Credit Suisse Group AG (CS) 2014 Q3 法說會逐字稿

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group third quarter 2014 results conference call. As a reminder, all participants are in a listen-only mode and the conference is recorded. (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 third quarter results call. Before we begin, let me remind you to take note of the important disclaimer on slide two including the statement on non-GAAP measures and Basel 3 disclosures.

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

Thanks very much, Christian. Welcome, everybody. Thank you for joining our third quarter 2014 earnings call. As usual, I'm joined by David Mathers, our CFO who will deliver the results portion of today's discussion.

We delivered a good performance in the third quarter. Our results demonstrate further progress in the execution of our strategy and continued strong momentum with clients across both of our divisions.

We reported net income attributable to shareholders of CHF1b for the third quarter and a return on equity of 10%. For the first nine months of this year, reported net income was CHF1.2b.

For our strategic businesses, we reported net income of CHF1.1b for the quarter and a return on equity of 11%. And for the first nine months of the year, strategic net income was CHF3.8b with a strong return on equity of 13%.

Turning first to private banking and wealth management. Our profitability in private banking and wealth management benefited from continued cost discipline, although margins remained subdued and revenues continued to be impacted by the low interest rate environment.

The strategic businesses of private banking and wealth management generated pre-tax income of CHF900m, an 8% increase from last year's third quarter, and reported a continued high return on regulatory capital of 27% for the quarter.

In our strategic businesses, we generated net new assets of CHF8.8b in the quarter, driven by growth in emerging markets particularly in Asia Pacific. This strong growth was partly offset by continued outflows from our Western European cross-border business, due to the importance we have placed on regularizing our asset base.

In Asia Pacific alone, we generated net new assets of CHF6.2b in the quarter, at an annualized net new asset growth rate of 19%. Our overall results in the APAC region were robust driven by the successful collaboration with the investment bank and the ongoing expansion of our franchise with increased footprints in Greater China and Singapore.

Our continued cost efficiency measures helped us sustain our net margin in wealth management clients at 27 basis points despite the continued low interest rate environment and higher average assets under management. This excludes certain litigation provisions taken in the quarter.

During the quarter, we made further progress on executing our strategic initiatives in developed markets including the ongoing regularization of our asset base, improved cost efficiency and the completion of the sale of our German onshore business, which we'll give you more detail about shortly.

Going forward, we plan to continue to address our clients' changing needs and invest in growth initiatives amid the various cyclical and structural changes in the industry.

First, our lending initiative. In the first nine months of this year we saw strong growth in our ultra high net worth lending initiative with good momentum across both emerging and mature markets. We recorded CHF3.9b in net new lending compared to CHF1b in the first nine months of last year. To capitalize on this strong growth potential, we are adding further product capabilities to our lending offering.

Second, we are investing in sophisticated technological solutions to launch a comprehensive and differentiated digital client interface for all of our client segments.

Third, we are improving our sales effectiveness and hiring relationship managers in select markets to further enhance our client coverage while maintaining our cost discipline.

And fourth, we are upgrading our mandate offering suite including the launch of Credit Suisse Invest, a new range of advisory services. More specifically, this allows the client to select an offering that matches his or her personal preference as it relates to the breadth and frequency of advisory services offered.

With these initiatives, we believe we are well positioned to cater to our clients' changing needs and to capitalize on our full growth potential in these franchises.

Looking now at the investment bank. The results for our strategic businesses reflect substantially increased profitability and improved returns, with strong client activity and sustained market shares across most of our businesses. This quarter, our strategic businesses generated pre-tax income of CHF1b, up 43% compared to the last year's third quarter. Net revenues were up 24% and we reported a return on regulatory capital of 17%, demonstrating the stability of our franchise.

We had strong results in fixed income with sales and trading revenues up 50% from the third quarter of last year. This increase was driven by more favorable trading conditions and robust client activity. In particular, we saw significantly higher emerging market revenues and continued strength in our high returning securitized products franchise.

In equities, we reported stable revenues as higher derivatives revenues were offset by more muted trading volumes.

And in our underwriting and advisory franchise, we saw continued momentum driven by robust origination activity including a number of high profile client transactions. One of them was the landmark $25b IPO of Alibaba Group, the largest IPO in history where we served as a joint book runner.

We continue to work towards increasing the capital and cost efficiency of our strategic businesses in investment banking and reported a return on regulatory capital of 19% and a cost-to-income ratio of 69% for the first nine months of the year.

Going forward, we plan to continue to focus on allocating resources to our market-leading and capital-efficient businesses where we expect to generate consistently high returns. We expect our repositioned macro franchise to generate improved profitability and allow further reductions in capital.

Additionally, we intend to focus on supporting the growth initiatives in private banking and wealth management, by further optimizing our product setup and delivery for these clients.

Now to slide five. Looking at our non-strategic portfolio, we made further progress in winding down positions in our non-strategic unit and are on track to reach our deduction targets for end 2015.

In investment banking, we reduced risk-weighted assets by $2b and our leverage exposure by $11b during the quarter. And in private banking and wealth management, we completed the sale of our domestic private banking business book in Germany, which was the primary driver for pre-tax income of CHF71m in our non-strategic unit.

This brings me to capital and leverage. We're executing the capital measures announced in May to fully mitigate the impact of the US cross-border litigation settlement. As at the end of this quarter, our look-through CET1 ratio stood at 9.8% compared to 9.5% last quarter. We remain on track to improve this ratio to above 10% by the end of the year.

We reduced risk-weighted assets by $10b in the quarter across both our strategic and non-strategic investment banking portfolio. However, the appreciation of the US dollar against the Swiss franc more than offset these business reductions in Swiss franc terms. It's important to note that there is a minimal impact on our capital ratios from this FX movement as underlying capital and exposures are approximately hedged.

We're continuing to execute real estate sales and business divestitures which are expected to generate about CHF300m of capital by year end, with the remainder to come through in 2015.

Our capital measures include the continued accrual of cash dividends for 2014. We remain committed to returning approximately half of our earnings to shareholders through annual distributions, once we reach a look-through CET1 ratio of 10% and as we continue to accrete capital towards our 11% long-term target.

And finally, our look-through Swiss total capital leverage ratio improved to 3.8% during the quarter bringing us within reach of the Swiss requirement of 4.1% for 2019. And we target to further increase this ratio to approximately 4.5% by the end of 2015.

In terms of an update on the fourth quarter thus far, we've seen a mixed start to October, with recent market volatility benefiting certain businesses across both divisions while negatively impacting others. We have a strong advisory and underwriting pipeline, but the pace of execution in the fourth quarter will clearly depend on market conditions.

Now moving to slide six. We wanted to update you on several ongoing and upcoming regulatory initiatives and the significant and proactive steps we've already taken to address them.

First, let's discuss the ongoing trend toward tax transparency which has led the global and industry wide regularization of undeclared assets. Credit Suisse first started to address this issue a number of years ago. Since then we've taken numerous measures to ensure compliance across jurisdictions. Additionally, we've undertaken a number of strategic initiatives to address the margin compression and changing client mix that resulted from this regularization trend.

Given our proactive measures and the importance we place on the regularization of our asset base, we had approximately CHF30b of outflows from our Western European cross-border business between 2011 and 2013. In the first nine months of this year, we've had additional outflows of CHF7.7b and we expect regularization outflows to continue through 2014 and 2015 at the rate of CHF10b to CHF15b per annum. Thereafter there will likely be additional outflows though at a slower pace.

In spite of these outflows from regularization, we were still able to generate strong strategic net new assets of CHF94b between 2011 and 2013 and CHF37b for the first nine months of 2014. We continue to target an annualized net new asset growth rate of 6% for our wealth management clients business over the long term once these regularization outflows have been diminished.

Additionally, we were able to mitigate some of the pressure on our margins by rationalizing our expense base. We also continue to reallocate resources to areas where we see the greatest growth potential including the ultra high net worth clients business and emerging markets.

Turning to the current regulatory proposals regarding capital and leverage. Over the past few years, regulatory capital and leverage frameworks have continued to evolve across the globe. We've responded to the evolving regulatory requirements at an early stage and have reduced our look-through leverage exposure by CHF199b or 14% since the third quarter of 2012 despite adverse FX movements. We also reduced risk-weighted assets across the bank by CHF84b or 23% since the third quarter of 2011.

As we continue to wind down our non-strategic unit, we target an additional reduction of CHF51b in leverage and CHF8b in risk-weighted assets by the end of 2015.

In addition, we've substantially strengthened our capital position in recent years, aligned our capital structure to the new regulatory frameworks and issued CHF18b in CoCos. We're on track to reach the Swiss CET1 capital requirements for 2019 and are making progress towards our risk-weighted asset reduction targets. And with the revised leverage target we announced today, we've set out a clear path to further accelerate the improvement of our leverage ratio.

And finally, another topic that regulators are focused on is recovery and resolution planning. The Financial Stability Board published a proposal calling for an increase in loss absorbing capital, total loss absorbing capacity or TLAC. This is likely to require the issuance of bail-in debt out of bank holding companies.

As you know, Credit Suisse today already has a holding company structure in place and a year ago we announced our plan to further evolve our legal entity structure in line with regulatory requirements. Our aim is to have a single funding entity for the Group and the execution of that plan is well underway.

We currently expect to issue our first bail-in debt out of an entity linked to our holding company sometime over the next 12 months. The additional cost of these issuances are still an open question, but are expected to be manageable. Based on our current assumptions on both the volume of required TLAC issuance and an assumed issuance premium, we expect the cost of issuance to be materially offset by savings resulting from the run-off of legacy instruments.

Before I turn it over to David, let me just very briefly sum up. We delivered a good performance in the third quarter and continued to see strong momentum of clients across both divisions. In private banking and wealth management, our profitability benefited from our ongoing cost measures and we saw strong net new asset growth. Our investment banking results were driven by increased client activity and we continued to make progress in winding down our non-strategic unit.

The implementation of our capital measures is on track and we're continuing to proactively respond to the developing regulatory proposals and requirements. Our intention remains to return approximately half of our earnings to our shareholders once we reach a look-through CET1 ratio of 10%.

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

Thank you very much, Brady. Good morning, everybody.

So I'd like to start please on slide eight, with an overview of the financial results.

In the third quarter, we achieved revenues of CHF6.3b and pre-tax income of CHF1.6b from our strategic business lines. We had a cost-to-income ratio of 73%. The after-tax return on equity was 11% in the strategic businesses and net new asset inflows CHF8.8b.

On a total reported basis, we achieved pre-tax income of CHF1.3b and net income of over CHF1b in the third quarter, equivalent to an after-tax return on equity of 10%. If we exclude the impact of fair value adjustments due to the movements in our own credit spreads, we achieved an after-tax return of 7% in the third quarter.

Slide nine. So in this slide we show the quarter's results measured against the various Group and divisional KPIs that we've set. Our Group's strategic return on equity of 11% compares to our target of 15% and the strategic cost-to-income ratio of 73% is now approaching our target of 70%.

In the private banking and wealth management strategic business lines, we achieved a cost-to-income ratio of 69% in the third quarter compared to 72% in the third quarter of 2013.

Net new assets in our wealth management client business grew at an annualized rate of 3% in the third quarter which is in line with the expectations that we've given before.

The investment bank achieved a cost -- strategic cost-to-income ratio of 70% in the third quarter and 69% year to date which again is in line with the 70% target we've set for the division.

Let's now turn to private banking and wealth management division and look at it in more detail please on slide 10. In the third quarter, the strategic businesses achieved a pre-tax income of CHF0.9b, 8% up on the third quarter of 2013 which was driven by a reduction in our expenses.

In what's usually a seasonally weaker quarter, collaboration revenues were strong, particularly in the Asia Pacific region and brokerage fees improved year on year.

In the first nine months of the year, we've now reduced expenses in the strategic business lines by 7% compared to the same period last year, which takes us closer to our savings target for the division.

Please note these results include provisions relating to specific legal issues totaling CHF41m in the wealth management business in the third quarter.

Slide 11. Net new assets in the third quarter for the strategic businesses remained solid at CHF8.8b. And that's after Western European cross-border outflows of CHF0.7b in the third quarter within the strategic businesses.

The wealth management client business saw strong inflows of CHF5.8b, with a further CHF3.3b in the asset management division which was driven by inflows in the emerging markets and in alternative products.

Slide 12. The wealth management client business achieved pre-tax income of CHF536m in the third quarter, an increase of 5% compared to the third quarter of 2013, but below the level of the second quarter.

Net revenues were slightly down compared to the third quarter of 2013 as solid growth in transaction revenues were partly offset by reduction in net interest income, with recurring fees stable. Expenses were down 3% compared to the third quarter of last year notwithstanding increased litigation provisions.

In the first nine months of the year, pre-tax income increased by 6% to CHF1.7b compared to the same period in 2013. This was driven by a 7% reduction in expenses more than offsetting the decline in net interest income.

Slide 13. Let's look in more detail at the asset inflows in the wealth management client business. Asset inflows in emerging markets were strong with inflows in the Asia Pacific region growing at an annualized rate of 19% in the third quarter.

In Switzerland, we've seen a normal slowing down in activity during the second half of the year. That said, excluding one particular large client outflow in the third quarter, our net new assets were broadly stable in the country. I'd also like to point out that overall inflows in Switzerland for the first nine months of the year were strong at CHF6.1b.

Within the Americas, growth in our Latin American business was more than offset by outflows in North America where we continue to be focused on repositioning the onshore business towards increased profitability.

Total Western European cross-border outflows stood at CHF1.5b in the third quarter, CHF0.7b of which was reported in our strategic business lines and a further CHF0.8b in the non-strategic unit.

Whilst cross-border outflows in the third quarter was lower than what we saw during the first half of the year, we would still like to reconfirm our expectation that we will see CHF10b to CHF15b per annum in outflows during 2014 and 2015 resulting from the focus on the continued regularization of client assets.

Further, as we've announced before, we'd expect continued outflows in Western European and other regions in 2016 and beyond, albeit at a slower pace than what we expect to see in the next year or so.

We'd also like to remind you we've been generally very successful in retaining net client assets throughout this regularization process.

Slide 14. On this slide we're providing an update on our lending initiative to the ultra high net worth client segment. Over the first nine months of the year, we increased lending to this sector by CHF3.9b compared to CHF1b in the first nine months of 2013.

We're generating loan growth in all regions having achieved CHF2.8b net new lending so far in emerging markets, primarily driven by loan growth in the Asia Pacific region. This initiative continued to drive the growth in net new assets in the ultra high net worth client segment which totaled CHF15b for the first nine months of the year, up 50% compared to the same period of 2013.

Slide 15. Our reported net margin on assets under management decreased by 1 basis point from the third quarter a year ago to 25 basis point, reflecting CHF41m of litigation provisions that I mentioned earlier. Excluding these provisions, the net margin stood at 27 basis points for the quarter and 28 basis points for the first nine months of 2014.

In terms of the revenue composition for the quarter, transaction and performance revenues were stable, with seasonally lower client activity, but offset by growth in the emerging markets. Recurring commissions and fees were stable year on year and up quarter on quarter due to higher discretionary mandate fees, higher investment account and service fees and the appreciation of the US dollar.

The decline in net interest income in the third quarter this year when compared to last year was driven by the impact of the low interest rate environment and our replication portfolio. However, in line with the earlier comments that we've made on this subject, the adverse impact from the replication portfolio should bottom out in the second half of this year. And as you can see, net interest income in the third quarter was stable when compared to the second quarter this year.

Just finally, I'd like to point out that our ultra high net worth share of assets under management has now increased to 48% in the third quarter.

Slide 16. On the left-hand side of the graph you can see the factors affecting the net margin on assets under management during the last year. The appreciation in the market value of assets under management, which is of little immediate benefit to our revenues, and the continuing shift in the client base have adversely impacted our net margin by 2 basis points.

Assuming a stable level of assets under management, net margin was also negatively impacted by 4 basis points from lower net interest income and reduced fee-based revenues.

These adverse impacts, however, were more than offset by the continued progress in delivering cost efficiencies, driving the net margin up to 28 basis points over the first nine months of the year. If we then include the litigation provisions that I've mentioned before, the reported net new -- the reported margin stood at 27 basis points.

Combined with the slight increase in the net margin and the 4% increase in average assets under management, pre-tax income was 9% higher when compared to the first nine months of 2013.

We intend to continue to invest in growth initiatives to reinvigorate the franchise, such as the ongoing ultra high net worth lending initiative, the digital private banking initiative, the comprehensive sales effective and coverage enhancement program and significant upgrade to our mandate suite better aligned to evolving client demands.

We also intend to continue to generate gross cost savings in the private banking division in excess of our net cost plan, releasing resources to better align with our growth areas and initiatives.

If we look at the net margin trends going forward, I would like to start first with a small caveat. In any single period, the net margin will be affected by asset inflation or by deflation which increases or decreases the denominator with little immediate impact on revenues. This caveat aside, our intention is to maintain a stable net new margin balancing the adverse impact from the outflows of the tax regularization program with the benefits from the initiatives we mentioned before.

Slide 17. The corporate and institutional clients business generated a solid pre-tax income of CHF240m in the third quarter, 4% lower than in the same period of last year.

When compared to the third quarter of 2013, this year's third quarter results reflect the slight reduction in net interest income and stable non-interest revenues. Operating expenses however were down 7%, which drove 2 percentage point improvement in the cost-to-income ratio to 49%.

Slide 18. Our asset management pre-tax income of CHF96m for the third quarter doubled compared to the third quarter of 2013, driven by higher commissions and fees, improved other revenues and a 4% reduction in expenses.

Net new assets were CHF3.3b this quarter including a significant contribution from our joint ventures in emerging markets.

Our year-to-date pre-tax income of CHF339m increased by 40% compared to the first nine months of last year, benefiting from a 3% increase in recurring commissions and fees on an increased asset base as well as a 6% reduction in expenses.

Slide 19. We continue to make progress in winding down the non-strategic portfolio in the private banking and wealth management division. Revenues in the third quarter included a CHF109m gain from the sale of our German onshore business. But I'd note that revenues last year included gains of CHF146m and CHF91m from the sale of the ETF fund and the Strategic Partners business respectively.

Excluding these gains in sale, revenues in the third quarter were lower compared to the second quarter, the same quarter in 2013 which clearly reflects the continuing run-down of the non-strategic portfolio.

Let's turn now to the investment bank please on slide 20.

The investment banking division had a strong third quarter with strategic net revenues increasing by 24% to CHF3.4b, driving a 43% increase in our pre-tax income in our pre-tax income to CHF1b compared to the same period a year ago.

Our results were driven by a robust fixed income performance in securitized products and emerging markets, stable equity revenues and continued momentum in equity and debt underwriting.

In the quarter, we also had several large client transactions across our business including the IPO of the Alibaba Group, which helped us to achieve a return on regulatory capital of 17% in the strategic businesses and 8% in the overall division.

Total expenses for the strategic businesses was CHF2.4b in the third quarter, up from CHF2b in the same period last year. The increase is primarily due to higher variable compensation reflecting the higher results as well as higher litigation and deferred compensation expenses. This increase though was partly offset by cost reductions from our infrastructure initiatives.

Overall in the first nine months of this year, the strategic businesses delivered a strong return on regulatory capital of 19%. Including looses in the non-strategic unit, the investment banking division's total return was 11%.

Slide 21. In fixed income we had strong revenues of approximately CHF2.1b in the quarter, 42% higher when compared to the prior year. We saw continued momentum in the securitized product franchise with particular strength in asset finance. We also saw strong results in emerging markets reflecting robust client financing activity as well as solid trading revenues.

In credit, results were slightly lower than those in the strong first half of the year, but remained on a high level and relatively stable level.

Revenues in the macro business lines also improved albeit from very subdued levels driven by a higher client activity and increased volatility. As you may recall last quarter, we announced a shift in our macro strategy and we continued to make good progress in execution reducing risk-weighted assets by $2b this quarter.

Slide 22. I'd like to spend a few minutes just to provide an update on the progress we've made in continuing to diversify the yield franchises within the fixed income portfolio. The securitized products business diversified significantly in the last nine months. Particularly asset finance, where we are consistently ranked as a market leader, continues to generate strong revenues and returns.

The business is diversified across asset classes such as auto, consumer and credit card loans, resulting in a stable and consistent revenue stream. And as we've said before, we continue to believe that there remains opportunities to expand and diversify this client-focused business, particularly as securitization activity continues to expand in Europe.

Let's turn now to credit. This remains a very high returning business for us, albeit with lower level of revenues in the third quarter are reflecting the widening in credit spreads.

The business continues to operate at a fraction of our pre-crisis risk levels. In fact, one statistic is that our leverage finance primary commitments are down by 88% from levels in 2007.

Similar to asset finance, we continue to expand this franchise into EMEA to capture the greater interest in bank balance sheet restructuring and capital market funding of corporate debt.

Let's now turn to emerging markets. As you know we have a very good business across Brazil, Eastern Europe, India, China, South Korea and Mexico, which is focused both on financing and on trading. We saw strong emerging markets in the third quarter and a turnaround of our year-to-date performance.

Just to conclude on this slide, as we've said before, returns on capital that we've achieved in these businesses substantially exceeded the Group target for the first nine months of the year.

Slide 23. Equity revenue in the third quarter increased by 5% compared to the same quarter last year, primarily driven by continuing momentum in origination activity, but partly offset by muted trading conditions.

In terms of the performance of different business lines, we had strong results in derivatives primarily driven by growth in structured products distributed through our private bank, particularly in the Asia-Pacific region. Equity underwriting revenues increased substantially when compared to the third quarter of 2013 due to strong IPO activity this year.

Our prime service business had solid results with continued market leadership in prime brokerage, growth in chargeable client balances and client clearing services as well as benefiting from improved pricing power.

I'd note that our equity trading results also reflect the adverse impact of decreased trading volumes in the United States and subdued activity in Brazil.

Slide 24. In underwriting and advisory, we achieved solid revenues of CHF903m, 28% higher compared to the third quarter of 2013. Equity underwriting results increased by 66% compared to the third quarter of last year primarily due to the growth in Europe and Asia-Pacific. Advisory revenues are higher compared to the third quarter of 2013 reflecting increased industry activity.

Going forward, we continue to have a strong pipeline in M&A which is driven by higher confidence levels in the Americas and in Europe by restructuring opportunities. That said, quite clearly the execution of this pipeline will remain dependent on the prevailing market conditions over the next few months.

Slide 25. Consistent with prior quarters we include the usual bubble chart which shows the relative market shares of each of our business lines and the return on regulatory capital usage for each of these areas.

First, as we said before, the global macro business is beginning to benefit from a combination of reduced capital utilization and some uptick in client activity.

Second, we've seen an improvement in our equity derivative results driven by strong collaboration revenues from the private bank.

And finally, our emerging market business saw a notable pick-up in activity in the last few months and remains in the position to see further growth.

Slide 26. In the non-strategic unit of the investment banking division we had pre-tax losses of CHF479m in the third quarter. These higher losses reflect increased cost to exit of certain concentrated positions as well as a rise in litigation expenses to CHF227m in the third quarter.

We continued to make progress in the wind-down of our capital positions in the third quarter reducing risk-weighted assets by $2b since the last quarter. But as importantly, we reduced our leverage exposure by $11b over the same period.

During the quarter, we completed the transfer of the commodities trading book into the non-strategic unit which is in line with the announcement we made last quarter.

Just to be specific, we moved $1b of RWA and $5b of leverage out of fixed income trading and into the non-strategic unit. One key point to note though is that the end state non-strategic unit capital target for end 2015 that you saw last quarter remained unchanged.

Slide 27. The waterfall chart on this slide highlights the returns generated by our strategic investment banking business. In the first nine months of this year, the strategic after-tax return on capital remained high at 19% compared to 20% in the prior period. Clearly, the total return of 11% reflects the continued drag in the non-strategic unit. And we will continue to focus on reducing the remainder of the non-strategic portfolio and minimizing the adverse effects of these positions on our results.

In addition, there are three factors driving the year-to-date movement on costs. First, the higher variable compensation expenses reflecting the change in deferral that we've discussed before. Second, our cost base reflects the increase in deferred compensation from prior year awards. And third, we also saw an increase in litigation expenses in the nine months period compared to the prior year.

Slide 29 please. In the third quarter, our total cost savings were CHF3.6b. We achieved significant cost savings in the first nine months and we are on track to achieve our year-end cost savings target for the Group of CHF4.5b for 2015.

Let's turn now to capital side and start on slide 30 please. As you can see from the chart, our look-through risk-weighted assets stood at CHF286b at the end of the quarter. But just to be clear, the move in the US dollar/Swiss franc exchange rate during the quarter has had a significant impact and our reported quarter-on-quarter risk-weighted asset trends.

If you look at the investment bank division, we remained focused on reducing risk-weighted assets across both our strategic and our non-strategic businesses. We achieved a total of $10b of reduction in the quarter. However, in Swiss franc terms, this was more than offset by the appreciation of the US dollar which went from 0.89 against the Swiss franc at the end of the second quarter to 0.96 at the end of the third quarter, inflating the value of our risk-weighted assets in Swiss franc terms.

Leaving aside the currency move, it's clear we continued to reduce capital in the investment bank division reallocating it to the private banking and wealth management area, a trend we expect to continue over the next few years.

Just one point for analysts to note, it should be clear that these FX driven moves in total RWAs are approximately hedged compared to our capital base resulting in approximately net neutral impact in terms of capital ratios from currency moves and to any gains in terms of CTA in our book value.

Our long-term RWA target remains at CHF250b; you may recall we laid that out in October last year albeit on the FX rates prevailing at that time. Just if you apply the third quarter rates to that target the number will translate to approximately CHF260b at the end of the third quarter.

Slide 31. Our look-through BIS CET1 ratio improved to 9.8% at the end of the third quarter which includes the benefit of approximately CHF100m generated from the sale of the domestic private banking business booked in Germany.

In addition, we continue to intend to further realize approximately CHF0.3b of capital from planned disposals in the fourth quarter. This puts us on track to increase our look-through CET1 ratio to at least 10% by the end of 2014 and continuing towards our long-term goal of 11%.

I'd also point out to you that our going-concern loss-absorbing capital ratio that is CET1 plus high trigger CoCos stood at 12.7% at the end of the third quarter compared to 12.3% at the last quarter. Further, our total capital ratio which includes going concern capital plus low trigger CoCos stood at 15.8% at the end of this quarter, up from 15.3% last quarter.

Slide 32. Our average look-through leverage exposure stood at CHF1.19 trillion during the third quarter, up from CHF1.15 trillion last quarter. There are two main factors driving this. First, as you know from our discussion on risk-weighted assets, the Swiss franc reported balance sheet reflects the inflation driven by the appreciation of the US dollar/Swiss franc ratio between the second and the third quarters which added approximately CHF25b to our average leverage exposure.

Aside from the FX movements, we've seen a rise of about CHF21b in the average leverage used by the business. This primarily reflects an increase in balance sheet usage from lending initiatives in the private banking and wealth management division and as well as the increase in liquidity requirements that we're seeing in our legal entities across the world.

Slide 33. At the end of the third quarter our look-through Swiss total capital leverage ratio stood at 3.8% and our target is to increase this to approximately 4.5% by the end of 2015. On this slide I'd like to walk you through the intended steps to achieve this leverage ratio target.

On the left-hand chart, you can see our CET1 capital of CHF27.9b and our Swiss total capital of CHF45.4b as at the end of the third quarter. If you look at the analysts' consensus for retained earnings over the next five quarters, we're expected to build CET1 capital by about CHF2.5b driving total capital to CHF47.9b by the end of 2015.

So let's just look at -- briefly at the denominator of the leverage ratio and focus on the leverage exposure on the bottom left-hand chart. You can see our previously disclosed leverage exposure target of CHF1 trillion. Now if you apply the Swiss franc/US dollar exchange rate of 0.96 that stood at the end of the third quarter to that number, the leverage exposure would be about CHF1.05 trillion.

On the bottom right, you can see how we plan to reduce the average leverage from CHF1.19 trillion at the end of the third quarter to CHF1.05 trillion by the end of 2015.

First, as you've seen earlier in the presentation in the non-strategic unit discussion, we intend to reduce approximately CHF50b of leverage through the continued wind-down of the non-strategic portfolios, meeting our 2015 targets for the non-strategic unit.

Secondly, we intend to see approximately CHF20b of leverage reduction from structural optimization of our HQLA positions on our balance sheet.

Thirdly, we intend to reduce our leverage by approximately CHF70b through business reductions primarily within the investment banking division. These business reductions will likely include several structural reductions with limited impact on the revenues of our overall business as well as the impact of the reduction in our macro leverage exposure that we discussed in previous quarters.

Clearly, applying the resulting leverage of CHF1.05 trillion to the total capital of CHF47.9b would enable us to achieve our Swiss total capital leverage target of 4.5% by the end of 2015.

And with that, I'd like to conclude the results portion and pass back to Brady. Thank you.

Thank you very much, David. I think with that we're going to open it up for Q&A. So operator, you want to open up the line for Q&A?

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

Good morning, Brady, David. Just three related questions on leverage. Firstly, you obviously plan to reduce leverage exposure by 12% by the end of 2015 which I thought was very helpful. But even in dollar terms your leverage exposure increased 2% in the quarter. So question one is if you're seeing profitable opportunities to deploy your balance sheet, why don't you scrip the dividend, get there more quickly and then give yourself a little bit more flexibility to actually deploy your balance sheet rather than commit to such a sharp decrease?

Number two, given the growing importance of leverage, I was wondering why your dividend policy is only based on Core Tier 1 and why your dividend policy wouldn't also be, after hitting a leverage trigger maybe of 3% if that's where the number is likely to move to.

And then three, maybe a little bit more related. But if you're now effectively telling us that you're going to target a 3% equity leverage ratio by the end of 2015, wouldn't it be prudent to change all your other targets because at the moment you allocate your equity in the strategic business only using 2.4% and therefore your ROE is probably overstated by 1% in the strategic businesses if you're creating this new target. Thanks ever so much.

Thanks Huw, thanks very much. I think maybe I can try to address the first question and David could pick up the second and third question that you asked.

Obviously, this question of the balance between as you say reducing leverage and/or retaining more earnings, we're obviously trying to get the balance of that right. I think if you look at the reduction in leverage that we're talking about here though, almost half of the reduction is in either the non-strategic unit or the optimization on the liquidity side. So the truth is that's obviously not really impacting the business at all. That's already planned reductions.

[The other] business reductions obviously will require some work and will require us to look at restructuring. I do think that the -- again I think it's relatively modest. Not that it won't have any impact, but it's relatively modest and I do think that we will -- along with the changes in the evolution we're going to have to make to our business, we think we'll be seeing that in the industry as well. So that will also mitigate some of the impact there.

So I think we're trying to balance it in a way that we think is appropriate in terms of both rebalancing the leverage requirements in the business as we see a developing environment against our desire to make sure that we are returning cash to shareholders.

But just I think to add on what Brady said, clearly over the last couple of years we have been focused on reducing our leverage and I think you've seen substantial reductions with relatively limited impact because I think we have been very focused on optimizing the balance sheet allocation by business and by clients over that period.

I think even in the strategic business lines in the investment bank we've seen a reduction of about CHF65b in the last couple of years. So I think if you think about what we've said today, as Brady said, there's about CHF50b which comes from the non-strategic side, there's CHF20b from the optimization of the HQLA which leaves CHF70b.

But I think as we announced in the second quarter about CHF26b of leverage reductions are planned in the macro business. We won't see that all by the end of 2015. But I think what we're really saying is we intend to continue the moves we've been making over the last couple of years in terms of leverage and I think laying out some targets and timelines.

It's not as if the CHF1 trillion target is actually new, got it out before. It's CHF1.05 at current exchange rates. But I think we did want to be clear to our investors basically that we do intend to be there by the end of 2015 and see a 4.5% total leverage ratio.

And I think on dividend, I can only second what Brady said. I think we set the level of 0.7 last year in light of I think both litigation concerns and in terms of market outlook. Market outlook probably has been slightly better than we would have expected over that period. And we recognized that that level of cash distribution is something that's important for our shareholders.

I think that's a more fundamental question in terms of definitions for looking at return on capital. Candidly, we basically set the return on regulatory capital measures on the basis of the regulatory capital climate to which we operate. And as you know, Huw, that's 2.4% of common equity under the Swiss rules. So that's the basis on which we did that.

Clearly if that changes then we'll change it at that point. But I think we have to stick to the rules as they're actually laid out in terms of that allocation of regulatory capital. And that remains our approach.

That's very helpful. But can I just ask one follow-up then? Just from the point of view of the Board, does the Board not consider having a leverage constraint also an important input to setting a dividend policy? So not talking about a specific number but just the way you think about the appropriate policy? And I'm genuinely surprised that leverage is not an input to it.

I think leverage certainly is an input to it. So clearly looking -- it's obviously the performance of the business, it's the capital ratios, it's the leverage. All of that certainly comes into thinking about that. So no, it's obviously something that is looked at.

But again, I think what this -- what we tried to do here, as David mentioned, is to lay out a very clear perspective of how we're actually going to achieve these levels that we've laid out as targets. I think it's -- we think it's the right balance between increasing the efficiency of the business, obviously some of it is steps that we've already laid out in terms of non-strategic units, for instance. And -- but all that is certainly taken into account when we look at the dividend policy.

Okay, thank you very much.

Thanks. Next question?

Matt Spick, Deutsche Bank.

Good morning. Thanks for taking my questions. I actually had two, both on regulation if that's okay. Firstly, I was wondering if you had any early comments on the fundamental review of the trading book? Especially following submission of the quantitative impact studies? Looking at your business mix, you've obviously got strengths in credit and there are, I think, some industry issues around liquidity license in those products.

The second question was, I was very interested to see your expectation on issuing TLAC within the next 12 months. And I was wondering if you could add anything there on how quickly you expect the Swiss rules to be finalized on what will count as TLAC and what won't.

And secondly, sorry if it's a stupid question, but will that be senior debt with contractual bail-in as the vehicle? Or did you have a different vehicle in mind? Thank you.

Hi, Matt -- sorry, it's David here. I'll probably take both questions. So I think in terms of the continuing evolution of the capital rules, we're obviously seeing a couple of major developments. Obviously we have the SA-CCR and the FRTB, as you referred to.

I think just on the first of those that is the SA-CCR which is scheduled for implementation on January 1, 2017. Clearly it requires the development of a complex set of new models. But on the basis of our current understanding, the approval of those models we wouldn't expect a material increase, or any increase really, in RWA in relation to the SA-CCR measures.

On FRTB, as you say, the QIS submissions, I think, were due in last month. And I think, just to be clear on this point, I think the latest we're hearing is we're unlikely to see any final results from that before the end of next year. So it's a very long way away in terms of that. And it does look increasingly unlikely that we'll see implementation of this on January 1, 2017. So it's beginning to stretch out in terms of implementation pipeline, given the complexity of the potential rules. So I think it's very difficult to really speculate on that at this point.

I would say, yes, you are correct. The draft rules around FRTB would affect the credit business but it's really only one of a number of businesses. It has some impact on securitized products. It has some impact on macro, just to be clear around this, and it would have some impact on equity derivatives.

So it's a pretty wide-ranging set of rules which is why I think the -- it's likely we won't get the final rules, as I said, before the end of next year. And implementation is looking increasingly unlikely as a 2017 event.

So I can't really comment at this point, it's simply too far away. Certainly our comments on SA-CCR, I think, do look -- yes, I think we're reasonably confident about that at this point.

On TLAC, the total loss-absorbing capacity, clearly there's obviously draft rules and I think everybody knows that this will be discussed at the FSB next month. Clearly we'd just point out that it's really a formalization of the bail-in approach which we've been discussing for about five years now, and something, therefore, which I think Credit Suisse formally does support and it's been involved with.

I think we understand, I think, that the Swiss authorities, the FINMA, are also supportive of the TLAC rules. And we are obviously keen to begin issuance of TLAC debt as soon as we have clear enough rules to proceed. And that's probably the uncertainty. It could be later this year, it could be in the first quarter of next year. But I think it seems very likely within the next 12 months.

The type of debt in issuance, again, not fully finalized as yet. So if we change it -- please be careful, but I think it's likely it would be senior debt. It would be issued out of the -- an entity linked to the existing Hold Co because obviously Credit Suisse already has a holding company in existence. Just to be clear on that point. That's already in there, it's been there for a long time. As opposed to being issued out of the CS parents, which is where our existing senior debt comes from.

And it's -- I think on latest legal advice, it would include [merely] a structural subordination clause, providing we're actually issuing outside of Switzerland. So if we issue in the US, for example, that would include a structural subordination clause. I believe that is broadly similar to the Hold Co debt which was issued by one of our competitors, I think, I the last few months.

And just to be clear, completeness, the reason this issue's out of an entity linked to the holding company just relates to Swiss withholding tax, which I think you're aware of as an impediment to direct issues from a Hold Co in Switzerland.

Thank you very much.

Thanks Matt, next question.

Kinner Lakhani, Citi.

Yes, good morning. Just wanted to touch again on the leverage ratio. It seems like an interesting time to come up with a new target, 4.5% target, especially ahead of the too big to fail decisions that we're expecting in early 2015. So curious as to what bearing you have from those discussions into setting this new target?

And also if you could maybe elaborate on where the potential large structural reductions, the CHF70b, in which parts of the business? Is it prime brokerage, repo, etc., that it's coming from?

Again to touch on TLAC, how much end game issuance are you thinking of? And I know in the past you've said you expected CHF500m of net funding cost savings, CHF700m gross. Do you still stick with those?

And thirdly, on the litigation front, I just wanted to get a better sense of the provisions that were taken this quarter in the IB NSU. I think it's primarily mortgage related matters, if you could maybe give us some more guidance on where you see that issue going? Thank you.

Okay, thanks very much. A number of questions there, I guess. Maybe I can take the first two and then David can pick up the next two or three.

I guess our view is, in terms of this, as you say, laying out a new target on the total leverage ratio for the end of 2015. It's really -- I think we're just trying to clarify the path that we are planning to take to get to improved leveraging capital ratios generally. As you know, we had already announced that we were planning to get -- to be above 10% at the end of this year and then obviously to continue on up to 11% CET1 subsequent to that. So we'd kind of already laid that out.

We had also already laid out, as David mentioned, a target on the total balance sheet leverage exposure of around CHF1 trillion. And so, many of the elements of this were already out there.

I think the idea here was just to be very clear about where we think we will end up on that. and that is obviously against the context of obviously discussions around the world, certainly in Switzerland as well where as you know we have the Brunetti Commission thinking about reassessing the too big to fail measures that were taken a number of years ago and as to whether or not any adjustments need to be made to that.

But also just generally around the world, as you know, people are -- clearly, regulators are looking at want are the appropriate levels of leverage etc., and there's obviously some expectation that those will continue to tighten.

So I think this was just a way to lay out a very clear path to what we think is a solid leverage capital position out there. So that's really what the -- so I think there's nothing more with regards to timing.

If your question is, do we know something about what's going to come out of the Brunetti Commission, obviously we don't. So this is really just trying to lay out what we think is a good path to what will be a solid position there.

I think with regard to the CHF70b and, as you say, what the large categories -- the truth is, I think we're still -- there's still a lot of work going on and we're still looking at a number of different elements. Some of those are structural elements where we see ways to potentially put in place ways to structure our business and the organization in ways that actually obviously reduce the leverage requirements.

Some of it is -- as David said, some of it's already been laid out in terms of, for instance, the macro business where we do believe there are some additional reductions that will come which we've already talked about. But I think, as David said, the bulk of that will be certainly in the investment bank. And obviously that's -- primarily cuts across the two trading businesses; equities and fixed income. And so I think within that, though, I think it's still an open question about exactly how much will be reduced, where.

And David, do you want to take the TLAC and the equity cost questions?

Yes. Yes, on -- let's -- yes, and also I think, also -- let me do the litigation points first and I'll come back to the TLAC on if that's all right.

So just in terms of litigation, so I think you can see on -- I think it was slide 25 and 26 of the deck, that we booked litigation costs of CHF227m in the third quarter, year-to-date CHF432m compared to CHF459 in the first nine months of 2013. And you would be correct, the majority of that is related to civil mortgage litigation settlements or provisions against settlements.

Just for completeness, by the way, some of the numbers which might be helpful. If we look at the total investment bank expenses, so strategic and non-strategic, we actually have taken total litigation costs -- so including the numbers I've just given -- of CHF629m for the first nine months compared to CHF486m for the first nine months of last year.

So if you look at total expenses for the investment bank, there has been an increase of, I guess, that's about CHF145m in litigation expenses the first nine months. But obviously some is taken in the strategic and some is in non-strategic side of the business.

So just in terms of TLAC. So I think clearly we're expecting to see formalization of the TLAC rules with the FSB and probably there afterwards implementation by national regulators or their requirements. I think it's been well leaked or known that the TLAC basically is both a total requirement and also a pre-positioning requirement around that which is certainly something we'd planned for as one of our scenarios for our [legal entity] plans. So it's within our current planning.

If we look at debt issuance by a similar Hold Co debt issuance by peers then we do see that typically TLAC debt is issued to a higher spread, 20 basis points is not untypical. Clearly though, that is subject to how the rating agencies choose to rate this debt and how they look at this debt, which is really going to develop over the next few months as the regulations are actually formalized. So it could be a higher spread than that.

I think if we look at our total TLAC issuance, it's a very wide range. But I think to provide some helpful guidance, just in terms of that, I think you may recall that a year or so ago, we expected to see about an CHF800m reduction in our funding costs but that we would expect to see about CHF300m of that absorbed by the move to what we then called bail-in debt, as and when that actually happened.

So far this year, we've actually seen about CHF436m reduction in our funding costs. So about half of that's been booked already, mostly within the NSU in terms of the funding cost reduction. So it's come through pretty much as we guided, I guess, a year ago.

If we look forward, I have to say I think the guidance we've given in terms of the TLAC cost looks fine. Probably the spreads are probably slightly narrower now then when we did our projections a year ago. But maybe the size in terms of the pre-position requirement may be slightly higher. But I think probably that guidance in terms of that CHF300m plus, minus in terms of increased spread from this is probably about right. So I think we're probably still in the same kind of ballpark as we were a year ago.

In other words, we've seen about CHF430m in reductions so far, so that's most of what we've seen already. We would expect further run off of another CHF300m to CHF400m from the legacy debt instruments. But against that, a similar sort of quantum in terms of the increase in spreads from the cost of issuing TLAC debt as opposed to debt out of the parent company.

I think, as you know, we still do have a number of legacy debt and capital instruments, mostly within the non-strategic unit, which do -- which are actually costing us spreads very substantially in excess of that. So I think actually our guidance probably bottom line is about the same, notwithstanding the moving parts in that calculation.

Is that helpful? Sorry, it's a bit complex.

Yes, that's extremely helpful. I appreciate that, thank you.

Okay. Thanks very much. Next question.

Kian Abouhossein, JPMorgan.

Yes, hi, thanks for taking my questions. I've got three questions. The first one is, going top-down to bottom-up, just briefly on the Executive Board members who are joining, Jim and Tim. I just wanted to hear the rationale for the two new members joining the Executive Board.

And also, in that context, the thinking because clearly you now have people from each business in the IB representing the Executive Board in the Executive Board, I'm just wondering how you think about responsibilities and the impact that will have on the Executive Board decisions and management of strategic decision making.

The second view is on outlook statement which is clearly a bit mixed. Just wondering if you could be a little bit more specific on what businesses might have been impacted by the current more volatile environment that we are seeing in October?

And the third question is on wealth management margins. I recall in the second quarter, we were guided more towards second half top-line margins to be in line with first half due to re-pricing. And that's roughly 101 basis points. Just wondering where we stand now in terms of margin expectations. How the re-pricing is working out at the moment. Have we seen all the re-pricing because I recall second half was a re-pricing of prices generally?

And thirdly, in that context, you also mention on page 8 that you had a gain related to a more capital efficient positioning in the liquidity portfolio in the wealth management business. And I was wondering if you could maybe just tell us how much that was? Thank you.

Thanks, Kian, maybe I'll try to answer the first two and David can take the question on margins.

Yes, I think with regard to the Executive -- or the management changes that we made, it's really about consistency. It's really -- there's clearly no change in the strategy. And in fact, even the -- there's no change to the approach of managing the investment bank on an integrated basis as a business. In fact, even the people changes are really about consistency.

As you know, Eric Varvel who oversaw the equity and investment banking businesses has moved off the Executive Board. He's going to remain involved in the business in the senior client role. But Jim and Tim basically ran those businesses before, simply moving up into the Executive Board.

And Gael, Tim and Jim together will manage the investment banking business. So I think it's really mostly just about continuity. So I wouldn't -- we don't anticipate any change in the way the business is managed. We don't anticipate any change in strategically how we look at it. So I think it's actually really mostly about continuity, in terms of those changes.

The changes in the Asia Pacific, as I mentioned, Eric will be actually involved from a senior client and a senior point of view generally. But Helman Sitohang who before was running all the investment banking business throughout the region has now moved up to be CEO of the region. And he's got a very strong track record of building businesses out there. And so I think that's a very positive thing.

On the outlook that we mentioned, yes, as you can imagine, the increased volatility and volumes have certainly benefited some parts of the business, particularly those that are more on the trading side. So whether it's the secondary equity side, derivatives businesses, those are clearly benefitting from a lot of the volumes and the flow and the volatility, the macro business is certainly benefiting as well.

But clearly some of the new issue underwriting businesses have clearly been put on the back burner as we've had this sharp downward and then sharp move back up in the businesses. There is, as we mentioned, a lot of business in the pipeline to execute. So the question will obviously be whether or not the markets will reopen for that or not. But -- so clearly, those businesses have probably been more negatively affected.

And I would say in general as well, on the private banking side, clearly people do have a requirement to adjust their portfolios somewhat with that kind of volatility. But it also does, I think, lead people to feel a little bit more conservative and a little bit less opportunistic about the transactional side of the business.

So that's why -- I think that's why we've mentioned it's somewhat of a mixed impact. And obviously it somewhat depends -- we've gotten a sharp bounce back here and so whether that carries through or becomes a little bit more consistent or stable from here will clearly have a big bearing on how the business actually fares over the next couple of months.

And just to follow up very briefly on this. Has there been any -- has the -- we all wanted more volatility but we clearly -- you can argue we don't want a spike in volatility. But do you feel that volatility -- the way volatility has behaved, it's been actually a problem for the industry generally? Or do you think it's actually been overall a positive event? Or does it really depend purely by business by business?

Well again, I think it's a little bit mixed. I don't think it's been so much of a problem for our side of the business. I do think a lot of volatility, obviously, as you know, has impacted some of the managers across the business who are important customers and partners of ours. And so that obviously ultimately can also have impacts into our business.

So I'm not sure that -- I think in terms of the purely transactional part of the business, I think it's generally been a positive. But obviously it has other impacts as well, I'd say more broadly on the financial system which may not be positive in the longer run.

So again, I think it's kind of mixed. I don't think there are any -- I don't think the -- when you look at the actual business, I don't think that the increase in volatility had any immediate negative impacts on our business. I do think when you look at how some of the portfolios have -- obviously the impacts on some of the parts of the industry, that clearly is probably not so positive in the medium to longer run.

David.

Okay, just following on these other questions, really. Just in terms of the gain in the -- relating to liquidity, mentioned the wealth management division, it was about CHF18m. And it related to the integration of the liquidity portfolio with NAB, which you may know is a regional bank here in Switzerland which we took full ownership of a year or two ago as part of the creation of integrated treasury management for the management of that capital base. So that's what that was.

I think you asked a question around re-pricing, Kian. Could you just summarize that for me again, sorry?

Yes, I think it was the replication portfolio that you were referring to, I think, already, around the full-year results. But also on the second quarter, I think, that generally is that you see an improvement in the margins due to the margin pressure of the replication portfolio declining?

Well, the answer to that is, I think --

In the second half. I (multiple speakers).

Yes, if you look at -- I think we guided that net interest income should stabilized in the third quarter compared to the second quarter. And that has proved to be the case.

Within that, there is some decline in the replication portfolio but we expected that [to stay] in the second half, offset by some growth within the -- some other sources of net interest income.

So broadly stable in the third quarter against the second quarter, which is clearly good. We haven't changed the duration approach we take for the replication portfolio. On average it's still termed out for about 18 months.

And I recall also that there was an indication looking at the second quarter transcript -- and maybe I didn't understand it correctly -- that the top-line margin second half should be more in line with first half?

I think what we said is that, I think to be clear, I said, I think somewhere between the second quarter level and the first half level, which I think somewhere is between 99 and 101 basis points for the gross margin.

Okay.

To be (multiple speakers). But I may be wrong on that. But I think that's what I said.

So clearly, 97 basis points looks shy in terms of that. I think just to be clear on -- well, clearly the third quarter does tend to be seasonally weak in any sense. So I think third quarter will be the lower. But I think the point I was making, really, as I spoke today is the impact of portfolio inflation or deflation relative to that. We've seen about a 2 basis point adverse impact on our margin from the increase in the values of the clients' portfolios.

That has essentially no particular direct impact on revenues. And clearly, there's also currency effects there which came through more towards the end of the quarter. So you've seen about a 2 basis point deflation from that as well.

I think that is always going to be an issue in terms of looking at the margin on any quarter-on-quarter basis. You see about a 2 point deflation from that. And I think that will be the case. But yes, I think that's fair enough. And it has been driven by the portfolio inflation over that period of time.

Okay, and --

By the way, just to be clear of course, you can pick me up with this at some future point, if markets deflate, values deflate then you have the opposite impact as well.

Yes.

Not that we would hope that would happen but it runs both ways.

No, absolutely right, yes. No, that's very clear. But assuming that we have the ongoing inflation argument which clearly you couldn't foresee when we talked last time, then one could argue that the margins could be -- continue to decline?

I think that's possible, actually. Certainly the gross level, I think the trends which we've outlined before remain very much the case. There is a -- particularly at the gross level, I think although the outflows from regularization were slightly slower in the third quarter at CHF1.5b across the strategic and non-strategic side, we're still guiding to CHF10b to CHF15b for this year and CHF10b to CHF15b for the year after, and for outflows in 2016 and being, albeit a slower level.

Clearly the pace of outflows in any one quarter will depend to a degree on amnesties. But that does tend to deflate the gross margin. And that is a structural shift we're actually seeing.

Against that, I think what we're also saying in terms of the net margin, you can see essentially we have maintained a net margin which is stable for the first nine months. And I think that does remain very much our focus as we actually drive the business forward. We will see adverse pressure on that from regularization, but we will see, I think, upside from some of the measures that Brady talked about in terms of the client product, the lending initiatives, etc., across the private banking business.

No, you've done a great job on the top -- on the bottom line margin. Just to be very clear, one could argue that with an ongoing deflationary argument plus clearly seasonality on top that top-line margins could further decline from the current level. That's not unreasonable assumptions, considering what we've seen in history as well.

Wouldn't get into guidance. I think we've said before, the focus we have really is actually on the net margin because we will increase and we will continue to shift our business going forward. And I think that's probably a better indicator. But just to be clear, the net margin is also affected by portfolio appreciation and depreciation.

Thank you, very helpful. Apologies for taking so much time.

Not at all, Kian.

Thanks, Kian. Next question.

Fiona Swaffield, RBC.

Hi, good morning. I just have three questions. Firstly on compensation, I'm looking at slide 44, the variable compensation is still rising quite significantly from last year and well in excess of the revenues and particularly in the IB strategic. Could you give us some explanation for that breakdown but also whether there could be a true-up in the fourth quarter and whether we should be looking more for stable comp ratios versus last year?

The second issue is on the leverage exposure or the total exposure target for 2015. There'll still be quite a bit of NSU left. Should we -- if we're looking out 2016, 2017, is there an expectation that that -- you could come in below that number over time? Is that -- is the 2015 number the endpoint or not?

And then the third question is just coming back to this net margin in WMC. I think I heard you say we should expect it to remain relatively stable over time from this level which I thought was a bit lower than maybe consensus expectations. Could you just go through that again? I'm talking more about the future rather than the second half. Thanks.

So just on the compensation numbers, so it's slide -- the slide we gave there which is I think 44 in this deck and I think was 43 in the previous deck. So I think, as you say, essentially the variable compensation was CHF1.487b against CHF1.137b in the nine months 2013. So, therefore an increase in the variable compensation.

I think just to be clear, that that is the cash value of the variable compensation. And I think as we've said in the first quarter that we were making a couple of changes to this year.

Firstly, that we will be moving to accrue a greater proportion of the compensation earlier in the period, and that's remained our strategy. And we've certainly accrued more than three-quarters of our projected full-year compensation by the end of nine months.

And secondly, that we would be looking to reduce the amount of deferred compensation we awarded. I think, because I think we would prefer to have greater flexibility within our cost base from having a higher what we call cash value, or CV, to economic value or the award value.

So that remains the case. So what you are seeing here, essentially, is those two factors combined which is a shift towards a greater accrual in the first nine months and a shift towards a higher cash value as opposed to economic value in terms of our reported total.

I don't think you can necessarily deduce from that that the economic value that we award to our employees will necessarily then be higher for full year 2014 than 2013. Clearly that's very much dependent on the trading for the balance of the year and the discussions with the compensation committee and the Board there afterwards. But you certainly should not deduce from the nine-month comparison CV anything about the EV at that point because it is reflecting those two shifts.

I think secondly on the leverage ratio point, yes, there is still residual runoff within the non-strategic unit part of that. That could result in the overall leverage dropping further or it could result in us basically, for example, seeking to redeploy further leverage to the private banking and wealth management division. I think that's still very much open.

But what we did want to give everybody today, I think, is some clear guidance about where we intend to be at the end of 2015. Because I think we were conscious that the leverage target we'd given before didn't have a precise date attached to it.

Thanks.

On net margins, yes, I think you're probably right. We're marginally more cautious. I think that the appreciation in portfolios we saw in the third quarter, which did not generate any particular increase in revenues, I think made us a little bit cautious about these projections. And that's clearly a factor we don't have too much control over. But -- so yes, we're marginally more cautious, Fiona, but I wouldn't read too much into that.

Thanks very much.

Okay, thanks Fiona, next question.

Andrew Stimpson, Bank of America.

Hi, guys. So I can tell, on slide 33, you don't want to tell us where the CHF70b business reduction's going to come from yet but any timeline on when you will be able to give us a more granular breakdown? Because I think at that point, that's when people will be more comfortable giving you the credit for that plan in their forecast.

And then on the same slide, I'm just wondering how you can reduce the HQLA? Is that just the -- looking at the increase in the leverage this quarter, that was part of the reason, it seems. So is that just as you reduce the rest of the business or is there anything more technical that you're doing?

And then lastly on TLAC, I know that you've said before that you're fairly comfortable on that measure but I'm just wondering if you think this is something that eventually gets pushed down to desk level like leverage and the LCR has been? And then if there's any particular businesses that you think would be affected? Thanks.

Hi Andrew. I guess on the -- I'll take the first one and David can take the next two. I think we will -- we'll obviously, quarter to quarter, keep you all posted on how those -- how our thinking is developing on those reductions.

I think we've -- I think as David said, we have a pretty good record of actually achieving these targets that we've laid out. I have no doubt that we'll be able to achieve it. We're just looking for the best way to optimally achieve that across the different businesses. So we'll certainly keep you posted quarter to quarter as it develops.

Some of those things are more -- as I mentioned, we'd like to do some things that are more structurally -- a little bit more structurally innovative that allow us to maintain a strong position in businesses and don't have as much impact on revenue or on market position. So those are some of the things that we'll hope to look towards. But it'll probably be a mixture of different elements.

So unfortunately, as you say, we're not -- we don't really feel like it's appropriate now to give very specific breakdowns of what businesses those will come out of but you can imagine the various potential businesses it'll come out of. And part of it'll be whether -- us finding hopefully smart ways to do that.

Okay.

On the HQLA point, we do have significant potential to, as you might say, optimize the liquidity by actually terming that out, particularly beyond the 31 day threshold. And I think, as you notice -- you may have noticed, we've been active in the senior debt market in the last three months as part of that.

So as we actually term it out, you might say that our liquidity becomes more efficient in terms of meeting the key ratios we face. So I think we're relatively confident we can actually reduce the impact of liquidity ratios on our overall leverage by about CHF20b over the course of the next five quarters. So that'll be the first point.

On the TLAC cost, we've always had an approach that essentially the cost of debt instruments of all types -- and clearly a TLAC instrument is a debt instrument with such subordination -- are actually pushed out down to the individual business lines. That's how we run our existing capital and debt strategy. And I think it's very important we will continue to do so forward because it gives you a much clearer line of the accountability around that.

Not sure I really anticipate substantial change. After all, I think we've said already that our existing guidance around this has -- is broadly unchanged, albeit it with substantially different components. Note, obviously, there's going to be some shift in terms of allocation between the strategic and non-strategic, because we're obviously running off a component of that.

Right, okay. Thanks.

Good, thank you. Next question.

Jeremy Sigee, Barclays.

Hi there, thank you. Just two follow-up questions, please, looking back to earlier topics. So firstly, I just wondered, do you see a turning point in the fortunes of some of the macro businesses? The arrow is now positive on your favorite bubble chart. And I just wondered do you see that as a turning point? Do you view yourselves as having flexibility to scale back into those activities? And do you think that would be a valid move to make at this point in time?

Other question, really, was just on litigation. I wondered if you could talk a bit more about the wealth management case that caused a charge here. What it was? Whether there's any further charges to expect on that? And more broadly, whether you still have the confident view on FX and Libor exposure that you articulated previously, notwithstanding the recent Swiss franc settlement.

Yes, thanks, Jeremy. I think on the first point, I don't know -- I don't know about a turning point. I think our views on the macro business continue to be consistent in terms of a lot of the regulatory impacts and market structure impacts on the business.

And we're obviously -- I think have made good progress but still have more progress to make in terms of continuing to adapt that business. So I think one of the things you're going to see, as you say, not in addition to the green arrow in terms of the return axis, we also think that given this is a four-quarter rolling average, you're also going to see that bubble actually shrink in size because we will be -- we're continuing to reduce capital leverage, some of which we've already done, which will simply roll through in the averaging, but -- so we think we will continue to improve the dynamics of that business in terms of the capital allocated and hopefully the returns as well.

And I do believe -- we'll see, but I think our hope and expectation is that we could also actually potentially increase some market share there as well, as the whole industry has to deal, we think, with those kinds of issues because as everybody deals with some of the leverage issues that roll through to the business, we'll see how that impacts. But I think there is potential for that over time as well.

So I think obviously some of the green arrow is also just because market conditions in the third quarter were more favorable for the business. So we'll see how that continues or not. There's clearly a strong correlation between that and the -- between that and just volatility in the rates and FX environment. So we'll see how that looks.

So I think -- I think our view is that we remain confident that we can continue to restructure the business into one that will give us better returns over the cycle. So that's I think, how we're thinking about it.

I think, Jeremy, on the litigation point, I can't really comment. There were two specific provisions that we took in the wealth management division, they relate to two specific issues. Not really related to Libor, FX or anything like that. There's nothing -- I can't really add any more to -- there's nothing to be added beyond that. (Multiple speakers).

But there's no suggestion that they continue, they're just one-offs in the quarter? They're not a continuing drag, you don't think, going forward, those wealth management cases?

No, they were specific -- they were both specific events, essentially, which we felt it was appropriate to take a provision against at this quarter, frankly.

And the FX Libor question I meant as a separate one, really. In the light of the recent, small admittedly, settlement, do you still remain very confident on your broader exposure on those cases?

Yes, I think we -- obviously we -- you'll want to point out, obviously, the distinction on that Libor issue where, as you say, we had a EUR9m settlement that we entered into. That was not for anything to do with Libor index reporting or anything. It was actually more around the derivatives products that were linked to that.

So (technical difficult) on that, right? So -- but anyway -- then obviously that was a decision we made to resolve that issue and move on. We don't -- we do not see any material exposure to Libor issues. And obviously that's, as you point out and as you know, that's a -- that's an episode that's well into -- it's been many years now, I guess, three or four years that it's actually been being investigated. So we continue to see that we don't have any material issues there.

The FX issues are a little more -- are newer. As you know, they've probably been going for a little over a year now. But yes, we still don't see that we have any material issues on the FX side as well, as this point.

Yes, I think we'd probably what we've said for previous quarters. It's an ongoing investigation but we haven't really discovered anything material. So (inaudible) exactly what we said a quarter ago. I guess clearly there's a lot of market speculation that there may be some resolution elsewhere. But I think our comment is more or less identical to what we've said for the last couple of quarters.

That's very helpful. Thank you.

Thanks Jeremy, next question.

Jon Peace, Nomura.

Yes, hi. I've just got a couple of quick follow ups, please. So the first one is on litigation. You gave us a number last quarter of CHF1b for the reasonably possible losses not covered by provisions. I just wondered what that number looked like this quarter?

And then the second one is on the corporate center strategic. I know this number bounces around a bit but it's quite a bit higher this third quarter than prior quarter or prior year. And it's a number that's been trending higher as well. So how should we think about that run rate? Thanks.

The number of reasonably possible losses, which I think actually is in the earnings release but (multiple speakers) and obviously will be announced in our full filing in a week or so's time -- is CHF0 to CHF1.2b. So it's up slightly from the second quarter level.

That reflects two issues. Firstly, clearly, a large number of our -- it's a large number of small cases. And a majority of those tend to be dollar denominated. So you get another FX effect from the appreciation of the US dollar in terms of that.

And secondly, we have increased the reasonably possible exposure relating to certain of the civil mortgage litigation exposure we have, basically. So it's those two factors combine, if that's helpful.

Just in terms of the CC question, in terms of the strategic question, I probably would actually suggest we actually go back to the slide that I think Fiona referred to, which is 44, I believe, which basically just gives the cost reconciliation. What you see there is the RRP total of CHF295m for the first nine months, which is the primary driver -- that's first nine months, obviously, I think obviously it's about CHF100m I think in terms of the analysts' estimates for us for the quarter.

That really reflects the costs of the legal entity program which we announced I think just over -- just under a year ago, which I think, as you know, basically involves the formation of the separate Swiss legal entity, the formation of the IHC in the United States and the CCAR preparation around that in January 1, 2017, and clearly the formation of the service co as part of the recovery and resolution planning.

So yes, this is a relatively substantial infrastructure program to reshape the Group. It's clearly not a unique Credit Suisse issue. I think you've seen similar legal entity announcements from some of our peers.

I think that in terms of trying to provide some guidance and run rate, I think it's probably going to continue at this sort of level for the balance of this year and through 2015. But then if you think about some of the launch dates for the new legal entity structure in 2016, it will reduce very sharply in 2016 and beyond. But that, I think, is the primary driver that I think you were looking for.

Yes, great, thank you.

Good, thank you. Next question.

Daniel Zulauf, Basler Zeitung.

Yes, good morning. I have many questions but I would like to restrict myself to three of them. My first question is about wealth management business. You have mentioned that you are good at retaining assets that are being regularized, and especially in Europe. I would like to ask you whether we can conclude from this statement that the major part of the outflows that you are -- that you have mentioned is related to taxes, unpaid taxes that are -- it is related to the taxes that have -- that your customers have to pay and not to assets they are actually taking out from Credit Suisse in order to shift them to other banks?

That's my first question. Maybe you can even quantify this or try to quantify this element.

The second question is about the management changes. You have already given an answer to that question before. However, we are noticing here that we have now three heads at the helm of your investment banking division instead of two. This is at least some change in relation to what it was before. You also have the two heads at the helm of the private banking division. I would like to invite Mr. Dougan to share with me the thought that -- dividing power within the divisions is logically increasing power at the top. Mr. CEO -- Mr. Dougan is increasing his own power by dividing the powers within the divisions. So I would like him to elaborate a little bit on this thought.

And the third question is simply what your expectations and hopes are in view of the asset quality review from which we are seeing the results next [Sunday and Sunday]? Thank you.

Thanks, Daniel, and thanks for your restraint on limiting your questions. The -- I think on the wealth management side, I think what you said is -- I'm not sure -- I think I understood what you said and I think it's actually correct. So as you say, certainly there -- obviously, as the process happens, clearly if people do regularize their assets and pay taxes, that will reduce -- will lead to reductions, so (multiple speakers).

Typically, Daniel, we -- I think our experience is that through the regularization process, we retain about 60% of the net number. Now, clearly that does mean some moneys, basically, are actually flowing out of the bank. You may speculate that that's being used to pay taxes, and it may well be the case, but we clearly don't know. So it's almost certainly a mixture of taxes and outflows, as part of that regularization process.

Thank you.

I think your second point on the management changes, yes, honesty it's -- as I said, it doesn't represent any change in strategy. It doesn't really represent any change in the way that we approach the business. So as you say, I think -- I guess naturally people do headcounts and count up numbers, etc. I honestly don't think it changes the balance of how businesses are operating or clearly doesn't change our strategy at all.

And I'm not sure that it has any other implications on the overall management structure. So really, as I said, I think -- I almost entirely look at this as a continuity solution. The same two people who were running the businesses before are still running them. They've obviously moved up to this level but I don't think it actually changes the dynamic of which businesses are important or which ones we're emphasizing.

Our strategy is exactly the same. We're still very focused on running a very good, best in class investment bank that's very disciplined in terms of the capital and resources that it uses. We're still looking at continuing to expand our presence on the private banking wealth management side. We see the businesses as extremely synergistic and they work together extremely well. We want to continue to improve how they work together.

So I don't actually really see it as changing any of that. So anyway, that's my perspective, anyway. So David, do you want to -- AQR, you want to mention anything on that?

Just to be clear, obviously as a Swiss bank, we are not subject to the Eurozone Asset Quality Review. So -- and I think it's -- and we have not been subject to these before over the last two or three years. And I think we've been asked this question before.

It's very difficult for us to really asses what a Eurozone stress test looks like because obviously we're not involved in that detailed discussion with the ECB over how this actually operates and the parameters they use.

I think when we've looked at these in the past on the basis of the information that becomes available publicly, I think the stress tests that the FINMA basically applies to us are at least as stringent as the Eurozone tests and those are generally applied every six months and we've I think always passed those basically. But just to be clear, we're not subject to the AQR as we're not a Eurozone bank.

But I do think, Daniele, I guess our hope is clearly that this additional transparency that's brought to the banking system will be a positive and our hope is that that will actually increase confidence in the banking system in general for Europe, which will generally be a good thing I think for everybody, so, and that's our hope. So we'll see, obviously it's hard to predict exactly what the impacts will be but that's certainly our hope.

Thank you.

Next question.

Jernej Omahen, Goldman Sachs.

Yes, good morning from my side as well, I guess I've just got two very benign questions left here. The first one is on your performance in equities and your equities sales and trading revenues were down year on year. I guess in a quarter like this historically we'd be used to Credit Suisse doing better than peers rather than vice versa and I was just wondering if you can just add a bit of color on why equities were down or why there's underperformance there.

More specifically on the prime services you say on page 23 that you had a good result in prime services and the client balances grew, but on page 43 where you give us the risk-weighted assets in the subdivisions you show I guess a more than 15% drop of risk-weighted assets and therefore capital allocation to prime services, if you could help me square that please.

And that question is on tangible book value per share sensitivity to the US dollar. I guess things are going in a positive direction on that front and the correlation, historic correlation, seems to hold. Is there any reason to think that a continued appreciation of US dollar would start to provide a tailwind for your tangible book value per share growth? Thanks a lot.

Thank you. I think on the equities question, as you say, we had a solid performance from equities. I think when you look at the year-on-year comparison though, last year our businesses in both Japan and Brazil had outstanding performances and this year in the quarter both of those businesses were much more muted, obviously Brazil because of the difficulties in the market generally, and Japan is obviously just not as buoyant as it was a year ago.

So there are obviously other smaller issues but, to be honest, I think those are probably, it's a little bit I think because those were the outstanding performers last year and important businesses for us which are obviously not performing as well this year. So I think that's probably most of the explanation.

David, do you want to talk about --

Yes, I think we've given a partial answer to the CTA and currency exposure question in one of the appendix slides actually on page 46 because we thought it might be useful. This was aimed more I think at the capital hedging point, so what we show is the composition of our CET1 capital, risk-weighted assets and our leverage exposure.

I think at the high level, I think as you know, given that we're obviously a Swiss franc reporting company, a Swiss franc equity base with more than 50% of our RWAs and leverage actually in US dollars, we are, obviously we run a currency risk but therefore we seek to hedge that by essentially swapping a portion of our Swiss franc exposure into other currencies to actually neutralize that on the ratios. And you can see that approximate mix basically on page 46.

That then obviously does have, as you rightly say, a consequence on the shareholders' equity because clearly an appreciating US dollar means that we actually have gains on the dollar on those dollar hedges which actually boosts the, that comes through the CTA line which is what you're seeing. We haven't given the shareholders' equity number actually on page 46, as I said this was more capital based, but the shareholders' equity mix is not that different to the CET1 as, at least, a broad approximation.

So to the extent you continue to see dollar appreciation you would see a rise in the tangible book value of the Group in line with what we've seen really for the third quarter and in line with this kind of hedging strategy.

Just to be clear though and just to remind everyone what we've suffered in prior years of course as a consequence of that hedging strategy, clearly if the dollar depreciates then you have the opposite impact as well, it's not a, it's a roughly lineal, it's not quite lineal but it's a relatively lineal hedging strategy.

I think on your question on prime brokerage, the business did have a good result, it was actually a very good quarter for the business so that's quite good and we feel good about our presence there and continuing market share, etc. And that's not -- I think the reduction in risk-weighted assets is really, in prior quarters we had been impacted by some of the regulatory clarifications of the CCP capital, other regulations had increased and we're now working through some optimization on that.

So I think it's a reflection of the fact that we are continuing to optimize that business as to both capital and leverage consumption. But it was a very good performance in the business and I think what you're seeing in terms of the capital reduction is really around some of the optimization efforts and frankly that makes us feel better about the fact that we can continue to have a good presence and performance in the business while we optimize.

All right. Thanks a lot.

Thank you. Next question.

Stefan Stalmann, Autonomous.

Good morning. Three questions please if I may. The first regarding this 4.5% new leverage target. If I understand it right this is actually a tougher target than the 17.5% risk-weighted target that you have set yourselves, so essentially that means that for the next 15 months or so you're managing the bank on a leverage perspective as the binding capital constraint, not so much on a risk-weighted basis. Do you think that is something where the Brunetti Commission and the Too Big to Fail review could go to, that the outcome of that would be rules that may leverage the tougher constraint on UBS and Credit Suisse?

The second question regarding leverage exposure, could you remind us what the estimated impact is of implementing the final Basel definitions and how that features into you reaching this CHF1.05trillion target on leverage exposure?

And a final question on Slide 46 that we just discussed, that was actually very helpful, I was just very curious about why you have such a high risk density in Swiss francs, it seems that that risk density is about 45% in a Group that has an average risk density of about 24%. Are there any particular effects driving that? Thank you very much.

Okay, so I think on the first point, I think mathematically you're correct, the leverage ratio target is probably more binding than the risk-weighted asset target. I'm not sure I'd necessarily draw too much of a conclusion from that, this is not the first time that's actually been the case. I think when we actually launched the leverage program back in 2012 it partly was to make sure that we did get that back into balance basically. So they tend to -- it's either been RWA or it's been leverage.

I think, as Brady mentioned earlier in this call, I think in light of the general development of leverage standards around the world I think leverage has perhaps become more of a focus in terms of what we're seeing in the States and other countries and I'm not sure Switzerland is the exception in terms of that.

I'm not sure you can necessarily anticipate that from Brunetti, I think it's too early to actually speculate, we'll what comes out of it. I think in reality, as we've said already, the desire to set this leverage target I think is A, because we wanted people to have some precision about when we're actually going to get to the leverage target you were actually given before. And B, I think reflecting the general developments we're actually seeing around the world towards leverage as being a more important constraint for banks which obviously was led in the United States.

I think the second point then on BCBS, I think our understanding of the BCBS rules which goes live really on January 1, 2015, is, I think it's pretty much in line with what we said last quarter, is we don't expect any net increase in leverage overall as a consequence of moving from the Swiss rules which have been required for the last couple of years to the BCBS rules. We'll see how that goes plus/minus. There certainly will be some changes by business lines, some businesses will have more leverage exposure and some will have materially less, but the overall number in terms of target, you should regard that as net neutral in terms of the outturn.

I think in terms of risk density, I think I probably want to come back to that. We'll come back to you separately, Stefan, on that point in terms of Swiss franc risk density.

Great, thank you very much.

Thank you. Next question.

Daniele Brupbacher, UBS.

Yes, good morning, just two quick follow-ups from my side. Firstly on slide 32 again, sorry, leverage exposure, the CHF21b you show there, the increase from business and liquidity impact. Obviously it comes from lending initiatives in PBWM but I think that portion should be rather small bearing in mind what you show on slide 14, I guess it's a CHF1b or so. So it seems that close to CHF20b is the increase in liquidity requirements across the Group. Can you just elaborate a little bit on what that is in detail and what drives that? That's the first question. And also just out of curiosity, these are obviously average numbers, could you talk a little bit about the volatility around that CHF1.19b during the quarter and where it probably was at quarter end, that would be interesting.

And just a second question on the famous bubble slide, 25, obviously the size of the bubble, 50% of it is based on a 2.4% equity leverage ratio, so I guess if we were to apply 2.83%, the bubble would be bigger and a bit more on the left. I was just curious to hear your thoughts around re-pricing a little bit in more detail in terms of what you have done, what the impact was and how much more we can expect? And also in that context what is really the multiplier business into other businesses and, yes, the positive side effects so to say.

And then also this slide 43 caught my attention, the reduction obviously in RWA terms is quite significant, you explained it. Is it fair to assume that then on the other hand the leverage exposure did not really decrease in the third quarter, bearing in mind that you said it was mainly more than the regulatory changes which drove the reduction on the RWA side. That's really it. Thanks.

There's a number of questions there; I may not have got them all right, Daniele, so I might just ask for clarification. I think in terms of the increase in liquidity that we mention on page 32, it's certainly true that liquidity requirements are the primary driver of that increase to CHF21b. That, I think I, you may recall that, I think I was asked about the impact, for example, of the IHC a year or so ago basically and I said I think at that time we would expect that we would have to basically allocate certain amounts of liquidity to the new IHC holding company.

So that, we have actually built up our liquidity relating to the US business, actually also relating to our UK legal entities as well, and I think that just reflects the general development of the rules around local entity and liquidity requirements.

The optimization around that really reflects, as I said before, the (inaudible) after that strategy, but that's something you're actually seeing coming through this quarter in terms of that. Timing might be a little bit earlier than expected but I think in terms of the overall numbers I gave a year or so ago not particularly out of line of what we suggested at that point.

In terms of end period leverage, it was higher at the end of the period. It was about CHF1.24b as opposed to CHF1.19b here. That's relevant but I would point that essentially we manage our leverage on an average basis because it's the average over the period which is relevant for the leverage ratio calculation. So the spot will move up or down depending exactly on the end position but it's not something we particularly manage to in that sense, so it's the average which is kind of critical.

I think you asked a question then about, which I'm maybe missing, which was around RWA trends, was that within the prime business?

Well, it was basically starting with slide 25 and then 43, I mean it's kind of interlinked. But on 25, as you were saying there in the footnote, obviously the size of the bubble is based on a 50/50 split between a 10% CET1 ratio and a 2.4% equity leverage ratio. So I guess if I were to pencil in, everything else being equal, 2.83%, the bubble would be bigger and a bit more on the left right?

That's correct.

So I was just curious to hear your re-pricing strategy, what has been done, what more can you do there, what's the impact and also the multiplier, the positive side effects into other businesses from prime services.

And then linking into this you explained very well why there was this 15%, 20% decrease in RWA terms in the prime services business to CHF18b, slide 43, and I was curious, it is fair to assume that probably actually the leverage exposure in the prime services business did not decrease, or probably even increased in the quarter?

Well, I think there's a couple of points there. So the leverage exposure, we've not given the leverage by business line and I'm won't today, I think once we have the final BCBS rules we might move to do that but given we're in transition from that I think it's probably prudent that we don't really add to that today.

I would say the leverage in the prime business was marginally down in the third quarter compared to the second quarter, albeit nothing like as in proportion to the RWA move which Brady commented on before in that sense.

Okay, okay.

In terms of the re-pricing impact, I think it was marginal in terms of the third-quarter numbers because it's a process which is really just beginning in that sense. But we are aware this is very much an industry-wide phenomenon really following on from the introduction of the new US leverage rules in the States which is obviously having a much broader impact on the industry. But marginal in terms of the revenue or PTI benefit for prime services in the quarter.

That's very clear. Thank you.

Okay, next question.

Al Alevizakos, KBW.

Hi, good morning. Thank you for taking my questions. I've got two questions. The first one is regarding the fixed income revenues. Obviously you've suggested that the revenues were very strong on both securitization and emerging markets and I was surprised by that strong performance in securitization because the US investment banks didn't have such a good read-across. So what I wanted to ask you is, first of all, whether you think that you are actually gaining market share in securitization, even though I can see also that the RWA were decreased on the quarter.

And also what's your view regarding the ECB's move to actually, trying to issue more MBS and ABS and whether you think this would be like a big opportunity for Credit Suisse to increase their revenues on this segment in the next, let's say, three to five years?

My next question is actually on something that I read on Bloomberg, an article that suggested that the US Labor Department is facing pressure from Congress not to allow Credit Suisse to manage pension fund assets and that basically Credit Suisse could lose its status as a qualified asset manager with a final ruling taking place on November 21. It would be nice if you could update me on this one as well. Thank you very much.

Yes, thanks for those questions. I think with regard to the securitization business, we, David talked a little bit about it in the presentation, the breadth of that business and we view it as actually a best-in-class business. But it's also a very broad business so, as you say, I think a lot of people think of it as, well it's mortgage securitization or, but there are actually a lot of aspects to it. In fact a rapidly growing part, which David talked a little bit about, is the asset-backed business, which is not mortgages but other types of underlying securitizations, and so we've actually done very well in that segment.

So we do view it as a business overall where we've got a very strong business and we do feel that actually we've got strong market shares there, particularly across the various different elements and I do think the third quarter was probably a good example of that.

We do think that Europe is actually a very big opportunity for us. In fact, we've been incrementally moving resources and people to Europe out of the business, so we do think that there actually is a tremendous opportunity in Europe and obviously some of that is certainly being supported by the Central Bank's comments and activities there. But we do just think there is a big potential for increased securitization in Europe and we think we should be very, very well-positioned to be able to participate in that. So we'll see, it's certainly something we're very focused on.

With regard to the Department of Labor issue, as you say, we have obviously applied for the exemptions. I think that's a process that we continue to work through. No doubt, as you say, there have been various media coverage, etc. but we continue to work towards receiving that exemption. I think we obviously can't predict with certainty how that will come out but I think our hope and expectation is still that we'll, that we will receive our exemption on that but we'll have to see how it develops.

So you haven't taken any kind of provisions as of yet, or you haven't recognized anything in the targets that you use for the litigation that's not provided basically.

I think, just to be clear, I don't think there's a question of any further litigation exposure related to this, so there's no cost per se basically. The (inaudible) per se is whether or not there will be any restrictions on managing certain US pension fund monies at that point. So if we didn't then that would have some impact on the revenues but it doesn't have a litigation exposure per se. I don't think this is likely to be an issue, it's fairly fluid, but I think it's certainly not going to have any litigation exposure.

Okay, understood, thank you very much.

Thank you. Next question.

Alich Holger, Handelsblatt.

Yes, thank you for taking my question. Just to be sure to clarify some points. First of all on litigation, just to verify, is it correct that you just booked new litigation reserves of CHF41m this quarter? And secondly, what is the total overall number of litigation reserves that you have booked up-to-date now in the first nine months? Just to have the numbers right.

Secondly, on outflows from private banking that you're getting updates on expected outflows? Honestly I'm a little bit surprised about the volume that you expect, that it's CHF10b this and next year, knowing that, for example, UBS is telling us that the German regulation seems to be more or less finalized and this is, of course, one of the biggest cross-border markets. So my question is what lets you believe, why is it that outflow is still at these high levels, which markets are responsible for that? And perhaps you can just elaborate a bit on the German regulation where UBS saying they are through now and where is Credit Suisse standing there? Thank you.

David, do you want to address the litigation?

Well, we're just checking that, I'm not sure we have disclosed the nine months we've actually booked. To be precise, Alich, what we've said in the quarter is we've taken CHF41m in respect of two specific issues in the private banking and wealth management division, that's not the totality of our 3Q provisions. I think as you may recall I actually gave a number in excess of $600m in terms of what we've actually expensed within the investment bank, for example, so we've just checking whether we have a full nine-month-to-date one we've actually disclosed, but I don't think we do is the answer.

So I think those are the two numbers which I think you should focus on, but the CHF41m is purely for the PBWM division in respect to two specific items. And, obviously as is said before, I've given a number for the IB accrual we've actually taken, both strategic and non-strategic so far, but that was for nine months, just to be clear in terms of that. So that would be my point on the first question.

I think on the second question in terms of the regularization outflows, I don't think it's really appropriate actually for us to comment on what other banks have said. Clearly, the majority of the outflows, the CHF7.7b which we've seen in the nine months so far are coming out of the regularization programs in France and Germany. And I think you know we've taken a very firm line that we expect these accounts to be fully regularized by the end of this year.

I think the guidance we're giving around the CHF10b to CHF15b reflects both that, but also the likelihood we may see other amnesties in other countries in Western Europe over the course of the next 15 months as we move towards automatic data exchange, which I guess is about a year or so away basically. So that's the context in which we're actually giving that guidance. Just to be clear, the majority is Germany and France but it's not just Germany in France in terms of that CHF7.7b.

Okay and just your first remark, you said I don't trust the statements from other banks concerning regulation? Is that right?

I said I couldn't comment on other statements made by other banks. You should ask them yourself. I don't think it's appropriate for us to comment on statements made by other banks.

Okay and concerning German clients, just a rough number, where are you now? 95% have declared or gave an indication that they're not regularized or, just to get a rough idea where you are standing in the process?

I think I'd merely say given the, we're about two to three months away from the end of this year that clearly the vast majority are regularized.

The vast majority, okay. Good thank you.

Thanks very much. Next question.

Andrew Lim, Societe Generale.

Hi, good morning. Thanks for taking my questions. The first one is on TLAC, if I could get a bit more clarity on your guidance here. If I understand correctly you're saying that there's a CHF300m extra interest cost from debt which is now assuming bail-in status, and I'm just wondering how you arrive at that? Are you applying like a 20-basis-point uplift to your existing funding and capital structure or is there some kind of like mix going on?

And my associated question really is with regard to TLAC, what's your strategy? Are you comfortable having senior unsecured as part of TLAC or would you try and shield it from bail-in status and try and issue more tier 2 subordinated going forward? So that's my first two questions.

And then secondly, sorry, thirdly, you received a letter of caution from the Fed with regards to high-risk leveraged lending and I was wondering what your response to that letter was? And whether it would entail for yourselves a contraction of your leveraged lending activity and maybe you could quantify the impact there on revenues, not just in leveraged lending but maybe in associated businesses. Many thanks.

If I take the first point. So on the TLAC calculation I think, to be clear I think, I think it was a year or so ago when we actually set up the non-strategic unit. I think we did try and provide some specific guidance on the outlook for the funding costs of the Group and I think at that point we talked about in rough order-of-magnitude terms about an CHF800m reduction in our funding costs relating to the overall plans for the Group, clearly a large portion of that sits in the non-strategic unit.

Then we also guided that we'd see about half of that in 2014, the first year of the non-strategic unit which indeed is what we have done, but that if we look through to 2018/2019 that CHF800m reduction will be partly offset by about CHF300m of increased funding costs relating to the high likelihood that we'd move to issuing bail-in debt as opposed to conventional unsecured debt during the course of that time. I think we wanted to be very clear there would be some downs and some ups in there.

You can't, I'm afraid, simply take the existing funding costs and add 20 or 25 basis points because the funding costs of the bank, although we have, and I think as you know, done quite a lot of substantial ALM and capital restructuring transactions over the last four years, we still do have significant legacy instruments out there, some debt, some quasi-capital, which have relatively high funding costs dating back to the 2007 to 2010 period. So those essentially have to be run off and the spreads on those instruments are very substantially in excess of what we'd issue for senior debt today or TLAC debt on a likely basis over the next few years, so you will see that actually drop at that point.

I think what we're really trying to do simply therefore is just to refresh that guidance for everybody in terms of the outlook then for this CHF300m number we've given for bail-in debt in terms of our thinking today. It's clearly, to say the obvious thing, it's going to be dependent on the amount of TLAC debt you have to issue, which is clearly being formalized with the FSB and the spread cost at which you do issue it.

I would simply say on most of our central case projections for TLAC debt, the product of those two calculations is still CHF300m plus or minus. If anything I'd probably say if we look at the pre-provisioning arguments within the FSB paper then it looks like we may need to issue more TLAC debt than perhaps we would have thought a year ago, but it's equally true that the spread assumptions which we made a year ago are looking too wide on the basis of the issuance we've seen so far. So net/net we still come back to EUR300m plus/minus.

I would caution clearly that will depend on how markets develop over the course of the next few years but I think the answer essentially is our guidance for funding costs hasn't actually changed despite the significant evolution in regulation over the last year or so.

I think it's a little early to really speculate on the type of debt we'd issue but I think, as I said, our intention at this point is we would be issuing senior debt with a structural subordination clause out of the Credit Suisse's existing Holding Co by the form of an entity linked to the Hold Co, given the withholding tax issue I mentioned before. And that's probably where we will begin our issuance at some point over the course of the next year, hopefully sooner rather than later in terms of that. But I think going beyond that I think is probably a little bit too early at this point.

I think on your third question on the leveraged lending side, I can't comment specifically but obviously the regulators would like to restrict the lending in the sort of higher risk portion of that market. We clearly are going to be acting in line with that. That will have an impact on the amount of business we do in that area. I think the question as to what overall impact it will have will be dependent upon how much of that is across the whole industry or not, and so that will remain to be seen.

Okay, thank you very much.

Are there any more questions?

Michael Helsby, Bank of America.

Yes, morning, gents. Just two questions from me actually. Just turning back to that slide 33, so the increase in the leverage ratio target is about CHF5b of increased capital requirement. I appreciate consensus may have you getting there but, as you set out on slide 33, that does imply a 3% leverage ratio and a 12.1% CET1 ratio. So I'm just wondering, and you kind of alluded to this before, but why you do continue to use a 2.4% equity leverage ratio and a 10% CET1 target when you're allocating ROE? And why you're sticking to an 11% CET1 target at Group level when you seem to be directly endorsing those higher ratios embedded in that leverage requirement? So that's question one.

And question two is kind of related, but given the balance sheet now looks very geared relative to peers. Is it fair to assume that if there is any increase, further increase in the leverage requirement that we should think of that as coming all from CET1 rather than from future CoCo issuance? Thank you.

I think, just a few points really, I think just to be clear the increase from CHF1 trillion to CHF1.050 trillion is a currency move, it is not, now clearly that's why we basically did I think desire to give you the specific details around the hedging strategy for that. So therefore, you will see the CET1 and the shareholders' equity base reflecting that and obviously if the exchange rate went back down to 0.89 then the target would be CHF1trillion again, etc., etc.

It's more the 4 to 4.5.

Oh, in terms of total leverage.

Yes, yes.

Yes, but in terms of the equity component that's what I would say.

Yes.

Clearly, we issue CoCos in US dollars as well as in euros anyway so you have the same sort of currency effect implicitly in the non-equity capital portion of the balance sheet as well as in the equity portion of the balance sheet.

I think I'd probably still give you exactly the same answer I gave before in terms of the, when we look at the return on regulatory capital, it is return on regulatory capital, and the Swiss rules basically define that at 2.4%, so that's the ratio we actually apply. Clearly if that was to change we would change it at that point but I think picking an arbitrary number basically doesn't seem particularly prudent at that point, but I think at least we're being clear in terms of how we actually define it at that point.

As to the RWA leverage mix, I think we'll see how that develops. I think the point we do want to make essentially is we did want to give everybody clarity that essentially we are very focused on hitting the leverage target given before in FX-adjusted terms and that we intend to get there by the end of next year, which I think is important.

Okay.

Sorry, was there a second question, Michael?

Yes, it's just if, given the, if the leverage ratio were to step up from here, which people clearly are worrying about, so it's higher than 4.5, given there is so much leverage within the balance sheet already relative to peers is it fair to assume that that would have to come from CET1, so common equity, as opposed to a mix of common equity and further incremental CoCo issuance?

It's very difficult to really speculate, Michael. Clearly, I think we will look to see how the rules evolve globally and obviously the US has been a sort of first mover in this side but we're obviously seeing changes in the UK as well and, as you know, there's the Brunetti Commission and the Swiss discussion next year.

Yes.

And it's very difficult to prejudge where that will actually come out. I think it is very likely though that a significant component of that will be met by CoCos in some form or another, it's a very established product and there's an established market for that. So I don't think it would be fair to assume that it would be met entirely by CET1, it's very unlikely. I guess it might be met partly by CET1 although clearly if you were to see a significant change in leverage ratio that would also drive our decisions around how much balance sheet we choose to allocate.

Fair enough.

We don't regard it necessarily as fixed, Michael.

Okay, thank you.

Thank you. Any more questions?

There are no further questions. Please continue.

Okay. Well, I'll just say thank you all for joining us, thanks for the questions and appreciate your attention. Thanks 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.