Credit Suisse Group AG
Q1 2019 Earnings Call Transcript

Published: 24 Apr 2019

Operator:

Good morning. This is conference operator. Welcome and thank you for joining the Credit Suisse Group's first quarter 2019 results conference call for analysts and investors. As a reminder, all participants are in a listen-only mode and the conference is recorded. You'll have the opportunity to ask questions after the presentation. [Operator Instructions] I'll now turn the conference over to Adam Gishen, Group Head of Investor Relations and Corporate Communications. Please go ahead Adam.
Adam Gishen:

Okay. Thank you, operator. Before we begin, let me remind you of the important cautionary statements on Slide 2 including the statements that are non-GAAP financial measures and Basel III disclosures. For a detailed discussion of our results, we refer you to the Credit Suisse first quarter 2019 earnings release and remind you that our first quarter financial report and accompanying financial statements for the period will be published on or around May 03. With that, I will hand over to CEO Tidjane Thiam for a fuller briefing. Thank you.
Tidjane Thiam:

Thank you, Adam. Good morning, everyone and thank you for joining our call. With me is David Mathers, our Chief Financial Officer and together we'll present Credit Suisse's results for the first quarter of 2019 and look forward to answering your questions at the end of the session and discussing our results in more detail as usual. The first quarter of 2019 is an important one for us as it is the first quarter after the completion of a three-year restructuring. Therefore, it gives us the first chance to assess whether some of the benefits we expected from the restructuring are starting to emerge. So looking at our performance on the next slide; we have generated our highest reported Q1 pretax income focusing on reported as we told you at the end of our restructuring since Q2 2015. So focusing the last four years at CHF 1,062 million. So turning now to net income, which in past we've done on equity and shareholder distributions. On the next slide, our net income has continued to grow as you can see here CHF749 million in a challenging quarter. This is an 8% year-on-year increase against a very strong first quarter of 2018 and in as we all know a challenging environment particularly in January and February. This translates at the bottom of the page into a return on tangible equity of 8%. The various benefits we mentioned at our 2018 Investor Day, lower funding costs and our restructuring, lower ARU losses, which we pay to SRU have all come through in Q1 and they will have a recurring positive impact on our P&L in the future. David in his slides will give you more color on this later, but our calculations are that with flat revenues versus Q1 '18 i.e. if we had, had the same revenues as in Q1 '18 this obviously would have been 10.9% in Q1 '19. So let's look at the market environment we faced in the first quarter on the next slide. The market dislocation, which hit us in the fourth quarter of 2018 continued into the first weeks of '19. For our primary pipeline was most heavily impacted by lack in activity with ECM street fees as leverage finance issuance volumes to centers where we're very exposed is down more than 40% in the quarter. Even though equity index levels bounced back sharply in the second half of the quarter, market volumes and current activity took some time to catch up. This was particularly evident in APAC, which you can see here in the bottom right hand chart where equity market volumes were down almost 25%. The start to the year was particularly challenging with primary street such as ECM down up to 70%. As we moved into the second half of the quarter however, the environment became more constructive and we were able to begin to execute on our pipeline. To the next slide please. Against this market backdrop we protected our operating leverage. Over the last three years, we have demonstrated a consistent track record of disciplined cost management. Our cost management allows us to flex our cost base intra quarter if needed during unsupported markets and frankly after Q4 we expected that we would face an unsupported environment in Q1 '19 and planned for tough quarter. So as you can see here, we were able to reduce operating expenses by 6% year-on-year delivering our tenth consecutive quarter of year-on-year positive operating leverage at group level. Next slide please. The next important point is capital, our capital position has remained stable with CET1 ratio at 12.6%. In Q1 '19 we knew that we needed to absorb - in Q1 insulin about 0.3% of methodology changes and we further invested about CHF15 billion of additional RWA in our wealth management franchise with a net impact of 0.1% as you see here, taking our CET1 at the time below our previous guidance of 12.5%. During the quarter we took a number of actions to continue to optimize capital usage and finally our organic capital generation in the quarter was significantly stronger than we expected when we last updated you on February 14th adding 0.3% to our CET1 ratio and taking it back to 12.6%. It is worth mentioning on the right here that this was achieved while launching our share buyback program we've CHF261 million repurchased in the first quarter. We take some comfort from the fact that during what was a very challenging quarter we were able to absorb significant under-inflation, two, to continue to invest in supporting our clients and three, to buy back 261 million of shares whilst keeping our CET1 capital and leverage ratios flat. Next slide please. So having concluded our restructuring and started to create capital organically, which was always a key objective for us, what we need to do going forward is to grow our tangible book value per share. Since the same time last year, which still was impacted by a heavy drag from SRU, elevated funding costs and restructuring charges, we have been able to increase tangible book value by more than CHF1 demonstrating we believe the earnings potential of the bank. So at this stage of my presentation having talked to you about our first quarter more or less at group level, with our net income, ROT capital and tangible value per share, I would like to shift gears now and address the performance of some of our businesses. And I will talk more specifically about wealth management first and then global market. David will give you later more detail division by division and in an exhaustive manner. So let's start with wealth management, our wealth management revenues and we strictly here are sub either in APAC private bank have remained resilient during the recent market dislocation with 3% decrease and based at a component of that and particularly for net interest income and recurring commission and fees and talking about our AUM on this slide. If you remember at our Investor Day in December, we said that our AUM had proven to be sticky in the past during episodes of market dislocation and that we did not and would not suffer major client outflows. As you can see here, our wealth management AUM has been resilient during the market dislocation in the fourth quarter of 2018 and we ended the first quarter at a record high. As recurring fees and commission revenues tend to follow AUM with more or less a one month time lag. So we put a square here around 11 months for beating in the first quarter. We expect - but overall Q1 revenues were impacted by this. Looking forward, our record AUM level will be supportive of our second quarter fees and commissions reversing this effect. The other important consideration in this context is net new assets. So we are on this slide. We continue to attract during the first quarter significant net assets with about CHF10 billion, CHF9.6 billion exactly of net inflows. That's a 5% annualized growth rate, which is well, well within the targets we have in terms of growth and comparing these to 4Q it's a very significant bounce back from a relatively flat level to now very strongly positive level. And I'd like to single out Asia here. We're in a difficult market. We attracted CHF5 billion of new assets. That's a 10% growth rate and hit our highest AUM ever at CHF219 billion. In Switzerland also, we had inflows of more than CHF3 billion representing our highest quarterly result to date, a commendable performance. In IWM and in this quarter it was lower and it was impacted by the timing of several large transactions, which were delayed and are now expected in Q2. Additionally, we were able to attract CHF28 billion of net new assets in CNIC which is our Swiss corporate and institutional business, which included a large pension fund mandate of about CHF23 billion. So that on this page that is worth noting. So after AUM and NNA kind of recurring revenues let's look now at transaction revenues through the second component of our wealth mentioned revenues. As we have shown on Slide 10 in a quarter of low client activity, we were able to increase transaction revenues overall by 3%. That's largely thanks to the continued progress of ITS producing a flow of landmark transactions of which we give you some examples on this page. And fundamentally as you remember, we did a special workshop at the - at the Investor Day on IT'S to give you a sense of the opportunity that this represents. And we're really pleased that they continued to deliver after an 11% increase in '18 over '17 we now had a 24% increase in revenue in this environment in '19 over '18 and it's very interesting experience for us. It's a proof of concept. It's a joint venture between global market and the wealth management divisions and as you know we are now extending this concept to Asia. So if we look at ITS in more detail and we indexed the performance here as it matures within our organization what we see is a continuing and growing flow of transactions and a strengthening of our pipeline year-on-year. ITS is now making a material contribution to our top and bottom line and is increasingly a differentiator for our bank. We announced in early April the creation APAC trading solutions and it will replicate the success across Asia. ITS will be led by [indiscernible] one of our most experienced managers with deep knowledge of the Asian client base across both investment banking and wealth management and who's been working very closely with Mike Stewart who leads our equities business and come back to equities later. But that explains a lot of the numbers we've been able to publish this morning. So let me close on wealth management by looking at profits. What matters, we achieve a PTA of CHF124 billion, profitability year over year was broadly stable and we believe that's a reflection of the strength of our diversified global footprint. We are organized geographically but we are still able to enjoy the full benefits of that diversification, which protects our performance in tough times. Looking at the blocks here in Switzerland, we achieved a PTI of CHF550 whilst investing in the development of our core Swiss business and across the division we reached a new record AUM level of CHF607 billion. IWM at a particularly strong start to the year with record quarterly net revenues and pretax income since the division were established we will return on regulatory capital of 35% and for the first time above CHF500 million in profits and across APAC wealth management and connected we have seen a significant pickup in activity levels during the quarter and into 2Q also as revenues moved to more normalized levels. We continue to enjoy strong momentum in our financing businesses benefiting from our integrated approach. Let's move now to global market, second point I wanted to cover. This is a slide taken straight out of Investor Day in December. At the last Investor Day we presented a path to improving our returns in global market from a number of known actions. Lower funding, costs increased collaboration with wealth management for ITS and I just spoke about that. A reinvigorated equities platform and continued productivity improvement as across the rest of the bank. So we hoped that Q1 would provide further at that point on global markets ability to execute on this strategy plus restructuring. Next slide. In a challenging quarter with both primary and secondary markets activity down materially year on year JM has delivered solid performance and also equities because there we're starting to see the benefits of our investments and we delivered on a number of our strategic priorities. We are better positioned now in cash equities. We have growing market share, higher content revenues we hoped and continued progress in rejuvenating our AES platform. In Prime always very important. We are increasing our return on assets by optimizing capital deployment and plan balances and it's doing more with less the business was able to generate more revenue with a 25% less leverage and the revenue per leverage - per unit of leverage is up 31% year on year. So that really changes the economics of a business. And in equity derivatives which is a bright spot we had our best quarter in the past five years in the business we declared core to our strategy and in which we have been investing. So we continue to pick up share with our key clients and have strong momentum across all equity products. Much remains to be done across GM and Mike Stewart head of equities reminds me regularly not to be too bullish. So I won't be. But we are pleased with the progress made by Brian and his team and to see early evidence both restructuring of an improvement in returns. So we're often asked to reconstruct our global investment banking performance and we said for the next slide, which basically shows you taking up advisory and underwriting, the actual sales and trading performance, which I think also a lot of our peers publish and which should make comparisons easier for you. So against the backdrop of a particularly slow primary activity in 1Q, we have seen a weak quarter in the underwriting revenues across all our businesses. You can see it here minus 10% and minus 36%, minus 19%. Sorry minus 54%, minus 46%, minus 24%. Very, very marked decrease but our global equities and fixed income sales and trading businesses have delivered we believe a good performance in the first quarter. Our equities revenues in total in the blue at the bottom were down 5% but at the global market level they were up 4% for our U.S. and European businesses a strong result in a tough quarter. In fixed income we have been able to match our strong comparable of one 1Q '18 and nearly doubled our revenues sequentially. So from 4Q '18 to 1Q '19 with a 2% decrease overall and a 2% decrease in global markets and a 2% increase in APAC which is a much smaller business. So looking at the investment banking businesses in total we have seen a revenue decline of 17%. So after this presentation of a quarter, let us take a view to just talk about the outlook for Q2, as you can see here we have a solid pipeline of large announced transactions across advisory and underwriting and we've just illustrative M&A which was a weak spot in Q1 but coming back with Chevron, we've World Pay, in ECM also we have the lift, which is our largest transactions in Europe this quarter and left things going back. So we believe that this pipeline over time because you have to take into account the time between these announcements and when we actually get the fees, we'll support primary activity in the coming quarters. So to next slide please, to give you a something that we don't usually disclose but it's a month by month we've '18 and '19, I think it's quite interesting because you see that with the first quarter was one of three very distinct months, a challenging January things looked really, really challenging. We've a limited recovery in February followed by a very strong March which is the second house revenue month for us in the past 39 months. Now the positive momentum, which we observed towards the end of the first quarter, has broadly continued into April. However it is still too early in the quarter to draw any definitive conclusions. While geopolitical and macroeconomic concerns remain, we believe that their impact has begun to recede with client confidence returning progressively and our pipeline of transactions across both wealth management and investment banking is strong and end markets are becoming more constructive as the year progresses. So I'll summarize we believe we've delivered a solid performance in a challenging market environment. We had a resilient performance in wealth management. We have continued to execute our plan with discipline in global markets. We have been growing tangible book value per share and executing on our share buyback of at least CHF1 in 2019. So to summarize all this I would say but we are cautiously optimistic on the second quarter of '19. And with that, I will hand over to David.
David Mathers:

Thank you, Tidjane and good morning, everybody. I'd now like to take you through the financial results in some more detail please. As we've highlighted previously, you'll note that for the first quarter and indeed going forward, we will focus on our reported numbers after the completion of our three year restructuring program at the end of last year. Now although the adjusted results are no longer our primary focus, we will continue to provide these numbers in the documents in order to maximize transparency and to give continuity for your models. In the appendix, we've also continued to provide a full reconciliation of the reported and the adjusted results along group and divisional lines. Let's turn to Slide 25. Now for the first quarter Credit Suisse had net revenues of CHF5.39 billion down by 4% on the same quarter of last year. The result as Tidjane has already summarized of challenging market conditions in each of the major economies that we operate in during the period. I would note this is an increase of 12% against the fourth quarter of 2018 when net revenues stood at CHF4.8 billion. The decline in net revenues year on year was most marked in terms of primary issuance revenues but marketing conditions also adversely impacted trading revenues and to a degree transactional revenues in our wealth management businesses. This is reflected in the slide where you can see the impact on our different business lines. Our IBCM division saw revenues fall by 36% year on year on a US dollar basis, as activity fell markedly across the street in the quarter. In global markets and APAC markets, we saw revenues fall by 11% percent on a US dollar basis, which we believed to be significantly better than what we have seen across the industry in the first quarter, particularly in terms of sales and trading activity. Finally as you'd expect, the impact on wealth margin related revenue is much less marked down by 4% year on year with the decline coming in part from transaction revenues in APAC, WMC and to a lesser extent in the Swiss Universal Bank. I would note that our credit quality remains high. We have credit provisions comparatively low at CHF81 million. Now as we said before, most recently at our fourth quarter earnings announcement, we remain committed to delivering year on year productivity increases across our business with the pace reinvestment spend depending on the market and the economic environment. Total operating expense in the first quarter were reduced by 6% compared to the same quarter a year ago. Three percentage points from the end of the restructuring program and another three from the overall decline in other operating expenses. Consequently, we generate a pre-tax income of CHF1.06 billion in the first quarter an increase of 1% compared to the first quarter of 2018. Now when we spoke last, I said I'd give you some more details on our tax position. And I guided that I expect the tax charge to be reduced to around 30% in 2019. You can see that the effective tax rate for the first quarter was marginally less than that at 29%. I would just like to take this opportunity to reaffirm our guidance for 30% for the year as a whole. This includes an estimate of 2% for the marginal impact of the beat legislation in the United States. But I would just caution that we still only expect to receive final guidance on this measure at some point between June and September this year. Now with the benefit this reduction in the tax rate net income attributable to shareholders stood at CHF749 million in the first quarter up by 8% year on year, which equated to return on tangible equity of 7.8% in the first quarter on which I'll give us some more details shortly. Let's turn to Slide 26 now if you look at capital as CET1 ratio for the first quarter was 12.6% the same is at the end of 2018 despite repurchasing CHF261 million worth of shares through our buyback program in the first quarter as well as accruing a dividend in line with the policy that we outlined last year. I would just note that taking the value of the share buyback and the dividend accrued in the first quarter, we will have paid out 59% of net income in the quarter. Now just in terms of capital as Tidjane has touched on already, I would reiterate the guidance that we gave earlier this year. Our attention that - it's our intention to operate at around the 12.5% level plus or minus 25 basis points and that we continue to expect to end 2019 above 12.5%. I would just remind you at this point that we deliver share awards to our employees in the second quarter and that we would expect this to reduce our CET1 ratio by itself by approximately 11 basis points in the course of this quarter. Now if we turn to the leverage ratio at the end of the quarter as CET1 leverage ratio was stable at 4.1% well in excess of the Swiss 2020 requirement of 3.5% whilst our Tier 1 leverage ratio also remained stable at 5.2% above our target level which is to be greater than 5.0%. Looking at risk weighted assets, overall we saw a CHF5 billion increase in risk weighted assets from CHF285 billion to CHF290 billion since the end of the fourth quarter of 2018. That increase included CHF2.1 billion of mandated model and parameter changes by FEMA as well as CHF3.2 billion relating to the change in US GAAP lease accounting. But I would note that that impact is partly offset in the ratio by the related increase in CET1 from the capitalization there's leases of CHF178 million. So if you calculate the numbers, that's a net impact from leasing of about CHF1.8 billion. Now our leverage exposure at the end of the quarter stood at CHF902 billion up from CHF881 billion at the end of the fourth quarter which is a reflection of the usual seasonal improvement in capital activity - in client activity. Let's turn to cost please on Slide 27. As you can see at the last three years, we've been consistently successful through our restructuring program in bringing down expenses sharply in the first quarter of 2016, we had total operating expenses of CHF5 billion including CHF300 million of adjustable items such as restructuring costs. Last year in the first quarter of 2018 we had CHF4.5 in expenses with CHF200 million of such adjustments. Now we said at the Investor Day last December that notwithstanding the completion of our restructuring program, we remain very focused on delivering consistent productivity savings across the bank and reinvesting that surplus on a measured basis depending on our assessment of economic and market conditions. As you can see in the first quarter, which was marked by a much more challenging environment, we reduced our operating expenses on adjusted basis by 3% from a year ago from CHF4.3 billion to CHF4.2 billion and our expenses also benefited from the end of the restructuring program which is worth an additional three percentage point reduction, which equates to an overall decrease of 6% compared to the first quarter of 2018. Let's turn to Slide 28 please, now as I'm sure you recall from the Investor Day, we gave a detailed analysis of how we expected the various restructuring measures that we'd taken to increase our return on tangible equity towards our target level of 10% to 11%. I thought it'd be useful to update that analysis today and to show you how we performed in the first quarter of this year. If we start on the left our ROT in the first quarter of 2018 was 7.6%. Now if we move from left to right, we said at the Investor Day, we expected savings from the SIU now the AIU runoff, which would be worth a gain of about 1.0% for the full year. As you can see from the appendix the AIU which now sits within the corporate center had a pre-tax loss of CHF104 million U.S. dollars in the first quarter, putting us well on track for our guidance of an adjusted drag on profits of approximately CHF500 million U.S. dollars for the full year. In the first quarter I'm pleased to say that the reduction in the pre-tax loss contributed an improvement of 1.1% to our ROTE. Now if you move further right, we said that we expect to projecting - projected savings from the restructuring of the 81 buffer and the redemption of certain other instruments to be worth a benefit approximately 1% for our ROTE. In the first quarter these savings actually gave us a benefit to ROTE approximately 1.3%. Moving on, the end of the restructuring program has given us a further boost of 0.7% to the ROTE. And finally the reduction in the effective tax rate gives us a benefit 0.5% but offsetting that we have other moves of 0.3% reflecting corporate center volatility from credit spreads which as you know narrowed notably in the first quarter. And of course the increased shareholder equity base. That brings us to ROTE of 10.9% for the first quarter on the basis of flat business revenues in line with the guidance that we gave last December to achieve 10% to 11% on flat revenues. However, it was as we've said a significantly more difficult quarter for revenues with a particular shortfall in primary markets but also to a lesser extent in client transactional revenues and in trading revenue. Net productivity and cost saving measures that we implemented during the quarter that reduced ROTE by 3.1% to 7.8% for the first quarter. Now I think overall we're very pleased to be continuing to deliver on all the key strategic measures that we actually outlined just last year. And given the market conditions in this quarter we believe that delivering a return on tangible equity of 7.8% is a credible performance. Let me turn now to the first of our divisions please on Slide 29. The Swiss Universal Bank delivered a pretax income of CHF550 million in the first quarter slightly down year on year on net revenues of CHF1.38 billion down by 4%. In terms of business revenues, that reflects a reduction in recurring and transaction fees predominately due to the fall in markets that we saw in late 2013 whilst net interest income was more stable. Operating expenses were reduced by 4% to CHF800 million. If we turn to net new assets, we saw very strong net new assets in both our private clients and our corporate and institutional clients businesses. In private clients we had NNA of CHF3.3 billion which we believe is the strongest quarter for SUV in this metric since we began the restructuring of our bank in 2015. Combined with the rebound in markets, that's led to assets under management growing to a record CHF607 billion reversing the falls that we saw at the end of last year. I was also pleased to see very substantial pension fund inflows in our corporate and institutional client business, which contributed to CHF27.6 billion of net new assets in the quarter, lifting CNIC assets under management to CHF396 billion an increase of 12% on the first quarter of 2018. With that let me turn to Slide 30 to look at IWM. Now notwithstanding the market conditions, our international wealth management division started the year extremely well with record quarterly revenues of CHF1.4 billion up 1% year on year leading to an 8% increase year on year in pre-tax income of CHF523 million. If we look at the components of these revenues, transaction based revenues in private banking rose by 14% percent year on year to CHF354 million in the quarter. As I discuss in more detail when I come to global markets, this was underpinned by very strong levels of collaborative activity and in particular the continued momentum of the ITS franchise in the first quarter. IWM's profitability also benefited from further diligence on costs with total operating expenses reducing by 4%. If we turn to net new assets, in private banking inflows started the year slightly lower with a total of CHF1.3 billion of NNA. This reflected growth in the high net worth client segment and recovery of flows in Europe but reduced inflows in the ultra-high net worth clients segment in emerging markets. Notwithstanding the slightly slower start to the year in private banking NNA, we do expect to see a pickup in inflows in the second quarter of 2019 and we expect to achieve 4% NNA growth for 2019 as a whole similar to the level that we achieved in 2018. In asset management we saw inflows of CHF2 billion across most of our portfolio offset by net outflows of CHF2.5 billion in our emerging market joint ventures to leave NNA at minus CHF0.5 billion for the quarter. Let's turn to APAC please, market conditions were particularly challenging in Asia Pacific in the first quarter, reflecting the cumulative impact of the market and economic slowdown last year. Net revenues in our APAC division fell by 14% to CHF854 million in the first three months of the year. Pre-tax income stood at CHF183 million the first quarter, down by 22% compared to the first quarter of 2018. If we look first at wealth management and connected, we saw a continued strong performance in financing offset by weaker levels of primary activity and a significantly lower level of transactions. Overall revenues in private banking fell by 13% compared to the first quarter of 2018 whilst advisory, underwriting and financing revenue in total were 20% lower. I would note that the weakness in primary activity that we saw elsewhere also applied to deal flow in the Asia-Pacific region. Overall we made a pre-tax profit of CHF170 million in WMC compared to CHF205 million in the same quarter a year ago. If we turn to the Markets business, I'm pleased to say that we returned this business to overall profitability in the first quarter after the loss that we suffered in the final quarter of 2018. This was driven by a significant improvement in its credit and equities franchise this quarter on quarter. On a year on year basis, the credit franchise had a strong quarter but this was offset by a weakness in equity trading revenues. Combined with the cumulative benefit of the cost measures that we undertook, during the course of 2018 we reduced total operating expenses year on year by 12% resulting in a pre-tax profit for the subdivision of US13 million. Just briefly on net new assets, I am pleased to say that we saw NNA of CHF5 billion for the first quarter which took as Tidjane remarked already, assets under management to a total of CHF219 billion in Asia Pacific. Let's turn now to Slide 32 and IBCM, our IBCM business has delivered a very resilient performance over a number of years. However, as we already outlined the market conditions that we saw in the first quarter were extreme, adversely affecting revenues in all the major economies in which IBCM operates. If we look at deal logic data, this downturn was most marked in equity capital markets, which fell by 47% in the first quarter compared to the first quarter of 2018. As a result of these conditions IBCM's net revenues was down by 36% to $357 million, notwithstanding 11% fall in total operating expenses and a 6% fall in adjusted operating expenses that still resulted in a $94 million loss. Now as Tidjane has already summarized, this weakness was most evident in January and we have seen a consistent improvement in revenues in capital markets activity in each successive month of the year so far. If we look at the position at the end of the first quarter, our pipeline of transactions for 2019 both advisory and ECM is similar to that of 2018. Now whilst this does support a continued improvement in the performance this business, I would caution this is likely to be very much weighted towards the second half of the year. We expect conditions in Europe to remain significantly weaker than the US given current macroeconomic trends and the continued uncertainty over Brexit. Finally, let me turn to global markets please on Slide 33. Clearly this was also a difficult environment for our markets businesses to be operating in. And for that reason we're very pleased to be reporting a pre-tax income of $283 million or a return on regulatory capital of 9% for global markets in the first quarter of 2019. We were pleased with the performance of all our sales and trading businesses in the quarter. Our equities franchise for which as you know we have made a number of significant hires and investments over the past few years achieved net revenues only 3% lower than a year ago, which reflects both the strength of the ITS franchise and equity derivatives and the strength of our overall equity trading business, which offset the flows the weakness in primary flows and underwriting in the quarter. Fixed income revenues fell by 13% to $1.01 during the quarter, again reflecting resilience in our trading businesses offset by weakness in primary. I think these performances very much demonstrate both the ability of our fixed income business deliver good returns in difficult market conditions and the momentum that we're seeing in our equities franchise. It's also evident that GM's performance has been bolstered by ITS which sees GM working in tandem with IWM and with SUB and I think ITS is demonstrated once again the potential that results from collaboration a better integration of flow and improved service offering of better products from our clients from the shared business. I'd also point to the continued and disciplined approach that GM has taken to resource allocation with total operating expenses reduced by 11% year on year and to the conservative approach on the deployment of both RWA and leverage, which has helped to maintain the return on regular capital in what otherwise could have been a difficult quarter. On that note, I'd like to hand back to Tidjane.
Tidjane Thiam:

Thank you, David. Before we move to the question and answer session I'd just like to wrap up by saying but please when you look at the performance this quarter keep in mind how unusual this quarter was. We could have frankly hoped for better circumstances and market environment for our first quarter plus restructuring. But that said, we believe we've delivered a solid performance in that challenging market environment but the performance in wealth management in spite of the pressures and transaction income, net interest income is resilient and pleasingly we start to see the result of the restructuring that global markets has undergone in the last four years. We've now a growing tangible book value per share something we have not seen in a long time and the execution of our share and buyback of at least a CHF1 billion in 2019. And I will reiterate our mindset regarding to you which is cautiously optimistic. So we've that will move to the Q&A please.
Operator:

Your first question comes from the line of Andrew Simpson of Bank of America. Please go ahead.
Andrew Simpson:

Thank you very much. Good morning, guys. Two questions from me please. Firstly on capital, clearly that was better than we had or perhaps feared. Slide 9 of your presentation shows that you only had a 10 basis point headwind from the investments you made into wealth management and IBCM says on the slide there. Were those growth opportunities less than what you expected and are there other growth [Technical Difficulty].
Tidjane Thiam:

…what we did is that we also got some capital out in particular from memory in RWA from GM and we'll get David here in that quarter. So it's this capital allocation process we run intra quarter. So what you think is the net, not the gross. The gross investment was bigger than that. So yes we did mobilize capital to support clients and enter into transactions but we worked very hard to do that efficiently - capital efficiently. That's more of the answer. Okay.
David Mathers:

And one small point there. As you may recall Andy that when he spoke on February 14th we said we'd actually invested CHF2 billion of extra RWA into APAC at that point. So you have to think about it not just as one quarter from what's he done previously.
Tidjane Thiam:

And a final comment which we've heard make maybe too many times is that our CET1 is clean. By that I mean there is much less uncertainty on it because we spent four years dealing with legacy. So we have pushed legacy down the road with upfront. So that is also why we are more comfortable, we don't need to hold on to CET1 in the expectation of some big event coming. We don't have that on the horizon. That's a very important factor in how we think about this. Yeah group revenues. How is it going on Slide 22. Yeah. It's an innovation. I'm glad you find it useful because we discussed it quite a bit. No I think it is interesting sense of what we see when we're sitting here and we see our P&L data and what's going on. March very strong. If we run through the divisions, APAC certainly sentiment is better Asia than it was. It's been on an improving trend. It has not hit the level of Q2 '18 which was a very, very strong quarter. And looking at how many it but I think Q2 was above Q1 in Asia last year which is actually unusual. So we haven't reached a level of exuberance of Q2 '18, but it's improving. I can see and wealth management revenue. If you think about the run rate we need to hit our numbers January, February we were 20% below that and now we're back to veteran rates give and take. But it's still early to tell. April was a holiday Easter that does have an impact on the picture in April. So we've had fewer days in April than we would normally have at this point in the quarter. Switzerland, steady as you steady as you go. So it was slightly up. So yeah Switzerland is good. IWM I understand is a very strong pipeline and some of NNA miss that you see in Q1 will be in Q2. These are transactions that we know that we talk about that move from one quarter to another in the final days of the quarter. We do I have? Global market. Global market is better than in January February I would say below Q2 last year but solid, but again that's also disturbed by the number of trading days and the holidays Easter. So also too early to tell and IBCM would be the same the pipeline is strong, it is growing. It is improving but you know, so I'll summarize I would say April is like March more or less on balance David?
David Mathers:

No I couldn't agree with you Tidjane. I think broadly speaking, I think if you're looking at differentials between the businesses I think actually that was a pretty fair picture on that slide from what we saw across all the businesses March was consistently better. And as Tidjane said, I think we've seen that continuation through April. But you know it's the first couple of weeks to talk about.
Andrew Simpson:

Sure, very much appreciate it. Thank you.
Operator:

Thank you. Our next question comes from the line of Al Alevizakos
Al Alevizakos:

Hi good morning from my side. A couple of questions. First one is on total operating expenses. I can see the run rate right now is at CHF16.8 billion for the year. Clearly there's going to be some seasonality with Q1 being higher than certain other quarters. But I would like to know how do you feel about the operating expenses now, you've got a better view about the investment spending given that Q1 revenues were a bit weaker. And then secondly, I really liked the additional disclosure on prime because prime has been a division that hasn't been performing very well for you. Can you tell me about the prime balances instead of the profitability? Are they going up? So basically are you investing into getting new clients in? Thank you.
Tidjane Thiam:

Thank you, Al. Good morning. David do want to take the expenses?
David Mathers:

I think if you go back to the Investor Day last December, we gave an indicative range I think of between 16.4 and 16.9 And what we said is that post the restructuring phase we intended to continue to live 2%, 3% productivity savings every year. And I think we've obviously continued to do that in the first quarter. As we said we've obviously measured the amount of reinvestment we want to make to match what we see as the market environment that was clearly subdued in the first quarter. And as a consequence if you look at the REIT walk you can see that that dropped through to about a 2% drop in expenses ex restructuring and everything else in the first quarter. So I think I mean I think look. So I think it's April, so I'm not sure we're going to give you full year guidance for expenses now. I don't think I'd say that much different from what we said back in December. If you look at that range of 16.4 to 16.9 after clearly a very weak market and economic start to the year, I would expect our expenses to be towards the bottom end of that range quite clearly, but I don't think I'd go beyond that in terms of our expense guidance. I think I'll leave it there at this point.
Tidjane Thiam:

I think that's correct. Look we manage expenses depending on revenue environment and unfortunately, we don't know the revenue environment ahead of time. What we've always showed we've been cautious and we can as the year goes manage cost down, but we don't want to pre-commit to some number not knowing what the circumstances will be and if we need to invest or not. Well you can count on is that we'll be responsible. We're laser focused on cost and costs will be appropriate to protect our bottom line. That's really that's really what we run. But we after four years of restructuring, we would like not to have a number out there but we have to hit that at any cost.
David Mathers:

Yeah and I think we're just focused there on the adjusted operating expenses. I think what you can also see is the absence of the drag on our returns to shareholders from the restructuring program. So you've seen that further start sharp fall in our reported operating expenses and then obviously the AIU is I think we're very happy to say a small fraction of the SIU. But you've obviously seen further expense reductions there as well. It's in the MD&A disclosure you can see the loss in the AIU down to CHF103 million for the first quarter.
Tidjane Thiam:

But we see is laser focused on cost that's something we have now in our DNA. I was adamant about restructuring the absolute Q1 '19 should be below Q1 '18 and that's a cost to prove that there is no relaxation of discipline over pressure. And I think we've built some credibility there. We'll manage cost as appropriate.
Al Alevizakos:

The second question was on Prime.
Tidjane Thiam:

It's been really at the heart of this whole thing on German equities because the return on capital we were a bit harsh, from the start we said we'll take worst off for a return on capital. The return on RWA has always been quite decent and we could have put that forward, but by saying the worst off we punish Prime because the return on leverage, which Prime consumes as we know was always depressed. So attacking Prime has always been a priority, a number of things happened in the last 12, 18 months. We actually really, really, really and I know Mike and his team went to every client to discuss pricing and that was an execution and a discipline issue and we realigned pricing which helped the numbers. We consolidated our collateral merger was in six centers and we reduced the number of centers for our collateral management and that was a huge efficiency. So all in all we were able to reduce the balance sheet by about 25% and to increase our revenue actually Prime revenue are marginally up. So return on asset is 30 basis points better versus 1Q '18. So this is really a case of good execution and it's a across equities and if you cash, it's really [indiscernible] and his team we brought in [indiscernible] and what he's been doing to modernize investment technology and upgrade our AS capability but equities had a revenue problem, it's just simple, a revenue problem which we we're really tackling, by increasing revenue in Prime we've less balance sheet. By increasing revenue in AS and then really the kind of bright spot is really the equity derivatives where we have been attracting top talent. I think I've mentioned him on the previous call embarrassing him every time, but Ross Mtangi, he's a name in the market. revenues in some of those areas has tripled from one year to another. And the ITS as we said on the pipeline and transactions that are often our reduced link has been very good. And don't forget in Asia we took two in equity derivatives. We took two. So in all the frustration sometimes that are about our position. We are a top five equity player in Asia. We're top two in equity derivatives in Asia. We believe we gain share in Q1. We have to be cautious because from what we first want to announce but we believe on the back of these numbers that we've gained share and we think that we're moving up in the ranks in equities. And I don't need to tell you that's an activity where profitability and rank are quite correlated so I believe higher we'll be even more profitable we will be. And the final comment and the wealth management comment is that really the equities capability is strategic as economies get wealthier they their equity will increase it was entrepreneurs that we always talk about. We've made a fortune in overhaul to IPO of companies. So the ability to IPO and the ability to engage in secondary trading and the ability to structure derivatives are highly valued by our clients. And that's why we've invested so much resource in this turnaround behind Mike. Mike Stuart and his team and they've started to deliver. But again as Mike tells me don't be too bullish. So I won't be too bullish, but we are in a better place than before
Operator:

Thank you. Our next question comes from the line of Benjamin Goy of Deutsche Bank. Please go ahead.
Benjamin Goy:

Yes hi good morning. Two questions please from my side. So in Q1 you are well on track on your at least 1 billion share buyback. Just wondering on the parameters to better judge the at least 1 billion. So is it being close or above 12.5% or is it a year-on-year progression into net profit you are showing throughout the year. And then secondly, your comments around wealth management and the recurring fees are quite reassuring. Just wondering on net interest income whether we should also expect a recovery here given it was a bit weaker maybe in Q1. Thank you.
Tidjane Thiam:

No absolutely. Two important points. So David you want to take them?
David Mathers:

Thank you very much. I think on the issue of the share buyback, I mean we obviously set out two parameters; one that we intended to distribute 50% at least of our net income to our shareholders in respect to 2019 and two that we felt that would support a share buyback of at least CHF1 billion up to CHF1.5 billion. I think in the first quarter, we had net income of CHF749 million. We accrued a dividend in line with the plus 5% policy that we summarized at the Investor Day last December and we bought back 261 million of shares at an average price of CHF12.267 per share. So I think that's very much in track with what we said, actually works out to about 59% of net income for the first quarter. I think we understand it's a part of a cash plan to the bank. We can actually return some of the surplus capital to our shareholders and B, I think obviously a lot of support from our shareholders for us repurchasing shares at a discount to tangible book which just would remind you increased to 15.47 at the end of the first quarter. So we're going to continue to execute against that. I mean there's so much else I can say. I think we've obviously exceeded an annualized rate of CHF1 billion in the first quarter in what was a seasonally difficult quarter. So I think we are very much on track with what we said before.
Tidjane Thiam:

And do you want to talk about NII?
David Mathers:

Yeah. So I think net interest income, I think you have to think about each of our three wealth management businesses separately. If we start first of all here in Switzerland and the Swiss Universal Bank, if we look at the CNIC business, you can see that our NII was very resilient. And we have been very disciplined at pushing through the impact of negative interest rates here in Switzerland out to our corporate institutional and pension fund customers. If you look on the private client side, then we've continued to shield our private banking and our retail customers here in Switzerland from the SNBs 75 basis points negative interest rates. So I think unsurprisingly you see a slightly weaker trend in NII for the SUB compared to the CNIC side. If we look at the other regions then in IWM, I think it has the most positive trends in terms of net interest income because of the dollar balances. And even though the dollar curve has actually flattened so far this year, it's clearly ahead of where it was a year ago. I think that that's clear. But one fact I just discloses is we had a loan break fee in the first quarter IWM NII in the first quarter of 2018. So that's why the NII and IWM looks slightly down. Ex that it would be flat, which I think is roughly what you'd expect in this particular environment.
Tidjane Thiam:

You can give a number. It was CHF17 million in '18. It's a one off. Correct.
David Mathers:

So that explains I think the delta for IWM. I think for Asia Pacific another trend and definitely obviously I think we remarked in the course of our quarters last year that we saw a sustained deleveraging by a number of our clients in Asia Pacific to reflect their view of the economic environment at that point. And that did reduce the net interest income we actually receive from loans. You'll also note in the MD&A we actually also refer to this as well. There was some bundled service offerings we did as well in which we offered slightly lower spreads on loans, but we've higher recurring fees, which I think makes a lot of sense in terms of the pattern of our business. So those were I think three very different trends for and NII. I think in terms of forward-looking statements I think one would expect to be stable. Clearly there was a degree of reliance on the economic environment. We have begun to see some re-leveraging in the first quarter. So that will eventually boost NII as well. Including in terms of the curve I think we've given guidance before on what we'd expect the benefit to NII being from the interest rate curve. Just to update that, it's between CHF100 million and CHF150 million for 2020 compared to 2019. It's pretty consistent to what we said before. And there's some swings around about in terms of that including the Swiss curve has actually gone lower because of the move down within ECB as has the U.S. But on balance it's about CHF 100 million to CHF 150 million benefit across the bank.
Tidjane Thiam:

So, I think absolutely correct. And if I may just add one thing also looking forward. There are also actions we can take and I'm thinking about sub here with Swiss Bank. Because in TNIC there was - when you look at loan and deposit pricing and that helped and NII there helped. And there are things we can look at also on the private product side to see what we can do to improve the margins in the NII. And we're looking at that.
Benjamin Goy:

Okay. Thank you. Thank you.
Operator:

Thank you. Our next question comes from the line of Jeremy Sigee of Exane. Please go ahead.
Jeremy Sigee:

Good morning. Thank you. A couple of follow on please. One was on IBCM with the weaker revenues that I think reflected the environment, the costs didn't flexed very much. And I just wondered if that's the nature of the business model or if it's sort of conservative approach to entry year accrual? Just if you could talk about the cost base in IBCM, that would be helpful. And then second question really was a follow up on the RWA point. Do we sort of now take that the risk is just being below 12.5% entry year is reduced after the better revenue environment that's come through and having got through 1Q without that materializing? Or other factors that could still cause that to come through the remainder of the year between now and year-end?
Tidjane Thiam:

Okay, thank you, Jeremy, again, good morning, David.
David Mathers:

Yeah, I mean, I think if we look at the IBCM business, I mean we did reduced the expenses by 11% in the first quarter of 2019 compared to first quarter of 2018, which I think is a fairly significant reduction expense. Total, yeah.
Tidjane Thiam:

…it's people business…
David Mathers:

It is…
Tidjane Thiam:

…total means those service reduction of the …
David Mathers:

Exactly, so there was a pretty sustained activity, and that broke down to 11% in total, 6% in adjusted. So, it was actually one of the greater increase - decreases we could do. And I think - I think that was a pretty disciplined approach to expenses whilst as protecting the franchise. And I just would step back a bit. I mean this is actually the only - the second quarter that IBCM has actually made a loss since we established IBCM as a division back in 2015. And the average return on cap, I did look this one up, for IBCM over that period was actually 13.6% post-tax, including this loss and the previous one. So I think that does indicate what a very good track record that business has had and how well we've actually performed. I think the conditions in the first quarter were extreme. I didn't think we really - would have anticipated we'd have seen such a slowdown in all three of the major markets in which we operate for different reasons at the same time.
Jeremy Sigee:

And the RWA…
David Mathers:

I think just to reiterate what Tidjane said already, I think - firstly, one small point of fact which I did mention which is that we do deliver our share rewards to employees in the second quarter that will cost us about 11 basis points in the CET1 ratio all by itself. So, I mean with 4.60. So, that's going to take it 12.50. But I think perhaps more fundamentally, the reason that we said we wanted to operate at 12.5% plus or minus 25 basis points was because we wanted the flexibility to respond to opportunities and not be continuously trapped against the 12.5% floor. So, I'm not going to give you specific guidance. It's going to be 12.5% or what exact number. I think the point is we will look to take advantage of those opportunities as they come up during the course of the year. Trading conditions have generally improved month-to-month during the first quarter and there is that 11-basis-point thing to actually look for as well. And I think it's also true that the return of the investment of marginal RWA is never fully realized just in the immediate quarters invested. It tends to come through over several quarters. As indeed we've seen in the financing revenues in APAC this first quarter and when you may recall we made the investment back in the fourth quarter of 2018. That is a really, really important point. But you can actually destroy shareholder value by sticking too much to a given CET1 number because that means you will pass up value creating opportunities in certain quarters just to hit the number and that cannot be in the long-term interest of the shareholders. And this is why we think that, again, we have a cleaned-up bank with a [indiscernible] closed with most of our legacy dealt with, our ability to move the CET1 should be stronger because there's nothing out there that really justifies keeping an artificially high CET1. So, that's the idea. We think $12.5 million is achievable for the year. I wouldn't say directly to your question whether that has decreased or increased. I think it's kind of an opportunistic rate we have. I mean, of course, we don't want to come to 12.5%. And as you've seen this quarter, if the conditions are such what we can exceed it, we will. But we won't be the rate, or, if you wish, the rate from time-to-time if necessary to deal below that without creating alarm in the market.
Tidjane Thiam:

I think - I mean, one point, now, this is slight off-question, so I hope you don't mind me just taking a moment in this, I think - obviously, I think one concern people have when we changed our guidance was does [indiscernible] capital generation. Well, let's just look at the first quarter. We ended the fourth quarter of 2018 with a CET1 ratio of 12.59%. We closed it at the end - we ended 2018 at 12.59%. We closed the first quarter at 12.60%. So, we actually marginally increased the CET1 ratio. In the course of that period, we actually executed a buyback of CHF 261 million, and we have accrued a dividend as well through that period which equates to a 59% payout. So, we've managed both to meet our share buyback obligations at different accruals and end up the period with a slightly higher level of capital ratio and I think as you can see with the franchises in better shape now than they were a year ago, frankly. So, I think - just to step back, I think capital generation is clearly strong, and I think all we're asking for is the ability to reinvest that marginally when we see the rate opportunities for helpful things.
Jeremy Sigee:

It's very helpful. Thank you.
Operator:

Thank you. Our next question comes from the line of Jernej Omahen of Goldman Sachs. Please go ahead.
Jernej Omahen:

Yeah. Good morning from our side as well. I have three questions, please. The first one relates to the slides on page 22 and 28. And I was just wondering, did at any point during the first quarter - so, say, January February or March, did at any point Credit Suisse exceed the 10% return on tangible equity? So, you're basically saying that the revenue momentum was very poor at the start of the quarter but then increased cumulatively towards the end. And I was just wondering whether the revenue level in February and March, for example, is sufficient for Credit Suisse to meet or exceed its targets. And then the other two questions, so I think it's really encouraging to see that there was no restructuring costs this quarter and no litigation costs. I was just wondering to what extent you are comfortable saying that we can expect to see this in the whole of 2019. And the final question is on equities. So, the U.S. peer group was down 20% year-on-year. You obviously did substantially better than this. To what extent do you put this down to a lower result in Q1 last year, i.e., to a lower base effect than your international peers. And if it's not that, if it is in your mind a generally more constructive performance of the business, when you look at what drove revenues in equities this quarter, where do you think the big differential is to your international peers? Thank you very much.
Tidjane Thiam:

Okay. Thank you, Jernej. Good morning. Thanks for your questions. I'm looking at the VTR. I think I'm tempted to - for your first question, I'm tempted to say March.
David Mathers:

I think March, I think the case here…
Tidjane Thiam:

We both agree. Yeah.
David Mathers:

We're not going to disclose our results months by months. But in March was definitely about 10%.
Tidjane Thiam:

So it's achievable. Our revenue level for March is already sufficient to meet your target here.
David Mathers:

Yeah. Absolutely. Absolutely.
Jernej Omahen:

Okay. Thank you.
David Mathers:

But it was a very good month. So I have to say as a caveat. But, yeah, at that level, we have a restructured bank. The level of cost we have [indiscernible] comfortably above that. Very comfortable. The second point restructuring, litigation cost. Look, we're pleased too. There is actually a settlement in our Q1 numbers.
Tidjane Thiam:

It got taken in the - there was a settlement relating to residential mortgage litigation, which was taken actually within the corporate center because also it relates to the former SRU activities. So that has seen the corporate center. And you can see it in the - that's right. You could see it in the adjusting to reported reconciliation for the cc in the appendix.
David Mathers:

…would have been 10 more…
Jernej Omahen:

How much was that?
Tidjane Thiam:

27. 27. Would have been a 1089. So kind of CHF 1,089 million reported. So there is - look, unfortunately we have a pipeline of legacy cases. We have dealt with big ones, RMB as you saw it go through. But there are still small ones coming. So I wish I could tell you there's no litigation coming. Litigation for us coming but I can't do that. What I can say as we expect it to be manageable within our earning power now and yeah. But restructuring, no restructuring, no [indiscernible] size charging inside. Okay. Yeah. On equities, yeah. You're asking what is it due to? Is it - I think it's fair to say there was a lower comp because 1Q 2018 for us was less good than for our American peers. The reason I hesitate is I don't know the performance of European peers. So for them it's not - their comparative was unnecessarily low. Okay. It was a bit like us. Let me rephrase. If you compare us to the Americans, they had a tougher comparative. If you compare us to the Europeans, we don't think they had a tougher comparative. So we need to see what other Europeans produced when the numbers come out. I mean in terms of what's driving revenue in Q1, it was really the kind of ATS equity derivative, but it links to a volatility levels and where markets are. So I would caution on that. But what I think is that we have a footprint that's broad enough between everything we do for our clients, that we should be able to see progress, continued process in equities. I think we've got 29 broker ratings this year and 23 on the 29 were up, that significant. If you attended the Equities Conference for the first time this year, two weeks ago, and I spoke to a lot of client. It was super well attended. There was a buzz around the room. What we get from clients is also more positive. So I think we're - I don't give a name, when I get a ranking stand by account and we've been moving up in a lot of places in terms of our clients look at us. So that's encouraging. But again, I'm always cautious. I don't want to say that we done - our job is done. There's still a lot to do, but we're in a better place.
Jernej Omahen:

Thank you very much.
Tidjane Thiam:

Yeah. I mean, I think - just a couple of one other point I'll make, which is - you talked about equities, but the other point remember is you talked about equities, but the other point, remember, is the actual fixed income revenues I think also brought very good comparison against the peers particularly on the sales and trading side. And in terms of comparables, you should remember that the first quarter 2018 was particularly strong in our securitized products business. So I think we had a tough comparable in our fixed income business for 1Q 2019 compared to 1Q 2018.
Jernej Omahen:

Thank you.
Tidjane Thiam:

Okay. Thank you very much.
Operator:

Thank you. Your next question comes from the line of Kian Abouhossein of JPMorgan. Please go ahead.
Kian Abouhossein:

Yes. Thanks for taking my questions. One question I have is on IBCM. You discussed the mark-to-market issue, and I'm just trying to understand, I assume this is related to hedges, but please clarify. And also, how we should think about going forward mark-to-market positive or negative based on credit spread tightening in that business, and the impact of that is it material or not? And then secondly, if I look at your slide towards the 10% plus ROE where you clearly make a point that the revenues were lower relative to last year. I'm looking at something like a 5% annualized revenue growth rate over the next nine months to get to 10% plus ROE. And you've discussed a little bit the cost guidance. And you don't actually have the cost guidance on any of your slides anymore. Just wondering how we should think about the 10%. Is this a hard target even with lower revenues because you - I think last time, you gave guidance, it's flat revenues, or should we assume that even this lower revenue environment you should be able to read the 10%. And if I may very quickly last one, lot of discussion about asset management restructuring consolidation, what's your view? Thanks.
Tidjane Thiam:

Okay. Good morning, Ken, and thank you for your questions. David, do you want to take the…
David Mathers:

IBCM?
Tidjane Thiam:

Yeah.
David Mathers:

Yeah. I think as you know, Ken, we saw a marked compression in CDS spreads in the first quarter of 2019. We run a corporate lending book. Part of that is actually accrual part of that. And can maybe even marked par. So, on the asset side, we obviously saw some gains as a consequence of that credit spread move. But on the CDS, they're full mark-to-market. So, that's why we saw the hedging loss in the first quarter. And if you look at the MD&A, you'll see this minus 28 in either basically which is essentially the bulk of that change. What does that mean therefore? I mean, I think you have exposure relative to credit spreads. So, I think credit spreads go wider then obviously we'd see some small gains. And if it went narrow, then you'd see some small losses. But I think we just wanted to break it out too to get parity to everybody about the about numbers.
Tidjane Thiam:

Just to add to that, I think currently short base but it's a dynamic approach. So, in terms of the ratio to portfolio long, it's had a fixed correlation to credit spreads. So, you can't really kind of one-to-one analysis or question there. RoTE 10%?
David Mathers:

Yeah. I think - I mean I think the question you're asking really is obviously the balance between revenue growth and cost sales. I mean I think what we wanted to show on page 28 was how our RoTE stock work actually was composed because we did get some quite clear guidance back in December of what we intend to deliver. And I think you can see whether it's the ARU run off, it's the funding cost, it's the reduction in restructuring expenses, it's the tax rate of that master reduction in cost overall. We've delivered or done slightly better than what we actually in this ready two at the Investor Day. Now, clearly what we had also at that point is that in a flat revenue scenario, we would be in the 10% to 11% range. And I think what page 28 shows that exactly what happened. We were 10.9% on a flat revenue scenario. Now I think sitting here in April, I'm not going to get drawn on expectations for full year revenues. I'd make a couple of points though which is firstly, as Tidjane's slide showed, each successive month of the quarter showed an improvement and we give them some views about how it is against. So I think we say and certainly seen improvement against that. I think the second point I'd make is it's unusual to see conditions like we saw in the first quarter. Because you saw obviously severe weakness in primary markets. You saw some weakness in the sales and trading side. You saw some weakness in transactions relating to the fourth quarter and there was a lagging impact from the reduction in AUM on the recurring fee stream for the wealth management businesses. So; let's just take as a part in turn. Is it, I mean, Kian, you can make your own views as to how you're seeing markets develop in the course of 2019 or I would say if you look at AUM, we've already indicated the back of record levels and we charge on a month plus one basis. So I think you should see recovery and recurring coming through. I think we've given a pretty good indication of what we're seeing around the pipeline IBCM and we've said what we've said about sales and trading. And I think it's pretty clear that we do believe that our sales in trading side has done notably better than the street in the course of the first quarter. And I think that does reflect the management investments we've made. What you can also see on page 28 is we have stopped what we said that we intend to deliver productivity saves of 2% to 3% per annum. And that's coming through and it's not actually driving heavy restricting coming through, and it's not actually driving heavy restructuring costs, which otherwise would also depress the return on tangible equity. So, yes, there is volatility in the RoTE, but as a previous question has said, where were we in March, and the answer is at an RoTE which was more than 10%.
Tidjane Thiam:

That's the key point. Second point, Kian, I would also mention what I said anyway, nine months 2018 is quite weak. So, don't forget that when you talk about 5% increase against nine months 2018, it's a quite a low bar because we suffered enough of our results in Q3, Q4. We're able to tell you that Q3, Q4 was low. So, it's simply too early to say that nine months 2019 cannot hit nine months 2018 or even exceed nine months 2018. I feel quite confident that we have a number of levers we can pull when we see the dynamic again, because this is not the real discussion about the world economy and what it's going to do. I think there's quite a bit but it's under our control, but we still can do within the year to drive revenue in Wealth Management. ITS, really strong local pipeline, very strong. It's going to come through if you look at the transactions. That's going to help IWM, that's going to help GM, that's going to help SUB. When I look at APAC, ATS having in Asia, so there'd be things happening there. I see Helman nodding. We're going to - it's not really a lot of ideas about - we can do more in structured credit in Asia than we've been doing. We used to have a strong position, which we lost, but relatively easy to rebuild. I think if we can do in terms of better collaboration, we will. So, I can see opportunities across the board to have a better nine months. So, I think it's just too early. I think that 10% is certainly within our reach and we certainly hit it in March. And we have to see but we are determined to give you the [indiscernible] we can and we'll pull all the levers that we have and there are many from capital to cost to wealth management to get there. Q1 was a very depressed quarter and we we'll keep saying that really for our conditions we faced in January and February, 8% is encouraging.
Tidjane Thiam:

Yeah. And I think just to be clear I think the other strategic measures we outlined on that slide, to funding costs. I don't see any reason why we are not going to at least meet the targets that we've actually set. Asset management restructuring, actually we always in a presentation not too long. But it's a very good story, our asset management story. A very strong performance in this quarter. A very strong performance in number of quarters in a row. This has turned into a kind of CHF 400 million, CHF 500 million business from - more than kind of doubled from years back. And we are cautious in terms of inorganic growth. What we like about our model is that we said was CHF 9.6 billion of PB growth, NNA in Q1 more than CHF 100 billion in the last three years. Given the level of organic growth that we achieved, it makes the bar for any inorganic action even higher. And we think that particularly in asset management, those are tricky. In any field M&A is largely a portion of price. So, it's very hard to get the right price because if you're buying from owners, managers, my short advice is don't because if they're willing to sell to you're probably paying more than it's worth. Unless they have some specific reason in their life that they want to sell. Then you're getting to all these issue of retention and it's messy, very difficult. And buying from buyer, lots of integration issues. We only have so much mind, so usually traction. And actually, the way we look at it, we tend to wish our peers to do M&A because it's an opportunity for us to do better in the market for the [indiscernible]. So that's how we look at M&A mostly.
Kian Abouhossein:

Thank you very much.
Operator:

Thank you. Our next question comes from the line of Magdalena Stoklosa of Morgan Stanley. Please go ahead.
Magdalena Stoklosa:

Thank you very much. Good morning. I think I've got two more questions which will most likely round of the return on tangible target discussion. So for my first one, numbers decide, and I understand it early in the year to talk about revenues for the full 2019, but when you look at your business now, particularly what you see is the cyclical versus structural and also the effects of the restructuring. Where is the biggest delta, I think - in which business do you think there's the biggest delta to reach closer to your kind of original revenue run rate? That is my first question. And my second question, could you just remind us of the trajectory of the funding cost saves from here on? You've talked about, you talked about the legacy instruments which were replaced so far. But could you just run us through the details of what's yet to come in 2019?
Tidjane Thiam:

Okay, thank you. Thank you and good morning again Magdalena. Do you want to take the, I think the second one, and then we'll do the first one.
David Mathers:

Yeah. Thank you, Magdalena. Good question. I'll take the second one first. I mean, I think in terms of the funding cost savings, I mean, I think we are certainly annualizing at or above the CHF 700 million guidance of savings for 2019 compared to 2018. And I don't see any particular threats to that on the horizon, frankly. So, I think that pretty much stands there. I think one sort of follow-up question, obviously, is you may have seen that the Swiss government has produced a CAO, capital advisory adequacy ordinance, relating to potential TLAC requirements. I would just say I think we do support the CAO. I think it's a good package of measures because it does basically provide for a buffer of TLAC capital at CSAG, which I think supports regime. So, that's - personally, I think it's a good idea. I would just, though, in terms of any concerns, reiterate the guidance that we've given the debt markets before that we do not expect a TLAC requirement of CHF 55 billion to change as a consequence to the publication of that CAO. So, we're standing by our longer term TLAC plan. So, I don't see that as being a particular challenge in terms of the funding cost guidance we've given, but just wanted to be clear on that point.
Tidjane Thiam:

Okay. Magdalena…
Magdalena Stoklosa:

So, out of the CHF 700 million…
Tidjane Thiam:

Yes.
Magdalena Stoklosa:

What did we - what was already realized in 1Q?
David Mathers:

I'm not going to give you an exact number, but I would say at least and actually slightly more than 25% of that CHF 700 million number.
Magdalena Stoklosa:

Thank you.
Tidjane Thiam:

Yeah. Exactly. I think it's kind of a good guidance on each of those lines, we did about a quarter in the first quarter.
David Mathers:

The restructuring savings, funding savings, and…
Tidjane Thiam:

Yeah.
David Mathers:

…ARU or SRU losses. Your first question is really, really interesting, but I'm kind of struggling to answer it. Where is the biggest delta? For some it depends on how we measure it. Is it revenue? Is it PTI? Is it - look, I think I can run through a business having SUB as a website. I think Q1 was tough in SUB, so it should be able to produce a PTI higher, a good PTI, a strong PTI, progressing PTI. The balance of that between revenue and costs is the same question is tell me what the revenue will be and I'll tell you. It depends on, yeah, how, yeah, things evolving in the Swiss economy. APAC, I think there is a room there for improvement but it's going to depend a little bit on sentiment. In the Wealth Management we see good dialogue, good flows. But Asia are waiting for - it's a kind of cliché effect there. If the trade thing is resolved or not, you're looking at two completely different universes. And that's also very kind of beyond my favorite to predict it. Everybody is trying to predict it, but we already know that's kind of difficult to answer. But there is an upside. IWM is on a really, really good level. Asset management I'm quite confident. There's some visibility on the next two or three quarters that they are going to continue at a high level. PB you find the same issues elsewhere. Yeah. We have a good pipeline of transactions. We think that's going to come through. So it should be a good performance. GM we've discussed, very hard to predict. So most market dependent. We have taken the cost down which helps a lot. We have made it very much more capital efficient. There's a lot of focus on capital. I think potentially, yeah, if things - if markets are constructive, yeah, there's a sizable delta there compared to last year. But that's depending on market. And IBCM, IBCM has a good pipeline, as I said. But that takes whatever 6 to 12 months to come through. So I think you said, David, in your comment it would be H2 weighted, instead of backend loaded and I agree with that. So Q2 pretty still light. But we were better second half. And then we are helped structurally, as I said earlier by the weak comparative in the second half. We had a difficult second half last year and that's going to be a relatively low comparative. So I don't know anything - any other thoughts David?
David Mathers:

No. I mean, I think Magdalena, I think Tidjane has covered all the point. I mean, I think if you look at 2019 and we go back to the Investor Day in December, we laid out things like funding costs and the SRU rundown and other savings, which would boost returns. But I think more importantly, my business colleagues outlined the different plans they have, whether it's ITS, whether it's growth in terms of asset accumulation. I'm - first quarter of this year was a pretty tough environment to be executing against that. But I think you can see we did execute against that. I think we've laid out what we're going to do. And I think you should - I mean, hopefully, have confidence that we're going to execute.
Tidjane Thiam:

My reticence is more about a very short-term forecast. If you ask me over 12 or 18 months, you'd get a different answer. I'm confident that all of the things that we're doing are going to come through. The AuM keeps grinding up that future revenue and that puts a floor under a lot of things. But from one quarter to another, when you see the kind of pattern you've seen in Q1, January was probably one of our worst months was probably one of our worst months ever and March was one of our best months ever. It's kind of - I hope you won't blame us for being a bit cautious in an environment like that. That's why we said we're cautiously optimistic. If things remain constructive, yeah, we'll do very well. Not a shadow of doubt. But if some disruptions and completely unexpected at this stage, we'll be impacted. So, that's I guess the best we can tell you at this stage. But again, for me, I think the takeaway point is, look, this bank has been restructured to a degree where with any normalization, of course it's a double-digit RoTe mark, that's not where we started. And that's we think the most important for investors.
Magdalena Stoklosa:

Great. Thank you very much.
Tidjane Thiam:

Thank you.
Operator:

Thank you. The next question comes from the line of Anke Reingen of Royal Bank of Canada. Please go ahead.
Anke Reingen:

Yeah. Thank you very much for taking my questions. The first one is on ITS. You've said a couple of times the positive trends there. And I just wonder if you can give us any flavor in terms of how material the contribution is for the driver. Would the transaction revenues in wealth management be flat excluding the benefits and as an example? And also, would you say that Q1 was exceptionally strong as that maybe less specific marketing or a couple of initiatives or is that just a point on the trajectory of higher penetration. And then secondly, on the risk-weighted assets, I just wondered if you can update us on the outlook of risk-weighted assets and the rest - inflation and the rest of the year and I mean it's probably hard to say but should we expect any other positive benefits like in Q1 for model updates. Thank you so much.
Tidjane Thiam:

Okay. Thank you. Thank you and good morning, Anke. On ITS, it is a fair question and we've debated a lot internally whether we should disclose those numbers and the base is not close. But for the time being we've chosen not to. And it's also a management point. This ITS thing has been tried a number of times at Credit Suisse and it's never worked. And there was a lot of skepticism when we started. I've got to give credit here to Brian, to Thomas, to two years ago. Really the internal skepticism was high. But we have really taken an approach of just make the pie grow and we'll double triple count and it doesn't matter who gets each section of the pie that's need to grow. And actually I think not putting too much disclosure around it has been part of why it's been so successful. So, for the time being we don't want to change that. We're continuing, because as soon as you disclose those numbers, things become difficult. But if you go back to the slides that we lifted from the Investor Day, we gave you some sense. I think it was CHF 300 million to CHF400 million from memory. The additional revenue we expected from the slide, it's, yes, 2017. 2017. Was that equity and ITS of CHF 300 million to CHF 400 million. So, that's an increase, right by 2020. So, that gives you a sense of the scale of this business. It is not small that we can say. It's quite material Now, was Q1 exceptional? No. On slide 15, I think, yeah, if we showed you on this slide a number of transactions, it's been going up very strongly and we probably do now in the quarter the number of transaction we used to do in a year. We gave you two or three years ago in the sense of - and that trend is very solid to the pipeline and Q2 is very strong. So, no, Q1 was not a one-off. And the progression there is very, very good. And the client appetite is very good. I understand. How much time do we have? Okay. I wanted to give you what concrete example of the kind of things we do in ITS. So, this is really interesting. We'll go to the international asset manager. He wants to raise a fund. We know clients in Brazil was an appetite from that type of instrument. We will then hedge these by risk. We have our investor that we know that have an appetite. Any transaction like that is the third box on that page. It is UK base is very large, asset manager, emerging market focused. A call we made in our buyer, CIO about emerging market bond. But we'll listen to buy client. It's CHF 650 million transaction I have a really comfortable feel and we're exclusive on that. So the ability for us to do things like that is not limited. It's really scaling up and a lot of it is big. So that's the beauty of that model is material. You're talking about a lot of transactions that bring you CHF 10 million, CHF 15 million, CHF 20 million transaction. And really that's why we're excited about doing the same thing in Asia because of the exactly the same opportunity exist there. And so yeah, it's a good story. That's all but it gets to a level we'll have no choice but to disclose it. I'm looking forward to that day. RWA outlook?
Tidjane Thiam:

Yeah. And second point really was on RWA inflation. And just to be clear, on one point, we did not see any benefit from model changes in the first quarter number. We saw CHF 2.1 billion relating to modeling parameter updates relating to the calibration of RWA from FINMA rules. So, there's a CHF 2.1 million inflation in RWA as a consequence. So, there was no benefit from model changes per se. In terms of the full-year outlook, I would expect that to be somewhere between CHF 6 billion to CHF 7 billion depending on the final calibration, and we'll see that relatively evenly spread over the remaining three quarters.
Anke Reingen:

Okay.
Adam Gishen:

Well, thank you. Thank you for your patience this morning and for the questions. I hope we answered them. And of course, if there are other questions or things that need clarification, IR is here. They're happy to help you. And, look, it's - out of restructuring, it's a much better period for us. We faced for our first quarter really challenging conditions. I think we delivered a solid performance, but we believe we see the double-digit RoTE under any normal or reasonable circumstances with an ability to grow RoTE. That's why we end up often quarter over the next quarter but over two, three years as we indicated at the Investor Day and all of the things being equal. I'm absolutely confident that we can growth the RoTE year after year, and that's what's going to create value and growing the tangible book value per share. So, with that, we thank you again for attending our call and talk to you soon. Thank you.
Operator:

That concludes today's conference call for analysts and investors. A recording of the presentation will be available about two hours after the event. The telephone replay function will be available for 10 days. Thank you for joining today's call. You may all disconnect.

Credit Suisse Group AG Q1 2019 Earnings Call Transcript

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Credit Suisse Group AG
Q1 2019 Earnings Call Transcript