Credit Suisse Group AG (CS) 2008 Q2 法說會逐字稿

Good morning, this is the conference operator. As a reminder all participants are in a listen-only mode and the conference is recorded. Welcome and thank you for joining the Credit Suisse Group, second quarter 2008 results conference call. (OPERATOR INSTRUCTIONS). Analysts and investors will have the opportunity to ask questions after the presentation. (OPERATOR INSTRUCTIONS).

We're pleased to be able to report a solid result for Credit Suisse in the second quarter. We are well positioned for what we believe will continue to be a challenging environment. In summary, in the second quarter we made over CHF1.2 billion in net profit; all three divisions were profitable; and our business model continues to be remarkably resilient. Private banking continued to perform very well recording net new assets of CHF17.4 billion, including strong net new assets of CHF15.4 billion from wealth management. And we continue to benefit from the expansion of our international private banking capabilities.

Our Swiss corporate and retail business achieved good results, and continues to provide stable, high quality earnings. We achieved solid results in investment banking. Pre-tax income was CHF281 million, and we had immaterial net write-downs. Operating earnings, excluding litigation and fair value on our own debt, were CHF650 million. We continued to reduce our exposure significantly during the quarter with a 31% reduction in leverage finance, and a 22% reduction in CMBS. Since the third quarter of 2007, we have reported consistent, substantial reductions in our risk exposures, which are now approaching more normal levels. In asset management we returned to profitability.

We continue to benefit from our conservative funding structure and our position as one of the world's best capitalized banks. At the end of the second quarter, our Tier 1 capital ratio under Basel II stood at 10.2%. We achieved this without having to raise dilutive equity capital, and while accruing a significant dividend. Our financial strength differentiates Credit Suisse in uncertain markets. We are seeing and benefiting from increasing client demand for integrated financial solutions. In the second quarter, we generated CHF1.3 billion in revenues from cross divisional activities. Our focus on enhancing operating efficiency and active cost management continue to benefit us, and they remain strategy priorities.

When we discussed the first signs of the dislocation of the credit markets at our earnings conference a year ago, we could have not know the extent of the crisis that would emerge or how broadbased its effects would be. However, we said that given more difficult market conditions we would manage our businesses conservatively. We've done so over the past 12 months and it's served us well. You may also remember that when we announced our first quarter results in April, I did not see clear signs of recovery, and in fact markets have remained volatile since that time. And these results show that our conservative approach has so far paid off.

Overall, I'm pleased with our performance and the progress that we've made during the second quarter and, of course we're very focused on building on these results and on executing our strategy during the remainder of the year.

I'll now hand over to Renato Fassbind for a more detailed discussion of our results in the quarter. Renato.

Thank you, Brady, and good morning to everyone in the room but also on the webcast. I will start my presentation on slide 6 with an overview of the divisional results side-by-side. All three divisions were profitable during the quarter, as Brady already mentioned. With a pre-tax income of CHF1.2 billion, the good profitability in private banking further evidenced the strength of our business and its resilience in a more challenging market environment. Asset inflows continued to be strong, with good contributions from all regions. We have good hiring momentum, with continued success in adding new relationship managers, and our hiring pipeline remains strong. They are good results for private banking, as we are delivering our growth strategy and continuing to invest in the expansion of our international platform.

Investment banking delivered a solid operating result, with pre-tax income of CHF280 million. If we adjust for the fair value loss in own debt, and the net litigation credit, operating results would be closer to CHF650 million in the quarter. While we continue to be affected by dislocation in mortgage and credit markets, most of our other businesses within investment banking recorded good revenue levels. Overall, net valuation reductions were not material during the quarter, while we made further significant progress in aggressively reducing our risk exposures. Wilson Ervin will present in more detail to you on this shortly.

Asset management also returned to profitable territory, with a pre-tax income of CHF167 million. While assets under management have come down by 19% over the last 12 months, driven by lower market levels and asset outflows, the margin has actually improved year-over-year, as outflows were primarily in lower margin assets such as money market funds and the pension advisory business. The current results in asset management show that we need to continue making the necessary changes that allow us to deliver our profitable growth strategy. Rob Shafir, the new CEO of that division, who is present with us today, has put in place a streamlined operating structure that enhances visibility and accountability for the operating results.

I will now continue with a brief review of the overall results. The main points I want to highlight on these slides are that revenues increased sharply from the previous quarter to CHF7.8 billion. Total operating expenses stood at CHF6.2 billion, with compensation costs down from last year mainly due to lower performance-related compensation. Non-compensation expenses were also down as we continue our firmwide focus on cost management to drive efficiency. As a result, our profitability was solid, with net income of CHF1.2 billion for the quarter, which includes over CHF500 million of fair value losses on our own debt. Diluted earnings per share stood at CHF1.12, but adjusted for the fair value losses on our own debt, the number would be closer to CHF1.60.

Let me continue with the review of the divisional results in more detail, starting with wealth management on slide 8. On this chart, we show the revenues in Swiss francs on the left, and the corresponding gross margin on assets under management on the right. We have been very successful so far in compensating for a reduction in client activity and lower assets under management due to market movements. The gross margin remained stable at the very healthy 116 basis points for the quarter, and the half year margin is slightly up to 117 basis points compared to last year.

The composition of our revenue margin has become more stable as the higher contribution from recurring revenues has more than offset the reduction in transaction-based revenues, reflecting adverse markets and the more cautious client behavior. This increase in the contribution from recurring revenues is in line with our strategy to further enhance the stability of our revenue streams. In summary, we were able to maintain the margin, and actually improve the recurring component of our revenue stream.

Turning now to the net new asset inflows on slide 9. Net asset inflows were strong at over CHF15 billion with good contributions from all regions, especially Europe, Middle East and Asia Pacific. These inflows are a clear sign of the strength of our franchise and the trust that our clients have in Credit Suisse. We continue to attract high net worth individuals that seek holistic advisory solutions from a firm that also maintained a strong capital base throughout recent events. We have achieved our 6% net new asset growth target over the last four quarters. Going forward, we expect these trends to continue, but as can be seen from the chart, the third quarter in particular tends to see a seasonal slowdown in asset inflows.

We have a long-term growth strategy that is well founded given the sustained global wealth trends we are anticipating. As shown on slide 10, we continued to hire relationship managers across all regions. We added a total of 230 relationship managers during the first six months of this year, with strong growth rates, in particular in Asia, but also in our other international locations. Over the last 12 months, we added a total of 450 relationship managers as the state of the market allows us to hire good talent at unprecedented rate. This growth also demonstrates our geographic expansion. Since the beginning of 2007, we entered four new local markets and opened 14 new offices globally. And these growth initiatives are clearly delivering results. Currently, about 40% of our net new assets come from relationship managers that are in their first three years within Credit Suisse.

Such expansion comes at the cost, as we spent over CHF350 million annually on our international development. We have told you that under normal conditions, efficiency gains in our existing platforms should make room for such additional investments. In the current market environment, the short term deterioration in our efficiency ratios should be expected. However, we believe that especially large and well-capitalized firms like ours will benefit in the long run, and come out of this environment stronger than the competition. And this is clearly our goal.

Let me continue with the fixed income revenues in the investment bank on slide 11. Performance in investment banking improved significantly from the previous quarter, also due to much lower write-downs. We continued to see good momentum across many of our fixed income businesses. For instance, revenues increased in RMBS, European high grade and the life finance businesses. Especially a trading environment in RMBS showed that liquidity has returned into this asset class, resulting in significant trading opportunities.

Fixed income revenues of CHF320 million have been affected by the fair value loss on our own debt, and also include net write-downs of CHF391 million. Excluding these two items, the adjusted revenues in fixed income stood at CHF1.2 billion for the quarter.

The equity trading performance, as shown on slide 12, shows a strong performance, with a 64% increase to CHF2.3 billion. Our client-related businesses continued to perform very well. Prime services achieved near-record revenues with strong growth in client balances and mandates. We also achieved near-record results in equity derivatives across all regions and products.

Results in the global cash business and our electronic trading platform AES, continued to benefit from high trading volumes and increased client flows. A further key driver of the improvement compared to the first quarter is equity proprietary trading, which achieved good results in the current quarter compared to the loss reported in the previous quarter.

Let me continue now with the advisory and underwriting results on the next slide. Advisory results benefited from an increase in strategic M&A. However, this was more than offset by the decline in financial sponsor activity. Debt underwriting declined compared to the second quarter last year, as the increase in high-grade business only partially offset the continued weakness in leverage finance origination. The change in equity underwriting revenues against both comparable periods was driven by changes in industrywide activity levels and volatile market conditions.

Let me now continue with expenses in investment banking on slide 14. I will start with the compensation costs shown in the upper chart. The changes in the absolute level of compensation costs generally reflect the changes in revenues, but also reflect changes in our headcount as we continue to reallocate headcount from areas within fixed income to growth businesses like prime services and derivatives. Total non-compensation expenses as shown below, were down to CHF947 million in the quarter. This reflected CHF134 million net litigation related credit. Adjusted for this amount, other expenses were down CHF108 billion, or 5% in the first half of this year, and decreased CHF64 million from the second quarter last year.

These cost reductions reflect an increase in headcount-driven costs, which was more than offset by cost reductions across many categories, a stronger Swiss franc, and in the second quarter this year, lower commission expenses. So in total, we maintained a disciplined approach around our costs, benefiting in particular from the fact that we entered the current environment with the lowest headcount among our peers and with a firm expense management program in place.

We believe that this gives us the flexibility to manage through this environment and take advantage of the opportunities that present themselves as markets recover. But let me now continue with asset management on slide 15.

Here we show you the current assets under management, the second-quarter net new assets, and the second-quarter gross margin for our businesses side-by-side. In the middle column, you can see that the alternative investment business, which comprises our leading private equity and real estate business and our single- and multi-manager hedge fund strategies, continues to see good asset inflows of CHF7.5 billion. These businesses account for 40% of the division's fees and commissions, commanding a healthy 64 basis points gross margin during the second quarter.

We believe that the alternative asset inflows will fuel further revenue growth, also driven by our best-in-class capabilities. Outflows within global investors were driven by outflows of CHF10 billion of low-margin institutional pension advisory assets.

On slide 16, we have split the revenues into the asset management fees shown in the upper part of the slide, and private equity gains shown below.

Overall, the gross margin stayed stable at 40 basis points compared to the previous quarter, and improved 4 basis points from the second quarter last year, as management revenue stood at CHF610 million during the quarter, a decline against both comparable periods, with lower management fees due to lower assets under management in MACS and Global Investors.

Alternative investments reported higher performance fees offset in part by higher funding costs. Private equity gains, as shown below, returned to positive territory with gains of CHF50 million, primarily from energy-related investments. The margin has improved year-over-year as outflows are primarily in lower margin assets such as money market.

This slide concludes the divisional results overview, and I will continue with the Group's capital position on slide 17.

During the quarter, the Basel II Tier 1 ratio improved 40 basis points to 10.2%, as our Tier 1 capital improved to CHF30.8 billion, and the risk-weighted assets remained stable. Compared to our peers, our Tier 1 ratio remains among the highest in the industry.

We have maintained our strong capital ratios without diluting existing shareholders, and the composition of our capital is of a very high quality, as approximately 85% comes from core Tier 1 capital, and the current ratio includes the negative impact from the accrual of a significant dividend.

We believe that the strong capital base, together with a conservative liquidity profile, is a competitive advantage, especially in these markets. As Brady said, we will continue to prudently manage our balance sheet exposures and capital in order to remain in a position to seize opportunities that arise from the market dislocation.

And with that, I welcome Wilson to present the next section of the presentation.

Thanks, Renato, and good morning. I want to update you on how our risk positions developed in the second quarter.

As part of our commitment to transparency, we've provided essentially a full update of the risk information we've disclosed previously, and in some cases more. I will only be speaking to some highlights of these slides in my remarks today, but there are some additional slides in an appendix.

As you know, market conditions remained difficult in the second quarter. Although conditions eased a bit in April and May, June saw further declines, and retested some of the lows in several market sectors. The quarter saw a number of institutions liquidating assets, and some new sectors coming under stress.

Credit Suisse has pursued its risk reduction program consistently over the last nine months. Progress has been good, and we feel that we've now resized our overall portfolio to a level roughly consistent with current market conditions at this point.

While we will look to continue distribution of older assets and turn over the portfolio, new business is likely to become a more meaningful proportion of our positions in coming quarters.

Our overall write-downs were immaterial in the second quarter, as mark-downs taken in the commercial mortgage book were offset by gains in CDO and RMBS books. This result derived in part from our exposed reduction and pricing disciplines in prior quarters, as well as some good positioning decisions in this quarter.

Let's turn to slide 19 and I'll walk you through an overview of the business lines in investment banking that have been most affected by the recent market turmoil.

Across the top of this page, we show a few different columns. The first three columns of numbers show you the exposures at Q2 and Q1 and the percentage change between them. The last two columns show you the net write-downs in the last two quarters.

Down the left side, we show how the individual focus areas have performed. In leveraged finance, we cut our gross positions further from CHF20.8 billion in the first quarter to CHF14.3 billion in the second quarter. This is a reduction of 31%. Net write-downs during the quarter were CHF86 million.

In the next line, you can see we continue to make progress in cutting our commercial real estate portfolio. Here we reduced our exposures by 22%. Net write-downs are more significant here, and totaled CHF477 million.

The bottom block shows our exposure to residential mortgage and subprime CDO businesses, which are more trading-oriented in nature.

Residential mortgage positions are down slightly to CHF5.4 billion this quarter, with the subprime component down to CHF800 million. There was a small write-up in Q2, and the business benefited from good trading volumes and client activity.

Since the RMBS business showed relatively little net change in the quarter on a balance sheet basis, I won't comment on that further today, but further details for this business are included in our supplemental slides.

The next slide shows our CDO trading positions, which have been the most difficult area for us in recent quarters. In the second quarter, we actually saw a net valuation gain of CHF508 million. While some of that gain was from better hedge performance in a run-off book, most of the gain was from some ongoing businesses in that sector that performed well.

Our exposure to directional market moves is now CHF1.1 billion on a net basis, and our gross positions have also been reduced.

We've made some methodology refinements in how we present our exposures and we explain this in detail in our appendix slides.

As you can see at the bottom of the page, we reduced our index hedges substantially during the quarter. Index hedges now total CHF6.6 billion of high yield credit, crossover credit and mortgage index short positions. The reduction in hedges was made to rebalance our net position in light of the cuts we've made in our long underwriting exposures in recent quarters.

Now let me spend a few minutes in each of these areas to give you a more detailed look at our exposures and our risk results. As you can see on the next slide, slide 20, we've remained disciplined in selling down our leveraged finance exposures. Back at September of 2007, our exposure was CHF59 billion. In the last nine months, we've focused relentlessly on selling paper in line with our distribution-oriented business model and cut this balance by 76%. Net write-downs are fairly small this quarter at CHF86 million.

Our exposures were valued at an average price of below $0.80 on the dollar, although there is significant variations in the pricing of loans and bonds and for specific names.

The reduction continued to benefit from the strong sales effort. This has resulted in the portfolio becoming more concentrated, but that's a natural result of strengthening the denominator. The largest five commitments now represent about 80% of the portfolio.

Our remaining portfolio is mostly Senior secured loans, and does not include any exposure to autos, retail or home-building. The portfolio remains US-oriented and focused on large-cap institutions with significant enterprise value.

The reduction process has been orderly and we've avoided selling down by large, heavily-discounted transactions using term finance. We have sold a few loans this way with term financing, but this amounts to only about CHF2.8 billion,

Overall, our exposure in leveraged finance has now been rebalanced to a size commensurate with current market conditions. We will continue to move old inventory, but will we will also look to do new underwritings as market opportunities arise.

The story is broadly similar in our commercial real estate activities. Our exposures have been cut by more than half when compared to the CHF36 billion of exposure we had in Q3 last year. In Q2, we reduced our gross exposures from CHF19.3 billion to CHF15 billion. All positions are fair valued and we do not have a hold book for this business.

Valuations have been written down in line with observed trading levels for cash and index instruments, while adjusting for specific asset fundamentals. This resulted in net write-down of CHF477 million during the quarter.

It's important to note that credit performance for commercial and real estate continues to be fundamentally different from the residential markets. It is secured by high-quality, income-producing real estate properties. While there have been some more reported stories about situations under stress in the newspapers, we haven't seen significant current distress in our portfolio.

The portfolio composition in CMBS remains similar to the profile in Q1. The portfolio continues to have good loan-to-origination value ratios and good sector selection, with office properties as the largest sector.

In terms of geographic diversity, exposure to Continental Europe now comprises about half the portfolio, with the largest contributor being Germany. As with leveraged finance, our CMBS exposure is also reduced significantly, and is closing in on a scale that we feel is reasonable in light of current market conditions. We will continue to focus on distributing old deals, but hope to see new origination becoming more of a factor in coming quarters.

On slide 22, we give you some more detail on our CDO trading positions we've made good progress in reducing here in the second quarter. In the top box, you can see that we reduced our positions in both gross and net terms during the quarter. Some of this is due to the continued decline in market prices, which reduced the value of both some of the longs and the shorts in the portfolio. But a large portion is due to hedging and sales in various parts of the book

As you can see in the middle box, we had some good results this quarter in the P&L side, as well, and the net valuation gain in Q2 was CHF508 million. Now a natural question is whether this is simply some bounce-back from an overly conservative Q1. In fact, the result was due to some different factors.

First, there are some ongoing business lines in the CDO trading area that had a strong Q2, such as secondary trading, and positions here gained approximately CHF300 million.

Second, some of the more highly stressed basis relationships normalized somewhat in Q2. This gave some natural lift to our run-off portfolio, as value differences between longs and short positions normalized somewhat, but this was due to market changes rather than changes in conservatism or anything like that.

We've added some further detail on CDO risks in the appendix slides, and in the bottom box on this page. The box on this page provides a high-level sensitivity analysis that shows you potential losses that could result under various adverse market scenarios, based on our current risk profile.

There are obviously some other risks, such as risks to specific names, and our portfolio can change over time, but I think this should give you a high-level view of some of the macro factors that could drive the portfolio from here.

In aggregate, the new teams worked hard to bring these positions down, and I think they've done a good job in creating a smaller, more balanced risk profile, and we will continue to execute on these objectives.

Now let's turn to the asset management division and the money market liftout portfolio on slide 23.

We did not do any liftouts in Q2, and our money market funds operated normally during the quarter. In the top panel, you can see an update of our gross exposures by asset type in our liftout book, and the second panel shows how the size of the liftout book evolved during the quarter.

The final box shows the net valuation change during the quarter, which totaled gains of CHF79 million. This is mostly from gains in the hedges we put on, as the underlying assets themselves actually declined slightly during the quarter.

Subsequent to the quarter end, we participated in a restructuring of one of our larger SIV positions, which comprised about a third of the exposure you can see in the top box here.

We sold this position for cash and achieved a net value slightly above our Q2 mark. While this is only a part of a longer-term process of working down the liftout portfolio, it does show that we continue to make good progress here, and gives us some validation for our marks at the end of the second quarter.

Before concluding, I'd like to turn briefly to other areas of risk that have been in the headlines recently, which are set out on slide 24.

First, monolines; we do not rely on monolines to hedge our subprime positions in RMBS or CDOs. We do have some trading in other positions that are wrapped by monolines, but we have CDS and other forms of protection that more than offsets this exposure.

Second, US agencies have been prominent in the news lately. In this area, it's important to distinguish between senior debt and lower ranking positions, such as subordinated debt and preferred positions. The market considers the senior debt to be fairly low risk and supported by the US authorities, and this was supported by some Congressional action yesterday.

The preferred and subordinated debt classes are trading at wider spreads, however, and the market considers them to be more at risk to a potential restructuring. Our exposure to these low-rated classes is limited and totals less than CHF100 million across both agencies. Our exposure to senior debt fluctuates more, but we're fairly comfortable with that position and the market there remains quite liquid.

Third, we do not sponsor any SIVs, and our current exposures in investment banking total only about CHF250 million.

Lastly, we're not in the auction rate underwriting business, so we don't have any meaningful inventory positions there either.

In summary, Credit Suisse has continued to achieve good reductions in exposures in Q2, and has continued its disciplined approach to reducing these exposures since the crisis began. We've now rebalanced risk to a level that is roughly appropriate for current market conditions. While we will continue to distribute old inventory positions, new originations should begin to play a larger role in coming quarters.

The overall position levels will show less of a one-way trend, and should start to fluctuate around these lower levels, as is normal for an ongoing business.

Our net mark-downs in the investment bank were immaterial in the second quarter. We benefited here from early asset reduction, from hedging, and from our mark-to-market discipline in prior quarters.

All our focused exposures have been accounted for on a fair value basis, and all markets go through P&L. We also continue to see good progress in the AM liftout portfolio. We reduced exposures there by nearly a third, and achieved a small net valuation gain during the quarter.

So overall, we've achieved good results in our risk reduction strategy because of our consistent and disciplined approach, and are pleased with the progress we've made in the second quarter.

And with that, I'll hand it back to you, Brady.

Before we open it up to the Q&A session, I want to say a few words on our opportunities and our strategic plans.

At a time when many competitors are questioning their business models, our strategic direction is clear and consistent, which is a definite advantage. Given our strengths, this period of change within our industry provides Credit Suisse with unprecedented opportunities.

Our focus remains on organic growth. We will manage our resources and our balance sheet prudently, even as we accelerate the execution of our strategy by, one, continuing to invest in the growth of private banking; two, further diversifying our business mix and revenue streams, and improving capital efficiency in investment banking; three, improving the financial performance of asset management and aligning it more closely with our other businesses; and four, enhancing our ability to leverage our resources seamlessly and achieve our potential as an integrated bank.

Market developments over the past year have inevitably led to a reassessment of regulation for our industry. Although Credit Suisse has operated successfully within the current regulatory framework, we understand the need to explore further measures to safeguard the stability of the financial system. We're actively participating in these discussions, and are hopeful that these will lead to enhanced stability of the global financial system, while ensuring our competitiveness.

We expect challenging market conditions to persist in the near- to medium-term and will, therefore, continue to manage our business conservatively.

Credit Suisse is in a strong position financially and competitively. I'm confident that as opportunities emerge, our disciplined approach will enable us to seize and realize them.

Before we open it up to Q&A, just to summarize.

We had a solid result for the quarter, with net profit of CHF1.2 billion. All three divisions were profitable, and our business model continues to be remarkably resilient. Private banking continued to perform very well, with strong net new assets. Our Swiss corporate and retail business had good results. We achieved solid results in investment banking, with immaterial net write-downs. We reduced our exposure significantly during the quarter, continuing the consistent, substantial reductions since the third quarter of 2007.

We continue to be one of the world's best-capitalized banks, and our financial strength clearly differentiates Credit Suisse in a period of market volatility. The quarter's strong net new assets in private banking and other client flows across our franchise underscore the trust that clients are placing in Credit Suisse.

With that, I'd like to open up the Q&A. I'd like to add that in addition to Renato and Wilson and myself, we also have here in the front row Walter Berchtold, the CEO of Private Banking; Rob Shafir, who is our CEO of Asset Management; and Paul Calello, the CEO of Investment Banking, who will be available to have some questions directed to them.

We'll start here.

Thank you. It's Daniele Brupbacher from UBS. I would have just one question on capital. You said you made a significant dividend accrual in the quarter.

Firstly, could you be a bit more specific in terms of guidance for the whole year, and is it fair to assume that you made that accrual based on the view that the Swiss regulator does not implement the leverage ratio?

And, in that context, could you comment how you see the situation there? There's obviously a lot of noise in the Swiss press. It feels like it's going to be a typical Swiss compromise. Do you agree on that, and is there anything more you can say?

Well, with regard to capital as you say, we remain extremely well capitalized. We obviously haven't raised any capital; we've continued to build our capital from the cash flow of the operations. As you could see in the second quarter, we were accretive from an earnings point of view.

When we say we accrued a significant dividend, obviously, dividends are only determined at the end of the year. The Board will make a recommendation to the AGM to finalize a dividend, but at this point, we've accrued a significant dividend. It's a bit less than last year, but it's still a very material dividend.

I think with regard to the overall regulatory situation, as I mentioned, obviously, with everything that's happened over the last 12 months, regulators around the world are clearly, as we all know, focused on thinking about what we can do, what we all can do, the industry and the regulators, to increase the stability and the safety of the financial system. That's only natural and we're, obviously, involved in those discussions globally.

Obviously, from a Credit Suisse point of view, we've actually navigated these markets with the current regulatory regime without having had to raise any additional capital, profitable over the last 12 months, and remain one of the strongest capitalized banks. So we also -- we think that's an important fact as well.

But with the regulators around the world, as well as here in Switzerland, we've always had a constructive relationship. We continue to have a constructive dialogue and, as we've said, that process is ongoing, but we're hopeful that we will end up with a result that leads to increased stability, and safety of the financial system, but also allows us to continue to pursue our business model, which is, by the way, it's been a very resilient business model, but allows us to continue to pursue that.

There was a question there. Yes.

Kilian Maier, NZB Neue Zurcher Bank. The first one would be private banking margin. The margin was pretty impressive this quarter. What's your outlook for the rest of the year? Do you expect it to come down a little bit because of de-leveraging and lower transactional revenues?

And the second question would be on investment banking. You provided information on the marks you took for most asset classes, except for CMBS. Maybe you could comment a little bit there as well.

Maybe I can ask Walter Berchtold to address your first question on private banking margins.

On the margin side, I think our margins will stay around these levels between -- I always say, like, between 117 and 110; somewhere in that range. We obviously are experiencing still very slow markets, that might have some impact, but I'm quite confident to keep it in that range.

And also we, obviously, are -- that's the one statistic everyone focuses on, but one of our big initiatives in our private banking business is to continue to increase the cross-sell, increase the liability side and increase obviously our cross-sell from other parts of the business, which is not part of that gross margin, but clearly is important in terms of profitability of our relationships with clients. So we expect that to grow over time.

On the investment banking side, talking about marks for CMBS, which one of you; Wilson or Paul?

We've never given specific marks because of the distinct nature of the portfolio in CMBS. As Wilson said earlier, we're very comfortable with the composition of the portfolio in each of the positions.

You can see by the total size of the portfolio now, less than CHF15 billion and the mark-downs we took, that it's at a significant discount to par. We also disclose in the appendix, you can see the LTVs for each of the geographies in which we operate, which I think gives you a pretty good idea of the conservatism of the marks on the portfolio.

I think particularly, given the wide geographic spread of that portfolio, a single mark is a little less useful there than it is for the leveraged finance portfolio.

Next question. I'm going to go -- shall we go to the phone?

Matt Spick, Deutsche Bank.

Good morning. It's Matt Spick from Deutsche Bank and I just had a couple of questions on the balance sheet, and then just a small question again on the margin in the private bank.

Just on the balance sheet, I noticed that your customer deposits are down about 10% year-to-date from about CHF340 billion to about CHF304 billion, and I guess in my mind, I've been thinking that you're a big balance sheet bank with a strong national position and probably stronger than some of your competitors. So I just wondered why it was that your customer deposits were tending to decline quarter-over-quarter. Is there any particular division or particular factor that's behind that?

And a second question on the balance sheet is, unlike in Q1, the absolute size of your balance sheet didn't shrink that much, and I was just wondering if you could make any comments about which parts of your fixed income business are the biggest consumers of that balance sheet. Is it, for example, the rates business which I know didn't do so well this quarter? Are there any particular businesses that perhaps if assets are going to be a scarce resource, you could easily scale back on without affecting the rest of the Group? So those were two questions on the balance sheet.

And then just a small question on the private bank recurring margin. It seems that your interest income in the private bank went up a bit this quarter. Are we seeing a bit of an automatic stabilizing effect where, as people come out of trading assets in the private bank and perhaps have more money in cash, that that's a pretty remunerative product for you, so that you're getting, it seems to me, about 4 or 5 basis points of extra recurring margin as an automatic offset as people come out of transaction margin generating products? Thanks.

Thanks, Matt. Maybe I'll try to take a bit of a stab at the first question, but some others may have some illuminating comments on it.

But overall, I think our asset flows and our deposit base is very stable, in fact, very strong, as you can see the net new asset flows. I actually think, I'd have to see the exact reason, but I think that's probably more currency related in terms of the size of the deposit. So it's really an FX related -- they've been very stable. So -- and that's confirmed actually by Renato here. So it's really more FX; it's not a question of any kind of reduction in deposit base.

As you mentioned, the absolute size of the balance sheet did not shrink that much, even though our risk-weighted assets went down I think by about 10%. And the reason for that is that, as you mentioned, a number of the businesses have increased in volumes and increased in balance sheet usage. For instance, private -- prime brokerage has been a rapidly expanding business for us. We've been benefiting I think very strongly from customer flow that's been coming in. So that's been a big increase in the second quarter. That gives rise to balance sheet size, but very little in the way of risk-weighted assets.

In addition, we have seen expansion in our equity derivatives business. Paul could maybe comment on it, but we had a close to record quarter in the second quarter on equity derivatives. That's also given rise to some balance sheet usage, as well as I think our commodities business.

So it's actually been risk-weighted assets down, absolute balance sheet pretty stable, but I think very healthy trends in terms of the kinds of business that underline that, growing the prime brokerage business, growing our equity derivatives business.

Do you have anything to add to that, Paul, that would help?

[Just to] add to that, some of the crudest measures of leverage ratio become apparent when you look at the composition and the use of our balance sheet in the investment bank. And the big users of that would obviously be in repo, but also in prime services, where we've been able to attract very high quality assets. But they are significant users of the balance sheet, as Brady mentioned; relatively small users of ERC or risk-weighted assets overall.

We continue to invest as well, Brady mentioned, in equity derivates. We had a record quarter in dollars in equity derivatives in the second quarter, which also had some impact on the balance sheet. But overall for us, it's really a focus on the quality of the assets that we're adding to the balance sheet.

Walter, you want to --?

(Inaudible) derivatives. Is it really customer balances that inflate the balance sheet, because I would have thought that would be limited to margin calls, or is it more that you're having to put on balance sheet to facilitate customer business and things like futures businesses?

No, in equity derivatives, I think it's more transactional flow that's giving rise to counterparty exposures and other things that increase the balance sheet. So -- and FX. Walter, do you want to address the margin question on PB?

Yes. If I understood you correctly, obviously, there is some -- first of all, there is a certain shift from products into cash. Now, that shift doesn't result in a shift of 5 basis points from nonrecurring to recurring; it's a lot less than that. But the recurring fees have really profited by the refinancing rate because, obviously, we have a lot more liabilities on our books that helps refinancing our positions.

But as well helped has management fees coming in, particularly for hedging [repo], and slowly but surely our strategy of moving more money into managed investment products has helped on the recurring side.

Okay. Thanks very much.

Next question on the phone.

Fiona Swaffield, Execution.

Hi. Could I ask questions on a couple of things? Firstly, just coming back to this private bank and deleveraging, I'm trying to understand how we would see the deleveraging other than the transaction margins, because as I can see it, the lending is still actually going up. So I wondered if you could give us a bit more color in terms of how the products are shifting.

The second area is on the gross versus the net; so the use of hedges against CMBS and leverage finance. I wonder if you could talk about the fact you've taken the index hedges down so significantly, more so in the gross exposures, and what the strategy is there.

And then the last thing is on structured products and leveraged finance, the underlying revenues from those businesses. It looks like they're about just over CHF200 million in the second quarter, so not much improvement at all from the first. I just wonder if you could talk about the outlook, I know it's very difficult, but for the revenues in those businesses and what you feel -- when you feel they could come back, or how those business models may have changed, or the revenue opportunity changed in those areas. Thanks.

Good. Thanks Fiona. Yes; Walter, do you want to deal with the private banking deleveraging question?

Well, first of all, we haven't deleveraged. As you probably can see in the numbers, our loans expanded by about CHF3.5 billion. But what we've seen is deleveraging in certain emerging markets which traditionally have clients who do a lot more trading activities, and they have deleveraged. But overall, private banking on that basis actually increased the [length].

And that's actually one of our objectives and one of the opportunities we think we see is that there are opportunities to increase the liability side in our private banking business. It's one of the things that we're focused on and we're starting to see some results of that.

Yes, so the gross and net exposures on hedges, Paul, do you want to address that?

Yes. As you know, over -- from the third quarter, we've brought our exposures down very materially, as you've seen, and consistently from third quarter through what we just reported here at the end of the second quarter.

Associated, you can look at that same time period, we've brought our index hedges down at a slower pace, so there -- between the end of the first quarter and the second quarter, there was a bit of a catch-up with regards to our index hedges that we have.

Additionally, if you look at the balance of the portfolio, as Wilson mentioned earlier, it's much more concentrated in individual names, so that the index hedges become less good hedges against that portfolio, more idiosyncratic risk that require more individual hedges. And by having large hedges on, you're in fact taking significant basis risk, which we don't look to speculate on our overall index hedges. And so we feel now that those hedges, the index hedges have come down appropriately in line with the portfolios that we now have.

With regards to the question on ongoing business, we have seen, and Wilson showed it, in each one of the businesses, if we look at leveraged finance we've seen some business; again, we committed about CHF1.1 billion in the quarter. Over the past nine months, we've seen about CHF6 billion in leveraged finance, additional transactions that we've committed that were very attractive levels and rates that we're able to do that business. Of that CHF6 billion, only about CHF1 billion of that, of those new commitments, is still on the books, meaning we have been doing business that we've been able to turn quite quickly, the focus really being on the origination and distribution at a faster pace.

CDO business has been a good business. You've seen on the trading side, we've continued to -- the margins on that business have increased as has the business. And RMBS, as there are less players in the market, and providing opportunities for us.

Thanks.

Okay. Next question on the phone.

David Williams, Fox-Pitt, Kelton.

Good morning. Two questions please. The first is on the fixed income run rate. On my calculations, the underlying run rate for the quarter was round about CHF1.2 billion. A year ago, the run rate of your fixed income was something like CHF3.2 billion, so down 60%. Could you just explain whether it is the lack of opportunity now in a number of the areas like high yield, like leveraged finance, like the structured products, etc., which has brought the run rate down, and whether we should now be thinking about the CHF1.2 billion, CHF1.3 billion area as being the normalized run rate? And if so, also what does that mean for the compensation expense, where would that normalize in such an environment?

And the second question, perhaps a broader question with regard to Switzerland, bank secrecy and tax haven status. Obviously, there's been some repercussions in the US with the US Senate report. UBS has withdrawn from the US. I just wonder if you can give us your view on the way the political climate is going and perhaps just highlight in the US the extent of your offshore banking activities in that market please.

Paul, do you want to deal with the fixed income run rate question?

Sure. I think your calculation on run rate is exactly correct in terms of the quarter. You added back the fair value and added back the write-downs with the more disclosure that is in the appendix. So that CHF1.2 billion is the run rate for that second quarter.

I don't think investment bankers have particularly been very good at predicting what the future markets will look like. We certainly hope our run rate can be stronger than that. We're satisfied over this quarter, given the challenging markets, given if you look at our peer results and also looking at the continued success that we've had at reducing positions.

So satisfied for the quarter, but certainly hope to be able to increase our run rate going forward.

And I think that's what we -- what we've been more focused on really is, rather than trying to predict when the market might turn and get more favorable in some of the affected businesses, is really making sure that we've worked our risk down so that we're in a position to really take advantage of the opportunities when they come along. And we think we are -- because of the fact that we have really very consistently and pretty aggressively reduced risk over the past 12 months, we're in a position now where we will be able to take advantage of new business opportunities as and when they come along.

Yes.

Walter, do you want to address the --?

Just quickly, well, first in general, obviously, we have a policy to comply with all rules and regulations around the globe where we do business in, and we have very rigid processes internally to make sure that we do comply. We've made assessments around the globe what is allowed and what is not allowed. Obviously, the same applies clearly to the US. We do conduct our business along the rules and regulations of that country.

Now with the current environment, with UBS, we obviously do assess and will take necessary measures if and when needed to adjust our business model.

I think that Walter's talked before about the fact that we've really for the past couple of years had a program called Cross Border Plus, where we have really taken a very vigorous approach to how we do business in all the various jurisdictions around the world. So we have worked very hard to make sure that we are complying with local rules and regulations. I think the other question that was asked was just the size and the importance of the US offshore business, which is not material, right? It's --?

It's immaterial.

Yes. Or it's immaterial.

Thank you.

Okay, next question on the phone.

Huw Van Steenis, Morgan Stanley.

Good morning. Just had two questions. First, obviously, great news on your CDO write-backs. Could you perhaps just give a bit more color on how you managed that? I'm assuming from the nature of the trades that maybe you've also taken your index hedges off there and it's the underlyings which rallied.

And then secondly, if I add back all the various one-off impacts in the quarter, it looks like you made about a CHF1.25 billion in fixed income. To what extent do you feel this was an incredibly depressed quarter, or to what extent do you think that actually CHF1.25 billion, CHF1.5 billion is now more a realistic post credit crunch expectation for a fixed income division when structured credit and leveraged finances are not firing on all cylinders? Thanks.

Thanks, Huw. Do you want to answer, Wilson? I might just answer because you kind of just answered it --.

Thanks, Huw. If you look at slide 22 in our slide pack, you can see a bit of disclosure about our CDO trading. In the quarter, we made CHF500 million. Of that, we did see some bounce-back in our run-off book. That was about CHF200 million. Most of that was from basis adjustments between longs and shorts.

In Q1, we talked about how some of those basis adjustments, things like the discount for holding a cash position versus a matching credit derivative, have been very dislocated in the market due to stress at that time. Some of those basis risks have been rebalanced during the quarter, and that gave some lift to the run-off book.

Secondly, we did have -- we do have some ongoing activities in the sector such as secondary trading. They traded that business well, and that made about CHF300 million during the quarter.

Great.

And I think, Huw, on the other question, Paul kind of -- basically addressed it before. I think, obviously, it was a -- second quarter performance in fixed income was lower than we'd like it to be. Hard to predict what market conditions will be over the next quarters. We think we're well positioned to take advantage of what business is out there.

Eventually, I think leveraged finance and CMBS, which are important franchises for us, will recover and will be contributors to the business. Don't know if that'll be in the third quarter, don't know if that'll be in the fourth quarter, but eventually we think that will happen. And overall, we think the businesses continue to perform pretty reasonably well in what are very volatile markets. So I guess a lot of it just depends on how markets develop.

Okay. Thank you.

Next question on the phone.

Jon Peace, Lehman Brothers.

Morning, everybody. Just a couple of questions on cost flexibility. Firstly, in the investment bank; in absolute terms, could we expect the compensation cost accrual to go much below the CHF2.5 billion in the second quarter, which was also I note the average for the last year, for competitive reasons more than anything else, even if the second half revenues are tough?

And then on the private banking side, we've heard from peers that this is a good opportunity to take market share and accelerate advisor hiring, but that's coming at the expense of some short-term cost drain. Might we expect to see Credit Suisse over-delivering on hiring plans, but also then the cost income creeping higher? Thanks.

I think in general -- I would say in general we spent the last couple of years working pretty hard on increasing our efficiency, and we actually came into this crisis a year ago with probably -- particularly in the investment bank, one of the leanest staffs around, and also having spent a couple of years working pretty hard on our non-comp expenses and making some good progress on that.

So we actually came into this with, I think, a lot of cost flexibility from that point of view. We're actually viewing this in private banking, but also in the investment bank as an opportunity to make some investments here. The investment bank -- probably investment needs more keeping headcount relatively stable, but very aggressively reallocating across the businesses.

The private bank, clearly, we see some of the best opportunities we've ever seen to hire the top teams from -- in various different markets and that's something that we are taking advantage of right now.

Clearly, in the private bank, that will -- we know there is an element of investment in that, although I have to say when you take the top teams out of places, the payback period actually is a lot more -- is accelerated.

So I think in general on the compensation side, and Paul can speak a little bit more to it in the investment bank, we've tried to strike a balance between discipline, and also making sure that we are accruing sufficiently to pay competitively. Clearly, we need to do that. I think as the year goes on, we'll see how the business progresses and how the competitive environment progresses in terms of compensation for people and we'll accrue appropriately. But -- so, I don't know if that answers your question about flexibility, but we're obviously trying to strike the balance between discipline and making sure we obviously accrue enough to pay competitively.

Thanks.

Next question on the phone.

Derek De Vries, Merrill Lynch.

Good morning, I have three questions if I might. The first one deals with accounting, and I was wondering if you could give some comments on FIN 46R and FAS 140, what the impact's going to be on your balance sheet as we adopt the changes there next year? Recognizing you're probably willing only to commit to a range, but if you could give us a range, that'd be helpful.

Then I want to go back to a subject we touched on briefly earlier with the conversations with the regulator and leveraged ratio. You in the past have made your views on leverage ratios and their usefulness fairly clear, but I wonder if you could tell us a little bit about your conversations there. Do you have any indication what the regulator is going to use as the numerator, i.e. when they compare equity to assets, what do they consider equity in that calculation?

And then the last question. We've talked a little bit about the impact of reducing your index hedges from the CHF20.9 billion to I think CHF6 billion or CHF6.6 billion. Can you tell us what the P&L impact of that reduction was; i.e. did you do that at a gain or a loss? Or if you could give some impact of how that hit your -- or how that impacted your P&L; the significant reduction there. It would be very helpful.

I don't know. Renato, you want to take the accounting question?

-- the accounting question? It's fair to say that we have yet to see on how this finally comes out and what will be decided and what the impact would be on our balance sheet, so to say. That's something we have to straighten up as we go.

On the other hand, it's also fair to say that from a -- I would say from a capital, from a funding liquidity position, but also from a risk position, the change will be relatively immaterial because we -- this is already taken care of to a large extent already now.

Yes. Just maybe to push you a little bit on that. I understand the economic impact of these accounting changes are zero, but I'm just wondering optically, so we're not surprised next year, is it -- are we talking 10% increase in assets, 20%, 100%? Just some -- and we're not going to hold you to it, but some range that maybe we could help prepare us.

Don't hold me to the range. You can decide it yourself. I cannot tell you exactly on how this would look like. First of all, the rules are not clear yet. Secondly, the impact; we haven't calculated the range of impact yet. So you'll have to bear with me and to know it as soon as I do it and --.

Okay.

I think with regard to your second question on the regulatory dialogue and the leverage ratios, again, I think, we obviously think it's entirely appropriate for regulators around the world -- and this is obviously a global issue, it's not just an issue in Switzerland -- to be thinking about and working on appropriate response to what's happened the last 12 months. We're party to, involved in lots of those discussions.

As we say, we're hopeful that we'll actually end up with something that is appropriate to the markets, but also allows us to continue to pursue the business model we have.

I don't think beyond that we want to get into too much detail about -- it's obviously a -- as you know, it's a very complex issue. There are lots of different considerations and aspects to it, and frankly, I think we're -- we think the right way to do it is to continue the dialogue with the regulators, and then again, as and when we have answers on that, we'll certainly give them to you.

With regard to the index hedge question, do you, Paul, want to take that?

The index hedges, as you know, are very observable pricing marked-to-market each day, and reflected through the P&L that we've shown each quarter for the respective businesses. But we've obviously made gains on our index hedges given the deterioration of the market, given the -- you've seen how we've taken some of the marks down, but we don't quantify exactly what the index gain is versus the loss in the underlying positions.

All right.

And also I think it's important -- Paul mentioned it before, but we've said we have taken, and we continue to take a conservative approach here. So we're not trying to trade the hedges to speculate, to -- we're trying to make sure that we moderate our risk and that we control our risk. And again, we think that's served us pretty well over the last 12 months and that's what we are going to continue to do.

Maybe just on the hedges then, to give me a sense --. Can you give us some sense of the timing of when they were reduced? Is it the end of June that they were reduced? Obviously, doing that at that point in time would be a different price than if you did it the end of May.

No. I don't think we're going to go into the detail of timing on reducing hedges.

All right, I had to try. 0 for 4, I guess. Thanks.

Next question on the phone.

(Inaudible), RBS.

Yes, good morning. Three questions. Firstly, on the topic of regulatory change; I just wanted to get your views on how you see the implementation of more stringent requirements on the trading book. It's been suggested we may shift from a VaR-based methodology to an IRC approach actually; how that could impact your regulatory capital ratios.

Second question on wealth management. I wonder if you could quantify the impact of hedging performance fees in terms of basis points benefit in the second quarter.

And thirdly, back to the investment bank. To what extent did the inversion of the euro yield curve affect your fixed income revenues in the second quarter? Thank you.

Thank you for the questions. Wilson, you want to address the questions about the changes in VaR limitation?

Sure. As Brady mentioned, obviously, regulators and all the people that have been affected by this crisis are looking for ways to make rate caps smarter, rate caps more robust. And there's been a particular focus, given some of the dislocations particularly in trading books, on VaR and how that measures regulatory capital.

For a long time, regulators have been looking at something called IDRC, or incremental default risk, in the trading book, and they've expanded that somewhat to take light of some of the recent market conditions.

That will have an increase on the market risk capital that will be phased in over the next couple of years. And I think on a percentage basis, that will increase the market risk capital pretty significantly. On the other hand, market risk capital is a relatively small portion of our overall rate cap, so the overall impact on Credit Suisse won't be that large.

On the wealth management issue with regard to Hedging-Griffo, I'm not sure we give the detail, but go ahead

No, I give the details. It's 2 basis points. But as you know, Hedging-Griffo obviously is normally reporting on a half-year basis when it comes to management fees.

And, Paul, do you want to deal with the --?

In June, when we saw the ECB rate hike, we saw unprecedented moves in the curves -- European curves. Some of that went unnoticed with all the other activities that's happened in the market. It did have an adverse effect on our results, which is outlined in the MD&A; I think it;s explained in a good amount of detail. We see that as a one-time event, in that our positions are balanced and we don't see it affecting our business going forward.

Could I just follow-up on my first question on regulatory change? Thanks for the answers, very useful. I just wanted to see whether the position risk calculations that you show in respect of the, let's say, investment bank activity, would be a relevant tool to help me quantify the magnitude of the multiplier effect of market risk?

I think you're probably talking -- in our supplemental risk pack, we disclose economic risk capital, which is our internal measure. This is already -- this is not built on regulatory capital, this is built on our internal assumptions, and it has already included some of those types of factors. That does not directly relate to VaR. If you look on that chart, VaR is at the bottom of the chart. That covers only trading risk in the investment bank or economic risk capital measures, all risk, including trading risk in the investment bank, but also risks for private bank, asset management and in the credit books.

So we think that's a better guide to the risk trends we've taken over time than nominal VaR, but the two don't relate to each other on a one-for-one basis.

Would they be closer to the new approach that regulators may implement, the IRC approach?

As of now, we don't know exactly what approach the regulators will take in the IDRC approach. That's still being finalized. I don't know if they'll happen on our ERC calculation. That would be terrific if they did. I think they're moving in that direction, but I think those are going to be two pretty independent calculations.

Thank you very much.

Next question on the phone.

(Inaudible), Citigroup.

Yes, hi there. You sounded very comfortable on your monoline exposure, so far, but I wonder if you could comment on rating agency downgrades that have happened post quarter end, and whether that might impact you in any way. I was -- I'm referring specifically to the two monolines that held on to their AAA ratings, but are now on negative watch. Thanks.

Wilson?

As we said, we don't have significant exposure to monolines; we don't use them to protect either RMBS or CDO portfolios. And we have third-party protection against the inventory we have on our trading books. So we're really not that exposed on either a price basis or to any ratings downgrades over those different monolines.

Okay, thanks.

Next question.

Matthew Czepliewicz, HSBC.

Good morning. Thank you. I had one broad question on wealth management and then one narrow question on asset management.

And on wealth management, maybe you could leave out of the context of your response your major Swiss competitor, but you mentioned several times during your presentation that you feel that you were a beneficiary during the quarter of the conservatism and I think the way you've handled the crisis generally. And most of us would intuitively agree with that.

But if you look not just at Q2, but maybe three, four quarters back as well, do you actually have any clear or demonstrable or measurable evidence of market share shift in wealth management in any particular part of the world, whether you measure that, say, by net new money flows or some other metric? And if you do, do you think the gains you're making would be at the expense of the local players or at, say, the expense of second-tier global players?

Maybe that first, and then I'll just follow on with my second question after.

I think -- and maybe Walter can add to it -- but I think there's no question that we feel we are benefiting from the stability of our platform and the strength of the capital, etc. I think we've been seeing that really around the world. And if you look at our net new asset flows in our wealth management business, it's very consistent and strong across all the regions.

I think -- in some respects, I believe that we think that this will probably continue to gain momentum, so we think that we will, I think, continue and maybe increasingly benefit over time. But I also would not say that we see that there is any particular sector or any particular type of bank that we think we're gaining flows from. It's very balanced from across -- it's across the board. And so I think it's just a -- it's a generally pretty strong performance.

Maybe I just could give you a little bit of a color of how I think this normally evolves. And the way I see this is really first by hiring relationship managers. And we're really now in a position where we basically could double the hiring we're doing currently, but it is obviously as well about quality, so we can pick and choose.

And normally after the relationship manager has joined, the client will come in. So what you see currently is really add-on assets of existing clients we have, obviously as well some new hires, but this is normally how it evolves. And some of the demonstrations around this is obviously our hiring we've done recently in the US. We are able to hire best teams from probably the toughest competitors we have, from Goldman Sachs and Citi, which is a demonstration of the belief of these relationship managers in our platform.

And same obviously applies in other areas of the world in terms of RMs joining us. And they join us because of stability and because of our business model. Because clearly, the integrated business model, it's a great thing for our customers. Our customers want to have all those services available. And there, I think this is how this whole taking advantage of the current situation is currently unfolding for us.

Asset management -- you had a question on asset management?

Yes, okay. Just a very specific question. Under the global investors arm of asset management, you had an outflow of pension advisory assets, which you footnote; it was about CHF10 billion. I guess first question is, was that a lumpy outflow?

And secondly, putting it in a cynical light, since that is very low-margin business, are you making efforts to stabilize that, or would you simply expect it to continue, and if it does, it does?

Rob, do you want to address that?

Sure. To specifically answer your question around the Swiss advisory business, that was a lumpy -- there was a lumpy situation regarding one client who evolved the strategy outside of Switzerland, where we actually did not have the capability. So it was very lumpy, as I said, specific to one client.

In terms of the overall business, certainly I'd say that in a lot of our businesses that are lower margin, we have stabilized those businesses and continue to analyze which businesses we want to emphasize versus de-emphasize.

But in terms of looking at the overall portfolio, I think, as you saw in the slides, our margins are going up in the asset management business. And that's attributable to the fact we've actually had positive inflows in our alternatives business. And the good news about those inflows is that they're actually not lumpy; they are pretty much across the board, private equity, real estate, credit, as well as in the hedge fund strategies.

Right, okay. Thank you.

Next question.

Kian Abouhossein, JP Morgan.

Yes, hi. A few questions. First of all, if I look at your cost income ratio clean in the investment bank, I get to 83%. Historically, you've indicated that you want to be in line with your peers, and I'm wondering by the end of the year, should we be looking at an underlying cost income which is very much in line with what we see within your peer group? The first question.

The second question's related to your retained earnings on page 54. They go down by about CHF0.5 billion. You made CHF1.2 billion of profit, so about CHF2.7 billion of swing factor. Does that explain the accrual on dividend?

And the third question is on balance sheet. Your repo book is roughly the size of Citi, about double the size of JPMorgan. You both -- or you report on the US GAAP, so I assume the numbers are comparable. Why don't we see a much smaller repo book considering the size of the Group, the equities? And in that context, how do you see the development? I'm not really that interested in the current short-term development of the balance sheet and risk-weighted assets, but more the longer term development of the risk-weighted assets and balance sheet within CS Group? Thanks.

You know, I think with regard to cost income ratio and peers, I guess right now I think it's probably a pretty confused landscape because lots of people are showing losses and write-downs. And so I'm not sure that -- I think we do expect to be among best-of-class in terms of our cost income ratios over time. Right now, I'm not sure for our results in the investment bank or for the industry, it's probably not a time when you can find a lot of relative data points, I would say.

But if I take your Parmalat provision release, and I take it out, I take your own debt out, I take the mark-downs out on your legacy assets, which are very small, I get to roughly 83%. And if I do the same with the US peers that have reported, I would not get even close to that kind of high level. And I remember in the first quarter, you indicated that you did not under-accrue bonuses. So I'm just trying to understand, as we go through the year or we look at the end of the year, will we be in line with peers?

I don't know how are you calculating that, Because some of our peers don't even have incomes, so they've had losses which a number of the peers. So, I mean -- so I don't know whether --.

[You can strip out though].

(inaudible) breakdowns. That's a very (inaudible) calculation to compare to.

What's that? Yes, I'd have to say I just don't -- we obviously -- I think we've shown very good trends in terms of our cost metrics. I think we will continue to do so. I just think right now is probably not a very normalized environment to be able to compare those and look at them. And so I think we've actually shown good cost discipline and good cost progression in our business, so --.

With regard to the retained earnings issue, can you address that, Renato, or --?

The question was about Tier 1, if I'm not mistaken, and the --.

I think it was retained earnings, but anyway. Was it Tier 1?

I think it was Tier 1, and the cap for the calculation.

If I look at page 54 under your breakdown of the capital, your retained earnings basically go down by about CHF0.5 billion, and I would have expected them to go up to -- and that's, of course, CHF0.5 billion down, but you made a profit of CHF1.2 billion. So the delta is really CHF2.7 billion.

Yes, that's -- yes, I understand what it is. It's basically a dividend payment, that we do, of course.

So -- but that would be your dividend for the year that you paid last year roughly.

The dividend we paid -- we accrued before and we paid out for last year, so it was --.

Okay.

So it was '07 dividend paid in the second quarter.

Okay. All right. Now that's clear.

Your last question was on balance sheet and the repo book and the size of the repo book. Again, we tend to manage our business based on the risk aspects. So, I think, as Wilson mentioned, much more focused on ERC, more focused on risk-based elements and less focused on just kind of gross balance sheet.

The repo book, obviously, is a balance sheet user, but it's a relatively low risk activity. And so, to date, we have managed it, I think, appropriately in that context. And I think in terms of the longer-term development of the balance sheet, again, we would tend to manage our business much more on a risk-based element and, obviously, there could be changes to the global regulatory background to that. But from our point of view, it is a low risk but larger balance sheet user. And that may change somewhat in the context of changes in the regulatory structures globally, but my guess is it probably won't change that much.

And do you see risk-weighted assets coming down over a longer period of time? Do you feel that you want to actively reduce your risk-weighted assets?

We reduced risk-weighted assets from the end of the first quarter to the end of the second quarter by close to 10%, I think. I think that it will somewhat depend on opportunities that are out there and how the business develops. But in general, I would say we are focused on tightly managing our capital and our risk-weighted assets and our exposures, and we'll continue to be.

Okay. If I may ask one more very quick one. Your legacy asset reductions, have you financed any of the assets that you got rid of yourself through debt financing; so the leveraged finance and CMB --?

Yes, Wilson will address that.

This has been an important issue for us. We've tried to make sure that the quality of our sales was also good during this period. In leveraged finance, we have done a couple of finance sales, although we've tried to make that a relatively small portion. We do mention that in one of our footnotes; it's about CHF2.8 billion, so a pretty small percentage of the sales. Most of the sales in CMBS and leveraged finance have been for cash.

Right, thank you very much.

-- 59 to 14.2 It was only CHF2.8 billion of term financing, so take those sales at extraordinarily low (multiple speakers).

Right.

Matthew Clark, KBW.

Good morning. I'm going to rake over the same questions, I'm afraid. Firstly, just on bonus accruals, you seemed to accrue quite lightly in the first quarter, a bit more heavily in the second quarter. And when I do the stripping out, I get to a pre-tax margin underlying for the first half in the IB of -- in the low 20% range. Is that a level you think that, in a fairly normal environment, you can hold for the rest of the year?

And then second question is on hybrid capital. The hybrid capital fell this quarter. Firstly, presumably that was FX driven? And then secondly, I thought that you'd issued $1 billion of hybrid capital via the [Claudius] vehicle. Could you just comment on whether that was Tier 1 eligible or maybe it's deferred or something was going on there. And then finally, what's your strategy for hybrid going forward? Are you intending to keep the hybrid component around the 15% level of Tier 1? Thanks very much.

I think on accrual, I'll let Paul address it. Specifically, for the investment bank, our comp to revenue for the overall bank was about 51% on a raw basis, which we think is -- particularly for these markets, is pretty competitive. But again, we're trying to strike a balance between discipline, but making sure that we can pay competitively and we can take advantage of opportunities that we have to hire people. I don't know, Paul, if you want to specifically address the comp revenue, the investment bank and the margin in the second quarter -- sustainability.

Sure. As you notice, our -- as you noted, our accrual in the first quarter was light, and so were our earnings in the investment bank. Reflective of that, we've much stronger earnings. And reflective of trying to get that balance right between ensuring that we accrue enough to pay our employees fairly and competitively with the interest of our shareholders, we accrued an amount that we think is appropriate, given the better results and the mix of businesses in the second quarter. But of course, it's not until the fourth quarter that we true that up with the amount of accruals that we think are required.

I think the ratios were, on a [published] basis --.

The ratios -- yes, 65. 65 on a raw basis. But I think you may, if you take out the fair value, you'd move to a 58% accrual in the second quarter.

Okay, thanks.

On the hybrid capital falling during the quarter, you want to address that, Renato?

The main reason for that fall is that we bought back a hybrid portion of a small one; very attractive conditions in the market. So we basically retired that debt during Q2. But that was a small amount that reflects, or explains the delta.

On the issuance that you are referring to, that was a pure Tier 1 issue. It was not the hybrid; that quantified fully as core Tier 1. As you know, in Switzerland, the cap we have on the hybrid Tier 1 is 15% of our total Tier 1. And coming back to your question, of course, those are the levels -- those are very conservative levels set by our regulators, as you know. And in the -- in other jurisdictions, that is higher. And we intend, of course, to keep that level going forward of the 15%, where we are at right now.

Okay. Can I follow up then with the definition of hybrid? You're saying -- presumably then, you classify hybrid as being cumulative preferred securities. But if it's a non-cumulative preferred security, then you would classify it as being core equity. If that's the case, could you give us the quantity of non-cumulative preferred shares that are included in your Tier I capital in addition to the CHF5 [billion] or so of hybrid as you classify it? Thanks.

The classification follows, of course, what the regulator is defining as hybrid, and that is typically, for every issuance, we are discussing with them, they have certain rules on what classifies as hybrid and what doesn't. And it has of course also to do with how they are ranked in the balance sheet accordingly.

So it is a definition that is done by the regulators. And it would be very technical to go into that. But I think we are pretty straightforward in communicating which piece is a hybrid Tier I issue, which piece is part of the core Tier I. And the one that we have issued in the second quarter is core Tier I capital, it has nothing to do with hybrid, and doesn't also affect our 15% ratio.

Okay, but different banks have different definitions that are -- for their hybrid, or let's call it non-common equity Tier I-eligible instruments. And I'm just trying to get a clear picture, because I was certainly viewing what you classify as hybrid as being all non-common equity components, and that's not the case. So surely, you can give a figure for the delta between our two definitions, that component of --.

We can pick it up with you later, but I think actually it's not banks that have the definition; it's the regulator that makes the definition. And if you want to get into more detail on that, we can certainly get into more detail with you later on, but --.

Okay. Thanks so much.

And I think it also reflects your other question, though, which is -- on the hybrid, as Renato said, right now, we have a limitation on the core Tier I, the non-dilutive core Tier I, like we raised in the second quarter, obviously to the extent we could raise more of that. It's non-dilutive.

Next question on the phone?

Chris Malmer, Goldman Sachs.

Yes, good morning. Hi, it's Chris Malmer with Goldman. I was just wondering, you mentioned -- it was during the end of your presentation, the strategic priorities, one of which was improving the capital efficiency in the investment bank as one of the targets. Apart from obviously downsizing and risk reduction, which you're undertaking right now, is there anything else that you're planning to do, and if so, is there anything we should expect in terms of the size of the balance sheet in the investment bank?

Secondly, within equity derivatives, you mentioned that a couple of times as a key driver of the strong equity results. Could you give us some more color as to what has been behind that? Is this favorable market conditions, in particular certain products? Is it new hires that are starting to pay off? Is it client demand increase in certain areas that is driving that performance?

Thirdly and finally, just on that press [shares] that you issued in the quarter that qualifies as core Tier I, if you can give us the indication what the cost of that is for you? Thank you.

I think on the first question, maybe I'll take that, and then I'll ask Paul to give some more detail on equity derivatives. But in terms of our strategic priorities, it's actually not -- you mentioned to cut and downsize, whatever. It's really not -- as I said, we came into this very lean. We believe we've got, obviously, a lot of strong franchises, but we also see opportunities to grow. We have been shifting assets very aggressively across areas that have less positive growth opportunities to other areas that we think have better opportunities; so some of the areas that Paul mentioned earlier, the prime brokerage area, equity derivatives, which as you mentioned, commodities --.

There are a number of areas that we see interesting growth opportunities, and we're going to continue to take advantage of those. So it's really about diversifying the revenue base in investment banking. It's about reducing correlation across those areas, which also will reduce the volatility. And it is about, certainly, controlling risk in particular verticals to make sure that we keep things balanced, diversified, really low the earnings volatility, which is our objective.

So when you say improve capital efficiency, it's not really different to what you've done so far?

I think we're also managing the investment bank on an EVA basis, and there's a lot more focus on returns on that basis. And so just day-to-day, the way we look at the business, and then longer-term in terms of strategically, where we're looking to put our risk-weighted assets, I think we're being more discriminating in how we do that to manage more efficiently to our capital basis.

Thanks.

Equity derivatives?

On equity derivatives, as I noted, we have a record second quarter in dollars. And we're seeing that business, it's principally growth in our client-related businesses. As you know, a lot of the equity derivative business is OTC-related business, and we benefit for the same reason we see a flight to quality in our prime service business, we've seen also somewhat a flight to quality in our equity derivative business, as well as the risk counterparty credit risk associated with that business.

In addition, we've just seemed to capture a greater market share. It's been a focus of ours. We've brought in -- some really top, talented people from across the street have been available to us over the past six months or so. And as they come onboard, I think we're seeing some of the benefits of that.

Thank you.

Renato, you want to address the question?

Yes, the coupon is 8.25 and it's tax deductible.

Thank you very much.

Next question?

Elie Darwish, Exane BNP.

Yes, good morning from Paris. Maybe just a follow-up on the capital. I wanted to -- could you give us more detail regarding the growth in minorities? Apparently, it's related to this issuance of core equity. But the growth for CHF1.2 billion, is this the reason for which you are so comfortable on accruing significantly in H1 '08?

No, in general, I think the reason that we feel it's appropriate to accrue a dividend is that we think we have a business that's very capital-generative, and under any kind of normal conditions, we actually generate a lot of capital. And we do feel that given the way the business is positioned now -- and we can't obviously foresee future market conditions -- but we feel that it's appropriate to be accruing a dividend, given the strength and the ability of the business to generate capital.

I don't really -- do you understand the question on minorities, growth in minorities?

You're absolutely right. The overwhelming majority of the delta is this new issue we had in Q2. So that explains most of it.

But could you give us some more details regarding this issue?

Regarding which issue?

I mean, the core equity Tier 1 issuance that you have made, which is booked apparently in minorities. I mean, what is the reason for which it is minorities rather than on your core capital?

It basically follows the accounting rules. As you know, it has been issued -- not by the Holding, but by one level down, by Credit Suisse, the bank, and therefore it's treated for holding purposes in minorities. We made that very transparent.

Okay; okay. Thank you.

Okay, I think we're at the end of the questions on the phone. Any further questions here in the auditorium that we could answer for anybody? Yes?

[Thomas Brown, Classic Funds]. Your loan-loss provisions are still very, very low. So do you expect this figure to remain that low, and in this context, what are your exposures to the real estate markets in UK, Ireland, and Spain? And we have to expect here surprises in the future?

You want to answer that, Wilson?

Sure. I'll answer the second one first. Exposures to UK, Ireland and Spain are not that significant for us. If you look at our exposures, we do show a geographic diversity for the commercial mortgage business. That's 50% to Continental Europe. Most of that is in Germany, and most of the rest tends to be in Northern Europe, for example, the Benelux countries. With respect to RMBS, we also give you a geographic breakdown of that in our supplemental slides, and most of that is in the United States.

Actually, there was a first question --.

That was about loan loss provision generally, I guess, and the feeling that our loan loss provisions remain -- or the point was made that they're --.

Our credit books continue to perform well. Most of the credit books are in Switzerland, and although Switzerland is not immune from economic downturns, it has performed very well. And our portfolio, I think, has benefited from strong underwriting standards we've maintained over a number of years. You haven't seen, for example, a real estate bubble in Switzerland as you've seen in some other markets. So I think the conservatism both that we've applied internally, as well as some of the conservatism inherent in the Swiss market, has benefited us there.

There's also a lot more hedging that's being done now. So, for instance, against our corporate loan book, we've done a lot. A very high percentage of it is hedged where we can, in terms of single name risk elsewhere. So our hope is that, while clearly nobody believes that the situation with regard to credit could be much better than it's been for the last two or three years; it's clearly -- at some point it's got to deteriorate. We hope that we're actually -- through our underwriting standards or hedging, etc., that we're actually well-positioned to weather that, but obviously we'll see how that develops.

You quantified the impact of Hedging-Griffo on the private banking margin. Can you also quantify the impact of performance fees in asset management, if there are any, and how material are they?

Rob, you want to take that?

The performance fee and Hedging-Griffo on the asset management business was CHF79 million.

Okay, any other questions here? Okay. Well, again, thank you very much for spending time with us. Again, we feel like we're happy with the performance in the second quarter. We're obviously going to continue to manage our business conservatively going forward, and hopefully, we'll see you again in three months' time. Thank you very much.

The conference is now over. Thank you for your interest and goodbye.