Credit Suisse Group AG (CS) 2014 Q1 法說會逐字稿

Good morning, welcome, and thank you for joining the Credit Suisse Group first quarter 2014 results conference call. (Operator Instructions).

At this time, I would like to turn the conference over to Mr. Christian Stark, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Stark.

Good morning, and welcome to our first quarter results call. Before we begin, let me remind you to take note of the important disclaimer on slide 2, including the statements on non-GAAP measures and Basel III disclosures.

I now turn it over to Brady Dougan, our CEO.

Thanks, Christian. Welcome, everybody; thanks for joining the first quarter earnings call. I am, as usual, joined by David Mathers, our CFO, who's going to deliver the results portion of the discussion today.

I would like to begin with a few highlights from the first quarter. First, we achieved pretax income of CHF1.9 billion, and a return on equity of 14% in our strategic businesses, for the quarter, well within reach of our 15% through the cycle target.

This strong performance was driven by significantly improved profitability in private banking and wealth management, solid returns in investment banking, and continued effective cost and capital management.

We also saw continued momentum with clients across many of our key businesses, including the highest asset inflows in our strategic businesses since the first quarter of 2011, and a meaningful increase in the share of assets under management from ultra high net worth clients.

In private banking and wealth management, we grew the pretax income of our strategic businesses by 28%, compared to last year's first quarter, to CHF1 billion, resulting in a high return on capital of 33%.

In the first quarter, we recorded CHF16 billion of net new assets in our strategic businesses, reflecting our strength in key emerging markets within Asia, Latin America and the Middle East, our strong position in our Swiss home market, and significant inflows in alternative investments in index products within our asset management business. Notably, our net new assets in Asia Pacific grew at a 17% annualized rate.

Wealth management clients had a good start to the year, and improved its net margin to 29 basis points from 23 basis points in the prior year quarter. In line with our strategy, we increased the share of assets under management from ultra high net worth clients to 46% in the first quarter from 43% a year ago.

Corporate and institutional clients continued to make a strong contribution to the division's overall performance, and asset management more than doubled its pretax income, compared to the first quarter of 2013, as a result of its more focused approach.

In investment banking, we delivered a strong return on capital of 21% on our strategic businesses for the first quarter, and pretax income of CHF1.1 billion, demonstrating the strength of our diversified business.

We delivered a strong performance in securitized products, credit and underwriting and advisory, as well as solid results in equities.

At the same time, the first quarter seasonal contribution from our rates and emerging markets businesses was significantly lower, compared to prior years, as the industry adapts to structural changes in the rates business, combined with challenging market conditions in certain emerging markets.

We made significant progress in winding down our non-strategic units, which we identified last October. We reduced the leverage exposure of these units by CHF11 billion, and made risk-weighted asset business reductions of CHF4 billion in the quarter.

And on costs, by the end of the first quarter, we delivered CHF3.4 billion of annualized run rate cost savings versus the first half of 2011. Given this progress in reducing our cost base, we remain on track to achieve our targeted cost savings in excess of CHF4.5 billion by the end of 2015.

We continue to maintain a resilient capital position and leverage ratio, notwithstanding the impact of our progress in resolving legacy litigation matters in the first quarter.

We achieved a 24% reduction in risk-weighted assets since the third quarter of 2011, despite methodology uplifts of CHF13.5 billion in the first quarter. And we reduced leverage exposure by 19% since the third quarter of 2012.

We ended the quarter with a look-through Basel III CET1 ratio of 10%, effectively meeting the 2019 Swiss requirement. And we reported a look-through Swiss leverage ratio of 3.7%, as of quarter end, within reach of our 2019 requirement of 4%.

I'd like to reiterate the key elements of our strategy in the roadmap to achieving our targets. Specifically, how the combination of our two strong businesses, coupled with resource reallocation, will drive growth in targeted areas; namely, in capital efficient, high returning businesses.

And how this growth, combined with the wind down of our non-strategic units and increased efficiency of our operations, will drive a return on equity in excess of 15% and allow us to return cash to our shareholders.

First, we have two high returning businesses which we are growing in a targeted manner, and rebalancing capital into private banking and wealth management.

In private banking and wealth management, we grew pretax income in our strategic businesses by 28% from last year's first quarter, resulting in a high return on capital of 33%.

We will continue to build on our growth momentum in emerging markets, such as Asia Pacific, where we recorded CHF5 billion in net new assets in the first quarter.

We will also expand our lending initiatives, targeting ultra high net worth clients, an area where we saw an 8% increase in our balance of outstanding loans in the first quarter.

We continue to build on our strong position in our Swiss home market. At the same time, we are repositioning certain less profitable onshore markets and improving our net margin.

In investment banking, our strategic businesses generated a 21% return on capital in the first quarter. We will continue to focus on our market-leading and high returning businesses, notably our top-three equities franchise, our strong underwriting and advisory business, and our yield businesses within fixed income, specifically credit, securitized products and emerging markets.

We will also complete the transition of our macro products business to a client-focused capital-light franchise, as we outlined last October.

Second, we have a resilient capital base and leverage position, as well as an efficient operating model. We remain on track to reach our long-term balance sheet and risk-weighted asset reduction targets.

We will continue to reallocate resources to capture growth opportunities, particularly in private banking and wealth management, and to achieve a more balanced distribution of risk-weighted assets between our two divisions. At the same time, we will further improve operating efficiency across our businesses and infrastructure areas.

Third, we will continue to focus on the run-off of position and losses in our non-strategic portfolio and on resolving legacy litigation matters. Given the leverage and risk-weighted asset reductions achieved in the first quarter in our non-strategic units, we are on track to reach our 2015 targets of a 70% reduction in leverage exposure and a 58% reduction in Basel III risk-weighted assets from the end of the first quarter 2014.

In the first quarter, we have also made good progress in resolving legacy litigation matters. As you know, we announced an agreement with the Federal Housing Finance Agency in March. This effectively resolved the largest mortgage-related legal dispute between Credit Suisse and investors dating back to the financial crisis.

In addition, we are continuing our efforts to resolve legal cases related to our former cross-border private banking business with US clients. In February, we reached a settlement with the Securities and Exchange Commission on the US cross-border matter.

The US Department of Justice's investigation into the US tax matter remains outstanding and, while we're working hard to bring this to a close, the timing and outcome remain uncertain.

To sum up, in the first quarter, we continued to optimize resource allocation to grow our high returning businesses. At the same time, we maintained our resilient leverage and capital positions and remain on track to meet our long-term targets. We also made good progress towards resolving legacy litigation matters and increasing the efficiency of our operations.

Given all of these positive developments and progress in our strategy execution, our intention remains to deliver cash returns to our shareholders at or above 2013 levels.

And with that, I'll hand it over to David, who will discuss the results in more detail. David.

Thank you, Brady. Good morning. I'd like to start on slide 7, please, with an overview of the financial results.

In the first quarter, we achieved revenues of CHF6.6 billion, pretax income of CHF1.9 billion from our strategic businesses, with a cost to income ratio of 70%.

The after-tax return on equity was 14% in the strategic businesses, and net new asset inflows were CHF16 billion. It's worth noting this is the highest level of inflows achieved during a quarter since the first quarter of 2011.

On a total reported basis, we achieved pretax income of CHF1.4 billion and net income of CHF0.9 billion, equivalent to an after-tax return on equity of 8%.

Excluding the impact of fair value adjustments due to the movement on our own credit spreads, we achieved an after-tax return of 9% on a reported basis in the first quarter.

I'd also just like to point out that our tax expenses in the first quarter were higher than the 28% tax rate guidance we have given previously for 2014. This reflects a one-off reduction in deferred tax assets from CHF151 million, due to the change in New York State tax rates that was enacted on March 31 this year.

Slide 8. On this slide, we show the quarter's results against the various Group and divisional KPIs we set. Our Group strategic return on equity of 14% for the quarter is very close to the 15% target. And we've achieved, with our strategic results, our cost to income target of 70%.

In the first quarter, the private banking and wealth management division reduced its cost to income ratio by 6 percentage points to 68%, compared to a year ago, making good progress towards the target of 65% for the division.

In addition, net new assets in our wealth management client business grew at an annualized rate of 5% in the first quarter. That's despite continued outflows in the Western European business. And that means we're exceeding the short-term target of 3% to 4% we set including such outflows, and now approaching the long-term target of 6% for this business.

The investment banking division achieved a strategic cost to income ratio of 68% for the first quarter, better than the target of 70%.

In summary, I think the strategic results this quarter demonstrate the momentum we have towards reaching all of our KPIs.

So let's start now with the private banking and wealth management division on slide 9.

In the first quarter, strategic businesses within the private banking and wealth management division achieved pretax income of CHF1 billion, 28% higher compared to the prior-year quarter. This was equivalent to return on capital of 33%, compared to 28% in the prior-year quarter.

Net revenues for the first quarter were slightly higher, due to an increase in fee-based revenues. This was partly offset, though, by lower net interest income, reflecting the adverse impact of lower interest rates and a reduction in deposits eligible for stable funding.

Continued cost discipline delivered efficiency gains and reduced our strategic cost base by 8%, compared to the prior-year quarter, delivering a cost/income ratio of 68%.

Net new assets for strategic businesses were CHF16 billion in the quarter. And total reported net new assets of CHF13.7 billion were very strong also in the first quarter.

Just looking at wealth management, we generated net new assets of CHF10.6 billion in this part of the division, with particularly strong growth in Asia Pacific and in Switzerland. We had a further CHF6.9 billion of new inflows in asset management.

We've also made continued progress in winding down the non-strategic portfolio this quarter and I'll cover the details of this later in the presentation.

So let's turn to slide 10 to discuss net new assets.

In the first quarter, we saw strategic net new assets of CHF16 billion, and that's after taking into account continued Western European cross-border outflows of CHF1.6 billion in the strategic businesses during the first quarter.

Our wealth management client business saw strong inflows of CHF12.2 billion and net new assets of CHF10.6 billion in the first quarter. Within asset management, as I've already mentioned, we achieved strong net new asset inflows of CHF6.9 billion with continued strength in both alternative investments and index products.

Slide 11. Wealth management clients began 2014 with a strong pretax income result of CHF578 million, 27% higher compared to the prior year. Net revenues were slightly down, due to lower net interest income, partly offset by an increase in fee-based revenues.

Operating expenses in the first quarter were at the lowest level since the first quarter of 2011. The cost to income ratio improved to 71%, 6 percentage points better than a year ago. These cost reductions were achieved across all major expense categories, including reduced infrastructure expenses.

As already mentioned, net new assets increased significantly in the first quarter to CHF10.6 billion, primarily in the higher wealth bands of our client base.

So let's now look at wealth management in some more detail on slide 12.

Our net margin on assets under management increased by 6 basis points from the prior year to 29 basis points, reflecting the reduction of expenses and the growth in our emerging market businesses.

Transaction and performance revenues were slightly higher, compared with the prior year, and this increase was in collaboration revenue in the first quarter, albeit partly offset by lower foreign exchange transaction volumes. If we compare it to the fourth quarter of 2013, we achieved significantly higher revenues also from securities transactions with higher volumes.

Recurring commissions and fees were slightly higher, compared to the prior year, reflecting the benefit from the increase in the asset base, and also from various pricing measures, which more than offset the negative impact from Western European cross-border outflows and lower retrocession fees.

Net interest income decreased in the first quarter, reflecting the higher level of deposits -- sorry, the lower level of deposits eligible as stable funding and the continued impact from the low interest rate environment. This decrease, though, was partly offset by higher loan volumes.

Slide 13. Wealth management clients achieved strong inflows of CHF12.2 billion for the first quarter and reported net new assets of CHF10.6 billion, taking into account the Western European cross-border outflows.

Inflows from the Asia Pacific region amounted to CHF4.9 billion, with an annualized growth rate of 17%. This reflected strong momentum over the region with growth from ultra high net worth clients in Greater China and South East Asia.

We also saw strong inflows in Switzerland across all client segments. These grew at 7% on an annualized basis in the first quarter. Solid inflows in the Americas region of CHF1.5 billion were largely driven by growth from Latin American, ultra high net worth client base.

Let's turn to slide 14 to discuss the ultra high net worth segment in some more detail.

I think, as you may recall, in previous presentations, we've referred to our strategy of expanding the lending business in this sector, and what we want to give here is an example of our progress so far.

In the first quarter, we achieved CHF2.2 billion of net new lending to ultra high net worth clients, compared to CHF0.5 billion in the prior-year quarter. Net new lending was particularly strong to clients in the emerging markets, with the Asia Pacific region accounting for 36%, and Eastern EMEA accounting for 32% of total net new lending in the quarter. As a result, total ultra high net worth loan balances increased by 8% to CHF31 billion at the end of the first quarter.

Two I'd like to emphasize here. The continued expansion of our lending offering to ultra high net worth clients is, and remains, a core part of our long-term strategy and is a means of enhancing revenue in the future.

The average interest margin on these loans exceeds 100 basis points, and that means that this increased growth in lending to ultra high net worth clients should enhance gross margin in this segment, which currently stands at around 50 points of assets under management.

In addition, our One Bank Collaboration initiative provides opportunity for additional revenues in investment banking that can be generated from the broadened and deepened client relationships.

Let's now turn to corporate and institutional clients on slide 15.

Pretax income for the first quarter was higher by 3%, compared to the prior-year quarter, and the cost to income ratio improved further to 50%. Net revenues were broadly in line with the prior-year quarter, with growth in recurring commissions and fees offset by lower transaction and performance based revenues, as well as slightly lower net new interest income.

Operating expenses in the first quarter declined by 5%, compared to the prior-year quarter, reflecting continued cost efficiencies, and leading to a cost to income ratio of 50%. As you can see, credit provisions continue to remain at a very low level in this business.

Finally, net new assets of CHF0.4 billion reflected the impact of a small number of clients rebalancing their investments following strong inflows into this segment in the fourth quarter of 2013.

Let's now turn to asset management results on slide 16.

Asset management delivered strong first quarter pretax income of CHF141 million and a return on capital of 60%, more than double the level of the prior-year quarter. Net revenues of CHF465 million increased 10%, compared to the prior-year quarter, due to increased management fees on a higher asset base, as well as higher carried interest gains on private equity realizations. This was partly offset by lower investment-related gains, which reflects reduced capital usage compared to the prior-year period.

Operating expenses were lower by 9%, reflecting continued efficiency improvements, with a cost to income ratio of 70%. Net new asset inflows of CHF6.9 billion was strong in the quarter, including inflows of CHF3 billion into alternative investments. And we continued to improve our fee-based margin to 49 basis points, up from the 46 basis points achieved in the prior-year quarter.

Compared to the fourth quarter of last year, the reduction in revenues was driven by the absence of semi-annual and annual performance fees this quarter, which are booked in the second and the fourth quarters of each year, as well as recognition of higher private equity placement fees which is normally biased towards the fourth quarter.

Slide 17. We're making good progress in winding down the non-strategic portfolio within the private banking and wealth management division.

Revenues were lower in the first quarter, compared to the prior year, including lower investment-related gains, reflecting the disposals of non-strategic businesses throughout 2013, a process that is now largely complete. Nonetheless, as we previously indicated, the first quarter did include a CHF91 million gain on the sale of our private equity fund of funds and co-investment group, CFIG.

Operating expenses remained flat from the prior year as the benefits from business disposals were offset by accelerated severance costs for a business sale that we expect to complete later this year.

Compared to the previous quarter, operating expenses were significantly lower, due to the litigation-related charge booked in the fourth quarter of 2013. As you will recall, in the fourth quarter, we took litigation charges of CHF175 million in connection with the US cross-border tax matter with the SEC that we concluded in February of this year.

Furthermore, as part of our ongoing efforts to reach a resolution with the DOJ in connection with their investigation into the US tax related matter, we increased litigation provisions by CHF425 million, a gain taken in the fourth quarter of 2013.

We made some progress from reducing risk-weighted assets through business reductions, albeit this was more than offset by the increases due to the impact of the methodology change in risk-weighted assets related to private equity holdings. We reduced leverage exposure by CHF4 billion in the first quarter, driven by portfolio wind-downs, asset sales and a spinoff.

So with that, let's turn to the investment bank, please, on slide 18.

In the first quarter, we achieved a return on capital of 21% in our strategic businesses and a solid return on capital of 14% for the overall division, including the non-strategic losses. Our strategic businesses delivered solid revenues of CHF3.6 billion, and pretax income of CHF1.1 billion.

We saw a particularly strong performance in credit, securitized products, advisory and underwriting, and a solid performance in equities. However, our first quarter results this year were, nonetheless, lower than the prior-year quarter. This reflects a combination of two factors.

First, conditions in certain emerging markets were significantly weaker this year; and second, weaker trading conditions in the macro sector is being exacerbated by the structural industry and regulatory changes that are also adversely affecting client activity.

Overall expenses are lower, compared to the prior year, driven by lower commissions, infrastructure and litigation, as well as the currency FX moves due to a weaker US dollar.

Total risk-weighted assets, though, increased by $10 billion compared to prior year, prior quarter, primarily due to $8 billion of methodology-related changes. This included the new operational risk model adding $3 billion, an additional $4 billion from the change in Basel III treatment of certain securitizations which have been implemented across the industry.

If I start then with fixed income results on slide 19.

In fixed income, we had revenues of CHF2.1 billion with very strong results across trading and origination in the credit and securitized product franchises. We achieved market share gains in leveraged finance origination and asset finance, and rank number 3 in global high yield.

Emerging market revenues, though, were significantly lower, impacted by challenging conditions in certain markets. And, as I've already mentioned, revenues from macro products were depressed by -- were affected by the structural industry changes that are compounding cyclical weakness.

Let's turn to equities on slide 20.

In equities, we had solid results for the first quarter with revenues of CHF1.4 billion with continued market leadership across the products and a strong, stable client franchise.

Derivative results were higher, reflecting both favorable market conditions and client flows across both products and regions.

We saw solid and consistent prime service revenues, reflecting growth in client balances as well as increased client interest, particularly in our European business.

Cash equity results, however, were lower, compared to the prior-year quarter, as commission growth in the US and Europe were offset by weaker trading conditions in the emerging markets, notably in Latin America.

Equity underwriting results were higher, compared to the prior-year quarter, reflecting both higher industry fees and share of wallet gains in the EMEA and APAC regions.

Let's turn to underwriting and advisory, please, on slide 21.

In underwriting and advisory, we achieved strong revenues of CHF831 million, compared to CHF763 million in the prior-year quarter. Stronger underwriting results were driven by a market-leading leveraged finance franchise, whilst our advisory revenues improved, compared to the prior-year quarter, with a significant share of wallet gains in the Americas.

We see increased momentum in the coming quarters in our advisory franchise, given both these market share gains and the increase in announced M&A volumes.

Equity underwriting results were higher, compared to the prior-year quarter, and we also expect continuing momentum here, with higher global IPO activity and a healthy forward calendar, provided that markets remain favorable to execute this business.

Let's turn to the investment bank non-strategic unit on slide 22.

In the first quarter, we achieved higher revenue losses than in the prior-year quarter and in the last quarter. However, revenues in the prior-year quarter include the gain of CHF77 million from a sale in our legacy real estate portfolio. And revenues in the fourth quarter of last year also reflected portfolio valuation gains, as you may recall, we discussed at the time.

As we suggested last year, our funding costs in non-strategic unit decreased significantly, due to proactive portfolio management of both our legacy debt instruments and our trading assets.

During the first quarter, we did exit a number of relatively liquid positions at minimal cost. But I caution that we maintain our guidance that, ultimately, the cost of exiting all these positions could well be in the range of 2% to 3% of risk-weighted assets.

We're making solid progress towards the achievement of our capital reduction targets for the end of 2015. We reduced risk-weighted assets by $1 billion in the first quarter, after taking into account the methodology-based updates, which include the change in the Basel III treatment of certain securitizations.

We also reduced leverage exposure by $8 billion, compared to the end of last year.

The litigation-related impact of CHF61 million this quarter clearly substantially lower than the prior quarter, an amount of CHF901 million which, as you may recall, reflected the FHFA settlement.

Let's turn now to slide 23.

Consistent with prior quarter, this bubble chart summarizes the returns, capital usage and market positions of our investment banking businesses. However, for the for the first time, we do show now allocated capital based on a combination of risk-weighted assets and leverage exposure, to better reflect the resource usage in our businesses.

Our credit franchise benefited from strength in leveraged finance origination, which produced substantially increased returns which are amongst the highest in the investment bank.

Our securitized products business was also resilient, driven by market share gains in the asset finance business.

Prime services also produced solid returns, positive impacted by a reduction in capital usage year on year. But as you can see, returns from our emerging market businesses were lower, reflecting the challenging market environment we have already mentioned, particularly in Latin America.

Both cash equities and equity derivative returns are solid, reflecting improved revenues and lower capital usage in the last 12 months.

Finally, as you can see, the returns in our global macro products businesses remain low. This reflects reduced seasonal revenues than in prior-year first quarters, primarily due to lower client activity. And that's been driven by cyclical factors such as the low interest rate environment, current central bank policies, as well as recent geopolitical events.

But in addition, the structural changes, such as the introduction of the swap execution facilities, are also having a significant impact and are likely to continue to compress margins.

In response to these developments I think, as we've discussed before, we remain very focused on offering a combined sales model across these sectors with particular emphasis on [clear] derivatives and the electronic trading and cash products.

We're also targeting cost reductions within the macro businesses of approximately $200 million, as well as a further reduction in both leverage and risk-weighted assets usage, all of which were included in our current targets for both the Group and the investment banking division.

Slide 24. The waterfall chart in this slide highlights the strong returns generated by our strategic investment banking businesses.

For the first quarter, our strategic businesses achieved a solid after-tax return on capital of 21% amid more challenging market conditions, as well as the reduced seasonal impact we mentioned before. The increase in US dollar expenses was driven by higher seasonal compensation expenses, partly offset by ongoing cost efficiencies.

We expect further cost savings from both the ongoing infrastructure efficiencies, but also from the optimization of the macro business model.

Finally, I'd like to reiterate that, clearly, the wind-down of our non-strategic unit will significantly reduce the pretax income drag over time.

Let's move to the non-strategic units, slide 26.

We achieved business reductions in risk-weighted assets in the first quarter that were offset by the adverse impact from the methodology change that I mentioned, which also occurred this quarter. Nonetheless, we remain very much on track to achieve the 58% reduction in non-strategic risk-weighted assets by the end of 2015.

Since the end of 2013, we've cut leverage exposure by CHF11 billion and we intend to achieve a further 70% by the end of next year.

Slide 27. This slide is an update to the similar slide that you may recall from our fourth quarter earnings presentations, and we've designed it to try and help you analyze this non-strategic pretax impact between now and going forward.

Specifically, it shows how we move from a reported pretax loss of CHF0.5 billion in the first quarter, which we show on the left-hand side of the waterfall chart, to a pretax income drag rate around about CHF280 million on the right-hand side, including some litigation costs. And the bars show the key drivers [allotted] to the impact in our pretax income this quarter and how they're expected to develop over the next couple of years.

So let's just start with the corporate center. First, we have CHF120 million impact this quarter from the contraction in our credit spreads on the portfolio of debt that we carry at fair value. This is not really relevant for capital and, in any event, is expected to be eliminated with the anticipated change in fair value accounting targeted for 2016.

Next, we have CHF123 million of realignment and IT architecture simplification costs, which we'd expect to continue at around this run rate through 2014 and 2015 until the completion of our main cost reduction program by the end of next year.

The remaining impact of the corporate center this quarter primarily relates to the impact of gains from real estate sales that we took in the first quarter.

Moving then to legacy funding costs, which are predominately in respect of the investment banking portfolio. The CHF52 million of legacy funding costs this quarter demonstrates we're on track to reduce the funding costs associated with non-Basel III compliant legacy debt instruments by 50% this year, compared to the CHF439 million you might recall that we incurred in the whole of 2013. And, as we said before, the remaining portfolios of these instruments will be fully run off by the end of 2018.

Then just coming to the final components, the remaining non-strategic drag this quarter is primarily driven by legacy litigation costs of approximately CHF61 million, together with losses on the fixed income wind-down portfolio and the legacy rates business investment banking of approximately CHF180 million.

Our plan is to accelerate these wind-down of these assets, including a targeted CHF38 million of incremental quarterly expense savings, and continue to work through to resolve our legacy litigation issues.

Therefore, rolling forward to 2016 and beyond, once the wind-down is largely complete it's apparent from this analysis that the remaining [FID] drag from the NSU should drop away significantly.

Let's turn now to the next section, where we discuss our continued progress on cost and on capital.

Slide 29. On this slide we show the annualized cost savings by division, as well as the infrastructure [saving] functions on a direct basis, and that's consistent with how we've shown it before.

In addition, in order for you to see how the infrastructure savings impact the operating efficiency of the business divisions, we're now showing you a fully loaded view for the first time, with the infrastructure savings allocated to the divisions.

In both cases, we compare our operating expenses to our run rate cost base for the first half of 2011, which was when we initiated our efficiency program.

In the first quarter of 2014, we achieved annualized cost savings of CHF3.4 billion after normalizing for the immediate accounting recognition of the retirement eligible population that occurs in the first quarter.

If you look at the direct savings view on the left-hand side of the page, you can see that the investment banking division has achieved CHF1.5 billion of annualized savings, which you may recall is lower than the CHF1.75 billion that we reached at the end of 2013. And this reduction in savings, compared to the end of last year, represents the impact of higher deferred comp charges in 2014, compared to 2013.

The private banking and wealth management division, though, achieved CHF0.6 billion of annualized cost savings in the first quarter, making substantial progress towards its yearend 2015 target of CHF950 million.

Finally, if we turn to the infrastructure saving pace; we increased our savings to CHF1.3 billion with continued progress towards the yearend 2015 target of a minimum of CHF1.65 billion.

These infrastructure savings are allocated to the business divisions in line with their usage, resulting in total savings on a fully allocated basis of CHF2 billion in the investment bank and CHF1.2 billion in the private banking and wealth management division.

So just to reiterate our targets, we remain very much committed to achieving a minimum of CHF4.5 billion by the end of 2015, as well as the interim target you may recall for 2014 of CHF3.8 billion.

Let's now turn to the capital slides on 30, please.

As you can see from this chart, our look-through Basel III risk-weighted assets stood at CHF280 billion at the end of the quarter. Compared to the end of last year, risk-weighted assets increased by CHF14 billion, primarily driven by methodology and policy change in the first quarter that impacted both the investment banking and private banking and wealth management divisions.

These methodology and policy changes included CHF5.3 billion in respect of the new M&A model for operational risk, as well as changes to the Basel III rules applicable to trading book securitizations, private equity positions and also, just to recall, the mortgage multiplier.

Business reductions within the non-strategic units of CHF3.7 billion were offset by modest business growth from a seasonal increase in lending activity in the investment banking division.

To give you an outlook on risk-weighted assets developments through 2014, we would expect some modest fluctuation due to seasonal and further methodology impacts. But I would point out, those methodology impacts are linked to be both positive and negative and, as a consequence, we remain focused on limiting our risk-weighted assets for investment banking to the yearend 2013 levels. In other words, to reverse these methodology impacts. And we continue to reiterate our Group long-term target of approximately CHF250 billion.

So let's move to capital ratios, then, on slide 31.

At the end of the first quarter, our Swiss total capital ratio stood at 15.0%, slightly lower than the fourth quarter of last year, reflecting the repurchase of the second tranche of Claudius, the former Tier 1 participation instrument, on March 18 of this year. You may recall that we also redeemed the first tranche of Claudius at the end of 2013.

Our BIS CET1 ratio was 10% at the end of the first quarter on a look-through basis, reflecting the impact, the methodology changes related to the risk-weighted assets that we've already discussed.

Let's just turn to leverage now, slide 32.

At the end of the first quarter, our leverage exposure stood at CHF1.14 trillion. This is a cumulative reduction of CHF265 billion, or 19%, since the third quarter 2012 when we announced the balance sheet reduction program.

Including the full implementation of the BCBS proposals, together our own ongoing mitigation efforts and the run off of our non-strategic portfolio, we're targeting a long-term goal for leverage of approximately CHF1 trillion for the Group.

Slide 33. Our BIS total capital leverage ratio improved from 3.5% at the end of the last quarter to 3.8% at the end of the first quarter, again on a look-through basis.

Clearly, if you look at the capital base we have, and assuming the achievement of our long-term leverage exposure target of CHF1 trillion, our pro forma look-through Swiss total capital ratio would increase to over 4% just on current capital levels.

So just to conclude on slide 34, please.

What we show here is a summary of our key long-term targets, and we also reiterate our commitment to generating cash return for shareholders.

On a Group level, we continue to target risk-weighted assets of approximately CHF250 billion, post the wind-down of the non-strategic units.

We're well positioned to meet our long-term leverage exposure target of approximately CHF1 trillion through the completion of the non-strategic runoff, as well as the implementation of the final BCBS rules and planned mitigation measures.

We're maintaining the target we announced last year for a CET1 ratio in the long term of 11%. And clearly, as we've discussed before, this will mean that we will exceed our long-term total leverage ratio of 4% as the non-strategic runoff is completed.

In terms of capital allocation, risk-weighted assets in investment banking were higher in the first quarter, compared to the end of last year, due to the seasonal and, more importantly, the methodology effects that we've already discussed. However, we would expect the risk-weighted asset usage of the investment banking division to return to the levels that we saw at the end of 2013 by the end of the current year.

We will continue to reallocate capital resources for the capital light private banking and wealth management businesses to capture growth and to drive towards a more balanced business mix.

Finally, as we said before, we are committed to redistributing capital in excess of our targeted ratio to shareholders.

With that, I'd like to conclude the results proportion of today's presentation, and hand back to Brady. Thank you.

Thanks, David. Thanks very much. I think, with that, we're just ready to open it up to questions.

(Operator Instructions). Huw Van Steenis, Morgan Stanley.

I have two questions. One, turning to page 23, I thought it was very helpful for you to share with us the lens you're looking at your businesses now, looking at leverage as well. But what I thought was interesting was it shows that, potentially, your equities business is actually a lower return on equity business than your fixed income is today. So I'd be interested on any thoughts you have about what else you can do to enhance the returns in your prime brokerage business, and more broadly optimize your portfolio?

Secondly, there's also been a huge amount of focus on high frequency trading in the market. To help investors calibrate the risks, could you share what percentage of your equities' revenues come from HFT clients, and any perspectives you have on the potential risks in the market, given you've got a bit of a rough ride in the Lewis book? Thanks.

Huw, thanks for those questions. Maybe I can try to address the second question, and then maybe David can talk a little bit about the first.

I think in general, as you know, we obviously do have a large automated execution business in equities; we think it's a very good business. It's been one where we've actually been at the forefront of a lot of developments and working together with the regulators over the years, and we think we've taken actually a very responsible approach to it. It's a purely agency business; it's one that we think serves our customers very well, and we do, as you say, have good market share with it.

To be honest, I don't think we have any numbers around specific market shares or whatever. I think we haven't seen any impact on the activity in that business, and again, we think we've had a very state-of-the-art platform that has actually helped to address a lot of the issues over the years that have recently been raised in this debate. So we feel like it's actually a business that should be pretty well positioned, and we certainly don't see any impact on the business in the near time.

And I'd say even longer term, obviously we'll have to wait and see if there are, and what kind of market structure changes might come, but I think our view right now is that it shouldn't be material to our overall revenue position there.

If you look at slide 23, Huw, really I think, firstly I wouldn't quite agree actually. If you just, take in that graphic, you look at the aggregate of the equities block and you compare it to the average of the fixed income block, recalling obviously that macro is to the left, the average return on equities overall is actually higher than the average return in FID, just on a point of detail really.

I think, in terms of the prime service business, there's two points really. I think what we wanted to recognize here, I think it's a point that you and others have actually made to us, is we shouldn't just look at 10% of RWA; we should look at leverage [right now]. Clearly, when we run the business, we do look very closely at leverage as well, but we wanted to update our external disclosure to better reflect that.

I think it's certainly true that, as part of the balance sheet reduction program over the last couple of years, the CHF265 billion, we've pushed through a great deal in terms of looking at the ROA by client, the ROA by business type. And I think we've probably still got further to go as part of the optimization of the business, and that, clearly, will have some impact on the prime service business.

I would just point out though, of course, certainly if we look at equities, look at investment management or at the Bank as a whole, we are actually running a portfolio. And prime services is a business which does employ a relatively high balance sheet, but very low levels of risk-weighted assets.

It's also a business which is highly linked and complementary to both our cash equities and our equity derivatives business, as well as other parts of the franchise because, clearly, a lot of the relationships with the prime service business are closely tied to the business we're actually executing elsewhere in equities. So it's not quite simple to just say, prime services looks lower than the rest of equities, therefore we should do something about it because actually, what you're actually seeing, is a great deal of interconnection there with the rest of the equities portfolio.

I think, quite clearly, it's important that a) I think leverage should be seen externally as a key factor in terms of how we run the business, and also how we actually run it internally. And this is, clearly, an aspect of the Bank we'll be looking for optimize, and it's one reason why, I think as you know, we've reduced the leverage target today to around the CHF1 trillion mark.

Thanks very much.

Fiona Swaffield, RBC.

I have two questions. Firstly, WMC and the net interest income; could you go into a bit more detail about the drivers? You mentioned something to do with regulatory deposits. And whether this is a new base for us, going forward, and the impact on, for example, the duration [of the] replication portfolio. That would be useful.

The second area is, I just wanted to check my understanding on the RWA plan. I think you've got something like CHF14 billion to come off from the NSUs in the next couple of years, by the end of 2015. I think you're saying CHF10 billion from the investment bank, to offset some of these changes. I still don't see that there's that much room for growth as an offset, so I just wondered if you could run through the moving parts again and why you're still so confident of CHF250 billion, if you're going to grow the non-investment bank RWAs. Thank you.

Okay, let's just start then with the net interest income number. The reason the net interest income was down, compared to a year ago in the fourth quarter, reflected two factors. Firstly, I think what we've talked about before, which is we do run a portfolio of positions, with about an 18-month lag, and clearly, you have to just really look at the curve, so euro, US and Swiss franc in terms of the impact of that.

I think we'd probably stick with our guidance that we would expect the full impact of that to be seen really by the middle of this year. That's when we actually reach the trough in terms of the interest income we actually achieve from that portfolio, so that's when you might see the full impact. That hasn't really changed, Fiona.

I think we did say that we would expect NII to actually be down, basically, as a consequence of that in the first half of this year, but reaching a trough in the middle of the summer. Thereafterwards you should expect some increase at least from that component.

The other point we are actually referring to that to here just relates to what deposits actually count as eligible deposits under the net stable funding rules and the LCR rules. The implementation of that is slightly more constricting than we were actually expecting and, therefore, the proportion of deposits we have is slightly lower. We've also seen a further slight drop in the amount of cash deposits which we actually hold in the business, which is probably good news in terms of what that actually means for the other segments of the margin calculation.

Those are the combined effects which actually resulted in the net interest income being down. We did expect to be down in the first quarter and I would not expect it to increase in the second quarter, unless we're particularly successful on the lending side. But we are expecting to reach a trough, basically, in the middle of this year. That would be the components of net interest income.

I think clearly, the other aspect of this is, I think I was very clear a couple of months ago, that we'd expect the net margin to improve. I would say certainly that improvement from 26% to 29% is certainly a positive from our point of view. And that it's a level we are obviously looking to hold or even improve on in the balance of this year, subject to how market conditions develop.

Then really on risk-weighted assets, I think what we've tried to lay out in the roll forward is the combination of methodology, the different components of methodology. I can go through that in more detail, but the numbers are there on slide 30. I think we have seen the majority of that in the first quarter. I caution we might see a little bit of noise further in the second quarter.

But we are actually completing a number of new models in the investment banking business, so we'll likely see a significant reversal for that in the third quarter. So we're definitely seeing some noise coming through for the Basel III methodology in terms of risk-weighted asset numbers, which is distorting it upwards in the first quarter, but we'd expect to see a drop in the third quarter thereafterwards. And we'll obviously update you on that when we actually speak next in three months' time.

Within the overall targets, so that really means -- if I were you, I'd simply say the first quarter, certainly from a model point of view, has been an aberration; we expect to get back on trend by the end of this year. So I think the calculations which you had before in terms of growth and reallocation just remain the same as they were before.

I think, as you saw before, we obviously had a growth in lending in the wealth management business of CHF3.4 billion, which added about CHF0.5 billion into risk-weighted assets. So we clearly are growing our lending book in the private bank. It not necessarily that RWA intensive.

Great. Thanks very much.

Matt Spick, Deutsche Bank.

I have three questions, if that's okay? The first is just your previous restructuring cost guidance was another CHF1.4 billion to go in the Q1 number seemed a little bit low versus what I was expecting. Do you think that your restructuring costs might come in a bit lower than you thought, or were there some other factors that affected Q1 in terms of seasonality or staff departures or something that meant that your Q1 restructuring cost was light?

The second question was just to come back on the prime brokerage business; comparing the bubble chart for Q1 versus the bubble chart for Q4, it looks like there was a big increase in capital allocated to prime services. I just wanted to confirm, I think I understood this right, that you, on your internal methodology, shifted from a RWA measure to a leverage measure and that's what the increase in the prime services bubble is. So that's just reflecting the change in the way you're managing the business and that's happened in Q1 2014.

Then the third question is a policy one. We've seen the latest large exposures rules from the Basel committee. I suppose, with Switzerland being quite a concentrated banking market with [two] G-SIFIs in it, I just wondered if you could confirm that you don't expect the new large exposure rules to have any effect on you. Thank you.

Maybe I could just take the second one to reiterate the -- basically, Matt, you're right. What we're showing here in the chart is, for the first time in the chart, we're showing the combined leverage and RWA, so the leverage and capital combined. We've actually been managing it on that basis for quite some time, but we just thought that, in the bubble chart, it would be better to show that specifically.

So that's why, as you say, when you compare it to the fourth quarter which was not done on that basis, it was just on a pure capital basis, those businesses that have a higher leverage component show up with a larger increase because it is sort of apples and oranges, as you point out. So that is exactly the answer.

I don't know, David, if you want to take the other two portions (multiple speakers)?

Yes, I would still think the guidance we have given of CHF1.4 billion in terms of total restructuring spend for this year and next remains correct. It's certainly true at CHF123 million, therefore, is running slightly less than that on a quarterly basis.

Hopefully, we will be able to sustain that, but I think until we complete these measures, I think it's best to assume that what we said is right, and that's likely to be our cost to achieve. If we can do better than that we will, but I would caution that, clearly, we will have some further severance costs which need to come through over the course of the next few quarters.

We'll see where we get to, but I think [CHF1.4 billion] is still good guidance for the final CTA for this.

On the large exposure point, I don't think we really expect anything material to impact in terms of our current legal entity structure, but I'll check, but I don't think that we'd expect a material impact from that.

Thank you.

Daniele Brupbacher, UBS.

Just a quick follow-up on slide 12, the gross margin question a bit in a more general context. Can you give us, like last year, a bit of a guidance for the full year? And also, you specifically mentioned pricing measures, can you be a little bit more specific there in terms of what that is, and what the impact was?

And then secondly, just again, sorry, on slide 23, leaving aside the macro bubble and just focusing more on the core areas, is it fair to assume that, in terms of structural changes, regulatory changes, and what have you, that basically the situation now is the way it is, so no major further changes expected, and from here onwards it's all about market share, cyclical trends, and more this side of the equation; is that a fair statement?

And just on your remark, Brady, you made before, that you manage the business on, basically, taking the average of a CET1 ratio and the leverage ratio, I would have expected that probably you would run the business more on the ratio which is the limiting factor.

So for example, if the leverage ratio is the limiting factor that you would run it based on that equity allocation, why would you take the average, just for me to understand how you run that? Thanks.

Yes, I guess maybe I can just address the last two a little bit, and maybe David could speak to the gross margin question. Thanks, Daniele, for the questions.

Yes, I would say with regard to the businesses as a whole, I think for many of the businesses we are in a fairly stable place from the point of view of where the businesses are positioned, regulatory impact, etc. Not that there couldn't be other impacts, but it's actually, I think we've restructured these businesses pretty heavily and we feel like they're in good shape, good share and performing well, and relatively stable, from a regulatory point of view.

You excluded the macro area, but that obviously continues to be the business where we still have more work to do I think. We announced early on, as you may remember late last year, that we were instituting a lot of changes in that business, and I think, at the time, we were clearly one of the first to do so.

I think it's proven, in retrospect, that a number of others have clearly had to make similar changes, and so I think we continue to believe that this will continue to be a challenge for the industry as a whole. And I think, over time, we're going to see less capital, and less combined capital and leverage in that business, over time, as we continue to drive that business forward.

So we would see that as a business that we really are looking to restructure, certainly the capital and leverage footprint. Also the sectors where we're focused will be much more of a -- there will be a large sort of electronic, low touch aspect of the business which we think we can do very profitably and with high returns on capital.

We obviously still will have an important business with the largest clients around the world that will be more of a traditional business. And we also think that there is a good solutions business there, but probably not nearly as much of the exotics, longer term derivatives, etc., and things like that.

So we think there's a very good business there that can make 15% returns on capital, but that requires a) completing the restructuring; I think we're in good shape because we started early on it, compared to most of the industry.

But secondly, we also need somewhat better conditions in the market anyway, and the first quarter, clearly, was not good for anybody in that business.

I think, as to your question on how we manage the businesses overall, we don't use just a simple sort of average. Again, I guess it's part of our struggle to try to be transparent with you all and show you in different ways to look at it.

But we don't use a simple average of leverage and capital, in fact we don't use any one measure. We obviously look at every business from a number points of view. And I think David was also explaining, as I'm sure you clearly understand, many of these businesses have other interconnections that are important both with other investment banking businesses, and with other parts of the overall business.

So we obviously have to measure all of that together as well, but clearly, as you said, leverage is an important aspect, capital is an important aspect; there are lots of other elements as well that we consider in these businesses. Operating risk is an important aspect, so it's probably a much more complex way of looking at it. We didn't mean to imply that we simply look at all the businesses based on a pure average of those two things, and that's how we make our decisions.

Okay. That's very clear.

David do you want to --?

So just a couple of points, I think in terms of the gross margin we've been quite clear before is that the shift towards the ultra high net worth margin business will always dilute the gross margin. And I think we've actually given today the gross margin in ultra high, which is 50 basis points.

Now clearly, we would expect that to increase; that's one reason we talked about the lending, CHF2.2 billion up from CHF0.5 billion. All of this is actually going to be enhancive to the gross margin of the ultra high net worth business, but nonetheless, in terms of the blended mix, an increase in proportion of ultra high net worth business will dilute the gross margin.

I think what we said, basically a couple of months ago, is two things. Firstly, that we'd look to see a significant increase in the net margin, which I think you've seen through here in the first quarter. In terms of guidance for that, then I think you should, market conditions being what they are, you probably should expect that net margin to be at or above this level for the balance of this year.

If we're thinking about the gross margin, I think what we said was that we expect it to be broadly stable, compared to last year's 107 basis points; at the moment, of course, it's about 3 bps short of that.

Now we did warn, of course, that net interest income would be less in the first half of this year, and that is slightly exacerbated by this change in the treatment of eligible stable deposits.

We're clearly doing many things to actually mitigate the impact to the gross margin from that shift in terms of our [trading], lending generally, etc., etc., and I think we'd still expect to be broadly stable. But it's clearly not impossible that it may end up being 1 or 2 basis points lower than the 107 last year, depending on exact market activity.

I think the net margin is probably the more important parameter for us, and I think that's where we're likely to see significant improvement.

Okay. And can I just, on the CHF2.2 billion net new lending that you mentioned, that the margin there is probably more than 100 basis points, just for me to understand this, that I'm sure I understand this correctly, is that the combined sort of lending spread and then basically the proceeds being reinvested into products? So that's the total thing?

It's just the lending spread.

Just lending spread, yes, pure lending spread.

So the actual total gross on the business will be different from that, of course, but we just wanted to give that because I think people were interested in what we're doing around the space. It's clearly a key part of how we actually build up our ultra high net worth business around the world, and I think that pricing probably is maybe better than you may have thought, basically. But it's clearly, obviously, very enhancive to the gross margin of the Bank.

I think in general, as you can see, we were encouraged by the first quarter's absolute profitability, the progress on cost reduction, obviously hand in hand, therefore, the increase in the net margin, the very strong net new assets, and the specific initiatives like this lending initiative is something. We actually think we've got some good momentum in it, and we expect to see good progress in that, going forward. So we're encouraged by a lot of what's developed in the business.

Thank you.

Jeremy Sigee, Barclays.

Just three questions, please. You touched on the FID wind-down drag, and I wondered if you could just go into that in a bit more detail, because on slide 27 the CHF180 million drag from FID wind-down I think was bigger than I was expecting. I wonder if you can just come back onto what was in that, and what the outlook is for that over the remainder of this year? That's the first question.

Second question just specifically on IB variable compensation, and your disclosure. Is the percentage deferral similar to last year? Can we assume that that's the same?

Then last point of detail; last quarter you said that the BCBS rule change on the leverage exposure would add about CHF40 billion to CHF50 billion, is that estimate still valid? Just to be clear, I assume that's not in the number you're printing today; that's still the old rules number. Is the improvement to that number still the same as you indicated last quarter?

Just in terms of the FID wind-down, it's difficult to comment really in terms of expectations. I think the comparison, though, maybe slightly distorted because, in the first quarter of last year, we took a significant gain from the restructuring of one of the legacy CMDS positions that dated back to 2008. That came through in the first quarter. It was actually a sizeable gain in the first quarter a year ago; we didn't have that gain this quarter. And in the fourth quarter of last year, so the two quarters you see here, we also had a gain on some other positions we took in the fourth quarter.

I don't think there was anything particularly abnormal in terms of the FID wind-down. I would just be a little cautious in terms of this, because we did exit a number of positions in the first quarter, did some restructuring, and that wasn't at that high a cost. We are a little bit concerned that the point about non-strategic unit, I said before is that we don't have it anymore, and so there will be some exit costs associated with that. But I think it's probably more the comparison with those other two quarters which perhaps is a surprise, in that sense.

In terms of the deferral, I think I'd probably make three points really. Firstly, we are assuming a reduction in the amount of deferred compensation we pay, going forward, i.e., the cash, deferred balance for 2014 and thereafterwards. Mathematically, therefore, that pushes up the CV for a constant level of EV in any particular quarter this year. So there is a slight change in terms of deferral there, Jeremy.

The second issue is, we have been looking at our approach in terms of how we accrue for compensation throughout the year. I think you know, for the last two years, we've accrued on a 25% per quarter basis, and I think there's obviously some questions as to whether that is the best method.

That's something that we have been looking at, and certainly, going forward, we would try to accrue more closely to the expected proportion of earnings. You know, even though seasonality is not as pronounced this year as it has been in prior quarters, the first quarter does tend to be a seasonally slightly higher proportion. So we have accrued for slightly more than 25% within the investment bank. We have made the same change with private bank, but it's less seasonal so it's not particularly material in terms of this. So there is a slight more heavily weighting to the first quarter in terms of the amount of compensation.

Thirdly, just to be clear, if that's helpful on this, there is an increase in the amount of deferred compensation from prior years than we actually see with the investment bank. That really is a consequence of the PAF2 roll off because you may recall that we did the PAF2 charge a couple of years ago. That actually reduced that deferred compensation, so we're now back to which you might say is I guess a more normal, or a more trend level.

You do get this slightly interesting combination, which is you have an impact of higher past deferral; it's about CHF150 million in the full year by the way, it's not a big number, but it's about CHF150 million. There is a reduction of assumed deferral for future years, and then we've also slightly changed the quarterly pattern. So it's a combination of all those factors, Jeremy.

BCBS. BCBS, yes, we'll continue to look at that; it feels more like about a CHF30 billion saving than a CHF40 billion saving. But it's within -- in terms of where we are, we definitely will still expect a useful reduction from the implementation of BCBS.

No, the numbers we're disclosing today do not assume that new BCBS definition, because it's not yet final, and, therefore, only when it actually goes final under the FINMA rules will we actually be doing it. So the numbers do not include that benefit at this point, Jeremy.

Great, that's very clear. Thank you.

Christopher Wheeler, Mediobanca.

A few questions, if I may, quite quickly. First one, Swiss net new money in the wealth management, obviously very strong, stronger than I think the whole of the last two years. Can you give us some more color on that?

Secondly, can you just talk through the RWA uplift in operational risk in the last two quarters, was it CHF6.9 billion followed by the [CHF5.4 billion] this year. How much of that was down to litigation and what can we expect that to do, do you think, or can you give us some view as to where you think that might go over the next couple of quarters?

On the costs in wealth management, down 6%. I'm trying to get my head around that, looking into the numbers you do give in private wealth management. It appears that [some of those] or compensation is pretty flat, but the down numbers are general and admin down 12% quarter on quarter, and, rather surprisingly, commission expense is down 15%. Can you talk about how much that impacted the 6% decline in wealth management and why?

Then perhaps finally, could you give us some comment on what's going on at Hedging-Griffo following the announcement last week of some of the changes there, and some of the asset managers moving and you perhaps providing some support to those individuals? Thanks very much.

Thank you, Chris. I think maybe I can take the first and the last question, and a little bit on litigation, and David can take most of the second and third.

Yes, obviously, the net new money number is quite strong, as you say; I think it's our strongest quarter in three years. Pretty balanced contribution, but a very strong performance in Asia Pacific where we had I think about CHF5 billion of net new money; that's about a 17% annualized growth rate. That was a very nice performance there, and we feel like the franchise out there has good momentum.

Switzerland was also quite strong with, I think, CHF4.5 billion, and again, we feel pretty good about that. But we did have contributions from the Americas, and also from EMEA, in terms of net new money, smaller but nonetheless pretty good contributions.

We did have continued outflows, as we've talked before, on the cross-border Western European business, so we had about CHF1.6 billion in the strategic businesses and probably another CHF0.5 billion, so about CHF2.1 billion of outflows in those areas that we spiked out for you guys in terms of those cross-border Western European outflows.

Sp probably still kind of on a pace is what we have already highlighted for you, but maybe a little bit lower than what we've seen. Generally, as you say, good strong performance, and I think some of it certainly due to a number of the things that we've developed in the business, the lending initiative on the ultra high side, has certainly helped. And so we're seeing actually, I think, good progress on that.

I'll let David talk a little bit more about the op risk uplift, but on the litigation side, as you know, clearly we've made some progress in getting some of these legacy issues behind us; the SEC issue, the FHFA, which was obviously the largest mortgage related issue that we have. We feel like we've obviously gotten some of that behind us; clearly, the biggest issue still is the DoJ cross-border issue that's been long outstanding and which we continue to work towards a resolution on. But I'll let David comment in a minute, on how that interfaces with the RWA.

I think on the Hedging-Griffo side, we're very happy to be able to announce this restructuring, but including basically having our Hedging-Griffo businesses that have been very successful, continue to be closely affiliated with the business. So one of the most successful managers in the market down there, Luis, continues to be very much affiliated with the firm.

We have an ownership stake in the fund, and we'll obviously still be a primary distribution engine for that fund. So generally, we're quite happy with the ability -- with having been able to restructure that in such a way that we still have a very close affiliation. And we think that's going to continue to be very good for the business. So David --

Then taking those two questions really. So firstly, just on operational risk, it's two separate factors. The first one, in the fourth quarter of last year, was related to litigation, inflation, i.e., basically the trend we're seeing everywhere, particularly in America, so towards higher cost, higher cost [for these issues].

And I think you know that that is [cap loaded] for CS at least, on the possible loss disclosure, so 25% of that. So that was the number that came through. As you rightly thought, that was about CHF6.9 billion in the fourth quarter.

The other issue, essentially, is that, for the last couple of years, we've been updating the M&A model for operational risk. That was approved beginning of this year, and basically it's just come in place. And that's a new model for operational risk. It's slightly more granular than the previous one, and it's separate to litigation risk add on.

So I wouldn't assume -- I think that's it basically, in terms of operational risk changes. And I don't think you'd assume it to change materially from this level, going forward. The litigation number is linked to the disclosure, but that's the variable issue on that one.

Just turning then, I think, to the expense numbers. So if we actually look at the detail of the numbers actually, I'd probably refer to page A5 in the earnings release. If you look for private banking and wealth management, you can see the number of employees actually dropped from 27,000, in the first quarter of 2013, to 26,100. So it's about 900 less people.

If we look at compensation and benefits, you can see it's dropped from CHF1,379 million to CHF1,290 million. And that was a small increase in terms of comp, because it's not as seasonal as the investment bank. And so if anything, I'd say the comp and benefits change there probably underestimates the reduction in managed comp.

The general administration reduction was CHF791 million down to CHF736 million. Yes, that is a combination of the expense measures, which you may have read about, relating to Credit Suisse, which are relatively extensive and which you're seeing in these numbers.

The slight drop in commission expenses, CHF199 million to CHF169 million, primarily reflects change in some of the payout ratios in relation to some of our external managers.

So I think the expense program for the Group is extremely wide ranging, not just in the private bank, but across the investment bank and infrastructure as well. I think it's fairly clear from page A5 that it's actually affecting all lines, all of the expense lines, both in terms of direct comp and in terms of the non-compensation side. Is that helpful?

Kian Abouhossein, JPMorgan.

A few questions. The first one is related to, coming back to slide 30, risk-weighted assets. Just wanted to see if the AVA regulation or /PVA, whatever you want to call it, is already in your numbers, because it's not stated in your annual report. Or if there's any adjustment that might come for that regulation.

And secondly, regarding risk-weighted assets on securitization, the increase in the risk weightings, is that related to the consultation document, or is this related to something else, and consultation document, when finalized, still will have an impact on risk-weighted assets for securitization?

The second question is relating to staff numbers. In the IB you've reduced staffing, at 19,500. Just wanted to see if you could tell me how much is strategic or non-strategic.

And secondly, should we expect a material increase in the third quarter, as you normally have new, younger recruits coming in? Or should we expect a continuous decline?

And the last question is regarding wealth management margins. Just very briefly, when you say trough, potentially, by the end of the first half, should we assume there could be actually an improvement in them? Or is it more that the run rate, assuming interest rates are unchanged, will be at the same level?

Perhaps if I start. When you're referring to PVA changes, are you referring to the potential valuation adjustment or the issue which popped up, which was the funding valuation adjustment, which I think was an issue which you may have seen from some other banks late last year, Kian?

It's the PVA, which is now called, I think under EU rules, additional valuation adjustment, but the same thing as a PVA, yes.

Yes, I don't think -- I can't really comment on the PVA; that's normally an internal capital model adjustment.

The FCA issue, I think, is certainly something we continue to look at. We're not convinced it's observable in pricing. But the PVA, I think, is a local capital reduction, but we can get back to you on that one. But I don't think we're expecting anything in terms of that, because I think you were referring to the ECB and the PRA's requirements for PRA actually for this issue.

I think your peer across the street is adjusting for it, that's why I was just wondering if you're making adjustment or not.

Can't comment I'm afraid, sorry. Certainly, we do include a PVA within our subsidiary accounts in London, because it's a PRA requirement, but that's not something I'm aware of for the Group.

In terms of the short securitization rules, we will not change on the basis of a consultation paper. We change on the basis of final requirements, so it was a change in the treatment of the short securitization positions. I think it's an industry-wide thing.

In terms of headcount for the investment bank, firstly, I'd just make a general point which is there isn't a great deal of correlation between headcount in the investment bank and costs in the investment bank, for two reasons. You're looking not just at direct headcount in the investment bank, but also allocated accounts, so you're seeing, for example, our IT and operations staff, as well as our direct office traders as well. So it's a combination of factors within that. And I think you know that we've been looking quite a lot at off-shoring recently, so that will also change the cost profile.

The second thing which I think probably is -- I appreciate that we have a very successful mortgage servicing business, which also includes quite a lot of headcount, which is I'd say, not that high cost, so that will also distort the numbers.

And then as you say, yes, we probably will see some pickup. We'll have the normal campus class that comes in the third quarter. But I don't think any of this is going to detract from the investment bank savings, basically, increasing back towards the target levels we expect to see over the next two years.

And then your final point, really, was on wealth management gross margins and net interest income. Certainly, from the point of view of the replication portfolio, we reached a trough in that in the summer, and it's basically linked to the curve 18 months out. So if you look at the curves 18 months ago, you can see that's basically when interest rates actually troughed.

Now they went up a bit and gone down a bit since then. The answer is we should see some increase in net interest income from the replication portfolio. Clearly, what that does to the total interest number will depend on how much lending we do and how big our stable deposits are.

For example, if they were to increase because people moved money back into cash, that will probably be not -- that would be probably negative for overall gross margin but be positive for net interest income. Clearly, if people moved away from cash, that would be negative for interest income, but probably good for our overall gross margins.

But on the pure point around the component of the net interest income that comes through our replication portfolio, it reaches its low point in the summer and it should increase moderately thereafterwards. How much it will increase will depend, basically, on long-term interest rates and where they go over the course of the next 18 months.

I think, as we said before, 1 basis point parallel impact is about CHF500 million in terms of net interest income. Unfortunately, we've not seen an increase of anything like that scale.

That's very helpful. If I may, just one more follow-up? On the 19,500, can you also give an indication how much of that is of the staff numbers in IB is strategic?

Sorry, not directly. It would be a difficult calculation to get to because it's not -- yes, the direct staff, that would be relatively straightforward to get, but the infrastructure is, you've got allocated costs within that, basically, and a lot of the infrastructure for the non-strategic unit is using people elsewhere in the Bank to actually support it. So it would be quite a complicated allocation calculation.

Stefan Stalmann, Autonomous.

I have three questions, please; first, subsidiarization. Are there any updates on any of the moving parts exactly? For instance, the Swiss subsidiary that set up their capital requirements in the Swiss subsidiary, etc. Also related to that, do you expect actually tax impact from that as you set up these slightly different corporate structures?

Second question, going back to the question of compensation accruals in the investment bank. Your slide 43 disclosure suggests that, in this quarter, you have accrued, or you have accrued for variable compensation of CHF538 million. In Q1 last year, it was CHF447 million. So you've actually increased your variable expense accrual by about 20%, while revenues were actually down. Is it fair to say that this delta of around CHF100 million year on year reflects largely your change in bonus accrual methodology in the investment bank?

Thirdly, and lastly, I should probably know this, but when did you move to 11% CET1 as a target, and when do you want to achieve this by? Thank you.

So taking those in order, in terms of the Swiss subsidiary, that's a program which, as you know, we've been working on now for about a year and we announced obviously in November, and it's expected to be live in about 2.5 to 3 years' time. So that's when it will actually start operating as an entity. I don't anticipate any particular change in the Group's capital requirements as a consequence of that, so no particular issues there.

In terms of the tax rate, we do think, at the moment, there could be some negative drag from the subsidiarization structure, actually more related to the AHC structure than the Swiss legal entity structure. However, I think at the present time, in terms of our current planning, we would expect to be able to mitigate most of that.

And candidly, probably in the context of things that affect our tax rate, the most important thing is actually the balance between how much money we earn in the Americas where the tax rate is around 40%, and how much we earn elsewhere, which is much lower; 20-odd-% in the UK, for example.

So frankly, the geographical mix of our earnings is likely to swamp any adverse impact from the change in terms of legal entity structure of the Group. But it is marginally negative but not much, 1% type thing. But as I said, we'll be working to actually mitigate that.

But also, Stefan, I'd just like to add, we announced this legal entity plan, structure, late last year. In our view, this is going to be a major issue for the entire industry to figure out how to rationalize our business across all the different regulatory jurisdictions that they operate in.

The fact that we had a clear blueprint and one that we're executing on, as David said, is something I think is a major achievement, and the fact is I'm not sure, I don't think I've seen anybody else lay out that blueprint. I think this is going to be a big challenge for the industry as a whole and the fact that we have a blueprint I think is something that's actually quite good. But go ahead, David.

And then the final point really would just be on the comp accruals. Yes, you're correct. The change in first quarter, CV accrued, is respect, one, basically, the change in terms of the proportion we're actually allocating to the first quarter as opposed to future quarters, and clearly, that's a forecast, etc., etc., but it's a higher proportion than we would have taken under the methodology we had a year ago.

And, two, as I said before, I think we're trying to move back towards a more -- perhaps towards a more even balance of cash with deferred compensation, I think mainly because, obviously, high levels of deferred compensation does lead to high fixed cost, going forward.

So those are the two primary drivers in terms of the year-on-year comparison.

And then 11%?

11%; I think we announced that actually in the third quarter, but perhaps one of my colleagues can correct me. But I think we said 11% as a CET1 ratio at that point.

I was still under the impression that you're targeting a Swiss core ratio of more than 10%, which is what the annual report says.

Yes. What we said --

I may have missed that.

The regulatory requirement in Switzerland, you're correct, is obviously 10% in terms of CET1, 3% in terms of high-trigger CoCos, and then around 4% in terms of low-trigger CoCos, or 3.66% in terms of low-trigger CoCos.

I think, in the third quarter, we said that we intended to move to around 11% level to provide about a 1% buffer, particularly against things such as RWA volatility because I think you know that some of the RWA calculations are pro-cyclical in the event of market volatility. So that's our guidance in terms of where we'd like to be. It's not a regulatory requirement; it just provides a guidance as to where we expect the buffer.

I think, prior to that, we talked around 10.5%, but I think we moved that up to 11% in the third quarter, not as a strict legal requirement but as a working buffer.

Right. Great. Thanks; very helpful.

Daniel Zulauf, Berner Zeitung.

I have three questions. The first is about the ForEx [cartel]. You have said that this investigation by the Swiss authorities was damaging for the image of Credit Suisse. I was wondering what measures you are taking in order to quickly shed light on the role of Credit Suisse in this possible cartel.

The next question is about the provisions you have taken recently; judging the last year's result, I guess it will be not easy to explain this quite weak last year's net income to the shareholders, and especially also in relation to the fact that compensation of the management executives have increased in this year. I would like to invite you to explain a little bit on this. In my view, it's a contradiction.

And lastly, I would like to have an assessment from you regarding this New York inquiry which is, apparently, getting more intense. According to reports today, I understand that this inquiry is being expanded over the private banking services. I would listen to your assessment with regard to this inquiry. Thank you.

Okay. Thanks, Daniel. Thanks for your questions. I think on the FX matter, I guess in general, just to reiterate what we've been saying, I guess the FX matter's probably been going on for almost a year now, I think, in terms of various regulators and different bodies looking into the practices in the FX markets.

I think, as you know, we actually have not -- we were never really that large of a player in the FX markets. In addition, we've obviously taken a pretty close look at the businesses and we've also had a number of inquiries and we've been cooperating in a number of different entities around the world in terms of the business.

So far, we haven't seen any material issues in our business. So in general, we feel like we don't have -- at least so far, we haven't found any material issues there.

So I think the issue, as you mentioned, of the [WICO] investigation that was announced here, I think, obviously, we're going to cooperate with that and we're going to do just like we do on all these things; we'll cooperate closely and provide whatever information we can.

I think the thing -- I think our reaction to that was just somewhat a result of the fact that I think they said that they had been looking into it for nine months before they announced the inquiry and we hadn't had a single contact with them over that period, so they had never talked to us, they had never asked us for anything.

So I think we were surprised to see that come out in the way that it did, particularly since we didn't see any issues and we'd had no contact from them.

Obviously, they have a right and a duty probably to look into any of these issues and we'll cooperate fully with them and we'll see where it ends up. But so far, we don't have any indication of any issues and I think probably, as you say, in terms of what we're going to do about it, I guess all we can do is wait and hope that the investigations, and this particular investigation, turn out the way that so far everything else we've found has, which is that we don't have any issues. So that's our hope.

With regard to the issues around the provisions that were taken in the fourth quarter, I guess the way we look at it is we think it is helpful and important to try to address some of these legacy issues, some of which, as you know, are from a long time ago, particularly the cross-border private banking issues are pretty old at this point.

I think actually addressing those and moving on is something that we think is the right thing to do for all concerned and obviously, we're working hard to try to do that. And I actually think that, as you say, subsequent to the end of the year, we made some good progress on a couple of areas, the FHFA and the SEC issue around cross-border which we then, because of the accounting rules, had to actually include back in the fourth quarter results. So we had no choice around that; that was really what we had to do. But we think actually that progress is good.

Even with the impact of these additional provisions, the reported net income for the firm is up substantially 2013 over 2012, so I hope that people will a) recognize that, I hope our shareholders will recognize that, and also will recognize that we are trying to move ahead on some of these legacy issues and get them behind us.

I think we've also done a pretty good job of, so far, knock on wood, avoiding any of the new issues that have been out there. LIBOR we've had no issues. I believe that also on the FX thing, as I've said, I've already outlined that, so I hope that's also recognized.

I think in general, on the compensation front for the firm as a whole, but also for the management team, I think we try to be pretty state of the art in terms of the structure that we've laid out, in terms of making sure it's aligned, making sure we have instruments so that management is clearly very much aligned with the shareholders and that there's a lot of transparency on it. So I hope that will be recognized as well.

Overall, as you know, for the whole Bank, total compensation was down year on year, even though the results were up quite a bit, and I also think total Executive Board compensation was actually down year on year. So all those, I think, are facts that probably need to be incorporated in people's thinking about it.

I think in terms of assessment on the New York inquiry, there is activity there, obviously we are providing information and working with them. We'll continue to cooperate and do that. It is with regard to the cross-border issues, so again, these are issues that have been -- we've had ongoing issues in terms of the SEC which have been resolved and the DoJ for many years now, so I think it's around similar issues, but we'll obviously see the New York State will determine what they want to look into and how they want to look into it.

I think at this point, yes, it's just very early in the process and we'll cooperate with them and we'll see where it goes. Again, I think we've been pretty clear about the fact that we had people who violated our policies and probably did things they shouldn't have done in the past, but I also think we've done a very good job of cleaning up the business, fixing it and making sure it's a compliant business, going forward.

I'm confident that, over the past five years, we've done a huge amount of work to make sure we have a compliant business and I feel pretty good about that. But obviously, we have to deal with these issues and we'll do the best we can. They're obviously difficult issues. They're very complex issues and they involve -- there are government to government issues, there are broader industry implications, so they're not easy to resolve, but we'll continue to work as hard as we can to get a resolution.

Jon Peace, Nomura.

I had a question about your dividend plans. The first is for 2014. Is there any subtle change in message around the dividend? I think, Brady, you said at one of the last public forums that you thought last year's dividend provided a base for future progression. Today, you say that the dividend this year should be at, or above, 2013.

I'm just thinking, with some of the RWA inflation, the new 11% target, perhaps the intentions to retire more Claudius, we should just lower our dividend expectations this year to be flat and then see where we go with the markets.

And then, as we think to 2015, most banks these days have a payout plan, a specific payout target, [people own] asset managers for the dividend potential. How do you think about your long-term dividend payout? Thank you.

I think firstly, just a few points really of clarification. Yes, I think firstly in terms of Claudius, we redeemed the first tranche last December and that was done. I think you know, in February, we obviously pointed out that it wasn't fully regulatory compliant and that obviously led, shortly thereafterwards, to us actually launching a tender for the remaining Claudius II tranche to which I think there was 93% acceptance, and we actually then redeemed the rest on 18 March. But I don't think Claudius really has any direct relevance to our dividend decisions for 2014, but it's kind of gone, basically, full stop, really, in that sense.

I do think the 11% is not new and is not intended to be new. It was a plan in fact we put in place in the third quarter of last year and that doesn't actually change. And I think, therefore, the bottom line, in terms of what we've said, which is that it's our intention to -- we understand how important this is to our shareholders' intention to make cash dividends at or above 2013 levels, I think, is just a rewording of what we said before around 2013 as being a base that is important to us in terms of what we pay to our shareholders and what we recommend to the shareholders to be paid, in that sense. But, Brady, do you want to comment beyond that?

Yes, I'd probably just say it's simple. I don't think there's any change.

Yes, that's better, actually (laughter).

Did you want to address -- in terms of an ultimate 2015 or payout target, as you know, that's something that people have been raising and asking about. It's not something that we have laid out at this point, so it's obviously something that we'll continue to think about, but at this point --

Although I think the mathematics, though, should be relatively clear, which is that we've laid out a long-term target for risk-weighted assets of CHF250 billion, leverage exposure of CHF1 trillion, that we are going to limit the amount of RWA and, therefore, capital usage of the investment bank to the level we had last year. And, therefore, we will generate significant net cash debt for our shareholders at that point.

In terms of usage for that, given we're limiting what we actually invest in the investment bank, it really comes to how much we choose to grow the private banking business. Now, I think the lending initiative's got off to a great start but, as you said earlier, basically, CHF3.4 million lending, that doesn't actually require that much risk-weighted assets.

So I think we would like to see the capital usage go up in the private banking business, obviously commensurate with maintaining mid-30% type return on capital, which is our target for that business. But I think it's inevitable, therefore, that we'll end up with surplus capital above what we can use in the private banking division.

Given that we've said we're going to cap what we actually have in the investment banking division, I think that does imply that we should be able to generate significant capital, both to reach our 11% target but also to, I think, provide appropriate returns for our shareholders. Is that fair?

Okay. Thank you.

Jernej Omahen, Goldman Sachs & Co.

I've got two clarification questions left, and then two questions on a slightly different topic. So the first one, David, can you just please explain the deferred tax asset reduction in, you mentioned the change in New York State tax, and the impact that has? I definitely missed that, so if you can just walk us quickly through how that works?

And then, going back to the very first question which was asked on this call in relation to the high frequency trading, I think the question that Huw was asking is what proportion of your equity revenues that is today. Can you give us a sense of what that is? I think the sense in the market it is anywhere between 5% to 8% of your total equity revenue, but can you update us on that?

And then the third and the fourth question would be on the leverage ratio. You're at 3.2% fully phased Basel III, and you're at 3.7% Swiss and the Swiss requirement is 4%; the US went to 5%. And I think the Chairman of the bigger Swiss bank -- or, sorry, the Chairman of UBS seemed to suggest that he finds it very likely that Switzerland will follow the US on that topic, if you could just comment on that?

And, finally, on Lombard loans, I think it's a good thing that they are coming back because it tends to be a high return product. Can you just give us a sense what the proportion of -- or what the amount of outstanding Lombard loans was in 2006/2007 and where it is now and where you think this could go? Thanks a lot.

I think there's two points, really. Firstly, just under IFRS or US GAAP, no matter, it's the same in both treatments, we obviously have tax losses in the US and other locations, and those tax losses create a deferred tax asset, depending on the tax rate that's prevailing at that time.

If that tax rate is subsequently reduced, that means the rate at which we can capitalize that tax rate has to come down and, therefore, you have to write off that deferred tax asset proportionate reduction in the tax rate through the face of your P&L.

Now, the New York State on March 31 reduced their relevant tax rate. I couldn't quote the numbers [off the top of my head], but it's in the order of 1%/1.5%. As a consequence, obviously, the capitalization rate dropped and that resulted in a writedown of deferred tax of CHF151 million. So that was signed, I think, by the governor on March 31, right at the end of the first quarter, therefore it's a first quarter relevant statistic.

David, what's that as a percentage of total DTAs you have in the US? What was the percent writedown?

I couldn't answer that off the top of my head.

Don't worry.

I think, if you look at the other US banks that have already reported, I think you will see both banks have also taken similar writedowns in deferred tax in their numbers and the headlines as well. So it's not unusual in that sense. We can probably get back to you on that, actually. It's not a (multiple speakers) number.

Yes, sure. Thanks a lot.

I think, on the high frequency trading, to be honest with you, I don't even know if we'd know how to answer the question of what proportion of our revenues is actually high frequency traders. I would think it's extremely low, so I would think it was relatively immaterial.

If you're talking about our automated execution business generally, which is obviously, the vast bulk of the volume on that is from normal users of it, I think probably all electronic trading in equities is probably something like 15% to 18% of the total revenues in that business.

So of the CHF4.8 billion in equities, yes? The run rate for equities this year is CHF4.8 billion and last year was CHF4.8 billion (multiple speakers).

Yes, so that's total; that's all of our electronic execution for all customers. For every customer; that's everybody. So as I say, I would think the -- I don't even know if we could -- the question -- it's one of the things that's a bit of a misnomer is that I'm not exactly sure how you exactly define a high frequency trader.

There's lots of varying definitions of what that is, but for our whole electronic platform, that's what it would be, and obviously that's an increasing proportion of how all business gets done in equities. So I think the HFC portion would be, I would say, de minimis.

All right. Thanks a lot.

And then, David, do you want to address the leverage?

Just to put it in numbers, I think, in terms of different ratios, so as at the end of the first quarter, our BIS total capital leverage ratio was 3.8%, and that is calculated on a look-through basis. I think the number you're referring to was the BIS Tier 1 leverage ratio which was 3.2%, but our total capital ratio on a BIS basis is 3.8%.

Actually, our Swiss total capital ratio is marginally lower at 3.7%. There's a marginal difference which is, the Swiss treatment is slightly harsher, actually, than the BIS treatment. So those were the two starting point numbers. And that's clearly based on CHF42 billion of total Basel effective capital, so that's CET1 plus CoCos. And if you're talking about Tier 1, that's based on CHF35.9 billion of etc., etc.

Now in terms of where we go from here, I think there's probably two points to make. Firstly, as we said, 11% as our CET1 target, so everything else being equal that would add about CHF2.5 billion to our CET1 basis, so that would get to about CHF44.5 billion. I think we've been clear that it is our intention to complete our CoCo issuance during the course of 2014 which will probably involve about another CHF2 billion or so in terms of issuance, plus/minus basically.

That would put us at around about the sort of CHF46 billion in terms of total Basel effective capital. And against a CHF1 trillion leverage target, that would give us about 4.6% as being the long form state in terms of that. So I think that clearly isn't that far from the sort of numbers you talk about, under the US rules, which is about 5%.

And my understanding, which may be incorrect, is that the proposed US rules are very similar to the proposed BCBS rules, so you're cutting out some of the regulatory arbitrage we've seen before this. But this is going to be a common approach in that sense.

So that's mathematically where we are. I think in terms of the Swiss debate, I don't think we can really comment on what other individuals have said. I do think that the debate is still very much heading in the [GLAC] approach, as we talked about a couple of quarters ago, that essentially the [gone] concern loss absorbing capital ratio which will be a requirement for a Swiss bank.

And in fairness, this is an FSB proposal, so it's not just a Swiss proposal to have a certain mandatory requirement in terms of the amount of bail-in senior unsecured debt they actually have in issuance.

Now at the moment, basically, if you put that together with that CHF46 billion, that would probably be something in the order of about CHF90 billion in terms of the amount of gone concern loss absorbing capital we actually have on that definition.

The denominator, the GLAC is unclear, it might be total exposure, it might be on balance sheet. Clearly if it was on balance sheet, then on that basis we'd be around the 10% mark already in terms of our GLAC requirement. If it was total exposure then I guess it would be about 9%.

So I think that just puts the numbers in context and we'll see where the debate goes. But I think the GLAC concept is more fundamental on leverage ratio because it does actually formally enshrine bail-in senior debt as part of the CapEx structure of the Bank in that sense.

Thank you. And just on the Lombard loans?

I can't give you the numbers for 2006/2007, but we can probably get back to you on that. One thing I would point out is, Lombard loan penetration is relatively low; it's less than 5% of assets under management at the moment. Even if we look at a ultra high net worth it's only about 8% of assets under management.

So I think, if you think about the potential we have here to actually grow our lending in this space at a margin which I've said is in excess of 100 basis points, it's clearly significant and it's something that can be risk managed and deliver appropriate returns.

And, David, just finally now. So on the economics of a Lombard loan, you charge a customer a spread on the loan, then that is treated as a private banking asset under management. So you charge a fee on that, I imagine, plus you expect the customer to transact once they get the cash so you charge that transaction fee as well, right? So the profitability of this product, I imagine, is very high. So if Lombard loans pick up from here the margin should benefit?

I'm not going to comment specifically. I think we've said that it is in excess of 100 basis points. Clearly, the pricing would depend of the type of risk actually involved, but I think that's good. What we were clearly pointing out is that, if you have a lending relationship with an ultra high net worth client, then that is clearly part of a much broader relationship; completely separate from the lending relationship, you'll be doing other business with them as well.

I think it's also the One Bank thing as well, because these type of customers are very interested in total bank services. So it drives both our investment bank and the One Bank. And I think as we said, collaboration revenues are something which was a particular fact in the first quarter [in that sense].

Thank you very much. Thanks.

Robert Murphy, HSBC.

I just wanted to come back to slide 18, on returns in the investment bank. Obviously, you show a return on Basel III capital here, but I'm just wondering how you're thinking about the economic return because clearly, in terms of the tangible equity required for that business, it's the amounts for the RWAs plus deductions. And if I look at Group deductions, tangible equity down to Basel III capital fully loaded is about CHF14.6 billion.

Let's just take a guess that 80% is in the investment bank. That would bring the economic return in that business to maybe 8% for Q1 for the whole business. And perhaps even more for the strategic, given that the DTAs obviously have to be supported by profit making businesses. So I'm just wondering how you think about the economic return versus what you're showing on that slide.

Well, I think just a tad. What we're actually showing here is our internal calculations, so we actually gross up RWAs for deductions. So what the business sees essentially is a grossed up RWA number, and we take 10% of that, and then obviously an average of that and the leverage ratio.

So essentially, the business actually sees an economic return, whether it comes through as an RWA number or as a grossed up deduction. So it's neutral in that sense. I think, clearly, in terms of the equity that the Bank use, the fact we're at 10%, means that it matches at that point. But internally, the numbers we're showing here, they're grossed up because if we think about internal [OS] we wanted people to think about the total risk they're using as opposed to just one component of it.

So the deduction you're applying there is relatively small then, right, because the total deductions between the Group and Tier 1 are CHF14.6 billion from tangible equities? If you gross those up, you'd be on nearly CHF200 billion or something for the Group (multiple speakers).

I think what you have there is the goodwill and the deferred tax, so we look at the Bank and we say you're effectively using CHF280 billion of risk-weighted assets, [CHF28 billion] of CET1, and you can see basically numbers that's effectively what we have. The difference between what is effectively the regulatory capital we actually use in our shareholders' equity is composed of shareholders' equity, DTA and goodwill.

The reason that, obviously, is very confusing in our accounts, of course, is because you have this thing between phased-in actual look-through, because what you're seeing is the actual -- if you actually look at, purely at the actual look-through, you've got around about CHF28 billion, CHF27.5 billion, CHF28 billion of CET1, and that's 10% of the RWA we actually apply to the business.

So that obviously excludes deferred tax, pensions and that kind of stuff. It's as you might say, the position risk, operational risk and credit risk within the business.

Right, but on the look-through you're not grossing up the RWAs?

We are using the grossed up RWAs (multiple speakers)

Maybe we'll take it offline here. I don't understand the difference between those numbers, but thanks anyway. I don't want to take up time.

No, I think, Rob, you're actually right. The confusion in the external essentially is unfortunately, or whatever, the phased-in one is the one we have to actually report to. So you get this kind of -- but when you actually look through it, it's actually quite -- it's more what we actually gross up then is the specific deductions. So for example --

No, I was looking at the phased-in versus the fully phased. I was looking at the tangible equity relative to the Basel III.

I think it's probably better [to take this offline].

I do think it's slightly different. Okay, thanks anyway, guys.

Andrew Lim, Societe Generale.

First one on the net margin on page 12. I'm just trying to gauge to what extent that's improved due to expense reductions, but also versus the mix effect as you have more ultra high net worth clients. Perhaps you could say what the net margin is for ultra high net worth clients versus other clients, and how that's changed over the past few years, if not quarters?

And then secondly, on Kian's question on all of these methodological changes, it just seems to me that suddenly we're having this proliferation of changes which are inflating risk-weighted assets, whereas in the past banks were allowed to get away with changes that were beneficial. And I'm just wondering what's the regulatory driver for this? Is it the ECB putting pressure on banks across the board or the Basel committee? And is this in the anticipation of the forthcoming Basel 3.5 or Basel IV regulations to come?

And then lastly, I think I might have asked this question in the past before, but regarding your returns on capital stack as part of the leverage ratio, it doesn't seem to me that there's any restriction under Basel III or the Swiss regulations as to how much hybrids you can use for the numerator. So what's to stop you from issuing lots of hybrids as part of your capital stack there and really ramping up your leverage ratio in a much faster fashion? Many thanks.

In terms of methodology changes, I think there's two parts. Firstly, I think, as we disclosed in our reports, we did have significant methodology changes actually in 2013. I think people focus on the operational risk add on, the CHF6.9 billion, but I think the total, from recollection, was around about CHF17 billion. So it's not new in that sense.

What you're seeing, essentially, is really as the Basel III methodology actually evolves, you're seeing a number of consultation papers and also refinements amongst the regulators, how they treat certain assets. And as that comes through, you generally see -- we've seen some increases this quarter.

However, it's clearly also true that, as new models are actually approved under Basel III, sometimes you get increases, so the new M&A model for operational risk. We are anticipating some significant reductions actually later in this year, provided those models are approved, which we would expect at that point.

So there is some general inflation, yes, CHF17 billion then, and obviously we talked about the increases this quarter as well. But I think we will see some contras against in terms of that.

And I think that's all I can really say in terms of this. I think it's certainly true that the Basel rules are not necessarily final. It's certainly evolving because of the sheer complexity of those and as the regulators agree their approach.

I think the second point is that we've not disclosed the net margin ultra high net worth formula and we're not going to today. I would simply say that, as we've said on many times, the pretax margin on ultra high net worth business is higher than the average margin for the business, and that remains the case.

Clearly, given measures such as we said, basically, in terms of penetration of Lombards, less than 8% for this group of clients, we obviously have some potential to actually improve that net margin further to the extent we increase the penetration with those type of products, basically.

I think the mathematics in that margin are in the numbers. Essentially, it's a mixture of efficiency and in terms of the gains we've had with the clients. I think it breaks up into those two components. But we're not going to give that margin now in that sense; it is simply higher than that.

Clearly, we always look at disclosure in this space and that's why we gave the lending thing [in the numbers] because I think it's in that focus, but that's where we are at this point on this.

And in terms of -- his last question was with regards to the capital stack. Why couldn't we just issue more hybrid CoCos, etc., in order to improve the leverage ratio? Are there any restrictions on composition?

There are some restrictions. Under high-trigger CoCos, essentially it's a limit of about 3%/3.5% in terms of that. And under low trigger, I think there are some further restrictions, but we're probably not there at this precise moment.

But certainly you couldn't carry on actually boosting -- but definitely at high trigger there is a specific limit; low trigger, I think it's probably the Swiss legal requirement in the sense of that. After that, you can issue them but they don't necessarily get recognized. There would be no limit for us, for example, in issuing more high-trigger CoCos. It's just once you get beyond about 3%/3.5%, they don't get recognized for capital purposes.

Right. Thank you very much.

Kilian Maier, MainFirst.

This is a question on litigation. There is no full quarterly report for Q1, but still, if I look at the Q4 report, then you put the number for reasonably possibly losses that are not covered by existing provisions. That was zero to [CHF2.2 billion] when you reported Q4.

Subsequently, you took these two litigation charges related to the SEC and the mortgage issue of CHF275 million and around CHF500 million. And when you published the full-year report, then the estimate for reasonably possibly losses was increased to zero to [CHF2.4 billion]. So my question would be, what has been driving this increase in the range after you took the material additional provision?

Thanks for the question. I think, as you say, the number did go up slightly and that was after a couple of issues were settled. I think all I can say is one, there weren't any major new matters that we added to it. I think it's actually just a -- again, it's always an assessment that we make.

It's a conservative assessment in terms of the possible losses there. And that's where we came out, so there's not much more than I can say to it actually. But there weren't any major new issues that were added to it, but that's where our accounting and legal teams came out when they analyzed the issue.

Okay. Thank you.

Holger Alich, Handelsblatt.

Just a quick one; what is exactly the reason why you can't publish a full-blown financial report for the first quarter? The background of my question is because it's after the presentation of the results of the first quarter, you twice reviewed your results, especially with the new US tax provision. So is that the fact that you didn't publish a full-blown report a hint that there might come some new corrections in the near-term future?

No, what we decided to do this quarter, essentially, is to move to the British reporting style, which is what the US banks do. So we're publishing an abridged report now and we will make our full filing with the SEC on or around May 2, which I think is also slightly earlier than we used to before.

But just in terms of practical delivery, we haven't completed all the supplementary notes which are required under full SEC filing. And that will be done between now and May 2, but that's it really.

Yes and, as you know, this earnings announcement today is, I guess, about 2 weeks earlier -- 1.5 weeks earlier than what we normally would have done and 1.5 weeks earlier than some of the other European banks, as you know.

So our view is that it was actually probably helpful to get out early to people with what's a fairly extensive but not the full report, as you said. And then that, obviously, follows in early May, but it is a 1.5 weeks earlier than we normally would have reported.

Yes, because our historic approach was to publish a quite extensive report and then there'd be an even larger one which actually is filed with the SEC on May 2. So we're now doing the abridged report, which is I think probably as or more extensive than US banks, and then a single report to the SEC, as I said, on or about May 2.

Okay. Thank you.

But also just to make clear, it's got nothing to do with the issue. This was a long-planned change in our reporting style. So it has nothing do with any other issues.

I think we agreed to it a couple of years ago.

Yes. And, again, the idea being that, hopefully, this is more investor and analyst friendly, in the sense that you get the information sooner and, hopefully, it's helpful. But thanks for your question.

There are no further questions. Please continue.

Okay, well, I just want to thank everybody for calling in and for your questions and for your attention to the first quarter results, and thank you 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.