Credit Suisse Group AG (CS) 2010 Q3 法說會逐字稿

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group third quarter 2010 results conference call. As a reminder, all participants are in a 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. Good morning. Welcome to our third quarter results call. I'm joined by our CFO, David Mathers, who took over from Renato Fassbind on October 1. And as usual, I'll make some brief introduction remarks; David will take you through the detail. We'll then obviously entertain your questions, and then I'll sum up.

With underlying net operating income of CHF1 billion and all divisions being profitable, I think we've delivered a good result in a challenging quarter, characterized by low market volumes and subdued client activity. We continue to make disciplined investments in client-focused, capital efficient, high return businesses. These are already producing strong net new assets, and we've also grown our market share.

We had an encouraging performance in Private Banking, with additionally strong net new assets of CHF12.4 billion in Wealth Management. We saw inflows in all regions, and a particularly strong performance in Asia Pacific with annualized growth of over 20%.

Our gross margin at 118 basis points reflects the fact that revenues remain subdued. The industry is near a cyclical low in the current low interest rate environment, which is compounded by reduced levels of client activity. However, the prospects for growth in Wealth Management remain very attractive.

With our integrated model, we're poised to capitalize on improving markets, thanks to our disciplined investment in our global platform, our advisory process, and our people. And our Swiss Corporate & Institutional business, which is an important provider of financing and services to the Swiss economy, had a good quarter with a strong pre-tax profit and continued high pre-tax margin.

In the Investment Bank, we're encouraged by our continued market share momentum. Fixed Income and our Underwriting and Advisory businesses achieved a solid performance, reflecting our improving competitive position. In Equities, the performance of our client-focused business was in line with industry volumes. Equities has also shown lower overall revenue volatility than the industry in the first nine months, which underscores our strong client position.

In Asset Management, we were pleased with the strategic progress, the solid result, and strong net new asset inflows of CHF3.6 billion, and this is the fifth successive quarter in which we've seen positive inflows. The acquisition of a minority stake in York Capital is an important next step in the continuing implementation of a strategy focused on high margin, capital efficient businesses able to leverage our global platform.

Our results for the first nine months, with an underlying return on equity of 15% and net new assets of CHF55 billion, underscore that our business model is able to produce strong returns over the cycle. Should the current challenges persist, our capital efficient strategy will enable us to manage them well.

We anticipated much of the regulatory change, both in terms of capital requirements and the new cross-border regime. That means that we're well placed to meet these new requirements, and at the same time compete and deliver attractive returns to our shareholders.

I'd now like to hand over to David, who's going to give you some more detail on the results, and also talk about how we see our capital structure developing over the next few years. David?

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

On a headline basis, we achieved revenues of CHF6.3 billion and net income of CHF600 million, equivalent to an after tax return on equity of 7% for the quarter. Total net new assets in the quarter were CHF14.6 billion, reflecting a continuing strong contribution from our Wealth Management business.

And as per our normal practice, we include the underlying result. Overall net revenues on this basis were CHF6.9 billion; pre-tax income, CHF1.4 billion; and on underlying tax rate of 28%, the net income result was CHF960 million.

The underlying return on equity so far this quarter was 11% and now stands at a cumulative 15% for the first nine months of the year. We include as usual a detailed reconciliation of the underlying results in the appendix to the slide deck.

Let's now turn to slide six for an overview of our divisional results. In the Private Bank, we continued to demonstrate momentum in our industry-leading, multi-shore business model with strong net new asset inflows. These totaled CHF12.4 billion in Wealth Management, in line with our 6% target, and benefitting from a 20% growth rate in net new assets from Asia Pacific.

In the first nine months, net new asset inflows were CHF37.2 billion for Wealth Management and CHF45 billion for all of Private Banking. And that means we've already exceeded in the first -- we've already exceeded the net asset inflows for the whole of 2009, when we recorded CHF35.3 billion and CHF41.6 billion respectively.

Private Banking's underlying pre-tax income of CHF880 million was slightly ahead of the second quarter and the third quarter of 2009. Wealth Management's gross margin remained resilient compared to the first half of the year at a cyclically low 118 basis points, reflecting client cautiousness and low levels of activity.

We continue to capitalize on our competitive position this quarter as we increase relationship managers by a net 60 and a total of 140 in the quarter, around 55% of which were senior relationship managers.

Let me continue now with Wealth Management on slide seven. Revenues were down 5% quarter on quarter, reflecting continued risk-averse client sentiment and the usual seasonal slowdown, which resulted in lower brokerage fees. However, the underlying pre-tax income for Wealth Management, excluding CHF44 million litigation provision, stood at CHF656 million; an increase over -- 4% over the second quarter, with overall expenses declining 8% quarter on quarter. The underlying pre-tax income margin was 28%.

Let me now turn to slide eight. We had strong net new asset inflows of CHF12.4 billion in the quarter, equivalent to an annualized growth rate of 6.2%. We regard this as a significant outperformance in a challenging market.

The balanced regional contribution that we show here demonstrates the strength of our platform and the trust that our clients have in Credit Suisse. Inflows have been particularly strong in EMEA and in Asia Pacific so far this year. On the right hand side of the slide, the quarterly gross margin comparisons for 2010 shows a stable picture in a period of subdued revenue levels.

Let's turn to slide nine. We are regularly asked about the sustainability of the gross margin given the changing business environment, so we thought it would be useful to show an analysis of our net new asset inflows and gross margin to help better explain the dynamics of the business.

This slide shows a booking center analysis of our net new asset inflows and the related gross margins, and this is for our Swiss platform and for our international platform, excluding United States, which operates on a slightly different business model to the rest of the Private Bank.

From the top of the slide downwards, we've listed our major booking centers in descending order of breadth, depth, and maturity of product and service offering. From left to right, we show the net new assets for fiscal year 2009 and for the first nine months of 2010. We then show the gross margin for the same periods.

Of the CHF32 billion of asset inflows so far this year, the blue box shows the asset inflows into our Swiss booking center of CHF12 billion. This includes ultra-high-net-worth; high-net-worth; affluent and retail within Swiss Onshore, as well as our mature markets and emerging markets offshore businesses.

If we look at the sub-segments within our Swiss booking centre, you can see we have good contributions from Swiss onshore clients and emerging market-based offshore clients. We have seen outflows from mature based -- mature market-based offshore clients, predominantly in Western Europe, but at a significantly lower absolute level than we experienced in 2009 when we had the Scudo amnesty in Italy.

Moving down, the orange block shows CHF20 billion of net new asset inflows to our non-US international booking centers. We think these strong inflows are testament to the sustained investment that we've made here over a number of years.

Let's look now at the individual gross margins on a booking center analysis. I think the first point to make here is there is a broad correlation between the relative margin and the depth and maturity of the product and service offering. It's not surprising, therefore, that our Swiss platform had a gross margin of 135 basis points so far this year, higher than the overall business at 120 basis points. This booking center is easily the most developed in terms of product and service.

If we look at the sub-segment breakdown in Switzerland, you can see that the gross margin for the mature markets is lower than the average for Switzerland, and below that of high net-worth. If we then look further down the page, you can see that the gross margin from our emerging market and international booking centers are slightly lower than the average at 103 basis points and 96 basis points, respectively.

And the current build-out phase of the product and solution capability of these platforms means that the margin in these areas in generally more dependent on transactional revenues, which have been subdued recently. And the high-net-new asset growth rates achieved in recent years on those platforms also has an initial dampening effect on the gross margin.

We do see upside in the gross margins as and when markets improve. But furthermore, as these international platforms mature for the broadening of the client product and service offering, it should also provide further upside potential for the gross margin.

Let me continue now with Corporate & Institutional Clients on slide 10. Pre-tax income was CHF224 million, with a strong pre-tax margin of 51% for the quarter. Net credit risk provision releases of CHF16 million were supported by the continued recovery of the Swiss economy, and reflects a high quality loan book. Revenues remained stable, with a higher contribution from fees and commissions.

So let me now turn to Investment Banking on slide 11. Investment Banking's results reflected a particularly weak July. Although August was clearly affected by the normal summer slowdown, we did then see some improvement in activity in September. Notwithstanding these difficult market conditions, our fixed income sales and trading results were solid. We achieved strong performances in RMBS secondary trading and credit, both Leverage Finance and Investment Grade, and there were also solid contributions from global rates and emerging markets.

Our equity sales and trading results predominantly reflected the substantial industry-wide decline that we've seen in exchange and in client volumes through the summer, as well as seasonality in our prime service business, and weaker client flows in derivatives compared with a particularly strong quarter.

Underwriting and advisory was solid, despite muted activity levels in a number of products, and we continue to have a strong pipeline heading into the fourth quarter.

Slide 12. This shows you a more detailed analysis of the quarterly results. Net revenues, excluding the fair value of own debt moves allocated to the Investment Bank, were CHF3.5 billion, down 9% from the second quarter in US dollar terms, and down 16% in Swiss franc terms.

Pre-tax income on these revenues was CHF0.5 billion Swiss francs. And so far this year, the pre-tax margin in our Investment Bank stands at 24%, and the pre-tax return on economic capital, 22%.

Let's turn to fixed income on slide 13. Fixed income revenues increased 3% quarter on quarter, with many of our businesses performing well. This increase was equivalent to a rise of 12% in dollar terms.

In particular, as I mentioned before, we had good results in our non-agency RMBS trading business and in our credit businesses, driven by increased client flows and strong high yield new issuance activity.

We also had solid revenues from rates and emerging markets, with the latter particularly benefiting from increased client flows.

Finally, our planned sales force expansion in targeted areas of flow fixed income is now largely complete. The impact of our investments here is starting to materialize, as we see better penetration with key clients and as we improve the breadth and the intensity of our coverage.

Let me now turn to the Equities business on slide 14.

Our combined equity revenues fell 35% compared to the second quarter in Swiss franc terms, 30% in US dollar terms.

And in Cash Equities, our business was adversely affected by the decline in market volumes. For example, NASDAQ volumes were down 26% on the third quarter compared with the second quarter, and Euronext down by 21%. And these falls were particularly acute in electronic trading, where we are a market leader.

In Equity Derivatives, where our business is predominantly flow based, revenues were also affected by lower client business flows in the quarter.

I would note that the Equity Revenue performance does include a debit valuation adjustment, or DVA, in our structured and note liabilities as a result of the tightening in spreads on our own debt, and this resulted in CHF118 million loss this quarter compared to a gain of CHF64 million in the second quarter.

Slide 15, turning to Advisory and Underwriting; revenues from these businesses was resilient, although the benefit from stronger debt issuance was more than offset by weaker equity issuance and lower levels of M&A completions in the third quarter.

Going into the fourth quarter, our pipeline is stronger than a year ago, particularly in ECM and Leveraged Finance, but broadly in line with the levels that we reported at the end of the second quarter. Clearly, the execution of this pipeline does remain very much dependent on market conditions.

Let me now turn to slide 16, which shows two charts that we presented at a recent industry conference. The top chart provides an analysis of our Investment Banking revenues, and the key point here is that 98% of our revenues come directly or indirectly from our clients. And client revenues, as we show here, consist of fees, commissions, the gains and losses from matching of client trades and revenues from client financing activities, such as in Prime Services for example.

The lower chart shows our standard histogram of daily revenues, and it's clear that this much more client focused business model does deliver more consistent daily revenue contributions with a very low level trading loss days.

Revenue distribution so far this year has been tightly concentrated, with few outside gains or losses. In fact, we've seen only three loss-making days in the year so far, and only one loss making day in the third quarter, which we do believe to be significantly better than industry levels.

Slide 17; the chart at the top of the slide shows the risk weighted asset levels in the Investment Bank. RWAs increased by $9 billion, but have reduced by $1 billion in the exit businesses this quarter. This increase resulted from higher lending commitments in our Leveraged Finance and Corporate Banking, as well as increases in respect of the expansion of our flow businesses.

Slide 18; total compensation expenses in the Investment Bank of CHF1.9 billion were down 7% from the second quarter, reflecting a consistent approach to compensation accrual based on performance and on the external market environment.

Year-to-date compensation in the Investment Bank is down 20% on the same nine months of last year. With this accrual, the Investment Bank in comp to revenue ratio stood at 54% at third quarter, 48% year-to-date. And across the Group, the equivalent ratios on the same basis was 50% for the quarter and 47% so far this year.

Non-compensation expenses decreased compared to the last quarter. This was driven by decreases across most expense categories, as well as the favorable impact of a stronger Swiss franc.

Let me turn now to Asset Management on slide 19.

In light of the recent agreement to acquire York Capital, or acquire a minority stake in York Capital, I wanted to spend a few minutes reiterated our strategy in Asset Management. We're focusing this business on our core competencies that capitalize on the strengths of the Credit Suisse brand and our on our global footprint.

These core capabilities are in asset allocation, in alternative investments, in our Swiss platform, and the product suite is aligned to synergies that exist through collaboration with both the Private Bank and the Investment Bank.

For example, asset allocation is a key requirement for our Private Banking clients and it's delivered by a discretionary mandate capability. Ultra high net worth and high net worth individuals require access to private equity and hedge fund products, and our ETF and index strategy products utilize the technology and financing capability of Investment Banking.

And in leveraging the Integrated Bank, our objective is to build a high margin, capital efficient business focused on raising third party capital by creating best in class investment capabilities, with superior performance, either by in-house funds, or joint ventures and partnerships with world class managers.

So if we turn to slide 20, our recently announced agreement to acquire a significant non-controlling stake in York Capital is a very good example of the execution of this strategy. York's key products include event driven, credit and risk arbitrage. It's one of the best performing hedge funds in the world, with a broad based product platform that complements our existing capabilities. Our decision to purchase a significant non-controlling equity stake aligns our interests and retains the best talent at York.

We think the leading players in the hedge fund industry need to be at scale in the next few years, and in return for access to one of the best distribution platforms in the world at Credit Suisse, we want to ensure that Credit Suisse also benefits in the upside that we think will result from this collaboration.

And I point out that investment in the management company is wholly consistent with the new US financial reforms, and consistent with the capital-light approach of focusing on recurring fee income and avoiding large capital commitments or potential conflicts of interest with our clients.

So let's turn to slide 21 and look at the results of the Asset Management division this quarter.

Asset Management's pre-tax income was strong at CHF135 million. Total revenues were up 16% compared to the second quarter, and expenses down 7%, demonstrating the continued momentum in the implementation of our strategy. There was also an encouraging progression in our fee-based revenues, up 4% quarter-on-quarter.

Let's turn to slide 22.

I think as important as the quarterly financial result is the continued strong net asset inflows in this business for the fifth consecutive quarter. We continue to see -- achieve stronger asset inflows, CHF5.2 billion alternatives, particularly in real estate, commodity and ETFs; continued inflows from emerging market products and private equity fund-of-funds. And there are also inflows in multi-asset class solutions. The only outflows we suffered were in more low margin products within the Swiss platform.

We are encouraged by this performance compared to quarterly industry trends, and we're continuing to build upon the positive trends we see in this business over the last few quarters.

So turning to slide 23, this concludes the divisional results review, and on slide 24, I'm going to continue with a discussion of the Group's capital position and the recently announced regulatory changes.

So if you look at slide 24, you can see that we continue to maintain our strong position as one of the best capitalized banks globally, with a Basel II Tier 1 ratio of 16.7%. Our core Tier 1 ratio, excluding hybrid capital, improves to 12.1%, whilst the Swiss regulatory leverage ratio was higher at 4.3% in the third quarter. And I would note that the Tier 1 ratio includes a dividend accrual in line with our historic payout ratio.

So the next few slides, we wanted to spend some time drilling into the implications for our regulatory capital progression in light of the Swiss Expert Commission's recommendations published earlier this month.

So let's look at slide 25. This shows the progression in risk weighted assets under the proposed Basel changes, and please note that these assumptions are based on our current mix of positions on the balance sheet.

So if we step back and look at this slide, it shows the BII.5 increase of CHF45 billion, and the BIII increase of CHF130 billion, and this is before mitigation efforts.

Starting at the left hand side of the slide with CHF228 billion of RWAs under the current BII regime at the end of the third quarter. We then look at the first phase of changes under BII.5, which will be implemented under BS rules at the end of 2011 at the latest.

If we move from left to right across the chart, the first adjustment column is stressed VaR. This is the RWA equivalent of VaR calculated on the most severe dataset experienced in the last three years, and results an estimated increased in RWA of CHF15 billion.

The second column represents the incremental default risk adjustment, and this is in respect of credit risk held within our trading book. The B11.5 recalibration increases the capital charge closer to what these would have been under a banking book treatment, and we estimate an impact of around CHF20 billion from this change.

The third column shows the BII.5 securitization changes, and this reflects an increased charge on certain higher quality securitization charges, 50% of which are written off directly to equity under BII.5. And on our current positions, we estimate a total impact of around CH10 billion from this change.

So looking across the BII.5 changes, the total impact is around CHF45 billion, and would increase risk weighted assets to approximately CHF270 billion prior to the mitigation measures that we'll come to in a moment.

So let's now move to the BIII changes that are planned to be implemented from the beginning of 2013.

So the first CHF65 billion represent the gross up of the capital deductions relating to different securitization tranches. The next column shows the recalibration of the credit valuation adjustment, or CVA, under the BIII rules. We estimate on our current positions, this could add around CHF65 billion of RWA, primarily in respect of the counterparty risk from uncollateralized OTC derivative contracts.

So in total across the slide, we think that RWAs on our current position mix, post BII.5 and BIII implementation, could rise to about CHF400 billion, but we expect to reduce this amount by between CHF50 billion to CHF70 billion through a number of measures, resulting in net post BIII BWA -- RWA of between CHF330 billion and CHF350 billion.

Now let me discuss these mitigation assumptions, which we do regard as conservative on slide 26.

If we start from the top of the slide, the first box represents our exit businesses. You may recall these are businesses that, as we announced back in 2008, are no longer consistent with our client focused, capital efficient strategy.

If we were still to have these positions when BIII is implemented in 2013, there would be a significant increase in RWA from the CHF14 billion of current RWA that we showed on an earlier slide in the Investment Banking section. So as we continue to run these positions down and achieve the bulk of the disposal of these by 2013, this will contribute CHF20 billion to CHF25 billion out of the mitigation total. We don't generate revenues from these businesses and, therefore, we don't expect there to be any revenue impact from this mitigation.

So let's move to the second box, which is our structured product exposure.

We anticipate reducing the size of our trading book that supports our client business in these products by perhaps CHF3 billion by 2013, which would reduce the BIII RWA equivalent positions by CHF15 billion to CHF20 billion.

I think this could potentially have some impact on the revenues from this business if we implemented it today, but given how we expect client trading demand in these assets to change by 2013, we would have expected these books to have been smaller by then in any event. So we think the marginal impact of these mitigation changes shouldn't be too significant.

Let's turn to the third box. In emerging markets, as you know, we're in the process of refocusing this business towards a more flow based model. We think this will mitigate some of the impact from the incremental default risk charges relating to the credit inventories. What's more, a more flow based emerging market operation should generate higher revenues and more than offset any adverse impact from this mitigation.

Finally, if we look at the CVA in our Derivatives business, we expect there to be approximately CHF5 billion to CHF10 billion of RWA reduction, resulting from uncollateralized exposures that will either mature, be hedged or can be collateralized over the next few years. Furthermore, we think that there should be a further CHF5 billion to CHF10 billion of RWA mitigation that results from a shift of some of our OTC Derivatives business to central counterparty clearing.

So let's turn now to slide 27. We thought it might be useful to provide you with an illustrative simulation or model of how our capital ratios could develop under the new rules, as laid out by the Basel Committee and by the Swiss Expert Commission. It is worth noting that this model is based on current market consensus estimates, and as such, are not forward-looking statements made by Credit Suisse management.

So let's look at the top of this graph and move downwards.

We start with our Tier 1 equity ratio under BII of 12% at the end of September 2010. This is a conservative starting point that excludes our existing hybrid issuance, but I would note that under BIII, the hybrids are still fully capital effective in 2013, and for some period there-afterwards.

The first bar down shows the positive impact of this ratio from retained earnings until the end of 2013. As we've said before, this is based on current market expectations and assumes a dividend payout ratio of 30%.

The next bar shows the impact on the ratio of the recalibrations under BII.5 and BIII we just discussed, which would lift our post-mitigation RWA to around CHF340 billion.

To be conservative here, we've also allowed for some business growth in the next bar, with an assumed organic RWA growth of, say, 5% per annum until 2012, resulting in a 1% reduction in the ratio. So on this basis, by 2013, the BIII ratio will be 12%, and that's already in excess of the 2019 minimum.

We've then extended the model to give a 2019 common equity ratio, assuming net income is constant each year at the 2013 level, with a 30% dividend ratio. On this basis, retained earnings would generate a further 9% increase in the common equity ratio. This would be offset by a 2% reduction in the ratio from a phasing in of the some of the new Basel III equity deductions. So by 2019, on this simulation, these assumptions would achieve a hypothetical common equity capital ratio of 18%.

We've also modeled a stress scenario, with earnings set at 50% of current market consensus expectations for the entire period, but maintaining a 30% dividend payout ratio. But even in this scenario, the common equity ratio would still be comfortably in excess of 10% at the end of 2013 and beyond.

So this gives some idea of how our capital position could evolve under BIII. Although clearly this shows the strength of our existing and future common equity position, we also expect CoCos to play a significant part in a BIII capital structure.

So let me now turn to the next slide, which lays out some views on the viability of a contingent convertible market; so looking at slide 28.

I think although the market for contingent convertibles is still immature, we are confident that the extended time horizon for the implementation of the recommendations will enable these instruments to develop over time, and that moreover, Credit Suisse will be an attractive issuer of these securities. So why would investors buy CoCos?

First, we believe there is a significant and institutional and retail appetite for high yielding assets in a continued low interest rate environment. Second, there is a substantial current inventory of bank capital instruments that will either mature or be called, and will need replacement. Just to be specific on this point, there are currently EUR450 billion of Tier 1 and Tier 2 bank instruments in issuance globally. Thirdly, CoCo structures arguably have a superior value to investors in a liquidation scenario. Bondholders should achieve a high conversion rate on their debt, and the financial institution would continue to trade as a going concern.

By comparison, in a liquidation scenario where no CoCo structure exists, bondholders tend to receive a low payout as a percentage of the face value of the bond.

Finally, the significant out-of-the-money trigger levels should ensure that conversions are remote enough to enable fixed income investors to own CoCos.

So who should be interested in acquiring CoCos?

Well, as I mentioned before, there are currently EUR450 billion of hybrid Tier 1 and Tier 2 instruments in issuance globally. As these assets roll off, from a fixed income investors' perspective there will be a need to replace the existing regulatory capital instruments as they phase out gradually from qualifying under B3 under either called or mature.

Thinking more broadly, we do think these instruments represent an attractive proposition. If they do indeed convert, investors receive equity at depressed levels, and if they don't, which is rather more likely, investors receive a high coupon as compensation for assuming that obligation. And we think this fits well with the investment strategy of many sovereign wealth funds, as well as that of a number of hedge funds; and it's wholly possible that the superior economic value will also extend interest to other investor groups.

Let me turn now to slide 29.

We've attempted here to model the financing impact of the new capital structure. The left hand column lays out our current funding structure, and we've split this funding into three main categories; shareholders' equity, regulatory debt capital, and senior debt. We've also split out regulatory debt capital between lower and upper Tier 2, hybrids, and the Claudius notes.

Then on the right hand side, we've included an illustrative future funding structure based on the recommendations of the Swiss Expert Commission, and this simply assumes converting our current regulatory debt structure to CoCos. I'm sure we've put different assumptions in, and you can. But the key point from the left hand column is that the existing regulatory debt structure already costs around CHF1.2 billion more in debt spreads above that of our existing senior debt costs.

So if we look at the right hand side, for CHF340 billion of RWA, new rules would imply a requirement of around CHF30 billion of CoCos split CHF10 billion into high strike and CHF20 billion into low strike.

So if we do a simple comparison of our CHF1.2 billion existing financing costs above senior of -- against these CoCo issuance of CHF30 billion, this would equate to an average spread against senior of around 400 basis points.

But furthermore, if you assume that low strike CoCo priced in line with Tier 2, and high strike priced in line with hybrid debt, you can see that the overall cost isn't that different to the cost that we already pay for our current structure.

So just in summary; first, we know that the CoCo market is nascent for the time being and it will need time to develop, but we do have this time. Second, we think there are clearly identifiable economic reasons to give us confidence that the CoCo market will develop, and we have seen a high number of reverse enquiries at all levels into our DCM and ECM desks, which I think verifies our positive stance on these instruments.

And finally, we think our business model allows us to accommodate these changes. Institutions like Credit Suisse, that already have an existing high capital level, will be at an advantage as the CoCo market develops.

So this concludes my presentation, and with that, I'd like to hand back to Brady.

Thanks, David. So I guess at this point we're ready to open it up to questions over the phone. So, operator, we're ready to take the first question.

(Operator Instructions). And your first question comes from the line of Huw Van Steenis from Morgan Stanley. Please ask your question.

Good morning, and thank you very much for what I thought was an extremely useful presentation on the new Capital Rules.

Just a quick question on the dividend. How open is the Board to consider a scrip dividend to accelerate hitting the new Swiss standards?

And I guess number two, you obviously pointed towards a 30% dividend payout. Clearly, a CHF2 dividend from last year based on the current net earnings just grossed up for the full year would imply nearer 40%. And again would that be a subtle hint to us that a scrip dividend is certainly something which is on the table for consideration?

Thanks.

Thanks, Huw. It's Brady. Yes, I think in general, as we said, we remain committed and think we have a business model that can provide cash dividend returns to shareholders over time. We have continued to explain that we are broadly consistent with what we've done over the years in terms of dividend accrual.

I think that obviously in terms of this year's dividend, we obviously still have a quarter to go in the year. There's still obviously questions around exactly how the business will finish up, etc., although I think in principle, we continue to be committed to that, as we said, and consistent in the way that we've looked at it.

Well, obviously, I guess we could think about different alternatives on the dividend, but in general, I think we're more focused just on cash dividend payments as opposed to scrip, so I would be -- I doubt that that would change.

Okay, thanks a lot.

Thank you.

Your next question comes from the line of Fiona Swaffield of Execution Noble. Please ask your question.

Hi, I had a couple. Just coming back to the dividend and the payout ratio, I thought historically it was more like 35%, so I wondered if you could discuss why you chose 30%.

And then secondly on the costs in Wealth Management, obviously, those have gone down considerably on the quarter, down 8%, yet you've had less cost flex in the Investment Bank. Are there different compensation accrual programs in the two?

And then thirdly, I don't know if you could talk a bit more about the net impact of the dollar because, obviously, it's affecting lots of different lines. Have you got a number for what you think currencies did to the Q3 P&L, pre-tax or post-tax level?

Thanks.

Thanks, Fiona; appreciated. On your first question, I guess just to make clear, because I guess that this 30%, you were referring to the simulation that we put in there. Just to be very clear, I think David said it but we'll say it again, that's really just a model. It's just a simulation. We're not suggesting that any of the numbers in there, whether they be earnings numbers or dividend numbers, etc., are projections or guidelines as to what we will actually do. It's really just meant to be illustrative, so to be clear. So if that's what you're [teeing] on is that 30%, that's just very much -- it's just a model and it's a number that we put in.

I think, if you look historically, actually the numbers have been higher than that, lower than that, but we've tried to give you a reasonable idea of the direction that we're going in without pinning that number down exactly, as you know. So I think again, just to again -- to say that is not -- that 30% is just a model input.

So again though, as we've said, we believe that we're approaching the dividend in a consistent way to what we have done in recent years. So again, I know that's probably not as precise as many would like to hear, but that's our general direction.

David, do you want to take the cost question?

On the expense issue then, so if we turn to the PB numbers, or the Wealth Management numbers, we did see declines across most expense categories, admittedly helped by the fact that sales and marketing costs were at a seasonal low.

But IT costs have also been at a lower level than in the first quarter. So I think we have been disciplined about this, and I think you're seeing the benefit from that.

I think within the Investment Bank I would point out that the quarter-on-quarter -- sorry, the nine-months-on-nine-months compensation accrual is down 20% in Swiss francs; obviously, slightly less in US dollar terms; so I think you are seeing that fall there.

In non-compensation expenses, admittedly helped by the Swiss franc move, we also saw like-for-like declines in our non-compensation spend, and the rise earlier in the year I think reflects the IT investment.

So I think we are taking a very disciplined approach to that across both -- across all the businesses, because I think you saw the progress in Asset Management too. But I think in terms of the way the numbers came out, you saw the benefit more in Private Banking and Asset Management this quarter.

I think in terms of the dollar/Swiss franc impact, I think I'd hesitate to give you an exact number across the Bank as a whole. I would point out though that we obviously have a very successful business in the Americas and in other dollar-denominated countries and, therefore, even though that will obviously reduce costs because of the depreciation of the dollar, it actually has a greater impact on the revenues. So there's no doubt that the weakness of the dollar is a net negative in our results this quarter for the Bank. And quite clearly I think as you may have noticed, that also contributed to the book value per share in terms of the move downwards in the equity there.

Thanks, Fiona. Next question.

Your next question comes from the line of Derek De Vries of Bank of America. Please ask your question.

Thanks. I have a few questions. I actually want to go back to the costs in the Investment Bank and specifically the compensation costs.

On slide 18 you make the good point that the compensation cost to revenues is 48% for the first nine months this year versus 47% last year, which I guess is reassuring, except that last year, you had the big [true-up] in Q4, and that left your full year run-rate at about 42%, I think. So I guess my question is if you -- first of all, could we see another big true-up in Q4 of this year?

And then more just generally, if you hadn't accrued any bonus for anyone this year, how much lower would your costs have been? Do you have 15% flexibility between paying the bonuses you've accrued and not paying anything, or is it 20%, or 25%? Given the changes in compensation structure, higher salaries, more deferred, I'm just curious how much leeway there is there on the costs in the Investment Banking.

And I also wanted to ask about -- there's been a lot of noise from US banks about US mortgages, and I guess for you guys, the big issue is on your Investment Banking business where you do have a strong RMBS business.

When you warehouse these mortgages, at any point do you provide the representations and warranties, or is that all done by whoever writes the US mortgage? And then is there any issues around, legal issues around the third party arrangers and what they may have told you, or not told you?

And then I guess my last question -- I'll keep it to three questions -- my last question would relate to the CoCos, and perhaps I should know this, but have you given any guidance in terms of how your CoCos will be written, how they will actually convert into equity? So will it be done at a fixed exchange rate, or will it be done at a discount, or done at the closing price the day before? How does it work when it actually, if -- and we don't expect it would, but if it were to convert into equity?

Great, Derek. Thanks very much. Let me -- let's try to take them in reverse order, I think.

On the CoCos, really, it's obviously still quite preliminary. We've got -- it was announced I guess about two weeks ago, and I think we've got nine years to raise it or something in terms of the transition period. So obviously, this will develop over time, and I think right now it's still obviously formative.

And I think it'll partly be shaped by some dialog with the regulator and partly shaped by dialog with the market and what really works in the market. And so to be honest, I don't think we have -- we obviously have views and ideas about what direction that may take, but I think it's pretty preliminary to be talking about those kinds of terms. So I think we'll -- I guess just stay tuned. I think over time it will develop.

We do feel though, as you know, and we talked to the conference about just the -- we do believe this will be a viable market, and I think the most compelling fact is, as David mentioned, CHF450 billion of hybrids out there that are going to get called out or mature over the next five years/10 years, and those investors will be looking to replace those, so our view is that it will be a viable market, but we'll see.

On the US mortgage issue, I guess I would say a few things. I think probably the most important summary comment is, overall, we don't think there is any material impact on our business from this. We were a very small player, particularly compared -- if you compare us to some of the other banks that were much more active in this, we're a very small player actually in these markets over time. So that's the first overall comment.

The second thing is, this is not a new issue. I know the market has sort of seized on this, but there's obviously these issues have been out there for a period of time. There's been a lot of regulatory activity around this and a lot of dialog. There also have been, as you know, there are -- there is some legal activity already around this. So in many respects this is not a brand new issue that's just popped up from nowhere, at least certainly from our point of view.

I guess what people have focused on, and what we focus on in terms of the real source of risk here, is the actual origination of the product, as you know the actual origination of the loans. And I can give you some specific numbers in terms of our activities there, which is in the 2004 to 2008 period, which is -- as you know, basically since '08, there really hasn't been any origination of private label mortgages. But over that period, we originated CHF6.1 billion of whole loans. That constitutes a 0.14%, and let me make this very clear, that's one tenth of 1% market share in that market was Credit Suisse's market share and origination of those loans.

Of the CHF6.1 billion, CHF1.7 billion were sold as whole loans. The remaining CHF4.4 billion were put into securitizations. Of the CHF4.4 billion that we originated, CHF2 billion is currently still outstanding. So the others have matured. So we have a total of CHF2 billion originated loans that are still out there as parts of securitizations, and so it's a very small exposure.

And our view is that, that is -- when you talk about these issues around foreclosure, documentation, etc., that's where the real issue will be. Although clearly, again, this is an area where there are clearly issues across the business, but that's where the issues are in terms of exposure.

In terms of our current activity in that area though, we're really very much just involved in a secondary sale, purchase and sale of securities. And so frankly, I think that this, A, will not have much impact on that flow, nor are there embedded risks to that.

So our view is that overall, we have a very small presence in this market, and we don't think there'll be any material impact.

David, do you want to take the compensation point?

I think as we discussed before, we don't target to a specific comp to revenue ratio in any one quarter. What we do instead is we make an accrual based on our risk adjusted profitability, our full year expectations and our assessment of the external competitive market conditions, and try and actually accrue through that period.

That said, I think clearly, the regulatory changes in the market have resulted in a requirement for higher salaries and the distribution of that, so there's a degree of reduction of flexibility in our cost structure as a consequence of that. And you're probably seeing a component of that which we need to adjust for in our -- fully in our bonus calculations.

I think just as a supplementary point, you may note there's actually a new table on page 102 in our financial release which does give a deferral disclosure, but for the Bank overall, which may be helpful in the analysis.

Perfect, I hadn't seen that table so I'll look at it now. Thank you very much.

Thanks a lot, Derek. Next question.

Your next question comes from the line of Kian Abouhossein of JPMorgan. Please ask your question.

Yes. Hi, Brady. A few quick questions. First of all, actually coming to the Merrill Lynch presentation, slide 19, where you had this useful slide of your [highest] and fixed income, up about 30%, and you want to be top five in all regions.

Looking at the results, it looks like the gap is actually widening against your competitors rather than closing, so I'm trying to understand how I should think about the revenue P&L movements in terms of higher, where you are, and in terms of movement in terms of revenue closure over the next, let's say, two years. And at the same time, is that the reason why we see a comp ratio which is out of line with your peers? So really the P&L movement, that's what I'm trying to understand.

Secondly, if you could maybe give some indication of mortgage put-back reserves on your balance sheet. I'm not interested in foreclosures, but mortgage put-back reserves.

And thirdly, if you could just briefly talk about trends, in particular in Equities within your flow businesses.

Thanks.

Why don't -- let me -- Kian, thanks for the questions. Let me take the middle question first, just on the mortgage issue. We don't have any material put-back reserves because we don't believe we have any material exposure there. So we don't have any -- no material reserves.

I would say on the first question in terms of the Fixed Income business, I guess maybe I can just give you some general comments and then David can give you a little bit more specific. But again, as you know, our focus is really on the client flow aspects of that business, and we do feel like we've -- we actually -- if you look at the third quarter performance, I think it was actually quite good in terms of trend quarter-to-quarter, etc. And I think that is representative of some of the progress that we've made, but also representative of the strategy that we have out there.

But again, we continue to try to distinguish between these issues around businesses that have very asset-heavy, risk-heavy approaches, versus a more capital efficient approach that's more client focused.

And so I think what you're going to see is continued progress in the business, and continued growth in the business, but also importantly for us, high returns, because that's really what we're looking to do is drive the returns off that capital.

David, do you want to --?

Exactly. I think a few data points. Fixed Income revenues were up 12% in US dollar terms quarter on quarter, which I think is supportive of this. We've added 118 sales people across our Fixed Income businesses in flow rates, credit, foreign exchange, and I think we are definitely seeing benefits from that in terms of improved penetration by key clients. Although quite clearly, just given the normal timing of recruitment, those benefits are only beginning to flow now, and we won't really -- we wouldn't really expect to see the full credit from that into 2011.

Then you had a final question on Equities, I think.

Just to follow up on that. If you want to be top five, I would think that we're talking more like CHF15 billion/CHF14 billion of revenues, which is more like doubling of what you're making in Fixed Income, but is this what we're talking about, and are you geared up in terms of people to that kind of revenue level, or should we expect ongoing investments in Fixed Income to come still?

I don't think I could comment on that exact number. I think -- but I think the point we'd make is we're actually talking about top five in client flows. I would guess that that kind of revenue level would imply a quite different approach to risk than we would consider.

And you're more or less done with the hiring on Fixed Income?

I think we're very pleased with the progress we've made in our sales effort in the key areas. Clearly, I think -- I mentioned during the course of the presentation that a core part of our strategy is to re-orientate the emerging market business towards more onshore flow based business. I would expect that probably will require some recruitment over the coming years as we actually build that.

I think your last question, Kian, was on the trends on the Equity business, I guess, and I think our view is obviously I think for the whole industry -- you can see the volumes yourself. Obviously, for the whole industry, Equities has just been a more muted activity in this business for the whole year really.

We continue to think we have one of the best equity businesses around, with the top cash presence, a top Prime Brokerage, Prime Services business, and so we think we're in good shape to benefit when the volume in the market comes back.

I think clearly, as the -- we're two weeks into the fourth quarter, so I think as we said, our best guidance is just that so far October looks a lot like September, and obviously we'll see how the quarter progresses.

But we do think longer term and the more medium term, whether it's into -- whether it's fourth quarter or into next year, etc., we do -- we believe actually that these markets will become more active, and that's certainly going to benefit us because of our strength in that area. So hopefully we'll see that happen.

Great, thank you.

Thank you. Next question.

Your next question comes from the line of Kinner Lakhani from Citi. Please ask your question?

Yes, hi. Good morning. Had a couple of question to start off with on the Private Banking side. What are your views on the upcoming German/Swiss tax treaty? And how do they factor into your thoughts on the I think CHF25 billion to CHF35 billion of AuM at risk?

And related to that just looking at slide nine, clearly, the pressure versus 2009 on the margin has been greater from the International Booking Centers. I suspect part of this is coming from the One Bank revenues drawing up to some extent, so just wondering if that is the case and what kind of pipeline you see for One Bank revenues going forward?

And the final question is on the Investment Bank. Would I expect to see any change in terms of the economic capital calculations backing the Investment Bank, and -- you know, from moving to Basel III, and would that result ultimately then change in pricing in front of clients actually from needing more regulatory capital?

Okay, great. Thanks very much for those questions. I guess on the first question with regard to the potential -- as you say the sort of rumors or reports around discussions between Switzerland and Germany on a tax treaty, I think our view is, as you know, we have been for many years building our business in a way that makes it -- prepares it well for these changes should they come. We've built strong onshore operations around the world, and certainly in Europe, and we have made sure that our cross-border business was completely compliant.

And so we really obviously have not had a business that's been focused on tax type issues. We've basically built what we think is a fully compliant business. And so from our point of view actually, we welcome getting some of these issues resolved and being able to move on.

I think as you say, we have highlighted overall just an estimate that there might be CHF25 billion to CHF35 billion of AuM at risk throughout Europe, so that's the whole -- that's across all of the markets in Europe not just Germany, and so I think that clearly the German number would be significantly small than that.

And again, at the end of the day, our belief is actually that we think that once some of these issues get clarified, I think actually we will -- our business will actually have a lot of upside to it from that point. So once we do get some certainty around it, that will be helpful. And we continue to have a very strong brand and a very strong presence, and as we said, even with the issues that have been going in Germany, we've actually had inflows in our onshore business in Germany this year, so a net inflow.

So we actually feel like we'd be well positioned for whatever changes come through, and there'll be certainly an initial adjustment period, but we think in the longer run, this is something that's good for the Swiss Financial Center and good for us.

Your comments on the slide nine and the revenues, particularly on the international side, I think as you say, I think one of the things that we do see is that obviously the more mature markets are -- there's more content in terms of managed revenues as opposed to just transactional. There's obviously a broader -- there's a broader array of products that we can offer, and so not only do we see higher margins in the more developed markets but we also see probably a little more resilience in terms of those gross margins over time.

I do think your comment on the single global currency, or the One Bank approach in those markets, is a good observation. I think it's correct. Clearly, in the emerging markets particularly, those are business models where there is a lot of integrated bank approach, and it's something that's been very powerful for us and, therefore, is something that has had an impact.

And clearly, as we see -- if we see and as we see some of these levels of activity in the markets picking up, as we've seen for instance in Asia Pacific with increased ECM calendar, etc., that should have a positive impact on some of the One Bank revenues and the overall margins in the business.

I guess --

Final question was on the economical capital or [ERC] calculation. We don't really anticipate any significant changes to that as a consequence to the Basel rule changes; it's an entirely separate process. We do continue to revise that for our estimates, so there's always a number of small changes, but we wouldn't expect a radical change in this as a consequence of Basel II.5 or Basel III for that matter.

I think your comment on pricing levels as a consequence to the capital changes I think is apposite. It's very difficult to comment on, and clearly the pricing impact would be more coming from the [industry-wide] recalibration of RWA, and what that means for necessarily our own economic capital. And I think to be honest with you, one would expect something as a consequence of that, but it's very difficult to estimate how much.

Thank you.

Thank you. Next question.

Your next question comes from the line of Jernej Omahen from Goldman Sachs. Please ask your question.

Hi. Good morning, it's Jernej here from Goldman's. I have a question on the page of 29 of your slide pack, and I believe it's 54 of your financial statement. Can I just confirm something with you? It seems that the volume of Claudius issuance is up from CHF1.8 billion to CHF3.4 billion during the quarter, and if I'm not mistaken this counts towards your core Tier 1 capital. So is it fair to say that the entire core Tier 1 capital generation during this quarter is due to the increased issuance of these Claudius notes?

And then second question on this topic, can you explain to us why the other hybrids are what we think is correctly excluded from core Tier 1 but Claudius counts towards your core Tier 1 calculation?

Then just two questions, very short on the issue of contingent capital and contingent convertibles, how are you thinking about timing of issuance? If I understood you correctly, the suggestion was that the interest is reasonably high and you think that the appetite for this instrument is going to pick up, or it will be there in a sense. I was just wondering whether you're thinking of waiting or whether you're thinking of testing the market reasonably early.

And the final question is a very, very simple question. The tangible book value per share, which whether we like it or not seems to be a base of any investment bank valuation; has not increased for Credit Suisse over the course of the past five quarters, even if we adjust for the dividend payment during this period. This quarter I guess it's down because of the FX impact. I was just wondering, is Credit Suisse thinking that maybe tangible book value per share or book value per share should become a key performance indicator for you at some point, and were you thinking of trying to hedge some of your more obvious exposures? I guess currency would be one of them.

Thanks a lot.

Thank you. Those are good questions. I'll maybe start with the CoCo timing of issuance and I'll let David address the other issues.

I think it's -- as you say, it's a -- obviously, it's a very formative market right now and so it's extremely early days, and so from that point of view obviously it is early days. On the other hand, we do think that there would be a lot of appetite, but there are also probably some issues that need to be clarified, looked at there.

So I think in general, we're still sort of weighing that out. I think we'll see how things proceed, and I think we would -- I think we would like to be opportunistic to the extent that we could, but clearly, we need to get -- we need to make sure that we've got issues, all the issues ironed out.

But I do think it -- I think it would be good actually probably to move sooner than later because I think it would help reassure the market that this is something that will develop. And our belief is there is, and I think as David said, we've actually had a fair amount of reverse enquiry and interest in it. So our belief is that it will be actually a market that can establish and go forward. But we'll have to see.

The truth is, I don't think we really know how -- exactly what our approach will be to it, but those are some of the considerations that we have in thinking about it.

So on the technical questions, I think if you refer to page 54 on the financial release, you can see two numbers there which I probably would pull out. Firstly is the foreign exchange impact of Tier 1, which was minus CHF2.2 billion, and then secondly, the other, which was plus CHF1.176 billion. So the Claudius issuance which we did in July is basically a contribution to that CHF1.176 billion, and that's kind of offsetting the foreign exchange impact. So the real issue in the quarter really was the foreign exchange move on our capital base.

So your question then essentially is, what does that mean I guess for our foreign exchange strategy? Our foreign exchange strategy for our equity has been based around hedging to a neutral Tier 1 ratio hitherto essentially. So clearly, whilst that has obviously shielded the Tier 1 ratio from being -- from volatility as a consequence of the FX move, you see the move essentially at that point in terms of the retained capital.

I think that's something that we obviously look at constantly. It is part of our planning, and I think it's fair to say that we do look at the book value issue and in terms of the volatility the FX is resulting on that, and that's probably something that we need to consider further.

But I don't think at the moment we plan any changes. At the moment essentially what we do is we do hedge to that constant Tier 1 ratio, which means we have a certain amount of our equity actually in US dollars and therefore affected by this -- the depreciation of the US dollar.

In terms of the treatment of Claudius, Claudius is treated by the regulators currently somewhat differently from hybrid, which is why it's treated as part of core equity. I think if you look at the capital projections or capital simulation we included in the slide deck, you'll see there's 2% of deductions between 2013 and 2019. That includes the phase-out of Claudius as part of that, basically.

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

Yes, good morning. Actually, just a couple of clarifications really on previous questions, if I could. Firstly, on the Investment Banking activity, you obviously highlighted the acceleration into September and October, but I just wondered if you could give us a feel of how much that acceleration had been? I think you're sort of implying that we're still running below what you might consider a normalized run rate, but are we back to Q2 levels of activity, or maybe a bit better or a bit worse?

The second question is just on the hybrids, I take your point about wanting to be opportunistic in CoCo issuance, but could you give us an idea of the maturity or the call profile of your current hybrids; does that force when you might have to first tap the market?

Thanks very much.

I think in terms of IB activity I think, as we said, July was probably abnormally weak, August was seasonally weak, and this year wasn't any different and we did see an improvement in September. I think really commenting that deeply on October when you're a couple of weeks into it fourth quarter I think is probably premature. I think as we have said though, we have seen more similar trends compared to September continue into October.

Does that mean that's normal? I guess not basically, but I would point out certainly better than what we saw in July, for example. And I would say that comment by the way really applies across the Bank not just to the Investment Bank if that's helpful.

I think in terms of second question in terms of the hybrid issuance, a large proportion of our hybrid issuance comes due for first call in 2013, so that's when it becomes first due for (inaudible), yes.

Thanks.

Your next question comes from the line of Kilian Maier of NZB. Please ask your question.

Good morning. The question would be on slide 26, you provided some guidance of how the risk weighted assets mitigation measures will impact your revenues, but I didn't get your statement here on the movement from OTC derivatives to central counterparties. Maybe you can give us an indication of what that would imply on the revenue side as well.

Sure. I think there's two issues here really. First of all is the move to central counterparty clearing, which we wouldn't expect to have any particular impact on our Derivatives business. I guess the related question is then what happens from the move to exchange clearing, which is separate from this, and I think really that could -- leads on to what impact we expect from Dodd-Franks in terms of that move as well.

I think it's difficult to be wholly confident of that. Clearly, history has suggested that moving products on to exchange cleared markets tends to re-boost transparency and impact volumes, and that certainly in other markets there's actually been positive elasticity from that. Whether we'll see that happen across the Derivatives business globally I think remains to be seen. Clearly, in some OTC derivative products, the actual spreads, even though they're OTC based is actually very narrow. In other products however, they're quite wide. So how that actually is going to move I think is difficult to project.

But certainly a move to exchange base clearing we would expect to boost volumes, and that will wholly, partly or fully offset for a margin -- for any margin squeeze that comes from that.

So I think that specifically on slide 26 in terms of derivatives, we therefore don't expect any significant impact to revenues, either from the collateralization, hedging or roll-off of our existing OTC business, or really from the moves to central counterparty clearance.

Okay, thanks.

Next question.

Your next question comes from the line of Philipp Zieschang of UBS. Please ask your question.

Morning, hi. Three questions, if I may. The first one would be on costs in Wealth Management, but also partly on the Investment Bank. Would you describe the reductions as rather cyclical given the low activity levels on the top line, or is there any structural items in there?

The second question is on slide number nine, and thanks for disclosing the growth margin of the various pockets. I was just wondering in order to square the numbers with the overall gross margin of the Swiss Booking Center at 135 basis points, what is that business which is included there, is it the Mortgage business which isn't in the denominator of the assets under management? Or could you just give some color how this re-pockets basically [then come] up to the end result of 135 basis points gross margin?

And the third area is on the Investment Bank. I was just wondering if activity levels haven't picked up and if we assumed a current run rate of October going forward, are you confident or are you happy with the size of the investment, and given that you added 600 headcounts during the quarter?

And basically connected with that, Brady, you said that fixed income as long as there is a high return on capital, you're actually fine, but Basel III is going to reduce it significantly. So what's the impact in terms of Basel III on the return on capital for your Fixed Income business according to your calculation?

Thank you.

Yes, Philipp, thanks. Let me answer the second and third, and David can address the first one.

I think, yes, in terms of the numbers as you say on slide nine, obviously, the difference between what we spiked out and the total is everything else. So that includes as you say mortgages, credit cards, the affluent business, all of those areas. So that's the remaining piece. But we're more, obviously more focused on the private banking flows and the net new asset flows. We thought we're probably more instructive for people to see just in terms of those different categories. But, yes, the rest of it is clearly as you know well affluent business, credit cards, mortgages, and as you say, often things that impact the gross margin that don't actually have assets there. So I think that's right.

In terms of the scale of IB, etc., we -- I think we continue to be constructive on the business in the medium term, and we think we can continue to generate good returns. We -- so in general, we're constructive on the business and we think that it will be a good business over the medium term, over the next quarters. And whether that means the fourth quarter or not we don't know, but over a longer period of time we think it will be a good business.

We are actually taking a very disciplined approach to the cost. The headcount increase in the third quarter, a lot of it relates to more seasonal type issues. As you know, a lot of -- the campus recruiting heads actually come in in the third quarter and so a lot of that was actually just headcount increases that were in the works from earlier. We continue be quite disciplined on the overall cost and headcount in the business and I think we'll continue to be disciplined no matter what happens. But certainly, as you say, if conditions continue as they are, we'll continue to be very, very disciplined.

The Basel III impact in terms of the capital against Fixed Income business or any of those businesses, clearly, we are and as David discussed in terms of the mitigation, those are some of the specific mitigation areas but we'll also continue to adapt the business and take measures to make sure that we're running it efficiently. We certainly think we can run an Investment Banking business and a Fixed Income business that's quite -- a good returning business on Basel III, but it will require additional development, etc..

We happen to think we're probably much further along in that because of the fact that we have a more client focused and a more capital efficient business than many of our competitors, and so just from a -- in terms of a remaining work to do in terms of getting the business in line with those, we feel like we're a lot further down the line. But there is still work to do but we'll continue to adapt that.

David, do you have anything to add to that, or do you want to answer the cost question?

I think the only point I'd probably add on the -- just to supplement to that is that the largest component of the increase in IB headcount was obviously campus recruitment. The second largest component would be IT staff as part of the flow expansion we talked about before, all of which I guess relatively low cost in the context of the Investment Bank.

Do you want to talk about the cost? The first question was on -- it's a question about whether reductions were cyclical or structural or -- I guess it was a question towards the outlook as well as Management and Investment Banking.

I think commented before, there were definitely -- there was some seasonal reductions in marketing expense within the Wealth Management business, but putting that aside, there were also reductions across all the major expense categories across the Private Bank, the Investment Bank and Asset Management. So it's really a combination of both.

Thank you.

Thanks. Next question.

Your next question comes from the line of [Daniel Zilav] of [Basler Ziton]. Please ask your question.

Yes, good morning. I have two questions; Mr. Mathers said during that conference that the cost flexibility of the Investment Bank in particular has decreased as a result of rising salaries, obviously on the expense of bonuses. Can you be more specific on that effect?

My second question is, I understand that the Investment Bank realize now even more than in the past on these RMBS trading revenues. I would like to know to which extent -- more about the dependence of the Investment Bank on this specific business line.

Yes, and maybe just a third question. I understand that you have in the Investment Bank increased the capital. You have allocated more capital into the Investment Bank over the last 12 months or so significantly according to your presentation. What is the logic to -- when I look at the revenues of that business, which the business is producing significantly lower profit, what is the logic to that?

Thank you.

Thanks for those questions. I think on the cost flexibility, I think all we were really commenting on was more of a structural issue, which is just exactly as David said where I think as in general regulators around the world have pushed us to increased fixed levels of compensation and decreased variables, so on the margin that has made it a little bit less flexible.

There still is a lot of flexibility in the cost base, so we still do have a fair amount of flexibility, but on the margin, it has certainly become less flexible. I don't think we are specifically laying -- we're not specifically delineating the percentages or whatever, but I would say it's not a huge impact, but -- it's noticeable, but it's not that significant. So I would say that's the answer to that.

In terms of the RMBS trading, as you said, it certainly is an important for us. It's a good area, and we think it's one that has good prospects. It's not such a large part of the overall Bank's business. So obviously, it's a good area. We think we've got a good business there. It's a very client-focused business. It's a very capital efficient and low risk business, but it's not that major a part of the Bank's overall revenues.

And then, David, do you want to answer the question on RWA?

So I think you're probably referring to slide 17 which showed an increase in risk weighted assets up to $151 billion, of which $137 billion were ongoing and $14 billion was in respect of our exit business.

The increase is predominantly in respect of our credit businesses, both Corporate Banking and Debt Capital Market, and it's pretty much in line with the market share gains which you may see on slide 37, where you saw that, for example, we've moved up to third in high yield debt issuance and fifth in investment grade debt issuance. So it's very much in line with that, and I think it's referred in our results presentation that we have seen that business as being a key part of the improvement in fixed income revenues quarter-on-quarter. So it does support that, and it's very much in line with that.

I think I'd also point out that compared to industry levels of risk weighted assets, these are pretty low compared to the revenues we actually operate with. You will get mix changes like this just depending on the actual mix of business in any particular period.

And just as a supplement on the first point on cost, I would point out that the year-to-date compensation accrual in the Investment Bank is down 20% compared to last year. So I think on Brady's point and my point, I think there clearly still is very substantial flexibility in the compensation costs for the Investment Bank and for the Group overall.

Yes, and I think it's also just worth restating; the business model that we're running is really one that's, I think, quite differentiated in the industry. I think it shows that we've really learnt the lessons from the crisis; that we have -- we're really running a much lower volatility, more capital efficient business that's focused on clients.

And I think if you look at the first nine months of this year, a 15% underlying ROE, actually 16% stated but 15% underlying ROE is among -- I think it's probably pretty much best in class among global banks. And I think that's a good indicator of the strength of this, because we've really -- in the second and third quarter there have been some pretty challenging out there with the Eurozone sovereign issues and the slowdown in volumes in the quarter. So I think that's an important thing to note.

Okay, next question?

Your next question comes from the line of Matt Clark of KBW. Please ask your question.

Good morning. It's a question on the securitization risk weighted asset impact that you give on the Basel III slides. It just looks a bit higher than I would have expected, given you don't really have that much in the way of banking book deductions or banking book risk weighted assets from securitizations under the current Basel II regulations. So am I right to think that you get hit more on trading positions that no longer qualify for low trading risk weightings? Is that a reasonable way to think of it?

And is there anything you can say in terms of what determines whether a securitization can be put in the trading book or the banking book? I'm just wondering whether you've got lots of stale, hung securitizations that are in the trading book but still qualify for a fairly benevolent trading risk weighting under the current rules that will go away.

Thanks.

To be specific, no we haven't. The BII.5 securitization changes actually reflect a change in a recalibration in actually middle or higher quality securitization [charts]. It's typically BB minus, as opposed to the lower rated stuff, which actually moves under BII.5 to being deducted, and that's what you're really seeing there in terms of the step-up in BII.5. The gross-up then follows from that, so there isn't any particular legacy of lower quality securitization.

I think the other point here of course, which I did emphasis, was the risk weighted asset impact relating to our exit businesses, where as you know, there's 14 billion there. Those businesses are -- or those positions would be if we still have them by 2013, significantly affected by the BIII rules. Clearly, our attention, our plan is to continue to sell down those assets. I think you've seen the progress we've made this quarter, so that would further mitigate it.

Great. Thanks very much.

Thanks, Matt. Next question.

Your next question comes from the line of Jeremy Sigee of Barclays Capital. Please ask your question.

Hi, there. Just one follow-up question, please, and then a second question. The follow-up; just have you given us the assets under management corresponding to the segments on slide nine? And if not, could you?

And then second question, do you have any comments at this stage on the implications of the organization section of the Swiss expert reports about resolvability and emergency measures, and what kind of changes you need to make to implement that? And also, in that scheme, would the Swiss booking center of the Private Bank be part of what goes into the bridge bank, in your view?

Thanks, Jeremy; I appreciate it. We thought we were giving a lot of new disclosure on slide nine, so we -- I guess there's always more you can do. No, we're not actually -- we haven't put out, and we're not planning to put, the total assets under management in the different segments, as you say. But hopefully, that gives you some idea.

We're just trying to be responsive in terms of obviously peoples' concerns that the mature market segment was the highest gross margin segment, and if that were to be reducing over time, that that would really challenge the gross margin. So that's what we were trying to give a perspective on, but sorry for -- we're not -- we haven't disclosed, and don't plan right now to disclose the overall numbers.

The organization segment of the report, I think one of the very positive things from our point of view that came out of the whole expert commission discussion is the fact that in fact in terms of the organization of the large banks and the integrated bank approach that that was something that actually the expert commission ratified and supported in terms of not requiring or not asking for any additional -- any measures with regard to that. So we actually -- we think that was actually a positive.

I think actually some of the other things that were talked about in the expert commissioner report you mentioned, but also obviously by regulators around the world, are issues that surround simplifying structures, talking about market-critical utilities and things like that and making sure that those are things that under any circumstances would be able to continue to operate, etc.

So I think our general view is that obviously this will probably develop over time, but we don't view it as something that has really any impact on our business structure or our direction. We will -- you've probably seen, we've taken these steps to buy in the minority in [NAB], which just helps to -- really helps us to streamline the structure and make it just basically more a simpler structure overall, and so that's really the direction that we're taking.

So I don't think there's anything -- it's a good question, but I don't think there's anything significant in those measures that we think would have an impact on our business model, or strategy, or prospects.

Thank you very much. And do you think that the Swiss booking center of the Private Bank, would that be caught under that Swiss deposit, Swiss loan, Swiss payments, the bits that go into the bridge bank?

Yes, to be honest with you, I don't think there's really been -- it's not a very developed discussion. I think the -- obviously, one of the things that regulators are obviously quite interested in is more the utility, the payment systems, etc., and there's been more focus on that. Frankly, I don't think it's a very developed discussion, and frankly, with the kind of capital requirements that we're going to have and with these contingent convertibles, etc., I think obviously that's been the focus is really taking the whole too-big-to-fail issue off the table through that -- through very strong capitalization has really been more the focus.

Okay, thanks very much.

Okay, it looks like there's one last question. Next question.

The last question comes from Robert Murphy of HSBC. Please ask your question.

Morning, guys. You've answered most of my questions. I just wanted to come on to the fair value of structured liabilities which you're now disclosing, and my question was why are you now disclosing that? And secondly, what do you think that means economically? Is it the same as your other DVA adjustments?

And then thirdly, the three quarter -- third quarter impact looks a lot bigger than -- relative to the second quarter than your other DVA marks and I wanted to know why that was.

Sure, thanks very much. Well, I think we felt that improving the disclosure around this was meaningful, particularly as the move was actually larger in the third quarter than it had been before. There's always been some volatility around those positions for us, as I'm sure you've seen at other banks. So it was a decision to disclose that. I think if people find that helpful, then that's something we'll probably carry on doing going forward as we do with the other fair value own debt-type moves.

I think just in terms of the structured notes move, it is obviously clearly partly correlated to moves in our credit spreads, but not wholly so because the structured note discount curve moves -- is only approximately correlated to our own debt spreads. And that will move up and down depending on level of issuance and market environment in the product. So I'm not unduly surprised to see there is -- you're seeing some degree of a basis shift there in the third quarter, and I think we should probably expect that. It can really -- it can actually run in both directions in any one period.

I think those are -- does that answer the question, Robert? Sorry.

Yes. Are you basically suggesting that we should strip that out now of numbers, or is that (multiple speakers)?

Well, I think we didn't in the underlying calculation; I think we wanted to be broadly consistent with what we've done before. I think that's your decision in terms of how you wish to adjust your numbers. It isn't perfectly analogous to [fair value own] debt because, as I said before, it's not perfectly correlated.

Equally, although most of it through the lifetime basically does even out, there is a certain amount of secondary trading around structured note which doesn't exist in our own debt so it's slightly different in that. But it's clearly very closely analogous and has some of the same economics.

So are you also going to disclose any realized gains based on the trading around those then as well? And were there any in the quarter?

I don't think -- we can look at that. I don't think there's anything particularly material; it's just part of the ongoing business. We do provide a market, a secondary market in these notes once they've been issued as a key part of the client offering.

Okay, thanks.

Good, thanks. Well, I guess we're through the questions, so thanks everybody. Let me just briefly sum up. Obviously, our view is CHF1 billion of underlying net operating income is a solid result in a challenging quarter. We were particularly encouraged by the net new asset inflows, both in Private Banking and Asset Management.

We will continue to be very disciplined but nonetheless invest in our client focused, capital efficient, high return businesses. That's already been delivering results with strong net new assets and improved market share.

We do think the nine months results, a return on equity of 15.9%, net new assets of CHF55 billion underscore that the business model is able to produce strong results over the cycle. Should the current challenges persist, we think our capital efficient strategy will allow us to manage that well.

And we did anticipate much of the regulatory change, both in terms of the capital requirements and the new cross-border regimes. So this means that we think we're well placed to meet these new requirements, and at the same time compete and deliver attractive returns to our shareholders.

Thanks very much, everybody, for your time and attention.

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