in managing all the risks associated with selling insurance policies. Protecting Winterthur from undue risk accumulations (e.g. natural catastrophe exposure) is a core risk management activity. The overall responsibility for risk identification, risk measurement and control is assumed by a central risk management unit. Specialist subunits focus on the various individual risk components using tools such as ‘economic risk capital’. This is defined as the capital required to protect a business for one year with a predetermined safety margin; it is a key tool for risk management and performance measurement. Winterthur’s risk universe and risk management activities In order to understand the risk universe of an insurance company, the flow of business and the accompanying flow of risks are analysed. Premiums earned by selling insurance policies are invested to cover claims occurring at a future date – sometimes many years later. This means that the company has to manage and limit insurance risk – e.g. through reinsurance contracts – manage the financial market risks associated with its assets and liabilities (reserves), and manage and control the credit risks associated with its assets and reinsurance contracts. Within centrally established boundaries – relating to underwriting guidelines, reinsurance protection, reinsurance security guidelines (credit risk), asset allocation strategies and allocated risk capital – Winterthur’s individual business areas are responsible for day-to-day risk management. 45
Slide 48: 1999 ECONOMIC CAPITAL OF INSURANCE RISK Insurance underwriting risk 36% Winterthur follows stringent guidelines, especially with regard to assuming insurance risk, the selection of risks and the sums insured. Winterthur operates two main insurance businesses, non-life and life, and faces several risk types stemming from its underwriting activity. 64% Non-life Life In non-life business, insurance risk relates to claims that might be more frequent or larger than forecast, and/or that might have to be paid earlier than expected (expected payouts are priced into the premiums paid). Better-diversified insurance portfolios tend to imply smaller differences between expected and actual claims. Winterthur therefore holds a well-diversified insurance portfolio, in terms of both geographical and industry structure. A well-diversified insurance portfolio with many business lines spread over many policyholders might, nevertheless, be vulnerable to natural hazards. In such circumstances the portfolios, although well diversified, can be exposed to a large accumulation of risk. If adequate reinsurance protection were not in place, substantial losses could be triggered by a single natural catastrophe. Winterthur thus uses reinsurance to limit the loss triggered by a single event, e.g. winter storm in Europe, to a worst-case amount of CHF 50 m. Non-life In life insurance the basic underwriting risk characteristics are similar to those in non-life business. The underwriting risk universe in this type of business is represented by deviations from expected death and disability rates, expected longevities and expected surrender rates. Savings elements are quite often embedded in life insurance products. The associated financial risks can be substantial and must be managed accordingly. The asset management units are responsible for taking care of these risk elements and producing the kind of cashflows that policyholders are likely to claim. Life The risk structure in the insurance business Underwriting Premium Insurance risk (gross) Assets Reinsurance Reserves Retention Market risk Credit risk Insurance risk 46
Slide 49: Winterthur runs a well-designed reinsurance structure to protect its local businesses, its divisions and its capital at large. The architecture of this reinsurance protection is such that, on all levels of the organisation, i.e. local businesses, divisions and Group, a set of internal and external reinsurance contracts absorbs all risks that exceed a prudent retention level. Reinsurance protection follows a three-layered organisational structure based on the uniform principle that each organisational entity runs insurance risk in accordance with its portfolio and its capital base. Reinsurance Financial market risks and investment strategy 1999 RELATIVE IMPORTANCE OF ASSET CLASSES 7% 1% 11% 26% 54% Investment portfolios are defined according to the legal nature of the business concerned and the product structure. The main asset classes used by Winterthur are money market instruments, bonds, loans, mortgages, equities and real estate. The quality of assets is generally excellent: primarily bonds with AA and higher ratings, with A rating being the minimum requirement for new investments. Derivatives are not considered as a suitable asset class for investment, but are used for risk management purposes. The asset allocation strategy for Winterthur is revised on a yearly basis, taking regulatory, local and product-related restrictions into consideration. Bonds Equity Real estate Mortgages Money market Winterthur’s asset and liability management The financial market risks of Winterthur’s assets are not assessed in isolation. Insurance company assets are generated by the fact that premiums are paid earlier than claims are settled. The resulting time difference of up to 50 years has to be bridged through asset and liability management. Winterthur’s exposure to credit risk stems from holding debt instruments and from the use of reinsurance. Winterthur has defined high quality standards for investments. In addition, the Group monitors counterparty-specific accumulations across asset management and reinsurance credit risk exposures. Credit risk at Winterthur Outlook It is part of Credit Suisse Group’s strategy to be a leader in risk management. Significant personnel and technological resources are focused on ensuring that Credit Suisse Group continues to enhance its risk management capabilities, and thereby remains at the forefront of the industry. To achieve this goal, Credit Suisse Group has developed an integrated framework of best-practice risk management, risk policies, methodologies and infrastructure. Credit Suisse Group is also in the process of linking risk management and performance measurement using an economic risk capital framework, with economic risk capital usage as a common denominator for all major risks. Together with a proactive risk management culture and the appropriate qualitative and quantitative tools, this economic capital management framework will support decisionmaking by senior management at Credit Suisse Group, thus linking risk management to the Group’s shareholder value strategy. Economic risk capital Economic risk capital at Credit Suisse Group is defined as an equity reserve or cushion for unexpected losses. It ensures that Credit Suisse Group – even under extreme conditions – remains solvent and stays in business. Unlike regulatory capital, which is confined to market and credit risk, economic risk capital is designed to reflect all significant quantifiable risks associated with the business activities of Credit Suisse Group. 47