Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Credit Suisse Group (NYSE:CS)

Q4 2012 Earnings Call

February 07, 2013 4:30 am ET

Executives

Brady W. Dougan - Chief Executive Officer and Member of Executive Board

David R. Mathers - Chief Financial Officer and Member of the Executive Board

Analysts

Derek De Vries - BofA Merrill Lynch, Research Division

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Matt Spick - Deutsche Bank AG, Research Division

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Huw Van Steenis - Morgan Stanley, Research Division

Kinner R. Lakhani - Citigroup Inc, Research Division

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

Jeremy Sigee - Barclays Capital, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Robert Murphy - HSBC, Research Division

Stefan Stalmann

Andrew Stimpson - Keefe, Bruyette, & Woods, Inc., Research Division

Dirk Hoffmann-Becking - Societe Generale Cross Asset Research

Andrew Lim - Espirito Santo Investment Bank, Research Division

Antoine Burgard - Natixis S.A., Research Division

Operator

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group Fourth Quarter and Full Year 2012 Results Conference Call. [Operator Instructions] and the conference is recorded. [Operator Instructions] At this time, I would like to turn the conference to Mr. Brady Dougan, Chief Executive Officer of Credit Suisse. Please go ahead, Mr. Dougan.

Brady W. Dougan

Thanks very much. Welcome, everybody. Good morning. Thanks for joining us for our fourth quarter and our full year earnings call. Obviously, I'm joined by our CFO, David Mathers, and he'll deliver the results portion of the discussion and then obviously, we'll open up for questions.

Before I start, just ask you to take note of the usual cautionary statement. Credit Suisse enters 2013 as one of the few financial services firms to have completely reengineered its business to thrive into the new regulatory environment. Throughout 2012, we dramatically transformed all of our businesses, substantially lowered our cost base, significantly increased our capital base and considerably reduced risk -- risk-weighted assets and notional balance sheet. We are confident of the proactive and decisive actions that we've taken will enable us to achieve our goal of a 15% return on equity through the cycle. In an industry that still faces substantial restructuring to come, we have effectively completed the bulk of that restructuring. We now have a business model in place that is a stable, that's higher returning and that's good for the new regulatory environment.

We have one of the leading Private Banking and Wealth Management businesses globally. In the last 4 years, we've generated more net new assets at CHF 162 billion than any of our competitors. We have assets under management of CHF 1.25 trillion. Our Investment Banking business is one of the first that's Basel III compliant and has global reach and critical mass in fixed income, equities and underwriting advisory. The consistency and sustainability of our model will allow us to better serve our clients and to produce high and stable returns for our shareholders.

Before turning the slides, I will outline the 4 key areas that I'd like to highlight on the call now. First, we achieved solid results from the fourth quarter and more consistent performance throughout 2012, with an underlying after-tax return on equity of 10% for the year, we'll continue to drive strong client and market share momentum across our businesses.

Second, we delivered on our capital and balance sheet plans, resulting in a further strength in capital base, improved leverage ratios and a continued strong liquidity position.

Third, we made significant progress in transforming our business for the new environment. We reduced our overall cost base and we improved our capital efficiency.

And fourth, we are on track to return significant cash to shareholders once our Look-through capital ratio exceeds 10%, which we target in mid-2013.

Let me spend a little more time on detail on each of those topics. So first of all, we achieved solid fourth quarter results and stable earnings throughout 2012, demonstrating more consistency in our performance, as we executed a significant business transformation during the year. We reported underlying pretax income of CHF 1.2 billion and an underlying after-tax return on equity of 9% in the fourth quarter and 10% for the full year.

So in Private Banking and Wealth Management, we benefited from strategic and cost initiatives, maintaining client momentum and improving profitability despite continued market headwinds. In an environment characterized by continued client risk aversion and year-end seasonality, we reported improved results driven by stronger transaction and performance-based fees. Fourth quarter pretax income of CHF 900 million increased 71% from the year-ago quarter, primarily reflecting the higher performance fees in Asset Management and lower operating expenses as a result of our cost efficiency initiatives in Wealth Management. And we had net new asset inflows of CHF 6.8 billion in the quarter, up from CHF 5.3 billion in the third quarter and CHF 4.5 billion in the fourth quarter of 2011, but David will analyze that in more detail.

In Investment Banking we delivered resilient fourth quarter results with strong underwriting and advisory revenues but reflecting a typical year end slowdown in sales and trading revenues. We reported fourth quarter pretax income of CHF 300 million compared to a loss in the year-ago quarter, driven by significantly higher fixed income results, reflecting the strength of our repositioned franchise and more favorable market conditions. Our Investment Bank produced higher revenues and profitability with lower capital usage, lower risk and reduced cost base, resulting in a substantially higher underlying after-tax return on equity of 8% for the fourth quarter and 14% for the full year for our ongoing businesses. And for the full year 2012, the group's underlying pretax income was CHF 5 billion, and this was achieved in a volatile operating environment with subdued levels of client activity and risk aversion amidst continued political and economic that our transfer of franchise is well positioned to achieve our previously stated target of a 15% return on equity through the cycle. We also continue to build on strong market shares across our businesses throughout the year, even as we were adapting our business model and organization.

So second point, we strengthened our capital base by successfully executing on the enactions that we announced last July, and we achieved our target pro forma Look-through Swiss Core Capital ratio of 9.4% as of the end of the fourth quarter. We made further progress on previously announced strategic divestments with the January announced sale of our exchange-traded funds business and Asset Management. Our capital program's on track, and we target to exceed the Swiss 2018 year end Look-through capital ratio requirement of 10% by mid-2013. And again, once we exceed the 10% level, we are committed to making significant cash distributions to shareholders from capital generation.

Note also that we currently have an additional 2.8%, or CHF 8.2 billion of loss-absorbing capital in the form of high-triggered contingent capital, a portion of which has already been issued and the remainder to be issued through an exchange in October this year, which will raise the pro forma Look-through Swiss total capital ratio to 12.2%.

We also continue to conservatively manage our liquidity during the year with an estimated long-term net stable funding ratio in excess of 100% and short-term liquidity under Swiss regulation, which is similar to the LCR, in excess of the requirement as of end of the quarter.

Regarding balance sheet size. We made significant progress towards our previously announced target to reduce total balance sheet assets to below CHF 900 billion by the end of 2013. In the fourth quarter, we reduced our overall balance sheet by CHF 99 billion to CHF 924 billion. This balance sheet reduction has resulted in improvements in our leverage ratio under various calculation methodologies. And also note that the new FINMA Basel III leverage requirement, which some of you may be aware of, will not be a major issue for us. In fact, we're well on track to exceed the Swiss requirement.

Third point, we have taken decisive steps and made further substantial progress in transforming the business for the new environment. We significantly reduced our cost base during the year. By the end of 2012, we achieved CHF 2 billion of expense savings. We continue to seek further cost-savings opportunities throughout our business, and as a result, we are today, increasing our total cost run rate reduction target by CHF 400 million to an annualized CHF 4.4 billion by the end of 2015.

We remain disciplined on capital efficiency and made further significant progress in reducing risk-weighted assets throughout 2012. Since the third quarter of 2011, we reduced group-wide Basel III risk-weighted assets by nearly CHF 90 billion. Basel III risk-weighted assets stood at CHF 284 billion for the group at the end of 2012, and we are confident that we will achieve our target of less than CHF 280 billion by the end of 2013.

In the Investment Bank, we further reduced risk-weighted assets by $13 billion in the fourth quarter, with a total level of $187 billion at the end of the year. We're now within reach of our goal of less than $175 billion by year end 2013.

We have significantly adapted our business model in the investment bank. We have created what we believe to be the first Basel III-compliant Investment Banking business, focused on market-leading, high-returning franchises. Going forward, we expect to deliver a cost-to-income ratio of 70% and a sustainable return on Basel III capital above 15% throughout the cycle.

The integration of our Private Banking and Wealth Management businesses and changed organizational structure enables us to better serve our clients to enhance product development, advice and distribution and will improve our efficiency. We've identified an additional CHF 450 million in cost savings as of 2015, resulting from the integration plus other efficiency models we have taken. As a result of the streamlined business model, we seek to achieve a 65% cost-to-income ratio, as well as 6% annual net new asset growth.

And fourth, given the consistency of our earnings and our ability to generate excess capital, we are on track to return significant cash distributions to our shareholders once our Look-through capital ratio exceeds 10%, which we target to achieve by mid-2013. For the 2012 financial year, the Board of Directors will propose a dividend of CHF 0.75 per share, consisting of CHF 0.1 cash and CHF 0.65 stocks.

In summary, we entered 2013 well positioned to thrive in the new regulatory environment. We took proactive and decisive actions starting in 2011 to restructure our business in response to changed client demands, the current market environment and new regulatory acquirements. In 2012, we substantially strengthened our capital position by adding over CHF 12 billion in pro forma Look-through Swiss core capital, reduced Basel III risk-weighted assets by 16% across the bank, lowered our annualized cost base by CHF 2 billion, considerably reduced our notional balance sheet and continued to invest in key markets. During this substantial transformation, we, nonetheless, achieved solid revenues and an underlying after-tax return on equity of 10% for 2012, while continuing to build on strong market shares across our business.

Looking at the year ahead, so far in 2013 revenues have been consistent with the strong starts that we've seen in prior years. We're now additionally benefiting from the strategic measures we took in 2012, including the strength in capital base, and our significantly reduced risk and cost base. So we believe that our business model will continue to deliver strong and consistent results, positioning us to better serve our clients and deliver superior returns to our shareholders. With that, let me turn it over to David.

David R. Mathers

Thank you, Brady. Good morning, everybody. I'd like to start on Slide 7, with the overview of the financial results. In the fourth quarter, we achieved underlying revenues of CHF 6 billion, pretax income of CHF 1.2 billion and net income of CHF 816 million. Diluted earnings per share were CHF 0.42; the underlying cost-to-income ratio, 79%; and the underlying after-tax return on equity, 9%.

Look at the full year, the underlying pretax income reached CHF 5 billion, up from CHF 2.4 billion in 2011. For 2012, we achieved an 80% underlying cost-to-income ratio at 10% underlying after-tax return on equity. Net new asset inflows of CHF 6.8 billion for the quarter picked up significantly compared to CHF 4.5 billion in the fourth quarter last year. And throughout 2012, we did see good underlying inflows, albeit these were partly offset by a number of nonrecurring items that I'll summarize later in the presentation. Reported pretax income was CHF 596 million in the fourth quarter, and CHF 2.1 billion for the full year.

On Slide 37, as per our normal practice, we include a reconciliation to the underlying results. You can see in the full year that the primary difference between the reported and the underlying number is the CHF 2.9 billion in [ph] debt move, resulting from the substantial tightening in our credit spreads. We did also take total business realignment cost of CHF 680 million, but this is offset by CHF 533 million gains on real estate sales at CHF 384 million gain on the sale of Aberdeen within the Asset Management division, as well as net impairment charges of CHF 82 million, relating to the sale of certain of our private equity interests.

Let's turn now to Slide 8. Following the announcement that we made last November, we've combined the form of product banking asset management divisions to form the new Private Banking Wealth Management Group. The restated figures and the detailed time series that we divided to you last week are also available on our website. The new division reported fourth quarter pretax income of CHF 911 million. On an underlying basis, pretax income was CHF 978 million. Our underlying results reflects a number of adjustments, primarily related to the impact of exiting certain liquid investment strategies within our private equity portfolio. For the quarter, division reported a 69% underlying cost-to-income ratio. Whilst we did see the normal seasonal slowdown activity towards the end of the year, I would note this was much less marked than in 2011, and we also saw the benefit of strong transaction and performance-based revenues, as well as higher revenues from our integrated solutions group.

The results also demonstrate the benefits of our efficiency and cost-cutting initiatives. The year-end seasonal pickup in expenses was muted in the fourth quarter, with total operating expenses up only 1% compared to the third quarter and down by 5% compared to the fourth quarter in 2011. For the full year, revenues were stable, and total underlying operating expenses, that is excluding the litigation provisions we took in 2011, declined by CHF 300 million compared to the prior year, resulting in an underlying cost-to-income ratio of 72%.

Furthermore, in addition to the cost measures that we've already identified in the third quarter last year, we've now identified a further CHF 450 million efficiencies to come from the merger, both from the 2 divisions, but also from some additional measures that we undertake. This will enable us to achieve our target cost-to-income ratio of 65% for the division.

Now let's look at the performance of the business in more detail and let's start with wealth management, please on Slide 9. For the fourth quarter, both revenues and total operating expenses were broadly stable compared to the prior quarter, whilst activity did decline towards the end of the year, which with [ph] high levels of transaction revenues compared to both the same quarter in 2011 and the third quarter in 2012.

We look at the full year, revenues are broadly stable compared to 2011, but I think our performance demonstrates both the success of mitigation and the adverse impacts in the operating environment, as well as the benefit from higher assets on the management and from our various price initiatives. As a result of our efficiency measures, included in the integration of, our total underlying operating expenses decreased by CHF 300 million, or 4% for the full year, resulting in the underlying cost income ratio marginally improving to 77%.

So let's turn to Slide 10. If we look at the fourth quarter Wealth Management revenue trends in some more detail, starting with the bottom segment in the columns on the slide, net interest income were slightly lower compared to the fourth quarter of 2011, primarily due to the impact of continued low interest rates, albeit this was still mostly offset by higher loan and deposit volumes. Recurring fees and commissions were also slightly lower, the slightly both the cyclical factors that we alluded to before, that is the further switch in client portfolios towards cash, near cash and fixed income products during the year, as well as the structural shift in our business towards emerging markets and ultra-high net worth clients.

Conversely though, transaction and performance-based revenues increased year-on-year. The increased reflects 3 factors: First, the benefit from semiannual performance revenues from our Brazilian subsidiary, Hedging River [ph]; secondly, the revenues from our Integrated Solutions business reflecting the benefits of the integrated cost lending [ph] business model; and third, an encouraging pickup in client activity, albeit from very subdued levels. If we look at gross margin, with revenues and assets under management up slightly versus the third quarter, the various margin were broadly stable at 110 basis points.

Looking forward, despite the encouraging increase in client activity that we've seen so far in 2013, we do expect the gross margin to continue to be affected, as we shift our business towards segments with a lower gross margin but a higher pretax margin. So for example, our ultra-high net worth clients. So driving cost reduction has to be a critical part of our strategy for this division to further strengthen the pretax income.

Let's look briefly at the 2012 Wealth Management pretax income drivers on Slide 11. The chart on the left outlines the adverse impacts of market headwinds, including a conservative asset mix, subdued client activity, low interest rates and high regulatory costs. As you can see, the largest impact was on recurring revenues with a CHF 203 million decline. [indiscernible] impact on net interest income from lower rates was offset by growth in both deposits and loan volumes, resulting in an increase about CHF 70 million in reported net interest income for 2012.

On the right, the slide demonstrates the benefits of our strategic initiatives, which contributes to the total of CHF 300 million to pretax income, consistent with the plan that we communicated back in -- it's easy total that the million Swiss francs to pretax income, consistent with the plan that we communicated back in 2011. Of the CHF 300 million, CHF 120 million relate to dedicated growth initiatives, such as improving profitability in several of our key onshore businesses, and CHF 180 million relate to efficiency measures, such as the streamlining effort of the support functions and the simplification of our operating platform.

So let's turn now to Corporate and Institutional Clients on Slide 12. In our Corporate and institutional Client business, revenues were up, driven by strong commissions against the resilient Swiss economy. Pretax income improved to CHF 238 million in the fourth quarter, and we delivered a strong cost-to-income ratio of 51%, that's even better than the 57% we recorded in the fourth quarter of 2011. Credit provisions increased slightly, but remained at a low level given the strong cost in loan portfolio, and as before, the continued resilience of the Swiss economy. So the full year, we delivered high revenues compared to 2011. The pretax income also increased year-on-year, notwithstanding the slightly higher credit provisions. And for 2012 as a whole, our cost-to-income ratio increased from 52% to 54% in 2011.

Let's turn to Asset Management results on Slide 13. In Asset Management, reported fourth quarter net revenues were low compared to the third quarter. However, this quarterly comparison is distorted by the restructuring actions which resulted in investment-related losses, primarily relating to the private equity positions that were currently in the process of selling.

Fourth quarter underlying pretax income of CHF 250 million increased significantly, both from the prior quarter and the fourth quarter 2011. And I will explain the drivers behind this increase in some more detail in the next slide. We also achieved net new assets of CHF 2.5 billion in the quarter, [indiscernible] with inflows in credit and in emerging markets, albeit partially offset by outflows in fixed income and certain money market funds.

During the quarter, the Asset Management division makes a further progress implementing our strategic agenda as were shown in the next slide, 14, please. So starting with the chart on the left, underlying pretax income for the third quarter was CHF 122 million. This underlying pretax income excludes all net gains relating to the disposal of Aberdeen, as well as an impairment charge in the prior quarter. From that starting core point, in the fourth quarter, we delivered significant high transaction and performance-based fees of CHF 200 million, which was partly offset by lower investment gains and other revenues of CHF 71 million, resulting in an increased underlying pretax income of CHF 250 million.

Our underlying cost-to-income ratio improved to 61% in the fourth quarter, down from 76% in the third quarter. If we look at the full year on the right-hand side, starting with underlying pretax income of CHF 579 million in 2011, we delivered higher fee based revenues of CHF 24 million in 2012, which were offset by low investment-related gains and other revenues of CHF 122 million.

During the year, pretax income also benefited from a reduction in expenses of CHF 50 million, resulting in full year 2012 underlying pretax income of CHF 531 million. Consequently, the full year underlying cost-to-income ratio deteriorated slightly to 76%.

Let's move to net new asset on Slide 15. So I'll like to take just a few minutes to discuss the net new asset trends first in Wealth Management during 2012. During the year, we achieved good inflows of CHF 33.4 billion, which was driven by solid growth with ultrahigh net worth individuals across all regions and by stronger emerging markets. The growth rate in Asia Pacific was 11.4% in 2012. The Wealth Management inflows for the year were then adversely affected by CHF 14.4 billion including the outflows. CHF 6.9 billion of which, is in relation to West European cross border client, and CHF 7.5 billion in relation to the outflows we saw in the first half of the year, following the carbon law integration, which I think we've already discussed in the past.

Adjusting for these outflows, Wealth Management achieved net new assets of CHF 19 billion for the year. This net new asset growth rate was 3.5%, excluding the current outflows, and 4.5% if you also adjust for the rest of European outflows, but I'll come back to that later.

Next on Slide 16, I'd like to discuss the net new asset trends for 2012 for the combined division, so that's including Wealth Management, Asset Management and CIC. So if you look at the total numbers, you can see we recorded strong adjusted inflows across PWM of CHF 40.6 billion for the year, driven by healthier inflows in emerging markets versus in EMEA and in Switzerland, as well as the continued growth in the Americas and Asia-Pacific regions, also from emerging market inflows.

These are an offset by the CHF 14.4 billion outflow I mentioned in the previous slide relating both to the Western European cross border business and to the current law integration. Further, you can see on the chart, we have the loss of a single low margin fixed income client in Italy in the first quarter of 2012, which as you may recall, led to a CHF 14.7 billion outflow in the form of asset management divisions.

Finally, on net new assets. I wanted to point out that with the fourth quarter, we saw growth inflows of CHF 11.2 billion of new divisions. However, at a net level we achieved inflows of CHF 6.8 billion, and that's net of CHF 4.4 billion of West European outflows in the final quarter.

Let's turn to Slide 17. During 2012, you may recall we announced that the future probably of Banking Wealth Management division would achieve a total of CHF 500 million of cost savings. Now CHF 300 million of which has already been booked down to 2012 numbers. In addition, based on the synergies that we expect to achieve on the integration of the Private Banking Asset Management division, as well as in other measures, we will now target additional CHF 450 million of cost savings to be achieved by the end of 2015. So that will bring our total expense reduction program to CHF 950 million for the new combined division.

Let's turn to 18 to look at our KPIs for the division. So I just mentioned, we're targeting future further cost reductions of another CHF 650 million for the new division, and that's equivalent to a 500-basis-point improvement to our 2012 underlying cost-to-income ratio of 72%. Furthermore, private banking and Wealth Management will also benefit from their share of infrastructure and shared service savings, which will improve the cost-to-income ratio by a further 200 basis points, putting the division very close to the target cost income ratio of 65%.

So let's turn now to net new asset growth rate, which we continue to target at 6%. We expect continued strong net new asset generation within the Wealth Management business in emerging markets. The worst continued both slower growth in our mature market operations. However, in Western Europe, we will expect to see continued outflows at level similar to that experience in the last year or 2, until the West European border business, cross-border business stabilizes.

So in the next couple of years, aligned for this continued outflow, we will expect an overall net new asset growth rate of around 3% to 4% Wealth Management, follow our through the cycle target of 6%. However, as the West European cross-border business stabilizes, we will then try to achieve our 6% target, albeit that was still very much driven by growth in our emerging market businesses.

First, let's turn to Investment Bank on Slide 19.

The Investment Bank posted net revenues of CHF 12.6 billion and pretax income of CHF 2 billion for the full year 2012. These results demonstrate both further improvements in operating capital franchises, as well as the continued strength of the franchise. In 2012, our Investment Bank produced higher revenues and profitability with lower capital usage, less risk and a reduced cost base, resulting in substantially higher after-tax return on B III allocated capital, 9% on underlying basis. Clearly, that's after the losses, which we've taken in the division from our wind-down portfolio. If you exclude that, the underlying after-tax return equity would have been 14% last year.

During 2012, we reduced our Basel III risk-weighted assets in the Investment Bank from $242 billion at the end of 2011 to $187 billion at the end of 2012. This $55 billion reduction puts us very much in reach of our targets to bring the level of risk-weighted assets of NIB down to at less than $175 billion by the end of 2013. Perhaps as importantly, I'd also like to point out that the $55 billion reduction was entirely achieved, in fact, more than entirely achieved through reduced risk exposure and hedging, not through model changes.

Net revenues in the quarter increased substantially compared to the fourth quarter of 2011 when we both faced challenging and volatile trading conditions, and we're also prioritizing accelerated reduction in risk-weighted assets as part of the paying for our Basel 3 transition. However, compared to the third quarter, revenues declined by 16%, as continued strength in underwriting advisory was offset by low sales and trading activity, as well as an increase in losses from the wind-down portfolio.

If you look at Slide 20, you can see the significant improvement in pretax income from 2011 to 2012 from a different perspective. What we show here are the components of the year-on-year pretax income progression in U.S. dollars to illustrate a better like-for-like comparison full-year distortion from the foreign exchange translation impact. So if we move from left to right, you can see the significant increase of over $2 billion in our fixed income underwriting advisory revenues. This improvement was then slightly offset by lower revenues in equity sales and trading. We also have lower provisions for credit losses, but also more importantly, a very significant reduction in the cost base across all of our businesses within the Investment Bank. If you compare 2011, the full year, we reduced the expense by over $1 billion. Now that combined impact of high revenues, lower provisions and expenses results in a dramatic improvement in pretax income.

Slide 21. So fixed income trading revenues are lower compared to the third quarter, due to higher losses in our wind-down areas, our year-end seasonality and also, we closed to the year in our global rates businesses. That said, we continue to see a strong performance in our core businesses, including securitized products, credit and our Brazilian operations. And as you can see from the chart, we've significantly improved the operating performance in fixed income during 2012. Revenues increased by 60% in the full year and lower expenses of over 31% reduction in Basel 3 risk-weighted assets compared to the end of 2011. And as a result, our fixed income business is now delivering a return on capital, improve to that on our overall Investment Banking division average return.

So with that, let's move to equities on Slide 22.

2012 was a challenging year for equities as trading volumes remained depressed and client activity was subdued compared to 2011. Nonetheless, I think we delivered resilient revenues for the full year and for the fourth quarter, supported by the strong franchise and our market-leading positions. Compared to the third quarter, prime service revenues were higher due to increased client balances, that's notwithstanding lower hedge activity and reduced leverage. Cash equities and derivative revenues also increased sequentially, reflecting some improvement in volumes relative to the third quarter. So these increases were then offset by lower results of fund-linked products and convertibles.

Let's turn to Underwriting and Advisory now on Slide 23. Within our Underwriting and Advisory businesses, our revenues increased by 8% from 2011, with increase in momentum in the second half of the year. And that was particularly evident in our stronger debt, underwriting M&A and advisory results. In fact, if you look at the fourth quarter, it was the strongest quarter we've seen in the last 2 years, revenues increased by more than CHF 100 million compared to the third quarter, and by 93% compared to the fourth quarter of 2011. We were not only to benefit from a strong influence [ph] in debt underwriting, but we also saw more pickup in M&A fees.

So Slide 24. We thought it would be useful given the discussions around fixed income businesses in particular, but also Investment Banking in general, to show you an analysis of how our capitals are allocated across the businesses within our investment bank, and how this year's return on capital performance relates to market share. But first, let me just take a moment just to explain the graph.

So along the y-axis, we measure the 2012 market share positions for our businesses. So in the top segment, we include those businesses to the top 3 market positions. In the middle, both businesses that are ranked between fourth and sixth, and at the bottom, those businesses that are ranked 7th or below. Now on x axis, we show the 2012 return on Basel 3 capital to businesses, with returns increasing as you move to the right.

Finally, the bubble size reflects the rose of capital usage of each business at the end of 2012. Now just to be clear, this does not include the losses nor the remaining 13 billion risk-weighted assets in the said wind-down portfolio.

What you see on the top of the chart is over half the capital we have employed is actually assigned to market-leading, and generally, very high return businesses in equities and fixed income. Particularly, global credit, prime services, emerging markets, securitized products and cash equities. If you look at the middle section of this graph, you can see about 1/3 of our capital in rates, IPD and equity derivatives.

Looking forward, we clearly expect and target to see these businesses shift to the right on the graph, as we continue to enhance operating leverage, reduce expenses and optimize returns in these businesses.

Finally, on FX commodities businesses, whilst we continue to ensure a full suite of products for our investment banking, product banking clients, we will also look to continue to reduce the costs and capital allocated to these areas during the course of 2013 to improve returns.

Let's look at the graph as a whole. Over half of our capital is employed in business with strong returns, top 3 market shares. And actually, over 90% of our capital is in businesses where we have a top 6 market position or better.

Slide 25. So Slide 25 shows the incremental impact on the Investment Banking divisions year-to-date, normalized return from cost improvements and RWA reductions compared to 2011. As you can see from the chart, higher revenues compared with the impact from efficiency improvements and cost savings and lower RWA usage, provided significant uplift to our Basel 3 return. It improved from negative 2% in 2011 to positive 9% in 2012 on normalized basis. Then this is after the losses on the wind-down portfolio. Without these, the underlying after-tax return for the ongoing businesses would have been 14% last year. Also just to be clear, this legacy wind-down book is much more it was a year ago. We reduced risk-weighted assets from $48 billion at the end of 2011 to $13 billion by the end of 2012.

Going forward, we'd expect to see a further improvement in after-tax return in this business in 2013 and beyond, primarily due to the planned cost savings, as well as a substantial reduction in drag from the wind-down portfolio.

So let me turn now to the key performance target for the Investment Bank on Slide 26.

Now 2012 is clearly an important transition year for the investment bank, reducing costs, moving the regulatory goals and achieving a sharp reduction in the capital returns of the business. Looking forward, as the rest of the industry still faces substantial restructuring, we've effectively completed the bulk of this transition, and I will focus on it on achieving a 70% cost-to-income target. Now driving on improvement of 70% will be continued cost reductions to bring the ratio down by about 8%, a reduction but not elimination of the losses in the wind-down business, about 3%, and various growth and business initiatives that we have across the division, which should reduce the ratio by a further 3%.

Let me now turn to the group's cost savings now for the group as a whole on Slide 27. Sure you recall on the third quarter of 2011, we set a target of CHF 2 billion of cost savings to be achieved in 2012 for the group as a whole. And as you can see on Slide 27, we achieved this target last year, and that represents the 10% reduction from our 6-month annualized 2011 cost base. This is when we started this program. Further, at the end of the third quarter last year, we announced target expense of CHF 3 billion in 2013, rising to a total of CHF 4 billion for 2015. Now there's no -- in line to the discussion we had about the PWM division, that we will be able to increase our target to CHF 4.4 billion in 2015. We eventually go from 2013 of around CHF 3.2 billion compared to the CHF 3 billion we've mentioned before. But let's look at this in more detail on Slide 28.

Just to recap what we delivered since first half 2011. Last year, we achieved savings of CHF 1.3 billion in direct expenses and you got some banking division, CHF 0.3 billion in PBWM, and a further CHF 0.4 billion in the underlying infrastructure and shared services across the bank. If we look forward, as already announced, we intend to achieve CHF 1.1 billion of incremental savings across the infrastructure and shared service functions. Within PBWM, we will deliver additional CHF 650 million of savings of result of integration of the 2 former divisions, as well as our other initiatives. This will also drive some further infrastructure and shared service expenses in the total.

Let's look at our capital, please, Slide 29. Slide 29 shows the significant progress we've made towards our 2013 year end Basel 3 risk-weighted assets to be at less than CHF 280 billion. Our Basel 3 risk-weighted assets at the end of fourth quarter stood at CHF 284 billion. Since the third quarter 2011, we know reduced Basel 3 risk-weighted assets by nearly CHF 90 billion, so that includes the CHF 12 billion I mentioned before in the Investment Bank in the fourth quarter of last year.

Slide 30. This slide demonstrates the continued strength of the capital ratios. As you can see, our Basel 2.5 Tier 1 capital ratio improved to 19.5% from 18.5% in the third quarter, whilst our Basel 2.5 Core Tier 1 ratio increased to 15.6% from 14.7% at the third quarter time. Now if we look at our Basel 3 Look-through ratios, our reported Swiss core capital ratio improved to 9.1% from 8.2% at the end of the third quarter. You may recall when we spoke back in July and then the third quarter, we gave a pro forma target, which allows for the completion of the sale a number of the Asset Management business which takes time for regulatory approval, by which will be closed in the course of the first half of this year. On that pro forma basis, we ended the year at 9.4%, which exceeds the 9.3% guidance we have on the same basis in the third quarter.

Let's move to the balance sheet on Slide 31. We made significant progress towards our goal of reducing the total balance sheet assets to below CHF 900 billion by year end 2013. In fact, total assets were CHF 924 billion at the end of the year, down significantly from CHF 1,023 billion in the third quarter. During the fourth quarter, we kept total assets by CHF 99 billion, CHF 59 billion of which was in the investment bank, and CHF 20 billion in PBWM. So I think given that, I think we're all confident we will achieve our 2013 year-end goal.

And surprisingly, our leverage ratio has improved as a result of this balance sheet reduction, and the Olsen ratio, that is as per the 2008 decree, stood at 5.8% at the end of last year. But let me turn now to the new Swiss leverage ratio that came into force a month ago, beginning of 2013.

I think most of you are aware of the requirements for leverage under the Swiss capital loss, that's based on the proposed Basel 3 leverage ratio and is stated under the Swiss capital loss between 2013 and 2019. Now the denominator of this ratio is similar to the Basel 3 proposal, that is it includes both on-balance sheet assets and number of add-ons relating to the off-balance-sheet exposures. The numerator includes both CET1, and also high and low strength protest. Now included the detailed slides, both the summary of the Swiss capital law, in the appendix for those who would like more details.

I think the key point of this slide, is that our on and off balance sheet exposures declined by CHF 129 billion during the fourth quarter. If you solve the math in the appendix and assume that our target for firm-wide, risk-weighted assets of CHF 280 billion, we will need to operate with on and off balance sheet exposure of around CHF 1.17 trillion, by January 1, 2019. To let's put it in context of CHF 129 billion reduction in the fourth quarter, wanting to cut exposure aside by additional CHF 100 billion over the course of the next few years.

But I think given the progress we've made so far, I know this is going to be a particularly constraining factor for Credit Suisse.

So let's just turn to funding liquidity on Slide 33.

Our funding liquidity position remains strong, and we're well prepared for the Basel 3 liquidity requirements. At the end of 2012, our Basel 3 Net Stable Funding Ratio continue to be in excess of 100%. And we also continue to pass the short-term liquidity requirement on the Swiss regulation, which uses a similar approach to the Basel 3 LCR issue. I'll also note that our funding in CDS spreads continuous down the fourth quarter, both on absolute basis and relative to peers. Finally, we continue to have a highly unencumbered balance sheet, with limited used of covered bonds, and we use about 14% of the Swiss mortgage book for such a clear long-term funding. So on that point, I'd like to conclude the financial results section of today's announcement and pass it back to Brady, please.

Brady W. Dougan

Yes. Thanks, David. I think at this point, we'll just open it up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Derek De Vries of Merrill Lynch.

Derek De Vries - BofA Merrill Lynch, Research Division

I've got a few questions, if I may. I guess, I'll start with some of the detailed questions and then work back to the more strategic stuff. First, in the Investment Bank, you had legacy asset write-downs, they're about 25% higher in 2012 versus 2011. And I was, I guess, surprised just generally every risk asset class rallied last year. So how should I think about that going forward 2013, 2014? And then still in the Investment Bank, I guess, I was surprised, you didn't give any color on the awarded versus expense compensation, so can you just tell us how much deferred comp is outstanding at the end of 2012, and I guess, compare that to 2011, just so we know what the run rate is for the sort of vesting schedule? And then maybe sort of more bigger picture, I guess, just on your cost guidance, I guess that's based on sort of flat revenues-ish. And do you have an estimate of a marginal cost income ratio, so for every incremental dollar presumably, that marginal cost-to-income ratio is much lower than your actual cost-to-income ratio? And then last question, you talked about significant capital return, how should we think about that in light of your old sort of 30% payout ratio? Does that potentially change once you hit your capital targets?

Brady W. Dougan

David, do you want to -- I guess...

David R. Mathers

On the fixed income wind-down portfolio, I mean, I think, it is a -- somewhat it is in classic assets, some of them date back to sort of 2009, such as the remaining European CMBS assets and therefore, not really that correlated to the market recovery you saw at the end of the year. So I mean, in the fourth quarter, as you saw, we took about CHF 130 million write-down, and that's have been the fixed-income results relating to that portfolio. And the loss from that fourth quarter is about CHF 180 million. I think looking forward, our plan is to include the risk-weighted assets we have in the FID wind-down portfolio, down about 3/4 from the end of 2011, CHF 48 million to CHF 13 billion was -- CHF 13 billion. I think it's probably fair to say that we expect the drag drop by about half in 2013 compared to 2012, but I think there will still be long tail. I think you note in the KPI guidance, they were still assuming some drag from this there afterwards. But about 1/2 would be a good view for the next year. On the awarded and expensed, while we will be giving full details in the annual report, which comes out mid-to-late March, I think a couple of numbers, just to think about though. The unrecognized deferred compensation balance is likely to drop by about CHF 550 million in the numbers that you actually see when that comes out, and I think you should still look to see the deferred comp balance through the P&L to drop by about CHF 700 million in '13 compared to '12, if that's hopeful. In terms of the assumption for costs, you're right. Essentially what we're assuming is flat revenues and no change in FX in our cost numbers. And there's also a sort of a perform analysis we'd include in the back as to where we think that would put the total costs for the group on that basis, but that is on the basis of flat revenues, flat variable comp [indiscernible] just to complete the picture. On the marginal cost-to-income ratio. I probably want to get to you, but I think it's probably something like 50% in the equities business and probably 40%, 45% within the fixed income business, but that's probably -- that's slightly back at the end of the envelop [ph] cap line, so we can probably give you a better estimate if you give us an hour or so.

Derek De Vries - BofA Merrill Lynch, Research Division

And just on the private bank, I think you've given in the past numbers there and I think it's probably lower than even the fixed income numbers out, is. That right?

David R. Mathers

It should be lower, because the pretax margin is actually higher. But let's get back, Derek, on that.

Derek De Vries - BofA Merrill Lynch, Research Division

And then just on dividend payout policy.

David R. Mathers

Well, I think, really in respect of 2012, I mean, I think, we said last year, we, as part of the capital measures, we intended to pay the dividend tied [ph] in scrip. What we're doing essentially, clearly, is paying $0.75 in total of, recommending we're paying $0.75 in total. 10 of which would be -- $0.10 which would be in cash, and $0.65 will be in stock. If we look forward to the current year, I think we stand by what we said before that we would expect to make significant cash distributions once we cost 10% on the Swiss Core Capital ratio. And I think as we said before, we would expect that to happen sometime around the middle of the year. I think it's probably a little bit early to be giving dividend forecasts there afterwards, but what we try to do is do it at by same $0.75 last year, $0.75 this year. I think it gives some indication of our sort of thinking. But I think a bit of early, but I think no real difference in terms of our plans going forward. And also say -- I was actually asked earlier this morning, what does that mean for asset distribution? Clearly, we are targeting the investment bank. [indiscernible] to be a way to be a 175 billion or less. Clearly, going forward, therefore, [indiscernible] growth such as it is will probably be in the PBWM division, but it's not a business that's capital led. So there should be a capital generation model that we should generate significant free cash flow for shareholders whilst growing the Wealth Management and Private Banking businesses.

Operator

Your next question comes from Kian Abouhossein of JPMorgan.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Two questions. First on Slide 24, your bubble chart, just trying to understand the $122 billion of risk-weighted assets. Should we expect that overall $122 billion could decline further as some of the other areas you're indicating there's a decline or that's just a rebalancing act that you're seeing? In that context, you also talked about some kind of cost-reduction programs. I looked at your IB staff, and it's now 19,800, down about 4% since 2007. Just wondering, you could do some quite a bit this year, 4%, roughly, but wondering, is this a continuous trend that we should expect, the staff reductions to go on? The second question is regarding Slide 45, which is a good slide, and referring also to Derek's question. If I do a back of the envelope calculation, assuming flat revenues in your cost savings, are we looking at a cost income of around 67? Am I doing the math right? And in that context, your IB cost income of 70% target, you indicate some revenue pickup in the slide. Wondering, will you reach 70% assuming no revenue pickup by 2015? I'll leave it at that for now.

Brady W. Dougan

Thank you. I think on the first point, clearly for the IB, we were at $187 billion of risk-weighted assets, and that was after about a 3.6 billion transfer with the Swiss trading sales business to PBWM, the $187. The target we're actually looking for, for the IB is to actually get them below $175 billion, so that's about another $12 billion of reductions for the IB as a whole. In that, you have the $122 million for fixed income you're referring to. That also includes the 13 billion of FID wind-down. Now we would expect clearly -- the priority has to be to reduce further the FID wind-down out of your way. And we will make substantial progress against it. But we still think there's going to be a tail. So that will obviously generate, hopefully, the bulk of the further reductions, and that will come through in the FID side, there afterwards, we'll be looking for a further RWA across the entire bank to actually meet and exceed that $175 billion goal. But clearly, first target, if it wind-down, that is actually in FID, so that will target the 122 million number. I think your second question was around the headcount numbers within the investment bank. Now I think just to recall, I think we disclosed numbers down as you say -- let me just get the page. Numbers was down from 20,100 to 19,800 all from 20,700 at the end of last year to 19,800. Now just to be clear, that includes both direct and infrastructure headcount. If you look at our cost plan for -- going forward over '13, '14 and '15, we're actually targeting about 1.2 billion in total of infrastructure and shared service reductions. That obviously, does involve, will involve staff, some staff changes, so I think you would expect to see the headcount drop further, certainly in terms of what's allocated to the investment banking in total. The number you see here on Page 23, that will actually also drop further.

In terms of the group cost-to-income ratio, I think there was probably 2 questions there. The first one really in terms of Slide 45, and I think we calculated that we came out about 71% for the cost-to-income ratio. I think we were dividing by revenues before fair value and debt, 2.9, that may give the difference between your 67% and the 71%. So that's kind of what we're expecting to achieve with that -- on that basis. Would we achieve -- then I think your next question was would we achieved the KPI for the investment banking division of 70% without that 3%? I mean, clearly, what we said there is, we will expect 8% from the existing efficiency initiatives. A further 3% [indiscernible] of the FID wind-down, 3% from growth. So the answer is, no. I think we fall short, unless we can be more successful in actually eliminating the FID wind-down, which we've clearly closed that gap. But I think it is important I think for us to target 70%, that's what we're working to get to for the IB division.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Okay. And if I may, just 2 more very quick ones. Can you just say the duration of the wind-down business? And secondly, on Wealth Management, performance semiannual performance fees, could you tell us roughly how much that was?

Brady W. Dougan

I think on the first point, it's somewhat difficult to answer that question, because it is a -- that is the duration of the said wind-down portfolio because it is a mixture of very different assets. It includes some of the long-dated rates transaction, which we've been working hard on to innovate during 2012. Some of those can actually stretch out 8 to 10 years, if it was a runoff. But obviously, we'd be hoping to watch innovate and reduce that further, particularly as other banks actually move into the Basel 3 regime, have a similar incentive to us, to actually reduce the CVA relating to that. So I think, so -- summary includes some of the CMBS assets were just no longer than that. So I think to be candid, I think it's not really runoff, because I think some of the runoff assets will take number of years to do it. We want to be faster at selling and actually, innovating that. I think in terms of the hedging group of fees that we actually had last year, it was about CHF 107 million we took in the fourth quarter, of which, about 28 was actually in the Wealth Management division.

Operator

Your next question comes from Matt Spick of Deutsche Bank.

Matt Spick - Deutsche Bank AG, Research Division

I had 3 questions this morning. The first was on the private bank and the issue of retrocessions. I noticed you seem a lot more relaxed than some of your competitors around that. Is that a fair assessment? And I wondered if you could remind us roughly what percentage of your AUM in the private bank were in discretion rate mandates? The second question I have was deleveraging, where obviously you're making very good progress there, but relatively, you still got more to do with the off-balance sheet items, that's quite a big bit of work for 2013. I wondered if that was mainly B facilities or mainly the derivatives booked with the current exposure method, and if you can tell us about that. And then the third question was on Slide 24, where I'm just curious how you can hold it, because I'm not sure that your globally top 3 in credit, and I'm not sure you're top 6 in rates either. So is that a revenue market share position or are you using a kind of survey-based approach?

Brady W. Dougan

Maybe I can address the retrocessions issue. Yes, I guess, in general, I mean, obviously, we are very focused on delivering good product to clients and having a lot of transparency around those products and we think we've done a pretty good job at that. I mean, on the retrocessions issue, we have had disclosure on discretionary mandates in terms of the retrocession issues since 2008, and we've also had waivers as part of that. So we feel like we've had quite a significant amount of disclosure. And so as you said, I guess, that makes us feel more comfortable around it. I think total discretionary mandates as a percentage of the Wealth Management, I guess assets under management are a little over 10%. So that's been sort of the -- in terms the assets under management in Wealth Management around that number. You want to talk about the deleveraging issue?

David R. Mathers

Yes. In terms of the off-balance sheet add-ons, I mean I think it's actually going to be a number of factors that actually drive the reduction there afterwards. I mean I see quite clearly what the Basel III leverage ratio does, and the Swiss leverage ratio is simply a variant of that, but if it makes you focus on the off-balance sheet firmness [ph]. So you do think about for example, Evergreen rollover, [indiscernible] facilities or corporates, because whilst they don't affect the risk-weighted assets, the on-balance sheet leverage of, really, the risk-weighted assets, they have a marked impact on the off-balance sheet exposure. So what we're looking at is a mixture of things, which some of which will be -- will have short-term impact. Other will require both of the commitments to actually roll off over time in order to actually reduce it. I mean, candidly, I think the mixture of most that we have will probably exceed the goal we've put here. And I think that's probably a conservative way of proceeding, just in case any of those things prove to be more difficult to achieve than we expect.

Brady W. Dougan

I guess the third question was on the market share positions. I think obviously, taken from a number of different measures, as you said, we can probably have a debate about some of it, I mean we feel pretty comfortable with where we position them, mainly based on external surveys and geologic, and sort of more market share. Not so much lead table, it's a little hard to get revenue numbers obviously, but more a sort of what we view as kind of whatever we can determine from market share, what's publicly available. I think -- I mean obviously, I guess, we're not so much trying to split hairs over where its number 3 or number 4 or number -- but the basic point was simply that in those areas where we feel -- and I think we could probably agree we have better market shares, obviously that's where more of our capital is, and that's where the higher returns are. But also I think importantly, was the message about the directional aspect to this, which is we do think across -- particularly, our businesses in that middle group, which is a -- it's 1/3 of our capital, it's a fair amount of capital, we have plans in place that we think will materially increase the returns on those businesses while maintaining and maybe somewhat improving market shares in them as well. But it also does raise other questions about where your optimal return comes, at what market share does your optimal return come in all those various businesses. And those questions will be different for different organizations, but that's what we're -- we're very much focused on optimizing the returns on those businesses, and so that's -- I guess, that's just -- it's a little bit of a window into our thinking about how we look at it. Not revenue market share, it's not -- it's really about trying to optimize those returns.

David R. Mathers

I think specifically on the global credit product, I mean I think it clearly is split between leveraged finance and high-yield penetration and investment grade. I think I can look at any survey or any external analysis which would say we're very strongly and definitely a top 3 leveraged finance house and a top 3 high-yield house for that matter. And I think, if anything, that position strengthened in 2012. I think in investment grade, I don't think we would say we are in the top 3, or that actually our market share has actually improved in that business as well. What we're trying to share here is actually, it's credit combined business, but certainly, Matt, we quite agree this is a business -- it's certainly for global credit which is more driven by the leveraged finance than the spectrum than the investment grade. Next question?

Operator

Our next question comes from Fiona Swaffield of RBC.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

I have just 3 questions. The first was Slide 45, trying to reconcile it with the slide you gave in Q3, where you gave a CHF 16.5 billion cost base. I know the -- there is obviously -- it's not comparable because of variable compensation. But I wondered if you could kind of give us what the comparative would have been then because it doesn't look like it's changed much in spite of CHF 400 million incremental cost save, but I don't know if I'm doing something wrong, that's the first question. The second question is on gross margin. Just trying to understand the moving parts for the next couple of years. You mentioned [indiscernible] the mix issue, but could you talk also about net interest margins? So if we look at the base of CHF 114 million for the full year, there's a few one-offs in there, but do you think that the 2 -- better transaction could offset the drag from net interest income and the recurring, if you could comment on that? And the third issue is the fixed income number and securitized products have been particularly strong in 2012, on whether you could comment on what you think the outlook is for 2013 for that revenue line and whether you think it's sustainable at the current level.

Brady W. Dougan

Okay. Maybe -- Fiona, it's Brady. Maybe I can start with the gross margin question, and talk to that a little bit, and maybe sort of prospects for securitized product as well, and then we can get back to your reconciliation question on Slide 45. I think on the gross margin issue, as you say, there are a lot of -- I would say there are, what I would call, some cyclical factors and there are some more secular trends in terms of that. And obviously included in the secular factors are things like, as you said, certainly net interest margin, it's a very important part of that, as well as sort of the mix of business and the sort of degree of opportunism of our clients, how active they're being, et cetera. On the other hand, there are some secular trends, as you know, which are, in my view, clearly are -- clearly more use of ETFs rather than more structured products, more -- so there probably are some elements that do structurally move that down. And then in addition, there are a number of initiatives that we have on our side to try to obviously increase gross margin by increasing the number of products that we sell and lots of different initiatives that we have to try to do that. I think, as you say, I think we were happy to see a stable gross margin third to fourth quarter even though there were a lot of headwinds, and you've obviously seen that from a lot of the other industry participants, where obviously, the gross margin has taken much more of a beating sort of across the industry. So we were happy to see obviously, our -- a stable performance on that. I do think that obviously, we have seen, and you saw in the numbers in the fourth quarter, a little bit of an increase on the transactional side, obviously stable, and/or constructive markets will help towards that. So I think that January so far has sort of continued that trend. Our private banking clients probably take -- they react to things in sort of longer term, but I do think that, that is something that is -- that hopefully, will be a positive. The net interest margin on the other hand also had sort of a tail on it, and so will take some time. Even if rates stabilize or start to go back up, it will take some time for those benefits to flow through, but they will eventually flow through. And then you also have the next question in terms of our clients, which is we clearly have an increasing composition of ultra-high net worths than emerging markets, clients which tend to be slightly lower gross margin. As you know, we actually think we can drive better pretax margin out of them, but it is a little bit lower. So those -- I think you're probably aware -- I'm probably not telling you a thing you don't know -- those were a lot of the factors that are in there, and I think a lot of it will depend on sort of the market base factors and how they continue to develop through the rest of the year. I think transactional volume could continue to improve as we saw in the fourth quarter, we'll see it, it depends a lot upon the environment. Obviously, if interest rates start to go back up, that will eventually filter through, and that would be helpful. But we are still going to have the composition issues and some of the more secular issues around product mix that will probably moderate that. So that's -- those are kind of the selection of issues there, I'm not sure how much that helps you. But on the -- on your third question on the structure products outlook, I mean, generally, as you know, we think we have an excellent business there with very good market shares and it's -- we think it's actually been the restructure of the business that works very well on a capital efficient basis. I think our outlook is pretty strong for that business. I mean, the U.S. housing market is improving, we'll benefit from that, that's clearly a significant portion of the business, but we're also growing the business not just in U.S. but in Europe as well. And clients continue to look for yields and this is a segment that obviously benefits from that. So I think again, obviously, we'll be somewhat influenced by the macro environment but we're pretty -- we -- I'd say we're fairly bullish on our outlook for that business.

David R. Mathers

Just on the reconciliation then between Slide 45 and the fourth quarter deck, and Slide 21, the third quarter deck. So in the third quarter, you showed I think the number excluding available costs, also excluding realignment costs. So in other words, the underlying costs. And I'm not sure we kind of really got the message across, so what we wanted -- and I'm thinking at subsequent meetings and also in this, was to give the sort of total cost estimate on the base revenues, flat variable comp and flat FX. So you've got a difference of between 18.3% and 16.5%. As you say, the increased VaR in the target for 2015 from [indiscernible] reduces -- should reduce the expenses by CHF 0.4 billion. However, what we're actually also doing is we've also got a CHF 4 billion of realignment costs in that year as well. And to reconcile between the 2 numbers, you start at 16.5%, CHF 1.4 billion of variable costs, [indiscernible] VaR comp, and CHF 0.4 billion of restructuring costs, so that's the reconciliation. But essentially, it's variable comp and realignment, and that's the difference.

Operator

Your next question comes from Huw van Steenis of Morgan Stanley.

Huw Van Steenis - Morgan Stanley, Research Division

I found the data -- or sorry, your presentation on the costs is extremely helpful. So probably can I ask a slightly different question, how will your targets be tied into management incentives and in particular, will the new KPI of 70% cost income for the investment bank, will that get hardwired into executive compensation? Will there be any incentives if the management can actually hit that target 1 year or 2 earlier, clean of restructure or exit costs? And then secondly, as you debate with the board dividend policy -- and I appreciate you won't be able to give us some hard numbers here -- but have you thought that in years to come, how your dividend policy may adjust and have a much higher payout once you get beyond obviously, the new ratios?

Brady W. Dougan

Thanks, Huw. Yes, I guess I'd say in general, in terms of the tie-in to the management in executive board level comp, I mean there will definitely be a -- that is obviously an important aspect of our overall strategy, and it will be an important part of compensation and my guess is it will be fairly hardwired into that, so it will be -- there'll be a very direct involvement. And obviously, that -- those cost targets relate clearly to the 70% cost income, which relates clearly to the 15% return on equity, which is clearly where we need to get to. In terms of dividend policy, I mean again, I think our view is -- as you know, our overall strategy is -- we feel this is a sustainable business at these kinds of levels, we don't see -- we'd like to grow our Private Banking Wealth Management business over time, but as David said before, that's not a particularly capital-intensive business to grow, but we'd like to grow it. It's a very cash-generative model overall. So our belief is that, that's going to lead to significant, potential to pay out those dividends over time. So -- and obviously, a lot of, we'll obviously be -- have to -- we'll have to look at it in the context of how the business is performing and market conditions, et cetera, but I think that's our -- I guess it's just consistent with what we said all along, I'm not sure if we can get any more specific, but -- David, I don't know...

David R. Mathers

I think the only point I would just add it's more of a service technical point. What we said is not only that we've returned significant cash distributions but also once we part the 10%, we will seize the dilutive measures we've taken in the past, so in other words, issuing new shares for deferred employee compensation. So once we actually hit that 10% point, we will be looking to buy shares in the market to deliver to our employees in that sense. So there's -- that's the -- a small [indiscernible] of what Brady mentioned.

Operator

Your next question comes from Kinner Lakhani of Citi.

Kinner R. Lakhani - Citigroup Inc, Research Division

So a few questions, firstly, I wanted to start off with deleveraging, and just wanted to get a better feel for what the CHF 69 billion of asset in the investment bank is coming from, if you can maybe give us some more color in terms of asset classes? On capital, my next question, in terms of how you think about the in-state [ph] of capital ratios for CS, would you be running with a buffer over 10% over time? And just related to that, I saw the benefit from the Tier 1 participation securities, increased from CHF 2.3 billion to CHF 3.1 billion, I just wanted to understanding the increase there, I wasn't sure about that? And then also if you could give us an update on the disposals, particularly in relation to the private equity funds. I did see the announcement on the ETF, but haven't seen anything on the private equity fund? And finally, just on the macro business, Slide 42, it seems like the revenue pull from macro has dropped from CHF 2.2 billion in 2011 to CHF 1.8 billion in 2012. Clearly, this is a business that over time, you have invested in and you have had some aspiration to bring it up to CHF 3 billion of revenues, so just kind of trying to get a feel for where you think you are in terms of macro?

Brady W. Dougan

Okay, great. Thanks very much. Maybe I can -- let me take your second and your fourth questions and then I'll -- I can ask David to answer the others. I think with regard to -- as you said, the in-state on capital, I think our general view is that in terms of the common equity, I -- we probably will want to run some kind of a margin to the 10%, but I don't think it would be very large. I mean, just remember on the other -- on top of this, we're going to have another 3%, which have already put in place of a high trigger convertibles, and we'll also have some amount of low trigger on -- we're still sort of looking at that versus on the business model and some other measures we're taking. As you know, the original proposal was 3% of high trigger and 6% of low trigger, we'll probably going to have mitigating measures that will allow us to have a lower amount of low trigger. But in any case, there's going to be a significant amount of contingent capital behind that as well. So I think our view is while we may want to run some small buffer on that, I don't think it will be very large. With regard to the disposals in relation to the private equity funds, I mean, they're actually going very well. As you say, we've announced the ETF sale, we did not announce the price of the proceeds, but we think that was a great buyer, where the business will do well within, and we think that was -- it was an appropriate price, so that was good. All the other funds that we have actually -- that we actually indicated that we were in the process of selling are all in the process and -- at various stages in the process, but they're all proceeding very well. I think our view is that we will meet or exceed the targets that we laid out in the capital plan for those over the course of the next months. So I think we're -- we feel very comfortable with the outcome of that. David, I don't know if you want to talk about...

David R. Mathers

Yes. Let me take some of the other points then. So in terms of deleveraging, I mean the total balance sheet reduction was about CHF 99 billion, of which as you say, CHF 69 billion was actually in the investment bank. All of that CHF 99 billion, and just under 1/2, was in respect of the repo [ph] prime services businesses, which was a very balance sheet intensive. Then the balance would relate to other position reductions we took both across the PBWM, in our central treasury usage and also in the investment bank itself. I mean, I think we're obviously pleased with the initial result of the balance sheet exercise. And I think what we've been focusing on is a much greater alignment of the allocation of balance sheet to our client needs and through our major clients, particularly within the investment bank, and that reapplies to both the prime service and the repo business as well as the investment bank as a whole. So we've seen some benefits from that already. And I think going -- looking forward, in the course of 2013, we'll probably see some seasonal pickup in the requirements for that which will partly mitigate the underlying decline in the balance sheet as we actually -- we optimize it. So I expect to see rough stability over the first quarter or 2, and then a continued decline. And I think we took the first measures, and I think got good results out of that, we would expect to see further credits there afterwards from that. I think on the second point then, on the Tier 1 securities of the Claudius securities destined to get called, this -- as you say, the capital credit increased from CHF 2.3 billion to CHF 3.1 billion, so if you look at the difference between the Swiss core capital ratio at 9.4%, and the Basel core capital ratio at 8.4%, that's gone up by about 20 basis points from the third quarter. That is related to a discussion we have on the regulator and about the fact that we can actually use the Claudius securities to actually offset some of the other deductions you have under Basel III, so I think you know there's a limit on the amount of deferred tax on that as well as you can actually take on some of the other minorities. So you get, you actually get a sort of roughly, 20% credit from Claudius as a consequence of that. So it was a more advanced treatment of Claudius that we actually agreed with the FINMA. It doesn't affect the Basel III ratio, clearly, it does affect the Swiss core capital increases at -- by about 20 basis points. On your point then, moving back to macro, I think I make a few points. I mean, I think fundamentally, this is the rates business is and the FX business are actually quite heavily impacted by B III through counter-party credit risk, which is a somewhat punitive add-on. And a lot of the focus we've had this year has actually been on innovating and restructuring that business. We are very focused on profitability on a B III basis, and that's kind of where we're heading with this. I would though, slightly caution, that clearly the market environment for our rates business with be very flat and low curve, isn't that easy, frankly? I mean this is a sort of business that would benefit from a steepening rates environment, which we're not seeing at the moment. So I think I'd look at the year-on-year performance, and say, this is probably is where you've seen some of the consequences of the Basel III transition, and what this actually does to it. But I think -- and I think it's an important business in terms of its kind of cyclicality, but I'd also be slightly cautious in terms of the, just the shape of the curve at the moment.

Kinner R. Lakhani - Citigroup Inc, Research Division

So very helpful. Just a quick follow-up on that, just on the capital side. Do you see any risk weight inflation in terms of the Swiss mortgage book? And also, could you remind us of what you think would be the impact, the counter cyclical buffer?

David R. Mathers

Yes. I think -- this is in reference to the discussions, I think from the FINMA returns and add-on for the Swiss mortgage book in response to -- concerns obviously about the Swiss mortgage market. But I think the point we probably make is we have a very strong and high-quality mortgage book, and we've been very, I think, careful to maintain that in recent years. So I think -- I'll just put that a little bit in context. There will be an add-on, probably in the order of about CHF 1 billion to CHF 2 billion per annum for the PBWM division, but we would expect to be able to absorb that in our total RWA target for the bank.

Operator

Your next question comes from Jon Peace at Nomura.

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

I've got 2 further questions, please. So one was on group risk-weighted assets. David, I think you hinted about beating the targets in the investment bank. I know your group target the end of 2013 is less than CHF 280 billion. But could it be much less than CHF 280 billion? You're always saying as like the mortgage add-on mean that you expect to be at about that figure. And the second question was just with regards to the CHF 1.1 billion of strategic disposals you identified as part of the capital plan back in Q2, how much of that was booked in 2012, and how much is still to come in 2013?

Brady W. Dougan

I think -- I mean I think the intention is -- so reduce -- as I said, the IB's dollar RTB [ph] weighing number to be less than CHF 175 billion, which is about 12 billion less than the position at the end of the year. So I guess in Swiss franc terms, you're talking about roughly, CHF 11 billion, and so I think everything else equal, that would take you down from 284 billion, down to about CHF 273 billion. That said, I think, there are some add-ons in the PBWM business. I don't -- I think you probably should take the guidance of those value, we'd expect to be at CHF 175 billion or [indiscernible] for the investment bank, and to be at CHF 280 billion or below for the group. I don't think -- I don't expect it to be radically beyond that. I think we are getting to -- towards the end of our transition in terms of the Basel III risk-weighted process. I think the second question then, really is -- let me answer it first slightly, it's really the difference rate between the reported number and the pro forma number. We are expecting in terms of disposals, both of within the Asset Management division, but also some residual real estate disposals, plus the deductions relating to that, because as you know, the capital actually gives around a 20% add-on, because we can use our deductions more effectively, about an CHF 800 million of capital we received by the time actually complete all these different disposals. But I would just caution, and we being a bit careful here in the sense, it does take a while to get the regulatory approval when we announce something. I think you've seen the ETF sale. It will take time to actually announce and close the other things, so something you probably expect to see coming in over the first 2 quarters of 2013. I think it's likely by the time we get to the end of it, we will actually, and I think we'd beat the CHF 1.1 billion target, but it will take some time to realize.

Operator

Next question from Jeremy Sigee of Barclays.

Jeremy Sigee - Barclays Capital, Research Division

Just a couple of follow-on questions, please. Firstly, can you just talk a bit more about the U.S. tax case, just where that process stands at the moment, and what kind of timing you expect in your resolution? And then second question, some of your peers commented a bit about the recent BIS paper comparing market risk weighting, so I just wondered if you would also want to comment on where you fell in terms of the comparison of risk weightings?

Brady W. Dougan

Yes, sure. Thanks. I mean on the U.S. tax issue, unfortunately, there's not a lot new to say. I mean, it's -- it continues to obviously be an outstanding issue, it's a pretty complex issue, which involves governments and a number of different banks, et cetera. We still have a hope and an expectation that we'll get it resolved at some point. As you know, we've already taken some provisions for it. So we'll see how it develops, but our hope and our expectation is still that we will get it resolved, but it's hard to put a timetable on it or get any more specific about the outcome.

Jeremy Sigee - Barclays Capital, Research Division

Is it -- I mean, is it fair to say that after an understandable delay late last year, it's now sort of being dealt with more aggressive -- I mean it's sort of moving forward?

Brady W. Dougan

Well, I mean we've been working pretty hard on it for a long time, even through last fall, et cetera, and obviously, working together with the Swiss government and the U.S. government, et cetera. So I think it's certainly is something that people are focused on and hopefully, we'll get a resolution, but it's really hard to actually -- yes, just hard to predict, sorry.

David R. Mathers

Sorry, David, I just -- answering the other point. I think on the CBS review, so it's an interesting paper, clearly, focus really is on the art of U.S. total asset bases and then the art of UH trading asset bases, both for us and our peers, and then some of the other tests they did. I mean, I think I'd make a few points. Firstly, the paper, it clearly is a mixture of B I reporters, and B II, and B 2.5 reporters, so there's a lot of different instruments and environments, actually that's included in that paper. If we look at the group's total balance sheet, clearly, there is a substantial block of very low risk asset, sitting prime services and repos, which tends to -- sort of the total ratio. And if we look at the trading asset ratio, which I think you know, of course, I think shows is about CHF 279 billion. And it's you -- if you look at the fourth quarter numbers report here, it's down to about CHF 256 billion of assets. Within that CHF 256 billion, there is also a substantial element of assets which are either government-guaranteed mortgages within these securitized products portfolios, it's about CHF 30 billion. There's also a couple of -- how do I put it, investment grade governments, I think that's the best way of putting it. So U.S. Treasury, for example, which we hold as part of that rates business, and there's a block of prime service assets, which were also enclosed in that relating to the hedge fund business. So a large chunk of that CHF 279 billion is also very low risk in terms of numbers you see. So that would tend to result in a lower RWH trading asset ratio all things being equal. I think 2 more points I will make. The first one is, the combination of Path 1 and then Path 2, and then the past Plus Bond we've just initiated for our employees, plus certain other internal actions around this, actually generate quite substantial employee hedges for the trading portfolio. The round about 5% of the assets, trading assets, on a B 2.5 basis, will be twice that on a B III basis. So that would also tend to offset the RWH trading asset ratio because you have those hedges in there which reduce the RWA, but don't reduce the actual trading assets. I think then the final point is just a more general point, which is being how does one assess the richness of this portfolio, I think you probably have to look at the number of lost [indiscernible] trading days you've had, and we have none in the third quarter, 2 in the fourth quarter at a very low-level. So I think the risk in this portfolio is generally low. So I mean, I think, it's initially starting. I think we'll probably expect to see more on this. I think as Brady mentioned this morning, I think probably the harmonization we'll probably most focused on is everyone going to B III on a consistent basis, but -- that still seems a while away. So I think that was your first question.

Jeremy Sigee - Barclays Capital, Research Division

Sorry, can I just pick -- just -- do those last 2 factors, so the sort of the Path hedge and the low loss experience, did those result in you having coming out of the low end on the standard portfolio exercise at the BCBS third [ph]?

Brady W. Dougan

That's a good question. I think on the -- I don't know how the standard models have interacted with the Path on the top of my head, I think we have to get back to you on that one, I'm afraid. And there was 1 point actually, just to clarify, I think it was John's question really on the CD disposal. I think what I -- so let me just be clear. What we are still expecting to book from the CD disposals is about CHF 550 million of sales still to be made. On top of that, there's between CHF 50 million and CHF 100 million of additional real estate. So that gets you into the sort of CHF 600 million, 50-50 level. You may recall as you generate CET1, you get a benefit from deductions, which is typically about a 17% to 20% add-on, that gives you a total capital benefit from the real estate and the end disposals about CHF 800 million. The CHF 800 million is the number you see on Slide 49, which is the difference between the reported and the pro forma numbers for both CET1 and Swiss core capital numbers. I just wanted to come back on that, John, sorry, I wasn't sure if I was clear enough.

Operator

Next question, Christopher Wheeler of Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

Just some questions on Wealth Management. First of all, just looking at Slide 18 and your new updated KPI for the year, the combined businesses, can I assume you've now dropped any kind of gross margin target, or do you still -- are you still running with your previous target on the Wealth Management clients? That's the first question. And perhaps related to that, we saw, obviously, from your big competitor, the marked decline in the gross margin in Asia after a bit of a spike in Q3. Can you confirm whereabouts your gross margin is sitting in Asia? I mean is it around about the 75 basis points at the moment? And then just turning again to Wealth Management clients, I think it was 22.2% was the pretax margin. Now some 21% of your assets under management in the Americas, if you split that out, could you give us a clue as to what the pretax margin would look like if we never had the U.S. business, so we can get a bit more of a comparison against UBS?

Brady W. Dougan

Okay. I think on the first question, it's a relatively easy answer, which is we actually never had a KPI, which was gross margin. So we had given some guidance in the past from time to time. But we didn't have a KPI that was gross margin so -- and we don't now.

David R. Mathers

I think that you gave one of the private banking date back in '09, Brady. I think it was about 110 to 120 or something like that. But anyway, it doesn't matter too much.

Brady W. Dougan

Yes. Sorry, just from a KPI point of view. We don't -- we've obviously talked from time to time. And obviously, I answer the sort of -- I don't know how good an answer you thought it was, but we actually talked a bit about the different factors on gross margin, which [Indiscernible]. I think in terms of the gross margin and from a regional point of view, we don't actually provide a lot of guidance on the differences between the regions. It is the case that for us as well in Asia Pacific, is a little bit, is lower than the average in terms of gross margin. But we haven't really gotten into a lot of detail around that. And again, our objective in all these markets is to try and grab higher gross margin. And so that's really our approach on it. Yes, I guess, the question then on -- I don't know, David, can we answer the question on the U.S. if you took the U.S. out of -- I can't really...

David R. Mathers

I think what we've really -- we can probably -- I mean I always -- we'll really say is that our U.S. business is not profitable in its current shape. It's not substantially loss making, but it is not profitable in its current shape. And clearly, one of the goals of the PBWM division is to drive synergies and benefits from that division to improve it overall. But at the moment, it would be dilutive at the overall numbers that you see.

Brady W. Dougan

Thank you. Next question?

Operator

Next question, Robert Murphy of HSBC.

Robert Murphy - HSBC, Research Division

The first question, just on the Wealth Management in the cross-border assets. Can you remind us roughly, the quantity that could be at risk of outflow there, where we stand right now? Because you seem to be implying, I guess something like, I don't know, between 10 billion and 20 billion per annum outflow given your change in guidance on the overall inflows? And then on the Slide 45, just a couple of quickies there. First of all, why are you including the CHF 400 million of realignment costs in the 15 expense guide [ph]? I know you would have taken that out Brady. And then secondly, the infrastructure costs, should I assume that those are roughly a portion pro forma between the investment bank and the private bank Wealth Management businesses?

Brady W. Dougan

I think on the first question, I mean as you saw, we basically disclosed the Western European cross-border outflow. It's a little bit under CHF 7 billion for 2012. I think it's obviously hard to project that. I think our view is that, if anything, it should be going down over the next couple of years, but there still will be outflows. So that's why we kind of -- we obviously had a fairly broad range of estimates when we looked at -- when David talked about the net new asset target of sort of 5% to 10% outflows for some time. So I think in terms of that specific item, I think over the next 2, 3 years, hopefully, you're looking at numbers that are more like in total, CHF 10 billion, CHF 15 billion, something on that order. But obviously, it's a little hard to precisely estimate, but it's -- we certainly wouldn't expect that per year. But I think that for the total over the next 2 or 3 years as it hopefully works its way out, maybe a total number of CHF 10 billion to CHF 15 billion would probably be -- CHF 10 billion, CHF 15 billion, maybe maximum CHF 20 billion over that period is something that we think would, could be in the range of expectations.

David R. Mathers

Yes. I think to be clear, the CHF 6.9 billion we saw last year is about a 6% of the total West European, asset. So about 10% guidance is I think, it's to say [Indiscernible]. I think your second question then was actually on Slide 45 in terms of your total cost number. I guess, I mean, the answer is what we wanted to give here was the total cost including variable comp and realignment. And we have, we have about CHF 400 million in restructuring costs in 2015, and that will be a cost we'd actually take. I think when we reported our third quarter, we tried to give the numbers clean as that. I think we found that, probably [indiscernible]. That was a bit confusing, so we just wanted to give you a total cost. But yes, I guess, the 18.3 number would be the total, and then the 0.4 would be the restructuring costs we've actually taken in that year. Just a caution though, that is assuming flat revenues, flat variable comp and no change in FX, so the number of assumptions there.

Robert Murphy - HSBC, Research Division

Is that actually, x the variable comp, have you allowed for sort of underlying inflation in the cost base there, or is that done on a sort of on a staged [ph] money basis?

David R. Mathers

It's included in our -- there isn't -- we're not seeing that much inflation. It's included in our some areas, and so we don't see much inflation. And I think you should include -- you assume whatever we see is kind of included in that. Clearly, part of what we're doing, obviously, is looking at purchasing synergies, things like that, so there's deflation in some of our purchasing. In terms of the allocation of infrastructure, we've not really given it. It's somewhat biased in favor of the investment bank, because they have a number of functions, such as product control, market risk, which tend to -- to which you're actually sitting in this function, actually support the investment bank, but don't have so much to do with PBWM. So even if you think sort of 50%, 70% investment bank, the balance through PBWM, you're in the right ballpark.

Operator

Next question from Stefan Stalmann of Autonomous.

Stefan Stalmann

Three quick questions, please. First, Slide 24. Could you indicate whether FX and commodities is actually losing money? Second question, if you look at the fixed macro revenue line that you report, could you give a rough indication of how much of that is FX, and how much of it is of the macro? And the final question, you mentioned that the amortization of deferred compensation is going to drop off in 2013. Is that part of your CHF 4.4 billion cost-cutting target?

Brady W. Dougan

Yes. I think in terms of FX and commodities, no, they're not unprofitable. So this is obviously, the question of the returns as opposed to profitability. So no, they are profitable, but obviously, they are lower returning than we would like them to be. So that's clearly part of the overall initiative, is to obviously increase those returns, either by increasing market share or obviously, making the business more efficient and pushing it towards the right. In terms of the macro level FX versus rates?

David R. Mathers

Well, I guess, last year, FX revenues would be approximately, 30% of the total. And rates would be the balance, I think, to give you some help in that sense. And I think your final question was then on -- sorry, could you remind me, Stefan? I'm sorry.

Stefan Stalmann

Sure, the drop-off of amortization of deferred compensation. I think you mentioned CHF 700 million 2013. Is that part of your cost-cutting plans?

David R. Mathers

The answer is in the -- for example, the increase in the cost savings from 2 to 3.2, the 1.2, it does contribute to that. But I just recalled that, that was a normalized number, adjusting for path 2, so you see the path 2 adjustments in 45. The path 2 essentially, reduces the third comp, so you probably expect to about 400 billion increase and the cost by about 300 billion basically is the path 2 reduction. Sorry, that's a bit...

Operator

Next question, Andrew Stimpson of KBW.

Andrew Stimpson - Keefe, Bruyette, & Woods, Inc., Research Division

First question be on the U.S. RMBS litigation. Just wondering what -- that didn't seem to be any big tick-up in the provisions you made against that in the fourth quarter, maybe I missed a bit. A lot of your competitors did tick up. So I'm just wondering if that's something that you see, that we should expect to come through in 2013. And then secondly, on -- just wondering what your plans for the low trigger CoCos vision, whether you guys really need to build up that issuance quicker in order to not get any hassle from the regulator on paying your dividend, or whether we should think of the -- those 2 as completely separate?

Brady W. Dougan

I think with regard to the mortgage litigation in the U.S. I mean, yes, we obviously do have some outstanding issues. We -- naturally, we feel like we're adequately provisioned for them. And we have a lower profile, I think, than many other players in the market. We didn't have any actual sort of portfolio lending. We didn't have lending within the firm. We didn't have any exposure to any of the -- a lot of the servicing or the robo [ph] signing issues, et cetera. So we've actually had, I think a generally, a lower footprint in those issues. But we do clearly have some issues outstanding, but I don't think that we saw anything that happened in the fourth quarter that made us feel that there was any dramatic need to change the provisioning. We still feel like we continue to feel like we acted fairly responsibly through the crisis period. We reduced our originations in 2006 while the market is going up dramatically. And so we hope that, that's going to play out as higher quality product was originated, and we'll see. But in any case, we obviously feel that we're adequately positioned on that. I think in terms of plans for the low trigger, I mean, I think the good news is that we feel we could raise it whenever we wanted, and there will be plenty of demand. So we'd have a -- we think we could easily raise that whenever we need to, so the market is certainly available. I think right now -- I don't think -- clearly, we believe we'll be at our 10% core ratio. We've got almost -- we've got, virtually, the entire 3% of high trigger in place already. That puts us, I think, in a very strong position. So I don't think that we view that it's necessary for any of the other things that we talked about. But over time, we'll obviously think about it and look at the market conditions and whether we need it. But I don't think we see any immediate need to raise that.

Andrew Stimpson - Keefe, Bruyette, & Woods, Inc., Research Division

And just one other question. I know in the press conference call, you guys said there was 6,000 staff have a performance drawbacks in their contracts. I'm just wondering are you guys able to quantify what proportion of that 6,000 have [indiscernible] Total comp?

Brady W. Dougan

Well, it's our most senior people, so it's mostly managing directors, directors. So that would be a high proportion of -- what's that?

Unknown Executive

[indiscernible]

Brady W. Dougan

Yes, deferred compensation, but it's a substantial portion of deferred compensation that's out there, and it's a substantial proportion of our staff. So yes, so it's -- we probably had that in place for the last 3 years. And again, as was mentioned before, I mean, we've had, I think in terms of the compensation structure, we've actually continued to do what I think are good things for employees, but also very good things for the bank in terms of reducing risks, et cetera. David outlined some of that, but again, this year, we have the plus bond, which helps to offset some of the risks in some of our businesses and contribute to our RWA reduction goal. So I think it's a good way to do that.

Operator

Next question from Dirk Hoffmann-Becking of Société Générale.

Dirk Hoffmann-Becking - Societe Generale Cross Asset Research

Three questions. First of all, over the last, I think, about 8 quarters, you've sort of increased your cost reduction target to roughly, CHF 500 million each quarter. It's a nice tradition. Shall we think going forward that you're working hard to maintain that kind of tradition, or is 30% operating margin in IB and 35% in PV pretty much as good as it gets? The second question is on cash to equity shift in the allocation of high net-worth customers. You said cash allocations have gone up again. How shall we think about it? Put numbers on it. If we have another sort of 6 months of [indiscernible] equity markets, are you going to see expected material shift, or are you thinking this is more of a long-term multiyear event? And last point is foreign currency translation had went, gone up to I think CHF 12.8 billion this quarter. If these abate, how shall we think about the windfall capital? Is that -- would you regard that as distributable capital? Does it go into your dividend decision, or would you regard this as money-ish probably hold until the exchange rate has fully stabilized?

Brady W. Dougan

I guess maybe I'll answer the middle question. David can address the cost question, foreign currency question. I think disregard -- with regard to the cash proportion, we haven't really seen it, I couldn't tell whether you're seeing it was going up or we're seeing a shift out of cash and equities. I think if anything, we've seen it gone down slightly. But basically, it's been fairly stable the last couple of quarters at around the 30% level. So we haven't really seen it. It hasn't gone up in terms of the proportion of cash, but it hasn't significantly come down either. And so as you say, our hope is that over time, people will get more comfortable. The environment's more stable, and we will see more of that coming out of cash, but I would say, it's been fairly sticky. So maybe we'll see it, maybe we won't, that remains to be seen.

David R. Mathers

The comment we made in the speech was really around the full year numbers. And you may recall, we actually said this in the first couple of quarters that we've seen a shift towards fixed income, instrument to that point. So that's the comment in terms of the impact on recurring fees. In terms of the cost reduction process, I mean, I think predominantly, we're actually focused on making sure we achieve these goals. Because I think -- there's a number of things we need to do to get there. I think we've made very good progress in 2012. Clearly, there's sort of precipitating event really in the last quarter was the formation of the PBWM division, which triggered the bulk of the additional cost savings we're looking for here. So I think it sort of follows from now. I think other than that, I think the total would probably moved out that sort of level. So I think our focus will be, I think 70% cost/income ratio for the group, 70% for the IB, 65% for PBWM and also, just for the record, reducing loss within the corporate center as well to contribute to the overall numbers. But I think, at the moment, it's probably our best estimate, we see things as we say at the moment. On the FX translation, I think in the past, we've essentially run virtually neutral on a dollar Swiss franc basis in terms of the equity to match our distribution of risk-weighted assets across the bank. And I think that's still likely to be the case, although we'll probably shift slightly more in favor of shareholders' equity distribution now that we've completed the Basel III transition. But I guess mathematically, if we would see, I don't know, a very sharp rise in U.S. dollar, then we would see an increase in the Swiss franc RWAs on consolidation. So if the ratio would be approximately neutral depending how, what the exact position we're actually running. So given we're targeting a 10% Swiss core capital ratio, it shouldn't really change the mathematics for our distribution. So that's the point I'd really kind of make. I mean clearly, the other, just whilst we're actually on FX translation moves, there is a sort of marginal benefit we should get from a weakening of the Swiss franc against the euro because as you know, from a couple of years ago, we actually have less Swiss franc revenues than we have Swiss franc expenses because essentially, obviously, the PB Wealth Management business have an awful lot of resource focus in Switzerland, and Swiss francs denominated. But actually, works in books in those Swiss francs, euros, dollars and other currencies. For the year, our Swiss franc is not unimportant in terms of the economics of the PBWM division.

Operator

Next question, Andrew Lim of Espirito Santo.

Andrew Lim - Espirito Santo Investment Bank, Research Division

I've got 3 questions, please. Firstly, on the hybrid equity, referring back to Slide 50. I'm just trying to figure out what is the absolute enhanced [indiscernible] that this represents? And then under [indiscernible] the impact from high interest costs, what can we think about that there, and to what extent could that be offset by interest costs being lower from, in the [indiscernible] hybrid that runoff, or other -- like savings? Perhaps on the asset side, you've got obviously, interests that can offset that cost there? And then secondly, just on the Asset Management side, you also have a CHF 200 million increase in your fee-based revenues there. Could you give more color on how that's achieved exactly? To what extent is that sustainable going forward? And just trying to figure out the quarterly run rate, the Asset Management revenues? And then lastly, on Clariden Leu outflows, you obviously had the outflows this quarter again, whilst previously, I thought you said that had come to an end, could you give a bit more color there, and whether we should expect further outflows?

Brady W. Dougan

Do you want to take the hybrid equity and....

David R. Mathers

Yes. So I think -- well actually, probably the last point might be the easiest one. I mean just to be clear, the Clariden Leu outflows were in the first and second quarters of 2012. They strayed to a trickle I think in June, it was at CHF 200 million and likewise July. And there haven't been any outflow since. I mean the business is now fully integrated, so I wouldn't want to get an impression that there's any outflows from Clariden Leu in the fourth quarter or anything like that. The outflows we saw in the fourth quarter were really related to the Western European cross-border flows. I think on the issue of low-trigger CoCos and the [indiscernible], I mean I think really relates to Slide 50 and 51. 50 actually lays out the requirements under the Swiss law for the total capital of the bank, and then Slide 51 which has probably too many equations on, is intended to actually show how that actually converts to the leverage ratio. But let me just think about in the components. So if we look at the total capital ratio, so we've been informed, and this is on Page 51. I think you know that the Swiss law basically lays out a requirement for G-SIFI to be at 19%. But that is calibrated to both the leverage, the RWA and also certain other factors, such as a critical ongoing business in Switzerland, which actually relates that. So for example, so our initial conversation really in terms of where that is, in terms of -- if we were fully in for 2019 regime, which we're obviously not, then we've had to be at 17.9%. Although, with the balance sheet reduction, it's probably about 17.5%. Clearly, that's on an ongoing issue, because it relates to some of the resolution discussion, recovery and resolution discussions. But essentially, the relevant capital ratio for us today would be 17.9% under that. And that has to be satisfied through a mixture of, obviously, Swiss core capital, which you can see at the 10% number at the top; and clearly, on our pro forma basis, we're at 9.4%. Then the high strike, high-trigger contingent capital, which between what we've issued already and what we'll convert in October, will be at around about the 2.72 -- 2.8% of that 3%, so very close to the kind of 3% requirement need, because you have about CHF 8.2 billion of capital coming through. That then leaves the sort of the low-strike bucket, which at -- so therefore at this point, in order to complete that, we'd have to issue by 2019, 4.92% of low-strike capital, which on a CHF 280 billion of risk-weighted asset, it's about CHF 214 billion of low-trigger CoCos. So that's, as the mass as it stands today. Now that mass can change in a sense the balance sheet reductions we're planning, should actually bring down the Swiss total cap requirement. As I said, some of the [indiscernible] arguments can also be given discounts, but that's where we're at, at the moment. So everything else being equal, we would need to complete our capital plan with that CHF 30 billion of low-trigger CoCos to be issued over the course of the next 6 years. Now cost for that, I don't think, and I think you can see the numbers in the market, I think clearly, the low-trigger CoCo market has continued to mature. It's become much more popular and widespread instrument in the last few months, and I think that's something we welcome and respect. I mean it's obviously a couple of years now since we did the initial high-trigger transactions, almost exactly 2 years ago. We don't -- I mean, we've actually repurchased about CHF 10 billion of capital instruments, most of which are B I, B II, all capital instruments, plus a bit of senior debt. I think as you may recall, we generated about CHF 1 billion of capital towards the capital measures you see reported today. We do have some still to runoff, and we'll look to retire that in due course. But I think there's probably some savings to come from that. I don't think we're going start with too much inefficiency between the 2. I'm not sure I can give an update on the low-trigger cost. I mean I think in the past, we said we didn't expect to be that much different to the cost of our former capital regime, I think that we'll be able to give you a better analysis of that going forward. Sorry, a number of sort of technical points there, relating to Slide 50 and 51. Perhaps, before we continue, is that helpful at all, Andrew?

Andrew Lim - Espirito Santo Investment Bank, Research Division

That's helpful. Sorry, could you confirm the amount of the ineligible hybrids, that remain, that you could repurchase going forward?

David R. Mathers

Not at the top of my head. No, it's not a large amount basically. Because clearly, a block of it is essentially, about CHF 4 billion, relates to the -- will be converted this October into the high-strike CoCos anyway. But we can get you the number in some revert.

Andrew Lim - Espirito Santo Investment Bank, Research Division

Okay. And then your glide path for the leverage ratio and so on, the denominator there is assuming, about CHF 900 million on the, on your asset side. Is that [indiscernible] or that RWAs remained constant at CHF 280 billion. Is that what you're using there?

David R. Mathers

Slide 50, are you referring to Slide 50?

Andrew Lim - Espirito Santo Investment Bank, Research Division

That's right.

David R. Mathers

That's actually just the requirement as laid down under the Swiss law, so it's the regulatory requirements. I mean in essence, the way it works is the mass are at about 17.9%. You need a total exposure about 1.17, and that's composed the 10%, so that's -- if you CHF 280 billion of risk-weighted assets, CHF 28 billion of equity, plus the high-strike CoCos, there are about CHF 8 billion-plus, about CHF 13 billion for low-strike, that gets you to a total of about CHF 49 billion, that's how you get to the ratio.

Brady W. Dougan

And just to finish up your question on Asset Management, there was a nice increase in fees in the fourth quarter. Some of it just seasonally related, Hedging-Griffo and York, both contributed to that, part of that seasonal, but also they had good performances during the year. It also includes placement fees in that business, which is also strong in the fourth quarter. So all of those, and it's all, I think all representative of the continuing focus towards our performance fees, towards fees in general in the business and in increasing the proportion, which was I think was good in the fourth quarter.

Operator

Your last question comes from the line of Antoine Burgard of Natixis.

Antoine Burgard - Natixis S.A., Research Division

I have only 2 small questions. Regarding [indiscernible] notes, my understanding is that you authorize to include them in your core capital until 2018. Do you plan to replace them by common equity until 2018? And second, you said that you expect it to make significant cash returns after you looked through core capital exceeds 10%. In this 10%, do you include your [indiscernible] or not?

David R. Mathers

I think on both those points, Swiss core capital is defined, includes the [indiscernible] notes. And I think that was the securitization, that was introduction question I think somebody asked before. So clearly, it's 10%, including the increase from 9.1% to 9.4% to 10%, that covers that. I think it's very likely that over the course of the next 5 years, has [indiscernible] become due for redemption. We will actually purchase that back, and replace it through common equity to accrue over time, but I wouldn't see that as a particular constraint in terms of what we're talking about, in terms of our significant cash distributions.

Brady W. Dougan

I think that was the last question, is that right, operator?

Operator

Yes, sir.

Brady W. Dougan

Thanks, everybody, for all your questions. I know it's taken a little time, but just to leave you with our key points. Again, 2012 was a year of transition for us at Credit Suisse. We do feel like we've done a lot of the heavy lifting to come into 2013 with a reengineered business that's going to be able to do very well on the new regulatory environment. We transformed our businesses in 2012, lowered the cost base, increase the capital base, reduced risk, reduced risk-weighted assets and those balance sheet. And through all that, we managed to maintain our market shares and actually drive additional momentum on that side and achieve pretty good results in the fourth quarter and in the full year, with 9% return on equity; in the fourth quarter, 10% for the full year. So we continue to feel that the actions we've taken and what we've done, enabled us to achieve our goal of 15% return on equity through the cycle. We do think the industry still faces substantial restructuring to come. We feel like we're ahead of the curve on that, and we have a business model in place now, and it's stable. It's high returning and well fit for the new regulatory environment. So we're convinced that the capital efficiency business model that we have is going to continue to deliver strong and consistent revenues across the businesses, operating on a lower cost base, bringing more to the bottom line, and that we're going to continue to be very well served to be able to actually build our client franchise drive further market share gains and deliver very good returns to our shareholders.

So thanks very much for your time and your attention.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Credit Suisse Group Management Discusses Q4 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts