Credit Suisse Group AG
Q1 2013 Earnings Call Transcript

Published: 24 Apr 2013

[Brady W. Dougan:]

Thanks. Welcome, everybody. Thanks for joining us for our First Quarter Earnings Call. Obviously joined by David Mathers, our CFO, who's going to deliver the results portion of today's discussion. And before I begin, I'd just like you to take note of the cautionary statement. We had a very good start to 2013. We posted strong operating results that demonstrate the effectiveness of the strategic measures that we've taken over the past 2 years. We couldn't believe it confirms the potential of our high-returning business model. As of January 1 this year, we're successfully transitioned to the Basel III capital and risk-weighted asset regulations. We're among the first of the global banks to achieve Basel III compliance well ahead most industry peers. We said very early on that most of the proposed regulatory changes would be unavoidable. Switzerland's role as an early mover in defining regulatory requirements required us to accelerate our transformation to a more client-focused and capital-efficient business at an early stage. While this initially led to an unlevel playing field with competitors in other countries, this disadvantage has now abated. Our peers in other regions are now forced to make hard, strategic decisions about their business models as governments around the world have continuing debates on regulatory frameworks. We now operate from a position of strength, able to spend more of our time and effort focused on advancing our Basel III compliant business rather than implementing changes to our business model. We've already made our changes and the strategy is in place. We view this as a significant competitive advantage. The decisive actions we've are already taken position Credit Suisse to do well on the new regulatory environment to deliver value to our clients and to generate solid, consistent results across our businesses. This morning, I'll provide a brief overview of our financial performance in the quarter, including an update on our delivery against capital and cost targets, then I'll give a brief divisional strategy update before turning it over to David. First, we achieved strong results in the quarter demonstrating continued consistency in our performance. On an underlying basis, Credit Suisse Group delivered pretax income of CHF 2 billion, net income of CHF 1.5 billion and an after-tax return on equity of 16%, which is well within our target range. On a reported basis, we achieved a pretax income of CHF 1.8 billion, net income of CHF 1.3 billion and a 14% after-tax return. Our reported results reflect fair value charges on our own debt due to an improvement in credit spreads, as well as other significant nonoperating items. Second, we continue to deliver on our capital and expense targets. We further strengthened our capital base and achieve the pro forma look-through Swiss core capital ratio of 9.8% as of the end of the first quarter. That assumes the completion of the remaining measures that were announced in July 2012. Note that this ratio includes a cash dividend accrual for 2013, which would be paid in 2014. Our capital program remains on track. We're set to exceed the Swiss 2018 year-end look-through capital ratio requirement of 10% during the middle of the year. As previously stated, once we exceed the 10% level, we're committed to making significant cash distributions to shareholders from capital generation. During the first quarter, we also continued to reduce our cost base. By the end of the quarter, we achieved a cumulative expense reduction of CHF 2.5 billion. Today, we are also reaffirming our target of CHF 3.2 billion of expense reductions in 2013 and CHF 4.4 billion of reductions by the end of 2015. Briefly looking at our divisions. In Private Banking & Wealth Management, we achieved solid profitability during the first quarter with pretax income of CHF 881 million, down slightly from CHF 951 million in the first quarter of 2012. We had an improvement in transaction activity in the quarter, although this improvement was offset by lower interest income driven by the ongoing low interest rate environment in which we operate. For the quarter, we recorded net new assets of CHF 12 billion. This pickup in inflows reflect the growth on our Wealth Management Clients business, particularly in emerging markets, and the ultra-high net worth client segment, which was partly offset by continued client outflows in Western Europe. In addition, we benefited from strong inflows from our Asset Management and Corporate and Institutional Clients businesses. The organization realignment of our Private Banking & Wealth Management business is well on track. We are confident that the new structure will deliver strong returns as we further improve our capabilities, expand our market share and enhance our efficiency. Although several measures have already been implemented, we expect the benefits from this integration to bring -- to begin to materialize in the second half of this year and into 2014. In investment banking, we delivered strong first quarter results driven by stable revenue levels, broadly sustained market share positions, a reduced cost base and lower capital usage from a year ago. We also significantly reduced the balance sheet in the past year. The investment bank posted pretax income of CHF 1.3 billion for the quarter, reflecting broad-based strength across our fixed income equities and underwriting businesses. We continue to improve our operating efficiency while remaining focused on our clients. In this seasonally strong first quarter, we achieved a return on Basel III capital of 23% compared to 13% in the first quarter last year. We ended the quarter with Basel III RWA of $182 billion in the Investment Bank, well within reach of our yearend target of less than $175 billion. Turning now to Slide 5, I'll briefly touch on our forward-looking strategy in Private Banking & Wealth Management. As you're aware last November, we integrated our Private Banking and Asset Management divisions into the new Private Banking & Wealth Management division. The realigned business and streamlined organizational structure enables us to better serve our clients through enhanced product development, advice and distribution, and will improve our efficiency and position us for sustainable growth. We had a solid first quarter result, and we expected to begin to feel the benefits of the integration in the second half of this year. Moving forward, we expect Private Banking & Wealth Management to deliver disciplined growth with significantly improved operating efficiency. As part of our core strategy, one, we will improve the efficiency and effectiveness of our product manufacturing capabilities and delivery channels to create a more focused offering for our clients. In doing so, we seek to increase collaboration between Private Banking & Wealth Management and the Investment Bank. Continued collaboration between our businesses will enable us to better serve our client needs and will drive further operational efficiencies. Two, we will continue to sharpen our focus on our core businesses as we invest in select markets, products and client segments. For example, expanding our ultra-high net worth client and emerging markets franchises, as well as investing in our core platform; for example, through the announced acquisition of Morgan Stanley's Private Wealth Management business in EMEA last quarter. To add to that effort, we are also divesting our noncore franchises, for example, with the announced sale of JO Hambro last quarter. Three, we will continue to rationalize our organization into a more effective and leaner structure. It will simplify platforms and reduce complexity in our business, which is instrumental to improving collaboration, reducing costs and enhancing our client service. Four, finally, we're committed to delivering our target cost-to-income ratio of 65% assuming a continuation of current market conditions. However, when conditions improve, we remain positioned to benefit from the market share gains we've realized over the past few years. Now, let's turn to Slide 6 to discuss our strategy in Investment Banking. We spent the last 2 years transforming our Investment Bank, and we now have a client-focused, capital-efficient business that is among the first of our peers to be compliant with Basel III. Today, we have a highly targeted business model with the majority of our capital and resources focused on market-leading, high-returning franchises. Our strategy is not to build scale in all businesses, but rather, we will continue to invest, deliver value to our clients and drive market share momentum in targeted business areas where the returns on capital are attractive. We will also further invest in high-growth regions where we have expertise, including our emerging markets franchise. At the same time, we'll continue to further improve operating efficiency and drive increased profitability. We are committed to achieving our CHF 1.8 billion expense reduction target by the end of 2015. As we have transformed our Investment Bank, we have also significantly lowered our risk. We've reduced risk-weighted assets by nearly $140 billion or roughly 44% from peak levels in 2011, and we're well on track to reach our target level of less than $175 billion by yearend. Going forward, we will continue to benefit from our efficient operating model. Our transformed Basel III compliant Investment Bank is built to achieve strong and sustainable returns to support our through-the-cycle target return of above 15% for the group. And with that, I'll turn it over to David to review the results in more detail.

[David R. Mathers:]

Thank you, Brady. Good morning, everyone. I'd like to start on Slide 8 please, with an overview of the financial results. In the first quarter, we achieved underlying revenues of CHF 7.2 billion, pretax income of CHF 2 billion and net income of CHF 1.5 billion. Diluted earnings per share were CHF 0.86, the underlying cost to income ratio is 72% and the underlying after-tax return on equity is 16%. Net new asset inflows of CHF 12 billion for the quarter improved significantly compared to CHF 6.8 billion last quarter and the net outflow that we saw in the first quarter of 2012. On a reported basis, pretax income was CHF 1.8 billion in the first quarter. And within our financial release, we include a reconciliation to the underlying result, which adjusts the fair value charge around debt due to improvements in our credit spreads, as well as certain other significant nonoperating items very much in line with our prior practice. Let's turn to Slide 9. The Private Banking & Wealth Management division reported solid profitability in the first quarter, driven by stable revenues and reduced operating expenses year-on-year. The division delivered underlying pretax income of CHF 839 million or CHF 881 million on a reported basis. The division's underlying revenues of CHF 3.3 billion, roughly flat year-on-year as an improvement in transaction activity, as well as the benefit from the increased asset base, were offset by the adverse impact of a continued low interest rate environment. The division has reported revenues that were lower compared to the first quarter of last year, as this quarter's results included gains of CHF 47 million from the sale of JO Hambro, as well as certain private equity investments. Whereas if you look back a year ago, in the first quarter of 2012, we generated CHF 178 million from the sale of part of our stake in Aberdeen Asset Management. Operating expenses declined 4% year-on-year due to a combination of non-repetition of the PAF2 charge in the first quarter of 2012, as well as the benefit from our cost-saving initiatives, albeit this was partially offset by IT impairment costs and higher commission expenses, reflecting increased activity this quarter. The underlying cost-to-income ratio improved to 73% compared to 75% in the first quarter of last year. So let's turn now to Slide 10 to discuss the trends in net new assets. As you can see, we saw solid inflows of nearly, CHF 21 million in the quarter. Adjusting for certain items I'll come to in a minute, we achieved net new assets of CHF 12 billion in the quarter. We saw continued momentum across all the businesses in the regions, with particularly strong inflows in Switzerland and close to 10% annualized M&A growth in Asia-Pacific. In addition, we continue to benefit from the growth in the ultra-high net worth client segment, as well a strong inflows in Asset Management from both our traditional core investments, as well as our alternatives business. To adjust for double counting, that is where we have assets managed by Asset Management on behalf of Wealth Management Clients, our CHF 12 billion net figure excludes CHF 4.4 billion of inflows. We're very encouraged by the strong growth in collaboration between these businesses in the first quarter, evidenced by these new discretionary Asset Management mandates. And we view that this is an indication of continued and future collaboration potential between the combined Private Banking and Asset Management businesses. The CHF 12 billion inflows is also net of CHF 2.1 billion of outflows from businesses that we decided to sell in Asset Management, as well as CHF 2.1 billion of outflows of Western European cross-border assets, which, I think, is broadly in line with the guidance we gave a couple of months ago. Now, let's look at the financial results in more detail, and let's look at Wealth Management plans please on Slide 11. For the first quarter, both revenues and total operating expenses were broadly stable year-on-year, with underlying pretax income for the Wealth Management Clients at CHF 477 million, up slightly from CHF 441 million last year. As I've mentioned already, we saw a continued improvement in transaction activity offset by the adverse impact of a continued lower interest rate environment. On the expense side, the benefits from our efficiency management exercise coupled with non-recurrence of the PAF2 charge of CHF 63 million in the first quarter of last year, were somewhat offset by IT impairments, the higher commission expense I've mentioned before, as well as certain increased costs from regulatory-driven initiatives. The business delivered solid inflows of CHF 7.6 billion, driven by continued growth in emerging markets and ultra-high net worth clients. Net of the CHF 2.1 billion in outflows from Western European cross-border clients, the business saw net new assets of CHF 5.5 billion in the quarter. As we mentioned in prior quarters, we expect further moderate outflows in Western Europe. Reported net new asset growth was 2.8% for the quarter, which is at the low end of our previously disclosed 3% to 4% growth for expectation for this business between 2013 and 2015. Let's look at Wealth Management revenue trends in more detail on Slide 12. If you look at the chart, you can see that on a sequential basis, our gross margin remains stable at 110 basis points. Year-over-year, the gross margin has been impacted by both our shift in the client focus toward segments with our higher pretax contribution, i.e. ultra-high net worth in some emerging product clients, as well as by continued depressed interest rates. Note the driving cost reductions remain a critical part of our strategy in the division, as we continue to shift to our focus towards those segments with a lower gross margin but a higher pretax margin, and that's evidenced by the growth you can see in ultra-high net worth client share from 37% of assets under management in the first quarter 2012 to 42% this year. During the quarter, we saw different trends between our revenue categories. You can see from the chart that the continuing adverse impact from low interest rates on our net interest income has been offset by improvements in transactional revenues, as well as by relatively stable commissions and fees. Looking forward, we could see a further dilution of 2 to 3 basis points on the gross margin from the adverse impact of low interest rates in 2013. We would hope to partly mitigate this through further loan growth this year, but I would note the scope of deposit repricing is more limited than in prior quarters. That said, this effect should come to an end in 2014, and clearly thereafter, we remain very positive to leverage if and when interest rates rise. Let's turn now to Corporate & Institutional Clients, Slide 13. Pretax income remains stable despite lower revenues, again, reflecting the adverse impact of low interest rates. First quarter pretax income benefited from reduced operating expenses reflecting the PAF2 charges in the same quarter last year. Constantly, cost-to-income ratio was 50% in line with the first quarter of 2012. In addition, we posted low provisions for credit losses, reflecting the continued high quality of our loan portfolio and the resilience and stability of the Swiss economy. So let's turn now to Asset Management results on Slide 14. During the first quarter, Asset Management delivered strong net new assets and higher underlying pretax income. The business saw net new assets of CHF 6.4 billion, including CHF 8.5 billion of inflows across both traditional core investments and our alternatives business, offset by CHF 2.1 billion of outflows from those businesses where we've decided to sell. In terms of profits, the division delivered underlying pretax income of CHF 112 million first quarter, up from CHF 85 million in the same quarter last year. The year-on-year increase was driven by stable revenues and lower expenses. The underlying cost-to-income ratio improved to 78%, down from 84% in the first quarter of last year. Underlying revenues were driven by higher performance in placement fees but offset by low investment-related gains and low equity participations following the partial sale of our stake in Aberdeen Asset Management in the first quarter of last year. Sequentially, underlying revenues declined slightly from a seasonally strong fourth quarter, given that we recognized the majority of our performance fees in the second and the fourth quarters of each year. We saw benefits from our expense program, as well as the non-recurrence of PAF2 charges in the first quarter of 2012. But these reductions are partly offset in the first quarter by an increase in certain retirement costs around CHF 25 million that quarter -- this quarter. The next slide, please. Slide 15 looks at operating expenses for the entire division. Back in 2011, we outlined a series of revenue and cost measures aimed at improving the pretax income of the former Private Banking division by CHF 800 million by 2014. This program is referred to as future PB, and it included cost-saving measures totaling CHF 360 million. Since then, we've executed on these initiatives, including the integration of Clariden Leu, as well as further rationalization of our support areas. If you look at this chart, you can see that the quarterly run rate reductions increased to CHF 116 million in the first quarter of 2013 compared to the first quarter of 2012. Our annualized cost savings are just over CHF 460 million for the entire division compared to the future PB target, that you may recall was CHF 360 million. Net of certain expense increases, particularly revenue-related and regulatory expenses, the division achieved annualized savings of approximately CHF 200 million during the first quarter of the year. Including PAF2 expense in the first quarter and the negative impacts on the slide, including high pension expenses, the revenue-related expenses given high improved transaction activity and the cost from regulatory initiatives, reported operating expenses in the first quarter were CHF 100 million lower than in the first quarter of last year. Overall, we remain on track to deliver on our previously announced cost reduction targets, and we continue to make good progress in the Private Banking & Wealth Management division. So let's now turn to the Investment Bank on Slide 16. The Investment Bank delivered pretax income of CHF 1.3 billion in the first quarter on stable revenues, broadly sustained market share positions, a reduced cost base and lower capital and balance sheet usage from a year ago. Net revenues of CHF 3.9 billion were flat year-on-year, reflecting broad-based stretch [ph] for fixed income, equities and underwriting, notwithstanding a somewhat less favorable trading environment in certain areas. During the quarter, we continue to make progress in our cost reduction efforts. Total expenses declined by 13% on a reported basis. If you exclude the PAF2 charge in the first quarter of last year, expenses were stable as the progress in underlying cost reductions were offset by a combined CHF 115 million of certain litigation divisions, as well as accelerated accruals relating to the 2012 compensation program. We also continue to concertedly manage capital and risk in the Investment Bank, and we've reduced Basel III risk-weighted assets by USD 25 billion since the first quarter of 2012. And in the end of the first quarter of this year, Basel III RWAs stood at $182 billion, which is in striking distance of our target to be under $175 billion by the end of 2013. Furthermore, we reduced total assets by $73 billion or 11% year-on-year, reducing leverage in Investment Bank in which we achieved with a limited impact on revenues. Our after-tax return on Basel III allocated equity increased substantially to 23%, up from 13% in the first quarter of 2011. So let's turn first to fixed income results on Slide 17. Our fixed income franchise delivered strong operating results with sustained market share positions. We produced higher revenues on substantially lower risk-weighted assets in the business. Revenues increased 3% year-on-year, whilst Basel III RWA declined by 22%. The fixed income businesses achieved a solid return on capital in line with that for the overall Investment Banking division. From a revenue prospective, our market-leading businesses, such as emerging markets, credit and securitized products, delivered resilient results in the first quarter. However, results in rates were weaker year-on-year, following a record first quarter in 2012, as well as the continued low interest rate and low volatility environment that we've seen in the first quarter of 2013. Though we still incurred a pretax loss on our wind-down portfolio in the first quarter of 2013, this was substantially reduced from the level that we saw last year. Specifically, we actually had a net revenue gain of CHF 4 million for our wind-down portfolio compared to revenue losses of CHF 261 million in the first quarter last year. So there we still lose money at a pretax level on our wind-down portfolio, this has substantially reduced the drag on our overall pretax income results. With that, let's move to equities on Slide 18. We reported solid results in equity sales and trading with sustained market share positions across our products. Revenues were stable on a lower cost base, driving significantly improved profitability. We improved our operating efficiency and we continue to benefit from our 2012 headcount and cost reductions. Compared to the first quarter of last year, we delivered strong results in our cash equities business driven by market share gains and particularly strong, stronger -- particularly stronger industry volumes in Asia, which offset softer markets in the U.S. and Europe. Derivative revenues also increased year-on-year with improved performance in Asia, whilst our prime service revenues were resilient during the quarter with continued market share momentum. So let's now turn to underwriting and advisory on Slide 19. We significantly improved profitability in our underwriting and advisory businesses, as revenues were higher on a lower cost base following a material headcount reduction and resource realignment in 2012. Year-on-year, our debt underwriting revenues increased, driven by strength in our high-yield and leveraged loan franchises. We also have strong equity underwriting performance reflecting higher issuance volumes. Advisory fees were lower in the first quarter following an acceleration of transaction closes in the fourth quarter of 2012, resulting in lower book fees in the first quarter of this year. Overall, our advisory business remains robust. So let's now turn to Slide 20 to review our capital allocation for the Investment Bank. So on this slide, we show you an analysis of how our capital is allocated across the Investment Banking businesses. We show -- also show how this rolling 4 quarters return on capital performance related to market share and how our returns have changed for the last 12 months compared to the full year 2012. We thought it would be useful to review returns on a rolling 4 quarters basis to better illustrate underlying business trends for a distortion from the seasonality which is inherent in some of the businesses. Let me take this just a moment then to review the graph, which you may recall from the results presentation we gave last quarter. Along the y axis, we measure market share positions through our businesses as of the first quarter. So in the top segment, we include those businesses with top 3 market positions. In the middle, we include businesses which are ranked between fourth and sixth. And the bottom, we show businesses that are ranked seventh or below. Now on the x-axis, we measure the return on Basel III capital for the rolling 4 quarters ending March 2013, with returns increasing as you move to the right. The bubble size then reflects the relative capital usage of each business at the end of the first quarter. And then finally, what we show on the graph, you can see we've added markets which indicate the change in returns for the rolling 4 quarters ending March 2013 compared to the full year 2012. The green arrow indicates where returns have improved, and the red arrow, where returns have declined. And if there's no indicator, the returns in the business were broadly stable. So I think with the business transformation that we've executed over the last couple of years, we now have a differentiated and targeted Investment Bank. If you look at the top of the chart, you can see that almost 60% of the capital we have employed is allocated to market-leading and generally very high return businesses in equities and fixed income. And that's an increase from 55% at the end of 2012. Relative to the full year 2012 results, returns in our top business have either improved or remained stable. And I particularly note here this significant sequential improvement in our cash equities returns, driven by the cost savings program in 2012. If we look at the middle section of this graph, you can see we have about 1/3 of our capital in rates, IBD and equity derivatives. IBD returns were improved significantly, as we continue to focus on improving the profitability of this franchise. Whilst returns in global rates decline, reflecting lower favorable -- as favorable trading additions in the first quarter in this year, looking ahead, we intend to improve returns as we reduce the amount of capital that we wish to allocate to this business. Finally, then, we saw a significant improvement in the returns in our FX and commodities business compared to the full year 2012, driven by the measures we took to reduce costs and capital allocated to these businesses, as well as a significant improvement in market conditions. But I think the overall message from this slide is clear

[Brady W. Dougan:]

Yes. With that, we'll just open it up for Q&A. So operator, I guess let's go through the different people in the queue.

[Operator:]

[Operator Instructions] Your first question comes from the line of Kinner Lakhani of Citi.

[Kinner R. Lakhani:]

So I wanted to start off by asking on the cost savings, particularly in relation to the Private Banking side. At this stage, it kind of appears that progress is, let's say, frustratingly slow. Savings only running around CHF 100 million to CHF 200 million. So what I was trying to get a sense of is what you think about timing in terms of the remaining kind of CHF 750 million that I think is yet to come. And I believe there's another CHF 200 million from shared services, which accrues to Private Banking. So that's almost about CHF 1 billion. And I'm currently looking at where consensus is in terms of your overall cost base, around CHF 20.5 billion. It seems to be overshooting quite dramatically, about CHF 2 billion-odd what you're guiding over the next 2 years. So that was question one. Question two was, could you talk about the cost savings -- sorry, the savings that you could get in terms of interest expense via the deleveraging of the balance sheet, i.e., the funding cost? Could you possibly try and quantify on a 2- to 3-year view what you could see from that? And thirdly, just coming back to the net interest margin component of Wealth Management, what I'm slightly struggling to understand is whereas over the last year or 2 we've had a more gradual compression in the margin, we've had a 4-basis-point compression in Q1. And in your comments, you guided to another 2 to 3 basis points for the rest of the year. So it seems to be accelerating. So if you could possibly shed some color on that.

[Brady W. Dougan:]

Kinner, thanks for those questions. Maybe I might just answer the first one in general terms and then maybe David could speak a little more specifically. But I think in general, on the Private Banking & Wealth Management business, I would say generally, as you say, the first quarter, I think the cost reduction that you see there is somewhat distorted by a few, what I would call, sort of more special items in the first quarter, some of the IT write-offs, some of the other sort of, I'd say, non -- a little less operating-type expenses. So I do think that actually, the first quarter was probably somewhat distorted by those views. But on the other hand, we do still, as you say, have a significantly higher aspiration for reducing costs in the division. I think the integration between Private Banking and Asset Management has come together well, and I think we're making good progress on that. But there's no doubt that we're going to see acceleration of the cost reduction in the division as time goes on. And I think we feel very good about the progress that we're going to make on that. So overall, I'd say just more -- just maybe more qualitatively, I think there's no question that we expect to see and we believe we will see acceleration in those cost reductions. I also do think the first quarter was a little bit impacted by some of these more extraordinary expenses. But David, I don't know if you can answer it in a more...

[David R. Mathers:]

Sure. So just a few points, Brady, and I'll try and refer to both Slide 15 and the other slides as we go through this. In the first quarter in terms of PBWM, we actually had a CHF 27 million write-off relating to IT impairments. So that's not adjusted for in underlying items. It's a direct cost charge. It's not something we obviously expect to repeat. It actually reflected some of the changes that we made within IT last year, and we actually went through the book of work and we decided, I think, in light of that, to actually write off 3 programs, and that drove that. So that's sort of a one-off in terms of that charge. There was also CHF 27 million -- sorry, CHF 25 million in respect of pension and retirement costs, which also came through. That's not something we actually expect. So there's a number of small items like that. I think just there's also -- I think there's some incremental regulatory costs relating to withholding tax proposal, which though it was not accepted in Germany, was accepted in Austria and the U.K., so we need to continue to actually build the infrastructure towards that. So those are just a few factors just to pull out in terms just to explain the progress. And then clearly, I think we have things which we probably would like, which is high commission expense, which reflects the pickup in transactions. But that gives some context to that. In terms of the timing of the savings, we would expect the bulk to be achieved in '14 and '15. So an aggregate number for around about, as you said, about CHF 900 million, CHF 950 million including shared services. Somewhere between CHF 100 million and CHF 150 million this year and then the rest split roughly evenly between '14 and '15 in terms of the savings from the plan. I think in answer to your question really then about the gross margin within Wealth Management, I think just to be clear, the 2 to 3 basis points I'm talking about in terms of the gross margin impact, there's probably 2 points to make, firstly, that's already in the first quarter. I think what I'm kind of saying is you'd expect that in 2013 compared to 2012, you've seen that already. It shouldn't step down further, but it will depress those numbers for the balance of this year. Clearly, what we saw last year is we were very successful in terms of boosting deposits and deposit repricing, as well as boosting our loans, which actually offset the adverse impact of lower interest rates within the Private Banking & Wealth Management division. Coming to this year, I think we're clearly very hopeful of good, high-quality loan growth, which would improve this -- which would obviously improve that net interest income guidance. However, I would say that given where interest rates are at the moment, there's not much scope for us really to actually reduce the interest any further. We're actually paying our [ph] deposits, and it's very close to 0. So there's a limited scope from what we can actually do in that sense. So that's the 2 contexts. So what I'm saying is 2 to 3 basis points. You've seen it already in the first, but it will be a factor for '13. We would expect to have some offset from loan growth, and we'll see how successful we are. But I don't think whereas in 2012, we were more than successful in offsetting it, we'll necessarily see that fully in 2013. Now the final point to make is this is an impact which, on current interest rates and current interest rate structure does come to an end in early 2014. So there afterwards, you would not expect any further adverse impacts from the interest rates on today's rates. And clearly, you don't have the upside as and when rates actually increase. Just another question, which you asked, really, which was around funding cost savings. I think we will probably -- I mean, I think I'm not -- I can't give you a specific forecast because there's a number of moving parts in here. But I mean, to give you some guidance, as a consequence of the balance sheet and leverage reduction measures that we took last year, we probably expect to see the funding costs within the Investment Bank drop, and obviously, a net in the revenues you see, by CHF 100 million to CHF 200 million. Now that will increase further next year because clearly, as we roll that off, we can actually retire debt, we won't need to refresh it. And therefore, the amount of senior debt we need to actually support it will decline. So that will increase more in 2014. That said, clearly, we've said before that we do intend to raise low-strike CoCos as part of the Swiss capital regime. So that will then start to run the opposite direction. But net-net, I would expect to see our funding cost drop this year and then more next year, notwithstanding the interest costs relating to low-strike CoCo into issuance. And clearly, we have our high-strike CoCos in place already. The first tranche is already issued, and we'll complete the conversion of the balance, which is owned by investors, our Qatari investors, in October this year. So it will be low strike coming through into next year. I think I've answered most of the questions, but please come back, actually, if I've missed any of the points.

[Operator:]

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

[Kian Abouhossein:]

A few questions, again, coming back to Private Banking. The 2 to 3 basis points, just to put it in context, should we compare to the 114 basis points in 2012 in terms of declines, so we should look at this x any lending growth around 100 and -- 114 in 2012 going to 112, 111 for 2013? And in that context, if I look at your clean margins top line, we were at about 108. And just putting that in context, how should we look at that? Why shouldn't it be 108 and going down further considering normally, we have the seasonality of slowdown? The second question is related to your cost savings. If I compare your presentation, February 7 and now, and you have this cost savings slide of CHF 4.4 billion, you actually seem to have gone backwards in Private Banking & Wealth Management in terms of cost savings achieved by about CHF 100 million. I'm just trying to understand why there are less cost savings than with the full year results. And if you can just clear those numbers. And generally, in Private Banking, if I can be blunt, I mean, you don't seem to really ever generate operating leverage, positive operating leverage. And we clearly hear constantly we have to wait for the next quarter, wait for the next 6 months. I'm just wondering, how much of the cost savings that you just mentioned, I think you just mentioned CHF 950 million including infrastructure, how much of that is actually in Wealth Management Clients x the other businesses that you include there? And how should we think about the run rate achievement there considering that your track record is not particularly good. Lastly, IB, you're already below your target of 70% cost income. I'm wondering, is this just accrual? Should we dismiss a very excellent cost income ratio in the IB and still focus on 70-plus post full restructuring, so 70-plus for this year and post full restructuring probably to 70? Or should we think that what you're seeing today in terms of cost income is a good run rate for the year?

[David R. Mathers:]

So firstly, I'll take the gross margin point first. So I think what we were trying to indicate in our guidance is that if we look at the balance of activity, we've obviously seen an improvement in transaction activity. We then see an offset in terms of net interest income. I mean, the numbers will tend to oscillate a little bit over the quarters, but I mean, I guess what we're trying to indicate is that we would expect to see some gains but offset by lower net interest income, so 110 plus minus, depending on how a number of factors kind of way out this year, particularly our growth in deposit factors, also any other in net interest income that comes through. So I think that's kind of what we're trying to indicate really in terms of talking about the 2 to 3 basis points of gross margin pressure. In terms of the detail of cost savings within the Private Banking & Wealth Management division, I think you asked the question really about the IT impairments, also about those pension costs. Are they actually in Wealth Management or are they elsewhere in the division? I mean, just to be clear, the CHF 27 million of IT impairments is predominantly within Wealth Management. There's some in CIC [ph] but predominantly Wealth Management. The one-off pension costs I mentioned in the first quarter are predominantly actually in Asset Management. Clearly, if we look at regulatory expenses, the Wealth Management, that's really withholding tax related, so that's Wealth Management again, and commission expenses, mostly Wealth Management. So I think it's certainly fair to say that the bulk of those items we identified and picked up before are in Wealth Management with the exception really of that pension cost of 25, which was in the Asset Management component of the division. I think your next question really was -- I may not answer all the points, but let's come back, was then really around the IB cost-to-income ratio. I mean, I think we know we have a KPI of 70% for this division. 67% is clearly good. Now I think a couple of factors in that. We have made most progress within the IB. I mean, accumulated cost savings were up to 1.7. We're talking about a further CHF 100 million or so to come through in that. And maybe that's something we can actually beat. But I would obviously point out that in the first quarter, we have that normal sort of January surge in terms of the revenue items. So whilst we are saying that conditions in April have been broadly in line with what we saw in February and March, excluding that January income, we shouldn't forget that January does tend to boost things in terms of the revenues, and therefore, depress the cost-to-income ratio. Nonetheless, I think we're obviously encouraged to be through our 70% cost-to-income target in the first quarter, and that's clearly a target we obviously want to work towards for the full year. But I think we obviously have a long way to go in terms of the balance of the year.

[Brady W. Dougan:]

Yes, Kian, it's Brady. I would just say a couple of things to add. I mean, I think on the gross margin, I think we're -- I mean, obviously, we've been pretty flat at 110 for the last 3 quarters. Obviously, that has been the continued interest rate headwinds offset by better transactional environment. So obviously, it's anybody's guess how the rest of the year develops. But certainly, our hope would be that we can continue to see decent transactional environment that can offset that interest rate -- that interest rate decline that we've seen. And I think as to your point about the operating leverage in the business, I mean, I think there is a lot of operating leverage in the business, but as you say, we just haven't -- we haven't seen conditions really improve across whether it'd be the interest rate side, which has continued to be difficult. I think there is still a lot of positive operating leverage if we see an improvement in the environment. In the meantime, we're clearly -- as you've pointed out, as we've all talked about, we continue to want to improve the performance of the business through reducing the cost base. So hopefully, that'll mean that it is -- that the benefits will be there down the road.

[Kian Abouhossein:]

Sorry, just to be clear. So despite the fact that you made 108 basis points, we shouldn't think about the normal seasonality in terms of top line margins. You believe you can improve that a bit to get to the implied run rate, which you indicated 110 plus minus? And secondly, on the cost savings, can you just say out of the, I think, CHF 750 million in Private Banking & Wealth Management that are remaining, how much are actually in Wealth Management Clients?

[David R. Mathers:]

So 2 points. I mean, I think -- we're not making a forecast. I think what we're trying to indicate is you've seen a pretty sharp drop in net interest [ph] income in the first quarter. We've given some guidance about how that might pan out during the year. Clearly, the adverse -- that's been offset to a substantial degree in the fourth quarter, as Brady said, by the higher net interest income. I think -- but we'll see how the rest of the year pans out in that sense. So your question on was, what, on the allocation between Wealth Management and...

[Brady W. Dougan:]

Yes, of the cost reduction, how much is Wealth Management versus...

[Kian Abouhossein:]

Yes. How much of the CHF 750 million, I think, that are remaining are actually Wealth Management because you clearly put it together with Private Banking. And clearly, we're really not that interested in Private Banking cost savings, and we're more interested in what's happening in Wealth Management. So wondering if you could give a bit of a split.

[David R. Mathers:]

It's about CHF 200 million in Asset Management and the balance of that in the Wealth Management division. I think just finally, on the operational leverage point, I mean, I think it's -- clearly, the measures we took in the Investment Bank started, gosh, almost 21 months ago, now almost 2 years ago in terms of that, whereas we did the big integration really with the Private Banking & Wealth Management division in November of last year. So we're further behind in terms of timing. We have more to deliver in PBWM. Certainly, this year is the year in which we are actually making a lot of progress, but you're also seeing the final leg of the interest rate fall coming through in this. This is the final year in which you'd actually see it. Clearly, for '14, we would hope basically and we intend that with that past, plus CHF 400 million of cost savings to come through, then that should run more positively in terms of operating leverage regardless of market conditions.

[Operator:]

Your next question comes from the line of Matt Spick of Deutsche Bank.

[Matt Spick:]

I had a couple of questions on the Investment Bank. And apologies in advance, they're going to be a bit nitpicky in what is overall a pretty good investment banking result. But just firstly on the rates business, still a lot of capital tied up in there and declining returns year-over-year. Can I just ask, is that mainly a U.S. rates business? Because I tend to think of the rest of your fixed income franchise as pretty U.S.-centric. So I was a bit surprised to see it so weak given that perhaps you didn't have quite such big LTRO gains as others. And secondly on the rates business, I wanted to ask if you had any comments on the next deadline in June for central clearing and whether you expected that to have any impact on the rates business? And then a second question about commodities and FX. Quite low returns, areas you're deemphasizing. How close are you or could you get to a point where you only offer commodities and FX really to your Private Banking clients? Could you completely deemphasize those to the institutional clients and maybe improve the returns that way?

[David R. Mathers:]

Okay. So just in terms of the balance business. We actually do have quite a sizable European rates business as well as a sizable U.S. rates business and a smaller business in Asia-Pacific. So it is a generally global business in that. You're actually correct, though, that the first quarter of last year did include a very strong benefit from the various macro measures at that time, and in fact, was a record quarter for the business a year ago. So we're definitely seeing the drop away of that kind of comparison. And I think since then, realistically, we've had a very low rate environment, flat yield curve. It's not a great rate environment. And I think it's probably not surprising that it's been weaker since then. And I think -- that's probably in line with what we're seeing across the industry, I think. In terms of central clearing, I think we're on track for that. We don't really expect that much impact. I mean, longer term, we would actually have some positive aspirations to central clearing; it would reduce the amount of capital we actually have employed in the business because obviously, it's lack of central clearing, which is partly driving the capital usage in the rates business. Notwithstanding that, we would also intend to reduce the capital we have in rates because clearly, at the moment, as you rightly say, we have an unfavorable market environment with quite a lot of capital employed. This is a business where we would expect to raise capital, partly for redeployment to the rest of the Investment Bank but also to meet the target of CHF 175 billion. On commodities and FX, I think certainly, we've reduced substantially the costs and scale of both of these businesses. It is more of a servicing operations for the bank, and I think FX is an important part of what we actually across -- offer across the entire bank, both our Institution and our Private Banking clients. It's clearly been a more favorable environment, so it's been -- I think what we've seen is better results, which reflect that fundamental improvement in our cost and operating environment, what we're actually doing in the business. And it's working well, I think, as a service center in that sense. And I think we're very encouraged by the results we've seen from it. I think commodities, as you know, I think it is a business which is closely aligned already to what we want to do in Private Banking. Again, I think we've made a lot of progress in reengineering that business, and we've seen some of that in these results.

[Matt Spick:]

Sorry, can I ask a quick follow-up? Could rates be turned into a pure service center in the medium term?

[David R. Mathers:]

I would probably say no. I mean, I think that we actually have a very good rates business. I mean, it's [indiscernible] . So this is a serious business for the bank. I mean, it's not, in market share terms, as strong as our emerging markets credit or securitized products business, let alone some of the equities franchise, but it is actually a very good business. And we've seen good returns from this in the past. I think if you're running -- if you're looking at the overall returns of the Investment Bank, it also tends to be countercyclical in terms of its response to macro conditions. So I think in terms of our overall returns, it's actually very useful to have a part of that, as well as being a pretty fundamental part of an Investment Bank.

[Operator:]

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

[Christopher Wheeler:]

A few quick questions. First of all, on some net new money flows. The CHF 2.9 billion of inflows against the CHF 2.1 billion of outflows in Western Europe, can you give us a flavor as to where those inflows were? Were they also in Europe or was it in Middle East, perhaps? Where was the strength there? And then perhaps a question on the unsung hero of Asset Management. The inflows there, I'm just wondering where they came from, what geographies they came from because obviously, that was a very encouraging performance. On the Investment Bank, you had obviously a compensation ratio of about 37.6 on reported numbers. I think it was 39.7 last year first quarter, and it rose in the end excluding PAF2 to about 45%. Where would you like to see that settle this year? Are you looking for that to be close to 40% or back to where it was last year? And then final one, I'm sorry, I'm going to flog a dead horse here on these costs in Wealth Management. But I just looked at your wonderful spreadsheets and looked at the pretax margin and how dull it's been since 2009. And I suppose my concern is it's a great business, but we're seeing a lot of cost-cutting programs and we're seeing, for example, the U.S. banks last week, Barclays today, they're accelerating those programs quite rapidly. And I mean, is the issue you're having in Wealth Management one of, the Swiss issue of the more difficult job of obviously moving staff or is it partly the fact you're still investing, particularly in Asia? And is that what's really slowing down your ability to obviously do what you want to do in 2014 and '15 and get these costs out the business?

[David R. Mathers:]

So just taking the questions in order. Was -- I think you referred firstly to the inflows in Western Europe of CHF 2.9 billion compared to, obviously, the outflows on cross-border of CHF 2.1 billion. I don't think there's anything particular to note there. It was broadly sourced across the businesses. I mean, I don't think there's any particular trends. Obviously, we saw strengths in the emerging market businesses related to that, Russia, but nothing in particular to note. And certainly, just to address any hidden question, nothing in particular relating to the Cyprus events in the first quarter. I think your next question then...

[Brady W. Dougan:]

On Asset Management.

[David R. Mathers:]

Was on Asset Management. And I think the mix, we can give you the mix, actually. 50% of it was actually in Switzerland, 20% in Asia-Pacific and 30% in the Americas. So again, led in Switzerland but a pretty broad brush. I think the point there also to note is that CHF 4.4 billion of the inflows are actually essentially sold to our Wealth Management division very successfully, particularly some of the MACCS asset allocation product. So what you're seeing is a matching there between the Wealth Management and Asset Management. But in there, 50% Switzerland, 30% Americas, 20% Asia Pacific. I think the third question then was actually on the IB account revenue ratio. Actually, we actually did include on Page 36 in the Appendix a variable comp disclosure, which is for the group and not necessarily for the Investment Bank, you can see our variable comp is down slightly accrued in the first quarter. But actually, around half of that is actually in Wealth Management, Asset Management relating to some of the timing of that. And obviously, the business has been through a substantial transformation for the year. The IB accrual is marginally lower but not that different in terms of that and does reflect, obviously, some of the cost measures we pushed through. So we don't specifically target a comp-to-revenue ratio. Actually, I think we look at the economic contribution through the year, and we're trying to accrue rather pretty evenly through the year against it. But obviously, the accrual we made in the first quarter isn't that different for the IB compared to the first quarter 1 year ago.

[Christopher Wheeler:]

Okay. And then obviously, just if you can give us any flavor on this cost issue? Again, I'm sorry, I know we're rattling on about it, but it is pretty important given the strength of that business underlying.

[David R. Mathers:]

Could you just repeat the question on...

[Brady W. Dougan:]

Wealth Management?

[James Chappell:]

Just on the Wealth Management. I was really asking, I mean, just as I said, looking at the spreadsheets and see how anemic the pretax margins has been now since really Q1 '10. It's a matter of asking with a lot of banks putting cost-cutting programs in the last 12 months, we've seen quite a bit of acceleration of those programs, but for you, it seems quite painful to get to 2014 to '15 to really get to where you want to get to. And I was asking why you that might be. Is it partly because of the big Swiss component, which means it's difficult take out costs? Or are you investing as well in that business in Asia and that's obviously offsetting the work you're doing on costs? Because it just does seem to take a long time here.

[David R. Mathers:]

Well, I think there's probably 3 points there. And I think you're right on all 3 of them. We clearly have continued to invest in the core businesses in Asia, particularly in Singapore and Hong Kong, and that remains a very important growth market for us. I think -- I wouldn't underestimate, though, the factors I went through before in terms of the IT impairments, the regulatory costs, et cetera. That certainly damped this sort of -- the trends you see in the first quarter. I would say though that clearly, just making these changes, as you say, in terms of the environment, it does take about 6 months for these costs to actually roll over. We only had the integration of the 2 businesses actually in November of last year, so it does tend to take a delayed impact to actually come through. But I think then more fundamentally, if you look back over that period, you've seen a very sharp drop-off, obviously in the interest rate environment, and that does tend to depress the overall results if you look back at your 2010 comparison.

[Operator:]

Your next question comes from the line of Holger Alich of Handelsblatt.

[Holger Alich:]

Yes, I have a question on the German issue, if I may, quickly. The German tax authorities have bought another CD with data -- can you hear me? -- bought another CD with data apparently from Credit Suisse. First of all, can you officially confirm that it's your bank that is hit by that new data leakage? Secondly, have you identified yet where the data came from? And thirdly, I think this is the third time in a short time that data came to German tax authorities. So is there -- do you think you have to work that out to protect better your data?

[Brady W. Dougan:]

Well look, I guess in general, I mean, obviously, we have been, for a number of years, pursuing a compliant business strategy. That's something that's been an important priority for us, and we've been very focused on that. And I think we've made good progress on that. As you know, we also entered into a settlement with the German authorities some time ago on these kinds of issues. I think with regard to the specifics that you're talking about, we don't know anything more than what you read in the papers or what the rumors are that are reported there. So we don't really have any facts around that. So I'm not sure there's too much more we can kind of add to that. And obviously, with regard to the issue of protecting the confidentiality of our client data, it's something that's extremely important. It's something that we work very hard on, and it's something that we're going to continue to make a very high priority. So it's something that clearly is very important to us and to our customers, so we'll continue to focus on it.

[Holger Alich:]

So did I get that right that you don't know really if it's your bank or the data of your clients that are on the CD which has recently caused some police action in Germany?

[Brady W. Dougan:]

We don't know. I mean, as I said, we don't know anything more about what the data is, whether there is data, what happened. We don't have any facts around that. All we know is what -- it's either the rumors or the news that's reported in the media is all that we know. So we can't confirm -- we can't tell you anything more about that, as I say.

[Holger Alich:]

Okay. But normally, clients call the bank when they have visits from the police. So there might be some information coming back from your client base or from the tax advisors that there are some feedback if there's some issues there. So this is a little bit of a surprise for me.

[Brady W. Dougan:]

Well, as I say, we can't confirm anything more than what you've seen in the papers. We've seen the same thing, and other than that, we don't really -- we can't really give you any particular information about client data, the CDs, what was -- whether there were CDs, what was on them, et cetera. So I'm sorry, we can't add more.

[Operator:]

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

[Huw Van Steenis:]

Quick question about the way you think about dividends, and I appreciate it's very early in the year. So a couple of questions. First, I see that about CHF 1.5 billion of Claudius notes could be called December this year. And I was just wondering how you factor that into your decision. Would you rather do an economic noncore and pay a divi rather than actually retire those notes in December? I think number two, also how big a buffer do you feel appropriate above 10% given there are a number of outstanding litigation matters which may or may not get resolved this year? So if they won't get resolved this year, would you want to leave yourself a decent buffer, there for, maybe constraining some of your potential to pay out all your full cash dividend this year?

[Brady W. Dougan:]

Yes, Huw. I guess in general, as we've said, I mean, I guess the clearest statement is kind of the one we've already made, which is as we've said, as we exceed the 10%, which we hope to do during the middle of this year, we're clearly going to expect to accrue for and return significant capital to shareholders. We have, we think, a very capital-accretive model. And so that's something that hopefully will play through, as you say, as we reach the levels that we've set. On the buffer issue, I'm sure we'll want to keep some buffer, but frankly, we've got -- we're going to have an awful lot of capital stacked up in the bank with obviously 10% and on the CET1 side plus another 3% of high-strike CoCo contingent capital, as David said, that's basically already in place. Eventually, there will be low-strike CoCos in place as well. So there's a lot of capital behind all that. So I'm not sure we've come to a final decision, but I'm not sure that there's a need for a significant buffer on top of that. But as you say, certainly how things progress in the rest of the year, it's very early in the year, as you say. So what market conditions are like, what the earnings are, et cetera, as well as some of these more specific issues will certainly have some bearing on that. But I think looking through all that, our belief is and our expectation is that the business is going to be very capital-accretive, and we should be able to return significant cash returns back to shareholders as we move through those numbers. But I don't know, David, if you have anything to add?

[David R. Mathers:]

Well, I think that just -- I mean a couple of points really. I mean, I think we wanted to be clear that in the first quarter capital numbers, we have made a pro-rata accrual towards our resumed cash dividend in respect to 2013 that we paid in 2014, subject, obviously, to the Board of Director's review and obviously our shareholders' approval at the AGM next spring. So we have restarted that accrual process already, Huw. I think the point on Claudius, as you say, Claudius actually sits in 2 tranches. The option to actually redeem begins right at the end of this year for about CHF 1.4 billion of that, and then the balance, I think the option is actually in June of 2015. I think -- I don't think we want to make a commitment to tell that. We'll clearly look at the Claudius redemption option. As it's forced here, it's not a one-off option. Once the redemption is actually open, it's then open continuously there afterwards. And we'll make a decision, I guess, in December depending on how the capital position looks at that time and balance these factors off. But it's clearly something we've factored in our thinking.

[Huw Van Steenis:]

But just one thing, you would rather reward shareholders with a cash dividend and delay the payment of Claudius than the other way around if it came to that?

[David R. Mathers:]

I think that's probably -- I don't think we could really comment on that at this point, Hew. I think that would be a decision for the Board and for the AGM subsequently in terms of the different priorities of that point. But I would say simply we're obviously aware that the option to redeem Claudius does fall during December. Technically, redemption of Claudius would actually be enhancive to earnings per share, so that's a fact that we keep in mind as well. But whether we do it in December or next year will clearly depend how this year turns out. I think the point we want to make is we clearly look to that. And by the way, that was clearly something we considered when we actually thought about our first quarter results and what we should and should not accrue in terms of a pro-rata cash dividend for this year.

[Operator:]

Your next question comes from the line of Daniele Brupbacher of UBS.

[Daniele Brupbacher:]

Just 2 questions, one again on Wealth Management and the CHF 2.1 billion outflows related to Western European countries. Is it fair to assume that business is still skewed to Germany and probably also U.K. or is it too early to see an impact from the new agreements with Austria and the U.K.? And then the second question coming back to Slide 20, with the various revenue streams within the IB, I would like to say that's quite helpful. I also think it's interesting to see that your highest capital consuming business, it seems to generate the most attractive ROEs, which is -- it could be related to your top 3 or leading positions there or certainly cyclical drivers within certain markets in the U.S., for example, securitized products or credit products. How do you think about it? I mean, what is really the driver for your high ROE there? And how much is related to the market's cyclical elements there and how much is related to your market position within that? And then what's your sort of outlook for the next couple of quarters there?

[Brady W. Dougan:]

Yes, I think on the first question, I think the outflows, they're broadly across the Western European markets. But obviously, Germany is a big market within that, and certainly Austria and the U.K. as well. And as you say, some of those outflows could actually be clients that are obviously keeping their accounts with us, but maybe reducing and paying some taxes in some of the programs, et cetera. So -- but as I say, broadly across Western Europe, but certainly in Germany would be a big part of that, no question. I think on the issue around the fixed income businesses, as you say, I mean I think the most important issue there is that we have really completely transformed the business model in these areas. And they are businesses that now generate very high returns on much less capital than they did in the past. And frankly, the Basel III in many of these cases, the Basel III additional capital required is very high in these businesses. So the restructuring was actually very heavy. Our view is that actually, as more and more banks go completely to Basel III, many of them may have to exit some of these businesses, which will actually end up having a benefit to us of reduced competition in some of those areas. I mean if you look at securitized products, for instance, that's probably the business that has the heaviest surcharge from Basel III capital, and our view is that a number of our -- number of the players in that market may find it difficult to restructure their businesses in ways that actually allow them to make competitive returns under the Basel III capital requirements. So I actually think that certainly, the environment has been a favorable one for those businesses, credit, emerging markets from securitized products, as you mentioned, there's no doubt. But I also think that the transformation that we've actually undertaken in those businesses to make them use significantly less risk, significantly less capital, is something that makes those returns sustainable. But will that be if -- I mean, obviously, if markets turned down in any of those areas, will it have an impact? Of course, it will have some impact. But we do think that the way that we've actually restructured those businesses makes them much more resilient, and actually businesses that we think will be able to make good returns over various different market environment conditions. So, David, I don't know if you have any...

[David R. Mathers:]

I wouldn't.

[Operator:]

Your next question comes from the line of Fiona Swaffield of Royal Bank of Canada.

[Fiona Swaffield:]

Just some quick questions on Basel III look-through. The regulatory deductions over CHF 7.9 billion seem to have gone up, and I just want to ask David whether you still think they should go down in 2013 because I thought that they were related to, as the capital grows, they would reduce. And also the same is true for like DTA burn-off, that was on the first question. The second question was on share-based compensation and this kind of whole issue with the AGM. Should I -- firstly, am I right in thinking that in future, to reduce your shares, the staff compensation, they will be offset in the market so we shouldn't expect any increase in the number of shares? And secondly, if the plan is voted against in the AGM, what would that mean for the capital ratio?

[David R. Mathers:]

So just a couple of points then. A couple things really. In terms of the deductions, it's a pretty small effect. I think it was about CHF 7.7 billion in that last projection, and CHF 7.9 billion now. It's really reflecting FX moves in the period because obviously the dollar is strengthened by about 3.5% since the close. I think it's also fair to say that just in terms of where our earnings were distributed this quarter, we didn't actually make as much progress as we'd like to have done in terms of our DTA turnout. We would expect to make further progress to the balance of this year, as they were just relating to some of the tax planning around some of the hedging essentially. So just in terms of the seasonality, there was an adverse trend in the first quarter. But most of it is down to FX. We did clearly reduce DTA turnout, but not as much as we'd like it done, but then the rest is FX. Just in terms of the number of shares and just to sort of give guidance there, I think, obviously, we have the MACCS in issue, conversions happened already. Our total share count, therefore, will go up to about 1.599 billion or just under 1.6 billion. That's assuming this -- obviously, with the scrip dividend, assuming approved on this Friday's AGM in terms of the numbers. I think in terms -- so that would be the number of shares you'd expect between the MACCS conversion and the dividend. But there afterwards, you're actually correct. Once we actually pass our 10% Swiss core capital threshold, our intention is to essentially neutralize share issuance in respect to their deferred comp through market purchases. So at that point, the number of share count should definitely be stable in that sense. And I think your final question then was about resolution 4.2, which is up for discussion at this Friday's AGM as well. We're actually asking for I think 30 million of shares, which could be issued in effect to share-based compensation. I mean it's -- essentially, it's the tail of the capital plan that's in respect to the APPA. Just how many of those we actually issue clearly would depend on how quickly we actually get to 10%. So I think if you said, you took a case that this was not approved or you didn't have it, you shouldn't be deducting that from the capital ratio because I think it's unlikely, given the progress in the capital plan, we necessarily need to actually have all of that. But I think let's just see how the AGM goes on Friday just in terms of that. I would point out that obviously Glass Lewis actually recommended 4 on that measure. And we'll see what the votes come out on Friday in terms of the final conclusion.

[Operator:]

Your next question comes from the line of Jeremy Sigee of Barclays Bank.

[Jeremy Sigee:]

Three, I think, quite quick questions actually if I could. So firstly, on the Investment Bank revenues, the losses on the exit portfolio have obviously reduced a lot now in this quarter. Are those largely behind us? Are we kind of done on that issue and the drag in future quarters should be minimal as well? Second question, somewhat related. Expectation for group RWAs at the end of the year. You're obviously getting very close to your year-end target, but then there's the kind of less than, and I just wondered how we should read that? Are you viewing that process as largely done or do you think a material undershoot could be realistic? And then third and final question, your litigation note, I think it's Note 29, shows unprovided litigation risks I think down, if I'm reading it correctly, from CHF 2.9 billion to CHF 1.8 billion. I just wondered if you could comment on that movement?

[Brady W. Dougan:]

You want to...?

[David R. Mathers:]

So just taking the last one first. I think the predominant driver on that is actually the NCFE settlement, which, you'll note, we actually -- we obviously concluded that a few weeks ago. So that was obviously a provision, and we actually made a final settlement for that. So that's the primary driver in terms of that. I think in terms of the group RWA target, I think, to be candid, I think we set a target to be less than, I think that's a good target to be at. I mean, I think our focus essentially is being below that target and also being below on the total leverage. So less than CHF 900 billion in terms of on-balance sheet asset, less than CHF 1.19 billion at current exchange rates or on balance sheet plus add-ons. So that -- it's our priority to hit both of those measures really to make sure that we actually optimize our capital structure in a complete sense. And I don't think we really want to change those targets as we sit here today. In terms of the -- your first question really, which was actually on the Fed wind-down losses, you'll see disclosed in the MD&A that we had a gain on one of the positions at just, I think, it was just under CHF 80 million, which we took in the first quarter. So that was clearly good. We actually exited from one of the remaining European CMBS positions. And that clearly -- obviously, helped to report that revenue gain you saw of CHF 4 million in terms of Fed wind-down portfolio. That said, if you look back at the loss we suffered in Fed wind-down last year, which is over 800 million in the whole of 2012, I think a couple of months ago, we guided that we'd expect that to be half or less in respect to 2013. We're clearly tracking very well to that. And I think it will be significantly less than that impasse, even half of what we had last year, so maybe in the few hundred million. Not perhaps as good as in the first quarter, but substantially reduced. One final follow-on point to that, basically, you may note that the RWA within Fed wind-down in one of the appendixes is actually flat at USD 13 billion. So given we settle something, it will happen. There was actually a methodology increase of about 1.5 billion within that. And then obviously, we had the position reduction, which gets us back to that. So we're still very much committed to seeing the amount of risk in RWA within the Fed wind-down portfolio down. But just want to explain why, notwithstanding that sale and the other measures we've taken, you haven't seen the headline total reduced in terms of Fed wind-down risk-weighted assets.

[Operator:]

Your next question comes from the line of Jon Peace of Nomura.

[Jon Peace:]

I just wanted to clarify quickly on the dividend. Are you accruing it flat with prior year in absolute terms of CHF 0.75 or are you working to some sort of payout ratio? And as we go forward from here, I mean is payout the right way to think about it?

[David R. Mathers:]

I think probably -- I think, if we look back to what we said a couple of months ago. So obviously, we paid CHF 0.75 with a scrip alternative in respect to 2011, and we obviously have a proposal to our shareholders on this Friday for a CHF 0.75 dividend paid, CHF 0.1 in cash and CHF 0.65 in scrips for this year. So that's clearly what we've done for the last couple of years. I don't think I can really give guidance on what we might choose to do this year. I think there's too many uncertainties. What I'd really say is we've kind of accrued a cash dividend pro-rata to what our expectations and plan is for '13 into '14. Coverage-wise, I think we probably should -- we probably ought to give you better guidance as we have to go through this year. But I think that's all I can really say about the -- what we've done so far this year.

[Operator:]

Your next question comes from Jernej Omahen of Goldman Sachs.

[Jernej Omahen:]

They're very brief questions, because most of them have been answered. So firstly, just a question on your FX translation or in the FX effect. So Credit Suisse gained roughly CHF 800 million, I think, of tangible equity this quarter due to the reduction in this cumulative translation adjustment. And I was just wondering a very straightforward question, is this how we should think about this going forward as well? Is this what the current sensitivity is? So roughly a 1% move in the exchange rate is more or less CHF 300 million of Swiss francs positive or negative obviously on your tangible equity? The second question I wanted to ask you is more -- a broader question related to the debate, which is now really gaining momentum, I guess, on the financial transaction text in Europe. Obviously, you are a non-EU-11 -- you operate in a non-EU-11 country, but I guess the impact would still be quite significant. Are you able to provide some sort of, I guess, a broad guidance as to what you think the effect could be, and what you could do to mitigate it? And in that context, I was just wondering if you could actually highlight what you thought the biggest regulatory challenges for Credit Suisse are at this point? And then thirdly, I wasn't planning to ask this question, but it got mentioned in so many different ways during the course of this call the issue of capital return at some point. Do you have like hard targets or hurdles in mind where you basically say, "Look, if we are above 11%, 12% core equity Tier 1, we are willing to pay everything back," i.e. is there a level where you just think to yourself, okay, this is the maximum amount of capital that we're willing to run with and that, I guess, would make it relatively straightforward for us to think about the capital return in the future at some point?

[Brady W. Dougan:]

I think maybe I'll -- let me take the second one. David could answer the first, and maybe I can -- or do you want to start with the first one, and then I'll take the second?

[David R. Mathers:]

I'll just take the first one. So in terms of the FX translation effects, I think approximately 60% of our B-III risk-weighted assets are U.S. dollar-denominated or U.S. dollar-related. And we would tend to hedge that exposure against sharp moves in currency. Not completely, typically something in the 40s of our equity base we actually hedge into dollars. So clearly in an appreciating dollar environment, you would expect to see a pickup in -- or an increase in the tangible book. And that -- primarily, that drives most but not all of that CTA, but it's certainly most of the factors that you're identifying. And what we're trying obviously to do is to match the hedging at our capital ratios, and also our leverage ratio for that matter, with the gains and losses to shareholders' equity in terms of that as well. So we try and balance that between those 2. But I think it -- this is a core point, is $1 of appreciation against the Swiss franc would lead to an increase in the shareholders' equity and clearly vice versa in that sense.

[Brady W. Dougan:]

I think on the second question, to which was sort of a two-part question. I think on the financial transaction tax, I mean we've got -- our research people have spent a lot of time looking at the impact on markets of the financial transaction tax. And there certainly is an impact in the markets where it's imposed when you have selective imposition on different markets, and obviously, that does have an impact on volumes there, et cetera. I mean, I think in general, our view would be that our -- we have a global client base, they're involved globally, and my guess is that probably, people's need to adjust portfolios, need to try to take advantage of opportunities, et cetera, sort of transcends any one particular market. So I suspect that there might be comfort in that to some extent, there might be compensating volumes and flows in different markets. And so I think the key there is obviously our presence in all the major markets worldwide in a fairly -- I'd say a fairly balanced and even a strong capability, particularly, for instance, in equities, where we have strong businesses all around the world. So I think I mean, obviously, I think our general view would that be that it won't be that, that will -- it will cause some distortions in markets to the extent that it is put in place. In terms of our business, there'll probably be some effect. But I think given the global nature of our business, we should -- global nature in the fact that it's across a lot of different product categories as well, I think our hope and our expectation would be that wouldn't have a dramatic impact. In terms of our regulatory challenges, as you said, I guess we kind of see them in a few different categories. And I mean, the first category is really sort of, if you will, that sort of Basel III capital requirements, RWA measurements, liquidity, et cetera, leverage. And on those fronts, I think the -- from our point of view, the landscape is pretty clearly defined. Now, obviously, that's somewhat unique to Switzerland but is increasingly the case, I think, around the world. And obviously, we're Basel III effective from January 1 this year. We've talked about the fact that we're sort of within reach of most of the targets we need to get to. So we feel like we're in very good shape on that front, and again, that's probably a somewhat different situation than you see on different parts of the industry around the world. The second sort of category I would say is more -- almost more legislative, things like Vickers or Liikanen or Dodd-Frank, et cetera, which are more structural, more deeply structural. In many cases, those don't impact our home market in Switzerland. They do impact us in parts in our presence in different countries. But still, that's probably an area that's a little bit less clear. Sometimes, it's longer lead times, still things happen. It's not exactly clear how they'll be implemented. And again, there, I think we're probably in relatively better shape partly because we have less -- in any one of those markets, we have less concentration of our business. But also I think the way we've actually transformed the business, it probably puts is in better shape. I'd say the third category that we think about is probably more of the local regulatory issues that are coming up, the U.S. IHC proposals and any other similar aspects in markets around the world. And there again, I think that is a challenge for the industry and it's something that we're going to have to deal with as well. We're somewhat -- we're blessed somewhat with having a structure that's already subsidiarized. We've got, in most countries, that's the structure that we deal out of. So we've already got capital, et cetera. It doesn't mean we won't have to make adjustments to our business model. But I think in general -- we'll have to see how these things develop, but in general, we feel like we're in pretty good shape against that. So I actually think against the regulatory challenges around the world, we're in -- I think we're in pretty good shape. And I think the most important thing within that is that we're dealing with sort of a stable environment, particularly here in Switzerland, where obviously they move quick and with some pretty heavy capital requirements. But there's not a lot of debate about what direction it's going. And that certainty is something that I think is very valuable to running a business, so I think that's something that's quite good. The last question that you asked was about capital return at some point. I mean, obviously, as we've said, we think as we exceed the 10% number, our view is we want to return a lot of that capital to shareholders. So I'm not sure we've set any sort of bright lines in terms of an amount. And we will -- I think as we see opportunities, particularly in our Private Banking & Wealth Management business. But of -- in all of our businesses, if we see opportunities, it's not that we won't take opportunities to potentially grow those businesses. But I think our view is there's going to be a lot of opportunity, a lot of capacity to return cash to shareholders. So -- but I don't know, David, if you want to...

[David R. Mathers:]

No, I think we said last July, with the capital raise, that our intention would be to return the most significant cash distributions to shareholders. That very much remains our plan. I think you can see with these results for the capital ratios, we're absolutely on track with that, whether in terms of the cost measures to the group, whether in terms of the disposals. We've actually completed what we said we're going to do. So I think that would be our intention. And I don't think -- quite clearly, as Brady says, once we actually go through the 10% level, we do start to move into significant cash generation. And clearly I think, if you asked the question around Claudius, that would clearly be one goal of due course. But I think clearly, we recognize the importance of cash dividends and a stable share count to our shareholders.

[Operator:]

Your next question comes from the line of Andrew Stimpson of KBW.

[Andrew Stimpson:]

We've been doing a lot of work into the compensation structures, different banks. And one of the stats that jumped out for you guys, the big jump in pay for 2012 that you guys had for the key risk takers, even if I adjust for the currency and headcount changes. The direction obviously makes more sense if you look at the rebound in the IB profitability in 2012, but the key risk take pay per head is now the highest out of any of the European Investment Banks. And we're still seeing some headlines thrown off of some of your staff being poached. So I guess there's 2 questions in there. One, what -- why do you think the pay is the highest at CS? And number two, how should -- how do I tally that out with some teams still being poached? And then a second topic on the PAF2 structure. Obviously, that's been made slightly more complicated with the Basel Committee paper from December that makes it ineligible for the counterparty credit-spread hedging. And the annual report, when it came out, said you're evaluating what to do next there. I'm just wondering if there's any update there. And if you did have to cancel the transaction in its entirety, what the impact from the risk-weighted assets would be if indeed they do come back for you? And any deadlines in timing for that would be helpful, too.

[Brady W. Dougan:]

Andrew, I guess on the first question, I mean we've continued to -- I mean, we have a general view that we'd like to get to a business model where there is fair sharing between employees and shareholders, but obviously, also where we can pay our employees competitively and well in that context. And that's what -- and if you look at the first quarter, a 16% ROE, 23% ROE in our Investment Bank, I think those are the -- that's what we'd like to get to. But we are committed to a fair sharing, and it's something that we do believe that we should be able to get to. I think in terms of structure on compensation, I think we have been fairly state-of-the-art in terms of a lot of the structures that we've used to make sure we're aligned with shareholders to make sure that we're helping to accomplish some of the goals in terms of our strategies around risk reduction and RWA reduction, et cetera. So we've done, I think, quite a lot on that front. So, in general, we're trying to be, I think, one of the leaders in sort of responsible pay structure and also hopefully in terms of sort of the split of shareholder versus employee rewards is something that we certainly aspire to. I think the specific thing that you are talking to is sort of the 2012 to 2013 progression and, I guess, pay for a relatively narrow group. I mean, I think basically we doubled our operating performance from 2012 to 2013. So -- and for -- we can sort of talk about a lot of reasons around that, but that's a pretty hefty increase in profitability. And that obviously did lead to some increase in compensation across some of those levels. So I think -- as you said, I think we're obviously trying to pay competitively. I think in general, we pay competitively, but I don't think there are any particular outliers in that, so I wouldn't take any more from that. But it was -- certainly, year-on-year it was actually a change based on the performance of the business. So, David, do you want to talk about PAF?

[David R. Mathers:]

So on PAF2, as you rightly say, the BCBS did publish some revised guidelines back in November around such hedge structures, DVA hedge structures. And we did make some comments around this in the annual report, the revaluating -- the impact on PAF2 of that. I mean, specifically, what the guidance actually said is it actually confirmed that index or asset-specific hedges, which is really what PAF2 actually is, are actually [indiscernible] hedges and can we trace this such with under the Basel III legislation, along with obviously index hedges, CDSs and certain other instruments like swaptions. What they also said, though, is they gave some guidance around the senior structure of PAF2. And in line with that guidance, we're obviously to be negotiating with a number of people over the course of the last 3 months in terms of how we actually restructure that senior funding. That -- those discussions are progressing well. They're extremely advanced. And I think we would probably expect to conclude that in the next few months, frankly. So that's what I could say at the moment. I think it has certainly been a pretty positive conversation so far. In terms of the absolute amount, I think we, for various reasons, didn't give that a year ago when we actually did the PAF2. And I can't give that -- I wouldn't -- I can't give that to you today either in that sense, sorry.

[Operator:]

Your final question comes from the line of Stefan Stalmann of Autonomous.

[Stefan-Michael Stalmann:]

I have 2 questions regarding the Wealth Management business, please. The first one is with retrocessions. Could you give a bit of color around whether you are actually changing your contracts with clients or whether you intend to do that, and what possibly the impact could be on your gross margin from that? And the second question relates to the Slide 12 of the presentation, where you show the share of your ultra-high net worth business in total assets under management. And it appears as if the non-ultra-high net part of your business had actually stagnated. In fact, it's slightly down year-on-year at a time when your overall portfolio generate 6% returns in FX portfolio or FX effects. So is there some shrinkage going on or are we talking about mix effects or maybe people graduating into the ultra-high net worth clients? Maybe you could shed a bit of light on that as well.

[Brady W. Dougan:]

Yes, Stefan. I think on your first question on retrocessions, I mean, we were quite early in the disclosure and information to our clients around the whole retrocession process. So we feel like we have, a, been transparent around that, and, b, we feel like we've been acting on our client's best interests in terms of providing the right kind of products and returns to them. So I think our general view is that we've had -- again, we addressed this issue years ago and we feel like we're, so therefore, reasonably well positioned with our clients on that. And so as a result, I think we might offer some additional products. We might do some things that are responsive. But in general, we feel like we've had a pretty -- our lineup of products has been a pretty adequate one against those issues, so I don't think we're expecting any change in respect to the profit dynamic of the business as a result. Do you want to share something?

[David R. Mathers:]

Sure. Just in terms of Slide 12 and the mix of clients. So what you're referring to, obviously, is that a year ago, we had CHF 763 billion of assets under management, 37% of which were ultra-high net worth. And now we have CHF 820 billion, of which 42% is ultra-high net worth. So under the deduction, you can see that the non-ultra-high net worth, absolute quotant [ph] I think, I guess must be in -- by deduction around CHF 3 billion or CHF 4 billion lower than it was a year ago. I think the answer to that really is if we look at the cross-border outflows, that is really predominantly the high net worth or the non-ultra-high net worth individuals, that's what you're seeing as outflows. You're not really seeing it as an ultra-high net worth effect. So that's what's driving that drop there. It's certainly true, though, nonetheless, that whilst we have had growth in high net worth individuals outside of Western Europe, bulk of our growth and our emphasis has actually been our ultra-high net worth clients over the last few years and particularly in the last year. But it's really Western European outflows which is driving that dynamic.

[Stefan-Michael Stalmann:]

David, maybe just as a follow-up, I think the Western European outflows were probably about CHF 8 billion during that year, give or take. So that would probably explain the drop. But then there would still be no performance and no FX effect on this part of the portfolio, which, for the whole portfolio, was plus 6%. So somewhat there seems to be around CHF 25 billion to CHF 30 billion of AUM missing relative to what's going on in the overall business?

[David R. Mathers:]

Let's get back to them in terms of the mix of that, but I think it is predominantly driven by those Western European outflows. But we can give you the breakdown in performance. That's -- we can give you that data.

[Brady W. Dougan:]

Good, okay. I think there are no more questions. So thanks, everybody. In summary, we had a strong start to the year. I think the first quarter results demonstrate the effectiveness of the strategic measures that we've taken over the past few years and particularly the potential of our high-returning business model. We have continued to focus on our clients while delivering on our expense and capital targets. As we mentioned, as of January 1, we do operate fully under Basel III well ahead of our -- most of our industry peers. And today, our integrated bank model generates strong returns with substantially lower costs and risks. We are confident that our transformed operating model positions Credit Suisse to effectively serve our clients to drive further market share gains and deliver superior returns to our shareholders. Thank you very much.