Credit Suisse Group's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: Credit Suisse Group AG (CS)
by: SA Transcripts

Credit Suisse Group AG (NYSE:CS)

Q1 2014 Earnings Conference Call

April 16, 2014 03:00 ET

Executives

Christian Stark – IR

Brady Dougan – CEO

David Mathers – CFO

Analysts

Huw Van Steenis – Morgan Stanley

Fiona Swaffield – RBC

Matt Spick – Deutsche Bank

Daniele Brupbacher – UBS

Jeremy Sigee – Barclays

Christopher Wheeler – Mediobanca

Kian Abouhossein – JPMorgan

Stefan Stalmann – Autonomous

Daniel Zulauf – Berner Zeitung

Jon Peace – Nomura

Jernej Omahen – Goldman Sachs

Robert Murphy – HSBC

Andrew Lim – Societe Generale

Kilian Maier – MainFirst Bank

Holger Alich – Handelsblatt

Operator

Good morning. This is the conference operator. Welcome and thank you for joining the Credit Suisse Group First Quarter 2014 Results Conference Call. (Operator Instructions). At this time I would like to turn the conference over to Mr. Christian Stark, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Stark.

Christian Stark

Good morning and welcome to our first quarter results call. 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 Dougan

Thanks Christian. Welcome everybody thanks for joining the first quarter earnings call. I’m as usual joined by David Mathers, our CFO who is going to deliver the results portion of the discussion today. I would like to begin with a few highlights from the first quarter. First we achieved pretax income of CHF1.9 billion and a return on equity of 14% in our strategic businesses for the quarter well within reach of our 15% through the cycle target. This strong performance was driven by significantly improved profitability in private banking and wealth management, solid returns in investment banking and continued effective cost in capital management.

We also saw continued momentum with clients across many of our key businesses including the highest asset imposed in our strategic businesses since the first quarter of 2011 and a meaningful increase in the share of assets under management from ultra-high net worth clients.

In private banking and wealth management we grew the pretax income of our strategic businesses by 28% compared to last year’s first quarter to CHF1 billion resulting in a high return on capital of 33%.

In the first quarter we recorded CHF16 billion of net new assets in our strategic businesses reflecting our strength in key emerging markets within Asia, Latin America and the Middle East. Our strong position in our Swiss Home market and significant inflows and alternative investments in index products within our asset management business.

Notably our net new assets in Asia Pacific grew at a 17% annualized rate. Wealth management clients had a good start to the year and improved its net margin to 29 basis points from 23 basis points in the prior year quarter. In line with our strategy we increased the share of assets under management from ultra-high net worth clients to 46% in the first quarter from 43% a year ago. Corporate and institutional clients continue to make a strong contribution to the divisions overall performance and asset management more than doubled its pretax income compared to the first quarter of 2013 as a result of its more focused approach.

In investment banking we delivered a strong return on capital of 21% on our strategic businesses for the first quarter and pretax income of CHF1.1 billion demonstrating the strength of our diversified business. We delivered a strong performance in securitized products, credit and underwriting and advisory as well as solid results in equities.

At the same time the first quarter seasonal contribution from our rates in emerging markets businesses was significantly lower compared to prior years as the industry adapts to structural changes in the rates business combined with challenging market conditions in certain emerging markets.

We made significant progress in winding down our non-strategic units which we identified last October. We reduced the leverage exposure of these units by CHF11 billion and made risk-weighted assets business reductions of CHF4 billion in the quarter.

And on cost by the end of the first quarter we delivered CHF3.4 billion of annualized run-rate cost savings versus the first half of 2011. Given this progress in reducing our cost base we remain on track to achieve our targeted cost savings in excess of CHF4.5 billion by the end of 2015. We continue to maintain a resilient capital position and leverage ratio notwithstanding the impact of our progress and resolving legacy litigation matters in the first quarter. We achieved a 24% reduction in risk weighted assets since the third quarter of 2011 despite methodology uplifts of CHF13.5 billion in the first quarter and we reduced leverage exposure by 19% since the third quarter of 2012.

We ended the quarter with a look through Basel III CET1 ratio of 10% effectively meeting the 2019 Swiss requirement and we reported a look through Swiss leverage ratio of 3.7% as of quarter end within reach of our 2019 requirements of 4%.

I would like to reiterate the key elements of our strategic and the roadmap to achieving our targets. Specifically how the combination of our two strong businesses coupled with resource reallocation will drive growth in targeted areas namely in capital efficient, high returning businesses. And how this growth combined with the wind down of our non-strategic units and increased efficiency of our operations will drive or return on equity in excess of 15% and allow us to return cash for our shareholders.

First, we have two high returning businesses which we are growing in a targeted manner and rebalancing capital into private banking and wealth management. In private banking wealth management we grew pretax income in our strategic businesses by 28% from last year’s first quarter resulting in a high return on capital of 33%. We will continue to build on our growth momentum in emerging market such as Asia-Pacific where we recorded CHF5 billion in net new assets in the first quarter. We will also expand our lending initiatives targeting ultra-high net worth clients, an area where we saw an 8% increase in our balance of outstanding loans in the first quarter. We continue to build on our strong position in our Swiss home market and at the same time we’re repositioning certain less profitable onshore markets and improving our net margin.

In investment banking our strategic business has generated a 21% return on capital in the first quarter, we will continue to focus on our market leading and high returning businesses notably our Top 3 equities franchise, our strong underwriting and advisory business and our yield businesses within fixed income specifically credit, securitized products in emerging markets.

We will also complete the transition of our macro-products business to a client focused capitalized franchise as we outlined last October. Second we have a resilient capital base and leverage position as well as an efficient operating model, we remain on track to reach our long term balance sheet and risk weighted asset reduction targets. We will continue to reallocate resources to capture growth opportunities particularly in private banking and wealth management and to achieve a more balanced distribution of risk weighted assets between our two divisions. At the same time we will further improve operating efficiency across our businesses and infrastructure areas.

And third we will continue to focus on the run-off of position and losses in our non-strategic portfolio and on resolving legacy litigation matters. Given the leverage and risk weighted asset reductions achieved in the first quarter in our non-strategic units we are on track to reach our 2015 targets of a 70% reduction in leverage exposure and a 58% reduction in Basel III risk weighted assets from the end of the first quarter 2014.

In the first quarter we have also made good progress in resolving legacy litigation matters. As you know we announced an agreement with the federal housing finance agency in March. This effectively resolves the largest mortgage related legal dispute between Credit Suisse and investors dating back to the financial crisis.

In addition we’re continuing our efforts to resolve legal cases related to our former cross border private banking with U.S. clients. In February we reached a settlement with the Securities and Exchange Commission on the U.S. cross border matter. The U.S. Department of Justice’s investigation into the U.S. tax matter remains outstanding and while we’re working hard to bring this to a close the timing and outcome remain uncertain.

To sum-up in the first quarter we continue to optimize resource allocation to grow our high returning businesses. At the same time we maintained a resilient leverage in capital positions and remain on track to meet our long term targets. We also made good progress towards resolving legacy litigation matters and increasingly efficiency of our operations. Given all of these positive developments and progress in our strategy execution, our intention remains to deliver cash returns to our shareholders at or above 2013 levels.

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

David Mathers

Thank you Brady. Good morning. I would like to start on slide 7 please with an overview of the financial results. In the first quarter we achieved revenues CHF6.6 billion, pretax income of CHF1.9 billion from strategic businesses with a cost to income ratio of 70%. The after-tax on equity was 14% in the strategic businesses and net new asset inflows was CHF16 billion.

It's worth noting this is the highest level of inflows achieved in a quarter since the first quarter of 2011. On a total reported basis we achieved pretax income of CHF1.4 billion and net income of 0.9 equivalent to an after tax return of equity of 8%.

Excluding the impact to fair value adjustments due to the movement on our credit spreads we achieved an after-tax return 9% on a reported basis in the first quarter. I would also just like to point out that our tax expenses in the first quarter were higher than the 28% tax rate guidance we have given previously for 2014. This reflects a one-off production in deferred tax assets from a CHF151 million due to the change in New York State tax rates that was enacted on the 31st of March this year.

Slide 8, on this slide we show the quarter’s results against the various group and divisional KPIs we set. At group’s strategic return on equity 14% for the quarter is very close to the 15% target and we have achieved strategic results, our cost to income target of 70%.

In the first quarter the private banking and wealth management division produced this cost to income ratio by 6 percentage points to 68% compared to a year ago making good progress towards the target of 65% for the division.

In addition, net new assets in our Wealth Management Client business grew at an annualized rate of 5% in the first quarter that’s despite continued outflows in the Western European business and that means we are exceeding the short term target of 3% to 4% we set including such outflows and now approaching the long term target of 6% for this business.

The investment banking division achieved steady cost to income ratio of 68% in the first quarter better than target of 70%. In summary I think the strategic results this quarter demonstrated the momentum we have towards reaching all of our KPIs.

So let’s start now with the Private Banking and Wealth Management division from slide 9. In the first quarter strategic businesses in the Private Banking and Wealth Management division achieved pretax income of CHF1 billion, 28% higher compared to the prior year quarter. This was equivalent to a return of capital of 33% compared to 28% in the prior year quarter.

Net revenues for the first quarter was slightly higher due to increase in fee based revenues, this was partly offset though by lower net interest income reflecting the adverse impacts of lower interest rates and a reduction in deposits eligible for stable funding.

Continued cost discipline to the efficiency gains and reduced our cost base by 8% compared to the prior year quarter delivering a cost income ratio of 68%. Net new assets from strategic businesses was CHF16 billion in the quarter and total reported net new assets 13.7% were very strong also in the first quarter.

Just looking at wealth management we generated net new assets of 10.6 billion in this part of the division with particularly strong growth in Asia-Pacific and Switzerland. Yet a further 6.9 billion of new inflows in asset management. We have also made continued progress in winding down the nonstrategic portfolio this quarter and I will cover the details later in the presentation.

Let’s turn to slide 10 and discuss net new assets. In the first quarter we saw a steady net new assets of CHF16 billion and that’s after taking into account continued Western European cross border outflows of 1.6 billion in the strategic businesses during the first quarter.

Our Wealth Management Client business saw strong inflows at CHF12.2 billion and net new assets of 10.6 billion in the first quarter. Within asset management as I earlier mentioned we achieved strong net new asset inflows of CHF6.9 billion with continued strength in both alternative investments and index products.

Slide 11, Wealth Management Clients began 2014 from a strong pretax income result of CHF578 million, 27% higher compared to the prior year. Net revenues were slightly down due to lower net interest income partly offset by an increase in fee based revenues. Operating expenses in the first quarter were at the lowest level since the first quarter of 2011. The cost to income ratio improved to 71%, 6 percentage points better than a year ago. These cost reductions were achieved because all major expense categories including reduced infrastructure expenses.

As already mentioned net new assets increased significantly in the first quarter to CHF10.6 billion primarily in the higher wealth bands in our client base.

So let’s now look at wealth management in some more details in slide 12. Our net margin on assets under management increased by six basis points from the prior year to 29 basis points reflecting the reduction in expenses and the growth in our emerging market businesses. Transaction performance revenues were slightly higher compared to the prior year and this increase was in collaboration revenue in the first quarter, a little bit partly offset by lower foreign exchange transaction volumes.

Compared to fourth quarter 2013 we achieved significantly higher revenues also from securities transactions with higher volumes. Recurring commissions and fees were slightly higher compared to prior year reflecting the benefit from the increase in the asset base and also from various pricing measures which more than offset the negative impact from Western European cross border outflows and lower retrocession fees.

Net interest income decreased in the first quarter reflecting lower level of deposits eligible for stable funding and the continued impact from a low interest environment. This decrease though was partly offset by higher loan volumes. Slide 13, wealth management clients achieved strong inflows of CHF12.2 billion in the first quarter and reported net new assets of 10.6 billion taking into account the Western European cross border outflows. Inflows from the Asia-Pacific region amounts to CHF4.9 billion of it annualized growth rate of 17%.

This reflect a strong momentum in the region with growth from ultra-high net worth clients in Greater China and South East Asia. We also saw strong inflows in Swiss and across all client segments. These grew at 7% on annualized basis in the first quarter. Solid inflows in Americas region at 1.5 billion were largely driven by growth from Latin American ultra-high net worth client base.

Let’s turn to slide 14 to discuss the ultra-high net worth segment in some more detail. So I think as you may recall in previous presentations we have preferred to our strategy in expanding the lending business in this sector and what we would give here is an example of our progress so far. In the first quarter we achieved CHF2.2 billion of net new lending to ultra-high-net worth clients compared to 0.5 billion in the prior year quarter.

Net new lending was particularly strong to clients in the emerging markets with the Asia-Pacific region accounting for 36% and India accounted for 32% of total net new lending in the quarter. As a result total ultra-high-net worth loan balances increased by 8% to CHF31 billion at the end of first quarter.

I would like to emphasize here through the continued expansion of our lending offering to ultra-high net worth clients is and remains a core part of our long term strategy and is means of enhancing revenue in the future. The average interest margin on these loans exceeds a 100 basis points and that means that this increase growth in lending to ultra-high-net worth clients should enhance gross margin in this segment which currently stand around 50 basis points assets under management. In addition, on bank collaboration initiative provides opportunity for additional revenues in investment banking that can be generated from the broader and deepen time relationships.

Let’s now turn to corporate institutional clients on slide 15. Pretax income for the first quarter was higher by 3% compared to the prior year quarter and the cost to income ratio improved further to 50%. Net revenues have been in line with the prior year quarter were both in recurring commission and fees offset by lower transaction and performance based revenues was slightly lower net new interest income. Operating expenses in the first quarter declined by 5% compared to the prior year quarter reflecting continued cost efficiencies and leading to a cost to income ratio of 50%. As you can see credit provisions continue to remain at a very low level in this business.

Finally net new assets of CHF0.4 billion reflected the impact of a small number of clients rebalancing their investments following strong inflows into the segment in the fourth quarter 2013.

Let’s now turn to asset management results on slide 16; asset management delivered strong first quarter pretax income of a CHF141 million and return on capital of 60% more than double the level of the prior year quarter. Net revenues of CHF465 million increased 10% compared to the prior year quarter due to increased management fees on a high asset base is what it's high carry interest gains on private equity realizations. This was partly offset by lower investment related gains which reflects reduced capital usage compared to the prior year period.

Operating expenses were lower by 9% reflecting continued efficiency improvements with cost to income ratio of 70%. Net new asset inflows is CHF6.9 billion is strong in the quarter including inflows at 3 billion in alternative investments and we continue to improve our fee base margin to 49 basis points up from the 46 basis points achieved in the prior year quarter.

Compared to the fourth quarter of last year a reduction in revenue was driven by the absence of semi-annual and annual performance fees this quarter which had booked in the second and fourth quarters of each year. As well as recognition of higher private equity placement fees which is normally biased towards the fourth quarter.

Slide 17, making good progress in winding down the non-strategic portfolio within the Private Banking Wealth Management division. Revenues were lower in the first quarter compared to prior year including lower investment related gains reflecting a disposal of obsolete businesses throughout 2013, a process that is now largely complete. Nonetheless as we previously indicated the first quarter did include a CHF91 million gain on the sale of our private equity fund of funds and co-investment group, CFIG.

Operating expenses remain flat from the prior year as the benefits from business disposals were offset by accelerated severance costs for a business sale that we expect to complete later this year. Compared to the previous quarter operating expenses were significantly lower due to the litigation related charge booked in the fourth quarter of 2013.

As we recall in the fourth quarter we took litigation charge of a CHF175 million in connection with the U.S. cross border tax matter with the SEC that we concluded in February this year. Furthermore as part of our ongoing efforts to reach resolution with the DoJ in connection with their investigation into the U.S. tax related matter, we increased litigation provisions by CHF425 million, a gain taken in the fourth quarter of 2013.

We made some progress in reducing risk weighted assets to our business reductions albeit this was more than offset by the increases due to the impact of the methodology change in risk weighted assets related to private equity holdings. We reduced leverage exposure by CHF4 billion in the first quarter driven by portfolio wind-downs, asset sales and spin-off.

So with that let’s turn to the investment bank please on slide 18, in the first quarter we achieved a return on capital of 21% in our strategic businesses and a solid return on capital 14% for the overall division including the nonstrategic losses. Our strategic businesses delivered some solid revenues of CHF3.6 billion and pretax income of CHF1.1 billion.

We saw particularly strong performance in credit, securitized products and advisory and underwriting and a solid performance in equities. However our first quarter result this year were nonetheless lower than the prior quarter, this reflects a combination of two factors, first, conditions in certain emerging markets were significantly weaker this year and second weaker trading conditions in the macro sector is being exacerbated by the structural industry and regulatory changes that are also adversely affecting client activity.

Overall expenses are lower compared to the prior year driven by lower commission’s infrastructure and litigation as well as the currency FX moves due to a weaker U.S. dollar. Total risk weight assets though increased by $10 billion compared to prior year, prior quarter primarily due to $8 billion of methodology erratic changes.

This included the new operational risk model adding $3 billion and additional $4 billion from the change in Basel III treatment of certain securitizations which we have been implementing across the industry.

Let’s start then with fixed income results on slide 19, the fixed income we had revenues of CHF2.1 billion with very strong results in trading and origination and the credit of securitized product franchises. We achieved market share gains in average finance origination and as asset finance; we rank number 3 in global high yield.

Emerging market revenues was significantly lower impacted by timing conditions in certain markets and as I’ve already mentioned revenues from a macro products were affected by the structural initial changes that are compounding cyclical weakness.

Turn to equities on slide 20; in equities we have solid results in the first quarter with revenues of $1.4 billion. We have continued market leadership across the products and a strong and stable client franchise. Derivative results were higher reflecting both favorable market conditions and client flows across both products and regions. We saw solid and consistent prime service revenues reflecting growth in clients towards increased client increased particularly in our European business.

Cash equity results however were lower compared to prior year quarter, as commission growth in the U.S. and Europe were offset by weaker trading conditions in emerging markets notably in Latin America. Equity underwriting results were higher compared to prior year quarter reflecting both higher industry fees and share wallet gains in EMEA and APAC regions.

Let’s turn to underwriting and advisory please on slide 21, in underwriting and advisory we achieved strong revenues of CHF831 million compared to CHF763 million in the prior year quarter. Stronger underwriting results were driven by a market leading leverage finance franchise, whilst the advisory revenues improved compared to the prior year quarter in share wallet gain from the Americas.

We see increased momentum in coming quarters in advisory franchise given both these market share gains and the increased in M&A and volumes.

Equity underwriting results were higher compared to the prior year quarter and we also expect continued momentum here with high global IPO activity and a healthy forward calendar provided that markets remain favorable to executing this business.

Let’s turn to the investment bank nonstrategic unit on slide 22. In the first quarter we achieved higher revenue losses during the prior year quarter and in the last quarter. However revenues in the prior quarter include the gain of CHF77 million from a sale of our legacy real estate portfolio and revenues in the fourth quarter of last year also reflected portfolio evaluation gains as you may recall we discussed at the time.

As we suggested last year our funding to the nonstrategic unit decreased significantly due to proactive portfolio management of both our legacy debt instruments and our trading assets. During the first quarter we did accept a number of relatively liquid positions at minimum cost but I cautioned that we maintain that guidance that ultimately the cost of actually all these positions could well be in the range of 2% to 3% of risk weighted assets.

We are making solid progress towards the achievement of our capital reduction targets for the end of 2015. We reduced risk weighted assets by a $1 billion in the first quarter after taking into account the methodology based updates which include the change in the Basel III treatment of certain securitizations. We also reduce leverage exposure by $8 billion compared to the end of last year.

The litigation most impact to CHF61 million this quarter fairly substantially lower than the prior quarter the amount of CHF901 million. And as you may recall reflected the FHFA settlement.

Let’s turn out to slide 23, so consistent with prior quarter this bubble chart summarizes the returns, capital usage and market positions of our investment banking businesses. However the first time we do show now allocated capital based on the combination of risk weighted assets and leverage exposure to better reflect the resources in our businesses.

Our credit franchise benefited from strength in leverage finance origination which produced substantially increased returns from amongst the highest in the investment bank. Our securitized products business was also resilient by market share gains in the asset finance business. Prime services also produced solid returns most of the impact by reduction in capital usage year-on-year. But as you can see returns from our emerging market businesses were lower reflecting the challenging market environment we have already mentioned particularly in Latin America. Both cash equities and equity derivative returns solid reflecting the improved revenues and lower capital usage in the last 12 months.

Finally as you can see the return in the global macro products businesses remain low. This reflects reduced seasonal revenues and prior year first quarter’s primary due to lower client activity and that’s being driven by cyclical factors such as the low interest rate environment, current central bank policies as well as recent geopolitical events. But in addition the structural changes such as the instruction of a swap exclusive services are also having a significantly impact and like to continue to compress margins.

In response to these developments I think as we have discussed before we remain very focused on offering a combined sales model across these sectors with particular emphasis on clear derivatives and electronic trading of cash products.

We’re also targeting cost reductions within the macro business of approximately $200 million as well as further reduction of both leverage and risk weighted asset usage all of which were included in our current target for both the group and the investment banking division.

Slide 24, the waterfall chart on this slide highlights the strong returns generated by strategic investment banking businesses. For the first quarter our strategic businesses achieved a solid off-tax turn capital 21% amid more challenging market conditions as well as the reduced seasonal impact we mentioned before.

The increase in U.S. dollar expenses was driven by higher seasonal compensation expenses partly offset by ongoing cost efficiencies. We expect further cost savings from both on the ongoing infrastructure efficiencies but also from the optimization of the macro business model.

Finally I would like to reiterate that clearly the wind-down of our nonstrategic unit will significantly reduce the pretax income drag overtime. Let’s move now to the nonstrategic units, slide 26. We achieved business reductions in risk weighted assets in the first quarter that were offset the adverse impact from the methodology change as I mentioned which also occurred this quarter.

Nonetheless we remain very much on track to achieve the 58% reduction in nonstrategic risk weighted assets by the end of 2015. Since the end of 2013 we have cut leverage exposure by CHF11 billion and we intend to achieve a further 70% by the end of next year.

Slide 27, so this slide is an update to the similar slide that you may recall from our fourth quarter earnings presentation and we designed to try and help you analyze this nonstrategic pretax impact between now and going forward.

Specifically it shows how we move from reported pretax loss of CHF0.5 billion in the first quarter which we show in the left hand side of the waterfall chart to a pretax income drag rate around about CHF280 million on the right hand side including some litigation cost. And the bar show the key drivers in nonstrategic impact in our pretax income this quarter and how they are expected to develop over the next couple of years.

So let’s just start with the corporate center, first we have a CHF120 million impact this quarter from the contraction in our credit spreads on the portfolio of debt that we carry at fair value. This is not really relevant to capital and in any event is expected to be eliminated with the anticipated change in fair value accounting targeted for 2016.

Next we have a CHF123 million of realignment and IT architecture simplification costs which we expect to continue at around this run-rate through 2014 and ’15 into the completion of our main cost reduction program by the end of next year. The remaining impact of the corporate center this quarter primarily relates to the impact of gains from real estate sales that we took in the first quarter.

Moving into legacy funding cost which predominantly in respect the investment banking portfolio. The CHF52 million of legacy funding cost this quarter demonstrates are on track to reduce the funding cost associated with non-Basel III compliant debt instruments by 50% this year compared to the CHF439 million that we made we incurred in the hold of 2013.

And as we said before the remaining portfolios of these instruments will be fully run-off by the end of 2018. Then coming to final components, the remaining nonstrategic track this quarter is primarily driven by litigation cost approximately CHF61 million together with losses on the fixed income wind-down portfolio and the legacy rates business investment banking are approximately 180 million.

Our plan is to accelerate these wind-down of these assets including a target of 38 million of incremental quarterly expense savings and continue to work through to resolve our legacy litigation issues.

Therefore going forward to 2016 and beyond, once the wind-down is largely complete it's apparent from this analysis that the remaining FID drag from the NSU drop away significantly.

Let’s turn out to the next section; we will discuss our continued progress on cost and on capital. Slide 29, on this slide we show the annualized cost savings by division as well as the infrastructure set functions on a direct basis and that’s consistent with how we have done it before. In addition in order for you to see how the infrastructure savings impacted the operating efficiency of the business divisions we’re now showing you a fully loaded view for the first time with the infrastructure savings allocated to the divisions.

In both cases we compare our operating expenses to a run-rate cost base for the first half of 2011 which is when we initiated our efficiency program. In the first quarter of 2014 we achieved annualized cost savings of CHF3.4 billion after normalizing for the immediate accounting recognition or the retirement eligible population that occurred in the first quarter.

If you look at the direct savings here on the left hand side page you can see the investment banking division has achieved annualized CHF1.5 billion annualized savings which you may recall as lower in the 1.75 billion that we recently at the end of 2013.

And this reduction in savings compared to the end of last year represents the impact of high deferred comp charges in 2014 compared to 2013.

The Private Banking Wealth Management division both achieved CHF0.6 billion annualized cost savings in the first quarter making substantial progress towards this year end 2015 target of CHF950 million. Finally if we turn to the infrastructure savings pace increased our savings to CHF1.3 billion with continued progress towards the year-end 2015 target although a minimum of CHF1.6 billion.

These infrastructure savings are allocated to business division’s in line with their usage resulting in total savings on a fully allocated basis of CHF2 billion in investment bank and 1.2 billion in the Private Banking Wealth Management division.

So just to reiterate our targets we are very much committed to achieving a minimum of CHF4.5 billion by the end of 2015 as well as the interim target you may recall for ’14 of CHF3.8 billion.

Let’s now turn to the capital slides on 30 please, so as you can see from this chart I will look through Basel III risk weighted assets to the CHF280 billion at the end of the quarter. Compared to the end of last year risk weighted asset increased by CHF14 billion primarily driven by methodology and policy change in the first quarter that impacted both the investment banking and private banking and wealth management divisions. These methodology and policy changes included CHF5.3 billion in respect to the new M&A model for operational risk as well as changes to the Basel III rules applicable to trading book securitizations, private equity positions and also just to recall the mortgage multiply.

Business transactions in the nonstrategic units of CHF3.7 billion were offset by modest business growth from seasonal increase in lending activity of the investment banking division. To give you an outlook on risk weighted asset developments through 2014, we would expect some modest fluctuation due to seasonal and further methodology impacts but I will point out those methodology impacts are like both positive and negative and as a consequence we remain focused on limiting our risk weighted assets for investment banking to the year-end 2013 levels in other words to reverse this methodology impacts. And we continue to reiterate our group long term target of approximately CHF250 billion.

So let’s move to capital ratios that on slide 31. At the end of first quarter our Swiss total capital ratio sort of 15.0% slightly lower in the fourth quarter of last year reflecting the repurchase of the second tranche of Claudius, the former Tier 1 participation instrument on March 18 this year and you may recall that we also redeemed the first tranche of Claudius at the end of 2013.

At BIS CET1 ratio was 10% at the end of the first quarter on look through basis reflecting the impact of the methodology changes related to the risk weighted assets that we already discussed.

Let’s just turn to leverage now, slide 32. At the end of the first quarter our leverage exposure stood at CHF1.14 trillion, this is a cumulous reduction of 265 billion or 19% since the first quarter of 2012 when we announced the balance sheet reduction program. Including the full implementation of the BG gas proposals together our ongoing mitigation efforts and the and the run off of our nonstrategic portfolio we’re targeting long term goal for leverage of approximately CHF1 billion for the group.

Slide 33, at BIS total capital leverage ratio improved from 3.5% in the last quarter to 3.8% at the end of the first quarter again on a look through basis. If you look at the capital base we have and assuming the achievements of our long term leverage exposure target of CHF1 trillion our pro forma look through Swiss total capital ratio would increase to over 4% just on current capital levels.

So just to conclude on slide 34 please, what we show here is a summary of our key long term targets and we also which -- commitment to generating cash for shareholders. On a group level we continue to target risk weighted assets of approximately CHF250 billion post the wind-down of the nonstrategic units.

We are well positioned to meet our long term leverage exposure target of approximately 1 trillion through the completion of the nonstrategic run-off as well as the implementation the final BCBS rules and time mitigation measures. We are maintaining the target we announced last year for a CET1 ratio and a long term of 11% and clearly as we have discussed before this means that we will exceed our long term total leverage ratio of 4% as the nonstrategic run-off is completed.

In terms of capital allocation risk weight assets in investment banking were higher in the first quarter compared to the end of last year due to the seasonal and more importantly the methodology effects that we already discussed. However we would expect the risk weighted asset usage of the investment banking division to return to the levels we saw at the end of 2013 by the end of the current year. We will continue to reallocate capital resources for the capital like private banking and wealth management business to capture growth and to drive towards more balance business mix.

Finally as we said before we are committed to redistributing capital in excess of our target ratio to shareholders. With that I would like to conclude the results portion of today’s presentation and I will hand back to Brady. Thank you.

Brady Dougan

Thanks David. Thanks very much. I think with that we’re just ready to open it up for questions. So operator can you open the line.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Huw Van Steenis of Morgan Stanley. Please go ahead.

Huw Van Steenis – Morgan Stanley

I had two questions, one turning to page 23 I thought it was very helpful for you to share with us just sort of the length looking at your businesses now, looking at leverage as well but what I felt was interesting is it shows the potentially your equities business is actually a low return on equity business than your fixed income is today and so I would just be interested any thoughts you’ve about what else you can do to enhance your return in your prime brokerage business and more broadly optimize your portfolio and then secondly there is also a huge mass focus on high frequency trading in the market. It help sort of investors calibrate the risks, could you also share what percentage of your equities revenues come from HFC clients and any perspectives do you have on the potential risks in the market given you’ve got a bit of a rough ride in the Lewis book. Thanks.

Brady Dougan

Maybe I can try to address the second question and then maybe David can talk a little bit about the first. I mean I think in general as you know we obviously do have a large automated execution business in equities and I think it's a very good business. It's been more and more -- we have actually been at the forefront of a lot of developments and working together with the regulators over the years and we think we have taken actually a very responsible approach to it. So it's a purely agency business, it's one that we think serves our customers very well and we do as you say have a good market share with it.

To be honest I don’t actually -- I don’t think we have any numbers around specific market shares or whatever. I mean I think our -- we haven't seen any impact on the activity in that business and again we think we have had a very sort of state of the art platform that has actually helped to address a lot of the issues over the years that have been raised that have recently been raised in this debate, so we feel like it's actually a business it should be pretty well positioned and we certainly don’t see any impacts on the business from a near term and I say even longer term obviously we will have to wait and see if there are and what kind of market structure changes might come but I think our view right now that it shouldn’t be material to our overall sort of revenue position.

David Mathers

If we look at slide 23 here really, I think both we actually wouldn’t quite agree actually -- if you’re just taking that graphic and if you look at the aggregate of the equities block and you compare the average of fixed income block recalling obviously the macro is to the left. The average return on equities overall is actually higher than the average return in fixed. So just on a detail really, I think in terms of the prime service business I mean I think there is two points really, I think what we wanted you to recognize here…

Huw Van Steenis – Morgan Stanley

I think it's point that you and others have actually made to us is we shouldn’t just look at 10% of RWA, we should look at leverage right now. Clearly when we are on the business we do very closely at leverage as well but we wanted to update our external disclosure to better reflect that. I think it's certainly true that as part of the balance sheet reduction program over the last couple of years the CHF265 billion we have pushed through a great deal in terms of looking at the ROI by client, the ROI by business type and I think we probably still got further to go as part of the optimization of the business and that clearly will have some impact in the prime service business.

I would just point out that of course that certainly if we look at equities, look at investment banking or the bank as a whole we’re actually running a portfolio and prime service is a business which does employ relatively high balance sheet with very low levels of risk weighted assets. It's also a business which is highly linked and complimentary to both our cash equities and our equities derivatives business as well as part of the franchise and because clearly although the relationships with the prime service business are closely tied to the business we’re actually executing elsewhere in equity. So it's not quite simple to just say, hey prime services looks lower than the rest of equities therefore we should do something about it because actually what you’re actually seeing is a greater interconnect with the rest of the equities portfolio.

But I think quite clearly I think it's important that, A, I think leverage should be seen externally as a key factor and tell us how we’re in the business and also how we actually run it internally and this is clearly an aspect of the bank will be looking to optimize and it's one reason why you think as you know we have reduced the leverage target date around the trillion mark.

Operator

Thank you. Your next question comes from the line of Fiona Swaffield of RBC. Please go ahead.

Fiona Swaffield – RBC

I had two questions, firstly WMC and the net interest income. Could you go into a bit more detail about the drivers? You mentioned something to do with regulatory deposits and whether this is a new base for us going forward and the impact for example the duration of replication of portfolio would be useful and the secondary, I just wanted to check my understanding on the RWA plan, so I think you’ve got something like 14 billion to come off from the NSUs in the next couple of years by the end of ’15, I think you’re saying 10 billion from the investment bank to offset some of these changes but I still don’t see that there is that much room for growth as an offset. So I just wanted if you could run through the moving parts again as why you’re still so confident of Q’15 if you’re going to grow the non-investment bank RWAs. Thank you.

David Mathers

So I think let just to start then with the net interest income number. So the reason the net interest income was down compared to a year ago in the fourth quarter reflected two factors, firstly I think what we have talked about before which is that we do -- we run a portfolio of positions was about 18 month lag and clearly that’s you have to really look at the curves in Euro, U.S. and Swiss Franc in terms of the impact of that and I think we probably stick to our guidance but we would expect the full impact of that to be seen really by the middle of this year that’s when we actually reach the trough in terms of the interest income we actually achieve from that portfolio. So that’s in my sense a full impact, that hasn’t really changed Fiona and I think we did kind of say that we would expect NII to actually be down basically as a consequence of that in the first half of this year by reaching a trough basically in the middle of the summer, therefore you should expect some increase at least from that component.

The other point where I refer to here just relates to what deposits actually count as eligible deposits under the next funding rules and LCR rules. The implementation of that is slightly more constricting, we’re actually expecting that for the proportion of deposits we have is slightly lower and we have also seen a slight drop in the amount of cash deposits which we actually hold in the business which is probably a good news in cash what that actually means for the other segments of the margin calculation.

So those are the combined effects which actually results in net interest income being down. We did expect it to be down in the first quarter and I would not expect it to increase in the second quarter unless we’re particularly successful on the lending side but we’re expecting to raise the trough basically in the middle of this year. So that would be the components on net interest income.

I think clearly the other aspect of this is I think I was very clear couple of months that we would expect net margin to improve I would say certainly that improvement from 26 to 29 is certainly a positive from our point of view and that it's a level we’re obviously to hold or even improve on in the balance of this year, subject to how market conditions develop.

So then really on risk weighted assets, I think what we have tried to layout in the roll forward is the combination of methodology, the different components of methodology. So I will go through that in more detail but the numbers are there on slide 30. I think we have seen the majority of that in the first quarter, I caution we might settle the noise further in the second quarter but we are actually completing a number of new models in the investment banking business, the like we see a significant reversal for that in the third quarter.

So we’re definitely seeing some noise coming through from the Basel III methodology in terms of risk weighted asset numbers which is the starting upwards in the first quarter but we would expect to see a drop in the third quarter there afterwards and will obviously update you on that when we actually speak next in three months’ time.

Within the overall targets I think -- so that really means -- if I were you I would simply say the first quarter set a model upon in U.S. that an operation, we expect to get back on trend by the end of this year. So I think the calculations which you have before in terms of growth and reallocation just remain the same as they were before and I think as you saw before we obviously had a growth in lending into our flagship business of 3.4 billion which added about 0.5 billion to risk weighted avenues so we’re clearly outgrowing our lending book in the private bank. It doesn’t necessarily, is not necessarily that hard to be intensive.

Operator

Thank you. Your next question comes from the line of Matt Spick with Deutsche Bank. Please go ahead.

Matt Spick – Deutsche Bank

I had three if that was okay, the first is just your previous restructuring cost guidance was another 1.4 billion in the Q1 number seemed a little bit low versus what I was expecting. Do you think that your restructuring costs might come in a bit lower than you thought or was there some other factors that affected Q1 in terms of seasonality or staff departures or something that meant your Q1 restructuring cost was light. And the second question was just to come back on the prime brokerage business, comparing the bubble chart for Q1 versus the bubble chart for Q4 it looks like there was a big increase in capital allocated to prime services and I just wanted to confirm I think I understood this right but you have on your internal methodology shift a bit from an RWA measure to a leverage measure and that’s what the increase in the prime services bubble is. So that’s just reflecting the change in the way you’re managing the business and that’s happened in Q1 ’14 and then the third question is a policy one, we have seen the latest large exposures rules from the Basel committee. I suppose with Switzerland being quite a concentrated banking market with two G-SIFIs in it. I just wondered if you could confirm that you don’t expect the new large exposure rules to have any effect on you. Thank you.

Brady Dougan

Maybe I can just take second one to reiterate kind of but basically Matt you’re right. We’re showing here in the chart is for the first time in the chart we’re showing the combined leverage in RWA sort of leverage and capital combined. We have actually been managing on that basis for quite some time but we just thought that in the bubble chart it would be better show that specifically and so that’s why as you say when you compare it to the fourth quarter which was not done on that basis it was just on a pure capital basis, those businesses that have a higher leverage component show up with a larger increase because it is sort of apples and oranges as you point out so that is exactly the answer and I don’t know David if you want to take the other two portions.

David Mathers

Yes I think I would still think the guidance we have given 1.4 billion in terms of total restructuring spend for this year and that remains correct and it's certainly true, 123 therefore is running slightly less than that on a quarterly basis. Hopefully we will be able to sustain but I think until we complete these measures I think it's best assume that what we said is right, I mean that’s unlikely to be our cost to achieve. If we can do better than that we will but I would caution that clearly we will have some further severance cost which need to come through over the course of the next few quarters. But we will see where we get to but I think 1.4 trillion is still good guidance for the final CTA for this.

On large exposure point I don’t think we really expect anything material to impact in terms of that current legal entity structure but I don’t think -- so we would expect a material impact from that.

Operator

Thank you. Your next question comes from the line of Daniele Brupbacher of UBS. Please go ahead.

Daniele Brupbacher – UBS

Just a quick follow-up on slide 12, the gross margin, the question a bit more general context. Can you give us like last year bit of a guidance for the full year and also you specifically mentioned pricing measures. Can you be a little bit more specific in terms of what that is and what the impact was and then secondly just again sorry on slide 23, leaving aside the macro bubble and just focusing more on the core areas. Is it fair to assume that in terms of structural changes regulatory changes and what have you that basically the situation now is the way this or no major further changes expected and from here onwards it's all about market share, cyclical trends and more this side of the equation. Is that fair statement and just on your remark Brady you made before that you managed the business on basically taking the average of a CET1 ratio, the leverage ratio. I would have expected that probably you would run the business more on the ratio which is the limiting factor. So for example if there is limiting factor that you would run it based on that equity allocation, why would you take the average, for me to understand how you run that. Thanks.

Brady Dougan

Maybe I can just address the last two a little bit and maybe David could speak to the gross margin question and thanks Daniele for the questions. I think, yes I would say with regard to the businesses as a whole I think for many of the businesses I think we’re at a fairly stable place from the point of view of where the businesses are positioned. You know regulatory impact et cetera, now that there could be other impacts but it's actually I think we have restructured these businesses pretty heavily and we feel like they are in good shape, good share and performing well and relatively stable from a regulatory point of view.

I mean obviously, I mean you’ve kind of excluded the macro area but that obviously continues to be the business where we still have more work to do. I think obviously we announced early on as you may remember late last year that we were instituting a lot of changes in that business and I think -- I mean at the time we were clearly one of the -- the first to do so. I think it's proven in retrospect that a number of others have clearly had to make similar changes and so I think we continue to believe that this will continue to be a challenge for the industry as a whole and I think overtime we’re going to see less capital and less combined capital and leverage in that business overtime as we continue to drive that business forward, so we would see that as a business that we really are looking to restructure certainly the capital on leverage footprint.

Also, the sectors where we’re focused it will be much more of, there will be large sort of electronic sort of low touch aspect of the business which we think we can do very profitable and the high returns on capital. We obviously still will have an important business with the largest clients around the world that will be sort of more of a traditional business and we also think that there is a good sort of solutions business there but probably not nearly as much of the exotics longer term, derivatives et cetera and things like that. So there is still is we think there is a very good business there that can make 15% returns on capital but that requires a completing the restructuring.

I think we’re in good shape because we started early on it compared to most of the industry but secondly we also need, somewhat better conditions in the market anyway the first quarter clearly was not good for anybody in that business. I think as to your question about how we managed the businesses overall, we don’t use just a simple sort of average. Again I guess it's part of our struggle to try to be transparent with you all and show you in different ways to look at it but we don’t use a simple average of leverage and capital. In fact we don’t use anyone measure, we obviously look at every business from a number of points of view and I think David was also explaining as I’m sure you clearly understand many of these businesses have other interconnections that are important both with other investment banking businesses and with other parts of the overall business. So we obviously have to measure all that together as well.

But clearly as you said leverage is an important aspect, capital is an important aspect. There are lots of other elements as well that we consider in these businesses, operating risk is an important aspect. So it's probably a much more complex way of looking at it. So we didn’t mean to imply that we simply look at all the businesses based on a pure average of those two things and that’s how we make our decisions.

David Mathers

So just a couple of points. So I think in terms of the gross margin, I think we have been quite clear about this before is that the shift towards the ultra-high-net worth margin business will always dilute the gross margin and I think we have actually given today I think the gross margin in ultra-high-net worth which is 50 basis points. Now clearly we would expect that to increase that’s one reason we talked about lending 2.2 billion up from 0.5 billion. All of this is actually going to be enhancive to the gross margins of ultra-high-net worth business but nonetheless in terms of the blended mix an increase in proportion of ultra-high-net worth business will dilute the gross margin.

I think what we said basically couple of months ago is two things, firstly that we look to see a significant increase in the net margin which I think you’ve seen through here in the first quarter. I think in terms of guidance for that, I think you should mark the conditions being what they are. You probably should expect that net margin to be at or above this level for the balance of this year.

If we’re thinking about the gross margin, I think what we said was that we expect it to be broadly stable compared to last year the 107 basis point. At the moment obviously according to that 3 bps shorter than right now. We did warn of course that net interest income would be less in the first half of this year and that’s slightly exacerbated by the change in the treatment of eligible stable deposits. We are clearly doing many things to actually mitigate the impact, the gross margin from that shift tells us how the trend work, lending generally except for such -- and I think we would still expect to be broadly stable. But it's clearly not impossible than it may end up been 1 or 2 basis points lower than the 107 last year depending on exact market activity. I think the net margin and I think it's probably the more important parameter for us and I think that’s where we like to see significant improvement.

Daniele Brupbacher – UBS

Okay and can I just on the 2.2 billion net new lending you mentioned and that the margin there is probably more than 100 basis points, just for me to understand this that I’m sure I understand this correctly is that the combined sort of lending spread and then basically the proceeds being reinvested into products, so that’s the total thing?

David Mathers

It's just the lending spread.

Brady Dougan

Just lending spread, pure lending spread.

David Mathers

So the actual total growth on the business will be different from that of course but that is just, we just wanted to give that because I think people were interested in what we were doing around this space. It's clearly a key part of how we actually build our high net worth business around the world and I think that pricing probably is maybe better than you may have thought basically but it's clearly obviously very enhancive to the gross margin of the bank.

Brady Dougan

And that’s I think in general as you can see I mean we were, I think we are encouraged by the first quarter absolute profitability, the progress on cost reduction obviously hand in hand therefore the increase in the net margin, the very strong net new assets and the specific initiatives like this lending initiative is something I mean we actually I think we have got some good momentum and then we will, we expect to see good progress in that going forward. So we’re encouraged by a lot of what’s developed in the business.

Operator

Thank you. Your next question comes from the line of Jeremy Sigee of Barclays. Please go ahead.

Jeremy Sigee – Barclays

Just three questions please. You touched on the FID wind down drag and I wondered if you can just go inside in a bit more detail because on slide 27 the 180 million drag from FID wind down I think was bigger than I was expecting. I wonder if you can just come back on to what within that and what the outlook is for that over the remainder of this year that’s the first question. Second question, just specifically on IB variable compensation and your disclosure is that percentage deferrals are similar to last year, can we assume that’s the same and then sort of last point of detail, last quarter you said that the BCBS rule change on the leverage exposure was at about 40 billion to 50 billion, is that estimate still valid and just to be clear I assume that is not in the number you’re printing today. That’s still the old rules number, so is the improvement of that number still the same as you indicated last quarter?

David Mathers

So I think just in terms of the FID wind down. I mean it's difficult to comment really in terms of expectations I think the comparison there may be slightly distorted because in the first quarter of last year we took a significant gain from the restructuring of one of the legacy CMDS positions that dated back to 2008. So that came through in the first quarter it was actually a sizeable gain in the first, a year ago. We didn’t have that gain this quarter and the fourth quarter of last year so the two quarters you see here we also had a gain on some other positions we took in the fourth quarter. So I don’t think there was anything particularly abnormal in terms of the FID wind down.

I would just be a little cautious in terms of this because we did exit a number of positions in the first quarter, did some restructuring and that wasn’t that higher cost and we’re a little bit concerned that the point about nonstrategic unit I said before is that we don’t have it anymore and there will be some exit cost associated with that. But I think it's probably more the comparison with those other two quarters which perhaps is a surprising in that sense.

In terms of the deferral, I think I probably made three points really. Firstly, we’re assuming a reduction in the amount of deferred compensation we pay going forward, either cash, deferred balance for 2014 and there afterwards and mathematically therefore that pushes up the CV for a constant level of EV in any particular quarter this year. So there is a slight change in terms of deferral there Jeremy.

The second issue is we have been looking at a approach in terms of how we accrue for compensation throughout the year. I think you know for the last two years we have approved on a 25% per quarter basis and I think there is obviously some questions as to whether that is the best method. So that’s something we have been looking at and certainly going forward we would try to accrue more closely to the expected proportion of earnings and you know even though the seasonality is not as pronounced this year as it has been in prior quarters the first quarter does tend to be a seasonally slightly higher proportion. So we have accrued for slightly more than 25% within the investment bank. We have made the same change with private bank but it's less seasonal so it's not pretty material in terms of this.

So there is a slight, more heavily waiting to the first quarter in terms of the amount of compensation and then thirdly just to be clear if that’s helpful in this, there is an increase in the amount of deferred compensation from prior years that we actually see in the investment bank and that really is a consequence of the past two roll off because you may recall that we did the past two charge a couple of years ago. That actually reduced that deferred compensation, so we’re now back to as you might say I guess well a more normal or a more trend level. So you do get this slightly interesting combination which is you have an impact of higher past deferral, it's about a 150 million in the full year by the way. It's not a big number but it's about a 150 million.

There is a reduction of assumed deferral for future years and then we have also slightly changed the quarterly pattern and so it's a combination of all those factors Jeremy.

And then BCBS, yes we continue to look at that. It feels more like about a 30 billion saving or a 40 billion saving but it's within, it's in terms of where we’re, we definitely would still expect a useful reduction from the implementation of BCBS and know the numbers we’re disclosing today do not assume that new BCBS definition because it's not yet final and therefore only when it actually goes final under the FINMA rules will we actually be doing it. So the numbers do not include that benefit at this point Jeremy.

Operator

Thank you. Your next question comes from Christopher Wheeler of Mediobanca. Please go ahead.

Christopher Wheeler – Mediobanca

A few questions, if I may, quite quickly. First one, Swiss net new money in the wealth management, obviously very strong, stronger than I think the whole of the last two years. Can you give us some more color on that? Secondly, can you just talk through the RWA uplift in operational risk in the last two quarters, was it CHF6.9 billion followed by the CHF5.4 billion this year. How much of that was down to litigation and what can we expect that to do, do you think, or can you give us some view as to where you think that might go over the next couple of quarters?

On the costs in wealth management, down 6%. I'm trying to get my head around that, looking into the numbers you do give in private wealth management. It appears that some of those or compensation is pretty flat, but the down numbers are general and admin down 12% quarter on quarter, and, rather surprisingly, commission expense is down 15%. Can you talk about how much that impacted the 6% decline in wealth management and why? And then perhaps finally, could you give us some comment on what's going on at Hedging-Griffo following the announcement last week of some of the changes there, and some of the asset managers moving and you perhaps providing some support to those individuals? Thanks very much.

Brady Dougan

Maybe I can take the first and the last question and little bit on litigation and David can take most of the second and third. Yes I mean obviously the net new money number is quite strong as you say. I think it's our strongest quarter in three years. Pretty balanced contribution but very strong performance in Asia-Pacific where we had I think about 5 billion of net new money, there is about a 17% growth annualized growth rate, so that was a very nice performance there and we feel like the franchise out there has good momentum. Switzerland was also quite strong was I think 4.5 billion and again we feel pretty good about that.

But we did have contributions from the Americas and also from EMEA in terms of net new money, smaller but nonetheless pretty good contributions. We did have outflows continued outflows as we have talked before on the cross border, Western European business so we had about sort of 1.6 and the strategic businesses and probably another 0.5 so about 2.1 of outflows in those areas that we sort of swiped out for you guys in terms of those cross border Western-European outflow.

So still probably still kind on pace of what we have kind on the pace is what we have already highlighted for you but maybe little bit lower than what we have seen but generally as you say good strong performance and I think some of it certainly do to a number the things that we have developed in the business, you know the lending initiative on the ultra-high side has certainly helped and so we’re seeing actually I think good progress in that.

On the -- I will let David talk a little bit more about the op risk uplift but on the litigation side as you know I mean clearly we have made some progress in getting some of these legacy issues behind us, the SEC issue, the FHFA which was obviously the largest sort of mortgage related issue that we have. So we feel like we have obviously gotten some of that behind us, we still clearly the biggest issue still is the DoJ cross border issue that’s been long outstanding and which we continue to work towards resolution but I will let David comment in a minute on the RWA, how that sort of interfaces with the RWA.

I think on the Hedging-Griffo side, we're very happy to be able to announce this sort of restructuring but including basically having our Hedging-Griffo businesses that have been very successful, continue to be closely affiliated with the business. So one of the most successful managers in the market down there Luis continues to be very much affiliated with the firm. We have an ownership stake in the funds and will obviously still be a primary distribution engine for that fund. So generally we’re quite happy with having been able to restructure that in such a way that we still have very close affiliation and we think that’s going to continue to be very good for the business. So David…

David Mathers

Then taking those two questions really. So firstly just on operational risk, it's a two separate factors. The first one in the fourth quarter of last year was related to litigation, inflation i.e. basically the trend was everywhere particularly in Americas though towards a higher cost for these issues. And I think you know that is calculated for CS at least possible loss disclosure of 25% of that. So that was the number that came through as you rightly thought that was about 6.9 billion in the fourth quarter. The other issue is essentially is that for the last couple of years we have been updating the M&A model for operational risk. That was approved beginning of this year and basically it has just in place and that’s just a new model for operational risk. It's slightly more granular than the previous one, and it's separate to litigation risk add on.

So I wouldn’t assume I think that’s it basically in terms of operational risk changes and I don’t think you would assume it to change materially from this level going forward. I mean litigation was linked to the disclosure but that’s a variability on that one.

So then just turning then I think to expense numbers. So if we actually look at the detail of the numbers actually I probably refer to page 85 in the earnings release. So if you look private banking and wealth management you can see that number of employees actually dropped from 27,000 in the first quarter of 2013 to 26,100. So it's about 900 less people.

If we look at compensation and benefits you can see it has dropped 1379 to 1290 and there was a small increase in terms of comp but it's not a seasonal as the investment bank and so anything I say the comp benefit change probably underestimates the reduction in managed comp.

The general administration reduction was 791 down to 736, yes that is a combination of the expense measures which you may have read about relating to Credit Suisse which are relatively extensive and which you’re seeing in these numbers.

The slight drop in commission expenses 199 to 169 primarily reflects changes some of the payout ratios in relation to some of our external managers. So I think the expense program for the program is extremely wide ranging not just in the private bank but across the investment bank and infrastructure as well. I think it's fairly clearly from page 85 that it's actually affecting all of the expense lines and both in terms of direct comp and in non-compensation side.

Is that helpful?

Operator

Thank you. Your next question comes from the line of Kian Abouhossein at JPMorgan. Please go ahead.

Kian Abouhossein – JPMorgan

A few questions. The first one is related to, coming back to slide 30, risk-weighted assets. Just wanted to see if the AVA regulation or /PVA, whatever you want to call it, is already in your numbers, because it's not stated in your annual report or if there's any adjustment that might come for that regulation. And secondly, regarding risk-weighted assets on securitization, the increase in the risk weightings, is that related to the consultation document, or is this related to something else, and consultation document, when finalized, still will have an impact on risk-weighted assets for securitization? The second question is relating to staff numbers. In the IB you've reduced staffing, at 19,500. Just wanted to see if you could tell me how much is strategic or non-strategic. And secondly, should we expect a material increase in the third quarter, as you normally have new, younger recruits coming in? Or should we expect a continuous decline? And the last question is regarding wealth management margins. Just very briefly, when you say trough, potentially, by the end of the first half, should we assume there could be actually an improvement in them? Or is it more that the run rate, assuming interest rates are unchanged, will be at the same level?

Brady Dougan

So when you’re referring PVA changes you’re referring to the potential valuation adjustment or the issue which popped up, which was funding valuation adjustment which I think was an issue which you may have seen from some other banks late last year Kian.

Kian Abouhossein – JPMorgan

It's the PVA, which is now called, I think under EU rules, additional valuation adjustment, but the same thing as a PVA, yes.

Brady Dougan

Yes I mean I think I can’t really comment on the PVA and that’s normally an internal capital model adjustment. The FCA issue is something that I think is certainly something we continue to look at. We’re not convinced it's observable in pricing. But the PVA, I think is a local capital reduction but we can get back to you on that one but I don’t think we’re expecting anything in terms of that because I think you’re referring to the ECB and PRA’s requirements for PRA actually for this issue.

Kian Abouhossein – JPMorgan

I think your peer across the street is adjusting for it, that's why I was just wondering if you're making adjustment or not.

Brady Dougan

Can’t comment. I’m afraid, sorry. And certainly we do include a PVA within our subsidiary accounts in London because it's a PRA requirement but that’s not something I’m aware for the group. In terms of the short securitization rules we will not change on the basis of a consultation paper. We change on the basis of final requirements, so it was a change in the treatment of short securitization positions. I think it's an industry wide thing.

In terms of the head count for the investment bank, firstly I just make a general point which is there isn't a great deal of correlation between headcount in the investment bank and cost in the investment bank. For two reasons you’re looking not just at direct headcount of the investment bank but also allocate headcount. So you’re seeing for example, our IT and operational staff as well as our direct office traders as well. So it's a combination of factors in that.

And I think you know that we have been looking quite a lot offshoring recently so that will also change the cost profile. The second thing which I think probably is -- I appreciate we have a very successful mortgage servicing business which also includes quite a lot of headcount which is I would say not that high cost. So that will also distort the numbers and then as you say yes we probably will see some pickup. We would have the normal campus class that comes in the third quarter but I don’t think any of this is going to detract from the investment bank savings basically increasing back towards the target levels we expect to see over the next two years.

And then your final point really was on wealth management, gross margins and net interest income. Certainly from the point of view of the replication portfolio we have reached a trough in that in the summer and it's basically linked to the curve 18 months out. So if you look at the curves 18 months ago you can see that’s basically when interest rates actually troughed. Now they went up a bit and going down a bit since then, the answer is we should see some increase in net interest income from the replication portfolio. Clearly whether what that does to the total interest number will depend on how much lending we do and how big our stable deposits are. For example, if they were to increase because people move money back into cash that would probably negative for overall gross margin and positive for net interest income, clearly if people moved away from cash that will be negative in interest income but probably good for overall gross margins.

But on the peer point around the component of the net interest income that comes through our replication it reaches its low point in the summer and it should increase moderately there afterwards. How much increase will depend basically on long term interest rates and where they go over of course the next 18 months. I think as we said before one basis point parallel impact is about CHF500 million interest income. Unfortunately we’ve not seen an increase anything like that still.

Kian Abouhossein – JPMorgan

That's very helpful. If I may, just one more follow-up? On the 19,500, can you also give an indication how much of that is of the staff numbers in IB is strategic?

David Mathers

Sorry not directly, it would be a difficult calculation to get to because -- yes that’s the direct staff, that would be relatively straightforward to get but the infrastructure is, you’ve got allocated cost within that basically and lot of the infrastructure for the nonstrategic unit is using people elsewhere in the bank to actually support it. So it will be a quite complicated sort of allocation and calculation.

Operator

Thank you. Your next question comes from the line of Stefan Stalmann of Autonomous. Please go ahead.

Stefan Stalmann – Autonomous

I have three questions, please; first, subsidiarization. Are there any updates on any of the moving parts exactly? For instance, the Swiss subsidiary that set up their capital requirements in the Swiss subsidiary, et cetera. Also related to that, do you expect actually tax impact from that as you set up these slightly different corporate structures? Second question, going back to the question of compensation accruals in the investment bank. Your slide 43 disclosure suggests that, in this quarter, you have accrued, or you have accrued for variable compensation of CHF538 million. In Q1 last year, it was CHF447 million. So you've actually increased your variable expense accrual by about 20%, while revenues were actually down. Is it fair to say that this delta of around CHF100 million year on year reflects largely your change in bonus accrual methodology in the investment bank? Thirdly, and lastly, I should probably know this, but when did you move to 11% CET1 as a target, and when do you want to achieve this by? Thank you.

David Mathers

So taking those in order in terms of the Swiss subsidiary. I mean that’s our program as you know we have been working on now for about a year and we announced obviously in November. It's expected to be live in about 2.5 to 3 years’ time, so that’s when it will actually start operating as an entity. I don’t anticipate any particular change in the group’s capital requirements as a consequence of that so I have no particular issues there.

In terms of the tax rate and we do think at the moment there could be some negative drag from the subsidiarization structure, actually more related to the AHC structure than the Swiss legal entity structure. However I think at the present time I think in terms of our current planning we expect to be able to mitigate most of that and candidly probably in the contracts of things that affect our tax rate, the most important thing is actually the balance between how much money we earn in Americas where the tax rate is around 40% and how much we earn elsewhere which is much lower, you know 20% in the UK for example.

So frankly the geographical mix of our earnings is likely to swamp any adverse impact from the change in terms of legal entity structure of the group. But it is marginally negative but not much so 1% type thing but as I said we will be working to actually mitigate that.

Brady Dougan

But also Stef I would just like to add, I mean we announced this legal entity plan, structure late last year and in our view this is going to be a major issue for the entire industry to figure out to how to rationalize their business across all the different regulatory jurisdictions that they operate in and the fact that we had a clear blueprint in one that we’re executing on as David said is something I think is a major achievement and the fact I’m not sure, I don’t think I’ve seen any other anybody else layout that blueprint. I think this is going to be a big challenge for the industry as a whole and the fact that we have a blueprint I think it's something that’s actually quite good but go ahead David.

David Mathers

And then the final point really would just be on the comp accruals. Yes you’re correct and the change in first quarter CV accrued is respect one basically the change in terms of the portion we’re actually allocation to the first quarter as opposed to future quarters and clearly that’s a forecast et cetera, et cetera but it's a high proportion than we will take under the methodology we had a year ago and two as I said before and I think we’re trying to move towards a more even balance of cash with deferred compensation. I think mainly because it obviously high levels deferred compensation does lead to a high fixed cost going forward. So those are the two primary drivers in terms of the year-on-year comparison.

And 11% I think we announced that actually in the third quarter but perhaps my colleagues can correct me but I think we had 11% as a CET1 ratio at that point.

Stefan Stalmann – Autonomous

I was still under the impression that you're targeting a Swiss core ratio of more than 10%, which is what the annual report says. I may have missed that.

David Mathers

I mean the regulatory requirement in Swiss you’re correct is obviously 10% in terms of CET1, 3% in terms of high-trigger CoCos, and then around 3.66% in terms of low-trigger CoCos. I think in the third quarter we said that we intended to move to around 11% level to provide about 1% buffer and particularly against things such RWA volatility because I think you know this some of the RWA calculations are pro-cyclical in the event of market volatility. So that’s kind of a sort of guidance in terms of where we would like to be. It's not a regulatory requirement, it just provides a guidance as to where we expect the buffer.

I think prior to that, I think we talked around 10.5% but I think we moved that up to a 11% in the third quarter not as a strict legal requirement but as a working buffer.

Operator

Thank you. Your next question comes from the line of Daniel Zulauf of Berner Zeitung. Please go ahead.

Daniel Zulauf – Berner Zeitung

I have three questions. The first is about the Forex cartel. You have said that this investigation by the Swiss authorities was damaging for the image of Credit Suisse. I was wondering what measures you are taking in order to quickly shed light on the role of Credit Suisse in this possible cartel. The next question is about the provisions you have taken recently; judging the last year's result, I guess it will be not easy to explain this quite weak last year's net income to the shareholders and especially also in relation to the fact that compensation of the management executives have increased in this year. I would like to invite you to explain a little bit on this. In my view, it's a contradiction. And lastly, I would like to have an assessment from you regarding this New York inquiry which is, apparently, getting more intense. According to reports today, I understand that this inquiry is being expanded over the private banking services. I would listen to your assessment with regard to this inquiry. Thank you.

Brady Dougan

I think on the FX matter, I mean I guess in general just to sort of reiterate what we have been saying. I guess the FX matter has probably been, it's probably been sort of going on for almost a year now I think in terms of various regulators and different bodies looking into the practices in the FX markets. I think as you know, we actually -- we were never really that large of a player in the FX markets. In addition we have obviously taken a pretty close look at the businesses and we have also had a number of obviously increase and we have been cooperating in a number of different entities around the world in terms of the business and so far we haven't seen any material issues in our business.

So in general we feel like we don’t have at least -- so far we haven't found any material issues there, so I think the issue as you mentioned of the WICO [ph] investigation that was announced here. I think obviously we’re going to corporate with that and we’re going to do just like we do on all these things, we will cooperate closely and provide whatever information we can.

I think our reaction to that was just somewhat a result of the fact that I think they said that they had been looking into it for nine months before they announced this sort of inquiry and we haven't had a single contact with them over that period, so they would never talk to us, they never asked us for anything. So I think that was -- I think we were surprised to see that come out in the way that it did particularly since we didn’t see any issues and we had no contact from them but obviously they obviously have a right and duty probably to look into any of these issues and we will cooperate fully with them and we will see where it ends up but so far we don’t have any indication or any issues and I think probably as you’re saying in terms of what we’re going to do, I mean I guess all we can do is wait and hope that the investigations and this investigation turn out the way that so far everything else we found has which is that we don’t have any issue. So that’s our hope.

With regard to the issues around the provisions that were taken in the fourth quarter, I guess the way we look at it is, we think it is helpful and important to try to address some of these legacy issues, some of which is you know are from a long time particularly the cross border private banking issues are pretty old at this point. I think actually addressing those and moving on is something that we think is a right thing to do for all concerned and that’s really -- obviously we’re working hard to try to do that and actually think that as you say in the sort of subsequent to the end of the year we made some good progress on a couple of areas the FHFA and the SEC issue around cross border which we then because the accounting rules had to actually include back in the fourth quarter results.

So we had no choice around that, that was really what we had to do but we think actually that progress is good. Even with the impact of these additional provisions the reported net income for the firm is up substantially 2013 over 2012. So I hope that people will, A, recognize that I hope our shareholder would recognize that and also you know will recognize we’re trying to move ahead of some of these legacy issues and get them behind us. I mean I think we have also done a pretty good job of so far, knock on wood avoiding any of the new issues that have been out there. LIBOR we have had no issues, I believe that also on the FX thing as I said I have sort of already outlined that so I hope that’s also recognized and I think in general on the compensation front for the firm as a whole but also for the management team we have I think we tried to be pretty state of the art in terms of the structure that we have laid out in terms of making sure it's aligned, and making sure we have instruments so that management is clearly very much aligned with the shareholders and there is a lot of transparency on it.

So I hope that will be recognized as well and overall as you know for the whole bank total compensation was down year-on-year even though the results were up quite a bit and I also think total executive board compensation was actually down year-on-year. So all those I think are facts that probably need to be incorporated in people’s thinking about it.

I think in terms of assessment on the New York inquiry I think it's -- there is activity there, we’re obviously we’re providing information and working with them. We will continue to corporate and do that. It is with regard to the cross border issue, so again it's these are issues that are have been -- we have had ongoing issues in terms of the SEC which have been resulted and the DoJ for many years now. So I think it's around similar issues but we will obviously see the New York state will determine what they want to look into and how they want to look into it.

I think at this point I think it's just very early in the process and we will cooperate it with them and we will see where it goes but again I think we have been pretty clear about the fact that we had people who violated our policies and probably did things they shouldn’t have done in the past but I also think we have done a very good job of cleaning up the business, fixing it and making sure it's a compliant business going forward and I’m confident that over the past five years we have done a huge amount of work to make sure we have a compliant business and I feel pretty good about that.

But obviously we have to deal with these issues and we will do the best we can. They are obviously difficult issues, they are very complex issues and they involve the government to government issues. They are broader industry implication so they are not easy to resolve but we will continue to work as hard as we can to get resolution.

Operator

Thank you. Your next question comes from the line of Jon Peace of Nomura. Please go ahead.

Jon Peace – Nomura

I had a question about your dividend plans. The first is for 2014. Is there any subtle change in message around the dividend? I think, Brady, you said at one of the last public forums that you thought last year's dividend provided a base for future progression. Today, you say that the dividend this year should be at, or above, 2013. I'm just thinking, with some of the RWA inflation, the new 11% target, perhaps the intentions to retire more Claudius, we should just lower our dividend expectations this year to be flat and then see where we go with the markets. And then, as we think to 2015, most banks these days have a payout plan, a specific payout target, people own asset managers for the dividend potential. How do you think about your long-term dividend payout? Thank you.

David Mathers

So I think firstly just a few points really of clarification, I think firstly in terms of Claudius we redeemed the first tranche last December and that was done. I think you know in February we obviously pointed out that it wasn’t fully regulatory compliant and that obviously led shortly there afterwards to actually launching a tender for the remaining Claudius 2 tranche to which I think there was 93% acceptance and we actually then redeemed the rest on the 18th of March but I didn’t think Claudius really has any direct relevance to our dividend decisions for 2014 but it's kind of gone basically and full stop really in that sense.

I do think 11% is not new and it's intended to be new, it was a plan in fact we put in place in the third quarter of last year and that doesn’t actually change. And I think therefore you know the bottom line I think in terms of what we have said which is that is our intention to -- we understand how important this to our intention to make cash dividends at or above 2013 levels. I think it's just the rewording what we said before around the 2013 as being based it's important to us in terms of what we pay to our shareholders or we recommend to the shareholders to be paid in that sense. But Brady do you want to comment beyond that?

Brady Dougan

Yes I would probably just say it's simple I think it's I don’t think there is any change. So in terms of an ultimate sort of 2015 our payout target, as you know I mean something that people have been sort of raising and asking about it. It's not something that we have laid out at this point. So it's obviously something that we will continue to think about but at this point.

David Mathers

Yes. Although I think the mathematics though should be relatively clear which is that we have laid out a long term target for risk weight assets 250 million, leverage exposure of a trillion. That we’re going to limit the amount of RWA and therefore capital usage and the investment bank the level we had last year and therefore we will generate significant net cash debt for our shareholders at that point.

In terms of usage for that given more limiting what we actually invest in investment bank, it really comes to how much we choose to grow the private banking business. I think the lending initiative's got off to a great start but, as we said earlier basically 3.4 million lending that doesn’t actually require that much risk weighted assets. So I think we would like to see the capital usage go up for the private banking business obviously commensurate with maintaining mid-30s type return on capital which is our target for that business.

But I think it's inevitable therefore, we will end up with surplus capital above what we can use in the private banking division and given that we have said we’re going to cap what we actually have in the investment banking division. I think that does imply that we should be able to generate significant capital both to reach our 11% target but also to I think provide appropriate returns for our shareholders. Is that fair?

Jon Peace – Nomura

Okay. Thank you.

Operator

Thank you. Your next question comes from Jernej Omahen of Goldman Sachs. Please go ahead.

Jernej Omahen – Goldman Sachs

I've got two clarification questions left, and then two questions on a slightly different topic. So the first one, David, can you just please explain the deferred tax asset reduction in, you mentioned the change in New York State tax, and the impact that has? I definitely missed that, so if you can just walk us quickly through how that works? And then, going back to the very first question which was asked on this call in relation to the high frequency trading, I think the question that Huw was asking is what proportion of your equity revenues that is today. Can you give us a sense of what that is? I think the sense in the market it is anywhere between 5% to 8% of your total equity revenue, but can you update us on that? And then the third and the fourth question would be on the leverage ratio. You're at 3.2% fully phased Basel III, and you're at 3.7% Swiss and the Swiss requirement is 4%; the U.S. went to 5%. And I think the Chairman of the bigger Swiss bank -- or, sorry, the Chairman of UBS seemed to suggest that he finds it very likely that Switzerland will follow the U.S. on that topic, if you could just comment on that? And, finally, on Lombard loans, I think it's a good thing that they are coming back because it tends to be a high return product. Can you just give us a sense what the proportion of -- or what the amount of outstanding Lombard loans was in 2006/2007 and where it is now and where you think this could go? Thanks a lot.

David Mathers

So I think there is two points really, firstly just under IFRS or U.S. GAAP for that matter is the same in both treatment. We obviously have tax losses in U.S. and other locations and both tax losses create defer tax asset depending on the tax rate that’s prevailing at that time. If that tax rate is substantially reduced that means the rate at which we can capitalize that tax rate has to come down and therefore you’ve to write-off that deferred tax asset proportionate reduction in the tax rate through the face of your P&L.

Now the New York state on the 31st of March reduced their relevant tax rate I couldn’t quote the numbers off my chart but it's the order about 1% or 0.5%. As a consequence the obviously the capitalization rate dropped and that resulted in a write-down of deferred tax of 151 million. So that was signed I think by the governor on the 31st of March right at the end of the first quarter therefore it's a first quarter relevant statistic

Jernej Omahen – Goldman Sachs

David, what's that as a percentage of total DTAs you have in the U.S.? What was the percent write-down? Don't worry.

David Mathers

Yes I think if you look at the other U.S. banks that have already reported I think you will see both banks have also taken similar write-downs that are deferred tax in their numbers and the headlines as well. So it's not unusual in that sense. We could get back to you on that actually it's not a potential [ph] number.

Jernej Omahen – Goldman Sachs

Yes, sure. Thanks a lot.

Brady Dougan

I think on the high frequency trading I mean to be honest with you I don’t have, I don’t even know if we would know how to answer the question of what proportion of our revenues is actually high frequency traders. I would think it's extremely low. So I would think it was relatively immaterial. You’re talking about our automated execution business generally which is obviously the vast bulk of the volume and that is from normal users of it. I think probably all electronics trading and equities is probably something like 15% to 18% of our total, the total revenues in that business.

Jernej Omahen – Goldman Sachs

So of the CHF4.8 billion in equities, yes? The run rate for equities this year is CHF4.8 billion and last year was CHF4.8 billion, so you’re saying…

David Mathers

Around last year’s number. Yes, so that’s total -- that's all of our electronic execution for all customers, for every customer. That’s all everybody, so you know as I say it's I would think -- I don’t even know if we can -- the question it's one of things it's a bit of a misnomer is that I’m not exactly sure how you exactly define a high frequency trader. So there is lots of varying definitions of what that is. But for our whole electronic platform that’s what it would be and obviously that’s an increasing proportion of how all business gets done in equity. So I think the HFC portion would be I would say de minimis.

Jernej Omahen – Goldman Sachs

All right. Thanks a lot.

Brady Dougan

And then on David you want to address the?

David Mathers

So just to put it in numbers, I think in terms of different ratios so as that at the end of first quarter at BIS total capital leverage ratio was 3.8% and that is calculated on a look-through basis. I think the number you’re referring was the BIS Tier 1 leverage ratio which was 3.2%. But our total capital ratio on a BIS basis is 3.8%. Actually our Swiss total capital ratio is marginally lower 3.7% and there was a marginal difference which is the Swiss treatment is slightly harsher actually than the BIS treatment. So those were the two starting point numbers and that’s clearly based on 42 billion of total Basel effective capital, so that’s CET1 plus CoCos and if you are talking about Tier 1 that’s based on 35.9 billion of et cetera, et cetera. Now in terms of where we go from here I think there is probably two points to make. Firstly as we said 11% as a CET1 target so everything else being equal that were about 2.5 billion to our CET1 basis so that would get you about 44.5.

I think we have been clear that it is our intention to complete our CoCo issuance during the quarter of 2014 which will probably involve about another 2 billion or so in terms of issuance plus minus basically. So that would put us at around about the sort of 46 billion in terms of total Basel effective capital and against a 1 trillion leverage target that would give us about 4.6% as being the kind of as you might say long form state in terms of that.

So I think that clearly isn't that far from the sort of numbers you talk about under the U.S. rules which is about 5% and my understanding which may be incorrect is that the proposed U.S. rules are very similar to the proposed BCBS rules. So you’re cutting out some of the regulatory arbitrage we've seen before, it's going to be a common approach in that sense.

So that’s kind of mathematically where we’re. I think in terms of the Swiss debate, I don’t think we can really comment on what other individuals have said. I do think the debate is still very much heading in the GLAC approach as we talked about a couple of quarters ago that essentially the growing concern, loss absorbing capital ratio which will be a requirement for Swiss bank and in fairness this is an FSB proposal so it's not just a Swiss proposal to have a certain mandatory requirement in the terms of amount of available senior unsecured debt. They actually have an issuance.

Now at the moment basically if you put that together with that sort of 46 billion that would probably be something in the order of about sort of 90 billion in terms of the amount of gone concern loss absorbing capital we actually have on that definition. The denominator for the GLAC is unclear, it might be total exposure, it might be on balance sheet. Clearly if it was on balance sheet then on that basis we would be around the 10% mark already in terms of our GLAC requirement if it was total exposure then I guess it was that 9%.

So I think that just puts the numbers in context and we will see where the debate goes but I think the GLAC concept I think is more fundamental than leverage ratio because it does actually formally enshrine bail-in senior debt as part of the capital structure of the banking in that sense.

Jernej Omahen – Goldman Sachs

Thank you. And just on the Lombard loans?

David Mathers

I can’t give you the numbers, 2006-07 but we can probably get back to you on that. I mean one thing I would point out is Lombard loan penetration is relatively low, it's less than 5% of assets under management at the moment even if we look at a ultra-high-net worth it's only about 8% of assets under management. So I think if you think about the potential we have here to actually grow our lending in this space at a margin which I said is in excess of a 100 basis point it's clearly significant and it's something that can be risk managed and deliver appropriate returns.

Jernej Omahen – Goldman Sachs

And, David, just finally now. So on the economics of a Lombard loan, you charge a customer a spread on the loan, then that is treated as a private banking asset under management. So you charge a fee on that, I imagine, plus you expect the customer to transact once they get the cash so you charge that transaction fee as well, right? So the profitability of this product, I imagine, is very high. So if Lombard loans pick up from here the margin should benefit?

David Mathers

I’m not going to comment specifically. I mean I think we have said that it is in excess of 100 basis points. Clearly the pricing will depend on the type of risk actually involved but I think that’s good. What we’re clearly pointing out is that if you’ve a lending relationship, an ultra-high-net worth client then that is clearly part of a much broader relationship you know completely separate from the lending relationship we’re doing other business with them as well.

I think this is also kind of One Bank thing as well because these type of customers are very interested in total bank services. So it drives both our investment bank and a One Bank and I think as we said collaboration revenues is something which was a particular factor in the first quarter.

Operator

Thank you. Your next question comes from the line of Robert Murphy of HSBC. Please go ahead.

Robert Murphy – HSBC

I just wanted to come back to slide 18, on returns in the investment bank. Obviously, you show a return on Basel III capital here, but I'm just wondering how you're thinking about the economic return because clearly, in terms of the tangible equity required for that business, it's the amounts for the RWAs plus deductions. And if I look at Group deductions, tangible equity down to Basel III capital fully loaded is about CHF14.6 billion. Let's just take a guess that 80% is in the investment bank. That would bring the economic return in that business to maybe 8% for Q1 for the whole business. And perhaps even more for the strategic, given that the DTAs obviously have to be supported by profit making businesses. So I'm just wondering how you think about the economic return versus what you're showing on that slide.

David Mathers

Well I think just a tad. I mean what we’re actually showing here is our internal calculation. So we actually gross up RWAs for deduction. So what the business sees essentially is a grossed up RWA number and we take 10% of that and then obviously an average of that and the leverage ratio. So I mean so essentially the business actually sees an economic return whether it comes through as an RWA number or is it grossed up deduction. So it's neutral in that sense. I mean I think clearly in terms of the equity that the bank use, the fact we’re at 10% means that the, it kind of matches that point but internally the numbers were showing here the grossed up because if we’re thinking about internal and that’s we wanted people to think about the total risk they are using as opposed just the one components of it.

Robert Murphy – HSBC

So the deduction you're applying there is relatively small then, right, because the total deductions between the Group and Tier 1 are CHF14.6 billion from tangible equities? If you gross those up, you'd be on nearly CHF200 billion or something for the Group…

David Mathers

I think what you’ve there is the goodwill and the deferred tax, so we look at the bank and we say you are effectively using 280 billion of risk weighted asserts, 28 billion of CET1 and you can see it basically numbers that's effectively what we have. The difference between what is effectively is the regulatory capital we actually used in their shareholders equity it's composed of shareholders equity, DTA and goodwill. The reason that obviously is very confusing in our accounts of course is because you’ve this thing between phased-in and actual look through because what you’re seeing is the actual -- if you actually look at purely as the actual look through you got around about 28 billion or 27.7 billion, 28 billion of CET1 and that’s 10% of the -- we actually applied to the business.

So that obviously excludes deferred tax, pensions and that kind of stuff as you might say, the position risk, operational risk and credit risk within the business.

Robert Murphy – HSBC

Right, but on the look-through you're not grossing up the RWAs?

David Mathers

We’re using the grossed up RWAs.

Robert Murphy – HSBC

Maybe we'll take it offline here. I don't understand the difference between those numbers, but thanks anyway. I don't want to take up time.

David Mathers

I think you’re actually right but the confusion in the external essentially is unfortunately or whatever the phased-in one is when we have to actually report to so you get this kind of -- but when you actually look for it it's actually, it's more so. When we actually gross up then is specific deduction.

Robert Murphy – HSBC

No, I was looking at the phased-in versus the fully phased. I was looking at the tangible equity relative to the Basel III. I do think it's slightly different. Okay, thanks anyway, guys.

Operator

Thank you. Your next question comes from the line of Andrew Lim of Societe Generale. Please go ahead.

Andrew Lim – Societe Generale

First one on the net margin on page 12. I'm just trying to gauge to what extent that's improved due to expense reductions, but also versus the mix effect as you have more ultra-high-net worth clients. Perhaps you could say what the net margin is for ultra-high-net worth clients versus other clients, and how that's changed over the past few years, if not quarters? And then secondly, on Kian's question on all of these methodological changes, it just seems to me that suddenly we're having this proliferation of changes which are inflating risk-weighted assets, whereas in the past banks were allowed to get away with changes that were beneficial. And I'm just wondering what's the regulatory driver for this? Is it the ECB putting pressure on banks across the board or the Basel committee? And is this in the anticipation of the forthcoming Basel 3.5 or Basel IV regulations to come? And then lastly, I think I might have asked this question in the past before, but regarding your returns on capital stack as part of the leverage ratio, it doesn't seem to me that there's any restriction under Basel III or the Swiss regulations as to how much hybrids you can use for the numerator. So what's to stop you from issuing lots of hybrids as part of your capital stack there and really ramping up your leverage ratio in a much faster fashion? Many thanks.

David Mathers

Well I think in terms of methodology changes I mean the I think there is two part, I mean firstly I think as we disclosed in our reports, we did have significant methodology changes actually in 2013. I think people focus on the operational risk add on the 6.9 billion but I think the total from recollection was around about 17 billion. So it's not new in that sense.

What you’re seeing essentially is really at the Basel III methodology actually evolved, you’re seeing a number of consultation papers and also refinements amongst the regulator how they treat certain assets and as that come through you generally see, we have seen some increases this quarter. However it's clearly also true that as new models are actually approved under Basel III you actually tend, you can actually -- sometimes you get increase, so the new M&A model for operational risk. We’re anticipating some significant reductions actually later in this year provided those models are approved which we would expect at that point.

So there is some general inflation yes, I mean 17 billion then and obviously we talked about the increases this quarter as well but I think we will see some contras against in terms of that.

And I think that’s all I can really say in terms of this, I think it's certainly true, that the Basel rules are not necessarily final it's certainly evolving because of the sheer complexity of those and as a regulatory agree their approach.

I think the second point is that we have not disclosed the net margin ultra-high-net worth, we’re not going to do -- I would simply say as we said on many times the pretax margin on ultra-high-net worth business is higher than the average margin for the business and that remains the case and clearly given measure such as we said basically in terms of penetration of Lombard is less than 8% of this group of clients. We obviously have some potential to actually improve that net margin further to the extent we increased the penetration with those type of products basically. I mean I think the mathematics of that margin in the numbers essentially it's a mixture of efficiency and in terms of the gains we have had with the clients, it breaks up in those two components. But I don’t think we’re going to give that margin now in that sense, it is simply higher than that. Clearly, we always look at disclosure in this space and that’s why we gave the lending thing in the numbers, I think it's in that focus but that’s where we’re at this point on this.

Brady Dougan

And in terms of his last question with regards to the capital staff, why couldn’t we just issue more hybrid CoCos et cetera in order to improve the leverage ratio. Are there any restrictions on composition?

David Mathers

Yes there are some restrictions. I mean on the high-trigger CoCos, it's essentially it's a limit of about 3% – 3.5% in terms of that, and on the low-trigger I think there is some further restrictions but we’re probably not there at this precise moment but certainly you couldn’t carry on actually boasting. But there is definitely a high-trigger there is a specific limit, low-trigger I think it's probably the Swiss legal requirement in the sense of that. After that you can issue them but they don’t necessarily get recognized and there would be no limit for us for example to issue more high-trigger CoCos it's just once you get beyond about 3% – 3.5% that don’t get recognized for capital purposes.

Operator

Thank you. Your next question comes from the line of Kilian Maier of MainFirst. Please go ahead.

Kilian Maier – MainFirst Bank

This is a question on litigation. There is no full quarterly report for Q1, but still, if I look at the Q4 report, then you put the number for reasonably possibly losses that are not covered by existing provisions. That was 0 to 2.2 billion when you reported Q4. Subsequently, you took these two litigation charges related to the SEC and the mortgage issue of 275 million and around 500 million. And when you published the full-year report, then the estimate for reasonably possibly losses was increased to 0 to 2.4 billion. So my question would be, what has been driving this increase in the range after you took the material additional provision?

Brady Dougan

I think as you say we obviously the number did go up slightly and as you say and that was after a couple of as you say as the couple of issues were settled, I think all I can say is one there weren’t any major new matters that we added to it. I think it's actually just a again it's always an assessment that we make, it's sort of a conservative assessment in terms of possible sort of losses there and that’s sort of where we came out. So I mean there is not much more than I can say to it actually but there weren’t any major new issues that were added to it and but that’s sort of where our accounting and legal teams came out as when they analyzed the issue.

Operator

Thank you. Your next question comes from the line of Holger Alich of Handelsblatt. Please go ahead.

Holger Alich – Handelsblatt

Just quick one, what is exactly the reason why you can’t publish a full blown financial report for the first quarter? The background of my question is across after the presentation of the results of the fourth quarter you twice reviewed your results especially with the new U.S. tax provision so is that the fact that you didn’t publish a full blown report, a hint that there might come some new corrections in the near term future?

David Mathers

What we decided to do this quarter essentially is to move to the British reporting style, which is what the U.S. banks do. So we’re publishing in a British report now and we will make our full filing with the SEC on around May 2nd, which I think is also slightly early than we used to before but just in terms of practical delivery we haven't completed all the supplementary notes which are required under full SEC filing. And that will be done between now and May 2nd but that’s it really.

Brady Dougan

Yes and as you know I mean this earnings announcement today I guess about two weeks earlier than -- a week and half earlier than what we normally would have done, a week and half earlier than some of the other European banks as you know. So our view is that it was actually probably helpful to get out early to people, what’s a fairly extensive but not the full report as you said and then that obviously follows in early May. So but it is sort of week and half earlier than we normally would have reported.

David Mathers

Yes because our normal, our historic approach was to publish quite extensive report and then there will be an even larger one which actually is filed with the SEC on May 2nd, so we’re now doing the British report which is I think probably more as and more extensive than the U.S. banks then a single report to the SEC as I said on or about May 2nd.

Brady Dougan

But also just to make clear I mean it has got nothing to do with the issue, this was a long planned change in our reporting style, so it has nothing to do with any other issues. And again the idea being that this is hopefully this is more investor and analyst friendly in the sense that you get the information sooner and hopefully you know it's helpful. But thanks for the question, next question.

Operator

There are no further questions. Please continue.

Brady Dougan

Okay. Well I just want to thank everybody for calling in and for your questions and for your attention to the first quarter results and thank you very much.

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