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credit-suisse Annual Report Part 1 Performance of Credit Suisse Group shares

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  • 1. ANNUAL REPORT 1996/1997
  • 2. PERFORMANCE OF CREDIT SUISSE GROUP SHARES Swiss Market Index Swiss Performance Index - Banks CSG 150 100 50 1993 1994 1995 1996 1997 MARKET CAPITALISATION as at 31 December 25 20 15 10 5 0 90 91 92 93 94 95 96 CHF bn Financial Calendar Annual General Meeting 1997 Friday, 30 May 1997 Financial statements for 1st half 1997 Wednesday, 27 August 1997 Press Conference on the Annual Results 1997 Thursday, 5 March 1998 Annual General Meeting 1998 Friday, 29 May 1998
  • 3. CORPORATE AND FINANCIAL HIGHLIGHTS 1996 1996 1995 Change GEOGRAPHICAL Group income statement and balance sheet in CHF m in CHF m +/- % COMPOSITION OF NET OPERATING INCOME Net operating income 12,890 11,002 17 52% Group operating profit after tax 1,795 1,806 –1 Group loss/profit –2,432 1,541 – of which minority interests 157 140 12 Cash flow 3,719 3,492 7 48% Total assets 524,154 412,490 27 Total shareholders’ equity 16,426 17,362 –5 Switzerland of which minority interests 581 878 –34 International Market capitalisation 26,701 22,279 20 Per share (par value CHF 20) CHF CHF +/- % Group operating profit after tax 8.62 9.02 –4 STRUCTURE OF NET OPERATING INCOME Net loss/profit (average) –13.63 7.59 – Net profit (fully diluted) – 7.47 – 30% 27% Dividend 4 4 0 Book value 81.60 87.5 –7 Year-end closing price 137.5 118.25 16 Ratios % % +/- % 38% ROE (operating profit after tax) 17 10.1 10.9 Net interest income Net commission and service after minority interests 3 9.6 10.3 fee income Net trading income ROE (net loss/profit) –258 –13.7 9.0 Other ordinary income after minority interests 3 –15.2 8.7 BIS core capital ratio (tier 1) 12 8.0 8.6 BIS capital ratio 12 11.9 12.7 Resources (at year-end) No. No. +/- % Total staff 34,821 34,310 1 of which in Switzerland 23,553 24,330 –2 Total offices 470 500 –6 of which in Switzerland 369 402 –8 1996 – AN EXTRAORDINARY YEAR By focusing on the activities of its four business units, Credit Suisse, Credit Suisse Private Banking, Strategic repositioning. Credit Suisse First Boston and Credit Suisse Asset Management, Credit Suisse Group laid the foundation for future growth and for a considerable expansion in profitability. Credit Suisse Group intends to divest its non-core activities. At the end of 1996, the Group took Concentrating on core business. the first steps towards selling its most important non-core interest, Electrowatt Ltd. Last year’s good operating results demonstrated the strong earnings power of Credit Suisse Group. Good operating results. Net operating income increased by 17% to CHF 12.89 bn, and gross operating profit improved 12% to CHF 4.55 bn. A number of forward-looking measures, such as the introduction of a new Extraordinary measures – investment in the future. methodology for credit risk management and the provisions made for restructuring costs, led to a technical loss. 1
  • 4. TO OUR SHAREHOLDERS RAINER E. GUT, CHAIRMAN OF THE BOARD OF DIRECTORS, AND LUKAS MÜHLEMANN, CHIEF EXECUTIVE OFFICER Dear shareholder For our company, 1996 was a year marked by good operational performance, but also by far-reaching strategic reorientation. Over the last ten years we have expanded to become a major, globally active financial group through a number of acquisitions within Switzerland and abroad but also through our own internally generated expansion. With consolidated net operating income of almost CHF 13 bn and total assets of over CHF 500 bn we are now one of the largest financial services companies in the world. Our new Group structure will ensure that we are able to focus our services even more effectively on the needs of our customers and on the markets in which we operate. Responsibility for each of our financial services activities is clearly allocated to one of the four new business units. This will help us to improve competitiveness, further expand our market position, significantly increase our earning power and profitability and lay the foundations for future growth. Although only a few months have passed since the introduction of the new structure, the benefits are already apparent. The new Credit Suisse Group has gained in dynamism, efficiency and transparency. Each of the four business units has clear objectives in terms of market positioning, allocation of resources and results. A fundamental component of our strategic reorientation is concentration on our core business. As a result, we are divesting ourselves of operations which lie outside the financial services sector. Accordingly, at the end of 1996 we agreed the sale of our stake in Electrowatt. We secured advantageous arrangements for both the industry and the energy sections which provide maximum benefit for all concerned and help to safeguard jobs within the Electrowatt Group. 2
  • 5. In addition to the organisational restructuring, a further important feature of the 1996 finan- cial year was the need to take a number of extraordinary financial measures. We have made provision for the costs of the restructuring. In addition, we introduced a completely new credit risk management system and formed the provisions and reserves necessary to under- pin it. In future, expected risk costs will be determined statistically and charged to the income statement. The new system will help ensure that pricing is more closely attuned to the corresponding risk. It will also enhance the transparency of our credit portfolio. The annual charges for provisions and losses will be stabilised through the use of a fluctuation reserve. These and other extraordinary measures, which we view as an investment in the future prosperity of our company, inevitably made an impact on our annual accounts, mainly in the form of extraordinary income and expenses. Thus, despite our healthy operating result we ended the year with a technical loss. The reorientation of our Group represents a huge challenge for all our staff whatever their level or location. We would like to thank them for the superb job they are doing. We are certain that the decisions and measures taken last year have laid very solid foundations for the future success of Credit Suisse Group. Our task over the next few years is to ensure that our new structure lives up to its promises – for the benefit of our customers, our staff, and our shareholders. We would like to express our gratitude for the trust placed in us. Rainer E. Gut Lukas Mühlemann Chairman of the Board of Directors Chief Executive Officer 3
  • 6. THE STRUCTURE OF CREDIT SUISSE GROUP One of the world’s leading financial services groups, Credit Suisse Group is active on every continent and in all the world’s major financial centres. The Group comprises four business units, Credit Suisse, Credit Suisse Private Banking, Credit Suisse First Boston and Credit Suisse Asset Management, each geared to the requirements of specific customer groups and markets. CREDIT SUISSE CREDIT SUISSE FIRST BOSTON 240 locations in Switzerland 50 locations in Switzerland 2 locations in Switzerland 7 locations in Switzerland 40 locations internationally 50 locations internationally 10 locations internationally Subsidiaries Subsidiaries Subsidiaries Subsidiaries Neue Aargauer Bank* Bank Leu* Credit Suisse Financial Products BEA Associates (98.6%) Affida Bank* (80%) Credis International Fund CS Leasing Ltd Bank Heusser* Credit Suisse First Boston Holding Ltd. CS Car Leasing Ltd Credit Suisse Fides* Private Equity* CS Real Estate Leasing Ltd Clariden Bank* Credit Suisse Group Services* Bank Hofmann* Bank für Handel & Effekten CS Life* Credit Suisse Trust* *Direct holdings of Credit Suisse Group 4
  • 7. THE FOUR BUSINESS UNITS OF CREDIT SUISSE GROUP CREDIT SUISSE Credit Suisse is among the market leaders Credit Suisse serves corporate and in its area of business, thanks to its high individual clients in Switzerland through level of innovation in the design of an efficient branch network covering all products and services, particularly in the major locations and a multichannel area of direct banking, and to its strategy. collaborative arrangement with Winterthur, Switzerland’s largest insurer. CREDIT SUISSE PRIVATE BANKING Credit Suisse Private Banking provides Credit Suisse Private Banking is one of comprehensive services in the areas of the largest private banking operations in portfolio management and financial advice the world with a strong market presence for private clients worldwide. in Switzerland and internationally. CREDIT SUISSE FIRST BOSTON As an advisor, partner and capital-raiser Credit Suisse First Boston is one of a for its clients, Credit Suisse First Boston small number of global providers of focuses on long-term business financial services to major companies. relationships, offering integrated services in corporate and investment banking. It has a presence in all the world’s principal financial centres. CREDIT SUISSE ASSET MANAGEMENT Credit Suisse Asset Management The worldwide activities of Credit Suisse comprises the internationally oriented Asset Management are focused on the asset management and advisory business requirements of institutional investors. of Credit Suisse Group and Credis, the investment fund company serving Switzerland and Europe. 5
  • 8. CREDIT SUISSE GROUP CONSOLIDATED RESULTS In 1996 Credit Suisse Group succeeded in improving its consolidated net operating income by 17% to CHF 12.9 bn. All major sources of income contributed to this healthy growth. Group operating profit after tax stood at CHF 1.8 bn. This result contrasts with a technical loss of CHF 2.4 bn posted by the Group because of the restructuring operations and the introduction of a new credit risk management framework. Of the consolidated net operating income of CHF 12.9 bn, trading Good operating result. income advanced most strongly, posting an increase of 33% to CHF 3.9 bn. Earnings from commission and service fee activities climbed by 18% to CHF 4.9 bn, while net interest income rose by 6% to CHF 3.5 bn. At 38% of operating income, commission and service fee revenue remains the most important source of earnings. Operating expenses rose by 20% to CHF 8.3 bn, partly owing to currency movements but also as a result of higher staff expenses and of restructuring costs incurred in the second half of 1996. Staff numbers at end-1996 totalled 34,821. In Switzerland there was a net reduction of 440 jobs, a figure which takes into account the permanent employment of more than 500 former apprentices, trainees and graduate trainees and the hiring of a further 300 new apprentices. This compares with an increase in staff abroad of 950. The growth in staff numbers abroad can be attributed to the healthy business performance of CS First Boston Inc. and of Credit Suisse Financial Products as well as to the strategic expansion of the international operations of the former Credit Suisse. In 1996 Credit Suisse Group posted a gross operating profit of CHF 4.6 bn, an increase of 12%. Because of the continued difficult economic environment in Switzerland and the persistently adverse conditions on the Swiss property market, depreciation, write-downs, provisions and losses in the operational income statement climbed by 26% to CHF 2.1 bn. Pre-tax operating profit amounted to CHF 2.5 bn, up 3% on the previous year. Return on equity in respect of the Group operating profit after tax was at 10.1%, and, after accounting for minority interests, 9.6%. The balance sheet total of Credit Suisse Group stood at CHF 524 bn at year-end. The BIS core capital ratio (tier 1) for Credit Suisse Group was 8%, while the BIS capital ratio was 11.9%. Shareholders’ equity fell to CHF 16.4 bn, including minority interests, due to the technical loss. 6
  • 9. Extraordinary income amounted A technical loss as a result of extraordinary measures. to CHF 1.3 bn. This is attributable primarily to the book profit from the planned sale of Electrowatt Ltd. Extraordinary expenditure stood at CHF 5.4 bn, comprising CHF 1 bn in restructuring costs for the refocusing of the Group initiated in July 1996 and CHF 97 m in other expenses in connection with previous restructuring projects; CHF 1.6 bn for extraordinary provisions in respect of Swiss lending and the introduction of the new credit risk management system; CHF 459 m for extraordinary depreciation; CHF 1.6 bn incremental credit reserve which, together with a further CHF 195 m, was assigned to the reserves for general banking risks; CHF 216 m for the formation of a provision for the integration of the emerging market trading activities of CS First Boston Inc. into the new Credit Suisse First Boston; other extraordinary expenses of CHF 242 m. As a result of the extraordinary structural and strategic measures which have been taken, the Group recorded a technical loss at year-end of CHF 2.4 bn before minority interests, CHF 2.6 bn after minority interests. Given the sound operating results for 1996 and the pleasing start to the current year, an unchanged dividend of CHF 4 per share will be proposed at the annual meeting on 30 May. Indicative pro forma accounts have been Pro forma accounts for the business units. drawn up for 1996 for the four new business units of Credit Suisse Group, which have been in operation since 1 January 1997. These accounts are based on the operating result for 1996. Credit Suisse, which serves Swiss corporate and individual customers, posted operating income of CHF 2.7 bn. High provisions and a cost structure which continues to be unsatisfactory resulted in Credit Suisse recording a pre-tax operating loss of CHF 950 m. Credit Suisse Private Banking, which offers private banking services worldwide, recorded operating income of CHF 3.0 bn and annual pre-tax operating profit of CHF 1.4 bn. Credit Suisse First Boston, the globally active provider of corporate and investment banking services, achieved operating income of CHF 6.5 bn, with annual pre-tax operating profit of CHF 1.9 bn. Credit Suisse Asset Management, which provides asset management services to institutional investors, recorded operating income of CHF 660 m and posted annual pre-tax operating profit of CHF 195 m. 7
  • 10. CORPORATE AND INDIVIDUAL CUSTOMERS IN SWITZERLAND Credit Suisse, the business unit which specialises in serving Swiss corporate and individual customers, recorded net operating income in 1996 of CHF 2.7 bn. Even in a difficult economic environment, Credit Suisse was able to maintain its good position in the market and, indeed, extend its position in individual areas such as retirement savings. The pre-tax loss of CHF 950 m posted by the business unit was attributable largely to the high level of provisions and a cost structure which remains unsatisfactory. Over the next few years Credit Suisse aims to improve its results sufficiently so as to ensure a satisfactory return on the capital deployed. The Credit Suisse business unit comprises the Swiss corporate and individual Structure. customer business of the former Credit Suisse and of Swiss Volksbank, together with Neue Aargauer Bank. Boasting around 2.5 million customers and a market share of some 20%, Credit Suisse is among Switzerland’s leading banks. Its target branch network will cover around 240 locations, backed up by 555 CASH SERVICE ATMs. Credit Suisse is working systematically to extend its strong position in telephone banking and telebanking; it already has around 150,000 customers in this area. In an essentially recessionary economic environment the volume of business, both on the lendings and the deposits side, remained constant in 1996. Individual customer business performed well and produced Individual customer business. a clearly positive result. The merger of the Credit Suisse and Swiss Volksbank personal pension foundations has created one of the largest Pillar 3 foundations on the Swiss market, with pension assets of around CHF 2.8 bn. Both the number of members and the volume of funds experienced another significant expansion in 1996. Thanks to the collaborative arrangement with the Winterthur Group, the range of products and services was expanded to include integrated risk cover, making it even more attractive. In contrast to the growth in savings deposits, there was another sharp drop in medium-term notes business as a result of low interest rates and the attraction of other investment options in the funds area. Assets invested by individual customers in Credis funds accounted for over 40% of the total amount in safekeeping at the end of 1996. Sales of CS Life products continued to perform well: around 40% of CS Life’s premium income – which in 1996 amounted to CHF 924 m – was generated through Credit Suisse. Self-service facilities are becoming increasingly popular. Over 70% of all cash withdrawals are now made at cash dispensers. In the second half of last year, the foundations were laid for the harmonisation and standardisation of the product range in 1997. Further steps were also taken towards streamlining the branch network. Credit Suisse has a set of three private accounts designed to meet the varying requirements of individual customers. In addition, the bank offers an 8
  • 11. attractive range of savings products, including an Interest Growth Savings Account which rewards long-term saving with an interest bonus. Corporate client business recorded a positive performance, but is still Corporate clients. not yielding sufficient returns to cover risks. A high level of provisions led to a negative result. Corporate clients, in particular small and medium-sized businesses (SMBs), form the backbone of the Swiss economy. For Credit Suisse, SMBs are a core customer group, accounting for 100,000 banking relationships. Over 45% of lendings are made to such companies and more than 75% of Credit Suisse corporate client officers service SMBs. Credit Suisse wants to help existing and new corporate clients ensure their future success. A number of measures have already been taken: In mid-1996 a central unit was set up to deal with the broad-ranging requirements of SMBs. An automatic telephone service has been established – DIRECT LINE BUSINESS – giving corporate clients access to their accounts 24 hours a day. Further products designed to meet the needs of corporate clients will follow. The focus will be on providing services which allow companies to carry out financial transactions round the clock and cost- effectively on an electronic basis. The collaborative arrangement with the Winterthur Group is of great importance for corporate client business. From the second half of 1997 all corporate clients will be able to benefit from comprehensive and integrated bancassurance solutions from a single source. The figures posted by Credit Suisse in 1996, with a pre-tax operating loss of 1996 results. CHF 950 m, were unsatisfactory. However, through the restructuring Credit Suisse will have a firm basis for attaining an appropriate level of profitability. The emphasis is now on the implementation of its cost reduction measures, the systematic use of alternative channels of distribution, increased marketing efforts for customer retention and, finally, margins in lending business which are more closely tailored to risk. 1996 Pro forma figures (indicative) in CHF m Net operating income 2,700 Personnel expenses 1,720 Valuation adjustments, provisions and losses 990 Pre-tax operating loss –950 Equity 3,950 Staff 15,800 9
  • 12. SERVICES FOR PRIVATE INVESTORS IN SWITZERLAND AND INTERNATIONALLY In the 1996 financial year Credit Suisse Private Banking recorded substantial growth. It received an additional boost from low interest rates worldwide and lively capital markets. The new Credit Suisse Private Banking comprises three areas: Credit Suisse Structure. Private Banking in the narrow sense, covering the national and international private banking business of the former Credit Suisse and Swiss Volksbank; the independent private banks, i.e. the Bank Leu Group (Bank Leu, Affida Bank, Bank Heusser, Credit Suisse Fides), Clariden Bank, Bank Hofmann and Bank für Handel & Effekten; and the CS Life and Credit Suisse Trust Switzerland/Guernsey product and service centres, Credit Suisse Securities London, Swiss American Securities Inc., New York, and Credit Suisse Deposit Centre Guernsey. Within the framework of Credit Suisse Private Banking Switzerland/international, six “market groups” provide a service which is in close touch with and directly focused on the requirements of their customers and markets. The Investment Office and Finance & Treasury divisions, Services and the Corporate Centre ensure the necessary basis for this and provide support for front-office activities. In Switzerland, Credit Suisse Private Banking is present in 40 locations. Outside Switzerland it has some 50 offices in the key private banking markets on every continent. In 1996 the emphasis in Swiss onshore business Consolidation and strategic expansion. was on consolidation and extending the scope of financial advisory services to meet client requirements. The financial advice which Credit Suisse Private Banking provides is geared to the different stages of the client’s life and encompasses services in the areas of investment, portfolio management, financing, tax, inheritance, pension provision and real estate. The new fee and pricing system introduced in investment and portfolio management business in Switzerland makes for a clearer overview of costs. In offshore business Credit Suisse Private Banking has expanded its range of trust services, which now extends from standardised, cost-effective products to comprehensive, tailor-made solutions. Since the refocusing of the Group was announced on 2 July 1996, Milestones reached. considerable energy has been devoted to setting up the new Credit Suisse Private Banking business unit. This has involved such major tasks as defining and implementing the new organisational structure, appointing staff, allocating clients within the new structure and providing clients with the necessary information. In addition, the set-up of the Swiss/ international sales network was finalised, the Management Information System defined and a qualitative and quantitative business plan drawn up for 1997. 10
  • 13. Credit Suisse Private Banking employs around 6,150 staff, Focus on the front office. most of whom work in front-office related functions in one of the six market groups. Around 2,800 are employed in Switzerland and around 900 outside Switzerland. The independent private banks have a staff of 1,880 and 520 work in the product and service centres. At the beginning of 1997 there was a client base of approximately 270,000, two-thirds of whom were from outside Switzerland. 50,000 are served by the independent private banks and 18,000 by the Credit Suisse Private Banking international section. Around half have assets invested of less than CHF 500,000. 74% of funds under manage- ment are with Credit Suisse Private Banking in Switzerland, 10% are accounted for by the international section and 16% by the independent private banks. In 1996 investment and portfolio management business was conducted in an 1996 results. environment of low interest rates across the world and lively activity on the capital markets. Against this backdrop commission income improved, particularly in the first half of the year. Overall, this area of business posted better results than in the previous year. Of total net operating income of CHF 3.0 bn, CHF 810 m was used to cover staff expenses. After other expenditure and ordinary provisions of CHF 60 m, pre-tax profit stood at just under CHF 1.4 bn. 1996 Pro forma figures (indicative) in CHF m Net operating income 3,040 Personnel expenses 810 Valuation adjustments, provisions and losses 60 Pre-tax operating profit 1,360 Equity 1,950 Staff 6,150 11
  • 14. WORLDWIDE CORPORATE AND INVESTMENT BANKING Financial performance for 1996 included record levels of revenues and strong levels of net operating income. Among its many major transactions the former CS First Boston was advisor to Boeing in its USD 14.6 bn purchase of McDonnell Douglas and underwriter of The Walt Disney Company’s issue of USD 2.6 bn in senior notes. The old Credit Suisse was arranger of a USD 3 bn revolving credit facility for J.C. Penney’s acquisition of the Eckerd Corporation. In the Swiss franc capital markets Credit Suisse was the number one lead-manager for the sixth consecutive year. On 1 January 1997 CS First Boston was brought together with the international Structure. wholesale business and the trading activities of the old Credit Suisse to form the new Credit Suisse First Boston (CSFB). Even before the creation of the new Credit Suisse Corporate and investment banking. First Boston business unit, the former Credit Suisse (corporate banking) and CS First Boston (investment banking) had been working together for some time. Last year, in close conjunction with one another and making good use of each other’s network of relation- ships, they lead or co-managed more transactions than in any prior year. The bouyant global environment for mergers and acquisitions continued through 1996. Credit Suisse and CS First Boston executed close to 40 transactions in excess of USD 1 bn and advised on a total of 250 deals with a total volume of over USD 200 bn. CS First Boston maintained leadership in the field of privatisation. It advised the Victorian Government of Australia on its entire programme of restructuring and privatising the state-owned electricity industry, with a total value realised thus far of AUD 13.6 bn. The project financing for the Kern River Funding Corporation attracted significant attention for its creative use of capital markets in preference to bank financing. In addition, the Credit Suisse project finance team in Hong Kong arranged one of the largest infrastructure project financings in Asia, USD 1.4 bn for the PT Jawa Power project in Indonesia. In 1996, the Firm arranged the secondary offering for ENI, Equity trading and sales. the recently privatised Italian oil company; at USD 5.9 bn, it was the largest secondary equity offering on record. CSFB was responsible for one of the largest corporate secondary offerings ever accomplished in Europe, the German SGL Carbon. Last year CSFB acted as co-lead manager for the common stock offering of the Commonwealth Bank of Australia; at USD 3.3 bn it was the largest-ever bank equity offering. CSFB also completed the largest equity financing for an Indian industrial company in recent years when it acted as bookrunner for Tata Engineering and Locomotive Company’s USD 200 m issue. 12
  • 15. Any equity business is to a substantial degree dependent upon the quality of its research. At CSFB equity research has become virtually synonymous with Economic Value Added (EVA™). This analysis of Economic Value Added has helped solidify relationships with issuers of securities. In 1996 Credit Suisse and CS First Boston were among Fixed income trading and sales. the key global market players in virtually all of the fixed income markets they are active in. On the basis of 1996 performance, International Financing Review named Credit Suisse “Swiss Franc Bond House of the Year” and named CS First Boston “Eurobond House of the Year”. The consolidation of Credit Suisse and CS First Boston has created a broadly diversified fixed income department with three major groups: government securities and proprietary trading worldwide; emerging markets and foreign exchange; and capital markets. The unification that created Credit Suisse First Boston will promote rapid expansion in the new growth markets with use of the existing banking and broker licences worldwide. Continuous expansion of trading in growth markets is one of CSFB’s most important strategic initiatives. The Firm’s direct investment arm, Private Equity, chooses its investment Private Equity. opportunities in areas such as recapitalisations, management buyouts and growth financings. Private Equity has committed and invested capital of approximately USD 1.4 bn, including its own funds and those under management directly. In 1996, Credit Suisse Financial Products produced Credit Suisse Financial Products. record results benefiting from favourable conditions in the major world markets. There were strong results in equity derivatives, credit derivatives and emerging market products and European fixed income products. For the second year running there was a general downturn in client interest in structured fixed income products in developed markets. This was more than offset however by higher turnover and trading profits in less complex products. 1996 Pro forma figures (indicative) in CHF m Net operating income 6,475 Personnel expenses 3,265 Valuation adjustments, provisions and losses 170 Pre-tax operating profit 1,875 Equity 9,600 Staff 11,000 13
  • 16. SERVICES FOR INSTITUTIONAL INVESTORS WORLDWIDE During 1996, preparations were made to combine the institutional asset management business and mutual fund business of Credit Suisse and Swiss Volksbank and create the Credit Suisse Asset Management business unit. The business currently amounts to over USD 160 bn in discretionary and advisory assets under management. Credit Suisse Asset Management is a major global participant in institutional and mutual fund asset management. Overall, 1996 was a good year. The different entities in the institutional and mutual fund business have been Structure. brought together within Credit Suisse Asset Management. From these enterprises, a new and focused global asset management product and distribution organisation has been created. Credit Suisse Asset Management aims to extend its position as one of the most successful global providers of services for institutional and mutual fund investment customers. Credit Suisse Asset Management’s clients are world wide, with large The product mix. concentrations in Switzerland (32%), in Europe (25%) and in the US (28%). While strong in all areas, the management of fixed income assets is the largest business, representing 52% of assets under management, with equity (17%) and balanced portfolios (18%) also accounting for a substantial share of assets under management. Key market segments are the management of mutual funds which represents 38% of assets under management, followed by pension funds (28%). Credit Suisse Asset Management’s largest business is managing Domestic products. domestic assets for locally domiciled clients. The biggest market is Switzerland where discretionary assets under management represent USD 36 bn and advisory assets, USD 44 bn. The Swiss institutional asset management business enjoyed significant growth in 1996 and continued to produce good investment results. The Swiss team continued to focus on Swiss fixed income and equity but also expanded balanced funds and an array of indexed products. ANSKA, the pooled pension fund vehicle for Swiss corporate pension funds, experienced substantial growth and good investment performance. A number of the mutual funds managed by Credit Suisse Asset Management Switzerland won performance awards from Micropal, Lipper and BOPP for 1996. Other markets where Credit Suisse Asset Management offers domestic products are the US, Japan, Australia and Eastern Europe. In the US, through the wholly owned subsidiary BEA, 1996 was another year of growth and very good performance in fixed income funds, high-yield commodities and derivatives. BEA has also become a participant in a pooled mutual fund product for a major US brokerage firm and has introduced mutual funds in several mutual fund supermarkets. 14
  • 17. 1996 was also a successful year in Japan, with growth and above-average investment results. With USD 7.1 bn at year-end, up 42% in 1996, Credit Suisse Asset Management Japan is among the largest foreign asset managers, with an excellent product line. The core strengths lie in balanced account management designed for corporate and government entities. Australia represents the smallest but fastest growing market. 1996 ended with assets under management of USD 2.4 bn and good performance numbers in equity, fixed income, and balanced accounts. The global products managed in London and New York enjoyed a 22% Global products. surge in assets under management and a 28% increase in the number of client relationships during 1996. The global fixed income flagship product managed in London ended the year with USD 14.2 bn under management and produced a fifth straight year of first quartile performance and won several awards. Other key products are UK equities, European equities and Eastern European emerging markets, all of which had first quartile performance in 1996. A key to the distribution strategy is the mutual fund organisation. Aided by Mutual funds. strong markets and superior investment performance, assets under management grew 21% to end the year at USD 45 bn. The exceptional investment performance resulted in the Micropal award, “Best Management Group 1996” (in the category “very large organisations”), and, in addition, over 70 other awards for individual mutual funds. In 1996 Credit Suisse Asset Management successfully opened distribution channels in the UK and Japan. Efforts are currently underway to develop and extend distribution channels in Germany, Italy and France. Mutual funds were launched in Russia late in the year and the operations in the Czech Republic further developed. 1996 Pro forma figures (indicative) in CHF m Net operating income 660 Personnel expenses 220 Valuation adjustments, provisions and losses 30 Pre-tax operating profit 195 Equity 400 Staff 1,254 15
  • 18. CREDIT SUISSE GROUP RISK MANAGEMENT Today effective risk management is a crucial component of banking business. It is an ongoing task for providers of financial services to see that risks are quantified and minimised. Credit Suisse Group places a very high priority on the careful management of risk. The aim is to ensure, in rapidly changing markets, that the relationship between risk and return is optimised across the Group. Risk management at Credit Suisse Group is carried out at various levels: – Within each business unit all relevant risks are determined and controlled, using standardised procedures. In this way returns – after risk-related costs – can be more closely predicted and capital usage optimised. – The overall monitoring and the management of risk takes place at Group level, in close co-operation with the business units. This also creates the conditions for an optimal allocation of business capital. At all levels the development and application of state-of-the-art technology is an essential prerequisite. Through the effective management of market risk a steady flow of returns Market risks. can be obtained in line with the relevant risks. Of crucial importance in the monitoring of market risk are: – the precision of the market risk measurement models used; Credit Suisse Group uses value-at-risk methods and scenario analysis tools among others – the quality and consistency of the data used – continuous, up-to-date reporting In 1996 Credit Suisse Group designed a new, forward-looking framework for Credit risks. the management and pricing of credit risk. It has five essential components: – a credit limit system for individual counterparties – country and sector concentration limits – a forward-looking credit risk provisioning methodology – consistent methods for valuing the credit portfolio, allowing, for example, a unified categorisation according to risk class – the securitisation of credit risk 16
  • 19. An essential element of the new provisioning system is the Annual Credit Provision (ACP), representing the future expected annual credit loss on the performing part of the credit portfolio. The second element, the Incremental Credit Reserve (ICR), is designed to absorb the fluctuations around the ACP from year to year. The new provisioning methodology also supports risk-adjusted pricing and the optimisation of the credit portfolio through targeted diversification. In order to minimise settlement risk – e.g. in funds transfer or currency Settlement risks. transactions – the settlement amounts of as many counterparties as possible are netted against each other. The objective is to reduce the total transfer sums through netting. Credit Suisse First Boston is in the process of installing netting systems at its major trading centres worldwide. Operational risks – i.e. risks incurred through internal processes – are Operational risks. reduced through comprehensive regulation of procedures by means of internal directives, and through the systematic use of internal controls. In addition, effective EDP contingency plans minimise the risk of system crashes and security breakdowns. Legal risks are contained principally through the use of appropriate business Legal risks. documents, such as standard master agreements and individual trade confirmations, and through ongoing consultation with internal and external legal experts. Balance sheet interest rate Asset and liability management and liquidity management. risk is monitored and managed by the individual business units and by special centres of competence. Responsibility lies with the respective Asset and Liability Management Committees. Swaps, forward rate agreements, options and other instruments are used to manage such risks. Applying the various risk management procedures outlined will allow the Group to make optimal use of its capital. In this way risk management also helps enhance shareholder value. 17
  • 20. CREDIT SUISSE GROUP AND THE COMMUNITY Companies are measured not merely in terms of their financial perfor- mance but also in terms of their role in society as a whole. Credit Suisse Group is well aware that in addition to its core economic responsibilities it also has responsibilities on the wider social level. In Switzerland, in particular, Credit Suisse Group wants to participate in shaping the social and economic environment in which it operates to the good of the community. On 2 July 1996 it was announced that CS Holding Credit Suisse Group as employer. would be reshaped to form Credit Suisse Group. The increase in productivity linked to the new structure involves job reductions in various areas of the Group. Credit Suisse Group was concerned to give its staff a clear picture at the earliest possible juncture of exactly how the job reductions were to be achieved. In collaboration with the employer and employee associations, a workable strategy was developed for the reductions for Switzerland. In fact, as early as July of last year Credit Suisse Group was able to reassure its staff that the downsizing would be achieved largely through attrition (fluctuation and retirement), in tandem with such measures as transfers within the Group, early retirement provisions, retraining and flexible working arrangements. Within the international organisation, where the job reductions cannot be achieved solely through these measures, solutions will be sought which are appropriate to local practices and legal provisions. Credit Suisse Group is committed to further developing the skills and market competitiveness of its staff and therefore to supporting them with ongoing training. The objective here is also to maintain and enhance the Group’s competitiveness. Only in this way can new, attractive jobs be created. The success of this is demonstrated by the rapid expansion of operations in a number of areas. Over the last 20 years or so Credit Suisse has pursued Commitment to the environment. an active policy of environmental protection. Since 1989 a special environmental unit set up under the aegis of the Executive Board has played an important part in helping the bank pursue a highly effective environmental policy. One of the most notable aspects of the bank’s commitment to environmental protection is that it has also generated value for customers and shareholders. By integrating ecological considerations into its operations, cost savings have been made and environmental risks reduced. In 1996 Credit Suisse published its first environmental report. Aimed at staff, customers and shareholders, as well as at interested members of the public, this report sets out the basis of the company’s environmental strategy and details the concrete measures which have been taken. In 1996 Credit Suisse also introduced an environmental audit with the aim of measuring its success in achieving its objectives in this area. One of the company’s aims is to achieve a further substantial reduction in its energy consumption. 18
  • 21. Since 1992 Credit Suisse has systematically examined credit applications for environmental risk, thus enabling companies to identify such risks at an early stage. Where there is a potential risk, the bank is ideally placed to offer the customer advice and to provide contact with specialists and the relevant official bodies. In 1996 the companies within Credit Suisse Group provided Charitable contributions. support to a number of different organisations and institutions with social, charitable, humanitarian and cultural objectives. More than a thousand beneficiaries shared a total of around CHF 13 m. The Anniversary Foundations helped finance a large number of undertakings benefiting the community, such as “Les Schtroumpfs” (Geneva), the Swiss Cerebral Palsy Association (Zurich area group), the Fontana Passugg Co-operative (Chur) and the Centre Européen de la Culture (Geneva). In today’s environment many charitable and community Credit Suisse Group as sponsor. organisations can rely on support from companies. There are very many cultural, sporting and social organisations which would be forced to scale down their activities were it not for the support of the private sector. The high points of the 1996 sponsorship year at Credit Suisse included the International Festival of Music in Lucerne, Euro ’96 (football) in England, the “White Turf” event (horse racing on snow) in St Moritz, the European Masters (golf) in Crans-Montana and the World Road Cycling Championships in Lugano. “Corporate philanthropy” is an integral part of Credit Suisse Group’s business activities in the USA. There, too, events and organisations are selected with the utmost care to maximise both the benefit to Credit Suisse Group and the benefit to the community. In 1996 the two largest sponsorship programmes in the USA involved the Carnegie Hall and the Museum of Modern Art (MOMA), both world-class institutions. Credit Suisse Group was the main sponsor of the special series of films for children, “Matinees at MOMA”. The Credit Suisse Foundation Trust is the philanthropic arm of Credit Suisse First Boston and provided grants to more than 100 organisations focusing on inner city youth and education in 1996. In addition to that financial support, more than 500 Credit Suisse First Boston employees volunteered their time and efforts in connection with a variety of youth and education related organisations. Finally, the core business units of Credit Suisse First Boston provided assistance to more than 300 charitable organisations in support of their clients and the regions in which those clients are located. Credit Suisse First Boston also played a leading fund-raising role for the Ronald McDonald House of New York City, Junior Achievement, Polytechnic University and The Appeal of Conscience Foundation. 19
  • 22. THE ROLE OF THE SWISS FINANCIAL CENTRE IN THE SECOND WORLD WAR Credit Suisse Group is applying itself very seriously to the debate about the role the Swiss banks played during the Second World War. Switzerland’s public authorities and the industrial and financial community are aware of the scope and significance of this discussion and are working at all levels towards finding constructive solutions. The big three banks have made an important contribution to this with their initiative to create a humanitarian fund to which they have contributed CHF 100 m. The commemoration of the end of the Second World War two years ago Dormant assets. brought the fate of the victims and survivors of the War and the Holocaust back to the centre of public attention. In the context of the search for assets belonging to the descen- dants of Holocaust victims, in the summer of 1995 the Swiss Bankers Association asked its members to carry out a further survey of all assets which had been deposited with them before 8 May 1945 where the customer had not been in contact for at least ten years. The survey revealed a total of 40 m Swiss francs in dormant accounts. Since the beginning of 1996 the search for assets at Swiss banks on behalf of the heirs has been co-ordinated by the Swiss Banking Ombudsman’s Central Contact Office. On 2 May 1996 the Swiss banks and Jewish organisations decided to establish a joint commission to examine the surveys instigated by the Swiss Bankers Association. Credit Suisse Group will ensure that the audit companies commissioned with this task enjoy optimal conditions in which to carry out their work at Credit Suisse Group companies. Under current banking legislation Swiss banks are obliged to continue to manage dormant assets for an unlimited period. Credit Suisse Group supports the political drive for legislation for assets which have been dormant over a long period of time to be assigned to an external, independent body. Swiss banks enjoy the trust of a broad international public and Historical investigations. are aware of their obligations in this matter. Credit Suisse Group is therefore committed to supporting in whatever way possible the Volcker Commission and the government’s Committee of Experts, who are charged with investigating the history of Switzerland’s financial centre during the Second World War. It is also carrying out an objective examination of its own company history for the period in question. 20
  • 23. Credit Suisse Group and the other big Swiss banks have laid the A humanitarian gesture. foundations for a humanitarian fund for the victims of the Holocaust. The contribution of a total of CHF 100 m, deposited in an account held under the trusteeship of the Swiss National Bank, has encouraged other parties to contribute. The Federal Council has now created a Special Fund and, in close consultation with Jewish organisations, has determined its purpose and how it is to be managed. The fund is not directly linked to the dormant accounts: all rights to dormant assets on the part of the legal beneficiaries will be maintained in full. The idea behind the establishment of the fund goes beyond the questions about Switzerland’s role during the Second World War. It represents a gesture of gratitude for the fact that Switzerland was spared the ravages of the war and was able to draw maximum benefit from post-war economic developments. The fund should thus be seen as a signal of recognition of the immeasurable suffering of those concerned. 21