Investment Bank

In third quarter 2007, the Investment Bank recorded a loss of CHF 3,680 million. This was driven by negative operating income of CHF 1,419 million. In the same period a year earlier, it recorded operating income of positive CHF 4,500 million and pre-tax profit of CHF 1,083 million.

The substantial losses in certain businesses in the fixed income, currencies and commodities area in third quarter 2007 resulted in net revenues of negative CHF 4,226 million, and were mainly a reflection of markdowns and losses on its inventory of securities linked to the US sub-prime residential mortgage market.

Operating income

Total operating income in third quarter 2007 was negative CHF 1,419 million. In the same period a year earlier, total operating income was positive CHF 4,500 million.

The equities business posted revenues of CHF 1,709 million this quarter, essentially flat compared with the same period in 2006. A poor performance in statistical arbitrage and other proprietary trading led to losses, which were almost fully offset by stronger revenues in most other equities businesses. Cash equities rose on strong global volumes in the quarter, as record levels of transactions were processed. This led to an all-time high in commissions, which was partially offset by greater client facilitation costs and lower cash trading revenues. Derivatives remained very strong, posting higher revenues in all regions on rising structured products revenues. Prime brokerage revenues grew significantly, driven by the increased client base and higher average client balances, although this was partially offset by lower client spreads. Exchange-traded derivatives experienced another record quarter driven by greater volatility and higher volumes, the latter helped by the acquisition of ABN AMRO's futures and options business in 2006. Equity-linked revenues were essentially flat compared with the same period last year as gains in Asia and Europe were largely offset by reduced revenues in the US. Compared with second quarter 2007, equities revenues were down 45%, with all businesses reporting declines except exchange-traded derivatives business, which reported record results.

Fixed income, currencies and commodities (FICC) revenues were negative CHF 4,226 million in third quarter 2007, down from positive CHF 1,964 million in the same quarter a year ago. The credit market dislocation this summer affected most of our FICC businesses. The rates business recorded significant losses in mortgage-backed and asset-backed securities, driven by markdowns in the collateralized debt obligation (CDO) portfolio and our residential mortgage-related trading business. Widening spreads for mortgage-related products also affected proprietary positions in our securitized products business. Additionally, the deteriorating market for US residential mortgage-backed securities in August led to further markdowns of structured notes. Credit fixed income recorded losses in proprietary US credit trading. In the money markets, currencies and commodities (MCC) business, we recorded losses and markdowns in a portfolio that invested excess liquidity in AAA-rated asset-backed securities, mortgage-backed securities and commercial paper. Markdowns of leveraged finance positions were limited to CHF 480 million, gross of fees, and affected FICC as well the investment banking business. Municipal securities had lower results as increasing yields drove issuers to the sidelines.

Despite these large losses, certain areas of FICC posted positive results. In the rates business, both the flow derivatives and government bonds businesses recorded strong client revenues. The emerging markets business saw a very strong improvement in performance, particularly in Latin America, driven by the acquisition of Banco Pactual in 2006, and increases in the Asia Pacific region. In MCC, we saw strong revenues in derivatives and emerging markets, as well as record results in our FX spot business. Commodities revenues declined due to a reduction in own trading positions, as well as low market volatility during the summer months, which led to decreased client flow in the power and gas markets. This, however, was partly offset by strong revenue growth in precious metals, crude oil and structured products.

Credit default swaps hedging loan exposures recorded gains of CHF 140 million, compared with losses of CHF 61 million a year ago.

Compared with second quarter 2007's revenues of CHF 1,814 million for the whole FICC area, revenues this quarter fell in most businesses except municipal securities and commodities.

Investment banking revenues, at CHF 1,103 million, rose to the second highest level ever, and were up 38% from third quarter 2006. Europe, the Middle East and Africa and the Americas recorded double-digit revenue growth, while revenues in Asia Pacific were down from an outstanding quarter a year ago. Revenues from the advisory business increased significantly, as did results in equity capital markets, which more than offset a decrease in debt capital markets revenues, reflecting poor credit market conditions. Compared with the record set in second quarter 2007, investment banking revenues fell 16%, with decreases seen in all products except advisory, which recorded an improvement.

Operating expenses

Total operating expenses in third quarter 2007 were CHF 2,261 million, down 34% from the same period last year.

Personnel expenses were CHF 1,190 million, down 49% from a year earlier, reflecting lower accruals of performance-related compensation and a change in the composition of bonus between cash and shares. This was slightly offset by a rise in salaries, which reflected higher numbers of personnel. Expenses for share-based compensation were up 3%, mainly reflecting accelerated amortization of deferred compensation for good leavers.

General and administrative expenses grew by 7% to CHF 801 million from third quarter 2006 due to higher occupancy costs, which were driven by additional space requirements and higher rents. Increases in professional fees and consultancy costs also pushed general and administrative expenses up.

Charges from other businesses fell 33% to CHF 173 million compared with third quarter 2006, as Industrial Holdings made a CHF 38 million performance-related credit 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. Moreover, the Global Asset Management business no longer charged the Investment Bank for DRCM investment management services.

Depreciation expense was CHF 59 million, up 55% from the same period last year, on a one-time depreciation of office space in the US and a rise in amortization due to an increase in occupancy, reflecting business expansion.

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