Credit Suisse Group AG Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Credit Suisse (CS)

Credit Suisse Group AG (NYSE:CS)

Q4 2013 Earnings Call

February 06, 2014 2:30 am ET

Executives

Christian Stark

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

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

Analysts

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Matt Spick - Deutsche Bank AG, Research Division

Huw Van Steenis - Morgan Stanley, Research Division

Kinner R. Lakhani - Citigroup Inc, Research Division

Daniele Brupbacher - UBS Investment Bank, Research Division

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

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

Jernej Omahen - Goldman Sachs Group Inc., Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Jeremy Sigee - Barclays Capital, Research Division

Stefan-Michael Stalmann - Autonomous Research LLP

Robert Murphy - HSBC, Research Division

Andrew Lim - Societe Generale Cross Asset Research

Operator

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group Fourth Quarter and Full Year 2013 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Brady Dougan, Chief Executive Officer of Credit Suisse. Please go ahead, Mr. Dougan.

Christian Stark

Yes, good morning and welcome to our Fourth Quarter Results Call. My name Christian Stark, Head of Investor Relations.

Before we begin, let me remind you to take note of the important disclaimer on Slide 2, including the statements on non-GAAP measures and Basel III disclosures.

I now turn it over to Brady Dougan, our CEO.

Brady W. Dougan

Welcome, everybody. Thanks a lot for joining us for the Fourth Quarter and the Full Year 2013 Earnings Call. I'm joined by David Mathers, our CFO, who will deliver the results portion of today's discussion.

Turning to Slide 4, on some of the key messages. Going into 2013, our priorities were to further improve our profitability, continue to strengthen our capital position and reduce risk and leverage exposure while expanding market share in targeted markets. We made strong progress on all these objectives while at the same time taking a number of strategic measures both at the group level and in our 2 divisions to continue transforming our business for the changing environment.

First, I'll provide a few key highlights on our financial performance. Fourth quarter underlying pretax income was CHF 1.3 billion, with an after-tax return on equity of 9%. We saw strong profitability in Private Banking & Wealth Management and a solid performance in the strategic business of Investment Banking, with particular strength in equities, credit and underwriting, partly offset by weak performance from our rates business. For the full year, our underlying pretax income was CHF 5.8 billion and we generated an after-tax return on equity of 10%. Our strategic businesses, which are now clearly separated from the nonstrategic operations under our new reporting structure, reported pretax income of CHF 7.1 billion and an after-tax return on equity of 13% for the full year 2013, close to our 15% through-the-cycle target. This performance clearly demonstrates the strength of the core franchises within our 2 divisions.

In Private Banking & Wealth Management, we achieved strong profitability from our strategic businesses in the fourth quarter with pretax income of CHF 1.1 billion and a continued high return on Basel III capital of 34%. For the full year, we improved the profitability of the strategic businesses in Private Banking & Wealth Management, driven by our restructured Asset Management business, growth in emerging markets and in our Wealth Management Clients business. In 2013, we recorded net new assets of CHF 38 billion in the strategic businesses of Private Banking & Wealth Management. This includes strong growth from Wealth Management Clients, in particular from emerging markets and the "ultra high net worth" individuals client segment, partly offset by Western European cross-border outflows. We also recorded significant inflows from higher-margin Asset Management products and strong inflows in the Corporate & Institutional Clients business.

In Investment Banking, we delivered a solid performance in our strategic businesses for the fourth quarter with pretax income of CHF 0.5 billion. This was driven by a strong performance from our equities and underwriting franchises, as well as from our high-returning businesses in fixed income, offset by lower results in our rates business. Total reported results for Investment Banking were impacted by the litigation provisions of CHF 339 million we took for ongoing mortgage litigation. For the full year, Investment Banking reported pretax income of CHF 3.9 billion for its strategic businesses. Continued robust market share positions across our high-returning businesses, combined with a reduced cost base and lower leverage and capital usage, resulted in an after-tax return on Basel III capital of 19% for the year.

Collaboration revenues between our 2 divisions remain a significant contributor to our overall revenue base. We saw strong performance in providing expertise to "ultra high net worth" clients, combining the expertise of our 2 divisions. In 2013, CHF 4.5 billion of revenues were generated from the collaboration between Private Banking & Wealth Management and Investment Banking, or 18% of our overall net revenues for the group, within our targeted range.

Now let's turn to our continued progress on capital, leverage and costs. During the year, we largely completed the execution of the capital plan that we announced in July 2012. Additionally, we had 2 positive developments this quarter regarding regulatory requirements from FINMA and the Basel committee that benefit us as we work towards meeting 2019 requirements. We ended the year with a look-through Basel III CET1 ratio of 10.3% and a look-through total capital ratio of 16.1%, including issued BCNs and contingent capital instruments. Note that FINMA recently reduced the progressive capital component for the Credit Suisse Group, thereby reducing our 2019 total capital requirement from 17.4% to 16.7%.

We also completed the exchange of CHF 3.8 billion of hybrid tier 1 notes in the high-trigger capital instruments, successfully raised CHF 6 billion of low-trigger capital notes and are now just roughly CHF 3 billion away from meeting the 2019 progressive capital requirement. Furthermore, as part of our 2013 compensation structure, we introduced a similar instrument which aligns compensation incentives to the capital strength for the group, as well as providing additional tier 1 benefits. At the same time, we further reduced leverage exposure and reported a look-through total capital leverage ratio of 3.8% as of year end.

Based on our preliminary assessment, the Basel Committee on Banking Supervision's revised guidelines on the calculation of leverage exposure would provide us with a benefit of CHF 40 billion to CHF 50 billion, taking into account the planned litigation measures and subject to interpretation of the final rules. This would increase our year-end 2013 leverage ratio to around 4%, effectively meeting the 2019 Swiss requirement. In terms of Basel III risk-weighted assets, we ended the year at CHF 266 billion, exceeding our end-2013 target and moving closer towards our long-term target of CHF 250 billion.

Through the end of 2013, we delivered CHF 3.1 billion of annualized run rate cost savings versus the first half of 2011. As part of these measures, we reduced our 2013 compensation and benefits expense by 8% from 2012 for the group and by 10% in Investment Banking. Given this progress in reducing our cost base, we remain on track to achieve our targeted cost savings in excess of CHF 4.5 billion by the end of 2015.

Turning to Slide 5. In 2013, we made significant progress in transforming our business to the changing environment through a number of strategic measures. I'd like to highlight some of our strategic achievements from 2013. We created nonstrategic units in line with our strategy of shifting resources to focus on growth in high-returning businesses, particularly in Private Banking & Wealth Management, and to accelerate the runoff of positions and losses in nonstrategic businesses. This represents an important step toward achieving a more balanced allocation of capital between our 2 divisions. In November, we announced our program to evolve the group's legal entity structure. The plans are designed to meet future requirements for recovery and solution planning, including key steps to support FINMA's resolution strategy for "single point of entry" bail-in. It will also result in a substantially less-complex and more efficient operating infrastructure for the bank.

In Private Banking & Wealth Management, we improved the profitability of our strategic businesses and completed the integration of our former Asset Management division. I'll speak about the progress we've made in Private Banking & Wealth Management in more detail on the next slide. In Investment Banking, we continued to realize the benefits of our sustained market share positions across our high-returning businesses, combined with a reduced cost base and lower leverage and capital usage. In a few minutes, I'll give you an overview of how our transformed investment bank is well positioned to deliver strong returns and profitability in 2014.

Turning to the dividend for the 2013 financial year. The progress we've made in executing our capital plan and in reducing leverage and risk-weighted asset usage while at the same time improving the operating efficiency of the bank gives us confidence to begin to return significant amounts of capital to our shareholders. The Board of Directors will propose a cash distribution of CHF 0.70 per share for the financial year 2013 at the Annual General Meeting of Credit Suisse Group on May 9, 2014. This amount is intended to provide a basis for future progression in our dividend payments as we continue to execute our strategy and resolve legacy issues.

Results so far this year have been largely consistent with the good starts we've in prior years, with some variability across businesses. We're confident that the continued momentum we're seeing in our strategic businesses, combined with the runoff of positions and losses in the nonstrategic units, will allow us to achieve our targeted return on equity of over 15% and cost-to-income ratio of under 70% over the cycle.

Turning to Slide 6, let's review the progress we've made in Private Banking & Wealth Management in 2013 in more detail. As I mentioned earlier, we have significantly improved the profitability of all 3 businesses within Private Banking & Wealth Management. The pretax income of the strategic businesses of Asset Management increased 32% compared to 2012, underscoring the strength of the ongoing business and its importance in generating profits within our Private Banking & Wealth Management franchise.

We continued to reallocate resources to growth areas and recorded a net new asset growth rate of 8% from emerging markets, where we see additional strong growth potential. We made continued progress in adapting our onshore client service model for Western Europe and further leveraged our strong market position in Switzerland. We announced the sale of our domestic private banking business in Germany while at the same time remaining highly committed to serving the German wealth management market. Going forward, we will remain focused on improving the profitability of Private Banking & Wealth Management by growing in emerging markets and continuing to adjust our capacity to meet client needs in mature markets.

Turning to Slide 7, let's look at the progress in the investment bank where we achieved solid results in our strategic businesses in 2013, driven by our balanced business mix. We're confident that with our transformed business model in IB, we are well positioned to deliver strong returns and profitability in 2014. Our top 3 equities franchise will remain one of our key drivers of growth going forward, as we expect to continue to benefit from our strong platform across products and regions. Given favorable market conditions and continued investor rotation into equities, we're positioned to grow in these businesses, specifically cash equities, electronic trading and prime services. We anticipate higher M&A activity, attractive valuation levels and an improved macro environment to support our strong and profitable underwriting and advisory business.

In fixed income, we will continue to focus on our market-leading high-returning businesses, especially leveraged finance, securitized products and our emerging markets franchise. Additionally, we expect increased profitability and returns from our newly created global macro products group, which combines our rates, foreign exchange and commodities businesses into a single platform. This differentiated model offers clients a comprehensive approach across the macro asset classes and allows us to focus our resources on those areas and products that matter most to them. We believe that with this balanced business mix across equities, underwriting and advisory and fixed income, our investment bank is well positioned to continue to serve our clients' needs and deliver strong returns and profitability in 2014.

Turning to Slide 8, let me end with a few words on how the performance of our strategic businesses will drive momentum towards reaching our financial targets. The results of our strategic businesses are indicative of what the group's financial performance will look like once we eliminate the drag from our nonstrategic units. Looking at our strategic results for 2013, we are already today well within reach of our KPIs. For instance, in looking at the slide, our group return on equity for the strategic businesses was 13% for the full year versus our target of above 15%, and our cost-income ratio at 72% is within reach of our target. In both Private Banking & Wealth Management and Investment Banking, we plan to deliver the remaining cost reductions to achieve our targeted cost-to-income ratios for the divisions. Additionally, we expect a shift in resources to high-returning areas to lead the revenue growth in our strategic businesses.

To sum up, the runoff of positions and losses in our nonstrategic units, combined with targeted growth in our high-returning businesses, will position us to achieve the key performance indicators we've set out for the bank over the cycle.

And with that, I'll hand it over to David, who will discuss the results in more detail.

David R. Mathers

Thank you, Brady. And good morning, everyone.

I'd just like to start on Slide 10 with an overview of the financial results. In the fourth quarter, we achieved revenues of CHF 6.1 billion and pretax income of CHF 1.5 billion from our strategic businesses, and a cost-to-income ratio of 75%. The after-tax return on equity was 11%, and net new asset inflows, CHF 5.4 billion.

For the full year, pretax income from our strategic results was CHF 7.1 billion, equivalent to an after-tax return on equity of 13%. Please note that our fourth quarter results include CHF 339 million relating to ongoing mortgage litigation taken within the Investment Banking division and CHF 175 million in connection with the SEC-related aspect of the ongoing U.S. tax matter, where we're working towards a resolution, and that's taken within the Private Banking & Wealth Management division. These increases in provisions are all included in our nonstrategic results.

You'll note that for this quarter, we have continued to include our pretax income, return on equity and diluted earnings per share on an underlying basis, and we've done that given that the underlying results were the basis for our key performance measures under the previous supporting structure. I think many of you joined us on Jan 7, and as we said then, our financial disclosures will focus on the strategic and the nonstrategic results going forward and we'll retire the underlying measures during 2014.

So let's turn to Slide 11. We provide here an overview of the Private Banking & Wealth Management results under the new reporting structure. In the fourth quarter, total pretax income for the strategic businesses was higher both year-on-year and quarter-on-quarter. And the results reflected higher transaction and performance fees as well as increased management fees from hedge funds and alternative products within the Asset Management group. Operating expenses in the fourth quarter were higher, primarily driven by the aforementioned litigation provisions in the nonstrategic unit.

If we look at our full year strategic results, our pretax income improved compared to the prior year, driven by a number of developments. That includes the significant progress in restructuring the Asset Management business and demonstrates the strength of the ongoing and current franchise. In addition, we saw growth in emerging markets activity across wealth management, stronger recurring commissions and fees, and we increased our penetration further in the "ultra high net worth" client segment. We continued to improve the efficiency of our strategic businesses, reducing our cost-income ratio to 70%, down from 72% in 2012.

Let's turn to Slide 12 now to review the net new assets performance. For the full year 2013, our net new asset inflows are solid, particularly driven by strong growth in assets related to our clients in emerging markets. The Wealth Management Client business saw inflows of CHF 28.9 billion and net new assets of CHF 18.9 billion for the full year. Inflows from emerging markets grew at 8% per annum, with particularly strong growth in Asia Pacific at 11% per annum.

The Western European onshore segment continued to see good inflows, particularly in Italy and in Spain. The Western European cross-border business, where we're focused on the regularization of clients, we saw further outflows of CHF 10 billion, in line the guidance we gave a year ago to expect outflows of CHF 6 billion to CHF 10 billion of net new assets per annum.

Within the Asset Management business, we saw inflows of CHF 15 billion in 2013, including CHF 11 billion into higher-margin alternative products, particularly credit and emerging market funds.

Finally, Corporate & Institutional Clients contributed positive net new assets of CHF 8.8 billion during 2013, a significant improvement from 2012, with an especially strong fourth quarter.

So let's now look at the financial results in more detail and start with Wealth Management Clients on Slide 13. The Wealth Management Client business delivered solid results in the fourth quarter pretax income of CHF 475 million. Revenues declined slightly compared to the prior year quarter due to the adverse impact on net interest income from the continued low interest rate environment as well as lower revenues from integrated solutions. This was partly mitigated by higher recurring commissions and fees, reflecting the increase in assets under management.

Operating expenses increased in the fourth quarter, partly related to integration costs related to the private wealth management business that we acquired from Morgan Stanley in EMEA. Net new assets of CHF 1.7 billion in the fourth quarter reflected and was after continued cross-border outflows in Western Europe of CHF 3.4 billion also in the fourth quarter.

For the full year 2013, pretax income of CHF 2.1 billion increased compared to the prior year, primarily driven by higher fee-based revenues and improved operational efficiency. Net new assets of CHF 18.9 billion for the full year reflected continued strong growth in emerging markets, partly offset, as I've mentioned already, by Western European cross-border outflows of CHF 10 billion.

So let's look at the revenue trends in some more detail on Slide 14. In the past, our disclosures have focused on the gross margin, but as we've noted before, the shift in our business mix means that we think it is a better view and a more complete view to focus at the net margins generated by our wealth management businesses. I think you can see at the top of the slide that our net margin was stable at 26 basis points for the full year compared to 2012, and we achieved this while growing the "ultra high net worth" client segment from 41% at the end of 2012 to 45% by the end of 2013.

In terms of gross margin, the full year results of 107 basis points is in line with the guidance that I gave, I think, at the third quarter last year, when we indicated that the continued low interest rate environment would have a dilutive impact on margins, albeit we've worked hard to and have generally succeeded in offsetting this through growth in loan volumes.

For the full year, we maintained relatively stable margins on transaction- and performance-based revenues and on recurring commissions and fees. In going forward, we'd expect our margins in 2014 to remain broadly in line with our 2013 levels. However, as we've mentioned before, our main focus remains on the "ultra high net worth" client segment. So as a consequence, whilst we'd expect the gross margin outlook to be broadly stable, we wouldn't anticipate an ample progression on our net margin in 2014.

Transaction revenues for the full year increased by 4% compared to 2012, reflecting overall increased levels of client activity.

Turn now to Corporate & Institutional Clients on Slide 15, please. Net revenues in the quarter were lower compared to the prior year quarter, reflecting the one-off recovery gain of CHF 25 million that we took in the fourth quarter of 2012, as well as the continued impact of low interest rates. For the full year, we increased pretax income compared to 2012, with lower credit positions reflecting a well-diversified portfolio, strong risk management, and there's no doubt that cost-efficiency measures also drove the reduction in operating expenses.

Just looking at 2014. With the NSFR rules now approaching finalization, I think you may note that they -- the final rules have been put out for consultation recently. We anticipate some notion of net interest income from the Corporate & Institutional Clients business, albeit this will be partly offset by an increase in net interest income in Wealth Management Clients, reflecting the more favorable treatment of retail and private banking deposits under the NSFR consultation document.

Let's turn to Asset Management results on Slide 16. Asset Management reported a pretax income of CHF 369 million in the fourth quarter, and that reflected significant performance fees and strong investment returns and higher placement fees on client activity. In addition, management fees increased on the higher asset base, with the robust inflows into alternative investment products during the year. Operating expenses increased in the quarter in line with the growth in fee-based revenues.

For the full year, reported pretax income was up by 32% to CHF 612 million. This strong improvement in profitability was driven by fee-based revenue growth as well as by the benefits from the restructuring measures. Our fee-based margin improved to 58 basis points, up from 52 basis points in 2012. As part of the successful restructuring of the Asset Management businesses, this operation has become significantly less dependent on investment-related gains. The combination of stronger revenue performance and efficiency benefits has enabled us to improve our cost-to-income ratio by 5 percentage points to 69% for the year.

Let's just turn to Slide 17. So in this slide, I think these will be 2 key points that I'd like to make. First, just to be clear, because I know there have been questions over the course of the last 6 months. Under our new presentation of the strategic or ongoing business, the results that you see here are a realistic assessment of the ongoing results of our strategic Asset Management business and clearly, therefore, exclude the contributions from the businesses that you know we've sold over the last 18 months. The strategic business which you see here and in the previous slide, excluding the asset sales, has delivered strong and sustainable profitability, with pretax income increasing by 32% from 2012 to 2013.

I think the second point which I think perhaps is also not fully understood is that there is significant and pronounced seasonality within our Asset Management businesses. We typically deliver strong contributions in the second and the fourth quarters from the fees generated by our hedge fund businesses in Brazil, which are actually recognized on a semiannual basis, and also from our other holdings, including York, which are recognized on an annual basis.

So let's now look at the nonstrategic unit with our Private Banking & Wealth Management division, Slide 18. On this slide, we present an overview of the nonstrategic results within the Private Banking & Wealth Management division, but I've also included some further details on this in the appendix of the presentation. In the fourth quarter, we completed the sale of several private equity assets. And I'd note, please, here that the operating expenses in the nonstrategic units include and reflect the CHF 175 million relating to the SEC-related aspect of the ongoing U.S. tax matter that both Brady and I referenced earlier.

For the full year, pretax income of CHF 50 million primarily reflects sales gains from business disposals and related expenses, as well as reduced management fees and equity participation income resulting from the sale of these interests. Compensation expenses are lower, but I'd also note here that operating expenses includes the CHF 100 million relating to the U.K. withholding tax charge that we announced in the second quarter, as you may recall, as well as the litigation provisions that we've mentioned before.

Let's turn to the investment bank now, please, on Slide 19. In the fourth quarter, our strategic businesses reported revenues of CHF 2.8 billion; pretax income, CHF 485 million. This performance reflects the strength of our equities, credit and underwriting franchises, but this was partly offset by lower revenues from rates, and that's just within the strategic areas. Full year 2013, we reported total revenues of CHF 12.6 billion and pretax income of CHF 2.2 billion. The increased pretax drag from our nonstrategic unit reflected the IB-related share of the high litigation provisions that we discussed before.

We remain obviously focused on our cost-efficiency program. We reduced our total reported expenses significantly compared to 2012, with comp and benefits down by 10% year-on-year. We continued to improve capital efficiency during the year. You can see that our leverage exposure has been reduced by $149 billion. This reduction in our balance sheet leverage exposure also had the benefit of reducing our risk-weighted assets by $27 billion last year. But just to be clear, offsetting the benefit of these reduced assets, we had an operational risk add-on of $6 billion just relating to the investment bank in the fourth quarter. And I'd also note there was about $10 billion of add-ons relating to methodology and parameter changes that were taken during 2013. So net-net, with a gross reduction of $27 billion, offset by the -- of the increases that I've mentioned, risk-weighted assets reduced by $11 billion between the end of 2012 and the end of 2013.

Finally, and we'll give some more details on this in a minute, the strategic business within the investment bank achieved a 19% after-tax return on Basel III capital, up from 16% in the prior year.

Let's turn now to fixed income, Slide 20, please. In the fourth quarter, revenues from the business-categorized [ph] yield, including our market-leading credit and securitized product franchise, were solid, driven in particular by momentum in the leveraged finance trading and by asset finance, respectively. Our emerging market revenues were adversely impacted by weaker trading activity in the quarter, albeit that new financing activity was stopped. I think, overall, the resilience in our fixed income business, which is credit and mortgages, was offset by significant low rates results, which reflects subdued client activity in both the residual non-cleared business as well as the cleared businesses.

Let's turn to equities on Slide 21. Our strong equity results in the fourth quarter reflects the continued market leadership across products and regions, strong client franchise, a balanced risk profile but also favorable market conditions in most of our markets during 2013. Equity underwriting revenues were significantly higher, actually more than double in the fourth quarter [indiscernible] in the third quarter and up by 64% compared to the prior year quarter. And that number is driven by substantially higher IPO volumes. Solid performance in cash equities was driven by further market share gains in both the U.S. and Europe, as well as by increased client activity and favorable market conditions.

Our prime service results were resilient and we saw increases in client balances in the fourth quarter. And we substantially improved the performance in our equity derivative business, again reflecting robust client activity and strong performance and particularly in Asia Pacific. Our full year 2013 revenues were 16% higher compared to 2012, and combined with improved operating efficiency and cost reductions, we delivered significantly higher franchise profitability.

Let's now turn to underwriting and advisory on Slide 22. In underwriting and advisory, we achieved strong revenues of CHF 951 million in the quarter. Strong underwriting performance was partly offset by lower advisory revenues, reflecting a decline in total industry-wide M&A fee pool but also lower market share for Credit Suisse. But I would note that advisory notes were up from the third quarter, reflecting the increased momentum that we saw towards the end of last year.

So let's just conclude for the investment bank and look at the nonstrategic unit, please, on Slide 23. So we obviously completed the setup of the nonstrategic units during the fourth quarter, and we've included here a financial summary of performance. And again, we've included some further details in the appendices. So I think, as you know, the investment bank nonstrategic unit is a further development of the fixed income wind-down group that we've operated for several years, with a number of additions to the portfolio. These additions, including the -- obviously, the restructured components of the rates business, as well as some of the capital-intensive structured product positions.

In the fourth quarter and the full year, we reduced our nonstrategic revenue losses compared to prior periods, and that reflects benefits in valuations gains partly in that legacy fixed income wind-down portfolio and in our legacy rates portfolio, as well as some reduction in funding costs. Reflecting the CHF 0.75 billion of litigation provisions that we took within the investment bank during 2013, and that includes the number we mentioned today, our nonstrategic expenses increased significantly in the year. However, our leverage exposure decreased by CHF 34 billion year-on-year and our Basel III risk-weighted assets decreased by a net CHF 3 billion for the period.

With the implementation of the nonstrategic units, we've clearly substantially increased the focus on driving to exit these positions and to support our progress towards our long-term capital targets. Just to reiterate these targets: the Basel III risk-weighted assets, our targets for 2015 are CHF 6 billion in aggregate terms and CHF 24 billion in leverage terms.

Slide 24. So a key point to highlight on this slide is that we allocate the majority of our capital to the market-leading and higher-return businesses. We made significant progress in '13 in shifting capital to the businesses where we have top 3 market shares, and you can see that increase from 57% to 62%. We improved the returns in cash equities and equity derivatives reflecting both increased activity levels and lower cost basis. Prime services produced solid but slightly lower returns, adversely impacted by an increase in the capital it consumes due to the methodology changes during the year. Returns in emerging market businesses were also lower and that reflects lower finance origination activity but also less favorable market conditions for the year at the half.

Credit benefited from strength in origination trading and by higher revenues in leverage finance producing significantly increased returns, which are amongst the highest in the Investment Bank. Our securitized products business was resilient, driven, as I mentioned before, by strength in our asset finance business, but the returns in our global macro products business remain challenged, driven by subdued client activity particularly in the rates business during 2013. We've already reduced the capital in this business materially and we're obviously increasing our electronic trading operations in this area.

Slide 25. The waterfall chart in this slide highlights the strong returns that have been generated by the strategic businesses within the Investment Bank. For the full year, our strategic business has achieved an after-tax return on Basel III capital of 19%, up from 16% in the prior year, reflecting reductions in cost and in capital usage. I can tell you [ph], looking at 2014, our focus has to be continue to grow the strategic businesses whilst running off the nonstrategic assets.

So let's look at the combined nonstrategic units in more detail on Slide 27, please. So as you may recall from the presentation that we gave on the 7th of January this year, our nonstrategic results also included nonstrategic items within the Corporate Center. In the fourth quarter, the negative revenues earned on strategic units was significantly lower at CHF 78 million compared to CHF 243 million in the previous quarter. As we mentioned before in the divisional sections, this reduction in drive was achieved primarily as a result of valuation gains and the legacy fixed-income wind-down portfolio in Investment Banking and higher investment-related gains in Private Banking & Wealth Management. Pretax income losses of CHF 1 billion also improved compared to the fourth quarter 2012 as a result of reduced operating expenses driven by lower comp and benefits, notwithstanding [ph] the pick-up in litigation. In addition, losses from movements in credit spreads in our own liabilities were significantly lower in 2013, amounting to CHF 296 million compared to CHF 2.9 billion in 2012.

Let's talk -- turn to Slide 28 now to talk about our balance sheet and the RWA run-off profile. As previously announced, I'd like to reiterate the nonstrategic leverage and risk-weighted asset targets. We intend to reduce our nonstrategic leverage exposure by 74% by the end of 2015 and risk-weighted assets by 57%.

Let's turn to Slide 29. So you may recall that on January 7, we gave you a similar slide, albeit that that version was for the first 3 quarters of 2013 and this one is for the full year 2013. And again, I'd just like to walk you through the major components that comprise the nonstrategic units and how we moved from the reported pretax loss of CHF 2.7 billion for 2013, shown on the left-hand side of the waterfall chart, to a pretax run rate of around CHF 100 million excluding litigation on the right-hand side. The bars show the key drivers of how we intend to reduce the impact of nonstrategic units in our pretax income in the next couple of years, which I think may also be helpful in structuring the metrics in your forecast for Credit Suisse.

Let's start on the left and go to the adjustments that we've made to get from reported to underline nonstrategic results, going from left to right. So if you start with a portfolio of debt carried at fair value, in 2013, our credit spreads were roughly stable compared to the movements we saw in 2012, but we still saw losses of about CHF 315 million. Looking forward, the effect of these movements will be eliminated with the anticipated changes under U.S. GAAP, but incidentally, also under IFRS, that are expected from 1/1/2016.

If we move then to the right, we saw CHF 522 million of realignment and restructuring costs. These are costs we incurred primarily to achieve the cost-reduction program we established several years ago, and they will continue in 2014 as implementation of this program continues to the end of 2015. We maintain the guidance that we gave back in October that our total cost to achieve is around CHF 1.8 billion between 2013 and 2015.

The next column represents the significant litigation provisions that I mentioned earlier, the ones that we actually have just taken and incurred in the fourth quarter in both the Private Banking and the Investment Banking divisions. Then there's these 2 columns here you'll see entitled CC Underlying Adjustments and PB&WM Underlying Adjustments. These are really net off each other and they compare the gains and losses from business sales associated in our completed 2012 capital plan. Going forward, the bulk of those disposals now have been achieved. I think you know, we did note there's been more one sale booked in January, but these items should not, clearly, therefore, be a prominent feature in this area.

So that brings us to the underlying nonstrategic pretax loss of CHF 1.4 billion for 2013. So let's continue moving right. The negative impact on the business results from discontinued operations are -- well, I think by their nature, will not continue in 2014. We then look at the legacy funding costs and particularly the high-funding costs associated with non-Basel III compliant legacy debt instruments in both the Investment Banking divisions and the Corporate Center. I think as we said before, you should assume that this will decline by more than 50% this year, reflecting the maturity of these instruments. Just looking beyond that, we expect this portfolio to be fully run off by the end of 2018 and clearly will not be replaced. The CHF 100 million relating to the U.K. withholding tax charge, that was also a one-off item.

I think you know then from our first quarter, we increased our cost-saving target from CHF 4.4 billion to a minimum of CHF 4.5 billion by the end of 2015. Our 2015 pretax income should benefit therefore from the incremental CHF 150 million in cost saves. So I think what we're trying to give here is you can see that the items are either nonrecurring in nature by their nature or will have an expected roll-off profile over the next few years.

So let's just look at the final component. This remaining nonstrategic drag is primarily driven by legacy litigation costs, together with the losses on the fixed-income wind-down portfolio and the legacy rates in Investment Banking. And we've shown here the CHF 555 million of litigation provisions and fees comprising pre-mortgage litigation revenue losses of CHF 98 million in 2013 and approximately CHF 100 million of legacy litigation fees. That leaves CHF 99 million primarily driven by the losses on fixed-income wind-down portfolio and legacy rates in Investment Banking. As we've already mentioned, it's clearly our intent to work through the latest litigation matters and to accelerate the wind-down of these remaining positions.

Let's turn now to our overall cost and capital program, Slide 31. We continued to make progress on our expense program this quarter. Now I think as you know, we've been consistent about this. We compare the operating expenses to the run rate cost base for the first half of 2011, when we initiated the efficiency program. In 2013, we achieved total cost saves for the year of CHF 3.1 billion. That increased from CHF 2 billion at the end of 2012, but in fairness, this is also slightly below our targeted CHF 3.2 billion that we set for 2013. And that is predominantly due to a pickup in commission- and revenue-related expenses that we saw in the Private Banking & Wealth Management division, as well as by certain legal fees in the nonstrategic units partly relating to the some of the litigation issues we mentioned before. And I think we remain committed very much to the annualized run rate savings target of a minimum CHF 4.5 billion for the end of 2015.

Just on the divisions. The Investment Banking division achieved CHF 1.8 billion annualized savings for full year '13. I think through a combination of a restructuring program and the continued realignment of resources across businesses, we'd expect to achieve the additional CHF 100 million in the Investment Bank. Private Banking & Wealth Management achieved CHF 400 million in savings for full year '13. We continue to see savings from the ongoing implementation of the previously announced exit of the small nonstrategic markets and the reposition of select onshore operations. And we're clearly making progress towards the savings target we intend to achieve of CHF 950 million for the end of 2015. Finally, we achieved infrastructure savings of CHF 950 million in 2013, so we're just over halfway towards our 2015 target of CHF 1.65 billion.

Let me turn now to capital, Slide 32. So as you can see from the chart, our look-through Basel III risk-weighted assets stood at CHF 266 billion at the end of 2013, and that was down by 28% from the third quarter of 2011 and that beats the goal that we set a year ago, say in [ph] 2013, which was to be below CHF 285 billion. For the quarter, you can see there was an increase of CHF 5 billion in risk-weighted assets compared to the end of the third quarter, and I think we've now included a breakout box on the top right-hand side where you can see that was primarily driven by a CHF 6.9 billion add-on [ph] in respect of operational risk that we took in the fourth quarter, and I think that's similar what you now see elsewhere.

As announced -- as already announced in our third quarter earnings presentation, we have several new long-term goals for risk-weighted assets to reduce to approximately CHF 250 billion for the group. And that's not a normal [ph] target we're changing. That's very much our intent.

So let's move to capital ratios on Slide 33. So just the first point, really is, as you may be aware, under the Swiss -- to the capital rules, the FINMA provides an annual requirement each year, it's the progressive capital component that's calculated on the base of the size of the balance sheet and market share in the Swiss domestic irrelevant [ph] functions, as well as an assessment of the resolvability. The 2014 requirement for Credit Suisse, which is calculated on year 2019 basis was 3.7%, down from 4.4%, which implies that that 2019 total capital requirement is 16.7% compared to 17.4% last year.

At the end of the year, our total capital ratio stood at 16.1%, which is clearly very close to the 2019 requirement. We made further substantial progress towards this goal in 2013 and in the fourth quarter. Our BIS CET1 ratio was 10.3% at the end of 2013. And clearly, that is after litigation provisions and it's after the accrual for the dividend. And just to be absolutely clear, that is a look-through number and does not include any benefit from the remaining Claudius preference shares.

If we then look at the next ratio, which I think as you know, the Swiss National Bank has referred on various occasions, as the loss dissolving ratio, that is now 13.2% post the exchange of the hybrid tier-1 notes into high-trigger buffer capital notes in October 2013. So both our CET1 ratio and our loss-absorbing ratio now exceed the 2019 Swiss requirements. Just finally, I think obviously, I think you know that we redeemed the first tranche of the Claudius notes in December 2013. And I would like to note that we're currently reviewing options to potentially call the second and the final tranche at some point during 2014.

Just finally, in terms of dividend, as I said already, our fourth quarter capital ratios includes a pro rata cash dividend accrual for 2013 of CHF 0.07 to repay our reserves from capital contributions in 2014 and clearly subject to shareholder approval at our AGM in May. Our board aims to recommend and maintain a prudent dividend policy that allows for future progression as we continue to execute our strategy and resolve legacy issues.

Let's turn now to leverage on Slide 34. So I think you can see here that we further reduced our leverage exposure to CHF 1,130 billion at the end of the fourth quarter. I think just to put that in context, we've shown here where we started this program in the third quarter of 2012 and you can see that our leverage exposure is reduced by CHF 275 billion or 20% since that starting point. We've also completed an initial high-level estimate on the basis of a revised guidance published by the BCBS last month, which indicated a potential reduction to this leverage exposure of approximately CHF 40 billion to CHF 50 billion, including our planned mitigation measures. But I would caution that, while the leverage rules are final, it is subject to the final interpretation and implementation of those rules by the FINMA in due course. But I would like you to be clear though that this is separate from and in addition to the nonstrategic run-off. We have CHF 99 billion of leverage in the nonstrategic units and we're targeting to reduce about CHF 73 billion by -- of that by 2015. But I think you can see between these different measures that that positions us very well to beat the target we set before for our long-term leverage exposure to be below CHF 170 billion.

So what does this mean in terms of our leverage ratios? Let's look at Slide 35. So our Swiss Total Capital leverage ratio improved from 3.2% at the end of the last quarter to 3.8% at the end of the fourth quarter, and that's all calculated, to be absolutely clear, on a look-through basis. If you exclude the remaining tranche Claudius, then the number is 3.6%. As we've already mentioned, we have a revised target for the progressive capital components, which thereby reduces the amount of low-trigger contingent capital that we need to issue. That means, essentially, that our Swiss Total Capital leverage requirement is now 4.0% compared to 4.2% you may recall that we discussed during last year.

So I think in sum, the combination of nonstrategic runoff and I think clearly some expected benefit from the BCBS rules should increase our Swiss Total Capital leverage ratio to 4.0%, in line with 2019. Now just for the sake of clarity, I've not included in this slide the transitional leverage ratios but they are included in our financial report, and that was 5.1% at the end of last year.

Slide 36. So I think, obviously, since we spoke on the third quarter, we've announced our legal entity program, and I wanted just to discuss briefly here the proposed changes to legal entity structure. And what we're showing here is a preview of the structure on a simplified basis. We're making good progress on this program, albeit that many elements are still subject to a number of different and final regulatory approvals. We've decided to implement this program for 2 main reasons. First, the new structure will more closely align the bookings in the Investment Banking business to the region from which it originates. This will help to simplify our organization from a client, regulatory and risk management perspective, and will also provide a more efficient operating infrastructure.

Second, the new model is designed to meet the future requirements for global recovery and resolution planning. For example, it moves the funding up to the holding company level, which I think helps to support the FINMA's preferred resolution strategy of a "single point of entry" bail-in resolution. Resources created at this level can be used to protect clients and counterparts in all our regions. And furthermore, as we improve this resolvability, it gives us potential for further capital reductions under the Swiss banking law. And we remain committed, as we noted in November, towards moving to issuing our debt with contractual bail-in clauses in due course.

With that, I'd like to conclude the results portion of today's presentation and pass back to Brady Dougan.

Brady W. Dougan

Thanks very much, David. I think at this point, we'll just open it up for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from the line of Kian Abouhossein of JPMorgan.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

The first question is relating to Private Banking & Wealth Management. If I look at the cost savings slides and your target of 65% cost income ratio, you could imply that assuming the revenues are flat, the costs would have to be reduced by about CHF 600 million, CHF 700 million, that kind of range. Is that kind of how you're thinking about moving to that 65% cost income target, or is it more revenue based? What -- if you could just maybe discuss that? The second question is a very short one on the Morgan Stanley wealth management business. What was the cost of that? Integration cost in the P&L? And one more on private banking is related to the margins. You're indicating top line margins being flat, and just trying to understand what are the underlying assumptions to get to that conclusion? If I may, 2 more questions. One is on fixed income. If you could discuss how emerging market volatility has impacted you this quarter so far in your fixed income revenues. And lastly, you indicate on Basel CHF 40 billion to CHF 50 billion of capital reduction under Basel III leverage rules, and I'm surprised you have asset reductions under Basel III leverage rules relative to your current rules. Just trying to understand where the asset reductions are coming from?

Brady W. Dougan

Thanks, Kian. Thanks very much. Maybe I can start with the fixed income question and then maybe we can move on to the, as you say, the Basel leverage questions. And then maybe David could address a number of these sort of cost and margin issues on Private Banking. I mean, I think on fixed income, I think we've made the general statement, as you know, that the start for this year, so far, has been largely consistent with what we've seen in previous years, but that there have been obviously varying impacts across the different businesses. So we've seen a pretty strong start in things like credit and structured products. Certainly, emerging markets has been impacted by the challenging conditions there. But again, as you know, I mean, it's been a little bit more intense this year. But we already had some fair amount of disruption last year in the third and, particularly, fourth quarter in the emerging markets business. And actually, our business performed pretty well even across the -- in the fourth quarter on the emerging side. So it certainly has been impacted so far this quarter. But we'll see. I mean, obviously, it's led to certainly reductions in some of the trading volumes, but also some interesting opportunities on the origination side. So -- but it certainly has been impacted. We'll see how the rest of the quarter actually plays out. I think on the Basel, the CHF 40 billion to CHF 50 billion, I mean, David, you want to...

David R. Mathers

Thanks very much. I think there's a couple of points. I think you know that Credit Suisse and UBS as the 2 Swiss g cities, have been required by the FINMA to report our total exposure numbers, which is based on the, I guess, the original BCBS rules for leverage since the beginning of last year. So we've obviously had to operate in a total-exposure regime for about a year now. And clearly, as you can see from the leverage program, that's something we've been working to really now for about 15 or 16 months. Why do you get a change? Well, when we actually got the rules set, there are a number of changes in the BCBS final rules, although I would caution, just to be clear, that their implementation will clearly be subject to the FINMA's new template to actually install those rules. Even though they've been published finally, of course, there's now, I think, a chance for some further comment and then it will actually get converted into practice during 2014. But to help you more specifically, I mean, there's clearly a number of changes in the Basel rules, but the 2 things that have had the most impact is firstly, I think we had hitherto been assuming that unfunded commitments, both from the Investment Bank and within the Private Bank for corporates, for example, accounted 100% towards leverage exposure. I think you may know under the proposed rules, there is now a tiering of that between 20%, 50% and 100% depending on certain criteria. So -- which I think, is, by the way, very logical. 1.00 [ph] from an underfunded [ph] commitment, I think, had a [ph] drawdown analysis was extremely harsh. So I think this is a much more logical rule, though we had previously been assuming and still doing these numbers 1.00 [ph]. Second thing is that some of the treatment derivatives is more favorable because you are allowed to net off for cash collateral you actually hold. And hitherto, we had not basically taken that into account and we don't at this point. So those -- I mean, there's no other changes. But if you wanted to say, "What are the 2 biggest changes that we see in the BCBS rules compared to the existing rules we've been operating under," then those would be the things I'd actually point to. Moving on to the other points then, I think, actually on Page 8, I think you're actually correct because what we've actually given there is the path to our targets. I think you can see that for the Investment Bank then simply running off the nonstrategic loss will take you from 77% down to 72% cost to income, leaving not too far to go in terms of the sub-70% story. That's for the group, the 70%. So for the Investment Bank, then we're at 71% against 70%. So you might say that the Investment Bank, the primary target, has to be to eliminate the nonstrategic unit. For the Private Bank, that's not true. The strategic number is 70%, so it's slightly better than the 71% we show and, therefore, you need about a further 5% reduction to get that key in [ph], which I think is the number you're referring to. And I think in terms of our planning, it splits roughly equally 50-50 between further cost saves in the strategic business and revenue growth that we expect to achieve in the strategic business. Moving on then in terms of the Morgan Stanley integration costs, then I think I would refer to the wealth management page in the presentation, which is on Page 13. Just in terms of the operating expenses there, you can see it's gone from CHF 1,554 million to CHF 1,572 million. There's clearly -- it's not -- Morgan Stanley is clearly not the only in terms of that, but that was about CHF 21 million in the fourth quarter. And we actually also give that number on Page 47 in the breakdown of the cost moves in the detailed appendices. I think -- have we now -- or was the gross margin or gross margin point?

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Yes, margin, gross margin point.

David R. Mathers

Yes, I mean, think -- obviously, one change we wanted to do this year, because I think we obviously talked for a long time, is that the shift towards "ultra high net worth" clients and "ultra high net worth" clients in emerging markets in particular is that those -- the profitability slides will be lower in gross margin terms but higher in net margin terms, obviously, just for -- purely [ph] reflecting the tightened scale of the deals that we're actually conducting on their behalf. So it is logical, therefore, to focus much on, in fact, more on the net margin as a percentage of gross assets at the gross margin. So if we look then at the performance last year, you can see that the gross margin, at least, was stable on recurring and stable on transaction, but was obviously diluted by the reduction in interest income that we've obviously warned about and is roughly predictable. If we look for 2014, we would -- probably would expect [indiscernible] and the transaction elements to be stable, but we're still seeing some volatility in the net interest number. We probably will see the final runoff for that in the first half of this year, but then looking at the shape of the curve, which are in our replication portfolio, a pickup towards the second half. So I think that's really what we meant in terms of gross margin being broadly stable and those are the kind of trends. But we would expect the net margin to actually improve from the number we actually showed on the slide here. And I think -- I would encourage you, I think we'll obviously -- as a business, we're much more focused on net margin, and that's really what we're driving towards.

Brady W. Dougan

Thanks, Kian.

Operator

Your next question comes from the line of Matt Spick of Deutsche Bank.

Matt Spick - Deutsche Bank AG, Research Division

I had 3, if that was okay. The first question was, there was some commentaries in Q4 in the Private Bank this year, the contribution from some of your sharing revenues was a little bit more evenly spread over the year and less concentrated in Q4. I just wondered if there was a smaller-than-usual contribution in terms of performance fees in Q4 in the Private Bank from some of your other operations like Hedging-Griffo. If you could give us any sense of whether or not that was something that affected Q4 differently than it affected Q4s in previous years. The second question was on the CHF 175 million of SEC-related issues with the tax matter. I know previously you've said that you don't want to talk about that until it's finalized, but now you're providing that presumably because you've got a bit more visibility. I just wanted to ask if the CHF 175 million to the SEC was for disgorgement of profits and that that would imply that you still have the DOJ disgorgement of profits to go and the federal backup withholding tax to go. So if you could just clarify if that's the right understanding of the SEC provision this quarter. And then the third question is on the compensation in the Investment Bank, which obviously picked up quite a bit in Q4 it. I was just curious whether that was purely a mechanical true up of your compensation because the mechanical accruals earlier in the year had come in low, or whether you've seen any cost pressures within your business, maybe related to the equities mix or something in the fourth quarter.

Brady W. Dougan

Thanks, Matt. Thanks for those questions. Let me start with the second one on the SEC provision that we made. So as you say, we -- obviously, this has a long-running issue. We've been working towards resolution on it. There are several aspects to it and, obviously, there's been a lot of focus on the DOJ piece of it, but there also is and has been with others. I mean, if you look at historical settlements on this, there's also been the SEC element, which is a securities or a licensing-type issue. And so as you say, we're clearly working towards resolution on both of those sides. The DOJ matter is still outstanding. As you know, we took some original provisions a couple of years ago. That matter is still outstanding. The provision we've taken today is with regard to the overall SEC. So rather than getting into the issues of, as you say, specific issues around disgorgement or other -- a number of technical sort of definitions around aspects of that. I mean, we basically have just taken a provision which we're hoping will represent the cost of resolving that issue. Obviously, we're taking that provision because we think we have made some progress towards resolution. But exactly when and exactly what the form of the resolution will be, we'll keep you informed. But basically, this would be the cost of resolving that aspect of the issue. And then as you say, when we get the other aspect of the issue resolved with the DOJ, that will be sort of a separate issue for which we obviously do have some provisions, but we'll see how that develops. I think on compensation in the IB, maybe I could start and David could jump in. But we're obviously -- I think we've mentioned that the total comp number for the year is down 10% versus 2012. Our comp-to-revenue number is down from -- on an underlying basis, from 48% to 43% in 2013. So we have -- we believe we have -- we've driven, I think, some pretty disciplined processes around that, not to mention, of course, the fact that we always try to make sure that the form, the structure of the compensation is very well aligned. So as you know, we actually have a component of compensation for our directors and managing directors in the form of a CCA or contingent convertible bond this year, so that's helpful. So yes, the fourth quarter really is more of a true up. We've more looked at the annual approach, which as we say, is on an absolute basis down about 10% in total comp and benefits, and on a comp to revenue down from 48 to 43. You want to add to that?

David R. Mathers

Yes. I think the truth is is that clearly certain of our business is in equities and so the underwriting business is actually quite stronger than we perhaps had expected in the third quarter. And the increase, the accrual in the fourth quarter compared to third quarter obviously had to reflect that stronger close. So I think you described it, Matt, as mechanical, and that was exactly the case.

Brady W. Dougan

You want to take the Q4 PB?

David R. Mathers

Just in terms of SGC or collaboration revenues, it's -- the overall collaboration revenues for the year as a whole were the same in 2013 as in 2012. But in 2012, I do recall that we had a particularly strong fourth quarter in terms of SGC bookings and it was rather more even in 2013 as a whole. So I think more a flattening out to what was rather pronounced seasonality in 2012 than anything else really.

Operator

Next question comes from the line of Huw Van Steenis of Morgan Stanley.

Huw Van Steenis - Morgan Stanley, Research Division

Two questions. First, you obviously did a great job in reducing your leverage exposure in the quarter. And I noticed that in the core Investment Bank, it was down by about 6%. Any clues you can point us to between sort of tear-ups and rates shrinkage versus prime brokerage shrinkage at to what extent there's further potential opportunity? And then, secondly, in wealth management, I'm struck with your -- obviously, your strong emerging market growth. Is there a chance you can also give us disclosure of then what your assets are in Asia Pacific, Eastern Europe and Latin America? Because obviously, you still structure it in the sort of overall geographic buckets but you're now starting to talk out [ph] EM versus mature. And also, what sort of cost budget you think you need to try and sustain and grow that net new money back to the targets you're aspiring to?

Brady W. Dougan

Let me just see. David, do you want to try to take the question on the reduction on leverage? How -- what -- some more detail on the...

David R. Mathers

Well, good question really, because I think as you know, Huw, we have moved a large component of the non-clear business within the rates portfolio into the non-strategic unit. But I think your question was right. It was actually on the strategic unit. And I would imagine, as you'll recall, that we obviously do have a number of non-clear businesses still [indiscernible], which will be transferred over the next 2 years as those businesses go clear. And clearly ahead of that, we will also be looking to reduce their leverage exposure. So you will see reductions in the strategic unit relating to that clearing, as well as, obviously, the -- what we've talked about already in terms of the non-strategic units. I think I could give you numbers, but what I would say in terms of the contribution to the balance sheet reduction, it was really in 3 components. The largest would be in repo, in terms of the reduction in our repo balance sheet. The second really during the year was in our general rates balance sheet, and the third really would be prime services in terms of the 3 contributors to that. There were some small reductions elsewhere, but those would be the businesses most affected by that. I think in terms of the add-on number, and we've actually given the add-on number in one of the slides, that does primarily reflect compression and tear-ups and moving things on to exchanges, so that's where we've seen the bulk of the benefit in terms of reduction of the add-ons over the last 15 months. So does that answer your question, though, Huw?

Huw Van Steenis - Morgan Stanley, Research Division

No, that's very helpful. I was just struck it was in the core business where you'd actually made more progress, and I was just obviously impressed, so I was just -- thanks, that's helpful.

David R. Mathers

Well, I think what matters for us really is very much the focus for us now is setting those two units up has to be -- to basically work -- really work very hard to grind those down over the next 2 years as fast as we possibly can. But it's a fair point.

Brady W. Dougan

Do you want to address the M&A issue and emerging markets and any further detail we can give on either assets outstanding...

David R. Mathers

I can give those numbers in terms of the net new assets. I think what you are also looking for, Huw, was basically the actual start -- the actual total, which I don't have in front of me at this point. I'm going to have to think about that. We've not really disclosed before. But basically, in total terms, our net new assets full year is about CHF 0.9 billion in Switzerland, about CHF 7.4 billion in the emerging markets, EMEA, minus CHF 5.7 billion pure in Western Europe, and then the Americas, about CHF 4.7 billion. And then the balance will be Asia Pacific, CHF 11.6 billion.

Huw Van Steenis - Morgan Stanley, Research Division

Okay, that's helpful. And just on the last bit of -- to what sort of extra cost budget you might need to try and hit the net new money targets. What -- do you think there will be a quite a bit more layering on of cost or you've got broadly what you need?

David R. Mathers

It's entirely within the plans we've committed. I think, Huw, though, it does obviously require resource rebalancing across the bank towards the emerging markets. I mean, I think it's fair to say that obviously with the outflows in Western Europe and the regularization there, you are going to see -- obviously, pure assets will result in less costs. You know as well, basically, we've actually announced the sale of our German business. But equally against that, there will be regional shift towards the emerging markets in terms of our investments.

Brady W. Dougan

I also think, Huw, as you know, one of the things that we announced last quarter, and which we've continue to make good progress on, is this targeted ultra high-lending initiative and a lot of that actually will also be in the emerging side of things, which will also -- that also generates good asset flow and client retention growth and attraction. So that will also help, which is not necessarily increasing our costs, but it will increase actually our capital and our allocation to that part of the business

Operator

Your next question comes from the line of Kinner Lakhani of Citigroup.

Kinner R. Lakhani - Citigroup Inc, Research Division

A couple of questions. Firstly, just on the wealth management side. Just wanted to get some sense of the progress that you're making in turning around the U.S. wealth management franchise? And maybe if you could be a bit more specific about how you would expect us to think about the lending book in 2014 and then going into 2015. And then secondly, just on the Investment Bank, where you talk about kind of an improved performance in the strategic business in 2014, I just wanted to better understand what that's predicated on. I mean, I guess the remaining kind of cost-save potential is very limited. So does that suggest that you expect an improved revenue performance, particularly in the fixed income there?

Brady W. Dougan

Thanks, Kinner. I think with regard to the Private Banking Wealth Management question on -- I guess, you're talking about basically the U.S. Private Banking business. I mean, we've mentioned before that that has been a business that has not been consistently profitable for us. As you know, we're taking a different approach to that business. We've put new management in place. We are increasing the balance sheet around that. And really, very much focusing on improving or bringing that business to profitability, improving the overall profitability performance there. I think as you mentioned, I guess your lending question is really -- I guess that's specifically with regard to the U.S. business. And certainly, it's one of the things that we've noted is -- that our business in the U.S. has been actually a reasonable performer on transactional and recurring costs, but we really have not had -- we've had very little balance sheet really allocated to that business. And so that certainly is a -- a big focus of ours will be to increase the balance sheet there. I'm not sure that we've been public about any specific metrics around increasing that, but we do -- we certainly be increasing our risk-weighted assets and our capital allocated to that in the U.S., I'd say, reasonably materially, in the course of 2014. David, you want to take...

David R. Mathers

Yes, on the cost point [ph], I think you're right. In terms of direct expense, I think there's about CHF 100 million to go. But clearly, I think, in terms of the infrastructure size, we're at CHF 950 million of savings now, targeted to get to CHF 1.65 million, so about CHF 700 million to go. Just over half of that would actually go to the investment bank numbers you see reported even though the cost savings are actually driven out of the shared service infrastructure side.

Brady W. Dougan

In regards of some of the businesses, I mean, clearly with the restructuring of the rates business, our objective and our expectation is that business will perform better in 2014. So -- and that certainly is our expectation.

Operator

Next question comes from Daniele Brupbacher of UBS.

Daniele Brupbacher - UBS Investment Bank, Research Division

Can I just briefly come back to the exposure number in the strategic IB business? Obviously, that's down at quite an impressive CHF 150 billion within 9 months. Just wondering whether you could somewhat -- somehow quantify the revenue impact of that reduction. So just a follow up there. And in that context, I mean, on Slide 34, the CHF 1,130 billion leverage exposure and then the longer-term targets, if I add the CHF 40 billion to CHF 50 billion relief, I mean, you're basically almost there. How should we think about the target in terms of -- that you're going to reduce it further or that you're just going to recycle probably some of the high -- lower return businesses into higher return businesses? It's just question 1. And then a follow-up on the compensation question. The same question for the Private Banking or [indiscernible] business. It feels as if Q4 was a bit higher than expectations. Is that also just a true-up in your opinion? And on the IB side, I mean, the CHF 600 million comp reduction in -- during the year, how much of that is due to lower amortization of deferred comp from the 2011 and '12 bonus years, assuming that bonuses were down back then? Then very lastly, the CHF 1.5 billion cost-cutting to come, how should I think about the years when that will show up in terms of '14 and '15, the split of that?

Brady W. Dougan

Thank you. Thanks. Maybe I can start with the third part of your question on the PB compensation, although David is going to have to help me on the deferred aspect of it. But -- and then we can go on to the overall cost and then back to your other -- the other first parts of your question. Yes, I think the PB was similarly -- it's basically a catch-up, somewhat performance-related. I mean, again, the underlying comp-to-revenue ratio year-on-year is down for the private banks. So I think it's down from sort of CHF 42 billion to CHF 40 billion from '12 to '13. And so clearly, the fourth quarter was a bit of just a true-up, but also, as you could see, the Asset Management performance in the fourth quarter was very strong and there is, as you can imagine, a fair amount of performance-related compensation associated with that. So that was sort of a required true-up in the fourth quarter as a result of that. In terms of the IB number and the amount of the reduction in comp that was deferral-related, if I have that number...

David R. Mathers

I think we've got to get back to you on that one, actually. It's one of the more detailed calculations, but we'll get back to you. I think it certainly true that the IB numbers did benefit from a significant reduction in deferred compensation, as I think we alluded to last year, but we'll get back to you with the specific number.

Brady W. Dougan

You want to address this question of the CHF 1.5 billion cost saves remaining and how they true-up between '14 and '15?

David R. Mathers

Yes. For the sake of tidiness, we didn't include all the previous targets, but what we've said before is that we intended to increase our savings to about CHF 3.8 billion in respect to 2014 and then CHF 4.5 billion by '15. That -- we -- that -- those targets for this year have not changed in terms of what we intend to achieve for this year. I think you also asked the question really in terms of the exposure and the revenue impact. I wouldn't want to quantify it because I think there's different ins and outs. I mean, I think if you look at the reductions in the add-ons from the tear-ons -- tear-ups, then you can see that's come down across the bank. I don't think it would be fair to say that there was any revenue impact from that, that those positions had [ph] to tear-up, I think, quite clearly across the industry. And as everybody now begins to focus on their leverage exposure, there's increased pressure on all banks to actually join in and actually reduce their -- both mutual exposure but also such tri-party [ph] exposure. So that won't have -- that wouldn't have any particular impact on revenues. But if we actually think around CHF 50 billion reduction across our rates business, yes, it's a business that is facing fundamental strategic change as it moves from being OTC to being cleared. Yes, the environment, with a flat curve, is extremely tough and difficult, as I think you're well aware. But I think that kind of reduction in the balance sheet must have had the significant impact on the revenue as well. Their decrease in prime is much smaller, but I think as you note from the bubble chart, the competitive provision of the prime business has been broadly stable in 2013 compared to 2012 in what, let's be realistic, was a favorable market environment. So I think it is probably true to say that the focus in terms of optimizing the balance sheet and the leverage utilization within the clients service business will have some impact on our ability to actually exploit that. Now I think that was mostly in the first half. As we said already, the prime business certainly closed 2013 very well. So I think we're kind of through that. So I think in terms of real revenue impact, it certainly contributed to but is not the prime driver of the weakness in the global macro product area. I think the flat curve and the fundamental change is at least as important, but it would be wrong for me to suggest that didn't have a negative revenue impact. In terms of the forward-looking plan, as you know, we're at CHF 1,130 billion. We intend to strip CHF 73 billion over the next 2 years out of NSU, so that will obviously bring you down to sort of CHF 1,151 billion -- sorry, CHF 1,050 billion, CHF 1,060 billion, so less than our CHF 1,070 target. If the BCBS rules go through as currently scheduled, that would obviously bring us down very close to around the sort of trillion mark or CHF 70 billion less than I told you. I think that probably is a good target though. I think -- but I think -- I'm not sure I necessarily want to go further from that or necessary to pull back from that kind of trillion number plus/minus, assuming the BCBS changes. I think the consequences there for the business is I don't think you really should expect us to see, as you might say, the strategic leverage exposure actually going up for the Investment Bank. I think it is perfectly possible that you may see the capital allocation to the Private Bank going up, both in RWA and leverage terms. I think in the third quarter, we talked a lot about this in terms of lending activity and moving closer towards a 50-50 cap allocation. Now the NSU doesn't quite get you there. It gets you down to about 55%, so that's probably where, if anything, I would expect to see RWA and leverage growth over time. But clearly, that has to be matched to the appropriate risk-adjusted return, that we actually have the right investments to actually make. So slightly long answer, but I hope I've covered the issues there, Daniel.

Operator

Your next question comes from Fiona Swaffield of RBC.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Can I ask -- come back to this net margin issue? I think you said in answer to an earlier question, net margins should be up in 2014. Could you talk us through where we could see some of the incremental cost savings for the whole Private Bank? Would we expect some in WMC? So if revenues are to pick up, would you expect significant operating leverage, for example, in that division? And then secondly, on the Western European crossborder outflows which were relatively high, and I think, cumulative, might be somewhat higher than your total number, could you update us on where we stand there versus the original. I think it was 25 to 35?

Brady W. Dougan

Thank you. Well, I think on terms of the cost numbers, I mean, I think in answer to an earlier question, I think we intimated that we would be looking for approximately CHF 300 million or so in additional savings within the strategic Wealth Management & Private Banking business. I think clearly, a lot has been done within the Asset Management business so I think that does imply we will by seeing that in the Wealth Management Client business. And that really is going to come in the Western European business, and it will come to a degree in the Americas restructuring. So yes, I think you will see a lower cost in the wealth management business even as we actually reorient the business. I think in terms of the Western European crossborder outflows, I think I would probably agree and disagree in the sense that certainly if you go back 3 or 4 years, I think we talked at that point about potential in sort of CHF 25 million to CHF 35 billion level. I think if you add up what's been outflowed since that, today it would be north of CHF 35 billion. In terms of the outflows we saw last year, then it was in -- it was CHF 10 billion, and I think against a range of CHF 6 billion to CHF 10 billion. So it's definitely at the top end of what we actually guided to a year ago. I wouldn't say it's beyond that. As I said, I think it's a good thing and it's a bad thing. I mean, clearly, it's not good to see assets outflow, although on the other hand, I think it does indicate, I think, the progress that's being made towards the regularization of those assets across Western Europe, which I think is a good thing. I would -- just to be clear, I think, would suggest to you that we could -- my [ph] -- the guidance I'd give for 2014 is probably the same as it was in 2013, something in the CHF 6 billion to CHF 10 billion and potentially towards the top end of that range. Hopefully there afterwards will start some stability, but I think this regularization now is very much a full flow.

Operator

Your next question comes from Jon Peace of Nomura.

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

I have 2 questions, please. The first one is is there any more color you could give on the dividend outlook, your desire for a progressive dividend? I mean, should we be thinking in terms of absolute increases or do you have a payout target in mind for 2014? And then the second question is around the fixed-income performance. Despite having hived off the rates business, your growth rates and the strategic fit were a little less than your peers. Is that mix related or does it cause you at all to reconsider just how far you may go in that business in terms of downsizing?

Brady W. Dougan

Thanks, Jon. I mean, I think on the dividend side, I think as we've said, we are -- we have said all along that we felt that we -- with the reorienting of the business, the progress we've made on the capital and our confidence in working through some of the legacy issues, we felt we would like to start returning significant capital to shareholders, and that progressively over time, we'd clearly like to and feel and hope the business will allow us to see a reasonable progression in that over time. So as you say, I mean, this year, we're going to recommend to the shareholders the CHF 0.07 of cash, full cash dividend. And obviously, our hope and our outlook is that we're -- we believe that that's hopefully a number which we can continue to grow over time in terms of returning increasing amounts of cash to our shareholders over time. I don't think at this point we're going to make any definitive statements about percentages or specific numbers or anything like that, but it certainly is something where we're committed to returning material amounts of cash to the shareholders, and hopefully, to increasing that over time. That's certainly our hope and expectation. On the fixed income side, and maybe David can add to this as well, I'm not sure. I don't know how you're looking. I mean, I think our view is actually that the growth rate in many of our strategic businesses are actually quite strong. So if you look at our credit, our structured products and our emerging markets business last year, I think, actually the performance of those businesses was very, very strong, including competitively versus other players in the industry. So we feel very good about those, not only in terms of overall sort of revenue progression, but particularly returns in this business is -- we feel very good about. There's no doubt that we are probably one of the first movers in terms of restructuring the rates business. I think that all the things you've seen and moves that other firms have taken since then, I believe, sort of indicate that decision in terms of the direction that that business has to go and -- but there's no doubt that that -- in terms of the timing on that, I think that will put in a good place eventually, but there's no doubt that in the fourth quarter that probably we had some impact on the revenue outlook. But I think our view is, overall, we point to the strategic businesses, and the Investment Bank and 19% return on Basel III capital in 2013. That's -- our view is that's a really high-performing investment banking business. And so I think, as David said, the quicker we can get that non-strategic piece down and continue to focus on optimizing and growing those strategic parts of the business -- I mean, a 19% return is actually, I think, a very good, if not best-in-class, return in those businesses. So that's our view, I think. But I don't know if, David, if you want to add to that.

David R. Mathers

Yes -- no, [indiscernible] I think, but I'd also refer back to the discussion we obviously had about leverage before. I mean, I think CHF 275 billion reduction leverage exposure over 15 months is a very substantial program. And whilst we can point to the reduction in add-ons as being of minimal and no revenue impact, I think clearly, the drive to bring leverage down and I think to report the leverage ratio numbers we reported today did have an impact on the macro business in terms of the rates side. I think that was the right decision. I think you have to look at all of our business lines in terms of the return on assets, and I think that's what drives the 19% return that Brady talked about. But if you're talking about total headline revenue, then there's going to be an impact from that. I think -- but I also say that, realistically, by setting up strategic and nonstrategic -- the BCBS changes, you can now look at the strategic, and say, "Well, that's it. That's the game plan going forward." We obviously have some transfers within the credit rates when things get cleared, but you know roughly what the leverage exposure you're going to be actually work with. Likewise, I think we would obviously like to see some expansion of our lending in the private banking business in that sense. And then the focus really then is on driving down the nonstrategic unit now, because that will obviously enable us to complete the progress to our target. So I think you now have stability in terms of the resource allocation to the strategic investment banking business and the strategic [indiscernible] business going forward in terms of that, with the pressure now very much on the NSU side, which I think is probably a much better way of running things.

Operator

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

Jernej Omahen - Goldman Sachs Group Inc., Research Division

I have 4 questions left and one is more of a strategic nature and aimed at you, Brady, and the other 3 are, I think, more shorter-term numbers questions. So the first question I have is the following. The last time, on the last conference call, I asked you the question on the "too big to fail" issue and the probability of that debate being reopened. And by coincidence, the Swiss finance minister made a statement, I think, a couple of weeks later basically saying, "Look, you know what, we might as well double the leverage ratios here because that debate hasn't been resolved yet." So on that point, I wanted to ask you the following. On Slide 34, you show us that your long-term target for leverage exposure is just above CHF 1 trillion, which is roughly 175% of Swiss GDP today. So I was just wondering, from a perspective of a policymaker in Switzerland who's going to have to debate a "too big to fail" issue again in 2015, where do you think that debate is likely to end? And on that point, I wanted to ask you on the dividend payment, did you require -- did Crédit Suisse require supervisory approval for these dividend payments increase or not, or do you see the level of dividend at this point purely as a management decision without any interference from the policymaker? And I think then, finally, on this point, I wanted to ask you, you are now at a 10.3% fully phased Basel III and you tell us kindly that you are at 3.1% leverage ratio. It's roughly a quarter less capital than your competitor across the road. So what makes you feel comfortable or confident that hiking to dividend now and stop -- essentially accruing capital at the lower pace is the right thing to do. And then, 3 very quick questions. So the first one is on Page 36 where you give us the new legal structure for the -- essentially, how you're going to set up Crédit Suisse. And I have 2 questions on this slide. Question #1, the way it looks here is that you will still be funding centrally from the holding company. And I was just wondering from a resolution perspective, how does that make things better? Because I thought that the whole point of subsidiarizing is to essentially ring-fence -- more or less ring-fence capital, and make sure that the legal entities are self-funded, but that doesn't seem to be the case here. And the second question on this slide is when you transfer funding from the holding company to the subsidiary, I'm assuming that if it's in different legal entities, now it's going to be -- have to be -- it's going to have to be done on an arm's length basis. Will you be charging market rates plus a spread when you provide liquidity from the holding company to, say, your U.S. investment bank or not? And how does that affect the profitability of these various entities? And finally, on collaboration revenues, I was asking this -- UBS on their results they -- I mean, they've got investment banks [ph] much more than Crédit Suisse, but their overall revenue dynamic is very similar to that of Crédit Suisse. And I was just wondering, how does one explain that? Because if these collaboration revenues are really bad, then the logic would have to go whoever keeps most of the investment banking is going to show better than any seen [ph] collaboration revenues and in overall revenues, but that doesn't seem to be the case here.

Brady W. Dougan

Thank you. I guess on the first question, obviously, the question's around, as you say, the forward-looking prospects for the kind of global regulatory and, as you say, the various different countries within that. They, obviously, continue to be an important element. I mean, I think our view is, again, notwithstanding, as you say, some remarks that were made in the meantime. I mean, I think Switzerland was very early in putting in place a very tough regime. We have now at this point, I think as I mentioned, David mentioned, we've basically gotten to the point where we've virtually met or just about met all of the requirements under that regime. So whether it's a common equity requirement, as you said, the contingent capital element within that where we basically are within CHF 2 billion or CHF 3 billion of completing that requirement, and also, importantly, the legal entity structuring. We've made a tremendous amount of progress against that original requirement of the law, the "too big To fail" law which has been put in place here in Switzerland. So I think we've actually made a tremendous amount of progress against that. So I think that in of itself I think is obviously a good achievement and puts us, I think, in a good place. The question about further elements from here, I mean, obviously, there is actually a provision in the law for a reassessment of the -- of whether or not the measures are sufficient that have been put in place. I think that's to be undertaken at the end of 2015, so it's sort of a couple years from now. But there is a provision to continue to look at that. And I guess on that point -- I mean, you asked the question about from the perspective of a policymaker. I think our view is that the important thing is how much capital is available for loss absorption and how does the legal entity structure also help to facilitate that? I think all of the measures that we've taken, when you look at our capital, when you look at the contingent capital we've put in place, the fact that we're going to be actually issuing bail-enable debt going forward, the legal entity structure where I think what we've laid out in December and more detail in January, I think is pretty much state-of-the-art in terms of having a legal entity structure that really, I think, helps the resolvability of the overall structure significantly, I think all that leads to a structure which is dramatically improving the safety and soundness of the financial system here in Switzerland and the global financial system. So I mean, the way I look at it is I say if you look a couple years out, we'll have CHF 30 billion or CHF 40 billion of common equity, we'll have another CHF 20 billion or so of contingent capital on top of that, we'll have some amount of -- over time, of senior debt that will be bail-enable. So you end up with -- from a policymakers perspective, you end up with a bank that's got, I don't know, 80 -- say CHF 80 billion plus/minus capital available in case there were any issues. Now that's about 10% of the notional balance sheet, of the nominal balance sheet that's out there. And if you look back at past crises, which, I guess, as you say in Switzerland, probably what people would look back is '08 and look at UBS's experience then, and I think their losses were less than 2% of their notional balance sheet. So I think from a policy perspective and from the debate, I hope that what people will look at is say, "Gee, Crédit Suisse, for instance, has 10% of capital available against this balance sheet, which is sort of 5x more than what we saw in past crises as being necessary." And so certainly my hope is that is -- that that will be persuasive argument, but obviously, it's a debate that will happen here just like it will, I think, happen probably all around the world. But my view is that that's a pretty strong argument and one that I hope will have resonance. On the dividend payment, of course, we are in a very close dialogue with our regulators about all these issues about capital and capital planning, and obviously, dividend is an important part of that, so I think you can assume that that's certainly something that we work very closely with them on. And so that's -- I think that's a fair assumption. I think your question about the -- I think you were talking about sort of comparative levels of capital. To be honest with you, I think we feel really good about our comparative levels of capital. I mean, I think it's 16.1% total capital. If you include the contingent capital as well as the common equity, I think we're probably one of the best capitalized banks in the world. And again, if you look at the high trigger plus common equity, which is one of the things at the Central Bank here in Switzerland looks like -- looks at -- they have this level of sort of a 13% requirement. We're above that level. I think if you look at the transitional leverage ratio, which is what a lot of other banks quote, there aren't a lot that are looking at pure Basel III as we have been able to do but I think we're at 5.1%, so we're actually over 5.0% on that measure. So actually, I think we feel like the capital resources that are there, the progress we've made against the 2019 requirement, yes, make us feel actually quite good about the strength that we have there. And frankly, we'll probably stack that up against any institution, because it's a -- I think it's actually a very strong set of capital there. David, you want to...

David R. Mathers

Yes, I think just a few supplementary points. I mean, I think, clearly, just in terms of the policy agenda, I think I'm sure you're aware of the SSB document, which came out in September last year, which refers to the GLAC concept or as I understood, a loss absorbing capacity of a G-SIFI. And I think GLAC is something which is widely supported and is very much on the regulatory agenda for all banks and all regulators at this point. And I mean, it's quite clear what GLAC clear stands for. You're talking about CET1, contingent capital and bail-in debt. So I think to the numbers Brady talked about, you can see CHF 27.5 billion of CET1. You can see that we have CHF 14 billion of contingent capital in place already, which puts you just over the sort of CHF 41 billion mark -- CHF 41.5 billion. We've probably got another CHF 2 billion or CHF 3 billion of contingent capital issue. We're talking mid-40s. If you said that, say, 4% or 5% of your balance sheet had to be in informal bail-in debt, and that is something we've both committed to and is something we're very supportive of, then you can actually get to do that ratios which is sort of in the 8% to 9%, overall, really. And that's very much where I think the global regulatory compensation is actually going, towards that concept. Not much to add really in the capital ratios, I think, 10.3%, 13.2%, 16.1%. I'm not sure there is a G-SIFI in the world which has a higher contingent capital plus CET1 ratio in excess of that. If we turn to the legal entity point. I think just -- this is obviously on Page 36, was intended as a model of the future structure. I'm sure most of you are aware that Credit Suisse already operates hard [ph] in this sense and that the majority of our investment banking activities actually sit already in 3 legal entities: Credit Suisse International, Credit Suisse Europe, and then Credit Suisse U.S.A. in the United States. So we already obviously are somewhat subsidiarized in our operating model and this simply takes us to a further step to that. I think you asked a number of questions really about the global funding model. So I think at the moment, the U.S. banks are normally structured as a holding company, from which they actually issue debt. And that is I think, in many ways, the preferred resolution structure because if you're issuing out the holding company then generally, the FDIC approach to resolution, at that point, you take out the holding company and you basically get interest in [ph] bail-in because of the haircut [ph] on the debt that's issued out of senior debt. Many other banks around the world actually are issued more -- structured more as a branch network and will issue out the bank branch. So obviously, at that point, it's difficult to disentangle the bank funding that's issued by the bank from the actual holding company structure. So clearly, I think it's no particular surprise that most of the regulators around the world are moving towards recommending and requiring a holding co structure more akin to a U.S. holding co structure. And if you look at this, this is very much a -- in that kind. You have a holding co structure and you actually fund that at that point. Clearly, if you're issuing bail-in debt on the hold co structure, that means in an operational point of view, the operational entities that actually sit beneath the holding co can actually continue, in a resolution event, with the bail-in debt, essentially taking any losses that have not been absorbed by the CET1 and the contingent capital. I think you asked a question then about funding. I mean, Crédit Suisse does operate a central treasury. I think most banks tend to operate with central treasury model. There's many good reasons for that. It's why most regulators prefer "single point of entry" bail-in structures, because once you have fragmented treasury, essentially, you end up with potential for rapid sell-offs in a crisis between different components. And we've obviously seen that in real examples over the last 20 years, which is why people prefer a central treasury model but hold [ph] out of the holding company in a sense. So I'm not sure that we would regard our legal entity model here as anything particularly different or original in that sense. It's very much a best practice legal entity model, and I think we'll see it being quite common across the world over the next 5 to 10 years. You asked a question then in terms of transfer pricing. We already do fund the investment bank on an arm's length transfer pricing. So the funding for the Investment Bank is charged at market price. It does include a spread. The results, the financial results that you see reported today is after deduction of that spread already. So that would be no change from how we actually really operate the Crédit Suisse at the moment.

Brady W. Dougan

I think your last question on collaboration revenues. I can't really comment on anybody else. I think, for us, it's a very important aspect of our business is trying to serve our clients on an integrated basis. We see it day in and day out, how effective it is. We think when we do that, we have -- we're more effective than our competition in terms of attracting and servicing our clients, and so, it's something that we find very important. So for us, we think that's actually a really important aspect of the business. Hard to comment on how that maps out to others, so I'm not sure we can help on that part.

Operator

Your next question comes from the line of Michael Helsby of Bank of America.

Michael Helsby - BofA Merrill Lynch, Research Division

I've just got a couple of questions. Firstly, just on Slide 29, I know you walked through this, but I just want to double-check I'm not missing something. So you got your underlying loss of CHF 1.4 billion on your nonstrategic pretax loss. And that walks you forward to CHF 654 million. Now you've got CHF 436 million in legacy funding costs, so that's going to halve. So you've got a remaining after-litigation of CHF 999 million. So if we just add CHF 2 million onto that, you're talking about a CHF 300 million drag that remains in 2015. I think when I look at consensus, consensus has got about CHF 1 billion drag. I'm just wondering, am I missing something there or is -- can you help explain where consensus is when you look at consensus relative to what you guys are thinking about?

David R. Mathers

[indiscernible] question. I don't think I want to give explicit guidance for the overall NSU losses. But what I probably can give is perhaps try and give some help in terms of the individual components a little bit. I mean, I think, just going from left/right, I mean, NSU, as I said, it will be what it will be until the accounting rules change, which we sincerely hope and expect on 1/1/16. On the restructuring costs of CHF 522 million, I would warn that we would expect restructuring costs probably at a similar level in 2014, at least, before tailing off more sharply in '15 and '16, because obviously that's the -- if you look at the timing, what we need to achieve in the cost play, again, that's a prudent expectation. Litigation, I think I wouldn't want to give you a forecast. We've clearly spent, you can see here the CHF 473 million. You can also see the CHF 555 million. So you're talking CHF 1 billion basically of litigation costs in 2013. I mean, I would sincerely hope that by '15 and '16, that that number is going to be markedly lower, but I would encourage you to make your own forecast there. The funding cost, yes, you're right. We certainly expect it to at least halve, and a majority of the benefit from the funding cost does come through in the NSU. Discontinued [ph] is clearly 0. The U.K. holding tax should be 0. The cost savings are a '15 event. Then that -- then you get back to that litigation. Essentially, that CHF 654 million is CHF 100 million, of as you might say, fundamental losses, and CHF 555 million in litigation. So [indiscernible] a good number. I mean, actually, a CHF 100 million solution, I think, does reflect the progress we made [indiscernible]. I would hope we can improve on that in '15, but I think it's quite possible given the focus actually on getting rid of these assets in '14 that we could see those losses pick up a bit in '14. So I hope I'm answering your question. I mean, I think the NSU losses will be significant in '14 but we would hope to see them tail off significantly in '15 and even more substantially in '16, so we'll see where we get to. And to caution you a little bit, the PB numbers that we saw last year were a bit extraordinary for 2 reasons. One, they actually included gains on businesses we actually sold, and secondly, they included business who are regularizing. They weren't necessarily loss-making businesses they regulate [ph]. Some of them were actually profitable. And as basically the assets are regularized and moved off the platform, then you have the costs which you have to run down. So I would be not too optimistic on the PB NSU. The IB NSU, I think you know the components now as well as I do.

Michael Helsby - BofA Merrill Lynch, Research Division

Brady, you gave some color on the -- in the -- when you was talking about this variability of products at the start of the year. I was wondering if you could extend that to the bigger piece of your business which is clearly equities and banking as well. And just finally, I think David, you mentioned that there's some capital methodology changes that you made to prime services. Could you just expand on that? Was that due to the leverage ratio becoming more of an issue or can you just expand on that, please?

Brady W. Dougan

Yes, I think in terms of equities and banking, as you said, in the fourth quarter, obviously, the business has performed pretty strongly. Our expectation is we've got some good backlogs there. Businesses have I think started off the year pretty well. We'll see how the rest of the quarter finishes out, but our -- I think our expectation is those parts of the business will continue to be pretty active. M&A -- the M&A backlog has grown, the financing background -- the financing pipeline is actually quite good. So we'll see. I mean, obviously, markets have to cooperate in terms of execution but in general, I think we're -- we see those businesses as in a pretty good position.

David R. Mathers

Actually, the equity business did [indiscernible] last year very strongly actually. Good pipeline, and I think a good performance. I think particularly once we got past that kind of leverage ratio pressure on prime in the first half of the year.

Brady W. Dougan

Do you want to talk about this capital methodology on prime services?

David R. Mathers

Yes, nothing to -- I mean, it was really relating to CCP, so clearing changes around the RWA methodology, that boosted the RWA we allocated to prime a little bit. Also, when we took the operational risk add-on relating to our litigation exposure, CHF 6.9 billion across the group, $6 billion -- CHF 6.9 billion, $6 billion for the Investment Bank, a decent chunk of that actually flowed to prime business because it is obviously an operationally complex business, and therefore, out of the allocation models, you'd expect it to attract a component of the operation [ph] charge.

Operator

Your next question comes from the line of Christopher Wheeler of Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

A few quickies, if I may. First of all, it's nice to say something nice about Bob Shafir. Your Asset Management rarely [ph] gets mentioned but obviously, he helped with some nice numbers. But can you give us a clue on what you think the ongoing fee-based margin might be? The 6 basis point leap in the year was obviously fairly positive, but I just wondered where we think it might go given the uncertainty or the unpredictability, should I say, of that business. First question. Second question, the move to the 65% PBWM cost income. If you break even in even U.S. wealth management business, can you tell us sort of what that might do to the 71% underlying that you gave us? Thirdly, on the IB comp, Jeremy's question earlier, what confuses me a little bit is if we look at the annual comp ratio, it looks absolutely fine, good progress. I don't understand why we get a 22% uplift in comp and a 2% uplift in revenue in the quarter. I just don't understand it. I'm just confused about your methodology because most of your competitors try and keep things pretty level in Q1 to fully -- and then level out normally on the downside or spot [ph] slightly on the upside in the Q4. I just wondered what we should look for next year. Was this just somewhat unusual because of a surge in investment banking fees at the end? Final 2. The capital uplift you have, the CHF 6.9 billion, when did you actually find out about that? Because obviously, I'm just intrigued about in the process given that your competitor said they got the letter on the 1st of October. And then finally, on the dividend, great to see the cash dividend recently reinstated. I'm just feel a bit [indiscernible] that you've gotten down to CHF 0.70 from the last 2 years of CHF 0.75. I know you've gone back to cash, but I'm just trying to get my head around why you would do that because it just seems weird. So anyway, there are my questions.

Brady W. Dougan

Okay. I mean, I think on Asset Management, I mean, you're right. Actually, the business has -- the business did perform well and we think it's actually developed well. I mean, I think certainly in terms of the fee and the recurring revenues from the business, you can see that that has improved and that's something that obviously we see as hopefully an ongoing feature of the business. The net new assets actually that we've attracted are high-quality and you can see that that was actually a strong number for the year at CHF 15 billion, but more importantly, they were actually high-quality assets, so we think that probably bodes pretty well for the future. Clearly though, the performance fee part of the business was clearly a factor in the performance in 2013. And obviously, it's hard to predict whether or not that kind of performance can be repeated in 2014, you'd have to think that, that's probably a tough record in terms of the appreciation, all the assets and everything. So we do see improvement in the margin there. I'd say maybe about 1/2 of it is probably from the fee, ongoing sort of fee, and maybe 1/2 was from what you'd have to consider is potentially less permanent sort of investment performance benefits there. But, as you say, we certainly do see improvement in profitability there, and we feel pretty good about it going forward. I think maybe just picking up the dividend question, it's a balance. I mean, I think our view is that actually a CHF 0.70 dividend is a very -- obviously, a very healthy cash dividend. It's also, as you know, for a lot of Swiss investors, it will be tax-free. It will be capital distribution, so that's a positive as well. So it's hard to -- as you say, we've had different forms. I think 2 years ago, with CHF 0.75 of a pure stock dividend. Last year, was CHF 0.10 of cash and CHF 0.65 of stock share or scrip dividend. So I mean, I'm sorry if you think it's odd. I think our view is that that's a good, healthy distribution. It represents a good base from which we can grow going forward and hopefully, will be appreciate as a cash return on the business. So I'm not sure there is that much more logic to it. We're just trying to set a level at which we feel like we can grow it progressively over time and what we feel is a decent return of cash. I don't know if you want to add anything.

David R. Mathers

Yes, I mean, I think the concept of having a sort of CHF 0.05 centime scrip and a CHF 0.70 cash, we just thought will be unduly complex in terms of that. So we did want set CHF 0.70 as our base for long term, and that was the basis we went for. I think in terms of the U.S. side, I mean, I think you know the U.S. PB is loss-making. I think we've given some range numbers [indiscernible]. It would certainly drop the cost income ratio, the big figure, from 0.70 to a 0.69 number. Not all the way to 0.69, just to be clear, but it would certainly drop it if we didn't have those losses. But that -- and it will be useful in that sense, but it's only part of what the plan has to be. You asked on operation charge. I think candidly, we have been in discussion with the FINMA I think, over the revisions to the operational risk model, I think, for most of 2013. I think discussions started in the spring and we basically completed those discussions I think some time in November/December basically. But there wasn't anything particularly rushed or -- about it one way or the other, frankly. And it was what we'd expected and we didn't really see it as a surprise.

Brady W. Dougan

And I think your last question was just, Chris, on the IB comp, as you said, fourth quarter versus full year. Again, I mean, we've tried to make it clear and obviously, you know that the quarterly accruals are just that. I mean, they're basically accruals, and so I mean what we really look at is the full year numbers, whereas you said, I think we've got a good progression on that, an appropriate progression, so that's what we are more focused on. And as you said, that does sometimes lead to quarterly variation.

Operator

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

Jeremy Sigee - Barclays Capital, Research Division

There was just 2 quick clarifications. I know it's late, actually. Firstly, on the leverage exposure, I think you've said that effectively pro forma you're at CHF 1 trillion now with the BCBS and the nonstrategic. Did I understand correctly, that's effectively now -- that represents the base level? You may get mix changes, you may get some slight growth, but there's no real kind of downside trend below that CHF 1 trillion level, is that correct? And then the second clarification I had was I think you suggested that the growth of "ultra high net worth" is positive for profit margin on AUM, which surprised me. I mean, I know it's more profitable in terms of revenues but I thought it was neutral to lower profitability as the sense of AUM. So I just wondered if you can clarify those 2 points, please?

David R. Mathers

Yes. I think just on the leverage point, I mean, we're not formally changing the target of CHF 1,070 because I think the BCBS rules came out about 3, 4 weeks ago, and it clearly has to be subject to the final review of those and obviously the implementation of that by the FINMA here in Switzerland. So I think it would be premature for us to reset the target. But I think your conclusion is probably not unfair, which is the strategic businesses in the IB have probably got about the leverage exposure we'd like to have. There's probably some reallocation there because as you know, as I said before, there's still uncleared businesses within that that need to be reduced. But in reality, you're talking about smaller changes after the big shifts we achieved over the last 15 months. And I think we would like to see expansion of lending activities in the Private Bank, particularly in the areas we've highlighted before. But again, that's not going to change things too much in terms of that. But I guess, your conclusion would be correct [ph] but I think it would be premature for us to make that commitment and we'll see how that situation develops this year. But I think your math is not wrong. On the gross margin, I think you're absolutely correct, but perhaps I should just be a little bit -- if we think about the gross margin for "ultra high net worth" business, it is going to be less than the 107 basis points that we achieved last year. I think that's [ph] a particular surprise. We're thinking about the net margins. So the pretax margin, then, generally is more favorable. So the difference between the gross and the net essentially which explains our expectations for the net margin trend. As we move more towards "ultra high net worth" business, then it is the net margin that is more important for us as a performance indicator than the gross margin. But I think you're correct, Jeremy, but I'm just being clearer.

Operator

Your next question comes from the line of Stefan Stalmann of Autonomous.

Stefan-Michael Stalmann - Autonomous Research LLP

I have just one question left, please, and it relates to the legal entity structure. If I understand it correctly, you have so far hardly funded out of the holding company. Most of your funding is sitting somewhere in the AG, in the branches. How are you looking at the transfer of these funding instruments over time? What is the timing of it? Do you expect and any side effects really from this?

Brady W. Dougan

Thanks very much, Stefan. Mostly true. I think you may notice that we issued an AT1 instrument, low trigger, in December, which was actually issued out of the hold co. So we've started issuance out of the hold co for the new instruments, certainly the Tier 1 instruments. In terms of the senior unsecured debt exposures, we have already -- I think I've already actually been talking to our debt investors. We will not be changing the security of the existing debt instruments. So if you have an instrument in Crédit Suisse AG -- so the bank essentially, and it's secured on that, then you will remain to have that exposure. But as we move to issuing bail-in debt, then the new instruments will be issued at the group. So there's likely be a transition phase over the next 4 to 5 years as the existing senior unsecured debt rolls off and the new instruments [indiscernible] of the group. But we do not think it would be a good idea nor something we would suggest that we would change the security of the existing senior debt of the bank and we will not be doing so.

Operator

Your next question comes from Robert Murphy of HSBC.

Robert Murphy - HSBC, Research Division

Just quickly. On Slide 34, just coming back to the leverage exposure improving. You're saying that's post-mitigation. Can you actually say what it is as of the end of the year, before the mitigation? And then secondly, I also wanted to come back to the dividend again, because I do think it seems strange that for the sake of CHF 0.05, you would actually reduce that. And I was wondering, your competitor across the road looks at dividend distributions on the basis of core equity Tier 1 and also a stressed capital ratio, and I was wondering is that what the regulator is looking at for you guys as well or not?

David R. Mathers

I think -- I mean, I think it's impossible to answer the first question because the -- although the primary impact of the BCBS measures on cash collateral and commitments is a whole collection of other changes within the BCBS rules, which makes [indiscernible]. So I would simply say at the moment, it's the number we actually report, which is the CHF 1,130 million. That's the number we would actually file with the regulators, and it's Basel III leverage exposure.

Brady W. Dougan

I mean, that's the actual end-of-year number, so there's no...

David R. Mathers

That's right. But -- so --

Robert Murphy - HSBC, Research Division

I was talking about the impact of the new rules. But if you know what it is after mitigation, you must know what it is before mitigation, right?

David R. Mathers

Yes, but there's a quite a number of small moving parts is the answer. I mean, the mitigation benefit isn't that huge, frankly. But I don't think I could give you a precise number now, frankly. It's not -- I mean, clearly, things such as cash collateral, you take into account, it flows straight through. Things that actually changes in the commitments, it flows straight through as well. So we don't actually have to do anything around that. But certainly, some positioning around CDS spreads and things like that, we need to fix, but it's not that material I think mainly because we've actually been operating on a quasi-Basel III basis already, so a lot of what we're doing around tear-ons and add-ons are things that we actually do already in that sense.

Brady W. Dougan

I think with regard to your dividend question, I mean, it sounds like -- I mean, maybe I'm just interpreting your question, but it sounds a little bit like you're saying maybe there were some technical test or aspect that drove us to the CHF 0.7. That's really not the case. I mean, I don't think there is anything technically keeping us from paying a CHF 0.75 dividend. It's just our best judgment and what we thought was the right level and that gave us a base on which we could build from with the CHF 0.7. So it's not that there was any particular stress capital ratio or any particular CET1 or anything like that that was driving us there. I mean, we could, I guess just as easily done CHF 0.75, but our determination and the board's determination was that the right level to recommend to the AGM was the CHF 0.7. So nothing more complex behind that.

David R. Mathers

I think the only complexity we wanted to avoid is we didn't really want to give out CHF 0.05 of scrip and CHF 0.70 as a cash. So the cash component has gone from CHF 0.10 to CHF 0.70 and -- but having CHF 0.05 of scrip I think would have been operationally complex. And I think, although there are many arguments pro and against scrips, I think we wanted to send a clear message this year that we were paying cash in that sense. And clearly, that is as before, obviously, net of withholding tax, so recipients to it at least will not suffer any tax -- a further tax on that asset. Your question around stress test is, yes, I mean, we -- the FINMA conducts regular stress tests for us. We also conduct our own stress for that -- stress test for that, and that is on the basis of all the capital ratios. So not just the CET1 but also in terms of the high trigger and the low trigger components as well.

Operator

Your last question comes from the line of Andrew Lim of Societe Generale.

Andrew Lim - Societe Generale Cross Asset Research

I'm querying about the risk-weighted assets for your businesses and they've actually increased by CHF 1.4 billion over the quarter, which I find quite surprising given how much leverage exposure in the assets have fallen, of course. And I'm wondering whether there's some underlying risk-weighted inflation in here or some negative credit migration. So perhaps you could give a bit of color on that. And then secondly, your NII component for the wealth management growth margin has fallen again. I was just wondering if you could give clarity to your guidance on [indiscernible] coming out again. Do you still stick by what you've said? And then just looking further beyond that, for the [indiscernible] expense, that to comp again, how sensitive is that to U.S. rates versus European rates and also the short term versus the long end?

David R. Mathers

Thank you. So on the RWA point, the move isn't really that material, but we certainly did see a pickup in market-based activity for the end of 2013 compared to where it was at the end of the third quarter. You may recall, at the end of third quarter, you were going at the [indiscernible] shutdown levels of activity and were actually extremely low. I think, as we said, we did actually end 2013 quite strongly, which I think did push up a little bit our market-based utilization. We clearly, also had some small expansion obviously in our private banking lending activities as well. Not huge but those would be the 2 components in terms of that. In terms of net interest income, I think the answer is we still think -- if we looked at the curve, obviously, the curve has now started to steepen further out, so you're beginning to see in terms of the replication portfolio, some pick up in the net interest income. However, overall, I think first half down, but pick up in the second half basically in terms of that. The technical [ph] duration, but it's not quite as simple as that, is because we operate really as sort of barbell-type [ph] replication curve, is around the sort of 18-month level, but it is more curve-specific than that and it is generally a blended mix of all curves, not just the Swiss franc curve in terms of that basically. But I would -- but I mean, bottom line is pressure in the first half, beginning to pick up in the second half, clearly, the more curve steep, the easier that actually gets.

Operator

No further questions.

David R. Mathers

I'll actually just one point on that one actually. We have not shifted our replication curve. So we haven't -- we are at the 18-month on average. So we basically still have the same leverage to higher interest rates in the future that we have in the past basically. So we've not done anything like shifting out 4 or 5 years or anything like that which would take that exposure away. So everything we said before about upward exposure to the curve is very much intact.

Brady W. Dougan

I think that's it everybody. So thanks very much for staying on the call, if you're still on, and appreciate your interest. Thank you very much.

Operator

That does conclude today's conference. An email will be sent out shortly advising how to access the replay of this conference. Thank you for joining today's call. You may all disconnect.

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!