Results

In second quarter 2004, the Investment Bank posted a pre-tax profit of CHF 923 million, down 8% from the same quarter last year. Revenues rose on strong results in Investment Banking and the solid performance of the Fixed Income, Rates and Currencies (FIRC) and the Equities businesses. Compared to the record result reported in first quarter 2004, pre-tax profit fell 45%, reflecting flat market conditions in June and lower investor activity.

Operating income

Operating income in second quarter 2004 was CHF 3,962 million, up 5% from the same period a year earlier. Compared to the performance reported in the exceptionally favorable markets in first quarter, revenues decreased in all businesses except Investment Banking, driving operating income down 20%.

Investment Banking revenues, at CHF 510 million in second quarter 2004, were up 15% on the same period last year (12% higher than in first quarter 2004). The growth was driven by strong performance in the advisory business and syndicated finance as activity levels improved. The growth was slightly offset by falls in debt and equity underwriting. The business posted strong revenue increases in Asia Pacific and the Americas as clients took advantage of strategic opportunities and favorable financing markets in these regions.

Operating income from the Equities business stood at CHF 1,401 million in second quarter 2004, up 2% over the same period last year. This reflected increased client revenues in a slightly better environment than a year ago. Income was 19% lower than in first quarter 2004, as higher revenues from equity finance and equity issuance were offset by declines in secondary cash equities commissions, and proprietary trading revenues.

The FIRC business posted revenues of CHF 1,999 million in second quarter 2004, down 1% on the same quarter last year. Strong revenues from the rates business were offset by a decrease in FX/CCT revenues, and lower results in principal finance driven by a deterioration in market conditions as a result of rising interest rates. Credit default swaps hedging our loan exposures posted revenues of CHF 12 million, an improvement from negative CHF 343 million a year earlier.

FIRC revenues were 23% lower than the record results of first quarter 2004, principally reflecting lower market volumes in fixed income driven by rising interest rates at the end of the quarter and a lack of volatility.

Our Private equity business posted revenues of CHF 52 million in second quarter 2004, compared to negative CHF 57 million in the same period a year earlier. Improved market conditions allowed a number of successful divestments and a lower level of writedowns. In second quarter 2004, writedowns on the private equity portfolio were CHF 32 million, compared to CHF 58 million in second quarter 2003. The performance of our Private equity business remains dependent on our ability to capitalize on exit opportunities and on industry conditions for our underlying investments.

Operating expenses

Total operating expenses in second quarter 2004 were CHF 3,035 million, up 10% on the same period last year, reflecting an increase in general and administrative expenses.

Personnel expenses increased 1% in second quarter 2004 compared to the same period a year earlier, despite a 5% increase in revenues, reflecting a lower accrual rate for performance-related compensation. Compared to first quarter 2004, personnel expenses fell 19% as performance and incentive-based remuneration declined in line with revenues, driving total operating expenses down 7%.

General and administrative expenses rose 40% to CHF 755 million in second quarter 2004 from the same period last year. Whilst underlying running expenses were flat, operational risk costs including the penalty related to our banknote business and provisions covering an estimate for additional US withholding tax costs, pushed up this quarter’s general and administrative expenses. The provision for US withholding tax costs relates to gaps in our systems and processes which led to incomplete client tax documentation in some of our US operations. We are currently remediating the problems and reviewing the possible consequences in terms of retrospective tax payments, in close cooperation with the Internal Revenue Service. As with all other operational risk issues, and in accordance with the approach we set out on page 17 of this report, the provision we have established will be adjusted in future as analysis concludes. The 47% increase in general and administrative expenses over first quarter 2004 is attributable to the same factors.

Amortization of goodwill, at CHF 73 million, increased 6% in second quarter 2004 over the same period last year, following last year’s purchase of ABN AMRO’s prime brokerage business. Depreciation expense was CHF 63 million, up 17% on second quarter 2003 and 26% on first quarter 2004, reflecting increased IT equipment spending.

Headcount

Headcount, at 15,551 on 30 June 2004, rose by 112 or 1% from the end of first quarter 2004 and by 177 or 1% from the same period a year earlier. Headcount increased primarily in our logistics areas due to IT initiatives. Staffing levels are managed in line with business needs and market opportunities.