Credit Suisse Group AG (CS) 2016 Q1 法說會逐字稿

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group's first-quarter 2016 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 the first-quarter 2016 results call. Before we begin, let me remind you of the important precautionary statements on slide 2, including the statements on non-GAAP measures and Basel 3 disclosures.

I now turn it over to Tidjane Thiam, our CEO.

Thank you, Christian, and good morning, everyone. Thank you all for joining the call. With me today is David Mathers, our Chief Financial Officer, and all our executive team in Zurich.

So this morning we will present the first-quarter results for Credit Suisse and of course take your questions at the end of the session.

First let me run through a summary of the financials for the quarter. This slide, slide 2, gives you an overview of our financial performance in Q1. As you can see, we delivered a profitable quarter for each of our wealth management-focused businesses, APAC, Asia Pacific; IWM, International Wealth Management; and the Swiss Universal Bank, which we call internally SUB. Together they generated around CHF1b of PTI.

In global markets and in IBCM, International Banking and -- Investment Banking and Capital Markets, we incurred losses, as you can see here. Together with the result of our Strategic Restructuring Unit, SRU, we therefore recorded a net loss of CHF302m attributable to shareholders and a pre-tax loss of CHF484m at the Group level, which you can see at the bottom of the chart.

David, after me, will give you more details on the key drivers of these results division by division. What I would like to do in my section is to update you on the execution of our strategy and highlight a few key aspects of these results.

So I'll start with our key messages. In the first three months of this year we have focused on three simple areas. First one is execution. The second one is profitable growth. And the third one is capital. So I'll take these in turn.

Firstly, we continued to execute on our restructuring program with discipline. Our Group-wide cost reduction program continues to move at pace. And given our progress to date, we are confident that we will meet or beat our operating cost base target of CHF19.8b by end 2016.

Second, the accelerated restructuring of global markets is well underway. We have a new and simplified structure. We are reducing our fixed cost base and reducing our exposure to market risk through the cycle.

We continue to make progress in the wind-down of the SRU, which is crucial to the achievement of our strategic and financial objectives. So that's for execution.

The second area where we are focused has been to generate profitable quality growth in our chosen markets and activities. In the challenging environment that we have all seen in the first quarter, all of our wealth management-focused businesses have performed well. Together they are profitable and have generated around CHF1b of PTI in the quarter.

Moving to IBCM, which is another growth area for us, our IBCM strategy, as you know, has been to pivot towards M&A and ECM. This is being implemented successfully and is reflected in an improved share of wallet.

Lastly but importantly, we have been able to maintain our capital position. Facing a sharp fall in client activity levels and lower market volumes, we have used a number of levers, cost control, RWA and leverage reduction, to deliver a stable look-through CET1 ratio of 11.4%. Going forward, we aim to operate within a range of 11% to 12% in 2016.

Let me then in the following minutes give you some more color on the progress we have made. I will start by addressing the actions we are taking around restructuring the Bank.

What you see on this slide is our adjusted total operating expenses at constant FX rates. So we have made good progress towards our Group cost reduction targets. We needed to bring costs down materially after a fourth quarter at CHF5.8b, and that is what we have achieved through a combination of measures. Our cost base of CHF4.8b in 1Q 2016 is 17% lower against 4Q 2015 and 8% lower year on year. Based on the progress to date, we are confident that we will meet or beat our Group cost target of CHF19.8b by year end.

Turning now to the headcount reductions largely supporting that progress on cost. When we presented the accelerated restructuring of global markets in March, we announced an additional headcount reduction of 2,000 that you can see on the left here, bringing our Group-wide headcount reduction target to 6,000 for the full year 2016. As of May 10, in green here, we have achieved 3,500 or 58% of our 6,000 target for 2016. That is an additional 700 since March 23, leaving a balance of 2,500 to be actioned between now and the end of 2016.

To put this in monetary terms, in the first quarter of 2016 we have achieved on an annualized basis more than half of the CHF1.4b of net cost savings we are targeting for 2016. We will not relent on the pace of our cost saving measures for the remainder of the year and beyond.

Moving now to global markets and its restructuring, we call it GMAR internally, Global Market Accelerated Restructuring, we have defined an end state with a simplified structure and a materially lower cost base, a business model that is less capital-consumptive, with $60b of RWA versus $75b today, and that would generate a risk adjusted return on capital of 15% in normalized markets.

Thirdly, a lower risk profile, better aligned to the size of our balance sheet with reduced earning volatility for the cycle. We are implementing this program. We have put in place a new structure, focused on equities, credit solutions and, I should add, electronic, an electronic platform. GM will continue to provide a differentiated product offering and provide crucial support to our international wealth management and IBCM divisions. In parallel, GM will focus on quality core client relationships, prioritizing a greater share of wallet and higher recurring revenues.

We have been implementing actions but have already generated annualized savings of $260m and actioned over 1,000 of our targeted headcount reduction to date. We have also managed capital proactively in a way that allowed us to absorb $7b of regulatory-driven RWA increases over the past 12 months.

Lastly, we have significantly derisked the business through the reduction of fixed income inventories. Against the prior quarter, distressed credit assets exposure is 79% down and US CLO has been reduced by 81%.

So in summary, we're making good progress, achieving important milestones against our objective to create positive operational leverage within GM through lower costs, reduce our risk profile and reduce the volatility of earnings.

Clearly our results in 2016 will remain highly dependent on market conditions and client activity levels. However, at the end of this restructuring, the division is expected to be more profitable, consume less capital and generate more stable earnings.

Moving now to the last of our big restructuring topics, the SRU. The Strategic Resolution Unit, the SRU, is critical in the successful execution of our strategy through the rundown of expenses and the wind-down or exit of businesses. The SRU has reduced RWA by CHF7b over the past quarter and reduced expenses too, excluding restructuring costs, which is the right way to look at it, reduced them by 24% versus the prior quarter.

So to sum up, we have made good progress on execution. We have lowered our cost base. The global market accelerated restructuring is on track. We have reduced our exposure to market risk. And the SRU continues the wind-down of non-core assets effectively and efficiently.

So now let's turn to our second priority, key to our medium-term and long-term perspective, profitable growth. APAC delivered a good performance in 1Q. We have had profitable growth. And we believe strongly that we have outperformed our peer group in the region in a challenging market environment.

We recorded net new assets of CHF4.3b in the quarter, with a stable gross margin at 81 basis points. Asset flows were strong considering the level of disruption experienced by Asian markets in 1Q. And inflows were largely driven by our ultra-high-net-worth clients.

In 1Q 2016 an additional 40 RMs, relationship managers, joined APAC, achieving a net increase now of 100 relationship managers since 1Q 2015, well on our way to achieve our 800 target for 2018. We now have approximately 630 relationship managers in APAC.

This performance was underpinned by our geographic diversification across the region, with Southeast Asia, Japan and Greater China contributing in roughly equal measure to a quarter of solid performance.

And last but not least, at the bottom of the chart there you can see that APAC was able to deliver a return on regulatory capital of 20%, so really a good job for Helman and his team.

Let's move now to international wealth management. There we registered net new assets of CHF6.9b in the first three months of the year. I want to single out within this number the performance of private banking, with a significant turnaround from outflows of CHF700m in 1Q 2015 to inflows of CHF5.4b in 1Q 2016. This improvement is consistent with our strategy of prioritizing wealth management and highlights the progress we have been able to make in the first quarter, with the gross margin, as you can see on the right here, at 109 basis points, an improvement against the prior quarter, further reflecting the quality nature of our flows.

Adjusted return on regulatory capital was 24%. Inflows have been broad-based across regions within IWM, that's a very important point, this is across the board really, with loan penetration up to 14% from 12% in the first quarter of 2015. Mandate penetration increased to 30% from 27% in 1Q 2015, so year on year, 27%, 30%, with cumulative mandate sales now at CHF7.8b since 1Q 2015, driven by the sale of our flagship product, Credit Suisse Invest.

Here too we have been recruiting. We initiated the recruitment of 90 relationship managers in 1Q, of which 40 have already joined and 50 have committed to join and are going to join in the coming weeks. Of these, two-thirds are focused on serving clients in emerging economies and approximately 80% are senior hires, with an established track record and well-established client portfolios. The recent addition of a 23-member team to bolster our client coverage in Mexico further highlights the attractiveness of a platform that Iqbal Khan and the team are building in IWM.

So let's move now to Switzerland. The Swiss Universal Bank has delivered a quarter of profitable growth. Adjusted PTI of CHF466m increased by 12% against the same period last year, a very creditable number in a market that is considered as mature, and a gain by 39% against the prior quarter, so Q4 2015. Adjusted return on regulatory capital was up 3 percentage points year on year to 16% -- it's actually 2 percentage points, sorry, it's 14% to 16%.

We recorded NNA of CHF3b across the division. In private banking, the gross margin improved to 139 basis points against 130 basis points in 1Q 2015, so here again quality growth, inflows at very good margins. Mandate penetration, another important KPI for us, went to 27% from 15% in 1Q 2015, a notable achievement. And on the cost side, we have accelerated our 2016 cost saving program, with nearly 50% of our planned reductions for 2016 initiated in 1Q 2016.

The improvement noted in our adjusted cost/income ratio to 64% is a reflection of the progress being made across the whole division as we make preparations for an IPO in 2017. So again, well done to us and the team. Good progress really in the core market for us.

IBCM, led by Jim, here is another bright spot because we had a resilient quarter against a difficult market backdrop for all our financing activities. M&A was a highlight for Credit Suisse during the quarter. Advisory revenues did well and referral pipeline remained strong. Against 1Q 2015, CHF230m of revenue in the current quarter, as you can see here, represents a material improvement year over year as well as significant outperformance against our peers, leading to an increasing share of wallet.

IBCM is a strong capital-light franchise, with businesses that are expected to deliver a high return on regulatory capital under normalized market conditions. Our M&A and financing capabilities are attractive to our ultra-high-net-worth clients across the globe. And a high degree of synergy exists between IBCM and our wealth management business.

To give a concrete example of these synergies, there is currently a strong interest in outbound M&A among Chinese corporates and entrepreneurs. Our strength in the ultra-high-net-worth individual segment in Asia positions us well to capitalize on this trend. For instance, during 1Q 2016 IBCM advised on ChemChina's CHF47b acquisition of Syngenta and on HNA's CHF1.4b acquisition of Gategroup, just to pick two examples.

In a quarter where market volumes in M&A, ECM, LevFin and DCM were respectively down 13%, 50%, 35% and 7%, IBCM was able to increase gross revenues by 3%. We continue to make targeted investments in IBCM to expand and deepen our client coverage. This includes strategic new hires that we have announced over the past quarter.

Finally, last but not least, capital. We have remained focused on managing capital proactively. In spite of a CHF484m pre-tax loss that we reported this quarter, we have been able to maintain a look-through CET1 capital ratio of 11.4% at the end of 1Q 2016, the highest level we have ever achieved. This is a good outcome given that we face material regulatory-driven RWA increases since 1Q 2015 that we have managed to absorb.

So before handing over to David, let me conclude by saying we have been executing our strategy with discipline in challenging markets to reduce cost and risk across our businesses, with global markets at the heart of this. And Tim O'Hara and his team have done a great job there, which I salute. Our continued focus on quality growth in Switzerland, in international wealth management, in Asia Pacific, has resulted in a good quarter in all our wealth management-focused businesses. And despite operating at a loss in 1Q 2016 and absorbing the effects of several billions of regulatory driven RWA increases, we maintain a strong look-through CET1 ratio at 11.4%.

I will let now David present our financial results in more detail before I come back to close.

Thank you, Tidjane. Good morning. I'd also like to thank you for joining our first-quarter earnings call today. So I'd like to start, please, on slide 17 with a summary of our quarterly earnings.

As we said last quarter, we will continue to show our results on a both a reported and an adjusted basis. And in the first quarter the adjustment items included CHF255m restructuring charges relating to the implementation of our strategy, as well as the cumulative translation adjustments relating to the sale of Credit Suisse Gibraltar that we announced during the first quarter. We exclude these items on an adjusted basis to better reflect the operating performance of our businesses.

We provide a full reconciliation of our adjusted and our reported profits for the Group and for each of our divisions on slides 44 to 47 in the appendix.

Now for the first quarter we reported a Group net loss of CHF302m. The Group had an overall pre-tax loss of CHF484m on revenues of CHF4.6b. On an adjusted basis we had a pre-tax loss of CHF173m for the Group.

We delivered a combined adjusted pre-tax profit of CHF997m from the Swiss Universal Bank, Asia Pacific and the international wealth management businesses. This however was offset by losses in global markets, investment banking and capital markets and in the SRU division. As Tidjane has already summarized, the global markets division was adversely impacted by challenging market conditions, continued mark-to-market losses and low levels of client activity in the quarter.

The performance of IBCM was similarly impacted by these effects. And, whilst oil prices have recovered in the quarter, we still saw some impairments relating to the cumulative fall in oil prices that happened in 2015.

So I'd now like to walk you through our quarterly Group performance in more detail and start with capital on slide 18. Clearly the first quarter was a challenging period for capital generation, given the losses that we saw in global markets, IBCM and the drag from the SRU. We are therefore very pleased that we managed to increase the amount of capital that we deployed to our growth markets whilst maintaining our look-through CET1 ratio at 11.4%.

What we show on slide 18 are the movements in CET1 capital in the first quarter. So we start with a pre-tax loss of CHF484m and we also saw CHF300m of CET1 relevant tax outflows in the first quarter. We then net out the capital used for our cash dividend accrual and FX movements, partly offset by a capital benefit of CHF300m, to result in a CET1 level of CHF31.8b at the end of the first quarter.

Now matching this decline in CET1 capital, we achieved a reduction in risk-weighted assets of CHF10b since the end of last year. This was driven by CHF8b of business reductions across global markets, IBCM and the SRU, CHF5b of FX movements and then partly offset by methodology changes of CHF3b. But as a result of the overall reduction in RWA, our look-through CET1 ratio was constant quarter on quarter at 11.4%.

We saw a similar effect in our leverage ratio, with total leverage exposure reduced by about CHF18b Q on Q, resulting in an unchanged leverage ratio of 3.3% on an equity basis. Now that 3.3% falls slightly short of the new Swiss TBTF rules which we expect to be published shortly and to come into effect in July, which will require us to operate the CET1 leverage ratio of 3.5% but by 2020.

But I would note that we already exceed the going concern leverage requirement of 5.0%, again effective in 2020. Our ratio was 5.1% at the end of March.

Now I'd just like to remind you that when we spoke in March, we communicated that we intended to operate the CET1 ratio between 11% to 12% through 2016, subject to any major litigation costs. That remains our intention. And so far in the first quarter we've raised a total of about CHF140m of CET1 capital through various initiatives, including business sales.

Let's turn now to slide 19 to review our Group RWA and leverage positions in more detail. So as we said, we've reduced Group RWA by CHF10b since the end of 2015. But what's important to note is over the course of the first quarter we released CHF6b of RWA from the SRU and we reinvested CHF2b in our growth markets.

If we look at leverage, you can see that the impact of our deleveraging program has been very pronounced. We reduced our leverage exposure by CHF133b or 12% since the first quarter of 2015. That was driven by a reduction of CHF62b in global markets as well as CHF59b in the run-off of assets within the Strategic Resolution Unit, primarily formerly investment banking assets that were transferred into this division.

So let's now turn to the divisional results and start with the Swiss Universal Bank on slide 21. For the first quarter, the Swiss Universal Bank delivered a reported pre-tax profit of CHF426m on revenues of CHF1.3b. Excluding the CHF40m of restructuring costs in the quarter, the pre-tax income was at CHF466m, 9% ahead year on year.

But as we compare to the first quarter of last year, I would remind you that in July of 2015 we deconsolidated Swisscard. We continue to have the same economic interest in Swisscard, but this income, following the deconsolidation, is no longer reported above the line within our pre-tax results. Adjusting for the impact of the deconsolidation of Swisscard, our adjusted pre-tax profit of CHF466m improved from CHF415m, an increase of 12% since the first quarter of 2015.

I think it's key to note the division's return on capital increased from 13% to 16% year on year. And the cost-to-income ratio improved to 64%, down from 67% in the first quarter of 2015 and well within reach of the goal we announced last October to deliver a sub-60% cost-to-income ratio.

If we look at risk-weighted assets, as we've warned before, the Swiss Universal Bank continues to be adversely affected by certain regulatory items, primarily the phase-in of the Swiss mortgage multipliers. And this was the primary driver of the CHF3b in risk-weighted assets quarter on quarter.

Now I'd now like to spend a few minutes reviewing the two businesses within the Swiss Universal Bank. The private banking businesses delivered an adjusted pre-tax income of CHF235m for the quarter, up 2% year on year, again excluding the impact from the Swisscard deconsolidation.

Net interest income continued to benefit from the SNB's decision to remove the minimum exchange rate between the Swiss franc and the euro in January of 2015. Recurring commissions and fees were broadly stable year on year, again adjusting for the impact of the Swisscard deconsolidation. That said, we did see a significant reduction in transaction activity in the first quarter compared to the very active first quarter in 2015 following the SNB's decision last year.

Private banking delivered net new assets of CHF0.7b in the quarter, in line with the quarterly average of last year and showing a solid recovery from the negative flows of CHF2.9b in the fourth quarter of 2015. But I'd note that the adjusted gross margin of 139 basis points was up by 9 basis points from the first quarter of last year, again adjusting for Swisscard.

And on the same basis, the net margin improved to 39 basis points, the highest level in the last couple of years. And this strong improvement is primarily driven by the trends in net interest income year on year.

If we look at corporate and institutional banking, for the first quarter we saw an adjusted pre-tax income of CHF231m. That's 26% up year on year. We saw some of the same benefits as in the private bank, with significant improvement in net interest income year on year, partly offset by lower income in the replication portfolio and reduced transaction activity.

I think one final point to note is that after a slow start to the year, we see strong momentum in the investment banking business in Switzerland, with 52 announced deals in the first quarter. And combined, these transactions represent over CHF50b in deal volume, which we expect to recognize in revenues in the upcoming quarters, clearly subject to market conditions.

So let's turn now to international wealth management, please, on slide 22. So IWM started the year with good momentum, with year-on-year growth in revenues and pre-tax income and very strong net new asset generation. For the first quarter IWM reported pre-tax income of CHF270m, 3% up year on year. And adjusting for the CHF9m restructuring costs, pre-tax income was up 10% year on year.

Net revenues of CHF1.1b improved by 4% year on year, predominantly driven by the growth in private banking. And the adjusted return on regulatory capital improved to 24%.

If we look at the individual businesses within IWM, the private bank reported a pre-tax income of CHF202m for the first quarter and CHF212m excluding the CHF10m of restructuring costs that we took, 2% up on a year ago. This was driven by revenue growth in the business, but partly offset by increased investment in our risk and, to a lesser extent, our compliance infrastructure.

Looking at the private banking trends, we saw higher lending and deposit margins which contributed to a 37% growth in net interest income year on year. Slightly lower assets under management drove a slight reduction in recurring commissions and fees, but transaction activity also declined. As we said before, last year included the benefit from higher client activity following the SNB's decision.

This though was partly offset by slightly higher revenues from structured product solutions, where we successfully introduced our ultra-high-net-worth clients as part of our strategy to deliver high-quality products to this group.

If we look at net new assets, the private bank delivered strong inflows of CHF5.4b, roughly two-thirds from emerging markets and one-third from Europe. That represents annualized growth rate of 7%. And that includes regulization outflows of roughly CHF1b.

I think as important as the net new assets, the adjusted gross and the net margins both increased year on year, I think underlining the quality of the assets that we've acquired in recent quarters.

Just lastly on private banking, I'd note that we saw a continued momentum in relationship management hires. We added 90 RMs in the first quarter. Approximately 80% of the hires are senior level managers and the majority of these hires are focused on emerging market coverage. Of the new hires, 40 have already begun working and 50 are committed to start in the coming months.

At the same time, the new hires in the quarter were offset by a managed reduction of 80 relationship managers due to the structural transfers to the SRU as well as the planned reduction in coverage across lower wealth bands and in lower-growth markets.

If we look briefly at asset management, clearly it's been a very difficult environment so far this year, but our first-quarter results did benefit from a significant private equity realization in the quarter. AM reported a pre-tax profit of CHF68m and, excluding restructuring, CHF67m, an increase of 46% year on year. We've made significant progress in reducing expenses, with operating expenses down by 8%, improving our cost-to-income ratio to 79%.

We also saw net new assets of CHF1.5b which I think is strong given the market environment in which we're actually operating. And that was driven by inflows in traditional products, including index and real estate.

Let's move to Asia Pacific, please, on slide 23. In this region we saw -- the first quarter saw a continuation of the challenging market conditions that began in the second half of last year, particularly in equities. Given the market environment, I think I'm very pleased to see that the business reported a pre-tax profit of CHF251m, albeit lower than last year. But I'd also note that revenues and pre-tax income in this business improved from the 4Q level, which saw similarly difficult market conditions.

Consistent with our stated strategy, we've made significant growth investments in our platform in APAC as we continue to attract quality talent, and we also invested in our risk and our control infrastructure. As a result, we saw an increase in our operating expenses year on year.

If we look at the businesses within APAC, in private banking we saw a pre-tax profit of CHF102m compared to CHF108m in the first quarter of last year. Our diversified geographic footprint as well as strong ultra-high and high net worth client activity contributed to solid absolute results. We added 40 new relationship managers in the quarter and 100 over the past year.

If we look at net new assets, we saw inflows at CHF4.3b in the first quarter, with an annualized net new asset growth of 11%, supported by the new RM reduction. And the majority of the contribution was from the ultra-high-net-worth client segment.

And finally, I'd note that our gross and our net margins were stable, I think again underlining the quality of the net new assets acquired in the quarter.

Within the investment banking business in Asia Pacific in the first quarter, we reported pre-tax income of $154m. This was about 60% down year on year, reflecting the challenging market environment during the quarter, particularly in equity markets. Equity sales and trading revenue in APAC declined by 42%, reflecting these conditions, particularly in equity derivatives. But notwithstanding this market environment, Credit Suisse gained share in equities trading. Our estimated market share was 6.4% in the quarter, up from 5.2% in the first quarter of 2015.

Our fixed income businesses in Asia Pacific were broadly stable, primarily driven by increased activity in macro products, but slightly offset by lower emerging market revenues.

So let me now turn to global markets on slide 24. Our global markets business has been very adversely affected by the difficult conditions we've seen across both equities and fixed income in the first quarter. Our performance was also impacted by structural changes to our business model as we restructure this area to a less volatile and lower-risk model.

Specifically we incurred mark-to-market losses as we decreased inventory to reduce the risk profile of the portfolios. And notably, as you may recall, last week we announced we completed the sale of the bulk of our distressed assets to TPG. This resulted in a loss of $100m in respect of that sale, of which $96m has been included in our first-quarter numbers.

If you look at the first-quarter results on a reported basis, global markets saw a pre-tax loss of $649m in the first quarter. This includes restructuring charges of $102m. And adjusting for these, we saw a pre-tax loss of $547m. Overall these results were in line with the guidance that we gave on March 23, with revenues down 46% year on year, excluding the mark-to-market losses.

First-quarter equity sales and trading revenues of $566m declined by 32% compared to the first quarter of 2015. Looking at our performance compared to the first quarter of last year, we had lower derivative revenues due to weak market conditions in our structured and corporate businesses, and we also saw reduced cash equity revenues as lower European trading volumes offset increased commissions from higher volumes in the United States.

But against that, the prime service business delivered a resilient performance, with significantly lower leverage and a return on assets of 135 basis points.

Turning to fixed income, this was clearly a very difficult quarter given both the challenging environment and approximately $400m in mark-to-market losses. Offsetting this difficult revenue environment though, we have been successful in reducing our expenses, with adjusted operating expenses down by 12% year on year.

A key driver in this was the reduction in compensation expenses, including deferred compensation, which was down $107m or 40% year on year following the prior decision we made to reduce both deferral rates and the overall value of awards in prior years. This was partly offset by investments in our risk, regulatory and compliance infrastructure.

Provisions for credit losses of $69m increased significantly compared to the first quarter of 2015, reflecting adverse developments on non-fair valued [lines] in our corporate lending portfolio, primarily energy-related, which I'll come to in a minute.

But let's turn to slide 25 and look at the risk profile within global markets. This slide provides an update around the mark-to-market losses incurred across our portfolio. As we've said, we've already successfully completed the sale of the bulk of the remaining portfolio to TPG. Overall in the first quarter we saw marks of $443m across global markets and IBCM, which compares to marks of $633m last quarter.

And if you look at the components of our mark-to-market losses, you can see that we incurred the losses most substantially in the trading-related areas. Our trading book mark-to-market write-down totaled $357m in the quarter. The marks within the distressed and par portfolios include, as I've said already, the $96m of exit costs relating to the sale of our distressed portfolio to TPG.

Now away from the trading books, the losses were much more muted. In leverage finance underwriting we had a mark-to-market write-down of only $22m in the quarter, and that was fully offset by carry on those same positions.

In the corporate bank, we had mark-to-market writes of $64m in the first quarter, but this includes $72m of oil and gas provisions. Whilst we do expect some further impairments to come in the oil and gas portfolio due to the cumulative impact of the oil price falls last year, we do think we're through the worst of this at these levels of oil prices.

I think it's also important to note that, given the significant derisk in the business, including the sale of most of the distressed portfolio, global markets has clearly made very substantial progress towards reducing the drawdown on maximum quarterly pre-tax losses by 50% under a severe stress scenario that we aimed, as we outlined as one of our goals on March 23.

Let's turn now to the investment bank and capital market segment. So clearly similar to global markets, the results in IBCM were impacted by the market environment, with significantly lower street activity across all products. For the first quarter, IBCM delivered gross revenues after joint venture splits with global markets of $456m, up by 3% year on year. Notwithstanding the difficult market conditions in equity and debt underwriting, we delivered a very strong performance in advisory, with M&A revenues more than doubled year on year. And we achieved this notwithstanding the fact that street M&A fees were down by about 16% year on year.

If you look at equity underwriting, the volatility in equity markets severely impacted the level of IPO activity, which drove revenues down by nearly 55% year on year, which I think is in line with the level of street fee decline we saw in the period. First-quarter debt underwriting revenues declined by 19%, and that's slightly better than the market decline of 27%.

Just briefly on capital, RWA was down by about 8% compared to the end of last year, driven by a decrease in the underwriting portfolio.

So let me turn now to conclude with the Strategic Resolution Unit in slide 27. So the SRU was formed in the October of 2015. And since that time we've made significant progress in respect of both capital mitigation and the reduction in pre-tax drag on our overall Group results.

If you look at performance, you can see we've significantly reduced our operating expenses from over CHF1b last year to CHF566m in the last quarter. Now on an adjusted basis, which I think correctly excludes restructuring and major litigation expenses, our costs were CHF489m, down by 24% quarter on quarter.

Reduction in costs is a core target for the SRU and was primarily clearly driven by reductions in both restructuring litigation expenses but also by the savings from the exit of our US private banking business. Within the US platform, expenses were predominantly driven by a reduction in people-related expenses. Headcount peaked last year in the US business at around 1,100 people. And at the end of March, headcount had been reduced to 350 and today it's around 80 people. There will be some delay into how this translates into expense reductions given the normal notice periods. But whilst we've already seen some benefit from headcount reductions, we will continue to see costs come down in SRU throughout 2016 as a result of this initiative and other steps we're actually taking within the SRU.

Negative net revenues in the quarter were the result of valuation losses as well as the spend related to exit of portfolios. The valuation losses were predominantly taken in emerging market and credit loan derivative portfolios, which clearly were adversely affected by the market conditions we saw.

We took valuation losses of CHF177m in the SRU, including CHF46m in provisions for credit losses in the quarter.

Notwithstanding these market conditions though, we made substantial progress on capital reduction in the SRU and were ahead of the schedule to meet our capital targets for the unit. In aggregate we've reduced RWA by CHF7b or 16% compared to the end of 2015. Leverage exposure was down by CHF16b or 12% compared to the end of last year.

These reductions were achieved across a broad range of exits and mitigations and at a relatively low cost. The exits are generally accomplished at less than 1%, somewhat better than the guidance we've given so far. I would note though that whilst we'd hope not to see a repeat of the valuation marks in subsequent quarters, we would expect to see continued losses as we exit from this portfolio.

So on that point, I'd like to conclude the results portion of this presentation and hand back to Tidjane, please.

Thank you, David. Before we take your questions, please let me summarize 1Q 2016 from our perspective and comment briefly on the outlook for 2Q.

We have been executing in 1Q our restructuring program with discipline and are making good progress. Our wealth management-focused divisions achieved a quarter of profitable growth, attracting quality inflows of assets and generating in aggregate CHF1b of PTI.

IBCM is demonstrating that its pivot towards M&A and ECM is on track and global market is being restructured effectively.

Lastly, our look-through CET1 ratio has remained stable at 11.4% in challenging market conditions, and we expect to operate in a range of 11% to 12% for the remainder of the year.

Regarding our outlook, we have seen effectively more constructive markets in April. However, we remain cautious for 2Q as transaction volumes are still lower than in previous years and a number of macroeconomic and political factors continue to weigh on client sentiment.

Before I finish, I would like to flag that we will hold an Investor Day in the fourth quarter this year and our Investor Relations team will provide more details in due course with regard to timing and location. We look forward to welcoming you all to that event.

And with that, we will now take your questions. Thank you for your attention.

(Operator Instructions). Andrew Coombs.

Good morning. Three questions from me, please, one on net new money, one on capital and then one on the corporate center. Firstly on net new money, a very good result compared to the fourth quarter. But the net new money flows are less than you guided to in your preannouncement in mid March, particularly in the Swiss Universal Bank. So perhaps you could elaborate on what changed between the pre-announcement and today in terms of the net new money flows.

Second question on capital, you reiterated the 11% to 12% core tier 1 range during full year 2016. You're already in the middle of this range. You've come in better than expectations for the first quarter and that was widely expected to be the lowest quarter. So why do you continue to believe that you won't breach that 12% mark this year, particularly when you've still got the CHF1b of asset sales to process? So perhaps an update on those as well, please.

And then finally on the corporate center, you've seen a better result there versus prior quarters and it appears to be due to a better other revenues result as well as a negative compensation number. So perhaps you could just provide a bit more detail on what's driving that as well, please. Thank you.

Okay. Good morning, Andrew, and thank you very much. I'll take the first one and let David deal with the two others. And thanks for noting that the flows were strong. But you're right, they're different from the indication given in mid March. But M&A is volatile. You will see that the APAC number is actually higher than the number we gave in March, and quite materially, and the Swiss number is lower.

We go through a very rigorous verification process every time on M&A. And what happened is that one flow in Switzerland that we classified initially as AUM, through that rigorous assessment was considered AUC, the client wanted to leave it in cash and that's most of that difference. So it's a reclassification at the end of the quarter.

David?

So on the second two points then, in terms of just on the capital position, I think there's several factors here. Firstly I think what we're pleased with in the first quarter is we actually did manage to balance continued investment in our growth markets, so Asia Pacific, IWM and the Swiss Universal Bank, whilst basically reducing the amount of capital we had in the SRU by CHF7b and basically maintaining our CET1 ratio at 11.4%, notwithstanding the loss we actually suffered in the first quarter.

So I think we felt we'd got that balance about right in the first quarter. I think it's very important to us to actually continue to drive towards some of the growth goals we laid out last October. And that's clearly a core part of what we're doing.

And that's a balance we intend to, I think, walk in the remainder of 2016. I think -- clearly I think, as Tidjane said, we have seen some improvement in market conditions in April and in May, but I think I'd be a bit cautious over the environment.

We do have a significant transformation to actually do within the Global Markets business. As we've said before, in the second quarter we'll be moving CHF10b to CHF15b of RWA into the SRU so there will be some losses related to that. So I'd just be a little bit cautious that we A, need to be aware of those market conditions which clearly have been difficult for the first quarter; and B, we actually need to actually runoff those assets and there will be some cost to that. And we'll give you much more detail on that in the second quarter.

I think the second point is normally in the second quarter we do see some capital costs relating to our share awards and deliveries. That's typically in the 10 basis points to 15 basis points. I don't see any particular reason why that would be different this year so I think that's a further measure to be cautious.

So at this point I think we're quite happy to talk about a range of 11% to 12% pre litigation expense, and that's what we would like to target, I think.

I think the third point really on the corporate center, a number of technical points there. So firstly, as you say, there's actually a negative compensation number. That relates to the fact that we actually maintain the mark-to-market position of certain comp instruments which were actually linked to our stock price within the CC. As you know, the stock price did fall in the first quarter so that actually generates gains in the corporate center. So clearly one would hope the stock price will improve and the situation would normalize going forward.

I think the second point, you did notice other revenues there. As part of our equity derivatives business, we do have positions in our own shares. And again the volatility related to that is actually booked in the corporate center, so we saw some gains there as well. So those would be the primary technical factors within the corporate center.

Okay. Is that okay, Andrew?

Very useful. Thank you.

Okay. Thank you.

One final point basically. We did actually make some good treasury revenues within the corporate center as well, reflecting the fixed income market. So hopefully that will be more sustainable.

Okay. Thank you. Thank you, David. All right. So shall we move to a next question?

Daniele Brupbacher, UBS.

Yes. Good morning and thank you for the presentation. I have a few small questions in private banking in general. And to start with IWM, the gross margin, 109 basis points I think was the highest in three years. Could you just talk about what stands behind that high level in the first quarter?

And then probably related to this, mandate penetration went up in most areas. And particularly in SUB obviously it almost doubled within a year. Can you just talk about the profitability differential between non-mandates and mandates if that's possible?

And then just lastly on the Swiss IPO, can you just give us an update there in terms of the steps you still have ahead this year, like creation of a legal entity and some of those milestones? That would be useful. Thank you very much.

Okay. Thank you, Daniele. A lot of question on PB. David, do you have a summary of the margins in PB? Do you want to go into that?

Yes, I would actually. So firstly just -- there's a couple of slides in the appendices worth looking at. I'd probably start on slide 35, which has the private bank trends within the international wealth management division, which I think was the core of the question.

So what you see there essentially is clearly net interest income improved from CHF220m to CHF301m, recurring commissions and fees slightly down. But I would note what we said before about we have been quite successful in terms of selling more structured products. You've seen that in terms of mandates as well. The only reason it's slightly down is just the number of assets we actually have is slightly down.

And transaction activity was lower, but perhaps not as low as people were expecting. I think maybe it was more resilient than people were expecting. Clearly the first quarter of last year was very good at CHF241m with the SNB action, but essentially transaction activity in the first quarter was stable compared to that. I think, look, it's a good result I think is the bottom line.

Now if you actually just translate that into gross margin, as you say, you end up with an adjusted gross margin of CHF109m compared to CHF97m, and adjusted net margin of CHF30m against CHF27m.

I think the second slide just to look at really gets to the whole question, the broader question around margins across our private banking business on page 31. You can see similar trends. You can see the gross margin for IWM, as I've mentioned before, from CHF97m to CHF109m, net from CHF27m to CHF30m. If we look at the SUB, CHF130m to CHF139m and net to -- I'm sorry, I apologize, on page 31 on the Swiss Universal Bank, the net margin improved from CHF36m to CHF39m.

And then Asia Pacific, it was stable there, but I think that stability does reflect perhaps the pace of growth we're actually driving there in terms of higher expenses.

And the number you're referring to is the adjusted number, without Swisscard.

The adjusted ones, of course.

Because otherwise the overall numbers indicate a different evolution.

Correct. That's right.

So the correct ones are the ones excluding Swisscard.

Yes. So as Tidjane is pointing out, the Swisscard deconsolidation does reduce the reported margins and it reduces that primarily through the recurring margin component, because there's about CHF56m recurring revenues in Swisscard which were excluded.

Which explains then the movement in recurring income.

So therefore you do need to exclude that, which gives that. But I think stepping back, I think the key point here is it is pretty much driving to trend. I think as Tidjane referred to before, we are very conservative about assets we actually recognize as AUM. You remember we actually tightened our policy around this in the third quarter of last year so the denominator is controlled.

But I think the balance of revenues here is exactly what we said we'd do, essentially you have seen the strength in net interest income. We're clearly doing things to protect and grow our recurring fees as much as possible ex the Swisscard effect. Transaction activities are a bit more obviously open to market conditions.

Yes. And maybe the other thing we said very quickly about that, that is that it's broad-based really. I think that's a particularly pleasing aspect of the IWM flows. They're really across regions, both in emerging markets and --.

And in Europe.

Exactly, and in Europe. Mandate penetration and differences in profitability?

The -- I think I'm not sure I'd add much. I think the usual trends, as you know, is the ultra-high-net-worth business tends to have a lower gross margin. But the dilution on the net margin is normally less because some of the operating expenses are lower relative to the size of the business. And I think in terms of ultra-high-net-worth penetration it was about 47% across all of our private banking businesses in terms of that. So broadly stable with the trends that we actually reported before.

And when you were asking about the IPO, the first thing I will say is that I'm really pleased with the increasing return on capital in the Swiss business, because one of the drivers of this IPO is really our desire to see the value of that asset recognized in our share price. And we've always believed there was a material upside there that was hopefully recognized.

So again, credit to Thomas and his team, 2 points increase in one year is very good and driving towards a very attractive asset and I believe a very attractive valuation. So part of the preparation for the IPO is improving the operational performance. That's really the first block absolutely necessary.

And the second block is the legal work, the setting up of the legal entity Switzerland. And there we're working very closely the regulator because the legal entity Switzerland is not identical to a Swiss Universal Bank; there are differences at the margin, whether it's in STS and our trading activities or some of the support centers, etc. There are differences of (inaudible). But the registration for a banking license has been made on time and we are on track for completing that process in Q4, I'm looking at Thomas here, Q4 2016. October, yes.

Thank you.

Okay? Thank you, Daniele. Okay. Next question?

Al Alevizakos, HSBC.

Hi. Good morning. A few questions from me, if I may. First of all, I just have a question, a general question regarding this year. So if, let's suggest that there's going to be statutory loss for the full 2016, is there any kind of preliminary discussion with FINMA whether they may, let's say, block the dividend if the losses continue? That's question number one.

And then secondly, I'm just trying to understand basically, David, on your comments, whether there's a one-off element or whether the actual mark-to-market losses and actually gains this quarter on the corporate center actually should be taken off as one-off items, because, for example, there were gains this quarter but actually next quarter there may be some losses similar to the fair value of own debt.

And then a third question is in the Annual General Meeting you've actually raised the capital, the ability to raise capital for acquisitions. Is it something that you believe that will be on your agenda before the IPO at the end of next year? Thanks very much.

David, you take the first one on FINMA and the dividend and losses, statutory losses.

Firstly I think -- I don't think we would feel necessarily -- we're certainly not making a full-year projection for our results basically, neither in our earlier comments nor now basically. So I'm not really going to comment on your suggestion we might make a statutory loss for full 2016. That would seem pretty forward-looking as a statement at this point, frankly.

And therefore I think it's difficult to really comment on FINMA's view on these things. Clearly we did have a loss last year due to the goodwill write-off we took. And I think, yes, obviously we're actually paying a dividend with a scrip alternative which was approved by our General Assembly last week. So I think it seems a bit forward-looking and rather presumptive I think in terms of making a comment around the full year.

I think within the corporate center, I think I've been clear in terms of the major components here. Firstly, if you go back to what we actually said last October, we did substantially streamline the corporate center. It now basically contains treasury and some of the comp-related volatility. And it contains certain parent group expenses and it retains the legal entity program, the expenses for which I'm happy to say are actually beginning to reduce.

If you look at the CC numbers this quarter, I think there were some things there which I think are definitely recurring, so I'm thinking improved treasury performance. So we'll see how that goes. And there were some things which reflect that volatility, so, for example, around the compensation line and the trading your own shares effects. Those were clearly a positive in the first quarter. They could easily be a negative in subsequent quarters.

Should we exclude them? No, I think we're trying to -- I think our process for adjusted numbers we've actually laid out in terms of what we exclude, which is restructuring and significant litigation costs. Those numbers are actually now included within our GAAP accounts so they have to meet formal standards. They have to be sustainable otherwise I think we would have a challenge from the SEC around that, so it's not appropriate. And we've stuck to that discipline here basically.

But I think I've been pretty clear to you in terms of the trends in the CC. It was better than one would have expected normal course. But there are some sustainable items in there, such as the reduction in the [LE] drag and certainly the other revenues which one would hope would be more repeatable.

I think the third question was a formal question. No, I think the AGM authorization is something we've actually requested each year. We normally try to have a reserve of around about 100m shares available for acquisitions. And that is renewed each year and it was renewed this year as part of that basically.

From a technical point of view, it's a related and the same reserve as what we used for the scrip dividend, so the number might not be quite what you expect because we have to get authorization for the scrip as well as for acquisitions within that category of our share class. But there's nothing unusual within that request.

That's correct. Is that okay?

Yes. Thank you very much.

Okay. Thank you. So next question?

Jeremy Sigee, Barclays.

Morning. Two or three questions, please. Firstly, on the path back to breakeven and profitability in global markets. If I add back the mark-to-market, it looks -- underlying revenues in the quarter are just below CHF1.4b and the cost ex-restructuring are just above CHF1.4b, so you're slightly loss-making in the quarter. I just wondered, so I take your points about the exit costs, but just focusing on operating costs, how rapidly do we see some of these cost savings coming through? You're saying you've already achieved a headcount reduction equivalent to CHF260m annualized. Will we see the operating cost base in global markets come out already in 2Q at a CHF1.3b, CHF1.2b level? We will see a step down in the near term such that that unit can reliably be breakeven or even profitable? That's my first question.

The second question is just on the IWM private banking gross margins that you noted, which are now up at the 109 basis points, having been also pretty good in 4Q, 107 basis points. Are we viewing these as a sustainable base level from which we move forward? And that's it.

Okay. So I think on the first one, as I said, I think Tidjane has given a very clear summary of the operating divisions in which we currently trade. And as I said, whilst April was better, I think we have to recognize this is a very challenging macro environment. Some of the conditions which obviously resulted in 4Q being difficult and 1Q being difficult could easily recur in the balance of this year. There's still the same macro effects that we saw in the first quarter.

So just be cautious. And I think that's there basically, this is not an easy environment in which to operate.

But I think taking account of that, should we see the costs come down is my point really?

I think the second point is we'll obviously make every step we can to get the expense reductions in as early as possible. But I think it is worth recalling that people typically are on three months' notice period and it takes time for that process to actually go through. So regardless, even if we announced and executed everything on March 23, which we didn't, because it does take time to put this in place, there is a timing and a phasing for this. So I think the reductions will come through, but I would be careful about how much comes through in the second quarter.

And Jeremy, on a technical point which you understand as well as I do, the balance will shift because we will actually be restating our numbers with the reload into the SRU because as we move that CHF10b to CHF15b of assets into the SRU, certain infrastructural costs will actually go with it because the SRU will be involved in running off some of the infrastructure relating to those assets. So the numbers you'll see for global markets in due course when they're restated for this in 2Q and we report again so 2Q won't be the same as this.

So I've answered your question really on a pre-restatement basis. Clearly the basis will shift with the SRU reload.

Understood.

I think that's the central point really, Jeremy. That's why we're not giving you a clearer answer at this point. Once we restate at Q2 you'll have a clearer visibility on the economics of global market and what's happening in the remaining global market. But I would say a good rule of thumb is two to three quarters. You get a lag between the quarter in which you take or announce or notify and the quarter in which the benefits materialize. Two to three quarters is a good rule of thumb to do your forecasts, I think.

The other question was on IWM and the margins. The short answer is yes, I think that's a good level of margin and something we can sustain barring a big differ from the macroeconomic conditions. It's something we can sustain.

There's a potential there. We said loan penetration has gone from 12 to 14. That will feed into the net interest income over time. The appetite for loans is real among our ultras. These are high-quality risks, where we have a very good track record with our risk functions. We're very good at assessing those risks. And the margins on those transactions are very good on a risk-adjusted basis. So there is room for expansion in IWM at stable margins, I would say.

Very clear. That's good to hear. Thank you.

Thank you.

Kinner Lakhani.

Yes. Good morning. Yes. I just wanted to follow up on this question or theme of margin sustainability, in particular thinking about the net interest income or the net interest income component of the gross margin. If we compare where we are today in terms of the NII component of gross margins, it's substantially up from where we were four or five quarters ago. I think in total we're up from 40 to 52 basis points if I added all the private banking units together.

And I remember a debate last year that we were having about how this was benefiting from swap income, the negative Swiss franc rate environment. So I guess I wanted to ask the question again how sustainable this is, especially if the environment of interest rates normalized to, say, zero rates.

Second question was to think about obviously the shift to your lower-risk, lower-inventory model within the investment bank. I guess now that you've had a few months of restructuring through the fixed business, do you have any preliminary thoughts as to what the end-state revenue go-to level might be for the fixed business? Fixed business has historically made about CHF4.5b if I think underlying 2014/2015 and I'm just trying to get a sense of where is this going to end up.

Also the losses that you've experienced in recent months, how does that impact the models and the risk weights going forward?

And the final question, apologies for this, the CHF1b capital gain that you look to recognize this year, what are the earnings implications of that? Thank you.

Sorry. I'm not sure I got the last one, the CHF1b capital gain, you said what? The line wasn't very good. What was this one?

Yes. So what are the earnings implications of that? Will there be any earnings implications?

Okay. All right. Thank you very much.

Thank you.

Okay. Well we'll try to take them in order. First one is net interest income sustainability. David?

So I think clearly there are a number of components to the net interest incomes we're actually seeing across the businesses. I think as Tidjane mentioned before, expanding the loan penetration in our private banking business is a core component of our strategy. And that applies outside of Switzerland as well as inside of Switzerland.

And I think the momentum that we're seeing in IWM and Asia Pacific is -- it's a core part of what we're doing there. It's important both in terms of revenues. It's important in terms of the broader client relationships we have and the profitability we enjoy from those assets. So it's a core part of what we're doing. And clearly that's one reason why you're seeing the risk and compliance controls related to that increasing, because that needs to be matched by a step up in the appropriate control environment to actually support it.

I think the point you're touching on really is the benefit that we see from the negative interest income, the negative interest rate environment here in Switzerland. I think, as Tidjane said, I think his projection really in terms of where we are in terms of that is based on where we are today in terms of the interest rate environment.

Clearly if the interest rate environment was to substantially normalize then you would see a drop in net interest income to zero and then it would actually improve again basically as rates go positive at that point if we're in an unusual position in terms of that book. But I think it's fair to say that's only a component of what we're actually doing here. And to be clear, that is a benefit which primarily affects the Swiss Universal Bank as opposed to the IWM business.

So I think if I was to step back, I would say clearly for the IWM business I think we've got strategic and structural things we're actually doing in terms of expanding our loan penetration. Within the SUB they'll have some risk in terms of the Swiss franc rate environment. Asia Pacific is clearly more driven by those same factors.

There's also, if I can add, a counterbalancing effect on the deposits because we are not passing the negative interest rates too. So if rates moved in the other direction you would lose that downside, if you will, on the retail side. So there are counterbalancing effects. It's not completely straightforward. Is that okay?

Yes.

Okay. Then, yes, you're asking about fixed income. Very hard to give you a revenue forecast. I don't think we stage we would do that. But the way we think about the business, we said we would take it down to a CHF5.4b cost base. If you want a global revenue number, it's anywhere between CHF6.5b and CHF7.5b, to give you a sense. And we think we can generate in normalized conditions, I insist on those words, 15% return on capital on that basis on an RWA of CHF60b and a leverage significantly reduced. So that's what we are trending to.

Clearly the process to get there is painful, because again, the results of global markets are not that surprising if you just think about what we are doing. If you tell a business -- I will give you much less capital to work with, you will get a revenue decrease from that. And when you look at the RWA available in 1Q 2015 and the RWA available in 1Q 2016, you need to take into account the RWA inflation. So actually on average across the quarter, the business had much less capital to work with in 1Q 2016. That's one impact.

The second impact is market demand. So you are shrinking the capital available and at a time when demand is collapsing, anywhere like 30% or 40%. And you then have the opportunity cost in the time of your teams because they are working quite hard to drive the RWA down and as they are doing that they can trade.

And finally, you have a fixed cost base which is, by definition, fixed. So you are stuck with a cost base that you can only attack over time and you have a pretty ugly revenue picture. So I'm sorry, I think what's happening is actually quite rational and explainable currently if we look at the drivers of that performance.

And then if you add markdowns, you end up with revenues we've had. There's nothing extraordinary about those revenues. They are logical given where we are and the restructuring we are undergoing. But it will, as we've said, it will evolve after that, because once the RWA has been reduced and so cost has been taken out, considering that you have derisked too, you reach a really, really quite attractive platform that can focus on clients.

But at the end what we want to do is serve our clients, have minimum disruption to servicing our clients, provide the products that they like to buy from us and we'll be then in a good position to do that. Sorry if it's a long answer, but I think it's worth running through that logic.

Do the losses feed into the RWA? David, that was the next question.

I think we probably need to get back to you with that. I think we definitely saw some increase in the risk-weighted asset utilization of the bank from the market volatility that we saw because that does come through in some of those drivers. Some of that we actually succeeded in hedging in the quarter, therefore mitigating the cost of that. But I think there is still some residual adverse effect. And you see that primarily in the businesses that have investment banking assets, so global markets, but actually also in the SRU numbers as a consequence of that volatility.

I think I'm not expecting any changes in our models, per se, relating to the losses we saw in the first quarter. I think it's more a market volatility impact in terms of how that comes through in terms of some of the VAR calculations.

And the CHF1b capital gain.

I do apologize. I think it will depend on the exact mix of assets as we finalize the sales in the balance of this year. There would be, for example, on real estate sales there certainly would be a gain. On some of the others, that would not be the case basically. And we'll disclose those as we go through the year.

Okay. Is that okay?

Great. Thanks a lot. Yes. Thank you, Tidjane.

All right. Thank you. No problem. Next question?

Kian Abouhossein, JPMorgan.

Yes. Hi. Thanks for taking my questions. The first question is on your cost number that you had at the beginning of the slide, the 8% decline. It's about CHF400m. And if I look at your page 112 in your release, it looks like you have about CHF300m of deferred decline. And you have clearly guided to ongoing deferred decline. But it looks like you're using all the deferred decline, more or less, of CHF400m for the full year already in the first quarter. I just want to try and understand this, if I'm looking at this correctly or not.

The second question is related to the inventory exposure that you have left. You give the percentages, but clearly there are hedges, there are sales. So I was wondering if you can give me more exact numbers. I can calculate something but I don't think it's exact. And both for the distressed book as well as the CLO book.

And in that context, how should we think about the mark to market going forward, because I'm sure you have macro hedges. Should we think about credit spreads as a good guide or would you say that is inaccurate as such?

And lastly, just coming back to your discussion on revenues, you mention on slide 8 reduction of volatility of earnings in global markets by 50% in a stress scenario. Now that to me means much less revenues, assuming less risk. At the same you reiterate the cost base from the Investor Day. So just trying to square your P&L in the IB with less risk.

Okay. Thank you, Kian. Do you want to take the deferred?

Yes. So let me just start on the overall cost numbers. So I think if we actually look at the adjusted cost number, you can see it drop from CHF5.8b in the fourth quarter, which did, as I think we outlined quite clearly at that time, include a number of significant one-offs. So I think probably a fairer comparison is with the CHF5.2b we actually had in the first quarter a year ago. So clearly we're pleased to see it's down from CHF5.2b to CHF4.8b.

If you look back at what we said on March 23 when we actually gave more detailed cost guidance, we said we're looking to be at or below CHF19.8b, which equates to a cost number of CHF4.95b. So I think it's good news clearly that the CHF4.8b is actually less than the run rate we need to achieve in terms of hitting that target.

But I would caution that on two points really. The first quarter does tend to be abnormally low in terms of expenses. And secondly, the point we discussed before around the corporate center in terms of volatility around some of the comp charges actually affect these overall numbers as well. So that actually reduces our expense run rate in the first quarter.

Now clearly against that, we come back to the comments we've made before, which is we have achieved significant reductions of headcount, predominantly around contractors and consultants, but across the Bank. But the costs for that normally take a couple of quarters to actually come through.

So I think it's -- what you're actually seeing in terms of the overall expense reduction is the CHF4.8b number is relatively low. It's not impossible that it actually could go up in the second quarter and then drop downwards as the more structural changes we have actually coming through it.

So that would be my broad picture in terms of guidance around that. So I think we're pleased with the CHF4.8b number, but I don't think we should be declaring victory at this point in terms of our cost goals. It does put us very much on track for being at or below the CHF19.8b number.

Just to follow up on that, David, it looks like it's all deferred based on page 112. It's no real cost reduction; it's just adjustment to the deferred that you guided to in the fourth quarter after you took the one-time hit.

Compared clearly to the -- so the deferred comes down for two reasons. One, essentially we reduced the EV over the last three years so the actual amount of the awards we've actually given over the last three years is actually lower, and that comes through this year. And secondly, clearly -- and that was obviously more marked in 2015 than in year prior years.

And secondly, reduced the amount we defer by about CHF150m. And that gave us about a CHF25m benefit from the reductions in deferral.

And then thirdly, we also get these CC effects as well, which give us some swings. And I think that's what's distorting the analysis you see there.

If I may Kian, just on that one, I think the more interesting number is the other number we gave you. We said of the CHF1.4b net, which is the net cost reduction, the CHF21.2b minus CHF19.8b, we've done more than half of that that. That's real. That gives you a sense of the run rate of savings being achieved, because then we take the jobs being taken out. We know -- also keep in mind when we take out jobs, there's a lot of infrastructure coming with it. There's some risk and some compliance and some systems, etc., that you don't have to do with it anymore.

So the CHF700m of net cost reduction for me is the cleanest number. The quarterly absolute cost, it's interesting, but it's full of noise and it's not going to tell you much about the story. The really, I think, good number is the half of CHF1.4b, more than half of CHF1.4b. Yes?

Okay.

That's the core point, because what you see in the deferred comp numbers is you see the reductions we had before, then you see this volatility effect we've had before. So that supercharges the benefit in the first quarter. As I'm sure, as you dig through the rest of the earnings release, you'll see that certain costs, such as our non-comp expenses, professional services and contractor, are actually ahead of where they were a year ago. That's not particularly surprising because we talked about some of the investments in risk, compliance and related IT investment we actually made a year ago. The ramp-up for that peaked in the fourth quarter and it's coming down.

So that's the overall story of our cost reduction. So if you think, going forward, we have the sustainable benefit in terms of lower deferred comp, we will then start to see the ramp-down in terms of those non-comp expenses as the other measures we're taking actually kick through, which Tidjane summarized, and that drives us through it. But what you're seeing here, as Tidjane said, is the noise around that quarterly volatility. But as you see through it, you can see those are the components of the cost moves.

And that's why we showed you the headcount, because really those jobs taken out are definitely going to flow through in the coming quarters. But again, the deferral is really a key reform because one problem I found when I arrived was a double problem, if you wish. We thought people were costing us a lot of money and people were very unhappy with the money they received. And that's not a good place to be, but that's what happens if you defer a lot. People get very little and you're pushing forward this wall of money.

So yes, there was a lot of commotion when we -- we had CHF5.8b in the fourth quarter. But really in there was the cost of changing that once and for all so that we actually variabilize the comp so that when you move it down, because you have a downturn or whatever, some of it flows to the bottom line and to the shareholder, which before we had that disconnect, that you could make a very harsh [REM] decision and there be no benefit to your bottom line.

I hear you, Tidjane, but you've just taken the cost upfront. It's a net present value for shareholders actually negative because you're paying it upfront. There's no claw-backs anymore. But that's a different discussion. You're creating flexibility but you pay people upfront. There's no change.

I see a lot of heads moving here negatively that you cannot see. But we shall see later. I think there is claw-back.

I think your second question then was on the size of the positions post the sale. We have CHF598m of distressed market value after the disposals that were accomplished in the fourth quarter, the first quarter and then the sale of the distressed business, if that's helpful.

CLO is 200.

And the CLOs?

CLO is 200.

200. Okay. That's very helpful.

Okay? Yes.

I think the third question was actually really just on the revenue impact in terms of the reduction in distressed. I don't think, Tidjane, there's much we'd probably add to what you said before, which is I think we've given guidance that the point of the restructuring is to have a global markets business which can achieve a 10% post-tax return in tough conditions, like we're seeing now, and 15% in more normalized ones.

And the target expense base we have, as Tidjane said, that gives you a revenue range of CHF7b plus/minus depending on how you put it, and that's what we need to achieve. Now clearly that's going to have to be achieved with a lower level, I'd say a more appropriate level, of risk appetite.

Okay. That's very helpful. And lastly, just on the mark to market of the remaining exposure, is it fair to look at credit indices or you think that's not a good idea, don't go that way, because we have hedges against it?

I personally wouldn't look at that for a different reason, Kian, which is the positions are very idiosyncratic. And I think trying to find an index that actually relates to it I think is very misleading. And I think it reflects that idiosyncrasy.

So I think it's very likely we'll finalize that this quarter, that the bulk of that [CHF598m] we're moving across to the SRU and we'll be reporting it in there basically. It is idiosyncratic. That said, it clearly is -- I think that's all I can really say. I don't think credit indices give you much guidance around the performance of these types of assets.

But it will be still a mark-to-market book, so it will go up and down based on fair valuations that you do.

Absolutely. Yes.

But it's basically one-fifth of what it used to be. So you can equate those variations to be one-fifth of what they would have been.

It was and is a trading book, therefore it's fair value elected. You don't have the option to change it basically, even if we move it to SRU.

And we've looked at the composition of the portfolio. You really have taken out a big chunk of a standard deviation of that division, as we said, 50%. If you run your simulations and [actual] scenarios, you could do a draw down. With the reduction we've done, we've taken out about close to 50% of that. So you're in a much less volatile earnings stream.

Yes. Thank you. I apologize for taking so much time.

No, no. It's always interesting. Always very interesting questions. So thank you. Any more?

Huw van Steenis, Morgan Stanley.

Good morning. Thanks very much for your helpful discussion on your progress this morning. Just two questions. First, I was just interested to understand are there any lasting knock-on implications from your trading losses, either on capital requirements or regulatory costs? So, for instance, if you go into the CCAR process for the first time, do you think there's a risk you might potentially fail the US stress test either quantitatively because of higher stresses or qualitatively because of concerns on process? And what would that mean for costs and capital?

And then secondly, just on the sub IPO, I realize that you're hesitant to give us many more details at this stage. But just to help investors get their hands around the valuation impact, could you guide us of what core tier 1 or leverage requirement you think an independent entity would need to run at, because clearly they're not going to be able to run at the minimums of 10 and 3.5 that you're using in your management accounts at the moment.

So, for instance, if you had, let's say, a 50 bps -- I think leverage is the key constraint at the moment on capital. If you had a 50bps buffer, that would mean that of the CHF2b to CHF4b you raise, you'd need to keep at least CHF1b in the sub, which would take a further 2 points of the sub's ROE. So maybe just talk to us a little bit about what you think is the target ratio and therefore what is the realistic ROE for a sub-IPO business. Thanks.

Thank you and good morning. I'll take the first one and maybe let David take the second one. On the first one, we actually have done a lot of work and it's been one of the drivers of the accelerated restructuring on CCAR and all the things we're cutting beyond the two books we've been focusing on. There's also securitized products that is being cut very, very significantly in the restructuring that Tim presented in March.

So fundamentally this is designed to pass comfortably CCAR and also to be very comfortable from a liquidity perspective. So we are driving towards July 1, I think, the IFC, and I think we're well on track. And part of the reason why we like this new GM structure is that it passes CCAR. So we have no particular concerns in that area.

Okay. Thanks.

I think just on the -- in terms of the IPO, I think it's somewhat premature to give much more details on this. As we've said before, the application to the FINMA for the new entity is on track. We're anticipating go live in the fourth quarter, ideally October, for this entity and we'll be able to give more numbers at that point.

I think I would say, just in terms of the capital requirements for this entity, I actually don't see leverage as being the key constraint on this. It will be around the amount of RWA we have basically and particularly the rules environment for that. I think you know, and as we gave guidance in October last year, that we are all looking forward to new standard rules and things like that. And I think that will be part of our discussion with FINMA. I don't really anticipate this at this point, but I'd say that's probably more likely to be the key factor than purely leverage.

But would it be fair to say you'll need to run a decent buffer over the minimum, so you might need to retain at least a CHF1b of the capital you raise in the sub you actually put out?

I'm not going to comment. I think at this point we did give guidance that we'd expect to achieve between CHF2b to CHF4b of capital benefit from the IPO and minority stake. I think that very much does remain our view at this point. Everything we've seen in the work we've done over the last six months since we announced this would very much support that.

Okay. Thank you.

Okay? All right. Thank you, Huw. Any more questions?

Andrew Stimpson, Bank of America.

Morning, guys. I've just got a strategy question here. The other ones have been asked already. A lot of the businesses that you've been cutting, clearly there's been some volatility and that's not desired. So you've been cutting a lot of businesses which are very risk-weight-intensive, but you're already running a Group which is leveraged-constrained as it is. So I'm just wondering, when you look forward three, four, five years, whether you think -- what -- are you worried that the Bank might be very leverage-constrained in the future? Because if that is the case, then even if you achieve very good costs, then it's always going to limit the amount of -- limit the ROE you'll be able to achieve. So just how you're thinking about the shape of the Bank between risk-weight-intensive businesses and leverage-constrained businesses, please. Thanks.

Thank you, Andrew. It's a very good point. First of all about capital is that I would say in financial services one should always have more than one lens to look at capital. Maybe it's my insurance background talking, but I really think that's vital. You always optimize for more than one capital metric, otherwise you're really bound to run in trouble.

So today we are leverage-constrained. I think we were clear on that in October that really for the next two or three years we are leverage-constrained. But when you look at the dynamics of the Bank, what we've cut and the shape that the Bank is taking, actually that constraint goes away and you become RWA-constrained. Which doesn't mean that then we should take our eyes off leverage, back to my first comment, because otherwise you will become leverage-constrained again.

But I think that's the big picture. And actually we think it's quite a positive message because, in the end, RWA is more risk-sensitive and it's probably a better way to run the Bank in the long term in terms of metric.

So David, I don't know if you want to --?

No, I think that's a very, very good summary. I think at this point, clearly we're at 3.3% common equity tier 1 leverage against the Swiss rules, which we do expect to be published in the next few weeks, and then basically go into effect on July 1, which require us to be at 3.5%.

In total leverage, as I said before, on my current understanding of those rules, we would be at 5.1% against a 5% requirement. So I think we are leverage-constrained, but obviously not deeply so, primarily given the success of the deleveraging, which we've actually conducted over the last year, with over CHF130b of leverage being removed.

As Tidjane says though and as we guided last October, the law changes around RWA, which are still out there, would expect to swap it round to us being RWA-constrained. I think the only thing I'd say to update what we said from October is, if anything, those years look about a year or so later now than we expected then. So it's possible leverage might be our primary constraint rather than RWA. But we would expect to swap around at some point.

That's really helpful. Thanks. And any comment that you could give around what buffer you think you'd eventually run at above the leverage ratio if that was the constraint. Obviously you'd work your buffer round on the risk weight side if that was the constraint. But do you know where you might end up running at since you'll have a buffer to that number?

Yes. I think we would -- I think when we did the Investor Day last October, we did quite a lot of forward-looking projections in terms of the RWA impact and gave quite a lot of guidance at that point. I think given that we're several years till this actually happening and the rules are still being published and then likely to be refined, I think -- I don't think the estimate I could give today would be any better than what we said last time basically in terms of the ratios we'd like to operate at.

Okay. Fine. Thank you.

Okay. Thank you. Thank you, Andrew. I think we have a few more questions so we'll prolong the call. I think we're in overtime, but let's try and get through the questions. Maybe we'll give shorter answers then. Next question, please.

Jernej Omahen, Goldman Sachs.

Okay. Good morning from my side as well. I've just got two questions left, and hopefully they'll be short. The first one is for your -- on your outlook statement for the second quarter, can I just ask a simple question? If the environment continues as it has up until this point in the second quarter, do you expect Credit Suisse to make a loss or do you expect Credit Suisse to be profitable in Q2?

And the second question is on page 23. Can I just ask you to explain the dynamics of adding 100 relationship managers in the private bank? So I'm looking at the slide that says financial overview Asia Pacific, and I'm looking at the key metrics. So Credit Suisse added 100 advisers. But the risk-weighted assets are flat. The balance sheet is down. The net new assets are down year on year. So the productivity of these advisers seems to have fallen by at least 20%, and the pre-tax profit has halved. So how do you think about that? Thank you very much.

No, no, very good points.

Well I don't think we'd really want to add much to what Tidjane and I have actually said already about the market environment. I think you should forecast on the basis of that. I think the only input I'd give to that really would be it just relates to the exit losses around the SRU in the sense I think -- I've said this before, the whole point of the SRU is to be run down as quickly as possible. So if we have to take losses in order to accelerate that and release the capital, that's going to be a much better trade than actually keeping the operating infrastructure going around that basically. And it's very difficult to guess when and how that would actually [take]. But I think that's just an important point to keep in mind.

I think the second one, clearly in terms of the global markets business, I think we've said what we've said in terms of the environment and the cost there. I think you should make your own estimates around that. I don't think we're going to commit at this point to a 2Q outlook.

I'm really thinking hard about your question. I think the SRU is what makes it hard to answer. All I'd be willing to say is if things did not move from what we've seen up to now to today, I think the result would be better than in Q1. That's all I'd be willing to say, which doesn't tell you much, but I think that's certain. So there's been an improvement in April/May over Q1. But then we've had so many reversals of these markets. They've been so volatile so frequently that I'm just very reluctant to say anything else forward-looking.

On Asia, actually thank you for asking the question. It's a really important point. I said very quickly in my remarks that we outperformed our peers. I'll say it more strongly now, and that's the central point about Asia, because we can all see that the PTI went down from CHF465m to CHF200m-something. And I was looking with Helman yesterday at the quarter-by-quarter evolution of us versus our peers in Asia over the last two or three years.

All I can tell you is that this Q1 is the best we've ever had on a relative basis, so people who were 2 to 1.5 our size on a quarterly basis are now our size in absolute terms in terms of PTI. The reason why we're pleased would be -- so you have to really look at it as a relative performance story rather than look at the absolute flow 2015 over 2016, 2016 over 2015.

I completely reviewed the flow. It's on the slide. The flow is lower. But in this context, we have done extremely well, extremely well. And I've used the example this morning. For instance, CHF1b of this CHF4.2b is referrals to the PB from the IB. So the IB people are bringing business to the PB. We think the model is working very well.

I can also tell you that we have had a record account opening, a record number of account openings in Q1 in our history, which bodes well for our future. So the RMs, what they bring you first is account openings. So that increase, that spike in account openings is directly a consequence of the RMs.

First they have to open the accounts, which is a big deal. That means they have gone to the client. They have talked about Credit Suisse. And the client is opening an account with Credit Suisse and then they will bring the flows. So yes, you're right to say that RWA is flat because we've seen that through a small deleveraging in Asia, very minor, small deleveraging among ultras. But we continue to invest in building those teams, because honestly we think that the upside later from having taken those people onboard is very material. And it's already helped us outperform everybody else.

I think there's a supplementary slide in the appendix, Jeremy, on page 37, which has the Asia Pacific private banking numbers. Just a few points to note there, which is I think notwithstanding the market environment in which we're actually operating, transaction revenues in APAC were actually CHF128m compared to CHF129m a year ago, which --.

And [CHF94m] in 4Q.

In 4Q, which I think gives you an idea of the environment we're actually in there. I think that actually means that our private banking revenues are actually slightly ahead of where they were a year, notwithstanding that environment. So your profits are down, but that does reflect the investments we're actually making.

I think then, as Tidjane said, there is some deleveraging, which explains the lending numbers. But I think obviously a gross margin maintained at 81% and net margin at 28% against 29%, I think in the conditions we're operating I think does show the strength we're actually seeing from this expansion in the RMs. And I think it also shows the quality of both the RMs and the assets we're actually acquiring.

Right. And so if anything, this has given us even more confidence in the resilience of the model, because frankly, this was a terrible quarter in terms of market conditions. So this performance is quite impressive actually.

The balance sheet being down is purely what, Lombard loans being called in?

No. There was just a small amount of -- I think many banks have actually commented on the market conditions we saw. Yes, there was some deleveraging in the quarter. Yes.

Okay. Thank you very much.

Which, by the way, I think underlines the point about net new assets. If you have deleveraging and CHF4.3b of net new assets, I think it does say something about the quality of the assets.

All right. I see. Okay. Thanks a lot.

Okay. Thank you. Sorry, the deleveraging in APAC was CHF300m, [CHF300m negative]. Okay. Next and last question I'm afraid, please.

Stefan Stalmann, Autonomous.

Yes. Good morning, gentlemen. Thanks for taking the questions. I have three, please. The first one, global markets. On March 23 you guided for a 40% to 45% down on trading and now it turned out to be about 46%. And I guess March probably should have helped, but it didn't. So could you give a little bit more color on whether you are actually losing ground in businesses where you would not like to lose ground? Are there, from your point of view, signs of, let's say, contagion into businesses that you like to keep, like in equities, that kept you from performing a bit better than the 40% to 45% initial guidance?

The second question around share-based compensations, please. Slide 18 shows that there was a positive about CHF400m effect from share-based compensation in your CET1. Could you maybe explain why there was a positive effect from this?

And maybe related to this, I think you need to deliver about 60m shares to your employees this spring. Could you maybe provide a bit of color on what this will do to either your share count or your CET1 capital or whether that is already digested in your numbers?

And the final question goes back to the net interest income in IWM, private banking specifically. I'm still struggling a little bit with the performance there, net interest income plus 37% year on year. Loans plus 5%. How did you do this? And also the net interest margin over loans is now north of 300 basis points, which is very impressive also considering the type of clients that you're dealing with. I would be very happy to get a bit more color around that, please. Thank you.

Sure. Thank you.

So I think taking them in sequence, so I think firstly, obviously we made that statement actually on March 23, so I think that did include March and our view somewhat of March. So clearly 40%, 45% is what we guided at that point. It came out at 46%.

I think not a great quarter. Not much to really add in terms of that basically and it was difficult from a market sense, but I think also difficult in terms of the number of things we had to achieve in terms of our RWA usage in the business basically. We were very focused actually on making sure that we were disciplined in terms of our capital allocation. Clearly I think you've correctly adjusted for the TPG effect as well in terms of the sale basically.

I think just on the second point, just in terms of the capital impact, yes, we talk about CHF300m. Part of that is the impact from share-based compensation, because until we actually deliver we do accrete some capital. It's not the only thing though. It's a bit of a -- it's that plus other items relating to certain threshold effects we have in our capital. There's always going to be some noise around it.

I think in terms of guidance, I think I did mention a [number before]. I think your adverse impact from deliveries around the 10 to 15 basis points in the second quarter. I think we talked about that in the context of the CET1. I think that's probably a fair number to stick in in terms of your assumptions around deliveries in the second quarter. It's clearly taken partly through the period and then partly basically actually on delivery in the second quarter really. So that's all I'd really probably say around the CET1 impact.

And I think maybe the RWM, look, I understand your surprise at some of these numbers. What we can say about that is that it's good client segmentation and good execution. We have a range of client profitability in our client, in our portfolio, both on the loan and on the deposit side. And the fact that IWM has worked very well, both on the load side to move balances towards higher-profitability clients, and on the deposit side also to do the same, has created margin expansion. So there has been material margin expansion in IWM. It's good execution really.

Okay. Thank you very much.

You're welcome. Very well. I'm afraid we have extended the call by about 15 minutes. We have unfortunately other commitments this morning. Anyway, it's been a pleasure talking to you, as always. I'm sure you have more questions so don't hesitate to come back to us. With IR, we'll be very pleased to answer your questions.

So thank you for attending the call this morning and see you all soon. Thank you.