Credit Suisse Group AG
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

At this time, I would like to hand the conference over to Adam Gishen, Group Head of Investor Relations and Corporate Communications. Please go ahead, Adam.

[Adam Gishen:]

All right. Good morning, and welcome to our third quarter and nine months 2018 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 numbers as it is a way we manage the operating performance of our businesses. For a detailed discussion on our reported results, we refer you to the Credit Suisse third quarter 2018 earnings release and remind you of full quarter 2018 financial report will be published on or around the end of the day. With that, I would pass over to Tidjane Thiam, our CEO.

[Tidjane Thiam:]

Thank you, Adam. Good morning, everyone. And thank you for joining the call. With me, I have David Mathers, our Chief Financial Officer. Together, he and I will present Credit Suisse's results for the third quarter of 2018 and for the first nine months of 2018. But before we move to the slides we have provided you with this morning, please allow me to take a minute or two to put this quarter in perspective. When we started this restructuring at the end of 2015, we had three main objectives. The first one was to address some clear and urgent problems, i.e., our capital position, our absolute level of risk and our fixed cost base which was too high. Second was to define and implement a strategy that would lead us to sustainable compliant profitable growth. And third, to invest in order to significantly upgrade our risk and compliance culture and improve our controls. Our goal was to move towards an operating model that would allow us to do well when markets are supportive and to be resilient when markets are more challenging. 2008 (sic) [2018] so far has given us opportunities to assess the progress we have made in both directions, because the first and second quarter were characterized by very favorable markets and by strong client activity levels, which were then reflected in our very strong performance in Q1 and Q2. In the third quarter, however, we have seen more challenging conditions and lower levels of client activity, particularly in July and in August. In addition to the usual seasonal slowdown, markets were impacted by increasing trade tensions, rising U.S. rates, increased emerging market currency volatility and a notable rise in geopolitical uncertainty. In that context, client has taken a more cautious approach, something we flagged and adopted a wait-and-see attitude. Against this backdrop, we believe we have delivered our best third quarter in PTI terms since 2014, demonstrating the resilience of our new operating model. So, let's go now to the slide and start with slide 4. We have delivered adjusted pre-tax income of CHF 856 million, up 38% year-on-year. In our Wealth Management related businesses, the first point here, we can now say at the end of our three-year program that we have achieved a step change in profitability with adjusted pre-tax income of CHF 3.7 billion in the first nine months of 2018. That is up 26% compared to our full-year 2015 results, so not nine months in 2015 but the full year. So, we did 26% more than we did in the full year of 2015 in with nine months of 2018. We've still one quarter remaining. Looking at operational leverage productivity efficiency, Q3 2018 was our lowest cost quarter in the past five years. Since the start of our restructuring, we have delivered cumulative net cost savings of CHF 4 billion or 96% of the CHF 4.2 billion target savings over the lifetime of a program. And finally on capital, we improved our CET1 to 12.9%, but actually more importantly, our CET1 equity leverage ratio to 4%, which is the strongest of any large Europe, 4%. Very pleased with that because leverage is our historic capital constraint. So, let's turn to slide 5 which you are used to. What it shows you here is a continuation of our trend of consecutive year-on-year profit growth. Since 4Q 2106, on the right-hand side of this chart, we have grown pre-tax profits year-on-year every quarter. How did we manage to do this? The core component is our ability to generate positive operating leverage, which you can see on the next slide. You can see here that we have been able to generate positive operating leverage, positive growth in each of the last eight quarters including challenging quarters like Q3 2017 and Q3 2018, where you see that our revenues in both years were under pressure and came down. We were able to flex intra-quarter our cost in order to preserve the positive growth and the bottom line, and you saw that again in Q3 2018. Let me say a few words how we do this and how we get in that position. We have promoted since 2015 accountability and decentralization by pushing out cost out of the corporate center and allocating responsibility for managing them to our revenue centers. That was fundamental to the restructuring we put in place. When I started in my role, the complaint I heard most often from managers was that most of their costs were allocated to them and that we had no say, no control over what or how much was allocated to them. We inverted that logic when we put in place our new structure. We ensured that managers would control and manage at least 60% or more of their costs. And that is one of the reasons we made so much progress on costs. Managers now have a say directly and indirectly on 90% of the costs they are allocated. So, in that context, the processes we put in place allow us to react intra-quarter to drop in activities and generate significant savings allowing us to protect our bottom line and operating expenses in 3Q 2018 were down 8%. That cost management technology and the quality of information available to us allows us to take cost management decisions in real-time and for these decisions to be implemented directly and almost immediately across the organization. This approach has allowed us to proactively generate positive operating leverage quarter-after-quarter, which since Q4 2016 has delivered cumulative PTI improvement of CHF 4.6 billion. And this has, on the next slide, a compounding effect over time. In the first nine months of 2018, adjusted pre-tax income for the group stood at CHF 3.3 billion, as you can see in here on the right, and that's an increase of CHF 2.9 billion over 2016, so in two years. We have achieved over that period an 8% increase in net revenues combined with 12% decrease in adjusted operating expenses. Looking at the next slide, which is also familiar to you just a reminder of our strategy. You will recall that it is built on two pillars to be a leading wealth manager with strong investment banking capabilities. So, our next slide looks at a practical translation of this in capital allocation. We have completed, in the blue here, the light blue, the rightsizing of our market activities and the restructuring of the SRU. And we have been continuously allocating capital towards businesses, which generate a higher return with more stable recurring revenues. We have been able to grow significantly those more profitable, more capital-efficient activities in that good year, and we show some of that on the next slide which shows you our NNA, our net new assets. In 3Q, we were able to generate strong net new assets of CHF 10.3 billion in the third quarter with growth across all our management divisions whether it's Switzerland, SUB, IWM or APAC. APAC Private Bank had a particularly strong performance with CHF 6.4 billion of net new assets. That's 45% more than what we did in 2015 at the bank level. So, moving on and looking also at Asset Management. For the first nine months of this year, we have generated cumulative net new assets of CHF 33.8 billion in Wealth Management, which is up year-on-year in a much more challenging environment. And Wealth Management net asset inflows in 2018 are 67% higher than what we did in 2015. Adding CHF 21.5 billion of Asset Management NNA takes the total at nine months 2018 to CHF 55.3 billion and that's up 28% compared to the same period in 2015, another area where we have managed a step change. So, this translates into total AuM with strong NNA plus market movements have allowed us to reach record levels of Wealth Management AuM at CHF 785 billion in nine months 2018, that's an increase of CHF 173 billion compared to nine months 2015 three years ago. And this corresponds to a CAGR of 9% over a period, which we believe for a player of our size is creditable, 9% per annum on leverage. Now, if you look at Asset Management and if you add that, we have reached now CHF 1.2 trillion of assets under management across Wealth and Asset Management. So, volume growth and revenue is important and we're quite happy that we've been able to grow a key driver of our revenues in that period, but that only matters if you are able to create actual operating leverage by controlling your costs. So, let's look at how this has translated into profit. If we aggregate Switzerland, IWM and APAC, looking at nine months 2015 versus nine months 2018, we have generated CHF 1.4 billion of incremental profit in the period so that those businesses have generated in nine months 2018, 26% more than what we generated in the full year of 2015, three years ago. And that's why we keep doing a step change because we believe that is a step change that we can do in nine months. We can do 26% more in nine months when we used to do in the full year. So, revenue growth, cost control have been central to this, so let's look at cost. You have also seen this slide many times. It shows you our progress in terms of costs. For our third quarter, group operating expenses were at CHF 4.0 billion. That is the lowest cost quarter in any quarter of the last five years. And traditionally we see, as you can see on this chart, generally, we have higher cost in the last quarter of the year. And this chart highlights that our 4Q 2018 cost on an FX-neutral basis need to be below CHF 4.4 billion for us to achieve our operating cost base target that you're familiar with of less than CHF 17 billion for 2018. If you remember the first time we gave a target, it was CHF 18.5 billion, we went over down to 18%, we went over down to 17%, and we are absolutely confident that we will hit at CHF 17 billion target which was hugely ambitious when we started at CHF 21.2 billion in 2015. So that will be delivered, and David will give you more detail. So, if we step back and look at the group, what you see here is that we've made a lot of progress in improving our core profitability, so dark blue here which is up 50% compared to two years ago. 2016, we go on the left. In combination, that growth in core profitability combined with a decrease in the SRU drag, which is down 60% that's created a very positive powerful momentum to grow our total profitability. So, we are now in quarter 12 of 12 quarters. So, we're at the end of the restructuring process. Allow me to step back and just look at all the objectives we gave in this restructuring program three years ago. If you remember in my introduction, I said we had some urgent immediate plans to resolve that's the block there, capital cost and SRU. That we needed to come up with a new business model that generated profitable growth. That's the central block and that we needed to improve our controls and that's a block down there. And we have tried to give a kind of rag stages on what we have underway right in the green. So, a minute on the top part for capital we believe is completed. With 12.9% CET1, 4% CET1 leverage ratio that's good. We passed the CCAR in the U.S. Cost, we can't say completed but with very high chance of completion, as I explained earlier, we will hit the CHF 17 billion that we gave you. SRU is basically done. We are beyond the point at which we said we would wind it down. Then, moving on to – so it's important that we've done well on that block because it was crucial. Moving down to central part, if you step back at nine months, we've done CHF 1.7 billion of PTI in SUB, objective is CHF 2.3 billion. We're confirming that objective. IWM, CHF 1.3 billion, objective is CHF 1.8 billion. We're confirming that too. APAC WM&C, CHF 650 million, CHF 850 million is the target and we confirm that as well. And IBCM 15% return on capital, we're at 14%, we're conforming that target. Global Markets, we have several objectives there. One was to right-size the business. We've done that for the RWA. But more importantly, this quarter, and this explained some of what you've seen in the numbers, we've cut leverage again. So that is down 12% year-on-year. And leverage has been our biggest and most severe constraint in that business. So, that's actually quite transformational. So, that is completed. The operating expenses, we started at $6.5 billion. We said we did $4.8 billion, highly confident we will hit it. The [indiscernible (14

[David R. Mathers:]

Thank you, Tidjane, and good morning to everybody. I'd also like to thank you for joining our third quarter earnings call this morning, and I'm going to be taking you through the second part of the presentation. You may have already noticed from looking at the slide deck that we've made some changes to the way that we explain our business this quarter. I would discuss the results in general, followed by focus on capital, funding costs, expenses and on the Strategic Resolution Unit. But I will not, as in quarters past, run through each of our five main operating divisions in detail, but the slides for each division and for the SRU can still be found in the appendix section. What we intend is to change and reduce the length of today's presentation and allow some more time for questions. So, I'll just start with the usual results overview slide, which many of you I'm sure will become used to. As usual, we summarize our group numbers on both a reported and on an adjusted basis, and these are being prepared under the same definition that we've used in prior quarters. For those who'd like to take a more detailed look, there's a full reconciliation of the adjusted and the reported results on both the group and the divisional lines in the appendix. For the third quarter 2018, Credit Suisse generated a pre-tax income of CHF 671 million on net revenues of CHF 4.9 billion. On an adjusted basis, again, as per our usual definition, we've achieved a pre-tax income of CHF 856 million on CHF 4.9 billion of revenues, and that's an increase in profits of 38% year-on-year. If you look at the first nine months this year, we've made an adjusted pre-tax income of CHF 3.3 billion, which is an increase of 53% against the same period last year. And as part of our continued focus on improving operating leverage, we've further reduced our cost/income ratio, with a move in positive jaws now totaling 8% for the first nine months of 2018 compared to the first nine months of 2017. We have grown revenues by 3% whilst reducing cost by 5% on a reported basis. I would discuss our efficiency program in more detail shortly, but as you can see, we've made further substantial progress in the third quarter. Indeed, we've now achieved cumulative net cost savings totaling CHF 4.0 billion since the end of 2015. That's 96% of our end 2018 target. The restructuring program that we announced in 2015 will be complete by the end of this year and is expected to live a cumulative net cost savings of at least CHF 4.2 million. I would expect the fourth quarter to include a restructuring charge of around CHF 200 million, taking the total restructuring cost to CHF 2 billion over the life of our restructuring program. We achieved net income attributable to shareholders of CHF 424 million, which takes our net income to CHF 1.8 billion for the first nine months of 2018, 54% higher than the same period in 2017, and that equates to return on tangible equity of 6.3% for the first nine months. Finally, the effective tax rate for the third quarter is 38.9%, reflecting the fact that our profitability is still suppressed by the restructuring program and by the SRU losses. And my expectation for the full-year 2018 is that tax rate will be approximately 37%. Now, for the rest of the presentation, I will focus on the adjusted numbers. We continue to believe that this more accurately reflect the operating performance of our businesses. With that, let's turn to slide 47 to look at capital and leverage. We completed the third quarter with a look-through CET1 capital ratio of 12.9%, above our 2018 target to be in excess of 12.5% and an increase compared to the 12.8% that we achieved at the end of the second quarter. As Tidjane has already said, our CET1 leverage ratio improved to 4.0% at the end of the third quarter. That's up from 3.9% at the end of the second quarter and well above the Swiss too-big-to-fail growing concern requirement of 3.5% for 2020. You'll note that we've completed the refinancing of our AT1 buffer during the third quarter and our Tier 1 leverage ratio remained above 5.0%. Indeed, the exact ratio was 5.14% at the end of the third quarter. On a look-through basis, our risk-weighted assets were stable from the end of the second quarter to the end of the third quarter at CHF 277 billion. In the Strategic Resolution Unit, the continued reduction of the residual portfolio cut RWA by another $1 billion to $9 billion excluding operational risk. The continued reduction of RWA in the SRU means, as I highlighted a quarter ago, it is now below the target of $11 billion in RWA excluding operational risk that we originally expected to meet by the end of 2018. Now, as you may recall, when we spoke on July 31st for our second quarter numbers, we said we expected to reduce HQLA usage by approximately CHF 10 billion to CHF 15 billion in the third quarter. I'm pleased to report that leverage exposure overall decreased by CHF 35 billion compared to the prior quarter, of which CHF 27 billion came from lower HQLA usage. This HQLA reduction reflected a number of factors including the optimization of business usage in our Global Markets division and the stabilization of liquidity requirements in our New York branch. We would expect these reductions in HQLA to be sustained during the fourth quarter. So, let's turn to slide 48, please, for an update on our funding cost guidance. Now, during the third quarter, as you're aware, we substantially restructured our AT1 buffer. First, we called and redeemed CHF 290 million of low trigger Swiss franc-denominated Tier 1 instruments. Second, we issued irrevocable corners in August on a further CHF 5.9 billion of U.S. dollar and Swiss franc-denominated high-trigger Tier 1 capital. The first optional redemption date for these instruments was October 23rd, and that means as a result these have now been redeemed. As the slide shows, we've also issued CHF 3.7 billion of new Tier 1 instruments comprising CHF 3.5 billion of new Tier 1 U.S. dollar instruments in two issues in July and in September, and a CHF 300 million new Swiss franc issue in August. Now, as you may recall from last year's Investor Day, in anticipation of this refinancing, we estimated a reduction in funding costs for 2019 compared to 2018 of $700 million. With the completion of this refinancing, together with other legacy redemptions within the Strategic Resolution Unit which have also now been completed, I would like to confirm the $700 million estimate for 2019. Now, with that, let's turn to slide 49 to review expenses. In the third and the final year of restructuring, our commitment to reduce costs and increase efficiency remains paramount. As you know, we set a target to reduce our adjusted operating cost base to below CHF 17 billion by the end of 2018 that's measured in constant 2015 FX rates and using a consistent accounting basis. Our adjusted operating cost base stood at CHF 12.6 billion for the first nine months of the year, having achieved CHF 800 million of savings in this period compared to the same period last year. These savings came across all expense types and divisions, as well as from the continued wind down of the SRU. And as you can see from the slide, since the restructuring program began at the start of 2016, there's been a step change downwards in our operating cost base, which I would remind you and as Tidjane mentioned, stood at CHF 21.2 billion in 2015. Since the start of 2016, we've now delivered CHF 4.0 billion of cost savings and are on track to exceed CHF 4.2 billion over the life of this program. I think that compares well to the restructuring costs that we expect to have incurred of CHF 2 billion over the last three years in order to achieve these savings. And as we said before, this is measured on a constant FX basis are on the same accounting basis as in 2015. Finally, I'm going to talk briefly about the SRU for a few minutes. So, the third quarter of 2018 was one of continued progress for the Strategic Resolution Unit, which has already achieved two of its three end of 2018 targets, for RWA excluding operational risk and for leverage exposure. In the third quarter, we reduced the negative revenue drag on Credit Suisse from the SRU by $107 million compared to the third quarter of 2017. We also reduced the adjusted operating expense of the SRU by another $114 million compared to last year. So, the third quarter adjusted pre-tax loss was cut to $275 million compared to $484 million in the third quarter of last year. Now, if we look back over the last three years, you can see that RWA excluding operational risk has been reduced to $9 billion by the end of the third quarter, $2 billion less than our end-of-year target for 2018 and 84% full from the end of the third quarter of 2015 when we started this restructuring. Our leverage exposure stood at $34 billion at the end of the third quarter, $6 billion less than our end year target and 83% reduction from the end of the third quarter of 2015. So just if we look forward to the remainder of the year, our objective remains to continue to sell off as much as possible of the remaining SRU assets, breading the division still further below the end year capital targets. With regard to the pre-tax losses, I think you can see that we're very much on track to beat our adjusted pre-tax loss target of approximately $1.4 billion of drag in the current year. And that clearly positions us to meet our guidance for 2019 which, as I'd remind you, is to have a residual drag from the assets that were running off of approximately $500 million excluding litigation next year. And with that, I'd like to thank you for listening and hand back to Tidjane for the presentation. Tidjane?

[Tidjane Thiam:]

Thank you. Thank you, David. I'd like to go back to the slide which I used earlier, and which is a way to capture our progress in our restructuring program. On the first group of objectives we had are on capital, cost and SRU, we are well on track and have completed most of these tasks. As far as driving the business forward, SUB is well on track to its target, so as IWM, so as APAC WM&C, and so is IBCM. Global Markets has delivered a part of this restructuring that was under its control and remains a challenge on revenues as we showed here. And the investment in controls have had a major impact I believe on the way our bank functions. So, overall, this drove, we believe, a positive picture. Let me, before we move to the Q&A section, say a few words about the Investor Day that's coming on December 12th in London and just outlining some of the key themes we'd like to cover. We'll show you where we think continued profitable compound growth can come from Wealth Management. Any opportunities there, we believe that is a huge opportunity still ahead of us. We will show you, because there's been a lot of question sometimes on whether we had cut costs at the expense of investment, we believe that we made actually a very good investment and very interesting innovation. So, we will show you some of new tools we have developed and are using to improve client satisfaction, efficiency and compliance. And these have all been developed during the period of cost reduction that we just went through. We will also illustrate for you, as a third point here, how we believe the business will behave through the cycle from leveraged finance, to credit risk, to some of the items in our various portfolios around the world, and we'll also talk to you about capital management. So, with that, we look forward to that Investor Day and also to taking your questions this morning, which we'll do now. Thank you.

[Operator:]

Thank you. Thank you. And your first question comes from the line of Daniele Brupbacher from UBS.

[Daniele Brupbacher:]

Yeah. Good morning, and thank you for the presentation. I had two things. I mean, firstly, on Global Markets. If I recall correctly, the three main units

[Tidjane Thiam:]

Thank you. Thank you, Daniele. And thanks for your question. Yeah, it's important to see more or less what happened in Q3. I mean, there's clearly a drop in revenue compared to what you expected from Global Markets, and it's important to see where it's coming from. And I think I gave a number during my speech, there's about $79 million coming from that restructuring that we mentioned. And similarly, the $20 million in equities and $59 million in fixed income. Okay? Rather than $1 billion-ish or $1.1 billion of (56

[David R. Mathers:]

No. I think that's (59

[Tidjane Thiam:]

So, that's the story.

[Daniele Brupbacher:]

Okay. Thank you. That's very useful. Is it fair to say that revenue momentum-wise probably accretive for you for idiosyncratic reason should be the one which shows the highest momentum given you're investing there or am I wrong assuming that?

[Tidjane Thiam:]

Yeah. At this point in the cycle, I think that's a fair assumption to make. Mike Ebert, who runs the Equity Derivatives, we got Ross Mtangi who runs the exotic Derivatives have been doing a great job, had some great days since he arrived. We've got Hippolyte Agkpo joining also in London. We've really got a first-rate team now driving our Equity Derivatives business. And I mentioned it was 70% up year-on-year. That's a transformational difference in terms of level of performance. And we expect it would turn around and make sure it is leading to work. And frankly that's part of why Brian and I went to get Mike a while ago because we knew that at some point the cycle would turn and that we needed to rebalance the portfolio between equities and credit. And our thought was always to use the good times in credit to invest in equities so that equities pick up when there is a relative weakness in credit. That was the strategy and it's working. Okay. And yeah, it was also very good question on slide 19 and 20. Look, we're very cautious. If you step back, look at the bank, it's been derisked massively. I talked about Level 3 assets going from CHF 31 billion to CHF 15 billion. The VaR has been reduced massively and that's not by coincidence. I've been quite bearish. I've been on the record many times saying the exit of QE would be difficult. And I want us to be in a conservative prudent position going into 2019. So, all the work we've done to lower the breakeven point shows its value in difficult times, okay, because where we used to have losses, we have maybe lower profits and not losses. We're profitable in the quarter, thanks to the fact that we dropped down our breakeven point in our fixed cost base very significantly. And the way we're thinking about the budget for 2019 is really to be back-end loaded. I want to go into Q1, Q2 quite prudently in terms of investment and cost and see how the year unfolds. If our fears don't materialize, then we'll be able to invest more. But if the environment doesn't change materially or doesn't improve, we'll remain in a relatively cautious stance. And you've heard me often talk about the 2%, 3% productivity improvement that I want to continue to generate once we reach our desired efficiency level. I see that as a flex to manage uncertainty. Ideally, what I'd like is to use that to invest because we have very good return opportunities. You've seen part of the portfolio, 30% return, 33% return. But it also gives me the latitude to watch how things develop before making those investment decisions. So, I don't know if that answers to your second question but...

[Daniele Brupbacher:]

Absolutely. No. It shows your thinking. It's very useful. Thank you very much.

[Tidjane Thiam:]

Okay. Thank you, Daniele.

[Daniele Brupbacher:]

Thank you. Thank you.

[Tidjane Thiam:]

Thank you.

[Operator:]

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

[Jeremy Sigee:]

Good morning. Thank you very much. Two questions from me, please. The first is on the funding cost savings for 2019, $700 million. You're mentioning that $250 million of that is going to show up in Global Markets. Is the rest predominantly in SRU or are there meaningful amounts in any of the other operating divisions? That's my first question. And then, the second question is, I just wondered if I could get you to talk a bit more about the restructuring that you undertook in the quarter within Global Markets of rates and macro. Just around what drove your thought process there. So, why now? What evaluation criteria caused you to take that action? And if you could talk a bit about what you've actually exited, that would be helpful as well.

[Tidjane Thiam:]

Okay. Thank you, Jeremy. I think the short answer to your first question is yes, but David.

[David R. Mathers:]

I think yes is the answer. The SRU is allocated a significant slice of the AT1 instruments given the volatility that it has as well as its past capital usage. In addition, as I think you may know, Jeremy, there were a number of other funding instruments in the SRU, which were actually not B3 compliant but B2 compliant which we redeemed partly during the course of the third quarter and completely since the beginning of the fourth quarter. So, essentially the bulk of the savings is split between GM and SRU.

[Jeremy Sigee:]

And de minimis in the other businesses?

[David R. Mathers:]

Not de minimis, but the bulk is definitely in GM and in SRU.

[Jeremy Sigee:]

Okay. Thank you.

[Tidjane Thiam:]

Okay. And on the restructuring, look, Global Market is a big business and the restructuring has gone in several ways. So, we did very big things early, which had a big impact. And as time passes, you get to smaller and smaller issues, which were always on the radar but frankly we hadn't tackled. So, some of what happened, a big chunk is really that we reduced the rates for U.S. and EMEA rates business. And in particular, we eliminated trading services for low-margin clients. So, in a way, you could consider that normal business, but really it is something we've been doing in prime, et cetera, taking the clients and eliminating low-margin clients and refocusing on high-margin electronic clients and also some of our internal clients. So, that was one thing. We also did quite a few things in Brazil. We reduced some of the FX and rates options traders. We closed down one equity loan. I mean, I could go on and on, but it's things like that. We've also rationalized our local presence in Russia. So, it's a number of things that we had on the list that we knew we needed to do before the end of the restructuring. And the timing is kind of fortuitous, getting to the end of restructuring and some things that we had maybe de-prioritized, we were just trying to do before this restructuring is over.

[Jeremy Sigee:]

Okay. That's very helpful. Thank you.

[Tidjane Thiam:]

Okay. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Andrew Stimpson, Bank of America Merrill Lynch.

[Andrew Stimpson:]

Morning, guys. Thanks for taking my questions. I guess, just one main point I want to make or one big question I guess. I see the revenues in Global Markets have disappointed, but the balance sheet reduction in Global Markets is, at least in my view, is good and I think many shareholders won't mind that, but how does Brian Chin and the management team and the staff of the IEB feel about that? Do they think that the balance sheet cuts they've made from those areas you've mentioned in EM and macro are going to be reinvested, i.e. the benefit eventually comes back to them or are they clear that the benefit stays with shareholders in a better capital allocation in trying to further improve the look of slide 9 on your presentation pack going forward? That's all for me.

[Tidjane Thiam:]

Thank you, Andrew. It's a great point. I think Brian Chin and his team, there is a slide that we've used sometimes. We didn't put in this time. After the slide 9, which from memory, I believe, is capital allocation one, yeah, it should be. That's one you have in mind, yeah, showing markets, exactly. No. No, reality. We're showing you the PTI. My fundamental view to them is that as the dark blue grows, the light blue can grow. Okay? So, I think that the balance we have is quite good now. Okay? We've taken GM down. We didn't want to take it forward down because there's a point where it's not viable anymore. It has a certain level of volatility, but we believe that the risk is getting big enough to absorb that volatility. That's really central to the way we are thinking. So, we understand we're focused on GM this morning, but we think it's possibly a bit overdone because a $21 million loss and (01

[Andrew Stimpson:]

Okay. But sticking to the balance sheet, you think that the – so I guess, because you've reduced the balance sheet, so are you saying that actually you could see that grow back up again?

[Tidjane Thiam:]

I think marginally and opportunistically. David, do you want to...?

[David R. Mathers:]

No. I think and there's few points, which just to support what Tidjane said. I think we talked a little bit about this on July 31 that we said that we had seen the removal of liquidity buffers here in Switzerland. We also basically saw removal liquidity buffers elsewhere in the UK and that reflects the improvements in liquidity management that we've actually achieved over the last year or so. Now, as a consequence of that, we were able to actually reduce the HQLA. On top of that, we also, I think, knew we had some increase in HQLA from the IHC new branch at the end of last year and that's now been stabilized as well. That is mostly GM-related. And, therefore, what Brian saw was a reduction in its HQLA balance, most of it comes through to GM given the booking entities. But I think Tidjane's point is absolutely correct. I think what we've done is, we've taken out unproductive HQLAs of this means and the actual business usage is less than that. But I think your point (01

[Tidjane Thiam:]

Yeah. It's opportunistic. I mean, you should expect that absolute levels we have are about right. All I'm saying is, there's absolutely no flexibility before. And I'm saying as Wealth Management becomes bigger, we can be a bit more pragmatic in how we manage Global Markets. But the general shape of having a very predominantly Wealth Management-driven capital allocation is there to stay given the differences in return. In between the two businesses, it's fully justified. All we're saying that GM does play a role in supporting the Wealth Management, and that can punctually allow us to invest in GM where it make sense.

[Andrew Stimpson:]

Okay, great. Thank you.

[Tidjane Thiam:]

Just to give an example that I'm just thinking aloud here. The rate of internalization is still quite weak, i.e., quite a bit of our Wealth Management is executed outside, really quite a bit, way too much. So, the notion that when we are competitive with the best growth in the market, it should come inside, it's very easy to understand. And things like that will drive growth in Global Market without even any change in the external markets, just that discipline of saying that, look, let's internalize the higher proportion of trades we do for the Wealth Management plans. It's something that will allow Global Market to grow, increase revenue without taking any additional risk. So, opportunities like that exist. This is why I'm not doing a straitjacket and saying, no, we're not going to grow because there may be very, very good reasons and very good opportunities to grow as we collaborate more between Wealth Management and Global Markets.

[Andrew Stimpson:]

Okay. But for me, probably slower than Wealth?

[Tidjane Thiam:]

Sorry?

[Andrew Stimpson:]

Probably slower than Wealth, say.

[Tidjane Thiam:]

Oh, yeah, yeah, yeah. Definitely.

[Andrew Stimpson:]

Yeah.

[Tidjane Thiam:]

Because it's opportunistic and it's on specific products and specific locations.

[Andrew Stimpson:]

Great. Thank you.

[Tidjane Thiam:]

Okay.

[Operator:]

Thank you. Your next question comes from the line of Kian Abouhossein from JPMorgan.

[Kian Abouhossein:]

Yes. Thanks for taking my questions. The first question is regarding targets. You clearly outlined again the CHF 17 billion below target, but you're not discussing the CHF 16.5 billion to CHF 17 billion target that you set for 2019 and 2020. And considering that your run rate looks like you will be well below the CHF 17 billion going into next year, I'm just trying to understand how we should think about the CHF 17 billion and CHF 16.5 million since you're doing a great job on cost. The second question is related to Private Banking. And here, I just wanted to understand a bit better, the transaction banking margin pressure or transaction banking revenues I should say for Asia WM. Can you run us through, is there any structural issues here that we should think about going forward, a trend that's developing? And also, just the NII pressure in SUB that you highlight is due to deposits. If you could discuss a little bit deposit pressure on how we should think about that going forward. And if I can put one more sneaky one in, Global Markets, you mentioned $79 million lower revenues due to restructuring, how much is the cost impact? Thank you.

[Tidjane Thiam:]

Okay. Thank you. It's a good list. Let me try and address those with David. Look, for 2017, I'm pleased we're having this conversation because that's the target that was not always believed. So, yes, you're right, we are going to come into 2019 with a very good run rate. I talked a little bit about the CHF 16.5 billion. You're a bit unfair. I talked about 2%, 3% continued improvement in productivity that's what was the CHF 16.5 billion was and that remains. And what I said also is that we kept, how can I say, the option of using some of that for investment in 2019 depending on market conditions. And I think that's the best answer I can give you at this point. So, we have the capability to get there of how we use that headroom. It's going to be a bit market dependent. But look, to be here talking about CHF 16.5 billion or CHF 17 billion for this bank is having more or less kept revenue is, I think, a good problem to have. PB transaction revenue APAC, there's no real – I mean, I could get under the cover for you a little bit but it's really driven by the clients. I can tell you it's more – we have now restructured North Asia, South Asia. It's more North Asia than South Asia. So, it's more a Chinese thing than a non-Chinese thing if you're in Southeast Asia versus China. And a lot of it is fixed income. A lot of it is fixed income that's probably where you've seen the most drop in transaction revenue. I hope that gives you some color. But it's really – I don't know if it's structural. I mean, structurally, as you can see from our disclosures, transaction revenues are a higher proportion of our PB revenues in Asia than elsewhere, and significantly higher. This is why you've seen the impact you've seen in our numbers this quarter, because both SUB and IWM are less transactional revenues dependent. It's just customer behavior. We know that people in Asia ultra-high-net-worth like to trade and trade a lot. So, that's been impacted a lot. So, to give you a breakdown of the drop in transaction revenues, you see it's a little bit in Southeast Asia and a lot in North Asia. Does that answer your question on this, Kian?

[Kian Abouhossein:]

Any structural changes or...

[Tidjane Thiam:]

No.

[Kian Abouhossein:]

No. Okay.

[Tidjane Thiam:]

No. I have, Helman, frankly, he said vigorously there and the CFO. No. No.

[Kian Abouhossein:]

Okay.

[Tidjane Thiam:]

No, really. It's a reflection – I was in Asia three times this quarter in Q3. I've seen tens of clients, but sentiment it's a reflection of a sentiment universally. All the clients you talk to raise the same issues, concerns, et cetera. It's sentiment. And it is paradox where the trade, et cetera, has not really had an impact on the real economy, it hasn't. You don't see it in the growth rates. It has an impact on sentiment, and sentiment is very connected to trading. But what you've seen in past cycles, that doesn't last forever. People sit on the sidelines and some of them come back. And they'll come back with different ideas and do different things, and we're doing an enormous amount of work. With Helman with the team almost daily to come up with trading ideas, to come up with new trading strategies acknowledging how we feel. So, we're fine. That's how you feel. What is it we can do very smart and that will make you trade. So, we've always seen it's a bounce back in the past. So, we don't believe...

[Kian Abouhossein:]

And SUB deposit margin pressure you discussed on WM.

[David R. Mathers:]

Yeah. I think what you're referring to is the comment on page 19 of the financial part in which we refer to a slight decrease in deposit margins in the bottom left. I think two points to make. It's actually temporary because what you're actually seeing there is stable client deposit margins but actually a drop in the central treasury contribution which was related to the AT1 refinancing we actually did. So, I think you probably should see that actually going up in the fourth quarter. So, I wouldn't be reading more into at that. There's certainly no particular questions around deposit margin pressure here in Switzerland. And I think you then had a final question I think on the cost impact of the macro and EM equity restructuring that we did in the second quarter. I mean...

[Kian Abouhossein:]

Yeah, the equivalent of the $79 million, yeah.

[Tidjane Thiam:]

Yeah. Yeah. Look, in the full year, you should think about it as $80 million savings.

[David R. Mathers:]

Yeah.

[Tidjane Thiam:]

It's a one-year payback, which is in our cost reduction that is good. So, yeah, you will have a little bit in Q3, a little bit in Q4 and full-year 2019, $80 million.

[David R. Mathers:]

Yeah. I mean, I think, the point would be, we were very focused on bringing our breakeven down to below the $4.8 billion number. You can see we're actually well below the $1.2 billion per quarter. I think exiting and downscaling these businesses was exactly the right thing we had to do in order to reduce the breakeven point for GM and hit the $4.8 billion target. And I think these were exactly the right targets.

[Kian Abouhossein:]

And this $80 million is included in your guidance?

[Tidjane Thiam:]

Yes. Yes.

[Kian Abouhossein:]

Okay. Thank you very much.

[Tidjane Thiam:]

Okay. Thank you, Kian.

[Operator:]

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

[Jernej Omahen:]

Good morning from my side as well. I just got two questions left. The first one is on page 64. And you showed that the Asia Pacific Wealth Management had a drop in leverage exposure sequentially from CHF 60 billion to CHF 56 billion QonQ. And I was just wondering, what is this? Because – so, seeing a strong net new money number in Asia, one would assume that's embedded is that is some growth in leverage as well, but it seems the opposite is happening. So, if you could just explain whether this is the right way to look at it that there was net redemptions of some loans or whether I'm missing something. And the second question is on page 68. So, the Global Markets, and I guess the question falls into two categories. So, one, as you pointed out, Tidjane, the cut in leverage exposure was quite meaningful. So, it's down CHF 13 billion quarter-on-quarter. Can we get a bit more insight into what this CHF 13 billion actually encompasses? It just seems to be a high number. And I was wondering, so the second question would be this, so markets was loss-making this quarter. This was a reasonably strong quarter for your global peers in their Markets businesses. Given the composition of the Markets business, so as you point out on page 39, right, so your FIC is asset finance, U.S. RMBS, leveraged finance and high yield. I was just wondering, when you look at that number and you see a loss in Q3 and with the leading indicators on the horizon for the credit-intense FIC businesses that Credit Suisse have, I'm just wondering how you feel about this business. Is there scope to cut it back further or are you committed to keeping capacity? Thanks a lot.

[Tidjane Thiam:]

Okay. Thank you, Jernej. So I think on the first point, it's mostly deleveraging that you see going through. Similarly, there's been about CHF 6 billion or CHF 5.5 billion of deleveraging, and it's now CHF 3 billion in North Asia and CHF 2.5 billion South Asia. So, this is why we're so pleased with CHF 6.4 billion NNA.

[Jernej Omahen:]

So, the CHF 6.4 billion number needs to be grossed up for this deleveraging?

[Tidjane Thiam:]

It's much more. Thank you. It's much more. Exactly. No, this is why we absolutely, thank you. It's absolutely. This is why we're so pleased with it. It's really very intense deleveraging. It's a really good number. Your second question, let me just maybe step back something I've said before. We have really changed the business. I kept saying during my presentation, look, we've done more in nine months 2018 than in full-year 2015. We've done more in nine months 2018 than in full-year 2015, the recurring line because which trend the scale of our Wealth Management business. Every analysis we do shows that the 10% to 11% RoTE target we gave you for next year is not sensitive to the Global Markets performance. So, we have to keep that in mind. We've all the focus on Global Markets today and absolutely a business which is strategically important which we like to have and we're driving forward. The slide 9 that I think, Stimpson mentioned, the capital allocation shows you that really the shape of a group has changed and that is not the single driver of our economics anymore. Maybe it was four or five years ago, but it's just not. The 10% to 11% RoTE is quite a not dependent on the Global Markets result. Now, that being said, yes, there is a loss in Q3. But again when you say it was a favorable market environment, yes, for some of our peers, yes, but look at our footprint. We have SBU which is a very good business which gives us a unique profile. And SBU was hit very hard this quarter. That's a fact. And I kind of gave a breakdown on where it came from. So, but even after that I also said that the return on capital in SBU was strong, even at this low point in Q3. So, we're comfortable with our footprint. At a strategic level, we really are driving. We need to have stronger equities presence, and that's really strategic. And we've hired and we're making the investment we want to grow there. And we will have this big uplift that's coming in 2019, a lot of which will benefit Global Markets. So, we think that in 2019, we're looking at a very different picture than the one we've had for during this restructuring which really started in earnest kind of late 2016 when Brian took over. So, we are kind of two years into it, and it's going to take one more year, (01

[Jernej Omahen:]

Okay. Thanks very much.

[Tidjane Thiam:]

Yeah.

[David R. Mathers:]

I think just to emphasize what Tidjane said on your question on GM leverage, that is more than entirely due to the HQLA reduction, just to be clear on that point, that CHF 12 billion. Recall what I said that the HQLA level actually dropped by CHF 27 billion in the second quarter to the third quarter move.

[Jernej Omahen:]

All right. Thank you.

[Tidjane Thiam:]

(01

[David R. Mathers:]

And clearly at CHF 255 billion leverage, that means you've allocated equity of CHF 8.9 billion in GM. So, it balances the business better.

[Operator:]

Thank you. And your last question comes from the line of Giulia Miotto, Morgan Stanley.

[Giulia Aurora Miotto:]

Hi. Good morning. Thank you for taking my question. Just a couple of follow-ups at this point. So, number one on LCR capital. Of course, we had a good reduction in HQLA in the quarter, but actually, LCR remains quite high when compared to peers, up 202%. Some peers are even as low as 120%. So, I was wondering if there is scope for these to improve. And then, the other question is with regard to the Investment Banking but in Asia this time. So, we have talked a lot about GM but actually the Investment Bank in Asia was also more or less breakeven at CHF 2 million PBT in the quarter. How do you see that evolving? And is the 10% to 15% return on allocated equity target realistic for perhaps next year or do you need to take further restructuring actions here? Thanks.

[David R. Mathers:]

I think on the first point, the LCR ratio clearly did drop between the second and third quarter. Just to recall, the HQLA reduction is end quarter to end quarter. And as the HQLA actually dropped during the course of the third quarter, you're going into the fourth quarter at a lower level. And I think that's why I indicated when I spoke that with regard to the HQLA reduction, it's sustainable, it's not going to reverse. So, you will see therefore the LCR ratio should drop in the fourth quarter just mathematically. And I think your second question was on the outlook for the APAC Markets.

[Giulia Aurora Miotto:]

Yes.

[David R. Mathers:]

I mean, I'll pass to Tidjane. But I mean, I think the first point to make and I'm probably guilty as everybody else, I think we tend to look at the U.S. markets. I think as Tidjane summarized in his presentation, I mean it's clearly been a very, very difficult market environment to actually operate against, and I think that doesn't need to be taken into account. Certainly, Tidjane and I think if we look at the performance in Asia Pacific the first nine months, one key point to note is the fixed income business is relatively small and you see volatility in the mark-to-market positions. In fact, if you actually look at the nine-month fixed income revenues for APAC Market, they were actually marginally up compared to the nine months a year ago. It's a bit of a lower of small numbers in terms of the trends you're actually seeing there. I don't know if you want to add.

[Tidjane Thiam:]

No. I think that's exactly right, because some of uptick or underperformance you see in Q3 in Asia fixed income is a reversal of some outperformance in Q2. So, it's kind of small numbers moving up and down, which have a disproportionate impact, because we do give you a lot of disclosure and you have to see that APAC Market is a CHF 10 billion, CHF 11 billion RWA business. It would be a kind of destined Global Market business in New York and we don't give you that level of granularity. So, sometimes because we wanted to be transparent, but going into kind of over-analysis of that is difficult, because you've got a relatively small number that can move around a lot. I mean, for year-to-date profit is CHF 95 million on the scale of a group that is – with all respect to our teams, they're doing a great job on the scale of a group that's relatively small number and it will move around. But it won't have a material impact under the group's economics. Yeah.

[Giulia Aurora Miotto:]

Thank you.

[Tidjane Thiam:]

Thank you, Giulia.

[Operator:]

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

[Andrew Coombs:]

Good morning. A couple, please. Just first one is to labor the point on Global Markets. $4 billion of revenues to nine months 2018. You've said the $6 billion target is no longer realistic. It looks like you're going to be closer to $5 billion. If we think about the run rate going into 2019, we can add the $250 million for the funding cost benefit, but we also need to take the annualized impact of the business rationalizations you've done. So, it looks like you're talking about low $5 billion unless I stand corrected. So, more broadly, what does that mean for the returns for the division? Because you're running at 7%, the 10% to 15% target looks very ambitious even going into next year and beyond. So, should we just assume that Global Markets' standalone is a drag versus the cost of equity, but it's there as a division to support the wider group or do you still think this is a division that can make its cost of equity standalone? And then, my second question, a very quick one on capital. Given the further reduction you've had in leverage exposure, if I look at your core tier 1 ratio at 12.9%, your core tier 1 leverage at 4%, it actually looks like the core tier 1 ratio is now the binding capital constraint when you're thinking about capital return. Is that fair?

[David R. Mathers:]

That second point. I think, yes, I think that's – I mean, I think to be clear, I think that's true for all major Swiss banks, given the calibration of the Swiss capital regime and that has been the case, I think, for some time. And I think just reiterating what I said at the end of second quarter, I think if we look at the Basel III reforms, I would expect leverage to remain the binding constraint for some years to come. But I think we're very happy to be at 4.0% common equity leverage ratio, 3.5% is the requirement, but 4% is the highest for a Swiss GSifi. So, that's good.

[Andrew Coombs:]

Do you still think so leverage is the binding capital constraint?

[David R. Mathers:]

Yes. Perhaps I'm missing the point, but the answer is, well, yes, leverage is and it will remain so for some years to come and so the B-III reforms are phased in, I would say, I think at least 2022, 2023.

[Tidjane Thiam:]

But it is less so than it used to be. I think that's...

[David R. Mathers:]

Oh, sure. Oh, sure, sure, sure. Oh, yeah. I mean, let's be clear. I mean we're at 4% against 3.5%. So we've got a significant buffer against the Swiss requirements, but that is more binding (01

[Andrew Coombs:]

Okay.

[Tidjane Thiam:]

Yeah. And also – yeah, okay, the first question was on GM and profitability. Look, I would just say the $6 billion, I wouldn't say it's not realistic and it's not achievable. I think it was a realistic number in a normal market environment, but really conditions have been such given our footprint, but it is not achievable. And we've continued (01

[Andrew Coombs:]

All right. Thanks very much.

[Tidjane Thiam:]

Okay. Thank you. Thank you, Andrew.

[Operator:]

Thank you. And your final question comes from the line of Anke Reingen from Royal Bank of Canada.

[Anke Reingen:]

Yeah. Thank you very much. Yeah. Sorry to come back to Global Markets. And in a way, you obviously have been very successful on capital management costs. The focus has been on Wealth Management. So, I can understand you must be a bit disappointed or I mean must – continue to discuss the Global Market's performance. So how much of your patience is actually left in terms of – I mean I understand it's a small part of the group, but the return is obviously below what you aim to deliver. Is it that a certain part of the U.S.-graded assets is just not running at your target or is it like can you say what percentage of capital allocated delivers below cost of equity return and is it just basically that part? And you indicated that internalization from the Wealth Management operation would be supportive to the Global Markets division? Could you just say how material that will be for improving the return of the Global Markets division? Thank you very much.

[Tidjane Thiam:]

Well, thank you, thank you, thank you, Anke. I don't know, if you can see me, but I was smiling when you were talking about my patience. Let's just say it's a quarterly exercise in improving my ability to be patient, because frankly, look, I understand, it's the nature of the game that people focus on things that don't work. And out of that slide on the 2018 – yeah, okay. It was like 6, 7, 10, 13, 14, I count 17 lines and that's the (01

[Anke Reingen:]

Yeah. I think on the return on equity, I think that was a misunderstanding. I meant within Global Markets. Is that like 30% of the equity is allocated to a business that doesn't deliver sufficient return or what would be, yeah, the right answer basically? It's just within Global Markets.

[David R. Mathers:]

I mean I think the point is clear. We're very focused. 6.3% is our return on tangible equity in the first nine months. We're targeting 10% to 11% for next year. That's the group returns. If we actually think about what we're trying to achieve in Global Markets, part of it is to align it very closely to Wealth Management business and that's clearly what seeing coming through in ITS and we'll see those returns boosting the overall return on tangible equity. So, as Tidjane said, our focus is to ensure that the group's return on tangible equity gets up to the 10% to 11% next year and we are delivering our targets. That's clearly above the cost of capital for a Swiss bank and I think that will be well-received by certainly us. And I think in terms of GM itself, I think we've touched on the key points there. I mean, clearly the ITS joint venture has momentum, but as Tidjane said, there's ample penetrate – potential for increased internalization. I think the momentum we've built in equities, I think you've seen equity derivatives, you've seen it elsewhere. But I think I'd also just point to the denominator, one point about leverage. $255 billion leverage, the denominator is $8.9 billion. If you look at $60 billion of RWA, it's $6 billion. Actually, the returns of our Global Markets business on RWA are far more acceptable and that's my point about balancing leverage in RWA. There's a number of ways you can actually improve this and it's worth keeping an eye on that.

[Tidjane Thiam:]

Yeah. There is work on that. I mean we'll still working on improving the prime business, which is the biggest consumer of leverage, same thing in Asia also. So, there is still room for improvement in GM and we're not done there.

[David R. Mathers:]

So, I think we think about (01

[Tidjane Thiam:]

Yeah. And I think, for me, I'll keep repeating it. I'm not going to run out of patience. We are different from the others. People are right to interrogate many of our peers throughout the call on their GM equivalent, because that's where the battleground is for them. That is not the case for us. We have taken it down in size. The risk is growing. David just said 26% more in nine months in 2018 than in 2015. That's an enormous pace. We talk about 9% CAGRs, 11% CAGRs, 14% CAGRs, okay, and we're sitting here discussing Global Market, which I'm happy to do. But in the case of Credit Suisse, that is not, how can I say this, the main driver of the story, but we are writing. It's a important division. It plays a key role in supporting growth. But look at the economies, look at the numbers, $20 billion of loss, again, $523 billion, $412 billion, $184 million. You can do the math yourself. And if those other numbers keep growing, as we've been able to make them grow, we think we get to a good place. I really think that we are being impacted by (01

[Anke Reingen:]

Thank you.

[Tidjane Thiam:]

Thank you.

[Operator:]

Thank you. I would like to hand back to Adam Gishen to close the call.

[Adam Gishen:]

Okay. Well, that concludes our third quarter call and I thank you, all, very much for joining. With that, we conclude. Thank you.

[Operator:]

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