Credit Suisse Group AG
Q2 2017 Earnings Call Transcript

Published: 29 Jul 2017

[Adam Gishen:]

Good morning, and welcome to the second quarter 2017 results call. Before we begin, let me remind you of the important cautionary statements on Slide 2, including the statements on non-GAAP financial measures and Basel III disclosures. In this presentation when we discuss our results, we focus on our adjusted results, as it is the way we manage the operating performance of our businesses. For a detailed discussion of our reported results, we refer you to the Credit Suisse 2017 Q2 financial report. With that, I turn it over to our CEO, Tidjane Thiam.

[Tidjane Thiam:]

Thank you, Adam. Good morning, everyone, and thank you for joining this call. With me this morning is David Mathers, our Chief Financial Officer. He and I will now present our second quarter and first half 2017 results for Credit Suisse. David and I both look forward to taking your questions at the end of the session. So I suggest we start with Slide 4. Our earnings release this morning showed that in the environment of Q1 and Q2 '17, at the group level, we have been able to generate positive operating leverage. We have grown net revenues by 9%, while our fixed cost base reduced by 13%. We have also continued to make progress in the wind down of the SRU. In financial terms, we delivered group adjusted pretax profit of CHF1.6 billion for the first half versus 117 million in 1H '16. Now looking at this in more detail, and most of my comments will be on H1, David will give you more specific detail on Q2 itself later. So first, we are delivering broad-based profitable growth. We attracted close to CHF23 billion of new assets in Wealth Management, that's up 12% year-on-year. Our Wealth Management-related businesses increased revenues by 9% and adjusted profits by 21%, so that growth was profitable. In IBCM, revenues were up 19%, and adjusted profits up more than 140%. And Global Markets generated CHF3.2 billion of net revenues, a very important milestone for us, whilst further reducing costs, delivering CHF638 million of profit. Both credits and equities are up year-on-year. These results reflect the strength of our core current franchises across Wealth Management and Investment Banking after 18 months of intense restructuring. Second point on this page. We continue to execute with discipline. We continue to make material, steady progress in reducing our cost base, which is down 9% in Q2 year-on-year when measured in FX constant terms. And you remember we've taken this convention of always using FX constant terms so that our results are not fettered by FX evolutions. In the SRU, we are continuing to de-leverage, with a further $8 billion of leverage exposure reduced in the quarter. The third point on this page is really about increasing our return on capital, which we noted must increase, this is crucial. In the second quarter of '17, we have significantly strengthened our capital and leverage ratios for the completion of a recent right offering, and thanks to the support of our shareholders. We now have a stronger balance sheet, and we must continue to operate with discipline to preserve that strength going forward. So we are improving the return on capital across businesses, and over time, we are allocating capital towards higher returning divisions and activities. Over time, we aim to accrete growing levels of capital which will ultimately return to shareholders as the strategy plays out. So let me now look at our financial results in a bit more detail, and this slide is really just about operating leverage. You can see the benefits of this leverage. You have H1 '16, H2 '16, H1 '17, so three half years in a row. We achieved savings of CHF600 million, so far, in H1 '17. This is in addition to the CHF 1.9 billion of net savings in 2016, and David will elaborate on that further in his section, so that's the bottom part of this chart. You see the CHF9.6 billion, going to CHF9.5 billion going to CHF9 billion, operating expenses. And at the top, you can see the revenue growing up CHF9.8 billion to CHF10.2 billion to CHF10.7 billion. And if there is one slide that we would like to stick in your mind today, it's this one because it tells the story very well. Now taking, separately, revenue and cost, starting with revenue. We had an increase of about CHF900 million in 2017, as you can see here, and that is split about half and half between Wealth Management and Investment Banking and Markets. So I'll give you a few more insights on that, starting with Wealth Management. And there, what we're looking at here is the inflows. So you can see that we went from about CHF13.2 billion in 1H '15 to CHF22.8 billion in 1H '17. It's quite evenly spread. You can see that APAC, Asia Pacific, and IWM are both above CHF9 billion. And very pleasantly, our Swiss Universal Bank went from, basically, 0 in '16 to CHF3.7 billion on -- in '17. So really, well spread between mature and emerging market. This is very good growth, and these flows are a clear indication of the power of our franchises. And it's worth noting that, in addition to this, we have attracted CHF17.8 billion in our asset management activities. So that's NNA. Let's now look at AUM. At the end of the first semester -- this is only PB AUM just to be clear, Private Banking AUM. We had a record CHF716 billion of AUM in our Wealth Management activities. That's up 8%. So that's just really -- it not annualized, it's up 8% directly, if you wish. I won't annualized the number, but I'll leave that to you. Total client assets are at CHF1.6 trillion. That's also up 8% year on year. And as we have stated in the past, growth is a fundamental pillar of our strategy, but we also work very hard to ensure that this growth is of high quality, is compliant and is of low risk in nature, and I'll have a chance to comment on that later and also hopefully during the Q&A. Now moving on to Investment Banking and Markets side. You can see some good revenue growth there as well. In IBCM, we achieved CHF1.1 billion of net revenues, up 19%. That's one of our best half years in many years. And Global Markets revenue totaled CHF3.2 billion in the first half, which is up 15% year on year if you exclude SMG, and I'll come back to that, too, later. So going forward, we see -- sorry, no. Going forward, we actually see significant opportunities. Think about Wealth Management, which I just covered, and Investment Banking here and Global Market. We see significant opportunity to bring all those Investment Banking and Markets capabilities to our Wealth Management clients, and we believe we have only just begun to unlock this potential. So that's for revenue, moving now to cost. We are pleased that we've been able to achieve revenue growth, whilst reducing cost. We made continuous progress there. And for the first half of the year, we reduced operating expenses by 6%, as you can see here, and non comp expenses, something we follow closely, by 13%. These savings are net of investment that we continue to make in technology and innovation and in attracting new talent to the bank. In fact, as you can see on the next slide, and this is a quarterly -- this gives you quarter by quarter the adjusted operating expenses, from the light blue 2014 to the dark blue 2017. And what you will see here is that the last two quarters, so Q1 '17 and Q1 -- Q2 '17, at CHF 4.6 billion and CHF 4.4 billion, are the lowest in the past four years. And this gives you a sense of the change -- the absolute transformation in cost level across the bank. There's a quite a few tranches there, and you can see that this quarter is the lowest by margin. So that was just for revenue costs. I will then, if you allow me to spend a few minutes, giving you highlights for each of the divisions, and David will give you much more details in his section. And I will start with Switzerland. Switzerland has achieved its highest ever adjusted quarterly PTI of CHF 504 million, so above CHF 500 million in the second quarter of '17. That's a 5% year-on-year increase in revenue, together with strong cost discipline. Because costs are more or less [indiscernible], but we are investing as I will indicate later. So over the past two years, PTI has grown 14% in what is considered a mature market. And actually, according to data from the recent Swiss National Bank report, the revenue pool of industry's banking market is down 3.2% since 2014. So the growth achieved by Swiss Universal Bank is really remarkable. This increase in profitability was achieved in a period in which we are strongly investing into digitalization. We have rolled out a number of features in the first half of this year, and there is more to follow in 2017. Thomas and his team are also working hard to preserve the future of our Swiss franchise and focusing now on the segment of younger customers, which represent the generation of tomorrow, and there's more to that coming during the rest of the year. So let's now turn to IWM. International Wealth Management. We have increased adjusted products income by 24% with a return on regulatory capital at the bottom going from 24% to 28% now, which explain why we are so keen to continue to invest in that division, given the marginal returns we generate. It is a strong performance. We setup IWM in 2016 as a dedicated division, which houses our international Private Banking franchises, so Middle East, Africa, Central and Eastern Europe, Western Europe, Brazil, Mexico, alongside our asset management capabilities. This focus has allowed us to significantly increase client engagement and activity, as evidenced in the second quarter across our international footprint. In combination with our advisory and structuring team, we are benefiting here from strong client demand for our customized solutions and services, something we call priority solutions internally leading to higher mandate penetration at 30%, which then translates into recurring fees which I will cover on my next slide. So if you look at the components of revenue and growth in the next slide, you can see that revenue is up 9% year-on-year in our Private Banking franchise. This is only PB, and that growth is broad-based. Net interest income is up 12%, and that's with contribution both from loans and deposits, both sides. And we had an acceleration because it was actually up 5% in Q1 and 18% in Q2. So you can see the acceleration within the year leading to the 12%. We have the transaction and performance base, which is up 5%. That's where we deploy our house view every day to increase client engagement. And then you have several best-for-less recurring commissions and fees, which really is a driver of value in the long term, because we are very focused on growing the recurring, which grew at 8%, actually, 11% in Q2. So you can see that same acceleration from Q1 to Q2 that I mentioned earlier. So for us, IWM is absolutely central to the strategy. It is 40% of the world GDP and there is plenty of growth because the numbers you are seeing are generated just by covering some of our largest clients. And as we extend this approach to the next layer of transfer, there's a lot of growth available. And final comment again on this growth, most of it come from existing clients. It's really about working better and more intensely the existing client base. There is often this view that we are growing by recruiting new clients, that is not what we are doing. And this is why we're so confident in the growth and the growth potential. So moving to APAC; in APAC, we have really put in place an innovative structure in '16, which is an integrated approach to ultra high net worth and entrepreneurial clients where we have put side by side Wealth Management, the advisory and underwriting, both equity and debt, and the financing activity. And that was new, and frankly, it has worked very, very well. The performance is extremely strong. Profits in the first half increased by 72% to above CHF 400 million for the first time and was double compared to the same period in 2015. And adjusted return on regulatory capital was 29%, up 7 points year-over-year. And we actually look at this, we think the marginal return on this business -- return on capital is about -- is comfortably above 30%. So it's again another business where we're very keen, very keen to invest. Just allow me one more slide on this on our pure Private Banking activities. Revenue there has increased 24%. So what we see in Asia is also a different form of operating leverage, shape of operating leverage, because revenues going up strongly and cost is going up less strongly, so you have positive draws there opening, and that's also very powerful. We have seen a strong increase in recurring commission and fees. So remember the comment I was making earlier in recurring, hereto, it's up 22%, and the strong rebound of client activity, which is up 24%. And our decision to hire RMs, which was at the time, we said opportunistic in 2015 and 2016, has paid off very well. We had a unique opportunity to hire experienced RMs at a very competitive cost. And subsequently, we have seen that the market for RMs are significantly repriced in places [indiscernible]. So we're pleased with what we've done here, and it's delivered some really good results. And we are now investing in technology to increase client-facing time for our RMs, which is another way to increase your RM population. It's not how just about how many RMs you have, it's really about the technology they have to work. And we're doing that in APAC. We're also doing that in IWM with great effect. And just one comment also on lending. so we get a lot of questions on that. The model we run in Asia with our Asia financing group, just got awarded Best Financing Team in Asia, is a real model of originate and distribute. We distribute a lot of that risk, close to 80%. So we've been able to increase the capital velocity, generate good returns without increasing the absolute amount of risk we take. Allow me to say a word -- sorry, still on Asia, on the Asia markets, which posted a loss in Q1 and broke even this quarter, basically. And it's interesting, there's an improving underlying trend there. June for APAC market was the strongest month since November '16. So after the difficulties we've had, things are better. And over the first half year, we have continued a program to reduce the cost base, and we have lowered operating expenses by 11% sequentially, which is going to flow through the numbers in the coming quarters. We will continue to reduce costs, while protecting our franchises in equities, cash, claim, and derivative. We believe we're on track to hit the 10% to 15% return on capital by 2018 we indicated. And we've got some comfort from the fact that, sequentially, revenues increased in APAC markets. So Q2 was above Q1 in terms of revenue, and that's always a good thing, and it shows that the cost-cutting has not really damaged the franchise. So having covered the three Wealth Management focus businesses

[David Mathers:]

Thank you, Tidjane. Good morning, everybody. I'd like to thank you very much for joining our second quarter earnings call. So I will start with a summary of our second quarter results on Slide 24. So as usual, we show here the group numbers on both a reported and an adjusted basis. And these have been prepared under the same definition as in prior quarters. As is our normal practice, we provide a full reconciliation of the adjusted and the reported results in the Appendix. Now if you look at the results in the second quarter, we achieved a reported pretax income of CHF582 million on net revenues of CHF5.2 billion. On an adjusted basis, we achieved a pretax income of CHF684 million, also on CHF5.2 billion of revenues. And so for the first half, our adjusted pretax income was CHF1.6 billion on revenues of CHF10.7 billion. Net income was CHF303 million in the second quarter, equivalent to return on tangible equity of 3.4%. And for the first six months, net income was CHF899 million and return on tangible equity of 5%. I'd note that our second quarter tax charge was higher than in the first quarter, primarily due to tax costs relating to the delivery of our share based compensation awards in the quarter. By comparison, you'll note that our effective tax charge in the first quarter was substantially lower, and that reflected the benefit from establishing a new core structure to hold our Asset Management businesses. For full year 2017, we would expect our effective tax rate to be in the mid 30s range. In future years, as we continue to execute on our strategic plan, reducing expenses and the drag from the Strategic Resolution Unit, we would expect the effective tax rate to fall back to more normal level, somewhere in the high 20s. So as per our usual practice, for the balance of this presentation, I will focus entirely on the adjusted numbers as we believe this more accurately reflect the operating performance of our businesses. And let's now turn to Slide 25 to review our capital and our leverage positions. So we show here the walk across through our risk weighted assets and our leverage exposure quarter on quarter. True, the most significant impact in the second quarter on the exposure numbers was from the depreciation of the U.S. dollar against the Swiss franc. And as you can see, this has reduced RWA and leverage exposure by CHF5 billion and CHF23 billion, respectively. I'd remind you that we continue to hedge our CET1 position to FX neutrality, so the net impact on our key ratios from this FX volatility has accordingly been neutral for the quarter. In terms of business reductions, the most significant move was from the Strategic Resolution Unit, where we reduced risk-weighted assets by CHF2.4 billion and leverage exposure by CHF9 billion, again net of FX moves. Given the progress that we've continued to make in reducing positions in the SRU, we're ahead of the schedule that we announced last quarter to achieve the accelerated closure of the SRU by the end of 2018 with the associated RWA and leverage targets that we gave last quarter. Just as a reminder, we intend to be at $11 billion in RWA, excluding operational risk and $40 billion in leverage exposure by the end of next year. Now if we look at the overall group, at the end of the second quarter, risk-weighted assets stood at CHF 259 billion, down by CHF5 billion from the first quarter. And following the completion of the rights issue, our CET1 ratio improved to 13.3% at the end of the second quarter. Leverage exposure stood at CHF 906 billion at the end of the quarter, down by CHF 30 billion from the end of the first quarter, of which, as I've said already, the majority was due to FX. Our Tier 1 leverage ratio improved to 5.2%, that's up from 4.6% in the first quarter, and that's surpasses our 2020 Swiss "Too Big to Fail" requirement and is in line with our stated ambition to operate at or above 5% of Tier 1 leverage. The CET1 component of this leverage ratio stood at 3.8% at the end of the second quarter, which also exceeds the 2020 Swiss TBTF requirements, which is a growing concern level of 3.5% or greater. So just lastly on the slide, I'd note that we would expect increase in our operational risk capital exposure in the third quarter of 2017, and that results from the requested add-on from FINMA in respect, primarily, of our past RMBS settlements. Separately, we have also approached the FINMA with a request to review the appropriateness of the level of op risk exposure in the SRU, given the progress that's already been made in reducing the size of the SRU over the past 18 months and with the aim of -- further aim of aligning the reductions in this op risk exposure to the accelerated closure of the SRU by the end of 2018. Depending on the sequencings of these discussions, we would expect a net increase in op risk capital exposure in the third quarter, perhaps in the order of 20 basis points of our CET1 ratio. Now with that, let's turn to our cost program, please, on Slide 26. We have continued to make further significant progress in reducing our expense base. And we achieved another CHF350 million of run rate savings in the second quarter. And that brings our net savings for the first half to around CHF600 million, well ahead of the schedule that's required to deliver our full year cost targets, which I remind you is a net saving of over CHF 900 million, and for total costs to be below CHF18.5 billion for the whole of 2017. I'm sure you don't need this reminder, but just please note that the cost program continues to be measured on an FX constant basis from a full year 2015 baseline of CHF21.2 billion. Now in terms of the main components of the CHF 600 million of net savings that we've achieved in the first half of the year, this has been primarily driven by a reduction in our contractor and consultant count and, to a lesser extent, by the reduction in our permanent workforce. The reduction in contractor and consultants has led to a significant reduction in professional service costs within the non-comp expense line. And you'll note, as Tidjane said already that the total non-compensation spend is down by 13% in the first half compared to the first half of 2016. Now I'd reiterate that these savings are being driven by our extensive and wide-ranging work force strategy. This strategy is aimed at removing duplication and fragmentation across our businesses, whilst building integrated processes in low-cost locations. As a result, we would expect to sustain reduction in costs, continued gains in efficiency and a reduction in operational risk. This is clearly a very core component of our ambition to be below CHF 18.5 billion in expenses for this year, and we believe will also help to deliver the further improvement in productivity in order to drop our cost to below CHF 17 billion for next year. With that, I'd now like to turn to each of the divisions' performances, and I will start with the Swiss Universal Bank on Slide 27. The Swiss Universal Bank has continued to deliver strong year-on-year pretax income growth for the sixth consecutive quarter. For the second quarter of 2017, we achieved a record pretax income of CHF 504 million, an increase of 10% year-on-year, and driven by higher revenues. Compared to the second quarter of last year, revenues in the Swiss Universal Bank increased across both segments. This growth was greatest in our corporate institutional client business with particular strength in Investment Banking fees and net interest income. I think this shows the value, once again, of the universal bank model and a diversification which this provides. We've continued to make progress of our efficiency measures, with the cost-to-income ratio improving to 62%. Now that's down to 65% in the second quarter of last year. We did see some uptick in the credit provisions in the second quarter, mainly relating to three specific cases within the Corporate & Institutional Client business. The division reported record assets under management of CHF 554 billion in the second quarter, and that's an increase of 4% since the end of 2016. Turning to private clients. We delivered a pretax income of CHF 222 million, slightly lower than a year ago. This performance reflects continued investments in compliance, risk and digitalization initiatives. We have significantly revamped our online banking efforts, successfully launched our digital onboarding and upgraded our technology to better align to our clients' needs. We're particularly proud of the ability for our Swiss clients to remotely open an account in 15 minutes without having to visit a branch. Within the Corporate & Institutional Client segment, revenues increased by 10% year-on-year, driven by higher investment in product fees and a strong investment banking performance. And the benefits to the bottom line was further bolstered by a 4% reduction in operating expenses year-on-year. If we look at net new assets division, the Private Clients business saw a very strong momentum with net inflows of CHF 1.7 billion, primarily driven by strong performance with ultra high net worth and entrepreneur clients. And that follows on the back of the strong performance in the first quarter where we saw 2 billion of net new asset inflows, bringing the total NNA to 3.7 billion for the first six months. In Corporate & Institutional Clients, we saw inflows from Swiss pension funds in the second quarter, but offset by outflows from the selected exits in our external Asset Management business that we've discussed in previous quarters. Now for the first half of this year, outflows from EAM exits halves totaled CHF1.8 billion, and we maintained our total guidance for regularization outflows, including EAM exits to be at or below CHF3 billion for the whole of 2017. I'd also remind you that net new assets in the Corporate & Institutional Clients subsegment do tend to be lower margin and also somewhat more volatile compared to those in the Private Client business. With that, I'd like to move to International Wealth Management, please, on Slide 28. International Wealth Management had an outstanding performance in the second quarter, marked by strong pretax income growth and continued net new asset momentum. The second quarter has been a key milestone for the IWM business. We've turned around our Private Banking operations in Western Europe from loss to profit. We've seen continued profitable growth in our emerging market businesses, and we've increased the management fees in asset management. If you look at the results for the quarter, net revenues of nearly CHF1.3 billion grew by 10% year-on-year, and pretax income of 378 million increased by 45%. This growth was supported by our focused efforts to improve client engagement and sharpen the visibility of our chief investment committee's House View solutions. We saw a rise in mandates as a percentage of AUM to 30%. And I'd note this figure includes CHF5 billion in net sales mandates in the first half of the year. The increased operating leverage within this business was evident as we combine this growth in revenues with diligent cost management. And as a result, the second quarter cost-to-income ratio improved to 69%, that's down from 76% in the same period last year. Now if you look at net new assets in the first half of the year, the two businesses in IWM reported combined net new assets of CHF27.1 billion. That's almost double that of the first half of last year. If we look at Private Banking, we saw a sharp improvement in profitability with pretax income of CHF307 million, an increase of 56% compared to the second quarter of 2016. Net revenues in the second quarter have increased by 14% year-on-year with a record net margin of 36 basis points. If we look at the components of revenue, net interest income was up by 18% year-on-year, with higher loan volumes and a steepening in the U.S. dollar yield curve compared to 2016. I'm very pleased that we've managed to match the growth in assets under management with similar growth in recurring commissions and fees, up by 11% year-on-year. Finally, the quarter saw a significant improvement in transaction-based revenues, up by 12% year-on-year with brokerage and FX fees increased by over 20%. We saw a significant improvement in structured product sales with clients benefiting from the uptick in yield from these products in this environment. And as I'll discuss further in the global market section, this is an area in which we're keen to expand the range and the depth of the products that we can offer to our clients, and this is now underpinned by a former partnership between IWM, Global Markets and the Swiss Universal Bank. We've made a number of key strategic hires in this area in the first half of the year with the aim to further enhance the collaboration between our Private Banking and our trading businesses. Private Banking net new assets amounted to CHF4.6 billion in the second quarter, and that's equivalent to an annualized growth rate of 6%. Inflows were broad based across both emerging and developed markets. Now in terms of regularization outflows, these have been relatively muted due to the extensions of the amnesty programs in Latin America. And in total, we've seen about CHF0.8 billion of outflows from regularization so far this year. As in prior periods, we expect the bulk of regularization of those outflows to incur in the second half of this year, and we expect outflows for the whole of 2017 to be between CHF3 billion and CHF5 billion. In asset management, the second quarter pretax income of CHF71 million increased by 13% year on year. But I would remind you that the comparison quarter last year included a CHF24 million benefit from the investment gains that we noted at that time. As we've mentioned already, management fees and asset management of CHF269 million increased by 22% compared to the second quarter of last year. This reflects a number of factors, including good investment performance and strong net new assets, which reached CHF17.8 billion for the first half of the year. And I would note that these new assets reflect the success of the increased collaboration with our Private Banking business, both in Switzerland and globally. Overall for asset management, second quarter revenues were stable year on year, but of higher quality as the increase in management fees was offset by a reduction in investment products income and lower performance and placement revenues. Now for the second quarter, asset management saw net new assets of CHF2.8 billion with inflows from traditional and alternative investments. This was partly offset by outflows from our joint ventures. With that, let's turn to Asia Pacific, please, on Slide 29. In the second quarter, Asia Pacific delivered a pretax income of CHF199 million, with return on regulatory capital of 15%. In Wealth Management and connected activities, we continue to drive profitable growth with pretax income of CHF198 million in the quarter, up by 78% year on year. The return on regulatory capital was equally strong at 28% for the quarter. Net revenues of the business grew steadily to CHF559 million, up by 23% year on year. We saw a particular strength in Private Banking, with revenues increasing by 20% year on year, and that reflects, as Tidjane has already summarized, the maturing of the significant investments that we've made in this business, particularly in the RM team over the last couple of years. Now if we look at advisory underwriting and financing, revenues are up by 31% year on year, primarily driven by debt underwriting and financing activities for our ultra high net worth and entrepreneur clients. Our financing activity also benefited from a valuation gain of CHF15 million in the quarter as well as additional revenues relating to the recovery of interest payments. Now if we look at net new assets, which generated CHF4.5 billion of NNA in Asia Pacific in the second quarter and annualized growth rate of 10%. Year-on-year, the net margin improved significantly by 11 basis points to 34 basis points, reflecting higher client activity. This is being achieved simultaneously with the 13% growth in assets under management year-on-year. We did see an improved performance in our markets business in Asia Pacific, eliminating the losses that we've suffered over the past 2 quarters, and a key component of this improvement has been the realization of the efficiency initiatives that we've summarized in prior quarters. Our operating expenses of CHF297 million was down by 18% year-on-year, and 11% quarter-on-quarter. Now the difficult environment for equities sales and trading continued in the second quarter with lower market volatility and a continued low level of client activity, particularly in equity derivatives, albeit the performance in cash was more resilient year-on-year. Turning to fix income, revenues declined by 29% year-on-year. But compared to the first quarter, we saw an improvement of 79%, reflecting improved performance in some of our emerging market rates and FX products in Asia Pacific. Let me now turn to Investment Banking and Capital Markets, please, on Slide 30. In the first half of the year, we've continued to execute our strategy in Investment Banking & Capital Markets. Our revenues improved, and our market share is higher, both in the Americas and in Europe compared to the first half of last year. We achieved a top 5 rank for IPOs and a top 4 rank for leveraged finance. We've also seen continued momentum in announced M&A, advising on two of the three largest transactions so far this year. We saw good improvement in the EMEA franchise with market share gains, M&A and equity underwriting as well a strong activity in debt underwriting. Indeed, so far this year, we've actually priced over 80 transactions in EMEA credit financing. Now revenue recognition of these improved share gains tends to be somewhat volatile quarter-on-quarter depending on the timing of deal closures, and this was particularly marked in the second quarter, where notwithstanding the strong growth in our M&A pipeline, we saw a decline in advisory fees. As a consequence, coupled with the decline in investment-grade debt underwriting, our net revenues of CHF527 million was down by 6% year-on-year. I'll just give you some more details on the performance, business by business. We saw the strongest momentum in equity underwriting with revenues of CHF 109 million, up by 12% compared to the second quarter of last year. This was driven by a significant pickup in IPO activity as well as in rights issues. The second quarter was IBCM's second strongest quarter for IPO issuance since 2014. And for rights issuance, actually, it was the best quarter since 2009. In debt underwriting, we saw continued strength in leveraged finance, offset by lower investment-grade financing, with revenues of $265 million, down by 11% year-on-year. Overall, the division achieved a pretax income of $92 million, equivalent to return on regulatory capital of 14%. These returns remained higher in the Americas than in EMEA, but we did see some improvement in EMEA's performance in the second quarter. And overall for the first half this year, we had a return on capital of 18%, well within the targeted range of 15% to 20%. Now if we look forward to the second half, we would expect some seasonal slowdown in issuance activity in the third quarter, but our M&A pipeline is strong with a significant volume of deals still to be closed. And with client engagement high, we expect the environment for equity assurance and debt underwriting to be stronger, particularly towards the close of the year. Let me now turn to Global Markets, please, on Slide 31. For the second quarter, Global Markets delivered strong results with a 44% year-on-year increase and pretax income to $300 million and a return on regulatory capital of 8% for the quarter. Second quarter operating expenses fell by 16% year-on-year, driven by reductions across compensation, benefits and other operating expenses as we continue to remain very disciplined around our cost program. We've executed further on the strategy that we've outlined for the business. First half revenues are now at $3.2 billion, on track for our 2018 goal of $6 million or greater in revenues for the full year. Our expenses for the first half was $2.5 billion, also putting us on track towards the 2018 Global Markets expense goal to be less than $4.8 billion. Now if we look at the second quarter, the credit franchise clearly outperformed, with revenues of $926 million, an increase of 22% compared to an already strong second quarter performance last year. We saw continued strength in Securitized Products with broad-based growth across all product lines, particularly in our fee-based asset finance business and with increased client activity in our non-agency RMBS business. If we turn to investment-grade and leveraged finance credit businesses, revenues were resilient, albeit slower than a strong second quarter last year. We saw stable underwriting fees from leveraged finance, but a reduction in investment-grade underwriting activity and slightly lower trading activity in view of the lack of volatility in the market. Now if we look at equities, we've seen positive momentum in the franchise, with revenues increasing by 5% year-on-year. Cash equity revenues are stable, with robust underwriting activity, partly offset by lower trading volumes, particularly in the Americas. In Prime Services, our results remain resilient with higher client balances year-on-year. Now if we turn to solutions, difficult market conditions was characterized by persistently low levels of volatility, which adversely affected both global macro products and equity derivatives. We also saw a decline in emerging markets revenues due to lower new deal volumes in Brazil, reflecting the impact of the political uncertainty on the markets in this country. I'd also remind you, the second quarter of last year benefited from high volatility and increased client activity relating to the Brexit referendum. Now if you look ahead for solutions. We are going to move our emerging market finance and derivative businesses into a formal partnership of IWM and the Swiss Universal Bank. This partnership will substantially increased the debt and the diversity of the product offerings for our clients, improving the integration between our trading businesses and our Private Banking flows, and should deliver significant upside as a result of this increase in collaboration. Now following the implementation of this partnership, we reflect, from the third quarter, we would revert to a reporting structure with fixed income and equities as the main two business lines for Global Markets. Now just in conclusion for our business divisions, and before I turn to the Strategic Resolution Unit, in terms of the outlook for the balance of the current year, as Tidjane has noted in our release this morning, in both our markets and our Wealth Management businesses, we would expect to see the normal seasonal slowdown in the summer, with client activity and transactional volumes slower in the third quarter. Nonetheless, we believe markets remain constructive, and we would hope for an improvement in activity once our clients return from the summer break. Furthermore, as I've mentioned, our M&A pipeline is stronger in the third quarter, with a number of deals still to be closed in the balance of the year. Now let's turn please to Strategic Resolution Unit on Slide 32. You may recall from last quarter that we announced that we would accelerate the completion of the SRU, aiming for the sell down of these positions to be economically complete by the end of next year. We also brought forward our capital targets by one year to the end of 2018 without requiring incremental costs above and beyond the existing guidance that we gave at our Investor Day last December. Now just to summarize those goals, we're targeting to reduce risk-weighted assets excluding operational risk to $11 billion, and leverage exposure to 40 billion by the end of 2018. And our pretax loss guidance for 2018 remains unchanged at $1.4 billion. If we look at the operating performance in the second quarter, the pretax loss was at $546 million compared to $502 million in the first quarter and 758 million in the second quarter of 2016. Compared to the first quarter, net revenues have decreased by $34 million. Whilst funding costs have continued to decrease in line with the shrinking portfolio, this was offset by increased valuation losses as a result of certain counterparty-specific credit events as well as the continued decline in fee-based revenues arising from the sale of the senior financing of U.S. middle market loans, in addition to the Private Banking business exits. Exit costs on asset sales this quarter were $41 million, equivalent to 1.7% of RWA, and that brings our total average exit cost to 1.1% of RWA since the end of 2015, in line with our guidance for expected exit costs to be less than 3% of RWA over the lifetime of the SRU. The SRU continues to be on track to reach the accelerated capital targets we just summarized. Since the end of 2015, we reduced leverage exposure by $95 billion of 56%. And sequentially, compared to the end of the first quarter, we reduced leverage exposure by $8 billion or 10%. Reductions have been driven by a combination of activities, including the sale or runoff in emerging market loans, and the unwind or restructuring of macro derivatives in life and finance exposures. I would note, for example that we have now exited from all remaining reserve financing for term life insurance writers. At the end of the second quarter, leverage exposures stood at $75 billion compared to $170 billion from when we started in 2015 and compares to the end '18 target of at or below 40 billion. If we look at risk-weighted assets, since the end of 2015, we've reduced RWAs excluding operational risk by around $35 billion or 65%, and during this time, the bilateral trade count has been reduced by approximately 220,000 transactions or a 66% of the opening total. Now compared to the end of the first quarter, RWA was reduced by $2.4 billion or 11% ex-ante risk. This was achieved through this targeted de-risking measures across the portfolio, including the reduction of emerging market credit derivatives as well as the sale or unwind of legacy asset management funds and ship finance positions. And at the end of the second quarter, RWA, excluding operational risk, stood at 19 billion compared to 54 billion from when we started and to the 11 billion target. Now before I conclude, I would like to draw your attention to a new slide that we've included in the Appendix, which is Slide 54, which is a summary of the results for the Corporate Center. You can see that the Corporate Center incurred a loss of CHF318 million in the first half of 2017 albeit with substantial volatility in the losses between the first and the second quarter. In the first quarter, we saw a gain from the volatility and derivative exposures in structured notes relating to treasury function -- funding of CHF67 million. That is reversed in the second quarter to a loss of CHF28 million. As we've said before, over the lifetime of these positions, this sums to zero, and what we're showing here is the volatility in the swap books in the Corporate Center. Just in terms with guidance for the Corporate Center, you may recall from the Investor Day last year that I said the losses in the Corporate Center would fall to approximately CHF400 million for 2018 following the runoff of the legal entity program. And I'll still stand by that guidance for next year. And as we think about 2017, I'd expect to see Corporate Center losses in the second half to be broadly similar to those in the first half, subject to the aforementioned volatility relating to the funding. So just in summary, we're continuing to execute on our strategic plan and drive positive operating leverage. In the Wealth Management businesses, we're seeing the momentum from the significant investments that we've made over the last two years, evidenced by the continued growth in both profits and net new assets in these areas. In IBCM, we've continued to achieve share gains across products. And in Global Markets, our strategy is clearly working. We've continued cost discipline, driving profitability in the division. In the SRU, as I've summarized, we've made further progress in reducing positions, and we're ahead of schedule to meet our accelerated wind down schedule for the end of 2018. Our cost program remains very much on track, and with roughly CHF600 million of savings in the first half of this year, we're clearly in a very good position to deliver our target to be below CHF18.5 billion in expenses for the full year, on course for the goal to be less than CHF17 billion in 2018. And with that, I'd like to pass the presentation back to Tidjane. Thank you.

[Tidjane Thiam:]

Thank you, David. I like to take a few minutes to wrap up and really focus on an assessment of where we are just exactly at the halftime of this program. It's an interesting juncture. We have completed 6 of the 12 quarters comprising the period, and it's worth trying to assess how much progress we've been able to make. And to do that, we felt that it would only be fair to look at where we started from. So where did we start from back in '15? When we embarked on this three year plan, we could build on a number of strengths

[Operator:]

[Operator Instructions] Your first question comes from the line of Kinner Lakhani from Deutsche Bank. Please go ahead.

[Kinner Lakhani:]

I think the results speak for themselves, so I'm going to focus very much on thinking about '18 and 2019. So, firstly in terms of the kind of cost target for '18, which consensus is mostly not been willing to give you the credit. The additional CHF 1.5 billion of cost savings that you're targeting for next year. Could you provide us with more kind of a granularity as to where you think they will come from? Clearly, you've reduced your professional spend quite substantially. Is there still further scope there? Or is this coming from other areas such as the single or the legal entity program? That's my first question. And my second question, just to keep it short is on SRU. You hinted in the Q1 call that the drag could be a little bit better than what you've guided to, the CHF 1.4 billion drag next year and the CHF 800 million the year after. Can you maybe provide some more thoughts on that? Do you still feel more confident on that side?

[Tidjane Thiam:]

Well, we were going to -- thank you. Two good and important questions. The cost target for '18 -- and I agree. I think consensus is in now CHF 17.4 billion or something like that? We've come a long way. So I think consensus was way above that, so we're getting credit progressively. But maybe I'll let David have a go and come back at the end.

[David Mathers:]

So I think we've always said that what we strive to do is to set an overall cost program that applies across the bank, divisions and corporate functions. And I think we do that to basically maintain our portfolio initiatives that creates a buffer against unexpected costs. Rather than doing it specifically division by division or initiative by initiative, and I think that's probably something we should stick to. Our overall goal, essentially, as we've said is to be at or below CHF 18.5 billion this year and at or below CHF 17 billion for next year. I think, if we think about the causes for that, and how we're driving that, it's clearly a combination of debt issues. In rough order of magnitude, we clearly have, on further progress, in the SRU to deliver. And we've talked about that and I'll come back in a minute specifically on your SRU point. We have, as I've said already, a wide ranging workforce strategy, which is aimed at reducing duplication and fragmentation and building integrated process in lower cost locations.

[Tidjane Thiam:]

Maybe you're going too fast on that, because that's really central. We're not just taking out consultants and -- because that makes people think that this is not sustainable, okay. You just cancel a project and you call it a saving. No. We are actually changing the operating model and creating the capability to deliver those projects elsewhere. That's really what it is, and it is -- the product is delivered at a lower cost. And there's plenty-plenty of that going on.

[David Mathers:]

Yes. I think that's exactly the point. These are measures we're taking to improve our efficiency on a sustainable basis, and if we build single processes in lower cost locations, then we reduce fragmentation, reduce duplication, it's sustainable but what also it does, it also reduces operational risk and the need for reconciliation projects. It's about how we run the bank better as opposed to how we achieve just a cost goal.

[Tidjane Thiam:]

And we've -- sorry, but these savings will flow through in the future, because you will also have future projects, and we'll also do them at a lower cost. So they're permanent, rebuilding.

[David Mathers:]

And I think not at least, I think, we've also give indications over the prior quarters around some of the specific cost measures that we have in some of the divisions we've talked about. What we're doing in Asia Pacific. You noticed we said we reduced our savings there by about 300 million. If you take the first half, and you compare it to last year and you annualize it, which is a dangerous process, you come to something like about 182 million. We're clearly very much on track for the efficiency goals we've actually set for the division. And equally, I think, on Global Markets, you can see a 2.5 billion of expenses in the first half. We're on track to be below 4.8 billion for the full year. So this is, I think, a glimpse into the portfolio here. I'll just emphasize what Tidjane said. This is actually about building a better bank with better efficiency, better productivity and lower operational risk, and one which will actually deliver sustained improvements going forward beyond 2018.

[Tidjane Thiam:]

Absolutely. And if I may just give more color also. With different areas, if you had outsourced resources, they are down about 23% since December '15, and 116,000. Now the key point there is that 80% of those are under, what we call managed capacity contracts, i.e., we buy a number of people to work for us and we pay for them. Now we believe that we can move two thirds of those to managed services i.e., we pay for a service to be delivered with a risk on how many resources are required, being borne by the vendor, and that's another 30%, 40% of savings. Okay? So that's something we have not even tackled, and it's sitting out there. Robotics. We have 58 robot introduced in production in 2017. 150 expected by year-end. And in operations, a robot manages five times more transactions than a human being. IT investment. 30% of our IT investment is into legacy applications that will be decommissioned over the next two to three years. That's more savings. Buildings. Our buildings are down in numbers by 10% since year-end '15 to 387 buildings, and we're down in square meters by 14% to 1.5 on 5 million square meters. Providers. We had 35,000 providers at end '15. We're down to 29,000, down 15%, and more reduction is to come. Okay? 20,000 supplier contracts are being consolidated by almost 50%, and 400 IT contracts of individual amount of around CHF1 million renewed annually with no discount are now being currently consolidated. We signed the contract a few weeks ago to 100 contracts, which will each carry a 20% discount. And I could go on and on and on. So when you look at the potential for additional cost savings, we're highly confident that we can hit those targets. And that actually we will continue beyond that. So that's forecast. SRU?

[David Mathers:]

The second question was actually on the SRU. What we actually said in the first quarter is, we said that we would achieve the economic completion of the SRU by the end of 2018, and we said that the RWA and leverage goals that we set for the end of 2019 would be achieved by the end of next year, and that's 40 billion of leverage and 11 billion of RWA, excluding operational risk. I didn't actually refresh the PTI loss guidance that we'd given at our Investor Day last December which, as you rightly say, is a loss of 1.4 billion for next year, and a loss of 800 million for 2019. I'm not going to update that now. As Tidjane's already said, we're having another Investor Day at the end of November in a few months time. I'm sure we'll look at it again at that point. I would say that if we think around the SRU performance, as I've noted, we've clearly had some episodic credit losses in the second quarter, and those were significant in terms of numbers. That's one reason the number was 546 million. I think that's always going to be the case in a portfolio at the SRU, where we've got a very broad ranging portfolio with a number of idiosyncratic positions. And I think there if we looked at next year, then I think you know, we've got a number of factors which will actually drive the loss reduction at not just the position size reduction, which will reduce the funding costs for the SRU, obviously, but also basically, we have the roll off of the legacy Basel II funding instruments that we've discussed before, most of which were actually booked within the SRU. And so those actually drop out as well as some regularization and legal programs we've touched upon in the past, which should also be running off next year. And that's what drives the loss number of CHF1.4 billion. I think it suffice to say, for the course of 2017, we and the team are extremely focused on accelerating that. I think it's very important as we go into 2018. And with the sort of progress we've seen in the first quarter, in terms of position reduction, to ensure we meet or exceed the reduction goals for 2018 and 2019.

[Tidjane Thiam:]

And I'm afraid that I'll upset our COO. He's sitting there and making face and he just emailed me, because I didn't mention the cloud. So I'm doing this now in real time. We aim to have more than 60%, he tells me, of our workload on the cloud by 2020. We are at 5% right now. We will be at 15% at the end of 2017. So that's an additional source of savings. So that's for the cost chapter. Next question?

[Operator:]

Our next question comes from the line of Daniele Brupbacher from UBS. Please go ahead.

[Daniele Brupbacher:]

First question would be on Global Markets. And there, you had the ambition to increase risk weighted assets, again, from around $50 billion to $60 billion. I think it was around $51 billion in the second quarter. Could you just give us a little bit of an update there in terms of where this could come from and where did you feel that there is enough opportunities in the markets to grow to $60 billion again? And probably also, if you could talk about revenue efficiency, like revenue margin on that RWA growth? And then secondly, really just a numbers question. In the context of Slide 25, you mentioned the 20 bps increase from the op risk RWA changes. Could you talk a little bit about potential other changes ahead and add ons, for example, on the credit risk RWA side? And probably, in this context as well, would you be willing to share your thoughts with us regarding a potential outflow and how you see that discussion -- what the impact could be?

[Tidjane Thiam:]

Thank you, Daniel. The last point was the output flow? Okay. Yes. Okay, thank you. I think I'm going to let David take this here.

[David Mathers:]

So, I think on the first point, just one point. In terms of GM RWA, we said $60 billion. And given the depreciation of the Swiss -- of the U.S. dollar against the Swiss franc in this quarter, we are actually at 54 billion, not 51 billion, against our saving of 60 billion. I think -- and I'd probably defer it to our Global Markets team, but I think we continue to deploy capital very selectively. And I think you can see the performance in our credit and our securitized products business this quarter, how successful that can actually be, and I think, as and when opportunities present themselves. I think clearly, if we think about the Equities business, the fact that equities revenues were actually up year on year, I think you can see the performance there. But that's not a heavy RWA user. I think as we develop our partnership between Global Markets, the Swiss Universal Bank and IWM, then I guess that will provide opportunities to deploy RWA, and we'll take advantage of that. But I think we are very focused on that being sustainable and clearly, I think it has two big pluses for us

[Tidjane Thiam:]

Absolutely. And if I may add to that, it's a deliberate stance to be below $60 billion. $60 billion is an absolute ceiling, and it will not be moved. So if you want to run the business optimally and keep some headroom and be tactical, you put yourself below, and then you, kind of, you pounce tactically when there is an opportunity. And we get, sometimes, things at 60% rate on capital that we can do whilst staying below the ceiling and that's how we can maximize the BTI in the division. And as for the [indiscernible] reinforcement, David said on the opportunities of bringing the Global Markets to our Wealth Management clients. We know that something others have done better than what we have. We've brought in Mike Stewart, and this is a clear upside in the equity story. The 20 bps, David?

[David Mathers:]

Yes. On the second point, and as I mentioned earlier, and it's actually also referred to in our full financial report, we are going to see an uptick in our operational risk exposure in the third quarter. The FINMA has requested an op risk add-on in respect primarily of our RMBS settlements. Now we are also separately in discussion with the FINMA. We've approached them about the amount of op risk capital that's actually used in respect of the SRU. Given the scale of reductions that have been achieved already in the SRU but also looking forward to what we intend to achieve by the end of '18, we are hopeful that, that will lead to some relief in terms of that components of it. But clearly, the sequencing and timing of both the first request and the second discussion, it seems likely to then increase our op risk exposure somewhat in the third quarter. Difficult to be precise. I've in given order of -- perhaps in the order of 20 basis points, but will, obviously, give you further clarity on that when we get to the third quarter. I think, on the second point around credit risk, a complicated subject. We have obviously looked at our credit models over a number of years, particularly around the probability default, PD and the OGD assumptions that are in there. I think we're very much aware that the assumptions we use, I think, are very much in line with that of other European banks. And we don't foresee any particular increase in that relating to our IFRIC exposure at this point. So nothing on the horizon for us in terms of that. I think finally, in terms of the Basel III reforms and the 75% floor, we've given some guidance around that in our past two Investor Days, given that the whole Basel III reform processes is still somewhat on hold. And I think it now that moves forward to the next meeting in September, the BCBS. I don't think I'd really want to add to that at this point.

[Operator:]

The next question comes from Andrew Coombs from Citigroup. Please go ahead.

[Andrew Coombs:]

If I could just follow up on the capital question, and then also discuss SRU again as well. In terms of capital, given the point that you have made and you just mentioned, again, in terms of the operational risk add-on coming from FINMA. I mean, when -- we've seen this in the past with some of your peers, it's been quite a sizable magnitude. I know it's very difficult to provide any quantitative framework at this stage, but if you could just elaborate a bit more on how we should think about the magnitude of the add-ons, how it's being constructed, and what the potential offset is given the SRU running down as well. It'll be greatly appreciated. Second question, just again on the SRU. The terms -- the core divisional performance are very strong. The SRU, perhaps, one of the areas which was slightly weaker than expected. You mentioned some idiosyncratic factors. Within the CHF 280 million negative revenues in the second quarter, can you just give us an idea of how much that is due to funding cost versus loss on disposal versus other factors?

[Tidjane Thiam:]

Thank you. Thank you, Andrew. I'll let David take now.

[David Mathers:]

So I think, just taking those two points in order. I think if we look at the capital position, I think, as I've said, the FINMA actually requested an add on to our operational risk capital exposure and that is primarily in respect of the capitalizations around the totaling of the RMBS settlements that have occurred over the last few years. And that's something which we will take in the third quarter, and we'll see it come through. Now I think -- if we think about the SRU, I think you can see that we have CHF 19 billion of operational risk RWA in SRU. That number is unchanged from when we actually started that. If we look back to what's been done since then, you've seen reductions of 60% plus/minus in terms of both RWA ex op risk and in terms of leverage. You may recall, over CHF 170 billion down to CHF 75 billion. And yet, the SRU RWA number's not changed. Now that's something we're actually in discussion with FINMA at the moment. That has not been concluded at this point. So I think it's appropriate for me to say much more about that. Clearly, the timing and sequence to that is something we'd like to give you more guidance on in the third quarter. I suspect it'll also depend on business being finally exited over the course of the next 18 months. Although, obviously, we have, as you might say, exited a number of businesses already in the course of that run there. So as I said, I think, those are the key components of this. And the actual size, as I said, I think perhaps in the order of 20 basis points is a reasonable estimate to think about the 3Q at this point. But I think beyond that, I doubt that we can have this. This is very much a 3Q event, but we -- and we did want to give you some guidance around this issue going forward.

[Tidjane Thiam:]

I think order of magnitude is correct. It gives you a sense of what we are talking about. It's not two or three times, but it's kind of 20-ish.

[David Mathers:]

That's right. Now I think on the SRU, I'll be as helpful as I can in terms of the actual components of that. I think the points I probably want to take basically are -- firstly, in terms of the numbers, as I said, there's about 41 million of actual exit losses in the period. And that was about 1.7% of the sales of RWA. I'm not particularly surprised to see that. I think we always said that as the focus shifts towards leverage reduction, we would see the percentage is drifting up as a percentage of RWAs because we're moving leverage -- we're losing, as you might -- we're actually moving some leverage-heavy RWA-light assets, and that's -- that 1.7% just gives a total exit loss of 1.1% over the lifetime of the SRU. So I don't think I'm particularly concerned about the guidance we've given before to be at or below 3% over the SRU, given we've about CHF 19 billion left to actually settle. But we will say, hop up and down as we actually now begin to get towards the end of the SRU portfolio, and we're moving larger and more specific positions and we're shifting more leverage over the course of that. I'll give you one helpful number, which may be useful. In terms of the idiosyncratic credit events, there were a couple of things which cost about 65 million in the course of second quarter. So I'm not going to say exactly what they were. There were two specific credit events. As I'm afraid, the nature of the Strategic Resolution Unit is we have this specific positions. They're actually very long-standing positions. They're not recent in terms of that. And those were actually credit losses basically. That may help you. We did see some uptick in expenses relating to some of the regulatory programs and that is genuinely a blip, I would say, in the general downtrend that we expect over the course of the next 18 months, and that's probably what I'd like to say at this point. I think we've given guidance before around the Basel II funding costs that are actually booked, but I wouldn't add to that at this point. It's essentially mathematical, because these positions actually mature next year basically, and they will drop off of at that point.

[Tidjane Thiam:]

And you've got some [indiscernible] also, as we said, in some of the activities we're [indiscernible].

[David Mathers:]

Exactly. Essentially, the exits that Tidjane says from the Private Banking businesses, as you may recall, Monaco, Gibraltar and also the U.S. broker-dealer business, those were essentially fee generative business. They've dropped off as we exit them, which is core to our strategy. It's very much what we want to do. You lose the revenues at that point as well.

[Tidjane Thiam:]

Is that okay, Andrew?

[Andrew Coombs:]

Completely.

[Operator:]

The next question comes from the line of Kian Abouhossein from JPMorgan. Please go ahead.

[Kian Abouhossein:]

First, very quickly. FRTB, at the Investor Day, you indicated the impact will come 2019. What do you expect at this point following the U.S. Treasury proposal looking to delay it? Secondly, in respect to Investment Banking and Markets, you indicated both in your speech, but also outlook, quite positive momentum in the Investment Banking business. Just wanted to see why you expect that, considering we normally have seasonality second half, first half? And in that context, can you talk a little more about credit. Brian was spot on indicating that credits will probably outperform macro in '17 at the Investor Day. But we have to say we've seen a superb environment in credit. I'm just wondering how do you see, going forward, credit developing? Do you see the environment continuing as we're seeing today? Or do you see a change with credit plus EM?

[Tidjane Thiam:]

Okay, all right. FRTB, I'll let David take that, and I'll take the two of else. Yes? Thank you, Kian.

[David Mathers:]

So just on FRTB. I think clearly, it's part of the Basel III reforms processes. As I think you know, there are certain credit-related components which come through next year under the Swiss implementation. FRTB has actually been delayed now until 2020, Kian, and which is clearly, obviously, several years away. And I think we will wait to see if there is more progress around the BCBS negotiations in September around this and also the other aspects of FRTB. But at this point, it's certainly a year later. I think as I said, we'll probably revise and look at our guidance for FRTB on the 30 of November. But I would say, clearly, the impact of FRTB will be somewhat dependent on the availability of industry utilities that actually enable these positions to be cleared and reduce the risk around them. So therefore, you know one question essentially is that, how fast the utilities actually develop, and does the whole world go to FRTB at the same time, in which case, it just moves a lot faster. So that, that gives you some uncertainty around this. But I don't think at this point, I'd changed what we've said before last December. It's a year later in terms of the implementation. And as I said, we will see what comes out to the BCBS process later this year.

[Tidjane Thiam:]

Yes, okay. I'll take the rest, Kian. I should probably rephrase than what we have said. You had a question on the outlook. We think, if I take IBCM, we think that actually Q3 will see the normal seasonality. That's completely expected. When we say the stronger towards end of the year, we expect a stronger Q4. When I talk to Jim and his team, we talk over the pipeline, I think that's what you should expect to see. So we're going to have a weak Q3 and a better Q4. From market and credit, I think, Yes, Brian did get it right. We actually think that the market environment will remain positive for credit, adjusted for seasonality, which we've seen a little bit in July, because we think both of the fundamentals and the technical's remain strong. Where we are challenged, I think as Brian predicted rightly, it's kind of macro rate FX which is still challenging, given where our volatility is. Now stepping back, you need to remember that we believe we have an upside in equities. You may have seen some appointments yesterday, etcetera. You've seen Mike coming in. You have to see that we're doing CHF1.5 billion, CHF1.6 billion in -- I'm talking about Global Markets here, Kian. CHF1.6 billion, Q1; 1.5 billion, Q2; kind of CHF3.2 billion, really running on one engine, okay? Because you've got solutions very depressed, and you've got equities with a big upside. So that's why we're relatively confident that we can drive this forward and develop our Equities business, if and when the credit cycle turns that we have another leg.

[Kian Abouhossein:]

Sorry, but the credit before was twice the size of the equity business. So I mean, credit view is the best environment ever for a very, very long time. And just wondering how we square the numbers considering a very positive outlook in second half? And I mean, you must have a view on credit.

[Tidjane Thiam:]

No, it's fair. It'd fair. But I've been positive. I said, we're positive on credit, we're seeing the fundamentals, and we remain positive and view the technical's as well. So we are still positive on credit. And you're right, it's a big force, no question about it. So we will remain positive.

[Operator:]

The final question comes from the line of Magdalena Stoklosa from Morgan Stanley.

[Magdalena Stoklosa:]

I've got two questions. So one is on the IWM and another one is on Asian market. That thing -- within the IWM, you've talked a lot about self funded growth principles commit in the past and, of course, we have seen very strong results offered, as your net margins kind of attest to. But the question is really about the ability of the IWM to sustain these level of margins. And I think I'm particularly interested in two things. The lending strategy, but also what's happening on the cost. I know what you envisage will happen on the cost line going forward. And so this is first one. And the second one is quite quick. So of course, in Asian markets, we are on the kind of breakeven on the PBT level. Now how do you see -- what are your ambitions for the kind of restructured parameters of this business going forward?

[Tidjane Thiam:]

Okay, thank you. Thank you, Magdalena. On IWM, yes, we're really pleased with the progress made. It's actually more than what you see, because if you remember, that we had some one offs last year like the city airport, etcetera. The progress in H1 -- on H1 is actually bigger than what you see. We are actually quite confident that we can maintain revenues and margins going forward. What Iqbal and his team are doing are really developing customized solutions for really ultra-high-net worth clients. And I may sound surprising, but our penetration of registry is quite low. There's much more to do, again, in our existing clientele. So these is a new way of working with our existing clientele. The beauty of the people we have as clients, and we have a lot of them, is that we know they're wealthy. They're already wealthy. So very often, when we have low fees, and we have those curves that we drew, and we have trend by trend, how much income we get from them. It's very easy to see where you're going to target and where you can actually do much more, because you know that this person has a huge fortune, and you're only scratching the surface. So there is a big potential to do similar things to what we've been doing this year, just with more clients and on a bigger scale, even before you talk about acquisition of new clients. So that's one. But it leads to a cost question, because you're not out on a recruiting spree to grow. And I think you, Iqbal will be upset with me if I don't mention that, but he tells me every time we speak that RM productivity is of double-digit. And that's really something he uses to run the business very much. So relevant with a number of RMs, we are really driving the productivity per RM. And actually that's something that I can say APAC as well. I made a comment during my script that we are investing in technology to increase client-facing time and helping the RMs. That is the most profitable way of increasing your number of RMs. If you give them the right support. It also reduces risk, because, really, when you put in that technology you improve compliance. So you reduce risk. So it's a kind of win, win, win. So costs -- look, it's a growth business. The key thing is that the cost doesn't increase proportionally, and the cost raise is less than the revenue. So in IWM, it's less a question of cost-cutting than having positive draws between the -- so we have efficient and profitable growth, so that your revenue grows ahead of your cost. As long as you can do that, you're improving margin, and we're confident that we -- there is enough headroom to do that in IWM. And don't forget also the geographic diversity of that portfolio. He is working on Brazil. He's working on Mexico. Doing well. He's working on the Middle East. We have a really strong franchise, doing very well. He's working on Central and Eastern Europe, doing very well. He's working on Western Europe, doing very well. So there's a lot to go after in a very well-established clientele and old relationships. So it's a nice mix of mature markets, developing markets and I know that's coming through the numbers. APAC markets, the ambitions. We've kind of given a target expense level. We'll tell you, we're driving the expenses down, trying to create CHF300 million of savings, so we'll hit kind of CHF1 billion to CHF1.1 billion of expenses. That's the target. And we think that we can generate kind of 10% to 15% return on capital. Remember, that business, as I speak, CHF12 billion of RWA. So I know that, if you're correct, sometimes there's a lot of attention, but it's -- CHF12 billion of RWA is a small number. So you do the return on that -- 10% return on that, and then you get to kind of where we need to get to in terms of revenue. And again here, you have to see that this is a depressed point. Equity derivatives, which is one of our huge strength in Asia, is hit hard by the low volatility. So we're not getting those revenues. And we have a continued upside of connecting APAC market better with the Wealth Management business. There's a strong demand from our clients to access our trading platform, and there is much more we can do there. So we think -- on the cost side, we're almost there. Frankly, we've taken most of the measures. Some is going to come now from the decreasing corporate functions. So corporate function allocations following the cost cuts in Asia. And for revenue, there is upside in equity derivatives. There is upside in working more closely with the Wealth Management and connected activities. I'm looking at Adam. It sounds like we have no more questions. So we had scheduled till 10

[Operator:]

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