An investment in our shares involves a number of risks. You should carefully consider the following information about the risks we face, together with the other information in this document, in the light of our mix of businesses when you make investment decisions involving our shares.
Market declines and volatility can materially adversely affect our revenues and profits. Changes in our business in recent years have been causing a shift among the primary risks we assume. In particular, we have increased our exposure to the financial markets as we have emphasized growth in our investment banking activities, including trading activities. We have been de-emphasizing growth in our traditional lending business. Conditions in the financial markets materially affect our businesses. Market downturns can occur not only as a result of purely economic factors, but also as a result of war, acts of terrorism, natural disasters or other similar events and can cause our revenues to decline. If we are unable to reduce our expenses at the same pace, our profitability can erode. Volatility can sometimes also adversely affect us.
In particular, this represents the following:
- We may incur significant losses from our trading and investment activities due to market fluctuations. We enter into and maintain large trading and investment positions in the fixed income, equity and currency markets, primarily through our Corporate Banking & Securities Corporate Division, many of which include derivative financial instruments. We also have made significant investments in individual companies through our Corporate Investments Group Division. In each of the product and business lines in which we enter into these kinds of positions, we assess the financial markets and trends in them. The revenues and profits we derive from many of our positions and our transactions in connection with them are dependent on the development of market prices.
- Protracted market declines can reduce liquidity in the markets, making it harder to sell assets and leading to material losses. In some of our businesses, protracted market movements, particularly asset price declines, can reduce the level of activity in the market or reduce market liquidity. These developments can lead to material losses if we cannot close out deteriorating positions in a timely way.
- Even where losses are for our clients' accounts, they may fail to repay us, leading to material losses for us, and our reputation can be harmed.
- Our investment banking revenues in the form of financial advisory and underwriting fees may decline in adverse market or economic conditions.
- We may generate lower revenues from brokerage and other commission- and fee-based businesses if market downturns lead to declines in the volume of transactions. The fees that we charge for managing our clients’ portfolios are in many cases based on the value or performance of those portfolios. A market downturn that reduces the value of our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive.