Credit Suisse Group AG (CS) 2016 Q2 法說會逐字稿

Please go ahead Mr. Gishen.

Good morning and welcome to the second quarter 2016 results call. Before we begin, let me remind you of the important precautionary statements on slide two, including the statements on non-US GAAP measures and Basel 3 disclosures. I turn it over to Tidjane Thiam, our CEO.

Thank you Adam. Good morning everyone and thank you for joining the call. With me today is David Mathers, our Chief Financial Officer. This morning, we will present the second quarter results for Credit Suisse and David and I are looking forward to answering your questions at the end of the session.

Let me turn first to the key financials for the quarter on slide two. We have kept the format we introduced on May 10, presenting side by side on the left, reported numbers and on the right, adjusted numbers. I will focus my comments on two topics; one, profitability and two, capital.

Starting with profitability; this morning we reported Group PTI of CHF199 million, translating into a reported net income from shareholders of CHF170 million for Q2, a significant improvement against Q1. From here, I will refer in my comments to adjusted numbers, so on the right-hand side of the slide.

APAC, Asia Pacific, IWM, International Wealth Management and SUB, the Swiss Universal Bank produced together combined adjusted PTI of CHF933 million. This was complimented by an improved performance from IBCM with a profit of $132 million and Global Markets, where we saw a rebound in client activity from the unusually low levels reached at the beginning of Q1.

Moving on to my second point, which is capital, we have been able to increase our CET1 ratio to 11.8%, a 40 basis point improvement over the prior quarter and a 150 basis point improvement against the 10.3% we had in the same period in 2015. We have also kept our leverage ratio flat at 3.3%, an improvement of more than 60 basis points over the same period in 2015.

Organic capital generation remains a key objective for us and disciplined capital management is at the core of our strategy; more on this later. David will give you more details of the drivers of these results division by division in his section. So what I would like to do in the rest of my section this morning is to update you on the operational performance of our businesses and on the progress we are making on executing our strategy.

So, for business, turn to slide five to look at what happened during the second quarter. Firstly, on execution, we had two clear objectives, cost reduction and de-risking. On the first one, cost reduction, our efforts have continued at pace year-over-year; we have reduced adjusted operating expenses by CHF400 million or 8% and we are on track to meet our cost base target of CHF19.8 billion by year-end.

On de-risking in global markets, we have reduced our expected quarterly PTI loss in a stress scenario by 50% since end 2015. Our trade in varying global markets, our published measure of market risk, was down by 39% by end of Q2 compared to year-end 2015.

So moving now to the second priority on this page, profitable growth; in a period of heightened market volatility, we have maintained our focus on supporting our clients across wealth management and investment banking. In APAC, IWM and SUB our wealth management activities, which we customarily call private banking, have seen continued inflows of quality assets at stable margins.

Our IBCM teams stayed close to our clients around origination and execution opportunities as markets progressively reopened in Q2 after a very challenging Q1. Global markets had a much improved performance as well. Our core client franchises in credit, in securitized products and solutions, improved their performance strongly sequentially.

Finally, a word on Brexit. Our planning and coordination between global markets, group risk and all our support functions in IT and operations and other parts of the bank was effective in the run up to and on the day itself. Our risk management, hedging and operational performance around Brexit was improved by the de-risking, which has been taking place in Q1 and Q2.

We benefited from significant increased client volumes and provided quiet execution for our clients throughout the day. We, of course, continued to support our clients as they navigate through this post-UK referendum environment.

Thirdly and lastly on this page, capital; our look-through CET1 ratio at 11.8% is above the Q1 level of 11.4%. This was achieved through disciplined capital management supported by return to Group profitability.

So let me now look at the quarter in a bit more detail, starting with our cost reduction efforts on slide six. As I said earlier, we have reduced total operating expenses by 8% year-over-year. This has been achieved by reducing both compensation and non-compensation expenses respectively by 7% and 8%.

We see these cost reductions as only a first wave in our restructuring, in parallel with that we have launched a broad process of front to back reengineering, which will create over time a new operating platform for the Bank that is more efficient, more effective and more compliant. We also continued to leverage our lower cost operations in Poland and India; there we take advantage of the quality of the workforce in these locations and deploy technologies which drive increasing efficiency and automation.

So we are on track to meet our net cost reduction target of CHF1.4 billion for 2016 and operating cost base of CHF19.8 billion or below by end 2016. So reducing cost is a clear and absolute priority for us, but this is not being done at the expense of our growth ambitions in our chosen markets. That's what I'd like to look at next.

Our franchise in wealth management is a key competitive advantage for us, so let me take us back to a slide we used in October, during our Investor Day, when we were clear that what we aspired to capitalize on is both the large pool of wealth available in mature markets, on the right here, and the significant growth in assets underway in emerging economies.

So what have we achieved, on the next slide? We are showing you here the sequential evolution between Q1 and Q2 of our assets under management, which ultimately largely drive our wealth management earnings. We have been able to grow our AUM; in mature markets we have increased AUM by CHF10 billion and in emerging markets we have increased by CHF15 billion sequentially. These results underline both the breadth and quality of our wealth management footprint across mature and emerging markets.

So let us take a look at the asset flows underpinning this growth on page nine, slide nine. We are focusing here uniquely on our wealth management inflows, so at the exclusion of the asset management influence. We have achieved, year-on-year, a strong performance as we are up 60%. IWM, international wealth management, stands out here with a substantial improvement, thanks to the work of Iqbal and his team.

Helman and his team in Asia have maintained their positive momentum, attracting more than CHF9 billion of new flows in a challenging environment; and Thomas and his team, here in Switzerland, have delivered a creditable performance with significant inflows in spite of the challenges of a negative interest rate environment.

Margins, at the bottom of the chart, have increase year-on-year underpinning the healthy quality of these inflows as they went from 110 basis points to 118 basis points gross margins.

So let's look now at our three geographic divisions in turn. I will start with Asia Pacific. The environment in H1 in Asia was significantly more challenging than in the same period last year; however, our APAC division was able to attract CHF5 billion of net new assets. This increase in assets represents an annualized growth rate of 13% and these are quality assets, as evidenced by the 9 percentage point increase in gross margin on the right of this slide year-on-year.

APAC delivered a solid adjusted return on capital of 16%, despite challenging markets and our continued investment in growth, as we are taking a unique opportunity to recruit and have recruited over 100 RMs over the past 12 months. This is not the whole story, as the next slide shows, because we think it is worth looking at the quarterly dynamics in the region to put these Q2 results in perspective.

We know that Q3 and Q4 last year showed significant market disruption in Asia; that's what I was eluding to when I said that H1 in Asia had been exceptionally good; you can see that H2 was different. We can see here our teams have been able to create, since then, a strong positive momentum. This has contributed to allowing us to achieve our highest ever level of AUM at CHF158 billion with a particularly strong performance among our ultra high net worth clients.

We have seen an increase in our loan penetration, which was much lower than in other regions, supported by the growth of our integrated financing unit dedicated to serving entrepreneurs and ultra high net worth clients. Revenues for this group are up 28% year-over-year. Our integrated approach in Asia to client coverage, between wealth management and investment banking, is proving to be a successful model with our clients as evidenced by the continued momentum in the region.

So let's move now from Asia to IWM. In international wealth management our wealth management teams attracted net assets of CHF5.4 billion. Our pipeline of net new lending of CHF3.3 billion at attractive margins has supported net interest income growth of 20% versus the second quarter of 2015.

We have also increased our recruitment activity with 80 RMs recruited in the first half of 2016; a good indication of the quality and attractiveness of our franchise. We are focused not just on growth but on quality growth and this is highlighted in our Q2 adjusted return on capital of 22% at the bottom of the slide.

So focusing again on the pure wealth management flows, given the institutional nature of the asset management flows, you can see here that during the first half of 2016 we have attracted in total net new assets of close to CHF11 billion, CHF10.8 billion exactly, and this represents a clear turnaround from the outflows experienced in both the first half of 2015 and the full year 2015.

Let's move now to our home market, Switzerland. We have achieved adjusted PTI of CHF457 million; however, corresponding adjusted return on capital, on regulatory capital, is at 15%, improving by 100 basis points year-over-year. Our cost income ratio improved by 2 percentage points from Q2 2015 to 65%.

Net interest income remains stable year-over-year and we further increased mandate penetration, an important metric for us, to 28%, an increase of 6 percentage points over the past 12 months and a good source of income. So we are on track with our IPO plans, we have expected regulatory approval for the Swiss legal entity that we call [LISH] before year-end and the IPO in 2017, market permitting.

So after those three geographic divisions, APAC, IWM and the Swiss Universal Bank, please allow me to turn now to IBCM, investment banking and capital markets, where our franchise, we believe, performs well with a reported PTI of $141 million, or adjusted $132 million.

Jim and his team achieved market share gains with our clients with notable strength in our Americas franchise. Looking at the quarter in ECM sequentially, we were up 116% against a market up 50%. This was driven by our better share of IPOs, with 12 IPOs executed in 2Q. In [DCM] we were up 70% sequentially against a market up 23% with increased inflow from both financial sponsors and corporate. Our pipeline into Q3 we believe remains robust.

Looking into a little more detail at advisory; H1 revenues presented here were up 30% compared to the prior period in 2015. In addition, we have a number of market transactions in the pipeline on top of the deals already announced. So, overall we believe a good quarter from IBCM.

So let's move now to global markets on slide 15. Tim and his team have made real progress in implementing the accelerated restructuring announced in March. During the second quarter, we have completed the transfer to the SRU of certain assets and activities, and David will give you more details on this later.

For the purpose of this slide and to make comparisons easier, we are showing you global markets on a pre-transfer basis; so, the same basis throughout the chart from quarter to quarter. So, on this basis, we incurred the loss of $649 million in the first quarter, following a loss of $810 -- sorry, $819 million in Q4 2015 ex the goodwill write-off we did in Q4 2015.

As you can see here, we reported in Q2 a marginal loss of $23 million on the old GM basis, but this is clearly a material improvement over previous quarters with a positive swing of profitability in the quarter of $626 million. This is due to an improvement in revenues with significant sequential improvement in credit and securitized products and better equities results following the completion of our leverage exposure reduction initiative in prime services.

Global markets was able to achieve this improvement in revenue whilst reducing risk significantly as described earlier. There was also material progress during the period on cost reduction, with operating expenses in the division down 7% year-over-year in Q2. Having implemented all these changes, we can say that our global markets business is now right-sized.

Global markets now has a simplified business model, consuming less capital and with lower risk, which enables our teams to focus on serving our client needs for uncertain times, now that the right-sizing is complete.

Finally, let's have a look at the SRU. Reducing legacy cost and capital in the SRU is key to a successful transformation of Credit Suisse. Consistent with the previous slides for global markets, we are showing you the progress made in the SRU on a pre-transfer basis, so before transfers from global markets.

Our team must continue its track record of good execution by being able to reduce RWA since Q4, so over H1, by 18%. We see these reductions in the SRU RWA as a form of capital generation, actually allowing us to grow RWA in our chosen markets, and David will come back to this in his section.

So turning to slide 19, we were able to improve our capital position during the quarter with a look-through CET1 ratio of 11.8%. This was achieved through a combination of capital management and improved profitability. Going forward, our guidance remains unchanged and we aim to operate within a range of between 11% and 12% in 2016, making no provision for major litigation expense.

So, in summary, this has been a quarter of continued progress for Credit Suisse. We have continued to execute with discipline around cost reductions and de-risking; we have delivered profitable growth in APAC, IWM and the Swiss Universal Bank with a strong performance from IBCM and notable improvement in global markets. Lastly, our look-through CET1 ratio at 11.8% is above our Q1 level of 11.4%; this was achieved through disciplined capital management supported by return to Group profitability.

I would now like to hand over to David, who will give you more detail on the financials of our Group and the divisions. Thank you.

Thank you Tidjane. Good morning and I'd very much like to thank you all for joining our second quarter earnings call. So I'll start, please, on slide 22 with a summary of our financial results for the second quarter. We show here the Group numbers on both a reported and an adjusted basis and, to be clear, our adjusted results are prepared under exactly the same definition that we've used in previous quarters and, as usual, we provide a full reconciliation of our numbers for the Group and for each of the divisions in the appendix.

That said, as you can see on the slide, the only point of real relevance in the second quarter is for restructuring, where we have adjusted for CHF91 million of charges. Throughout the rest of this presentation, throughout the rest of this presentation, I'll focus entirely on our adjusted results, as we believe these more accurately reflect the operating performance of our businesses.

The other point I'd like to note is that we report our financials in line with the management structure announced with a global market accelerated restructuring on March 23 of this year. We've reclassified our historic financial information, both in the Q2 2016 finance report and the time series that we publish on the Credit Suisse website, to reflect this revised reporting and I'll go into some further detail around these changes in a few moments.

If we look at the results of the second quarter, we achieved an adjusted Group pretax income of CHF290 million, on CHF5.1 billion of revenues. All five our core businesses were profitable in the second quarter and we further reduced the pretax drag from our strategic resolution unit. We reported net income attributable to shareholders of CHF170 million in the second quarter.

Let's turn to slide 23 to review our Group capital and leverage. As you can see from the chart, in the second quarter we increased our CET1 capital by approximately CHF200 million and we ended the quarter with a CET1 balance of CHF32 billion. This growth is largely attributable to our reported pretax profit in the quarter as well as a positive benefit from CET1 relevant taxes and from favorable FX movements in the period.

This increase was partly offset by the capital utilized for our cash dividend accrual and for deliveries of share-based compensation to our employees during the quarter. Furthermore, in addition to the growth in CET1 capital, we've also reduced risk-weighted assets by CHF9 billion in the second quarter. This was driven by approximately CHF13 billion in business reductions, offset partly by FX and adverse methodology impacts of CHF4 billion.

Of the business reductions, the largest component is from the SRU, where we released about CHF9 billion in the quarter, we reduced a further CHF7 billion of RWA from global markets. I just note these are net of the FX and methodology impacts, which I mentioned before.

I would also point out that, consistent with our strategy, we increased the amount of capital deployed to our growth divisions, particularly Asia Pacific and international wealth management, by about CHF4 billion net in the quarter. This quarter reduction in risk-weighted assets coupled with the growth in CET1 capital improved the look-through CET1 ratio to 11.8%, up from 11.4% at the end of the first quarter.

We reiterate the guidance that we gave in the first quarter that is we intend to operate the look-through CET1 ratio of between 11% and 12% during 2016, subject to any major litigation items.

If we look at leverage, our overall exposure was marginally lower quarter-on-quarter with a significant reduction in the SRU and, to a lesser extent, in global markets; mostly offset by FX impacts and some increases in our growth businesses, again particularly in IWM and APAC.

In terms of our ratios, our current look-through Swiss leverage ratio was 5.1% at the end of the quarter; that means we are currently ahead of the new 2020 TBTF requirement of 5.0%. Our look-through CET1 ratio was 3.3% at the end of the quarter and that remains 20 basis points below the new 202 [TBF] requirement of 3.5%.

Let's now turn to the cost program on slide 24. On slide 24 we show the progression of our adjusted quarterly operating expenses year-on-year. As you can see, in both the first and the second quarter, we're operating well below 2015 quarterly expense levels. We're also operating below the quarterly average run rate of CHF4.95 billion that is required to reach our target of CHF19.8 billion for full year 2016.

If we look at the progress that we've made so far this year, as we summarized three months ago, the primary reduction in the first quarter came from lower deferred compensation costs. In the first quarter we saw a significant decline of CHF318 million in deferred compensation expenses compared to the first quarter of 2015.

That was driven first by a decision to lower deferral rates at the end of last year and, second, by certain stock price plans where the expense was reduced due to the negative stock price moves that we suffered in the first quarter. If we look to the second quarter, we begin to see the benefit of the cost measures that were introduced across the bank.

Reduced deferred compensation was still helpful, but a lower level reflecting both the timing of expense recognition and a more stable stock price during the quarter. The benefit was around CHF170 million in the second quarter of 2016 compared with the same period a year ago.

However, in the second quarter we also saw momentum in the benefit that we're achieving from the reduction in the number of contractors and consultants that we employ. Our professional service fees are down by CHF58 million, when we compare the second quarter of 2016 to the average quarterly rate last year. This has driven the overall reduction in adjusted non-comp expenses, which are down around CHF125 million in the second quarter, again compared to the second quarter last year.

I think -- looking forward to the second half of this year, I think it's clear that we're on track to be at or below our target cost base of CHF19.8 billion for the full year 2016. First, we'll continue to see the benefit from the reduction in deferred compensation expenses in the second half of this year; second, we will see continuing savings from reductions in contractors and consultants, bringing down our professional services fees within our non-compensation line; and third, the reductions in our permanent staff headcount will begin to feed through our salary costs in the second half of this year as these individuals roll off our headcount.

Now, before we move to our detailed divisional results, I'd like to remind you of the changes which followed from the global markets accelerated restructuring announcement, which we outlined on March 23 and which are now reflected in our reporting. As you may recall, the primary component of this was the move of certain assets out of global markets into other business areas; primarily the SRU.

During the second quarter, we completed the transfer of a number of businesses to the SRU, including the distressed credit, European securitized products trading and a further downsizing of our derivatives portfolio. Furthermore, we have integrated the global markets FX businesses into our existing FX sales and trading businesses here in Switzerland and these are reported under the Swiss Universal Bank and IWM divisions.

Finally, we completed a detailed realignment of our funding costs to each divisions net stable funding relations, the NSFR requirements, again now reflecting these asset moves. In the appendix we include an overall summary of the changes as well as the divisional impacts of these transfers.

So I will now discuss each division's performance on this basis, starting with the Swiss Universal Bank on slide 25. I'd remind you we will focus on the adjusted numbers as we go through each of these pages. For the second quarter, the Swiss Universal Bank delivered an increased pre-tax profit of CHF457 million.

Now, as we compare to the second quarter of last year, I'd like to remind you that in July of 2015 we deconsolidated our 50% interest in Swisscard. Now, to be clear, as you know we continue to have the same economic interests in Swisscard, however the income is no longer reported above the line within our pre-tax result. Excluding the impact from the deconsolidation of Swisscard last year, our adjusted pre-tax profit improved by 6% year-on-year.

Now, just continuing on the basis of excluding the Swisscard deconsolidation, year-on-year our revenues have seen some reduction in client activity compared to the high levels that we saw in 2015, following the SNB action back in January of that year. This has been partly offset by an increase in recurring revenues; following the success of Credit Suisse Invest.

Operating expenses declined by 3% year-on-year, despite the investments we've made in advertising, platform and digital enhancements, as well as for certain regulatory projects. Overall, the division reported a return on capital of 15% in the second quarter, up from 14% in the second quarter of 2015.

Within the Swiss Universal Bank, the wealth management businesses delivered a pretax income of CHF254 million for the quarter, an increase of 15% year-on-year. The mandates penetration further improved to 28%, significantly ahead of the 22% level last year. The wealth management businesses saw further net new asset inflows of CHF0.9 billion in the quarter, with a gross margin stable at 140 basis points.

We turn to the corporate and institutional banking business. We delivered a pre-tax profit of CHF203 million in the second quarter, slightly down from the prior year. I'd note that credit provisions remain at very low levels and that reflects the quality of our loan portfolio in this business as well as the continued strength of the Swiss economy.

We saw continued momentum in our investment banking interests here in Switzerland with a strong increase in fees, compared to the first quarter of 2016. Credit Suisse was actually named by Euromoney as the best investment bank in Switzerland for the fifth consecutive year.

With that I'd like to move to international wealth management on slide 26. IWM continued to deliver a resilient performance amid a challenging environment. The pre-tax income stood at CHF260 million in the quarter, down 4% year-on-year and equivalent to a strong return on capital of 22%.

Looking at the results in more detail, year-on-year the wealth management revenues were resilient at CHF811 million, reflecting high net interest income but lower fee-based revenues, due to the subdued transaction environment. Net interest income increased by 21% year-on-year, reflecting higher loan volumes and higher margins. We also grew our loan book to CHF43 billion, with net new lending of CHF3.3 billion in the second quarter of 2016.

However, as we've noted before, transaction and performance based revenues were down 16% year-on-year, reflecting lower brokerage and FX revenues. Recurring revenues were stable from the first quarter with a recurring gross margin at between 37 basis points and 39 basis points, now over the last six quarters. And this stability has been achieved due to higher mandates penetration, reflecting the success of Credit Suisse Invest and more resilient investment product fees. This successfully offset the adverse impact from asset regularization effects and from the shift in our client focus, towards the ultra-high net worth segment.

Within IWM wealth management achieved strong net new asset inflows of CHF5.4 billion. Now that brings the total to CHF10.8 billion for the first half of this year and that CHF108 billion of inflows corresponds to an annualized growth rate of 7% and this clearly represents a successful turnaround, compared to the net outflows that we suffered in the first half in the full year of 2015.

This CHF10.8 billion of inflows during the first half of this year was recorded across emerging markets and Europe, with annualized growth rates of 9% and 8% respectively. And the gross margin improved to 110 basis points, up slightly from 108 basis points in the same second quarter last year.

Just concluding with asset management, revenues were broadly stable, year-on-year, and in line with our strategy to grow recurring revenues we saw an increase in management fees with the revenue margin slightly ahead of last year. Outside of management fees an increase in performance and placement fees was offset by lower investment and partnership income.

With that I'll turn to Asia Pacific on slide 27. Despite a difficult market environment, Asia Pacific delivered a resilient performance in the second quarter, with return on capital of 16%. The division saw significant year-on-year revenue growth in our wealth management interests, supported by the investments in the franchise and the continued focus on ultra-high net worth and entrepreneur clients. Reflecting the investments that we've made in this business our Asian operating expenses increased by 5% year-on-year and this increase included relationship management hires as well as investments in IT, infrastructure and controls to support business growth.

With Asia Pacific the wealth management business delivers strong quarterly revenues at CHF337 million. We've continued to invest and we've added over 100 relationship managers to our footprint over the course of the last year.

We've seen strong net new asset generation of CHF9.3 billion in the first half of this year, which equates to an annualized growth rate in the first half of 14%. We ended the quarter with record assets under management of CHF158 billion, with a gross margin that was stable at 87 basis points.

Within the investment banking business in Asia Pacific we saw a strong demand for financing and advisory services from our ultra-high net worth and entrepreneur clients in the second quarter. We've significantly increased our share of wallet, with revenues up by 16% year-on-year across the underwriting and advisory businesses. And that compares to [Street three quarters], which was down by 23% over that period, which I think demonstrates the success of the integrated model which we operate within Asia Pacific.

In equities we saw a year-on-year decline in revenues -- unsurprising given the challenging market environment. However, as we note in our financial report, the weakness in equities this quarter was partly offset by the positive impact of the recalibration of our valuation model for certain hybrid notes.

Let's turn to investment banking and capital markets on slide 28. IBCM returned to profitability in the second quarter with a pre-tax income of $132 million, compared to a pre-tax loss of $32 million last quarter. Our performance in the quarter was driven by rebound in capital markets issuance activity and by increased market shares, which was in turn driven by a number of recent senior hires that we've completed, particularly in the Americas.

If we look at the quarter, we delivered a strong revenue performance in our equity and debt underwriting business, which outperformed the market quarter-on-quarter. As Tidjane's mentioned, equity underwriting revenues, $97 million, was up by 116% quarter-on-quarter, more than double the level of the market increase in the period. Debt underwriting revenues at $311 million increased by 70% quarter-on-quarter, and that compares to a market increase of only 23%. In advisory revenues were down by 20% at $183 million, but I would note the strength of our numbers in this business in the first quarter.

I think these quarters' results demonstrate the continued progress that's been made in executing IBCM's divisional strategy. We've made significant progress in our recruitment efforts, particularly in the Americas and this has helped to drive wallet share gains in all of our key products, leading to a top five rank in each of M&A, ECM and America's leverage finance in the first half of the year. We've made progress in our targeted client segments, improving our share of investment grade corporates and with financial sponsors and this has been particularly beneficial as non-investment grade market activity rebounded after a weak first quarter.

I'd also underline, in addition to the improvements in market shares, the IBCM division has continued to be very disciplined around operating expenses, which has helped to drive the return to profitability in the second quarter. Total operating expenses of $426 million decreased by 6% year-on-year, primarily driven by lower compensation expenses.

Now turn to global markets, please, on slide 29. In global markets we've already made significant progress implementing the measures we announced on March 23, to reduce costs and risks, as well as the amount of capital employed by the business. Global markets now operates under three franchises, equities, credit and solutions. The latter comprises our equity and fixed income derivative capabilities, emerging markets and global macro products.

The results of this reorganization, helped by more favorable market conditions, was evident in the second quarter, with the division reporting a pre-tax profit of $208 million, compared to a loss of $98 million in the first quarter. The stabilization of our results demonstrates the significant progress we've made to right size the business and reduce risk exposure as this progress in profitability has been achieved while simultaneously reducing the expected quarterly pre-tax loss by 50% in an adverse, stressed scenario.

Compared to the last quarter, we saw a significant improvement in revenue and profitability as client activity rebounded, particularly in equity and leveraged finance underwriting. The equities business delivered stable revenues of $550 million in the second quarter, with an improvement in prime service results compared to the first quarter of the year following the completion at the end of last year of our leveraged reduction initiative.

Equity underwriting revenues also increased, reflecting improved issuance activity compared to the first quarter. And revenue from trading was up slightly quarter-on-quarter as the pick-up in activity surrounding the Brexit vote offset previously lower trading volumes across EMEA.

The credit franchise posted revenues of $758 million, significantly up quarter-on-quarter. This reflected stronger credit markets, higher client activity and a better performance in both our leveraged finance trading and underwriting, as well as in the non-agency RMBS business within the securities products franchise.

In solutions second quarter revenues of $423 million increased by 23% and after a muted first quarter the revenues in emerging markets improved significantly, particularly in Brazil. We also saw improved performance in our equities derivatives business across both corporate derivatives and convertibles.

I'll now turn to the strategic resolution unit on slide 30. We've made significant progress executing our strategy for the SRU in the second quarter, significantly reducing both capital employed and the drag on the Group's pre-tax income. The second quarter loss of $757 million is a reduction of $424 million compared to the first quarter and this improvement reflects a combination of lower revenue losses and a reduction in operating expenses by roughly $100 million or 19% quarter-on-quarter.

To put that in context, that means that the operating expenses were $945 million in the first half of this year, which compares to $2.7 billion in the full year of 2015. And a significant part of that expense reduction has been due to the transition out of the US private banking business, now largely completed.

Capital reductions were achieved across a wide range of transactions. Risk rated assets, excluding operational risk, was down by 18% and leverage exposure was down by 12%, quarter-on-quarter. Key transactions, including the purchase and sale agreement of the entire CDS portfolio and the exit and restructuring of the majority of the cash credit assets.

The sale of our CDS portfolio resulted in a $5 billion reduction in leverage exposure in the second quarter and we also saw reductions in the quarter in our derivatives business in the form of novations, restructuring and early terminations. In aggregate we achieved these reductions at an exit cost of around 1% of risk weighted assets, which remains lower than our long term guidance to be at 2% to 5% of RWA.

We will provide further details on the glide path for the enlarged SRU during our investor day in the fourth quarter. However, we clearly intend to further reduce our leverage exposure and RWA, excluding operational risk, by approximately 70% over the next three years. And we also intend to drive significant reductions in the funding and the operating costs of the SRU over the same period.

With that this concludes the results portion of today's presentation and I'd like to pass back to Tidjane. Thank you.

Thank you David. Before we take your questions in a minute, let me wrap up on the quarter and provide an outlook for Q3.

This quarter Credit Suisse has continued to execute with discipline, reducing both cost and risk. Our client franchises across APAC, IWM and SUB delivered a strong quarter with combined PTI of more than CHF900 million and strong inflows of assets at stable gross margins. Our advisory and underwriting groups in IBCM stayed close to our clients during the quarter, gaining market share in our key product areas and the division returned to profitability in Q2.

Global markets saw a significant improvement as we completed our restructuring in terms of right sizing and risk reduction. The division is now able to continue to focus on serving its clients. Finally, on capital, we have improved our look-through CET1 capital ratio to 11.8%, an increase of 40 basis points over the quarter.

Regarding Q3, we remain cautious in our outlook, notwithstanding the healthy client dialogue we are having across wealth management and investment banking. Market activity will continue to be heavily influenced by geopolitical and macroeconomic uncertainties, with the fallout of the UK referendum, a US election and other international developments.

In this uncertain context we believe we are on the right path and we will continue to execute our transformation program with discipline.

With that we look forward to your questions.

We will now begin the question and answer part of the conference. (Operator Instructions). Our first question today comes from the line of Daniele Brupbacher from UBS. Please go ahead.

Yes, good morning and thank you. I had three rather smaller questions. On the IWM business first, and there I think flows again, surprised positively and I think particularly bearing in mind some of the tax amnesties, regularization efforts happening in LATAM. Can you just talk about what the impact of these legalization efforts were in the first half probably this year and why you are still able to generate this $5 billion plus net new money available in terms of net new money? That would be helpful.

And then just on costs, David, you talked through slide 24 that was very clear in terms of what will happen also in the second quarter in terms of additional benefits, but I still struggle to get my arms around the cost items that actually probably are going to go up in the second quarter, because the average remaining run rate will be around CHF5 billion. If, just to get around the CHF19.8 billion level. And for example, if I look at professional services expenses those are actually up 12% to CHF1.5 billion in the first half. So do you expect to see a steep decrease there in the second half? Or what really drives all that? That would be helpful as well.

And just very briefly on pension fund accounting impacts in this quarter was a bit of a topic for some of your peers and I understand that on the US GAAP you would probably do these changes only at year end. Could you just talk us through the risk of a potential adjustment there towards year end, if interest rates stay where they are that will be helpful too. Thank you.

Good morning Daniele and thank you for your questions. I'm going to take the first one, David will come back on costs and we'll probably do a double-act on the pension fund.

On IWM -- and thank you for noting the performance. I have to say it's been a continuous bright spot in this story. We had high hopes when we created the division and appointed Iqbal to lead it. There are a number of factors explain what's going on there. The first one -- you hit the nail on the head talking about regularization. That is -- it's a removal of a big negative. What you're seeing there is less a positive dynamic than the removal of a negative.

I think we've given the number -- regularizations were about CHF1 billion in outflows in Q2, okay, and the guidance we gave for the full year is CHF5 billion. So that gives you a sense.

So we were slowly before -- sorry -- slightly below the year -- the average rhythm we gave you to expect for the year. But on the positive side there is really a lot of new factors there. First of all, the division is getting the capital it needs. If you remember, when we raised capital we put a lot of emphasis on the fact that in wealth management you need capital to grow, because -- I think all our peers have emphasized the importance of lending in that business. It is real. It's controlled lending with careful risk analysis, but it's lending to people we know extremely well and with whom we have a longstanding relationship. So it's really getting the capital we need.

It's also recruiting. We talk about recruiting in RM, which has been rejuvenated and I mean, I spoke at their convention. You can feel the enthusiasm there and across regions. It's not just in continental Europe. It's in the Middle East, it's in Eastern Europe. So there's new management, there's the financing, and there's also the approach to the business, which is much more, I would say, bottom line focused, quite frankly, with things like mandate penetration being pushed very systematically and contributing to the bottom line.

A number of landmark deals. We have also strengthened our teams who are able to structure really smart what we call marquee transactions, whether it's in aviation or [yacht] or shipping or long bond lending -- we're doing, I think, smarter things, frankly, a degree of cost cutting too. There is an explicit effort to cull the RM and step up the quality and improve the productivity and a lot of client time. I was last Saturday with Iqbal all day in front of clients, and a lot of client time. Given the type of clients we have. So if you put all that together it's positive.

And on LATAM, just to finish, on LATAM it's a combination. There is regularization going on, effectively. That's included in the CHF1 billion of half two I mentioned earlier, but don't forget that we also have new hires. You've seen what we have done in Mexico, which has been public. So there is also an upside there and we believe a good growth potential.

So sorry for a long answer, but it's -- we actually believe that the turnaround in IWM is real. That actually Iqbal is covering a broad range of market, which are attractive, from Eastern Europe to the Middle East, to continental Europe, to Latin America. That's a very broad field where there are many, many opportunities to drive flows up and margins up. But with that I'll stop and let David talk about the cost.

If I move to the second point then, in terms of the costs and the run rate, I think we -- thank you, Daniele, for your comments. We did feel it was important to actually lay out the steps and evolution of the cost program. I think we were very clear in the first quarter that we'd seen a significant reduction in our costs, primarily driven by deferred compensation and that partly reflected the decisions we made last year in terms of the reduction of deferral rate. Then essentially, clearly the impact which we outlined three months ago in terms of the benefit you see from certain stock prices of lower -- of a lower stock price. So that was a very special effect in the first quarter and we wanted to be very clear about it.

Clearly, if we look at the second quarter, that's when you start to see the real benefits from the underlying measures that we're taking across the bank to reduce our expenses. Now, unsurprisingly, that comes through first in terms of the reduction in the large contractual consultant population we have and we talked about that last October and again in March and you may recall, for example, the London program where that's been a core thrust. What we've actually done there, in fact we've reduced the headcount in London from 9265 people to only 8000, primarily through reductions in contractual consultants. So that's a core component of that. And that's what you're seeing coming through now in terms of the non-compensation expenses.

Your point about professional service fees, as I said, they're down CHF58 million against the average rate of last year, but that's because they actually went up in the second half of this year, reflecting the build-up of the legal entity program and also a number of the other regulatory programs. So clearly that's why it's the comparison to the average that matters and that's the drop. And if you look at the overall non-comp costs, they drop from CHF1.848 billion to CHF1.76 billion between the first quarter and the second quarter.

I think in terms of second half, and I think we have a target of CHF19.8 billion, I think we're very clear that we intend to be at or below that target in the second half. What we will see in the second half is the continued benefit from the deferred comp measures, the continued benefit from the reductions in the contracting consultants, but we'll also begin to see the benefit from the reductions in permanent headcount, which clearly comes through last in terms of the order of these things. And I think that's all I'd say at this point. We're clearly, I think, looking confident on the CHF19.8 billion number. I think that's very important for our investors in terms of the outlook for this year. Reducing the breakeven point of the bank, reallocating resources in the bank is a core part of our strategy.

So that's probably what I would say on costs at this point.

Absolutely.

Can I -- just a quick follow up?

Yes.

I mean, that's extremely useful and transparent, but can you just give us a few examples of cost buckets which are probably going to go up in the second half? Because otherwise it's a struggle to get to CHF19.8 billion, if I bear in mind the benefits which should still come through.

I don't think we'd be drawn. I think we've done a good job so far this year. The deferred comp reduction, the stock price move was a particular benefit in the first quarter. I don't think I want to get specific on the second half. I would say, I think, if you look at the numbers, and I think you can see why we have some confidence of being at or below the CHF19.8 billion, but I'm not sure I'd get drawn into buckets at that point.

Okay. Right, thanks.

And I would remind you, we actually did give longer term targets back on March 23, in terms of where we expect to be over the next two years, which implies further reductions from that.

Yes.

So I think, on the pension fund, you're exactly correct. IFRS, which is what most of the European banks report under, has a different approach than US GAAP. US GAAP requires us to re-measure the pension fund at the end of each year and it will reflect clearly the discount rate, but also other factors in the second half of this year. That is the performance of the assets, as well as a whole collection of actuarial assumptions which you have to update in the second half of this year.

We will be looking at a number of measures as well around the structuring of the pension fund, in conjunction with the board of trustees of the pension fund, and we'll need to reflect that in the valuation we do at the end of the year. I don't think I really can add much more to it at that point because it is something that has to be done at year end.

Okay.

Okay?

All right. Thanks very much.

All right. Thank you Danny.

Thank you.

Next question.

Thank you. Your next question comes from the line of Andrew Coombs from Citi.

Good morning. Two questions from me, please, one on gross margins and the second on RWA reduction. Firstly, in terms of the gross margins, you have seen a two basis points decline Q-on-Q in the [Chubb] private banking operations, an eight basis points decline Q-on-Q in international wealth management private banking. It looks like the NII has declined at both on a quarterly basis and also transactions have declined, IWM. But I'd be grateful if you could give a bit more on the outlook, particularly on the net interest income side both of those divisions there and what that might mean for the gross margin, going forward.

Then my second question on the RWA run down, an impressive result during the second quarter. When I look at the global markets division on the new reporting basis, you've seen a reduction from CHF59 billion to CHF52 billion. Should we now assume that's stabilizes or do you envisage further reductions within global markets on the restated basis? Or is it a case of all of the RWA reduction going forward is likely to come from the SRU unit? And with that in mind, given the Brexit vote, given all the uncertainty we've seen, do you expect the pace to slow from here? Are you seeing any headwinds to disposing of those assets? Thank you.

So, first, shall I take the gross margin point first? I think the slide you're referring to, just for the benefit of the listeners, is actually slide 35 in the appendix where we actually give the gross net margin and other key facts for the Swiss Universal Bank, IWM and for APAC. And as you say, essentially, that showed that the gross margin dropped for the Swiss Universal Bank from 142 bps to 140 bps. I would obviously point out that also compares to 134 bps a year ago, which reflects the increase in net interest income.

And for IWM, if you read across the line the gross margin was 110 basis points. That compares to 108 bps a year ago and down from 119 bps, just to confirm the numbers.

I think there's two factors there. Firstly, I think, as I warned, I think the transaction activity in the first half and in the second quarter was lower than a year ago and that, you've got to remember, obviously, as you know, back in January of last year the Swiss National Bank lifted the cap on the Swiss franc and we saw a substantial increase in the amount of hedging activity around our FX businesses at that time. So that was very helpful transactions. It also drove brokerage, and what we've seen, a resumption to more normal markets -- I mean, and so clearly I'd say some depression in those markets, given what we've seen in the six months. So it's been a challenging transaction environment.

We've obviously been pushing, therefore, in terms of growing the recurring stream, and you may recall, over the last couple of years we've talked about Credit Suisse Invest. The success of that has been very evident in both divisions in terms of the high penetration. it's clearly reached targets which we were -- beyond our expectations.

I think in terms of the net interest income item line, it's clearly up from a year ago, reflecting the measures we've given -- we've outlined before. Also the expansion of the net lending activities we've done, which have been at good margins.

In terms of the drop, first quarter to second quarter, we have seen a runoff of certain central positions we have in treasury, which we're benefiting those numbers in the first quarter. I'd expect that to be broadly stable, going forward, particularly as we're going to continue to obviously expand our lending interests across our wealth management activities.

I think that's correct. So I'll take the RWA in global market. As you know, Andrew, there are a number of things that have driven the drop in RWA. The first one is really the sale of inventory or old assets that we had before the disposal of the distressed credit, the reduction of a private label, which has been quite material, more syndication in emerging markets and also the sale of a few non-strategic assets. So all that together has made a big contribution.

There's also hedging and insurance. You saw our ops risk insurance, which has played a role in this and finally, some market phenomena, just because some of the demand was deferred due to Brexit. Some decisions, some deals didn't happen. So all that together takes you significantly below the target, which I must say, is a nice point to have, because it's a bit of a new situation for us. So we have now to answer the question of, hey, what do we do next? And it goes to where we (technical difficulty) think that it's good to have headroom. It's good to arrive below the target.

The target remains what it is and we will operate with that range. It allows us to be tactical in markets that are quite volatile and to pick really very good opportunities. And that's a position you want to be in, instead of passing up business, because you don't have enough capital. So I think that range between, let's say, CHF52 billion, CHF53 billion and CHF60 billion is where we will operate and act tactically. Yeah?

That's very clear. And on the runoff of RWAs in SRU, the pace of that going forward?

David?

Well, I think -- I mean, we're obviously pleased by the progress we've made so far. On a post restated basis that's CHF15 billion of reductions in the first and the second quarter and that's obviously been accomplished in what were not easy markets, to actually do those sales. And at a cost, as I said, which has been typically around the 1% level, which has been less than guidance.

I think if we look to the second half we will obviously continue to look to make significant progress in that. I would caution a little bit that we are focusing more and more now on the derivatives portfolio, hence the bulk sale last quarter, so that does tend to be a slower progress in terms of that, but nonetheless I'd be surprised if we don't make further significant progress in the balance of the year.

Okay, Andrew?

Right, thank you.

Thank you, Andrew.

Thank you. Your next question comes from the line of Al Alevizakos from HSBC. Please go ahead.

Hi. Good morning. Thank you for taking my questions. Okay, so now we are on a CET1 capital ratio of 11.8% and still the target remains between 11% and 12% through year end. And at the same time you still always warn about the litigation timelines. Even though now we're reaching the end of the year and I suppose the main case is still the US RMBS, which is unlikely to be dealt with, I think, until the end of the year and I would like a comment from you on that one.

Then second question is really regarding the restructuring expenses. The restructuring expenses this quarter were significantly lower compared to what we expected, and I just wanted to know whether you reiterate the target of CHF1 billion through the end of the year for 2016?

And then the third question is on operational risk, which was marginally down, and unlike some of your peers, I just wonder, do you see any inflation coming in through the year end because of the market database? Thanks very much.

Okay, thank you, Al. important points. On the CET1, the first thing I'll say is we were pleased that it went up because I think everybody will agree that these were very, very difficult markets, so it shows, I think, a good control in terms of capital management.

We tend to be cautious. So we like the 11% to 12% guidance. We like to be towards the top of the range. But these are unpredictable markets and frankly, we wouldn't want to be led to economically value destructive decisions because we have given an inappropriate guidance on CET1. So in the trade-off between economic value and CET1 we like to keep that flexibility. I think that's just good management.

Now, on RMBS you know we don't comment publicly on matters with the Department of Justice, so as tempting as it is, I will refrain from any further comment. But we -- the guidance we say is ex-major litigation expenses and we've been consistent in giving that guidance. Yes

Then restructuring expenses, David do you want to take that?

Yes. So I think we -- the numbers are actually on page 22 of the slide deck, so you can see that in the first quarter it was CHF255 million and the second quarter was CHF91 million. A couple of points to note. In the first quarter we actually took a significant restructuring expense relating to the exit from one of the buildings in Canary Wharf and that was part of the resizing of London. I think we're very pleased to have that done. It's a building which we'd owned for a number of years and it's part of our cost reduction program. And I don't want to give too much details but somewhere in the CHF60 million to CHF70 million was in respect of that exit cost. So I think if you look at the first quarter then you're probably talking something like CHF190 million ex that type of real estate provision.

If we look at the second quarter the CHF91 million's actually net of the release of provision. It was about CHF31 million. So net that you'll be about --

(Multiple speakers) important point. It's kind of CHF120 million.

You'll be about CHF120 million. So I think like-on-like, essentially, there clearly is a reduction restructuring spend in the second quarter against the first quarter but there's two large contra items there which may help you to understand the trend more clearly.

I think we would expect further significant restructuring costs in the second half. It's clearly core to our cost program. I would say the guidance we've given before is -- was probably on the conservative side in terms of this. But I don't think I want to get drawn in much more detail beyond that, but I think, you know, first half was first half. Probably not a bad guidance, but I think that's as far as I'd go at this point.

I think it's right, yes. Op risk. Do you want to talk about the regime we have here in Switzerland?

Op risk. Yes.

It is quite different from others.

Yes, it is. So I think a few points, really. Firstly, if you go back a couple of years we actually did include an op risk buffer and I think we talked about that at the time. And that basically presaged a significant revision of our op risk modelling, including the date [upgrades] which I think some of the other European financial institutions have now been reflecting, so the op risk charges already actually reflect that data at this point.

I wouldn't expect to see any further significant changes under the current regime in the balance this year. I think, as you know, if you look towards the various measures, which tend to be called Basel IV, there's a number of approaches in the op risk around that, but not in relation to I think what you're seeing from the European institutions so far.

Okay, and a follow up, if I may, on the CET1 capital. I remember during the acceleration of the plan back in March that you mentioned that in theory you could put the lever on the capital of additional CHF1 billion of disposals, if needed, to keep the core tier one capital ratio above 11% in the short term. I can assume right now that this won't be needed? Is that right?

Well, we maintain that guidance. You're correct. We did mention that. Some of it has been done and we have work underway to continue to pull those levers. But it's -- we maintain that guidance.

Okay, thank you very much.

Thank you.

Thank you. Your next question comes from the line of Kinner Lakhani from Deutsche Bank. Please go ahead, sir.

Yes, good morning. So three questions. Firstly, on APAC, the net margin seemed to come down quite a lot., nine basis points Q-on-Q, seven bps year-on-year, to 23 basis points. I think 30 bps feels like the normal. We also saw some cost pressures at the investment bank in APAC. So if we think about Q2, we're basically running at 10% of the annual CHF2.1 billion target that you've set out. I guess my question is, is growth coming at too heavy a price in terms of profitability? How are you looking at this?

Secondly, just to check on global markets, now that we've got the restatement are you still sticking to your cost guidance of CHF5.4 billion that you provided previously? And I know Tidjane suggested -- to my question in the last quarter, a revenue guidance of CHF6.5 billion to CHF7.5 billion. I just want to see if those numbers are reset?

And then just coming back to the regularization theme -- just wanted to take a more forward-looking approach. Obviously Switzerland is going into automatic exchange of information from the beginning of next year, as well as the ongoing (multiple speakers 69:06)

Sorry, can I stop you? I missed the beginning of your comment. Could you please repeat it? Sorry. Apologies.

On the third one, yes, it's on regularization.

Yes.

Switzerland's going into automatic exchange of information from the beginning of next year and I just wanted to get a sense for how you're thinking about this, how it impacts your model. And if there are any unintended consequences of this in terms of impact on business.

Okay, no, thank you. Those are all important points. I'll take the first one on APAC and I think you described it very well. That's the judgment we have to make. At what pace do we recruit versus when the profitability comes? You're correct. In the decreasing net margin, and it's frankly almost all of it is a function of recruiting. We've been recruiting very heavily. We said 100 RMs. The point in Asia, which is different from IWM -- which is why it's good to discuss these separately -- is that there is a window of opportunity. There really is a market, a unique market opportunity, and we had to make a call.

A lot of excellent resources, whom we've competed against for a long time and whom we know very well, have become available in the last six months. So the judgment we had to make was whether to secure them -- at a cost -- to a net margin, or not. So clearly the judgment we've made is to go for them. I mean, we have such a belief, medium term, in the potential in the region that we feel that's the right management decision.

Now of course we have to make that work. We have one of -- we have recruited someone who re-joined us, who leads this financing unit. And a bit like IWM, they're doing really some very, very good work in terms of thinking about how to develop our loan portfolio in Asia. That's very promising. I said that the revenue was up 28% year-on-year in that segment. And that's a huge potential uplift.

And really, on cost, we are also implementing efficiency measures, which will come with a lag because what happens that we will come in first, we take the costs of that. And some of the efficiency will come later. So I don't think there is anything to be alarmed by there. What these numbers reflect is the investment we are making for the future of the region. But it leaves us in a very, very good place we believe. We have an excellent RM force. And the other guidance I can give you is when you run a distribution group you do tend to do your recruiting in Q4, Q1, because you take the cost and then you get the benefit over more quarters.

So it's smart to do it the way we've done it. It's just practical management. Because the benefit will less -- nine months or six months, rather than back-loading your recruiting towards the end of the year, where you get the negative and the positive goes into the following year. So it's also tactical.

Global markets, yes, we maintained the CHF5.4 billion guidance and we're well on track on that. We made really good progress. We said cost down 7%. I mean, you can do the math and see that that takes you at a good level. But we maintain the guidance and there's a lot of work underway in global market to hit that target. I'm highly confident that we'll hit it.

And in terms of revenue, yes the guidance is not the same we gave. 7% is the top of the range and yes, it's correct.

I think, just on the third point, in terms of the automatic exchange of information. I think that for several years now we've had a very active tax regularization program, primarily in the EU countries, which is where the ones which will actually be signed up under the automatic exchange of information first next year. That regularization program within the EU countries is more or less now at an end. Of the CHF2 billion of regularization we've see in the first half of this year, only a small subcomponent was actually relating to the tax amnesty in Italy, which has now come to an end as well.

So I think we've been preparing for the automatic exchange of information now for some years and our business model's been aligned to that. And I think in many ways if you look at that 8% growth in net new assets within IWM, the European business, you can see that some of the benefits have a more stable environment now we've actually gone through that regularization phase.

I think that's correct. Our strategy has been very clearly to be very transparent and we are for all the reforms that increase transparency, we always say that what we sell is safety not opacity. So Switzerland is a safe haven, which has increasing value in a world that is getting more and more uncertain, so we look to the future, actually, quite optimistically, thinking that in terms of recent events, things like Brexit underline the attractiveness of Switzerland and the safety and the stability that it offers, so we think that the prospects are good.

Great. Thank you.

Thank you.

Thank you very much. Your next question comes from the line of Jeremy Sigee from Barclays. Please go ahead.

Morning. Thank you very much. Three questions, please, some of which follow on from topics already discussed a little bit actually. So, firstly, on the capital target and the 11% to 12% range. I'm echoing the observation somebody else made that you're already at 11.8%, you've got disposable gains coming through, you've got further SRU shrinkage coming through. So it would seem likely that you ought to be drifting above the 12%. So my specific question is, are there any negatives coming through that we need to be aware of in the second half that could offset that -- apart from litigation. I understand we're putting that to one side. So are there any other negatives coming in the second half on capital, is my first question?

Second question, linked to that, can you sort of update us on the RWAs and the leverage exposure at a Group level that you're aiming for on a 2018-ish time horizon? I mean the original targets you set were something like just below [300] of RWAs, which now feels like you should be below that. You're already below it and will probably stay below it. Also I think you said CHF920 million of leverage exposure, is that also coming down? So I wonder if those are valid or if you could update those?

The third question I had really -- I'm just circling back on the hiring point -- you're making a lot of progress hiring advisors in Asia, which is fantastic. What was striking at the beginning of this week Julius Baer were also talking about making a lot of hires in the region and, in fact, the question to them were, were they getting more from Credit Suisse? Now obviously that's not the case. You're busy recruiting as well. So I guess the question is, where are you both recruiting from? Where are all these people coming from? And are you confident about sustaining that pace of recruitment of advisors in the second half of this year and into 2017?

Okay thank you, thank you Jeremy. On capital, I think you're correct, we gave a guidance 11 to 12, we have a few things up our sleeve and we're still working on it. We don't want to be too explicit above those but we do have those levers.

Look, the negatives, everything we say, of course, is market dependent. We've been -- that's why we've been outwardly so cautious. The one thing we do not control in all this is markets. We are exposed to markets. There is enough -- I mean I could do a long list from the US election to Brexit negotiations, to the Middle East, to French elections in May, to German elections next summer and the list is long, to what the Fed is going to do, are factors that could potentially impact our capital guidance. So frankly that's why we are being so cautious. There is no, how can I say, hidden facts here or things lurking inside (inaudible) that makes us worries. It's all about external factors that are outside our control. I don't know if you want to --

I think the -- I think just firstly I think a clear point, that we're obviously not looking again at the SRU targets, now we'll actually come to those basically in the investor day basically which we're planning for the fourth quarter. So I'm not going to give you updated targets for the SRU and therefore for the Group RWA and leverage targets in 2018. That's something we'll look to address more at the investor day in the fourth quarter.

That said, clearly the global market (inaudible) we did move more positions into the SRU and therefore they're running off. So the numbers which you're quoting, which I think date back to the October meeting obviously are dated in the sense we've actually moved forward on our capital strategy. But nonetheless, I think the core of that is very much intact. We are reallocating capital in to the growth businesses and we're funding that largely by the run off of the SRU. So the process is there and we'll come back to you at the end of the year in terms of those revised targets.

Thank you for your comment on the recruitment. For us it's really important. We think it's the right thing to do, just betting on the future, investing in the future. Where are we coming from? You would have to look -- there's quite a bit of public information on retrenchments in the region. Yes, private banking, wealth management in Asia is attractive but there is no room for everybody and a number of players you've seen have thrown in the towel. The positive of the kind of statements we make is frankly if you put yourself in Asia they are very attractive. Because here is a bank that says we are not swayed by short term volatility in GDP numbers. We have a long term strategy in the region. We have a long term commitment in the region. I was again in Asia two weeks ago, saw a lot of clients with Helman.

Our clients really love our organization. Several of them told me we really like what you've done with the APAC division, because we now have a decision maker on the ground here, pointing to our CEO there. So we've also chosen an organizational model that's consistent with all those statements. You see the leverage going up. You see the RWA going up. We're putting capital to work and we are recruiting. So I actually believe that that gives you better quality resources, that position, because people really want to build a good portfolio, as are in Asia finds us very attractive.

So we've picked up quite a few people from all the names you know of the people who have said that they are retrenching or leaving the region. The top 10% of RMs were very good and very pleased to recruit them.

That's very helpful, thank you.

Okay, thank you. Next question.

Thank you sir. Your next question comes from the line of Kian Abouhossein from JPMorgan.

Yes, thanks for taking my questions. Tidjane, I would like to get a view from you of what is being discussed at this point in the Board as the key issues between the Board members, because clearly there's been the investor day last year, there's been a change in strategy to some extent to adjust to the market conditions. There's been further adjustments being made and transfer of assets et cetera. Just wondering, what are the key points on the wealth management side and on the other side on the investment banking side that are the key discussion points within the Board. So that's the first question.

The second question is can we talk a little bit about the topline margins in wealth management and the trends that you're seeing, because clearly investors, analysts, have been very concerned about Asia slowdown, generally EM slowdown and you have performed extremely well. So what is the disconnect that we are seeing here?

The third question is related to the SRU, maybe for David. We had an indication of an CHF850 million loss in the past, now you have transferred more assets into this division, is this loss number going to be bigger or you've done well on the reduction of assets and SRU assets and hence these numbers will actually be smaller. Can you give us an update? What are the exit risk weighted assets by 2018 that we should be looking at, at SRU? So what's the pretax loss that we should be roughly looking at and what are the exit risk weighted assets? Thank you.

Okay, thank you. Thank you again Kian. Look, on the first issue it's relatively transparent. We work -- when I say we, the Chief Executive, Board, we work very, very closely with the Board and the way I run the bank is that I have the Executive Board members attend the Board. You could actually address for question two, to each of them. So it's very, very transparent. What goes on at the Board I really always insist on having my management team on the -- at the Board, in close contact with the Board. Frankly, everything we're telling you today is discussed in depth and transparently with the Board. I think that's a simple answer I can give you, the Board unanimously is very well aware of what we are doing, the challenges of communication.

The slides are shared with the Board, we did that this week. So it's complete, I would say, transparency and alignment.

The second point is really, really interesting also. What is the disconnect? I would point to a number of things. Again, the fact that we have an Asia division is really -- for me the first test of anything is our clients. I assure you I saw (inaudible) my last trip to Asia, every single one of them commented on how much they like that. We have a boss in Asia who's actually the boss and he doesn't have to call Zurich or London. Because they are billionaires, they're very successful, they're very important, that draws them to us. It's a real point.

The second one is really the integration. Helman has taken the head of IBCM and he's given him mandates to look after our ultra-high net worth. If you look we didn't -- we're trying to limit the number of slides. We had a slide we could have showed you but that just shows how much of our IBCM revenue in Asia comes from the entrepreneurs. They are a major -- more than half. They are a major -- more than half. They're a major client of the investment bank. So that integration between the investment bank and the high net worth is part of a magic sauce. I can assure you there are individuals in Asia who bring us as much revenue as respectable institutional clients in the developed world. Absolutely.

So we touch them from a number of angles. So the fact that there is headroom there in terms of the loan penetration being lower than in other regions you can get a lot of penetration growth. I.e. you don't even need to go and look for new clients, just selling your whole services range and product range to your existing client base gives you growth. I think those are a few other things I would point to, to explain maybe why Helman I believe has been outperforming all the other banks now two quarters in a row in Asia, on every metric.

So, of course, we can't defy gravity. You see the revenues, we're down on certain brands. In equities we're down. The context is what it is. But within that context we are doing better than other banks and I think it's for those reasons.

Yes, all yours.

So I think just a few points on the SRU. I mean I think valid points really. One, as you said in -- when we did the investor day we actually laid out a 2018 goal of less than CHF850 million losses in 2018. We also said that we intended to reduce RWA by CHF16 billion in full year 2016. So a couple of things really. I think firstly -- and it's not entirely comparable because we've obviously done a restatement since then, but we've actually reduced RWA by CHF15 billion in the first half of 2016, in the SRU. So I think we're obviously making very good progress against the targets we actually laid out at that point.

I think secondly as I said in -- when I spoke a few minutes ago, we are going to commit to reduce RWA ex op risk and total leverage in the SRU by 70% over the next three years. But I think to go beyond that and to give you a revised PTI target for 2018 as I said before I think is something that best awaits the investor day which we're planning for the fourth quarter. So we'll give you revised guidance at that point.

But I mean I just would reiterate that the point of the SRU is to reduce it and to reduce it as fast -- at least as fast as we targeted already and that's something we're very committed to and I think have made good progress in so far.

Thanks, just one more follow up if I may for Tidjane. In the senior management team are there any -- two or three big buckets of topics that you are focusing on in particular that you might be able to share with us?

Look, I can share with you a few but none of them will surprise you. CET 1 I think everybody around the Company knows we're extremely focused on that through (inaudible) daily focus. It is really a daily focus. We drive the CET 1 across the bank. Growth M&A yes and really managing the risks associated very tightly. It's very important. We are investing across the Board in our risk and compliance system. We have a huge investment in our compliance because all these -- these net cost reductions hide very, very major material investment in compliance and in risk that is underway.

So the cost reduction is much bigger than you can actually see. Because I am very focused on having asset quality and compliance growth I don't want to plant the seeds of future problems. We want very healthy growth and we are -- I would take you through the new procedure we have for [PEPs]. We have a new policy for politically exposed persons. We have a new policy for all kinds of transactions that would happen in the emerging markets. We have a new list of countries where business is forbidden, countries where business is authorized. So there is a really big effort to raise the bar in terms of compliance, because that's very important for the future.

Then there is the whole reengineering of the bank. These calls are always too short so we can't really talk about it. But one of the big changes we introduced is the Chief Operating Officer and to break the kind of central functions. The amount of work the projects internally (inaudible) where we have reallocated the 75,000 employees in a completely different direction. What we've done is give the CEOs accountability for their budget. The first thing I heard when I arrived from everybody was well I cannot write my P&L because 60% is allocated.

Well, you know what, we've turned that on its head, now 70% is not allocated. We're putting people under pressure to say -- well, let's take IT. You actually control your IT spend through the demand. You need cost of an IT project (inaudible) demand. Actually we have now a huge level of granularity and transparency and we can show people -- given (inaudible) you have CHF157 million -- these are real numbers -- of IT allocation. Okay, well CHF65 million of that is completely driven by you, so stop complaining about the central function and do something about it. Are these projects vital? Which one do you make, which one do you buy. We've been going through that for every single project in the Company.

So what we are driving up is actually IT productivity. It's a real sacred cow in financial services. We are really tackling that and taking it down. We discuss that at the EXV. We had an EXV Tuesday, we spent half the time on that, because that's how you drive costs down durably. It's not by saying well nobody travels anymore, which is just delaying a problem because people do need to travel. In the end you're just postponing spending from one quarter to another. What we are doing is really a deep restructure, operational restructure, whilst running a good operation. So yes, cost, growth, risk -- total risk reduction that is going on. You stop me when I bore you but I could --

No, very interesting. But just on the topic of capital that you mentioned at the beginning, should litigation come in better and you reducing SRU risk weighted assets faster?

I recall universal bank was an option to IPO, it wasn't mandatory in your strategy. Would it still be possible to walk away from that if capital goes to the 12% level by 2018, without any IPO?

Again, there is so many ifs in your question that I will probably take a pass. I don't deny the interest of the question but there are a lot of ifs there. So if -- I think (inaudible) if litigation turns out better than we expect, if performance of our business turns out better than we expect, if the capital is better than we expect I suggest that we have a discussion then, if you allow me. For the time being it's part of the strategy. Now more seriously, look, the IPO has real benefits. We really, really believe that the Swiss Universal Bank is a great bank. I mean by the way, we created it. In the previous structure it was split between PB and IB, so you couldn't see it.

So we created it and we made it visible as an entity so that you can now see it in the numbers. We think it's very valuable and we want that value to flow into our share price. We think it doesn't today. We think that to have -- I think we said in our comments, we are the best investment bank in Switzerland for over five years in a row. Okay, Switzerland is not a small IB market. Is that recognized in our share price today? We're not convinced.

So really externalizing that value, showing what we're doing. We said (inaudible) penetration up six points in a year to 28. That's major, in the wealthiest country in the world. So really all that is going to go into the prospectus. We think that doing this IPO whilst keeping the strong control on the asset, hopefully, will allow people to look differently at the valuation of this asset. That will flow into our share price. So really thank you for the opportunity to allow me to talk about it again because unfortunately because we were under so much capital pressure it's been widely believed that we are talking about this for capital purposes. I want to absolutely deny that. This is truly a strategic idea, which also happens to have a capital benefit. But it is really done for strategic reasons.

So I see I I've answered all your questions, although I didn't want to.

Yes.

So it means that really it is strategic and we believe it's a good idea. But now nothing in life is internal -- eternal and as we said, it's an option but we are working hard to drive. You see a return on capital going up in (inaudible) and I would personally argue that part of that progress has been thanks to the need to prepare for an IPO. So we're getting the benefits of having that project on the table.

Okay, very helpful. Thank you.

Okay, thank you.

Thank you very much. Your next question comes from the line of Fiona Swaffield from RBC.

Good morning, I had two questions. The first one was on the corporate center where there's a larger negative result under normal and quite a large negative treasury result. I don't know, David, if you could talk through how we should think about that going forward and whether this is the impact of negative interest rates coming through in this division?

The other question was on strategy, on share based [confrontation] in general, I noticed that in your slide 23 in the footnote you mentioned that there was a share issuance. I think historically you didn't -- you used to neutralize that. So are we now getting some capital creation or capital offset and we should see a higher number of shares due to the share compensation factor? Thank you.

Yes, good morning Fiona, thanks for the questions and they're both important, we haven't talked enough about the corporate center. It's important to explain and the remuneration. David.

So just taking the first point, I think I'd probably refer to page 45 in the financial report for the audience. As you say, what we saw in the second quarter was a loss in the corporate center of CHF235 million. That compares to a gain in the first quarter of CHF33 million. So just stepping back a few points. So you'll recall back in October that one of the goals of the strategy was to actually sharpen the corporate center and actually align some of the costs which were sitting there to divisions. So they actually have control under the strategy, which Tidjane's just outlined, in terms of each of the businesses actually owning and driving these costs.

So the corporate center is a much narrower reporting segment than it used to be before last October and it's been restated on that basis. So what you still have in there really is there are still some costs related to the parent bank and there are still the costs from the legal entity program, albeit that those costs are now actually reducing. I mean clearly with the launch of the [IHC] on July 1 that's the single largest cost this year in terms of that. So those costs are actually declining and those are the only costs that really sit there.

But what you're referring to is the final component, which is the volatility around the swap books that we run in central treasury. So I think as you know, we actually hold on a number of central deposit books which sit here, which the net interest income actually flows to the divisions and the volatility around those positions is actually taken to the corporate center.

Now in the first quarter -- and I think I did mention this at the time -- we saw a lot of volatility gains due to the very disrupted interest rate market in the first quarter. As markets have actually normalized in the second quarter we've seen those losses actually reverse.

There is also some impact from positions that the bank made in terms of (inaudible) structured notes which actually relate to Credit Suisse's own equity and the moves in those were actually taken through the corporate center as well. So as the stock price has been more stable after the falls in the first quarter you see obviously a quarter on quarter change.

So long answer, what we're really seeing is treasury volatility in the second quarter, which does reflect some normalization.

I think in the interests of full disclosure we did actually lock in some of the gains in the first quarter, otherwise this normalization effect would have been larger than what you see today. I'd really encourage you to look at the first and second quarter combined as being a better indicator of the corporate center run rate than looking at the second quarter overall. So that's probably what I'd say on the CC, there's nothing else there. Certainly there's no negative interest rate effect in the corporate center relating to the divisions. That's not how we actually run it.

I mean I think the second point really relates to share issuance in the second quarter. The primary issue in terms of share issuance was actually the scrip. You recall we actually paid 0.7 with a scrip alternative. Take-up I think as you know was 67.8% on that scrip and that is the primary driver in terms of share issuance in the quarter.

We also issued equity in respect of a deferred purchase agreement relating to York, which is a hedge fund interest which we actually hold within asset management and therefore within the IWM business. That's a second component.

But you're right, there was also some share issuance in respect of employee deliveries. The bulk of our employee deliveries it will actually continue to be purchased in the market but there was some share issuance. I think if you want to be precise on that I'd estimate the benefit to the CET 1 of that share issuance was probably something in the 10 basis points to 14 basis points in the second quarter, Fiona. So it's not a change of strategy but a nuance in terms of that.

Thank you.

Okay, yes. Okay, I think we're getting to the -- actually beyond the end of the session. So maybe we can take one more -- one more question. There is one there.

Thank you very much sir. Your final question comes from the line of Andrew Simpson from Bank of America.

Hi guys, thanks for fitting me in at the end. On the -- couple of questions. On the LCR I notice that's gone all the way up to 172%, which I think is the highest of any of your peers. I'm just wondering if that's really necessary or whether there's the possibility you could cut that down as it could be quite meaningful for the leverage ratio. Or why you think it has to remain so high?

Then looking at the restatements you've done for the global markets, just looking a bit further back and maybe this is a statement rather than a question I suppose, but I'd like to get your thoughts. I appreciate you're trying to reduce the volatility and bring down the risk weighted assets, but it looks like you're giving up a huge amount of profits historically. So the PBT cut from 2015 was minimal, I understand that, because the fourth quarter in particular was weak. But the first half was actually really, really strong. In 2014 I get to about CHF640 million PBT contribution from the units that you're putting into the run off. So (a) I just wanted to check that I've got that right and (b) whether once you started doing those numbers whether that was a surprise, how profitable those units were and whether -- yes, any thoughts you've got around that would be appreciated. Thank you.

Two, (inaudible) I'll let David take -- yes, go ahead.

Thank you Andrew. So yes, the LCR ratio of 172%, I think is high. It's higher than we'd really like to target it. I think there are two factors there just to be aware of. Firstly, I think we obviously had go live for the IHC on July 1 and I think you may recall I actually made a comment some years ago around the expected standalone equity requirements for the IHC and that's proven to be the case. So that actually did increase the liquidity requirements to the IHC which were actually more than met for the go live on July 1.

I think second to that, I think obviously follows the US banks, so obviously you follow [Ref YY] in terms of branch liquidity. We actually have been looking at our branch liquidity measures under stress metrics. We actually fulfill those requirements as well. So that does drive additional liquidity requirements for the Group.

That said, I think it's very likely that we can reduce the LCR over the course of the next year or so and actually draw down on some of that liquidity. Clearly that would actually obviously reduce that funding cost too. So I think this is probably a peak in terms of what we're actually doing with the go live at the IHC and meeting the branch based requirements. You should expect it to fall from these levels.

I think the second point then I think is a comparison, if you actually look at the numbers we've previously reported for our divisions under the post October restatement and what we've reported now on the website. The -- you're looking essentially at 2013 and 2014. The major component of that was actually the distressed credit books, which we talked about before, the range of which is about CHF300 million just by the way, sitting in SRU, and were actually transferred as part of that in the second quarter. So what you're seeing there is the historic profitability of the distressed credit book, which wasn't CHF600 million by the way, there are other moves within that basically. But it's clearly a large component of that CHF600 million.

I would just say basically, clearly 2013 and 2014 were very good years for distressed credit. If you complete the comparisons to the other periods you can see the gain from that has actually fallen a lot.

I think if you look back at everything we said about GMAR and I think the focus we want to have actually on reducing our expected loss and the stress situation to 50% before, I think that's the right balance too, reflecting that 2013 and 2014 were very good years for those typed of assets. But there were some other transfers within that which we outline there basically. But that would be the largest component.

Great, thank you.

But fundamentally we -- Andrew, we do believe in the earnings power of this platform, as we explained the kind of equities, credit, solutions -- within solutions (inaudible) emerging market. We have many, many initiatives going there. We wanted to get to the right sizing quickly, so it's done. So as I said in my comments several times, they can now focus on serving their clients. You've seen the power of that already in the rebound in Q2.

We explained this in Q1. It sounded like an excuse, that people were restructuring, were around sizing, were p[unwinding] positions and there was a big opportunity cost to that. But as that work is over you're going to see the power of our franchise and quality of our teams come through. I'm quite confident in that.

So look, thank you for listening to us this morning and joining the call. Just a quick wrap up to say that -- look, we said we'd deliver in our plan profitable growth. We believe that's happening. Reducing the cost is a central part of what we're doing, that's also happening. Reducing the risk, that's happening. Right size global market, that's happened and managed capital, you've seen the improvement. So we recognize it's only two quarters in and it's only a start but we believe it's a good start against a very unsupportive market backdrop. So, again, a cautious outlook for Q3 but we will continue to execute this plan and this strategy. So thank you and see you all next time. Thank you.

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