Credit Suisse Group AG (CS) 2011 Q1 法說會逐字稿

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group first quarter 2011 results conference call. As a reminder, all participants are in listen-only mode, and the conference is recorded. You will have the opportunity to ask questions directly after the presentation. (Operator Instructions)

At this time I would like to turn the conference over to Mr. Brady Dougan, Chief Executive Office of Credit Suisse Group. Please go ahead, Mr. Dougan.

Thank you, operator. Welcome, everyone, to the Credit Suisse first quarter results call. I'm joined by our CFO, David Mathers. I'll make a short introduction, and David will take you through the detail, and then, obviously, we'll take your questions.

We delivered a strong, balanced, high quality set of results with underlying pretax income of CHF2.2 billion, underlying net income of CHF1.6 billion, and an underlying return on equity of 19%. This performance demonstrates that our business model generates stable, high quality earnings, and underscores the strength of our client-focused, capital-efficient strategy.

Despite the continuing challenges in global markets, we've maintained our strong momentum with clients, gaining market share, and generating over CHF19 billion of net new assets.

Taking a quick look at our businesses, I think you can see the impact of our client-focused approach. In Private Banking we saw strong asset inflows and improved transaction-based revenues offsetting a decline in net interest income.

In Investment Banking, we had significant quarter-on-quarter revenue momentum, in US dollar terms, driven by continued positive market share momentum, and the impact of client flow sales expansion across securities. And this led to a strong return on equity for the business, well in excess of the cost of capital.

In Asset Management we had solid asset inflows and posted higher quality results reflecting increased fee-based revenues, and lower operating expenses.

We had anticipated the regulatory developments we are now seeing. We've continued to build on our already very strong capital position with a Tier 1 ratio of 18.2%, a core Tier 1 ratio of 13%, and a Basel 2.5 core Tier 1 ratio of 10.2%.

During the quarter we announced two transactions to create up to 70% of our maximum potential issuance of high trigger Contingent Capital suggested under the proposed Swiss regulations. And we reduced our net deferred tax assets by CHF800 million, and increased shareholders' equity by CHF800 million.

Funding is the continuing area of focus, and our spreads remain tight. We have a conservative approach to liquidity management, and we believe that our debt maturity model is best in class, all reflected in a tightening of CDS spreads during the quarter. Spreads are also positively impacted by the Buffer Capital Note transactions.

We've continued to work closely with regulators to build a more stable financial system. In line with our expectations, regulatory developments show that progress is being made toward a more level playing field for the global banking industry. So overall, this was a strong, high quality quarter in which we made good progress on capital, and in meeting the challenges of the emerging global regulatory regime.

With that, I'll turn it over to David.

Thank you, Brady, and good morning. I'd like to start my presentation on slide 5, with an overview of our financial results for the first quarter.

We achieved underlying revenues of CHF8.4 billion, pretax income of CHF2.2 billion, and net income of CHF1.6 billion, diluted earnings per share of CHF1.28, the pretax income margin was 27%, and post-tax return on equity 19%. Total net new asset inflows were CHF19.1 billion with a particularly strong contribution from Wealth Management.

We also show the reported results on this slide, which includes CHF617 million of fair-value movements in the quarter. This falls into two components. First, the fair-value movement on own debt was CHF309 million this quarter, driven by a significant narrowing in our credit spreads. Our senior debt spreads narrowed by approximately 15 to 20 basis points, while the move in our hybrid Tier 1 instruments was more extreme, at approximately 100 basis points in the quarter.

This followed the issuance of the Buffer Capital Notes in February, which further boosted our already strong existing capital position. And, particularly for the hybrids, accelerated the market's recognition of the [pull to par] due to the higher probability these instruments will, in fact, be called on the first eligible date.

The second component is a charge of CHF308 million in respect of standalone derivatives related to our funding. And this is the standard mark to market adjustment in the quarter.

Turn to slide 6 now for an overview of the divisional results. In the Private Bank we delivered a solid performance in the first quarter. We achieved strong net new asset inflows in Wealth Management of CHF15.7 billion, equivalent to an annualized growth rate of 7.8%. Net revenues were stable, compared to the first quarter of 2010, with lower net interest income offset by a positive trend in transaction-based revenues, due to early signs of improved client activity.

Our Corporate & Institutional business, which is predominately based here in Switzerland, continued to benefit from an environment which is underpinned by the strong fundamentals of the Swiss economy. The overall pretax income margin was 30%.

We continue to invest in the franchise, albeit balancing the post-investment with achieving efficiency gains across the business. Total operating expenses remained in line with the 2010 quarterly run rate. Within the quarter we kept the total number of RMs unchanged, but this included gross hires of 70 RMs, 70% of which were senior.

Let me now look at the Wealth Management results on slide 7. Revenues were broadly stable at CHF2.4 billion, pretax income for Wealth Management stood at CHF623 million, and the pretax income margin remained stable at 26%. Wealth Management's gross margin declined slightly in the quarter to 118 basis points.

Let me now focus on revenue trends on slide 8. As you can see from the slide, our first quarter revenues were reduced by CHF180 million, due to the adverse impact of the strengthening Swiss franc. Excluding this, revenues grew by 6% year on year. If we look at the components of these revenues, including the FX impact, transaction-based revenues improved by 11%, due to higher brokerage and product issuing fees, which included strong demand for structured products.

Recurring commissions and fees were essentially flat on a like-for-like basis, although you will note, on a reported basis, they dropped by 5%. That reflected the one-off gain that we took in the first quarter of 2010 when, as you may recall, we changed the estimates for certain fund managements fee accruals. Net interest income was 4% lower, due to lower deposit volumes and lower margins.

Let's focus more on that on slide 9. You can see here how net interest income has contributed to revenues over the last few years. Net interest income has suffered both from the impact of foreign currency moves leading to lower average deposit volumes, and from the lower reinvestment rates, and on our deposits. This roll-off effect has a material lagging impact which means we probably have another quarter or so of adverse impact from low interest rates on our Wealth Management business.

Our estimate is that, if interest rates didn't increase, but instead remained at current levels, a further margin reduction is another CHF20 million from the current level of net interest income. Clearly, trends towards increasing interest rates will start to counterbalance this at some point. I would note that 100 basis point parallel shift in the yield curves of the major currencies would, once fully reflected across our deposit and loan base, lead to an incremental CHF75 million to CHF100 million of revenues per quarter.

On slide 10 you can see how transactional revenues have contributed to total revenues. Since 2007 there's been both an absolute decline in transactional revenues, and a fall in gross margins, due to reduced client activity and adverse change in product mix. We are now seeing signs of recovery in client activity from the low point reached last year.

Slide 11. We had strong net new asset inflows of CHF15.7 billion in the quarter, equivalent to an annualized growth rate of 7.8%, which is well above our 6% KPI target.

Let me now turn to Corporate & Institutional clients on slide 12. Pretax income remained strong at CHF232 million in the first quarter, with a pretax margin of 50%. Net new asset inflows were also strong at CHF2.3 billion. And the continued strong results in this business reflects both the high quality of the loan book, and the resilient fundamentals of the Swiss economy.

Let me turn now to the Investment Bank on slide 13. The Investment Bank produced a strong result in the first quarter. Significantly improved revenue levels in fixed income sales and trading reflected an early sign of a payback in the investment that we've made to build out our client franchise, with market share gains achieved in most of our flow businesses.

Many of our fixed income businesses had strong results in the quarter, particularly Securitized Products, Rates and Credit.

The solid equity sales and trading result benefited from an increase in client volumes, as well as our sustained strong market share positions, and a significant improvement in the performance of Equity Derivatives business.

We achieved solid underwriting and advisory results in the first quarter, with particular strength for high yield issuance.

Slide 14. If you look first at the bottom table of this slide, you can see that, in US dollar terms, the Investment Bank has achieved significant year-on-year revenue momentum. Net revenues increased 8%, compared to the first quarter last year, and we're up 48% compared to the fourth quarter of 2010. In Swiss franc terms, our revenues decreased 6% against the first quarter of last year.

Pretax income totaled CHF1.4 billion, and the pretax income margin in the Investment Bank was 28%.

If we focus first on our fixed income results on slide 15. Investment in our client flow business model is beginning to deliver, and we believe we've outperformed the average industry growth this quarter, capturing market share in our target areas.

In US dollar terms, fixed income revenues were $3.3 billion this quarter, an increase of 10% compared to the first quarter of 2010.

We have strong results in Securitized Products, driven by increased client flows in non-agency RMBS; in Credit, driven by robust leveraged finance activity, including strong new issuance; and in Rates, resulting from higher client flows as we began to see the benefits from our expanded distribution footprint.

Slide 16. As I mentioned already, the impact of our investment in the [FID] flow sales force expansion is beginning to positively impact revenues. One key internal measure, sales credits, were 19% higher in the first quarter of 2011, compared to the first quarter of 2010, with good contributions from both Rates and FX.

Let's turn to the Equities business on slide 17. The solid revenue levels were driven by higher client volumes and improved investor risk appetite, with a particularly strong contribution from the Derivatives business as we saw improved client activity resulting from an intensified coverage effort over the last year. In US dollar terms, total Equity revenues were slightly higher than the first quarter of 2010.

We had a strong result in Cash Equities and Prime Services on mixed market trends.

Turn to our Underwriting and Advisory business on slide 18. In Swiss Franc terms, revenues increased by 5%, compared to the first quarter of 2010. In US dollar terms, revenues improved by $164 million, or 20%, compared to the first quarter of last year.

In terms of individual business lines, the strongest performance was from debt underwriting, where revenues improved significantly compared to the first quarter of 2010. We also saw an improvement in M&A activity. Only equity underwriting lagged, due to lower issuance volumes in the quarter. Both our M&A and our underwriting pipelines for the balance of 2011 remain strong.

Turning to slide 19, this shows a long-term view of our market share progression.

Touching briefly on the major businesses. In Equities we maintained our leadership position in both Cash Equities and Prime Services.

In Fixed Income we have significant momentum across those products that are being driven by the franchise build out, and there's still room for improvement, especially in Rates and FX.

In Underwriting and Advisory, we have consolidated our leadership position in global high-yield underwriting. We also maintained our number 1 position in our total share of wallets within emerging markets.

Slide 20. This is the chart that we use to illustrate market positions, the trading environment, and the revenues of our key businesses in 2010 and the first quarter of 2011.

The key points that I'd highlight for you on this slide are first, Prime Services, Cash Equities and Securitized Products are businesses where we continue to have market-leading positions. And this was clearly a particular benefit in our RMBS business this quarter.

Second, the sales force expansion benefited from the overall revenue contribution of the Rates business as we improved our market share on a higher level of client activity, compared to the 2010 quarterly average.

Third, in Leveraged Finance, the good market environment continued into 2011, driven by a combination of strong investor appetite and greater refinancing activity.

Slide 21. Total compensation expenses in the Investment Bank of CHF2.4 billion increased by 4%, compared to the first quarter of last year, due primarily, in Swiss franc terms, to CHF70 million of increased social security taxes resulting from the timing of the delivery of deferred compensation share awards in the first quarter of the year. And note, these were actually delivered in the second quarter last year.

Partly as a consequence of this, the Investment Bank comp to revenue ratio stood at 48%, compared to 49% in the full year for 2010, and 44% in the first quarter of 2010.

Non-compensation expenses increased slightly, compared to the fourth quarter of 2010, driven by CHF34 million of higher litigation provisions, but also an increase in regulation-related professional and consulting fees.

Let me now turn to Asset Management on slide 22. Our strategy in Asset Management is delivering better results through increased scale, strong investment performance, a focus on restructuring, and general improvement in efficiency.

The quality of our revenues has improved with our fee-based revenues increasing by 9% from the first quarter of 2010, adjusting for the FX impact.

We achieved solid net new asset inflows of CHF4.5 billion this quarter. And I point out, this is the seventh consecutive quarter of positive inflows, reflecting strong investment performance and our product expansion.

We also benefit from lower operating expenses, and I point out that the 4% reduction in costs this quarter is sustainable, and results from successful implementation of a number of efficiency programs.

Slide 23. Pretax income in Asset Management was strong at CHF172 million, with a pretax margin of 29%, and consolidating the good progress that we made in 2010.

Slide 24. The strong net new asset inflows of CHF4.5 billion were well distributed across product types, with a particularly strong contribution from our asset allocation business, MACS. Equities and hedge fund inflows also benefited from an expanded product offering and increased client activity.

Slide 25. This slide shows the 9% increase in fee-based revenues, adjusting for the currency impact from the strengthening franc. On the same basis, operating expenses have fallen by 4%. And, as you can see, we both exited from a number of loss-making businesses, and grew a number of businesses that are already delivering a high incremental return.

Finally for Asset Management, on slide 26, this shows that, historically, we have had a good fourth quarter. The reason is the timing and recognition of performance fees. The majority of performance fees are recognized in the second and the fourth quarter for Hedging Griffo, and in the fourth quarter for York, where you may recall that we acquired a substantial minority interest in 2010.

Slide 27. Given the increased focus on certain eurozone countries this quarter, we've updated the numbers that we provided with our fourth quarter results. As we stated then, and as you can see here, we have a limited exposure to both sovereign and non-sovereign exposure in the countries that we lay out on this slide.

Slide 28. We continue to maintain our position as one of the best capitalized banks, globally, with 100 basis point improvement in the Basel 2 Tier 1 ratio to 18.2%. Our core Tier ratio, or CT1, which excludes hybrid capital, also improved to 13% from 12.2% as at year end 2010. Furthermore, adjusting for the incremental risk weighted assets and capital reductions, the pro forma B2.5 core Tier 1 ratio also increased by 50 basis points to 10.2%.

I would note that the regulatory capital base includes a CHF423 million Swiss franc accrual for our quarterly dividend accrual in line with the 2010 level.

On slide 29 we've repeated the simulation of the illustrative model on how the CET1 ratio could develop from now to the beginning of 2013, under the rules as laid out by the Basel Committee, and by the Swiss Expert Commission.

On the left of the slide is the capital development, and on the right, risk weighted assets. This slide assumes current market expectations and, as such, does not represent forward-looking statements made by Credit Suisse management.

As at the end of the first quarter of 2011, the estimated pro forma CET1 ratio is 9.2%, and by the beginning of 2013 the CET1 capital grows to CHF40.2 billion, and divided by CHF300 billion to CHF350 billion of RWA, under the new B3 rules would give a B3 CET1 ratio of 11.8%.

Slide 30. As we said on previous occasions, we expect our residual net deferred tax assets to be substantially reduced by the beginning of 2014. Deferred tax asset utilization is very much on schedule, with a balance reducing by 9% this quarter. The primary mover has been our US deferred tax assets, due to strong performances by business in the Americas, but I would note, this results in a slightly higher effective tax rate this quarter.

Slide 31. We showed this slide at a recent industry conference. And the key points to note are the high trigger Buffer Capital Note transactions, that we announced in February, have secured over 70% of the high trigger contingent convertible capital requirements that's required for 2019.

Compared to our existing hybrid Tier 1 and Claudius capital, the indicative spreads over senior debt on these transactions, at the time of issuance, are lower than for our existing hybrid Tier 1 capital. So I think we've proven that we're able to transition an important component of our capital structure into the new regime at equal, or even lower, [balancing] financing costs.

I would also note that, of the public transactions, nearly 50% was allocated to traditional institutional investors, with a further 18% to hedge funds. And as we noted earlier on, we have seen a sharp narrowing of spreads, particularly in senior debt and our hybrid Tier 1, partly as a consequence, we believe, of the issuance of this debt.

Slide 32. Much of the public attention of Basel 3 focuses on capital requirements. But, as importantly, the Basel 3 regime also proposes new liquidity and funding requirements, and we thought it might be useful to give an indication of how we might stand under these potential new rules.

First in terms of liquidity, the proposed Basel regime, known as the LCR or liquidity coverage ratio, has a number of marked similarities to the existing Swiss regime which we operate under already, and have since the second quarter of last year.

On the Swiss regime, we have an excess, short term, 30 day liquidity of CHF119 billion, or 127% coverage ratio as calculated by the Swiss rules. The cost of this increased liquidity buffer is already factored and taken into our results creating a drag to our overall pretax income.

Second, if we look at the net stable funding rules, whilst the final definitions are still in flux, based on our current understanding, we would estimate that our ratio stands at 94%, with future funding plans taken it above 100% by 2013, well ahead of the potential implementation date.

Finally, just to conclude on slide 33, I would like to touch briefly on the revised ROE targets that we laid out back in February, particularly as they relate to the Investment Bank. As you can see on the left-hand side of the slide, we have an ROE target for the Group of greater than 15%. And in particular, this is meant with regard to the period following Basel 3 implementation, when we will accrue at a still higher equity base.

In the first quarter of 2011 the Group achieved a 19% underlying return on equity. However, this already reflects the capital base, which is high under the existing Basel 2 rules, with a Tier 1 ratio as referred to before of 18.2%. If we just assume the minimum capital of the business that would have been required under the old, but still extant B2 rules using our former B2 target, that you may recall was 12.5%, our returns for the Group as a whole have been 23% for the first quarter.

Now on the same base, assigning 12.5% equity to the Investment Bank's B2 RWA this business would have made 22%. As you can see, it's slightly lower than the Group return, but still well in excess of our cost of capital.

But let's now look at the same analysis under Basel 3, which is the real focus. Using the projected minimum common equity Tier 1 ratio of 10% on the increased B3 RWA usage, on this pro forma basis, in full year 2010, the ROE for the Investment Bank was 11%, but has now improved to 16% in the first quarter.

Clearly, this is a pro forma analysis and it's almost two years before we enter the Basel 3 regime, but I think what this analysis does show is that the returns to the Investment Bank met, or exceeded, our cost of capital last year, even the larger B3 capital base, and that the first quarter results show considerable improvement from this level.

So on this note I would like to conclude my presentation, and hand you back to Brady.

Thanks, David. I guess at this point we'd like to open it up for Q&A. So operator, if you can let us know when there are any questions queued up, we'll start to work through them.

We will now begin the question and answer. (Operator Instructions) Jon Peace, Nomura.

I've got three quick questions, please. The first one for Brady. I wonder if you could expand on your comments about the emergence of a more level playing field for regulation? And specifically, where do you think the SIFI buffers might get set, and do Swiss regulators think it's already captured in your current higher capital requirements, or does it need to be added on?

And what do you think is the chance of a potential cost to subsiduarization of the Swiss Retail business, and could that result in lower potential buffers, going forward?

The other two questions, just a bit of detail for David. First one, on slide 29, you used to indicate that potential deductions for financial stakes and DTAs were about CHF6 billion from 2013. Where does that number sit, net of your DTA recovery?

And secondly, to get your net stable funding up from 94% to 100%, what do you think the increased interest costs might be? Thanks very much.

Thanks, Jon. I'll take the first one and, as you say, we can have David address the other two. I guess, obviously, on this question of emergence of a more level playing field, we can give our opinion. Obviously, you're all extremely knowledgeable about it, so you'll have your own opinions. But I just think, with the recommendations in the UK of their Commission there, which talked about 10% common equity ratio, also referred to contingent capital and [bail in] type capital, some of the announcements that have come out of Sweden.

Our view is that these are encouraging -- well, these are indications that we seem to be moving to more of a level playing field. Obviously, the question will be, how far will that extend, what other countries will end up at etc., and we obviously don't know that.

But clearly, there have been a few indications, I would say, recently over the past quarter that things seem to be migrating more towards that 10% common equity level, which is where we are. And also with more discussion around contingent capital type instruments etc.

So in our view, obviously one of the things people thought when Switzerland first came out to regulations, was that it was going to be very difficult for us to be competitive on that basis. We've obviously had a slightly different view, because our view was that the contingent convertible market was going to be very accessible, at reasonable cost, and the 10% CET1 ratio requirements was something where other countries would move more towards that.

And I guess what we're saying is, we feel like we've had some vindication in that. Recently, if you look at just some of the moves, and obviously we'll see it's a longer process and it takes time, but we'll see how that actually moves on.

With regard to the SIFI, I guess the GSIFI surcharges etc., I guess our view would be that, I think the Swiss regulatory requirements, or recommendations at this point, are in excess of whatever would be required by a GSIFI charge. So we don't believe there is any real prospect of us having any additional capital requirements on top of what we already have.

And I'd say, as you know, this whole issue around the GSIFIs and the SIFI surcharges is, obviously, a process. There are a number of countries and institutions involved etc., but we continue to believe that, in general, there will be a GSIFI list, and there will be additional capital above the 7% minimum required on that. Whether that's 1.5%, 1%, 2% in addition or more, I don't know, but we continue to believe that that will transpire, over time.

The question of the subsiduarization you mentioned and about Swiss Retail etc., again I think, if you look at what the Expert Commission recommended and what their focus was, was really on these issues around capital, and really ensuring that capital liquidity etc., were looked after. And there wasn't as much of a focus on issues of, as you say, subsiduarization.

Clearly there will be, I think, our view is that regulators around the world are going to be working with the banks to ensure that people have plans in place, resolution type plans etc., contingency plans. But I actually don't think that this whole subsiduarization issue is really one that will have much of a role. But again, I guess it's a process, and as you know there are debates around that in various different countries, so we'll see how that develops. But in our view, that's not going to be a major feature of the solution on the too big to fail issue. So David, do you want address [the other ones]?

Yes, thank you. So on those two points, I think historically we talked about potentially, as you say, CHF6 billion of potential deductions which begin to phase in from the beginning of 2014 at 20% per annum. I think that, in terms of our deferred tax asset utilization, I think clearly seeing the usage of CHF0.8 billion this quarter, of which CHF0.5 billion was in DTA, or NOLs, I think does show the progress we're actually making, which we talked about before.

I think the CHF6 billion estimated deduction is probably a little bit on the high side now. Probably the number's going to be more like CHF4 billion, but it's clearly very subjective to how the numbers move over the next couple of years. But it's probably slightly better than we indicated before, in fairness.

I think, in terms of the incremental interest costs to achieve an NSFR of 100%, I would say the rules are still a little bit in flux. We wanted to give our best estimate today of 94%; we'll see how that pans out as these get locked down over the next year or so. But I guess, to give you some idea, I think we probably need incremental debt funding of the order of CHF15 billion to CHF20 billion, which is readily achievable within our funding plan. And the interest cost on that, I think my own view on spreads, your view on spreads, but it's probably in the CHF200 million to CHF250 million level basically. So most of the way there, the incremental costs some, but not that substantial.

Great, thank you.

Kian Abouhossein, JPMorgan.

A few questions. First of all the Basel 3 number, where you have the nice slide, could you tell me, if I take a fully loaded basis, what number would I get for the Basel 3 number?

The second question is on Glencore, we clearly have a bit more numbers, and you have JV with Glencore, and I'm just wondering, what is it that is not working with Glencore, considering your commodity commonality business is still not where, I guess, you want to be, and you have been in this JV for a very long time? What is the end game for your Commodity business, how do you see that developing?

And the third question is on FICC slide 16, which is very useful, and despite headwinds it looks like you're making good progress. I wonder where do you want to be, so if you take first quarter at 100%, where should the 119% be, and where is it coming from, from what segments will you expect an improvement? And are we done in terms of headcount increase, another 100 people? And how do we see the comp ratio developing in that context as you're moving higher up the percentage increase in client business? Thanks.

Could I just ask to clarify in your first question, you mention the Basel 3 number; are you talking about slide 33, the return on equity?

Sorry, no, slide 29 where you have the 11.8%, my understanding that's not fully phased. And I just wonder, on your numbers, I've made some estimates, but I'm just wondering what would be the fully phased number, if I look at slide 29?

Okay, maybe I can start with your second question on the Commodity business, and then David can come back on the other two. As you say, I think in commodities in general, we have, as you say, we have had a cooperation arrangement with Glencore over a number of years, and that's actually worked well, and they've actually been a great partner in that and I think they've actually been a terrific partner to have in the Commodity business.

I think our issues are really around, we want to make sure that we have a Commodity business that's focused on areas which really are synergistic with the rest of the business overall, and where we think we really have an edge and we can really build that. Because as you know, it's a business that is a little bit different from many of the other more financial product type businesses, and so it's one where our view is that we need to be focused, and we need to build out those areas carefully in a disciplined way, but we think we can actually build some real capability there.

So I think we've had a good ongoing relationship with Glencore in that area. We continue to have a cooperation arrangement there, and we will continue to have that, but that we will also continue to, in a disciplined but focused way, build out the Commodity business. So I think hopefully that's responsive to that question. Do you want to, David, then take the Basel 3 question and the --?

Sure. Sorry, Kian, just running through, so I think I understand the question. Clearly, the Basel 3 RWA is fully loaded, so CHF400 billion, and then the CHF300 billion to CHF350 billion because the deductions which are taken under B2.5 are actually grossed up under Basel 3.

Just for the sake of clarity, just to give the B2.5 numbers, we gave the pro forma core Tier 1 ratio at 10.2%. That was after CHF30 billion of incremental RWA for B2.5, and a further CHF2.9 billion of deductions. So if you were to gross it up you'd be thinking about CHF292 billion as a pro forma B2.5 number.

In terms of the CET1 ratio, so we've given numbers here of 9.2% on the basis of the CHF330 billion to CHF350 billion post mitigation RWA, rising to 11.8% by the Jan 1, 2013 checkpoint. Now I think, clearly just in terms of definition for that, that we have had clear discussions with the FINMA, and I think, by virtue of the progress with Basel 3 and the Swiss Expert Commission recommendations, we have considerable clarity over our capital ratio definitions.

So I think, as you're aware, essentially we've given that there, it's obviously the shareholders' equity, deducting the dividend which goes for approval to the AGM on Friday and the accrual for first quarter, which means implicitly that that includes goodwill, as you know, which is included. It also, though, deducts for the Claudius preference share issue, and also things such as the pension fund filter. So that's the number as we know will be defined by our regulator from the beginning of 2013.

I think one can know what a different ratio is from that. I'm sure, Kian, you can calculate those.

I think all I would says is, as in answer, I think, to Jon's question earlier, the deductions we've talked about before of CHF6 billion are probably on the high side. I'd probably work more towards CHF4 billion. And I think that's probably the only comment I'd make beyond that basically, Kian.

Okay, no, that's fair.

I think you also wanted to talk about the Fixed Income business on slide 16? I think the point I'd make there is that we wanted to give some illustration of how the benefits from the sales force expansion, which we talked about last year, have actually come through.

I think you can see that the primary target for that was Rates, and that's where we've seen the primary benefit. The expansion of the flow Rates business is a relatively capital efficient business and fits well with our business model. And I think you've seen that both in terms of these sales numbers and, as you can see from the bubble chart, also in terms of our reported revenues from the Rates business in the first quarter. And I think, in fairness, we would expect further momentum from that as we actually build on that.

There is plans for incremental sales adds beyond that, but it's a relatively balanced process, just infilling where we are now. I wouldn't expect that to be that expensive in terms of incremental costs.

Away from the Rates business, we've clearly obviously also added in businesses such as FX, Credit and emerging markets. I think, in emerging markets, you know our objective there is to shift it from being more of a, as you might say, hub and spoke structured lending driven business, to an onshore business. We're making progress on that. There's probably still further to go over the next two years.

I think your next question then was actually on the comp to revenue ratio for the Investment Bank, is that correct Kian?

Yes, I'm just wondering, how should we think about headcount, going forward?

And how should we think about the comp ratio, because clearly, you might over-accrue and that's why the number looks, maybe, higher? Or how should we think about the number of comp of what you would engage in, what you think is reasonable?

Well, I think we feel we've made a conservative and appropriate accrual for variable compensation in the first quarter, albeit that it's clearly difficult making a full year projection for compensation against full year results, particularly in the first quarter. It's more uncertain at this point than perhaps it might be later in the year.

I would point out, though, that if you look at the first quarter compensation to revenue number now, we don't accrue to a ratio, it's a result. You can see that it's 48.4% compared to 49% last year, and compared to 44% in the first quarter. So it increased by about 4% from the first quarter of 2010 to the first quarter 2011.

Now within that, as you can see, we actually delivered our stock awards in the first quarter rather than the second quarter; it's shifted by about a month. And that triggered approximately CHF70 million of higher social security taxes relating to that award. That's approximately 1.5% of that increase.

And most of the rest really reflects deferred comp accruals as opposed to anything else. But I think we're trying to balance here a conservative and appropriate accrual with also making decent returns for our shareholders.

Clearly in dollar terms, this is actually a record first quarter revenues for the Investment Bank.

And just very briefly on headcount, can you just say how we should think about that developing?

I think, as you're aware, we announced that we were in negotiations to buy a [financial] administration business last year from Fortis. So at some point later this year, I think probably in the second quarter, you will see an increase in headcount in the Investment Bank. However, most of that staff is actually processing based.

So the headcount will go up, but I think that that will not have that much impact on the incremental compensation accruals. So I don't think you should expect to see, ex that, that substantial changes in the balance of the year.

Great, thank you.

I think, Kian, I just wanted to add to what David said on slide 29. I think one of the things you wanted to make clear was that I do think that we feel that we've gone a long way down the road to getting pretty certain around all these issues.

So when you look at slide 29, I think it's pretty well laid out in terms of how we see the capital progressing. We've shown that we can raise the contingent capital, and it obviously puts us in a pretty good place.

And so it's one of the things I think that is a little bit different in terms of our situation from any other is that we've got a very clear view of how we're going to progress and how we're going to get there. And hopefully, slide 29 helps to demonstrate that.

Great, thanks.

Derek De Vries, Bank of America.

Just two questions, if I might? First, we saw Julius Baer announce a settlement with Germany authorities. And given your situation in Germany, is that something you would consider; something similar, pay a fine and move on? Is that something you're discussing?

And I guess my second question is more of a broader question, even broader than that one. Just on all the stuff, the Basel 3, the capital requirements, funding issues, issues like Germany, Private Banking issues, and securities litigation, how much management time is being consumed by those types of regulatory and litigation issues today? Where was that number 12 months ago? And if you look two years into the future, do you still anticipate a large percentage being consumed by that?

Well, I think taking your second question first, Derek, and by the way thanks for the questions, I actually think, to be honest, we actually think like we're in a much better position now than we were say a year ago.

As I say, one of the nice things about our situation, I think, is we've got a clear view of what our capital requirements are, how we can meet those requirements, how we need to continue to evolve the business and mitigate different aspects of it etc. So it's actually been quite refreshing over the past six to eight months to be able to have certainty around a lot of these issues. So with the Basel 3 framework, with the capital framework in Switzerland, with our raising of the contingent convertible etc., it actually puts us in a proactive positive.

The worst thing is when these things are undecided and you can't actually do anything because you don't know exactly what the requirement's going to be, or what direction they're going to go in.

So to be honest with you, I actually think that on most of these issues, we've been very proactive about it, so you're talking about funding, you're talking about capital, you're talking about the Basel 3 etc., we've been very proactive about it. And actually I feel like we're in a really strong position, from a management point of view, in terms of the issues and having our arms around them etc.

So to be honest with you, they're taking a lot less time now than they did a year ago. So I think that's actually a really positive thing, and it allows us to really focus on the business, and on really delivering.

These other issues, as you say, some of the regulatory and some of the litigation type issues etc., as you know, it's very much just a feature of the industry right now. And if you look at probably most of the banks that you cover, and if you look really at any country around the world, there are a lot of regulatory and a lot of ligation issues out there. It's probably just a feature of the industry anyway.

But there's clearly a lot going on in that area right now. And I don't view that as being any more intensive now than, again, say we've been at any point over the past two or three years.

So I think in general, we feel that we've got kind of a fresh -- with certainty around these issues, we've actually got a nice platform, a strong base to actually manage the business from and to make real business and resource allocation decisions etc., which is actually quite good.

And frankly, until others get certainty around it, it's hard. Until you have certainty, it's hard to know which direction to take your businesses in etc. And that's probably the hardest part.

With regard to Germany and what's going on there, I think, as you know, we basically don't really have much to add to what we've said in the past. We're obviously continuing to cooperate with the authorities there.

We believe that, globally, we've had a really state of the art compliant cross border banking business, so we'll see how it develops. We really don't anything to add.

Thanks, appreciate it.

Thanks, Derek.

Christopher Wheeler, Mediobanca.

A couple of questions. First of all, I do apologize for going back to slide 29, but we seem to be dancing around a little bit on this. I think really you've given us some fantastic disclosure here, and it's very much appreciated.

But I suppose what we're all saying to you is, the 11.8%, if you take in the goodwill and obviously the deductions, we're probably down somewhere north of 8%. And I guess the question is, when you look at what Morgan Stanley did last week, Goldman Sachs around 11%, Barclays around 10%, and obviously Italian retail banks now up around the 10% mark, does it matter that you're at that kind of level?

Or is you view that, look, we're a strong Bank, strong credit ratings and it doesn't matter; it's 2019 that matters. Or do you think there may be a competitive issue? That's the first question.

And the second one is just on the Wealth Management business, and I think, Brady, we had this chat this time last year. Great business, great inflows, the pretax margin now down at just 25.6%, I think.

I know the dollar weakness is an issue, but as we saw yesterday, you've now got UBS up towards the mid 30%s. Is there anything else you think you should be doing apart from just doing a good job of trying to bring in the money and run the business? Or is it a time where you have to look a little bit at the cost base, or how you can just accelerate what you obviously want to do in terms of moving to a higher pretax margin? Thank you.

Yes, thanks. I guess on the first question, I think our view is that we have a very strong capital position, pretty much no matter how you look at it. So there are obviously lots of different ways to look at it, as you say.

Slide 29 is, as you say, it's actually fairly complex and it probably only contemplates about one-third of the different ways you can calculate it and the different kind of things that you could bring in.

So to be honest, there are lots of ways to look at it. But 18.2% Tier 1 ratio under Basel 2 today, I think obviously that includes hybrids etc., which we still believe certainly are effective capital. You've got the CET1 ratios and they fully incorporate all the transitional elements etc.

In addition, on top of that, we have now CHF8 billion of contingent convertible, high trigger capital in place. I think the level of capital that we have in place is extremely strong. And so, to be honest with you, there are lots of different ways you could look at it, but my view is the strength of our capital and funding is actually a competitive advantage.

And if you look at the client flows that we have coming in, and there is no bank that has come close to our net new asset gathering over the past three years; no bank that's come anywhere close. And I think that's an indication of the trust the clients have in the firm; the fact that we're one of the few banks that didn't take a government bailout through the crisis; and the fact that we have a very strong liquidity and capital regime.

So to be honest, I think that's actually a competitive strength of ours, nothing else. So I don't know, David, if you have anything you want to add to that?

No, I agree with Brady. I think the points to really focus on is clearly the CET1 ratio does not include any of the Buffer Capital Notes and, as Brady said, there's CHF8 billion of that now in place, CHF2 billion in issuance.

I think if you look at the debt spreads we referred to earlier on, 15 to 20 basis points narrowing in the quarter for our senior debt, 100 basis point Tier 1, I think shows an awful lot about the confidence of the market in our funding.

In terms of detailed points in slide 29, as I said, I think the deduction is probably more like CHF4 billion rather than CHF6 billion.

One small point of detail you may want to focus on is the RWA number, I think is conservatively stated. And I point out, basically, that we've still left our RWA numbers at the same level as we did for last October, even though, of course, in currency terms, we're now talking about a dollar/Swiss franc level closer to the CHF0.90 level.

Now we did that on the grounds of being consistent but clearly, the equity, obviously, has been restated for that, the RWA hasn't. So if you factor that in, that will also change your numbers.

And I think, last but not least, we talk here about a ratio of 9.2% rising to 11.8%. Well, that sounds good, but I'd also point out that our CET1 ratio under B2.5, which we don't report until the end of this year, actually improved by 50 basis points this quarter already. So we showed significant earnings retention to actually drive that. And clearly, you're seeing that as well in terms of things such as deferred tax reductions.

I think equally it's important, and clearly the capital markets don't just look at the capital ratio, they also look at the liquidity coverage ratio, and the NFFR, which I think we've given some reasonable disclosure there just in terms of the strength of our position.

I think on your second question around the Wealth Management business, obviously we've been through a lot of the dynamics of the business, and I'm sure you get the dynamics of the interest rate margin aspect etc.

We're obviously pleased to see the transactional volumes going up. That's a nice trend; if that continues that will obviously be a positive. We continue to believe that, as we've described to you here, that interest rates, over time, are probably not going down from here; they're probably going up. And as they do, you can see there's significant benefit that will come into the business.

So I think on the revenue side there is obviously, given the amount of assets that we've gathered, given the strength of the franchise overall, our view is we've really taken a step change in our position in this business over the last three years versus competitors. And that's going to have us positioned extremely well as the business continues to improve.

I think in terms of the issues around efficiency on the cost side, we have tried to continue to maintain our investment in the business, but to be very disciplined about how we do that. And so we've had pretty continuous efficiency measures in place around pricing, around cost measures, front to back efficiencies, etc.

Clearly, there are impacts as well to the business, as you know, of the strong net new asset growth. And as things come in obviously they -- assets as they come in tend to depress gross margin, those new assets etc. But we do believe that we've got a great platform to increase our breadth of product sale etc., which will, we think, improve the revenue productivity of these assets, over time, as well.

On the other hand, there are some structural issues. The cost of doing business is going up in the business. Regulatory costs, etc., is a fact of life; that's going to be one of the things that we're going to need to continue to deal with, over time.

But I think our view is that we still are very optimistic about our position in this business. As I say, I think we've actually -- there's been a step change in the relative position over the past three years in this business, and we think that puts us in a really good place to benefit as things do continue to improve in the business. And so as a result, as that happens, you'll see real improvement in the overall profitability of the business, but also in the margins in the business.

Gentlemen, thank you very much.

Robert Murphy, HSBC.

A quick question on the risk weighted assets in the Investment Bank, which were down in both Swiss francs and dollars. I'm just wondering if there's anything specific in there, or whether it's just quarter end volatility relative to average for the quarter.

I wouldn't say that there's anything particular we'd highlight. I think, from an internal point of view, we actually put in shadow reporting for B2.5 back last year, and we're actually managing the business on that basis already, even though we don't actually report on that basis at the year end.

So within that, I think the B2 number coming down is fine. I think it's in line with the general approach we have towards being very capital efficient. So I don't think there's anything in particular to note. I think it's clearly an important part of how we measure the business.

Okay, thanks.

Jacques-Henri Gaulard, Autonomous.

Two questions. Well done on the results this morning. I thought that was good because you've been able to convert the try of market share gains in Investment Banking. Question would be, when can you convert those tries in Private Banking? Can we expect it in the second half of this year, or can we expect it next year, because that's basically, obviously, the one area that is still missing versus your crisis efforts, I would say, between '07 and '09?

The second question is on the draft project on the TBTF law. When you read this draft project it seems that the rights of the creditor of low-trigger CoCo is extremely very low. All these CoCos will be issued in Switzerland; the capital in case of conversion will be used to actually bail out the Swiss subsidiary. Aren't you a bit concerned that people investing potentially in your low-trigger CoCos end up owning a small Swiss bank at the end of it, even if it's a tail end risk? Thank you very much.

Yes, Jacques-Henri, thanks very much for those questions. I think, as you say, we are pleased to see that in the first quarter, as you know, in Investment Banking we clearly are beginning to see the progress in the monetization of some of those investments, and building market share. And we think that, in Investment banking, that market share momentum continues, and it is something that we will hopefully continue to see the benefits from, over time.

And as you say, in the Private Bank as well, clearly the market share gains are there; the net new asset inflows have been strong, as we've said, so clearly those are there. When will we actually see that convert is, I think, largely dependent upon overall market conditions.

As we've said, we've been encouraged by the progression in the transactional side of the business and, hopefully, that will continue. It's obviously, probably, somewhat contingent on overall market conditions, and the psychology of the investor base.

But also, as we said, the interest rate margin aspect of it can be a very important aspect, and if we do start to see interest rates rising, which again we're not predicting that they go up at any certain rate or any certain time, but we do believe they're more likely to be up than down over the next period of time. That will also help to convert that.

I also do think that just the passage of time -- as you know, net new assets come in over time; you do get more cross-sell; you get a more broader participation of the product offerings, etc. And we still do believe that those are programs that we're very focused on, and are ongoing.

So it's not a very specific answer to your question on when will we actually see that but, obviously, we hope to see that over the quarters to come.

I think, as you say, you're talking about, I guess, the contingent convertibles, the low trigger, or any of the contingent convertibles. Obviously --

It's more the low trigger ones which the draft law was basically saying, tough luck for you creditors; if you get converted it's going to go into the Swiss Bank, and if there's any money left then you may get some money back. But you're not sure what you're going to be the owner of, or the creditor of at the end of the process.

I think the issue, Jacques-Henri, is to step back a little and look at the way in which the contingent capital was actually structured by the Expert Commission, with reference to Basel 3. So clearly the way in which it works, and this is supposed to take effect from 2019, is there's a minimum CET1 ratio of 10%.

Now in order to trigger the high strike requirement you'd have to drop that to 7%. Within between 7% and 10%, as you know, [there's then] an intensive regime from the Swiss regulators over things like dividend payments, variable compensation, etc., etc., which is clearly designed to preclude the trigger when you actually hit the 7%.

But let's just say you go through that phase, and you do hit 7%, on CHF350 billion, CHF340 billion of risk weighted assets, CHF300 billion, you're talking about approximately CHF10 billion of net losses required to actually trigger that, so you trigger that. Then, essentially, you're back at 10%. The low strike kicks in at 5%, and if the RWA is still at the same level that would require a further CHF15 billion of net losses before you're actually triggered.

So I think it's clearly early days in terms of the market for low strike CoCos. I think we've made it clear we focused on the high strike in the interim, but if you look at it from the view of a potential purchaser you're talking about CHF25 billion of net losses after a period of close supervision to actually get there.

I think, in the context of the business model that we have for Credit Suisse, we described the conversion of the high strike convertibles as remote and highly unlikely. I'm not sure how you come up with [that, Jacques-Henri], but it's clearly extraordinarily remote, and I think that is probably what is going to be the primary interest that we will actually see from a buyer of those instruments.

It is also fair to say that, just as we said last October, we'd seen reversed enquiries for the high strike CoCos, we have seen significant reversed enquiries for the low strike CoCos as well.

So I think that it should be a perfectly viable instrument once you actually look at the cushion of losses that would have to be incurred, and the business model that Credit Suisse operates to.

Thank you, gentlemen.

Matthew Clark, KBW.

Some numbers type questions, I'm afraid. Firstly on the Wealth Management net interest income, I was just wondering what duration the deposits are invested at. So if we do see that 100 basis point rise, how long before we see the revenue impact come through?

Second question is on the loan loss charge in the CIC division. Just wondering if the reason it remains so low is because there are no new loans going bad, or is it because you're still seeing recoveries from loans that went bad 5 or 10 years ago?

So I guess, to think of it another way, will we see that loan loss charge tick up when past recoveries are exhausted, or do we need to see a deterioration in the Swiss economy for that to happen?

And then finally, given the higher contribution from cross-currency hedges this quarter, perhaps you could just go over what, economically, those accounting items are, and why we should strip them out? Thanks.

Sure. I think just to answer those questions in order. The typical average duration of those deposits is about 18 months. So I think it would take about 18 months for the full impact of high interest rates to actually come through. But you're clearly seeing the final tails of the roll-off from past interest rates, both in this quarter's results and the CHF20 million that we talked about in the presentation.

I think the CIC, you see a number of net zero. That does reflect new accruals on loans we're actually making, but offset by releases on past loans which we've basically offset.

So we had new provisions of CHF41 million, releases of CHF29 million in terms of that, so we are making new loans, but I think our credit experience is actually resulting in releases off the existing loan book. And as I said, I think that reflects, A, the fact that the loan book itself is of high quality, and B, the Swiss economy obviously remains very strong.

On the third point then, just in terms of the fair value own debt moves. As we said, there was CHF617 million of those, of which just over half related to fair value own debt, and was clearly accelerated by the strengthening of our capital position further in the first quarter with a Buffer Capital Note issuance.

In terms of the other derivative moves, that also relates to our funding, and I think we've touched upon this in the past. There's two components of that. Firstly, where we actually have issued debt in euros and then swapped it to US dollars, which occasionally we do from a funding point of view, we don't fair value elect on our loans any more, because we find the fair value own debt volatility unhelpful.

So the loan is then accrual elected, and you have mark to market volatility on the swap from euros into dollars. So clearly, the duration of that will match the loan; over the course of the loan, when it's actually redeemed, nets out to zero. But during the lifetime of loan you actually get volatility.

And I think the example I just gave, the euro one, is probably the most important one, because you've seen a move in the euro-based interest curve against the dollar, primarily driven by the ECB's moves in the first quarter.

The second component is much smaller, you may have seen this elsewhere, which relates to the receiver swaps. And again, that's been driven by basis curve moves in the quarter, and again, it zeros out over the lifetime. So that's the essence of it.

But I think the unusual move, from our point of view, was very much triggered by the issuance of the Buffer Capital Notes, which, A drove our senior debt spreads down, and B, triggered this 100 basis point rally in our Tier 1 hybrids, as people looked towards the first call.

That's all very clear. Thanks very much.

Kinner Lakhani, Citi.

I've got one question on your Structured Products business. In a previous presentation you said it represents about 40% of the RWA increase under Basel 3. And this time you basically say the returns are expected to be good under Basel 3. Just wanted to get a sense, how would those returns, on a pro forma Basel 3 basis, compare to the average for the Investment Bank 16% that you achieved in the first quarter? Clearly, the RWA inflation is disproportionate.

Thank you. We obviously have looked at the Securitized Product business, and particularly the RMBS business under Basel 3. And as you said, its mitigation is part of our plan for that business, going forward. That said, and I think it's difficult to -- we have looked at this, and the projected return on capital for the RMBS business under B3, post-mitigation, is actually, I think, at or slightly above the Investment Bank average. And I think that reflects the scale benefits we actually have from the market leadership. Just for the sake of clarity, that is also true for the Credit business as well.

Would that be true for the high yield Products business, including leveraged finance?

Yes. It is true for that business as well.

Right, okay, and if I could just follow up. What is the current Group tax rate guidance we should be thinking about?

28.6% in the first quarter. I think, clearly, in terms of deferred tax utilization, our Americas business has performed very strongly in the first quarter. The effective rate on the deferred tax is 41%, so therefore, as we utilize those deferred tax losses in the United States that comes through at 41%. If, on the other hand, we utilize the tax losses in the UK, where then the rate would be around 27%, although, of course, that will change with the latest budget rules. So that's the kind of balance we have in terms of the regional mix.

Net net, I would say at this moment, at or around this level, is probably a reasonable expectation for the expected tax rate for full year 2011. And within that, I would also say we would expect to see significant further deferred tax utilization.

Thank you.

Sebastian Lemaire, Societe Generale.

I would have one question, please. You're subject to Basel 2.5 since the beginning of the year. At the same time, you have maintained, or improved, your ranking in the various league tables, suggesting that there has been no re-pricing of Basel 2.5 additional costs, otherwise, you would have probably declined in the league tables. Is it fair to think that way, have you seen some re-pricing related to Basel 2.5 in market prices? Thank you.

I think it's difficult to comment. For us, clearly, I think as you're aware, the B2.5 rules take effect at the end of this year. The reason we're giving pro forma numbers to it because I think we wanted to be open and transparent, and one can see how it actually tracks. I guess, obviously, the other European banks will follow, but the US banks are clearly on a slightly longer timetable. So I think it's probably too early for us to say clearly we have, or have not, seen much impact yet from B2.5. I'm not sure you really expect it this early in 2011. So I think difficult to comment, given where we are in the regulatory timetable.

Okay. Thank you.

But I think, as you know, we do continue to have good momentum across the business really, and so that's one of the reasons why we continue to have confidence that we'll be able to, as we continue to evolve the business, and respond to a number of the different capital requirements as they come into place, we continue to have a lot of confidence that we'll be able to maintain our leadership in those businesses.

Exactly. And we do run out on a pro forma B2.5 basis already; [that's] how we actually operate the business. And I think the returns remain pretty strong, notwithstanding that.

Okay. Do you think it possible to pass onto the clients the additional costs related to Basel 2.5 at a certain point in time?

Well, I think that's a difficult question; it depends on a much broader range of issues. What I would say, actually, is probably refer back to an earlier question, which I think in terms of the expected B2.5/B3 returns for the RMBS business, I think those returns are at or above the Investment Bank overall. I think that does reflect the leadership we have in that business and improved scale econ as we get.

Beyond that, I think it's difficult to say too much. Clearly, we're not in some of the much more complex, exotic structured products, which would be much more affected by Basel 2.5 or Basel 3 still to come. So it would be difficult -- we're actually not in those businesses greatly, so it would be difficult to comment on the re-pricing.

Okay, thanks.

(Operator Instructions) Gregor Hunter, The National.

I have a question regarding how the Bank's operations have been affected by ongoing events in the Middle East. Can you give us any update on operations there?

Well, obviously, the first quarter there have been a lot of issues, geopolitical issues, natural disasters. Obviously, there's been a lot of disruption to the markets, and that has had an impact on overall client volumes etc. On the other hand, as you know, the markets have tended to be fairly resilient in the face of those changes, and you can see that from our market shares and the volumes that we experienced in the first quarter overall.

I think, specifically, our businesses in the Middle East and our franchise there, we actually have a strong franchise, but it tends to be more focused in the Gulf, Saudi Arabia, areas that were, I think, less impacted by some of the disruption there. So we have actually had relatively minimal impact on our business, overall, from events there. But they obviously do have an impact on the broader world economy and markets, and we obviously continue to be vigilant in that respect. But in general, our franchise in the Middle East has not been materially affected by the events there.

All right, thanks very much.

Jeremy Sigee, Barclays Capital.

Just a clarification, please. Slide 33 where you do the pro forma ROE. I assume that's on the same basis as slide 29, i.e., without phasing in -- i.e., you're ignoring the deductions and the goodwill. Is that correct?

I think in answer, on slide 33, we just wanted to give an illustrative example on the basis of a 10% common equity requirement. So that 10% common equity will clearly include things like goodwill, which are actually part of the equity base under the rules. And the RWA basis we've used is actually consistent, again, with what we said on slide 29, i.e., basically, CHF330 billion to CHF350 billion and the IB's component of that. So it is consistent with that.

Yes, I think, Jeremy, this was our attempt to really try to get at this fundamental question of the returns in the Investment Bank, how they compare to the overall returns, and how they'll compare under Basel 3. So this was what we thought was one of the most -- I don't know, one of the clearest ways that we could try to lay it out in a way that was helpful.

Obviously, there are different ways to calculate; there are different bases you could use, etc., but we thought this was actually one of the clearest ways. But there are, obviously, different ways to calculate the returns, etc. So we're just trying to get at -- obviously one of the questions a lot of people have had is, well how is the Investment Bank going to look in terms of returns, particularly under Basel 3, and so we were trying to take a stab at being able to help with some of the thinking on that.

Jeremy, we also include a supplementary slide in the appendix, on slide 41, which actually lays out the basis there. So you'll see that RWA for the Investment Bank projected from CHF137 billion under B2 to CHF247 billion, post mitigation.

Okay, but I wanted to be clear on the goodwill. As you sense from the questions on this call, I think a lot of people are trying to look at it on a full look-through basis. And on that basis, the returns would be quite a bit lower on slide 33, but thanks for the clarification.

Yes, I [see your point]. Clearly on the return on intangible equity, that wouldn't be the case.

But if you had to carry equity in that division to cover these additional deductions, including the goodwill, then the ROE would be low -- yes, I take your point on tangible. Thank you.

We have no further questions at this time, Mr. Dougan. Please continue.

Okay, well, thanks everybody for the questions. I would just like to sum up briefly reiterating some of the themes. We do think this is a strong set of results. They do, we think, demonstrate the power of the business model to generate stable and high quality earnings. Underlying pretax CHF2.2 billion, underlying net income of CHF1.6 billion, underlying return on equity of 19%, and CHF19 billion of net new assets, we think provides strong evidence that the client-focused strategy is having a real impact. Obviously, we anticipated a lot of the regulatory developments that we're now seeing, and with an 18.2% Tier 1 ratio and a Basel 2.5 core Tier 1 ratio 10.2%, we think we're strongly positioned there.

During the quarter, our transactions to create our high trigger contingent convertible capital structure I think was a clear demonstration of the importance of that market. We also reduced our net deferred tax assets by CHF800 million, increased shareholders' equity by CHF800 million.

Funding continues to be an area of focus; our spreads remain very tight and I think, as David mentioned, tightened in considerably during the quarter. We do have a conservative approach to liquidity management, and we think our debt maturity model is best in class, and all that being reflected in the CDS.

On the regulatory front, as we said, we do think that we are ahead of the curve, in terms of a certainty around the structure of our capital, on the asset weightings, etc. We are encouraged by a more level playing field beginning to emerge, and we'll see how that develops. But overall, we think it was a strong quarter, good progress on capital, and are meeting a lot of the challenges there.

As we stated in our outlook, we do expect the market environment to remain constructive. We also expect clients to remain active with an increased appetite for higher return assets, and comprehensive advisory services. But, obviously, the macroeconomic recovery continues to be gradual, and it continues to be impacted by external and market events. Nonetheless, we do have substantial momentum across all our client base businesses, and we remain well prepared to continue to capitalize on our improved market positions.

Thank you all for joining the call.

That does conclude today's conference. Thank you for joining today's call, you may all disconnect.