Credit Suisse Group AG (CS) 2006 Q3 法說會逐字稿

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group third quarter 2006 results conference call. [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 this morning. There is an information package available on our website where you will find the presentation slides. Following my presentation, there will be a question and answer session, and I will be joined by Neil Moskowitz, the CFO of the Investment Banking Division, Christoph Brunner, the COO for Private Banking, and Larry Haber, the COO for Asset Management. As usual, before I start on slide two, I would like to refer you to the disclaimer.

Let me go on slide three to the financial highlights. Slide three gives a brief overview on our third quarter result. We produced a good overall performance for the first nine months of 2006. The results for the third quarter were influenced by the seasonally lower Private Banking result. And Investment Banking reported good results in fixed income trading but not impacted by lower equity trading revenues.

Consolidated pre-tax income from continuing operations stood at CHF7.4b for the first nine months, up over 50% from the same period of last year. This line here includes -- excludes minority interest revenues from certain private equity funds where we have no significant economic interest.

Pre-tax income of CHF1.8b was achieved during the quarter, which is down 9% on the usual strong third quarter -- on the unusual strong third quarter of last year. Basic earnings per share in the third quarter increased 4% to CHF1.74, also benefiting from our share buyback program. The Group's return on equity was 18.9%, with a return on equity of 19% in the Banking business.

Net new assets of CHF31b were added in the quarter, driven by strong inflow levels in Asset Management and Wealth Management. The first nine months net new asset inflows have almost doubled compared to the same period last year.

Let me go to slide number four. It compares the third quarter performance versus the previous quarter and the same quarter from last year. Adjusting for the insurance settlements received in the second quarter, of which you are all aware, Investment Banking's pre-tax income performance was lower in the third quarter, at CHF758m, as a result of weaker equity trading results.

Private Banking produced another good result with pre-tax income in excess of CHF1b. Within this segment, Wealth Management's pre-tax income was CHF684m, some CHF100m lower than the strong second quarter. Asset Management's pre-tax income recovered somewhat from last quarter, at CHF158m, although it included a further CHF40m charge for realignment costs.

Let me go to slide five on Investment Banking results. Fixed income trading produced good results in the quarter, while the performance of the underwriting and advisory business remained solid in the light of the weaker market environment over the summer. Equity trading had a lower result in the quarter as a result of a reduced revenue contribution from the Equity Derivatives business.

Let's have a closer look at the results, starting with the underwriting and advisory business on slide number six. Combined advisory and underwriting fees were down 5% compared to the third quarter last year. Higher debt underwriting revenues in the quarter, driven by continued strength in leveraged finance, were offset by lower performance in equity underwriting and advisory.

Advisory revenues were stronger in the third quarter of 2005, benefiting at the time from a number of high fee transactions in the quarter. The seasonal slowdown in underwriting activity resulted in lower revenues compared to the second quarter. Our M&A and equities market share improved from the second quarter, as a result of particular focus we have placed on developing these businesses.

In equity underwriting, we participated in a number of key equity transactions across a broad range of industries and geographies. Our deal pipeline for both equities and M&A looks strong going into the fourth quarter and into 2007. I will now continue with the trading results on slide seven.

Fixed income markets remained challenging in the third quarter of 2006, as the yield curve flattened. But market conditions recovered from a slow start, with increased activity in the latter part of the quarter. Third quarter result of CHF2.1b is up 9% from last year and reflects a strong contribution from commercial mortgage-backed securities, global foreign exchange and collateralized debt obligations, partially offset by weaker results in asset-backed securities and residential mortgage-backed securities.

Note that, excluding the positive CHF260m fair value adjustment in RMBS in the third quarter of last year, it would have resulted in a 22% increase in fixed income trading revenues.

In line with our strategy to build out our commodities trading platform, the business experienced good revenue growth in its first year of operation, with revenues significantly higher than the third quarter of 2005. During the third quarter, we announced a second strategic alliance with Glencore International to build a derivatives and structured trading business in base and precious metals. This is in addition to the previously announced alliance in the oil and petroleum products market.

Now, let's look at the equity trading on slide eight. Equity trading revenues this quarter, of CHF1.1b, were down 21% from last year and 7% from the prior quarter, reflecting lower results in derivatives. The derivatives business made a positive revenue contribution in the quarter, despite an uneven performance in the business.

Prime services had strong results in the quarter. Despite more challenging market conditions for hedge funds, our hedge fund balances increased as clients continued to direct new prime broker business to the bank. Our strong reputation in this business is building, evidenced by our recent number three ranking as prime broker in Institutional Investors' top 100 Hedge Funds Survey.

Client-driven activity in the cash businesses improved from the third quarter of 2005. However, there was a small decline from the prior quarter, as a result of a seasonal slowdown in client activity. The second consecutive year, our AES trading platform was recognized as Best Algorithmic Trading Service by Financial News in its annual IT Excellence Award for 2006.

The Group's average value at risk, VaR, in the third quarter of 2006 was CHF80m, down CHF15m since the second quarter, mainly due to reduced interest rate and credit spread value at risk exposures.

Let me go on to expenses in Investment Banking, set out on slide nine. We continue to pursue sustainable, long-term cost/income ratio reductions. We are beginning to see some tangible progress and we are confident about the future benefits from our initiatives. Again, we have kept the compensation to revenue ratio stable at 53.5%, which is 2 percentage points below the full year 2005 level. We intend to keep this ratio at or below this level for the remainder of 2006.

In addition, our level of non-compensation costs is down from the second quarter if you exclude the CHF474m insurance settlements received last quarter. We have begun to see some progress from our non-comp initiative and expect to see continued progress in the fourth quarter and on into the next year.

As part of our commitment for improvement in this area, specific non-compensation expense targets for the year-end 2006 run rate, and 2007, have been set for each business by category of expense and region.

Let me move to Private Banking and start with slide number 10. Private Banking achieved a steady quarterly performance against prior periods, heavily influenced within Wealth Management by slow client activity and falling markets in July and August. This was in contrast to the strong corresponding period last year.

As seen on slide 11, income was broadly maintained in the third quarter compared to last year, but down on the record levels experienced in the first two quarters of this year. This was primarily due to lower transaction revenues. Turnover volume and the number of trades on the Swiss Stock Exchange, which are indicative for brokerage activity, were down 34% and 11% respectively on the second quarter of this year. Consequently, our transaction margin was down more than 10 basis points, with 31.4 basis points.

Looking at the nine month on nine month movement in the transaction margin, when you eliminate volatility associated with quarter-on-quarter market movements, you can see it has risen by just over 1 basis point. On a nine month on nine month comparison, this asset-based margin has fallen 2.2 basis points. It is mainly influenced by the slower growth in net interest income compared to average assets under management.

For those of you who look at gross margin, the rolling four quarter calculation, shown by the dotted line of the chart, shows you a normal trend of around 112 basis points. The net margin on assets under management, a better indicator to measure our performance, improved for the nine months to date versus the same period last year.

On slide 12, I will now provide you further insight into what influenced the downward movement in the asset-based margin this quarter. Analyzing the 3 basis point fall in the asset-based margin, third quarter on third quarter, you can see that the strong 12% increase in average assets under management is outpacing the 5% growth of underlying net interest income.

Within net interest income, lending does not form part of assets under management. When we see strong levels of assets under management growth, we don't see the same level of lending growth and, therefore, this impacts the asset-based margin. This drag accounts for 1.7 basis points and purely reflects the way we calculate the gross margin.

The remaining decrease of the asset-based margin relates to two factors. First, the timing difference. Generally, there is a timing difference of one month between the assets under management development and the related asset-based revenues. Therefore, the relatively low assets under management at the end of June were the base for July fees billed to clients, whereas the high assets under management at the end of September will be the base for October fees.

And second, strong net new asset growth and the international mix of AUM growth. Our strong growth in net new assets in the last quarters was driven, in particular, by international growth markets. This led to a temporary dilution of the overall gross margin. Actually, the strong growth in the U.S. business has a dilutive effect on Wealth Management's gross margin.

On slide 13, you see that the net new asset growth amounted to CHF10.9b. This represents a rolling four quarter average growth rate of 7.2%, well ahead of our 6% per annum mid-term target on which our targets are based. Net new asset growth during the quarter benefited from good inflows across all regions. The decrease in net asset gathering in the third quarter compared to the previous quarter was mainly driven by seasonality effects, especially in Europe and the U.S.

Unlike the last quarter, when the market movements depressed total assets under management, the good market in September resulted in an increase in assets under management to over CHF750b.

We go to slide 14 and Wealth Management and the costs side. Compared to the same quarter last year, total operating expenses, at CHF1.2b, increased slightly compared to the same quarter last year but were down versus the second quarter. Underlying compensation costs have risen in line with the expansion of the headcount, predominantly in respect of investments in international growth.

As well as reducing the bonus accrual, a lower quarterly bonus accrual rate has resulted from the decision to include a greater number of employees who receive share-based compensation, which is subject to vesting. Of course, as is normal practice, in the fourth quarter there might be a true-up based on the final calculation of bonuses, depending on the performance, of course, in the final quarter.

Other expenses were maintained at the same level last year but were down on last quarter, as we continued to strictly focus on cost levels. For the nine months we continued to run at our mid-term target pre-tax income margin of 40%.

Corporate and Retail Banking business, as shown on slide 15, continued to achieve strong pre-tax income. Compared to the same quarter last year, revenues fell 2%, whereas operating expenses reduced 5%. This resulted in a small increase in the pre-tax margin to above 40%, and the pre-tax return on average economic risk capital remained at a high level of 48.1%.

I will now continue with Asset Management on slide 16. The repositioning of the business, announced last quarter, continues to create a drag on the results. However, given the significant changes that are taking place, there are positive indicators in terms of moving the model to serve the purpose of the integrated bank in the longer term and position us for future growth.

Strong net new asset growth achieved last quarter continued again this quarter across all major asset classes. Asset Management fees continued to grow in line with this growth. The realignment efforts are on track, with the headcount reductions of 300 people in the U.S. expected to be mostly complete this year. Although we are in the middle of this realignment, we announced a number of growth initiatives to add to the alternatives investment platform across a variety of new products, sectors and regions.

As shown on slide 17, net revenues amounted to CHF692m. This was driven by an 18% increase over the third quarter last year in Asset Management revenues and private equity commissions and fees. Stripping private equity and other gains out of the gross margin shows a consistency in our quarterly revenue generation compared to the asset base. Indeed, there was a small increase this quarter to 37.8 basis points compared to the previous quarter.

On slide 18, you can see that the total operating expenses increased by CHF87m, or 19%, when compared to the third quarter of 2005. The increase in compensation and benefits of CHF33m includes CHF22m of severance-related costs in connection with the realignment, as well as additional costs incurred in hiring high-quality investment talent.

In terms of the increase of CHF54m in other expenses, there was an increase in commission payable in line with the higher assets under management levels and a further CHF18m of costs in respect to the realignment of the business. The CHF394m other expenses in the second quarter included CHF120m for the write-down of intangible assets following the U.S. realignment.

As already mentioned, net new assets, as shown on slide 19, amounted to CHF21.2b. The four quarter average growth rate now stands at nearly 10%. This is a good result, especially during a quarter where there was some upheaval in the business and given that nearly 30%, or CHF6.2b, of this increase came from alternative investments. Assets under management now total almost CHF660b.

On slide 20 you can see how diversified the asset mix is and how we are achieving growth across all asset categories. Our alternative investment assets now total CHF135b, making us one of the biggest alternatives fund managers globally.

Let me give you a few words on Winterthur, on slide 21. As we reported last quarter, the financial results of Winterthur are reflected in income from discontinued operations net of tax, a separate line between pre-tax and net income. The result of CHF424m this quarter benefited in particular from the release of a provision of CHF154m following the [final] resolution of the value added tax-related claim in the U.K. This shows you that the underlying business is still going strong, at the rate we have seen in the first two quarters. As we did last quarter, there is a short press release available via Winterthur's website, which includes key financials.

This concludes the discussion of segment results and brings me to the two final slides for the Group, starting with slide 22. The Group continued the share buyback program, as promised. At the end of September, we have now repurchased 62.7m shares totaling CHF3.9b out of the CHF6b buyback program.

Risk-weighted assets increased 3% compared to the second quarter of 2006, primarily reflecting increased commercial and private lending, partially offset by a decrease in market risk equivalents. Tier 1 capital increased by CHF1b during the quarter, with net income and -- in line with net income, and offset by dividend accruals and the buyback program. At the end of the quarter, the Group's consolidated BIS Tier 1 ratio stood at 10.8%.

My last slide, number 23, summarizes this quarter's performance against our mid-term targets. Our current performance compares favorably against these targets. Looking forward, we believe the economic outlook for 2007 is positive in view of the financial strength of corporations, the robustness of the financial services industry and the sustained growth prospects for the emerging markets.

As global energy and commodity prices remain subdued, we expect some modest increases in interest rates in the coming months. In addition, we see further upside potential in equity market valuations, although of course periodic setbacks are possible. As we move towards the end of the year, we have a strong pipeline of business which leads us to the conclusion that we will have a record year for 2006.

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

[OPERATOR INSTRUCTIONS]. The first question is from Mr. Jean -- Jacques-Henri Gaulard of Merrill Lynch. Please go ahead, sir.

Yes, good morning.

Hi, Jacques.

Hello. Three quick questions. Following what happened in the equity derivatives and the change in management, are you going to change the strategy there? If you can maybe just elaborate a little bit about what would you like to do with this business and for how long, that's the first question.

The second one - actually, I just have two, not three - would be the Asset Management business seems really to have recovered nicely now versus where it was even last quarter. I remember that at the Investors' Day last year the idea was to restructure the business for one year and then kick off on the growth for another year. And I wanted to ask if you were still comfortable about meeting the 24-month deadline we had -- you had for the business. Thank you.

Yes, thanks for your question. Let me answer the second one first. We clearly said that Asset Management for 2006 is a construction site, because we need to realign the business. We need to put it on a more profitable platform, on a platform also that serves the customer better, with more innovative products and so forth, and that's why we have taken all these steps. I think that phase will be over towards the end of the year and we should start seeing positive impacts going forward into the next year.

On the equity side it is very clear, of course, that with the changes you mentioned we are aiming at improving the performance of the equity trading area with various, how should I say, with various actions in that part. And it's very clear that we are addressing the issue as it came up. Maybe, Neil, you can give a couple of --

Is it more a risk management issue? Is it more a commercial issue? I'm trying to get a bit of color there.

Yes. This is Neil Moskowitz, Jacques.

Hi, Neil.

The two areas we're focusing on initially are, one, on the distribution side. We think there's a lot of opportunities there that we can exploit, particularly in Europe, and we're looking to upgrade where we are there. And the second area we've been spending some time on is the infrastructure side, allowing us to achieve more scaleability in the business and lower costs. Those are the initial focus and I would add that Simon Yates, who's taken over, is in the process of developing a comprehensive plan, not only around those two areas but others as well.

And that goes hand-in-hand, as we explained to you also before, with our derivatives change program we have running in order to upgrade the platform. As I have told you before, we had -- partly in the past, we had limits on how many trades could be made on the system, so we are developing -- about 50% of the development was that start-up.

Thank you very much, guys.

Welcome.

The next question is from Mrs. Fiona Swaffield of Execution. Please go ahead, madam.

Hi, my question is in a number of areas. On the Wealth Management division in the, basically staff costs, you mentioned you've changed the accrual. Is that a one-off? I couldn't -- is it basically you've had a release in terms of the share comp, so there's a one-off effect there?

And also, on the asset-based fee explanation, I wondered if you could talk a bit more about the interest income, and why it's not growing as fast and whether this is something that's going to continue to further pressure margins?

And then, on the Investment Bank, in the non-compensation expenses, you mentioned you'd made some progress in terms of bringing those down, or you're having some impact. Could you quantify maybe some One Bank effects or say how significant this has been in terms of where we could go, going forward? Thanks.

Okay. Let me take the question first and then I can give the word to a couple of my colleagues to be more in detail. In Wealth Management you asked about the accrual I mentioned in my presentation. On an ongoing basis, we are of course assessing our accruals that are needed, based on some of the share plans we have and that -- we usually do that in the third quarter. And that led us to taking into consideration what has been decided, which was to include more people, so to say, in the share plan set-up we have, which leads to a higher deferral due to the vesting period. So that is basically -- I think that is happening in the third quarter and had a relatively minor impact.

The asset-based margin and the question why it is - if I understood that correctly - is why isn't the interest income development similar to the growth in revenues or to the growth actually in assets under management. Perhaps Christoph quickly to answer that in more detail. It has mainly to do with the fact that this is not related to each other.

Yes. This is Chris Brunner. Within the interest income, the lending business is not part of assets under management. And in periods with strong assets under management growth, we don't see the same growth rate for lending and therefore the interest-based asset margin automatically goes down. And this fully explains the margin development within asset-based margin compared to the second quarter this year. Compared to the third quarter 2005, this explains 1.7 basis points as a dilution effect. In addition to that, as Renato explained, we have a timing difference in revenue recognition compared to the assets under management development and some dilutive effects from net new asset growth.

So --

Or otherwise expressed, it is pretty difficult to basically match the net new asset growth with corresponding lending.

So it's not an issue? Because I think in the past you've mentioned mortgage margin pressure. So that's going away as an issue, it's just a technical effect?

No, it's more a volume issue that the volumes are not developing, of course, on the same side on the lending like they do on the net new asset intake. That's the key factor here.

On the Investment Banking non-comp side, the -- can you repeat your questions quickly, please? You ask about --

You mentioned that the non-comp was down marginally on the second quarter and you feel you're making progress. I just wondered if you could give us any more information on -- because I assume that commission expenses would have been down, because of the seasonality. So have you really made much progress to date and has One Bank had an effect at all?

It's fair to say that on the One Bank side, or on the integrated bank, we were very clear that the benefits will kick in, in 2007. You remember the number of something like CHF200m, CHF250m, which we said would be the net effect. We were also clearly saying that, in 2006, we have not yet no benefit because we always have upfront costs where they go against them, and the real benefit will kick in with the -- from the costs side in 2008.

So, from that perspective, we did not expect anything this year already. On the other hand, you know that we have various projects running in the Investment Bank that were elaborated over the last couple of quarters. And we will see the impact of those projects in early next year, throughout the year. So that's a clear focus we are having. But of course, there is always a time lag in these types of exercises and we are very confident that we will see first results next year.

Thank you.

Welcome.

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

Good morning. Two questions, firstly just wondering if you could update us on the number of advisors that you've got in the Wealth Management division and how that's changed over the last quarter?

And then, secondly, just on -- I think it was a 37% pre-tax margin in the Wealth Management division, which is below your 40% medium-term target. Would you expect, over the cycle, your pre-tax margin to oscillate around that 40% target, or is there any reason why it can't be above that every quarter? So I guess another way of putting it is, is there any kind of build-out expense in there that meant you were unable to meet that level in a weak quarter that will go away in the future? Thank you.

Thank you. Regarding the advisors, the number, the net number in the third quarter was more or less flat, and the net increase in the first nine months was 70, 7-0. On the pre-tax margin, let's not forget this is a mid-term target we have set out, which is three to five years from now, and it just shows you that we have already achieved it today, almost. And the reason for that is because we had a very good development in net new asset intake.

We have calculated our 40% pre-tax margin based on an expected, calculated and assumed gross margin and, of course, also the net new asset growth of 6%. So of course it's obvious that if one of them goes faster, then it has a positive impact. So, again, that's a mid-term target which we have set, which we have achieved partly already in the nine months. But of course we will have to review if that will still be a target going forward, but it's definitely a good performance here.

So, just to follow up, you'd expect the kind of cost flexibility that you've seen in the third quarter on lower transactional activity to be pretty indicative of what you'd see in a similar revenue environment going forward?

Well, you have to see that part of the costs in Wealth Management is of course driven by our expansion of our business into the emerging markets. It's typically so that you are investing, of course, into particularly people, to develop them in relationship managers, to train them, and it takes 12 to 18 months to bring them, so to say, up to speed and to deliver positive results.

But that of course is a drag, as you maybe can appreciate, on all measurement on all margins. But still we have, of course, the target of 40%, which we achieved now in the nine months almost.

Okay. Thank you very much.

Welcome.

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

Yes, good morning. I've got three questions. Firstly, on fair value hedging losses, we saw some quite significant impact at UBS, which went through the corporate center. Is there any impact at Credit Suisse this quarter?

Secondly, in terms of the weakness that we saw in derivatives, the press speculated that that may have been a function of a single -- or a small number of transactions. But could you confirm that, and perhaps elaborate on whether that issue is closed and that we won't see that again?

And, thirdly, in terms of your economic risk capital exposure, on page 27 of your report, I've seen a very significant growth in terms of the ERC coming from real estate and structured assets, about a third growth. Can you maybe talk to that?

Sure. Thanks for the questions. The fair value hedging, the FAS 133 issue, we have decided about a year ago not to talk about that any more in particular detail, because it is really part of the business and that goes -- that is considered in the business results in our Group. We do not have that as corporate. That's included in the segment results.

And the second question, on derivatives, we are not commenting on any rumors in the market. And as I told you in my presentation, equity derivatives had a positive revenue contribution in the quarter and I think that should answer your question.

The ERC distribution and growth in the Investment Banking division has particular reasons why that increased, despite the fact that the VaR went down. Maybe, Neil, you can give that detail?

Yes. As you know, we manage -- mostly when we look at our risk we focus on the ERC number, primarily. And this quarter there were excellent opportunities in commercial mortgage-backed securities, and some as well on the residential side. And we did decide to shift some risk out of the interest rate and credit spread side of the world, particularly in the market risk place - and you can see the drop in the VaR numbers there - and use that risk capacity to accommodate clients in both commercial and residential real estate. That paid off. As you can see, our biggest increase in fixed income trading, which was our standout for the quarter, was indeed in the commercial mortgage-backed securities area.

Can I just follow up on the fair value hedges, actually? Would you say that you had gains or losses in the quarter? Were they of material magnitude? And would they have gone through Wealth Management and Retail Banking?

Well, again, as we said a few quarters ago, we see that as a part of the business. We are not specifically commenting on the individual businesses. If you press me hard, I can tell you that it had a negative impact on Corporate Retail Banking and Wealth Management in this quarter, but as much as I don't -- I'm confident when it goes up. I'm confident also when it goes down. So I'm not bringing that up as one of the reasons.

Sure, thank you.

We feel that it is part of the divisions. They have to manage that and they do, actually, so we do not need to put that into Corporate.

Thank you.

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

Hi, good morning. Just -- I was wondering if you could just talk a little bit about the fixed income area and your progress in the areas that you'd wanted to build out your breadth of products, and just what your progress is on the various areas that you've been focusing on.

Neil, do you want to take that or should I start? Go ahead.

Sure. It's a little open-ended, so I'll hit it from the few areas that [Tim Healey] usually talks about, who's our Head of Fixed Income. The first big area we generally refer to are the jewels of the business, which we're continuing to strengthen and allocate more capital to, which are leveraged finance, EMG and commercial mortgage-backed securities.

The growth there continues the way we had planned it. And, frankly, we're happy with how those are moving along on their high ROE businesses, strong net income providers. Residential security -- residential mortgage-backed is almost in that class. We like where we are with breadth of product. We think we're developing our origination channels pretty well. And, again, I think, while we know who the main two leaders are there, we think we have them in our sights and it's a business that we're happy that that's moving along.

On the commodities side, which would be one of the businesses we would then target as would fall in the category of businesses that we're looking to develop, we think we've brought on the commodity hedging savvy that we need in the power and gas area. And we feel that combines well with the leveraged finance and M&A savvy, which are probably the three key ingredients to really making that business work.

The other two areas, which are really oil and metals, well, we feel we've built the internal capacity. We feel that some of the external expertise that you need, particularly in the physical markets, we've had to get together with Glencore to provide that to us, while at the same time we are providing them our expertise in things like derivatives, hedging and, frankly, a credit rating, so that we can issue product. And so we feel in general that all those businesses are really moving along, both the ones that we wanted to grow, which are big producers -- the ones that we want to grow, such as commodities from scratch, and the high-income businesses.

The last set of businesses are the businesses that we're fixing, that started off as businesses that were not profitable and almost all had moved into the profitable category, whether you talk about interest rate trading, FX, derivatives or -- I mean FX or FID derivatives. So, again, those businesses continue to improve. I would argue that FID derivatives is already profitable and it's starting to get even better.

That's great. Thank you very much.

Next question, please?

The next question is from Mr. Christopher Wheeler, Bear Stearns. Please go ahead, sir.

Thank you, yes. Good morning, gentlemen. Just a couple of questions. The first one, on the Asset Management business, obviously some good progress being made there but could you elaborate a little bit more on the new money? Obviously I seem to remember that David Blumer said he's hired a new Global Head of Distribution, a new Head of Asian Distribution, a new Head of Institutional Distribution.

Could you perhaps give us a clue as to where this money has come from, in terms of perhaps retail and institutional, where it's come in terms of products? I do believe there's been a strong showing by alternatives. But also, perhaps, talking about geography and, finally, whether these new individuals have had a part to play in this improvement? And also, the final point on this one, how much has the relationship with the Wealth Management operation improved and how much of that can be said to have helped boost the net new money?

And then a second point, which I think you've just touched on, but I just wanted a little bit more color. Obviously the advisory revenues were down in the third quarter. I know you were talking in the first quarter about how you were disappointed by your position in the league table. This has obviously flowed -- come through into the third quarter. But can you perhaps tell me, the improvement you've seen in the league tables in the third quarter, how much of this is down to, I don't want to use the word luck, but the fact that perhaps areas where you have a stronger suit are playing out in M&A? And how much is down to the fact that you have been hiring in those areas? Thank you.

Okay. I give the first question to Larry Haber, our COO of the Asset Management Division.

In terms of the growth in net new assets in the quarter, we think that it's a very positive sign in terms of the positive working of our business strategy. The significant gains that we see coming in the money market area actually is derived from a number of positive factors, first is some excellent investment performance. We've got a top-rated capability in terms of the investment returns there. And then, very significantly, we see here a real significant payoff in terms of some of the One Bank synergies, distribution coming in from our organization as well as partnership with both the Investment Bank and the Private Bank.

The other gains that we have in net new assets are deriving from a lot of our alternative capabilities. Again, I think it's a combination of effects of the people that we've added in terms of the product development area, the coordination of our sales organization and, again, partnership within the bank. And here, I think there's been some very positive developments in terms of our relationship and coordination with the private bank. And I think that all of those point to some positive impacts from both the people that we have added to our organization, as well as the strategic direction in which we've been heading.

So, in summary, are you saying -- I think I got the understanding that maybe up to 30% of the new money came from alternatives. Are you saying the balance was broadly within the money market area?

About 30% of that is from alternatives. There's a large piece there in money markets and then smaller pieces in longer duration fixed income. There are also a couple of smaller components from some of the core real estate activities that we do.

Okay. And in terms of the institutional business, where obviously you are making a -- you said you hired a new Head of Distribution, how did that kick in, in terms of the new money?

Well, in terms of new money, we've won a number of very significant mandates along institutional lines, in the United States I would mention, as well as in other parts of the world, the Pacific rim and in Europe.

Thank you very much.

Okay. On the advisory, let me just mention a preamble. I think it's -- talking about luck or coincidence when it goes up and about performance when it goes down is not giving fairness to our people. So maybe --

Absolutely true. I'm sorry. I apologize. I was really wondering whether you had the right people in the right sector.

Yes, yes. Maybe Neil can shed some light in this area.

I think I like Renato's summary there. But I think in the third quarter really what's reflected is probably an area where we think we have market leadership, which is in LBO transactions. We were involved in two of the bigger transactions, which were the sale of HCA to a private equity consortium and then a private equity consortium's acquisition of Freescale. All in all, through the year, maybe just looking at that through the year, we've advised clients in six of the top 10 LBOs announced globally in 2006. That's an area we feel we've had market leadership in. And maybe it was a bigger factor, obviously when you look at the league tables in the third quarter, because more of the deals were in that area. So I'll let you judge whether that's lucky or good or a little bit of both.

The other point you make I do think is an important one, that you're right, I think some of the performance in the third quarter is a reflection of where we were in the first quarter in the league tables. And I'd also say that I think the fact that we're significantly higher in the league tables in the third quarter will hopefully manifest itself in future advisory results.

Thank you.

Thank you. Next question please.

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

Yes. Hi. If I look at the Investment Banking result on the first nine months and I take our your [litigation] cost, you made about CHF3.1b. Your target for next year is CHF4b but under a different revenue environment. If I remember Mr. Dougan indicated, on December 7, that 2005 was a kind of a normal environment. So what I'm trying to understand is how have you developed in terms of taking market share from the investment and how should we look into next year? Is next year going to be an efficiency ratio improvement, a level or target or change in order to get to the CHF4b on a sustainable basis? So I'm just trying to understand the changes that are happening within the P&L to get to the CHF4b.

It's -- of course you have rightly stated your questions. It's a mix of, on the one hand, expanding the business. I think Neil went through that a couple of minutes ago, on where we want to grow, where we have been growing, where we will further grow from the revenue point of view. I think we are addressing all these areas very diligently.

But at the same time, of course, we will also have positive impacts, as I mentioned before, out of the cost reduction exercises that have started off this quarter or a couple of quarters ago, which will be materializing in next year. And, of course, there will also be some benefits, as I mentioned also before, out of the integrated bank, which will also lead to some cost reduction in investment banking. So it's a whole combination of effects that makes us strongly believe that we will achieve that result.

And can you give us an idea of [what we have] achieved from our investment plan to help the revenue side, X%, and on the cost side you are at Y% at the moment. Can you give us an idea of where you stand in terms of tracking on what you wanted to achieve so far?

That's difficult to express, of course, in percentage terms. I think on the cost side we are at the beginning, I would say. As I mentioned before, there's a lot of projects that have been started. And on the revenue side it's difficult to judge. We are definitely in some areas quite advanced. In others we have still to go. So it's not possible to quantify that with percentages.

Okay. Thank you.

Welcome.

The next question is from Mr. Philipp Zieschang of UBS. Please go ahead, sir.

Good morning.

Morning.

Couple of questions, first on the Private Banking or the Wealth Management net new money. The 6% seemed a bit on the lower end of expectations. Could you just comment in terms of your momentum of people you are losing to competitors, to some Swiss competitors which are hiring in Asia, in particular versus people you've brought on board in terms of net new money flow? And do you think you've basically reached the trough there in terms of people losing? And could you probably also comment on the net new money figure, excluding the U.S. broker business?

The second part is on the Investment Banking side. Could you just provide a bit of more color in terms of this non-compensation cost, which averaged about CHF1.2b over the past couple of quarters? Which are the areas you have now identified where you have the most room for cost cuts? And assuming revenues were at current levels, what percentage of this CHF1.2b run rate you think actually you could cut?

And just a very last point on the Private Bank. With respect to your compensation, you flagged some potential bonus true-ups in the fourth quarter, versus a very firm opinion that Investment Banking comp revenue is flat or down. Could you just highlight whether this is -- whether you are facing a rise in compensation ratio in Private Banking? It went up slightly to 34% now.

And also could you probably be a bit more specific on the compensation charge, on the benefit for moving some compensation parts into deferred comp in Q3, so that we get a feel how much it actually was for the quarter? Thanks.

Yes. As I mentioned to you before, the impact on Q3 was insignificant. It was a couple of tens of millions that was the result of Wealth Management was impacted. So it's not -- really not noteworthy and therefore we haven't even given a number, which otherwise would have been necessary.

Flagging that, we have a true-up in Q4, which is for completeness reason because, at the end of the day, it will be dependent on the performance for the full year, which of course includes the fourth quarter. But I see no reason why we should have a deterioration, so to say, of our compensation to revenue ratio in Private Banking, as such.

So that the comp to revenue ratio, which is a -- how should I say that? The common standard for comparing comps between investment banks is not the same in Private Banking. It's differently calculated. So, again, I have no reason to believe that this will be deteriorating from what we had as of nine months.

The non-comps, the net new assets regarding losing people to competitors, I mentioned to you before that we have had a net 70 relationship managers since the beginning of the year. And, of course, you always lose and you hire people. But it's definitely so that we are continuously hiring relationship managers in order to grow our business and we will continue to do that. And it's not so that we're feeling in any way a great pressure on that.

Maybe, Christoph, you can add -- complement on that?

Actually, you mentioned Asia Pacific. We are quite stable with our personnel base down in Asia. We were very satisfied with net new asset growth in the third quarter down in Asia. The slowdown in growth really is coming from the U.S. business, as you mentioned, and, in addition to that, from -- seasonally from the European business as well as from the Middle East business.

Now, having said that, Christoph, I think it's fair to say that the growth was particularly good in the first two quarters in the U.S., actually surprising even ourselves by it. So, of course, it was to be expected that there was a slight slowdown in that area.

Regarding the non-comp initiatives we have running into the Investment Bank, there of course are various areas that we have to address in the first place. As I always say, it's a fundamental issue which has to do with cost consciousness. And we're making sure that people understand that cost is an important matter, particularly for the results of a company and for the contribution to the shareholder.

And that is a cultural change that we are about to make there. There were some funny comments made on us not printing in color any more but in black and white. I think that's exactly where it shows if you have the right mindset or not. And that's something we have to bring into this industry much more than in the past.

And then, of course, we have a lot of concrete examples of where we want to attack non-comp cost categories. And there's various [points]. It's on commissions, it's on travel, for example, it's on the way we are organizing our supply management, having global contracts for all of our businesses, which we didn't have before. So there's a whole variety of issues we will address. And particularly, as I mentioned, under a different cost consciousness that will yield quite some benefits going forward. But we have not -- we are not into, so to say, specifying how many million we are going to benefit in which area.

Just a little follow up. What are the areas in non-comp costs at the Investment Bank which you see room to save which are not being addressed by One Bank?

One Bank has not addressed the individual cost base of the divisions. That's addressed in their strategic planning, of course, which they have to address individually. The One Bank cost synergies are mainly resulting out of combining organizations and departments, particularly in shared services, that should result in lower costs in the division as well.

So the supply management side you've mentioned is not -- is a standalone investment banking part and not being addressed by One Bank?

It is partly addressed by One Bank, but it's also, of course, addressed by Investment Bank in areas that only concern investment banking. [Inaudible].

Thanks.

Next question, please.

[OPERATOR INSTRUCTIONS]. The next question is from Mr. Michael Rohr of MainFirst Bank. Please go ahead, sir.

Yes. Hi. Good morning. Just a quick question following up on your LBO presence and the growth initiative right there. Looking into the leveraged finance, can you possibly tell us a bit more on the leveraged finance book and if there are any limits to you in terms of risk management, risk assessment and sheer size of the leveraged finance book to grow this going forward over the next one or even two years?

And the second question, just a quick one which I do not necessarily expect an answer. It's on litigation. Again, if you can possibly update us on the Italian Parmalat situation. Thank you.

Maybe, on the second one, there is nothing new to report, otherwise we would have done that. And we are basically at the same situation as we were before. So it's a status quo, so to say.

Okay. Good.

And on the first one, Neil, maybe you can elaborate more on the leveraged finance?

Yes. There are multiple limits on the leveraged finance book. And it's something that we follow very closely, not only on the size of the book but any concentrated exposures looking at particular commitments. It is something that's actively discussed and monitored. In terms of the business, yes, the business has been changing. And, with that, we're making sure that we're constantly monitoring all those limits around it.

And on top of that, of course, we have a very clear view, from the Group's point of view, on the individual allocations of risk capital into the Group which, of course, considers what Neil just said.

Okay. But there is nothing special within the third quarter or even within the nine months where you finally had to adjust on the risk and then possibly take out some exposure or maybe increase exposure elsewhere? I just wanted to get a feel for the book and where it stands in terms of, well, industry exposure and [performance cost].

Yes. I would say that we have moved limits around. And I think we've been more nimble than we've been before. If you get a big deal in [inaudible] or something that's a big deal in CMBS, one of the examples I mentioned earlier, we do have limits that we have to work within as a bank as a whole. And in that case, we decided to take some of the risk away that we had in terms of interest rate and credit risk exposure and move them over to realize opportunities in these books. So there is a function of yes, there's caps. And yes, we have to be nimble within those caps. And that's something we're always working with.

All right.

And from what Neil's just said, you know it shows you that we have a very tight control on these issues and following up regularly.

Okay. Thank you very much.

Okay. Next question. You're welcome. Next question, please.

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

Morning. Thank you very much.

Hi there.

Hi there. Just two questions, one is just to come back on Private Banking, which I know you've talked about. But are you saying that there's no underlying moderation of commissions and we should expect a full bounce back to 110, 115 basis point gross margin, 2% per quarter inflows? So do we bounce back fully to that run rate?

And then, second question, is there any progress in your thinking on redeploying the proceeds of the Winterthur sale and any shift in your appetite for reinvestment versus buybacks?

Thanks for the questions. Let me address the first one, which I have done actually before in the sense that I said we will go back to longer-term trends. And you can see what we had in the nine months. Now, will it be exactly that amount, will it be less or more, that is always depending, of course, on various factors, not the least on the transaction base margin. And, of course, in quarters where transactions are -- or client activities are stronger, then of course that is also positively impacting the margin.

So the answer is pretty clear, that we believe that we are going back to the longer-term trend. And I think, as I said several times before, that's definitely not one of the items you can basically make a judgment on, on a quarterly base. You have to look on the longer-term trend.

On the Winterthur side, there's nothing, for the time being, that I can say more than was said before. As I mentioned, we are in the midst of our strategic planning process, which is a three-year rolling process which has to take into consideration, of course, this year the Winterthur sale, which was different than we expected, of course, in the old plan, because the old plan was still under the assumption that we would have an IPO which, of course, would have given different inflows and different risks and different capital levels over the years. And we will be more transparent on that on our January 22 Investor Day to come.

Okay. Thank you.

Welcome.

The next question is from Mr. James Rossiter of Standard. Please go ahead, sir.

Thanks very much. Renato, I wonder if you could give us any more assurance that, now that Jim Kreitman has taken responsibility for that 120m derivative loss in South Korea, that there'll be nothing similar going forward and that proper checks and controls are in place. I know you said derivatives have made progress overall over the quarter.

Honestly, I don't know what you are talking about. Jim Kreitman will not take responsibility for anything. And I made it very clear before that we had a positive contribution from equity trading in the quarter. And that's what it is. Now, we have also clearly stated that we are not satisfied with the equity trading results in general and that we have also taken, for that purpose, some actions. That's what it is.

Okay. So has anyone, therefore, taken responsibility for this particular loss in South Korea, because it's an enormous amount to lose on one trade? And can you give us a bit more assurance this won't happen, then?

As I mentioned several times before, I am not disclosing any book or anything. And if it was something we had to act on, we would have. But, as I mentioned before, I will neither confirm or contest what has been said.

Okay. Okay.

And if it was a sizable loss, just to mention that between brackets and between you and I being on the call, we would have had to come out with a statement, right?

Well, sizable in terms of percentage terms.

You said it's an enormous loss.

Right, okay.

[If it was one], we'd have to come out with it. Let me reconfirm what I said before. We are not commenting on rumors and we are very clear on that. And I am not going to disclose anything on our trading books just because something is written in a newspaper. And I am basing -- I am looking at the business in totality, and that's what it is.

Okay.

The next question is from Mr. Matthew Czepliewicz of HSBC. Please go ahead, sir.

Yes. Hello. Thank you. Actually, one question about your alternatives business and one about the Investment Bank. On slide 20, you quantify your alternative assets at the end of the quarter in asset management as CHF135b. Could you give us maybe some percentage breakout on that? How much is hedged? How much private equity? How much real estate and so forth?

Which page are you referring to?

Slide 20 of the presentation.

My slide presentation?

Yes. Alternative assets you quantify at CHF135b at the end of the quarter.

Typically we are not giving that breakdown. One second. Yes, as you can see on our quarterly report on page 23, what we gave is the amount of private equity and that is the CHF30.6b you can see there. That's the [inaudible], so to say, we are disclosing.

Okay. If you do look at your internal breakdown there, are you comfortable -- are there any areas where you feel you might be a little light or would like to be stronger? And, if so, are you comfortable you can build those organically? Or, given what one of your competitors has done in recent days, would you consider something a little more strategic?

Larry?

The position that we have is we've got a number of areas in alternatives, significant hedge fund to funds practice, single-name practice as well, and a number of other areas that flow into the balance of that figure. We're striving to grow all of these areas in a disciplined and organic fashion. Obviously there are transactions that come to our attention. We take a look at those. But like any organization of our nature, we're going to look at things. We're going to consider them. But we're really, for the moment, and our plans are really focused on predominantly driving our business forward organically.

You've seen a couple of transactions that we've done in the last quarter, joint ventures, the Osprey joint venture, the combination that we have with General Electric. I think you're going to see themes like this continuing to play out over the course of the next several quarters as we build out our alternatives capabilities.

Okay. That's good. In the interest of time, I'll just let the IB question go. Thank you.

Thank you. Next question?

There are no more questions at this time.

Okay. So then I open the questions for the press. If there is any questions from the press side, please speak up now.

[OPERATOR INSTRUCTIONS]. The first question is from Mr. Daniel Zulauf, Boersen-Zeitung. Please go ahead, sir.

Yes. Good morning.

Morning.

Could you please give us a forecast, to the extent you are able to do this, with regard to this leveraged finance business? Do you think this business is going to expand the way it did in this year, next year? And are you willing to participate the way you did this year also next year in this business?

The answer is clearly that this is one of the businesses where we have a strong franchise, I think where we did -- we did well. And I think it's definitely an area we want to expand. Now, having said that, as Neil Moskowitz mentioned before, this has to be, of course, under the clear rules and a clear scrutiny on the risk side. And provided that this is given, of course we will expand that business.

You have mentioned before that, in order to participate in some of the larger deals this year, you had to reduce risk in other areas. You mentioned credit risks and interest rate risks.

Yes. That was more a mix within the quarter and how we reallocated that. It was not that we had to do that to accommodate the large deal. That's where you move the focus around, because you have to see that from a Group's perspective we are keeping, of course, our divisions pretty limited in what kind of risk limits they can use. And within their own businesses they have to allocate the risks where the opportunities arise. It's not so that this has to be done because there were huge tickets.

Okay. Yes. If there are not many questions around, I would obviously be happy to ask one or two more questions.

It's up to you. If you have one more question.

Okay. Well, I don't want to stand in front of the others who want to ask questions but I'm happy to continue, if that's fine with you.

If you have a question, just ask it and then maybe others will -- it will be interesting for the others as well. I have time.

Okay. Good. I would like to understand the -- you have also mentioned that you have a strong growth in mortgage-backed securities, commercial and residential business. Is that -- I have read recently that there is an enormously strong trend in real estate transactions cross border in Europe and in the United States. Is that business -- is that mortgage-backed securities business that you are showing to a certain extent reflecting this increase in cross-border real estate transactions?

Neil, maybe you can definitely answer that.

Yes, I would say it's part of the whole. The business is growing as a business. Certainly it started in the United States but it's definitely grown in Europe and in Asia. As that has happened, there are things that you might call more cross-border type of transactions taking place. But I would say that, in general, I see this business probably continuing to grow, continuing to flourish, particularly on the commercial side, going forward. As to what percentage the cross border is and how you actually define cross border in this business could be a subject of debate. But I think that too will continue to rise.

I think it's fair to say, Neil, that the business is not yet as developed in Europe as it is in the U.S. And therefore there is quite some opportunities out here as well.

I suggest that we open up the question now for maybe some others that want to have questions, if you agree. And then, if you have more questions, please feel free to come in later. Is that okay for you?

The next question is from Mrs. Katharina Bart of Dow Jones.

Yes. Good morning, gentlemen. I just wanted to circle back to something that was said in the previous call about Investment Bank's visibility of fixed income. What are some of the franchises that you're seeing a lot of success from, and what were the ones that you're looking to build out as well?

I think Neil answered that question a couple of minutes ago. But go ahead.

Yes. The ones that we're seeing a lot of success from, I would say, are leveraged finance, EMG, CMBS. Those are all particularly high ROE, high net income businesses. We're big. We like our franchises there. We think we can continue to build those out on a global basis. [Resis] is probably right behind it and it's one where we feel we have the breadth of product. And we're already pretty close to the top on those. We're building distribution. So those are the ones that are big that we're trying to build out some more.

We then said -- and then there's a series of businesses where I would say we're trying to close gaps. And one of those would be commodities, which we talked a bit about and I won't get into that again. I'll spare you that. And others would be FID derivatives. Those are businesses where we have gaps to competitors and we feel we can build those out more.

The last set of businesses are businesses that I mentioned that we were not so good at, that we think we could get better at over time. And we've put in new management and are reorganizing those businesses. Some interest rate products and foreign exchange are probably the best examples of those businesses. Those would be the three groups. Is that helpful?

Yes, it is. What's EMG stand for?

I'm sorry. That will be the emerging markets business.

Okay. Thank you.

Sorry about that.

That's alright. Thank you.

Thank you. Next question, please.

The next question is from Mr. Jacob Greber of Bloomberg. Please go ahead, sir.

Actually, most of the early ones addressed that. I did have -- I just wanted to look -- I was looking at this value at risk chart in the report, page 28, where it does seem to dip quite a bit. You may have addressed this earlier and I missed your answers on it. I don't know if you could explain what's behind that move. Does that mean you're just taking less risks than you were, say, in the second quarter?

That's primarily Investment Bank, so I'll take a shot at that one. If you take a look at the dip on the average, you would see that -- I don't know if you heard that. If you look at the dip on the average, you would see within there that it's really around the interest rate and credit spread line. You can see that that went down from 67 average to 50. And, again, some of that was a bit of a conscious decision for us to reallocate risk.

Out of those areas, out of the market risk space, in those areas, again, the yield curves were flat and probably not as appetizing an environment for fixed income in that world. And use that risk that -- use that risk and it frees up within our total limit and we allocated it more towards the structured products, which is synonymous with the CMBS, the commercial mortgage-backed securities area, where we had some opportunities to do some securitization, which we did. And, in fact, that was our biggest area of increase within fixed income in the quarter.

Okay. It's sometimes said of Credit Suisse that -- or it's actually quite often said that you guys do take a higher risk and that sometimes means you win and you make more. The opposite is also true. Does -- do these numbers that you've presented here, how do you now compare to some of your rivals?

I don't know where that perception comes from, to be honest. We are clearly [within] the quotas. And that's always -- by the way, when I talk to analysts, usually I get the other question. They say why don't you take more risks in order to maybe benefit from that. We are clearly below the average of our peers when it comes to risk taking. And we have been that for the last eight to 10 quarters, at least since I am with the Bank. And it's simply not true that we are taking more risks than others.

Thanks.

Welcome. Okay?

There are no more questions at this time, sir.

Very good. Thanks to everybody and hear you next time. Bye-bye.

Ladies and gentlemen, the conference call is now concluded. You may disconnect your telephone. Thank you for calling and goodbye.