CREDIT SUISSE GROUP ANNUAL REPORT
2001
Part I 2
Credit Suisse Group key figures 2001
3
Editorial
Part II 4 4 6 12 14
An overview of Credit Suisse Group Strategic orientation Organizational structure Financial highlights 2001 Financial review
Part III 19 20 31 34 37
Review of business units Credit Suisse Financial Services Credit Suisse Private Banking Credit Suisse Asset Management Credit Suisse First Boston
Part IV 42
Credit Suisse Group Risk Management
Part V 65
Consolidated financial statements
127
Parent company financial statements
136
Five-year summary of selected financial data
Part VI 139
Management
146
Main offices
147
Information for investors
This symbol is used to indicate topics on which further information is available on our website. Go to www.credit-suisse.com/annualreporting/bookmarks.html to find links to the relevant information. This additional information indicated is openly accessible and does not form part of the Annual Report. Some areas of Credit Suisse Group’s websites are only available in English. Credit Suisse Group's Sustainability Report 2001 will be available in English, German, French and Italian from May 24, 2002, at: www.credit-suisse.com/sustainability. It can also be ordered from: CREDIT SUISSE GROUP Environmental Management, P.O. Box 1, 8070 Zurich, Switzerland, Tel. +41 1 333 82 95, Fax +41 1 333 69 68 Copies of all Credit Suisse Group financial publications may be ordered from: CREDIT SUISSE, KIDM 23, Uetlibergstrasse 231, 8070 Zurich, Switzerland, Fax +41 1 332 72 94, www.credit-suisse.com.
Cautionary Statement Regarding Forward-Looking Information This communication may contain projections or other forward-looking statements related to Credit Suisse Group that involve risks and uncertainties. Readers are cautioned that these statements are only projections and may differ materially from actual future results or events. Readers are referred to the documents filed by Credit Suisse Group with the SEC, specifically the most recent filing on Form 20-F, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements, including, among other things, risks relating to market fluctuations and volatility, significant interest rate changes, credit exposures, cross border transactions and foreign exchange fluctuations, impaired liquidity, competition and legal liability. All forward-looking statements are based on information available to Credit Suisse Group on the date of its posting and Credit Suisse Group assumes no obligation to update such statements unless otherwise required by applicable law.
Credit Suisse Group is a leading global financial services company headquartered in Zurich. Credit Suisse Financial Services provides private clients and small and medium-sized companies with private banking and financial advisory services, banking products, and pension and insurance solutions from Winterthur. Credit Suisse First Boston, the investment bank, serves global institutional, corporate, government and individual clients in its role as a financial intermediary. Credit Suisse Group’s registered shares (CSGN) are listed in Switzerland, Frankfurt and Tokyo, and in the form of American Depositary Shares (CSR) in New York. The Group employs around 80,000 staff worldwide. As of December 31, 2001, it reported assets under management of CHF 1,425.5 billion.
Credit Suisse Group key figures 2001 Operating income in CHF m Gross operating profit in CHF m Net operating profit in CHF m 1) Net profit in CHF m Basic earnings per share in CHF Basic earnings per share – operating, in CHF 1) Reported ROE Operating ROE 1) Net new assets in CHF bn
Total assets in CHF m Shareholders’ equity in CHF m Total assets under management in CHF bn Client assets in CHF bn
Change in %
2001
2000
39,154 8,870 3,974 1,587
37,231 12,083 7,218 5,785
5 (27) (45) (73)
1.33 3.33
5.21 6.50
(74) (49)
4.1% 10.0%
17.7% 21.5%
(77) (53)
66.4
58.1
14
31.12.01
31.12.00
Change in %
1,022,513 38,921
987,433 43,522
4 (11)
1,425.5 2,131.3
1,392.0 2,065.0
2 3
All share-related data have been adjusted for the 4-for-1 share split effective as of August 15, 2001. 1) Excluding amortization of acquired intangible assets and goodwill, exceptional items of CHF 1,092 m in 2001, as well as restructuring provisions of CHF 1,074 m in 2000, all net of tax.
Financial calendar First quarter results 2002 Annual General Meeting 2002
Wednesday, May 15, 2002 Friday, May 31, 2002
Second quarter results 2002
Wednesday, August 14, 2002
Proposed distribution of par value reduction
Wednesday, August 14, 2002
Third quarter results 2002
2
Thursday, November 14, 2002
EDITORIAL
Lukas Mühlemann Chairman and Chief Executive Officer
Dear shareholders, clients and colleagues 2001 was a challenging year for the whole financial services industry, including Credit Suisse Group. The Group reacted to the negative market developments early in the year and started to adjust its cost base. It was thus possible to reduce our operating expenses by 12% in the third quarter and – excluding exceptional items at Credit Suisse First Boston – by 18% in the fourth quarter. At the same time, we successfully built our market franchise in all of the Group’s businesses. Our asset gathering and asset management businesses recorded net new assets of CHF 66.4 billion compared with CHF 58.1 billion in 2000, corresponding to an increase of 14%. The Group’s insurance businesses achieved double-digit premium growth. Donaldson, Lufkin & Jenrette (DLJ) was successfully integrated into Credit Suisse First Boston and their combined market position was maintained. We attribute this performance to our dedication to providing our clients with the best possible services and products. Our strategic decision three years ago to offer mutual fund and life insurance products from external providers – and not only our own products – has clearly paid off for our clients. Our decision two years ago to offer alternative investment products also enabled many of our clients to protect their capital despite the negative market conditions in 2001. Moreover, the combined product and market strength of the former DLJ, Credit Suisse First Boston and Credit Suisse Asset Management enables us to provide a full and high-quality product line to our institutional clients. Credit Suisse Group reported a net operating profit of CHF 4.0 billion after taxes for 2001, excluding exceptional items at Credit Suisse First Boston and the amortization of acquired intangible assets and goodwill. Net profit for the year was CHF 1.6 billion.
At year-end 2001, total assets under management stood at CHF 1,425.5 billion, up slightly from year-end 2000. Our financial services, private banking and asset management businesses proved remarkably resilient in 2001 and put in a good performance given market conditions. Credit Suisse First Boston was strongly impacted by the negative market environment, primarily in the second half of the year. The strict implementation of cost saving measures led to exceptional items in the fourth quarter, but also to a much more competitive cost base which is expected to impact positively on the business unit’s performance going forward. We remain cautious in our outlook for 2002. However, the Group has considerable financial strength and a good position for additional growth when markets recover. In lieu of a dividend, the Board of Directors will propose a par value reduction of CHF 2 per share – unchanged versus the financial year 2000 – to the Annual General Meeting on May 31, 2002.
Lukas Mühlemann May 2002
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3
AN OVERVIEW OF CREDIT SUISSE GROUP
2001 was a challenging year for global financial services companies. In order to benefit from the fundamentally positive long-term market trends, Credit Suisse Group has focused its activities on two core business areas: asset gathering/asset management and investment banking/financial intermediation. In both areas, the Group has initiated cost reduction initiatives and introduced measures to take advantage of potential synergies, so that despite the continuing difficult market environment it can continue to build on its leading position in its key markets.
Challenging economic environment
Strategic orientation
2001 was a difficult year for the world economy, marked by a global economic downturn and a significant weakening of confidence among consumers and businesses. The equity markets responded with a sharp fall in value and lower transaction volumes. This was exacerbated by the psychological effects of the September 11 terrorist attack; households, businesses and investors alike displayed insecurity and greater caution in the autumn months. Global political uncertainties, profit warnings and uncertain sales and earnings prospects contributed to increased volatility on the equity markets. These factors also had an impact on the results of financial services providers such as Credit Suisse Group. While it did not come as a surprise that, in 2001, the US was unable to maintain the high pace of growth achieved in previous years, the timing and speed of the decline in the capital markets were more severe than expected. Europe was unable to take over the role of primary engine driving international economic activity. The weakening of the euro did help exporters in the European Monetary Union, but persistently high unemployment rates, lower earnings prospects and a lack of incentives to invest all dampened domestic recovery. In the second half of the year, global economic weakness increasingly impaired demand from abroad. There was no contribution to growth from the Japanese economy, which continues to face structural problems, record unemployment, deflation and growing government indebtedness. Some of the emerging nations fell into recession, and others had to cope with significantly lower gross domestic product realterm growth rates than in the previous year. Financial market upheavals worsened in key emerging markets such as Argentina and Turkey. In Switzerland, gross domestic product growth declined from 2% to 0.8% in the third quarter of 2001, and the KOF (Institute for Business Cycle Research at the Swiss Federal Institute of Technology in Zurich) index of business confidence fell to its lowest level since August 1996. The appreciation of the Swiss franc and disappointing economic growth in Europe undermined Swiss gross domestic product expansion in the fourth quarter of 2001.
Notwithstanding the short-term developments in the financial markets, the fundamental trends for financial services companies such as Credit Suisse Group are positive in the medium term. An increase in savings due to retirement savings initiatives will result in a strong demand for well-positioned products and wealth management platforms offered by financial services providers. Additionally, companies and institutions increasingly require the services and products offered by skilled, globally active financial services providers in order to optimize their strategic position, finance their activities and deploy their financial resources more efficiently. In order to benefit from these trends, Credit Suisse Group has, for several years, been focusing its activities on two core areas of business: asset gathering/asset management and investment banking/financial intermediation. The financial services industry has emerged from a phase of strong growth that was supported by many years of favorable developments on the markets. In the wake of the downturn in economic growth in 2001, Credit Suisse Group – like many other financial services companies – adjusted its capacities to the current market conditions, especially in investment banking, and exited some of its non-core businesses and markets. At the same time, it succeeded in maintaining its good market position in the area of investment banking. The Group’s asset gathering activities proved resilient in a demanding environment, evident in the fact that the net inflow of new assets was higher than the industry average. In 2001, Credit Suisse Group implemented cost reduction initiatives and introduced measures to take advantage of potential synergies in its asset gathering and investment banking businesses. As a result, Credit Suisse Group, in spite of the continuing difficult market environment, is well placed in both its core areas of business to capture opportunities in the financial services industry and to build on its leading position in its key markets.
4
Listing On September 25, 2001, Credit Suisse Group’s shares were traded on the New York Stock Exchange (NYSE) for the first time. They are listed as American Depositary Shares under the ticker symbol CSR. The advantages of this listing include improved transparency and information for shareholders and analysts, better access to the US capital market, greater flexibility with regard to acquisitions, greater ease of comparison with peers and a reinforcement of employee identification with the company in the US. Credit Suisse Group shares are listed in Switzerland, Frankfurt and Tokyo.
In order to improve client focus and to take advantage of certain synergies, Credit Suisse Group streamlined its organizational structure effective January 1, 2002. In addition to Corporate & Retail Banking, Life & Pensions and Insurance, the Credit Suisse Financial Services business unit now also includes the private banking business. The Personal Finance Initiative in Europe, which focuses on affluent clients, has been integrated into Private Banking. The Credit Suisse First Boston business unit now includes the investment banking business as well as the Group’s asset management business. Credit Suisse Asset Management has been combined with Credit Suisse First Boston’s securities clearing business, Pershing, and with its Private Client Services business in the US, within CSFB Financial Services.
Credit Suisse Personal Finance ■ Acquisition of the Spanish broker and asset manager General de Valores y Cambios. ■ Personal Finance offering expanded to include two new markets: Germany and Spain. Credit Suisse Private Banking ■
■
■
Launch of alternative investment products (lower correlation with negative market trend). Expansion of Family Office business: acquisition of Frye-Louis Capital Management Inc. in Chicago; new Family Office opened in London. Global Private Banking Centre launched in Singapore: clients all over the world have access to a complete range of financial services around the clock.
Credit Suisse First Boston Highlights 2001
■
Credit Suisse Financial Services
Winterthur Insurance ■ Further progress in the implementation of the strategy to focus on markets offering high growth and earnings potential. This included the acquisition of insurance portfolios in the UK and Belgium, the divestiture of Winterthur International (business with multinational corporates), as well as the sale of a branch in France and subsidiaries in Austria.
■
■
Credit Suisse Asset Management ■
Winterthur Life & Pensions Focus on earnings-oriented growth: acquisition of VOPF, one of the largest pension funds in the Czech Republic (25% market share); withdrawal from the French and Austrian markets. ■ Successful launch of unit-linked products in the UK and Japan. ■
Implemented cost reduction measures to bring expenses in line with competitors and the current market environment; exited non-core businesses (CSFBdirect US und UK, precious metals, and Autranet, among others); adjustment of cost base. DLJ integrated rapidly and smoothly while maintaining its combined pre-acquisition market share. Maintained top positions in rankings.
■ ■
Acquired SLC Asset Management. Successful integration of DLJ Asset Management. Expansion of real estate business in Switzerland and Germany.
Credit Suisse Banking Strengthening of market leadership in online banking via launch of a portal for corporate clients. ■ Announcement of cooperation with Bank Linth. ■
www.credit-suisse.com
5
AN OVERVIEW OF CREDIT SUISSE GROUP
New structure since January 1, 2002 Credit Suisse Group
Credit Suisse Financial Services
Credit Suisse First Boston
is a leading provider of comprehensive financial services in Europe and other selected markets. Under the brands Credit Suisse and Winterthur, it offers investment products, private banking and financial advisory services, including insurance and pension solutions, for private and corporate clients.
serves global institutional, corporate, government and individual clients in its role as a financial intermediary. Its businesses include securities underwriting, sales and trading, financial advisory services, investment research, venture capital and brokerage services for financial institutions. It also provides asset management products and services.
Private Banking
Life & Pensions
Corporate & Retail Banking Switzerland
Insurance
Credit Suisse legal entity
Winterthur legal entity
Strategic objectives Credit Suisse Group is a globally active financial services
company. It aims to be a leading provider in its two core business areas of asset gathering/asset management and investment banking/financial intermediation. Its primary objectives are to offer its clients first-rate products and services, to provide its employees with an attractive and challenging working environment, and to generate above-average returns for shareholders. The Group attaches great importance to rigorous cost and capital management and to an exemplary control and compliance environment. It aims to use the available resources in the most efficient way within and across its business units. The business units of Credit Suisse Group The Credit Suisse Financial Services business unit is a
leading provider of comprehensive financial services in Europe and other selected markets. Under the brands
6
Investment Banking
CSFB Financial Services
Credit Suisse First Boston legal entity
Credit Suisse and Winterthur, it offers investment products, private banking and financial advisory services, including insurance and pension solutions for private and corporate clients. In the asset gathering business, it is continually expanding its onshore presence in key European markets, particularly Germany, Italy and Spain. In retail banking and non-life business, the Group’s focus is on continuing to improve its existing market position and increasing efficiency. In all of its businesses, Credit Suisse Financial Services offers a comprehensive and innovative range of online products and services in addition to those available via traditional distribution channels. The Group has been able to further expand its bancassurance activities through the successful sale of bank products (especially mortgages and investment funds) via its insurance channels and of life insurance products via its banking channels. The banking and insurance businesses are aiming to leverage each other’s client bases even more effectively in future. The integra-
virt-x virt-x was created in response to growing demand for a pan-European trading platform for blue chip stocks. The virt-x market is based on a flexible market model and world-class technology that can significantly reduce cross-border transaction costs. Initiatives such as the Concentrated Liquidity Programme enable Credit Suisse Group to make even better use of the benefits offered by this platform. virt-x has made a major contribution to the consolidation of Europe’s stock exchanges, and it is regarded as an attractive tool within the context of the irreversible internationalization of securities trading.
tion of the private banking business into Credit Suisse Financial Services effective January 1, 2002, allows both areas to work together even more efficiently and to exploit considerable synergies with regard to products as well as support and infrastructure facilities. ■ In Private Banking, Credit Suisse is a global market leader in terms of service quality, product innovation and the range of products and services offered. It specializes in providing personal investment counseling and professional asset management for an affluent and high-net-worth clientele and offers an open range of products. Italy, Spain and Germany, as well as Asia and Latin America, have been targeted for further growth in onshore business. ■ In Corporate & Retail Banking, Credit Suisse occupies a leading position in the Swiss market. It provides a wide range of high-quality banking services for private and corporate clients in Switzerland. In addition, it offers clients user-friendly and innovative online banking services. ■ In the Life & Pensions business, Winterthur provides life insurance and pension solutions for private and corporate clients worldwide. Its key markets are Switzerland, Germany, the UK, Italy, Spain and Belgium. Since the acquisition of Nicos Life (now Credit Suisse Life Insurance Co., Ltd.) in 2000, Japan and other selected Asian markets have also grown in significance, as has the Eastern and Central European region. ■ In the Insurance sector, Winterthur is the seventh largest provider in Europe. Private clients and small and medium-sized companies are offered a wide range of property and liability insurance solutions via traditional and alternative distribution channels. The Insurance area concentrates its resources on markets with good growth and high earnings potential, above all in Switzerland – where the Group is the market leader in the insurance business – and Germany, the UK, Italy, Spain and Belgium.
financial market intermediary, it serves corporate clients, financial institutions, governments and individuals, concentrating in particular on three core areas: investment banking, securities business and financial services. It aims to strengthen its leading position in these core areas, expand its client base and increase its share in specific markets. All of its work centers around a pronounced focus on clients, a strong and unified corporate culture and professional risk management. Effective January 1, 2002, Credit Suisse First Boston’s reporting is based on the two segments Investment Banking and CSFB Financial Services. ■ The Investment Banking business is managed in two operating divisions, the Investment Banking division and the Securities division. The Investment Banking division offers comprehensive worldwide mergers and acquisitions (M&A) advisory services; it is also active in the private equity and underwriting businesses. It benefits from critical mass in terms of industries, products and markets and is concentrating on improving productivity. Equity and fixed income trading, sales and research have now been brought together in the Securities division. This combination should lead to an increased client focus, improved use of synergies among the different areas, and more intensive cooperation with Investment Banking. ■ CSFB Financial Services comprises institutional asset management and the investment funds business; the services offered by Pershing, a leading provider of securities processing services; and business with highnet-worth clients in the US (Private Client Services). By combining product expertise in asset management with the distribution capacity of the whole Group, business potential should be exploited even more efficiently.
The Credit Suisse First Boston business unit is one of the world’s five leading global investment banks and has a strong position in asset management. In its role as a
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7
AN OVERVIEW OF CREDIT SUISSE GROUP
Rankings 2001 CSFS
Corporate & Retail Banking ■ Leading online provider in Switzerland ■ Market leader in Swiss corporate business (market share of 18% for SMEs, 24% for large companies) Insurance ■ Seventh-largest provider in Europe ■ 22% market share in Switzerland Life & Pensions ■ Second-largest provider in Switzerland with a 24% market share ■ Eleventh-largest provider in Europe
CSPB
One of the most successful private banking organizations worldwide Benchmark in global product offering
CSFB
M&A advisory (worldwide): ranked 4 Fixed income business (worldwide): ranked 3 High yield new issues (worldwide): ranked 1 Equity new issues (worldwide): ranked 5 Debt and equity new issues (US): ranked 3 Equity research North America: ranked 2 Equity research Europe: ranked 2
Awards CSFS
■
Best Trade Finance Bank: Global Finance magazine
CSPB
■
Best Private Bank in Asia: Finance Asia magazine Bank with the Best Wealth Management Programme globally and in Europe: Lafferty Group Best Use of IT in the Banking Sector for FrontNet portal: Banking Technology Magazine
■ ■
CSAM
■ ■
CSFB
■ ■ ■
8
Retail Fund Manager of the Year in Australia: Money Management magazine and the leading research house ASSIRT Best M&A House of the Year: The Banker magazine European Securitisation House of the Year: International Finance Review Best Equity-Linked Bond House of the Year: Finance Asia magazine
Banking secrecy Swiss banking secrecy protects the privacy and personal freedom of every individual with regard to their financial affairs, and can thus be considered a personal right. In a survey conducted in Switzerland in 2001, 82% of respondents were in favor of banking secrecy. It should be noted that Swiss banking secrecy does not provide any protection for criminal activities such as fraud or money laundering.
Corporate governance
Credit Suisse Group is committed to implementing high international standards of corporate governance. It strives to ensure that the governing bodies appointed by the shareholders endeavor to increase the value of the company in a sustainable and responsible manner. At Credit Suisse Group, “good corporate governance” signifies in particular: ■ A Board of Directors that meets high standards of professionalism and independence; ■ Board of Directors’ Committees (Audit Committee and Compensation and Appointments Committee) that are composed of experienced members who are not employed within the company; ■ The formal appointment of a Lead Independent Director who is responsible for and coordinates the evaluation of the Chairman of the Board and the working methods of the Board of Directors; ■ Transparent reporting and accounting; ■ Independent internal audit. Credit Suisse Group has actively supported moves in Switzerland to draw up and implement a Swiss Code of Best Practice. Social responsibility
In industrialized countries, the relationship between government and the business world has changed greatly since the 1990s. Today, there is widespread agreement that the state should concentrate on structuring the regulatory framework but refrain from actively influencing market developments. This contemporary understanding of the role allocation between economic and political entities also results in increased corporate responsibility. Acknowledging that they have a “corporate social responsibility,” more and more companies are trying to live up to the social and political accountability this entails. At the same time, the general public is also becoming more sensitive to these issues. Credit Suisse Group has therefore decided to expand its reporting in this area: in addition to its Annual Report for 2001, it is also publishing a corporate Sustainability Report. In the knowledge that long-term corporate success depends on, among other things, a responsible approach to business, two years ago Credit Suisse Group pro-
duced a Group-wide Code of Conduct. The Code lays down the most important principles that Credit Suisse Group employees must follow when conducting business and when interacting with colleagues, customers and other stakeholders. This document is binding for all employees of Credit Suisse Group and it forms an integral part of their employment contracts. The Code of Conduct includes a definition of Credit Suisse Group’s 12 core values. Ethical values ■ ■ ■ ■ ■ ■
Integrity Responsibility Fairness Compliance Transparency Confidentiality
Performance values ■ ■ ■ ■ ■ ■
Service Excellence Teamwork Commitment Risk culture Profitability
The skill and the cultural diversity of its employees are among the greatest strengths of Credit Suisse Group. The Group is present in more than 60 countries, and its employees originate from more than 100 different nations. The Code of Conduct is intended to be an indispensable common denominator that creates a Groupwide identity and helps employees identify with the company’s shared methods and objectives. Attractive employer
Credit Suisse Group wants to be an employer of choice for men and women seeking careers in the financial services industry. It provides a stimulating working environment, attractive training and development opportunities, as well as rewards in line with performance and market conditions. It has introduced arrangements that allow for flexible forms of working, part-time work, job-sharing, maternity leave, and health and safety measures. The achievement of these goals is supported by employee satisfaction surveys and, in Switzerland, by company rules governing co-determination for employees. Particular attention is given to the promotion of equal rights and the creation of a working environment free from discrimination. Among business students in Switzerland, Credit Suisse Group topped the list of preferred employers in 2001.
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9
Compliance
All Credit Suisse Group employees are committed to the highest standards of compliance with all legal, regulatory and internal requirements, and they observe the highest professional standards. The implementation of compliance begins with the selection of staff and ranges from training, detailed processes and rules, to effective supervisory and control systems. Credit Suisse Group does not tolerate any breaches of compliance. Switzerland leads the way in the fight against money laundering and has the strictest know-your-customer rules in the world. Credit Suisse Group has a clear policy that it implements rigorously if signs of criminal activity are discovered. If money laundering is suspected, the bank reports this immediately to the responsible authorities. If there is an official investigation, the bank will cooperate closely with the authorities. With regard to “politically exposed” persons, Swiss law places special duties of diligence on the bank. The terrorist attack of September 11, 2001, in the US brought a whole new type of criminal financial activity to the attention of the general public: so-called terrorist funds. Over recent months, Credit Suisse Group has made a great effort to help search for this type of funds. In January 2002, the Wolfsberg Group – a partnership of well-known international banks, including Credit Suisse Group, that have pledged to combat money laundering – published the Wolfsberg Statement on the Suppression of the Financing of Terrorism. The statement expresses the Wolfsberg Group’s commitment to combating these financial flows and calls on the authorities to take a coordinated approach. Promoting sustainable development
In its Code of Conduct, Credit Suisse Group commits itself to taking sustainable development into account when making business decisions and in the management of its resources and infrastructure. The business units are obliged to adhere to national and international environmental standards. They also fulfill the UNEP declaration for financial services providers and insurers and implement the initiatives contained in the UN’s Global Com-
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pact. Credit Suisse Group has set up an environmental management system and had this certified under ISO 14001. This progressive approach to environmental management brings added value in the form of a more efficient use of resources, new products and services and improved risk management. Social role
By signing the Global Compact, Credit Suisse Group has committed itself to meeting its social responsibilities in its everyday business. Within Credit Suisse Group, there are various entities that donate money to charitable organizations. Each year, Credit Suisse Group’s Jubilee Foundation donates a substantial sum to promote social and charitable projects with an interdisciplinary focus. Credit Suisse First Boston’s Foundation Trust is dedicated to the education and care of socially disadvantaged young people in America. Winterthur Insurance was the first company in the world to give USD 1 million to the UN’s Global Aids and Health Fund. Following the attack of September 11, Credit Suisse Group, Credit Suisse First Boston and their employees donated a total of USD 6.5 million for the families of public service workers who lost their lives. Trend towards value reporting
Clients, shareholders and employees do not choose a company or invest in its share solely on the basis of products and location, but also by looking at the values for which the company stands. Credit Suisse Group’s market value is driven by its financials, and also by intangible values that cannot be captured in figures – such as the strength of its brand, its good reputation, the intellectual capital of its employees and the loyalty of its clients. The market acknowledges these values and prices them into sales forecasts and share valuations, though it does not yet do this on a standardized basis. However, corporate reporting continues to develop. Investors, rating agencies and non-governmental organizations that act on behalf of various interest groups are calling for increasingly precise and prompt information about how businesses create added value and integrate it into their value creation processes. Various organizations are currently developing and discussing systems and
Thought Leader Programme In April 2001, Credit Suisse and Winterthur launched the Thought Leader Programme with a speech by UN Secretary-General Kofi Annan. This series of events is intended to promote open, interdisciplinary dialogue and serve as a platform for leading public figures to share their ideas. Apart from recurring platforms such as the well-established WinConference, the second event in the Thought Leader Programme came in March 2002 with a presentation by Rudolph W. Giuliani, the former Mayor of New York who earned worldwide respect for his commitment and unshakeable resolve in coping with the terrorist attack of September 11, 2001.
standards to capture these values. Credit Suisse Group is well aware of the importance of values that cannot be quantified – or that can only be quantified with difficulty – such as its brands and its reputation. It thus attaches great importance to maintaining and cultivating its values since the banking and insurance business is based to a significant extent on the confidence of the client.
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CREDIT SUISSE GROUP FINANCIAL HIGHLIGHTS
31.12.01
31.12.00
Change in %
Shares issued Shares repurchased
1,196,609,811 7,730,000
1,201,751,960 0
0 –
Shares outstanding
1,188,879,811
1,201,751,960
(1)
Share price in CHF
70.80
77.00
(8)
Share data 1)
84,173
92,535
(9)
Book value per share in CHF
29.92
34.08
(12)
Share price in CHF 1)
2001
2000
Market capitalization in CHF m
High Low Repayment of capital (in lieu of a dividend)
87.00 44.80 2.00 2)
Calculation of earnings per share (EPS) 1)
Change in %
(10) (39) 0
97.13 73.25 2.00
Change in %
2001
2000
Net profit in CHF m Net operating profit in CHF m 3) Diluted net profit in CHF m Diluted net operating profit in CHF m 3)
1,587 3,974 1,588 3,975
5,785 7,218 5,787 7,220
(73) (45) (73) (45)
Weighted average shares outstanding 4) Dilutive impact 5) Weighted average shares, diluted
1,194,090,788 9,356,766 1,203,447,554
1,111,100,088 4,591,588 1,115,691,676
7 104 8
1.33 3.33 1.32 3.30
5.21 6.50 5.19 6.46
(74) (49) (75) (49)
Basic earnings per share in CHF Basic earnings per share – operating, in CHF 3) Diluted earnings per share in CHF Diluted earnings per share – operating, in CHF 3)
1) All share-related data have been adjusted for the 4-for-1 share split effective as of August 15, 2001. / 2) Proposal of the Board of Directors to the Annual General Meeting on May 31, 2002. / 3) Excluding amortization of acquired intangible assets and goodwill, exceptional items of CHF 1,092 m in 2001, as well as restructuring provisions of CHF 1,074 m in 2000, all net of tax. / 4) Adjusted for weighted average shares repurchased. / 5) From convertible bonds and outstanding options.
Market capitalization
Share performance Swiss Market Index (rebased)
As of end of reporting period (in CHF bn)
Credit Suisse Group 100
100 90 80
90 80
70
70
60
60
50
50
40
40 30
30
20 10
20 1996
12
1997
1998
1999
2000
2001
2002
0
91 92 93 94 95 96 97 98 99 00 01
Consolidated income statement in CHF m Operating income Gross operating profit Net operating profit 1) Net profit Cash flow
Return on equity (ROE) in % Credit Suisse Group: Banking business: Insurance business:
Reported ROE Operating ROE 1) Reported ROE Operating ROE 1) Reported ROE Operating ROE 1) Return on invested capital (ROIC)
Consolidated balance sheet in CHF m Total assets Shareholders’ equity Minority interests in shareholders’ equity
BIS data in CHF m BIS risk-weighted assets BIS tier 1 capital of which non-cumulative perpetual preferred securities BIS total capital
2001
2000
39,154 8,870 3,974 1,587 8,384
37,231 12,083 7,218 5,785 10,734
2001
2000
4.1 10.0 1.7 8.4 17.6 18.7 16.7
17.7 21.5 18.2 23.1 16.2 16.6 26.5
31.12.01
31.12.00
1,022,513 38,921 3,121
987,433 43,522 2,571
31.12.01
31.12.00
222,874 21,155 2,076 34,888
239,465 27,111 1,102 43,565
BIS capital ratios in % BIS tier 1 ratio
BIS total capital ratio
Credit Suisse Credit Suisse First Boston 2) Credit Suisse Group 3) Credit Suisse Group
Change in %
5 (27 ) (45 ) (73 ) (22 )
Change in %
(77 ) (53 ) (91 ) (64 ) 9 13 (37 ) Change in %
4 (11 ) 21 Change in %
(7 ) (22 ) 88 (20 )
31.12.01
31.12.00
6.9 12.9 9.5 15.7
7.1 13.6 11.3 18.2
Assets under management/client assets in CHF bn
31.12.01
31.12.00
Change in %
Advisory assets under management Discretionary assets under management Total assets under management Client assets
725.4 700.1 1,425.5 2,131.3
724.7 667.3 1,392.0 2,065.0
0 5 2 3
Net new assets in CHF bn
2001
2000
Change in %
Net new assets
66.4
58.1
14
31.12.01
31.12.00
Change in %
22,346 6,297 28,415 22,641 79,699
21,454 6,781 30,666 21,637 80,538
Number of employees Switzerland
banking insurance Outside Switzerland banking insurance Total employees Credit Suisse Group
4 (7 ) (7 ) 5 (1 )
1)
Excl. amortization of acquired intangible assets and goodwill, exceptional items of CHF 1,092 m in 2001, as well as restructuring provisions of CHF 1,074 m in 2000, all net of tax. / 2) Ratio is based on a tier 1 capital of CHF 15.2 bn (December 31, 2000: CHF 17.6 bn), of which non-cumulative perpetual preferred securities is CHF 1.1 bn (for all periods). / 3) Ratio is based on a tier 1 capital of CHF 21.2 bn (December 31, 2000: CHF 27.1 bn), of which non-cumulative perpetual preferred securities is CHF 2.1 bn (December 31, 2000: CHF 1.1 bn).
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13
AN OVERVIEW OF CREDIT SUISSE GROUP
Credit Suisse Group reported a net operating profit of CHF 4.0 billion in 2001, down 45% versus 2000, excluding exceptional items at Credit Suisse First Boston and the amortization of acquired intangible assets and goodwill. Net profit declined 73% to CHF 1.6 billion, compared with CHF 5.8 billion in 2000. The Group’s asset gathering businesses continued to perform well. Net new assets amounted to CHF 66.4 billion, representing growth of 4.8% for 2001. Total assets under management stood at CHF 1,425.5 billion as of December 31, 2001. The Group has made progress in reducing costs in all its business units. The Group’s Board of Directors will this year again propose a par value reduction of CHF 2 per share in lieu of a dividend to the Annual General Meeting.
Overview of business unit results 1)
Credit Suisse Financial Services
Credit Suisse Private Banking
Credit Suisse Asset Management
Credit Suisse First Boston
Operating income Operating expenses
9,601 6,618
5,781 2,707
1,575 1,138
22,825 20,902
(628) (1,081)
39,154 30,284
Gross operating profit
2,983
3,074
437
1,923
453
8,870
850 347
84 36
126 0
2,292 1,938
397 271
3,749 2,592
1,786
2,954
311
(2,307)
(215)
2,529
10 (480)
15 (631)
(14) (61)
(1) 685
(239) 1
(229) (486)
1,316
2,338
236
(1,623)
(453)
1,814
(49)
(20)
0
(1)
(157)
(227)
1,267
2,318
236
(1,624)
(610)
1,587
98 – (2)
18 – –
94 – (8)
1,361 1,428 (594)
(8) – –
1,563 1,428 (604)
1,363
2,336
322
571
(618)
3,974
(747)
1,164
2001 in CHF m
Depreciation of non-current assets Valuation adjustments, provisions and losses 2) Profit before extraordinary items, taxes Extraordinary income/(expenses), net Taxes Net profit before minority interests Minority interests Net profit Reconciliation to net operating profit Amortization of acquired intangible assets and goodwill Exceptional items Tax impact Net operating profit 3) Value added
4)
Average allocated capital 5) Return on average allocated capital 5) Return on average allocated capital (operating) 3) 5) Increased/(decreased) credit-related valuation adjustments 2) 1)
517
2,071
206
(883)
10,906 12.1% 12.9%
3,471 – –
1,291 – –
16,913 (9.6%) 3.4%
27
(5)
–
194
Adjust. incl. Corporate Center
Credit Suisse Group
The Group’s consolidated results are prepared in accordance with Swiss GAAP, while the Group’s segment reporting principles are applied for the presentation of the business unit results. For a detailed description of the Group’s segment reporting principles, please refer to note 4 of the Group’s consolidated financial statements on page 81 and to the footnotes to the business unit results. This presentation of the business unit results is provided to assist in evaluating the operating performance of the business units, which should be considered in the context of the Group’s consolidated financial statements. / 2) Increased/decreased valuation adjustments taken at Group level resulting from the difference between the statistical and actual credit provisions. / 3) Excl. amortization of acquired intangible assets and goodwill, as well as exceptional items, all after tax. / 4) Value Added is a measure of value creation in the period under review. It is derived from Credit Suisse Group’s Value Based Analysis (VBA) and complements the performance metrics which are currently used, but does not replace them. The measure is aimed at enhancing management’s awareness of value creation. For this purpose, accounting figures are adjusted by adding back accounting distortions such as selected non-cash charges (e.g. amortization of goodwill), and cost of equity is charged to the business unit as well as the consolidated accounts. / 5) For Winterthur business units within Credit Suisse Financial Services, average invested capital is used for the calculation of return on invested capital (ROIC).
14
Assets under management/client assets in CHF bn
31.12.01
31.12.00 1)
Change in %
Credit Suisse Financial Services Assets under management of which discretionary Client assets
274.2 144.0 290.3
273.8 142.6 289.6
Credit Suisse Private Banking Assets under management of which discretionary Client assets
469.1 128.0 505.1
456.4 108.7 495.6
Credit Suisse Asset Management Assets under management of which discretionary Client assets
508.8 364.2 508.8
487.2 360.1 487.2
4.4 1.1 4.4
Credit Suisse First Boston Assets under management of which discretionary of which Private Equity on behalf of clients Client assets
173.4 63.9 29.3 827.1
174.6 55.9 31.9 792.6
(0.7) 14.3 (8.2) 4.4)
1,425.5 700.1 2,131.3
1,392.0 667.3 2,065.0
2.4) 4.9 3.2
Credit Suisse Group Assets under management of which discretionary Client assets
0.1 1.0 0.2) ) ) 2.8 17.8 1.9 )
) )
Net new assets in CHF bn
2001
2000 1)
Change in %
Credit Suisse Financial Services Credit Suisse Private Banking Credit Suisse Asset Management 2) Credit Suisse First Boston 3)
7.9 33.0 9.2 16.3
10.4 18.8 24.4 4.5
(24.0) 75.5 (62.3) 262.2
Credit Suisse Group
66.4
58.1
14.3
Assets under management include assets placed with Group entities for investment purposes or which, in the case of the insurance business, underlie insurance contracts. Deposits from banks and brokers are generally excluded from assets under management. Net new assets exclude interest and dividends. 1)
Certain restatements have been made to prior-year amounts to conform to the current presentation. / 2) Net new discretionary assets. / 3) Measured as the balance from accounts opened minus accounts closed.
2001 was a challenging year for Credit Suisse Group in view of the difficult capital markets environment, particularly in the second half. Despite the adverse market conditions, Credit Suisse Financial Services, Credit Suisse Private Banking and Credit Suisse Asset Management achieved good results in terms of both profitability and growth. Credit Suisse First Boston was particularly impacted by market conditions. In addition, exceptional items of CHF 1.1 billion (USD 646 million), net of tax, led to an unsatisfactory result. Credit Suisse Group reported a net operating profit of CHF 4.0 billion in 2001, excluding the exceptional items
at Credit Suisse First Boston and the amortization of acquired intangible assets and goodwill, all net of tax. This corresponds to a decline of 45% versus the previous year. Net profit for 2001 declined 73% to CHF 1.6 billion, compared with CHF 5.8 billion in 2000. Operating earnings per share were CHF 3.33 in 2001 versus CHF 6.50 in the previous year, and earnings per share amounted to CHF 1.33, down 74% on 2000. Return on equity was 4.1%, or 10.0% on an operating basis, compared with 17.7%, or 21.5% on an operating basis, in 2000.
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15
AN OVERVIEW OF CREDIT SUISSE GROUP
Strong net new asset growth
The Group’s asset gathering businesses maintained their healthy growth momentum over 2001. Net new assets totaled CHF 66.4 billion, representing growth of 4.8% of assets under management. Credit Suisse Financial Services contributed CHF 7.9 billion of total net new assets, Credit Suisse Private Banking CHF 33.0 billion, Credit Suisse Asset Management CHF 9.2 billion and Credit Suisse First Boston CHF 16.3 billion. The Group’s total assets under management stood at CHF 1,425.5 billion as of December 31, 2001, up 2.4% on the yearend 2000 figure. Operating income and expenses
Operating income increased 5% to CHF 39.2 billion. Net interest income was up 27% year-on-year to CHF 6.8 billion, commission and service fee income increased 8% to CHF 17.8 billion and trading income rose 4% to CHF 9.2 billion. Income from the insurance business increased marginally by 2%, to stand at CHF 6.3 billion. The rise in operating income was attributable to the fact that unfavorable market conditions were more than offset by the increased business volume resulting from the acquisition of DLJ. At the same time, the higher cost base following the acquisition of DLJ led to a 20% increase in operating expenses, which totaled CHF 30.3 billion. Credit Suisse Group implemented extensive cost reduction measures in 2001. Per capita incentive compensation decreased by an average of 49% at Credit Suisse First Boston. Liquidity and capital management
Group’s business. To underscore its importance, such resources are managed at both Group and operating levels, with a prudent number of checks and balances. In keeping with this approach, the operating units finance their operations on a basis consistent with their business mix, capitalization and ratings, in line with their Asset and Liability Management (ALM) and risk management policies. Corporate Treasury reviews practices regarding market access, such as diversification of liabilities and creditor relations. In 2001, the Group established a comprehensive capital planning and allocation framework, which considers regulatory as well as market and economic capital requirements. In the course of the year, the Group issued hybrid tier 1 capital of about CHF 1 billion and bought back its own shares in the amount of CHF 1.1 billion. Consolidated shareholders’ equity stood at CHF 38.9 billion as of December 31, 2001, of which BIS tier 1 capital represented CHF 21.2 billion. The consolidated BIS tier 1 ratio stood at 9.5% at year-end 2001, and the BIS tier 1 ratio for the banking business was 8.8%. Both the banking and insurance businesses remain adequately capitalized. Par value reduction
The Group’s Board of Directors will propose a par value reduction of CHF 2 per share – unchanged versus the financial year 2000 – in lieu of a dividend to the Annual General Meeting on May 31, 2002. If approved by the Annual General Meeting, this capital reduction will be paid out on August 14, 2002.
At Credit Suisse Group, the management of liquidity and capital resources is recognized as a critical aspect of the
Operating income composition in 2001 16%
Operating income contribution by BU in 2001
Net operating profit contribution by BU in 2001 12%
17%
24%
30%
7%
57%
23%
15% 44% 4% 51%
Balance sheet business Commission and service fees Trading Insurance
16
CSFS CSPB CSAM CSFB
CSFS CSPB CSAM CSFB
Business unit results Credit Suisse Financial Services’ full year results are
reported under the old structure, applicable prior to the realignment on January 1, 2002. A new reporting structure will apply for the presentation of the business unit’s first quarter results 2002 and onwards. Credit Suisse Financial Services performed well in view of the challenging market environment and achieved further growth. Net operating profit stood at CHF 1.4 billion for 2001, down 24% on the previous year. This decrease was primarily attributable to a lower investment return from the insurance units and to continued investments in pan-European wealth management expansion at Credit Suisse Personal Finance. Excluding these investments, net operating profit stood at CHF 1.7 billion for 2001. Total assets under management increased slightly to CHF 274.2 billion in 2001, despite adverse market conditions. Winterthur Insurance recorded a 12% increase in its gross premium volume, to CHF 18.4 billion, in 2001. The underwriting result improved 9% to CHF 1.1 billion, resulting in a lower combined ratio. Net operating profit was down 28% to CHF 536 million versus the previous year owing to a 7% decline in investment income as a result of generally weak market conditions, as well as transaction-related charges of CHF 167 million for the divestiture of Winterthur International. Winterthur Life & Pensions’ gross premiums amounted to CHF 17.4 billion in 2001, up 13% compared with 2000, of which 10% represents organic growth. Net operating profit for 2001 was down only 5% to CHF 578 million, despite a significantly lower investment return. Net new assets for 2001 totaled CHF 3.9 billion, versus CHF 2.7 billion in 2000, as a result of organic growth in asset gathering. Credit Suisse Banking reported a net operating profit of CHF 632 million for 2001, down 4% on the previous year. The operating cost/income ratio rose from 64.1% in 2000 to 69.4% in 2001 owing to lower revenues from the securities and wealth management businesses, as well as higher depreciation. Net new assets amounted to CHF 2.8 billion for 2001. At Credit Suisse Personal Finance, continued investments in expansion resulted in a net operating loss of CHF 383 million in 2001 versus a net operating loss of CHF 222 million in the previous year. Assets under management totaled CHF 6.6 billion as of December 31, 2001, representing growth of CHF 0.8 billion or 13.8% versus December 31, 2000. In addition to the further expansion of operations in Italy, which progressed well in view of market conditions, Credit Suisse Personal Finance was launched in Germany and Spain in autumn 2001.
Credit Suisse Private Banking posted a healthy net operating profit of CHF 2.3 billion in 2001, despite the challenging market conditions. This corresponded to an 11% decline versus the previous year’s strong result. Assets under management rose by 2.8% to CHF 469.1 billion in 2001. This solid performance is mainly attributable to CHF 33.0 billion in net new assets, an increase of 75.5% versus the previous year. This corresponds to a growth rate of 7.2%. Credit Suisse Asset Management recorded a 5% decline in net operating profit to CHF 322 million in 2001, versus CHF 338 million in 2000. Net new assets totaled CHF 9.2 billion for 2001. Discretionary assets under management stood at CHF 364.2 billion as of December 31, 2001, and total assets under management increased by 4.4% to CHF 508.8 billion. Credit Suisse First Boston reported a net operating profit of USD 338 million (CHF 571 million) in 2001, excluding exceptional items of USD 646 million (CHF 1.1 billion) and the amortization of acquired intangible assets and goodwill, all net of tax. This represents a decrease of 78% compared with 2000. The pre-tax exceptional items relate to the previously announced cost reduction initiatives and to the settlement with the US Securities and Exchange Commission (SEC) and the National Association of Securities Dealers Regulation Inc. (NASDR) regarding their investigations into certain IPO allocation practices. For 2001, Credit Suisse First Boston reported a net loss of USD 961 million (CHF 1.6 billion), versus a net profit of USD 1.4 billion (CHF 2.4 billion) in 2000. An extensive restructuring and cost reduction program initiated in 2001 is well underway and will provide the firm with a lower and more flexible cost base going forward. Outlook
Credit Suisse Group remains cautious in its outlook for 2002 and expects revenue levels at Credit Suisse First Boston to be lower than in 2001 and earnings at Credit Suisse Financial Services to not exceed 2001 levels. Despite the challenging environment, the Group remains confident about its market position across all its core businesses. The Group believes it has implemented appropriate measures to meet current challenges and to capture new growth opportunities.
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17
REVIEW OF BUSINESS UNITS RISK MANAGEMENT
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FINANCIAL SERVICES
Credit Suisse Financial Services reported a net operating profit of CHF 1.4 billion in 2001, versus CHF 1.8 billion in 2000. This 24% decline is primarily attributable to a lower investment return from the insurance units and to higher investments in pan-European wealth management expansion. Net profit stood at CHF 1.3 billion (–27%). Despite the negative market environment, total assets under management increased slightly to CHF 274.2 billion as per year-end 2001, thanks to CHF 7.9 billion of net new assets.
Overview of business area Credit Suisse Financial Services 1) Winterthur Winterthur Insurance Life & Pensions
Credit Suisse Banking
Credit Suisse Personal Finance
Credit Suisse Financial Services
3,236 2,261
2,503 1,420
3,806 2,453
56 484
9,601 6,618
Gross operating profit 2)
975
1,083
1,353
(428)
2,983
Depreciation of non-current assets Valuation adjustments, provisions and losses 3)
199 –
393 –
200 343
58 4
Profit before extraordinary items, taxes
776
690
810
(490)
1,786
Extraordinary income/(expenses), net Taxes
0 (224)
0 (153)
15 (200)
(5) 97
10 (480)
Net profit before minority interests
552
537
625
(398)
1,316
2001 in CHF m
Operating income 2) Operating expenses 2)
Minority interests
(46)
(2)
(1)
Net profit
506
535
624
30 0
43 0
10 (2)
Reconciliation to net operating profit Amortization of goodwill Tax impact Net operating profit 4)
Increased/(decreased) credit-related valuation adjustments 3) Assets under management in CHF bn of which discretionary Net new assets in CHF bn Client assets in CHF bn 1)
578
536
Average allocated capital 5) Return on average allocated capital 5) Return on average allocated capital (operating) 4) 5)
6,514 16.7% 17.8%
0 (398)
15 0
850 347
(49) 1,267
98 (2)
(383)
1,363
4,369 14.3% 14.5%
23 – –
10,906 12.1% 12.9%
632
–
–
27
–
27
30.5 30.5 – 30.5
108.3 108.3 3.9 108.3
128.8 2.5 2.8 144.4
6.6 2.7 1.2 7.1
274.2 144.0 7.9 290.3
For further information on the presentation of business unit results, please refer to the “Overview of business unit results” on page 14, footnote 1). / 2) Operating income for the insurance business is defined as net premiums earned, less claims incurred and change in technical provisions and expenses for processing claims, less commissions, plus net investment income from insurance business. Expenses for handling both claims and investments include: personnel expenses Winterthur Insurance: CHF 477 m, Winterthur Life & Pensions: CHF 122 m; operating expenses Winterthur Insurance: CHF 252 m, Winterthur Life & Pensions: CHF 119 m. / 3) Increased/ decreased valuation adjustments taken at Group level resulting from the difference between the statistical and actual credit provisions. / 4) Excl. amortization of goodwill, net of tax. / 5) For Winterthur business units, average invested capital is used for calculation of return on invested capital (ROIC).
20
Credit Suisse Financial Services maintained its earnings power and growth momentum in 2001 despite the challenging market environment. In addition to the further expansion of operations in Italy, Credit Suisse Personal Finance’s offering for wealthy private clients in Europe was extended to include two new markets, Germany and Spain. The insurance businesses made further progress in the implementation of their strategies of focusing on markets offering high growth and earnings potential. The business unit’s results were impacted by a lower investment return from the insurance units and continued
investments in pan-European wealth management expansion. Credit Suisse Financial Services’ established businesses, excluding Credit Suisse Personal Finance, posted a net operating profit of CHF 1.7 billion versus CHF 2.0 billion the previous year. This corresponds to an operating return on average allocated capital of 16.5% for the year 2001, compared with 21.7% in 2000. Winterthur Insurance
Winterthur Insurance recorded a gross premium volume of CHF 18.4 billion in 2001, representing healthy growth
Winterthur Insurance income statement (non-life business) 1) in CHF m
2001
2000
Change in %
Gross premiums written Reinsurance ceded
18,412 (1,572)
16,508 (1,876)
12 (16)
Net premiums written
16,840
14,632
15
Change in provision for unearned premiums and in provision for future policy benefits (health)
(1,833)
(1,113)
65
Net premiums earned
15,007
13,519
11
(11,509) (311) (4,335)
(10,432) (376) (3,969)
10 (17) 9
(1,148)
(1,258)
(9)
2,217 29 (127)
2,385 96 (136)
(7) (70) (7)
Claims and annuities incurred, net Dividends to policyholders incurred, net Operating expenses, net (incl. commissions paid) Underwriting result, net Net investment income Interest received on deposits and bank accounts Interest paid Other income/(expenses) (including foreign currency translation impact)
53
–
1,140
(29)
(224)
(305)
(27)
582
835
(30)
30
16
88
Net profit before minority interests
552
819
(33)
Minority interests
(46)
(90)
(49)
Net profit
506
729
(31)
Profit before taxes Taxes Net operating profit before minority interests Amortization of goodwill
Reconciliation to net operating profit Amortization of goodwill Net operating profit 2)
(165) 806
30
16
88
536
745
(28)
1)
For further information on the presentation of business unit results, please refer to the “Overview of business unit results” on page 14, footnote 1). The business unit income statement differs from the presentation of the Group’s consolidated results as it reflects the way the insurance business is managed, which is in line with Winterthur’s peers in the insurance industry. Amortization of goodwill is excluded from “Operating expenses” and is reported separately in the income statement. / 2) Excl. amortization of goodwill.
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21
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FINANCIAL SERVICES
of 12% (organic growth: 11%) versus the previous year. This increase was primarily attributable to an increase in rates as well as to above-average volume growth, especially at Churchill in the UK but also in almost all other key markets. New products launched in 2001, including WinProfessional and Bonus-Protection, were well received in the market. Winterthur Insurance also made significant progress in the implementation of strategic projects aimed at focusing its resources on markets that offer high growth and earnings potential, while withdrawing from markets in which it cannot achieve adequate returns on invested capital. The acquisitions of insurance portfolios in the UK and Belgium, the divestiture of Winterthur International, as well as the sale of branches in France and subsidiaries in Austria, represent milestones in the implementation of this strategy. In 2001, the overall expense ratio fell by almost half a percentage point compared with 2000, to stand at 28.9%. This contributed to an improvement in the combined ratio, which decreased by 0.9 percentage points on the previous year to 105.6%. The claims ratio decreased 0.5 percentage points to 76.7% compared with the previous year. Further improvements in several countries within Europe (Italy, Spain, Portugal, Switzerland) were partially offset by a weak North American performance, as workers’ compensation reserves were strengthened. The sale of Winterthur International also had a positive effect on the claims side. The underwriting result stood at CHF 1.1 billion for 2001, 9% better than in 2000. The 7% decline in investment income owing to the generally weak market conditions, as well as transaction-related charges
of CHF 167 million for the divestiture of Winterthur International, resulted in a net operating profit of CHF 536 million, down 28% on the previous year’s figure of CHF 745 million. Winterthur Life & Pensions
Winterthur Life & Pensions reported strong gross premium growth of 13% (organic growth: 10%) in 2001 to CHF 17.4 billion. All core markets contributed to this growth through increased sales of the existing product range and the successful launch of new products, such as unit-linked products for wealthy clients in Japan and the UK. In 2001, the premium contribution from outside Switzerland exceeded 50% for the first time. Net new assets for 2001 totaled CHF 3.9 billion (CHF 2.7 billion in 2000) as a result of organic growth in asset gathering. Net operating profit for 2001 was down only 5% to CHF 578 million (CHF 609 million in 2000), despite a significantly lower investment return. Solid operating profits were realized in all core markets, with significant contributions from Switzerland, Belgium, the UK and the Netherlands. As a result of continued cost management, the expense ratio decreased from 11.1% to 10.9% compared with the previous year. Investment income for 2001 decreased CHF 2.4 billion or 40% versus 2000, owing to market conditions. Of this decrease, one third is related to the depreciation of unit-linked investments, though this did not impact on net operating profit due to a corresponding reduction in unit-linked provisions. Capital market developments in 2001 have been a challenge for Winterthur Life & Pensions, especially as regards employee benefits business in Switzerland, where a guaranteed investment return of 4% must be
Winterthur Insurance key information (non-life business) 2001
2000
105.6%
106.5%
Claims ratio
76.7%
77.2%
Expense ratio
28.9%
29.3%
31.12.01
31.12.00
Combined ratio (excl. dividends to policyholders)
30.5
32.5
Technical provisions in CHF m
27,738
26,653
Number of employees
21,368
21,796
Assets under management in CHF bn
22
provided to policyholders. This business, which represents 25% of Winterthur Life & Pensions’ technical reserves, has been managed with a very low cost ratio over the last two years. Winterthur Life & Pensions is currently assessing measures to further improve the profitability of its pension funds business and to substantially increase the flexibility of employee benefit products to compensate for the unfavorable regulatory environment. A sharp focus on profitable growth prompted the withdrawal from the Austrian and French markets. In ad-
dition, the acquisition of VOPF, one of the largest pension funds in the Czech Republic, provided Winterthur Life & Pensions with a 25% share of the Czech pensions market. The successful launch of product distribution with Credit Suisse Private Banking and Credit Suisse Personal Finance in Italy, Germany and Spain is expected to further strengthen market positions. Further progress was achieved through the implementation of a crossborder IT platform.
Winterthur Life & Pensions income statement (life business) 1) in CHF m
2001
2000
Change in %
Gross premiums written Reinsurance ceded
17,413 (210)
15,452 (280)
13 (25)
Net premiums written
17,203
15,172
13
(1)
–
Change in provision for unearned premiums Net premiums earned Death and other benefits incurred Change in provision for future policyholder benefits Dividends to policyholders incurred Operating expenses, net (incl. commissions paid) Net investment income Interest received on deposits and bank accounts Interest on bonuses credited to policyholders Other interest paid Other income/(expenses) (including foreign currency translation impact) Profit before taxes Taxes Net operating profit before minority interests Amortization of goodwill Net profit before minority interests Minority interests Net profit Reconciliation to net operating profit Amortization of goodwill Net operating profit 2)
(15) 17,188
15,171
13
(12,167) (5,457) (287) (1,868) 3,651 86 (135) (225)
(9,734) (6,377) (1,982) (1,680) 6,051 88 (116) (239)
25 (14) (86) 11 (40) (2) 16 (6)
(53)
(416)
(87)
733
766
(4)
(153)
(101)
51
580
665
(13)
43
15
187
537
650
(17)
(56)
(96)
594
(10)
43
15
187
578
609
(5)
(2) 535
1)
For further information on the presentation of business unit results, please refer to the “Overview of business unit results” on page 14, footnote 1). The business unit income statement differs from the presentation of the Group’s consolidated results as it reflects the way the insurance business is managed, which is in line with Winterthur’s peers in the insurance industry. Amortization of goodwill is excluded from “Operating expenses” and is reported separately in the income statement. / 2) Excl. amortization of goodwill.
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23
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FINANCIAL SERVICES
Winterthur Life & Pensions key information (life business) 1)
Expense ratio Net return on average technical provisions 2) Net new assets in CHF bn 3)
Assets under management in CHF bn 4) Technical provisions in CHF m Number of employees 1)
2001
2000
10.9%
11.1%
50 bp
68 bp
3.9
2.7
31.12.01
31.12.00
108.3
104.7
108,326
105,522
7,570
6,562
Operating expenses/net premiums earned. / 2) Net profit before minority interests/average technical provisions. / 3) Based on change in technical provisions for traditional business, adjusted for technical interests; net inflow of unit-linked business; and change in off-balance sheet business such as funds. / 4) Based on savingsrelated provisions for policyholders plus off-balance sheet assets.
24
Winterthur balance sheet in CHF m
31.12.01
31.12.00
Assets Investments Non-life Life Life business, where the investment risk is borne by the policyholders Policy loans Deposits on reinsurance assumed Due from banks/cash and other liquid assets Receivables from insurance companies Receivables from agents and policyholders Sundry debtors Accrued income and prepaid expenses Tangible fixed assets Other assets
Change in %
131,605 28,171 91,206 12,228 813 483 1,427 1,792 5,729 3,012 2,178 2,360 16,214
134,837 29,667 92,281 12,889 840 226 1,280 1,504 5,193 2,109 2,117 2,408 12,412
(2) (5) (1) (5) (3) 114 11 19 10 43 3 (2) 31
Total assets
165,613
162,926
2
Liabilities and shareholders' equity Technical provisions Non-life Life Life business, where the investment risk is borne by the policyholders Deposits on reinsurance ceded Convertible bonds and warrants issued Due to banks Payables to insurance companies Payables to agents and policyholders Sundry creditors Accrued expenses and deferred income Other liabilities Shareholders' equity of which minority interests
136,064 27,738 95,518 12,808 527 1,393 2,602 973 4,480 5,554 1,719 7,023 5,278 860
132,175 26,653 92,105 13,417 653 1,418 2,195 900 3,317 3,934 1,403 7,782 9,149 1,064
3 4 4 (5) (19) (2) 19 8 35 41 23 (10) (42) (19)
Total liabilities and shareholders' equity
165,613
162,926
2
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25
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FINANCIAL SERVICES
Credit Suisse Banking income statement 1) Change in %
2001
2000
Net interest income Net commission and service fee income Net trading income Other ordinary income
2,456 1,005 318 27
2,379 1,159 342 45
3 (13) (7) (40)
Operating income
3,806
3,925
(3)
Personnel expenses Other operating expenses
1,602 851
1,513 917
6 (7)
Operating expenses
2,453
2,430
1
Gross operating profit
in CHF m
1,353
1,495
(9)
Depreciation of non-current assets Valuation adjustments, provisions and losses 2)
190 343
84 562
126 (39)
Profit before extraordinary items, taxes
820
849
(3)
15 (202)
20 (208)
(25) (3)
633
661
(4)
8
12
(33)
625
649
(4)
(1)
0
648
(4)
12 0
(17) –
632
660
(4)
27
(151)
–
Extraordinary income/(expenses), net Taxes 3) Net operating profit before minority interests Amortization of goodwill, net of tax Net profit before minority interests
(1)
Minority interests
624
Net profit Reconciliation to net operating profit Amortization of goodwill Tax impact
10 (2)
Net operating profit 4) Increased/(decreased) credit-related valuation adjustments
2)
1)
For further information on the presentation of business unit results, please refer to the “Overview of business unit results” on page 14, footnote 1). The business unit income statement differs from the presentation of the Group’s consolidated results in excluding amortization of goodwill from depreciation of non-current assets, and reporting these costs separately in the income statement. / 2) Increased/decreased valuation adjustments taken at Group level resulting from the difference between the statistical and actual credit provisions. / 3) Excl. tax impact on amortization of goodwill. / 4) Excl. amortization of goodwill, net of tax.
Credit Suisse Banking
Credit Suisse Banking recorded a net operating profit of CHF 632 million in 2001, down only 4% on the good results of the previous year due to lower commission and service fee income and higher depreciation resulting from increased investment. The operating return on average allocated capital for 2001 was 14.5%. Despite pressure on margins, net interest income in 2001 improved 3% versus the previous year as a result of a 4.8% increase in lending volumes. The operating cost/income ratio rose from 64.1% in 2000 to 69.4% in 2001 owing to lower revenues from the securities and wealth management businesses, as well as higher depreciation.
26
Net new assets amounted to CHF 2.8 billion in 2001. The strategically important funds business grew 3% in 2001 and thus outperformed the market by 1.8 percentage points. Credit Suisse Banking also further improved the risk structure of its credit portfolio, as non-performing loans dropped to 4.5% of total counterparty exposure from 6.5% at year-end 2000, and provision coverage of non-performing loans stood at 59% versus 62% at yearend 2000. Credit Suisse Banking further strengthened its leading position in online banking in 2001. The portal www.credit-suisse.ch/investment has been offering clients information and valuable assistance in the analysis
Credit Suisse Banking key information 2001
2000
Cost/income ratio Cost/income ratio (operating) 1)
69.7% 69.4%
64.4% 64.1%
Return on average allocated capital Return on average allocated capital (operating) 1)
14.3% 14.5%
14.7% 15.0%
Average allocated capital in CHF m Pre-tax margin Pre-tax margin (operating) 1)
4,369
4,401
21.7% 21.9%
21.8% 22.1%
Personnel expenses/operating income
42.1%
38.5%
Net interest margin
236 bp
239 bp
5.0%
3.7%
2.8
5.5
31.12.01
31.12.00
68.8%
69.1%
128.8
130.8
227
235
11,953
11,438
Loan growth Net new assets in CHF bn
Deposit/loan ratio Assets under management in CHF bn Number of branches Number of employees 1)
Excl. amortization of goodwill.
and selection of a range of investment and pension services since July 2001. Moreover, corporate clients have been able to access online bancassurance products and services as well as other offerings geared specifically to the needs of business clients at www.credit-suisse.ch/ business since October 2001. As a result of cooperation agreements and partnerships, Credit Suisse Banking also offers access to non-financial services via the new portal. Credit Suisse Banking’s Direct Net offering had approximately 322,300 clients as of year-end 2001, representing growth of around 23% for the year.
www.credit-suisse.com
27
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FINANCIAL SERVICES
Credit Suisse Banking balance sheet Change in %
in CHF m
31.12.01
31.12.00
Assets Cash and other liquid assets Money market papers Due from banks Due from other business units Due from customers Mortgages Securities and precious metals trading portfolios Financial investments Participations Tangible fixed assets Intangible assets Accrued income and prepaid expenses Other assets
970 467 1,479 1,756 31,745 66,288 8 1,068 28 484 173 397 736
1,142 656 986 1,082 28,940 64,616 58 944 26 488 109 450 1,156
(15) (29) 50 62 10 3 (86) 13 8 (1) 59 (12) (36)
105,599
100,653
5
4,921 19,375 32,895 34,523 3,026 4,083 636 971 295 4,874 16
9,751 11,441 33,322 31,287 3,286 4,561 718 1,275 200 4,812 13
(50) 69 (1) 10 (8) (10) (11) (24) 48 1 23
105,599
100,653
5
Total assets Liabilities Due to banks Due to other business units Due to customers in savings and investment deposits Due to customers, other Medium-term notes (cash bonds) Bonds and mortgage-backed bonds Accrued expenses and deferred income Other liabilities Valuation adjustments and provisions Capital of which minority interests Total liabilities Certain restatements have been made to prior-year amounts to conform to the current presentation.
28
Credit Suisse Personal Finance income statement 1) Change in %
2001
2000
Net interest income Net commission and service fee income Net trading income Other ordinary income
7 36 4 9
8 45 6 2
(13) (20) (33) 350
Operating income
56
61
(8)
Personnel expenses Other operating expenses
194 290
113 223
72 30
Operating expenses
484
336
44
in CHF m
(428)
(275)
56
Depreciation of non-current assets Valuation adjustments, provisions and losses
43 4
13 1
231 300
Profit before extraordinary items, taxes
(475)
(289)
64
(5) 97
0 67
– 45
(383)
(222)
73
5
200
(227)
75
0
–
(227)
75
5
200
(222)
73
Gross operating profit
Extraordinary income/(expenses), net Taxes Net operating profit before minority interests Amortization of goodwill Net profit before minority interests Minority interests Net profit Reconciliation to net operating profit Amortization of goodwill Net operating profit 2)
15 (398) 0 (398)
15 (383)
1)
For further information on the presentation of business unit results, please refer to the “Overview of business unit results” on page 14, footnote 1). The business unit income statement differs from the presentation of the Group’s consolidated results in excluding amortization of goodwill from depreciation of non-current assets, and reporting these costs separately in the income statement. / 2) Excl. amortization of goodwill.
Credit Suisse Personal Finance
In addition to the further expansion of operations in Italy, Credit Suisse Personal Finance was launched in Germany and Spain in autumn 2001. It also acquired and successfully integrated the Spanish broker and asset manager General de Valores y Cambios. Credit Suisse Personal Finance now has a presence in 63 locations in Italy (35), Spain (18) and Germany (10). As of year-end 2001, Credit Suisse Personal Finance had around 600 financial advisors and its number of clients had risen to approximately 31,600. Continued investments in expansion resulted in a net operating loss of CHF 383 million for the year 2001, versus a net operating loss of CHF 222 million the previous year. Assets under management increased by 13.8% from CHF 5.8 billion as of December 31, 2000, to CHF 6.6 billion as of December 31, 2001.
Credit Suisse Personal Finance’s priorities for 2002 are to increase assets under management and further expand its distribution network in Germany and Spain. Additions to the product range are also planned, as well as closer cooperation with the Winterthur units regarding products and distribution capacity. The Swiss online broker youtrade increased its client base in 2001 by 11% to more than 28,000 customers.
www.credit-suisse.com
29
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FINANCIAL SERVICES
Credit Suisse Personal Finance key information 2001
Personal Finance Growth in assets under management of which net new assets of which market movement and structural effects of which acquisition
19.5% 22.6% (21.7%) 18.6%
2000
40.1% 51.9% (11.8%) –
youtrade Number of transactions (in ’000s)
335
436
Credit Suisse Personal Finance Average allocated capital in CHF m
23
n/a
31.12.01
31.12.00
Personal Finance Assets under management in CHF bn Number of clients Number of advisors
5.7 31,578 599
4.8 17,898 331
youtrade Assets under management in CHF bn Number of clients
0.9 28,112
1.0 25,228
1,071
764
Credit Suisse Personal Finance Number of employees
30
REVIEW OF BUSINESS UNITS
C R E D I T S U I S S E P R I VAT E B A N K I N G
Credit Suisse Private Banking posted a net operating profit of CHF 2.3 billion in 2001, down 11% on the previous year’s strong result of CHF 2.6 billion. Net profit declined 12% year-on-year to stand at CHF 2.3 billion. In 2001, assets under management rose 2.8% to CHF 469.1 billion, versus CHF 456.4 billion at year-end 2000. Net new assets totaled CHF 33.0 billion for the year. The net operating margin remained high, at 50.4 basis points. In 2001, Credit Suisse Private Banking further expanded its international network, invested in technology to the benefit of its clients, and further extended its range of market-neutral and capital-protected products.
Credit Suisse Private Banking income statement 1) in CHF m
Change in %
2001
2000
Net interest income Net commission and service fee income Net trading income Other ordinary income
1,171 3,939 568 103
1,247 4,171 752 81
(6) (6) (24) 27
Operating income
5,781
6,251
(8)
Personnel expenses Other operating expenses
1,706 1,001
1,734 883
(2) 13
Operating expenses
2,707
2,617
3
Gross operating profit
3,074
3,634
(15)
66 36
41 160
61 (78)
2,972
3,433
(13)
1 (766)
– (18)
Depreciation of non-current assets Valuation adjustments, provisions and losses 2) Profit before extraordinary items, taxes Extraordinary income/(expenses), net Taxes Net operating profit before minority interests Amortization of goodwill Net profit before minority interests Minority interests
2,356
2,668
(12)
18
7
157
2,338
2,661
(12)
(20)
Net profit Reconciliation to net operating profit Amortization of goodwill Net operating profit
15 (631)
3)
Increased/(decreased) credit-related valuation adjustments 2)
(29)
(31)
2,318
2,632
(12)
18
7
157
2,336
2,639
(11)
(40)
(88)
(5)
1)
For further information on the presentation of business unit results, please refer to the “Overview of business unit results” on page 14, footnote 1). The business unit income statement differs from the presentation of the Group’s consolidated results in excluding amortization of goodwill from depreciation of non-current assets, and reporting these costs separately in the income statement. / 2) Increased/decreased valuation adjustments taken at Group level resulting from the difference between the statistical and actual credit provisions. / 3) Excl. amortization of goodwill.
www.credit-suisse.com
31
REVIEW OF BUSINESS UNITS
C R E D I T S U I S S E P R I VAT E B A N K I N G
Credit Suisse Private Banking recorded assets under management of CHF 469.1 billion as of year-end 2001, up 2.8% versus year-end 2000 (CHF 456.4 billion). This increase represents a good performance in view of market conditions and is attributable in particular to healthy net new asset growth. Net new assets totaled CHF 33.0 billion for the full year, representing 7.2% of assets under management. Net inflows of new assets in 2001 were thus 75.5% higher than in the previous year. Operating income decreased 8% to CHF 5.8 billion in 2001 (2000: CHF 6.3 billion) as a result of significantly lower transaction volumes. Weak equity market conditions particularly impacted income from trading, which contributed 9.8% of operating income in 2001 (12% in 2000). The relative contribution of net interest income and net commission income to operating income rose
slightly on the previous year, to stand at 20.3% and 68.1% respectively. The gross margin was 123.5 basis points for 2001, compared with 133.4 basis points in 2000. Personnel and other operating expenses rose only 3% in 2001 despite a 7% increase in headcount. Credit Suisse Private Banking continued to invest in technology with the aim of increasing efficiency and serving clients more effectively. The net operating margin remained high in 2001 at 50.4 basis points; in 2000 it stood at 56.9 basis points. The operating cost/income ratio amounted to 48.0% for 2001, compared with 42.5% in the previous year. Expansion of international network
Credit Suisse Private Banking continued to implement its qualitative growth strategy in 2001 and increased its number of client advisors in Asia — its most rapidly
Credit Suisse Private Banking balance sheet information in CHF m
31.12.01
31.12.00
123,379
101,153
38,552 10,509 26,056
33,717 9,206 22,621
2001
2000
48.3% 48.0%
42.6% 42.5%
3,471
3,117
Pre-tax margin Pre-tax margin (operating) 1)
51.4% 51.7%
54.8% 54.9%
Fee income/operating income
68.1%
66.7%
Growth in assets under management of which net new assets of which market movement and structural effects of which acquisition
2.8% 7.2% (5.8%) 1.4%
1.1% 4.2% (3.1%) –
Total assets Due from customers of which secured by mortgages of which secured by other collateral
Credit Suisse Private Banking key information Cost/income ratio Cost/income ratio (operating) 1) Average allocated capital in CHF m
Net profit before minority interests/average AuM Net operating profit before minority interests/average AuM 1)
50.0 bp 50.4 bp
56.8 bp 56.9 bp
31.12.01
31.12.00
Assets under management in CHF bn
469.1
456.4
Number of employees
9,244
8,665
1)
Excl. amortization of goodwill.
32
growing market — as well as in Europe. Credit Suisse Private Banking opened a branch in Hong Kong in the second quarter of the year and announced the acquisition of Frye-Louis Capital Management, Inc. in Chicago in the third quarter. The business unit demonstrated its market leadership in the area of online banking with a number of initiatives, including the launch of its customized financial website MyCSPB in February 2001 and the opening of its Global Private Banking Centre in Singapore in December. This unique offering provides clients throughout the world with round-the-clock access to a complete range of financial services. Expansion of range of innovative products
Credit Suisse Private Banking further extended its range of innovative products in 2001. Various marketneutral investment products such as CS Alternative Equity and Bond Performance Units, Units on Best and Dynamic International Managers, as well as capitalprotected products such as the Protected Investment Note USD and EURO met with strong demand. In 2001, Credit Suisse Private Banking clients invested a total of CHF 20.1 billion in structured products, thus enabling the bank to strengthen its leadership position in this area. It also received three major awards in the course of the year: it was named the best private bank in Asia by the investment magazine Finance Asia for the third consecutive year, and was judged by Lafferty Group to have the best wealth management programs both globally and in Europe. The Banking Technology Magazine awarded Credit Suisse Private Banking its prize for the best use of IT in the banking sector, in recognition of its relationship management portal FrontNet.
www.credit-suisse.com
33
REVIEW OF BUSINESS UNITS
CREDIT SUISSE ASSET MANAGEMENT
Credit Suisse Asset Management reported a profit before extraordinary items, acquisition-related costs and taxes of CHF 483 million in 2001, CHF 37 million or 8% more than in 2000, despite the turbulent market conditions in 2001. Net operating profit stood at CHF 322 million, down 5% on a year earlier, and net profit was CHF 236 million, 17% lower than in 2000. Net new assets for the full year added CHF 9.2 billion to discretionary assets. The net operating margin on average assets under management decreased from 7.5 basis points in 2000 to 6.7 basis points in 2001. Credit Suisse Asset Management showed resilience in the difficult economic and market conditions prevalent during 2001.
Credit Suisse Asset Management income statement 1) Change in %
2001
2000
Management and advisory fees Net mutual fund fees Other revenues
1,135 374 124
1,195 324 93
Operating income
1,633
1,612
1
646 472
656 481
(2) (2)
1,118
1,137
(2)
515
475
8
32 0
29 0
10 –
Profit before extraordinary items, acquisition-related costs, taxes
483
446
8
Extraordinary income/(expenses), net Taxes 2)
(14) (69)
(1) (57)
– 21
Net operating profit before acquisition-related costs, minority interests
400
388
3
58 20 86
50 0 52
16 – 65
236
286
(17)
in CHF m
Personnel expenses Other operating expenses Operating expenses Gross operating profit Depreciation of non-current assets Valuation adjustments, provisions and losses
Acquisition interest Amortization of retention payments Amortization of acquired intangible assets and goodwill, net of tax Net profit before minority interests Minority interests Net profit Reconciliation to net operating profit Amortization of acquired intangible assets and goodwill Tax impact Net operating profit 3) 1)
(5) 15 33
0
0
–
236
286
(17)
53 (1)
77 700
338
(5)
94 (8) 322
For further information on the presentation of business unit results, please refer to the “Overview of business unit results” on page 14, footnote 1). Certain reclassifications have been made to prior-period amounts to conform to the current presentation. The business unit income statement differs from the presentation of the Group’s consolidated results in a) presenting operating income by product line and b) excluding acquisition-related costs of acquisition interest, amortization of retention payments and amortization of acquired intangible assets and goodwill from operating income, personnel expenses and depreciation of non-current assets, respectively, and reporting these costs separately in the income statement. / 2) Excluding tax impact on acquisition-related costs. / 3) Excluding amortization of acquired intangible assets and goodwill, net of tax.
34
The 2001 results include a full year's contribution from DLJ's asset management business, which was included from November 3, 2000. Discretionary assets under management as of December 31, 2001, were CHF 364.2 billion, including CHF 26.2 billion in assets acquired with SLC Asset Management in December 2001. Advisory assets increased 13.8% to CHF 144.6 billion as of the end of 2001. Total assets under management increased 4.4% over the year to CHF 508.8 billion as of December 31, 2001, compared with CHF 487.2 billion as of December 31, 2000. Operating income rose by CHF 21 million, or 1%, to CHF 1.6 billion in 2001. Management and advisory fees decreased CHF 60 million, or 5%, to CHF 1.1 billion and net mutual fund fees increased CHF 50 million, or 15%, to CHF 374 million. Personnel expenses fell by 2% in 2001 to CHF 646 million (2000: CHF 656 million). Other operating expenses were also down 2%, or CHF 9 million, to CHF 472 million.
Strategic development
Integration of the DLJ asset management operation with Credit Suisse Asset Management Americas was completed in the first quarter 2001. As part of this integration, DLJ mutual funds were merged with the Warburg Pincus funds and rebranded Credit Suisse Funds. In the third quarter, Credit Suisse Asset Management withdrew from the US direct non-load retail business and now focuses on building distribution with load/advice channels. In November 2001, Credit Suisse Asset Management Limited Japan merged the operations of Warburg Pincus Asset Management (Japan). The Japanese entities had operated separately since the 1999 acquisition. Integration was completed in the first quarter of 2002. In December, Credit Suisse Asset Management completed the acquisition of SLC Asset Management, the principal UK asset management subsidiary of global insurer Sun Life Financial Services of Canada, which includes former parent-related insurance assets, third party institutional and retail funds and a property
Credit Suisse Asset Management key information 2001
2000
Cost/income ratio Cost/income ratio (operating) 1) 2) 3)
76.2% 70.4%
75.6% 72.3%
Average allocated capital in CHF m
1,291
1,147
Pre-tax margin Pre-tax margin (operating) 3) Pre-tax margin (operating, excl. amortization of retention payments) 2) 3)
18.2% 23.9% 25.2%
21.2% 24.5% 24.5%
Personnel expenses/operating income 1) 2)
39.6%
40.7%
4.4%
14.7%
Growth in discretionary assets under management of which net new assets of which market movement and structural effects of which acquisition
1.1% 2.6% (8.7%) 7.2%
11.1% 7.5% (8.1%) 11.7%
Net profit before minority interests/average AuM Net operating profit before minority interests/average AuM 3)
4.9 bp 6.7 bp
6.3 bp 7.5 bp
31.12.01
31.12.00
Assets under management in CHF bn Discretionary funds in CHF bn Advisory assets in CHF bn Mutual funds distributed in CHF bn
508.8 364.2 144.6 132.4
487.2 360.1 127.1 136.9
Number of employees
2,395
2,350
1) 2)
Growth in assets under management
1)
Excl. acquisition interest. / 2) Excl. amortization of retention payments. / 3) Excl. amortization of acquired intangible assets and goodwill.
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35
REVIEW OF BUSINESS UNITS
CREDIT SUISSE ASSET MANAGEMENT
investment business. The integration of SLC Asset Management is expected to be completed by mid-2002. Products and key markets
Credit Suisse Asset Management made continued progress in developing the alternative investment market in 2001, with improved investment returns in key alternative products. It also benefited from improved market conditions for this business towards the end of the year, turning in a strong investment performance in the final quarter. In Australia, Credit Suisse Asset Management moved into the top fifteen asset managers by mid-year, and was voted Retail Fund Manager of the Year by Money Management magazine, a leading Australian retail financial planning publication. Credit Suisse Asset Management consolidated its continental European retail effort under a single management team in the second quarter. Focused on both third party and Credit Suisse Group internal channels, this continued to generate significant net new business in 2001. In Switzerland and Germany, Credit Suisse Asset Management continued to expand its real estate business, an asset class with strong investment performance during 2001.
36
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FIRST BOSTON
Credit Suisse First Boston’s operating income in 2001 was USD 14.0 billion (CHF 23.6 billion), up 14% compared with 2000, which included two months of postacquisition DLJ results. Net operating profit was USD 338 million (CHF 571 million) for 2001, excluding exceptional items of USD 646 million (CHF 1.1 billion) taken in the fourth quarter, and the amortization of acquired intangible assets and goodwill, all net of tax. This compares with a net operating profit of USD 1.6 billion (CHF 2.6 billion) for 2000. A net loss of USD 961 million (CHF 1.6 billion) for 2001 was recorded, compared with a net profit in the previous year of USD 1.4 billion (CHF 2.4 billion).
Credit Suisse First Boston income statement 1) in USD m
Fixed Income Equity Investment Banking Financial Services Group Other Operating income Personnel expenses Other operating expenses Operating expenses Gross operating profit Depreciation of non-current assets Valuation adjustments, provisions and losses 2) Profit before extraordinary items, acquisition-related costs, exceptional items, taxes Extraordinary income/(expenses), net Taxes 3) 4)
Change in %
2001
2000
5,687 3,894 2,779 1,520 101
2,919 5,076 3,681 268 355
95 (23) (25) 467 (72)
13,981
12,299
14
8,036 3,280
7,083 2,176
13 51
11,316
9,259
22
2,665
3,040
(12)
543 912
386 322
41 183
1,210
2,332
(48)
0 (629)
– (57)
(1) (269)
Net operating profit before acquisition-related costs, exceptional items, minorities
940
1,703
(45)
Acquisition interest, net of tax Amortization of retention payments, net of tax Amortization of acquired intangible assets and goodwill, net of tax Exceptional items, net of tax
296 305 653 646
68 71 152 0
335 330 330 –
1,412
–
Net profit before minority interests Minority interests
(960) (1)
(2)
(50)
Net profit
(961)
1,410
–
Reconciliation to net operating profit Amortization of acquired intangible assets and goodwill Exceptional items Tax impact
805 845 (351)
178 0 (26)
352 – –
338
1,562
(78)
115
4
–
105 109 (75)
334 330 332
Net operating profit
5)
Increased/(decreased) credit-related valuation adjustments 2) Acquisition interest Amortization of retention payments Tax impact
456 469 (324)
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37
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FIRST BOSTON
Credit Suisse First Boston income statement 1) in CHF m
Change in %
2001
2000
9,611 6,581 4,696 2,569 172
4,874 8,477 6,148 447 593
97 (22) (24) 475 (71)
Operating income
23,629
20,539
15
Personnel expenses Other operating expenses
13,582 5,543
11,830 3,634
15 53
Operating expenses
19,125
15,464
24
Gross operating profit
4,504
5,075
(11)
Depreciation of non-current assets Valuation adjustments, provisions and losses 2)
919 1,541
644 537
43 187
Profit before extraordinary items, acquisition-related costs, exceptional items, taxes
2,044
3,894
(48)
0 (1,050)
– (57)
Fixed Income Equity Investment Banking Financial Services Group Other
Extraordinary income/(expenses), net Taxes 3) 4)
(1) (455)
Net operating profit before acquisition-related costs, exceptional items, minorities
1,588
2,844
(44)
Acquisition interest, net of tax Amortization of retention payments, net of tax Amortization of acquired intangible assets and goodwill, net of tax Exceptional items, net of tax
501 515 1,103 1,092
114 118 254 0
339 336 334 –
Net profit before minority interests Minority interests Net profit Reconciliation to net operating profit Amortization of acquired intangible assets and goodwill Exceptional items Tax impact Net operating profit 5) Increased/(decreased) credit-related valuation adjustments Acquisition interest Amortization of retention payments Tax impact 1)
(1,623)
2,358
–
(1)
(3)
(67)
(1,624)
2,355
–
1,361 1,428 (594)
296 0 (42)
360 – –
2,609
(78)
571 2)
194 770 792 (546)
6
–
175 181 (124)
340 338 340
For further information on the presentation of business unit results, please refer to the “Overview of business unit results” on page 14, footnote 1). Certain reclassifications have been made to prior-period amounts to conform to the current presentation. The business unit income statement differs from the presentation of the Group’s consolidated results in a) presenting operating income by division, b) including brokerage, execution and clearing expenses as part of other operating expenses in common with US competitors rather than netted against operating income, c) excluding acquisition-related costs of acquisition interest, amortization of retention payments and amortization of acquired intangible assets and goodwill from operating income, personnel expenses and depreciation of non-current assets, respectively, and reporting these costs separately in the income statement, d) deducting minority interests from operating income and e) excluding exceptional items from operating income, personnel expenses, depreciation of non-current assets and valuation adjustments, provisions and losses and reporting these exceptional items separately in the income statement. / 2) Increased/decreased valuation adjustments taken at Group level resulting from the difference between the statistical and actual credit provisions. Business unit Credit Suisse First Boston recorded credit provisions of CHF 800 million (USD 473 million) for 2001 in addition to the statistically derived provision level due to a substantial deterioration in the economic environment. / 3) Excluding tax impact on acquisition-related costs and exceptional items. / 4) Prior to 2001, deferred tax assets for net operating loss carry-forwards were not recorded. In 2001, the accounting policy was changed to allow such deferred tax assets to be recorded in the event of sales of businesses at a taxable gain, where the realization of the deferred tax assets is certain. The impact on the financial statements was a tax benefit of CHF 303 million (USD 179 million). The prior-period financial statement would be unchanged had it been prepared under the new policy. / 5) Excluding amortization of acquired intangible assets and goodwill as well as exceptional items, all net of tax.
38
Credit Suisse First Boston key information Based on CHF amounts
2001
2000
Cost/income ratio 1) 2) 3) Cost/income ratio (operating) 1) 2) 3) 4)
90.6% 84.8%
79.9% 78.4%
Return on average allocated capital Return on average allocated capital (operating) 3) 4) Return on average allocated capital (operating, excl. amortization of retention payments, net of tax) 2) 3) 4)
(9.6%) 3.4%
19.7% 21.8%
6.4%
22.8%
16,913
11,968
Average allocated capital in CHF m Pre-tax margin 3) Pre-tax margin (operating) 3) 4) Pre-tax margin (operating, excl. amortization of retention payments) 2) 3) 4)
(3.7%) 2.0% 5.4%
15.8% 17.2% 18.1%
Personnel expenses/operating income 1) 2) 3) 5)
55.4%
55.4%
31.12.01
31.12.00
25,152
28,122
Number of employees 1) 5)
Excl. acquisition interest. / 2) Excl. amortization of retention payments. / 3) Excl. exceptional items. / 4) Excl. amortization of acquired intangible assets and goodwill. / Ratio excludes expenses for contractors.
Evidence of a slowdown in the markets appeared in the first half of the year, particularly in the Equity and Investment Banking businesses. Fixed Income, on the other hand, was strong through the third quarter, in which it experienced its best results on record. By the fourth quarter, however, the poor market conditions, exacerbated by the September 11 terrorist attack in the US, affected all businesses. Credit Suisse First Boston undertook a rigorous cost reduction program in 2001, targeting USD 1.0 billion (CHF 1.7 billion) in run rate reductions in 2002. By yearend, headcount reduction goals had been achieved. Per capita incentive compensation decreased 49% in 2001 compared with 2000. As part of its internal restructuring program, the business unit made a number of high-level management changes in the second half of the year. Operating expenses dropped 32% in the fourth quarter compared with the third quarter, to USD 2.0 billion (CHF 3.5 billion). This decrease was due to lower personnel costs resulting from the reduction in incentive compensation costs – in line with reduced revenues – and to the classification of discretionary compensation expenses of USD 340 million (CHF 575 million) associated with the previously announced fourth quarter headcount reduction as an exceptional item rather than as personnel expenses. Credit provisions for the year totaled USD 718 million (CHF 1.2 billion). In the fourth quarter alone, pre-tax
losses relating to Argentina amounted to USD 213 million (CHF 360 million) and pre-tax losses related to Enron amounted to USD 126 million (CHF 213 million). Non-performing loans as a percentage of lending exposure rose to 1.6% and provision coverage of non-performing loans increased to 59% at the end of the fourth quarter compared with 54% at the end of the third quarter. Pre-tax exceptional items recorded in the fourth quarter of 2001 totaled USD 845 million (CHF 1.4 billion) and were comprised of USD 745 million (CHF 1.3 billion) for the previously announced cost reduction initiatives and USD 100 million (CHF 169 million) for a settlement with the US Securities and Exchange Commission (SEC) and the National Association of Securities Dealers Regulation, Inc. (NASDR) regarding their investigations into certain IPO allocation practices. The Fixed Income division reported revenues of USD 5.7 billion (CHF 9.6 billion) for 2001, nearly double those of 2000. The interest rate products and credit products groups were positively impacted by several interest rate declines in the US and Europe, and the division was strengthened by the full year impact of the leveraged and bank finance business line acquired from DLJ in November 2000. The distressed trading group improved its revenues over the prior year; however, the revenues of the emerging markets group declined, reflecting the difficult conditions in several economies, including Argentina.
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39
REVIEW OF BUSINESS UNITS
CREDIT SUISSE FIRST BOSTON
Credit Suisse First Boston balance sheet in CHF m
Change in %
31.12.01
31.12.00
Assets Cash Money market papers 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 portfolios Financial investments Participations Tangible fixed assets Intangible assets Accrued income and prepaid expenses Other assets of which replacement value of derivatives
1,506 26,559 206,530 166,001 2,351 126,222 59,806 16,348 205,016 9,638 991 2,986 15,867 9,229 56,570 51,063
1,323 26,364 220,174 182,923 3,110 116,398 48,258 19,566 192,301 10,604 1,163 3,820 17,387 9,126 48,422 43,978
14 1 (6) (9) (24) 8 24 (16) 7 (9) (15) (22) (9) 1 17 16
Total assets
679,813
669,758
2
Total assets (in USD m)
405,762
409,738
(1)
Liabilities Money market papers issued 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 of which minority interests
28,215 349,713 140,958 11,358 156 121,975 62,136 63,067 20,329 56,204 53,461 3,736 25,060 10,238
30,554 371,033 131,741 9,825 49 102,431 37,863 45,449 22,565 54,958 49,641 3,330 29,564 10,261
(8) (6) 7 16 218 19 64 39 (10) 2 8 12 (15) –
Total liabilities
679,813
669,758
2
Total liabilities (in USD m)
405,762
409,738
(1)
Certain reclassifications have been made to prior-year amounts to conform to the current presentation.
40
In the Americas, the division’s research team was ranked number three for 2001 versus nine in 2000. Compared with 2000, Equity division revenues fell 23% to USD 3.9 billion (CHF 6.6 billion) for 2001. The division was adversely impacted by poor economic conditions, which affected both customer-related trading revenues and fees from capital market activities. Risk arbitrage revenues also declined due to a reduced number of M&A deals versus 2000 as did revenues from derivatives due, in part, to the Enron bankruptcy. According to Institutional Investor, the division’s research team was ranked number three globally for 2001 versus seven in 2000. The European research team ended the year ranked number one, and the research team in the Americas at number two. Revenues in the Financial Services division stood at USD 1.5 billion (CHF 2.6 billion) for its first full reporting year. In line with its strategy to divest businesses that do not fit into its core activities, Credit Suisse First Boston announced the sale of its CSFBdirect business and its brokerage service subsidiary Autranet, Inc. in the fourth quarter. The sales, which closed during the first quarter of 2002, produced aggregate proceeds of approximately USD 660 million (CHF 1.1 billion). Assets under management, including Private Equity assets held on behalf of clients, totaled USD 103.5 billion (CHF 173.4 billion) as of December 31, 2001, with USD 9.6 billion (CHF 16.3 billion) in net new assets in 2001. The Investment Banking division's 2001 revenues of USD 2.8 billion (CHF 4.7 billion) decreased 25% compared with a year earlier, reflecting the industry's 50% decline in merger and acquisition activity and 30% decline in equity new issuance activity. Credit Suisse First Boston retained its global equity new issuance ranking of number five while its US equity new issuance ranking rose from fifth to third place by end-year. The global high yield ranking remained at number one and Credit Suisse First Boston ranked number three globally in terms of capital raising for clients in 2001. The Private Equity business incurred net realized and unrealized losses of USD 258 million (CHF 436 million) for 2001. The total pre-tax loss for the Private Equity business amounted to USD 364 million (CHF 615 million) for the year. The book value of all Private Equity investments stood at USD 2.2 billion (CHF 3.7 billion) and fair value at USD 2.3 billion (CHF 3.9 billion) as of December 31, 2001.
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41
CREDIT SUISSE GROUP RISK MANAGEMENT
Risk management contributes to the Group’s success by fostering a disciplined risk culture, providing risk transparency and ensuring intelligent risk-taking that appropriately balances risk and return and optimizes the allocation of capital throughout the Group to the benefit of shareholders and other stakeholders. Significant personnel and technological resources are focused on ensuring that Credit Suisse Group remains a leader in risk management. Through a proactive risk management culture and the appropriate qualitative and quantitative tools, the Group aims to minimize the potential for undesired risk exposures. Introduction – key principles
Financial services – put in a simplified framework – can be summarized with: transaction, risk, information, capital and knowledge/knowhow. The following sections concentrate on capital and risk. Risk is uncertainty about a future outcome. It is the essence of financial institutions’ activities. Risk is multifaceted, complex, often interlinked and/or contextdriven. While not avoidable, risk is to be managed, not feared. Intelligent, informed risk-taking is the key. Risk is not only about the “downside” and threats, but also about chances and opportunities. The ultimate risk is not taking a risk. A responsible risk and compliance culture combined with the necessary knowhow for modern risk management processes and methods has become a decisive competitive advantage. It helps to maintain stability and continuity and supports revenue and earnings growth as well as brand equity. Disciplined and intelligent risk-taking is an “attitude” towards stakeholders. A robust risk culture and integrated holistic risk management are very closely related to general management and corporate governance – this is especially true of financial institutions. Credit Suisse Group – a living, growing and multifaceted organization – is a globally active institution which supports the diversity of its employees. Other countries, other customs: priorities and preferences can vary from country to country or even from an institution’s department to department. In this context, our internal Code of Conduct – the 12 core values for employees of Credit Suisse Group – plays an important role, as presented in our annual report last year. The principles should be common for applicants and members of Credit Suisse Group. This is especially important in view of over fifty acquisitions/mergers and two major restructurings that have taken place since 1990. The 12 core values for employees of Credit Suisse Group are meant to add to our corporate cohesion in fast-changing times; they are a guide for identity, identification, focus and commitment; they should make cultural compatibility and daily cooperation easier. Loyalty to
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a simple set of values is the basis for much needed flexibility and speed. This does not imply at all that these principles are met around the world all the time. Common principles are aims which need daily efforts to implement. Thereby, leaders and managers, as catalysts, bear the prime responsibility. People shape the culture. Our observations and research in the financial services industry have led to the additional 12 key principles in risk management, which serve as our general framework in risk management (see chart on page 44). We have reviewed the principles again during 2001. To apply these principles consistently and globally is our continuous objective. To comply with them fully will never be possible at all times, but they are our aims. While risk management will never be “finished” in a complex and evolving financial environment, we aim to institutionalize learning and stay at the cutting edge of “best practice.” The 12 key principles in risk management
Our principles have not changed, but as a “learning organization” in a dynamic environment, we are continuously adjusting the contents with new priorities or refinements based on experience. The issue is not the intellectual level of the 12 principles but rather their diligent implementation – which is challenging in a diverse, global and changing world. Thereby, no organization ever achieves ideal or perfect positioning in every respect. Executing the fundamentals 1. Risk is uncertainty about future results. The proper climate as a challenge. ■ ■
■
■
Risk taking = risk management. Do not fear but respect risks. Ensure the balance of gains versus losses. “Informed and intelligent” risk-taking, including attention to proportionality, concentration and diversification ➞ active portfolio management. Watch liquidity/flexibility aspects in turbulent times. Watch harm by association.
Never forget “extreme event” risks. Deal with consequences of unexpected cases. Capital allocation based on Economic Risk Capital.
■
2. The 6 S’s for the systematic mental discipline of an organization: the logical sequence.
■
■
■
■
Strategy ➞ structure ➞ system/s ➞ simplicity ➞ safety ➞ speed.
3. Clear structure, allocation of responsibility and accountability, and discipline are basic preconditions. ■ ■ ■
■
Prioritize disciplined processes and structures. Transparency as to policies, directives, etc. Clear and communicated responsibility and accountability. “Ownership” of issues and risks. No conflicts of interest: i.e. front office versus support areas – but “constructive tension” where appropriate.
■
■ ■ ■
■
7. Risk management is part art, part science. ■ ■ ■
■
4. Rigorous measures in case of non-compliance/ breaches. ■
■
■
Know the rules of the game: courage for unpleasant measures with a “culture of consequences.” It takes a lot of discipline, training and time to get everyone worldwide on an adequate control/compliance level. Adequate compliance environment: Responsibility lies not only with immediate heads ➞ leadership function of each management level.
■ ■
■
■
■
No diagnosis without information. Know what you do not know. What is measured, observed and recognized gets attention. Data characteristics are ideally: Complete, objective, consistent, transparent, standardized, comparable across the institution, interpretable, auditable, replicable, embedded in aggregated processes, and above all they are relevant and credible as to facts and perceptions. Credibly quantified and relevant risks represent an opportunity. If not credible, cynicism abounds. Thoughtful self-challenge – especially rigorous audit reports – can provide a formidable basis to avoid/limit operational risks.
■
6. Risk management is a tenacious process not a program.
■
■ ■ ■
■
■
■
■
Prevention ahead of correction.
Facts, perceptions, expectations – all are important. Markets might promise but never guarantee anything. Risk management is often the art of drawing sufficient conclusions from insufficient premises. Watch internal and external exuberance and paralysis: counterbalancing is a management task. To be right too soon is also wrong: timing is the issue. Common sense for reality checks, especially for models.
8. Limitation of models.
■
Retaining the perspective 5. Completeness, integrity and relevance of data/ systems/information as a basis.
“Best practice” as goal. However, “best practice” must be applied intelligently – no “fads.” Ongoing questioning of strategy, structure, systems, simplicity, safety, speed. Risk and compliance awareness ideally with everyone. Care about substance, not only legalistic form. Focus on long-term initiatives versus short-term ones. Emphasize furthering the risk culture, rather than controlling the numbers. Management of risks for own organization comes ahead of risk management for supervisors/regulators.
■
■
■
A model is always a strong reduction/approximation of a more complex reality. Models are as good as the underlying assumptions: “garbage in – garbage out effect.” Not all risks are relevant and/or quantifiable: also here, use 20/80 approach. “Reductio ad absurdum” may lead to a “model figure” but is irrelevant in the overall context. New external parameters and continuous restructurings can make models questionable as there is no reliable base material. Comparisons of absolute model figures with those of third parties are questionable: The prime internal value added of a good model – including the stress test – is its trend over time. Theoretical rigidity may not prevail over practical relevance and credibility. Models are always only part of an overall risk management approach and must include common sense.
9. Complex organizations, restructurings and projects can add risks. ■
Complexity is the enemy of speed and responsiveness: apply simplicity. The more complex a risk type is, the more specialized, concentrated and controlled its management must be.
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CREDIT SUISSE GROUP RISK MANAGEMENT
Focus on human aspect 10. A financial institution is a “knowledge and learning organization.” ■
■
■
■ ■ ■
■
■
Faster race – higher bar: antennae out to receive and implement internal and external input. Data is ubiquitous and abounds: Timely sorting and packaging in the proper context creates relevant information and value added. Everybody is a “knowbody.” People with authority especially must be educators: source, share, synthesize and save knowledge. Specialists can “walk out” easily in good times. Learn from mistakes and determine causality. Self-management and leadership with regard to a culture of open communication on “experience” and knowhow are increasingly challenging: Ban knowledge-hoarders and turn knowledge-givers into heroes as part of evaluation/incentive process. Continuous learning and training is a part of the evaluation/incentive process. Knowledge alone is not enough: it is its rigorous implementation which leads to results.
11. Responsible control/compliance/risk culture is as important as the most sophisticated quantification. ■ ■ ■
■
Those values count which are enforced. Lead by example – practice what you preach. Combine overall judgement by experienced people with specialist knowledge. Mistakes or misjudgements are unavoidable: The ways of correcting mistakes are part of the culture.
■
Risk culture on the whole is the final responsibility of top management.
12. Human element is THE critical factor of success. ■
■
■
■
Professionalism includes: inquisitiveness, feel, intuition and inspiration for risk and market direction. Good mix of professional, open-minded and honest people with formal training, professional and life experience, integrity and character. Honesty includes intellectual honesty. Cover-ups are lethal. Successful risk management is primarily the result of the capacity, aptitude and attitude of the people involved: people shape the culture, reputation and brand equity.
Risk management framework
The Group has established a framework for comprehensive and effective risk control. The chart below entitled “Risk management framework” illustrates the three main elements of Credit Suisse Group’s framework. The underlying external and internal factors shaping the risk disposition of the firm are shown on the left of the graph. The risk management organization and risk culture are established on the basis of the 12 core principles of good management shown in the middle of the graph. Maintaining a firm-wide risk management process providing effective control over the eight major risks must be the ultimate goal. Given its strategy, Credit Suisse Group differentiates between eight priority risk categories as shown on the right of the graph: market, credit, insurance underwriting, business and some operational risks are already quantifiable or are increasingly becoming so (see pages 51–59).
Credit Suisse Group’s risk management framework Scope and challenge of integrated firm-wide risk management
Major factors shaping the risk disposition of an organization
Cli e nts
pe rien ce
ion etit
pti
Perce
io ulat ns
Markets & economy
o gy
ions
reg
Ex
ol chn
r v io
s&
Know ge l ed
& te
t cta
Co mp
ion vat
Ex pe
Action and reaction by management and staff
Beha
icie Pol
44
Fa cts s on
o Inn
Values, society & politics
Building on the organization’s 12 S: · Strategy · Scrutiny · Structure · Shared values · System/s · Skills · Simplicity · Sustainability · Safety · Synchronization · Speed · Stakeholders Ensuring a risk culture with: · Modern methods/limits · Proactive risk management · Constructive control attitude · Continuous training · Discipline as to corrective actions Appropriate risk culture is as important as modern risk management tools
Effective risk management provides focus on and control over eight major risks
Strategy risk Reputation/brand risk Market risk Credit risk Insurance underwriting risk Business risk Operational risk
Liquidity risk
Strategy risk deals with the existing basis of an institution and its options, based on a “what if” analysis. Strategy is doing the right thing at the right time and must be properly implemented. The implementation is an issue for all other S’s of an organization, especially their synchronization. Reputation/brand risk is the aggregation of the outcome of all risks plus other internal and external factors based on facts, perceptions and expectations. Reputation is the outcome of our actions and how they are perceived by our stakeholders over an extended period. The combination of reputation, trust and brand contributes – especially for financial institutions – to brand equity. Strategy and reputation/brand risks can be assessed with methods like relative stock performance, relative stock price over book value, relative price/earnings ratio, return on equity, net increase in number of clients or assets under management, attracting and keeping good staff, and other benchmarks. Risk culture
Risk management is a multifaceted process that extends well beyond an organization’s formal risk management structure, its standards, processes, methodologies and tools. The mathematical/statistical quantification of risks and consequent setting of appropriate, common sense limits represents only part of the integrated holistic approach to risk management. While Credit Suisse Group aims to stay at the forefront of any relevant, credible and cost-effective quantification of risk, successful risk management is much more than producing a risk or model amount. The development and maintenance of an appropriate risk, compliance and control culture is at least as important as the most sophisticated quantitative risk models. A key factor in risk management is discipline, including discipline as to compliance requirements. 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, authorizations, compliance checks, and follow-ups on non-compliance clearly defined at every level of business. Internal and external auditors are recognized by the Boards as critically important agents, providing an independent and continuous check on how business is conducted. If a financial services group is to achieve sustained success, confidence and trust built over the years are
vital. An excellent reputation is hard to gain but easy to lose. Knowledge, expertise, experience, integrity, intellectual honesty and the daily conduct of each employee are crucial elements that contribute to an institution’s reputation. Thus, management has to lead by example. One of the strengths of Credit Suisse Group is the competence and diverse skills of its staff. Despite global diversity, our corporate culture and values have to be based on common denominators and shared identification. This led to the introduction of our internal Groupwide Code of Conduct at the end of 1999. Risk management governance
The decentralization and further realignment of Credit Suisse Group into two distinct business units strengthens transparency, discipline and accountability. This structure allows the business units to be a leader in their respective activities. Although the Group as a whole is large, the new structure helps to make it less complex. The new structure increases flexibility and the ability to focus and react. Specialization and closeness to the market are heightened, and duplication should be avoided. More importantly – with respect to risk – the set-up allows the Group to align risk types, focus on major risk categories and concentrate on specific risks with the help of tailor-made management tools. Group-wide risk management approaches are applied uniformly where appropriate and relevant. It is our ambition to establish the global benchmark of a large, multifaceted financial organization with regard to risk management structures, processes and methods. This is not a program but an ongoing process. Group risk management governance
This aspect relates to four major legal entities within Credit Suisse Group: legal entity Winterthur for the insurance business, legal entity Credit Suisse for retail banking and private banking, legal entity Credit Suisse First Boston comprising investment banking and institutional asset management, and legal entity Credit Suisse Group as the holding company of the three aforementioned legal entities. The same members of the boards of the three legal entities also serve as members of the Board of Directors of Credit Suisse Group and itscommittees. At Credit Suisse Group, the risk management governance structure begins with the Boards of Directors, including their Audit Committees. Among other duties, they are responsible for determining the general risk policy, proper checks and balances, the strategic risk manage-
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CREDIT SUISSE GROUP RISK MANAGEMENT
ment organization and the Group’s overall appetite for risk. They are also responsible for reviewing major risk exposures on a regular basis. The Audit Committees’ primary function is to assist the Boards of Directors in fulfilling their oversight responsibilities by monitoring management’s approach to ensuring the adequacy of the financial reporting process and systems of internal controls, accounting, risk management, and legal and regulatory compliance, as well as monitoring the independence and performance of the external auditors and the Group’s Internal Audit department. Additional tasks include the review of the annual report, the annual financial statements and proposed resolutions for the
Annual General Meeting for further presentation to the Board of Directors; analysis of the effectiveness of the audit function; review of relevant reports submitted to the regulators, as well as keeping the Board of Directors informed about such reports; review of Group Audit’s and external auditors’ findings and the annual audit plans; review of material legal and regulatory matters, as well as any material breaches of rules and regulations and any actions taken as a result of such breaches, with notification to the Board of Directors of such matters in serious cases. The simplified organizational set-up is presented in the chart below.
Credit Suisse Group risk management – general organization* Credit Suisse Group Board of Directors
Internal/External Audit
Group level
Audit Committee
Group Chief Executive Officer Group Executive Board Group Chief Risk Officer
Group Risk Management
Group Executive Board Risk Management Committee
Group Chief Financial Officer
Legal & Compliance
Group Risk Processes & Standards Committee
Provisions Committee
IT Executive Board
Credit Suisse Board of Directors
Credit Suisse First Boston Board of Directors
Main legal entities Winterthur Board of Directors
Business unit level
Audit Committee
Audit Committee
Credit Suisse Financial Services Executive Board
Credit Suisse First Boston Operating Committee
Chief Executive Officer
Chief Executive Officer
Audit Committee
Risk Commmittees
Investment Committees
Risk Committees
Investment Committees
Strategic Risk Officer Chief Credit Officer Risk Managers
Chief Credit Officer Risk Managers
Strategic Risk Officer Chief Credit Officer Risk Managers
Chief Credit Officer Risk Managers
Legal & Compliance
Legal & Compliance
* Valid from January 1, 2002 * The Boards of Directors and their committees of Credit Suisse Group, Credit Suisse, Credit Suisse First Boston and Winterthur are identical in terms of members.
46
The Group’s Executive Board Risk Management Committee includes all Executive Board Members and is chaired by the Group Chief Risk Officer (GCRO). It prepares risk issues for approval by the Boards of Directors. It reviews the Group’s exposure to different categories of risk, assesses potential opportunities and risks, initiates corrective actions to mitigate undesired risk exposures and reviews the allocation of capital. The Group Risk Processes & Standards Committee (GRIPS), chaired by the GCRO, also meets four times a year to define the overall Group risk and capital policies and to approve material general instructions, processes, standards, methods and tools concerning risk management at business unit level, or to unify these where appropriate and relevant on a Group-wide basis. The GCRO also chairs the quarterly Provisions Meeting, where the status and development of credit allowances at business unit level are discussed and challenged. In addition, the GCRO is responsible for the development, implementation, monitoring and managing of high-level risk limits and exposures, as well as for risk strategy, standards, procedures and risk reporting. Group Risk Management supports the GCRO in fostering general risk awareness throughout the Group and in harmonizing approaches to managing risk types across business units. It also monitors the implementation of the Group’s risk management strategy together with the risk management units at the individual business units. The daily risk management responsibilities at Group or Corporate Center level are set up as a “risk arbiter layer” of risk management and control between business units, harmonizing relevant risk management issues. The prime value added is the challenging of the business units and the overall control and overview, while avoiding the duplication of efforts. A similar function is assigned to Legal & Compliance at Group level by coordinating compliance issues with the business units and supporting the application of Credit Suisse Group’s ambitious compliance standards within the entire Group. Credit Suisse Group’s Internal Audit department assists the Boards of Directors, the Audit Committees and senior management in fulfilling their responsibilities by providing an objective and independent evaluation of the effectiveness of risk management, controls and governance processes. An ongoing, systematic risk assessment lies at the heart of its planning process. The use of both static and dynamic planning tools – which are regularly evaluated for suitability – helps to ensure that resources are allocated efficiently, effectively and in line with current risks. The aggregation of all risk assessments across Credit Suisse Group serves as a basis for
operational planning and the allocation of audit resources to the business units. The audit plan reflects such current risk assessments and may be modified during the year based on a continuous monitoring of both internal and external factors, to ensure the proper prioritization of audit efforts in a dynamic environment. The audit work plan is prepared in consultation with the external auditors in order to avoid duplication of efforts and to ensure compliance with regulatory requirements. The Internal Audit department reports directly to the Chairman of Credit Suisse Group. Its staff consists of 320 professionals worldwide. Moreover, unsatisfactory audit reports are followed up by the GCRO and have increasingly become a subject of compensation discussions. Business unit risk management governance
While the business units are exposed to all risk types in one way or another, their relative significance varies substantially by design. Trading book market risks are concentrated at Credit Suisse First Boston, while credit and liquidity risks are most important at Credit Suisse Banking and at Credit Suisse First Boston. Insurance underwriting risks are found exclusively at Winterthur, while commission income risks dominate at Credit Suisse Private Banking and Credit Suisse Asset Management. All business units are exposed to operational, reputation/brand and strategy risks. The strategies of each business unit and of the Group are discussed at the highest levels at least once a year. The business units of Credit Suisse Group are – by design – substantially autonomous, and are thus responsible for the implementation of their own risk management. To exercise this authority responsibly, each of the business units has its own consistent risk management framework that is subject to regular checks and challenges by Group management. Each business unit has its own specialized risk management structure and systems in place – including risk committees, appropriate tools, systems, procedures and controls – specially tailored to cope with the risks taken in its particular line of business. At every level of the risk management process – especially with regard to market and credit risk – measurement and monitoring functions are independent of the respective front office being monitored. At Credit Suisse Group, risk management structures and systems, as well as policies and techniques, are subject to constant reassessment and improvement to ensure that implicit risks in the evolving financial markets are captured and appropriately managed.
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CREDIT SUISSE GROUP RISK MANAGEMENT
Economic Risk Capital (ERC)
Motivated by the greater scope and complexity of business activities at many banking organizations, management, shareholders and regulators have placed increasing emphasis on financial firms’ risk evaluation capabilities and their ability to ensure that capital, liquidity and other financial resources are adequate given the organizations’ overall risk profile. While specific risk measures such as Value-at-Risk or potential credit exposure provide valuable information on aspects of a firm’s risk profile, they do not lend themselves easily to a comprehensive and integrated view of an organization’s overall risk profile. In order to accommodate the increased need for a comprehensive and consistent risk measure across different businesses, financial institutions have therefore begun to complement their specific risk measurement tools with a measure that allows for an integrated, consistent and comprehensive view of a firm’s risk profile: Economic Capital, which is usually defined as an estimate of the unexpected level of loss in economic value over a certain period (one year), that is exceeded with only a small probability (e.g. 1%). Credit Suisse Group and its business units have established an economic capital model for the above-mentioned reasons. Specifically, the Group and its business units have established Economic Risk Capital as: ■
■
■
A consistent and comprehensive risk management tool; An important element in the capital management and planning process; An important element in the performance measurement process.
Following endorsement by the Boards of Directors, ERC is being integrated into the standard management processes at Credit Suisse Group and its business units. Representing the common standard for assessing risk, ERC considerably strengthens the Group’s ability to manage its risk profile on a consolidated basis and to assess the Group’s risk-bearing capacity in relation to its financial resources. By providing a common language and terminology for risk across the Group, the ERC effort has also created considerable side benefits in terms of increased risk transparency and knowhow sharing across the Group. As with other risk measures, the primary merit of ERC lies in its ability to provide meaningful signals regarding risk trends over time. In contrast, comparisons with other firms’ Economic Risk Capital estimates are not meaningful, as there is substantial
48
variation across institutions in terms of the definition of economic capital, model coverage, assumptions, data series and implementation specifics. Concept
Credit Suisse Group’s economic capital model is designed to measure all quantifiable risks associated with the Group’s activities on a consistent and comprehensive basis. It is based on the following general definition: Economic Risk Capital (ERC) is the capital needed to remain solvent and in business even under extreme conditions, given a certain solvency standard. Depending on the underlying source of risk, Credit Suisse Group distinguishes between three fundamental risk categories: ■
■
■
Position risk ERC – defined as the level of unexpected loss in economic value on the Group’s portfolio of positions over a one-year horizon, that is exceeded with a given, small probability (1% for daily risk management purposes; 0.03% for capital management purposes); Business risk ERC – defined as the difference between expenses and revenues in a severe market event, exclusive of the elements captured by position risk ERC and operational risk ERC; Operational risk ERC – defined as the estimated worst-case loss due to operational risk events.
Position risk ERC: This includes all risks associated with the Group’s positions, regardless of whether or not those translate into balance sheet exposures. The term position risk is not confined to the positions typically held by banks, but also includes the risks associated with the Group’s private equity and strategic investments, as well as the risks incurred by the insurance underwriting and asset management activities undertaken by the Winterthur entities. In order to represent a comprehensive risk measure, ERC aims to reflect the underlying sources of risk in an integrated way. ERC therefore not only treats all financial positions on a consistent economic basis, ignoring potential differences along other dimensions (e.g. in terms of their accounting treatment), it also does not distinguish between market and credit risks in the conventional way. Instead, the associated risks are treated on an integrated basis according to the underlying source of risk (e.g. while the foreign exchange risk associated with a rouble FX position is typically treated as a market risk, it is considered an emerging market risk in the ERC model because the underlying source of risk is an emerging market country
risk). Hence, ERC reflects the Group’s risk universe in a way that allows for an integrated measure based on the underlying source of risk, while maintaining sufficient granularity to take account of the different modeling approaches needed to capture the subtleties of the different businesses or risks. While position risks constitute the most direct and important source of risks for the Group, ERC also takes account of more indirect risks to the Group’s financial resources. Although those risks may not easily lend themselves to quantification (operational risk) or give rise to challenging conceptual issues (business risk), they can have a substantial impact on the Group and therefore need to be identified, addressed and reflected in the assessment of the Group’s solvency. Business risk ERC: It is now widely accepted that any sensible economic capital model must take account of the fact that financial organizations do not simply represent warehouses of financial assets but also act as originators and distributors of financial services. Origination, asset management and advisory services have become important sources of firm-wide income. They have also become important sources of firm-wide risks.
Liabilities
Assets
Set of stress events
Results
Model representation
Significant financial crisis
Erosion of market values of assets and liabilities in an ERC event
Position risk ERC (at appropriate confidence level)
Equity
Revenues
Costs
Expenses and revenues
Balance sheet 1)
Current state
Although there is widespread recognition that the risk and return characteristics of non-warehouse businesses have profound implications for the need for economic capital and the capacity to bear risks, no industry consensus has emerged as to how exactly to alter the assetbased economic capital calculations (e.g. based on Value-at-Risk type calculations) to reflect the non-warehouse businesses. Given the lack of consensus regarding the economic capital needs related to business risk, Credit Suisse Group has adopted a pragmatic and prudent approach. Specifically, the Group’s business risk ERC numbers are designed to measure the potential shortfall in revenues relative to the expenses base in a crisis situation, using conservative assumptions regarding the earnings capacity and the ability to reduce the cost base in a crisis situation. Operational risk ERC: While Credit Suisse Group is strongly convinced that capital charges – be they external or internal – do not represent an effective substitute for adequate management processes, the ability to absorb operational risk-related losses must be reflected in the ERC framework. Due to the limitations of current modeling techniques for operational risks in the market (espe-
+ Impact on non position-related expenses and on revenues 2) (over one-year horizon)
Operations
Operations
P/L
Operational risk event
Estimated difference between expenses and revenues in an ERC event (difference can be positive or negative)
Business risk ERC (can be positive or negative)
Estimate worst-case loss due to operational risk event (based on industry-wide historical experience)
Operational risk ERC
+
= 1) 2)
Including off-balance sheet item positions. Includes impact of a significant financial crisis on revenue sources net of crisis level expenses.
Total ERC
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49
CREDIT SUISSE GROUP RISK MANAGEMENT
cially with respect to the so-called “low frequency – high impact” operational risks that are relevant from a capital perspective), the ERC estimates for operational risks are primarily intended to integrate operational risks into the overall risk capital process and to provide an adequate capital reserve for those risks. Given the rudimentary stage of operational risk modeling, the operational risk ERC numbers were derived using quantitative approaches (estimations using industry loss data and scenario analysis) complemented by reviews by senior management to reflect the context-specific nature of operational risk and to ensure the integration of qualitative aspects deriving from business experience. The exhibit on page 49 summarizes the main building blocks of the Group’s ERC framework. Applications
The ERC model has a variety of applications, the most important being risk management, capital management and performance measurement. The objective is to use ERC as a tool that allows for more efficient usage of the Group’s risk-taking capacity, to the benefit of shareholders and other stakeholders.
ERC is already being used extensively in the risk management area: ■ ■
To assess, monitor and limit risk exposures; To guide and prioritize risk management actions.
ERC is also being used as a reference point for the structured assessment of the Group’s risk-bearing capacity in relation to its financial resources, recognizing that a comprehensive analysis must also take into account factors that are outside the scope of the ERC framework (e.g. the strategy and economic and competitive environment, as well as external constraints such as those imposed by regulators or rating agencies). Credit Suisse Group is in the process of further capitalizing on the benefits offered by ERC by extending the usage of ERC as the common risk denominator (e.g. by using it as a comprehensive limit-setting tool) and by using ERC as an important input into the capital management and performance measurement processes, thus linking risk management to the Group’s shareholder value strategy.
Key risk trends 2001 versus 2000 Change 2001 1)
Risk category 2)
Position risk ERC Foreign exchange ERC 2)
(11.6% ) (28.0% )
Fixed income, ALM and traded credit ERC
(34.1% )
Equity markets ERC Lending and counterparty exposures ERC
(18.9% ) 4.1%
Emerging markets ERC Real estate ERC
(3.7% ) (5.2% )
Insurance underwriting ERC
4.3%
Business risk ERC Operational risk ERC Total ERC
2) 3)
(81.3% ) 1.5% (16.5% )
Brief comment
Driven by a substantial reduction in equity exposures Due to lower foreign exchange risk profiles at the Winterthur entities and lower foreign exchange translation risks. Lower Asset and Liability Management (ALM) risk profiles at Credit Suisse Banking and the Winterthur entities, partly offset by impact of a larger securitization platform. Substantially reduced equity exposures at the Winterthur entities. Impact of a more difficult international credit environment (e.g. downgrades) partly offset by risk reductions at Credit Suisse Banking as a consequence of continued write-offs of legacy exposures. Reductions performed in 1999 and 2000 locked in. Ongoing reductions in Credit Suisse First Boston’s commercial real estate portfolio, partly offset by impact of a larger securitization platform. Increase in business volume, partly offset by sale of Winterthur International. Substantial reduction due to cost-cutting efforts across Credit Suisse Group, partly offset by impact of more difficult market environment. No material change since Donaldson, Lufkin & Jenrette integration. Substantial reduction in overall risk profile as a consequence of reduced position risks and lower business risk.
1) Changes are partly driven by the change in USD/CHF exchange rate. / 2) Including foreign exchange translation risk (defined as the potential reduction in income or equity associated with the consolidation of foreign entities with different functional currencies in case of an adverse move in foreign exchange rates). / 3) Diversified sum of position risk ERC, business risk ERC and operational risk ERC.
50
Key risk trends 2001
The table on page 50 summarizes the evolution of the Group’s risk profile over the course of the year 2001, using ERC as the common risk denominator. Market risk – overview
The term market risk refers to the risk of potential loss arising from adverse effects on interest rates, foreign currency exchange rates, equity prices, and other relevant market rates and prices, such as commodity prices and volatilities. A typical transaction may be exposed to a number of different market risks. Credit Suisse Group defines its market risk as potential changes of fair values of financial instruments in response to market movements. At Credit Suisse Group, the consolidated primary market risk exposures in the trading portfolios at yearend 2001 were interest rates, equity prices and foreign exchange rates. Exposure to the Swiss franc exchange rate of the US dollar and the euro as well as to equity price levels in Western Europe and North America constituted major elements of Credit Suisse Group’s market risks embedded in the non-trading portfolios or banking books. The most important tools used to measure and manage market risk exposures include the following: ■
■
■
The Value-at-Risk (VaR) method to estimate the potential loss arising from a given portfolio for a predetermined probability and holding period, using market movements based on historical data. Scenario analysis to estimate the potential immediate loss after extreme changes in market parameters. These changes are modeled on past extreme events and hypothetical scenarios. Other models measure interest rate sensitivity risk, default risk and Economic Risk Capital for certain complex activities. Regular assessments of mark-to-market revaluations of all balance sheet positions and interest rate rotation scenarios are the basis for these analyses.
The major modeling techniques are described in more detail on page 62. Market risk exposures of Credit Suisse Group business units and the corporate center – trading portfolios
The distribution of trading portfolio-related market risks reflects the distribution of activities between the different business units. Trading activities and the associated market risks are focused primarily within Credit Suisse First
Boston. Credit Suisse Private Banking and Credit Suisse Banking also conduct trading activities – albeit on a much smaller scale – primarily driven by the need to offer a complete product mix to their clients. Credit Suisse Asset Management and Winterthur – comprising Winterthur Insurance and Winterthur Life & Pensions – do not engage in trading activities. At Credit Suisse First Boston, market risk exposures in trading and non-trading portfolios are broadly diversified as it is active in most of the principal traded markets of the world. It uses almost all common trading and hedging products, including derivatives such as swaps, futures, options, cash instruments and structured products (customized transactions using combinations of derivatives and executed to meet specific client or proprietary needs). With such a broad spread of products and markets, Credit Suisse First Boston’s trading strategies are diverse and variable, and exposures at any given time will generally be spread across a wide range of risk factors and locations. The businesses with trading book activity perform a daily VaR calculation to assess market risk. The calculations are based on a ten-day holding period with a 99 percent confidence level and risk movements that are generally determined by two years of historical data. For many purposes, such as backtesting, the resulting VaR figures are usually scaled down and presented as one-day holding period values, including those provided in this disclosure. The estimates provided below are shown in Swiss francs, the base currency in the VaR calculations of two of the three business units using VaR; Credit Suisse First Boston manages market risk utilizing VaR calculated on the US dollar as the base currency. In the table, the
Market risk exposures in trading portfolios: Credit Suisse Group 99%, one-day VaR; in CHF m
Market risk Exposure type
31.12.01
31.12.00
58.4 18.0 46.7 4.1
60.1 11.2 50.9 2.6
127.2
124.8
Diversification benefit
55.4
56.1
Total
71.8
68.7
Interest rate Foreign exchange Equity Commodity Subtotal
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51
CREDIT SUISSE GROUP RISK MANAGEMENT
spot exchange rates of December 31, 2001, and December 31, 2000, were applied. The table provides an overview of the VaR estimates in the material trading portfolios as of December 31, 2001, and December 31, 2000. The VaR calculation for the Group as a whole was further improved during 2001. The amounts provided represent an overall VaR estimation of the Group, taking all the trading portfolios of the business units and – as a result – the overall diversification benefits between business units into consideration. Last year’s simple arithmetic sum approach, which implied overstatements by the prior aggregation method, was adjusted accordingly. Credit Suisse Group uses backtesting to assess the accuracy of the VaR model. Backtesting – the comparison of daily revenue fluctuations with the daily VaR estimate – is the primary method used to test the accuracy of a VaR model. Backtesting is performed at various levels, from business unit level down to more specific trading areas. The one-day 99% VaR at Credit Suisse First Boston at year-end 2001 was USD 42.7 million, compared with USD 84.1 million at year-end 2000. The VaR decrease was in large part due to the implementation of an enhanced methodology within the Fixed Income division. The backtesting chart of Credit Suisse First Boston shows the component of trading revenue due purely to overnight price movements and excluding fee and commission income. This calculation is better suited for the evaluation of a VaR model and the most appropriate to
compare with VaR for backtesting purposes. As illustrated in the backtesting chart, Credit Suisse First Boston had two regulatory backtesting exceptions in the fourth quarter of 2001. On average, a backtesting model returns two or three exceptions per annum. The VaR methodology is most useful for day-to-day risk monitoring of trading books in the context of “normal” markets. Scenario analysis is important to help understand risks during periods of severe disruption. Credit Suisse Group performs scenario testing to ensure that – even in good environments – its exposure to particular events remains well controlled. Non-trading portfolios
All Credit Suisse Group entities manage the market risks in their non-trading portfolios – also known as “banking books” or “other than trading portfolios” – through procedures and tools such as risk limits, independent monitoring of risk from risk-taking functions, and limiting excess resolution steps. In 2001, Credit Suisse Group expanded its use of VaR modeling also for the non-trading portfolios. As part of the extension of the use of Credit Suisse Group’s VaR model, the VaR figures for all exposure types have been recalculated for December 31, 2000. The prior monitoring of market risks associated with banking books through sensitivity analyses was replaced by VaR to harmonize the risk management instruments among the different portfolio types and among the Group as a whole in order to have one common denominator.
Adjusted trading revenue and VaR estimate for Credit Suisse First Boston in USD m
100
50
0
–50
–100
–150 1Q2001 Daily revenue One-day VaR (99%)
52
2Q2001
3Q2001
4Q2001
The non-trading portfolios comprise all non-trading books of the banking units – including private equity investments – and the financial investments of the insurance business. In the non-trading portfolios, the major elements of market risk during 2001 were exposures to changes in the Swiss franc to US dollar and euro exchange rates, as well as equity instrument price levels in Western Europe and North America. The following table summarizes the market risk exposures in non-trading portfolios as of December 31, 2001, and December 31, 2000. Credit Suisse Group’s business includes a substantial volume of non-trading related banking activity both in providing products and services to its clients and in proprietary investments. These activities include equity instrument participations, investments in bonds and other money market instruments, lending money and securities, and deposit-taking. The instruments used for balMarket risk exposures in non-trading portfolios: Credit Suisse Group 99%, 10 days VaR; in CHF m
Market risk Exposure type
31.12.01
31.12.00
Interest rates Foreign exchange Equity Commodity
530.4 561.2 2,675.7 8.1
789.3 916.2 1,983.1 0.0
Subtotal
3,775.4
3,688.6
Diversification benefit
1,444.2
926.4
Total
2,331.2
2,762.2
ance sheet management include derivative instruments such as swaps, interest rate swaps, forward rate agreements and options. The financial investments from the insurance business are held to ensure coverage for future obligations arising from policies. The quality of these assets is generally high – holdings are primarily bonds with AA ratings and higher, with an A rating being the minimum requirement for new additions to the portfolio. Notes 22 and 23 “Financial investments from the banking and insurance business” of the consolidated financial statements on pages 98 and 99 provide an overview of the book and market values of these assets.
Credit risk – overview
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 debtor, less a recovery amount resulting from foreclosure, liquidation of collateral or the restructuring of the company. The majority of Credit Suisse Group’s credit risk is concentrated in Credit Suisse Banking and Credit Suisse First Boston. The credit risks taken on by Credit Suisse Private Banking are mostly collateralized and primarily have an operational risk nature. Credit exposures exist within lending products, commitments and letters of credit, as well as counterparty risk from derivatives, foreign exchange and other transactions. Winterthur’s insurance assets are not a subject of discussion in this credit risk context. Credit Suisse Group’s credit risk management framework comprises seven core components: (i) an individual counterparty limit system, (ii) country and regional concentration limits, (iii) a credit risk provisioning methodology, (iv) a pricing methodology, (v) an individual counterparty and country rating system, (vi) a transaction rating system and (vii) active credit portfolio management by trading assets and primarily buying credit protection. The credit risk management framework is refined constantly and simultaneously and covers all business areas exposed to credit risk. Credit Suisse Group’s credit risk management framework allows a more accurate pricing of transactions involving credit risk by performing a risk/return calculation. The current implementation of the credit risk management framework covers virtually all of Credit Suisse Banking, Credit Suisse Private Banking and Credit Suisse Asset Management, as well as the vast majority of Credit Suisse First Boston’s credit-related exposures. The remaining portion of Credit Suisse First Boston’s credit-related exposures is better covered by either VaR methodology – such as mark-to-market valued mortgage portfolios, the majority of which is earmarked for securitization – or by applying credit risk adjustments. The business units of Credit Suisse Group manage credit risks through a credit request and approval process, ongoing credit and counterparty monitoring and a credit quality review process. Thereby, Credit Suisse First Boston employs a state-of-the-art global counterparty risk management system – Insight – monitoring daily the potential exposure for over 45,000 counterparties worldwide.
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53
CREDIT SUISSE GROUP RISK MANAGEMENT
Credit requests are prepared by experienced credit officers, based on the analysis and evaluation of debtor creditworthiness and type of credit transaction. Credit committees and senior credit managers take credit decisions on a transaction-by-transaction basis appropriate to the amount and complexity of the transactions as well as to overall exposures to counterparties and their related entities. These authority levels are set out within the governing principles of the legal entities. Transactions and exposures of a high level or of a significant and unusual nature are discussed with and/or ratified/approved by the GCRO. The credit review process is designed to result in early identification of possible changes in the creditworthiness of our clients. These procedures include regular asset and collateral quality reviews, business and financial statement analysis of individual clients and economic and industry studies. Other key factors considered include business and economic conditions, our historical experience, regulatory requirements, and concentration of credit volume by industry, country, product and counterparty rating. The process results in a quarterly determination of the appropriateness of our allowances for credit losses and leads to the decision as to whether allowances should be released or increased. The credit committees of the business units and the Group are responsible for such decisions. Another tool especially in use at Credit Suisse First Boston comprises regularly updated watch-lists for the identification of counterparties where changes in creditworthiness could occur due to events such as announced mergers, earnings weakness, lawsuits, etc. Possible recovery measures are evaluated even before potential credit losses might be incurred. In addition, Credit Suisse Group and its business units regularly analyze their industry diversification and concentration in selected segments. Credit protection such as credit derivatives is increasingly used.
Loans and loan equivalent portfolio – counterparty exposure
Credit Suisse Group defines counterparty exposure as all positions, exposures and facilities that potentially generate a credit risk for the Group. This includes loans and loan equivalents representing drawn exposures as well as committed but undrawn facilities. It also includes marketdriven exposures: off-balance sheet transactions such as derivatives and foreign exchange transactions, and also letters of credit and guarantees. All these instruments are converted using internal loan equivalent factors, which are related to regulatory risk-weightings. This approach represents a more comprehensive definition of counterparty exposure, especially in comparison with other financial institutions that often emphasize lending exposure only. The total gross counterparty exposure amounts to CHF 400 billion as of December 31, 2001 (December 31, 2000: CHF 405 billion). A counterparty credit risk class system has been implemented by Credit Suisse Group to define a framework that supports consistent credit risk analysis (statistical and otherwise), credit risk monitoring, risk-adjusted performance measurement, economic capital/usage allocation, and certain financial accounting purposes. The establishment of a credit risk rating for each counterparty is the first step in evaluating the possible risk from credit losses. The counterparty credit rating is used – in combination with credit (or credit equivalent) exposures and recovery rates – to quantify potential credit losses. Each counterparty that generates potential or actual credit risk exposure for Credit Suisse Group is rated and assigned a risk class. For those counterparties identified as having at least one impaired transaction, the counterparty is rated as either (i) a potential problem counterparty, (ii) a nonperforming counterparty, or (iii) a non-interest earning counterparty. In order to provide more detailed information on the counterparty credit risk exposure to stakeholders and
Credit Suisse Financial Services 31.12.01
Credit Suisse Private Banking 31.12.01
Credit Suisse First Boston 31.12.01
Credit Suisse Group 31.12.01
of which: Lending Committed, but unused Contingent exposure Counterparty trading exposure
103,188 12,081 12,734 156
38,968 0 2,904 822
46,108 101,719 9,883 71,808
188,264 113,800 25,521 72,786
Total counterparty credit risk exposure
128,159
42,694
229,518
400,371
Counterparty credit risk Exposure by type in CHF m
54
shareholders, Credit Suisse Group has begun tracking its credit risk exposure according to four basic exposure types, which are also comparable to some extent to those reported by other institutions. The breakdown on page 54 includes the following components: the lending exposure summarizes the funded on-balance sheet exposures such as loans and term-loans; committed, but unused facilities relate to limits unused by the counterparties; the contingent exposure includes letters of credit, guarantees, performance and bid bonds which are committed to the clients and are off-balance sheet exposures; the counterparty trading exposure relates to lending facilities, mark-to-market valued derivatives, forwards, secured lending and borrowing, and repos exposures of all sorts of financial institutions as counterparties. The following tables show the breakdown of Credit Suisse Group’s counterparty exposure by internal counterparty rating classes and major industry segments. The graph on the right provides an overview on the expo-
sure breakdown by counterparty rating on the one hand and transaction ratings on the other hand. Unlike counterparty ratings, which reflect the default probability of a counterparty, transaction ratings reflect credit risk in a more comprehensive way by also taking into account the likely loss in the case of a default considering the arrangement and structure of the credit transaction. As indicated by the substantially strengthened risk profile under the transaction rating view compared to the counterparty rating view, Credit Suisse Group extensively uses credit mitigants such as collateral, guarantees and other structural enhancements to actively reduce credit risks. Credit Suisse First Boston has become much more active in the portfolio management of its credit-related assets. This includes credit protection, which is bought when positions seem to be disproportional considering the risk appetite of the institution. The approach functioned and served well during 2001 to reduce potential losses.
Credit Suisse Group banking units counterparty exposure by rating
Credit Suisse Group banking units counterparty exposure by industry
Credit Suisse Group banking units counterparty rating versus transaction rating
Gross total of CHF 400 bn, as of end-2001
Gross total of CHF 400 bn, as of end-2001
Gross total of CHF 400 bn, as of end-2001
160
160
160 Investment grade 80%
Investment grade 80%
Non investment grade 20%
140
140
140
120
120
120
100
100
100
80
80
80
60
60
60
40
40
40
20
20
20
0
0
0
R1 R2 R3 R4 not R5 R6 R7 R8* ProAAA AA A BBB rat- BB B CCC/
