Credit Suisse Group AG (CS) 2007 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 2007 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.

Yes, thank you. Good morning everybody, and thanks for joining us for the first quarter 2007 earnings call. I assume that you have downloaded the slide presentation and the related materials from our website. You will hopefully also notice that we enhanced the content and style of our quarterly reports which, hopefully, you will also get in printed version some time, and throughout the document you will find new disclosures. such as a new revenue split in asset management and the like.

Also, we have introduced the concept of core results, which include the results of our three divisions and the corporate center, but excludes revenues and expenses from the consolidation of certain private equity and other funds, in which we do not have a significant and economic interest, and which as you may remember, obviously started the calculations of our KPIs.

Furthermore, we have split the report into two documents. The first part, the financial revue will be printed and contains discussion of our results. The second part, the financial statements, will only be available in electronic format, and includes all the notes to the accounts.

On this earnings call, we will follow the usual format. First, I will walk you through the presentation, and we will be happy to answer any questions you may have. For that, I will be joined by Christoph Brunner, CEO of Private Banking, and Larry Haber, CEO for Asset Management, whom you know for quite a while.

For the first time, I also welcome David Mathers. David has been with Credit Suisse for over eight years, and has recently been appointed Head of Finance and Strategy of the Investment Banking Division. His previous responsibilities include the co-head of European Equities, and Director of European Equity Research. I'm personally looking forward to working together with David, who adds his vast pool of knowledge to our management team within finance.

Let me go to slide number 2, the disclaimer, as usual before we start.

On slide 3, you can see that we had a strong start into 2007. In the first quarter, we maintained the momentum we established last year, our first year as an integrated bank. Against a backdrop of good client flows, we achieved continued profitable growth, and records -- recorded a good start into 2007.

Net revenues for the quarter increased 11% over the same period last year, and 9% over the previous quarter. Revenue increases were broad based, with good contributions from our three divisions. Expenses rose at a slower rate, further supporting the operating leverage we see in our business. Income from continued operations, the banking businesses if I may call it like that, after tax, increased 17% to CHF2.7 billion from the first quarter last year. And net income, which from past periods included the results from the insurance business, also stood at CHF2.7 billion this quarter.

Diluted earnings per shares stood at CHF2.42 increasing at a higher growth rate than net income, reflecting the positive impact from our share repurchase program.

The return on equity improved to 25.2%, and our assets under management increased strongly, largely driven by good asset gathering momentum. Net new assets for the Group amounted to CHF43 billion, resulting in a rolling 12 month growth rate of 8%.

Slide 4 shows you the earnings progression of our divisions over the last three years. We achieved another record first quarter results. These are the first quarters of the last three years. The banking sector continued to experience a generally attractive business environment, with low interest rate spreads, low risk premiums, and low levels of credit provisions. All divisions continued to grow pre-tax income.

Investment banking pre-tax income increased to CHF2 billion for the quarter, with a pre-tax income margin of 30.2%. The global investment banking fee pool grew by 10% compared with the first quarter last year. It was down by 16% sequentially. Against the backdrop of this supportive environment, recent sub prime challenges remained contained, although it did result in a reduced volume of RMBS and ABS transactions.

Activity levels in leveraged finance, as well as mergers and acquisitions, remain strong.

In private banking, pre-tax income increased to CHF1.4 billion, almost 50% higher than we achieved two years ago. Pre-tax income margins stood at 42.8%. With the healthy economic background, we observe good market sentiment, with continuing growth prospects and strong wealth accumulation.

Client activity was good, but below the very high levels seen in the first quarter last year, as temporary declines in the equity markets this quarter affected investors' confidence, which in turn had some adverse effects on volumes. There was continuously [increasing] and strong demand for structure products, our [prohibitions] activities significantly improved against the fourth quarter, but it was down compared to the strong first quarter last year.

Pre-tax income in asset management improved to CHF257 million, recovering from the low levels we experienced in the second half of 2006, following their realignment. Pre-tax income margins in that division improved to 33.1%. We believe that the performance this quarter in asset management reflects a good start to 2007 for the division as we continue to build our capabilities.

In terms of asset allocation, we have seen some evidence of rebalancing from equities into more defensive strategies, such as high grades and money markets. We also observed significant investor interest for credit products, especially in the areas of high yield and emerging markets.

Overall, the good performance this quarter reflects our efforts to grow and further diversify our revenue streams, while maintaining our disciplined approach to managing risk and controlling costs.

Let me continue with slide 5. We continue to make progress in our cost management initiatives as general and administrative expenses declined despite increases in revenues.

In this respect, we have given you detail of initiatives underway targeted at achieving sustainable efficiency improvements. For example, the establishment of centers of excellence is a key element in our plan to build a new and more cost effective integrated global infrastructure.

During the quarter, we launched our center of excellence in India, where we planned to increase the number of support staff to 2,500. A further center is due to become operational in Poland in the third quarter of this year.

As detailed in our quarterly report, we also signed an agreement to outsource our telecommunications infrastructure. In essence, this step will allow us to simplify and standardize our global telecommunications infrastructure by reducing the number of suppliers from more than 200 down to just 2. This arrangement is expected to generate considerable efficiency gains and help drive innovation.

However, our approach to cost is more than just saving costs per se. As we build our global platform, especially in private banking and asset management, we will also incur costs as we invest for future growth. Our approach to efficiency is as much about creating new profitable revenue streams, as it is about ensuring our current businesses are operating efficiently.

Let me go to assets under management. The strong asset gathering trend continues. Net new assets at wealth management reached CHF15.2 billion, resulting in a rolling 12 month growth rate of 7%. Contributions were strong from all strategic markets, especially in Asia, the US and Europe. Combined with market and currency movements of CHF15.4 billion, the asset base in wealth management increased to CHF815 billion.

We recorded CHF29 billion new asset inflows in asset management resulting, in a rolling 12 month growth rate of 10%. Contributions were especially strong in money market and alternative assets, but more on that later. Combined with market and currency movements of CHF9.7 billion, the asset base in asset management increased to CHF709 billion.

Let me go onto the gross margin development on the next slide. Solid revenues resulted in stable margin levels, and we significantly increased asset base. In wealth management, the gross margin was 118 basis points. The 7 basis points reduction from the high level achieved in the first quarter last year was due to lower product issuing fees. The gross margin improved by 9 basis points over the previous quarter, with higher net interest income from lower funding costs and higher management fees. Transaction based revenues increased due to higher brokerage and product issuing fees and client foreign exchange income.

In asset management, the gross margin before private equity gains remained stable at 37 basis points compared to the 36 basis points the same quarter last year. The margin in the fourth quarter 2006 was very strong due to a high level of private equity placement fees recorded in alternative investments.

Now let me give a few comments on capital management on slide 8. During the quarter our shareholders' equity increased by CHF400 million to CHF44 billion. The contribution from net income was partially offset by cumulative net impact of CHF860 million from the adoption of the Fair Value US GAAP Standards SFAS 157 and 159.

We concluded the 2005 share buyback program repurchasing close to 88 million shares for CHF6 billion. Of that, we bought back 11 million shares for CHF1 billion in the first quarter 2007. As you may know, we plan a new share repurchase program for a value of up to CHF8 billion. This program will commence after approval at the annual general meeting, and will last for a maximum of three years. The shares bought back under the former, and the new repurchase program, will be canceled.

Our consolidated BIS Tier 1 ratio stood at 13.2%. The decrease from the year end was driven by business growth. Risk weighted assets increased by CHF17.6 billion, primarily related to commercial and private lending activities, derivative trading positions, and an increase in market risk equivalents, all in line with our business plans.

So now let me look at the results of our segments, and I will start on slide 9 with investment banking. In investment banking, we continued to deliver strong results during the first quarter. This was achieved amid more volatile markets and a more challenging fixed income trading environment. The pre-tax income was almost CHF2 billion, the second best result ever. We continued to benefit from our strengths in certain businesses, including CMBS, leveraged finance and emerging markets. Results in equity prop trading, the equity cash business and advisory, were also strong.

Let's look at the business in detail and start with fixed income trading on slide 10.

In fixed income, the adverse impact from dislocation of the US sub-prime mortgage market was contained, and lower revenues in our RMBS and ABS businesses were more than offset by strong revenues in other areas of our fixed income business. Revenues in the CMBS; high grade debt and leveraged finance business increased. The commodities business continued to grow, but significant growth opportunities remain as our business is of moderate size when compared to the market potential.

Additionally we also recorded lower revenue levels in fixed income prop trading, an area that we also continue to build over time.

Let me continue with equity trading on slide 11. Equity trading achieved record results. Prop trading generated excellent results across most strategies and regions. The cash business also recorded higher revenues due to growth led by the strong performance of AES, which is part of our electronic trading platform.

The cash business also benefited from generally increased deal activity and good client flows. Prime services revenues increased as the global platform benefited from growth in client balances, and a strong level of new client mandate. These results were partly offset by lower revenues in derivatives and convertibles which had solid results, but were down compared to the strong first quarter last year. In derivatives we are continuing to rebuild our franchise to become a strong full service equity derivative [house].

Let me continue with the advisory and underwriting business on slide 12. Record revenues in debt underwriting were driven by leveraged finance reflecting the strength of our syndicated lending business, and our strong relationships with financial sponsors. We also had higher revenues in our emerging markets business, partly offset by lower revenues in asset backed securities. The increase in equity underwriting is due to higher industry activity driven by increases in IPOs and convertibles.

The improved advisory revenues is due to increased M&A activity, and higher market share in both announced and completed transactions. Compared to the fourth quarter, the decrease in advisory fees is driven by lower revenues from the private fund group. The private fund group raises capital in hedge funds, private equity and real estate funds, an activity that always picks up in the fourth quarter.

Let me go on to the expenses in investment banking as set out on slide 13.

The compensation to revenue ratio was 51.5% in the quarter, and is targeted to remain at about that level for 2007. This reflects a disciplined approach to compensation accrual. As usual and in line with last year, the final compensation level for a given year will, of course, be determined by the strength and breadth of the full year results.

A decrease in G&A expenses from the same period last year is driven primarily by lower expense provisions for legal fees, and most other general and administrative expenses also declined, reflecting our focus on cost management. We continued to make progress on our cost management initiatives. Our focus on fixed costs has enabled us to achieve a lower run rate in the first quarter compared to the fourth quarter of 2006. This reduction in our fixed cost run rate has been achieved despite growth in volumes and higher activity.

With that, I would like to go over to private banking, starting with slide 14.

Positive impact from sound economic fundamentals, and a more volatile market environment, was reflected in the results. We continued to see evidence of strong wealth accumulation trends in our strategic markets. We achieved good growth while further improving our operating structures.

At the beginning of the year, the combined Clariden Leu became fully operational as a single independent private bank with a brand and media campaign raising its profile. During the quarter, we continued with the middle and back office integration.

We also launched Bank-now in Switzerland, a separate unit specializing in consumer credit and car leasing.

Let me go into the details for wealth management on slide 15.

With a healthy economic background, we observed good market sentiment and client activity, but below the very high levels of the first quarter last year. We made progress to grow our business with a higher contribution from recurring revenues. This was primarily due to lower funding costs and an increased asset base, with higher management fees.

Transaction based revenues decreased due to lower product issuing fees, which did not reach the high levels of the first quarter 2006. This was partly offset by higher brokerage fees.

Total operating expenses increased as the international expansion in strategic growth markets remains the main driver behind higher compensation costs. Additional premises, information technology, as well as sales and marketing costs, reflected continued expansion of the integrated banking organization.

Overall, we had an excellent start to 2007 in wealth management, building on the momentum established in 2006. The number of relationship managers increased by 60 during the quarter, with a good pipeline of relationship managers scheduled to join us later this year. Over the last 12 months, we increased the number of relationship managers by around 160 or 6%.

We continue investing in the growth of our business while focusing on our operating efficiency. The pre-tax margin was comfortably above 40% at 41.5%.

Let me go to corporate and retail banking on slide 16. Pre-tax income increased 31% to CHF451 million as revenues increased by more than 12%. Net interest income benefited from favorable liability margins and increased volumes, offset in part by asset margin pressure. Net interest income also reflected lower funding costs.

Total operating expenses remained unchanged at CHF546 million. Our strong performance in the quarter was due to a favorable set of circumstances, including improved liability margins, seasonally lower costs, and lower levels of provisions for credit losses. The results also included net release of a non-credit related provision in the amount of CHF37 million.

Let me move to asset management starting with slide 17. In a broadly supportive market, we achieved very strong sales, significantly above any previous period. Net new assets were strong at CHF29 billion, and assets under management exceeded the CHF700 billion mark. We are pleased with the progress made during the quarter.

We largely achieved the integrated goals from our realignment in 2006, and experienced increased momentum in attracting new talent. We also saw further benefits from the integrated banking organization, with a higher level of referrals from private banking and investment banking. We successfully launched a number of innovative products which contributed significantly to the very strong level of net new assets.

Recurring asset management revenues, as shown on slide 18, increased 18% compared to the first quarter last year. This increase was mainly driven by the growth in assets under management. Private equity and investment-related gains stood at CHF128 million during the quarter. Asset management at the time, the first quarter last year, included an CHF85 million gain arising from the sale of assets in an emerging market investment fund.

Now let's look at the asset mix and net new assets on slide 19.

As mentioned earlier, the business experienced an impressive asset growth with CHF29 billion of net new assets. Net new assets included strong inflows of CHF19.5 billion in fixed income and money market assets, and CHF8 billion in alternative investments. These inflows are partially offset by an outflow in equity assets of CHF1.8 billion due to client terminations as a result of the realignment in the United States. The strong inflow in money market assets included some reversal of the seasonal year end outflows we experienced in the fourth quarter 2006.

This concludes the review of the divisional results. Before we open for questions, let me briefly summarize this quarter's performance and make some statements about the outlook for 2007.

As shown on slide 20, we made good progress in our key performance indicators. Our earnings momentum remained strong, driven by underlying business growth and continued efficiency improvements. Net new assets of CHF43 billion reflect record inflows in asset management and new record inflows at wealth management.

At 12%, the annualized asset growth rate stands at twice the rate we targeted over the cycle. The return on equity reached 25.2%, and this, despite the fact that we currently operate from a relatively high capital base.

Let me finish the presentation with some personal remarks. This Friday, Oswald Grubel will retire as CEO and pass that responsibility on to Brady Dougan. I truly enjoyed working with Ozzie in a time of significant change for our firm. I hope that you agree that Ozzie, supported by the current management team, has achieved a lot over the last couple of years. Credit Suisse, the Credit Suisse I work for now, looks already much stronger and better positioned to seize growth opportunities than the firm I joined almost three years ago.

In view of our robust pipeline of business, and the healthy global macroeconomic environment, we are very optimistic about our long term prospects. Our strategy and the integrated banking model are designed to capture market opportunities, and deliver growth of our business in excess of the industry growth rate.

With that, I would like to ask the conference operator to initiate the question and answer session. Thank you.

We will now begin the question and answer session. (OPERATOR INSTRUCTIONS). The first question is from Mrs. Fiona Swaffield, Execution. Please go ahead madam.

Hi. Can I ask questions in a couple of areas? Firstly on the transaction margin and the recurring fee in the private bank. Could you talk a little bit more about whether this is a step change? Because you talk about shifting people to recurring, so you mention the 43 basis points is low because of lower product issuing fees. Is that because you've cut the fees and you've increased the management fees? Or is that because you've sold less? Could you just talk about whether this is a change for good? So 43 is kind of a new base, or whether the 75 could go up further.

The second issue is on the Winterthur proceeds. You mentioned throughout the statement lower funding costs within all the divisions. Could you talk us through how the CHF12.3 billion cash that you received at the beginning of the year has been invested, and how it's affected the results so far, and how much of that money you've put to work?

And then the third issue is you mentioned obviously reduced volumes of MBS, ABS post issues in sub-prime, but have you had any issues in terms of your ability to securitize or sell down? Do you think liquidity has changed much in any of your businesses, or is just that it's become more soggy in the US side of the business? Thanks.

Thank you. Let me answer the first -- the second question first before I give it to my colleagues to answer the other two. The proceeds from Winterthur, we outlined our plans at our investor day in January, and how we would use these proceeds. We are in the process of course of deploying the capital and the cash through the organization, and we are on good track there.

On the one hand, of course, we have the capital that we deploy, for which, of course, the divisions have to pay. On the other hand, we have, of course, the benefit now in reorganizing our capital structure more efficiently and also entering the market differently than before in overall having, foreseeing, lower funding costs for the Group as a whole.

But is it as simple as saying you have CHF12.3 billion and you could have made a return of 4% on it initially by just putting it in the money market, or have you started to see a proper return from putting it to use in businesses?

No, as we've said before, we are using the capital in order to push the businesses in the various segments, and that's how we deploy the capital. You may remember that we said we will deploy some CHF4 billion capital out of the CHF8 billion, actually, it was from the Winterthur sale, in order to grow the business organically, and at the same time, we set aside some CHF3.5 billion for smaller and medium size acquisitions.

Okay.

On the question on the transaction margins, I ask Mr. Brunner to give an answer?

Maybe we look first at the Ukraine margin. The Ukraine margin is up some 5 basis points compared to the fourth quarter. 3 basis points of that is related to interest income. Interest income is up because of the lower refinancing costs and high liability margin. The other 2 basis points are really coming from recurring commission income.

And this reflects somehow our strategy. What we are doing, we are pushing first of all managed assets, so all the asset classes with management fees like investment funds, like discretionary mandates, like stock to products and stock to derivatives.

Secondly, what we also try to do, we try to optimize our pricing into a direction where we increase the share of recurring fees. In doing that, we pushed some 10 billion investment fund mandates into all in pricing schemes so we have there higher recurring fees and lower transaction fees. This accounts for roughly 1 basis point higher recurring fees, 1 basis point lower transaction fees.

Thank you Christoph. David, on the volumes in RMBS maybe?

Yes, indeed. 2 points I guess. The regard to the ability to distribute and sell down the existing RMBS and ABS issues, we have continued to distribute issues since the dislocation of the sub-prime market a couple of months ago. So I think our distribution capabilities very much remained intact, but clearly the level of activity in the market is significantly reduced from where it was a year ago.

Can I have the next question please?

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

Yes, good morning. I've got several questions. Firstly, on the investment bank. I noticed that equity derivatives is down year-on-year despite all the investments you've been making. Can you talk to where we are in the investment phase, and when we can start to expect the dividends of those investments?

Secondly, in terms of the RMBS, and particularly the sub-prime business, to what extent the weakness was due to lower activity as you mentioned, and to what extent they were mark to market downward adjustments relating to any carry that you have on your books at this point in time?

And third question in terms of the wealth management business, to what extent March was significantly weaker than January and February, particularly in relation to transaction based revenues, and whether you see investor confidence as having returned in April. Thank you.

Okay. I guess taking the equity derivative point first, I think as Renato commented, we had lower equity derivatives revenues in the first quarter of 2007 compared to a year ago. I think I would simply say that the first quarter a year ago did have some quite strong equity derivative numbers in, so it makes for a very tough comparison, and that's what Renato is actually referring to.

I think that we have made a number of significant investments in terms of developing that franchise, particularly in recent months. I think we are optimistic about that progress, and I think we'll probably see that coming through over the course of the next few quarters. But in terms of the specific comparison, the first quarter of 2006 was actually quite a high comparable.

In terms of the RMBS business, we wouldn't comment on the split between those issues. Clearly, as I said before, there has been a substantial reduction in activity, origination volumes in that market, and certainly compared to a year ago when the market was more active.

On your wealth management question, you may understand that we are not commenting on an individual month, I can only say that investor confidence is still good.

Next question please?

The next question is by Mr. Matthew Clark, KBW. Please go ahead, sir.

Hi, good morning. Two questions. First, I just wanted to follow up on the impact, or net interest income, of the Winterthur proceeds. Could you perhaps just give us a number in basis points of how the growth margin was affected by the inclusion of the proceeds of Winterthur's disposal in the wealth management division?

And then a second question. Just to check up on the 150 basis points Basel II impact that you gave last year. Is there any update on that? Do you think that now that the impact might be less now you've had longer to think about how you might make mitigating actions?

And then also if you could just confirm or clarify whether that 150 basis point impact that you talked about includes the operational risk charge? Or whether you're not intending to allocate Tier 1 capital against that, and you're intending to allocate lower capital against it, if that makes sense. Thanks.

Thank you. Let me take the second one first. We are still not deviating from our guidance we have given earlier on the 15% impact on Tier 1 capital out of Basel II and, of course, that is all in at the end of the day, including any operational, or Pillar 2 effects as you allude to.

Now we will of course keep you updated over time should that change. As you know, we are heavily in parallel reporting right now. There is a lot of details to be cleared still with the regulator, and we will know much more in the second half of the year.

By the way, as you also know, we are below compared to our peers in our Tier 1 proportion of -- sorry, in the hybrid Tier 1 proportion of the Tier 1, so we will also have that instrument going forward should this number of 15% be different.

On the Winterthur, I didn't quite understand which gross margin you're referring to. Again, the Winterthur proceeds, on the one hand, we got about CHF8 billion Tier 1 capital, and we got about CHF12 billion in cash. And as we said, we would deploy that into the divisions of course, and by giving them capital for which they have to pay, and at the same time, of course, they have a benefit from a more efficient and also from our centralized treasury activities, which we describe also in our quarterly report, which gave them a benefit from the funding cost.

Now we are, of course, not materializing that. It's very difficult to say because it depends a lot on the individual businesses, and it's different from every corner to the other. In total, it's definitely not material for the individual businesses but, of course, it has helped, particularly the net interest income side, in a couple of areas.

Okay, but maybe if I can just clarify the question then. I'm talking specifically about the wealth management division. Presumably there was some benefit to the gross margin meaning revenues as a proportion of average assets under management from the, however you put it, either the funding costs or the return on the capital that's been allocated to that division but not yet deployed into operations itself. So could you give us the impact in terms of that gross margin?

Yes, I understand your question, but I hope you don't expect me to track now every single individual benefit we have due to the restructuring from a financial perspective of the Group in the individual businesses. What I can tell you is that it is between 2 and 3 basis points from an overall perspective of the net interest income, which includes both elements, the liability margin and, of course as well, the lower funding costs.

Okay, thanks very much.

You're welcome.

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

Yes, good morning everybody. Two questions. First, on the investment banking, obviously the increased provisions, up to CHF61 million --

We can hardly hear you. Can you speak up please?

Can you hear that better?

Yes, it's better; yes.

Okay, so two questions. The first one is on the investment banking, the provisions you've made, CHF61 million. You talked about emerging market loans. Could you perhaps give a little bit more color to exactly what that is, and perhaps also just confirm whether or not you made provisions at all against any of the sub-prime exposure you had? I believe you probably didn't, given the comments you made earlier.

The second questions really is on corporate and retail banking. Clearly, a really strong result, ignoring the CHF37 million write-back. The revenues, in particular, are very strong as a result of the liability margin. Can you give us some guidance as to whether you think this was a one-off? Is it something that's sustainable during the year?

Sorry to interrupt you. We can't acoustically hear you. There's some problem with the line. We'll try to improve that. Can you hold off a second?

Is that better?

Yes, maybe you can speak a little bit slower so we can [record] you better.

Okay, I've tried to do that since I was born. Okay, just to go over those questions again. Can you hear me now?

Go ahead.

Okay. The first question was, the CHF61 million provision in investment banking. You mentioned that's related to emerging market loans. Can you provide more color on that and can you just confirm whether there's any provisions in there against your sub-prime exposure? I suspect there aren't.

Yes, we got that.

And the second question was on corporate and retail banking. Obviously, a very good performance, even excluding the CHF37 million write back. You talk about the liability margin being very strong. Could you give us some clue as to how sustainable you think that might be during the course of 2007? Thank you.

Let me take the CRB first. As I said in my presentation, it was influenced by some positive impact. First of all, we have seasonally pretty low cost in the first quarter which, of course, is an element that is not sustainable over to 2007 than the CHF37 million I mentioned for the reversal of a couple of provisions we have there. So the cruising altitude of the shares for CRB will definitely not be at that level we had in the first quarter, although it will be substantially improved over the levels we had seen before.

On the other question, David?

I think with regard to the emerging markets loan portfolio comment, that's a normal course of business provision which reflects the increase in loans we actually had in that business. I don't think there was any connection at all to the comment in terms of sub-prime, although I may had slightly missed the question actually in terms of the bad audio, but certainly there's no linkage there whatsoever. Okay?

Thanks.

Thank you. Next question please.

The next question is from Mr. [Philip Seeshan], UBS, please go ahead, sir.

Good morning, gentlemen. Two questions please. One is one private banking, or in particular, on wealth management. As it's under management grew compared to a year ago by 11%, revenues by 7, and I think profits by 2.5%, could you just comment on operating leverage in general in that business and your ability in the future to let better revenues filter through to the bottom line? So basically the spread between revenue and cost growth also in light of your investment.

The second question is on the investment bank. Your non-compensation ratio is obviously great at 17.5, which is among the best in class. What is -- you've mentioned that, for instance, year-over-year legal charges declined, but what is a level you would think you're happy with in the course of the year? This number tends to be a bit more volatile than the [compensation] accruals, at least in the first three quarters. Thanks.

Thank you. Let me tackle as usual the second one first on the compensation to revenue ratio. As you can see, and as we said a couple of years back, we want to substantially improve our compensation to revenue ratio over time. We started out in, I think -- I believe in '05 at 55.5. We brought it back. Our target was then 53.5. We ended up very low in the full year because we had an excellent fourth quarter. And, sorry? Right. And, of course, also now in 2007, we want to make a further step in reducing the compensation to revenue ratio to decent levels, but we have on the longer term, we have clearly the intention to reduce that.

And of course not to forget the non-comp to revenue ratio also improved substantially over time, and that is a reflection of our cost reduction programs, particularly in investment banking, that we're starting the first effects.

On the wealth management, the question just to remind me was --?

Revenues are on the up, 7% and --

Right, on the -- basically, the cost development vis--vis the revenue development. Again, here I would not focus too much on a single quarter in the first place, because that's a development that we have to look at it on a longer term, at least on a yearly basis. But it's very clear that we expect to show -- the business to show higher revenues going forward, which would, of course, grow faster than the costs at the end of the day.

This is just a phase of private banking that is taking place right now, also in the globalization, in the integrated bank, where prior banking now participates much more than in the past of the globalized organization that we have throughout our businesses, and sharing in its cost as well. So it's part of this build up and local presence that we can see right now, but this will turn into a positive delta as you'll expect of course in the future.

Sorry, just two follow-up questions. First, on the investment banking cost questions. So basically with the 17.5, I think you're you are -- basically you're already there, where you wanted to be in the medium term, as you reflect on the investors' day and talking about the non-comp ratio. So is this a level you feel comfortable with to keep the investment bank running over the next couple of quarters?

And the second one just on the private bank. Could you then comment how many quarters this phase of investment do you expect to last?

David, can you say something on that?

Of course. On the non-compensation point, I think clearly we tend to focus as much on the absolute as the relative, and I think that we are pleased that the G&A expenses fell both against the fourth quarter and against the first quarter, so we're actually below the 2006 run rate as Renato referred to. And I think it's an area that we remain focused on, and I think the most pleasing thing, of course, is that the revenues have actually increased, those costs have not increased.

Clearly on the commission expenses, I think as part of the investment bank non-comp plan, we are particularly focusing on that area now and we've put together a team on that, so we're making further progress there. So I don't think that we'd want to get drawn on a specific ratio we're targeting. I think we're pleased with the fact that the G&A has actually come down, and the commission side perhaps has not increased as much as it might have done, but it is an area which we remain very focused on.

Christoph, more details on the wealth management side?

The operating expenses, we've an increase of 10%. Those look fine to me. Operating expenses usually reflect our investments we are doing. We added 160 relationship managers since end of the first quarter 2006. We are investing in premises, IT operations, sales and marketing, management and control functions.

However, on the revenue side, the 7% are looking low. I think this is really driven by the very high transaction income we had in the first quarter 2006. For the full year I expect more revenue growth in line with our asset under management growth, and assets under management on average against 2006 first quarter are up 12%.

Thank you.

You're welcome.

Next question please.

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

Thank you very much. A couple of questions actually, both following up on things that have already been touched upon. Firstly, the credit loss provisions in the investment bank. You've said that's due to your emerging market loan portfolio, and the growth in that portfolio. It's obviously the highest charge you've had there for about ten quarters I think. So is this a one-off in that particular quarter, or is this a new run rate that we should expect going forward from here. Are we returning to what was normal a few years ago?

Second question, again following up just on investment bank and also asset management divisions, the non-comp expenses, and you've explained that you see mainly in absolute terms. Should we view in both cases the reduction in absolute terms as something that can extend further, or do we need to be a bit careful because it's the sort of seasonal 1Q under accrual kind of scenario?

Thank you. On the credit loss provision side, you have to realize that the benign market has allowed us over various quarters to release provisions which we had set up previously, and that resulted in the partly over compensating of new provisions. So it was not so that we hadn't set up new provisions. We continuously set up new provisions according to the risks we have in our portfolio and so forth. And what you see now is that basically, the ability to reverse old provisions which are not needed based on the risk side, is of course declining, and therefore you come back to the, say, to a more normal net level than before which was influenced of course, by the positive impact of releasing provisions. And that is not only true for investment banking; it's also true for corporate and retail banking.

And the asset management side. Larry, can you give a --?

Yes. With regard to the non-compensation for asset management, the lower level here is largely reflecting the impact of the realignment that we undertook during the course of the latter part of last year as, with respect to any seasonality or neutral items, there really aren't, and as a consequence, we see this level as being broadly sustainable.

Thank you. And sorry, just so I understand correctly on the investment banking credit costs, so you are effectively saying that we could see something of this sort of magnitude, in the next quarter and the quarter after that?

Look, I'm not fixing myself on any number. That's something which we have to see in how our business goes, and how the individual portfolio looks like. And that's something we basically look into monthly, so this is not the number we can give you as a target.

But this 1Q number isn't an abnormal number?

As I said, I don't give any indication into how the next quarter will look like, because we have to see on how the market goes.

Okay, thank you.

Thank you. Next question.

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

I have two questions.

We can't hear you.

Yes, hi. Can you hear me?

Yes, I can.

Yes, I have two questions. One is on an update on [Mark Crufay], if he could tell me were he is at this point in terms of his cost savings plan. Is it down 30%, 40%? Is he going to give us an idea?

Secondly on CDS mark to market gains that you discuss in the tax and the investment bank. I was wondering if you could tell me how big your CDS book is that you're using for hedging purposes and the mark to market gain that you booked in the first quarter '07. Thank you.

Okay, let me take this one and then David can go into the detailed question in the second one.

First of all, let me point out that our cost reduction exercise, or cost conscious culture change is very much driven by Mark Crufay, but of course, it's the whole management that has to be behind it. And we have a high attention at Group Executive Board level, and I'm pleased to answer you questions, as we say, from where we are from the cost reduction program.

I think it is fair to say that we have just initiated it to the extent that we would like to see it going forward, and we can see the first benefit now in the first quarter, but there's still a lot to come, and there's a great opportunity in all segments to save costs further, to make our business more effective and we are working hard on that in all, in all areas. Now is it 10%, 30%, 50%? It's difficult to say at which point we are today. It's definitely to say that we are at the beginning of the exercise and we will still have a lot of opportunities to benefit from going forward. David?

I think on the second point essentially, I think you are referring obviously to the MDNA analysis relating to other revenues. And I think as we say there, the bulk of the year-on-year's growth there is due to the increase returns on the credit full swaps that we hold as part of the hedging for our corporate loan book, basically. So that's been the major contributor there. And I think that given the pricing in the credit swap market, I wouldn't say it was particularly surprising.

Can you quantify that, or can you tell us how big that book is?

No, we don't disclose that I'm afraid. But I think we just want to highlight it as a factor in that area.

Okay. If I could add maybe one more question. I saw that there was a statement that a market correction cannot be excluded. Where do you see potential risk factors in the market that could trigger such an event?

This is in the -- you are referring to our outlook?

Yes

Again, mid-term we see the outlook very positively, but as usual, if you're in a well developing market, you also have setbacks. We anticipate that we can have temporarily some volatility come into the market. It can be triggered by various elements and I'm just -- take you through the same with a macroeconomic hat on and not the bank's hat. It can be triggered by suddenly upcoming inflation in some of the countries; that might well be a reason. It can also be triggered by slowing investor confidence for any particular reason. But that is, in our opinion, the short term effect that we will see on the general, generally very positive outlook.

Okay, thank you very much.

You're welcome. Next question please.

The next question is from Mr. [Killian Myer, NZB], please go ahead, sir.

I would have a question on your private banking franchise. The reporting of the number of your relationship managers is highly appreciated, but one further question in that respect. Could you also indicate if you saw a change in the turnover of your relationship managers, or has that remained stable?

Actually, the turnover rate is pretty much stable and nothing special to report. What we pointed out, we have a very good high pipeline going forward, and I think we had a better start in 2007 than we had in 2006 overall.

Okay, thank you.

Next question.

The next question is from Mr. Peter Thorne in Helvea. Please go ahead, sir.

Thank you. On the wealth management disclosures on page 30, you show a figure for utilized economic capital that's actually down 20% year-on-year, yet the assets and the loans, and obviously the assets under the management in the division are actually up year-on-year. Can you explain that disparity?

Where you see that downturn?

On page 30.

On which line?

Well, the average utilized economic capital's gone from CHF1.9 billion in '06 to CHF1.5 billion in '07. And it was actually down in the fourth quarter as well of last year.

Actually that's not really volume, because if you look at volume, volumes are up, so net loans are up from CHF69 billion to CHF71 billion. Behind that is really the ERC model itself, and with the [bad] economic parameters we have, we have experienced lower ERC numbers. Oh, so it's just the model that you've changed, not the underlying reality? Okay, thanks.

Thank you. Next question please.

The next question is from Mr. [John Piece, SPK]. Please go ahead, sir.

Yes, hi, good morning. Just two questions please. Firstly, on your CHF8.2 billion -- at least CHF8.2 billion net profit target for 2007, even allowing for seasonality, you're obviously well ahead of that right now. You speak about a very positive mid-term outlook for the markets. Is there any update you'd like to provide on that target? I'm sure you're internal budgets are probably pointing considerably ahead of that right now?

The second thing is, with all the very good progress you've made on the cost income ratio in the investment bank, it seems to be kind of overshadowing a little bit the more broad one bank program driving further integration in between the different divisions. When you first launched that, you talked about that one bank program creating an incremental CHF1 billion of net profit between the start of 2008, of which about CHF200 million was going to fall into 2007, so an CHF800 million pick up from '07 to '08. Is that still the plan? Are you ahead of target with realizing the one bank synergies, and do you provide at any -- do you anticipate at any point providing us with a bit more color on what the initiatives are and how you're doing? And just making sure that we're modeling the right level of pick up in profitability. Thanks.

Yes sure, and I think the two questions are hanging very closely together in that of course, we have set out (inaudible) with the integrated bank. As you may remember, it was the CHF1 billion bottom line impact, we expected to happen in 2007 -- sorry 2008. A part of that already happened in 2007; I outlined that at the investor day back in January.

And I also made clear that we are, of course, driving that, exceeding that if possible. But it becomes utterly difficult now to reconcile all these numbers that have been out there before, and therefore we clearly refrain from giving any numeric numbers, so to say, for any bottom line expected going forward. So the CHF8.2 billion target, we have never commented again, and will not, because we have shifted our KPI targets to other elements that you could see, which is cost income ratio we have clearly said what we term an equity one to achieve, double digit growth in shareholder return and the like. So these are the kind of benchmarks we want, we would like to be measured against. So, in a nutshell, we were very clear in saying that we are not reiterating any targets from a nominal perspective going forward and I trust you appreciate that.

Okay thanks.

Thank you.

(OPERATOR INSTRUCTIONS).

Are there any questions from the media? If not, thank you very much. Are there any questions, sorry?

There is a follow up question from Mr. [Derek Defrieze], Merrill Lynch. Please go ahead, sir.

Yes, it's Derek, from Merrill's. I don't think it's a follow-up questions, but I have two questions. I guess in light of the very good results you had this quarter, I'm surprised at the change in the outlook statement from what was a very positive outlook statement after Q4 to a perhaps more sensible cautious outlook statement in Q1. I'm wondering if you can just give us some background. Is it a different person making the outlook statement? Or why has, in light of good results, the outlook changed?

And then the second point I wanted to touch on was something you've touched on a little bit. In the wealth management area, you give the relationship managers and you point out the 6% year-on-year net increase there. I'm wondering if you can give us directionally, is that a 10% lead, 16% new? So is that kind of the gross number of new hirers?

And then a follow-up on that. Where are you hiring people from? Is this people that you're training, so you're hiring graduates, or are you hiring from local, smaller retail banks, or are you hiring from the large global private banks?

Yes, let me answer the outlook first. Again, I didn't feel that we were less optimistic on the outlook. We still believe that there is a mid-term positive outlook on the (inaudible). Sorry, I was interrupted here.

Sorry?

We still see the macroeconomic environment as very positive, but the future, you are sailing to a higher degree than you encounter sometimes, you know, a little bit stormy weather. That's exactly what typically happens to markets, and we expect high volatility coming forward, and that that will also increase the likelihood that we have some corrections. But again, over time, we are very optimistic about the developments.

On the wealth management, relationship management question, I give the word to Christoph.

Actually we don't, we will not disclose any gross numbers. Looking at the net number, I would say the majority is really coming, the majority from the increase, coming from our competitors. However, also a substantial part are graduates we developed internally.

Okay, so if you won't disclose any gross numbers, would you take exception to my assumption that it's 10% departures and 16% growth. Would you point me in a different direction, or would you still say that's your assumption?

We are disclosing the net number which makes sense, because at the end of the day, what counts for us is that we have good people in, and that we grow the number of good people constantly.

Fair enough.

Okay?

Thank you.

There are no more -- sorry. There are no more questions at this time, Mr. Fassbinder.

Thank you very much. Thank you all for joining, and I wish you a great day. Thanks.

Ladies and gentlemen, the conference call is now over and you may disconnect your telephone. Thank you for joining and have a nice day.