Credit Suisse Group AG
Q4 2016 Earnings Call Transcript

Published: 14 Feb 2017

[Operator:]

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group Full Year and Fourth Quarter 2016 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is recorded. At this time, I would like to turn the conference over to Mr. Adam Gishen, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Gishen.

[Adam Gishen:]

Yeah. Good morning and welcome to our fourth quarter 2016 results call. Before we begin, let me remind you of the important precautionary statements on slide 2, including the statements on non-U.S. GAAP measures and Basel III disclosures. In this presentation, when we give our segment reports, we focus on adjusted results, as it is the way we manage the operating performance of our businesses. For a detailed discussion on our reported segment results, we refer you to the Credit Suisse Q4 2016 earnings release. With that, I will turn over to Tidjane Thiam, our CEO.

[Tidjane Thiam:]

Thank you, Adam, and good morning, everyone, and thank you all for joining this call. With me today is David Mathers, our Chief Financial Officer. This morning, we will present our fourth quarter and full year 2016 results for Credit Suisse. David and I both look forward to taking your questions at the end of the session as usual. 2016 was a year of considerable change for Credit Suisse. It was the first full year of implementation of our strategy to be a leading wealth manager with strong investment banking capabilities, which we announced in October 2015. It coincided with a period of considerable strain in financial markets, particularly during the first half of 2016. These conditions were further heightened by a number of significant geopolitical developments. Against this backdrop, we have been able to make good progress on executing our full year strategic plan, and we are building in Q4 2016 and Q1 2017 considerable momentum. Progress is being made on many fronts. It is clear that these achievements are due to the support of our clients and the dedication and hard work of our teams. I would like to thank here our clients for their trust but also all our employees at Credit Suisse for their hard work during 2016. We are, of course, well aware that a significant amount of work remains in order to achieve our ambitions and deliver value for our shareholders. So, with that, I will focus my comments this morning on our strategy and its implementation in 2016. I will also give you our outlook for 2017 which although, of course, market-dependent is positive. So, turning to slide 5, we show here our group reported and adjusted PTI, as well as key capital metrics. David will come after me to walk you through all our financials by group level and by division, and we will then take your questions. So, for me, let's start with our key messages this morning. You will be familiar with the format of this slide. Firstly, on cost, we have significantly increased operating leverage across our businesses, realizing net cost savings of CHF 1.9 billion for 2016. We will not relent on the pace of cost reductions going forward. As you are aware, our objective is to achieve a group cost base of below CHF 17 billion for 2018 having started above CHF 21 billion in 2015. So, moving on from cost to profitable growth, we have achieved CHF 28.5 billion of net asset inflows, an increase of 58% compared to 2015. And this was not achieved at the expense of profitability. Both our gross and net margins increased. Our global advisory and underwriting franchise had a good year with particular strength in Q4 across all key products and good momentum in 2017. In Global Markets, we have substantially completed our rightsizing with the benefits of that restructuring starting to emerge. Thirdly, we are dealing proactively with our remaining legacy issues. In December 2016, we reached a settlement with the U.S. DOJ related to our legacy RMBS business. This was a key objective for me to put this matter behind us, and this removes a major source of uncertainty for our bank as we look forward. In addition, we have continued to make progress in deleveraging our Strategic Resolution Unit. Finally, at end Q4, our look-through CET1 ratio stood at 11.6%, and our CET1 leverage ratio was 3.3%. Pre-DOJ RMBS settlement, these ratios would have been respectively 12.5% and 3.5%. So, after this overview, let's look at the quarter in a bit more detail starting with our cost reduction efforts. We have reduced operating expenses, as I said earlier, by CHF 1.9 billion in 2016. This is more than 30% above our initial target of CHF 1.4 billion. Within these reductions, our 2016 non-comp expenses at constant exchange rates are down 9%. This is a very important KPI for us. So, non-comp expenses, down 9% year-over-year and down 16% in the fourth quarter compared to the same quarter a year ago, showing an acceleration within 2016 in the pace of our cost-cutting efforts so that the run rate at the exit of 2016 is 16% below of the run rate at the exit of 2015. We measure our progress on cost reduction on an FX-neutralized basis with end 2015 exchange rates. You will note that this leads to an operating cost base on this slide of CHF 19.4 billion at end 2016. With current exchange rates – and it's shown to you here on the right – our actual cost base is CHF 300 million lower at CHF 19.1 billion so from CHF 21 billion at the end of 2015. Let's turn now to our second objective, profitable growth. We produced, as you can see here, strong net new asset inflows of CHF 28.5 billion, an increase of 58% compared to prior year and with higher gross and net losses. We have been able to recruit experienced quality relationship managers, RMs, particularly in IWM and APAC. And this, combined with the quality of our existing RMs and our close interactions with clients, has allowed us to produce this performance. In the year where the environment was challenging with low or negative interest rates, lower levels of client activity, significant geopolitical uncertainty leading to a wait-and-see attitude for some clients, the geographic diversification and the scale of our platform have shown their value. This growth has not been achieved at the expense of profitability. Both our gross and net margins have increased year-over-year. We believe that we are seeing here the benefits of our integrated approach for ultra-high net worth and entrepreneur clients, combining our traditional wealth management with also advisory, so IBCM, and capital market expertise and financing capabilities. More on this later. Let me take a minute to focus on our M&A in Q4, which will be a point of interest, and provide you some color on what actually happened. The first point I would like to emphasize is that in a typically slower quarter, we saw continued positive flows in Q4 in APAC and, of course, emerging Europe, Middle East and Africa, as you see here. I would also like to highlight our performance in Western Europe, where we attracted inflows. We believe that we have achieved relative our performance in these markets for our industry. That said, we have been taking a number of proactive actions, which we wanted to describe to you here and which have led to new outflows. As we have highlighted in earlier calls, we have what we call clients (08

[David R. Mathers:]

Thank you very much, Tidjane. Good morning, everybody, and thank you again for joining our fourth quarter and our full year earnings call for 2016. So, I'll start on slide 24 with a summary of our financial results. As per usual, here we show the group numbers on a reported and an adjusted basis and need these have been prepared under the same definition that we've used in prior quarters. Furthermore, we've also provided a full reconciliation of the adjusted and the reported results to the group and for each of our divisions in the appendix. You'll see that the most significant adjustment item in the fourth quarter was the major litigation expenses of CHF 2.1 billion, of which CHF 2 billion relates to the settlement with the U.S. Department of Justice regarding legacy RMBS matters on which we announced the final settlement on January 18 of this year. So, I'd note that this is treated as a fine, and therefore, there is an immaterial tax offset in respect to this charge. Furthermore, under U.S. GAAP, we're required to assess the lifetime cost of provision for the consumer relief portion of the settlement. And this amount has been included in our fourth quarter charge. So, look at the results for the fourth quarter. We reported a pre-tax loss of CHF 1.9 billion on revenues of CHF 5.2 billion. On an adjusted basis, we achieved a pre-tax income of CHF 171 million on CHF 5.1 billion of revenues. For full-year 2016, we achieved an adjusted pre-tax profit of CHF 615 million, and that compares to the reported pre-tax loss of just under CHF 2 billion. Now, in net terms, given the immaterial tax offset from the DOJ settlement, our reported net income was a loss of CHF 2.4 billion for the whole of last year. Now as in prior quarters, for the balance of this presentation, I will focus entirely on the adjusted numbers, as we believe this more accurately reflect the operating performance of our businesses. So, let's turn to slide 25 and review our capital and leverage positions. Throughout last year, the key focus of our strategy has been to reallocate capital to our growth businesses, and we've made both significant and consistent progress on this front. Risk-weighted assets stood at CHF 268 billion at the end of the fourth quarter, and that's a reduction of CHF 22 billion from the CHF 290 billion at the end of the fourth quarter 2015. Compared to a year ago, we reduced risk-weighted assets in Strategic Resolution Unit by CHF 28 billion and by a further CHF 12 billion in Global Markets. And I note these are business reductions that's net of the impact from FX and major external methodology changes. Now, with the capital release from these areas, we've reinvested CHF 9 billion of risk-weighted assets into our growth businesses in Asia Pacific, International Wealth Management, the Swiss Universal Bank and Investment Banking & Capital Markets. We've made similar progress in terms of our leverage exposure, which stood at CHF 951 billion at the end of the fourth quarter. That's down by CHF 37 billion from CHF 988 billion at the end of 2015. This is primarily being driven by year-on-year reduction of CHF 63 billion within the SRU. As risk-weighted assets, we then reinvested our capital resources, increasing leverage exposure by CHF 30 billion in our growth businesses. Now, if we look at our capital and leverage ratios, we ended the year then with a look-through CET1 ratio of 11.6%, which compares to 11.4% at the end of 2015. I'd noted that if we excluded the impact from the DOJ settlement in the fourth quarter, the CET1 ratio would've ended the year at 12.5%. That's 110 basis points higher than 11.4% that we reported at the end of 2015. Our CET1 leverage ratio was 3.3% at the end of the quarter, and that's stable from a year ago. If though we, again, exclude the impact of the DOJ settlement, the CET1 leverage ratio would have increased to 3.5%, meeting our Swiss Too Big to Fail going concern requirement for 2020. Our Tier 1 leverage ratio stood at 4.4% at the end of the fourth quarter, and that compares to 4.5% at the end of 2015. So let me turn now to discuss how we mitigated the impact of the RMBS settlement on our capital ratios on slide 26. So, we show here the CET1 ratio development over the last year. As I mentioned in the previous slide, we achieved a year-end CET1 ratio, 11.6%, and that's a 20-basis-point improvement from 11.4% at the end of the last year. And you can see that the settlement with the DOJ reduced their ratio by approximately 90 basis points in the fourth quarter. And adjusting for this, the pre-settlement CET1 ratio would have been 12.5%. Now, I'd remind you that our previous guidance was to operate between 11% and 12% CET1 ratio for the duration of 2016 subject to major litigation events. And this is clearly a target that we have met both on a pre- and a post-settlement basis. Now, in terms of our guidance for our CET1 ratio, with the RMBS settlement now behind us, we would now expect to operate between 11% and 12% pre-IPO during the course of 2017. Just briefly on dividends, we've continued our prior-year practice when we intend to recommend to our shareholders at the general assembly a payment of CHF 0.7 per share in cash with a scrip alternative as in prior years. So, let's turn to slide 27 to review our cost-reduction program. I'm pleased to report that our cost program remains very much on track and that we surpassed our target for 2016, with our full-year cost base being reduced to under CHF 19.4 billion compared to the CHF 19.8 billion target that we set for 2016. Now, as Tidjane has mentioned, I'd reiterate these amounts are stated on FX-neutral basis from the full-year 2015 baseline of CHF 21.2 billion. In fact, factoring in currency moves, which is particularly depreciation of sterling in the course of last year, our adjusted cost base was CHF 19.1 billion for 2016. So, if we look at our net cost savings in the year, in FX-neutral terms, we achieved net cost saves of CHF 1.9 billion, well in excess the target of CHF 1.4 billion that we set originally. In 2016, we benefited from the previously announced head count reductions across the bank. We exceeded our original target of 6,000 net reductions, reducing our net head count by more than 7,250, of which the vast bulk represents departed and notified contractors and consultants. Now if we look forward, as we said at the Investor Day in December, we target our cost to be at or below CHF 17 billion by the end of 2018. And I note this is again is measured on an FX-neutral basis. And just to put that in context, if we do that at today's exchange rate, that would equate to a target that's about CHF 300 million lower than the FX-neutral target. If we look at 2017, we are therefore targeting costs to be at or below CHF 18.5 billion, again stated on that consistent FX-neutral base. And that's supported by additional net head count reductions of between 5,500 and 6,500 across the bank. With that, I'd now like to turn to each of the bank's divisions' performance, and let me start with the Swiss Universal Bank on slide 28. The Swiss Universal Bank delivered a strong performance in 2016. We included four consecutive quarters of solid year-on-year pre-tax income growth, which has been achieved notwithstanding the interest rate environment here in Switzerland. For the fourth quarter, the Swiss Universal Bank delivered a pre-tax income of CHF 378 million. That's an increase of 13% year-on-year. Net revenues were down slightly compared to the fourth quarter of 2015, but I'd remind you that those revenues included an extraordinary dividend from our ownership in the SIX Group in 2015. So, if excluding this, our revenues year-on-year were broadly flat. Overall, in the fourth quarter, we saw a strong net interest income and resilient recurring commissions and fees. Our focus on cost efficiency has also helped to offset investments that we've been making in regulatory, compliance and visualization initiatives in the division. Overall fourth quarter operating expense has declined by about 5% year-on-year, and the cost-to-income ratio improved to 70%. Within Wealth Management, the continued success of Credit Suisse Invest resulted in our mandate penetration increasing to 30%, and that's up from about 26% at the end of 2015. And this increase in mandates penetration has supported our recurring commissions and fees. In the Corporate & Institutional Banking business, we delivered a pre-tax profit of CHF 207 million in the fourth quarter. That's an increase of 6% year-on-year. We saw very good momentum here in the Investment Bank in Switzerland, with Euromoney and IFR naming us the Best Investment Bank in Switzerland in 2016 and also the Swiss Franc Bond House of the Year. So let me just conclude then with just a few words on net new asset flows for the division. So, if we look at the whole of 2016, Wealth Management saw net new asset inflows of CHF 2.1 billion before the impact of our regularization and the selected exits in our External Asset Manager business. The combined regularization and EAM-related outflows totaled CHF 3.8 billion for the whole of 2016, and the majority of these were actually taken in the fourth quarter. Just looking at 2017, we would still expect to see outflows from both regularization and selected EAM exits, and we'd guide you towards total outflows of roughly CHF 3 billion in 2017, somewhat lower than in 2016. Just concluding on Corporate & Institutional Banking, the full year had positive net new assets of CHF 4.3 billion, of which CHF 2.5 billion was received in the fourth quarter. So let me turn now to International Wealth Management on slide 29. The International Wealth Management division had a strong finish to the year, contributing to a 9% growth in pre-tax income for 2016 as a whole, and we achieved this growth notwithstanding difficult market conditions for most of last year. In the fourth quarter, pre-tax income of CHF 300 million was an increase of 31% year-on-year. And I'd also remind that this is also against the comparison to the fourth quarter of 2015 when we saw the extraordinary SIX dividend which was split between SUB as I've mentioned already, and IWM. We remain very focused on cost efficiencies, mitigating the major investments in growth and in our compliance and risk functions. And overall, the fourth quarter cost-to-income ratio improved to 75%, down from 81% a year ago, and the return on regulatory capital improved to 24% from 19%. Within Wealth Management, revenues increased by 8% compared to the fourth quarter of last year primarily driven by high net interest income, compared to the third quarter which were a marked uptick in transaction revenues reflecting increased activity for the U.S. election and the benefit from certain measures we took to proactively focus on idea generation and client engagement. Overall, fourth quarter pre-tax income of CHF 192 million was broadly stable year-on-year. But excluding the extraordinary dividend from SIX, as I mentioned before, pre-tax income increased by 15%. If we look at assets from Wealth Management, AuM increased by 12% during 2016. And in terms of net new assets, we saw very substantial and critical turnaround from the outflows that we suffered in 2015. We saw record full-year net new asset inflows of CHF 15.6 billion across our businesses in emerging markets and in Europe. We also saw regularization-related outflows of CHF 5.7 billion in 2016, which is in line with the guidance we have given before for that to be around CHF 5 billion and these were incurred primarily in Latin America. That means the annual net new NNA growth rate was 5% for 2016 or 7% before the regularization-related outflows. So as looking forward to 2017, we would continue with our prior guidance, and we'd expect further regularization outflows around CHF 5 billion in the current year. Year-on-year, the gross margin improved by 3 basis points to 110 basis points for the full year, again, primarily reflecting increased net interest income. In Asset Management, the fourth quarter pre-tax income of CHF 108 million improved significantly. In fact, it increased by over 175% year-on-year. And for the full year, pre-tax income of CHF 287 million was up by 54% compared to 2015. If we look at the fourth quarter, performance fees are much stronger than in the same period last year, reflecting strong returns within our credit funds, mainly CLOs, our commodities funds, and some of our hedge fund investments. Recurring management fees were stable year-on-year. But I'd also point out that cost control was the key success for Asset Management with fourth quarter expenses down by 16% year-on-year. What about net new assets for Asset Management? We saw inflows for the whole of 2016 totaling CHF 5.6 billion, but this did include outflows of CHF 4.4 billion in the fourth quarter primarily in respect to money market funds in our emerging markets joint venture. With that, let's turn to Asia Pacific, please, on slide 30. Asia Pacific delivered a pre-tax income of CHF 122 million in the fourth quarter, and that compares to CHF 148 million in the fourth quarter of 2015. And as we indicated during the Investor Day in December, we think about our business in Asia in two sub-segments. First, our Wealth Management and connected activities, which encompasses wealth management, financing and our underwriting advisory operations. Separate to that, we have our Asia fixed income and equities trading business, which supports both our wealth management activities but also deals extensively with a broader range of institutional clients. And we'll be moving to reporting our divisional numbers on this basis with effect from the first quarter of 2017. And in the interim, we provide here pro forma numbers on this slide based on our preliminary estimates. We show the performance of Asia Pacific on this basis. So, we first look at the Wealth Management and connected businesses. For the full year, we achieved a pro forma pre-tax income of CHF 513 million, reflecting the continued focus on ultra-high-net-worth entrepreneur and corporate clients. The number of net relationship managed increased by 10% year-on-year, reflecting both strategic hiring but also substantial performance discipline. Although net new assets inflows did slow in the fourth quarter, our full-year net U.S. inflows still totaled CHF 14.6 billion. And I'd note that these net asset inflows were after regularized-related outflows of CHF 1.4 billion in the fourth quarter and CHF 2.5 billion for the whole of 2016. Going forward, in 2017, we continue to expect some further regularized-related outflows of approximately CHF 1 billion in the course of the year, the majority of which we expect to be incurred in the first half. If we then look at our trading businesses in Asia Pacific, clearly, the equity markets in which we operate were significantly weaker for the whole of 2016 compared to 2015, and that has impacted all of our businesses in the region. In the fourth quarter, particularly in December, the market for our fixed income business deteriorated substantially, and we saw a significant reduction in client activity for our rates products. And as consequence, whilst the full year we made a pro forma pre-tax income of around CHF 265 million in our APAC trading business, on a pro forma basis, these businesses recorded a net loss for the fourth quarter. As Tidjane has already mentioned and as we summarized on Investor Day, we're targeting a number of efficiency measures to improve our operational leverage and capital returns should these challenging market conditions persist. So let's turn to Investment Banking & Capital Markets, please, on slide 31. The division reported a very strong result in the fourth quarter with net revenues of $569 million, and that's an increase of 36% year-on-year. We saw improved wallet share across all key products and covered client segments, and we ended the year with top five market shares in equity capital markets and leveraged finance, and we're a leader in global cross-border announced M&A activity. Now if we look at this in terms of revenue, our equity underwriting revenues of roughly $100 million were largely flat year-on-year, but essentially better than the decline in industry-wide fees. We also remain very active in advisory with revenues of $265 million. But clearly, our strongest performance was in debt underwriting, where we had a 63% increase year-on-year with revenues totaling $225 million. Operating expenses for the quarter fell by 14% year-on-year, reflecting lower compensation and G&A expenses. And overall, the division delivered a pre-tax income of $142 million, equivalent to return on capital of 22%. Furthermore, as we said before, returns were particularly strong in the Americas where the execution of our strategy began earlier and is more advanced, and we achieved a return on capital of 28% for the quarter. If we just turn to the full year, IBCM's results reflected the continued implementation of our strategy, with revenue and profits up meaningfully compared to 2015. Net revenues of $2 billion was up 8% year-on-year, driven by stronger advisory and debt underwriting revenues, whilst full-year operating expenses were down by 5%, reflecting both cost discipline and a focus on self-funding investments. Overall, the full-year pre-tax income was $297 million, triple that of 2015. So, just to conclude then on IBCM, a few words on the analysis at the bottom of the slide. As you may recall, we introduced this new disclosure in the third quarter to show the full breadth of our global advisory and underwriting franchise, including revenues booked in Global Markets, Asia Pacific and the Swiss Universal Bank in addition to IBCM. Overall, across all of our divisions, our total global advisory and underwriting revenues of CHF 1 billion was up by 32% year-on-year, significantly outperforming the industry-wide fee pool. So let me now turn to Global Markets, please, on slide 32. The Global Markets division has clearly been through a substantial restructuring in the course of 2016, refocusing the business around our strongest product and client areas. We've also significantly reduced the amount of capital in the division. And I'm pleased, therefore, to say that the division delivered revenues of $5.6 billion for the full year and a pre-tax profit, notwithstanding this restructuring, of $284 million. For the fourth quarter, notwithstanding the significant reduction in our exposure to macro business lines, FX and rates, which we saw across the market had the most significant rebound in general activity in the fourth quarter, our Global Markets division still delivered revenues of $1.3 billion, an 8% increase year-on-year. Furthermore, with the support of a 26% reduction in costs, we were profitable in the fourth quarter with pre-tax income of $23 million, and that compares to the loss of $507 million that we suffered in the fourth quarter of 2015. The credit franchise posted revenues of $608 million, and that's an increase of 66% year-on-year. We saw continuing momentum in global credit products and particular strength in the Americas in light of both a substantially improved market conditions and a higher underwriting share. Our securitized products revenues also increased, that reflected higher client activity across both agency and non-agency business lines. If we turn to equities, as we mentioned at the Investor Day in December, we're moving our SMG business to a fund structure, and that process will be completed later this year. If we look at equities excluding SMG, revenues of $421 million declined by 6% year-on-year. And in the fourth quarter, resilient cash equity and Prime Services results in the Americas was offset by weaker market activity in EMEA. Compared to the third quarter of 2016, equity revenues, again excluding SMG, increased by 34% despite what's normally a seasonally slower quarter. In solutions, fourth quarter revenues of $259 million was down by 18% year-on-year. We delivered strong results in the emerging markets, particularly Latin America, but this was offset by a weaker performance in equity derivatives, partly reflecting low levels of volatility in the quarter. And going forward, it's clear that a core focus for 2017 will be the strengthening of our solutions franchise, particularly in equity derivatives with increased collaboration with the IWM division. Lastly, if we look at capital, you can see we significantly reduced our risk profile in 2016, and at $51 billion in risk-weighted assets, we continue to operate well below our year-end RWA ceiling that we targeted at $60 billion. In leverage, $278 billion in leverage exposure compares to a ceiling of $290 billion. If I just conclude then with a few words on the Strategic Resolution Unit, please, on slide 33. So, as Tidjane has already summarized, we've continued to make substantial progress reducing risk-weighted assets, leverage exposure and operating expenses in the SRU. In the fourth quarter, we reduced total risk-weighted assets by $11 billion, 20%, compared to the third quarter, reduced leverage exposure by $16 billion or 13% quarter-on-quarter. And these reductions included the unwind and novation of macro derivatives, the sale, restructure and roll-off of the emerging market corporate loans, and the sale of our entire European middle-market loan portfolio. Now, if we look over the last year, that means we've reduced total RWA by $29 billion or 39%. Furthermore, if we look at leverage exposure, we reduced the total by $67 billion, also 39%. A key contributor to this has clearly been the reduction in our external bilateral derivative trade count. We cut this by roughly 57%, eliminating 191,000 trades last year. So I think, all in all, these actions put us well on track to achieve the multiyear targets that we summarized at the Investor Day in December. So let me now turn to operating expenses. Operating expenses were $1.6 billion for the full year, a reduction of $1.1 billion or 41% compared to 2015. In the fourth quarter, our operating expenses of $287 million was a reduction of $64 million from the previous quarter. Now in 2016, clearly the exit of our Private Banking business in the United States was a very significant driver of these savings. But I'd also point out the progress made reducing head count and volume-related expenses through portfolio exits, as well as the reduction in the footprint of the former investment banking operations, which was the primary driver of savings in the fourth quarter. So, just lastly before we conclude, I'd note that if we look at the cash generation of the SRU before litigation, restructuring costs and legacy funding, we released about $1.1 billion last year. In terms of exit costs, these were approximately 0.5% of RWA in the fourth quarter and 1% for the whole of 2016. And I think given the progress we've made, we're revising our guidance downwards for exit costs to be at or below 3% of RWA over the lifetime of the SRU. This reflects both the potential volatility in the macro environment and also a continued shift towards more leverage-intensive but RWA-light assets. So, that concludes the results portion of today's presentation, and I'd now like to pass back to Tidjane, please.

[Tidjane Thiam:]

Thank you. Thank you very much, David. In summary, 2016 was a year of progress for Credit Suisse. We have said that it is our ambition to be a leading wealth manager with strong investment banking capabilities, and the executive team and myself are fully mobilized to deliver on this. We have made good progress against this objective during the 12 months of 2016. We have increased our operating leverage with CHF 1.9 billion of net cost savings. We have achieved profitable growth with a 58% increase in net new assets and an 8% increase in assets under management with higher margins, and this continued into 2017, with SUB led by Thomas Gottstein; IWM, Iqbal Khan; and APAC, Helman Sitohang. We ended 2016 with strong positive momentum in our restructured Global Markets business led by Brian Chin. And we have had industry-leading performance in IBCM activities with Jim Amine, which has continued into 2017. We've dealt with our key legacy issue by settling with the DOJ, and I'll mention here our General Counsel, Romeo Cerutti, who did a great job. And we ended the year with an 11.6% CET1 ratio after our settlement. Our outlook for 2017, the second year in our three-year plan, is positive. And with this, we'll be happy to take your questions.

[Operator:]

We will now begin the question-and-answer part of the conference. The first question is from Andrew Coombs from Citigroup. Please go ahead.

[Andrew P. Coombs:]

Good morning. If I could ask three questions, please, two relating to the private bank and then one on capital. First question on Private Banking which you comment in your guidance on regularization flows, you guided to CHF 5 billion for 2017, which I think will be less than half of what you booked in 2016. That's quite a different set of commentary compared to your largest peer, which is guiding to broadly similar regularization outflows. So, I'd be grateful if you could just explain your rationale there on why think they will fall so much in 2017. Second question would be relating to the relationship managers. I noticed that both in IWM and in APAC, you've actually seen a decline in relationship managers in Q4. For IWM, that's been ongoing for a little while, but for APAC, it demonstrated a reversal. Just what your plans are on hiring in those two regions. And then the final question on capital. 11.6% core Tier 1 is clearly better than expected. Does that give you more flexibility on future capital decisions? And with that in mind, Tidjane, could you just talk about your plans to (56

[Tidjane Thiam:]

Okay. Good morning, Andrew, and thank you. We'll do a double up here between David and me. Maybe on regularization, to be clear, maybe we were not clear enough in our commentary. We gave actually the targets by division. So, the CHF 5 billion was for IWM only. We gave CHF 3 billion for Switzerland, and we gave CHF 1 billion for APAC. So, if you add all of that, that's CHF 9 billion which, frankly, is in the ballpark of numbers you were referencing for our peers, yes.

[Andrew P. Coombs:]

Understood.

[Tidjane Thiam:]

Okay. RMs, you are correct. A bit of a different situation in IWM and APAC, and that's true in many respects. IWM, never forget that IWM has a mature business sitting in there. So, they're quite different from APAC which is quite a young business. So, the levers you can pull in terms of cost management in IWM are just more significant. So, they have been able to recruit, looking at Iqbal here, I think 215 gross? 215 gross RMs, but you see that the net is a decrease because there is very active, to use a euphemism, performance management underway in part of a portfolio. So, that's what you see. And in APAC, it's different because simply it's a much smaller population. We started with 540-something. When you see IWM hiring 200, you can see the difference in scale between the two businesses. So, the scope for performance management there is less. So, there's been a bit of performance management, but compared to 161 gross hirings, you won't see that impact in the numbers. But going forward, you can expect IWM to continue to do what they've been doing, i.e., to invest and grow, if I may say so. I think we invested something like CHF 130 million and saved CHF 125 million. So, it's more or less balanced between the two. And APAC is pacing its investments. But frankly, the environment has been more difficult than we expected. We're very pleased. We feel the recruiting we've made in each work. I mean, you see our numbers for Wealth Management activity, PTI of 65%. A lot of that is due to the new RMs, but we are posing and watching the environment, and we'll move depending on how the environment evolves there. Capital, David, you want to say a word?

[David R. Mathers:]

Thank you. I mean, I think just in general sense, we're obviously pleased to close the year at 11.6%. I think just a few words of explanation, I think, looking at some of the analyst questions or commentary to come in this morning, just to expand a bit on the impact of FX and U.S. dollar moves. Obviously, the U.S. dollar actually ended the 2016 somewhat higher, just over CHF 1.02. That actually means because, obviously, just in recollection, just under half of our revenues, half of our leverage and half of our risk-weighted assets are actually in U.S. dollars. So, obviously, as a consequence, the appreciation of that, that pushes up the reported balance. If you look at the RWA numbers in FX-neutral terms, rather than the CHF 268 million number we shared in that slide, you'd be about CHF 7 million lower than that, so just over the CHF 261 million mark. So, clearly, we were I think rather more successful in reducing risk-weighted assets than perhaps what anticipated by the market. That was clearly led by the SRU. That was a significant outperformance against that target, but we also reduced in Global Markets and in some of the other areas as well. So, those are the primary drivers for us actually closing at 11.6% and actually gives us a stronger position to start 2017 with.

[Tidjane Thiam:]

But to the other part of your question, how we look at the future, in preparing for this, I actually went back to what we said in 2015, I think it's on slide 35 that we said we needed CHF 9 billion to CHF 11 billion of capital. And you really have to go back to that number in terms of how we think about capital. Clearly at the time, the prospects of raising that much were nonexistent. So, what we did is a – we were transparent on the CHF 9 billion to CHF 11 billion. We raised CHF 6 billion. We did a number of disposal. You saw our proactive capital management during 2016 for about CHF 1.7 billion, and CHF 2 billion to CHF 4 billion was always the kind of backstop which the IPO provided, and it's been an effective plan in terms of giving comfort to the market on our ability to strengthen our capital position. Now, as you said, things have improved, but we believe we're in a comfortable position. I think incredible scenario on the table on which we are working, and Thomas Gottstein and his teams are working to prepare the IPO, and we have the time to consider currently all the elements of such a decision and ultimately make the best decision for our shareholders.

[Andrew P. Coombs:]

Okay. Thank you. Thank you very much.

[Tidjane Thiam:]

Thank you.

[Operator:]

The next question today is from Andrew Stimpson from Bank of America. Please go ahead.

[Andrew Stimpson:]

Morning, guys. You spoke very optimistically about your outlook here today, especially in markets and IBCM. And I remember at the Investor Day, there are a few questions around operating leverage. And I just wanted to kind of know whether that's still the same today in that your cost base is pretty fixed now and we should expect a low cost-to-income ratio on that marginal revenue rebound, and maybe some level of magnitude around what that marginal cost-to-income ratio could be would be good? And then, secondly, you've seemed to have seen a very material increase in the liquidity coverage ratio to 202% in the quarter. I think that's an average number, so I'm just wondering what that finished the year at and where you think that can come down to in the medium term because it seems to be a material drag on your leverage ratio and probably disproportionate to some of your peers. Thank you.

[Tidjane Thiam:]

Well, thank you. Thank you, Andrew. Good morning again. I think you're raising two very interesting areas, which personally I see as upside in our story. On the outlook on the operating leverage, what I can tell you is that the $5.2 billion we gave you is effectively a cap and we're going to go lower on that. We think that we'll hit – I'm talking about the cost in GM, sorry, cost in GM – $5.2 billion. We can hit $4.8 billion. And the other thing I would say is that the most dynamic part of our portfolio are have very low cost-to-income ratios, okay? I don't want to break down all our P&L, but some of them have a 20% cost-to-income ratio. So, when you think about what's going to happen if the volumes flow in there, there is a significant upside in terms of P&L impact. So, I think you will see that impact materialize in 2017. But I want to be very clear, we've been very clear that we believe in fixed income. We've been very clearly under pressures on equity, so take that into account. And keep in mind also that there is less capital working. But the return on capital are higher. If you think about it, our revenue per RWA has gone up a lot in the restructured unit. We're driving higher absolute revenues with significantly lower RWA. So, we believe it's a good setup. David, about this liquidity, 202%, where are we headed?

[David R. Mathers:]

So, I think if we look at the LCR ratio, so firstly, that is the end-of-the-period number just in terms of that, just to be clear on that, Andrew. So, I think in the course of the second half of last year, we made significant progress reducing our outflows, particularly our non-collateralized outflows, and you'll see that as you look at the denominator of the calculation. I think in terms of our HQLA, so the numerator, and two factors there

[Andrew Stimpson:]

Yes.

[David R. Mathers:]

So I think going into that, we thought it was prudent given, I guess, some of the market disruption we have seen elsewhere to basically remain relatively liquid on the 23rd. We did make some liquidity reduction measures in the week afterwards but, clearly, there's a limit to what one can do between 23rd and the end of the year. So, looking forward, you're actually right, and I'd echo what Tidjane just said, that's clearly a source of leverage efficiency for us, shall we say. I think we should certainly be able to operate by 180% or below for the end of the first quarter. And I think we'd look to be more like about the 150% by the end of the year. We are always going to be at the slightly higher LCR ratio than peers because of our big, lengthy (01

[Andrew Stimpson:]

Thank you very much.

[Tidjane Thiam:]

As we (01

[Andrew Stimpson:]

Okay.

[David R. Mathers:]

Exactly.

[Tidjane Thiam:]

So it's a good deal (01

[David R. Mathers:]

Yeah.

[Andrew Stimpson:]

Got it.

[David R. Mathers:]

I think my estimate was if you didn't understand, Andrew, is I think it's worth at least 10 basis points on the leverage ratio.

[Andrew Stimpson:]

Yeah. Okay, understood. Thank you.

[Tidjane Thiam:]

Thank you.

[Operator:]

The next question is from Kinner Lakhani from Deutsche Bank. Please go ahead.

[Kinner Lakhani:]

Yes. Hi. Good morning. So, I just wanted to take a step back on this CET1 guidance or target. Previously at the Investor Day, you talked about a pre-litigation exit rate of 12% to 13% at the end of 2018. Obviously, we've seen a 90-basis-point impact from the material litigation. And unless you are changing your end state guidance for the risk-weighted assets of the SRU or the growth that you expect in other divisions, then all things being equal, this suggests that the capital ratio will end up more in the kind of 11% to 12% mark, if you see what I mean. So, I'm just trying to get a sense of that. And secondly, just to come back on this point on the legal entity structures, what do you see as the costs related to Brexit and the subsidiarization implications of Brexit? And to what extent is that baked into your cost targets for next year? Thank you.

[Tidjane Thiam:]

Okay. Thank you very much. David, you want to – on target on CET1?

[David R. Mathers:]

Thank you. So, I think as you said, when we spoke at the Investor Day in December, we gave a range for 2017 and 2018 of between 12% and 13% pre any major litigation event. Clearly, we're now obviously post the settlement with the Department of Justice. And I think you can see that whilst the gross effect was about 90 basis points, we did mitigate that substantially in terms of the full-year outturn. I think when I spoke, I said that we expected to operate in the course of the current year at between 11% to 12% pre the IPO process. So, I think that's the type of operating range for this year basically, and that's our guidance for 2017. I think on Brexit, I think at this point, we clearly have a substantial working group looking into this for the referendum last summer, and that's obviously being stepped up post that. I think it's probably premature to give any clear guidance on this. We're obviously looking towards the likely exercise of Article 50 later on this quarter and seeing how that actually pans out. Clearly, we'll look at basically options that preserve access to the EU 27 markets, depending on how the planned negotiations evolve. But I think it's a bit premature at this point to give specific guidance around the cost of that.

[Tidjane Thiam:]

Is that okay?

[Kinner Lakhani:]

Thank you.

[Tidjane Thiam:]

Okay. Thank you.

[Operator:]

The next question is from Daniele Brupbacher from UBS. Please go ahead.

[Daniele Brupbacher:]

Good morning and thank you. And I wanted to ask about more like the client behavior side in wealth management industry regions. Could you talk a bit how that has probably evolved over the past couple of months and what your best guess would be how that looks like going into 2017? And then just on the Swiss IPO again, in Gottstein's presentation at the Investor Day, I think it was slide 23, that was a very useful road map to plan the IPO in terms of next step. Is there anything you could tell us or could you reiterate like when you will first publish the financial statements of the AG and give more guidance? Is there going to be like a Q2 event? How should we think about it? Is some sort of a mini Investor Day? And also how you think about the conversations with the FINMA regarding the calibration of the RWA requirements, if you could just sort of give us a bit of an update there and also probably whether STS is included or not that are – which businesses of IWM are going to be probably part of Swiss legal entity? Just to have a bit of an update on some of these topics, that would be useful. Thank you.

[Tidjane Thiam:]

Okay. No, thank you. Thank you, Daniele, and good morning. On clients, it's been an interesting year certainly for part of the year in Q3. You heard us say that there's two things, high cash balances and lower levels of transaction and trends activity, and I think that was kind of across the board. Then you had the events of Q4 and the U.S. election which kind of reawakened the appetite. And so, we see positive momentum towards end of the year, an improvement in January in terms of levels of activity and trading, and also a lot of clients looking to protect their portfolios. There is nervousness around the levels in the markets today. In fact, that the markets possibly price a very, very optimistic scenario in terms of the evolution of the U.S. where basically you would get tax reform and no-trade issues, a lot of growth and the regulation in the financial sector. So, clients – and I'm not impressing a personal view here. Clients are concerned about those things and look for downside protection. But all that creates opportunity for us. What we have found, and that's been really very successful both in IWM and Asia, is really working for real ultra-high-net-worth clients and designing very complex solutions for them has proven really very effective and very rewarding because there's really little competition in that space, and we are really leveraging our market and investment banking capabilities to the max. If you look at Asia now, there are quarters where more than 60%, 65% of revenue in IBCM is linked to ultras either personally or for the corporations they own, and you can see a similar pattern in the other regions, too. So, more positive, I would say, than we've been before, and I think we have more opportunities to learn and to advise our leading clients. On the Swiss IPO, you're right. I remember that slide. I used it in my section as well, but there is no change to that. I think we're progressing that we plan that the teams are working towards in the first half of this year.

[Daniele Brupbacher:]

Thank you.

[Tidjane Thiam:]

Is that okay? Okay. Thank you, Daniele.

[Operator:]

The next question comes from the line of Kian Abouhossein from JPMorgan. Please go ahead.

[Kian Abouhossein:]

Yes. Thanks for taking my questions, two of them. First of all, you gave a new cost guidance of below CHF 18.5 billion for 2017. Can you talk a little bit about – and clearly, that's roughly a month, month-and-a-half after the Investor Day. Just wondering why you're giving it now rather than what's different from the time in December. And in that context, how you think about the revenue environment, clearly, considering the view that you're taking on cost? And the second question is related to the SRU, which eats away most of your pre-tax core profit even post-litigation. Can you talk a little bit how we should think about this number in respect to 2017 in terms of potential pre-tax losses or what are the deltas that we should take into context in order to get a better understanding?

[Tidjane Thiam:]

So, very good and thank you, Kian. David, do you want to take that?

[David R. Mathers:]

Thank you. So, I think no change in that sense. So, when we spoke in December, we wanted to give our targets for 2018 and gave clear guidance around that. I think that was the core focus there. And I think we all said that we'd come back in the first quarter with more detailed guidance for 2017, and that's what we're doing today. So, essentially, that – we look to have our cost at or below CHF 18.5 billion in FX-neutral terms. And just to reiterate the point I made before, today's exchange rates, that'd be about CHF 300 million less than that just from our modeling point of view. And we've also given guidance around the head count reductions as well. That was obviously a key metric that I think people were looking to us for last year. We obviously exceeded that at just over the 7,250 mark against the 6,000 target. And we're setting a target now between 5,500 and 6,500 for 2017. So, I think it's more I think so people can actually see the glide path we're actually on towards our 2018 numbers. I don't think we gave last year year-by-year guidance for the SRU, and we're not going to do so now. I would merely say that we obviously laid our targets for the SRU in both 2018 and 2019, the latter being when the legacy funding costs actually expire. I would merely suggest that given that we want to be on a clear glide path from where we were last year to where we want to be in 2018, that's probably the best view in terms of the outlook for 2017. In terms of any detailed comments, I mean, I do think that the emphasis in 2017, as we have said before, will be increasingly around leverage collapse (01

[Tidjane Thiam:]

By the way, you were right to insist on that, just to build on what David had said, because now that RMBS is gone, two big things, in my mind certainly, were RMBS and SRU. Now that RMBS is gone, SRU is absolutely weighing on a very strong earnings power, what I consider a very strong earnings power of a very strong franchise. And props to David actually, he's done a great job driving it down. But it's really crucial that we stay focused on that. It's certainly a swing factor in our story.

[Kian Abouhossein:]

If I could just briefly follow up on SRU. I mean, you've gone from adjusted CHF 3 billion to CHF 0.3 billion and your target in SRU 2018 is CHF 1.4 billion. Should we just think about a glide path towards just the normal – as we've seen, the linear glide path towards that number is not unreasonable?

[David R. Mathers:]

I don't think we want to give specific targets year by year, but nonetheless, I think you know we want to make sure that as we get to the end of 2017, you can see we're very well positioned for the 2018 goal and then particularly for the 2019 goal because that's actually when that big chunk of costs in the SR relating to the legacy finding (01

[Kian Abouhossein:]

And could you just comment on revenues since you're giving the cost guidance?

[Tidjane Thiam:]

Nobody's jumping to answer that. I think we've stayed away from that. Honestly, Kian, we haven't even given NNA growth guidance. We talk about it ex post once we deliver it. We've given you PTI guidance in a number of cases. I think, on revenue, we're just prudent. Frankly, you just have to look at the horizon and see all the potential discontinuities that we're facing, if only just the French election, but one has to be reasonably cautious. But on the basis of what we know today, and if there were no major discontinuities, we'd be quite positive, which is what we've said in our outlook. But that's, as I said, all other things being equal and on the basis of the world as it is today, we think there's an upside in Global Markets and Brian has been clear about this kind of CHF 6 billion revenue potential. We think that's achievable. Revenue in IBCM is also probably achievable. So, we're cautiously positive. But I'm afraid we won't give you a number, but we're cautiously positive.

[Kian Abouhossein:]

Thank you very much for your time.

[Tidjane Thiam:]

Well, thank you

[David R. Mathers:]

Thanks, Kian.

[Operator:]

The next question comes from Fiona Swaffield from RBC. Please go ahead.

[Fiona M. Swaffield:]

Morning. Thanks for taking my questions. Two. The first one is on recurring commissions within the three Private Banking geographic divisions. They are very strong, particularly in APAC. And I wondered if you could talk about the dynamics there and expectations going forward. I was just surprised given regularization and other drags. The second is coming back to the moving parts on the capital ratio. And I think at the Investor Day, you talked about a 200 to 300 basis point of negative drag from RWA growth, and that was excluding the SRU. I wondered if you thought that that number would be lower now given the achievements in Q4. Thanks.

[Tidjane Thiam:]

Do you want to take the RWA first and then we'll...

[David R. Mathers:]

Sure. Fiona, I think that was a reference back to the original Investor Day back in October of 2015. I think we didn't update our guidance for RWA in December of last year, and I don't think I'm going to now. Clearly, if we think about the strategy of the group, then the reallocation of capital towards the growth businesses remains core to what we're actually doing, and that's an absolute priority. But I think, obviously, if you think about the numbers post GMAR, there's been quite a lot of shifts since we actually spoke back in October of 2015. So, I wouldn't give any specific guidance in terms of that 200 to 300 basis points at this point.

[Tidjane Thiam:]

Yes. Fiona, on the revenue, we – how can I say this – we're extremely focused on recurring for reasons you can imagine. So, that's true from APAC. Mandate penetration is still low, but we're driving it up with a degree of success. And more generally, the business is just very, very focused on that. We treat them as higher quality earnings, and we use every opportunity to drive them up with customers. And if you look at APAC, it's interesting. I said we had 17% increase in revenue in the PB, in the Private Bank. It's the five year in a row that we do this. So, over time, you're just finding that it's like sort of a virtuous circle, where we manage to really balance very well the sources of income from our clients. And I think you would notice also that even net interest income has been very strong too, and you should expect it to grow with the increase of the loan penetration and what the AFP (01

[Fiona M. Swaffield:]

Can I just check though, there's a very, very significant step change in APAC. Is there kind of – so that's just underlying growth? I mean, it was nearly 14%.

[Tidjane Thiam:]

There's a one-off. There's a one-off there.

[David R. Mathers:]

Let me just summarize. If we'd actually look at Asia for the full year, the biggest driver in the Private Bank was actually net interest income, which was up about CHF 157 million, then recurring was up about CHF 42 million, and transaction was up about CHF 30 million. In terms of the fourth quarter effect, if you read some comment in the MD&A, what we refer there was a true-up basically relating to certain costs which actually came through in the fourth quarter which, from memory, basically, were actually booked in recurring. So, you saw a bit of a jump basically in the fourth quarter in the exact recurring number. The numbers I've just given then are a full-year effect which are relatively clean for that because it was a – it was they were depressed in the first three quarters and then rebounded in the fourth quarter.

[Tidjane Thiam:]

From memory...

[Fiona M. Swaffield:]

Great. Thanks.

[Tidjane Thiam:]

...to be checked, but I think the jump was 37% and I think the underlying was 9% or something like that. So, the underlying is strong...

[David R. Mathers:]

Yeah.

[Tidjane Thiam:]

...but not as strong as what you (01

[David R. Mathers:]

It's an CHF 18 million one-off – well, it's an CHF 18 million reversal from the first three quarters into the fourth quarter. So, if you think about it, Fiona, for the full year as a whole, absolutely fine and your comparisons work. If you look at the fourth quarter against the previous three quarters, you'll see some distortion from that.

[Tidjane Thiam:]

It's overstated.

[Fiona M. Swaffield:]

Right.

[Tidjane Thiam:]

But if you don't detract from a very strong underlying, the 9% or 10% is very strong.

[David R. Mathers:]

Correct.

[Tidjane Thiam:]

So, you're correct on the conclusion that it's doing well.

[Fiona M. Swaffield:]

Thank you.

[Tidjane Thiam:]

But it's a bit overstated in 4Q, correct.

[Operator:]

Thank you. The next question is from Jeremy Omahen (sic) [Jernej Omahen] (01

[Jernej Omahen:]

Okay. Good morning from my side as well. Actually, I have two questions. One is more general and then one of a technical nature. So, the first question, Tidjane, relates to the comment that you made early on of this presentation in regards to the IPO. And I think you said something along the lines of we're continuing with the preparations; however, we will examine the regulatory environment to see if we can reach a more attractive solution. And I'd like to focus on this second part of your statement. What exactly from a regulatory perspective is new that could affect your thought process on the IPO? And secondly, what would the alternatives be to a potential IPO? Now, we are aware that there's obviously a capital aspect to the IPO as well. And I was just wondering whether one of the alternatives to an IPO would be a plain vanilla capital hike, if you could just clarify that. And then on the second question I guess more for David. I'm referring to page 30 of the presentation. Well, so all of these obviously is fine and encouraging to see growth and better numbers but the question is the following. So, loans are now up from CHF 36 billion to CHF 40 billion within a year. I was under the impression that essentially all of this is Lombard lending, which by definition should have a very, very low risk weight, and yet risk-weighted asset growth keeps outpacing loan growth by a quite substantial margin and I was wondering what the reason for that is. And just secondly on this slide, so you say that the bulk of the margin improvement is due to higher volume of lending. Given that loans are only up by CHF 1 billion in the quarter and the margin's up 8 basis points. So, I was wondering what the reason for that is. Thanks a lot.

[Tidjane Thiam:]

Okay. Thanks, Jeremy (sic) [Jernej] (01

[Jernej Omahen:]

Tidjane, can I just come back on that briefly? So I'm just trying to understand whether the message is we see potential for unfavorable regulatory treatment of the IPO, and therefore, we might consider other options or is the message the opposite of this...

[Tidjane Thiam:]

Oh, I see. Sorry.

[Jernej Omahen:]

...i.e., regulation is getting better, and we might not have to IPO?

[Tidjane Thiam:]

Okay. It's my mistake, I misunderstood. No, it's not the former. It's the latter; absolutely not the former.

[Jernej Omahen:]

Okay. Thanks a lot.

[Tidjane Thiam:]

It's broader. It's really have a broader regulatory environment, Basel IV, et cetera. Are there more attractive options out there? And really, again, we do feel that we have not changed what we've been saying about this from the start. Every slide. I know because we insisted (01

[Jernej Omahen:]

Right. Okay, thanks a lot.

[Tidjane Thiam:]

Sorry, I misunderstood. David?

[David R. Mathers:]

So, let's just take your points in terms of, Jeremy (sic) [Jernej] (01

[Jernej Omahen:]

Thank you very much.

[Tidjane Thiam:]

It's very, very predominantly Lombard lending.

[David R. Mathers:]

Yeah.

[Tidjane Thiam:]

Do we have more questions? No? No more questions?

[Operator:]

There are no further questions.

[Tidjane Thiam:]

Thank you all for attending the call and we're looking forward to see you at our next results call. Have a very good day. Thank you.

[Operator:]

That concludes today's conference. An e-mail will be sent out shortly advising you on how to access the replay of this conference.