Credit Suisse Group AG
Q2 2016 Earnings Call Transcript

Published: 28 Jul 2016

Operator:

Good morning. And welcome to the Second Quarter 2016 Results Call. Before we begin, let me remind you of the important precautionary statements on slide two, including the statements on non-US GAAP measures and Basel III disclosures. I turn it over to Tidjane Thiam, our CEO.
Tidjane Thiam:

Thank you, Adam. Good morning, everyone. And thank you for joining the call. With me today is David Mathers, our Chief Financial Officer. This morning, we will present the second quarter results for Credit Suisse, and David and I are looking forward to answering your questions at the end of the session. Let me turn first to the key financials for the quarter on slide two. We have kept the format we introduced on May 10, presenting side-by-side on the left reported numbers and on the right adjusted numbers. I will focus my comments on two topics. One, profitability and two, capital. Starting with profitability, this morning we reported Group PTI of CHF199 million translating into a reported net income for shareholders of CHF 170 million for Q2, a significant improvement against Q1. From here, I will refer in my comments to adjusted numbers. So on the right hand side of the slide, APAC, Asia Pacific; IWM, International Wealth Management; and SUB, the Swiss Universal Bank produced together combined adjusted PTI of CHF 933 million. This was complemented by an improved performance from IBCM with a profit of $142 million and global markets, where we saw a rebound in current activity from the unusually low levels reached at the beginning of Q1. Moving on to my second point, which is capital, we have been able to increase our CET1 ratio to 11.8%, a 40 basis point improvement over the prior quarter and a 150 basis point improvement against the 10.3% we had in the same period in 2015. We have also kept our leverage ratio flat at 3.3%, an improvement of more than 60 basis point over the same period in 2015. Organic capital generation remains a key objective for us and disciplined capital management is at the core of our strategy, more on this later. David would give you more details of the drivers of these results division-by-division in each section. So what I would like to do in the rest of my section this morning is to update you on the operational performance of our businesses and on the progress we are making in exhibiting our strategy. So for this, let's turn to slide five to look at what happened during the second quarter. Firstly on execution, we have two clear objectives, cost reduction and de-risking. On the first one, cost reduction, our efforts have continued at pace. Year-over-year, we have reduced addressing operating expenses by CHF 400 million or 8%. And we on track to meet our cost base target of CHF 19.8 billion by year-end. On de-risking in global markets, we have reduced our expected quarterly PTI loss in a stress scenario by 50% since end-2015. Our trade in varying global markets, our published measure of market risk was down by 39% by end of Q2 compared to the year-end, 2015. So moving now to the second priority on this page, profitable growth, in a period of heightened market volatility, we have maintained our focus on supporting our clients across wealth management and investment banking. In APAC, IWM and SUB, our wealth management activities, which we customarily call private banking, have seen continued inflows of quality assets at stable margins. Our IBCM teams stayed close to our clients around origination and execution opportunities as markets progressively reopened in Q2, after a very challenging Q1. Global markets had a much improved performance as well. Our core client franchises in credit and securitized products and solutions improve our performance strongly sequentially. Finally a word on Brexit, our planning and coordination between global markets, group risks, and all our support functions in IT and operations, and other parts of the bank was effective in the run-up to and on the date itself. Our risk management hedging and operational performance around Brexit was improved by the de-risking which has been taking place in 1Q and 2Q. We benefited from significantly increased loan volumes and provided quality execution for our clients throughout the day. We of course continue to support our clients as we navigate through this post-UK referendum environment. Thirdly and lastly, on this page capital, outlook for CET1 ratio at 11.8% is above the Q1 level of 11.4%. This was achieved through disciplined capital management supported by return to Group profitability. So let me now look at the quarter in a bit more detail starting with our cost reduction efforts on slide six. As I said earlier, we have reduced total operating expenses by 8% year-over-year. This has been achieved by reducing both compensation and non-compensation expenses, respectively by 7% and 8%. We see these cost reductions as only a first wave in our restructuring, in parallel we have launched a broad process of front-to-back reengineering which will create over time a new operating platform for the bank that is more efficient, more effective, and more compliant. We also continue to leverage our lower cost operations in Poland and India. There we take advantage of the quality of the workforce in these locations and deploy technologies which drive increasing efficiency and automation. So we are on track to meet our net cost reduction target of CHF 1.4 billion for 2016 and operating cost base of CHF 19.8 billion or below by end of 2016. So reducing costs is a clear and absolute priority for us, but this is not being done at the expense of our growth ambitions in our chosen markets. That's what I would like to look at next. Our franchise in wealth management is a key competitive advantage for us. So let me take us back to a slide we used in October during our Investor Day when we were clear that what we aspired to capitalize on is both the large pool of wealth available in mature markets on the right here and the significant growth in assets underway in emerging economies. So what have we achieved, on the next slide. We are showing you here for sequential evolution between Q1 and Q2 of our assets under management, which ultimately largely drive our wealth management earnings. We have been able to grow our AuM. In mature markets, we have increased AuM by CHF 10 billion and in emerging markets, we have increased by CHF 15 billion sequentially. These results underline both the breadth and quality of our wealth management footprint across mature and emerging markets. So let us take a quick look at the asset flows underpinning this growth on page nine, slide nine. We are focusing here unique on our wealth management inflows, at the exclusion of the asset management inflows. We have achieved year-on-year a strong performance as we are up 60%. IWM, International Wealth Management stands out here with a substantial improvement. Thanks to the work of Iqbal and his team. Helman and his team in Asia have maintained their positive momentum attracting more than CHF 9 billion of new flows in a challenging environment. And Thomas and his team here in Switzerland have delivered a creditable performance with significant inflows in spite of the challenges of a negative interest rate environment. Margins at the bottom of the chart have increased year-on-year underpinning the healthy quality of this inflows as they went from 110 basis point to 118 basis point gross margins. So let us look now at our three geographic divisions in turn. I will start with Asia Pacific. The environment in H1 in Asia was significantly more challenging than in the same period last year. However, APAC division was able to attract CHF 5 billion of net new assets. These increase in assets represents an annualized growth rate of 13% and these are quality assets as evidenced by the 9 percentage point increase in gross margin on the right of the slide year-on-year. APAC delivered a solid adjusted return on capital of 16%, despite challenging markets and our continued investment in growth as we are taking the unique opportunity to recruit and have recruited 100 RMs over the past 12 months, but this is not the whole story as the next slide shows because we think it is worth looking at the quarterly dynamics in the region to put these Q2 results in perspective, we know that Q3 and Q4 last year showed significant market disruptions in Asia. That's what I was alluding to when I said about H1 in Asia have been exceptionally good. You can see about H2 was different. We can see here, how our teams have been able to create since then a strong positive momentum. This has contributed to allowing us to achieve our highest ever level of AuM at CHF 158 billion with a particularly strong performance among our ultra-high-net-worth clients. We have seen an increase in our loan penetration, which was much lower than in other regions supported by the growth of our integrated financing unit dedicated to serving entrepreneurs and ultra-high-net-worth client. Revenues from his group are up 28% year-over-year. Our integrated approach in Asia to client coverage between wealth management and investment banking is proving to be a successful model with our clients as evidenced by the continued momentum in the region. So let's move now from Asia to IWM. In International Wealth Management, our wealth management teams attracted net assets of CHF 5.4 billion. Our pipeline of net new lending of CHF 3.3 billion at attractive margins has supported net interest income growth of 20% versus the second quarter of 2015. We have also increased our recruitment activity with 80 RMs recruited in the first half of 2016, a good indication of the quality and attractiveness of our franchise. We are focused not just on growth but on quality growth and this is highlighted in our Q2 adjusted return on capital of 22% at the bottom of the slide. So focusing again on the pure wealth management flows, given the institutional nature of the asset management flows, you can see here, that during the first half of 2016. We have attracted on total net new assets of close to CHF 11 billion, CHF 10.8 billion exactly, and this represents a clear turnaround from the outflows experienced in both the first half of 2015 and the full year of 2015. Let's move now to our home market, Switzerland. We have achieved adjusted PTI of CHF 457 million. Our corresponding adjusted return on capital, on regulatory capital is at 15%, improving by 100 basis point year-over-year. Our cost income ratio improved by two percentage points from 2Q, 2015 to 65%. Net interest income remained stable year-over-year and we further increased mandate penetration an important metric for us to 28%, an increase of six percentage points over the past 12 months and a good source of income. So we are on track with our IPO plans, we have expected regulatory approval for the Swiss legal entity that we call LECH before year-end and the IPO in 2017, markets permitting. So after those three geographic divisions, APAC, IWM and the Swiss Universal Bank, please allow me to turn now to IBCM, Investment Banking and Capital Markets, where our franchise, we believe, performed well with the reported PTI of $141 million or adjusted $142 million. Jim and his team achieved market share gains with our clients with notable strength in our Americas franchise. Looking at the quarter in ECM, sequentially we were up 116% against the market up 50%. This was driven by our better share of IPOs with 12 IPOs executed in 2Q. In DCM, we were up 70%, sequentially against a market up 23%. We've increased deal flow for both financial sponsors and corporates. And our pipeline in Q3, we believe remains robust. Looking into a little more detail at advisory, H1 revenues presented here were up 30% compared to the prior period in 2015. And in addition, we have a number of market transactions in the pipeline on top of the deals already announced. So overall we believe a good quarter from IBCM. Let's move now to global markets on slide 15. Tim and his team have made real progress in implementing the accelerated restructuring announced in March. During the second quarter, we have completed the transfer to the SRU of certain assets and activities, and David will give you more details on this later. But for the purpose of the slide and to make comparisons easier, we are showing you global markets on a pre-transfer basis, so the same basis throughout the chart from quarter-to-quarter. So on this basis, we incurred the loss of CHF 649 million in the first quarter following a loss of CHF 819 million into Q4, 2015, ex the goodwill write-off we did in Q4, 2015. As you can see here, we recorded in Q2 a marginal loss of $23 million on the old GM basis. But this is clearly a material improvement over the previous quarters to the positive swing of profitability in a quarter of CHF 626 million. This is due to an improvement in revenues with significant sequential improvement in credit and securitized products and better equities results following the completion of our leverage exposure reduction initiative in prime services. Global market was able to achieve this improvement in revenue, whilst reducing risks significantly as described earlier. There was also material progress during the period on cost reduction with operating expenses in the division down 7% year-over-year in Q2. Having implemented all these changes, we can say that our global market business is now right-sized. Global market now has a simplified business model consuming less capital and with lower risk, which enables our teams to focus on serving our clients' needs for uncertain times, now that the rightsizing is complete. Finally, let's have a look at the SRU. Reducing legacy cost and capital in the SRU is key to a successful transformation of Credit Suisse. Consistent with the previous slides for global markets, we are showing you the progress made in the SRU on a pre-transfer basis, so before transfers from global markets. Our team has continued its track record of good execution by being able to reduce RWA since Q4, so over H1 by 18%. We see these reductions in the SRU RWA as a form of capital generation actually allowing us to grow RWA in our chosen markets. And David will come back to this in his section. So turning to slide 19. We were able to improve our capital position during the quarter with a look-through CET1 ratio of 11.8%. This was achieved for a combination of capital management and improved profitability. Going forward, our guidance remains unchanged and we aim to operate within a range of between 11% and 12% in 2016, making no provision for major litigation expense. So in summary, this has been a quarter of continued progress for Credit Suisse. We have continued to execute with discipline around cost reductions and de-risking. We have delivered profitable growth in APAC, IWM, and the Swiss Universal Bank, with a strong performance from IBCM and notable improvement in global markets. Lastly, our look-through CET1 ratio at 11.8% is above our Q1 level of 11.4%. This was achieved through disciplined capital management supported by returned to group profitability. I would now like to hand over to David, who will give you more detailed on the financials of our group and the divisions. Thank you.
David R. Mathers:

Thank you, Tidjane. Good morning. I'd very much like to thank you all for joining our second quarter earnings call. So I will start, please on slide 22, the summary of our financial results for the second quarter. We show here the group numbers on both reported and in adjusted basis and, to be clear our adjusted results are prepared under exactly the same definition that we have used in previous quarters. And as usual, we provide a full reconciliation of our numbers for the group and for each of the divisions in the appendix. That said, as you can see on this slide, the any point of irrelevance in the second quarter is for restructuring, we've adjusted for CHF 91 million of charges. Throughout the rest of this presentation, our focus is entirely on our adjusted results, as we believe these more accurately reflect the operating performance of our businesses. The other point, I'd like tonight is report our financials in line with the management structure announce for the Global Markets Accelerated Restructuring on March, the 23rd of this year. We've reclassified our historic financial information both in the 2Q16 financial report and the time series that we publish on the Credit Suisse website to reflect this revised reporting. I will now go into some further detail around these changes in a few moments. If you look at the results of the second quarter, we achieved an adjusted group pre-tax income of CHF 290 million on CHF 5.1 billion of revenues. All five that core businesses were profitable in the second quarter and we further reduced the pre-tax drag from strategic resolution unit, reported net income attributable to shareholders, CHF 170 million in the second quarter. Let's turn to slide 23 to review our group capital and leverage. As you can see from the chart, in the second quarter we increased our CET1 capital by approximately CHF 200 million and with the end of the quarter with a CET1 balance of CHF 32 billion. This growth is largely attributable to our reported pre-tax profit in the quarter as well as a positive benefit from CET1 relevant taxes and from favorable FX movements in the period. This increase was partly offset by the capital utilized for our cash dividend accrual and for deliveries of share-based compensation to our employees during the quarter. Furthermore, in additions to the growth in CET1 capital, we've also reduced risk-weighted assets by CHF 9 billion in the second quarter. This was driven by approximately CHF 13 billion of business reductions offset partly by FX and adverse methodology impacts of CHF 4 billion. Of the business reductions, largest component is from the SRU were released about CHF 9 billion in the quarter, reduced to further CHF 7 billion RWA from global markets. I just note these are net of the FX and methodology impacts which I mentioned before. I'd also point out the consistent of our strategy, we increased the amount of capital deployed to our growth divisions particularly Asia Pacific and International Wealth Management by about CHF 4 billion net in the quarter. This quarter reduction risk-weighted assets, coupled with the growth in CET1 capital improve the look-through CET1 ratio to 11.8%, up from 11.4% at the end of the first quarter. We reiterate the guidance that we gave in the first quarter. That is, we intend to operate the look-through CET1 ratio of between 11% and 12% during 2016, subject to any major litigation items. If you look at leverage, our overall exposure was marginally lower quarter-on-quarter with a significant reduction in the SRU and through a lesser extent in global markets, mostly offset by FX impacts and some increases in our growth businesses, again particularly in IWM and APAC. In terms of our ratios, our current look-through Swiss leverage ratio was 5.1% at the end of the quarter. That means we are currently ahead of the new 2020 TBTF requirement of 5.0%. Our look-through CET1 ratio was 3.3% at the end of the quarter and that remains 20 basis points below the new 2020 TBF requirements of 3.5%. Let's now turn to the cost program on slide 24. On slide 24, we show the progression of our adjusted quarterly operating expenses year-on-year. As you can see in both the first and the second quarter, we're operating well below 2015 quarterly expense levels. We're also operating below the quarterly average run rate of CHF 4.95 billion that is required to reach our target of CHF 19.8 billion for full year 2016. If we look at the progress that we've made so far this year, as we summarize three months ago the primary reduction in the first quarter came from lower deferred compensation costs. In the first quarter, we saw a significant decline of CHF 318 million in deferred compensation expenses compared to the first quarter of 2015. That was driven first, by a decision to lower deferral rates at the end of last year, and second, by certain stock price plans where the expense is reduced due to the negative stock price moves that we suffered in the first quarter. If we look to the second quarter, we begin to see the benefit of the cost measures that were introduced across the bank. Reduced deferred compensation was still helpful, but a lower level reflecting both the timing of expense recognition and the most stable stock price during the quarter. And the benefit was around CHF 170 million in the second quarter of 2016 compared the same period a year ago. However, in the second quarter, we also saw momentum in the benefit of a chain from reduction, a number of contractors and consultants we employ. Our professional service fees are down by CHF 58 million when we compare the second quarter of 2016 to the average quarterly rate last year. This has driven the overall reduction and adjusted non-comp expenses, which are down around CHF 125 billion in second quarter, again compare to the second quarter last year. I think looking forward to the second half of this year, I think it's clear that we are on track to be at or below that target cost base of CHF 19.8 billion for the full year, 2016. First, we will continue to the benefit from the reduction deferred compensation expenses in the second half this year. Second, we will see continued savings and reductions in contractors and consultants bringing down our professional services fees within our non-compensation line. And third, the reductions in our permanent staff head count will begin to feed through our salary cost in the second half this year, as these individuals roll off our head count. Now before we move to detailed divisional results, I would like to remind you the changes, which followed from the Global Markets Accelerated Restructuring announcement, which we outlined on March 23rd and which are now reflected in our reporting. As you may recall, the primary component of this was the move to certain assets out of global markets into other business areas, primarily the SRU. During the second quarter, we completed the transfer of a number of business to the SRU, including the distressed credit, European securitized products trading and a further downsizing of our derivatives portfolio. Furthermore, we have integrated the global markets FX businesses into our existing FX sales and trading businesses here in Switzerland. And these are reported under the Swiss Universal Bank and IWM divisions. Finally, we completed a detailed realignment of our funding costs. To each divisions, net stable funding relations, NSFR requirements, again now reflecting these asset moves. In the appendix, we include an overall, some of the changes as well as divisional impacts of these transfers. So I will now discuss each division's performance on this basis, starting with the Swiss Universal Bank on slide 25. Now I would remind you, we will focus on adjusted numbers as we go through each of these pages. For the second quarter, the Swiss Universal Bank delivered an increased pre-tax profit of CHF 457 million. Now, as we compare to the second quarter of last year, I would like to remind you in July of 2015, we deconsolidated a 50% interest in Swisscard. Now to be clear, as you know, we continue to have the same economic interest in Swisscard. However, the income is no longer reported above the line within our pre-tax result. Excluding the impact from the deconsolidation of Swisscard last year, adjusted pre-tax profit improved by 6% year-on-year, that is continuing on the base of excluding the Swisscard deconsolidation. Year-on-year, our revenues have seen some reduction in client activity compared to the high levels that we saw in 2015 following the SNB action back in January of that year. But this has been partly offset by an increase in recurring revenues following the success of Credit Suisse invest. Operating expenses declined by 3% year-on-year, despite the investments, we've made in advertising platform and digital enhancements as well as for certain regulatory projects. And overall the division reported return on capital of 15% in the second quarter, up from 14% in the second quarter of 2015. Within the Swiss Universal Bank, the wealth management businesses delivered a pre-tax income of CHF 254 million for the quarter, an increase of 15% year-on-year. The mandates penetration further improve to 28%, significantly ahead of 22% level last year. The wealth management businesses saw further net new asset inflows of CHF 0.9 billion in the quarter with a gross margin stable at 140 basis points. Returned to the corporate and institutional banking business, we delivered a pre-tax profit of CHF 203 million in the second quarter, slightly down from the prior year. I have met the credit provisions remain at very low levels and that reflects the quality of our loan portfolio in this business, as well as the continued strength of the Swiss economy. We saw a continued momentum in our investment banking interest here in Switzerland, the strong increase in fees compared to the first quarter of 2016. Credit Suisse was actually named by Euromoney as the best investment bank in Switzerland for the fifth consecutive year. With that I'd like to move to International Wealth Management on slide 26. IWM continue to deliver a resilient performance amid a challenging environment, the pre-tax income sort of CHF 260 million the quarter, down 4% year-on-year, an equivalent to a strong return on capital of 22%. Looking the results in more detail, year-on-year, the wealth management revenues resilient at CHF 811 reflecting higher net interest income but lower fee based revenues due to subdue transaction environment, net interest income increased by 21% year-on-year reflecting higher loan volumes and higher margins. We also grew our loan book to CHF 43 billion, with net new lending of CHF 3.3 billion in the second quarter of 2016. However, as we noted before, transaction and performance-based revenues were down 16% year-on-year reflecting lower brokerage and FX revenues. Recurring revenues were stable from the first quarter with a recurring gross margin at between 37 and 39 basis points, now over the last six quarters. And this stability has been achieved due to high mandates penetration reflecting the success of Credit Suisse Invest and more resilient investment product fees. This successfully offset the adverse impact from asset regularization effects and from the shifting in our client focus towards the ultra-high-net-worth segment. Within IWM, wealth management achieved strong net new asset inflows of CHF 5.4 billion, that brings the total to CHF 10.8 billion for the first half this year, and that CHF 10.8 billion inflows corresponds to an annualized growth rate of 7% and it clearly represents I think a successful turnaround compared to the net outflows that we suffered in the first half in the full year of 2015. This CHF 10.8 billion of inflows during the first half this year was recorded across emerging markets and Europe with annualized growth rates of 9% and 8%, respectively, and the gross margin improved to a 110 basis points, up slightly from 108 basis points in the same second quarter last year. Just concluding with asset management, revenues were broadly stable year-on-year and in light of our strategy to grow recurring revenues, we saw an increase in management fees with the revenue margin slightly ahead of last year. Outside of management fees, an increase in performance and placement fees was offset by lower investment and partnership income. With that, I'll turn to Asia Pacific on slide 27. Despite a difficult market environment, Asia Pacific delivered a resilient performance in the second quarter, a return on capital of 16%. Division saw a significant year-on-year revenue growth in our wealth management interest supported by the investments in the franchise and the continued focus on ultra-high-net-worth and entrepreneur clients. Reflecting in the investments that we made in this business, our Asian operating expenses increased by 5% year-on-year and this increase included relationship management hires as well as investments in IT infrastructure and controls to support business growth. With Asia Pacific, the wealth management business delivered strong quarterly revenues of CHF 337 million. We continue to invest. We've added over 100 relationship managers to our footprint over the course of the last year. We've seen strong net new asset generation of CHF 9.3 billion in the first half this year, which equates to an annualized growth rate in first half of 14%. We ended the quarter with record assets under management of CHF158 billion with a gross margin that was stable at 87 basis points. Within the investment banking business in Asia Pacific, we saw a strong demand financing and advisory services from our ultra-high-net-worth and entrepreneur clients in the second quarter. We have significantly increased our share wallet with revenues up by 16% year-on-year across the underwriting and advisory businesses and that compares to street which was down by 23% over that period, which I think demonstrate the success of the integrated model, which we operate within Asia Pacific. In equities, we saw a year-on-year decline in revenues unsurprising given the challenging market environment. However, as we note in our financial report. The weakness in equity this quarter was partly offset by the positive impact, the recalibration of our valuation model for certain hybrid notes. Let's turn to Investment Banking and Capital Markets on slide 28. IBCM returned to profitability in the second quarter. The pre-tax income of $132 million compared to a pre-tax loss of $32 million last quarter. Our performance in the quarter was driven by rebound in capital markets issuance activity and by increase market shares which was in turn driven by a number of recent senior hires that we've completed particularly in the Americas. Look at the quarter, we delivered a strong revenue performance in equity and debt underwriting business, which outperform the market quarter-on-quarter. As Tidjane mentioned, equity underwriting revenues $97 million was up by 116% quarter-on-quarter, more than double the level the mark increase in the period. Debt underwriting revenues of $311 million increased by 70% quarter-on-quarter and that compares to a mark increase of only 23%. In advisory, revenues were down by 20% at $183 million, but I would note the strength of the numbers in this business in the first quarter. I think these risk quarter's results demonstrate the continued progress is being made in executing IBCM's divisional strategy. We've made significant progress in our recruitment efforts, particularly in America's and this has help to drive wallet share gains in all of our key products leading to the top-five rank in each of M&A, ECM, and Americas leveraged finance in the first half of the year. We've made progress in our targeted client segments, improving our share of investment grade corporates and with financial sponsors. And this has been particularly beneficial as non-investment grade market activity rebounded after a week first quarter. I'd also underline in addition to the improvements in market shares, the IBCM division has continued to be very disciplined around operating expenses, which has helped to drive the return to profitability in the second quarter. Total operating expenses of CHF 426 million decreased by 6% year on year primarily driven by lower compensation expenses. Now turn to global markets, please on slide 29. In global markets, we've already made significant progress implementing the measures we announced on March 23 to reduced costs and risks, as well as the amount of capital employed by the business. Global markets now operates under three franchises, equities, credit and solutions. The latter comprises our equity and fixed income derivative capabilities, emerging markets and global macro products. The result of this reorganization helped by more favorable market conditions was evident in the second quarter. With a division reporting a pre-tax profit of $208 million compared to a loss of $98 million in the first quarter. The stabilization of our results demonstrates the significant progress we've made to right size the business and reduced risk exposure. As this progress and profitability has been achieved while simultaneously reducing the expected quarterly pre-tax loss by 50% in an adverse stressed scenario. Compared to the last quarter, we saw a significant improvement in revenue and profitability as client activity rebounded, particularly in equity and leveraged finance underwriting. The equities business delivered stable revenues of $550 million in the second quarter with an improvement in prime service results compared to the first quarter of the year from the completion, end of last year of our leverage reduction initiative. Equity underwriting revenues also increased, reflecting an improved issuance activity compared to the first quarter. Revenue from trading was up slightly quarter-on-quarter as the pickup in activity surrounding the Brexit vote offset previously lower trading volumes across EMEA. The credit franchise posted revenues of $758 million, significantly up quarter-on-quarter. This reflected stronger credit markets, higher client activity and a better performance in both our leveraged finance trading and underwriting, as well as in the non-agency RMBS business within the securitized products franchise. In Solutions, second-quarter revenues of $423 million increased by 23% and after a muted first quarter, the revenues in emerging markets improved significantly, particularly in Brazil. We also saw improved performance in our equity derivatives business across both corporate derivatives and convertibles. I'll now turn to the Strategic Resolution Unit on slide 30. We made significant progress executing our strategy for the SRU in the second quarter, significantly reducing both capital employed and the drag on the Group's pre-tax income. The second quarter loss of $757 million is a reduction of $424 million compared to the first quarter. And this improvement reflects the combination of lower revenue losses and a reduction in operating expenses by roughly $100 million, or 19% quarter-on-quarter. To put that in context, that means that the operating expenses were $945 million in the first half of this year which compares to $2.7 billion in the full year of 2015, and a significant part of that expense reduction has being due to the transition out of US private banking business, now largely completed. Capital reductions were achieved across a wide range of transactions. Risk weighted assets, excluding operational risk, was down by 18% and leverage exposure was down by 12% quarter-on-quarter. Key transactions, including the purchase and sale agreement of the entire CDS portfolio and the exit and restructuring of the majority of the cash credit assets. The sale of our CDS portfolio resulted in a $5 billion reduction in leverage exposure in the second quarter and we also saw reductions in the quarter in our derivatives business in the form of novations, restructuring and early terminations. In aggregate, we achieved these reductions at an exit cost of around 1% risk weighted assets which remains lower than our long-term guidance to be at 2% to 5% of RWA. We will provide further details on the glide path for the enlarged SRU during our Investor Day in the fourth quarter. However, we clearly intend to further reduce our leverage exposure in RWA excluding operational risk by approximately 70% over the next three years. And we also intend to drive significant reductions in the funding and the operating costs of the SRU over the same period. With that, this concludes the results proportion of today's presentation. And I'd like to pass back to Tidjane. Thank you.
Tidjane Thiam:

Thank you, David. Before we take your questions in a minute, let me wrap up on the quarter and provide an outlook for Q3. This quarter, Credit Suisse has continued to execute with discipline, reducing both costs and risks. Our client franchises across APAC, IWM and SUB delivered a strong quarter with combined PTI of more than CHF 900 million, and strong inflows of assets at stable gross margins. Our advisory and underwriting groups in IBCM stayed close to our clients during the quarter, gaining market share in our key product areas and the division returned to profitability in Q2. Global markets saw a significant improvement as we completed our restructuring in terms of rightsizing and risk reduction. The division is now able to continue to focus on serving its clients. Finally, on capital, we have improved our look-through CET1 capital ratio to 11.8%, an increase of 40 basis point over the quarter. Regarding Q3, we'll remain cautious in our outlook notwithstanding the healthy client dialogue we're having across wealth management and investment banking. Market activity will continue to be heavily influenced by geopolitical and macroeconomic uncertainties with the fallout over UK referendum, the US election and other international developments. In this uncertain context, we believe we are on the right path and we will continue to execute our transformation program with discipline. With that, we look forward to your questions.
Operator:

Our first question today comes from the line of Daniele Brupbacher from UBS. Please go ahead.
Daniele Brupbacher:

Yeah. Good morning and thank you. I had three, a lot smaller questions on the IWM business first. And I think flows again surprised positively and I think particularly, bearing in mind, some of the tax amnesties, regularization efforts happening in LATAM. Can you just talk about what the impact of these legalization efforts were in the first half probably this year and why you are still able to generate the CHF 5 billion plus net new money level in terms of net new money, that that would be helpful? And then just on cost, David, you talked through slide 24, that was very clear in terms of what will happen also in the second quarter in terms of additional benefits, but I still struggle to get my arms around the cost items that actually probably are going to go up in the second quarter because the average remaining run rate will be around CHF 5 billion that is just to get to around CHF 19.8 billion level and, for example, if I look at professional services expenses, those are actually up 12% to CHF 1.5 billion in the first half, so do you expect to see a steep decrease there in the second half or what really drives all that, that would be helpful as well. And just very briefly on pension fund accounting impact in this quarter, it was about a bit of a topic for some of your peers and I understand that under US GAAP, you would probably do these changes only at year-end. Could you just talk us through the risk of a potential adjustment there towards the yearend, if interested rates stay where they are, that would be helpful, too? Thank you.
Tidjane Thiam:

Okay. Good morning, Daniele and thank you. Thank you for your questions. Let me take the first one, David will come back on cost and we probably do a double act on the pension fund. On IWM and thank you for noting the performance. I have to say, it's been a continuous bread spot in the history. We had high hopes when we created the division and appointed Iqbal to lead it. A number of factors explain what's going on there. The first one, you hit the nail on the head talking about regularization, okay? That is, it's a removal of a big negative. What you're seeing there is less of positive dynamic when the removal of the negative. I think we will give you the number, regularizations were about CHF 1 billion in outflows in Q2, okay? And the guidance, we gave for the full year is CHF 5 billion. So that gives you a sense. So we are slightly before, so it's slightly below the year, the average driven we gave to respect for the year, but on the positive side, there is really a lot of new factors there. First of all, the division is getting the capital it needs. If you remember, when we raise capital, we put a lot of emphasis on the fact that in wealth management, you need capital to grow because I think all our peers have emphasized the importance of lending in that business, it is real. It's controlled lending with careful risk analysis that is lending to people we know extremely well and with whom we have a long-standing relationships. So it's really getting the capital we need. It's also recruiting. We talk about the recruiting in RMs which has been rejuvenated and I spoke at the convention. You can feel the enthusiasm there in cross regions. It's not just in the Continental Europe. It's in the Middle East. It's in Eastern Europe. So there is new management. There is a financing, and results of the approach to the business which is much more, I would say, bottom line focus quite frankly with things like mandate penetration being pushed very systematically and contributing to the bottom line, the number of landmark deals. We have also strengthened our teams who are able to structure, really smart what we call marquee transactions, whether it's in aviation or Europe or shipping or long [broad] lending. We're doing I think smarter things, frankly a degree of cost-cutting too. There is an exclusive effort to cull the RM and step up the quality and improved the productivity and a lot of client time. I mean, last Saturday, I was with Iqbal all day in front of clients and a lot of client time given the type of clients we have. So if you put all that together, it's positive. And on LATAM just to finish, on LATAM, it's a combination. There is regularization going on effectively. That's including the CHF 1 billion of outflow I mentioned earlier. But don't forget that we also have new hires. You've seen what we done in Mexico which has been public. So there is also an upside there and we believe a good growth potential. So sorry for long answer, but we actually believe that the turnaround in IWM is real that Iqbal is covering a broad range of market which are attractive from Eastern Europe to the Middle East to Continental Europe to Latin America. That's a very broad field where there are many, many opportunities to drives, flows up and margins, but we went up. I'll stop and let David talk about the cost.
David R. Mathers:

I mean, it's the second way that in terms of the costs and the run rate, so I think we – thank you, Daniele, for your comments. We did feel that it's important to actually layout the steps in the evolution of the cost program. I think we are very clear in the first quarter that we've seen a significant reduction in our costs primarily driven by deferred compensation and partly reflected decisions we made last year in terms of the reduction. Deferral rate than essentially clearly the impact which we outlined three months ago. In terms of the benefit, you see from certain stock prices of a lower stock price. So, that was a very special effect in first quarter and we wanted to very clear about it. Clearly, if we look at the second quarter. That's when you start to see the real benefits from the underlying measures that we're taking across the bank to reduce their expenses. Now, unsurprisingly, that comes through first in terms of the reduction in the large contractor consultant population we have. We talked about that last October and again in March. And you may recall, for example, the London program, where that's been a core thrust of what we've actually done there. In fact, we've reduced the head count number in London from 9,265 people 28,000 primarily to reductions in contract and consultants. That's a core component of that and that's what you're seeing coming through now in terms of non-compensation expenses. Your point about professional service fees, as I said, they are down CHF 58 million against the average rate last year. But that's because they actually went up in the second half this year, reflecting the buildup, the legal entity program and also a number the other regulatory programs, so clearly that's why it's the comparison to the average that matters and that's the drop. And if you look at the overall non-comp costs, they drop from CHF 1.848 billion to CHF 1.76 billion between the first quarter and the second quarter. I think in terms of second half and I think we have a target CHF 19.8 billion, I think, we are very clear that we intend to be at or below that target in the second half. What we will see in the second half is the continued benefits from the differed account measures. The continued benefit from the reductions in contracts and consultants, but we will also begin to see the benefit from the reductions in permanent head count which clearly comes through last in terms of the orderlies things. And I think that's all I have said at this point, but clearly I think looking confident on the CHF 19.8 billion, I think that's very important for our investors in terms of the outlook for this year reducing the breakeven point with the bank, reallocating the results in the bank is core part of the strategy. So that's probably what I would say on costs at this point.
Daniele Brupbacher:

Can I – just a quick follow-up?
David R. Mathers:

Yeah.
Daniele Brupbacher:

I mean that's extremely useful and transparent. Can you just give us a few examples of cost buckets, which are probably going to go up in the second half because otherwise it's a struggle to get to CHF 19.8 billion, if I bear in mind the benefits, which should come through?
Tidjane Thiam:

That I think would be drawn, I think we've done a good job so far this year. The differed comp reduction of stock price was a particular benefit in the first quarter. I don't think I want to get specific on the second half. I would say, I think if you look at the numbers, and I think you can see why we have some confidence of being at or below the CHF 19.8 billion but I'm not sure I get drawn into buckets at that point.
Daniele Brupbacher:

Okay, great. Thanks.
Tidjane Thiam:

And I would remind you, we actually did give longer-term targets back on the 23rd of March, in terms of where we expect to be over the next two years, which applies further reductions from that.
David R. Mathers:

Yeah. So I think on the pension fund, you are exactly correct. IFRS which is much most of the European Banks report under has a different approach than US GAAP. US GAAP requires us to be measure the pension fund at the end of each year. And it will reflect clearly the discount rate, but also other factors in the second half of this year that is the performance of the assets as well as a whole collection of accrual assumptions which you have to update in the second half this year. We will be looking a number of measures as well around the starting of the pension fund in conjunction the Board of Trustees, the pension fund and that we need to reflect that in the valuation of what we do at the end of year. I don't think I will be able to, can add much more to that point because it is something that has to be done at year-end.
Daniele Brupbacher:

Okay.
Tidjane Thiam:

Okay?
Daniele Brupbacher:

Thanks very much.
Tidjane Thiam:

All right. Thank you. Thank you, Daniele.
Daniele Brupbacher:

Thank you.
Tidjane Thiam:

Next question?
Operator:

Thank you. Our next question comes from the line of Andrew Coombs from Citi.
Andrew P. Coombs:

Good morning. Two questions from me please, one on gross margins and the second on RWA reduction. And firstly in terms of the gross margin, do you have seen a two basis points decline Q-on-Q in the sub private banking operations in eight basis points declined in Q-on-Q in International Wealth Management private banking. It looks like the NII has declined at both on a quarterly basis and also transaction to declined IWM. But I'd be grateful if you could give a bit more on the outlook particularly on the net interest income side both of those divisions there and what that might mean for the gross margin going forward? And my second question on the RWA rundown, an impressive result during the second quarter. When I look at the global markets division on the new reporting basis, are you seeing a reduction from CHF 59 billion to CHF 52 billion? Should we now that stabilizes or do you envisage further reductions within global markets on the restated basis or is it case of all of the RWA reduction going forward is likely to come from the SRU unit? And with that in mind given the Brexit vote, given only uncertainty we've seen, do you expect the pace to slow from here? Are you seeing any headwinds to disposing of those assets? Thank you.
David R. Mathers:

So, first I'd like to talk on the gross margin point first. I think the slide you are referring to, just to benefit the other listeners, is actually slide 35, in the appendix where we actually give the gross net margin and other key facts for the Swiss Universal Bank, IWM and for APAC. And as you say, essentially that show that the gross margin dropped for the Swiss Universal Bank from CHF 142 billion to CHF 140 billion. I would obviously point out that, that also compares to CHF 134 billion a year ago, which reflects the increase in net interest income. And for IWM, if you read across the line, the gross margin was 110 basis points, that compares to 108 a year ago and down from 119, just to confirm the numbers. I think there're two factors there. Firstly, I think as I warned, I think the transaction activity in the first half and in the second quarter was lower than a year ago and that if you'd remember obviously, as you know that back in January last year the Swiss National Bank lifted the cap on the Swiss Franc and we saw a substantial increase in the amount of hedging activity around our FX businesses at that time. So that was very helpful transactions. It also draw brokerage and what we've seen a resumption to more normal markets. I mean, so clearly I'd say some depression in those markets given what we see in the six months. So it's been a challenging transaction environment. We obvious have been pushing therefore in terms of drawing the recurring stream and you may recall over the last couple of years we talked about Credit Suisse Invest, the success of that to be a very evident in both divisions in terms of high penetrations. It's clearly reached targets which were beyond our expectations. I think in terms of the net interest income item line, it's clearly up from a year ago, reflecting the measures we've given with outline before, also the expansion in the net lending activities we've done which is being at good margins. In terms of the drop first quarter to the second quarter, we have seen a runoff of certain central positions, we had in treasury which were benefiting those numbers in the first quarter. I'd expect that to be broadly stable going forward particularly as we're going to continue to obviously expand our lending interest across our wealth management activities.
Tidjane Thiam:

I think that's correct. So I'll take the RWA and global markets. As you know, Andrew, a number of things that have driven the dropping of RWA. First one is really of the sale of inventory or old assets that we had before disposal of the distressed credit, the reduction of a private label which have been quite material, more syndication in emerging market and also the sale of a few non-strategic assets. So, all that together has made a big contribution. There is also hedging and insurance. You saw up risk insurance which has played a role in this, and finally some market phenomena just because some of the demand was deferred due to Brexit's on decisions. Some deals didn't happen. So all that together takes you significantly below the target, which I must say is a nice point to have, because it's a bit of new situation for us. So we have now to answer this question of, okay, what do we do next? And it goes to a way we run the bank which we are very much care about. Yesterday, we just set our capital allocation committee and really the way we run the capital now in the bank is really as a whole. And we're trying to position the best outcome from our bank. Having around the table, Jim and IBCM team in global market, but also Helman and Iqbal and all the division heads and Thomas, and really optimizing the total, that's allocation for the bank. So the short answer to what's going to happen is we didn't outflow to reload. If you didn't go into SRU, it couldn't be correct to just turn around and reload it magically. So that's not the idea we think that is good to have headroom, it's good to arrive below the target. The target remains what it is and we will operate with that range. It allows us to be tactical in markets that are quite volatile and to pick really, really, very good opportunities and that's a position you want to be and so passing of business because you don't have enough capitals. So I think that range between, let's say 52, 53 and 60, is where we will operate and act tactically. Yeah?
Andrew P. Coombs:

That's very clear, and on the one of RWA and SRU, is the pace of that going forward?
Tidjane Thiam:

David?
David R. Mathers:

I think, I mean, we are obviously pleased by the progress we made so far and on a post restated basis, that's a CHF 15 billion reductions in the first and the second quarter and that's obviously been accomplished in what we're not easy markets to actually take the sale and at a cost, as a I said, which is being typically around the, sort of, 1% level, which has been less than guidance. I think, if we look to second half. We will obviously continue to look to make significant progress in that. I would caution a little bit that we are focusing more-and-more now on the derivatives portfolio. Hence the bulk sale last quarter, so that does tend to be a sort of slow progress in terms of that but nonetheless, I'd be surprised, if we don't make further significant progress in the balance of the year.
Andrew P. Coombs:

Okay, well, thank you.
David R. Mathers:

All right. Thank you.
Tidjane Thiam:

Thank you, Andrew.
Operator:

Thank you. Your next question comes from the line of Al Alevizakos from HSBC. Please go ahead.
Alevizos Alevizakos:

Hi. Good morning. Thank you for taking my questions. Okay, so now we are on the CET1 capital ratio of 11.8% and still the target remains between 11% and 12% through the year-end. And at the same time, you still always kind of warn about the litigation timelines. Even though, now, we're reaching the end of the year and I suppose the main case is still the US RMBS, which is unlikely to be dealt with, I think on-field at the end of the year and I would like a comment from you on that one. Then second question is regarding the restructuring expenses, the restructuring expenses this quarter were significantly lower compared to what we expected and I just wanted to know whether you reiterate the target of CHF 1 billion through the end of the year for 2016. And then the third question is on operational risk, which was marginally down and unlike some of your peers, I just wonder do you see any kind of inflation coming in through the year-end because of the market database? Thanks very much.
Tidjane Thiam:

Okay. Thank you. Thank you, Al, an important point. Under CET1, first thing I would say is we are pleased that it went up because I think everybody will agree but these were very, very difficult markets, so it was, I think, a good control in terms of capital management. We tend to be cautious. So we like the 11% to 12% guidance. We like to be towards the top of the range, but these are unpredictable markets and frankly we don't want to be led to economically valued destructive decisions because we have given an appropriate guidance on CET1. So in the trade-off between economic value and CET1, we like to keep up that flexibility, I think that was a good management. Now in RMBS, you know that we don't comment publicly on maters with the department of justice, so as tempting as it is, I will be referring from any further comment but for guidance we say is X major litigation expenses and we've been consistent in giving that guidance. Then restructuring expenses, David, do you want to take that?
David R. Mathers:

Yes. So I think the numbers were actually on page 22 of the slide deck, so you can see during the first quarter was CHF 255 million and the second quarter is CHF 91 million. And couple of points tonight, in the first quarter we actually took a significant restructuring expense relating to the exit from one of the buildings in Canary Wharf and that was part of the resizing of London. I think we're very pleased to have that done into building which we don't for number of years on and it's part of that cost reduction program. And I don't want to give too many details, but somewhere in just sort of CHF 60 million to CHF 70 million was in respect of all that exit costs. So I think if you look at the first quarter, then you're probably taking something like 190 X that type real estate provision. If you look at the second quarter, the CHF 91 million is actually net of the release version is about CHF 31 million. So net value will be about...
Tidjane Thiam:

That is about 120...
David R. Mathers:

It will be about 120. So I think like-on-like essentially, there clearly is a reduction restructuring spend in the second quarter against the first quarter. But there are two large contra items there which might help you to understand the trend more clearly. I think we would expect further significant restructuring costs in the second half. It's clearly core to our cost program, and I would say the guidance we've given before was probably on the conservative side in terms of this, but I don't think I want to get drawn in much more detail beyond it. But I think in the first half was the first half probably not a bad guidance, but I think that's as far as I'd get at this point.
Tidjane Thiam:

I think that's fair. Op risk, do you want to talk on the region we have here in Switzerland, well it's quite different from others?
David R. Mathers:

So I think, the three points really. Firstly, if you go back a couple of years, we actually did include not for its buffer and I think we talked about that at the time, and that basically precise to significant revision of outrage model including the data upgrade, which I think some of the other European financial institutions have now been reflecting. So the outrage charges already has reflected that data at this point, and I wouldn't expect to see any further significant changes under the current regime in the balance of this year. I think as you know, if you look towards the various measures, we tend to be called [Basel] IV there is a number of approaches in the op risk around that, but not in relation to I think what you seeing from the Europe institutions so far.
Alevizos Alevizakos:

Okay. And then follow-up, if I may, on the CET1 capital. I remember during the acceleration of the plan back in March that you mentioned that in theory you could put the lever on the capital of additional CHF 1 billion of disposals if needed to keep the Core Tier 1 capital ratio above 11% in the short-term. I can assume that right now this one be needed. Is that right?
Tidjane Thiam:

Well, we maintain that guidance. You're correct, we did mention that. Some of it has been done and we have work under way to continue to pull those levers. That it's – we maintain that guidance.
Alevizos Alevizakos:

Okay. Thank you very much.
Tidjane Thiam:

Thank you.
Operator:

Thank you. Your next question comes from the line of Kinner Lakhani from Deutsche Bank. Please go ahead, sir.
Kinner Lakhani:

Yes, good morning. So three questions. Firstly, on APAC, the net margin seems to come down quite a lot, 9 basis points Q-on-Q, 7 year-on-year to 23 basis points. I think study feels like the normal. We also saw some cost pressures at the investment bank in APAC. So if we think about kind of Q2, we're basically running at 10% of the annual CHF 2.1 billion target that you set out. I guess my question is growth coming at too heavier price in terms of profitability, how are you looking at this? Secondly, just to check on global markets, now that we've got the restatement, are you still sticking to your cost guidance of CHF 5.4 billion that you provided previously? And I know Tidjane suggested to my question last quarter revenue guidance of CHF 6.5 billion to CHF 7.5 million. I just want to see, if those numbers are reset? And then just coming back to the kind of regularization team, just wanted to take a more kind of forward-looking approach. Obviously, Switzerland is going into automatic exchange of information from the beginning of next year, as well as the ongoing kind of...
Tidjane Thiam:

Sorry, can I stop you? I missed the beginning of your comment. Could you please repeat it? Sorry, apologies.
Kinner Lakhani:

On third one, yeah, it's on the regularization. Switzerland is going into automatic exchange of information from the beginning of next year. And I just wanted to get a sense for how are you thinking about this, how it impacts your model? And if there are any kind of unintended consequences of this in terms of impact on business?
Tidjane Thiam:

Okay, no, thank you. There's is an important point. I will take the first one on the APAC. And I think you described it very well. That's for judgment, we have to make. At what pace do we recruit versus when the profitability comes? You are correct, in the decrease in the net margin and it's frankly almost all of it is a function of recruiting. We've been recruiting very heavily. We set 100 RMs but the point in Asia, which is different from IWM, which is why is good to discuss this separately, is that there is a window of opportunity. There really is a market, a unique market opportunity and we had to make a call. A lot of excellent resources whom we've competed against for a long time and who we know very well have become available in the last six months. So judgment we have to make was whether to secure them at a cost to a net margin or not. So clearly the judgment we have made is to go for them, I mean we have such a belief medium term in the potential in the region that we feel that's a right management decision. Now, of course, we have to make that work. We have one of – we have recruited someone who rejoined us, who leads this financing unit and a bit like IWM are doing really some very, very good work in terms of thinking about how to develop our loan portfolio in Asia, that's very promising. I said that the revenue was up 28% year-on-year in that segment. That's a huge potential uplift. And really on cost, we are also implementing efficiency measures, which will come with a lag because what happens that will come in first, we will take the cost of that and some of the efficiency will come later. So I don't think there's anything to be alarmed by there, what these numbers reflect is the investment we are making for the future of region. But it gives us in a very, very good place we believe. We have excellent RM force and give a guidance so I can give you is when you run on a distribution group you do tend to do your recruiting in Q4, Q1, because you take the cost and when you get the benefits over more quarters. So it's kind of smart to do. It's the way we've done it. It is just practical management because the benefit will last for nine months or six months relevant, back loading you're recruiting towards the end of the year or you get the negative and operative goes into the following year. So it's also tactical. Global markets, yes, we maintained the CHF 5.4 billion guidance and we went on track on that. We've made really good progress. We said cost down 7%. I mean you can do the math and see where that takes you at a good level. But we maintain the guidance and just a lot of work underway in global markets to hit that target. I am highly confident that we'll hit it and in terms of revenue, yes, the guidance is not the same we gave the kind of seven is the top of the range and, yeah, it's all correct.
David R. Mathers:

I think just on third point in terms of the automatic exchange of information. I think that for several years now we've had a very active tax regularization program, primarily in EU countries, which is where ones which will actually be signed up under the automatic exchange of information first next year. That regularization program within EU countries is more or less now at end. Of the CHF 2 billion of regularization we've seen in the first half of this year, only a small sub component was actually relating to the tax amnesty in Italy which has now come to an end as well. So I think we've been preparing for the automatic exchange information after some years and our business models will be in line to that. And I think in many ways if you look at that 8% growth in net new assets within RWA and the European business, you can see that some of the benefits of a more stable environment now we've actually gone through that regularization phase.
Tidjane Thiam:

Well, I think that's correct. Our strategy has been very clearly to be very transparent, and we are for all the reforms that increase transparency. We always say that what we sell is safety not opacity. So, Switzerland is a safe haven which has increasing value in a world that is getting more and more uncertain. So we look to the future actually quite optimistically thinking that the recent event things like Brexit underline the attractiveness of Switzerland and safety and stability that it offers. So we think that the prospects are all good.
Kinner Lakhani:

Great. Thank you.
Tidjane Thiam:

Thank you.
Operator:

Thank you very much. Your next question comes from the line of Jeremy Sigee from Barclays. Please go ahead.
Jeremy C. Sigee:

Good morning, and thank you very much. Three questions please, some of which follow on from topics already discussed a little bit actually. So, firstly on the capital target and the 11% to 12% range, I'm sort of echoing the observation somebody else made that you're already at 11.8%, you've got disposal gains coming through. You've got further SRU shrinkage coming through. So it would seem likely that you would be drifting above the 12%. So my specific question is, are there any negatives coming through that we need to be aware of in the second half that could offset that apart from litigation? I understand we're putting out to one side. So are there any other negatives coming in the second half on capital, is my first question. Second question linked to that, can you update us on the RWA and the leverage exposure at the group level that you're aiming for on sort of a 2018-ish kind of time horizon. I mean the original target you said were something like just below 300 of RWA's which now feels like you should be below that. You're already below and probably stable at and also I think you said CHF 920 billion of leverage exposure, is that also coming down? So I wonder if those are valid or if you could update those. And the third question I had really, I'm circling back on the hiring point, you're making a lot of progress hiring advisors in Asia, which is fantastic. It was striking at the beginning of this week Julius Baer we're also talking about making a lot of hires in the region. And the question to them were, were they getting a more from Credit Suisse? Now obviously that's not the case. You're busy recruiting as well. So I guess the question is where are you both recruiting from, where are all these people coming from? And are you confident about sustaining that pace of recruitment of advisors in the second half of this year and into 2017?
Tidjane Thiam:

Okay. Thank you, Jeremy. On capital, I think you're correct. We gave the guidance 11% to 12%. We have a few things up our sleeve and we're still working on it. We don't want to be too explicit about those but we do have those levers, negatives. Everything we say of course is market dependent. We've been – that's way the outlook is so cautious. But the one thing we do not control in all this is markets and we are exposed to markets, and there is enough, – I mean, I could do a long list from the US election to Brexit negotiations to the Middle East to French elections in May to German elections next summer and the list is long, to what the Fed is going to do, are factors that could potentially impact our capital guidance. So frankly, that's why we are being so cautious. There is no, how I can say, hidden fact here or thing working inside Credit Suisse that makes us worried. It's all about external factors that are outside our control. RWA, if you would want to...?
David R. Mathers:

I think just, first, I think a clear point that we're not obviously not looking again at the SRU targets. Now, we will actually come to those basically in – in the Investor Day, basically which we are planning for the fourth quarter. So I am not going to give you updated targets for the SRU and therefore for the Group RWA and leverage targets in 2018. That's something we will look to address more at the Investor Day in the fourth quarter. That said, clearly the global markets accelerate restructuring, we did move more positions into the SRU and therefore, they are running off, so the numbers – I think they're back to the October meeting obviously, are dated in the sense, we have actually moved forward in our capital strategy. But nonetheless, I think the core of that is very much intact. We are reallocating capital into the growth businesses and we are funding that largely by the runoff of the SRUs. The process is there and we will come back to it at the end of the year in terms of those revised targets.
Jeremy C. Sigee:

Thank you for your comments on the recruitment force. It's just really important. We think likely the right thing to do. It's kind of betting on the future, investing in the future. Where are they coming from, you would have to look quite a bit of public information on retrenchments in the region. Yes, private banking, wealth management in Asia is attractive, but there is not room for everybody. And a number of players you've seen have thrown in the towel, and the positive of the kind of statements we make is, frankly, if you put yourself in Asia, they are very attractive because here is a bank that says, we're not swayed by short-term volatility in GDP numbers. We have a long-term strategy in the region. We have a long-term commitment in the region. I was again in Asia two weeks ago, saw a lot of clients with Helman. The clients really love our organization. Several of them told me, we really like what you've done, the APAC division because we now have a decision-maker on the ground here, pointing to our CEO there. So we've also chosen an organizational model but consistent with global statements and you see the leverage going up, you see the RWA going up. We are putting capital to work and we are recruiting. So I actually believe that that gives you a better quality resources, and position because people who really wants to build a good portfolio as RM in Asia find us very, very attractive. So we've picked up quite a few people from all the names, the people who have said that they are retrenching or leaving the region, the top 10% of their RMs were very good and we're very pleased to recruit them.
Jeremy C. Sigee:

That's very helpful. Thank you.
Tidjane Thiam:

Okay. Thank you. Next question?
Operator:

Thank you. Sir, your next question comes from the line of Kian Abouhossein from JPMorgan.
Kian Abouhossein:

Yes, thanks for taking my questions. Tidjane, I would like to get a view from you of what is being discussed at this point in the board as the key issues between the board members because clearly there's been – the Investor Day last year, there's been a change in strategy, to some extent to adjust to the market conditions. There's been further adjustments being made in terms of assets et cetera, just wondering what are the key points on the wealth management side and on the other side, on the investment banking side that are the key discussion points within the board, and so that's the first question? The second question is, can we talk a little bit about the top line margins in wealth management and the trends that you are seeing because clearly investors, analysts have been very concerned about Asia slow down, generally EM slow down, and you have performed extremely well, so what is the disconnect that we are seeing here? And the third question is related to the SRU, maybe for David, we had an indication of CHF 850 million loss in the past, now you have transferred more assets into this division, is this loss number going to be bigger or you've done well on the reduction of assets and SRU assets and hence this number will actually be smaller, can you give us an update? And what are the exit risk-weighted assets by 2018 that we should be looking at at SRU? So what is the pre-tax loss that we should be roughly looking at and what are the exit risk-weighted assets? Thank you.
Tidjane Thiam:

Okay. Thank you. Thank you again, Kian. Look, on the first of issue, it's relatively transparent. We work, when I say we, the executive board, we work very, very closely with the board and the way I run the bank that I have executive board members attend the board. So you could actually address two questions to each of them, so it's very, very transparent. What goes on other board, I really always insist on having my management team at the board in close contact with the board. And frankly, everything we are telling you today is discussed in depth transparently with the board, I think that's the simple answer I can give you. The Board unanimously is very well aware of what we're doing, changes or communication. The slides are shared with the board, we did that this week. So it's complete, I would say, transparency and alignment. The second point is really, really interesting also, what is the disconnect? I would point to a number of things. Again the fact that we have in Asia division is really – for me, the first test of anything is our clients, and I'm assure you, I saw about ten clients, my last trip to Asia. Every single one of them commented on how much we like that, that we have a boss in Asia, who is actually the boss. He does not to call jury, or call London, and because there'll be you as very successful very important that draws them to us. It's a real point. The second one is really the integration. Helman has taken the head of IBCM, and he has given me mandates to look after our ultra-high-net-worth. And if you look, we didn't – we're trying to limit the number of slides. We had the slide, we could have showed you, but that shows how much of our IBCM revenue in Asia come from the entrepreneurs. They are major more than half. They are major client of the investment bank. So that integration between the investment bank and the high-net-worth is a part of the magic source. I can assure you, there are individuals in Asia who bring us as much revenue as respectable institutional clients in the developed world, absolutely. So we touch them from a number of angles. So, the fact that there is headroom there in terms of auto loan penetration being lower than in other regions, you can get a lot of penetration growth i.e. you don't even need to go and look for new clients, just selling your whole services range and product range for your existing client base gives you growth. Those are a few of the things that I would point to explain maybe why Helman I believe has been outperforming all the banks now two quarters in the row in Asia on every metric. So of course, we can't defy gravity. You see the revenues were down in on several lines, in equities were down, the context is what it is, but within that context we are doing better than other banks and I think it's for those reasons. These are all yours.
David R. Mathers:

So I think just a few points on the SRU, I mean I think fair points really, one as you said when we did the Investor Day we actually laid out 2018 goal of less than CHF 850 billion and losses in 2018. We also said that we intended to reduce RWA by CHF 16 billion in full year of 2016. So a couple of things really, I think, firstly it's not entirely comparable because we obviously done a restatement since then, but we've actually reduced RWA by CHF 15 billion in the first half of 2016, the SRU. So I think we're obviously making a very good progress against the targets we actually laid out at that point. I think secondly, as I said in, when I spoke a few minutes ago, we are going to commit to reduce RWA ex op risk and total leverage in the SRU by 70% over the next three years. But I think to go beyond that and to give you a revised PTI target for 2018, as I said before, I think it's something that best waits the Investor Day, which we are planning for the fourth quarter. So we will give you revise guidance at that point. But I mean, I just would reiterate that the point of the SRU is to reduce it and to reduce it at least as fast as we targeted already and that's something we are very committed to and I think it made good progress and so far.
Kian Abouhossein:

Thanks. Just one more follow-up, if I may, for Tidjane. Within your management team, are there any two or three big buckets of topics that you are focusing on in particular that you might be able to share with us?
Tidjane Thiam:

Look, I can share with you a few but none of them will surprise you. CET1, I think, everybody on the company knows, we are extremely focused on that. I mean, through a consensus of a daily focus. It is really a daily focus. We drive CET1 across the bank. Group NNA, yes and really a managing the risk associated very tightly is very important. We are investing across the board in our risk and compliance system. We have a huge investment in our compliance because these net cost reductions hide very, very major material investment in compliance and in risks that is underway. So, of course, reduction is much bigger when you can actually see, because I am very focused on having asset quality and compliance growth. I don't want to plant the seeds of future problems. We want very healthy growth and we are, and I would take you through the new procedure we have for politically exposed persons. We have a new policy for all kinds of transactions that could happen in the emerging markets. We have a new list of countries where business is forbidden, countries where business is authorized. So there is a really big effort to raise the bar in terms of compliance because that's very important for the future. And then there is the whole reengineering of a bank. These calls are always too short, so we can't really talk about it, but one of the big changes, we introduced is about Chief Operating Officer and to break the kind of, central functions. The amount of work is project internally called project Villa, where we have relocated 75,000 employees in a completely different direction and what we've done is give the CEO's accountability for their budget. The first thing I heard when I arrived from everybody was, well you know I cannot drive like P&L because 60% is allocated. Well, you know what we've turned that on each head, now 70% is not allocated. And we're putting people under pressure to say, well, let's take IT. You actually control your IT spend through, who is the demand. There is a unit costs of an IT project that raise your demand and actually we have now a huge level of granularity and transparency, and we control people given the – okay, you have 157, these are real numbers of millions of IT allocating while 65 of that is completely driven by you, so stop complaining about the central function and do something about it. These projects are vital which one you make which one you buy and we've been going through that for every single project in the company. So what we are driving up is actually IT productivity. It is your sacred cow in financial services. We are really tackling that and taking it down and we discussed that at the ExB. We had an ExB Tuesday, we spend the half of the time on that, because that's how you drive cost down durably. It's not by saying, nobody troubles anymore which is just delaying a problem because we do need to travel. And in the end, you just are postponing spending from one quarter-to-another. What we are doing is really a different structure; operational restructure was running a good operation. So yeah, cost, growth, risk and also the risk reduction, that is growing on. You stop me when I bore you, but I could...
Kian Abouhossein:

Yeah. Now, very interesting but just on the topic of capital that you mentioned at the beginning, should litigation coming better? And you're reducing SRU risk-weighted assets faster. I recall universal bank wasn't option to IPO. It wasn't mandatory in new strategy. Would it still be possible to walk away from that if capital goes to the 12% level by 2018 without any IPO?
Tidjane Thiam:

Yeah, there are so many ifs in your questions. I will probably take a pass. I don't deny the interest of the question, but there are a lot of ifs there. So if I think, I suggest that if the litigation turns out better when we expect, if proposal business turn out better when we expect, if the capital is better that we expect, I suggest that we have the discussions then. If you allow me, for the time being, it's part of the strategy, now more seriously, look, the IPO has real benefits. We really, really believe that Swiss Universal Bank is a great bank. I mean, by the way, we created it in the previous structure. It was split between PB and IB, so you could then see it. So we created it and we made it visible as an entity, so you can now see it in the numbers, we think it's very valuable and we want that value to flow into our share price. We think it doesn't today. We think that you have – I think you said in your comments, we are best investment bank in Switzerland for over five years in the row. Okay. Switzerland is not a small IB market, is that recognize in our share price today? We're not convinced. So really externalizing that value, showing what we're doing, we said the mandate penetration up 6 point in a year to 28, that's major in the wealthiest country in the world. So really all that is going to the perspectives and we think that doing this IPO wealth keeping the strong control on the asset, hopefully will allow people to look differently on the valuation of this asset and that will flow into our share price. So really thank you for the opportunity to allow us to talk about it again because unfortunately, because we're under so much capital pressure, it's been widely believe that we are talking about this for capital purposes. I want to absolutely deny that. This is truly a strategic idea which also happens to our capital benefit, but it is really done for strategic reasons. So I see I've answered all your questions, although I didn't want to, but it means that really it is strategic and we believe it's a good idea. But now, nothing in life is internal and external. As we said, it's an option, but we're working hard to drive and you see the return of capital going up in sub and I would personally argue that part of that progress has been thanks to the need to prepare for an IPO. So we are getting the benefits of having that project on the table.
Kian Abouhossein:

Okay, very helpful. Thank you.
Tidjane Thiam:

Okay. Thank you.
Operator:

Thank you very much. Your next question comes from the line of Fiona Swaffield from RBC.
Fiona M. Swaffield:

Good morning, and I had two questions. The first one was on the corporate center where there is a larger negative results on the normal and quite a large negative treasury results. I don't know, David, if you could talk through how we should think about that going forward and whether this is kind of the impact of negative interest rates coming through in this division. And the other questions was on strategy on share-based compensation in general, I noticed that in your slide 23 on the footnote, you mentioned that there was some share issuance. I think historically, you didn't – you used to neutralize that. So are we now getting some capital creation or capital offsets and we should see a higher number of shares due to the share compensation factor? Thank you.
Tidjane Thiam:

Yeah, good morning, Fiona. Thanks for the questions, and most important, we haven't talk enough about the corporate center. It's important to explain and the remuneration. David?
David R. Mathers:

So just taking the first one, I think I probably referred to page 45 in the financial report for the audience. As you say what we saw in the second quarter was a loss in the corporate center of CHF 235 million and that compares to a gain in the first quarter of CHF 33 million. So just stepping back, if you go into this, so you recalled back in October that one of the goals or the strategy was to actually sharpen the corporate center and actually align some of the cost, which are sitting in that division so they actually have control under the strategy, which Tidjane just outlined in terms of each of the business side, actually owning and driving these costs. So the corporate center is a much narrower reporting segment than it used to be before last October and it's been restated on that basis. So what you still have in there really is, there are still some cost rise at the parent bank and there are still the cost from the legal entity program, and albeit that those costs are now actually reducing, I mean, clearly with the launch of the IHC on the 1st of July, that's that the single line of cost this year in terms of that. So those costs are actually declining and those are the only cost that really sits there. But what you are referring to is the final component, which is the volatility around the swap books that we run in central treasury. So I think, as you know, we actually hold on a number of central deposit books, which sit here, which the net interest income actually flows divisions and the volatility around those positions is actually taken to the corporate center. Now, in the first quarter, I think I did mention this time, we saw a lot of volatility gains due to the very disrupted and the strike markets in the first quarter. And as markets have actually normalized in the second quarter, we've seen those losses actually reverse. And there is also some impact from positions of the bank remains in terms of transfer restructured notes, which actually relate to Credit Suisse owned equity and the moves in those are actually taken to the corporate center as well, so as the stock price has been more stable often. So in the first quarter, you see, obviously a quarter-on-quarter change. So a long answer, but what we're really saying is treasury volatility in the second quarter, which it does reflect some normalization. I think in interest of full disclosure, we did actually look in some of the gains in the first quarter. Otherwise, this normalization effect would have been larger than what you see today and I really encourage you to look at the first, second quarter combined as being a better indication of the corporate center run rate than looking at the second quarter overall. So that's probably what I would say on the CC. There is nothing else there, and certainly there is no net negative interest rate effect in the corporate center relating to divisions. That's not how we actually run it. I mean, I think the second point relates to share issuance in the second quarter. The primary issue in terms of share issuance was actually the scrip. You recall, we actually paid CHF 0.7 billion with a scrip alternative. Take up I think as you know, was 67.8% on that scrip and that is the primary driver in terms of share issuance in the quarter. We also issued equity in respect of a deferred purchase agreement relating to York which is a hedge fund interest, which we actually hold within asset management and therefore within the IWM business. And that's the second component. But you are right there was also some share issuance in respect of employee deliveries and the bulk of our employee deliveries, it will actually continue to repurchase in the market but there was some share issuance. And I think if you want to be precise on that I'd estimate the benefit of the CET1 of the share reference was probably something and sort of 10 to 14 basis points in the second quarter, Fiona. So it's not a changes strategy, but a new one in terms of that.
Fiona M. Swaffield:

Thank you.
Tidjane Thiam:

Is it okay? Yeah. Okay. I think we're getting towards the after the beyond the end of the session, so maybe we can take one more question if there is one of there?
Operator:

Thank you very much. Sir, your final question comes from the line of Andrew Stimpson from Bank of America.
Andrew Stimpson:

Hi, guys, thanks for fitting me in at the end. On the – couple of questions on the LCR, I notice that's gone all the way up 172%, which I think is the highest of any of your peers. I am just wondering if that's really necessary or whether there is the possibility you could cut that down as it could be quite meaningful for the leverage ratio, or why you think it has to remain so high? And then looking at the restatement you've done for global markets, just looking a bit further back and maybe this is a statement rather than the question, I supposed, but I am like to get your thoughts and I appreciate you're trying to reduce the volatility and bring down the risk-weighted assets but it looks like you're giving up a huge amount of profits historically. So the PBT cut from 2015 was minimal, I understand that because the fourth quarter in particular was weak, but the first half was actually really, really strong. And in 2014, I get about CHF 640 million PBT contribution from the units that you are putting into the run off. So I just wanted to check that I've got that right, and whether once you start it doing those numbers, whether that was a surprise, how profitable those units were, and whether, yeah, any thoughts you have got around that would be appreciated? Thank you.
Tidjane Thiam:

I will let David take you. Go ahead.
David R. Mathers:

Thank you, Andrew. So yes the LCR ratio of 172%, I think it is high. And it's higher than we would really like to target it. I think there are two factors that just to be aware of. Firstly I think we obviously had go live for the IHC on 1st of July. I think you may recall, actually I made a comment some years ago around the expected standalone equity requirements the IHC and that's proven to the case. So that actually did increase the equity requirements of the IHC, which were actually more than met for the go-live on the 1st of July. I think second to that, I think obviously follows the US banks, so obviously you follow Reg YY in terms of branch liquidity and we actually have been looking at our branch liquidity measures under stress metrics. We actually fulfill those requirements as well so that does drive additional liquidity requirements for the group. And that said, I think it's very likely that we can reduce the LCR over the course of the next year or so, and actually draw down on some of that liquidity and clearly that would actually obviously reduce their funding cost too. So I think this is probably a peak in terms of what we are actually doing with the go live with the IHC and meeting the branch-based requirements. And you should expect it from these levels. I think the second point then is, I think if you – is the comparison if you actually look at the numbers we previously reported for our divisions under the post-October restatement and what we reported now on the website. You're looking essentially at 2013 and 2014, the major component of that was actually distressed credit books which we talked about before, which the range of which is about CHF 300 million just by the way, sitting in SRU and we actually transferred as part of that in the second quarter. So what you're seeing there is the historic profitability of the distressed credit book which wasn't CHF 600 million by the way. There are other moves in that basically. But it's clearly a large component of that CHF 600 million. And I would just say basically, clearly 2013 and 2014 were very good years for distressed credit. And if you complete the comparison for the other period, you can see the gain from that is actually CHF 400 million in a lot. I think if you look back at everything we said about GMAR, and I think the focus we want to have actually on reducing our expected loss and the stress situation to 50% before, I think that's the right balance to reflecting the 2013 and 2014 were very good years for those types of assets. But there were some other transfers of in that which we outline there basically, but that will be the largest component.
Tidjane Thiam:

Fundamentally we do believe in the earnings power of this platform. As we explained the kind of equities, credits, solutions, moving solutions derivative in emerging market, we have many, many initiatives going there. We wanted to get to the rightsizing quickly, so it's done. So as I said in my comments several times, we can now focus on serving our clients and you've seen the power of that already in the rebounding Q2. We explain this in Q1. It's only like an excuse that people were restructuring, were rightsizing, were unwinding positions, and those are bigger opportunity cost to that. But as that work is over, you are going to see the power of our franchise and quality of our teams come through. I'm quite confident in that.
Tidjane Thiam:

So, thank you for listening to us this morning and joining the call. Just a quick wrap-up to say that, we said we deliver in our plan profitable growth. We believe that's happening; reduce the cost to central part of what we're doing, that's also happening; reduce the risk, that's happening; right size global markets, that's happened; and managed capital and you've seen the improvement. So we recognized it's only two quarters in and it's on the start. We believe it's a good start against a very unsupportive market backdrop, so again a cautious outlook for Q3 but we will continue to execute free service plan in this strategic. So thank you and see you all next time. Thank you.

Credit Suisse Group AG Q2 2016 Earnings Call Transcript

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Credit Suisse Group AG
Q2 2016 Earnings Call Transcript