Credit Suisse Group AG (CS) 2017 Q3 法說會逐字稿

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group Third Quarter 2017 Results Conference Call for Analysts and Investors. (Operator Instructions) The conference is recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Adam Gishen, Group Head of Investor Relations and Corporate Communications. Please go ahead, Adam.

Good morning all, and welcome to the third quarter 2017 results call.

Before we begin, let me remind you of the important cautionary statements on Slide 2, including the statements on non-GAAP financial measures and Basel III disclosures. In this presentation, when we discuss our results, we focus on our adjusted results as it is the way we manage the operating performance of our businesses. For a detailed discussion of our reported results, we refer you to the Credit Suisse third quarter '17 financial report.

With this, I turn it over to our CEO, Tidjane Thiam.

Thank you. Thank you, Adam. Good morning, everyone, and thank you for joining this call. With me today is David Mathers, our Chief Financial Officer. He and I will now present the third quarter 2017 results for Credit Suisse. I will give an overview of our results and highlight some specific aspects of our quarterly and year-to-date performance, and David will then, as usual, present the detailed financials, focusing more on the discrete third quarter. We both look forward to taking your questions at the end of our sessions.

So let's start with Slide 4. Our third quarter earnings demonstrate that we continue to generate positive operating leverage by growing profitably in our Wealth Management business and by, in parallel, reducing operating expenses. Against a backdrop of typical summer slowdown, we have continued to create operating leverage. At 9 months, group revenues are up 6% year-on-year and costs down 6% year-on-year.

Our Wealth Management operations have delivered a very strong performance with higher flows, record AUM and higher net margins. In a seasonally challenged quarter, our more market-dependent activities delivered a resilient performance. We have achieved these results with a significantly lower risk profile, and we have continued to make progress in the wind-down of the SRU, reducing this drag on our profitability. As a result, we have been profitable for the third quarter in a row, with group adjusted pretax profits of CHF 620 million in 3Q and CHF 2.2 billion since the start of the year, a significant improvement over 2016, respectively, of 90% and 394%.

Now looking at this in more detail and following a plan of this page. First point is that we are delivering broad-based profitable growth in Wealth Management. We attracted more than CHF 33 billion of net new assets at 9 months '17 and achieved adjusted pretax income of CHF 1 billion in 3Q '17. We have gained share in IBCM and in Global Markets, both divisions delivering a resilient performance in a seasonally slow quarter with muted client activity and historically low levels of volatility.

Second point, we continued to execute with discipline. We continued to make significant progress in reducing our cost base. Our operating expenses in the third quarter were the lowest in the past 4 years with CHF 4.4 billion. Note that this is the FX-neutral number. The actual number is CHF 4.3 billion. But we're not claiming credit for the FX. In the third quarter alone, we reduced operating costs by a further CHF 0.4 billion, CHF 400 million, bringing the total cumulative 9 months '17 cost savings to CHF 1 billion. And you will remember that our objective for the year was CHF 900 million, so it's already exceeded. In the SRU, we are continuing to deleverage at pace, and we'll give you more detail later on this, both I and David.

The third key message today then is that we have been able to generate CHF 400 million of organic capital accretion in the quarter on a look-through basis. Organic capital generation and, ultimately, the return on that capital to our shareholders, is and has been, a central objective of our strategy since the start. It is comforting for us, that 7 quarters through a 12-quarter restructuring program. And as we still carry a heavy drag from the SRU, we have been able to accrete capital. We ended the quarter with a CET1 ratio of 13.4% or 13.2%, as published this morning, after adjusting for the 26 basis point operational gross add-on, which we flagged at Q2.

Our 3-year program is based now on a few priorities that have not changed. You're familiar with this slide. We've used it before. Just very quickly, it's deliver profitable growth and, as I was saying earlier, generate capital organically, key objective; reduce cost base; rightsize and de-risk Global Markets; strengthen capital; resolve legacy.

Now let's take those 5 points in turn to see how much progress we've made, and we'll start with Wealth Management, Wealth Management-related businesses. In the Swiss Universal Bank, IWM and APAC Wealth Management, net revenues have increased by 9%, at the top there, in the first 9 months of 2017. We have been able, and actually we must, continue to invest in our growth businesses, invest in people, in recruiting, in technology and in our control functions while maintaining a strict cost discipline. As you see, costs went up 3%, opening nice [churns] between the revenue and the cost. So this has resulted in CHF 3.1 billion of adjusted pretax profit, a 24% improvement year-over-year as a result of operating leverage.

Moving on to cost. You are familiar with this slide, too. It shows you quarter-after-quarter, year-by-year of the trend. You can see this trending down. Progress in the third quarter was particularly strong. While we traditionally then see higher costs in the last quarter, this chart helps you analyze basically our position vis-à-vis the CHF 18.5 billion cost target.

On an FX-neutral basis, we need to be below CHF 5.1 billion, that's the line on the chart there, for us to beat the CHF 18.5 billion operating cost base target for end 2017. And we are confident that in our fourth quarter, costs will come in below CHF 5.1 billion, allowing us to end the year below the target announced.

Moving on to risk and rightsizing. We have rightsizes -- rightsized, sorry, excuse me, Global Markets. You can see here, RWA down 47% and leverage down 34%, so very significantly. And at the same time, we have also de-risked. You can see that the group VaR is down 53%. So our group profitability per unit of risk has significantly improved whilst better protecting the group against periods of severe market dislocation.

Recently, we ran 3 market shock scenarios on the current Global Market portfolio, simulating the market conditions of 4Q '15 and Q1 '16, which we all remember. The key takeaway is that the impact of those shocks would have been reduced by approximately 2/3, and Global Market would have been profitable in those quarters should such an event happen now. This illustrates the magnitude of the de-risking implemented in just 7 quarters.

Then capital. Strengthening our capital has been a core objective of our strategy. Over the past 2 years, our capital position has been transformed for a number of measures, including raising equity, but also asset sales; the reduction of the SRU; and most recently and for the first time in Q3, capital accretion -- organic capital accretion. All these actions combined give the next picture, which you're familiar with and we've just updated with the Q3 numbers.

We believe that, in dark blue here, the quality of our franchise will become more visible as we do 2 things in parallel: one, we improve the intrinsic profitability of the core business, in dark blue here; and two, we reduce systematically the drag from the SRU. Core adjusted profits have grown by 29%; and in the same time, the SRU drag has decreased by 38%. It is what I call a double compound effect, and this leads to a significant increase in group adjusted pretax income, as you can see here, of 394%.

So at this point, I'm going to transition to the next section, which is really to give you a few highlights, I think, points that are worth noticing in the performance of our various businesses.

So let's start with Wealth Management. Let me say a few words about our approach to Wealth Management. We have been, first of all, allocating more capital to Wealth Management, and I will illustrate this. We have been very deliberate and explicit about our focus on ultra-high net worth and entrepreneurs. We have also said that we would follow a balanced approach between mature and emerging markets. And finally, we're offering an integrated approach and we believe it's highly valued by our clients with alongside Investment Banking, Global Market, Wealth Management and Asset Management. And I meet more than 100 Wealth Management clients a year, and I can say first hand that they all value this very much.

And finally, we develop advisory and investment solutions to generate recurring income, which, for us, is a high-quality, high-multiple stream of earnings. We have a good focus on controls and risk management to ensure that we generate quality, sustainable, compliant growth. In spite of all the cost cuttings underway, the budget of the control functions is basically up 11% at the bank level. So we're investing in controls whilst we're cutting cost. So that's all on capital allocation.

You can see here that we are allocating increasing amounts of capital towards our Wealth Management and IBCM businesses as we significantly deleverage both Global Markets and the SRU, that we call market activities here.

So turning to the next slide, that's the most important for us. You can see the impact of this on the shape of the group. From the starting point mid-2015, we have significantly shifted the balance of capital allocation within the bank. Wealth Management typically generates more predictable annuity-like revenue streams with higher fee income and recurring revenues. As we continue to allocate more capital towards Wealth Management, we expect these benefits to compound and to drive returns higher for the group. So that's for capital.

Let's move now to something close to our hearts, clients. And we try, in everything we do, to be client focused and client driven and we want to lift the lid a little bit on what we do with clients. So this is a busy slide, and I'm sorry, but what it shows you in the light blue is basically a kind of revenue-per-client curve. Now this is actual data that we -- we have not given you the vertical axis, but it's revenue by client. We have been explicit about our focus on ultra-high net worth and entrepreneurs. So this is revenue by client in 2016. The point we want to illustrate is how we move from 2016 to 2017 on this chart.

Just a point of principle for us. We believe that wealth in the economy is created by entrepreneurs, and we know that that wealth creation process leads to concentration at the top. That is why we believe that being a bank for entrepreneurs is a winning strategy, particularly in emerging markets. So using here the example of APAC. We illustrate that progress. We have chosen 4 specific clients, 3 of which brought us little revenue in 2016. You can see point 2, 3, 4, low revenue. And you can see 1 large existing client in 1. And we're trying to show you what we did during 2017 with these clients.

And fundamentally, we have been increasing our share of wallet by offering our range of asset and liability solutions to these clients as well as by managing their personal wealth. And this results, in each case, in more value for our clients but also more NNA, more revenue and more profits for our firm by bringing together Wealth Management, Investment Management and advisory solution. For example, if you take client 2, we did a number of transactions for him, DCM transactions in the billions of dollars. And as a result of that relationship, we got an NNA of -- an inflow of $400 million (sic) [CHF 400 million]. And we can multiply the examples. So keep in mind that these are existing clients, all of them. They're well known to our coverage, it seems, but they've been under serviced in the past. So the growth we generate with them by increasing our share of wallet carries no new additional compliance risk whatsoever.

So 3 final comments on this side -- on this slide. When you think about growth, there's 3 things that happen. First is what I have just illustrated, increasing the share of wallet, that brings us NNA. Two, all of these people are becoming wealthier. Over time, they are successful entrepreneurs. So that light blue curve goes up, okay? And three, those economies produce new billionaires every year. So that population itself grows. So the reason why we're not worried about the growth potential is that with those 3 phenomena, the penetration, the increase of share of wallet, the enrichment of this population and the growth of that population in size, we believe there's plenty of growth to go for.

And we believe this has been working for us. That's the next slide. If you look at NNA, the progression is very strong. We have in 9 months '17 gathered more NNA than in the whole of '16, which was already a good year. And keep in mind that really, the major part of these flows comes from ultra high net worth, the major part of these flows.

So this leads to record AUM, next slide. No, the one before. Yes. You can see the AUM here, 10%, 12% progression. It's grown at double-digit rate in each of the past 2 years. But within that, it's important, then we have to be transparent about that, it's not all NNA. NNA -- our NNA growth, which is 100% organic -- no acquisitions here, it's 100% organic is attractive at 7%, okay? So 7% of the 12%, a bit more than half is organic; and the rest, frankly, is a tailwind, and that's been good for us.

But the thing we're most happy about is this one because it's good to get the flows, it's good to grow the AUM, but it's very hard to grow the net margin as you do that, and that's what the teams across our businesses have achieved. So the strategic decisions we made in '15 to hire relationship managements -- no, sorry, managers, to upgrade their skills is paying off, we believe, as we have generated quality, as I illustrated earlier, profitable growth, combined with disciplined cost management. And this illustrates the operating leverage in our model as volumes grew and has allowed us to produce, we believe, industry-leading performance.

Now this growth comes from both a mature and emerging market [after] a balanced approach. This is Switzerland, and it's a very, very strong performance, we believe. Net new assets, up 150 -- 147% and the 2 phenomena for growth in net flows from CHF 2.3 billion to CHF 4.8 billion on the left but also the decrease in regularization outflows. So those 2 compounded has led us to a really good performance at 9 months '17 and also good progress in PTI, the next slide, which is 14%, up double digits in a mature and crowded market in 2 years. And we're very pleased with the work done there by the Swiss team and Thomas.

So now if we should look at emerging markets, which is mostly IWM with Iqbal Khan and APAC with Helman. Progress has been good, as you can see here. This is just the third quarter with a really stellar performance from Asia with CHF 5.8 billion of NNA. And this is translating also in profitability, most importantly for us. Profits for those 2 divisions are up 64% in 2 years at a 9-month stage, which is a very, very strong performance. So we're going to just look in a little bit more detail at IWM and APAC, and I think you're going to see similar stories there of operating leverage, revenue up, cost control, PTI up.

So this the revenue slide for IWM. Net interest income rose 12%, it's the middle bar here. Revenue in total is up 10%, double digit. At this scale of business, that's a very good performance. But most pleasing is at the bottom, recurring commissions and fees. That grew strongly year-on-year, 11%, demonstrating solid client demand for House View-linked advisory solutions. But also progressing our Asset Management operations. We did very well this quarter. We have been transitioning our Asset Management business towards a model more focused on recurring fees -- recurring management fees, and we have seen improved efficiency as well as higher revenues from specific growth initiatives, in particular, from better collaboration with our Private Banking activities, where we have been selling very well, but it's only when they have best-in-class products. So this was, of course, enhanced by a few market tailwinds. So if you combine this 10% revenue growth with an effort to self-fund the investment we have to make in platforms, people and controls and -- sorry, it's going too fast, still on the cost slide -- so progression of 3% of the cost, you, of course, get a step change in profitability, which is the next slide, with a pretax income up 38% over the past 2 years. And the other interesting thing is that this is accelerating each quarter, if you look on the right, at Q1, Q2 and Q3. You see plus 22%, plus 39%, plus 55%, so really very good performance inside the year. So that's what's for IWM.

Moving on to APAC. Same thing. If we look at revenues, revenues in the private bank, revenue growth is 21%, which year-on-year is very strong. And this is driven by higher productivity. Because I'm sure you will have seen that the number of RMs is down. Productivity per RM is up 24% in Asia. So higher productivity, better RM and banker productivity. Transaction and performance fees are up 33% year-on-year, while recurring fees and commissions are up 20%. Both of these revenue lines had record performances in the third quarter.

Now let's look at costs. Here, we must be clear what we're investing; we're investing in controls, in infrastructure and talent. It is worth noting that part of the cost increase is just a result of increased volume -- of volume-related expenses. Volume is up 21%, so that grows. But we work hard to mitigate this by generating efficiencies in the non-volume-related expenses taking it to 12%. So volume up 21%, expenses up 12%, we still maintain positive jaws there. But it's also worth noting that it's a priority for us to have compliant growth. So we have significantly increased our risk and compliance [spend] in APAC which is reflected here.

So all this leads to profitability. We have generated very strong profit growth, up in APAC Wealth Management over the past 2 years, up over 150%. PTI is already, after 9 months, significantly higher than the full year of 2016, and this is driven by higher levels of divisional collaboration with that divisional approach we have put in place and innovated with and activity levels with client.

In spite of the progress already made, we remain positive on the opportunity in APAC, with ultra high net worth and entrepreneurial wealth expected to double over the next 5 years in a market which remains still underpenetrated, so we still believe there is a huge potential there. And our integrated model is proving attractive for our clients. We have seen a 30% increase in revenues from strategic clients through the large ultra high net worth, entrepreneurial clients. And 40% of our clients are multi-product.

In APAC advisory, underwriting and financing, we have generated CHF 150 million of revenue for the fourth consecutive quarter. And very importantly, the IBCM bankers have referred CHF 1 billion of NNA through the private bank in the third quarter of 2017 alone. And that's a unique characteristic of our model. We don't just get NNA from the RMs, we also get NNA from the bankers. And we believe that's a big part of the value of the integrated model.

So in APAC markets, sequentially, in Q3, we grew revenues by 19%. We know -- you know that, that activity is under deep restructuring. And we continued to make progress in reducing operating expenses by 19%. And year-on-year, we believe we're on track to meet our ultimate return target of 10% to 15%. I wouldn't read too much into the $52 million, frankly. That business is still recovering, still quite fragile, still quite dependent on market volatility, and we'll see how Q4 unfolds. But the point is expenses are down 19%. The business is being restructured. And we hope it's going to follow on the path of Global Markets in terms of performance, which give me a good transition to Global Markets.

Global Markets is fundamental component of our strategy. Our Corporate & Institutional client base is core for Credit Suisse, as much as I've talked about the ultra high net worth, I want to make that point strongly, and central to the effectiveness and credibility of our integrated approach. Our flows and activities in Global Markets provide access to capital, to ideas, to information and solutions with potential to generate significant offer as we leverage these capabilities with Wealth Management clients.

Clients, whether institutional or ultra high net worth, require best-in-class global execution capabilities. Under Brian Chin and his team, we are further strengthening these capabilities, and we will continue to invest going forward.

Now looking at the financial performance at 9 months '17. We have made good progress in creating operating leverage, growing revenues by 8% while cutting cost by 8%, highlighting the strength of our client franchise and our sustained leading market share across our trading and underwriting businesses.

Now a few words on Q3. It was, again, a tough quarter. The division Global Markets posted a resilient performance in a quarter which is seasonally challenging. This was amplified by continued historically low levels of volatility, muted client activity and a very strong comparable period in Q3 '16, which benefited from a number of idiosyncratic events such as Brexit and the U.S. elections, and saw higher levels of volatility.

So in 3Q, revenues in equities increased by 5%, which we consider a good performance in an area where we have now a refreshed management team. Fixed income revenues were down 8%, a solid quarter in sales and trading supported by our particular strength in Securitized Products.

We are pleased about our risk management and controls in Q3 as in a market characterized by unusually low levels of activity and revenue, we remain disciplined in terms of our risk appetite. With these results, we remain on track to achieve our 2018 objectives of $6 billion of revenue and $4.8 billion of cost.

Let's turn now to IBCM. IBCM achieved a strong relative performance across products in 9 months '17 and continued to deliver against this strategy in the traditionally slower third quarter, increasing share of wallet in advisory and equity underwriting. Jim Amine and his teams achieved top 5 rankings in M&A, in leverage finance and ECM, including a #1 position in IPOs in 3Q '17, which we're quite proud of. Adjusted pretax income reached $54 million for the quarter and totaled $297 million in 9 months '17, up 92% compared to 9 months '16.

So after these highlights by division, I'd just like to say, before handing over to David, a few words about cost and capital. We have talked to you for a few quarters about our workforce strategy, and I'll say a few words about technology here. Because we're taking a technology-led approach to costs in order to ensure that the efficiency gains we are achieving are sustainable, with just a few examples here. It's far from exhaustive, but we have decommissioned more than 30% of our applications since 2012. But the point here is that we used some of the savings generated by these decommissionings to invest in new technologies and digitalization. We have put 150 live robots in place, with another 60 plus in development. And we are running an ambitious program to move an increasing share of our operating systems to the cloud. But we will, at the Investor Day, give you much more color on this.

Now all these efforts lead to cost reductions that are continuing at pace. As I mentioned at the beginning of my presentation, we have achieved an additional CHF 1 billion of savings at 9 months '17, putting us ahead of the full year target of CHF 900 million. These savings are in addition to the CHF 1.9 billion of net savings we already achieved in '16. So cumulatively, we have CHF 2.9 billion at this point.

Now a word on the SRU. We have continued to make progress in deleveraging the SRU. We have reduced RWA by $3 billion (sic) [$2 billion] in the quarter or 13% sequentially and 53% year-on-year. Leverage is down 43% year-on-year and 10% sequentially. Costs are down 35% and 10% sequentially. Q3 was a quarter of strong progress, which sets us well on track to complete the accelerated wind down of the SRU by 2018. And to illustrate that point, the $17 billion of RWA is to be compared to the $11 billion objective for the end of '18, so completely achievable.

Capital. We have continued to strengthen our capital base, with almost CHF 35 billion of CET1 equity at the end of Q3, benefiting from the accretion of CHF 400 million of capital during the quarter. It's a good foundation from which we can serve our clients, ensure regulatory compliance and maintain a buffer against future market shocks.

So wrapping up on our year-to-date performance, I will close with the following slide, which you are familiar with. It illustrates the significant operating leverage in our business model. Our jaws of 6% revenue growth, combined with strict control in operating expenses, down 6%, have resulted in 9 months '17 pretax income of CHF 2.2 billion, up almost fivefold from the same period 12 months ago.

So in summary, we remain focused on delivering profitable growth across Wealth Management; exceeding our 2017 cost target and completing the accelerated wind-down of the SRU by end 2018; and maintaining a strong capital position.

With that, I will hand over to David. Thank you.

Thank you, Tidjane. Good morning, everybody, and I'd like to thank you for joining our third quarter earnings call this morning.

I'm going to start with the usual summary of our third quarter results on Slide 41, and we show here the group numbers on both a reported and an adjusted basis, and these have been prepared under the same definition that we've used in prior quarters. As is our normal practice, we provide a full reconciliation of adjusted and the reported results in the appendix.

If we look at the results for the third quarter, we achieved a reported pretax income of CHF 400 million on net revenues of CHF 5 billion. And I'd note that the reported pretax figure includes the charge of approximately $80 million in connection with the MassMutual Life Insurance Company settlements that we announced in September as well as restructuring costs of CHF 112 million.

On an adjusted basis, we achieved a pretax income of CHF 620 million, which is a 90% improvement compared to the third quarter of last year. Year-to-date, our adjusted pretax income was CHF 2.2 billion, which is a significant increase compared to the CHF 444 million in the first 3 quarters of 2016. Our net income was CHF 244 million in the quarter with an effective tax rate of 38%, which takes our year-to-date net income to CHF 1.1 billion at an effective tax rate of 31%. As I said in July, we'd expect our effective tax rate for the full year to be in the mid-30%s range, and this view has not changed.

Now as per our usual practice, for the balance of this presentation, I will focus on the adjusted numbers as I believe these more accurately reflect the operating performance of our business.

Let's now turn to Slide 42 to review our capital and our leverage positions. We show here the walk across for our risk-weighted assets and our leverage exposure quarter-on-quarter. You may recall that when we announced our second quarter results back in July, I said that we would expect to see a net 20 basis point adverse impact in respect to the incremental operational risk RWA relating to our RMBS settlements with the DOJ and the NCUA. And this included an off -- an expected offset over time from a reduction in the op risk RWA from the business exits and position downsizing achieved by the SRU division.

In terms of the impact to the third quarter, we've now included CHF 5.2 billion of additional op risk RWA, which equates to a gross 26 basis point reduction in our CET1 ratio. This has been booked in the Corporate Center. A further tranche in respect of the NCUA settlement totaling CHF 3.2 billion of RWA will be booked in the fourth quarter.

We continue to make progress in our discussions with the FINMA around the offset from the SRU, but we have not yet booked any credit from this. But we would confirm our guidance of a net income -- net impact of approximately 20 basis points in due course from these 2 offsetting measures.

Now in terms of business reductions, which, as you know, are net of FX moves, the most significant reduction was a gain in the Strategic Resolution Unit, where we reduced risk-weighted assets by CHF 3 billion. As a result, at the end of the third quarter, RWA excluding operational risk in the SRU, stood at $17 billion. Now given the progress that we've continued to make towards reducing positions in the SRU, we remain ahead of the schedule required to reduce our RWA excluding op risk to $11 billion by the end of 2018 when we will close the SRU.

If we look at the overall group, at the end of the third quarter, risk-weighted assets stood at CHF 265 billion, that's an increase of CHF 6 billion from the second quarter, with nearly all of the increase coming from the op risk add-on. That equated to a CET1 ratio of 13.2% at the end of the third quarter and I'd note, as Tidjane has said already, that without the 26 basis point deduction from the op risk add-on, the CET1 ratio would've been 13.4%. That underlines our capital generation. I'd note that both our operating free capital generated as well as our CET1 capital increase was approximately CHF 400 million in the quarter.

Leverage exposure for the group stood at CHF 909 billion at the end of the quarter, and that's an increase of CHF 3 billion from the end of the second quarter. The majority of this was due to FX movements, partly offset by business reductions, primarily within the SRU. Our Tier 1 leverage ratio was therefore stable at 5.2%, which continues to surpass the 2020 Swiss too-big-to-fail requirement and in line with our stated guidance to operate an approximately 5% Tier 1 ratio going forward. The CET1 component of this was 3.8% at the end of the third quarter, which again exceeds the Swiss 2020 TBTF requirement to be at 3.5% or greater.

With that, let us now turn to our cost program on Slide 43. We continue to make further significant progress in reducing our expense base, and we achieved approximately CHF 400 million of net -- further net savings in the third quarter. That brings our total net savings for the first 9 months of the year to around CHF 1 billion, which surpasses the target for the full year for net savings to be at over CHF 900 million.

Our total cost number for the first 9 months stands at CHF 13.4 billion, which, as you can see, puts us well ahead of our target to be at below CHF 18.5 billion expenses for the whole of 2017. I'm sure you don't need this reminder, but just please note our cost program continues to be measured on an FX constant basis from the full year 2015 baseline of CHF 21.2 billion.

Now in terms of the main components of the CHF 1 billion of net savings we've achieved so far this year, this has been primarily driven by the reduction in our contractor and consultant count and, to a lesser extent, by a reduction in our permanent workforce. The savings were driven by an extensive and wide-ranging workforce strategy, which continues to be aimed at removing duplication and a fragmentation across our businesses and building integrated processes in lower-cost locations. As a consequence, we are seeing a sustained reduction in costs, continued gains in efficiencies and reductions in operational risk. This remains a core component of our ambition to drive costs to well below CHF 18.5 billion this year, putting us on target to deliver the further improvements in productivity to achieve our goal of reducing our cost base to be below CHF 17 billion for 2018.

With that, I'd now like to turn to each of the divisions' performances, and let's start with the Swiss Universal Bank on Slide 44. For the third quarter, the Swiss Universal Bank delivered a solid pretax income of CHF 448 million, and that's an increase of 4% year-on-year. Now please note that the reported PTI which you see in our accounts for the third quarter of 2016 did include a gain last year from a single real estate sale, which totaled CHF 346 million. But if we focus on adjusted profits, which is the core measure of the division's performance, that marks the seventh consecutive quarter of year-on-year pretax income for the division.

Year-on-year net revenues were flat at CHF 1.3 billion, with higher client activity offset by lower revenues from our trading service operations. Operating expenses declined by CHF 3 million year-on-year, with a reduction in personnel costs being partly offset by investments in our regulatory infrastructure. And I'd note that the continued low level of provision for credit losses in the third quarter reflects the high quality of our loan portfolio.

In Private Clients, we saw an improvement in operating leverage with a pretax income of CHF 217 million, an increase of 11% year-on-year. Revenues increased by 3% year-on-year, driven by an improvement in client activity. I'm also pleased to announce that in the third quarter, we successfully launched the Viva Kids banking package, which includes the very well-received Digipigi savings tool for children.

Within Corporate & Institutional Clients, lower trading service revenues impacted transaction-based fees. Our net performance was also impacted by a decline in recurring revenues due to lower discretionary mandate fees and the selected EAM exits that we've discussed before. We saw continuing momentum in the Investment Banking business in Switzerland, with good deal flow in M&A, ECM and DCM.

If you look at net new assets for the division, we saw good progress in Private Clients, with further net new asset inflows of CHF 1 billion in the third quarter, taking the total for the 9 months to CHF 4.7 billion. That equates to an annualized growth rate of 3.3%, which is one of the highest levels that we've achieved in recent years. Now notwithstanding this, I would caution that the fourth quarter does normally see a slowdown given the mortgage repayment cycle in Switzerland in terms of our net new asset flows.

If we turn to Corporate & Institutional Clients, net new assets were negatively impacted by a CHF 13.3 billion outflow from a single public sector mandate. But I would note, however, that the loss of this mandate will have a very limited impact on revenues due to the low margin of this contract.

Now finally, I'd also note that in the third quarter, we finalized our review of the selected EAM exits, and this totaled CHF 0.7 billion of outflows in the quarter, which takes the total to CHF 2.5 billion for the first 9 months of 2017.

Let's now turn to International Wealth Management, please, on Slide 45. In IWM, we continued to drive improved profitability in the third quarter, with a pretax income of CHF 382 million, up by 59% year-on-year. That means that the pretax income of CHF 1.1 billion for the first 9 months of the year is in line with the full year pretax level that we achieved in 2016. The improved operating leverage in this business was evident as higher revenues across all major categories, coupled with continued cost control, resulted in a significant step change in the quarterly pretax income. The cost-to-income ratio improved to 69%, which is down from 78% in the third quarter of last year. And the return on capital increased to 29%, up from 20% in the third quarter of last year.

If we look at the Private Banking results for the third quarter, we saw a continued improvement in profitability in all regions, with the third quarter pretax income of CHF 272 million, up by 43% year-on-year. This improvement was driven by a net 10% increase in net revenues coupled with stable costs year-on-year.

Now if we look at the components of revenues, net interest income was up by 13% year-on-year, driven by higher loans and margins. We've continued to broadly match the growth in assets under management with similar growth in recurring commissions and fees, which increased by 12% year-on-year. Transaction-based revenues increased by 3% year-on-year, driven by a significant increase in client activity-related revenues but offset partly by lower revenues from trading services.

The overall growth in Private Banking was supported by our focused efforts to improve client engagement and sharpen the visibility of our Chief Investment Committee's House View solutions. We've continued to see a significant improvement in structured product sales, with clients benefiting from the uptick in yield of these products. This is an area where we remain extremely focused, and we're going to further enhance the collaboration between our Private Banking and our trading businesses through the formal partnership between IWM, Global Markets and the Swiss Universal Bank.

Private Banking net new assets amounted to CHF 3.6 billion in the third quarter, equivalent to a growth rate on an annualized basis of 4%. For the first 9 months of the year, net new assets stood at CHF 12.9 billion, an annualized growth rate of 5%, with strong inflows across both Europe and emerging markets. Regularization-related outflows remain relatively muted, with a total of only CHF 1.2 billion so far this year. I think at this point, therefore, I would like to revise down our guidance for regularization-related outflows from the CHF 3 billion to CHF 5 billion they gave in July to an expectation that these would total only around CHF 2 billion in the whole of 2017, and that compares to regularization-related outflows of CHF 5.7 billion last year.

In Asset Management, the third quarter pretax income of CHF 110 million more than doubled year-on-year. I'm very pleased to say that we've successfully transitioned our Asset Management business towards a higher revenue contribution from recurring management fees, with a lower reliance on investments and partnership income, which does tend to be more volatile. This shift should also reduce the historic skew in our Asset Management results towards the fourth quarter.

Now if we look at net new assets for the quarter, Asset Management reported net new inflows of CHF 1.1 billion. In the third quarter, we saw a good contribution from alternative investments, partly offset by outflows from our emerging market joint ventures. Year-to-date, net new assets amounted to CHF 18.9 billion, largely driven by inflows in both traditional and alternative investments. And I think these net new asset inflows demonstrate the success of the increased collaboration with our Private Banking businesses, both in Switzerland and globally.

Let's turn now to Asia Pacific, please, on Slide 46. In the third quarter, Asia Pacific delivered a pretax income of CHF 228 million, an increase of 30% year-on-year. We saw a continued momentum in Wealth Management & Connected activities, whilst in markets, we saw a significant improvement compared to the last quarter.

In WM&C, we delivered a pretax income of CHF 178 million for the third quarter, up by 75% year-on-year. The return on regulatory capital was equally strong at 25% for the quarter compared to 17% in the third quarter of last year. Net revenues for the business grew to CHF 548 million, a 14% increase year-on-year. We saw particular strength in the Private Bank, with revenues up by 16% year-on-year, driven by higher transaction revenues and increased recurring commissions.

If we look at advisory, underwriting and financing, revenues are up by 10% year-on-year, primarily driven by financing activities for ultra high net worth and entrepreneurial clients. Equity underwriting activities were lower year-on-year, but we would still expect to see a pickup in the fourth quarter.

Looking at net new assets, we generated inflows of CHF 5.8 billion in Asia Pacific in the third quarter and an annualized growth rate of 13%. I would note, though, that in terms of inflows, the fourth quarter of the year does tend to be seasonally slower. We saw that in 2016, and I'd expect to see it again this year.

The net margin improved significantly by 16 basis points to 31 basis points year-on-year, and that reflects higher client activity as well as a lower provision for credit losses. And that's been achieved simultaneously with a 13% growth in assets under management.

In markets, I'm pleased to say that we are seeing the significant benefits from the various restructuring measures, with the business achieving a pretax income of $52 million in the third quarter. Expenses have been reduced from $375 million in the third quarter of 2016 to $302 million in the third quarter of 2017. We've also seen a pickup in equity sales and trading activities, where we benefited from the higher volatility in Asian markets and some improvement in client activity, primarily in equity derivatives. But the difficult market for Fixed Income sales and trading continued in the third quarter, with revenues declining by 20% quarter-on-quarter, with a lower level of activity in emerging market rates. And we'd still remain cautious for the final portion of the year given the normal seasonal patterns.

With that, I'd now turn to Investment Banking & Capital Markets, please, on Slide 47. We continue to execute on our strategy in IBCM. Revenues for the first 9 months improved by 12% year-on-year, with a market share that was high in both EMEA and in the Americas compared to the same period last year. Pretax income for the third quarter stood at $54 million, taking the total for the first 9 months to $297 million, an increase of 92% compared to the first 9 months of 2016.

If we look at the individual businesses, we saw the strongest performance in advisory with revenues of $187 million in the third quarter, up by 13% year-on-year, and outperforming the decline in industry fee pools.

In equity underwriting, IBCM achieved a #1 rank in IPOs in the third quarter, the highest-ranking since 2008. Revenues of $68 million in the third quarter was down by 11% year-on-year, driven by muted convertible bond issuance and follow-on activity, but up by 28% in the first 3 quarters.

In debt underwriting, revenues of $242 million was down by 2% year-on-year, driven by a decrease in leveraged finance revenues. We saw lower loan activity in Americas, as well as lower investment-grade acquisition financing revenues compared to the comparable period last year. Now if we look at the first 9 months, revenue is up by 10% compared to 2016.

So just turning to the fourth quarter, we continue to have a strong backlog of deals to close this year. And subject to markets remaining constructive, we'd expect a similar performance in the fourth quarter of this year that we saw in the fourth quarter of 2016.

Let me now turn to Global Markets, please, on Slide 48. In Global Markets, we maintained a conservative approach to risk and this delivered resilient results amid muted market conditions and seasonally lower client activity. For the third quarter, we achieved a pretax income of $101 million on net revenues of $1.3 billion. And as I noted in July, you can see we've now moved back to reporting under a fixed income and equity structure.

In Equities, we saw a consistent improvement across the franchise with a 5% increase in revenues year-on-year. Prime service results improved, reflected higher client financing and listed derivatives performance. Cash equity revenues increased, reflecting higher revenues in Latin America, which offset a reduced volume environment in the United States (inaudible) see a slowdown in issuance activity year-on-year.

Now if we turn to fixed income, our trading results were resilient compared to a strong performance in the third quarter of last year (inaudible) outperformance in Securitized Products, particularly in our asset finance business. This was offset by lower leverage finance activity and reduced investment-grade issuance. Emerging market revenues declined by (inaudible) Year-on-year, reflecting a strong comparative performance in the third quarter of 2016.

We also saw further declines in our residual macro businesses due to the persistently low levels of volatility. And I'd remind you that the third quarter of last year did benefit from higher volatility and increased client activity relating to the combination of U.S. elections, Brexit and the impact of money market reforms a year ago.

We've remained disciplined on costs, with operating expenses down by 4% year-on-year, bringing costs the first 9 months of the year down by 8%. And we remain on track to deliver our goal to be at less than $4.8 billion in expenses in 2018. You'll note that there was an uptick in risk-weighted assets, and this largely reflects the expiry of a credit risk hedge in the third quarter given that Global Markets continues to operate well below its RWA cap of $60 billion.

Now if we turn to revenues, we've continued to execute on the strategy outlined for this business, and we remain on track to achieve our 2018 goal for revenues to be in excess of $6 billion. We've invested in the business, and you will have noted a significant number of new and senior hires, particularly in the Equities.

As we mentioned last quarter, we've formalized the relationship with IWM and the Swiss Universal Bank, which will substantially increase the depth and the diversity of the product offerings for clients, improving the integration between our trading businesses and our Private Banking flows, and deliver a significant upside potential as a result of this increase in collaboration. We'll further discuss this partnership at our Investor Day at the end of this month.

So let me now conclude with a few words on the Strategic Resolution Unit, please, on Slide 49. So I'm pleased to say that the SRU has continued to make further substantial progress in the third quarter, with reductions running ahead of the run rate required to meet our end 2018 goals. And just as a reminder, we intend to reduce risk-weighted assets, excluding op risk, to $11 billion and leverage exposure to $40 billion by the end of 2018.

Now if we look at the third quarter, the adjusted pretax loss was $484 million, and that compares to $546 million last quarter and $527 million in the third quarter of 2016. Net revenues decreased by $95 million compared to the third quarter of 2016, and that primarily reflects, as we said before, the lower fee-based revenues as a result of the business exits that have now been accomplished.

Exit costs stood at $72 million in the third quarter, and that's equivalent to 2.8% of RWA, and that compares to 1.3% in the third quarter of last year. Nonetheless, the lifetime exit cost of the SRU represent 1.2% of RWA, which is significantly below our long-term guidance to be at less than 3% over the lifetime of the SRU.

Operating expenses of $228 million reduced by $123 million or 35% compared to the third quarter of 2016. And this reduction results from a number of initiatives, including the exit from our former U.S. Private Banking business. Furthermore, as we already disclosed, during the third quarter, the SRU took a pretax charge of approximately $80 million in relation to the settlement with MassMutual.

In terms of the progress towards our capital goals, compared to the end of the second quarter, we've reduced leverage exposure by $7 billion, 10%; and we've reduced RWA, excluding operational risk, by $3 billion or 13%. That takes the cumulative reduction in leverage exposure to $103 billion, 60%; and a reduction in risk-weighted assets, excluding operational risk, to $37 billion or 69% since the end of 2015.

And during this time, just to put this in context, the bilateral derivatives trade count has been reduced by approximately 229,000 transactions or 69% of the opening total. Reductions in the third quarter was driven by a combination of activities, including the sale of the majority of our remaining limited partnership fund interests. These positions are clearly capital intensive from an RWA perspective.

Furthermore, through a combination of unwinds, novations and restructurings, we're able to reduce our interest rate in FX derivative exposures by another 16% in the quarter. And we further reduced our loan exposures through a number of different avenues, including sales and unwinds.

Now with that, I'd like to pass the presentation back to Tidjane, please.

Thank you very much, David. So let me leave you with our key messages for today. I believe these results demonstrate: one, that we are delivering profitable growth across Wealth Management; two, that we will exceed our 2017 cost target; and three, that we are working hard to maintaining a strong capital position. So with that, we look forward to taking your questions and we should open the call to questions.

(Operator Instructions) And your first question today comes from the line of Kinner Lakhani from Deutsche Bank.

I've got 3 questions. First one is on the Corporate & Institutional Clients business within sub, where we're actually seeing some quite negative operating jaws in Q3 on a year-on-year basis. And I guess, if I think about sub as a whole, the last 2 quarters are indicating a run rate of CHF 1.8 billion, CHF 1.9 billion pretax compared to your CHF 2.3 billion target for next year. So the question being, is the negative operating jaws in CIC challenging the targets for next year for the subdivision? Second question on capital where I see your LCR ratio has gone to 181% compared to -- I think, your previous guidance that you should be able to bring this to circa 150%. If you did, then it feels like the CET1 leverage ratio could head up pretty close to 4%, which I think is your kind of stated goal. And clearly, changes the story in terms of capital return. So the question is, why is the LCR ratio going the wrong way? And do you still see it heading towards 150%? And final question, if I may, is on MiFID. We're 2 months away. I just wondered if you could give us some guidance as to how we should think about it impacting our forecasts for next year and beyond.

Okay. Again, good morning to all. Thank you. Thank you, Kinner. I think you're correct on CIC. The main thing you are seeing there is the exit of the EAMs. That's where you're going to find it. We talked a lot about the fact that we're exiting EAMs, and that's been impacting our numbers negatively for quite a while. I mean, the rest of it is really various business transfers, but that's the main thing you're seeing there. And we expect really this to be not at all structural and with better rebound in 4Q, so as the drag from the EAM exit is almost over. So that's the #1 factor. On the target, I think CHF 1.8 billion, CHF 1.9 billion -- I hate to give profit forecasts, so I'll let you (inaudible) for that, but we think that we have plans to get to that level in 2018. So we are not reconsidering this at this point. Capital, LCR, David.

On the LCR ratio, I'd probably just refer you to Page 54 of the MD&A. So what you see there is that you saw 2 things. Firstly, if we actually look at net cash outflows, the denomination of the LCR ratio, it actually dropped from CHF 96.2 billion to CHF 92.5 billion, which is what you'd expect seasonally given the lower level activities because LCR -- the actual outflows are very closely correlated to the level of business activity in any particular quarter. And I'd remind you, it's the weighted average not the end quarter. That said, we did see a pickup in the HQLA from CHF 159 billion to CHF 167.8 billion. I think that there's 2 points there. Reality is that the amount of HQLA we need is actually driven by our subsidiary structure, and the requirements we actually operate to in each regime for that. I think we could probably reduce this by maybe CHF 10 billion as we actually optimize the HQLA at this point, which would be about 1% reduction in terms of our leverage. I think I'd be reluctant about going beyond that. In terms of target ratio, yes, I would expect it to be lower than 181. But I would note it's -- the actual ratio is inflated by the fact that the denominator in the third quarter is seasonally lower. And of course, that does tend to be something you see in the fourth quarter, which we all know is a seasonally quiet quarter.

David, the last question on MiFID. Sorry, I think we -- can you -- Kinner, can you repeat for us just the third question?

Yes, MiFID is 2 months away from implementation. So I'm just trying to get some commentary to help me understand what kind of impacts there would be, not just in '18 but beyond as well, that might influence your earnings profile?

So a very fair question, Kinner. Now I'm afraid we may disappoint you on the answer.

Well, I think at this point, our Global Markets business in particular is obviously engaged in the various discussions with our accounts, particularly in Europe. But obviously, it is a global trend, not just a European reform. I think you're aware that in terms of provision of fixed income research, we regard that as trading flows, so therefore it's not something we actually charge for, and that's been widely commented on in the press and media. So -- but I'm not sure that's particularly changed for us from where we were before. On the equity research side, I think we've had a positive reception from many of our clients around our pricing proposals. So I think that's good. I think the content is well received. But I think, clearly, it's a substantial change in the landscape next year. And that will come through most in Europe, but I think it will be a global change there afterwards. But I think we've been positively impressed so far by the reaction so far from the core European clients which is clearly the first wave. Now clearly, MiFID II actually goes way beyond just being a research issue. It comes down to the reporting requirements that we have to our accounts. That's a big investment process for us, a lot of work going into that. We'll be able to deliver that on time for our clients. I'm not particularly worried about that. But that's clearly the other side of this.

But just to add to it, we think that, overall, we're well positioned with HOLT, which, as you know, is a very, very popular product on the equity side and something that clients value. So I was opening saying we may disappoint you because, frankly, it's quite uncertain how this is going to play out. We need to be open about that. We don't know. I see Brian Chin nodding over there. We don't know. We're well prepared for any eventuality, but I wouldn't want to be held to a given scenario here. But we think that the approach we've taken, no charging for office income research, possibly for traveling for some meetings on that side. And building on HOLT on the equity side to defend the franchise I think is probably the right answer for us. But we'll have to continue this conversation, I think, quarter-after-quarter.

Your next question comes from the line of Magdalena Stoklosa.

I've got 2. Now the first one is on gross margins and refers particularly to the Slide 57 in your presentation. Now could you help us understand the quarterly trends in the gross margin, particularly in kind of APAC and IWM? I understand there is of course seasonality per quarter. And also, you've talked particularly in IWM about lower revenues from trading activity. But how should we think about that, I suppose, pressure on the gross margin at IWM? And also the expansion in APAC and how is it likely to be delivered going forward? So that's my first question. And my second question, you have been kind of delivering on costs kind of quarter in, quarter out for the last straight 4 quarters. And of course, the delivery that we've talked about in your commentary over that period had quite a few kind of cost-savings initiatives. The personnel policy, the IT infrastructure efficiencies, of course a big part of the SRU rundown, legal entity programs and so forth. When you think about the cost savings into 2018, which one of those programs do you still kind of feel quite strongly and confident about?

Okay. Thanks a lot, Magdalena. I think I'll let David start with the gross margins.

Thank you. I'd just start off by saying that the core metrics we look at for our Wealth Management business is clearly the pretax profits they make and return on capital. So I think clearly seeing the step changes we've seen in the third quarter, 29% in International Wealth Management, I think is a very strong result and very much a vindication of the strategy we've been working to. So I think that's one we should start on. That's clearly what is key for us in terms of value generation. If we then look at Page 57, just in terms of the details here. I think if you look at the gross margin, you can see that for the third quarter of 2017 in APAC, the gross margin has actually doubled from 15 basis points to 31 basis points. It's lower than it was in the second quarter, but you'd expect that given that the summer is always a seasonally a lower period in terms of trading activity, and we've remarked on that. I think the key thing here is the actual -- so that the net margin has actually doubled from 15 to 31. If you look at the gross margin for APAC, it's actually up from 84 to 87, which I think, given the range of this business, the fact essentially a lot of our business is clearly biased towards entrepreneur and high -- ultra high net worth clients, I think it's a very steady performance in the context and I think reflects the progress we talked about. And particularly some of the initiatives Tidjane mentioned in terms of what we can do to actually improve the returns from some of our clients where we have excellent relationships where we haven't perhaps fully provided the range of services we can provide. If we look at IWM, I'd make the same comparison. The net margin has actually increased from 25 basis points in the third quarter of 2016 to 31 basis points in the third quarter of 2017. And yes, it's down, basically, at both the net and the gross level, from the second quarter. But I'd make the same point, the summer is a seasonally low point in terms of client activity. And I think we've noted that we've seen some weakness in our trading service revenues as well, which did also impact the C&IC results in answer to Kinner's question before. But I think, frankly, if you look at this, net margin for IWM, 31 compared to 25 in the third quarter. APAC, 31 against 15. And the step-up in return on capital, I think it's a pretty strong performance.

If I may add to that. As you know, we're not driving a revenue-focused strategy, but a value-focused strategy. So we're running it for return on capital, not for margin. So we use the margin when they're consistent with the story. But actually, on a quarter-to-quarter basis, anyone can really read too much into margins. You have to look at it over a longer period of time. So I would go to Page 53, which is a slide we've used before, just give you time to get there, but it's a return on capital per -- return on regulatory capital per business. And if you look at that, you see that APAC, WMC goes from 20% to 28%. That's what we run the business for. And that IWM goes from 23% to 28%. That's real value for our shareholders. Margins are interesting, but they are so impacted by market effects, volume effects, et cetera, that really ultimately it is how much capital do we use, what returns do we generate on that and is the return on capital going up, which I think is the case. That's for me the most pleasing part of that story. We're driving return on capital up in our most capital efficient, least capital conservative businesses. And on cost, do you want to...

I mean, I think your second question, Magdalena, I mean, we have always talked about operating a very broad portfolio of measures to improve the efficiency and productivity at Credit Suisse. And as you said, that includes some of the IT investments to move to the cloud. It includes the SRU rundown, and it includes the reduction in the legal entity program. You asked me what I feel most strongly about. The answer is I feel most strongly about all of these things. Because firstly, one, we are committed to reducing our total costs to below the CHF 18.5 billion number for this year and to below CHF 17 billion for next year. Secondly, it's not just about the absolute cost number, it's actually about productivity and it's about improving operational risk. And all these measures are actually driving towards a fundamentally more sustainable, more efficient and lower-cost environment. So I'm not sure I'd pick any of them out. Certainly, we'll come back to this at our Investor Day at the end of this month. But I'm obviously very pleased that we're clearly very well on track, I'd say probably ahead of track, in terms of our 2017 performance. And that positions us well for achieving our goals for 2018.

There's a lot of things driving this. There's certainly a short-term aspect to this cost program and the longer-term things. When you take something like the single-client view, that is how we call it internally, which is the ability for us to have a single-client view, both internal and external. We have a compliance lab. We have 18 PhDs there or 54 people with Masters. I went to see them the other day, there's about -- [a whole big room] for a team to develop a phenomenal system. It's now covering 95% of the clients. As we roll that out, the efficiencies out of that are huge. It's the kind of change that increases effectiveness, and efficiency is cheaper. Because now, instead of having paper floating all around the company and boxes moving, it's all digitalized and electronic. And it's safer and more effective because you'd be amazed what this system will spit out if you put a client name in it, whilst respecting the law and client confidentiality. And the gains on that are almost exponential. You gain on every layer. So as we roll things like that across the bank, we're going to get efficiencies. We've got the work for strategies, the transfers to Raleigh in North Carolina that we've talked about, which are also generating a lot of gains. We're streamlining the legacy systems, they're generating a lot of gains. We are becoming better, thinking more carefully about our change programs. We think more carefully about the make or buy trade-off, and that has had huge impacts, positive impacts. That we used to make most of what we do in IT, maybe 70%, 80%, and we're [keeping] that with again great effects when projects are delivered faster, at a lower cost and more effectively. So I could go on and on and on. It's a way of running the bank more than numerical targets. And as we more and more run the bank like that, the costs come through. So I'm really confident in the cost delivery with some benefits of -- on the revenue line, too, as you do those things better. One of the things that (inaudible) has done (inaudible) that has allowed him to get substantial results. If you improve -- it's very basic, but if RMs spend less time on administrative tasks, that's like increasing your RM population. So we get a double benefit. You spend less. But as you free up their time, they can also bring in more flows. If you had what Thomas has done in Switzerland, the number of RMs per adviser -- the number of clients per adviser is down. What we've done by creating those centers where we have segmented the clientele, some clients go to the centers, the most profitable clients go -- stay with their adviser is that the adviser has now fewer clients and is spending more time per client. And we've seen already the numbers for progress generated by that. So it's a whole range of things and really goes way beyond 2018.

Your next question comes from the line of Jeremy Sigee from Exane.

I'm resisting the temptation to ask about the Digipigi product. I think we'll save that for the Investor Day actually. But...

That's good for us. We are very grateful.

Okay. I don't want to steal your thunder.

One for you.

Two questions instead, I was going to ask about, actually. So number one, you mentioned regularization and you've obviously improved the guidance for this year. Are you done at year-end 2017? Or is there sort of any that's spilling over into 2018? That's my first question. And then, second question, which is sort of a bit of a timing question, just on the FINMA model approval. Do you see any chance to get that done by the time of the 4Q numbers? Or do we just need to sort of expect the further kind of 18 bps of op risk impact in 4Q and then the FINMA model approval comes in 2018? Do you have any view on that?

Okay. Thanks, Jeremy, maybe I'll say a few words about regularization. I mean, as of you know, our former guidance on IWM was CHF 3 billion to CHF 5 billion. Given that the actual at 9 months is CHF 1.2 billion, we are now forecasting CHF 2 billion for the year, kind of CHF 0.8 billion for Q4. But there are some timing effects there. So there will be some beyond '17. Do you want to...

I think at this point -- and I think, clearly, the amount of regularization remaining to be done is getting to low levels. So I think I'd be reluctant to give explicit guidance for IWM for next year given it is getting to low levels. I mean -- but I guess, at this point, there may be something, but it seems very much likely to be less than the level we're guiding for 2017. So we're getting to the end of that. I think I'd also just note that -- not quite on regularization, but on the EAM outflows within the sub business, sub C&IC business, reality is with that further CHF 0.7 billion that we took in the third quarter, we regard that program as complete now at the end of the third quarter. So I wouldn't expect anything particularly material in the fourth quarter, nor would I expect anything in 2018. And for APAC, I think there is some potential for some regularization outflows over the next year or so. But it's going to be small, probably less than the IWM levels at this point. So I think, overall, not a big impact in the business. But I did want to be very clear on the Swiss Universal Bank point, please.

Except for really unknown, unforeseeable events or -- in the future, on the basis of what we know today, we expect it not to be material going forward. Not to (inaudible) we need to report on it as specifically as we've done in the past. I think that's the best we can say after 2017.

I think on the -- Jeremy, on the second question, really, which is around the op risk RWA and the SRU exits, I think we have continued those conversations over the course of the last quarter, and we have made progress on that. I think there is a general understanding for this. I mean, I think, we didn't say so in the meeting, but the SRU actually completed a transaction a month ago, which actually moved nearly all of the remaining clients from the U.S. exit, which, just to recall, started at 90,000, I think now it's less than 100 clients left. So the business -- these businesses have actually exited. I very much hope that we will see an offsetting credit in the fourth quarter but I think that's very much up to our final discussions with the FINMA over the course of the next few months.

Your next question comes from the line of Anke Reingen of Royal Bank of Canada.

I just wanted to actually follow up on the op risk question. And I was wondering if this is on top of your targets of reduction and risk-weighted -- operating risk-weighted assets in the SRU to $11 billion or is the expected benefit basically part of the reduction to the $11 billion? And you've given us some impact about -- some guidance about the Q4 risk-weighted assets inflation from regulation, and if you -- there's anything you could directionally probably point us in 2018. And then on the private bank, you talk about allocating more capital to the private bank. And I just wanted to understand if this is like -- is there are some initiatives or where you proactively, it felt like, pushed probably more lending. Or is this just a result of your volume growth as well as reduction in other business areas?

Okay. You want to take the...

I think on the first point, for the last couple of quarters at least I think, we have been quoting the RWA numbers ex op risk for the SRU, because I think we just want to be clear. We reduced the RWA ex op risk by $3 billion in the third quarter to $17 billion. We have a goal to be at $11 billion, which is the same as we actually said at the Investor Day last year by the end of 2018. So that's $6 billion to go. We're going to achieve that. And that is entirely separate from any relief that we actually get from the regulators in terms of op risk. So that's why we're actually quoting them separately, just to be clear on that particular point.

And we took it in Corporate Center, the increase. It's in the CC.

Yes. The increase is in the -- the op risk, which is separate, this is in the CC. I think the second question you asked was really around the reforms to Basel III. I think most people are aware there clearly was a further -- there've been several further BCBS meetings this year, and there was one just prior to the IMF meetings in Washington a few weeks ago. There was obviously also some speculation that, that could lead to a final approval. It doesn't seem to happen. There was obviously some pushback from certain European governments at that point. I would expect and it seems likely, that there'll be at least one further BCBS meeting before the end of this year. Whether that's then approved by the GHOS, I wouldn't want to speculate on. But I think, given the state of these negotiations, I think it's not really possible for us to provide any further guidance at this moment.

Okay. And on capital allocation, this is -- we have a regular internal capital allocation meeting, and I'm looking at my team here in the room. It's the best attended meeting in the company. They're all laughing because I'm quite tight-fisted with capital, and that's really the meeting where they go to fight. Capital is a scarce resource. I believe we drive a company with capital allocation and it has to go to the best destination. And I am -- I try to be very fair so there's no predetermined allocation. So they really know they have to fight for capital. And they only get it if they can use it profitably. And that's the best I can say. So those macro numbers you saw, they are the aggregation of this micro process. And if Wealth Management ends up with more, it's because they have better uses for the capital on a risk-adjusted basis. And that's the way we run the process. And so far, with good results.

Okay. But it's not that you're running any specific initiative to push up the capital (inaudible)

No, no. It's not a bottom up and top down. We know which direction we want to go. Every quarter, they know what their pipeline is. We look at that really -- I mean, less hours, line by line. And yes, in the end, there's a capital allocation decision made. And it's all actually quite formal, signed off by everybody. And people run with that and they're held accountable on the capital they've been allocated, and the returns on that capital. And we follow -- we track that week by week.

Your next question comes from the line of Jernej Omahen from Goldman Sachs.

Actually, I just have one question I think at this stage, and it relates to the workout of the SRU. And I'm just referring here to, I think it is Slide 49 of the presentation. And you point out that the exit losses were only $72 million, which is very low. I guess that it's correct to expect the workout losses to be low given that the portion of the portfolio that was worked out during the quarter was the lowest since the start of the SRU. So if I have the right numbers, I think the risk-weighted assets are down broadly by $2 billion on the quarter and the leverage exposure by $6 billion, which is broadly half the pace of the previous quarters. So when the exit losses actually looked at in the context of the portion of the portfolio being worked out, we get to a quite high number. And I just wanted to ask you 3 things on this topic. So number one, what type of assets were worked out over the course of Q3? And therefore, why is the loss relative to the scope of the assets worked out high? Number two, why -- how should we think about this? So at what point does the loss, the pretax loss for this unit, start declining meaningfully, let say, by half? At what point do you say, okay, we worked out what we can and so we're now going to reflect that in cutting the operating cost as well? And finally, I wanted to ask. So in terms of longer-term guidance, and I fear now that you're just going to repeat what was said before, that you're going to update us at the Investor Day. But at what point is the SRU mission complete? Are we now talking next year, the year after that or even later?

Great questions. So David, that's yours.

Thank you very much. Actually, you do you need to look -- as the SRU RWA is now getting to quite low levels, you do really need to look at them at 1 decimal place. The actual exit run rate for RWA was actually higher in the third quarter than the second quarter, and we'll send those numbers to you to 1 decimal place later. In terms of the percentage of losses, yes, I agree, I think I did comment that the exit losses was actually -- at $72 million, was actually 2.8% of exit losses.

2% versus 1-point-something we had before.

Which is I think is the highest level of exit losses we've actually seen over that period. And if you actually look at the MD&A on Page 43, you'll see there's a comment there which relates to higher exit losses relating to the sale of legacy asset management positions. Essentially, we sold a portfolio of LP interests, which were actually sitting here. So you, I think you understand the -- you know as well as I do that the liquidity of those assets is relatively limited. As a consequence, we did have to take a reasonable discount to actually move those positions, and that's what pushed up the exit loss to 2.8%. Clearly, lifetime, it's 1.2%. I think we've said before, in last year's Investor Day actually, that as we get to the end of the portfolio, there will be trickier positions to shift and they may require greater discounts to get there. I think we're looking, obviously, extremely comfortable against lifetime guidance of 3%, given we're at 1.2%, but I wouldn't be particularly surprised to see that rate step up as we move the final $6 billion of RWA which we have to achieve over the next 5 quarters. Clearly, just on a run-rate basis, by the way, in order to achieve that, we have to achieve $1.4 billion per quarter. So clearly, over -- where we were for the second, we're actually running well ahead of that in terms of the exit pace. You then asked a question which was around when would we actually expect to see the actual losses drop. I think we've been pretty clear about this before, which is the SRU actually bears the majority of a collection of very expensive funding cost instruments, which fall due for maturity in the third quarter of next year. So you will see a very sharp drop off as those are actually redeemed because those instruments are paid back. There's only much we can do about that. I mean, there's [admittability] to actually redeem these assets prior to that.

But that's a real material tailwind for this equity story. It's just we couldn't get wait to '18 because we get a big uplift there really.

And I think in terms of guidance for next year, we've always had a target that the loss for the SRU next year would be 1.4 billion or less. And I think we also have a target to be at 800 million for 2019. I'm not going to update those targets today. We'll come back to it at the Investor Day. But I think that 1.4 billion target is still very much our goal for the SRU next year in terms of those numbers. And that will be driven both by position reductions and also by operating expense reductions.

Can I just go back to one point, David, that you mentioned before. So you said, as you would expect, they're somewhat difficult positions to shift, and the loss rate could go up from here. I think actually you used the word step-up from here. So the way to think about this is to forecast a rising exit loss in the coming quarters, yes?

No, I'm merely cautioning that as a consequence of the fact we have some residual positions left and the focus of our effort is actually now on leverage reduction to a greater extent than RWA reduction, the percentage of RWA may more be in the sort of 1.5% to 2% type level than in the 1.2% level you're seeing for the lifetime. I don't think you should construe more to it than that, frankly.

But it's a mix within the 1.4 billion. One would say is that the 1.4 billion stays, that we're highly confident that we don't go above 1.4 billion. But the mix within that quarter-by-quarter may be different. Because really, we make those decisions. This private equity thing, David, we agonized over it. We knew it would increase the loss in this quarter. But on the other hand, we wanted it out because of the gain. So it's also kind of an art as much as it sounds quarter-by-quarter, transaction by transaction. But I think we are -- we will be well within the guidance we gave, which is frankly, you come from 2.9 billion, then you leave 2 billion, then you leave 1.4 billion. If you think of the relative changes there, how much PTI you get, it's still very material. And then I...

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

First of all, just a few very quick ones. IWM, can you give me the mandate penetration this quarter? You gave it last quarter. Secondly, ultra high net worth, can you tell me how much penetration or how much of your assets are ultra high net worth in IWM and in APAC? And then thirdly, on Global Markets, the clean cost to income is 92% in the third quarter. If you achieve your targets, you're running around 80%. I'm just wondering how you're thinking around operating leverage, which clearly is still very high, even achieving your targets in a more volatile environment. If you can just run me through your thinking. And in that context, clearly your cost flexibility. And one more question regarding markets -- Global Markets. In equities, as you mentioned, you have made some key hires. Can you just tell me what the strategy is in equities in terms of, I assume, growing revenues? What is it that you're doing differently going forward?

Okay, thank you. Thank you, Kian. Mandate penetration for IWM, I think it's at 30%, yes? We're at 30% in the third quarter.

So unchanged, okay.

Yes. Ultra high net worth, you want it as a percentage of AUM, yes?

Yes, if possible.

Okay, PB IWM it's -- 3Q, it's 61%. And PB APAC, it's 62%. And from 59% -- 2Q, IWM was 59%, and APAC, 61%. So slightly up, okay? And just one number again. Year-to-date, the net sales in mandates were 7.2 billion in IWM to give you another kind of -- yes, okay? So we still believe that ultra is our key to our strategy. And for just 60% of AUM and they drive the growth, which is why we talk about it so much. And it takes us away from a lot of the discussions or secular decrease in margin in [AUM]. We are not in the mass affluent market or in the -- we have 100 strategic clients in IWM and we have 50 strategic clients in Asia, and that's it. So we're in a very different business from a lot of people who talk about Wealth Management. Global Market cost income. Look, It's a fair comment that we're still at a high cost income. And I'm going to wrap this up with the equities. One of the big opportunities for Global Market is to work better with the private bank and the wealth management. It will not have escaped your attention that the profile of a person we hired to run equities and where this person comes from. And the track record this person has of driving collaboration between equities and wealth management. And if you want -- the penetration -- we won't give the number. But our own penetration of our own wealth management is very low, okay? There is a big revenue upside in Global Market there. That's not in the numbers we're giving you, the kind of 6 billion in 2018, et cetera. And that's where a lot of the tailwind is going to come from. Plus the joint venture that we have announced between Global Market and IWM that we've called ATS. Getting them together generates efficiencies, which we are capturing. But also, more importantly, revenue upside. So really, equities -- strategically, it was taking out SMG, that we've done. And actually, by the way, we haven't had the question, but it increased the cost in IWM quite significantly. So just keep that in mind also when you look at the IWM cost evolution. We transferred SMG to IWM. And so that was one strategic thing because the volatility of earnings is where we want to derisk again and stabilize GM. We've done that. We've hired, beyond Mike Stewart himself, really a range of people to drive our Equities business up in EEMEA, et cetera, Mike Di Iorio from Barclays and others. And then we're really getting them to -- I mean, actually, if you look at Cash and Prime, they did okay this quarter. They did okay in our number. We're plus 5% in equities. And look, it's not going to be overnight, but we are going to continue pushing that equity story. I think it's a kind of 18 to 24 months story. But you're going to see a lot of the upside come from collaboration and working better with our Wealth Management. And Mike Stewart would tell you any day that he [wants what's close], and he doesn't really understand why we don't use them today, because he's going to make his Equities' business better to see all those flows that our clients from the Wealth Management bring. So it's kind of a win-win, really, on both sides.

Just on Equities, is it more an issue of organization? Or is it more an issue of you just don't have the products? Like you mentioned, in APAC, you had good sales of structured products, but you didn't mention it when you talked about Global Markets. I'm just trying to understand what the issue is.

It's a little bit of all of that, okay? So the first question I asked Mike, after 3 months, was it diagnostic? And it's a combination of a people issue. Frankly, we've lost some people, and that actually predates me. It's really some organizational changes we made transferring some of those teams out of equities. We lost some really good people. We just haven't done enough in, if you wish, pushing the products in the Wealth Management. And that's really -- if you look at the difference in performance with us and others and what we know of their numbers, a lot of it is there. And there is also an issue around Prime where we are looking at our pricing. And from the intelligence we have, there is also an upside there where we can get better revenues with the Prime base we have by being even more disciplined. We've done quite a bit already, but there is an upside there. And finally, there is really equity derivatives, but that's more volatility dependent. If there's any normalization in volatility, you're going to see a big improvement there. Yes?

I'd now like to hand the conference back to Adam Gishen.

Okay. Well, thank you. That brings us to the end of our third quarter '17 results. I thank you all for attending. And we look forward to seeing you at our Investor Day on the 30th of November. Thank you.

That concludes today's conference call for analysts and investors. A recording of the presentation will be available about 2 hours after the event. The telephone replay function will be available for 10 days. Thank you all for joining today's call, and you may now disconnect.