Credit Suisse Group AG (CS) 2010 Q2 法說會逐字稿

Welcome, everybody, to our second quarter results. I'm joined by Renato Fassbind, our CFO. I going to make some very brief introductory remarks, Renato will take you through the details, I'll make a few more comments, and then we'll obviously open it up for Q&A.

We also have, as is our custom at the end of the second quarter, our divisional CEOs with us. So we have Walter Berchtold, Eric Varvel, and Rob Shafir here; they'll obviously be available also to help answer questions.

Second quarter environment was obviously a difficult one but, nonetheless, I think our performance was resilient with a reported return on equity of 18%. Overall revenues, at CHF8.4 billion, were only slightly down on the same period last year. We had positive pretax results across all our divisions with pretax income at CHF1.8 billion, slightly higher than the second quarter of 2009. So we think this consistent pattern of lower volatility results reflects our client-focused, capital-efficient strategy.

The second quarter results also demonstrate continued strong momentum in our client franchise. We saw inflows of CHF14 billion of net new assets in the second quarter; that makes for the half year 2010 a total of over CHF40 billion of net new assets. We also saw continued market share momentum in our Investment Banking, especially in our Equity franchise, and also in our Advisory and Underwriting businesses. And Asset Management maintained a positive trend in asset inflows for the fourth quarter in a row.

At the end of the second quarter, we maintained our industry leading capital strength with a Tier 1 ratio of over 16%, and a conservative liquidity position. We do think that we are well positioned for the continued regulatory development; we're well capitalized; we're already subject to a leverage ratio, and already comply with a strict liquidity regime.

Despite the continuing macroeconomic uncertainty in the first half of 2010, we achieved a reported return on equity of 20%, and an underlying return of 17%, while making further substantial progress developing all of our businesses. We remain confident that our strategy's appropriate and resilient in the face of an uncertain and challenging economic and market environment.

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

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

On a published basis we achieved revenues of CHF8.4 billion and net income of CHF1.6 billion. Diluted earnings per share stood at CHF1.15 for the quarter. The published after-tax return on equity stood at 18% for the quarter. Total net new asset inflows of CHF14.5 billion reflected the continued strong contribution from our Wealth Management business.

Looking at the bottom of the slide, as in previous quarters we have also calculated the underlying result. Overall net revenues were at CHF7.6 billion, and the pretax income result of CHF1.6 billion. The underlying return on equity was 12% this quarter. This adjusts for a credit from the widening of spreads on own debt, partially offset by the UK bonus tax payment, and significant litigation provisions. In addition, we recorded a discreet tax benefit this quarter. A detailed reconciliation of the underlying results is included on slide 41 in the appendix of your pack.

This is a solid performance during a challenging period for the banking sector, and demonstrates the resilience of our client-focused, capital-efficient strategy. Underlying return on equity for the first six months of 2010 stands at 17%, close to our medium term target of 18%, as we continued to deliver an industry-leading return on equity.

Let me turn to slide six for an overview of our divisional results. This shows our second quarter 2010 divisional results side by side against the first quarter and the second quarter of last year. With a pretax income of CHF874 million, Private Banking reported a similar result to the first quarter. It continued to experience strong asset inflows in a challenging market environment with subdued client activity.

Investment Banking results represent a resilient quarterly performance as pretax income of CHF846 million, despite volatile market conditions from foreign debt concerns and client risk aversion, resulting in reduced client activity across most businesses. Asset Management continues to make progress on delivering a more focused business model. Pretax income was CHF22 million.

Let me continue by looking at the Group's operating expenses in more detail on slide seven. The second quarter expenses included some non-recurring items, so we are showing this slide to better identify the trends in overall compensation and non-compensation expenses against the first quarter of 2010, and the second quarter of 2009.

We remain disciplined in our approach to compensation. At the top right-hand side of the slide you can see that the increase in compensation, compared to the first quarter, resulted from the payment of the UK bonus tax of CHF440 million, which was reported in the corporate center. Adjusting for this item, like-for-like compensation and benefits were down 9% and 19% from the first quarter of 2010 and the second quarter of 2009 respectively, as a result of lower performance-related compensation.

We continued to build our capabilities, increasing our headcount by a further 900 people in the quarter. We have now increased our total employee numbers by 5% from a year ago.

Adjusting for significant litigation provisions, other operating expenses increased by 10% quarter-over-quarter, as we continue to invest in business growth. Our priorities remain the strengthening of our flow businesses in Investment Banking, and expanding our international presence in Private Banking.

Marketing costs were seasonally higher in the second quarter, and professional services also increased. So overall total operating expenses were down 2% versus the first quarter, and 7% against the second quarter of last year.

Let me move to the divisional results on slide eight. Challenges in the market environment resulted in subdued client activity as the industry landscape continues to evolve, however Private Banking continued to report solid second quarter results. We continued to demonstrate momentum in our industry-leading, multi-shore business model, with strong net new asset inflows of CHF13.8 billion.

Revenues were up on higher client foreign exchange income and brokerage fees, driven by market volatility, although performance fees were negatively affected by the market conditions. Clients remain cautious with regards to more complex investment products. As a result, the gross margin remained stable compared to the first quarter at the cyclical low of 120 basis points.

We are encouraged by an increase in the number of integrated solution transactions in the first half of 2010, but the average transaction size is smaller than a year ago. Corporate and Institutional Client business continued to perform strongly.

Let me continue with further detail on our Private Banking results, starting with our Wealth Management business on slide nine.

Pre-tax income for Wealth Management was CHF633 million, a decrease of 6% over the first quarter of 2010. Net new asset inflows were strong at CHF11.9 billion as we continued to gain market share. Revenues were up slightly and more than offset by higher expenses, driven by continued investment in international platforms and client services, particularly IT related, and higher sales and marketing costs.

We continued selective hiring, adding a net 20 relationship managers; gross new hires were 100. The delta of 80 here reflects the continued talent upgrade taking place within the business.

In summary, the solid pretax result has been affected by the operating environment, however strong asset inflows continued this quarter.

On slide 10 you will see our net new asset performance. The strong net new asset inflows of CHF11.9 billion, combined with a CHF12.9 billion in the first quarter, represents an annualized growth rate of 6.2%, a significant outperformance in a challenging market.

The balanced regional contribution demonstrates the strength of our platform and the trust our clients have in Credit Suisse. Inflows were particularly strong in EMEA in the second quarter, despite small outflows due to the situation in Germany.

Now turning to net revenues and gross margin on slide 11. This shows you a three-year history of the net revenue and gross margin trends, and gives you a clearer picture of how net revenues are being affected by the current operating environment.

We have split out the recurring revenues between net interest income and commissions and fees to help explain the trends. Looking at the quarterly average revenue comparisons between the first six months of 2010, and full year 2009, the quarterly average net revenues are 1% higher overall, with 4% and 2% increases in recurring commissions and fees, and recurring net interest income respectively.

Higher assets under management levels resulted in increased management and advisory fees. However, the percentage increase in recurring commissions and fees lacked the growth in assets under management as cautious client behavior resulted in lower demand for more complex financial products. Subdued client activity reduced transaction-based revenues by 6% from the average level seen in 2009.

Moving to the average gross margin, you can see that the dilution from 131 to 121 basis points has resulted from the gap between the 1% overall improvement in average quarterly net revenues, compared to a 9% increase in average assets under management, comparing the first half of 2010 with the full year 2009. New assets under management are not initially as productive in margins terms as existing assets under management, but become more productive over time.

The overall year-on-year gross margin decline was due to a strong increase in assets under management, compared to relatively stable net interest income levels driving 3 basis points of the overall 10 basis point gross margin reduction. Lower commission and performance fees resulted in a further 2 basis points fall in the recurring margin. And cautious client behavior and lower integrated solution revenues accounted for a 5 basis point fall in the transaction margin.

Looking ahead, there are a number of different levers that will drive the expansion of the gross margin, namely increased client activity, integrated solution revenues, a greater level of managed investment products, performance fees, and a rise in interest rates.

I will continue with our Corporate and Institutional Client business on slide 12. Compared to the second quarter of 2009, pretax income increased by 37% to CHF241 million as a result of 6% higher revenues, and the net release of credit risk provisions. Pretax margin is 50.7%, supported by a strong credit environment and the continued recovery in the Swiss economy, where companies generally are performing well. We are continuing to expand our market share in our Institutional business with further asset inflows this quarter.

With that, let me turn to Investment Banking on slide 13. We delivered a respectable pretax return on capital, and reported solid revenues across most of our businesses in the second quarter of 2010 during a more challenging quarter for the industry. Spiking volatility, macroeconomic concerns, and regulatory uncertainty caused many clients to sit on the sidelines. Nevertheless, we continued to gain market share across products and geographies, and made further progress in implementing our strategy initiatives.

Within our Sales and Trading businesses, in franchises where we have been historically strong, we continued to deliver solid results. In particular, we achieved strong revenues across our major Equity Sales and Trading businesses, and our RMBS business continued to perform well. We also had good results in global rates and foreign exchange.

Performance in these businesses helped partially mitigate the weaker sales and trading results in credit, which were adversely impacted by a difficult market environment. Our Underwriting and Advisory results held up well, reflecting the market share gains we have achieved, even though in this industry-wide capital issuance declined during the quarter. So overall, we delivered resilient results, given the volatile conditions during the quarter.

Slide 14 shows you a more detailed analysis of the quarterly results trend. Revenues of CHF4.2 billion, and pretax income was CHF800 million. Although the results were lower, compared to the first quarter 2010, and the second quarter 2009, they represent resilient results, given the market backdrop. Similarly, our pretax return, although lower than in prior quarters, continues to be healthy at 17%.

And finally, despite the turbulence and volatility during the quarter, we maintained our focus on risk discipline. Our risk weighted assets decreased slightly in dollar terms in the second quarter, while VaR increased slightly as we grew our client businesses.

Moving to our results by business line, and starting with fixed income sales and trading and underwriting on slide 15. Many of our fixed income businesses delivered strong results during the quarter, while others were more severely impacted by the market environment. In particular, our RMBS business, where we have historically been a dominant franchise, performed very well.

We had solid results in global rates and foreign exchange, both businesses where we have made significant process in recent quarters, in improving our market position, but where we are continuing to invest in order to further improve this market position.

Businesses that had weak results included our credit businesses, impacted by the foreign debt concerns and widening credit stress. Similarly, our emerging markets in corporate lending businesses were also affected by increased client risk aversion and widening spreads during the quarter.

And finally, as we continue to build on our market share in our flow-based business, we have now completed the majority of the planned flow sales hires that we had previously outlined. Most of these hires came on board fairly recently, and we expect them to become productive by the end of the year.

Let me turn to our Equities business on slide 16. Our Equities results for the quarter, were strong, both overall and across key businesses. Our revenues were in line with the previous quarter, with strong revenues in all our key businesses. Cash equities, including higher revenues from electronic trading, prime services and equity derivatives.

Prime services continued to perform well, notwithstanding the fact that hedge fund leverage and activity levels remained low, compared to historic levels. Despite the volatile environment, equity derivatives produced solid revenues.

Moving onto slide 17, as I have mentioned before, our Advisory and Underwriting revenues were resilient, even as issuance volumes declined, underscoring our market share gains in the Underwriting business. Our M&A revenues increased quarter-on-quarter, and year-on year, driven by an increase in our market share and completed M&A volumes.

Going into the third quarter, our pipeline is significantly stronger, compared to where we were a year ago, particularly in ECM and leveraged finance. However, the execution of this pipeline is heavily dependent on market conditions.

Turning to slide 18, this shows you a long-term view of our market share progression, touching briefly on our major businesses. In equities we maintained our leadership position in key businesses, including cash equities and prime services.

In Fixed Income we have significant momentum across products, but there is still room for improvement, especially in rates and foreign exchange. And in Underwriting and Advisory, we have seen particularly strong market share gains in debt underwriting, this quarter. Our share of wallet in leveraged finance also showed significant improvement within emerging markets. Meanwhile, we are continuing to reestablish leadership in products where we have been historically strong, such as IPOs.

Let me move to the traditional bubble charts on slide number 19. The following slides are a slight variation, though, on what we have shown you in previous quarters. In these slides here have attempted to categorize our businesses, based on the trends we are seeing in the market share and the market environments so far this year, compared to 2009.

Starting with slide 19, which addresses businesses where we saw improved market share, as well as more favorable market conditions, during the first half of 2010.

In emerging markets, we are currently taking advantage of our strength in the business to further invest. We continue to grow our platform across products, and should benefit, going forward, from a move to a local market focused strategy.

We have increased our M&A market share, from a year ago, with a 17% market share year-to-date in global completed transactions.

Equity derivatives performance was solid across all products and regions, in a very volatile quarter. We continue to make significant market share gains, especially in Asia, benefiting from our shift to a client focused capitalization strategy.

Moving to slide 20, looking at those businesses with improved market share and a less favorable market environment. In some of these businesses, notably prime services and cash equities, increased market share has helped largely offset the impact of a less favorable environment, resulting in broadly stable revenues.

It is a similar story in leveraged finance. In foreign exchange we have expanded our sales force significantly, and are building out our electronic capability. In rates, the normalization of the environment had a significant impact resulting in lower revenues, which we indicated would happen last year.

Finally, on slide 21, we address businesses where revenue decline was driven by a combination of both lower market share and the less favorable environment, namely ECM, investment grade debt, RMBS and commodities.

In ECM and investment grade debt, the revenue decline was largely a function of the environment in the first half of 2010, the significantly lower issuance levels, especially in the second quarter. In addition, investment grade debt was also affected by the difficult credit environment during the quarter.

Commodities is an important growth area for us, but as you can see from the chart, not yet a significant revenue contributor. Revenues in the first half were impacted by weak client activity, but we are beginning to see an improvement in market conditions, and have a better pipeline for the second half.

Finally, in RMBS, there has been a stabilization of the market environment, compared to the exceptionally favorable conditions that we saw last year, and market share remains relatively stable.

Now, slide 22 brings it all together, by showing the relative performances of all our main businesses. Overall, our market share grew in the first half of 2010, although generally, revenues were affected by a less favorable environment, especially in the second quarter.

The next slide, number 23, represents our medium-term outlook on the development of our market share and the market environment. Our views on prospects for revenue sustainability have not changed significantly from what we have articulated in the past.

We believe that we have a significant opportunity to gain further market share, as our flow sales hires in rates, emerging markets, credit and foreign exchange, become fully productive, and we will continue to invest in our equities businesses.

Next, we expect these market share gains to offset the impact of continued market normalization in rates and RMBS. In addition, over the medium term, we expect the market condition in most of the key businesses to remain stable, or improve.

Let me move to risk and capital usage trends on slide 24. The chart on the top shows the risk weighted asset levels in the Investment Bank. Risk weighted assets in the ongoing businesses remain stable, while in the exit businesses, they reduced by a further $2 billion.

The VaR increased slightly, primarily reflecting increased risk usage in our client flow businesses. There were no back testing exceptions in the quarter. Indeed, we experienced only two small loss-making trading days in the quarter. If you look at the daily trading revenue chart on page 63 of our financial release, you will also see a tight distribution in our daily revenue levels, during the quarter.

Our change in strategy to a client focused, capitalization business model, delivers a very different outcome than four to five years ago, when you would have certainly seen more lost days, and a much wider distribution of daily profits and losses during any one quarter.

I will now continue with Asset Management on slide 25. We continue to implement our asset management strategy, focusing on alternative investment strategies, asset allocation products and solutions, and our Swiss platform.

Following the very strong inflow of CHF11 billion, last quarter, we continue to generate net asset inflows, despite the challenging environment and against general market trends seen by some of our competitors. And we continue to transform the business towards a more fee-based business model.

Let me turn to slide 26. Management fees remain stable, but difficult market conditions impact the pretax income, with performance fees minimal in the quarter, due to market conditions and much lower investment gains.

Money market lift-out gains were CHF36 million, compared to CHF107 million in the first quarter. This completes the exit of the money market lift-out portfolio.

Repositioning of unprofitable businesses contributed to the operating expense increase of 3% in the first quarter.

Turning to slide 27, the fee-based margin on average assets under management remained relatively stable. Financial fees improved 6% on the second quarter of last year, and were stable compared to last quarter. Placement, transaction, and other fees have increased, compared with the previous quarter. Lower performance fees are reflective of the difficult market environment.

Now let's look at the asset inflows in more detail, on slide 28. Net new asset inflow in the second quarter of 2010 was achieved against the backdrop of a more risk averse client base, and represents the fourth consecutive quarter of net inflows for the business. The alternative investments business continued to see asset inflows, particularly in private equity fund-of-funds and hedge funds.

In summary, and despite the lower asset inflows, we are encouraged by this performance, compared to the quarterly industry trends, and will continue to build on the positive trends we have seen over the last few quarters.

This concludes the divisional results review, and I will now continue with the Group's capital and funding position, on slide 29.

We continue to maintain a strong position as one of the best capitalized banks globally, with a Basel II Tier 1 ratio at 16.3%, notwithstanding the negative 21 basis point impact of calling hybrid notes during the quarter.

Our core Tier 1 ratio, excluding hybrid capital, improved slightly to 11.4%. The Swiss regulatory leverage ratio was slightly lower, at 3.9%, as a result of higher average total assets in the second quarter, mainly driven by exchange rate translation differences. The US dollar, Swiss franc exchange rate movement also drove total risk weighted assets slightly higher in the quarter.

We have maintained our consistent dividend accrual policy from the first quarter and last year. And this accrual is fully reflected in our June quarter end 2010 Basel II capital ratios.

Credit Suisse is subject to FINMA's stress tests regularly, and undergoes a potential loss analysis quarterly. Although we have not been informed of all the specific parameters being used by EU institutions, our estimate is that the FINMA tests are more than twice as severe as the EU stress test currently being carried out by the European Central Bank.

We believe that, if we were subjected to similar EU stress tests, we would remain one of the best capitalized banks in the world, and well in excess of our targeted 12.5% Basel II Tier 1 ratio.

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

Thanks a lot, Renato. Before we go to Q&A, I wanted to spend a little bit of time saying a few words about our position in respect of the evolving regulatory developments. And there's obviously been a lot of discussion and debate on the topic, and there's still a fair amount of uncertainty around a lot of these issues. But we thought it would be helpful, maybe, just to put a little bit of context on it, and where we think Credit Suisse is positioned in this.

So while there still is a fair amount of uncertainty in the emerging regulatory landscape, we do think we have a strong starting point, which we show in the box in the upper left-hand corner of this slide.

We do think our client-focused, capital-efficient business, positions us well, for most of the regulatory initiatives. We have a strong capital position, with an industry leading Tier 1 ratio of 16.3%, which is a good base to work from.

We've been operating within the limits of the FINMA leverage ratio since 2008 and, with our very strong liquidity position, we have been able to comply with the FINMA requirements, which we believe will be similar to Basel III. We also adapted our compensation policies a year early, to ensure that they're aligned with FINMA's guidelines, which are proving to be industry best practice.

The evolution of our client-focused, capital-efficient strategy, and lower risk business model over the past three years, means that the evolving US regulation around prop trading and derivatives is likely to have limited impact for Credit Suisse.

Looking at the right-hand column on this slide, in general, we are seeing indications of an easing of pressure, globally, both as to the level and timing of the implementation of capital leverage and liquidity requirements, including significant transition periods.

We're encouraged by what seems to be an increased consensus among policy makers on contingent capital securities as a key element of future capital structures. We're also seeing an increased interest in the idea of a so-called bail-in concept as an additional means of strengthening capital.

There's increasing clarity on regulatory outcomes in the US, the UK and the EU. We also believe that it's likely that Switzerland will regulate its industry in the context of the global competitive landscape. This is likely to be tougher than the rest of the world, but proportionate.

If you go to the bottom of the slide, you can see that Credit Suisse has a number of advantages, which we think will help us manage these changes over the transition period.

First, our hybrid capital will remain an important capital component during the transition period, with the potential to convert into other forms of effective capital.

Second, our capital efficient strategy means that, although the Basel III risk weighted asset developments are not yet completely certain, we believe that they'll be more manageable for us.

And finally, we have a very capital-generative business model, which brings us a number of advantages. It'll enable us to build significant retained earnings but, at the same time, allows us to provide capacity for continued payments of dividends to shareholders.

And this earnings potential also allows use of our deferred tax assets over the transition period. For instance, we've seen a CHF400 million underlying reduction of deferred tax assets in the second quarter of 2010.

So there's some way to go before the evolving picture becomes clear, but there are encouraging signs. We've already made, and will continue to make, our strategic choices in the context of all this. So hopefully, this is just a very short summary, but it helps to give you some context for assessing the possible impacts of these changes and our ability to manage through them, while continuing to maintain the momentum of our business model.

So now with that, I think we're ready to take questions. I guess we'll start here in the auditorium. Yes?

(Operator Instructions)

The first one would be too-big-to-fail discussion; the dust really settles here. The most important question for me, that remains open, is on the so-called predetermined breaking points, sollbruchstelle, and how that is reconcilable with the integrated banking model.

And the second one, in September there will be probably a result on the Swiss/German double taxation agreement, what would be your best case scenario, and what do you think is a realistic outcome on that?

And then, a last tiny question on Wealth Management. You increased your client loans by CHF3 billion; yesterday, at Julius Baer, about 50% of increased loans remains within the Group. What's the picture at Credit Suisse?

Sorry, to your last question, we increased by CHF3 billion --?

(inaudible -- microphone inaccessible)

Oh I see, how much of those assets do we retain you mean, in terms of --- okay, why don't I try to answer the first question, and then maybe I'll have Walter Berchtold address your second and third questions on the issues around the German withholding tax and asset under management impacts of lending, within the Wealth Management business.

Well I think, on too-big-to-fail, I guess what I'd say is, first of all hopefully there is increasing recognition of everything that's been done in terms of the regulatory front, and particularly here in Switzerland. Obviously, a lot of measures have been taken in terms of capital, leverage, liquidity. And clearly business models have been involved quite a bit. Credit Suisse's business model has been evolved quite substantially over the last three years to a much more capital efficient business etc.

So I think all that is relevant to the overall discussion. As you say, there's a continuing discussion around whether additional measures need to be taken, what kind of measures, in the context of the too-big-to-fail. I think it's obviously still under discussion, so I'm not sure that there is a very specific answer to your question.

The expert commission though, that preliminarily reported, the expert commission actually ruled out a number of measures. As you know, things like breaking up the large banks etc., were actually ruled out by that expert commission report, which we thought was encouraging and a pretty convincing answer to that.

So they're obviously -- I do think that the discussion takes into account the totality of the issues. Capital, leverage, liquidity, business model, all those issues will be relevant to whether or not there are any organizational measures and at what point any organizational measures need to be put in place, living wills etc.

So my view is actually I still think that this obviously is an issue that's under debate, but we believe that we're going to end up with a solution that will allow us to maintain our business model, and continue to push forward with this strategy that we have.

Walter, do you want to try to take the issue around the German withholding tax and the --?

I'm not 100% sure I understood it correctly, but we had about CHF3 billion of additional Lombard loans in the second quarter. And all of that basically stays within Credit Suisse, it's really leveraging securities position. Maybe Baer was referring to something else that --

They were referring to the total increase in loans, and they said about 50% remained within the Group, and 50% is just taken out and invested out.

So in that respect, when we speak about loans taken against securities, almost everything stays within the Bank.

(multiple speakers) what management's done and, say, in our Private Clients business, if you -- mortgage lending, obviously, doesn't stay within the Bank, because it goes to purchase a house presumably.

And corporate lending as well, there it's different, but when it comes to Lombard lending against securities, most of it stays with us.

Which I think is what you were referring to; that's the increase. And then your other question was just on the overall -- you were saying what's the prospect of the government agreements on cross-border issues?

Yes, the double taxation agreement with Germany probably will be reported in September, and your best case scenario and what you think is realistic maybe?

Well, obviously double tax rules how we collect taxes from each other and (inaudible) back. So I think that will go the normal course. The question is what happens on the side, i.e. when we speak about regulation of legacy assets.

And I don't know what the outcome will be. Just what I would hope for is a solution that we can, as well, concentrate on our daily business, and don't have to really discuss all the time about these legacies, and what that will be I don't know. That's obviously, right now, a political discussion going on, but we just need to find a way, in Switzerland, to deal with the legacy, especially when it comes to neighboring countries.

I think, as you know, we've made the point before, we feel we obviously have a very diverse Private Banking business, global etc. And we feel like we have a business that will be able to perform quite well through these issues. But obviously, certainly is better than -- getting these issues bedded down would be helpful.

Thank you very much.

Next question here.

Philipp Zieschang from UBS. Two questions please. One on the Wealth Management side, and one on the Investment Bank.

On the Wealth Management side, when you held your investor day on Wealth Management, in September last year, you issued the 40% pretax profit target, and that was already at a time when you saw how 2009 evolved. We are now down to I think, 25% in Wealth Management, could you just comment what is the delta in terms of your expectations and what is cyclical, and what's your reaction towards that?

The second point on the Investment Bank is, you mentioned that your view on revenue sustainability has not changed a lot. It's interesting to model your Investment Bank, given you had three huge quarters in sales and trading last year. And you've disclosed a couple of hundred million bounce-back revenues, but nevertheless there's quite a gap between the past three quarters, and the first three last year.

So what would you say is the base you build your plans on? Is it the first half this year with a bit of upside? Or is it still in sight to move back to the levels last year, given your comment on revenue sustainability and what's the impact on the profit margin? Thanks.

Well, I think on the first question maybe I can answer generally and then, if you want more detail, Walter could address it. But I think our medium-term view on the Private Banking business is still quite constructive. We think that we are at a cyclical low in terms of activity.

We've had, I think, the strongest private bank in the context of net new assets that have been gathered over the course of the past couple of years. We have continuing momentum on that front and our belief is that we will get less conservative client behavior over time. At some point we'll get interest rates moving up, which will benefit the business. And so our view is still quite constructive on the business, over the medium term.

And so I think ultimately, those profit margins that we laid out are still margins that we believe the business should get to. And that's certainly our aspiration, but it's also our belief.

The question is obviously, as you say, we presented that last September. Probably if you had held our feet to the fire at that point and said, when would you actually see this happen, we wouldn't answer it. We probably wouldn't have answered if you'd asked us.

But a year later, obviously we'd like to see it happen and we would probably -- if you'd have asked me I probably would have expected to have seen it starting to happen by now. So it's clearly been pushed out by a lot of the activity in the market volatility etc.

But I think our view is still that we've got a great fundamental business here. It is at a cyclical down point, but we actually still believe that that kind of margin expansion will occur over a period of time. It's just obviously hard to say -- the CHF64 question is exactly what period of time will we see that on.

I don't know, Walter, if you want to add to that?

Maybe just quickly now. Obviously we want to move this back up but, as Brady said, we do believe in the long-term growth of this industry.

And what we are currently concentrating on is investing, but obviously keep it balanced around current levels. And we need the market to come back. And we're all in the same environment, so we know a little bit how these markets are behaving.

And there is a lot of cyclicality. There's obviously very subdued activities from our clients which needs to come back to one point in time. And then we want to move that back up. We want to move that back up to 40%.

Now, whether 40% is then the right level we will have to see, review that in the long run. But clearly, we want to improve the margins on that business. That's our aim, but I need a little bit of help as well by markets. And in the meantime, we very carefully invest into the business and keep it around these levels.

Now in terms -- what I'm always getting asked, do you have any triggers if it doesn't come? I don't have triggers. We just constantly observe the market. We constantly check whether our investments make sense, where the growth is coming through, and growth is very important for me. As long as I have growth, net new asset growth, I'm very confident that we're on the right track. And that is how we currently manage the businesses, going forward.

And in all this, I probably would expect a little bit of a J-curve effect here. Still have relatively subdued development of revenues in the current environment, and then have leverage kicking in later.

Eric, do you want to address the issue about investment banking revenue sustainability or --?

Yes. I think what you're trying to do is compare the previous year to the last two quarters. And I think what you saw in 2009 was an environment where you had extraordinarily high volumes and very good margins. There was a very directional market, investors were taking risk, which was a very good environment for banks to make good returns.

In the first two quarters you've seen, especially in the second quarter, very subdued flows, more turmoil in the market, more volatility. In that environment we're going to make less money. The question is, where's the market going to be?

We actually think there's a lot of upside in our business. We don't think it get a whole lot worse than it currently is. Our business model is built around client focus and capital efficiency. We don't run as much risk in our model as others do, so we think it's very sustainable in good markets and bad markets.

As we look forward, some of our big engines of growth, if you look at emerging markets, if you look at leveraged finance, if you look at the share that we're taking in rates and in FX, those are all very positive signs.

If you look at our investment banking backlogs, our M&A backlog is 20% better than it was a year ago. Leveraged finance is 100% better than it was a year ago. Equity capital markets is 90% better than a year ago. So we feel very good about our pipeline. For the constructive market we think there's a lot of upside.

In the Equity business there's a lot of leverage in it. We're a top player across different businesses. And as volume comes back into that business, we think the scale and the operating leverage in that business will bring a lot of additional pretax income.

So where are the market's going to be? We're not sure. But we're obviously investing for a more normalized market which we think is better than what it is right now.

I would just add, I think we gave the -- in the third and the fourth quarter last year we talked about what we thought were the prospects for the business, and we actually even talked about the fact that we thought there was upside from the levels produced in '09. Because '09 was a good market in many respects, but we saw opportunities and we saw more ways to grow our business and to do more.

Obviously, as Eric says, it's very much dependent on market conditions that we see. But we do think, and what we've tried to build here is, and we're continuing to build toward, is a model that's actually more resilient. And I think what you can see, I think the Equities business, as Eric mentioned, is probably the best example of that.

If you look at the second quarter performance we were flat on revenues in the first quarter. And that's because of the very strong market share, because of the investments that we've made in that business in terms of a lot of electronic trading platforms etc.

And we think, when you have very strong market share like that, even when client flow shrinks you actually probably get a higher percentage of the total flow, which actually leads you to get a similar absolute amount of flow. So that's where we're trying to drive all of our businesses and continue to make progress towards that.

So I hope we can bracket some of the performance with -- the second quarter was, as Eric said, I think a pretty difficult environment, I think, as all of you know, and you can see that from the industry as a whole. But I do think actually that, even as we looked at the business late last year, we still think there were areas of upside, depending on market performance.

So we'll see. And I think that coming out the backlogs is a very good one, which is we've got. If the markets are -- and obviously backlogs are notoriously hard to predict whether you're actually going to be able to execute them, but we have terrific backlogs right now. So if we can just get decent markets through the rest of the year, then I think we can probably see a leg up in the business. Yes?

Teresa Nielsen from Bank Vontobel. I have a question regarding the Investment Bank compensation expenses.

You've hired a lot of people in the rates business, which I expect will be coming in as of the third quarter. When do you expect these people to break even? Should we expect the compensation cost base in the Investment Bank to increase materially due to these hirings? And are you hiring currently also in other businesses in the Investment Bank?

Then my second question is on the Wealth Management. Do you see an increase in competition for client advisors in Asia? Is there an increase also in the compensation of these client advisors that you have in Asia? And do you see generally this having a material impact on the overall compensation, going forward, for Wealth Management?

And regarding market share in Asia, do you see an increase in your market share in Wealth Management?

Maybe, I don't know, Eric, if you want to take the first question. and Walter, if you can take the second, third.

Yes. I think we've added about 600 people between the first quarter and the second quarter, which is 2.5%, 3% increase in headcount. A lot of that headcount did come out of the expansion in the sales areas, both FX, rates and credit.

But what we're trying to do is really broaden and deepen our sales platform so we can create more volume and put them across our electronic trading platforms, create more volume, get more leverage in the business. Very consistent with our client-focused, capital-efficient model.

Where we also saw headcount increase was in the technology side, where we're trying to continue to build those electronic models and support the ones that we've already developed in the cash equities and the AES businesses. And that's very consistent with trying to take the technology from the cash equities and AES business, where we're a top player, and leverage that into the Fixed Income business in a similar way and create a similar sort of engine for profitability.

We also increased headcount in the emerging markets to build out that area which we talked about in the first quarter; I think there was a question on that. We continue to focus on the emerging markets to build on our position. We also added some in the cash area and the prime area.

So when do we cover costs? A lot of these, we think, are accretive immediately. In terms of the overall sales build-out we expect them to cover costs within the first year and then be very accretive thereafter.

But I don't think you'd see, in terms of the impact on the cost line, obviously the compensation accruals are risk adjusted effectively. So it's not really -- I don't know that you would see an impact on the cost line from that hiring; you shouldn't. I think we'd expect the business, as Eric said, to really produce enough to cover that.

Okay. Quickly on the competitive landscape in Asia; clearly, it is obviously a very competitive landscape. But what we see now in this new cycle since the financial crisis is that we have new entrants coming to the market, i.e. the local banks like ICBC, Bank of China and so on and so forth, who now start as well developing private banking franchises.

That has obviously pushed up certainly the compensation levels and get more attractive places to go to. And so far we have been very fortunate. We took the chances, as I pointed out many times before, to really upgrade. We've been hiring as well, this year again, very substantial gross amounts of new relationship managers in the area.

In terms of market share, I do believe we gain market share. We're growing around 20% in Asia. Even though Asia's booming it's still above, I think, the overall growth rate of wealth in the region.

And then in general I think we have seen a little bit of a salary increase, mainly salary increase pressure in the private banking industry. It has something to do with people adapting certain salary bands because of overall retention problems. And that obviously has had an impact on the entire industry.

Any other questions here? And we can come back after; I'm sure we'll have a lot of call-in questions. But any other questions here before we go to the phone? We can come back here after that. Okay. Why don't we go to the call-in and start taking some of those questions.

Your first question comes from Fiona Swaffield of [Executive Mobile]. Please ask your question.

Hi. Can I ask some questions on Wealth Management and also on liquidity? On Wealth Management, can you talk a bit more about the inflows in the quarter and to what extent it was going to have a flight to quality and whether that was the issue behind the very strong inflow in EMEA? I don't know -- I would assume that there were slight inflows and outflows out of Germany, so if you could talk a bit more about that.

And then you made a comment on the fact that the net new money growth is diluting the margin. Is that also something to do with the move from offshore to onshore?

And also whether you've got any hope or plans to do something on pricing, because I think your peer group are talking about adjusting pricing upwards slightly.

And then the third question, just on liquidity. I don't know if you could comment on the new rules and where you are versus them. I noticed your buffer or your stock liquidity went up CHF10 billion. Are we there now? Have you put everything in place? Or is there more cost to come? Thanks.

I'll take the last part of that question first, and then maybe I'll quickly answer the first one. And then Walter can talk a little bit about the net new money growth and onshore offshore etc.

On the liquidity front, we have entered into this agreement with FINMA, with the regulator, on what the liquidity requirements are and we are fully in satisfaction of that requirement. That's really a result of what's been a very conservative approach to liquidity by us really for the last year and a half.

We've basically continued to term out our liabilities. We have continued to take a very conservative approach to the structure of the liability side of the balance sheet. In fact, I think we've gone over the last three years from 12% long-term debt to 17% long-term debt. We've pushed out the average maturities by a couple of years over the past period of time.

So we've actually taken a lot of measures on the liquidity side which have put us in a much stronger position that's clearly cost us money as well. When you look at our '09 results, our first half results this year, they clearly incorporate the cost that goes along with that. But we are I think in a very strong position on the liquidity front.

On the Wealth Management side, in terms of the inflows, as you say, they were very strong really around all the regions around the world which was good; strong in Switzerland. As you mentioned our flows in EMEA were the strongest. A lot of those flows were actually out of the emerging parts of Europe, but there were very strong flows there.

I would say I think this issue of the flight to quality, I think in general obviously Switzerland is a very stable environment, strong currency, fiscal surplus etc. I think all that is a positive, but I think it's a marginal positive.

I don't think that we've seen huge flight to safety flows of net new money. And, in fact, our flows in the second quarter were pretty, I would say, similar seasonally adjusted to our flows in the first quarter. So we just continue to have a very strong client momentum in that business.

Walter, do you want to address the net new money growth issue?

Well, quickly under net new money in EMEA, as Brady mentioned, the major part came from emerging markets, i.e. Middle East and Eastern Europe and onshore Europe. We had, as mentioned by Renato, modest outflows when it comes to Germany, due to the ongoing discussions we have around that.

In terms of diluting factor, obviously a lot of assets which are coming these days are coming from ultra high net worth individuals. They have normally a little bit of a lower income, but obviously higher multiplier underneath.

And then it's as well as timing issue. If you have strong net new asset inflow it takes a while 'til you can make them productive. And it has nothing really to do with on or offshore. It has something to do with how much you can offer to a client on the various platforms available.

And in terms of pricing, we do constantly look at our pricing models and we do constantly adjust our pricing models, and we go up and we go down. Because, obviously, our services are changing and what we are trying really to do is more and more price for advice. That's our strategy.

Next question?

Your next question is from Huw Van Steenis of Morgan Stanley. Please ask your question.

Good morning. Two questions; one's just on the dividend. Perhaps you could share with us any thoughts you have on whether you would see a progressive dividend for this year or given, I think, your outlook that Q3 remains much like Q2 we should probably just figure more on stable. And I appreciate this is obviously the decision of the Board.

And number two, it is possible you could just share your views on the outlook for fixed income? One way to read slide 22 is that actually the current environment is what you think of as a more ordinary environment for fixed income and, therefore, we should actually expect more subdued returns in the future. And I'd just love for you to share any thoughts you have about where we may go from here. Thank you.

Thank you. I think with regard to the dividend issue, I think we've been consistent in our comments, which is just that what we're saying is we'll continue to take a consistent approach to dividend accrual and leave it at that. So obviously, as you say, there will be an impact on exactly performance of the business etc., could have an impact on that. But in general, we're taking a consistent approach to dividend accrual.

With regard to the outlook for fixed income, I could probably have Eric answer it in more detail, but I don't think we view the second quarter as a status quo case for the markets going forward. The second quarter was a very challenging environment, so I don't think we view it that way at all. I think, in fact, we see a number of areas where we could see really pretty significant upsides.

So I don't know, Eric, if you want to address that a little bit?

Yes, I think if you look at the slide, and I don't think we'll put the slide back on, but I think what it showed was --

They did put the slide back on.

Did they? Oh good. No, it's the one after that, 23. Yes, there is it. I think what that slide shows is that in RMBS, which is a very strong business of ours, you're probably moving into less favorable environment and we will probably lose a bit of share, just given our dominance in that area.

In the Rates business probably a little bit less of an attractive market. But we've got a lot of momentum there, and we think with our sales build out we'll actually take share and we'll actually make incremental money in that business.

Away from RMBS and rates, we are pretty bullish on the rest of our businesses, whether it be FX, emerging markets, credit. We think those are all very big engines that will have a pretty big uplift if we get into more favorable markets.

So we don't see a similar market to Q2. We actually see a lot of upside as we move forward.

If you take areas like where we've talked about the backlog on the leveraged finance side, where we have a leading franchise and a very strong backlog, and if the markets are available for it, that's a business where we could see a significant uptick in results.

Thank you. Next question?

Next question, Derek De Vries of Bank of America. Please ask your question.

Thanks. I have two questions. One's a general question on the Wealth Management business, where the costs came in above where I was going for anyway. And reading qualitatively, it sounds like that's an area you're investing in and it makes a lot of sense to invest counter-cyclically.

But what would make you hit the brakes on the investment, I guess much like you did in the Investment Bank in '08? What are the mileposts, if you will, that you're looking at that make you think, yes, this business is going to turn around, the market's going to turn around? And what would scare you and make you say, no, we're going to start cutting costs? That's my first question.

And then just a really detailed question on the Tier 1 capital. Once again, the other move in the quarter was a rather big other in terms of Tier 1 capital. It was a negative [CHF1,349 million]. I was just wondering if you could give us some more color on what that move was.

Thanks, Derek. Well, I think on the Wealth Management, Walter a little bit addressed it before but you're right. We are investing in the business, although I think we're being pretty disciplined about it.

I think, as we mentioned, we added net 20 RMs in the quarter, which I think that represents a fairly disciplined approach. However, we did add gross 100 RMs in the quarter. So as Walter mentioned, we're actually doing a lot of upgrading in the quality etc. But it is a fairly disciplined approach to investment. But, as we've said, we do have a medium-term positive view on it.

I'm not sure there are any specific bright-line tests in terms of where we would feel that that would be something where we would make a change in approach there.

Again, I think it's, as Walter said, we're constantly looking at the business; looking at what the inflows are; wealth creation around the world, which continues to be pretty robust; market share growth for us, which continues to be pretty robust. And so I think, based on all that, we would obviously continue to monitor that, but I'm not sure there is any sort of bright line areas that would jump out at us.

With regard to the Tier 1, you can't see it, Derek, but we're flipping through pages to make sure we've got a good answer to your question. Do you guys have that, or do you want to come back to that? Come back to it, okay. So I guess, you were right, Derek; it was a technical question so we'll come back. These guys will look into it and we'll come back later in the call and answer it.

Next question, Kinner Lakhani of Citi. Please ask your question.

Yes, hi. Good morning. Three questions from my side. On the dividend, I understand you're consistently accruing through the quarters. And ignoring the results for a second, do you think there is any potential impact on the dividend from the findings that we get from the expert commission, which I think are coming out in late August? So that's my first question.

Secondly, on Wealth Management, again, I felt that the expenses were a bit higher than I gone for, and wondering whether the current level is a sustainable level, or whether there were any one-offs there?

And a third question was really on the Investment Bank. Just wondering if you could quantify the mark-to-market impact of the traded corporate lending book in the Investment Banking revenues; to what extent that might have been an adverse result within fixed income?

Okay, I'll try to answer the first one, and then maybe Walter could answer the question around the level of expenses in Wealth Management. And I guess Eric or [David] could take the corporate book impact.

I think in terms of the dividend side, obviously, as we've said, there's a lot of uncertainty with regard to a lot of these regulatory issues, so I don't think right now we're not certain of anything. But I think what we tried to outline, if you look at the slide that we laid out, was the combination of elements that make us feel pretty comfortable with our ability to manage through a lot of these issues, and to be able to continue to accrete capital, continue to have the capacity to pay dividends, etc.

So obviously, I guess there could be outcomes that might change that. But I think our general view is that we believe that the world seems to be kind of converging towards a more predictable place in terms of a lot of these regulations. And so I think our general view is that we continue to feel confident in our ability to manage the business towards that.

So Walter, can you answer the question on the expense level?

On the expense level going forward, certainly for the next couple of quarters to come I do think we will stay around these levels which you see currently as we further invest into our business, both be it in platforms and in people.

And, Eric, could you address was there any mark-to-market impact of the traded corporate? But I wouldn't have thought so, right?

No, there's nothing unusual.

Really, no material impact from our mark -- I guess you're talking about our mark-to-market loan book, I assume is what you're talking about; no real impact.

Are you ready? Yes, can you go back to the --?

Sorry for the late answer. The main elements for the negative Tier 1 development you see in the report, there are three elements there. As usual, we have dividend accrual that is reflected in that line; then we have compensation impacts there, for instance, some shares that had to be bought back for compensation schemes. And then we have called the two hybrids, the smaller hybrids, to the tune of something like CHF450 million in the quarter. So that's the negative line you see there to the tune of, I believe, CHF1.3 billion.

Okay.

Okay, next question, please.

Your next question, Kian Abouhossein of JPMorgan. Please ask your question.

Yes, hi. A few questions. The first one is related to cost. Could you give me an idea how much of the cost is actually investment cost for the future within your cost line, and in particular within Private Banking and within the IB? And then I'll come up with a follow-up with the rest of the questions.

Why don't you ask the rest of your questions because --?

Yes, the second question is again related to comp. Comp clean is [46%] in the second quarter, highest on the industry; you had the highest in the first quarter. I think last time we had the lunch with you, Brady, you indicated could be around the same level as '09; I think you had about [42%] in '09. Should we assume that you will stick to the around '09 level in comp-to-revenue ratio?

And the third question is, on slide 31, you talk about increased consensus around inclusion of CoCos, and I'm just interested what you mean with consensus. Is consensus within the Swiss banking industry, G20? How should we look at this? Thanks.

Second and third, and then we'll get back to your first question on the costs; the elements that are invested in that cost. I think, well, just on your last question, it's our observation so you may have a different observation.

But it just seems like increasingly in the regulatory debate around the world there's an increasing discussion around the role that contingent capital could play within that. And obviously, there's still uncertainties about terms of that [debt], and whether there's a market, and how much could actually be placed, etc. But it just seems that there's an increasing discussion around that as a constructive part of the capital structure, which frankly was less the case, I think, six months ago.

So I would say across all those jurisdictions, I think it is a more frequent element of discussion. And obviously, I don't think anything's been finalized on it, but I think it's a more frequent element of that.

In terms of the comp levels, as you say, clearly, quarterly comp accrual, and particularly comp-to-revenue, is a bit of a spurious number. I think, as you say, what we had said from the beginning of the year, what I'd said and what I still am, I think our goal would be to be in the sort of low [40%s], which is a similar level, or maybe even slightly lower level, from 2009 in terms of the comp accruals. That will depend, obviously, on the performance of the business, and I would think that'll be the case for the industry, and that'll be the case for us as well.

And I would argue, you're talking about the level of our comp accruals versus others in the industry. Again, I think there's a lot of apples and oranges in terms of comparing those kinds of numbers. We have the lowest risk weighted assets in the industry, the lowest capital that's being put at risk in the industry, which arguably means you probably would have higher compensation as a percentage of your cost base.

But in any case, we do still certainly aspire to get to those kinds of levels, as we mentioned to you before, so I think we're consistent with that. But obviously, the second quarter, slightly more difficult quarter leads to a slightly higher comp-to-revenue number.

And then on the -- you want to start with IB? Okay. IB, what element of that is investment?

Sure, in the Investment Bank, about half of the increased cost is currency related. The other half is IT expense, which is investment into the electronic trading platforms. Another piece of it were fees, professional fees related to the acquisition of the fund administration business that we purchased from Fortis for the Prime Services business. And then there is a little bit associated with CMBS disposal.

Walter?

And on the Private Banking side, let's make it half-year/half-year, we have an increase of about CHF300 million. Now just to remind you first that we had last year an extraordinary insurance policy of about CHF100 million, then another CHF120 million is really investments into the future, and CHF80 million is salaries, higher running costs.

Is that responsive? Yes, okay. Next question.

Your next question, Jernej Omahen of Goldman Sachs. Please ask your question.

Yes, hello. It's Jernej here, from Goldman's. Can I start you off on the following question? Just looking at the tangible book value progression quarter-on-quarter, I think it was down around 7.4%, and obviously a large chunk of that is the dividend payment. But still, even if you strip out the dividend payment and add the EPS for the quarter, I think the tangible book per share is down around 4% Q-on-Q. Can you just break that down for us, just to understand how much of that is currency and what else is going on?

And the second question I wanted to ask is, just tying into the previous questions on dividend accruals, etc., I think it was mentioned on more than one occasion that Credit Suisse sees itself as essentially best-in-class when it comes to capitalization levels. Should we interpret this in a way that Credit Suisse has decided how high the capital buyer will go, and that any capital generation upwards from where you are now, so compared to your core and headline Tier 1 ratio, should be deemed as excess capital or surplus capital? Thanks a lot.

Thank you. No, I think on the second question, let me address that first and then we'll [take] your detailed question on the book value. No, I wouldn't say that.

Again, what we tried to lay out for you with this regulatory slide was considerations. As we said, I think we all know there is a lot of uncertainty in a lot of this and so we're not trying to make it overly precise. But we do think there are a number of elements that actually put us, we think, in a strong position against this, the capital-generative business model. We are very strongly capitalized, and again we can talk about the different components of that capital. We tried to talk a little bit about how we see those progressing as well.

So I don't think I would go so far as to say that we know where the bar is in terms of capital, because I don't think we do. We tried to point out some of what we see in the external environment, and again you have your own views and your own information on that as well in terms of what you see happening, in terms of the BIS discussions, etc., and their impact on the industry as a whole, which I think is a relevant element.

So we tried to just lay that out, so I wouldn't go so far as to say that we know exactly where the bar is going to be, etc., but I think again, what we were trying to lay out on this screen was not that there isn't continuing uncertainty, because there is, we all know there is. But to try to show that we think there are a number of ways in which we think we're in a strong position to start out with; the external environment has probably improved a bit in terms of some of these issues. And we think we've got some Credit Suisse specific issues that put us in a very good position against that.

How about the question on book value?

Yes, I think you're applying your own calculation on the capital development, which I appreciate, but in order to better understand you probably want to take that offline. What we publish, and you can see that on page 72 of our report, is the half-year development of the equity over six months. And the main drivers there is, of course, the income in the first place, but also dividend payment, then share repurchases, they are all affecting that. But in order to better understand where you are coming from, I think we should take that offline and make sure that we follow the reasoning, and then we can explain to you in detail on how this works.

Yes, I think our view is that the bulk of the book value development in the second quarter was the dividend really, that was the bulk of it, is the way we look at it. But maybe, as Renato says, we need to figure out what exactly you're looking at.

Because we are only giving half-year reconciliation of our equity, so we have to see on what assumption are taken here.

Okay, next question.

Next question, Matthew Clark of KBW. Please ask your question.

Good morning. A couple of questions on capital, please. Firstly, just hoping you could tell us what the cumulative own debt gains are at the moment, and what they were at the end of the first quarter on a net of tax basis.

And also, it looks like you've assumed a 30% tax rate on the tax gain, sorry on the own debt gain this quarter, but I seem to remember it was much lower, around a 10% rate when you were seeing negative mark-to-markets a year ago. I'm just a bit curious why there seems to be an asymmetric tax rate when you see own debt gains and own debt losses.

And then a second follow-up question on CoCos, you just seem to be very confident on this issue, and I'm wondering whether you have had discussions with your hybrid investors as to whether they would be interested in converting into a CoCo structure, or whether at this stage it's just your conjecture that they might be interested? I'm just curious how far along in that process you are. Thanks very much.

Matthew, let me leave the first and second questions for a second, and go to your third question. I think, just in terms of our views on it, I think just from general discussions as well as from understanding some of the -- we do have some chunkier investors in some aspects of our capital structure. I think our general view is that we think that some of these structures, depending on how they ultimately end up in terms of where they're struck, etc, could be of interest to them.

So again, it's still unclear exactly what levels are going to be required by the regulators, etc. So I don't think we have a good feel for that, but I think there are certainly structures here which we think would be of interest. But it is still obviously quite preliminary, because there aren't really any specific terms out there that we know would work. But we do think that actually, in principle, they're probably things that we think would be of interest to an investor base.

You want to try to answer that, or you want to come back to it? Okay, Renato?

Yes. The fair value of own debt number increased in the quarter by roughly CHF900 million from CHF1.6 million pretax to CHF2.5 million pretax. The tax rate that is applied depends on where these fair value own debts are locally booked in the legal entities. You can apply broadly the normalized, I would say, or the underlying group tax rate which we have described as being around 27%, 28% for the first half, so you can apply the same rate, roughly, for the fair value of own debt as well.

You mentioned about the lower tax rate, the 11%, and that was very much influenced by the one-offs we had on the tax line; there was a lot of noise on the tax line. But if you exclude all the impacts of the one-offs, you have an underlying tax rate of something like 27%, 28% which is in line of the guidance we have given over the last couple of quarters in the high 20%s.

Okay, next question.

Next question, Matt Spick, of Deutsche Bank. Please ask your question.

Good morning. I had two questions. One was just on the geographic disclosure. Your Asia Pacific pretax profit for the quarter was down to CHF24 million, and obviously that's a very small number, it's down about 94% year-over-year, and I was just wondering if you could elaborate as to what's happened? That business has got near 100% cost income ratio now, and I appreciate that it's a collection of businesses, it's your Asian Private Bank, and it's your Asian Equity Derivatives franchise, and so on. But it's still quite anomalous with the rest of your reporting that you're not making any money in Asia at all at the moment.

My second question was just coming back to the DTAs. Obviously you are using your DTAs, and that's a source of value, but the absolute amount of DTAs has gone up because you've been able to merge these legal entities. Can you give any indication as to whether or not there are other unrecognized DTAs that are beyond the statute of limitations, or in the wrong legal entities that you think would give you an opportunity to bring new DTAs onto the balance sheet as you utilize the existing ones? Thanks.

I think with regard to the first issue, actually I would say our Asia Pacific business in general is a strong franchise, and it actually has performed in the second quarter, I would say, relatively consistently across the customer businesses, etc. We did have some position write-downs that we took in some of our wind-down businesses in Investment Banking that were disproportionately in the Asia Pacific P&L. So that was really the impact with some of the continuing write-downs that we took in the wind-down businesses impacted that regional P&L.

With regard to the DTAs, in terms of any unrecognized DTAs that are beyond statute, etc, I don't know, Renato, if you could answer that.

We are continuously valuing it properly according to US GAAP, so whatever is feasible we, of course, value accordingly, and we put them as assets on the balance sheet. And that is driven, of course, by future earnings expectation, where we basically test every quarter with our future expectation of earnings, is able to absorb these losses carried forward, but it's not a buffer in there.

He may be referring to some other institutions that have actually ridden assets back up as they've seen earnings capability go up or something. We don't have any of --

It's actually more than that. Some peers had such high losses that, at a time when the calculation would have been done, their expected earnings would, of course, have been too low, and now as they go they can use that more.

We do not have that impact.

We don't have that impact, no.

Was that your question, Matt? Maybe that was your question. I guess we don't allow people --

Next question, Dirk Hoffmann-Becking of Bernstein. Please ask your question.

Hi, good morning. I have a question on Investment Banking, in particular on the volatility of your revenue line. And the key problem that I have is, I would expect a client-driven, capital-light business model to have lower volatility in revenues than peers, but it doesn't seem to be the case. And also, if I look at the equity side clearly outperformed expectations; the fixed income side somewhat underperformed expectations this quarter. So do you want us to think about the volatility of your Investment Banking earnings going forward?

Well, I'm not sure how you come to the conclusion that it is more volatile, so I guess that's one question I would have. From our point of view, we do view it as less volatile, I think you're right. The different businesses actually, though, have somewhat different characteristics, and we're still at different, I'd say, different stages in terms of developing those businesses.

So I do think, we've talked about the equity business as being one where I think it's actually in a very good place in terms of being a very strong client model, very capital-efficient business, benefits from the strong market shares even in more difficult markets. So that helps to preserve and reduce the volatility. And frankly we are still, as we've discussed, we're still investing in the fixed income business to make sure that we get to those kinds of very, very strong market shares across the broad range of those businesses to put us in the same place.

One of the things that we look at and, again, it's hard for us to compare with other businesses, but certainly compared within our business, we see a lot less volatility in the revenue distribution. So I think, if you look at the revenue distribution that's laid out, that may give you at least some data points, and I don't know whether you'll conclude that that's less volatile or not. But from our point of view when we look at it, it's clearly a tighter distribution. We had in the second quarter, I think, two days that were negative trading days, small negative trading days, and I guess our view is that certainly is a less volatile profile that we would have seen in the business that we had four or five years ago.

How that will stack up against the rest of the industry, I guess we'll see when others report similar distributions of their trading. But we think that's one concrete way to look at the volatility in the revenues of the business. But I don't know if there's anything to add, or not really?

I think you said it right, and that is if you look at our past business model I think you're seeing far more stable earnings as we move ahead. And I think Brady's also right, as we look at our businesses, in comparison to those that have already announced, we see far more stability in the business. Obviously, fixed income isn't where we exactly want it to be, and we're investing and we're growing that, but we think, overall, we have a pretty stable business model.

Yes, to have the Equity business basically flat revenues first to second quarter, given the differences in environment between those two quarters is, I think, it's a very strong result, and demonstrative of the power of that model. So we had the same thing on the Investment Banking side in terms of advisory, etc., and we're I think making progress towards getting our Fixed Income business in the same place, but that will take some time.

Next question?

Next question, Jeremy Sigee, of Barclays Capital. Please ask your question.

Morning. Just one question at this stage, please. Capital usage and balance sheet in the Investment Bank went up quite a bit in the quarter. Looked like currency would be a small part of that, but I just wondered if you could talk about what other elements, which business areas, or what drivers were causing the increase in capital usage and in assets, please?

Yes, I thought it was actually pretty flat, Jeremy, but when you look at the numbers that we laid out, but --

I've got capital allocation in the Investment Bank up 5% in the quarter, and assets up 7%.

Yes, I guess risk weighted assets were down, actually, so they were down from $144 billion to $122 billion in the overall business, and excluding the exit businesses, it was flat at $127 billion. Our VaR was up, as you mentioned, from $99 million in the first quarter, to $105 million but that, to me, is not that significant in terms of a move, quarter-to-quarter.

But you're also talking about notional balance sheet, though?

Yes.

I don't know, what were the notional balance sheets --

Maybe there's nothing specific, maybe it's random movements, but I just thought it was interesting, a 7% jump against volumes being softer, generally.

Yes, Jeremy, I think what we would say is, we think it's actually pretty consistent, particularly if you isolate some of the foreign exchange effects, both nominal risk weighted assets. And then VaR did move up a bit more, but it's still only a few percent, so frankly, in our view, that's all within the noise of a pretty consistent, disciplined model. So I think from our point of view, we think that that's in line.

Nothing notable. Okay, thank you very much.

Thank you.

Your next question comes from Jon Peace, of Nomura. Please ask your question.

Good morning. I just wanted to come back briefly to the trading revenues, and understand a little bit more color. Firstly, in equity derivatives, as you benchmark against your peers, why is it that you were so strong? We heard from one of your peers that they were short volatility against their clients going into the quarter, and that hurt them. Were you perhaps the other way around? I'm trying to get a sense whether there were some fortuitous revenues in there which supported the number.

And then, in fixed income trading, again, benchmarking you against your peers. Back in the first quarter, you underperformed a little because, as credit spreads narrowed, you didn't perhaps get some of the inventory gains, and you had a lower prop contribution. As I look at Q2 versus Q1, I was maybe hoping for a little bit better of a performance versus the peer group, as the opposite was true, and I wondered why, do you think, it may not have been a bigger number. Was it due to perhaps with business mix and perhaps the commodities contribution? Thanks very much.

Yes, Eric, do you want to take those questions?

On the derivatives side, I think if you look at the mix of our business, we were very neutral on the risk side throughout the quarter. Where we outperform is really on the corporate equity derivatives front, which tends to be much lower risk, tends to be more credit intensive by nature, and there we did quite well.

What was your other question?

The other question was just on fixed income trading, so that was equity derivatives. The other question was on fixed income trading, what do we view as -- in Q1 we didn't see quite the increases that some of the competitors saw. I'm just paraphrasing his question. We didn't see some of the increases that the competitors saw, but in the second quarter, the question was then they would have expected to have seen a better performance than the competitors, and why was that? Is there something with the mix, commodities, whatever?

Yes, I don't think that's necessarily anything with the mix. We actually saw significant gains in FX, rates, had strong performance in RMBS. Probably the biggest underperformer was credit, where we didn't get credit quite right.

I don't think there's anything systemic with it. We've got a great management team there, and we're very confident in it, but we didn't get it right in the second quarter, and that was probably the biggest shift.

Okay. Thanks.

: Okay, I think that was all the questions from the phone line? Any last questions here? Otherwise, we'll wrap it up. No?

Okay, just a couple of summary comments. Obviously, as I say, our view is this was really a very resilient performance during a difficult second quarter for the banking sector. I think the continued strong flow of net new assets that we achieved in Private Banking, our fourth successive quarter positive inflows in Asset Management, and a continued share momentum, particularly in Investment Banking, reflect the strength of the business model and the franchise.

We think that our strong capital and liquidity positions, as well, to meet changing regulatory requirements; we do obviously continue to contribute to the industry efforts to build a more robust and stable financial system. Clearly, despite the continuing macroeconomic uncertainty in the first half of 2010, we achieved a reported return on equity of 20%, and underlying return on equity of 17%, while making substantial further progress in developing all of our businesses. So again, we remain confident that our business model is strong, our strategy is appropriate, and it's resilient in the face of an uncertain and challenging economic and market environment.

So thanks very much for everybody's time. Thank you.

That does conclude today's conference. An e-mail 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.