Credit Suisse Group AG (CS) 2011 Q4 法說會逐字稿

Good morning, this is the conference operator. Welcome, and thank you for joining the Credit Suisse Group fourth quarter and full year 2011 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.

I'm joined by David Mathers, our CFO, who's going to deliver the results portion of today's discussion, and our divisional CEOs are here as well, and they'll participate in the Q&A. So, Hans-Ulrich Meister of the Private Banking, Eric Varvel of Investment Banking, and Rob Shafir of Asset Management will be available for questions as well.

2011 was a year of transition for Credit Suisse. We took decisive steps in the second half of the year to further evolve our integrated bank model, and we made significant progress in adapting the business to the new market and regulatory environment.

There's been a fundamental change in the industry landscape, and in response, we have aggressively reduced risks and costs during the year. While these actions had an impact on our financial results, we're convinced that our status, as a first mover in adapting the business model, will position us for improved profitability and more sustainable returns.

We did this against the backdrop of very challenging market conditions throughout the year, characterized by a high degree of uncertainty, low levels of client activity across our businesses, and periods of extreme market volatility driven by concerns about European sovereign debt crisis and its effects on the global economy.

We did make significant progress in three areas; first, sizable and accelerated reduction of risk-weighted assets in the Investment Bank, which will allow us to achieve our original year-end 2012 target level a full nine months ahead of schedule.

Second, demonstrable progress against our CHF2 billion cost reduction program, primarily aimed at improving the financial performance and cost flexibility of the Investment Bank; we're confident of achieving CHF1.2 billion of run-rate savings from the start of 2012, excluding the impact of the one-time charges from PAF2 awards granted and expensed in the first quarter. PAF2, or Partner Asset Facility 2, is a deferred compensation plan, which effectively transfers risk from the Group to employees, and will result in one-time costs of CHF500 million in the first quarter of 2012.

And third, early and encouraging progress toward achieving enhanced profitability in the Private Bank. I'm going to cover these achievements in greater detail, but first, I do want to discuss our financial performance and the impact our actions had on fourth quarter and full-year results.

Our performance in the fourth quarter with a net loss of CHF637 million was clearly disappointing. The loss reflects not just challenging market and trading conditions, continued lower client activity in the quarter, but also the impacts of rapidly adapting the business model.

This includes the impact of a pre-tax loss of approximately CHF1 billion in the fourth quarter related to these measures including, first, the implementation of our risk reduction plan. Second, losses from businesses we're exiting, particularly specific areas of fixed income in which we no longer see the prospect for attractive returns under the changed regulatory environment. And third, business realignment costs resulting from the rapid execution of our cost reduction program.

In spite of the difficult fourth quarter, for the full year 2011, we reported net income of CHF2 billion, or CHF2.4 billion on an underlying basis. And this equates to a reported return on equity of 6% for the full year, or 7.4% on an underlying basis.

We continue to gain market share across our businesses. We saw solid Private Banking net new assets of CHF 7.5 billion in the fourth quarter, and CHF44.5 billion for the full year, including strong contributions from ultra-high net worth individuals and the emerging markets.

Now moving to slide 5; overall, as I said, a disappointing fourth quarter, but given our robust capital position, we are able to take these measures while maintaining the strength of our franchise. In fact, despite the fourth quarter, we continue to further strengthen key financial and capital ratios.

We maintain a strong capital position and increased our Basel 2.5 Tier 1 ratio to 15.2%, up 0.9 percentage points, and improved our core Tier 1 ratio to 10.7%, up 0.7 percentage points from the end of the third quarter. As you know, Credit Suisse has been operating under Basel 2.5 standard since the beginning of 2011.

On a Basel 3 basis, we expect our year-end 2012 CET1 ratio to be at 13%, well in excess of the FINMA requirement of 6%. And on a look-through basis, we expect our CET1 ratio to be 7% at the end of 2012, and to increase to 10% by the end of 2013.

The balance sheet remains highly liquid, and Credit Suisse continues to have an industry-leading Basel 3 net stable funding ratio that is well ahead of requirements. We further improved our ratio to 98% in the fourth quarter.

We will continue to pay a material dividend. The Board of Directors will propose a dividend distribution of CHF0.75 per share at the Annual General Meeting on April 27. The distribution will be free of Swiss withholding tax, and will be payable in cash or in new shares of Credit Suisse Group at the option of the shareholder.

For the scrip alternative, the new shares will be issued at a discount, with a price equivalent to approximately 92% of the average opening and closing price on the Swiss Exchange during a period of five trading days following the Annual General Meeting.

While we're mindful that the market and economic environment remain uncertain, we are encouraged that our business is off to a good start in 2012, with year to date underlying return on equity consistent with our target level of 15%, including the benefit from our risk and cost reduction plans.

And with this, I will now turn to how we are implementing the measures to evolve our strategy; moving to slide 6, then. We're confident that our measures to aggressively reduce risk and cost in 2011 have been effective in adapting our business to the new environment, and have strengthened our position heading into 2012.

I want to give you some of the details on the three areas that I mentioned earlier, including our significant progress in, first, risk-weighted asset reductions in the Investment Bank; second, expense reduction initiatives across the Group; and third, early progress on initiatives aimed at bolstering the profitability of the Private Bank.

First, as you can see from the chart on the left-hand side of the slide, we've accelerated the reduction of our Basel 3 risk-weighted assets in the Investment Bank, reducing them from $331 billion at the end of the second quarter to $248 billion at the end of the year. This amounts to an aggregate reduction of $83 billion in the second half of 2011; $47 billion of that in the fourth quarter.

We expect to achieve an additional $33 billion reduction by the end of the first quarter, bringing us to $215 billion. This aggressive reduction in risk-weighted assets will allow us to exceed our year-end 2012 goal nine months early, by the end of the first quarter. We now expect to achieve a risk-weighted asset level of $190 billion by year-end 2012, which is $40 billion lower than our original target.

Second, as you can see from the chart in the middle of the slide, we significantly reduced our expense base and improved our cost flexibility, primarily aimed at improving the performance of the Investment Bank in 2012. We completed aggressive measures to achieve expense run-rate reductions of CHF1.2 billion from the start of 2012, again, excluding the expenses related to PAF2 awards, which were granted in the first quarter. But we've targeted additional reductions of CHF800 million by the end of 2013 for a total cost reduction of CHF2 billion.

We go into 2012 having increased our compensation flexibility by reducing senior level headcount, with the resulting substantial decrease in costs from deferred compensation from previous years.

And third, in the Private Bank, we've taken steps and see early progress towards achieving enhanced profitability. The integration of Clariden Leu is well advanced. We acquired an onshore platform in Japan, and we see continued momentum in our ultra-high net worth market share.

We've set a goal for an CHF800 million improvement to pretax income in the Private Bank in 2014, and we will achieve this enhanced profitability while maintaining our industry-leading franchise momentum.

And with that, I'll turn it over to David.

Thank you, Brady. Good morning. I'd like to start my presentation on slide 8, with an overview of the financial results. If you look at the full-year numbers, you can see that underlying net income was CHF2.4 billion and diluted earnings per share, CHF1.71. The underlying return on equity was 7% compared to 14% in 2010.

In the fourth quarter, we reported an underlying pretax loss of CHF0.8 billion and a net loss of CHF0.5 billion. The reported pretax loss was CHF1 billion and the reported net loss CHF0.6 billion.

On slide 9, we highlight the significant items that affect the reported result. The reported fourth quarter pretax loss of CHF1 billion includes CHF0.2 billion of fair value and debt gains, and CHF0.4 billion of severance costs that we booked in the corporate center. These severance costs are part of the CHF1.2 billion total implementation costs that we expect to occur over the whole of 2011 and 2012, in order to deliver the CHF2 billion cost reduction initiative.

As a result of accelerating this program, we've recognized some CHF0.8 billion of these charges in 2011, and we expect to incur the remaining CHF0.4 billion of realignment costs during the course of 2012.

It's also worth noting that our fourth-quarter result includes pretax losses of CHF0.6 billion in our fixed income businesses within the Investment Bank. These losses relate to businesses we're exiting and to the accelerated risk reduction program, and the full-year losses across both categories total CHF1 billion.

Slide 10; we're on track to deliver total savings of CHF2 billion from the cost reduction program by the end of 2013. The left-hand chart shows that we expect to achieve annualized expense reduction of CHF1.2 billion of this in the first quarter of 2012.

The bulk of this CHF1.2 billion will be realized in the Investment Bank, where we reduced headcount, particularly at senior levels, and as we rationalize and reallocate resources, downscale and exiting some of the less capital efficient business lines. These numbers exclude the impact from the PAF2 awards, which will be granted and fully expensed in the first quarter of 2012.

The right-hand chart shows the divisional split of the further CHF0.8 billion of expense reductions planned to be achieved by the end of 2013. Savings from this include the benefits from the integration of Clariden Leu, the streamlining and integration of our operations and support infrastructure, as well as a focused vendor management initiative.

Slide 11; we've achieved a material reduction in compensation levels going into 2012. The left-hand chart shows that we have reduced the economic value with variable compensation awards by 41% in 2011 compared to 2010.

The right-hand chart shows that compensation awarded in prior years, but not yet expensed, has fallen from CHF5.9 billion at the end of 2010 to CHF3.7 billion by the end of last year. Of this CHF3.7 billion, we expect CHF2.4 billion to be charged in 2012, subject to fluctuations from market movements relating to the award value.

Slide 12; for 2011, we awarded deferred compensation to senior employees in two forms; Credit Suisse deferred shares and PAF2 units. The effect of the PAF2 units is to transfer an element of credit risk to our employees.

This achieves three things. First, it reduces the risk to the Bank; second, it accelerates the implementation of our restructuring strategy; and third, it aligns the risk and rewards to our employees with those of the Bank and of our shareholders. As a result of this program, CHF500 million in respect of the risk transfer will be expensed in the first quarter of 2012 as this award is vested and granted.

Slide 13; let's turn to the Private Bank. The Private Bank's fourth quarter pretax income of CHF467 million was characterized by significantly lower levels of client activity, as well as higher expenses for legal matters and an increase in provisions.

Despite the continued weak environment, we achieved strong net new asset inflows of CHF44.5 billion in 2011, with strong contributions across all regions.

The overall pretax income margin was 26% in 2011. The full-year result was adversely impacted by the strength in the Swiss franc during 2011, with net revenues and pretax income CHF844 million and CHF550 million lower as a consequence.

At constant exchange rates, constant FX rates and excluding the litigation charge that we took in the third quarter, the full-year pretax income in the Private Bank would have been down 3% from 2010.

Let's look at Wealth Management revenues in more detail on slide 14, so, if we start with net interest income, the lower segment in these columns. You can see that after several quarters of falling net interest income, the result of continued low interest rates, we saw an increase in the fourth quarter to CHF863 million due to increased loan and deposit volumes, as well as a somewhat weaker Swiss franc in the fourth quarter.

Recurring commissions and fees was slightly higher in the fourth quarter at CHF821 million, in line with the improvement in average assets under management.

After the increase we saw in transaction-based revenues in the third quarter, there was then a sharp decline in the fourth quarter due to significantly lower levels of client activity. And this was the main driver in the 5 basis point decline in the overall gross margin to 109 basis points. And these revenues will remain subject to the continuing market environment and the significant fluctuation in client activity levels that we've experienced over the last couple of years.

Slide 15; in an increasingly difficult market for net new asset accumulation, Wealth Management achieved net new asset inflows of CHF4 billion in the fourth quarter, with continued strong contributions from emerging market and ultra-high net worth clients. In Switzerland, net outflows of CHF2.3 billion were influenced by the usual fourth quarter seasonal effects.

For the full year, the net new asset growth rate was 4.7% with well-diversified inflows across all regions and that included a 13% growth rate in Asia Pacific.

Let me now turn to Corporate & Institutional Clients on slide 16. Pretax income was CHF183 million in the fourth quarter, with a continued strong pretax margin of 40%. Net new asset inflows were particularly strong. Credit provisions did increase in the fourth quarter but, due to a small number of specific cases, for 2011 as a whole, they remained low.

Slide 17; in light of the ongoing challenging environment and regulatory changes, in our third-quarter results, we announced a comprehensive set of measures to rebalance the Private Bank towards growth areas in order to enhance its profitability.

Already we have hired 100 Senior Relationship Managers, one-third of whom are focused on the ultra-high net worth client segment, whilst reducing the overall headcount in Private Banking by 400. We've acquired a Private Banking onshore franchise in Japan. We've announced the integration of Clariden Leu. And we're well on track to achieve the financial and operational benefits that this will bring.

Furthermore, we've also begun work on the shift in our resources towards ultra-high net worth clients, particularly in emerging markets, and you'll see this in the hiring of Relationship Managers, towards a much more cost efficient infrastructure in Western Europe, including the consolidation of the different processing centers, and also the restructuring of our cross-border business to better segment how we look after affluent clients.

We're confident these combined measures will result in a targeted incremental pretax income improvement of CHF800 million by 2014, and that's on the assumption that the external environment remains similar to that in 2011. Furthermore, we expect to achieve CHF300 million of that in 2012.

So let me now turn to Investment Banking on slide 18. The Investment Bank posted a CHF1.3 billion pretax loss in the fourth quarter. Our 2011 performance was disappointing, adversely affected by difficult trading conditions, losses from businesses and positions that we're exiting, and for the costs of the accelerated risk reduction.

For the full year, net revenues totaled CHF11.5 billion compared to CHF16.2 billion in 2010.

Slide 19; as we mentioned earlier, we incurred losses of CHF320 million from businesses that we're exiting and a further CHF149 million in respect of the accelerated risk reduction. Our B3 RWA was reduced by $47 billion or 16% in the fourth quarter. If you were to adjust for these losses, fourth quarter revenues would have been CHF1.7 billion, but still down 31%, from the prior quarter.

Slide 20; what we give here is an update on our progress in reducing the Investment Bank's Basel 3 risk-weighted assets. I'd just note this is a first time we've provided you with quarterly B3 RWA numbers. And I would caution that these calculations are still in flux, but they do represent our current best estimates, based on our understanding of the draft B3 rules as they stand today.

As you can see, we significantly accelerated RWA reduction, resulting in an $83 billion decrease, to $248 billion, in the second half of 2011. We expect to achieve a reduction of another $33 billion, in the first quarter of 2012, and to exceed our original goal for 2012, of $229 billion, nine months early.

Further, we plan another $25 billion of RWA reduction, during the remainder of 2012, resulting in risk-weighted assets of around $190 billion, in the Investment Bank, by the end of this year.

Slide 21; fixed income revenues were significantly lower in the quarter, reflecting the volatile trading conditions, low client trading volumes, and reduced liquidity. Our securitized products and credit franchise underperformed in the fourth quarter of last year; primarily due to losses on client inventory positioning, increased basis risk, extremely thinner liquid markets, as well as some losses on the hedges against these positions.

Emerging markets and commodities were also somewhat weaker than in previous quarters, again due to subdued client activity. But our Rates and FX businesses continue to perform well.

Slide 22; if you recall at our third quarter presentation, we showed a breakdown of CHF100 billion, of planned risk-weighted asset mitigation, in the Fixed Income business. What slide 22 shows is the progress in these mitigation efforts during the fourth quarter, as well as updated Basel 3 risk-weighted asset target levels for each business line, at the end of 2012.

We presented the RWAs in dollars here, to show a better like-for-like comparison, free of the FX movements. You can see in the fourth quarter, we've mitigated $50 billion of the planned $105 billion target.

In macro, credit and emerging markets, you can see we've made significant reductions in the fourth quarter, and we have relatively limited further reductions planned in these business lines, already close to our end state for these areas.

In securitized products, we do still have $11 billion to mitigate, having mitigated $25 billion in the fourth quarter. But this does give us confidence that a further $11 billion reduction is very much achievable, and can be done at minimal incremental cost.

Now let me turn to the wind-down category. As you can see, this includes a total of $57 billion, of risk-weighted assets, at the end of the third quarter, reducing to $48 billion, at the end of 2011. So just to be clear, $10 billion of this is what you saw in November at our third quarter results, and that's the final tail of the 2008 exit portfolio, most of which has been sold down over the last three years.

The other $38 billion is in respect of businesses and assets which under the Basel 3 review, which we talked about in November, we have also decided to exit from. So having reduced this portfolio by $9 billion in the fourth quarter, you can see that in 2012, the target is to reduce this by a further $34 billion.

We already have firm plans in place to eliminate more than half of this, in the first quarter, and that includes PAF2. The incremental costs of the reduction are expected to be minimal, but I would note that these assets are subject to market fluctuations, which do affect the fair value over time.

So let's now turn to equities, on slide 23 please. You can see we had lower, albeit resilient equity revenues, quarter on quarter, reflecting a strong performance in prime services, with increased client balances; resilient cash equity revenues,. notwithstanding lower client volumes; and an equity derivatives performance that was impacted by reduced customer activity, and that was particularly in Europe and in Asia, as well as hedging losses due to the cost of a conservative approach to risk positioning in this business.

Slide 24; underwriting and advisory results were lower in the quarter, reflecting low industry-wide issuance, and the declining completed M&A activity. Dead underwriting revenues declined, driven by reduced high yield issuance, and also equity underwriting levels were lower, particularly in IPOs.

Let's now turn to Asset Management, on slide 25. Pre-tax income was CHF87 million in the fourth quarter. Full year pre-tax income was CHF553 million, a 10% increase on 2010. If we move to slide 25, you can see the drivers in this improved performance.

Slide 26, you can see that the pre-tax income was driven by higher fee based revenues, and significantly reduced operating expenses, as we continue to realize platform efficiencies, and exit sub-scale businesses.

The higher fee based revenues were somewhat offset by lower investment related gains, as a result of adverse market conditions in the second half of the year. And the strong franc also had a negative impact on like-for-like performance. The overall pre-tax margin for 2011, nonetheless, increased to 26%.

Slide 27; in 2011, Asset Management experienced strong underlying inflows, primarily in higher margin alternative investments. However, we had outflows of CHF5.9 billion, resulting from our decision to close certain product lines, as well as from certain private equity realizations that we saw during the year. In addition, we experienced CHF7.1 billion of outflows in the low margin Pension Fund Advisory business.

So let's now turn to capital liquidity on slide 28 please. We continue to maintain and strong capital position, with a Basel 2.5 core Tier 1 ratio, increasing by 1.0%, to 10.7%, during 2011; our Basel 2.5 Tier 1 ratio increased by 0.9%, to 15.2%, at the end of the year. And clearly, in addition to the B 2.5 capital, we also benefit from the issued and forward exchanged buffer capital notes, or CoCos, that we raised in February, a year ago.

Let me comment briefly on the EBA stress test. Although the Swiss banks are not subject to this test, on the most conservative definition of the EBA rules, our ratio would be around 9.5%, at the end of 2011, which is comfortably above the requirement, as laid out in the draft rules that have been published so far by the EBA. And I'd note that this excludes any credit for the buffer capital notes. Including these notes, the ratio would be 10.2% at the end of 2011.

Slide 29; we show here the substantial reduction and overall B3 RWA in light of our 2012 goal, resulting from the [strategic] alignment -- realignment in the Investment Bank. We have accelerated the reduction in B3 RWAs, and will achieve our end 2012 target, during the first quarter, nine months earlier than we'd previously planned. At the end of 2012, we now expect to achieve our end state risk-weighted assets of CHF283 billion, CHF37 billion below the original target.

If we look forward to 2013, we anticipate the business growth, going forward, to be in the Private Bank and Asset Management.

Slide 30; slide 30 shows an update of how the B3 CET1 ratio could develop, based on our capital progression expectations, through to the end of 2013.

On the left chart, the first column shows are current shareholders equity. We've adjusted for regulatory deductions and analyst expectations for the next 12 months retained earnings. And I would remind you this does not represent forward looking statements being made by Credit Suisse management.

We assume a benefit of CHF2.6 billion, from issuing shares out of conditional capital, for share based compensation awards, as well as other movements in capital deductions. So by the end of the year, our CET1 capital goes to CHF36 billion, to give a B3 CET1 ratio of 12.9%, based on the transitional definition in the proposed FINMA capital ordinances, that were published in December.

In addition, we have issued and forward exchanged loss absorbing contingent capital, which is worth another 2.7% on this ratio. And we've included, just for reference, the proposed FINMA glide path requirements that came out with the December draft ordinance, and that's on slide 42 in the appendix.

We've also included in the appendix, the CET1 look through calculation. So on this basis, which is on slide 41, shows ratios of 7.1% and 9.9% at the end of 2012 and 2013, respectively.

So let's now turn to slide 31. Our funding and liquidity positions remain strong. The Basel 3, net stable funding ratio, NSFR, increased to around 98%, at the end of 2011. Our Swiss regulatory leverage ratio stood at 4.6%, under B 2.5, which is towards the top of the required range. And funding spreads remain amongst the tightest, compared to our peers. Furthermore, we have a highly unencumbered balance sheet, with limited use of covered bonds. Only about 12% of our Swiss mortgage book is so utilized.

And finally, we have not, and have no intention of participating in the LTRO facility, given our existing strong funding liquidity position, and also our limited inventory of euro collateral.

So on that note, that concludes my presentation, and I'll hand back to Brady. Thank you.

Thanks very much, David. So now we'll go to the Q&A portion, I think we're going to start with a few of the questions on the phone, so do we have some questions lined up?

Huw van Steenis, Morgan Stanley.

Thanks for that useful presentation, two questions. I want to first focus on the Basel 3 look through ratios. For the end of 2013 despite your very successful de-risking, your ratio is only about 40 bps higher than last time, so at 9.9% versus 9.5% last disclosed. And, I think, if I think about that, almost all of that is explained by you cutting the dividend.

Have you also got thoughts about not only accelerating the reduction of RWAs, but actually looking to a much smaller risk-weighted asset base in two to three years' time as you rethink the opportunity set in Investment Banking?

And then the second question's really around the cost base, clearly, you've done a great job in trying to rebase the cost base for a more challenging environment. What sort of assumptions did you use as you thought about what was the appropriate level of cost? And what would it take for you to have another look at that as the year goes on? Thank you.

Well, maybe on the second question first, Huw -- by the way, Huw, thanks for the questions. I think with regard to the cost base, obviously that's one of the more important questions is how -- what kind of an environment are we going to be encountering and, therefore, what kind of a cost base should we be maintaining?

I think, as you know, we've actually planned to reduce the cost base, we've actually executed on that, in such a way that we think if we had 2010/'11 average environment, we thought we'd have a 16% return on our Investment Bank. If we have a 2011 average environment, we'd be more like a 12% return on equity in that environment.

And so that's what we've kind of cut to, with something where we think, hopefully we can have -- I think our view is that if we had conditions that are along those lines, we'll still have something that is in the low teens in terms of returns on the business. So I think for right now, that's how we've positioned the business.

Obviously, that's an important -- one of the more important decisions is how to scale the business for what we see going forward. I think, obviously, it's anybody's guess as to how 2012 is going to proceed. We've said we're encouraged by how it started off. But I think our view is that hopefully we will be -- we will experience an environment such that the scale of our cost base will allow us to make those kinds of returns. But we'll, obviously, re-assess it as time goes on, but we think that's probably about the right place to be.

I think with regard to the RWA, I don't know if, David, you want to comment on this specific question of the changes to that. I think our -- I guess what I would say is the acceleration of our program hasn't really impacted our end state approach to the business, so -- but --

I think as you said, Huw, I think in the third quarter on the look through basis, which I think your question was about. I think we talked about a look through ratio of about 9.4%, excluding the buffer capital notes. And I think if you look at slide 41, the ratio increase is now up to 9.9% excluding the buffer capital notes, or 12.5% including the buffer capital notes.

So I guess your question is -- I think you -- you but correct me if I'm wrong, is should we be looking beyond that in terms of numbers? I would say, clearly, the Swiss rules essentially do lay out pretty clearly in terms of what they are. We've given the glide path in the back against the transitional CET1. Clearly, the end state out of 2019 is a requirement for 10% common equity Tier One, 3% further equity or high strike CoCos and then there's a further 6% low strike. So I think that's probably pretty much in keeping with Swiss rules, but somewhat earlier, obviously, than the timeline required.

But I thought your question really was going -- is should we go beyond that? I guess, probably, we feel that's about the right level.

I thought the question was -- maybe, Huw, you can clarify, but I thought the question was since we've accelerated the movement, your question was does that mean we're going to have an end state that's actually lower than what we originally projected?

And I would say the acceleration is not changing our ultimate configuration of the business. We've taken some very clear steps, we outlined them; we've spent some more time talking about some of the RWA increases, as you see here. And that's really just based on the new capital regulations and how they impact the returns on the business.

So we're really working to have an Investment Bank that can make around the 15% return on equity in decent market conditions, and I think that configuration hasn't really changed. And I think our decisions around the acceleration of that are really more around our view that if we can get our business into a sustainable state earlier, we'll be able to take advantage of opportunities with clients in the market.

And we still believe that-- our belief -- our theses is still that the industry will have to move pretty rapidly towards this. Some of that's happened in the industry, but not very much and so, frankly, you're going to see a lot more movement to reduce RWA, which is going to obviously increase the price of the reductions. And so if we can do that up front, we will hopefully be in a better position. That's at least the theses; we'll see how it works out.

Thank you, that's very helpful.

Thanks, Huw. Our next question on the phone.

Derek de Vries, Bank of America.

I have a few questions if I can, first on the Investment Banking compensation. I think you mentioned with Q3 results that you're accruing for a bonus fall down 25% to 30% in line with what your compensation consultants are telling you.

Your pool actually fell 41%, so I guess I was surprised that the cost in the Investment Bank rolling down about CHF90 million. So my question is did you pay a higher percent in non-deferred, if you will, than you envisioned at Q3, or how else do you reconcile that difference?

Then on the $47 billion risk-weighted asset reduction in the Investment Bank, I was wondering if you could give us the actual asset reduction, just so as we can do some calculations on what the haircut was on the assets that you've sold?

And then on the exit costs, you gave us your legacy business in Q4, were all of those assets sold or given a January recovery? Could we see some write-backs of that?

And then finally, I guess more theoretical in the Q4 results Deutsche Bank said that their regulator forced them to take some operational risk-weighted assets to cover potential legal issues, or litigation losses and I'm wondering if you had a similar conversation with FINMA, given the potential for fines in servicing non-disclosed US tax payers as well as you do have some put back risk as well?

So those are the three questions, maybe four, a few anyway.

Maybe I can start with the broad answer to the first question, but then David can address that and we can go on from there. But I'll try and answer a couple of them and then probably David or Eric could jump in and give better or more complete answers.

I think first of all on the Investment Banking side, I'm probably going to increase the scale of your question by saying that while the variable comp was down 41% for the whole Bank, it's actually down more than that in the Investment Bank as you can imagine. The Investment Bank, obviously, had a worse performance, so it's actually down more than that. So, when David gets round to answering, he'll have a bigger difference to explain than what you just mentioned.

The -- on the exit costs I would say some of those are realized in terms of those exit businesses, we have reduced our risk-weighted assets in those businesses, but some of them clearly are mark to market but not realized losses. So could those come back? I guess they could, certainly. So I think it's a combination of those two.

And I think on the last question, the answer is yes as you say with the industry's increasing litigation docket, etc., the number of the issue out there, I think in general the regulators are looking at the operational risk as increasing and are actually requiring more capital against that, so.

I think just an addendum to that point, generally, I think there does seem to be a cross European impact in terms of looking at operational models again in light of 2011 just generally. So, yes, we have seen some increase in our operational RWA in the numbers that we actually report today as a consequence of that. I don' think I'd comment specifically on one regulator against another, but it's definitely been a common trend across the industry, particularly in the second half of the year.

I think on the IB comp point, I think there's probably two ways of looking at that. Firstly, if you look at slide 45, which is actually in the appendix, what we've given there is the Investment Banking results in US dollars. And you'll see there that the comp and benefits line did actually drop from $1.729 million to $1.491 million which, clearly, does reflect part of the true-up in terms of the CV or the cash value in the Investment Bank.

I think then if we step back and look at the Group, I think if you look at that earlier slide, you saw that -- if we could jump to the slide in the first section which shows the fall in economic value of compensation awarded across the Bank, which refers to the 41%, don't worry, and we've then included --

It's on slide 8 or something.

I think it's about slide 8.

Slide 11 sorry.

So you'll see the Group number there actually did fall by 41% between 2010 and 2011. If we look at the Group number that 41% drop in that Group number we then actually reconciled on slide 44, sorry about this guys, and what you see there is the 9% drop in the CV that actually went to the accounts, because I think we really wanted to try and reconcile this.

So what you see there in the Group numbers is that the salary component drops from CHF8.6 billion to CHF8.1 billion. There were then the severance costs which we took in the corporate center of CHF0.4 billion. And then the variable compensation awards for current years dropping from CHF2.3 billion to CHF1.7 billion and then you have the prior year deferred compensation coming through.

So what we tried to point out, it's, clearly, because we have prior year deferred compensation, the actual decline in the comp charge you actually see in the accounts falls lower as a consequence of that prior year amortization coming through.

So I think that probably gives an idea how it worked on the Group level, if you want to look for the Investment Bank in particular, then clearly that drop in the fourth quarter comp and benefits line reflects the specific true-up to your question. By I think we'd have to get back to you if you want to try and reconcile the Investment Bank numbers to the same detail we've actually done for the Group numbers overall in the slide deck.

So then your second question was around whether we would link up the RWA reductions to actual asset reductions and a) I not sure we gave that level of disclosure. But also it's a little bit of an odd situation, because a lot of the Basel 3 RWA they are giving rise to, are not necessarily on-balance sheet items, so.

Well, I think if we looked at -- what we said in the Investment Bank, it was about CHF0.6 billion of costs, related to accelerated risk reduction measures; and also, the wind-down business. Of that CHF0.6 billion, and CHF149 million was in respect of the sale of predominantly securitized product positions. Now, clearly, we've sold those, and, therefore, if there was a rebound, then we wouldn't see it.

Nonetheless, you can see from the analysis we showed of target RWA between the end of 2011, and the first quarter and the balance this year, there is still further work we need to do in the securitized product portfolio. So we, clearly, would benefit from such a thing.

Within the [FID] wind-down business, that really reflects two things; the ongoing loss of, actually, running that portfolio, as well as some costs associated with the CHF9 billion reduction. So I think you would see some in which we, actually, sold off, and you wouldn't see a recovery. Clearly, the ongoing costs of the wind-down business will depend on the market conditions we have over that. So an improvement in that environment would, obviously, help our efforts to, actually, run that down.

Is that fair, Eric?

That's fair, yes.

Well, his other specific question was, would we be able to link the risk-weighted asset reduction to actual, I guess, nominal balance sheet reduction. And it's, obviously, a) we have not given that level of detail; and b) it's not really necessarily corresponding because some of the Basel 3 risk-weighted assets are not --

I think it's true that the overall balance sheet dropped by about CHF33 billion, in the quarter. But in reality, given that the Basel 2.5 to Basel 3 assets, obviously, have a very high capital multiple, and we have a lot of other things in the balance sheet at much lower risk levels, it doesn't directly link to that.

Okay. Well, thanks. That was a lot of questions, and you guys gave thorough answers, I appreciate it.

Okay. Good, thanks. Let's go to the next question, then. Thanks, Derek.

Kian Abouhossein, JPMorgan.

A few questions. My first one is on your ROE 15% that you have achieved for this year. You have excluded PAF2, which I see you've taken in the first quarter. So if I adjust for it, is it fair to say we're looking more at 11% ROE, that kind of run rate?

The second question is on the deferred comp. I just wanted to clarify if the CHF2.4 billion for 2012 expense -- deferred expenses, includes the CHF500 million PAF2?

And then, I have one more question. And the third question is regarding the IB ROE. Just to clarify, I think you said 12%, potentially, in 2012. If I make back of the envelope calculations, I take your cost savings, I take your deferred out, and I look at how much earnings you generated this year, including adjusting for structured liabilities, where you had a lot of gains, I get well below 10%. So should we assume that the revenue should look very different in the IB, or I'm doing something wrong here?

Okay. Yes, you want to answer it?

I think on the second point, on the PAF2, so that was slide 11, that number, actually, includes -- the CHF2.4 billion specifically includes the PAF2 expensing in the first quarter.

I think, on the first point, about ROE calculations 15%, 11%, I don't think that we're going to comment any further. We've said that the performance, notwithstanding the uncertain market and economic environment, is consistent with the -- on an underlying basis, with the 15% target we've announced before.

But I think -- I'm not sure we get into discussing how PAF2 affects. What we're making clear is that PAF2 will be expensed in the first quarter, and it's separate from that in terms of the calculation.

But why do you exclude PAF2? That's an expense that somebody gets, and will expect to get another one next year, maybe in a different form. I just find it very awkward that you don't see that as an underlying cost.

Yes, I guess -- I'm sorry, but I guess, all we're trying to do is, basically, give an indication as to how the year has started, to be honest. Because we could get into a long discussion of -- and we've talked about operating ROE, so obviously, it doesn't probably include things like fair value in that, etc. But we could have a long discussion around what was in, what wasn't in.

We're just talking about really how the year's started out. So particularly, specifically, for PAF, that's actually going to be awarded and expense later in the quarter, etc. But we just didn't want to -- we don't -- obviously, we don't want to get into a detailed discussion of what's in there or not; it's more just an indicator that the quarter has started off well, as we said. So anyway -- so I don't think we're going to get into a detailed reconciliation of that.

Fair enough.

I think your third question, then, was on the underlying ROE, and how that relates to the numbers. I think it's difficult for us to really comment on forward-looking projections. I think what we said, back in the third quarter, November, still very much stands. In our assessment, the business model, the fourth quarter hasn't, actually, changed that. If anything, I think we've accelerated certain measures around cost, and RWA reduction.

And I think what we said then is that the ROE, on average, if we looked at '10/'11, would be around 10% to 12%. Clearly, '11 was, actually, worse than that. Nonetheless, if we were to have '11 again, given we've got a significant reduction in the cost base, and a reduction in the RWA relating to the Investment Bank, I think that probably would improve things. But I think we probably -- we can't really go beyond that, in terms of making forward commitments, at the moment.

Brady, can you maybe just comment about the revenue environment for 2012 relative to 2011? Also, considering that it's been very tough, I guess, for you in the second half, in particular, in terms of fixed income revenues. Is the base quite low? Should we look at the 2011 revenue environment as a very low base, going into 2012, for the IB?

No, I think the average revenue from 2010 and '11 in fixed income was about $5.5 billion -- CHF5.5 billion. So that was the average base of revenues in the fixed income business. As you say, I think the second half of the year didn't seem to be a particularly attractive environment for that business. Our hope would be that things will be better this year, but obviously, who knows?

So I think where we -- but we think probably, as -- that, as a level, over the past couple of years, is not a bad place to center expectations around it. But obviously, it's very much dependent on market conditions, so it's hard to say.

So far as we say the year started off well, I think people are -- clearly, clients have increased in their confidence and their activity. Hopefully, that will continue. But as always, just like last year, there are, obviously -- events could happen which could, obviously, stall the markets and the activity, and which would impact the overall performance, needless to say.

Great. Thank you very much.

Another question on the phone?

Matt Spick, Deutsche Bank.

I had two questions; one on compensation, and one on franchise. Just on the compensation issue, I'm still a bit confused on PAF2 and whether this is substituted in the 2011 bonus communications, or whether it's additive, because if it was substituted, then I would have thought that you would have paid people CHF500 million less in the 2011 pool, and you'd have had a bigger claw-back than you did in Q4.

And on a similar point, if it is part of the 2011 bonus pool, I appreciate the accountant says that you expense it when it vests in Q1, but you could think of it as being part of your 2011 expenses. And if you move into 2011, the Investment Bank would have been lossmaking. And generally, for risk taking individuals, if a division is loss taking, they would see adjustments to past remunerations. So I was wondering if that had been a consideration.

And then, the second question was just something on franchise, where, if I think of a couple of areas that are pretty capital intensive, and derivatives with higher counter party risk charges, or leverage loans, derivatives seems to have underperformed for you a bit in Q4. If I look at leverage loans, the amounts written, year to date, this year, are comparable to last year. Last year, you ranked third, after the first five weeks of the year, in leverage loans. This year, globally, you're outside the top 10.

And I'm just interested, do you see a risk that you've gone first mover, which I think is justifiable and smart, but if we see a delay to things like the Volcker Rule, the EBA being [defound] a little bit with the European banks, and a lot of liquidity in the LTRO, if you've gone first mover and the rest don't follow, do you think there's a risk that your franchise is affected by that? Thanks.

Thanks, Matt. I think, on the first issue, on the PAF2, and etc., basically, our considerations were that we thought it was a smart way to, obviously, distribute compensation to employees; but also, to be able to materially accelerate the strategy, and reduce risk at the same time.

So, in a sense, it's compensation that we would have paid, but it also is being used to accelerate the risk reduction on our strategy overall. And so that was our main approach to it.

Given the structuring, given everything that we had to do on it, it was only really possible to expense that -- to complete that and expense it in the first quarter. So we didn't really have -- you make it sound like there was maybe an option to do it in 2011 or 2012. We didn't really have that option, so at the end of the day, this was really the only way that we could do it, make the risk transfer effective, etc.

And, again, I think it's, actually, a pretty smart way to kill two birds with one stone, in terms of compensation and reducing risk. And so we think it's, actually, very helpful, but we didn't really have that option on the accounting.

Exactly. And I think, to make two further points. It is, clearly, substitutional, rather deferred compensation. So it was in substitute rather deferred compensation. If we had not awarded this, then, I don't know, we would probably have awarded equity or whatever, but it was substitutional, and it is included, on slide 11, in that 41%. So this is not some further payout in addition to that. The 41%, actually, includes that, in terms of those numbers.

Because it's a substitute for deferred compensation, it would not have affected the amount of CV or cash we actually accrued in 2011. So that's why you don't see a bigger write-back [than you] expected, when we looked at the purely Investment Bank numbers. So that's how it works. That's what I'd add.

On your second question, on the franchise, obviously, to the extent that we're -- to the extent that there is not a level playing field around the world, it certainly does impact competitiveness and the franchise generally. But, by the way, we're already living with that.

We've been on Basel II.5 since the beginning of last year, while many of our competitors are on Basel II or Basel I and that, clearly, creates an advantage if you're pricing and doing transactions on that basis. So we don't have a -- we didn't start with a level playing field.

In addition, as you know, to some extent, I think our strategy is the right one, because I do believe that there will be impacts in the markets that we'll see later as others do move to reduced risks, etc., that I think having been first out of the box will be very advantageous, but we also don't have that much latitude.

We're on Basel II.5. We're going to Basel 3. There may be debates about other parts of the world. I'm not sure there's that much of a debate in Switzerland. And so, I think for us we do, obviously -- obviously, if other regulators in other parts of the world defer or change their application to some of these rules, that could impact the competitive balance.

We feel like so far we've managed to remain competitive in our businesses and have continued to have strong market shares and have pretty stable, if not growing, market shares in many areas. We hope that will continue.

I'm not sure you took the snapshot on average loans for the first four weeks of the year. I'm not sure that -- I don't know the numbers there, but I'm not sure that that's relevant to look at a one-month snapshot.

(microphone inaccessible) relevant, but -- and I'm not sure with that you're exactly looking at. I know in the US with respect to issuance, which has been -- sorry, with respect to issuance, it's been pretty robust. We've been at the top with respect to that volume and have been very participatory in that market. So I'm a little surprised. It remains one of our stronger franchises with very high returns.

Yes, so in any case, though there certainly could be competitive impacts, but again, I guess our -- the negative scenario you can paint is that we're accelerating the changes and we'll be in a sustainable new model, which actually, I think, is better for investors anyway, because they can actually -- the questions they've had around business models and how they're going to work would be answered. While others don't have to move to that, that's the negative scenario.

The positive scenario is we do all this now and others are forced to go into that model on a fairly concentrated basis later on this year or into next year and that causes a significant increase in the cost of actually reducing the RWA balances, etc. So that's kind of the ball case on it. So, in any case, obviously, you can -- we'll see what happens, but we think this is a -- we think this is the right strategy.

Right. Thank you.

Thanks, Matt. Maybe one more on the phone, and then we'll come here in the room.

Jon Peace, Nomura.

I just wondered if you could give us a bit more color about where you've seen the pickup in the business in the first quarter, which supports the upbeat outlook. Is it all in trading or also, have you seen a pickup in gross margins and net new money in the Private Bank?

And then I just wondered to what extent are there any lumpy or one-time items in there which support the comments? And I'm thinking in particular the transaction you did around Maiden Lane. Thanks very much.

Yes, I'd say in general we're probably not -- I don't think we'll get into a lot of detail on color on it. It's been a pretty broad -- I think things have been -- we've had an encouraging start to the year broadly across the business. Obviously, not every area and not every area equally, but it's been fairly broad.

And, as you say, it's actually -- I'd say it's client business. It's definitely client business as well as other parts of the business. There are no particularly lumpy results in there. It's been a fairly even performance I'd say.

Okay. Thank you.

Thanks. Why don't we go here in the room, then we'll, obviously, come back to the other questions on the phone; we'll maybe go back and forth. But any questions here in the room? Is there -- does somebody have a second question, we'll get a microphone to you while he asks his.

Philipp Zieschang from UBS. Three questions please. The first one is with respect to your fully phased Basel 3 target or illustration of close to 10% in 2013, what is basically the potential dilution impact, given that you're talking about a partial scrip dividend, you were adding CHF1.4 billion of the deferred comp. So how should we think about the impact on issued shares?

The second one is in terms of your cost reductions. You've mentioned the CHF1.2 billion net for 2012, however, this is excluding the CHF500 million amortization in Q1. Now, in general, I thought that your total deferred comp amortization for 2012 was probably CHF800 million lower, which you run through the P&L compared to 2011.

So what is basically the total cost benefit from your cost reductions, the CHF1.2 billion, from this CHF800 million lower amortization of deferred comp? And could you also comment where you see actually underlying offsetting cost growth?

And the third one is just coming back to the total asset question in -- for the Investment Bank. Not only for Q4 but in a broader picture, you are reducing your risk-weighted assets under Basel 3 in fixed income from CHF230 billion to CHF125 billion. Would you expect that to have some meaningful impact on your total balance sheet size, because obviously you could -- if it is true assets, which obviously partly if you would get rid of some long-dated funding, etc., so what is just a sense of the balance sheet potential in terms of the notional footing?

Yes, you want to take it?

So taking the questions in order, I think we've said previously when we talked about this in the second/third quarter, in terms of the deferred comp award to employees that we expected approximately 50 billion between -- of 50 million of incremental shares between, what, the midpoint of last year and the end of this year. We've got about another 30 million to actually go through this year.

I think the number for next year is likely to be the same order, but I'll get back to you in terms of that.

The other potential dilution, just to be clear, as you know, is we've said that we're actually offering our shareholders our scrip alternative. Now I think we've assumed in this projection that approximately 50% of shareholders might choose to take up that election. Clearly, we'll find out in due course.

If that was the case, then you'd expect that to actually result in another 20 million to 25 million shares, depending on the stock price at the time of that election in the AGM. So that would be the impact this year. Next year, we can revert to you, but it's probably, if we would do exactly the same thing, is you'd expect something in the same sort of order of magnitude if that answers the question.

The second question then really relates to the cost savings. I think, to be clear, so the PAF2 charge, I guess you're really comparing if the deferred -- if it had been regular deferred comp as opposed to a PAF2 accelerated charge, how much of that would have actually come through this year, and then to what extent to the cost sum would that actually benefit.

Well, obviously the PAF2 charge is about CHF500 million. We would probably expect about 50% to 60% of that to be actually vested in the first year, because it's not level vested through the period under US GAAP, it actually vests more in the first year, then declines there afterwards. So I guess the costs would be better in the whole of the year by the decision to actually accelerate that into the first quarter, although the impact in the first quarter is obviously only a fraction of that benefit.

And the CHF1.2 billion number, really, therefore, does actually apply whether you include that or not, certainly, for the first quarter. If we look at our full-year targets over the next two years, we'll certainly meet the CHF2 billion target regardless of how you actually meet PAF2.

I guess you might say, Philipp, that implies a degree of outperformance against that, because you would expect to benefit from the PAF2 deferral. You'd be correct in that statement, but I think we're quite happy to make that statement and have it stand as it is.

But, clearly, for the first quarter, you have a CHF500 million one-off charge and we would not be able to offset all of that CHF500 million one-off charge in the quarter of CHF1.2 billion, which is the saving we'll actually see in the first quarter of 2012.

And we did want to make that clear that it's in that sense, because there's a difference from our normal practice.

The other part of the question was the CHF800 million reduction in deferral comp costs coming through in 2012, how much of that was -- how much of that is included in the CHF1.2 billion or how does that impact the overall cost saving target?

I think I'd have to revert on that one. Certainly, in the CHF2.4 billion I mentioned before in terms of our likely deferred comp from the CHF3.7 billion, that CHF2.4 billion includes CHF500 million from that, but I'd have to get back to you, Philipp, on the CHF800 million point.

And the total assets? Sorry, the balance sheet.

Yes, the last question is if your -- the question is the impact on balance sheet. David may have some more specific numbers. Obviously, it's a mixture. As we said before, some of the Basel 3 risk-weighted asset reduction doesn't necessarily apply to on-balance sheet assets. So it is a mixture, but there is clearly some balance sheet reduction as well.

I think the overall impact -- and I don't know if David has more specific numbers, I don't have more specific numbers at hand, the overall impact is that obviously from a funding and a balance sheet point of view, generally, our requirements are reducing. So, in fact, if you look at our funding requirements for this year, for instance, they're actually shrinking, which obviously puts us in an even better position from the point of view of the funding side of things.

We would -- looking at the funding requirements as a consequence of the IB's reduction program. We would expect the funding requirement to be about CHF13 billion to CHF15 billion lower than it otherwise would have been if we hadn't done this. So, I guess, therefore, our issue requirement for wholesale funding would be less to that amount this year.

In 2012.

'12, yes.

Other questions here? Yes.

Christian Stark from Cheuvreux. Just a very quick follow up question on the risk-weighted assets; in terms of the 2013 for the look-through calculations the targeted risk-weighted assets are similar to what you had before, because despite the very good acceleration of the risk-weighted asset reduction, you had negative FX impact. Can you just remind us what the hedging is on the capital ratios, in terms of the regulatory capital hedging, in terms of dollars versus the risk-weighted assets?

Yes, because if you look at the projection, what we had, of course, is we have an increase in shareholders' equity and then an increase in RWA as a consequence of translating the IB's dollar RWA base into Swiss francs.

And just to recall, the Investment Bank, nearly all of it, or the vast majority of its risk-weighted assets is actually dollar-denominated. It's just -- so -- that it -- just -- that's -- the numbers you assume for the Investment Bank in dollars will actually flow through that.

We -- it's something we watch very carefully. At the moment I think that if we were fully neutralized on the dollar, then it'd be something like 66%/67% of the equity would be -- I think as of today, I think I -- we're running and at the end of last year we were actually running about 64%. So more or less neutral against -- in terms of that, so that's why it matches. Sometimes we run that slightly shorter, sometimes longer, but essentially we normally try to be around neutral on this, just to hedge this out.

Other questions in the room here?

SIX Swiss Exchange, Konstantin Dombrowski. I've got a question about your sovereign debt exposure. You've got a breakdown here on page 43, and we can see here your exposure to Italy, in particular, it's substantially higher compared to your other European periphery countries.

And well, first of all, any particular reason for this, and are you looking to reduce this exposure even further? Or are you now at a level where you're comfortable at?

And the follow-up question is, yes, what is your take on the sovereign debt crisis in Europe? How do you see it developing? Do you think we are -- we've seen the worst, behind us now? Or how do you see it developing, and are you prepared for the worst case?

I think, as you say, we've -- these are -- this is a disclosure that we've been making for many quarters now, I think for, I don't know, at least a year maybe longer. So what you'll see is actually the exposure is small, and it hasn't changed much, really, over the past quarters or so.

So we have almost no exposure -- we have almost no net exposure, period. And then obviously, as you say, a gross exposure to Italy is, as you can see there.

Overall, I think we are comfortable with our exposures and the nature of those exposures; and we feel like we're -- we feel like the -- well, you see the gross-to-net exposure, we feel comfortable with the effectiveness of those hedges. And so, overall, I think we feel pretty comfortable with this exposure.

Your question as to whether we're ready for the worst case, I think -- in general I think we're comfortable with the direct exposures that we have to the sovereign risk in the region. We, obviously, have other exposure. I'd also say, quite manageable to financial institutions and corporates in some of the Eurozone countries.

But, overall, we think our -- within the context of the Bank overall, we have very manageable exposure here, and we certainly think hard about what the various different scenarios might be. But we feel -- I think we feel like we're pretty well-positioned for that. Not that we wouldn't have an impact, obviously, if there was a major event in that area; but we think that, in general, it is manageable. Having CHF600 million of net exposure to the -- all of the sovereigns is a pretty manageable number in the context of these risks, we think.

Okay. Thanks.

Shall we go back here next?

Dirk Becker, Kepler Capital Markets. I have a question on your risk-weighted assets reduction. As far as I understand, you made a CHF149 million loss in the fourth quarter on the RWA reduction. Do you want to reduce this further now in 2012, and particularly in Q1?

And the question is, do you expect a similar loss from the RWA reduction, and what should we then expect for Q1?

It's a very good question. Obviously, the cost of the reduction on RWA is dependent upon a number of different factors and, certainly, market conditions, and in the specific areas that we're looking to reduce is also -- is a factor.

I think what we've said -- I think David mentioned that, we actually have pretty good visibility on a pretty substantial reduction in the first quarter. We've mentioned that we're going to get to $215 billion by the end of the quarter. And, frankly, most of that is a reduction that we already have good visibility on, and we feel like the cost will be relatively manageable, a reasonable cost within that.

So it's hard to say exactly what the cost will be, because, obviously, it is somewhat dependent on markets, but we don't think there'll be a major cost associated with the reductions that we're looking at in the first quarter.

But also, as you could see, some of the businesses that we're exiting continue to have exposures. Those will also be -- those could also be impacted by market movements in the first quarter. Those could either be, as was mentioned earlier, positive or negative; but we still do have exposure in those businesses as well.

Just to be clear, the CHF149 million was specifically related to securitized products, and it was related to the CHF25 billion reduction you actually saw in those numbers, between CHF73 billion in the third quarter and CHF48 billion at the end of the quarter. And we've, obviously, separated it, because it contributed to the overall securitized product, [and that's the] revenue number you saw in the MD&A, basically.

And I think it was more triggered by the fact we were obviously selling down and in an illiquid market that did that, not particularly in a market issue, or anything like that.

Why don't we go back to the 'phone; there are probably a few more questions there, I think, and we're running out of time, so --

Fiona Swaffield, RBC.

I've got three questions. Firstly, could you talk a bit more about the gross margin in Wealth Management, and the 109 basis points, and what we could see for 2012, and how that ties in with your statement about the start to the year?

The second issue is net new money. Obviously, you've got a target, and you're come -- the net new money's been slowing over the quarters. Could you talk about what's happening there, particularly the slowdown in the Asian numbers?

And the third issue is, apologies if you've already mentioned this, but how does PAF -- have you been specific on how PAF works, from an RWA reduction? Was that -- just to clarify, was that seen in the Q4 number, and how much is it? Do I just times the CHF500 million by 12.5? I'm just trying to work out what that gave to RWA reduction. Thanks.

Maybe I'll ask Hans-Ulrich to address the first two questions, but maybe I can take the third question first, which is, as we said, the PAF to -- or first of all the PAF to structure is really (technical difficulty) that's our focus now. There will be other ancillary impacts, but it's really focused on risk reduction. It's also only effective in the first quarter.

So there is no reduction in [fixed] or RWA for that matter, in the fourth quarter that's attributable to the PAF structure, because it's only actually put in place in the first quarter.

And then -- but furthermore, we're not -- we've shown some, I think, pretty specific RWA targets, but we're not going to go into a lot of detail about how we're going to get into that by line item, so -- but why don't I want to ask you to address gross margin --

Perhaps on the margin side. Our target 125 to 135 is an over the cycle margin, of course. Now in this environment, this low-interest environment, it's a risk averse portfolio mix with a lot of liquidity. Then, of course, it's on the short-term basis it's not possible to have this 125 or 135, so we expect that it's closer when we look one or two quarters ahead, what we have seen in 2011.

Perhaps to the net assets growth you have seen it's still altogether Private Banking CHF44 billion or CHF37 billion net, Wealth Management it's an impressive number also last year.

So what we have seen in the market, because the macro-economic environment, is also a lot of deleveraging. So because the low-interest environment was leading that some private clients really used to do deleveraging and, therefore, it depends on the macro-economic environment now going forward, but it's not a trend, it's really specific to this issue.

Yes, I would just add -- I mean I completely agree with what Hans-Ulrich said. I would just say on the net new money side actually fourth quarter Private Banking number of CHF7.5 billion doesn't represent slowing. That's actually on a seasonal basis. That's a pretty good number, and if you look back the last couple of fourth quarters, there is a seasonal slowdown there. So, frankly, the full-year number and the fourth-quarter number are pretty strong; so I don't think we view that as a slowing -- we hope, we hope that's confirmed in the first quarter, obviously.

Sorry, can I just clarify that, because is that because you're including -- more retail and corporate banking side, rather than just looking at Wealth Management? So it is just there's a different mix of type of clients?

No, the Wealth Management as well, is that there's a seasonal impact to it, so if you look at the Wealth Management specific numbers in the fourth quarter, if you go back the last couple of years there are seasonal outflows for tax payments and the holiday season, and other things. So there is a seasonal element to it. So whether you're talking about Private Banking as a whole, or you talk about Wealth Management, we think that holds.

And then the only other think I would mention, because you talked about the start to this year, etc., with regard to the gross margin; and I completely agree with Hans-Ulrich's comments. And, as you know, it's the Private Banking business that moves more slowly.

And so we obviously saw a couple of encouraging ticks up in the net interest margin, etc., in the fourth quarter. We, obviously, hope that continues, and we hope that over time the gross margin will recover. But it's obviously something that is more gradual, and not really -- frankly, not really something that you see change dramatically in a four or six-week period, frankly.

Thank you.

Okay. Thanks, Fiona. Another question?

Kinner Lakhani, Citi.

Most of my questions have been answered, I guess. But just maybe -- just come back to slide 22, and on the CHF48 billion of risk-weighted assets on wind-down. I'm still struggling, and maybe I've missed a few points, but I'm still struggling to understand; broadly speaking, what the main categories of that CHF48 billion are. So any kind of color you can give us on that would be great?

And secondly, on the basis risk, there was clearly an issue that some of you -- or at least, one or two of your US peers had talked about through their results. But the effect or the impact on your fixed revenues was much more dramatic, and maybe partly understand that by business mix? Was there anything specific there in terms of your position, which maybe hurt you more?

Slide 23?

Sorry, slide 22, the $48 billion of wind-down.

Slide 22?

Yes.

The $48 billion. So that splits into two components.

Firstly is $10 billion relating to the separate wind-down business we established at the beginning of 2009. And we've sold about five-sixths of those positions now, if you go back to what we said over the last three years.

What is remaining in that portfolio? There is still some town exposure certainly CMBS positions we had at that time; and there's also power and gas contracts; and one other -- some other small assets. But, essentially, most of that portfolio's actually been sold over the last three years.

If you're then referring to the other $38 billion separate from that, that really is what we try to basically break up in the box on the right-hand side.

Now, most of the CMBS we had from the re-entry last year has been expired. You've still got some correlation credit exposure, which is sitting there; about 60% of that has actually been worked off in the fourth quarter. And there is still some EM hard currency in there, which has come down by about 40%.

But in reality, I think the largest component of this would be what we talked about back in November, which is the long-dated swap exposure within the rates business, which is, as you know, quite highly calibrated under the Basel 3 rules, particularly when it's uncollateralized or when there's mismatch.

So that would be the single largest component of the $38 billion. As you might see, we added this quarter in terms of those positions.

That's great, that's very helpful.

I think the question on the basis risk, just again to reiterate, I think the fixed income results were really a function of a few things. One is just the overall environment, which, obviously, everyone in the industry experienced. And we think in areas like emerging markets and rates etc., we had solid performances that, clearly, impacted.

Secondly, were these costs that we incurred of the risk-weighted assets write-down some of the accelerated costs. And so, basically, that obviously did impact that. But we, as you say, do feel that there was an issue around, particularly in our structured product and credit business the basis risk, so I don't know, Eric, if you want to --.

But I just think it's hard to quantify that in the context of what you see in the numbers, but maybe Eric can give us some more insight.

(Inaudible - microphone inaccessible) particularly well in credit or structured products in the fourth quarter. And that led to, I think, a disappointing performance, most specifically in structured products.

We did see times in the fourth quarter where the cash position in structured products were deteriorating. We had mark to market losses and at the same time hedges rallied, and we had losses on hedges. And that's probably the biggest single item in terms of real change, in terms of Q over Q that we saw in terms of trading.

Okay. If I could just follow up with one more; just the principal risk that we have in the Asset Management division, I think there might have been some small impact on that in Q4. But how do you feel about that portfolio? I think it's about a $3 billion/$3.5 billion portfolio going forward?

Private equity position, do you want to address that, Rob? Private equity, that's it, yes.

We do use balance sheet primarily for some of the private equity portfolios. It's about $3.5 billion of balance sheet. So, there's not -- there isn't a material movement in those positions in the last couple of years. In fact, our actual risk-weighted assets in the business have actually gone down over the last couple of years, as we try to get more efficient and raise more third party capital relative to our overall asset base.

Well, I think with that, we probably ought to wind up, to finish up at the appointed time. Thanks a lot for all your questions.

I would just like to sum up a little bit.

Obviously, as I said, 2011 was a transitional year for us. We do believe that we took decisive and aggressive steps to evolve the business model. We did make significant progress in adapting to the new market in the regulatory environment; aggressively reduced risks and costs in the second half of the year; and redeployed resources to a number of client-focused growth businesses.

As I said, we did take these steps, because we're convinced they will benefit our clients, reward shareholders in the long term and position us to achieve superior returns. There's no doubt that the fourth quarter was impacted by these actions. However, we were able to take these measures while maintaining an industry-leading capital position and a strong client franchise. And as we pointed out, our capital ratio's actually strengthened during the quarter.

As we said, we're obviously mindful that the market and economic environment remains uncertain. But we are encouraged that the business is off to a good start in 2012. And, as we said, year-to-date underlying return on equity is consistent with that 15% target level. And that obviously includes some of the benefits from our risk and cost reduction plans.

So we do believe that the client-focused strategy, coupled with the strong capital base, conservative funding and liquidity and a clean balance sheet do put us in a position to pursue and gain market share across all of our businesses.

And finally, we do remain focused on delivering consistent, industry-leading returns to our shareholders and ensuring that Credit Suisse maintains its strong franchise, improves profitability and continues to grow. And we are confident that the measures described here today have positioned Credit Suisse for success in the new environment.

So thanks very much everybody for your attention; appreciate your time. Thank you.

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