Credit Suisse Group AG (CS) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen. Warm welcome to you here in the auditorium and on the Internet and on the telephone.

Just let me point out our disclaimer on slide 2, as we can see there. You are familiar with this.

Now, ladies and gentlemen, 2005 was a very decisive year for us, not only with the results we have good news, but as you know we put out two banking units, Credit Suisse and Credit Suisse First Boston together into Credit Suisse. We started under the name, Credit Suisse, under one name, as one integrated bank on January 1.

That meant that we had to do quite some work during last year which was profitable for the future, but internally did cost some money last year and drew the attention of our people all away from the great client work and to the new organization.

And if you look with that in mind at our results and also that we, during 2005, nearly -- slightly more than CHF1b had made in special reserves. So from that point of view I think our result is not bad. And certainly we -- the management and I think we are on course and what we said we want to achieve in the next few years.

Now, because of that good profitability, the Board proposed to the shareholders to increase the dividend from CHF1.50 to CHF2.00 for 2005. And with a new level of CHF2.00, I think you also see the confidence we have in the business going forward, and do think we can improve on that in the coming years.

Net income for the year was CHF5.85b. And that’s an absolute number that looks low. And the market reacted accordingly to it. But, as I said, if we adjust it for the litigation reserves, which we do not intend to have every year, and also for the change in accounting treatment which we announced this week, then net income would have stood at close to CHF7b or CHF6.00 per share. And that is roughly up 20% on the year before. And I think that shows you a little bit closer what kind of profitability we are running as a Group.

On that basis, the return on equity would have been at 19.5% for the Bank and at 12% for the Winterthur.

During the year, all banking segments benefited from higher client activity. And from a very benign credit environment. So where you didn’t have very much in credit provisions to make, and actually where you also had provisions which were released in that area.

We are aware, like everybody else, that that situation will not stay here forever. So it will probably influence Bank earnings going forward in the next few years. But at the moment we do not see any big change coming up in credit provisions.

In Private Banking, we saw a strong asset growth, far above our target scenario. Our target there is 5% in net new assets. So with a total of CHF43b we were far above the 5%. We see, especially in the emerging markets, the growth in assets continues also during the course of this year.

In Corporate and Retail Banking, for the first time we had a record profit there of CHF1b. But that was mainly because of the benign credit environment. But again, as I said, it’s probably consistent for this year then.

[In our] Investment Banking, our strategy to deliver more focused franchise. I think it did comes through and we, as we will see later, we made improvements in volumes and revenues. We didn’t get the bottom line improvement yet. And so we have to work on cost improvement there. But we are confident that we will continue to improve also the net result there in the coming quarters.

Winterthur, our insurance business, made good progress. And as you can see from the results what is the net income of over CHF1b. And considering where it was three years ago and how we have improved this business, I think it is a very good story and shows that one shouldn’t panic at the wrong moment.

So the measures, I think, overall, what Renato will show you, the measures we have taken in the last few years have come through. We slowly get to a profitability which is comparable to our peers. And I think in the next few years we will beat them.

So, I would like to thank, at this point, our clients at first for the confidence they had in us during the last year, and hopefully they also will have in the future.

And I also would like to thank our employees for, under the circumstances we had last year, moving through the integrated bank and doing a lot of additional work internally, but also keep the business running and producing results which are comparable to the market, I think. That was quite a good job. And thank you very much to our clients and our employers.

And now I will give over to Renato who will brief you in detail on the last quarter and the year.

Thank you, Ossy. And a warm welcome also from my side. Let’s begin the financial overview by looking at slide six, where we briefly summarize our fourth quarter 2005 results.

Net income for the quarter stood at CHF1.1b and earnings per share at CHF0.98. These are up 15% and 20% respectively compared to the same period last year.

With the exception of revenues and Winterthur’s return on equity, all these numbers shown are affected by the charge we took this quarter in relation to a change in accounting treatment related to share awards, which brings me to the next slide, number 7.

As discussed on Monday’s conference call, and following our announcement, the fourth quarter result was impacted by the additional guidance received from the SEC staff on share-based compensation. These are the terms associated with these awards made in 2005, and the decision early adopt the respective standards, which is FAS123 R. We recorded an additional charge of CHF630m which resulted in a reduction in net income of CHF421m in the fourth quarter and the full year of 2005.

This non-cash charge represents an acceleration of compensation expenses otherwise recognized in future years, and has no effect on the Group’s cash flow net shareholders’ equity. It has a minor impact on tier 1 capital.

Furthermore, although it is difficult to be precise about the financial impact of this change in accounting treatment in the future, it will not have an adverse impact on our commitment to the 2007 net income target or in achieving the bottom line integration benefits by 2008.

Going forward, we are currently evaluating the terms of the 2006 share awards to minimize the impact of this change in accounting treatment. We will be restating our net income target for the new reporting segment in April, and will adjust the overall target in the light of the decision communicated Monday, as well as the decision reached concerning the plans for the 2006 share awards.

As you will see later, the accelerated element of the charge to net income of CHF421m is reflected in the Corporate Center. In the future, we will record the segment share of the charge for the 2005 share awards over the vesting period and record an offset in credit to the Corporate Center. So this change will not affect the future planned performance of the segments, including items such as current compensation to revenue ratios or future targets.

Let me go to slide 8, which shows the fourth quarter results in more detail. If we adjust for the shareholder charge in the fourth quarter, net income would have stood at CHF1.52b, 59% over the same period last year.

You’re reminded that last year’s results included also an after-tax charge of CHF242m related to the increase in the provisions in connection with the sale of Winterthur International to XL. Adjusting also for this charge, the year-over-year increase would have still been close to 30%.

Revenues are up 10%. Significant increases in all the banking segments were offset, in part, by a reduction in Life & Pensions, primarily a result of lower investment income.

Total operating expenses increased by 16%, as higher revenues and net releases of credit provisions resulted in an increase in performance-related compensation in the Banking segment.

Return on equity for the Banking business stood at 16.3%, and for Winterthur, return on equity was 11.4%.

Next slide 9, shows a significant year-on-year improvement in the performance of each of our businesses. With the exception of Life & Pension segment, all segments reported sizable improvements in their pre-tax results.

A comment on the Corporate Center, the roughly CHF1.1b pre-tax loss reported in 2005 includes the CHF630m charge for the change in accounting for share-based compensation awards as just mentioned before. In addition, and as indicated to you in previous periods, this also includes expenses relating to the integration of our banking businesses amounting to CHF84m in the fourth quarter as we geared up for the launch of the new segmentation and the new brand.

Total integration costs incurred in 2005, and booked in Corporate Center, were CHF128m. Starting in 2006, all costs related to the integration of our banking businesses, including branding costs, will be borne by the segment. If you were to adjust the pre-tax figure of CHF1.1b shown on this slide for these items and adjust for taxes, it will get you back to a more normal annual charge for the Corporate Center which we indicated to you earlier would be approximately CHF200m after tax per year.

Looking at the segment results in detail, starting with Private Banking on page 10. Net income in this segment for the year is up 7%. The record level of CHF2.65b. This strong annual result primarily reflects higher revenues related to the increase in assets under management, an increase in brokerage volumes and higher trading revenue.

In the fourth quarter of 2005, net income stood at CHF653m, up 6% from the same quarter last year, and down 10% from the previous quarter. Overall, these results reflect a strong growth momentum we have experienced in our business while we continue to take the necessary measures to strengthen our platform to accelerate international growth.

On the next slide 11, you can see how this is reflected in Private Banking revenues and costs. For the year, net revenues were up 8%, benefiting from a strong increase in the assets managed by Private Banking, as well as the high level of client activity, driving higher trading execution revenues and brokerage fees.

Full-year expenses increased 7%, as compensation and benefits increased by 13%, and other expenses remained stable.

As we have mentioned now for some time, we continue to make strategic investments in our growth markets, especially in Asia and Middle East. Year over year, we have added over 160 relationship managers outside Switzerland which, together with higher performance-related compensation in line with better pre-tax results, drives the increase in the compensation expense in this segment.

On the non-comp side, we were able to keep the cost flat, as further investments in the strategic expansion of the business were compensated by efficiency gains, especially in the free space operating platform.

The full-year cost/income ratio improved slightly to 57.3%, as shown at the bottom of the chart.

In the fourth quarter, as shown on the right-hand side of the slide, revenues were up 16% compared to the same quarter 2004, primarily driven by a CHF210m increase in commission and fees, reflecting higher asset and transaction-based commissions.

Expenses are up 17% compared to the same quarter last year, driven by the investments that I just mentioned and by higher commission expenses, in line with increased commission income.

Slide 12 shows the development of net new assets and assets under management. 2005 has been a record year for Private Banking. We have net new assets totaling CHF42.7b. This increase represents an annual growth rate of 7.9%. [Gearing] and assets under management have increased by an impressive CHF120b, or 22% during the year.

Besides new asset inflows, this increase was driven by higher market valuations of CHF45b, and the foreign exchange impact of CHF31b. Net new assets in the fourth quarter amounted to CHF8.6b, reflecting continued inflow across all key regions.

Let’s look in more detail now at the relationship between revenue growth, asset growth and the gross margin on slide 13. The gross margin for 2005 was 129 basis points, a reduction of 5 basis points from 2004. As you can see, on the top left chart, average assets under management have increased by 12% year on year.

In the table below that chart, you can see that net revenues are up slightly less, with an increase of 8%. A reduction in net interest income is the key driver behind this gap in growth rates. Interest income is not directly linked to the development in assets under management, but was primarily driven by a low interest environment and the margin compression in the private mortgage sector.

Commission and fees are up 7%. Also less than average asset growth, as the strong net new asset inflows result in temporary margin decline from the lower margin earned on newly acquired assets during the year. This margin and new assets is expected to improve over 18 to 24 months as the client relationship develops.

Let me move over to Corporate and Retail Banking. As shown on slide 14, Corporate and Retail Banking reported its best annual result ever, with a net income of CHF1,069m. The 19% increase compared to the previous year is primarily driven by net releases of provisions for credit losses amounting to CHF96m in 2005, compared to net provisions totaling CHF120m in 2004.

For the fourth quarter, net income of CHF254m is slightly down from last year, and down 4% from the previous quarter, as higher revenues and the release of credit provisions were more than offset by an increase in operating expenses.

The business made good progress in placing investment products in the high end retail segment, and recorded strong growth in private mortgage volumes of approximately 9%. In line with these good results, the segment reported a full-year return on allocated capital of over 20%.

Net revenues in 2005, as shown on slide 15, were up 3% or CHF110m, to CHF3.5b, reflecting a CHF66m increase in commissions and fees, mainly due to higher brokerage volumes. Trading revenues also increased by CHF55m. Interest income remains stable as an increase in lending volume was offset by lower asset and liability margins.

In the fourth quarter, revenues increased 7% compared to the same quarter last year, primarily due to the fair value change in interest derivates recorded in trading revenues, and increased product sales driving an 8% increase in commissions and fees.

Operating expenses for the year increased 7%, primarily reflecting higher performance-related compensation, in line with the higher pre-tax result. This was up 16%, primarily driven by net releases in credit provisions.

The increase in compensation is also the main driver behind the increase of expenses in the fourth quarter of 2005 compared to the same quarter in the previous year.

Now let me turn to the next segment on slide 16. Institutional Securities recorded net income of close to CHF1.1b in 2005. Adjusted for the litigation charge, net income would have stood at CHF1.7b, an increase of 30% compared to 2004.

Net income for the quarter stood at CHF336m, up 25% from the same quarter last year. Net income was positively impacted by a release of tax contingency accruals following a favorable settlement of tax relief, resulting in CHF132m tax benefit.

As you can see on the next slide, number 17, year-over-year Investment Banking revenues increased 16% to CHF3.9b, due to increased revenues reflecting the ongoing implementation of our strategy to focus on selected key business areas, like IPOs, and also benefiting from the strong position with financial sponsors client base and a leadership position in emerging markets.

Full-year equity underwriting revenues of CHF930m increased 25% over 2004, and revenues of CHF344m in the fourth quarter 2005, a 73% increase over the same quarter last year. In both cases, these improvements were due to higher industry-wide equity agent activity, and increased IPO market share. This strong result underscores our leadership position in initial public offerings, ranking first in global market share for the full year 2005.

We participated in a number of high-profile transactions in the fourth quarter of 2005, including the initial public offering for China Construction Bank, the world’s largest initial public offering since 2001.

Full-year debt underwriting revenues of CHF1.75b increased 8%, as the leveraged finance franchise remained strong. The Company should continued to shift from the high-yield securities market to the syndicated loan market. Debt underwriting revenues in the fourth quarter 2005 of CHF498m were up 64% from the same period in 2004, due primarily to higher results in the leverage finance and structured products business.

With the full year 2005, institutional securities ranked third in global high-yield securities underwriting. We have listed some industry awards the highlight the strength of our franchise in emerging markets, leverage lending and loan trading in the U.S.

In line with our strategy, we are very focused on what type of service we offer to our clients. As an example, we ranked 10th in global investment trade new issuance volumes for the full year 2005, down from 3rd in 2004. Nevertheless, we experienced a substantial improvement in the profitability of this business line, consistent with our strategy.

For the full year, advisory fees increased 23% to CHF1.2b, and in the fourth quarter advisory fees increased 49% compared to the same quarter in 2004. In both cases, the increase was primarily due to higher industry-wide activity and increased market share.

Let me go over the trading results, starting with fixed income trading on slide 18. Fixed income trading revenues for the full year 2005 increased 13% to CHF6.2b, reflecting improvements in commercial and residential mortgage-backed securities and trading in Latin American and other emerging market securities.

Partially offset by weaker results in the U.S. high-grade and global foreign exchange position, the fourth quarter of 2005 fixed income trading generated revenues of CHF1.2b, an increase of 5% compared to the same quarter of 2004.

The market environment in the fourth quarter of 2005 was challenging for many products, as the yield curve continued to flatten and credit spreads widened. Reduced hedge fund activity negatively impacted customer-driven transaction revenues in the rate and credit products businesses.

Equity trading revenues for the full year 2005, as shown on slide 19, increased 14% to almost CHF4b, reflecting higher revenues in Prime Services, the Global Cash business and Proprietary Trading, partially offset by the lower revenues in the Convertibles and Derivates businesses.

Versus the same quarter of 2004, Equity Trading revenues increased 17% to CHF966m, again reflecting higher revenues in Client Services, partially offset by lower revenues in Equity Derivatives and Proprietary Trading.

Demand for Execution Services continued to experience strong growth, and the platform was recognized as the number 1 algorithmic trading platform in the market, according to a survey published by institutional investors.

Market conditions in the business continues to be difficult, with low levels of volatility and issuance for most of the quarter.

Let’s go to the expense side in Institutional Securities on slide 20. Adjusted for the litigation charge, total operating expenses for the year were up 11%. In the fourth quarter 2005, compensation expenses increased in line with higher revenues, but other expenses included several significant items.

Specific drivers were a contingency accrual of CHF28m for value-added tax, and CHF24m of expenses in the expanded Life Insurance Finance business under current accounting rules. Revenues from this business will not be realized until future periods. [inaudible] we suspect though to issue new guidance in early 2006, that would permit these costs to be capitalized rather that expensed as incurred.

The pre-tax margin for the year, adjusted for the litigation charge, increased slightly to 14.4%. We continue to drive the strategy implementation within this business, to close the considerable margin gap versus our peers. Now the activity is increasing and revenues are up substantially. We are also working on the expense side, with initiatives underway, aimed at achieving sustainable expense reductions in the mid-term.

Related to compensation, we delivered on our goal to further reduce the comp to revenue ratio, taking the Institutional Securities and Wealth & Asset Management segments together, the comp to revenue ratio was reduced by 1.2 percentage points, to 51.9% for the full year.

Let me move to Wealth & Asset Management, on slide 21. Full-year net income increased 25%, driven by higher investment-related gains in alternative capital. In the fourth quarter of 2005, net income stood at CHF182m, up significantly from the same period last year, and also up from the previous quarter.

Let me go to revenues on slide 22. Full-year net revenues were up to CHF3.54b, primarily as a result of higher investment-related gains which increased 28% to CHF750m for the year. While we report fluctuating levels of private equity gains each quarter, our track records of gains in this business is impressive.

Our Private Equity business is continually making new investments, with a view to sustaining the trend of reporting sizable gains, as we have seen over the last few years. During the fourth quarter 2005, the seasonal end of the year movement into alternative investment [bankers], drove the 69% increase from the previous quarter in commissions and fees and alternative capital to CHF204m.

As shown on slide 23, Wealth & Asset Management recorded net new assets of CHF11.5b. This improved significantly from 2004. In the fourth quarter, Wealth & Asset Management reported net asset outflow of CHF800m. This result reflected outflows of CHF3.4b in CSAM, primarily due to redemptions in money market fund, partially offset by inflows of CHF1.7b in alternative capital, and inflows of CHF900m in private client services.

Assets under management were at CHF609b, which was up 26% year on year.

Let me now go over to the insurance results. Before looking at the individual Life & Pensions and Non-Life results, let’s have a look at the aggregated results of these segments on slide 24.

Driven by considerable improvement of the underlying operational performance, combined net income for the Insurance business in 2005 stood at CHF1.1b. Total business volume increased 2.9%, to CHF28.3b, driven especially by the increase in the unit-linked business.

The investment return slightly increased to 4.8%. Net realized gains also increased. But contributions to net income declined into larger policy holder participations.

The capital position during 2005 has improved by CHF1.5b to CHF9.7b, primarily driven by retained earnings, but also by a reduction in foreign currency translation adjustments on foreign subsidiaries, reporting other comprehensive income.

In 2005, Life & Pensions continued its focus on technical performance, reflected in an improved risk margin, while maintaining good growth dynamics. Full-year net income, as shown on slide 25, increased 6% to CHF490m, primarily due to the adverse net after-tax impact of CHF61m, related to changes in actuarial assumptions and models in the third quarter of 2005.

Additionally, net income reflected a lower release of valuation allowances on deferred tax assets.

Net income in the fourth quarter 2005 remained flat, at CHF152m compared to the fourth quarter of 2004.

Total business volume, as shown on slide 26 for the full year 2005, grew 5%, or CHF17.7b, reflecting strong growth in the deposit business in the United Kingdom, Central and Eastern Europe and Japan, and solid growth in the traditional business in Germany, Spain and the Swiss Group Life business.

Making the year-on-year comparison, please note that total business volume in 2004 included CHF690m in deposits from certain businesses that have been transferred to Private Banking at the beginning of 2005. Adjusted for this transfer, total business volume year on year has increased 9%, driven by a 21% increase in the policyholder deposits.

Gross premiums written increased 3% to CHF10.6b, mainly reflecting solid growth in the traditional business in Spain and Germany, offset by a decline in Swiss Individual Life.

The full-year expense ratio, as shown on slide 27, increased to 9.9% from 9.1% in 2004. Insurance underwriting and acquisition expenses increased by CHF192m, or 35%, due to the negative effect of changes in actuarial assumptions and models, affecting the expense ratio by 1.2 percentage points.

Administration expenses grew by 2%, which is less than the growth experienced in total business volume, reflecting cost efficiency in mature markets.

Let me go over to the Non-Life segment, starting at slide 28. Full-year net income strongly increased to CHF578m, resulting primarily from the significantly improved underwriting results and, of course, the charge related to the sale of Winterthur International recorded in 2004, which didn’t incur any more, fortunately.

With the exception of the unusually heavy rainfalls and major floods in Switzerland in August, the high level of catastrophic events in 2005 did not adversely affect Non-Life, reflecting the exit from certain risk exposure in geographic areas in recent years.

Net premiums earned for the full year, as shown on slide 29, were unchanged at CHF10.4b, reflecting primarily organic growth and tariff increases in Switzerland and Spain, partially offset by continued strict underwriting in the U.S. and Germany. In Germany, market pressure in the motor business is ongoing, and management continues to take measures, including new product initiatives, to address these conditions.

The full-year combined ratio improved 3.5 percentage points, to 96.6%, primarily driven by lower claims, even with the impact of the heavy rains and flooding in Switzerland, and improvements in cost and claims management.

The expense ratio improved slightly to 24.6% compared to 25% in 2004, reflecting lower administration expenses. The decrease in administration expenses was primarily due to efficiency improvements. Insurance underwriting and acquisition expenses were flat, in line with net premiums earned.

This concludes the discussion from my side on the segments. Let me now continue with a discussion of the Group’s capital position on slide 30.

The consolidated BIS tier 1 ratio improved to 11.3%, up from 11.1% as at the end of the previous quarter. Risk-weighted assets decreased, primarily reflecting securitization activity in the fourth quarter of 2005. We repurchased 26m shares, valued at CHF1.4b against our two-year program to buy back shares of up to CHF6b.

I already mentioned that Winterthur’s capital position stood at CHF9.7b at year end.

Let me now conclude my part on slide 31, with information about the upcoming restatement of our financial results following the new segmental structure.

For some time now, we highlighted to the markets the restatements which are due as a result of the reorganization we implemented as of January 1, 2006. On April 11 this year we will provide restated annual and quarterly figures for the years 2004 and 2005.

We will explain key movements as a result of restating our historic result and the consequent impact on our key performance indicators. In addition, we will supply you with targets that reflect the new reporting structure. I hope to see most of you there as well, of course.

Now I give back to Ossy, who will conclude the presentation with his closing remarks, and I thank you for your attention.

Thank you Renato. I hope you have seen from the detailed figures now that we did improve our business quite considerable during the year, and it shows, I think, a slightly different picture than probably you will get from looking just at the one result.

We go on reaping the benefits, so to speak, from our integrated bank over the next couple of years. It has, as I said before, started surprisingly well at the beginning of this year, although the markets were very good in January, but it seems the last few years they always have been good in January. We will see how they do for the rest of the year.

So, from a management point of view, actually we are pretty confident that we can go on improving on these results and will produce very good profitability in the coming years.

Now, we would like to go over to questions and answers. And I would like to point out that we first would like to have the questions from the analysts. And the media, please restrain yourselves. You will have a separate meeting later after the analyst meeting is over and where you can ask all your questions.

We will take the questions first here in the room and then [technical difficulty].

[OPERATOR INSTRUCTIONS].

[Philip Tijang] from UBS. Three questions please. The first on is on Institutional Securities. Adjusting for the two small one offs, you had a non-compensation revenue ratio of 35% in the quarter. Just could you comment in general, what are the drivers for this high level in general, that we get a bit of a better understanding? Is it the previous outsourcing? So what are the structural reasons for this continued high level and what room for improvement do you actually see, given the cost-reduction program you have mentioned in terms of this non-comp ratio.

Second question please on operating leverage in Private Banking and Asset Wealth Management. Asset Wealth Management, stripping out the realized gains is probably similar cost and revenue growth. Also in Private Banking it was the same picture. In particular the fees in the Private Bank year over year went up 7%, while assets under management went up 22%.

Could you just touch on please the reason for that gap? I know there is a timing difference in terms of when you actually charge fees on the high asset base. But nevertheless, could you just add a bit of color and comment on your expectations on the operating leverage of these businesses going forward?

And last but not least, a question for Mr. Grubel please. In case Institutional Securities cannot incrementally narrow the gap to peers in terms of pre-tax margin, now runs around 10 to 15 versus the peers at close to 30, what are the strategic options you actually see for this business?

I think at the moment we are absolutely convinced that we can narrow that gap. And we do come from a situation in the last three years, I think, where we had to rebuild the reputations, the profitability, and I know we are still a long way away from peer profitability.

But if you look now back over the last couple of years and we have produced in every quarter profitability. We had, in some quarters, we came very near to 20% return on equity and 20% pre-tax returns. And so we still have to work on that. We know that. And I think at the moment they are -- that is our determination to make them profitable. And I am convinced that Brady Dougan and his management team will be able to achieve that.

Renato, do you want to answer the first question? Do we only have one microphone here? That’s pretty clever.

Just answering the question on expenses in the CSFB and the Institutional Securities segment specifically. We do feel that we’re making progress on the cost side. First of all I’d point out on the comp side, we brought the comp to revenue ratio down from [53 1] to [51 9] from 2004 to 2005, which we believe represents increased discipline. And obviously we’re going to continue to work on that.

On the non-comp side, obviously one quarter snapshot is quarterly numbers obviously can go up and down. The full-year number of total costs going up 11% we think represents a reasonable performance. But we do think there is more room to improve on the non-comp side.

We do have a program that we put in place which we have begun to execute on. We believe that there is a lot of room to bring that down further. We’ve actually put in place some managers to focus on this program. So we think there is room to bring that down over time.

In terms of the fourth quarter specifically, I think Renato mentioned there were a couple of specific items that did influence the fourth quarter result. One of those was life insurance or insurance reclamations that were lower in the fourth quarter than what we had expected. We did have some -- the life insurance business did have some costs as a result of premiums that we had to expense, which I think, as Renato mentioned, the counter for that, we believe, is changing and then there was the Swiss VAT charge in the fourth quarter, all of which made the fourth quarter a little bit higher. We do think those are one-offs.

On the other hand, we do think that we can bring our non-[cop] expenses down. We are confident that we will be able to that over time, and we have an effective program in place, so we think we’ll see the results for that over the coming quarters.

Private banking operating margins, quickly, you said 22% was obviously year-over-year increases, correct, but on average assets under management increased by 12%. Non-interest income increased almost parallel by 11% so reflecting the high asset base. I think actually, that’s a pretty good return when it comes to commission driven income.

What’s negatively impacting the assets under management margin was interest income which went in parallel with the increase of assets down by 2%, so that is obviously an impact we have which is, I guess, quite similar for others in the marketplace, that you have a margin compression on the interest rate side.

Then further, which you need to take into consideration, we have about CHF42b, or CHF43b of net new assets. Normally they take roughly between 18 and 24 months to be fully profitable, like the old assets, so that all impacted our margin which is slightly below 130 basis points, but I’m still very confident with that return on assets.

Any further questions from the room here? Here, in the middle, over here.

[Inaudible]. I have some questions on Winterthur, if I may. The first would be the capital base. I’m quite surprised that the capital base has not increased from the CHF9.7b that was already reported at end of third quarter, and also if you look at comments from rating agencies, they seem to be rather negative on an IPO as the backing from the Credit Suisse Group would no longer be there. So probably you could comment a little bit more on the capital position of Winterthur?

The second question on Winterthur would be how would you use the proceeds if you are going to say anything about this? And the last question I actually have is on the target on the CHF8b net profit target, still reiterated for the financial year ’07. I am wondering if next year you are also going to have share based payments as you had this year, why this would not be diminished? Thank you.

First, [inaudible] our target is unchanged. Do we have this year and the coming year’s share based payment? I would think probably at a much smaller scale than we had last year [inaudible], and on the Winterthur capital position, why is it unchanged, simply because bond prices did not go up. That’s the explanation. They even actually went down, and the equity bonds went a little bit up, so they canceled each other out, but that is the explanation on that. Do you want the other question on Winterthur, do you want to answer that?

You have to be very careful because you can’t really track the capital position quarter-over-quarter under U.S. GAAP because of the unrealized gain component.

In terms of the question related to the rating agencies, I have to openly tell you I don’t know what you’re talking about, because the reports that I have been reading have naturally all said, oh, it would be lovely to have parental guarantee for the rest of your life. We’d all like to have that, but there was no report that said that ratings will be lowered as a result of that. I’m at least not aware of it. If you have read one then please tell me. I don’t know if the [Handelsblatt] is a rating agency but --

[Inaudible].

I don’t know. We are not aware of this. We have just got a confirmed rating from S&P on a stand-alone basis so that’s the facts we have and the Handelsblatt is the Handelsblatt.

[Interpret] then as it is quoted in German Handelsblatt?

I don’t know. I haven’t read the article. I don’t know what – I really can’t tell you that, but the point -- the question you were making was that the rating agencies were not believing that we can make an IPO because the company cannot do an IPO without parental guarantee. I’m not aware of that so I would strongly refute that statement.

Okay, so there is no issue from the capital base of the Winterthur if you would do an IPO?

That’s clearly our opinion.

Okay.

No, on the proceeds of eventual sale of IPO, and as we said in the past, I’m sure we can use them in our current business and in case the business is not expanding then we probably have to try to buy some more shares back. Yes, here?

[Inaudible]. I would have a question on [Season]. Maybe you could elaborate a little bit on the outflows of CHF3.4b? I understand you said it’s a redemption of money market funds but if your whole product offering would be interesting, so you broadly should have been able to put the client into some other asset class, so probably some more comment on this outflow?

You’re absolutely right. What is the answer, Mr. Blumer?

Thank you. It was actually one outflow of CHF3.4b of an institutional client who adjusted their year-end positions out of the money market fund. And thirdly, we do everything in our best to actually keep them within other products but this was a one-off event of CHF3.4b.

Next question please. If there are no questions from the room here any more we -- oh, there is one, last one. It’s all coming from that area here lately.

Sorry, I was frightened out here. It’s a one-off. Peter [Cazenove] of Sal Oppenheim. I’m very pleased to see that you have excellent tax advisors. I would like to find out what is the tax rate going forward? I’m convinced 5% ratio in the last quarter is not sustainable. Can you comment on that please?

It would be nice if it were, but Renato?

As I mentioned before, we will come out on April 11 with the new target for the new instruction, but at that time we will also give an indication on the tax rate going forward, and this will not be for – substantially from what we have before.

As you know, in the past we have given indications on tax rate of segments, and in an international global context it doesn’t make sense any more, so in the future, as you will see, pre-tax figures for segments going forward, not as income any more. You will have one tax rate that we will come out with, and you’re absolutely right.

It was an unusually low tax rate because we had successfully concluded some open items with tax authorities which of course is -- thank you for the praise -- which it had to do with, and I may say, our tax department, and my tax department, but at the same time, it is also to do with the fact that we have better distribution and a better tax planning for the Group as a whole, which leads overall to a slightly lower tax rate, so it’s fair to say that as well.

One of the other players we have, tax loss carry forwards as well, which helps, but clearly, I think, if you look in the past, I don’t know if that is an indication on going forward, the tax rate normally was 1% to 20%, 22%, but we will see -- have some more details there April 11. Now can we go over to the first question over the phone please?

The first question is from [Holsten Semis] of Morgan Stanley. Please go ahead sir.

Yes, morning, it’s [Hugh vans Guinness] from Morgan Stanley. Two questions, one if I just go back to the investment bank, could you give us a bit more color on what went wrong in equity trading because I saw that revenue is down 22, despite equity average VaR being up 15. From my reading it looks like the worst quarter of revenue on average VaR for over six years. Could you give a bit more color on what went wrong in positions?

And then secondly, what gives you confidence that as you deploy more capital and more human capital to the business, the average returns will actually come back to a more normalized level? What gives you that confidence on a two to three year basis please?

Brady?

I think as to the first question, in terms of equity results in the fourth quarter, as you say, I think that while we’re very happy with the investment banking results and felt we outperformed on that, we probably did under-perform on the sales and trading side, on the equity side, being part of that. We did not do as well as we would like to have done in the fourth quarter. There’s no question.

As you mentioned, our overall plan, as you know, is to over time, increase our risk-taking in the business, and we have been doing that, and in fact, our VaR, as you mentioned, over the quarter, did increase. That’s in line with our plan. Our overall risk was actually a little more moderated than that, but our VaR did go up, and unfortunately the result within the equity business was not as good as we would have liked it to have been, but again, I think that will happen from time to time in the business.

So I think we continue to be confident that our equity business is very well positioned, and that we have very good businesses within that, that are performing quite well, whether it’s our AES business, or our proprietary business, but again, there will be quarter-to-quarter variations.

Sorry, the second part of your question?

Well, I suppose you partly answered it, just what gives you confidence as you put more capital in the business that the returns will follow? Was there any -- I was just wondering was there something which was just an accident in Q4. Were there more returns on average, fine? What gives you confidence for the next year that returns on capital will be improving?

Well, I think that we continue to believe that our strategy is the right strategy. We are investing in building out our higher margin, higher return businesses. Those include risk-taking businesses as well as other businesses, and more of the customer-based businesses, and we continue to be very confident that that is the right direction.

We are making progress and we look at all of the things that we’ve laid out that we want to do in those businesses. We believe we are making progress and again, every quarterly snapshot won’t necessarily exhibit that, but we believe that we are absolutely on the right track, and that the businesses are going in the right direction.

Okay, second question, changing tack onto the private bank, there are two points. First, given your exceptionally strong growth in the new markets of Asia, Middle East and Onshore Europe which are lower margin, I think, about 105 to 115 basis points for you, isn’t it statistically highly unlikely that you would be able to hit your target of 130 basis points for this year and next year because the terrific growth you’re enjoying just simply puts a strain on the margins?

And then related to that, I see that [Joachim Scholler] has left. Have you replaced -- have you got a new replacement for the head of International, and do you see there’s a risk to the growth you have been enjoying in Singapore and elsewhere?

Okay, first of all, yes, obviously 130 basis points is an ambitious target, but I think we are quite famous for being innovative when it comes to new products. We have proof of that and we do believe that we will prove that in the future.

It will have a certain dilutive effect that will mean that we’re probably going to be at the lower end of 130, maybe slightly below. In the past we were always clearly above. I think for that, that will be the adjustment we will see. And then, with the departure of [Joe Stroller] I think we have two very capable people who have been actually driving the whole process in the Far East, in Asia in particular, as you know, Joe Stroller was responsible for more than just Asia, so I’m very confident that we will keep that up and we will certainly come up with a succession planning in the near future.

Thanks very much.

Okay, we certainly have to look at our key performance indicators, on the who should we use, the restatement on April 11, because as we told you before, we moved a little out of private banking into other areas in investment banking and asset management, and that might have – might bring some changes to the gross margin or any of the other indicators. Next question please.

The next question is from Jeremy Sigee, Citigroup. Please go ahead sir.

Morning, thank you. I’d like to ask a couple of questions relating to the share backed compensation, and also the share buybacks if I could just focus on those two points. Firstly, just going back to this issue that you flagged on Monday in the conference call, etc, the CHF630m seems a very big number for share awards to people eligible for early retirement, and I wondered if you could clarify what the total value of share awards in the ’05 compensation year was?

Secondly, on the share buyback program, I just wondered if you could talk about, is it just a normal seasonal pattern that you’ve not done any buybacks since mid-October? Do you plan any catch-up between now and say, May, so that you might be at CHF3b of buybacks a year into your two year program? Could you just talk about that please?

Okay, first, I think you have to consider on the CHF630m gross and CHF420m net numbers which we announced this week, that that lies with roughly 4,500 employees and of which the majority is employed in investment banking because there you have the practice of early retirement clauses. And Renato, do you want to add anything in addition to that?

I think you have to see it from that kind of point, and on share buybacks, we have been in the market but there were other eager buyers and so we couldn’t buy any in the last few months and obviously it will change from today on.

Well, can I follow up on those two points? Just the share-based, the share awards, CHF630m to people eligible for early retirement, last year your total share awards were CHF1.3b, so the CHF630m for 4,500 people, does that suggest that your total share awards were quite a lot bigger than last year’s CHF1.3b?

Renato, anything?

No, it doesn’t. It just tells you that the majority of awards that were given were to people that technically have a right to early retire. That’s the straight answer.

So that does not, in itself, probably doesn’t sound very logical but very clearly, the highest deferred parts are with the senior management and because blanket deferred, that’s one way to try to keep them, and then because they all have early retirement clauses which are strict, but because of accounting rules, you have to reserve them, and that’s how that came together.

Okay, but let me just add something. It’s not just that we have of course also to relate to non-competition clauses in these contracts and that’s the whole discussion we had with the SEC staff, to what extent are they mitigating the early retirement clauses.

Yes.

And therefore, it’s, for us, factually, nothing changes. It’s just the way of how you account for that. Do you early recognize that, because there is the risk, as such, that people could leave, or do you really recognize that according to the vesting period which is also driven by your experience you have, because not everybody that has the early retirement clause, let’s say, retires the next day, so naturally that has to be considered as well.

So I guess we wait for your annual report to find out actually?

Well, if you -- it’s below 5%, so it’s nothing that high.

Sorry, what did you say Jeremy?

Sorry, I missed that last number, what was below 5% [inaudible]?

The [number] is the actual number of people who do early retire, and are not going into competition is below 5%.

Okay, and to get the number for the value of your share awards for ’05, we have to wait for the annual report, I guess?

Yes.

And I’m sorry, then, I just wanted to follow up on the buyback point then, because you’re saying that it’s --

No, I wasn’t finished there, sir.

Oh, sorry.

And firstly, we’re in the market there. We didn’t buy -- we were not successful buying anything on the second line which is visible so we bought some shares back which we need for the share awards, and these shares we had to buy back in the market as well. But on the second line, on a few days we put in bids, but the market was so exuberant that it didn’t sell us anything, and as I said, I hope that now it’s changed and we can try to get some more shares back again.

Okay, thank you.

Thank you, next question please.

The next question is from Moreno Vasco of KBW. Please go ahead sir.

Hi, good morning gentlemen, it’s Vasco Moreno from KBW. Just a couple of questions, first of all, in terms of private banking, you did mention and in fact, you’ve mentioned it twice I think, that part of the issue is net interest income. You mentioned in particular the fact that private mortgages are a strong contributor to the lower private banking margins in general.

Can you give us an idea as to where spreads have moved to over the course of the past year as well as the past quarter in terms of private banking mortgages? And then can you also give us an idea as to what the problem is? Is it the spreads or is it funding costs? What is actually going on there, because obviously interest rates in Switzerland have stopped going down, so I don’t really understand exactly what is going on there?

The second question is related to operating expenses within the private bank as well. Can you give us a little bit color on those? I know you’re obviously expanding and then that’s an issue, particularly in terms of compensation expenses, but the operating expenses going up as much as they did in the fourth quarter, again, I know there’s a seasonal impact there but if you could give us some more color, that would be great.

And then thirdly and lastly, UBS mentioned yesterday that Basel II is unlikely to have a meaningful impact in terms of their capitalization. Would you be able to, at this stage, say more or less the same?

If you start with Basel II, Renato? I don’t think we are necessarily comparable there.

Well, first of all we are not comparable, and the Basel II experience has shown now with the tests that were started all over the place, every bank is very, very special in itself. It depends a lot on the mix of business you have. And Basel II, as we said before, will have a somewhat negative impact on our capital requirement going forward, but that’s exactly what we talked about. Remember, when I talked to you about the level of Tier 1 capital, the ratios and so forth. That is of course being considered when we look forward and plan our capital as we go.

Okay, and on mortgages, as far as I know, spreads really have nearly halved in the last 12 to 18 months and so that did have an impact there on operating expenses. Walter, do you want to say something?

Okay, just quickly, maybe, on the private banking mortgage side, they were roughly about 10 basis points lower than the normal retail corporate mortgage market. That has something to do with obviously the portfolio aspect you have with private clients. They do a lot more of other businesses with you. That’s how you meld mortgages into this.

Then on the operating side, the higher costs in the fourth quarter really are a reflection of our ongoing expansion. We have hired about 740 people and you should actually look at it over the year, but sometimes it’s the last quarter a little bit more costs are coming in.

And then secondly, we had some higher marketing costs in the last quarter. We had some real estate projects which got finished, and we had a couple of IT projects which got finished. And we are trying to smooth that as much as possible but still, at the last quarter we had a little bit of a ramp-up.

And sorry just a follow-up on the spreads on mortgages, on private banking mortgages. You mentioned 10 basis points lower than retail, and you also mentioned, but I didn’t quite get that, that they have halved over the past year, is that what you said?

No, I said that as far as I know, it’s quite [halved] of the profitability and the market share in the business, because of market competition, because of lower interest rates. And so the spreads came down from 1% to nearly half to three quarter percent.

Okay, thank you.

But as you very clearly heard, the way to achieve mortgage is to become a private banking client.

Thank you.

Next question please?

The next question is from Jacques Henri-Gaulard of Merrill Lynch. Please go ahead.

Yes, good morning gents. It’s not the first time that your Q4 earnings are telling a horror story. If I remember well, Q4 ’02, ’03 and now ’05 had problems on the cost base, basically. So is it a reporting issue, different accruals? Do you expect that with the one bank you will be able to split things a bit more within the quarters?

You’re absolutely right, Jacques Henri that in Q4 we seem to, or our people seem to be paying all the bills which are expanding, and so nothing carried early into the New Year, and so expenses are going up. And we try to minimize that, and hopefully get a better handle on it, and in the coming years, so far we were not very successful.

But I think this year, 2005, you have to consider that we did a job, certain internal expenses we had on the creation of the integrated bank, and on legal fees, and all that stuff is just connected with it. And as we said in the beginning, fine, we will not take a special charge for these things, because in the end it will be positive for the bank going forward. And I wouldn’t describe it, Jacques Henri as a horror quarter, so I’m sure you are capable of looking behind the top-line number.

You never know. Thank you very much, Herr Grubel.

Next question please?

The next question is from Kian Abouhossein of JP Morgan. Please go ahead sir.

Yes hi. I have two questions. One is relating to private equity. I was wondering if you could tell me how big your private equity gains were in 2005 which were not client related? And in that context, if you could give me an idea of how big your private equity book is, including CLO book, excluding client activity.

And the second question is coming back to your non-compensation ratio and institutional securities, you’re running at 30%+ for quite a long time. And it looks like it’s more of a structural issue because it’s not just a matter of reducing costs -- sorry, reducing staff levels. So what I’m really trying to understand is, what is the reason behind the significantly higher cost base in non-comp, and what are you actually doing in order to reduce this, in a bit more detail? Thanks.

So, we are doing something about the non-comp in introducing securities. Brady will come -- will answer that, and private equity, do you want to say something?

Yes, I just tried to understand the question properly. What did you say there, what is our gain for the, say, on our own?

Yes, in the bank, not a third party, i.e. not the client returns in your asset management division, but I’m more interested in your own gains, on your own banking business?

Yes, we did have, within the asset management division, so they were showing up during the year in the asset management division. And last year, I think in 2004, and so it was questioned if they were repeatable and actually, they were a little bit higher in 2005. We do have some investment, the bank itself -- I would think something like, as far as I know, it’s something like CHF2.5b or so, in different private equity investments and which are from time to time reducing lump gains.

Okay.

Now on non-comp in the institutional securities, Brady?

Yes, on the non-comp side, obviously the percentage of revenue issue currently is a revenue issue as well, if that’s what you’re talking about, and on a percentage basis, and we obviously have a key part of the strategy is to increase the revenues as well.

On the non-comp side though, we are specifically basically attacking every different category of the non-comp expenses. We’re looking at trying to influence the man management. We are also working to negotiate with suppliers, looking to consolidate demand for the various different aspects of it.

We’ve actually just hired somebody and put them in charge of the program. Their full-time job will be to be in charge of the program, to try to bring down those non-comp costs, and we have a program for every different category of those expenses, looking to drive down and do everything we can to both reduce the cost of what we’re consuming but also reduce the amount of what we need to consume by trying to get through to the demand side of it.

Okay, thank you, next question. Next question please.

The next question is from [Kina Latani] of ABN Amro. Please go ahead sir.

Yes, good morning, a couple of follow-up questions. Firstly, can you give us an update on Enron and whether this could be a source of negative surprise in 2006? And secondly, given your leading position in the leveraged finance business, do you have any medium-term concerns given the significant increase in the leveraged multiples that we were seeing, decline in credit ratings on the business that’s being written, and at the same time, competition and pressure margins?

Okay, Brady over there will and -- the market is very competitive there, yes.

Yes, as you say, we obviously have, we think, the leading position in the leveraged finance market, both in the loan side and the security side, and there’s no question, I think as Ozzy mentioned in his remarks, the credit markets are cyclical and clearly we’ve had a very good environment for a while.

We’re very, very focused on that, and a lot of it has to do with making sure that we’re participating in the right deals and the high quality deals, and watching our risk profile closely, but we are a big participant in that part of the market. We think we’re very good at it, so we believe we know what we’re doing, but obviously, if the markets get more difficult, then that will impact our business. But we feel we are quite focused on it.

Can I actually follow up on that? How much of these deals actually sit on your balance sheet, in percentage terms, if you can provide us with some guidance, and are you actually avoiding deals with certain leveraged multiples or are you consciously avoiding certain sectors?

Well, we obviously -- well, first of all, we distribute the vast majority of everything that we participate on these deals, and so obviously it takes some time to sell those down, but over time, we are not in the business of holding on to these risks, so the vast majority of what we participate in, we do sell off.

We clearly watch very closely at any point in time our concentration in any particular industry or sector, or geography, so we’re pretty careful about that. And yes, certainly we look at the credit quality of the deals that we participate in.

As you note and you’re absolutely right that over the past year and a half, two years, things have tightened quite considerably. So the levels at which deals are being done now are clearly far more leveraged than they were a couple of years ago, but within that field, we clearly try to participate in the deals that we think are of higher quality.

We have a very [good] risk management.

Thank you.

And getting stricter, obviously, in that environment. Now our Chief General Accountant there may make a comment on Enron and --

As you know, we don’t discuss for litigation matters in detail, pending litigation matters. However, as you also know, we have a process that is the same standard process that we do every quarter. We look at our individual reserve positions on the basis of [inaudible], U.S. accounting, GAAP rules, i.e. in particular [FAS5] and on the basis of all the facts known to us as of today we are confident that, let’s say, our reserve position is adequate to cover any probable and reasonably estimable contingencies related to these matters.

That includes obviously Enron, and if I may add though that’s, obviously something which is subject to continuous scrutiny as matters evolve over time, and as you know, estimates also are subject of, well are subject of, I would say, an objective analysis of cases on an ongoing basis, but on the basis of the facts known to us as of today we are confident that we are adequately reserved, for all probable and reasonably estimable contingencies.

I can assure you, we would like to wish the final outcome as much as you.

Thank you.

Now we take the last question from the phones and then we have to finish.

The last question is from [Joanna Meader] of Lehman Brothers. Please go ahead Madam.

Hi good morning, just a few questions on the investment bank. First of all, on fixed income, I just wondered, Brady, if you could comment on some of the risk factors you see this year, particularly in the CMBS and RMBS area where I know you’ve been very successful. And whether you think to the extent that these risk factors might manifest themselves in declines in profitability, whether the areas that you’re investing in this year might offset that in terms of growth.

And then just also on risk management, your trading lines have been a bit more volatile than peers in the past, and I just wondered, looking forward over the next year, two years, whether you think growing the portfolio of businesses will reduce the volatility even as you’re increasing your aggregate risk, just your outlook there.

And then lastly, on equity trading, I’m just wondering if you can give a bit more color on the equity derivatives performance? I know the comment in the report was that there was a decline, year-over-year, and I’m just wondering if that was a flow derivative issue, or higher margin business and how you see your derivatives business progressing in general?

Brady?

All right. As to your first question, which is risk factors this year and our outlook for the different businesses, I certainly do – we do believe that the structured part of the business will be more challenging this year. I think, as you point out, the residential mortgage business, we believe, obviously dependent on interest rates and how the markets go, will probably be a more challenging market this year.

We also think that probably on the commercial side, we think it will probably be a little less challenging from a market condition point of view, but nonetheless, margins have come in. There’s a lot of competition in that business, so I guess of the two, we believe that probably the commercial mortgage of that securitization market is probably a little bit better prospect this year than residential. But certainly, I think market conditions are challenging in both of those.

I think as you mentioned, our view is that we do have a number of growth areas and we continue to, we believe, have the leading franchise in emerging markets which we believe should be attractive markets this year. In addition, we continue to build out our commodities business which we believe we should see improved results in this year. And we also continue to build out the proprietary side on the fixed income business, and those are all areas that we think will be positive contributors this year.

On the risk management side, we certainly do believe that as we build out our businesses and have a more diversified portfolio of businesses and risk-taking activities, that that is going to lead to much more stable revenues across all of our trading businesses going forward, and I think particularly when you look at something like a commodities business which is a pretty non-correlated source of trading revenues to some of the other businesses, we think that will be a big positive in terms of a diversified source of revenues in our risk-taking areas.

On the equity trading side, I guess, as I mentioned before, I don’t think there were any specific areas in the fourth quarter that I would point to. I think certainly last year in general was challenging on the convertible side, as you know. On the derivatives side we probably -- our business didn’t develop as much as we would like it to.

I think our outlook for this year is that convertibles should be a more positive market this year. It’s already started off pretty well. Derivatives as well, we believe that some of the investments we’ve made and the progress we’ve made in that business will actually pay off in 2006. So I wouldn’t really point to any specific flow business, or higher margin business. I think these are businesses that we think will perform well this year, and so we think the prospects are actually good, and they’ve started off quite well.

Thank you.

Okay, thank you very much for your interest and that closes the Q&A session for the analysts and we will take a five minute break and then we start with the media questions. So as I said, we are convinced that going forward we will achieve our results.