Credit Suisse Group AG
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

Operator:

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group's Full Year and Fourth Quarter 2020 Results Conference Call for Analyst and Investors. . I will now turn the conference over Kinner Lakhani, Head of Investor Relations and Group Strategy and Development. Please go ahead Kinner.
Kinner Lakhani:

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, we refer you to the Credit Suisse fourth quarter 2020 financial release published this morning.
Thomas Gottstein:

Thank you, Kinner. Good morning, everyone. Thank you for joining our call this morning to discuss our fourth quarter and full year 2020 results. Let me begin as I have since I became group CEO one year ago, with some comments on the current environment. We continue to monitor with full vigilance the elevated levels of COVID-19 cases in Switzerland, and all the countries around the globe where we operate. In my first year, I'm very proud of what Credit Suisse has delivered for clients, employees and shareholders. For clients, we took a leading role in establishing Switzerland's successful lending facility last year, and helped clients around the globe navigate turbulent economies and markets. For our employees, we created a safe and productive environment while moving to a mostly digital footprint in a short period of time. Our success is reflected in a survey last year that showed more than 90% of employees felt well supported and well informed by management. For shareholders, we paid the full dividend with respect to 2019 and reinitiated our 2021 share buyback program earlier this year in January. We stand ready to do our part for our communities and economies, be it here in Switzerland or elsewhere, through lending initiatives, donation programs, and other measures. In the challenging 2020 environment, we delivered solutions for our clients to help them seize opportunities and manage risks in turbulent times. We addressed historic issues and invested in our businesses. We launched sustainability research and investment solutions, SRI to put sustainability at the heart of our offering to private, corporate and institutional clients. We enter 2021 with strong momentum, as evidenced by our best January in a decade. Pretax income for the month was up year-on-year across all divisions. Investment Banking revenues are up substantially from the same period in 2020. Notwithstanding the fragility of the global economy due to the pandemic, the growth strategy that I will discuss with you today puts us in an excellent position to build on our progress and to achieve our midterm ambitions that we set out at our Investor Update in December, and which we reaffirm today. With that, let me turn to the Slides. Let me start with Slide 4. Our step-by-step growth strategy builds on the work completed in the last few quarters. This is supported by a strong balance sheet that allows us to invest while maintaining our disciplined approach to capital distribution.
David Mathers:

Thank you, Thomas. Good morning, everybody. And I'd now like to take you through our financial results in more detail. And before I start, I'd remind you that whilst our reported performance remains our primary metric, given the combination of the restructuring measures that we announced last summer, the charges that we took in the fourth quarter, and the movements that we've seen in some of our equity investments over the last two years, we will continue to give additional emphasis to our adjusted numbers. This quarter was particularly complex, given that in addition to our restructuring costs, we have also absorbed the impairment related to our investment in York capital and the increase in our existing RMBS provisions. And you will note that we reached a settlement with MBIA last week. I would highlight two items that we've not previously announced. First, the gain before tax of CHF 158 million on our equity investment in SIX Group and second, the gain before tax of CHF 127 million francs on our equity investment in Allfunds Group, both of which were taken in the fourth quarter. I'd also highlight again, the adverse effect of the strengthening of the Swiss franc against many other currencies in which we conduct our business. On a constant currency basis, this translated into a reduction to our adjusted pretax income, excluding significant items for the fourth quarter of CHF 108 million, compared to the same period last year. And for the full year, a reduction of CHF 287 million for 2020 compared to 2019. Let me turn to Slide 23. So as Thomas has already summarized, Credit Suisse delivered a resilient performance for the year. Reported net revenues are flat year-on-year at CHF 22.4 billion. On an adjusted basis, excluding significant items, net revenues were 3% higher. In terms of business trends, we saw strong performance from the Investment Bank, with heightened transactional activity across the Group. Clearly, our Wealth Management businesses suffered from weakness in net interest income, primarily due to the fall in U.S. interest rates, and from the impact of the appreciation of the Swiss franc. However, as I'll discuss in more detail later on, recurring revenues have shown sequential quarter-on-quarter improvements in Swiss franc terms, and we believe that the adverse trends affecting our net interest income and are bottoming out at current exchange rates. Overall adjusted pretax income, excluding significant items increased by 6% for the full year from CHF 4.14 billion to CHF 4.3 8 billion year-on-year. As I've said before, our reported numbers for the quarter were adversely affected by significant charges, which resulted, as we previously guided in a pretax loss for the quarter, totaling CHF 88 million. This did, however, mask a resilient underlying performance. Adjusted pretax income, excluding significant items was 10% lower year-on-year, but on a constant currency basis, 1% higher. Our tax charge for 2020 was 23%. In the middle of the range that we'd set for the year, I would note, it was a little bit higher than I'd previously anticipated, primarily due to the charges that we took in the fourth quarter. With regard to 2021, I'd maintain our guidance for a level around the mid-20s. Although I'd warn that the rate for the first quarter may be higher than this. I'd once again caution that this assumes unchanged tax regimes in the countries in which we operate, with a particular caveat about whether the Biden administration will amend the U.S. federal tax rate later this year. Reported net income attributable to shareholders for the year stood at CHF 2.67 billion, 22% lower than in 2019. That equates to return on tangible equity of 6.6% for the year, compared to 8.7% for 2019. I would note that this drop was entirely due to the year-on-year swing in the contribution of adjustments and significant items, which are shown in more detail on the next slide. As you can see here, although our reported pretax income was 27% lower year-on-year on an adjusted basis excluding significant items, it was 6% higher, as the impact of the items that I've listed here swung from a net credit of CHF 577 million in 2019 to a net debit of CHF 908 million in 2020. I'd add that once you adjust further for FX movements, our adjusted pretax income, excluding significant items was 13% higher year-on-year. Let's just turn to the next slide please and just look at the CET1 ratio. We finished 2020 with a CET1 ratio of 12.9% approximately 20 basis points higher than at the end of the previous year. And I'd reiterate my previous guidance, which is that we intend to maintain a CET1 ratio of at least 12.5% for at least the first half of this year. I've mentioned the phase-in of certain Basel III reforms, primarily the SA-CCR change on a number of occasions over the last few years. These changes resulted in a cumulative impact of CHF 11 billion with RWA inflation for 2020, slightly better than the guidance we've given before. And clearly this has been fully accounted for in our end period capital ratios. In terms of capital distribution, we have as you know, paid the 2019 dividend CHF 0.2776 in full. With regard to 2020, we intend to recommend a single payment of CHF 0.2926 per share, which provided that it is approved by our shareholders at our Annual General Meeting in April, will be paid in May. You also know that last month, we initiated our 2021 share buyback program, and we'd repurchase shares to the value of CHF 112 million as of the 16th of February. Let's look at leverage please, on the next slide. Our exposure at the end of the fourth quarter stood at CHF 800 billion excluding central bank reserves, down from CHF 824 billion at the end of the third quarter. This decrease was mainly due to currency movements, particularly the depreciation of the U.S. dollar compared to the Swiss franc. Our CET1 leverage ratio at the yearend was 4.4%. And our Tier 1 leverage ratio stood at 6.4%, both stable compared to the end of the third quarter. I would remind you that the famous temporary exemption of cash held at central banks ended on the 1st of January this year. And if you look at these ratios, including central bank reserves, they would have stood at 3.9% and 5.6%, respectively, at the end of last year. I'd once again draw your attention to our Liquidity Coverage Ratio, which at 190% is similar to the level at the end of the third quarter. We continue to take a conservative approach to liquidity management, and this ratio remains amongst the highest of the major banks. Let me touch briefly on tangible book value per share. You'll see that our tangible book value per share was broadly unchanged at the end of 2020, compared to the end of 2019, standing at CHF 15.80 compared to CHF 15.88, 12 months earlier. Let me just run you through the changes. Net income attributable to shareholders of CHF 2.7 billion, contributed CHF 1.10 per share with the effects of our capital distribution program and share based compensation awards, resulting in a total for the year before own credit and FX movements of CHF 16.94 per share. As you know, tangible book value per share is influenced by movements in our own credits spreads and by FX changes, given that we retain a significant amount of our capital denominated in U.S. dollars. Now with regard to our own credit moves, spreads widened in the first quarter, and then subsequently narrowed, leaving a net impact of CHF 0.08 for the year. However, the negative impact from currency move was much more marked, totally CHF 1.27 for the year of which CHF 0.49 came in the final quarter. And next, I'll just like to update you on the progress of our restructuring program. As a reminder, we said in July, that we expected to spend approximately CHF 300 million to CHF 400 million on this program over the course of 12 months. And that we expect to generate around CHF 400 million in run rate savings, with the full benefit being realized from 2022 onwards. The key components of the restructuring were, bringing together our Investment Banking and Capital Markets and Global Markets businesses together into a single Investment Bank together with APAC markets, creating a new function, sustainability, research and investment solutions, bringing together the risk and compliance functions and integrating Neue Aargauer Bank into the Swiss Universal Bank. You recall that we reported at the end of the third quarter that we'd spent CHF 107 million on restructuring. And you can see that the total for the year was CHF 157 million. Primarily taking the International Wealth Management, the Investment Bank and in the Swiss Universal Bank, and primarily relating to redundancy expenses. At this point, I'd expect our restructuring costs to total something between CHF 300 million and CHF 350 million marginally lower than before. And I would still expect to complete this program by the end of the second quarter of this year. Now we continue to expect to achieve the gross savings that I mentioned in October that's CHF 250 million to CHF 300 million for 2021 and CHF 400 million, to CHF 450 million, from 2022. Let's just turn to the next slide, please. This looks at credit provisions. Including provisions for the CECL methodology, which as you know was implemented at the start of last year, we started 2020, with CHF 1.22 billion for allowances for credit losses. And of course in the first half of the year, we took an additional CHF 864 million in provisions, split approximately equally between CECL related and specific provisions. Net write-offs of CHF 84 million in other adjustments took us to a balance of CHF 2.0 billion at the end of June. And if we look at the second half of the year, our CECL balance was more stable, with a net release of CHF 23 million, reflecting a broadly unchanged set of predictions. We did, however, see an increase in specific allowances, and had net write-offs in the second half of CHF 241 million. Factoring the weakness in the U.S. dollar, the net provisions on the balance sheet of CHF 1.90 billion at the end of the year, was split approximately equally between specific and nonspecific provisions and were clearly, considerably higher than where we started 2020. Let's move to the next Slide, please. I think if we look forward to 2021. I just caution. I think it's too early really, to make forecasts for credit provisions for this year. Clearly 2020 was an exceptional year, especially as the pandemic coincided with the introduction of CECL, and provisions room was four times higher than our 11-year average of CHF 280 million per year. That equates to an average provision for credit losses ratio, that is the total taken relative to loans held at amortized cost outstanding of 9.0 basis points. For 2020, that ratio leapt to 30 basis points. Now, of course, I would expect to see our provisions return to levels, the more normal over the next few years, with the difference dropping through to the bottom line. But the pace of that normalization does remain difficult to gauge. Personally, I do not expect to see a comparable increase in CECL charges in 2021. Given that I believe we're unlikely to see a repeat of the precipitous decline in the economic operating environment that we witnessed about a year ago. However, against this, we do need to balance the risk of increasing corporate failures as we emerge from the pandemic, together with a corresponding requirement for heightened levels of specific provisions. Next slide. Now shown here, a version of this slide over the past few quarters, and just as a reminder, it charts our allowance for credit losses on loans as a percentage of gross loans for our wholesale business across last year, compared to three of our leading U.S. peers. As you can see, we remain at broadly similar or indeed marginally more conservative levels to the other banks. Next slide, please. And before we turn to the divisional overviews, I wanted to give you a summary of the revenue trends that we've seen in our Wealth Management businesses. Let me start with a net interest income on the left-hand side. And surprisingly, when looked at in Swiss francs, net interest income has dropped sharply since the start of the pandemic from CHF 1.35 billion in the first quarter of 2020 to CHF 1.20 billion in the fourth quarter. However, as Thomas has indicated, on a sequential basis, this downward trend has now stabilized and given the momentum that we're seeing in our lending programs, we would expect to see this trend begin to improve sequentially in 2021. In terms of recurring commissions and fees, after the low point in the second quarter, primarily the result of the impact on portfolios of the market sell-off in March and April and compounded by the weakness since of Swisscard, fees have increased steadily, notwithstanding the currency impact. Transaction activity, as I've mentioned before, has been strong throughout 2020, including into the fourth quarter and notwithstanding the normal seasonal trends. Our Global Trading Solutions offering, providing bespoke institutional style products to our ultra high net worth clients, was a key driver of this growth in transaction revenues with Wealth Management-related revenues in collaboration of GTS, 34% higher in the year compared 2019. And I would reiterate that this strength has been sustained so far in 2021. I'll now turn to the divisional slides. Now before doing so, though, I'd remind you that in the tables, we're showing adjusted key financials excluding significant items. Where appropriate, I will call out the points where FX moves have had a particular impact. And I've included in the appendix versions of the slide for IWM and APAC in U.S. dollars, as well as full reconciliations with the reported numbers. Let's start with the Swiss Universal Bank. On an adjusted basis and excluding significant items, the Swiss Universal Bank generated net revenues of CHF 5.31 billion in the year, slightly higher than in 2019. Operating expenses were slightly lower at CHF 3.15 billion, reflecting our strong ongoing cost discipline. However, the significant increase in provisions for credit losses CHF 270 million compared to CHF 109 million in 2019 means that adjusted pretax income, excluding significant items was 4% lower year-on-year at CHF 1.89 billion. It's worth noting that CHF 75 million of the provision for credit losses was part of our CECL calculation, which as you know, is based on an assessment of a range of macroeconomic factors and can be recovered if the outlook improves. Now if we look at the fourth quarter, as I said already, we have seen the pressure on net interest income stabilize compared to the third quarter helped by an increase in net loans, which rose to CHF 176 billion from CHF 174 billion. Recurring revenues, albeit stable sequentially, still reflect the substantially weaker performance of our investment in Swisscard. Transaction based revenues were 5% lower in the fourth quarter compared to the same period last year. Though they increased by 8% for the full year, driven by higher brokerage fees and increased revenues, both from GTS and from our Swiss Investment Banking business, credit provisions were still elevated at CHF 66 million in the fourth quarter compared to CHF 43 million in the fourth quarter of 2019, although we didn't see any particular signs of stress in the period. Now before we move to the next division, you will notice in addition to showing a year-on-year comparison for some of the key divisional metrics the quarter, I've included the full year total for these metrics for the last five years. Let me now turn to IWM. Our International Wealth Management division delivered net revenues of CHF 4.92 billion for the year on an adjusted basis, excluding significant items, 10% lower year-on-year. Operating expenses were 2% lower than 2019 at CHF 3.62 billion, although provisions for credit losses of CHF 110 million compared to CHF 49 million in 2019, which meant that the adjusted pretax income excluding significant items was 30% lower year-on-year at CHF 1.19 billion. This total includes an adverse impact of CHF 104 million from FX movements. The reported loss of CHF 12 million for the quarter was primarily due to the York capital impairment of CHF 414 million. The charge for which was taken in Asset Management. Adjusted pretax income excluding significant items was CHF 321 million, 22% lower year-on-year, but up sequentially by 20% on the third quarter of the year. Within Private Banking, we saw a record year for net new assets of CHF 16.7 billion for the year, of which CHF 4.3 billion for the fourth quarter was also a record and it reflected strong inflows both in emerging markets and in Western Europe. Asset Management saw CHF 15.5 billion of net asset inflows for the year against a challenging backdrop, and improved inflows in the fourth quarter, compared to the third with net flow in new assets of CHF 6.3 billion. Let's turn now to Asia Pacific, please, on the next slide. The performance of our Asia Pacific division reflected stronger market and client activity. Full year adjusted net revenues excluding significant items were 5% higher year-on-year at CHF 3.09 billion, with operating costs on the same basis 2% higher at CHF 2.09 billion. Provisions for credit losses were CHF 236 million compared to CHF 55 million for '19, resulting in an adjusted pretax income, again excluding sniffing items of CHF 769 million, 7% lower than in the previous year. Now looking at the fourth quarter, adjusted net revenues and adjusted pretax income excluding significant items were stable year-on-year at CHF 746 million, and CHF 201 million, respectively. And that resulted in a return on regulatory capital of 23%. Transaction based revenues made the most significant contribution, they were 20% higher year-on-year at CHF 450 million, reflecting increased financing revenues, which included mark-to-market gains and higher origination fees for equity related activity and strong client activity. Net interest income fell by 27% year-on-year, mainly reflecting the low interest rate environment and low lending volumes due to the deleveraging that we saw in the first half of 2020. Our recurring commission and fees were 5% lower due to unfavorable FX movements. Total net new assets for the year was CHF 8.6 billion equivalent to an annualized growth rate of 4%. That included outflows of CHF 1.1 billion in the fourth quarter. We've continued to see a reversal of the deleveraging in the first half of the year, and a resumption of net loan growth on a constant currency basis. Let me now take this opportunity just to advise you that as of the first quarter of 2021, we will be presenting the results of our Asia Pacific division in U.S. dollars in order to provide greater transparency on the underlying performance, given that much of our business is conducted either in U.S. dollars, or in currencies that are pegged to the U.S. dollars. Let me turn now to the Investment Bank. The Investment Bank had another robust quarter to close out a year in which strong revenue momentum flow through to high profitability and improved returns. If you look at the fourth quarter, adjusted net revenues were 19% higher year-on-year at USD 2.34 billion. Adjusted operating expenses was 7% higher at USD 1.94 billion, primarily due to higher compensation costs. Provision for credit losses were $42 million, compared to $69 million in the same quarter last year. And that resulted in an adjusted pretax income of USD 357 million. Now if we look at each business line, the strongest area was Capital Markets, in which revenues were up by 90% year-on-year, reflecting higher debt issuance activity and a threefold increase in ECM revenues. Our fixed income sales and trading performance has been resilient, particularly as we're not materially exposed to the strongest and the most volatile sub-segments in macro, having restructured and downsized our rates business some years ago. Equity sales and trading revenues were 5% higher year-on-year, with strong contributions from cash equities and equity derivatives, partly offset by defensive risk positioning in the second half of the year. Now if we look at the full year performance, adjusted net revenues at USD 9.72 billion were 18% high year-on-year, including growth across all products and accelerating momentum in capital markets, particularly in the second half. Adjusted operating expenses were 5% higher at USD 7.35 billion, resulting in adjusted pretax income of USD 1.88 billion and that was 70% higher than in 2019. Now I'd just reiterate the guidance that Thomas has given. The positive trends that we've seen in the Investment Bank last year have continued so far in 2021 with a strong capital markets pipeline augmented by a resilient trading performance. And with that, I'd like to conclude my part of this morning's presentation, and hand back to Thomas. Thank you very much.
Thomas Gottstein:

Thank you, David. So let me wrap up on Page 46. Our key growth agenda allows us to deliver attractive shareholder value. This includes our ambition to deliver pretax income in our Wealth Management related businesses of CHF 5.0 billion to CHF 5.50 billion in 2023. We expect to deploy most of our incremental capital into Wealth Management, and aim to drive positive operating leverage. We affirm our ambition to achieve an RoRC of 20% to 25% for Wealth Management related businesses, and of 10% to 15% for the Investment Bank, with sustainable investment solutions at the core of our offering to Wealth Management, corporate and institutional clients. These efforts should support our goal to achieve our medium-term ambition of 10% to 12% RoTE in a normalized environment, subject to market and economic conditions. I will close my presentation with a few words about start to 2021. Investment Banking revenues, year-to-date, are up substantially year-on-year, driven by continued strong capital markets performance and trading activity. We have a healthy IB pipeline across products. We expect more normalized credit provisions in 2021 but with a wide range of possible outcomes. We also expect a more normal level of Asset Management profitability. As such, we saw our strongest January in a decade, with pretax income up year-on-year across all divisions with notable strength in APAC and the Investment Bank. However, this pandemic is not behind us. And we recognize that the broader economic recovery remains fragile and markets will remain somewhat unpredictable. Before I hand over to Kinner, allow me to thank you for your attention today and for your great engagement. I look forward to seeing as many of you as possible this year. In the meantime, I wish you all the best for you and your families and wish you a healthy and prosperous continuation of 2021. Thank you. And with this, I would like to hand over back to Kinner. And we will then go together with David's into the Q&A. Thank you.
Kinner Lakhani:

We will now begin the question-and-answer part of the conference. Operator, let's open the line, please.
Question-and:
Operator:

Thank you. . Your first question today comes from the line of Jeremy Sigee from Exane. Please go ahead. Your line is open.
Jeremy Sigee:

Thank you very much. Two questions, please. Firstly, on the bonus pool comment that you made, did you say that was in Swiss francs or in dollars, that you reduced the bonus pool by 7% year-on-year? And how do you see that move, is that a sort of one-off impact reflecting some of the one-off charges in the year or is that a sustained realignment of the profitability in that business in the direction that you need to go towards your targets? So that's my first question. The second question really was a slightly broader one of the Wealth Management side about flows where there was weakness in the Swiss business and in Asia in the quarter. But even just looking at the year as a whole, relatively modest flows I'd say so largely around sort of 2.5% net new money. And I just wondered how you saw prospects for flows in 2021, whether we can expect a little bit more growth than that in terms of inflows?
Thomas Gottstein:

Yeah, thanks, Jeremy. I hope you can hear me. Can you hear me?
Jeremy Sigee:

Yes, absolutely.
Thomas Gottstein:

Okay, very good. Just wanted to make sure the technology works. So bonus pool, yeah, it's 7% down in Swiss franc, which in dollar terms is probably about flat. We clearly, we paid up in Investment Bank, we paid down in some of the divisions outside the Investment Bank or flat and Corporate Center somewhat down. So, overall, I think we have to pay for performance. And we had kind of a mixed 2020 in the sense that we had strong underlying performance, if you look at our PTI excluding significant items, we're up 6%, despite higher credit provisions and despite FX headwinds. But on the other hand, we had some one-offs and especially in the fourth quarter, legacies to address and that's why together with the Board, we came to view that the minus 7% is the right number. And we will continue to pay for performance going forward. So this is not a trend or anything, it's just the way we look at the bonus pool. In terms of Wealth Management flows. Look, I intentionally included a slide, Slide 17, which shows you more on the longer term, the client business volume, and that's the way I have always looked at the business, be it in my old role as Head of the SUB division, be it now in the Group role because this is really how you should look at the Private Banking franchise, namely Asset under Management, custody assets and net loans. And as you can see that we've been growing 4% in Switzerland over the years. And if you look at IWM and APAC, and these numbers here are in U.S. dollars, which reflect also the fact that 25% only and I think it's only 4% or 5% in APAC, are in Swiss francs. So in these two divisions, so it's much better look at U.S. dollar, we have been growing by 6% in IWM and by 14%. And that's why mid-single digit is the right target for SUB, mid-to-high single digit is the right target for IWM and double digit is the right target for APAC. You can also see some deleveraging going on in Switzerland, because if you see the loan in Switzerland, it went from CHF 160 billion to CHF 118 billion. But the custody assets went up from CHF 43 billion to CHF 54 billion. And for example, in Asia, we also had quite a lot of deleveraging USD 57 billion to USD 107 billion in terms of custody assets, but net loans went down USD 47 billion to USD 44 billion. So there was definitely some deleveraging going on. And that's for us an opportunity to grow and to increase our lending business in all three divisions actually. But this is the way I think one should look at Private Banking business. So you look at all three elements AuM, custody assets and net loans.
Jeremy Sigee:

Thank you, so helpful. Thank you.
Thomas Gottstein:

Thank you.
Operator:

Thank you, we will take your next question. And the question was from the line of Andrew Coombs from Citi. Please go ahead. Your line is open.
Andrew Coombs:

Good morning. I'd like to ask the same two questions actually I asked at Investor Day, just your updated thoughts. The best on Slide 32, under the transaction column, you flag two things. One is that you've got a very tough comp in first half '20, given the elevated transaction levels that we saw. On the flip side, you suggest you're seeing a 34% increase in WM-related revenues in collaboration with GTS. I'm interested to know or how you think those two things were into play going into 2021, as one is, obviously somewhat of a headwind versus the second being a tailwind. That will be the first question. The second one I just wanted to turn to the Investment Bank. I know when we talk about it on the Investor Day, you talked about focusing on profitability and returns rather than market share. You also made a point about your business mix, namely, in equity you're overweight cash and derivatives and underweight prime and in fixed income, you've been underweight macro. But when I looked at Q4, there was obviously some degree of normalization and a lot of those business mix shifts, rates particularly pulled back and credit was actually stronger and yet for the third consecutive quarter, you've underperformed the peers pretty much in every business line, fixed income equities and primary. And so just to about the momentum kind of stalled a little bit there, so perhaps you could just elaborate on your thoughts on Investment Banking, more broadly in 2021? Thank you.
Thomas Gottstein:

Thank you. And do you want to start with the transactional revenues and I will take the Investment Bank, David? Thank you.
David Mathers:

My pleasure. I mean, I think your question Andrew was around in terms of how we see the comparables, I think, and then obviously, the performance with GTS really because obviously, we saw strong growth during 2020. I guess your question, Andrew is, so what do we expect for '21, is it going to be up against that 2020 comparable, given the structural growth? Or how does it come together? Look, I think that was the point. But I, please correct me if I'm wrong, Andrew. But my answer to that would be, we clearly have seen a strong start to 2021 in terms of our GTS businesses. And that's what we're really reflecting, obviously, in terms of the comments we've made about the very strong January that we've had. Clearly, those comparables will get more tough as we actually move into the, as we now move into our one-year anniversary of COVID and you saw the market volatility picking up in March, April and May. So look, I think last year was very strong in terms of structural activity and it was strong in terms of volatility, and it will become more difficult to show that progression against that comparable, but it's certainly been a very good start to the year. And I think there is clearly a fundamental demand by clients in a market where it's difficult to earn net interest income, because interest rates are kind of zero or negative in most locations. And at that point that's leading to two trends. One, I think clients are looking to alternatives, they are looking investments to actually made to generate those returns. And clearly many of our corporate clients are also concerned around hedging risk, and how do they actually hedge some of the volatility, it's still a very uncertain market. And I think that does mean it's a favorable market for GTS. And it's a favorable market for transactions across the Wealth Management division. But I'm not sure I just want to get into a forward-looking view for how I see the next 10 months of the year against the comparables we saw for 2020. But it's certainly been a very good start for the year.
Thomas Gottstein:

As far as Investment Banking is concerned, if you look at one of the slides, I presented you, you can see that we were for the full year, up 19%. And I said also that if you actually include the GTS part, we were up more than that, close to the industry of 24%, I think is the industry. So I think overall, we have despite the fact that we have less exposure to macro, for the full year, actually performed more or less in line with the market. We outperformed the market in capital markets and in M&A, as you can see also in one of my slides, equities was somewhat slower, that's true, but we've also had probably less market share on the equity derivative side. We have had quite solid performance with plus 12% in equities. And especially on the on the cash side, I'm quite satisfied. But also in equities, you should probably look at it a bit more holistically. And if you include equity capital markets, and look at the whole equity business in the fourth quarter, for example, I think we were up 44%, 45%, very much in line with our U.S. peers. So and, from that perspective, I'm not worried at all. Quite the contrary, actually, if I look at January, we've had a very strong start. And as I said it was the strongest January, we had in the last 10 years.
Andrew Coombs:

Thank you. I have a follow up on the latter point. There you said about looking at equities holistically, and ECM, obviously a lot of strength we've seen particularly in the back end of 2020 and also in January, it's back-related. But can you just comment on the sustainability there and how CS is positioned to benefit? Thanks.
Thomas Gottstein:

Yeah, we had a very strong year in 2020 in IPOs, and within that in specs, number one in both. I year-to-date, where this activity has been even stronger compared to last year, we think we are number four number five globally. So far, we continue to see big demand for specs, not only in the U.S., but increasingly, also in Asia, and to some extent, also in Europe. So, at least in the short term, we don't see this to slow down. It provides an alternative to private equity and traditional IPOs. And it's something that is certainly here to stay, whether it will - is here to stay at these levels in the mid-to-long term, we'll have to see. But I also think that if you look at the overall macroeconomic situation, there will be a lot of companies that will need to raise capital in the next two, three, four quarters. As we come through this crisis, and people see opportunities, some sectors have been harder hit than others. So maybe there will be a switch or shift somewhat from IPOs to more secondary offerings, capital market activities, but also, we see stronger leveraged finance market. And from that perspective, we've seen that trend already in the first six weeks of the year.
Andrew Coombs:

Thanks so much.
Thomas Gottstein:

Thank you.
David Mathers:

Thanks Andrew.
Operator:

Thank you. Your next question comes from a line of Benjamin Goy from Deutsche Bank. Please go ahead. Your line is open.
Benjamin Goy:

Yes. Hi, good morning. Two questions, please. First on the buyback and then secondly, on the recurring fees. On the buyback, as you mentioned, you're a bit above CHF 100 million. So just wondering on the pace of the buyback, should we think like you aim for the CHF 1 billion, and then when you have more clarity in the second half, it will depend or will then decide where you land within the CHF 1 billion to CHF 1.5 billion range? And then the second question, on the recurring fee margins, I think were good in IWM and also solid in APAC, SUB was down, so just wondering, for this Q3, all the numbers, just wondering how you see the outlook and the client risk appetite in terms of demand for products? Thank you.
Thomas Gottstein:

Thanks very much, Benjamin.
David Mathers:

So just first, on the buyback? Yeah, we obviously started the buyback in January. I think what you said is exactly on the money. You know, as Thomas has already remarked, I mean it's an uncertain 2021, COVID-19 we're still in the pandemic, we don't really know yet, what's going to be the extent of government support and stimuli. I think it's early to make forward looking projections around credit provisions, although I do accept that we're lower in '21 than '20. I think it seems prudent therefore, to aim for around about the CHF 250 million a quarter for the first quarter. And then we'll see basically, once we've actually got the first quarter behind us, and we say how the second quarter shaping up, at what level do we actually want to pace it. But I think that's certainly our strategy for the first quarter in terms of how we see it developing. And clearly, the first quarter start has been very promising, shall we say and let that continue, is all I'd really point there. I think in terms of recurring, I'd go back to my Slide 32, if you wouldn't mind, actually, Benjamin. You know, the point I wanted to make there is, if I look at recurring, there's obviously you saw the first as you might say, post COVID quarter 2Q20, we saw the drop, unsurprisingly, because you saw the sell-off in portfolios in March of 2020. That flows through to recurring margins on a recurring fees on a month plus one basis. So unsurprisingly, 2Q was the low point. And then you've seen a steady increase since then, notwithstanding, clearly the strengthening of the Swiss franc against some of the currencies, we earned these revenues in, particularly APAC and IWM. So I think it's been pretty good to see that actually heading up. The other factor in there, we've been explicit about for is clearly the Swisscard investment, which is booked towards recurring revenues in the SUB. You know, I think given the importance of foreign exchange fees to the Swisscard joint venture, I think it's unsurprising that that remains depressed right through 2020 and today basically. So that's clearly a fact, which is very dependent on COVID-19. The balance is beyond that, so, but I'm pleased about the trend in recurring commissions and fees, you can see why it stepped up and if it hadn't increased, then I would be worried. So I think a good trend there in terms of at what we're seeing. And clearly on net interest income, I think whilst you can see the bottom in recurring was 2Q20. I think we would hope that the bottom in net interest income was 4Q20, you could see the pace of decline is dropping. That's obviously been driven by both dollar interest rate move but also around the Swiss franc appreciation. I would certainly expect to see that stable to up. Stable probably in 1Q, up later in the year as we expand our lending initiatives on the basis that the Swiss franc remains around current levels, i.e. we don't see a further precipitous sell off in the dollar or anything else. That's just a slight caveat in terms of that but that's probably a fuller answer. I think your question was more on recurring Benjamin.
Benjamin Goy:

No but that was very holistic, thank you.
Operator:

Thank you. Your next question comes from the line of Magdalena Stoklosa from Morgan Stanley, please go ahead.
Magdalena Stoklosa:

Thank you very much. Can you actually hear me well? Okay, okay, great. And so I've got two questions. One is on your lending franchise, and another one is on the kind of pace and direction of investment. So on lending, and I think I'm going to refer to I think, your Slide 17. And so in 2020, the actual growth or the actual kind of lending growth was pretty kind of lackluster, in quite a few places and not growing at all. But of course, when you talk about the holistic business volumes, when you talk about the defense of NII from let's just say mid-year this year, of course, the loan growth is a big part of that narrative. So could you kind of let us know, where do you see the opportunity, I suppose both geographically and on the product level and also whether you have to make any changes. Thomas, I suppose it's a question to you whether you had to make any changes from the perspective of the organization of the kind of lending franchise across Credit Suisse to kind of prepare for that medium term plans of kind of single digit growth in lending across the Wealth, in particular? And my second question is on your investment budget, kind of but more holistically. Could you tell us kind of where over the next two years, your investment budget is likely to get spent? And I'm not only talking about the gross savings, which you will invest, but in general, when you think about where in the business, you will still continue investing? Because of course, in like 2019, 2020, we from that next step outside, saw the kind of big changes to the Swiss business overall. And of course, with the launch of CSX as well, so yes, so where's the investment? Thank you.
Thomas Gottstein:

Thank you, Magdalena. So on lending, what we saw was, especially in the first two quarters, significantly leveraging. We started to turn the corner in the middle of the year. But I still think that we have substantial upside in terms of our lending growth, into 2021 actually, in all three divisions, and in particular, in Asia, where you can see we have reduced our lending volume almost by 10%. So and it's really across the board. So whether it's traditional kind of mortgages here in Switzerland, whether it's single stock loans, whether it's traditional lombard loans, whether it's corporate loans in Switzerland, or also in IWM, and APAC, where we have invested in our corporate franchise, and obviously also in the U.S. and in our Investment Bank. So it's partially also M&A related, it's partially more traditional lending. So the opportunities are across the board. We have clear plans for every division, how to go off these opportunities. And from that perspective, I'm optimistic that we can increase our lending growth, which we have been a bit more cautious about, let's call it this way, in 2020. On the investment budget side, again, we have clear plans in every division, starting with our Group efforts around digitalization, IT, online banking, digital offerings, in every of the three divisions on the Wealth Management side, but also on technology and risk systems in the Investment Bank. And then obviously it's about certain products, whether its ESG products, whether it's Private Markets, whether it's in mandates. And then finally, expansion of footprints in certain regions, in particular, in Asia and the Middle East, where we see significant opportunities, but also Brazil, for example, and in other areas where we have hired teams and relationship managers, and where we will continue to invest.
Magdalena Stoklosa:

And Thomas, just to be, just to be sure that I understood correctly, the expansion of footprint is broad. Is it a Wealth Management trend for you?
Thomas Gottstein:

Yes, it's in particular the footprint in Asia, but also in the Middle East. Just to give you an example, we opened a branch in Riyadh, in Saudi Arabia, we have 45 people there, which I visited recently. We went up from 20 to 45 and we continue to invest in the region, whether it's in Doha, whether it's in Dubai, whether it's in other areas. So and obviously the China rollout for onshore Private Banking, but also our securities joint venture in Asia, Credit Suisse Founders went 51%, we will go to 100%, we announced that already last year. So the investments are not only pure play Private Banking, but it's also Wealth Management related and also in Asset Management, where we continue to invest.
Magdalena Stoklosa:

Great, thank you very much.
Operator:

Thank you. Your next question comes from the line of Kian Abouhossein from JP Morgan. Please go ahead, your line is open.
Kian Abouhossein:

Yes, thanks for taking my questions. First of all, very quick one, can you just confirm the cost ambition for 2021 of CHF 16.2 billion to CHF 16.5 billion, couldn't see it in the presentation. Just wanted to see, is that still intact? The second question very briefly, U.S. dollar, my model report in dollars now that you are saying, you're talking about Asia going to be reported in dollars, I'm just a bit confused how this will all work. And in that context, if you don't want to report in dollars, why not start hedging some of your earnings. And lastly, in terms of Slide 7, if I look at your phases, so clearly now, as you say in the growth phase, but you still produce adjusted profits. And clearly, the slide is on adjusted profits. And really what we want to move to post 2007, 2008, 2009 subprime crisis really to a level of stable profit clearly, as that drives the book value. And I was wondering, when we see Credit Suisse focusing on stated book value as of 2021? And if not, why not?
David Mathers:

Okay, thank you very much Kian. I'll take those three.
Kian Abouhossein:

Stated profit or book value?
David Mathers:

Thank you, Kian. Let me take those different points. So firstly, in terms of cost ambition. You know, we obviously ended 2020 at CHF 16.6 billion, which was slightly above my guidance, primarily, because I think, as Thomas has said already, given the generally strong trading performance we'd seen, I think it seemed relevant to keep the investments going. These are important for us to deliver our numbers in '22 and beyond. And in terms of the '21 numbers, I think we said at the Capital Markets Day, the range of between CHF 16.2 billion and CHF 16.5 billion, depending on how much of the CHF 600 million of investments we actually choose to make. And that roadmap remains intact. And although clearly, I think if we do see a continuation of the strong start to 2021, then I would expect to spend the bulk of that given what we want to do in the Wealth Management businesses. But that the guidance is intact. And those are the factors actually driving this. And I think in terms of FX and currency reporting, I think you know this is as well as you can, we have reported the Investment Bank in dollars since 2015 because the bulk of its revenues and its costs are actually U.S. dollar related. So, it's always been clear to do that and we've said that, that way in our slides. I think of the other three divisions, I think it makes - would make no sense to report SUB, in dollars. It's a Swiss franc business, has Swiss franc cost. It's based here in our home market. Whereas APAC does generate just over two thirds of its revenues, actually in dollar and dollar linked currencies and also has the bulk of its expenses in the same expenses. So I think it's probably easier to make the comparisons to show those numbers in dollars for everybody, because I think then you can compare the peers more easily. I thought a lot about IBM. But we have to remember, you know, the bulk of IBM's costs are here in Switzerland as well, even though essentially it does have a much broader exposure to dollar and non-Swiss franc currencies than some of our other businesses. And therefore is most exposed to the economic challenges that come from a strengthening Swiss franc and a weakening dollar or weakening euro for that matter. And that's why we're going to keep carrying forward that in Swiss franc. So that's how we're doing the divisions, I think so it's more transparent, and you can make the comparisons to the peers. That then breaks a broader question, which is, should we look again at moving our reporting from Swiss franc to U.S. dollars? Look, I think we looked at it with the board back in '19. We decided not to move from that, Switzerland is our home market, we operate in Swiss francs. And that was something that, we did discuss with central bank and other people basically, and I think it was a decision that was very much supported. It is, I'm not sure it's a bad thing to report in one of the world's strongest currencies. It's a bastion of safety and it's something that's important to us to our clients. And I would just remind you, the reporting currency doesn't affect the economics. It's just how you choose to present things. And at the end of the day, we're listed on the Swiss Stock Exchange, and we buyback our shares in Swiss francs. So we have to generate Swiss francs to actually deliver this. That then gets to your next question, which is okay, what about the economics? I think, generally speaking, as a bank, we're quite well balanced. The only open exposure we have really is actually to sterling, because we do have a sterling cost base, but there's not these days a great deal of sterling revenues in the world markets, essentially. So we generally do have a short sterling position, which has been obviously favorable post '16, marginally less favorable in the last year or so. And we'll see what happens next. We have looked at hedging that occasionally. But I mean, in reality, it's the economic base of the business and hedging basically only smoothes the FX effects rather than anything else. And I don't think it really makes a great deal of sense to do it. But it wouldn't make any sense for us to hedge the Swiss franc dollar, given our liabilities are ultimately in Swiss francs in terms of how we actually operate. So I have given it some thought. You know, it clearly, as I said, I think that the division is most exposed to this economically is IWM. It's a challenge in terms of the currencies and how they actually choose to work. And your next question, then I think was around adjusted was reported. Look, a few points. Firstly, our primary metric remains reported PTI. If you look at the LTI metrics for the , it's reported, is the reported RoTE that we actually report that sits out there and that's how it actually works. The secondary measure, which is the tangible value of share is adjusted only for FX and own credit volatility. Because I think otherwise, you'd be creating incentive for Credit Suisse to have a lower credit rating, which would be not the right thing to do. So that does remain our primary metrics. When we announced the restructuring measures last July, we said for the period of this time, it made more sense to focus on the adjusted numbers because otherwise, you'd see the reported trends disrupted by the restructuring costs. Clearly, the restructuring program comes to an end at the end of the second quarter. And there afterwards I think it will be our intention to move back towards reported numbers. But we did say for this period, what we're doing it, we'd actually look at the adjusted numbers. And as I said, clearly, as I said in terms of your final point about adjusted tangible value per share, the adjustments are purely for FX and for own credit, there's no adjustment for restructuring costs. There's no adjustment for litigation or anything like that, in terms of how we see it.
Kian Abouhossein:

Very clear. Thank you.
David Mathers:

Thanks Kian.
Operator:

Thank you. Your next question comes from the line of Amit Goel from Barclays. Please go ahead, your line is open.
Amit Goel:

Hi, thank you. And a couple of question on the Wealth Management margin progression. So and I guess just with, I guess, so far, a large part of the AuM growth is driven by the market performance. Just wanted to understand a bit better, what that means for the margin going forward and in terms of the assets that you have, which don't really generate the kind of reoccurring fee margin, how that's going relative to AuM that does generate reoccurring fees? And what we should expect clearly in Q4 for APAC and IWM the margin was stable but just curious what your thoughts are on that? Thank you.
David Mathers:

Well, look, just a few points Amit. I think we've made this point before but the banks do not have the same AuM definition. We went through a number of changes back in 2012, 2013, which I think you know as well as we did. And we went for a very tight, narrow definition in terms of what actually qualifies for AuM, you know, we limit the amount we give for lending, we have restricted in terms of the amount of single stock positions, and we have a firm criteria around guidance and advice. That's one reason why AuM is a smaller subset of our total client business volume than it might be for some of our peers. I think that's right, because essentially, that means that, we're actually looking at assets where we're actually actively earning fees. So you're not going to see the dilution of gross margin, from actually recognizing more AuC in terms of this. So that's just a sort of point in terms of comparison, and myself or any of the IR team be happy to talk through this. This is something I review regularly with the Audit Committee. It's an important control metric for us. I think then for turning into Page 32, really, I think, rather than giving you a margin guidance, because I think it comes down to the different trends, the businesses, I'd just summarize what we think, which is, I do think that we are at the bottom. So long as exchange rates don't move further downwards against the Swiss franc or the Swiss franc doesn't appreciate further in terms of our net interest income, particularly as we'll see lending growth. And I'm just making that comment sequentially clearly, not year-on-year, because, you had a completely different FX rate in the first quarter of 2020. But I think we are sequentially we've seen the bottom in terms of that. Recurring, I think the fees we're talking about are linked to the value of portfolios. So that will come through on a, as you said, a month plus one basis, so typically flows through into the next quarter. And transaction, we've said what we said, I think our comments around the strong start to January should not be interpreted as just relating to the Investment Bank. It's certainly true, the Investment Banks had a good start. It's certainly true, though, that our APAC business and we are generally seeing transactions being strong across the bank. So I think that's what but certainly, I'm not trying to guide you to lower net or gross margins.
Amit Goel:

Okay, thank you. Thanks.
David Mathers:

Thanks, Amit.
Operator:

Thank you. Your next question comes from the line of Jernej Omahen from Goldman Sachs. Please go ahead, your line is open.
Jernej Omahen:

Good morning from my side as well. Actually, I have only two questions left. It's always tempting to look at operating performance and excluding all the one-offs, I guess, but then it becomes problematic when these one-offs become recurring, to an extent. And I just went back and I looked at consensus estimates for the litigation charge at Credit Suisse, at the start of January of last year. And it was CHF 58 million. And it ended up being CHF 988 million. The consensus for this year is CHF 68 million. And for '22, it's CHF 36 million. And I was just wondering, so just two questions. And I think to an extent they go back to Kian's questions as well on stated versus underlying. To what extent do you think consensus is accurately capturing what you expect for litigation and non-operating charges more broadly, for this year and next? And then Thomas, a question to you. To what extent were you surprised in your new role as CEO by the extent of non-operating charges that keep popping up at Credit Suisse? And then the second question is just very basic. So on Page 5, you quote, low bond yields as one of the factors affecting or pressuring this year's results. I think we can see from your chart very nicely. How this trend is reverting? And I was wondering if you see that as a potential tailwind to your results this year. Thank you very much.
Thomas Gottstein:

Okay, I'll take the first one and then maybe, David you can take the second one. Look, it did only partially come as a surprise. I think we said on various previous sessions with you, for example, that we are looking at some of the positions in Asset Management and clearly the situation about York was something that we had discussed previously and was something we wanted to address, I wanted to address in my first year. And the legal expenses or the legal provisions around our RMBS docket was something that we knew at some point will materialize. These legal cases sometimes have their own timeline and their own dynamics. I'm very happy that we managed to address the MBIA case. And I think it's also appropriate what we have done for the balance. I'm not going to comment on whether the consensus is right or wrong. But I do definitely think that what happened in the fourth quarter was necessary, was the right thing to do in my first year, to address some of these historic situations. And from that perspective, it didn't come as a surprise. But it was also actually it was interesting that both when we announced the York situation as well as the MBIA, the share price went up. So I think actually, investors are appreciating that we follow through on our promise that we want to address legacies and work through them. So from that perspective, I think it was the right thing to do, it gives us a much better and clear platform now for '21. And we have solid momentum in the first six weeks in all four divisions. We are focused on growth in all four divisions. And from that perspective, we can really now focus not only, thanks to the addressing the legacies I mentioned, but also on the back of what we announced in the summer, namely putting the two Investment Banks together, putting risk and compliance together, creating SRI on the group level, addressing the Neue Aargauer Bank here in Switzerland and launching digital offering here in Switzerland, the new one together with reducing the branch network. These were all measures that were done in the middle of COVID-19 in the summer, which I feel very good about because now we can focus on growing the business on all dimensions. So that's how I would answer your question on operating performance versus one-off and whether this was a surprise.
David Mathers:

Perhaps I could just make a few supplementary points Jernej on this one, I think, firstly, the reasonably possible loss disclosure at the end of the third quarter was CHF 1.2 billion. So and I think there's been very full disclosure around the RMBS docket and other litigation risks in all of our reporting. I think the second point, the MBIA case obviously went to trial last year. And we obviously received an adverse judgment on the end of 31st November, and we made an appropriate ad hoc statement there afterwards around it. I think that judgment was probably worse than we expected. And therefore, it was not something we wanted. But I think we reacted appropriately, both in terms of the provision we took in respect of the MBIA case, and the broader read across for the rest of the year. The book we actually took as a back of that and I think it's good though, actually I mean, if you go back to what we said in the 1st December, we talked about a risk of $680 million in respect to the MBIA, you can, so we actually closed it out at $600 million. I think it's an interesting question, which we could discuss, has it been right to actually fight these RMBS cases since they go back to 2005 to 2007? I think the answer is yes. I think if you look at the settlements that are reached in some of these cases by other banks, in the 2011, 2012 period, they were clearly a great deal higher than this. So I think it has been the right thing to do. But I just would just caution, there's not been - no lack of disclosure around these positions in this risk in terms of that. And I think we have, as Thomas said, made the appropriate read across to the rest of the book in terms of our fourth quarter provisions. Secondly, I'd also point out that the significant items do include some positives. And obviously, you've had the two tranches, the gains on Allfunds. And that does remain, I think, conservatively marked, compared to some of the speculation we've seen around this asset. And secondly, I think, obviously SIX continues to be a very well-run bank utility, and I think has generated gains for us. And that's come through as well. So there are positives as well as negatives. So I think the issue for '20 is in 2019 you had a net credit from such write-downs whereas in 2020, you had a net debit in terms of that, just to make a couple of points. So then the next point, really just in terms of long bond yields. And I think we've probably said as much as you want to say of net interest income, which is, I think we have, we are at the bottom and I think we should start to see it improve as we build lending sequentially. Clearly given the FX moves. I think that'll be much more challenging on a year-on-year basis. But if FX rates do remain at current levels, given the lending initiatives, I don't, I think we'll probably won't see too much of a shortfall, maybe something in the CHF 50 million to CHF 60 million on a constant currency basis for 2021 compared to 2020. So I think we're coming through the inflection point around net interest income trends.
Jernej Omahen:

Thanks very much.
Operator:

Thank you. Your next question comes from the line of Anke Reingen from Royal Bank of Canada. Please go ahead, your line is open.
Anke Reingen:

Thank you very much for taking my questions and two please, two follow up questions. And the first is on the litigation on disclosure. And were just called it the CHF 1.2 billion at the end of Q3, which went down to CHF 0.9 billion at the end of Q4, and given the large charge expected in, taken in Q4, I guess it could have gone down more. I just wondered, is there too many moving parts of the number just to see rhetoric and any sort of like more clarity on this point? And then on the costs, I mean, should we see the fact that you no longer quote the CHF 16.2 billion to CHF 16.5 billion, and the fact that you come in CHF 16.6 billion versus 16.5 billion but not really explain it as much as a as a sign that you sort of are like moving away from the absolute cost guidance or de-emphasize it given it wasn't necessarily reiterated. Thank you very much.
David Mathers:

Well, the two points, really. I think we obviously did reduce the RPL by CHF 300 million, which as you say, it's not as much as the CHF 800 million increase in the RMBS provision. And the reason for that is, as I commented before, there were certain items in the judge's order of the 31st November, which, I think were adverse to us. And we looked both in terms of the MBIA case and in terms of the read across to the rest of the RMBS docket, and we wanted to reflect that fully. It is what it is, it's a matter of fact, is clearly a number of other cases and other appeals going on around that. But that's why you see that balance, basically. And I think the second point in terms of the expenses, I think I was asked a question earlier on basically, by one of your colleagues. And I think it was Kian. And just to reiterate, our guidance does remain CHF 16.2 billion to CHF 16.5 billion, dependent on the level of the CHF 600 million investments we identified in the capital markets that we choose to invest. At this point, given the strong start this year, I think it would seem prudent to be making those investments to support the longer-term growth of our Wealth Management businesses in '22 and '23, particularly in fast growing markets. But clearly that's a decision which is constantly under review. And we'll see how 2021 develops. It is an uncertain year, we are not through COVID-19 yet, but it has been a good start.
Anke Reingen:

Okay, thank you very much.
Operator:

Thank you. Your next question comes from the line of Adam Terelak from Mediobanca. Please go ahead, your line is open.
Adam Terelak:

Hi, morning, thanks for the questions. I want to just come back to costs. Look, I think the print this year is kind of hiding some big movements in different directions. So the good side of CHF 16.9 billion, the FX neutral cost base is CHF 17.4 billion. Now, when we talked about expenses of 2020, the prior CMD, the upper end of the range was CHF 16.9 billion in a good year. So I'm just trying to work out where this additional spend come from. I know you're talking about investment budgets going forward. But can you sort think about that in a backward-looking sense? How much a business is investment in growth? And how much is this is rectifying some control issues or anything like that? And then, what should the J curve on this spend look like? When will the revenues come through? Are there any this year with any because clearly the bonus pool is down so it's not paying for performance? So I'm just trying to get an idea of that and how that looks going forward? And then, just quickly, a clarification on the January trends, is that in Swiss franc or in U.S. dollar? Clearly, you're flagging strong transactional and trading revenues but clearly the year-over-year FX headwind is fairly sizable. Thank you.
David Mathers:

Thank you, Adam. There is a number of points there. So I might come back to you just to clarify, in case I've missed anything. Firstly, in terms of the cost guidance, yes, it is complex because you will see in 2021 current exchange rate, a further drop in expenses due to the FX moves, obviously subject to how rates actually pan out. But I think in terms of things that we chose to spend on, I think, firstly, and we have talked before about the growth in China. Thomas has talked about it, that is critical for us. But I think Secondly, there is obviously everything else we actually want do in APAC because it is our fastest growing region. I think that's where a lot of the opportunities lie. I think but in terms of other things, yes, I think it's very important to maintain appropriate in terms of your control infrastructure. There's plenty of risks out there. And I think we're spending appropriately in terms of that. So that's what I'd say at this point. I think the expense what we gave at the Capital Markets Day, I think does very much remain intact. The interest, FX have moved a bit since then. But you know, I think that's all I'd really say in terms of the costs, really.
Adam Terelak:

I mean, in terms of the delta is on 2020 it's CHF 600 million versus the top end of the prior range. I mean, it's a big, big number. I'm just wondering whether that's bringing forward investment or when the revenues attached to that can come through?
David Mathers:

I probably would defer to Thomas. I mean, obviously, you stepped in as Chief Executive. And I think you, I think, allow me to say, I would say rightly have prioritize the growth in our Wealth Management businesses. And I think the things we're spending money on are exactly the right things for future, Thomas. But -
Thomas Gottstein:

Yeah, look, I think that it's important to address obvious cost reduction, structural opportunities, like we had with integration of Neue Aargauer Bank here in Switzerland, closing down the branches, and investing in CSX, our new mobile device or putting together IBCM in global markets, which allowed us to take structural costs out or combining risk and compliance, which allowed us to take costs out. We also addressed some structural opportunities in IWM and in other areas of the Corporate Center. Real estate is another area where we see some opportunities. But generally, I also think it's important to really manage, especially in the three private banking divisions, the cost base dynamically and in a cost income ratio basis and not absolute. We are investing, we are rolling out in China, we are investing in the Middle East, we are investing in Thailand and in Korea. So as we want to grow, we see huge growth opportunities in private banking, we made that clear in the mid-December Capital Markets Day. This is a market that grows 7% globally, and we want to grow, at least with the market. And if you open branches, like we opened in Riyadh, or we do a rollout of relationship analysis for onshore private banking in China, that costs money. But we are financing a lot of these investments with some structural moves, like we did in 2020 in the summer, that I feel very good about. We didn't see the benefit yet of those, but it allows us to actually invest in growth and self-finance a large portion of that.
David Mathers:

Adam, I think your second question was, is that guidance given in dollars or in Swiss francs? That guidance is given in Swiss francs.
Adam Terelak:

Okay, great. Thank you.
Operator:

Thank you. Your next question comes from the line of Andrew Lim from Societe Generale. Please go ahead, your line is open.
Andrew Lim:

Hi, good morning. Thanks for taking my questions. So you've talked about, in places how the impacts of lower interest rates has affected interest income in CIC, for example, and overall for Wealth Management net interest income. But could you elaborate more specifically about your - to the short end versus the long end of the U.S. curve? And obviously, there's quite a few just in the U.S. terms?
Thomas Gottstein:

Can you repeat question, please? Sorry, it was difficult to hear you acoustically.
David Mathers:

Andrew, I think you cut out for a bit, I'm afraid, sorry.
Andrew Lim:

Oh, sure. I'll repeat again, asking about the sensitivity of your net interest income to the short end versus the long end of the U.S. curve. Could you elaborate more on your sensitivity there and how we should expect NII to develop given moves in the past two quarters?
Thomas Gottstein:

I think I mean, that's -
Andrew Lim:

That's my first.
David Mathers:

Thanks, sorry, Andrew. Do you have a second question? Sorry.
Andrew Lim:

And yes, my second question really is on is on dynamics on recurring fees. In Swiss franc terms, your AuM is at record high levels. But if we turn to Slide 32, your recurring fees are edging down, and maybe you can allude there to translation effects as well. But are there other dynamics happening there, which offset the record high AuM?
David Mathers:

Okay. I think in terms, I take the first point, Thomas. But I think in terms of the dollar interest rate exposure, we do run a swaps book. And therefore, we will benefit from the steeping of the dollar curve in due course, but we'd normally seek to price out over the sort of two to three years in terms of this. So we, it tends to be a sort of medium-term type swap book to reduce interest rate volatility. So we don't have the up or the down volatility that you see for some of the U.S. banks relative to the curve. And as I said before, I think I did give a general guidance a few minutes ago, which is, if I look at the interest rate effect for this year, and net of the FX move, I expect to be down about CHF 50 million for full year 2021 compared to full year '20. I'm clear that would obviously change if we see another shift in FX and that's across the entire bank.
Thomas Gottstein:

On the recurring if you exclude certain, I would say abnormal things fees like Swisscard in Switzerland, which is our credit card business, which is an equity consolidate, that business joint venture with American Express, which all the revenues are in recurring. And clearly credit card business was very difficult in 2020. But if you exclude that, there is a very clear correlation between Asset under Management and recurring revenues, which we have seen some degree of margin erosion. But at the same time, we are very much focused to increase our mandate penetration. That's our clear strategy in all three private banking divisions. I think with our performance we've had in our CIO office, but also with our efforts around ESG. And new mandates, be it for high net worth, but also ultra high net worth, which would include also private equity investments. So Platinum Mandate, as we call them, we are offering new opportunities for our clients to have tailor-made mandates depending on their risk appetite. And this is how we are planning to further increase our recurring revenues. And as you can see on Page 32, whilst year-on-year we are down and there is also some translation element in there. We like the trajectory and we definitely see an improvement in our overall recurring fees, even in Swiss francs.
Andrew Lim:

Okay, that's great. Thank you very much.
David Mathers:

Thanks, Andrew.
Operator:

Thank you. Your next question comes from the line of from Octavia. Please go ahead, your line is open.
Unidentified Analyst:

Good morning. Thank you for taking my questions. First, the first question is on net new money in Asia. And can you maybe elaborate a bit more, what lead to the outflows in Asia, particularly since obviously, your larger peers have reported quite strong new money numbers in Asia? And then secondly, maybe sorry, to come back again to this litigation thing and obviously, I think there is a moral hazard because litigation tends to come with a huge time delays are normally not the managers who actually do the wrong things are paying for the wrong things which has been done in the past. What do you do to prevent this moral hazard? Thanks.
Thomas Gottstein:

Okay, so on net new money, I mean, if you look at our Page 39, you see that for the whole year 2020, we had CHF 8.6 billion, we have in 2019 CHF 8.7 billion. If you were to translate that into dollars, we're actually up about 10%. So I think overall, we have a good trajectory, very healthy M&A in the business, if you took and analyze. I agree with you, the fourth quarter was a bit weak, but I don't look at M&A on a quarterly basis. This is more like an annual basis and it kind of shows some of the trends. But again, I can just come back to my earlier observation that the way you should really look at the banking franchise Private Banking franchise is client business volume. That really gives you the best sense of how the franchise is growing. But the CHF 8.6 billion in Swiss francs is actually higher on the like-for-like basis than the CHF 8.7 billion we had in 2019. Look and then with respect to the moral hazard, this is somewhat theoretical question, we had the legal strategy at the time in 2009, 2010. You can argue whether it was the right strategy or not, but, as David said, we chose that way and overall it probably was not the wrong strategy. But I can also say that unlike others, we have settled, for example, the RMBS case with the DoJ. That was done in 2016 and from that perspective, some good efforts were made by my predecessors. And some of these litigations have their own, as I said, their own tactical considerations with respect to when do you settle and when do you actually go to court. And each bank has to do that, as they see fit, depending on the case. So that's all I can say to that.
Unidentified Analyst:

Okay, let's leave it like that. Thanks.
Thomas Gottstein:

Thanks, Daniel.
Operator:

Thank you. Your next question comes from the line of Patrick Lee from Santander. Please go ahead. Your line is open.
Patrick Lee:

Hi, good morning, everyone. Thanks for taking my question. I have a couple of questions on the Wealth Management and related businesses, mainly referring to your disclosure on Page 17, where you said that the client business for them is an aggregate of AuM custody assets. And I know that is something that you commented on before. The two questions on this, firstly, on the especially strong growth in Custody A asset in APAC, and also to a lesser extent in SUB compared to the steady performance in IWM for custody assets. Is this primarily a reflection of the transaction nature of the businesses in APAC or whether we should expect custody assets to fluctuate around the transaction volatility? Or can I look at it another way whether it could be a temporary parking space for the money, there's some expectation of this converting into a more profitable AuM elevator stage? A second question relating to this is that if I look - looking ahead, is it fair to say that you're steering us to focus on from AuM to this broader client business volume as a better reflection of your Wealth Management performance? And I guess, then, in terms of gross margin, would it give us a better forecast or estimate, if you think about it separately, like NII margin on loans, recurring fees on AuM and transaction on the asset would it gives us a better feel for it? Thanks.
Thomas Gottstein:

Yeah. Thanks, Patrick. Thanks for your two excellent questions. So custody assets in Asia grew for mainly two reasons. One, that we saw some deleveraging, as I said earlier, but also, there are quite a few of them which are single stock positions with performance, strong equity markets in Asia, obviously. So we saw both trends. In Switzerland a bit similar but with less I think the equity exposure, single stock exposure in custody assets is probably proportionally smaller. There's also a lot of cash in there, there's some gold in there, etc. So these are single asset class positions where we have low or no revenues, which we define as custody assets. To your second question, you could definitely make the argument that you should look actually at your margins in percentage of the overall client business volume. Obviously then, we would deviate a bit from the industry standard, which is to relocate a percentage of the AuM. We are currently not planning to change that but we are planning to be disclosing client business volume going forward because, as I said before, I think it's the right way to look at the franchise.
David Mathers:

Clearer indication of the number of assets which the bank has relationship or associations with. So I think what was done very well in SUB over the years, essentially was to migrate some of these custody businesses into AuM as you build on the initial relationship with the clients. So I think you know, I think it's a very good leading indicator and very much worth looking at.
Patrick Lee:

Okay, thank you very much.
Operator:

Thank you. I will hand the call back over to you, Kinner.
Kinner Lakhani:

Great and thank you. Thank you very much, everyone, for all your questions this morning and your interest. Of course, if you have any further questions, feel free to contact IR. Thanks, all
A - Thomas Gottstein:

Thank you very much. Bye-bye.
Operator:

Thank you. 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 Q4 2020 Earnings Call Transcript

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Credit Suisse Group AG
Q4 2020 Earnings Call Transcript