Credit Suisse Group AG (CS) 2006 Q1 法說會逐字稿

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group First Quarter 2006 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is recorded. You will have the opportunity to ask questions directly after the presentation. [OPERATOR INSTRUCTIONS]. At this time, I would like to turn the conference over to Mr. Renato Fassbind, Chief Financial Officer of Credit Suisse Group. Please go ahead, Mr. Fassbind.

Thank you and good morning, everybody, and thank you for joining us for the call today. There's an information package available on our website, where you will find the presentation slides. Following my presentation, there will be a questions and answer session, when I will be joined by Neil Moskowitz, the CFO of the Investment Banking Division, by Christoph Brunner, the COO of Private Banking, Larry Haber, the COO for Asset Management, and Hans Ulrich Lienau, the CFO of Winterthur Group.

Before I start the results presentation, I would like to refer you to the disclaimer on slide two of the presentation.

The next slide, slide three, gives a brief overview on our first quarter results. We're very pleased with the results for the quarter. The environment provided an excellent background in which to start operating as an integrated global bank. Positive market sentiments translated into strong client activity across our divisions and we were well positioned to benefit from favorable trading conditions.

Consolidated net income stood at CHF2.6b in the first quarter, up 36% from the same period of last year. Pre-tax income of CHF3.5b was achieved during the quarter, which is up 37%. Please note that this excludes the minority interest related income of CHF1.27b, at the same time also the last year's numbers, as you can see in the footnote, which are now booked in corporate [center].

Basic earnings per share in the quarter also increased significantly to CHF2.31. The Group's return on equity was 24.4%, with a return on equity of 27.4% in the banking business and 15% at Winterthur. The cost/income ratio for our banking business also improved 2.5 percentage points to 68.4%, which represents the lowest level over the last nine quarters.

Significantly better results in private banking and investment banking have driven this improvement. Net new assets of CHF31.1b were added in the quarter, driven by strong inflows in wealth management and improving inflow levels at institutional asset management.

Let me go to slide number four. It shows how the first quarter performance has improved versus the same quarter last year. All segments achieved significant improvements in pre-tax income when compared to last year. Investment banking's performance benefited from a very good market environment with a high level of client activity. Pre-tax income increased by 68% to CHF1.56b.

Private banking also produced a record result with a pre-tax income of CHF1.3b, up 34%. Within this division, the increase was in particular driven by wealth management, which achieved a 50% increase in pre-tax income to CHF963m.

Asset management increased pre-tax income by 13% to CHF234m. While this is a good result, we are on a path of realigning this business to increased profitability.

Winterthur, our insurance segment, confirmed the strength of its underlying business and delivered further operational improvement. Its pre-tax income totaled CHF505m, up 21%.

So, overall, we achieved solid growth in our businesses. To ensure we can sustain this progress, we will focus on the development of our integrated business model, which places us -- which places our clients at the center of all what we do and enables us to capitalize on our integrated global platform.

On to investment banking, on slide five, which achieved record revenues and pre-tax income, reflecting strong performance in all key business areas. We achieved strong improvements in investment banking's key performance indicators, as the pre-tax margin achieved was 27.2% and the return on economic risk capital stood at 42%.

Emerging markets continued to show strong momentum for the industry, where our investment banking franchise is amongst the leaders. During the first quarter, our Latin American business experienced robust growth. The strength of the franchise was recognized in the market, as Latin Finance named Credit Suisse the best investment bank in that region.

Let's have a closer look at the investment banking results, starting with fixed income revenues on slide six. Fixed income markets were generally favorable, with narrowing credit spreads and a substantial increase in new issue activity. Compared to last year, fixed income trading revenues increased 31%, reflecting strong results in leveraged finance, Latin American trading and global foreign exchange positioning. These increases were partially offset by weaker results in other emerging markets and lower revenues from our asset backed and commercial mortgage backed securities business.

As shown on slide seven, equity trading revenues increased 95% when compared to the first quarter last year and more than doubled when compared with the previous quarter. These significant increases reflected higher revenues across all major business areas amid strong markets. Customer flow businesses in cash and convertibles performed well across all regions. On the derivatives side, the business benefited from increased deal flow and good trading results. Prime services continued to perform well with higher revenues in the quarter.

Looking at the overall value at risk positions within investment banking, we can see that average daily VaR in the first quarter of 2006 was CHF72m, up CHF5m in the first quarter of -- compared -- in the first -- sorry, up CHF5m from the first quarter of 2005 and up CHF1m from the previous quarter.

This provides further evidence that this quarter's outstanding performance was not due to increased risk taking but rather driven by increased customer flows and generally better trading conditions.

As shown on slide eight, advisory fees amounted to CHF333m in the first quarter, down from the fourth quarter due to lower industry wide transaction levels and lower market share. M&A revenues and market share positions for Credit Suisse are not satisfactory but we are taking steps to improve this. We have made a number of critical hires that have put us into new or better dialogue with key clients. The effect on our M&A business is positive but not yet visible in our results.

Equity underwriting revenues, as shown on slide nine, increased by 79% to CHF249m. This improvement was due to higher industry wide equity issuance activity, including convertible securities, together with an improvement in our market share. Debt underwriting revenues increased 68% to CHF456m, reflecting higher revenues in the leveraged finance franchise, asset backed securities and investment grade capital markets.

The high yield market continued to be very competitive among the top firms. The overall leveraged finance franchise remained strong and core positions continued to shift from high yield securities to the syndicated loan market.

On the expenses in investment banking, as shown on slide ten, you can see that, as a result of higher revenues and improved results, compensation and benefits increased 44% compared with the same quarter last year. Consistent with commitment to improve the cost/income ratio over time, investment banking had a compensation to revenue ratio of 53.5% in the first quarter of 2006, a 2 percentage points decline from the full year 2005. It is our intention to keep the compensation to revenue ratio at this level throughout 2006.

Other expenses increased CHF222m, or 23%, in the first quarter last year, reflecting higher professional fees and costs associated with the implementation of the new brand and related advertising costs. The cost/income ratio declined significantly to 73.8%, a sustainable cost/income ratio reduction at investment banking remains a priority for us.

Let me go on to private banking, starting with slide 11. The excellent first quarter results for private banking reflected a significant improvement in net revenues, driven by growth in commissions and fees. These results were achieved in an environment that benefited from very strong client activity in a favorable market environment. Wealth management registered higher assets under management and net new assets, while brokerage and product issuing volumes also increased.

On the strategic side, as mentioned on slide 12, we announced last week that we are going to merge our four independent private banks and Credit Suisse Fides to create a single independently managed bank named Clariden Leu. Clariden Leu will focus on wealthy clients and position itself as a leading international private bank, firmly rooted in Switzerland. This merger will create the basis for continued profitable growth in Switzerland and in selected international markets. The transaction is expected to generate synergies resulting in additional net income of around CHF100m per annum from 2008 onwards.

Let me go to slide number 13. Net revenues in wealth management totaled CHF2.2b, an increase of 31% compared to the same quarter last year and 19% from the previous quarter. This increase was mainly due to high brokerage volumes and product sales. Also revenues increased due to higher assets under management. The gross margin on assets under management stood at 125 basis points. The increase was driven by the transaction-based component. Transaction-based margin increased 12 basis points, benefiting from very strong client activity.

As shown on the next slide, slide 14, net new assets amounted to CHF14.5b. This represents an annualized growth rate of 8.4%. Taking the performance of the last four quarters into account as a rolling average, the growth rate has improved to 7.8% compared to the same period a year ago.

Net new assets during the quarter particularly benefited from strong inflows from Switzerland, Europe and the Americas. Assets under management increased to over CHF730b during the quarter.

Let me go on to slide 15. Compared to the same quarter last year, total operating expenses increased CHF205m or 19% to CHF1.26b. The main drivers of the increase were higher performance-related compensation accruals of CHF146m, in line with a strong quarterly performance and strategic growth, including front office recruiting predominantly outside Switzerland. Approximately 200 relationship managers were added since the beginning of 2005.

The increase in other expenses was primarily driven by the implementation of the new brand and related advertising costs and higher commission expenses. Despite these cost increases, the pre-tax margin improved to 43.2%.

The corporate and retail banking business, as shown on slide 16, continued to achieve strong pre-tax income. Compared to the same quarter last year, revenues increased by 6%, while operating expenses only increased by 4%. Pre-tax margin nevertheless decreased 0.5 percentage point to 39.1%, as releases from credit provisions decreased compared to the first quarter of 2005.

Let me now continue with asset management on slide 17. Asset management achieved good results, while focusing on further strengthening its business model. Besides growing commissions and fee income, the division again reported strong private equity gains. Operating expenses increased due to commission expenses, business realignment and branding implementation costs.

As we are implementing changes to the business model, we have launched several initiatives to turn around unprofitable businesses and reduce the overall cost base.

As shown on the next slide, net revenues amounted to CHF756m. The 23% increase from the first quarter last year was driven primarily by a CHF121m increase in private equity gains. As we've said many times before, private equity gains are cyclical in nature. Looking back at 2005, we consider the full year amount of almost CHF700m to be at the high end of the private equity cycle.

Net revenues, before private equity gains, increased 4%, as the 7% increase in commissions and fees was partially offset by lower trading revenues as a result of changes in the fair value of interest rate derivatives. The gross margin of 49.8 basis points in the first quarter was also negatively impacted by over CHF40b in low margin money market funds included within [AOMs] during the fourth quarter of 2005.

As shown on slide 19, total operating expenses increased by CHF114m or 28%, when compared to the first quarter of 2005. Let me give you some detail on this cost increase. In particular, costs increased mainly due to higher performance-related compensation costs, higher commission expenses in line with higher commission income and a charge of approximately CHF20m associated with the realignment of the business, and costs associated with the implementation of the new brand and related marketing costs.

As we detailed during the recent investor day, this year will be a year of transition for asset management. As part of bringing all the pieces together, we also started to launch a number of initiatives for increased profitability.

So net new assets are shown on slide 20. You can see that net new assets amounted to CHF17b in the first quarter for asset management. This is a good result, although approximately a third of these inflows related to the reinvestment of money market outflows recorded in the U.S. during the fourth quarter of 2005. Year end money outflows and the subsequent reinvestment are a trend observed in the industry every year in this business.

Let me now move to our insurance business, or Winterthur, starting with slide 21. Winterthur recorded a strong top line growth and pre-tax income, driven by continued operating improvements. Return on equity for the business stood at 15%. Winterthur's capital position decreased slightly with shareholders' equity of CHF9.4b due to lower unrealized gains on investment securities. As usual in the first quarter, following the finalization of the statutory accounts, we provide you with an update on Winterthur's consolidated E.U. solvency ratio, which stood at 229% at year end 2005.

In relation to that, I would like to remind you of tomorrow's presentation on Winterthur's European embedded value. The event will take place in London and can also be followed via telephone conference and on the Internet.

As shown on slide 22, pre-tax income for Winterthur increased by 21%. The increase in the pre-tax income at both Life and Pensions and Non-Life is primarily due to continued improvements in the technical result. In line with our commitment to further optimize the business portfolio, we recently announced the sale of part of the Swiss health business to Sanitas. We also announced the restructuring of administration and back office functions in the strengthening of sales force in Switzerland in our drive to strengthen the operating platforms.

Strong growth in business volume at Life and Pensions, as shown on slide 23, was driven by the Group Life business in Switzerland and the unit-linked or deposit business in the U.K. and other international markets. Growth in the U.K. reflected strong new business performance, particularly in the traditional business, and an increased investment inflow in anticipation of U.K. tax law changes.

Despite higher premiums in Switzerland and Spain, growth in the Non-Life was affected by reductions in Germany resulting from both selective underwriting in the non-motor business and market pressures in the motor business.

As a result of sustained cost management and underwriting discipline, Winterthur's technical performance improved further. As shown on slide 24, the expense ratio for the Life and Pensions business improved to 4.2% as total business volume grew and expenses decreased. The combined ratio in Non-Life improved to 93.5%, as the claims ratio decreased 3.5 percentage points, to 65.6%, in a generally favorable claims environment. The expense ratio increased 0.3 percentage points to 27.9%, driven by increased underwriting and acquisition expenses.

Overall efficiency improvements in mature markets offset increased expenses -- offset increased expenses in growth markets. Net investment return backing traditional Life policies and Non-Life policies decreased 0.5 percentage points to 4.8%, reflecting a lower level of realized gains.

This concludes the discussion of segment results and brings me to the two final slides for the Group, starting with slide 25. The Group continued the share buyback program, repurchasing 7.9m shares worth CHF580m in the first quarter. Risk-weighted assets increased compared to the fourth quarter of 2005, primarily reflecting increased commercial and private lending balances as well as securitization activities in the first quarter of 2006.

At the end of the quarter, the Group's consolidated BIS tier 1 ratio stood at 10.8%. Tier 1 capital increased by CHF434m, with the contribution of the first quarter net income partly offset by the deduction for additional shares repurchased, dividend accruals and certain non-qualifying unrealized gains.

Slide 26 summarizes this quarter's performance against our mid-term targets. I'm very pleased with our performance in the first three months of 2006. In addition to focusing on the needs of our clients, we will exploit revenue synergies, improve productivity and concentrate on cost efficiency in order to deliver sustained profitable growth. With these targeted efforts, we will continue to build a bank that is committed to providing our clients with the best products and advice and to creating value for our shareholders.

With that, I have finished my presentation and I would like to open the questions and answer session. Conference operator, we are now ready to take the first question.

We will now begin the question and answer session. [OPERATOR INSTRUCTIONS]. The first question is from Mrs. Fiona Swaffield of Execution Ltd. Please go ahead, Mrs. Swaffield.

Hi. Can I ask questions firstly on the asset based fees, which have improved from a relatively low level in the fourth quarter? Is this because the mortgage margin pressure has become less of an issue or is it also -- are you having better margins on the net new money? I think you originally talked about the fact that you have dilution from the strong growth.

The second issue is non-staff expenses across all the divisions have obviously come down significantly versus the fourth quarter. But one of the problems we had last year was accrual. I think that obviously you had a very big jump in the fourth quarter. Could you talk about whether the 20% growth rate year-on-year that we're seeing Q1/Q1 is the kind of rate that we should expect for the full year?

And then the third issue was I think at the end of the report there's something about litigation and that Credit Suisse is going to receive some money back from insurance contracts. Is -- could you talk a bit more about that? Is it particularly related to [Excel] or any one case? And how -- to what extent have you insured other litigation discussions, so this is something we could see in the future? Thanks.

Yes, thank you for the questions. Maybe I'll take the second one first, on the outlook on the cost development. We are of course extremely eager to reduce costs over time. It's difficult to say how this will develop throughout the year. But definitely, we will keep the focus on these elements and make sure that we are improving the cost/income ratio going forward.

For the -- for answering the question on the asset based fees, I give the word to Christoph Brunner, our COO of the Private Bank.

Well, actually the asset based margin is up 2.8% -- basis points. This is mainly coming from discretionary mandates; management fees were up also in the investment fund business, management fees were up. And third of all, interest income was better with an improved margin on liabilities. These were the three main reasons.

So do you think that's kind of sustainable -- those are kind of ongoing themes?

That's hard to say. Discretionary mandates, we have the money in and we will see the improvement also in the future. For the interest income, it's hard to predict. That will depend on the total AUM basis. If we grow very fast on the AUM basis, we will still see the slack between interest income and commission and trading income.

And the question on the recovery will be answered by Neil Moskowitz, our CFO of the Investment Bank.

Yes. Being that the CFO of the Investment Bank is asking it, I think that goes to your question about whether it related to [Excel]. Actually, these matters relate to the investment bank and there are the insurance obligations relating to certain litigation matters and the related costs. Confidentiality keeps us from going into exactly the exact nature of the settlement and exactly which cases they pertain to.

You may remember that we also received the benefit of one of these settlements back in the fourth quarter of '04 that we had disclosed in our quarterly statement. There are a few more out there that we're still working on, but this is going to be the biggest number that we see in that area.

Thanks.

Thank you, Neil. Next question, please.

The next question is from Matthew Clark of KWB. Please go ahead, Mr. Clark.

Good morning. Matthew Clark, KBW, here. I've got a couple of questions. Firstly, on the advisor hires in the private bank, you said the advisor headcount has gone up by 200, which I guess is about 10% or so. Will these advisors be profitable yet or should we expect a continued improvement in the cost/income ratio over the next year as they start to produce? That's the first question.

Second question also on the wealth management division. Again, the gross margin seems to jump about a bit more than it appears. Am I right in thinking that there's still some kind of gains and hedging type revenues that will introduce volatility, quarter to quarter? Or was the jump in the transaction-driven revenue purely client based rather than due to the accounting treatment?

And then third question, just on the Winterthur IPO. There was a headline on the tape saying that you are now looking for a second quarter IPO. I don't know if you could confirm or deny that, please. Thank you.

Thank you for your questions. I will take them straight on. Maybe Christoph can fill in, if I forget something. The new hires, the relationship managers, it typically takes 12 to 18 months to basically bring them, so to say, to breakeven, so that they start generating positive bottom line to the Company or the segment, as a matter of fact.

When it comes to the gross margins, the hedge effect is immaterial, so the major reason for the improvement in Q1 was definitely client activity.

Then, regarding the Winterthur, let me be again very precise. We said very clearly that Winterthur will be prepared -- will be able to be IPO’d at the end of the second quarter. But we have not said anything regarding to the timing of the IPO and that depends on our own assessment of the market situation and decisions we have to take internally.

Great. Thanks very much.

Welcome. Next question, please.

The next question is from Mr. Huw van Steenis of Morgan Stanley. Please go ahead, Mr. van Steenis.

Yes. Morning. Huw Van Steenis. Two quick questions, one on the private bank. Great result. I was wondering if you could give us a bit more color on the mix of where the assets are coming from. And in particular, you didn't mention Asia in the text for, I think, the first time in many quarters. Has there been a negative impact on the departures of the various teams which have been leaving in Asia?

And then secondly, terrific result in the investment bank. In the equities division in particular, could you give us a little bit more color on where the numbers are coming from, either contribution or which particular unit grew by the most? Because I think you've got an equity trading result which is twice as fast as Goldmans and yet you're saying its all client flow, and I was just interested what geographical product mix you are particularly seeing. Thanks.

Let me take the --- thanks for the question. Let me take the first one straight on myself. The mix of the assets is the same as we had it traditionally. Of course, very strong in emerging markets but particularly a positive also I've mentioned here in, so to say, more the traditional markets - Switzerland, U.S. and Europe. So that's why we highlighted those because those are typically the ones that were overshadowed by the good results in the emerging markets.

The investment banking question, Neil, could you please take that?

Sure. With regards to equities, I think we had great results across the board in all our major areas. Cash equities was very strong, client activity was very good. In terms of regions, Asia and Europe probably stand out. Prime brokerage continues to improve. As you know, that's more of a seasonal business, so we would expect probably even better quarters in that in the second and third quarter, but still had a good first quarter as well. And derivatives and convertibles, which were areas that were a bit problem areas last year, seem to have turned the corner and both had a very good first quarter.

Okay. Thanks.

Thank you. Next question please.

The next question is from Mr. Adrian Pilz of MainFirst Bank. Please go ahead, Mr. Pilz.

Yes. Hi, good morning. It's Adrian Pilz here. I have three questions, please, two number questions and one general strategic one. The number questions, the first one is on the corporate and retail segment underneath private banking. Generally good numbers but I just wondered if there was a bit of a slowdown in the net new asset inflows, if there was any indicative trend which we should watch out for in --- since we've seen only 0.3 of net inflows in Q1. It's a small question, that’s number one.

Number two, I'm trying to get my head around investment banking a little bit with the other revenue line, where you did mention there was actually an increased loss or lower revenue, and in the other line I think it’s also to do with private equity. And I just wanted to know whether that's a timing issue, as you don't make much capital gains in the first quarter but maybe later in the year, or whether it’s a strategic move underneath that. That's question two, please.

And lastly, on private banking more generally, I'm trying to gauge, given your very strong numbers and performance, are you grabbing market share? What is your reckoning on your market share in the global private banking market? Is it increasing or are you just riding the bullish market itself? Thank you.

Let me answer or let me ask Neil to answer your question regarding investment banking first, and then we can take the other two together.

With regard to the other line, the portion you ask about in particular, the private equity and is it a timing issue, understand that that's a legacy position. It's the old private equity business that we had prior to the DLJ merger, which is a business that’s winding down in size. I don't really think it’s a timing issue and that we could say 'hey, we expect to make more money later in the year'. As you know, with private equity you're never exactly sure when the gains are coming in but, in general, you should know the position is winding down and the results. If you remember, last year in the first quarter, which we compare it to, was a very good first quarter for that legacy position last year.

Thank you, Neil. Christoph?

To private banking, first question, corporate and retail banking, net new assets were CHF300m. This is a slowdown compared to the previous quarter and the first quarter 2005. The slowdown is coming from the small and mid-sized pension fund business, where we had some larger outflows compensated by inflows in the other segment. And for sure we tried to improve this figure.

You were asking about market share. It’s hard to say where our market share is, as there is not a real number how much wealth really is around the world, so it’s hard to say what the market share and the market share development is. However, if you look at our net new asset development over the last quarter, I'm convinced that we are constantly gaining market share, which is also true, by the way, for the business here in Switzerland.

Thank you very much.

You are welcome. Can I have the next question please?

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

Thank you. I'd like to ask a couple of questions on wealth management, and then one on the investment bank. On wealth management, are there any particular factors behind the very strong transaction revenues? Could you talk a bit more about whether there are any particular product areas or product launches or anything of that kind that drove that?

Secondly, relating to that, can you remind us, have you firmed up what you expect to be a typical gross margin on the new accounting basis?

And then finally, on the investment bank, you said that you expected the comp ratio of 53.5% to be good for the year. Could you talk about your expectations for non-comp expenses, either in percentage terms or in absolute terms, going from this Q1 level through the remainder of the year?

Okay. Thank you. Christoph, can you take the first two?

Actually, if I look at commission income and commission income was particularly strong in wealth management, this additional income is mainly coming from brokerage, from product issuing, as well as from asset-based fee. And all three parts made roughly the same additional commission income. If I look at product issuing, especially strong was the issuing of investment funds and within the investment funds particularly equity funds.

Neil?

With regard to the IB costs, the first on the comp ratio, as you remember, what we're doing there is we're carrying over the policy that we had at old CSFB, which is a bit of a discipline that we put in a couple of years ago that we wanted to stick to on comp. And this year obviously the target is 53.5%. The other target that we have out there is to achieve a pre-tax margin of 20%, which you are aware of from our investor day, with the difference between the two obviously being 26.5%. So in terms of non-comp to revenue might be a way to think about that. Now, obviously we have this settlement coming in, so we're hoping that together with that we could do a little bit better.

Okay. Thank you. Actually, sorry, just can I come back on wealth management, sorry? The other part of the question was have you firmed up what you expect to be a typical gross margin going forward?

We have not given any targets on gross margin and neither on net margin. We are focusing on pre-tax margin on the income side, which for us is of course the key.

Yes. Understood.

Profitability side.

Okay. Thanks very much.

Welcome. Next question please.

The next question is from Mr. Kilian Maier, Neue Zurcher Bank. Please go ahead, Mr. Maier.

Good morning. First, congratulations to the results, and then I would have three questions. The first one would be on the number of shares outstanding. There has been quite a lot of discussion in Swiss newspapers on the share-based, option-based program for your top management. Maybe you could elaborate on possible scenarios how much this will cost in '06 and '07 and the potential impact on diluted shares.

The second one would be on fixed income trading. Could you please elaborate a little bit on the impact of the commodities business, where are you standing there?

And the third one would be on risk-weighted assets. How do you see the development of this position from the operational perspective in the coming months? Thanks a lot.

Thank you. Let me take the last one first. Risk-weighted assets will develop in line with our business development, the way that we are executing our plans. And you will see, of course, with the increase of -- slight increase of risk, taking also what you have seen in the first quarter, you will see a slight increase in risk-weighted assets. But that is something you could basically follow every year, that in the beginning of the years risk-weighted assets would increase according to plan and we then have a stabilization or even a decline over the second half of the year and that is expected to develop the same throughout that year.

Neil, can you take the fixed income trading?

Yes. I think, with regard to commodities and the impact of that on fixed income trading, the impact there is not yet material, looking at the first quarter results. As you are probably aware, we formed the joint venture with Glencore, obviously using their expertise on the physical side to put together a venture where we offer derivatives and structured products on commodities, particularly petroleum here in this case.

In general, it’s in the slow build phase. I think that the impact will be bigger as we go throughout the year. But at this point, that's not really material to the first quarter results.

Okay.

And on the question of number of shares outstanding, as you know, the number of shares outstanding exclude the treasury shares which we have, which basically we are holding to hedge our share award programs we have for the Group. And it’s difficult to say how this will develop, because that's a lot also depending on how our performance goes and how the market condition goes. But at any time, we try to have enough shares to satisfy those needs as we go.

Okay. Thanks a lot.

Can I have the next question please?

The next question is from Mr. Kian Abouhossein from JP Morgan. Please go ahead, Mr. Abouhossein.

Yes, hi. I've got two questions. The first one is related to value at risk. You mentioned that it hasn't increased really. However, we've also seen that correlation has gone up or is basically similar between all asset classes at 1 in the first quarter, i.e. everything seems to be moving the same direction, which is clearly not captured by value at risk. And I'm interested in your views about, first of all, concerns of using value at risk as a measure for risk involved in the business. And secondly, is there any other way you manage risk? And thirdly, what do you expect to happen in terms of risk capital throughout the year?

The second question is related to the mortgage business. Can you give me an indication of mortgage volume growth we should expect for the full year '06 in private banking as well as in retail? Thank you.

Just for the second question, we do not give any expectations on that detailed number, when we expect the growth in particular product areas. Perhaps you can understand that.

Neil, can you give the answer to the VAR and the risk taking, which particularly is, of course, important for IB?

Yes. Obviously VAR is not the sole measure that we use to look at risk. In fact, probably the measure that we rely on the most is ERC, which is fairly detailed in the quarterly report. That is probably our primary measure of risk. And one of the reasons that we have made a point to emphasize that when we changed our restatement, so that we did look at the segment and look at all our returns on capital versus the return on economic risk capital.

And in terms of what we expect throughout the year, obviously the risks we take will be in a sensible [consummate] way with the revenue opportunities out there. In general, as we’ve said, part of our strategy is to take a little bit more risk as we continue to grow our business.

Thank you.

You are welcome. Can I have the next question please?

The next question is from Mrs. Joanna Nader, Lehman Brothers. Please go ahead, Mrs. Nader.

Hi, good morning. I just wanted to drill down a little bit more into the fixed income trading result. Just wondering if you could give any color whether there's any particular product segment that substantially detracted or improved the overall revenue growth rate year over year, quarter over quarter. You mentioned that CMBS was a weaker area and leveraged finance was positive. But just wondering, if you were to strip out those areas or other particular areas, would the growth rate have been much different?

And then also you mentioned ABS as one of the weaker areas, and I think this probably relates to the same sort of mortgage areas that have been weaker, so probably home equity loans. But I just wanted to clarify whether that -- is that segment of ABS, that's the weaker part, or whether it’s something else.

Thank you.

Starting with the first part, yes, your observation is correct. Probably the biggest winner of the first quarter in fixed income was the leveraged finance business. Tends to be stronger early in the year but obviously, with credit spreads tightening, a lot of activity on the sponsor side, it was a very good quarter in that regard and a good quarter for us in terms of capturing share of that business.

On the CMBS side, the fourth quarter last year, correct, was a good quarter for CMBS. And some of the actual realization of some of that activity is down in the first quarter relative to the fourth. That said, the Group would have what I would call a good pipeline, in that they are putting -- they are in the process -- they’re going through the process of actually putting together mortgages for securitizations. And we probably have a somewhat bullish outlook for that, particularly as the year starts to progress.

And is that your U.S. CMBS, or is that your expansion into the European area that's causing that?

Yes, it’s actually both. And we like both markets right now, both markets we have very favorable views on in terms of the way that our fundamentals of those markets.

On the other side, I was a little confused about the question with ABS and some of the lending in that. Let me just talk about the residential securities business, which may have been the missing link there. In that RMBS, it was a good quarter for RMBS. In our text we do not mention it as a big increase over the first quarter of last year, which was a great quarter for residential mortgage-backed securities. It did increase quite a bit over the fourth quarter of last year. So it was a good quarter for RMBS but versus a great quarter the first quarter last year that's hard to see. The ABS drop off is not really substantial but, again, it was a pretty good first quarter last year in that business as well.

Okay. And is that -- you’re most strong on home equity loans there, I guess, within ABS or is it anything else that we should be aware of?

That, among others. I think it’s a pretty good variety of things that they have in the Group. And I can tell you they always seem to be thinking of new things all the time, to say the least.

Okay. That’s great. Thank you.

Thank you. Next question please.

The next question is from Mr. Georg Kanders of WestLB. Please go ahead, Mr. Kanders.

Yes, good morning. I have a special question on the other revenues in the investment banking area. You are talking about losses there. Is it -- I understand that there were losses from credit default hedges, but does it mean that there are also losses from private banking activities or can I assume that there is also a small gain in this area?

I didn't quite get the part about the private banking activities.

Not private, private equity.

Oh, the private equity, I'm sorry. I think there's three big elements in other. One is the interest on goodwill. Okay? The interest on our goodwill goes through other, alright? And that's a significant item. The credit default, which will, as you know, always be a comp to revenue. The credit default swaps, obviously with credit spreads tightening those swaps were down in value. I tend to look at those, just so you know, versus our credit provision. So generally, if you see a good quarter where we're bringing back in credit provisions, or reducing our credit provisions, the credit default swaps value will drop.

And then the third big piece is the private equity -- legacy private equity. And as we did say, the legacy private equity, although it was a positive, it was not a negative, it was a positive this quarter, wasn't as positive as it was the first quarter of last year. Was that helpful?

Yes. Could you please give the number of how large these losses on credit default swaps were?

I couldn't give you a number on that, but you could compute the number on the goodwill interest, I could tell you that much. In the information in the report, it’s going to run about CHF90m or so.

Okay. Thanks.

Thank you. Can we have the next question please?

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

Yes, good morning. I just wanted to tackle a few of the issues again on investment banking side. Clearly the comp to revenue ratio target of 53.5%, and I think it’s a very interesting target, a number of your peers have talked about pressure on the comp to revenue ratio as the business mix shifts to equity and advisory. I just wanted to find out what the source of that is. Is this really benefit from the one bank strategy, improved productivity of the employees that work in the investment bank, or let’s say a more successful prop trading outcome?

And on that point on prop trading, I just wanted to ask a follow-up question. You mentioned in a couple of places a strength in global ForEx positioning, fixed income prop, equity prop. Is this the fact that we've just had a few bets that have worked particularly well in the first quarter, or actually genuinely that the prop trading desks are coming together and are starting to catch up with the stream?

Let me first start with the comp to revenue ratio. It is a target that’s born out of our strategy, which the increased focus strategy is really one of increased productivity. And part of our realizing that strategy is we do expect our comp to revenue to come down over time. So I do think productivity is a driver of that. Yes, I also think if we increase our prop trading activities and we’re successful at it, generally, as you know, that is a lower comp to revenue business and well it should be because we're using more capital in it. So we do expect to pay less on that.

The third issue about the global foreign exchange positioning, as we put it, it’s a combination of both trading and positioning. The success we had this quarter is we have increased our trading from the one bank, we have merged in the foreign exchange desk from the old private bank. That merger has been very successful. And I think, together with our old desk, I think there is a lot of very good information flow there which is helping our positioning and it’s also helping to improve our trading results.

Thank you.

Thank you, Neil. Can we have the next question?

The next question is from Mr. [Daniel Zuelauf] of [Burden Zeitung]. Please go ahead Mr. Zuelauf.

Good morning. I have three quick questions. Can you tell us a bit more about how the Winterthur IPO is going to take place? Is there an idea already whether this will be a straightforward sale as a placement of shares or whether it will be type of a classical spin off?

The second question is on Clariden Leu, the new private bank that’s about to be created. Is this bank set to expand in Switzerland through acquisitions or mergers?

The third question is, is there a possibility that Clariden Leu will, after being created, be sold similarly to the private banks of UBS which merged in November with Julius Baer?

And finally, I would like to have a quick comment on how you value this consolidation of the Swiss private banking business.

In what sense do you mean how we value that -- how we view it?

How you view the consolidation of the Swiss private banking business.

Okay. Let me answer the questions in the sequence you have asked them. For Winterthur for the IPO, the details have yet to be defined. As we go forward, we will go for the straight [inaudible]. There will be no spin off from that.

Thank you.

On the Clariden Leu, on the expansion, of course the new combined private bank or independent private bank has a much better platform, if need be, to participate in the expansion. But I think their first concern now is to come together throughout 2006, particularly as of 01/01/07, and also make sure that they exploit the high growth markets outside Switzerland for which they have identified a number of countries on where they want to grow. So the focus is clearly on organic growth in the first place.

And the question on potential sales, this is definitely not intended to be done. This -- as you know, this merger has been done out of strength. All the units are profitable, are growing, and therefore I think they are extremely strong and are a very important part of our private banking segment.

And the way I see the consolidation, I mean the merger itself, is a reaction to that, that in the present situation you have to have a critical mass in order to make sure that you stay productive and you keep your customer control. And I think the fact that we are able to save CHF100m to the bottom line as from 2008 onwards, on the basis of something like CHF450m bottom line right now, shows you that there is quite some impact to that.

Thank you very much.

You are welcome. Is there any more questions right now from the analysts, investors side before we go to the media?

There are no more questions as this time.

Okay. So if that’s not the case, I open the question and answer to the media. It seems that there is no question as well. Okay?

That is correct. There are no more questions.

Okay. So thanks a lot for joining us this morning and I wish you a nice day.

Ladies and gentlemen, the conference call is now over. Thank you for joining. Have a nice day.