Credit Suisse Group AG (NYSE:CS)
March 19, 2013 12:30 pm ET
Hello, and welcome to our next presentation by Credit Suisse. My name is Zaf Aziz, Head of DR Market Solutions at Deutsche Bank's Depositary Receipts team. Before I introduce the next presentation, a few quick points. During the presentation, please feel free to submit questions in a small ask-a-question box below the speaker's photo. [Operator Instructions] On a final note, all of today's presentations will be recorded and are available for replay at your convenience via the Deutsche Bank website, www.adr.db.com. At this point, I'm very pleased to welcome Mary Nadler [ph] from Crédit Suisse, Vice President, Investor Relations. Over to you, Mary.
Thank you, Zaf. Good afternoon, and thank you for joining the introduction to Crédit Suisse presentation this morning. My name is Mary Nadler [ph], and I'm a Vice President in the Investor Relations group based in New York. Today's presentation will provide a high-level introduction to Crédit Suisse, who we are, description of our businesses, our recent performance and our capital position. You can find a link to our Investor Relations website in our booth where you can access all our recent filings and presentations. Before we begin, please take a note of the cautionary statement on Slide 2.
Let's begin on Slide 5. Crédit Suisse is an integrated global bank, which was founded in 1856. We're headquartered in Zürich, Switzerland, and we have businesses operating as 2 divisions: Private Banking & Wealth Management; and Investment Banking. We provide companies, institutional clients and high-net-worth private clients worldwide, as well as retail clients in Switzerland, with advisory services, comprehensive solutions and a wide range of financial products.
Slide 6. We currently have 550 offices and 20 booking centers located in over 50 countries. We have over 47,000 employees, 60% of which are outside Switzerland. As of December 31, 2012, we had assets under management of approximately CHF 1.3 trillion. To provide those of you who are not familiar with the exchange rate, this equates to a little over USD 1.3 trillion of assets under management. If you look at the pie chart in the middle of the slide, you can see that our revenues in 2012 were almost evenly split between our 2 divisions, Private Banking & Wealth Management and Investment Banking. From a regional perspective, we also have a balanced distribution between Switzerland, the Americas and Europe, Middle East and Africa with a smaller contribution from Asia Pacific. For 2012, we reported, on an underlying basis, net revenues of CHF 25.7 billion and net income of CHF 3.6 billion, resulting in a return on equity of 10%. On a Basel III basis, our look-through Swiss core capital ratio at the end of 2012 was 9.4%. We have some of the highest credit ratings in our peer group, with long-term ratings of A1, A+ and A from Moody's, S&P and Fitch, respectively.
Slide 7 provides a quick overview of our shareholder base. Crédit Suisse shares are listed on the Swiss Exchange, as well as on the New York Stock Exchange in the form of American Depository Shares. Please note that our ADRs represent a 1:1 ratio to our local shares. Our depository shares are some of the most liquid and active, with 3% to 5% of our total share turnover taking place in the New York Stock Exchange on a daily basis. If you look at our shareholder base, you can see that as of December 31, 2012, approximately 73% of our holders were institutional investors, and our retail holders made up approximately 10% of the total. We have listed our top institutional shareholders on this slide, again, as of December 31, 2012, based on externally reported figures. Here, you can see a strong group of shareholders. Note that just the ones listed on the slide are holding over 1/3 of our outstanding shares.
Now a closer look at our businesses. Before we talk about the businesses, I would like to note that in November 2012, we announced the combination of our Private Banking and Asset Management businesses to form the new Private Banking & Wealth Management division. This action was intended to simplify our divisional structure, and the resulting streamlined structure is designed to help us better serve our clients by having a single product development platform aligned to meet their needs, complemented by integrated distribution. Our historical financials have been restated to reflect this new structure.
Slide 9 provides an overview of our Private Banking & Wealth Management business. Our Private Banking & Wealth -- apologies, I just went to the next slide. Going back to Private Banking & Wealth Management. Our Private Banking & Wealth Management business offers a broad range of financial solutions and advise in financial planning, financial and tax consulting and estate planning to our clients. We advise and manage portfolios, mutual funds and other investment vehicles for private clients, corporates, institutions and governments. The business is made up of 3 main segments: Wealth Management, Corporate & Institutional Clients in Switzerland and Asset Management. We'll provide additional detail on this page regarding these different segments, as well as the respective assets under management.
From 2008 through 2012, our Wealth Management business has generated CHF 170 billion of net new assets, which is approximately 70% higher than the net new asset generation achieved by our closest competitor. We have close to 4,000 relationship managers within our Wealth Management business globally. Private Banking & Wealth Management generated net revenues of CHF 13.5 billion and pretax income of CHF 3.8 billion in 2012.
Moving on now to the overview of our Investment Banking business on Slide 10. Our investment bank offers equities and fixed income sales and trading capabilities and provides a full range of advisory, origination and capital raising services. Our clients include corporations, governments, pension funds and institutions. In addition, our integrated model helps us work closely with the Private Banking & Wealth Management division to provide our clients with customized financial solutions. We have been proactively implementing a client-focused and capital-efficient business model in our investment bank. We have successfully transformed our fixed income business to achieve strong and sustainable returns in capital under Basel III requirements. We have maintained our market leading and highly scalable equities franchise, and we continue to win significant mandates and gain wallet share in our underwriting and advisory businesses. We have reduced risk-weighted assets in the investment bank by 42% since the second quarter of 2011 and have enhanced efficiency through a significant expense reduction. The business generated net revenues of CHF 12.6 billion and pretax income of CHF 2 billion in 2012, with 9% return on Basel III capital.
Now let's talk a little more about our recent performance. Moving on to Slide 12. Slide 12 summarizes our achievements in 2012. During 2012, we generated underlying pretax income of CHF 5 billion, resulting in an after-tax return on equity of 10%, as I mentioned. During the year, we made significant progress on our expense saving initiatives, achieving expense savings of CHF 2 billion worldwide. We also increased our 2013 target to CHF 3.2 billion and then rising to CHF 4.4 billion by the end of 2015. Our capital program remains on track with pro forma look-through Swiss core capital ratio of 9.4%, and the ratio is targeted to exceed 10% in mid-2013. Just to provide some context, our regulators require us to be at 10% level for this measure by the end of 2018. During the year, we reduced our overall balance sheet by close to CHF 100 billion to CHF 924 billion, and we're substantially ahead in progress towards target level below CHF 900 billion. Our year-end performance in Private Banking & Wealth Management improved significantly compared to a year ago. And we substantially increased the actual and prospective returns in investment banking by reducing costs and capital while increasing market share and revenues.
Let's take a closer look at our Private Banking & Wealth Management results in 2012 on Slide 13. As we had mentioned earlier, net revenues totaled CHF 13.5 billion for this division. Pre-tax income improved to 27% to CHF 3.8 billion in 2012 and cost-to-income ratio improved to 71% from 77% in 2011.
From a strategic perspective, during the last 2 quarters, we have been implementing on our strategy to rebalance our Wealth Management business to growth areas, including ultra-high net worth segment, as well as emerging markets. We have also been steering our Asset Management business towards the more liquid alternatives businesses. We have also been taking a closer look at our business by identifying actions that would enhance profitability.
On this slide, we'll provide a summary of the efficiency measures we have announced for this business to date. Specifically, we had originally announced that this division would achieve a total of CHF 500 million of cost savings. Note that CHF 300 million of that has already been achieved in 2012. In addition, based on the synergies that we expect to achieve following the integration of the Private Banking and Asset Management division, as well as certain other measures, we are now targeting an additional CHF 450 million of cost savings to be achieved by the end of 2015. This brings our total expense reduction program to CHF 950 million for the new combined division. As a result, we expect profitability to further improve on this business going forward.
Moving on to Slide 14. This slide looks at the underlying performance drivers of the 3 businesses under our Private Banking & Wealth Management division. Our Wealth Management results reflect the improvement from the actions we have taken so far, with underlying cost income ratio improving a percentage point to 77% for 2012. Our Corporate & Institutional business, which represents the actual branches we have in Switzerland only, continues to deliver strong profit contribution to the results. Lastly, our Asset Management business also delivered consistent 2012 results, with improvement in fee-based margins from 52 basis points in 2011 to 54 basis points in 2012. Overall, we have seen improved performance across businesses mostly driven by the efficiency measures we have started implementing.
Slide 15 shows the net new asset accumulation in our Wealth Management business, which is reported under Private Banking & Wealth Management. Note that the current assets under management for this segment represents 64% of the total assets under management by the division. As I mentioned earlier, since the end of 2007, we have added CHF 170 billion of net new assets in this business, which implies approximately 4.5% growth per year. The impact from these net new asset inflows has been masked by currency, market and other adverse movements, resulting in other assets under management number that is less favorable to the end of 2007 level. However, the outlook for the industry remains strong. The expected annual growth is at around 6% in the long term, driven mainly by emerging market growth, asset monetization and generational transfer of wealth.
On Slide 16, we take a closer look at our key performance indicators for Private Banking & Wealth Management. As mentioned earlier, we are targeting further cost reductions of another CHF 650 million for the new division. That is equivalent to a 500 basis point improvement to our 2012 underlying cost income ratio of 72%. Furthermore, Private Banking & Wealth Management will also benefit from the share of the infrastructure and shared services savings we have announced, which will improve the cost-to-income ratio by a further 200 basis points, putting the division very close to the target cost to income ratio of 65%. Note that these cost reductions are not only expected to come from headcount cuts, but also from efficiency measures such as streamlining of the value chain, eliminating overlaps, increasing scale and strengthen the bank's product offering outside Switzerland. However, I should also note that as we go through the restructuring process, it is our priority to make sure that our client relationships are not impacted.
Regarding the net new asset growth rate assumptions on the bottom left of the slide, we continue to target 6% long-term growth rate. We expect continued strong net new asset generation within the Wealth Management business in emerging markets, as well as continued but slower growth in our mature market operations. However, in Western Europe, we would expect to see continued outflows at a level similar to that which we have experienced in the last year or 2 until the Western European cross-border business stabilizes. So over the next couple of years, allowing for this continued outflow, we would expect an overall net new asset growth rate of around 3% to 4% for Wealth Management. And as the Western Europe cross-border business stabilizes, we will then expect to achieve our 6% target with a caveat that this will still be very much driven by our growth in our emerging market businesses.
Moving on to the investment bank on Slide 17. In 2012, our investment bank produced higher revenues and profitability with lower capital usage, less risk and a reduced cost base, resulting in a substantially higher after-tax return on Basel III allocated capital of 9% on an underlying basis. These results demonstrate both further improvements in our operating and capital efficiencies, as well as the continued strength of the franchise. Also note that we have been the first Basel III-compliant investment bank, well ahead of many of our peers who are just beginning to transition.
During 2012, we reduced our Basel III risk-weighted assets in the investment bank from USD 242 billion at the end of 2011 to USD 187 million towards the end of -- at the end of 2012. This $55 billion reduction puts us very much in reach of our target to bring the level of risk-weighted assets within our investment bank down to less than USD 175 billion by the end of 2013. The detailed return calculation explains the components of the improvement in 2012 versus 2011. Just to clarify, the wind-down portfolio refers to business areas we have decided to exit as they are no longer viable from a return perspective in the new higher capital requirement environment. Some examples of these businesses would be CMBS origination and hard currency trading in the emerging markets among others. 2012 results include pretax loss of $852 million from the wind-down portfolio. If you exclude these losses, the underlying after-tax return on equity was 14% last year.
Slide 18 takes a closer look at our individual businesses within the investment bank. First, fixed income sales and trading. This business has gone through a major transformation over the last few quarters. Through our actions, we have achieved a more balanced business mix, as well as lower inventory levels in this business. As you can see from the chart, we have significantly improved our operating performance during 2012. Revenues increased by 60% for the full year on lower expenses, and we reduced Basel III risk-weighted assets to USD 122 million, a 31% reduction compared to the end of 2011. As a result, our fixed income business is not delivering a return on capital that has improved to that of our overall Investment Banking division average return.
Equity sales and trading. 2012 was a challenging year for the equities business across the industry as trading volumes remain depressed and client activity was subdued compared to 2011. Nonetheless, we delivered resilient revenues supported by our strong franchise and our market-leading positions while also reducing Basel III risk-weighted assets by 3% to USD 34 billion. We ranked #2 globally in prime services, and we are a recognized leader in U.S. cash equities.
Within our underwriting and advisory businesses, stronger debt underwriting and M&A and advisory revenues were partly offset by lower equity underwriting results due to low industry issuance levels. Our revenues increased by 8% from 2011, with increasing momentum in the second half of the year. In 2012, we ranked #3 globally in completed M&A and also ranked #3 in global high yield.
Moving on to Slide 19. 2012 was clearly an important transition year for the investment bank, reducing costs, meeting the regulatory goals and achieving a sharp reduction in the capital intensity of the business. Looking forward, as the rest of the industry still faces substantial restructuring, we have effectively completed the bulk of this transition, and we'll focus on achieving a 70% cost-to-income target. Driving that improvement to 70% will be continued cost reductions, a reduction but not elimination of the losses in the wind-down business and various growth and business initiatives that we have across the division.
Slide 20. This slide looks at our firm-wide cost savings progress. Last year, we achieved savings of CHF 1.3 billion in direct expenses in the Investment Banking division, CHF 300 million in Private Banking & Wealth Management and a further CHF 400 million savings in the underlying infrastructure and shared services across the bank. If we look forward, we intend to achieve CHF 1.3 billion of incremental savings across infrastructure and shared service functions. Within Private Banking & Wealth Management, we plan to deliver an additional CHF 650 million of savings as a result of integration of the 2 former divisions, as well as certain other initiatives. This will also drive some further infrastructure and shared service expenses which are in this total. And we're targeting a further CHF 500 million cost reduction in the investment bank. All in, our expense reduction program for the group is targeted to achieve CHF 4.4 billion of annual savings by the end of 2015.
The last section is about our capital position. Slide 22 demonstrates the continued strength of our capital ratios. As you can see, on a Basel III look-through basis, our reported Swiss core capital ratio improved to 9.1% from 8.2% at the end of the third quarter. We maintain our pro forma target of 10% by mid-2013. On a pro forma -- I should note that on a pro forma basis, that ratio was 9.4%, and we maintain our pro forma target of 10% by mid-2013. Please note that this target reflects completion of the sale of a number of the asset management businesses we had announced, which may take time for regulatory approval but which we expect to close in the first half of the year. On a pro forma basis, taking into account these sales that I just mentioned, we ended the year at 9.4%, which exceeds the 9.3% guidance we gave on the same basis in the third quarter.
Slide 23 shows the significant progress we've made towards our 2013 year-end Basel III risk-weighted assets to reach CHF 280 billion. Our Basel III risk-weighted assets at the end of the fourth quarter 2012 stood at CHF 284 billion. Since the third quarter of 2011, we have reduced Basel III risk-weighted assets by nearly CHF 90 billion, which is a significant achievement towards reaching our target capital ratios and is well ahead of the reductions achieved by many of our peers. We are now very close to where we want to be at the end of the year.
Let's turn to Slide 24 for a couple of notes on balance sheet reduction, funding and liquidity. We have made significant progress in reducing the size of our balance sheet, consistent with the changes we have made to our business. We have a year-end total asset target of less than CHF 900 billion, as we continue to focus on resizing our balance sheet to match our business needs. Our funding and liquidity positions remain strong and we are well prepared for the Basel III liquidity requirements. At the end of 2012, our Basel III net stable funding ratio continued to be in excess of 100%, and we also continued to surpass the short-term liquidity requirements under Swiss regulation. Also note that our funding and CDS spreads continued down in the fourth quarter, both on an absolute basis and relative to peers. And we continue to have a highly unencumbered balance sheet. We believe that our capital and liquidity strength is a clear advantage as we position ourselves for the current regulatory environment.
Slide 25. We have announced our intention to deliver significant cash dividends to our shareholders once our look-through Swiss core capital exceeds 10%, which we expect to realize by mid-2013. We have been reducing capital allocation to Investment Banking and specifically, to fixed income, as we transition our business to Basel III requirements. In the long term, we expect that less than 60% of our capital will be attributable to the investment bank. We expect the consistent earnings capacity of our business model to generate substantial levels of excess capital, which will then be delivered to our shareholders in the form of cash dividends.
To summarize, on Slide 26. Looking forward, we will continue to focus on expense savings we have announced, targeting to achieve CHF 4.4 billion savings by the end of 2015. Our capital program is on track, targeting to exceed 10% pro forma look-through Swiss core capital ratio in mid-2013. We are ahead in progress in balance sheet reduction towards the target level of below CHF 900 billion. Our Private Banking & Wealth Management business is benefiting from the profitability initiatives we announced and the outlook for the industry remains strong. And last, but not the least, we maintain an improved return outlook in Investment Banking through cost and capital reductions.
This concludes my formal presentation for today. Please note that I have included some additional slides in the back of the document, which may be of interest. Again, for our complete set of documents and presentations, please visit our website. With that, I will now check the Q&A queue to answer some questions.
Okay. I'm just quickly looking through. There's [ph] a question. It says Crédit Suisse's ROE was 10% in 2012. Is there a longer-term goal for return on equity? We have stated key performance indicators and we have goals for the long term over the cycle, and our return on equity target is above 15%. This is one of our key performance indicators and this is not -- it is the medium term over the cycle target, not the next quarter's short-term target. So that is the number that we have quoting on a return on equity basis. Another question I'm looking at right now. It's talking about the ETF business, asking about the sale of the ETF business. We announced in January that we did sell our ETF business. This was part of the Asset Management businesses that we had announced that we were going to be exiting in January 2013. We announced the sale of our ETF business to BlackRock. This was a strategic step in consolidating industry and was part of the firm's previously announced divestment plans. And it allows us to realize the value from a business that we've successfully built over the past decade. Looking at the questions quickly. There's a question about dividend, and we have -- at the general meeting on April 26, the Board of Directors will be proposing for the financial year of 2012 a distribution of CHF 0.10 of cash payment and CHF 0.65 of stock dividend. And it should be noted that the dividend will be paid only after the shareholder approval at the Annual General Meeting. I would also like to note that we had committed to a CHF 0.75 dividend at the -- in shares at the time of the capital raise we did back in July of last year. The fact that we're actually paying CHF 0.10 of that in cash reflects our confidence to return to significant cash dividends next year once we reach our target capital ratio of 10% on a Swiss basis. Looking quickly. Okay. This is talking about the plans about our -- in our Private Banking & Wealth Management division, some of the divestments that we were announcing. I guess this is referring to what we had announced in our Asset Management business before the division became one. And as we had mentioned, the focus there is going to be to towards more liquid businesses, and we have made announcements and we have actually incorporated in our projections some of the sales of these businesses and assuming that they will be closed by the middle of this year. And this was a strategy that was a part of our -- looking at our businesses, all 3 businesses that we have reviewed to increase efficiency and to align ourselves in businesses that are more capital-efficient in an environment where the capital requirements are higher. This was just to fit the rest of the strategy of the bank. And I see that -- I think I have run out of time. I'm happy to stay on the chatline as long as you would like to answer questions. And please also feel free to contact me directly with any questions you may have. Thank you very much.
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