Credit Suisse Group AG (CS) 2017 Q4 法說會逐字稿

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group's Full Year and Fourth 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.

Okay. Good morning all, and welcome to the fourth quarter results and full year results for 2017.

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 on our reported results, we refer you to the Credit Suisse fourth quarter 2017 earnings release and remind you that our 2017 annual report and audited financial statements for the period will be published on or around March 24.

With that, I would hand over to our CEO, Tidjane Thiam, for a discussion of our fourth quarter results. Tidjane?

Thank you, Adam. Good morning, everyone, and thank you for joining the call. With me today is David Mathers, our Chief Financial Officer. And together, we will present Credit Suisse's results for the fourth quarter and the full year 2017.

In my section, I will focus mainly on our full year 2017 performance, and David will then present the detailed financials, as usual, focusing on the fourth quarter. We look forward to taking your questions at the end of the session.

So let's begin with Slide 4, which is in the format you are used to. 2017 was a crucial year for us and saw us make significant progress. In 2016, the first year of our 3-year plan, we completely changed the structure of the bank, and reorganized it in 5 divisions plus an SRU. In parallel, we conducted a deep restructuring, disposing of or closing many businesses and business lines. So in fact, 2017 was the first full year where we could put this new organization at work and truly test our new strategy.

You can see in the results we present today that after 2016, which saw the first signs of year-on-year progress, 2017 was a year of marked acceleration on every one of our key metrics. Just to mention a few. We have achieved our first profit, our first positive reported pretax income since 2014, with group reported pretax income of CHF 1.8 billion in 2017.

Two, we have continued to create positive operating leverage. We were able to increase revenues by 5% year-on-year and reduce cost by 6%. We have lowered our breakeven point by delivering sustainable fixed cost reductions, reducing our operating cost base to CHF 17.7 billion at FX actual rates. This brings our net cost savings since 2015 to CHF 3.6 billion at FX actual rates or CHF 3.2 billion at constant FX rates, which is the metric we have used from -- since 2015.

Each of our 5 divisions was profitable. We have continued to make progress in the wind-down of the SRU. We have transformed our capital position with a Tier 1 leverage ratio of 5.2% at end 2017 and a CET1 ratio of 12.8% after absorbing 45 basis points of operational risk add-ons in the second half of '17 and investing in our 2018 pipeline.

In terms of full year net income, we were impacted by a one-time noncash item resulting from a write-down in our deferred tax asset, following the recent U.S. Tax Cut and Jobs Act. David will provide more detail on this as well as on the positive impact we expect to our group tax rate going forward.

Clearly, the first 6 weeks of any year provide only a limited glance from which we can provide an outlook. That said, we have made a strong start to the year across our Wealth Management and market-dependent activities, and more on that later.

So for the balance of my presentation and the number slides, I will focus on the adjusted numbers, unless I specifically mention otherwise.

So let's turn to our next slide, which shows our progress in creating positive operating leverage, and we've been looking for a way to put this graphically, and we think this works. You have on the top, the revenue in '16 and in '17. And you have on the bottom, the cost in '16 and '17. And you can see it was positive jaws opening. You can see that in '17, we have grown our revenues quarter-after-quarter and that we have simultaneously lowered our costs compared to the same period last year in 2016. So you can see on the right that as a result of those jaws opening, we have increased pretax income from CHF 0.6 billion to CHF 2.8 billion, so roughly CHF 2.1 billion of increase. And this is nicely split between cost improvements of CHF 1.1 billion and revenue increase, which is CHF 1 billion. So very good balance and something we're quite pleased with.

So focusing now on cost. In this chart, you can see the progress we have made in the first 2 years of our cost-reduction program. We came into 2015 -- sorry, 2016, with a cost base of CHF 21.2 billion. We came into 2016 (sic) [2017] with a cost base of CHF 19.4 billion, and we're going into 2018 with a cost base of CHF 18.0 billion. All these numbers are FX constant rate 2015. So what I want to underline here is the compounding effect of continuously lowering our breakeven point, which creates momentum in our PTI. As we enter 2018, our operating cost base has been reduced by CHF 3.2 billion at constant FX rates or CHF 3.6 billion at actual FX rates.

Importantly, something we track, non-compensation expenses in 2017 are down 11% year-over-year, showing the intensity of our efforts. And just to give you a bit of color, we have now more than 185 robots in production with an objective to have between 350 in active use by end 2019. We have migrated 17%, 1-7, of our operating systems into the cloud, with a target to reach 60% in 2020 with all kinds of benefits. And importantly, we have decommissioned 285 business applications. To keep up of these cost-reduction programs, it's very important to actually close down things and decommission things. And that's what we call actual fixed cost reduction where you shrink the infrastructure.

The worst way to cut costs is to take a team and take 10% out. You keep the same infrastructure, you keep the same cost and you have lower revenues. That's a very negative spiral, and that's a spiral we have worked so hard to avoid. By taking structural measures from closing the U.S. private bank, we generated significant savings, to the restructuring of London, which also generated significant savings.

At the same time, we have continued to invest in talent and in improving our controls. These sustainable reductions in fixed cost are a core part of our strategy, and they leave us well-positioned to benefit from improving market conditions with any uptick in revenues flowing straight through to the bottom line. We believe our restructuring is going well because we have been able to cut cost materially without damaging our franchise. The start of this year has illustrated the point as we have been able to make the most of the improved market environment of the first 6 weeks of 2018 with a direct and positive impact on our profitability starting from this lower cost base.

Moving to our next slide, which is familiar to you, too. We can see here the progress that we have made in terms of winding down the SRU over past 2 years, with RWA ex op risk down by 73%. In 2017 alone, we achieved a 43% reduction in RWA ex op risk and a 41% reduction in leverage year-on-year. Our adjusted operating expenses are down by CHF 700 million -- sorry, USD 700 million, a 40% reduction, and this continued to reduce the SRU's drags on our group earnings, which is a key driver of our profitability.

Moving to Slide 8. We have transformed our capital position for a number of organic and inorganic management actions. A strong capital position is an absolutely nonnegotiable necessary condition for success in our business, so we take comfort from the progress we have been able to make in that respect. We are operating above our guidance of more than 12.5%, which we gave at Investor Day, leaving us well-positioned to allocate capital dynamically to our businesses and to support our clients. And on the right, you can see that we have also significantly derisked, nearly halving our group VaR. So stronger capital and less risk.

If we zoom on the recent evolution of our CET1 ratio, I want to start actually at the bottom with the leverage. It's important because you know that we are leverage-constrained mostly at this stage, and leverage has stayed strong and flat at 5.2%.

Now moving to CET1. During this period, we have accreted capital organically. We have invested in attractive 2018 client-led pipeline of opportunities and absorbed 45 basis points, as we had flagged before, of op risk RWA add-on. As a result, we have a CET1 ratio of 12.8%, which reflects the full impact of our major RMBS settlement with the DOJ, an additional operational risk add-on without taking into account any capital relief that we expect to benefit from through the exit of legacy businesses in the SRU. And David, in his presentation, will give you more color on that, but we are making good progress in our discussions with FINMA.

So on the next slide, we just tried to summarize our progress towards our 2018 targets, starting with cost on the left. We are now 2 years in the 3-year plan, so 2/3 of the way, and we have achieved more than 75% of our planned cost savings.

Looking then at PTI in the middle section of this chart. In our Wealth Management-related businesses, SUB, IWM and APAC Wealth Management, we have achieved 85% of our combined pretax income targets for 2018. We've adjusted PTI of CHF 4.2 billion in 2015 and against our target of CHF 4.95 billion, and we started actually in 2015 from CHF 2.9 billion, so it's a significant increase.

Moving then to IBCM on the right. IBCM had a strong year in 2017 and operated already within its target adjusted return on capital range of 15% to 20%. Looking at our market businesses. At Global Markets, further progress is required to drive returns above 10% as we committed to do for Global Markets this year and APAC market next year. We believe the key building blocks to achieve this are in place. We have lowered materially our fixed cost base. We have protected our leading franchises in credit and invested materially to strengthen our Equities franchise. And thanks to those efforts, we stand to benefit from any upturn in markets.

Let's focus now for a while on Wealth Management on the next slide. It's at the heart of the strategy. Assets under management rose to a record CHF 772 billion from CHF 630 billion in 2015. Net new assets more than doubled to CHF 37.2 billion compared to 2015. And we were able to increase our NNA, net new asset, growth rate from 3% to 5%, notwithstanding a materially higher asset base, as you can see here. It is notable that regularization outflows were significantly down this year, year-over-year, which is a very positive development for our margins and for our profitability.

And importantly, on the next line, you know that we have put ultra high net worth clients at the heart of this strategy. We are effectively gathering more assets at higher net margins with a larger share of inflows coming from our ultra high net worth clients. Starting at 50% in '15, we're now at about 75%. As a result of all these evolutions, we saw a step change in profitability in our Wealth Management-related businesses in 2017, with a combined pretax income of CHF 4.2 billion, up by CHF 1.3 billion or 44% compared to 2017 -- 2015, sorry, 44% up compared to '15. And you can see here the acceleration I've been talking about because it's up 17% in '16 and 25% in '17. And you will see this pattern run through our businesses as we look at the divisions in the next slide.

Our Swiss Universal Bank has achieved its eighth consecutive quarter of year-on-year adjusted pretax income growth, with a further acceleration in the fourth quarter of 2017. Thomas and his team have achieved an adjusted PTI in 2017, which is up 17% over the past 2 years, a strong performance in a mature market like Switzerland.

We have increased our adjusted return on regulatory capital to 15%. And looking forward to the 2018 targets, we have a number of important revenue initiatives underway because you saw that in '17, actually, revenue was down over '16. We have a number of initiatives to drive revenue up from better connecting our high net worth and ultra high net worth clients with our bespoke ITS solutions to deepening our relationship with a vibrant Swiss SME sector or executing on our strong pipeline of Investment Banking transactions where we're already #1 in Switzerland and where we intend to strengthen that position, that #1 position.

Turning now to IWM with Iqbal. We can see here the same acceleration I've been talking about in profitability, the same momentum over the past 12 months, with a return on regulatory capital increasing by a further 6 percentage points, from 23% to 29%. This growth, pleasingly, has largely been self-funded with revenues up 8% and costs flat over the same period, excluding the transfer of SMG equities trading activity.

In particular, our business has benefited from 3 main trends: one, broad-based double-digit PTI growth in emerging markets and a turnaround in profitability in Europe, which we talked about at the Investor Day; two, continued high-quality asset inflows, representing a 5% growth rate in Private Banking or 15.6% -- sorry, CHF 15.6 billion of NNA. And again, I emphasize here, this is not an objective; it's an outcome. It's an outcome of doing everything right. We don't have an NNA growth target. We grow NNA because we have good relationship with the clients and we deepen them. And again, most of our NNA is from existing clients, from the key KPI of a quality of a growth that we're generating, both in IWM and in APAC, I'll come back to that later.

Thirdly, higher levels of currency engagement with better integration of our House View solutions and higher mandate penetration, all important to drive fee revenue. At the same time, we have made significant investment in compliance and in controls to ensure that we generate profitable and compliant growth, and those improvements have been acknowledged by our regulator in recent reviews.

Within IWM, I'd like, this time around, to focus on Asset Management, which is worth a mention given the quality of the performance. Improving the profitability and quality of earnings in our Asset Management business has been a strategic priority led by Eric Varvel over the past 2 years. And we are seeing our efforts starting to pay off with adjusted PTI up more than 100% since 2015.

We have leveraged our core strengths across alternatives and traditional asset management, adding CHF 16 billion, 1-6, of NNA in our operating businesses in 2017. Importantly, 2/3 of these assets are raised via our Private Banking channel as we service the needs of our ultra high net worth clients in a more integrated fashion. And bringing together the Asset Management with our Wealth Management businesses has been very powerful.

You can also see on the next slide that this has led to an improvement in the quality and stability of earnings with an increase of 22% year-on-year in recurring management fees year-over-year in 2017, which is an income stream for which we have a very high appetite as it's repeatable.

Let's move now to APAC with Helman and his teams. Adjusted pretax income reached CHF 822 million in 2017, a nearly threefold increase over the past 2 years. We have exceeded our original 2018 adjusted PTI target of CHF 700 million 1 year early. And we're on track to meet our new 2018 adjusted PTI target of CHF 850 million that we introduced a few weeks ago at our Investor Day.

Adjusted return on regulatory capital for Wealth Management & Connected increased 8 percentage points to 30%, bringing the APAC division as a whole to 15%, 1-5. We expect this to further improve as we complete our restructuring of APAC markets.

There are many highlights from what was an excellent year for our franchise, but mentioning a few, Q4 '17 was our best-ever quarter for Wealth Management in terms of revenues and PTI, with broad-based strength across Private Banking, Financing and IBCM, including the positive impact of 2 one-off items.

We had a 10% growth rate in NNA with CHF 16.9 billion of net asset inflows in 2017, up 24% year-over-year, and achieved record AUM at CHF 197 billion. We have a top 2 position in IBCM APAC ex Japan and ex China onshore for the full year '17. And importantly, we were able to increase the referrals from IBCM to PB, which is a key part of our strategy and integrated model, increased those referrals by 244%, which really demonstrates the power of the integrated approach we take.

Moving now to Slide 17. We received around 120 in total awards, including, for the first time, Best Corporate and Institutional Bank and Best Private Bank in the same year. We also got the Best Bank for Financing, Best Investment Bank in Asia, Quant House of the Year, and I'll spare you all the details, but it's a very, very good year.

So let's move now to Jim Amine and IBCM teams. Our IBCM business had a strong performance last year and delivered pretax income of USD 419 million, an increase of 41% year-on-year and more than 4x compared to 2015. For 2018, as you know, we are targeting an adjusted return on regulatory capital of between 15% and 20%, and we have already been operating within that range in 2017 with a healthy pipeline of announced M&A transactions and primary deals to launch in the coming quarters.

Moving now to the share of wallet. We increased share of wallet in all key products in 2017, with a few highlights: M&A, up 78 basis points; we moved up one rank in ECM rankings globally; we increased our share of wallet in leveraged finance by 27 basis points; and we basically, in terms of revenue growth, were able to outperform The Street fee pool.

So looking at M&A maybe in a little more detail. We announced a number of significant transactions in both Q4 '17 that you can see here, for instance, KKR's USD 8.2 billion acquisition of Unilever's Spreads business; and also, in Q1 '18, with, for instance, the $23 billion merger of Dr Pepper Snapple and Keurig Green Mountain. And the dialogue with CEOs, it remains very strong.

So moving now to Global Markets with Brian. The market environment was challenging for Global Markets in the fourth quarter, but our franchise held up with revenues down only 5% year-on-year, which we consider a resilient performance. In Fixed Income, revenues were actually up 5%, driven by a strong contribution from Securitized Products. And in Equities, revenues were down 15%, 1-5, driven by continued low volatility, a dynamic which has reversed in the first few weeks of '18, and a tough comparable period in '16 which included the U.S. elections. A better gauge of our performance on that basis is against the prior quarter, Q3 '17, where revenues in Equities increased 10% sequentially, which is a positive indicator.

Now looking at the full year 2017, we continued to make good progress on cost, reducing operating expenses by 5% as we targeted a cost base of less than $4.8 billion by end of '18. We have seen a strong start to Q1 with GM estimated revenues up more than 10% in the first 6 weeks of '18 compared to the same period last year, mainly driven by equity derivatives and securitized products.

So we have been able here to -- sorry, go back one, we have been able to hit the numbers we had announced at the Investor Day, $5.7 billion of revenue and $5 billion of cost. So as a result of this operating leverage, profitability in Global Markets increased by 118% year-over-year. We have an improved return on regulatory capital to 4%, and you know that we have a 10% target. But we're very confident in the momentum there and the speed at which Brian and his teams are improving returns.

Finally, maybe just a moment on ITS, which you'll remember we launched as a partnership between Global Markets, IWM and Switzerland in the second half of last year. As we said at the Investor Day, we see this as a great opportunity to enable our clients in Wealth Management to benefit from our strong expertise in Global Markets with bespoke solutions to meet their investment and financing needs.

As you can see from this page, which has a few examples, the business has had a strong start to 2018 with several successful transactions, and I would highlight here the first protected note in Brazil linked to a leading global asset management bond fund of BRL 600 million.

So moving -- stepping back and moving back to the group as a whole, you're familiar with this slide, too. What we want to emphasize here is that we are able to improve profitability at pace because we benefit from 2 major trends: one is the operating leverage, which drives the core group earnings forward; and two is the wind-down of the SRU. So the compounded effect of those 2 dynamics is very powerful to drive our bottom line up.

So you can see that playing through on the next slide, where you can see that we've continued to drive year-on-year returns higher across each of our divisions.

Before closing, I would like to provide you the trading update on the first 6 weeks of '18. We've had a strong start to the year across Wealth Management and our more market-dependent activities. In Wealth Management, we are seeing positive net asset inflows in each of our businesses. And in our Global Markets business, there has been a significant rebound in client activity levels. We have enjoyed a strong start in ITS and equity derivatives but also in Securitized Products.

Estimated revenues at this point in Global Markets are up more than 10% over a very strong Q1 '17, and APAC markets are up more than 15% in the first 6 weeks. While their estimated adjusted operating expenses have, in both cases, been significantly reduced since we started our restructuring 2 years ago, this is directly benefiting our bottom line with a positive effect on profitability.

In the beginning of '18, we have seen a significant pickup in market volatility, which, on the one hand, had a positive impact on our secondary activities that I just commented on; and on the other hand, impacted negatively our primary calendar as clients wait for calmer markets in order to return debt. That said, the quality and the intensity of the dialogue remains high for IBCM.

We are adopting a cautious short-term outlook, of course, in this period of heightened volatility. But overall, we believe we've made significant progress in strengthening our capital position and derisking our market-dependent activities since 2015. Our outlook on the world economy is positive. And we believe that our strategy of being a leading wealth manager with strong investment banking capabilities, as well as our efforts to cut fixed cost and lower our breakeven point, leave us well-positioned to create significant value for both our clients and our shareholders.

So in summary, we are delivering profitable growth across our franchise and driving positive operating leverage. We are executing with discipline, as evidenced by the progress against our cost targets and the accelerating wind-down of the SRU. And we're maintaining a strong capital position and increasing the return on capital across every division.

With that, I will hand over to David, who will provide more detail on our fourth quarter performance. Thank you.

Thank you, Tidjane. Good morning, everybody. I'd like to thank you for joining our earnings call today for both our full year and our fourth quarter results.

Now I'll start with the summary of our financial results on Slide 30. And as usual, we show here the group numbers on both a reported and an adjusted basis, and these have been prepared under the same definition as in prior quarters. And as is our normal practice, we provide a full reconciliation of the adjusted and the reported results in the appendix.

On a full year basis, we achieved a reported pretax income of CHF 1.8 billion on net revenues of CHF 20.9 billion. On an adjusted basis, our pretax income was CHF 2.8 billion, also on net revenues of CHF 20.9 billion.

Now if we look at the results in the fourth quarter, we achieved reported pretax profit of CHF 141 million and an adjusted pretax income of CHF 569 million on CHF 5.2 billion of revenues. In the fourth quarter, we recognized CHF 255 million of substantial litigation expenses, of which the largest component, CHF 133 million was in regard to the settlement with the New York Department of Financial Services that we announced back in November.

We also took further restructuring costs totaling CHF 137 million in the fourth quarter. This primarily related to the resizing of our footprint in both New York and in London, which came through in both personnel and real estate-related restructuring expenses.

I'd remind you that we said in 2016 that over the complete lifetime of our restructuring program, we would expect to incur restructuring costs totaling around CHF 1.9 billion. Now up until the end of 2017, our running total comes to CHF 1.35 billion, and I would expect most of the remainder to be incurred in 2018.

Now in net terms, we reported a loss attributable to shareholders of CHF 1 billion for the whole of last year and CHF 2.1 billion in the fourth quarter. This was driven by the approximately CHF 2.3 billion write-down in the value of our deferred tax assets, and that's primarily resulting from the enactment of the U.S. Tax Cuts and Jobs Act on December 22 last year. Now excluding this write-down in DTA, our net income would have been a gain of CHF 1.3 billion for 2017.

Now if we look forward to the impact of the U.S. tax reforms, as Tidjane said already, we would expect this fiscal stimulus to be positive for the United States and for the global economy, which we believe will be to the benefit of our businesses. Now if we look purely at the impact of the reforms on our tax rate, then this will depend on whether we're within scope of the new alternative tax regime that has been introduced in the act, and that's known as the base erosion and anti-abuse tax.

Now provided that we remain out of the scope of the BEAT as a consequence of the U.S. corporate rate falling from 35% to 21%, the group's tax rate should fall by approximately 5% from the mid-30%s to the low 30%s in the current year, that is 2018. Furthermore, if you look at 2019, the rate should drop from the high 20%s to the mid- to low 20%s. And all else being equal, this will be expected to increase our reported return on tangible equity by at least 100 basis points.

Now with regard to BEAT, our current assessment is that it's more likely than not that we will not be subject to this tax. I'd caution, though, that this assessment is subject to the further guidance that we would expect to achieve in due course from U.S. Treasury and from the IRS. And if we were in the BEAT regime, then this tax would most likely offset most of the above benefits in 2018 from the lower corporate tax rate. Now as per our usual practice, for the balance of this presentation, I will focus entirely on the adjusted numbers as we continue to believe this more accurately reflect the operating performance of our businesses.

So let's turn to Slide 31, please, to look at capital and leverage. Now if you look at the group, at the end of the fourth quarter, risk-weighted assets on a look-through basis stood at CHF 272 billion, and that's an increase of CHF 7 billion from the third quarter, primarily due to the increases in operational risk RWA. You might recall that when we announced our second quarter results in July, we expected -- we said that we expected our operational risk RWA to increase as a result of the RMBS settlements.

Now following discussions with FINMA last year, we updated our loss history and implemented a revised methodology for the measurement of operational risk, primarily in respect of these settlements. In the third quarter, the update in our loss history and methodology increased RWA by CHF 5.2 billion, and that's equivalent to a 26 basis point reduction in our CET1 ratio.

And in the third quarter, as a result of the NCUA and MassMutual settlements, RWA increased by a further CHF 3.8 billion, and that's equivalent to another 19 basis points reduction in our CET1 ratio. So that takes the adverse impact to our CET1 ratio from these op risk changes in the second half of 2017 to approximately 45 basis points.

Now in terms of business changes, which, as you know, we show net of FX and external methodology changes, the most significant move was in the Strategic Resolution Unit where we reduced risk-weighted assets by a further CHF 3 billion. Now as a consequence of these changes, our CET1 ratio stood at 12.8% at the end of the year. That compares to 13.15% at the end of the third quarter and 13.29% at the end of the second quarter. And clearly, the reduction has been driven by the increase in operational risk RWA over the 6-month period.

Now leverage exposure on a look-through basis stood at CHF 917 billion at the end of the quarter. That's an increase of CHF 8 billion from the end of the third quarter. Increases in the core businesses and those due to FX movements were partly offset by a reduction in SRU usage. And our Tier 1 leverage ratio and the CET1 component of this were stable at 5.2% and 3.8%, respectively. And these ratios continue to exceed the fully phased-in 2020 Swiss too-big-to-fail requirements.

So just looking forward, there are a few points I'd just like to make around risk-weighted assets. First, for 2018, with regard to methodology changes, we expect additions of approximately CHF 8 billion this year, primarily in respect of credit multipliers, of which we'd expect approximately CHF 2 billion to be incurred in the first quarter.

Second, as we've said in prior quarters, we have been in discussions with FINMA about reductions in operational risk RWA as a consequence of the businesses that we have exited from the SRU, primarily the former Private Banking business in the United States. We continue to expect to finalize the treatment of these business exits with the FINMA in the coming months.

Now finally, you might recall at the Investor Day in November, I gave estimates for the future potential impact of the Basel III reforms. And these reforms were finalized in the principal agreement agreed -- reached by the Basel Committee on Banking Supervision, or the BCBS, in December. Now there were clearly a number of items in this agreement, but 2 that I'd like to bring to your attention today.

Now first, the implementation of the Fundamental Review of the Trading Book, FRTB, has been delayed from 2020 to 2022. And second, our latest assessment of the impact of the rules relating both to the standard approach to counter-party credit risk, that's SA-CCR, and to FRTB, is that we would expect to see a slightly lower impact than we indicated on the 30th of November. Overall, in fact, over the next 5 years, we would estimate the total impact from FRTB, SA-CCR, changes in the rules of equity investments in funds and banking books securitization to be approximately CHF 35 billion to CHF 40 billion of additional risk-weighted assets. Now that compares to the guidance I gave on the 30th of CHF 45 billion to CHF 50 billion.

Now I think this very much supports what we said back on the 30th of November around dividend distribution. We intend to distribute 50% of our net income in 2019 and 2020, and that leaves 20% available for investment in our Wealth Management & Connected businesses and 30% to allow for regulatory RWA uplifts, such as I've described. And obviously, given that our guidance is reduced now, we've got a slightly wider margin for that than we had at the Investor Day.

Let me turn now to our cost program, please, on Slide 32. We made further significant progress in the reduction of our expenses in 2017, and we achieved net savings of CHF 1.4 billion. And that's lowered our operating cost base at constant FX rates by 7% to CHF 18 billion, and that's significantly below the target that you may recall we gave a year ago at CHF 18.5 billion and in line with the expectations that we spoke about at our Investor Day back in November.

Now in the fourth quarter, we achieved further net savings of CHF 0.3 billion, and that was primarily driven again by the continued execution of our workforce strategy that includes a reduction in our contractor and consulting count as well as by the rundown of the SRU. And if we look forward to 2018 and beyond, I'd just like to reiterate the guidance that we gave at Investor Day. We intend to reduce operating cost base from CHF 18 billion in 2017 to less than CHF 17 billion in the current year, as well as achieving further net savings in 2019 and 2020.

Now at this point, I'd also like to update you on the funding cost guidance that we gave at the Investor Day. As we said then, we'd expect to see our funding costs reduce substantially by about CHF 200 million in 2018 and by a further CHF 700 million in 2019. And these reductions reflect a number of factors, including the redemption of high-trigger capital instruments that were issued in 2012 and '13, the reduction in our funding requirements due to the progress in the wind-down of the SRU, the increase in growth in our deposit base from the acceleration of Wealth Management activities, and not least, the continued reduction in our credit spreads.

Now separately with regard to net interest income, on the basis of the current forward rate curve, our net interest income is expected to increase by approximately CHF 200 million per year over the next 3 years compared to what we've seen in 2017.

Now with that, let me now turn to each of the divisions' performances, and I'd like to start, please, with the Swiss Universal Bank on Slide 33. The Swiss Universal Bank increased its pretax income for the full year 2017 to CHF 1.9 billion, and that's an increase of 8% from the prior year, and that includes another strong performance in the fourth quarter. The Swiss Universal Bank delivered a pretax income of CHF 438 million in the fourth quarter, and that's up by 16% year-on-year and was driven by a reduction in operating expenses. And that marks the division's eighth consecutive quarter of year-on-year pretax income growth.

Now revenues in the fourth quarter did decline by 4% year-on-year, and that mainly reflects lower revenues in our International Trading Solutions business. Our focus on cost efficiency in 2017 resulted in a 4% reduction in full year operating expenses, and that's notwithstanding continued investments in digitalization and regulatory initiatives. And as a result, the cost-to-income ratio improved to 64% for the full year. That's an improvement of 2 percentage points, whilst the return on regulatory capital increased to 15%.

In Private Clients, we delivered a full year pretax income of CHF 860 million. That's an increase of 10% year-on-year. And the net margin rose by 2 basis points to 43 basis points in the full year with an increase of 10 basis points in the fourth quarter year-on-year, which reflects the cumulative reduction in operating expenses.

In Corporate & Institutional Clients, the full year pretax income increased by 6%. In the fourth quarter, our performance was adversely impacted by the revenue decline in ITS and reflects the strong comparatives that we achieved in the fourth quarter of 2016. And I'd note that our Investment Bank in Switzerland retained its #1 position in the country in M&A, DCM and in ECM and continues to have a solid pipeline for the first half of 2018.

Assets under management in the Swiss Universal Bank rose by 6% in 2017 to a record CHF 563 million. And in terms of net new assets, the Private Clients business recorded its best annual performance ever with net inflows of CHF 4.7 billion in 2017. Now I'd note, with regard to net new assets, we did suffer the usual mortgage repayments in the fourth quarter. But unlike in prior fourth quarters, other net inflows were sufficient to fully offset these mortgage payments.

With that, let me move to International Wealth Management, please, on Slide 34. In IWM, we continued to consistently execute our strategy, and we delivered a substantial step change in profitability in 2017 with 35% growth in pretax income to CHF 1.5 billion. And I think that clearly puts us well on track towards our 2018 PTI target of CHF 1.8 billion. The increased operating leverage in 2017 was driven by growth in recurring commissions and fees, in transaction-based revenues and in net interest income, and that's been coupled with continued cost effectiveness. The cost-to-income ratio for the year improved by 6 percentage points to 70%, and the return on regulatory capital increased to 29% last year.

Now in Private Banking, PTI increased by 36% to CHF 1.1 billion in the year, and that included a meaningful contribution from our European business, whilst the fourth quarter result increased by 43% to CHF 275 million, and that's compared to a year ago.

Now revenues for the year in Private Banking rose by 9%. Net interest grew by 11% in the year and 8% in the quarter, and that was driven by higher loan volumes and better margins. Our recurring commissions and fees continued to steadily increase with higher investment product fees. And fee growth also reflected the performance of our House View-based strategic asset allocation and related investment theme process, which was a clear driver behind the CHF 15.3 billion of net mandate sales and an increase of 3 percentage points in mandates penetration, which reached 31%.

Now transaction-based revenues increased by 3% in the year with an increase in brokerage and product distribution revenues, partly offset by lower ITS revenues and reduced FX commissions.

Turning to net new assets. In 2017, these matched last year's record level of CHF 15.6 billion, and that included CHF 2.7 billion in the fourth quarter. That's equivalent to an annualized growth rate of 5% for the year, with solid net new asset inflows in both emerging markets and in Europe. I'd just note that, by the way, this includes regularization-related outflows totaling CHF 1.6 billion for the year, and that's below the revised guidance of less than CHF 2 billion that I mentioned when we reported our third quarter results last year. At this point, we do not expect to see any significant regularization-related outflows in 2018.

Now in Asset Management, PTI increased by 33% to CHF 381 million in 2017, and that included a 25% year-on-year growth to CHF 135 million in the fourth quarter. Management fees continue to grow at a double-digit rate both during the year and in the fourth quarter, while strong investment performance resulted in a 66% increase in performance fees compared to 2016. Now that, though, was partly offset by lower investment and partnership income following an investment loss of CHF 43 million within our AMF business. Net new assets increased to an annualized rate of 6%, and that partly reflects the success of the increased collaboration with our Private Banking businesses both in Switzerland and globally.

Let me turn now to Asia Pacific, please, on Slide 35. Asia Pacific had its strongest fourth quarter to date, with pretax income of CHF 199 million, and that's an increase of 63% year-on-year. And both for the fourth quarter and for the full year, the division delivered a return on regulatory capital of 15%. We saw continued momentum in our Wealth Management & Connected businesses, which saw record net revenues of CHF 626 million in the fourth quarter as well as a record pretax income of CHF 239 million.

Now in terms of the component businesses, in Private Banking, revenues increased by CHF 90 million, and that's 5% year-on-year, and that was driven by higher transaction revenues and increased recurring commissions and fees. We had a strong quarter in advisory, underwriting and financing with revenues increasing by 25% year-on-year to CHF 235 million. Now that included a gain of CHF 64 million following the IPO of a Vietnamese retailer into which we had co-invested with several of our clients and which was successfully listed in the period. And these gains were partly offset by lower fees in M&A.

Asset referrals into Private Banking more than tripled in 2017, which I think is a further testament to the success of the integrated model that we operate in Asia Pacific. Net new assets overall were extremely strong. They totaled CHF 16.9 billion in the full year. That represents growth of 10% from the already high levels we achieved in 2016, with assets under management reaching a record level of CHF 197 billion.

Now I'd note, at the same time, we also significantly increased the net margin in Private Banking, improved to 30 basis points in 2017. That compared to 23 basis points in the previous year.

Now in markets, our fourth quarter result was impacted by the normal seasonal reduction, which was compounded by continued low volatility. Lower year-on-year revenues in equity sales and trading was due to a weaker performance in prime services and in equity derivatives, partly offset by a stronger cash performance. Just today, our fourth quarter equity derivative revenues included a gain of $28 million, and that resulted from the exercise of a call option on a structured note liability.

The difficult market of fixed income, sales and trading continued in the fourth quarter with revenues declining by 28% year-on-year, with reduced activity in FX and in structured products. But that was partly offset by an improvement in our emerging market rates and credit businesses. We continue to realize efficiencies, and that resulted in a 14% year-on-year reduction in operating expense in the fourth quarter as well as a 23% year-on-year reduction in risk-weighted assets utilized.

Now as Tidjane has already noted, the markets business has got off to a strong start in 2018, benefiting from the increased flow and the high levels of volatility that we've seen in the last -- in the first 6 weeks. And as we've said, market revenues have increased by more than 15% in the first 6 weeks this year compared to the same year -- period a year ago.

So let me now turn now to Investment Banking & Capital Markets, please, on Slide 36. We saw continued momentum in IBCM in 2017. Revenues of $2.2 billion was up by 9% year-on-year. That was driven by an improved performance in debt and in equity underwriting. Pretax income of $419 million increased by 41%, and that reflects both revenue growth as well as disciplined expense and capital management. I think it's also important to note that we saw market share gains in all of IBCM's core products, that's both in the Americas and in Europe.

Now if we look at the fourth quarter, revenues improved marginally compared to the strong close of 2016, primarily driven by growth in debt and equity underwriting businesses. Debt underwriting revenues increased by 12%, whilst equity underwriting revenues improved by 14%, with IPO revenues at the highest level in the past 12 quarters.

In common with The Street, we saw a decline in year-on-year advisory revenues, and that's notwithstanding the announcement of a number of noteworthy transactions, and that includes KKR's acquisition of Unilever's Spreads business.

Operating expenses for the year increased by 6%, and that reflects targeted investments in business growth, in compliance and in IT. And overall, the division delivered a pretax income of $122 million, a return on regulatory capital of 17% and well within our targeted range of 15% to 20% for 2018. I'd also note that the contribution from EMEA improved substantially year-on-year with a 14% increase in revenues and a significant outperformance against The Street in the fourth quarter.

Now if we look at 2018, as Tidjane has already commented, the U.S. tax reforms and stronger global growth are leading to substantially improved levels of new business inquiry. And I would also like to note a recent strong example of collaboration between our IBCM and our IWM businesses. We advised Ferrero in their acquisition of Nestlé's U.S. confectionery business. Nonetheless, I would caution that recent market volatility may lead to some delays in executing the capital markets pipeline.

Let me turn now to Global Markets, please, on Slide 37. In Global Markets, we continue to execute our strategy during the year. We delivered significantly higher pretax income of $620 million, and that compares to $284 million in 2016, and that was on revenues of $5.7 billion for the whole of last year. Now whilst our fixed income revenues increased by 14% year-on-year in 2017, our Equities business did suffer from lower volumes and lower volatility, with revenues down by 8% over the full year.

Turning to costs, our expenses overall reduced from $5.3 billion to $5 billion between 2016 and 2017. Although I'd note, this did include some increase in professional service costs in the fourth quarter of last year.

Now if we look at the fourth quarter, I think it's important to note that we saw some of the same trends that have already been reported across the market, notably the considerable reduction in both trading volumes and volatility in the closing months of the year, which particularly adversely affected our equity derivatives business. And as a consequence of this, and notwithstanding the fact that our fixed income sales and trading revenues were flat in the period compared to a year ago, we saw a loss of $119 million in the fourth quarter.

Now as Tidjane has already noted, this trading revenue -- this trading environment has improved notably since the beginning of the current year, and this has been most marked within our equity derivatives business. Although I would note that we have also seen a continued strong performance in both our credit and our Securitized Products franchises. We have also seen significant benefits emerging in the ITS business from cross-divisional collaboration. And as a result, net revenues in Global Markets are up by more than 10% in the first 6 weeks this year compared to the same period of last year.

Let us now turn to the Strategic Resolution Unit, please, on Slide 38, which, as you know, we intend to complete by the end of the current year, 2018. Now if we look at the progress we've made in 2017, I'm very pleased to say that we've reduced leverage exposure by $42 billion, from $103 billion in 2016 to $61 billion. And we have reduced RWA, excluding operational risk, by $11 billion from $25 billion in 2016 to $14 billion at the end of last year, and that's for least significant capital for use by the rest of Credit Suisse.

Furthermore, the pretax loss in achieving these reductions has also been substantially reduced to $1.9 billion in 2017. That's $1.1 billion better than the loss that we incurred in 2016. And a key component of this reduction in operating -- a key component of this is the reduction of operating expenses, which were lower by $675 million, and that's 43% year-on-year.

During the year, we completed the exit of several portfolios, and that includes senior financing on middle-market loans and leverage finance capital markets. And we further reduced our bilateral derivatives trade count, bringing down the total number of trades eliminated since the start of the program to approximately 241,000.

Just in terms of the fourth quarter, you can see that the pretax loss was reduced from $516 million in 2016 to $352 million in 2017. I would note, though, that there were 2 one-off factors in the fourth quarter. First, we had an unexpected gain of $29 million from noncontrolling interest attributable to consolidation of certain private equity funds. And second, we made exit-related gains of $53 million in the fourth quarter, which brings down the lifetime exit cost to 1% of RWA to date over the period.

Now I think given the progress we've made both in the fourth quarter and in the full year, I think it's clear that we're well on track to achieve our goals for the SRU. Let me just remind you we're targeting a reduction in RWA, excluding operational risk, from $14 billion at the end of last year to $11 billion at the end of this year. And a reduction in leverage exposure from $61 billion to $40 billion.

I'd also like to confirm our guidance that we intend to reduce the pretax loss of the SRU to approximately $1.4 billion in 2018, albeit with a higher proportion of this loss expected to be incurred in the first half than in the second half of the year. Now clearly, in addition to achieving these goals for 2018 and closing the SRU as a separate division by the end of this year, a critical priority for the team will be to ensure that we minimize the drag from the residual assets in 2019. I'd just remind you that we said at the Investor Day that we intend to bring our pretax loss drag down to approximately $500 million in '19, of which operating expenses are targeted to be no more than $250 million.

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

All right. Thank you, David. As our final slide for today, and I'd like to leave you with our key messages again. We believe these results demonstrate that we are delivering profitable growth across our businesses, that we are executing with discipline, particularly on cost and the wind-down of the SRU, and that we are increasing return on capital again across businesses, tracking towards the return target we gave you for 2019 and 2020.

So with that, we look forward to taking your questions. Thank you.

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

So thank you for the helpful disclosure, particularly on the interest rate sensitivity. I think you mentioned CHF 200 million bottom line benefit in each of the next 3 years. To kind of help us better model this, would you be able to give us any color on which division would benefit the most from this?

Okay, thank you. Thank you, Kinner. And David, can you...

And sorry, could I just follow up with one more?

Yes, go ahead. Go ahead.

Yes. Just on the XIV and volatility products, I guess one of the questions that we've received, just how much contribution this kind of business made to your earnings or to your revenues? So if you could give a rough kind of quantification about how material it was, that will be great.

Okay, thank you. And sorry for interrupting. You are allowed 2, so no problem. David, do you want to take that one?

Sure, of course. Kinner, I think a few points. What we wanted to try to do is 2 things really. I think one, just to confirm to everybody that our guidance for the reduction in funding cost is unchanged, down CHF 200 million in 2018 and CHF 700 million in '19. And then separate from that, just looking at the curve in terms of where we are today and what that actually might mean for our businesses, just to reiterate, the 100 basis point parallel shift would give us about CHF 500 million of a gain. And if we look at the curve now, then it's approximately CHF 200 million over the next 3 years, each of the next 3 years. Now in terms of the businesses, obviously, it depends where the curve is actually sitting, including a change at that point. We've obviously seen the greatest steepening at this point in the dollar and, to a lesser extent, in the euro. So that clearly will benefit more our International Wealth Management businesses and, to a lesser extent, APAC and the Swiss Universal Bank. And that's broadly the pattern over the next 3 years. But clearly, it will be dependent on, for example, where the long curve in the Swiss francs sits and the short curve for that matter compared to the U.S. dollar. But that's a rough indication of what we see at this point. And your second question was on ETN products.

The XIV.

Yes, I mean, I think -- I don't think I want to give you a specific number. It's not particularly large part of our business frankly, so not particularly material.

It's really not material. We can say that very, very strongly. Not material. And again, as we said in the release, we suffered no trading loss or no material gain. I mean, both are important to keep in mind. Product introducing in [2020].

Your next question comes from the line of Al Alevizakos from HSBC.

A couple of questions. First of all, one of your peers gave us a good indication about what could be the Basel IV impact, whenever that may be in 5 years' time. But I would like to know what's your view at this stage about Basel IV. And then secondly, I know that you gave this nice disclosure about the trading and how positive it is for the first 6 weeks of the Q1. However, I wanted to know regarding Wealth Management, given that a lot of the clients leveraged a lot in H2, will the current environment help them to leverage even more? Or you've seen already some people taking some money off the table?

Okay. Thank you, Al. David?

Thank you. Well, I think 2 points, a number of points really. I think, firstly, just to reiterate what I said on the call, if we look between now and the end of 2022 and just focus on what we talked about at the Investor Day, which is FRTB, SA-CCR, bank-imbursed securitization, equity investment and funds, our latest assessment of that is the adverse impact is an increase in RWA between CHF 35 billion to CHF 40 billion, and that compares to the guidance I gave on the 30th of November between CHF 45 billion to CHF 50 billion. Now I think that does give you some indication. There's always some uncertainty in this process. So if we look forward to the period, 2022 to 2027, I think all I would say at this point is well, first, clearly, that's quite a long time in the future, and the actual impact would depend on the detail implementation that the FINMA develops in its rulebook over the next few years as well as on our business portfolio and as well as on our hedging strategy at that point. So that's an awful lot of moving parts, frankly. So I would say generally that I would agree with the comments that most of my peers have said, which is the impact of [standard flaw], the 72.5% thing, and -- is likely to be blessed and, perhaps, it was feared originally. And I think that's all I'd say at this point. But what I would say is if you look over the next 5 years, CHF 35 billion to CHF 40 billion is coming from FRTB, SA-CCR, et al, and that is slightly less than we indicated before. So if you're thinking around capital distribution plans in 2019 and 2020, remember we said that we wanted to distribute 50% in net interest income in those 2 years. That leaves 50% available for both the RWA pick up, but also investments in that business. And we actually said on the 30th, 30% in terms of regulatory uplift such as this, 20% for the businesses. So at this point, we are more comfortable around that than we were when we spoke on the 30th.

Yes, and if I may add to that, we always position the capital raises as a kind of a bridge in the U.S. to get us back to a position where we generate significant amount of capital organically. I've always said the best source of capital is to be profitable. And what you see in the current trajectory that we have is that in '18, you start to have meaningful profit emerge, and that organic capital accretion, you can convert it into RWA to kind of whatever percentage you choose that gives you headroom to cover more significant RWA inflation, that's one. And two, actually [regarding] the inflation, as David illustrated, it's much less than expected. So in every respect, I think it's a good news story compared to where we were 18 or 24 months ago. On the impact of the current market conditions on Wealth Management, I mean, clearly, it's something we monitor closely, and we see -- you see that in our language, we always say when we talk about markets, our more market-dependent activities. So we're never saying that Wealth Management is not market-dependent. It is to a certain extent. But the beauty of the platform we have is that it is well-diversified geographically and by type of clients. And that gives it a lot of resilience in any market scenario. The other thing is that the ultra high net worth are very attractive clientele from that respect because you find that they do different things at different points in the cycle, but they always do something. So you've a broad enough platform that allows you to do well for the cycle. And so far, we have seen no impact of -- no impact in terms of leverage yet. That is something we're looking at closely. We've seen a bit of deleveraging in Asia in Q4, to be fair. But other than that -- and it was mostly profit taking more than deleveraging. To be fair, we are not seeing that at all. Actually, what we're seeing with ITS, as we pointed out in Q1, is that the penetration is increasing and their appetite for structured products is actually quite strong at this point in the cycle, changes in the cycle. So short answer is yes. So far, so far, no major impact.

The next question comes from the line of Andrew Coombs from Citi.

Three quick questions, please. One on tax, one on the market outlook commentary, and then finally, on net new money. Starting with the tax, your previous guidance was for a 28% tax rate post the U.S. tax changes. Could you just confirm what your tax rate guidance is now? I'd assume it's in the low 20s? And further to that the 100 basis points of RoTE uplift that you've mentioned. Is that just from the lower tax rate? Or does that encompass the 2 billion lower tangible equity following the DTA write-down as well? So that's tax. On the markets, up 10% year-on-year for Global Markets first 6 weeks. You said notably equity derivatives. So is it fair to assume that equity is even stronger than that and FICC a little lower? And then finally, on net new money, I just wanted to ask about the Asia net new money number in Q4. If you strip out the cross-border effects, it does look like it's down year-on-year in Q4. So I just wanted to say if there's anything to read into that or it's just a bit lumpy.

Okay. Thank you. Thank you, Andrew.

So just on the tax rate, what we said as you rightly say is that once we completed the exit from the SRU and also which does include the maturing of the legacy Basel II instruments that I know we talked about in the past. We did say, as you say, that we expect the tax rate to drop to 28%, and that would be in 2019. And then provided that we're not in BEAT, you're correct. We would expect the tax rate to be down at the 23% to 24% level in 2019. Just to be clear on 2018, we still have those legacy costs and they have very limited tax recoverability. So the tax rate would have been before the tax reforms something in the mid-30s, and this will now drop it down into the low 30s as a consequence of the U.S. corporate tax rate. And as I said before, that is on the presumption that we're not subject to BEAT. And as I said in the call, at this point, our assessment is it's more likely than not. We will not be subject to BEAT. If you think about the return on tangible equity benefit, yes, the return would exceed the benefit for us not being in BEAT and benefiting from the U.S. corporate tax returns and not including the benefit to corporate activity is at least 100 basis points, and that reflects both the benefit to the numerator in terms of the high net interest income and the benefit to the denominator in terms of the reduced tangible equity following the DTA write-down.

Yes, okay? That okay, Andrew, on that one?

Very clear.

So now, market, I think you are asking kind of a breakdown, yes, within the 10% for equity derivatives and fixed income. I think I can give you direction. As we said, it is essentially more than 10% of revenue up, and equity derivatives is effectively stronger than fixed income. Fixed income is positive, which is pleasing, and within that, Securitized Products is doing very well, continuing to do very well, and equity derivatives really a major rebound. I think there Brian and Michael Stewart timed it well, the number of strategic hires they made and the investments we made in '17 were costly, but very, very well-timed. And we were in position to benefit from the upturn. But then, again, we're cautious. It's good for the 6 weeks that markets are, as we said, we have a cautious short-term outlook. But so far so good. [NNA], you're right. Maybe I'll step back from this. I'm always bit hesitant to overcomment on quarterly NNA movement. And you've seen the strategy, we've given PTI targets. We drive the business for PTI and return on capital. We've never given margins targets and/or NNA targets because my issue is they can lead you to do a wrong thing in trying to attain them. For instance, if you're overfocused on margins, you can slow down your year-end growth because it's just a way to boost your margin or as we're in the business of generating maximum amount of absolute PTI, not the margin. And NNA, it's the same thing. If you -- it's actually not that difficult to steer NNA if you're not too worried about quality. We have a very stringent process to define AUM. That's something we should talk about more. Likely to talk about it more in the coming quarters because it will be nice if the disclosures of banks allowed you to compare apples-to-apples. We have an internal process that is independent to decree that an AUC is an AUM. It's independent from the business. It's completely rigorous. It goes to the Audit Committee. So our AUM are really Ms, very managed. So you can be confident that our AUM is going to turn into profit. I'm sorry. It's a long preamble, but I think it's important. From what we know from our practices, for instance, we cap -- for benefits we can take in NNA from lending. We capped it to 1/3. We know of peers who've taken 100% benefit. I mean, we know who they are. So that makes NNA very hard to compare between 2 companies. So we're happy with the NNA we achieved, considering one thing I did mention, there was some deleveraging in Asia. So you saw that going. So it was profit taking really more than deleveraging. And we've seen some outflows. Regularization was minimal. It was mostly AUI driven but minimal. But overall, you have to look at the year really. I have said to be measured on the yearly performance. Quarter-to-quarter is very, very difficult. It depends on too many things. And we think if you've got the plans going forward, we're targeting a similar level of NNA every year for the next 3 years.

Our next question comes from the line of Daniele Brupbacher from UBS.

Can I briefly ask about the 2018 targets, particularly for SUB and IWM? I mean, those targets obviously imply pretty strong profit growth. And I was just wondering how you think about structural growth possibilities of those businesses beyond 2018? And then, for example, particularly in the SUB that you still think you can grow that from even double-digit or so. That will be just interesting to hear. And probably in that context for SUB, rate sensitivity. I think in the past, you were guiding for a situation that if negative rates were to be removed in Switzerland, this could even be negative in the first phase. If you could just elaborate a little bit on this. And then a technical question, risk density. I mean, obviously, the minimum regulatory levels imply a 35% risk density. If I very simplistically add 40 billion to your Q4 RWA. Your risk density is somewhere probably around 34%. How important is risk density for you? And do you think the regulator is still focused on this as a sort of -- as a threshold where RWA becomes finding again? How important is this?

Thank you. Thank you, Daniele. Good morning, again. The 2018 targets, maybe a few comments. We talked about the benefits of the cost cutting, if you wish. What you see in the past numbers, it's kind of an average cost, which is actually quite high in '17. As you -- this is why I talked about the run rate. When you get into '18, I'm thinking about [SUB here], you get a big benefit from the progress made in costs in your previous years. So that helps you in earnings. And really, we had 1.9, we look at 2.3, so you need kind of 400 more, and we split it between revenue and costs. I don't want to give too precise a split, but it implies another step down in cost reduction. I think we gave guidance at the Investor Day on SUB. We talked about kind of 200 million in the billion we have to generate in '18, and we need to increase revenue. And that's an area where Thomas and his team are very focused. I talked about the entrepreneur strategy, and I visited some of those centers in the Swiss regions, and they are doing well. The numbers and progression is good. Some of the NNA you see -- you saw that the NNA in '17 was 4.7 billion. It was the best since 2014. So it's a big recovery in NNA and drives profitability. And we are also working much more closely with ITS. The revenues were depressed in '17 with ITS. We have an upside there, which is quite significant. And Thomas is working getting ITS to work more closely with his Wealth Management teams. So really, look, it's -- if it was certain it wouldn't be interesting. It requires a degree of work. It's ambitious. But from 1.9, 2.3 seems less unattainable than from 1.5, which is where when we started all this. So I think we're really making good progress. So beyond '18, I think you really will need to think about it more in terms of return on capital. I think we will have, if we hit our target, we will have achieved the return on capital, which we believe is very attractive in the industry's context, and we'll run the business to preserve that. IWM is a different story because IWM has a depending on how you count, but let's call it 40% to 45% overall GDP. That's a lot. So it's a big opportunity, and it's not diminishing Basel merit, but it's -- I don't see any reason why they would stop at 1.8 and wouldn't continue to grow. The opportunities are huge. The synergies between Asset Management and the other businesses are huge. And frankly, if you're any CEO, if you have a business that's returning 29% on capital, you want it to grow because I can allocate dynamically any additional unit of capital to that and generate returns that you cannot get in the classical economy. Then, if that's okay on that, Daniele, we [are in a] rate-sensitivity in the Swiss Universal Bank, yes?

So, yes, I think -- this is I think probably a supplementary to my comments before in terms of net interest income sensitivity. As I said, we expect to benefit from the current curve of around 200 million per annum in each year over the next 3. So '18, '19 and '20. And as I -- I think I said that IWM is the Wealth Management division don't have the greatest benefits there because it has the greatest dollar and euro sensitivity. Now in Switzerland, you're commenting really around when does the Swiss National Bank choose to actually move back from negative interest rates back to 0 territory and presumably positive rates in due course. And I think an expectation at that point that the benefits that we get in terms of that minus 75 basis points from HQLA would actually reduce. I think that's why, basically, if we think about the progression over the next 3 years, I mean, if I look at the Swiss Universal Bank, the Swiss Universal Bank will have some benefit from our central treasury numbers as a consequence of that pickup in the curve. But that is then, as you say, offset by the progression around the SNB reduction, and that's why the benefit to SUB is less than the benefit to IWM, for example. But I think we would expect to be able to offset the -- any impact from the SNB move as and when it comes in terms of our overall NII for the division.

Risk density?

Yes. Risk density. So yes, I think if you take current RWA 271 billion plus 35 to 40, as you say, you get to something around the 34% risk density in 2022 plus, minus. Now so you're just short at that point of the 35% threshold, which is embedded in the TBTF 2 requirements. So I would guess, basically, we will reach 35% risk density shortly there afterwards as the Basel IV issues sort of come in. Is this important to the FINMA? I think it's always been a core principle of TBTF 2. They did want to calibrate their rules to 35%, and I'm not sure basically I'd expect anything different from that at this point.

Our next question comes from the line of Andrew Stimpson from Bank of America.

Guys, 2 questions. The first one is the extra volatility that was seen year-to-date, I think it's probably fair to say you might see more demand to your balance sheet or maybe more trades to be on risk than last year, I suspect. But the Global Markets division is already up against its USD 290 billion leverage target or limit or guidance that you've given to us. You -- is it fair to say you will be able to capture the benefits of that extra volatility? Or will some of those balance sheet limits, you set yourself, maybe limit the upside you can get there? And then the second question is on these pre-IPO gains and the loan recoveries. I know you had some loan recoveries in 4Q '16 as all. So is that a 4Q thing that we should sort of half expect to happen more often? And are those pre-IPO gains is that a normal part of what you do? Or is that really a one-off there?

So I think on the first point, I mean, it's not per se leverage that is the primary constraint in terms of volatility. It would be risk-weighted asset utilization. And I think it's very important. I mean I think a core part of Brian's strategy for Global Markets has been to strengthen our equity derivatives business. And you've seen both the key recruitments we've made there, but also I think as importantly, the ITS joint venture with the Swiss Universal Bank and IWM because that structurally improves the profitability of this business. And I think that does lead to a Global Markets business, which is well balanced then between a strengthening Equities business and our continued strong performance in credit and Securitized Products. So I think, clearly for us, essentially we'll have to look at the balance between those businesses. It feels a good and a better balance in terms of what we've seen in the first 6 weeks because not only we've seen resilience in the SP and credit side, but we've also seen it on the derivative side. But yes, it is -- it will be a constraint, but it's how we actually balance within that, and I think that's always been a core part of our strategy.

Yes, Good morning, Andrew. I can also add to that. There's also the way we manage capital across the group, and that's true of any of the businesses. What you do then is you make your capital work harder and turn faster, okay? It's not just a question of how much capital there is. Velocity is very important. This, when we have our internal capital allocation committee, we absolutely look at velocity in how we allocate the capital, and actually, GM is a high-velocity business, and we're very good at being nimble and redistributing risk and make the capital work harder. So what you should expect is that there are more opportunities to do that. What Brian will tell me is that, you have the bid offer will be wider. So it's not necessarily about to make more money, you put more capital at work, okay? And that's what we've seen in this market. So I think we -- at this point, the pressure will be to do more with the same amount of capital. And we think we can participate. Every indication we have is that -- that's also positive of having quite a focused strategy. Where we compete, we are very good, which allows us to be discriminating and to generate very, very, very attractive return on the margin and rate of capital at this point. So no, we don't see it as a constraint. Asia, I don't think it's a seasonal feature. I mean, it's just kind of coincidence. We did have a large one in Q4 '16 and another large one in Q4 '17. But I don't think we should expect that as a regular feature. But that said, one-offs are part of our model and they come regularly. So it's a bit hard to describe regular one-offs, but it's really what we are dealing with because in our focus on entrepreneurs, those pre-IPO situations will come again and again. And the one we had this year was extremely attractive. I mean, the returns were just really, really attractive. And there will be a few of those from time to time.

I mean, I think -- to Tidjane's point, I mean, it's -- the bank for entrepreneurs is deeply entrenched as a core part of what we're actually trying to do in Asia Pacific. That means we actually work. We [haven't] co-invested with our clients. It's part of how we actually choose to support them. And that does lead to gains such as this.

And I have to say that the amount of co-investment is capped before anybody worries. And it's not a large amount. But the returns it's been generating are very, very, very attractive.

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

So first of all, obviously, well done on how the year ended and the operational turnaround. I guess, on these calls, you always focus more on the outstanding issues. So I have 3 questions. So firstly, it's very encouraging to hear that Credit Suisse believes that you will be outside of the scope when it comes to the U.S. tax reform and the BEAT provision. And I was just wondering whether that statement is based on your expectation that you can reach that you can structure the U.S. entity in a way that allows you to go down the 2% exemption routes? Or do you expect further clarification from the U.S. authorities on the topic? So that's question #1. Question #2, which relates to your markets operation. So first of all, thanks for the guidance. I think you're the only global investment bank to have provided it so far this year. I was just wondering -- so certainly I understand the positive guidance on equities, struggle more on the fixed income side of the equation for Credit Suisse, one would have thought that the current operating conditions are more supportive of a macro franchise rather than a micro franchise. So is it possible to get an insight how, in a world of rising yields and rising rates, securitization still does well, particularly, I guess, compared to Q1 last year which was a very strong year? And finally, a question on XIV. Do you expect there to be -- whether with merit or without merit, but do you expect there to be some sort of a litigation risk following on from the unwind of that vehicle?

Okay. Well, thank you, Jernej, and thank you for your kind words. This is much appreciated in the [trenches] here. Thank you. BEAT?

Thank you. Yes. So Jernej, I think when -- what we're saying at this point is on the basis of what's included in the U.S. tax reform bill is that we are more likely than not, not to be subject to BEAT. Now that means that on the basis of the current rules, we will be within the safe harbor provisions. So therefore, we do not suffer BEAT at that point. So I'm not relying on further guidance to come out to take us out of it. On the basis, our current calculations around BEAT deductibles against total deductibles and our BEAT exposure, we qualify for the safe harbor exemption. The caveat, obviously, I've said more likely than not, is clearly we would expect to see further guidance from the U.S. Treasury, in particular, and potentially from the IRS, too, later this year, potentially even in early next year as they actually build out the tax bill. So I can't rule out that the rules change basically in the course of next 12 to 15 months. And that's clearly a risk factor. But at this point, our calculations is that we do account for the safe harbor rules.

Okay. You then you had a question on market guidance. And I mean, it'd be bit of a long answer, we've a lot of comments to make here. I've commented today on -- starting with equities on the investment we made in equities derivatives, how we were well-timed. We made some real notable recruitments and that's really paying off. In prime, we have a very sticky client base and we continue to focus on deploying the balance sheet to really our core clients and that has been continuously improving the return on assets, and we think that's going to continue. The cost discipline, the reengineering, et cetera, it continues in equities too. So all that, we think, is positive. Now if you look at the credit business. First thing I'll say is that we have lowered the volatility. When we reduce risk, when we [exited] distressed and resized the capital footprint, we have a very capital and cost-efficient business. We focus on kind of the core liquid and more annuity-like product, which is something we talked about at the Investor Day, kind of transparent flow cash and credit derivatives, structured notes, [liquid] alternatives and structured lending but against liquid collateral. So we believe that in credit, we can withstand a downturn. We have also higher operating leverage, I think, as we mentioned earlier, and we're less exposed to market movements due to the resizing as we carry less inventory. That has been helpful in these markets. And if you look at the loans franchise, we are, I believe, #2 in the U.S. We have a floating rate product. And it's a kind of interest rate hedge in the rising rate environment, and that positively impacts new loan [insurance]. And if you combine that with the uplift in secondary trading that you get from the rising environment and rising volatility, we can mitigate, I think, any lower high-yield insurance, which we haven't seen yet because so far, high yield has held up and spreads have not moved in this market. And finally, Securitized Products, a very interesting point because in that, a lot of credit goes to Brian because he did it. When he was there, it's -- we've transformed the business so when it's really very good going through the cycle, and it went from a purely trading business to a really integrated asset financing and trading model, which is much more resilient. The business is less risky as we showed in the reduction in VaR. Earnings' volatility is lower. We are very well known and trusted in that space, very, very strong relationships and clients come to us. And finally, SP is a high-velocity business. And I talked about that earlier and that impacts the Global Markets numbers. And as rates rise, we're able to reprice the financing book. So in full year '17, some numbers here. We're book runner on 108 issues. That's an enormous amount of activity. We have a notional value of 27 billion. So that's a 10.4% market share. And the #1 rank in the U.S. If you put all of that together, given the footprint of our business, the way we've gone through cycles before and the lessons we've learned from that and the restructuring done in the last 2 years, we think that we're reasonably well-placed in this cycle. XIV? I'm only hesitating because it's not in my gift to predict whether there will be a litigation against us or not. What I can say is that the we -- the [literature] is very clear. As I said, it's a product launched in 2010 mostly. That's been in the news. It's been around for 8 years. It's very well known. The prospect you see is extremely clear. I mean, I had to read it myself. It says things like your ETN has zero long-term value. That's in the prospectus. It says things that like if you invest for more than 1 day, you're likely to lose all or substantial portion of your investment. I know it by heart now. That's what it says. And it's a 1-day trading tool. So we believe that the disclosures made and the kind of role we've played, which is really to be a manufacturer who mostly interact with market makers, we service the market makers. We're not involved in the distribution of these to a third party, leaves us in a reasonable position.

Okay. This is great. Can I just circle back for one second on the U.S. tax and the BEAT provision. So if I understood this correctly, so Credit Suisse expect that you will get the benefit of the lower U.S. corporate tax rate unless there are changes to the BEAT provisions that you currently don't anticipate. Is that what you were trying to say?

Yes. That's what I was trying to say, yes. Or it is more likely than not, that that is the case.

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 for joining today's call. You may all disconnect.