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Executives

Caroline Stewart - Head of IR

John Cryan - CFO

Analysts

Jon Peace - Nomura

Kinner Lakhani - Citigroup

Fiona Swaffield - Execution

Kian Abouhossein - JPMorgan

Jacques-Henri Gaulard - Autonomous Research

Matthew Clark - KBW

Derek De Vries - Bank of America Merrill Lynch

Huw van Steenis - Morgan Stanley

Christopher Wheeler - Mediobanca

Jernej Omahen - Goldman Sachs

Beat Soltermann - Swiss Public Radio

Robert Murphy - HSBC

UBS AG (UBS) Q3 2010 Earnings Call October 26, 2010 3:00 AM ET

Operator

Good morning. I am Stephanie the Chorus Call operator for this conference. Welcome to the UBS Third Quarter 2010 Results Conference Call. Please note that for the duration of the presentation all participants will be in listen-only mode and the conference is being recorded. After the presentation there will an opportunity to ask questions. (Operator Instructions).

At this time I would like to turn the conference over to UBS.

Caroline Stewart

Good morning, everyone, and welcome to our third quarter results presentation. My name is Caroline Stewart and I am the Head of Investor Relations at UBS. This morning, our Chief Financial Officer, John Cryan will take you through the results, and then we’ll be very happy to take your questions.

Before we get started, I’d like to highlight this slide, which contains our cautionary statement with regard to forward-looking statements, and I’d ask you to take some time to read it.

With that, I’d like to hand over to John.

John Cryan

Good morning, everyone and welcome to the webcast. It’s my pleasure to take you through the details of our results for the third quarter of 2010.

We made a bottom line net profit attributable to our shareholders of CHF1.7 billion or diluted earnings per share of CHF0.43, about half of this amount comprises the net tax credit, which I’ll cover in more detail later. All of our businesses report lower revenues quarter-on-quarter as a result of lower levels of client engagement. The results of most of our divisions were also heavily impacted by the 9% fall in the value of U.S. dollar against our reporting currency.

Our overall invested asset base held up despite the effects of heavy foreign currency depreciation. This is in large measure thanks to strong market performance. We further strengthened our capital base and reported Tier I ratio of 16.7% notwithstanding having called the $1.5 billion hybrid capital instrument.

Our core Tier I capital is CHF29.6 billion at the end of September, representing 14.2% of risk weighted assets, as calculated on the Basel II basis.

Our annualized return on equity year-to-date is been 17.6%, well within the range of the medium term target we set last year.

This waterfall chart shows the principle quarter-on-quarter changes in our net profit attributable to shareholders. The narrowing of our credit spreads over the quarter reversed some of the owned credit gains in Q2 with an aggregate delta of almost the CHF1 billion.

Our operating income, excluding owned credit and credit loss expenses, nevertheless fell quarter-on-quarter by over CHF1.6 billion. This was principally as a consequence of the unusually low level of client activity. To mitigate the impact of lower revenues, we cut our expense base.

We’ve recognized a net income tax benefit for the quarter of CHF825 million. The principle component of the tax line is a credit to income of CHF882 million from the re-measurement of the deferred tax assets recognized on our balance sheet in respect of tax losses incurred in previous years in United States of America.

This was partly offset by amortization of deferred tax assets held against prior period losses recognized in Switzerland, net of the recognition of the deferred tax revaluation benefit that I mentioned last quarter. The net amount of the two items relating to Swiss tax was a charge of CHF272 million.

We were also able to recognize an aggregate credit of CHF246 million as a consequence of agreeing previously opened prior year tax positions in a number of jurisdictions.

And finally, we incurred the smaller net charge of CHF31 million largely representing current tax payable, again, in a variety of locations.

The recognition of deferred tax assets through the P&L is governed by a standard that requires annual pro-rata temporis recognition. So, for example, the $900 million credit we took in Q3 in recognition of U.S. tax losses represents three quarters of the overall amount of $1.2 billion. The remaining $300 million will be recognized in Q4 together with the final installment of the other deferred tax re-measurements for the year. As a consequence, I now expect that the overall effective tax rate for the Group for 2010 will be close to zero.

I’ll take you through each of the divisional results in a moment. Overall, Wealth Management’s results were unsatisfactory. Retail and Corporate and Global Asset Management both reported relatively stable results. And Wealth Management Americas and the Investment Bank showed operating losses.

At Wealth Management Americas, we’ve completed our restructuring work and there are now signs that the division can return to sustainable profitability. The Investment Bank reported a loss mainly due to low client-driven revenues and the negative impact of own credit effects as our credit spreads tightened across the board.

The corporate center results reflect a gain of CHF293 million on the valuation of our option to acquire the equity of the SNB Stab-Fund.

This slide shows divisional pre-tax profit year-to-date compared to the same period last year. You’ll see that all the divisions have improved performance year-on-year, though restructuring work has weighed on Wealth Management Americas, which has not yet returned to profit. The standout improvement is clearly in the Investment Bank which has reported the year-on-year net increase in reported profit of almost CHF8.5 billion.

We brought expenses down by nearly 6% quarter-on-quarter on an adjusted basis. We cut personnel expenses by 10%, as we reduced our bonus accruals to reflect lower revenues. Non-personnel expenses increased by 4% on an underlying basis, largely reflecting increased litigation charges, the cost of re-launching the UBS brand and our sponsorship arrangement with Formula 1.

We expect to meet our target for 2010 of keeping our fixed cost base below CHF20 billion, but it’s fair to say that we experienced a helpful tailwind in Q3 from the heavy depreciation of the U.S. dollar and the British pound against the Swiss franc.

Moving on to the divisions, Wealth Management and Swiss bank’s revenues fell 6% on the second quarter result. The principle driver of the fall was the 19% decline in trading related income and brokerage fees, reflecting exceptionally low levels of client activity, particularly over the summer holiday season.

Recurring income was also down. Fees charged on the balance of invested assets declined. This was because billings for a particular period are generally based on asset balances at the end of the prior period. The fall in asset values at the end of the second quarter and the impact of the strengthening of the Swiss franc against the U.S. dollar both had an adverse impact.

The overall 7% decline in revenues in Wealth Management was accompanied by a 3% increase in expenses. The increase in expense was, however, largely because we took a lease termination charge against the Curzon Street premises in London and Wealth Management was allocated a significant proportion of the cost of our branding and sponsorship initiatives.

The net new money picture continued to improve. We saw good inflows from our global ultra-high net worth client base and from clients in Asia, and net inflows in the quarter in the Swiss domestic business. However, we continue to see net outflows from our international businesses, though these declined to CHF1.1 billion from 3.9 billion in Q2.

The gross margin in Wealth Management slipped to 89 basis points per annum compared with 95 basis points in the prior quarter. This was a consequence of two factors. First, the gross margin in Q2 was boosted by the decline in the balance of invested assets over the quarter, whereas there was no impact from this effect in the third quarter, this effect caused around one-third of the decline in the gross margin. Secondly, transaction based income, for example, brokerage fees, commission income and brokerage related foreign exchange trading income was unusually low, even for the summer months.

Improving the profitability of Wealth Management remains a key priority. We continue to make underlying progress in reaching our medium term target of 100 basis points of gross margin. Pricing discipline had a positive effect on underlying revenues and we also slightly increased our Lombard lending balances.

The balance of invested assets at the end of the third quarter was in line with its starting point at the beginning of the quarter. Good market performance, the 2% appreciation of the euro against the Swiss franc, and net new money inflows were mostly offset by the 9% decrease in the value of the dollar against the franc. In Wealth Management, 33% of invested assets are denominated in euros and 31% are in U.S. dollars.

In the third quarter, we saw a slight increase in client advisors numbers. At our forthcoming Investor Day, we will be providing you with more information on the impact of our hiring and training initiatives for client advisors.

The Retail and Corporate segment turned in another steady performance in the third quarter. Business volumes fell slightly over the summer, reflected in 3% lower revenues. We continue to experience pressure on interest margins from the flat yield curve. The segment continued its excellent credit track record, with minimal credit losses recorded in the quarter. Expenses were held steady, so the lower revenues contributed to a slight deterioration in the cost income ratio to 53.4%.

Last quarter, I mentioned some concern about house price inflation in certain regions, especially around the lakes of Geneva and Zurich. To put this context, this slide provides details of the spread of loan-to-value ratios in our Swiss Residential Mortgage book. Around 99.5% of the residential mortgage portfolio has an LTV below 80%. LTVs are reassessed regularly and we run stress tests on negative equity in the portfolio.

We currently calculate that a 20% fall in the value of single and multiple family homes nationwide would result in borrowers facing negative equity in a gross aggregate amount of only CHF700 million. In addition to high over-collateralization levels, debt servicing levels remain extremely high and arrears remain low.

Revenues in Wealth Management Americas fell by 10% on the second quarter, eight percentage points of which was attributable to currency translation effect. In dollar terms revenues fell 2%.

The factors that caused the decline in revenues were the same as those impacting our other wealth management operations. Account billings are based on the previous quarter’s closing invested asset balance which had fallen on market performance in June.

Recurring income was 63% of total operating income, in line with the prior quarter. Non-recurring income fell 10% on low transactional revenue. The gross margin decreased seven basis points per annum to 77 basis points largely due to the 10% fall in revenues on an average invested asset base that declined by only 2%.

Approximately four basis points of the decrease were attributable to currency translation effects while the first time inclusion of CHF21 billion of retirement plan assets managed by, but held in custody away from Wealth Management Americas, lowered the gross margin by a basis point.

Expenses fell 11% quarter-on-quarter, excluding ForEx effects the decline was 3%.

The third quarter includes a provision of CHF78 million, due to an unexpected result in an arbitration case.

The numbers of financial advisors increased slighting in the quarter, on the back of our recruitment programs.

Net new money inflows were CHF0.3 billion, an improvement from outflows of CHF2.6 billion in the second quarter. For the third quarter in succession, we recorded positive same store net new money and including interest and dividend income, net new money was CHF 4.6 billion.

Revenues in Global Asset Management fell 9% on Q2, expenses fell 11%, all of the reduction being in personnel expenses. In both cases, the depreciation of the dollar against the Swiss franc was the most important factor.

In the second quarter, we saw net new money inflows of CHF3.4 billion, but these dropped to almost zero in the third quarter. Net outflows from our Wealth Management businesses fell to CHF1.4 billion from CHF7.5 billion of outflows in Q2. Inflows were boosted by the transfer of investment management responsibility for CHF2.5 billion of U.S. funds of hedge funds from Wealth Management Americas to A&Q. Net inflows from third parties decreased to CHF1.5 billion from CHF10.9 billion in the prior quarter.

In traditional investments, equities recorded inflows of CHF1.5 billion, mainly into passive strategies. And fixed income saw inflows of CHF2.3 billion, mainly into U.S. short duration bonds and into passive global bonds. Invested assets fell by CHF2 billion to CHF567 billion, primarily due to the negative currency effects, mostly offset by positive market movements. The overall gross margin was 33 basis points per annum, down 3 basis points from Q2.

The IB reported the pre-tax loss of CHF406 million for Q3 compared with a profit of CHF1.3 billion in the second quarter. The biggest single factor in the deterioration was the impact of holding certain of our financial liabilities at fair value. In the third quarter, we’ve recognized a charge of CHF387 million from the tightening of our debt curve compared with the gain of CHF595 million in the second quarter.

In credit and emerging markets bond trading as well as in the M&A and DCM, we saw improved results quarter-on-quarter but these were more than offset by weaker performances in foreign exchange, rates, cash equities and equity derivatives. In response to weaker markets we cut personnel expenses. Change in personnel costs quarter-on-quarter was also impacted by the charge to the IB results in Q2 of CHF228 million for the U.K. Bank Payroll Tax.

The third quarter was characterized by low levels of client activity, particularly in trading. The example we show here is the volume of shares traded on the New York Stock Exchange. It was also marked by lower levels of volatility than those we experienced in Q2. This was the case in both equities and FX and these conditions underpinned the disappointing performances of FX, cash equities and equity derivatives.

Our average one day 95 VaR increased by just over 20% in the quarter to CHF58 million. The increase was largely driven by increased credit spread risk and some increase in interest rate risk. The preponderance of credit risk in VaR reduced the diversification benefit. On a Basel II basis the increase in credit spread risk fed through to a significant increase in market risk risk-weighted assets, albeit from a low base. In the quarter, we continue to manage down our legacy risk positions at little or no cost to the bank.

Equities had a weak quarter. Cash trading revenues fell significantly on low levels of client orders. The experience in derivatives trading was similar, though in equity-linked we took mark-to-market valuation gains as sentiment in the sector improved. Prime brokerage recorded lower levels of securities financing after a strong second quarter. ETD commission levels fell in line with client activity.

Revenues in FICC as a whole fell significantly quarter-on-quarter, partly attributable to a decline in revenues in FX and rates. Results were also impacted in the FICC other segment, by a charge for un-hedged debit valuation adjustments of CHF0.2 billion and by a significantly lower contribution from our legacy positions compared with their contribution in Q2.

Credit sales and trading had a good quarter with revenues up by over 25%, with a particularly strong performance by the client solutions teams. Client trading revenues increased as volumes and bid-offer spreads improved, especially in Europe.

In macro, revenues fell just to CHF291 million on very subdued volumes and tighter spreads in both rates and FX. Emerging markets saw improved volumes and better results from all markets, especially in domestic market bond trading.

Other FICC revenues were negative CHF127 million compared with positive CHF502 million in Q2. Losses on fair value adjustments from the tightening of our CDS spreads in the quarter were almost CHF200 million compared with a gain of CHF280 million in Q2.

The balance of other revenues was driven by losses on hedges offset in part by gains in our remaining exposure to monoline bond insurers.

Revenues in Advisory and Global Capital Markets increased to CHF583 million. The improvement quarter-on-quarter was more than offset by mark-to-market losses of CHF161 million on hedges against our franchise lending book.

Advisory revenues improved by 44% on the previous quarter notwithstanding a 9% contraction in the global fee pool. We gained market share in ECM this quarter although revenues declined. In DCM, however, revenues were up substantially with strong performances especially in the U.S.A.

Our capital ratios further improved in the quarter. Our Tier 1 capital ratio was 16.7% at the end of September. Risk-weighted assets increased by CHF3.5 billion to CHF208 billion. Tier 1 capital increased by a net amount of CHF1.1 billion to CHF34.8 billion after taking an additional charge of CHF0.5 billion, net of a CHF1 billion reserve, to redeem $1.5 billion of Trust Preferred Securities.

The next first call date for one of our hybrid issues is 26 June, 2011 when a $500 million instrument becomes eligible for redemption. We increased our Core Tier 1 capital over the quarter to CHF29.6 billion. It now represents 14.2% of our risk-weighted assets. We will continue to retain earnings in order to reach our Core Tier 1 capital target range of 45 to CHF50 billion.

With that Caroline and I now have some time to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). First question from Mr. Jon Peace, Nomura. Please go ahead, sir.

Jon Peace - Nomura

Good morning. I just have two questions please. The first is touching your outlook statement, you talk about a pick-up in activity across the bank going into Q4. I realize that it’s very early days, but I just wondered if you could provide a little bit more color as to how strong that pick-up is?

And the second thing was about your net new money flows. You’ve obviously showed a nice trend, a move towards positive inflows, but these can be quite lumpy in the short-term. How confident are you of the momentum behind that and should we continue to see inflows improving going into the end of the year and into 2011? Thanks.

John Cryan

Thanks Jon. You’re right; in our outlook statement today we are giving slightly more positive views on the level of client engagement with the bank. There has been an uptick. It’s not saying very much because over the summer months, the levels of client activity were very, very low across all the divisions. So all we’re seeing is more of a reversion to what we hope is a normal trend. I still think that there appears amongst our client base to be a lack of conviction about the direction in which the markets are moving. So I wouldn’t bank on there being bumper quarter, it’s difficult to say, it’s very early days. But we did want to flag that we not experiencing the malaise that we saw particularly in July and August.

On the net new money front, I’ve tried subliminally to play this down a little bit on the basis that I didn’t want to get too excited by one quarter, particularly as the quarter had in it a couple of reclassifications and also because the quarter is a difficult one to gauge. It’s one out of a number of quarters. We won’t call this a victory until we see a number of quarters of sustainable and much higher levels of net inflows.

We did however want to focus people slightly away from net new money, more back to the balance of invested assets because it’s really that the drives the profitability of the bank rather than the flows themselves although clearly without positive inflows, it’s more difficult to grow the invested asset base. At the moment we are certainly not claiming a victory. It’s not necessarily an inflection point, these flows are very lumpy, as you say, and I’d much rather deliver a number of quarters of performance and then say that we’ve achieved the goal.

What I could say though which is the more positive point is that the work that we’ve done to try to remedy the situation appears to be bearing some fruit and so it’s another milestone on the road to recovery. But it’s just another milestone.

Jon Peace - Nomura

Okay. Thank you.

Operator

Next question from Mr. Kinner Lakhani, Citigroup. Please go ahead.

Kinner Lakhani - Citigroup

Yes. Hi, good morning. Yes, I wanted to ask you two questions. Firstly, on the Investment Bank, just wanted to try and understand how you guys are seeing your market shares across your key sales and trading franchises, so FX, rates, equity derivatives and cash equities. And I’m thinking on a year-on-year basis and maybe more short term on a sequential basis.

And related to that also, could you quantify and maybe explain a bit more the markdowns on non-linear rates positions that you disclosed in this quarter?

And then my second question was on Wealth Management and just trying to understand what your views are in terms of the potential impact of a potential German-Swiss double tax treaty? Thank you.

John Cryan

Thanks. On market shares, I think the market share movements, we showed some on the slide for IBD and the capital markets businesses. I think particularly within FICC and ForEx, there is no doubt that we have certainly slipped in market share. In rates, we never had very much in the first place. That’s a market in which virtually all banks participate. And so I’m not sure we particularly use market share as a determining factor there, but it’s been very low and it’s possibly got slightly lower.

The area where we’ve seen a considerable improvement is in credit, where we had nearly no market share over a year ago, and now we have some market share. I think the general improvement in the FICC division is certainly within the credit businesses. In FX I think we need to pull our socks up a little bit and try and recover a bit of market share which we’ve definitely lost.

On the non-linear rates positions, it’s a very complex area. Pre-crisis we wrote a number of very long-dated, and very, very complex swaps and swaption type trades and those trades are extremely difficult to value. The technology in that market has changed and approaches to valuation have changed and as we try to improve the estimate of the carrying value of those positions, we’ve seen for a few quarters now some markdowns on the carrying value of those positions.

We do continue to try to refine them, but they’re positions that they’re difficult to risk manage, because some of them are very, very long-dated. They’re not particularly pernicious, I’m not worried about the safety of the bank because of them, but they are difficult to value and unfortunately over the past few quarters we’ve seen markdowns.

On the separate subject, and it’s a topic that’s in the press this morning, is this agreement to agree that the Swiss and British governments seem to have struck and the likelihood of a similar arrangement being agreed with the German government. I think it’s too early for us to say what sort of impact that would have on us.

Clearly it will impact us. We’ve already said that we have money in our bank from residents of both the U.K. and Germany. So it will have an impact, but I think it’s too early to say what that impact would be, not least because, as far as I can tell, the agreement at least with the U.K. is an agreement to agree rather than the final agreement itself.

Operator

Next question from Mrs. Fiona Swaffield, Execution. Please go ahead.

Fiona Swaffield - Execution

Can I ask on the Wealth Management Division and the cost base and personnel expenses seem to be up slightly if you take out the CHF15 million in Q2 and obviously, the revenues are down. So could you talk through that?

And also could you remind us of the impact on the P&L from the dollar, maybe particularly in Wealth Management? Would it have been a big negative in the quarter and also at the Group level?

And then on the deferred tax in the U.S. obviously, you said there is a bit more to come in Q4, I mean is there more to go longer term? And is there any kind of feel for what’s driven this? Is it a higher pre-tax assumption than you originally went in with or could you just talk through the dynamics there? Thanks.

John Cryan

Yes, on the Wealth Management cost base, you are right about personnel expenses, they are up. The fact is that there has been a shift in the mix of personnel. We are hiring more onshore Wealth Management staff in more expensive locations. There has certainly been some inflation in the personnel expenses particularly in Asia, where the market for Wealth Management client advisors in particular is quite hot. We are generally recruiting people onshore. As the market shifts from off shore to onshore it is a more expensive proposition. So I fear that that’s a trend, although not a particularly worrying trend, I think, but it will nevertheless mean that there is inflation in personnel costs in Wealth Management going forward.

On the...

Caroline Stewart

U.S. dollar.

John Cryan

The U.S. dollar. On the Wealth Management business, the U.S. dollar has some impact. Generally speaking in the Group, we pay a lot of our most expensive people in U.S. dollars and British pounds and that was the tailwind that I mentioned in relation to our fixed cost base, a lot of people in New York and London. Obviously, we pay expenses in all sorts of currencies, but the dollar and the pound are important ones.

In Wealth Management the dollar is proportionally less important. We have people in Asia where they are paid in currencies that are pegged to the dollar, but Wealth Management in particular is still Swiss franc and euro based as well. So it has something of an impact but less of an impact in Wealth Management and certainly in Wealth Management and Swiss bank there is a much heavier proportion of Swiss franc.

On the deferred tax asset, this is an exercise we carry out around this time every year. It impacted fourth quarter last year and third quarter the year before. So it’s around about this time that we re-measure our deferred tax assets. The increase, as I mentioned, was driven by an amount that we took in Q3 which was actually higher than the net tax credit. And that was calculated in relation to our U.S. taxable profits. And we look at the prospects for our businesses each year. We build a five year business plan, which we sent to the Board for approval. But in the construction of that plan and with our experience year to date, it became clear to us that we were starting to generate a meaningful amount of taxable profit in U.S. and the prospect was that we would be able to do that in the future.

What we’ve done during the crisis is we had applied significant haircuts to the business plans that we produced during the crisis particularly in relation to the IB where in fact we haircut the prospect of making taxable profits in U.S. by 75% in assessing our deferred tax balances.

And in the light of our experience this year, holding that haircut at 75% was no longer sustainable, and so we reduced it to 50% and the impact of that was to require us effectively to re-measure up the deferred tax asset we hold in the US. And that was an amount of about $1.2 billion. We take three-quarters of that for the three quarters to date and $900 was CHF882.

As to whether there is more to come in future, if there were, then we’d obviously have to have reflected that in our re-measurement. At the moment, we don’t have concrete visibility on the future profitability. But I’d have thought next year when we look at the matter again and we look at on a periodic basis, as I said. Next year, if in the context of producing our five year business plan, or just in an annual review of our deferred tax assets, we feel even more confident that we can either reduce the haircut or we have better visibility on future taxable profits in the U.S., then we could write that up further, yes, that’s right.

Hopefully, we’re never in a position where we have to impair it or write it back down again. But we feel fairly confident that the number we have now is the right number in the context. It still implies some sort of model reserve or haircut against the businesses’ view of their own profitability.

The reason for the haircut is there is obviously a degree of risk attaching to future profits. We’re going out to five years in our business plans and also there is little visibility on the legal entities in which those profits arise. So it’s difficult to say whether they would arise in the relevant places in the U.S. But that was the background to that.

Your last question was that was the longer term question on deferred tax assets, yes?

Fiona Swaffield - Execution

Yes, that was it. Thanks.

John Cryan

Thanks Fiona.

Operator

Next question from Mr. Kian Abouhossein, JPMorgan. Please go ahead, sir.

Kian Abouhossein - JPMorgan

Yes. Two questions. The first one is on the IB, if I look at your medium term targets that were given, slide 21, you clearly talked about CHF14 billion of cost, CHF20 billion of revenues, 70% cost income. Now the cost side looks not too far off from your medium target. The revenue side is clearly way off. How should we think, as investors/shareholders, about how you manage costs against the revenues? And in that context, of your CHF3.2 billion of I think deferred comp, variable deferred comp, how much is actually vesting in 2010?

John Cryan

On the revenues in the Investment Bank, I think the message for today is that unfortunately, given the change in the business mix and the focus on client based flow trading, we are inevitably going to see much more volatility in revenues than we would have seen from the business model pre-crisis, where we had a lot of carry-trades that were, at least for a while, earning a positive yield. And so we have to cope with much more variability in the quarterly revenue picture from the Investment Bank.

What we’ve tried to do is make our cost base as flexible as possible and it’s difficult to do that. You’re absolutely right. So what you got to do is, you’ve got to make the base level as low as possible. And that’s been difficult because of the change in the markets, particularly for personnel, fixed personnel costs have increased. So we’ve tried to retain or maintain a cost base that’s as efficient as possible to support the production of revenues that fall within the range of our medium term target, but where there is a variable element which is largely compensation-related. We took over CHF730 million out our cost base in the quarter, but I don’t think we could take that amount further out if we had a further full quarter. So, you are right to focus on the fact that ultimately, we have operational leverage which works against us at times when revenue levels are relatively low.

On the deferred compensation, for last year’s bonus awards, I think we said that there was about CHF1.5 billion of the amount of the award whose accounting recognition was pushed forward into future periods, and we said that approximately two-thirds or so of that would need to be recognized in the first year. So of the prior year’s variable compensation, there’s roughly CHF1 billion or so, a little bit less than that, I think, now, because of the staff turnover, but it’s roughly that sort of number which is effectively therefore a fixed element in this year’s IFRS accounts.

Kian Abouhossein - JPMorgan

And in respect to staff numbers, should we expect a material change from this level and where have you actually hired roughly 500 people?

John Cryan

Well, some of them have been client advisors and we do have hiring programs Q4 is not going to be a big hiring quarter, it never is. It’s not commercially rational to hire people in Q4, because you end up paying their bonus from a different bank. But I would have thought that in Q1, we would see some increase in numbers. We are actually hiring client advisors in all of our asset gathering divisions. We are still, to some extent, building out the IB and particularly in sales and trading, and I think we’ve lost some people in IBD and therefore there will be a little bit of a rebuilding that needs to be done there, particularly in the U.S., where we’ve lost some expertise in some core sector teams. But generally speaking, I don’t think there is a need to massively increase our head count. It’s still pretty much under control. I think, compared with most of our peers, we still run light, but I wouldn’t expect a massive increase in head count over the coming year or so, over and above those points that I just made.

Kian Abouhossein - JPMorgan

If I may, one more question on litigation, page 17 your reports. At what point do you actually record a litigation charge as material and put it in a release like that, what is the kind of quantitative impact that needs to be decided before putting it in here?

John Cryan

Well, there are rules in IFRS about when to take provisions. I think they have to be quantifiable and they have to estimable. And there are special rules sometimes that apply to litigation where, for commercial reasons, we can’t set up, its bad practice to set up a litigation provision, because you’re inviting the other side to take it. But the probable and estimable test is the one that applies.

Kian, Caroline has just reminded me that, in relation to your prior question, I probably didn’t answer the question fully. You asked about the 500 increase in head count this quarter.

Kian Abouhossein - JPMorgan

Yes, and the 450 in the IB...

John Cryan

Yes, apologies. I did write that down and I forgot to answer it. A lot of that is the graduate recruitment season, which is particularly big, as you probably know, in Europe and especially in the U.K. So we had our annual influx of graduates and then we have the apprentices in Switzerland who came on board.

Kian Abouhossein - JPMorgan

Okay. Thank you.

Operator

Next question from Mr. Derek De Vries, Bank of America Merrill Lynch. Please go ahead.

Derek De Vries - Bank of America Merrill Lynch

Thanks. I actually want to go back to couple of the areas that Kian just touched on. First, just very quickly on the provisions for legal risk, and you sort of alluded to this. But that’s run down from CHF1.4 billion at the end of 2008 to CHF1.0 billion in 2009, down to CHF448 million at Q3. So does that mean you’re half as worried about legal risk as you were at the beginning of the year, and a third as worried as you were at the end of last year? It just seems sort of odd given where we are in the cycle and lawyers’ fees and whatnot. So that’s on provisions for legal risk.

Then Kian also asked about the deferred comp and here I think, Credit Suisse gave us some numbers, they said that CHF910 million of their quarterly comp expenses was related to deferred comp and in aggregate, they had CHF3 billion of unrecognized comp expense. I was wondering if you could give us those same numbers?

And then finally, a new question, not to steal all Kian’s questions. On Basel III, you’ve given us very good disclosure on what could happen to your risk weighted assets as well as your common equity Tier 1 capital. I’m wondering what probability you put on further changes to the calculations of that under Basel III, and here I’m thinking specifically of CVA. Do you think it’s possible, as we get to the end of the year, you’ll see some changes in that CVA calculation that could be either positive or negative, but I’m thinking positive here?

John Cryan

Thanks, Derek. On note 14, which is I think where you got your numbers from in your accounts.

Derek De Vries - Bank of America Merrill Lynch

Yes.

John Cryan

The provisions that note is unfortunately not indicative of our expectations, for having to make provisions. The simple answer is, it’s a little bit like bad debt provisions. When they go down sometimes, it’s simply because you’ve written off the bad debt, the provision disappears.

These are provisions that are actually being used and the delta in the third quarter in the litigation provision, it went from 783 down to 448. The lion’s share of that is actually the payment of the final installment of the $780 million fine and charge that we incurred in relation to the cross-border case. So it’s actually using the reserves that we set up and actually paying over the provision. So that’s why that comes down.

Derek De Vries - Bank of America Merrill Lynch

Okay.

John Cryan

On deferred comp, we are under an obligation anyway by the FINMA, at the end of the year, to improve substantially the disclosure we give you on deferred compensation. In fact we will be disclosing it, warts and all, and we were planning to do that only at the end of the fourth quarter.

The only help I can give you so far is the point that I made in relation to Kian’s question which is, we didn’t really pay much in the way of bonuses that had a deferred element to them during the crisis. So the first year in which deferred compensation is much relevant is the 2009 performance year. 2007, we didn’t pay under our standard plan and then 2008, frankly, most of my colleagues would agree, we didn’t really pay and so there was nothing to be deferred. There is this cash plan CVCP which has a very small effect. But it was tiny in the context of our overall bonus plan.

The one that’s relevant is the normal bonus plan from 2009 and the deferred element of that, i.e. the amount that was pushed in our IFRS accounts into future periods because it was still at risk in the hands of the recipient, was about CHF1.5 billion and it’s recognized over predominately over three years on a concave curve, and about two-thirds of that gets recognized this year. So this year is around about CHF1 billion of that, roughly speaking. And in future years would be around about CHF0.5 billion.

Derek De Vries - Bank of America Merrill Lynch

Okay.

John Cryan

Now what we pay this year will be on probably a similar plan. There will certainly be a significant element of deferral. It’s not agreed yet, neither the amount nor the structure is particularly agreed, but we have been accruing on the basis that there is significant deferral element and therefore next year and the years after that will be impacted by this year’s grants.

On Basel III, I’m never very good at predicting these things, however, I think there is quite a strong body of evidence that suggests that you are right. In particular, the CVA calculation in Basel III needs some further engineering, and I would hate to give you the impression that other people may agree with me and change it, but I think at the moment, it does not give an accurate reflection of the risk inherent in hedging of CVA, nor do I think it provides the right incentive to go and hedge it in the first place. And so logic may prevail and there may be a reassessment of the algorithm that’s used to derive the risk-weighted asset equivalent of the regulatory VaR that derives from the CVA book, but it’s more of a hope than an expectation but I think it would be backed by logic, if there were a change.

I think at the moment though, one of the driving factors behind Basel III is to act as a deterrent to banks running aggressive trading books and so, for political reasons, it may not change. But if logic were to prevail, I think it should. So I don’t know the answer, but I would have hoped that it would ameliorate the impact of the introduction of Basel III.

Derek De Vries - Bank of America Merrill Lynch

Great, thank you very much.

Operator

Next question from Mr. Jacques-Henri Gaulard, Autonomous Research. Please go ahead.

Jacques-Henri Gaulard - Autonomous Research

Yes. Good morning, John. Good morning, Caroline. Just two questions: on page 71, about the put back of the RMBSs that you’ve underwritten, you give very good disclosure. I would guess and I can understand why you wouldn’t be able to give more information about what you expect to be put back, but maybe a little bit of color about your level of reserve, maybe, and how much you’re expecting somehow to be put back, so a bit of maybe a comparative view of where you stand and how much you could repurchase, I would guess?

And the second question, back to Fiona’s question, can we effectively change your tax rate guidance for 2011 or 12, or do you still feel happy about us maintaining about 25%?

And lastly, if we can have a view about the lease termination, because it had an impact on the cost of the Wealth Management and effectively how much it was? Thank you.

John Cryan

On the putback, we tried to give you as much disclosure as we could. For those of you who’ve turned to page 71, note 15 on litigation, we tried to show you the experience, the actual experience we’ve had so far. There are three categories at issue here. First is mortgage loans that we’ve originated and there are very small. We are not really an originator of loans.

Second is, other people’s loans we sold, for example, through Wealth Management Americas, we white labeled other people’s mortgages and sold them. That’s a potential area of concern.

And then within the Investment Bank, obviously we securitized a lot of loans and we re-securitized a lot. And it’s really in that last category that the concerns predominantly arise.

And I think it’s very difficult to gauge or give you any guidance on what might happen in future, so what we thought we could do, though, is give you as much detail as possible on the experience to-date, which so far has not been material in the context of our overall results. But obviously, we were a very big participant in the securitization market. It remains to be seen how that pans out.

But obviously, where we have securitized and been a recipient of representations, then obviously we would have a back-to-back position. The difficulty is where the deliverer of the representation in the first place is longer around.

Jacques-Henri Gaulard - Autonomous Research

And you’re disclosing your reserve, because some of your U.S. DSBs disclosed where they were?

John Cryan

Well, I think we’ve disclosed what we’ve done so far, there is not much in addition to that.

Jacques-Henri Gaulard - Autonomous Research

Okay.

John Cryan

There is no further news.

On the tax guidance, I think we can’t work out what we would do this time next year, when we look at our deferred tax position. I think the case is that in Switzerland, we’re pretty much done. The big area for potential write-up of deferred tax assets will be in the United States. And at the moment, there is no visibility on being able to do that at the moment. I think the tax guidance for next year would be that the effective tax rate should be I think 25 is probably a little high. We normally work internally on something in the range 20-22 sort of number, but not far off, yes.

And then on the lease termination in Curzon Street, I think the in Swiss francs, it ended up being 19, CHF19 million.

Jacques-Henri Gaulard - Autonomous Research

Thank you very much.

Operator

Next question from Mr. Matthew Clark, KBW. Please go ahead.

Matthew Clark - KBW

Good morning, I was just hoping if you could give us an update on the Stab Fund, your thoughts there about whether you might look to repurchase, and then also just to make sure I understand the accounting treatment. At the moment, your investment is 50% deducted from Tier 1 capital, is that correct? Thanks.

John Cryan

The Stab Fund has had a very good year. It’s announced that September to date, it has made CHF2.8 billion and there are some interesting things about the Stab Fund. One of which is that, for U.S. tax purposes, we benefit quite considerably from some of those profits year-to-date. That’s helped a little bit in the deferred tax reassessment. And that’s because the Stab Fund is dealt with as a financing transaction, rather like a repo, rather than an outright sale for tax purposes.

The repurchase we never actually owned it, so technically it would be a first time purchase of the Stab Fund entities, is something we intend to do, otherwise we wouldn’t hold any positive replacement value for the option. We do intend to do it, whether we intend do it while it still has risks assets in it, or whether we wait until everything is turned into cash and it’s just a company sitting on cash, it’s difficult to say.

As I think Ossie Grübel once mentioned, we did approach the SNB and suggested to them that we buy it and they declined politely, so perhaps they don’t want to sell it. It’s been a bit of a cash cow so far this year. So it may be that we wait until there’s nothing more than cash in it and it would at least make the valuation of the fund easier to calculate. But we do intend to buy those companies, otherwise we obviously wouldn’t hold the value of the option. And from the regulatory capital accounting, you’re right, we only get credit for half of the value of the option in our Tier 1 capital.

Matthew Clark - KBW

Okay. And then just to follow-up, am I right to think your incentive to repurchase early would be that you then get 100% of the upside from that point in time onwards, rather than 50% of the upside, the longer you wait is that the right way to think about it?

John Cryan

Not really, because the price is done at fair market value so at the time we would buy the company, we would have to have a valuation done of the company. We then effectively pay an exercise premium of $1 billion, plus half of the net assessed value of the company. So for example, at the moment, the company is, let’s say, worth something like $5 billion. We would pay CHF1 billion and then we would share the remaining CHF4 billion 50-50. And so effectively, we’d pay CHF3 billion for something worth 5. And with a little bit of a model reserve in our books at the moment, we have the option held at CHF1.75 billion.

Matthew Clark - KBW

Okay.

John Cryan

Dollars, I am sorry, dollars, $1.75 billion.

Matthew Clark - KBW

But is that $5 billion subsequently turned out to be worth $6 billion, then you would pocket all of that 1 billion improvement?

John Cryan

We would then be on risk, yes, that’s right. We would own the company, absolutely, right.

Matthew Clark - KBW

Right.

John Cryan

Yes.

Matthew Clark - KBW

Thank you.

John Cryan

Thanks.

Operator

Next question from Mr. Huw van Steenis, Morgan Stanley. Please go ahead, sir.

Huw van Steenis - Morgan Stanley

Good morning. Most of my questions be answered, so perhaps just one more general one. How has the first nine months of this year changed the business plan for the way you want to build out the Investment Bank? And in particular, I think about the fixed income division, I note your point that obviously quarterly volatility will be higher than the old model. But also it strikes me that the quarterly volatility has been a tad higher than many of your peers. And I wonder that’s because of the slightly lowish market shares in many of these products means that you have less confidence to trade in tougher markets, and what’s the consequence of that? Does that mean you need a much leaner cost base to offset the ups and downs of markets or does that mean that you need to redouble your efforts to go for market share and then you will be seeing significantly higher investment spend as we go into next year? So just maybe some general thoughts about how the tactics of your business planners have changed given the market environment?

John Cryan

There isn’t a fundamental change in the business plan. I think some of it is still, to be fair to the divisions, some early teething troubles in having rebuilt fixed income from scratch. So I think in some markets we are still finding our feet. There are some markets in which we are still relatively weak, but have performed well. I know we gave you a little bit more disclosure than some of our competitors. So it’s difficult sometimes to see where they’ve done well and where they’ve done less well. But for example, in high yield in the U.S., we are still not a major player and I know that’s been a very strong market. It’s not an excuse, it’s just one of the explanations as to why when in fixed income as a whole, some people have done relatively well. We happen to have been stronger in some areas that had not done too well.

Having said that, you are right, we have underperformed in too many areas and it may be that we are still a bit part player in some of them. Our market share is just not big enough. Some of that I think is that we are not well enough established in some markets. And so the client relationships that we’re not top three or top five for a particular client and so when there is very little business going around, they tend to favor the people at the top of their relationship list. And if we’re further down the list, we don’t even get any crumbs that fall from the table.

So I think it’s just a question of seasoning the development of that business. We’re not worried that it’s not going right. I think we’re still fairly confident we’re on the right track and doing the right things. But it will be more volatile, because we don’t have this bedrock of earnings from having a lot of positions on the book that ostensibly carry a positive yield. We are relying on people wanting to do things with us and wanting to trade with us and have us perform investment banking services for them.

Huw van Steenis - Morgan Stanley

Thank you very much.

Operator

Next question from Mr. Christopher Wheeler, Mediobanca. Please go ahead.

Christopher Wheeler - Mediobanca

Yes. Good morning. Couple of questions. Just going back on to the compensation ratio in the Investment Bank, it’s about 68%, if we exclude the owned credit costs. I just wanted to get a feel for whether, given the uplift you have obviously had to deal with in terms of particularly basic compensation, are we looking at that 1,494 as a number which is kind of a line, which you can’t go beyond? Because clearly 67% or 68% is a pretty high number and obviously you’re looking to get below that. So can you just talk about that?

Secondly, on compensation, we have all kind of ignored the elephant in the room, which is that obviously what we’ve heard from the business sector within the U.K. and the head of CBI about warning against bonuses in general. Have you given any thought about how you’re going to deal with this rather messy problem at the end of the year, particularly in the U.K.?

And then just perhaps moving on quickly to Wealth Management, in talking about the increase of the financial advisors from 4,148 to 4,700, could you just give us some favors to how much of that you expect to be onshore in Europe, how much in Asia, that would be quite helpful? Thank you.

John Cryan

Well, on the compensation ratio, we tend not to look at it on a quarterly basis. We try to look at it on a year-to-date basis. And on a year-to-date basis, the numbers for the group and for the Investment Bank obviously are much lower than the percentage you mentioned, mainly because the first quarter was very strong and the compensation ratio was consequently lower. But the number we have excluding own credit and the payroll tax, is about 54, 55% for the IB year-to-date, which is still a little bit higher than we would expect the longer-term target to be and we’d like to bring it down below 50%.

We have to work on the basis that we operate in the market or what is called talent and as a consequence we have to pay market or thereabouts. We are a living example of a bank that experimented with not paying people and it didn’t come off very well in 2008. And as a consequence, we know that we are bound to pay people, to some extent, regardless of the performance of the bank, whether we retain their services isn’t at issue, but if we retain them we have to pay them to some extent.

As a consequence there is obviously a balancing act between the public interest in banks, reducing their bonus or compensation payments generally and what it takes to retain and attract stars. I don’t think the U.K. is particularly different from anywhere else. There is pressure coming from everywhere we operate. It may be more public in U.K., but it’s nevertheless, a factor globally. In wealth...

Christopher Wheeler - Mediobanca

Sorry, John I know this is an incredibly tricky subject, but you are basically saying you are sort of, no disrespect to you, you are hoping it is going to go away, which I feel it won’t. And I just wondered perhaps a personal view on how this could be dealt with in a sensible fashion? Because obviously we fully understand the need to retain talent, that’s obvious.

John Cryan

Yes, I am not sure there is an easy solution. I think you have to pay, because we tried last time, not paying, and it didn’t work.

Christopher Wheeler - Mediobanca

And so the likely consequence of that is further cost from the perspective of shareholders I would imagine?

John Cryan

Yes, that’s right.

Christopher Wheeler - Mediobanca

They will be punished...

John Cryan

For the company, anyway, which is...

Christopher Wheeler - Mediobanca

Yes, of course.

John Cryan

In Wealth Management the client advisors, well the gross numbers are obviously bigger than the net numbers. And we are hiring actively in Asia and onshore in Europe. I don’t actually have the exact split for Q3 but both are an area of focus for hiring.

Christopher Wheeler - Mediobanca

Okay.

John Cryan

And those would be predominantly the areas.

Christopher Wheeler - Mediobanca

Sure. Thank you very much.

John Cryan

Caroline is just giving me some, it suggests that just about the majority is probably in APAC in the quarter but both areas are big focus for us.

Operator

Next question from Jernej Omahen, Goldman Sachs. Please go ahead.

Jernej Omahen - Goldman Sachs

Good morning. It’s Jernej here from Goldman.

John Cryan

Hi, Jernej.

Jernej Omahen - Goldman Sachs

A few questions last I guess, can we start on page 20 of your slide deck and I would just like to ask you for a breakdown of the increase in core capital from 26.7 in the second quarter. So we are almost 3 billion Swiss francs during this quarter, what’s driving that because it’s obviously not just your retail profits, I guess?

John Cryan

Yes. Maybe. I don’t know if you can do this, Martin if we can look at the previous slide to that. We included in the pack, I think, given going forward there is going to be a lot of more interest in the capital of the bank I think the capital of all banks we’ve included for the first time, well; I hope it’s a helpful slide that shows you the movements in the IFRS equity balance. Now the movements in the quarter for us in our own shareholders equity, the minorities position is quite complicated for us because we bought back that hybrid that had been classified as non-owner interest or non-owner equity in the bank.

If you look at a middle column, the one that’s headed of which UBS shareholders, you see the net profit figure there. And then you see a number of important movements that they build up the delta between the opening balance on 1st of July and the closing balance on 30th September. And there are a number of relatively large numbers there, the foreign currency translation account in other comprehensive income is the biggest single item, it’s almost CHF900 million of charge. And that’s simply the result of our biggest item in the foreign currency translation account would be what was Paine Webber, UBS Financial Services Inc., the Paine Webber entity that was acquired a decade ago. That’s held at original cost in dollars and as the dollar falls, it falls in value and the difference goes through other comprehensive income and impacts equity.

Cash flow hedges is the impact of the macro cash flow hedge in particular it’s the amount that is not taken through P&L, but the recognition of it is deferred into equity. There is a deferred tax credit to equity that relates to couple of items, one of which is foreign currency translation. These are items when the deferred tax is calculated under local US statutory and Swiss GAAP and the differences in the tax account between IFRS and local taxes goes through equity. And those would relate to things that anyway go through equity like foreign currency translation. There is the impact of compensation plans, the movement in treasury shares and they will impact the equity.

If you turn over the page to the next slide, movement in Tier 1, we start or the core Tier 1, we start with CHF26.7 billion at the end of June, then add the bottom line profit, the net profit attributable to shareholders. Own credit, the amount of own credit on the medium term notes, when we disclosed as own credit is not eligible for capital and therefore a charge to the P&L is added back. So in effect 2.1 billion instead of 1.7 is taken into the regulatory capital account.

There are some very small FX impacts. There is then this Tier 1 hybrid redemption, there was this odd concept in Q2 that I explained where in order for there to be a semblance of capital replacement, the deal we did with FINMA in order to redeem the hybrid instrument was essentially redeem it by assigning core equity to it. So we set up an equity reserve of 1 billion by Q2, we added another 0.5 billion notionally in Q3 and at the end of the quarter, we called the instrument back. It was actually called back on the 1st of October, but the call was made during August in fact. And so that instrument was reclassified from equity, where it was held as a minority interest, into a creditor, because we had to redeem it. And we were able to release the reserve of 1 billion in core tier 1 because the hybrid was never in core tier 1.

So it’s a slightly odd way of showing this, but essentially as we showed I think in the second quarter pack, the core tier 1 capital was 1 billion lower than it could have been, because there was a reserve set up for redeeming the hybrid. That reserve was released and the net number at the end of the quarter was 29.6.

In the tier 1 capital, for that hybrid redemption, you can see the posting of the additional reserve of 0.5, that’s because it was a $1.5 billion deal, but the exchange rate for the dollar versus franc is about 1 anyway. So, it’s lost in the rounding. But essentially it was the 1 billion taken in Q2 plus the 0.5 billion taken in Q3, was the impact in Tier 1 as a whole of the hybrid disappearing. But in core Tier 1 it was never there. We got the reserve back.

Jernej Omahen - Goldman Sachs

Okay, that’s clear. Thanks a lot for that. And just the second question on Lombard loans. You mentioned that there was a pick-up in Lombard loan balances during the quarter, I was just wondering what the number was?

John Cryan

Yes. I don’t have it at the top of my head. It’s tiny. It’s about CHF250 million.

Operator

Next question from Mr. Beat Soltermann, Swiss Public Radio. Please go ahead.

Beat Soltermann - Swiss Public Radio

Yes. Good morning. I have some questions concerning Basel III. You mentioned a couple of weeks ago that in order to reach the new capital requirements that UBS will not pay any dividend. I was wondering if that is still the plan and for how long will you not pay any dividend and why is your strategy differing from other banks, for instance, Credit Suisse which will pay dividends even in the next couple of months and years?

John Cryan

Thank you. Well, the answer to that question goes slightly back to the previous slide. We showed on that slide that our Core Tier 1 capital is just under 30 billion at the end of September and we announced about a year ago at our Investor Day last year, we’ve another one coming up in the middle of November, but we said that we thought that the company should hold something between 45 and CHF 50 billion of real equity capital. And the balance of the Core Tier 1 capital at the moment as consolidated into that account, for example, about CHF8.3 billion is deferred tax assets, many of which will not count, will have to written off from the capital account under the Basel III regulations.

And so our core Tier 1 capital at the moment, if you took off let’s say 7 billion or so would be only 23 billion. Now to get to the 45 to 50 essentially still means that we need to double the amount of our Core Tier 1 capital, but we certainly need to take it from the 30 billion or so it is today up by another at least 50%, 45. And we believe as a management team that the most prudent way to do that is to do it as quickly as possible. And that’s because we want to fulfill our promise to shareholders that we do not dilute them any further by issuing any more shares as the new capital.

And so we think that it’s most prudent for us to retain earnings until such time as we come close to the range of 45 to 50 billion which is our target range under the rules that apply under the Basel III convention. So it’s difficult for us to compare ourselves with other banks. They obviously take a different management decision, but it’s been our management and our Board is behind the strategy of retaining earnings until such time as we feel confident that we can meet our goal of a capital range of 25, 45 to CHF50 billion.

Beat Soltermann - Swiss Public Radio

Okay. Thank you very much.

John Cryan

Are there any more questions?

Operator

The last question for today is from Mr. Robert Murphy, HSBC. Please go ahead.

Robert Murphy - HSBC

Yes, good morning. I just wanted to come back to the deferred tax assets, you’re using a five year horizon. Legally in the U.S., you can use earnings for 20 years. So if I apply your methodology each year, shouldn’t we get an extra year release per annum of something like a CHF1 billion back into either income or equity from U.S. tax asset reserves?

John Cryan

You’re correct about the 20 years. So on average there is probably something like 18 years left because the tax losses in particular were incurred in 2008. And you are right, as we move forward, we get different vintages. We lose the current year and we gain one in five years’ time.

Your logic works if everything applies as we expect it to apply and everything is on track. It also applies only if the fifth year that comes in is equal to the one year, the current year that falls out. But at the moment we only provide our Board with a five year business plan and it’s as I said earlier, it’s difficult to plan what’s going to happen next week, particularly in the Investment Bank. So five years is little bit of a finger in the air, but we do it for all sorts of reasons. I mean you have to do it as a bank anyway. And we do use it as one of the guides to determining what we provide on balance sheet deferred tax asset.

But you’re right, in theory, as time goes on we can take in future profits, future taxable profits as we expect them to arise.

Robert Murphy - HSBC

So I mean, just mechanically applying that, then so each year we should go I mean for the next 15 years, we should get a billion release or something? That’s kind of I mean, if you just kept everything flat.

John Cryan

I think that’s no, that’s too aggressive. The difference this year is as I said not only do we have this walk forward of one more year, which we have every year as you rightly say. This year though, the bulk of the increase in provision arises from a change in our approach, where we could no longer justify haircutting the contribution to our future taxable profits in the U.S. from the Investment Bank. We had this swinging haircut because it was difficult to gauge during the crisis years, not only would the Investment Bank make a profit, but where it would make that profit.

Now, we’re getting a little bit more certain on the ability of three divisions that operate in America, making some profit there. And as a consequence, we could no longer justify having such a swinging haircut, so we reduced it by one-third to 50%.

Robert Murphy - HSBC

Sure. But then assuming you make your targets in the Investment Bank, each year you’ll have to add in the difference between the Investment Bank profits and your haircut, plus the release of the New Year.

John Cryan

That’s true, but it won’t be as a big a number as the reduction in the haircut. So we’ve taken the haircut down by a-third.

Robert Murphy - HSBC

Yes, I understand. Great, thank you.

John Cryan

Thanks. I think it looks as though that’s it for today. So thank you for joining and we’ll see you next quarter. Thank you.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing the Chorus Call facility and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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