Credit Suisse Group AG
Q1 2018 Earnings Call Transcript

Published: 25 Apr 2018

Operator:

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group's First Quarter 2018 Results Conference Call for Analysts and Investors. As a reminder, all participants are in a listen-only mode and the conference is recorded. You will have the opportunity to ask questions after the presentation. [Operator Instructions] At this time, I'd now like to turn the conference over to Adam Gishen, Group Head of Investor Relations and Corporate Communications. Please go ahead, Adam.
Adam Gishen:

Okay. Good morning all, and welcome to the first quarter results 2018 results call. Before we begin, let me remind you of the important cautionary statements on slide two, 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 first quarter 2018 earnings release and remind you that our full first quarter 2018 financial report will be published on or around May 3. With that, I will now hand over to our CEO, Tidjane Thiam.
Tidjane Thiam:

Thank you. Thank you, Adam. Good morning, everyone, and thank you for joining this call. With me today, I have David Mathers, our Chief Financial Officer, and all the members of our Executive Board. Together, we will present Credit Suisse's results for the first quarter of 2018. We look forward to having a dialogue with you today and answering your questions at the end of the session. So let begin may be with a few overview remarks. We have now just completed nine quarters out of our 12 quarter restructuring program. 2016 was the first year of our program, and it was a year of deep strategic and organizational restructuring. Then, 2017 was for us a year that we call internally of stabilization and consolidation, where some of our benefits of our deep restructuring started to emerge. In 2018, we aim to generate an acceleration in our performance to complete our restructuring successfully. We believe that these first quarter results demonstrate that we have made a strong start to our third and final year of restructuring. We are basically back close to our 2015 levels of absolute profit, pre-restructuring with a higher quality, more capital efficient business mix that will, over time, generate growing amounts of capital organically, whilst necessitating less risk per - less risk capital per unit of income. You have seen the results we present today that we are driving returns higher across our business lines and delivering increasing returns on equity for our shareholders. So let me turn to slide four and talking a little more detail about this first quarter. 1Q '18 was a quarter, as said, of marketed acceleration in every one of our key metrics. We have just achieved our strongest group performance in PTI in the past 11 quarters, so almost three years. We have delivered profitable growth in our Wealth Management businesses with higher net asset inflows, record AUM, Assets Under Management and higher net margins and addressing PTI of CHF1.3 billion for the Swiss Universal Bank International Wealth Management and Asia Pacific, WMC, which is up 27% year-on-year. We have continued to create and deliver positive operating leverage, which is core to our equity story, growing revenues and further reducing cost, which for the quarter, are the lowest in the last five years. We have continued to wind down the SRU at pace, significantly reducing its drag on our group profitability. We have strengthened our capital position with CET1 ratio of 12.9% and the Tier 1 leverage ratio of 5.1%. Fundamentally, we are driving return on capital higher, which should allow, in due course, increased return of capital to shareholders. Turning to the next slide, our progress can be seen here in visual manner. 1Q '18 is our sixth consecutive quarter of year-over-year profit growth since we started this in 1Q '16. This is our highest absolute quarterly profits since 2Q '15, and is our eighth consecutive quarter of adjusted profitability starting in Q2 '16. On an adjusted basis, this quarter's profitability alone is double full year profit of '16 and already represents 44% of our full year profit in '17. Let me take this opportunity, if you allow me, to step back and try and assess the progress we believe we have made in transforming Credit Suisse since the start of this restructuring in Q1 '16 just two years ago. Let's look at slide six. Since the start of our restructuring, we have been allocating systematically increasing amount of capital towards our more profitable and more capital efficient, Wealth Management and IBCM businesses. And in parallel, we have been significantly deleveraging the SRU, in the gray here, as well as cut the size of our market's business. From a starting point in mid-'15, we have been able to fundamentally transform the balance of capital allocation and capital consumption, you can see at the top, it's gone down from 248 to 232 in less than three years. And as we've continue to allocate more capital to a higher returning more capital efficient businesses which have an added benefit of higher capital velocity, or in other words shorter payback periods, we expect these benefits to compound over time and drive returns higher for the group. This strategy has led, as you would expect, to what we believe is a significant improvement in the quality of our earnings, which you can see on slide seven. Looking at 1Q '15 as a reference basis. This is what we call before in this slide, and excluding the Corporate Center in blue at the bottom. Basically 60% of our core adjusted PTI was generated from our markets activities in 1Q '15. And while returns, which you can find at the bottom, core adjusted return on a regulatory capital, we're at 14.9%, we were operating just above that with a 10% CET1 ratio while carrying significant absolute levels of risk with the VaR at CHF46 million as you can see at the bottom of the left, the left box. So after two years and one quarter of restructuring, we believe the shape of the bank has changed dramatically. We are basically back to the same level of core adjusted profitability at the top there, you see 1,571 versus 1,650, so basically minus 5%. However, this is a fundamentally different bank, because this is being achieved. We, first of all, significant level of absolute risk. The group VaR is down 37% from 46% to CHF29 million, and don't forget that we have a spike in volatility in Q1. So this is a very significant and material decrease, a much stronger absolute capital position, which you can see the CET1 of 12.9% here on the right and also significantly higher capital generation as we have grown our Wealth Management and IBCM businesses from a 41% of PTI on the left here to around 80% of core adjusted PTI. These businesses have higher absolute returns of capital, shorter payback periods and lower capital consumption in absolute terms than our market activities. That said, I'd like also to take a moment to emphasize that our markets activities are an absolutely fundamental component of our strategy. They provide best-in-class solutions to institutional, corporate and ultra-high net worth clients key to our long-term success. We simply would not have the NNA that you have seen and the success we are having in the ultra-space without those best-in-class trading and market capabilities. So global market has been rightsized and derisked, which leaves our group in an excellent position to grow its Wealth Management and IBCM portfolio, with blue here, without running unnecessary downside risk in the market activities that have been eliminated with the reduction of inventory, the de-risking and the lowering of the fiscal space, the gray here. We have worked very hard to reduce the fixed cost base in our market activities and thereby making them more resilient when market conditions become challenging. So the concerns about global market we sometimes hear from some market participants were possibly justified in Credit Suisse before our transformation that you can see the picture on the left here. And frankly, I can see why those concerns we have existing. However, it seems reasonable to say that such concerns are less justified in the new CS on the right here after nine quarters of restructuring and the implementation of the new Wealth Management focused strategy, again the blue on this chart. So let's now focus on that blue portion, the Wealth Management performance on the next slide, starting with NNA. We have generated NNA of CHF14.4 billion in 1Q '18, our highest quarterly inflows in the last seven years. This growth is driven, in large part, by the successful execution of our strategy of focusing of ultra-high net worth client. And you can see at the bottom, the proportion of ultra-high net worth assets and our flows growing. So looking at it geographically. APAC has contributed CHF6.2 billion of net flows. That is an annualized growth rate of 13%, 1-3. Importantly, and this is new, this included over 4 billion of referrals to between our IBCM to a Private Banking business. That's a strong proof point for us of the value and effectiveness of our integrated divisional model, where we have the private bank, IBCM and markets and financing, sitting inside the unit division and working hard hand in hand. Moving on to IWM, International Wealth Management. The PB generated CHF5.5 billion of NNA, that is a 6% annualized growth rate. It is worth mentioning here that this quarter marked a turnaround in the contribution of Latin America, very important region for us, as we have substantially completed our regularization program in the region. And therefore, we are not giving you any more forward guidance on regularization. And in Switzerland, we had a really outstanding performance at CHF2.7 billion of net inflows, which I believe is market leading, I believe it's the best in Switzerland, representing a 5% annualized growth rate, highest growth rate since 2013 and a major achievement in the market considered as much or, and again, market leading performance in Switzerland, best-in-class. So not also as the numbers on this slide, do not include CHF9 billion of additional net inflows in our Asset Management business which would take our quarterly total to a kind of CHF23.4 billion, which is a nice number. Looking at AUM, drove another profitability driver. Notwithstanding significantly higher asset base, we're up 9% year-on-year and we have an annualized NNA growth rate of 7%. And please keep in mind that this growth is entirely organic, some acquisition in our growth. It is in large part driven by our ability to do more with our existing clients and penetrate our existing client base and working quality. Note also that this IWM performance is in spite of a currency headwind in 1Q '18 in Swiss franc of about CHF7 billion, CHF6.7 billion adverse. So on the next slide, our adjusted net margin has increased for the quarter and has reaches its highest level since 2013. And I will repeat here that this has been achieved notwithstanding the higher asset base, so it's higher margin on a higher asset base, and that reflects a step change in our absolute profit generated in our Wealth Management businesses, which we show you on the next slide. So in our Wealth Management divisions that you have here, Swiss Universal Bank, IWM and APAC wealth and management, we have continued to deliver client driven, client driven, and it is sometime client driven profitable growth. In 1Q '15, these divisions together generated CHF798 million of PTI, adjusted PTI. In 1Q '18, we generated CHF1.3 billion, CHF1.284 billion exactly of adjusted PTI. That is an increase of 6% in three years or about CHF500 million of additional PTI in just one quarter. So if you add those three years, more than half of the increase, CHF269 million exactly, was generated during the last 12 months. This is why we're talking about an acceleration in '18, which you can see highlighted here, in our ability to deliver profitable compliant growth. And as we said on many occasions, we follow a balanced approach between mature and emerging markets. It's a good diversification. And you can see this reflected in the profitability speech between our business units. Since 1Q '15, Switzerland, which is our so-called mature market, still represents 25% of the growth we have achieved in our adjusted PTI. So very strongly supports the growth in PTI. IWM, which is a perfect brand of emerging and mature markets, sometimes [indiscernible], sometimes half-and-half, represents 42% of our PTI growth, and APAC, the balance, 32%. So that's really balanced growth. High-quality, stable growth from Switzerland, very dynamic for IWM. It's a mix between mature and developing and APAC completing that. So something - it's a mix we're very pleased with. Last but not least on this page, you can see adjusted profit in Wealth Management have grown by 61%. The interesting thing is that RWA at the bottom has grown by 22%. If there's a word like capital leverage or reporting operating leverage for capital, you'll see it here, positive results between PTI growth and capital growth. And this is why we keep saying this growth is capital efficient. If I can grow profit by 61% and by investing 22% more capital, that is a very attractive destination for shareholder capital. So look - let's look at the revenue picture behind this PTI picture. You can see that for most divisions, we have grown revenue by 15% over the past two years. We have the highest increase in recurring fees and commissions at a CAGR of 8%. And this is something I'm very focused on. Everyone knows that. The bottom part, the recurring commissions and fees, I keep bringing about it because this is a value. You can put multiple in it, it's very important. That is the sustainability of the story, and that what gives you confidence in the continued growth potential of what we are doing. We have implemented a range of actions to drive that recurring stream, that income stream from delivering higher mandate penetration, which we can track across divisions and to enhancing our dialogue with clients. We talked to you at the Investor Day about the house view and how we house related solutions will then lead to driving up that recurring stream. Moving on to net interest income. We have been driving it higher for a combination of loan growth, but controlled loan growth, reasonable loan growth, quality loan growth, not loan growth at any cost and also repricing, particularly on the deposit side. And if you put it together with the recurring fee income, 70% of our revenues in Wealth Management are from quite predictable, higher quality earnings streams. Now this growth in revenues has been largely self-funded, which reflects a disciplined approach to cost management, which you can see at the bottom of this slide at 0.5% CAGR over the same period. And this is something we really like in our model. This positive operating leverage in Wealth Management, 7% CAGR top line growth, 0.5% cost growth, very, very nice positive leverage. So moving on, on this theme of positive leverage. Looking at the bank as a whole, this was just Wealth Management. You are now familiar of the slide, which we've been using few quarters. And it shows you the impact of generating positive leverage on the group. That positive operating leverage has lifted our first quarter earnings by more than CHF1.4 billion in the last two years. So if you strip out the FX impact, which is significant, you can see here, 1Q '17 1Q '18, you see actual FX revenue up 1%, the cost down 6%. We've given you the constant FX number, which are more reflective of the underlying dynamics, 4% revenue increase, 5% cost decrease, very nice again positive results will support the growth of our profits. So let's look at cost for a minute. You're also familiar with this slide. We've now presented it for a number of quarters. We have kept our focus on execution, continue to reduce our operating cost base in order to strategically lower our breakeven point. 1Q '18 represents our lowest adjusted operating expenses in the last five years. We have given you quite a bit of detail on this at the Investor Day on November 30 of last year on how we have achieved the cost savings for a combination of strategic cost decisions and a systematic approach to efficiency gains. We have also given you granularity as to how we intend to achieve our full year cost target of less than CHF17 billion at constant FX rates, which we take the opportunity to reconfirm at this point. And you'll find in the November 30 slide, the slide that gives you a breakdown by the order. We use three main levels to unlock value for our shareholders. As we've just discussed, growth in Wealth Management, generating operating leverage, as we just saw; and finally, the third leg is the accelerated wind down of the SRU. So let's spend a few minutes on the SRU. On this chart, we have tried to look at the SRU wind down against that of a few peers who have gone for similar exercise, starting from when the respective non-core units were set up just to compare our evolution. And we believe we're winding down our non-core division at a reasonable pace compared to similar situation in the industry because this is a picture and ex op risk. Because op risk often obscures the picture. If you are to look at the operational transformation of the SRU, you have to look at the ex op risk, and we've actually been asked by the regulator to reallocate the op risk, and David will give you more color on that as we're winding down the SRU, because as the SRU gets smaller, the op risk needs to be reallocated to the other divisions. Importantly, like to date, since the end of 2015, we have experienced exit losses equating to 1% or exactly 98 basis points, so 1%, which is materially below the initial guidance we gave you of 3% to 5% of RWA. So I would like to confirm here that we would wind down our SRU division by end 2018. So looking at the evolution of the size of the SRU in more detail with RWA and leverage. You see on the left, we have significantly reduce the scale of the SRU with both RWA, excluding op risk again and leverage down by 79%, each compared to 1Q '15. And if your leverage, which was bit kind of behind RWA, we really made good progress going from this 83% a year ago, billion [ph] to $45 billion. Having exited now a substantial portion of our RWA intensive positions, our focus will remain on settling residual litigation items which are residing in the division for the remainder of 2018. And this is an important part because we gave you guidance 500 million of losses post '18. This is has to be clean 500 million. So it's a bit of cleaning up to ensure that's sticky situations still in the SRU are resolved before winding down. So we also have reduced operating expenses in the SRU. You can see this cost here, which have been eliminated from the SRU in what's a core part of our strategy, good things in the SRU and close them down. These costs will not reoccur as they have been driven by our strategic decisions to exit certain businesses and to remove the entire stack of associated costs. I was insist, we closed the business, everything goes, the real estate, the IT, the wireless infrastructure, the overhead, everything goes. So it's been very effective for us. So if to just wrap up in this section and three dynamics that I've talked about, the continued growth in Wealth Management, the positive operating leverage and the reducing drag from the SRU, this combined effect, of course, drive group profitability up in a significant way as you can see here. Before closing, I would like to take a few minutes and run through the divisions, with more or less one slide per division starting with Switzerland. Switzerland achieved its ninth consecutive quarter of year-on-year adjusted pretax income growth with a further acceleration in 1Q '18, delivering CHF554 million of adjusted pretax income for the first time above CHF500 million. Adjusted PTI in 1Q '18 is up 29% compared to 1Q '15, a strong performance in a mature market like Switzerland which is growing at around 2% per annum. GDP is growing around 2% per annum. Importantly, a number of key revenue initiatives, that's has been a bright spot for us in these results have led to finally our revenue increasing in Switzerland. We're increasing by 3%. We have outlined some of these initiatives in the past and we've combined them with a more effective use of technology to boost activity levels and client interactions to contribute to this financial performance. To give you a few examples, we've talked a lot about these bank entrepreneur, so we have improved the covering intensity of Swiss SMEs, Swiss [ph] dynamics and with an increased focus on high potential clients within that and regionally also. And we're also better leveraging our bespoke suite of investment solutions to penetrate the client base. And last but not least, we have also had very good execution and a strong pipeline in investment banking where, I remind you are number one in Switzerland. So turning to IWM. IWM too has delivered a step-change in profitability in 1Q '18 with 12% higher adjusted revenues year-on-year and stable adjusted expenses. It's a combination of revenue growth and well-controlled cost as delivered adjusted PTI of CHF474 million. This division made further progress in leveraging our investment engine through our house-view-led solutions that increased mandate sales to both ultra-high net worth and high net worth clients. Importantly, we call the number of landmark ITS transactions. Remember, we created this joint venture ITS between Global Markets and IWM. And these are bespoke solutions which provide our clients with cutting-edge, institutional quality product, widely distributed across our Private Banking franchise, again something we could not do without our sophisticated GM capabilities. We have consistently driven return on regulatory capital higher in IWM as consequence of strong revenue growth and disciplined cost managements. So in 1Q '18, we achieved an adjusted return of 35% at the bottom here, up 9 percentage points year-over-year. I want to say a few words about asset management because it is in IWM and it is a core part of our strategy and it's done really well. Our Asset Management business has delivered another strong quarter with revenues up 7%, lower operating expenses and adjusted pretax income up 42% year-on-year. Assets under management were up 7% year-on-year to CHF391 billion, driven by CHF9 billion of net new assets. So let's move now to Asia and APAC Wealth Management. In our Wealth Management and connected activities, APAC has continued to perform strongly with adjusted PTI of 25% year-on-year, simply our best ever quarter since the division was created. As with IWM, we have continued to drive adjusted return on capital higher, reaching 36% for the quarter, up 5 percentage point's year-over-year. And if we look at APAC as a whole, including APAC markets, adjusted return on regulatory capital in the quarter reached 21%, reflecting the progress we have achieved in restructuring our APAC market activities which were a topic of concern in previous quarters. I want to mention just a few highlights in Asia. We had record revenues in Private Banking, and that reflected strong transaction activity and recurring fees, and we come back to that in the Q&A., but a lot of very good initiatives there and programs. And we also had highest first quarter revenues for advisory, underwriting and financing. It was their sixth consecutive quarter with gross revenue above CHF200 million. And again, on the effectiveness of our unique integrated model in APAC, as I said earlier, we have seen over 4 billion of asset referrals between the Investment Banking and Wealth Management in Q1 alone. In addition to the 5.4 billion of referrals also achieved - already achieved in '17. And we actually think this approach to cover ultra-high net worth and entrepreneurial trends in the region is challenging some of the conventional wisdom, but NNA growth can only be achieved by hiring new RMs. So moving on to slide 22 and look at Global Markets in more detail. We believe we have completed the rightsizing and the de-risking of our Global Markets activities. We have, on the left here, significantly reduce the RWA, or in the middle, the leverage and also the VaR within the division, while at the same time, investing in talent, this is sort of the key for us, specifically within our Equities business, where we saw an opportunity to refresh our franchise in equity derivatives, but also across our franchises to retain, motivate and grow our teams. So if we look at the revenue performance attached to this restructuring, in 1Q '18, global market had actually its strongest revenue since 2Q '15, so in three years. We are often asked to reconstruct the revenue performance in our old structure, so aggregating our global sales and trading revenues across fixed income and equities. On this basis, revenues were up 8% in U.S. dollars, year-over-year. And if you look in the middle at global market for division per se in the middle, revenues were up 2% in U.S. dollar against a very strong year-on-year comparable; equities were up 7%, reflecting the impact of increased market volatility; and this investment we've have made and talents over the past 12 months; and fixed income revenues increased by 3%, driven by a continued to strength in our traditional very strong areas of Securitized Products and also share gains in leveraged finance. For us, the equities is significant because the inflection point in the business where revenues have been decreasing. So there's more to come from there. And these results have been of course achieved while maintaining our strict discipline around capital usage and reduction in risk. Risk management, VaR and AGM have been reduced since Q3 '15, largely driven by the reduction of inventory. Of course, our credit businesses making us more resilient in the invent of market structure on this location and considerably lower risk from today's position vis-à-vis history. Global Markets provides our clients with bespoke solutions and access to capital markets across the entire institutional corporate and ultra-high net worth spectrum. And this is a key to our value proposition. Looking in more detail at the contribution of our ITS franchise. Again, this is the joint venture we set up between Global Markets and the Wealth Management division. We have made strategic investments in our ITS capabilities, adding key hires, closing product gaps and increasing penetration of our Wealth Management clients. You can see on this slide that we've made and are good progress over the past several quarters. We are generating 11% of increase year-over-year while keeping cost stable resulting in PTI up more than threefold year-over-year, threefold. And if I pause here for a second and just maybe just more concrete between the brand and products we have launched two or three products just in the first quarter where we collected more than $1 billion, and these are fundamentally products that give some kind of downside protection or hedging with an upside that are quite sophisticated structured by global market. But the interesting point is that those were sold to about 1,000 clients. So that shows you the penetration of Global Market in our Wealth Management base, which is now starting and where we still believe there is enormous upside. So turning to IBCM. On the left-hand side of the slide, we have reconstructed for you a global view of our advisory and underwriting activities across divisions. So it's a global IBCM and your challenging quarter for The Street where you see street fees were down 13%. Our global franchise has remained resilient with revenues down only 2%, doing better on The Street. The usual revenues for IBCM in the middle are down 8% compared to The Street down 17%, which was driven by reduce client activity, partly offset by increase in IPOs. But we're very confident that the dialogue is strong there and Jim and his team are building a good pipeline going forward. So moving to - after covering the BUs, sub IWM, APAC, Global Market, IBCM, let's close in the capital position. We have strengthened our capital position in 1Q with a CET1 ratio of 12.9% and a Tier 1 leverage ratio at 5.1%. We have spoken in the past about the potential op risk relief for business exits in the SRU. David will talk in more detail about this. But at a high level, we have reduced - or FINMAs has allowed us to reduce our RWA by CHF2.5 billion in the quarter which is equivalent to 12 basis points in CET1. So on this slide, which you've seen before also, you can see compared to '16 to '18 that we have continue to drive returns higher in our businesses. And as this core profitability increases and as the drag from the SRU diminishes, we are well positioned to generate profitable growth and we believe over time, create value for our shareholders going forward. So on the next slide, you can see that in - next slide, yes - next like, please. In 1Q '18, we delivered a reported return on tangible equity of around 8% an increase of 11 - swing of 11 percentage points compared to the same period two years ago. And on an adjusted basis, this has increased by around 10 points over the same period. It is important to note that these returns reflect a relatively high tax rate which we expect to drop to the low 40s by the end of '18 and then to mid-20s by the end of '19, assuming we stay out of it. So with that, let me conclude on the following slide. In summary, having completed nine quarters out of the 12 quarters of our program, we believe we are on track. We are benefiting increasingly from a number of dynamics, the reallocation of capital towards more profitable, more capital efficient activities. Our growth in Wealth Management, our positive operating leverage and the reducing drag from the SRU. By executing this program with discipline, we have strongly increased and will continue to increase our return on capital for a number of known measures and we elaborated on those at the Investor Day, which will in turn, lead to the return of capital to our shareholders. With that, I will hand over to David who will provide more detail on our first quarter performance as he usually does. Thank you.
David Mathers:

Thank you, Tidjane, and good morning to everybody. I like to thank you all for joining our first quarter earnings call today. I'll start my presentation with a summary of our financial results. As you can see on slide 31. And as usual, we highlight our group numbers on both a reported and an adjusted basis, and this have been prepared under the same definition as we've used in prior quarters. And for those who would like to take a more detailed look, there's a full reconciliation of the adjusted and the reporters results on both the group and the divisional lines in the appendix. Now for the first quarter of 2018, Credit Suisse achieved a pretax income of CHF1.1 billion on net revenues of CHF5.6 billion. On an adjusted basis, as per our usual definition, we delivered a pretax income of CHF1.2 billion on CHF5.6 billion of revenues. And that's an increase in profits of 36% year-on-year. We reported net income of CHF694 million, and that's equivalent to return on tangible equity of 7.6% in the first quarter, up from 6.5% in the same quarter a year ago. Now on an adjusted basis using the same definition, the return on tangible equity was 8.8%. Now for the rest of my presentation, I will focus on the adjusted numbers as we believe this more accurately reflect the operating performance of our business. So with that, let's turn to slide 32 to look at the capital and our leverage position. So we ended the first quarter with a look-through CET1 capital ratio of 12.9%, and that compares to 12.8% in the final quarter of 2017 and is above our target, which as you know, is to be in excess of 12.5%. Our CET1 leverage ratio was stable at 3.8%, and that remains above our Swiss too big to fail going concern requirement of 3.5% that we have to be at for 2020. Our Tier 1 leverage ratio stood 5.1% at the end of the first quarter, and that compares to 4.6% at the end of the same quarter last year. Now on a look-through basis, our risk-weighted asset position reduced slightly CHF271 billion at the end of the first quarter, that compares to CHF272 billion at the end of the fourth quarter of 2017. During the quarter, we grew our risk-weighted assets in our core business whilst continuing to reduce positions within the Strategic Resolution Unit. We added some CHF4 billion primarily in our Wealth Management businesses in the Swiss Universal Bank and in Asia Pacific, whilst reducing RWA, excluding operational risk, in the SRU, by a further CHF2 billion. Now just in terms of methodology changes. As I noted when we announced our fourth quarter results, we expect to see approximate CHF8 billion of additions due to external methodology changes in 2018, primarily in respect of credit multipliers and banking books securitization changes and face fairly equally across the four quarters. Now in the first quarter, however, as Tidjane said, we concluded the discussions with the FINMA around the operational risk RWA in respect to the Strategic Resolution Unit, and this resulted in a CHF2.5 billion reduction in op risk RWA. The net impact for the first quarter of 2018 was therefore a reduction of just under CHF1 billion from this offsetting methodology changes. I'd also note that as part of this discussion, the FINMA ask us to reallocate the residual balance across their reporting lines and this is now been completed and is reflected in our results. As can be seen at the bottom of the slide, our leverage the exposure rose from CHF917 billion at the end of the fourth quarter of 2017 to CHF932 billion at the end of the first quarter. The business use of leverage increased by CHF16 billion, again primarily in our Wealth Management focused divisions. However, in response to the increased market volatility that we saw in the first quarter, we decided to increase the central high-quality liquid asset buffer, the HQLA, by CHF8 billion. And as you'll have noticed, we have realigned HQLA for 2018. Each division is now assigned the amount of HQLA related to its specific risk usage in its legal entity or with entity specific buffers above and beyond that business usage assigned to the Corporate Center. Now before we turn to cost, I'd like to make a couple more detailed points. Now first, in terms of accounting changes, as you may have seen in the reporting, by certain of our U.S. peers over the last two weeks, we've adopted a new U.S. GAAP standard on revenue recognition, that's ASU 1409 which acquires the change in the growth and net presentation of certain revenues and expenses in relation to some underwriting and brokerage transactions. This U.S. GAAP change is neutral to profits but has increased both from revenues and operating expenses by US$ 8 million in Global Markets and revenues and operating expenses by US$16 million in Investment Banking and Capital Markets. Now the second point I just wanted to make, just turning to foreign exchange. Our results this quarter have been adversely impacted by currency movements. And in particular, the weakness of the U.S. dollar compared to the Swiss franc, which more than offset the strength of the euro and the sterling against the Swiss franc. I would estimate that across the group, the impact of these changes was to reduce net revenues by around CHF150 million and to reduce the pretax income by approximately CHF80 million. Now with that, let's turn to slide 33, please, for a closer look at cost. A major component of our restructuring has been our commitment to reduce cost and to improve the efficiency and the productivity of Credit Suisse. As you remember, we set a target to reduce our adjusted annual operating cost base to less than CHF17 billion by the end of 2018. And you may recall that we measured this at constant 2015 FX rates. For the first quarter, our cost base stood at CHF4.4 billion. And we, therefore, delivered incremental net savings just above CHF200 million, about CHF 225 million in fact, and that's equivalent to a 5% cost reduction compared to the prior year. Over the remaining nine months to the year, we intend to deliver CHF800 million of savings, putting us on track to achieve our goal of net savings of more than CHF4.2 billion by the end of this year. Now cost savings in the quarter came from the continued wind down of the Strategic Resolution Unit, lower professional service costs and the reduced use of contractors and consultants. In actual FX rates, our adjusted operating cost for the first course was lower, of course, at just over CHF4.2 billion. Let me now turn to the divisional performance, please, and I'll start with the Swiss Universal Bank on slide 34. The first of our six op reporting segments, the Swiss Universal Bank delivered positive operating leverage in the first quarter of the year, reflecting the continued benefits of the combination of wealth and corporate clients under the same management team, as well as the number of key business initiatives that this management team has introduced over the past few years. In the first three months of the year, the Swiss Universal Bank produced a pretax income of CHF554 million, and that's an increase of 15% year-on-year. The drivers for this increase were broad based, with the Private Client segments showing the strongest improvement. But we achieved the very favorable balance across the whole division. Overall, revenues grew by 3% to CHF1.4 billion, whilst continued progress in cost reduction so expenses dropped by 6% to CHF806 million. Now as a consequence, for the first quarter since the division's creation, the Swiss Universal Bank's cost income ratio dropped below 60%, as it stood up 58 % in the period and that compares to 64% in the same quarter a year ago. Turning now to capital with 18%, and that compares to 15% in the same quarter a year ago. For the end of the first quarter, we reported risk-weighted assets of CHF71 billion for the division, an increase of CHF5 billion compared to the prior quarter, and this increase was driven by changes in the business growth, synthetic securitized loan portfolios, as well as my methodology and policy changes. And it's also worth noting that within the Swiss Universal Bank, the net new asset figure for Private Clients came in at CHF2.7 billion. That's the highest quarterly net level of net new assets to the segment since 2014 and an increase of 35% year-on-year And this was driven by positive contributions from all business lines. Just continue to focus on our product client segment, the year-on-year pretax income stood at CHF268 million, up by 29% with net revenues increasing by 5%. The adjusted net margin rose to 52 basis points compared to 43 in the first quarter of 2017. Now if we turn to subs corporate and institutional client business, pretax income of CHF286 million was a 4% increase year-on-year with revenues increasing institutional mandates and transactions. Now with that, let's please turn to International Wealth Management on slide 35. International Wealth Management delivered a further increase in profitability in the first quarter, reflecting increased momentum from the execution of this existing strategy. Pretax income of CHF474 million, up by 45% year-on-year demonstrated continued momentum towards IWM's 2018 profit goal of CHF1.8 billion. This was delivered broadly across our regions and our client segments with pretax income for Private Banking and asset management increasing by 46% and 42%, respectively. And return on registry capital was 35% for the quarter, and that's up from 26% a year ago. In the Private Banking business, we saw broad-based revenue momentum, which reflected our ability to advise clients in a more volatile market environment. And in particular, our tailored structured solutions were in demand for portfolio optimization in this more difficult environment. The proven capabilities, as Tidjane said already, from ITS, has been an enabler in developing more institutional type solutions for our high net worth clients, allowing us to leverage our existing Global Markets expertise infrastructure for these customers. Noteworthy ITS deals included a €1 billion protected note linked to the Credit Suisse carry income index. Furthermore, this has been accompanied by the continued development of our mandate sales totaling CHF4.8 billion, a 56% uptick year-on-year and reflecting the continued delivery of our single house view. Overall, if you look at the components of IWM's Private Banking revenues, year-on-year, we've seen 24% growth in transactional revenues, 6% in recurring fees and 13% in net interest income. We also saw a continued strong net new asset growth, CHF5.5 billion in the quarter with consistent growth in both Europe and emerging markets. Now turning to Asset Management. Net revenues rose by 7% to CHF361 million, whilst pretax income rose to CHF92 million. That's up from CHF65 million a year ago, reflecting the continued growth in management fees. And net new assets was CHF9 billion in the quarter. As with all divisions, cost controls remained a key theme with total operating expenses broadly flat year-on-year. This resulted in a cost income ratio of 65% compared to 73% in the first quarter of 2017. Now with that, let me turn to Asia Pacific, please, on slide 36. The first quarter of the financial year was another significant one for Asia Pacific with continued momentum in its Wealth Management and connected segment and a return of its markets business to profit. Across the division as a whole, pretax income of CHF288 million was 73% higher than the first quarter of 2017, and the division generated return on capital of 21% compared to 12% a year ago. In markets, the return to profitability was driven by 19% increase in U.S. dollar revenues and a 6% reduction in costs. Fixed income revenues rose by 55% as part of this, primarily due to a stronger performance in foreign exchange trading and in structured products. Wealth Management and connected, which unifies our wealth and our Investment Banking capital market businesses in the region delivered a strong quarter with pretax income up by 25%. Our focus on ultra-high net worth individuals, entrepreneurs and their businesses continue to bear fruit with net new assets of CHF6.2 billion, reflecting large flows in particular from two major accounts, and that took assets under management to CHF199 billion. WM&C's performance was also underpinned by continued growth in Private Banking with transaction-based revenues at our highest ever level. This was accompanied by strong advisory, underwriting and financing activities with greater China and Japan contributing significantly. Notable transactions in the quarter, including advising Alibaba on its 33% stake in ad financial and advising the single Korean renewable power firm, Equis Energy on its $5 billion sale to Global Infrastructure Partners. The division did see a 9% increase in leverage exposure to CHF116 billion, and this was driven primarily by two factors. First, the growth in Wealth Management activities and the related business usage, and second, the HQLA reallocation as I mentioned earlier. Next, let me turn to Investment Banking and Capital Markets on slide 37. Investment Banking and Capital Markets, which focuses on delivering advisory and Investment Banking services in the Americas and EMEA generated a reduced return in a challenging quarter. We noted in February and our fourth quarter results that the recent market volatility we've seen at that time may cause issues in executing our capital markets pipeline, and this is indeed proved to be the case. Now as Tidjane referenced earlier, if we look at the global advisory and underwriting business, that combines revenues from those booked in IBCM, Global Markets, the Swiss Universal Bank and Asia Pacific, revenues totaled $1.1 billion for the quarter. That's down about 2% from the same quarter last year. And that compares to the 13% for in street [ph] fleet globally according to the geologic data. If we look purely IBCM, which as you know, operates primarily across the Americas in Western Europe, geographies which were more adversely affected by market volatility, our revenues totaled $559 million, and that was down by 8% year-on-year. Our equity capital markets franchise, however, continue to be a highlight. In particular, our initial public offerings or IPOs which delivered revenue growth one in excess of The Street. Notable IPOs were done in the quarter, included Deutsche Bank's, DWS asset management unit, Hudson Group, and the Mexican airport operator, GACM. M&A revenues fell by 19% year-on-year, driven by fewer closings in the quarter, whilst debt underwriting fell by 7% year-on-year compared to a strong first quarter in 2017. Leverage finance continue to be a significant area of new business with IBCM ranking number one in the first quarter with a market share of 8.7% in the geographies in which we operate. Major transactions included GBC's $4.7 billion leverage loan and [indiscernible] €2.1 billion leverage loan. As I noted earlier, IBCM's revenues - IBCM's numbers, both revenues and operating expenses, include a $16 million uplift as a result of the U.S. GAAP standard, ASU 1409 on revenue recognition. Pretax income for the divisions stood $94 million in the quarter. That compares to $151 million in the same period or a reduction of 38%. And return on regulatory capital stood at 12% albeit a significantly higher returns in the Americas at 21%. Now let me turn to slide 38, please, and focus on our Global Markets division. As we noted during the quarter, the strong start to the year was dampened by the market turmoil in mid and late February which adversely impacted the level of capital market issuance that could be completed during the period. Nonetheless, the investments that we've made in this business, particularly in equity derivatives and in the ITS joint venture with SUB and IWM have begun to pay off. If we look at our equities revenues, this increased by 7% year-on-year led by a particular strength in equity derivatives. And I also note that our prime service business was resilient during this period. If we turn to fixed income, this had a satisfactory quarter with continued growth in Securitized Products activity and a resilient performance by our Global Credit Products franchise, particularly in leverage finance activity where as I've noted already, we rose to a number one ranking in U.S. and EMEA, increasing both our share of wallet and our rank notwithstanding significant decline in industry volumes. Pretax income for Global Markets in the first quarter was $357 million. That's an increase of 6% on the same quarter a year ago. In terms of operating expenses, the increase that you see in U.S. dollar terms reflects the weakness in the dollar which increased the expenses by just over $40 million in the period. Furthermore, the ASU 1409 change, as already mentioned increases both revenues and expenses by $8 million. In addition, risk-weighted assets stood at US$61 million at the end of the quarter, that included the reallocation of $1.9 billion of op risk RWA, whilst leverage exposure stood at $296 billion, a 3% increase on the first quarter of last year. It's our intention to see GM back below the respective limits of $60 billion of RWA and $290 billion leverage later this year. And with that, I'd like to move on to our final reporting division, the SRU on slide 39. The Strategic Resolution Unit continues to meet its goal under the scheduled wind down in December of this year. In the first quarter of the year, the SRU delivered on key metrics, reducing risk-weighted assets, cutting leverage exposure and lowering losses. Risk-weighted assets, excluding operational risk RWA stood at $12 billion at the end of the quarter. That's pretty close to the SRU's year-end target of $11 billion, and that compares to $22 billion at the end of the first quarter of 2017 and $14 billion at the end of last year. The four was driven by the number significant deals that were completed in the quarter and the continued reduction in derivative exposure. I'd note we unwound another 5,000 trades in the last quarter, bringing the residual total to 87,000, and that compares to 330,000 trades in the fourth quarter of 2015 when we started. Leveraging exposure fell to $45 billion in the first quarter from $83 billion a year ago. And that's a reduction of 45% and again closing in on the year-end target of $40 billion. The portfolio has been further reduced in the period, including the runoff of the derivatives positions, the set of emerging market loans and some of the residual asset management exposures. Additionally, the accelerated reduction in the business portfolio has reduced the amount of HQLA that the SRU needs to hold against this portfolio. If we turn to P&L performance, the SRU lost $382 million in the quarter. This was marginally higher than the loss in the fourth quarter of last year when, as you may recall, the division did benefit from certain gains. But quite clearly, this represents a significant reduction in the operating loss compared to the 502 million that we suffered in the first quarter of 2017. Total operating expenses fell by 29% year-on-year to $166 million as the cost reduction programs that are a core part of the SRU's operating strategy continue to gain traction. And at this point, I'd just like to reiterate the guidance that we gave at the Investor Day last November and confirmed in February. We expect the pretax loss from the SRU to be at no more than $1.4 billion for 2018 with a high proportion of this loss to be incurred in the first half of this year. And as I said before, our goal is not just to beat this loss guidance for 2018, but to ensure that the drag from the residual positions, the carry-forward in 2019 incur a loss of less than $500 million for next year. And with that, I'd like to thank you for listening. And I'd like to pass you back to Tidjane to conclude the presentation. Thank you.
Tidjane Thiam:

Thank you very much, David. So let me leave you, please, with a few key messages we had for you today. We believe these results demonstrate that we are, while continuing the successful transformation of the bank, two, accelerating profitable growth in Wealth Management, three, creating operating leverage, four, winding down the SRU at pace, and five, driven returns and delivering over time growing shareholder value. So with that, we look very much forward to taking your questions and trying to answer them. Thank you.
Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Kinner Lakhani of Deutsche Bank. Please ask the question.
Kinner Lakhani:

Yes. Good morning, Tidjane, David. The numbers, I think, speaks for themselves, so apologies of my questions are directed elsewhere. First question is to really try to understand the impact of BEAT as part of kind of U.S. tax reform, and how that's changing your operating and funding model? And also related to that, kind of the implications of LIBOR OIS. And my second question is just to see if you could provide a bit more of a update in terms of the kind of Basel IV type guidance, especially given that during the quarter, we saw new proposal in terms of FRTB, which clearly is quite impactful? Thank you.
Tidjane Thiam:

Thanks very much, Kinner. So I think this is more for David.
David Mathers:

Thanks very much, Kinner. I think that might be three questions but...
Kinner Lakhani:

Pardon.
David Mathers:

So let me start with BEAT. I think there's only a couple of points I'd make, and our assessment on BEAT has not changed since we spoke in February that we judge it more likely than not that we will not be subject to BEAT in the course of 2018. I'd recall, I mentioned that time and at that point, we only had limited guidance on the structure of BEAT and that remains the case. We don't expect further guidance from the U.S. Treasury later this year or potentially even in the first quarter of next year. In terms of changes in the funding model, I think you know that we have made some changes there. And in particular, the - our international businesses, that's Credit Suisse International in London is now accessing the U.S. repo markets directly which takes those cross-border outside of the BEAT scope as currently defined. So I think that's what I'd really say on BEAT. No real change to what we said before, and we've obviously taken some steps to reduce the risk of BEAT nonetheless.
Tidjane Thiam:

LIBOR-OIS?
David Mathers:

LIBOR-OIS. So LIBOR-OIS, I think we have obviously, like every other bank, we obviously watch the spreads between LIBOR and OIS actually widened this first quarter and we could expect and the reasons for that are probably offbeat for this question. And I think there's a number of points to make. Clearly, LIBOR is a measure which has only limited lifespan left. And for some years now, we have operated Credit Suisse on an OIS basis. So that means essentially, we swap to OIS. We hedged to OIS, and the charge business - the rate to our businesses on OIS as well, and we would expect our businesses to actually accumulate OIS priced assets. So they're saying that in terms of their position, and therefore, the vast majority of that positions are matched to OIS rates. So therefore, the widening by itself doesn't have much impact. The impact it does have merely relates to the extent we have HQLA buffers in excess of our Street minimum [ph] where we may not have full matching over the lifetime on that positions. If LIBOR rates, the LIBOR OIS spread was to remain this level, we might see something in order about 15 million a quarter from that basically, 1-5, 15 million per quarter as a consequence of that. I think that's - always said that LIBOR OIS now, I think one point really then relates to net interest income. And just to recap what we actually said back in February, a parallel shock of 100 basis points across our major currencies would basically increase our net interest income by about 450 million once that have been fully absorbed which takes typically 2 to 3 years. I think this question which I ask back in February with people ask, what's the impact of the current forward structure on our NII and you may recall that I said at that point, it will be plus 200 million for '18, plus 200 million for '19, plus 200 million for '20 against '17 starting point. So 200 million, 200 million, 200 million, not 200 million, and 400 million and 600 million. If you look at what's happened to the curve since then, you have seen obviously the short end move up by 50 basis points or so, but you haven't seen that much move in the long end. So this is, in many ways, part of this LIBOR-OIS change you've actually seen. What that actually means is that our guidance of a 200 million increase in each of these three quarters is approximately unchanged. It may be slightly better but it's a rounding error. So that's I think this full answer I can actually gave on this point.
Tidjane Thiam:

Just before we move to Basel IV, to wrap up and to confirm what David has said on LIBOR-OIS. Just two point, we're an OIS bank and we have no material exposure there because the 15 million he gave is in case the spread potential increase, but in any case, it's not an issue for Credit Suisse.
David Mathers:

Exactly.
Tidjane Thiam:

Okay. Basel IV?
David Mathers:

Basel IV. I think we've obviously seen continued development on the Basel IV function. I think all I would say at this point given that the FRTB is only due to be introduced in 2022 is that - I think I'll stick by what we said before that from a combination of the banking book changes securitization, the fundamental read of the trading book and the SACCR model, we'd expect a net impact of somewhere between 35 billion to 40 billion of RWA by the end of 2022. I think as we see these rules develop over the course of the next year or so, we have to update that guidance.
Kinner Lakhani:

Thanks. Very helpful. Thank you.
Tidjane Thiam:

Okay. Thank you, Kinner.
Operator:

Thank you. Our next question comes from the line of Daniele Brupbacher of UBS. Please ask your question.
Daniele Brupbacher:

Good morning and thank you. First question would be on those Swiss business. Good result there, but just in order to reach the CHF2.3 billion target for this year, if my calculations are correct, you still need something like a 5% sequential pickup for the remaining quarters from a pretax profit point of view. I just wanted to ask you in terms of what you drive that, what is less in terms of cost cutting? I mean, you used to talk about I think CHF200 million there, what is left? And then probably in this context, how important is the CHF4 billion RWA increase you've had in the quarter that is tend to drive obviously your P&L. And then, the second question is really on HQLA again. The MCR ratio jumped another more than 20 percentage points to above 200 now. And there you gave all those interesting information regarding the HQLA allocation between division's legal entities, et cetera. I just still struggle to get my arms around why these ratios are so high and what is driving all this? Are there certain - I don't know, inefficiencies regard to legal structures or constraints at those legal entity levels versus the group? If you could just elaborate a little bit on this, it will be helpful? Thank you.
Tidjane Thiam:

Okay. Thanks, Daniele. I'll take the first one on Switzerland. Thank you for the positive appreciation of our performance. Look, first of all, we're very pleased to be above 500. This was certainly an objective. I kept telling Thomas I need quarters with a 500 if want to get to the 2.3. I welcome but we're having a few detailed discussion about the 2.3, for me that's progress compared to where we started from. But more seriously, look, the cost will deliver. That's the shortest answer. I think the whole team knows that cost targets are not negotiable. So that's how we run. So we will deliver on the cost and there's a whole battery of measures to deliver on that. More interesting discussion is the revenue and there was a lots of things we've been doing. It starts with pricing and deposits and deposit campaigns. We have now run the balance sheet with an eye to HQLA. This is something we have managed quite actively in '17, and you're seeing some of the benefit flowing through in '18. With the AUM growth, AUM is a big driver and everything that's Wealth Management. The AUM growth is going to help the PTI, and that's true. You often - people often talk about it on the private side, but it's also true on the corporate side where we've been pushing the lending, and that's also very profitable. Mandate sales can still continue. Our advisory mandates are doing very well and we see an upside there. We have a lot of campaigns or investment products that we are pushing that are being very successful. We also talked about ITS and the potential for structured products. So FX sales, structured products have been a really bright spot. We've also been doing some internalization. The SP revenue in ITS has grown up by 60% in Q1, and we are continued our sales effort on primary FX. And then don't forget I mentioned the IB in Switzerland, that's a little gem that we have in the bank. We're number one in Switzerland. We're fair enough - we're second largest bank in IB. We've been number one and continue to be number one. Pipeline is pretty strong as far as I can tell, lot of transactions. So if you bring all that together, we think that NII can grow kind of 1%, 2%. We think recurring can grow kind of for 4-ish, 4%, 5%. And transaction because it's not just market dependent. I try to indicate the structured product, the FX we have. You all think that we just sit there and take the volatility, but there is lot of proactive actions. So we think we can drive that about 5%, so high single digits probably. So between NII recurring and transaction, you got a lot of good growth there. And again, on the cost side, we're not concerned. And I think you asked about the RWA, was that...
David Mathers:

LCR ratio.
Tidjane Thiam:

LCR. There's a question on RWA in Switzerland.
Daniele Brupbacher:

The 4 billion increase I think. Yes, I guess that's a part of the loan book.
Tidjane Thiam:

There is some methodology, it's kind of 1 billion. Growth is kind of 1 billion and balance sheet is a synthetic securitization that we did.
Daniele Brupbacher:

Okay. Thank you for the detail.
Tidjane Thiam:

Thank you. David?
David Mathers:

Just on the LCR point. I think as you know, this is a split quarter for us. So if you - what you have today obviously is the earnings release, and then we follow 6-K at the end of the 3rd of May. So you'll find more details on the LCR there. However, I can tell you that the primary driver of the increase in the LCR ratio is the drop in the denominator. The so-called NCO, which actually dropped from I think just short of 90 billion at the end of the fourth quarter by about 10 billion which you'll see when we filed the 6-K in due course. So that's really what's driven the majority of the pickup in the LCR ratio. The only real increase in HQLA was what I actually mentioned before, which is due to the market volatility, which we saw in the first quarter, we did actually choose to increase our central HQLA buffer by about 8 billion. So that's the increase in the numerator, but the real impact is the decrease in the denominator. And I think that's a point which I sort of made before, which is increasingly, when we actually looked at liquidity metrics, the NCO is not really the best risk metric. We actually run our business on a more rigorous internal match, which is more binding than LCR, in which we actually look at our economic assessment of liquidity outflows. And the NCOs are generally much more light shall we say than that. So that's point one. Point two, we obviously looked very close to it what happened in the states and three, four years ago where you saw the [indiscernible] and the need to maintain liquidity against stressed scenarios in your U.S.-based branches, and that's an approach which we rolled out across the banks. So we do a look at our liquidity stress in each individual entity. And that's where we're actually we're managing to ensure that remains the case. The final fact, just to continue. And you've noted, Daniele, obviously the HQLA reallocation we did. That's actually intended to provide people much more visibility because what you'll see is a total buffer in the Corporate Center of just over 40 billion, which includes the 8 billion I mentioned before, plus the buffers in each individual legal entity in excess of The Street business usage. So I think you'll be able to hold us accountable now to what is our business usage by division and how we actually manage that central buffer in terms of that. And clearly, by separating those two that really comes down to the executive - the Board of Directors in terms of how we actually manage down the central buffer. And I think by making it transparent, you can see what we're doing, and that's certainly a number we intend to reduce. I do think though, if you're going to focus purely on the LCR ratio, given that the NCOs are not really that primary driver of risk that CS's LCR ratio on a reported basis likely to remain high. If you look at our HQLA levels, you will see that they're not that different to those of other banks.
Tidjane Thiam:

And as [indiscernible] ask you to do the calculation. The P&L impact of those movements in HQLA from A to B is…
David Mathers:

About 8.1 million of P&L which is taking the Corporate Center, which otherwise would have been in the division. So assuming we don't reduce that buffer till that give about 30 billion in the full year.
Tidjane Thiam:

So for any suspicious minds out there, this is - it's to align the HQLA with the business logistics that we move P&L…
David Mathers:

Exactly. So when we comment going forward, division size, we've seen leverage increase, it only be HQLA will only be reflect of them matching business usage. Clearly, changes the buffers you'll know see that central number.
Daniele Brupbacher:

Okay. Thank you very much.
Tidjane Thiam:

Okay. Thank you, Daniele.
Daniele Brupbacher:

Thank you.
Operator:

Thank you. Our next question comes from the line of Kian Abouhossein of JPMorgan. Please ask your question.
Kian Abouhossein:

Yes, hi. Thanks for taking my questions. The first one relates to Global Markets. Just recalling your target at the Investor Day on the revenues for this year, you mentioned 6 billion-plus the old target on cost was 4.8 billion, implied 1.2 and you make about 28% of that 1.2 billion implied target for this year and pretax profits in the first quarter. And clearly, as we all know, seasonality means you should make probably 100 million more this quarter to get to this target. So I'm just wondering, should we ignore this target, which implies 10% to 15% of ROE, which is also your guidance, or is this target still on? That's the first question. And the second question, I mean, your IWM and your WM numbers are superb. And I'm just trying to understand a little bit how you're holding up so well on top line margins in IWM that even up year-on-year and 70% of your net new money comes from ultra-high net worth which you all know was lower gross margins. Just trying to understand how you manage that which looks great. And in that context, how should we think about RMs going forward also in IWM and in WM? Thank you.
Tidjane Thiam:

Okay. Thanks a lot, Kian. Also surprise me if I start with IWM. I think it's a real bright spot. As you said, what we are doing and really we're doing a lot of things there. We've talked about, I think if you remember of a workshop at Investor Day. Iqbal and Claudio talked about the house view and how that ties into our solutions. That is actually really important. Our mandates have done very well. And we all know that flows and performance are for kind of "retail customers," very strongly correlated. So that's a big source of profit there. There's also loan borrowed lending, which is also important, which we believe it still is lower risk and it's typical. You take a - it's a bit more than that. I think Claudio gave a good example at the Investor Day of if we take up family, typical wealthy family, wealthy entrepreneurs, all their wealth is in one stock, they are highly concentrated. A way we often come in is by allowing them to diversify that. First, monetize it and then often those flows are reinvested in a more diversified portfolio in which we can help them. We also sell our solutions in that context, so all that is very positive. We really track the revenue per client. And also, we - also give such a simple answer and we drive that very systematically using every opportunity, whether it's to manage our investment, whether it's the land or whether it's to do a specific transaction, a lot of them have hedging. They have FX needs. We have natural FX exposures. We have long [indiscernible] helping the manage that is very good, and it's something we're very well equipped to do. And this is why we can call it ITS and global market that we really - we believe have a unique proposition there. And that's why you see that our margins have the life of their own. Also, don't underestimate the Asset Management story here. We said we would add 200 million of profit in Asset Management. We've already done from memory, I think '93, and we're well on track, and we added another 31 or 32 in Q1. So when you take the numbers and you do your margins and return on capital, asset management is a big part of the story. And I will - another one which I think Iqbal and his team don't get credit for enough is the cost, because people can generate revenue growth. Not everybody can generate positive operating leverage. And really, this team were very focused on that and the cost control in IWM has been superb. They have grown the top line. But if you look at the gross margin, it's somewhere in the past...
David Mathers:

Like 46…
Tidjane Thiam:

Okay, if you've got gross margin, it hasn't move that much. It's really the cost control has made a big contribution to the improvement in the net margin, and that's a point, I think, that's often missed. So we do put more balance sheet at work, but we do that in a very efficient way. So in that context, RMs are important. But in the way I drive the business as to in APAC too, I want to see much growth from increasing the productivity of the existing RMs, remember just adding RMs. So adding RMs is good. It's part of a business model, but that's a - the smaller part of the profitable growth that we are generating. It also ensures quality growth. I would say, if you can sell to our existing clients, you have a challenge in your model. And adding RMs won't solve that. Global markets. I mean, you're correct in the objective we gave. Look, you've seen how we've run the bank in the last two or three years. We do not set non-ambitious target, and there's several ways to approach targets. That's just our philosophy. We set ambitious targets. So they need to be discussed because we think there's not much value in a target that is obviously achieved before you even start. So yes, there is attention. We did - it depends on how you count 1.5 billion, 1.6 billion of revenue in Q1. Yes, there is - absolutely there is a shortfall there to get to the six, but we're not going to give up. The pressure is high. Look at Brian here, he's nodding. The pressure is on him, pressure is on his team. That's how we get somewhere. So we're shooting for 6 billion. As always, and these discussions, cost is much more under our control. The 4.8 driving towards it. We have idea. It's something taking - we just had a meeting yesterday again about that. We have ideas to get there. We're not giving up on the 4.8. And the six is something we believe we can achieve with all the upsides we've talked about in equities where there's been a turnaround. We can do more. We're working towards it, but we also have to be step back. Remember, that slide I showed showing 80% of PTI is from Wealth Management. That's the big story. We want Global Markets strategically to be an upside. We have run it to be an upside. We can hit our targets, et cetera, as we are set up now. And with a bit of tailwind, we can outperform, thanks to the global market, but it will not - if we marginally don't hit these numbers, actually the story is intact. I think we have the right strategy. I think Global Market has right sized. And frankly, I'm hesitant because we know - you saw what had happened in Q1 and we were very transparent to the recent conference. So - it's a market dependent activity. It doesn't matter how much you de-risk it. It is market-dependent activity. So to make any extremely strong forward-looking statement is always difficult. The challenge that what we've done strategically is to turn our economics so that the economics of the bank are not dependent on that dynamic anymore and it's just an upside and it can't really hurt us. I don't know David to...
David Mathers:

Just a very small addendum. Just on GM, I think you did note on page 38, that you've obviously seen an adverse impact from FX and the accounting change totaling 50 million. So if you look at that basically, our expenses in the first quarter on FX accounting neutral basis would be not 1.281 but 1.231. So we clearly are converging but not yet at the 4.8 billion target. That's all I'd say.
Tidjane Thiam:

And really this is the comments we have to be careful in making, because I've said several times. And I think not in the presentation, how important GM is for the strategy. But frankly, I'm like you, I want the share price. When I see the correlation between the trading activity of the floor in New York and our share price, I'm baffled, because that's not supporting by any of our numbers. It's an upside. But to see that driver share price like it has in the last four or six weeks is baffling.
Kian Abouhossein:

And sorry, if I may just very briefly, RMs, is there any target for this year that we should assume for RM higher in IWM and WM?
Tidjane Thiam:

No. We think we can drive the NNA one way or another and we have that flexibility. Usually in Asia, the contribution made by the bankers to the NNA. And it's not material. I'm looking at Iqbal here. We have the growth of natural attrition. So we always hire, but there are no aggressive hiring plans in IWM. In APAC, I think we'll grow a little more. We have - we kind of slow down the hiring last year, and we've been since last quarter of '17 we've been hiring a bit more.
Kian Abouhossein:

Superb. Thank you very much.
Tidjane Thiam:

Thank you. Thank you, Kian. Operator Thank you. Our next question comes from the line of Andrew Coombs of Citi. Please ask your question.
Andrew Coombs:

Good morning. My first question will be on transaction revenues in IWM and APAC. They're exceptionally strong, up 24% and up 20% year-on-year. What I'm just trying to get a feel for is, how much of that is six good trends on better brokerage, structured product issuance versus how much do you can actually structural uplift given the investment in your ITS capabilities that you outlined on slide 24? Just trying to get a feel for if you actually think where the higher base level now. And my second question which will be on your Global Markets results, more specifically your equities results. You flagged that equity derivatives is actually weak. It's different in the comments of your peers. If you could just elaborate a bit more and what was driving that? Thank you.
Tidjane Thiam:

Okay. Thank you. Thank you, Andrew. Good morning. Thanks for your question. Andrew, last one. I actually might recall. I think up significantly?
David Mathers:

Yes, the equity derivatives was particularly strong in Global Markets, less not so much in APAC but in GM.
Andrew Coombs:

Okay, so let me reword in that case. But if you look at your numbers, you're up 7% year-on-year in dollar terms. Peers, you're up 30%-plus. So what was the key driver then for the reason why you've lost a bit of share in equities? Thank you.
Tidjane Thiam:

Okay, okay. I'll pick up the transaction question. It's also an important one. I would say most of it is really due to the actions we have been driving, the increase. Take Asia, we had several campaigns. There's one we call the jumpstart campaign, because it sounds a bit silly, but they did the sales conference in Q4 as we did in Q1 because we've always observed slowdown in Q1, so we really make sure that everybody in January had books lined up their plans and really that have a big impact. We've had a lot of success selling funds in Asia, and we've had lot of success in structured products. But you also know that it's a feature of the Asian markets that transaction levels are structurally higher. It's the behavior of the Asian investors running other parts of the world. So I think that's amplified when you get to APAC. And in IWM, we think some of it is markets, yes, but most of it is really the actions we're driving. So we really believe that there is a strict change in our basis for driver - the transaction revenues. It's across the board. I'm looking here at Asia. Equity structured products, FX, we've seen concern. It's a broad range of things that we are driving forward. And it's just - its notion of also markets NPB working more closely. It's something we're driving across the bank and with positive results. So back to equities. I think derivatives was very strong. I think cash and prime was okay. But also don't forget that we did not to put VaR at work. And that's one of the key things that happened. You see that some of our peers engaged in some idiosyncratic transactions which are quite public in equities and led to - we know the revenue and some of those are very, very material. But also, we also know that that's a very risky activity. That type of activity we've been involved in the past. So you need - when you look at and compare, you also need to keep in mind that we have capped the business in terms of risk budget and of capital. So I consider that with that constraint in mind, we've done very well. Most of our peers who have reported increased VaR quite significantly. So the numbers are not comparable apple-to-apple I think.
Andrew Coombs:

Okay. Thank you.
Tidjane Thiam:

Okay.
Operator:

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

Thank you very much. I've got two questions today. One on cost and one on the trends in the Wealth Management going forward. So let me start with the cost because we talked about delivery. We've talked about what we're doing on that - what on the group level. But there are two standouts in your jaw's execution kind of operationally per business this quarter. One is SUB and another one is IWM which we kind of broadly, broadly talked about kind of 9% and 12% jaws, respectively, on a quarter. Now on a group level, the commentary was about the workforce strategy SRU kind of decreased professional fees. But for those two divisions in particular, when you look forward, what are the actual kind of key drivers that you see of the continued cost delivery? So that's first question. And the second question. I suppose could you give us a sense of a couple of things. One, the quality of flows that you saw in 1Q across the board. Two, any shifts in client sentiment, particularly affecting transactional activity and what would you watch, particularly if you were in our seat going forward? And three, how do you see your sensitivity to the market levels for the Global Wealth Management revenues? Thank you.
Tidjane Thiam:

Okay. Thank you. Thank you, Magdalena. Good morning. Look, on cost, I think you've kind of said it to yourself. There is really nothing revolutionary on you - just driving the same things and implementing them. The workforce strategy is very important. I think we can go - there's more detail if you want. We've been restructuring our centers in India, for instance. I know, which is a contributor. It was North Carolina initiative for Italy, we call it that's important, sizable, 1,200 jobs and it has a big impact on the cost. If you view on it geographically, so in America, we have that. In London, we've almost completed light house, but it's continuing. We've talked in the past about some of the - as simple as real estate. We have reduced our square meters by 14%, from 1.7 million to 1.5 million square meters. Just since '15, we have reduced the numbers of buildings by 10%, 554, to 487. That continues. We're just in Q1 completed four building sales for CHF100 million. That's also in our numbers. We are sourcing. I mean, I could really bore you with reduction in the number of vendors in the last two years. We have 20,000 separate contracts that have been consolidated into 10,000. We reduced by 50%. We are rebalancing our contract services towards the managed outcome, which is a commitment to result. The non-compensation expenses are down by 7%. I mean, I can go on and on and on. This is a million things that we do. We're confident that we are going to work. We've talked about cloud in the past, in terms of moving towards 60% of our systems in the cloud. We were, I can tell you at 17% end of Q1 - end of '17. We are now at 20%, so we added three points and one quarter. We're aiming for 34% at the end of 2018. And we're driving, driving and then will then driving to 60. So it's - so I am going to stop at the end of '18. I mean, you can see, these are initiatives that we drive. So I don't know if I give you a better sense, and that's how we think we're going to produce a chunk of 400 or something like that?
David Mathers:

That. I mean, as you can see, the cost basically drop sharply this quarter, so we're very much on target what we've laid out for '19. I mean, that's the key SRU target. And I think it's fair to say talking about large co reductions it's primarily SRU now basically. If you're talking about the rest of the divisions, it's primarily productivity and structural efficiency gains. So all things that Tidjane just discussed, moving to the cloud, decommissioning another 74 apps. I think like other firms, we've actually been looking at clienteles because we've got a whole collection of clients, so we haven't actually dealt with. It's now into very broad spread productivity measures.
Tidjane Thiam:

We eliminated 107,628 low returns clients in Q1.
David Mathers:

Exactly. And if you look at the detail NDA for the divisions, you see reductions are gaining contracts, and some you're seeing conductions in professional service expertise. But that's very much sort of financial accounting explanation of what the drivers that Tidjane summarized.
Tidjane Thiam:

So it's actually - we said at the Investor Day. Remember, I think we've said 400 SRU, 400 call center, 200 GM.
David Mathers:

That's right.
Tidjane Thiam:

200.
David Mathers:

That's right, increases as well.
Tidjane Thiam:

200 sub Switzerland and so we had a growth reduction of kind of 1 billion, plus 200 million of investment with 2Q to the 1 billion with 2Q from '18 to '17. So we're still tracking on that program. Quality of flows is fine. It's something we look at carefully. I've talked about - I think at Q4, how rigorous we are in counting the NNA. I really wouldn't insist on that. I hope it's an emerging theme. We are extremely confident in the NNA numbers. We have an externally audited progress on NNA. So our NNA can resist external analysis and that's what I will say on that. But ours are very, very clean and solid, because frankly, it's also - we had issues in the past. We had to really improve there. Sentiment, this is also - the conversations we're having. Yes, we also - January synchronize growth, normalization if interest rates are really being very positive, very, very strong January. We saw the shift in February, that's reformed. But I think the fundamental view because the beauty of our clientele is that they are entrepreneurs. And this comes through in every conversation with them, not only to read the papers of the world economy, there are - most of them in China on the ground. They know you what's going on. I was talking to them yesterday. She was telling me China is booming, China is on fire. Those were her words. So they have their finger on the pulse of the world economy issues. And we still find them very positive. Yes, there is what we said in - what we call geographic uncertainty, et cetera. But it doesn't really - it changes the nature of the dialogue. It changes what we talked about when we talk. It doesn't change so much the fact that we are engaged with them and we talk a lot to them and we do a lot to activate that dialogue. We manage our people very proactively to make sure that, that dialogue takes place. So sensitivity to the markets, I think it was kind of your third question. Yes, it's there. How to put number on it? I think our model is diversified enough. I think we have enough product strengths across asset classes that we can mitigate a lot of the volatility, but you know it's never going to be all of it. So I won't sit here and say we're not exposed. We are exposed quarter-by-quarter. But I think medium, long term, the trends on which the story is built, what you see in that slide, I think six or seven, that growth in the blue and in the Wealth Management is really driven by the global rise in wealth.
David Mathers:

Slide 7.
Tidjane Thiam:

Slide 7. That's the secular wave we are riding. And I would say you cannot succeed in business unless you're riding a real secular wave that is happening in the real economy, jumping from one quarter to another, it brings [indiscernible]. That's not a sustainable business model for a company of our scale. We are riding that wave, and we do that effectively. And we're aligning to hold bank to make - to get our maximum share of that, which we believe is there to stay, that operations is going to continue and obviously, it's very, very profitable.
Magdalena Stoklosa:

Thank you very much.
Tidjane Thiam:

Thank you, Magdalena
Operator:

Thank you. I'd now like to hand the conference back over to Adam for his closing remarks.
Adam Gishen:

Okay. Thank you, everyone, for joining our first quarter results. With that, we conclude the session and please come back to our Investor Relations team if there's more that we can clarify or add. So thanks very much, everyone. Have a good day.
Operator:

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

Credit Suisse Group AG Q1 2018 Earnings Call Transcript

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Q1 2018 Earnings Call Transcript