Credit Suisse Group AG (CS) 2010 Q1 法說會逐字稿

Good morning, this is the Chorus Call operator. Welcome. And thank you for joining the Credit Suisse Group first quarter 2010 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. Brady Dougan, Chief Executive Officer of Credit Suisse Group. Please go ahead, Mr. Dougan.

Thank you. Welcome, everybody, to our first quarter results call. I'm joined by Renato Fassbind, our CFO. And after I make some introductory remarks, Renato will take you through the detail of the results; we'll then take your questions; and after that, I will sum up.

From our point of view, there are really two ways to look at our first quarter results. And the first is as an industry-leading set of results; CHF2.1 billion of net income, produced with industry low levels of risk; 22.3% return on equity; a Tier 1 ratio of 16.4%; net client inflows of CHF26 billion.

A second way to look at this is business as usual at Credit Suisse; the consistent execution of our strategy; consistent performance; consistently high quality earnings. CHF2.1 billion in net income in the first quarter means that we averaged almost CHF2 billion in operating net income per quarter over the last five quarters. 22.3% return on equity in the first quarter of 2010 means that we averaged around a 21% operating ROE over the last five quarters.

We had an industry-leading Tier 1 ratio of 16.4% at the end of the first quarter this year, with an average Tier 1 ratio above 15% during those quarters. With net client inflows of CHF26 billion in the first quarter, we averaged CHF14 billion in net new client assets per quarter over the last five quarters. So, you can see these are both industry-leading results and business as usual at Credit Suisse.

We had a strong overall performance in the first quarter. In fact, at the operating level, it was better than the first strong quarter last year. These results provide further evidence of how our client-focused capital-efficient strategy can generate attractive and sustainable returns for shareholders. In particular, I would highlight the fact that our industry-leading return on equity of over 22% has been achieved with one of the lowest levels of risk-weighted assets in the industry.

And what exactly does earning a 21% operating return on equity over the last five quarters mean? Well, if we can continue to produce those kinds of returns, excluding dividends, we would double our book value over the next four years. And at a constant price-to-book, this would also mean doubling our market cap. Of course, I'm hoping that this consistency of performance will be appropriately reflected in a higher earnings multiple.

The first quarter results also demonstrate continued momentum in our client franchise. This is shown by the very strong level of net new asset inflows of CHF18.6 billion in Private Banking, with very strong inflows from Swiss and emerging markets' clients in particular.

It's also demonstrated by the high quality, client-driven results in Investment Banking, where we achieved strong pre-tax return on economic capital of 37%; sustained market share gains across securities businesses; and a strong underwriting and advisory pipeline.

In Asset Management, we saw continued improvement in the operating results, and we also had encouraging net new asset flows of CHF11 billion.

At the end of the first quarter, we maintained our industry-leading capital strength with a Tier 1 ratio of 16.4% and a conservative liquidity position.

The fact that Credit Suisse is in such a strong position today reflects the decisive action we took to prepare for the challenges of the new environment. For example, we entered the credit and financial market dislocation with a strong liquidity position, which we've maintained and, in fact, strengthened through open market funding ever since; obviously, incurring significant additional costs as a result. But this has positioned us well to meet the new rules for quantitative and qualitative liquidity management announced yesterday by the Swiss regulator, FINMA, when they become effective at the end of the second quarter of 2010.

Our strong performance is a credit to the dedication of our people; their hard work will drive long-term value for our shareholders and clients. The continuity of our people in key positions, including in our control functions, has been extremely helpful throughout and since the crisis.

Attracting, retaining, and developing talented people remain a key area of focus for us, and we remain advantaged in that respect. So far this year, our retention rates are very high, and we continue to attract the best people to our platform.

Looking ahead, we are confident that we will further improve our profitability in Private Banking when markets and the demand for comprehensive solutions recover. We also expect to benefit significantly from a higher interest rate environment.

We are positioned to perform well in the changing regulatory environment in cross-border banking as we have been building a multi-shore business for many years with a robust compliance framework. We will continue to invest in strengthening and expanding our international presence.

We believe that we have a significant opportunity to extend our market share gains across our Investment Banking businesses as we build our distribution platform and expand our client base.

We believe that Asset Management will benefit further from the strategic measures we undertook last year, and will be a significant contributor of value to the Bank and to our clients in 2010 and beyond. We are focusing on core fee-generating businesses in which we believe we can excel; asset allocation, the Suisse businesses, and alternative investment strategies.

Market conditions so far this quarter have remained similar to those in the first quarter, and we remain confident that our business model will enable us to continue to generate high quality results in good, as well as in more challenging, market conditions. We are acting from a position of strength, and can focus on the execution of our clear defined strategy and on serving our clients.

Having carefully laid the foundations by building a robust franchise, we have an exceptional opportunity ahead of us to press our advantage home. We will redouble our efforts to drive our market share higher and set a benchmark for our industry in providing exceptional advice and service to our clients.

Now, I'll hand it over to Renato, who'll take you through the results in more detail.

Thank you, Brady, and good morning. I will start my presentation on slide five with an overview of the first quarter financial highlights.

The first quarter 2010 performance continues to demonstrate that our strategy is working well and that our business model provides sustainable, high quality and less volatile earnings. We achieved revenues of CHF9 billion and a net income of CHF2.1 billion.

Diluted earnings per share stood at CHF1.63 for the quarter. The cost-to-income ratio improved slightly to 69% (sic - see presentation), compared to the first quarter of 2009. The after-tax return on equity stood at 22% for the quarter. Total net new asset inflows of CHF26 billion showed a strong improvement compared to each of the four quarters of last year.

Looking at the bottom of the slide, you will see the underlying results. Overall, net revenues were at CHF8.9 billion, the same level as the first quarter of 2009, but with an improved pre-tax income result of CHF2.8 billion. The underlying return on equity stood also at 22%. We have consistently achieved an industry-leading return on equity over the last 15 months, achieved while running a low risk profile compared to our peer group.

Let me turn to slide six for an overview of our divisional results. This shows our first quarter 2010 divisional results side-by-side against the fourth and first quarter of last year. With a pre-tax income of CHF892 million, Private Banking reported an improvement on the fourth quarter of 2009, and a similar result to the first quarter of last year when adjusting for captive insurance settlements. We experienced high levels of assets under management, reflecting better markets in general than a year ago. And the pre-tax margin showed some improvement from the first quarter of 2009.

Investment Banking results represent another strong quarterly performance with pre-tax income of CHF1.9 billion. There is continued strong momentum in the client franchise, resulting in a consistent high return on capital and reduced volatility.

Asset Management continued to make progress on delivering a more focused business model. Pre-tax income was CHF166 million.

Let me continue by looking at the divisions in more detail on slide seven. Despite continuing challenges in the market environment and an evolving industry landscape, Private Banking reported a solid first quarter result. We continue to demonstrate our clients' trust in the value of Credit Suisse's industry-leading, multi-shore business model with very strong net new asset inflows of CHF19 billion.

Client satisfaction remained at a high level as we continued to further improve our market share in the high net worth and ultra-high net worth client segments. Although investor sentiment has improved from a year ago, clients remain cautious with regard to more sophisticated investment products. And as a result, client activity remained subdued for most of the quarter.

The Swiss franchise continues to perform well, and we continue to invest in our multi-shore platform.

Let me continue with further detail of our Private Banking results, starting with our Wealth Management business, on slide eight. Pre-tax income for Wealth Management clients was CHF677 million; an underlying increase of 8% over the first quarter of 2009. Net new asset inflows were strong at CHF13 billion; above the medium targeted annual growth rate of 6%.

There was also a small pre-tax income margin improvement. This was achieved despite unusually high quarterly provisions for credit losses at CHF32 million, mainly related to an isolated case and not reflective of the credit quality in the portfolio, which remains very high.

We continued hiring, adding a net 30 Relationship Managers. Gross hires were 100, reflecting the continued talent upgrade taking place within the business. We are continuing to target our hiring on Senior Relationship Managers, with a focus on also high-net-worth clients as we upgrade our talent pool, benefitting from our strong competitive position.

In summary, the solid operating result is being affected by the operating environment. However, assets are up again this quarter, supported by continued strong inflows and improving markets. And we are still seeing good opportunities to hire Senior Relationship Managers as we take advantage of our competitive position.

Let me turn to net revenues and gross margin on slide nine. On this slide, we show the key trends in net revenues on the left-hand side of the slide, with the analysis of the gross revenue margin movement on the right-hand side. We have split out the recurring revenues between net interest income and commissions and fees to help explain the trend.

Looking first at the year-on-year revenue comparisons, transaction-based revenues and recurring commissions and fees have both increased by 8%. Client activity improved from the deep depressed levels we experienced in the first quarter of 2009, resulting in higher brokerage income and product issuance fees.

Higher assets under management levels resulted in increased management and other asset-based fees. However, the percentage increase in recurring commissions and fees lacked the growth in assets under management as client-cautious behavior resulted in lower demand for more complex financial products.

Net interest income decreased 2% due to the low interest environment.

Moving to the gross margin, you can see that the dilution from 134 basis points to 121 basis points has resulted from the gap between the 4% overall improvement in net revenue, compared to a 15% increase in average assets under management year-over-year.

In summary, the overall year-on-year gross margin decline was mainly due to a strong increase in assets under management, compared to relatively stable net interest income levels, driving 8 basis points of the 13 basis points reduction. Cautious client behavior accounted for the remaining 5 basis point fall.

Turning to slide 10, it shows you a three-year history of the net revenue and gross margin trend. It shows you a clearer picture of how net revenues are being affected by the current operating environment.

Looking ahead, higher assets under management levels will be a major driver of increased operating leverage for each of the three revenue categories set out on the slide. In addition, Wealth Management revenues will also improve with increased client activity and higher integrated solutions revenues, increasing transactional-based revenues.

A higher mix of management investment products and performance fees will deliver improved recurring commissions and fees and an increase in the overall interest rate environment, will result in higher recurring net interest income.

On the next slide, number 11, you will see our net new asset performance. Total net new asset inflows of CHF12.9 billion represent an annualized growth of 6.4%, an outperformance in a challenging market resulting in continued market share gains. The balanced regional contribution demonstrates the strength of our platform and the trust our clients have in Credit Suisse.

Inflows were particularly strong in Switzerland and in the emerging markets. In EMEA, the contribution was solid, despite outflows in our western European cross-border business. We expect this trend to continue over the next few quarters but, given our business model, we are confident that we can continue to generate positive quarterly net new assets in EMEA.

Since the beginning of 2007, we have achieved total net inflows of CHF145 billion. This averages CHF11 billion per quarter with consistently positive inflows every quarter. We remain confident that our industry leading business model will enable us to achieve our 2012 net new asset growth target.

I will now continue with our Corporate & Institutional Client business on slide 12. Compared to the fourth quarter of 2009, pre-tax income increased by 30% to CHF215 million as a result of lower operating expenses and a net release of credit risk provisions. The positive delta in fair value changes on loan hedges offset the impact of the low interest rate environment.

Pre-tax income decreased by 20% compared to the first quarter of 2009. Net interest income fell 15%, also affected by the low interest rate environment.

Net new asset inflows were very strong at CHF6 billion, reflecting continued client confidence in our business. Loan volumes have remained stable as we continue to be committed to supporting Swiss corporate customers.

With that, let me turn to Investment Banking on slide 13. Investment Banking continued to produce consistently strong results and we continue executing our client-focused capital efficient strategy.

Our revenues returned to levels closer to the first three quarters of last year. At the same time, our overall risk capital usage remained relatively stable with a small overall increase as we continued to increase capital allocated to our client businesses. The quality of earnings continues to be strong, with an overall return on economic capital of 37%, slightly above the 34% return achieved for the full year 2009.

While our performance for 2010 will continue to be influenced by market conditions, we believe that we continue to be well-positioned to maintain or even improve upon these results for a number of reasons.

First, we believe that in our equity businesses, we are yet to realize the full benefit of the market share improvements we have achieved over the last several quarters as market conditions in many of our equity businesses remain subdued.

Second, the execution of our underwriting pipeline in the first quarter of 2010 was adversely impacted by macroeconomic disruptions. However, going into the second quarter of 2010, both our underwriting and advisory pipelines continue to be strong with good momentum.

And third, we have made, and continue to make, considerable investments in our Fixed Income flow businesses including a significant expansion in our flow sales force and significant progress in our emerging markets' initiatives.

Slide 14 shows you a more detailed analysis of the quarterly results trend. Investment Banking continues to produce strong results in both revenue and pre-tax income terms; but, more importantly, is the consistency of the return on economic capital.

Our net revenues of CHF5.3 billion are in line with 2009 levels. Our pre-tax income margin continues to be healthy at 35%, reflecting both strong revenues and continued expense discipline. Our pre-tax return on economic capital is higher than the average for 2009 and our risk-weighted assets and VaR increased slightly from the end of 2009 levels as we grew our client businesses.

Let me move to Fixed Income sales and trading and underwriting on slide 15. Results in our Fixed Income franchise continue to demonstrate the strength and diversity of our businesses.

Results in global rates and foreign exchange were solid; although year-on-year they did reflect the slowdown in market conditions, which we anticipated last year. However, this slowdown was offset by a strong performance in high yield, investment grade, RMBS and emerging markets. This business has benefited from a move away from government debt towards corporate debt client flows, as clients increasingly begin to seek yield.

Our overall Fixed Income trading and underwriting revenues were 18% lower than the first quarter of 2009, but more in line with the levels we saw in the second and third quarters of last year. However, in US dollars, we are just down 10% versus the first quarter of last year as you can see in the box below the chart.

First quarter 2009 revenues include market rebound revenues of CHF1.1 billion and exit losses of CHF1.6 billion.

Our outlook for the rest of the year is optimistic as we continue to invest in our high return flow businesses. As of mid April, we have completed the majority of our planned flow sales hires in our key businesses. We expect these hires to benefit the business in fairly short order.

Turning to our Equities businesses on slide 16. Again, we produced good results for the quarter with solid revenues in all our key businesses, cash equities, prime services and equity derivatives. And the significant market share gains over the past two years have continued into the first quarter across all major markets.

The results are actually stronger than the first quarter of last year if you adjust for the CHF200 million market rebound revenues and the CHF400 million gain from trading strategies that were repositioned and have subsequently been exited. However, we believe there is still considerable upside yet to be realized, as market conditions remain relatively subdued, particularly hedge fund activity and leverage.

Similar to Fixed Income, revenues for the quarter were stable compared to a very strong first quarter a year ago, adjusting for rebound revenues and for foreign exchange translation impact.

Our [Investment Banking] (sic - see presentation) results set out on slide 17 were heavily influenced by industry-wide issuance volumes and M&A activity. Net underwriting revenues were resilient reflecting stronger issuance activity, while equity underwriting experienced the disruption in issuance midway through the quarter due to macroeconomic concerns.

While our future performance will be influenced by market conditions, the pipeline entering the second quarter is strong and we believe that we can continue to benefit as our market share momentum from the first quarter carries into the rest of 2010 and more favorable markets allow us to monetize market share.

We were ranked number three globally and number one in the Americas for announced M&A. And finally, we maintained our top five position in both DCM and ECM rankings, while we consolidated on our leading emerging market position with the number one share of wallet position in the combined emerging market economy.

Turning to slide 18, this shows a long-term view of our market share progression across many of our major key businesses. In most of these businesses, we have made significant strides in both market share and rankings over the past few years.

In Equities, we have leadership positions in many businesses, including cash equities and prime services and we plan to improve further upon these market shares. In Fixed Income, we have significant momentum across products, but still have a way to go in certain areas, specifically rates and foreign exchange. And in Underwriting and Advisory, we are looking to reestablish leadership in products where we have been historically strong, such as high yield and IPOs.

Of course, all these businesses, there are still a number of areas where we have significant upside potential by extending our market share gains and I will address this on slide 19 and 20.

Slide 19 shows the relative revenue contributions from our major businesses in the Investment Bank. You should be familiar with this format and we find it useful to explain current and future trends. Until now, we have used this chart to set out an outlook for each of our major businesses. We are now going one step further by showing how our performance is evolving using dark blue bubbles to represent relative revenue contributions for the first quarter of 2010 and grey bubbles to represent the 2009 quarterly average relative revenue contribution.

The development in revenues has been consistent with the trends we have communicated. Over time, some revenue contributions trended down as market conditions normalized. Revenues contributions from other businesses are increasing as our market share and/or the business environment improve.

A couple of noteworthy exceptions would be RMBS, where there has been continued strength in market activity. In ECM the strong pipeline at the end of the fourth quarter has not materialized yet given macro concerns that have delayed the completion of transactions. Finally, the improvement in market environment within cash equities and prime services has not improved as much as we expected.

Slide 20 looks forward to how we see the market share and environment developing. Our view is that prospects of revenue sustainability remain strong as we continue to build our market share momentum from 2009 into 2010.

We believe that we have a significant opportunity to gain further market share as we increase sales headcount in rates, emerging markets, credit and foreign exchange and continue to invest in our Equities businesses. We expect a partial revenue offset from a normalizing market environment in RMBS and investment grade credit.

Let me turn to expenses on slide 21. The top chart shows our compensation expense development. Our compensation accrual, as we have noted frequently in the past, is based on an economic profit model. The compensation revenue ratio is 44% down from 48% versus the same quarter last year.

In our financial release, I would point you to disclosure that indicates the UK levy on variable compensation was ratified this month and will result in additional compensation expenses of approximately CFH400 million. This will be booked in operating expenses in the second quarter within the corporate center.

Below you can see that non-compensation expenses were stable compared to the fourth quarter of 2009, although they have increased from the first quarter, primarily due to increased IT spend on infrastructure in our client and flow-based businesses partly offset by the US dollar, Swiss franc exchange difference.

Slide 22 sets out risk and capital usage trends in the Investment Bank. We have moved to an updated VaR model, which continues to use a three-year dataset, but scales it up or down based on short-term market volatility.

This methodology is a more appropriate way to capture our risk. We have included the old methodology calculation in our quarterly report. Using this new methodology VaR increases by 6% in the quarter, reflecting increased Fixed Income client activity.

If we had moved to a one-year dataset, which is used by some competitors, our first quarter 2010 VaR would have shown an estimated 27% reduction in the quarter due to a roll-off of more volatile periods from a year ago; namely the fourth quarter 2008 and the first quarter 2009.

The chart on the bottom shows the risk-weighted asset levels in the Investment Bank. They grew slightly in the first quarter as we increased capital usage in our client and flow-base businesses.

Our continued focused and discipline on allocating capital to high returning flow businesses enabled us to maintain an industry leading pretax return on capital of 37% in Investment Banking for the first quarter.

This concludes my review of the Investment Banking results and I will now continue with Asset Management on slide 23.

We continue to implement our Asset Management strategy focusing on alternative investment strategies, asset allocation products and solutions, and our Swiss platform. This is starting to translate into good net new asset generation. We had very strong inflows of CHF11 billion this quarter, which, together with positive market movements, resulted in an CHF18 billion or 4% increase in assets under management. We continue to transform the business towards a more fee-based business model and this progress is reflected in our results.

Let me turn to slide 24. Results show improved revenues based on the fee generative aspect of the business model compared to the first quarter of 2009 and include positive trends from investment gains across most of our investment strategies.

We continue to maintain cost discipline with a reduction in general and administration expenses, down 6% and 3% on the first and fourth quarter of 2009 respectively, and our investment performance continues to show a consistent improvement.

Let me turn to slide 25. Asset Management fees are developing positive momentum. They showed a good improvement of 9% on the first quarter of last year and were stable compared to the fourth quarter. The strong net new asset inflows should positively impact fees going forward.

The majority of performance fees are recognized on a half-year basis and you can see the strong fourth quarter 2009 performance driven by hedge fund results. Placement and transaction fees have been generally consistent with the previous quarters. The fee-based margin on average assets under management continues to remain strong.

But let's now look at net new asset inflows in more detail on slide 26 to consider strong inflows this quarter broken out between alternative and traditional investments.

The alternative investments business, which comprises our leading private equity and real estate business, our single and multi-manager hedge fund strategies and our ECF and index products continued to see good asset inflows of CHF4.3 billion in the quarter. In traditional investments, we saw inflows of CHF6.9 billion, driven by CHF4.4 billion inflows from MACS. Annualized net new asset growth in the quarter was 10.8%.

In summary, we continued to make progress in refocusing the business on its core strength and better aligning it with the integrated bank. We saw encouraging asset inflows into multi-asset class solutions and alternative investments, building on the positive trends we saw in the second half of last year.

The profitability of the business continues to improve with stable fee-based margins, a stabilized private equity portfolio and the disposal of our money market lift-out portfolio all but completed.

This concludes the divisional results review and I will now continue with the Group's capital and funding position on slide 27.

We continue to hold our position as one of the best capitalized banks globally with a slight increase in the Basel II Tier 1 ratio to 16.4%. Our core Tier 1 ratio, which includes hybrid capital, also improved slightly to 11.3%. Around CHF2 billion of the CHF7 billion risk-weighted assets increase resulted from foreign exchange translation differences.

We continue to see opportunities to invest capital to fund organic growth in the business and potentially through tactical acquisitions.

We have maintained a consistent dividend accrual policy as last year. This accrual is fully reflected in our March quarter-end 2010 Basel II capital ratio.

We have also maintained a strong balance sheet structure and liquidity this quarter as you can see on slide 28. Over 40% of our balance sheet is match funded and requires no unsecured funding. The match funded part of the balance sheet, totaling CHF461 billion, consists of assets and liabilities with close to equal liquidity and durations.

Moving down the columns and outside the matched funding, CHF173 billion of our assets are unencumbered liquid assets and, together with CHF47 billion of cash, are available to settle CHF113 billion of short-term debt and other liabilities. Loans, which comprise the larger component of the illiquid assets are funded by our core deposits and have an excess buffer of 21%.

The remainder of the balance sheet, namely other illiquid assets, is funded by long-term debt and equity. Stable and low cost deposit base remains a key funding advantage.

The regulatory leverage ratio was maintained at 4.2%.

Finally, the percentage of our balance sheet financed by long-term debt is 17% compared to 12% at the end of 2007 (sic - see presentation) as we continued to lengthen our overall long-term debt profile, which now stands at 6.5 years.

This concludes my presentation and with that, I will hand back to Brady.

Good. Thanks very much Renato. I think with that, we would like to open it up for questions over the phone. So happy to take your questions now.

(Operator Instructions). Derek de Vries of Bank of America.

Sure. I've got a couple of questions. Just wondering on the trading revenues, I'm hoping you can help me reconcile slide 19 where you've updated your Q1 relative to last year. And if I look at all those little bubbles, it looks like your market share in each business line, relative to last year is flat or, frankly, up across all those different divisions. But then when I compare that with the reported Q1 trading revenues, you haven't shown nearly the positive momentum as peers versus 2009 average run-rate.

So I'm just wondering how I reconcile the bubbles, which look like a growing market share to the reported revenues, which looks like, frankly, others had a better Q1 than you did?

And then as long as we're reconciling trading revenues, I take on board all your qualitative comments about which parts of your Fixed Income business were strong and which were less strong I guess. But then when I reconcile that with page 83 of the document you published, it's almost like backwards to what you're telling us qualitatively. On page 83, it looks like your rates business is fantastic and your credit business is horrible, so I'm wondering how I reconcile that?

And then one last question just on regulatory, I was wondering if you could give us an update? I think Renato in the past has said moving to the Basel III rules would hit your Tier 1 ratio by -- I think 10% was the number I have in the mind, and we could adjust that into risk-weighted assets. We're obviously a little bit further in the quantitative impact study process, I think that's due at the end of this month. So I was wondering if you could just give an update if you're still comfortable with that number or if there's a need to change that number?

Okay Derek. Thanks very much, appreciate the questions. Well, we probably should start out with just an overall answer to your first question, which is remember we continue to reiterate our strategy which is client-focused capital efficient and, again, continue to emphasize the strength of the returns in the business.

Over a 22% return on equity, over 21% operating return on equity over the last five quarters; it's been a very consistent, very high returning business model and it's one that is though -- however, it is done on a very capital efficient basis. So if you look at our RWA and compare it to a lot of other players out there, we are running less risk. We just are and so just to make it clear; it's a client-focused business, it's not a capital heavy business. As a result, the returns are very high, but the focus is on the client businesses and so, I think it's something that's very important to focus on.

Having said that, I think your observation is exactly right on the first quarter. We actually had strong -- we actually had stable to stronger market shares across almost all of our businesses and so we're actually very happy about that; we're seeing very strong performance there.

As we've mentioned, we think there are parts of the portfolio that are still -- we're not receiving the full benefit of the market share gains that we've had, because they continue to lag in terms of market activity. So, prime brokerage, cash equities, etc. But overall, we're very happy with the progression in terms of market shares.

And so, when we look at the actual results versus our first quarter last year, for instance, obviously one of the things is, we had a strong first quarter last year. A lot of our competitors, I think, when they're looking at sequential comparisons, etc., a year ago comparisons, are not comparing quite a strong -- in some cases, not quite as strong a performance.

But we actually think that, given the client-focused element of it, this is actually a very solid, very strong result. So, when you compare -- when you look at -- you take out the puts and takes in the first quarter of last year, and as you know, we actually provided a lot of visibility on issues, what we call rebound revenues, as well as some of the write-downs that we had, we think the equity numbers are, actually, very comparative. And on the fixed income side, it's pretty close.

And so, at the end of the day, we think it actually rolls up pretty well. I think versus the bubble [gram], which, as you pointed out, in terms of looking at our slide -- it was slide 19 and 20, which is the bubble charts that we put. I think, clearly, from our point of view, the businesses that we are stronger in and bigger in are the RMBS business, the credit portions of the business, which are actually very -- where we are leaders and are very important parts of our business. And those are, by the way, parts of the business that we think are actually moving in a very positive direction in terms of overall environment.

Obviously, some of the banks are bigger than us on the rate side. And so, I think, clearly, that's been an area where we're continuing to grow. You can see that from our bubble chart. But that's an area where we look to grow over time.

Clearly, also, there is a commodity gap versus some of the peers. And so, we still have a very small commodities business. That's something that does remain an issue. But also, in terms of the -- on the equity side, I think that we believe it actually stacks up pretty well in performance versus the first quarter last year.

But I think the most important thing that we would note is just that you really have to segregate. The strategy that we have is one that is focused on client flow; it's a very high returning model of the business; but it's not going to have as big an asset drag on it either. When markets are buoyant, others have more assets on the books. We're a much -- we run a much lighter business model.

The second question you asked was on this page 83. I think, to be honest, those classifications are not really very useful or very relevant. So, frankly, those -- for instance, a lot of the RMBS revenues, they're actually in the rates line. So, it's an artificial accounting-based presentation of those numbers. So, frankly, it doesn't -- actually, it's not a good indicator of the different business lines. So, apologize for that, but you can't really -- you can't refer from one to the other in that respect.

And then, Renato, do you want to answer the --?

Yes. On the [tax rate], I believe you mean the Basel II changes that are up to be implemented shortly, which means actually first quarter 2011. For those, and that's still under the old rules. So, basically, it's a market risk component that has been adjusted -- will be adjusted. We have given the guidance of 200 basis points. And that, I still hold that out. We'll have to see how it materializes over time.

But this piece on Basel III, the whole proposal that is on the table right now is, of course, far too little concrete when it comes to assessing what the impact could be going forward. And we will, of course, observe that very closely, and whatever conclusion we can draw from that, we will communicate accordingly. But I can reconfirm the 200 basis points estimate.

Okay. Just to clarify on the 200 basis points. That's market risk but also securitization and just -- that's January 1 of 2011, that 200 bps is still the number, right?

Precisely. Everything that has nothing to do with Basel III, which is (multiple speakers).

Brilliant, fine. Yes, you're right, thanks.

Okay. Next question?

Kinner Lakhani from Citigroup.

Yes, hi. Good morning. Wanted to focus a little bit more on the prime brokerage business, which looks like an opportunity; what do you see are the trends over the recent quarters, both in terms of client balances on one hand, and spreads on the other? Just trying to get a better feel for how the underlying metrics are trending.

Second, I just wanted to look at the long term debt that you're showing on your funding chart, actually. It seems to have grown from CHF159 billion to CHF185 billion over the past quarter, actually. So, just to try and understand that.

And the third question on capital, and particularly hybrid, and what your thinking is in terms of using some of these hybrids and perhaps converting them into contingent convertibles or contingent capital?

Good. Okay. Thanks very much. I think on prime brokerage side, we continue to believe that we have very strong market share there. We've had significant client adds this quarter. We continue to have positive momentum in terms of our market share there. So, we still have a very strong franchise and a lot of positive momentum.

And, in fact, we continue, however, to be pretty selective about the business and making sure we have a high quality portfolio of clients. I think even we continue to turn down more than half of the requests that come into prime broker for people. So, we have a very high quality but with strong momentum in the business. So, overall, the trends on our side are actually very positive around market share.

I would say, generally, leverage remains relatively low. It's one of the things that we've talked about as just activity out of the hedge fund community, and also leverage has remained pretty subdued. We still believe that there's scope for that to improve, get better over time; which will, obviously, improve the contribution to the business. And I'd say, in general, spreads have been stable over the quarter.

So, overall, it's still a business where we've got great market share and great momentum. But we think that we haven't really fully been able to monetize the benefit of that market share yet, because the market's just not quite there.

On the capital and hybrid, the third part of your question, I'll answer that and then we'll get back to the long-term debt question. On the capital and the hybrid side, obviously, we have a 16.4% Tier 1 ratio, which is quite high. If you just look at core capital, it's still a very -- it's 11.5%, or something in that range. So, we're extremely well capitalized.

Some portion of that total capital Tier 1 ratio, though, is made up with some hybrid securities, as you know. Obviously, the regulators around the world, and in conjunction with BIS, are still deciding where they come out in terms of contingent convertibles, and what the structure of those might be.

I continue to be hopeful that, in fact, there will be a form of contingent capital that will be eligible for Tier 1 qualification. And if that's the case, I think there will be a good market for that. And, obviously, there have been some issues already that have been done.

So, our view is that there's probably -- there probably will ultimately be a structure that works for the regulators, and once that's the case, there will be a market there. And so, probably a lot of the current hybrid type capital would be converted or called, and new issuance done on the contingent convertible structure. So, we continue to feel like that's a pretty likely outcome.

And then, with regard to your long-term debt question, do you want to address that, Renato?

Yes, sure. Thanks for the question. You're right, long term debt went up, out of which the delta is consisting of some CHF7 billion plus on new debt issuances we had in the first quarter. As you know, we try to expand the terming of our debt, and we have been successful in that.

And the remainder, the delta is due to the new FAS 167 rules, which led us to consolidate more entities into our balance sheet. I think it's properly described also in the quarterly report. So, that you can say that approximately CHF20 billion came in through that additional consolidation; about CHF7 billion was increased funding in the first quarter.

Brilliant. Thanks.

Okay. Next question?

Fiona Swaffield of Execution Noble.

Hi. My questions were on WMC. Firstly, on the transaction margin, could you spend some time on what your views on to what extent this could be a permanent, in that your clients are just going to trade less, because of the change in your business model towards more recurring fees? And whether you think this is just a market phenomenon or what the balance could be?

And then secondly, on the issue of operating leverage. Obviously, the clients are taking longer to recover or re-risk. What does that mean for the costs? Does that mean you're reining back your investment, because obviously the costs are growing faster than the revenues?

And then, the last issue is on the dollar. You're quite specific about currency in the Investment Bank, but I would have thought it might be quite important as well, Q/Q1 in the P&L of the WMC. I don't know if you could comment on that? Thanks.

Okay. Thanks a lot, Fiona. I guess, with regard to the transaction margin, obviously, it does include transactions like brokerage. But it also includes some of our integrated solutions revenues; so, some of the revenues that we get from, actually, leveraging the whole of the product range across the Bank.

I would say, in general, we do believe that those revenues, both the transaction side, so the brokerage side as well as the integrated solutions revenues, will -- we believe they will recover. And so, our margins are -- it's not a permanent substitution away from that category into others. But it really is, I think, a reflection of the activity and the approach that clients are taking. We still believe that, in fact, there will be a recovery in that area.

The operating leverage issue is an important one. We have continued, obviously, to have extremely strong market share growth, in terms of our net new assets and how we continue to see the momentum in the business. So, we, obviously, are very optimistic about that.

I think that we, clearly, are impacted by, first of all, the overall activity of our customers in the market. But also, one of the things that we pointed out here was the net interest margin impact on the business. It's actually quite ironic, because we have a number of people in the media and elsewhere, who continue to write about the fact that we are somehow benefiting from low interest rates. In fact, it's quite the obvious. We're a very large provider of liquidity and the lower interest rates go, actually, the more difficult it makes the business overall.

So, that -- the other -- we believe that we will see -- over time it's probably going to be hard to see much lower interest rates than this. And so, over some period of time, we will see interest rates move back up. And that, clearly, is going to contribute, over time, to also an improvement in the revenue picture, and ultimately to the operating leverage side of things. So, we do feel we're at a low point in the business right now.

I would say, in general, we continue to believe that there's a lot of upside in this business. As you know, there's a lot of operating leverage. We have a very strong position in the business. And so, I think our point of view is to, clearly, continue to maintain the strength of our platform here and continue to drive that forward.

I think the impact in the currency, on the Wealth Management results, is relatively immaterial in the overall numbers; certainly, in the financial results. I think also in terms of AUM, it's a relatively small impact; probably less that CHF5 billion impact on the AUM side. But it's not as big an issue as in the IB.

Thanks.

Thanks, Fiona. Next question?

Huw Van Steenis of Morgan Stanley.

Good morning. Perhaps could I just go back to regulations, three questions? So, first, Brady, would you be able to share with us your views about the derivative legislation in the States, and any potential risks for your business?

Second, perhaps just an opportunity to talk about the CDO investigations in the States; I'm sure you haven't had a Wells Notice, but you may just want to have the opportunity to say that.

And thirdly, with the various documents coming out of FINMA, should we also expect a 16% core Tier 1 for CS as well? Or if not, what sort of guidance would you think about, given the many different strands coming through? Thanks.

Thanks, Huw. Yes, with regard to the legislation in the US and, obviously, the derivates aspect of that. It's actually, as you know -- and it's really difficult to estimate right now. A) Is they're going to be reform? What kind of reform is it going to be? How is it going to impact the industry? So, frankly, it's pretty -- we're not shy to give estimates of how things might be impacted. But it's really -- as you know, it's a pretty fluid situation right now.

The one thing we do think is that, given our strategy, our business will probably be a lot less impacted than many other businesses. We focus much more on the flow parts of the derivatives business; we are -- we largely exited the more structured, longer and exotic type stuff, which makes up a) a lot of the business; and b) a lot of the impacted business by the legislation.

So, in general, we think that we have a much lower risk to our business as a result. But again, it's a little hard to speculate, because the bill is just so -- it's so preliminary right now; we just don't have, I think, a good view of it.

Secondly, with regard to the CDO issues. Yes, we haven't had much activity in that area. If you look at the league tables and things, over the past three, four, five years, we really have not had much of a presence there. And we don't think we have any issues there. And yes, as you say, we don't have any Wells -- any SEC Wells requests outstanding.

The last issue you mentioned was just the FINMA issues. And, as you say, we had the liquidity issue last night, which was announced by FINMA last night. I think what we have tried to lay out for you is the fact that, clearly, we've been pretty active about pushing out our liability profile and really trying to drive a pretty conservative overall profile.

Renato picked some of the highlights of that for you. We've gone from 4.5 years to 6.5 years average weighted maturity over the past three years. We've gone from 12% to 17% of long-term debt funding in the portfolio. And I think if you look at our chart, which -- our second to last or last chart, which shows the balance sheet, it's a very conservatively funded balance sheet. So, from that point of view, we believe we're in a pretty good shape as against the FINMA liquidity issues.

The question of capital and a number of the other things, again, I think it's still -- we feel like we're extremely well capitalized. We've got a business that is relatively low risk. We have a very capital generative model overall. So, I think our view is that we feel like we're pretty well positioned against any of that.

It's still -- I think, trying to make a point estimate so as to where things are going to settle out in two or three years, when the BIS gets done and when all the other regulatory authorities get done, I think it's pretty difficult to do. But we're pretty confident about the strength of our capital and that we'll fare well on that.

Thanks.

Thanks, Huw. Next question?

Philipp Zieschang of UBS.

Good morning. I have a couple of questions, please. The first one is, basically, on the net margin or the pre-tax margin in your Wealth Management business. You're now at 27.5% or so. You had the ambition to go up to 40%. I understand the cyclical aspects you've mentioned, in terms of clients' willingness to re-risk, etc. But when do you start to look at the business in terms of costs, or whether there's a structural issue in terms of the returns?

The second point is also on Wealth Management. What I'd just like to know, you've mentioned that you suffered from the lower rates, but if I look at your annualized net interest income versus 2007, for instance, and also your balance sheet footings in Wealth Management clients and in terms of loans and deposits, your margin hasn't actually deteriorated in terms of interest income since 2007. So I was wondering; what is your upside gearing into rising rates, given that your margin hasn't declined?

And the third one is a strategic one. I've heard your comments about the multiple, in terms of that the market's probably underestimating your capital generation and your future book value growth, which isn't appropriately reflected in the multiples.

I was just wondering, given that the Investment Bank probably used to earn 30% more than Wealth Management, three years ago or so, but now it's, basically, earning more than twice the run rate of Wealth Management. Do you think that earnings mix is going towards Investment Bank? Is that something which you are worried about in terms of that you need to do more on the non-Investment Banking side in terms of stabilizing the earnings mix to protect the multiple? Thank you.

Philipp, thanks very much. I appreciate the good questions. On the Wealth Management pre-tax margin, as I said, it really is a question -- part of it's actually a call on where we think the business is going. And as I say, very strong net new asset growth continues, I think, to position us well. And the call is really, do we think that a) activity will increase from here; and b: will we be in a higher interest rate environment at some point over the next year or two? I think, if you believed either of those then, obviously, maintaining the presence there is going to pay off quite handsomely, hopefully, over time.

And so, we have been -- we've continued to be pretty, I think, disciplined on the cost side. As you recall, we cut costs in the first half of last year. We've continued to be pretty disciplined. We're hiring -- we hired net 30 RMs in the first quarter. I think that's a good pace, but it's obviously -- some of that, we did 100 -- there was 100 of gross hiring, 30 of net hiring; which means we're continuing to upgrade and to really improve the quality of our people as well.

So, we're certainly taking I'd say a moderate approach to it, but I do think that we still believe that this is going to be a very attractive business. And so, as you mentioned, we do still think that, over the near term, we're going to be able to get to some much higher pretax margins, closer to the 40%, given the operating leverage that we think that we have.

But again, that depends, obviously, on issues around the interest rate environment. It also depends about issues around how our client base reacts. But we continue to believe that, that's the right place to be and that's the right decision to make with regard to the business.

With regard to the lower rates issue, in many respects you're right. If you look at how the net interest margin has developed, it's been pretty stable, as you say. The issue is, obviously, assets under management have gone up a lot. And so, as a proportion of the gross margin, if you look at just as an explanation of the gross margin on assets under management, that's an explanation for it; which is, we've had basically flat net interest margin and we've had assets under management go up 15% in the last year.

And so, in some respects you're right; it's not that net interest margin has fallen necessarily, it's just that it's been stable while -- but as a proportion of our assets overall it's obviously fallen. And I think, again, that's sort of a -- if you think about it, that's a bit of a reflection, I think, on how our clients are behaving. They're not using a lot of leverage; they're not -- so they're not actually borrowing money; the proportion they're borrowing versus their assets overall has gone down. Again, I think that in and of itself is actually something that, again, I think probably normalizes over time.

But secondly as well, if you do have a rising interest rate environment, you will increase the net interest margin, which will benefit the overall results of the business. And so, I think, while you're right to say, I think that it's not so much that we suffered by having lower net interest margin, but it's a lower proportion versus assets under management. And it's not what it could be if we see an interest rate -- a growing interest rate -- or increasing interest rates over time.

Your question on the capital, and the question about book value growth and our returns, etc., I think it's a good question. I think there is absolutely no question but that we -- are objective is, and we expect to have, higher proportions of our earnings coming from our Private Banking business and from our Asset Management business over time. And so, as you say, I think that in and of itself should have some pretty significant impacts on hopefully the overall valuation of what we're doing.

I think, clearly, we've talked a lot about the profit dynamics in the Private Bank and how we feel that that is a business that will improve over time; a question of how quickly and how much, but it will improve over time. Maybe it'll do that rapidly, maybe it'll take longer, we'll see. But we think there's certainly a lot of upside there.

But also, on the Asset Management side, CHF11 billion in net new assets in the first quarter, continued improvement, we think some tailwind hopefully in terms of some of the asset valuations there, I think all put us in a position -- we think the Asset Management business will be a bigger contributor over time too.

And then the other thing just to point out though and I think this is a very, very critical point; the quality of our earnings in the Investment Bank -- and it comes back to the answer to Derek's question earlier on, the quality of our earnings in the Investment Bank is different. It's a high quality, it's a client-focused, lower volatility earnings stream. And that's something that's very important to think about.

When you look at the balance of the business, that's a very fair question, we do expect to see more balance in the others. But remember, that Investment Banking earning stream, for exactly the questions that Derek asked, and exactly what our answer was, is a very high quality, lower volatility earnings stream, because it's focused on the client business.

So, I think that's something that's important for people to keep in mind, is it's not like there is the volatile Investment Banking revenues versus the very good Private Banking and Asset Management revenues. It is a very good Private Banking and Asset Management revenues, but our Investment Banking revenues are lower vol., lower risk, higher quality, so I think that has to be taken into account.

Okay, thanks a lot. Next question?

Kian Abouhossein from JPMorgan.

Yes, a few questions. Just coming back to, first of all, Wealth Management, you have a top line margin of 125 basis points to 135 basis points as a target; do you think we can still end up at the low end of that target, if I look at the average through the year?

Yes, Kian, thanks very much. Yes, obviously, when you start off the first quarter at 121 basis points it makes it more of a challenge. I think our view is we still believe that 125 basis points to 135 basis points is a reasonable range. But we're more likely -- unless we see more dramatic changes in the elements that we've talked about, we're more likely to be towards the bottom end of that range.

But it's still possible to achieve that? And is that top down related, i.e., interest rate change-related? Or what has to be bottom-up -- what can you do bottom-up to trigger improvement in the top line margin?

Well, as I say, I think it'll be challenging to get it into that bottom end of that range. But we do think that depending on the environment we'll see how that goes.

If you -- on slide 10 we've kind of laid out what we view as some of the drivers of that. We're very encouraged by in the first quarter the managed investment products performance. We've actually had a really strong recovery in managed investment products, and that's actually very helpful to the overall gross margin performance. So, that's important.

Interest rates, as we mentioned, are another driver. So, I think that's something that, as you say, is not necessarily under our control but which you all have a view on how you think that'll develop.

We do continue to think that the transaction-based side of it, with brokerage and product issuing activity, is one where we're clearly very active and we can certainly have an impact on that. And we've got a number of different initiatives there that we think will put us in a good -- leave us feeling optimistic about that we can make some impact there.

And then really, this integrated solutions revenue is a very important aspect of it. That's basically our integrated Bank offering. So, it's making sure that we're offering the Investment Banking products, etc., through the Private Banking client base. And that's been a very important contributor in the past.

And particularly when you have a high level of activity on the Investment Banking side, which, as we mentioned to you, very strong; the strongest pipelines that we've really had since pre-crisis in terms of equity issuance, IPOs, leverage finance, advisory stuff, a lot of that does lead to more follow-ons in terms of impact on the Private Banking side as well, because if we can do transactions there, there are things to do that obviously also follows through the Private Bank.

So, I think all of those are things we can influence, and all of those are things that make us feel positive about the direction we can take it. But it's clearly -- it's our challenge. We're going to need to work on that.

And if I come back to fixed income, the impression that I get, looking at some of the US peers who have now reported, and some of them clearly having had to restructure, they generate two times fixed income revenue that you generate in the first quarter, I get the impression the arrows that you show on slide 19/20 actually going down relative to market. So, really, when will we see you closing the gap?

And first of all, do you agree with that? And secondly, when do you close the gap in respect to some of the fixed income initiatives that you take? And when we will see that kind of revenue gap closing?

Well, I think what's important, and I guess the way we think about it, and I don't know if it's useful for you all to think about it this way or not, but the revenues at all the banks are made up of a couple of different components. One component is the actual transactional revenues that come from doing business with the clients. Another component is the positioning profit. And so, clearly, if you're carrying inventory and the markets rally over the quarter, you're going to make a lot of money on that.

I would suggest that if you actually -- and maybe it's hard to get the information on it, but if you actually pulled out the components of peoples' revenue streams, I think you'd find that a lot of those big increases in fixed income numbers from some of the competitors come from that fact that they had a lot of securities on their books and that has appreciated during the course of the quarter.

We actually do believe that our market shares -- and you can see, our market shares are actually increasing across a lot of these areas. So, it's not a gap in terms of our market share presence. Our market share presence is strong and increasing across most of the areas. It's really a question of what level of inventory that you're going to carry and what the impact of that inventory -- of price changes in the quarter are on that inventory. So, I think that's -- so I think we actually feel we do stack-up quite well.

Now, having said that, our focus on clients, we do have a lot of initiatives underway that will, we think, continue to improve our market shares from already high levels. So, we've had a very major hiring program on a fixed income side in sales; we are continuing to expand on the emerging market side where we've already talked about the fact that we have a number one share of wallet there, but we're very strong in emerging markets. And the commodity side continues to be a business where we have more work to do.

And so, I think all of those will actually continue to allow those, the bubbles on slide 20, to move in the right direction, which is up the page. But we do feel we've got a very strong collection of market shares and positions there already, but we do think there's more potential.

Okay, last question, just to -- on the comp ratio. I know it's a formula-based approach; assuming that revenues go down from historically always the best quarter that we see in historic terms, would then the comp ratio come down as well?

Well, it depends obviously on -- it will be the answer you expect, I guess; it depends on a number of different issues. As you say, certainly, the performance of the business is one issue. As you mentioned though, we are looking at it much more on the basis of a capital-based system.

And so, clearly, it's also a question about how much capital we're using and what areas we're using it. But also, there is some relevance of the overall industry, and so we obviously have to set our compensation in that context as well. So, overall, I think it will depend on how those things develop.

In general, we think that the 44% ratio, which as you say kind of falls out of all that, is -- there aren't any particular distortive elements in that. So, we'll have to see how performance and how the industry tracks going forward, but we think that's probably not an unreasonable level to be at.

Okay. And if I can add one more quickly. The CHF260 million assets under management per advisor that you're targeting, on what time frame should we assume that is achievable?

Well, obviously, part of that depends on market levels. And so, we've seen some recovery in markets and that will obviously have an impact on it. But we also do obviously continue to -- well, we continue to add advisors, but we also continue to grow our AUM per advisor in terms of net new asset production. And then you have -- lastly, you have the markets' element of that. So, it's a little hard to set a particular date on which we'd want to get there; it depends, obviously, on how the markets perform.

All right, thank you.

Thanks. Next question?

Georg Kanders of WestLB.

Hello. It's Georg from WestLB. I have a question; most of it is answered from -- on Kian. But you said that client activity in the Wealth Management and the Private Banking business was subdued for most of Q1 2010; is there higher activity in -- well, at the end of Q1?

I would say it wasn't -- there wasn't any particular prominent trend during the quarter, I'd say; so, nothing to note really.

Okay, thanks.

Thank you. Next question?

Jon Peace of Nomura.

Hi, good morning. Can I ask three quick questions, please? Firstly, on equity trading, could you make a quick comment about your regional mix? I understand from some of your US peers that maybe the Americas was a bit stronger than Europe, and I just wondered if that had impacted your comparative growth rate.

Second question is on Basel III. Where do you sit on the spectrum that on the one hand the Committee might come back towards the end of this year and say that their December proposals have been significantly delayed or diluted, which obviously the market would welcome? Versus, on the other hand, the Committee might come back and say, actually, we're not delaying or diluting the proposal at all, and it's up to individual countries to grandfather changes through if necessary, because obviously this has an impact on your, and the industry's, perception of excess capital?

And finally, also on regulation, can you just comment on the Swiss too big for sale discussion that's going on at the moment, and how regulators might force you to change your structure to allow for a break-up in a future crisis, and what the cost of that might be? Thanks very much.

Thanks, Jon. I think on the equity trading issues, we don't really see any significant regional trends in the first quarter so we wouldn't -- we didn't see stronger performance in the Americas versus Europe, for instance. So, I'd say we didn't see anything really significant in our business in the first quarter.

On the Basel III issue, it's a somewhat complicated issue. We obviously feel like we are better capitalized than -- we're quite well capitalized in the context of the industry. We feel like we're already, in the context of our regulators, operating under leverage constraints; pretty high capital requirements. You saw liquidity last night. So, we're already -- we think we're already a lot of the way there in terms of what needs to happen.

So, in some respects, obviously, we feel like probably it would level the competitive playing field if the rest of the world were more quickly to have to come to similar type levels, or closer to those levels. On the other hand, I think practically looking at it, we obviously wouldn't be surprised to see if there needed to be some -- or if there was a view that there needed to be some delay or some pushing out in some of the implementation time lines on some of these things.

But, again, from our point of view, we're already at a very high level of capitalization. We're already operating under liquidity guidelines that are similar to the BIS is laying out; the leverage ratios we already have, so I think in general we're pretty well positioned against it.

You want to add something to that, Renato?

Yes, just one remark. I think what is much more important than the timing, so to say, of the implementation is what is grandfathered? What kind of implementation time you have afterwards in order to get there. I think that is more crucial than if it's at the end this year or next year. In that respect, as Brady said, there is a -- I think we are well positioned.

I think the last issue you mentioned also on regulation was the too big for sale discussion. It obviously continues to be a discussion globally but also in Switzerland, and we're obviously constructively involved in this discussions. And we'll have to see how it comes out. There are some -- there are a number of potential approaches, etc.

I continue to believe that hopefully around the world we will end up with solutions here that help to make the system safer and sounder, but don't necessarily change the business structures that we have in place. So, that certainly continues to be my hope but, again, it's obviously -- there's still a lot of uncertainty in the process.

Okay, thank you very much.

Thanks. Next question?

(Operator Instructions). Rainer Skierka of Sarasin.

Good morning. Rainer Skierka from Bank Sarasin. I have a question on commercial real estate. We have heard about potential losses or even occurred losses at Morgan Stanley and possibly at Deutsche Bank. Can you elaborate a little bit on your position in commercial real estate and the fund sector, please?

Sure. Obviously, just -- not necessarily on the fund sector but in terms of our own portfolio, we've obviously reduced the exposure quite substantial in that area. We're down to some -- certainly among the global banks some very low numbers in terms of our exposures, and we view those assets as pretty stable. They're marked down quite substantially. They're marked at an average of [CHF0.45] on the dollar, etc. So, from that point of view, we feel comfortable from a balance sheet exposure point of view.

I think you're specifically talking about the fund exposure. We do have a reasonably sized real estate fund business here in Europe. It's pretty conservatively, I think, structured, invested. We don't see any issues around valuation, so it's not really -- it's they're much more a physical real estate investment approaches as opposed to more leveraged or securities-type approaches.

So, they're really more physical and in fact operating real estate investment properties. And frankly, that's actually performed quite stably and it's been fine. So, we don't see -- we don't foresee any of the issues that -- any of the same issues that you mentioned that have been seen in other places.

Thank you. And a follow-up question on the German data theft; any update from your side, as mentioned in the quarterly report?

Well, obviously, it continues to be a situation that we monitor pretty closely. We don't have any additional specific concrete information on it, although there are data points that indicate that we may be one of the banks that may have had some of our data compromised. So, that's really all that we can say at this point.

Okay, thanks Brady.

Thank you. Next question?

Jacques-Henri Gaulard of Autonomous Research.

Yes, good morning. I have a bit of off-track question. I was wondering, Brady, if the communication of the Bank at top management level has not been a bit too aggressive over the last three/four quarters, because since Q1 last year, you've been very, very bullish and you're creating, unwillingly, a bit of a bubble around the results, which means that it's very difficult for you not to disappoint?

Should you change that a bit maybe by effectively calling for all the operating leverage, the Private Bank recovery, all the potential monetization, if you want, of your positioning when and as it happens, rather than probably having people being disappointed and say, well, it's not really happening in the Private Banking yet; maybe next quarter? Thanks.

Jacques, thank for your question. I don't know; I think all we try to do is to be as transparent as possible and to give you our -- all the information and views that we have. So, I think we try to be pretty careful about making sure that you understand where there's uncertainty around how things will progress, so whether it's interest rates or behavior of the Private Banking client base. So I think we've tried to be pretty clear that we don't control that, nor do we have particular insight over how that may progress over the next couple of quarters.

So, I don't know; we're trying -- I think maybe it's -- it sounds like what you may be referring to is just our transparency. We've -- basically, we've tried to be as transparent as possible about all these things, and we think that's kind of hopefully considered best practice among --

It's absolutely great. It's just a matter of saying you delivering regularly, say, recurring earnings of about CHF2 billion plus every quarter, and having you stop behaving like that, which adds a bit a frustration. So, it's just the expectation seems to be higher and higher.

Yes, I don't know. As you say, we certainly, if we look at the -- it's been a pretty consistent delivery of, we think, very high quality earnings with very high ROE; really, highest ROE in the industry. We think it's a very high quality result. So we hope that consistent delivery of that will be something that makes a difference over time. And around that, all we can do is really, I think, try to give you our best insights into the business and what we see and what we know, so that you can make your best judgments and analysis of it. So that's -- I guess that's all -- so I think that's what our objective has been.

Thank you, Brady.

Thanks, Jacques.

Florence Taj of MFS.

Yes, I have two questions, actually. One is on the Wealth Management side. You mentioned that clients are quite conscious in terms of the assets that they're investing in. Can you maybe give us sense of the mix of assets in Private Banking between various asset classes today and where it was maybe at the peak back in 2007?

Second question is on the tax rate; I'm just wondering what the right number is on the tax rate. So, if you could talk about the different tax assets and whether you've been using any of that, because clearly that's a big source of deduction on your core Tier 1 for Basel III.

Maybe I will start with the tax rate question, I don't know if you want to answer that Renato?

As we said when we discussed our fourth quarter we expect to end up the year in the high 20s, from a tax rate perspective.

Okay.

I think with regard to the DTA, clearly obviously with these levels of profitability we are obviously using up the DTA. We believe we're on a track to really utilize the DTA over the next three or four years; obviously depends on continued earnings etc. But we, clearly, believe we're still on track towards that.

There obviously are quarterly fluctuations and we had some impacts on that of the FAS 167 consolidation, etc. But in general we still believe -- we're still very confident that we will work that down over the next few years, so we still feel pretty comfortable with that.

I think with regard to your question on clients and the mix, in terms of asset classes versus say 2007, there's no doubt there's been a change in the overall configuration of investing in, for instance, structure derivatives. It's probably about half what it was in 2007, so it's probably gone from CHF35 billion to maybe CHF17 billion of the total assets outstanding. Discretionary mandates are probably down by, I don't know, 30%/40% from where they were in 2007.

Now, as I mentioned, we saw some encouraging signs in the first quarter on the discretionary mandate side. We believe hopefully that we will see the structured product size, start to see some good recovery as well. So it will -- we will see how that develops over time. Certainly don't want to predict or promise anything there, but our view is that if things probably will recover over time. But clearly it's been -- it's a more conservative mix of assets than what we saw a couple of years ago.

And what proportion is in cash?

I don't know if we have that answer to that. Yes, generally we think it's about a third, a third, a third; so a third cash, a third equities, a third fixed income.

Okay thank you.

Okay any other questions.

There are no further questions, back to you Mr. Dougan.

All right, well maybe I can just sum up. I appreciate everybody listening in and appreciate your questions. I think they were good questions and certainly helped to eliminate some of the aspects of the business.

I do think that this result is an industry-leading very high quality result. In particular, as you've heard, I'd highlight the 22.3% return on equity that was delivered with industry low levels of risks, which should certainly hopefully underline the quality of the result; and very strong client inflows and overall client momentum. I think that that -- the client focus capital efficient strategy that we put in place has generated very stable, very attractive returns. And I think that's something that hopefully is viewed as something that's been consistently delivered and can be consistently delivered going forward.

So, we've averaged over CHF2 billion of operating net income in the last five quarters. We've had over CHF14 billion of net new client assets on average over those five quarters and a 21% return on equity over those five quarters. So -- and all that with an industry-leading Tier 1 ratio of 16.4%.

So our view is that hopefully this will be viewed as consistently outstanding and really industry-leading results and obviously our objective is to continue to deliver similar results in the future.

So thanks everybody.

That does conclude today's conference. An email will be sent out shortly advising how to access the replay of this conference. Thank you for joining today's call. You may all disconnect.