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Executives

Caroline Stewart

Sergio P. Ermotti - Chief Executive Officer and Member of Group Executive Board

Thomas Naratil - Chief Financial Officer and Member of Executive Board

Analysts

Huw Van Steenis - Morgan Stanley, Research Division

Derek De Vries - BofA Merrill Lynch, Research Division

Jon Peace - Nomura Securities Co. Ltd., Research Division

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Kinner R. Lakhani - Citigroup Inc, Research Division

Matt Spick - Deutsche Bank AG, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

UBS AG (UBS) Q4 2012 Earnings Call February 5, 2013 3:00 AM ET

Caroline Stewart

Good morning, and welcome to our fourth quarter results presentation. This morning, our CEO, Sergio Ermotti, will present the highlights of our full year results. Then our CFO, Tom Naratil, will present our fourth quarter results in detail. We'll then be very happy to take your questions, and we'd like to take questions from the telephone first. After that, we'll take questions from the room.

Before I hand over to Sergio, I'd like to draw your attention to this slide, which contains our cautionary statement with regard to forward-looking statements, and I'd ask you to read it carefully. Now let me hand over to Sergio.

Sergio P. Ermotti

Thank you, Caroline, and thank you for joining us. 2012 was another challenging year for the banking industry and one where we had to address our own challenges. Weak macroeconomic conditions and geopolitical issues affected clients' confidence despite equity markets performing well. But our employees met these challenges by maintaining their focus and commitment to our clients, and I want to thank them for their efforts during 2012.

In 2012, we made substantial progress towards achieving our strategic objectives on capital, costs and operational risk control. At the same time, we made a solid progress across our business divisions and our strategic transformation. On capital, we exceeded our targets for risk-weighted asset reduction and strengthened our industry-leading capital ratios. On cost, we are making headway with our efficiency programs. And on operational risk, we also continued to strengthen risk controls, as well as remediating legacy issues and addressing the missteps of the past. We also demonstrated what can we do through hard work and execution of a forward-looking strategy. Based on these achievements, particularly in relation to capital, and as a sign of our confidence, we are recommending a 50% increase in our dividend for 2012. Our progress on balance sheet reduction has also allowed us to launch a tender offer to repurchase debt of up to approximately CHF 5 billion. This program will help lower our funding cost in the future, and Tom will discuss in more details later.

Our strategy is a journey that we set out on just over a year ago. And in October last year, we announced an acceleration in the transformation of the Investment Bank and further cost reduction across the group. We are reshaping our business to better serve clients, deliver more sustainable performance, reduce risk and enhance value and returns to our shareholders. Our strategy has been well received by our clients, shareholders and bondholders, and we are pleased with the strong share performance since with -- in absolute and relative terms.

Overall in 2012, we recorded a net loss of CHF 2.5 billion, driven by goodwill impairment and restructuring cost, as we executed our accelerated strategy. We also incurred significant legal and regulatory cost, as well as material own credit losses. For the fourth quarter, we reported a net loss of CHF 1.9 billion, which included CHF 2.1 billion of expenses related to litigation, regulatory and similar matters. As you're aware, we also resolved a number of LIBOR-related matters in the quarter. This experience is a stark reminder of what can happen if we fail to maintain the highest ethical standards in our business. As our regulators noted, we have already made significant progress to strengthen our operational risk controls. I'm firmly committed to ensuring that we continue to put our reputation and risk control first everyday and in everything we do. The implementation of our accelerated strategy will allow us to unlock the full potential of our franchise. In 2013, we will use the achievements of the past year and continue to decisively execute on our plans.

On capital, we continue to make excellent progress, adding 460 basis points to our phase-in Basel III common equity Tier 1 ratio. Our fully applied ratio stood at 9.8% at year-end, with the 2019 Swiss regulatory requirements of 10% now within striking distance. We achieved this by reducing Basel III risk-weighted assets by over CHF 120 billion, including over CHF 80 billion from the Investment Bank. We also made good progress in reducing our funded balance sheet down almost CHF 90 billion, mostly from the Investment Bank. On costs, our underlying program is good, with CHF 1.4 billion of net savings delivered since the summer of 2011. Our industry-leading capital position continues to be a source of competitive strength. It has allowed us to restore and improve client confidence while we execute our strategy and address the past issues. At the same time, it has allowed us to increase capital returns. In 2013, we aim to strengthen this position even further in line with our plans.

Our Wealth Management businesses continued to perform well in 2012 despite unusually high client risk aversion. Overall, profits increased and net new money inflows accelerated to CHF 47 billion, reflecting the efforts of our advisors in bringing the best ideas, advice and execution to clients across UBS. It also -- it is also clear signs of the trust of our clients continue to place in us. Wealth Management Americas had its most profitable year since we acquired Paine Webber. Our financial advisor productivity also reached an all-time high, and we attracted very strong net new money. Our strategy here is working, and the team has done an excellent job in turning this business around. For our Wealth Management businesses outside the Americas, we saw an acceleration of net new money driven by continued strong performances in APAC, emerging markets and ultrahigh net worth individuals. Growth in these areas affected our margins, but low activity and client confidence, record high cash balances throughout the year and falling interest margins were also important factors. A recovering confidence, activity levels and interest rates are needed if we are to see this business deliver margins within its target range. But regardless of markets, our clients' needs remain at the center of everything we do.

In our own market, Switzerland, we continue to win back market share and deliver solid profits. In a mature business operating in a strong but low-growth economy, we reported net new business volume growth of almost 5%. Deposit inflows totaled CHF 14 billion, and we saw the highest net new client inflows from retail clients since 2001. While clients have been critical of our past missteps, this is a clear sign of their loyalty and growing confidence in UBS. We are also making sizable investment to support our strategy. We had great success in refurbishing branches as we have seen a 25% increase in new customers in these locations. We also invested in our community, with over 80,000 children enjoying our Kids Club events and almost 0.5 million people benefiting from our partnership with Swiss tourism. I'm very proud of the achievements here in Switzerland, and I'm convinced that the benefits of our investments will increasingly be recognized not only by our employees, clients and shareholders, but also by all other stakeholders in Switzerland.

In Global Asset Management, we delivered stronger investment returns to our clients with profits up almost 20%. Our fixed income and alternative businesses continued to deliver excellent performance, and over 60% of our collected funds showed first or second quartile performance.

In the Investment Bank, 2012 was a year of significant change and we made real progress in a number of critical areas. Risk-weighted assets are down over CHF 80 billion. Our balance sheet is over CHF 200 billion smaller, and we have 1,100 fewer staff. In the core IB -- the core IB also outperformed its full year risk-weighted assets operating with the Basel III risk-weighted asset of CHF 64 billion, so within the targets that we set of CHF 70 billion for this business. Despite this sharp reduction in resources, our staff continue to put our clients first, which is evident in the results they deliver. In IBD, revenues were up over 16% as we gained share in equity and debt capital markets and globally -- and global-syndicated finance. In cash equities, we increased exchange market share in EMEA, particularly on alternative trading platforms, and also across APAC. In FX, we invested to sustain our leading position, and our cutting-edge e-trading systems enabled us to grow volumes significantly while overall market volumes declined. Our rates businesses delivered a steady performance and created a good year with revenues up 27%. We are on track with the transformation of the Investment Bank. The changes in the IB strategy have been very well received by clients. In Wealth Management, our clients recognize the value of the services and the execution provided by our Investment Bank. Our corporate and institutional clients have also embraced the changes, and since then -- since the announcement, they have continued to reward us from -- for our long-term commitment.

As part of our commitment to deliver sustainable performance, we have further aligned our compensation programs to pay for appropriate performance and ensure we can continue to attract and retain top talent. We have made a number of significant changes. For example, we have extended vesting periods and multi-year performance conditions. We had introduced a new deferred compensation plan, which broadly replicates the future of UBS loss-absorbing capital we issued to external investors in 2012 but at a higher trigger set at 7%. This plan counts towards our total Basel III "too big to fail" capital, and awards in this plan will take losses ahead of our low-trigger notes. And finally, we have also reduced the immediate 1-year cash cap for individuals by 50%. Taken together, these changes are another important steps toward ensuring that compensation is better aligned to medium- and long-term performance and our shareholders' interest. I believe they will create the right reward for those who execute our strategy effectively and efficiently and deliver attractive and sustainable returns to our shareholders.

In 2012, we focused and made significant progress on 3 key objectives: capital, cost and operational risk remediation. But we have more work to do, and these objectives are just as relevant for the next stage of our journey. Each milestone we reach frees up more time and energy to focus on reinvigorating our growth and our businesses and improving our performance.

As for 2013, markets have performed very strongly in January, but we all see what happened in the first couple of days in February. Therefore, we need to remain realistic. The global economy is still fragile, and many important economic and structural issues remain unresolved. We are focusing on what we can control. And while we would welcome any tailwind, we are not counting on them for our execution. We are determined to achieve the targets we outlined in October, and I'm confident that clients and our investors and shareholders will continue to recognize our efforts.

Now I hand over to Tom, and then we will come back after the presentation on the Q4 details for Q&A. Many thanks.

Thomas Naratil

Thank you, Sergio, and good morning, everyone. As Sergio noted, for the fourth quarter, we reported a net loss attributable to shareholders of CHF 1.9 billion and adjusted pretax loss of CHF 1.2 billion. These results include CHF 2.1 billion of expenses related to litigation, regulatory and similar matters. Despite the headline losses, our businesses continue to make progress in the execution of our objectives, and the accelerated implementation of our strategy is on track. Our capital ratios remain the best in our peer group, and we strengthened them further in the quarter as we continued to reduce risk-weighted assets. This is the last time we'll report Basel 2.5 capital ratios. But as we say farewell to them, we note that we ended this era with Basel 2.5 -- with a Basel 2.5 Tier 1 capital ratio of 21.3%. Balance sheet reduction in the quarter was significant. Lower funding needs will allow us to buy back debt. And today, we announced tender offers to repurchase up to approximately CHF 5 billion of senior unsecured debt.

Several of our business divisions performed well in the quarter. Wealth Management Americas reported strong pretax results and very strong net new money. Retail & Corporate's performance remained resilient, and we continue to gain -- to regain market share with net new business volume growth of over 4%. Global Asset Management also did well, with improved investment performance and higher pretax profits. Our Investment Bank made good progress on its restructuring, reducing Basel III RWAs by 19%, funded balance sheet by CHF 72 billion and headcount by approximately 800 positions. In Wealth Management, we continue to see strong net new money growth in our focus areas of APAC, emerging markets and the ultrahigh net worth segment.

Concerns around the U.S. fiscal cliff were at the forefront of our clients' minds in the fourth quarter and led to an overall reduction in activity levels across our businesses. Despite this, equity markets rallied in the second half of the quarter, albeit on relatively low volumes. The franc remained stable against the euro while appreciated against the U.S. dollar and the British pound, generating foreign currency translation losses in other comprehensive income. Our CDS spreads tightened during the quarter, continuing the trend seen in the third quarter and leading to own credit losses of CHF 414 million.

Our adjusted pretax loss of CHF 1.2 billion in the fourth quarter excludes the own credit loss and restructuring charges. We reported restructuring charges of CHF 258 million versus the expected CHF 500 million we announced in December. The variance is mainly driven by the Investment Bank, where voluntary levers replaced redundancies or were delayed to later quarters. Average cost per redundancy was also lower than expected, and we also deferred some redundancies in Wealth Management until the first quarter. The total restructuring charges booked in the fourth quarter represent notifications of 1,900 redundancies.

Throughout the remainder of this presentation, I'll refer to adjusted figures. The adjusted results do not exclude legal provisions and expenses totaling CHF 2.1 billion nor the U.K. bank levy of CHF 124 million.

Despite a loss in the quarter, we posted a tax expense of CHF 66 million, and we've concluded the year with an effective tax rate of negative 26%. Following the acceleration of our strategy, including associated restructuring costs, we expect our tax rate to be in the region of 25% to 30% for the first half of 2013 as non-core and legacy losses that may be incurred in some entities may not be eligible for a tax benefit. Also, the full year 2013 tax rate may depend on the extent to which deferred tax assets are revalued during the year and on other adjustments affecting Swiss taxable profits.

Wealth Management's pretax profit was CHF 415 million, down from the third quarter, reflecting both lower revenues and higher expenses. Revenues declined as a result of lower client activity levels and net interest income, resulting from the continuing low interest rate environment. Expenses increased, driven by several factors, including the absence of onetime credits that benefited the third quarter. General and administrative expenses included higher provisions for legal and regulatory matters and higher cost for marketing and communication. Net new money was positive with faster growth in the emerging markets, another strong performance in APAC and continued growth in ultrahigh net worth. Europe recorded an increase in outflows as clients responded to the developments surrounding the Swiss-German tax treaty in December.

The gross margin declined to 85 basis points as revenues declined and average assets increased slightly. These margins remained outside our 95- to 105-basis-point target range. Client risk aversion and the resulting low trading activity, increasing preference for advisory over discretionary mandates, persistently high levels of cash in our clients' portfolios and interest rates that remain stubbornly low are all putting pressure on gross margins. As we've indicated, material improvements to economic and geopolitical issues will be necessary for a meaningful improvement in client sentiment and engagement. We should reach our target range when market conditions improve.

This slide provides greater detail on the regional trends that are driving our Wealth Management results. For Wealth Management as a whole, annualized net new money growth was 1.2% for the quarter, which is below our target range, and 3.5% for the year, which is within our range. Emerging markets, APAC and the ultrahigh net worth segment should improve net new money growth. In Europe, we saw increased outflows from our offshore business, and we expect this to continue in the coming quarters. We also saw slight outflows in Wealth Management Switzerland after 3 consecutive quarters of net new money growth. In terms of gross margin, the factors that I previously mentioned affected all regions although not to the same extent. APAC was more affected by lower transactional and trading activity, including lower revenues from fund fees, as well as structured products. Switzerland felt a greater impact from the ongoing interest margin pressure on deposits, as well as lower recurring fees and lower activity in FX. Improvements in our net interest margin require better global growth than we experienced currently.

Wealth Management Americas recorded a pretax profit of $290 million and a record profit of $872 million for the full year. And as Sergio mentioned, it was the most profitable year for this business since UBS acquired Paine Webber in 2000. Revenues beat last quarter's record by 7%, driven by strong recurring income, which included higher mutual fund and annuities fees resulting from a change in accounting estimates and higher net interest partly offset by lower realized gains from the available-for-sale portfolio. The net credit loss expense was $16 million, solely attributable to our securities-based lending business compared with the recovery of $2 million in the third quarter. We continue to make progress on our banking and lending initiatives, recording 16% growth in average mortgage balances and 3% growth in securities-based lending. Expenses increased 9%, mostly due to higher litigation provisions. Net new money inflows were very strong at $8.8 billion, driven mostly by advisors with the firm for at least a year and benefited from large year-end liquidity events and other inflows related to U.S. fiscal cliff concerns. Including dividends and interest, net new money increased to $16.7 billion due to larger seasonal dividend payments in December. Advisor headcount remained broadly stable, around 7,000, which is the upper end of our target range. We reported new all-time highs in our key advisor productivity metrics, with annualized revenue per advisor surpassing the $1 million mark.

In the Investment Bank, we made an excellent start, implementing the accelerated strategy we announced in October. Once again, we were very successful in reducing Basel III RWAs, and we achieved a reduction of CHF 31 billion, mostly in credit and rates in FICC. These actions also led to a reduction in FICC revenues, which, in light of the exceptional RWA reduction, was a good performance overall. The Investment Bank reduced its funded balance sheet by approximately CHF 72 billion. Average VaR decreased further to CHF 23 million and ended the quarter with just CHF 15 million, which is seasonally low in our view. Headcount declined by approximately 800, and we recorded CHF 224 million in restructuring costs. Excluding these costs, we recorded -- we reported a pretax loss of CHF 333 million on revenues of nearly CHF 1.7 billion.

IBD revenues improved meaningfully, and it recorded its best quarter in 2012. Advisory revenues were up 8%, and we participated in 3 of the top 10 announced global M&A transactions. Equity capital markets performed well, with a 12% revenue increase, with a particularly strong quarter in APAC, where we ranked #1 in fees. Fixed income capital markets revenues improved on stronger performance on leveraged capital markets, where revenues almost doubled. This improvement was partly offset by a decline in debt capital markets fees as we concentrated our efforts on target markets and products in line with our strategy. In the Americas, global industrials, financial institutions, energy and real estate each had a strong quarter, aided by continued good performance in wealth-management-driven products, such as Master Limited Partnerships in energy and closed-end funds in FIG. In EMEA, we saw strong performances from media and telecoms, FIG, infrastructure and GIG. In APAC, we continue to enjoy a leading market share in the high-margin areas of high-yield and equity capital markets, as well as connecting strategic capital across geographic borders. Our franchise and strategy continues to attract top-tier talent, and our investments in energy and FIG paid off as they both showed significant growth versus the prior year. It was a slow quarter in the industry for equities with low volatility and low market volumes. Despite the environment, cash equities revenues increased sequentially on stable client activity and improved trading, particularly in EMEA and APAC. Our derivatives business suffered trading losses, following high market volatility in Japan. Revenues in prime services decreased despite increased balances as funding revenues declined on lower spreads. Our plans to reduce the scope of activities in credit and rates led to an expected reduction in FICC revenues. In addition, there was a CHF 170 million increase in negative debit valuation adjustments as our credit spreads tightened. In macro, FX revenues increased marginally due to an improved precious metals performance, while revenues in commodities benefited from a onetime gain of CHF 88 million on the sale of an equity investment. Revenues in rates declined significantly as a result of our focusing and reshaping of that business. Credit performed well despite an expected drop in flow trading and structured credit revenues as we reduced risk-weighted assets in those businesses, and it benefited from a solid quarter in real estate financing and corporate lending.

The pro forma information shown on this slide reflects the estimated full year financial performance for 2012 of the core Investment Bank and for the non-core activities we're exiting, as announced in October. At this point, these figures represent our best estimates of the historical performance of the Investment Banking business based on our new structure. We may refine these in our annual report for 2012 as we provide additional information, including quarterly breakdowns of the pro forma estimates. As you can see on the chart, we've separately identified treasury-related activities that in the past were managed by the Investment Bank on behalf of the group. In 2012, these activities generated approximately CHF 400 million of revenues and CHF 300 million of profits. During the quarter, we've centralized all of these activities into Group Treasury within our Corporate Center. At the same time, related repo activities were reduced significantly and will continue to be further reduced. As a result, the revenue contribution from these activities will decrease in the future. Consistent with our allocation of treasury revenues, business divisions other than the Investment Bank, most particularly Wealth Management, will see an increase in treasury revenues allocated to them.

Global Asset Management had a strong performance. Pretax profit improved by 30% to CHF 164 million on higher revenues, driven by global real estate and the alternative and quantitative business, as well as lower expenses. The cost income ratio improved to 67%. Investment performance was very good for the majority of our traditional strategies, and we had a particularly strong quarter for alternatives. We saw net new money outflows of CHF 3.3 billion. While strong performance has been a positive factor in third-party institutional net new money, it was outweighed by liquidity needs, portfolio realignment and general de-risking by Wealth Management and other wholesale clients.

Retail & Corporate's performance remained resilient, with a CHF 362 million pretax profit. Despite continued low interest rates in Switzerland, the business posted increased revenues, reflecting increased fees from corporate finance activities. We also saw an increase in credit loss expenses, as we raised provisions for a small number of workout cases, which was partly offset by a decline in our collective loan loss allowance. Expenses were higher mostly in the G&A line, including higher legal provisions for litigation, regulatory and similar matters. Net new business volume was again strong and above our target range, driven by growth in net new client assets from corporate and institutional clients and deposit inflows as we continue to regain share in our home market. As Sergio mentioned, our performance in the fourth quarter enabled us to achieve the highest net new client assets from retail customers since 2001.

Corporate Center - Core Functions reported a pretax loss of nearly CHF 1.5 billion, driven primarily by litigation provisions related to LIBOR. Reported operating income was a loss of CHF 271 million, driven by an own credit loss of CHF 414 million on the tightening of our credit spreads, partly offset by a CHF 112 million gain on the sale of properties in Switzerland and a hedged ineffectiveness gain of CHF 37 million. We've reduced Corporate Center headcount by approximately 1,000 in the past year and 6,000 since 2008. As we continue our efforts on our cost-reduction program, we expect restructuring charges for the group of approximately CHF 300 million in the first quarter.

Corporate Center legacy reported a loss of CHF 501 million, driven by litigation provisions related to mortgage-backed securities. We reported a CHF 91 million gain on the revaluation of the SNB StabFund option. Since the creation of our Legacy Portfolio announced at Investor Day in 2011, we've reduced Basel III RWAs from CHF 80 billion to CHF 38 billion, and the funded balance sheet declined by CHF 9 billion to CHF 20 billion.

Adjusting for currency fluctuations, we've achieved CHF 1.4 billion in run rate savings since we announced our original program in the summer of 2011 primarily through headcount reductions of approximately 3,100, which have resulted in lower personnel expenses. These savings, however, were more than offset by higher litigation and regulatory provisions. In view of the current regulatory and political climate affecting financial institutions and because we continue to be exposed to a number of claims and regulatory issues arising from the financial crisis of 2007 to 2009 and other matters, we expect associated charges to remain at elevated levels at least through 2013.

The performance awards pool for 2012 was CHF 2.5 billion. Following a decrease of almost 40% in 2011, partly to reflect the unauthorized trading incident, we reduced the pool in 2012 by an additional 7%. The IFRS expense for the performance year was CHF 1.7 billion, which excludes approximately CHF 800 million of deferred awards for 2012 as they'll be recognized in the future. Adding the expense for 2012 to the CHF 1.3 billion of amortization for prior year awards, we arrived at the 2012 IFRS expense of CHF 3 billion, which is 17% lower than 2011, excluding restructuring costs.

We reduced awards to be amortized in future periods by CHF 700 million or 31% year-over-year to CHF 1.5 billion. This reduction includes CHF 1.3 billion of awards for previous years amortized in 2012 and CHF 200 million of awards forfeited, partly offset by CHF 800 million in awards granted for the 2012 performance year. We expect to amortize CHF 600 million of the CHF 1.5 billion in unrecognized awards in 2013.

We reduced Basel III RWAs by CHF 43 billion in the quarter, closing the year at approximately CHF 258 billion. Since the third quarter of 2011, we've achieved a total reduction of 35%. I'd like to emphasize that 84% of the reduction has come from sales and exposure reduction.

At year end, the Investment Bank had CHF 131 billion of Basel III RWAs. In the first quarter, we transferred approximately CHF 67 billion of RWAs from the Investment Bank to the Corporate Center. On a pro forma basis as of year end, the Investment Bank non-core and legacy would have represented approximately CHF 105 billion, while the Investment Bank would have been CHF 64 billion, below our target of CHF 70 billion. Future RWAs will be impacted by FINMA's decision to apply a bank-specific multiplier for banks using the internal-ratings-based approach. This applies to new and renewed Swiss residential mortgages. The multiplier will be phased in over the next 7 years. Based on our current portfolio, we expect the multiplier to cause a CHF 2 billion to CHF 3 billion increase in RWAs for Retail & Corporate and Wealth Management combined for each year from 2013 through 2019.

We maintained our capital leadership and grew our ratios despite the quarterly loss and the negative CHF 900 million impact of IAS 19R and other adjustments to our capital calculations. Our Basel III common equity Tier 1 ratio stood at 15.3% on a phase-in basis and 9.8% on a fully applied basis at year end. In future quarters, we'll see volatility in our fully applied CET1 ratio as a result of IAS 19R-related movements. This quarter, we've accrued in our capital account for high-trigger loss-absorbing capital as part of our 2012 compensation programs. Over the next 5 years, we could build approximately 100 basis points of high-trigger loss-absorbing capital from these programs.

We reduced our funded balance sheet by CHF 76 billion in the quarter to approximately CHF 840 billion, about 1/3 of our overall targeted reduction. The remainder of the reduction will come from businesses we're exiting as our core Investment Bank already operates within its funded balance sheet target of less than CHF 200 billion. Our Basel III liquidity coverage and net stable funding ratios remain comfortably above minimum requirements. Our RWA and asset reductions give us more flexibility to accelerate the reduction of the liability side of our balance sheet as well.

This slide shows the list of outstanding preferred securities treated as hybrid Tier 1 capital. As you can see at the top of the table, the EUR 995 million issue has a first call date this April. As a result of our lower funding needs, we'll exercise our option to call this instrument on its first call date. We do not expect to attribute profits to noncontrolling interest in the first quarter, but we expect to attribute CHF 200 million of profits to preferred noteholders in the second quarter.

Today, we've announced cash tender offers to repurchase up to approximately CHF 5 billion of senior unsecured debt. You'll find more details about these offers in today's announcement. Our actions to prudently manage the composition of our liabilities will lower interest expense in the future. Please note these actions could lead to a tightening of our credit spreads and as a result, we could see significant own credit charges in the first quarter.

We made meaningful progress during the fourth quarter in the execution of our strategy by reducing RWAs and our balance sheet. In challenging markets, our businesses have performed well and the transformation of our Investment Bank is on track. These achievements and our confidence in the future have allowed us to propose a 50% increase in capital returns to our shareholders.

Thank you. Sergio and I will now take your questions.

Question-and-Answer Session

Unknown Analyst

[indiscernible] I have several questions. First of all, what happened in your Wealth Management unit in the fourth quarter? Yesterday, you just reported that the December was the best month in the entire year and you have net new money below expectations and margin decline and furthermore, concerning the money outflow from Western European countries. Is that due to the tax issue with Germany because Germany is the biggest country there? So perhaps you can elaborate a little bit on that. Second question concerns the bonus pool, perhaps observers might think that the reduction of 7% is a little bit disappointing and I've calculated that the compensation rate is, in 2012, about 57%. That's much higher than Deutsche Bank or your American peers. Perhaps you can elaborate on that, too.

Sergio P. Ermotti

Well, let me take the last questions and then Tom will take the Wealth Management one. I think that when we look at 2012, our people have worked extremely well in executing our strategy, both in terms of capital accretion, in terms of reducing cost and taking risk -- controlling risks. In many areas of our businesses, as we've just said, we achieved record profitabilities. Last year, our performance pool was down 40%, was affected by the unauthorized trading incident. So when we look at year-on-year performance, one has to look into this strategic and -- objectives that we achieved. The other very important point I have to say is that when you look at our compensation framework, we have introduced a more stringent conditions for -- to make sure that a big chunk of this compensation will be deferred over time and is subject to sustainable performance achievements. And last but not least, I think that's comparing our common ratio to the one of large commercial banks as like comparing apple with oranges. And I think that compensation framework, I do think, reflects the strategic objectives we have in place.

Thomas Naratil

So then on your question on the gross margin and activity levels in the fourth quarter in Wealth Management, so one thing that I think, looking at the gross margin development, that we need to take into account first is net interest margin. And we've made a choice specifically in our replication portfolios not to extend duration in a low interest rate environment in order to try to chase yield. And we think that's a better long-term decision for our shareholders, and we're taking a little short-term pressure on the net interest margin to preserve the capital of our shareholders when interest rates eventually rise again. Second, if you look at the activity levels of clients in 4Q, in particular, we saw a decline in transactional activity in the funds area in APAC and also in the structured product areas, primarily in FX-related structured products as implied volatilities dropped in the fourth quarter. And we also had the seasonal effects of the holiday period in the last 2 weeks of the year. As we look out in terms of the -- some of the comments that have been made about activity levels of retail investors potentially picking up as market levels rise, I think it's important for us to point out that there is -- that, that behavior does not necessarily correlate with what you see with Wealth Management clients, and that we found the high net worth and ultrahigh net worth clients, in making their portfolio, shifts from cash assets, wherein our advisory accounts in Wealth Management we have about 28% of our clients' money in cash today. That shift from cash to riskier asset classes will become a multi-year process, not a multi-quarter process. And further, it requires us to see better progress on the global fiscal issues in a number of countries.

Sergio P. Ermotti

Let's move to Huw Van Steenis on the phone.

Operator

Mr. Van Steenis, your line is open.

Huw Van Steenis - Morgan Stanley, Research Division

On your deleveraging, it strikes me you're about maybe 6 instead 9 months ahead of the target you put out. So I have 2 questions.

First, in terms of the CHF 5 billion, the senior bonds that you've highlighted today, I couldn't see the keysets of which particular securities you're buying back. Is there any indication you could give us of potential savings in net interest income? And obviously, is there a par or over par potential capital hit? And then secondly, with the acceleration in -- successful acceleration of rundown of risk-weighted assets, how did that govern the way you think about the dividend for this year and for next year and potential dividend increases?

Sergio P. Ermotti

On dividend yield, I think that's -- as we stated before, we will introduce progressive capital return policies. But the substantial steps will be done once we achieve our 13% target, which we still have in light -- in sight of delivering by the end of 2014. At that point in time, we have committed and we will commit to at least 50% capital returns policy. But between now and then, I think that it will be marginal. And Tom?

Thomas Naratil

Sure. I'll take that one. Thanks, Sergio. So, Huw, on the tender offer, we have details in the tender offers that we've put out in the various jurisdictions where they're active. If you look, there is -- first, there is a U.S. tender offer that's for a purchase of up to 2.5 billion across 7 note issues of senior unsecured securities. There is 12.6 billion in total outstandings in that pool. When we look at the European tender, it's for a cash tender of up to EUR 2.25 billion across another 7 issues of senior unsecured, where there's a total of 8.1 billion outstanding. I'm trying to calculate what we're going to say because obviously, a little question on how we're trying to anticipate investor behavior in each one of the issues. I would say the best way to think about it for us, we see it as neutral within the first 12 months of the year and something that has -- should have a range of roughly 4% to 4.5% payback over the life of the notes.

Operator

Next question from Mr. Derek De Vries, Bank of America.

Derek De Vries - BofA Merrill Lynch, Research Division

I have a couple of questions if you don't mind. First of all, on Wealth Management on the cost line, and fee revenues were down slightly on Q3, but your comp cost and your non-comp cost are both up with the non-comp being up pretty significantly even in distributing out restructuring charges. I was wondering if you can give us a little more color on that. Is that just seasonality? Or is there something sort of notable in there? And then I was also wondering if you can quantify the impact still in Wealth Management of moving the treasury out of the Investment Bank and reallocating it to the divisions, if you could give us the impact that, that will have on gross margin in basis points. And then just sort of related to the gross margin there, I saw you made a comment, Tom, on the -- on Bloomberg about not being overly concerned about the margin. Is that related to the treasury? Or is that just kind of in the long term, you think you'll get there? Or is there anything else that makes you not overly concerned despite the big miss versus your target there? And then just one last question, I guess, in the Investment Bank, you've now had 3 months to further sort of execute your strategy. I was wondering if you had any sort of shift in -- on the margin in terms of businesses that you were exiting or maintaining. And then, I guess, still in Investment Banking, on the VaR -- I'm sorry, not on the VaR, on the risk-weighted assets, the CHF 64 billion that's on a VaR-based sort of methodology, do you have any sense as to where that might be in the new methodology, the sort of stress losses methodology or expect a shortfall, I guess, in the new methodology and where that CHF 64 billion might go? Or is it just broadly the right number?

Sergio P. Ermotti

All yours.

Thomas Naratil

Thanks, Derek. So starting first with your question on Wealth Management and cost, there actually are 2 types of seasonals that are affecting us. The first was we've had some onetime benefit that hit us in the third quarter that weren't repeated in 4Q. We also did see some upticks that are slightly seasonal. For example, in the T&E line in the fourth quarter, we also saw -- we started a new marketing campaign around our product capabilities. So we incurred the expenses for the development of that program, the initial rollout of that in the quarter. The other thing that I think I would note, we did -- as I mentioned in my remarks, we did postpone some headcount notifications that we intended for the fourth quarter to the first quarter. So we do have some future actions in place to start to take down the cost base. And then the other thing I'd note, that our long-term strategic cost-reduction program across the group will certainly benefit the Wealth Management business because our drive outside of the consolidation of the on- and offshore businesses in Europe, our desire is not -- certainly not to touch the front office portion of the businesses. In terms of your questions on the reallocation of the income to treasury and how we would, from -- sorry, from treasury to Wealth Management, I think the best way to think about it is the -- certainly, the majority of the revenues will be going to Wealth Management. But as I noted, the amount of repo productivity were going to have with the free cash generated by Wealth Management will certainly be lower than it was last year. So I'd say a rough estimate to use is in the -- roughly around the CHF 100 million range, which is certainly a variable number depending on markets. In terms of gross margin and my comment that I wasn't overly concerned with it, that's because we actually see, as I mentioned, certain short-term effects on the gross margin that actually aren't indicative of what we believe the future potential of the business -- of the business is. I think it's important to note that we -- as I mentioned to respond to an earlier question, that we are positioning ourselves conservatively based on our view on ultimately a rise in interest rates. So we may be taking some short-term pain in the gross margin. But ultimately, we believe that's better for our shareholders overall. Second, when I mentioned about the timing in terms of how long will it take Wealth Management clients to adjust their asset allocation from liquid cash into riskier assets, and I would say that they intend to be, especially with the help of their client advisors, more disciplined about that transition rather than hair-triggering their adjustments in their portfolios. So we still believe the 95- to 105-basis-point range is an appropriate target, but we certainly need to see resolution of the fiscal issues across the globe, as well as improved global growth to achieve that. On the Investment Bank, after the 3 months of experience, how do we feel? We certainly feel that Investment Bank has done a fantastic job in terms of getting the group positioned and started on the acceleration of our strategy. We have the core IB. Underneath, it's RWA target. Underneath, it's the funded balance sheet target. And we've had a good start to the reductions in our cash positions, certainly, in the non-core portfolio. I'd also point out we did have some favorable tailwinds in terms of market conditions in the fourth quarter. We like to take advantage of those, which we obviously did. But we feel that we've had a good start. But as Sergio mentioned in his remarks, that's just the beginning of -- again, of a multi-year process for us, but we feel good about the momentum we have early on. Regarding the RWA question, I'd point to really 2 things, Derek. I think, first, with our VaR down to CHF 15 billion at year end, the amount of delta that we're really going to have on our market risk in terms of the standardized approach is probably insignificantly minimized from when the issue first came up before we had changed our strategy back in 2011. Second, in looking at the PCBS study that was recently released, we find ourselves falling in the middle of the pack in terms of looking at the results, which is where we thought we would be.

Operator

Next question from Mr. Jon Peace from Nomura.

Jon Peace - Nomura Securities Co. Ltd., Research Division

I've got 3 questions, please. The first one relates to the risk-weighted asset runoff you saw in the Legacy Portfolio and the Investment Bank in the fourth quarter, I just wondered if you could comment on the P&L from the reduced exposure, whether there were any exit costs and how that makes you feel about forward-looking exit costs as you continue to run those positions down. The second question is, although you're well ahead of targets on RWA reduction, I see you haven't changed your 2013, '15, '17 targets overall. Is that conservatism? Or is that because you're anticipating this same multiplier? And then the final question relates to that helpful Slide 17, where you gave us the pictures, the new Investment Bank revenue profile. I guess, as we look to 2013, you would hope to grow the Investment Banking and equities piece, but the fixed income piece is still sort of rolling off. So I don't -- if you could just help us at the highest level what you think the revenue and the mix of that business might look like in 1, 2 years' time.

Sergio P. Ermotti

Okay. Maybe I'll tackle the second question and then Tom can address the other 2. I guess -- of course, we are focusing very much on our targets and reviewing them on a regular basis. But I think it would be inappropriate to change targets on a quarterly basis based on a couple of weeks of favorable market conditions. So I think that -- we do think that considering all the problems that are still out there unresolved, it would be not realistic for us to change targets. Of course, we feel very good about the momentum we had in the fourth quarter. We feel good about our part in execution -- in executing the strategy, but we want to be realistic. In respect to multiplier of FINMA as you saw in our chart, the recent increase in our -- in the blue bar in Retail & Corporate business that goes from around CHF 95 billion to CHF 105 billion over the next years, which seem netting this kind of changes and some growth and also optimization that we will run through our portfolio. Therefore, I think that there is no need to change our target based on these FINMA multiplier introductions.

Thomas Naratil

Great. Thanks, Sergio. So John, on your first question on the RWA reductions and cost of exit, as you can tell from the P&L, we obviously saw minimal exit costs during the quarter. In terms of a forward look on that, I'd repeat what I said about having a favorable environment. We certainly look to take advantage of that, but it's also a long path. At the same time, we do have the -- we are in a position that I noted when we announced the third quarter results, that we meet our capital ratio targets merely by allowing, in particular, the over-the-counter book just to roll off. And any time that we look at accelerating our reductions in our portfolio, it's only if we believe we're going to generate additional shareholder value by doing so. And we measure that by taking a look at the cost of equity and support those positions during the time period we would have to carry them versus the acceleration time period. In terms of the pro forma questions and how you should think about it, so one -- I think the first thing is, as I've mentioned, we'll have more information in the annual, which will show you a quarterly breakdown, which I think will be quite helpful, because my overall comment on the year would be, obviously, when you look at these revenues, these revenues would generate with a much higher average RWA than utilization that we're going to have in the core Investment Bank going forward. I do think your focus on what do we want to grow and where do we think the performance will come from, we certainly are looking for an improved performance from equities in the year. Our IBD division is already performing well, and we'd expect to see that continue. And obviously, FICC, which includes some of the treasury revenues previously plus almost entirely 100% of the RWA reductions that we've taken, I think that that's probably the best way for you to start think about it. And I think the quarterly time series in the annual will help you get there.

Operator

Next question from Mrs. Fiona Swaffield from RBC.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

I had a couple of questions. One was you mentioned the FINMA multiplier, but I've been reading about the potential for countercyclical buffer on real estate. Could you talk about what impact that could be and how that could change your core Tier 1 target? The second issue is on fixed income going forward. I mean, I was quite surprised how strong credit was. Are there any one-off positives in there from de-risking? Or what's the long-term strategy or expectation of revenues from credit because I thought that was where the RWAs were coming out? And lastly, just to understand on the gross margin, you talked about foregoing higher revenue from net interest income because of the strategy on interest rates, but the weakness in the margin in Q4 was only partly due to interest rates. So should we expect some seasonality? Q1 is usually a good quarter. And could you talk about potential seasonality in Q1 2013?

Sergio P. Ermotti

Maybe I'll just tackle the one on the introduction of any countercyclical buffer. Of course, this will not change our target at 13%. I think that -- as we outlined last year, I think that we do intend to have an additional buffer in our capital base that, hopefully, we can control on a proactive basis. We will see how the regulatory framework changes but we -- in any case, we will not change our targets based on any introduction of additional buffers.

Thomas Naratil

So Fiona, on your question on FICC and the result there, I'd say first, I think our teams in credit and rates actually handled the reduction of the positions in the portfolios extremely well. And as a result of that, I think some of the outperformance is also on reducing positions in a very smart way during the course of the quarter. So there may have been some flattering benefit due -- as a result of that. Second, we also -- when we announced the acceleration of our strategy, also indicated that we wouldn't drop in-flight client transactions, that we'd complete anything that was in the pipeline. So we had a couple of more advisory-related types of roles in structured solutions and in real estate, where those that have already been set up when we completed those transactions with our clients during the course of the quarter. So I think in order to get more visibility on that, certainly, it will be helpful when you see our first quarter results, which then, in a way, takes us to the next question, which is on Wealth Management. So what about -- is there a seasonality, 4Q to 1Q? What should we anticipate? Certainly, the fourth quarter saw a reduction in transactional activity and structured product activity related to the holiday season itself and also due to some of the factors like decreased implied volatility in currencies. As those conditions change as we move through the first quarter, that could certainly change our clients' views of their -- of how they'd like to interact with us during the course of the quarter. But overall, I'd repeat what I said about net interest margin and the fact that we are deliberately not extending duration in this environment. And so that will have a continuing drag on the gross margin. But we ultimately think that's the best solution for shareholders.

Operator

Next question from Mr. Kian Abouhossein from JPMorgan.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

I have a few questions. Just coming back to the margin, Slide 12, net -- you mentioned that there is the liability spread margin pressure. Can you tell us how much more, in terms of basis points or in terms of revenue impact assuming no interest rate changes, we should expect for margin pressure? And in terms of trading activity, we've seen a material improvement in trading activity both in retail and institutional. For January, shouldn't we assume that that's a good indicator for what's happening in your business? And that's, I think, what Julius Baer was referring yesterday. I'm just wondering why you are more cautious than what we heard yesterday from one of your peers. The second question is related to Slide 17. The revenue loss on your non-core, does that relate to Slide 26? You're roughly CHF 65 billion of -- CHF 67 billion of non-core. And in that respect, on Slide 22, can you explain to me the CHF 1.4 billion of cost savings? Are they realized or are they annualized, these numbers? I just don't -- it's not clear from the slide. And the last one is on tax rate. Your tax rate is, you mentioned, 25% to 30% in the first half. What is it for the full year? And what do you expect for next year? I have to say I was hoping to get a bit more detail on the new divisional breakdown and hence, a lot of detailed questions as it's not possible to do the model with the slides that you're giving.

Sergio P. Ermotti

Okay. Kian, let me tackle the first question. I think that, of course, as you are rightly pointing out, both in the fourth quarter and the beginning of the year, we see a little bit more activity, particularly by retail clients globally, but this cannot be a proxy for our Wealth Management clients, particularly high net worth and ultrahigh net worth clients behave. Therefore, to use that as a proxy could be misleading. But maybe I want to go back a year ago. You remember that a year ago, it turned out that we were coming across as a little bit pessimistic because we weren't so bullish about how January develops. So I have to say that story repeats itself. We cannot multiply January 2012, and January is not a good proxy of -- on how a year works. We do believe that there is still a lot of challenges out there. A lot of issues are unresolved in Europe, both macroeconomically and in respect of the entire financial systems. There are unresolved issues in the U.S. in terms of the fiscal cliff issues. And for sure, growth is not something I would say can be taken for granted in the global economy. Therefore, we have to manage our business according to what we expect to happen over the next 12 months. It's not being too cautious. It's just being realistic about what we have been seeing in the last few years, learning the lessons and making sure that we also fully understand that the opportunity cost for us of being wrong and being cautious is fairly limited compared to the risk we take if we are overly optimistic in positioning our business going forward.

Thomas Naratil

So Kian, to go back to one of your questions, where you asked about liability and sort of the pressure on our net interest margin and how you actually should think about that. I think the pattern, excluding the effect of the strategic investment portfolio in looking at 2011 versus 2010, is a reasonable basis upon which to model 2012 versus 2011 declines in margin, assuming there is no change in interest rates. Now obviously, as interest rates are changing during the course of the year, when we're replicating portfolio tranches to the extent that interest rates rise somewhat, we may have an opportunity to improve on that. But to the extent that the environment becomes more challenging, that would continue to compress the margins. But nevertheless, obviously, since a lot of these replicating portfolio tranches could have been put on a few years ago, we're reinvesting at lower rates than the original tranches had been put on. But I would emphasize though, it is a net interest margin calculation. And so rather than focusing on duration, as I mentioned, extension of duration, we're spending a lot of our time looking at the optimization of liability structure, so reducing cost to the divisions in terms of our overall liability mix, which is why we announced the hybrid Tier 1 -- our intention to call the hybrid Tier 1 today and also, our announcement of the debt tender. So there are 3 different ways for us to approach this issue, and we're spending a lot of time focusing on the liability side of the balance sheet. On your multi-slide question, so this is from 17 and, I guess, 22 -- 17 and 22 and how you bridge those. The first one is the non-core in terms of what you should think about -- it's not 22, maybe 26, sorry. In terms of what you think about it, that non-core section is related to the Corporate Center non-core CHF 67 billion in RWAs that you see on the pro forma, post transfer, except when you think about the revenues that we'll generate in 2012. Remember that those were generated on a substantially higher RWA base throughout the course of the year of 2012. I do think it highlights for you some of the few things we told you in the third quarter though, which was when we looked at the businesses we put in the non-core and you looked at the total cost of operating these businesses and the cost of complexity, what you see in that pretax result, rather than just focusing on the revenue, is the fact that reduction of these non-core assets is what allows us to take out complexity cost in our business. And so when you think about it, acceleration of our non-core asset portfolio reduction will put us in a position where we're able to take out costs, albeit with a lag because some of those structural costs take some time to move out. In terms of the tax rate question, where we talked about the 25% to 30% for the first half of the year, if you assume, and that's what my comment alluded to, which is no change in terms of deferred tax asset revaluations, obviously, we'd be at the same rate for the full year. And that's currently the way we're thinking about the full year tax rate.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Just on the Slide 17, clearly, the Slide 17, non-core implies CHF 1.3 billion of cost and it's good that you say there could be a bit of mismatch over revenues and cost. But on the CHF 1.3 billion of cost, can you tell me how many staff members are part of the CHF 1.3 billion? And just over the CHF 1.4 billion of cost that you say you have realized -- or is this annualized, the CHF 1.4 billion on 22, Slide 22? Is this a real number?

Thomas Naratil

Yes. I think that -- sorry, on the -- I forgot to comment on your Slide 22. I wouldn't combine Slides 22 and 17 together. The Slide 22 is the net cost savings going back and looking at our cost program that we announced at the end of the second half '11. And those are the realized run rate savings from those initiatives, which, as I mentioned, was a reduction of 3,100 personnel since the announcement of that cost savings program. I think when you look at the non-core piece, the real piece of work that we have to do on the cost base, as I mentioned, is the complex infrastructure that we have, supporting those complex businesses. And so the better that we're able to accelerate the reduction, in particular, of the OTC book, that will allow us to take out some structural costs more quickly. But I do have to tell you that that's the stickier part of the balance sheet reduction. It's also the stickier part of the cost reduction.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

And just -- sorry, on the CHF 1.4 billion, you say it's a run rate. So what is the real realized cost savings? And it looks like it's not the new cost savings, as I understand it.

Thomas Naratil

That's separated from the incremental savings program that we announced in the third quarter. The progress -- we announced that in October. So we -- obviously, as I indicated, we notified 1,900 personnel of redundancy in the fourth quarter. That's what the restructuring charges in the fourth quarter represents. So we began the improvement in our cost base from that point. Those personnel will come out of the staff roles, and that's off the payroll, primarily in the first quarter and the second quarter. We had a slight reduction in the roles in 4Q. And there will be a slight reduction in 3Q, the bulk of which will be 1Q and 2Q.

Operator

Next question, Mr. Kinner Lakhani from Citigroup.

Kinner R. Lakhani - Citigroup Inc, Research Division

So firstly, I just wanted to come back on the capital point, where you basically told us that over time, the high-trigger CoCos could build up to about 1% of risk-weighted asset. How does that change the shape of the capital structure, i.e. would it substitute for common equity or would it substitute for lower trigger CoCos? Related to that, I just wanted to get an update on measures you're taking to improve resolvability, which, I guess will, over time, also help you to reduce your endgame capital target, and whether you have any kind of comments on subsidiarization, including kind of the recent Fed proposal that we've had on U.S. subsidiary. And finally, just on funding, it wasn't clear to me the interest expense that was saved on the CHF 5 billion buyback. I know you gave us some guidance but I didn't quite follow. But equally importantly, how we should think about further reduction in wholesale funding of your balance sheet over time? Should we relate it to the LCR ratio being 113%, NSFR 108%, and obviously further reduction in your balance sheet?

Sergio P. Ermotti

Okay. Maybe I'll tackle the first question on -- the first 2 questions in respect of what is additional 100 basis points of high-trigger notes means for our capital base. I think that, for sure, it's introducing a degree of flexibility in how we manage high trigger and low triggers and how we manage, what we always say that we want to have, an additional buffer above the 13%. But the most important issue, in addition to this benefit, is that we have basically created an instrument that while recognizes compensation also creates a value for shareholders. And there is as much as a message to our shareholders and bondholders about how we want employee to be aligned with their interest and vice versa, then there is just pure issues about creating capital. So in a nutshell, I think these instruments create flexibility in terms of contingent capital options, not in respect of our targets of 13%, and it's a message about creating sustainability with our shareholders. Of course, when we go into the resolution, we are working on the resolution. We are working on different ideas on how to speed up the process of subsidiarization of some of our activities outside Switzerland. But remember that this -- the eligibility. We're going to make sure that we are eligible for further capital reduction, but this is going to be a subjective assessment of the regulators in respect how much additional rebate we will get. So what we showed you last quarter was a change from the 19% to the 17.5%, which is based purely on our reduction of balance sheet. And this is a factual element of our calculation. The further reduction is a subjective assessment of our regulator in respect if we are allowed to get it or not and only -- and it's going to take time to develop all these changes in our corporate structure in order to get the eligibility to be there.

Thomas Naratil

Okay, great. Then, Kinner, on your last question, talk about the funding and how I evaded disclosing the actual number. I think -- that will take some of the fun out of it for you. I think if you look at the tender offer, you'll be able to see, based on the issues that we have and the caps that we have on the total purchase, I think you'll be able to work back to what that is. I think the guidance I gave you will help you to do that by seeing pretty much assume one for one over the 12-month time period in terms of the initial expense for us relative to the savings in a year and then think about it as a 4x, 4.5x on the cost in Year 1 as to life-to-date savings over the maturity profile of the instruments.

Kinner R. Lakhani - Citigroup Inc, Research Division

And should we expect kind of further buyback optimization on the wholesale funding plan over time?

Thomas Naratil

The way I describe, I think, overall, we obviously have set out based on our 2015 target, 2015 target liability structure, and we've laid out our funding plan for this year, including changes in that mix and the way we'd like to see that develop. I think as you see our first quarter balance sheet relative to where we are at year end and you start to do some of the comparative work, I think you'll see how we're beginning to shift that mix. But obviously, as we noted at the 3Q announcement, we're certainly shifting where deposits are higher percentage over time of our mix, but it's a part of our mix. We want to make sure we've got a diversified liability structure, one that's both optimized on the cost and tender.

Operator

Next question from Mr. Matt Spick from Deutsche Bank.

Matt Spick - Deutsche Bank AG, Research Division

I have 3 questions, if that was possible. The first was on retrocessions and there is some disclosure on Pages 22 and 98 of the full report, but I just wondered if you could remind us what percentage of your client AUMs and discretionary mandates and whether retrocessions was one of the contributing factors to perhaps being a bit cautious on the gross revenue margin in 2013. The second question is obviously, it's quite difficult to forecast revenues for the pro forma Investment Bank, but I wondered if you could update us on roughly the headcount that will be in that business during the first quarter. I'm working with an assumption it might be 9,000 to 10,000 total, of which about 1,000 people would be fixed income, front office so on and if you thought that was a reasonable estimate. And then finally, just on the equities business in 2013, obviously, we all hope it's a lot better, but the margin pressure in cash equities is obviously still there. And I think margin pressure is picking up in prime finance. So I wondered if you had any comments on how you've got you prime finance business would position to 2013, whether you saw that margin pressure as well and whether the rescaling or descaling of the balance sheet had any impact on prime finance more generally.

Thomas Naratil

So Matt, thanks for those questions. So on the retrocessions, what percent the asset is in discretionary? It's 12.8% of the assets that we have. In terms of the next -- could you repeat your third question? You did mention something about margins and volumes. I just want to make sure I got the intent correctly.

Matt Spick - Deutsche Bank AG, Research Division

Yes. The question is really just prime finance, very high return on equity business. Historically, it's had a lot of market concentration. And I think margins are under quite a lot of pressure there. You've got quite a big prime finance business. Do you see margins under pressure? And how do you feel about that business for 2013 given the shrinkage of the balance sheet?

Thomas Naratil

Yes. So certainly, as you look at 2013 equities, equities business overall as one of the Basel III-friendly businesses. It certainly is one and its various areas that has increasing competition. However, one of the reasons why we accelerated our strategy and position ourselves with greater focus on for us, key area of equities overall, is to make sure that we have the investments, the sufficient investment that we need to make in order to make sure that we are as equipped to handle our clients' business and, in particular, execution as efficiently as we can going forward and in the most up-to-date methods that we can from a technology perspective. So first, I think the changes that we've made strategically reinforce some of the investment needs that we see as a result of your thesis about what's happening in the industry. Then second one, when you're, I think -- I believe you're specifically talking about prime brokerages and prime brokerage and balance of spreads, we look at that as an additional component of the products we -- that we have for our clients and not just standalone business on its own. It's part of what we do. As we concentrate our investments in our -- in a key area like equities, we also want to make sure that we're allocating balance sheet to those clients who actually feel that we're providing the appropriate amount of service and that they're presenting us with the order flow associated with that. And then -- sorry, yes -- as Sergio is mentioning, also, all the work that we're doing on the liability optimization on the balance sheet certainly will help to put us in a good position going forward.

Operator

Next question, Mr. Christopher Wheeler from Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

Just a few questions. First of all, perhaps you would give us a little bit detail on the issue you had with derivatives in Japan and exactly what the story was there because obviously -- that obviously had an impact against what seems to be a really good cash equity performance. Second couple of questions on litigation, Tom, I think you talked about staying at high levels of cost into this year. I assume you're relating that to the CHF 449 million of legacy issues. And related to that, in Wealth Management Americas, you talked about litigation. There is something like a 39% increase in non-comp cost, which suggests that maybe CHF 60 million or CHF 70 million of litigation. Perhaps you could clarify whether that was the case. And then finally, related on what Kinner was asking, I just want to get my head around the high-trigger loss-absorbing capital and it doesn't seem to me -- I mean, Sergio talked about the flexibly that gives you, but you didn't seem to talk about how that could mitigate the additional 3% above the 10%, which has always been the issue around why you don't like high-trigger CoCos. But I would have thought the high-trigger bail-in bonds would have fulfilled that part of that 3% requirement, and why you wouldn't try and utilize that? And perhaps related to that, could you give us some clue on the structure of the bonds that you're giving to staff? In other words, could you give us a clue on what the coupon will be? But also, I'm hearing that it may be 5-year cliff vesting. I just wondered what are you doing about rolling up the coupon, how that will work, and perhaps also how you will calculate the redemption cost. Will it be a par? Or will you calculate it based on the direction of your core Tier 1 ratio weight in the 7% trigger?

Sergio P. Ermotti

Yes. Christopher, thank you. You sound like an employee. That's -- those are not very interesting questions. Actually, to your question, the coupon, we're going to send the coupon in consideration, the yield of the outstanding low-trigger instruments, therefore, the yield to maturity. So we're going to take a conservative view on that, so -- and therefore, I think it's a fair assessment on where the coupon will be. It will stay the same for the entire 5-year life and will be repaid at par unless, of course, we have an event coming in. In respect of why we are not using it against the 3% buffer, the 3% high-trigger buffer, it's purely because we do believe that we want to have our capital strength in full equity at this stage, for sure. We want to have a 3% -- the 3% buffer being used with a pure equity and not with a contingent capital. And in any case, as we said before, we do think that we're going to need an additional buffer in the future. And therefore, we can use that flexibility. In respect of the big difference between this instrument, I guess -- I don't know if I got exactly your question. But we are against CoCos because we don't want to introduce potential dilutions to our shareholders, and this instrument doesn't necessitate the issuance of treasury shares. We potentially could dilute shareholders, and it's purely obtaining the same results by a write-off of the notion. So we do continue to believe we don't like the CoCo concept. We talk about CoCa because it's contingent capital and not contingent convertibles. So it's fundamentally a completely different instrument from our standpoint of view in respect of taking away a huge dilution problem for shareholders and something that in my point of view could also disturb the normal market dynamics of the stock trading if an event happen.

Christopher Wheeler - Mediobanca Securities, Research Division

I mean, I totally agree with you on that and obviously, Barclays and other banks do as well. Would you actually think about issuing more high-trigger bail-in bonds because it does seem to make a lot of sense in terms of the kind of capital structure you're looking to achieve?

Sergio P. Ermotti

I think that our plan is to go first with our low triggers, building up our low triggers and building our 3% core equity buffer, and then using the high trigger through the employee plans. But Christopher, over time, we may change it. It's not in the foreseeable future that we can see this as being an option for us.

Thomas Naratil

Chris, if I could just add on to what Sergio said about the question. I think, as you know, we've talked about how do you manage. So you have your certain targets, but then how do you manage your capital during the course of the year? And so obviously, if you think about a 13% target, where you've got a 10 plus 3 requirement, you've got to manage above that 13% level. One of the ways to do that is to introduce the high trigger that we've introduced as part of the compensation program. And that will give us more flexibility in terms of managing during the course of the year, specifically, when we talked about the management countercyclical capital buffer or how we manage our capital when we look at potential stress events that could occur. Going back and then addressing your second question, which is about Wealth Management Americas' historical litigation items, you're in a ballpark in terms of sizing the effect. I would just note that there were 2 lumpy issues in the course of the quarter rather than a series of individual small events. Finally, you asked about what exactly happened in derivatives in Japan. This wasn't a major item. We just saw a -- some trading losses in Japan in our Japan's structured product book as volatility increased during the market rally in the fourth quarter.

Christopher Wheeler - Mediobanca Securities, Research Division

Okay. I just wondered whether that CHF 449 million of litigation in the non-legacy, what's the sort of benchmark against which you were saying. You expect similarly high charges in the -- in 2013.

Thomas Naratil

Yes. So the litigation of the legacy -- in the legacy books, specifically deals with RMBS issues. I'm not sure about the sizing, if that's the correct way if you look at that and extrapolate that going forward. But certainly, the pressures, if you look at a year-over-year comparison and stripping out the LIBOR issue as an event, we certainly see a rising -- an increasing cost per event of operational risk in those categories.

Sergio P. Ermotti

Okay. Now many thanks for everybody for joining on the webcast. We now close the webcast sessions, and we open for questions here in the room.

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