Credit Suisse Group AG (CS) 2016 Q3 法說會逐字稿

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group's third quarter 2016 results conference call. (Operator Instructions). At this time, I would like to turn the conference over to Mr. Adam Gishen, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Gishen.

Okay. Good morning and welcome to the third quarter 2016 results call. Before we begin, let me remind you of the important precautionary statements on slide 2, including the statements on non-US GAAP measures and Basel III disclosures. With that I will hand the presentation over to our CEO, Tidjane Thiam.

Thanks, Adam and good morning everyone. And thank you for joining our call. With me today is David Mathers, our Chief Financial Officer. We will present this morning the third quarter results for Credit Suisse. David and I both look forward to taking your questions at the end of the session.

As you know, our second quarter this year was one of marked improvement after a challenging period in Q4 2015 and Q1 2016. I am pleased that many of those positive trends have been confirmed in the third quarter. During the third quarter the macro environment remained challenging, with significant political uncertainty and continued low or even negative interest rates, clear headwinds for our industry.

In this context, we have continued to implement our strategy with discipline. We still have a long way to go in our journey, but there are clear signs in the results we are presenting today that our strategy is working.

Let me now take you through the third quarter results in more detail, starting with slide 4. You will be familiar with this format we have used now for a few quarters, showing side-by-side reported on the left and adjusted numbers on the right-hand side. David will cover these results in detail in his section. I will therefore limit my comments to our profitability.

This morning we reported Group PTI of CHF222 million, an improvement of 12% sequentially against the second quarter. All our operating divisions were profitable on both a reported and adjusted basis. On an adjusted basis, the Group CHF327 million of pre-tax income, an improvement of 13% sequentially over Q2, confirming the positive momentum in our underlying performance.

We have presented on the next slide what for us are the key take-aways of this quarter, in a form that you are also familiar with. In a quarter that is traditionally slower, we have continued to serve our clients effectively, and have been able to continue to make progress in our absolute top priority, the execution -- the disciplined execution of our strategy.

Regarding costs, a central part of our restructuring program, our efforts have continued at pace, with 90% of our targeted headcount reductions for the year achieved as of today.

Moving to the second priority, profitable growth, we have maintained our focus on supporting our clients across geographies, providing access to capital, to financing solutions and to investment expertise.

In APAC, IWM and the Swiss Universal Bank, we have been able to attract inflows of 30 -- three, zero -- CHF30.9 billion at nine months' 2016, an increase of 40% over previous year. In IBCM, we increased our global share of wallet across most of our key products. And in global markets we delivered a second consecutive profitable quarter.

Finally, on capital, we have been able to increase our look-through CET1 ratio to 12%, a 20 basis point sequential improvement, and a 180-basis point improvement against the same period in 2015, when our CET1 ratio a year ago was 10.2%. And this is after taking additional litigation provisions of CHF357 million.

In parallel, we have been able to improve our look-through CET1 leverage ratio from 2.8% a year ago to 3.4%, an increase of 60 basis points.

This improvement in our capital ratios was achieved through a combination of measures that we have actioned over the past several quarters, including disciplined capital allocation, organic capital generation and disposals of assets and businesses, like in this quarter.

So, let me now look at the quarter in a bit more detail, starting with our first priority, execution, and within that our cost reduction efforts. You can see here on expenses that we have achieved further improvement, both sequentially and year-over-year, and David will cover this in much more detail later. It is worth highlighting though the progress we have made in managing our non-comp expenses, which is on our next slide.

Our year-over-year, the non-comp expenses measured at constant exchange rates are down for this quarter 12%. We believe that this reflects both the depth and the breadth of our restructuring effort, beyond straight headcount reductions and that this marks significant progress in our plan to lower structurally the breakeven point of our firm and therefore create new operational leverage.

Turning to slide 8, we are on track to deliver on our 2016 headcount reduction objective of 6000, with 5400 achieved as of today. So, in short, in Q3 we have made continuous progress, both in the reduction of comp and non-comp expenses, sequentially. This cost reduction is a core part of our strategy, and we plan to continue to drive it forward.

Let's turn now to our second strategic objective, profitable growth. As you know, our strategy in wealth management is to follow a balanced approach between mature, at the top of the slide, and emerging markets, at the bottom. At the end of the third quarter we had in total CHF725 billion of assets under management, a key driver, we believe, for our long-term profitability and earnings power.

Year-over-year wealth management, assets under management, have increased by 4% annually in mature, and 16%, one, six, annually in emerging markets. So, since the first quarter, we increased AuM by CHF52 billion, of which about two-thirds, or CHF33 billion, is attributable to emerging markets and about one-third, CHF19 billion, to mature markets.

Let's look at this performance in a more granular way. Our total net new assets are CHF30.9 billion in 2016 year-to-date and that is up 40% against the same period in 2015. The performance for both APAC and IWM, our emerging markets focused divisions is especially noteworthy. Their net new asset flows year-to-date are up 82%, compared to the same period last year.

The lower level of net new assets observed in Switzerland in 3Q for me is evidence of our focus on quality, compliant and profitable growth. Because this decrease is the result of deliberate selected exits of EAM -- external asset managers -- we say EAM in our jargon -- external asset managers' relationships, which I mentioned at a recent investor event, combined with ongoing regularization. And a bit more on this later.

But first let's take a few minutes to look close -- more closely at our performance in Asia, in the next two slides. Our teams in Asia Pacific produced a solid set of results. We saw notable areas of strength against a backdrop of a challenging market environment, more challenging, certainly, than last year.

Our relationship managers have had a strong quarter, attracting, as you see here, CHF4.6 billion of net new assets on the left, a 24% increase over the third quarter 2015. Assets under management, in the middle, are at a record level of CHF169 billion, up 22% against last year.

On the right side of this slide we are showing you what for us is the most important aspect of our model and what we believe is the impact of our integrated approach between our wealth management activities at the top and our underwriting and advisory activities at the bottom, where we have set up dedicated teams as part of our new organizational structure since January.

You can see here that our wealth management revenues are up 14% year-on-year. This is a high-quality annuity-like revenue stream. In parallel, our underwriting and advisory revenues have increased 98% year-on-year. The bulk of this growth is derived from serving the needs of our ultra-high net worth and entrepreneurial clients. We believe these are higher quality revenues, based on long term client relationships, and repeat business opportunities.

It is our experience that there is a strong and positive synergy resulting from this integrated approach between wealth management and investment banking, and this underpins our willingness to continue to invest in the platform. Year-to-date we rank first -- number one -- in share of wallet, in underwriting and advisory across Asia Pacific, ex Japan, among our international peers, and that's a major improvement over our performance last year.

So, our investment across APAC aims at building a high performing, compliant platform, laying the foundation for long-term sustainable, profitable growth.

Moving on to profitability, adjusted PTI of CHF175 million represents an 8% increase year-over-year. This results reflects our growth in revenues, which are up 4% year-on-year, but also up sequentially, and the continued investments we are making in the region. David will give you soon more detail on this, and as I mentioned at a recent investor conference in September, we saw an uptick in provisions during the quarter. This simply relates to a small number of share-based loans in Hong Kong, dating back to 2012, so not part of the current expansion.

After APAC, let's now move to IWM, international wealth management. In IWM our team is continuing to make progress in implementing our strategy. Our wealth management teams have been able to attract net new assets of CHF15.2 billion year-to-date. Our gross inflows were CHF5.9 billion during Q3 and were offset by CHF1.5 billion of regularization outflows, leading to positive net inflows of CHF4.4 billion, as you can see on the left side of this chart here.

Our AuM in wealth management is at CHF311 billion, up 9% year-over-year and 4% sequentially. In addition, IWM has managed its costs with discipline so that gross margins year-to-date have improved to 111 basis points and we delivered an adjusted return on regulatory capital of 20% in the quarter. We are seeing here the early benefits of our 2016 growth initiatives, such as the launch of our strategic client partners' unit.

These initiatives all aim at improving the services, the focus and the products we offer to our ultra-high net worth clients and they have driven a significant proportion of these asset inflows. Our new client lending initiative has resulted in an increase of lending volume since the beginning of the year. Our recruitment efforts have also been successful, with 160 senior and experienced relationship managers joining us so far this year.

Looking at asset management, which also sits in this division, in IWM, we had a strong quarter, with CHF5 billion of assets inflows and a 10% reduction year-on-year in operating expenses. This allowed us to significantly increase our PTI, up 24% year-on-year.

So overall, continued progress in IWM, with attractive returns on capital. And here again David will provide more granularity soon.

Let's now move to our home market, Switzerland, on slide 14. In the Swiss Universal Bank, we achieved an adjusted PTI of CHF431 million in the third quarter, an improvement of 8% year-over-year. Our top line performance was resilient with stable net interest income and recurring commissions, offset by markedly lower transaction revenues, a feature of this quarter.

Our adjusted costs in the Swiss Universal Bank decreased by 7% year-over-year, in spite of absorbing and executing continuous investments in regulatory programs and compliance, which are very material. It is to the credit of our teams in Switzerland that we are able to more than compensate for that increase in regulation-driven costs, whilst continuing to invest in the future of an exciting digitalization program.

As a result of all these efforts, our return on regulatory capital has improved to 14%. This has been achieved in a period in which we have a lot going on as we are preparing for the IPO of Credit Suisse Schweiz, Switzerland, planned for the second half of 2017. The Bank has approved the new Board of Directors, which had its first Board meeting and appointed an independent chairman, Mr. Alexandre Zeller, who was the former chairman of SIX, the stock exchange.

We are on track with all required regulatory filings and approvals and expect to go live with Credit Suisse Switzerland at the end of November. We are working continuously on improving our cost position in Switzerland. Note in this context that a significant portion of the very material costs associated to the legal [and to this set up] sitting mostly in the corporate center are not of a permanent nature and will fade over time.

After our three geographic divisions, APAC, IWM and Switzerland, let's move now to IBCM, which combines for us M&A, ECM and DCM. IBCM is crucially important for our clients and is therefore a core part of our strategy. Consequently, we have been investing materially since 2015 and we are starting to see some of the benefits of these investments.

In the third quarter 2016 we have achieved global top five positions across each of our key products. So, let me comment first on the IBCM division as we know it, in our disclosures, and I will then come back to our global franchise, combining our IBCM activities across geographies, in the next slide.

For the division, our net revenues are up 16% year-over-year, during what is a seasonally slow quarter. In ECM, we recorded revenues up 40% year-over-year, significantly outperforming the market, which was up 12%. In DCM, our revenues were 13% higher, year-over-year, outperforming the market, which was up 1%, driven by substantially higher leveraged finance and investment grade issuance.

In advisory, revenues were down 2% year-over-year, but we outperformed significantly a market that was down 14%. Also, as you know, there is always a significant lag here, between announcements and actual revenues, and we're very confident in our pipeline.

So, moving now to our global franchise. The revenues of our global advisory and underwriting activities consolidated across regions were up 22% year-over-year, against a market up only 4%. ECM was up 44%, compared to a market up 21%. DCM was up 23% compared to a market up 8% and advisory was up 4%, compared to a market down 11%.

There is clear proof here, we believe, that our divisional structure has in fact enhanced, rather than detracted from our client connectivity. We have continued to leverage the strength of our global franchise with a number of market transactions, such as the Bayer Monsanto or Enbridge Spectra Energy transaction announced during earlier quarters. And our M&A pipeline is healthy as we look towards 2017.

These encouraging results are the translation of the leadership positions we enjoy in a number of products and sectors, thanks to the top quality and relentless efforts of our coverage teams.

So, moving now to global market, which is also absolutely crucial to our clients and a core part of the strategy. In the third quarter, global market recorded positive adjusted PTI of $150 million. This second consecutive quarter of profitability was achieved by the combination of a particularly strong performance in credit and very strict cost discipline.

So, compared to the third quarter 2015 we are operating with significantly reduced RWA, in accordance with our strategy. We have reduced RWA by 16% compared to the third quarter 2015 and we are operating below our end 2016 ceiling of $60 billion. Leverage exposure is at $296 billion, down 6% year-over-year.

Over the same period, we have reduced costs in line with our right-sizing of global market, in order to increase our operational leverage, which is a key objective of our strategy. Year-to-date operating expenses in global market are down 6%, compared to last year. But importantly, we have seen an acceleration in prior year and in the third quarter we have accelerated our cost initiatives and achieved 15% sequential reduction, so Q3 over Q2.

We continue to make progress on costs and expect to approach our end 2018 cost target of $5.4 billion by end 2016. I repeat, we expect to approach our end 2018 cost target $5.4 billion by end of 2016 -- so two years early.

Looking at the performance of our key global market businesses inside the division, a number of our client franchises had a strong third quarter. Global credit products delivered its best third quarter performance since the third quarter 2013, as our teams stayed close to clearance across high yield and investment grade markets.

In the US our equities franchise, which is core to our strategy, held up well, and we maintained our leading positions with our core clients, across cash and prime. In fairness, in Europe our performance in equities was weaker, driven by lower client activity and less favorable market conditions, particularly in equity derivatives and trading.

We will continue to support our leading client franchises across credit and securitized products, and we are investing in technology and talent to strengthen our equities franchise, which is an integral part of our strategy.

So, to summarize, the right-sizing of global market is complete. And we will continue to improve the operational leverage of the business.

Finally, let us look at the strategic resolution unit, the SRU, which actually has played a key role in the delivery of these numbers. During the third quarter our team there worked hard to take advantage of the current interest rates level at the long end of a yield curve and was able to significantly reduce leverage.

Year-over-year leverage is down 40% -- four, zero -- and is down 20% sequentially, between Q2 and Q3. We have also reduced RWA by $20 billion, or 37%, excluding operational risk. The non-op risk part of the RWA down 37% year-over-year. In the same period, and importantly adjusted total operating expenses in the SRU decreased by $310 million, or 47%.

Progress in the SRU remains central to our restructuring phases of our Group. It contributes to generating the resources we need to invest profitably in APAC, IWM, SUB and IBCM, where we expect to generate higher returns over time. And this is illustrated in the next slide.

So, since the third quarter 2015 we have reduced RWA by about CHF30 billion, or 11%. That's the measure of the restructuring effort -- primarily through reductions in GM and SRU. But in the same period -- and you see it on the right here -- we have invested CHF16 billion of RWA in SUB, IWM, APAC and IBCM, where we believe we're getting better returns on capital.

So, on a net basis, we have only deleveraged by about CHF15 billion over the period, equivalent to 5% year-over-year, but the real intensity of the effort is better captured by the 11% on this page.

On the next slide, you can see our capital position. We were able to improve our capital position during the quarter and have achieved a look-through CET1 ratio of 12%, an improvement of 20 basis points sequentially. And this is after taking additional litigation provisions of CHF357 million. We have also been able to increase our look-through CET1 ratio -- leverage ratio -- to 3.4%.

To close on my section and in summary, this has been a quarter of continued progress for Credit Suisse. We have executed with discipline and are generating significant cost savings. We have delivered profitable growth in APAC, IWM and the Swiss Universal Bank, with good momentum in IBCM and a second consecutive quarter of profitability in global markets. We further improved our look-through CET1 ratio to 12%, the highest level the Group has ever reported.

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

Thank you very much, Tidjane. Good morning, and I'd like to thank you all for joining our third quarter earnings call today.

I will start on slide 23 with a summary of our third quarter financial results. We show the Group numbers here on a reported and on an adjusted basis. And we continue to prepare our adjusted results under the same definition that we've used in prior quarters. And as usual we provide a full reconciliation of our adjusted and our reported results for the Group, and for each of our divisions in the appendix.

You can see this year's -- this quarter's adjusted results exclude gains of CHF346 million from a significant real estate sale, offset by restructuring costs of CHF145 million and increase in provisions relating to major litigation items of CHF306 million.

If you look at the results of the third quarter, our reported pre-tax income was CHF222 million on net revenues of CHF5.4 billion. Adjusting for the items that I mentioned, we achieved a pre-tax income of CHF327 million, on CHF5.1 billion of revenues.

Now, as in prior quarters, for the balance of this presentation I will focus entirely on the adjusted numbers, as we believe these more accurately reflect the operating performance of our businesses.

As Tidjane's mentioned, the continued successful execution of our strategy has driven these quarterly results, with continued profitability in each of our core operating divisions.

Let's turn to slide 24 to review our capital and our leverage positions. In the third quarter, as Tidjane summarized, we continued to reallocate capital to our growth businesses. Risk-weighted assets stood at CHF270 billion at the end of third quarter, stable from the CHF271 billion that we reported last quarter, but down from CHF285 billion at the third quarter in 2015.

Compared to a year ago, we reduced risk-weighted assets in the strategic resolution unit by CHF20 billion and by CHF8 billion in global markets. I'm pleased to say that with the capital that we released from these areas we then reinvested CHF16 billion into risk-weighted assets in our growth businesses in Asia Pacific, the Swiss Universal Bank, international wealth management and the investment banking and capital market division.

We've made similar progress in our leverage exposure, with year-on-year reductions of CHF76 billion from the SRU and CHF11 billion from global markets. As with risk-weighted assets, we've then reinvested capital resources. We've an increase in leverage of exposure of totaling CHF28 billion across the four growth areas.

If we look at our capital and our leverage ratios we ended the third quarter with a look-through CET1 ratio of 12.0%. That compares to 10.2% at the end of the third quarter last year and 11.8% at the end of the second quarter. The significant reduction that we've achieved in leverage exposure results in the CET1 leverage ratio improving to 3.4% at the end of the quarter and that's only marginally below the new Swiss too-big-to-fail legislation requirement in 2020, for us to be at 3.5%.

Our tier one leverage ratio stood at 4.6% at the end of the third quarter, and that compares to 3.9% at the end of the third quarter of 2015, and 4.4% at the end of the second quarter.

Let's turn now to slide 25, to review our cost reduction program. Now, before I turn to the details, I'd just like to remind you that as in previous quarters, we continue to measure our cost program and all expense reductions on a constant FX basis, from the full year 2015 baseline of CHF21.2 billion.

At CHF4.8 billion in costs for the third quarter, we continue to operate well below the quarterly run rate of CHF5.3 billion through 2015. We've also continued to operate below the average quarterly run rate of CHF4.95 billion that is required for us to meet our target to be at or below CHF19.8 billion for 2016.

As we show on the slide, our expenses for the first three quarters of the year totaled CHF14.5 billion. And I'd note that this is on an FX-neutral basis, which means we exclude the benefit, i.e. the reduction in costs, that comes from roughly CHF240 million in FX moves, primarily resulting from the depreciation of sterling.

When compared to CHF15.9 million expenses, which is equivalent to three-quarters of our 2015 baseline, we've achieved a reduction of CHF1.46 billion. By way of comparison, you may remember that we set a net target for the full year of CHF1.4 billion in 2016. And I think given the progress that we've demonstrated so far around cost reductions, it's fair to say that we're on track for our full year expenses to be below CHF19.8 billion in 2016.

If we look at the details behind the CHF1.46 billion of savings that we've achieved in the first nine months, CHF590 million of savings was achieved from lower deferred compensation expenses. We also continue to see the benefit from the net reductions of 5400 across our contractor, our consultant and our employee populations.

As we mentioned last quarter, the reduced amount of contractors and consultants that we use drives a reduction in our professional service costs within the non-compensation total. This equates to savings of roughly CHF170 million in the first nine months of the year. We've also achieved savings in salary expenses from reduction of our permanent staff and that's driven savings of approximately CHF240 million in the first three quarters of 2016.

I'll now turn to each of the divisions' performance and I'll start with the Swiss Universal Bank, on slide 26. The Swiss Universal Bank delivered a resilient performance in the third quarter, with pre-tax income of CHF431 million and a return on regulatory capital of 14%. Our third quarter net revenues were broadly stable at CHF1.3 billion, with weaker transaction activity partly offset by strong growth in net interest income.

We reduced operating expenses by 7% year-over-year and that's notwithstanding the continued investments that we've made in our regulatory and our compliance infrastructure, as well as in the digitalization program for our wealth management businesses.

Clearly, this decline in operating expenses drove our pre-tax growth, with third quarter pre-tax income improving by 8% year-on-year and as a consequence of these measures the Swiss Universal Bank has now achieved year-on-year profit growth each of the last three consecutive quarters.

Let me turn now to the net new assets in the wealth management business. For the third quarter, we had net business inflows of CHF1.1 billion. But then we then saw regularization-related outflows of approximately CHF0.4 billion. We've also continued to realign our external asset management business, resulting outflows of a further CHF0.5 billion in the third quarter, leading to net new assets for wealth management of CHF0.2 billion this quarter.

The corporate and institutional banking business drove -- maintained stable revenues year-on-year. Pre-tax profit though benefited also from our cost-saving measures, increasing by 11% year-over-year to CHF217 million.

On net new assets we saw some small outflows from a small number of individual cases, totaling CHF1.2 billion in the quarter.

With that, I'd like to move to international wealth management on slide 27. The division delivered a resilient performance, notwithstanding the challenging environment from transaction revenues in the quarter. Pre-tax income was CHF241 million, a return on regulatory capital of 20% in the third quarter. And we saw strong net new assets across both of the businesses in this division.

Revenues of CHF1.1 billion were broadly stable year-on-year, with strong growth in net interest income offset by significant reductions in client transaction activity in wealth management as well as lower investment and partnership income in asset management.

Private banking continued to demonstrate very strong net new asset inflows, totaling CHF4.4 billion in the third quarter. And I note that this is after outflows of CHF1.5 billion relating to regularization this quarter. We saw strong inflows across emerging Europe, the Middle East and western Europe, partly offset by some de-risking in Latin America. For the first nine months of the year net new assets totaled CHF15.2 billion, an extremely successful turnaround for the business when compared to the performance in 2015.

The upgrades in our relationship manager team have supported these strong inflows. As you know, growth in the IWM business is a critical priority for Credit Suisse and we've been very focused on the strengthening of our relationship manager team and the realignment of this team towards these opportunities. We've added over 160 relationship managers during the first nine months, but have offset this in our total RM headcount through vigorous management performance measures.

Within IWM, private banking revenues of CHF789 million increased slightly year-on-year. This performance was driven by high net interest income, reflecting loan growth and higher loan deposit margins, partly offset by lower transaction revenues, reflecting muted client activity and risk aversion in a volatile and depressed market environment.

The asset management business delivered pre-tax income of CHF51 million, up by 24% year-on-year. This growth was partly driven by cost reductions of 10% year-on-year, offsetting the decline in investment and partnership income.

In asset management, net new asset inflows improved to CHF5 billion, with a strong contribution from both our joint venture of ICBC in China, as well as from fixed income products in the quarter.

Let's turn now to Asia Pacific, please, on slide 28. The Asia Pacific division delivered a resilient performance in the third quarter, with pre-tax income of CHF175 million, up by 8% year-on-year. Net revenues of CHF917 million increased by 4% year-on-year. Investments in our franchise and a continued focus on ultra-high net worth and entrepreneur clients supported significant growth in wealth management revenues, increasing by 14% year-on-year.

Within the investment banking businesses, the strongest performance was achieved by our underwriting and advisory operations, with revenues up by 98% year-on-year. As Tidjane's already mentioned, this reflects the success of our integrated approach across investment banking and wealth management in this region.

In the other investment banking businesses, we saw solid year-on-year revenue growth in fixed income, although our equities business continued to reflect the more difficult market environment this year than last year.

Operating expenses increased slightly year-on-year, and that reflects both relationship management hires as well as investments in risk and compliance infrastructure to support the growth long term in this business.

And as Tidjane's mentioned, we had some impairments on a small number of share-based loans in Hong Kong with net credit provisions totaling CHF34 million for the division in the third quarter.

Let me just conclude on Asia Pacific with a few comments on assets under management. These increased to CHF169 billion -- a record for our business in Asia Pacific. Net new assets were strong at CHF4.6 billion in the quarter, equivalent to an annualized growth rate of 11.6%. And that's been supported by the increase in our relationship manager footprint by the 100 net new RMs that we've recruited over the last year.

I'll now move to investment banking and capital markets, on slide 29. We've achieved strong market share gains across our key investment banking capital markets businesses. For the first three-quarters of the year we achieved a top five rank in each of announced M&A, equity capital markets and leveraged finance.

If you look at the financial results of the quarter, we generated net revenues of $479 million, up 16%, driven by higher revenues from debt, and equity underwriting. Equity underwriting revenues of $76 million increased by over 40% year-on-year, and debt underwriting of $246 million grew by 13% year-over-year.

If we turn to advisory revenues, it's important to understand a couple of points. First, as we've said already, we've continued to increase our announced market share, whilst industry activity levels declined. In the third quarter, industry wide announced M&A volumes decreased by 32% year-on-year, while IBCM's announced volumes was down by 10%, resulting in the top five ranks I've mentioned before.

Second, there's always a timing gap between a transaction's announcement and the eventual closing. And in terms of the recognition, the advisory revenues we're currently reporting reflect deals which were typically announced several quarters ago. The strength we're currently seeing in our announced M&A market share will only translate to growth in advisory revenues over the coming quarters, for example, with Bayer's agreed $66 billion acquisition of Monsanto.

Let me turn now to expenses. Our cost base the first nine months of the year was $1258 million, and that's broadly stable from $1268 million for the first nine months of 2015. We've accomplished this whilst making significant investments in new senior hires, particularly in the Americas. In the third quarter, operating expenses increased and that primarily reflects the timing of the recognition of variable compensation accruals during 2016 compared to 2015.

Overall, the division reported pre-tax income of $55 million, compared to $68 million in the third quarter of last year.

Now, before I turn to global markets, you'll note at the bottom we've included the new disclosure that Tidjane summarized. You can see in the third quarter that whilst total advisory and underwriting revenues in the IBCM division increased by 16% year-on-year, Credit Suisse's total advisory and underwriting revenues increased by 22%. And that includes those revenues booked in global markets, Asia Pacific and the Swiss Universal Bank.

And that compares to a 4% increase in the industry wide fee pool for the same period, clearly demonstrating the strength of our underwriting and our advisory franchise globally, including the cross-selling opportunities with our wealth management operations.

Let me turn now to global markets then, on slide 30. The global markets division delivered a pre-tax profit of $150 million on revenues of $1.4 billion. Let me just discuss the three subcomponents of this division. The credit franchise posted revenues of $740 million and that's an increase of 2% year-on-year. This improvement was primarily driven by leveraged finance trading and underwriting activity, reflecting both improved market conditions and an increased underwriting share.

We did see some reduction in securitized products revenues, reflecting both the reduction in the capital invested in this business, as well the strong third quarter in 2015, which benefited from a number of very significant episodic trades. Our market share is strong though, and we maintained our number one rank in asset finance.

In solutions, third quarter revenues are $359 million, decreased by 13% year-over-year, primarily reflecting the difficult equity derivatives environment globally, where we suffer from a significant reduction in volatility compared to earlier quarters. And this was partly offset by a much stronger performance in emerging markets, particularly in Latin America.

If we turn to equities, revenues of $330 million declined by 38% year-on-year. As Tidjane's already mentioned, we achieved stable results in our cash and our prime service operations in the Americas. However, revenues declined substantially in EMEA, reflecting a combination of weak client activity, reduced primary flows in this area and a difficult trading environment.

If we look at operating expenses so far this year, for the first nine months the cost base was $4.1 billion and that's down by 6% compared to the same period last year. On an annualized basis that represents $5.4 billion in expenses. Now that's clearly significantly below the target we've set for 2016 of $6 billion and in line with the target of $5.4 billion you may recall we set in March, to be achieved by 2018.

Let me now conclude with the strategic resolution unit on slide 31. As we've achieved in previous quarters, we've continued to make substantial progress in reducing our leverage, our risk-weighted assets and our operating expenses within the strategic resolution unit. Over the course of the last year we've reduced our leverage exposure by $78 billion, or 40%. And if we look at RWA, year-on-year we've reduced the total by $21 billion, or 37% of RWA, excluding operational risk.

And over the same period, we've reduced the quarterly cost base to approximately $350 million, a 47% decline year-on-year. To put this in context, you may recall that we've committed earlier to achieve reductions of approximately 70% in RWA and leverage exposure over a three-year period.

If we look at the third quarter, we reduced RWA excluding operational risk by $3 billion, or 9% quarter-on-quarter. This reduction was achieved through a number of actions, given the diverse range of assets within the SRU portfolio. And that includes the sale of a portfolio of corporate loans, and the sale of a business development corporation, Credit Suisse Park View.

In the third quarter, our emphasis was shifting more towards reducing our derivatives exposure, which has seen a disproportionate benefit this quarter in terms of leverage exposure. Overall, we reduced leverage by $29 billion, a reduction of 20% compared to the last quarter. This reduction includes the further execution of CDS trades following the purchase and sale agreement that we announced last quarter.

Just to put this in context, over the course of the nine months -- last nine months, we've reduced our derivative trade account by roughly 50% and that's the elimination of 160,000 positions.

I note in aggregate we've achieved these reductions at an exit cost of just over 1% of

RWAs, and that's similar to what we've achieved earlier over the last year. But I would still guide towards an average cost for exit of 2% to 5% of RWAs over the remaining lifetime of the SRU. This reflects both the macroeconomic environment and also the continued shift in focus towards more -- the sale of more leverage intensive but RWA-light assets in which disposals will, therefore, represent a higher proportion of risk-weighted assets.

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

Thank you, David. Before we take your questions let me wrap up on the quarter and provide an outlook for Q4.

In summary, this has been a quarter of continued progress for Credit Suisse. We have executed with discipline and are generating significant cost savings. We have delivered profitable growth in APAC, IWM and SUB, with good momentum in IBCM. And a consecutive -- a second consecutive quarter of profitability in global markets. We further improved our look-through CET1 ratio to 12%, the highest level we ever reported.

Looking ahead, we remain cautious about the outlook for the remainder of the year. We expect market activity to continue to be influenced by geopolitical and macroeconomic uncertainly over the next several quarters and the outlook to remain challenging.

We still have a long way to go. But we are on the right track. We are fully mobilized to deliver in challenging market conditions on our key commitments to reduce cost, strengthen our capital base, and drive profitable business growth where attractive prospects exist.

With that, we look forward to your questions.

Thank you, sir. We will now begin the question and answer part of the conference. (Operator Instructions). Daniele Brupbacher, UBS.

Yes. Good morning and thank you. I had two things, firstly on the interest-rate sensitivity. Could you give us a bit of an update there, particularly with regards to the sensitivity Credit Suisse has to the US yield curve and probably how you're skewed to the short end of the curve?

And then, secondly, on cost management can you just give us a little bit more details in terms of where you did better compared to the targets? And, in that context, you did mention professional services which, to me, always looks like a very high-cost item. I think it was something like CHF2.2 billion year-to-date or 40% of G&A cost.

Can you just tell us how much of that is related to contractors? And what other main items are within that cost line? That would be very helpful.

Thank you.

Thank you very much, Daniele. Daniele, it's David here. I think in terms of interest-rate sensitivity, within the financial report on page 75 we do give the usual disclosure. And you'll see there what we say is the impact of a 1 basis point parallel move in yield curves would have been an increase of CHF4.5 million. So, essentially the -- very similar to what we said before.

I think in the past we've said CHF500 million for 100 basis points. It's CHF450 million now. But, given that we've obviously exited from the US broker/dealer business a year ago, that would explain the slight downward shift in sensitivity. And that's actually no change from the second quarter.

So, that's our current interest-rate exposure within the banking book.

I think in terms of cost details, I think we're clearly pleased with the execution progress we've actually made over the course of the year so far. Clearly what we've given is a net saving of CHF1.46 billion compared to the average run rate in 2015.

And, just for the sake of clarity, when I spoke before I did mention that what we do when we report our cost numbers is those are on FX-neutral basis. So, in other words, the CHF14.5 billion of nine-month cost excludes the benefit that we get from the reduction from FX move, which is predominantly driven by the weakness of sterling, so far this year. So, it's a clean comparison to 2015.

In terms of the components of that, I think we've given it already in terms of obviously deferred comp was the biggest reduction in the first quarter. And it's also continued to contribute during the second and the third quarters.

But, as you say, we have relatively high professional-service costs in the bank. That is being driven by a, I would say, unduly large contractor population. And that has been a very substantial focus of our cost efforts so far this year. In fact, it's been the largest contributor of the 5400 reductions that Tidjane's already summarized, and will be of the 6000 total.

So, I think we're very pleased to see that number come down. And I think it's -- I think obviously the -- by prioritizing those costs they tend to come out quicker because there's clearly no notice periods. And actually the restructuring costs associated with contractors are minimal. So, I think you see benefits in that.

And I think clearly it's also the right thing to do from our employee place, as well. So, I think more to go there. That's clearly being driven by some of the initiatives we have. That would be, for example, I think you're aware of the London program which you've heard the code name, which I think it's Lighthouse 2. But there's also an equivalent program in New York, as well, to drive these costs down.

So, I think that's been good. And that's obviously been the second driver after deferred comp.

I did say, I think, at the end of the second quarter that we would see some savings in our salary costs from the reduction in permanent employees. And that's the third component which is now coming through as well.

So, I think more to go, Daniele, in terms of the numbers you've outlined. We'll have to get back to you in terms of the percentage of the actual professional-service fees which relate to contractors. I would say the difference between contractors and consultants is a little bit academic. But we can probably give you some more insight.

That's great. Thank you.

Thank you.

Thank you.

Thank you very much. Andrew Coombs, Citigroup.

Good morning. Three questions please, one on litigation, one on net new money and then, finally, one on Asia.

Starting with litigation, if I look at page 162 of the report your estimate of losses not covered by existing provision is now estimated to be up to CHF2.6 billion. That's up from CHF2.1 billion in the prior quarter, despite the CHF0.3 billion extra provision you booked in Q3.

So, I was hoping you could just provide a bit more color on why you've increased your estimate of potential losses there.

Second question is just on the regularization outflows that you flag on slide 34. They've jumped up from CHF1.4 billion to CHF2.8 billion in the third quarter, including quite a big increase in Asia. So, again, what's driving the increase in those cross-border outflows there?

And then the final question. Asia; the provision number's ticked up. It's not a big increase but there is a subtle increase there. You flag some share-based loans in Hong Kong. I would be grateful if you could just provide a bit more detail. Thank you.

Yes. I think those are mostly for you David. Do you want to take the --?

I think on the -- taking them in sequence, then, on litigation we are I think going to continue with what we've said before. We're not going to make any further comments around our litigation provisions or the [RPO] number you mentioned on page 162, I'm afraid.

In terms of net new assets and particularly the regularization outflows, as you say, I think slide 34 does give the regularization outflows. I think previously we obviously focused on giving our guidance around the international wealth-management business. And I think we've guided there to total regularization outflows of approaching CHF5 billion this year.

We're clearly at CHF3.5 billion so far. And the run rate in the third quarter was consistent with what we've seen earlier in the year. So, I wouldn't be looking to change that guidance, I think. That's an unchanged number.

In terms of the other areas I did pick up, obviously that we have seen some outflows in the Swiss Universal Bank. Just under CHF0.5 billion. That basically has both been on our own book and also in the books of the -- some of the external asset managers. And we would expect some further outflows, but it will probably primarily of more by the realignment of external asset manager business.

Within Asia Pacific we have seen outflows of about CHF0.9 billion, of which CHF0.7 billion relates to the amnesty which we've seen in Indonesia. We probably expect similar to slightly less in the fourth quarter, I think would be my guidance, basically.

But I think one point, just to put this in context, I mean, I think if you go back over the last few years obviously the peak outflows was actually about three years ago when it was CHF13 billion. The margin impact of those outflows obviously was quite material because of the high gross margin we actually saw in those businesses. And they were primarily in Western Europe.

The outflows we're seeing now, the margin on this business is not particularly different to the average gross margin, for example, we have in Asia Pacific. So, you should not expect a margin shift as a consequence of this. Just to be clear on that. It's quite different from the events several years ago.

And the provision (multiple speakers) --?

Just in terms of the provisions of a net CHF34 million I think, as we said, that relates to a small number of Hong Kong-based share loans where there was a fall in the stock price that exceeded significantly the average loan to value, which is typically around 55% on these type of exposures.

Extremely unusual behavior. Generally speaking, whilst there clearly are credit events around share-based loans, the degree of loan to value means that actual credit losses are extremely unusual. So, this was an unusual event. As we've said, it's a net CHF34 billion. If you look at the details you can see it was CHF37 million in the private-banking side and there was about CHF4 million recovery in the investment-banking side.

That's our estimate. We'll continue to see if we can actually improve the recovery of that. But I think, as Tidjane said, the origination of these loans dates back to 2012. It's not related to the expansion of our Asia Pacific business since then. And it's a little bit unusual.

And, again, it's Tidjane here, as David said, the recovery on these the track record is very good over time -- [these are] people we know very well. And that's why obviously this integrated model is useful. The net/net over a few quarters is generally zero. So, we are positive that we can get that money back.

Very helpful. Thank you both.

Thank you.

Thank you. Jeremy Sigee, Barclays.

Morning. Thank you. Two questions, please.

Firstly, you made a comment about global markets. I think you said words to the effect that the right sizing of global markets is complete. The cost income there is still very problematic. It's 90% in 3Q, 94% for the nine months. So, it feels like it needs more than just operating leverage to rectify that, going forward. So, I just wondered if you could amplify a little bit that comment and your outlook for how that gets fixed.

And then my second question relates to the SRU. Obviously, you've achieved very impressive shrinkage in the quarter here. And I just wondered whether it's reasonable for us to view that as a continuing acceleration in the coming quarters. Should we expect you to continue to track faster in terms of reduction than you originally targeted? Or should we view that as a bit of a one-off event in 3Q?

Thank you Jeremy. Look, you're right to mention the cost income on global market. We're really doing two things there. The first one, as we've described, is really to drive the cost down. And I think the progress there has been very material.

Remember we started at CHF6.5 billion. We're talking about CHF5.4 billion to -- at the end of 2016, so two years early. So, we're driving that down, and we will continue. And Brian is doing a big piece of work on that and we'll update you on that all the time.

And the other one is that the revenue outlook is quite depressed. We have had a good quarter in credit. But (inaudible) if we went for an exercise where we basically shrank the business and that had an impact on revenues. And in equities we, frankly, as we said, in Europe had a bad quarter.

So, we see quite a bit of upside there, even in current market conditions, as we are investing in people and in technology also to turn around the performance in equities in particular. But, again, really America's equities did very well. (Inaudible) anybody the impression that it didn't.

I think that cash in prime was actually up 1% from what I've seen, year-on-year, so good performance there. But a problem in Europe.

So, we see upside in driving of cost down and in also -- now that all the disruption associated with the right sizing is fading away, continuing to penetrate our clients, increase our share of wallet in our top clients. And we have every indication that that can work. So, you should expect to see a -- market conditions permitting, a continued improvement in the coming quarters towards the 10% to 15% range we gave initially.

Sorry. You played a big role in these numbers. Very important to our story. David, do you want to give more color?

Thank you Tidjane. So, I think, as Tidjane said, I mean, I think obviously we're very pleased with a CHF20 billion reduction risk-weighted assets, CHF76 billion reduction in leverage. So, I mean, I think to be down 40% in leverage, 37% in RWA, ex op risk, but I think, as importantly, the reduction in the expenses being down 47%, it clearly is ahead of our schedule.

I mean, I think you may recall we said, and we've been consistent with that, that we expect it to achieve a 70% reduction in leverage and in RWA, excluding op risk, over a three-year period. So, we're clearly ahead on that point of view.

I would just make two or three points really. Firstly, from a credit environment, a flattening yield curve is clearly favorable to the disposal of assets. And I think that's why we've continued to achieve exit costs, and it was about 1.4% in the third quarter, below our guidance of 2% to 5%. Because a flattening curve is favorable if you're trying to sell assets which are clearly slightly impaired.

I think the flip side, though, of a flat curve is it reflects a weakening macroeconomic environment. And I think one has to be cognizant that there are risks in this portfolio. And that's why we're sticking with the guidance of 2% to 5% of RWAs because, as time goes on, we could see some further impairment charge within this portfolio.

We did see impairment charges in the SRU. We actually did take some provisions in the SRU which are actually included in these numbers. We did also see some gains as a consequence of that; that yield-curve flattening.

So, I think we are very committed to at least meeting the 70% three-year targets laid out before. We will come back on Investor Day with some revised guidance around the SRU in terms of what we -- [the movement] and, I think, some more details in terms of the key aspects of that.

But I think it's always good to have CHF20 billion under your belt in the first year. And I think -- but I would just caution in terms of that guidance, 2% to 5%, and that point I made before. I mean, obviously the elimination of 160,000 derivative positions, half, is very good.

But as we move through the reduction of leverage and they are leverage-intensive but RWA-light positions, so, you would expect that the percentage of RWA you actually have to sell to actually close out these positions will rise up with our increasing shift towards moving the rest of this derivatives portfolio over the next few years.

That was okay, Jeremy?

Thank you.

Okay. Thank you.

Thank you. Kinner Lakhani, Deutsche Bank.

Yes. Hi. Good morning. I have three questions.

So, firstly, I just wanted to revisit global markets, in the context that most of us would have said 3Q was actually quite a good outturn. And annualizing Q3 revenues essentially gets us to CHF5.5 billion for the year, which is broadly in line with the cost base. So, it doesn't feel that this franchise is much better than breakeven at this point in time.

Second question is on net interest income. And thanks for pointing out the sensitivity. I guess the issue being none of us really expect rates to go up in a parallel fashion. So, I guess, to put the question in a different way, based on forward curves today, how would you expect your NII to evolve one, two, and three years out from here?

And then the final question is on wealth management, but here I'm looking at wealth management in totality, so adding the three subdivisions. I understand transaction revenues are cyclical. But, just looking at the fee and commission margins, they seem to be down from 36 basis points a year ago to 32 basis points in Q3.

So just trying to understand what you think are the key components behind the 4 basis-point deterioration and, therefore, the outlook on that?

Thank you.

Thank you.

So, perhaps if I just start with the global markets point. I mean, I think -- a few points to make. When we came out with the acceleration program back in March we did give some longer-term cost targets for the Group as a whole. And particularly, obviously, we said we'd be at or below CHF19.8 billion. And we've revised that guidance today to be below CHF19.8 billion for the current year.

We also said that we'd be looking to reduce our costs further during the course of 2017 and 2018. And GM will actually gain their portion of those costs. And, therefore, that does give us the potential to reduce our expense base below the CHF5.4 billion which we're annualizing today.

And I think it's clearly very good news that we've achieved the CHF5.4 billion in nine months; admittedly two years ahead of schedule. And -- but I think (a) there is that overall Group saving to come through. And (b) I think it's something we'll look to give you more guidance to on Investor Day.

I think it's certainly fair to say and that we are very much focused on the profitability of this division, not so much the revenue or the cost of this division. We've -- we want to move towards a 10% to 15% return on capital. You know that means CHF1 billion to CHF1.5 billion in terms of the profit contribution. That can clearly come both from the cost lever as well as the revenue lever.

That said, it's also clear that the performance from our equities business, particularly in Europe, was disappointing. And I think that touches on the revenue opportunity, which Tidjane mentioned, in terms of that. So, it's those combination of factors which we'll look to drive.

As I said, we will look to give some more help and guidance on this issue on December 7.

Yes. I think that's correct. Net interest income?

Just moving to the second question then. So, yes, I think the net interest-income trends for the bank, I mean, it clearly has different sensitivities by different divisions. I think that's the obvious point to make.

If we actually think around a core part of our strategy it's been to actually expand our lending operations across the wealth-management businesses, I think, to help our clients providing the lending they actually need. But it's also good for us in terms of the strength of our client relationships and the business opportunities come from that.

And that is clearly driving a large component of our net interest-income growth. And you see that particularly, for example, in international wealth management. You see it in the Swiss Universal Bank too. But in the Swiss Universal Bank you're also seeing some of the increases in funding costs there relating to the (inaudible) issues.

So, when you're looking at net interest income, it's clearly net of those costs.

So, if we looked, for example, on an interest-rate neutral point of view, i.e. interest rates stay where they are in Switzerland, stay where they are in the States. And just recalling our sensitivity to the US is less than it might be for some peers and less, basically, because we've obviously exited from the US broker/dealer business, then you would expect our net interest income to actually grow because we are actually expanding our loan book. And we're expanding that at good net interest-income margins.

I think to go beyond that it probably gets into the details of which interest rates move where. We have less sensitivity to higher US curves. And, clearly, I think Swiss interest rates are not really linked to US interest rates. I think it's the clearest thing to say. But I think on a flat basis I would expect our net interest income to continue to grow because we're actually expanding our lending book and we're maintaining those margins.

So, I hope that's of some help, basically.

Shall I just conclude? Just in terms of the recurring fees and our margins, you can see, for example, in IWM that they've been pretty stable for the last three quarters. But a year ago we were just going through the transition to retrocession free products. And moving from products which has retrocession, which boosted our recurring fees, to products which essentially were driven by Credit Suisse Invest and at a higher mandate penetration.

That shift in mandate penetration has been successful. You may recall it was in the teens a couple of years ago. We're up to about 29% now. But we are -- the growth rate, that's actually slowing. So, I think they're now stable in that sense. But we've been through obviously a big shift from products with retrocession fees to the new mandate-type product.

Just in terms of the overall totals, obviously we've included in the back another key factor which relates to the Swiss Universal Bank, which is -- I think we've talked about this before, is we deconsolidated Swisscard. So, we moved from having 50% of Swisscard consolidated and, therefore, booked in our recurring-fee income, to 50% as our [non-usury] interest which, therefore, is excluded from that.

Quarter-on-quarter that doesn't make a difference because it was actually accomplished at the end of the second quarter of 2015. But if you're certainly looking over the nine-month period then you will still see that impact, because the recurring fees from Swisscard have been dropped out, although we obviously maintain the same economic interest.

Did that answer your question?

That's very helpful. Thanks, David.

Thank you.

And just to ask you on TLAC actually, have you provided any guidance on the impact of meeting the TLAC-type requirements?

Yes. We've -- we have given some guidance to the debt market in terms of the likely scale of issuance we need. I mean, I think just to go back to the Investor Day of a year ago, we talked at that point around total leverage exposure about CHF1 trillion. Under the Swiss too big to fail rules they require us to actually operate with a 5% TLAC buffer, so that would equate to about CHF50 billion of TLAC.

Now, you may recall that TLAC has diminishing effectiveness in the last year and the last two years, which you can potentially address through some structural changes around TLAC issuance, which we could talk about offline. But you do need to operate with a slight buffer to that.

So, therefore, we've given guidance in the CHF55 billion to CHF60 billion in terms of the amount of TLAC you have to have in issuance. And we're just over CHF20 billion so far in terms of the actual TLAC we've actually issued in the debt market today.

I think perhaps, sorry, if I could jump ahead there for -- to an obvious next question, I guess, which would be what does that mean for your overall funding costs.

Correct.

I probably should answer that. I mean, when I look at the funding costs over the next two to three years, we would expect obviously some increase in funding costs relating to TLAC, because we're typically issuing that at 50 basis points to 60 basis points wider spreads than we're actually issuing senior debt.

That said, we have several contra-factors. So, firstly, we clearly have still a very substantial funding position within the strategic resolution unit. So, as that's actually run off, that will actually reduce our actual funding requirements.

Secondly, within the strategic resolution unit you may recall that we had, I think, some legacy Basel II hybrid instruments which we actually discussed at the investor day last year. That's typically costing us about [CHF250 million] plus or minus per annum of extra interest costs. And those expire at the end of 2018. So, that will actually drop out in terms of our funding cost.

And, thirdly, we were relatively early in terms of the CoCo issuance and actually then, more recently, the TLAC issuance. We actually did redeem some CoCos in august. We've got some more now. Those early instruments were relatively widespread compared to where the market actually prices today.

So, net-net, what does that add up to? I think I'd probably say funding costs for 2017 are likely to be broadly similar to those of 2016. But we will then start to see some reduction in later years, primarily, as those instruments in the SRU drop out. But we'll talk about that more on December 17 -- December 7.

Thanks again. Very helpful.

Thank you.

Thank you. Jernej Omahen, Goldman Sachs.

Yes, good morning from my side as well. I have two questions. And I don't want to take away from what is obviously a positive quarter, particularly on the capital side of the equation, but still there's two things that stand out here I think.

So, the first one is, I'm looking at your equity result. And I think particularly, David, you described it in reasonably constructive terms. But going back to your -- to Credit Suisse's old disclosure, the equities revenue is the lowest or the worst this quarter in the last decade. And this is during the quarter where your competitors had a reasonable equity result.

So, I'm just trying to understand that when you comment on your equities result, should we take this number and take it as a new base for where you see your equity revenues going? So, that's question number one.

Question number two, if that's not the case, what went wrong here? Because it doesn't seem to us, at least, that this is due to volatility in -- or weakness in equity derivatives alone. And, if it is, there must have been a substantial trading loss on some of your positions.

And then the second question is I would just -- we would just like to understand better how do you -- how does one lose money on a Lombard loan? Because, as you point out, the loan to value is 50%. I don't think -- was there any major Asian equity that dropped 50% so quickly that you couldn't liquidate that collateral? How does this work? And how does that make you feel about the rapid expansion of the loan portfolio in Asia?

And finally, on Tidjane's point that there is an expectation that there will be substantial recovery on these Lombard loans, does that mean that Credit Suisse hasn't sold the underlying collateral? So, you expect positive [MICs], as time goes on?

Thank you very much.

So, let me start there with -- just to provide some more details around the equity performance. I think, I mean, first and foremost I think, yes, I think it's certainly true that the equity numbers, particularly in Europe, were disappointing in the third quarter.

I think if we look at your first point really, in terms of equity derivatives, what we actually saw was quite good equity derivative numbers in the second quarter, helped obviously by the rather surprising result in the EU referendum, which pushed up vol and actually generated gains in the second quarter.

As basically vol has deteriorated through the course of the third quarter, that's actually cost us money in our equity derivatives business. So, it's been that decline in volatility [at home]. And we'll obviously see what happens in political events in terms of volatility. But it's obviously been a straight-downward trend through the third quarter so far. And that has been expensive in terms of the performance of our equity derivatives business.

I think in terms of the European equities business I'm not sure there's much I'd probably add to what I said before, which is we've seen weak client activity. And the ECM business, market share in Europe was low, so there was limited primary flows, which you know is a core part of the equities business, full stop.

And it's been a difficult trading environment for us. So, it's been that compendium of things which has depressed the equities business performance in Europe.

As we also said, revenues in the Americas across the cash and prime business, leaving equity derivatives to one side, was broadly stable in the third quarter. So, that's the pattern of what we actually saw.

I think something we'd probably come back to on December 7, but clearly we do need to improve the performance of this business, it's a very important franchise for us and something that is a core part of Credit Suisse.

Yes, if I may just add on this. I think as we said really, it's a tale of two cities. A real geographic story. In Americas, which is most of the franchise, things were fine; in line with market or better. So, it's a loss in revenue, there are no trading losses. Which is something you raised. It's a loss in revenue, mostly in Europe. So, I don't think you should take this point as a new reference point, absolutely not.

I think there's big upside from here. And we'll update on it. But if you take back to the global market story at high level, as we said earlier, ultimately we want to get to 10%-plus returns, so you're talking about CHF1.5 billion of PTA. Fundamentally, there are a number of levers you can pull. We've done the rightsizing, we've said we can do better on cost, and there I'm looking at Brian Chin here, but we've got to get to CHF5 billion or less from the CHF6.5 billion we started at, the CHF5.4 billion we're at today. CHF5 billion or less, which will be an upside.

And there's another upside which is really happening is that we could do much more to get GM to work with the other divisions. There's a lot of preparatory work going on there with IWM. So, it's already starting, but there is a big upside there. So we're confident that if we get better at that, the revenue will go up. Costs will go down, revenue will go up and the economies of the division will improve.

I think the second question then was around the Hong Kong-based (multiple speakers). Yes, the LTV.

So yes, I think as we said, the average LTV of our share backed lending in Asia Pacific is around 55%. So therefore, in order to suffer a credit loss, the respective shares must have fallen by more than that. Which indeed they did. They actually fell by I think around about 75%.

So, that's obviously an extremely unusual situation to actually see. That's what actually drove the loss in that. As I said, it's a very small number obviously as it actually relates to two or three type equity positions. I'm not going to give the names.

That's why it's unusual. It's not something we've actually seen in our share backed lending before. As Tidjane said, it does relate to some loans which were made several years ago, back in 2012, in terms of that. So, it is unusual in that sense.

I think the reason we alluded to recovery there is we clearly have strong client relationships in Hong Kong which go far beyond the mere clash where we actually have (inaudible), I don't know, Tidjane if you want to add to that?

Recovery is a broad word I use, but actually we are going to get, if you wish, money back from those people because we have a broader relationship with them and we've been negotiating agreements and they will pay us back over a period of time. That's what's basically agreed. That's why we're confident that we will make good those losses to us.

Actually, that position was spotted in our check and had been actually reduced and was being reduced when the share prices collapsed. So, it's not more than that.

Okay, can I just please have one follow on, on the first question on the equities business performance? David, within the equities franchise, was there any sub-segment that was substantially loss making which you expect to revert to zero in the fourth quarter?

No, I don't think there was any particular one-off losses per se. It was lower activity, particularly in Europe as I said, and across equity derivatives. And obviously limited primary flows in Europe, therefore limited follow-on business from that as well. Plus a generally weak trading environment.

But on derivatives, it's straight forward. It's obviously the fall off involved in those positions over the last three months.

It's really lower revenue. If you look at the revenue drop, it's probably CHF190 million, CHF195 million, and most of that was in Europe, not in the US.

Most of that was in Europe?

Yes, it's a revenue-loss story.

All right, thank you very much.

The US was down in line with the market, really. Marginally down, 8%.

Thank you very much.

Yes.

Fiona Swaffield, RBC.

Hi, good morning. Just a couple of things. The first was on the improvement in the look-through Core Tier 1. I'm trying to understand what drove it? Because the net profit wasn't that significant in Q3. Something to do with other, I wondered if you could go through that on page 60 of the report?

And the other issue I wanted to ask about was the strategic resolution unit and the exit losses, or just generally the negative revenues. They seem to me to be somewhat higher than 1% of RWA reduction. Particularly if you looked at the nine-months data.

I just wondered if you could talk about the future revenues ex-the exit cost issues? Because I can't quite get to the numbers that you're discussing. Thanks.

Thank you Fiona, David, you take the CT1.

Thanks, Fiona. We actually did have positive operating free cash flow, or free capital growth during the period. Obviously that's driven partly by the pre-tax profits. But I think the other point which we've mentioned before is how share-based compensation awards actually work for employees.

So, during the year, we basically expense those awards, but we retain the capital on those awards until we actually deliver. So, I think we've said this before; you would expect to see the capital ratio improve consistently, but there's then normally a drop in the second quarter as a consequence of that.

So, that is a substantial component of the other number, which you are referring to actually, Fiona. I think beyond that, clearly we obviously dropped the RWA slightly and that's what drove that result. But that is the core component actually, Fiona.

I think the second question then was --

The SRU.

The SRU, that's right. So, the exit losses, I think it was about CHF42 million, which was 1.4% of the RWA we actually moved. The balance of the revenues then is the funding costs that I mentioned before.

So, there is the -- what you obviously have in the SRU is you have a portfolio which does not generate much revenue. By its nature, it's certainly not doing any new trades. You then have the funding costs of the regular positions against that, which is a drag.

Then on top of that, you have the issue I mentioned before I think, in answer to an earlier question, that's where the legacy Basel II hybrids actually sit, tune of about CHF250 million per annum in terms of those costs. And there are some other instruments in there as well. So, that's funding cost.

And then on top of that, we have obviously mark-to-markets in terms of the fair-value positions on those lines. So, we did have, I think, some gains as a consequence of the flattening of the curve. We saw that actually in some of our Latin American exposure which sits in the SRU. But that was more than offset by some of the provisions that we took in the rest of the portfolio. So, it was a net negative number from that.

So, those are the three components. But funding is the biggest gap in terms of those numbers, Fiona.

Thanks very much.

Okay, thank you.

Al Alevizakos, HSBC.

Hi, thank you for taking my questions. I've got a couple of questions. First of all, it seems like you haven't reiterated the target of 11% to 12% CET1 capital ratio target. Obviously now you being at 12%, therefore it feels like you could exceed it. But I just wanted to ask what is the expected pension hit in Q4? Because obviously everybody who reports under IFRS tends to take it quarterly but you do it annually.

And the second thing is, can we factor any additional gains on real estate for the fourth quarter? And that's question number 1.

Question number 2 is that generally provisions have looked elevated, like for banks in certain countries in Asia Pacific and also emerging markets. A good example could be Singapore, for example. And I'm just trying to get an update, because I saw that the provisions in IWM were zero, but I heard somewhere Iqbal Khan mentioning that certain loan classes may have got some problems, like for example transport or shipping.

So, I just wanted to get a bit of an outlook on that kind of question.

Okay, thank you. David, do you want to talk about the pensions?

Yes, so I think just -- so as you said, we gave guidance of 11% to 12% as being our CET1 ratio this year, barring any major litigation provisions. I think -- we're not updating that guidance at this point, I think we've been very clear over the course of the last year that we need to build our CET1 ratio ahead of the reforms to the Basel III program, that is the SACCR models, the fundamental review of the trading book, FRTB, and the interaction between advanced and standard models.

So, I think we've always said we want to build capital ahead of those changes, which will come at the end of this decade. And that's very much part of our strategy.

On the specific point of the pension position, I think we've obviously said before that we have sensitivity, particularly in the Swiss Pension Fund to the moves in the long-term Swiss rates, and therefore obviously the flattening in the Swiss curves which is, I guess -- this is obviously triggering your question.

All I would say at this point is we are in discussions with the Board of Trustees of the Swiss Pension Fund around a number of mitigating measures to offset the move lower in terms of Swiss interest rates, which I have to say does seem to be perhaps more long term than short term in its nature.

And I think if we think about -- and as you say, this is something new need to comply for the year under US GAAP -- I would be confident that we would be able to substantially mitigate most of that interest rate move. And, as I said, we'll try to give you more guidance later in the year. But I think we'd be able to mitigate most of it but that is clearly subject to our discussions with the Board of Trustees in the close of the year.

Provisions?

Provisions in terms of emerging markets, I think you may be referring to the impaired loan note which is actually in the financial report. What we refer to there actually is some increase I think in aviation impaired loans. But that's been offset by some improvement actually in ship loans actually, and net zero.

By the way, impaired loans doesn't mean we take credit provisions, it means that there is some issue in the loans. If we have collateral against it then we don't have to take a credit provision, because we haven't suffered a loss. But they still count towards the impaired loan balance. Hence the zero credit charge within IWM.

[One of the] fundamentally (inaudible) attractive aspects of our story is that we have and excellent track record in terms of credit in the emerging markets. Historically, if you go back and look, the numbers have been really, very, very acceptable. So, we're not particularly concerned over that.

You will see minimal movements from quarter to quarter but nothing massive really.

And what about any additional gains for [real] estate?

Apologies, I --

Sorry, yes.

Yes, sorry, well I think we've completed the bulk of the actions towards the target we laid out this year. We may have some small gains in the fourth quarter but you should not expect anything as large as we saw in the third quarter.

That's very helpful, thank you.

I think we can -- sorry, is that okay? Okay, thank you. I think we can take one more question, it's getting to the end.

Thank you, sir. Your final question comes from the line of Andrew Stimpson, BofA Merrill Lynch.

Good morning guys. So, first question on Asia. I know you're up 100 advisors year-on-year. But it looks like there was no net hiring in the third quarter. So just wondering what interrupted the momentum that you'd been building on hiring there?

And whether you can -- given you've hired an extra 100 people over the past year, then it doesn't look like inflows over a nine-month period have been accelerating. So, given that you have hired so many people, eventually those inflow numbers have to improve. When do you think that inflexion point might be, given that you've hired so many people?

And then secondly, on equities, if this is a -- we're supposed to estimate that these revenues will recover. Would you also suggest that we would therefore expect the risk-weighted assets and leverage numbers to expand again in the IB? Which I know last quarter you said that actually maybe the low number in the second quarter, maybe that would rebound over time.

I'm just wondering whether we should be connecting those and therefore also whether costs would come back there or whether the cost reduction that you've seen in the IB is genuine fixed cost reduction that you've put through there?

And then lastly on the LCR, I see it's come down a little bit but it still seems exceptionally high versus your peer group. I can't see an obvious reason why you'd need to run with such a high number. Clearly, it looks to me like there's a clear way that could improve your leverage ratio if you were to run that nearer to ratios similar to your peers.

So just (a) can you do that? And (b) how quickly might that happen, please? Thank you.

Yes, okay, thank you Andrew. On the recruiting in Asia and the NNA, we think that actually you're seeing some of the benefits already on a relative basis. On a relative basis, we've done, we believe, much better than our peers. At least on the data we can see. The CHF4.6 billion in Q3 is very strong.

The other thing you have to keep in mind is that of course people come on stream, it's not 100 people on January 1. This is spread over a year because some of them come from competitors et cetera. So, it's not -- the average infusion of people is much lower than 100.

But we think that they are contributing, you see it in the NNA. You see it also in the way we run this model. A lot of the IBCM revenues are linked to some of those new relationships we have introduced. We said we have [98%].

And we've done some internal work. What I can tell you is that we believe the return on the marginal investment of hiring an RM is in excess of 40%. This is something we can probably go over in more detail in future meetings. But the economics of RM hiring are extremely, extremely attractive. And the payback, we said, is about three years.

So, that gives you a sense of what you can get here. But we can give you more granularity. So undoubtedly, it's a value-creating investment to recruit these people. So, we're quite confident in that.

Okay.

Equities, RWA, are we going to expand? I think really if you look exactly, I can -- CHF195 million of revenue we lost. I can tell you more -- about 80% of that is in Europe. Very little of that is in the Americas, as I indicated.

So yes, there will be a recovery, I think, without necessarily having to put more RWA in that business line, I think. I think we can do it on the current levels of capital.

LCR?

Yes, so the LCR, as you say, dropped from 172% to 163% between the second and third quarter. I think we did say last quarter what we're very focused actually on reducing the amount of HQLA we actually had. And we've obviously made progress this quarter and that remains a core priority for us.

But I would refresh what I actually said back in July, which is obviously you're aware of Reg YY, which is part of the Federal Reserve, which does require that both subsidiaries and branches have matching liquidity funds. So, that does require, given that banks are increasing their operating with a network of independent branches and a network of subsidiaries, all of which have to have pools of liquidity against that, that is going to result in a binding constraint for HQLA which is higher than would be required if liquidity was treated as fully fungible across all the entities of a bank.

So, I think it will come down. It's something we're very focused on. But I think we'd look to make progress quarter-on-quarter. But I think I would caution that given the importance of Reg YY, that the sum of the components by branch subsidiaries will be in excess of a Group LCR requirement. And that's now the binding constraint on liquidity for banks.

Okay, and do you feel that that affects -- I know you won't comment on competitors, but just given that all the rules apply to all your competitors as well and they're all about 30 percentage points, if not more, lower on the LCR. Is that the kind of level you think you'd get to? Or would yours just naturally be higher?

We don't really comment on competitors, and I think getting into legal entity structure is a complex subject. I would merely say that we have always operated in the UK with a standalone subsidiary, in fact two, but we were one, and obviously we also have the [LHC] in the States. So, we're already more subsidiarized in terms of that.

Perhaps from an industry point of view, that is the trend that all banks are going down, I think.

Okay, thank you.

Okay, well thank you. I think this closes our call. Thank you very much for attending and for your questions. We think Q3 was a quarter of continued progress, continuing to make progress on the cost front, continuing to attract assets at stable -- at good margins. Very good performance in IBCM, profitability in GM, common market and very good performance in SRU. Which leads to a stronger capital position.

So hopefully more on that at the investor day on December 7. So, thank you for being here this morning. Thank you.

Thank you very much, sir. That does conclude today's conference.