Investment Bank

The first six months of 2007 were the most profitable ever. Pre-tax profit in the first half of 2007 was CHF 3,616 million, up 3% from the same period in 2006. This result was driven by strong revenues from investment banking (up 49%), reflecting revenue growth in all regions, particularly in the Americas. Our equity businesses (up 21%) were also strong, reporting higher revenues in all products, with the most significant gains in derivatives, proprietary trading and equity capital markets. The decline in revenues from fixed income, rates and currencies (down 20%) mainly reflects losses in the portfolios that were managed by DRCM as well as the difficult market environment for our rates business in the US. This was partly offset by an improvement in performance from the credit fixed income and emerging markets businesses. Personnel expenses rose as we hired more staff in the context of the expansion of our product range, which also heightened occupancy costs. We also increased expenditure on our IT infrastructure and incurred more administration and professional fees.

Pre-tax profit in second quarter 2007 was CHF 1,815 million, up 3% from second quarter 2006. Higher revenues in equities and investment banking more than offset lower revenues in fixed income, rates and currencies and higher personnel and general and administrative expenses. Compared with first quarter 2007, pre-tax profit was up 1%, a new quarterly record.

Operating income

Total operating income in second quarter 2007 was CHF 6,217 million, up 9% from the same quarter a year earlier.

The equities business posted revenues of CHF 3,094 million in second quarter 2007, up 36% from the same period in 2006, with all business lines reporting stronger revenues. Cash equity revenues increased as stronger global volumes across all regions drove commission income higher. Prime brokerage, experiencing a record quarter, showed positive results from its successful build-up, as client numbers and average balances increased significantly. Exchange-traded derivatives also experienced a record quarter, driven by year-on-year increases in volumes and helped by the acquisition of ABN AMRO's futures and options business. Derivatives continued to be strong, predominantly driven by growth in Europe and Asia where positive market sentiment led to healthy structured product revenues. Significant growth was also seen in equity capital markets revenues, reflecting robust volumes in the Americas, in particular Latin America, and Asia (excluding Japan). Equity-linked revenues were essentially flat compared with the same period last year, as gains in Asia and Europe were largely offset by reduced opportunities in the US. Proprietary trading revenues increased, with regional performance improvements in Europe and Asia. Equity revenues were further enhanced by gains from the sale of our stake in Euronext and other such revenues. These were slightly higher than similar gains recorded in second quarter 2006, such as the sale of our stake in the London Stock Exchange. Compared with the record first quarter 2007, equities revenues were practically unchanged (down 1%). Most businesses experienced slight declines, except prime brokerage and equity capital markets, which rose.

Fixed income, rates and currencies (FIRC) revenues were CHF 1,814 million in second quarter 2007, down 31% from the same quarter a year ago. In connection with the closure of the DRCM business, the management of all portfolios (including the former outside investor fund) was integrated into the Investment Bank in second quarter 2007. Continued difficult market conditions in the US mortgage-backed and asset-backed securities market led to further losses in the portfolios. Net revenues from DRCM's business activities were approximately negative CHF 230 million, compared with approximately negative CHF 150 million reported in first quarter 2007. Revenues from the other parts of the FIRC business overall were flat compared with a year earlier. Credit fixed income had a record quarter, with growth across the business driven by leveraged finance, global credit trading and proprietary strategies. Credit default swaps hedging loan exposures recorded gains of CHF 35 million, compared with losses of CHF 30 million a year ago. Emerging markets saw very strong increases, particularly in Latin America and Eastern Europe, while municipal revenues fell as a result of a large number of new issues in the primary market and selling in the secondary market driven by widening spreads and overall interest rate concerns. Performance in the rates business was down in government bonds and mortgage-backed and asset-backed securities in the context of difficult market conditions caused by the US sub-prime market. This was only partially offset by increased derivatives revenues. Revenues in the money markets, currencies and commodities business fell compared with the same quarter last year, when our performance benefited from the sale of our stake in EBS Group. Foreign exchange and money market revenues increased as volumes and market share continued to rise. Trading in emerging markets currencies and technical upgrades to the trading capabilities of our platforms, which increased efficiency, further enhanced revenues. Commodity revenues fell due to lower results posted in precious metals and natural gas, as both suffered from market corrections and the resulting low client activity levels. This was partially offset by a stronger performance in crude oil and commodities structured products. Compared with first quarter 2007, FIRC was down 20%, with revenues lower in most businesses except credit fixed income, and emerging markets.

Investment banking revenues, at CHF 1,313 million, rose to a record high and were 65% higher than in second quarter 2006. This extraordinary performance emphasizes our strong market position and the key roles we played in a number of major transactions in second quarter. All regions recorded double-digit growth in revenues, with the largest increase coming from the Americas. Revenues from our advisory business increased significantly. The capital markets business also saw strong growth as did our leveraged finance franchise, demonstrating our commitment to this business. Compared with first quarter 2007, investment banking revenues were up 52%, with increases seen in all businesses and regions.

Operating expenses

Total operating expenses in second quarter 2007 were CHF 4,402 million, up 11% from the same period last year.

Personnel expenses were CHF 3,233 million, up 8% from a year earlier, driven by the increase in staff recruited in 2006 to support growth strategies and due to the acquisitions of Banco Pactual and ABN AMRO's futures and options business.

Share-based compensation in second quarter 2007 was down 12%, as the same period a year earlier included accelerated amortization of deferred compensation for good leavers.

General and administrative expenses increased by 33% to CHF 951 million, reflecting an additional provision relating to the settlement of Enron litigation as well as increases in administrative costs related to the acquisition of Banco Pactual and higher occupancy costs related to the need for more office space. IT and professional fees increased as well.

Net charges from other business units were CHF 133 million, down 36% compared with second quarter 2006 as Industrial Holdings made a CHF 76 million performance-related payment to compensate the Investment Bank for its help in disposing of private equity investments, which had been transferred to Industrial Holdings from the Investment Bank in 2005. Charges from Global Asset Management for managing the Investment Bank's investments in DRCM decreased, as the business was integrated into the Investment Bank during the quarter. These reductions were partially offset by higher charges from IT Infrastructure.

Depreciation expense was CHF 46 million, up 24% on second quarter 2006, driven by an increase in occupancy costs and IT expenditures. Amortization of intangible assets, at CHF 39 million, was up from CHF 14 million a year earlier, driven by the acquisitions of Banco Pactual and ABN AMRO's futures and options business.

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