Credit Suisse Group AG
Q3 2014 Earnings Call Transcript

Published: 23 Oct 2014

Operator:

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group Third Quarter 2014 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Christian Stark, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Stark.
Christian Stark:

Good morning, and welcome to our Third Quarter Results Call. Before we begin, let me remind you to take note of the important disclaimer on Slide 2, including the statement on non-GAAP measures and Basel III disclosures. I now turn it over to Brady Dougan, our CEO.
Brady W. Dougan:

Thanks very much, Christian. Welcome, everybody. Thank you for joining our Third Quarter 2014 Earnings Call. As usual, I'm joined by David Mathers, our CFO, who will deliver the results portion of today's discussion. We delivered a good performance in the third quarter. Our results demonstrate further progress in the execution of our strategy and continued strong momentum of clients across both of our divisions. We reported net income attributable to shareholders of CHF 1 billion for the third quarter and a return on equity of 10%. For the first 9 months of this year, reported net income was CHF 1.2 billion. For our strategic businesses, we reported net income of CHF 1.1 billion for the quarter and a return on equity of 11%. And for the first 9 months of the year, strategic net income was CHF 3.8 billion, a strong return on equity of 13%. Turning first to Private Banking & Wealth Management. Our profitability in Private Banking & Wealth Management benefited from continued cost discipline, although margins remained subdued and revenues continued to be impacted by the low interest rate environment. The strategic businesses of Private Banking & Wealth Management generated pretax income of CHF 900 million, an 8% increase from last year's third quarter, and reported a continued high return on regulatory capital of 27% for the quarter. In our strategic businesses, we generated net new assets of CHF 8.8 billion in the quarter, driven by growth in emerging markets, particularly in Asia Pacific. This strong growth was partly offset by continued outflows from our Western European cross-border business due to the importance we've placed on regularizing our asset base. In Asia Pacific alone, we generated net new assets of CHF 6.2 billion in the quarter, with an annualized net new asset growth rate of 19%. Our overall results in the APAC region were robust, driven by the successful collaboration with the investment bank and the ongoing expansion of our franchise, with increased footprints in Greater China and Singapore. Our continued cost-efficiency measures helped us sustain our net margin in Wealth Management Clients at 27 basis points despite the continued low interest rate environment and higher average assets under management. This excludes certain litigation provisions taken in the quarter. During the quarter, we made further progress on executing our strategic initiatives in developed markets, including the ongoing regularization of our asset base, improved cost efficiency and the completion of the sale of our German onshore business, which we'll give you more detail about shortly. Going forward, we plan to continue to address our clients' changing needs and invest in growth initiatives amid the various cyclical and structural changes in the industry. First, our lending initiative. In the first 9 months of this year, we saw a strong growth in our "ultra high net worth" lending initiative, with good momentum across both emerging and mature markets. We recorded CHF 3.9 billion in net new lending compared to CHF 1 billion in the first 9 months of last year. To capitalize on this strong growth potential, we're adding further product capabilities to our lending offering. Second, we're investing in sophisticated technological solutions to launch a comprehensive and differentiated digital client interface for all of our client segments. Third, we're improving our sales effectiveness and hiring relationship managers in select markets to further enhance our client coverage while maintaining our cost discipline. And fourth, we're upgrading our mandate offering suite, including the launch of Credit Suisse Invest, a new range of advisory services. More specifically, this allows a client to select an offering that matches his or her personal preference as it relates to the breadth and frequency of advisory services offered. With these initiatives, we believe we are well positioned to cater to our clients' changing needs and to capitalize on our full growth potential in these franchises. Looking now at the investment bank. The results for our strategic businesses reflect substantially increased profitability and improved returns with strong client activity and sustained market shares across most of our businesses. This quarter, our strategic businesses generated pretax income of CHF 1 billion, up 43% compared to last year's third quarter. Net revenues were up 24%. And we reported a return on regulatory capital of 17%, demonstrating the stability of our franchise. We had strong results in fixed income, with sales and trading revenues up 50% from the third quarter of last year. This increase was driven by more favorable trading conditions and robust client activity. In particular, we saw significantly higher emerging markets revenues and continued strength in our high-returning securitized products franchise. In equities, we reported stable revenues, as higher derivatives revenues were offset by more muted trading volumes. And in our underwriting and advisory franchise, we saw continued momentum driven by robust origination activity, including a number of high-profile client transactions. One of them was the landmark $25 billion IPO of Alibaba Group, the largest IPO in history, where we served as a joint bookrunner. We continued to work towards increasing the capital and cost efficiency of our strategic businesses in Investment Banking and reported a return on regulatory capital of 19% and a cost-income ratio of 69% for the first 9 months of the year. Going forward, we plan to continue to focus on allocating resources to our market-leading and capital-efficient businesses where we expect to generate consistently high returns. We expect our repositioned macro franchise to generate improved profitability and allow further reductions in capital. Additionally, we intend to focus on supporting the growth initiatives in Private Banking & Wealth Management by further optimizing our product setup and delivery for these clients. Now to Slide 5. Looking at our nonstrategic portfolio, we made further progress in winding down positions in our nonstrategic units and are on track to reach our reduction targets for end 2015. In Investment Banking, we reduced risk-weighted assets by USD 2 billion and our leverage exposure by USD 11 billion during the quarter. And in Private Banking & Wealth Management, we completed the sale of our domestic private banking business booked in Germany, which was a primary driver for pretax income of CHF 71 million in our nonstrategic unit. This brings me to capital and leverage. We're executing the capital measures announced in May to fully mitigate the impact of the U.S. cross-border litigation settlement. As we ended this quarter, our look-through CET1 ratio stood at 9.8% compared to 9.5% last quarter. We remain on track to improve this ratio to above 10% by the end of the year. We reduced risk-weighted assets by USD 10 billion in the quarter across both our strategic and nonstrategic Investment Banking portfolio. However, the appreciation of the U.S. dollar against the Swiss franc more than offset these business reductions in Swiss franc terms. It's important to note that there is a minimal impact on our capital ratios from this FX movement, as underlying capital and exposures are approximately hedged. We're continuing to execute real estate sales and business divestitures, which are expected to generate about CHF 300 million of capital by year-end, with the remainder to come through in 2015. Our capital measures include the continued accrual of cash dividends for 2014. We remain committed to returning approximately half of our earnings to shareholders through annual distributions once we reach a look-through CET1 ratio of 10% and as we continue to accrete capital towards our 11% long-term target. And finally, our look-through Swiss total capital leverage ratio improved to 3.8% during the quarter, bringing us within reach of the Swiss requirement of 4.1% for 2019. And we target to further increase this ratio to approximately 4.5% by the end of 2015. In terms of an update on the fourth quarter thus far, we've seen a mixed start to October, with recent market volatility benefiting certain businesses across both divisions while negatively impacting others. We have a strong advisory and underwriting pipeline, but the pace of execution in the fourth quarter will clearly depend on market conditions. Now moving to Slide 6. We wanted to update you on several ongoing and upcoming regulatory initiatives and the significant and proactive steps we've already taken to address them. First, let's discuss the ongoing trend towards tax transparency, which has led to global and industry-wide regularization of undeclared assets. Credit Suisse first started to address this issue a number of years ago. Since then, we have taken numerous measures to ensure compliance across jurisdictions. Additionally, we've undertaken a number of strategic initiatives to address the margin compression and changing client mix that resulted from this regularization trend. Given our proactive measures and the importance we place on the regularization of our asset base, we had approximately CHF 30 billion of outflows from our Western European cross-border business between 2011 and 2013. In the first 9 months of this year, we've had additional outflows of CHF 7.7 billion, and we expect regularization outflows to continue through 2014 and '15 at the rate of CHF 10 billion to CHF 15 billion per annum. Thereafter, there will likely be additional outflows but with a slower pace. In spite of these outflows from regularization, we were still able to generate strong strategic net new assets of CHF 94 billion between 2011 and '13 and CHF 37 billion for the first 9 months of 2014. We continue to target an annualized net new asset growth rate of 6% for our Wealth Management Clients business over the long term once these regularization outflows have been diminished. Additionally, we were able to mitigate some of the pressure on our margins by rationalizing our expense base. We also continued to reallocate resources to areas where we see the greatest growth potential, including the "ultra high net worth" clients business and emerging markets. Turning to the current regulatory proposals regarding capital and leverage. Over the past few years, regulatory capital and leverage frameworks have continued to evolve across the globe. We responded to the evolving regulatory requirements at an early stage and have reduced our look-through leverage exposure by CHF 199 billion or 14% since the third quarter of 2012 despite adverse FX movements. We also reduced risk-weighted assets across the bank by CHF 84 billion or 23% since the third quarter of 2011. As we continue to wind down our nonstrategic units, we targeted an additional reduction of CHF 51 billion in leverage and CHF 8 billion in risk-weighted assets by the end of 2015. In addition, we substantially strengthened our capital position in recent years, aligned our capital structure within the regulatory frameworks and issued CHF 18 billion in CoCos. We're on track to reach the Swiss CET1 capital requirements for 2019 and are making progress towards our risk-weighted asset reduction targets. And with the revised leverage target we announced today, we've set out a clear path to further accelerate the improvement of our leverage ratio. And finally, another topic that regulators are focused on is recovery and resolution planning. The Financial Stability Board published a proposal calling for an increase in loss-absorbing capital, total loss-absorbing capacity or TLAC. This is likely to require the issuance of bail-in debt out of bank holding companies. As you know, Credit Suisse today already has a holding company structure in place, and a year ago, we announced our plan to further evolve our legal entity structure in line with regulatory requirements. Our aim is to have a single funding entity for the group, and the execution of that plan is well underway. We currently expect to issue our first bail-in debt out of an entity linked to our holding company sometime over the next 12 months. The additional costs of this issuance are still an open question but are expected to be manageable. Based on our current assumptions on both the volume of required TLAC issuance and assumed issuance premium, we expect the costs of issuance to be materially offset by savings resulting from the runoff of legacy instruments. Before I turn it over to David, let me just very briefly sum up. We delivered a good performance in the third quarter and continued to see strong momentum with clients across both divisions. In Private Banking & Wealth Management, our profitability benefited from our ongoing cost measures, and we saw strong net new asset growth. Our Investment Banking results were driven by increased client activity, and we continued to make progress in winding down our nonstrategic unit. The implementation of our capital measures is on track, and we're continuing to proactively respond to the developing regulatory proposals and requirements. Our intention remains to return approximately half of our earnings to our shareholders once we reach a look-through CET1 ratio of 10%. And with that, I'll hand it over to David, who'll discuss the results in more detail. David?
David R. Mathers:

Thank you very much, Brady. Good morning, everybody. So I'd like to start, please, on Slide 8, with an overview of the financial results. In the third quarter, we achieved revenues of CHF 6.3 billion and pretax income of CHF 1.6 billion from our strategic business lines, with a cost-to-income ratio of 73%. The after-tax return on equity was 11% in the strategic businesses, and net new asset inflows, CHF 8.8 billion. On a total reported basis, we achieved pretax income of CHF 1.3 billion and net income of over CHF 1 billion for third quarter, equivalent to an after-tax return on equity of 10%. If we exclude the impact of fair value adjustments due to the movements in our own credit spreads, we achieved an after-tax return of 7% in the third quarter. Slide 9. So on this slide, we show the quarter's results measured against the various group and divisional KPIs that we've set. Our group strategic return on equity of 11% compares to our target of 15%, and the strategic cost-to-income ratio of 73% is now approaching our target of 70%. In the Private Banking & Wealth Management strategic business lines, we achieved a cost-to-income ratio of 69% in the third quarter compared to 72% in the third quarter of 2013. Net new assets in our wealth management client business grew at an annualized rate of 3% in the third quarter, which is in line with the expectations that we've given before. The investment bank achieved a steady cost-to-income ratio of 70% in the third quarter and 69% year-to-date, which again is in line with the 70% target we've set for the division. So let's now turn to the Private Banking & Wealth Management division and look at it in more detail, please, on Slide 10. In the third quarter, the strategic businesses achieved a pretax income of CHF 0.9 million, 8% up on the third quarter of 2013, which was driven by a reduction in our expenses. In what's usually a seasonally weaker quarter, collaboration revenues were strong, particularly in the Asia Pacific region, and brokerage fees improved year-on-year. In the first 9 months of the year, we've now reduced expenses in the strategic business lines by 7% compared to the same period last year, which takes us closer to our savings target for the division. Please note that these results include provisions relating to specific legal issues totaling CHF 41 million in the wealth management business in the third quarter. Slide 11. Net new assets in the third quarter for the strategic businesses remained solid at CHF 8.8 billion, and that's after Western European cross-border outflows of CHF 0.7 billion in the third quarter within the strategic businesses. The wealth management client business saw strong inflows of CHF 5.8 billion, with a further CHF 3.3 billion in the Asset Management division which is driven by inflows in emerging markets and in alternative products. Slide 12. The wealth management client business achieved pretax income of CHF 536 million in the third quarter, an increase of 5% compared to the third quarter of 2013 but below the level of the second quarter. Net revenues were slightly down compared to the third quarter of 2013, as solid growth in transaction revenues was partly offset by a reduction in net interest income, with recurring fees stable. Expenses are down 3% compared to the third quarter of last year, notwithstanding increased litigation provisions. In the first 9 months of the year, pretax income increased by 6% to CHF 1.7 billion compared to the same period in 2013. This was driven by a 7% reduction in expenses more than offsetting the decline in net interest income. Slide 13. Let's look in more detail at net new asset inflows in the wealth management client business. Asset inflows in emerging markets were strong, with inflows in the Asia Pacific region growing at annualized rate of 19% in the third quarter. In Switzerland, we've seen the normal slowing that -- down in activity during the second half of the year. That said, excluding one particular large count -- client outflow in the third quarter, our net new assets were broadly stable in the country. I'd also like to point out that overall inflows in Switzerland for the first 9 months of the year were strong at CHF 6.1 billion. Within the Americas, growth in our Latin American business was more than offset by outflows in North America, where we continued to be focused on repositioning the onshore business towards increased profitability. Total Western European cross-border outflows stood at CHF 1.5 billion in the third quarter, CHF 0.7 billion of which was supported in our strategic business lines and a further CHF 0.8 billion in the nonstrategic unit. Whilst cross-border outflows in the third quarter was lower than what we saw during the first half of the year, we would still like to reconfirm our expectation that we will see CHF 10 billion to CHF 15 billion per annum in outflows during 2014 and 2015 resulting from the focus on the continued regularization of client assets. Further, as we've announced before, we'd expect continued outflows in Western Europe and other regions in 2016 and beyond, albeit at a slower pace than what we expect to see in the next year or so. We'd also like to remind you we've been generally very successful in retaining net client assets throughout this regularization process. Slide 14. On this slide, we're providing an update on our lending initiative to the "ultra high net worth" client segment. Over the first 9 months of the year, increased lending to the sector by CHF 3.9 billion compared to CHF 1 billion in the first 9 months of 2013. We're generating loan growth in all regions, having achieved CHF 2.8 billion net new lending so far in emerging markets, primarily driven by loan growth in the Asia Pacific region. This initiative continues to drive growth in net new assets in the "ultra high net worth" client segment, which totaled CHF 15 billion for the first 9 months of the year, up 50% compared to the same period of 2013. Slide 15. Our reported net margin on assets under management decreased by 1 basis point from the third quarter a year ago to 25 basis points, reflecting CHF 41 million in litigation provisions that I mentioned earlier. Excluding these provisions, net margin stood at 27 basis points for the quarter and 28 basis points for the first 9 months of 2014. In terms of the revenue composition for the quarter, transaction and performance revenues are stable, with seasonally lower client activity, but offset by growth in the emerging markets. Recurring commissions and fees were stable year-on-year and up quarter-on-quarter due to higher discretionary mandate fees, higher investment account service fees and the appreciation of the U.S. dollar. Decline in net interest income in the third quarter this year, when compared to last year, was driven by the impact of a low interest rate environment on our replication portfolio. However, in line with the earlier comments that we've made on this subject, the adverse impacts to the replication portfolio should bottom out in the second half of this year. And as you can see, net interest income in the third quarter was stable when compared to the second quarter this year. Just finally, I'd like to point out that the "ultra high net worth" share of assets under management has now increased to 48% in the third quarter. Slide 16. On the left-hand side of the graph, you can see the factors affecting the net margin on assets under management during last year. The appreciation in the market value of assets under management, which is of little immediate benefit to our revenues, and a continuing shift in the client base have adversely impacted our net margin by 2 basis points. Assuming a stable level of assets under management, net margin was also negatively impacted by 4 basis points from lower net interest income and reduced fee-based revenues. These adverse impacts, however, were more than offset by the continued progress in delivering cost efficiencies, driving the net margin up to 28 basis points over the first 9 months of the year. If we then include the litigation provisions that I've mentioned before, the reported net new -- the reported net margin stood at 27 basis points. Combining the slight increase in the net margin and the 4% increase in average assets under management, pretax income was 9% higher when compared to the first 9 months of 2013. We intend to continue to invest in growth initiatives to reinvigorate the franchise, such as the ongoing "ultra high net worth" lending initiative, the digital private banking initiatives, the comprehensive sales effective and coverage enhancement program and significant upgrades to our mandate suite, better aligned to evolving client demands. We also intend to continue to generate gross cost savings in the private banking division in excess of our net cost plan, releasing resources to better align with our growth in areas and initiatives. If we look at the net margin trends going forward, I would like to start first with a small caveat. In any single period, the net margin will be affected by asset inflation or by deflation, which increases or decreases the denominator, with little immediate impact on revenues. This caveat aside, our intention is to maintain a stable net new margin, balancing the adverse impact from the outflows of the tax regularization program with the benefit from the initiatives we mentioned before. Slide 17. The Corporate & Institutional Clients business generated solid pretax income of CHF 240 million in the third quarter, 4% lower than in the same period of last year. When compared to the third quarter of 2013, this year's third quarter results reflect a slight reduction in net interest income and stable noninterest revenues. Operating expenses, however, were down 7%, which drove a 2 percentage point improvement in the cost-to-income ratio to 49%. Slide 18. Our Asset Management pretax income of CHF 96 million for the third quarter doubled compared to the third quarter of 2013, driven by higher commissions and fees, improved other revenues and a 4% reduction in expenses. Net new assets were CHF 3.3 billion this quarter, including a significant contribution from our joint ventures in emerging markets. Our year-to-date pretax income of CHF 339 million increased by 40% compared to the first 9 months of last year, benefiting from a 3% increase in recurring commissions and fees on an increased asset base, as well as a 6% reduction in expenses. Slide 19. We continue to make progress in winding down the nonstrategic portfolio within the Private Banking & Wealth Management division. Revenue in the third quarter included a CHF 109 million gain from the sale of our German onshore business, but I'd note that revenues last year included gains of CHF 146 million and CHF 91 million from the sale of the ETF funds and the Strategic Partners business, respectively. Excluding these gains and sale, revenues in the third quarter were lower compared to second quarter -- the same quarter in 2013, which clearly reflects the continuing rundown of the nonstrategic portfolio. So let's turn now to the investment bank, please, on Slide 20. The Investment Banking division had a strong third quarter, with strategic net revenues increasing by 24% to CHF 3.4 billion, driving a 43% increase in our pretax income to CHF 1 billion compared to the same period a year ago. Our results were driven by a robust fixed income performance in securitized products and emerging markets, stable equity revenues and continued momentum in equity and debt underwriting. In the quarter, we also had several large client transactions across our business, including the IPO of the Alibaba Group, which helped us to achieve a return on regulatory capital of 17% in the strategic businesses and 8% in the overall division. Total expenses in the strategic businesses were CHF 2.4 billion in the third quarter, up from CHF 2 billion in the same period last year. The increase was primarily due to higher variable compensation expense, reflecting the higher results as well as higher litigation and deferred compensation expenses. This increase, though, was partially offset by cost reductions from our infrastructure initiatives. Overall, in the first 9 months of this year, the strategic businesses delivered a strong return on regulatory capital of 19%. Including losses in nonstrategic unit, the Investment Banking division's total return was 11%. Slide 21. In fixed income, we had strong revenues of approximately CHF 2.1 billion in the quarter, 42% higher when compared to the prior year. We saw continued momentum in the securitized product franchise, with particular strength in asset finance. We also saw strong results in emerging markets, reflecting robust client financing activity, as well as solid trading revenues. In credit, results were slightly lower than those in the strong first half of the year but remained on a high level and relatively stable level. Revenues in the macro business lines also improved, albeit from very subdued levels, driven by higher client activity and increased volatility. As you may recall, last quarter we announced a shift in our macro strategy. And we continue to make good progress in execution, reducing risk-weighted assets by USD 2 billion this quarter. Slide 22. I'd like to spend a few minutes just to provide an update on the progress we've made in continuing to diversify the yield franchises within the fixed income portfolio. The securitized products business has diversified significantly in the last 9 months. Particularly asset finance, where we're consistently ranked as a market leader, continues to generate strong revenues and returns. The business is diversified across asset classes such as auto, consumer and credit card loans, resulting in a stable and consistent revenue stream. And as we've said before, we continue to believe that there remains opportunities to expand and diversify this client-focused business, particularly if securitization activity continues to expand in Europe. Let's turn now to credit. This remains a very high-returning business for us, albeit at the low level of revenues in the third quarter, reflecting the widening in credit spreads. The business continues to operate at a fraction of our precrisis risk levels. In fact, one statistic is that our leveraged finance primary commitments are down by 88% from levels in 2007. Similar to asset finance, we continue to expand this franchise into EMEA to capture the greater interest in bank balance sheet restructuring and capital market funding of corporate debt. Let's just turn to emerging markets. As you know, we have a very good business across Brazil, Eastern Europe, India, China, South Korea and Mexico, which is both -- focused both on financing and on trading. We saw strong emerging markets in the third quarter, a turnaround of our year-to-date performance. Just to conclude on this slide, as we've said before, returns on capital that we've achieved in these businesses substantially exceeded the group target for the first 9 months of the year. Slide 23. Equity revenues in the third quarter increased by 5% compared to the same quarter of last year, primarily driven by continued momentum in origination activity but partly offset by muted trading conditions. In terms of the performance of different business lines. We had strong results in derivatives, primarily driven by growth in structured products distributed through our private bank, particularly in Asia Pacific region. Equity underwriting revenues increased substantially when compared to the third quarter of 2013 due to strong IPO activity this year. Our prime service business had solid results, with continued market leadership in prime brokerage, growth in chargeable client balances and client clearing services, as well as benefiting from improved pricing power. I'd note that our equity trading results also reflect the adverse impact of decreased trading volumes in the United States and subdued activity in Brazil. Slide 24. In underwriting and advisory, we achieved solid revenues of CHF 903 million, 28% higher compared to the third quarter of 2013. Equity underwriting results increased by 66% compared to the third quarter of last year, primarily due to growth in Europe and Asia Pacific. Advisory revenues are higher compared to the third quarter of 2013, reflecting increased industry activity. Going forward, we continue to have a strong pipeline in M&A, which is driven by higher confidence levels in the Americas and, in Europe, by restructuring opportunities. That said, quite clearly, the execution of this pipeline will remain dependent on the prevailing market conditions over the next few months. Slide 25. Consistent with prior quarters, we include the usual bubble chart which shows the relative market shares of each of our business lines and the return on regulatory capital usage for each of these areas. First, as we said before, the global macro business is beginning to benefit from a combination of reduced capital utilization and some uptick in client activity. Second, we've seen an improvement in our equity derivative results, driven by strong collaboration revenues from the private bank. And finally, our emerging market business saw a notable pickup in activity in the last few months and remains in a position to see further growth. Slide 26. In the nonstrategic unit of the Investment Banking division, we had pretax losses of CHF 479 million in the third quarter. These higher losses reflect increased costs to exit of certain concentrated positions as well as a rise in litigation expenses to CHF 227 million in the third quarter. We continued to make progress in the wind-down of our capital position in the third quarter, reducing risk-weighted assets by USD 2 billion since the last quarter, but as importantly, we reduced our leverage exposure by USD 11 billion over the same period. During the quarter, we completed the transfer of the commodities trading book into the nonstrategic unit, which is in line with the announcement we made last quarter. Just to be specific, we moved USD 1 billion of RWA and USD 5 billion of leverage out of fixed income trading and into the nonstrategic unit. One key point to note, though, is that the end-state nonstrategic unit capital targets for end 2015 that you saw last quarter remain unchanged. Slide 27. The waterfall chart on this slide highlights the returns generated by our strategic Investment Banking business. In the first 9 months of this year, the strategic after-tax return on capital remained high at 19% compared to 20% in the prior period. Clearly, the total return of 11% reflects the continued drag in the nonstrategic unit, and we will continue to focus on reducing the remainder of the nonstrategic portfolio and minimizing the adverse effect of these positions on our results. In addition, there are 3 factors driving the year-to-date movement on costs. First, we had higher variable compensation expenses, reflecting the change in deferral that we've discussed before. Second, our cost base reflects the increase in deferred compensation from prior year awards. And third, we also saw an increase in litigation expenses in the 9-month period compared to the prior year. Slide 29, please. In the third quarter, our total cost saves stood at CHF 3.6 billion. We achieved significant cost savings in the first 9 months, and we're on track to achieve our year-end cost savings target for the group of CHF 4.5 billion for 2015. Let's turn now to the capital slides and start on Slide 30, please. As you can see from the chart, our look-through risk-weighted assets stood at CHF 286 billion at the end of the quarter, but just to be clear, the movement in the U.S. dollar-Swiss franc exchange rate during the quarter has had a significant impact in our reported quarter-on-quarter risk-weighted asset trends. If we look at the investment bank division, we remain focused on reducing risk-weighted assets across both our strategic and our nonstrategic businesses, and we achieved a total of USD 10 billion of reduction in the quarter. However, in Swiss franc terms, this was more than offset by the appreciation of the U.S. dollar, which went from $0.89 against the Swiss franc at the end of the second quarter to $0.96 at the end of the third quarter, inflating the value of our risk-weighted assets in Swiss franc terms. Leaving aside the currency move, it's clear we continue to reduce capital in the investment bank division, reallocating to the Private Banking & Wealth Management area, a trend we expect to continue over the next few years. Just one point for analysts to note. It's clear -- it should be clear that these FX-driven moves in total RWAs are approximately hedged compared to our capital base, resulting in an approximately net-neutral impact in terms of capital ratios from currency moves and, clearly, gains in terms of CTA in our book value. Our long-term RWA target remains at CHF 250 billion. Remember -- you may recall we laid that out in October last year, albeit on the FX rates prevailing at that time. Just if you apply the third quarter rates to that target, the number would translate to approximately CHF 260 billion at the end of the third quarter. Slide 31. Our look-through BIS CET1 ratio improved to 9.8% at the end of the third quarter, which includes the benefit of approximately CHF 100 million generated from the sale of the domestic private banking business booked in Germany. In addition, we continue to intend to further realize approximately CHF 0.3 billion in capital from planned disposals in the fourth quarter. This puts us on track to increase our look-through CET1 ratio to at least 10% by the end of 2014 and continuing towards our long-term goal of 11%. I'd also point out to you that our going concern, loss-absorbing capital ratio, that is CET1 plus high-trigger CoCos, stood at 12.7% at the end of the third quarter compared to 12.3% at last quarter. Further, our total capital ratio, which includes going-concern capital plus low-trigger CoCos, stood at 15.8% at the end of this quarter, up from 15.3% last quarter. Slide 32. Our average look-through leverage exposure stood at CHF 1.19 trillion during the third quarter, up from CHF 1.15 trillion last quarter. There are 2 main factors driving this. First, as you know from our discussion on risk-weighted assets, the Swiss franc reported balance sheet reflects the inflation driven by the appreciation of the U.S. dollar-Swiss franc ratio between the second and the third quarters, which added approximately CHF 25 billion to our average leverage exposure. Aside from the FX movements, we have seen a rise of about CHF 21 billion in the average leverage used by the business. This primarily reflects an increase in balance sheet usage from lending initiatives in the Private Banking & Wealth Management division and as well as the increase in liquidity requirements that we're seeing in our legal entities across the world. Slide 33. At the end of the third quarter, our look-through Swiss total capital leverage ratio stood at 3.8%, and our target is to increase this to approximately 4.5% by the end of 2015. On this slide, I'd like to walk you through the intended steps to achieve this leverage ratio target. On the left-hand chart, you can see our CET1 capital of CHF 27.9 billion and our Swiss total capital of CHF 45.4 billion as at the end of the third quarter. If you look at the analyst consensus for retained earnings over the next 5 quarters, we are expected to build CET1 capital by about CHF 2.5 billion, driving total capital to CHF 47.9 billion by the end of 2015. So let's just look at -- briefly at the denominator of the leverage ratio and focus on the leverage exposure, on the bottom left-hand chart. You can see our previously disclosed leverage exposure target of CHF 1 trillion. Now if you apply the Swiss franc-U.S. dollar exchange rate of $0.96 that stood at the end of the third quarter to that number, the leverage exposure would be about CHF 1.05 trillion. On the bottom right, you can see how we plan to reduce the average leverage from CHF 1.19 trillion at the end of the third quarter to CHF 1.05 trillion by the end of 2015. First, as you've seen earlier in the presentation in the nonstrategic unit discussion, we intend to reduce approximately CHF 50 billion of leverage through the continued wind-down of the nonstrategic portfolios, meeting our 2015 targets for the nonstrategic unit. And secondly, we intend to see approximately CHF 20 billion of leverage reduction from structural optimization of our HQLA positions on our balance sheet. Thirdly, we intend to reduce our leverage by approximately CHF 70 billion through business reductions, primarily within the Investment Banking division. These business reductions will likely include several structural reductions, with limited impact on the revenues of overall business, as well as the impact of the reduction in our macro leverage exposure that we've discussed in previous quarters. Clearly, applying the resulting leverage of CHF 1.05 trillion to the total capital of CHF 47.9 billion would enable us to achieve our Swiss total capital leverage target of 4.5% by the end of 2015. With that, I'd like to conclude the results portion and pass back to Brady. Thank you.
Brady W. Dougan:

Thanks very much, David. I think, with that, we're going to open it up for Q&A, so operator, do you want to open up the line for Q&A?
Operator:

[Operator Instructions] Your first question comes from the line of Huw Van Steenis from Morgan Stanley.
Huw Van Steenis:

Brady, David, just 3 related questions on leverage. Firstly, you obviously plan to reduce leverage exposure by 12% by the end of '15, which I thought was very helpful, but even in dollar terms, your leverage exposure increased 2% in the quarter. So question one is, if you're seeing profitable opportunities to deploy your balance sheet, why don't you scrip the dividend, get there more quickly and then give yourself a little bit more flexibility to actually deploy your balance sheet rather than commit to such a sharp decrease? Number two, given the growing importance of leverage, I was wondering why your dividend policy is only based on quarter 1; and why the dividend policy wouldn't also be, after hitting a leverage trigger, maybe of 3% if that's where September is likely to move to? And then three, maybe a little bit more related, but if you're now effectively telling us that you're going to target a 3% equity leverage ratio by the end of 2015, wouldn't it be prudent to change all your other targets? Because at the moment, you allocate your equity in the strategic business only using 2.4%, therefore, your ROE is probably overstated by 1% in the strategic businesses if you're creating this new target.
Brady W. Dougan:

Huw, I think maybe I can try to address the first question, and David could pick up the second and third question that you asked. I mean, obviously, this question of the balance between, as you say, reducing leverage and/or retaining more earnings, I mean we're obviously trying to get the balance of that right. I think, if you look at the reduction in leverage that we're talking about here, though, almost half of the reduction is in either the nonstrategic units or the optimization on the liquidity side, so the truth is that's obviously not really impacting the business at all. That's already planned reductions. The other business reductions obviously will require some work. It will require us to look at restructuring. I do think that the -- again, I think it's relatively modest. Not that it won't have any impact, but it's relatively modest. And I do think that we will -- along with the changes and the evolution we're going to have to make to our business, we think we'll be seeing that in the industry as well, and so that will also mitigate some of the impact there. So I think we're trying to balance it in a way that we think is appropriate in terms of both rebalancing the leverage requirements in the business, as we see a developing environment, against our desire to make sure that we are returning cash to shareholders.
David R. Mathers:

I just, I think, to second what Brady said. I mean, clearly, over the last couple of years, we have been focused on reducing our leverage. And I think you've seen substantial reductions with, firstly, limited impact because I think we have been very focused on optimizing balance sheet allocation by business and by clients over that period. I mean I think, even in the strategic business line in the investment bank, we've seen a reduction of about CHF 65 billion in the last couple of years. So I think, if you think about what we've said today, as Brady said, there's about CHF 50 billion which comes from the nonstrategic side. There's CHF 20 billion from the optimization of the HQLA, which leaves CHF 70 billion, but I think, as we announced in the second quarter about CHF 26 billion of leverage reductions in the plan at the macro business, we won't see that all by the end of 2015. But I think what we're really saying is we intend to continue the moves we've been making over the last couple of years in terms of leverage and, I think, laying out some targets and time lines. It's not as if the CHF 1 trillion target is actually new. We've got that out before. It's CHF 1.05 trillion at current exchange rates, but I think we did want to be clear to our investors basically that we do intend to be there by the end of 2015 and see a 4.5% total leverage ratio. And I think, on dividend, I can only second what Brady said. I think, on the -- we've set the level of 0.7 last year in light of, I think, both litigation concerns and in terms of market outlook. Market outlook probably has been slightly better than we would have expected over that period. And we recognize that, that level of cash distribution is something that's important for our shareholders. I think that more a fundamental question in terms of definition for looking at return on capital, i.e. candidly we basically set the return on regulatory capital measures on the basis of the regulatory capital requirements to which we operate. And as you know, Huw, that's 2.4% of common equity under the Swiss rules. And so that's the base, and we're seeing that clearly. If that changes, then we'll change it at that point. And -- but I think we have to stick to the rules as they're actually laid out in terms of our allocation of regulatory capital, and that remains our approach.
Huw Van Steenis:

That's very helpful, but can I just ask one follow-up then? Just from a point of view of the board, does the board not consider having a leverage constraint also an important input to setting a dividend policy? So not talking about a specific number but just the way you think about the appropriate policy. I'm genuinely surprised that leverage is not an input to it.
David R. Mathers:

I think leverage certainly is an input to it, so they're clearly looking. It's obviously the performance of the business. It's the capital ratio. It's leverage. I mean all of that certainly comes into thinking about that, so no, it's obviously something that is looked at. But again, I think what this -- what we tried to do here, as David mentioned, is to lay out a very clear perspective of how we're actually going to achieve these levels that we've laid out as targets. And I think it's we think it's the right balance between increasing the efficiency of the business. Obviously, some of it is steps that we'd already laid out in terms of the nonstrategic units, for instance, and -- but all that is certainly taken into account when we look at the dividend policy.
Operator:

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

So actually I had two, both on regulation, if that's okay. Firstly, I was wondering if you had any early comments on the Fundamental Review of the Trading Book, especially following submission of the Quantitative Impact Studies. Looking at your business mix, you've obviously got strengths in credit, and there are, I think, some industry issues around liquidity horizons in those products. And the second question was I was very interested to see your expectation on issuing TLAC within the next 12 months, and I was wondering if you could add anything there on how quickly you expect the Swiss rules to be finalized on what would count as TLAC and what won't? And secondly, sorry if it's a stupid question, but will that be senior debt with contractual variedness of [ph] vehicle? Or did you have a different vehicle in mind?
David R. Mathers:

So Matt, it's David here. I'll probably take both questions. And so I think, in terms of the continuing evolution of the capital rules, we're obviously seeing a couple of major developments. Obviously, we have the SA-CCR; and the FRTB, as you referred to. I mean I think, just on the first, that is the SA-CCR, which is scheduled for implementation on 1/1/17, clearly it requires the development of a complex set of new models, but on the basis of our current understanding of the approval of those models, we wouldn't expect a material increase or any increase within RWA in relation to the SA-CCR measures. On FRTB, as you say, the QIS submissions, I think, were due in last month. And I think, just to be clear on this point, I think the latest we're hearing is we're unlikely to see any final results from that before the end of next year, so it's a very long way away in terms of that. And it does look increasingly unlikely that we'll see implementation of this on 1/1/17, so it's beginning to stretch out in terms of implementation time line given the complexity of the potential rules. So I think it's very difficult to really speculate on that at this point. I would say, yes, you are correct, and the draft rules around FRTB would affect the credit business, but it's really only one of a number of businesses. It has some impact on securitized products. It has some impact on macro, just to be clear around this. And it would have some impact on equity derivatives. So it's a pretty wide-ranging set of rules, which is why I think the -- it's likely we won't get final rules, as I said, before the end of next year. And implementation is looking increasingly unlikely as a 2017 event. So I -- can't comment, at this point, it's simply too far away. Certainly, our comments on SA-CCR, I think, do look -- I think we're reasonably confident about that at this point. On TLAC on the total loss-absorbing capacity, clearly, there's obviously draft rules, and I think everybody knows that this will be discussed at the FSB next month. And clearly, we've put -- we just point out that it's really a formalization of the bail-in approach, which we've been discussing for about 5 years now and something, therefore, which I think Credit Suisse formally does support and has been involved with. I think -- and we understand, I think, that the Swiss authorities defend or are also supportive of the TLAC rules. And we are obviously keen to begin issuance of TLAC debt as soon as we have clear-enough rules to proceed, and that's probably uncertainty. It could be later this year. It could be in the first quarter next year, but I think it seems very likely within the next 12 months. And the type of debt in issuance, again, not fully finalized as yet, so if we change it, please be careful. But I think it's likely it would be senior debt. It would be issued out of an entity linked to the existing HoldCo because, obviously, Credit Suisse already has a holding company in existence, just to be clear on that point. That's already in there. It's been there for a long time, and as opposed to being issued out of the CS parent, which is where our existing senior debt comes from. And it's -- I think, on latest legal advice, it would include merely a structural subordination clause providing we're actually issuing outside of Switzerland. So if we'd issue in the U.S., for example, that would include a structural subordination clause. I believe that is broadly similar to the HoldCo debt which was issued by one of our competitors, I think, in the last few months. And just to be clear, completeness, the reason this issue is out and end-linked to the holding company is it relates to Switzerland withholding tax, which I think you're aware of, as an impediment to direct issues from a HoldCo in Switzerland.
Operator:

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

Just wanted to touch again on the leverage ratio. It seems like an interesting time to come up with a new target, 4.5% target, especially ahead of the kind of "Too Big to Fail" decisions that we're expecting in early 2015, so curious as to what bearing you have from those discussions into setting this new target. And also, if you could maybe elaborate on where the potential large structural reductions, the CHF 70 billion, which -- and which parts of the business. Is it prime brokerage, repo, et cetera, that it's coming from? Again to touch on TLAC, how much kind of endgame issuance are you thinking of? And I know, in the past, you said you expected 500 million of net funding cost savings, CHF 700 million gross. Do you still stick with those? And thirdly, on the litigation front, just wanted to get a better sense of the provisions that we're taking this quarter in the IB NSU. I think it's primarily mortgage-related assets, but if you could maybe give us some more guidance on where you see that issue going.
Brady W. Dougan:

Okay, a number of questions there, I guess. Maybe I can take the first 2, and then David can pick up the next 2 or 3. I guess our view is, in terms of this, as you say, sort of laying out a new target on the total leverage ratio for the end of 2015, it's really, I think, we're just trying to clarify the path that we are planning to take to get to improved leveraging capital ratios generally. As you know, we had already announced that we were planning to be above 10% at the end of this year and then obviously to continue on up to 11% CET1 subsequent to that, so we've kind of already laid that out. We had also already laid out, as David mentioned, a target on the total balance sheet leverage exposure of around CHF 1 trillion. And so many of the elements of this were sort of already out there. I think the idea here was just to be very clear about where we think we will end up on that. And that is obviously against the context of obviously discussions around the world, certainly in Switzerland as well, where as you know, we have the Brunetti commission sort of thinking about reassessing the "Too Big to Fail" measures that were taken a number of years ago and as to whether or not any adjustments need to be made to that but also just generally around the world. As you know, people are -- clearly, regulators are looking at what are the appropriate levels of leverage, et cetera. And there's obviously some expectation that those will continue to tighten. So I think this was just a way to lay out a very clear path to what we think is a solid leverage capital position out there. So that's really what the -- so that -- I think there's nothing more with regards to timing. If your question is are we -- do we know something about what's going to come out of the Brunetti commission or what the conclusions will be there, obviously, we don't. So this is really just trying to lay out what we think is a good path to what will be a solid position there. I think, with regard to the CHF 70 billion and, as you say, sort of what the large categories, the truth is I think we're still -- there's still a lot of work going on and we're still looking at a number of different elements. Some of those are sort of structural elements where we see ways to potentially put in place ways to structure our business and the organization in ways that actually obviously reduce the leverage requirements. Some of it -- as David said, some of it's already been sort of laid out in terms of, for instance, the macro business, where we do believe there are some additional reductions that will come, which we've already talked about. But I think, as David said, the bulk of that will be certainly in the investment bank. And obviously, that's primarily cuts across the 2 trading businesses, equities and fixed income. And so I think -- within that, though, I think it's still sort of an open question about exactly how much will be reduced where. David, do you want to take the TLAC and the cost questions?
David R. Mathers:

Yes, yes, on -- yes, and also -- I think, also. Let me do the litigation point, first, and I'll come back to the TLAC one, if that's all right. So just in terms of litigation, so I think you can see on, I think it was, Slide 25 and 26 in the deck that we put litigation costs of CHF 227 million in the third quarter, year-to-date CHF 432 million compared to CHF 459 million in the first 9 months of 2013, and you would be correct. The majority of that is related to several mortgage litigation settlements or provisions against settlements. And just for completeness, by the way, some of the numbers which might be helpful
Kinner R. Lakhani:

Yes, that's extremely helpful.
Operator:

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

I've got 3 questions. The first one is going top-down to bottom-up. Just briefly, on the Executive Board members who are joining, Jim and Tim, just wanted to hear the rationale for the 2 new members joining the Executive Board; and also, in that context, the thinking. Because clearly, you now have people from each business in the IB representing the Executive Board -- in the Executive Board. I'm just wondering how you think about responsibilities and the impact that will have on the Executive Board's decisions and management of strategic decision making? The second view is on outlook statement. They're just clearly a bit mixed. Just wondering if you could be a little bit more specific of what businesses might have been impacted by the current more volatile environment that we are seeing in October. And the third question is on wealth management margins. I recall, in the second quarter, we were guided more towards second half top line margins to be in line with first half due to repricing, and that's roughly 101 basis points. Just wondering where we stand now in terms of margin expectations, how the repricing is working out. At the moment, have you seen all the repricing? Because I recall, second half was a repricing of prices generally. And thirdly, in that context, you also mention on Page 8 that you had a gain related to a more capital-efficient positioning in the liquidity portfolio in the wealth management business. I was wondering if you could maybe just tell us how much that was.
Brady W. Dougan:

Well, thanks, Kian. Maybe I'll try to answer the first two, and David can take the question on margins. Yes, I mean I think, with regard to the executive or the management changes that we made, it's really about consistency. It's really there's clearly no change in the strategy. And in fact, even the -- there's no change to the approach of managing the investment bank on an integrated basis as a business. And in fact, even the people changes are really about consistency. As you know, I mean Eric Varvel, who kind of oversaw the equity and Investment Banking businesses, has moved off the Executive Board. I mean he's going to remain involved in the business in a senior client role. But Jim and Tim who basically ran those businesses before, are simply moving up into the Executive Board. And Gael, Tim and Jim together will manage the Investment Banking business. So I think it's really mostly just about continuity, so I wouldn't -- I -- we don't anticipate any change in the way the business is managed. We don't anticipate any change in sort of strategically how we look at it. So I think it's actually really mostly about continuity in terms of those changes. I mean the changes in Asia Pacific, as I mentioned, Eric will be actually involved from a senior client and a senior point of view generally, but Helman Sitohang, who before was running all the Investment Banking business throughout the region, has now moved up to be CEO of the region. And he's got a very strong track record of building businesses out there, and so I think that's a very, very positive thing. On the outlook that we mentioned, yes, I mean, as you can imagine, the increased volatility in volumes have certainly benefited some parts of the business, particularly those that are more sort of on the trading side, so whether it's the secondary equity side and derivatives businesses. Those are clearly benefiting from a lot of the volumes and the flow and the volatility. The macro business is certainly benefiting as well. But clearly, some of the new issue, underwriting businesses have clearly been sort of put on the back burner as we've had this sharp downward and then sharp move back up in the businesses. There is, as we mentioned, a lot of business in the pipeline to execute, so the question will obviously be whether or not the markets will sort of reopen for that or not, but so clearly, those businesses have probably been more negatively affected. And I would say in general as well, on the private banking side, clearly, people do have a requirement to adjust their portfolio somewhat with that kind of volatility, but it also does, I think, lead people to feel a little bit more conservative and a little bit less opportunistic about sort of the transactional side of the business. So that's why -- I think that's why we've mentioned it's somewhat of a mixed impact. And obviously, it somewhat depends. I mean we've gotten a sharp bounce-back here, and so whether that carries through or becomes a little bit more consistent or stable from here will clearly have a big bearing on how the business actually fares over the next couple months.
Kian Abouhossein:

And just to follow up very briefly on this. Has there been any -- has -- I mean we all wanted more volatility, but we clearly -- you can argue we don't want a spike in volatility, but do you feel that volatility, the way volatility has behaved, it's been actually a problem for the industry generally? Or do you think it's actually been overall a positive event? Or does it really depend purely by business by business?
Brady W. Dougan:

Well, again, I think it's a little bit mixed. I mean I don't think it's been so much of a problem for our side of the business. I do think a lot of the volatility, obviously, as you know, has impacted some of the managers across the business, who are important customers and partners of ours. And so that obviously ultimately can also have impacts into our business. I'm not sure that -- I think in terms of the purely transactional part of the business, I think it's generally been a positive, but obviously, it has other impacts as well, I'd say, more broadly on the financial system, which may not be positive in the longer run. So again, I think it's kind of mixed. I don't think there are any -- I don't think the -- when you look at the actual businesses, I don't think that the increase in volatility had any immediate negative impacts on our business. I do think, when you look at how some of the portfolios have obviously impacts on some of the parts of the industry, that, that clearly is probably not so positive in the medium to longer run. David?
David R. Mathers:

Okay, just following up on his other questions really. Just in terms of the gain in the relating to liquidity mentioned in the wealth management division, it was about CHF 18 million. And it related to the integration of the liquidity portfolio with NAB, which you may know is a regional bank here in Switzerland which we took full ownership of 1 year or 2 ago as part of the creation of integrated treasury management and the management of that capital base. So that's what that was. I think you asked a question around repricing. Can you just summarize that for me again? Sorry.
Kian Abouhossein:

Yes. I think, with the replication portfolio that you were referring to, I think, already around the full year results but also on the second quarter, I think, that generally that you see an improvement in the margins due to the margin pressure of the replication portfolio declining.
David R. Mathers:

Well, the answer to that is I think...
Kian Abouhossein:

In the second half...
David R. Mathers:

Yes, the second half, yes. If you look at -- I think we guided that net interest income should stabilize in the third quarter compared to the second quarter, and that has proved to be the case. Within that, there was some decline in the replication portfolio, but we expect that to stay in the second half, offset by some growth within the -- some of the other sources of net interest income, so broadly stable in the third quarter against the second quarter, which is clearly good. We haven't changed the duration approach we take for the replication portfolio. On average, it's still termed down for about 18 months.
Kian Abouhossein:

And I recall also that there was an indication, looking at the second quarter transcript, and maybe I didn't understand it correctly, that the top line margin second half should be more in line with first half.
David R. Mathers:

I think what we said is that, I think -- to be clear, I said, I think, somewhere between the second quarter level and the first half level, which I think is somewhere between 99 and 101 basis points for the gross margin, to be -- but I may be wrong on that, but I think that's what I said. So clearly, 97 basis points look shy in terms of that. And I think, just to be clear, well, I mean, clearly, the third quarter does tend to be seasonally weak in any sense, so I think third quarter was lower, but I think the point I was making really, as I spoke today, is the impact of portfolio inflation or deflation relative to that. We've seen about a 2 basis point adverse impact on our margin from the increase in the values of the clients' portfolios. That has essentially no particular direct impact on revenues. And clearly, there's also currency effects there which came through more towards the end of the quarter. So you've seen about a 2 basis point deflation from that as well. I think that is always going to be an issue in terms of looking at the margin on any quarter-on-quarter basis. You've seen about a 2-point deflation from that, and I think that will be the case. But yes, I think that's fair enough, and it has been driven by the portfolio inflation over that period of time. By the way, Kian, just to be clear, of course, you can pick me up on this in some future point, if markets deflate and values deflate, then you have the opposite impact as well. Not that we would hope that would happen, but it runs both ways.
Kian Abouhossein:

No, it's absolutely right, yes. No, that's very clear. But assuming that we have the ongoing inflation argument, which clearly you couldn't foresee when we talked last time, then one could argue that the margins could be -- could continue to decline.
David R. Mathers:

Well, I think that's possible, actually, certainly at the gross level. I mean I think the trends which we've outlined before remain very much the case. There is a -- particularly at the gross level. I think, although the outflows from regularization were slightly slower in the third quarter at CHF 1.5 billion across the strategic and nonstrategic side, we're still guiding to CHF 10 billion to CHF 15 billion for this year and CHF 10 billion to CHF 15 billion for the year after and for outflows in '16 and beyond will be at a slower level. Clearly, the pace of outflows in any 1 quarter will depend, to a degree, on amnesties, but that does tend to deflate the gross margin, and that it is a structural shift we're actually seeing. Against that, I think what we're also saying in terms of the net margin, you can see essentially we have maintained a net margin which is stable for the first 9 months. And I think that does remain very much our focus as we actually drive the business forward. We will see adverse pressure on that from regularization, but we will see, I think, upside from some of the measures that Brady talked about in terms of the client product with lending initiatives, et cetera, across the private banking business.
Kian Abouhossein:

No, you've done a great job on the top -- on the bottom line margin. Just to be very clear
David R. Mathers:

Wouldn't get into guidance. I mean I think we've said before that the focus we have really is actually on the net margin because we will increase and we will continue to shift that business going forward. And I think that's probably a better indicator, but just to be clear, the net margin is also affected by portfolio appreciation and depreciation.
Operator:

The next question comes from the line of Fiona Swaffield from RBC.
Fiona Swaffield:

I just have 3 questions. Firstly, on compensation. I'm looking at Slide 44. The variable compensation is still rising quite significantly from last year and well in excess of the revenues and particularly in the IB strategic. Could you kind of give us some explanation for that breakdown but also whether there could be a true-up in the fourth quarter and whether we should be looking more for stable comp ratios versus last year? The second issue is on the leverage exposure or the total exposure target for '15. It -- there'll still be quite a bit of NSU left. Should we -- if we're looking out '16, '17, is there an expectation to that -- you could come in below that number over time? Is that kind of the -- is the '15 number the endpoint, or not? And then the third question, just coming back to this net margin in WMC. I think I heard you say we should expect it to remain relatively stable over time from this level, which I thought was a bit lower than maybe consensus expectations. Could you just go through that again? I'm talking more about the future rather than the second half.
David R. Mathers:

Just on the compensation on this slide, the slide we gave there, which is I think 44 in this deck. And I think it was 43 in the previous deck. So I think, as you say, essentially, the variable compensation was CHF 1.487 billion against $1.137 billion in the 9 months of 2013, so therefore an increase in the variable compensation. I think, just to be clear, that is the cash value of the variable compensation. And I think, as we've said in the first quarter, that we were making a couple of changes this year
Operator:

Your next question comes from the line of Andrew Stimpson from Bank of America.
Andrew Stimpson:

So I can tell on Slide 33 you don't want to tell us where the CHF 70 billion business reduction is going to come from yet, but any timeline on when you will be able to give us a more granular breakdown, because I think, at that point, that's when people will be more comfortable giving you the credit for that plan in their forecasts. And then on the same slide, I'm just wondering how you can reduce the HQLA. Is that just the -- looking at the increase in the leverage this quarter, that was part of the reason, it seems. So is that just because you reduced the rest of the business, or is there anything more technical that you're doing? And then lastly, on TLAC. I know you said before that you're fairly comfortable on that measure, but I'm just wondering if this -- if you think this is something that eventually gets pushed down to desk level, like leverage and the LTR has been; and then if there's any particular businesses that you think would be affected.
Brady W. Dougan:

Andrew, yes, I guess, I mean, I'll take the first one, and David could take the next two. I mean I think we'll obviously, quarter-to-quarter, keep you all posted on how those -- how our thinking is developing on those reductions. I mean I think we've -- I think, as David said, we have pretty good record of actually achieving these targets that we've laid out. I have no doubt that we'll be able to achieve it. We're just looking for the best way to optimally achieve that across the different businesses. So I mean we'll certainly keep you posted quarter-to-quarter as it develops. Some of those things are more, as I mentioned, we'd like to do some things that are more structurally -- a little bit more structurally innovative that allow us to maintain a strong position in businesses and don't have as much impact on revenue or on market position. So those are some of the things that we'll hope to look towards, but it'll probably be a mixture of different elements. So unfortunately, as you say, we're not -- we don't really feel like it's appropriate now to give very specific breakdowns of what businesses those will come out of, but you could imagine the various potential businesses it'll come out of and part of it will be whether us finding, hopefully, smart ways to do that.
David R. Mathers:

On the HQLA point, we do have significant potential to, as you might say, optimize liquidity by actually terming that out, particularly beyond the 31-day threshold. And I think, as you noticed -- you may have noticed, we've been active in the senior debt market in the last 3 months as part of that. And so as we actually term it out, that -- as you might say, that liquidity becomes more efficient in terms of meeting the key ratios we face. So I think we're relatively confident we can actually reduce the impact of liquidity ratios on our overall leverage by about CHF 20 billion over the course of the next 5 quarters. And so that will be the first point. On the TLAC cost, I mean we've always had an approach that essentially the cost of debt instruments of all types, and clearly a TLAC instrument is a debt instrument with such subordination, are actually pushed out down to the individual business lines. That's how we -- on our existing capital and debt strategy, and I think it's very important we will continue to do so forward because it gives you a much clearer line of the accountability around that. I'm not sure I'd anticipate substantial change after all that. I think we've said already that our existing guidance around this has -- it's broadly unchanged, although they're substantially different components, and know obviously there's going to be some shift in terms of allocation to the strategic and nonstrategic because we're obviously running off a component of that there.
Operator:

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

Just 2 sort of follow-up questions, please, circling back to earlier topics. So firstly, I just wondered, do you see a turning point in the fortunes of some of the macro businesses? The arrow is now positive on your favorite bubble chart. And I just wondered, do you see other turning points? Do you view yourself as having flexibility to scale back into those activities? And do you think that will be a valid move to make at this point in time? Other question really was just on litigation. I wondered if you could talk a bit more about the wealth management case that caused the charge here
Brady W. Dougan:

Yes, I mean I -- Jeremy, I think, on the first point, I don't know about a turning point. I mean I think our views on the macro business continue to be consistent in terms of a lot of the regulatory impacts on -- and market structure impacts on the business. And we're obviously, I think, have made good progress but still have more progress to make in terms of continuing to adapt that business. So I think one of the things you're going to see, as you say, not -- in addition to the green arrow, in terms of the return access, we also think that, given this is a 4-quarter rolling average, you're also going to see that bubble actually shrink in size because we will be -- we're continuing to reduce capital and leverage, some of which we've already done, which will simply roll through in the averaging. But so we think we will continue to improve the dynamics of that business in terms of the capital allocated and hopefully the returns as well. And I do believe, I mean, we'll see, but I think our hope and expectation is that we could also actually potentially increase some market share there as well, as the whole industry has to deal, we think, with those kinds of issues because, as everybody deals with some of the leverage issues that roll through to the business, I mean, we'll see how that impacts, but I think there is potential for that over time as well. So I mean I think, obviously, some of the green arrows, also just because market conditions in the third quarter were more favorable for the business. So we'll see how that continues, or not. I mean there's clearly a strong correlation between that and the -- between that and just volatility in the rates and FX environment, so we'll see how that looks. I think -- I mean I think our view is that we remain confident that we can continue to restructure the business into one that will give us better returns over the cycle. And that's -- and so that's, I think, how we're thinking about it.
David R. Mathers:

And I think, Jeremy, on the litigation part, I mean I can't really comment. They were 2 specific provisions that we took into our financial division that related to 2 specific issues not really related to LIBOR, FX or anything like that. And there's nothing -- I can't really add any more to that. There's nothing to be added really on that...
Jeremy Sigee:

But there's no suggestion that they'll continue. They're just one-offs in the quarter. There's -- they're not a continuing drag, you don't think, going forward, those wealth management cases.
David R. Mathers:

No, there's -- no, they were specific. They were both specific events, essentially, which we felt it was appropriate to take a provision against in this quarter, frankly. And FX....
Jeremy Sigee:

Yes, the FX and LIBOR question, I meant as a separate one really, sort of in the light of the recent small admittedly settlement. Do you still remain very confident on your broader exposure on those cases?
Brady W. Dougan:

Yes, I mean, I think we -- obviously, we want to point out obviously the distinction on that LIBOR issue, where as you say we had a EUR 9 million settlement that we entered into. That was not for anything to do with sort of LIBOR index reporting or anything. It was actually more around the derivatives products that were linked to that, so...
David R. Mathers:

[indiscernible]
Brady W. Dougan:

The asp [ph] spread on that, right. So but anyway, and yet obviously, that was a decision we made to resolve that issue and move on. We do not see any material exposure to LIBOR issues. And obviously, that's -- as you point out and as you know, that's an episode that's well into -- I've spent many years now, I guess, 3 or 4 years that it's actually been -- being investigated. So we continue to see that we don't have any material issues there. The FX issues are a little more -- are newer. As you know, they've probably been going for a little over a year now, but yes, we still don't see that we have any material issues on the FX side as well at this point.
David R. Mathers:

Yes, I think we'd probably say what we said the previous quarters. It's an ongoing investigation, but we haven't really discovered anything material. So I think it was exactly what we said a quarter ago. I guess, clearly, there's a lot of market speculation that there may be some resolution elsewhere, but I think our comment is more or less identical to what we said for the last couple of quarters.
Operator:

Our next question comes from the line of Jon Peace from Nomura.
Jon Peace:

I've just got a couple of quick follow-ups, please. So the first one is on litigation. You gave us a number last quarter of CHF 1 billion for the reasonably possible losses not covered by provision. So I just wondered what that number looked like this quarter. And then the second one is on the Corporate Center strategic. I know this number bounces around a bit, but it's quite a bit higher this third quarter than prior quarter or prior year, and it's a number that's been trending higher as well. So how should we think about that run rate?
David R. Mathers:

So the number of reasonably possible is -- I think actually is in the earnings release, but obviously...
Brady W. Dougan:

[indiscernible] in the back.
David R. Mathers:

Sorry. And obviously will be in our full filing in a week or so's time, is 0 to CHF 1.2 billion. So it's up slightly from the second quarter level. That reflects 2 issues
Operator:

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

I have many questions, but I would like to restrict myself to 3 of them. My first question is about wealth management business. You have mentioned that you are good at retaining assets that are being regularized in -- especially in Europe. I would like to ask you whether we can conclude from this statement that the major part of the outflows that you have mentioned is related to taxes -- unpaid taxes that are -- is related to the taxes that has -- that your customers have to pay and not to assets they are actually taking off from Credit Suisse in order to shift them to other banks. That's my first question. Maybe you can even quantify this or try to quantify this element. The second question is about the management changes. You have already given an answer to that question before. However, we are now -- we are noticing here that we have now 3 heads at the helm of your Investment Banking division instead of 2. I mean, this is -- at least, there's some change in relation to what it was before. You also have the 2 heads at the helm of the private banking division. I would like to invite Mr. Dougan to share with me the thought that -- I mean, dividing power within the divisions is logically increasing power at the top -- I mean, Mr. CEO, Mr. Dougan, is increasing his own power by dividing the powers within the divisions. I would like him to elaborate a little bit on this thought. And the third question is the -- simply, what's your expectations and hopes or with -- in view of the asset quality review from which we are seeing the results next Sunday -- on Sunday?
Brady W. Dougan:

Thanks, Daniel. Thanks -- and thanks for your restraint on limiting your questions. The -- I think -- on the wealth management side, I think what you said is -- I'm not sure -- I think I understood what you said, and I think it's actually correct. So as you say, certainly, there's a -- obviously, as the process happens, clearly, if people do regularize their assets and pay taxes, that will reduce in a -- will lead to reduction. So [indiscernible].
David R. Mathers:

And typically, Daniel, we -- I think our experience is that for the regularization process, we retain about 60% of the net number. Now clearly, that does mean some monies, basically, are actually flying out the bank. I -- you may speculate that's being used to pay taxes, and it may well be the case, but we clearly don't know. So it's almost certainly a mixture of taxes and outflows as part of that regularization process.
Brady W. Dougan:

I mean, I think, your second point on the management changes. Yes, honestly, it's -- as I said, it doesn't represent any change in strategy. It doesn't really represent any change in the way that we approach the business. So as you say, I guess -- I think, I guess, naturally, people do sort of headcounts and count up numbers, et cetera. I honestly don't think it changes the balance of how businesses are operating or clearly doesn't change our strategy at all, and I'm not sure that it has any other implications on the overall management structure. So really, as I said, I think I'm -- almost entirely look at this as a continuity solution. I mean, the same 2 people who are running the businesses before are still running them. They've obviously moved up to this level, but I don't think it actually changes the dynamic of which businesses are important or which ones we're emphasizing. Our strategy is exactly the same. We're still very focused on running a very good, best-in-class investment bank that's very disciplined in terms of the capital and resources that it uses. We're still looking at continuing to expand our presence on the Private Banking & Wealth Management side. We see the businesses as extremely synergistic, and they work together extremely well. And we want to continue to improve how they work together. So I don't actually really see it as changing any of that. So anyway -- that's my perspective anyway. So David, do you want to -- I mean, AQR? Do you want to mention anything on that?
David R. Mathers:

Yes, I mean, typically, obviously, as a Swiss bank, we are not subject to the Eurozone asset quality review, and so -- and I think it's -- and we have not been subject to these before. Over the last 2 or 3 years, I think we've been asked this question before. It's very difficult for us to really assess what a Eurozone stress test looks like because, obviously, we're not involved in that detailed discussion with the ECB and how it actually operates. And the premise is they view -- I think when we looked at this in the past on the basis of information that becomes available publicly, I think the stress test -- that the FINRA basically applies to us are at least as stringent than the Eurozone interest, and those are generally applied every 6 months. And we've -- I think we'd pass those basically. But clearly, we -- just to be clear, we are not subject to the AQR as we're not a Eurozone bank.
Brady W. Dougan:

But I do think, Daniel, I guess, our hope is clearly that this additional transparency that's brought to the banking system will be a positive. And our hope is that, that will actually increase confidence in the banking system in general for Europe, which will generally be a good thing, I think, for everybody, so -- and that's our hope. So we'll see. I mean, obviously, it's hard to predict exactly what the impacts will be, but that's our -- that's certainly our hope.
Operator:

Our next question comes from the line of Jernej Omahen from Goldman Sachs.
Jernej Omahen:

I guess I got just 2 very benign questions left here. The first one is on your performance in equities, and your equity sales and trading revenues were down year-on-year. I guess, in a quarter like this, historically, we'd be used to Credit Suisse doing better than peers rather than vice versa. And I was just wondering if you can just add a bit of color on why equities were down, why there's underperformance there. More specifically, on the prime services, you say on Page 23 that you had a good result in prime services and the client benefits grew, but on Page 43, where you give us the risk-weighted assets in the subdivisions, you show, I guess, a more than 15% drop of risk-weighted assets and, therefore, capital allocation to prime services. If you could help me square that, please. And the last question is on tangible book value per share sensitivity to the U.S. dollar. I guess, things are now going at a positive direction on that front, and the correlation -- historic correlation seems to hold. Is there any reason to think that a continued appreciation of U.S. dollar would stop to provide a tailwind for your tangible book value per share growth?
Brady W. Dougan:

Thank you. I think on the equities question, we -- as you say, we had a solid performance from equities. I think when you look at the year-on-year comparison, though, I mean, think last year, our businesses in both Japan and Brazil had outstanding performances. And this year, in the quarter, both of those businesses were much more muted, obviously; Brazil because of the sort of difficulties in the market generally. Japan is -- obviously, is not as buoyant as it was 1 year ago. So there are, obviously, other smaller issues, but to be honest, I think those are probably -- it's a little bit, I think, because those were the outstanding performers last year and important businesses for us, which are obviously not performing as well this year. So I think that's probably most of the explanation. David, do you want to talk about...
David R. Mathers:

Yes, I think we've given a partial answer to the CTA and currency exposure question in one of the appendix slides, actually on Page 46, because we thought it might be useful. This was aimed more, I think, at the capital hedging point. So what we show is the composition of our CET1 capital risk-weighted assets and our leverage exposure. I mean, I think, at the high level, I think as you know, given that we're obviously a Swiss-franc-reporting company, a Swiss franc equity based but with a -- more than 50% of our RWAs and leverage actually in U.S. dollars, we are -- you obviously run a currency risk. So therefore, we seek to hedge that by essentially swapping a portion of our Swiss franc exposure into our other currencies to actually neutralize that on the ratios, and you can see that approximate mix, basically, on Page 46. That then, obviously, does have, as you rightly say, a consequence on the shareholders' equity because clearly, an depreciating U.S. dollar means that we actually have gains on the dollar -- on those dollar hedges, which actually boosts the [indiscernible] when it comes to the CTA line, which is what you're seeing. We haven't given the shareholders' equity number actually on Page 46. As I said, this was more capital-based, but the shareholders' equity mix is not that different to the CET1, as at least a broad approximation. So to the extent you continue to see dollar appreciation, you would see a rise in the tangible book value of the group in line with what we've seen really for the third quarter in line with this kind of hedging strategy. I mean, just to be clear though, what -- and just to remind everyone what we suffered in prior years, of course, the consequence of a hedging strategy is clearly, if the dollar depreciates, then you have the opposite impact as well. It's not a -- it's a roughly linear -- it's not quite linear, but it's a relatively linear hedging strategy.
Brady W. Dougan:

I think on your question on prime brokerage, the business did have a good result. It was actually a very good quarter for the business. So that's quite good, and we feel good about our presence there and continuing market share, et cetera. And that's not -- I mean, I think the reduction in risk-weighted assets is really -- I mean, in prior quarters, we had been impacted by some of the regulatory clarifications of the CCP capital. Other regulations had increased, and we're now kind of working through some optimization on that. So I think it's just a -- it's a reflection of the fact that we are continuing to optimize that business as to both capital and leverage consumption. So -- but it was a very good performance in the business, and I think what you're seeing in terms of the capital reduction is really around some of the optimization efforts, and frankly, that makes us feel better about the fact that we can have -- continue to have a good presence and performance in the business while we optimize.
Operator:

Your next question comes from the line of Stefan Stalmann from Autonomous.
Stefan-Michael Stalmann:

Three questions please, if I may, the first, regarding this 4.5% new leverage target. If I understand the drive, this is actually a tougher target than the 17.5% risk-weighted target that you had set yourself. So essentially, that means that for the next 15 months or so, you're managing the bank on a leverage perspective as a binding capital constraint, not so much on a risk-weighted basis. Do you think that is something where the Brunetti commission and the Tabickta [ph] fare review could go to, that the outcome of that would be rules that make leverage the tougher constraint on UBS and Credit Suisse? The second question regarding leverage exposure, could you remind us what the estimated impact is of implementing the final Basel definitions and how that features into you reaching this CHF 1.05 billion -- or CHF 1.05 trillion target on leverage exposure. And final question on the Slide 46 that we just discussed, that is actually very helpful, I was just very curious about why you have such a high-risk density in Swiss franc? It seems that, that risk density is about 45% in a group that has an average risk density of about 24%. Are there any particular effects driving this?
David R. Mathers:

Okay. So I think on the first point, I mean, I think mathematically, you're correct. The leverage ratio as targeted is probably more binding than the risk-weighted asset target. I'm not sure I'd necessary draw too much of a conclusion from that. This is not the first time that's actually been the case. I think when we actually launched the leverage program back in 2012, it partly was to make sure that we did get that back into balance, basically. So they tend -- they -- it's either been RWA or it's been leveraged. And I think -- as Brady mentioned earlier in this call, I think in light of the general development of leverage standards around the world, I think leverage has perhaps become more of a focus in terms of what we see in the States and other countries, and I'm not sure Switzerland is an exception in terms of that. And I'm not sure you'd necessarily anticipate that from Brunetti. I think it's too early to actually speculate. We'll see what comes out of it. I think in reality, I think, as we've said already, the desire to set this leverage target, I think, is, a, because we wanted people to have some precision about when we're actually going to get to the leverage target you've actually given before; and, b, I think, reflecting the general developments we're actually seeing around the world towards leverage as being a more important constraint for banks, which, obviously, was re-led [ph] in the United States. I think the second point then on BCBS, the -- I think our understanding of the BCBS rules, which goes live really on 1/1/15 and is -- I think it's pretty much in line with what we said last quarter is we don't expect any net increase in leverage overall as a consequence of moving from the Swiss rules, which have been required for the last couple of years to the BCBS rules. We'll see how that goes plus, minus. There, certainly, will be some changes by business lines. Some businesses will have more leverage exposure, and some will have materially less. But the overall number in terms of target, you should regard that as net neutral in terms of the outturn. I think in terms of risk density, I think I'd probably want to come back to that, which we'll come back to you separately, Stefan, on that point in terms of Swiss franc risk density.
Operator:

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

Just 2 quick follow-ups from my side. Firstly, on Slide 32 again, sorry, leverage exposure, the CHF 21 billion you show there, the increase from business liquidity impact, obviously, it comes from lending initiatives in PBWM, but I think that pushes up your rather small [ph] bearing in mind what you show on Slide 14. I guess, it's CHF 1 billion or so. So it seems that close to CHF 20 billion is increasing liquidity requirements across the group. Can you just elaborate a little bit on what that is in detail and what drives that? That's the first question. And also, just out of curiosity, I mean, these are obviously average numbers. Could you talk a little bit about the volatility around that CHR 1.19 billion figure in the quarter and where it probably was at quarter-end? That would be interesting. And then just a second question on the famous bubble Slide 25, the -- obviously, the size of the bubble, 50% of it is based on the 2.4% equity leverage ratio. So I guess, if we were to apply 2.84 -- 3%, the bubble would be bigger and a bit more on the left. And so I was just curious to hear your thoughts around repricing a little bit in more detail in terms of what you have done, what the impact was and how much more we can expect. And also, in that context, what is really the multiplier business into other businesses and the -- yes, the positive side effects, so to say? And then also, this Slide 43 caught my attention. The reduction, obviously, in RWA terms is quite significant. You explained it. Is it fair to assume that then, on the other hand, the leverage exposure did not really decrease in the third quarter, bearing in mind that you said it was mainly more than the regulatory changes, which we -- may have drove the reduction on the RWA side? That's really it.
David R. Mathers:

That's a number of questions there. I may not have got them all right, Daniel. So I might just ask for clarification. I think in terms of the increased liquidity that we mentioned on Page 32, it's certainly true that liquidity requirements are the primary driver of that increase, the CHF 21 billion. That -- I mean, I think you may recall that, I think, I was asked about the impact, for example, of the IHC 1 year or so ago, basically, and I said, I think, at that time, we would expect that we would be -- have to basically allocate certain amounts of liquidity to the new IHC holding company. So that -- we have actually -- we will top out liquidity relating to the U.S. business actually also relating to our U.K. legal entities as well, and I think that just reflects the general sentiment of the rules around local entity and liquidity requirements. The optimization around that really reflects, as I said before, that there's something after that strategy, but that's something you're actually seeing coming through this quarter in terms of that. Timing might be a little bit earlier than expected, but I think in terms of the overall numbers I gave 1 year or so ago, not particularly out of line of what was suggested at that point. In terms of end-period leverage, it was higher at the end of period. It's about CHF 1.24 billion as opposed to CHF 1.19 billion here, and that's relevant. But I would point out that essentially, we manage our leverage on an average basis because it's the average over the period which is relevant for the leverage ratio calculation. So the spot will move up or down depending exactly on the end positions, but it's not something we particularly manage, too, in that sense. So it's the average which is kind of critical. I think you asked a question there about -- which I maybe missing, which was around RWA trends. Was that within the prime business?
Daniele Brupbacher:

Well, it was basically starting with Slide 25 and then 43, and I mean, it's kind of interlinked. But on 25, as you were saying there in the footnote, obviously, the size of the bubble is based on a 50-50 split between a 10% CET1 ratio, 2.4% equity leverage ratio. So I guess if I would pencil in everything else being equal, 2.83%, the size would -- the bubble would be bigger and a bit more on the left, right?
David R. Mathers:

That's correct.
Daniele Brupbacher:

So I was just curious to hear your repricing strategy, what has been done, what you can -- what more can you do there, what's the impact? And also the multiplier has a positive side effect into other businesses from prime services. And then linking into this, you explained very well why there was this 15%, 20% decrease in RWA terms in the prime services business to CHF 18 billion, Slide 43. So I was just -- is it fair to assume that probably, actually, the leverage exposure in the prime services business did not decrease or probably increased in the quarter?
David R. Mathers:

Well, I think there's a couple of points there. So the leverage exposure, we've not given the leverage by business line, and I won't today. I think once we have the final BCBS rules, we might move to do that, but given we're in transition from that, I think it's probably prudent we don't react to that today. I would say the leverage in the prime business was marginally down in the third quarter compared to the second quarter, albeit nothing like as in proportion to the RWA move, which Brady commented on before in that sense. In terms of the repricing impact, I think it was marginal in terms of the third quarter numbers because it's a process which is really just beginning in that sense, but we are aware this is very much an industry-wide phenomenon, really following on from the introduction of the new U.S. leverage rules in the States, which is obviously having a much broader impact on the industry. So -- but marginal in terms of the revenue or PTI benefit from prime services in the quarter.
Operator:

Your next question comes from the line of Al Alevizakos from KBW.
Alevizos Alevizakos:

I've got 2 questions. The first one is regarding the fixed income revenues. Obviously, you've suggested that the revenues were very strong on both securitization and emerging markets, and I was surprised by that strong performance in securitization because the U.S. investment banks didn't have such a good read across. So what I wanted to ask you is, first of all, whether you think that you're actually gaining market share in securitization even though I can see also that the RWA were decreased in the quarter. And also, what's your view regarding the ECB's move to actually trying to issue more MBS and ABS and whether you think that this would be like a big opportunity for Credit Suisse to increase their revenues on the segment in the next, let's say, 3 to 5 years? My next question is actually on something that I read on Bloomberg, an article that suggested the U.S. Labor Department is facing pressure from Congress not to allow Credit Suisse to manage pension fund assets and that basically, Credit Suisse could lose its status as a qualified asset manager, with a final ruling taking place on the 21st of November. It would be nice like if you could update me on this one as well.
Brady W. Dougan:

Yes, thanks for those questions. I think with regard to the securitization business, I mean, we -- David talked a little bit about in the presentation the breadth of that business. And we view it as actually a best-in-class business, but it's also a very broad business. So as you said, I think a lot of people think of it as, "Well, it's mortgage securitization" or -- but there are actually a lot of aspects to it. In fact, the -- a rapidly growing part, which David talked a little bit about, is the asset-backed business, which is not mortgages, but other types of underlying securitizations. And so we've actually done very well in that segment, and so we do view it as a business overall, where we've got a very strong business. And we do feel that actually we've got strong market shares there, particularly across the various different elements. So -- and I do think -- I think the third quarter was probably a good example of that. We do think that Europe is actually a very big opportunity for us. In fact, we've been incrementally moving resources and people to Europe out of the business. So we do think that there actually is a tremendous opportunity in Europe, and obviously, some of that is certainly being supported by the Central Bank's comments and activities there. But we do just think there is a big potential for increased securitization in Europe, and we think we should be very, very well-positioned to be able to participate in that. So we'll see. It's certainly something we're very focused on. With regard to the Department of Labor issue, as you say, we have obviously applied for the exemptions. I think that's a process that we continue to work through. No doubt, as you say, there have been various media coverage, et cetera, but we continue to work towards receiving that exemption. I think we, obviously, can't -- we can't predict with certainty how that will come out, but I think our hope and expectation is still that we will receive our exemption on that and -- but we'll have to see how it develops.
Alevizos Alevizakos:

So you haven't taken any kind of provisions as of yet or you haven't recognized anything in the package that you use for the litigation that's not provided, basically?
David R. Mathers:

Well, I think -- just to be clear, I don't think there's a question of any sort of litigation exposure related to this, and so I -- there's no cost per se, basically. The keypound waiver [ph] per se is whether or not there'll be any restrictions on managing certain U.S. pension fund monies at that point. So if we didn't, then that would have some impact on the revenues and -- but it doesn't have a litigation exposure per se. I think -- I don't think this is likely to be an issue. It's clearly -- but I think it's certainly not going to have any litigation exposure.
Operator:

Your next question comes from the line of Alex Hoge [ph] from Handelsblatt.
Unknown Attendee:

Just to be sure, to clarify some point, first of all, on litigation, just to verify, is it correct that you just booked new litigation reserves of CHF 41 million this quarter? And secondly, what is the total overall number of litigation reserves that you have booked up-to-date now in the first 9 months? Just to have the numbers right. Secondly, on outflows from private banking -- I know you're getting your updates on expected outflows. Obviously, I'm a little surprised about the volume that you expect, that it's CHF 10 billion this and next year, knowing that, for example, UBS is telling us that the German regulation seems to be more or less finalized, and this is, of course, one of the biggest cross-border markets. So my question is what led you believe -- why is that outflow still at these high levels? Which market are responsible for that? And perhaps, you can just still elaborate on the German regulation that you were saying they are through now. And where is Credit Suisse standing there?
Brady W. Dougan:

David, do you want to address the litigation issue?
David R. Mathers:

Well, we're just checking that. I'm not sure we have the slides for 9 months we've actually booked. I mean, to be precise, Alex, what we've said in the quarter is we've taken CHF 41 million in respect of 2 specific issues in the Private Banking & Wealth Management division, and that's not the totality of our 3Q provisions. I think if you may recall, I actually gave a number in excess of USD 600 million in terms of what we've actually expensed within the investment bank, for example. So we're just checking whether we have a full 9 months date when we've actually disclosed, but I don't think we do is the answer. So I think those are the 2 numbers which I think you should focused on, but the CHF 41 million is purely for the PBWM division in respect of 2 specific items. And obviously, as I said before, I've given a number for the IB accrual we've actually taken by strategic and nonstrategic so far, but that was for 9 months, just to be clear in terms of that. So that would be my point on the first question. I think on the second question, in terms of the regularization outflows, I don't think it's really appropriate for -- actually for us to comment on other -- what other banks have said. Clearly, the majority of the outflows, the CHF 7.7 billion, which we've seen in the 9 months so far, are coming out of the regularization programs in France and Germany. And I think you know we've taken a very firm line that we expect for this amount -- these accounts to be fully regularized by the end of this year. I think the guidance we're giving around the CHF 10 billion to CHF 15 billion reflects both that, but also, the likelihood we may see other amnesties in other countries in Western Europe over the course of the next 15 months as we move towards automatic data exchange, which, I guess, is about 1 year or so away basically. So that's the context in which we're actually giving that guidance. Just to be clear, the majority is Germany and France, but it's not just Germany and France in terms of that CHF 7.7 billion.
Unknown Attendee:

Okay. And just the first remark, you said, "I don't trust the statements from other banks which concern regulations." Is that right?
David R. Mathers:

I said I couldn't comment on other statements made by other banks. So you should ask them themselves. I don't think it's appropriate for us to comment on statements made by other banks.
Unknown Attendee:

Okay. And concerning German clients and just a rough number, where are you now? 95% have declared or above -- gave their indication that they're now regularized or -- and just so we have a rough idea where you're standing in that process?
David R. Mathers:

I think I'd maybe say given the -- we're about 2 to 3 months away from the end of this year, clearly the vast majority are regularized.
Unknown Attendee:

Vast majority, okay.
Operator:

Your next question comes from the line of Andrew Lim from Société Générale.
Andrew Lim:

The first one is on TLAC, if I could get a bit more clarity on your guidance here. If I understand correctly, you're saying that there's a CHF 300 million extra interest cost on that which is now assuming bail-in status. I'm just wondering how you arrive at that? Are you applying like a 20-basis-point uplift to your existing funding and capital structure? Or is there some kind of like mix effect going on? And my associated question really is with regards to TLAC, what's your strategy? Are you comfortable having senior unsecured as part of TLAC? Or would you try to ensure it [ph] from bail-in status and try and issue more Tier 2 subordinated going forward? So that's my first 2 questions. And then secondly -- sorry, thirdly, you received a letter of caution from the Fed with regards to high-risk leverage lending, and I was wondering what your response to that letter was, and whether it would entail for yourselves a contraction of your leveraged lending activity. And maybe you could quantify the impact there on revenues, not just in leveraged lending, but maybe in associated businesses.
David R. Mathers:

So probably, I'll take the first point. So on the TLAC calculation, I think -- to be clear, I think it was 1 year or so ago when we actually set up the nonstrategic unit. I think we did try and provide some specific guidance on the outlook for the funding costs of the group, and I think at that point, I think we talked about -- in rough order magnitude terms, about an CHF 800 million reduction in our funding costs relating to the overall plans for the group; clearly, a large portion that sits in nonstrategic unit. And then we also guided that we'd see about half of that in 2014, first year, the nonstrategic unit, which, indeed, is what we have done. But that -- if we look through to 2018, '19, that CHF 800 million reduction will be partly offset by that CHF 300 million of increased funding cost relating to the high likelihood that we'd move to issuing bail-in debt as opposed to conventional unsecured debt during the course of that time. I think we want to be very clear there'll be some downs and some ups in that. You can't, I'm afraid, simply take the existing funding cost on that 20 or 25 basis points because the funding cost of the bank, although we have, and I think as you know, done quite a lot of substantial ALM and capital restructuring transactions over the last 4 years, we still do have significant legacy instruments out there, some debt, some quasi-capital, which have relatively high funding costs dating back to the sort of 2007 to 2010 period. So those essentially have to be run off, and the spreads on those instruments are very substantially in excess of what we'd issue for senior debt today or TLAC debt on a likely basis over the next few years. So you will see that actually drop at that point. I think what we're really trying to do is simply, therefore, is just to refresh that guidance for everybody in terms of the outlook then for this CHF 300 million number we've given for bail-in debt in terms of our thinking today. It's clearly, obviously -- so the obvious thing, it's going to be dependent on the amount of TLAC debt you have to issue, which is clearly being formalized with the FSB and the spread cost at which you do issue it. I would simply say -- or most of our central case projections for TLAC debt, the product for those 2 calculations is still CHF 300 million, plus or minus. If anything, I'd probably say if we look at the preprovisioning arguments within the FSB paper, then it looks like we may need to issue more TLAC debt than perhaps we would have thought 1 year ago. But it's equally true that the spread assumptions, which you made 1 year ago, are looking too wide on the basis of the issuance we've seen so far. So net-net, we still come back to CHF 300 million, plus or minus. I would caution clearly that will depend on how markets develop over the course of the next few years, but I think the answer essentially is our guidance for funding cost hasn't actually changed despite the significant evolution in regulation over the last year or so. I think it's a little early to really speculate on the type of debt we'd issue, but I mean, I think, as I said, our intention at this point is we would be issuing senior debt with a structured subordination clause out of the Credit Suisse's existing holding co ended [ph] by the form of an entity linked to the hold co but given the withholding tax issue I mentioned before, and that's probably where we will begin our issuance at some point over the course of the next year, hopefully sooner rather than later in terms of that. I think going beyond that, I think it's probably a little bit too early at this point.
Brady W. Dougan:

I think on your third question on the leverage lending side, I mean, I can't comment specifically, but obviously, the regulators would like to restrict the lending in the sort of higher-risk portion of that market. We clearly are going to be acting in line with that. That will have an impact on the amount of business we do in that area. I think the question as to what overall impact it will have will be dependent upon how much of that is across the whole industry or not, and so we'll have -- that will remain to be seen.
Operator:

Your last question comes from the line of Michael Helsby from Bank of America.
Michael Helsby:

Just 2 questions from me actually. Just turning back to that Slide 33. So the increase in that -- the leverage ratio target is about CHF 5 billion of increased capital requirement. I appreciate consensus may help you getting there, but as you set out on Slide 33, that does imply a 3% leverage ratio and a 12.1% CET1 ratio. So I'm just wondering -- you kind of alluded to this before, but why you do continue to use a 2.4% equity leverage ratio and a 10% CET1 target when you're allocating ROE and why you're sticking to an 11% CET1 target at group level when you seem to be directly endorsing those higher ratios embedded in that leverage requirement. So that's question 1. Question 2 is kind of related, but given the balance sheet now looks very geared relative to peers, is it fair to assume that if there is any increase -- further increase in the leverage requirement that we should think of that as coming all from CET1 rather than from future CoCo issuance?
David R. Mathers:

Well, I think just a few points really. I mean, I think just to be clear, the increase from CHF 1 trillion to CHF 1.050 trillion is a currency move. It is not -- now clearly, and that's why we basically, I think, did decide to give you the specific details around the hedging strategy for that. So therefore, you will see the CET1 that shows equity base reflecting that. And obviously, if the exchange rates went back down to CHF 0.89, then the target would be CHF 1 trillion again, et cetera, et cetera.
Michael Helsby:

It's more the -- really the 4 to 4.5?
David R. Mathers:

Oh, in terms of total leverage?
Michael Helsby:

Yes.
David R. Mathers:

Yes, yes, but in terms of the equity component, that's what I would say. I mean, clearly, we issue CoCos in U.S. dollars as well as in euros anyway. So you have the same sort of currency effect implicitly in the nonequity capital portion of the balance sheet as well as in the equity portion of the balance sheet. I think I'd probably still give you exactly the same answer I gave before in terms of the -- when we looked at the return on regulatory capital, it is the deferment to earn regulatory capital, and the VIS [ph] rules basically define that at 2.4%. So that's the ratio which we actually apply. Clearly, if that was a change, we would change at that point, and -- but I think picking an arbitrary number basically doesn't seem particularly prudent at that point. But I think we, at least, are being clear in terms of how we actually define it at that point. As to the RWA leverage mix, I think we'll see how that develops. I think the point we really want to make essentially is we did want to give everybody clarity that essentially we are very focused on hitting the leverage target given before in FX-adjusted terms and that we intend to get there by the end of next year, which I think is important. So was there a second question, Michael?
Michael Helsby:

Yes, just if given the -- if the leverage ratio were to step up from here, which people clearly are worrying about, so it's higher than 4.5%. Given there is so much leverage within the balance sheet already relative to peers, is it fair to assume that, that would have to come from CET1, so common equity, as opposed to a mix of common equity and further incremental CoCo issuance?
David R. Mathers:

That's -- it's very difficult to really speculate, Michael. I think -- clearly, I think we will look to see how the rules evolve globally, and obviously, the U.S. has been a sort of first mover in this side, but we'll obviously -- we've seen changes in the U.K. as well and, as you know, there's the Brunetti commission and the Swiss discussion next year, and it's very difficult to prejudge where that would actually come out. I think it is very likely though that a significant component of that will be met by CoCos in some form or other. It's a very established product, and there's an established market for that. So I don't think it would be assumed -- fair to assume that it would be met entirely by CET1. I think it's very unlikely. I guess it might be met partly by CET1 although clearly, the -- if you were to see a significant change in leverage ratio, that would also drive out things [ph] around how much balance sheet we choose to allocate [indiscernible], Michael.
Operator:

There are no further questions. Please continue.
Brady W. Dougan:

Okay. Well, I'll just say thank you, all, for joining us. Thanks for the questions, and I appreciate your attention. Thanks very much.
Operator:

That does conclude today's conference. An email will be sent out shortly, advising how to access the replay of this conference. Thank you for joining today's call. You may all disconnect.

Credit Suisse Group AG Q3 2014 Earnings Call Transcript

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Credit Suisse Group AG
Q3 2014 Earnings Call Transcript