Credit Suisse Group AG
Q4 2019 Earnings Call Transcript

Published: 13 Feb 2020

[Operator:]

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group's Full Year and Fourth Quarter 2019 Results Conference Call for Analysts and Investors. [Operator Instructions].I will now turn the conference over to Marc Smart, Credit Suisse investor relations. Please go ahead, Mark.

[Marc Smart:]

Thank you, Operator. Before we begin, let me remind you of the important cautionary statements on Slides 2 and 3, including in relation to forward-looking statements, non-GAAP financial measures and Basel III disclosures. For a detailed discussion of our results, we refer you to the Credit Suisse fourth quarter 2019 earnings release and remind you that our 2019 annual report and audited financial statements for the year will be published on or around March 25.I will now hand you over to Tidjane, who will run through the numbers.

[Cheick Thiam:]

Thank you, Marc. Good morning to all. I will present today, for the 19th and final time, results as CEO of Credit Suisse. With me, I have David Mathers, our Chief Financial Officer; and the whole Executive Board, led by Thomas Gottstein, our next CEO. We look forward to answering your questions at the end of the session and discussing our results in more detail.So let's start with Slide 5, please. This shows that we have delivered in 2019 a strong performance which an -- with a 19% underlying improvement. You will have noticed this morning that there is a number of nonoperating items in our results that I've put on the right side of the slide here with InvestLab, the SIX revaluation on the positive side; and major litigation provisions on the negative side. So if you strip that out, reported PTI went from CHF3.6 billion to CHF4.3 billion, which is basically an 18% profitability improvement which shows the progress made in the first full year after the end of our 3-year restructuring.You can see the same thing on the next slide, which shows you our net income. I have had the privilege of leading Credit Suisse for 4 full years, '16, '17, '18, '19. We lost CHF2.7 billion in the first year; lost close to CHF1 billion in the second; made CHF2 billion in the third and more than CHF3 billion in the fourth year, with a return on tangible equity of 9%, which we believe is a creditable performance in the challenging environment for the industry that we experienced last year.But let's look at '19 in more detail, and this is quite important to me. What we've done here is show you quarter by quarter the delta in revenue year-on-year, so '19 over '18. What you can see is how difficult 1Q was and that 2Q was a stabilization. Things improved in 3Q. And 4Q, I will recognize and admit that it was from a low base in '18, but 4Q shows a huge improvement, a 19% increase in revenue. And it's very important to keep in mind. And some of you who have been in various meetings with me will remember I've said that -- when we talk about the target for costs for the year, I said that we'd go in low because what's spent cannot be unspent and that we would accelerate the spending pace should things improve. That's what the next slide shows you, which is how we manage costs intrayear. And this is how we run things with the ESB. When we saw that Q1 was difficult, we put our foot on the brake, decelerating in costs very strongly in H1 and came back in H2. And I know there are a lot of questions on the Q4 costs, but this explains a big part of that. There is an element of catch-up of the prudence we had in the first 3 quarters and an element of variable cost increase driven by the 19% increase in revenue.And the other important thing

[David Mathers:]

Thank you very much, Tidjane. Good morning, everybody. And I'd now like to take you through our financial results in more detail.So as Tidjane has already mentioned, Credit Suisse had a strong year in 2019. To be helpful with comparisons and to better illustrate our financial performance, you'll see that I've included a table on this slide that includes our results excluding the gains related, first, to the transfer of the InvestLab fund platform to Allfunds Group that we reported in the third quarter which totaled CHF327 million; second, the revaluation of our equity investment in the SIX Group which totaled CHF498 million, which we took in December; and third, the major litigation provisions for both 2019 and 2018 of CHF389 million and CHF244 million, respectively.Overall net revenues in 2019 were CHF22.5 billion, an increase of 7% compared to 2018. This includes the impact of the gains from InvestLab and SIX that I previously mentioned. If we were to exclude these, net revenues for the year would have been CHF21.7 billion, an increase of 4%, including the benefit from reduced funding costs.Now if we look at our fourth quarter performance. Net revenues increased by 29% year-on-year. Excluding the aforementioned items, our revenues would have been up 19% year-on-year in the final quarter.If we look at our major business lines. In 2019, wealth management related revenues increased by 9% compared to 2018, and that's including the gains from InvestLab and from SIX. And during the fourth quarter, wealth management related revenues increased by 23% year-on-year. Again excluding the gains from InvestLab and SIX, wealth management revenues would have been up 2% for the year and up 8% in the final quarter. I think this growth demonstrates the resilience of our franchise across all 3 of our wealth management related businesses.So if we look at our other operations. Our Investment Banking & Capital Markets activities continued to face significant challenges. Net revenues for the year were down 25% on a U.S. dollar basis, and in the fourth quarter by 8%. The slowdown in deal making in 2019 with fewer completed M&A transactions and lower levels of activity in our historic areas of strength such as sponsors had a significantly adverse impact on our performance. Our Markets business across GM and APAC continued to see the benefits of the investments that we've made and of the significant restructuring that we concluded at the end of 2018 as well as a more favorable operating environment, with combined revenues increasing by 10% year-on-year in 2019 and by 43% in the fourth quarter, again both stated on a U.S. dollar basis.Turning to expenses. We remain committed to delivering year-on-year productivity increases across our businesses and our operations. Our total operating expenses in 2019, including the increased provision for major litigation items that we took in the fourth quarter, stood at CHF17.4 billion, an increase of 1% compared to 2018. Our adjusted operating cost base, consistent with our usual definition which excludes major litigation items, was CHF16.9 billion, an increase of approximately CHF0.5 billion compared to 2018. This was in part due to higher investments in certain strategic business lines, including compensation awards. You will note that we saw a sharper increase for operating expenses in the fourth quarter than for the full year. This is reflective of the fact that our compensation accruals were reduced in the fourth quarter of 2018 due to the adverse market conditions at the end of that year but with more normal levels in the fourth quarter of this year, reflecting the stronger environment that we saw at the end of 2019. Even so, as Tidjane has already shown, we were able still to deliver positive operating leverage in the quarter.As I mentioned already, you'll note that we've taken a significant litigation charge in the fourth quarter of 2019. Overall, we had litigation costs for the fourth quarter of CHF413 million, of which CHF326 million was in respect of major litigation items primarily in connection with mortgage-related matters. Correspondingly, we have reduced the aggregate upper range of reasonably possible losses from CHF1.5 billion in the third quarter to GBP 1.3 billion in the fourth quarter. Now the bulk of the litigation costs sit in the corporate center, as they primarily relate to legacy matters previously recorded in the Strategic Resolution Unit.Overall, we generated a pretax income of CHF4.7 billion last year, an increase of 40% compared to 2018. Excluding InvestLab and SIX as well as the major litigation provisions, our pretax income would have been CHF4.3 billion in 2019, an increase of 18% year-on-year. For the fourth quarter, our pretax income was CHF1.2 billion, up 104% year-on-year, or up 54% excluding these 3 items.Now I previously indicated that we'd expected to reduce our effective tax rate from 40.4% in 2018 to between 28% and 30% for 2019, and I'm pleased to announce today that the rate for last year was 27.4%. This still includes approximately 3 percentage points for the adverse marginal impact of the BEAT legislation in the United States, the expected impact which I summarized at our Investor Day last December. Looking forward to 2020, I'd reiterate the guidance I gave then. We still expect our tax rate to drop to between 26% and 27% for the year, although it may be lower than that in the first quarter of 2020.Now including the benefits of the reduction in the tax rate in 2019, our net income attributable to shareholders stood at CHF3.4 billion last year, an increase of 69% year-on-year. That equates to a return on tangible equity of 8.7% for 2019. And you may recall that at the Investor Day we guided to a full year RoTE in excess of 8%. Now just excluding the impact of SIX and the major litigation provisions, we'd have ended the year at 8.2%. And just for reference, I've included a slide in the appendix to show this reconciliation.Let's turn to Slide 39, please, and let's look at the capital base. Our CET1 ratio increased to 12.7% at the end of 2019, up from 12.4% at the end of the third quarter, whilst our Tier 1 leverage ratio was stable at 5.5%. As you know, we completed our 2019 share repurchase program buying CHF1 billion at an average price of CHF12.53 per share. Now that's equivalent to a discount of about 20% to our tangible book value per share at the year-end. As we announced this morning, the board intends to propose a dividend of CHF0.2776 per share to our shareholders. That represents a 6% increase compared to our prior year dividend, in line with our stated intentions. Taken with the buyback, that equates to a payout ratio of 51% of net income last year, which is in line with our guidance.We expect to continue our distribution of at least 50% of net income to our shareholders via an increasing ordinary dividend as well as by the share buyback program. We have already begun our 2020 share repurchase program. And I would remind you that we intend to buy back at least CHF1 billion worth of shares in 2020, subject to market and economic conditions.Now if we look at risk-weighted assets. These decreased by CHF12 billion to CHF290 billion, of which CHF6 billion was due to foreign exchange moves, specifically from the strengthening of the Swiss franc against the U.S. dollar at the end of the final quarter of the year. We also saw a CHF7 billion decrease in net business usage in the fourth quarter, reflecting a continued discipline to RWA deployment, particularly in GM and IBCM. As we've noted before, we had a CHF1 billion increase in RWA in the quarter for regulatory-driven model and parameter updates. The net result was a CET1 ratio of 12.7% at the end of the quarter compared to 12.4% at the end of the third quarter. I will just emphasize what we said before

[Marc Smart:]

We will now begin the question-and-answer part of the conference...

[Cheick Thiam:]

Sorry, sorry. Sorry. I'll just say a few words before that, if we can have the next slide, please. Yes. Just to wrap up. We are focused on five key themes

[Marc Smart:]

We'll now begin the question-and-answer part of the conference. Operator, let's open the line.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Andrew Stimpson from Bank of America.

[Andrew Stimpson:]

Two questions from me, please. Firstly, on the buyback. I mean you caveated on the buyback of at least CHF1 billion, you said, due to or depending on market and economic conditions. Is that a reference to where the shares trade relative to tangible book? Or is that something that you're considering when deciding whether to buy back the shares or not? Or can you clarify what that caveat means, please? And then secondly, I'm just wondering about client confidence on the wealth side. It did seem to start the year very strongly, but I'm just wondering what impacts you've seen, so far, from the virus effects in the APAC region specifically. The outlook does say it's all good, so far, but any caveats to that, that we might need to place on that statement there, please?

[Cheick Thiam:]

Okay, Andy. And thank you for your questions. Look, on the buyback, we've been very clear that we believe that, as long as we trade below book, tangible book value, it's accretive. So we wish to do as much of it as is reasonable. So that's certainly a consideration, but also the global economic environment is a consideration. And this is why we prefer a buyback to a dividend; because it gives us the flexibility, should there be a major unexpected disruption, to post -- I think that's really what we can say reasonably. I mean we don't expect that to happen, but it's a prudent way to manage the capital position of the bank and protects ourselves from downside, yes.

[David Mathers:]

I wouldn't read too much into, Andy. I think it's an appropriate caveat, and I think we said the same thing last year...

[Cheick Thiam:]

Yes, we said the same thing...

[David Mathers:]

So it's just an appropriate caveat. That's not intended -- you shouldn't infer any more to it than that.

[Cheick Thiam:]

It's nothing new. It's really that was there before.

[Andrew Stimpson:]

But you wouldn't be halting the buyback if you go above tangible book suddenly.

[David Mathers:]

I don't -- I mean I think that that's -- I think we've said that we intend to buy back at least CHF1 billion of shares this year, subject to market and our conditions. I don't really want to add to that. And clearly, that would be a quality issue to have to deal with.

[Cheick Thiam:]

I hope you have that discussion soon in the coming quarters. So that's [indiscernible]. On the coronavirus, I am not a medical expert, so I have to caveat anything I say with that. It's, I mean, we all read about it. Current confidence is very strong. January in some divisions is the best since Q1 '15. It's been a really, really strong January. That's a fact. And across the board, current confidence is strong, but really I mean it's completely impossible to predict the path of the coronavirus from here. You've seen the announcements from the changes of leadership in the Hubei province overnight. The top 3 officials were removed by the central Chinese government. And actually I see that as a good sign because it means again there's the real focus on this and that it's going to be managed. So I remain among the people who think that this is going to be managed, but clearly if it lasts a long time, it will have an impact on sentiment and client, consumers. But we have not seen that yet.

[Andrew Stimpson:]

Okay. Great. So you -- so maybe there's an impact, but you haven't seen anything yet.

[Cheick Thiam:]

Exactly, exactly.

[Operator:]

Your next question comes from the line of Jeremy Sigee from Exane.

[Jeremy Sigee:]

[Indiscernible] all the clarity you gave on the costs because I was wondering why they haven't flexed down last -- late last year...

[Cheick Thiam:]

Jeremy, stop. Jeremy, we missed the first part. I think we took you -- you were already speaking, so could you just, please, apologies, but start from the top again? Thank you.

[Jeremy Sigee:]

Sure. From IBCM, I was just saying thank you for the clarification around one-off items that were burdening the fourth quarter because I was a bit surprised how heavy the costs were. My question is, are those done now, the real estate exit costs and the severance costs? Are those finished as of 4Q, or is there a bit more of that continuing in the first part of 2020? So that's the first question. Second question, I just wanted to pick up on your outlook statement where you talked about strong start to the year and in particular get a view on what you're seeing on the Investment Banking side both in Global Markets and IBCM in terms of activity levels as we're sort of about halfway through the first quarter.

[Cheick Thiam:]

Okay, thank you, Jeremy. Do you want to take ICBM, David?

[David Mathers:]

Yes. I think we took certain real estate exit costs. And I think actually, just for the help of everybody, I'd refer you to the earnings release page on the reconciliation of adjusted to reported. And those are actually in respect of the next phase of the London and New York real estate strategy, where we actually got to the point where we did decide to actually impair those leases as we've actually compressed space. That's been planned for a couple of years now in terms of there would come a point when this will be the right thing to do. I don't think about anything particularly planned in the near future, but we obviously do continue to look carefully at our level of real estate usage, particularly in high-cost locations. And the page ref, by the way, Jeremy, would be Page 8 of the media release, which has -- the earnings release, which has the reconciliation. Because it's there's obviously gains in the Swiss Universal Bank and IWM and then there's obviously exit losses in both GM and IBCM.

[Jeremy Sigee:]

Okay. So the -- from what you're saying, it sounds like those do fall away. Those do reduce coming into the new quarter.

[David Mathers:]

Right.

[Cheick Thiam:]

Yes, okay. So I'll pick up the outlook and just start with IBCM since we're on it. There is a -- I mean you know it. You always have to be careful is my famous words, but so far, Q1 has been strong in IBCM. And I think we've indicated in various communications that, if you look at M&A, which had been a really challenging spot last year, the announced deals are up 90% year-on-year. And that's very significant. And IBCM is doing much better. Part of the problem in '19 was, coming in '19, the pipeline was very soft. It was mostly conversation. The expected deals were -- say this is a much harder pipeline. So we're quite positive on the prospects in IBCM. And global market is doing well. I know Brian will not like me saying this, but doing really well. Equities is up very strongly. Equity derivatives is up even more. Fixed income is a bit under pressure, but the total is strongly positive on the previous year between -- remember '19 was challenging also in the first quarter. Now it's good. And the indications we have in the Swiss Universal Bank, from Thomas, his team are positive in terms of revenue growth. And IWM is also doing well. And APAC, the wealth management is doing very well in Asia. And so yes, it's a best start of a year we've seen in a while, but you guys have to caveat that with potential discontinuities, et cetera, but so far, so good.

[Operator:]

Your next question comes from the line of Magdalena Stoklosa from Morgan Stanley.

[Magdalena Stoklosa:]

I've got two questions. The one is about how do you see the balancing act for the operating cost management from here. Because, of course, we have gone through the restructuring with like billions of costs being taken out of the base. You now are kind of much more confident talking about strategic investments but also the infrastructure savings, as David mentioned a little earlier. And of course, at the same time, we -- you still communicated the absolute range of costs between that CHF16.1 billion and CHF16.9 billion, so how shall we think about your binding constraint here? Is it the positive jaws at all times or the absolute guidance that you have given us? So that was my question number one. And question number two...

[Cheick Thiam:]

Last point. Could you -- Magdalena, sorry. Could you repeat your last point? Sorry. I missed it, yes, about, yes, investments, yes.

[Magdalena Stoklosa:]

Of course. So when you take all of the things into account, your savings plans but also your strategic investments now, how shall we think about the binding constraint on the costs? Is it would you manage to positive jaws at all times or the absolute cost guidance that you have given us?

[Cheick Thiam:]

Okay. Thank you.

[Magdalena Stoklosa:]

And the question two is about the Investment Bank overall. If we look at the Global Markets and the IBCM, of course, we have seen very strong end to a year in one and the strong beginning to the year in both, but when you think about it overall, what's the acceptable range of return on regulatory capital that you show that you would accept going forward for those 2 businesses?

[Cheick Thiam:]

Okay. Thank you, Magdalena. I'll take those but probably need some help from Thomas because a lot of that is also for him. And on the costs, look, we've been quite clear that the central piece is productivity improvement, not cost reduction. And we've put out this number of 2% to 3% per annum, and that will happen no matter what. What is then flexed is the investment basically. And that's what you see if you look at our intrayear pattern on the slide I showed in '19. That's kind of what you see, that we have the ability to slow down or push, depending on the economic environment. So -- and positive jaws are an aspiration and are there to stay, but on a given quarter, they may not be there...That's fine, but long term, yes, they are necessary because, if you're improving your productivity and growing your top line, that should be the case. And we have plenty of growth available. And the absolute cost is a kind of year-on-year guidance. It's really a 1-year guidance to give you some visibility on the next 12 months. So I don't know, Thomas, if you want to say more.

[Thomas Gottstein:]

Yes. I hope you can hear me. So thank you, Tidjane. So first of all, I would like to welcome you also from my side. And I want to take this opportunity to thank the Board for the entrusting me with this mandate and obviously thank Tidjane for his leadership and his partnership over the last 4.5 years.Now clearly cost management will continue to be extremely important. As you know, we managed to improve our pretax income in Switzerland by CHF600 million in the years '16, '17, '18. And that was largely achieved by reducing costs by CHF500 million, so I've seen it in my division, how important it is. And it will continue to be important. In -- at our Investor Day in December, we said we want to stay below the CHF17 billion cost. And depending on how strong revenue is, it will be closer to CHF17 billion or, if it's a weaker environment, closer to CHF16 billion. So absolute cost will continue to be very important. And from that perspective, nothing has changed since our December statements to that effect.

[Cheick Thiam:]

Okay. And I think your next question was on GM and IBCM. Look, we've been clear on GM that we want a double-digit return on regulatory capital and we're getting quite close to it, which mean that's achievable. Considering the return on all the other parts of the business and the way we allocate capital, we think that, that group allow us to continue to grow RoTE. And IBCM has historically been actually comfortable in the mid-teens. First years did 14%. So we've seen '19 as an outlier. And we think that on average it should be able to hit 14%, 15% return on capital.

[Operator:]

Your next question comes from the line of Andrew Coombs from Citi.

[Andrew Coombs:]

If I could ask one to David and one to Tidjane, please. And first question, on the CHF326 million litigation provision for mortgage-related matters, can you just clarify exactly what that is for? I think there are some civil claims in RMBS outstanding related to the home equity asset and mortgage trust series. So did you see hits with that? Or if it's separately through the monoline in dispute or if it's through a combination of both. If you could just update us on where we are with the trials relating to those cases, I would appreciate it. And then second question, to Tidjane. With the benefit of hindsight, is there any part of your strategy over the past few years you'd change or you'd wish you'd executed earlier or faster? And do you have any advice you'd publicly like to share for Mr. Gottstein going forward as well?

[Cheick Thiam:]

Okay.

[David Mathers:]

Shall I take...

[Cheick Thiam:]

Yes, take the first one.

[David Mathers:]

The first one, yes, yes, yes. So Andrew, thank you for asking the question. And I'm probably not going to add a great deal to what I've actually said already because we obviously do not comment on specific court or legal issues. And what I'd always really say is that we do review regularly our litigation provisions relating to the book of cases which we, I think you've seen, are [indiscernible] disclosed. And as we looked at the end of 2019 as part of that process, what we've done essentially is we've reduced the reasonably possible loss exposure, so the upper end of the range, which you may recall was CHF1.5 billion at the end of the third quarter, to CHF1.3 billion. And we've increased the so-called major litigation provisions, which as I said before is predominantly in respect to cases which sit within the former SRU and therefore in the corporate center, by CHF329 million in the corporate center and by CHF326 million net. On the Page 8 and 9 I referred to before, you'll see that reconciliation. And just to give you one more helpful number

[Cheick Thiam:]

Okay, yes. And then you asked me a tough question, yes. I think, if we look back, it was quite open. And I think the basic thrust of the strategy was correct, is correct, the focus on wealth management and leveraging Investment Banking. I think, in our first -- we developed the strategy in December of '15. And if you remember, there was a very positive climate. Even -- people often referred to the share price in July, when I arrived. All banks were at a high in July '15, and the outlook was very positive. So strategy is always a mix of deep analysis long term, medium term but also where you are in the cycle. And I think, when we came out in October, we announced the strategy and was very much reflecting that environment. And actually, within a few weeks, the environment deteriorated severely. We had a major of drop of markets in Q4 '15.And frankly, we had a tough decision to make, which is do we just stay the course or do we reconsider. And I think we made the right call, which was to reconsider, and took quite a bit of courage. We had the famous GMAR, global market accelerated restructuring. We said kind of February, March, look, this is just not going to work. The environment has completely changed. And that led to a lot of downpour of criticism, but if we had not done that, we wouldn't be where we are. So I think a big part of what I would say is, yes, be strategic, but be pragmatic. Don't have too much pride, yes. It's what matters in the end is to be right and to do the right thing for the company. The same thing when we announced the regional model, we heard a lot of recriminations saying no bank is organized regionally. And I think the number of banks organized regionally is increasing now. So on that, we also stuck to our guns. We executed and we were able to achieve some progress. And there's been a lot of discussion on the targets.I think it's good to have ambitious targets because you at least land in a good place. We say -- when I said CHF2.3 billion for Thomas and Swiss Universal Bank, it was at CHF1.6 billion. And they did CHF2.2 billion. That, for me, was a huge success and rather than saying CHF1.9 billion and achieving CHF1.9 billion. So it's that extra oomph, the CHF1.2 billion to 2 -- CHF1.9 billion to CHF2.2 billion, that you get from pushing hard and being ambitious. And that's not universally understood. Sometimes, culturally it leads to misunderstanding because -- in my management culture the CHF2.2 billion is a huge success. For some, it's a failure because it's not CHF2.3 billion. So that's for people to judge, but I think -- yes, I think that worked.I think the investment in -- I mean we did an Investor Day on compliance. You came here and many of you. I think that's been also a great area of progress with Lara, first, and now Lydie of saying we need to strengthen our compliance. And the primary source of value disruption in this company have been compliance issues. The numbers are staggering in terms of fines, et cetera, et cetera. And it's not so much that the bank has not created value in its operations. It's that those issues have cost us very, very, very dearly. So I think this whole team was focused and remain focused and will remain focused on not going there. I think in the U.S. GM did a great job executing. IBCM did a great job. In Asia it's a long-term story. I think the fact that IBCM is number one, the integration between IBCM and the rest, the fact that they generate flows for the private bank was also a new concept that has worked well. So I think the main bump on the road was really kind of 4Q '15 really; and having to rejig everything, reload the SRU, which was also I think the real cutting point, have a bigger SRU and wind it down, knowing that it would cost a lot of losses. And I will say swallowing the losses of '16 and '17 and staying the course I don't know. I'm looking at David here. You have more distance. You've been around longer than I have. What will you say?

[David Mathers:]

No. I think I will just second what you said. I think the most tricky period was the transition between '15 and '16 and particularly the sell-off in markets and some of the strangest liquidity patterns we saw at the end of '15 and the need for GMAR, frankly. I think -- though, I think once that was identified, I think, we as a management team took very decisive action to increase the size of the SRU and to complete the GMAR program. And I'm looking at Lydie in front of me as well. I mean it was a big team effort in terms of executing that. And I think the SRU team, I think, took on the mandate and, I think, executed very well against that. So I think one has to sort of stick to the principles, stick to the targets, stick to the strategy, but you do need to respond when something like that emerges. And you have to react quickly.And it will be easier to say, "That's it. We're done," but I think -- having made that decision, I think we made the right decision. I think ITS and the collaboration between SUB, IWM and Markets, I think, is a huge differentiator for Credit Suisse and I would definitely put down as one of the key achievements in the last few years. I think greater internalization of flow; the ability to offer our clients better, more complex services at better prices different hedging services, I think, is all part of the evolution of wealth management and Private Banking. And I think it's been, I think, just -- I mean Asia, the wealth management thing, I think, has been -- I think that number one in IBCM is remarkable, but ITS is really very important for how we actually organize our bank.

[Cheick Thiam:]

Yes, absolutely.

[Andrew Coombs:]

Well, thank you very much for your detailed answer and for the past 18 quarters as well. And all the best.

[Cheick Thiam:]

Thank you, Andrew. Thank you.

[Operator:]

Your next question comes from the line of Anke Reingen from Royal Bank of Canada.

[Anke Reingen:]

Yes. Sorry. I just have more number-related questions. The first was on costs, and I was wondering about the quarterly progression and the CHF16.1 billion to CHF16.9 billion range. Given the strong start to the year, should we expect that you would start the year on a higher level on the full term on cost run rate? Or should we expect something similar to last year, with the cost ramp-up seen in Q4? And then secondly, just on the litigation provisions. I always consider this comment in the quarterly report, the CHF1.5 billion, now CHF1.2 billion, as having a very low probability, but the fact that you now compare the CHF300 million to the CHF1.5 billion, maybe I'm just wrong on the probability. I'm not sure if you can give any more detailed wording around it, but I just feel maybe I'm a bit wrong on the probability, yes. And thanks for everything. Thanks.

[Cheick Thiam:]

Okay. Thank you, Anke. And for you, David. Are you taking that?

[David Mathers:]

Thank you. Well, I think it's an important balance to walk. And then I think we come into 2020 with, as Tidjane and Thomas already said, a very strong start to the year. That said -- and I, we do think that the markets are well supported by economic fundamentals. I think we felt some of the concerns last year were a bit overdone, but against that, we obviously do have the U.S. election in the second half of this year. We have the sort of slightly abnormal impact of the coronavirus, so I think that does argue for a very cautious approach to expenses in the first quarter. Protecting and preserving the initiatives which we began in 2019, whether that's RMs or some of the banking group, or some of the other strategic investments we've actually made but, I think, not really accelerating beyond that. I don't think I want to give detailed quarter-by-quarter guide at this point, but I think we're definitely going to be taking a conservative approach to expenses in the first quarter to ensure we maintain that balance and remain on track for our full year guidance.I think, on the litigation point, I mean, I'm afraid the RPL does stand for reasonably possible losses and is a required U.S. GAAP disclosure of reasonably possible losses. So when we said CHF1.5 billion of -- that's what we meant. And clearly we would prefer not to incur those costs, but we do look at that balance in terms of our provisions and our reasonably possible losses, and that's the assessment we've actually reached at this point. As I said before, a number that's not in the earnings release but will be in the annual report is the actual provisions. And just to give you an idea

[Operator:]

Your next question comes from the line of Benjamin Goy from Deutsche Bank.

[Benjamin Goy:]

Yes. Two questions, please. First, on net new assets. Your growth rate slowed a bit in 2019. I know it's probably the headline number is a bit one mentioned anyway, but maybe you can share your thoughts on this metric in this interest rate environment in particular. And then secondly, on collaboration, maybe just a quick number on the structured product penetration you have achieved in the fourth quarter and also the cross-selling with advisory and underwriting in IWM. So it's much lower penetration, but what is realistic to -- what is the realistic increase given potentially different client types and segments?

[Cheick Thiam:]

Okay. Thanks, Benjamin. David, do you want to talk about NNA a little bit or...

[David Mathers:]

Sure, yes. I mean I would like just to refer to Slides 56 and 57 in our earnings deck. And then what we show here is the NNA progression for the last 5 quarters. And I think the -- there's a number of important points to actually take away from this. The first thing is, if you actually look at the fourth quarter, that's always the seasonally lower. It's always the seasonally lower, fourth quarter. That's when we see the last step. So if you actually look at Slide 56, you can see that in the fourth quarter of 2018 we had CHF0.9 billion inflows in APAC, CHF0.5 billion in IWM; and an outflow of minus CHF1.1 billion. So if you look at the fourth quarter of 2019, you see a similar progression. So our APAC NNA was broadly similar at CHF0.7 billion. IWM was broadly similar at CHF0.6 billion.And the point I made in my speech, I think the SUB performance is really very good. And the -- we haven't -- I wasn't actually asked the question yet about the repricing of deposits. That was a big number -- a number of questions on that in the third quarter. That's been a very successful process in the course of the fourth quarter, which does bode well for the first quarter of 2020 and indeed for 2020 as a whole, but to actually manage that degree of repricing whilst having a low level of seasonal outflows in the fourth quarter compared to the fourth quarter of 2018, I think, is a remarkable achievement, frankly. And I think, for the year as a whole, I think I would say we did see some deposit-related outflows, particularly in Asia Pacific. And our net new asset inflows became more driven by our financing and underwriting businesses. And that's a point where we are actually managing the pricing of our business against the net new asset inflows, so that's why probably then look at Page 57, which shows the net and the gross margin progressions. Because you can see, if we look at the fourth quarter, that our net margin in APAC was 26 bps against 19 bps.Net in IWM was 33 bps against 33 bps, excluding SIX and InvestLab. And our net for SUB was actually 64 bps against 54 bps. So it is a balance between those two things. And last but not least, I would say that we do maintain a very conservative and, I will say, appropriately conservative definition of net new asset recognition. So I think it is important that we are very disciplined on what we actually do recognize. So I think we struck the right balance, but I would just -- I mean a very important point there about SUB and the repricing. I think it's been -- it's gone remarkably well, I think. I think the second question was actually over the...

[Cheick Thiam:]

Structured products. I can...

[David Mathers:]

Sure, yes.

[Cheick Thiam:]

I can take that one. Sorry. I think, if you look at structured products, I mean, first of all, remember we always said that we aspired to be a top-quartile player. Based on kind of external analyses, we saw that at around 6.6% and close -- or close to 7%. In '17, we're at 2.9, and in '19 at 4.5. So that's an increase of almost 55%, if you think about it. And it's largely driven by ITS; connectivity between ITS, the relationship managers and the CRU to create products that will enable our clients to achieve their investment goals. And we want to increase continuously the distribution of the structured lending product to ultra-highs and grow -- we like it because it's kind of annuity-based revenues and income. And more generally, if we go back -- I think Slide 27.If we go back to Slide 27, I really felt I would show this because the reality is, if you take APAC, we have a unique franchise of entrepreneurs. And it's really up to us to do those transactions because, many of them, they will do, anyway. And the next slide, which was on IWM, I think -- no. That's Slide 29, yes. That's really important to me because my view is that we -- it's not that different if you look at the type of clients in Brazil, for instance; in some of those IWM countries; even in Greece. We have real entrepreneurs, whether in retail, in electronics, in technology, mobile, telephony, yes. And my point is, the transactions that are on 27, we are doing them today. They're just not doing them with us. And that's really -- when we talk about internationalization, it's always kind of a same theme. So it's less about drumming up new business but just getting our natural share of that business and making the investment banking capabilities available to the IWM clients so they don't go to some of our dear peers but do business with us. And it's across the board, if you look at ATS, what Yves-Alain has been doing in Asia. ATS in high-yield trading has gone up many ranks in our internal business.So it's really about getting those platforms to really be the first port of call for business that our clients do rather than that business goes to others. And that's a relatively low-hanging fruit and it's very profitable, so that's why we're talking about it. And we think that there is a significant opportunity there. Well, it doesn't happen overnight. When we started ATS in '17, it had a lot teething issues, a lot to sort out there. So it's not going to jump up in a quarter or 2, but over time, medium term, we're convinced that there is a big opportunity there. And I believe David Miller and Philipp Wehle, more importantly, are convinced of that as well.

[Operator:]

Your next question comes from the line of Jernej Omahen from Goldman Sachs.

[Jernej Omahen:]

I've got a few questions. So firstly, on this litigation charge that was booked in the quarter -- or litigation reserve, rather, David, can you just give us a bit more detail as to what this actually is? Because I think we were certainly under the impression that these U.S. mortgage issues have been settled a while back. Is this related to this settlement? Is this new? So it's I'm not asking you to make any predictions. I'd just like to understand what the charge actually relates to. And then the second question I have is -- kind of is atypical for me, I guess, a detailed numbers question.So a number of your peers in Europe now, David again, expect to be allowed not to deduct intangibles relating to IT, to software from their core Tier 1. And just checking this for Credit Suisse, it seems to me that CS is already there, that the broadly 6 billion of intangibles are not currently deducted from Core Tier 1. Can you just confirm whether that's true or not? And then the final question I have

[Cheick Thiam:]

Okay. Thank you, Jernej. David?

[David Mathers:]

So let's take them in order. I mean there's not much I can really add to what I've said already but a couple of things. I think, firstly, just to be explicit, there are no new cases in this. These are legacy cases which were originally included within the SRU book of work, which we obviously set up in 2015, and actually predate that by some years. So there's no new cases per se. And I think I will just help you a little bit and say these are predominantly civil cases. So I think, if you were thinking about anything else, you may remember the RMBS settlement and which was a couple of years ago basically back in 2017, 3 years ago now, but this is predominantly the civil cases there but nothing new. And it's always represented the bulk of the reasonably possible losses and that remains the case now in terms of our provisions, but I can't really comment beyond that. But hopefully, that would address the questions you were asking there. I think, on the -- sorry.

[Jernej Omahen:]

Yes. I'm sorry. Just a follow-on on this one. So I mean you say it's nothing new, but it's a substantial number, and I don't think anybody was expecting it. So it's certainly new to me. So I was just wondering when you think about how much of additional charges could stem from this source. Because I was certainly under the impression that this item was settled and done with. Now that doesn't seem to be the case. I mean, do you -- so let me rephrase. Is it possible, in your view, that there is a substantial additional litigation charge relating to the same item over the course of this year?

[David Mathers:]

Well, I think, Jernej, that's a little on the specific nature. I think I can only really said what I've said before, which is we've consistently disclosed the major cases, so it's in all of our filings; that we had a reasonably possible loss provision -- or not provision, sorry, disclosure of the upper range of reasonable possible losses of CHF1.5 billion, of which the bulk was related to residential mortgage cases. And that has been the case for some years now. I think we do always assess on how these cases progress and what we expect. And then on the back of that, we decided to increase those provisions at the end of 2019 by a group-wide CHF326 million. And that's what's you're seeing disclosed now. The RPL is CHF1.3 billion. So that gives you our estimation of the upper end of the reasonably possible losses. And the balance of that, we'll see how it actually develops, but certainly that is our assessment, at the end of 2019, how we actually see that sort of cases. And there's nothing much more I can really add at this point, frankly, Jernej, but I think it's not a new development per se. Should I take the intangibles question?

[Unidentified Company Representative:]

Yes, yes.

[David Mathers:]

And you are correct, although the size you gave is too much. I'm not sure I've disclosed it or not. I will check, but it's certainly not -- you're correct that for, I think, I don't know, most of the last decade, perhaps all the last decade, the Swiss rules around the capitalization of IT costs allow those to be included in the CET1 ratio rather than being deducted. And as you say, basically we have seen moves in other jurisdictions too towards that same treatment. So no -- it's exactly what we've always said. We think it's been exactly the right treatment and we're seeing other regimes moving in line with that, but it is not a 6 billion capital benefit. It's a fraction of that, but I do need to just check whether we've actually disclosed that before, as opposed to making an ad hoc comment today.

[Cheick Thiam:]

Okay...

[David Mathers:]

It may -- yes. There are other intangibles which are not treated the same way, I guess, is the point.

[Cheick Thiam:]

Okay. And the first -- sorry, the third question is consolidation in Switzerland. Yes, I was always of a mind that it's -- should happen. And I have not changed my mind because those things take time, but I think you should step back and look at the market. It -- there's bound to be transactions. I think that's a certainty. It's more a question of when, but Thomas, you probably can talk, comment on that, yes.

[Thomas Gottstein:]

Yes, sure. Well, I agree -- I hope you can hear me. I agree that consolidation will continue. I mean, if you look back, since 2000s, we went from 370 banks in Switzerland to 260, so 110 banks disappeared in 20 years, 19 years. And I think directionally, with the negative interest rates, with continuous need to invest in digital and in compliance, the pressure continues to be on. And directionally I think consolidation will continue, but besides traditional takeovers, also some other forms of consolidation by collaboration and back office will happen. We expect that to happen more and more. And finally, also on the external asset managers side, I think, now with the introduction of FIDLEG and FINIG here in Switzerland, we expect that market to consolidate as well. So generally I think there is an expectation and a need of consolidation but not only in Switzerland, but I think it's true for most European countries.

[Cheick Thiam:]

And I think, thanks to the good work of Thomas and his team, Antoine and others, we are well positioned in that context. Because in any case, you want to be the low-cost producer, which is the position we got ourselves into, cost/income ratio of 57%. So we're very well positioned in that context, I think.

[Jernej Omahen:]

Thiam, thank you, and all the best for the future.

[Cheick Thiam:]

Thank you, Jernej, appreciate it.

[Marc Smart:]

The last question...

[Operator:]

Your final question comes from the line of Kian Abouhossein from JPMorgan.

[Kian Abouhossein:]

We are seeing -- first question is we are seeing a lot of pressure -- or not pressure, I should say, but a lot of investments being done by peers in the private banking space. You go to the U.S. players. You go to the European players. And I'm just wondering if you can talk a little bit about, within Asia and as well as this in Europe, pressure within the private banking compensation levels and fighting for talent and, in that context, breakeven points of new advisers that you hire and how we should think about net expansion of those. And then the second question is to -- Tidjane, to your comments about environment that you gave earlier where you indicated wealth management Asia is very strong, so far, this year. And FICC, you mentioned, looks weaker, as I understood it. Can you just give a bit of a color of what you're seeing both in wealth but also in FICC which comes to that conclusion?

[Cheick Thiam:]

Okay. Thank you, Kian. It's a great team. I know we're getting to the end, so I'll try to compress my thoughts. First of all, personally, I like a strategy that will have to be validated. So I do not necessarily see the fact that others are doing the same thing as a problem. It's a bit the same when other companies move to a regional model. You do something. It's very unique, and then others copy it with -- for himself, intellectual validation. And it sets a better context for the industry. Yes, there is a lot of investment, but really if you look at all the slides I went through about our strategy, I never really talked about number of RMs. I talked about capabilities, clients and how we build the relationship with them and how much secret sauce.And I think that to do what we're doing successfully the -- our financing group in Asia, for instance, is very well -- often, people have challenges on the profitability of APAC markets, but APAC market is key to the velocity of capital in AFG. We distribute through APAC markets, and that doesn't really come in their P&L. Now you should try to do an AFG by hiring a few people from our team to do the work. Because if you don't have the distribution that APAC markets brings, what you've done is hire a few people. So I think people sometimes miss the value of the integrated capabilities and how much it allows us to do for our clients. It allows us to be nimble. It's allows us to customize solutions, and the two are important. So it's not just an RM game.And if you remember, I said that we had CHF130 billion, CHF140 billion, CHF130 billion, of AUM when we started this in Asia. We have CHF220 million, so we grew by CHF90 million, CHF80 billion. And the number of RMGs was same, more or less, okay? So the productivity of the RMs and that new model is very strong. So we don't see the name of a game as a fight for RMs. We like to hire strong RMs. They bring us a lot. We track their productivity when we hire them, but we've never believed that this is, certainly in the space where we play because of the ultra-highs, that this is a question of number of RMs. I think that logic is more true when you go down in market to the mid and lower market. There it's very much a -- I don't want to make a wrong comparison. It's not like insurance. It's the more insurance you have, the more you sell, but that's not where we compete in the ultra high market, in the billionaire market. It's much more a question of skill. So we don't see that same inflation.And if you look at our returns, we've been quite robust in the context where we will claim that there is a secular decrease in margin. I think that's true at the lower end where there are no barriers to entry. And digital is extremely important, and there is a continued erosion of margins. I don't think -- it's a number we've always debated disclosing internally, but if you think about that Slide 27 that I showed and -- I can tell you that the -- take -- let's call it a multimillion-dollar threshold of revenue per annum that we use internally. The number of clients above that threshold has doubled in the last 3 years. So what we do is we increase share of wallet in clients that pay us multimillion dollars of fees per annum, so it's a completely different game than just hiring and -- hiring RMs. I think it's defensible. I think it is consistent with our history, who we are, what we're good at. And so I'm never complacent. I really look at the competition very closely and everything they are doing, but our model is very difficult to replicate. And I actually think it's unique. So sorry. It's a long answer, but I think it's an important one.And so -- and then you were asking about, yes, environment, yes. I think actually I went too fast in my comments. Sorry. I have to correct that. FICC is fine. I was actually thinking of a different portion of our portfolio where -- a little bit of pressure, but this is relatively small business. At a high level, equity is very strong. Equity derivatives is very strong, and FICC is also fine. And I said [indiscernible] APAC is fine, but -- yes. We've got -- I've always had a friendly relationship with Thomas. I'm not going to trip him up by inflating expectations for Q1, but -- I'm not that type of outgoing CEO. So it's -- but it's a good sign. And I'm really pleased.On a more personal level, it's a great way for the company to say goodbye to me. As I said, my job description is not to make myself indispensable. It's to build a successful company. And we're in a good place. So any more questions?

[Marc Smart:]

No. I think we'll leave it there.

[Kian Abouhossein:]

No. Thank you very much, Tidjane. And all the best for the future.

[Cheick Thiam:]

Thank you, Kian. I really appreciated the dialogue, always. Maybe I'll just say a few words to wrap up. Look, I think it's been a very good journey. I think it's not been well bumped, but that's life. Someone coming from insurance, I certainly enjoyed running a bank. I think that the story will return, will continue. And I want to end with thanks to the Board that gave me, and the Chairman, this opportunity to run CS; for clients, I always say this, lifeblood of the company, for all of us [Technical Difficulty].I look at the ESB here as kind of the best part of the job. That's why we do what we do. My colleague, because we've been through a real tough and quite deep restructuring for three years, and it's really good. But '19, which is our first kind of clean year out of that, is really a good year.

[Cheick Thiam:]

I thank the investors, without whose support this wouldn't be possible. Thank you very much. I wish everybody well. I wish the company well. I wish Thomas well. He's a great successor. I couldn't wish for a better person to come after me. And I hope that you will be as supportive of him as you've been of me. And I say goodbye to all, and thank you.