Credit Suisse Group AG
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good morning. This is the conference operator. Welcome and thank you for joining Credit Suisse Group's First Quarter 2016 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is recorded. You will have the opportunity to ask questions directly after the presentation. At this time, I would like to turn the conference over to Mr. Christian Stark, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Stark.

[Christian Stark:]

Good morning and welcome to the first quarter 2016 results call. Before we begin, let me remind you of the important precautionary statements on slide two, including the statements on non-GAAP measures and Basel III disclosures. I now turn it over to Tidjane Thiam, our CEO.

[Tidjane Thiam:]

Thank you, Christian, and good morning, everyone. Thank you all for joining the call. With me today is David Mathers, our Chief Financial Officer, and all our executive team in Zurich. So, this morning, we will present the first quarter results for Credit Suisse and, of course, take your questions at the end of the session. First, let me run through summary of our financials for the quarter. This slide, slide two gives you an overview of our financial performance in Q1. As you can see, we delivered a profitable quarter for each of our wealth management-focused businesses APAC, Asia Pacific; IWM, International Wealth Management; and the Swiss Universal Bank, which we call internally SUB. Together, they generated around CHF 1 billion of PTI. In Global Markets and in IBCM, Investment Banking and Capital Markets, we incurred losses, as you can see here, together with the result of our Strategic Restructuring Unit (sic) [Strategic Resolution Unit] (2

[David R. Mathers:]

Thank you, Tidjane. Good morning. I'd also like to thank you for joining our first quarter earnings call today. So I'd like to start, please, on slide 17, with a summary of our quarterly earnings. As we said last quarter, we will continue to share our results on both a reported and an adjusted basis. And in the first quarter, the adjustment items included CHF 255 million restructuring charges relating to the implementation of our strategy, as well as the cumulative translation adjustments related to the sale of Credit Suisse Gibraltar that we announced during the first quarter. We exclude these items on an adjusted basis to better reflect the operating performance of our businesses. We provide a full reconciliation of our adjusted and our reported profits for the group, and for each of our divisions, on slides 44 to 47 in the appendix. Now for the first quarter, we reported a group net loss of CHF 302 million. The group had an overall pre-tax loss of CHF 484 million on revenues of CHF 4.6 billion. On an adjusted basis, we had a pre-tax loss of CHF 173 million for the group. We delivered a combined adjusted pre-tax profit of CHF 997 million from the Swiss Universal Bank, Asia Pacific and the International Wealth Management businesses. This, however, was offset by losses in Global Markets, Investment Banking and Capital Markets, and in the SRU division. As Tidjane's already summarized, the Global Markets division was adversely impacted by challenging market conditions, continued mark-to-market losses, and low levels of client activity in the quarter. The performance of IBCM was similarly impacted by these effects. And, whilst oil prices have recovered in the quarter, we still saw some impairments relating to the cumulative fall in oil prices that happened in 2015. So I'd now like to walk you through our quarterly group performance in more detail, and start with capital on slide 18. Clearly, the first quarter was a challenging period for capital generation, given the losses that we saw in Global Markets, IBCM, and the drag from the SRU. We're therefore very pleased that we managed to increase the amount of capital that we deployed to our growth markets, whilst maintaining our look-through CET1 ratio at 11.4%. What we show on slide 18 are the movements in CET1 capital in the first quarter. So we start with a pre-tax loss of CHF 484 million, and we also saw CHF 300 million of CET1-related tax outflows in the first quarter, where they net out the capital used for our cash dividend accrual and FX movements, partially offset by a capital benefit of CHF 300 million, to result in a CET1 level of CHF 31.8 billion at the end of the first quarter. Now matching this decline in CET1 capital, we achieved a reduction in risk-weighted assets of CHF 10 billion since the end of last year. This was driven by CHF 8 billion of business reductions across Global Markets, IBCM and the SRU, CHF 5 billion of FX movements, and then partly offset by methodology changes of CHF 3 billion. But as a result of the overall reduction in RWA, our look-through CET1 ratio was constant quarter-on-quarter at 11.4%. We saw a similar effect in our leverage ratio, with total leverage exposure reduced by about CHF 18 billion Q-on-Q, resulting in an unchanged leverage ratio of 3.3% on an equity basis. Now that 3.3% falls slightly short of the new Swiss TBTF rules, which we expect to be published shortly and to come into effect in July, which will require us to operate with CET1 leverage ratio of 3.5%, but by 2020. But I would note that we already exceed the going concern leverage requirement of 5.0%, again effective in 2020. Our ratio was 5.1% at the end of March. And I'd just like to remind you that when we spoke in March, we communicated that we intended to operate with CET1 ratio between 11% to 12% through 2016, subject to any major litigation costs. That remains our intention. And so far in the first quarter, we've raised a total about CHF 140 million of CET1 capital through various initiatives including business sales. Let's turn now to slide 19 to review our group RWA and leverage positions in more detail. So as we said, we reduced group RWA by CHF 10 billion since the end of 2015. But what's important to note is over the course of the first quarter, we released CHF 6 billion of RWA from the SRU. And we reinvested CHF 2 billion in our growth markets. If you look at leverage, you can see that the impact of our de-leveraging program has been very pronounced. We reduced our leverage exposure by CHF 133 billion or 12% since the first quarter of 2015. That was driven by a reduction of CHF 62 billion in Global Markets as well as CHF 59 billion in the run-off of assets within the Strategic Resolution Unit, primarily formerly investment banking assets that were transferred into this division. So let's now turn to the division results and start with the Swiss Universal Bank on slide 21. For the first quarter, the Swiss Universal Bank delivered a reported pre-tax profit of CHF 426 million on revenues of CHF 1.3 billion. Excluding the CHF 40 million in restructuring costs in the quarter, the pre-tax income was CHF 466 million, 9% ahead year-on-year. But as we compare to the first quarter of last year, I would remind you that in July of 2015, we deconsolidated Swisscard. We continue to have the same economic interest in Swisscard; but this income, following the deconsolidation, is no longer reported above the line within our pre-tax results. Adjusting for the impact of the deconsolidation of Swisscard, our adjusted pre-tax profit of CHF 466 million improved from CHF 415 million, an increase of 12% since the first quarter of 2015. I think it's key to note that the division's return on capital increased from 13% to 16% year-on-year. And the cost to income ratio improved to 64%, down from 67% in the first quarter of 2015 and (25

[Tidjane Thiam:]

Thank you. Thank you, David. Before we take your questions, please let me summarize 1Q 2016 from our perspective and comment briefly on the outlook for 2Q. We have been executing in 1Q our restructuring program with discipline and are making good progress. Our Wealth Management-focused divisions achieved a quarter of profitable growth, attracting quality inflows of assets and generating in aggregate CHF 1 billion of PTI. IBCM is demonstrating that its pivot towards M&A and ECM is on track and Global Market is being restructured effectively. Lastly, our look-through CET1 ratio has remained stable at 11.4% in challenging market conditions and we expect to operate in a range of 11% to 12% for the remainder of the year. Regarding our outlook, we have seen effectively more constructive markets in April. However, we remain cautious for 2Q as transaction volumes are still lower than in previous years and a number of macroeconomic and political factors continue to weigh on client sentiment. Before I finish, I would like to flag that we will hold an Investor Day in the fourth quarter this year and our Investor Relations team will provide more details in due course with regard to timing and location. We look forward to welcoming you all to that event. And with that, we will now take your questions. Thank you for your attention.

[Operator:]

We will now begin the question-and-answer part of the conference. Your first question comes from the line of Andrew Coombs. Please go ahead.

[Andrew P. Coombs:]

Hey, good morning. Three questions from me please, one on net new money, one on capital and then one on the Corporate Center. Firstly on net new money, a very good result compared to the fourth quarter, but the net new money flows are less than you guided to in your preannouncement in mid-March, particularly in the Swiss Universal Bank. So perhaps you could elaborate on what changed between the preannouncement and today in terms of the net new money flows. Second question on capital; you reiterated the 11% to 12% core tier one range during full year 2016. You're already in the middle of this range and you've come in better than expectations for the first quarter, and it was widely expected to be the lowest quarter. So why do you continue to believe that you won't breach that 12% mark this year, particularly when you've still got the CHF 1 billion of asset sales to process, so perhaps an update on those as well, please. And then finally, on the Corporate Center, you've seen a better result there versus prior quarters, and it appears to be due to a better Other revenues result, as well as a negative compensation number. So perhaps you could just provide a bit more detail on what's driving that as well, please. Thank you.

[Tidjane Thiam:]

Okay. Good morning, Andrew, and thank you very much. I'll take the first one and let David deal with the two others, and thanks for noting that the flows were strong; but you're right – they're different from the indication given in mid-March. But NNA is volatile. You will see that the APAC number is actually higher than the number we gave in March, and quite materially, and the Swiss number is lower. We go through a very rigorous verification process every time on NNA. And what happened is that one flow in Switzerland that we classified initially as AUM, through that rigorous assessment, was considered AUC. The client wanted to leave it in cash, and that's most of that difference. So it's a reclassification at the end of the quarter. David?

[David R. Mathers:]

So on the second two points then, in terms just on the capital position, I mean I think there's several factors here. Firstly, I think what we're pleased with in the first quarter was, we actually did manage to balance continued investment in our growth markets, so Asia Pacific, IWM and the Swiss Universal Bank, whilst basically reducing the amount of capital we had in the SRU by CHF 7 billion, and basically maintaining our CET1 ratio at 11.4%, notwithstanding the loss we actually suffered in the first quarter. So I think we felt we got that balance about right in the first quarter. I think it's very important to us to actually continue to drive towards some of the growth goals we laid out last October, and that's clearly a core part of what we're doing and that's a balance we intend to, I think, walk in the remainder of 2016. I think – clearly I think, as Tidjane said, we have seen some improvement in market conditions in April and in May. But I think I'd be a bit cautious of the environment. We do have a significant transformation to actually do within the Global Markets business. As we said before, in the second quarter, we'll be moving CHF 10 billion to CHF 15 billion of RWA into the SRU; so there will be some losses related to that. So I'd just be a little bit cautious that we do – we need; A, need to be aware of those market conditions, which clearly have been difficult for the first quarter; and B, we actually need to actually run off those assets, and there will be some costs to that, and we'll give you much more detail on that in the second quarter. I think the second point is, normally in the second quarter, we do see some capital costs relating to our share awards and deliveries. That's typically in the, sort of, 10 basis points to 15 basis points. I don't see any particular reason why that will be different this year; so I think that's a further measure to be cautious. So I think, at this point, I think quite happy to talk about a range of 11% to 12% pre-litigation expense; and that's what we would like to target, I think. I think the third point really, on the Corporate Center, a number of technical points there. So I think firstly, as you say, there's actually a negative compensation number. That relates to the fact that we actually maintain the mark-to-market position of certain comp instruments which were actually linked to our stock price within the CC. As you know, the stock price did fall in the first quarter, but it actually generates gains in the Corporate Center. So clearly, one would hope the stock price will improve, and this situation would normalize going forward. I think the second point, you did notice Other revenues there. We – as part of our Equity Derivatives business, we do have positions in our own shares. And again, the volatility related to that is actually booked in the Corporate Center. So we saw some gains there as well. So those would be the primary technical factors within the Corporate Center.

[Tidjane Thiam:]

Okay. Is that okay, Andrew?

[Andrew P. Coombs:]

Very useful. Thank you.

[Tidjane Thiam:]

Okay, thank you.

[David R. Mathers:]

One final point, basically. We did actually make some good treasury revenues within the Corporate Center as well, reflecting the fixed income market. So hopefully, that would be more sustainable.

[Tidjane Thiam:]

Okay. Thank you. Thank you, David. All right. So, shall we move to our next question?

[Operator:]

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

[Daniele Brupbacher:]

Yeah, good morning and thank you for the presentation. I had a few smaller questions in Private Banking in general. And to start with IWM, the gross margin, 109 basis points, I think was the highest in three years. Could you just talk about what stands behind the high level in the first quarter? And then, probably related to this, mandate penetration went up in most areas. And particularly in SUB, obviously it almost doubled within a year. Can you just talk about the profitability differential between known mandates and mandates, if that's possible? And then, just lastly on the Swiss IPO, can you just give us an update there in terms of the steps you still have had this year, like Creation (50

[Tidjane Thiam:]

Okay. Thank you. Thank you, Daniele. Lot of questions on PB. David, you have a summary of margins in PB; you want to go through that?

[David R. Mathers:]

Yes, I would actually. So firstly, just – there's couple of slides in the appendices worth looking at. I'd probably start on slide 35, which has the Private Bank trends, I think within the International Wealth Management division, which I think was the core of the question. So what you see there essentially is clearly, net interest income improved from CHF 220 million to CHF 301 million; recurring commissions and fees slightly down. But I would note what we said before about, we have been quite successful in terms of selling more structured products. You've seen that in terms of mandates as well. The only reason it's slightly down is just the number of assets we actually have is slightly down. And transaction activity was lower, but perhaps not as low as people were expecting. I think maybe it was more resilient than people were expecting. Clearly, the first quarter of last year was very good at CHF 241 million with the SNB action, but essentially, transaction activity in the first quarter was stable compared to that – I mean, look, it's a good result, I think, is the sort of bottom line. Now if you actually just translate that into gross margins, as you say, you end up with an adjusted gross margin of 109% compared to 97%, and adjusted net margin of 30% against 27%. I think the second slide, just to look at, really gets to the whole question, the broader question, around margins across our Private Banking business on page 31. You can see similar trends. You can see the gross margin for IWM; as I've mentioned before, from 97% to 109%, net from 27% to 30%. If we look at the SUB, 130% to 139% and net – I'm sorry, apologize – on page 31, on the Swiss Universal Bank...

[Tidjane Thiam:]

There are a lot of numbers on the page.

[David R. Mathers:]

The net margin improved from 36% to 39%. And in Asia Pacific, it was stable there. But I think that stability does reflect perhaps the pace of growth we're actually driving there, in terms of higher expenses. So I mean...

[Tidjane Thiam:]

And the number you're referring to is the adjusted one...

[David R. Mathers:]

The adjusted one...

[Tidjane Thiam:]

(52

[David R. Mathers:]

That's right.

[Tidjane Thiam:]

The correct ones are the ones excluding Swisscard.

[David R. Mathers:]

So, as Tidjane is pointing out, the Swisscard deconsolidation does reduce the reported margins. And it reduces that primarily through the recurring margin component, because there's about CHF 56 million recurring revenues in Swisscard which were excluded.

[Daniele Brupbacher:]

Which explains the movement in recurring income.

[David R. Mathers:]

So therefore, you do need to exclude that, which gives that. But I think, stepping back, I think the key point here is, it is pretty much driving to trend. I think, as Tidjane referred to before, we are very conservative about assets we actually recognize as AUM. You remember we actually tightened our policy around this in the third quarter of last year. So there is (53

[Tidjane Thiam:]

I'd agree (53

[David R. Mathers:]

And in Europe.

[Tidjane Thiam:]

Exactly, and in Europe. Mandate penetration and differences in profitability.

[David R. Mathers:]

I think, I'm not sure I'd add much. I think that the usual trends, as you know, is the ultra-high net worth business tends to have a low gross margin. But the dilution on the net margin is normally less, because some of the operating expenses are lower relative to the size of the business. And I think, in terms of ultra-high net worth penetration, it was about 47% across all of our Private Banking businesses in terms of that; so broadly stable with the trends that you actually reported before.

[Tidjane Thiam:]

And then you were asking about the IPO. I mean, the first thing I will say is that I'm really pleased with the increase in return on capital in the Swiss business, because one of the drivers of this IPO is really our desire to see the value of that asset recognized in our share price. And we've always believed that there was a material upside there, but not (54

[Daniele Brupbacher:]

Thank you.

[Tidjane Thiam:]

Okay. Thank you, Daniele.

[Daniele Brupbacher:]

Thank you.

[Tidjane Thiam:]

Okay. Next question?

[Operator:]

Your next question comes from the line of Al Alevizakos from HSBC. Please go ahead.

[Alevizos Alevizakos:]

Hi, good morning, a few questions from me if I may. First of all, I just had a question, a general question regarding this year. So if – let's suggest that there's going to be a statutory loss for the full 2016, is there any kind of preliminary discussion with FINMA, whether they may just say block the dividend if the losses continue? That's question number one. And then secondly, I'm just trying to understand basically, David, on your comments, whether this is a one-off element or whether the actual mark-to-market losses and actually gains this quarter on the Corporate Center actually should be taken off as one-off item because for example, there were gains this quarter; but actually next quarter, there may be some losses similar to the fair value of own debt? And then third question is in the annual general meeting, you've actually raised the capital, the ability to raise capital for acquisitions. Is it something that you believe that will be on your agenda before the IPO at the end of next year? Thanks very much.

[Tidjane Thiam:]

David, you take the first one on FINMA and the dividend and losses, statutory losses.

[David R. Mathers:]

I think firstly I think I don't think we would fairly necessarily – we're certainly not making a full-year projection for our results basically now that we're in (57

[Tidjane Thiam:]

(59

[Alevizos Alevizakos:]

Yeah, thank you very much.

[Tidjane Thiam:]

Okay. Thank you. So, next question.

[Operator:]

Your next question comes from Jeremy Sigee from Barclays. Please go ahead.

[Jeremy C. Sigee:]

Morning. Two or three questions, please. Firstly on the path back to breakeven and profitability in Global Markets, if I add back the mark-to-market, it looks underlying revenues in the quarter are just below CHF 1.4 billion and the costs, ex restructuring, are just above CHF 1.4 billion, so you're sort of slightly loss making in the quarter. I just wondered – so I take your point about the exit costs. But just switching (1

[David R. Mathers:]

Okay. So I think on the first one, as I said, I think I mean I think Tidjane has given a very clear summary of the operating conditions in which we currently trade. And as I said, whilst April was better, I think we have to recognize this is a very challenging macro environment. Some of the conditions which obviously resulted in 4Q being difficult on 1Q, but it could easily recur in the balance of this year. There's still the same macro effects that we saw in the first quarter. So just be cautious and I think that's there basically. This is not an easy environment in which to operate. I think...

[Jeremy C. Sigee:]

...But I think taking account of that, I mean should we see the costs come down is my point really.

[David R. Mathers:]

I think the second point is we'll obviously make every step we can to get the expense reductions in as early as possible. But I think it's worth recalling that there are people typically around three months notice period and it takes time for that process to actually go through. So regardless, even if we announced and (1

[Jeremy C. Sigee:]

Understood.

[Tidjane Thiam:]

I think that's the central point really Jeremy, that's why we're not giving you a clearer answer at this point. I think once we restate at 2Q, you'll have a clearer visibility on the economics of Global Market and what's happening in the remaining Global Market. But I would say a good rule of thumb is kind of two to three quarters. You get a lag between the quarter in which you take or announce or notify and the quarter in which we benefit materially, two to three quarter is a good rule of thumb to do your forecast, I think. The other question was on IWM and its annual margins. Short answer is yes, I think that's a good level of margin and something we can sustain. Barring a big disruption in macroeconomic conditions, that is something we can intend to extend. There's a potential there. We said loan penetration has gone from 12% to 14%. That will feed into the net interest income over time. The appetite for loan is real among our ultra as these are high-quality risks where we have a very good track record. With our risk functions, we're very good at assessing those risk and the margins from those transactions are very good on a risk-adjusted basis; so there is room for expansion in IWM at stable margins, I would say.

[Jeremy C. Sigee:]

Very clear. That's good to hear. Thank you.

[Tidjane Thiam:]

Thank you.

[Operator:]

Your next question comes from the line of Kinner Lakhani. Please go ahead.

[Kinner Lakhani:]

Yes. Good morning. Yeah, I just wanted to follow up on this question or theme of margin sustainability. In particular, thinking about the net interest income or the net interest income component of the gross margin. If we compare where we are today in terms of the NII component of gross margins, it's substantially up from where we were four or five quarters ago. I think in total, we're up from 40 basis points to 52 basis points if I added all the private banking units together. And I remember a debate last year that we were having about how this was benefiting from swap income, the negative Swiss franc rate environment. So I guess I wanted to ask the question again how sustainable this is, especially if the environment of interest rates normalized to, say, zero rate? Second question was to think about obviously the shift to your kind of lower risk, lower inventory model within the Investment Bank. I guess now that you've had a few months of restructuring through the FICC business, do you have any kind of preliminary thoughts as to what the kind of end-stage revenue go-to level might be for the FICC business? FICC business has historically made about CHF 4.5 million if I think of underlying 2014-2015. And just trying to get a sense of where is this going to end up. Also the losses that you've experienced in recent months, how does that impact the models and the risk-weights going forward? And the final question, apologies for this – the CHF 1 billion capital gain that you look to recognize this year. What are the earnings implications of that? Thank you.

[Tidjane Thiam:]

Sorry, I'm not sure I got the last one, the CHF 1 billion capital gain, you said what – the line wasn't very good. What was the...

[Kinner Lakhani:]

Yes. So what are the early implications of that? Will there be any earnings implications?

[Tidjane Thiam:]

Okay. All right. Thank you very much.

[Kinner Lakhani:]

Thank you.

[Tidjane Thiam:]

Okay. We'll try to take them in order. First one is net interest income sustainability. David.

[David R. Mathers:]

Yeah. So I think clearly there are a number of components to the net interest income as we're actually seeing across the businesses. I think as Tidjane mentioned before, expanding the loan penetration in our Private Banking business is a core component of our strategy and that applies outside of Switzerland as well as inside of Switzerland. And I think the momentum that we're seeing in IWM and Asia Pacific is a core part of what we're doing there. It's important both in terms of revenues; it's important in terms of the broader client relationship we have and the profitability we enjoy from those assets. So it's a core part of what we're doing. And clearly that's one reason why you're seeing the risk and compliance controls related to that increasing because that needs to be matched by a step-up in the appropriate control environment to actually support it. I think the point you're sort of (1

[Tidjane Thiam:]

Also, if I can add a counterbalancing effect on the deposits because we are not passing the negative interest rates to – so if rates moved in the other direction, you would lose that downside issue (1

[Kinner Lakhani:]

Exactly.

[Tidjane Thiam:]

On the retail side. So there are counterbalancing effects.

[Kinner Lakhani:]

Yeah.

[Tidjane Thiam:]

It's not completely straightforward. Is that okay?

[Kinner Lakhani:]

Yeah.

[Tidjane Thiam:]

Okay. Then yes, you were asking about fixed income, very hard to give you a revenue forecast. I don't think at this stage, we would do that. But the way we think about the business, we said we would take it down to a CHF 5.4 billion cost base. If you want a global revenue number, it's anywhere between kind of CHF 6.5 billion and CHF 7.5 billion, to give you a sense. And we think we can generate, in normalized conditions, I insist on those words, a 15% return on capital on that basis on an RWA of CHF 60 billion, right and the leverage significantly reduced. So that's what we are trending to. Clearly, our process to get there is painful because again, the results of Global Markets are not that surprising, if you just think about what we are doing. If you tell a business I will give you much less capital to work with, you will get a revenue decrease from that. And when you're looking at the RWA available in 1Q 2015 and RWA available in 1Q 2016, you need to take into account the RWA inflation. Actually, on average across the quarter, our business had much less capital to work with in 1Q 2016; that's one impact. Second impact is market demand. So you are shrinking the capital available and at a time when demand is collapsing anywhere like 30% or 40% and you then have the opportunity cost in the time of your teams because they are working quite hard to drive the RWA down and as they are doing that, they can trade. And finally, you have a fixed cost base which is, by definition, fixed. So you are stuck with a cost base that you can only attack over time and you have a pretty ugly revenue picture. So I'm sorry. I mean what's happening is actually quite rational and explainable. Currently, if we look at the drivers of that performance and then if you add mark-downs, you end up with the revenues we've had; there is nothing extraordinary about those revenues. They are logical given where we are and the restructuring we are undergoing. But it will, as you said, it will – will evolve (1

[David R. Mathers:]

I think we probably need to get back to you on that. I think we definitely saw some increase in the risk-weighted asset utilization of the bank from the market volatility that we saw because that does come through some of those drivers. And some of that, we actually (1

[Tidjane Thiam:]

And the CHF 1 billion capital gain.

[David R. Mathers:]

I do apologize. I think it would depend on the exact mix of assets as we finalize the sales in the balance of this year that there would be, for example, on a (1

[Tidjane Thiam:]

Okay. Is that okay?

[Kinner Lakhani:]

Great, thanks a lot. Yes, thank you, Tidjane.

[Tidjane Thiam:]

All right, thank you. No problem. Next question.

[Operator:]

Your next question comes from Kian Abouhossein from JPMorgan. Please go ahead.

[Kian Abouhossein:]

Yeah. Hi, thanks for taking my questions. The first question is on your cost number that you had at the beginning of the slide, the 8% decline; it's about CHF 400 million. And if I look at your page 112 in your release, it looks like you have about CHF 300 million of deferred decline and you have clearly guided to ongoing deferred decline. But it looks like you're using all the deferred decline more or less of CHF 400 million for the full year already in the first quarter; just want to try to understand this if I'm looking at this correctly or not. The second question is related to the inventory exposure that you have left. You give the percentages; but clearly there are hedges; there are sales. So I was wondering if you can give me more exact numbers, I can calculate something; but I don't think it's exact and both for the distressed book as well as the CLO book. And in that context, how should we think about mark-to-market going forward because I'm sure you have macro hedges. Should we think about credit spreads as a good guide or would you say that is inaccurate as such? And lastly, just coming back to your discussion on revenues, you mentioned on slide eight reduction (1

[Tidjane Thiam:]

Okay. Thank you. Thank you, Kian. Do you want to take the deferral...

[David R. Mathers:]

Yeah. So, let me just start on the overall cost numbers. So I think, if we actually look at the adjusted cost number, you can see it drop from CHF 5.8 billion in the fourth quarter, which did, as I think we outlined quite clearly at that time, include a number of significant one-offs. So I think probably a fairer comparison is with the CHF 5.2 billion we actually had in the first quarter year ago. So clearly, we're pleased to see it down from CHF 5.2 billion to CHF 4.8 billion. If you look back what we said on March 23, when we actually gave more detailed cost items, we said we're looking to be at or below CHF 19.8 billion which equates to a cost number of CHF 4.95 billion. So I think it's good news clearly that the CHF 4.8 billion is actually less than the run rate we need to achieve in terms of assessing that target. But I would caution – two points, really. The first quarter does tend to be normally low in terms of expenses. And secondly, the point we discussed before around the Corporate Center in terms of volatility around some of the account (1

[Kian Abouhossein:]

Just a follow-up on that, David, it looks like it's all deferred based on page 112. It's no real cost reduction, it's just adjustment to the deferred that you guided to in the fourth quarter after you took the one-time hit.

[David R. Mathers:]

Compared clearly to the – so the deferred comes down for two reasons. One, essentially we reduced the EV over the last three years. So the actual amount that what you've actually given over the last three years is actually low and that comes through this year. And secondly, clearly – and that was obviously more marked in 2015 than in prior years. And secondly, we reduced our – the amount we deferred by about a CHF 150 million and that gave us about a CHF 25 million benefit from the reductions in deferral. And then thirdly, we also get these CC effects as well which gives us some swings. I think that's what distorting the analysis you see there.

[Tidjane Thiam:]

If I may (1

[Kian Abouhossein:]

Yeah.

[Tidjane Thiam:]

That gives you a sense of the run rate of savings being achieved, because when we take (1

[Kian Abouhossein:]

Okay.

[Tidjane Thiam:]

Yeah.

[David R. Mathers:]

(1

[Kian Abouhossein:]

Okay.

[David R. Mathers:]

Because what you say in the differed comp numbers is you see the reductions that went before, than you see this volatility effect we have before. So that supercharge is the benefit in the first quarter. As I am sure as you take through the rest of earnings release, you will see that certain costs, such as our non-comp expenses, professional services and contractual (1

[Tidjane Thiam:]

And that's why we showed you the head count, because (1

[David R. Mathers:]

Yeah.

[Tidjane Thiam:]

In the coming quarters, but then again, with deferral, and we are not – it's really a key reform, because (1

[Kian Abouhossein:]

I hear you, Tidjane, but you've just taken the cost up front, it's a net present value for shareholder is actually negative, because you're paying it upfront. There is no clawbacks anymore, but that's a different discussion. You are creating flexibility, but you pay people up front, there is no change.

[Tidjane Thiam:]

I see a lot of heads moving here negatively, that you cannot see, but we shall see, let us see.

[Kian Abouhossein:]

Okay.

[Tidjane Thiam:]

I think there is clawback.

[David R. Mathers:]

Yeah. I think your second question, then, was on the size of the positions, post the sale, we have CHF 598 million of distressed market value after the disposals that were accomplished in the fourth quarter, the first quarter, and then the sale of the distressed business, if that's helpful

[Tidjane Thiam:]

Sale was CHF 200 million.

[Kian Abouhossein:]

CHF 200 million?

[Tidjane Thiam:]

CHF 200 million.

[Kian Abouhossein:]

Okay. That's very helpful.

[Tidjane Thiam:]

So, it's helpful (1

[David R. Mathers:]

I think the third question was actually really just on the revenue impact in terms of the reduction in the – I don't think, Tidjane, there's much we probably add to what you said before, which is, I think we've given guidance that the point of the restructuring is to have a Global Markets business which can achieve a 10% post-tax return in tough conditions like we are seeing now, and 15% in more normalized ones. And the target expense base we have, as Tidjane said, that gives you a revenue range of CHF 7 billion plus-minus, depending on how you put it. That's what we need to achieve. Now clearly, that's going to have to be achieved with a lower level – I'd say a more appropriate level of risk appetite.

[Kian Abouhossein:]

Okay. That's very helpful. And lastly, just on the mark-to-market of the remaining exposure, is it fair to look at credit indices, or you think that's not a good idea, don't go that way, because we have hedges against it?

[David R. Mathers:]

I personally wouldn't look at that for a different reason, Kian, which is the positions are very idiosyncratic. And I think trying to find an index that actually relates to it, I think, is very misleading. And I think it reflects that idiosyncrasy. So that remain – I think it's very likely we'll finalize that this quarter, the bulk of that CHF 598 million we're moving across the SRU and we'll be reporting it in there, basically. It is idiosyncratic. That said, it clearly, as you know, (1

[Kian Abouhossein:]

But it will be still a mark-to-market book, so it will go up and down based on fair valuation ...

[David R. Mathers:]

Absolutely, yes, yes.

[Tidjane Thiam:]

But it is basically one-fifth of what it used to be. So you can (1

[David R. Mathers:]

It was and is a trading book. Therefore, it's fair value (1

[Tidjane Thiam:]

And we've looked at the composition of a portfolio, you really have taken out a big chunk of a standard deviation of that division, as we – we said 50%. If you take – if you run your simulations in extreme scenarios, you could go (1

[Kian Abouhossein:]

Yeah. Thank you. I apologize for taking so much time.

[Tidjane Thiam:]

No no, it's always interesting, always, always very interesting questions. So, thank you. Any more?

[Operator:]

Your next question comes from Huw van Steenis from Morgan Stanley. Please go ahead.

[Huw van Steenis:]

Good morning. Thanks very much for your helpful discussion on your progress this morning. Just two questions. First, I was just interested to understand, are there any lasting knock-on implications from your trading losses, either on capital comments or (1

[Tidjane Thiam:]

Thank you and good morning, Huw. I'll take the first one and maybe let David take the second one. On the first one, we actually have done a lot of work. And it's been one of drivers of the accelerating restructuring on CCAR. And all the things we are cutting, beyond the two books we've been focusing on (1

[Huw van Steenis:]

Okay.

[Tidjane Thiam:]

Okay. You...

[David R. Mathers:]

I think – just on the – in terms of the IPO, I don't think – I think it's somewhat premature to give us much more details on this. As we said before, the application to the payment (1

[Huw van Steenis:]

But would it be fair to say you will need to (1

[David R. Mathers:]

(1

[Huw van Steenis:]

Okay. Thank you.

[Tidjane Thiam:]

Okay, all right. Thank you, Huw. Any more questions?

[Operator:]

Your next question comes from Andrew Stimpson from Bank of America. Please go ahead.

[Andrew Stimpson:]

Good morning, guys. I've just got a strategy question here, the other ones have been asked already. A lot of the businesses that you've been cutting, clearly, there has been some volatility and that's not desired. So you've been cutting a lot of businesses which are very risk-weight intensive, but you're already running a group which is leverage constrained as it is. And so I am just wondering, when you look forward three years, four years, five years, whether you think – are you worried that the bank might be very leverage constrained in the future? Because if that is the case, and even if you achieve very good costs, then it's always going to limit the amount of – limit the ROE you'll be able to achieve. So, just how you're thinking about the shape of the bank, between risk-weight intensive businesses and leverage-constrained businesses, please? Thanks.

[Tidjane Thiam:]

Thank you. Thank you, Andrew. It's a very good point. My first one about capital is that, I would say, in financial services, one should always have more than one lens to look at capital, maybe it's my insurance background talking, but I really think that's vital. You always optimize for more than one capital metric. Otherwise, you really bound to run in trouble. So today, we are leverage-constrained. I think we were clear on that in October, that really for the next two years, three years, we are leverage-constrained. But when you look at the dynamics of a bank, what we've cut and the shape that the bank is taking, actually that constraint goes away and you become RWA constraint, which doesn't mean that when we should take our eyes off leverage, but to my first comment, because otherwise you'll become leverage-constraint again. But I think that's the big picture and, actually, we think it's quite a positive message, but in the end, (1

[David R. Mathers:]

I think that's a very, very good summary. I mean, I think, at this point, clearly we're at 3.3% Common Equity Tier 1 leverage against the Swiss rules, which we do expect to be published in the next few weeks. And then, basically go into effect on July 1, which requires to be at 3.5%. In total concern – total leverage, as I said before, on my current understanding of those rules, we would be at 5.1% against the 5% requirement. So I think we're leverage constraint, but obviously not deeply so, primarily given the success of the deleveraging which we'd actually conducted over the last year with over CHF 130 billion of leverage that's been removed. As Tidjane says though, and as we guided last October, the broad changes around RWA which is still out there, would expect to swap it around for us being RWA constraint. I think the only thing I would say to update what we said from October is, if anything, those rules look back a year or so later now than we expected then. So, it's possible leverage might be our primary constraint rather than RWA, but we would expect to swap around at some point.

[Andrew Stimpson:]

That is really helpful. Thanks and any comments you can give around what buffer you think it eventually run at above the leverage ratio, if that was the constraint, obviously, (1

[David R. Mathers:]

I don't think I have a buffer...

[Andrew Stimpson:]

Do you have a buffer to that number?

[David R. Mathers:]

I think when we did our Investor Day last October, we did quite a lot of forward-looking projections in terms of the RWA impact and gave a quite a lot of guidance at that point. I think given that there were several years to this actually happening and the rules are still being published and then like to be refined, I think – I don't think the estimate, I can give today would be any best than what we said last time basically in terms of the ratios we like to operate at.

[Andrew Stimpson:]

Okay. Fine. Thank you.

[Tidjane Thiam:]

Okay. Thank you. Thank you, Andrew. I think we have a few more questions. So we will prolong the call. I think we're in overtime. But let's try and get through the questions. Maybe we'll give shorter answers. Next question, please.

[Operator:]

Your next question comes from Jernej Omahen from Goldman Sachs. Please go ahead.

[Jernej Omahen:]

Okay. Good morning from my side as well. I just got two questions left and hopefully that would be short. The first one on your outlook statement for the second quarter. Can I just ask a simple question? If the environment continues as it has up until this point in the second quarter, do you expect Credit Suisse to make a loss or do you expect Credit Suisse to be profitable in Q2? And the second question is on page 23. Can I just ask you to explain the dynamics of adding 100 relationship managers in the Private Bank? So I'm looking at the slide that says financial overview Asia Pacific. And I am looking at the key metrics. So Credit Suisse added 100 advisors, but the risk-weighted assets are flat. The balance sheet is down. The net new assets are down year-on-year, so the productivity of these advisors seems to have fallen by this 20% and the pre-tax profit has halved. So how do you think about that? Thank you very much.

[Tidjane Thiam:]

No, no, very good point. (1

[David R. Mathers:]

Well, I don't think we really want to add much to what Tidjane and I have actually said already about the market environment. I think you should forecast on the basis of that. I think the only input I give to that really would be just relates to the excess (1

[Tidjane Thiam:]

I'm really thinking (1

[David R. Mathers:]

And I think, there's a supplemental (1

[Tidjane Thiam:]

CHF 124 million (1

[David R. Mathers:]

In 4Q, which I think gives you an idea of the environment we're actually in there. I think that actually means that our Private Banking revenues were actually slightly ahead of where they were a year (1

[Tidjane Thiam:]

Right. And so if anything, it has given us even more confidence in the resilience of the model because frankly this was a terrible quarter in terms of market conditions. So this performance is quite impressive actually (1

[Jernej Omahen:]

The balance sheet being down is purely what (1

[David R. Mathers:]

There was just a small amount of deal (1

[Jernej Omahen:]

Okay. Thank you very much.

[David R. Mathers:]

Which by the way, I think, underlines the point about net new assets. If you have deleveraging and CHF 4.3 billion of net new assets, I think it does says something about the quality of the assets.

[Tidjane Thiam:]

Is that okay?

[Jernej Omahen:]

All right. I see. Okay. Thanks a lot.

[Tidjane Thiam:]

Okay, thank you. (1

[Operator:]

Your final question comes from Stefan Stalmann from Autonomous. Please go ahead.

[Stefan-Michael Stalmann:]

Yes. Good morning, gentlemen. Thanks for taking the questions. I have three, please. The first one, Global Markets on the March 23, you guided for 40% to 45% down on trading and now it turned out to be about 46%, and I guess March probably should have helped but it didn't. So could you give a little bit more color on whether you are actually losing ground in businesses where you would not like to lose grounds? Are there, from your point of view, signs of, let's say, contagion (1

[Tidjane Thiam:]

Sure, thank you.

[David R. Mathers:]

So I think taking in sequence, so I think first, obviously we made a statement actually on March 23. So I think that did include March, and I view somewhat (14

[Tidjane Thiam:]

I'll take maybe the IWB. I understand you're surprised at some of these numbers. What we can say about that is, that it's good, good client segmentation and good execution. We have a range of current profitability in our (1

[Stefan-Michael Stalmann:]

Okay. Thank you very much.

[Tidjane Thiam:]

You're welcome.

[Tidjane Thiam:]

Well, I am afraid we have extended the call by about 15 minutes. We haven't (1