Credit Suisse Group AG
Q4 2015 Earnings Call Transcript

Published: 4 Feb 2016

[Operator:]

Good morning. This is the conference operator. Welcome and thank you for joining Credit Suisse Group's Fourth Quarter 2015 and Full Year Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is recorded. You will have the opportunity to ask questions directly after the presentation. At this time, I would like to turn the conference over to Mr. Christian Stark, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Stark.

[Christian Stark:]

Good morning and welcome to the Q4 2015 and full-year 2015 results call. Before we begin, let me remind you of the important precautionary statements on slide two including the statements on non-GAAP measures and Basel III disclosures. I now turn it over to Tidjane Thiam, our CEO.

[Tidjane Thiam:]

Good morning, everyone. Welcome and thank you for joining our 2015 full year and Q4 results call. Let's start this presentation. I would like to highlight three key points. First, we have made a good start in implementing our strategy. Our three geographic businesses, APAC, Asia Pacific, the Swiss Universal Bank, SUB, and International Wealth Management, IWM, have all delivered profitable growth in the fourth quarter of 2015, which we all know was challenging. Our key financial ratios are stronger. We ended the year with a CET1 ratio at 11.4% and a CET1 leverage ratio of 3.3%. Clearly, within these Global Markets we have been facing pressure and I will update you in more details on the actions we are taking to address this later on. Second, we're addressing a number of legacy issues. Their impact on our reported results is visible today. Notably, were the upfront financial and accounting costs associated with the restructuring of the bank as we communicated last October and the write-off of a goodwill. Third and last, given the environment, which has become much more challenging, we are accelerating the pace of our restructuring. In this context, we have been taking actions over the past few weeks to bring forward a number of cost savings initiatives as it is even more important now to lower our breakeven point as revenues are under pressure. So with that, let me take you through more details on these results. Looking first at full-year 2015, you can see here in the first column that we reported a pre-tax loss of CHF2.4 billion reflective of the CHF3.8 billion goodwill impairment that I just mentioned earlier, litigation and restructuring charges and fair value (03

[David R. Mathers:]

Thank you, Tidjane. Good morning, and I'd like to thank you for joining our fourth quarter 2015 earnings call. So, I'm going to start today on slide 31 with a summary of the financial results. For the full year, we had a pre-tax loss of CHF2.4 billion on revenues of CHF23.8 billion. However, as Tidjane has already noted, our reported results include a number of significant items which are not reflective of our underlying business performance. These include certain major litigation costs, goodwill impairment, restructuring charges related to the accelerated implementation of our strategy, fair value movements of our own debts, as well as a number of smaller components. Therefore, alongside the reported numbers, we provide adjusted numbers that are consistent with our underlying business performance. We provide a full breakout of these adjustments for the group and for each of our divisions in slide 69 to slide 75 of the appendix. In relation to the goodwill impairment, we took a charge of CHF3.8 billion in the fourth quarter, all of which was in respect of our former investment banking activities, primarily following on from a DOJ acquisition in 2000. This charge is allocated across the new Global Markets, Asia Pacific and IBCM divisions. And it's important to note that the impairment charge does not impact outlook through CET1 capital or leverage ratios. I'd also note this is the last time that FVoD movements will feature in our headline results as we've elected to adopt new accounting standard from the 1st of January 2016. Going forward, these valuation movements will reflect to direct to equity as a component of other comprehensive income. Now, if you exclude the adjustment items I have listed, we achieved a full year adjusted pre-tax profit of CHF2.1 billion for the group. If we look at the fourth quarter, we reported a pre-tax loss of CHF6.4 billion reflective of the CHF3.8 billion goodwill impairment, litigation, restructuring charges and FVoD movements. On an adjusted basis, we had a pre-tax loss in the fourth quarter of CHF1.1 billion for the group. If we look briefly at net new assets, we achieved core inflows of CHF4.4 billion in the quarter and for the full year, we generated net new asset inflows of CHF50.9 billion. That reflects solid business generation inflows across the divisions notwithstanding the adverse impact from regularization that I will discuss later. First, to review the core results on slide 32, please. So with regard to (30

[Tidjane Thiam:]

Thank you, David. As we know, the environment has deteriorated materially during the fourth quarter of 2015. A combination of uncertainty on Chinese growth an abrupt drop in oil prices, large industry mutual fund redemptions of financial assets, asynchronous policies by leading central banks, lower liquidity have all contributed to making the fourth quarter of 2015 challenging with lower levels of client activity, lower levels of insurance and material shift in the prices of some asset classes. In this challenging context, the bank has delivered resilient performance on the key aspects of our strategy. APAC has collected CHF17.8 billion of net new assets, Switzerland CHF13.8 billion. We have seen outflows in IWM, but that's for regularization continuing. It was in line with our guidance and decreasing. And finally, IBCM has a very good quarter. We have the best performance in deals announced since 2010. Global Markets was challenging, but we're addressing this and reducing the inventory aggressively, transforming the model to make sure that it is less volatile going forward. And finally, we have accelerated the pace of our cost savings with CHF1.2 billion or CHF3.5 billion already actioned at this point. With that, I will close this session and open the call to Q&A. Thank you.

[Operator:]

Thank you. We will now begin the question-and-answer part of the conference. Your first question today comes from the line of Huw van Steenis from Morgan Stanley. Please go ahead.

[Huw van Steenis:]

Good morning. Just three questions. So, first, given the very weak performance in Global Markets, can I ask the same question I did at the Investor Day which is, are you doing enough? Can you actually get to a 12.5% return in Global Markets through cost-cutting alone? I was disappointed you say earlier accelerating cost-cuts rather than actually more fundamentally looking to reconfigure that unit. I was just wondering what additional actions you think may be necessary. Number two on capital, you're obviously missing your RWA target. Do you think, in retrospect, to actually raise enough capital? And thirdly, and maybe this is more technicality. I'm just surprised you didn't pre-announce given the scale of the miss versus consensus expectations. I was just wondering, why you chose not to. But anyway, thank you very much indeed.

[Tidjane Thiam:]

Okay. Good morning. Thank you. On Global Markets, we really have a comprehensive plan. If you look at what's happening, we said that we would reduce the RWA allocation to Global Market back in October when we talked about it, and we have hit that target. What we're doing now is looking under that, at the make-up of that RWA, and we found in there, positions that are not consistent with (01

[David R. Mathers:]

You asked the question. You said did we actually raise enough capital? I think I would point out a couple of points really. Firstly, when we actually raised – did our capital raise last October, I think we did make it clear that part of the point of the capital raise was to actually fund restructuring and reengineering of the group, and that clearly is coming through in terms of the restructuring costs for USDC (01

[Huw van Steenis:]

Okay. Thanks.

[Tidjane Thiam:]

Okay. Thank you.

[Operator:]

Thank you. Your next question is from the line of Andrew Coombs from Citigroup.

[Andrew P. Coombs:]

Good morning. If I could please have a couple of follow-ups on Global Markets and then one on Wealth Management as well, please. With respect to Global Markets, just firstly looking at that fixed income result down 60% year-on-year and Global Markets down 50%. If you include Global Markets in Asia Pac, clearly far, far worse than peers. You've talked about the mark-to-market losses there, CLO and RMBS, but to Huw's point, I guess, firstly, is there any reason why this shouldn't continue in Q1, given the conditions have only deteriorated since then? Secondly, at the Investor Day, you did suggest you were going to review areas that you didn't think could reach 12.5% return. I know you made some specific comments on the distressed portfolio there, the Global Markets RWAs were actually flat Q-on-Q. You're still talking about increasing that by 2018. How bad do these product areas need to get before you can reconsider the capital that you're allocating to them particularly, within global credit and structure product? Second question, Global Markets with only about – you're talking about high and flexible cost base. I appreciate the point about expensed variable comp versus awarded variable comp. Your awarded variable comp is only down 11% year-on-year. Global Markets revenues are down 14% year-on-year, for example. Was there any reason why you couldn't cut the awarded variable comp further? And then a final question on the outflows both in the Swiss Private Bank and in International Wealth Management, you list a number of them one-off factors as it were regarding deposit repricing, the external asset management exits, the litigation case and (01

[Tidjane Thiam:]

Okay. Thank you. Thank you, Andrew. I'm going to take the cost base, and then I would like David to hand over your GM question. On the cost base, the 11% (01

[David R. Mathers:]

Sorry, Andrew. Just me – can you ask the question again on the marks? Sorry.

[Andrew P. Coombs:]

I mean, given the marks...

[Tidjane Thiam:]

Taking going forward, yeah.

[Andrew P. Coombs:]

Yeah, exactly. Just the market conditions have probably deteriorated given the sizable mark-to-market losses you've booked, and you're talking you're trying to reduce inventory into this adverse environment, presumably some of these mark-to-market losses are recurring during the first quarter as well.

[David R. Mathers:]

Thank you. Well, I think – I don't think I would want to give (01

[Tidjane Thiam:]

And I think your next question was on the outsourcing IWM. I think the short answer is yeah. These are really one-offs, and you shouldn't expect them going forward.

[Andrew P. Coombs:]

Thank you. Very clear. Just one quick follow-up there. The plan is still to grow the RWAs in Global Market to the CHF84 billion?

[David R. Mathers:]

No, I think we've set a target of CHF83 billion to CHF85 billion. Clearly, the out turn for the fourth quarter was much lower than that, around the sort of CHF74 billion level. I think, as Tidjane said, we have done a very substantial resize in the Global Markets. I think the priority for Global Markets in 2016 is to reshape the business the way we've laid it out. I think we do want to see more equities like fixed income business. We do not want to see these trading books at the size they actually are. That will probably result more though in a redistribution of RWA in the existing limit. And I don't think you should really look for us to see it going up to the ceiling of CHF83 billion to CHF85 billion in these market conditions.

[Andrew P. Coombs:]

Very clear. Thank you very much, guys.

[Tidjane Thiam:]

Just to add about it. That would only happen if our profitability had improved very substantially. In one of my slides you saw the margin on RWA on where it's going. It's really going into IWM in APAC, and you see the fee decreasing in Global Markets. So, until there's a clear improvement, given that we put our business is in competition for capital, there'd been no additional investment in Global Markets.

[Andrew P. Coombs:]

Thank you.

[Operator:]

Thank you very much. Your next question is from the line of Jon Peace from Nomura.

[Jon Peace:]

Yes. Thank you. Two questions, please. Firstly, on January trading, I know you're smaller in macro than your peers, and that's an area you've reduced. But are you seeing any sort of material offset to the weaker credit environment from macro? And also, some of your peers have talked about a reasonable January for margins in Wealth Management. I just wonder if you had any comment there. And then just separately, on oil and gas exposure, I can see you've given us numbers in various places, and thank you for that. But could you give us a sort of total consolidated exposure to oil and gas, and how much of that is investment grade versus non-investment grade? Thanks.

[Tidjane Thiam:]

David, why don't you take the January trading in macro. I'll take the margin and we'll come back to the oil and gas.

[David R. Mathers:]

Thank you. I think we did see some small improvement in our rates business, particularly actually in U.S. rates and Asia rates technically, but not really in European rates. But I don't think that would – it's clearly a relatively small business for us, and I wouldn't take it out of context in terms of that.

[Tidjane Thiam:]

On Wealth Management in January, look, what we are seeing is Asia a continuation of what we've seen in 2015 in Q4. And, frankly, in the other areas, it's just too early to tell. And oil and gas, do you want to comment on those?

[David R. Mathers:]

Yeah, so let's just – let me take the oil and gas point. So, within the appendix, you will note basically we actually do give the oil and gas exposure. And you can see on page 80, and that was a total of a $9.1 billion within the corporate bank. So that's clear, the majority of our oil and gas exposure, if you add up what we've given elsewhere, you can see it's about a couple of billion elsewhere, say around about the $11 billion mark. But let me focus on the corporate bank oil and gas number. You see here the number of $9.1 billion. Of that, as you can see, 58% is investment grade, 42% is non-investment grade. I think there's two points I'd make. Firstly, one, only about 22% of this actually is funded, 78% is actually unfunded. So, I think I would not get this out of proportion in terms of this. And secondly, the lending is very heavily biased towards asset back lending in terms of this. So there's very good recovery rates against the types of exposure we actually have here. So, I think it's clearly very much worth watching, but I don't think I would be particularly concerned and I certainly wouldn't – reality is if you look at the losses that we had within the Global Markets business, it was predominantly driven by the overall distressed loan book, not particularly by the oil and gas component, although clearly, the oil and gas sell-off has actually driven the weakness in the distressed loan market.

[Jon Peace:]

Got it. Thank you.

[Tidjane Thiam:]

Okay. And I think that's correct. Next question?

[Operator:]

Thank you, sir. Your next question is from the line of Kinner Lakhani from Deutsche Bank.

[Kinner Lakhani:]

Yes. Good morning, Tidjane. Good morning, David. Three questions. Firstly, I just wanted to revisit the capital point. Essentially, at the time of the Investor Day, I think we got a pro forma CET1 ratio of 12.2% and obviously, today, the number is 11.4%. So, the delta feels like about CHF2.5 billion, of which, I think about CHF1.1 billion is the ex goodwill loss, CHF0.6 billion is the Swiss pension, but I still kind of feel a missing almost CHF1 billion in terms of the deviation on the CET1 capital. Secondly, on cost, again, I'm trying to get my head around the CHF1 billion miss in the underlying operating expense. How much of this is perhaps the change in the deferred comp methodology and the impact that would have had in terms of true-up in Q4? And thirdly, just to talk about the credit or the FID business. Obviously, there seems to be a big drive now to de-risk the franchise, perhaps, to a greater extent than we might have thought at the Investor Day. Now, given that this is happening in areas that were previously considered as high ROE franchises which we saw from the chart. How does that make you feel about the ROE target, the ambition you have for 2018 which looks relatively high? Thank you.

[Tidjane Thiam:]

Okay. No, thank you. Moving to your questions, the movement of 12.2% to 11.4%, Dave?

[David R. Mathers:]

Let me just start on the capital numbers. So if we just refer, then please, to page 66. What you see there, basically, is a walkthrough basically from the 3Q to the 4Q numbers. So, obviously you the pre-tax loss of CHF6.4 million of which CHF3.8 billion is goodwill and it's not relevant for the look through CET1 numbers. You then have the (01

[Tidjane Thiam:]

And the next question on (01

[David R. Mathers:]

Yeah. I think it's – I mean, we can probably give you after a proper reconciliation of this in terms of the numbers. You can see that it's back at nine months 2015, the annualized cost of that CHF20.5 million and the number, excluding goodwill impairment, was about CHF22.1 million for the full year. Now, within that, just to, that was the question. The major component here really is about 0.1, which is the change in deferral that you're actually referring to. Obviously, then the second point is you know that a substantial component of our expenses are actually in U.S. dollars. So, obviously, as the U.S. dollar has appreciated, and you're looking at the Swiss franc consolidated numbers, they will go up in FX terms. There's then obviously the restructuring provisions you mentioned before, just CHF355 million. And then there's also litigation provisions which actually are taken through expenses. And there's also some indirect taxes in this as well. So, those are the major components basically in terms of the walk-across from where we were at nine months to where we are there. I mean, I think there's a clear point here, which is, if you adjust for all these factors, our underlying expenses are still marginally up compared to where they were at nine months. So, I think this underlines the importance of the cost program and what we need to achieve during 2016.

[Tidjane Thiam:]

Yep. And the last question was really the kind of fixed portfolio and how we look at profitability. I think you have two considerations there. As you rightly said, there is the absolute return you can get from a given activity and then there is the volatility which is the standard deviation in that return, and that can be outside risk appetite. And I think the issue with some of those activities is that they really just have become too big compared to the size of our investment bank. When you are running an investment bank with CHF200 billion of RWA, you could have a (01

[Operator:]

Thank you. Next question is from the line of Daniele Brupbacher from UBS.

[Daniele Brupbacher:]

Yeah. Good morning. Thank you. I had a numbers question and then one more on strategy. On the numbers, you now gave us values for additional disclosure on the divisional levels, and I saw that interesting comment, the Swiss business in Private Banking was up almost 20%, I think, in 2015, or CHF300 million and also some increases in IWM and APAC Private Banking. I think you made some reference to the replication portfolio during your prepared remarks. Could you just elaborate a little bit on what happened there in terms of the results in 2015 and what you probably could expect going forward? And then more generally on the environment in APAC specifically, you said the environment has deteriorated materially, but you at the same time reiterated your target. So do I understand you correctly that you consider this to be a temporary challenging situation and you are still as positive as you were before on the region? And when you talked about lowering the breakeven point, I guess that was for the group overall. How should we think about it? What is your revenue breakeven point? That would be very useful to get some thoughts around that as well. Thank you.

[Tidjane Thiam:]

First, let's go back to the first question the replication portfolio.

[David R. Mathers:]

So, yes, I think you obviously saw the increase in net interest income. Obviously, if you look to their numbers before over the last couple of quarters, then basically, the primary driver of our net interest income has been the various repricing move that we put in place back in January. So, that includes obviously, zeroing out in terms of deposits, although we obviously do not charge negative interest rates on our Private Banking or retail deposits, but we do pass all the negative interest rates through to some of our corporate and institutional clients I'm afraid, given the negative interest rate environment in Switzerland. I think you also know basically that we've been working diligently to actually expand our loan portfolio across the businesses and that applies to all three businesses which is clearly positively benefiting their interest income. The impact from the replication portfolio was negative last year against that, but I think you have history of us basically, so you know this has been in a decline now for five years, because clearly what you actually have is about an 18-month swap duration, and those swap curves are actually really running out. Now, there's basically not much left as interest rates, I'm afraid, have continued to actually fall. So, yes, it's a margin mix, but the really important thing was the moves that were taken by all three businesses in response to the interest rate environment and what we actually did in the Private Banking operations there which I think we've discussed before.

[Daniele Brupbacher:]

And is it fair to assume that this is now the full impact in the numbers? Or is there more to come assuming you will not implement further measures on the repricing side?

[David R. Mathers:]

Well, I think that's probably fair.

[Daniele Brupbacher:]

Yeah. Okay. Thanks.

[David R. Mathers:]

It's clearly making forward-looking statements on interest rates is not (01

[Daniele Brupbacher:]

Sure.

[David R. Mathers:]

I think in the current interest rate environment we have with negative Swiss interest rates as they stand today, then I think, no, I think we've completed the rollout of the measures. Clearly, if that were to change at all this year, and as I said, it's difficult to predict how 2016 will actually break out, then we'd obviously look at that again in that context. And I think as you know though, and as Tidjane has mentioned before, the continued expansion of our lending operations across our Private Banking businesses does remain a core part of our strategy. So that should boost net interest income.

[Daniele Brupbacher:]

Okay. Thank you.

[Tidjane Thiam:]

On APAC, thank you for the question. Because it's really important point in our equity story. We fundamentally believe in the long-term prospects of Asia. That is rock solid. Therefore, we're driving long-term value creation. And we think it's the right thing to do to invest in that part of the world. Yes, there will be volatility from one quarter to another, but we are committed. And actually, that commitment has a very direct upside which is that currently, we are picking up resources of better quality than we ever have and at a lower price than we ever have because our commitment to putting capital in the region no matter what is attracting actually people who are in the region, believe in the region and want a career with a player that is unapologetic about growing in Asia. We are absolutely convinced it's the right thing to do for our shareholders. And frankly, when I look at the performance in 2015, CHF17.8 billion of net new assets, I think that's remarkable considering all the challenges we've seen in markets. And in Q4, which everybody was nervous about, CHF3 billion for a business of that scale. We have exceeded, in absolute terms, players who are much large than us in Asia; 12% of AUM growth in what's supposed to be a very challenging market. So, how do we continue to grow? We continue to recruit. The good thing about recruiting top quality people, we sent 40 people in the fourth quarter out of the 70 people, so an acceleration in recruiting more people and of better quality. They strengthen our teams. Loan penetration is the lowest actually of all our regions in Private Banking in Asia. So, we see a big upside there both in the existing portfolio and in penetrating new clientele. We have geographic expansion. We have been historically underway China. We can invest and gain market share there. And I will say also that the credit track record of Asia is one of the best in the banks. We have heard a number of margin calls and surprisingly in the fourth quarter, and they've all done well. They've all done well. People have done what they're supposed to do, and there's been basically no credit incident or no issue in the Asian portfolio. So, not only is it growing, not only is it (01

[Daniele Brupbacher:]

Thank you very much.

[Tidjane Thiam:]

Okay.

[Operator:]

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

[Kian Abouhossein:]

Yeah. Thanks. And thanks for the disclosure on the energy side. That's very, very helpful. Three questions. It sounds to me that – and just I want to get this clarified. The endgame is 2018, all your targets are set in 2018. In the meantime, if the environment is more difficult and you talked about challenging, you talked about fourth quarter be more difficult than expected, if the environment continues to more challenging, ultimately 2018 is the endgame and if operating leverage is negative, you're willing to take that operating leverage as you're investing continuously. I just want to clarify, this is how we should think about the strategy. And in that context, the CHF9 billion to CHF10 billion on page 20 of your strategy slides. Is that still a realistic outlook from what you're seeing in the business now, Tidjane, that you had even more time to look at it and in the current environment? The second question is if you could explain a bit more how you go from a cash equity – how you create a fixed income cash equity like because equities is a flow agency business. DOJ is not a flow agency business, and I just try to understand what your strategy here is. And the last point is just to clarify on cost deferral. How many years do you have now deferrals on cost, bonuses and what did you have previously? Thanks.

[Tidjane Thiam:]

Okay. No. Thank you. Thank you, Kian. On 2018, I think you are right to say that the difficult conditions challenge that. Part of what we're doing is really, really, having a go at the cost as you've seen that is more aggressive to recreate a bit of room in terms of operating leverage because you're starting from a relatively bad place. The other area where we have some leeway, and David made that point, is around dividend and how prudent we've been in total payout ratio, et cetera, during this period. And for a level (01

[David R. Mathers:]

Sure. I mean I think the unrecognized conversation at the end of 2014 was CHF3.1 billion and the unrecognized at the end of 2015 was actually CHF2.3 billion.

[Kian Abouhossein:]

What is the deferral timeframe? I'm sure you get that later at the employment reports but just...

[David R. Mathers:]

Three years. So, you can actually see the (01

[Tidjane Thiam:]

So you can (01

[Kian Abouhossein:]

Yeah. And just on the environment, you mentioned that you could, at one point, potentially slow down. Investment can be flexed I think you said. If this environment continues is that something – is that kind of the trigger potentially? Or does it have to get much worse? I mean, how do you think about the flex on investment? What are the trigger points, really?

[Tidjane Thiam:]

It's a good question. I think one of my previous answers you find part of the answer to that which is that really the place where we would be the most resolute is certainly Asia. Because for all the fundamental reasons I gave, we would continue. There are other areas where we plan to invest wherever results is less obvious. I don't want at this point to go into too much detail on that, but we have flexibility, should the environment not improve, but I think frankly that's a quarter-by-quarter discussion that we're going to have in the coming quarters.

[Kian Abouhossein:]

Okay. Thank you very much.

[Tidjane Thiam:]

But to summarize how I feel about it, I think the CHF3.5 billion, I think we can exceed the CHF3.5 billion of cost savings. I think what we've achieved in two, three months shows you that. I'm quite confident we'll hit that early before the end of 2018. And there's more to come from there, so that's one lever. We can save more costs, and we can also slow down or time differently the investments.

[Kian Abouhossein:]

Thank you.

[Operator:]

Thank you. Your next question comes from the line of Fiona Swaffield of RBC.

[Fiona M. Swaffield:]

Hi. Good morning. I had questions in a couple of areas. Firstly, on the Swiss Universal Bank potential IPO, could you update us on basically how that differs from the numbers we see because I think it's the legal entity whether there's a difference in numbers and also whether you're still sticking to your CHF2 billion to CHF4 billion I think indication of a capital release. The second area was just the – I mean, because the starting cost base underlying, as you mentioned, is higher. So, are you still looking for CHF18.5 billion to CHF19 billion of absolute cost base in 2018 or has that gone up or are there other offsets? If you could discuss that. And then lastly on RWAs, 2018 is some time off. How do you think – should we still be expecting the RWAs to grow in 2016, 2017 or do you think we'll have some offsetting impacts on where are we on kind of model changes in the Swiss multipliers coming in? If you could help us a bit on a shorter term RWA outlook. Thank you.

[Tidjane Thiam:]

Okay. Thank you. Sorry, I just want to make sure we understand your last question. I missed the beginning of what you said on RWA.

[Fiona M. Swaffield:]

Just on RWAs, obviously, we're expecting them to grow towards 2018, but just shorter term, could the reduction in the SRU come in before the RWAs from growth? So, what's kind of the shorter term outlook?

[Tidjane Thiam:]

Okay. Very good. I think they're all for you, David.

[David R. Mathers:]

Thanks, Fiona. So, just on the Swiss Universal Bank. You're absolutely right. What we're reporting here is an MIS construct. So, it's the measure of reporting numbers from the Swiss Universal Bank whereas the actual entity that we IPOed is Credit Suisse (Schweiz) and that will be a separate legal entity. I don't think – today, I actually have an update for you on the exact financials of what the entity will look like. I think that is somewhat premature. As I said, the license actually went in actually on the 31st of January and the entity expect this to operate the second half. So, I think by the time we get to the end of the year, we're probably in position to start to give you the LE numbers but they will probably be slightly different from the MIS numbers just as we actually work through a completely separate legal entity at that point. I think on the second question I believe was on the cost base. And I think what we said back in October was that we would set a target for the cost base excluding restructuring and litigation but including everything else. And we also said that that obviously would be dependent on the exchange rates prevailing that time. Because given we have a large portion across outside the Swiss franc, you will see moves upwards and downwards. And that was one reason why I gave that reconciliation for. And clearly, with the strength of the U.S. dollar, that's something we'd expect to continue. Now, I think that the – at this point, basically, if you ex out that numbers, you end up with a target towards the soft end of that range, around the sort of 19 mark, but it's clearly going to be bit dependent on where the dollar moves. If it went to 110, that would have an impact on this, simply. If it went back to 90, it would have a different impact on this. I think that the point to take away here though is two-fold. One, is that we did see some cost inflation but nothing like as much as you saw from the overall numbers, it's a couple of CHF100 million, which as I said before, underlines the need for discipline and underlines the reason for the acceleration we're actually pushing through now. And two, we are committed to at least that CHF2 billion net number. As Tidjane said, the investment will be phased to offset that depending on the market environment. I think three, (01

[Fiona M. Swaffield:]

Thank you.

[Tidjane Thiam:]

Okay. Thank you. We have time for one or two more questions.

[Operator:]

Thank you, sir. Your next question is from the line of Jernej Omahen from Goldman Sachs.

[Jernej Omahen:]

Yeah. Good morning from my side as well. I have a question on page 52. The way you discussed the mark-to-market losses in your investment banks and if I understand correctly, this was the driver of the bulk of the loss. What are you marking these things to? And the reason why I'm asking is I'm assuming that the liquidity in securitized products in distress, securitizations and credit is virtually evaporated at this point. So, how much does it take for these spreads to blow out another 100 basis points or come in another 100 basis points? As with the next question I wanted to ask you, so I understand that you are reiterating the strategy announced late last year. From the perspective of kind of this basic hurdle that you discussed in assessing the businesses previously which is on a fully allocated cost basis over the long term, these businesses need to cover the cost of capital. Can you just give us a refresher why securitized products, particularly under the new regulatory regime, still clears that hurdle in your mind?

[Tidjane Thiam:]

Okay. Very good. David, you want to take them all?

[David R. Mathers:]

Sure. I mean I think it's a good question. I think clearly, but not a new question. I mean I think there's always this question about how you actually mark these positions in declining liquidity, but I would just point out, yeah, there is no option around this. You don't mark to some index or some proxy like that, you have to mark to the prices you actually see and observe at the end of the year. In a distressed market, we are seeing forced sales by redeeming hedge funds and credit funds and dispositions does result in some quite sharp losses, which is what you actually seen reported in our numbers. There's no doubt that the thinness of that market may basically give you some concern that essentially perhaps it's a stressed market you're actually pricing to, but we don't have any particular option to do anything different to that, and the marks do actually reflect that. So I think to that extent, therefore they are conservative but they do reflect the pricing at that time. The liquidity event we saw, it's not a – it was a flight to quality. It was not severe flight to quality so it's nothing on the level of, I'm afraid to say what obviously I've seen in prior years, and so, there was sufficient evidence there but it certainly was a very stressed market towards the end of December. That's all I said.

[Tidjane Thiam:]

Okay. On the second question, it's really an important question. If you look at again at page 52, you see the distressed look has an absolutely disproportionate size in this. So, we still think that fundamentally, the conclusion that the realized product is as good as it is correct too. And it's generating a reasonable level of losses here, (01

[Jernej Omahen:]

All right. Sorry. Just, David, a follow-up on the way this is marked. So the products that you hold in your obviously held for trading portfolio, the securitized products, so how liquid are these marks? What does it take to move the spreads out another 100 basis points?

[David R. Mathers:]

Well, I think that's a big question. I think I guess if we saw a similar collection of distressed outflows from our over-hedged funds, then you could see that's then actually happening. But I would just correct you on one point. The majority, the marks was actually not in the securitized products portfolio. It was actually in the credit portfolio. That's on page 52. See the number there was the Corporate Bank was about 21%. You can see the leverage on financed underwriting was about 17%. In overall basically, it's 56%. It's really credit. It's not really the securitized products business. We did see some stress there in terms of some of the agency and non-agency positions. But it was not the primary driver of this.

[Jernej Omahen:]

Okay. Thank you very much.

[Operator:]

Thank you very much. Your next question comes from the line of Jeremy...

[Tidjane Thiam:]

I think we should take your last question, because we're around the end.

[Operator:]

Thank you, sir. Your final question is from the line of Jeremy Sigee from Barclays.

[Jeremy C. Sigee:]

Hi, there. Thank you. Just two follow-ups really. The first one is on the subject we were just discussing there, the inventory in credit and securitized products. You talked about distressed basically heading to zero. You also said more broadly that you're reducing inventory. Could you give us idea of the scale of reduction for credit and securitization – securitized products in total? What scale of inventory reduction you have achieved since 4Q in the light of that bad experience and how much further that goes? That's the first question. The second question just very briefly, I don't know if you've given us the number for possible but not probable litigation exposure. I wonder if you have that number.

[Tidjane Thiam:]

Okay. Thank you, Jeremy. David, do you want to?

[David R. Mathers:]

Yeah. I think we've achieved reductions of about 20%- 25%. Clearly, it varies a little bit by (01

[Jeremy C. Sigee:]

Okay. Thank you very much.

[Tidjane Thiam:]

Okay. Well, thank you very much for joining our call. As we said, we have a clear strategy. Clearly, we're implementing it in difficult markets. And our outlook for Q1 remains very cautious. These are very unique market conditions and they are challenging. But fundamentally, we are maintaining the objectives and the targets we are presented. We're working hard to achieve those. And we'll update you in the coming quarters on our progress. Thank you very much.

[Operator:]

Thank you, sir. That concludes today's conference. An e-mail will be sent out shortly advising you on how to access the replay of this conference. Thank you for joining today's call. You may all disconnect.