Credit Suisse Group AG (CS) 2004 Q1 法說會逐字稿

Thank you and good morning everybody. I am also joined in Zurich by John Dacey who is the Chief Financial Officer of Winterthur Insurance, who will participate in the question and answer session.

We are very pleased to present these strong results, not only because they are good results across our business, but because it is our first US GAAP results where we managed the business under US GAAP and represents the end of over a two year long project for our Credit Suisse Group.

While you will hear several references to US GAAP throughout the presentation, we do not want to get into a discussion today about Swiss versus US GAAP. And our Investor Relations team stands by to answer any questions along those lines throughout the day or any time you would like.

I am starting on slide two, the net revenues for the first quarter were CHF16.5b, up 13% over the previous year, 29% over the fourth quarter and that was accompanied with approximately flat expenses compared to the fourth quarter, up 5% versus the previous year. A bottom line of CHF1.861b, which represents a return on equity of 21.3%, and earnings per share of 1.61%, up 144% over the fourth quarter

These are the strongest underlying results for our company since 2000. It represents a positive trend in all segments of our business, and good diversity of earnings by business line, marketing and geography. It also reflects the Group's focus on our earnings growth and cost discipline. The ROE is above our target range, and you will see throughout the presentation that we have made progress in enhancing a number of areas of our client franchise.

On the next slide, to dramatize the point, shows the year-over-year trend in our six segments. Most notably is a 72% pick-up in Private Banking, and the 22% improvement in Institutional Securities, which are the biggest parts of our business. That 22% is a Swiss franc number, CSFB is a dollar-operated business. In dollar terms, the profitability was up 34% year-over-year.

On the next slide, is to point out the efficiency that occurred across our organization as we took advantage of the operating leverage in all of our units. In the Banking units, the cost income ratio was down to 55.3% in Private Banking, 62.7% in Corporate Retail Banking, which are big moves, very close to their targets. In the Insurance business, great progress made in both areas, represented here by the expense ratio in Life & Pension and Non-Life.

By far the most dramatic improvement was in CSFB, where CSFB overall had a pre-tax margin of 23.9%. That is broken down here - 23% for Institutional Securities and 27.9% in the Wealth & Asset Management business. We are definitely closing the gap to our competitors.

I mentioned operating leverage, obviously driven by revenue growth versus expense growth on slide five. The Swiss banking businesses - Private Banking and Corporate Retail Banking - revenues grew at 20%. In the Insurance business up 5%, and in CSFB revenues year-over-year were up 15% Swiss franc terms, 26% in dollar terms and compared to the fourth quarter, CSFB's revenues were up 33%.

The other side of the equation, costs on slide six. Costs year-over-year were essentially flat -- fourth quarter to first quarter essentially flat, up around 5% year-over-year. It is a mixed picture with compensation in the Banking business rising, following the revenue levels and profitability in that business, offset by a noticeable drop in other expenses, which is represented by the fact that there were no special effects in the first quarter other.

There is some realization of some expense programs that have been going on for some time, and we do believe there is some effect of the first quarter which we have seen in previous years. But overall the expense picture very strong in a high revenue environment.

Let me just make a quick note here as it relates to the tax line. Under US GAAP, our normalized tax rates will be somewhat different than you will have seen in the past, and let me give you some guidance here. We believe in the Swiss banking business the normalized tax rate will be around 21%, in Winterthur around 23%, at CSFB around 28%.

Although you will notice in the first quarter the tax rate was 25%, primarily because of the FIN 46 revenues and then that combines to an overall tax rate for the Group of somewhere between 22-24%. Obviously there will always be items coming through, period after period that will change them in technical terms of mix but those are the normalized rates.

Moving on to slide seven, the credit picture continued to be very strong. The Swiss Banking business is back to a normalized provisioning level - CHF54m in the first quarter. CSFB experienced another write-back in provisions, reflecting the point in the credit cycle. We do expect provisioning to move forward to a more normalized level as the year progresses.

On slide eight impaired loans continues to move down, dropping CHF800m compared to the end of the year. CHF600m of that was accelerated charge-offs in both units. You will also see the coverage ratios are essentially flat period-over-period.

The last point are our capital ratios. Our risk-weighted assets came up by about 5%, which is driven by increased activity at CSFB and Corporate Retail Banking. The US GAAP consolidated capital ratio is 11.5%. Here we had the downward impact of moving to US GAAP offset by capital generation being much higher than risk-weighted asset growth.

You will also notice in our first quarter report, we disclosed that we have reached a new capital accord with our insurance regulators in Switzerland. That is based upon a EU solvency concept using our internal US GAAP accounting standards. And we disclosed that the surplus under that new standard, as of the end of the year, was CHF2.1b.

With that I would like to turn it over to Ulrich Korner to talk about the results at Credit Suisse Financial Services.

Thank you Phil. As Phil said, Credit Suisse Financial Services recorded a strong net income of CHF1.1b in the first quarter of 2004. This result reflects higher revenues and a continued focus on efficiency improvements. All four segments reported very strong net income, particularly Private Banking which has achieved strong revenue growth, leading to a net income of CHF681m.

Additionally, Private Banking recorded an excellent net asset inflow, representing a very high annualized growth rate of 8.4%. Corporate & Retail Banking recorded a net income of CHF189m, based on solid underlying revenues, low credit provisions and low operating expenses. Life & Pensions, a net income of CHF139m, was driven by high investment income and a decrease in administration expenses. This result includes a charge of CHF91m after tax, due to a new legislation for the Swiss employee benefit business - I will come back to that in a few minutes.

The Non-Life segment with a net income of CHF103m, generated significant premium growth, a higher investment result and further improvements in cost efficiency. With that I would like to turn it first to the Private Banking segment on page 11. Private Banking is a very good result. It was based, as I said, on strong growth revenue growth, with revenues up 30% compared to the first quarter last year. Especially strong their commission revenues. The main drivers here were the significant higher asset base, as well as higher brokerage and product issuing fees.

At a first glance, a revenue growth of 7% versus Q4 last year does not look that impressive but here I would like to remind you that Q4 included gains on interest derivatives used as macro hedges, not qualifying for hedge accounting under US GAAP of CHF76m, whereas the same impact in the first quarter was minus CHF7m. Additionally in the fourth quarter, divestiture gains of CHF106m were recorded.

Total operating expenses are up 12% compared to the first quarter last year, driven by higher incentive related compensation accruals and higher commission expenses in line with the increased brokerage activity. These effects were only partially compensated by further efficiency gains. Reflecting the strong revenue growth, the cost income ratio decreased to 55.3%, that is almost nine percentage points lower than in the first quarter last year.

Private Banking further improved its gross margin to stand at a very high level of 146 basis points in the first quarter 2004. The asset based margin increased, despite a higher asset base driven by a favorable product mix. Private Banking's transaction based margin benefited from this strong product pipeline and significantly better brokerage revenues. Therefore, reflecting the increased client activity. The decrease of the margin on other revenues is due to the one-time impact of the disposal of Kornerbank in the fourth quarter of last year.

With respect to the Assets Under Management development, we are pleased with the Private Banking's strong asset generations. Net new assets in the first quarter amounted to CHF10.8b - as I said, representing an annualized growth rate of 8.4%. This is the second best quarterly inflow ever. Private Banking recorded a broad asset inflow from all the different markets. Double-digit growth rates could be recorded in Asia Pacific, in Latin America and in Eastern Europe. Assets Under Management amounted to CHF541b, that is up CHF29b or 5.7% compared to year end.

With that I turn it to Corporate and Retail Banking. The good result here was driven by solid underlying revenues, low credit provisions and low operating expenses. In the first quarter of 2004, revenues amounted to CHF787m, that is CHF30m above the first quarter last year. This was achieved despite a negative impact of CHF31m, due to a change in the value of interest derivatives. These interest derivatives are used for economic hedging of changes in the interest rate risk but do not qualify for hedge accounting under US GAAP. Changes in the fair value of the related hedges have to be recorded in trading revenue.

In the fourth quarter of 2003, this effect has led to a positive impact of CHF53m and of CHF32m positive in the first quarter of 2003. Total operating expenses were at a low CHF494m compared to CHF520m for the first quarter 2003. Cost reduction was driven by further efficiency gains, and only partially offset by higher incentive related compensation accruals. The cost income ratio for the first quarter amounted to 62.8%, therefore being 4.4 percentage points down compared to the first quarter last year.

To the both Insurance segments, starting with Life & Pensions. Life & Pension's good quarterly result was driven by a high investment income and a decrease in administration expenses. Total business volume, which includes deposit business and gross premiums, declined 2%. The Deposit business increased CHF250m. This increase basically reflects Life & Pension's aim to introduce investment-type products, such as unit linked policies. Gross premiums written decreased by 7%, reflecting lower individual and group life business, based on the current market conditions.

Policyholder benefits incurred decreased from CHF5.4b to CHF5b. The decrease is mainly related to lower gross premiums written, the reduced guaranteed rate in the employee benefit business in Switzerland, and to high disability claims in the first quarter of 2003. The expense ratio improved by 0.9 percentage points to 6.6% in the first quarter, reflecting therefore significantly reduced administration expenses, which were down 22%.

Life & Pensions net investment income increased by CHF346m to CHF1.4b in the first quarter 04, compared to CHF1b in the corresponding period last year. This high level of investment income primarily reflects net realized gains, resulting from active portfolio management and strongly reduced equity impairments. This investment result represents an investment return of overall 5.6%, consisting of 3.8% current income and 1.8% realized gains.

Dividends to policyholders incurred increased from CHF23m to CHF421m in the first quarter 04. This increase was mainly driven by the higher investment income. Additionally, dividends to policyholders incurred included a one-time charge of CHF117m, which I like to explain a little bit more in detail with the next slide.

In March, as many of you know, the Swiss Federal Council passed a regulation on profit sharing in the Swiss employee benefit business - the so-called 'legal quota'. The regulation stipulates that profits have to be shared at the rate of 90/10 between policyholder and shareholder. The initial establishment of a deferred bonus was booked as dividends to policyholders is reflecting valuation differences between local statutory accounts and external financial reporting, i.e., US GAAP.

The related impact on the P&L amounted to CHF170m pre-tax and CHF91m after tax. Shareholders equity was reduced by CHF363m after tax, therefore reflecting policyholders' share of unrealized gains and losses. The impact on the ongoing business is expected to be minimal. as Winterthur has historically paid approximately 90% of profits to its policyholders.

Lastly, from Financial Services to the Non-Life segment. Non-Life's net premiums earnings amount to CHF2.8b - in the first quarter it was up 12%. This growth resulted from tariff increases across most markets, and a CHF133m increase in insurance coverage in the German health business, which is also reflected in higher claims reserves. The combined ratio of 100.4% in the first quarter improved by one percentage point, compared to the first quarter 2003.

The claims ratio was up 2.8 percentage points to 76.8%, due to a number of larger claims and the before mentioned CHF133m increased in reserves in the German health business. Underwriting and administration expenses slightly decrease, despite the higher premium volumes. As a result, the expense ratio decreased 3.8 percentage points to 23.6% in the first quarter 2004.

Non-Life's net investment income increased by CHF126m to CHF380m in the first quarter, compared to CHF192m a year ago. This higher level of net investment primarily reflects also here net realized gains resulting from the active portfolio management, and reduced impairments and losses on equity investments. This represents an investment return of 5.1%, consisting of 3.5% current income and 1.6% realized gains. And with that, I would like to hand it over to Barbara in New York.

Thank you. I want to point out that the numbers that we are presenting here - and I will be predominantly discussing - are in Swiss francs. But, as Phil mentioned earlier, we do manage the business in dollars, and so I will make a few references to where the foreign exchange translation rate is distorting some of the underlying trends.

As Phil mentioned, CSFB experienced strong revenue growth, which was the driver of our improvement in Q1 profitability, with revenue gains of 33% and 15% on sequential and a year-over-year basis. Net income of CHF759m was up six fold and 27% from preceding and year ago quarters respectively. Results for both Institutional Securities and the Wealth & Asset Management Segment were up strongly.

We have broad-based strength in many business segments - cash equities, investment-grade debt, leverage finance, mortgages, asset management, private equity and we certainly benefited from the favorable interest environment in the first quarter and in the equity markets. We also had higher risk-taking overall, which contributed to higher trading revenues in both fixed income in equity markets and you can see this in our value at risk numbers which were up 26% versus the fourth quarter.

We also had good revenue momentum outside of the United States, particularly in Europe, where revenues were up 38%, and that is an area of particular focus for us. Finally, during the quarter we also created the Alternative Capital division, under the leadership of Bennett Goodman - one of our most respected business managers, and previously head of our market leading, high yield franchise. The division brings together our private equity business; our private funds group, which is the leader in raising capital on behalf of third parties; and CCM's Alternative Investment Group which develops fixed income related hedge fund products.

The combination capitalizes on our natural strengths in both manufacturing and distribution. It creates a unique and powerful platform, and it positions us very well in one of the fastest growing segments of asset management.

The results of all this in the quarter, turning to slide 21, were a substantial increase in CSFB's profitability - pre-tax margin of 23.9% and an ROE of 28.1%. Both significantly above the 2003 levels, and much closer to peer performance and to our long-term profitability objectives.

Turning to Institutional Securities. In concert with the change to US GAAP, we took the opportunity to revisit our external reporting formats and sought to wind up what we report a little more consistently with the reporting of our investment banking peers. One of those changes was to introduce a total trading revenue concept, which consists of changes in principal values, related interest, and commissions and fees. Something that the majority of our peers do report.

On that basis, fixed income trading revenues of CHF1.9b reflect continued favorable interest rates and credit market conditions. The selective, but higher risk-taking I mentioned earlier, increased client activity and generally across the board product strength.

I do want to point out that in US dollar terms, first quarter revenues were actually up 6% versus the year ago period.

Highlights included strong revenue gains in structured products, particularly commercial and residential mortgages, which benefited from increased securitization activity. Record quarterly results in leverage finance due to strong customer flows. Solid results in credit trading, European and Asia interest rate products which all benefited from good market conditions and risk-taking. We have consistently said our risk levels would be a function of the opportunities the market presented, and conditions in the first quarter were attractive, particularly in foreign exchange where we did put some money to work.

On the equity side, the story is similar to fixed income - favorable market conditions driving increased customer flow, coupled with selective increases in risk-taking. Revenues of CHF1.1b were 38% above 2003's average quarterly run rate. We had good improvement in the global cash business, due to higher market volumes and stronger trading results across all major geographic segments.

Good results from increased risk-taking in equities was also experienced, particularly in indexed and risk arbitrage options and structured products. And we had favorable trends in our convertible trading. Again, a very broad-based, performance pick-up.

Investment banking results were relatively flat to prior periods, as strong underwriting offset decline in advisory revenue and here is another place where we have made a slight modification, where we are looking at the firm-wide progress of our underwriting activities. We did experience the highest debt in equity origination revenues since the second quarter of 2004.

In investment grade, where we have a strong focus on increasing our ranking and market share, we saw a pay-off as our standings increased to number four in investment grade debt from seven last year, with about 1.5 percentage point increase in market share. We had a record leverage finance quarter, as we continue to rank number one in that market with a 14% plus market share. Our global equity underwriting position was relatively flat with where we were in 2003, although we continued to see strength and growing strength in the higher margin IPO segment, where we rank number two on a dollar volume basis.

On the Advisory and M&A front, activity levels for us were down versus the fourth quarter, both in terms of number of deals as well as the number of large deals that generated revenue for us. In this particular, we are still not happy at all with our market standings in that business but it is worth pointing out that those standings are being driven by a few number of deals. And I am sure you all noticed what happened to the rankings in this segment, on the announce side, when the Comcast deal was withdrawn, and everybody's position in that market changed pretty significantly.

In Wealth & Asset Management, revenues of CHF798m were slightly below the prior quarter but up 18% on average versus the first three quarters of 2003 - driven by higher asset management fees and improved performance in private equity. On a US dollar equivalent basis, first quarter revenues were actually up 3% sequentially from the fourth quarter.

I do want to point out, you will notice in our reporting here two particular things. We have broken out for you investment gains in this segment, so we can more clearly differentiate the asset management fee-driven part of the business versus the capital gains that get recorded for us. And number two, is we have also isolated out the impact of consolidating under FIN 46, approximately 87 private equity funds which did contribute CHF68m to our revenue in the quarter. And that particular item is excluded from the chart itself, just to have more comparability.

With the creation of the Alternative Capital division, as part of CSAM we end up having two pieces of CSAM to talk about. One is the more traditional products, the fixed income, equity and balanced funds, and real estate funds. And one are the products within the new Alternative Capital division.

Revenue in the traditional products was up 4 - 5% versus both the year ago quarter and the preceding quarter, on higher performance fees related to market appreciation. In the Alternative Capital division, revenues were likewise up, even excluding the valuations in part from higher assets under management. The Private Client Division results were basically flat versus prior quarters. And I just also want to point out that for comparability the chart does exclude the gain on sale we recognized when we sold CSFB Direct Japan in the fourth quarter.

Positive net new asset trend continued in the first quarter. Flows were strongest in Europe, particularly in Switzerland, and largely in fixed income products. Inflows of CHF2.5b were largely due to an increase in global custody activity, as well as various successful structured product launches in the Alternative Capital division, which launched three new funds, bringing in approximately CHF100m in new assets. The increase in total Assets Under Management brought us to approximately CHF500b in the quarter which was predominately due to market appreciation. And now I will turn it back to Phil.

Thank you, Barbara. Just in summary - a strong quarter across all segments, benefiting from operating leverage, improvements in our client franchise, and good market conditions resulting in high level client activity. Our focus going forward remains on revenue growth and building our franchise. And we remain optimistic about 2004 in terms of continuing the momentum in the business, closing the gap versus competitors, and the good level of client activity and economic conditions we see for the balance of the year, although the second quarter has started off at a lower level of client activity than the first quarter.

With that, I am happy to open the call up for questions that either myself, Ulrich Korner, John Dacey, or Barbara Yastine will answer. Operator.

This is the conference operator. We will now begin the question and answer session. [Operator's Instructions] First question is from Mr. Jeremy Sigee, Citigroup. Please go ahead, sir.

Thanks very much, good morning. Can I ask two unrelated questions please? Firstly, obviously there are, as usual, a lot of movements in different directions in the insurance business. Can you give us any sort of steer on what you view as an underlying run rate to profitability in that business - either overall or in the two segments?

Secondly, unrelated, you have showed, obviously, good capital ratios here. And I just wondered at one point you start thinking in terms of share buybacks, and what thresholds you would have in thinking about that?

Okay. Jeremy, as you know, we do not give guidance on future earnings. I think the key issues with regards to the insurance business is the level of investment return. We had another very strong quarter with high gains. And I think it is fair to say that going forward we will be relying on the 4% current return and a lower level of gains.

As it relates to the capital ratios, we are pleased that we continue to show a strong level of capital. As you know, we do include a part of Winterthur's capital in our combined ratio - or our consolidated ratio - we will continue to enhance our capital. However, it is very clear that we need to move our dividend policy closer to a competitive policy over time. And we will look at other methods to manage the capital, and bring down the capital level, if it continues to grow at this rate, which could include share repurchase. However, you know, we are not making any conclusions on that at the current time.

And just in that context, I mean, do we attach any importance to those sort of press reports about, you know, this alleged squabble with the regulators, and the Swiss connection. The buffers versus Basel 2, etcetera.

Well, I think it has been said -- the debate that has been discussed in the press, it revolves around the fact that the Swiss -- two big Swiss banks dominate, you know, the Swiss banking scene. And that being such large competitors in a relatively small market, the regulators are very keen on us being very well capitalized, to make sure that, you know, we can function at this size in this market. I think we agree with that. However, are not going to get into a public debate about the specific aspects of our negotiations with the [EBK].

Thank you.

The next question is from Kinner Lakhani, ABN Amro. Please go ahead.

Hi, morning. I have got three questions actually. First question is on Institutional Securities. Wondering if you can just provide a little bit more guidance in terms of the comp to revenue ratio, which went up to 56.3% in the first quarter? And perhaps a little bit of guidance for the remainder of the year, particularly in relation to trading up or down in the fourth quarter?

The second question is on CSFB as a whole. I mean, clearly as we can see on slide 21, very strong recovery in the return on equity. But we have been here before, in 2003, where we saw a very strong ROE in the first quarter and then declining sharply in the remaining three quarters. How much comfort do you have that, you know, we are at a -- you know, reasonably higher [account] the sustainable level? Not necessarily the first quarter level but reasonably high, sustainable level to be above the cost of capital?

The third question is on private banking and in terms of margins. Strong improvement in margins again in the first quarter. To what extent is that kind of exceptional customer activity in the first quarter, and to what extent is it sustainable?

Well, again, we are not going to give -- we are not going to give guidance -- detailed guidance about the balance of the year. Although the message that Barbara made clear was that there are a number of fundamental aspects of the business which had noticeably improved in the fourth quarter. Barbara, do you want to come in on the compensation ratio?

Sure. A couple of points that I think it is helpful for everybody to understand. We at CSFB largely think of a correct comp to net revenue ratio as being one for the combination of our Wealth & Asset Management segment and Institutional Securities division. Because frankly any number of our peers, and certainly the pure investment banks, that is the only way they disclose, you know, disclose their numbers.

So we tend to think of it as a full firm number, and then we try to bucket in the two particular pieces that we have. We are seeing increased market pressure around compensation and there we, again, put it in two buckets. One relates specifically to transactors, where the market in general is getting more exciting about investment banking proper, and there is no doubt that is putting a little pressure on everybody.

The second thing is that we have the continued trend that we have seen with certain support functions - particularly around accounting, around risk management, and around IT specialists who particularly support the more sophisticated products. Where there continues to be a very, very strong demand which has increased comp levels in some areas.

So, I do not have any guidance for you for the rest of the year. Our requirement is when we look particularly at a quarter end, we have got to give our best estimate of what we think we will have to pay people at the end of the year. And that is where we have ended up.

Ulrich, a comment on that?

Yes, with respect to product banking margin, I think it is worthwhile to note that the gross margin on the US GAAP is higher, due to the treatment of the commission expenses. As you know probably, under US GAAP the commission expenses are booked as other operating expenses. And under Swiss GAAP, the numbers you have seen before, they are minus revenue. This leads to a gross margin which is about 10 basis points higher than what you have used to see under Swiss GAAP

That is one point and perhaps the second point, as I said, commission income was very strong. The increase is roughly driven by one-third by the higher asset base, and by two-thirds due to brokerage and product issuing fees. So, and as you know, brokerage and product issuing fees are somewhat volatile, so volatility of roughly CHF100m. That position would not be completely unusual.

The next question?

We have a question from Bert Chafner, New Zurich Bank.

Good morning gentlemen. I have a few questions relating to the insurance activity. You mentioned in your report that you were confronted with unusually large claims in the first quarter. Maybe you could elaborate a little bit on that? And still I am not very happy with your indications about the realized gains. Could you tell us what your active portfolio management encompassed and your length and duration, as you mentioned on another occasion in previous quarters? Or how should we imagine your active portfolio management since equity ratios are a bit low.

And lastly, in the insurance division as well, I think that combined ratio at around, or still above, 100% - I think it is a little bit feeble. Could you maybe confirm some targets of where you thought target ratios should be? Thank you very much.

Well, I think as it relates to the gains bid, the gains were largely due to a strategy of taking advantage of extremely low credit spreads, and bringing down duration. And I do not think there is any further to add on that. And John, do you want to comment on the first quarter claims?

Your lowest duration? Did I -- bringing down duration means you lowered duration? Is that correct?

We have lowered duration but we have not disclosed exactly what it is.

Okay.

With respect to the large claims. I think it is just a slightly unusual quarter where we had, from a number of countries and market units and positions, claims that were above the CHF1m coming into the accounts. We do not expect it to be any particular trend but it did effect the loss ratio as well the overall combined ratio. And that leads us to your last point, I think, asking about the combined ratio of 101.4. We are not satisfied with it. At over 100 we believe that our business can deliver a result below 100, and that would be the expectation that we have been the consistently setting for 2004.

Okay, thank you very much.

Okay, next question.

We have a question from Mr. Jorg Konders, West LB. Please go ahead.

Yes, also a question on the margin in the private banking area. The asset based margin showed very high increase compared to Q4, and could you please strip out a little bit more on the effect of the [assets]? I think it comes, as you mentioned, from the asset mix. Is this a kind of sustainable item?

Well, as I said and as you correctly repeated it, it is due on the product mix overall. So, what really happened there was the clients shifted their fund investments from money market and fixed income more into equity and structured products. And that is what effectively has driven this asset driven margin up by this 7.5 basis points we mentioned before. So it is also a question how the market conditions are and that is what is behind that.

Next question?

We have a question from Mr. Philippe Peson, UBS.

Hi there. Philippe Peson, UBS. Two questions if I may. First with respect to the corporate center - I have noticed that the bottom line result was basically minus CHF10m only, and I was just wondering about any general comments. Whether under your new reporting format, the corporate center structural loss which was historically indicated at some CHF400m per year, declined?

And, as second point with respect to your Swiss banking activities, the private banking as well as retail banking. Do you see any changed seasonality in terms of the cost [header]? In other words, do you think your very strong cost numbers, which is also partly due to the institutional securities segment in terms of non-comp, are sustainable throughout the year? Or should we expect some back loaded costs? Thank you.

Your first question is a very good one. Under US GAAP there are some structural effects that no longer run through the corporate center and, in addition, the level of items held at the corporate center is now down to a very small number. So we do expect the negative impact from the corporate center to be well less than the CHF100m per quarter guidance we used to give under Swiss GAAP.

I do not think we are in a position right now to give you clear guidelines going forward but we do know it will be less.

Now with respect to the cost situation in the banking segments, I would say, if you look at product banking - especially at other expenses - they are more or less at the run rate which we expect for the rest of the year. It is also clear that there is, as I said before -- there are commission expenses included in that line, so there is a certain volatility in there.

And with respect to Corporate & Retail Banking, I would say - if you look at other expenses - we are somewhat below the run rate, which we expect for the rest of the year. So the run rate could be something like 10-15% higher from what you see in the first quarter 2004.

And the non-comp costs on the institutional securities side, is that also sustainable? Obviously it is partly linked to transaction volumes as well?

Right, correct. I think what we are seeing in the first quarter is not really a sustainable level. I think we have a number of items which just look to be more seasonally driven, and so I would expect that number to trend up somewhat.

Thank you.

Next question?

[Operator's Instructions] We have a question from Miss Fiona Swaffield, Execution.

Good morning. Questions in two areas. One was, I think I heard you say that the provisions in CSFB were obviously very low, and I think you said they would trend up towards a more normalized level. I wondered if you could comment on - I know it is a difficult area - but what you kind of mean by normalized?

And the second is on the Tier 1 equity, the actual equity. Could you tell us how much the deduction is for Winterthur - the 50% under US GAAP - is it any different than it was under Swiss GAAP, which I think it was CHF2.7b? I think you announced that in 2003. Thanks.

I think we have been asked, I think, every quarter the question on giving guidance on CSFB's provisions. Given the environment we have come through, I think it is very hard to identify what normalized provisions are. At this point, we do feel that provisions will trend back up as we come through the bottom of the credit cycle. But we do not have a number in mind with regards to normalized provisions.

As it relates to Tier 1 capital, the treatment of Winterthur is essentially identical under Swiss GAAP. And I do not have the deduction in my head but if you call Investor Relations they can get it for you.

Thanks very much.

It is very similar to the Swiss GAAP number because, although the equity in Winterthur is up, the goodwill is up also.

Okay, thanks.

Next question?

We have a question from Mr. Mark Fogey, Lehman Brothers. Please go ahead sir

Thank you. Just on capital ratios as well. The convertible bond of CHF1.25b, I believe, is that included within the Tier 1 capital or not? That is it.

Yes, it is included in Tier 1 capital. It is also included in the fully diluted earnings per share. Although, under the way it is calculated, they put the maximum number of shares in to the calculation which I think is just over 40m shares. As long as the share price remains above CHF37.00, the actual dilution would be more like CHF33.7m. But as you saw in the balance sheet under US GAAP that instrument is characterized as debt not equity.

Okay, thanks.

We have a question from Mr. Kristoff Richer, Zurich Continental Bank.

Yes, good morning. I have just one question. Could you give an update on the European Onshore Private Banking Strategy in terms of net new money development, assets under management levels, and also the expected the breakeven time you have? It is quite a long time you gave an indication from that. Thank you.

As you know, we do not give out a vast amount of details here. But what I can say is that we are so far in line what we have expected from the development there. With respect to the breakeven points, we still expect to be breakeven there between 2005 and 2007, depending a little bit on the different countries. And also with respect to asset inflow, it was okay for the first quarter 2004. So overall we are clearly improving there and we are developing like we have planned it then.

Next question.

We have a question from Mr. Heinrich Beamer, Bank Sal Oppenheim.

Yes, hello, good morning everybody. Perhaps on the potential to manage down your commission expense. Do you see there a potential? Is Private Banking trying to do more things in-house, particularly after the switch to US GAAP - whether that is increasing your cost income ratio?

I am not sure that I have the question right but the commission expenses, they are to a large extent driven by the overall market development and by the client activities. So I do not see, spontaneously at least, possibilities to manage that down.

Heinrich, any other questions?

That is okay.

Okay. Next question.

[Operator's Instructions] Ladies and gentlemen, at this time there are no further questions.

Thank you all very much for participating. We look forward to speaking with you all next on August 4 and thank you.