Credit Suisse Group AG (CS) 2002 Q3 法說會逐字稿

Welcome and thank you for joining the Credit Suisse Group third quarter results 2002 conference call.

The results will be presented by Mr. John Mack, Chief Executive Officer of Credit Suisse First Boston, Mr. Oswald Grubel, Chief Executive Officer of Credit Suisse Financial Services, and Mr. Philip Ryan, Chief Financial Officer of Credit Suisse Group. The conference will start shortly. You will now be joined to the Auditorium Forum St. Peter in Zurich.

So, I want to make sure that we have a very open, direct dialog. All questions you have, we welcome them, and we want to make sure that when you deal with us, you get the answers to your questions. Now clearly, there'll be some questions that we cannot answer, but we will try to answer anything that you do have.

So, with that, [Inaudible] really take over January the first, and even though we worked for a short time together when I first joined, now that he's back, we work very closely together. One of the questions that I'm sure he gets and I get, "Well, co-CEs don't work." I don't believe that. I think he's running some very different businesses than I'm running. I think we really come together on Group questions. And also, I've found him - and [Inaudible] myself - very bottom line oriented. We do not take months to make decisions. And if there's one thing I like and I think he likes is the ability to look at an issue, take all the facts and consideration, and then make some decisions. So, I think this question of co-CEOs to me is moot, and I think it is moot to him.

On January 1, also, Walter Kielholz will become Chairman, which you already know. With his vast experience in the insurance business and his tenure on the Board chairing the Audit Committee, both Ozzie and I look forward to working with him.

The other thing that Ozzie and I decided that we needed to do, and this will be announced hopefully by year-end, we would like to expand our Group Executive Board. We think that we need to add some more people who have direct operating experience, and we will announce that hopefully by year-end.

So, let's go to the next slide. Clearly if you look at the Group's performance, it's absolutely unacceptable. We've lost 1.8 billion for the quarter - again, mainly most of this - 1.4 was Winterthur, but you'll also see that Credit Suisse First Boston also incurred some losses in this quarter. So the year-to-date net operating loss is 135 billion Swiss francs, again driven mainly by Winterthur. The rest of our businesses have been profitable with the exception, as you see, in CSFB. Profitability is substantially down from last year. Again, we will get into the details of this. The other metric I would like to point out to you is our assets under management in the company total 1.22 trillion Swiss Francs; that's down 6% in Q3 and 15% for the year and, again, most of that is driven by market conditions and we all know what the market has done in the last nine months.

There were a number of factors contributing to this loss. We have been very aggressive and I think very successful in cutting expenses for the year but it still has not been enough to keep up the pace of falling revenues. We also have incurred very high credit write-offs. This is probably the worst credit cycle clearly I've seen in my 35 years and talking to our credit people, one of them made a comment to me that this is probably as bad as it was back in the mid-30s during the Depression.

When you look at our credit losses, you know, we're not alone in that. As you see what has happened with competitors, everyone has had this issue. But, at the same time, we have to move more aggressively to make up for some of these issues and we have made some other decisions that we need to implement on closing the gap so we're not losing money.

So, what's happened to us in the last quarter? Well, number one, we've incurred substantial losses in Winterthur. We had to stabilize our investment portfolio. I think those are question you'll be asking Ozzie and we're comfortable on answering those questions. We're also going to restructure our European on-shore private bank and businesses and then the cost, at First Boston, of just working down legacy investments. One of the questions that I get and others get is, well, why does it take so long and we'd be more than happy to get into details of these investments and why it has taken so long and it is still work in progress.

As you can see, CSFB has experienced on a revenue decline, 23% decline. Some piece of this is legacy losses but we've taken costs down 25% but in absolute terms, our gross operating profit has been squeezed by $370 million. You can't see that in the slide, but that is the number and we are taking steps to address that shortfall and, as most of you know, that, I guess, two weeks ago we announced another headcount reduction which we think will pick up about a half a billion dollars in savings through that move.

As CSFS revenue declined 7% and expenses reduced by 4% and there's a squeeze there of 330 million gross operating profit. Now, the cost reductions exceeded 4% and were partly offset by growth to some parts of the business. Ozzie will get into this or clearly answer some of your questions. He's been back a short time and is very confident that there's more than can be done there.

So, let's summarize. If you look at this next chart, the net after tax profit impact in Q3 on the left and year to date on the right, various factors underlying the Q3 results. The overall impact has been to reduce our net operating profit by 2 billion in Q3. 3.8 billion in year to date.

Of course, and it's obvious, the biggest impact here has been the Winterthur losses. Without these, Witherthur would have broken even in the third quarter. The next biggest item is the loss on winding down the legacy portfolio at CSFB. And you can see there in the third quarter, that is 400 million.

Now, what the chart does not include is the -- as I said earlier, the worst credit cycle we've been in, clearly the last 10 years, and some would argue, since the Depression. That is not included in this. And as we get into Ozzie's presentation on CSFS and Dick Thornburgh on CSFB, we will get into some of those details, or we can do it in the Q&A.

Now, the core assets and capabilities of Credit Suisse Group are strong. I like the hand we have, but we have a tremendous amount of work, again, to bring it to the bottom line and to deliver to the shareholders the result that they expect.

We will continue to reduce cost. I think, you know, oftentimes people say, "Well, anyone could reduce cost." But I think to reduce cost but to at the same time keep in place the capability to take advantage of a market turn and not to cut all the muscle, I think that is a real art, and I'm very pleased with what we've been able to do.

We want to focus. And again, Ozzie will talk about it, return to profitability at Winterthur. We will refocus on our European private banking effort, and we'll put more emphasis on high-net worth individuals. And as I said, again, we need to resolve the legacy portfolio with CSFB. And then in terms of further business and revenue growth, we will ensure that we have enough capital to grow our business, which has led us to decide to cut our dividend rate to 10 cents. And that is subject to board and shareholder approval.

So, as we go forward, it's very clear we need to continue to focus on clients, make sure that our service to them is at the top of the pile of people and financial service. We need to continue to be innovative in the way we approach the business, and most importantly, we need to return to profitability.

At the end of the presentation, after Ozzie closes, we'll be more than happy to do a Q&A. And with that let me turn it over to Mr. Grubel. Oh, Mr. Ryan.

I'm sorry. Thank you. Thank you, John.

Starting on slide 10, let me just go through a brief overview of the group's results. Revenues quarter over quarter were down 26%. The primary factors here was the drop in commission and fees. Most of this drop relates to underwriting and corporate finance fees, which were down 46%, quarter over quarter. Portfolio management and brokerage commissions were down 11 percent.

The other key factor was the drop in trading income, which was across the board in all our areas, but particularly in the fixed income area, which was partially offset by stronger trading income in equities. It's important to point out, on the trading line, and we'll see this later in a slide that Dick will show you, it's 500 million francs of bringing down these legacy asset portfolios that John mentioned shows up in the trading line.

So you have a write down of assets that represents 500 million in that line. And of course, insurance revenues, as we define them in our bank assurance accounts, was down dramatically for the reasons we've discussed.

On the next slide, operating expenses. Personnel expenses down 21 percent across the group. All the banking units showed a drop in cost. As John mentioned, CSFB's expenses quarter over quarter down 27%. In the insurance side, expense growth (ph) is coming down, despite the strong continued growth in the business. And we show continued progress in other operating expenses.

This slide summarizes the net new asset flows. The private bank [Inaudible] report inflows with 3.4 billion for the third quarter, 18.2 billion year to date. I think the noticeable thing on this chart are the third quarter outflows at CSFB Financial Services, which really relates to performance issues, primarily in the single fixed-income product at C-Sam in New York.

Going to slide 13 and 14, I'd like to talk for a moment about the credit picture. This chart summarizes the credit-related provisions and losses throughout the group. At CS Banking, we've seen a slight increase, and there is some weakness in the Swiss credit market, but it continues to hold up quite well, given what's going on in the global economy.

The next bar is the portion of the CSFB legacy assets, which again, Dick will talk about, which does show up in the provision line.

The big issue, of course, is the jump in the overall provisioning at CSFB. We have to keep in mind that CSFB's credit book is a mirror image of its client base. It's a good sized large corporate book, high-yield lending, and 50% of it is in the United States. With that as a backdrop, high-yield spreads are at a 20-year high. High-yield default rates are two times worse than the previous poorest credit loss cycle.

In the United States, criticized shared national credits are up 22%, and recovery rates are at a 10-year low. In that context the CSFB increase in provisioning in the third quarter is highly influenced by two large credits -- Genuity and B-zed (ph) -- which represent 450 million francs of the 662 shown in the chart here.

Other areas that we're very focused on is the telecommunications and Telco service area, where our current exposure at CSFB is $4.1 billion, or four and a half percent of the portfolio, and also the energy sector, which is at $4.8 billion, with is 5.4%t of the total portfolio.

I also direct you to slides 14 through 17 in the supplements, which give you additional information on credit, and there's also some schedules in the Excel pack giving further information credit.

On slide 14 is the chart showing the progression in impaired loans. In the past we've shown this exact same chart focusing on non-performing counter parties. We felt it's a better picture and is more in line with what are competitors are showing to change this over to impaired assets. CSFB had an increase in impaired assets in the third quarter, which relates almost solely to those two largest credits I mentioned earlier.

Non-performing loans at CSFB were up to 3.2 billion -- up from 2.4 at the end of June. So, non-performers are currently 1.6% of total credits outstandings at CSFB, but are still below the level where non-performers were at the end of 2001.

CSFB continues to make progress in the credit joint venture, which takes a portfolio management approach to the credit issues and uses aggressively loan sales, defaults, [Inaudible] credit insurance, and a disciplined allocation process to do the best job possible in using our resources in the lending side.

We do 140 million at the end of September positive P&L in our default swap book, which is not reflected in the - in the P&L, which is different from some of our - how some of our peer group accounts for it.

You can see here, also, that the Swiss banking business continued to bring down its non-performers with very sound and making good progress in bringing down historic non-performing credits. We do expect provisioning to remain high into 2003, given this difficult environment.

Before I go on to this slide, I would like to just spend a moment on the tax line. This is something that's gotten a good deal of focus. In the tax line in the third quarter, we had a tax charge of 410 million francs. For the nine months year-to-date, we had a tax charge of 914. The impact in the third quarter was virtually identical to what happened in the second quarter. And as the banking industry - or the banking part of our business continue to show (ph) a consistent approximately 25% tax rate, the real issue has been in the insurance side, and particularly in Germany.

In short, in Germany the write-down on equity investments does not trigger any deferred tax accounting because equity gains and losses are not taxable as per the tax reform of 2001. However, offsetting that are two items that do impact our German deferred taxes, which is the unrealized gain or loss on debt securities which records a deferred tax liability or a - or an expense, and also the release of deferred tax - deferred bonus reserves to policy holders which occurs when the investment portfolio comes down results in a release of deferred tax assets to the income statement, creating an expense.

These are, you know, accrual tax entries. These are non-cash items. And as I said before, what happened in the third quarter is virtually identical to what happened in the second quarter. While the inherent tax rate of the group remains at 25%, until this process washes itself out, which will occur during the fourth quarter, you will see some further effect from this in the fourth quarter, although the German tax impact will be much smaller.

I'll point out that we put some slides in the supplement on slides 14 and 15 to try to summarize the deferred tax adjustments for the third quarter.

On this slide, I'd like to summarize two changes that we're proposing to be considered for the fourth quarter in our accounting rules. The first is to recognize deferred tax assets on net operating losses. This will increase comparability with our peer group. To our knowledge, we're the only company in our peer group that doesn't account for operating losses as benefiting our P&L. This also eliminates a difference between our Swiss GAAP and U.S. GAAP, and you know that brings us more into line with where we're going in 2004 when we move to full U.S. GAAP.

The pro forma effect for the nine months ended September would be a positive of 250 million and virtually all of that would be at Winterthur. And the cumulative impact going back over previous periods, which would be a positive adjustment to our equity account, would be about 300 million francs and the total about 550. We would plan on implementing this in the fourth quarter.

The second change we're looking at is changing the way we look at inherent allowance for loan losses in our loan portfolio. This is really fostered by two moves. One is to be consistent with an anticipated change by the Swiss Banking Commission - the EBK, which is changing the way they estimate inherent losses and guidelines, which will be enforced by the end of 2003. We would like to go ahead and make this move sooner. It brings us more in line with our peer group and is line with the general deterioration of the credit-worthiness in our credit portfolios.

With regard to potential impact, this allowance for inherent losses under our Swiss GAAP model was included in the reserve for general banking risk. So, essentially, what we're doing is moving these amounts from the reserve for general banking risk over to the allowance for loan losses account and that will be done in the fourth quarter by a charge to the provision line and an income item in extraordinary income with a reversal of the reserve for general banking risk. This will have a negative impact on our capital of 700 to 900 million and this is a rough estimate at this point. But the change in this allowance, offset by the NOL benefit, we think, are well within the means of our current capital base and our capital plans.

The implementation will likely be in the fourth quarter and it will depend very heavily on credit trends and how they develop in the balance of the year.

With that, let me cover my last topic which is capital and I'm going to show the same slides we showed last time to give you an overview of where we stand. The capital ratios for the banking only were up slightly to 9.4%. On a consolidated basis, the ratio came down slightly from 9.2 to 9% and the banking businesses continue to be very well capitalized.

The reason for the increase, particularly in the banking ratios, is the drop in the dividend accrual assumption which John mentioned which brought 210 million francs into our capital. The amortization of goodwill every quarter increases our capital. We did a private placement of Alternative Tier 1 in July which increased capital and lastly we lowered risk weighted assets which was a boost. So all of those factors combined improved our capital picture. The acquired intangibles are down to 3.1 billion and, as in the past, we've shown you what the Tier 1 numbers are completely eliminating the acquired intangibles.

On slide 17 gives the Winterthur number. The Winterthur number following the capital infusion is -- the solvency is up to 155% which is well within the targets that we have talked about in the past.

On slide 18, we wanted to make two points here. First, is to give you a clear view of what's happened to Winterthur's equity and what we did with the 2 billion francs. Winterthur started the quarter with 3.9 billion of equity. There was an increase in the gains and losses account as interest rates dropped and bond values went up. You see the loss of 1.5 billion and the capital infusion of 2 billion to leave us with 5.4 billion at the end of the period.

It's also important to note that, in addition to the capital infusions, an equally important part of our capital plan with Winterthur was to bring down the equity exposure and immunize the risk in the capital book to movements in the equity markets. At the end of September, the stated portion of equities was 8 percent but when you take our non-equity funds and equity participations that don't really have equity underlying them, it's more like six percent.

And when you incorporate shareholder -- or policyholder participation and other effects, what we call the capital-relevant, or P&L-relevant impact in our equity portfolio is three percent. Let me lastly, on slide 19, make a few comments about our capital actions. We have said repeatedly over the last year that we have the means within our balance sheet to make sure that we've got the capital to grow the business and to see it through this difficult period.

Of the actions we've taken recently was a further reduction of the dividend, the sale of our stakes in Suisse Ree (ph) and MetLife, and further, very effective balance sheet management. So we've delivered on our promise to be able to make it through this period given the resources we have. We have also said repeatedly for the last three quarters that we are looking for an opportunity to raise capital-qualifying financing and we continue to focus on this. We would like to pursue something in the near future, given market conditions, and we'll also be considering potential equity-linked opportunities.

The purpose of this would be to build equity to better position us for growth as we move into 2003. The size of any such transaction would be approximately 1 billion francs, and would be considered only if the market environment, timing and size makes sense. And with that, I'd like to turn it over to Ozzie.

Thank you, Phil. Before we go into the results of Credit Suisse Financial Services for the third quarter, I would like to clearly state that the results are very unsatisfactory.

We have taken in the last four months appropriate measures to correct the situation, and that is partly reflected in the results. It is clearly our objective to return to profitability in the fourth quarter. I am more than convinced that with the management team that we have that we can achieve that. I also would like to welcome Leonard Fischer, who will join us on 1st of January as the CEO of Winterthur. He previously was a member of the executive boards of Allianz and Dresdner Bank.

On the last quarter, Credit Suisse Financial Services recorded an operating loss of approximately 1 billion. On a cumulative basis for the financial year to September, this has equated to an operating loss of 671 million. Earnings contribution from the banking side on the third quarter with spending at 405 million was positive. On the other hand, Winterthur's non-life and life insurance business together posted losses of more than 1.4 billion.

These distinctly negative results in the insurance business have their root in the ongoing turbulence in financial markets. The chance is necessitated the realization of losses, and is all that is (ph) required [Inaudible] there's an earnings impact in valuation adjustment to individual (ph) security portfolio.

Furthermore, certain exceptional items had a negative impact third quarter results. I'll give you some more information on that later.

Market developments have also had a negative effect on trading and commission income in private banking. This has led, among other things, to an operating income of 2.3 billion for the quarter, representing a fall of 16% against the previous.

We have invested into the important core markets of private banking, as well as the premium grows in the insurance divisions. [Inaudible] was possible (ph) to reduce operating expenses for the first nine months by one percent, or 88 million.

When compared to the previous quarter, expenses for the third quarter decreased by 95 million.

Assets under management fell by approximately 27 billion in the third quarter, [Inaudible] to 686 billion at the end of September.

The figure for net new assets has also declined. So, this remains positive with a net inflow of one and a half billion.

Private banking achieved net new assets of around 3.4 billion, while corporate and retail banking recorded a net asset outflow of 2.3 billion. The reason for this outflow was volatility of the corporate client business, and 1.1 billion of this relates to assets [Inaudible] from timed deposits -- by deposits. There's a letter (ph) not considered as assets under management. The effective outflow of client funds at corporate and retail banking amounts to 1.2 billion.

The fourth quarter of this year we really aim to be profitable, as I said -- especially due to significantly improved results at Winterthur. There are two main reasons for this. [Inaudible] that equity markets -- the financial results of the insurance segment should improve significantly and support a recovery of the bottom line.

The insurance divisions are still maintaining unrealized losses of roughly one billion in the equity portfolios. But, the majority of these unrealized losses is to be found in countries, which it is primarily the policy holder who bears the market risk.

By contrast, the unrealized losses in countries in which the investment, which is born by us, have increased significantly.

Moreover, we want to change the accounting basis of these losses for both this and [Inaudible] years, thereby forming a tax asset which will positively impact fourth quarter results [Inaudible].

The next slide -- year-to-date we have realized efficiency improvements of 490 million; most of this we invested back into our business. 160 million went into expanding our private banking franchise in Asia and Europe, 53 million were absorbed by the restructuring activities in the context of building new CSFS organization, and 189 million were needed to fund the insurance premium growth. Net cost reductions after these investments [Inaudible] amounts to 88 million.

For 2003, we target savings of some 100 to 150 million in the banking segments. Based among [Inaudible] on the new business models in the private line segments of Switzerland and Europe currently being implemented. These savings will be used to fund organic growth and additional restructuring charges insurance segments, administration expenses will be brought down significantly.

As mentioned already, earnings from private banking have not developed in line with our expectations. Net operating profit for the third quarter amounted to 303 million. Income from operations which was just over 1.4 billion represented a drop of 16 percent as compared to the previous quarter. There are - there are essentially four reasons for this. Third quarter has traditionally always been not a very good quarter mainly of the holiday season. Then, the current market environment which we had in third quarter that [Inaudible] by our clients that didn't do any turnover in their portfolios, and they had lower commission revenues from the sale of structured investment [Inaudible] .

[Inaudible] reduced asset base growth by poor market performance led to a fall in asset-based commissions. [Inaudible] expenses were down five percent to 104 million compared to the previous year, and provisions for performance-related payments reduced by 27% year-on-year basis.

Due to low operating results in that margin shrank to 24 basis points thus representing a drop of 12 basis points from second quarter.

[Inaudible] banking acquired 3.4 billion of new client assets in the third quarter making net increase in new funds for the year-to-date to 18.2 billion. European private banking contributed 5.9 billion [Inaudible] year-to-date.

As a result of changes - on the next slide - result of changes to the fundamental environment caused by - caused by market events, the business model for the former European financial services initiative was subjected to [Inaudible] evaluation [Inaudible] was reformulated. We have decided to focus on private banking only [Inaudible] the core competencies of our [Inaudible] market will be [Inaudible] component of the reformulated strategy.

We must further insure that costs incurred [Inaudible] sustainable and profitable growth in earnings. This requires adjustment to the cost base. For example, we will have the following changes in Germany. We will focus on 15 cities instead of the planned 23 [Inaudible] agents networks and call centers and reduction of the planned e-offerings until on-line brokerage was anticipated.

That will -- for that we have taken a restructuring expenditure of 199 million which was booked under extraordinary expenditure.

Next line. In corporate and retail banking, the results look better. Profit for the quarter amounted to more than 100 million. Lower gross income compared to the previous quarter of around 14 million was more than offset by lower costs. These personal expenses could be reduced by 8 million or 3% in a quarter to quarter comparison although operating expenses decreased 23 million or 30 percent in the same period.

By contrast, there was a slight increase in expenses related to valuation adjustment provision and losses. The operating cost income ratio fell to 67.6%. Return on equity improved by 1 percentage point to 10 and a half percent. The net interest margin rose by 7 points to 238 basis points.

We also have decided to close down our Swiss on-line broker [Inaudible] which is run by Coburn (ph) Retail Banking by the end of the year.

On life and pensions, gross premiums written for the first nine months rose by almost 2.3 billion or 18% in a year on year comparison. The organic growth in gross premiums in local currency for the current business year amounted to 17%. The poor result for life and pension is primarily due to weak investment performance compared to the first nine months of the previous year. Investment income declined by 73% or 3 billion.

After taking into account taxes and other -- and the policyholder share of the negative investment performance, the weaker investments results had a 1.8 billion effect on net operating profit compared to the same period last year.

In addition, the third quarter witnessed some negative one-off effects and the poor financial performance is anticipated to be longer-term with reserves [inaudible] in individual countries being increased by 150 million overall.

For the same reason, write-down of deferred acquisition costs of 235 million was charged. This is also partly responsible for the rise in operating costs to 14% or Swiss Franc 194 million on a year on year basis.

If you were to exclude this one-off effect, the expense ratio for the third quarter would be 9.7% [Inaudible]. The increase of reserves and the write-down of deferred acquisition costs had a negative impact on net operating profit of 237 million. Overall, the quarterly results for life and pension showed losses over 1 billion.

The non-life insurance business, again, has had a fine technical result, but poor investment results in certain [Inaudible] of items. Net premiums earned in the first nine months of the current business year rose by 459 million or 4% in a year on year comparison.

Organic growth in local currencies amounted to 8%. Some 75% of the increase in premiums resulting from Paris inquiry (ph). This growth in business also led to an increase in claims of almost one percent, and an increase in operating expenses of three percent.

The technical result improved by more than 560 million, year on year. Equally positive was the development of the combined ratio. This fell by 0.9% against the previous quarter, with the current year to date extended 103.5%. We had reductions on the same figure last year which did 106.4%.

Investment income shows a loss of 69 million for 2002 year to date, almost 1.8 billion below that of the previous year. The effect on net operating profit was negative by about 1.5 billion compared to the previous year. Divestitures and discontinued business had a negative impact of 161 million on net operating profit.

Overall, Winterthur Insurance recorded a quarterly loss of 361 million, compared to a loss of 490 million in the previous quarter. Next slide.

Credit Suisse Financial Services has established four priorities overall for 2003. It should contribute immediately to a sustainable recovery of our profitability. Our insurance unit will focus more strongly on those core European markets in which we either have a strong market position already or expect to achieve one in the very near future.

Further growth in these markets will be financed out of the current business. In addition to that, we reduced administration expenses, and we adjusted tariffs. In practical terms, this means a reduction in the combined ratio in the non-life business to below 100. And a reduction in the expense ratio of the life business to less than 8%.

Private banking, we have established a new management team and clear responsibilities, and we will apply the strengths we have displayed in the past in order to achieve above-average growth. Bolivar has won position in our home market. We want to focus on growth in clearly defined markets such as the on-shore business in core Europe, the end markets and the business declines from Asia, the Middle East, Central and Eastern Europe and Latin America. These are our clear objectives to generate net new funds on [Inaudible].

Cost saving measures already decided upon will be pursued vigorously. [Inaudible] we want to realize savings of roughly 100 to 150 million in the banking segment, which as described to you earlier will go into financing business expansions, further restructures. The insurance units, we aim for significant reductions admin -- administration expenses. I expect my management team to implement all defined measures consequently, and immediately.

It also calls for clear communications, both within the company and externally. The next slide. In private banking, we have the objective to realize an increase in profits for 2003. We had an increase in net new assets of more than 5% as we said. We want to improve the results in European private banking by 100 to 150 million, compared to the current year.

We launched new products and service [Inaudible] other than bonus should [Inaudible] despite the planned growth.

Corporate and retail banking -- profits will remain stable. Operationally, we are aiming for improvements, particularly income growth product or risk profiles, such as the mortgage business, for example, as well as tweak the cross management there.

I have (ph) -- as a result of the economic environment, we're also expecting statistically derived credit risk costs to rise by around 10 basis points.

For years we have been adhering to consistent credit policy, and this should allow us to contain the negative effect of the larger environment.

In the insurance business we want to return to profitability in 2003 based on the following assumptions: the life insurance business -- we will be focusing strongly on [Inaudible] with less capital-intensive products; bench and front market in Switzerland following the decision of the minimum interest rate of three and a quarter percent. Given the optimization measures we have introduced, we aim at positive contribution profits from the existing business.

Generally we want to be more cautious in allocating bonuses to policy holders, as well as managing costs and risk ratios in line with changed market conditions. We want to reduce our administration expenses significantly. And we will risk [Inaudible] for (ph) market where we see no realistic chance of holding anything other than [sub-quidic] (ph) position in the future.

The non-life business -- we will pursue the following measure. [Inaudible] increases should allow us to improve our combined ratio by two percentage points. Administration expenses ought to be reduced significantly, which should also reduce the combined ratio further.

Additionally, we will double efforts to revise or remove unprofitable business, and the geographical portfolio will be further improved also in the non-life business.

I think we'll end on Credit Suisse First Boston.

Thanks, Ozzie.

Turning to CSFB, I'll cover three items -- our third quarter results and results year-to-date, the key issues underlying the poor performance in the third quarter, and the actions we're taking to address these.

Starting with our results for bottom line is that we incurred a net operating loss in the third quarter of $255 million, with a year-to-date net operating profit of 129. There are three main reasons for this result. The first is the decline in revenues, driven largely by industry-wide conditions -- particularly the fall-off in the capital markets business [Inaudible]. The second, as John mentioned, the legacy issues in our discontinued real estate, the stress security in private equity business, which affected both our revenues and provisions. Lastly, the higher credit provisions, reflecting the industry-wide credit environment. I think, as John has noted, the S&P default rates are running at their highest levels in decades.

In response to these issues, we're taking the following actions: reducing our cost to ensure that we're right-sized for the current and anticipated business volumes, accelerating the sale of those legacy assets to get them behind us as quickly as possible, as well as to free up the capital so we can re-deploy it into our core businesses. Third and key is to maintain our strong competitive position so that we're positioned to capture the revenue growth opportunities and improve profitability over the core businesses. And lastly, as John will talk about later, taking a lead role in resolving regulatory and reputation issues facing our industries particularly in the United States.

Now, looking to the future, we believe that with these actions, we can restore CSFB to profitability in 2003 and beyond.

Now, let's look at our results management actions and outlook in some more detail. With slide 33, we summarize our quarterly results for the overall Credit Suisse First Boston business unit, culminating in the 255 million net operating loss. As you can see on the table on the right, our revenues declined by 24% versus the second quarter and by 23% versus the year-to-date a year ago reflecting the substantial drop in business volumes and of course exacerbated by the losses incurred in working down the legacy assets. We've aggressively managed down our operating expenses, which fell by 18% versus last quarter. But in absolute terms, of course, this was less than our revenue decline. Personnel costs include 123 million of severance cost through nine months.

As you can see, provisions jumped from 260 million in the second quarter to 560 due to abnormally high credit losses and provisions taken against the legacy asset if we break down the 560 as follows - roughly 403 for commercial lending, 49 million for real estate provisions, $65 million for excess premises provision, while the rest relate to legal and unrecoverable fees. Year-to-date charge for excess premises is approximately 100 million, while in aggregate if you take the hundred plus the severance, we have roughly 223 million of restructuring cost which have flowed through the expense line in the first nine month numbers.

Going to slide 34, here we show the trend in revenues for the key businesses within the Investment Banking segment. Fixed income revenue fell 13% versus the second quarter to roughly 1.1 billion, mainly due to the developed market credit product segment, obviously reflecting falling bond prices and wider credit spreads. Was also impacted by leveraged finance revenues which fell in the second quarter primarily due to reduced new issuance in weaker markets. These were somewhat offset by revenue growth in emerging markets. Also, given the market uncertainties, we've taken a more defensive posture on risk. Our market risk is down around about a third versus a year ago, and you can see the details in the value of the risk on page 33 of the shareholder letter.

Equities revenues fell six percent versus the second quarter to roughly 718 million partly due to the extremely low new issue volumes. For example, there were only IPOs filed in the third quarter. That's the lowest level since 1980. Secondary revenues in the U.S. cash customer businesses also fell, and this was somewhat offset by stronger derivative revenues particularly in the index R (ph) business.

Lastly, investment banking revenue fell 44% versus the previous quarter to 485 million, mainly due to the decline in new issues. Equity issues falling roughly 62%, and debt issuance was down 19%, and the overall industry underwriting fees for the third quarter were down 45%. The M&A business fared slight better with volumes down just 6%.

Our global market shares were largely unchanged for the quarter. Year-to-date, we were ranked number two in M&A - number one in high-yield. [Inaudible] debt [Inaudible] equity.

Going into the financial services segment of CSFB's P&L, quarter on quarter drop in operating profit was due to a decline in revenue of roughly $50 million or 9% and this was combined with slightly higher provisions relating to the expense savings initiatives and a 13 million provision for excess premises which is a part of that $65 million number I mentioned before.

Revenue weakness resulted from first seasonal slowdown in retail activity which Ozzie noted. Second, lower market valuations which I think you're all very familiar with. Third, a mix of a shift to lower yielding fixed income products, i.e., e.g. equity assets fell 26% in the quarter and lastly, asset outflow.

The net asset outflow were driven by two reasons. One primarily driven by one US institutional fixed income portfolio and second due to a few client managers who took assets with them. These two items then would suggest that the large outflow is not a broad trend. Of course, the lower yield on this product for the fixed income product implies less of an impact on future revenues.

[Inaudible] management has already made personnel changes in the investment area in the fixed income side and is focusing on moves to further improve the investment process and the performance throughout the organization. Overall, though, the performance is in line with the industry. The US asset managers typically are seeing revenues fall 10% quarter on quarter versus our 9% and assets under management falling across the industry roughly 7%.

Turning to slide 36, CSFB's poor results in the quarter also reflect actions we've taken relative to these legacy assets. As you can see in the top right-hand table, we've reduced our revenues and raised our provisions. The result is that our net operating profit was reduced on an after tax basis by 285 million in the third quarter, partially offset by a 96 million after tax gain on the sales of Swiss shares.

The year to date impact of these legacy assets on a pre-tax basis is 800 million. On an after tax basis, 576 million.

We're obviously working hard to get the asset problems behind us as quickly as we can. Our net exposure to each of these asset types, real estate, distressed and private equity, shown on the bottom right-hand table, and there are more details provided in the supplements, roughly slides 20 to 25 give you more information on these items.

As you can see, we've reduced our net exposure this year from roughly 5.3 billion to 3.7 billion. We're taking the necessary steps to reduce the overall exposure in the next few months. Interestingly, the economic risk capital tied up in these assets was 2.6 billion year end '99 and, as you can see in the supplements, down to roughly 950 million at the end of the third.

The result of the actions we're taken, we would expect some further charges in the fourth quarter, but these will mostly be offset -- will entirely be offset by the 301 million after tax gains from the sale of Swiss Re which, you know, took place in the fourth quarter. We don't anticipate substantial charges from any of the residual legacy assets to be carried forward into 2004.

I don't think we can go out without mentioning we also have some legacy costs from the compensation structure which we've talked about in the past. Particularly, the high level of guarantees which largely run off at the end of 2002. They represent roughly 50% of this year's bonus pool. The amortization of the DLG Retention awards which you know run roughly 100 million pre-tax expense per quarter and those will entirely end, for the most part, by June of next year.

I'd like now to turn to what we've been doing on the cost side. One of the key steps that we've talked about in the past is to aggressively reduce our cost in line with what we think the market opportunities present us. We announced a year ago a billion dollar cost reduction program. For the first nine months of the year, our operating expenses are down $2.4 billion, 25%, and they're below the nine months of a year ago.

But given the revenue declines in the second half of the year, as John mentioned, we embarked on a further round of cost reductions which will take another 500 million out of the run rate operating costs in 2003, and that's going to be a combination of headcount reductions, roughly 1700 staff across the world, 7% of our personnel, and a program on other efficiency initiatives.

Once we've completed the program, we believe we'll be right-sized for the expected business volumes in 2003. We're obviously trying to structure ourselves so that CSFB can be profitable in 2003 on a flat year over year revenue environment. But as we said before, we'll reassess our cost structure again if the business volumes decline further, and we don't' see the opportunities out there to reasonably deploy our personnel.

We believe these cost reductions have not diminished our client service capabilities. In fact, our league table standings would suggest otherwise, and we don't believe it's impacted our market position. I think we remain well positioned to catch the revenue growth opportunities when the markets recover. My thanks for your attention. Ozzie?

Thank you, Dick. Now let me summarize our presentation with a short outlook of what is ahead and of our priorities. The last point Dick made about leadership is very important to me also in a broader context. As leaders in the industry, we need to demonstrate a strong commitment and a clear-cut plan to get things right again. At CS Group, a team of very experienced managers has been put in place. Our colleagues from the group executive board and the executive boards of CSFB and Financial Services, personally I feel very confident that the team leading the Group has a good future ahead.

As we said many times today, restoring profitability in all of our businesses is our top priority, and we will aim to do so very quickly.

For that we can build on a track record of client focus and innovation. We have become benchmark in many, and we have initiated the measures required to keep that leading edge basis for future growth. Our clients expect superior advice and solutions, and they will get it. As Phil has described, we have also done a lot to strengthen the capital base of our business. We have solved the major issues, and we are in a good position, but we will obviously closely follow developments, also with an eye on allowing us to support future growth. The outlook for the fourth quarter remains challenging, especially given the continued adverse market conditions. But in any case, we expect to see a clear recovery of results [Inaudible].

For 2003, we expect to return to profitability in all our business. We have undertaken the necessary measures to ensure that this can happen, if even if current market conditions persist. We have formed a new management team. We are tackling all the issues affecting our results, and we have an excellent franchise to build on.

Thank you very much. Now we'll turn it over to questions.

OK. May I suggest -- why don't we take a few questions from the room here?

OK. Does the feel (ph) of what your experts tell you -- where dollars (ph) will be heading in the fourth quarter after you reached a peak? Or, is this exponential development to continue? And then, resulting out of that question, what your aim of restoring profitability at CSFB also be achievable in still bad credit environment?

Well, the question abnormal -- it's abnormal on an historical basis, but it is, I would say, in line with industry or even better than industry losses, if you look at the major banks and the kind of losses they are taking in their credit position.

So, clearly, we're in line or better than our competitors on that. As we said in the presentation, this is for sure the worst credit cycle we've been in in the last 10 years, and some would say the worst credit cycle since the depression.

As far as CSFB of becoming profitable and getting these legacy problems behind us, we need to look at it and understand it.

These investments that were made over the last three or four years -- take the distressed portfolio as an example -- you can argue why that was done or why it wasn't done, but the fact is we inherited it. It is not a business that I believe an investment bank should be in -- the distressed business -- because it puts you at odds with your investment banking client as you negotiate a restructuring of the company.

It is very difficult to sell those properties, or those investments, in any short period of time. It is even more difficult in a tough credit environment to do that.

So, we will continue to have to work that down.

The real estate portfolio -- we think we can make more progress. We're convinced that we have not been aggressive enough in that, and we look forward to having that reduced dramatically, either by yearend -- from the numbers you see here -- or by the first quarter of next year.

Then, you need to look at the private equity investments. These are legacy investments that were made in the old First Boston. They're investments that were made in other people's private equity funds. And given what's going on, not only in the credit markets, but what's going on the equity markets, it is difficult in a short period of time to exit those investments.

Now after having said that, the progress we've made on the cost side -- I mean we've taken out over $2 billion in costs -- we've reduced dramatically over the years the bonus pool, and we'll reduce it again this year. And as Dick pointed out, 50 percent of the bonus pool is guaranteed. That will run off by '02, so at the end of this year, we will have much more flexibility in compensation. There will be a few guarantees remaining, but it will be very small.

So, some of these things that we have done, unfortunately -- even though we've moved quickly -- there are structural reasons you just cannot exit immediately. And if you look at what we did last year on bonuses, we were able to renegotiate approximately $300 million back, in comp numbers, back into the firm. We will not be as successful this year. We will not get 300 million, but we plan to get money back from some of these contracts. And at the end of the day, it is very difficult to manage a business when half of your compensation is guaranteed. And then lastly, as Dick pointed out, the retention bonuses that were given to the DLJ (ph) employees runs off in the middle of next year.

So I'm pretty confident, if the market stays where it is - doesn't have to turn into a bull market, just stays in these areas - given the things that we've done, that '03 we should return to profitability. Now, the bit question mark still is the credit picture - and mainly, again, as either Phil or Ozzie pointed out - six percent of that loan book is U.S.-based, that is still a big issue for us.

And if you - if you look at the losses - the big losses in the - in the - in the quarter here, it's Genuity and the DZ (ph) loans. Those loans were made two and three and four years ago. So, they're on the books and you know there are a lot of things you can do, as Dick has said with credit derivatives and selling loans which we are very aggressive on, but I am sure there are other positions in that loan book that have yet to surface.

And all I can say is that, you know, what we need is a credit cycle that starts to improve, it is somewhat out of our hands, and we have changed the procedures going forward on how we make loans and how much more [Inaudible] are in assigning cost to businesses when we make those loans.

So that's kind of a long answer to your question, but I hope that answered your question. And if I didn't answer it, give me another question.

All right.

It's Ronald Gersh (ph) Salomon Smith Barney.

A couple of questions - first of all, just following on that last point about credit derivatives, could you disclose how much of your CSB loan book is hedged using credit derivatives? And I wonder if you'd elaborate on the comments you made during the presentation of you've got 100 million plus of unrealized gains in your credit derivative book.

The second question relates to the private banking area. This is probably the first quarter in many quarters where your net new money is weaker than in other peer groups - peer of yours. To what extent do you think any restructuring measures you've already undertaken has led to a weakening in net new money? Could you just comment on why you've seen this slowdown? If is it simply seasonal or that particular geographies? For example, [Inaudible] Europe which has slowed down in the second - in the third quarter. Thank you.

Dick, you want to answer the first question on credit derivatives?

Yes. We have roughly 5.6 billion of notional credit default swaps against the commercial loan book. The disclosure, I think, on the size of the book is in the back. We have a mark-to-market value at the end of September of roughly 145 million, which does not go in our P&L. All U.S. companies and those people who follow IIF (ph) would find that value in the revenue line under "Trading Revenues," unless a credit defaulted. Then it would be a contra to the provision line.

So, we do not flow that through the P&L, as I mentioned at last quarter's results. And obviously when we go to U.S. GAAP, we will. That is value there to protect against the new loans that John noted we've made. And as you - as we talked last quarter, we started to be much more aggressive about this about 18 months ago, but obviously we're a little bit behind the - some of the competitors.

Ozzie?

[Inaudible] in private banking, I think year-on-year the [Inaudible] is not where we would like to [Inaudible] at 5%. We do believe, as we said, in the plan that we could go back to 5% there next year. What impacted the third quarter was the restructuring we are doing on-shore in Europe and so, again, we are occupying ourselves too much with our internal problems instead of getting net assets in and we close in Switzerland itself. On the other hand you had pretty strong growth in Asia and the Middle East and, of course, in America.

So, going forward, I believe we can get to four or 5 percent. At the moment, I have no indication that [Inaudible].

Next question. There don't seem to be any more further questions here in Zurich, so I'd like to open it up to those listeners on-line. Operator, do we have any questions?

Yes. We have a question from Mr. Mark Hogue, Bank of America. Please go ahead, sir.

Yes. Hello. I just had two brief questions. Firstly, on your comments about the capital situation, I think you mentioned that there's a possibility of an issue possibly, equity linked of around 1 billion francs. Should I interpret that as, you know, that item and the discussion around that item as meaning that you're more or less ruling out a rights issue and what you're looking at is probably a limited size convertible bond issue, is that how I should interpret that?

I think that --

My first question.

I think that the right direction. We have said very clearly, we are not looking at a large rights offering and have been very, very clear about that for quite some time. We've also been very clear that we are looking for an alternative capital financing to give us additional capital to fund growth as we go into 2003 and you're right. What we're signaling is a size in the billion franc area and we will be including equity linked in our consideration, since that's one of the most attractive markets available to us right now.

But this will depend on market timing and conditions.

And then my other question was just on the guaranteed bonuses. I think you said they would be 50% to the bonus pool this year at CSFB and I guess that works out to $1.2 billion. How much of that is what you would consider excess? Money that you're paying to people that, given the revenue situation now, you wouldn't normally pay to them and do you intend to fully return that to shareholders and get the cost income ratio down to industry standards?

Yeah. Our goal is to get to industry standards. Let's just start with this number. In our budget, when we start at the beginning of the year, that guaranteed number would have represented about a third and what we have done as the business has been deteriorating, we have cut the bonus pool. So that number you have and I'm looking at where the bonus pool is right now is slightly less than 50% but it's close to 50% and as cutting the pool as we already had, if we didn't have the guarantees we would be returning that to shareholders. And my guess is that compensation broadly across Wall Street will be down in the 30 to 40% range and some specific businesses will be down 50 to 60% so you could assume from that that you would be cutting that 1.2 billion somewhere in the 30 to 40% range, maybe even more.

Thank you.

Next question?

We have a question from Mr. David Williams, Morgan Stanley.

Hello, it's David Williams from Morgan Stanley here. This question is related to Winterthur. The suggestion in your presentation is that ex the write-downs, Winterthur was a break even business. Could you tell us what you think the sustainable return on capital in that business is going forward. Obviously, you're looking for 2003 to be a better year than what we've had, but break even doesn't suggest that that's really going to be returning much value to shareholders.

The second question related to Winterthur, could you give us the schedule of the impairment? Because obviously you've had some big write-downs so far. What is still to come by way of impairment in Q4, and will we continue to see impairment in Q1 of next year, and relating to that also, could you tell us whether the hedge has been effective in reducing your exposure? It just seems that you still have roundabout 1 billion of unrealized losses still on the balance sheet that I'm a little bit surprised at that.

The third question on Winterthur, you seem to be still having quite strong premium growth coming through in the third quarter. And if this is a breakeven business, why are you continuing to grow premiums? It doesn't seem that that's really an effective use of shareholders' capital. Thank you.

On return on equity, we think going forward that -- and if the market normalizes a little more, that we have return on equities there of 10 to 15% volume, going up to 20%. Next year, obviously depending very much on how we will operate there, but it probably will be at the lower end of that range.

On impairments, as we said, we are going in the fourth quarter with 1 billion of impairments, and we mentioned that the smaller part, maybe 40% of that, of 400 million, will go through our P&L and will not be passed on to the policyholders. But 60% of that 1 billion will be passed on to policyholders. The hedge, as we said, we would not have hedged the way we have in the end of June until now, we wouldn't have done that, our losses in equities would be something of the magnitude of 3.8 billion. Three strengths (ph) compared to 1.7 billion we had.

Now, obviously that it's very difficult to figure out what we could have done there or not, but we -- our calculation, we think we'll reduce the financial loss from 3.8 billion down to 1.7. Why do we still run new businesses, we run new businesses at interest rates in the life business at interest rates where we -- and we invest the money we are not subsidizing new business with old business.

Thank you.

Thank you, David. Next question?

We have a question from Fiona Swaseed, Lehman Brothers.

Good morning, it's Jenna Swathfield for Lehman Brothers. I just had a question on the provisioning in CSFB. You mentioned two names. Could you be a bit more specific on how much provisions on those names? I think you said BZ (ph) . Have you taken significant -- you know, how much of the exposure? Because it doesn't seem to us to be that significant, so could we get further provisions in the coming quarters? Thanks.

I think we said for those names that the provision was 450 million francs - $300 million dollars. I think that's pretty significant, but I don't think we can give any more detail beyond that.

OK. Thank you.

Next question?

You have a question from Daniel King, Cassanov.

Hi. Good morning. Daniel King (ph) from Cassanov here.

Two questions. Firstly, when you gave your semi profits warning -- I think it was on the second of October -- you discussed that the losses outside the insurance, I think, would be modest. By my numbers, that's about 600 or 700 million Swiss francs. Is there a change from your view on that date? Or, is it sort of the use of the word -- maybe I got confused about what you mean in terms of operational, non-operational?

The second question is on private banking. You're talking about making a non-operating increase in private banking, 2003 versus 2002. Given that it's very difficult to grow average funds under management next year, are there any other measures taken on the revenue side to try and drive that number? Thank you.

Yeah, on our outlook statement, we based that upon what we saw at the time. We believe our results are still within the guidance we gave on that date.

Ozzie, you want to ...

Well, what was the -- do you want to repeat the second question?

Yes. It's relating to the expectations of growing non-operating profit in private banking in 2003 versus 2002. I imagine your numbers have fallen. Average funds under management -- it's very difficult to grow the average '03 on '02 just to arithmetic. Are there any other revenue measures you're looking to take to try and sort of stem that problem? Otherwise, it looks quite difficult to make an actual increase.

Obviously, assets under management were very much impacted by the market development and the accounting developments. That would change, and obviously that plays a big impact. But, we want to -- the first, it depends on the market outlook you have. Obviously, if you think assets under management will continue to deteriorate because of market performance, then it will be difficult [Inaudible] for everybody. If you have to go out from a stable environment -- we think we do have new solutions on the client which we will be introducing. This year we were clearly -- had some problems in restructuring our European [Inaudible] initiative, and we lost a lot of money there that created prior costs, which are reflected in the private banking results. These costs, as you said, become [Inaudible], maybe next year, and we have to see how much of that will be invested in the growth segment.

[Inaudible] nobody will say that it will be easy [Inaudible] business next year.

I don't know if that answers your question, or.

Yes. Thank you very much.

Next question?

We have a question from Jeremy Siggy, Salomon, Smith, Barney.

Yeah. Jeremy Siggy, Salomon Smith Barney.

Two questions, please. Firstly, I just wanted to follow up on Winterthur. You commented on potential divestitures in non-core businesses. I wondered whether you could expand on where you are in the strategic options with Winterthur -- in particular, which bits you might keep or sell, any progress on sales, and how we should interpret the new management appointments in this respect.

Second question -- more of a specific one -- what scope do you have towards using non-staff costs within investment banking? You've talked a lot about the staff costs.

[Inaudible] divestitures obviously we cannot tell you what we want to sell or what we want to - how we want to [Inaudible]. We are in the process of looking at every entity we have and coming up with a clear plan what our core markets will be and that should be finished by the end of the year. At the moment, as you very well know, it's virtually impossible to sell insurance assets. And the first priority has to very clearly be to [Inaudible] that you're profitable again. And then, I think we will be able to concentrate more on the core markets and do our - implement our strategy.

And the new appointment of Chief Executive of [Inaudible] has nothing to do in the respect you [Inaudible] hinted at or what was there in the papers today. We - Winterthur is a major asset of ours, which we have a clear responsibility to make it profitable again and get the right return for our shareholders.

On the reduction to CSFB, the majority of that 500 million clearly will be headcount driven. I would say a non-staff would be in the range of 50 to 60 million. We've already taken, as you - as you know, a substantial amount of the non-personnel cost out of the business.

Next question?

We have a question from Jorg Conders, West Alby Penmir.

So I have concerning the income in the Investment Banking division. In the past, you've always given more detailed split with what's - what was income in investment banking, fixed income, and equity divisions. I'm missing these slides and the supplements.

The breakdown by division is in the Q3 report, and there's also additional information in the supplements.

Page 21 of the shareholders letter will give you the breakdown of revenue by division. And that's available on the Web, right [Inaudible]?

Did you hear that? There's a package of supplementary Excel tables that are on the Web where there's additional information.

As in the past with this split, what was in debt capital markets and equity capital markets on this (ph) and U.S. clients and so on?

Those are in - those are still in the supplements, right? Yes, they're in the supplemental slides.

Next question, please?

We have a question from Adrian Pitts, Main First.

Yes, hi. Actually I just have one specific question, and it's regarding the legacy assets again. You did mention that on the revenue impact for Q3, it was a 500 million roughly charge in the trading line. Can you possible give us some color to the set-up of that 500 million for the various three streams of distressed or legacy assets, and also possibly give us some insight, if you have it, in the previous quarters similar impacts? Thank you.

If we turn to the supplemental slide pack, going to the left, the slide, slide 25, we break out, by asset type, real estate, distressed and private equity for the nine months and for the third quarter with the mix between operating income and provisions and then the appropriate tax credit against those.

Thank you. That's excellent.

Next question.

We have a question from David Esera, Morgan Stanley.

Good morning. I have two questions. The first one with regard to the risk cap [Inaudible]. The second one relates on the capital structure.

The first one, the value risk keep on being reduced and [Inaudible] over the last 10 to 12 quarters now, trading income, even excluding the impairment of the discontinued assets and real estate, is running extremely low. Do you feel like at this point in time, we should completely change the P&L structure going forward and have trading activity should be completely different because you used to make between 8 and 10 billion Swiss of trading over the last two, three years and hence going forward lower risk, but as well, lower revenue and hence the risk appetite completely keep on shrinking?

Secondly, as far as capital is concerned, the move from the funds for general banking reserves into create allowance for about, if I well remember, seven to 900 million Swiss, is this what you feel of, sort of, substituting with a potentially convertible, am I right in assuming that or the two are not related?

Are you going to answer --

If we could start, if you go back the last 12 quarters, first I noted that the value at risk was down roughly a third versus a year ago and I think if you go back into the shareholders' letters you'll see, if you do the arithmetic, it's about 55% and the difference there are obviously methodology changes as we've -- I think we've talked in the past, our original model which was the first to be approved by any regulator was extremely conservative versus peer comparison. But we have, clearly in the last three years, taken our relative value at risk and when you look at the actual observed events, we used to be about one and a half times the industry peers and now we're slightly below the industry peers and that's a combination of reducing the emerging markets risk that we're willing to take, getting out of the distress business as a trading business and then, obviously, last year we had a very good opportunity to make proprietary gains in the fixed income business.

But I think John's philosophy, and I'll let him speak for himself, is that given the asset exposure we have on the balance sheet in distress, private equity and real estate, we're not really in a position, nor should we be in a position to take the amount of risk that we've taken in the past on a proprietary nature because we can't afford, from a shareholder perspective, to take that hit.

And, secondly, the focus is really on taking risk on behalf of clients. So if we're going to risk -- if we're going to take the risk dollar that we have available within CSFB, we're going to channel that to serving our clients and meeting their needs as opposed to using it for the house.

That's exactly right. I mean, we're prepared to take a fair amount of risk, but we want that risk to be client focused. The days of big casino and that's what I think you're seeing with these legacy investments, that was big casino. We're not going to do big casino. We will take positions for clients. They will be large positions. It will be a fair amount of risk, but the main focus will be clients.

Now, that's not to say that when there is unusual opportunity that we see in the market that we won't use our own capital, we will and as Dick has said, one of the things that we have really been more disciplined on is in the emerging markets business.

So, I think it's all been said.

On the capital structure question, there are a number of things going on in the fourth quarter. The capital raising is viewed as building up capital to prepare for growth as we go into 2003. The capital raising is not required to make the change in inherent risk we talked about. So, the two were included in the capital plan, and it incorporates a number of items that are not dependent upon each other.

Next question?

We have a question from Dieter Hine, Credit Leanay.

Yeah, good morning.

I would like to ask three questions. First, you mentioned changes in your accounting for the fourth quarter, so the question is: do you want to change to IS (ph) or use skip (ph) accounting, or what is the basis for the accounting changes?

Second question related to your group [Inaudible] . Trading income came down from two billion Swiss francs to 40 million in the third quarter on a year-on-year base. Can you make some comments on this?

And thirdly, you mentioned the appointment of Mr. Fisher as in U.C. of Wintature. He was the head of investment banking at Grisna Bank. We know the situations there. Mr. Fisher has no insurance experience so far as I know. Could you make some comments on this appointment, as well? Thank you very much.

Thank you. We made an announcement well over a year and a half ago that we're moving to U.S. GAAP, and we'll make that full transition starting January 1 of 2004. Both of the changes that I mentioned in my presentation are in line with our move to U.S. GAAP.

On the trading income, John and Dick have made a number of comments on it already, and we also pointed out that 500 million of the legacy expenses that were discussed flow through in the trading line. I'm not sure what more we can add to that one.

Well, trading income at CSFB -- factoring in everything, including the distressed -- went from roughly 579 million in the second quarter to 169 million in the third quarter. And I think that's reflective of what you've seen in other major investment banks except for Goldman Sachs, who had a significant proprietary gain in fixed income. But, I think you've seen in others' results -- certainly in JP Morgan -- that the opportunities in the third quarter, with credit spreads blowing out and rates going up rather than coming down, really didn't make it a very hospitable trading environment.

Ozzie, your question?

On [Inaudible] the appointment of Mr. Fisher -- it probably didn't have -- or wasn't long enough on the [Inaudible] have in depth knowledge on insurance, but in Winterthur we do have nearly 30,000 specialists on insurance, and we also have two executive boards which are full of specialists on insurance. And running a company like Winterthur requires management skills. It requires knowledge about risk management. And that, we believe, is [Inaudible].

Can I make a follow up question to the accounting issue?

Yes.

Yeah. Does it mean -- only to make it clear -- that you want to switch the fourth quarter to your skip (ph), and not waiting until 2004?

No. The full change to U.S. GAAP will happen when we cross into 2004. What we're talking about here is making two steps -- one that is in line with changes in our regulatory regime here in Switzerland, which is also in line with going to U.S. GAAP. And the benefiting of net operating losses is a move that's very consistent with IS (ph) and U.S. GAAP, so therefore is consistent with our change in 2004.

Do I have another question?

Yes, sir. We have one more question from Mr. Mark Hogue, Banc of America.

Yes. Hello.

Just, again, two very brief questions here. Firstly, on risk-weighted assets -- they have been pretty much flat for the year as a whole. I just wonder what the outlook there is, because I guess when you consider the weakness in the U.S. dollar and what we witnessed at other banks, you would have expected that number to come down. That's my first question.

And my second question is -- can you just give us an update on the reserving of your pension liabilities, and also non-life insurance reserving in the U.S. -- if there's any residual liabilities there that you foresee?

On risk-weighted assets -- maybe Dick will add an additional comment. The risk-weighted assets have remained flat because of the level of opportunity, particularly in trading at CSFB -- there's been a very modest drop in the Swiss bank, but in these markets we would anticipate risk-weighted assets to stay in this band. Obviously, when market opportunities present themselves, we could see an increase in the future.

I think, Mark -- this is Dick -- I think the FX impact really happened between the first and second quarter, and that much in the second to third.

That's absolutely correct. There's almost no FX impact in the third quarter.

Reserving in Winterthur, U.S.? Are we on a microphone, here?

I think we've mentioned in the past that long-term liability book that had been built up by the old Winterthur in the mid-1990s was actually sold with an exit subsidiary to Berkshire Hathaway two years ago, and as such, we've got the minimum exposure to asbestos risks in the United States going forward with the core regional companies that own there.

I think there was a question about the reserve for our pension funds. That's not an issue. We remain over-funded, or have gone to defined contribution, so that is not a factor that we're expecting to affect our P & L.

Thank you very much.

Next question? Or, was that the last question?

That's the last question, sir.

OK. Great. I would like to thank you all very much, and we look forward to talking to you again in late February.

Ladies and gentlemen of the teleconference, the conference is over. You may disconnect your telephones.