Global Wealth Management & Business Banking

Wealth Management International & Switzerland

In 2006, pre-tax profit, at a record CHF 5,203 million, was up 25% compared with 2005. This increase reflects higher asset-based fees, benefiting from a buoyant market and net new money inflows, as well as rising interest income, a reflection of higher volumes in our Lombard lending business. At the same time, operating expenses, up 15% in 2006 from 2005, also rose as our business expanded. Expenses for services from other business units were up from last year, mainly due to higher information technology charges. Personnel expenses rose 22% mainly due to the hiring of an additional 2,009 employees.

In 2006, net new money was a record CHF 97.6 billion, compared with CHF 68.2 billion in 2005. This outstanding result reflected increases in all geographical regions throughout the year, particularly in Asia Pacific and Europe, both a result of our growth strategy.

Invested assets, at CHF 1,138 billion on 31 December 2006, were up 16% from CHF 982 billion a year earlier, mainly reflecting the strong inflow of net new money and rising financial markets, with CHF 4.8 billion coming from new assets gained from acquisitions we integrated in 2006. This increase was partially offset by negative currency effects. Approximately 36% of invested assets were denominated in US dollars at the end of 2006.

The gross margin on invested assets was 103 basis points in 2006, up one basis point from 102 basis points a year earlier, as the increase in recurring margin due to higher fee income and increased Lombard lending was partly offset by a lower non-recurring margin.

The cost / income ratio improved to 51.7% in 2006 from 53.7% a year earlier. The cost / income ratio has improved for the fourth consecutive year despite the rise in costs in pursuit of our global expansion strategy.

Wealth Management US

In 2006, we reported a pre-tax profit of CHF 582 million compared with CHF 312 million in 2005. In US dollar terms, performance in 2006 was up 86% from 2005.

Total operating income was CHF 5,863 million, up 14% compared with CHF 5,156 million in 2005, primarily due to strong growth in recurring income based on higher levels of assets. Total operating expenses rose to CHF 5,281 million in 2006 from CHF 4,844 million in 2005, reflecting higher personnel costs and general and administrative expenses, both also related to strategic growth initiatives in support of our business and the Piper Jaffray private client branch network inclusion. Costs were up due to the New Jersey office provision that was made after the decision to sublet unused office space instead of occupying it ourselves. This was offset by a lower impact of litigation provisions compared with 2005.

The inflow of net new money in 2006 was CHF 15.7 billion, down 42% from CHF 26.9 billion in 2005. Including interest and dividends, net new money in 2006 was CHF 37.9 billion, down from CHF 45.2 billion a year earlier. Although the result was lower, the inflow of net new money compared favorably with peers in terms of growth rate relative to the asset base.

Wealth Management US had CHF 824 billion in invested assets on 31 December 2006, up 10% from CHF 752 billion on 31 December 2005. The increase was due to the strong market performance in 2006 as well as to the inclusion of the private client branch network of Piper Jaffray, adding CHF 54 billion of invested assets on a net basis.

The gross margin on invested assets was 76 basis points in 2006, up from 75 basis points in 2005. The increase is the result of revenues outpacing the increase in average invested asset levels over the year.

The cost / income ratio was 90.1% for 2006, compared with 93.9% in 2005. The decrease in the cost / income ratio reflects higher operating income due to strong growth in recurring income, partially offset by a rise in expenses mainly reflecting higher personnel costs in support of growth initiatives and the integration of the Piper Jaffray private client branch network.

Business Banking Switzerland

Pre-tax profit in 2006, at a record level of CHF 2,356 million, was CHF 167 million or 8% above the result achieved in 2005. This was mainly due to income growth. In 2006, non-interest income rose due to higher asset-based and brokerage fees, while personnel expenses decreased, reflecting the outsourcing of our Swiss facility management activities. The result shows the continued tight management of our cost base. The business also recorded an adjusted expected credit loss recovery of CHF 185 million.

Net new money was CHF 1.2 billion in 2006, CHF 2.2 billion lower than the inflow of CHF 3.4 billion in 2005, due to a decrease in inflows from existing clients, combined with transfers of client assets from discretionary to custody ­mandates.

Invested assets rose to CHF 161 billion in 2006 from CHF 153 billion a year earlier. Over the course of 2006, we ­transferred CHF 8.2 billion in client assets from the Business Banking Switzerland unit to the Wealth Management International & Switzerland unit, reflecting the development of client relationships.

In 2006 the cost / income ratio stood at 57.3%, 0.9 percentage points lower than the previous year's ratio of 58.2%, as the rise in income outpaced the increase in expenses.

Business Banking Switzerland's gross lending portfolio was CHF 143.4 billion on 31 December 2006, up 1% from the previous year, due to an increase in volumes of private client mortgages, which more than offset the ongoing reduction of our recovery portfolio, which fell to CHF 2.6 billion from CHF 3.3 billion a year earlier.