Credit Suisse Group AG (CS) 2012 Q3 法說會逐字稿

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group third-quarter 2012 results conference call. (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.

Good. Thank you. Welcome, everybody. Thanks for joining us for the third-quarter earnings call. I'm joined on the call by our CFO, David Mathers. Before I begin I'd just ask you to take note of the customary cautionary statement on slide two.

And then just getting into the results, I guess there are three key points that I would like to cover this morning. First of all we reported solid third-quarter results while maintaining strong momentum with our clients. Second, we further strengthened our capital base through the actions announced in July and we're on track to achieve a look-through Swiss core capital ratio of around 9.3% by the end of 2012, subject to the timing on closings of the sales of Asset Management businesses.

And third, we continue to successfully execute on the strategic measures that we articulated last year. We're announcing further measures to improve cost, capital efficiency and leverage. These actions will continue our progress to reach a 10% look-through capital ratio by mid 2013 and to approach 12% by the end of 2013 before capital distributions. Once we exceed the 10% level, we have committed to make additional cash distributions to shareholders from capital generation.

Let me now spend a little bit more time providing some detail on each of those points. First of all, we did achieve solid, stable earnings in the third quarter while at the same time improving the efficiency of our operations and maintaining strong momentum with our clients. Our underlying pre-tax income of CHF1.2b improved from CHF1.1b in the second quarter. Our reported net income of CHF254m included a pre-tax charge of CHF1b related to the tightening of credit spreads on our own debt.

Despite an operating environment characterized by muted client activity amid political and economic uncertainty, our results were strong. Our performance in these challenging markets underscores the strength of our business model and the significant progress we've achieved in executing our strategy.

Investment Banking delivered strong and more consistent results, reflecting the progress that we've made to realign our business to better meet the demands of a changed regulatory and market environment by substantially reducing risks and expenses. Fixed income has demonstrated substantially improved operating performance, reflecting the success we have had in transforming the franchise. The restructuring of the business over the past year through a significant reduction of risk-weighted assets, inventory levels and cost has resulted in a more balanced business mix with lower volatility and improved returns on capital.

Equity sales and trading revenues declined from the second quarter, reflecting muted client activity. However, we continue to capitalize on our market-leading positions in this business. Notably our prime services franchise was ranked number two globally with a 13.7% market share. In addition we achieved the strongest quarter of the year in underwriting and advisory results, driven by a pick-up in global debt issuance, strong advisory revenues and market share momentum. For the first nine months of 2012 our rankings increased to number three in global high yield and number three in global completed M&A, and that's versus number five and number six respectively for the full year 2011.

In Private Banking we achieved solid profitability, reflecting strategic revenue initiatives and measures to improve cost efficiency, but margins were impacted by the subdued environment, increases in regulatory-related cost and material increases in assets under management. We reported net asset inflows of CHF5.2b, consisting of strong gross inflows in international booking centers, partly offset by outflows from Western European mature markets. For the first time since 2007, assets under management in Private Banking exceeded CHF1 trillion during the quarter.

In Asset Management we reported higher underlying pre-tax income driven by investment-related gains and reduced expenses, offset by lower performance fees.

Year to date the Group has generated an underlying return on equity of 10% in what we consider to be a volatile environment with low levels of client activity, and including a 2% drag from residual losses in our wind-down businesses in the Investment Bank. Looking forward, we're confident that the full implementation of the strategic capital and cost-savings measures that we've announced will enable us to meet our previously stated 15% through-the-cycle return on equity.

Second, we further improved our capital position. The implementation of the capital actions which we announced in July is well underway. To date we've achieved CHF12.8b of the CHF15.3b target. We expect to deliver an additional CHF2.4b in capital by year end, through a combination of strategic divestments, additional real estate sales resulting from the Clariden Leu merger, retained earnings and lower deductions.

As it relates to strategic divestments in Asset Management, in addition to the sales of select private equity businesses previously announced in July, we have decided to pursue the sale of our ETF business. However, we remain committed to the Asset Management business going forward. We have no further plans for the divestment of other businesses and will focus on capital-efficient strategies within our business.

The successful implementation of these capital measures has substantially enhanced our capital position. At the end of the third quarter our look-through Swiss core capital ratio stood at 8.2%, and we expect our end 2012 ratio to be around 9.3%, subject to the timing on closings of the sales of Asset Management businesses.

We're confident that we will reach a 10% look-through capital ratio by mid 2013, well ahead of the Swiss 2018 year-end requirement, and will approach 12% by the end of 2013 before capital distributions. Once we exceed the 10% level, we have committed to make additional cash distributions to shareholders from capital generation.

And third, we continue to execute on the strategic measures we announced last year, and we have a strong track record of delivering on the targets that we've set. Today we've announced further measures on cost, risk-weighted assets and leverage to further improve efficiency and to ensure that we deliver superior returns in the industry.

To date we've made meaningful progress on our cost reduction efforts. We've significantly cut costs and improved efficiencies across the Bank, while we continue to identify future cost-saving measures throughout our businesses. We delivered on our target of CHF2b of expense reductions 18 months early and we now expect to exceed our previously announced year-end 2013 expense reduction target. We expect to realize a full CHF3b in cost savings during fiscal 2013, not just by the end of the year as previously articulated.

In addition we've identified a further CHF1b in cost savings, half of which will be achieved during each of 2014 and 2015. In total we are targeting CHF4b in expense reductions by the end of 2015. We are extremely confident that we will be able to achieve this target. The resulting significantly reduced cost base will provide us with operating flexibility and ensure the resilience of our business model going forward.

Next on capital efficiency. We continued to show discipline on risk-weighted assets in the quarter. Current Group-wide Basel III risk-weighted assets now stand close to our 2013 end target of CHF300b. We're targeting an additional 12% reduction in risk-weighted assets in the Investment Bank, bringing the number to CHF180b by the end of 2013.

And finally, balance sheet leverage. Today we announced measures to reduce total gross balance sheet assets to below CHF900b by the end of 2013, which represents a targeted reduction of approximately CHF130b or 13%. This balance sheet reduction will improve our simple gross leverage ratio from 3.8% at the end of the third quarter to 4.9% pro forma for the reductions, while having a limited impact on our revenues.

In addition, we continue to have very strong liquidity, with an industry-leading Basel III net stable funding ratio well ahead of requirements. Our estimated net stable funding ratio was in excess of 100% at the end of the third quarter.

In summary, we have successfully executed on our strategic measures and have a strong track record of delivering on the targets we've set. The additional targets announced today, to further improve cost, capital efficiency and leverage will continue and accelerate our progress to reach a 10% look-through Swiss core capital ratio in 2013.

We expect the consistent earnings capacity of our business model to generate substantial levels of excess capital and therefore we are committed to distributing additional cash to shareholders once we exceed this 10% look-through capital ratio. We're confident we can achieve this 10% target by mid 2013 and can approach 12% by the end of 2013 before capital distributions.

With that I'll turn it over to David.

Thank you, Brady. Good morning, everybody. I'd like to start the presentation on slide seven with an overview of the financial results.

In the third quarter we achieved underlying revenues of CHF6.3b, pre-tax income of CHF1.2b and net income of CHF891m. Diluted earnings per share were CHF0.57, the pre-tax income margin 19% and the post-tax return on equity 10%.

So if you look at the numbers for the first nine months, pre-tax income is up 13% to CHF3.8b compared to the same period last year, also delivering though a 19% pre-tax income margin and a 10% ROE.

At the reported level, third-quarter pre-tax income was CHF254m. Now on slide 33 of the slide deck we include the normal reconciliation to our underlying result. But the main drivers are the CHF1b of fair value and debt losses relating to the substantial narrowing of our credit spreads which we've seen in the third quarter as well as, just to be clear, CHF382m of gains from the sale of real estate as part of the capital plan that are actually booked in the corporate center.

Let me turn to slide eight. Private Banking's third-quarter pre-tax income was CHF689m and the pre-tax income margin was 27%. The revenues are broadly stable compared to the last quarter if you exclude the second-quarter gain that we had from the sale of a non-core business from within Clariden Leu, which as you can see on the slide was about CHF41m. I'd also note there's the absence of the semiannual performance fees that we book in the second quarter and the fourth quarter in both the Private Bank and Asset Management, and particularly with respect to Private Bank the Hedging-Griffo business in Latin America.

Compensation and benefits were lower, reflecting the initial benefits from efficiency initiatives, but other operating expenses increased due to higher regulatory and legal costs. Assets under management were 12% higher year on year, and that meant that our assets under management exceeded CHF1 trillion for the first time since 2007.

If we turn to slide nine to look at the Wealth Management revenues in some more detail, starting with net interest income, the bottom segment in the columns on the slide. Net interest income was slightly lower quarter on quarter due to the continuing impact of low current interest rates, albeit this was partly offset by higher loan and deposit volumes within the Private Bank. Recurring fees and commissions also declined, driven by the absence of semiannual performance fees, as I mentioned before.

Further, as we've said before, clients' portfolios continued to be biased towards more risk-averse fixed income, interest and cash which yield lower fees for us. And I think notwithstanding the recent improved tone in the Eurozone situation, client confidence remains at low levels and that's reflected in the continued subdued transaction revenues. As you can see, this combination of a subdued environment, a very conservative risk mix and relatively stable net interest income relative to higher assets under management in the quarter reduced the gross margin from 113 to 107 basis points in the quarter.

Slide 10, please. Net new asset inflows continued, particularly in Asia Pacific and other emerging markets, but there were outflows in Western Europe, particularly off the Swiss platform, as well as muted inflows in the Americas and Switzerland. I'd note that that is not uncommon in Switzerland to have such muted inflows in the third and fourth quarters from a seasonal point of view.

Slide 11. What I'd like to show here is how a number of different factors are affecting the performance of Wealth Management so far in 2012. On the one hand we've achieved net benefits in terms of lower costs and certain fee increases of CHF210m so far this year, and the target, you may recall, we set for 2012 of CHF300m. On the other hand, we have seen around CHF300m of revenues decline.

So overall the pre-tax income reflects the fall in transaction revenues, the adverse mix in terms of client assets and, to a lesser extent, some increase in the regulatory cost we face. This then offsets the gains we've seen so far from the future PB initiatives. But we're on track to achieve the further CHF90m of benefits from this program, to reach our target of CHF300m, as well as taking further measures to ensure progress towards the CHF800m under future PB that we announced before.

Slide 12. In corporate and institutional clients pre-tax income was broadly stable at CHF206m in the fourth quarter, with a continued strong pre-tax margin of 43%. Credit provisions remained at a low level in the third quarter, with the loan portfolio quality remaining strong.

Let's turn to Investment Banking now on slide 13, please. As you can see, third-quarter revenues are higher than in the second quarter and also higher for the first nine months of the year compared to the same period last year. We've seen stronger and more consistent results from fixed income this year. We've seen a resilient performance in equities and underwriting and advisory. And all this was achieved with a lower cost base and less capital which significantly benefits, of course, the divisional return on equity.

I'd also point out that the third-quarter results are after CHF136m of certain litigation provisions, as well as the wind-down losses of CHF100m relating to the FID wind-down portfolio that we've talked to you about before.

So let's turn now to slide 14. What you can see here is the substantial improvement that we've seen in our fixed income business so far in 2012. I think you may recall a year ago that there was a lot of concern about the future of the fixed income industry and whether you can make an appropriate return in this new regulatory environment.

As you can see from this graph, we've achieved a substantial improvement in our operating performance, with higher revenues quarter on quarter as well as year to date compared to the first nine months of last year. What's more, this result has been achieved while simultaneously reducing expenses and we've more than 40% lower risk-weighted assets in our fixed income business. So the business is now improving substantially improved returns, both in absolute terms and compared to last year.

If we talk about the trends in more detail, first we've seen strong and substantially improved results in securitized products where we delivered a well-balanced contribution from our non-agency, government guaranteed and asset finance businesses, both in the third quarter and in the nine months.

Second, we've had a robust performance in credit, primarily due to strong client flows and issuance across both leveraged finance and in investment grade.

And third, you may recall when we announced our second-quarter results we talked about a very strong performance in our emerging markets business in fixed income in the second quarter. In fact I believe it was a record level for that business. We've seen a continued good performance in emerging markets in the third quarter, with strong results from our Latin American operations.

Slide 15 please. In the equities business, where we have a very good franchise with consistently high market shares, the third quarter was definitely challenging. The strongest business in the quarter and in fact so far this year has been the prime services business. And it's clear we've continued to gain market share in this area. You may have seen there was a recent number two ranking for our business, putting us at 13.7% of the global hedge fund market. And there's no doubt that this business has performance well against what's generally been a somewhat mediocre market environment.

Clearly there's been a more difficult environment for our cash equities businesses in most markets globally. This is an area where we have some of our highest market shares and remains one of our best positioned businesses.

Notwithstanding the pick-up in equity markets from the value point of view we've seen this year, volumes remain depressed and there was a low level of primary activity which, as you know, tends to drive secondary trading. Notwithstanding this we've maintained our strong market shares in this business and this remains a solidly profitable area for Credit Suisse.

In equity derivatives, our numbers have lagged somewhat as we continue to take a very conservative approach to risk position and volatility management in the quarter.

Let's turn to slide 16, please. Within our underwriting and advisory businesses, this was the strongest quarter we've seen so far this year, primarily driven by a strong performance in debt underwriting across both leveraged finance and Investment Bank and investment grade. You can see that revenues are up more than CHF100m compared to the previous quarter.

Elsewhere in this business, as I mentioned before, equity underwriting continues to suffer from a very lackluster IPO calendar. And in M&A, while our share continues to be strong -- you can see on the graph we were third for completed M&A for the first nine months of the year -- our revenues were up quarter on quarter but volumes are still subdued compared to what we might have expected to see at this point in the cycle.

So then just to summarize for the Investment Bank, what slide 17 lays out is the incremental impact on Investment Bank's year-to-date normalized returns from cost improvements and RWA reductions compared to a year ago. As you can see, the impact of the efficiency improvements and lower risk-weighted asset usage on more or less flat revenues provided a significant lift to our Basel III return, which improved from 3% to 11%.

Furthermore, if we exclude the remaining wind-down portfolio, we would have achieved a 16% Basel III return. Just to be clear, this book is substantially smaller than it was a year ago when we had $54b of risk-weighted assets in this position, as you may recall when we talked about it back in 2011. That's now down to $14b now.

Let's turn to Asset Management, slide 18. Asset Management's year-on-year performance has been distorted by a number of one-off factors, including a significant private equity realization last year and in the current year the Aberdeen sale as well, as you note, the CHF38m write-down on AMF. Leaving those stats to the side, what we've seen is some pressure on performance fees in line with the Private Banking business trends. Fee-based revenues have dropped by about 10%. But against that you can also see that we've reduced costs by about CHF70m, showing the continued progress we've made in terms of reducing costs in general across Asset Management, but particularly in terms of consolidating platforms in this business.

Slide 19 then shows the quarter-on-quarter PTI performance, where we've seen higher investment gains and increased contribution from the sale of our Aberdeen position, offset by AMF write-down in the third quarter compared to what we took in the second quarter, and then the absence of semiannual performance fees in the third quarter then being broadly offset by lower compensation expenses.

Slide 20 then. So last November we announced that we intended to reduce our expenses by CHF2b, which as you know we actually met in the first half of the year, somewhat earlier than we'd planned. You recall back on July 18, when we announced our capital raise, we increased this target to a run rate of CHF3b by the end of 2013.

What we've been looking at over the past quarter is our longer-term plan for the next few years across the businesses and particularly how we -- our strategy and operations for the underlying infrastructure of the Bank.

I think as a result of this work we feel very confident that we will exceed our target of CHF3b cost reductions, not just by the end of 2013 but actually in the fiscal year as a whole. Furthermore, what we're aiming to achieve is not just a sequence of one-off cost reductions but a longer-term program to actually drive continuing and ongoing efficiency improvements.

I don't think we've necessarily come to the end of what we planned to do here, but I do feel confident to tell you that we'd expect to achieve another CHF0.5b of savings in 2014, and a further CHF0.5b in 2015. So just to put that in context, that means we're looking to achieve CHF3b of cost savings in fiscal 2013, CHF3.5b in fiscal 2014 and rising to CHF4b in 2015.

So what's driving these savings? So first in the Investment Bank, which you know has produced the bulk of the savings so far, about CHF1.4b of the CHF2b in the direct cost base, plus the additional savings from allocated infrastructure associated with the Investment Bank. Obviously this reduced run rate is both improving returns to our shareholders and dramatically improving the operating leverage of the business.

Looking forward within the Investment Bank's direct cost base, we think we can reduce cost by about another CHF700m. This is likely to come from synergies in our equities business and from continuing to rationalize other business and overlaps across fixed income, underwriting and advisory.

In Private Banking we've seen the early benefits from the Clariden Leu merger. And going forward we will seek to rationalize front office support further and downsize our affluent client coverage model.

In Asset Management we expect to see further benefits from the consolidation of our platforms as well as increasing the use of offshoring.

The largest single component of savings though will come from our shared service infrastructure that supports the entire Bank. So far we've achieved CHF300m of savings from this, but we're setting a target here of a further CHF1.1b over the 2013 to '15 period.

We are already well advanced integrating the operations and assessment functions across the Bank, and we now have a single operations function for the entire Group. We expect to see further savings from the integration of technology with the operations functions as we run these areas end to end in future. We're removing some of the duplicate management process and expenses across these areas.

I think to be clear, we're also continuing to develop our offshoring strategy and are looking to achieve a better balance of onshore, offshore and outsourced services across the business.

Okay. So let's just turn to slide 21. I think one of the comments that we've heard over the last year is a lot of confusion about run rate definition, actualing it, annualized, and the period in which savings are actually based on. So I think we just wanted to put up a slide in which we could show the actual reductions and what's included and excluded from these targets going forward, such as variable comp and obviously FX moves, which given the large component of our expenses are in dollars tends to distort the trends every year.

So just to be clear, we show here our underlying operating expenses, excluding variable comp and assuming constant FX rates. So we start then at CHF20.5b of expenses for the first six months of 2011. By the first nine months of this year, on the same basis, we're down to CHF18.5b.

On the right of the chart, what's implied is we expect to reduce costs by a further CHF1b in 2013 and CHF0.5b in each of 2014 and '15. So in other words, on the basis we set before, we're setting a cost target of CHF16.5b for 2015.

In terms of expenses relating to this, we think we'll probably take around CHF240m of realignment costs in the fourth quarter and then probably another CHF1b between 2013, 2014 and '15, that's in total over those three years.

Let's turn to slide 22. So slide 22 shows the Group's Basel III RWA numbers both so far this year and into 2012 and '13. Our estimated Basel III risk-weighted assets were CHF307b at the end of the third quarter, close to the target of around CHF300b for the end of this year. We expect to reduce our RWA then further in 2013 by about CHF20b to around CHF280b. And this will be achieved with a further 10% decline or reduction in the Investment Bank's current B-III levels to CHF180b by the end of 2013.

So I just wanted to give everyone an update on the progress we've made on the various capital measures we announced back on July 18. I think most of this should be clear and we've obviously made an announcement around the APPA and [Kestrel] transactions during the quarter, but what you can see here is we've achieved about CHF12.8b of the CHF15.3b that we mentioned back in July as our target.

So as said, this should be familiar. If we just look at slides six and seven then, you should be aware that we've seen about CHF0.3b, primarily related to the redemptions of certain hedge fund assets within the Asset Management division. We've also achieved real estate sales for a capital benefit of CHF382m.

In terms of things we -- let me turn to slide 24, please. In terms of things we still intend to accomplish against our capital plan targets, firstly we continue to target CHF900m of capital benefit from strategic divestments within Asset Management. And that includes the disposal of a number of alternative investments in line with focusing the business towards more liquid strategies.

In addition, as Brady mentioned, we're continuing negotiations to divest our ETF business. But other than what we previously announced, we have no plans for our other businesses within Asset Management.

Now we remain confident the bulk of these disposals will be announced by the year end. But I would caution, in line with what we said on July 18, that it's quite possible that the announcement and the completion of some of these sales may slip into the first quarter of next year. That said, three months into the marketing process for these businesses and assets, we do feel highly confident we'll reach the target once the progress is fully complete.

Second, given that we've exceeded the expected disposals proceeds on real estate sales so far, we've revised our future capital benefits and we think we'll make another CHF0.4b from the sales that we still have to make.

And then of course at the bottom is the normal impact that we assume in our calculations relating to the analyst consensus earnings estimates, changes in equity and of course lower regulatory deductions from the increase in common equity.

Let's turn to slide 25. So what we've shown here is our normal progression for the Swiss core capital ratio. You can see at the end of the third quarter this ratio improved to 8.2% due to the capital measures we completed so far. On a pro-forma basis we'd expect it to be around 9.3% by the end of the year, but there are a number of uncertainties here, including the assumption of when we actually receive the benefit from the asset disposals. But nonetheless we should be comfortably on track to achieve the 10% target by the middle of next year.

Looking forward to the end of 2013 with completion of these disposals, as well as the CHF20b reduction in RWAs, we think this ratio will drive up and approach 12%, but obviously that's before decisions are made around capital and distribution and dividend distribution to shareholders, as Brady mentioned. But it's also worth noting that even just factoring in the reduction in the Investment Bank's RWAs to the target of $180b alone would lift this target ratio to around 10%.

Just on then to slide 26, this is the updated version of what we showed back in July. So we include here on the left-hand side the same simulation for our B-2.5 ratios. And just for the benefit of our BCN holders or our high-strike CoCos, the relevant figure ratio -- the relevant ratio for that is 14.7%, and you may recall that compares to the BCN trigger level of 7%.

On the right-hand chart, as you can see, the same numbers we gave before, so the estimate on pro-forma basis of around 9.3% for the look-through Swiss core capital ratio at the end of the year, but then approaching 12% by the end of '13.

Let me turn to the balance sheet, slide 27. Over the last five years we've reduced the balance sheet from CHF1.4 trillion to just over CHF1 trillion in the third quarter of 2012. These reductions have been entirely by the Investment Bank. And in dollar terms, the Investment Bank balance sheet usage is about 24% smaller than it was in 2007.

Now looking forward, our intention is to reduce the Group balance sheet to less than CHF900b by the end of 2013. And to achieve this we've conducted a thorough review of the allocation of our balance sheet relative to our major investment banking clients, the return on assets from each business, particularly a number of balance-sheet-intensive, and low-ROA areas. We've also looked at some areas across treasury where we could be more efficient in our balance sheet usage.

Slide 28. Clearly this will have a significant positive impact on our leverage ratio. The capital measures we announced in July will already greatly improve this ratio to around 3.8% following the conversion of mandatory to convertible next March. What we show in the right-hand column is a steady state leverage ratio projection of around 5% once we're at the CHF280b risk-weighted asset target, which you know is what we've set now, 10% CET1, which again is also our target, and a CHF900b balance sheet.

You can see it's around 5% on that basis. And that's also a ratio which, given what we've said already today, is something we should achieve by the end of 2013.

So let me then just conclude then with some comments around our funding and our liquidity position. They remain strong at the end of the third quarter. Our net stable funding ratio, as Brady mentioned, is around 100%. And I'd note that our funding and CDS spreads remain amongst the lowest compared to the third quarter, and what's more have narrowed very substantially in the third quarter, although that of course has contributed to the over CHF1b of fair value and debt number that we've mentioned already, and a total of about CHF2.6b for the whole year.

We continue to have a highly unencumbered balance sheet with very limited used to covered bonds. And just to be clear on that point, only about 14% of our Swiss mortgage book is so utilized.

So on that note, I'd like to conclude the presentation and I'd like to pass back to Brady, please.

Great. Thanks, David. I think with that we're ready to open it up to Q&A.

(Operator Instructions). Your first question comes from Derek De Vries from Bank of America. Please ask your question.

All right. Thanks. I've got three areas I want to ask questions about. The first is the cost in the Wealth Management business. I notice the headcount's up about 300 in the Private Bank, and I guess some of that's school hires, but maybe you could comment on that and whether that drove the cost.

And then related to that, you show the slide on the nine months and you show CHF53m of incremental regulatory cost in Wealth Management. I'm just wondering how much of that was in Q3, or maybe the better way to ask it, is there an exceptional amount of regulatory cost in Q3? That's the first area.

The second, you talk about the new risk-weighted asset guidance, or I guess you gave new risk-weighted asset guidance for 2013. It's about CHF10b to CHF20b, I guess, below where people were forecasting. And I'm just wondering what's going to drive that. Is that genuine legacy assets running off faster or businesses that you're exiting or is it risk-weighted asset model optimization? So what's the driver of the delta on risk-weighted asset guidance?

And then the last question, you said, you talked about the meaningful capital return once you reach the 10% level, which is encouraging. But I guess my question is for 2012 paid out in 2013, you're probably not going to be there on your guidance. So does that change the 30% payout ratio that I guess we've been expecting or what's the thought for this year in terms of capital return? Those are my questions. Thanks.

Yes. Derek, thanks very much for those questions. I don't know, maybe we could take them in a slightly different order. I think on the RWA side, and David obviously you can contribute if you want, as you say, we do -- obviously the key is that we are planning to continue to drive additional capital efficiency in the business.

I would say it's a little bit of each of the areas that you mentioned. Certainly continued reduction on the legacy side is an important aspect of the -- of contributing to that goal. But we also will continue to look at just optimizing other parts of our businesses across a number of different businesses. We've obviously brought it down quite a lot over the last year, year and a half, so there's been a substantial reduction. So at this point we're more into optimizing the business model, which means probably bringing down RWA across a number of different businesses, but on a more selective basis, I'd say.

Yes. I think clearly, to take a point, at the moment obviously with the Basel III slippage in EU, CRD IV and clearly in the States as well, we will be one of the first banks actually switching to Basel III on January 1. So obviously we're going through the final preparation for that switchover in terms of the models and the numbers. But I think clearly what we felt is that we were close enough to that that we could probably give you some guidance in terms of where we'd expect the number to go as we actually cross through into 2013 and where we get to at the end.

But as Brady mentioned, the majority of that will actually come from a final optimization of the Investment Banking businesses. We still feel obviously we've got about $14b of risk-weighted assets, for example, still in the FID wind-down. It's come down from $54b to $14b a year ago, so a long way. But obviously our goal is to actually eliminate that. And we would hope to make a substantial further progress towards that in 2013.

But equally as we've gone through the business planning for next year, there's still some areas where we think we can actually optimize our RWA uses by actually reducing positions. So those are the two things that are driving that.

Shall I --

Actually maybe just because a headline popped up on Bloomberg, when you're talking about optimization, you're talking about business optimization, i.e. --

I mean business position reduction, Derek, sorry. That will be the majority of the [car]. Perhaps that was a wrong word from Bloomberg.

No, I think it will be about absolute position reduction, as in fairness if you look at what we've done over the last year, that's what it has been within the Investment Bank, frankly. I don't think we've -- with the Basel III changes I don't think they've had much optionality to actually optimize in a regulatory sense, Derek. So it should be -- you should think of this really as position reduction next year.

I think a year ago obviously we did talk about similar reductions, and I think we've managed them very well. Fixed income revenues are up despite that. So I think we're pretty confident.

But I think we're getting towards the end of this process. But we did feel as we actually go through the Basel III calibration finally at the end of this year, we could probably give some idea of where we'd expect the Basel III risk-weighted assets to be at the end of 2013, and we thought it was useful and appropriate to actually do so.

I think on the cost side in Wealth Management, we, as you say, we certainly have made some progress on that. Obviously that also is part of the continuing program there. I think as you know, we talked about CHF800m of improvements in pre-tax in Private Banking over the course of the next couple years. And of that, somewhere around half of that is in cost reductions.

The specific question you asked about the headcount, we did have -- there is a quarterly element in the sense that in the third quarter we did have campus hires and apprentices come into the business, so that, as you say, overall we were up 300. But we're actually up about 425 in campus hires and actually down about 120 through efficiency measures.

So overall I think we're obviously going to continue to drive the efficiency on the Private Banking side, and obviously that may have implications for headcount going forward.

Your question on the regulatory cost, in general obviously the regulatory costs in the business have been higher this year. They include preparation for FATCA. They include preparation for MiFID 2 and also the implementation of the withholding tax agreement in anticipation of the potential passage of the Germany treaty.

So I think the third quarter, costs were slightly higher, particularly from the IT preparations for the withholding tax agreement implementation in -- with the potential that it comes through, we obviously have to be ready if it does come through, so slightly higher. But I think in general obviously this is just a burden on the business going forward.

And I guess lastly on the capital issue, David, do you want to?

Yes. So I think I wasn't quite sure when you said your question was in terms of progress against target. I think, as we've said, with the additional RWA reduction just by itself, without any earnings retention or anything else, we'd be at almost around the 10% mark anyway once we actually drop down to $180b on the Investment Bank. And as I said, subject to the timing of the asset disposals and the final Basel III calibration, we expect to be around 9.3% at the end of the year.

I think we also included a simulation through to the end of 2013, so that would put us approaching the 12% level on the Swiss core capital level. So I think that's obviously comfortably ahead of the 10% target we're actually working to. And I think as Brady mentioned, clearly that will obviously give discretion to the Board in terms of making cash distributions to shareholders in respect of the 2013 year once we get to the end of the year.

Yes, sorry, I guess my question was very specifically for this year. So clearly I get your capital-generative business model and you're going to throw out a lot of cash and you've clearly signaled an intent to return it. But I guess for this year I don't think you're going to be at the 10% and therefore does it imply a change in the previous guidance for the 30% payout ratio?

Just to be clear, Derek, what we actually said on July 18 as part of the capital measures was that we -- I mean, clearly, ultimately it's the decision of the Board. But the discussion --- our recommendation and the discussion we've had with the Board is that in respect to 2012 we would actually pay our scrip dividend. That's what we did actually announce for this year.

Apologies. I missed that.

So no change to guidance. It's in line as part of the capital plan actually, Derek. So there shouldn't be any changes there in terms of expectations.

Of course. Got it.

Derek, one supplementary point, and I think it's for the benefit of everyone, actually. Brady actually mentioned the graduate and technical apprentice hires within the Private Bank, which as he said, was 105 apprentices, about 320 campus hires.

You should be aware that for the Group overall there was about 800 graduates and then another 100 apprentices. So those would be the Group addition from the seasonal add in terms of the graduate recruitment and apprenticeship programs for the year, just to complete that analysis.

Great. Thank you very much.

Thanks, Derek. Next question?

Thank you. Your next question comes from Huw van Steenis from Morgan Stanley. Please ask your question.

Morning, everyone. Two questions. First really thinking about capital return, I was interested by the subtle change in wording on page 31 about your targets being before capital distributions. I know it's very early, but thinking about the 2013 dividend do you think it's possible to get back to 100% cash dividend next year and what are the sort of factors which may go into that thinking?

And then number two, reflecting the new cost-cutting program, does that change when you expect you might hit the 15% ROE KPI and maybe give some sense about which year you think it's -- would you hope to achieve that target? Thank you.

Shall I, pass to Brady? Shall I take the cash point and then the ROE?

Yes, sure.

So Huw, I think we've said, as I said, confirmed, it's our intention that we would issue a scrip dividend for 2012, which would then be the scrip that's actually payable in spring of 2013 post the AGM. I think we've also said elsewhere I think reasonably consistently that once we actually achieve that 10% target we'd move away from such dilutive measures.

So our intention really would be the year after to recommend to the Board and then to the AGM that we'd go to a cash dividend for the 2013 year, which to be clear would then be payable in the spring of 2014. So that's just -- I don't think -- I think that's pretty consistent with what we've said before and I don't think we'd shift from that position actually, Huw.

Sorry. No, I'm sorry. I fully appreciate that. I was just thinking that if there was a scenario in which once paying the dividend you slipped back below 10%, would it still be a full cash dividend? Sorry, that was more what I was pointing to in the subtle change of wording.

Obviously we'd hope given we're approaching 12% that that shouldn't be an issue. But ultimately that would be a question for the Board. I think, candidly I think whilst a scrip is appropriate in certain circumstances, once we've actually achieved our ratios we'd like to move away from that. But that is a question for the Board.

Thank you.

And Huw, your question on ROE, are you just saying what's -- just kind of more detail around the target, when we might achieve it, what the dynamics are around that?

Yes, please.

Yes, I guess what we would point to is an operating ROE of 10% for the first nine months of this year and actually, as we've pointed out, that's been depressed by 2% from our legacy businesses. So we would have had a 12% return so far this year just on an operating business for our -- on operating basis for our ongoing businesses.

So -- and I think our view, as I think as David mentioned, it hasn't been a great environment so far this year. There obviously have been points in time when it's been reasonable, but it hasn't been, I'd say in general it hasn't been a great environment. So I think we look at it and say, you know, we'd be at a 12% return without our -- the legacy drag.

Obviously we have continuing programs to reduce cost. We also have continuing programs to reduce capital usage in the businesses. So I think that -- and I also think that we've got -- we feel like the business model is actually operating really well in these, even in these volatile markets. We feel like it's doing what we'd like it to do.

We feel like we've -- and again, we think this is a real advantage. We're way up the curve in terms of figuring out how to run the business on a Basel III compliant basis. So our view is that we ought to be able to continue to improve those returns over time as we continue to optimize the business.

And obviously we're not going to put a stake in the ground in terms of which quarter or which year we're going to get there, but I do think that in the not-too-distant future we should be able to achieve those targets. Assuming we have any kind of reasonable markets, I think that ought to be possible. If you just work through the cost reductions and the capital reductions I think you'll see that it actually moves us up obviously approaching that number.

Okay. Thank you.

Next question? Thanks, Huw.

Thank you. Your next question comes from Kian Abouhossein from JP Morgan. Please ask your question.

Yes, hi. I have a few questions. The first one's related to slide 21. You strip out the variable compensation and I'm just trying to understand if this includes deferred compensation or excludes deferred compensation.

Sure, Kian. Yes, it's David here. So slide 21, no, what we wanted to give you here was the actual variable compensation accrual that we make in each period for what we actually pay out. Now clearly what the recipient gets is obviously the CV or the cash accrual plus the deferral.

Now what we wanted to give you here was an ex-VC number so you get away from any fluctuations around the bonus accrual. And that's -- so it's an ex-VC. The deferred compensation actually comes through and is included in those cost targets, so the CHF18.5b, CHF17.5b, down to CHF16.5b.

And that was why I made that slight caveat. There was two caveats here really.

One is that it's dependent on FX because -- so we've assumed constant FX in this. And two, it's assuming a relatively constant bonus accrual because if we suddenly decrease the bonus accrual and then over the following period clearly the actual total expenses would drop because you'd have less deferral being amortized through the P&L, clearly if you increased you'd have the opposite effect. So we wanted to be clear this is the ex-VC number on those assumptions.

I think we thought it was worthwhile because we had a number of questions over the last six months as to what does these cost savings really mean in terms of your ex-VC, and we actually want to say explicitly what our targets were on that basis.

I actually would be like to look at it the other way around because, first of all, your deferred comp is going to decline anyway so in terms of your real cost declines I would say you have CHF500m to CHF400m of decline in deferred anyway per year which you include in your cost savings. At the same time you're increasing your variable compensation for a year where you're actually not performing here that well. Your IB comp year to date clean is quite high. It's running at around 46, 47. Your total cost/income's 81.

Now what I'm trying to understand is, assuming there's no revenue change in the environment, what is your real cost absolute number that you're targeting? Because clearly there's this influence by deferred, which is helping you, but you're increasing variable by CHF300m in a year where most banks are actually reducing variable. So --

Kian, I think it may be the format of the presentation which is confusing a little bit there. The variable compensation of CHF1.3b is what we actually accrued in nine months, whereas the number you see on the six months is actually, on EUR1.012b, is for six months. So the CHF1.3b is for three quarters; the EUR1.012b is actually for two quarters.

So we've not increased the variable compensation as a consequence of that. In fact you can see the numbers in the accounts that the variable compensation's down about 4% in accounting terms for the Group and down about 6% overall.

But if you include your variable, if you look at absolute cost, no big revenue change, what would be your cost number target for 2014 and '15?

I think it will depend on, clearly on what we choose to accrue in terms of bonuses (multiple speakers).

But assuming no revenue change because I think that's a number we're interested in. The CHF16.5b doesn't mean anything to us. So really assuming no revenue growth, considering your cost/income in the IB is 81 for nine months, what is your absolute cost number, CHF16.5b plus the variable, assuming no revenue growth?

I'm going to defer to Brady here. I'm not sure that we're necessarily at this point going to be giving a forecast for our bonus accrual two years out from where we are today. What we're giving here is a forecast for where we expect our other costs to actually be at that point.

But I think inevitably the variable compensation accrual will obviously depend clearly on our performance and it must also depend on external factors in terms of our competitive numbers. Brady, do you want to add anything?

So I think, Kian, hopefully we've given you some guidance here in terms of our ex-VC costs. I think probably hand over to you really I guess in terms of what assumptions you want to make about the variable compensation environment we'll face over the next three years.

And the second question is on page 38, slide 38. You give the fixed income breakdown, which is very helpful. Even if I adjust for the 16% in the nine months you make roughly $6b of revenues. 31% is macro. That's about $1.5b. $1.5b for nine months is roughly, just to give you an example, that's half of what Citi made in one quarter, in the third quarter, you make in macro.

How do you explain that? How do you actually make money in a business where you make $1.5b with other players who will make this year around $5b in the same business, probably even more than that? I just don't see that your cost/income can be below 100% in that business. Is that fair?

I guess, Kian, I guess, as you know, our focus is on return on capital in these businesses. And I guess that's one of the things that we continue to struggle with. We think that's the critical issue is driving high returns on capital in these businesses. So the fact is having transitioned to Basel III we've had to exit a number of parts of the business, we've had to be efficient around the capital that we put in the business and naturally that does have an impact on the absolute level of revenues that we make.

I think the most important thing that we point to is if you look at, to point you to a different slide, look at the slide which outlines the return on capital in the Investment Banking business, where you can see the ongoing Investment Banking business in the nine months earned a 16% return on equity. That's actually what we think is most important is that you can see we're making very high returns on capital in the business in a Basel III format.

And frankly, if you believe that's where the rest of the industry has to go, we've already gotten there. And frankly, that's probably, I think that's been the most key question, the biggest concern that people have.

Now in some of our businesses we clearly have very high market shares, very significant market shares and are really leaders in things like our structured products business, our credit business, our emerging markets business.

The rates business, as we've talked about, is a business that we're actually growing, where we're actually making progress in. It is a profitable business and -- but again, the amount of capital, the expense base against it is such that it supports that level of return in order to make -- or level of revenues in order to make returns.

But it's a business that is focused on generating high returns and rather than looking at absolute revenue levels we're looking at trying to drive returns in the business, which I think is where the whole industry's going to have to get to.

Sorry, Kian. I think a couple points I'd add to that. Clearly the business model we're actually adopting for fixed income is inherently different from that of the Citigroup, which I think you mentioned, some global bank, with completely different mix of customers and products to actually service. I think we've made it pretty clear both in over the last year and particularly in the last three months that we're very much focused on actually achieving good returns in a number of fixed income businesses. I don't think we really are that convinced by this flow-month-to-bulge-bracket-type argument in this changed regulatory world where you're going to have to have much greater constraints, much lower risk-weighted asset usage.

And what we have basically is a collection of businesses which, as Brady says, are actually making pretty acceptable returns and radically better than a year ago. Now that probably is a different strategy than some would pursue. But I think, in this environment I think it's a strategy which is actually pretty appropriate today.

And perhaps you might say we're being unambitious. I think, frankly, we're being realistic about what we can actually achieve. And as Brady said, to achieve an 11% ROE in the Investment Bank for the first nine months, 16% after the $667m drag from the FID wind down, I don't think is a bad improvement and a testimony to the strategy in particular compared to where we've come to over the last year, Kian.

That's fair comment. I think on the -- clearly the ROE is important and I see that and it makes a lot of sense. But clearly then the question backs if you have any update more between standardized and internal risk-weighted assets, and I was wondering if you have any more information to share from the last conference call if there's been any progress on your side to look into this issue.

Not really. I think the whole industry is obviously watching the Basel's review of model standardization and market risk across the industry. So I think once we actually -- as we see that develop I think we'll probably have to give you more guidance as that comes through, although, frankly, given that both the EU and the US have kind of delayed their Basel III implementation it does feel slightly confusing at the moment.

But I think we'll obviously wait and see what the Basel Committee comes up in terms of the harmonization of model parameters and inputs once they actually get through it. But it's -- my point really is that's somewhat being confused by the fact that large parts of the world are not in fact implementing Basel III on January 1.

Okay. Thank you.

Okay. Thanks, Kian. Next question?

Thank you. Your next question comes from Kinner Lakhani from Citi. Please ask your question.

Yes, hi. Good morning. So just on fixed income wanted to come back to the securitized products business, which seemed to suffer quite a lot last year, doing much better this year, but how you see the future of that on a three- to five-year view. Clearly there is an element of search for yield and support from QE3 and so on and without necessarily a high level of generation of new securitized product, how you look at the future of that business.

Secondly on Wealth Management outlook, just wanted to ask you about the cross-border outflows, how much we've seen so far cumulatively and what's the go-to level that you see in terms of the outflows once we're over and done with on this issue.

And also on the deposit margin pressures, we've clearly seen a fair amount over the last year but how much further this would go.

Good. Okay, thanks. I think first of all on the securitized product business question, we feel like we have an excellent business in that area. We think it's performed extremely well. It's a business that actually we see the improved performance from the fact that we're running the business differently. So obviously QE3 and some of the yield elements do make it an attractive segment but we, frankly, don't think -- we're running very light inventories in that area, as you know. So we don't think, frankly, there was a lot of sort of rising with the tide. We think we've got actually a very good business that's basically been remodeled to be a very high returning business under Basel III.

I think in general our view is that the future for that business is actually pretty bright. Obviously a lot of it is US. There's a lot, there's a high percentage of US content. With the housing market bottoming, improving from here, we think that'll -- that gives obviously improving fundamentals and probably will give rise to additional volumes in that business as well. So I think, frankly, we're a leader in that business. We've actually got a great franchise there and we think that the sort of macro influences on the business will probably be positive over time.

And, frankly, as and when others have to adapt Basel III to this business, this is probably one of the businesses that's most impacted by Basel III. As, I think probably as many banks look at it, they may have difficulty in figuring out how to make the business model work under Basel III and they may well just exit, which will probably -- which, if that happened obviously that would have a positive impact on margins in that business. So we're pretty bullish about that business actually medium term.

On the Wealth Management outlook and you talked about the cross-border outflows, we have talked about the fact that the mature, particularly European market net new asset flows have been, have really been outflows. We've talked about it this quarter, but it's been that way actually for some time. We've been seeing outflows in that business pretty consistently over some time. So I think year-to-date we basically have seen about CHF8b of outflows into the -- on the European, Western European mature markets region. So it's been a continuing outflow.

I guess it's hard to say exactly how that will develop from here. I think our view is that we're getting closer hopefully to an environment where we'll have agreements in place between Switzerland and other countries that will help to regularize the way that cross-border business is done. We also do feel that since we have had fairly consistent outflow for a number -- for a long period of time that it's obviously moving to a more stable state.

And frankly the fact that we've had as strong a net new asset in flow on an overall basis over the past three or four years, and we've probably had more inflows than any other private bank, I think is encouraging that that -- obviously those outflows have been offset by inflows from emerging markets into the offshore platforms as well as the performance of our onshore platforms. So we feel pretty good about that.

So I think it will probably continue, but our belief is it will reduce over time and overall our -- the state of the business is healthy with good inflows over time.

The last question on deposits, do you want to --

Deposits, yes, I think we obviously have seen a decline in net interest income in respect of the -- due to lower interest rates. I think so far, as you can see, we've been relatively successful in actually protecting our overall net interest income by the increase in the absolutely amount of deposit volumes but also our lending. And part of that is associated with the ultra-high-net-worth business, which does tend to include more lending around it and for which I think we have basically seen some pricing power in terms of what we actually do.

I think if we look forward I don't think we've come to the end of that process because I think you still have a flow through as various contracts actually drop through in terms of the interest rates you're actually going to receive. But nonetheless, as we continue to develop the ultra-high-net-worth business particular as well as our lending product, that should actually be reasonably successful in terms of offsetting it.

But to be absolutely clear, it is definitely a balance. If we didn't have this roll-off from lower interest rates then clearly that interest income would actually be going up. As you can see, it was -- it is actually up for the nine-month period but down quarter on quarter. But it's definitely a drag in terms of the gross margin because as we grow the -- as we actually improve our assets under management you're then being faced with expansion in lending but offset in terms of the actual interest rates, the --- our net interest income from our overall deposits we actually keep. So I think a bit further to go I'm afraid.

Thanks for that. And can I just ask one more just on the LCR? If we did see a forbearance from the Basel Committee on the liquidity coverage ratio and you guys are meeting these very high standards that exist today, would you imagine that you would be able to reduce your liquidity buffers?

Obviously, as I think you may know, the Swiss regime actually brought in a version of the LCR actually I think it was back in 2010. So we've actually maintained liquidity buffers to actually meet that for the last couple of years and they're not dissimilar in terms of how they actually work between the Basel rule and the Swiss rule.

So I guess if the Basel committee were to change their approach on this then that would be probably something we would have a discussion with our regulators about. But as to whether we would see any benefit I think unclear given that the Swiss rule technically predates now the sort of Basel III implementation by a couple of years and there's precedent around it in terms of that. But it's certainly a discussion we could have I guess, but I'm not entirely optimistic.

Okay, thanks very much. Next question?

Thank you. Your next question comes from Fiona Swaffield from Royal Bank of Canada. Please ask your question.

Good morning. It was in two areas. The first was on the leverage ratio and the decision to reduce the assets by CHF130b. I just wanted to ask -- I think you said it wouldn't have a significant revenue impact. Could you walk us through why that would be? And if that's the case then why hadn't you potentially considered it previously?

And then just in terms of how you were defining the capital, won't the leverage ratio under Basel III look at Basel III Core Tier 1 over time? I know it takes time to come in, but won't it be looking more at like CHF33b, CHF31b, depending on the hybrid, so it'd be closer to CHF30b? I just wondered if you could comment on that.

And then the second area was just the gross margin in the Private Bank. 107's obviously a low point. What are you thinking that you can do to improve that? I know there's some seasonal factors as well. How much of that is, do you think is seasonal? Thank you.

So perhaps if I talk to the first couple of points, I think you can see on slide 27 we have generally reduced the balance sheet over time. And that has become actually more than 100% from the Investment Bank because we've actually, as I mentioned before, increased our lending activity with the ultra-high-net-worth through the Private Bank if you look at the numbers. I didn't show them here, but I think they are actually in our financial reporting.

So it's not something we've not looked at. But it is probably fair to say, though, that a lot of our emphasis over the last year or so has been implementing the risk-weighted asset reductions ahead of the Basel III process that we actually talked about a year ago. And that's been where a lot of our emphasis has actually been.

Now I think, therefore I think myself, the finance team, treasury and also the team in the Investment Bank have been looking somewhat closely over the last year or so in terms of what is that, what would a more optimized balance sheet look like for the investment bank? I think you can see the repo disclosure in terms of our funding and capital position so you can see that we have a rather large repo business in fixed income. It's not in the treasury section in this deck, but I can tell you that the prime service business uses about CHF210b of balance sheet as well, which are all relatively large balance sheet uses.

I think, be candid, what's become clear as is we've actually gone through and looked not just at the return on equity -- sorry, the return on assets by business line but the return on assets by client, is that we could be rather more aligned between our more profitable major clients and their use of balance sheet. And there is actually substantial scope to actually optimize that as we go forward, really essentially therefore duplicating what we've actually done within risk-weighted assets in terms of aligning that to our client usage as well. So I think there is significant potential there and we are going to do it, we're actually going to follow that.

I wouldn't say, though, that, be clear, this is just exclusively a repo and a prime service issue. I think we would also be looking at essentially other balance sheet positions across the Investment Bank and we would expect to see quite substantial reductions coming from that from some very low return on asset positions that are actually there. So there is scope there. When we talk about this CHF900b target, I think you should see this is where you've got to in this process, not necessarily an end of the journey.

So that puts it a little bit in context and that's probably not a bad segway then to your second point really, which is around the Basel III leverage ratio. I think part of the problem of course is there's so many different leverage ratios. You may recall that there's also the Swiss 2008 [degree] leverage ratio; we're on 5.2 etc. But, as you say, over the course of the next few years I guess the whole industry will transition through to the Basel III leverage ratio or variants of it. You may be aware that there's something called the Swiss SIFI or TBTF leverage ratio, which is a variant of Basel III, which has the same numerator, i.e. the asset, but has a different denominator because it also includes CoCos and then it's actually calibrated to our high level.

But rather than going into that in detail I think, to be clear, the Basel III, the big difference obviously in the Basel III leverage ratio is, as you say, the denominator is actually some variant of CET1 and is a CET1-based denominator, and the numerator is both the balance sheet you see here plus off-balance sheet and guarantees. And I think you may recall that the, I think the Basel III leverage ratio was due to start required exposure I think from 2015 onwards when it enters the calibration phase. So it's still several years out in terms of that, although the Swiss regime actually does include components of this more soon.

So I think my point there is you're correct, but what we will also be doing in addition to looking to the absolute balance sheet, you see here the on-balance sheet assets, but also be looking to incorporate in the off-balance sheet assets and guarantees, which every bank has essentially, as we actually go into that new phase. So that will also be a further target for this actually, Fiona. I'm not giving that target today. I think it's a little bit premature. But we did want to basically give you an update on where we were in terms of our thinking about the on-balance sheet and the progress we're going to make there. But I think this is probably something you can expect us to talk more about over coming quarters actually.

Your second question --

Second question was on the gross margin development. I think obviously, as you said, there clearly are some seasonal impacts and some of the timing on some of the performance fees etc. We've identified there's at least a couple basis points in the second quarter that wasn't in the third quarter just from seasonal, pure seasonal impact. So probably some of that we would see hopefully come back in the fourth quarter. And -- but there are also some more what I would call cyclical effects that are impacting the business, obviously interest rates, the low level of transactions etc.

So I think a lot of those cyclical effects, again we believe that over time those will work back. We'll get to -- some day we may have higher interest rates. Hopefully, we'll get to more transactional volume. And also in the meantime obviously we're very focused on the net margin because that's obviously what's most important to the bottom line. We are focused on the net margin. Some of the success in the ultra-high-net-worth side has also probably impacted the gross margin. The ultra-high-net-worth is a bit dilutive to the gross margin, but is actually accretive to the net margin and so overall that's a sector that we're continuing to grow in.

So I think there are clearly some just quarterly volatility impacts. But also, as you say, we're still, we still are in a challenging environment for this business. And I do think that when we get to, when and if we get to conditions that are more normalized we obviously will see higher gross margin.

Thanks.

Next question?

Thank you. Your next question comes from Jon Peace from Nomura. Please ask your question.

Yes, thank you. I had two further questions please. The first one was on the Wealth Management net new money. To what extent is there still a dilutive impact from outflows from the Clariden Leu integration and when might those finally roll off?

And then the second question was just to ask Kian's question around variable compensation in the Investment Bank from another way. How should we think about how you manage that going forward? Do you have a particular target in mind for compensation cost to income ratio, and what number might that be, or are you working more towards, say, an ROE target for the Investment Bank out of which that ratio falls out? Thanks very much.

I think on the net new assets question, the Clariden Leu integration has actually been pretty much completed and we think it's actually in, it's in pretty good shape. So in the third quarter we did not see any material impact in the Private Bank from outflows from the Clariden acquisition. So we think that's actually stabilized at this point. There are some seasonal impacts in the third quarter. Particularly in Switzerland third quarter tends to be seasonally a bit of a more difficult quarter. You have, you do have some outflows there. But we did have strong inflows in APAC, Eastern Europe and the Middle East, as you know. But the Clariden Leu thing has basically pretty much settled down and I think is not an issue in terms of continuing outflows.

David, do you want to address the variable comp issue?

I think clearly the bottom line question is the ROE target, as you said, and that's primarily a work towards. That said, I think clearly when we look at the comp across for the Investment Bank we do very much look at an economic contribution basis post capital charge. And I think that's appropriate because I think we do want to give our employees an incentive to align their RWA usage to what we need to achieve as a Group and as a bank. So I personally think the pressure on comp is probably downwards across the industry. We'll see how that goes in the balance of this year in terms of that.

I don't think I could give you an absolute -- I wouldn't want to give you an absolute comp-to-revenue target because that's not how we think about it. We do think it more on a comp to, variable comp to economic contribution basis. But clearly as we look towards how we make sure we hit our 15% ROE target then the variable comp accrual is a very important part of that mathematics.

Great. Thanks.

Jon. Next question?

Thank you. Your next question comes from Philipp Zieschang from UBS. Please ask your question.

Three questions, if I may. What's your outlook in terms of risk-weighted assets but also total assets beyond 2013? You discussed that you'd like to grow the rates business and should we expect actually, given that you capture several opportunities given your early strategic positioning for Basel III, should we expect Group risk-weighted assets to grow from the CHF280b beyond 2013 and also probably total assets to pick up again?

The second question is on the 2013 end 12% Swiss Core Tier 1 ratio guidance of 12%. Have you -- how have you worked in that CHF1b additional realignment cost you're expecting for the period of 2013 to '15?

And finally just coming back to that risk-weighted asset reduction near term of the CFH20b, could you just give us a sense what's the total asset reduction related to it? I understand that your balance sheet reduction is so far guided in the low risk-weighted asset areas or buckets, but what's the associated balance sheet reduction coming with the CHF20b? Thank you.

Yes, I think with regard to the risk-weighted assets and total assets beyond 2013, I think our -- we think that this is a sustainable level of risk-weighted assets and in order to run the business and run it on the basis of a -- and hopefully meeting our 15% target return for the Investment Bank and for the Group as a whole. So I don't think that we anticipate that there would be some ramp up in the RWA in out years although obviously we will look to be dynamic about how we allocate the capital between businesses. But I think as an aggregate level our expectation is that we would probably keep it at similar levels.

In terms of your last question since it's RWA related as well, the CHF20b of risk-weighted asset reduction obviously, as you say, it will have varying different nominal balance sheet impacts, if that's your question. I do -- the legacy, for instance, where we have about, I guess we have CHF12b of --

CHF14b of RWA.

CHF14b of RWA. Probably the notional balance sheet related to that is probably about twice that roughly.

CHF23b.

CHF23b. So you could see if we reduced -- of the CHF20b -- if we managed to, which I don't think we will but just hypothetically, if we managed to reduce all CHF14b of the legacy RWA that would come -- that would have an associated CHF23b nominal of balance sheet reduction with it. But it'll be a mixture because it's obviously not going to be all legacy impact. You'd have to do more anyway to get to the CHF20b reduction. So there'll be, as you say, there'll be varying different probably ratios between RWA and the nominal.

I think you raised a further question then about the 12% or approaching 12% view basically for the Swiss core capital ratio at 2013 and the interaction with the CHF1b of likely realignment costs over 2013, '14, and '15. I think point one essentially is you clearly would not expect all of that CHF1b to be taken in 2013. I think probably around half would be about likely so that will be about CHF500m. If you look at that relative to the capital base then you're probably thinking that's probably going to be something like a 10 to 20 basis point cost in terms of the capital ratio.

If you actually do the calculation, your own calculation put in (inaudible) concessions, you probably may get to a slightly higher number than 12%. That's why we said approaching 12%. So we did in fact haircut that to allow for factors such as this in the actual process. So that's helpful in terms of that.

I would say generally to the balance sheet point, just reinforce what was said before, our efforts around balance sheet is clearly some work that we've been looking at particularly in the last year and we will be extending that further over the course of the next year or so. And that will also include the off-balance sheet financing guarantees, as I mentioned before, and I would clearly expect that to be coming down significantly as we move forward.

Can we just come back to the medium-term risk-weighted asset growth point? I guess probably from consensus or investors would expect your Investment Banking revenues to grow, say, 5% per annum from 2013, '14 onwards. So, and if we follow your comment in terms of keeping risk-weighted assets stable and basically the Investment Bank is the only area which really consumes additional capital, where would that efficiency come from? So why shouldn't it be reasonable to assume, say, 4%, 5% risk-weighted asset growth in the IB per annum given your growth ambitions in certain areas and given that you claim to have run the business very efficiently so far?

The first, most obvious thing is the wind-down businesses. Those -- that's obviously been -- that's been a 5% drag on the IB return on equity and obviously if that goes away that in and of itself is a fair up-tick in revenues. But --

To be explicit on Brady's point, in order to hit the $180b RWA target, we are in that projection actually assuming only about half of the wind-down business is actually used up in 2013. Now clearly we'd like to do better than that, but that's what we've assumed prudently.

I think the second question is then a little bit more conceptual and strategic and it really depends how does the rest of the industry actually evolve. Clearly I think the market and banks have generally moved towards accepting the Basel III transition's coming even though the regulatory timetable's actually slipped a bit. But what that's doing of course is actually changing the nature of our industry because I think the whole industry is moving towards more Basel III-light type capital approaches. So I think that kind of convergence clearly is very helpful because it supports business practices which do not require the commitment of large amounts of capital.

I guess, Philipp, if you saw the rest of the world basically abandoning Basel III then I think that would cause a lot of stress at that point and I think I would definitely concede that would be an important break point in terms of the analysis. On the other hand, if you see more convergence then I think you move away from some of the more Basel III risk-intensive businesses or practices we've seen in prior years.

Yes. Obviously the linkage between RWA growth and revenue growth is -- under the new model, under our model it obviously -- it's not directly correlated. Nine months last year to nine months this year we reduced RWA 43% and we increased our revenues pretty substantially in the fixed income business. So obviously I think our view is that we can continue to find ways to optimize and grow the business even with discipline on the risk-weighted assets side. But obviously that's the trick, that's the key to be able to do to operate successfully in the new environment.

But I think there's also a certain gritty basic reality here which is I think we have reduced the Investment Bank to this level. We're targeting that. Clearly we do want to see growth in the Private Banking and if that includes RWA around lending, then that's fine.

Okay. Thanks, Phil. Next question.

Thank you. Your next question comes from Christopher Wheeler from Mediobanca. Please ask your question.

Yes. Good morning. Just a couple of quick questions, you'll be pleased to know. The first one is on Wealth Management. Obviously you've been discussing the muted returns you're suffering because of the difficult markets. But given how far these have come down and not just for you but for the industry, can you perhaps comment on your targets because you have some pretty ambitious targets and I wonder whether Hans-Ulrich is thinking about the fact that getting up from where you are now, particularly the gross margin of 103, is going to be pretty difficult even in better markets? That's the first question.

And the second question is really around the leverage ratio, following up on Fiona's question. I'm just wondering what the motivation is for you now, focusing on this important metric. I obviously welcome it, as I'm sure everybody else does. But I'm trying to get how much of this is good corporate governance, but also perhaps talk about regulatory pressures that are building on you, on you and the industry in terms of this important measure. Thank you.

Yes. I think with regard to the gross margin and our targets, we've -- obviously the gross margin's developed from high points of the 130 level, as you say, down to what I'd say is more of 110-type level. I think some of that has been structural. Some of that has been more cyclical. I think we do still believe that if the cyclical aspects of the business move back towards a more favorable environment, i.e. some higher interest rates, some higher transaction levels, and obviously it doesn't have to go back to where it was in the mid 2000s, but just some improvement in those levels, I think, as we've said, we still believe that to have gross margin numbers around the 120 area, whatever, is certainly very possible.

And obviously also there's a lot we can do about this. We increase our gross margins by increasing the amount of business we do with clients, the more cross-sell we can do, the higher margin we can create for the bank and obviously provide value-added services for the client. So we can do a lot within that as well and we are focused on that. But it is, as you say, certainly what I would call the cyclical headwinds right now are pretty tough but I think that those will turn at some point and obviously at that point I think we will get a movement in the gross margin back more towards where it was before.

I think on the leverage ratio, and maybe David can comment as well, I think it's just, you see it, I think it's a reality of market focus, regulatory focus, etc. We obviously feel like we have an extremely high-quality balance sheet. The asset side of our balance sheet we think's probably the highest quality in the industry and therefore we think that leverage should be less of a concern. But I think both from a regulatory focus point of view as well as a market focus point of view, it's our view that obviously it will continue to be something that people do look at.

And so we feel like we've obviously tackled a lot of the, what we think are a lot of the toughest elements of transitioning to the new regime in terms of capital etc. And we really have reengineered the business. And I think so us the most illustrative slide of that is the fixed income business going from --- or the Investment Banking business going from a 3% return in the nine months last year to 16% this year, excluding the non-ongoing business. We think that represents a lot of progress on a lot of difficult issues that the industry's going to have to deal with. But frankly running the business on a lower-leverage basis is probably the right thing to do given the direction things are going. But David, do you want to add to that?

No, just a couple of supplementary points. We did actually, on page 43 in the appendix -- we didn't go through it in the main deck given we talked a little bit about leverage -- included the adjusted asset basis, which I think a number of US firms actual do as well. So that gives a measure I think of how much the repo actually contributes to that and you can see it drops to about 17 times or about 14 times given these changes, or about 5.9% and 7.3%. So I think that underlines Brady's point about the actual low risk in the implicit balance sheet.

That said, as I said I think before, I think one, whilst there's nothing specific, I think we can see the direction of discussions around overall leverage ratio, which I think we all read, and I think therefore it is something we felt we should focus on. I think also probably, as I said I think in answer to an earlier question, a lot of the work that we have done over the last year, over the last two years, has been very much focused actually on reducing the RWA, the very intensive position within the Investment Bank and aligning the model against that.

I think we feel it's probably appropriate now as we shift forward, yes, we are going to take another 25b of risk-weighted assets out of the Investment Bank. But we are also -- we are shifting I think to thinking what we can do to actually reduce our absolute balance sheet and particularly focus on low ROA assets within the balance sheet because I think it seems appropriate and I think affects the trend and I think is something which probably our shareholders I think will appreciate.

Thanks, gentlemen. Thank you.

Thank you. Next question.

Thank you. Our next question comes from Kilian Maier from MainFirst. Please ask your question.

Yes. Swiss Cantonal and retail banks are not using the IRB approach, have higher capital requirements for Swiss mortgages and they are increasingly lobbying against this. Maybe you can provide us with an update on this and your view on this situation.

I think that's something that probably our Chief Risk Officer could answer better, but, yes, clearly there has been a debate in Switzerland around standard [BIS] model approaches for mortgages and some discussion about how minimum capital requirements actually apply against that.

I think you're aware it's been an ongoing debate in Switzerland. There have been proposals, although I think most recently I think, and this obviously also relates to the pro-cyclical add-on which would require for Swiss assets in that context. But I think actually what I've seen most recently, and my Swiss colleagues probably could correct me, is that I think most -- some of those proposals have actually been dropped, I think, mainly because I think the SNB is probably less concerned about the real estate situation here in Switzerland. So I think it's probably become less of an issue in the last couple of months than maybe it was six months ago when there was some discussion around it.

Yes. But I think there is -- there are issues around an un-level playing field. Obviously there are global issues around that. There are certainly issues around that here in Switzerland as well. And obviously we advocate for we'd like to get to a level playing field and we think that's probably the right thing for the financial system. So over time that's obviously our hope is that we do get to the more level playing field.

Next question.

Thank you. Your next question comes from Dirk Hoffman-Becking from Societe Generale. Please ask your question.

Hi. Good morning. It's only one small question left. On your CHF130b reduction of balance sheet, I presume that affects the prime brokerage business somewhat disproportionately. Can you take us through how you think about maintaining the recent improvement to your positioning within prime brokerage despite the impact from potentially lower balances to be providing to clients?

Actually it doesn't affect disproportionately, to be candid, and that was one reason why we put in the pro-forma reduction on adjusted asset basis on page 43, which is half the story in terms of repo. I do think that there's about CHF32b we actually include in that. I think it's certainly clear that when we look at the repo business we do see a variance, as I've said, between our main clients and how we actually allocate balance sheet and therefore I think potential for us to actually align our balance usage much more closely to those major clients.

I think that is also true of the prime service business to a much lesser extent. So I think that we will reduce the balance sheet in prime services, but to a lesser extent. I'm not sure -- I don't think that will impair the overall performance and profitability of our prime service business to any material degree because I think what we've seen is many of our best clients are not that intensive balance sheet users and, if anything, they could actually benefit from this approach.

So I don't think you're going to see anything in that. It's obviously a very good business for us and one which we continue to outperform in. But no, I don't think you're going to see anything to be honest there. We will though be looking across the rest of the Investment Bank in terms of balance sheet usage. And as I said, certainly the work we've done already and identified a number of significantly low ROA users which we will obviously be eliminating.

Okay. Thanks a lot.

Thank you. Next question.

Thank you. Your next question is from Robert Murphy, HSBC. Please ask your question.

Yes, hi. Thanks for taking my question. I've got a couple of questions on slide 39 in terms of the -- related to your 20b reduction in RWAs. First of all in the wind-down business, I think you said legacy assets lost 136m in the quarter. And I was just trying to understand, given the move in yields we've had on both treasuries and mortgage assets, why you're still getting significant losses on the reduction there. And with regard to those wind-down assets, are those largely held-to-maturity accounted or fair-value accounted now? That's the first part. I've got a couple of others.

So why don't I take -- sorry, David here. The 136m you actually mentioned was actually in respect of certain significant litigation provisions primarily in respect of mortgage exposure so not the FID wind-down. The FID wind-down number was actually 100m.

So I heard, yes.

100m basically, actually minus 103m to be exact in the third quarter. That was composed of about 61m of negative revenue and the balance, I guess 42m essentially, was actually the expenses involved in actually running and maintaining that portfolio. Just to be clear then, to complete that picture for the year to date, we've had negative revenues on the FID wind-down portfolio of just under 500m and a negative [PTI] of $667m, which was on one of the slides. So about 500m and then about 160m-odd of expenses to actually run that in terms of the numbers.

I guess your next question is why have you seen those markdowns. I think the truth is that given we've actually reduced the RWA in the FID wind-down, the position sizes from 54 to 14, we are down to a collection of assets which don't really have much correlation to the overall macro environment. Some residual European CMBS positions, some residual power trades. They're not really correlated to those markets.

So we've not seen any particular benefit of any materiality from I guess the improvement to a slightly more favorable rate environment in terms of that. They're very specific positions and that just reflects the fact towards the end of the book we're actually working from. The majority of those are in fact fair-value marked actually, to be, just to be clear.

And so given that the RWAs didn't change in the quarter, how much did you actually sell to -- how much was the notional sale to generate the 61 loss, revenue loss?

Most of it would be marks actually. Most of it would be marks, not as opposed to sales.

It's just marks?

Yes, marks. I think obviously we made a lot of progress earlier in the year. We've made less in the third quarter. And in answer to a previous question, the target really for the next 15 months is to basically reduce that by about half. The target is to get rid of all of it, let's be honest, but our projection is about half.

Right. And for then the 20b as a whole, obviously you said about half of the wind-down. What's going to happen with the -- it was related to an earlier question on the securitized products. You said that's one of the toughest under the Basel III regime and I was just wondering how much of -- how much is that going to -- of the 20b is going to be out of that segment because that's quite a large amount of your fixed income risk-weighted assets.

I'm not sure we'll necessarily give a specific target by target. On page 39 you can see that securitized products have come down from $73b to about $37b. I think there's probably a few billion that will contribute towards that 25b, but I'm not sure I'd expect to see a radical change given that we've halved the amount of risk-weighted assets in that business already. So I think we'll be looking elsewhere across the portfolio. As I said, the single large FID wind-down and then it will be more small chops in other areas.

And then just --.

And including just for, clearly just for the record, this is obviously just, on page 39, the fixed income RWA. Yes, this is -- the 25b will not come entirely from the fixed income RWA. It will also come from some of our corporate lending books in the Investment Bank and we'll also revise some of our exposure in the equities portfolio as well, where you've seen an increase in RWA from CCP, for example.

And where -- when you move to Basel III, so given that we're in the last stages of mitigation here, where you would rank the securitized products in terms of ROE on a normalized basis out of those products that you're listing there?

It's been, I think we've said before, it's been a relatively successful business for us for a number of years. So --

Would it be your most profitable business by ROE or your second best?

No, no, it's not. It certainly more than covers its cost of capital on any basis, even on a full Basel III basis as we show here in terms of that. It certainly more than covers those costs. But no, clearly we can find very high ROE businesses in balance sheet-light business -- sorry, in RWA-light businesses. But it's certainly more than covered its cost of capital.

Okay. And then just quickly, just another issue on the, sorry, I was confusing the numbers on the mortgage litigation. Can you say what the outstanding claims are on the mortgage rep and warranty and what reserve there is there? I know it'll come out in the other report but I don't know if you can say now what that is.

Hang on a minute. Yes, it's the split reporting so you'll see it in the second phase. I don't have the number to hand actually, but -- so you'll probably get it in about a week or so's time, I think.

It's just we've seen a bit of a rise in the US numbers from the third party.

Yes. I think you will see a small increase for us. That's probably what you'd expect given the news flow over the last few months.

Okay. That's it. Thanks very much.

Thank you. Next question.

Thank you. Your next question comes from Andrew Lim from Espirito Santo. Please ask your question.

Hi there. Just coming back to the Basel III leverage ratio, I was just wondering if you could tell us what the off-balance sheet assets and guarantees are, and then just provide a bit more color about the nature of these off-balance sheet assets and perhaps to what extent they could be wound down and over what time period.

I don't think we've given that number. I think I'm not sure any bank has actually given their Basel III leverage ratio as yet. But it's -- as a bank, we've not generally been -- we don't generally issue much in the way of guarantees, as such, but there are obviously a number of variable interest entities in terms of those SPVs which are not consolidated which will be affected by that. It's quite a wide range of assets actually. As I've said, I think this is something we'll probably be coming back to you on in subsequent quarters as we move towards the Basel III leverage ratio issue.

But I don't think I really want to add to the disclosed at the moment. I think as I said, the emphasis of the work we've been doing around balance sheet has been very much actually on the on-balance sheet component. And we've now been shifting more as we go through the first phase of that to actually what we need to do to reduce the off-balance sheet. It's nothing extraordinary but I think something that we want to do some more work around.

Can you state what the quantum is, roughly speaking?

Not as yet, no. I think -- I don't think any bank has given their B-III number yet but it's something, as I say, we'll come back to you on.

Okay. Thank you.

Next question.

I would now like to hand the call back to Mr. Dougan. Thank you.

Okay. Thanks very much everybody. Appreciate all the questions. I think just in summary we have continued to prove the strength of our business model. We had good solid and consistent third-quarter results and I think we've continued to maintain good momentum with our clients in an environment which continues to be somewhat challenging. So we believe we have shown successful implementation of the capital actions that we announced in July. We've substantially enhanced the capital position and we are, as we've said, confident that we'll achieve a look-through Swiss core capital ratio of around 9.3% by year end, again subject to timing in terms of the closings of the sales and asset management.

But to date we have successfully delivered on all of our announced strategic and cost cutting targets and through the incremental targets announced today will continue to improve cost, capital efficiency and leverage. I think with these actions we are confident we'll receive -- we'll actually receive a -- we'll actually reach the 10% look-through capital ratio in 2013, and as we've said we'll then be in a position to make additional cash distribution to shareholders.

So in short, we're convinced that the stable, high-quality earnings streams of our business combined with the execution of our strategic capital and cost-saving measures will continue to create a very strong and competitive global platform to serve our clients, gain further market share and deliver superior returns to our shareholders. Thank you all very much.

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.