Credit Suisse International 2011 Annual Report
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Jagadeesan_AR2011_CSI_1393627_Layout 1 01/02/2012 11:35 Page 1 Credit Suisse International Annual Report 2011 Credit Suisse International Annual Report 2011 Board of Directors Fawzi Kyriakos-Saad (Chairman and CEO) Costas P Michaelides Eric Varvel James Henry Leigh Pemberton Rudolf Bless Tobias Guldimann Chris Carpmael Noreen Doyle (Non-Executive) Stephen Kingsley (Non-Executive) Company Secretary Paul E Hare 2 Credit Suisse International Annual Report 2011 Directors’ Report for the Year ended 31 December 2011 The directors present their Report and the Financial Statements for the year ended 31 December 2011. International Financial Reporting Standards Credit Suisse International’s 2011 Financial Statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted for use in the European Union (‘EU’). The Financial Statements for the year ended 31 December 2011 comprise Credit Suisse International (‘CSi’ or the ‘Bank’) and its subsidiaries together referred to as the ‘CSi group’. The Financial Statements were authorised for issue by the directors on 29 March 2012. Business Review Profile Credit Suisse Group AG (‘CSG’), a company domiciled in Switzerland, is the ultimate parent of a worldwide group of companies (collectively referred to as the ‘CS group’) specializing in Investment Banking, Private Banking and Asset Management. CSi is authorised under the Financial Services and Markets Act 2000 by the Financial Services Authority (‘FSA’). As a leading financial services provider, CS group is committed to delivering its combined financial experience and expertise to corporate, institutional and government clients and high-net-worth individuals worldwide, as well as to retail clients in Switzerland. CS group serves its clients through three divisions, Investment Banking, Private Banking and Asset Management, which co-operate closely to provide holistic financial solutions based on innovative products and specially tailored advice. Founded in 1856, CS group has a truly global reach today, with operations in over 50 countries and a team of more than 49,700 employees from approximately 100 different nations. CSG prepares financial statements under US Generally Accepted Accounting Principles (‘US GAAP’). These accounts are publicly available and can be found at www.credit-suisse.com. CSi is an unlimited liability company and an indirect wholly owned subsidiary of CSG. CSi is a bank domiciled in the United Kingdom. It is a global market leader in over-the-counter (‘OTC’) derivative products from the standpoints of counterparty service, innovation, product range and geographic scope of operations. CSi offers a range of interest rate, currency, equity, commodity and credit-related OTC derivatives and certain securitised products. CSi’s business is primarily client-driven, focusing on transactions that address the broad financing, risk management and investment concerns of its worldwide client base. CSi enters into derivative contracts in the normal course of business for market-making, positioning and arbitrage purposes, as well as for risk management needs, including mitigation of interest rate, foreign currency and credit risk. Principal products/Principal product areas The CSi group has three principal business divisions: Fixed Income, Equities and Investment Banking, which are managed as a part of the Investment Banking Division of CS group: The Fixed Income Division (‘FID’) provides a complete range of derivative products including forward rate agreements, interest rate and currency swaps, interest rate options, bond options, commodities and credit derivatives for the financing, risk management and investment needs of its customers. FID also engages in underwriting, securitising, trading and distributing a broad range 3 Credit Suisse International Annual Report 2011 of financial instruments in developed and emerging markets including US Treasury and government agency securities, US and foreign investment-grade and high yield corporate bonds, money market instruments, foreign exchange and real estate related assets. The Equity Division engages in a broad range of equity activities for investors including sales, trading, brokerage and market making in international equity and equity related securities, options and futures and OTC derivatives. The Investment Banking Division (‘IBD’) includes financial advisory services regarding mergers and acquisitions, origination and distribution of equity and fixed income securities, leveraged finance and private equity investments and, in conjunction with FID and Equities, capital raising services. Economic environment The global economy began showing signs of recovery in 2011, with manufacturing gains in most major economies and unemployment levels declining in the US and Europe. By mid-year, however, it was clear the global economy was cooling after a relatively robust post-crisis rebound. Significant causes included political unrest in the Middle East and North Africa, the European sovereign debt crisis, economic disruptions resulting from the natural disaster in Japan and US budgetary indecisiveness and a related downgrading of US Sovereign debt. This situation culminated in a summer equity market sell-off. Fear that the global economy could re-enter a recession eased somewhat towards the end of the year as indicators of economic growth in the US began to strengthen and central banks continued with their expansionary monetary policies. In the UK, the unemployment rate rose to 8.4% at the end of 2011, with an overall lackluster economic recovery in 2011. After growing by 2.1% in 2010, UK Gross Domestic Product (‘GDP’) eased to 0.9% in 2011. In the first half of the year global inflation was increasing. In the UK, despite the weakness in the domestic economy, an increase in the rate of value added tax and rising oil prices early in the year pushed the annual rate of Consumer Price Index (‘CPI’) inflation to 5.2% in September 2011, before moderating to 3.6% in December 2011. This was well above the Bank of England’s 2% target. The Bank of England left interest rates unchanged at 0.5% throughout the year, and the Asset Purchase Programme was increased by GBP 75 billion to GBP 275 billion in October 2011. The European Central Bank (‘ECB’) raised interest rates in April. After a second increase in July, the ECB signaled in September that it would not raise them further. In the fourth quarter, the ECB lowered interest rates again to levels seen at the beginning of the year due to the weaker economic outlook in the Eurozone area. The US Federal Reserve (‘Fed’) maintained interest rates unchanged through the year and completed its plan to purchase USD 60 billion of long-term treasuries in an effort to stimulate the economic recovery. The Fed announced it would keep short-term interest rates at low levels through mid-2013 and changed the composition of its US treasury securities holdings to hold a greater proportion of longer maturities. In the emerging markets, monetary policy actions were diverse. Brazil’s central bank increased its benchmark rate by 1.75% from the beginning of the year until August, but then lowered rates gradually in the second half of the year. India’s central bank raised rates throughout the year, and China tightened monetary policy by requiring banks to hold higher reserves against margin deposits. By the end of 2011, inflation was falling in many emerging markets again and slowing in developed countries. In 2011, the indebtedness of several developed countries was cause for substantial concern. In the third quarter, the ratings agency, Standard & Poor’s, downgraded the US long-term debt rating to AA+. 4 Credit Suisse International Annual Report 2011 Several European countries also had their ratings downgraded, and Italian and Spanish government bond spreads reached new highs, while German bond yields fell to record lows. Greece remained an open issue with Eurozone leaders moving to increase the haircut on Greek government bonds held by private investors. In July, the Eurozone and EU finance ministers agreed to increase the effective capacity of the European Financial Stability Facility and to widen the scope of its mandate. Equity markets were highly volatile in 2011. Volatility, as indicated by the Chicago Board of Options Exchange Market Volatility Index (‘VIX’), reached its highest level in the third quarter when both developed and emerging equity markets corrected sharply. In the fourth quarter, most equity markets recovered somewhat as overall corporate earnings proved fairly solid, but overall equity trading volumes were low. US equities outperformed European stocks and were stronger than emerging market equities in Asia and Latin America. During 2011 the UK FTSE100 closed down 5.5% from the beginning of the year. In fixed income markets, government bond yields across most major markets declined during the year. 10-year US Treasury bonds traded below 2% in the second half of the year, and Swiss 10-year treasuries yields were below 70 basis points at the end of 2011. Gilts were amongst the best performing bonds globally benefitting from the UK's AAA credit rating and the Bank of England's decision in the fourth quarter to launch a further round of quantitative easing. After a good performance for credit markets in the first half of 2011, the debt crisis in Europe drove yields of fiscally weaker European sovereigns and European banks to record highs. In 2011, the US high yield credit market posted positive total returns supported