Credit Suisse Group AG (CS) 2003 Q2 法說會逐字稿

Good morning, this is the Conference Operator. Welcome and thank you for joining the Credit Suisse Group's Q2 Results 2003 Conference Call. As a reminder all participants are in a listen-only mode and this Conference is being recorded. After the Presentation there will be an opportunity to ask questions. At that time anyone in the Teleconference who wants to ask a question should press 'star 1' on their touchtone telephone, if you change you mind and wish to remove yourself from the question queue then you may press 'Star 2'. At this time you'll be joined to the Forum St Peter in Zurich.

Good morning ladies and gentlemen. John Mack and I would like to welcome you, this time under more happier circumstances I presume, than last year, to the Presentation of our Second Quarter and First Half Results here in Zurich. Today we also have here Philip Ryan our Chief Financial Officer who will moderate the session and we have the Chief Financial Officers of the Business Units, Barbara Yastine for Credit Suisse First Boston and Ulrich Korner for Credit Suisse Financial Services.

First I will start with a brief overview of the key trends in our second quarter results, after that John will be talking about our compensation philosophy and changes we make going forward there. Then Philip Ryan will comment on the accounting treatment and [indiscernible] details on our consolidated results. After that, together with Ulrich Korner I will give you an introduction on the Financial Services results and John will do likewise with Barbara Yastine.

So, for the second quarter the Group recorded a net profit of Swiss francs 1.3b that is double the first quarter result. For the first half the net profit amounted to Swiss francs 2b, which is quite an improvement over last year, the year earlier of Swiss francs 201b. The net operating profit, which excludes amortization of goodwill and acquired intangible assets amounted to Swiss francs 1.5b for this quarter and Swiss francs 2.4b for the first half of 2003.

You will also see in the results that for the second quarter the Corporate Center actually had a profit of Swiss francs 122m, but for six months, which probably gives you a better view, it recorded a loss of 131m, which is still below the run-rate of normally Swiss francs 100m in a quarter. But nevertheless I would think that these results demonstrate the measures we have taken during the course of last year and also continue to take in the course of this year, to restore our core earnings to our successful - and you also can see from the results when you go into the details that it is not just cost cutting, it is actually revenue improvement as well.

Now let me say a few words about the key trends here in the second quarter. I think we did make substantial progress in regaining the confidence of the markets and our clients back. It also [indiscernible] down profitability, which evidently [indiscernible] underlying the figures here in our business. The Banking segment of Financial Services improved their results due to a higher operating income, as we've said before and also due to efficiency gains. I think the operating income, as you will see later is in line with international bank [allowances] of 7%-8% range.

Going forward I would - certainly for Financial Services, like to see the continuation of the trend of our cost [indiscernible]. The two Winterthur segments, Life and Non-Life achieved slightly better results, these were mainly due to reduced administration costs, but nevertheless I would think the life business in that kind of market environment still continues to be quite an interesting challenge whilst going forward.

Very pleasing to see are the fee results, which improved across the Board in nearly all departments; certainly most of the profitability is coming from market making [indiscernible]. I have seen often in my lifetime quite some long periods when most of the profitability in Investment Banking actually had come from the [situating] side and you get the period between 65 and 80 that was a case there. I think the next few years probably that will [indiscernible] so, but I'm sure John will tell you his view there.

I think also, not only the results but also the total measures we have taken out of the management of our risk assets in the balance sheet; help to further strengthen the capital base of our Group. I think the bill going forward looks very good there and Philip will give you further details on that later.

We also achieved an improvement in our negative asset flows for all business segments. It is not yet there where I would like to have it and I think it is not yet reflecting the strength of our Group, we still have to work on that, but I am confident that we will see progress and regain the confidence of clients out there. Then the asset flow there will improve the form.

With that I'll hand over to John now.

Thank you Osy. I want to make a couple of comments on compensation, these slides they're putting up are in your packet, but first let's do a quick recap at CSFB on compensation. You'll remember when we started changing the compensation philosophy at First Boston then a large number of people had guarantees. At that time the 65% of the [comp pool] was guaranteed, this year it will be slightly less than 10% and after that basically it will be nil.

Our comp to revenue number in the last two years has dropped from about 55% to 51.5%. Going forward, as I've said many times and I'll continue to say, multi-year guarantees will be off the table, we will not do that.

Also, as we've said in the past, our goal is to enhance the equity culture of our Group and in going this we've been trying to put more equity type of products, some options to stock, other plans in the hands of our employees. Trying to align our employees and shareholder interest. Also we think a good equity plan will attract in retaining people and is also a way for awarding our employees for a great performance.

I think in the past our equity component has not been in line with our street competitors and we're trying to adjust that. So the Group plans to implement a number of compensation changes and here's what we're going to do. First we're going to reduce the number of [indiscernible] in favor of shares and we will issue less options than we did [indiscernible].

Secondly we [indiscernible] for our options across the Company as far as stock [awards] at CSFB. In line with that we will adopt expensing the fair value of our options over the respective 3-year [indiscernible] period. Lastly we will launch an option reduction program that I'd like to explain going forward.

The purpose of the option reduction program is to reduce the number of option awards outstanding, but more important the exchange of awards, of these equity base awards, which we believe will be more effective means of rewarding and also retaining our best people. There are a number of important features to the reduction program first it's a value-to-value basis. The value will be calculated using a Black Scholes model and will be in line with the assumptions we use in the footnote disclosure in our Financial Statements.

Secondly the offer is open to all current employees. For those eligible, options that have stride (ph) price above 60, employees will be able to make a choice between new options or stock. For options of between 30 and 60 they will have the ability to exchange for stock only. The third feature of this option program is that they will be issued at a 10% premium to the market, reinforcing that we need to see further improvement to make these options valuable. Furthermore, we will add a 1-year vesting to these new options.

The offer will be open on August 6, about a month until the closing on September 9. This offer will not have any impact on 2003 P&L.

Now with that let me turn it over to Phil and we can go through the Group results.

Thank you John. Before that I'd like to make a brief comment about the accounting and of the compensation measures that John just mentioned. We will be adopting SFAS 123 so that the Fair Value Future Option Awards will be expensed over the respective 3-year vesting periods starting in 2004. So to make that clear, the next round in compensation options will be awarded in January 2004. They will begin vesting immediately and vest to the 3-year period ending in '06. With every compensation cycle we'll layer on an additional 3-year vesting cycle.

Additionally John mentioned that Credit Suisse First Boston is to adapt a 3-year vesting approach for it's stock awards for future compensation settlements in line with industry practice. A change in the vesting requires a change in the expense recognition. The future stock awards will result in deferred recognition of the related compensation costs over the vesting period. So shares awarded in January of that year will vest over the following 3 years.

In 2003 in the first half CSFB did recognize an expense associated with the share plan, that expense will be reversed in the third quarter and in the second half of this year there'll be a lower accrual associated with this change in vesting. The implementation of this deferral is expected to result in a decrease in the [inaudible] to revenue ratio in the second half of the year by 3%, which gives you some idea of the impact.

As related to Credit Suisse Financial Services and the Corporate Center, they will continue to vest stock awards as grant (ph) and have them blocked for 4 years, which is in line with the Swiss employment practice and is also in line with [indiscernible] treatment in Switzerland.

With that I'd like to go back to the main package and continue on, on slide 5 to discuss operating income.

Operating income overall is up 7% quarter-over-quarter when you exclude other ordinary income and expenses and focus on the main revenue drivers, Banking was up 7% driven by 3 factors. The first is interest income, which was up noticeably on higher volumes in trading (ph) and fixed income and also higher customer business. [indiscernible] were largely flat quarter-over-quarter.

For fees and commissions, brokerage commissions were up noticeably at Credit Suisse First Boston and in Private Banking, while asset management fees were flat quarter-over-quarter with the increased balance in managed accounts, which occurred largely in June, will be seen in the third quarter and beyond.

On the trading side, trading was largely flat quarter-over-quarter with a shift towards foreign exchange equities driven by equity derivatives and convertibles and offsetting lower trading fixed income, with much of that trading result and fixed as I mentioned appears in the interest income line.

Focusing on Insurance, as this is a seasonal business, the quarter-over-year comparison is somewhat hard. However, the biggest impact is an increase in policyholder dividends in the second quarter. The gains in the investment portfolio in the second quarter were concentrated in countries like Germany and the UK where there is a high level of policyholder participation in those gains, as compared to the first quarter, where the gains were most focused in Switzerland, where there's a much lower level of policyholder participation.

Looking at the expenses, in all of our businesses, revenues outstripped expenses, so we had efficiency increases across the Board, in some cases quite dramatic. Overall expenses including depreciation up 2%, personnel expenses were up 5%, however, salary was flat quarter-over-quarter. The increase was solely due to increased incentive compensation accruals following higher operating income, mostly at Credit Suisse First Boston.

In the other expense area, [indiscernible] expenses were down reflecting our cost cutting activities. At CSFB they were up very slightly, reflecting the higher level of activity during the quarter.

In the Insurance side it's worth noting that the expense efforts we talked about in February and again in May have really come through. Operating and administrative expenses at Winterthur quarter-over-quarter were down 13% in Life & Pension and down 6% on the Insurance side.

Before moving on, I'd like to make two additional points, one is to clarify [indiscernible] the point Osy Grubel made earlier and that is, it's worth taking a look at the Corporate Center line. In the first quarter we had a Swiss francs 150m losses associated with write-downs at Swiss Life and Swiss Airlines. In the second quarter we had Swiss Francs 150m of positive derived from a Swiss francs 50m gain from the sale of our Swiss Life stake, and we're now completely out of that position. Around Swiss francs 112m of reversal of no longer required reserves and a Swiss francs 65m gain in our Treasury Stock and share plan hedge position, which under Swiss GAAP runs through the P&L, when we move to US GAAP that will go directly to equity and the volatility from that will be removed. There was a negative Swiss francs 77m write down of the financial investment.

So with those items you had a positive in the Corporate Center in the second half and a negative in the first half. It's important to keep that in mind when looking at the trend. As Osy mentioned, we believe the normalized level at the Corporate Center is around Swiss francs 100m negative per quarter and we expect that to continue.

A quick comment on the tax rate, the tax rate in the second quarter was low, which related to some factors at Winterthur, but also the movement in the Corporate Center as I mentioned, because the Corporate Center has an extremely low tax rate, so the Corporate Center effect resulted in a higher tax rate in the first quarter and a lower tax rate in the second quarter. If you put the full half-year together, the tax rate is 25%, which is very much in line with what we expect the long-term tax rate to be.

Let me move onto slide 7 and make a few comments about Credit. While our reported Turner Party (ph) exposure as you may have seen in our second quarter report is up, lending volumes are essentially flat, with CSFB being very slightly down and CS Banking being slightly up. The Credit picture continues to improve with lower levels of new impaired assets coming into the portfolio, and greater provision releases from loan sales, repayments of various credits, which we believe is confirmation of the sound reserving policy that we've had through this cycle.

As you can see, valuation adjustments, provisions and losses were down from Swiss francs 233m in the first quarter to Swiss francs 131m in the second quarter. If the economy continues to stabilize and improve, we would expect further releases from the portfolio in the second half. The Swiss Domestic Portfolio continues to perform better than we had expected.

On slide 8; looking at the impaired loans, the drop in impaired loans comes again from a much-reduced flow of new problems into the portfolio and a quick pace of resolutions to loan sales and repayments. The valuation allowance to impaired loans moved up to 67%, the valuation allowance to non-performing loans was up to 95%. The historic level of high non-performing loans at the Swiss Bank are now down to about Swiss francs 4.3b and we're nearing the end of that process of resolving those historic credits.

We do see further improvements in credit in the second half of the year, assuming we see [indiscernible] stable economic environment.

The last thing I'd like to comment on is the capital ratios, starting on slide 9. I'd like to discuss some changes to how we want to - or how we will be calculating our BIS capital ratios going forward. We have been working with the EDK the Swiss Federal Banking Commission on a new methodology for including the Group's investment in Winterthur for calculating our consolidated BIS capital. The new methodology is expected to be released in the second half of this year.

The capital charge for Winterthur's investment will no longer be included as a risk weighted asset, as it has been since we brought Winterthur into the Group. Rather we'll be using a deduction methodology from our regulatory capital. The methodology is the risk weighted assets will be the Banking only risk weighted assets, and the in numerator we will deduct from our capital 50% of the adjusted net asset value of Winterthur from BIS tier 1 and we'll deduct the other 50% for the full adjusted net asset value of Winterthur from total capital. As always tier 1 capital includes the full deduction of goodwill, own shares and the minority interest at Winterthur.

We believe this new methodology better reflects the bank/assurance environment; it follows the guidance from Basil 2(ph) and is in line with how the capital structure works and how we finance a bank assurance acquisition. This obviously does not impact the capital ratios for CSFB legal entity or CS legal entity.

What's the result of this? On slide 10 are the formats you've seen from us several times. Our capital ratios are up noticeably because of the strong retained earnings and careful management of our risk weighted assets.

CS tier 1 ratio is about flat quarter-over-quarter, CSFB is up to 11% versus 10.5% in the previous quarter. The next column is the consolidated BIS tier 1 under the current methodology, which was up to 11.1% and 10.3% stripping out the acquired intangibles. Under the new methodology, the next column to the right, the tier 1 capital ratio would be 10.3%, the ratio taking out our acquired intangibles would be 9.5%, which would be up noticeably from 9.3% in the first quarter and 9% taking out the acquired intangibles - no excuse me 8.5% taking out the acquired intangibles.

We're still totally committed to building capital and to improving the quality of our capital over time. With that I'd like to turn it over to Osy and Ulrich for the Financial Services review.

Credit Suisse Financial Services recorded a net profit of Swiss francs 829m, and in the second quarter up Swiss francs 145m from the previous quarter and Swiss francs 1.5b for the first six months. That result is mainly attributable to high operating income, but also substantial efficiency measures throughout Financial Services.

All segments improved results to a 21% [indiscernible] of net profit and goodwill, [indiscernible] and equity of 26% order.

The Banking segment's income increased 8% quarter-on-quarter, mainly due to higher business volumes. Assets under management went up substantially and net due (ph) assets obviously improved.

The [indiscernible] operating income together with the cost base being almost at the low level of the first quarter, led to a further improvement of the combined [indiscernible] cost income ratio.

In the Insurance segments we were able to reduce the administration costs by 12% versus the first quarter and also Life & Pensions announced the introduction of it's new employee benefit model in Switzerland, which is to be implemented as per the 1 January 2004. The new model is more closely aligned with the sound economic environment and developments in terms of life expectancy. There's been a lot of publicity there but as the market leader you cannot point to the kind of publicity that you want in business [indiscernible].

In addition, in Winterthur we announced the sale of Republic Churchill and Winterthur Italy, all of which are expected to [below] in the second half of 2003 and up on completion they will strengthen the capital base of Winterthur quite substantially. These divestitures also mark an important step in repositioning Winterthur's business portfolio and we will disclose further information on the transactions after the expected closings.

Now Ulrich Korner will take you in detail of the [indiscernible].

Thank you Osy. Starting with Private Banking on slide 14, Private Banking reported a segment (ph) profit of Swiss francs 469m, that is up 26% against the previous quarter. Operating income improved 9% quarter-on-quarter, mainly due to an increase in transaction income. The gross margin increased 6bps to a standard 120bps. This increase of the gross margin underpins the strong revenue potential of our Private Banking franchise.

Operating Expenses increased 3% versus the previous quarter as year base salary costs could be reduced in line with the overall headcount development. However, accruals for performance related compensation and charges for the headcount reduction increased.

[indiscernible] income ratio improved for the third quarter in a row to standard 58.6% down 4.6%. Net assets further improved amounting to Swiss francs 3.8b for the second quarter as [indiscernible] management that has fallen down to Swiss francs 4b that is up Swiss francs 37b or 8% versus March and up Swiss francs 20b or 6% versus year-end. The increase was mainly driven by the strong equity performance.

Asia and European Private Banking again achieved clearly above average growth of net new assets.

Corporate and Retail Banking posted a second profit of Swiss francs of 157m, that is up 27% versus Q1, operating income rose here 7% mainly due to realized gains from the recovery portfolio within ordinary income, but also due to higher interest income and higher trading income.

Net interest margin rose to 221bps, operating expenses increased 2%, this is the same cost trends as I mentioned before for Private Banking. As a result the cost income ratio improved to 64.8% and the return on equity rose to 13.3% for Corporate and Retail Banking.

In the first half of 2003 credit related provisions recorded were Swiss francs 44m below the sophistical valuation adjustment and the impaired loans could be further reduced down Swiss francs 560m compared with the last quarter.

Turning to the Insurance segment, starting with Life & Pensions, in the first half of 2003 Life & Pensions reported a segment profit of Swiss francs 228m versus a loss of Swiss francs 412m in the first half 2002. This result was primarily driven by a significant improvement in investment performance and a reduction in the administration costs. The 3% decline in costs (ph) being written was mainly due to Life & Pensions ongoing selective underwriting policy, adjusted for acquisitions, divestitures and accentuate impact premium [indiscernible] decreased 1.4%.

Administration costs decreased 17% to Swiss francs 599m driven as mentioned before by the efficiency measures taken. The expense ratio decreased 0.6% to 8.4% for the half-year.

Investment income increased Swiss francs 1.7b versus the first six months of last year, mainly due to substantially lower impairments and realized losses on equity investments. The half-year investment return amounted to 5%, at the current income of 4%, and realized gains and losses of 1%.

Lastly to the Insurance segment. Insurance reported a segment profit of Swiss francs 194m in the first half, versus a loss of Swiss francs 637m for the first half last year. The strong recovery was mainly driven by a significant improvement in its underwriting result and in investment performance.

[indiscernible] premiums earned increased 4% primarily due to tariff increases across all major markets of insurance, adjusted for acquisitions, divestitures and accentuate impacts net premiums were up 10.2% for the half-year.

Insurance improved, as I said before, its underwriting result by Swiss francs 75m, which resulted in a decrease of the combined ratio by 3.2%. This improvement is mainly due to a decrease in the claims ratio, driven by the improved pricing and the continued streamlining of the portfolio. Administration costs decreased here 8% [indiscernible] reflecting also here the progress in our efficiency initiatives.

Net investment income increased Swiss francs 783m year-on-year, with a return on invested assets of 3.7%. Earned income was 4% and the realized gains and losses were negative 0.3%.

With that I'll give it back to Osy with the outlook for the second half of 2003 for our businesses.

In Credit Suisse Financial Services I believe that the outlook for the rest of the year is reasonably good, I think for the banking industry as such, because as you can see with most of the announcements now that the cost measures which have been taken in the second half of last year and the first half of this year are bearing fruits. So generally I would think that the Banking results of the industry look reasonably all right for the second half.

With us, we are seasonally affected in the third quarter as always by the banking results obviously, because July/August the banking clients are mainly on holiday and our own employees as well. So we should expect probably weaker figures in the third quarter. [indiscernible] certainly will remain exposed to the market movements but generally there I think also looking at the Winterthur as a whole I think we have seen it now for three quarters and we have improved results and we are confident [indiscernible] is confident to bring continue the trend.

We will definitely in Financial Services continue to drive the efficiency improvements. We have seen quite a few studies and I think you heard it here first when I mentioned that we have over-capacity in banking of 125% now and the university has concurred with that and thinks that that judgment is right, so it must be right.

Obviously part of it already has been taken care into market but believe me, there is still over-capacity in the financial industry in Switzerland and [indiscernible].

Several efficiency measures will continue and with that, I will hand over to John.

Looking at First Boston over review, we have had very solid quarter. Net operating profit up almost 50% in Q1 and it is no secret that that was accomplished with a very strong fixed income market, but also you need to go back and look at the last two years on cost reduction.

Let's just give you an example of the impact of cost reduction. On a six-month comparison in our Asian business our revenues were about flat. But our profitability tripled. It really gets to the point of what impact we had by cutting expenses yet keeping in place the ability to generate revenue.

Again it is no secret that this is driven by fixed income but then in the last six weeks of the quarter, equity investment banking picked up. We continued to see an improvement in the diversity of the different products that our clients are asking for. Europe and Asia has been strong for us with some very big mandates awarded there.

Our overall results improved the bottom line operating margin at 18.3% and a return on equity of 18.5%. Also we made a small acquisition in our product client service businesses. We acquired an options management group Ovalaris(ph.) which will our network individuals and also foundations and we think [indiscernible] institutions.

We are very encouraged by what has happened in the second quarter of this year. It has been very much focused on the fixed income business and clearly there is a lot of concern with [indiscernible] selling off, what is going to happen to the business and I think that's anyone's guess. But I would say that there seems to be a growing optimism within, especially the United States, historically low rates, tax cuts and just a general feeling of corporate American being so defensive for the last year and a half, we are seeing Boards now being much more interactive in the discussion on acquisitions and on different strategies and also getting our balance sheets back in shape.

So you can never predict the future, but I am optimistic going forward. With that I will get Barbara to take you through the financials.

For Credit Suisse First Boston overall, as you know we sold Pershing to the Bank of New York on May 1 and Pershing contributed $15m to operating income in Q1. Excluding Pershing, operating income was up 10% versus Q1 and operating expenses were up 7%, as Phil alluded to earlier, driven by performance related incentive compensation accruals [indiscernible].

While most of the dramatic reductions in headcount and expenses are behind us, we continue to work on strategic reductions, which came through in the quarter in another 500 reduction in headcount, Q2 versus Q1.

The personnel expense to operating income was 51.7%, which is flat with the Q1 level, but again we had very strong revenue production in Q2 so the aggregate accrual was somewhat higher.

Provisions declined to $49m in Q2 yet again. A couple of things going on there. We are naturally moving away from the peak provisioning we saw last year at what looks to be the worst of the credit cycle. So we are now coming off that peak.

The second thing is we have invested a substantial amount in more robust portfolio management and lost litigation strategies, which we are also saying. While there is no guarantees that provisioning will stay at this particular level, what I can tell you is that when we look at the portfolio today and look ahead six months, we don't see any reason to expect a dramatic increase in these kind of numbers.

We have non-performing loans which came down to $1.7b at the end of the second quarter from $2.2b at the end of March and likewise the total of repaired loans was lower. So all indications are that we are headed in the right direction.

For the Institutional Securities segment, trends in revenue, expenses and provisions are all consistent with the overall trends for Credit Suisse First Boston. I would point out the value at risk numbers that appear on this slide do show an increase from the first quarter and likewise from year-end.

Number one, as we said at the time, our year-end value at risk measure was particularly low since we just did not see adequate risk return opportunities in the market place. That has improved as we have gone through the year. The second thing that is happening here has to do with mortgages, which are a pretty big and profitable part of our business. But where the dramatic decrease in short term rates that we have seen throughout the first half of the year has resulted in some interesting modeling aspects on pre-payment fees in mortgages and so we have actually gone back and looked at our models and as a matter of fact we think that our models too conservative in how they were dealing with pre-payment fees.

But as a general matter we feel very comfortable that approximately this level of value at risk is comfortable for us. It is a pretty good indicator of how we would expect to play in the current market and we are really comfortable at that level.

Did you want to get into more detail?

Just a little bit more detail on the institutional businesses. Again we have had gains across the board in our businesses, a few highlights.

Our leverage finances have retained its number one position. Going through the first half of the year we have lead over 70 issues with the dollar value close to $12b. A very strong quarter for commercial mortgage activity, where we were right number one. Also we managed a larger CNDS transaction since 1999.

Merging markets and hard currencies popped in and we did well there and also with credit derivatives.

The equity performance is the best since Q2 of 2002. Operating income was up 24% versus the prior quarter, but the cash equity business is still a very difficult business. I mean it has really been the convert business and the derivatives business that has enabled our Equity division to perform the way it has.

We have also had good performance in our Priam (ph.) brokerage business, which you know is an area we want to grow and build.

If you go to Investment Banking Q1 markedly reflects a higher equity is high yield new issue issuance and to a lesser degree Private Equity gains have increased somewhat as we restructure that activity also.

Excluding [indiscernible] our Financial Services operating income was up 3% compared with Q1 2003. Expenses were up 5% over the same period, but if you took out our expenses for severance then our expenses would only be up 1%.

[Asset] management increased from $342b to $364b. In Q2 most of that is due to market appreciation and favorable currency movement, but also we saw some good moves where we have always said if the investment bank can cross sell, we believe we can bring more assets that are managed in the CSAM and we are beginning to see that with four large corporations putting money into our asset management business.

It has been in the Press that Jeff Teague who was running our Financial Services business at First Boston has resigned to become the President of CIT. He had already brought in a gentleman called Mike Kineely (ph.) who was CofA to run that business so that is in place now. Mike is reporting to me and we think the transition will be very smooth.

I mentioned earlier a little bit about the outlook. From our perspective on the first six months of this year we feel good about it. We think we have made a lot of progress, but we think there is a lot more work to do. But the real question is what is the future? As I said just a few minutes ago, I am optimistic about the rest of the year.

I mean there can always be some sudden surprise that we don't anticipate and I think the general mood has improved.

Just to touch on what Osy said about over-capacity. There is still no question that there is still over-capacity in this business and I think from a strategic point of view, as you talk to competitors and you see CEOs of other financial services businesses which do not compete directly with us, you get a sense that people are beginning to think about the future and is there an opportunity to do some consolidation or acquisition.

With that I want to turn it over to Phil and we will do the q and a.

Thank you John. As we have done in the past we will take questions from the audience here in Zurich first and after we have done some of those we will switch it over to the 'phone system and the operator system.

As a reminder, those people who are on the telephone should press '*' and '1' to register for a question. '*' and '1'.

Heinreich Weimer from Bank Oppenheim.

On the new Winterthur capital model for your Tier 1 calculation, have you discussed with the [indiscernible] of the alternative idea of not deducting the net asset value but the required equity of Winterthur? Because as I understand it your current model would imply that if you sell for example, Churchill at a gain it will increase your net asset value and therefore deduct more from your banking equity although the risk of Winterthur has been decreased by the divestment.

The second question about this model, had you also discussed also with the [indiscernible] the advantages and disadvantages of allocating more than 50%, for example two-thirds or three-quarters as a large charge to Tier 1 and only as a minority fraction, not a full half to Tier 2 capital?

That is a very good point Heinreich and we discussed this at great length. We analyzed what was being done around the world, what the UK environment has done and what's done in the US and I am not sure that there is any perfect solution.

We did discuss those elements and really felt that amongst all the different things is what we have come to here is the best compromise which fits the balance of bringing Winterthur into the total picture, but still providing the regulators with a view of the Group as a bank. So it was a compromise and we think it is a pretty good compromise.

But it is true for example that the sale of Churchill at a gain will reduce your Tier 1 under your current model, because it increases net asset value?

No, it is the other way around. The net asset value will go up and 50% of that increase will increase the Group's capital. So the sale of Churchill [indiscernible] will result in an increase, it would be more of an increase under the old method, but it is still an increase.

The total capital goes and then 50% of that is deducted, so you get a 50% pick up of the gain coming out of those divestitures.

Thank you.

I have three questions, if I may.

First of all is concerning the new assets and so the overall trend was broken and you could increase new assets except for CSFB Financial Services? Could you maybe explain a little bit why new assets were still reduced by $3.5b?

Then the second is an understanding question relating to provisioning. If I read you all correctly, you are telling us that for the second half of 2003, you are estimating the provisioning needed to be lower. Now my question is, is that lower than in the first half or lower to what you would normally expect?

Maybe the third point, you said that the consolidation of Churchill and Italian insurance operations will take part in the second half. Have you got a slightly better estimate so as for me to know when to book this gain in the third or in the fourth quarter that comes from the sale of those three operations?

On new assets I am not sure I understand, I guess the $3.5b number is the first quarter and then in the second quarter we had a net due asset gain of $2.3b.

Do you want me to take that part of it, Phil?

You really need to break Financial Services into two pieces. One is Credit Suisse Asset Management and the other one is the Private Clients Services division.

For CSAM the net outflow was $1.3b, which for us is actually pretty encouraging if you look at the trend of how it has been running between $3b and $4b for the last four to five quarters. We have always known that it was going to be a tough long trend to make that number positive again because of some performance issues that we talked about last year. It takes a while for that to work through the cycle.

You are going to lose some mandates and what you need to do is to be picking up some more mandates. As John mentioned, we have started to see an increase in the number of new mandates, which makes us believe we are getting pretty close to the end of the outflow at CSAM.

In the Private Clients business we did have the first outflow of assets that we have had in a while and it was specifically related to a number of financial advisers who had left the firm, as the client continues to look at the adviser base and frankly to make sure we have the most productive advisers that we possibly can. In that a few people left and took some of their assets with them. I don't particularly have a view about whether that continues. We don't think so. But we will have to see.

On the [credit] provision side I think we feel good about the movements in credit as you heard myself and Barbara mention. I think that the balance of the year, we will see, we are not making predictions. But I think the second quarter is representative given what we see in the economy and assuming that the economic activity has bottomed out.

As related to Churchill and the Italian divestiture, we are still looking at a gain of over Swiss francs 1b and we expect both those to close in the third quarter.

It is [indiscernible] from UBS. I have three questions.

First, what are your expectations with respect to the current investment income at Winterthur going forward?

Secondly, could you comment please on the contribution of those businesses in Winterthur to be disposed or whether disposal closes in Q3 and Q4 to the first half results?

Thirdly, with respect to fixed income, what are your expectations for the second half revenues, given the steep increase in the long-term rates and the fall-off in issuance volume? Thank you.

Do you want to answer the first question about the divestment income and then --?

Probably in the second quarter is slightly higher current incomes there. On the life side it was 5% and let's put it that way I wouldn't bet that going forward we can maintain that, but I think on the non-life side we had an income of 3.7% or so, around the 4% level is our target and that probably reflects the current market much better.

John can you cover the [indiscernible] business.

The second question is the business that we are disposing in Italy and Churchill. Both performed well in the first half, but they are one of a number of businesses, which are performing well for us on a [indiscernible] side and particularly in the first half. We will also book to the degree that we own these businesses in the third quarter a third quarter profit from these businesses. At the point of completion we will then take those businesses out of our accounts, so going forward we do not expect them to be in the fourth quarter and clearly not in 2004 numbers.

On your question on fixed income it is anyone's guess what is going to happen in the next two quarters. Any time you have a sell-off or you have seen the [indiscernible] Treasury move down close to 150 basis points in a very short period of time, you are going to incur losses. We feel like we have come through that in good fashion even though we are not chalking up a gain that we were previously, we are still doing pretty well in that business.

If we stay at this level going forward, clearly the Fixed Income businesses not only at CSFB but across the entire industry are going to be impaired somewhat and that gets back to the comments I said earlier, we are really looking for a pick up in our Equity business and hopefully in our MNA (ph.) business. So there is no question that a quick sell-off has been painful for the street, but if you go back and look at previous years and Lenny Fischer and I were talking about before this meeting, the risk controlled and management focus on risk today, is much different. If you go back to 1998, if you remember the fall in 1998 when long-term capital got into trouble, how much money was lost on the Fixed Income business because of the contagion in emerging markets and how it spread in other Fixed Income products.

So we have had a huge sell-off. I have not heard of any horrendous losses anywhere on the street. But that doesn't answer the question going forward and I do not anticipate the Fixed Income business for the industry, will have the same positive revenue flow that it has had in the last six months, or really in the last two and a half years.

Next question?

Chris Richards (ph.) from [indiscernible]. Two questions.

You will switch to at the beginning of 2004 and if you look at [indiscernible] figures we see quite a big gap for the last three years. Could you give some indication on what we can expect in the future on the US GAAP and the second question is on the option plan or the option program. Could you tell a little bit about the effects on dilution, the future dilution that we will observe and also on the [indiscernible] side in the future? You sold off that in effect now a few weeks back. A certain relief on costs but I think for future costs it will be higher as well as for the dilution, is that right?

On the Swiss GAAP question, our primary standard is Swiss GAAP and that's how the business is run and we will go through an education program in the first quarter of next year to bridge the gap. We are calculating the US GAAP results on a quarterly basis to make sure that all our people understand what the new rules will be and how to operate the business. We expect reasonable continuity in the results. We don't expect to get from a profit really this year to some huge loss. We expect continuity in that process.

It's been quite a big challenge and quite a big job. The key part is to get everybody ready to operate under the new rules. There are a handful of areas where they're impacted but big parts of the business are not. So I think - we'll give you the pieces you need to know, as we get closer to the conversion time.

As related to options, we have not decided how many options we are going to issue this year or in the future. As John mentioned, we know it's going to be very substantially less than the amount we did last year, but as we firm up these thoughts we will share them. But, as I mentioned before, and it's consistent with virtually our whole peer group, the expensing will come in over a period of time, so it will be a gradual increase, it will not be a dramatic year-over-year kind of change.

With that I'd like to open up to the telephone lines and operator can you pass through the questions that you have?

Yes sir. Our first question is from Jeremy Sigge of Citigroup. Please go ahead sir.

Thanks very much. I'm from Citigroup. Two questions if I may? First of all, sort of zooming in on one area, Private Banking, I just wondered if you could add a bit more light on what drove the improvement in the margin there back up to 120bps in the second quarter? Whether there is any sort of product developments or anything related to that.

Second question - you talked a bit about the normalized level on several items and you've given an indication on the bad debt charge of maybe sort of Swiss francs 700m for the full-year effectively is what you're saying, which is very low relative to your historic norms. I just wondered if you could give us a view on what is a normalized provision [indiscernible] going forward?

[Versus segment in March] in Private Banking it was up 6bps, that is being driven by the transaction driven margin, which increased to the more favorable equity markets. You'll find also a slight appendix to that, there you'll see also that the asset driven margin decreased slightly, but the overall increase is clearly due to the transaction driven margin increase.

Jeremy, on the Credit provisioning we are not going to give guidance for the year. What we've tried to convey is that we're pleased with the results of our provisioning methodologies; it has resulted in lower provision in the second quarter. A lot of it will depend upon the economy, but we generally feel good about our credit position and our provisioning levels. But we're not going to make predictions for the year.

I wasn't really asking for the year actually, I was just sort of observing that you're accruing towards a level considerably below Swiss francs 1b for the year. Whereas you've never done below Swiss francs 1b since 1990 or earlier, so I just wondered, looking out a couple of years - you talked about normalized in other areas, I just wondered if you had a view on normalized in this area?

We're not going to make a prediction on that.

Okay, thanks.

The next question?

We have a question from David Williams of Morgan Stanley. Please go ahead sir.

Hello, two questions, one could you comment whether there will be any impact on your equity base from SFAS 150? Deutsche Bank, obviously earlier in the week suggested that they were going to take a 3b hit against the outlook of the use of forward contracts against their share options and retention program. I wonder if you could just comment on whether you expect any impact to your equity base?

My second question, the discount on the net interest margin in the Swiss business, it seems to have improved quarter-on-quarter, and yet the prevailing interest rate environment would suggest a more difficult time. So if you could just shed some light on how you are able to see an improvement there please?

David on the first question, our practice has been that we operate a physical hedge in a very cash efficient structure, so we do not have the issues that Deutsche had with SFAS 150. It is not an issue for us.

With respect to the interest margin especially in Corporate and Retail Banking here we had a reduction of interest rates of savings and current accounts, which basically positively affected the interest margins for Corporate and Retail Banking.

Thank you.

Next question?

We have a question from Vasco Moreno (ph), Fox Pitt Kelton (ph).

Yes good morning. Just a few questions, first of all on Winterthur. The benefits and claims ratio deteriorated slightly if you look at it quarter-on-quarter and even year-on-year. Can you give me some ideas as to why that was and more importantly what do you expect going forward?

Also on Winterthur, one of the things people have been talking about related to insurance companies obviously recently is the impact of higher long-term rates. Could you give us some idea as to what you expect the impact of that to be both operationally as well as from a capital perspective?

Then the other questions are related to, one to capital. Tier 1, you mentioned basically that you're still looking for capital to increase from these levels, primarily your retained earnings. Before we used to talk about capital increases of about 20%-25% maybe from the previous levels of Q1. Can you give us a new expectation of capital increases given what you have seen from the Swiss Banking Regulator?

Then lastly on CSFB, I do agree with you that clearly M&A and equities recovery is going to be absolutely crucial for your business going forward given the weakness potentially in fixed income. Can you give us an idea as to what the pipeline looks like at this stage in both those two business? Lastly also [indiscernible] CSFB litigation update, if you can give us your opinion on that that would be great. Thank you.

Oswald the interest rate question?

Okay, it's a popular question, and what do you do with the investment portfolio when the market is going against you. What we did - part of the fixed interest portfolio, we put [indiscernible] amortization and you cannot do that with the whole book. As I've told you before our Life portfolio is roughly Swiss francs 100b and consequently you also cannot sell, let's say Swiss francs 50b of that in the market and then hope to buy it back after the market has dropped and those of you who are in fixed income trading know that that is impossible. Consequently what you will have is that when bond weights (ph) go up so the accumulated profits on the bond portfolio are relishing (ph) and that is what is happening now. You will - that has an impact on the capital of an insurance company and everybody knows that but there's nothing you can do about it. Generally for the Life business obviously [indiscernible] for higher interest rates and hope they go even higher, because as high as they are going is more profit we will make in the future, very clearly.

Japan is a perfect example of what happens when rates are going down for life companies.

With respect to the cancellation (ph) development, you'll see if you compare half and half year that this decreased by 3.3% reflecting basically as I said the improved pricing. Mainly if you compared Q2 versus Q1 you'll see the slight deterioration, which you mentioned, that is due to the fact that we reinforced the reserves in the UK by £20m and that is why you can see this movement quarter-on-quarter.

As relates to your question on capital - under the new definition we want to continue to be one of the best capitalized companies in our peer group, but as almost everybody in this group has pointed out in one form or another, the quality of our capital is not quite as good as it should be. One of the focuses will be on continuing to build capital to offset the acquired intangibles and some of the other weak spots in our capital fixture. So we will continue to focus on that goal as being one of the best-capitalized and highest quality capitalized companies in our peer group.

As far as the pipeline in M&A and equity, clearly it's larger than we've seen for a while but you know in the M&A where we have been given a couple of very large mandates, execution of actually closing those are still question marks. So I would say in general the pick-up in M&A and equity, making the assumption that fixed income stays around the level it is today is not enough to make up for the short fall in the fixed income businesses. That can change very quickly, and going back to my earlier comments about optimism in the market and the way CEOs are feeling, I believe that it will equalize out and you will see the pipeline all set to fall off in the fixed income businesses.

On litigation there's really not a lot to add. I don't see anything new or significant. I can look at David here - [indiscernible] changed since the last time we reported, so there's no more information I can give you on litigation.

We remain very comfortable with the Swiss francs 450m reserve we have.

Okay, thank you very much.

Next question?

We have a question from Mark Hoggie (ph), Lehman Brothers. Please go ahead sir.

Thank you very much. Just two quick questions, one is just to refresh our memory regarding your US dollar hedging policy. Then the second question is just to go back to banking sector consolidation, because I noticed it was mentioned on several occasions during the Presentation. I just wondered if you could expand on that a bit?

Yes, our hedging policy is each of the operating units matches their own revenues and expenses, but as it relates to the consolidation impact - the non-economic impact of consolidated Group's financials we have a practice of not hedging that consolidation impact on the earnings or the capital.

So on banking consolidation I don't think there's a lot more to comment on. I just believe that after two and a half years of difficult times the issue of corporate governance surveys ask the Board to kind of pull back, I think they're saying that now's the time to look at strategic transactions. There is a capacity, what's the right way to take this capacity out and also is this the right time to shore up weaknesses in someone's footprint. Other than that it's just a intuitive, if you go around and talk to enough people you begin to get a sense, in the financial service industry, people now are looking to see what's the next transaction to do. Even though it was very small, you saw I think it was last week or two week's ago, JP Morgan buy the trust business from I think Bank One. I think there are a lot of conversations taking place in the industry about consolidating financial service areas and it's kind of a broad topic.

Thank you.

Next question?

We have a question from Fiona Swaffield at Execution. Please go ahead ma'am.

Thanks; I've got three questions. The first is, can we come we back to the valuation reserves at Winterthur. You mentioned that rising bond deals aren't good for the capital. You've got a Swiss francs 1.7b I think unrealized valuation reserves, what would it be today - I think some of your US assurance companies are giving those numbers.

The second issue is on Private Banking margins. You mentioned that the fee-based margin has come down. Is that just a timing issue due to the fact that you've got a month time lag? Would you adjust that and say that the asset-based margins are pretty stable underlying?

The third issue is on credit to fault swaps. I understand, I think, that you don't put that through the P&L under Swiss GAAP. Would you have unrealized losses, because you mentioned risk mitigation? Thanks.

As related to the unrealized gains at Winterthur, [indiscernible] interest rate rise in July has basically wiped out the bond gains from the second quarter, that's about Swiss francs 800m.

In our Private Banking margins?

Private Banking margins, you concluded that right, the asset driven margin decreased and that is exactly the effect from the time lag in charge of the commissions on assets, because we have seen as you know the strong asset performance in June and this will only be fully reflected in July commission, so I guess you should take that into account, that certainly is a stable position.

You're correct that under Swiss GAAP the impact of changes in market valuations of credit to fault swaps do not run through our P&L. For 2003 in isolation, the changes, if they were to run through the P&L would be negative. However, the prior period numbers was much more positive, so net net, we would still have a positive mark on our credit to fault swaps if they were mark to market today.

Would that be a big number? Are we talking like minus to 100m or is it?

Well it depends which number you're asking?

For the first half, because everybody else is putting it in their P&L. I just - for this year?

Actually our number for this year is smaller than that.

Okay, thank you.

Next question.

We have a question from Adrian Dilche (ph), Maine First Bank. Please go ahead sir.

Yes, hello hi. I just have two questions please, going back one on the risk provisioning. The thing I noticed really in Q2 is one aspect of having lower risk provisioning itself, say in First Boston, whether the aspect of straight relief is seen either through the Corporate Center?

I believe also in the Retail Corporate Banking in the Swiss business, I think [indiscernible] mentioned in the Press Release as the realized gains from recovery portfolio. Just on the aspect of releases, or some form of write backs, what's your view for the second half on that aspect please?

My second question really is on again fixed income versus equity, [indiscernible] First Boston, institution securities. What I'd like to know more is not just whether fixed income has peaked, maybe and what the alternative revenue sources are, but more how you're gearing your resources within the equities department. Whether straight cash business, non-cash business, whether you view yourself more and more as a primary issuance or a donation house? Do you feel that you're changing as a structure in non-fixed income business somewhat? Thank you.

As related to the release of risk provisions, and the accounting rules are pretty clear on this and we follow the discipline that is required. I don't think we want to make a prediction about the second half. I did say earlier that we could see additional releases in the credit book as long as the environment continues like it is at the moment.

On First Boston we started in the first quarter of this year, if you remember we had a fair amount of reduction structurally in our equity business, mainly on the cash product. You may recall, I think we let go close to 200 people. We have beefed up resources in our derivatives and our convertible business and now on the converge side, especially in Europe, we're using some of our fixed income sales force to work with equity converts in moving that product. Then you've got to go back and look at your [indiscernible] overall structure of the equity business. Given what's happened in research, research has been cut fairly dramatically in our shops, because for a number of reasons, but the main reason is with the new guidelines from the SEC it's clearly that research really needs to stand on its impact that it has with the buy side, not with corporations. As a result we've taken that down dramatically, which all at the end of the day will pass through the bottom line of the equity position.

That's great. Thank you.

Any further questions?

[indiscernible] overall structure of the equity business. Given what's happened in research, research has been cut fairly dramatically in our shops, because for a number of reasons, but the main reason is with the new guidelines from the SEC it's clearly that research really needs to stand on its impact that it has with the buy side, not with corporations. As a result we've taken that down dramatically, which all at the end of the day will pass through the bottom line of the equity position.

That's great. Thank you.

Any further questions?

Yes sir. We have a question from Mr Derek Chambers at HSBC. Please go ahead sir.

Good morning. Can I ask a question about the non-personnel costs, particularly in the Swiss Private Banking and Retail Banking area? Last year there was quite a big increase between the first quarter and second quarter in both costs and in the first quarter of this year Mr Korner I think said that the first quarter costs in those areas were running about Swiss francs 50m below the normal level, but actually you've seen stable or even slightly declining costs in the second quarter. Could you comment on what will happen there? Is it recurring effects or is there something non-recurring that has kept your costs down in the Swiss Banking area?

As you mentioned, we have seen a decrease between Q2 and Q1. I would say that if you look at the overall operating expense line, this line we expect to be the reflection of the run-rate for the last two quarters. It means that we can see shifts between personnel expenses and other operating expenses, but overall that should reflect a fair run-rate for the rest of the year.

Okay, next question.

We have a question from Ronet Gush, from Citigroup. Please go ahead sir.

Hi, just a further follow-up on the Private Banking side. You've given us guidance that you've seen strong [indiscernible] again in Europe and in Asia. Can you just give us further color on there, I mean to what extent is that the onshore business and how much of it is still your offshore business? Is it primarily the onshore business that's growing there?

Also in terms of - just to follow-up on the last question, in terms of future costs in Private Banking. In the past we've had guidance from Alex Vitner (ph) that we should expect basically costs declining quarter-on-quarter there. Is that guidance still intact assuming a revenue seasonal slow down in the third quarter?

I think generally in Private Banking you have seen the [indiscernible] within the cost income ratio and I think personally it's still too high and I'm sure Alex Vitner can see it as well that we have to [indiscernible] cost income ratio getting nearer to 50 there. The reason why it moved up there we explained last time was the expansion in the onshore market. There we have costs at a much better level than we had before but we are still not [indiscernible] profitable in some of these areas.

On the quality of asset growth, or the kind of asset growth you have the onshore markets, obviously it is onshore money and in the European countries, I expect that trend to continue because of what you have heard, and the political movement in the UN (ph). So I presume that going forward asset growth will be stronger onshore, in Europe certainly.

In Asia it is mainly offshore money. Asia is a very big place and our [indiscernible] Hong Kong and Singapore say attract money from maybe everywhere.

Okay.

Next question?

We have a question from David Steerer, from Morgan Stanley. Please go ahead sir.

Yes a question related to the contribution of the mortgage business to your fixed income. Can you give us a rough idea, as you mention the increase the increase [indiscernible] mainly driven by the opportunity in this market? By how much did it contribute to the end of the second quarter and the first half as a percentage of total revenue?

We're not going to give detailed breakdowns. If you had a more general question we could assess that.

Well then, rephrasing the question. The increase in value [indiscernible] was about Swiss francs 20m in marginal productivity of total revenue divided by [indiscernible] was about 16 times. You know, I have a feeling the business could be Swiss francs 200m-300m, are we ball parking the right frame or are we completely off the chart?

No we're not going to respond to that.

Okay.

The next question?

We have a follow-up and a final question from Mr Mark Hoggie of Lehman Brothers. Please go ahead.

Just going back to your tax rate guidance - I think you said 25% going forward. Is that pretty much a clean number or does that take into account tax loss carried forward?

Well 25% is a mixture of a number of factors relating to where we're making our income and which tax jurisdiction, what's the ability of that tax jurisdiction to use up its deferred tax assets etc. So it's a fairly involved patchwork quilt, so it's hard to make any one detailed observation. But the 25% is what we feel the mixture should come out with given what's on our balance sheet and where we make our money. The key drivers are the insurance business, which has a relatively higher tax rate. CSFB's tax rate very much depends upon where the money is being made, but it's more like in the 27%-28% area. Then the Swiss businesses operate at a much lower tax rate. So it's a mixture of a number of factors. I don't know if that's helpful but.

Is there any risk of it popping up in future years, or do you think it will remain at 25% for the foreseeable future?

I think 25% is a stable blended rate for certainly our planning horizon.

Thank you.

With that I'd like to thank everybody for coming and thanks for your participation and we'll talk to you all on November 4 for the Q3 announcement.

Ladies and gentlemen the Conference is now over; you may disconnect your telephones. Thank you for calling.