Credit Suisse Group (NYSE:CS)
Q1 2010 Earnings Conference Call
April 22, 2010 10:00 am ET
Brady Dougan - CEO
Renato Fassbind - CFO
Derek de Vries - Bank of America Merrill Lynch
Fiona Swaffield - Execution
Huw Van Steenis - Morgan Stanley
Philipp Zieschang - UBS
Kian Abouhossein - JPMorgan
Georg Kanders - WestLB
Jon Peace - Nomura
Rainer Skierka - Bank Sarasin
Jacques-Henri Gaulard - Autonomous Research
Florence Taj - MFS Investment Management
Welcome everybody to our first quarter results call. I’m joined by Renato Fassbind, our CFO and after I make some introductory remarks, Renato will take you through the detail of the results. We’ll then take your questions and after that I will sum up.
From our point of view there are really two ways to look at our first quarter results. The first is as an industry leading set of results; CHF 2.1 billion of net income produced with industry low levels of risk, 22.3% return on equity, a tier 1 ratio of 16.4%, net client inflows of CHF 26 billion.
The second way to look at this is business as usual at Credit Suisse. A consistent execution of our strategy, consistent performance, consistently high quality earnings; CHF 2.1 billion in net income in the first quarter, means that we averaged almost CHF 2 billion in operating net income per quarter over the last five quarters. 22.3% return on equity in the first quarter of 2010, means that we averaged around the 21% operating ROE over the last five quarters.
We had an industry leading tier 1 ratio of 16.4% at the end of the first quarter of this year with an average tier 1 ratio above 15% during those quarters. With net client inflows of CHF 26 billion in the first quarter, we averaged CHF 14 billion in net new client assets per quarter over the last five quarters. So you can see these are both industry leading results and business as usual at Credit Suisse.
We had a strong overall performance in the first quarter in fact that the operating level it was better than the strong first quarter last year. These results provide further evidence of how our client focused capital efficient strategy can generate attractive and sustainable returns for shareholders.
In particular, I would highlight the fact that our industry leading return on equity up over 22% has been achieved with one of the lowest levels of risk-weighted assets in the industry. And what exactly does earning at 21% operating return on equity over the last five quarters mean? Well, if we could continue to produce those kinds of returns excluding dividends we would double our book value over the next four years and at a constant price to book, this would also mean doubling our market cap.
Of course I am hoping that this consistency of performance will be appropriately reflected in a higher earnings multiple. The first quarter results also demonstrate continued momentum in our client franchise. This is shown by the very strong level of net new asset inflows of CHF 18.6 billion in private banking with very strong inflows from Swiss and emerging markets client in particular.
It’s also demonstrated by the high quality client driven results in investment banking where we achieved strong pretax return on economic capital of 37%, sustained market share gains across securities businesses and a strong underwriting and advisory pipeline.
In asset management, we saw continued improvement in the operating results and we also had encouraging net new asset flows of CHF 11 billion. At the end of the first quarter, we maintained our industry leading capital strength with a tier 1 ratio of 16.4% and a conservative liquidity position. The fact that Credit Suisse is in such a strong position today reflects the decisive size of action we took to prepare for the challenges of the new environment.
For example, we entered the credit and financial market dislocation with a strong liquidity position which we’ve maintained and in fact strengthened through open market funding ever since; obviously incurring significant additional cost as a result. But this has positioned us well to meet the new rules for quantitative and qualitative liquidity management announced yesterday by the Swiss regulator FINMA when they become affected at the end of the second quarter of 2010.
Our strong performance as a credit to the dedication of our people, their hard work will drive long-term value for our shareholders and clients. The continuity of our people in key positions including in our control functions has been extremely helpful throughout and sense the crisis. Attracting, retaining and developing talented people remain a key area focus for us and we remain advantaged in that respect. So far this year our retention rates are very high and we continue to attract the best people to our platform.
Looking ahead, we are confident that we will further improve our profitability in private banking when markets and the demand for comprehensive solutions recover. We also expect to benefit significantly from a higher interest rate environment. We are positioned to perform well in the changing regulatory environment in cross-border banking as we have been building a multi-shore business for many years with a robust compliance framework.
We will continue to invest in strengthening and expanding our international presence. We believe that we have a significant opportunity to extend our market share gains across our investment banking businesses as we build our distribution platform and expand our client base.
We believe that asset management will benefit further from the strategic measures we undertook last year and will be a significant contributor of value to the bank and to our clients in 2010 and beyond. We are focusing on core fee generating businesses in which we believe we can excel asset allocation, the Swiss businesses and alternative investment strategies.
Market condition so far this quarter have remained similar to those in the first quarter and we remain confident that our business model will enable us to continue to generate high quality results as well as in more challenging market conditions. We are acting from a position of strength and can focus on the execution of our clear defined strategy and on serving our clients. Having carefully made the foundations by building a robust franchise we have an exceptional opportunity ahead of us to press our advantage home. We will double our efforts to drive our market share higher and set a benchmark for our industry in providing exceptional advice and service to our clients. Now, I’ll hand it over to Renato who will take you through the results in more detail.
Thank you Brady and good morning. I will start my presentation on Slide 5 with an overview of the first quarter financial highlights. The first quarter 2010 performance continues to demonstrate that our strategy is working well and that our business model provides sustainable high quality and less volatile earnings. We achieved revenues of CHF 9 billion and the net income of CHF 2.1 billion. Diluted earnings per share stood at CHF 1.63 for the quarter. The cost income ratio improved slightly to 69% compared to the first quarter of 2009. The after tax return on equity stood at 22% for the quarter. Total net new asset inflows of CHF 26 billion showed a strong improvement compared to each of the four quarters of last year. Looking at the bottom of the slide you will see the underlying results.
Overall, net revenues were at CHF 8.9 billion, the same level as the first quarter of 2009, but with an improved pretax income result of CHF 2.8 billion. The underlying return on equity stood also at 22%. We have consistently achieved an industry leading return on equity over the last 15 months, achieved while running a low risk profile compared to our peer group.
Let me turn to slide 6 for an overview of our divisional results. This shows our first quarter 2010 divisional results side by side against the fourth and first quarter of last year. With the pretax income of CHF 892 million, Private Banking reported an improvement on the fourth quarter of 2009 and a similar result in the first quarter of last year when adjusting for captive insurance settlements. We experienced higher levels of assets under management, reflecting better markets in general than a year ago and the pretax margin showed some improvement from the first quarter of 2009.
Investment banking results represent another strong quarterly performance with pretax income of CHF 1.9 billion. There is continued strong momentum in the client franchise, resulting in a consistent high return on capital and reduced volatility. As the management continued to make progress on delivering a more focused business model pretax income was CHF 166 million.
Let me continue by looking at the divisions in more detail on Slide 7. Despite continuing challenges in the market environment and an evolving industry landscape, Private Banking reported solid first quarter results. We continue to demonstrate our client’s trust in the value of Credit Suisse’s industry leading multi-shore business model with very strong net new asset inflows of CHF 19 billion.
Client satisfaction remained at a high level as we continued to further improve our market share in the high net worth and ultrahigh net worth client segments. Although investor sentiments have improved from a year ago, clients remain cautious with regard to more sophisticated investment products, and as a result client activity remained subdued for most of the quarter. The Swiss franchise continues to perform well and we continue to invest in our multi-shore platform.
Let me continue with further detail of our Private Banking results starting with our wealth management business on Slide 8. Pretax income for wealth management clients was CHF 677 million, an underlying increase of 8% over the first quarter of 2009. Net new asset inflows were strong at CHF 13 billion above the medium targeted annual growth rate of 6%. There was also a small pre-tax income margin improvement. This was achieved despite unusually high quarterly provisions for credit losses at CHF 32 million, mainly related to an isolative case and not reflective of the credit quality in the portfolio which remains very high.
We continued hiring adding a net 30 Relationship Managers. Gross hires were 100, reflecting the continued talent upgrade taking place within the business. We are continuing to target our hiring on Senior Relationship Managers with a focus on ultrahigh net worth clients as we upgrade our talent pool, benefiting from our strong competitive position.
In summary, the solid operating result is being affected by the operating environment. However, assets were up again this quarter supported by continued strong inflows and improving markets. And we are still seeing good opportunities to hire Senior Relationship Managers as we take advantage of our competitive position.
Let me turn to net revenues and gross margin on Slide 9. On this slide we show the key trends in net revenues on the left hand side of the slide with the analysis of the gross revenue margin movement on the right hand side. We have split out the recurring revenues between net interest income and commissions and fees to help explain the trends.
Looking first at year-on-year revenue comparisons, transaction based revenues and recurring commissions and fees have both increased by 8%. Client activity improved from the depressed levels we experienced in the first quarter of 2009 resulting in higher brokerage income and product issuance fees. Higher assets under management levels resulted in increased management and other asset based fees. However, the percentage increase in recurring commissions and fees lack the growth in our assets under management as client’s cautious behavior resulted in lower demand for more complex financial products. Net interest income decreased 2% due to the low interest environment.
Moving to the gross margin you can see that the dilution from a 134 to 121 basis points has resulted from the gap between the 4% overall improvement in net revenue compared to 15% increase in average assets under management year-over-year. In summary, the overall year-on-year gross margin decline was mainly due to a strong increase in assets under management compared to relatively stable net interest income levels driving eight basis points of the 13 basis points reduction. Cautious client behavior accounted for the remaining five basis point fall.
Turning to Slide 10, this shows here three year history of the net revenue and gross margin trends, shows here a clearer picture of how net revenues are being affected by the current operating environment. Looking at higher asset under management levels will be a major driver of increased operating leverage for each of the three revenue categories set out on this slide. In addition, wealth management revenues will also improve with increased client activity and higher integrated solutions revenues increasing transactional based revenues. Higher mix of managed investment products and performance fees will deliver improved recurring commissions and fees, and an increase in the overall interest rate environment will result in higher recurring net interest income.
On the next Slide number 11, you will see our net new asset performance. Total net new asset inflows of CHF 12.9 billion represented annualized growth of 6.4% and out performance in a challenging market resulting in continued market share gains. The balance regional contribution demonstrates strength of our platform and the trust our clients having Credit Suisse.
In flows were particularly strong in Switzerland and in the emerging markets. In EMEA the contribution was solid despite outflows in our Western European cross border business. We expect this trend to continue over the next few quarters but given our business model, we are confident that we can continue to generate positive quarterly net new assets EMEA. Since the beginning of 2007, we have achieved total net inflows of CHF 145 billion. This average is CHF 11 billion per quarter with consistently positive inflows every quarter. We remain confident that our industry leading bases model will enable us to achieve our 2012 net new asset growth target.
I will now continue with our corporate and institutional client business on Slide 12. Compared to the fourth quarter of 2009 pre-tax income increased by 30% to CHF 215 million as a result of lower operating expenses and a net release of credit risk provisions. The positive delta in fair value changes on loan hedges offset the impact of the low interest rate environment. Pre-tax income decreased by 20% compared to the first quarter of 2009. Net interest income fell 15% also affected by the low interest rate environment.
Net new asset in flows were very strong at CHF 6 billion reflecting continued client confidence in our business. Loan volumes have remained stable as we continue to be committed to supporting Swiss corporate customers. With that let me turn to investment banking on Slide 13. Investment banking continues to produce consistently strong results and we continue executing our client focus capital efficient strategy.
Our revenues returns to levels closer to the first three quarters of last year. At the same time, our overall risk capital usage remain vertically stable with a small overall increase as we continued to increase capital allocated to our client businesses. The quality of earnings continues to be strong with an overall return of economic capital of 37% slightly above the 34% return achieved for the full year 2009.
While our performance for 2010 will continue to be influenced by market conditions, we believe that we continue to be well positioned to maintain or even improve our company’s results for a number of reasons. First, we believe that in our equity businesses we are yet to realize the full benefit of the market share improvements we have achieved over the last several quarters, as market conditions in many of our equity businesses remains subdued. Second, the execution of our underwriting pipeline in the first quarter of 2010 was adversely impacted by macro economic disruptions.
However, going into the second quarter of 2010, both our underwriting and advisory pipelines continues to be strong with good momentum, and third, we have made and continue to make considerable investments in our fixed income flow businesses including a significant expansion in our flow sales force and significant progress in our emerging markets initiatives.
Slide 14 shows you more detailed analysis of the quarterly results trend. Investment banking continues to produce strong results in both revenue and paid tax income terms but more importantly, is the consistency of the return on economic capital. Our net revenues of CHF 5.3 billion are in line with 2009 levels. Our pretax income margin continues to be healthy at 35% reflecting both strong revenues and continued expense discipline.
Our pretax return on economic capital is higher than the average for 2009. Now, risk weighted assets in bar increased slightly from the end of 2009 levels as we grew our client businesses.
Let me move to fixed income sales in trading and underwriting on Slide 15. Results in our fixed income franchise continue to demonstrate the strengths and velocity of our businesses. Results in global rates and foreign exchange were solid; although year-on-year it did reflect the slowdown in market conditions which we anticipated last year. However, this slowdown was offset by a strong performance in high yield investment grade, RMVS and emerging markets.
These businesses benefited from a move away from government debt towards corporate debt client flows as clients increasingly began to seek yield. Our overall fixed incomes rating and underwriting revenues were 18% lower than the first quarter of 2009, but more in line with the levels we saw in the second and third quarters of last year. However in US dollar, we’re just down 10% versus the first quarter of last year as you can see in the box below the chart.
First quarter 2009 revenues include market rebound revenues of CHF 1.1 billion and exceed losses of CHF 1.6 billion. Our outlook for the rest of the year is optimistic as we continue to invest in our high return flow businesses. As of mid-April, we have completed the majority of our plant flow sales hires in our key businesses. Expect these hires to benefit the business in fairly short order.
Let me direct these businesses on Slide 16. Again, we produced good results for the quarter with solid revenues in all our key businesses, cash equities, prime services and equity derivatives are the significant market share gains over the past two years have continued into the first quarter across all major markets. The results were actually stronger than the first quarter of last year if you adjust for the CHF 200 million market rebound revenues, and the CHF 400 million gains from trading strategies that were repositioned and are subsequently being exited.
However, we believe that is still considerable upside yet to be realized as market conditions remain relatively subdued particularly hedge fund activity and leverage. Similar to fixed income, revenues for the quarter were stable compared to a very strong first quarter a year ago, adjusting for rebound revenues and for foreign exchange translation impact.
Our investment banking results set out on Slide 17, we’re heavily influenced by industry-wide issuance, volumes and M&A activity. Debt underwriting revenues were resilient, reflecting strong issuance activity while equity underwriting experienced a disruption in issuance midway through the quarter due to macroeconomic concerns.
While our future performance will be influenced by market conditions, the pipeline entering the second quarter is strong and we believe that we can continue to benefit as our market share momentum from the first quarter carries into the rest of 2010 and more favorable markets allow us to monetize market share.
We were ranked number three globally and number one in the Americas for announced M&A. Finally, we maintained our top five positions in both DCM and ECM rankings while we consolidated on our leading emerging market positions with the number one share of wallet position in the combined emerging market economies.
Turning to slide 18, this shows a long-term view of our market share progression across many of our major key businesses. Most of these businesses, we have made significant strikes in both market share and rankings over the past few years. In equities, we have leadership positions in many businesses, including cash equities and prime services and we plan to improve further upon these market shares.
In fixed income, we have significant momentum across products but still have a way to go in certain areas specifically rates and foreign exchange. And in underwriting advisory, we are looking to reestablish leadership in products that we have been historically strong such as high yield and IPOs. Across all these businesses, there are still a number of areas where we have significant upside potential by extending our market share gains and I will address these on slides 19 and 20.
The slide 19 shows the relative revenue contributions from our major businesses in the investment bank. You should be familiar with this format and we find it useful to explain current and future trends. Until now we have used this chart to set out an outlook for each of our major businesses. We are now going one step further by showing how our performance is evolving using dark blue bubbles to represent relative revenue contributions for the first quarter of 2010 and grey bubbles to represent the 2009 quarterly averaged relative revenue contribution.
Development in revenues has been consistent with the trends we have communicated. Overtime, some revenue contributions blended down as market conditions normalize. Revenue contributions from other businesses are increasing as our market share and other business environment improve. A couple of notes were the exceptions with the RMBS that they have seen continued strength in market activity.
In ECM, the strong pipeline at the end of the fourth quarter has not materialized yet given macro concerns that have delayed the completion of transactions. Finally, the improvement in market environment within cash equities and prime services has not improved as much as we expected.
Slide 20, looks forward to how we see the market share and environment developing. Our view is that prospects of revenue sustainability remains strong as we continue to build our market share momentum from 2009 into 2010. We believe that we have a significant opportunity to gain further market share as we increase sales headcounts in rates, emerging markets, credit and foreign exchange, and continue to invest in our equities businesses. We expect a partial revenue offset from a normalizing market environment in RMBS and investment grade credit.
Let me turn to expenses on Slide 21. The top chart shows our compensation expense development. Our compensation accrual as we have noted frequently in the past is based on an economic profit model. The compensation revenue ratio is 44% down from 48% versus the same quarter last year. In our financial release I would point you to disclosure that indicates the UK levy on variable compensation was ratified this month and will result in additional compensation expenses of approximately CHF 400 million. This will be booked in operating expenses in the second quarter within the corporate center.
Below you can see that non-compensation expenses were stable compared to the fourth quarter of 2009. Although they have increased from the first quarter primarily due to increased IT spend on infrastructure in our client and flow based businesses, partly offset by the US dollar Swiss Franc exchange difference.
Slide 22 sets out risk and capital usage trends in the investment bank. We have moved to an updated VaR model which continues to use a three year dataset that scales it up or down based on short term market volatility. This methodology is a more appropriate way to capture our risk. We have included the old methodology calculation in our quarterly report. Using this new methodology, VaR increases by 6% in the quarter, reflecting increase fixed income client activity. If we had moved to a one year data set which is used by some competitors, our first quarter 2010 VaR would have shown an estimated 27% reduction in the quarter due to a roll-off of more volatile periods from a year ago, namely the fourth quarter 2008 and the first quarter 2009.
The chart on the bottom shows the risk-weighted asset levels in the investment bank. They grew slightly in the first quarter as we increased capital usage in our client and flow based businesses. Our continued focus and discipline on allocating capital to high returning flow businesses enabled us to maintain an industry leading pretax return on capital of 37% in investment banking for the first quarter.
This concludes my review of the Investment Banking results and I will now continue with Asset Management on Slide 23. We continue to implement our Asset Management strategy focusing on alternative investment strategies, asset allocation products and solutions on our Swiss platform. This is starting to translate into good net new asset generation. We had very strong inflows of CHF 11 billion this quarter, which together with positive market movements resulted in 18 billion or 4% increase in assets under management. We continue to transform the business towards a more fee based business model and this progress is reflected in our results.
Let me turn to slide 24. The results show improved revenues based on the fee generative aspect of the business model compared to the first quarter of 2009 and include positive trends from investment gains across most of our investment strategies. We continue to maintain cost discipline with a reduction in general and administration expenses down 6% and 3% on the first and fourth quarter of 2009 respectively. And our investment performance continues to show a consistent improvement.
Let me turn to Slide 25. Asset Management fees are developing positive momentum. They showed a good improvement of 9% in the first quarter of last year and were stable compared to the fourth quarter. The strong net new asset inflows should positively impact fees going forward. Majority of the performance fees are recognized on a half year basis, and you can see the strong fourth quarter 2009 performance driven by hedge fund results. Placement and transaction fees have been generally consistent with the previous quarters. The fee based margin on average assets under management continues to remain strong.
Let’s now look at net new asset inflows in more detail on Slide 26. You can see the strong inflows this quarter broken out between alternative and traditional investments. Alternative investments business which comprises our leading private equity and real estate business, our single and multi manager hedge fund strategies, and our ECF and index products continued to see good asset inflows of CHF 4.3 billion in the quarter. In traditional investments we saw inflows of CHF 6.9 billion driven by CHF 4.4 billion inflows from MACS. Annualized net new asset growth in the quarter was 10.8%.
In summary, we continued to make progress in refocusing the business on its core strengths and better aligning it with the integrated bank. We saw encouraging asset inflows into multi asset class solutions and alternative investments, building on the positive trends we saw in the second half of last year. Profitability of the business continues to improve with stable fee based margins and stabilized private equity portfolio and the disposal of our money market lift-out portfolio all but completed.
This concludes the divisional results review and I will now continue with the group’s capital and funding position on Slide 27.
We continue to hold our position as one of the best capitalized banks globally with the slight increase in Basel II Tier 1 ratio to 16.4%. Our core Tier 1 ratio includes hybrid capital also improved slightly to 11.3%, around 2 billion of the 7 billion risk weighed assets increase resulted from foreign exchange translation differences.
We continue to see opportunities to invest capital to fund organic growth in the business and potentially to tactical acquisitions. We have maintained the consistent dividend accrual policy as last year, this accrual is fully reflected in our March quarter end 2010 Basel II capital ratios.
We have also maintained the strong balance sheet structure and liquidity this quarter as you can see on Slide 28. Over 40% of our balance sheet is match funded and requires no unsecured funding. The match funded part of the balance sheet totaling CHF 461 billion consists of assets and liabilities with close to equal liquidity and durations.
Moving down the columns and outside the matched funding, a 173 billion of our assets are unencumbered illiquid assets and together with 47 billion of cash are available to settle a 113 billion of short-term debt and other liabilities.
Loans which comprised the larger component of the illiquid assets are funded by our core deposits and have an excess buffer of 21%. Remainder of the balance sheet namely other illiquid assets is funded by long-term debt and equity. Stable and low cost deposit base remains a key funding advantage. The regulatory leverage ratio was maintained at 4.2%.
Finally, the percentage of our balance sheet finance by long-term debt is 17% compared to 12% at the end of 2007 as we continued to lengthen of overall long-term debt profile which now stands at 6.5 years. This concludes my presentation and with that I will hand back to Brady.
Thanks very much Renato, I think with that we would like to open it up for questions over the phone so happy to take your questions now.
(Operator Instructions) Your first question comes from Derek de Vries of Bank of America.
Derek de Vries - Bank of America Merrill Lynch
Sure. I’ve got a couple of questions. Just wondering on the trading revenues, I’m hoping you can help me reconcile Slide 19, where you’ve updated your Q1 relative to last year, and if I look at all those little bubbles, it looks like your market share in each business line relative to last year is kind of flat or, frankly, up across all those different divisions.
But then when I compare that with the reported Q1 trading revenues, you haven’t shown nearly the positive momentum as peers versus 2009 average run rate. So I’m just wondering how I reconcile the bubbles, which look like a growing market share to the reported revenues, which looks like, frankly, others had a better Q1 than you did?
And then as long as we’re reconciling trading revenues, I sort of take on board all your qualitative comments about which parts of your fixed income business were strong and which were sort of less strong I guess. But then when I reconciled that with page 83 of the document you published, it is almost like backwards to what you’re telling us qualitatively.
On page 83, it looks like your rates business is fantastic and your credit business is horrible. So I am wondering how I will reconcile that, and then one last question is just on the regulatory. I was wondering if you could give us an update I think Renato in the past has said moving to the bottle three rules when it sort of hit you here Tier 1 ratio by I think 10% was the number I have in mind and then we kind of adjust that in risk-weighted assets.
We’re obviously a little bit further in the quantitative impact study process, I think that’s due at the end of this month. So I was wondering if you could just give an update if you’re still comfortable with that number or if there’s a need to change that number?
Well I guess we would probably just start out with just an overall answer to your first question which is remember, we continue to reiterate our strategy which is client focused capital efficient, and again continue to emphasize the strength of the returns in the business. Over 22% return on equity, over 21% operating return in equity over the last five quarters.
I mean it has been a very consistent, very high returning business model, and it is one that is though however it is done on a very capital efficient basis. So if you look at our RWA and compare it to a lot of other players out there, we are running less risk we just are, and so just to make it clear it is a client focused business. It’s not a capital heavy business as a result the returns are very high. But the focus is on the client businesses and I think at something that very important to focus on.
Having said that your observation is exactly right on the first quarter. We actually had strong, we actually had stable to stronger market shares across almost all of our businesses, and so we are actually very happy about that, we have seen very strong performance there. As we mentioned, we think there are parts of portfolio that we are not receiving the full benefit of the market share gains that we’ve had because they continue to lag in terms of market, so prime brokerage, cash equities etcetera, but overall we are very happy with the progression in terms of market shares and when we look at the actual results versus our first quarter last year for instance obviously, one other things is, we had a strong first quarter last year.
Lot of our competitors I think when they are looking at sequential comparisons etcetera, year ago comparisons are not comparing to quite a strong; in some cases not quite a strong performance. But we actually think that given the client focus element of it, this is actually a very solid, very strong result.
So when you compare, when you look at, you need to take out sort of the puts-and-takes in the first quarter of last year and as you know we actually provided a lot of visibility on issues of what we call kind of rebound revenues as well as some of the write-downs that we had.
We think the equity numbers are actually very competitive and on the fixed income side, it’s pretty close. And so at the end of the day, we think that they are actually rolls up pretty well. I think versus the bubble gram which as you pointed out in terms of looking at sort of our slide, I guess its kind of slide 19 and 20 which is the bubble charts that we’ve put.
I think clearly from our point of view the businesses that we are stronger in and bigger in are sort of the RMBS business, the credit portions of the business which are actually very, where we are leaders and where there important parts of our business and those are by the way, parts of business that we think are actually moving in a very positive direction in terms of overall environment.
Obviously, some of the banks are bigger than us on the rate side, and so I think clearly that’s been an area where we are continuing to grow. You can see that from our bubble charts but that’s an area where we look to grow over time.
Clearly also there is a commodity gap versus some of the peers and so we still have a very small commodities business. That’s something that does remain an issue but also in terms of on the equity side I think that we believe it actually stacks up pretty well in performance versus the first quarter last year but I think the most important thing that we would note is just that you really have to segregate the strategy that we have is, one that is focused on the client flow, it’s a very high returning model of the business but its not going to have big in asset drag on either when markets are buoyant, others have more assets on the books. We were on a much lighter business model.
The second question you asked was on this page 83, I think to be honest, those classifications are not really very useful or very relevant. So frankly, those for instance, a lot of the RMBS revenues there are actually in the rate decline so let’s say, it’s kind of an artificial accounting base.
Presentation of those numbers, so frankly it doesn’t, actually it’s not a good indicator sort of the different business lines. So I apologize for that but you can’t refer from one to the other in that respect and then Renato do you want to answer that?
Yes, actually you mean the Basel II changes that are up to be implemented shortly which means actually first quarter 2011. That’s still under the old rules basically the market risk component will be adjusted. We have given the guidance of 200 basis points and I still hold that out. You have to see on how this materializes overtime but it is this piece.
On Basel III, the whole proposal is on the table right now is of course far too little concrete, many comes to assessing what the impact could be going forward and we will of course observe that very closely and whatever conclusion we can draw from that we will communicate accordingly. But I can reconfirm the 200 basis points estimate.
Derek de Vries - Bank of America Merrill Lynch
Just to clarify on the 200 basis points, that’s market risk but also a securitization and just that’s sort of January 1 of 2011, that’s 200 bps is still the number right?
Precise every single opening we do with Basel III.
Next question comes from Kinner Lakhani of Citigroup.
Kinner Lakhani - Citigroup
Wanted to focus a little bit more on the prime brokerage business which looks like an opportunity? What do you see as a trend over the recent quarters but in terms of client balances on one hand and spreads on the other? Just trying to get a better feel for how the underlying metrics are trending? Secondly, just wanted to look at the kind of long-term debt that you are showing on your funding chart actually, since you are going from CHF 159 billion to 185 billion over the past quarter actually, so just trying to understand that?
And third question on capital and particularly hybrid and then what you are thinking is in terms of using some of these hybrids and perhaps converting them into continuing convertibles or contingent capital?
I think on prime brokerage side, we continue to believe that we have very strong market share there. We’ve had significant client adds this quarter, we continue to have positive momentum in terms of our market share there. So we still have a very strong franchise and a lot of positive momentum. And in fact, we continue however to be pretty selective about the business and making sure we have a high quality portfolio of client I mean I think we continue to turn down more than half of the requests that come in to prime broker for people. So we have a very high quality but with strong momentum in the business.
So overall the trends on our side are actually very positive around market share. I would say, generally leverage remains relatively low. I mean its one of the things that we’ve talked about as just activity out of the hedge fund community and also leverage has remained pretty subdued. We still believe that there’s scope for that to improve and get better over time, which will obviously improve the contribution to the business. I would say in general spreads have been stable over the quarter. So overall, it’s still a business where we’ve got great market share and great momentum, but we think that we haven’t really fully been able to monetize the benefit of that market share yet because the market is just not quite there.
On capital and hybrid, the third part of your question, I’ll answer that and we’ll get back to long term debt question. On the capital and the hybrid side, I mean obviously we have a 16.4% tier 1 ratio which is quite high. If you just look at core capital it’s still a very, it’s 11.5 or something in that range, so we are extremely well capitalized. Some portion of that total capital of tier 1 ratio though is made up with some hybrid securities as you know. Obviously the regulators around the world and in conjunction with BIS are still deciding where they come out in terms of contingent convertibles and what the structure of those might be. I mean I continue to be hopeful that in fact there will be a form of contingent capital that will be eligible for tier 1 qualification and if that’s the case, I think there will be a good market for that, and obviously there have been some issues already that have been done.
So, our view is that there probably will ultimately be a structure that works there for the regulators and once that’s the case there will be a market there. And so, probably a lot of the current sort of hybrid type capital would be converted or called in and new issuance done on the contingent convertible structure. So we continue to feel like that’s a pretty likely outcome. And then with regard to your long-term debt question, do you want to address that, Renato?
Yes, sure thanks for the question. You’re right long term debt went up out of which the delta is consisting of some CHF 7 billion plus on new debt issuances we had in the first quarter. As you know, we try to expand the terming of our debt, and we have been successful in that. And the remainder of the delta is due to the new FAS 167 rules which led us to consolidate more entities into our balance sheet. I think it’s probably described also in the quarterly report so that you can say that approximately CHF 20 billion came in through that additional consolidation; about CHF 7 billion was the increased funding in first quarter.
Thank you. Your next question comes from Fiona Swaffield of Execution Noble. Please ask your question.
Fiona Swaffield - Execution
Hi. My questions were on WMC. Firstly, on the transaction margin, could you spend some time on what your views on to what extent this could be permanent in that your clients are just going to trade less because of the change in your business model towards more recurring fees? And whether you think this is just a market phenomenon or what the balance could be? And then secondly on the issue of operating leverage, obviously the clients are taking longer to recover or (re-risk). What does that mean for the costs? Does that mean you’re reining back your investment because obviously the costs are growing faster than the revenues? And then the last issue is on the dollar. You’re quite specific about currency in the Investment Bank but I would have thought it might be quite important as well Q1-Q1 and the P&L is the WMC. I don’t know if you could comment on that? Thanks.
I guess with regard to the transaction margin, obviously it does include transactions like brokerage but it also includes some of our integrated solutions revenues so some of the revenues that we get from, actually leveraging the whole of the product range across the bank. I would say in general we do believe that those revenues, both the transaction side, through the brokerage side, as well as the integrated solutions revenues will we believe they will recover. And so our margins there were, it’s not a sort of permanent substitution away from that category into others, but it really is I think a reflection of the activity and the approach that the clients are taking. We still believe that in fact there will be a recovery in that area.
The operating leverage issue is an important one. I mean we have continued obviously to have extremely strong market share growth in terms of our net new assets and how we continue to see the momentum in the business. So we obviously are very optimistic about that. I think that we clearly are impacted by first of all the overall activity of our customers in the markets but also one of the things that we pointed out here was the net interest margin impact on the business. I mean it’s actually quite ironic beacon as we have a number of people in the media and elsewhere who continue to write about the fact that we are somehow benefiting from low interest rates.
In fact, it’s quite the opposite. I mean we’re a very large provider of liquidity and lower the interest rates go actually, the more difficult it makes the business overall. So that the other thing, we believe that we will see overtime, it’s not getting hard to see much lower interest rates than this and so over some period of time, we will see interest rates move back up, and that clearly is going to contribute overtime to also an improvement in the revenue picture, and ultimately to the operating leverage side of things.
So we do feel we’re sort of at a low point in the business right now. I would say in general, we continue to believe that there’s a lot of upside in this business. As you know, there’s a lot of operating leverage. We have a very strong position in the business and so I think our point of view is to clearly continue to maintain the strength of our platform here and continue to drive that forward.
I think the impact of the currency on the wealth management results is relatively immaterial in the overall numbers, certainly in the financial results and I think also in terms of AUM, it’s a relatively small impact, probably less than 5 billion impact on AUM side, it’s not as a big an issue as in the IB.
The next question comes from Huw Van Steenis of Morgan Stanley. Please ask your question.
Huw Van Steenis - Morgan Stanley
Good morning. Perhaps could I just go back to regulations, three questions? So, first, Brady, would you be able to share with us your views about the derivative legislation in the States and any potential risks for your business? Second, perhaps just an opportunity to talk about the CDO investigations in the States; I’m sure you haven’t had a Wells Notice, but you may just want to have the opportunity to say that, and thirdly, with the various documents coming out of FINMA, should we also expect a 16% core Tier 1 for CS as well? Or if not, what sort of guidance would you think about, given the many different strands coming through? Thanks.
Thank Huw. Yes, I mean with regard to the legislation in the US and obviously the derivatives aspect of that. It’s actually as you know and it’s really difficult to estimate right now, a, is they are going to be reform, what kind of reform, is it going to be, how is it going to impact the industry. So frankly we are not shy to give estimates of how it might be impacted.
But it’s really pretty fluid situation right now. The one thing we do think that gives a given our strategy. Our business will probably be a lot less impacted than many other businesses. I mean, we’ve focused much more on the flow parts of the derivatives business. We are largely exited at the kind of more structured longer and exotic type stuff which makes up, A, lot of the business and B, a lot of the impacted business by the legislation.
So in general we think that we have a much lower risk to our business as a result but again it’s a little hard to speculate because the bill is just preliminary right now. We just don’t have a good view of it. Secondly with regard to the CDO issue, we haven’t had much activity in that area I mean if you look at the league tables and things over the past three, four, five years, we really have not had much of the presence there and we don’t think we have any issues there and yes as you say we don’t have any wells, any SEC wells request there outstanding.
The last issue mentioned was just the FINMA issues, and as you say we had the liquidity issue last night, which was announced by FINMA last night. I think what we have tried to layout for you as a fact that clearly we have been pretty active about pushing out our liability profile and really trying to drive a pretty conservative overall profile.
Renato picked some of the highlights of that for you. We have gone from 4.5 to 6.5 year sort of average weighted maturity over the past three years. We have gone from 12% to 17% of long-term debt funding in the portfolio and if you look at our chart, second last or last chart which shows kind of the balance sheet. It’s a very conservatively funded balance sheet. So from that point of view, we believe we are in a pretty good shape as against the FINMA liquidity issues.
The question of capital and a number of the other things, again I think it’s still I mean we feel like we are extremely well capitalized we have got a business that is relatively low risk. We have a very capital generative model overall. So I think our view is that we feel like we are pretty well positioned against any of that. Still I think trying to make a point estimate that was to where things are going to settle out in two or three years when the BIS gets done and all the other regulatory authorities get done I think it’s pretty difficult to do, but we are pretty confident about the strength of our capital and that will fair well in that.
Your next question comes from Philipp Zieschang of UBS.
Philipp Zieschang - UBS
I have a couple of questions please. The first one is, basically on the net margin or the pretax margin in your Wealth Management business. You’re now at 27.5% or so. You had the ambition to go up to 40%. I understand the cyclical aspect you’ve mentioned in terms of clients’ willingness to re-risk, etcetera. But when do you start to look at the business in terms of costs, or whether there is a structural issue in terms of the returns?
The second point is also on Wealth Management. What I’d just like to know, you’ve mentioned that you suffered from the lower rates, but if I look at your annualized net interest income versus 2007 for instance, and also your balance sheet footings in Wealth Management clients and in terms of loans and deposits, your margin hasn’t actually deteriorated in terms of interest income since 2007.
So I was wondering, what is your upside gearing into rising rates, given that your margin hasn’t declined. And the third one is a strategic one. And I’ve heard your comments about the multiple and in terms of that the market’s probably underestimating your capital generation and your future book value growth, which isn’t appropriately reflected in the multiples. I was just wondering, given that the investment bank probably used to earn 30% more than Wealth Management, three years ago or so, but now it’s basically earning more than twice the run rate of Wealth Management.
Do you think that earnings mix is going towards investment bank? Is that something which you are worried about in terms of that you need to do more on the non-investment banking side in terms of stabilizing the earnings mix to protect the multiple?
On the Wealth Management margins and pretax margin, as I said it really is a question apart its obviously a call on where we think the business is going as I say very strong net new asset growth continues, I think they position us well and the call is really due we think that, a) activity will increase from here and b) where we’ll be in a higher interest rate environment at some point over the next year or two.
I think if you believed either those then obviously kind of maintaining the presence there is going to payoff quite handsomely, hopefully overtime. And so we continue to be pretty disciplined on the cost side, as you recall we cut costs in the first half of last year, we continue to be pretty disciplined, we’re hiring, we hired net 30 RMs in the first quarter. I think that’s a good pace, but there were 100 of gross hiring, 30 of net hiring, which means we are continuing to upgrade and it really improved the quality of our people as well.
We’re surely taking a, say a moderate approach to it, but I do think that we still believe that this is going to be a very attractive business. And so as you mentioned we do still think that over the near term we are going to be able to get to some, much higher pretax margins closer to the 40% given the operating leverage that we think that we have.
But again that depends obviously on issues around the interest rate environment. It also depends about issues around how our client base reacts. But we continue to believe that that’s the right place to be and that’s the right decision to make with regard to the business.
With regard to the lower rates issues, in many respects you are right. If you look at how the net interest margins develop, it’s been pretty stable as you say the issue is obviously assets under management have gone up a lot and so as a proportion of the gross margin, if you look at just as an explanation of the gross margin on assets under management, that’s an explanation for it which is we’ve had basically flat net interest margin and we’ve had assets under management go up 15% in the last year.
And so in some respects your right, its not the net interest margin has fallen necessarily, it’s just that it’s been stable but as a proportion of our assets overall, it’s obviously fallen.
And I think again that’s sort of, if you think about it, that’s a bit of a reflection I think on how our clients are behaving, right. They’re not using a lot of leverage, they are not actually borrowing money. The proportionate borrowings versus their assets overall has gone down.
Again, I think that in of itself is actually something that, again I think probably normalizes overtime but secondly as well, if you do have a rising interest rate environment you will increase the net interest margin which will benefit the overall results of the business. And so I think while you are right to say, I think that its not so much that we suffered by having lower net interest margin but it’s a lower proportion versus assets under management and its not what it could be if we see an interest rate and in growing interest rates, increasing interest rates overtime.
Your question on the capital and a question about book value growth and our returns etcetera, I think it’s a good question. I think there is absolutely no question but our objective is and we expect to have higher proportions of our earnings coming from our private banking business and from our asset management business overtime and so as you say, I think that in of itself should have some pretty significant impacts hopefully overall evaluation of what we’re doing.
I think clearly, we’ve talked a lot about the profit dynamics in the private bank and how we feel that that is a business that will improve overtime, question of how quickly and how much, but it will improve over time. Maybe it’ll do that rapidly, maybe it’ll take longer we’ll see. But we think there’s certainly a lot of upside there. But also on the Asset Management side I mean CHF 11 billion in net new assets in the first quarter, a continued improvement we think some tailwind hopefully in terms of some of the asset valuations there. I think all put us in a position, we think the Asset Management business will be a bigger contributor over time too.
And then other thing just to point out though I think this is a very, very critical point. The quality of our earnings in the investment bank, and it comes back to kind of the answer to Derrick’s question earlier on, the quality of our earnings in the investment bank is different, it’s a high quality, it’s a client focused lower volatility earnings stream. And that’s something that’s very important to think about when you look at the balance of the business that’s a very fair question.
We do expect to see more balance in the others, but remember that investment banking earnings stream were exactly the questions that Derrick has asked and exactly what our answer was is that a very high quality, lower volatility earnings stream, because its focused on the client business. So I think that’s something that’s important for people to keep in mind is, it’s not like there is the volatile investment banking revenues versus a very good private banking asset management revenues. It is a very good private banking and asset management revenues, but our Investment Banking revenues are lower vol., lower risk, higher quality. So I think that has to be taken into account.
Your next question comes from Kian Abouhossein of JPMorgan. Please ask your question.
Kian Abouhossein - JPMorgan
Yes, a few questions. Just coming back to first of all, Wealth Management. You have a top line margin of 125 to 135 as a target. Do you think we can still end up at the low end of that target, if I look at the average through the year?
Yeah obviously when you start off the first quarter at 121 it makes it more of a challenge. I think our view is we still believe that that 125 to 135 is a reasonable range but we’re more likely unless we see more dramatic changes in the elements that we’ve talked about or more likely to be towards the bottom end of that range.
Kian Abouhossein - JPMorgan
But it’s still possible to achieve that? And is that top down related or interest rate change related? Or what has to be a bottom-up, what can you do bottom-up to trigger improvement in the top line margin?
Well I think it will be challenging to get into that bottom end of that range but we do think that depending on the environment we’ll see how that goes. On slide 10 we kind of laid out what we view as some of the drivers of that. I mean we’re encouraged by, in the first quarter, the managed investment products’ performance. We’ve actually had a really strong recovery in managed investment products and that’s actually very helpful to the overall gross margin performance. So that’s important.
Interest rates as we mentioned are another driver. So I think that’s something that as you say is not necessarily under our control but which you will all have a view on how you think that will develop. We do continue to think that the transaction based side of it with brokerage and product issuing activity, is one where we’re clearly very active and we can certainly have an impact on that and we’ve got a number of different initiatives there that we think put us in a good, leave us feeling a bit optimistic about that we can make some impact there.
And then really this integrated solutions revenues is a very important aspect of it .That’s basically our integrated bank offering, so it’s making sure that we’re offering the Investment Banking products etcetera through the Private Banking client base. And that’s been a very important contributor in the past. And particularly when you have a high level activity on the Investment Banking side which is as we mentioned to you very strong, I mean the strongest pipelines that we’ve really had sent pre-crisis in terms of equity issuance, IPOs, leverage finance, advisory stuff, a lot of that does lead to more follow-ons in terms of impact on the Private Banking side as well because if we can do transactions there for the things to do that obviously also follow through the Private Bank. So I think all those are things we can influence and all those are things that make us feel positive about the direction we can take it but it’s our challenge. We’re going to need to need to work on that.
Kian Abouhossein - JPMorgan
And if I come back to fixed income, the impression that I get looking at some of the US peers who have now reported and some of them clearly having had to restructure, they generate two times fixed income revenue that you generate in the first quarter. I get the impression the arrows that you show on Slide 19-20 actually going down relative to market. So, really when will we see you closing the gap? And first of all do you agree with that? And secondly, when do you close the gap in respect to some of the fixed income initiatives that you take? And when we will see that kind of revenue gap closing?
Well I think what’s important and I guess the way we think about it and I don’t know if it’s useful for you all to think about this way or not. But the revenues at all the banks are made of a couple of different components. One component is the actual transactional revenues that come from doing business with clients. Another component is the positioning profits and so clearly if you are carrying inventory and the markets rally over the quarter, you’re going to make a lot of money on that. I would suggest that if you actually and maybe it’s hard to get the information on it but if you actually pulled out the components of people’s revenue streams, I think you’ll find that a lot of those big increases and fixed income numbers from some of the competitors come from the fact that they had a lot of securities on their books and those appreciated during the course of the quarter.
We actually do believe that our market share and you can see that our market shares are actually increasing across a lot of these areas. So it’s not a gap in terms of our market share presence. Our market share presence is strong and increasing across most of the areas. It’s really a question of what level of inventory that you’re going to carry and what the impact of that inventory of price changes in the quarter are on that inventory. So I think we actually feel we do stack up quite well.
Now having said that, our focus on clients, we do have a lot of initiatives underway that we think continue to improve our market shares from already high levels. So we had a very major hiring program on the fixed income side in sales, we are continuing to expand on the emerging market side where we have already talked about the fact that we have number one share wallet there but we are a very strong and emerging markets, and the commodity side continues to be a business where we have more work to do. So I think all of those will actually continue to allow those, the bubbles on Slide 20 to move in the right direction which is up the page, but we do feel we’ve got a very strong collection of market shares in positions there already but we do think there’s more potential.
Kian Abouhossein - JPMorgan
Okay, last question just to on the comp ratio, I know it’s a formula based approach. Assuming that revenues go down from historically always the best quarter that we see in historic terms, would then the comp ratio come down as well?
Well I mean it depends on a number of different issues. As you say, certainly the performance of the business is one issue. As you mentioned that we are looking at it much more on the basis of sort of a capital based system and it’s also a question about how much capital we’re using and what areas we’re using it but also there is some relevance of the overall industry, and so we obviously have to set our compensation in that context as well. So overall I think it will depend on how those things develop. In general, we think that the 44% ratio which is you say kind of falls out of all that. There aren’t any particular distorted elements in that. So we’ll have to see how performance and how the industry sort of tracks going forward but we think that’s probably an unreasonable level to be at.
Kian Abouhossein - JPMorgan
Okay. And if I can add one more quickly. The 260 million assets under management per advisor that you’re targeting, on what time frame should we assume that is achievable?
Well obviously part of that depends on market levels and so we’ve seen some recovery in markets and that will obviously have an impact on it. But we also do obviously continue to add advisors but we also continue to grow our AUM per advisor in terms of net new asset production and then you will have lastly the markets on element of that. So it’s a little hard to set a particular date which we want to get there, depends obviously on how the markets perform.
The next question comes from Georg Kanders of WestLB.
Georg Kanders - WestLB
I have a question most of it is answered from Kian. But you said that client activity in the wealth management and the private banking business subdued for most of Q1 2010. Is there higher activity towards at the end of Q1?
I would say it wasn’t, there wasn’t any particular permanent trend during the quarter I would say. So nothing to know really.
Your next question comes from Jon Peace of Nomura
Jon Peace - Nomura
Good morning, can I ask three quick questions, please? Firstly, on equity trading, could you make a quick comment about your regional mix? I understand from some of your US peers that maybe the Americas was a bit stronger than Europe, and I just wondered if that had impacted your comparative growth rate. Second question is on Basel III. Where do you sit on the spectrum that on the one hand the Committee might come back towards the end of this year and say that their December proposals have been significantly delayed or diluted, which obviously the market would welcome?
Versus, on the other hand, the Committee might come back and say, actually, we’re not delaying or diluting the proposal at all, and it’s up to individual countries to grandfather changes through if necessary, because obviously this has an impact on your and the industry’s perception of excess capital? And finally, also on regulation, can you just comment on the kind of Swiss too big to sale discussion that’s going on at the moment, and how regulators might force you to change your structure to allow for a break-up in the future crisis, and what the cost of that might be?
I think on the equity trading issues, we don’t really see any significant regional trends in the first quarter so we didn’t see stronger performance in the America’s versus Europe for instance so I’d say we didn’t see anything really significant in our business in the first quarter.
On the Basel III issues I guess it’s a somewhat complicated issue. We obviously feel like we are better capitalized than we are quite well capitalized in the context of the industry. We feel like we are already in the context of our regulators operating under leveraged constraints, pretty high capital requirements, you saw liquidity last time.
So we think we are already a lot of the way there in terms of what needs to happen. So in some respects obviously we feel like probably it would level the competitive playing field if the rest of the world were more quickly to have to come to similar type levels or closer to those levels.
On the other hand, I think practically looking at it we obviously wouldn’t be surprised to see if there needed to be some or there is a view that there needed to be some delay or some pushing out in some of the implementation timelines on some of these things but again from our point of view, I mean we are already at a very high level of capitalization.
We are already operating under liquidity guidelines that are similar to the BIS is kind of laying out, the leverage ratio we already have. So I think in general we are pretty well positioned against it. And you want to add something to that Renato?
Yes just one remark I think what is much more important and that the timing so to say of the implementation is. What is grandfathered? What kind of implementation time you have afterwards, in order to get there I think that is more crucial than if it’s at the end this year or next year. From that perspective as Brady said, I think we are well positioned.
I think the last issue you mentioned also on some regulation with the sort of too big to sale discussion. It obviously continues to be a discussion globally but also in Switzerland and we are obviously constructively involved in those discussions. And we’ll obviously have to see how it comes out, there are number of different potential approaches etcetera.
I continue to believe that hopefully around the world we will end up with solutions here that help to make the system safer and sounder but don’t necessarily change the business structures that we have in place. So that certainly continues to be my hope. But again that’s obviously there is still lot uncertainty in the process.
(Operator Instructions). Your next question comes from Rainer Skierka of Sarasin. Please ask your question.
Rainer Skierka - Bank Sarasin
I have a question on commercial real estate. We have heard about potential losses or even occurred losses at Morgan Stanley and possibly at Deutsche Bank. Can you elaborate a little bit on your position in commercial real estate and the fund sector, please?
Sure, obviously not just not necessarily on the fund sector but in terms of our own portfolio, we’ve obviously reduced the exposure quite substantially in that area. We’re down to some, certainly among the global banks in very low numbers in terms of our exposures and we view those assets as pretty stable, they’re marked down quite substantially, they’re marked at an average of $0.45 on the dollar etcetera.
So from that point of view, we feel comfortable from a balance sheet exposure point of view. You were specifically talking about the funds exposure; we do have a reasonably sized real estate fund business here in Europe.
Its pretty conservatively I think structured and invested, we don’t see any issues around buyers and so its not really they are much more of physical real estate investments approaches as opposed to more leveraged or securities type approaches. So they are really more physical in fact operating real estate investment properties and frankly that’s actually performed quite stably and it’s been fine. So we don’t foresee any of the issues that any of the same issues that you mentioned has been seen in other places.
Rainer Skierka - Bank Sarasin
And a follow-up question on the German data theft, any update from your side as mentioned in the quarterly report?
Well, obviously it continues to be a situation that we monitor pretty closely; we don’t have any additional specific concrete information on it. Although there are data points that indicate that we maybe one of the banks that may have had some of our data compromised. So that’s really all that we can say at this point.
Your next question comes from Jacques-Henri Gaulard of Autonomous Research.
Jacques-Henri Gaulard - Autonomous Research
I have a bit of an off-track question. I was wondering Brady if the communication of the Bank at top management level has not been a bit too aggressive over the last three or four quarters because since Q1 last year you’ve been very, very bullish and you’re creating unwillingly a bit of a bubble around results, which means that it’s very difficult for you not to disappoint? Should you change that bit maybe by effectively calling for all the operating leverage, the Private Bank recovery, all the potential monetization, if you want, of your positioning when and as it happens rather than probably having people being disappointed and say oh, well it’s not really happening in the Private Banking yet, maybe next quarter?
I don’t know I mean we’ve, I think all we try to do is to be as transparent as possible and to give you all the information and views that we have. So, I think we try to be pretty careful about making sure that you understand where there’s uncertainty around how things will progress or whether its interest rates or behavior of the Private Banking client base. So I think we’ve tried to be pretty clear that we don’t control that nor do we have a particular insight of over how that may progress over the next couple of quarters. So we’re trying, I think maybe it sounds like what you maybe referring to is just our transparency. We’ve tried to be as transparent as possible about all these things, and we think that’s kind of hopefully considered best practice among you know.
Jacques-Henri Gaulard - Autonomous Research
It’s absolutely great. It’s just a matter of saying you are delivering regularly say recurring earnings of about 2 billion plus every quarter and having yourself behaving like that which has to be a frustration. So I guess it’s just the expectation seems to be higher and higher.
Yeah, I don’t know, I mean as you say we would certainly look, if we look at the, its been a pretty consistent delivery of we think very high quality earnings with very high ROE, I mean really the highest ROE in the industry. We think it’s a very high quality result. So we hope that I guess consistent delivery of that will be something that makes a difference over time. And around that all we can do is really I think try to give you our best insights into the business, and what we see and what we know so that you can make your best judgments and analysis of it. So I think that’s what our objectives have been.
Your next question comes from Florence Taj of MFS. Please go ahead.
Florence Taj - MFS Investment Management
Yes, I have two questions, actually. One is on the Wealth Management side. You mentioned that clients are quite cautious in terms of the assets that they’re investing in. Can you maybe give us a sense of the mix of assets in Private Banking between various asset classes today and where it was maybe at the peak back in 2007? Second question is on the tax rate, I’m just wondering what the right number is on the tax rate and also if you could talk about the deferred tax assets and whether you’ve been using any of that because clearly that’s a big source of deduction on your core tier 1 for (inaudible).
Maybe, why don’t we start with the tax rate question? I don’t know if you want to answer that Renato.
Right, as we said when we discussed our fourth quarter we expect to end up the year in the high 20s from a tax rate perspective.
I think with regard to the DTA, clearly, obviously with these levels of profitability we are obviously using up the DTA. We believe we’re on a track to really utilize the DTA over the next three or four years. Obviously it depends on continued earnings etcetera. But we clearly believe we are still on track towards that. There obviously our quarterly fluctuations and we had some impacts on that of the FAS 167 consolidation etcetera, but in general we still believe we are still very confident that we will work that down over the next few years. So we still feel pretty comfortable with that.
I think with regard to your question on clients and the mix in terms of asset classes versus say 2007 I mean there’s no doubt there’s been a change in the overall configuration that they are investing. For instance structure derivatives is probably about half what it was in 2007. So it’s probably gone from 35 billion to maybe 17 billion of the total assets outstanding, discretionary mandates are probably down by 30% to 40% from where they were in 2007. Now, as I mentioned we saw some encouraging signs in the first quarter on the discretionary mandate side. We believe and hope that we will see the structured product side start to see some good recovery as well.
So we will see how that develops over time. We certainly don’t want to predict or promise anything there but our view is that things probably will recover over time but clearly it’s a more conservative mix of assets than what we saw couple of years ago.
Florence Taj - MFS Investment Management
And what proportion is in cash?
I don’t know a clear answer to that. Yeah I guess generally we think it’s about a third cash or third equity is a third fixed income. Okay any other questions?
There are no further questions back to you Mr. Dougan.
All right well maybe I can just sum up by appreciate everybody listening and appreciate your questions, and I think they were good questions and serving help to eliminate some of the aspects of the business.
I do think that this result is an industry leading very high quality result; in particular as you have heard I’ve highlighted the 22.3% return on equity that was delivered with industry low levels of risk which is certainly hopefully underline the quality of the result and your very strong client inflows and overall client momentum.
I think of that the client focus capital efficient strategy that we put in place as it generated very stable, very attractive returns, and I think that’s something that hopefully is viewed as something that has been consistently delivered and can be consistent delivery going forward.
We averaged over 2 billion of strengths of operating net income last five quarters. We’ve had over CHF 14 billion net new client asset on average over those five quarters, and 21% return on equity over those five quarters so and all that with an industry leading Tier 1 ratio 16.4%.
So our view is that hopefully this will be viewed as consistently outstanding and really industry leading results, and obviously our objective is to continue to deliver similar results in the future. So thanks everybody.