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credit-suisse Letter to shareholders Q2/2006

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1. CREDIT SUISSE GROUP Credit Suisse Group Letter to Shareholders 2006/Q2 Investment Banking ã Private Banking ã Asset Management 2. Dear shareholders Credit Suisse…
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  • 1. CREDIT SUISSE GROUP Credit Suisse Group Letter to Shareholders 2006/Q2 Investment Banking • Private Banking • Asset Management
  • 2. Dear shareholders Credit Suisse Group achieved a strong performance in the second quarter of 2006 in a market that experienced higher volatility and increasing investor caution. The improvement in our results versus the same period of 2005 demonstrates our resilience in a demanding environment and shows that our efforts to build a powerful integrated organization are gaining momentum. Financial and strategic highlights in the second quarter Credit Suisse Group reported net income of CHF 2.2 billion for the second quarter, compared to net income of CHF 919 million in the corresponding period of 2005. The Group recorded a return on equity of 21.6% for the quarter, with a return on equity of 23.4% in the banking business. Basic earnings per share were CHF 1.94, compared to CHF 0.82 in the second quarter Oswald J. Grübel Walter B. Kielholz of 2005. Net new assets – a key indicator of our ability to Chief Executive Officer Chairman of the generate future revenues in Private Banking and Asset Board of Directors Management – totaled CHF 30.1 billion in the second quarter of 2006. Following the successful launch of our integrated global bank in January 2006, we announced two important strategic steps in the second quarter: the sale of Winterthur and the merger of our private banking subsidiaries to create Clariden Leu. Both steps will streamline Credit Suisse Group’s structure and underpin our strategy. We believe that we now have the necessary organizational framework in place to allow us to realize the benefits of our integrated organization. The sale of Winterthur to AXA In June 2006, we announced the sale of Winterthur to the French insurer AXA. The insurance and banking industries changed fundamentally following the combination of Credit Suisse Group and Winterthur in 1997, and high expectations regarding the potential synergies between these two areas of business were not realized in full. In 2004, we therefore decided to exit the insurance business in order to focus our resources on banking. The definitive agreement to sell Winterthur to AXA for a cash consideration of CHF 12.3 billion represents a very good solution for Credit Suisse Group. This sale will allow us to deliver the full value of Winterthur to our shareholders via a single transaction. We are confident that by joining AXA, Winterthur’s businesses will be ideally positioned for future growth. We also believe that in the long term, its clients and employees will benefit from being part of one of the global leaders in the insurance industry with an excellent reputation among its stakeholders. For further information, please refer to our Quarterly Report 2006/Q2, which is available at: www.credit-suisse.com/results
  • 3. demonstrate that the segment is delivering on its growth plans, Clariden Leu – merger of our independent private gaining momentum with clients and expanding its range of banks products in its core areas of business. We participated in a Our second important strategic step was the announcement of number of significant equity transactions in the second quarter the merger of our four independent private banks to form and once again demonstrated our expertise across a broad Clariden Leu. By combining these banks, we will create the fifth range of industries and regions. We also achieved a strong largest wealth manager in the Swiss private banking industry and quarter in the advisory business and were involved in key establish a strong basis for continued profitable growth. The four transactions such as the acquisition of Arcelor S.A. by Mittal banks complement each other ideally in terms of both their Steel Company NV, as well as a number of notable deals in the product offerings and regional presence. While remaining part of energy sector. Trading revenues increased significantly compared our Private Banking segment, Clariden Leu will maintain its to last year’s second quarter, reflecting higher revenues in many independent status and its culture as a traditional, first-class fixed income and equity trading businesses. Swiss private banking institution. The Private Banking segment posted its best second-quarter Growth and investment opportunities result ever, with income from continuing operations before taxes As a result of these two steps, we are now in an excellent growing 21% compared to the same period of last year. Private position to focus our capital, expertise and management Banking is continuing to invest in the global expansion of its resources on executing our strategy for the integrated bank. We business, and is rolling out its advisory services and growing its plan to grow Credit Suisse globally by combining our strengths in onshore presence in international markets. During the second investment banking, private banking and asset management. We quarter, we announced the launch of operations in Australia and also expect to achieve growth through selected acquisitions and made further inroads in the Middle East, where Credit Suisse joint ventures. The proceeds from the sale of Winterthur will was the first major global financial institution to be awarded a provide us with the necessary financial flexibility to execute these license in the Qatar Financial Centre. We also made progress in plans. the growth of our private client business in the US and in strengthening our onshore presence in Europe. The second We see significant opportunities for organic growth in the quarter brought further advances in our strategic development in emerging markets. We will continue to build on our existing the area of product innovation. Since the beginning of 2006, the presence in Asia, the Middle East, Latin America and Eastern Wealth Management business within Private Banking has Europe by opening more locations, recruiting additional staff, launched more than 500 new product offerings. The segment's broadening our current product offerings and building up our strong performance was further underscored by continued onshore activities. One way in which we will be able to harness strong net new asset inflows. Wealth Management generated the strong synergy potential of our integrated banking model in CHF 16.5 billion of net new asset inflows, notably from Europe these markets will be to strengthen the activities of Private and the US. Banking in countries where our Investment Banking business already has a strong position. The Asset Management division is essential to the success of our integrated bank’s strategy. However, the business is not yet In addition to growing our business organically, we will evaluate in a position to fully capitalize on the growth opportunities opportunities to acquire small or medium-sized institutions or to presented by this industry globally. We have conducted a global establish joint ventures. As a general rule, we will only consider strategic review of Asset Management and identified a number targeted acquisitions that would advance our existing strategy of measures to create a solid and sustainable platform for the and improve the performance of specific businesses. One such future growth of the business. These measures include example is our USD 1 billion joint venture with General Electric repositioning our Asset Management business by reshaping the to invest in global infrastructure assets, which we announced in product offering, improving sales and investment processes and the second quarter. The second quarter also saw the launch of lowering the overall cost base. our joint venture with South Korean Woori Asset Management. As part of the new strategy, we are realigning our Asset Second-quarter performance in the segments Management business in the US by changing our investment Our Investment Banking segment substantially improved its approach in a number of traditional asset management performance in the second quarter of 2006 compared to the strategies. Going forward, the US business will concentrate on same period of 2005. Net revenues increased by 30% during both current strengths and growth opportunities in this important the quarter, driven by higher revenues in all key areas of market. We are committed to our Asset Management business business. The second-quarter results in Investment Banking For further information, please refer to our Quarterly Report 2006/Q2, which is available at: www.credit-suisse.com/results Credit Suisse Group Letter to Shareholders 2006/Q2 1
  • 4. in the US, where we already have leadership positions in Outlook alternative investments and a number of select traditional asset Continued global economic growth is providing an excellent management strategies. We are convinced that these steps will environment in which Credit Suisse Group can grow. Our enable us to put the expertise and market reach of our Asset integrated bank is very well positioned to benefit from further Management business to optimal use within our integrated bank. wealth creation and increased corporate activity, particularly in the emerging markets. Revenue and operational synergies from In the second quarter, Asset Management recorded income from the integration, together with a firm focus on costs, will also continuing operations before taxes of CHF 27 million. This contribute to further improvements in profitability. included costs of CHF 152 million related to the realignment of the business. Net new assets totaled CHF 15.5 billion, We expect interest rates to remain stable over the next three underlining the business’ strength in certain high performing months and anticipate that the equity markets will recover and products and strategies. the currency markets will remain calm. Delivering value for clients and shareholders Yours sincerely We made good progress with our strategy during the first half of 2006. We are already seeing clear evidence of the increased value we can deliver to clients by working together closely across our divisions and regions. Furthermore, the expanding global economy is continuing to create wealth and is thus fuelling demand for the range of products and services we offer. The growth opportunities in our markets are excellent and we now have the right organizational framework in place to capitalize on Walter B. Kielholz Oswald J. Grübel them fully. As we expand our business globally, we are well Chairman of the Chief Executive Officer aware that effective risk control and strict cost management Board of Directors must also remain a priority to protect the value that we have created and to generate an enhanced return for our August 2006 shareholders. For further information, please refer to our Quarterly Report 2006/Q2, which is available at: www.credit-suisse.com/results 2 Credit Suisse Group Letter to Shareholders 2006/Q2
  • 5. Investment Banking Key information Change in % from in CHF m, except where indicated 2Q 2006 2Q 2005 2Q 2005 Net revenues 4,436 3,417 30 of which underwriting revenues 926 597 55 of which advisory and other fees 405 369 10 of which total trading revenues 3,085 2,265 36 Provision for credit losses 16 (1) – Total operating expenses 3,133 3,976 (21) Income/(loss) from continuing operations before taxes 1,287 (558) – Pre-tax income margin 29.0% (16.3%) – Pre-tax return on average economic risk capital 35.3% (15.2%) – Summary Pre-tax income margin The Investment Banking segment provides financial advisory, lending and capital raising services and sales and trading to institutional, corporate and government in % clients worldwide. 30.0 25.0 20.0 The second-quarter 2006 results show that Investment Banking is delivering on its 15.0 growth plans, gaining momentum with clients and expanding its range of products 10.0 5.0 in its core areas of business. 0.0 (5.0) Investment Banking reported income from continuing operations before taxes of (10.0) (15.0) CHF 1,287 million in the second quarter of 2006, including credits from insurance (20.0) settlements for litigation and related costs of CHF 474 million. This compared to a 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2004 2004 2004 2005 2005 1) 2005 2005 2006 2006 loss from continuing operations before taxes of CHF 558 million in the second quarter of 2005, which included a CHF 960 million charge to increase the reserve for certain private litigation matters. Pre-tax return on average economic risk capital Net revenues rose 30% to CHF 4,436 million in the second quarter. This increase in % reflects a 55% rise in underwriting revenues, a 10% rise in advisory and other fees 40.0 and a 36% rise in total trading revenues. 35.0 30.0 25.0 Total operating expenses decreased 21% compared to the second quarter of 20.0 2005. Excluding the above-mentioned insurance settlements and the litigation 15.0 charge, total operating expenses rose 20% in the second quarter of 2006, due 10.0 5.0 primarily to increased compensation accruals in line with improved results. The 0.0 compensation/revenue ratio was 53.5% in the second quarter of 2006, an (5.0) (10.0) improvement of 2.0 percentage points compared to the full year 2005. (15.0) (20.0) 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Investment Banking reported a pre-tax income margin of 29.0% in the second 2004 2004 2004 2005 2005 1) 2005 2005 2006 2006 quarter of 2006, compared to negative 16.3% in the second quarter of 2005. 1) Excluding the charge to increase the reserve for Excluding the insurance settlements and the litigation charge, the pre-tax income certain private litigation matters of CHF 960 million. margin was 18.3%, compared to 11.8% in the second quarter of 2005. For further information, please refer to our Quarterly Report 2006/Q2, which is available at: www.credit-suisse.com/results Credit Suisse Group Letter to Shareholders 2006/Q2 3
  • 6. Private Banking Key information Change in % from in CHF m, except where indicated 2Q 2006 2Q 2005 2Q 2005 Net revenues 2,913 2,524 15 Provision for credit losses (5) (28) (82) Total operating expenses 1,795 1,623 11 Income from continuing operations before taxes 1,123 929 21 of which Wealth Management 779 594 31 of which Corporate & Retail Banking 344 336 2 Pre-tax income margin 38.6% 36.8% – Net new assets, in CHF bn 16.6 8.6 – Assets under managment, in CHF bn 859.1 837.6 2.6 1) 1) As of December 31, 2005. Summary Pre-tax income margin The Private Banking segment provides comprehensive advice and a broad range of investment products and services that are tailored to the needs of high-net-worth in % individuals all over the world through its Wealth Management business. In 45.0 Switzerland, Private Banking supplies banking products and services to business 40.0 35.0 and retail clients through its Corporate & Retail Banking business. 30.0 25.0 0.0 Private Banking reported income from continuing operations before taxes of CHF 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 1,123 million in the second quarter of 2006, an increase of 21% compared to the 2004 2004 2004 2005 2005 2005 2005 2006 2006 second quarter of 2005. Net revenues grew by 15%, mainly reflecting increased commission and fee income driven by higher asset-based revenues and increased brokerage volumes and product sales. Assets under management in CHF bn Total operating expenses increased 11% versus the second quarter of 2005, 900.0 primarily reflecting ongoing strategic growth initiatives, as well as higher 850.0 performance-related compensation in line with the improved results. 800.0 750.0 700.0 The segment's strong performance was further underscored by continued strong 650.0 net new asset inflows. Private Banking generated CHF 16.6 billion of net new 600.0 550.0 asset inflows, notably from Europe and the US. 500.0 0.0 30.06. 30.09. 31.12. 31.03. 30.06. 30.09. 31.12. 31.03. 30.06. The segment reported a pre-tax income margin of 38.6% for the second quarter of 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006, an improvement of 1.8 percentage points compared to the second quarter of 2005. For further information, please refer to our Quarterly Report 2006/Q2, which is available at: www.credit-suisse.com/results 4 Credit Suisse Group Letter to Shareholders 2006/Q2
  • 7. Asset Management Key information Change in % from in CHF m, except where indicated 2Q 2006 2Q 2005 2Q 2005 Net revenues 675 782 (14) of which asset management revenues 503 476 6 of which private equity commissions and fees 57 40 43 of which private equity and other investment-related gains 115 266 (57) Total operating expenses 649 425 53 Income from continuing operations before taxes 27 357 (92) Pre-tax income margin 4.0% 45.7% – Net new assets, in CHF bn 15.5 11.4 – Assets under management, in CHF bn 615.2 589.4 4.4 1) 1) As of December 31, 2005. Summary Pre-tax income margin Asset Management combines the discretionary investment management functions of Credit Suisse and offers products across a broad range of investment classes, in % from equity, fixed income and multi-asset class products to alternative investments 55.0 such as real estate, hedge funds, private equity and volatility management. Asset 50.0 45.0 Management manages portfolios, mutual funds and other investment vehicles for 40.0 government, institutional and private clients. Products are offered through both 35.0 30.0 proprietary and third-party distribution channels, as well as through other channels 25.0 within Credit Suisse. 20.0 15.0 10.0 Asset Management reported income from continuing operations before taxes of 5.0 CHF 27 million in the second quarter of 2006, compared to CHF 357 million in the 0.0 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q second quarter of 2005. This decrease includes costs of CHF 152 million 2004 2004 2004 2005 2005 2005 2005 2006 2006 associated with the realignment of Asset Management, primarily impacting its US business. Assets under management Second-quarter 2006 net revenues declined 14% from the second quarter of in CHF bn 2005. Asset management revenues, which consist primarily of fees from asset 650.0 management and fund administration services for clients, increased 6% compared 600.0 to the second quarter of 2005, reflecting the growth in assets under management 550.0 – particularly in money market products. Private equity commissions and fees, 500.0 450.0 which include private equity fund management fees, increased 43% compared to 400.0 the second quarter of 2005. The segment’s private equity and other investment- 350.0 0.0 related gains were 57% below the second quarter of 2005. 30.06. 30.09. 31.12. 31.03. 30.06. 30.09. 31.12. 31.03. 30.06. 2004 2004 2004 2005 2005 2005 2005 2006 2006 Total operating expenses rose 53% compared to the second quarter of 2005, primarily reflecting the above-mentioned realignment costs of CHF 152 million. Assets under management decreased to CHF 615.2 billion as of June 30, 2006, from CHF 619.6 billion as of March 31, 2006, as CHF 15.5 billion of net new assets added during the quarter were more than offset by adverse market and foreign exchange-related movements. For further information, please refer to our Quarterly Report 2006/Q2, which is available at: www.credit-suisse.com/results Credit Suisse Group Letter to Shareholders 2006/Q2 5
  • 8. Key figures 6 months Change Change Change in % from in % from in % from in CHF m, except where indicated 2Q 2006 1Q 2006 2Q 2005 1Q 2006 2Q 2005 2006 2005 2005 Consolidated statements of income Net revenues 8,788 10,925 7,417 (20) 18 19,713 14,800 33 Income from continuing operations before taxes, minority interests, extraordinary items and cumulative effect of accounting changes 3,178 4,348 1,403 (27) 127 7,526 3,804 98 Net income 2,158 2,604 919 (17) 135 4,762 2,829 68 Return on equity Return on equity – Group 21.6% 24.4% 9.8% – – 23.1% 15.2% – Return on equity – Banking 1) 23.4% 27.4% 9.1% – – 25.4% 15.9% – Earnings per share Basic earnings per share, in CHF 1.94 2.31 0.82 – – 4.25 2.49 –
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