Credit Suisse Group AG
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Good morning, this is the Conference Operator. Welcome, and thank you for joining the Credit Suisse Group's First Quarter 2017 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is recorded. At this time, I would like to turn the conference over to Mr. Adam Gishen, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Gishen.

[Adam Gishen:]

Good morning, and welcome to the first quarter 2017 results call. Before we begin, let me remind you of the important precautionary statements on slide 2, including the statements on non-U.S. GAAP measures and Basel III disclosures. With that, I will turn it over to our CEO, Tidjane Thiam.

[Tidjane Thiam:]

Thank you, Adam, and good morning, everyone. Thank you for joining this call. With me today is David Mathers, our Chief Financial Officer. This morning, we will present our first quarter 2017 results for Credit Suisse. We will also provide you with more information on the execution of our capital plan. David and I both look forward to taking your questions at the end of the session. We show here our Group reported on the left and adjusted on the right pre-tax income, as well as other key capital metrics, CET1 leverage, and the format that you are familiar with by now. So with that, I'll start with our key messages this morning on slide 6. The first message we have is that, we had a strong start to 2017, continuing positive profit momentum seen in our 2016 results. A few highlights for the quarter include

[David R. Mathers:]

Thank you, Tidjane, and good morning, everybody. I'd like to thank you for joining our first quarter earnings call for 2017. I will start on slide 29 with a summary of our financial results. As usual, we show here the group numbers on both a reported and an adjusted basis, and these are being prepared under the same definition that we've used in prior quarters. I've also included a full reconciliation of the adjusted and the reported results for the group and for each of our divisions in the appendix. If you look at the results for the first quarter, we achieved pre-tax income of CHF 670 million on net revenues of CHF 5.5 billion. On an adjusted basis, in line of our usual definition, we achieved a pre-tax income of CHF 889 million. Our net income was CHF 596 million, and that's equivalent to a return on tangible equity of 6.5% for the first quarter. Now as in prior quarters, for the balance of this presentation, I will focus entirely on adjusted numbers. We continue to believe these more accurately reflect the operating performance of our businesses. Let me turn now to slide 30 and review our capital and our leverage positions. In the first quarter, we continued to reduce our risk-weighted assets and our leverage exposure, with the most significant reductions coming from the SRU. Risk-weighted assets stood at CHF 264 billion at the end of the first quarter, down by CHF 16 billion from the CHF 280 billion that was the level at the end of the first quarter in 2016. Compared to a year ago, we've reduced risk-weighted assets in the SRU by CHF 24 billion and by CHF 7 billion in our Global Markets division. We've then reinvested some of this capital in our growth areas in Asia-Pacific and International Wealth Management. And I'd note that these are like-for-like business changes net of the impact from FX and major external methodology changes. If we look at the overall year-on-year moves, there was an increase of CHF 7 billion from the appreciation of the U.S. dollar and CHF 8 billion from external methodology changes. We've made similar progress in our leverage exposure, with year-on-year net reductions totaling CHF 34 billion. This was driven by the SRU where our positions were reduced by CHF 80 billion, and that's been offset by increases as we've invested in our growth areas. I would note that the year-on-year net reductions include CHF 21 billion in HQLA balances as we reduced our liquidity coverage ratio. Furthermore, as you may recall, we discussed in February that we would substantially reduce HQLA in the first quarter of 2017. And I'm pleased to announce that we've reduced HQLA by CHF 32 billion from the end of 2016. If we look at our capital and our leverage ratios, we ended the first quarter with a look through CET1 of 11.7%. That compares to 11.4% in the first quarter of last year. Our CET1 leverage ratio was stable at 3.3%, whilst our Tier 1 leverage ratio stood at 4.6% at the end of the first quarter, that's up from 4.4% at the end of the first quarter in 2016. Let's turn now to slide 31 to review our cost reduction program. We've continued to make significant progress in reducing our expense base in the first quarter. And it puts us on track, with three quarters to go, to ensure that our full-year cost base will be at or below CHF 18.5 billion. Before I go into details, I'd just remind you that our cost program is measured on an FX constant basis from the full year 2015 baseline, which stood at CHF 21.2 billion. Now if we look at the first quarter, the FX constant cost base was CHF 4.6 billion, which means that we've achieved cost savings in the first quarter of approximately CHF 250 million compared to the average run rate of CHF 4.85 billion in 2016. Given the progress so far in the first quarter, that means we're very much on track to achieve target savings of at least CHF 900 million for the full year. The savings in the first quarter were driven by net head count reductions of around 1,400. The bulk of this, as in 2016, was driven by the reduction in contractor and consulting count, which has led to a further reduction in professional services expenses within our non-compensation costs. The head count reductions in the first quarter also put us on track to deliver our full year target which, as you know, is a planned reduction in contractors, consultants and employees of over 5,500 in the current year. Now just to remind you, looking forward to 2018, of the target that we announced at our Investor Day back in December, which is that for next year, we intend for our cost base to be below CHF 17 billion, again measured on FX constant basis. With that, I'd now like to turn to each of the division's performance, and I'll start with the Swiss Universal Bank on slide 32. Before I get to the detailed results, I'd just like to remind you that effective from the beginning of this year, the Swiss Universal Bank began serving clients through two dedicated segments. First, we have our Private Clients segment, which services both Private and Wealth Management clients, as well as our premium customers. And then we have our Corporate and Institutional Clients segment. Overall, the Swiss Universal Bank has continued to deliver year-on-year pre-tax income growth for the fifth consecutive quarter. For the first quarter, the Swiss Universal Bank saw a pre-tax income of CHF 483 million and that's an increase of 2% year-on-year. Net revenues were flat compared to the first quarter of last year, with higher recurring commissions and fees, offset by lower revenues from our trading service operations. Provisions for credit losses remain at low levels and that's underpinned by the very high quality of the asset portfolio within this business. Now as we summarized and indicated at the Investor Day last December, we've continued to implement efficiency measures within the Swiss Universal Bank and I hope to reduce our total operating expenses for the quarter by 2%. Let's now turn to the Private Clients segment. Year-on-year, the pre-tax income of CHF 208 million was broadly stable. The continued success of our Credit Suisse Invest program resulted in mandates penetration increasing to 31%. That's up from 27% at the end of the first quarter last year. Within Corporate and Institutional Clients, revenues increased by 2%. Recurring revenues were up by 11% and that was on the back of strong lending fees and growth in assets under management. We also saw continued good momentum in the Investment Banking businesses here in Switzerland, with strong deal flow across M&A, ECM and DCM. Now if we look at net new assets division, Private Clients saw net new inflows of CHF 2 billion in the first quarter of 2017. That's a 4% growth on an annualized basis. In Corporate/Institutional Clients, we had positive net new asset inflows of CHF 1.6 billion and that was balanced by similar outflows from the selected exits in our external asset management business that we discussed last quarter. And I'd note that the previous guidance that we've given, that is for outflows of approximately CHF 3 billion from both regularization and EAM exits in 2017 remains unchanged from our previous quarter. With that, let me turn to International Wealth Management, please, on slide 33. IWM has had a strong start to the year, with improved operating performance and a rebound in net new assets from the beginning of the year. The cost-to-income ratio improved slightly to 73%, whilst, as Tidjane has mentioned already, the return on regulatory capital stood at 26%. The first quarter pre-tax income of CHF 327 million increased by 6% year-on-year and 9% from the fourth quarter. Now I'd note that this growth has been achieved notwithstanding the fact that the first quarter of 2016 included a private equity gain of CHF 45 million related to the sale of the estate of London City Airport. Additionally, if we compare sequentially, clearly, the fourth quarter also included the seasonal recognition of year-end performance fees within Asset Management. In Private Banking, pre-tax income improved by 8% year-on-year, driven by a 5% increase in both recurring commissions, fees and net interest income. Net interest income grew on the back of high loan and deposit volumes at wider margins, whilst treasury revenues from our replication book declined. Transaction-based revenues decreased slightly compared to the first quarter of 2016. This reflects improved client activity, with 21% higher brokerage and client FX revenues, offset by 17% lower revenues from trading services, largely due to lower flows in equity and fixed income markets. Expenses remained largely flat year-on-year and were down by 7% sequentially, as the division continued to fund investments through the efficiency measures that were initiated. The net margin was resilient at 32 basis points. That's down by two basis points year-on-year, but up by 8 basis points from the fourth quarter. Net new assets were strong at CHF 4.7 billion, equivalent to an annualized growth rate of 6% across both emerging markets and Europe. I'd note that this CHF 4.7 billion of net new assets is after regularization outflows of CHF 0.4 billion in the first quarter. And our guidance for regularization for the whole of 2017 remains unchanged, with an expectation of around CHF 5 billion, similar to that experienced in 2016. In Asset Management, the first quarter pre-tax income of CHF 65 million was unchanged from last year. But I'd note that last year included the private equity gain of CHF 45 million that I've summarized already. Asset Management fees improved by 13% year-on-year and 11% sequentially, both in line with higher AUM and also reflecting our strategy to increase the contribution from recurring management fees. If we look at net new assets, we saw strong net inflows of CHF 15 billion in the first quarter, split with approximately CHF 6 billion within our core business and approximately CHF 9 billion from our emerging market joint ventures, reversing the outflows that we suffered in that business at the end of last year. With that, let's turn to Asia-Pacific, please, on slide 34. Similar to the changes that we made within the Swiss Universal Bank, we have restructured the business in Asia-Pacific into two sub-segments with effect from the beginning of this year. First, we have Wealth Management and Connected Activities, which encompasses private banking, financing and underwriting and advisory. Separate to that, we have our APAC Markets business, which includes our Fixed Income and Equities Trading businesses. The market segment both supports our Wealth Management and Connected Activities and also deals extensively with a broader range of institutional clients. I think as you already know, we provided a restated time series for prior periods on our Investor Relations website on this new basis last month. In the first quarter, Asia-Pacific as a whole delivered a pre-tax income of CHF 166 million. That compares to CHF 265 million in the first quarter of 2016, reflecting a difficult market environment in the region in recent quarters. Let's look first at the results for Wealth Management and the Connected Activities. This business delivered profitable growth, with record pre-tax income of CHF 205 million, and that's 67% higher compared to the first quarter of 2016. Net revenues grew steadily to a record CHF 589 million in the first quarter of this year. That's an increase of 44% year-on-year. This was driven by growth in financing and increased client activities, as well as M&A and debt underwriting deals. We also had positive credit marks of CHF 29 million in the quarter, and that compares to a negative CHF 5 million in the first quarter of 2016. We were ranked in the top two in Asia Pacific, ex-Japan, amongst international banks in advisory and underwriting in the first quarter. Asia-Pacific generated net new asset inflows of CHF 5.3 billion in the quarter and annualized growth rate of 13%, which I think clearly demonstrates the strengths and the effectiveness of our integration approach to serving ultra-high-net-worth entrepreneur and corporate clients. Year-on-year, the net margin in this business improved by 1 basis points to 33 basis points, reflecting higher client activity and increased loan and deposit volumes. And I would note, this has been achieved simultaneously with the growth in assets under management. Our RM count has remained stable. That reflects both continued strategic hiring, as well as continued upgrades of our team. Now if we turn now to the Markets business in Asia-Pacific. Performance in the first quarter was driven by a substantially reduced activity in rates, FX and derivatives, whilst performance in cash and particularly in credit was more resilient. Overall, first quarter net revenues declined by 41% compared to the first quarter of last year, with resulting pre-tax loss of $39 million. As we already mentioned, we're targeting a number of efficiency measures to improve our operational leverage and improve the returns in the Markets business in Asia-Pacific. These include a roughly 17% reduction in full-time employees in APAC markets, which has so far delivered an 8% reduction in year-on-year operating expenses. And by 2018, we intend to reduce the APAC Markets expense base to $1.2 billion, a reduction of 17% compared to the annualized first quarter of 2016. Our goal with these cost savings is to achieve a post-tax return on regulatory capital in line with the target for our Global Markets business; that is in the range of 10% to 15%. Our strategy for this business is to reduce complexity and optimize the operating footprint in APAC markets, strengthen the linkage to our Wealth Management activities in the region. Let's turn now to Investment Banking and Capital Markets on slide 35. The division delivered a strong result in the first quarter, with net revenues of $608 million, up by 54% year-on-year. The first quarter of 2016 clearly suffered from weak ECM and DCM issuance volumes, which makes it a weak comparable quarter. But nonetheless, notwithstanding this fact, this quarter's performance was strong across all key products, reflecting the momentum we see across our franchise. We saw wallet share gains across all key products year-on-year and ended the first quarter with a Top 5 rank in global M&A, leverage finance and in IPOs. Advisory revenues were down 6% year-on-year, partly due to the pace of closings we saw last year. During the quarter, we announced the largest M&A deal so far in 2017, that is Johnson & Johnson's pending $31 billion bid for Actelion. Our debt underwriting revenues of $292 million outperformed the market both year-over-year and sequentially, driven by continued strength in our leverage finance franchise and by higher DCM issuance levels. We saw the strongest momentum in equity underwriting, with revenues of $103 million, an increase of 129% year-on-year, reflecting a significant pickup in IPO activity and rights issuances. In fact during the quarter, as Tidjane's (45

[Tidjane Thiam:]

Thank you. Thank you, thank you David. So to wrap up, just three points. One, we have strongly increased profit of the group in Q1, very much in line with the strong momentum, positive momentum we saw in 2016 and across all divisions. Results in APAC, SUB and IWM are in line, but in line at 15%, 26% and 31% return on capital, so we'll be very happy to stay in line at those levels. We are executing with discipline. We'll continue to drive costs down, as we have, and to complete the restructuring of the SRU to hit our 2018 closure target. And we are raising capital in 2017 as planned. The announced rights issue will allow us to invest in our profitable growth opportunities where we expect to generate attractive returns for our shareholders. With this, we'll be very happy to take your questions. Thank you very much.

[Operator:]

Thank you very much. We will now begin the question-and-answer part of the conference. Your first question is from Magdalena Stoklosa from Morgan Stanley. Please go ahead.

[Magdalena L. Stoklosa:]

Thank you very much. Good morning. I have two broad questions. One is about the cost delivery in more detail and I would be referring to slide 31 in particular. We have – we see a delivery of the CHF 250 million savings in the first quarter. That, of course, puts you at above the – to the achieved targets. And of course, we also see the details of the 1,400 reduction. Now could you give us kind of a more sense from the perspective of what else in terms of kind of large cost items are you likely to be executing on to deliver on the 2018, CHF 17 billion kind of underlying cost base apart from the 5,500 kind of reductions we're likely to see this year? I think what particularly interests me is what your costs on the IT infrastructure savings are, any remaining costs from the legal entity programs, real estate programs, everything that you've been talking about up until now? And I suppose within that, what sort of net investments are you still projecting for the next two years to arrive at the net savings numbers? And I have one more question.

[Tidjane Thiam:]

Well, why don't you ask the second one, and we'll take them both if that's okay with you?

[Magdalena L. Stoklosa:]

Okay, perfect, absolutely. So my second one is about your thinking about the Global Markets revenue and balance sheet commitment. Of course there is a discussion in the market at the moment about whether the increase in revenues, which, of course, you have also seen in the first quarter, is a function of the efficiency of the balance sheet or the ability to commit more. Of course, we know the numbers, we know the ceilings of CHF 60 billion. But I'm just curious about your thinking about what's going to be the kind of most important in driving revenues and taking advantage of the better market conditions, the efficiency or actually the ability to commit balance sheet or some combination of both?

[Tidjane Thiam:]

Thank you very much. Two very clear questions. On cost, all I'd say at the high level is that all the numbers we've given you are absolute targets, and we insisted on using absolute targets, our cost-income ratios are after investment, so they're all net of investments and they're all taken into account in our planning. But David, do you want to give more granularity?

[David R. Mathers:]

Absolutely. So I think just referring back to slide 31, I think we're clearly pleased to have reduced our expenses by approximately CHF 250 million in the first quarter. And I'm particularly pleased about the source of that in terms of the reductions that have been achieved in the non-compensation costs. And within that, our professional service costs related to the contractor and the consultants, that is the single largest contributor of the reductions in the first quarter. I would caveat, of course, that that's a first quarter. It puts us obviously very much on track to be below CHF 18.5 billion for the full year, but it does require us clearly to continue to execute at these levels for the balance this year, not just to hit the 2017 goals, but to put us firmly on track for what we intend to achieve in 2018, which is to reduce our expenses below CHF 17 billion next year. So a good start, but we need to keep focused on this, and we will do so. I think just in terms of the components of that, I think last year, we did emphasize we wanted to reduce our reliance on contractor/consultants, to protect our full-time employees as much as possible. We were successful in doing so. That remains very much our plan for 2017. And clearly, within both the 1,400 and the 5,500, the bulk of those will be contractor/consultants, and therefore, that will continue to keep pressure downwards on the non-compensation costs within it. So that's probably a – in terms of guidance, that's the line you probably should expect to actually move. Clearly, we will continue to accrue compensation in line with the performance of the businesses at that point. In terms of major programs and the major contributors are clearly the large scale reorganization programs, of which the largest obviously is in the UK, the Lighthouse II program, as it's called internally, but we do have similar programs elsewhere which are aimed at actually reducing the overhead with particularly having contractors and consultants in some of our expensive locations. So those would be the single largest components I'd actually focus on and target in terms of that. As Tidjane said, I think we state these numbers clearly at a net level. It's an absolute target, so it is net of the investments we're making elsewhere. We clearly highlighted in Tidjane's slides the investments in the compliance infrastructure, so basically these net numbers are actually net of that increase of costs. And that clearly applies to the investments in IT infrastructure, which simultaneously support the CCRO program, for example. So I don't think I'd go beyond those points. It's not our general intent to give cost targets by division, but I think it's clearly a good start. You can see the major components in terms of that. It will be the big programs that drive most of that. We do have significant other cost programs which we have factored in, which I think will give us some, as we say, some further options to ensure that we actually fall below the CHF 17 billion number for 2018, notwithstanding likely investments that will come from elsewhere – and will come from elsewhere. And we'll give guidance and updates on those as we execute, but I think the intention is to run a portfolio and to actually manage within that in terms of our cost programs. Legal entity program, I'm not going to give a specific number for next year, but clearly the legal entity costs will decline substantially in 2018 from 2017.

[Tidjane Thiam:]

Yeah. And just to add some color. I mean, absolutely reinforce everything that David has said. Project Lighthouse in London, we have a similar project in North America where we have a platform in North Carolina that is very productive and we also use that as an opportunity to generate savings and that's actually quite material. We have in our Global Market accelerated restructuring. We have tranches that are underway that are being implemented, that are going to generate further savings. And as David said, our philosophy is to try and minimize the job losses. Our objective is to be maximize the actual (1

[Magdalena L. Stoklosa:]

...very much.

[David R. Mathers:]

Okay.

[Operator:]

Thank you very much. Your next question is from Andrew Coombs from Citigroup. Please go ahead.

[Andrew P. Coombs:]

Good morning. Three questions from me, please. One on dividends, one on APAC Markets, and then one on the Swiss Universal Bank gross margin. If I start with your dividend plans that you outline on slide 43, the CHF 4 billion capital raise obviously gives you a lot more flexibility, so you're talking about a cash dividend for 2017, but you obviously talk about becoming competitive versus peers. What I wanted to ask is does that mean you're targeting a specific payout ratio? So are we talking 50%-plus? Or would it be a case that you'd also consider paying out everything above your target 13% core Tier 1 and 5% leverage ratio given that you're already there today? That's the first question. Second question, when I look at your APAC Markets result, there has been a sizable decline in the fixed income revenue contribution. You attribute that to lower rates activity, also lower volatility. We've seen that for two consecutive quarters now. So I just wanted to get your feeling on whether you think that's a depressed number or whether that's the new normal? And then, finally, on the Private Banking gross margin, a drop from 152 basis points to 146 basis points Q-on-Q, largely driven by NII (1

[David R. Mathers:]

(1

[Tidjane Thiam:]

Oh, completely. I mean, the whole philosophy behind this plan and strategy is to get back to a accretive position and we have this in sights now beyond the – already in 2018 and much more so beyond 2018 with the current plan and then we're very happy to return the capital to the shareholders and that's why we see that CHF 4 billion infusion almost as a bridge and it will have a payback, and a strong payback we hope. APAC Markets, I think you've seen the results. Maybe I should say a few words about what's going on there. You can think about it as kind of three businesses. There is a Structured Derivatives, an Equity Derivatives business, a kind of classical Equities business and a Fixed Income business. The Equity Derivatives business is amazingly strong. And even in these numbers, with this loss you can – (1

[David R. Mathers:]

So, the gross margin was 146 basis points. That compares to 155 basis points a year ago. There was both – we did have some deposit campaigns, which actually did reduce our net interest income. And as Tidjane said, there was some reduction in our central treasury allocations to the Swiss Universal Bank. Also, I think, within the gross margin, there's also some other activity as well, the trading activities which, as we said, basically were actually down in the first quarter of this year, so those were the primary drivers of that. I mean, I think we've always said, we include the gross margins for completeness. Clearly, net margins from our point of view is a much better measure, so 43 basis points in the first quarter compared to 44 basis points a year ago and also compared to 31 basis points in the fourth quarter of last year. So I think a pretty solid net margin performance, particularly as this has been accompanied with the growth in assets under management of CHF 2 billion in the Clients business there, which I think is the thing you want to pull out. And by the way, on the other businesses, I think it is worth reiterating that the net margin for IWM, 32 basis points, up from 24 basis points in the first quarter, notwithstanding the very strong growth we saw in net new assets there. And APAC basically, also increased as well in terms of the net margin from 32 basis points to 33 basis points, again, notwithstanding the net new assets.

[Tidjane Thiam:]

Exactly. The way we run these businesses, we're okay with margins being flat, or even slightly declining, when we have a kind of AUM growth rate that we have, because we're creating value for our shareholders. Remember, return on capital is 15%. For me, when I'm writing business at 15%, I'm always happy to write it. In Switzerland, 26% in IWM, 31% in Asia, and those levels of return on capital. You can become overly focused on margin at the expense of PTI. In the end, we're driving absolute PTI and return on capital. And as long as recovering our cost of capital, we're happy to take it, so that's an important comment. And right now, I think also we shouldn't over-interpret quarterly variations in margins. I would encourage, for margins, to look at the full year, because there is seasonality there, product mix moves with the macro, the AUMs move with the markets, et cetera, et cetera. If you have a depressed market for three months, your AUM goes down, your margin is up. So are we going to say that's a great quarter? No, because you lost substance, you lost AUM. So I addressed – not a great fan of margins, never have been. I'm a fan of PTI, return on capital. Margins are interesting, but they can sometimes also lead to the wrong conclusion. So I think in the case of Switzerland, we're happy with the development of the business. Record AUM CHF 547 billion, CHF 2 billion of NNA in three months, that's very strong, and we're confident, rather than the instantaneous snapshot that over time that substance coming into the Bank is going to create a lot of value for us. Final thing that drove gross margin down is the transaction revenues, which were down, because you will remember when we put our FX business in the SUB, into the Swiss Universal Bank in STS and FX in 1Q, I mean we're not the only bank showing that, was challenging. Actually all of the (01

[Andrew P. Coombs:]

Very helpful. Thank you, guys.

[David R. Mathers:]

Thanks, Andrew.

[Tidjane Thiam:]

Okay. Thank you very much, Andrew. Shall we take one more question and I think we're running into the time, but if there are questions we should took them today, let's go to our next question.

[Operator:]

Thank you very much, sir. The last question is from Kinner Lakhani from Deutsche Bank. Please go ahead.

[Kinner Lakhani:]

Yes. Good morning. So I just had a question on the SRU, thinking about your guidance beyond 2018. So I know you'll be reintegrating that in. Should we still stick to the kind of CHF 800 million that I think you previously guided to? And would that be largely going into Global Markets? And is that kind of a sustainable run rate or does that start to diminish going into 2020, et cetera? So that's question one. Question two is just in terms of your cost guidance, whether that includes your plans in a kind of post-Brexit scenario? And question three is if you had any kind of updated thoughts post kind of the tax investigation of 31st of March that we read about? Thank you.

[Tidjane Thiam:]

Thank you. Thank you very much. Can you take the SRU, David?

[David R. Mathers:]

Thank you. So I think at last December's Investor Day, I think we guided to 2019 losses, which I think is the focus of your question, to be less than CHF 800 million in 2019. But I'd also remind you that there was some subsidiary guidance there, which is we expect the operating costs to be at or below CHF 110 million per quarter or about CHF 440 million annualized in 2019. So the question, I guess, will be, are we going to change our guidance? I think, at this point, what we've decided to do is clearly pull forward our capital and our leverage targets from the end of 2019 to the end of 2018, and we've said there will be no incremental costs from that. Once you've made that decision, then I think the value of retaining what is frankly obviously a very successful group of people focused on what would be only about CHF 10 billion ex-op risk of RWA, frankly, I know my colleagues in front of me I think have, should we say significant interest in re-employing these guys elsewhere. So I think at that point, it does make sense, because it becomes that that level to basically move it off and reabsorb at that point. In terms of that CHF 440 million, I'm not changing that guidance today. I think it's still 20 months away. The CHF 440 million number is actually in our cost guidance, some targets we've actually set, so it's assumed within those numbers. It's not – we have to get rid of that CHF 440 million which is our cost target, it's actually embedded and in that we'll clearly look over the course of the next few months to working out our final state plan for this. And clearly, some of these costs will be reallocated to divisions, and we'll get to that end state in due course. I think what I wanted to tell you today, essentially, is that's going to be our goal for the end of 2018. There will be some reallocation in 2019. We'll obviously work to make sure it's CHF 440 million or less. Clearly, there is other costs in there like funding costs, obviously setting a final end state for the SRU and giving 20 months notice of that, obviously helps my treasury team figure out exactly how much funding we actually need for that reduced date as well, so that will also be another lever we can actually pull to reduce the drag on the SRU. So that's kind of where we are at this point. We'll revert to you more formal plans. We wanted to give you guidance on something which is, as I said, 20 months in the future.

[Tidjane Thiam:]

Thank you, David. I think your last question was on tax investigation, yeah? So I'd say maybe a few words...

[Kinner Lakhani:]

Brexit – if Brexit was incorporated in your guidance?

[Tidjane Thiam:]

Sorry? Oh Brexit. Okay, go ahead. Do Brexit...

[David R. Mathers:]

Yeah. I think like other international banks, we're obviously looking at the options for our access to the EU 27 countries in a post-Brexit-type-world. Clearly, the political environment continues to develop, I think that's a fair comment. And I think it is likely, but it's a decision that the board will have to make in due course, that we will probably look to increase our clearing and transaction activity within the EU 27 sites. I think you've seen similar move from other banks, but we haven't decided finally on that, where or what size. I think that fits in on some of the options we have for our cost plans, so I don't think you should see any deviation from our cost plan. It's what I mentioned before in terms of we have a portfolio of cost projects we need to meet in order to ensure that we can both basically make the necessary investments for a changing environment and ensure we actually drop below CHF 17 billion. So we'll obviously give clearer guidance in due course, but I don't think you see that as a reason for us to deviate from the targets we've actually given so far.

[Tidjane Thiam:]

Yes. I think in the short-term Brexit has been helpful to our cost. It's because we give FX constant cost, you haven't seen it. But...

[David R. Mathers:]

That's right.

[Tidjane Thiam:]

The 19.4 FX constant cost for 2016 was actually 19.1.

[David R. Mathers:]

That's right. And that remains the case now. Obviously, the weakness of sterling continues, together and fairness with the progress on the Lighthouse II program continues to substantially reduce our U.K. costs.

[Tidjane Thiam:]

Not taking credit for it, but it's been a tailwind. Yes, the tax investigation, look, I think Iqbal went on Bloomberg, Iqbal Khan, to say we were surprised, I think that's a fair statement. This is an area where we have, and this really predates me, been making an enormous amount of work since 2011. We've had extensive client tax programs to go through our portfolios and ask every single individual client to provide evidence that they're tax compliant or to ask them to leave if they are not. There has been numbers in the media, I think they're correct, a number of CHF 40 billion of outflows has been mentioned, that's actually an understatement, it's more than that. And if you take – I have some notes here, but one given country which I will not name, had 22,000 clients here, with CHF 8 billion, we took 15,000 out with CHF 5 billion, so we have CHF 3 billion left. And ones left are tax compliant or at least have told us they're tax compliant, and have given us some evidence. Another country had 4,000 clients, and they have – we have exited about 2,200 nationals of that country. They had CHF 3.5 billion of assets, we exited CHF 1.3 billion of assets. These are anecdotal, but just to give you a sense of the magnitude of the effort that has been applied to this area and therefore, our surprise. Now, we are completely aligned with the authorities. Our policy is explicit. It's black and white internally. We have zero tolerance for undeclared asset. Could there be, in spite of all that effort, a situation or few situations where our people have misled us or have provided not the right documents? Absolutely. Or could have people done things wrong? Absolutely. And if there are such situations, we want to find them with the authorities, and we are cooperating with the authorities to find them. And this is not an area of tension. Our interests are aligned. As a bank, we don't want to be a haven for undeclared assets, and that's not our growth strategy. So it is what it is. We will cooperate at all times everywhere with the authorities and that's about all I can say about this at this point in time, yeah?

[Kinner Lakhani:]

Gentlemen very helpful. Thank you. Thanks for the discussion.

[Tidjane Thiam:]

Okay. Okay, thank you. Thank you all for joining our call this morning. Thank you for listening patiently and for your questions. And we're looking forward to exchanging further with you in the coming weeks. So it's been a good quarter. We make a good progress in executing our capital plan, which was to raise capital in 2017. And that will give us the fuel, if you wish, to complete the final phase of this restructuring program. So thank you very much.

[Operator:]

...today's conference, an e-mail will be sent out shortly advising you on how to access the replay of this conference. Thank you for joining today's call. You may all disconnect.