Credit Suisse (Bank)Financial Statements6M07 |
Condensed Consolidated Financial Statements – Unaudited |
Consolidated statements of income (unaudited) | ||||||||
in | 6M07 | 6M06 | ||||||
Consolidated statements of income (CHF million) | ||||||||
Interest and dividend income | 30,811 | 23,974 | ||||||
Interest expense | (26,917) | (20,752) | ||||||
Net interest income | 3,894 | 3,222 | ||||||
Commissions and fees | 9,508 | 8,002 | ||||||
Trading revenues | 7,003 | 4,639 | ||||||
Other revenues | 3,185 | 2,821 | ||||||
Net revenues | 23,590 | 18,684 | ||||||
Provision for credit losses | 28 | (44) | ||||||
Compensation and benefits | 10,026 | 7,856 | ||||||
General and administrative expenses | 3,198 | 3,095 | ||||||
Commission expenses | 1,141 | 1,012 | ||||||
Total other operating expenses | 4,339 | 4,107 | ||||||
Total operating expenses | 14,365 | 11,963 | ||||||
Income from continuing operations before taxes, minority interests and extraordinary items | 9,197 | 6,765 | ||||||
Income tax expense | 1,631 | 1,009 | ||||||
Minority interests | 2,391 | 2,162 | ||||||
Income from continuing operations before extraordinary items | 5,175 | 3,594 | ||||||
Extraordinary items, net of tax | 0 | (24) | ||||||
Net income | 5,175 | 3,570 | ||||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements. |
Consolidated balance sheets (unaudited) | ||||||||
end of | 2Q07 | 4Q06 | ||||||
Assets (CHF million) | ||||||||
Cash and due from banks | 38,096 | 27,865 | ||||||
Interest-bearing deposits with banks | 3,034 | 3,910 | ||||||
Central bank funds sold, securities purchased under resale agreements and securities borrowing transactions | 339,040 | 318,572 | ||||||
of which reported at fair value | 160,658 | – | ||||||
Securities received as collateral, at fair value | 24,053 | 32,310 | ||||||
Trading assets, at fair value | 550,839 | 449,422 | ||||||
of which encumbered | 161,149 | 141,404 | ||||||
Investment securities | 17,416 | 20,304 | ||||||
of which reported at fair value | 17,167 | 19,560 | ||||||
of which encumbered | 7,380 | 54 | ||||||
Other investments | 21,382 | 20,188 | ||||||
of which reported at fair value | 19,650 | 18,324 | ||||||
Net loans | 204,512 | 190,883 | ||||||
of which reported at fair value | 21,154 | – | ||||||
allowance for loan losses | 1,123 | 1,305 | ||||||
Premises and equipment | 5,591 | 5,443 | ||||||
Goodwill | 9,958 | 9,889 | ||||||
Other intangible assets | 499 | 475 | ||||||
of which reported at fair value | 217 | 181 | ||||||
Other assets | 176,904 | 147,503 | ||||||
of which reported at fair value | 48,061 | 11,265 | ||||||
of which encumbered | 23,487 | 26,426 | ||||||
Total assets | 1,391,324 | 1,226,764 | ||||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements. |
Consolidated balance sheets (unaudited) | ||||||||
end of | 2Q07 | 4Q06 | ||||||
Liabilities and shareholder's equity (CHF million) | ||||||||
Due to banks | 135,385 | 104,724 | ||||||
of which reported at fair value | 5,580 | – | ||||||
Customer deposits | 315,327 | 280,200 | ||||||
of which reported at fair value | 5,875 | – | ||||||
Central bank funds purchased, securities sold under repurchase agreements and securities lending transactions | 292,027 | 288,442 | ||||||
of which reported at fair value | 137,878 | – | ||||||
Obligation to return securities received as collateral, at fair value | 24,053 | 32,310 | ||||||
Trading liabilities, at fair value | 242,625 | 197,936 | ||||||
Short-term borrowings | 21,082 | 16,287 | ||||||
of which reported at fair value | 11,143 | 2,764 | ||||||
Long-term debt | 158,329 | 144,021 | ||||||
of which reported at fair value | 102,087 | 44,208 | ||||||
Other liabilities | 145,919 | 117,836 | ||||||
of which reported at fair value | 24,345 | 14,916 | ||||||
Minority interests | 25,252 | 18,963 | ||||||
Total liabilities | 1,359,999 | 1,200,719 | ||||||
Common shares | 4,400 | 4,400 | ||||||
Additional paid-in capital | 19,680 | 19,593 | ||||||
Retained earnings | 15,905 | 11,652 | ||||||
Treasury shares, at cost | (5,579) | (6,149) | ||||||
Accumulated other comprehensive income/(loss) | (3,081) | (3,451) | ||||||
Total shareholder's equity | 31,325 | 26,045 | ||||||
Total liabilities and shareholder's equity | 1,391,324 | 1,226,764 | ||||||
end of | 2Q07 | 4Q06 | ||||||
Additional share information | ||||||||
Par value (CHF) | 100.00 | 100.00 | ||||||
Issued shares | 43,996,652 | 43,996,652 | ||||||
Shares outstanding | 43,996,652 | 43,996,652 | ||||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements. |
Consolidated statements of changes in shareholder's equity (unaudited) | |||||||||||||||||||||||
Common shares | Additional paid-in capital | Retained earnings | Treasury shares, at cost | 1 | Accu- mulated other compre- hensive income | Total share- holders' equity | Number of common shares outstanding | 2 | |||||||||||||||
6M07 | |||||||||||||||||||||||
Balance at beginning of period | 4,400 | 19,593 | 11,652 | (6,149) | (3,451) | 26,045 | 43,996,652 | ||||||||||||||||
Net income | – | – | 5,175 | – | – | 5,175 | – | ||||||||||||||||
Cumulative effect of accounting changes, net of tax | – | – | (680) | – | 10 | (670) | 3 | – | |||||||||||||||
Other comprehensive income, net of tax | – | – | – | – | 360 | 360 | – | ||||||||||||||||
Repurchase of treasury shares | – | – | – | (287) | – | (287) | – | ||||||||||||||||
Share-based compensation, net of tax | – | (346) | – | 857 | – | 511 | – | ||||||||||||||||
Dividends on share-based compensation, net of tax | – | 122 | – | – | – | 122 | – | ||||||||||||||||
Cash dividends paid | – | – | (10) | – | – | (10) | – | ||||||||||||||||
Other | – | 311 | (232) | – | – | 79 | – | ||||||||||||||||
Balance at end of period | 4,400 | 19,680 | 15,905 | (5,579) | (3,081) | 31,325 | 43,996,652 | ||||||||||||||||
6M06 | |||||||||||||||||||||||
Balance at beginning of period | 4,400 | 18,770 | 7,045 | (1,895) | (2,532) | 25,788 | 43,996,652 | ||||||||||||||||
Net income | – | – | 3,570 | – | – | 3,570 | – | ||||||||||||||||
Cumulative effect of accounting changes, net of tax | – | – | 64 | – | – | 64 | – | ||||||||||||||||
Other comprehensive income/(loss), net of tax | – | – | – | – | (773) | (773) | – | ||||||||||||||||
Repurchase of treasury shares | – | – | – | (3,958) | – | (3,958) | – | ||||||||||||||||
Share-based compensation, net of tax | – | (52) | – | 341 | – | 289 | – | ||||||||||||||||
Dividends on share-based compensation, net of tax | – | (16) | – | – | – | (16) | – | ||||||||||||||||
Cash dividends paid | – | – | (2,458) | – | – | (2,458) | – | ||||||||||||||||
Balance at end of period | 4,400 | 18,702 | 8,221 | (5,512) | (3,305) | 22,506 | 43,996,652 | ||||||||||||||||
1 Reflects Credit Suisse Group shares which are reported as treasury shares. Those shares are held to economically hedge share award obligations. 2 The Bank's total share capital consists of 43,996,652 registered shares with nominal value of CHF 100.00 per share and is fully paid. Each share is entitled to one vote. The Bank has no warrants or convertible rights on its own shares outstanding. 3 Includes CHF 165 million related to SFAS 157, CHF (832) million related to SFAS 159, CHF (13) million related to FIN 48 and CHF 10 million reclassified from Accumulated other comprehensive income as a result of SFAS 159, all net of tax. |
Comprehensive income (unaudited) | ||||||||
in | 6M07 | 6M06 | ||||||
Comprehensive income (CHF million) | ||||||||
Net income | 5,175 | 3,570 | ||||||
Other comprehensive income/(loss), net of tax | 360 | (773) | ||||||
Comprehensive income | 5,535 | 2,797 | ||||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements. |
Consolidated statements of cash flow (unaudited) | ||||||||
in | 6M07 | 6M06 | ||||||
Operating activities of continuing operations (CHF million) | ||||||||
Net income | 5,175 | 3,570 | ||||||
Income from continuing operations | 5,175 | 3,570 | ||||||
Adjustments to reconcile net income to net cash provided by/(used in) operating activities of continuing operations (CHF million) | ||||||||
Impairment, depreciation and amortization | 415 | 548 | ||||||
Provision for credit losses | 28 | (44) | ||||||
Deferred tax provision | 0 | 217 | ||||||
Share of net income from equity method investments | (27) | 38 | ||||||
Trading assets and liabilities | (39,634) | (15,236) | ||||||
(Increase)/decrease in accrued interest, fees receivable and other assets | (47,275) | (25,862) | ||||||
Increase/(decrease) in accrued expenses and other liabilities | 34,071 | 15,894 | ||||||
Other, net | 7,883 | 305 | ||||||
Total adjustments | (44,539) | (24,140) | ||||||
Net cash provided by/(used in) operating activities of continuing operations | (39,364) | (20,570) | ||||||
Investing activities of continuing operations (CHF million) | ||||||||
(Increase)/decrease in interest-bearing deposits with banks | 1,070 | 301 | ||||||
(Increase)/decrease in central bank funds sold, securities purchased under resale agreements and securities borrowing transactions | (19,738) | 2,914 | ||||||
Purchase of investment securities | (28) | (1,105) | ||||||
Proceeds from sale of investment securities | 511 | 722 | ||||||
Maturities of investment securities | 2,473 | 3,415 | ||||||
Investments in subsidiaries and other investments | (1,604) | (3,800) | ||||||
Proceeds from sale of other investments | 884 | 928 | ||||||
(Increase)/decrease in loans | (15,783) | (13,323) | ||||||
Proceeds from sales of loans | 285 | 1,439 | ||||||
Capital expenditures for premises and equipment and other intangible assets | (580) | (797) | ||||||
Proceeds from sale of premises and equipment and other intangible assets | 11 | 1 | ||||||
Other, net | (40) | 301 | ||||||
Net cash provided by/(used in) investing activities of continuing operations | (32,539) | (9,004) | ||||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements. |
Consolidated statements of cash flow (unaudited) (continued) | ||||||||
in | 6M07 | 6M06 | ||||||
Financing activities of continuing operations (CHF million) | ||||||||
Increase/(decrease) in due to banks and customer deposits | 67,073 | 26,637 | ||||||
Increase/(decrease) in short-term borrowings | 5,136 | 1,964 | ||||||
Increase/(decrease) in central bank funds purchased, securities sold under repurchase agreements and securities lending transactions | 2,732 | (8,173) | ||||||
Issuances of long-term debt | 38,217 | 52,615 | ||||||
Repayments of long-term debt | (33,495) | (29,190) | ||||||
Issuances of trust preferred securities | 22 | 0 | ||||||
Repurchase of treasury shares | (287) | (3,958) | ||||||
Dividends paid/capital repayments | 72 | (2,524) | ||||||
Other, net | 2,663 | 1,147 | ||||||
Net cash provided by/(used in) financing activities of continuing operations | 82,133 | 38,518 | ||||||
Effect of exchange rate changes on cash and due from banks (CHF million) | ||||||||
Effect of exchange rate changes on cash and due from banks | 1 | (693) | ||||||
Net increase/(decrease) in cash and due from banks (CHF million) | ||||||||
Net increase/(decrease) in cash and due from banks | 10,231 | 8,251 | ||||||
Cash and due from banks at beginning of period | 27,865 | 19,945 | ||||||
Cash and due from banks at end of period | 38,096 | 28,196 | ||||||
Supplemental cash flow information (unaudited) | ||||||||
in | 6M07 | 6M06 | ||||||
Cash paid for income taxes and interest (CHF million) | ||||||||
Cash paid for income taxes | 952 | 868 | ||||||
Cash paid for interest | 27,155 | 20,214 | ||||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements. |
Notes to the Condensed Consolidated Financial Statements – unaudited |
Note 1 Summary of significant accounting policies |
Basis of presentation |
The accompanying unaudited Condensed consolidated financial statements of Credit Suisse (the Bank) are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and are stated in Swiss francs (CHF). These Condensed consolidated financial statements should be read in conjunction with the US GAAP Consolidated financial statements and notes thereto for the year ended December 31, 2006, included in the Credit Suisse Annual Report 2006. For a description of the Bank’s significant accounting policies, refer to “Note 1 – Summary of significant accounting policies in the Notes to the consolidated financial statements” of the aforementioned Consolidated financial statements. |
Certain financial information, which is normally included in annual Consolidated financial statements prepared in accordance with US GAAP but not required for interim reporting purposes have been condensed or omitted. Certain reclassifications have been made to the prior period’s Consolidated financial statements to conform to the current period’s presentation. These Condensed consolidated financial statements reflect, in the opinion of management, all adjustments that are necessary for a fair presentation of the Condensed consolidated financial statements for the periods presented. The results of operations for interim periods are not indicative of results for the entire year. |
In preparing these Condensed consolidated financial statements, management is required to make estimates and assumptions, which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Condensed consolidated balance sheets and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
Recently adopted accounting standards |
The following provides the most relevant recently adopted accounting standards. For a complete description of recently adopted accounting standards, refer to “Note 2 – Recently issued accounting standards in the Notes to the consolidated financial statements” in the Credit Suisse Annual Report 2006. |
EITF 04-5, FSP SOP 78-9-1 and EITF 96-16 |
In June 2005, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (EITF 04-5). EITF 04-5 provides a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate it. EITF 04-5 states that the presumption of general partner control would be overcome only when the limited partners have substantive “kick-out rights” or “participating rights.” These rights would allow a simple majority of the limited partners to dissolve or liquidate the partnership or otherwise remove the general partner “without cause” or effectively participate in significant decisions made in the ordinar y course of the partnership business. EITF 04-5 was effective upon ratification for all newly formed limited partnerships and for existing limited partnership agreements that have been modified. The guidance was effective for the Bank with respect to existing unmodified partnerships as of January 1, 2006. |
As a result of the ratification of EITF 04-5, EITF Issue No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights” (EITF 96-16) was updated and FASB Staff Position (FSP) No. Statement of Position (SOP) 78-9-1, “Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5” (FSP SOP 78-9-1) was issued. The amendments to EITF 96-16 were effective on a prospective basis upon issuance, whereas, similar to EITF 04-5, FSP SOP 78-9-1 was effective upon issuance for all new partnerships formed and for existing partnership agreements modified after June 29, 2005, and was effective for the Bank with respect to existing unmodified partnerships as of January 1, 2006. |
The changes to EITF 96-16 and the provisions of EITF 04-5 and FSP SOP 78-9-1 in effect during 2005 did not have a material impact on the Bank’s financial condition, results of operations or cash flows. As of January 1, 2006, the Bank increased its assets and liabilities by CHF 8.2 billion, primarily due to the consolidation of certain unmodified private equity partnerships which existed prior to June 29, 2005. |
SFAS 155 |
In February 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (SFAS 155). Under SFAS 155, hybrid financial instruments which contain embedded derivatives that would otherwise require bifurcation may be accounted for at fair value, with changes in fair value recognized in the Consolidated statements of income. The fair value designation may be applied on an instrument-by-instrument basis; however, the election to apply fair value accounting is irrevocable. SFAS 155 is effective for those instruments acquired or issued on or after an entity’s fiscal year beginning after September 15, 2006, with early adoption permitted as of the beginning of a fiscal year for which an entity has not previously issued interim financial statements. SFAS 155 allows limited retrospective application for existing bifurcated hybrid financial instruments. The Bank elected to early adopt SFAS 155 as of January 1, 2006, and the impact of adoption was an increase to the Bank’s consolidated retained earnings of CHF 33 million, which included gross gains after tax of CHF 119 million and gross losses after tax of CHF 86 million, and a corresponding decrease to the Bank’s consolidated liabilities of CHF 33 million. |
FIN 48 |
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 addresses the accounting for uncertainty in income tax positions by prescribing a consistent recognition threshold and measurement attribute for income tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. |
FIN 48 requires a two-step process in evaluating income tax positions. In the first step, an enterprise determines whether it is more likely than not that an income tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions meeting the more-likely-than-not recognition threshold are then measured to determine the amount of benefit eligible for recognition in the financial statements. Each income tax position is measured at the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. |
The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 as of January 1, 2007 resulted in a decrease in beginning retained earnings of CHF 13 million. For further information on uncertainty in income tax positions, refer to ”Note 15 – Tax.” |
SFAS 158 |
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS 158 requires an employer to: |
(i) recognize in the statement of financial condition the funded status of a defined benefit plan on a prospective basis; |
(ii) recognize as a component of other comprehensive income, net of tax, the actuarial gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, “Employers’ Accounting for Pensions” (SFAS 87) or No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” (SFAS 106). Amounts recognized in accumulated other comprehensive income (AOCI), including gains or losses, prior service costs or credits and transition assets or obligations remaining from the initial application of SFAS 87 and SFAS 106, are to be adjusted as they are subsequently recognized as a component of net periodic benefit cost; |
(iii) measure the defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial condition; and |
(iv) disclose in the notes to the financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits and transition asset or obligation. |
SFAS 158 recognition provisions associated with the funded status of a defined benefit plan are effective as of the end of the fiscal year ending after December 15, 2006. The provision to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial condition is effective for fiscal years ending after December 15, 2008, with early adoption permitted. |
The cumulative effect of the Bank adopting the recognition provisions of SFAS 158 as of December 31, 2006, was an after-tax decrease in AOCI and consolidated net assets of CHF 0.3 billion. The Bank did not early adopt the measurement date provisions and is evaluating the impact of those provisions for adoption in 2008. |
SFAS 157 |
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures for instruments carried at fair value. The statement applies only to fair value measurements which are already required or permitted by other accounting standards. It eliminates the EITF Issue No. 02-3 “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (EITF 02-3) guidance which prohibits the recognition of gains or losses at the inception of derivative transactions whose fair value is estimated based upon unobservable market data. SFAS 157 also eliminates the use of blockage factors on instruments that are quoted in active markets by brokers, dealers and invest ment companies that have been applying the applicable American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guides. SFAS 157 also requires the Bank to consider its own credit spreads when measuring the fair value of liabilities. The Bank adopted the provisions of SFAS 157 on January 1, 2007. As a result of this adoption, the Bank reported an increase in opening retained earnings of CHF 165 million, net of tax. For further information on fair values, refer to ”Note 20 – Fair value of financial instruments.” |
SFAS 159 |
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 creates an alternative measurement treatment for certain financial assets and financial liabilities that permits fair value to be used for initial and subsequent measurement with changes in fair value recognized in earnings. The availability of this alternative measurement treatment is referred to as the fair value option. The statement also provides for additional financial statement presentation and disclosures relating to the alternative measurement treatment. The Bank adopted the provisions of SFAS 159 on January 1, 2007. As a result of adoption and election of certain existing instruments under the fair value option, the Bank reported a decrease in opening retained earnings of CHF 832 million, net of tax. For fur ther information on fair values, refer to ”Note 20 – Fair value of financial instruments.” |
Standards to be adopted in future periods |
FSP FIN 39-1 |
In April 2007, the FASB issued FSP No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (FSP FIN 39-1). FSP FIN 39-1 permits a reporting entity that is a party to a master netting agreement to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments that have been offset under the same master netting agreement. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007. This FSP is required to be applied retrospectively for all financial statements presented unless it is impracticable to do so. The Bank is currently evaluating the impact of adopting FSP FIN 39-1. |
FSP FIN 46(R)-7 |
In May 2007, the FASB issued FSP No. FIN 46(R)-7, “Application of FASB Interpretation No. 46(R) to Investment Companies” (FSP FIN 46(R)-7). FSP FIN 46(R)-7 addresses the application of FIN 46(R), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51” (FIN 46(R)), by an entity that accounts for its investments in accordance with the specialized accounting guidance in the AICPA Audit and Accounting GuideInvestment Companies (Investment Company Guide). The guidance in FSP FIN 46(R)-7 states that these investments are not subject to consolidation according to the requirements of FIN 46(R). FSP FIN 46(R)-7 follows the transition guidance of SOP 07-1, “Clarification of the Scope of the Audit and Accounting GuideInvestment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (SOP 07-1). T he Bank is currently evaluating the impact of adopting FSP FIN 46(R)-7. |
SOP 07-1 |
In June 2007, the Accounting Standard Executive Committee (AcSEC) of the AICPA issued SOP 07-1. SOP 07-1 provides guidance on how to determine whether an entity is within the scope of the Investment Company Guide. SOP 07-1 provides further guidance for entities that are investment companies under the SOP and addresses whether the specialized Investment Company accounting should be retained by the parent company in consolidation or by an investor that has the ability to exercise significant influence and applies the equity method of accounting. |
SOP 07-1 has additional disclosure requirements for parent companies and equity method investors that have retained Investment Company accounting in the financial statements of the parent or the equity method investor. |
SOP 07-1 is effective for fiscal years beginning on or after December 15, 2007 with earlier application permitted. The Bank is currently evaluating the impact of adopting SOP 07-1. |
Note 2 Business developments |
The Bank had no significant divestitures or acquisitions in 6M07 and 6M06. |
Note 3 Segment Results |
Overview |
The Bank is a global financial services company domiciled in Switzerland. The Bank’s business consists of three segments: Investment Banking, Private Banking and Asset Management. The three segments are complemented by Shared Services, which provides support in the areas of finance, operations, including human resources, legal and compliance, risk management and information technology. |
The segment information reflects the Bank’s reportable segments as follows: |
– Investment Banking offers investment banking and securities products and services to corporate, institutional and government clients around the world. Its products and services include debt and equity underwriting, sales and trading, mergers and acquisitions advice, divestitures, corporate sales, restructuring and investment research. |
– Private Banking offers comprehensive advice and a broad range of wealth management solutions, including pension planning, life insurance products, tax planning and wealth and inheritance advice, which is tailored to the needs of high-net-worth individuals worldwide. In Switzerland, it supplies banking products and services to high-net-worth, corporate and retail clients. |
– Asset Management offers integrated investment solutions and services to institutions, governments and private clients globally. It provides access to the full range of investment classes, ranging from money market, fixed income, equities and balanced products, to alternative investments such as real estate, hedge funds, private equity and volatility management. |
Minority interest-related revenues and expenses resulting from the consolidation of certain private equity funds and other entities in which the Bank does not have a significant economic interest in such revenues and expenses are not reported in the segments. The consolidation of these entities does not affect net income as the amounts recorded in net revenues and total operating expenses are offset by corresponding amounts reported as minority interests. |
For purpose of presentation of reportable segments, the Bank has included accounts of affiliate entities wholly owned by the same parent which are managed together with the operating segments of the Bank. These affiliate entities include certain bank and trust affiliates, primarily managed by Private Banking. Income from continuing operations before taxes, minority interests, extraordinary items and cumulative effect of accounting changes of these non-consolidated affiliate entities included in the segment presentation for 6M07 and 6M06 were CHF 543 million and CHF 534 million, respectively. For the same periods net revenues of these non-consolidated affiliate entities included in the segment presentation were CHF 1,235 million and CHF 1,097 million, respectively. Total assets of these non-consolidated affiliate entities included in the segment presentation as of June 30, 2007 and December 31, 2006 were CHF 51.9 billion an d CHF 44.9 billion, respectively. |
Revenue sharing and cost allocation |
Responsibility for each product is allocated to a segment, which records all related revenues and expenses. Revenue-sharing and service level agreements govern the compensation received by one segment for generating revenue or providing services on behalf of another. These agreements are negotiated periodically by the relevant segments on a product-by-product basis. |
The aim of revenue-sharing and cost allocation agreements is to reflect the pricing structure of unrelated third-party transactions. |
Corporate services and business support in finance, operations, including human resources, legal and compliance, risk management and information technology are provided by the Shared Services area. Shared Services costs are allocated to the segments based on the requirements of the segments and other relevant measures. |
Funding |
The Bank lends funds to its operating subsidiaries and affiliates on both a senior and subordinated basis, as needed, the latter typically to meet capital requirements, or as desired by management to capitalize on opportunities. Capital is distributed to the segments considering factors such as regulatory capital requirements, utilized economic capital and the historic and future potential return on capital. Transfer pricing, using market rates, is used to record interest income and expense in each of the segments for this capital and funding. |
Taxes |
The Bank’s segments are managed and reported on a pre-tax basis. |
Net revenues and income from continuing operations before taxes | ||||||||
in | 6M07 | 6M06 | ||||||
Net revenues (CHF million) | ||||||||
Investment Banking | 14,120 | 10,193 | ||||||
Private Banking | 6,719 | 6,023 | ||||||
Asset Management | 1,629 | 1,431 | ||||||
Adjustments1 2 | 1,122 | 1,037 | ||||||
Net revenues | 23,590 | 18,684 | ||||||
Income from continuing operations before taxes, minority interests and extraordinary items (CHF million) | ||||||||
Investment Banking | 4,492 | 2,851 | ||||||
Private Banking | 2,820 | 2,431 | ||||||
Asset Management | 556 | 261 | ||||||
Adjustments1 3 | 1,329 | 1,222 | ||||||
Income from continuing operations before taxes, minority interests and extraordinary items | 9,197 | 6,765 | ||||||
1 Adjustments represent certain consolidating entries and balances, including those relating to items that are managed but are not legally owned by the Bank and vice-versa and certain expenses that were not allocated to the segments. 2 Includes minority interest-related revenues of CHF 2,353 million in 6M07 and CHF 2,107 million in 6M06, from the consolidation of certain private equity funds and other entities in which the Bank does not have a significant economic interest in such revenues. 3 Includes minority interest income of CHF 2,268 million in 6M07 and CHF 2,086 million in 6M06, from the consolidation of certain private equity funds and other entities in which the Bank does not have a significant economic interest in such income. |
Total assets | ||||||||
end of | 2Q07 | 4Q06 | ||||||
Total assets (CHF million) | ||||||||
Investment Banking | 1,204,397 | 1,046,557 | ||||||
Private Banking | 359,903 | 340,741 | ||||||
Asset Management | 23,929 | 20,448 | ||||||
Adjustments1 | (196,905) | (180,982) | ||||||
Total assets | 1,391,324 | 1,226,764 | ||||||
1 Adjustments represent certain consolidating entries and balances, including those relating to items that are managed but are not legally owned by the Bank and vice-versa and certain expenses that were not allocated to the segments. |
Note 4 Net interest income |
in | 6M07 | 6M06 | ||||||
Net interest income (CHF million) | ||||||||
Loans | 3,779 | 3,284 | ||||||
Investment securities | 361 | 309 | ||||||
Trading assets | 11,867 | 8,760 | ||||||
Central bank funds sold, securities purchased under resale agreements and securities borrowing transactions | 11,239 | 9,370 | ||||||
Other | 3,565 | 2,251 | ||||||
Interest and dividend income | 30,811 | 23,974 | ||||||
Deposits | (7,897) | (5,510) | ||||||
Short-term borrowings | (478) | (282) | ||||||
Trading liabilities | (4,787) | (3,493) | ||||||
Central bank funds purchased, securities sold under repurchase agreements and securities lending transactions | (10,266) | (8,686) | ||||||
Long-term debt | (2,400) | (2,097) | ||||||
Other | (1,089) | (684) | ||||||
Interest expense | (26,917) | (20,752) | ||||||
Net interest income | 3,894 | 3,222 | ||||||
Note 5 Commissions and fees |
in | 6M07 | 6M06 | ||||||
Commissions and fees (CHF million) | ||||||||
Lending business | 1,288 | 776 | ||||||
Investment and portfolio management | 2,510 | 2,177 | ||||||
Other securities business | 105 | 78 | ||||||
Fiduciary | 2,615 | 2,255 | ||||||
Underwriting | 1,331 | 1,311 | ||||||
Brokerage | 2,704 | 2,507 | ||||||
Underwriting and brokerage | 4,035 | 3,818 | ||||||
Other customer services | 1,570 | 1,153 | ||||||
Commissions and fees | 9,508 | 8,002 | ||||||
Note 6 Other revenues |
in | 6M07 | 6M06 | ||||||
Other revenues (CHF million) | ||||||||
Minority Interests without Significant Economic Interest | 2,322 | 2,040 | ||||||
Loans held-for-sale | (13) | 39 | ||||||
Long-lived assets held-for-sale | 6 | 2 | ||||||
Equity method investments | 68 | 72 | ||||||
Other investments | 453 | 435 | ||||||
Other | 349 | 233 | ||||||
Other revenues | 3,185 | 2,821 | ||||||
Note 7 Provision for credit losses |
in | 6M07 | 6M06 | ||||||
Provision for credit losses (CHF million) | ||||||||
Allowance for loan losses | 38 | (43) | ||||||
Provisions for lending-related and other exposures | (10) | (1) | ||||||
Provision for credit losses | 28 | (44) | ||||||
Note 8 Compensation and benefits |
in | 6M07 | 6M06 | ||||||
Compensation and benefits (CHF million) | ||||||||
Salaries and bonuses | 8,968 | 6,929 | ||||||
Social security | 550 | 458 | ||||||
Other | 508 | 469 | ||||||
Compensation and benefits | 10,026 | 7,856 | ||||||
Note 9 General and administrative expenses |
in | 6M07 | 6M06 | ||||||
General and administrative expenses (CHF million) | ||||||||
Occupancy expenses | 417 | 406 | ||||||
IT, machinery, etc. | 226 | 238 | ||||||
Provisions and losses | 17 | (313) | ||||||
Travel and entertainment | 273 | 301 | ||||||
Professional services | 978 | 1,018 | ||||||
Depreciation of property and equipment | 400 | 394 | ||||||
Amortization and impairment of other intangible assets | 15 | 154 | ||||||
Other | 872 | 897 | ||||||
General and administrative expenses | 3,198 | 3,095 | ||||||
Note 10 Trading assets and liabilities |
end of | 2Q07 | 4Q06 | ||||||
Trading assets (CHF million) | ||||||||
Debt securities | 238,194 | 214,076 | ||||||
Equity securities1 | 201,832 | 148,967 | ||||||
Derivative instruments | 78,969 | 57,744 | ||||||
Other | 31,844 | 28,635 | ||||||
Trading assets | 550,839 | 449,422 | ||||||
Trading liabilities (CHF million) | ||||||||
Short positions | 170,117 | 139,899 | ||||||
Derivative instruments | 72,508 | 58,037 | ||||||
Trading liabilities | 242,625 | 197,936 | ||||||
1 Including convertible bonds. |
Note 11 Loans |
end of | 2Q07 | 4Q06 | ||||||
Loans (CHF million) | ||||||||
Banks | 1,911 | 554 | ||||||
Commercial | 45,092 | 44,815 | ||||||
Consumer | 69,554 | 68,399 | ||||||
Public authorities | 1,046 | 1,000 | ||||||
Lease financings | 2,495 | 3,361 | ||||||
Switzerland | 120,098 | 118,129 | ||||||
Banks | 10,585 | 8,900 | ||||||
Commercial | 60,500 | 53,317 | ||||||
Consumer | 13,305 | 10,715 | ||||||
Public authorities | 1,063 | 905 | ||||||
Lease financings | 123 | 228 | ||||||
Foreign | 85,576 | 74,065 | ||||||
Gross loans | 205,674 | 192,194 | ||||||
Net (unearned income)/deferred expenses | (39) | (6) | ||||||
Allowance for loan losses | (1,123) | (1,305) | ||||||
Net loans | 204,512 | 190,883 | ||||||
Impaired loan portfolio (CHF million) | ||||||||
Gross impaired loans | 1,329 | 1,780 | ||||||
of which with a specific allowance | 1,160 | 1,515 | ||||||
of which without a specific allowance | 169 | 265 | ||||||
in | 6M07 | 6M06 | ||||||
Allowance for loan losses (CHF million) | ||||||||
Balance at beginning of period | 1,305 | 1,965 | ||||||
Change in accounting | (61) | 0 | ||||||
Change in scope of consolidation | (92) | 0 | ||||||
Net additions charged to statements of income | 38 | (43) | ||||||
Gross write-offs | (108) | (442) | ||||||
Recoveries | 38 | 63 | ||||||
Net write-offs | (70) | (379) | ||||||
Provisions for interest | 0 | 30 | ||||||
Foreign currency translation impact and other adjustments, net | 3 | (37) | ||||||
Balance at end of period | 1,123 | 1,536 | ||||||
of which a specific allowance | 730 | 1,206 | ||||||
of which an inherent credit loss allowance | 393 | 330 | ||||||
Note 12 Other assets and liabilities |
end of | 2Q07 | 4Q06 | ||||||
Other assets (CHF million) | ||||||||
Cash collateral on derivative instruments | 19,349 | 14,917 | ||||||
Derivative instruments used for hedging | 1,189 | 1,648 | ||||||
Brokerage receivables | 67,555 | 49,242 | ||||||
Assets held-for-sale | 55,791 | 53,346 | ||||||
of which loans | 55,560 | 53,178 | ||||||
of which real estate | 231 | 168 | ||||||
Interest and fees receivable | 10,397 | 8,657 | ||||||
Deferred tax assets | 5,104 | 4,835 | ||||||
Prepaid expenses | 629 | 452 | ||||||
Other | 16,890 | 14,406 | ||||||
Other assets | 176,904 | 147,503 | ||||||
Other liabilities (CHF million) | ||||||||
Cash collateral on derivative instruments | 34,918 | 24,038 | ||||||
Derivative instruments used for hedging | 229 | 959 | ||||||
Brokerage payables | 50,879 | 33,196 | ||||||
Provisions1 | 1,811 | 2,050 | ||||||
Restructuring liabilities | 2 | 2 | ||||||
Interest and fees payable | 27,048 | 29,195 | ||||||
Current and deferred tax liabilities | 4,180 | 3,351 | ||||||
Other | 26,852 | 25,045 | ||||||
Other liabilities | 145,919 | 117,836 | ||||||
1 Includes provisions for off-balance sheet risk of CHF 56 million and CHF 138 million in 2Q07 and 4Q06, respectively. |
Note 13 Long-term debt |
end of | 2Q07 | 4Q06 | ||||||
Long-term debt (CHF million) | ||||||||
Senior | 138,668 | 127,367 | ||||||
Subordinated | 19,661 | 16,654 | ||||||
Long-term debt | 158,329 | 144,021 | ||||||
Note 14 Accumulated other comprehensive income |
Gains/(losses) on cash flow hedges | Cumulative translation adjustments | Unrealized gains/ (losses) on securities | Minimum pension liability adjustment | Actuarial gains/ (losses) | Net prior service cost/ (credit) | Accumul- ated other comprehen- sive income | |||||||||||||||||
6M07 | |||||||||||||||||||||||
Balance at beginning of period | (1) | (2,811) | 106 | 0 | (754) | 9 | (3,451) | ||||||||||||||||
Increase/(decrease) | 10 | 311 | 9 | 0 | 0 | 0 | 330 | ||||||||||||||||
Reclassification adjustments, included in net income | (1) | 0 | 3 | 0 | 28 | 0 | 30 | ||||||||||||||||
Adoption of SFAS 159, net of tax | 6 | 0 | 4 | 0 | 0 | 0 | 10 | ||||||||||||||||
Balance at end of period | 14 | (2,500) | 122 | 0 | (726) | 9 | (3,081) | ||||||||||||||||
6M06 | |||||||||||||||||||||||
Balance at beginning of period | 35 | (2,082) | 55 | (540) | 0 | 0 | (2,532) | ||||||||||||||||
Increase/(decrease) | (34) | (757) | 21 | (1) | 0 | 0 | (771) | ||||||||||||||||
Reclassification adjustments, included in net income | (2) | (1) | 1 | 0 | 0 | 0 | (2) | ||||||||||||||||
Balance at end of period | (1) | (2,840) | 77 | (541) | 0 | 0 | (3,305) | ||||||||||||||||
Note 15 Tax |
The Bank adopted the provisions of FIN 48 on January 1, 2007. As a result of FIN 48, an increase in the liability for unrecognized tax benefits of approximately CHF 13 million was recognized as a reduction to the January 1, 2007 balance of retained earnings. The total amount of unrecognized tax benefits, as of January 1, 2007, was CHF 1,475 million. |
Included in the January 1, 2007 balance were tax positions of CHF 16 million, for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. On January 1, 2007, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was CHF 1,402 million. |
The Bank continues to recognize interest and penalties accrued relating to unrecognized tax benefits as current income taxes in income tax expense. Approximately CHF 298 million was accrued as of January 1, 2007 for the payment of interest and penalties, net of any tax benefit associated with the payment of these amounts. |
The Bank is currently subject to ongoing tax audits and inquiries with the tax authorities in a number of jurisdictions, including the United States (US), the United Kingdom (UK) and Switzerland. Although the timing of the completion of these audits is uncertain, it is reasonably possible that some of these audits and inquiries will be resolved within 12 months of the adoption date of January 1, 2007. However, quantification of an estimate of the range of the reasonable possible change in unrecognized tax benefits cannot be made at this time. |
The Bank remains open to examination from either federal, state, provincial or similar local jurisdictions from the following years onward in these major countries: Japan – 2005; Switzerland – 2004; the UK –1997; and the US – 1993. |
Note 16 Employee share-based compensation and other benefits |
Share-based compensation |
The Bank’s share-based compensation is an important part of the overall compensation package for select employees and senior executives. Share-based compensation is designed to promote employee retention and align the interests of employees and shareholders. The majority of share-based compensation is granted as part of the annual incentive performance bonus subsequent to the fiscal year to which the incentive performance bonus relates. Share-based compensation is generally subject to restrictive features such as vesting, forfeiture and blocking rules. All share-based compensation is delivered to employees in the form of Credit Suisse Group shares. For further information on share-based compensation plans and the related fair value assumptions, refer to ”Note 22 – Employee share-based compensation and other benefits in the Notes to the consolidated financial statements” in the Credit Suisse Annual R eport 2006. |
Compensation expense |
Compensation expense in any year includes a variable compensation expense for that year’s discretionary cash performance bonus and fixed expenses for share-based awards granted in prior years. Recognition in the Consolidated statements of income of expense relating to awards granted in prior years is dependent primarily upon the vesting period, which is determined by the plan, retirement eligibility of employees, moratorium periods and certain other terms. |
Total compensation expense for share-based compensation recognized in the Consolidated statements of income in compensation and benefits was CHF 1,208 million and CHF 790 million in the first six months of 2007 and 2006, respectively. As of June 30, 2007, the total estimated unrecognized compensation expense related to non-vested share-based compensation of CHF 2,895 million will be recognized over the remaining weighted-average requisite service period of 1.8 years. |
The Group generally repurchases its own shares in the open market to satisfy these obligations but can also issue new shares out of available conditional capital. Through June 30, 2007, the Group delivered approximately 20.2 million shares to employees. The Group expects to repurchase approximately 28 million shares during 2007 in connection with its share-based compensation. |
Credit Suisse Incentive Share Unit |
In January 2007, as part of the 2006 remuneration process, the Bank aligned its share-based compensation plans and introduced ISUs. Previously granted awards will continue to settle under their original terms and are not affected by the ISU. An ISU is a unit that is similar to shares, but offers additional upside depending on the development of the Credit Suisse Group share price. For each ISU granted, the employee will receive at least one Credit Suisse Group share. In addition, the leverage component can deliver additional upside, which will be determined by the monthly average Credit Suisse Group share price over the three-year period following the grant. Each ISU will vest at a rate of one-third of a share per year over three years, with the potential additional shares vesting on the third anniversary of the grant date, depending on the development of the leverage component. |
On January 23, 2007, the Bank granted 26.2 million ISUs. The compensation expense recognized during the first six months of 2007 related to ISUs was CHF 544 million. The estimated unrecognized compensation expense related to ISUs as of June 30, 2007, was CHF 1,783 million and will be recognized over a period of three years, subject to the early retirement rules. None of the ISUs were vested as of June 30, 2007. |
Incentive Share Unit activities | |||||
in 6M07 | ISU | ||||
Number of share awards (million) | |||||
Balance at beginning of period | 0.0 | ||||
Granted | 26.2 | ||||
Settled | (0.1) | ||||
Forfeited | (0.5) | ||||
Balance at end of period | 25.6 | ||||
Performance Incentive Plan |
As part of its annual incentive performance bonus process for 2004 and 2005, the Bank granted Performance Incentive Plan (PIP) units during 2005 (PIP I) and 2006 (PIP II), respectively. PIP units are long-term retention incentive awards requiring continued employment with the Bank, subject to restrictive covenants and cancellation provisions, and vest evenly over a five-year period. Each PIP unit will settle for a specified number of Credit Suisse Group registered shares subsequent to the fifth anniversary of the grant date based on the achievement of: i) earnings performance as compared to predefined targets; and ii) share price performance compared to predefined targets and share price performance relative to peers. |
The compensation expense recognized during the first six months of 2007 related to PIP I and PIP II was CHF 235 million. The estimated unrecognized compensation expense related to PIP I and PIP II as of June 30, 2007, was CHF 430 million. None of the PIP units were deliverable as of June 30, 2007. |
Performance Incentive Plan activities | ||||||||
in 6M07 | PIP II | PIP I | ||||||
Number of share awards (million) | ||||||||
Balance at beginning of period | 5.9 | 12.0 | ||||||
Granted | 0.0 | 0.0 | ||||||
Settled | 0.0 | 0.0 | ||||||
Forfeited | 0.0 | 0.0 | ||||||
Balance at end of period | 5.9 | 12.0 | ||||||
of which vested | 1.4 | 5.1 | ||||||
of which unvested | 4.5 | 6.9 | ||||||
Shares |
In addition to the PIP, the Bank’s share-based compensation in prior years has included three different types of share awards: phantom shares; longevity premium awards (LPA); and special awards. These share awards entitle the holder to receive one Credit Suisse Group registered share subject to continued employment with the Bank, restrictive covenants and cancellation provisions and generally vest between zero and three years. |
The compensation expense recognized in the first six months of 2007 related to shares awarded under phantom share, LPA and special awards was CHF 429 million. The estimated unrecognized compensation expense related to these awards as of June 30, 2007 was CHF 682 million. |
Share options |
Options were a substantial component of the Bank’s share-based program prior to 2004. The Bank has discontinued the practice of issuing options and the majority of the original grants have since vested. Share options were granted with an exercise price equal to the market price of Credit Suisse Group’s shares on the date of grant and expire after ten years. |
Note 17 Pension |
The calculation of the expected contribution for 2007 was revised, resulting in an increase in anticipated contributions. As of June 30, 2007, CHF 361 million of contributions have been made, including approximately CHF 340 million as a special contribution. The Bank expects to contribute CHF 15 million to the defined benefit plans and to other post-retirement defined benefit plans during the remainder of the year. |
in | 6M07 | 6M06 | ||||||
Total pension costs (CHF million) | ||||||||
Service costs on benefit obligation | 26 | 28 | ||||||
Interest costs on benefit obligation | 80 | 68 | ||||||
Expected return on plan assets | (80) | (69) | ||||||
Amortization of unrecognized transition obligation/(asset) | 0 | (1) | ||||||
Amortization of prior service cost | 0 | 0 | ||||||
Amortization of unrecognized (gains)/losses | 42 | 40 | ||||||
Net periodic pension costs | 68 | 66 | ||||||
Settlement (gains)/losses | 0 | (5) | ||||||
Curtailment (gains)/losses | 0 | (9) | ||||||
Total pension costs | 68 | 52 | ||||||
Note 18 Guarantees and commitments |
Guarantees | ||||||||||||||
Total gross amount | Total net amount | 1 | Carrying value | Collateral received | ||||||||||
end of 2Q07 (CHF million) | ||||||||||||||
Credit guarantees and similar instruments | 10,291 | 8,547 | 12 | 5,353 | ||||||||||
Performance guarantees and similar instruments | 12,723 | 10,729 | 150 | 3,803 | ||||||||||
Securities lending indemnifications | 47,372 | 47,372 | 0 | 47,372 | ||||||||||
Derivatives | 939,553 | 939,553 | 10,724 | – | 2 | |||||||||
Other guarantees | 4,104 | 4,104 | 0 | 1,466 | ||||||||||
Total guarantees | 1,014,043 | 1,010,305 | 10,886 | 57,994 | ||||||||||
end of 4Q06 (CHF million) | ||||||||||||||
Credit guarantees and similar instruments | 9,850 | 7,450 | 8 | 4,581 | ||||||||||
Performance guarantees and similar instruments | 10,893 | 9,687 | 162 | 3,069 | ||||||||||
Securities lending indemnifications | 36,834 | 36,834 | 0 | 36,834 | ||||||||||
Derivatives | 670,526 | 670,526 | 4,828 | – | 2 | |||||||||
Other guarantees | 3,326 | 3,326 | 0 | 1,356 | ||||||||||
Total guarantees | 731,429 | 727,823 | 4,998 | 45,840 | ||||||||||
1 Total net amount is computed as the gross amount less any participations. 2 Collateral for derivatives accounted for as guarantees is not considered significant. |
Guarantees provided by the Bank are broadly classified as follows: credit guarantees and similar instruments, performance guarantees and similar instruments, securities lending indemnifications, derivatives and other guarantees. For a detailed description of guarantees, refer to ”Note 26 – Guarantees and commitments in the Notes to the consolidated financial statements” in the Credit Suisse Annual Report 2006. |
Deposit-taking banks in Switzerland and certain other European countries are required to ensure the payout of privileged deposits in case of specified restrictions or compulsory liquidation of a deposit-taking bank. Upon occurrence of a payout event, the Bank’s contribution will be calculated based on its share of privileged deposits in proportion to total privileged deposits. These deposit insurance guarantees are reflected in other guarantees in the table above. The Bank believes that the likelihood of having to pay under these agreements is remote. |
Disposal-related contingencies and other indemnifications |
The Bank has certain guarantees for which its maximum contingent liability cannot be quantified. These guarantees are not reflected in the table above and are discussed below. |
Disposal-related contingencies |
In connection with the sale of assets or businesses, the Bank sometimes provides the acquirer with certain indemnification provisions. These indemnification provisions vary by counterparty in scope and duration and depend upon the type of assets or businesses sold. These indemnification provisions generally shift the potential risk of certain unquantifiable and unknowable loss contingencies (e.g., relating to litigation, tax and intellectual property matters) from the acquirer to the seller. The Bank closely monitors all such contractual agreements in order to ensure that indemnification provisions are adequately provided for in the Bank’s Consolidated financial statements. |
Other indemnifications |
The Bank provides indemnifications to certain counterparties in connection with its normal operating activities, for which it is not possible to estimate the maximum amount that it could be obligated to pay. As a normal part of issuing its own securities, the Bank typically agrees to reimburse holders for additional tax withholding charges or assessments resulting from changes in applicable tax laws or the interpretation of those laws. Securities that include these agreements to pay additional amounts generally also include a related redemption or call provision if the obligation to pay the additional amounts results from a change in law or its interpretation and the obligation cannot be avoided by the issuer taking reasonable steps to avoid the payment of additional amounts. Since such potential obligations are dependent on future changes in tax laws, the related liabilities the Bank may incur as a result of such changes cannot be reasonably estimated. In light of the related call provisions typically included, the Bank does not expect any potential liabilities in respect of tax gross-ups to be material. |
The Bank is a member of numerous securities exchanges and clearing houses and may, as a result of its membership arrangements, be required to perform if another member defaults. The Bank has determined that it is not possible to estimate the maximum amount of these obligations and believes that any potential requirement to make payments under these arrangements is remote. |
Other commitments | |||||||||||
Total gross amount | Total net amount | 1 | Collateral received | ||||||||
end of 2Q07 (CHF million) | |||||||||||
Irrevocable commitments under documentary credits | 5,525 | 4,865 | 2,421 | ||||||||
Loan commitments | 249,615 | 248,726 | 167,589 | ||||||||
Forward reverse repurchase agreements | 15,786 | 15,786 | 15,786 | ||||||||
Other commitments | 5,901 | 5,901 | 180 | ||||||||
Total other commitments | 276,827 | 275,278 | 185,976 | ||||||||
end of 4Q06 (CHF million) | |||||||||||
Irrevocable commitments under documentary credits | 5,346 | 4,965 | 2,705 | ||||||||
Loan commitments | 225,537 | 224,225 | 132,452 | ||||||||
Forward reverse repurchase agreements | 5,697 | 5,697 | 5,697 | ||||||||
Other commitments | 4,847 | 4,847 | 112 | ||||||||
Total other commitments | 241,427 | 239,734 | 140,966 | ||||||||
1 Total net amount is computed as the gross amount less any participations. |
Other commitments of the Bank are broadly classified as follows: irrevocable commitments under documentary credits, loan commitments, forward reverse repurchase agreements and other commitments. For a detailed description of off-balance sheet commitments, refer to ”Note 26 – Guarantees and commitments in the Notes to the consolidated financial statements” in the Credit Suisse Annual Report 2006. |
Note 19 Variable interest entities |
FIN 46(R) requires the Bank to consolidate all variable interest entities (VIE) for which it is the primary beneficiary, defined as the entity that will absorb a majority of expected losses, receive a majority of the expected residual returns, or both. The Bank consolidates all VIEs for which it is the primary beneficiary. |
As a normal part of its business, the Bank engages in transactions with entities that are considered VIEs. These transactions include selling or purchasing assets, acting as a counterparty in derivatives transactions and providing liquidity, credit or other support. Transactions with VIEs are generally executed to facilitate securitization activities or to meet specific client needs, such as providing liquidity or investment opportunities, and as part of these activities, the Bank may retain interests in VIEs. In general, investors in consolidated VIEs do not have recourse to the Bank in the event of a default, except where a guarantee was provided to the investors or where the Bank is the counterparty to a derivative transaction involving VIEs. |
As of June 30, 2007, the Bank consolidated all VIEs for which it is the primary beneficiary under FIN 46(R). Net income was unaffected, as offsetting minority interests were recorded in the Consolidated statements of income. |
The Bank’s involvement with VIEs may be broadly grouped into three primary categories: collateralized debt obligations (CDO), commercial paper (CP) conduits and financial intermediation. For further information on the Bank’s policy on consolidation of VIEs and the nature of the Bank’s involvement with these entities, refer to “Note 1 – Summary of significant accounting policies, Note 2 – Recently issued accounting standards and Note 27 – Transfers and servicing of financial assets in the Notes to the consolidated financial statements” in the Credit Suisse Annual Report 2006. |
end of | 2Q07 | 4Q06 | ||||||
Total assets of consolidated VIEs (CHF million) | ||||||||
Collateralized debt obligations | 8,196 | 6,538 | ||||||
Commercial paper conduits | 1 | 1 | ||||||
Financial intermediation | 15,590 | 15,186 | ||||||
Total assets of consolidated VIEs | 23,787 | 21,725 | ||||||
Total assets of non-consolidated VIEs (CHF million) | ||||||||
Collateralized debt obligations | 20,791 | 15,636 | ||||||
Commercial paper conduits | 9,616 | 7,038 | ||||||
Financial intermediation | 81,764 | 90,584 | ||||||
Total assets of non-consolidated VIEs | 112,171 | 113,258 | ||||||
Collateralized debt obligations |
As part of its structured finance business, the Bank purchases loans and other debt obligations from and on behalf of clients for the purpose of securitization. |
The Bank has consolidated all CDO VIEs for which it is the primary beneficiary, resulting in the inclusion by the Bank of approximately CHF 8.2 billion and CHF 6.5 billion of assets and liabilities of these VIEs as of June 30, 2007 and December 31, 2006, respectively. The beneficial interests issued by these VIEs are payable solely from the cash flows of the related collateral, and the creditors of these VIEs do not have recourse to the Bank in the event of default. |
The Bank also retains certain debt and equity interests in open CDO VIEs that are not consolidated because the Bank is not the primary beneficiary. The Bank’s exposure in these CDO transactions typically consists of the interests retained in connection with its underwriting or market-making activities. The Bank’s maximum loss exposure is generally equal to the carrying value of these retained interests, which are reported as trading assets and carried at fair value and totaled CHF 2.9 billion and CHF 1.7 billion as of June 30, 2007 and December 31, 2006, respectively. |
Commercial paper conduits |
The Bank continues to act as the administrator and provider of liquidity and credit enhancement facilities for several CP conduits. The Bank does not sell assets to the CP conduits and does not have any ownership interest in the CP conduits. The Bank’s commitments to CP conduits consist of obligations under liquidity and credit enhancement agreements. |
As of June 30, 2007, the Bank’s maximum loss exposure to non-consolidated CP conduits was CHF 15.5 billion, which consisted of CHF 9.5 billion of funded assets and the CP conduits’ commitments to purchase CHF 6.0 billion of additional assets. As of December 31, 2006, the Bank’s maximum loss exposure was CHF 12.5 billion. |
The Bank believes that the likelihood of incurring a loss equal to this maximum exposure is remote because the assets held by the CP conduits, after giving effect to related asset-specific credit enhancement primarily provided by the clients, must be classified as investment grade when acquired by the CP conduits. |
Financial intermediation |
The Bank has significant involvement with VIEs in its role as a financial intermediary on behalf of clients. The investors typically retain the risk of loss on such transactions, but the Bank may provide principal protection on the securities to limit the investors’ exposure to downside risk. |
As a financial intermediary, the Bank may administer or sponsor the VIE, transfer assets to the VIE, provide collateralized financing, act as a derivatives counterparty, advise on the transaction, act as investment advisor or investment manager, act as underwriter or placement agent or provide credit enhancement, liquidity or other support to the VIE. The Bank also own securities issued by the VIEs structured to provide clients with investment opportunities, for market-making purposes and as investments. The Bank’s maximum loss exposure to non-consolidated VIEs related to financial intermediation activities was CHF 18.6 billion and CHF 19.1 billion as of June 30, 2007 and December 31, 2006, respectively, which represents the notional amount of any guarantees from the Bank and the fair value of all other Bank interests held, rather than the amount of total assets of the VIEs. Further, the Bank considers the likelihood of incurring a loss equal to the maximum exposure to be remote because of the Bank’s risk mitigation efforts, including hedging strategies, and the risk of loss that is retained by investors. |
Note 20 Fair value of financial instruments |
The fair value of the majority of the Bank’s financial instruments is based on quoted prices in active markets or observable inputs. These instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most high-yield debt securities, exchange traded and certain over-the-counter (OTC) derivative instruments, most CDOs, most mortgage-backed and asset-backed securities, certain residential mortgage whole loans and listed equity securities. |
In addition, the Bank holds financial instruments for which no prices are available and which have little or no observable inputs. For these instruments, the determination of fair value requires subjective assessment and varying degrees of judgment depending on liquidity, concentration, pricing assumptions and the risks affecting the specific instrument. In such circumstances, valuation is determined based on management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). These instruments include certain high-yield debt securities, distressed debt securities, certain CDOs, certain OTC derivatives, certain mortgage-backed and asset-backed securities, non-traded equity securities and private equity and other long-term investments. Valuation techniques for certain of these instruments are described in greater detail below. |
The Bank has availed itself of the simplification in accounting offered under the fair value option, primarily in the Investment Banking and Asset Management segments. This has been accomplished generally by electing the fair value option, both at initial adoption and for subsequent transactions, on items impacted by the hedge accounting requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). That is, for instruments for which there was an inability to achieve hedge accounting and we are economically hedged, we have elected the fair value option for the instrument where we were unable to achieve SFAS 133 hedge accounting. Likewise, where we manage an activity on a fair value basis but previously have been unable to achieve fair value accounting, we have utilized the fair value option to align our risk management accounting to our financial reporting. |
Fair value hierarchy |
Financial instruments recorded in the Bank’s Consolidated balance sheets at fair value have been categorized based upon the relative reliability of the fair value measures in accordance with SFAS 157 (the fair value hierarchy). |
The levels of the fair value hierarchy are defined as follows in SFAS 157: |
– Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bank has the ability to access. This level of the fair value hierarchy provides the most reliable evidence of fair value and is used to measure fair value whenever available. |
– Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs include: (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers or in which little information is publicly available; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
– Level 3: Inputs that are unobservable for the asset or liability. These inputs reflect the Bank’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). These inputs are developed based on the best information available in the circumstances, which include the Bank’s own data. The Bank’s own data used to develop unobservable inputs is adjusted if information indicates that market participants would use different assumptions. |
The Bank records net open positions at bid prices if long, or at ask prices if short, unless the Bank is a market maker in such positions in which case mid pricing is utilized. Fair value measurements are not adjusted for transaction costs. |
Prior to January 1, 2007, net costs of originating or acquiring mortgage loans held-for-sale were recognized as part of the initial loan carrying value, with any subsequent change in fair value being recognized as a component of trading revenues. For such loans where the fair value option has been elected, net costs are now recognized on a gross basis as fee income and/or expense. |
Quantitative disclosures of fair values |
Fair value of assets and liabilities measured at fair value on a recurring basis | |||||||||||||||||
end of 6M07 | Quoted prices in active markets for identical assets or liabilities (level1) | Significant other observable inputs (level 2) | Significant unobser- vable inputs (level 3) | Impact of netting | 1 | Total at fair value | |||||||||||
Assets (CHF million) | |||||||||||||||||
Central bank funds sold, securities purchased under resale agreements and securities borrowing transactions | 0 | 160,658 | 0 | 0 | 160,658 | ||||||||||||
Securities received as collateral | 21,644 | 2,409 | 0 | 0 | 24,053 | ||||||||||||
Trading assets | 275,694 | 504,897 | 46,771 | (276,523) | 550,839 | ||||||||||||
Investment securities | 15,879 | 1,288 | 0 | 0 | 17,167 | ||||||||||||
Other investments | 592 | 3,136 | 15,922 | 0 | 19,650 | ||||||||||||
Loans | 0 | 20,570 | 584 | 0 | 21,154 | ||||||||||||
Other intangible assets | 0 | 217 | 0 | 0 | 217 | ||||||||||||
Other assets | 2,980 | 44,419 | 709 | (47) | 48,061 | ||||||||||||
Total assets at fair value | 316,789 | 737,594 | 63,986 | (276,570) | 841,799 | ||||||||||||
Liabilities (CHF million) | |||||||||||||||||
Due to banks | 0 | 5,580 | 0 | 0 | 5,580 | ||||||||||||
Customer deposits | 0 | 5,875 | 0 | 0 | 5,875 | ||||||||||||
Central bank funds purchased, securities sold under repurchase agreements and securities lending transactions | 0 | 137,878 | 0 | 0 | 137,878 | ||||||||||||
Obligations to return securities received as collateral | 21,644 | 2,409 | 0 | 0 | 24,053 | ||||||||||||
Trading liabilities | 156,081 | 348,832 | 14,270 | (276,558) | 242,625 | ||||||||||||
Short-term borrowings | 0 | 10,639 | 504 | 0 | 11,143 | ||||||||||||
Long-term debt | 0 | 69,862 | 32,225 | 0 | 102,087 | ||||||||||||
Other liabilities | 0 | 24,357 | 0 | (12) | 24,345 | ||||||||||||
Total liabilities at fair value | 177,725 | 605,432 | 46,999 | (276,570) | 553,586 | ||||||||||||
1 Derivative contracts are reported on a gross basis by level. The impact of netting represents an adjustment related to counterparty netting. |
Fair value of assets and liabilities measured at fair value on a recurringbasis using significant unobservable inputs (level 3) | ||||||||||||||
6M07 | Derivatives, net | Private equity investments | Other | Total | ||||||||||
Assets (CHF million) | ||||||||||||||
Balance at beginning of period | 192 | 14,722 | 10,701 | 25,615 | ||||||||||
Net gains/(losses) (realized/unrealized) included in net income | 1,004 | 2,500 | 1,441 | 4,945 | ||||||||||
Purchases, sales, issuances and settlements | 1,919 | (1,232) | 11,056 | 11,743 | ||||||||||
Transfers in and/or out of level 3 | 1,965 | (68) | 5,708 | 7,605 | ||||||||||
Balance at end of period | 5,080 | 15,922 | 28,906 | 49,908 | ||||||||||
Liabilities (CHF million) | ||||||||||||||
Balance at beginning of period | – | – | 27,939 | 1 | 27,939 | |||||||||
Net (gains)/losses (realized/unrealized) included in net income | – | – | 265 | 265 | ||||||||||
Purchases, sales, issuances and settlements | – | – | 8,943 | 8,943 | ||||||||||
Transfers in and/or out of level 3 | – | – | (4,226) | (4,226) | ||||||||||
Balance at end of period | – | – | 32,921 | 1 | 32,921 | |||||||||
1 Includes primarily structured notes. |
Gains and losses on assets and liabilities measured at fair value on a recurringbasis using significant unobservable inputs (level 3) | ||||||||
in 6M07 | Trading revenues | Other revenues | ||||||
Gains and losses of assets and liabilities (CHF million) | ||||||||
Net gains/(losses) included in net income for the period | 2,370 | 2,310 | ||||||
Changes in unrealized gains or losses relating to assets and liabilities still held as of the reporting date | 1,037 | 779 | ||||||
Both observable and unobservable inputs may be used to determine the fair value of positions that have been classified within level 3. As a result, the unrealized gains and losses for assets and liabilities within level 3 presented in the table above may include changes in fair value that were attributable to both observable and unobservable inputs. |
We employ various economic hedging techniques in order to manage risks, including risks in level 3 positions. Such techniques may include the purchase or sale of financial instruments that are classified in levels 1 and/or 2. The realized and unrealized gains and losses for assets and liabilities in level 3 presented in the table above do not reflect the related realized or unrealized gains and losses arising on economic hedging instruments classified in levels 1 and/or 2. |
Qualitative disclosures of valuation techniques |
Trading assets and trading liabilities |
Money market instruments |
Traded money market instruments include instruments such as bankers’ acceptances, certificates of deposit, commercial papers, book claims, treasury bills and other rights, which are held for trading purposes. Valuations of money market instruments are generally based on observable inputs. |
Trading securities |
The Bank’s trading securities consist of interest-bearing securities and rights and equity securities. Interest-bearing securities and rights include debt securities, residential and commercial mortgage-backed securities and other asset-backed securities and CDOs. Equity securities include common equity shares, convertible bonds and separately managed funds. |
For debt securities for which market prices are not available, valuations are based on yields reflecting the perceived risk of the issuer and the maturity of the security, recent disposals in the market or other modeling techniques, which may involve judgment. |
Values of residential and commercial mortgage-backed securities and other asset-backed securities are generally available through quoted prices, which are often based on the prices at which similarly structured and collateralized securities trade between dealers and to and from customers. Values of residential and commercial mortgage-backed securities and other asset-backed securities for which there are no significant observable inputs are valued using valuation models incorporating prepayment scenarios and Monte Carlo simulations. |
Collateralized debt, bond and loan obligations are split into various structured tranches, and each tranche is valued based upon its individual rating and the underlying collateral supporting the structure. Values are derived by using valuation models to calculate the internal rate of return of the estimated cash flows. |
The majority of the Bank’s positions in equity securities are traded on public stock exchanges for which quoted prices are readily and regularly available. Fair values of preferred shares are determined by their yield and the subordination relative to the issuer’s other credit obligations. Convertible bonds are generally valued using observable pricing sources. For a small number of convertible bonds, no observable prices are available, and valuation is determined using internal and external models, for which the key inputs include stock price, dividend rates, credit spreads, foreign exchange rates, prepayment rates and equity market volatility. |
Derivatives |
Positions in derivatives held for trading purposes include both OTC and exchange-traded derivatives. The fair values of exchange-traded derivatives are typically derived from the observable exchange prices and/or observable inputs. The fair values of OTC derivatives are determined on the basis of internally developed proprietary models using various inputs. The inputs include those characteristics of the derivative that have a bearing on the economics of the instrument. |
The determination of the fair value of many derivatives involves only a limited degree of subjectivity because the required inputs are observable in the marketplace. Other, more complex derivatives use unobservable inputs. Specific unobservable inputs include long-dated volatility assumptions on OTC option transactions and recovery rate assumptions for credit derivative transactions. Uncertainty of pricing inputs and liquidity are also considered as part of the valuation process. |
Other trading assets |
Other trading assets primarily include residential mortgage loans that are purchased with an intent to securitize. Valuations for traded residential mortgage loans are based on pricing factors specific to loan level attributes, such as loan-to-value ratios, current balance and liens. In addition, current written offers or contract prices are considered in the valuation process. |
Investment securities |
Investment securities recorded at fair value include debt and equity securities. These debt and equity securities are quoted in active or inactive markets. These instruments include government and corporate bonds. |
Other investments |
The Bank’s other investments include hybrid instruments, private equity and other alternative capital investments. |
Private equity and other long-term investments include direct investments and investments in partnerships that make private equity and related investments in various portfolio companies and funds. Private equity investments and other long-term investments consist of both publicly traded securities and private securities. Publicly traded investments that are restricted or that are not quoted in active markets are valued based upon quotes with appropriate adjustments for liquidity or trading restrictions. Private securities are valued taking into account a number of factors, such as the most recent round of financing involving unrelated new investors, earnings multiple analyses using comparable companies or discounted cash flow analyses. |
Internally-managed funds include partnerships and related direct investments for which the Bank acts as the fund’s advisor and makes investment decisions. Internally-managed funds principally invest in private securities and, to a lesser extent, publicly traded securities and fund of funds partnerships. The fair value of investments in internally-managed fund of funds partnerships is based on the valuation received from the underlying fund manager and is reviewed by us. The fair value of investments in other internally-managed funds is based on the Bank’s valuation. Balances for internally-managed funds also include amounts relating to the consolidation of private equity funds under EITF 04-5 and FIN 46(R). A substantial portion of the investments held by the private equity funds consolidated primarily under EITF 04-5 and FIN 46(R) is reflected in level 3. Funds managed by third parties include investments in f unds managed by an external fund manager. The fair value of these funds is based on the valuation received from the general partner of the fund and is reviewed by us. |
Loans |
The Bank’s loans include consumer, mortgage, corporate and emerging market loans. The fair value of the corporate and emerging market loans within the Investment Banking segment is based on quoted prices, where available. Where quoted prices are not available, fair values are calculated using implied credit spreads derived from credit default swaps for the specific borrower. Where credit default swaps for a particular borrower are not available, a matrix of similar entity implied credit spreads from credit default swaps is constructed to derive an implied credit spread for that particular borrower. Alternatively, fair value is determined utilizing unobservable inputs and a discounted cash flow analysis. Consumer, mortgage and corporate loans within the Private Banking segment are not held at fair value. |
Short-term borrowings and long-term debt |
The Bank’s short-term borrowings and long-term debt include structured notes (hybrid financial instruments that are both bifurcatable and non-bifurcatable) and vanilla debt. The fair value of these debt instruments is based on quoted prices, where available. Where quoted prices are not available, fair values are calculated using yield curves for similar maturities, taking into consideration the impact of the Bank’s own credit spread on these instruments. |
Other assets and other liabilities |
The Bank’s other assets and liabilities include mortgage loans held in conjunction with securitization activities and assets and liabilities of VIEs and mortgage securitizations that do not meet the criteria for sale treatment under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement of FASB Statement No. 125)” (SFAS 140). The fair value of mortgage loans held in conjunction with securitization activities is determined on a whole-loan basis or on an “as-if” securitized basis depending on the principal market in which the loans will be transacted. Whole-loan valuations are calculated using yield curves for similar maturities for similar loans using discounted cash flow analyses. “As-if” securitized loans valuations are calculated using inputs consistent with similar securitized loans with quoted prices. The fair value of assets and liabilities of VIEs and mortgage securitizations that do not meet the criteria for sale treatment under SFAS 140 is determined based on the quoted prices for securitized bonds, where available, or on cash flow analyses for securitized bonds when quoted prices are not available. |
Fair value option |
Upon adoption of SFAS 159, the Bank elected fair value for certain of its financial statement captions as follows: |
Central bank funds sold, securities purchased under resale agreements and securities borrowing transactions |
The Bank has elected to account for structured resale agreements and most matched book resale agreements held as of January 1, 2007 and those entered into after January 1, 2007 at fair value. These activities are managed on a fair value basis; thus, fair value accounting is deemed more appropriate for reporting purposes. The Bank did not elect the fair value option for firm financing resale agreements as these agreements are generally overnight agreements which approximate fair value, but which are not managed on a fair value basis. |
Other investments |
The Bank has elected to account for certain equity method investments held as of January 1, 2007 and certain of those entered into after January 1, 2007 at fair value. These activities are managed on a fair value basis; thus, fair value accounting is deemed more appropriate for reporting purposes. Certain similar instruments, such as those relating to equity method investments in strategic relationships, for example, the Bank’s ownership interest in certain clearance organizations, which were eligible for the fair value option, were not elected due to the strategic relationship. |
Net loans |
The Bank has elected to account for substantially all Investment Banking commercial loans and loan commitments and certain Investment Banking emerging market loans (of which both types are considered foreign loans) held as of January 1, 2007 and those entered into after January 1, 2007 at fair value. These activities are managed on a fair value basis; thus, fair value accounting is deemed more appropriate for reporting purposes. Additionally, recognition on a fair value basis eliminates the mismatch that currently exists due to the economic hedging the Bank employs to manage these loans. Certain similar loans, such as project finance, lease finance, cash collateralized and bridge loans, which were eligible for the fair value option, were not elected due to the lack of currently available infrastructure to fair value such loans and/or the inability to economically hedge such loans. Additionally, the Bank elected not to acco unt for loans granted by its Private Banking segment at fair value, including domestic consumer lending, mortgages, corporate loans, etc., as these loans are not managed on a fair value basis. |
Other assets |
The Bank did not elect the fair value option for loans held-for-sale as of January 1, 2007 as the current carrying values are deemed appropriate. The Bank elected the fair value option for new loans entered into subsequent to January 1, 2007 due to the short period over which such loans are held and the intention to sell such loans in the near term. Other assets also include assets of VIEs and mortgage securitizations which do not meet the criteria for sale treatment under SFAS 140. The Bank did not elect the fair value option for such assets existing as of January 1, 2007 due to the operational effort to change accounting for existing items reflected in the Bank’s Consolidated financial statements. The fair value option was elected for these types of transactions entered into after January 1, 2007. |
Due to banks |
The Bank elected the fair value option for certain time deposits associated with its emerging markets activities entered into after January 1, 2007. |
Customer deposits |
The Bank’s customer deposits include fund-linked deposits. The Bank elected the fair value option for these fund-linked deposits as of January 1, 2007 and those entered into after January 1, 2007. Fund-linked products are managed on a fair value basis; thus, fair value accounting is deemed more appropriate for reporting purposes. |
Central bank funds purchased, securities sold under repurchase agreements and securities lending transactions |
The Bank has elected to account for structured repurchase agreements and most matched book repurchase agreements held as of January 1, 2007 and those entered into after January 1, 2007 at fair value. These activities are managed on a fair value basis; thus, fair value accounting is deemed more appropriate for reporting purposes. The Bank did not elect the fair value option for firm financing repurchase agreements as these agreements are generally overnight agreements which approximate fair value, but which are not managed on a fair value basis. |
Short-term borrowings |
The Bank’s short-term borrowings include hybrid debt instruments with embedded derivative features. Some of these embedded derivative features create bifurcatable debt instruments. The Bank elected the fair value option for some of these instruments as of January 1, 2006 in accordance with the provisions of SFAS 155. New bifurcatable debt instruments which were entered into in 2006 are carried at fair value in accordance with SFAS 155. Some hybrid debt instruments do not result in bifurcatable debt instruments. The adoption of SFAS 159 permits the Bank to elect fair value accounting for non-bifurcatable hybrid debt instruments (and bifurcatable non-financial debt instruments). With the exception of certain bifurcatable hybrid debt instruments which the Bank did not elect to account for at fair value upon adoption of SFAS 155, the Bank has elected to account for all hybrid debt instruments held as of January 1, 2007 a nd hybrid debt instruments originated after January 1, 2007 at fair value. These activities are managed on a fair value basis; thus, fair value accounting is deemed appropriate for reporting purposes. There are two main populations of similar instruments for which fair value accounting was not elected. The first relates to the lending business transacted by the Bank’s Private Banking segment, which includes structured deposits and similar investment products. These are managed on a bifurcated or accrual basis; thus, fair value accounting is not considered appropriate. The second is where the instruments were or will be maturing in the near term and their fair value will be realized at that time. |
Long-term debt |
The Bank’s long-term debt includes hybrid debt instruments with embedded derivative features as described above in Short-term borrowings. The Bank’s long-term debt also includes debt issuances managed by its central Treasury department that do not contain derivative features (vanilla debt). The Bank actively manages the interest rate risk on these instruments with derivatives; in particular, fixed-rate debt is hedged with receive-fixed, pay-floating interest rate swaps. The Bank has availed itself of the simplification objective of the fair value option to elect fair value for this fixed-rate debt and will no longer be required to maintain hedging documentation to achieve a similar financial reporting outcome. |
Other liabilities |
Other liabilities include liabilities of VIEs and mortgage securitizations which do not meet the criteria for sale treatment under SFAS 140. The Bank did not elect the fair value option for such liabilities existing as of January 1, 2007 due to the operational effort to change accounting for existing items reflected in the Bank’s Consolidated financial statements. The Bank did elect the fair value option for these types of transactions entered into after January 1, 2007. |
Cumulative effect adjustment to opening retained earnings due to adoption of fair value option | |||||||||||
as of January 1, 2007 | Carrying value prior to adoption | Net gains/ (losses) | Fair value after adoption | ||||||||
Balance sheet items (CHF million) | |||||||||||
Other investments | 34 | 1 | 35 | ||||||||
Loans | 13,694 | 78 | 13,772 | ||||||||
Other assets | 1,313 | 2 | 1,315 | ||||||||
Due to banks and customer deposits | (229) | (21) | (250) | ||||||||
Central bank funds purchased, securities sold under repurchase agreements and securities lending transactions, net | (43,102) | (5) | (43,107) | ||||||||
Short-term borrowings | (2,543) | 1 | (2,542) | ||||||||
Long-term debt | (48,637) | (1,026) | (49,663) | ||||||||
Other liabilities | (211) | (286) | (497) | ||||||||
Minority interests | 42 | ||||||||||
Pre-tax cumulative effect of adoption of the fair value option | (1,214) | ||||||||||
Deferred taxes | 382 | ||||||||||
Cumulative effect of adoption of the fair value option (charge to retained earnings) | (832) | ||||||||||
Gains and losses on financial instruments | |||||
in 6M07 | Net gains/(losses) | ||||
Financial instruments (CHF million) | |||||
Central bank funds sold, securities purchased under resale agreements and securities borrowing transactions | 7,112 | 1 | |||
Trading loans | 106 | 1 | |||
of which related to credit risk | 21 | ||||
Other investments | 33 | 2 | |||
Loans | 593 | 1 | |||
of which related to credit risk | (26) | ||||
Other assets | 825 | 1 | |||
of which related to credit risk | 123 | ||||
Due to banks and customer deposits | (79) | 1 | |||
Central bank funds purchased, securities sold under repurchase agreements and securities lending transactions | (6,018) | 1 | |||
Short-term borrowings | (232) | 1 | |||
Long-term debt | (2,691) | 2 | |||
of which related to credit risk | (108) | ||||
Other liabilities | (5) | 2 | |||
of which related to credit risk | (5) | ||||
1 Primarily recognized in net interest income. 2 Primarily recognized in trading revenues. |
Interest income and expense are calculated based on contractual rates specified in the transactions. Interest income and expense are recorded in the Consolidated statements of income depending on the nature of the instrument and related market convention. When interest is included as a component of the change in the instrument’s fair value, interest is included in trading revenues. Otherwise, it is included in interest and dividend income or interest expense. Dividend income is recognized separately from trading revenues. |
The impacts of credit risk on debt securities held as assets presented in the table above have been calculated as the component of the total change in fair value excluding the impact of changes in base or risk-free interest rates. The impacts of changes in own credit risk on liabilities presented in the table above have been calculated as the difference between the fair values of those instruments as of the reporting date and the theoretical fair values of those instruments calculated by using the yield curve prevailing at the end of the reporting period, adjusted up or down for changes in our own credit spreads from the transition date to the reporting date. |
Difference between the aggregate fair value and the aggregate unpaid principal balances of loans and financial instruments | |||||||||||
end of 6M07 | Aggregate fair value | Aggregate unpaid principal | Difference | ||||||||
Loans (CHF million) 1 | |||||||||||
Non-accrual loans | 147 | 395 | (248) | ||||||||
Financial instruments (CHF million) | |||||||||||
Central bank funds sold, securities purchased under resale agreements and securities borrowing transactions | 160,658 | 160,516 | 142 | ||||||||
Loans | 21,154 | 20,988 | 166 | ||||||||
Other assets | 33,425 | 33,993 | (568) | ||||||||
Due to banks and customer deposits | (6,230) | (6,237) | 7 | ||||||||
Central bank funds purchased, securities sold under repurchase agreements and securities lending transactions | (137,878) | (137,668) | (210) | ||||||||
Short-term borrowings | (11,143) | (11,242) | 99 | ||||||||
Long-term debt | (102,087) | (97,946) | (4,141) | ||||||||
Other liabilities | (5,739) | (5,915) | 176 | ||||||||
1 There were no non-performing loans 90 days or more past due which were carried at fair value. |
Note 21 Litigation |
In accordance with SFAS No. 5, “Accounting for Contingencies”, the Bank has litigation reserves for private litigation involving Enron, certain initial public offering (IPO) allocation practices, research analyst independence and other related litigation of CHF 1.2 billion (USD 1.0 billion) as of June 30, 2007, after deductions for settlements. |
The Bank is also involved in a number of other judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its businesses. These actions have been brought on behalf of various classes of claimants and, unless otherwise specified, seek damages of material and/or indeterminate amounts. The Bank believes, based on currently available information and advice of counsel, that the results of such proceedings, in the aggregate, are not likely to have a material adverse effect on its financial condition but might be material to operating results for any particular period, depending, in part, upon the operating results for such period. |
It is inherently difficult to predict the outcome of many of these matters. In presenting the Consolidated financial statements, management makes estimates regarding the outcome of these matters, records a reserve and takes a charge to income when losses with respect to such matters are probable and can be reasonably estimated. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Bank’s defenses and its experience in similar cases or proceedings, as well as its assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings. |
Further charges or releases of litigation reserves may be necessary in the future as developments in such litigation, claims or proceedings warrant. |
Report of Independent Registered Public Accounting Firm |
Report of Independent Registered Public Accounting Firm to the Board of Directors of |
Credit Suisse, Zurich |
We have reviewed the accompanying condensed consolidated balance sheets of Credit Suisse and subsidiaries (the “Bank”) as of June 30, 2007, and the related condensed consolidated statements of income, changes in shareholder's equity, comprehensive income and cash flow for the six-month periods ended June 30, 2007 and 2006. These condensed consolidated financial statements are the responsibility of the Bank's management. |
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. |
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. |
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Bank as of December 31, 2006, and the related consolidated statements of income, changes in shareholder's equity, comprehensive income and cash flows for the year then ended (not presented herein); and in our report dated March 23, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. |
KPMG Klynveld Peat Marwick Goerdeler SA |
David L. Jahnke Robert S. Overstreet |
Auditor in charge |
Zurich, Switzerland |
July 31, 2007 |