Credit Suisse Group AG
Q1 2015 Earnings Call Transcript

Published: 21 Apr 2015

[Operator:]

Welcome and thank you for joining the Credit Suisse Group's First Quarter 2015 results conference call. [Operator Instructions]. 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 our first quarter results call. Before we begin let me remind you to take note of the important disclaimer on slide 2, including the statements on non-GAAP measures and Basel 3 disclosures. I now turn it over to our CEO Brady Dougan.

[Brady Dougan:]

Thanks very much Christian. And welcome to you all. Thanks for joining us for our first quarter 2015 analyst call. I'm joined obviously by David Mathers, our CFO, who is going to deliver the results portion of today's presentation. The four key points I'd like to make this morning, one, we delivered a strong and consistent performance in the first quarter. Two, in private banking and wealth management we saw a particularly strong performance from wealth management clients with improved margins and profits. Three, investment banking delivered consistent returns despite significant deleveraging. And four, we continue to make progress on our strategic initiatives. Turning now to slide 4 with an overview of our financial results, we reported net income of CHF1.1 billion up 23% from the first quarter of 2014 and pre-tax income of CHF1.5 billion. We generated this result against what was challenging backdrop given the Swiss National Bank's decision to discontinue the minimum exchange rate of the Swiss franc against the euro and introduce negative short term interest rates, certainly one of the most significant economic and political events during the quarter. In February we announced a number of actions to moderate the effect from this changed environment. And these decisive measures combined with an improvement in market activity successfully mitigated the impact on our results. Now, looking first at private banking and wealth management, we delivered solid results in the first quarter as the business benefited from a particularly strong performance in wealth management clients. The strategic businesses of private banking and wealth management generated pre-tax income of CHF938 million reflecting solid revenues and continued progress and improving efficiency. The net margin in wealth management clients increased to 30 basis points with lower expenses and higher net interest income. Compared to the previous quarter the net margin also benefited from a decrease in our asset base which was largely due to foreign exchange movements. Looking at our business in private banking and wealth management we had relatively stable results in corporate and institutional clients, where asset management had lower revenues reflecting increased seasonality. That brings me to net new assets. We generated strong net asset inflows of CHF18.4 billion in our strategic businesses in the first quarter. Wealth management clients contributed CHF7 billion with continued strong inflows from Asia Pacific as well as from Switzerland and Latin America. Looking now at the investment bank, we achieved strong strategic results in the first quarter despite a further significant reduction in leverage exposure. In the strategic businesses pre-tax income was CHF1.1 billion stable compared to the first quarter of last year. We generated a strategic return on reg cap of 19% compared to 17% for 2013 and 2014. Our reposition in investment bank is delivering consistent returns for our investors. Our fixed income franchise delivered a strong performance with improved sales and trading revenues compared to the first quarter of 2014, driven by increased client activity particularly in global macro-products and emerging markets. Equity sales and trading results were also robust reflecting a more favorable trading environment and sustained market share. The strength in the sales and trading businesses offset a slowdown in underwriting and advisory which had a difficult start to the year with a decrease in advisory market share. Additionally, we made continued progress on improving the capital efficiency of investment banking with leverage exposure reduced by $15 million in the non-strategic unit along during the first quarter. This brings me to capital and leverage, the leverage exposure reductions in the investment bank significantly contributed to our group-wide effort to further reduce leverage exposure. Given the progress that we've made so far we're well on track to reach our targets for yearend 2015 with both the look-through Swiss total leverage and the Tier 1 leverage ratio improving from last quarter to 4.2% and 3.6% respectively. In terms of capital our look-through CET1 ratio was 10% at the end of the first quarter. This is slightly lower than at yearend 2014 due to a combination of the impact on risk-weighted assets from regulatory and mandated methodology changes, the foreign exchange impact and seasonal share purchases for employee plans. Looking now at slide 5 for a brief over of our strategic initiatives, we continue to execute on our growth initiatives in the first quarter and made further significant progress towards achieving our strategic ambitions. In our wealth management clients business we continue to expand our lending program to ultra-high net worth clients. Our volume of lending to this client segment increased by CHF6.3 billion since the start of 2014 resulting in higher client market share and increased net interest income despite muted growth in the first quarter of 2015. In our Swiss home market and selected other markets we launched our new advisory offering Credit Suisse Invest which is focused on improving flexibility and transparency for clients. This is part of our effort to further increase mandate penetration. So far, we saw strong sales momentum in the first quarter which we expect to continue. As I highlighted at the beginning of the presentation we saw only a limited impact from the changed currency and interest rate environment in the first quarter, following the SNB's announcement in January. Thanks to our swift actions combined with an improvement in market activity we successfully mitigated the impact on our results. Next I'd like to look at our progress on rebalancing resources to growth markets particularly to Asia Pacific. The Asia Pacific region continues to be a strong driver of growth in both private banking and wealth management and investment banking, contributing 9% and 22% respectively to the overall revenues of the two divisions. In addition, in light of the evolving digital landscape, we've created a state-of-the-art digital private digital banking platform which we successfully launched in Singapore during the first quarter. With this platform we aim to upgrade our service offering and make it even more accessible to clients. As already mentioned another important strategic initiative in light of the regulatory developments is the reduction of leverage in our investment bank. Since the first quarter of 2014 we've reduced the division's leverage exposure by $154 billion. So far we achieved this decreased with only a limited impact on revenues since these reductions included a positive impact from the transition to the new BCBS leverage framework and have mainly focused on non-strategic activities. We're now ahead of schedule with our leverage reduction plan with exposure reduced by 18% since the first quarter of 2014. Before handing over to David I want to quickly give a brief outlook. Looking at the second quarter so far the momentum in the business has carried over from the first quarter with an improving trend in underwriting and advisory. We remain committed to our capital and leverage goals and expect to make further progress in executing our strategic initiatives over the balance of 2015. And with that, I'll hand it over to David who will discuss the results in more detail. David?

[David Mathers:]

Thank you Brady. Good morning, everybody. So I'd like to start please on slide 7 with a summary of the financial results. In the first quarter we achieved revenues of CHF6.6 billion and pre-tax income of CHF1.8 billion from strategic business lines with a cost to income ratio of 72%. Strategic after tax return on equity was 12% In terms of net new assets we saw solid strategic inflows of CHF18.4 billion with good contributions from our wealth management clients and our asset management businesses. On a total basis we achieved pre-tax income of CHF1.5 billion and net income of CHF1.1 billion the first quarter, equivalent to an after tax return on equity of 10%. Slide 8, so as is our usual practice we show here the first quarter results measured against the various group and divisional KPIs. For the first quarter our group strategic return on equity of 12% compares to our target of 15%. The strategic cost to income ratio of 72% remains on track to meet our target of 70%. In the private bank and wealth management strategic businesses we achieved a cost to income ratio of 68% in the first quarter, stable compared to the first quarter in 2014. Net new assets in our wealth management client business grew at 3.2%, again consistent with the target through to the end of 2015. And as we said before our long term target for net new asset growth, once we complete the tax regularization program, remains at 6% per annum. The investment bank achieved a strategic cost to income ratio of 69%, better than the target of 70% for the division. Now before I move onto discuss the division results in more detail, I'd just like you to note that we've transitioned to the new BCBS leverage reporting framework effective from January 1, 2015. Furthermore, from the start of this year we've aligned our return on regulatory capital calculation to reflect an expected increase in the minimum CET1 leverage rate requirement under Swiss rules to 3% compared to the current 2019 requirement of 2.4%. And we provide further details on the impact of this change in our calculations in the upcoming slides. Let's start with the private banking and wealth management division on slide 9. Before we go into the details, I'd like to start briefly with a discussion on the impact of the SNB measures in the first quarter. As you may recall when we announced our fourth quarter results of February 12, we indicated that we expected to fully mitigate the impact of the SNB actions to remove the minimum exchange rate between the Swiss franc and the euro, including the implement of negative interest rates. And as at that time we announced a number of measures on how we intended to achieve this. You can see from the overall private banking and wealth management division's performance in the first quarter that these actions have helped to achieve the desired results. In the wealth management client business the pre-tax income improved from last year as we benefited from strong net interest income driven by - primarily by the commitment to our lending initiatives and a re-pricing of our LIBOR-based loans. Given the results of the first quarter and the continued commitment to further realign our Swiss franc revenue to cost base over the next few years, we would expect to continue to mitigate the adverse impact of the SNB actions based on the current market conditions. I would point out though as we go through the presentation that whilst for the division as a whole we have been successful in fully mitigating the impact, the SNB actions did impact some of the business lines. So if we look more closely for the first quarter for the private banking and wealth management division strategic businesses achieved a pre-tax income of CHF0.9 billion. Compared to the prior quarter pre-tax income in the strategic businesses was down 7%. I'd remind you that the fourth quarter results included the gains relating to the sale of our affluent business in Italy and the partial sale of our investment in Euroclear. And excluding these gains the strategic pre-tax income was stable quarter on quarter. Operating expenses in the strategic business declined by 7% compared to the fourth quarter, primarily reflecting lower compensation expenses and the continued execution of our cost initiatives. The return on regulatory capital for the strategic business was 24% in the first quarter, assuming a 3% CET1 leverage ratio. And that compares to 28% in the prior year quarter on an equivalent basis. This lower return can be attributed to two factors. First, whilst the returns on the wealth management business on a like for like basis increased year over year, we saw a decline in revenues in the corporate institutional client business, primarily driven by the adverse impact from the SNB actions. Second, while the earnings potential of the asset management business remains broadly in line with that of 2014, we're seeing a substantial shift in business seasonality with weaker first quarter results compared to the anticipated full year out term. Slide 10, we had a strong start to the year in our wealth management client business with a pre-tax income of CHF636 million in the quarter, 10% higher compared to the first quarter of 2014 and the highest quarterly pre-tax income in the business for four years. The return on regulatory capital for the business in the first quarter was 29%. And that's calculated with the assumed 3% CET1 leverage ratio. And that compares to an equivalent return of 28% in the first quarter of 2014. Net revenues increased by 2% compared to the first quarter of last year, reflecting the cumulative benefit of our ultra-high net worth lending initiative that we've talked about for the last couple of years and the benefit of the management measures and the mitigating actions on Swiss interest rates in response to the SNB actions. Operating expenses fell slightly compared to the first quarter of 2014 with the cost to income ratio improving to 69% compared to 71% in the prior year quarter. Slide 11 please. In the first quarter the wealth management client net margin on assets under management was 30 basis points, up by 3 basis points from the last quarter. The gross margin was 100 basis points, up by 1 basis point quarter on quarter. If we look at the factors driving this it was primarily driven by the significant improvement in net interest income, reflecting the solid growth in our loan book as well as the measures we took to mitigate the impact of negative interest rates. We also saw higher transaction and performance-based revenues due to the increase in foreign exchange transactions as well as the additional currency exposure hedging needs of our clients as a result of the floating of the euro/Swiss franc exchange rate over the last few months. Nonetheless, if we look at our recurring commission and fees here we see some adverse impact from the depreciation of the euro against the Swiss franc. This is due to the fact that a large component of our recurring fees is our mandates performance. And the penetration of mandate sales is particularly high in Western Europe. And therefore as a consequence of this, there is a euro fee-based revenue impact, specifically the depreciation of the euro against the Swiss franc which reduces the value of the euro earnings in our recurring fee stream at the new lower exchange rate. However, as Brady has mentioned earlier, following the launch of Credit Suisse Invest we have seen a CHF12.1 billion increase in assets under management and mandate sales. And we expect this momentum to continue. I'd also note that ultra-high net worth's share of assets under management increased slightly to 49% in the first quarter. Slide 12, in the first quarter net new assets totaled CHF7.0 billion a growth rate of 3.2%. Asia Pacific continues to be the biggest driver of net inflows, contributing CHF4.6 billion to our overall net new assets at a 13% annualized growth rate. In addition, the Americas made a solid contribution this quarter with net inflows of CHF2.3 billion. And I'd point out that the inflows from both Switzerland and the Americas were attributable to the continued growth and momentum in the ultra-high net worth client segment. Net new assets in the EMEA region were adversely impacted by a small number of large clients rebalancing their investment strategy. And we saw an outflow of CHF1.6 billion in this area as a consequence. Separate from this, during the quarter the total outflows relating to regularization was CHF1.4 billion of which CHF0.5 billion was in the strategic business lines. We maintain our expectation of outflows to be in the range of CHF10 billion to CHF15 billion from the continued impact of regularization of client assets during 2015. Slide 13, so on this slide I'd like to give an update on the progress of the different measures we've implemented in the private banking and wealth management business. First, we're on track to deliver our overall cost saving target for the division in having reduced operating expenses by CHF1 billion or 11% from 2011 to 2014. And our cost income ratio has improved from 74% in 2011 to 70% in 2014. Expenses in, the first quarter of 2015 was the lowest of all the first quarter's since 2011. And we've achieved this by creating efficiencies in the non-revenue generating areas including the wind-down businesses within the non-strategic unit. Second, we have seen encouraging results from the ultra-high net worth lending initiative. Loan growth increased by 39% since 2013 across all regions and loan interest margins continue to be accretive to our overall business revenue margins. Third, as we've mentioned before, we've increased the penetration of mandates with strong sales for the launch of the new advisory service and the re-launch of our discretionary client suite which offers a tailored and a segmented approach to customer service. With the launch of Credit Suisse Invest at the beginning of 2015, effective on April 1 of this year, we have seen net mandate sales of CHF12.1 billion in the first quarter. And this was split between advisory mandates at CHF8.7 million and discretionary of CHF3.4 billion. And this will weigh the proportion of mandates as a percentage of total assets as of April 1, in wealth management clients to 19%. And we'd expect to see a further increase in our mandates penetration over time. Slide 14. The corporate and institutional clients business generated slightly lower pre-tax income of CHF230 million in the first quarter compared to CHF246 million in the same quarter last year. Whilst we did see a small improvement in both recurring commissions and fees and also in transaction and performance revenues, the latter being partly driven by the same increase in client activity that we saw in the wealth management client business, we did not succeed in fully mitigating the adverse impact from the SNB actions in this business, as you can see from the decline in the net interest income line. As a consequence our revenues were marginally lower than the first quarter a year ago of CHF484 million compared to CHF492 million. And that includes the positive impact from the increase in client flow, particularly the FX hedging as a consequence of the increase in volatility from the movement of the Swiss franc to the euro. But as I've mentioned before as a consequence of the nature of the lending book with the corporate institutional client business, we were able to partly mitigate the adverse impact of the SNBs actions on net interest income which dropped from CHF257 million to CHF240 million. Slide 15, asset management's pre-tax income in the first quarter was CHF72 million compared to CHF141 million in the first quarter of 2014. And this reflects two factors, first the absence of gains in private equity reflecting the interest that we've disposed of over the course of the last two years. Second, as we mentioned last quarter the change in management funds from Hedging-Griffo to a new venture in Brazil, Verde Asset Management, in which we have a significant investment. And the impact of this is a reduction in our first quarter fees but also an increased seasonality as the earnings from Verde will now only be recognized in the fourth quarter of the year as opposed to throughout the year under the previous structure. Now this change in the structure of asset management have also been accompanied by a further reduction in expenses which dropped from CHF324 million to CHF303 million between the first quarter of last year and the current period. So just to be clear, the result of this change in structure will be a more seasonal business with a greater bias towards fourth quarter results. Subject to prevailing market conditions and the performance of these funds we would nonetheless expect the earnings potential of this business to be broadly similar to that we achieved last year. Slide 16. We've continued to make progress in winding down the non-strategic portfolio within the private banking and wealth management division. In terms of capital, we've made progress in winding down the portfolio reducing risk-weighted assets and leverage exposure to CHF4 billion which means we've met our targets nine months early. In the first quarter we had a pre-tax loss of CHF104 million reflecting revenue losses from discontinued operations, investment related losses and continued regulatory related costs. I would also note thought that the prior year quarter included a CHF91 million gain on the sale of the general partnership interest in the firm's private equity fund of funds business known as CFIG. And this quarter we took a CHF22 million loss related to the sale of certain indirect capital interest in funds actually managed by CFIG. So with that let's turn to the investment bank on slide 17. In the first quarter the investment bank reported income before tax of CHF1.1 billion and net revenues of CHF3.6 billion in the strategic business lines. We've seen strong and consistent revenues in our strategic businesses, whilst reducing leverage exposure significantly. Robust equity trading results were driven by more favorable conditions with particular strength in both equity derivatives and cash equities. The resilience performance in our fixed income franchise reflected strong trading performance notwithstanding a weaker credit environment. Nonetheless, underwriting and advisory revenues were significantly lower due to a difficult start to the year and decline in our market share. Our strategic businesses achieved a cost to income ratio of 69%, better than the target of 70%. We made further progress in improving capital efficiency across the strategic and the non-strategic businesses with leverage exposure reduced by $97 billion in the first quarter. Risk-weighted assets increased though by $2 billion to $163 billion and that primarily reflects an increase in methodology and risk rating, offsetting ongoing business reductions. Return on regulatory capital was 19% for the strategic business, calculated using a 3% CET1 leverage ratio. And that compares to 18% on an equivalent basis in the first quarter of 2014. Slide 18. In the fixed income franchise we had revenues of CHF2.1 billion in the quarter, consistent with the prior year quarter. This reflects a well-balanced and diversified portfolio which delivered strong trading results notwithstanding the significantly weaker credit environment. We continued to generate growth in our securitized products business, driven by strength in the asset finance franchise. In global credit products results were lower, reflecting less favorable trading conditions and reduced client activity due to the reduction in leveraged finance underwriting and trading activity in the United States. Emerging margins revenues though grew significantly compared to the first quarter of 2014, led by APAC and EMEA. We also saw a significant improvement in our Macro revenues from the subdued levels of the first quarter of 2014. And this reflects increased client activity as well as both rates and foreign exchange in the period. Slide 19. We had a strong first quarter in our equity franchise, with revenues increasing by 8% compared to the first quarter of 2014. This reflects the 11% increase in our trading results, driven by more favorable conditions and market volatility as well as higher flows into equity funds and sustained leading market shares across these businesses. We saw robust derivatives revenues, particularly driven by strong growth in Asia Pacific and the continued momentum in fee-based products that we distribute via the private bank. Our prime services performance remains consistent and stable and that was achieved notwithstanding a significant reduction in leverage exposure. And finally we saw a decline in equity underwriting revenues as the slowdown in IPO volumes offset increased U.S. follow on activity. Slide 20. We had a weak start to the year in underwriting and advisory. This reflects a number of factors. First, leverage finance and credit activity across the industry was subdued in the first quarter. And given this is one of our strongest franchise, we were significantly impacted by this. Second, we saw a number of major transactions that we were involved with delayed into the second quarter. And we also saw reduced activities from our key franchise amongst the sponsors. Nonetheless, as Brady has mentioned already, we saw an improving trend month on month through the first quarter and that has continued into April with a forward pipeline that remains strong. Slide 21. In the non-strategic unit the investment bank we made further progress in reducing our capital position, achieving reductions of $15 billion in our leverage exposure in the quarter. We saw a reduced pre-tax loss of CHF170 million in the first quarter. This reflects these revenue losses of CHF43 million due to the significant portfolio gains and reduced legacy and other funding costs as well as lower litigation expenses. So let me now turn to leverage exposure please, on slide 22. So a year ago the Swiss leverage exposure was $851 billion and by the end of the first quarter of 2015 we reduced our leverage exposure by $154 billion to $697 billion. Let me turn now to the progress in the first quarter. Approximately half of the reduction in the quarter came from our non-strategic businesses and liquidity optimizations left from business optimizations. In terms of liquidity optimization and what I mean by that is the better matching of asset portfolios to liquidity requirements as well as an improved quality of the collateral which increases our balance sheet efficiency whilst maintaining our liquidity requirements. And so far, we have seen a limited direct impact on our trading revenues from this leverage reduction. Looking forward we're aiming for a further $75 billion to $95 billion reduction to be achieved in the balance of the year, keeping us on track to reach the target which we announced on February 12 of $600 billion to $620 billion for the investment bank by the end of 2015. And we provide here an update of the four major areas where we expect to drive these reductions. There does remain some risk of adverse revenue impact, particularly in regard to the final two components client and business optimization, although overall we would not expect this to be material to our results. Slide 23. On this slide we show the usual walk across of return on regulatory capital from the first quarter of 2014 to the current period. If we start on the left we have the total return on regulatory capital at 14% in the prior year quarter. Now if we adjust for the impact of calculating our returns using a 3% rather than a 2.4% CET1 leverage requirement, the equivalent would have been 12%. On a strategic basis the reported return of 21% and the return based on a 3% equity calculation, 18%. Now if we look at the 18% and move across the decrease in revenues caused a 2% drop in returns, offset by increased operating and capital efficiencies due to lower deferred discretionary comp and by the leverage reduction that I've mentioned earlier. And that leads to a 19% return on regulatory capital in the strategic businesses. Now if we take into account the non-strategic losses which gave a drag of 4%, the total return on regulatory capital is 15% for the investment bank. Let's move now to the update on capital and cost for the group on slide 25. So as we've mentioned before we've now transitioned to the full BCBS framework and that forms the basis of our reported leverage for this quarter and in the future. At the end of the first quarter our leverage exposure for the group was CHF1.1 trillion. And this is significantly reduced since the fourth quarter of 2014 where we reported CHF1.2 trillion. The leverage reduction this quarter reflects an FX translation benefit of CHF32b, but is then further driven by business reductions of CHF50 billion across both the strategic and non-strategic business lines in the investment bank, offset by a CHF35 billion [ph] increase in the private banking and wealth management division. So that compares to our leverage target for the group to be in the range of CHF960 billion to CHF990 billion for the end of 2015. And that's adjusted to current quarter end exchange rates which just to be clear were CHF0.97 against the U.S. dollar and CHF1.04 against the euro as at the end of March this year. So I think given what we've achieved in the first quarter we're actually ahead of our linear progression to our leverage target for the end of 2015. If we look at the ratio, as a consequence of these reductions, our look-through Tier 1 leverage ratio increased to 3.6% at the end of the first quarter of which the CET1 component was 2.6%. The Swiss total leverage ratio, including load figure CoCo's reflected a 30 basis point improvement from the prior quarter. Let's turn now to slide 26. Here we show the movements in risk-weighted assets and our CET1 ratio during the first quarter. If we look at risk-weighted assets the favorable currency movements fully offset the increase in regulatory and methodology changes resulting in a CHF1 billion decrease in risk-weighted assets between the fourth quarter and the end of the first quarter to CHF283 billion. Going forward, we continue to expect further increase in risk-weighted assets due to anticipated regulatory and related methodology changes in both the investment bank and the private banking and wealth management divisions. And this will limit reductions in group risk-weight assets even if we continue to wind down capital positions in our non-strategic units and further reduce risk elsewhere. The CET1 ratio for the first quarter was 10% falling marginally from 10.1% at the end of the fourth quarter due to foreign exchange translation and to share purchase for employee plans, relating to second quarter deliveries. The dividend has been accrued consistently to 2014, including optional scrip dividend alternative. As in prior years, I'd note that capital accretion in the second quarter is expected to reflect a further reduction of approximately CHF0.6 billion relating to the employee share deliveries. We would then expect capital growth to accelerate in the second half of the year, following the completion of these deliveries in the second quarter. Let me turn now to expense performance on slide 27. In the first quarter we increased our total cost savings to CHF3.6 billion. This was primarily driven by the progress that we've already mentioned within the private banking and wealth management division during the quarter. If we look forward to the balance of this year we would expect to achieve further cost savings to a cumulative CHF4 billion to CHF4.25 billion by the end of 2015. And I would note this is after the adverse impact we expect from increased regulatory risk and compliance expenses which are likely by the end of this year. And therefore for this reason you'll note we're advising our yearend 2015 cost target. If we look beyond 2015 we continue to expect to deliver a further CHF200 million of savings by the end of 2017 through a better alignment of our Swiss franc expenses and revenues within the private banking and wealth management division. With that, I'd like to conclude the results portion of today's presentation and pass it back to Brady. Thank you very much.

[Brady Dougan:]

Great, thanks David. Let me briefly sum up. Our results for the first quarter were strong and consistent and we made further progress on our strategic initiatives. Reported net income was up 23% compared to last year's first quarter. Our decisive measures successfully mitigated the impact from the changed currency and interest rate environment on our results. Our wealth management clients business delivered a particularly strong performance in the quarter with improved margins and profits. In investment banking we generated a high return of capital of 19% from our strategic businesses despite significant further deleveraging. We remain committed to our capital and leverage goals and expect to make further progress on executing our strategic ambitions over the balance of 2015. And with that, I'll open it up for questions now.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Matt Spick from Deutsche Bank. Please ask your question.

[Matt Spick:]

I'll just start by thanking Brady for putting up with all our questions on these calls over the years so patiently. Hopefully we can keep them relevant and useful today. So I had two questions, the first was you made a comment in the report that the deleveraging program might have some revenue impact over the rest of the year. I was just wondering if you could expand on what products you thought that might affect. And especially in the advisory franchise in Q1 where you did lose a bit of market share I wondered with so many big ticket advisory transactions coming along now whether having chosen to be more balance sheet constrained was limiting you at all on the types of the transactions that you could advise on. And my second question was on risk-weight asset inflation. Again you've mentioned that there is more regulatory pressure there which I think we all expect. Could you comment on whether there is any particular product that you think the Swiss regulator has in mind and what the specific products were that were affected in Q1? Thank you.

[Brady Dougan:]

Maybe I can take your middle question and David could answer the other two. But I think with regard to the advisory side, because we said, we feel like we continue to have a strong advisory and underwriting franchise. We clearly though have been - one of our real power allies has been the credit and leverage finance area which as we mentioned in the first quarter, obviously for the industry was a bit weaker. So we think that probably differentially affected us. We've also been very strong with the sponsors and that, I think, was a weaker area of activity in the first quarter. I think actually we're able to bring plenty of capital to bear on individual transactions. And so I don't think there is any transaction's we have not been able to do, in fact I think we've been quite good about stepping up and being able to commit capital, partly because I think we have excellent execution capability which obviously gives us confidence around that. So I don't think it's that issue at all. Obviously as you know in any sort of quarter the quarter comparison in the advisory and then the underwriting side it is lumpy and there are trends in certain industries etc., so that has some impact as well. For instance, we had some transactions, large transactions that got pushed into the second quarter. So, that's not a - I don't think that's a systematic impact. But in general I certainly don't think that we're at all handicapped by capital, I think we've made some of the biggest capital commitments and stepped right up for many transactions and delivered extremely well for our clients. I don't think that's an issue.

[David Mathers:]

Yes, so I think just to make here perhaps one supplement to Brady and then move onto the RWA point. Firstly, I think if you look at slide 22 which shows the investment bank walk across you can see that the majority has come through clearing and compression initiatives, the non-strategic run down and liquidity optimization. So therefore I think firstly I would not be expecting that, as Brady said, did not really affect the IBD business and I fact the return on assets or return on leverage exposure I'd say for the IBD business is actually one of the highest in the group actually, across the entire group. So that would not be a constraining factor. In terms of revenue impact, I think a few points really. Firstly, as we've said, we did not see or saw only a very limited direct impact from the leverage reduction in terms of our trading revenues in the first quarter, although it’s obviously difficult to quantify whether there may or may not have been any opportunity cost as a consequence to that. But clearly that's been very helpful in actually driving up the return on assets in the investment bank from 1.8% to 2% in the first quarter. And you can see that further on in terms of some of the add-ons have actually come down notably across the group as a consequence of those actions. Most of which is really not revenue impactful. I think if we think around the balance of this year in terms of that, I think we just feel it's appropriate to warn. And essentially you have CHF15 billion to CHF20 billion from client optimization and a further CHF20 billion to CHF27 billion from business optimizations. And there may well be some revenue impact from those reductions, albeit that I think it will be at least partly offset by the increased pricing power around leverage and balance at usage. But I'd say so far, limited or no direct exposure from those measures. Just in terms of RWA inflation or recalibration, I think you can see both on the slides that we had about a CHF6 billion increase from methodology changes. And actually also if you look at the earnings releases in - on page 39, there's actually a table there which actually breaks out the fundamental reduction in risk usage offset by the increase relating to those external methodology changes. Not all directly regulatory, but it's certainly methodology and data-based. I think you asked the question does that affect both the IB and the PB? It does actually. And if you look at Mr. Branson's speech from the FINMA which he gave on March 31, you'll see he specifically refers there - let me just quote, to both IB corporate credit and add-ons. And also mortgages on investment properties which is more of a private banking-type asset. So it does affect both in terms of that inflation. I would say I think that I see this more as a general point, but that was the specific Swiss reference. Of the CHF6 billion or so that we saw in the first quarter, about half of that was in respect of the securitized product business, so that was probably the single largest adverse impact from RWA recalibration in the first quarter. I hope that does answer the points, but please come back if they haven't.

[Operator:]

Your next question comes from the line of Kian Abouhossein from JPMorgan. Please ask your question.

[Kian Abouhossein:]

I've got three questions. First of all I'll get the boring one out of the way. The tax rate was 32%. You normally have a bit of seasonality in the first quarter. What should we think about for the year in line with last year or differently? The second question is related to capital again. It looks like you are addressing very well the leverage ratio and that was clearly a market concern in particular in the second half of last year. And I think it's shifting back to capital Basel III common equity tier 1 concern. And I was wondering if you could give us some more indication how we think about risk-weighted assets also for next year considering there's this recalibration going on and in that context how we should think about exit tier 1 ratio since you don't give a target any more. But you must have a number in mind that you feel comfortable with on a common equity tier 1 basis. And I recall there used to be an 11% kind of guidance. And then in that context, how should we think about the - how should we think about the outlook in terms of when you have to report standardized risk-weighted assets? Is this likely to be a 2018 event or could it be even earlier that you have to give all of your risk-weighted assets on a standardized basis as was indicated by the FINMA? And if I may, one more question, wealth management. You indicated CHF10 billion to CHF15 billion outflows. How should we think about 2016 in that respect? And before answering, thank you very much, Brady and well done on navigating the Bank through the crisis. I think CS came out extremely well out of one of the biggest issues that we've seen in the financial crisis.

[Brady Dougan:]

David, do you want to take the tax rate and --?

[David Mathers:]

So I think let me just start off from the top then. So in terms of tax guidance, we'd expect something in the high 20s, principally around the 28% level. It was slightly higher in the first quarter, reflecting the geographical mix of earnings we saw in the first quarter. But something around the high 20s is where we could probably guide you for the full year. In terms of the second question really then moving onto leverage and capital, it's certainly true that the biggest reduction we've achieved this quarter has been on leverage. It's down CHF154 billion from the level of the first quarter a year ago. It's down CHF97 billion in the first quarter by itself. But it's also true that we did reduce risk-weighted assets on an at-risk basis. And you can see that broken out, as I mentioned before, on page 39. And we saw about CHF6 billion in terms of RWA recalibration. I think if we look forward in terms of leverage and capital ratios, our primary focus does remain hitting the leverage targets we've actually laid out. That is essentially we get our tier 1 leverage ratio up to around 4% by the end of this year, with a common equity component of around 3% which I think would put us in a good leverage position. And I think it's clear that leverage increases are going to be I guess, our primary capital target for 2012 because that leverage requirement is more binding than an RWA or CET1 requirement. If we think about the first quarter though, as we've said before, the first two quarters of the year are always depressed in terms of capital accretion by the fact we actually purchased shares for delivery to our employees in the second quarter. So you see limited capital accretion in the first two quarters and then normally a pick-up in capital accretion in the second half of the year. And that's a pattern which I would expect, subject to normal market conditions, to be repeated in 2015. So I would expect the CET1 ratio - so firstly then, I guess in summary, hitting that leverage goal, 4% tier 1, 3% common equity, 4.5% total is the primary target. As a consequence of that I think we will end up with some accretion in the CET1 ratio above the 10% level. And whether we get to 11% I think would be difficult to forecast at this point because it will be a secondary driver at that point. But I would expect to see a more normal capital accretion the second half of the year as we actually get through the employee deliveries and away from some of the FX volatility we've actually seen in the first quarter. You know to come back if you need further points on that. Sorry, I think you asked about outlook for 2017 and standardized models. I think, generally speaking, RWA recalibration is going to be a long-term issue, certainly for the next few years. And I think FINMA said as much that way and I think we're seeing it from other regulators. It's a common trend. I think it's too early to be particularly helpful really on the impact to standardized models, FRTB, SACCR [ph] and floors against standardized models which you know is the package of Basel changes which are planned over the next two to three years because we're still very much in the quiz phase. We may see further rules later on this year, but it's still very early in terms of being able to give much indication. I would refer you thought to the quite extensive disclosure we actually gave in our Annual Report around these kind of issues at a qualitative level, just to give some idea of the various factors driving this. But I think it's - I would probably expect to see further RWA recalibration in 2017. And then obviously two to three years out basically we will see where the FRTB, SACCR [ph] and floors against standard models comes out in the regulatory regime--

[Kian Abouhossein:]

Sorry, just very briefly, David. Sorry, just very briefly, that means that is there the possibility that the CHF280 billion of risk-weighted assets roughly that you have today could increase going forward depending on where we end up on calibration?

[David Mathers:]

Well I think all I'd say at this point is we would expect to see further reductions in non-strategic units in 2015. As we delivered in the first quarter, we actually reduced risk in the business lines, strategic business lines as well. And that was offset by methodology-related recalibration in the first quarter. I hope to be able to do better than that in the balance of this year, but I'm just warning that this recalibration is definition an issue for 2015, and you should be aware of that in that sense. But I would hope we'd do a bit better going forward, but it will obviously depend on the pace of those two factors through 2015. I think in terms of net new assets, I think we've consistently guided that we'd expect CHF10 billion to CHF15 billion of assets through to the end of 2015. Although the pace was lower in the first quarter, it was only CHF1.4 billion in the first quarter, we obviously do have the Italian amnesty coming into effect really from the second quarter onwards. So I think that guidance we've given of CHF10 billion to CHF15 billion, I'd hope it's pessimistic, but it's probably something one should still plan for 2015. And then going beyond 2015, difficult to be specific, I think it is very unlikely that we would see outflows at that level beyond 2015. But I would not rule out some regularization-driven outflows in 2016 and 2017 given the continuing trend towards tax regularization outside of Western Europe. But I think we would be surprised if it is at the level we've seen for the last year or two.

[Operator:]

Your next question comes from Kinner Lakhani from Citi. Please go ahead.

[Kinner Lakhani:]

Just a couple of questions, firstly on the wealth management and the net interest margin which I think improved by 3 basis points versus the prior quarter. Could you just elaborate on the mitigating actions and how sustainable you view those? And secondly, just on the legal risk, especially post the Morgan Stanley mortgage settlement, it doesn't look like you have really changed your view on the contingent risk since the fourth quarter. I think it still remains up to CHF1.8 billion. Could you maybe provide some more color on your rationale for that? Thank you.

[Brady Dougan:]

Well I think on the legal side, I'll take that first. And then David can speak to the net interest margin question. As you say, basically you can see that our reasonably possible number has remained at a CHF1.8 billion number, same as last quarter. So we really haven't changed that. And I think that reflects the view that there really have been no - I'd say no major developments in the first quarter across these different areas. As you mentioned, the good news is obviously we continue to be free of issues on the sort of FX and the LIBOR side, so those are not issues that we have any material involvement in. On the mortgage side, obviously we have a number of issues that we continue to work through. There's a docket there of issues that we're working through of various types. And the larger issue there of the mortgage taskforce and how that will develop is still one that's a very preliminary level. So I'm not sure at this point. I don't think there's any more color we can really give to you. But we have kept the numbers basically the same as they were at the end of the fourth quarter. David, do you want to?

[David Mathers:]

So I think on net interest income, clearly the SNB actually announced they were moving into negative interest rates actually on December 18 last year and obviously followed that up with the removal of the minimum rates and increased the negative interest rates at that time. We've attempted to do a number of things. From a business point of view, I think we've been very conscious that we did not want to charge negative interest rates to our retail clients or to our wealth management clients at that point. And we've generally been successful in that. I think that's an important part of our strategy and how we intend to deal with our customers. But clearly the interest rate, that still means zero in Switzerland. And we've then maintained the margins of that deposit to our loan base which is actually protecting net interest income which I think is the right balance in the circumstances. We obviously have passed on negative interest rates to many of our corporate customers. I think you've seen that. That's actually been in the press and actually in many ways occurred earlier than the end of last year or this January. You may recall some of the press around that a couple of years ago. And that is unfortunately a factor in a negative interest rate environment we have passed through. I think the other factor in this is we do have floored LIBOR-based loans which also protect our negative interest income. So I think those - that package of measures is about the right balance. And it has protected our net interest income. But it's also meant that we've not passed our negative interest rates to our retail or our wealth management plans by and large which was the goal of this exercise. And yes, I do think it is broadly sustainable on current market conditions.

[Kinner Lakhani:]

So just to be clear, the improvement on a sequential basis is to do with increasing spreads on the lending side?

[David Mathers:]

As I said, we have passed on negative interest rates to corporates, corporate clients here in Switzerland. We do benefit from having floored LIBOR-based loans. That is helpful to the margin. And as I said, we've maintained our spreads between zero on deposits from our retail clients. And actually the loan margins we have, we do benefit from actually being a fully balanced universal bank in Switzerland with that ability to maintain our margins.

[Operator:]

Your next question comes from Jon Peace from Nomura. Please ask your question.

[Jon Peace:]

So my first question is just on your updated cost savings plan for this year. You had previously broken out the amount by division. I just wondered what had changed since the fourth quarter and how you expect the incremental cost saves to break out now. And the second question is back to litigation. Sorry if I missed the number, but what's the current reserve you got on balance sheet for litigation exposures? Thanks.

[Brady Dougan:]

Yes. I think on your second question, we actually don't disclose the current reserves on the balance sheet so it's not actually a disclosed number. As you said, we do obviously disclose the reasonably possible number but not those reserve numbers.

[David Mathers:]

Yes. I think in terms of cost goals, I think, just to be clear, the private banking and wealth management division actually achieved its cost goal in the first quarter which is an excellent performance. In terms of the look forward, we continue to expect an increase in our cost savings to the 4 to 4.25 space. I think before our target was to get to 4.5. And the delta for that will clearly therefore have to come in both the infrastructure and the IB direct side of the business and that's indeed our plan. I think the caution we have is really around risk compliance and regulatory cost being higher. Most of that comes through on the infrastructure side, so that's probably where you'd see less progress in the balance of 2015 than we'd previously been expecting. And then the CHF0.2 billion beyond that clearly is part of the package of measures we put in place in terms of deal with the strength of Swiss franc. That predominantly rates the private banking and wealth management division both direct and support.

[Operator:]

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

[Jeremy Sigee:]

Could I just ask three questions, please? So firstly a nitty-gritty one. Could you talk a bit more about the corporate center, the strategic corporate center which was a bit of a heavy drag in this quarter? I think it was CHF231 million negative versus the average CHF188 million over 2014, so if you could talk about that. And then secondly, a couple of slightly more directional questions. Firstly, on your bubble chart in IB, prime services is a big outlier. It's a very strong business but making poor returns. And I just wondered whether any of the deleveraging or re-pricing initiatives that you have underway are likely to make a difference to that picture during the course of the next few quarters. Just how soon could we see any improvement in prime services ROEs? And third question, on wealth management clients, there was a further slight increase in the ultra-high net worth. I remember last quarter you said that might be stabilizing and we might be finishing the big increase in ultra-high net worth. And I just wondered if that's still how you see things. Do you think we settle maybe around 50% ultra-high net worth within the AUM mix in wealth management clients?

[Brady Dougan:]

Yes. I think maybe I can answer the third and a little bit of the second. David could add to that and then also talk about the corporate center a little bit. I think on the ultra-high net worth side, I think our general view is, while we had signaled that it is slowing in terms of the interest, I think we're still - I think that still is really one of our power alleys and a place where we compete extremely well. I think our general view is that we will probably continue to see an increase in the mix in the business towards that. It may not be as accelerated as it was in the past. But I think moving up even above the 50% level is something that we think could definitely be something that we'd see over the next quarters, years. And we continue to see it as a very attractive segment, with high net margins and good business and one that we compete very well on. I think in terms of prime services, obviously it is a very important business. It's also a very good business. As you say, with a focus on leverage and balance sheet, it obviously has - that's reflected on the hybrid returns that we show on the bubble chart. Again, the bubble chart is not capital, but combination of hybrid of capital and leverage which is why it comes out at that level. Obviously return on capital is actually substantially higher. But we have seen significant improvements in the returns in that business. So I think even from the fourth quarter to the first quarter we improved by about 20 basis points. I think we went from 100 basis points to 120 basis points in ROA on that business. So we're seeing an improvement. And part of that's coming because of the general pricing environment, because you're obviously hearing it from competitors as well. But I also think we're doing a good job of evolving our approach to that business and how we're actually approaching it with clients. And so I think that we will continue to see improvement on that front and I think that will continue to drive it along the axis to the right. We have made a significant reduction in leverage in that business over the past few quarters. And the other thing, just to remind you of, is that this chart is a rolling four-quarter average. So if you actually looked at the spot first-quarter number, it's significantly better than that. So this is obviously reflecting the previous three quarters. So I think overall it's a great business. It obviously has a lot of connections with other parts of the business. And I think we're making substantial progress in deleveraging and improving the returns in it still and I think that would continue. I don't know, David, do you have anything to add to that or just go to the corporate center question?

[David Mathers:]

No. I think as you made the point, Brady, the - it's a rolling analysis for this, so it's the last four quarters. So the reduction which - and we did achieve a significant reduction in leverage exposure in the prime service business in the first quarter, you will only - you've only seen one quarter of that in terms of position of the prime service business. And we have seen a notable step up in the return on assets within the prime service business as a consequence of the measures in that area so far. So that should move to the right in the balance of this year. Just on the corporate center number, I think just one or two helpful numbers actually. If you look at page 41 in terms of the cost savings, you actually - we do give some useful supplementary disclosure there around some of the components. So you'll see there, for example, the RRP program which is also the legal entity program, is running an annualized, not first quarter, annualized of CHF456 million. So that's a bit ahead of where it was last year. That I'm afraid, is not particularly surprising because as you know, the legal entity component has a number of areas. So that includes the establishment of the intermediate holding company, the IHC in the United States and our preparation for our first [indiscernible] test which is in 2017 which is a substantial component of this. Also the launch of the separate Swiss legal entity which is due in 2016. And I think many of you are aware obviously that us and other banks are restructuring our infrastructure into a bankruptcy remote service Co as a part of the resolution. So 2015 is a peak year for that. So this kind of number is probably not - is only to be expected, I think, for the current year. In terms of the other components, realignment and the restructuring expenses, probably a little on the high side, but I would say overall, looking at the consensus expectations for the corporate center, it's - they're probably roughly in line with what we'd expect actually. So I'm not sure I'd see it out of kilter. There may be slightly more recognition in the first quarter because of the step up in those legal entity programs which were only just building in the first quarter a year ago.

[Operator:]

The next question comes from Huw van Steenis from Morgan Stanley. Please ask your question.

[Huw van Steenis:]

I've got a niggly question about how you think about your capital plan over the next one to two years. I'm still - I'm just curious why you chose to buy back the shares - not issue shares to the staff on the market and yet want to continue with a scrip dividend for this year and just how you prioritize one over the other given obviously a range of headwinds to capital over the next 12 months. Any update also on the pension fund deduction? And then lastly you obviously very kindly just described there that your ROA and prime services was going up as you're shrinking the leverage denominator. I noticed on page 40 that your RWA allocation to macro naturally drifted up with a good quarter in rates and FX which makes sense. Is there any color you can give us on what the leverage nominator - how the leverage exposure for macro moved in the quarter as well? Thanks very much.

[David Mathers:]

So perhaps if I take those points in order. I think, to be clear, we've always purchased shares to deliver to our employees over a number of years. The only time we deviated from that was actually in 2011 and 2012 when, as you recall, as part of the capital plan, we actually used an authorization we had from our shareholders to issue new shares to employees as part of the cog program. You may recall that we - that was then supported at the following AGM because we asked for top-up for that. And then last year's AGM, we did ask and the shareholders approved a CHF30 million share allowance to be used for employee compensation, but only if the CET1 ratio was actually to drop below 10%. Now clearly that is - it's not dropped below 10%, nor is it in our planning for it to drop below 10%. And therefore we have not activated nor used that consent from our shareholders. So it's - whether we should do that or not, Huw, is an interesting question. I think at this point basically we think maintain and the scrip alternative as an option for our shareholders is the right thing to do. But within the authorizations from our shareholders, we don't have the option to issue new shares to our shareholders at this point. In terms of the pension fund here in Switzerland, I think there's only a limited update that I can actually give from what we actually said on February 12. We have been in discussions with the trustees of the pension board here in Switzerland to look at the mitigation of the CHF500 million capital deficit that potentially would result at the end of this year as part of the annual reassessment of the pension fund if the interest rates at the end of last year were to prevail still at the end of 2015. Those discussions are continuing and we'll probably be able to give you a further update as of the second quarter. But I think I wouldn't really guide you to anything different than we did at February 12 at this point. In terms of leverage exposures, we haven't given a breakdown of the BCVS [ph] leverage by individual business lines. I think it's something we could think about. There might be some limits to how far we want to disclose. But what we did include on page 22 for the first time was actually a Venn chart on the bottom left corner which shows the breakdown of leverage exposure by the major business lines within the different businesses. And clearly macro does remain, by a nose, the largest leverage user within that 50% you see for the fixed income component. But at the moment I think we're restricting our disclosure to just giving it by business line which in fairness is not something we've given before actually, Huw.

[Operator:]

The next question comes from Fiona Swaffield from RBC. Please ask your question.

[Fiona Swaffield:]

I had two questions. Firstly on the recurring fees on slide 11, could we go through a bit more than CHF700 million versus the CHF756 million Q1 versus Q4? To what extent was that currency because the list on the right-hand side gives actually quite a lot of moving parts in terms of your retrocessions, etc., so that would be helpful. And the second issue is net interest income within the corporate and institutional was - did seem to be impacted much more by lower rates. And was that the one table to pass on to the loans or could you talk through why you were more successful in WMC than you were in the retail corporate business? Thank you.

[David Mathers:]

I'll take those two points in order. I think about half of that drop in recurring fees is due to the currency effect. It is the single largest one though and it does specifically relate to the move of the euro against the Swiss franc from CHF1.20 to the CHF1.04, CHF1.05 type space. And as I said before, that is predominantly because our historic mandate penetration has been relatively high in the Western European client base and therefore is a euro-denominated fees and therefore is particularly exposed to this change in currencies with the appreciation of the Swiss franc. So that's approximately half of it. As we mentioned before, we would expect that position to actually improve in the balance of the year because we've now launched CF Invest and we've actually achieved about CHF12.1 billion of mandate sales by April 1. So that should start to boost our recurring fees. It's very much part of the whole sales excellence program that we've talked about for the private bank over the last few quarters really. But strictly speaking it's about half of that in terms of the component. I think in terms of net interest income for the corporate institutional client business, I think the balance sheet structure clearly of the CIC business is very different to that of wealth management business because our wealth management business, just to be clear, may be different from other banks you look at. I think you know, Fiona, it has retail actually within it. It's not purely wealth management; it's retail and wealth management business technically as a division. So you have a quite different balance sheet structure to the corporate institutional client business or, for that matter, what you may see at other banks in terms of that comparison. So it doesn't afford the same margin protection we've actually achieved in the wealth management business. I would also point out that it was a couple of years ago now that we actually did impose negative interest rates on a number of bank deposits from overseas with us here, because frankly that did seem appropriate at that time. We have extended the pass-through of negative interest rates to certain corporate clients in excess of certain balances. But given we already were charging negative interest rates, the scope to actually make those moves when the CIC business was accordingly less than it otherwise might have been actually.

[Operator:]

Your next question comes from Andrew Stimpson from Bank of America. Please ask your question.

[Andrew Stimpson:]

So first one, just any insight into what your thoughts are on the how the too-big-to-fail review is going in Switzerland and maybe where those talks are heading? Clearly there's been a pretty consistent message, I think, from the Swiss authorities. It should be amongst the strictest globally. And then obviously there's a debate around whether 3% reflects that or not. But any additional insight you've got there would be welcome. And then number two, it might be slightly an odd question, but on page 40 of the earnings release, you show the Swiss capital rules with a 9.9% CET1 to risk-weighted asset ratio. But I just want to - I know we've transitioned and we're looking at the Basel metrics which is fine. But I just wanted to know what the difference was now and which one you look at when you sit down with FINMA. And then thirdly on credit which obviously, as you said and your peers have said as well this week in the first quarter, maybe you could talk about how that developed through the quarter and whether there was a recovery towards the end of the quarter. And maybe looking further ahead, how you see that business performing as rates rise in the U.S. and how that business might behave. Thank you.

[Brady Dougan:]

Sorry, Andrew, your last question was on which business? Sorry, just missed it.

[Andrew Stimpson:]

On credit.

[Brady Dougan:]

On the credit business. Maybe I can start with that and then David can come back to the other - the question on this page 40 question. I think in general, as you know, the fourth quarter and the first quarter in credit were more difficult quarters for that business for the market in general. We've actually continued to have in the first quarter we actually continued to have pretty good secondary performance in the business. But the origination side was clearly off from what it had been in the past. And still some volume there, but clearly not what we'd seen in previous quarters. So I think our view is we would expect the secondary performance probably to hold up. The question whether or not and how much the origination comes back I think is a little bit dependent upon what we see in the market, what the general view of the interest rate environment is. There certainly is demand. There certainly is potential issuance demand. But I think it's a question of whether - how constructive the buyers are and whether or not there will be more demand for those issues. So I think there is a chance that - it's actually been - in my view it's been a reasonable soft landing in that business over the last couple of quarters. So, as you know, I think that was always one of the things people were very concerned about was is it a credit bubble and are we going to get a big drop in the market? And my view is actually it's eased down in a relatively orderly way. So it is possible that we could actually get some pick-up in that business and in the coming quarters. But obviously still somewhat dependent on the markets. I think on your first question on the too-big-to-fail review, frankly I'm not sure there's really much more to say on that. As you know, we continue to draw the parallel to the UK market. We're at a 2.8 to 3.2 CET1 leverage ratio being the range there. As you say, certainly I think Switzerland will continue to want to be in a - at a level that is at the higher end of that. So I think we still believe that that's probably not a bad indicator to look at. But frankly there's not really much new to add in terms of the process here in Switzerland. At this point it's still pretty early. I think at this point people are assuming that it'll be late this year or early next year will be when we start to bet some clarity on where that might go.

[David Mathers:]

Since we spoke on February 12, I think the Swiss parliament did actually review the report from the Brunetti Report and substantially adopt the conclusions of Brunetti. And as a consequence of that the Swiss finance ministry has been asked to revert, I believe by the end of this year, with draft proposals for how to enact a number of the measures in Brunetti which I imagine the one which is obviously most important for this discussion is the leverage ratio. But it's not solely a leverage ratio recalibration issue. So we should expect to see something by the end of this year, but maybe not before the fourth quarter, I think. In terms of the difference between the Swiss calculation and the BCBS calculation, the answer to that is, firstly, the number we focus on and the discussion with FINMA is actually the BCBS calculation. That is the primary measure for the capital ratio. There's about CHF1 billion of RWA difference between the two of them, predominantly relating to a slight difference in credit risk multipliers which I think is a legacy dating back about four or five years which still sits in the reporting. But it is still a required report, but it is the BCBS number.

[Operator:]

Your next question comes from Stefan Stalmann from Autonomous Research. Please ask your question.

[Stefan Stalmann:]

And Brady, also from me, thank you very much for the last eight years. Very exciting times. Two questions left on my list, please. The first one regarding the investment bank, are you seeing any undue levels of key staff attrition or is everything pretty much in line with what you typically see at this stage of the year? And second, you had quite a bit of a pick-up in leverage exposure in the private banking and wealth management business during the quarter, about CHF35 billion. Is there any particular reason for that? Any particular driver? Thank you very much.

[Brady Dougan:]

I guess on the first question, no, basically a voluntary attrition right now is pretty much in line with where it was a year ago. So no changes at this point, very much in line with both last year and previous years generally.

[David Mathers:]

And the second part, I think the single largest component was actually within the asset management division. And that actually relates to a build-up of some of the new products there and I think probably is one of the reasons why I think we're relatively confident that the full-year earnings potential of the asset management division is likely to be broadly similar, plus or minus, to last year.

[Operator:]

[Operator Instructions]. Your last question comes from the line of Andrew Lim from Societe Generale. Please ask your question.

[Andrew Lim:]

Could you give an update on your NSFR and LCR ratios and whether there's any potential to reduce your wholesale funding costs or your funding costs just bringing these down to a level which is more consistent with regulatory minimums? And then could you be a bit more specific on RWA inflation going forward? Is it something that you can quantify and also give a timeframe to in terms of how we should see this being an impact going forward? And then lastly, perhaps a bit more detail on your wealth management NII margin. It's obviously gone up if we look to the slides. But you said you're not passing on negative rates to your non-corporate customers. So I'm just thinking in my head that this combination of being impacted more. So perhaps you could give a bit more clarity on why it's done so well and what we should expect going forward. Thank you.

[David Mathers:]

Okay. So probably I should take those in order then. So firstly, the LCR ratios will be disclosed in our full financial report which I think is due to be filed on April 30. But I can give you the headline numbers now. For the Group, it's 103. For the Bank it's 103. And for the parent it's 99. So those are the three components on average through the quarter. And clearly the - I think the end quarter numbers I don't think we do disclose, but we're actually slightly higher than that at the end of the quarter, just as guidance in terms of that. In terms of funding cost, I think you asked for guidance on the funding cost. I probably would not change the guidance we've given already around funding costs. I think as you know, we've issued our maiden TLAC offering, so that's a HoldCo debt offering. So we've moved now to a funding structure which is funding for HoldCo for our longer-term issues, but we're still issuing OpCo for the shorter-term issues. We've issued about CHF7 billion of HoldCo debt so far in both the U.S. and European markets. Typically that debt has been issued at a spread of around 40 basis points over the OpCo which is broadly in terms of where we gave guidance before around it. So I guess it's in line with our expected levels. So I think the guidance we've given before around funding cost probably remains unchanged. And clearly we'll probably look to update that when we see the final FSB rules around TLAC, although I think at the moment I'm not sure that would change that guidance, but obviously that's a paper which is actually due in the fourth quarter. In terms of the net stable funding ratio, those rules are still - have only been promoted globally, as you may know, that all regulators around the world have to then convert a number of those into the national requirements for that. That is still a process which is ongoing. So it's difficult for me to comment because I actually don't have final rules as yet for the NSFR and how it will be applied in Switzerland. But I'm sure we will comply with that. In terms of going forward for risk-weighted assets, I'm not sure I can really add much more to what we've said before. I think you will clearly see us, as I think the FINMA laid out in their statement of March 31, add-ons in terms of the investment and corporate credit, add-ons in terms of certain Swiss investment properties which was something that the FINMA have actually announced. And we will see other methodology changes going forward. I think you may have seen they won't allow significant reductions through model approvals. In terms of guidance as to where that ends up, I think we would hope to be able to partly offset that with the NSU run-offs and other business reductions. But we will be able to reduce it meaningfully below CHF280 billion on the current exchange rate mix, I think I would be cautious about guiding that we can actually achieve that given this RWA recalibration. Does that answer that point because I know there's a lot of - do you want me to come back? Well perhaps we can come back at the end. And then in terms of the wealth management net interest income margin. Well I think there's a number of points here. The key point is that the wealth management and retail business is a balance business, so it takes deposits and it lends money out. So clearly the net interest income margin depends on the spreads we actually make between our deposit rates which, as I said, we have protected our retail and wealth management clients from negative interest rates and the low margins we have. And we basically set those margins and I think they've been maintained in the market in terms of our interest rate spreads. And I think that is appropriate because I don't think we really want to pass on negative interest rates to our retail customers here in Switzerland. Now clearly we then also have LIBOR-based loans which do have a floor rate applied to them. So clearly they are at those floors. But obviously that - as the swap rate goes negative, that actually widens the spread on those LIBOR loans. And that also - that actually helps us to boost our net interest income margin. So that's the other component to it. But I think that is the key point to take away is we're matched in terms of asset liability mix in Swiss francs. And therefore that does give us some ability to protect our net interest income margin in this kind of interest rate environment. Does that answer the four questions? I'm more than happy to take a follow-on question on that.

[Andrew Lim:]

No, no. That's really good. I think you said you wanted to come back on some more comments on RWA inflation.

[David Mathers:]

No, I just hoped - I just wanted to confirm I'd answered your point really. Sorry, or as much as I can, I guess.

[Brady Dougan:]

Okay. I think that's it for the questions. So thank you all very much again. And I've appreciated working with you over the past eight years and all the best to you all as well. Thank you very much.

[Operator:]

Thank you. That does conclude today's conference. An email will be sent out shortly advising you on how to access the replay of this conference. Thank you for joining today's call. You may all disconnect.