Results financial businesses

Results

On a continuing basis, our 2006 result was the best ever, with all our businesses reporting a stronger performance than a year earlier. Attributable net profit in 2006 was CHF 11,253 million. Discontinued operations contributed CHF 4 million, compared with CHF 4,075 million in 2005, when we sold Private Banks & GAM. Net profit from continuing operations was CHF 11,249 million, up 19% from CHF 9,442 million in 2005.

Operating income

Total operating income was CHF 47,171 million in 2006, up 18% from CHF 39,896 million in 2005. This was the highest level ever.

Net interest income was CHF 6,521 million in 2006, down from CHF 9,528 million a year earlier. Net trading income was CHF 13,318 million, up from CHF 7,996 million in 2005.

As well as income from interest margin-based activities (loans and deposits), net interest income includes income earned as a result of trading activities (for example, coupon and dividend income).

Net income from trading activities increased by 15% to CHF 13,119 million in 2006. At CHF 4,759 million, equities trading income in 2006 was up 21%. Last year saw a large increase in derivatives, prime brokerage and proprietary business revenues. These gains were partially offset by lower revenues in our cash equity business. Fixed income trading revenues were up 8% in 2006, driven by increases in rates, metals and credit fixed income. This was partially offset by lower derivatives income due to declines in customer flows. At CHF 1,745 million, revenues from our foreign exchange business were up in 2006 compared with CHF 1,458 million recorded a year earlier.

Net income from interest margin products increased 9% to CHF 5,829 million, reflecting the growth in collateralized lending to wealthy clients worldwide. It also reflected an increase in spreads for US dollar, euro and Swiss franc deposits and higher volumes of mortgages to Swiss clients. The wealth management business in the US achieved higher levels of deposits, and benefited from higher spreads on them. This was partially offset by lower income from our shrinking Swiss recovery portfolio.

At CHF 891 million, net income from treasury and other activities in 2006 was 19% higher than in 2005. Interest income increased due to a higher consolidated capital base. Compared with last year, income benefited from mark-to-market gains on USD foreign exchange options used to hedge the currency exposure arising from future earnings. The US dollar fell against the Swiss franc in 2006.

In 2006, we experienced a net credit loss recovery of CHF 156 million, compared with a net credit loss recovery of CHF 375 million in 2005. This result reflects a prolonged period of favorable credit market conditions. World economic growth continued to be robust, despite a moderate slowdown in the US.

In 2006, net fee and commission income increased 21% to CHF 25,881 million. The increase was driven by a strong contribution from recurring asset-based fees, higher investment fund fees and net brokerage fees, rising underwriting fees as well as corporate finance fees.

Other income increased by 131% to CHF 1,295 million in 2006 from CHF 561 million in 2005. This was driven by gains on our New York Stock Exchange membership seats, which were exchanged into shares when it went public in March 2006. In addition, we sold our stakes in the London Stock Exchange, Babcock & Brown and the EBS Group.

Operating expenses

Total operating expenses increased by 18% to CHF 32,782 million in 2006.

Personnel expenses increased by 18% to CHF 23,469 million in 2006. The rise was driven by higher performance-­related compensation, reflecting the better performance in all our businesses. Salary expenses rose due to the 12% increase in personnel over the year, exemplifying the continuous expansion of our business as well as annual pay rises. Share-based components were up 34% to CHF 2,187 million, mainly reflecting higher share awards granted in 2006 and the higher fair value of options, driven by the rise in the share price. Insurance and social security contributions rose by 9% to CHF 1,374 million in 2006, reflecting higher salary and bonus payments. Contributions to retirement benefit plans rose 13% to CHF 802 million in 2006 as a result of both higher salaries paid and the increased staff levels. At CHF 1,564 million in 2006, other personnel expenses ­increased CHF 174 million from 2005, mainly driven by ­increased headcount.

At CHF 7,929 million in 2006, general and administrative expenses increased CHF 1,481 million from a year earlier. The increase was driven by a number of provisions, mainly for the Sumitomo settlement and the long term lease on an office building in New Jersey. Professional fees rose for projects that support our growth strategy. IT and other outsourcing costs, marketing and public relations as well as expenses for market data services were driven up by increased business volume. Higher staff levels resulted in increased costs for occupancy and for travel.

Depreciation was CHF 1,245 million in 2006, almost unchanged from CHF 1,240 million in 2005. Higher depreciation on real estate was partially offset by falling IT-related charges.

At CHF 148 million, amortization of other intangible assets was up 17% from a year earlier, related to the acquisitions during 2006.

Tax expense for 2006 was CHF 2,751 million, resulting in an effective tax rate of 19.1%, compared with the full-year 2005 tax rate of 18.8%.

Personnel

The number of people employed in our financial businesses was 78,140 on 31 December 2006, up 8,571, or 12%, from 69,569 on 31 December 2005. Staff levels rose in all business groups, driven by further business expansion in our core businesses. Some of the increase in personnel was also due to the inclusion of employees from Pactual, Piper Jaffray and ABN AMRO.