Credit Suisse Group AG
Q2 2012 Earnings Call Transcript

Published: 18 Jul 2012

[Operator:]

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Brady Dougan, Chief Executive Officer of Credit Suisse Group. Please go ahead, Mr. Dougan.

[Brady W. Dougan:]

Thank you. Welcome, everybody. Thanks for joining the call. Before I begin, please take note of the customary cautionary statement. Today, we've announced robust earnings, cost reduction progress and plans and a series of capital measures designed to solidify Credit Suisse's position as one of the best capitalized and funded banks in the world. There are 5 key points that I'd like to cover this morning. One, we're reporting a solid second quarter result with pretax income of CHF 1.1 billion, evidencing the strength of our business model which has been adapted to the new regulatory environment. Two, we achieved our CHF 2 billion cost savings target 18 months early and are now targeting an additional CHF 1 billion in cost savings by the end of 2013. Three, we are adding CHF 15.3 billion of capital through various measures. These capital actions will further strengthen our capital base in preparation for Basel III regulatory requirements and take any question of the strength of our capitalization off the table. We'll effectively raise our look-through Swiss Core Capital Ratio to 9.4% from 7% by the end of 2012. Four, we are reconfirming our previously announced at or above 15% through-the-cycle ROE target, even with this significantly strengthened capital base. Higher cost reductions offset the impact of higher capital levels, resulting in a comparable pro forma ROE of 12% for the first half of 2012. And five, we're committing to distributing substantial cash to shareholders from capital generation once the look-through capital ratio exceeds 10%. Why are we taking these measures now? We felt it was prudent and in our shareholders' best interests to eliminate any question about the adequacy of our look-through Swiss Core Capital. Credit Suisse has benefited substantially from its strong capitalization and conservative funding position over the past 4 years. We continue to maintain a best-in-class total capital and funding position, and this is corroborated by our superior ratings and CDS spreads. However, over the past several months, the market has focused more on our common equity position. We had a clear plan to build common equity and we're on a glide path where we were already double the level of capital required by our regulator, FINMA. In June, the Swiss National Bank, our central bank in Switzerland, published a report which questioned our overall capital position. While we disagree with this report both in substance and its communication style, and we still do today, we felt it was prudent and in fact necessary to respond decisively to these questions and ensure that we're in an unquestioned capital position from any point of view. And the Swiss National Bank's public statement today in support of these measures corroborates this. These measures represent an acceleration of our capital plans and take us to the top of the industry from every point of view on capital. Close to 80% of the improvement in the capital ratio to 9.4% does not dilute shareholders' percentage ownership, and those investors who take up their rights in this issue will end up being only about 8% diluted, so the measures are well balanced. But most importantly, these capital measures underscore that Credit Suisse is one of the safest banks in the world. I'll now spend a few minutes providing some detail on each of the 5 points I just outlined. First, our second quarter result underscores the strength of our business model and the positive impact of the changes we've made to adapt the model to the new environment. First quarter showed that we can produce high returns in moderate markets. The second quarter provides evidence that the business model is resilient under more challenging conditions. In the second quarter, we reported pretax income of CHF 1.1 billion, net income of CHF 800 million and an after-tax return on equity of 9%. In the first half of 2012, we reported normalized net income of CHF 2.1 billion then the after-tax return on equity of 12%. Improved profitability in Private Banking, resilient results in Investment Banking and solid profitability in Asset Management demonstrate the balance and strength of the evolved business model. The second quarter and first half performance demonstrates that the business model is working and delivering good results even under challenging market conditions. The measures we announced last year to adapt to the changed environment are proving very effective, and we see continued progress towards the best-in-class business model designed to perform well in the new regulatory environment. Second, expense reductions ensure the effectiveness and resiliency of the business model going forward. We exceeded our first quarter target of CHF 1.2 billion and normalized expense reductions by delivering CHF 1.5 billion in reductions. We bettered that performance in the second quarter and have now achieved our CHF 2 billion cost reduction target 18 months ahead of schedule. We've now identified an additional CHF 1 billion in cost savings, half of which will come from the shared services functions. With these additional savings, we have increased our 2013 expense reduction target to CHF 3 billion. We are extremely confident that we'll be able to achieve this. Our significantly reduced cost base provides us with real current and ongoing operating flexibility. Third, today, we've also announced a series of measures to ensure Credit Suisse continues to be at the top of the industry with regards to capital. In summary, we are effectively raising our look-through capital ratio to 9.4% by the end of 2012 up from 7%. This ratio includes a class of capital tier 1 participation securities which are loss-absorbing and which FINMA has deemed will qualify as part of the Swiss capital requirement. As you can see on the slide, we started 7% as per our first quarter simulation for the end of 2012. We then add 2.4% from immediate capital actions, including the mandatory convertible issuance during July and add a further 80 basis points from additional capital actions to occur by the end of the year, including strategic divestments. We then make some adjustments, which bring it down by 80 basis points, which brings us to 9.4% at the end of 2012. David's going to speak more in detail about the specific measures outlined on the slide, but I did want to spend the moment now on changes to the dividend in 2012 and strategic divestments in Asset Management. For the 2012 dividend, we are accruing for an unchanged distribution amount of CHF 0.75 per share, but we have changed the dividend accrual to 100% scrip or payment in new shares. The 2011 dividend was accrued for its 50% scrip and 50% cash, and registered holders have the option to elect the form of payment. In the end, shareholders elected for a 48% of the payment in new shares, allowing us to retain regulatory capital. This year, there will not be an election option. 100% will be paid in shares. And on strategic divestments in Asset Management, in line with our strategy towards a more liquid alternatives business, we intend to sell certain illiquid private equity businesses. This is compatible with our capital efficient strategy, addresses residual uncertainties around the Volcker Rule and applies the businesses that have limited synergies with other group businesses. At the same time, we intend to grow our liquid alternative strategies as they are more capital efficient, consistent with regulatory developments and more synergistic with our Investment Banking and Private Banking businesses. These capital measures take any question on the strength of our capitalization off the table. This ratio at 9.4% at the end of this year will be at the high end of our peers globally. And this, combined with our industry-leading total capital ratio, best-in-class funding and liquidity structure with an NSFR in excess of 100% and extremely high-quality asset side of the balance sheet, clearly confirms our position as one of, if not the most, well-capitalized banks in the world. The next slide presents the numbers in a different way, calculated using broadly the same methodology employed by the Swiss National Bank in their financial stability report published in June. The measures we have announced today should eliminate any of the doubts raised by this report. Our look-through total capital ratio by their calculation methodology will rise immediately to 8.5% and will reach 10.8% by the end of the year, almost double the 5.9% stated in the SNB report, and clearly, a leader in the industry. In October 2013, this ratio will rise to 12.2% or more than double this level stated in the report when the remaining hybrid tier 1 instruments convert into buffer capital notes. We were very well capitalized before. We're at the forefront of the industry now. These measures accelerate the build of our common equity and should completely put any capital question to rest. As part of our immediate capital actions, we are issuing CHF 3.8 billion of mandatory convertible securities at a fixed conversion price of CHF 16.29 per share for a total of 233.5 million shares. The issue consists of 2 tranches. The first tranche of CHF 1.9 billion will be bought by a group of high-quality, existing and new strategic investors. These securities will not have subscription rights for existing shareholders. The second tranche of CHF 1.9 billion will have preferential subscription rights for existing holders, which can be exercised over a 5.5-day period. Strategic investors have entered into definitive agreements to purchase any securities not taken up by shareholders, thereby ensuring placement of the entire offering. So if any investors do not take up their rights, their shares will be placed in firm strategic hands. The strategic shareholder group for the first tranche of CHF 1.9 billion is an extremely high-quality group, including some of our existing investors

[David R. Mathers:]

Thank you, Brady, and good morning. I'll start my presentation on Slide 13, with a summary of the financial results. In the second quarter, we achieved underlying revenues of CHF 6.1 billion, pretax income of CHF 1.1 billion and net income of CHF 815 million. The pretax income margin was 19%, post-tax return on equity, 9%. If we look at the numbers for the half year, we achieved return on equity of 11% compared to 15% in the same period in 2011. On a normalized basis, though, adjusting PAF2, batting in an equivalent amount of deferred share compensation, the post-tax return on equity in the first half was 12%. Reported second quarter pretax income was also CHF 1.1 billion, and that includes

[Brady W. Dougan:]

Thanks very much, David. I think with that, we'd like to open it up for questions. So operator, can you open up the line for questions?

[Operator:]

[Operator Instructions] Your first question today comes from the line of Kian Abouhossein from JPMorgan.

[Kian Abouhossein:]

First of all, just some technical questions. The deferred cash into CS payment for employees, is there going to be -- what is the assumption that you take that there will be roughly 50% plus per take-up? That's the first question. The second question is related to your cost savings. You've done a great job of achieving them. If I look at the comp ratio or the cost income ratios, one could argue, especially in the IB, there is more to be done. Can you maybe also talk a little bit about how you think about IB cost income ratio on a longer-term basis going forward, rather than just the absolute target? And the third one is more strategic. I'm sure there were a lot of options discussed of how to deal with the capital situation. And one could have argued that maybe the fixed income business should be reduced further from roughly CHF 150 billion of risk-weighted assets. And one of your competitors in your own country operates as less risk-weighted assets. Why didn't you choose that option rather than raising equity?

[Brady W. Dougan:]

I think on the first point, as you say, basically, the program that we're operating is basically -- as you know, we've had this APPA program out there, which is a deferred cash instrument. It earns the ROE of the firm. And there are also our callback provisions for the employees based on the performance of their business. So it's a fairly, I think, well-aligned instrument for our shareholders. What we're basically offering people is the ability to receive all the payments in that -- under that program, including any ROE, any callback, et cetera, all factored into that in the form of shares set at a conversion price that's the same as the mandatory convertible conversion price that's been set or CHF 16.29. And I think our view is that -- I mean, obviously, we don't know. We'll need to go to people. And as you know, there certainly are pressures in the industry. People are -- people would rather have less deferral, have more cash, et cetera. But I think our hope is that people will be quite interested and bullish on the -- on participating in the stock, in the upside there from this program. And so our assumption was that we would be able to get to those kinds of numbers. We do have -- we already have from our executive board, we have 100% participation and 100% of their APPA holdings. So actually, that comes -- basically, the remainder is about 50% take-up from other employees who hold it. So we think it's probably a reasonable assumption. But it'll obviously depend on various things, and we'll only find out when we find out when we make the offer to employees. But we think people will feel good about that.

[Kian Abouhossein:]

And just -- once they get the shares, they can sell them right away. There is no kind of vesting period involved.

[Brady W. Dougan:]

Yes. I mean, obviously, the shares will be delivered as they receive the payments on the APPA. So the first share delivery for someone who participates in it will be actually I think next April, so almost 9 months from now. But as they receive the annual interest payment in the form of shares, should they opt for that and principal payments over the next 2 or 3 years, those -- that's when they will actually get the shares. But yes, once they get the shares, they will be able to sell them, but they will be in tranches, and the first one beginning not until April of 2013. On the third question, as you say, certainly, we -- obviously, we would like to think that we thought hard around the business and the different options that we had here. And I think one of the things that we hope is good is that we view this as a balanced set of measures in terms of trying to have the maximum sort of non-dilutive impact, making the right choices around the businesses consistent with our strategy. I think your question on the fixed income business specifically is probably partly rooted in -- if you look at the performance in the second quarter, I mean, I think that we feel like we've done a lot to diversify and balance our fixed income business and very much de-risked the business. And so we feel like we are now running a sort of state-of-the-art Basel III-compliant fixed income business. As such, it's actually been performing pretty well. And second quarter, I think, is the good example of that if you look at the resilience of the revenues there. Frankly, it's also an area where we think there probably is the biggest diversions in the industry between those who have adapted their models to Basel III and those who haven't. And so we think that there's going to be a lot of change in this portion of the industry over time, and that change is going to lead others to have to really very significantly revamp their fixed income businesses, which will probably lead to opportunities for us. So we think it's a -- we think we can make it a consistent earner in the meantime. Second quarter is encouraging in that respect. But also, we do believe that this is probably the part of the Investment Banking business, as you know well, that is going to have the greatest impact from the capital regulation and the changes. And we think we are better positioned in that, given the measures that we've taken today. And David, I don't know if you want to talk about [indiscernible] a little bit.

[David R. Mathers:]

Sure. On the expense side -- I mean, I think clearly, second quarter cost-to-income ratio in the Investment Bank was about 87%. But for the first half, it's actually at 77% once you actually normalize the PAF2. So 79% without that normalization, 77% with. We have a KPI for the Investment Bank to actually get that to a 25% pretax margin, so for a 75% cost-to-income ratio. So I think -- we clearly think that we are making good progress towards that goal. Clearly, we think there's further to go and that's our intention and goal to do so. And that's one reason why we've actually stepped up the cost saving target for 2013. I would say, though, that it is an ongoing and rolling cost reduction target and that we will be looking further measures above and beyond that as we implement some of the programs we've now initiated. So I think we clearly would intend to push this further. As I said, I think our KPIs 25% in Investment Bank, 75% cost-to-income ratio, not far off that in the first half, with a little bit more drift in the second quarter with a more difficult operating environment we're in.

[Brady W. Dougan:]

But I think also, Kian, I just like to emphasize, the -- our focus is on return on equity in our businesses, and that's the most important focus. And frankly, I think that's going to be -- going to have to be the industry's focus going on given the cost of capital and given the amount of capital it's assessed against these businesses. And so that's really the way that we look at and manage the businesses. And frankly, if you have a lot leaner -- from a capital point of view in terms of the business, you're likely to have probably slightly higher costs and also -- costs and, to some extent, compensation costs in that business as well. As David said, we are targeting the 25% margin. We think we can make very good returns in the business and consistent returns. But that's really what we're focused on.

[Kian Abouhossein:]

And if I may, one more follow-up. As you said, you've done very well relative to some of the peers in your fixed income as well as equity business. Can you just talk a little bit about how the market environment is shaping up in July relative to what you've seen in the market and the second quarter, both in the fixed income and briefly in equities?

[Brady W. Dougan:]

I think broadly -- I mean, obviously, again, it's pretty early in the quarter. I think broadly, it's consistent with what we saw in the second quarter.

[Operator:]

Your next question today comes from the line of Kinner Lakhani from Citi.

[Kinner R. Lakhani:]

So I had a couple of questions, actually. Firstly, on the strategic divestments, which I believe may relate to private equity, is this within Asset Management? Perhaps could you give us some color on how advanced you think those disposals are in terms of the process? Number two, in terms of the APPA exchange, just wanted to make sure I understand in terms of the share dilution that comes out of it. Essentially, thinking about the CHF 750 million assumption relative to the mandatory conversion price, if that's the correct way of looking at it. And number three, if you could maybe give us a bit more color on the kind of repurchase of debt instruments and what really you're benefiting from in terms of both capital and funding costs?

[Brady W. Dougan:]

I guess on the first point, I guess I would just go back and stress that the measures that we're taking are consistent with the strategy that we've had in Asset Management and really more of an acceleration and continuation of those measures. And frankly, I think we've actually done a really good job in terms of our focused strategy there and how we've executed on it. I mean, as you know, as I think David mentioned, we basically finished off the sale of our Aberdeen stake. I think that was a very successful -- both strategically and financially. We sold our long-only business to Aberdeen, took a stake in exchange and have now sold that stake out at good levels. And so I think that's a good example of the focusing that we've had in the business. And I think we've actually shown in that business that we've done -- we've been very good at executing. I think, as I said, we -- this is just a continuation of our focus on a more capital-efficient approach to the business. We're looking at focusing on some of the more liquid alternatives parts of the business. We have a lot of great aspects in our Asset Management business. But that does mean, as you say, that we would be looking at sales of some of the businesses on the private equity side or the illiquid side of things. We think that we -- I'd rather not comment on sort of exactly where we are the process, but we feel confident that these are the kinds of Asset Management businesses that are actually quite attractive, and that will be of interest to a pretty good group of potential buyers. And so we feel -- obviously, there have been some other Asset Management business approaches which have not been successful. We think this is a very targeted set of businesses. It's not a large conglomeration business. It's a focused, targeted set of businesses, and we think that these are businesses that are actually -- clearly will be attractive to a pretty decent group of buyers. So our view is that we feel pretty confident that we'll be able to get these done. And obviously, we have done some work on it. So David, do you want to address APPA's...

[David R. Mathers:]

Sure. So on the APPA conversion -- deferred cash conversion, at CHF 750 million, you'd be talking about 46 million shares, which would come in 3 tranches in 2013, '14 and then a small tranche in 2015, which is the delivery program, the APPA instrument. So the shares are actually delivered following the election by the employee over the same period as the APPA itself. I think quite clearly, just to make a sort of small point, which is the actual dilution obviously would depend on our capital position at that time because clearly if we -- as you know, we've said we're going to commit to make substantial cash return to shareholders once we actually pass the 10% level. So we make sure, as obviously in latter years, to actually buy some of the market. But I think for the moment, why don't you assume the fully diluted, and that's for the most pessimistic and prudent case. In terms of the share buyback -- sorry, sorry. In terms of the debt buyback, I think you may remember that in the first quarter, we did a CHF 4.7 billion debt buyback, which contributes to about CHF 0.5 billion to our CET1 base. Mostly, it's directly bought equity, some gained through the P&L as well. And I mean, in reality, what we're actually doing is we're retiring some of the non-equity instruments relative to tier 1 instruments, which were, and actually still are, required under the Swiss decree which came out in 2008 but is replaced by the Basel III regime at the beginning of next year. So as essentially, we've issued buffer capital notes where we're actually retiring this sock of old capital instruments. And the -- this new exercise really falls into that, and the targeted size is somewhere between CHF 3 billion and CHF 4 billion. And we would not expect a substantial gains for this buyback as the first, partly relating to price and partly, I think, it turns out successfully or actually in terms of actually buying this debt back. However, at that size, we're probably looking at something like CHF 40 million of interest costs, and there will be a modest gain to capital but not on the sort of CHF 500 million gain that we saw from the first tranche. Is that helpful?

[Kinner R. Lakhani:]

That's really helpful, actually. And if I could just follow up, just with the kind of appreciation of the U.S. dollar and the sensitivity to your earnings going into the second half of the year. This time last year, exchange rate was in a very different place.

[David R. Mathers:]

Yes. I mean, the exchange rates -- I mean, if we look at the -- on average in the second quarter, it's 0.93, close to 0.945 for the capital ratios. Clearly, in the second quarter a year ago, it was 0.87, and I guess, at the moment, around sort of 0.97 to 0.98. And now that benefits the Investment Bank's earnings on translation because I think you should assume nearly all of the Investment Bank's earnings are actually dollar-based. So therefore, I think if one looks at one's forecast, if you assume those were dollars, then you can get a fairly direct impact of the earnings benefit from a high dollar against the Swiss franc. And just in terms -- just to be clear, I think we've made this point before, but just to be clear, we essentially hedge our shareholders equity against the dollar. So approximately 65% or so of our risk-weighted assets are actually in dollars. And our shareholders' equity is essentially matched to that. So it's about 65% dollars, too. We essentially do that to basically hedge the capital ratios. Clearly, what that means, though, of course, is in an appreciating dollar, you get a benefit to shareholders' equity because obviously, it could rise on consolidation to Swiss francs. So that's the other impact from an appreciating dollar against the Swiss franc for Credit Suisse.

[Operator:]

Your next question today comes from the line of Jernej Omahen from Goldman Sachs.

[Jernej Omahen:]

I have a few questions. Some of them are clarification questions on some of the capital measures, and then I've got a couple of other questions as well. Firstly, can you explain to us why it makes sense to issue a mandatory convertible note that matures in 8 months time? I mean, if I understood you correctly, particularly yourself, Mr. Dougan, you expressed a view that you expect participation from your own employees to be reasonably high because the outlook for the shares is, in a sense, constructive, yet, if I understand this correctly, you're offering the mandatory convert holders a 10% discount for 8 months. So an annualized return of 12%, 13% for essentially something that I think in normal circumstances one would expect to be done either through a rights issue or through a placement. The second question -- or accelerated book billed, rather. The second question that I have is on the first capital measure, the 1.7 billion of Tier 1 capital notes, which you're folding into BCNs, it's surprising to see that Qatar Holdings, your core shareholder and definitely your core holder of hybrid capital, is not participating in this exchange. Now if I understand this correctly, this is a hugely important development because their holding of hybrids is 4.1 billion, so it's actually larger than the mandatory convert issuance altogether. And I was just wondering if you can shed some light why is it that, if I recall correctly, it's probably for the first time since the beginning of the crisis that this core shareholder is not supporting a capital action of Crédit Suisse. The third question that I have is, it is surprising to see that when you have CHF 8.7 billion of capital measures, that an EGM is not called. And I was just wondering whether part of the reason -- and I'm assuming that's not the case, that there is a better explanation -- but maybe part of the reason for doing this via a mandatory convert note, which converts already in 8 months, is perhaps trying to -- I was just wondering whether if you did a rights issue or book billed, whether you would need to call an EGM or not, and whether doing it via a mandatory convert note allows you not to do that. And the final question I have is on the SNB recommendations. I think that you're right when you say that you are now fully essentially compliant or -- with what the SNB asked Crédit Suisse to do by the end of the year, but there seems to be 2 additional issues here. So the first one is the SNB made an explicit reference to the simple leverage ratio. And I was wondering if you can just update us on what the leverage ratio is on your calculations today, and what the simple leverage ratio will be after these capital actions. And my final question is, the SNB also called for an increase in transparency when it comes to risk-weighted asset calculations and has asked both UBS and Crédit Suisse -- or urged UBS and Crédit Suisse to report risk-weighted assets calculated on a standardized basis. And I was just wondering whether we can get that number as well. Sorry for the many questions.

[Brady W. Dougan:]

Thanks very much for all those – for those questions, great questions. I guess, maybe we can just work backwards from what you had mentioned. I mean, I guess, on the SNB recommendations, as you say, I mean, I think one of the most important things is that, obviously, with the measures that we've taken today, we've, I think, pretty much put to rest any of those concerns. And actually, I assume most of you probably have seen that the SNB actually issued a statement, which is actually pretty strong in terms of what they said. I mean if you haven't seen it, they welcome the capital measures. They said these measures lead to a rapid and significant increase in the loss of earning capital of Crédit Suisse Group. And in an environment that remains particularly challenging for the international banking system, these measures substantially increase the resilience of Crédit Suisse Group. So pretty -- I think a pretty supportive statement and one that, hopefully, indicates their alignment with the measures that we've taken. I think, I guess, on your very last point about increase in transparency, I mean, I guess, I would let everybody on this call judge that. I actually think that we have been about as transparent, if not more transparent, than virtually any other firm on all of these issues, whether it be earnings issues, capital issues. I don't know of any other bank that has disclosed as much about the RWA progression, the cap progression and everything else. So I think you all are probably in a better position, perhaps, than some others to judge about the transparency that we have offered. So I think that, actually, we have been extremely transparent and continue to be. And we will continue to be, but again, I'll let you judge that. You want to answer the question about the leverage ratio, and then I'll come back?

[David R. Mathers:]

Sure. So I think what the SNB did in the financial stability report is they took on the Swiss total capital, which they defined as the Basel III look-through common equity, and then added to that the issued CoCos as of the end of the first quarter. So if you look at Slide 26, actually, you'll see a number there, about CHF 17 billion. I think we felt that to get to that first quarter number, they must have used about the same number. You may recall that the balance sheet at the end of the first quarter was exactly CHF 1 trillion, so I think they closed [ph] a ratio about 1.7%. So if we look at the sort of second quarter numbers, you see that that capital increases on Slide 26 to CHF 25.8 billion, and to CHF 32.4 billion at the end of the year. Now the balance sheet was about 1,043 [ph], but essentially, if that [ph], we'd be seeing the leverage ratio on the SNB going from 1.7% to about 3.2% on a consistent definition basis. I would just state, though, that clearly the Swiss leverage ratio is what we actually operate under. You'll see that in the appendix, it was about 4.7% and increases to about 5.2% once these measures are actually complete.

[Brady W. Dougan:]

So I think as to your questions around -- I probably kind of lumped together a little bit your first question around the mandatory convertible form 8-month -- which is convertible in 8 months, and your question around the capital that we're raising in the form. I mean, I guess, I think that -- I mean, from my point of view, actually, I think that one of the absolute best things about all these measures is that the capital that is being raised -- first of all, a lot of it is from non-dilutive sources, so I don't know exactly what the CHF 8 billion is that you're referring to. Obviously, the mandatory convertible issue is about CHF 4 billion, and there are some other measures as well. But really, the only measures that are going out in terms of an actual sort of more traditional capital raise are the CHF 4 billion. But second of all, I think that the structure of this is extremely decisive, is completely underwritten by strategic investors, still offers the opportunity to participate from the broader group of our investors. So frankly, I have to say in my opinion, I think it's a very well-structured transaction from all those points of view. And frankly, we obviously -- all of this is being executed within the authorities that we have from our shareholders, which we received in our AGMs in terms of the authorized shares and the form that we can do it in. So our view is that -- I mean, again, my view is that I think this is an extremely well-structured transaction, so -- and we can talk more about that. But having it fully underwritten by a group of extremely high-quality, strategic investors is, in my view, a pretty good place to be. So when I compare it to other capital raises that have been done by banks, I think it's a pretty good structure, but I guess I would. In terms of your other question on the question of the acceleration of the hybrids into contingent convertibles and Qatar's participation in that, first of all, I would just say Qatar has been a tremendously valuable investor and strategic partner for us. They continue to be. They have participated fully in this capital transaction, have been very supportive, and that -- we have had a lot of dialogue with them in how we've actually structured and done this. We believe they are fully supportive, completely supportive of it. To be honest with you, on the issue of the actual acceleration of the conversion, I mean, their notes will still convert in October 2013, just as it was originally scheduled. To be honest, I think they have -- I'm sure they have a way they think about their portfolio and their investments. They certainly find that investment very attractive. It's got a high coupon on it. It's a good -- it's a very good instrument. On the other hand, for us, the -- increasing the level of high-trigger contingent convertibles is helpful. It does increase the loss-absorbing capital. It's helpful in getting an even higher number than what we are currently showing against the ratio that was shown in this SNB stability report. But to be honest, I think when you all look at the capital -- and the issue of capital for us is not a total capital issue, it's really just around this common equity issue, and so that's really what we're focused on. And so frankly, they have been extremely supportive in the overall transaction, and we're actually very grateful for their support. And whether or not they accelerated this contingent convertible, I mean, we would have been happy to do it. We're okay with their considerations in not doing it. So I don't think there should be any view that there is anything but a very strong strategic relationship and a lot of support there.

[Jernej Omahen:]

Maybe just 2 very, very short clarification questions. Did I understand you correctly that when it comes to SNB's recommendation that "banks should already be reporting risk-weighted assets on a standardized basis to help market better assess the reduction in risk," do you plan to essentially take the SNB up on that recommendation and release standardized risk-weighted assets with your full Q2 results, or later on in the year or not? Just yes or no? And the second question I was wondering, I still missed the rationale for issuing a mandatory convert which converts in 8 months' time at a 10% discount to the current share price when the view clearly is, from the perspective of Crédit Suisse Group, that you have a very constructive case for share price appreciation in the future. I'm just trying to understand the rationale. Is there a legal rationale where you're trying to avoid complexities of calling the EGM? Is there an economic rationale? But -- because from an economic perspective, it's just very hard for us to understand why this part of the capital increase makes sense.

[David R. Mathers:]

I mean, I think the point's -- sorry, it's David here. I think the point just to stress here is that financing through a managed convertible issuance is a relatively standard approach in Switzerland, and it's been used by other Swiss financials for a number of years. So it's more or less the normal course approach which one would take here in Switzerland. And it's the way in which the authorization and the rules actually operate. And the lifetime of that is relatively standard, so there's nothing particularly out of norms there. I recognize that's different from other regimes, but it's very common here in Switzerland. So that's the point I'd make on the first one. On the issue of the standardized calculations, it's not a trivial thing to do because any banks' risk systems are actually built around the models that are in play today. So those, of course, are currently B II and B 2.5 for us, and we're in the middle of the B III build for all our systems to take place in the beginning of next year. So if you actually wanted to recut all the systems so they operated on, essentially, a B I standardized type basis, you have rebuild a whole parallel set of models to actually do it. That would be extremely expensive for any sort of market risk approach. It would be difficult for some of the credit but easier than market risk. And then for off-risk, it wouldn't be that difficult. But it's not, in fact, a trivial exercise that can be done that easily and it would have substantial cost implications. So we have to then build, essentially, a B I system to run in parallel with B III. And I think as we all know -- I mean, I think you may recall, the B I regime didn't really reflect real risk. It was one of the reasons why, essentially, it was retired with B II in most places, and why, basically, people are moving to B III, because of the limitations around B I with a very standardized on-balance-sheet-type approach. But I mean, clearly, it's something. We will see, but I mean, it would not -- it's not a trivial exercise to do.

[Brady W. Dougan:]

Jernej, it's too bad because it would be nice if we could go back to the systems around 6 years ago and avoid all the costs that we've had in the meantime, but that's hard to do at this point. So I guess, that's our view. We don't -- it's complex.

[Jernej Omahen:]

So the answer is no. You will not be providing standardized risk-weighted assets.

[David R. Mathers:]

I think I just answered the question that it would be extremely expensive. It does not a provide a better matter of risk. I think that's what I've said.

[Operator:]

Your next question today comes from the line of Huw Van Steenis from Morgan Stanley.

[Huw Van Steenis:]

I think Jernej has asked my questions on capital, so I just have 2 more. First, I'm surprised in your release that you've maintained your 15% return-on-equity target given that it was sort of set in a time when you were far more optimistic about the revenue environment and also far more optimistic about your capital position. Could you maybe just talk through why you think this is actually -- a, when is this target actually realizable? Are we talking for the 5 to 10 years time? And what are your real expectation for next 3 years? And related to that, you previously thought you [indiscernible] one of 10 [ph] and 3 points of CoCos. In the light of being over optimistic in these slightly harsher regulatory environment, do you think that is still appropriate? Do you think that needs to be a significant buffer, the 10%? And then lastly on dividends, given the board has been over-optimistic on dividends for the last 2 years, do you feel -- and then you're going to scrip [ph] for this year. Would it be a safe bet that for the next 1 to 2 years, we just assume 0 cash dividend because the board will be much more cautious about capital world [ph] and regulations, and maybe that explains why you've chosen to do a sort of a rather generous mandatory because for the next year, it's highly unlikely that you pay dividend on the common equity?

[Brady W. Dougan:]

Yes, Huw. Thanks very much for those questions. Yes, I mean, I guess, with regard to the ROE, again, we have reiterated our target of a 15% ROE over cycles. I think in the first 6 months of this year, we posted a Basel 2.5 ROE of 12% in what I would view as not really great environment, particularly the second quarter. First quarter was okay. Second quarter was pretty difficult. I think a 12% Basel 2.5 ROE on that basis is -- I think that's a pretty credible performance. We, obviously, have identified additional cost reductions that we can make. We're continuing, I think, to realize the benefits from the changes that we've made, both on the cost side and a number of the alterations that we've made to the business model as a result of getting quickly to a Basel III-compliant model. And we think we're going to continue to benefit from that over time. In addition, I think we do continue to believe that -- and we're starting to see more signs of it now, that the rest of the industry is going to have to make the transitions that we've made. And as they make that, that is going to probably create more opportunity for us to take market share and to do more. I'm just starting to see more -- starting to hear a little bit more about Basel III from a number of the banks that talk about -- and you're starting to see a little bit more about what's happening with risk-weighted assets, et cetera, around the industry, and I think that's going to continue. So I think we're also going to benefit from that. So I don't think -- we're certainly not talking 5 to 10 years as a target for a 15% ROE. I think under reasonable market conditions, our business model can produce that now. We made, I think, 16% on a Basel 2.5 basis in the first quarter. So -- and I don't think -- I mean, again, you all can assess, but I don't think the first quarter was a blowout quarter in terms of industry conditions. It was okay. It was reasonable, but it wasn't sort of a blowout quarter. So I think if we -- I think we'll continue to improve the model, which will help to get us at or above that level more consistently. And hopefully, we'll also have some conditions that will make it a little bit better. I think on the core Tier 1 10%, and then with the high trigger on top, I think our view is, as we've said, we think we're -- I think when we get to it, a 10% sort of look-through -- Swiss core look-through ratio, and particularly with our total capital ratios, including 3% contingent capital in the form of our high trigger CoCos. In addition, given the extremely conservative funding profile that we have -- we have an NSFR over 100%. I'm not sure there are any other banks that have that. We think we have a very high-quality asset side of the balance sheet as well. I think all of those contribute to us, I think, believing that at a sort of 10% -- at that 10% look-through ratio -- I mean, we may have some small buffer on top of that, but being around that 10% ratio is going to be a pretty good place to be, I think. And so I don't think that -- if your question is, are we going to have to run significant cushions above that, I don't think that that's our belief right now. And with regard to dividends, I mean, I think that our view is that we've got a stable business model from the point of view of consumption of capital. I think, and as David said, we expect the investment bank to be at or below these levels. We may see a little bit of growth in our Wealth Management businesses, but they're not very capital consumptive anyway. So if we're at 10%, and we think -- and the business model performs in the range of how it can perform, I think it's going to be -- I think there's going to be clearly a significant amount of capital that could be passed on. David, you want to add anything?

[David R. Mathers:]

Just to define a few points, just to supplement what Brady said. I mean, firstly, I think it is worth recalling a couple of things. I mean, the ROE within the Private Bank was about 25% in the first quarter. It's on a post-tax basis, Basel III at 10%. It was about 29% in the second quarter. And I think you may have seen in one of the slides, we reiterated and actually reinforced that our RWA and capital allocation model that we intended to see less than 60% of the RWA of the bank within Investment Banking, with less than 40% in the fixed income division -- that's Slide 11 -- and more than 40% within the Private Banking, Wealth Management and Asset Management businesses. So clearly, for us, I think we are fortunate that we have a very, very strong market position in one of the highest return equity businesses in the modern financial world. I think you know, we've talked about this before. I mean, a number of things we could talk about is meeting some of the plans with the Private Bank in terms of what we're doing over expenses and growth in that business. So I think that's one thing just to put it in context when you look at the ROEs of the bank as a whole. I think the second point, just in terms of the sort of capital discussions here in Switzerland, I think the point I'd really want to reiterate, the discussions really are the 10% number, which we've talked about, and which clearly, given we're gaining a pro forma 9.4% at the end of the year, one would have thought we would have been at 10%, everything else being equal, not too long thereafter, which is subject to market conditions. And that's not a forecast, but we're obviously in good shape. We obviously have about 2.8%, 2.9% of our B III capital ratio in our straight CoCos and the -- obviously, the final tranche we convert next October. So we're at the 3% target under the Swiss regime. So I mean, in reality, I think the capital work that we will be doing will be around the retirement of the residual -- sort of the old Swiss finish [indiscernible] -- essentially the low-strike CoCos, which we require to operate under the Swiss regime. And that's really where the focus of the discussions will be, actually, Huw. And that's -- I mean -- and that's clearly, just to reiterate, I mean, that's why we've made this point about the commitment to return significant cash to shareholders once we fill the 10% bond [ph].

[Operator:]

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

[Fiona Swaffield:]

I had a number of things, sorry. The first issue is the discussion about the 9.4% or the 10% relative to kind of absolute Basel III equity, because Brady did mention that it was the absolute level as well that was important. And I'm looking at Slide 26 and the CHF 28.1 billion, which I think, obviously, includes the CHF 2.3 billion, so it's closer to just under CHF 26 billion. So I'm just trying to understand what you're thinking is on the absolute because it hasn't moved that much from a tangible point of view. It just, really, the MCN. So I can't tell whether there's a push and pull between this kind of leverage ratio issue versus the -- kind of the Swiss number of 10%. That's the first question. The second question is, could we spend a bit more on the gross margin and to what extent -- I mean, I'm trying to get my head around the net interest income part and the sustainability going forward. And then the third issue is, again, on Slide 26. The regulatory deductions are higher than they were, I think, as of the first quarter. I remember a number of just over 8. Now, they're 10.1. And then I'm wondering if you could tie that in. In the past, you've told us moving parts of 2013, and obviously, that's not in this slide pack, but when we're looking forward to 2013, has anything changed? You used to say there was a 3 billion reduction in regulatory deductions? Is that still the case? So when you model out, shouldn't you be including retained profit plus the regulatory deductions?

[Brady W. Dougan:]

All right. David will take the first and the third, and I'll talk a little bit about gross margin. So David, you want to start with the...

[David R. Mathers:]

So let me start with the regulatory deductions on Page 26. So Fiona, just a point of correction. In the first quarter, what we actually said in the look-through was the regulatory deductions would be 8.3, as you said. However, that was the regulatory deductions projected for the end of the year, not at the current time. So that's the sense. And essentially -- because, obviously, you build equity of the period under the 10% and 15% threshold, the deductions decline over that time also use up deferred tax. So that's what happened. So the 8.3 -- so before, it was an end-of-year. This is -- obviously, 10.1 is the actual deductions we've given as of the end of June. If you look at the slides, actually Slide 27 and 28, you will see we talk about projection within this of further 3 billion in deductions. So if you start at 10.1, you would expect the number to be down to about CHF 7.1 billion to CHF 7.2 billion by the end of the year. And the reason deductions are actually lower, Fiona, is because obviously you've got more common equity which comes with these measures, so you have less deductions. So that would explain those points, hopefully. In terms of projections for next year, I'm afraid I haven't looked in detail at 2013, but I would say that that 3 billion number is probably a pretty good estimate. We certainly would expect to burn through the -- most of the rest of the deferred tax and continue to build equity we actually get to target. So that's -- I would say that's a pretty good estimate, actually, Fiona. On the first point, I mean just to be clear, that relates to the 9.4% Swiss core equity. I mean, in -- I think, perhaps, I wasn't clear. The ratio we're targeting to hit is 10% on that core equity. So that's 10% including the tier 1 participation shares. That would be 9.24% on a look-through bar ratio. And as I said, the RWA we're targeting is around 300, so that would be the amount of, as you might say, look-through common equity we would actually expect to have at that time. I'm not sure we really meant to imply anything else, actually.

[Fiona Swaffield:]

So you [ph] won't have to be the absolute even though -- because of the whole debate on equities or on RWA to assets. So there's no some intention to kind of built it aggressively from here?

[David R. Mathers:]

No, I think we've been pretty clear. I think once we get to the 10% -- I mean, the Swiss rules are pretty clear. 10%, 3%, high stroke. I mean, the capital discussions that I'd be expecting to happen and we've started having is really around the sort of low-strike CoCos. That's the focus next for us. But I mean, clearly, this will obviously push up the leverage ratio anyway, I mean, I think as we applied to a previous question.

[Brady W. Dougan:]

So on the gross margin question, as you say, it was CHF 115 million. As you know this quarter, that was up nicely from CHF 111 million the last quarter. There are some -- there is an extraordinary item in there, the sale of the ILS [ph] business, so it's actually on a normalized basis, I think, CHF 113 million. But still, obviously, it's a nice tick up in the gross margin, so we're, obviously, encouraged by that. I think in terms of the net interest income, we had higher volumes, both on the lending side and the deposits. So the loan margin was slightly better but it was offset a little bit by lower deposit margins. But overall, I think, obviously, a nice and -- a nice move. I mean, I think in general, as you know, we have not been -- we have kind of stopped trying to call the turn and interest rates, et cetera. So I just think the fact that it's obviously stable and it's ticked up this quarter is a good thing. I mean, I hope, obviously, it can continue to tick up. But certainly, the fact that it has moved up, and at least that shows that it's clearly at a stable level, so in terms of net interest income. But also, I think the recurring commissions and fees was also somewhat encouraging. There is some seasonality. The second quarter, there is a little seasonality, very slight. But in general, again, I guess, I would take it more as -- I would look at these numbers as stable to slightly up, and that's, obviously, encouraging that they have stabilized. Obviously, we'll hope. We'll see. Third quarter is, obviously, seasonally, a little bit more difficult of a quarter with August, et cetera. But our hope is, obviously, that we can continue to see some of these trends. But we're mostly focused on continuing to drive our gross margin in this business. Make sure that we're hunkered down in case things continue to be difficult in terms of the environment. We want this business to continue to increase its profitability on the bottom line. And we'll do our best, obviously, to drive top line and gross margin, but we'll also continue to be prepared for it to be -- continue to be a challenging environment. But I think this quarter was certainly encouraging.

[Operator:]

Your next question today comes from the line of Christopher Wheeler from Mediobanca.

[Christopher Wheeler:]

A few questions of clarification. First of all, the Hedging-Griffo payment, the 33.5 million shares. Are you effectively just giving convertible notes or MCNs to the people who are going to get the additional shares? And is that in the CHF 1.9 billion you've already placed or is in the CHF 1.9 billion you are opening up to shareholders? I assume it's the former. Secondly, just confirm, I think the coupon on the MCN is 4%. Thirdly, on the participation notes, have they been placed? And if so, where have they been placed? Broadly? Was it a few investors or broadly? And what is the coupon that you will have on that? What is the cost of the conversion of the parts of the hybrid early into the CoCos, the 1.7 billion? Is there a cost, and what is that, and how will that be shown? A question on the [indiscernible] raised on the private equity. I hate to say this for your employees, but is it something you would also think you might be able to use as compensation this year in terms of paying out some of your private equity participations? And finally, Brady, you put out a couple of pretty strong statements after the Moody's downgrade and after a stability report about strong your capital position is. And today, obviously, you've done some pretty major moves to boost it further. Could you just talk about how much of that was driven by regulator and how much of that was driven by the board's view and your view on the need to be more competitive on your capital position?

[Brady W. Dougan:]

Thanks, Chris. Thanks for all those questions. Just on the last one first. I mean, I think it's as I kind of said in my speaking notes. We have benefited tremendously from being in a very strong capital position and being really unquestioned in a safe haven over the last 4 years. And as you know we've taken a lot of market share. It's been very important for our Private Banking business certainly, but also our Investment Banking business, which is very client-oriented, our prime brokers business, et cetera. So that's been a very, very important part of the value proposition overall. Again, it comes back to this question of our regulator, FINMA. We're double their requirements right now in terms of the capital glide path that they have. So this is why it's a little bit of a surreal discussion. As you say, is there a pressure from -- we're double our regulator's requirement for where we need to be right now in terms of capital. And so, obviously, the Swiss National Bank, an important player in the market is the Central Bank. Obviously, their opinions matter, but they're not our regulator. And so just to make that clear, we felt and we were on a very good glide path. Now, obviously, the market has increased the pressure a bit more on the common equity side. And I think the Swiss National Bank report clearly did increase the pressure in terms of sort of questions around the common equity capital position. I mean, the interesting thing, as you know, was out of that whole episode was that -- I think that all told after the SNB report and the changes in ratings with Moody's where, by the way, we ended up, I think, better rated than all but 2 banks in the global cohort. At the end of all that, our fixed income spreads were actually tighter, and we've actually moved in terms of CDS spreads, et cetera. And in fact, I think benefited relatively in terms of business that we were seeing. So in a sense, it's a bit of an odd position to be in, but I think our view was just this is much better to just take the question off the table definitively, no question with our customers, with anyone out there, that there is any issue around our common equity capital. And that's basically what we've done. We've tried to do it in a smart way by taking on dilutive measures, by structuring the capital we did raise with the complete strategic backdrop to it so we didn't end up with shares sloshing around the market, et cetera. But that's really -- and that's something that basically, between management and the board, we are very much a light on [ph]. Obviously, we have liaised with our regulators on this. They've been very supportive. You've seen the Swiss National Bank statement, which is very supportive. So I think, all told, that it's really meant to just be a decisive way to take this issue off the table. I think working backwards then, your question about private equity, I -- we do not right now have any thoughts around that. As you know, last year, we did this structure, the PAF2, which helped reduce RWA, et cetera. And we're, obviously -- continue to try to -- we try to do the best we can around having very well-aligned programs between our employees and shareholders and things that we think help further the strategy of the bank, and I'm not sure how much recognition we get for that, but we do try to do that. But right now, we don't have any thinking around that. David, do you want to start with the Hedging-Griffo?

[David R. Mathers:]

Yes, so [indiscernible] made the more technical points. Sorry. I think, Chris, you're exactly right. So the -- what we said in the first quarter is that we were going to place 33.5 million of shares in respect to the buyout of Hedging-Griffo, which as you know, is a very successful business that we own in Brazil and part of our very strong Private Banking, Asset Management and Invest Bank franchise there. We thought it was probably best to essentially incorporate that into these capital measures, so we've actually issued those as part of, as you said, the first tranche, the firm place, no-crawl-back tranche, and that actually is being completed and done now. And I think it was good to get that issue off the market and not be a concern in terms of any future drag in terms of share issuance. In terms of the tier 1 participation securities, they were already actually issued. They were issued in 2 tranches

[Christopher Wheeler:]

Okay. And the cost of the bringing forward of the CHF 1.7 billion of the high built-ins at CoCo?

[Brady W. Dougan:]

I would say basically, it's pretty -- I don't know that we're going to get into all the details, but it's pretty nominal. I mean, it -- so basically pretty nominal.

[Christopher Wheeler:]

And then the coupon on the MCN, it's I think 4%? Is that right, that I picked up on the Internet?

[Brady W. Dougan:]

4%, yes.

[Operator:]

Your next question today comes from the line of Jacob Kruse from Autonomous Research.

[Jacob Max Kruse:]

It's Jacob of Autonomous. Just 3 quick questions. Firstly, on the mandatory, is there a lock-up for the shares after they convert in March next year? And secondly, you gave a guidance for this capital progression where you included the dilutive effect in 2013 of 50% scrip dividends, as well as paying ample years of shares. I think that was 1.2 billion. Is that guidance now off the table or should we just assume that that's still how you look at your capital progression? And then just lastly, I just wanted to ask you if you have looked into your LIBOR positions, if you have any comments you can make about your own investigations and also the sort of state of regulatory debate.

[David R. Mathers:]

Yes, David here. So just -- I'll take the first 2. So there's no lock-up on the shares once the managed converts next March. On the scrip dividend, I think you're probably referring to the first quarter presentation when we talked about paying scrip for subsequent periods. I think you're right that the guidance that we gave at that time effectively is superseded now by what we've said today, which is that once we actually get through the 10% on a Swiss core capital basis, we will look to return substantial cash distribution to shareholders. So I think subject to us achieving that, I think we would look to retire the scrip [indiscernible] once and for all. So that's what I'd say on that.

[Brady W. Dougan:]

Yes, on the LIBOR issue, basically, this has been obviously, a long-running issue. I mean, this has been out there for the last year-plus. We have -- over that time, we've obviously had inquiries from regulators. We've done a lot of work. We've done pretty extensive work internally. Been through, obviously, lots and lots of emails, et cetera, particularly for the specific areas that would be involved. We have, obviously, analyzed that information. We've also discussed that information with the relevant regulatory bodies. And we don't believe that we have any material issues in this area. And obviously, these are -- and these kinds of investigations, as you know, can -- they can take different turns, et cetera, but we don't believe that we have any material issues that we're aware of now.

[Operator:]

Your next question today comes from the line of Daniel Zulauf from Basler Zeitung.

[Daniel Zulauf:]

I have just one question regarding your capital increase. I'm looking at the very positive share price reaction today, which certainly reflects to a very large extent the capital actions you have announced today. As the market seems to welcome greatly your capital measures, I wonder why you have hesitated so long to actually take these measures. Can you maybe give your view on that question?

[Brady W. Dougan:]

Well, again, I guess – well, thanks, Daniel, first of all, for your question. I think that, as I said, we have benefited tremendously from being in a very strong capital position for the last 4 years. We continue to be in a very strong capital position even before this, but there was increasing, I think, focus in the market on the common equity portion of that, which doesn't necessarily affect our customers as much, but there was an increasing focus on that. And then certainly, the Swiss National Bank report increased the focus on that. And so I think our view was that these are very decisive measures. They do completely put to rest this issue, and we think they're taken on a timely basis. So I guess, our view is that, before, we have basically been on glide path where, with our regulator, we were double their requirement for capital. So I'm not sure, given that, we felt that we were in the right place and continuing to progress on that. But clearly, given some of the questions raised by the Central Bank, which is a -- those are, obviously -- need to be taken seriously, we felt that this was the time to take the issue off the table.

[David R. Mathers:]

It's David here. I mean, I think just one point just to supplement what Brady said, I think if you look at the list of actions on Slide 27 and 28, there's clearly a number of issues here. But what we're really doing is accelerating and augmenting an existing capital plan, so obviously, the real estate plan. Also, issues such as the debt buyback I mentioned before. As Brady said, I think they are very good reasons for us to do that. But it's more of an acceleration of our glide path than anything else.

[Operator:]

Your next question today comes from the line of Andrew Lim from Espirito Santo.

[Andrew Lim:]

I don't think you've talked about the revenue profit impact from the divestments that form part of your capital plan. I was just wondering if you could give more color on that. And then secondly, just one -- a technical question on your lower capital deductions. There's about CHF 3 billion [ph] until the end of the year. I'm sure you've calculated that correctly, but is that calculated off a Basel III common equity level? Or is that off a Swiss core capital level? I'm mainly asking because you've included it in your Swiss core ratio, so I just want to know that we're talking on the same basis here.

[Brady W. Dougan:]

Well, I think on the first question, in terms of revenue and profit impacts of some of the -- I guess, you're talking about the divestiture measures that we are -- that we have announced. Is that right?

[Andrew Lim:]

Yes, that's right.

[Brady W. Dougan:]

Yes, I mean, I think, obviously, Slide 10 actually shows in more aggregate some of those impacts, but I don't know, David, if you...

[David R. Mathers:]

Yes, we're assuming a pretax profit impact, about 170 million, say, deduct tax and then at 6 months, so that's where that works out to what we've done there. But about 170 million was our primary [ph] estimate for that.

[Brady W. Dougan:]

So I think, again, one of the things that -- obviously, I'm sure you get the point, but the Slide 10 point is important to us, which is the -- we've obviously factored in the reductions in earnings versus the cost reductions, the additional capital to -- and those are basically fairly not dilutive to earnings. So I think that's an important point. The other question that was asked, David, I don't know if you caught it, it was lower capital deductions of CHF 3 billion. His question was is that being calculated off of Basel III or off of Swiss core tier ratio basis.

[David R. Mathers:]

That's a Basel III number, the deductions, so it's calculated off the Basel III look-through common equity, just to be clear.

[Operator:]

Your next question today comes from the line of Dirk Hoffmann-Becking from Societe Generale.

[Dirk Hoffmann-Becking:]

It's actually just 2 questions left. One is, can you just take us through the transition in Q1 to Q2 in terms of the CHF 14.5 billion in Basel III look-through capital that you had, i.e. in particular, how much of the about CHF 800 million in net profit did you actually translate into capital, how much was foreign exchange translation gains, et cetera, and how do you see that going forward? And the second question is on the Investment Bank, on Slide 46, you sort of assume an allocated capital of USD 22 billion going forward, USD 10 billion less than in the past. So am I right in assuming that you are happy to run the investment bank at the current leverage level, which I estimate to be about 40x going forward in order to preserve the return on equity in that division?

[Brady W. Dougan:]

Thanks very much for your questions. I think with regard to the second question, I think you're largely right on the -- I mean, we basically said we would -- we're running -- I think we ended up the quarter about 206 billion. And obviously, we've said that we think that we'll be at or lower than that going forward. So I actually think the allocated capital will be more like 20 billion or something. I'm just assuming a 10% Basel III read-through, so a little bit less capital. But I think our general view is that that is about -- that those levels or around those levels is about the right level that we believe we can drive an Investment Banking business that generates 15% return on equity. And that's really our target for that business. And we think actually that that is a configuration that works, and so we will continue to do that. I mean, overall, as you say, this is the whole leverage question. We are basically towards the top end of the leverage ratio requirement by FINMA, our regulator, at this point. They have sort of a 3% to 5% ratio guideline and we're actually at about the top end of that range at 4.7%. So we are -- we feel like we're actually in a good place from a leverage point of view, certainly with regard to our regulator. So we're riding, basically, at the top end of the range. We do think, obviously, that the kind of gross leverage arguments are ones that we don't like that much because we think we have an extremely high-quality and low-risk investment bank. I mean, half the balance sheet is either prime brokers deposits or repo, which we view as extremely high-quality. And again, I think you have to kind of put leverage in all those issues against things like funding profile as well. I mean, we think we run an extremely conservatively-positioned investment bank in terms of all of those elements. So yes, I think our view is that we think that's sustainable, and that we'll be able to continue to run it that way. Do you, David, want to address the first [indiscernible]?

[David R. Mathers:]

Okay, then the 4.7% was at the end of the second quarter on a pro forma basis. Adjusted for capital measures, the Swiss leverage ratio would be up at 5.2%. In terms of the FX moves coming through the balance sheet, the full financial report will be ready next Tuesday. But what you'll see there is the currency translation adjustments of just under 1 billion, which comes through from, I think, the equity heading strategy, which I mentioned before. This is the fact we basically swapped the equity to dollars to basically mitigate against any volatility on our capital ratio. So obviously, the dollars appreciated and closed about 94.50 at the end of the second quarter. Clearly, it depreciated more so far in July. So that's what you'll see going forward. I don't think -- there's probably -- that will probably be the most important item. But as I said, you'll see this in the report next week. In terms of looking through to the end of the year, I mean, I think -- I wouldn't want to call out an FX forecast, frankly. Given that about 65% of risk-weighted assets are in dollars, 65% of the equity's in that, if there was -- if the dollar rate stayed against the Swiss franc around 94.50, which it was in the second quarter, I'd expect neither the translation impact not any [ph] way to increase nor there to be much of a CGA effect. Clearly, if the dollar continues to strengthen like this, we will see that coming through as CGA. That will boost the shareholders' equity, but clearly, that will also basically boost the Swiss franc RWA on consolidation. But as I said, we're trying to hedge to, essentially, a neutral capital ratio then.

[Dirk Hoffmann-Becking:]

My question was more about the Q1 to Q2. So am I right in assuming that in Q1, you had 800 million profit in retained earnings -- less retained earnings, and about 1 billion less from FX translation in your Basel III capital? In other words, did you have about 12 billion in Basel III capital, of which 2.3 billion was tier 1 participation securities that wouldn't have been otherwise recognized?

[David R. Mathers:]

That's correct. So what the 1Q number would be. So the equivalent of the 14.5 billion? What was your estimate, Dirk? About 12 billion, was it?

[Dirk Hoffmann-Becking:]

Well I just -- I actually don't know because I don't know what your actual deductions were. I stupidly assumed. But I don't know if you had in the report were the actual results, so I don't know what the number is.

[David R. Mathers:]

The deduction effect, this also comes out with the threshold impact, so it's not a trivial calculation. From recollection, I think it was around 12.8 billion, actually, Dirk.

[Dirk Hoffmann-Becking:]

12.8 billion. Okay. Of which 2.3 billion are the participation securities, right?

[David R. Mathers:]

No, the 12.8 billion would be the equivalent of the 14.5 billion.

[Operator:]

Your next question today comes from the line of Robert Murphy from HSBC.

[Robert Murphy:]

Just a couple of questions. The first one is regarding your capital return. I mean, you're focusing on the Swiss core capital ratio exceeding 10%. But clearly, the participation securities are actually a temporary benefit. And I think most peers are looking at the common equity tier 1 ratio. And if you look at your common equity tier 1 ratio on the Basel III, it's actually quite significantly below many peers as of today. So the question is, how aggressive can you actually be on capital return, and what ratio do you think the regulators are going to look at in terms of allowing you to be aggressive on capital return?

[Brady W. Dougan:]

Well I think, as you say, as you lay out the landscape, I mean, the -- obviously, the BIS requirements are -- there are various different tiers. There's 9.5, 9, 8.5. We believe we're in the 8.5 tier, so that's what's kind of required for us or banks like us. Obviously, we've got the Swiss finish on top of that, which is the 1.5 points on top of that to get to 10%. So I actually think that even if you take the year-end number and even if you take out the tier 1 participation notes, which are eligible under the Swiss requirement of getting to 10%, you're still at -- you're still on the high 8%. And so I think that's actually a pretty competitive ratio compared to most others. And also, what is relevant, if others -- as you say, if others in the market are getting to 9.5s or 9s or the numbers that they need to get to on a tier Basel III look-through, for us to be -- if you add another 50, 60 basis points on top of that, for us to be in the low 9s as a result on a pure Basel III basis, I think that's going to position us very well. And again, I would put on top of that extremely strong total capital position. We have 3% of contingent capital on top of that that's sort of in the wings. We have, I think, the only bank with an NSFR in our funding over 100%. So I mean, all that, I think, adds up to a pretty strong positioning. And so I think that's -- so I think we believe we are there or thereabouts in terms of getting to the capital ratios that we need to get to, if that's your question.

[David R. Mathers:]

I think just one point to make on the tier 1 participation securities. This wasn't our reassessment for restructuring. It was actually a decree or ordinance from the FINMA, actually.

[Robert Murphy:]

Yes, yes, I understand that. I'm just wondering -- I mean, historically, as you pointed out, you've always actually carried much stronger capital ratios under the old regime. But going forward, it looks like you're going to be more like the sort of more quality peers, but you didn't sound like you intend to be, again, another level higher than those peers as you used to be.

[David R. Mathers:]

I would say that, clearly, obviously, the Swiss regime is 10%, plus the 3% CoCos, and we've essentially got about 2.85% of that in issue already. And then obviously, there's the requirement for the low-strike CoCos beyond that. So I think, actually, if we look at the total ratios, I think, that's going to be a relatively strong capital position against...

[Brady W. Dougan:]

Just about anybody. Yes. I don't think we -- I think we believe we are and will continue to be among the best capitalized when you take all that into account.

[Robert Murphy:]

And then just quickly one other follow-up. In the Private Bank, can you say what the performance fee this quarter versus last quarter?

[Brady W. Dougan:]

You mean in terms of an absolute amount or you mean as a...

[Robert Murphy:]

Either in the basis points contribution to margin or in Swiss francs, whichever way you want to express it. I think you mentioned that part of the margin benefit was performance fees.

[Brady W. Dougan:]

Yes, I think basically, I guess, you're talking about -- I mean, the Hedging-Griffo performance which is around 23 million this quarter. That's the performance element of it.

[David R. Mathers:]

So that would be in the recurring commissions and fees line under [indiscernible].

[Brady W. Dougan:]

So are there any other questions?

[Operator:]

There are no further questions at this time. Please continue.

[Brady W. Dougan:]

Okay. Well, thanks very much, everybody, for hanging on for a while. Maybe I'll just very quickly sum up. We do appreciate your attention and all the questions. We do view unquestioned capital strength as core to our franchise, and we believe the measures we announced today are designed to solidify Crédit Suisse's position as one of the best capitalized banks in the world. At the same time, we announced robust second quarter earnings and cost reduction progress, including CHF 1 billion of additional cost efficiencies to be achieved within the next 18 months. And with the business that's been fully migrated to the new regulatory environment that we believe can earn ROEs at or above 15% over the cycle and which will therefore have substantial capacity to return capital to shareholders, we think this is the best-in-class business model. And we're confident that the measures that we've announced will further enhance our ability to serve our clients and provide best-in-class returns to our shareholders. So thanks, again, for your time and for your attention. Have a good day.