Credit Suisse Group AG (CS) 2004 Q2 法說會逐字稿

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group's second quarter and half year results 2004 conference call. As a reminder all participants are in listen-only mode and the conference is recorded. [Operator's instructions]

Morning ladies and gentlemen. Welcome and thank you for joining the Credit Suisse Group second quarter and half year results presentation. The conference is also transmitted live on the web and via a telephone conference. I am joined on the podium here by our CFO, Phil Ryan, and for the questions and answers, the CEOs of the Business Units - Walter Berchtold for Credit Suisse; Leonard Fischer for Winterthur; and Brady Dougan for Credit Suisse First Boston, will also be available to answer any questions you might have.

Let us now turn to the next slide of our first half and second quarter results. We are actually pleased to announce a net income for the second quarter of close to CHF1.5b. And, together with the strong results in the first quarter, the first half year stands at CHF3.3b which in our history is the best result since 2000. This result was driven primarily by good revenue generation across most businesses, and the improvement in economic conditions versus the prior year, as well as our continued focus on process efficiency.

However, our second quarter results not only underscores the Group's fundamental strengths, but it also pinpoints the areas we must improve first on going forward. For the Group, the return of equity came in at 16.6% for quarter and at 19% for the first 6 months. Both measures within our long-term target range of 15%-20%. Earnings per share stood at CHF1.26 in the second quarter and at CHF2.82 for the first half.

For Private Banking, the net income of CHF665m in the second quarter and CHF1.35b for the first half of 2004, are evidence again for this segment's powerful client franchise, and it is expertise in the areas of product innovation, advice and distribution.

Corporate & Retail Banking reported a net income of CHF445m in the first half of the year, driven by an exceptionally strong second quarter. But this segment, even if it continued to enhance its profitability, it benefited from gains on interest derivatives in the second quarter.

Life & Pensions net income was CHF206m for the first 6 months and CHF67m in the second quarter. This result was driven by a strong investment result and the further reduction of administrative expenses.

The Non-Life segment reported a year-to-date net income of CHF185m and CHF82m in the second quarter. This stems from an improved underwriting result and high investment income, but was partially offset by charges related to discontinued operations in the UK, France, and the streamlining of our Spanish operations.

For CSFB, the second quarter was characterized by a more challenging market environment as we have see across the market, which resulted in lower trading income and reduced levels of client activity. This effect was partially offset by strong results from Wealth & Asset Management, as a result of gains from our private equity business and steady asset management fees. Net income from the business unit came in at CHF430m for the quarter and CHF1.2b for the first half of the year - that is also one of the best first halves since 2000.

Before progressing with a review of our financial results, I would like to take this opportunity to make some points about where we want to go, and where we see the Group heading. I am sure you all closely followed the June announcement by the Board of Directors, which clearly mandated a One Group structure. We will implement a more functional, operating model to further strengthen the Corporate Center going forward.

In addition we will continue to intensify co-operation across our banking units and segments. For Winterthur we said that we will be evaluating our options for maximizing value. But there is a pre-requisite to that, we will continue to drive further improvements in its operating performance. Throughout the Group, we see client focus as a key success factor and we want to increase the emphasis on accountability.

Credit Suisse Group consists of a great set of franchises, and provides the basis for continued organic growth. While we may be best known for our leading, global, private banking business, all of our segments have areas of top-class business which we intend to leverage.

Finally, we clearly recognize that we need to build on the turnaround at CSFB. The performance has not been satisfactory and we are still behind our peers with regard to our margins and performance.

Let me now make a few comments about CSFB. As you all know, Brady Dougan has appointed CEO of CSFB. He has already announced the appointment of several key members of his senior management team. Regarding CSFB, I want to emphasize some key facts which sometimes get overlooked. CSFB's core franchise remains very healthy. The business has leading positions in several investment banking areas, including leveraged finance, mortgage and asset-backed products, private equity, and middle market M&A.

In addition, we have strong teams in the areas of energy and technology banking and equity derivatives, amongst others. The recent creation of the Alternative Capital Division has allowed the use of [indiscernible] leading alternative platforms, positioning these business for future growth. But one thing is also very clear, despite all these strong business, we have to be better. CSFB's margins are substantially below its competitors.

Our focus is, therefore, on the implementing a detailed plan to grow revenues at a rate above market growth. Here growth initiatives have been divided into three broad categories. Firstly, strengthening and expanding the franchise where CSFB is already a market leader, and which we expect to grow in the future. Secondly, increasing the scale of existing business where CSFB is behind but has a platform that can be further exploited.

Thirdly, entering new business areas where CSFB has natural advantages but currently no presence. CSFB will conduct a strategic process during the rest of the year to evaluate its core business priorities and focus. Through these various initiatives, the goal for CSFB is to build on an already top-notch platform, in order to be amongst the industry leaders with respect to profitability.

Now let me come to the outlook for the Group as we see it at present. The Group is confident that it can achieve further improvements in its results, and sees progress in a number of its core business and a solid pipeline of mandates and products. However, our results are dependent of an economic trends and market conditions, as they impact line activity and transaction volumes. We also are challenged with cost pressures in many business, particularly investment banking, as we pursue a growth strategy, and protect our franchise in a competitive market.

And I would like to add that is not only for us the case, that is the case in the industry at the moment, as you very well know. Going forwards, the Group is committed to achieving continued progress in its performance, relative to its peers. Last but not least, we would like to announce our intention to host an investor day in December. At that time we will be able to present the progress we have made on our strategy, and give you an opportunity to review each of our segments in detail. Further details on the investor day will be communicated to you in the coming weeks.

Now I would like to hand over to Phil Ryan to present our financial results in more detail. But as most of you know, Phil has been-- Phil will be stepping down as CFO of the Group, effective tomorrow. I would like to take this opportunity to thank Phil very much for an outstanding job over his 5-year term as CFO of the Group. And I am sure he cannot deny it was a very interesting time.

Well, he has made a number of substantial contributions to the Group over this period, including improvements of financial reporting, and certainly all the capital management. So he is now looking forward to a well-deserved sabbatical. Thank you very much, Phil.

As of tomorrow, Renalto Fassbind- why do you not show yourself quickly? - will assume the role of Chief Financial Officer at Credit Suisse Group. Renalto has been with us since June 1 and has-- is already well up to speed. We look forward to Renalto's contribution and many of you will get to know him better in the coming months, and at our third quarter earning results in November 4. So Phil?

Thank you, Ossie. Starting off with revenues, across the board, the Group showed revenue improvements compared with the second quarter of 2003. Banking up 24%, CSFB up 4% and Winterthur up 4%. However, the first quarter compares and reflects the more challenging environment, and the lower level of client activity across the board. On the cost side, costs remain flat with compensation moving down, with revenues and other costs moving up - reflecting growth in the business and a relatively low level in Q1 of 2004.

At this point, for the analyst community, I would like to just make a brief comment on taxes. The tax rate is down again this quarter. The tax rate is 18% for the Group, year-to-date is 20%. The primary factors here are, that in Banking the tax rate benefited from a second quarter trading and derivatives strategy around dividend payments, which brought down the rate. And at CSFB there was impact from the FIN 46 revenue - which I will get back to later - and also the settlement of an outstanding tax case.

We still believe the statutory, or the standard rate for the Group is between 23% and 25%. Covering the credit factor very quickly. The Group continues to benefit from a very good credit environment. You see a tick-up in the second quarter, particularly at CSFB but these numbers are well below long-term trends. And we still to continue to benefit from the environment.

Looking at impaired loans, we continue to make progress in bringing down the portfolio older non-performing and impaired loans, and also the coverage ratio has improved or is stable. On the capital side, again capital remains quite strong at 11.6% on a consolidated basis Tier 1 capital. The risk rated assets are essentially flat in the second quarter compared to the first. Tier 1 capital is modestly up based upon retained earnings but is offset by an increase in treasury stock.

These are shares we purchased during the quarter on market weakness, to pre-fund our compensation plans that come in at the end of the year. With that, as a-- covering a number of Group points, let me move on to make some comments about the 6 segments.

Starting with Private Banking - Private Bank had another very good quarter in Q2. Revenues were up 26% over Q2 of 2003. The main drivers were - continued strong products and fees, with our innovation in that area; increased assets under management; good trading results which did include a CHF57m gain on interest rate derivatives not qualifying for hedge accounting. Those positive impacts were offset by lower brokerage activity and lower volumes of client activity.

Q1 versus Q2, we are down modestly on lower brokerage activity. Expenses were up compared to Q2 of 2003 on higher compensation, which was partially offset by efficiency gains in the business. Q1 versus Q2 expenses were largely unchanged, versus a typically low Q1 level. The tick-up in the cost income ratio in second quarter was solely the effect of lower revenue levels.

You have seen slide 15 from us many times, which details the gross margin for the business. The gross margin remains quite high. The assets under management margin is up 4 basis points compared to the previous year, which is driven by higher demand for structured products which have a higher asset based component.

The transaction fee was stable compared to Q3 but down 9 basis points compared to the first quarter, driven by lower levels of transaction volume - particularly noted by-- or in line with lower levels of activity at the SWX, which was down 19% in the first-- second quarter compared to the first quarter.

The transaction margin did-- was benefited by interest rate derivative gains that I mentioned previously. Typically the third quarter is a weak quarter in Private Banking, given the seasonality of client behavior. That was not the case in 2003 because of the market rally but we do see that materializing to be the case in 2004.

Last point on Private Banking was another good quarter in net new assets - up 5.8% in the quarter - a growth rate of 7.3% year-to-date. Well diversified across all regions. Continued good flows in Asia and good flows from our Swiss clients. Overall, the assets under management have dropped slightly, driven by foreign exchange and market levels during the quarter.

Switching gears to Corporate & Retail Banking, I think the key factor here to understand at the start is in the box, right below revenue and expenses where-- The Corporate & Retail Bank had a CHF136m gain from interest rate derivatives during the period. These are interest rate derivatives used to hedge the asset liability match, which do not quality for hedge accounting.

We continue to make progress in bringing down the level, or bringing up the level of hedge effectiveness but it is important to understand that is in the results for the quarter. When stripping away those results, the Corporate & Retail Bank made good progress in commissions and fees, which is in line with their strategy - both on the retail side and the corporate side, and other improvements in efficiency. Expenses were up 12% versus a seasonally, very low first quarter which were somewhat offset by efficiency improvements.

Turning to the insurance business, starting with Life & Pension. Half-over-half gross premium was up 1%. Our deposit and unit link business, which is the focus of the strategy, was up 20%, half-over-half. While the traditional business, particularly in Switzerland and particularly the employee benefits business, was down 6%. A decrease in policyholder benefits follows lower premiums and lower guaranteed rates in the Swiss employee benefits business. Expenses were down 4%, driven by lower administrative expenses, which were of CHF73m year-over-year.

A key factor, however, was the higher investment income. Investment income was up year-over-year, with higher gains and substantially lower investment impairments. The investment return for the first half was 5.1%, made up of a current return of 3.9% and net realized gains of 1.2%. The policyholder dividends were up noticeably, following higher investment return and included the Q1 provision, reflecting the new Swiss legal quota.

Switching over to the Non-Life business - Non-Life net premiums up 9%, mainly on tariff increases. The combined ratio for the first half has fallen below our target of 100-- well, our target was to get it below 100%. It did fall lower than 100% to 99% in the first half, and was at 97.5% in the second quarter. Driven primarily by lower expenses, where expenses grew at a much lower rate than premium growth, producing a drop in the expense portion of the combined ratio of 1.8%, and the claims level was stable.

We did have a loss in the second quarter of CHF103m in discontinued operations in this business, which relate to the exiting our businesses in-- our business France, and in particular business in the UK. We also had some restructuring expenses in Spain. The investment portfolio, similar story in the Non-Life business - higher realized gains and lower impairments.

I would like to switch gears now to CSFB. Overall, for CSFB, net income more than double compared to Q2 of 2003 but was noticeably off Q1 2004. The results were primarily made up of strong results in Wealth & Asset Management, that were driven by private equity gains. These are gains that come from the harvesting of investments in the Private Equity business, and I will get back to that in a moment.

The offset-- This is more than offset by a decrease in revenue of 22% in the institutional securities area, which was caused by challenging markets and lower levels of client activity. It was offset by better performance in our advisory business. Expenses overall were down 6% versus Q1, reflecting lower compensation in line with revenue but higher non-compensation expenses that related to higher levels of activity.

The lower results in Q2 in CSFB are demonstrated in the main key performance indicators, with a pre-tax margin dropping to 13.2% and the return on allocated capital at 14.5%, compared to a very strong quarter.

Now let me make a quick clarification on the next slide, about the consolidation of certain private equity and other funds under FIN 46, which is the new US GAAP statement dealing with consolidation. We made a business decision at CSFB not to change the structure of our private equity agreements with our limited partner-- limited partnership investors. Therefore, under FIN 46, CSFB is required to consolidate certain private equity and other funds as of January 1.

At the end of June, the amount of these funds that were consolidated on our balance sheet was CHF5.6b. The impact of that is that there is no impact on the net income. There is, however, some geographic impact on the income statement, in that the revenue from these consolidated partnerships shows up in the revenue line. And an equal amount is backed out as minority interest and you can see it very clearly in the financials.

The reason I make a point out of this is that it is unique to CSFB, which reflects the size and importance of our private equity business. And we have made for you, in all of our key performance indicators, an adjustment for this. Because, for example, in this quarter it would make our operating statistics, particularly relative to revenues, look much better than they should be. And at other times it may be the opposite effect.

I would also like to remind everybody that private equity is a core business for us at CSFB. We have a leading position in the business and its one of our growth areas. Over the cycle, this business will produce significant revenues in the form of investment-related gains. And these are not necessarily one-offs but they are not also necessarily smooth in how they come into the income statement. We do not expect as high a level of investment gains from private equity in the balance of the year.

Focusing on Institutional Securities, let us talk first about fixed income and equity. In fixed income, revenues were down 46% versus a very strong Q1 of 2004. The main drivers were low levels of client activity and transaction volume; lower proprietary trading; and a high level of losses in derivative positions used economically hedge our book but do not qualify for hedge accounting. There is significant effort being put forth as we keep our transition to US GAAP, to bring down this volatility. But, nevertheless, it was a factor in the second quarter.

The equity division is down, with lower transaction volume and lower levels of client activity effecting the cash trading business. Cash trading has been on a trajectory of gradual improvement over the last several quarters. And this is the first quarter in a while where we have seen it ticked down, related to levels of client activity. Also, lower proprietary trading but the level was similar to Q2 of 2003. An the convertible business - trading was off, reflecting the rise in rates and reduced liquidity in that marketplace.

If we switch now to the Investment Banking division - Investment Banking overall was up 7% over the first quarter, 3% over the second quarter of 2003. Debt capital markets was up 19% versus the first quarter, primarily driven by higher leverage finance and syndication fees, as that market remains very robust. We are ranked number three in investment and grade debt, which is an increase versus the previous quarter, and remain number one in high yield.

In equity capital markets, down in line with our peers. Down 22%, primarily driven by lower volume. We do remain number three in the IPO market. On the advisory side, revenues were up 21% versus the first quarter, 11% versus Q2 of 2003. There are number of modest market share improvements and increases related to high levels of client activity.

Overall, we are still dissatisfied with our market share at number eight but we are number three in terms of number of deals. And we are solidly in the top five with regards to share of wallet, meaning our overall share of investment banking fee income.

Switching over to Wealth & Asset Management. Asset management fees up 16% versus Q2 of 2003, approximately flat compared to Q1. Here we see the biggest factor is the swing factor in the private equity investments, reflecting a number of realized gains from the portfolio. Names likes TXU, [Energy], [Nextel] and others. Without these private equity gains, the Wealth & Asset Management division would basically be in line with the first quarter.

Looking at the new net asset trends, CSAM has turned around they-- their net outflows have bottomed out over the last several quarters. And we have seen a noticeable improvement in net new asset flows, as also in the alternative investment area, and private client services. As we saw, also with other wealth-- our other wealth management activities, the total assets under management are down on market movement and foreign exchange.

In conclusion, as this is my last time before this group, I would like to say that I am very proud to have served our shareholders as CFO over the last 5 years. And it has been particularly great to work with such an outstanding team of people here at Credit Suisse Group. I have enjoyed working with many of you on this call, and look forward to potentially seeing you in my next challenge.

And with that I would like to turn it over to questions which Ossie will moderate.

[Operator's instructions]

Thank you, Phil. We are now ready to take your questions. We will take your questions. We will take the questions first from the auditorium here and when we have no questions any more, we will go over to the telephone conference. Are there any questions? Yes, please.

Hi, Philipe Peson from UBS. A few questions on CSFB and then on the Group in general. First, when do we actually expect to be able to close the pre-tax margin gap to peers in CSFB? And in that context, could you comment on the flexibility of your cost base during that re-investment process? So meaning in an environment with low revenues, would you actually accept temporary losses, in order to achieve a better strategic position?

Third question, CSFB, and do you think you need to allocate more capital to this side? And then turning to the Group, could you comment on potential intra-group synergies. It appears as if you want to run the Group on a more combined basis. What could be the impact there in terms of synergies and potentially also the financial impact of those? Thanks.

Thank you. On when can we close up the margins to our peers and CSFB. I think will, hopefully Brady will be able to give you some more information there on the investors day in early in December. And, because we have to work on plans, we have to review the business. The market has changed and is changing continuously, as you know.

And on costs, I think you look at what happened in the investment banking industry. Everybody hired people from everybody and drove up prices. You often see that at the end of a bull market and we are sure to have bull market in that case. And, but also you had commercial banks, big commercial banks coming in and hiring investment banker. On top of it, you had an outflow of talent into the [head shrunk] market.

All that helped obviously to increase the cost for talent, and increase the cost for the professionals who understand their business. Now, I think we are not an exception there, and we certainly would, and have to, keep under our costs under control in that kind of market environment we see with watertight quarters.

You have to try to-- cost management is certainly part of how in the end your P&L comes out. Do we want to-- Are we prepared to lose market share? If the business would-- If we came to conclusions that the business would be unprofitable over a longer-term, I think we certainly would be, or was not prepared to lose market share than hang in there and kill ourselves.

On cost synergies within the Group - knowing our Group as you know it since years and following us, we have since 1997, when we started to form different business units, to get better overview over the cost structure within the Group. Which was a successful exercise and also improved the business in these different areas from private banking to retail banking, and so on.

But it also created at a later stage, in a way, silos. So everybody, every business unit, worked for itself without, let us say, the synergy effect which you should have within the Group got lost. And now we think it is time to refocus on the One Group structure, and the one firm, shall we say, culture. And try to make, for example, the corporate bankers in Credit Suisse work better together with the investment bankers in Credit Suisse First Boston.

Utilize the product innovation of CSFB more within Private Banking, and working together on the Private Banking side with Investment Banking side. And creating ideas regarding investments, and generally also on market outlook on-- Because our business is, as you know, trying to get the future right. And so, with more intelligence you have there the better.

And then also, certainly in the Corporate Center, we want certain functions from the legal and compliance down to certain operations. And there they could-- will be improvements and we will have-- we will install clear rules so which every business unit has to adhere to, and to smoothen the whole process.

So there is-- it is difficult to put a number on that. And-- But I think and in a way in some of the business units we ought to have programs running like operational excellence and-- So which will bring over time, over the coming years, some reasonable results and should bring over the next few years continuous saving, cost savings on efficiency gains. Mr. Beamer?

Heinrich Beamer from Bank Oppenheim. On the one-offs, first just to quantify. You mentioned the CHF57m in Private Banking from credit derivatives, the CHF136m in Corporate & Retail Banking. You mentioned a loss at Winterthur, the restructuring charge, the [indiscernible] amount. And then for First Boston, the gains on legacy issues and in Credit Suisse Asset Management the gains on private equity.

I would like to have that quantified, both on the revenue line and how much of that came really down to the bottom line? Were there costs related to it and were there certainly taxes related to that? That is the figure question.

On the other hand, I would like to understand why gains in private equity-- I would like to see in Credit Suisse a fee-based company where really the revenue comes from fees, and the same question arises. I imagine that in Corporate & Retail Banking the derivatives may have been used with the intention to hedge against rising interest rates?

So what was the underlying position which caused some losses, for which you needed the hedge? Or was that that much more taking a view and trading? And the other same question about Private Banking. Why does Private Banking, which I also like to see as a fee-based business - client-driven - why is there interest derivatives gains?

So there is a very-- to that is a very simple explanation. And we do hedge all the mortgages we give we immediately hedge. So we are not running an open mortgage book. And now you have got these gains because some of the swaps on the books to hedge the mortgage book. And Private Banking has a mortgage book as well as Credit Suisse Corporate & Retail Banking.

Some of the swaps did not quality for US hedge accounting but they are running out at the end of this year. And though, obviously, when interest rates are going up because we have that hedge on, then you book a profit. And when interest rates are going down you book a loss. But that is more coming more out of accounting. So it is certainly not taking a [punt] on the market, and it would have been better actually to do it right.

This is fairly standard stuff. This is managing your alcove position. This is the kind of thing the French banks have been complaining about. And when you make the transition to another accounting standards, you have a whole book of derivatives which are not qualifying. You have got to move through that over a period of time.

So this is very standard stuff. These are timing differences, they are not economic differences. So, over time they all ends up in the same place but between here and there you have got volatility in the mark-to-market of those derivatives. Because you are not mark-to-marketing, mark-to-marketing the corresponding asset. So that is--

Do you seriously expect these product funding negative effects to be [brought]? Which period then is the corresponding--

I cannot answer that because you--

Spread over several quarters.

It depends upon interest rate movements and market conditions, and how the hedges behave. So you cannot necessarily predict it What you can see in this quarter is, that it relates to the retail bank, the main driver of the gain was a rise in interest rates but you cannot relate it to a specific formula.

And then the quantification of the exceptionals in First Boston and Credit Suisse Asset Management, and the bottom line effect of roughly estimated?

Well, we show-- as relates to the private equity business, I think we can appreciate your comment about wanting it to look like a simple, clean, asset management business. But the fact of the matter is private equity for us is a huge business, and it is the cornerstone of our alternative investment franchise. And the private equity business will, from time to time, result in taking gains - that is what the business is all about.

On page 26 of the quarterly report, we clearly detail for you what the gains are. So you can see what is the prosaic asset management income and what are the gains. It is hard to unscramble the egg and say, if you did not have those gains what would the bottom line have been? More or less I-- as the comment I made earlier, the wham in the second quarter and first quarter would have been similar, if you had not had the private equity gains.

As it relates to the legacy numbers, I do not have that off the top of my head. Investor Relations will have to get back to you.

Christian [Sturrock] from Cheveraux. I have got a question on the impact of derivatives and hedge accounting. Can you quantify the impact for the corporate and retail side of the Private Banking? And you indicate that part of the fixed income decline in Institutional Securities is driven by losses on derivative hedge accounting. Can you quantify the negative impact of that? You have quantified the positive impacts for the other units.

It is a very good question. For our Swiss banking business, is a very simple business. Every derivative they have on their books is related to the alcove position. So you can disclose a repeatable number because it is so clear what is going on. At CSFB, where you have a giant derivative business and a giant hedging going in, it is not possible to pull out a piece of that derivative book, and say this is for hedging - because hedging is a core part of the business.

What we are referring to is particularly in the structured note business. This business has been executed in a way that is more compatible with, say, IAS, and that business is going to make a transition towards a US GAAP model. And in the meantime, there are these fairly large timing differences. And again, these are not economic, they are not shareholder relevant.

They are timing differences with regards to accounting recognition and that was a significant negative impact in the trading line in the second quarter at CSFB. But it is-- We have agonized over this and decided it is not appropriate for us to qualify. And it is a factor of the business, I mean we have to adapt that we have to work through it.

Maybe just a follow-up question on another issue on the [Exel] Capital reserving, where Exel Capital has indicated the CHF925m. You increased reserves in the third quarter. Can you indicate - you have obviously had reserves, previous increasing reserves in the third quarter, and you have probably got some re-insurance contracts in place as well to reinsure against that. Can you give us an indication as to your best judgment on whether this will have further financial impact-- further material impacts going forward?

No, unfortunately, we cannot comment on any of those numbers. As Winterthur has not yet received sufficient additional data related to the relevant subsequent to December 31 2002. The update is-- to update its current estimate. So the last time we got data from Exel was in December 31 2002, and the reserves we did then are based on what the actuaries told us we have to reserve, and we did that in 200

We only receive in the next few weeks additional data from Exel and we will have to see then what they chose.

So you have also got some re-insurance contracts in place besides the reserve strengthening?

Yes.

Thank you.

Kristoff Richer from ZCB. You mentioned a new role within Winterthur to check all strategic opportunities for that business unit. I think this is a statement you made already before but, at this stage, you make a big point of that. Can you explain what really has changed in terms of strategic initiatives or possible moves?

We are, of course, we are reacting only to what the Board said in its statement in June. Where it very clearly, or it made it very clearly, that we are going away from the bank assurance business. And look at Winterthur more as a financial investment, and try to improve its operation as much as possible. And as we have done over the last few years to, yes, find the best solution for all the stakeholders in the future there for that company. And there is not more to add to that.

Claudia [Meyer] from Bank Vontonbel. I have some questions for you, Phil. You said before that the minorities was-- were related to private equity gains, and they were being offset. So, in which other line is the offsetting line? First question I have, and then the second question. Probably you can comment a little bit on the other revenue line which has huge swings? And last question, litigation risk in the US. Where would you book provisions? And did book for some provision and what is the state there? Thanks.

Well, there as it relates to the private equity, the offset is in the minority interest line, which is just one-- is about two-thirds of the way down on page 32. The gains are in other revenues and that is the offset. I am sorry I spaced out on your second question.

On litigation risk but first let me tell you so. There is no data of information currently which indicates that we have to make additional reserves in there.

Probably still on the other revenue line. So besides from this private equity, which you could probably quantify a little bit, what we would have to expect? What is the reason for these huge swings? I mean it can be between minus CHF400m to, now we have seen CHF1b. So it is really huge swings and I would like to understand this more? Thanks.

If we go on with another question, let me get back to that.

If there are no any questions any more from here, then can we go over to the telephone questions, please? Can we have the first question?

We have a question from Mr. Matt Spick, Deutsche Bank. Please go ahead sir.

Good morning. I just wanted to ask a couple more questions about the investment bank. Firstly, historically when you have had a poor trading result, there have been occasions where you have scaled back your value at risk. Can you just give us an indication as to whether you think that the trading result was poor enough that - or market conditions difficult enough - that you are going to do that? Or whether the poor result was more to do with these derivative problems that you cannot quantify for us?

And thus that you think the underlying business is okay, and you will sticking with your value at risk in the market? And a second question I wanted to ask was something you have been asked about in 2002 in particular. What proportion of your compensation is guaranteed? I just wondered if you could let us know whether the proportion of guaranteed compensation has been going up at CSFB, given that you are building out in some areas there? And is that one of the reasons why the comp ratio has gone up?

And the third question, which is again one that we used to visit a lot in 2002, is previously you did want to give a blended guarantee figure for Winterthur Life. What you though the overall business had to pay out on its guarantees rather than just the BBG business. And I wondered if you could give us update on what the overall guarantee rate was in Winterthur Life at the moment?

And just one final little point. I think you did say to one of your other questions that IR would get back to them on the legacy gains. I am sure everybody on the call would appreciate it, if those numbers were emailed to back to your entire interested investor base because I think those are very important numbers. Thanks.

Thank you, Mr. Spick. I let Brady Dougan answer the trading questions. On salary guarantees - and please do not believe what the newspapers are writing there - so we are not giving multi-year guarantees. But, very clearly, if you hire good people these days you have to guarantee the first year, and I think that is going back to an old practice. But we are not in multi-year guarantees. Trading, Brady?

I would just say with regard to our VAR and our trading operations, we are clearly committed to continuing to grow in a disciplined and a very deliberate way, our trading operations. That means putting the right people and systems in place - we continue to do that. We are obviously disappointed with the second quarter results on the trading side but that was after a very, very strong first quarter.

I think that we will continue to see our VAR remain at stable or increasing levels over time, in line with our commitment to continue to build and grow those businesses.

Guaranteed rates at Winterthur Life, Lenny?

Well, the guaranteed rate and the Group business is at 2.25% at the moment. We are not giving, or not calculating, one number for all the other individual life businesses, as that is different currencies, and the level of a legal obligation on these numbers is changing all the time. If you want to have it as a guidance, then you can see that the overall implied guaranteed rate for the Swiss-related business is - between group life and individual life - around-- between 2.5% and 3%.

It is depending on how you take the different individual life guarantees in there. But this is at the current Group life guarantee which is also changing every year. So there will be a new decision by the politicians on the minimum guarantee levels for the Group life business next year.

Okay, thanks.

By the way, going back to the other income question that Claudia asked. The CHF515m of FIN 46 revenue is in the other line. If you back that out and back out other effects from going to US GAAP, the number is very stable. It is really the CHF515m of FIN 46 income.

Next question please from telephone conference.

We have a question from Mr. [Vasco Moreno, KP Bridget & Woods]. Please go ahead.

Hi, it is Vasco Moreno from KP Bridget & Woods. Just a couple of questions. First of all on fixed income trading. I think you under-performed to your competitors substantially there. And you mentioned basically that some of it is due to lower client activity, lower prop gains, and some losses in derivatives used for hedging. Could you just quantify what proportion of the fall, if you will, is attributed to each one of those three areas?

And the second question is regarding CSAM - pretty good performance there, particularly in the traditional asset management division where you actually saw pretty strong inflows. And I was wondering if this is basically it? If you feel that now CSAM is fixed and we can actually continue to see relatively healthy inflows going forward? And the second question on that is where did it actually come from?

Thank you very much. Brady, do you want to answer that?

Well, on the fixed income side, I mean it is hard to precisely delineate exactly which categories the underperformance came from. But I would say that probably, reasonably equal contribution from each of those areas in terms of client prop, and some of the hedging issue. With regard to CSAM, clearly the operations have continued to improve there.

Our investment performance has improved and, as you note, our net new asset performance over the past 6 months has improved quite substantially. So we are very positive about that. With regard to where those flows came from, I do not know the answer to that. Do you Phil?

No, I do not know.

No, normally we do not tell either.

Okay, thank you.

Thank you. Next question, please.

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

Yes, thank you very much. Just a question for Brady Dougan on CSFB. Obviously you have made it clear that you have some strategic calculations to run through, and you are going to present the plan in December. But for the moment, do you plan establishing a pre-tax margin target or comp target at all? Or are we going to be really talking about a focus on revenue generation?

Well, I think as Ossie mentioned, we will be talking a lot more about it in the investor meetings in December. I think clearly our focus has to be on revenue growth, that is going to be a high priority. But obviously, as Ossie mentioned as well, our pre-tax margins are below the competition. We need to improve those.

Those will be through a combination of revenue improvements but also looking at the cost side, and those of some of the things we are going to work through. So I would say definite focus on revenue growth but, obviously, we are going to consider all aspect of the business.

What about restructuring charges, can you rule those out or is it too early to say?

No comment on that.

Thank you.

Next question, please.

We have a question from Mr. Jeremy Sigee, Citigroup. Please go ahead sir.

Thanks very much. Three quick questions if I could. Firstly, just on the same issue of the cost income ratio in CSFB. Do you not see a risk of further slippage in that ratio in the third and fourth quarters, given that the revenue environment could well be weaker, and some of the costs are fixed or guaranteed?

Second question, Private Banking and Corporate & Retail Banking. The other expenses, as you noted, were up from a normally low Q1. Is the Q2 run rate typical in those two businesses? And my third question, Private Banking, could you just give us a quick round-up of where the inflows were mainly coming from? Thank you.

Let me start quickly with Private Banking and CRB. The first quarter normally, especially in CRB, has a lower cost associated to it and-- which are made up in the second quarter. Something to do with the booking of costs and-- but second quarter nearer to the run rate actually than the first quarter. In-- We do not have to underestimate there because of the results of the compensation cost increased a little bit.

In Private Banking, I think the underlying costs are pretty stable. But even there you see in the industry for talent getting bit up at the moment across the world, and especially in outside special, and in the offshore markets. So prices for good relationship managers are increasing. But I think overall in Private Banking and CRB we have reasonably good cost control. You want to add something there, Walter?

Well, I do not really have to add too much. I think we have controls pretty much in check, and the slight increase really is as well related to some of the compensation pulls.

Brady?

I think on the issue of the cost income ratio at CSFB, and whether or not we see further slippage in the third or the fourth quarter. I mean, we see a lot of opportunities for revenue growth. We are going to be focusing on those. Obviously we cannot-- we are somewhat at the whims of the market in terms of how the market plays out. So that clearly will have an impact but we also note that costs continue to be under control.

And our second quarters were in line, in fact, down a bit from the first quarter. And so we are obviously, as Ossie mentioned early on, I am going to continue to be watching our costs. And we hope to grow revenue but, obviously, we are subject to the markets.

Thank you. Next question, please.

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

Good morning. David Williams from Morgan Stanley. Three very brief questions. First of all on the Private Banking. At the time of your transition to US GAAP, you suggested that around 130 basis points of gross margin was a normal through the cycle type margin. Given the fact that you have had a strong Q1 and a strong Q2, do you still 130 basis points under US GAAP as being the appropriate, longer-term margin?

Second, on the private equity - could you quantify, please, the surplus and the market value of the portfolio over the carrying value, to give us some sense of, say, the inherent value in that business? And third, just a technical question. The interest rate hedge gains that you are reflecting in the revenue in the quarter. Are the subject to taxation or are they not taxable in that respect? Thank you.

Thank you. In Private Banking, I think forward going all [is a much] [indiscernible] 130 basis points is reasonable to achieve. Obviously, what influences the margin very much is, as you see occasionally from quarter-to-quarter, is the declined activity. It is the interest lines have, which is again depending on how the market is developing on structured products. And there generally the margins are compressing as the market and the rest of Private Banking there understands the products better.

There is a bit of competition going on but I think, as we have now proved for 6, 7 years, that we can hold this margin and in a reasonable market environment. And we certainly will try to improve on it actually. Phil?

As relates to private equity, David. I think the valuation metrics used in the funds do not necessarily translate to future cash flows. I think the key thing is the point we have made, that we do not see a repeat in the balance of this year, of the high level of gains in the second quarter.

Next question, please.

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

Yes, I have a question especially on the very positive development of the net interest income in Private Banking. What was the effect on the dividend income? And the second reason-- The second question is also to hedging. I think you said that it positively effected the trading revenues. In effect, then the trading revenues in Private Banking would have amounted to a loss. Are there specific reasons for this?

Yes, there is. There actually is a very specific reason for it. I mentioned when I was discussing taxes, this dividend and derivative-related strategy in trading in the Private Bank. In this strategy, the Private Bank captures dividends which show up in the net interest income line under US GAAP. And the corresponding, ex-dividend loss shows up in trading. This is a unique impact that occurs-- that has occurred in the second quarter because that is when the dividend payments cycle is.

And I think to get the trend right, you have to add the net interest income and the trading line together. But if you split them apart, which we cannot really do, you would see a very normal looking trend in net interest income. And trading, actually, by itself was quite strong in the second quarter.

Next question please.

We have a question from Mr. [David Esera], Morgan Stanley.

Good morning. I have a question relating your trading activity on page 9 of your press release. It looks like in the second quarter you had the one day VAR loss. Just looking at the histogram on slide-- on page 9 of your press release. Can you tell us in which area was it related and has it changed your [rate capital] in the asset class? So where you had the one day VAR on that trading date?

We have to get back to you on that one. Why do you not call Marc Buchheister?

Thanks.

Next question please.

Gentlemen, at this time there are no further questions registered in the teleconference.

In that case, thank you very much, and hope to see you at the next conference on 4 November.