Credit Suisse Group AG (CS) 2003 Q3 法說會逐字稿

Good afternoon. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group third quarter results 2003 conference call. As a reminder all participants are in a listen only mode and the conference is being recorded. Should anyone need assistance during the call they may signal an operator by pressing star and 0 on their phone. At this time I'd like to turn the conference over to Mr. Philip K. Ryan, Chief Financial Officer of Credit Suisse Group, accompanied by Mr. Ulrich Korner, Chief Financial Officer of Credit Suisse Financial Services, and Ms. Barbara Yastine, Chief Financial Officer of Credit Suisse First Boston. Please go ahead, Mr. Ryan.

Thank you, and good morning to everybody. Good morning to those in New York and good afternoon to everybody in Europe. Also joining me in zurich is John Dacey, the Chief Financial Officer for Winterthur Insurance, who will take part in the question-and-answer session. The format we'll follow is the same as we've done in previous such calls. We'll go through a presentation on the group on CSFS, Barbara will come in from new York for CSFB, then we'll take questions and answers from all four of us when that's over. The presentation is distributed on the web, and I'd like to start the discussion on slide 2.

The results for the third quarter were $1.8 billion for Credit Suisse Financial Services which includes the gains from the divestiture of Winterthur Italy and Churchill, Credit Suisse First Boston had a result of 308 million francs, producing a net profit of 2 billion 45 for the quarter. Adding back the amortization of goodwill and acquired intangibles the net operating profit is 2.25 billion for the nine months the net profit is 4 billion, net profit profit of 4.6, earnings per share of 166 and a return on equity including the gains of 26.3%.

Going to the next slide 3, some of the key trends for the third quarter further progress in achieving our efforts to produce sound profitability for the group, secondly the divestitures and provision at winterthur significantly strengthened the capital base and the balance sheet of winterthur. The after-tax gain from the sale is approximately 1.6 billion gross, when netting against that related provision associated with the business's sold the more realistic way to look at the gain is 1.3 billion. And additionally there were provisions of 183 million after tax taken against the international business portfolio that relates to certain events in the third quarter associated with our strategy of winding down these businesses. There is a chart in this package on slide 32 which details how these numbers are calculated. The private banking had great results in this quarter, which are better than seasonally expected and were helped by strong net new asset growth. Corporate and retail banking benefited from efficiency improvements in stable revenue and both insurance businesses benefited from strong investment income, increases in tariff, and good progress on administrative costs. CSFB's performance was dampened by lower fixed income revenue, which resulted from a conscious decision to lower risk in the face of volatility, particularly in the U.S. Interest rate environment. We decided on purpose to take a more conservative position in this market given our history and the market environment and it's fair to say we don't think we are where we need to be relative to our competitors in taking trading risks and Barbara will talk more about that later. Additionally, for CSFB the business unit demonstrated the flexibility of its cost base to bring costs down in line with operating income and also experienced -- or continued to experience very low credit charges during the quarter.

Moving ahead to slide 5, focusing on the group's consolidated reports, net interest income up 8%. This was a mixture of the banking units up 4% and CSFB up 13%, and as I'll come to again later, what we call trading income at CSFB is a mixture of net interest income on this top line and trading income three lines down. So the net interest income portion at CSFB was up quarter over quarter. Commissions and fees was a very strong showing up 9%. We had strong client-driven brokerage fee income both at private banking and at CSFB, most notably a pickup in cash equity trading at CSFB and good solid client activity across the private bank. We also saw growth in asset under management fees which were up about 5% and both m&a and equity capital market fees increased notably quarter over quarter. A trading again in the way we report it represents solely the buying and selling of securities and the price differential that's generated out of that. So looking at isolating this component of the trading picture, was down dramatically, mostly at CSFB. Private banking's trading was up slightly. Lastly, the insurance income, which is best looked at on a nine-month to nine-month comparison was a dramatic improvement driven by higher investment income and better claims experience.

And with that let me go on to the next slide detailing the expense side of the picture. Expense -- operating expenses overall for the quarter down 13% in line with the drop in operating income. If you look at the nine-month comparison, expense down 21% while operating income was down 2%, driving a very significant increase -- or improvement in the cost-income ratio. Overall personnel expenses down 18% I think all of the business units in their local currency had a decline in their salary base of 2 to 4% quarter over quarter. The big driver, however, was the drop in bonus accrual at CSFB which included the change in vesting provisions in the share plan which Barbara will get into in a little more detail in her presentation. The result of all this, if you look at it on a bank issurance basis, the cost income ratio is up very slightly. However, when you take away the insurance business and look solely at the banking business the cost income ratio is down noticeably from 73% in the second quarter to 70% in the third quarter.

It's worth spending a moment on the tax line. The tax rate was unusually low in the third quarter, owning to several factors. By far the biggest factor was much of the gain associated with the Winterthur divestitures occurred in non-taxed environments which skewed the rate. There was also a resolution of various tax matters at CSFB, a tax rate change in the Swiss insurance market, which resulted in some adjustments in our timing difference and lastly a reevaluation difference in our deferred tax assets, particularly in one of our insurance businesses. Putting all that together we still believe the natural tax rate for our Group is 25%, and the fourth factor as I mentioned were the primary difference between 13 and 25%.

Switching to the credit picture on slide 7, we continue to see improvements across the board in credit. We also took some steps to improve the credit disclosure in this quarter. You will see on pages 10 and 11 of our quarterly report we put in a roll forward of provisioning to fill some of the gaps in the understanding of our credit picture that many of you have made us aware of. Overall gross counter-party exposure is down in line with the lower risk level at CSFB. At Credit Suisse provisioning in the third quarter was up although if you look at the -month basis actual losses are still below the statistical loss model that CS banking uses. At CSFB losses were actually flat quarter over quarter, but there was an increase in releases to result in a very low charge to the P & L for the third quarter. We continue to see very low credit charges, at least for the balance of this year. You also notice a step up in non credit costs which relates to some charges associated with various real estate items and increase in legal expenses resulting from various activities in our portfolio of legal litigation.

On slide 8, impaired loans continues to come down, benefiting from both lower nonperforming loans at CSFS and CSFB's progress in repayments. Loan sales, write-office, generally reflecting the improving credit environment. You can also see an improvement in our coverage of impaired loans up to 68%.

On slide 9, the capital picture, capital continues to rise. That's largely a result of lower risk weighted assets at CSFB reflecting the lower risk going into the end of the quarter, offset somewhat by higher risk-weighted asset at Credit Suisse who continue to increase their volumes particularly in the mortgage area. Also a factor was the increase in tier 1 capital coming from the strong earnings for the last several quarters. We would expect risk-weighted assets to rise somewhat in the balance of the year, and I'd like to also point out that the divestitures that Winterthur recognized in the third quarter by themselves, looking at it on a pro forma isolated basis, added about $3.5 billion of solvency capital to the overall capital picture.

I'd like to spend these last three slides covering a few technical accounting issues that will affect our fourth quarter and our year end U.S. GAAP statements which we thought it was appropriate to make our investors aware of. The first on slide 10 are changes to Swiss banking GAAP. These changes are effective on January 1 and are implemented prospectively, which means there's no restatement. We have elected to implement these changes in the fourth quarter of this year so you will see in our fourth quarter results some adjustments associated with these changes. The impact of these changes is largely at CSFB. The first of these changes that's material is in accounting for owned shares. Under the change, income related to our treasury shares are recorded directly into equity, and treasury shares and share awards related liabilities are reported directly into equity. This is a change from Swiss GAAP where they were reported through the P & L. This change is very much in line with U.S. GAAP and is a step in the right direction for where we need to go next year. The impact of the accounting for owned shares will be a decrease in earnings as seen in the nine months ended September of $120 million negative. This is essentially the reversal of the gain on treasury shares taken in the first three-quarters of the year. Additionally, there will be a decrease in our reported equity of 600 million associated with the change. It's very important to point out, however that, for BIS calculation, for our regulatory capital calculation, we are allowed to continue to offset these treasury positions against a liability to deliver shares, unvested shares to our employees. So this change will have no impact on our BIS capital, but as I said will result in a decrease in our stated equity. The second change is Swiss banking GAAP, generally moving in line with FAS 133, accounting for derivatives, which no longer allows us to do strategic hedging. The change in this rule will result largely again at CSFB in a result which for the first nine months would have been a negative of $180 million offset by cumulative change in accounting principle of positive $190 million that will show up in the fourth quarter. So the net effect of these two in the nine months year to date is approximately negative 100 and we'll see what comes through in the fourth quarter of this year.

Now, the next two slides comes from another change that will be coming through in our year-end statements. However, only under U.S. GAAP so we need to change our thought process for these next two pages to U.S. GAAP, not Swiss GAAP. Under U.S. GAAP, the sale of Winterthur, Italy and Churchill is a triggering event, which means we need to go in and assess the value of the goodwill associated with the insurance business following these divestitures. So to step back for a moment, under Swiss GAAP, Winterthur in December of 1997 was apulling, which means you basically add the balance sheet of Winterthur to the balance sheet of Credit Suisse Group. No goodwill is created and no increase in equity. It's under that basis that the gains on the sale of these assets are reported to you this quarter. However, when we switch to U.S. GAAP under U.S. GAAP the Winterthur acquisition is recorded as a purchase, which means we have to fair-value the assets and liabilities of Winterthur at the time of acquisition in December of 1997, recognize the goodwill, and a corresponding increase in equity. As of January 1st of this year Winterthur under U.S. GAAP had 3.5 billion Swiss francs of additional goodwill on its books because of this impact. It's also fair to say that the gain in these two divestitures under U.S. GAAP is significantly lower because of the goodwill that's attributed to those subsidiaries. To try to make this clear on slide 12, in the box under Swiss GAAP are our financial reporting standards for 2003 where you can see a one billion of goodwill, given amortization and the divestitures that goodwill drops down to 800 million Swiss francs, and you can see at the end of last year the equity of 5.6 billion and the tangible equity of 4.6.

When you switch over to U.S. GAAP, which will become evident in the U.S. GAAP statements that we report at the end of March of next year and the standard we move forward to into next year, the amount of goodwill is $4.5 billion. We will write off 1.7 of that in the sale of these two assets, meaning 1.7 of the goodwill has been attributed to the asset sold and will be written off as part of the sale. In addition an analysis of the value of the life and pension business, as indicated, that the value of the goodwill is greater than the fair value and therefore an impairment of approximately $1.5 billion will occur under our U.S. GAAP statements. Therefore, the goodwill under U.S. GAAP will end up being somewhere around $1.3 billion and for reference in the lower right-hand corner I've put in the equity for Winterthur under U.S. GAAP at the start of the year of $10.8 billion and the tangible equity of $6.3. As we've said many, many times in these forums, when you impair goodwill or write off goodwill you reduce equity but you also reduce the goodwill, therefore the tangible equity remains completely unchanged, and it is the tangible equity that is the basis for all of our capital calculations used by the regulators and our bond holders. So with that, if that's not enough of a mouthful, I will turn it over to Ulrich corner to discuss more CSFS and we'll be glad to answer any questions.

Thank you. Let me start with an overview of Credit Suisse Financial Services and also some highlights with respect to the banking segments as well as to the insurance segments. Credit Suisse Financial services record net profit of 1.8 billion in the third quarter. This result includes an after tax gain of 1.3 billion from the divestitures of the Winterthur operation, Churchill, Winterthur Italy, and republic net of related provision and a charge of $383 million after tax for the strengthening operations related to Winterthur's international business portfolio. The year to date net profit amounts to $3.3 billion which is in comparison to a loss of $900 million a year ago.

Turning to some highlights from the banking segments here you can see that as a result of the slightly improved operating income and substantially decreased operating expenses despite higher incentive compensation, combined banking cost income ratio came down by 3.2 percentage points to 58.2% in Q3 which is, in fact, the best ratio in the past 7 quarters. Private banks net new assets amounted to $8.4 billion which compares to $3.8 billion last quarter. With respect to some highlights on the insurance side primarily Winterthur reported significantly improved investment results compared to 2002, driven by lower impairment and lower realized losses in the equity portfolio. Steady progress was achieved as well in the underlying operating result mainly driven by tariff increase and selective business renewals as well as by significantly lower administration costs. Furthermore, as I said Winterthur finalized in the third quarter the sales of Churchill, Winterthur Italy and Republic. In isolation these mentioned divestitures increased Winterthur Groups solvency surplus capital by approximately 3.5 billion Swiss francs due to the combination of lower capital requirement and higher available capital.

The next slide shows you certain significant elements included in the Winterthur profits. The reported Winterthur result in the third quarter amounted as you can see here to $1.1 billion. The after-tax gain net of related provision from the divestitures was $1.3 billion of which $1.27 billion for insurance and $57 million for life and pensions. Material amount of these sales related provision which are included in the net gain of $1.3 billion is from discontinued book of business in Churchill special risk. Additional to that provision were strengthened by $383 million after-tax related to Winterthur's current and former international business portfolio. Of these additional provisions, $117 million we have booked as claims and the rest as other expenses. The material amount of these additional provision is related to Winterthur international which was sold as you know in 2001.

With that I'd like to turn to the different segments, starting off with private banking. Private banking reported a segment result of $519 million, increase of 5% or $27 million over the previous quarter. Operating income increased by 3% to $1.6 billion. The main drivers for this improvement were an increase in net trading income as well as higher commission and service fee income related to the higher asset base. The gross margin decreased 3 basis points to standard 125 basis points also driven by the higher average asset base. In the third quarter operating expenses decreased 4% to $819 million in line with headcount development and despite higher incentive compensation. The cost income ratio decreased 4 percentage points to 55.1% representing the best ratio in the last six quarters. Net new assets more than doubled and amounted to $8.4 billion. Broad banking increased overall by $11.3 billion to $505 billion as of the end of September.

Turning to corporate and retail banking, which reported a result of $169 million, which is up 8% in Q3, operating income decreased slightly quarter and quarter by 2% to $789 million. This decrease is due to lower other ordinary income which in the second quarter included realized gains from the recovery portfolio. The net interest margin in Q3 was 215 basis points up 3 basis points from the previous quarter. Operating expenses down 4%, or $20 million, mainly due to lower personalized expenses also in line with the underlying headcount development. As a result the cost income ratio improved further to 64.4% which compares to 65.8 last quarter. Return on average allocated capital increased to 13.6%. In Q3 2003 actual credit related provisions 24 million above statistical evaluation adjustments where as if you look at that on a year-to-date basis actually credit related provisions were still 20 million below the statistic amounts. Impaired loans were reduced by a further 600 million and nearly to over all 5 billion.

With that I'd like to turn it to the insurance segment starting with life and pension, which reported a result of 354 million in the first nine months of 2003. This represents obviously quite a significant improvement from the loss of $1.5 billion the same period last year. The reported Q3 segment result amounted to $126 million and includes as mentioned at the beginning $57 million after-tax gain from the divestiture of the Italian operation. Adjusted for acquisitions, divestitures, exchange wide impact the volume decreased by 5%. This decline in premium volume is the result of the ongoing selective underwriting policy and of the strong single premium growth which we have seen during the first half of last year. The reported figures include crosswinds written off the divested Italian operation of 692 million.

Administration costs decrease 18%, a $192 million, to $862 million year on year. The Q3 expense ratio was clearly affect by the acquisition cost write-down of 201 million Swiss francs, recognized as the result of the lower expected long-term investment returns with negative impact on the segment result of 75 million Swiss francs. The year to date expense ratio decreased 0.3 percentage points to 10.6%, negatively affected by the lower premiums and the before-mentioned additional acquisition costs. Life and pension return on invested assets amounted to 5% compared with 1.5% in the corresponding period of last year with current income being at 4%.

To the P & C business, insurance reported segment result of $1.2 billion against a loss of $1 billion in the first nine months, and in the nine months of 2003 compared to last year amounted to $991 million, the Q3 result includes $1.3 billion after-tax gain on the divestitures net of related provision and, as I said at the beginning, additionally $383 million of provisions after-tax related to Winterthur International Business portfolio. Adjusted for acquisition and divestitures, increased 8.1% primarily due to tariff increases across all major markets. Included in the reported figures for the first nine months are net premiums of 4.5 billion Swiss francs from the operations. Year to date administration costs decreased 8% to $1.4 billion. Also here reflecting the continued progress in ongoing efficiency initiatives. The year to date net underwriting result before dividends to policy holders was improved by 218 million Swiss francs. This reflects a combined ratio improvement of 1.9 percentage points. The reported combined ratio of 103.6% in the third quarter includes 117 million of provisions related to the international business portfolio which basically corresponds to an adverse development of 3.1 percentage points in this combined ratio.

Lastly with respect to Credit Suisse Financial Services, outlook for 2003, Credit Suisse financial service expects an overall good result in 2003. The efficiency measures are showing clear effects. The higher asset base as well as the stable credit trend benefit our banking segments. However, with respect to the fourth quarter, costs most likely will come in higher due to the regular seasonality. The insurance segments have improved their technical results. However profits will be obviously affect by the exclusion of the divested businesses in Q4. Life and pension remains exposed through the volatility of the capital markets.

Looking forward in general, strong focus and further improvements in productivity will clearly remain our key priority. We suspect to Credit Suisse Financial Services.

With that I'm at the end of Credit Suisse Financial Service and I'd like to hand it over to Barbara.

Looking at Credit Suisse First Boston our net operating profit in the third quarter was $358 million U.S., down 13% from the second quarter, but clearly a dramatic positive change from where we were a year ago. The reduction was fully driven by a lower level of revenues, predominantly, or exclusively in fixed income with total revenues down 22%. I'll talk in a minute with more detail about where that came from. As Phil did mention earlier, however, we made some very conscious decisions to reduce our risk exposures coming into the third quarter, and that played out through our revenue line.

Operating expenses continue to decline, although the largest component of the quarter over quarter reduction was really driven by the change in vesting and associated accounting on annual stock plan awards, which we discussed with you at the end of the second quarter. In the third quarter, that reduction added up to approximately $90 million pretax as we reduced the accrual that had been built up in the first half of the year, obviously not accrue any more for stock in the third quarter, but then looked at where we expected our full year accrual needs to really be from a total bonus payout point of view. In fact, came back to a 48.5% comped net revenue ratio. This all added up to a pre-tax operating margin at 17.4%, pretty comparable with where we were in the second quarter. And a return on equity of 16.9, down about 1% from 18% in the second quarter.

Highlights for the period, cost containment obviously remains paramount in these markets, and we are continuing to work on that. Credit provisions remain at historically very low levels, and overtime that is likely to increase, although we don't see anything between now and the end of the year that will materially change this very low level of credit provisions. And finally, the vast majority, 99% of the retention payments that were incurred at the time of the DLJ acquisition have now been fully expensed and are behind us. I should note that the results that you will see here have been restated historically for the transfer of the Swiss trading operations to Credit Suisse financial service from Credit Suisse First Boston.

If we look at the revenues on slide 24, for the nine months year-over-year we would be down, excluding Persianing or generally flat year-over-year. Expense for the quarter but most importantly probably the nine months also remain much lower. I would point out probably on this page number of employees is roughly stable, with where we were at the end of Q2.

Turning to institutional securities, as you can see, the Q2 to Q3 net operating profits here, reducing 23% from 453 to 348, and again translating or being driven by a 24% reduction in revenues. I would call your attention to the value at risk chart on the lower left-hand side, where you see that our average value at risk cut almost in half from where we were during the second quarter. About one-third of that reduction is due to implementing a new set of models as it relates to the mortgage business and prepayment assumptions, but fully two-thirds is the conscious result of a decision to reduce our risk exposure heading into the third quarter in the face of uncertain interest rates. And, in fact, you'll see in the quarterly review all of the reduction manifest itself in the interest rate picture. That is a decision that, you know, given the rather checkered history of Credit Suisse First Boston and its risk-taking, we were very comfortable with that position at the beginning of the third quarter, and we are still very comfortable having made that decision as we end the third quarter, though, nonetheless, did it dampen our revenues, but this year, as we've said before, is a year of stabilization for us, and we are just -- we're quite comfortable with the way we've been running risk.

I would point out also, as Phil mentioned earlier, continued good results in the reductions of nonperforming loans as well as allowances to nonperforming loans, so credit continues to be extremely favorable for us. I would point out that we continue to have a number of very strong franchises, such as leveraged finance where we retained our number one market position. Our private equity business, which likewise ends up being number one by a lot of accounts, and a very strong presence in the middle market business.

In terms of the individual revenue divisions within institutional securities, the fixed income division revenues were down 41% Q2 to Q3 and we really saw the reduction fairly broadly across all product sets that are involved with interest rates. Which would include mortgages as well as just plain straightforward interest rate products. The largest impact is going to be our lower risk profile. However, we also did see lower customer volumes as I -- as certain customers themselves chose not to be as active in the marketplace, as well as fewer securitizations and a typical seasonal decline in customer activity. The equity division versus the second quarter was down 8% as we saw a reduction in derivative and structured product activity, largely because we are coming off of a very strong second quarter in convertible activity. But we did see a pickup in our cash trading activities across all regions, and that has continued into the fourth quarter.

Investment banking results revenues were down 11% Q2 to Q3 due to lower levels of private equity realizations. Merger and acquisition activity, or fees, actually increased in the period while overall market levels of activity remained fairly constant. I would note that the trends that we are seeing in investment banking and the reference I made earlier to healthy merger and acquisition fees does drive from the fact that we have been playing to our strengths in the middle market, many of the deals that are showing up and driving lead tables are, in fact, the larger deals in the market, but frankly we have had historically a very strong presence in middle market and, in fact, the margins in that business have remained fairly healthy. So when we look at our M&A fee share of wallet, we score pretty good, certainly top three, when it comes to share of wallet. Although that does not necessarily translate itself into the lead tables currently.

In Financial Services, we saw a 15% decline Q2 to Q3 in overall segment results, and perhaps the most disappointing thing for us is we are not seeing any type of significant improvement on net asset outflows at this point. You'll see in the third quarter CSAM had a negative net asset outflow of 4 million compared to 1.3 in the third quarter. The third quarter was largely driven by the awarding of a number of new mandates intoo CSam, which did not manifest itself again in the third quarter. The level of outflows on the other side remained fairly constant, and at PCS, we have continued to do a significant amount of restructuring in the business and office closings, resulting in the reduction in the number of financial consultants we employ, and quite typically in this business when a financial consultant leaves the assets leave with them. Nonetheless, we are disappointed that we have not seen the turn yet in this, and while we think we are getting to the end, it's impossible for to us predict when we'll have more positive indicators.

Nonetheless, assets under management did improve a bit from the second quarter, driven by F X but also a very positive lead by underlying performance. I would also mention that we had a very positive launch of a new alternative investment product issued by CSAM in September of this yeared not affect the financialsed have some effect on assets under management but basically generating another $700 million, so we feel like we are making very good if early day progress on building out the alternative investment platform within CSAM.

Looking ahead to the rest of the year, we feel pretty positive about the momentum we have heading into the fourth quarter, but I would note that seasonally the second half of the year, and particularly the fourth quarter, tends to be a low period for us. We continue to see slow but steady sqential improvement in the more strategic areas of customer activity, such as M&A, and, in fact, some positive pickups in both cash equity and the PCS business. We do expect credit to remain favorable through the rest of the year, and -- but we -- you know, we do believe that we have not achieved the level of profitability that we find acceptable in our business. We certainly have more work to do on that front, and -- but we are confident that as we enter 2004 we will be able to make some further progress on having the firm achieve the levels of profitability and franchise strength that we want.

Thank you, Barbara. Thank you. At this point, operator, we would be happy to open up the floor for questions.

Excuse me this, is the conference operator. We'll now begin the question-and-answer session. Anyone who wants to ask a question may press star and 1 on the touch-tone telephone. If you change your mind and wish to remove yourself, then you may press star and 2. Anyone who has a question may press star and 1 at this time. First question is from Jeremy Sigee, Citigroup.

I want to ask a couple of questions about CSFB, if I could, first, on the comp ratio, I understand the math, so what you're putting in, taking out, et cetera, but I was surprised that that didn't leave us with a lower level of comp ratio, because if we just put back in, for example, the 1.22 million in Swiss francs, we'd be basically back at a 52% plus comp ratio. Which sort of results in a surprisingly high level for me. Secondly could, you talk some more about the master production in VA R in the quarter, obviously in sharp contrast to most peers, the measured var, because of the volatility going up, and where you see that going, how quickly you anticipate that ramping up again.

On your first question, Jeremy, there's two issues, right? One is the mechanical issue, and you -- clearly the approach we took in it was, in fact to, reverse everything we had accrued, and then back in June saying where do we think we need the overall bonus pool to be at the end of the year, and what kind of levelized comp ratio does that give us quarter over quarter. So, I mean, I think, as you said, it's not the mechanics per se.

I think -- but your other issue is a little bit more on point, which gets down to, gee, would CSFB otherwise be running a 52% net to comp revenue ratio and isn't that higher than we see at some of your other peers. And the answer would be yes and yes. We are not yet at the level of productivity that we really want to be in the firm, although we have made some progress, we're not there yet, and so that's what's driving a 52% type underlying ratio compared to what you might see at some other firms.

And how does that play out? Because you yourself mentioned that profitability is not satisfactory, so is that just about incremental, watching the pennies, or does it require more structural action?

I would tell you more the latter than the former. Un, we are watching our pennies, that's for sure, but we think the issues about productivity are really more structural in nature. You recall the adventure we've been on for the last two years was really locking down the place, was really taking risk down to a level that we thought would produce no surprises for us, you know, getting out of a number of businesses that were sub-optimal, so we are at the point now where we are spending the majority of the time talking to ourselves about where we take the platform from here, what are the business opportunities that we may not be fully exploiting, what are product extension and regional pocket where we can still grow, and I would put all of those more in the strategic category. And that would include VAR and our overall risk taking.

You know, in terms of how fast we can ramp it up, our view has been we want to do it in a very sober, well-managed, well-controlled way, which is not something that we can turn on a dim and create overnight. I do think overtime, over the next year or, so you will see a more consistent ability for us to take on or to show higher levels of risk over time, but again that's not something that we're going to see right away.

Thank you.

Next question.

We have a question from Jacques-Henri Gaulard, Merrill Lynch.

Good afternoon, two questions, the first one on slide 7, the provision on the 119 million. You mentioned some legal costs effectively. You -- is it fair to assume that this should come back to the traditional level of 30, 40 million per quarter.

The second question would be on Winterthur and the accounting changes on slide 12, which are very useful, just want to know at this point at which value is Winterthur included into the account of Credit Suisse Group? How much does it represent to the book as economically reported? Thank you.

Jacque, the 119 of additional charges, as I said, really comes from some real-estate items and some legal fees, and by legal fees, I'll make the distinction, there's nothing in that number relating to building reserves or setting up reserves. It's just fees associated with various actions that are underway. And I would expect to the come back to a more normal level.

As it relates to Winterthur, we're in a bit of an awkward position. We're not in a position to disclose Winterthur's U.S. GAAP book value as it is now audited or produced until -- formally until the end of the year. So we are in a bit of an awkward position where we wanted to make people aware of this triggering event, but are not able until our U.S. GAAP results are completed, to give the full picture. So we apologize for that. Next question.

We have a question from Daniel King, Cazenove. Please go ahead.

Good afternoon. Thanks so much. Two questions. On Jeremy's question about the comp accrual. Given that you've written back the stock compensation element from this year, for the first half, and that will be building up for next year, effectively a third, then a third, and a third, we're talking about a comp ratio around 52% but where would you really see the underlying? Because if we believe the comp will only be up to the full level by 2006, when we have three years of this one-third, one-third, one-third, why have you taken the point position now of increasing effectively the bonus full element when it looks like already if you built in the full element of stock compensation it will be considered higher than the 52%? That's the first question.

The second question is on Winterthur and the additional provision you've made, particularly relating to past disposals. We're cleaned up in that area now and should we expect more provisions along that line? I'm not talking about the provisions related to disposals now but the ones you've made for the 2001 disposals.

Barbara, why don't you answer the first part of that.

Sure. To the underlying mechanic, when we piece through everything, what we would have had, had we not actually in June looked at the full year required amount and basically targeted for ourselves a comparable continent revenue in the third and fourth quarter, what you would have seen would have been a ratio probably more like 43% or so in the third quarter, followed by a ratio in the fourth quarter of probably 52.7%. So not -- you know, not considerably higher than the 52.2 that we had been running at, but the fact is that net-net, as a result of this, some of the benefits get recognized in the third quarter, and then some of them get recognized in the fourth quarter, but the real key thing -- and, you know, we're coming into year-end comp, which I don't have to tell sue an interesting process for our particular industry, and a lot tends to happen in terms of getting market reads in the fourth quarter, but nonetheless, we had been expecting, and still are expecting, you know, somewhere around that 48, 49% ratio again in the fourth quarter.

John, you want to answer the question on the --.

With respect to Winterthur and the 383 of additional provisions not related to specific sales in the third quarter, I think we believe that these are positions that are provisioned to the best estimate and a number of cases we've received in the third quarter third-party actuarial assessments of these reserves and believe that we've got them set correctly today. I would remind the audience, and I think it was mentioned that this relates to Winterthur in 2001. In that transaction we are on risk with a net reserve seasoning process through June 30th of 2004. So we're not in a position to never say never, but we think currently these provisions are correctly set for the information that we have today.

Thank you very much.

Next question.

We have a question from [Pascal Moreno, Fox-Pitt Kelton].

Two questions. The first one is about capital. You've mentioned time and time again that you want to become one of the best capitalized banks in Europe, and I think you're probably about two-thirds of the way there now via the disposals of Winterthur. Can you comment about going forward in particular in light of Mr. Grubel's comments I think about a month ago with respect to acquisitions, could you comment a bit about what to do with the capital that you're generating with the group, in terms of buy-backs, acquisitions, whatever else you have in mind. The second question is on AUM at private banking and retail banking. I thought that was an amazing figure. 8 billion for the quarter was very strong, in what you said was a seasonably weak quarter. The question really is, is this related to any specific products? Is this related to any sort of introduction of new service? Is it the ALM product finally kicking in? What are we talking about as being the major driver for both the private banking niche asset inflow and to some extent as well the retail net of inflow?

As it relates to capital, as you've indicated, our first priority is to become one of the best capitalized banks in our peer group. We never want to have to deal with the discussions around us that occurred in 2002. Beyond that, the capital will be used to find opportunities to grow the business and to produce a satisfactory return for our shareholders, while at the same time we will converge over time on a industry payout ratio to make us competitive as an equity to hold. Beyond that, I think that's sort of a high-class problem for us at the moment, and I don't think we have any real point of view on share buy-back programs, et cetera, although we very much are focused on managing our capital to those objectives I mentioned. Ulrich?

Sure, with respect to the management on the banking side, there are not at all any specific facts or issues included. In fact, all the different markets and entities within private banking and also retail banking contributed strongly to that asset development, and I think what you can see here are two things. First of all, relatively strong performance off our relationship management and the whole entity, as we said before. Secondly, the fact that hopefully the confidence of all of our clients has come back compared to last year, and that is why this increase is so strong in Q3.

Maybe just a follow-up on that. What about the issue of sort of Swiss off-shore versus sort of European on-shore mix of funds? Where did you see the biggest increase?

We had quite a strong increase across all markets. European on-shore banking contributed again strongly to that result, as well as Asia, but also the swiss, from our Swiss clients we saw a very significant increase in these figures, so that's really what I can say.

Thank you.

Thank you. Next question?

We have a question from George Candor, West l B.

I have a question concerning the improvement in cash equities business. Can you give us more hint how much increase it was in percentage terms, or how much came as a divert business down?

Barbara?

Yeah. I guess I am not fully comfortable talking about the percentage increases in the cash equities business, largely because it is very different in each region, and each region has unique seasonal characteristics, you know, in August for how long people are kind of on vacation. So I think in aggregate it could be a little misleading.

Could you then please specify where the largest increases were?

I think we're going to stick to the comments we made earlier, which is the quarter over quarter there was an increase in the cash equity business, but we're not going to get into details on regions. We also indicated that it is pretty broad-based. Next question?

We have a question from Mark Hogie, Lehman Brothers.

Thank you. I wonder if you could give us some guidance on the full-year expected impact for the change in equity-based compensation? I think Morgan Stanley gave quite a hard number in terms of what the overall impact would be.

I think, Mark, again what, we've done that's different than Morgan Stanley is we're looking at this on a second half base as opposed to a third quarter and fourth quarter basis. And the guidance we gave quite clearly in August was that we believe something in the neighborhood of this 48.5% comp to revenue ratio is the guidance for the second half of the year, and I don't think we've got any further guidance to give than that. But we are doing this noticeably different than Morgan Stanley did.

What about the expenses for 2002 that are now subject to deferral? What was the number in 2002 that you would be deferring into future periods looking just at that historical cost base?

I don't have that -- I don't know, Barbara, if you've got that but we can get back with you and go through that off line.

Right. Echoing what Phil said, I do also want to point out that this is not just a change in accounting, this was a change also in the vesting characteristics of our share awards. Where previously they were vested upon issuance subject to blocking, and so, you know, you have a different character of what's being given, not only just a different accounting recognition.

Thank you.

Sure, Mark. Next question?

We have a question from Alan Webron, Kelton International.

Thanks. You had a very good compensation ratio in the private bank in the third quarter and I wondered whether that was now sustainable and how you effectively manage the compensation within the private bank. I mean, also, secondly, in the retail bank, again, a very good score in terms of efficiency, and do you feel you're now at a run rate in that business, too?

We're basically the compensation for both businesses is based on the profit we produce in both business, and that's how we come to the amount for compensation, basically, and overall, with respect to the operating expenses overall, as I said in my comments, we will -- or we expect to see operating expenses to come in somewhat higher in Q4 than the figure you see for Q3. Which has been in effect that people have seen who have covered us for a long period.

Okay.

Next question?

We have a question from Ryan Alister, UBS.

Hi, thanks. Two questions, if I may. First on the value at risk number, did the fall-off, as your risk appetite is reduced does, that reflect the progress that you had taken on the second quarter, was sort of how interest rate risk relate to positions that the firm was taking? And secondly, on the debt write-down, there's a little over 4 billion from winterthur last year. What changed in the third quarter specifically from the second quarter that drove the write-down? And is there any risk that there will be further impairments to the daq asset in the coming quarters?

John, you want to answer that question?

I think the major move in the daq was actually as a result of the sale of Churchill. Churchill, as the balance sheet of Churchill carried quite a bit of daq due to the nature of the business that they had on the book, and the distribution channels they used, so with the sale of churchill, we swiped off most of our non-life daq in one swoop. With respect to the life business we talked about the 200 million daq unlocking. That's a constant process, but as you saw in the third quarter of last year we had that unlocking in the third quarter of this year. I wouldn't expect in the fourth quarter any major adjustments to our daq positions in the life business.

Unless there's something significant that happens, daq is evaluated in the first quarter and third quarter.

Typically, most of our business is in the third quarter.

Barbara, on the var question?

Yeah. I guess I have to distinguish when we talk about proprietary, two different buckets of it. One is dedicated proprietary, which is far, far smaller for us than it had been in years past. And that is an area that we are looking at to expand a little bit, but stand-alone dedicated prop is a relatively small component for us, was in the second quarter, was in the third quarter, and I would largely say is really not a factor here. The second area which, you know, at one level is prop and at another level is just called good trading, really are the kind of exposures that the flow business managers are comfortable with at any given point in time. And it has to -- you know, it gets to how they're hedged, how they dynamically hedge as their view of interest rates sort of changes, and that was really the driver of the reduction in var that we saw Q2 to Q3.

Thanks.

Next question?

We have a question from Derrick Chambers, HSBC.

Good afternoon. Questions in two areas. One on the risk assumption in markets activities then another one on corporate and retail banking. On the risk models, you had some discussion of changing your models in the second quarter results conference. Could you just clarify at what point did you change the models, and then looking at the daq testing results you've got on page 9 of the report, I know it's to some extent subjective, but it doesn't look to me as if the achieved trading result showed much decline in volatility even though you're saying you reduced your risk-taking. Could you comment on that and whether some of the volatility we're seeing there is perhaps positions running down and being marked to market or even some anticipation of changed accounting derivatives. And I had also a question on the corporate and retail banking, which is just -- very robust revenues there. Would you attribute this just to the equity market reviving or something else, and you said that other wasn't as strong as in the second quarter in conference and regional banking, but there is still some element. Is that, again, from the disposal of assets or is it something else?

Barbara, you want to go first this Sure.

Okay, on the first issue about the risk taking, number one, the models. The models that we are talking about having reworked in the third quarter and actually they were implemented in august, don't specifically -- dealt specifically with prepayment curves in the mortgage business. You know, these have been some interesting times in the mortgage business as interest rates during the second quarter in particular reached kind of all-time lows and the trick here was to look at how structures or securities were being placed -- being priced in the marketplace, and to go back and reexamine our own models to -- the marketplace. So it was very much evolved around pre pay and went in August. On the daq testing issue, what we found, if you're talking about daq testing the models, which actually were new models, retrofit and were historical predictors of what happened than our formers models. But having said that the third quarter was a bit of a choppy period, when it came to trading, and so there's not always a direct correlation between the risk that you take and what your trading results are going to be on any given day.

Okay.

With respect to corporate and retail banking, as you said, the overall very slight decrease is due to the fact that in the second quarter you had gains from the recovery portfolio within other ordinary income and that is why you'll see this drop in the remaining part of other ordinary income, this 21 million, a variety of different small positions and has nothing to do with other gains related to the recovery portfolio. And that is why you'll see this drop in income except from that there is nothing unusual in that line.

Okay. Thank you next question?

We have a question from Kristoff Richards.

Question on the profit and loss account, and my question is could you quantify the amount of value adjustments due to the deterioration in credit worthiness which is accounted for in your ordinary expense, and it was accounted for I think on the provision. Could you quantify the amounts in the third quarter and could you also give a certain breakdown of this item because normally this is quite a bit negative number. Thank you.

The sundry ordinary income and expense number is dominated by items from Winterthur that don't fit into the bank assurance view. The primary item in the change quarter over quarter relates to some various items in the adjustments for the divestiture of Churchill. But what I'd recommend is you put a call into the investor relations team to go through that in detail.

But for the write-downs, the provision, could you give a figure there of the 660, what is write-down in terms of credit worthiness?

Well, credit is in a different line.

No, no, it's in this line. For the write-down, you have it in the footnote below the p & L. The amount of value due to the deterioration in credit worthiness of the bond portfolio.

It's very, very small, that item, and please give Mark Bookheister a call.

We have a question from Matt Pickering, Institutional Capital. Please go ahead.

I had three small questions. The first was relating to the Winterthur international reserve block, which if I understand correctly you've provided the buyer of that block along with an indemnity that lasts until June '04. I was hoping you could provide us with just the size of that block of business and also previous reserving activity to have us have an understanding of how often you've had to go back because of late claim reporting or other issues and adjust those reserves since its sale. My second question, and I apologize because I was about 10 minutes late to the call, so you may have already discussed this, but in relation to the Credit Suisse First Boston third quarter absolute revenue number, given the conscious decision by management to reduce value at risk, because of an interest rate outlook, should we basically assume that the third quarter absolute revenue number is a good run rate for the revenue of that business in the current environment going forward? And then just finally, someone's already asked about daq, and I appreciate the explanation of the first and third quarter valuations which typically precede any adjustment but that number is still -- wasn't it greater than a 100 million, and it's not something that we're seeing at any of your peers. Can you provide or think an without providing at the full-year results, especially with most of your non-life daq gone, some assumptions related to life daq going forward?

I'll take the middle question first. We think we've made it clear that we're not satisfied with the results in fixed income in the third quarter and that we are, as Barbara mentioned, thinking through, you know, what risk levels we should be running at and what strategies we should have there. So I would not view this as a representative run rate, but however, we are not in a policy of giving out run rates in our various businesses, and we'll see in the fourth quarter when we get there. John, do you want to comment on daq details?

The two questions, I'll take them in reverse order if that's all right. In the fourth quarter we'll see what we might be able to provide you with respect our assumptions under daq. I think our processes are robust, but you need to understand that we've got these in a series of different markets, so the treatment market by market is specific to the conditions of those market and the conditions of our distribution in those market. Again, on the non-life, we did remove about -- more than 2 billion of the 2.9 billion of daq with the sale of churchill, so the non-life is less of an issue, as you said. With respect to winterthur international, the -- a ballpark number to give you some sense of the magnitude of the reserves, the net reserves were in excess of $1 billion as of June 30th, 2001. Those reserves are seasoned in the since that some claims are actually paid, some claims develop over the course of the business. We remain on risk for the adverse deterioration of claims that existed already as of June 30th but also on policies that were underwritten by winterthur international before excel renewed those policies. And so those are two sources where this deterioration is coming from. We routinely review the positions as I said we've got world-class third-party actuary that helps us look through the global developments here and so we have continued to review this portfolio and as I said we believe we are today at the third quarter on best estimate for where these reserves should be.

Can I ask you if you'll disclose the IB and R percentage?

No, I don't think we would.

But it is fair to at least assume that the indemnity for both of those items, both the late claim reporting and the policy renewal by excel ends in July of '04, June of '04?

Yes, any deterioration that occurs post June 30th, 2004 is a responsibility of excel. We've got a procedure in place to come to a resolution. Obviously one of the good things that's happened between and one of the reasons for the net seasoning mechanism is a number of these claims will actually have been paid, so there will be no more debate over what the appropriate reserve would be on those claims.

Okay. So, therefore, it's probable to expect some kind of true up adjustment in the second quarter of next year because you'll be going through that final reserve negotiation process with excel?

I'm not sure the second quarter would be the right place in the sense that we'll be working off second quarter data.

So it would be fair to be the fourth quarter.

Thank you.

Next question is from Julian Steben.

Good afternoon. Question on winterthur after disposal of some -- is it possible to have an idea of the revenue we may expect [inaudible] 2004, first question. Second question on csfb, to put more color on the fact that if we assume that you have now achieved a very low cost of risk that's a potential of cost decrease is limited and if we let unchanged your risk policy, how to reach a better revenues, either some structural program, some businesses by [inaudible] and last point you say that you want to be one of the best capitalized firm. There is a credit between being very well capitalized and getting the shareholders back some return. Want to know how much did you actually dividend for the nine first months. Thank you.

Barbara, why don't you start. I don't know if you could hear the question well. The question was given the low risk, what does that mean for revenues, and are we making any structural adjustments to the business.

Because previously the question relating CSFB if you look at all the parameters for when we can [inaudible] you said at the low level, he could is is the cost base, apparently there is a limited potential if we assume the structure of your business and at that point --your decision your risk -- say that in the short term you will -- so my question is, you say that you are not satisfied with the current, so does that mean that you will have to choose income or strategy point to increase or to decrease the weight of some businesses or some [inaudible] areas where the labor responsibility is very low for the moment? This is my question for CSFB. Okay.

The -- where CSFB goes from here is really more of a continuation of our rather long term strategic build in the business. Part of that is developing a healthy risk culture which is consistent and confident and performs well, and so that will evolve over time. But there are also a number of our own businesses, customer businesses, which we are looking to develop further, and examples of that would be our derivatives business where we have had some constraints because of past underinvestment in the infrastructure. It would be prime banking where we are continuing to build out that platform for servicing hedge funds. It would be our Europe business and our Asia business where we see some pretty significant opportunities to improve our client coverage in those models and generate greater revenue, so we see a number of strategic client opportunities to be growing the business and believe we can keep making progress in those areas. Along with that, we'll, you know, our risk appetite will evolve over time.

Thank you.

As it relates to capital it's our intention this year to continue to focus on building capital. I think I would expect a very modest dividend payout as you can tell in our capital numbers quarter over quarter but we're not going to disclose the actual accrue al, and the matter is up to the board at the end of the fiscal year. John?

The question, if I understood, you're looking for some help in trying to understand the profitability of the remaining business going into 2004. I can give you some source information, but as you know we don't project profits in any of continues lines, but if you turn to slide 31 of the pack what you do see are the nine-month contributions, both in 2002 and 2003, of the businesses that we've sold. I would suggest on the 2003 numbers the nine-month for the non-life business is probably below what you might have expected in part because of the problems that emerged in this one book of business at Churchill. Yeah, right.

So we've booked that through our operating account, depressing that contribution. Similarly, in our life side, this is largely the profits on the Italian life business. It's a bit overstated, if you will, because of gains that were realized, particularly in the first half of the year on the investment portfolio and life. But this gives you some sense of the underlying profits of the business sold. I think you can triangulate in and then understand what we've got left. We continue to improve materially the remaining businesses we operate and the combined ratio improvement that you've seen over all is consistent with a combined ratio improvement for the businesses which remain part of our portfolio.

Okay. Thank you.

I'm going to take two more questions. Who's next?

We have a question from Ron CitiGroup.

Please go ahead. Thanks. I have a couple of questions relating to fund flows the first one is on csam. We've seen an increase in the outflows and you refer to in the text about it being institutional. I was wondering if could you give any further color. Previously you talked about money market funds in the U.S. The second one is regarding private banking. We've had an extremely good quarter. Were there any unusual or lumpy items or was it just across board on the European on-shore, and the Asian business, those two, things.

Ulrich, you want to start?

I think we have a similar question. As I said, nothing unusual, just a strong performants from all major market, including our on-shore europe, so with respect to private banking absolutely nothing unusual except the strong performance.

And very well diversified by region and client type, no special product or initiatives that are lumpy in there.

Barbara, you want to comment on csam outflows? Yeah, on the csam side, I really don't have much more to add or really anything that would, I think, really answer your particular question. Again, I go back to in the third quarter what we had was approximately the same level of customer withdrawals but what we had coming in on the other side were a number of mandates, and those mandates in particular were money market-related man dates coming out of the U.S.

I think we've talked about this before. One of the key drivers is csam had a performance issue with two of its biggest core product, and when you have those issues, you change the management, but the outflows continue for some time, and we are starting to see indications that the outflows are slowing down, but you've seen this with other large managers, and it's something we need to continue to work through.

It's a continuation of previous issues?

Yes. Last question.

We have a question from Philip.

Hi there, quick question on capital. What is your expectation on the impact of moving to [inaudible] capital ratios?

Good question. The impact on U.S. GAAP by itself is unclear, but we expect it to be pretty modest. Our cal can you -- pro forma calculation that we're doing quarterly indicate a very manageable transition. There are other issues with regards to, for example, bozel two, which is not terribly friendly to our mix of business, that's something we'll be dealing with in a longer time frame obviously.

And the U.S. cap impact is that driven by numerator or the denominator predominantly?

It's impacted by both and there are a large number of issues in both numbers.

Thank you.

And with that, I'd like to thank everybody for attending. We look forward to seeing everybody on -- is it February 12th? For our Swiss GAAP results, then we will look forward to setting a date in the first couple of days of April to go through an educational session with everybody on our 2003 U.S. GAAP results. Thank you all for your time and patience, and take care.