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Executives

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

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

Analysts

Derek De Vries - BofA Merrill Lynch, Research Division

Huw Van Steenis - Morgan Stanley, Research Division

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Kinner R. Lakhani - Citigroup Inc, Research Division

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

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

Philipp Zieschang - UBS Investment Bank, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Kilian Maier - MainFirst Bank AG, Research Division

Dirk Hoffmann-Becking - Societe Generale Cross Asset Research

Robert Murphy - HSBC, Research Division

Andrew Lim - Espirito Santo Investment Bank, Research Division

Credit Suisse Group (CS) Q3 2012 Earnings Call October 25, 2012 3:00 AM ET

Operator

Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group Third Quarter 2012 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Brady Dougan, Chief Executive Officer of Credit Suisse Group. Please go ahead, Mr. Dougan.

Brady W. Dougan

Good. Thank you. Welcome, everybody. Thanks for joining us for the third quarter earnings call. I'm joined on the call by our CFO, David Mathers. And before I begin, I'd just ask you to take note of the customary cautionary statement on Slide 2.

And then just getting into the results, I guess there are 3 key points that I would like to cover this morning. First of all, we reported solid third quarter results, while maintaining strong momentum with our clients. Second, we further strengthened our capital base through the actions announced in July, and we're on track to achieve a Look-through Swiss Core Capital ratio of around 9.3% by the end of 2012, subject to the timing on closings of the sales of Asset Management businesses. And third, we continue to successfully execute on the strategic measures that we had articulated last year. We're announcing further measures to improve costs, capital efficiency and leverage. These actions will continue our progress to reach a 10% Look-through capital ratio by mid-2013 and to approach 12% by the end of 2013 before capital distributions. Once we exceeded the 10% level, we have committed to make additional cash distributions to shareholders from capital generation.

Let me now spend a little bit more time providing some detail on each of those points. First of all, we did achieve solid stable earnings in the third quarter, while at the same time, improving the efficiency of our operations and maintaining strong momentum with our clients. Our underlying pretax income of CHF 1.2 billion improved from CHF 1.1 billion in the second quarter. Our reported net income of CHF 254 million included a pretax charge of CHF 1 billion, relating to the tightening of credit spreads on our own debt. Despite an operating environment characterized by muted client activity, amid political and economic uncertainties, our results were strong. Our performance in these challenging markets underscores the strength of our business model and the significant progress we've achieved in executing our strategy.

Investment Banking delivered strong and more consistent results, reflecting the progress that we've made to realign our business to better meet the demands of a changed regulatory and market environment by substantially reducing risks and expenses. Fixed income has demonstrated substantially improved operating performance, reflecting the success we have had in transforming the franchise. The restructuring of the business over the past year through a significant reduction of risk-weighted assets, inventory levels and costs has resulted in a more balanced business mix with lower volatility and improved returns on capital. Equity sales and trading revenues declined from the second quarter, reflecting muted client activity. However, we continued to capitalize on our market-leading positions in this business. Notably, our prime services franchise was ranked #2 globally with a 13.7% market share. In addition, we achieved the strongest quarter of the year in underwriting and advisory results, driven by pickup in global debt issuance, strong advisory revenues and market share momentum. For the first 9 months of 2012, our rankings increased to #3 in global high yield and #3 in global completed M&A and that's versus #5 and #6, respectively, for the full year 2011.

In Private Banking, we achieved solid profitability, reflecting strategic revenue initiatives and measures to improve cost efficiency, but margins were impacted by the subdued environment, increases in regulatory-related costs and material increases in assets under management. We reported net asset inflows of CHF 5.2 billion, consisting of strong gross inflows in international booking centers, partly offset by outflows from Western European mature markets. For the first time since 2007, assets under management and Private Banking exceeded a CHF 1 trillion during the quarter.

In Asset Management, we reported higher underlying pretax income, driven by investment-related gains and reduced expenses, offset by lower performance fees. Year-to-date, the group has generated an underlying return on equity of 10% in what we considered to be a volatile environment, with low levels of client activity and including a 2% drag from residual losses in our wind down businesses in the Investment Bank. Looking forward, we're confident that the full implementation of the strategic capital and cost savings measures that we've announced will enable us to meet our previously stated 15% through the cycle return on equity.

Second, we further improved our capital position. The implementation of the capital actions, which we announced in July is well underway. To date, we've achieved CHF 12.8 billion of the CHF 15.3 billion target. We expect to deliver an additional CHF 2.4 billion in capital by year end, through a combination of strategic divestments, additional real estate sales, resulting from the Clariden Leu merger, retained earnings and lower deductions. As it relates to strategic divestments in Asset Management, in addition to the sales of select private equity businesses previously announced in July, we have decided to pursue the sale of our ETF business. However, we remain committed to the Asset Management business going forward. We have no further plans for the divestment of other businesses, and we'll focus on capital efficient strategies within our business. The successful implementation of these capital measures has substantially enhanced our capital position. The end of the third quarter, our Look-through Swiss Core Capital ratio stood at 8.2%, and we expect our end 2012 ratio to be around 9.3%, subject to the timing on closings of the sales of Asset Management businesses. We're confident that we will reach a 10% Look-through capital ratio by mid-2013, well ahead of the Swiss 2018 year-end requirement, and we'll approach 12% by the end of 2013 before capital distributions. Once we exceed the 10% level, we have committed to make additional cash distributions to shareholders from capital generation.

Third, we continue to execute on the strategic measures we announced last year, and we have a strong track record of delivering on the targets that we've set. Today, we've announced further measures on cost, risk-weighted assets and leverage to further improve efficiency and to ensure that we deliver superior returns in the industry. To date, we've made meaningful progress on our cost reduction efforts. We've significantly cut costs and improved efficiencies across the bank, while we continue to identify future cost saving measures throughout our businesses. We delivered on our target of CHF 2 billion of expense reductions 18 months early, and we now expect to exceed our previously announced year-end 2013 expense reduction target. We expect to realize a full CHF 3 billion in cost savings during fiscal 2013, not just by the end of the year, as previously articulated. In addition, we've identified a further CHF 1 billion in cost savings, 1/2 of which will be achieved during each of 2014 and 2015. In total, we are targeting CHF 4 billion in expense reductions by the end of 2015. We are extremely confident that we'll be able to achieve this target. The resulting significantly reduced cost base will provide us with operating flexibility and ensure the resilience of our business model going forward.

Next, on capital efficiency. We continue to show discipline on risk-weighted assets in the quarter. Current group-wide Basel III risk-weighted assets now stand close to our 2013 end target of CHF 300 billion. We're targeting an additional 12% reduction in risk-weighted assets in the Investment Bank, bringing the number to $180 billion by the end of 2013.

And finally, balance sheet leverage. Today, we announced measures to reduce total gross balance sheet assets to below CHF 900 billion by the end of 2013, which represents a targeted reduction of approximately CHF 130 billion or 13%. This balance sheet reduction will improve our simple gross leverage ratio from 3.8% at the end of the third quarter to 4.9% pro forma for the reductions, while having a limited impact on our revenues. In addition, we continue to have very strong liquidity, with an industry-leading Basel III net stable funding ratio well ahead of requirements. Our estimated net stable funding ratio was in excess of 100% at the end of the third quarter.

In summary, we have successfully executed on our strategic measures and have a strong track record of delivering on the targets we set. The additional targets announced today to further improve cost, capital efficiency and leverage will continue and accelerate our progress to reach a 10% Look-through Swiss Core Capital ratio in 2013. We expect the consistent earnings capacity of our business model to generate substantial levels of excess capital and, therefore, we are committed to distributing additional cash to shareholders once we exceed this 10% Look-through capital ratio. We're confident we can achieve this 10% target by mid-2013 and can approach 12% by the end of 2013 before capital distributions. With that, I'll turn it over to David.

David R. Mathers

Thank you, Brady. Good morning, everybody. I'd like to start the presentation on Slide 7 with an overview of the financial results. In the third quarter, we achieved underlying revenues of CHF 6.3 billion, pretax income of CHF 1.2 billion and net income of CHF 891 million. Diluted earnings per share were CHF 0.57. The pretax income margin 19% and the post tax to an equity, 10%. So if you look at the numbers for the first 9 months, pretax income is up 13% to CHF 3.8 billion compared to the same period last year, also delivering, though, a 19% pretax income margin and a 10% ROE.

On a reported level, third quarter pretax income was CHF 254 million. Now on Slide 33 of the slide deck, we include the normal reconciliation to our underlying results. But the main drivers of CHF 1 billion of fair value and debt losses relating to the substantial narrowing of our credit spreads, which we've seen in the third quarter, as well as, just to be clear, CHF 382 million of gains from the sale of real estate as part of the capital plan that are actually booked in the Corporate Center.

Let me turn to Slide 8. Private Banking's third quarter pretax income was CHF 689 million and the pretax income margin was 27%. The revenues are broadly stable compared to the last quarter. If you exclude the second quarter gain that we had from the sale of a noncore business from within Clariden Leu, which as you can see on the slide, was about CHF 41 million. I'd also note with the absence of the semiannual performance fees that we booked in the second quarter and the fourth quarter in both the Private Bank and Asset Management and particularly despite the private [ph] Bank that Hedging-Griffo business in Latin America. Compensation and benefits were lower, reflecting initial benefits from the efficiency initiatives. But other operating expenses increased due to higher regulatory and legal costs. Assets under management were 12% higher year-on-year, and that meant that our assets under management exceeded CHF 1 trillion for the first time since 2007.

If we turn to Slide 9, to look at the Wealth Management revenues in some more detail. Starting on net interest income, the bottom segment in the columns on the slide. Net interest income was slightly lower quarter-on-quarter due to the continuing impact of low current interest rates, albeit this was partly offset by higher loan and deposit volumes within the private bank. Recurring fees and commissions also declined, driven by the absence of semiannual performance fees, as I mentioned before. Further, as we said before, clients portfolio's continue to be biased towards more risk-adverse fixed income interest and cash, which yield lower fees for us. And I think notwithstanding the recent improved turn in the Eurozone situation, client confidence remains at low levels, and that's reflected in the continued subdued transaction revenues.

As you can see, this combination of the subdued environment, a very conservative risk mix and relatively stable net interest income relative to higher assets under management in the quarter, reduced the gross margin from 113 to 107 basis points in the quarter.

Slide 10, please. Net new asset inflows continued, particularly in Asia Pacific and other emerging markets, but there are outflows in Western Europe, particularly off the Swiss platform, as well as mixed inflows in the Americas and in Switzerland. I'd note that, that is not uncommon in Swiss to have such mixed inflows in the third, fourth quarters from a seasonal point of view.

Slide 11. What I'd like to show here is how a number of different factors are affecting the performance of Wealth Management so far in 2012. On the one hand, we've achieved net benefits in terms of lower costs and certain fee increases of CHF 210 million so far this year, as the target you may recall we set in 2012 of CHF 300 million. On the other hand, we have seen around CHF 300 million of revenues decline. So overall, the pretax income reflects the foreign transaction revenues, the adverse mix in terms of client assets and, to a lesser extent, some increase in the regulatory costs we face. This then offsets the gains we've seen so far from the future PV initiatives. But we're on track to achieve the further CHF 90 million of benefits from this program to reach our target of CHF 300 million, as well as taking further measures to ensure progress towards the CHF 800 million and the future PV that we announced before.

Slide 12. In Corporate & Institutional Clients, pretax income was broadly stable at CHF 206 million in the fourth quarter with a continued strong pretax margin of 43%. Credit provisions remained at a low level in the third quarter, with the loan portfolio quality remaining strong.

Let's turn to Investment Banking now on Slide 13, please. As you can see, third quarter revenues are higher than in the second quarter and also higher for the first 9 months of the year compared to the 9 months the same period last year. We've seen stronger and more consistent results from fixed income this year. We've seen a resilient performance in equities and underwriting advisory. And all of this was achieved with a lower cost base and less capital, which significantly benefits, of course, the divisional return on equity. I'd also point out that the third quarter results were after CHF 136 million of certain litigation provisions, as well as the wind-down losses of CHF 100 million related to the said wind-down portfolio that we've talked to you about before.

So let's turn now to Slide 14. What you can see here is the substantial improvements that we've seen in our fixed income business in -- so far in 2012. I think you may recall a year ago that there was a lot of concern about the future of the fixed income industry and whether you can make an appropriate return in this new regulatory environment. As you can see from this graph, we've achieved a substantial improvement in operating performance with higher revenues quarter-on-quarter as well as year-to-date, compared to the first 9 months of last year. What's more, this result has been achieved while simultaneously reducing expenses and with more than 40% lower risk-weighted assets in our fixed income business. So the business is now improving substantially improved returns, both in absolute terms and compared to last year.

If we talk about the trends in more detail. First, we've seen strong and substantial improved results in securitized products where we've delivered a well-balanced contributions from our Non-agency, Government Guaranteed and Asset Finance businesses, both in the third quarter and in 9 months. Second, we've had a robust performance in credit, primarily due to strong client flows and issuance across both leveraged finance and in investment grade. And third, you may recall when we announced our second quarter results we talked about a very strong performance in our Emerging Markets business and fixed income in the second quarter. In fact, I believe it was a record level for that business. We've seen a continued good performance in emerging markets in the third quarter, with strong results from our Latin American operations.

Slide 15, please. In Equities business where we have a very good franchise with consistently high market shares, the third quarter was definitely challenging. The strongest business in the quarter and in fact so far this year has been the Prime Service business, and it's clear we've continued to gain market share in this area. You may have seen there was a recent #2 ranking for our business, putting us at 13.7% of the global hedge fund market. And there's no doubt this business [ph] has performed well, about against what's generally been a somewhat mediocre market environment. Clearly, there's been a more difficult environment for our Cash Equity business in most markets globally. This is an area where we have some of our highest market shares and remains one of our best positioned businesses. Notwithstanding the pickup in equity markets, the value point of view you've seen this year, volumes remain depressed and there was a low level of primary activity, which as you know, tends to drive secondary trading. Notwithstanding this, we've maintained our strong market shares in this business and this remains a solidly profitable area for Credit Suisse. In equity derivatives, our numbers have lagged somewhat, as we continue to take a very conservative approach to risk position to volatility management in the quarter.

Let's turn to Slide 16, please. Within our Underwriting and Advisory businesses, this was the strongest quarter we've seen so far this year, primarily driven by a strong performance in debt underwriting across both leveraged finance and investment bank and investment grade. You can see that revenues are up more than CHF 100 million compared to the previous quarter. Elsewhere in this business, as I mentioned before, equity underwriting continues to outperform a very lackluster IPO calendar. And in M&A while our share continues to be strong, you can see on the graph, we were third for completed M&A for the first 9 months of the year. Our revenues are up quarter-on-quarter but volumes are still subdued compared to what we might have expected to see at this point in the cycle.

So then just to summarize the investment bank what Slide 17 lays out is the incremental impact on investment bank's year-to-date normalized return from cost improvements and other RWA reductions compared to a year ago. As you can see, the impact of the efficiency improvements on lower risk-weighted assets usage or, more or less, flat revenues, provided a significant lift to our Basel III return, which improved from 3% to 11%. Furthermore, if we exclude the remaining wind-down portfolio, we've achieved a 16% Basel III return. Just to be clear, this book is substantially smaller than it was a year ago when we had CHF 54 billion of risk-weighted assets in this position. As you may recall when we talked about it back in 2011, that's now down to CHF 14 billion now.

Let's turn to Asset Management, Slide 18. Asset Management's year-on-year performance has been distorted by a number of one-off factors, including a significant private equity realization last year; and in the current year, the Aberdeen sale, as well as you note, the CHF 38 million write-down we took on AMF. Leaving those factors aside, what we've seen is some pressures on performance fees, in line with the Private Banking business trends, fee-based revenues have dropped by about 10%. But against that, you can also see that we've reduced costs by about CHF 70 million, showing the continued progress we've made in terms of reducing costs, in general, cost Asset Management but particularly in terms of consolidating platforms in this business.

Slide 19 then shows the quarter-on-quarter PTI performance, where we've seen higher investment gains, an increased contribution from the sale of our Aberdeen position, offset by an AMF write-down in the third quarter compared to what we took in the second quarter, and then the absence of semiannual performance fees in the third quarter then being broadly offset by lower compensation expenses.

Slide 20, then. So last November, we announced that we intended to reduce our expenses by about CHF 2 billion, which as you know, we actually met in the first half of the year, somewhat earlier than we planned. You could recall that back on July 18, when we enhanced our capital raise, we increased this target to a run rate of CHF 3 billion by the end of 2013. We'll be looking at over the past quarter, is our longer-term plan for the next few years across the businesses and particularly how we -- our strategy and operations for the underlying infrastructure of the bank. I think, as a result of this work, we feel very confident that we will exceed our target of CHF 3 billion cost -- CHF 3 billion cost reductions not by just the end of 2013, but actually in the fiscal year as a whole. Furthermore, what we're aiming to achieve is not just a sequence of one-off cost reductions but a longer-term program to actually drive continuing and ongoing efficiency improvements. I don't think we've necessarily come to the end of what we plan to do here, but I do feel confident to tell you that we'd expect to achieve another CHF 0.5 billion of the savings in 2014 and a further CHF 0.5 billion in 2015.

So just to put that in context, that means we're looking to achieve CHF 3 billion of cost savings in fiscal 2013, CHF 3.5 billion in fiscal 2014 and rising to CHF 4 billion in 2015.

So what's driving these savings? So first, in the investment bank, which you know has produced the bulk of the saving so far, about CHF 1.4 billion of the CHF 2 billion in the direct cost base plus the additional savings from allocated infrastructure associated with the investment bank. Obviously, the reduced -- this reduced run rate is both improving returns to our shareholders and dramatically improving the operating leverage of the business. Looking forward, within the investment bank's direct cost base, we think we can reduce cost by about another CHF 700 million. This is likely to come from synergies in our equities business and from continuing to rationalize other business and overlaps across fixed income, underwriting and advisory.

In Private Banking, we've seen the early benefits from Clariden Leu merger and going forward, we will seek to rationalize front office support further and downsize our affluent client coverage model. In Asset Management, we expect to see further benefits from the consolidation of our platforms, as well as increasing the use of off-shoring. The largest single component of savings, though, will come from our shared service infrastructure that supports the entire bank. So far, we've achieved CHF 300 million of savings from this, but we're setting a target here of a further CHF 1.1 billion over the 2013 to '15 period. We're already well advanced in integrating the operations assessment functions across the bank. We now have a single operations function for the entire group. We expect to see further savings for the integration of technology with the operations functions as we run these areas, end to end in the future. We're moving some of the duplicate management processes and expenses across these areas. I think to be clear, we're also continuing to develop our off-shoring strategy and looking to achieve a better balance of onshore, offshore and outsourced services across the business.

Okay, so let's just turn to Slide 21. I think one of the comments that we've heard over the last year is a lot of confusion about run rate definition, actually [ph] it's annualized and the periods in which savings are actually based on. So I think we just wanted to put up a slide in which we can show what the actual reductions and what's included and excluded from these targets going forward, such as variable comp and other CFX moves, which given a large component of our expenses are in dollars tends to distort the trends every year.

So just to be clear, we show here underlying operating expenses, excluding variable comp and assuming comp in FX rates. So we'll start then a CHF 20.5 billion expenses for the first 6 months of 2011. By the first 9 months this year on the same basis, we're down to CHF 18.5 billion. On the right of the chart, what's implied is we expect reduced costs by a further CHF 1 billion in 2013 and CHF 0.5 million in each half 2014 and '15. So in other words, on the basis we've set before, we're expecting a cost target of CHF 16.5 billion for 2015.

In terms of expenses relating to this, we think we'll probably take around CHF 240 million of realignment costs in the fourth quarter and then probably another CHF 1 billion between 2013, 2014 and 2015, that's in total over those 3 years.

Let's turn to Slide 22. So Slide 22 shows the groups Basel III RWA numbers both so far this year and into 2012 and '13. Our estimated Basel III risk-weighted assets were CHF 307 billion at the end of the third quarter, close to the target of around CHF 300 billion for the end of this year. We expect to reduce our RWA then further in 2013 by about CHF 20 billion to around CHF 280 billion. And this will be achieved over a further 10% decline or reduction in the investment bank's current B III levels to $180 billion by the end of 2013.

So I just wanted to give everybody an update on the progress we've made on the various capital measures we announced back on July 18. I think most of this should be clear and we obviously made an announcement around the actuarial and pass-through [ph] transactions during the quarter, but what you can see here is we've achieved about CHF 12.8 billion of the CHF 15.3 billion that we mentioned back in July as our target. As I said, it should be familiar, if we just look at Slide 6 and 7 then, you should be aware that we've seen about CHF 0.3 billion, primarily related to the redemptions of certain hedge funds assets within the Asset Management division. We've also achieved real estate sales for a capital benefit of CHF 382 million.

In terms of things we -- let me turn to Slide 24, please. But in terms of things that we still intend to accomplish against our capital plan targets, firstly, we continue to target CHF 900 million of capital benefits from strategic divestments in Asset Management. And that includes the disposal of a number of alternative investments in line with focusing the business towards more liquid strategies. In addition, as Brady mentioned, we're continuing negotiations to divest our ETF business. But other than we previously announced, we have no plans to sell other businesses within Asset Management.

Now we remain confident, the bulk of these disposals will be announced by the year end. But I would caution in line with what we said in July 18, that it's quite possible that the announcement and the completion of some of these sales may slip into the first quarter of next year. That said, 3 months into the marketing process for these businesses and assets, we do feel highly confident we will reach the target once the progress is fully complete.

Second, given that we've exceeded the expected disposals proceeds on real estate sales so far, we've revised our future capital benefits, and we think we'll make another CHF 0.4 billion from the sales that we still have to make. And then, of course, the bottom is a normal impact we assume in our calculations relating to the analysts' consensus, earnings estimates, change in equity and, of course, lower leverage reductions from the increase in common equity.

Let's turn to Slide 25. So what we've shown here is our normal progression for the Swiss Core Capital ratio. You can see at the end of the third quarter, this ratio improved to 8.2% due to the capital measures we completed so far. On a pro forma basis, we'd expect it to be around 9.3% by the end of the year, but there are a number of uncertainties here, including the assumption of when we actually receive the benefit from the asset disposals. But nonetheless, we should be comfortably on track to achieve the 10% target by the middle of next year. Looking forward to the end of 2013, with the completion of these disposals, as well as the CHF 20 billion reduction of RWAs, we think this ratio will drive up and approach 12%, but obviously that's the forward decision we made around capital and distribution and dividend distribution to shareholders, as Brady mentioned. But it's also worth noting that even just factoring in the reduction in the investment bank's RWAs to a target of $180 billion alone would lift this target ratio to around 10%.

Just on end to Slide 26, this is the updated version of what we showed back in July. So we include here on the left-hand side the same simulation for our B 2.5 ratios. And just for the benefit of our BCN holders or high-strike CoCos, the relevant ratio for that is 14.7%, and you may recall, that compares to the BIS [ph] entry level of 7%. On the right-hand chart, as you can see, the same numbers we gave before so the estimate on a pro forma basis of around 9.3% for the Look-through Swiss Core Capital ratio at the end of the year, but then approaching 12% by the end of '13.

So let me turn to the balance sheet. Slide 27. Over the last 5 years, we've reduced the balance sheet from CHF 1.4 trillion to just over CHF 1 trillion in the third quarter of 2012. These reductions have been herein tied [ph] by the investment bank, and in dollar terms, investment bank's balance sheet usage was about 24% smaller than it was in 2007. Now looking forward, our intention is to reduce the group balance sheet to less than CHF 900 billion by the end of 2013. And to achieve this, we've conducted a thorough review to the allocation of our balance sheet relative to our major Investment Banking clients, the return on Assets Mix business, particularly a number of balance sheet-intensive and lower RWA areas. We've also looked at some areas across treasury where we could be more efficient in our balance sheet usage.

Slide 28. Clearly, this will have a significant positive impact on our leverage ratio. The capital measures we announced in July will already greatly improve this ratio to around 3.8%, following the conversion of mandatory to convertible next March. What we show on the right-hand column is a steady-state leverage ratio projections of around 5% once we're at the CHF 280 billion risk-weighted asset target, which you know is what we set now, 10% CET1, which again is also our target and CHF 900 billion balance sheet. You can see it's around 5% on that basis, and that's also a ratio which given what we've got already today, is something we should achieve by the end of 2013.

So let me then just conclude then some comments around our funding and our liquidity position. They remained strong at the end of the third quarter. Our net stable funding ratio, as Brady mentioned, was around 100%. And I'd note that our funding in CDS spreads remained amongst the lowest compared to the third quarter. And what's more, have narrowed very substantially in the third quarter although that, of course, has contributed to the over CHF 1 billion of fair value and debt number that we mentioned already and a total of about CHF 2.6 billion for the whole of the year. We continue to have a highly unencumbered balance sheet with very limited use of covered bonds. And just to be clear on that point, only about 14% of our Swiss mortgage book is so utilized. So on that note, I'd like to conclude the presentation and I'd like to pass back to Brady, please.

Brady W. Dougan

Great. Thanks, David. I think with that, we're ready to open it up to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Derek De Vries from Bank of America.

Derek De Vries - BofA Merrill Lynch, Research Division

I got 3 areas I want to ask questions about. And the first is the cost in the Wealth Management business. I noticed the headcount's up about 300 in the private bank, and I guess some of that's school hires, but maybe if you could comment on that and whether that drove the costs? And then related to that, you showed the slide of a 9-month, and you show CHF 53 million of incremental regulatory cost in Wealth Management. I'm just wondering how much of that was in Q3? Or maybe the better way to ask it is, is there an exceptional amount of regulatory cost in Q3? That's the first area. The second, you talked about the new risk-weighted assets guidance -- or I guess you gave new risk-weighted asset guidance for 2013. It's about CHF 10 billion to CHF 20 billion, I guess, below where people were forecasting. And I'm just wondering what sort of, what's going to drive that? Is that sort of a genuine legacy assets running off faster or businesses that you're exiting, or is it risk-weighted asset model optimizations? What's the driver of the delta on risk-weighted asset guidance? And then the last question, you said and you talked about the meaningful capital return once you reached the 10% level, which is encouraging, but I guess my question is for 2012, paid out in 2013, you're probably not going to be there on your guidance. So does that change the 30% payout ratio that I guess we've been expecting, or what's the thought for this year in terms of capital return? Those are my questions.

Brady W. Dougan

Yes, Derek, thanks very much for those questions. I don't know maybe we could take them in a slightly different order. I mean I think on the RWA side -- and David, obviously, you can contribute if you want to. As you say, we do -- obviously, the key is that we are planning to continue to drive additional capital efficiency in the business. I would say it's a little bit of each of the areas that you mentioned. I mean, certainly, continued reduction on the legacy side is an important aspect of contributing to that goal, but we also will continue to look at just optimizing other parts of our businesses across a number of different businesses. I mean, we've obviously brought it down quite a lot over the last year, 1.5 years, so there's been a substantial reduction. So at this point, we're more into optimizing the business model, which means probably bringing down RWA in -- across a number of different businesses, but on a more selective basis, I'd say.

David R. Mathers

Yes, I mean, I think, clearly, I mean to the checkpoint [ph] at the moment, obviously, with the Basel III slippage in the new CRD 4, and clearly, in the States as well, we will be one of the first banks actually switching to Basel III in the 1st of January. So obviously, we're going through the final preparation for that switch over in terms of the models and the numbers. But I think clearly, what we felt is that we were close enough to that we probably give you some guidance in terms of where we'd expect numbers to go as we actually cross through into 2013 and where we get to at the end. But as Brady mentioned, the majority of that will actually come from a sort of final optimization of the Investment Banking businesses. We know we still feel -- obviously, we've got about CHF 14 billion of risk-weighted assets, for example, still in the fit wind-down, but it's come down from 54 to 14 a year ago, so a long way. But obviously, our goal is to actually eliminate that, and we would hope to make a substantial further progress towards that in 2013. But equally as we've gone through the business planning for next year, there's still some areas where we think we can actually optimize our other RWAs [ph] by actually reducing positions. So those are the 2 things that are driving that. Shall I...

Derek De Vries - BofA Merrill Lynch, Research Division

Actually, maybe just because a headline popped up on Bloomberg. When you're talking about optimization, you're talking about business optimization, i.e...

David R. Mathers

Business position reduction, Derek, sorry. That will be the majority of the call, perhaps, that was a wrong word from Bloomberg. No, I think it will be about absolute position reduction and in fairness, if you look at what we've done over last year, that's what it has been within the investment bank, frankly. I think -- I don't think we've -- it was a Basel III change. I don't think we've had much option, honestly, to actually optimize in the regulatory sense, Derek. So it should be -- you should think of this really as position reduction next year. I think a year ago, obviously, we did talk about some reductions, and I think we've managed them very well, and our fixed income revenue's up despite that. So I think we're pretty confident, but I think we're getting towards the end of this process, but we do feel as we actually go through the Basel III calibration, finally at the end of this year, we could probably give some idea where we'd expect the Basel III risk-weighted assets to be at the end of 2013. And we thought it was useful and appropriate to actually do so.

Brady W. Dougan

I think on the cost side in Wealth Management, I mean we -- as you say, we certainly have made some progress on that. Obviously, that also is part of the continuing program there. I think, as you know, we talked about CHF 800 million of improvements in pretax in Private Banking over the course of the next couple of years. And of that, somewhere around half of that is in cost reductions. The specific question you asked about the headcount, we did have -- there was a -- there is a quarterly element in the sense that in the third quarter, we did have campus hires and apprentices come in to the business. So that, as you say, overall, we were up 300, but we're actually up about 425 in campus hires, and actually down about 120 through efficiency measures. So overall, I think we're, obviously, going to continue to drive the efficiency on the Private Banking side. And that, obviously, that may have implications for headcount going forward. Your question on the regulatory cost, in general, obviously, the regulatory costs in the business have been higher this year. They include preparation for FATCA. They improved -- include preparation for method, too, and also the implementation of the withholding tax agreement in anticipation of the potential passage of the German treaty. So I think in the third quarter, cost was slightly higher, particularly from the IT preparations for the withholding tax agreement implementation. And with the potential that it comes through, we obviously have to be ready if it does come through. So slightly higher, but I think in general, obviously, this is just a burden on the business going forward. And I guess lastly on the capital issue, David do you want ...

David R. Mathers

So I mean I think on -- I wasn't quite sure when you said, your question in terms of progress against target. I mean I think, as we've said, with the additional [indiscernible] reduction just by itself, without any [indiscernible] anything else, we bid almost around the 10% mark anyway once we actually drop down to 180 bid [ph] on the investment bank. And as I said, subject to the timing of the asset disposal in the final Basel III calibration, we expect to be around 9.3% at the end of the year. I think we also included a simulation through to the end of 2013, so that would put us, approaching 12% level on the Swiss core capital level. So I think that's obviously, comfortably ahead of the 10% target we're actually working to. And I think, as Brady mentioned, clearly, that will obviously give discretion to the board in terms of making cash distributions to shareholders in respect to the 2013 year once we get to the end of the year.

Derek De Vries - BofA Merrill Lynch, Research Division

Yes. Sorry, I guess my question was very specifically for this year, right? So, clearly, I get your capital generative business model, and you going to throw out a lot of cash. And you've clearly signaled an intent to return it. But I guess for this year, I don't think you're going to be at the 10%, and therefore, does it imply a change in the previous guidance for the 30% payout ratio?

David R. Mathers

Just to be clear, Derek, what we actually said on July 18, as part of the capital measures was that, clearly, ultimate decision of the board, but the discussion -- recommendation of the discussion we had with the board is that in respect to 2012, we would actually pay our scrip dividend. That's what we did actually announce for this year. No change to guidance. It's in line with part of the capital plan actually, Derek. So there shouldn't be any changes there in terms of your expectations. Derek, one supplementary point, and I think to the benefit of everyone, actually. Brady actually mentioned the graduate and technical apprentice hires within the private bank, which as he said, it was 105 apprentice, about 320 campus hires. You should be aware that for the group overall, there was about 800 graduates and then another 100 apprentices. So those would be the group addition from the seasonal add in terms of the graduate improvement and apprenticeship programs just to complete the analysis.

Operator

Next question comes from Huw Van Steenis from Morgan Stanley.

Huw Van Steenis - Morgan Stanley, Research Division

Two questions. First, really thinking about capital return. I was interested by the subtle change in wording on Page 31 about your targets being before capital distributions. I know it's very early, but thinking about the 2013 dividend, do you think it's possible to get back to 100% cash dividend next year, and what are the sort of factors, which may go into that thinking? And then number 2, reflecting the news of cost-cutting program, does that change when you expect you might hit the 15% ROE, KPI and maybe give us some sense about which year you think it's some -- which you hope to achieve that target?

David R. Mathers

So, that's for Brady. So I take the cash point and then the ROE...

Brady W. Dougan

Yes, sure.

David R. Mathers

So Huw, I think we said, as I said, confirmed, it's our intention that we would issue a scrip dividend for 2012, which would then be the scrip that's actually payable in spring of 2013, post the AGM. I think we've also kind of said elsewhere, I think reasonably consistently, that once we actually achieved that 10% target, we'd move away from such dilutive measures. So our intention really would be, the year after, to recommend to the board and then to the AGM, that we'd go to a cash dividend for the 2013 year, which to be clear, would then be payable in the spring of 2014. So that's just -- I don't think -- I know it's pretty consistent what we've said before. I don't think we'd shift from that position, actually, Huw.

Huw Van Steenis - Morgan Stanley, Research Division

Sorry, I fully appreciate that. I was just thinking that if there was a scenario, which once paying dividend, you slipped back below 10%, would it still be a full cash dividend? Sorry, that was the sort of more, what I was pointing to in the subtle change of wording.

David R. Mathers

Obviously, we'd hoped and we're approaching 12%. That shouldn't be an issue, but ultimately, that would be a question for the board. I think, candidly, I think whilst the scrip is appropriate in certain circumstances, once we actually achieved our ratios, we'd like to move away from that. But that is a question for the board.

Brady W. Dougan

And here, your question on ROE, you're just saying, what's just kind of more detail around the target when we might achieve it, what the dynamics are around that?

Huw Van Steenis - Morgan Stanley, Research Division

Yes, please.

Brady W. Dougan

Yes. I mean I guess what we would point to is an operating ROE at 10% for the first 9 months of this year, and actually, as we pointed out, that's been depressed by 2% from our legacy businesses. So we would have had a 12% return so far this year just on an operating business for our operating basis for our ongoing businesses. I think our view, and I think David mentioned, hasn't been a great environment so far this year. I mean, there obviously been points in time when it's been reasonable. But it hasn't been, I think, generally, it hasn't been a great environment. So I think we look at it and say, we'd be at a 12% return without our sort of the legacy drag. Obviously, we have continuing programs to reduce cost. We also have continuing programs to reduce capital usage in the businesses. So I think that, and I also think that we've got -- and we feel like the business model is actually operating really well in these, even in these volatile markets. We feel like it's doing what we'd like it to do. We feel like we've -- and again, we think this is a real advantage. We're way up the curve in terms of figuring out how to run the business on Basel III-compliant basis. So our view is that we ought to be able to continue to improve those returns over time as we continue to optimize the business. And obviously, we're not going to put a stake in the ground in terms of which quarter, or which year we're going to get there. But I do think that in the not-too-distant future, we should be able to achieve those targets, assuming we have any kind of reasonable markets. I think that ought to be possible. If you just work through the cost reductions and the capital reductions, I think you'll see that it actually moves us up, obviously, approaching that number.

Operator

Next question comes from Kian Abouhossein from JPMorgan.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

I have a few questions. The first one's related to Slide 21. You strip out the variable compensation, and I'm just trying to understand if this includes deferred compensation or excludes deferred compensation?

David R. Mathers

Sure, Kian. Sorry, David here. So Slide 21, no. What we wanted to give you here was the actual variable compensation accrual that we make in each period for what we actually pay out. Now, clearly, what the recipient gets is obviously the CV or the cash accrual, plus the deferral. Now what we wanted to give you here was an x BC number, so you get away from any fluctuations around the bonus accrual. And that, that's -- so it's next BC. The deferred compensation actually comes through and is included in those cost targets. So the CHF 18.5 billion, CHF 17.5 billion, down to CHF 16.5 billion, and that was why I made that slight caveat, it was 2 caveats, really. One is that it's dependent on FX, so we've assumed constant FX in this. And two, it's assuming a relatively constant bonus accrual, because if we suddenly decreased the bonus accrual, and then over the following period, clearly, the actual total expenses would drop because you'd have less deferral being amortized for the P&L, clearly if you increased it you would have the opposite effect. So we wanted to be clear, this is the x BC number on those assumptions. I mean I think, we thought it was worthwhile, because we had a number of questions over the last 6 months as to what do these cost savings really mean in terms of your x BC? And we actually wanted to say explicitly, what our targets were on that basis.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

I actually would like to look at it the other way around, because first of all, your deferred comp is going to decline anyway, so in terms of your real cost declines, I would say your CHF 500 million to CHF 400 million of decline in deferred anyway for the year, which included your cost savings, at the same time, you're increasing your variable compensation for a year where you're actually not performing that well. Your IB comp year-to-date cleans -- is quite high. It's running at around 46, 47. Your total cost income's 81. Now what I'm trying to understand is, assuming there's no revenue change in the environment, what is your real cost absolute number that you're targeting, because clearly, this is influenced by deferred, which is helping you, but you're increasing deferred variable by CHF 300 million in a year where most banks are actually reducing variable?

David R. Mathers

Kian, I think it may be the format of the presentation, which is confusing a little bit there. The variable compensation of 1.3 is what we actually accrued in 9 months, whereas the number you see on the 6 month is actually, the 1.012 is the 6 months. So the 1.3 is for 3 quarters, the 1.012 is actually for 2 quarters. So we've not increased the variable compensation as a consequence of that. In fact, you can see the numbers in the account, for the variable compensation, is down about 4% in accounting in terms of the group and down about 6% overall.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

But if you include the variable, if you look at absolute costs, no big revenue change. What would be your cost number target for 2014 and '15?

David R. Mathers

It would depend on, clearly, on what we choose to accrue in terms of bonuses...

Kian Abouhossein - JP Morgan Chase & Co, Research Division

But assuming no revenue change, because I think that's the number we're interested in. The 16.5 doesn't mean anything to us. So really assuming no revenue growth, considering your cost income in the IB is 81 for 9 months, what is your absolute cost number, 16.5 plus a variable, assuming no revenue growth?

David R. Mathers

I -- first of all, I'm going to refer to Brady here. I'm not sure that we're, necessarily, at this point, going to be giving a forecast for our bonus accrual 2 years out from where we are today. What we're giving here is a forecast for where we expect our other cost to actually be at that point. But I think, inevitably, the variable compensation accrual will obviously depend clearly on our performance, and it must also depend on external factors in terms of our competitor numbers. Brady, do you want to add anything?

So I think, Kian, hopefully, we've given you some guidance here in terms of our x BC costs. I think, probably, hand over to you really, I guess, in terms of what assumptions you want to make about the variable compensation environment we'll face over the next 3 years.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

And the second question is on Page 38, Slide 38. You give the fixed income breakdown, which is very helpful. Even if I adjust for the 16% in the 9 months, you make roughly $6 billion of revenues. 31% is macro, that's about $1.5 billion. $1.5 billion for 9 months is, roughly, just to give you an example, that's 1/2 of what Citi made in 1 quarter, in the third quarter, you make in macro. How do you explain that? I mean how do you actually make money in a business where you make $1.5 billion with other players, who will make this year around $5 billion in the same business, probably even more than that? I mean I just don't see that your cost income can be below 100 in that business? Is that fair?

Brady W. Dougan

I guess, Kian, I guess, as you know, our focus is on return on capital in these business. And I guess that's one of the things that we continue to struggle with. We think that's the critical issue is driving high returns on capital in these businesses. So the fact is, having transitioned to Basel III, we've had to exit a number of parts of the business. We've had to be efficient around the capital that we put in the business. And actually, that does have an impact on the absolute level of revenues that we make. I think the most important thing that we point to is if you look at, to point you to a different slide, look at the slide, which outlines the return on capital in the Investment Banking business, where you can see the ongoing Investment Banking business in the 9 months earned a 16% return on equity. That's actually what we think is most important is that you can see we're making very high returns on capital in the business in a Basel III format. And frankly, if you believe that's the way the rest of the industry has to go, we've already gotten there. And frankly, that's probably, I think that's been the most key question, the biggest concern that people have. Now in some of our businesses, we clearly have very high market shares, very significant market shares and are really leaders in things like our Structured Products business, our Credit business, our Emerging Markets business. The Rates business, as we've talked about, is a business that we're actually growing, where we're actually making progress in. It is a profitable business, and -- but again, with the amount of capital, the expense base against it is such that it supports that level of return in order to make -- or level of revenues in order to make returns. But it's a business that is focused on generating high returns. And rather than looking at absolute revenue levels, we're looking at trying to drive returns in the business, which I think is where the whole industry's going to have to get to.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

But if...

David R. Mathers

Sorry, Kian, I think a couple of points I'd add to it. I mean I think, clearly, the business model we're actually adapting fixed income is inherently different from that of Citigroup, which I think you mentioned, so a global bank with completely different mix of customers and products to actually service. I think we've made it pretty clear, both in over the last year and particularly in the last 3 months, that we're very much focused on actually achieving good returns in a number of fixed income businesses. I don't think we really are that convinced by this kind of flow month to bold bracket-type [ph] argument in this change regulatory world, where you're going to have to have much credit constraints, much lower risk-weighted asset usage. And what we have, basically, is a clash in [ph] the business, which as Brady says, actually making pretty acceptable returns and is radically better than the year ago. Now that probably is a different strategy than some would pursue. But I think in this environment, I think it's a strategy, which is actually pretty appropriate to that. And perhaps, you might say we're being unambitious. I think, frankly, we're being realistic about what we can actually achieve, and as Brady said, to achieve an 11% ROE in the investment bank for the first 9 months, 16% after the 6 -- 67 million drag from the fit wind-down, I don't think it's a bad improvement and a testament to the strategy, particularly compared to where we've come to over the last year, Kian.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Next comment. I think on the -- clearly, the ROE is important, and I see that, and it makes a lot of sense. But clearly then the question backs if you have any update more between standardized and internal risk-weighted assets. And I was wondering if you have [Audio Gap] any more information to share from the last conference call, if there's been any progress on your side to look into this issue?

David R. Mathers

Not really. I mean I think the whole industry is, obviously, watching the Basel review about model standardization and market risk across the industry. So I think once we actually -- as we see that develop, I think we'll probably have to give you more guidance as that comes through. Although and frankly, given both the EU and the U.S. have kind of delayed that Basel III implantation, it does feel slightly confusing at the moment. But I think we're obviously waiting to see what the Basel community comes up in terms of the harmonization of model parameters and inputs once they actually get through it. But it's -- my point really is, that's somewhat being confused by the fact that a large part of the world are not, in fact, implementing Basel III on the 1st of January.

Operator

Your next question comes from Kinner Lakhani from Citi.

Kinner R. Lakhani - Citigroup Inc, Research Division

So just on fixed income. I wanted to come back to the securitized products business, which seemed to suffer quite a lot last year, doing much better this year. But how do you see the future of that on kind of a 3 to 5 yearly? Clearly, there's an element of search for yield and support from QE3 and so on. And without necessarily a high level of generation of new securitized product, how do you look at the future of that business? Secondly, on wealth management outlook, I just wanted to ask you about the cross-border outflows, how much we've seen so far cumulatively? And what's the go-to level that you see in terms of the outflows, once we are kind of over and done with on this -- in this issue? And also on the deposit margin pressures, we've clearly seen a fair amount over the last years, but how much further this would go?

Brady W. Dougan

Good, okay, thanks. I mean I think our first one, on the securitized product business question. I mean we feel like we have an excellent business in that area. We think it's performed extremely well. It's a business that actually we see the improved performance from the fact that we're running the business differently, so obviously, QE3 and some of the yield elements do make it an attractive segment that we, frankly, don't think -- we're running very light inventories in that area as you know. So we don't think, frankly, there was a lot of, sort of rising with the tide. We think we've got actually a very good business that's basically been remodeled to be a very high returning business under Basel III. I think, in general, our view is that the future for that business is actually pretty bright. I mean, obviously, a lot of it is U.S. There's a lot -- there's a high percentage of U.S. content with the housing market sort of bottoming, improving from here. We think that will, that gives obviously improving fundamentals and probably will give rise to additional volumes in that business as well. So I think, frankly, we are a leader in that business. We've actually got a great franchise there, and we think that the sort of macro influences on the business will probably be positive over time. And frankly, as and when others have to adapt Basel III to this business, this is probably one of the businesses that's most impacted by Basel III. As I think, probably as many banks look at it, they may have difficulty in figuring out how to make the business model work under Basel III, and they may well just exit, which will probably -- which if that happened, obviously, that would have a positive impact on margins in that business. So we're pretty bullish about that business, actually, medium term. On the wealth management outlook, and you talked about the cross-border outflows. We have talked about the fact that the mature, particularly European market net new asset flows have been, have really been outflows. And I mean we talked about it this quarter, but it's been that way actually for some time, and we've been seeing outflows in that business pretty consistently over some time. So I think year-to-date, we basically have seen about CHF 8 billion of outflows into the -- on the European sort of Western European, sort of mature markets region. So it's been a continuing outflow. I mean I guess, it's hard to say exactly how that will develop from here. I think our view is that we're getting closer, hopefully, to an environment where we'll have agreements in place between Switzerland and other countries that will help to regularize the way the cross-border business is done. We also do feel that since we have had fairly consistent outflow for a long period of time, that it's obviously moving to a more stable state. And frankly, the fact that we've had as strong and net new asset inflow on an overall basis over the past 3 or 4 years, and we've probably had more inflows than any other private bank, I think it's encouraging that, obviously, those outflows have been offset by inflows from emerging markets and to the offshore platforms as well as the performance of our onshore platforms, so we feel pretty good about that. So I think it will probably continue, but our belief is it will reduce over time. And overall, the state of the business is healthy with good inflows over time. Last question on deposits, do you want to...

David R. Mathers

On deposits, yes, I think we, obviously, have seen a decline in net interest income in respect to the, due to low interest rates. I think so far, as you can see, we've been relatively successful in actually protecting our overall net interest income by the increase in the absolute amount of deposit volumes, but also our lending. And part of that is associated with the ultra high net worth business, which does tend to include more lending around it, and for which I think we have basically seen some pricing power in terms of what we actually do. I think if we look forward, I don't think we've come to the end of that process, because I think you still have a flow-through as various contracts actually drop through in terms of the interest rates you're actually going to receive. But nonetheless, as we continue to develop the ultra-high, net worth business in particular, as well as our lending product, that should actually be reasonably successful in terms of offsetting it. But to be absolutely clear, it is definitely a balance. If we didn't have this roll-off from low interest rates, then clearly, our net interest income would actually be going up. As you can see, it is actually up for the 9-month period, but down quarter-on-quarter. But it's definitely a drag in terms of the gross margin, because as we grow, as we actually improve our assets under management, you're then being faced with expansion and lending, but offset in terms of the actual interest rates, our net interest income from our overall deposits we actually keep. So I think a bit further to go, I'm afraid.

Kinner R. Lakhani - Citigroup Inc, Research Division

Can I just ask one more just on the LCR. If we did see a forbearance from the Basel committee on the liquidity coverage ratio, and you guys are meeting these very high standards that exist today. Would you imagine that you'd be able to reduce your liquidity buffers?

David R. Mathers

Well, obviously, I think you may know, the Swiss regime actually, it brought in a version of the LCR -- actually, I think it was back in 2010. So we've actually maintained liquidity buffers to actually meet that for the last couple of years. And they're not dissimilar in terms of how they actually work between the Basel rule and the Swiss rule. So I guess if the Basel committee were to change their approach on this, then that would be probably something we would have a discussion with our regulators about. But as to whether we would see any benefit now, I think unclear, given that the Swiss rule, technically, predates now the sort of Basel III implementation by a couple of years and there's precedent around it in terms of that. But it's certainly a discussion we could have, I guess, but I'm not entirely optimistic.

Operator

Our next question comes from Fiona Swaffield from Royal Bank of Canada.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Two areas. The first was on the leverage ratio and the decision to reduce the assets by CHF 130 billion. I just wanted to ask -- I think you said it wouldn't have a significant revenue impact. Could you walk us through why that would be? And if that's the case, then why haven't you potentially considered it previously? And then just in terms of how you're defining the capital, won't the leverage ratio under Basel III, look at Basel III core Tier 1 over time? I know it takes time to come in, but won't it be looking more like CHF 33 billion, CHF 31 billion depending on the hybrid, so it would be close to 30 billion? I just wanted to get your comment on that. And then the secondary was just the gross margin in the private bank. I mean 107 [ph] is obviously a low point. I mean what you're thinking that you can do to improve that? I know there's some seasonal factor as well, I mean how much of that is -- do you think is seasonal?

David R. Mathers

So if I should -- if I talk to the first couple of points. Well, I think you can see on Slide 27, we have generally reduced the balance sheet over time. And that has come actually more than 100% from the investment bank, because we've actually, as I mentioned before, increased our lending activity with ultra-high net worth through the private bank, if you look at the numbers. I didn't show them here, but I think they're actually in our financial reporting. So it's not something we've not looked at before. It is probably fair to say, though, that a lot of our emphasis over the last year or so has been implementing the risk-weighted assets reductions ahead of the Basel III process that when we actually talked about a year ago, and that's been where a lot of our emphasis has actually been. Now I think -- therefore, I think myself, the finance team, treasury and also the team of the investment bank have been looking somewhat closely over the last year or so in terms of what is a -- what would a more optimized balance sheet look like for the investment bank. And I think you can see the repo disclosure in terms of our funding and capital position, so you can see that we have a relatively large repo business here in fixed income. It's not in the treasury section in this deck, but I mean I can tell you that the prime service business uses about CHF 210 billion of balance sheet as well, which are all relatively large balance sheet users. I think to be candid what's became clear, as we've actually gone through and look not just the return on equity -- sorry, the return on assets by business line, but the return on assets by client is that we could be rather more aligned between our more profitable major clients than their use the balance sheet. And there is actually substantial scope to actually optimize that as we go forward. Really essentially, therefore duplicating what we've actually done have been risk-weighted assets in terms of aligning that to our client usage as well. So I think there is significant potential there, and we are going to do, we're actually going to follow that. I wouldn't say, though, that clearly, this is just exclusively a repo and a prime services issue. I mean, I think, we would also be looking at essentially other balance sheet positions across the investment bank, and we would expect to see quite substantial reductions coming from that, from some very low return on asset positions that are actually there. So there is scope there. When we talk about this CHF 900 billion target. I think you should see this is where you've got to in this process, not necessarily an end of the journey. So that puts a little bit in context and that's probably not a bad segue to your second point really, which is around the Basel III leverage ratio. I mean, I think part of the problem, of course, is there are so many different leverage ratios. I mean you may recall, that there's also the Swiss 2008 street leverage ratio around 5.2, et cetera. But as you say, over the course of the next few years, I guess the whole industry will transition through to the Basel III leverage ratio, or variance of it. You may be aware that there's something called the Swiss SIFI or TBTF leverage ratio, which is apparent to Basel III, which has the same numerator, i.e. the asset that has a different denominator because it also includes CoCos, and then it's actually calibrated to a high-level, but rather than going into the detail, I think to be clear, the Basel -- the big difference obviously in the Basel III leverage ratios, as you say, the denominator is actually some variance of CET1 and is a CET1-based denominator and the numerator is both the balance sheet you see here plus off-balance sheet and guarantees. And I think you may recall that the -- I think the Basel III leverage ratio was due to start required exposure. I think, from 2015 onwards when it entered the calibration phase. So it's still several years out in terms of that. Although, the Swiss regime actually does include components of this more soon. So I think my point there is you're correct, what we will also be doing in addition to looking to the absolute balance sheet -- but you see here the on-balance sheet asset. But also be looking to incorporating the off-balance sheet asset and guarantees, which everybody banks has essentially, as we actually go into that new phase. So that will also be a further target for this actually. Fiona, I'm not giving that targets today. I think it's a little bit premature, but we did want to basically give you an update on where we were in terms of our thinking of the on-balance sheet and the progress we're going to make there. But I think this is probably something you can expect us to talk more about over coming quarters, actually. You're second question...

Brady W. Dougan

Second question was on the gross margin development. I mean, I think, obviously, as you said, Fiona, there clearly are some seasonal impact and some of the timing on some of the performance fees, et cetera. We've identified, there's at least a couple of basis points in the second quarter that wasn't in the third quarter just from seasonal, pure seasonal impacts. So probably some of that we would see, hopefully, come back in the fourth quarter. And -- but there are also some more what I would call cyclical effects that are impacting the business, obviously, interest rates, the low level of transactions, et cetera. So I think a lot of the cyclical effects. Again, we believe that over time those will work back. We'll get to -- someday we may have higher interest rates. Hopefully, we will get to more transactional volume. And also in the meantime, obviously, we're very focused on the net margin, because that's obviously what's most important to the bottom line. We are focused on the net margin. Some of the success in the ultra high net worth side has also probably impacted the gross margin and the ultra high net worth is a bit dilutive to the gross margin but is actually accretive to the net margin. And so overall, that's a sector that we're continuing to grow in. So I think there are clearly some just quarterly volatility impacts but, also as you say, we still are in a challenging environment for this business. And I do think that when we get to -- when and if we get to conditions that are more normalized, we obviously will see higher gross margin.

Operator

Next question comes from Jon Peace from Nomura.

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

I had 2 further questions, please. The first one was on the Wealth Management net new money. To what extent is there still a dilutive impact from outflows from the Clariden Leu integration and when might those finally, roll off? And then the second question was just to ask Kian's question around variable compensation, the investment bank from another way. How should we think about how you manage that going forward? Do you have a particular target in mind for compensation cost-to-income ratio? And what number might that be? Or are you working more towards an ROE target for the investment bank, out of which that ratio falls out?

Brady W. Dougan

I think on the net new asset question, the Clariden Leu integration has actually been pretty much completed, and we think it's actually in -- it's in pretty good shape. So in the third quarter, we did not see any material impact in the private bank from outflows from the Clariden acquisition. So we think that's actually stabilized at this point. There are some seasonal impacts in the third quarter, particularly in Switzerland. Third quarter tends to be seasonally a bit of a more difficult quarter. You have -- you do have some outflows there. But we did have strong outflows in APAC, Eastern Europe and the Middle East, as you know. But the Clariden Leu thing has, basically, pretty much settled down and I think is not an issue in terms of continuing outflows. David, do you want to address the variable comp issue?

David R. Mathers

I mean, I think, clearly, the bottom line question is the ROE target as you said. And that's primarily worked towards. That said, I think, clearly when we look at the comp accruals for the investment bank, we do very much look on an economic contribution basis, post capital charge. And I think that's appropriate because, I think, we do want to give our employees an incentive to align [indiscernible] to what we need to achieve as a group and as a bank. So I mean I personally think the pressure on comp is probably downwards across the industry. We'll see how that goes in the balance of this year in terms of that. And I don't think I could give you an -- I mean I wouldn't want to give you an absolute comp-to-revenue target because that's not how we think about it. We do think it more of a comp to -- variable comp to economic contribution basis. But I think, clearly, as we look towards how we make sure we hit our 15% ROE target, then the variable comp accrual is a very important part of that mathematics.

Operator

Our next question comes from Philipp Zieschang from UBS.

Philipp Zieschang - UBS Investment Bank, Research Division

Three questions, if I may. What's your outlook in terms of risk-weighted assets but also total assets beyond Rates business? And should we expect actually given that you capture several opportunities, given your early strategic positioning for Basel III, should we expect group risk-weighted assets to grow from the EUR 280 billion beyond 2013 and also probably total assets to pick up again? The second question is on the 2013 and 12% Swiss Core Tier 1 ratio, guidance of 12%. Have you -- how have you worked in that CHF 1 billion additional realignment cost you're expecting for the period of 2013 to '15? And finally, just coming back to that risk-weighted asset reduction near term of the CHF 20 billion. Could you just give us a sense what's the total asset reduction related to it? I understand that your balance sheet reduction is so far guided in low-risk risk-weighted assets areas or buckets. But what's the associated balance sheet reduction coming with the CHF 20 billion?

Brady W. Dougan

I mean, I think, with regard to the risk-weighted assets and total assets beyond 2013, I think our -- I mean we think that this is a sustainable level of risk-weighted assets. And in order to run the business and run it on the basis of -- and hopefully meeting our 15% target return for the investment bank and for the group as a whole. So I don't think that we anticipate that there would be some ramp-up in the RWA in out years. Although obviously, we will look to be dynamic about how we allocate the capital between businesses. But I think, at an aggregate level, our expectation is that we would kind of probably keep it at similar levels. In terms about your last questions, since its RWA-related as well, the CHF 20 billion of risk-weighted asset reduction, obviously, as you say, it will have varying different nominal balance sheet impact, if that's your question. I do -- the legacy, for instance, where we have about, I guess, we have CHF 12 billion of...

David R. Mathers

CHF 14 billion...

Brady W. Dougan

CHF 14 billion of RWA, probably a notional balance sheet related to that is probably about twice of that, roughly.

David R. Mathers

CHF 23 billion.

Brady W. Dougan

CHF 23 billion. So if you could see if we reduce -- of the 20 -- if we manage to, which I don't think we will, but just hypothetically, if we manage to reduce all CHF 14 billion of the legacy RWA, that would come -- that would have an associated CHF 23 billion nominal balance sheet reduction with it. But it will be a mixture, because it's obviously not going to be all legacy. In fact, you'd have to do more any way to get to the CHF 20 billion reduction. So there'll be -- as you said, there'll be varying differences, sort of probably ratios between RWA and the nominal.

David R. Mathers

I think you raised a further question then about the 12%, approaching 12%, view basically for the Swiss Core Capital ratio in 2013. And the interaction was the CHF 1 billion of likely realignment cost over 2013, '14 and '15. I think point one, essentially, is you clearly would not expect all of that CHF 1 billion to be taken in 2013. I mean, I think, probably around 1/2 would be around likely, so that would be about CHF 500 million. If you look at that relative to the capital base, then you probably thinking that's going to be something like a sort of 10 to 20 basis point cost in terms of the capital ratio. And if you actually do the calculation, your own calculation putting down this conception [ph], you probably may get to a slightly higher number than 12%, that's why we said approaching 12%. So we did, in fact, haircut that to allow for factors such as this in the actual process. So if that's helpful in terms of that. I would say, generally, to the balance sheet point, just to reinforce as I said before, our efforts around balance sheet is clearly some work that we've been looking at particularly the last year, and we will be extending that further over the course of next year or so. And that will also include the off-balance sheet financing guarantees, as I mentioned before, and I would clearly expect that to be coming down significantly as we move forward.

Philipp Zieschang - UBS Investment Bank, Research Division

Can we just come back to the medium-term risk-weighted asset growth point. I guess probably consensus or investors would expect your Investment Banking revenues to grow, say, 5% per annum from 2013, '14 onwards? So -- and if we follow your comments in terms of keeping risk-weighted assets stable and basically the Investment Bank is the only area, which really consumes additional capital, where would that efficiency come from? So why shouldn't it be reasonable to assume, say, 4%, 5% risk-weighted assets growth in the IB per annum, given your growth ambitions in certain areas and given that you claim to have run the business very efficiently so far?

Brady W. Dougan

Well, the first most obvious thing is the wind down businesses. I mean that's obviously been -- that's been a 5% drag on the IB return on equity and obviously, if that goes away, that in and of itself is a fair uptick in revenues, but...

David R. Mathers

I mean to be explicit on Brady's points, in order to hit the $180 billion RWA target, where we are in that projection actually, assuming only about 1/2 of the wind-down business is actually used up in 2013. Clearly, we'd like to do better than that, but that's what we've assumed prudently. I think the second question is a little bit more conceptual and strategic, and it really depends how the rest of industry actually evolves. Clearly, I think, the market and banks have generally moved towards accepting the Basel III transition's coming, even though the regulatory timetable actually slipped a bit. But what that's doing, of course, is actually changing the nature of our industry because, I think, the whole industry is moving towards more Basel III-light-type capital approaches. So I think that kind of convergence clearly is very helpful because it supports business practices, which do not require the commitment of large amounts of capital. I guess if you saw the rest of the world, basically, abandoning Basel III, then I think that would cause a lot of stress of this point. And I don't think -- I would definitely conceive that would be an important breakpoint in terms of the analysis. On the other hand, if you see more convergence, then I think you move away from some of the more Basel III-risk-intensive businesses or practices we've seen in prior years.

Brady W. Dougan

Yes. I mean, obviously, the linkage between RWA growth and revenue growth is, I mean, under the new model, under our model, it obviously it's not directly correlated. I mean 9 months last year to 9 months this year, we reduced RWA 43%, and we increased our revenues pretty substantially in the fixed income business. So obviously, I think our view is that we can continue to find ways to optimize and grow the business even with discipline on the risk-weighted asset side. But that's obviously that's the trick, that's the key, to be able to do to operate successfully in the new environment.

David R. Mathers

But I think there's also sort of certain pretty basic reality here, which is, I think, we have reduced the Investment Banking at this level. We're targeting that. Clearly, we do want to see growth in the Private Banking, and that includes RWA around lending, and that's fine.

Operator

Your next question comes from Christopher Wheeler from Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

Just a couple of quick questions you'll be pleased to know. The first one is on Wealth Management. Obviously, you've been discussing the muted returns you're suffering because of the difficult markets, but given how far these have come down and not just for you but for the industry, can you just perhaps comment on your targets, because you have some pretty ambitious targets, and I'm wondering whether Hans-Ulrich is thinking about the fact that you're getting up from where you are now, particularly the gross margin of 103 is going to be pretty difficult even in better markets. That's the first question. And the second question is around the leverage ratio, following up on Fiona's question. I'm just wondering what the motivation is for you now focusing on this important mix? I obviously welcome as I'm sure everybody else does. But I'm trying to get how much of this is good corporate governance, but also perhaps talk about regulatory pressures that are building on you and the industry in terms of this important measure?

Brady W. Dougan

Yes, I mean I think with regard to the gross margin and our targets, I mean, we obviously the gross margins developed from sort of high points of 130 sort of level as you say down to what I'd say sort of a 110 type level. I think some of that has been structural. Some of that has been more cyclical. I think we do still believe that if the cyclical aspects of the business move back towards a more favorable environment, i.e., some higher interest rates, some higher transaction levels and obviously it doesn't have to go back to where it was in the mid-2000, but just some improvement in those levels. I think as we've said, we still believe that to have gross margin numbers around in the 120 area or whatever is certainly very, very possible. And obviously, also there's a lot we can do about this. We increase our gross margins by increasing the amount of business we do with clients, the more cross-sell we can do, the higher-margin we can create for the bank and obviously, provide value-added services for the clients. So we can do a lot within that as well, and we are focused on that. But it is, as you say, certainly what I would call the cyclical headwinds right now are pretty tough, but I think that those will turn at some point and obviously, at that point, I think we will get a movement in the gross margin back more towards where it was before. I think on the leverage ratio, I mean, David could comment as well. I mean I think it's just -- I mean you see it. I think it's a reality of market focus, regulatory focus, et cetera. I mean we obviously feel like we have an extremely high-quality balance sheet. The assets side of our balance sheet, we think, is probably the highest quality in the industry. And therefore, we think that leverage should be less of a concern, but I think both from a regulatory focus point of view, as well as a market focus point of view, it's our view that obviously it will continue to be something that people do look at. And so we feel like we've obviously tackled a lot of the -- what we think are a lot of the toughest elements of transitioning to the new regime in terms of capital, et cetera. And we really have reengineered the business, and I mean I think to us the most -- the most illustrative slide of that is the fixed income business going from -- or the Investment Banking business going from a 3% return in 9 months last year to 16% this year, excluding the non-ongoing business. We think that represent a lot of progress on a lot of difficult issues that the industry has to going to deal with. But frankly, running the business on a lower leverage basis is probably the right thing to do, given the direction things are going. But David do you want to add to that?

David R. Mathers

No, I mean, I just want -- a couple of supplementary points. I mean, we did actually on Page 43 on the appendix, we didn't go through at the main deck, given we talked a little bit about leverage, included the adjusted assets basis, which I think a number of U.S. firms actually do as well. So that gives a measure, I think, of how much the kind of a repo actually contributes to that and you can see it drops to about 17x, 14x in these changes or about 5.9% and 7.3%. So I think that probably underlines various points about the actual low risk in the implicit balance sheet. That said, as I said I think before, I think one -- whilst there's nothing specific, I think we can see the -- I think the direction of discussions around overall leverage ratio, which I think we all read and I think, therefore, it is something we felt we should focus on. I think also probably, as I said, I think in answer to an earlier question. A lot of the work that we have done over the last year, over the last 2 years, has been very much focused actually on reducing the RWAs, very intensive position within the Investment Banking and aligning the model against that. I think we feel it's probably appropriate now, as we shift forward. Yes, we are going to take another CHF 25 billion of risk-weighted assets of the Investment Bank, but we are also -- we are shifting, I think, to thinking of what we can do to actually reduce our absolute balance sheet and particularly focus on lower ROA, assets in the balance sheet, because I think it seems appropriate. And I think affects the trend and I think it's something, which probably our shareholders, I think, will appreciate.

Operator

Our next question comes from Kilian Maier from MainFirst.

Kilian Maier - MainFirst Bank AG, Research Division

Swiss Cantonal and retail banks who are not using the IRB approach, have higher capital requirements for Swiss mortgages, and they are increasingly lobbying against this. Maybe you can provide us with an update on this and your view on this situation?

David R. Mathers

I mean, I think, that's something that probably actually our Risk Officer could answer that. But I mean, yes, clearly, there has been a debate in Switzerland around standard vs model approach for mortgages and some discussion about how minimum capital requirements actually apply against that. I think you're aware it's been an ongoing debate here in Switzerland, there have been proposals. Although I think most recently, I think, and it's obviously also relates to the sort of pro-cyclical add on, which would require for Swiss assets in that context. But I think actually what I've seen most recently and my Swiss colleagues probably could correct me, is that I think most -- some of the proposals have actually been dropped I think mainly because I think this SMB is really less concerned about the real estate situation here in Switzerland. So I think it's probably become less of an issue in the last couple of months than maybe were 6 months ago, whether there were some discussions around it.

Brady W. Dougan

Yes, but I think there is -- there are issues around an unlevel playing field. Obviously, there are global issues around that, there are certainly issues around that here in Switzerland as well. I mean obviously, we have the cake for -- we'd like to get to a level playing field, and we think that's probably the right thing for the financial system. And so over time, that's obviously our hope, is that we do get to a more level playing field.

Operator

Our next question comes from Dirk Hoffmann-Becking from Société Générale.

Dirk Hoffmann-Becking - Societe Generale Cross Asset Research

There's only one small question left. On your CHF 130 billion reduction of balance sheet, I presume that affects the prime brokerage business somewhat disproportionately. Can you sort of take us through how you think about maintaining the recent improvement to your positioning within prime brokerage despite the impact from potentially lower balances to be providing to clients?

David R. Mathers

Actually, it doesn't affect disproportionately, to be candid. And that was one reason why we put in the pro forma reduction on adjusted asset basis on Page 43, which is half the story in terms of repo. I do think that there's about CHF 32 billion, we actually include in that. I think it's certainly clear that when we look at the repo business, we do see group of variance, as I said, between our main clients and how we actually allocate balance sheet and therefore, I think potential for us to actually align our balance sheet usage much more closely to those major clients. I think that is also true to Prime Service business to a much lesser extent. So I think we will reduce the balance sheet in prime services, but to a lesser extent. I'm not sure -- I don't think that will impair the overall performance and profitably of our Prime Service business to any material degree, because I think what we've seen is many our best clients are not that intense of balance sheet users. And if anything, they could actually benefit from this approach. So I don't think you're going to see anything in that. It's obviously a very good business for us and one which we continue outperforming. But no, I don't think you going to see a change there. We will, though, be looking across the rest of the investment bank in terms of balance sheet usage, and as I said, certainly the work we've done already identified a number of significantly lower RWA usage, which we will obviously be emanating.

Operator

Our next question is from Robert Murphy, HSBC.

Robert Murphy - HSBC, Research Division

I've got a couple of questions on Slide 39 in terms of the -- related to your CHF 20 billion reduction in RWAs. First of all, in the wind-down business, I think you said legacy assets lost CHF 136 million in the quarter? And I was just trying to understand, given the move in yields we've had on both treasuries and mortgage assets, why you're still getting significant losses on the reduction there? And with regard to those wind-down assets, are those largely held-to-maturity accounted or fair value accounted now? That's the first part. I've got a couple of others.

David R. Mathers

Sorry, it's David here. The CHF 136 million you actually mentioned was actually in respect of certain significant litigation provisions, primarily in respect of mortgage exposure. So not the Fed wind-down. The Fed wind-down number was actually CHF 100 million, so CHF 100 million basically or actually amount is CHF 103 million to be exact in the third quarter. That was composed of about CHF 61 million of negative revenue. And the balance, I guess, CHF 42 million essentially was actually the expenses involved, in actually running and maintaining that portfolio. Just to be clear then, to complete that picture for the year-to-date, we've had negative revenues on the Fed wind-down portfolio of just under CHF 500 million and a negative PTI of CHF 667 million, which was on one of the slides. So about CHF 500 million and then about another 160-odd of expenses to actually run that in terms of the numbers. I guess your next question is why have you seen those markdowns. I think the truth is, given we've actually reduced the RWA in the Fed wind-down, the position size is from 54 to 14, we are down to a collection of assets, which don't really have much correlation to the overall macro environment, the residual European CMBS position, residual power trade. They're not really correlated to those markets so we have not seen any particular benefits of any materiality from the -- I guess, the improvement to a slightly more favorable rates environment in terms of that. They're very specific positions. And that just reflects the fact towards the end of the book we're actually working from. The majority of those are, in fact, fair value mark actually, just to be clear.

Robert Murphy - HSBC, Research Division

And so given that the RWA didn't change in the quarter, how much did you actually sell to -- how much was the sort of the notional sale to generate the CHF 61 million loss, revenue loss?

David R. Mathers

Most of it would be marks, not as opposed to sale.

Robert Murphy - HSBC, Research Division

It's just marks?

David R. Mathers

Yes, marks. I mean, I think -- obviously, we've made a lot of progress. Earlier in the year, we made less in the third quarter. And in answer to the previous question, the target really for the next 15 months is to basically reduced that by about 1/2. The target is to get rid of all that, let's be honest. But our projection is about 1/2.

Robert Murphy - HSBC, Research Division

Right. And then the CHF 20 billion as a whole, obviously you said about 1/2 of the wind-down. What's going to happen with the -- related to an earlier question on the securitized products, you said that's one of the toughest under the Basel III regime. I was just wondering how much is that going to -- of the CHF 20 billion is going to be out of that segment. Because that's quite a large amount of your fixed income risk-weighted asset?

David R. Mathers

I'm not sure necessarily giving a specific target by target on Page 39. You can see the securitized products have come down from CHF 73 billion to about CHF 37 billion. I'd say there's probably a few billion that would contribute towards that 25, but I'm not sure we'd expect to see a radical change, given that we've halved the amount of the risk-weighted assets is in that business already. So I think we'll be looking elsewhere across the portfolio. As I said the single large Fed wind-down, and then it will be more small chops in other areas. And including -- just for -- I mean, clearly just for the record this is obviously just on Page 39, the fixed income RWA. And but this -- the CHF 25 billion will not come entirely from the fixed income RWA. It will also come from some of our corporate lending books in the Investment Bank and will also revise some of our exposure in the equities portfolio as well. But you've seen an increase in the RWA for CCP, for example.

Robert Murphy - HSBC, Research Division

And where -- when you move to Basel III, so given that we're sort of in the last stages of the mitigation here, where would you rank the securitized products in terms of ROE on a sort of a normalized basis, out of those products that you're listing there?

David R. Mathers

Well, it's been -- I mean, I think, we've -- and before, it's been a relatively successful business for us for a number of years.

Robert Murphy - HSBC, Research Division

Would it be your most profitable business by ROE or your second best?

David R. Mathers

No, it certainly more than covers its cost of capital on any basis even with on a full Basel III basis as we show here in terms -- It certainly more than covers those costs but clearly, we can find very high ROE businesses in balance sheet light business -- sorry, in RWA-light businesses. But it's certainly more than covered its cost of capital.

Robert Murphy - HSBC, Research Division

Okay. And then just quickly on just another issue on the -- so I was confused on the numbers on the mortgage litigation. Can you say what the outstanding claims are on the mortgage rep and warranty, and what reserve there is there? I know it will come out on the other report, but I don't know if you can say now what that is?

David R. Mathers

Yes, it's the split reporting, so you'll see it in the second phase. I don't have that number to hand, actually. So you see you'll probably get in about a week or so time, I think.

Robert Murphy - HSBC, Research Division

It's just we've seen a bit of a rise in the U.S. numbers from the third party?

David R. Mathers

Yes, I think you will see a small increase for us this year. That's probably what you would expect, given the news flow over the last few months.

Operator

Our next question comes from Andrew Lim from Espirito Santo.

Andrew Lim - Espirito Santo Investment Bank, Research Division

Just coming back to the Basel III leverage ratio. I was just wondering if you could tell us what the off-balance sheet assets and guarantees are? And then just provide a bit more color about the nature of these balance sheet assets and perhaps to what extent they could be wound down and for what time period?

David R. Mathers

I don't think we've given you that number. I mean, I think -- I'm not sure any bank has actually given their Basel III leverage ratio as yet. But I mean it's -- as a bank, we've not generally been -- we don't generally issue much when we have guarantees, as such, but there are obviously a number of interest [ph] SPVs which are not consolidated, which would be affected by that. It's quite a ride wide range of assets actually. As I said, I think this is something we'll probably coming back to in subsequent quarters, as we move towards the Basel III leverage ratio issue. But I don't think I really want to actually disclose at the moment. I think, as I said, the emphasis of the work we'd be doing around balance sheet has been very much actually on the on-balance sheet component, and we've now been shifting more as we go through the first phase of that to actually what we need to do to reduce the off-balance sheet. It's nothing extraordinary, but I think it's something that we want to do some more work around.

Andrew Lim - Espirito Santo Investment Bank, Research Division

I mean can you say what the quantum is, roughly speaking?

David R. Mathers

No, not as yet. I mean -- I think, I don't think any bank has given their B III number yet, but it's something, as I said, we'll come back to you on.

Operator

I would now like to hand the call back to Mr. Dougan.

Brady W. Dougan

Okay. Well, thanks very much, everybody. I appreciate all the questions. I think just in summary, I think we have continued to prove the strength of our business model. We had good solid and consistent third quarter results, and I think we've continued to maintain good momentum with our clients in an environment, which continues to be somewhat challenging. We believe we have shown successful implementation of the capital actions that we announced in July. We substantially enhanced the capital position. And we are, as we've said, confident that we will achieve a Look-through Swiss Core Capital ratio of around 9.3% by the year end, again, subject to timing in terms of the closings of sales and asset management. But to date, we have successfully delivered in all of our announced strategic and cost-cutting targets and through the incremental targets announced today, we'll continue to improve costs, capital efficiency and leverage. I think with these actions, we are confident we'll receive -- we'll actually reach a 10% look-through capital ratio in 2013. And as we said, we'll then be in a position to make additional cash distribution to shareholders. So in short, we're convinced that the stable, high-quality earning streams of our business, combined with the execution of our strategic capital and cost-saving measures will continue to create a very strong and competitive global platform to serve our clients, gain further market share and deliver superior returns to our shareholders. Thank you all very much.

Operator

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

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