Credit Suisse Group AG (CS) Tidjane Thiam on Q4 2015 Results - Earnings Call Transcript

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Credit Suisse Group AG (NYSE:CS) Q4 2015 Earnings Call February 4, 2016 2:00 AM ET


Christian Stark - Head-Investor Relations

Tidjane Thiam - Chief Executive Officer

David R. Mathers - Chief Financial Officer


Huw van Steenis - Morgan Stanley & Co. International Plc

Andrew P. Coombs - Citigroup Global Markets Ltd.

Jon Peace - Nomura International Plc

Kinner Lakhani - Deutsche Bank AG (Broker UK)

Daniele Brupbacher - UBS AG (Broker)

Kian Abouhossein - JPMorgan Securities Plc

Fiona M. Swaffield - RBC Europe Ltd. (Broker)

Jernej Omahen - Goldman Sachs International

Jeremy C. Sigee - Barclays Capital Securities Ltd.


Good morning. This is the conference operator. Welcome and thank you for joining Credit Suisse Group's Fourth Quarter 2015 and Full Year Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is recorded. You will have the opportunity to ask questions directly after the presentation.

At this time, I would like to turn the conference over to Mr. Christian Stark, Head of Investor Relations of Credit Suisse. Please go ahead, Mr. Stark.

Christian Stark - Head-Investor Relations

Good morning and welcome to the Q4 2015 and full-year 2015 results call. Before we begin, let me remind you of the important precautionary statements on slide two including the statements on non-GAAP measures and Basel III disclosures.

I now turn it over to Tidjane Thiam, our CEO.

Tidjane Thiam - Chief Executive Officer

Good morning, everyone. Welcome and thank you for joining our 2015 full year and Q4 results call. Let's start this presentation. I would like to highlight three key points. First, we have made a good start in implementing our strategy. Our three geographic businesses, APAC, Asia Pacific, the Swiss Universal Bank, SUB, and International Wealth Management, IWM, have all delivered profitable growth in the fourth quarter of 2015, which we all know was challenging.

Our key financial ratios are stronger. We ended the year with a CET1 ratio at 11.4% and a CET1 leverage ratio of 3.3%. Clearly, within these Global Markets we have been facing pressure and I will update you in more details on the actions we are taking to address this later on.

Second, we're addressing a number of legacy issues. Their impact on our reported results is visible today. Notably, were the upfront financial and accounting costs associated with the restructuring of the bank as we communicated last October and the write-off of a goodwill. Third and last, given the environment, which has become much more challenging, we are accelerating the pace of our restructuring.

In this context, we have been taking actions over the past few weeks to bring forward a number of cost savings initiatives as it is even more important now to lower our breakeven point as revenues are under pressure. So with that, let me take you through more details on these results.

Looking first at full-year 2015, you can see here in the first column that we reported a pre-tax loss of CHF2.4 billion reflective of the CHF3.8 billion goodwill impairment that I just mentioned earlier, litigation and restructuring charges and fair value (03:01) debt movements. On an adjusted basis, which I will define in a minute, we had a pre-tax gain of CHF2.1 billion for the group.

So, going forward and throughout this presentation, we will be – so I and David later, our CFO, will be discussing the results on this adjusted basis, which we believe better reflects the underlying performance of our business in a period of vast restructurings. We will report quarterly on the same adjusted basis at both group and business division level until 2018 to allow you to have a better picture of the progress we are making in implementing our strategy. You will see the reconciliation on the next slide and we have provided you with separate statement tables which contain both the reported numbers and the adjusted numbers.

This really doesn't require much comment, but if you look at the biggest items, it's goodwill at CHF3,797 million, FVoD at CHF697 million, litigation at CHF564 million, I'm talking about the quarter here, 4Q. And restructuring at CHF355 million, so you see a total for 4Q of CHF1.1 billion and the total for 2015 of CHF2,124 million for the adjusted pre-tax income, loss of income versus the CHF6.4 billion and the CHF2.4 billion you have at the top.

So, on these pages, at the next slide, our full-year 2015 results reflect, first of all, the positive contribution of our three new geographically focused divisions, APAC, Asia-Pacific, delivered CHF1.1 billion; SUB, Swiss Universal Bank, delivered CHF1.6 billion; and IWM delivered CHF1 billion on (04:50) PTI. And on a full-year basis, in spite of a difficult fourth quarter, Global Markets delivered CHF1.1 billion of PTI, and IBCM was negatively impacted by the slowdown of current activity and it's basically a wash for the year.

Corporate Center which is the next book on this slide, contributed a pre-tax loss of CHF700 million, mostly due to expenses incurred in connection with the ongoing legal entity program, which is very important for the bank and you will see that later on when we talk about Switzerland.

So, as a result of all these elements, adjusted core pre-tax income was CHF4.2 billion for 2015. You have then to look at the SRU, Strategic Resolution Unit, which we announced in October. Its wind-down is progressing as it is very important to the delivery of all our objectives. We expect from the wind-down of the SRU, a PTI drag which we think will peak over the next 12 months to 18 months as we're targeting to reduce the RWA and we leverage exposure of the SRU by approximately three quarters over this period.

By 2018, we expect the SRU PTI drag to come down from an elevated level of CHF2 billion in 2015 to between CHF700 million and CHF900 million, CHF700 million to CHF900 million, and David will give you much more color on this in his presentation.

So let me now come back to one highlight of these results which is the performance of our new geographically-focused divisions. They've all delivered profitable growth. So, starting with APAC at the top here. Asia, we announced record adjusted PTI of CHF1.1 billion, up 27% from last year for previous year. And very importantly, net new assets of CHF17.8 billion. So, the integration of a private bank and investment bank is working well for our franchise in Asia as these numbers show.

Return on regulatory capital was strong at 20%, with gross margins for APAC private banking improving by 3 basis points to 79 basis points on the 14%, 1-4, revenue growth and flat net margins of 23 basis points, as revenue growth was matched by associated costs mainly driven by strategic hires to support our growth plans.

Moving to second division here, International Wealth Management, IWM, looking at the private banking. So, you remember what we put in IWM, private banking and asset management. So, here we're looking at the private banking activity. We have announced adjusted PTI of 6% from the year before to CHF813 million. You can see it on the last column on the right here. And we have enough return on regulatory capital of 20%, which is satisfactory, with gross margins up by 1 basis point to 102 basis point and net margin at 17, down from 26 as the cost in 2015 included some significant litigation charges.

Moving on to Switzerland, the Swiss Universal Bank has delivered 4% increase in profit with CHF1.6 billion of adjusted PTI and, importantly, net asset inflows for the year of CHF13.8 billion. The business is on track for a partial (08:24) IPO we target for end 2017. And as demonstrated, a real stability in results in what has been a turbulent market environment in the fourth quarter.

Return on regulatory capital for the Swiss Universal Bank was 13% in a negative interest rate environment – negative nominal interest rest environment in Switzerland. So, these results give us confidence that we are investing resources and capital in the right area.

If we look at the next slide, we see the slide we showed you, it's identical, at the Investor Day in October. We are committed to the targets on this slide, and we will continue to report quarterly on our progress as we go through the next 12 quarters until end of 2018.

I won't read them back again. I think you're familiar with them . Let me just say that we have hit a number of them. Remember that we had a target of CHF83 billion to CHF85 billion of RWA for Global Markets which we have achieved and for leverage, CHF480 billion which we have achieved as well. So we've operated with discipline.

So, let's focus now on the fourth quarter of 2015. What happened in the last quarter of the year? Well, our three regularly focused business units: APAC, Swiss and International have made good progress. And I remind you that they are the ones for which we have explicitly targeted a profit number for 2018.

In Asia Pacific, starting with that, we have enjoyed a record year of profitability with strong net new asset inflows across each quarter including the fourth quarter where we had CHF3 billion of inflows. We have delivered on our strategy to attract new relationship managers. We have recruited 70 relationship managers in total in 2015, and pleasingly 40 of them alone in the fourth quarter, so more than half in the fourth quarter since we announced our new strategy. And we have a very healthy pipeline of future hiring to converge into 2016.

The integrating model between private banking and investment banking remains an attractive proposition for our new and existing clients. In IWM, the performance was driven by the successful execution of key strategic initiatives. And I'm pleased to say that mandate penetration increased from 23% to 30% last year, which is always for us a very positive indicator.

In the Swiss Universal Bank, we delivered solid results with strong net new asset inflows CHF13.8 billion, in particular in Corporate & Institutional Banking. We also saw a significant increase of mandate penetration from 15% to 26%.

We are pleased to see that those divisions where we have set PTI targets are on track to deliver profitable growth for our shareholders, and we are confident to achieve our 2018 targets.

In IBCM, in asset management, the financial results reflect a challenging market backdrop. We continue to invest in building our advisory capabilities in IBCM, and a rebound in equity underwriting volumes in the quarter was offset by weaker IBCM volumes given market uncertainties.

In Asset Management, we had resilient core operating results, but they were offset by lower performance fees. Given the market in 2015, that shouldn't be a surprise particularly from our alternative funds. Still, Asset Management made a good contribution to the bank with CHF26.5 billion in net new assets in 2015. Finally, Global Markets experienced difficult operating conditions, particularly in fixed income with the widening of credit spreads, a sharp decline in energy prices in the fourth quarter and a general lack of liquidity. This resulted in inventory markdowns.

In addition, we have a high cost base, which is why we have a cost-saving program. So, a decline in revenues combined with a high cost base have accelerated the need we feel to lower our breakeven point for specific action which I will highlight shortly.

So, overall, the relative performances of these businesses have confirmed the importance of disciplined capital allocation, which we show you on the next slide. And we have taken steps to continue to improve our capital allocation, moving capital towards the highest returning business. So you have, on the left, the average adjusted return on regulatory capital between 2015 and 2014. You see IWM and APAC at the top. The Switzerland then IBCM then GM and you see that we have allocated we see movement in capital allocation from nine months 2015 through 2018 which we plan which is to increase basically the capital allocation to those divisions returning – offering a better return on capital.

I'm now going to go through the divisions in turn: APAC, Switzerland and IWM, starting with APAC. Emerging economies we know that are intrinsically volatile. And one of the most effective ways to mitigate that volatility is diversification. What this slide shows is how well diversified our business platform in Asia is and the reason why you don't have country (13:42) in Asia. You don't really want to share that information but the message is the same. We have a well-balanced portfolio across developed economies or Asian countries like Japan and Korea and emerging economies like Indonesia or China and India. That's the real, real source of strength, and we cannot overemphasize it. And it will explain some of the difference between our performance, and that of some other players in the region which appears in the next slide.

APAC is generating strong and resilient performance in a very challenging year. This diversified mix of business is a key driver of our continued performance in 2015. In 2015, PTI in APAC grew 27% year-on-year and now 52% exactly versus 2013. And if you focus on the last quarter, 4Q alone, we had 12% revenue growth and 21% PTI growth over the fourth quarter of the previous year showing the momentum we have in this business.

So, 2015, was the second year in a row when Asia Pacific reported very strong net new assets. You can see here, CHF17.6 billion and CHF17.9 billion in 2015. To put that in context, this is over two years as much as some of the properties on sale in the region. That's the strength of the organic growth we generate in the region. And if you look at the fourth quarter, which was, I think, an object of much curiosity, CHF3.1 billion of net new assets growth, 82% above the previous fourth quarter in 2014. So, again, a great performance by our teams in Asia.

Recruiting and client relationships are key part of our model in Asia. And we're showing you here, how, after a period of stability, we've been growing our relationship managers in APAC. We recruited 50 managers in 2014 that I was telling you earlier, 70 managers in 2015, which we are very pleased by, and they're making a material contribution to our growth by enlarging our footprint and our ability to deepen our relationships with clients and have more clients. We'll continue to update you on this, but we think that we're confident that we will hit the objective of 800 managers that we set for 2018. We have quality hires because in this context, actually, people are knocking on our door in Asia and Helman spends a lot of time interviewing people. So, it's very, very positive environment for our group.

Moving on now to International Wealth Management, looking at our Private Banking. So, not just international but Private Banking. Private Banking has made steady progress with underlying PTI growth of 6% for the year, and 4% during Q4. On an adjusted basis, IWM Private Banking maintained stable revenues year-on-year in a really challenging environment. And there were two main drivers for this. Firstly, the expansion of average loan volumes. And secondly, higher asset margins due to a negative interest rate environment in Switzerland.

So, we also saw good progress in our underlying net new asset inflows and mandate penetration, which I'll address in the next slides. Excluding regularization which is continuing, IWM Private Banking recorded positive NNA during 2015 of CHF2.2 billion. And those CHF2.2 billion appear in our international location which are really our growth markets, and they're offset by the continued restructuring of our Western European franchise, as well as deposit repricing which explains the negative evolutions here.

So, despite a relatively muted net new asset generation, we saw it kind of flat in the end on a net basis. Mandate penetration and this is always pleasing for us, increased by one-third from 23% in 2014 to 30% in 2015 for successful sales of MACS and Credit Suisse Invest. For those who live in Switzerland, you would have seen the advertising everywhere, very successful with CHF4.9 billion of net new assets going into that mandate proposition.

So, moving now to the Swiss Universal Bank. In 2015, the Swiss Universal Bank was simply the largest contributor to our group pre-tax results with both Private Banking and Corporate & Institutional Banking contributing to this operating performance.

For the full year, the Swiss Universal Bank reported a pre-tax income of CHF1.6 billion, up from CHF1.5 billion in 2014. This strong performance was driven by a 3% revenue growth, a good result in a market considered as mature.

The Swiss Universal Bank demonstrated again in the fourth quarter that it is a reliable and important earnings contributor to the group. Adjusting for one-offs, pre-tax income improved by 25% to CHF336 million, on strong net interest income, driven by loan margins improvement. The growth in profit achieved is even more impressive at 33% if one takes out the impact from the Swisscard deconsolidation, as you will see later in David's presentation.

So, let's go to flows now. The Swiss Universal Bank delivered a strong performance in that respect as well with net new asset generations that total CHF13.8 billion in 2015. Looks like there's a mistake on this slide. I'm certain that the total is 13.8%, not 14.9%. And with CHF1.7 billion of net inflows in the fourth quarter, so 13.8%.

We continued also in Switzerland to improve the mandate penetration. I talked earlier about Credit Suisse Invest. It plays a role here too. In our private banking business, which is up by more than two-thirds or 9 percentage points from 15% to 26% driven again by Credit Suisse Invest.

So, let's move now to Global Markets. The Global Market division reported underlying full-year pre-tax income of CHF1.1 billion, a significant drop from CHF3 billion from previous year. And in Q4, generated an adjusted product loss of CHF0.7 billion for fourth quarter. Equity has had a resilient performance despite a slowdown in market activity and a challenging macro environment in Latin America in Q4.

And in fixed income, GM has a legacy of material positions in segments of the markets where spreads significantly increased in the fourth quarter and liquidity became limited. Those positions are not consistent with our new strategy. And therefore, have been reduced aggressively since we started implementing the strategy announced in October.

Nevertheless, they were still significant at the end of the fourth quarter resulting in the inventory markdowns that you see in our results today.

Declining revenue and a high cost base have emphasized the need to lower further our breakeven point through specific actions that I will again, highlight later. Our focus fundamentally will be on making the fixed income business model less volatile and less inventory-dependent, similarly to our successfully transformed equities business.

During Q4, as I was saying earlier, we have actively reduced our legacy inventory positions, taking the total down over the quarter as part of our risk management. You can see from this slide, and it will be in the back.

We are determined to reduce further our inventory in these vulnerable areas which are not aligned with our strategy. And you can see the actions taken further in January on this slide. I want to be clear that there will be no rebuilding of positions in fixed income areas which are not aligned with our strategy going forward.

Our fixed income franchise will be transformed with our equities franchise on the right here as a template. Given the macro and credit cycle related factors mentioned earlier, we will accelerate our move to a more capital-efficient model and less volatile model.

You can see the different standard deviation here, enough on fabricating the successful transformation made in equities. The end state for Global Market will be a business that is smaller, less volatile and more profitable for the cycle.

For rightsizing our Global Market activity, we will increase our connectivity to our Wealth Management franchise, reducing capital usage and increasing profitability over time which is absolutely crucial for a successful long-term future.

Moving now to IBCM, the next slide please. We have continued to rebuild our IBCM business which has suffered from underinvestment through incremental targeted investments, shifting our model more towards advisory and equity underwriting and more towards investment grade corporates.

In order to reduce the volatility of earnings, it needs attractive, capital light activity. Q4 2015 backlog ended – oh, deal was announced in M&A, ended 128% higher against the same period in 2014 with market share increasing to 14%. Historically, looking back over the past five years, 72% of yield volume announced in 4Q was completed the following year. We are therefore optimistic about this healthy pipeline and expect the conversion over some transactions once markets normalize.

So, let me now cover a few legacy issues in addition to what's already highlighted for Global Markets. The first one I'll talk about is goodwill. On this slide, you can see that our 2015 results include the impact of a number of big issues with goodwill being a CHF3.8 billion, on the right here, the biggest component. Other drivers or losses from the Strategic Resolution Unit of CHF2.1 billion; litigation and restructuring charges of CHF0.8 billion and CHF0.4 billion respectively, as well as fair value and other adjustments leading to a reported pre-tax loss of CHF2.4 billion for the full year.

Part of what we're trying to do – next slide, please – is to continuously look for ways to lower our breakeven point. A big part of this is remuneration. To this end, we have reduced variable remuneration by 11% in 2015, and we now look to reduce the impact of past variable remuneration decisions on future years in order to give us more flexibility.

So we have therefore lowered the deferral rate, so a proportion of our staff pay that is deferred to future years, and that will lead to 26% reduction in unrecognized variable compensation by year-end 2015, resulting in a lower compensation burden in the following years. If you wish – every year, we're pushing some compensation forward. What we're doing through that structural change is to reduce the level of compensation we're pushing forward every year and therefore, strengthening our flexibility. And David will give you more details on this.

Finally, we are increasing the pace of a cost saving program. We have done this last year also because of the deterioration in the environment. Because we need, as revenues are under pressure, to cut cost even faster. Therefore, we've worked hard in December and January to identify and action initiative that will permanently reduce further our fixed cost base, resulting in cost savings of CHF500 million per annum on a full year run rate basis. And we are implementing a reduction of approximately 4,000 positions.

These measures come in addition to those already implemented in the fourth quarter of 2015, particularly with the transition of our U.S. Private Banking business which, to be frank, generated subpar shareholder returns as it is a distribution model where most of the benefits go to a relationship manager.

So, the measures already actioned by end of January amount to CHF1.2 billion per annum on a run rate basis, representing one-third of the announced 2008 cost savings target of CHF3.5 billion or more than half the net cost target of CHF2 billion announced for 2018. We will, of course, beyond 2018 aim to continue to deliver continued productivity and competitiveness improvement, and we will provide you with quarterly updates on our progress in our cost saving program.

So, let me now summarize. We have made a good start in implementing our new strategy with substantial progress on a number of fronts. Our new geographic divisions have delivered profitable growth throughout the year. A strong pipeline in IBCM gives us confidence that we will see transaction and mandates when markets allow. The new organization that we have put in place will allow for better allocation of resource and capital. And with the completion of national capital rates, our ratios are stronger and give us the ability to restructure the bank and deliver profitable growth from our core businesses in the long term.

The execution of our strategy requires, as we see, the continued restructuring of our Global Market division. We remain committed to addressing legacy issues, and have outlined to you our plan to permanently reduce our legacy exposures, lower and amortize deferrals going forward and address our pending litigation.

Finally, as a result and in reaction to the challenging current environment, we are accelerating the pace of restructuring, bringing forward cost savings (27:46) cost reductions.

With that, I will now hand over to David who will take you through financial results in more detail.

David R. Mathers - Chief Financial Officer

Thank you, Tidjane. Good morning, and I'd like to thank you for joining our fourth quarter 2015 earnings call.

So, I'm going to start today on slide 31 with a summary of the financial results. For the full year, we had a pre-tax loss of CHF2.4 billion on revenues of CHF23.8 billion. However, as Tidjane has already noted, our reported results include a number of significant items which are not reflective of our underlying business performance. These include certain major litigation costs, goodwill impairment, restructuring charges related to the accelerated implementation of our strategy, fair value movements of our own debts, as well as a number of smaller components.

Therefore, alongside the reported numbers, we provide adjusted numbers that are consistent with our underlying business performance. We provide a full breakout of these adjustments for the group and for each of our divisions in slide 69 to slide 75 of the appendix.

In relation to the goodwill impairment, we took a charge of CHF3.8 billion in the fourth quarter, all of which was in respect of our former investment banking activities, primarily following on from a DOJ acquisition in 2000.

This charge is allocated across the new Global Markets, Asia Pacific and IBCM divisions. And it's important to note that the impairment charge does not impact outlook through CET1 capital or leverage ratios. I'd also note this is the last time that FVoD movements will feature in our headline results as we've elected to adopt new accounting standard from the 1st of January 2016. Going forward, these valuation movements will reflect to direct to equity as a component of other comprehensive income.

Now, if you exclude the adjustment items I have listed, we achieved a full year adjusted pre-tax profit of CHF2.1 billion for the group. If we look at the fourth quarter, we reported a pre-tax loss of CHF6.4 billion reflective of the CHF3.8 billion goodwill impairment, litigation, restructuring charges and FVoD movements. On an adjusted basis, we had a pre-tax loss in the fourth quarter of CHF1.1 billion for the group.

If we look briefly at net new assets, we achieved core inflows of CHF4.4 billion in the quarter and for the full year, we generated net new asset inflows of CHF50.9 billion. That reflects solid business generation inflows across the divisions notwithstanding the adverse impact from regularization that I will discuss later.

First, to review the core results on slide 32, please. So with regard to (30:48) core results, which I'd remind you excludes the Strategic Resolution Unit. For the full year, we achieved an adjusted profit of CHF4.2 billion. And what we show here is how the adjusted result reconciles to the reported group figure of a CHF2.4 billion loss for the year. Now if we reconcile to the reported figure, firstly, we had a CHF2.1 billion impact (31:11) from the Strategic Resolution Unit, excluding the restructuring and litigation expenses.

If we move then to the significant items in the year, our pre-tax income was further reduced by major litigation charges of around CHF820 million; CHF355 million in restructuring costs; a number of small adjustments and a positive FVoD impact of CHF300 million. And then lastly, as we've already mentioned, the CHF3.8 billion goodwill impairment charge clearly was the largest impact on our full year numbers.

I want to go through this in detail if you look at the (31:46) for the fourth quarter, we had an adjusted pre-tax loss of CHF420 million, and that compares to the reported loss of CHF6.4 billion when we take into account the drag from the SRU and the adjustment items we've discussed.

Just to be clear, as Tidjane said, we will consistently report our adjusted earnings on this basis going forward, and we've included a full reconciliation of the numbers in the appendix. And my comments throughout this presentation will refer to our adjusted results on a consistent basis.

Slide 33. So, I would just like to remind you the key financial elements of the strategy that we announced at Investor Day. The first component of our strategy is to increase the profitability of stable and high-returning cash flow businesses within Switzerland. The Swiss Universal Bank delivered an adjusted pre-tax income of CHF1.6 billion in 2015, up from CHF1.5 billion in 2014, and was the largest contributor to our group pre-tax reserves. And we remain committed to achieving the goal of CHF2.3 billion by 2018.

The second (32:54) of our strategy is to reallocate and optimize resources to a high return and scale businesses. If you recall from our Investor Day, under the old structure, we had 57% of the group risk-weighted assets allocated to the strategic Investment Banking businesses.

As you can see, we've made significant progress in realigning the divisional usage of (33:13) across the group. Notably, within Global Markets, we've begun to reduce the resources allocated to certain underperforming trading activities, and the division is now at around one-third of total usage, more proportionate to the overall group size. The dividends also overachieved the year-end capital target we've set, which was for a ceiling of $83 billion to $85 billion of risk-weighted assets and CHF380 billion of leverage exposure.

Going forward as Tidjane mentioned, we'll continue to restructure the Global Markets division towards the end goal of a less volatile and more sustainable and profitable business through the cycle.

If we move to Asia Pacific, the end of 2015, we achieved an adjusted pre-tax income of CHF1.1 billion, and we will continue to allocate further resources to the growth businesses in the Asia Pacific division to support our pre-tax income target of CHF2.1 billion for the end of 2018.

On costs as we mentioned at Investor Day, we intend to achieve a gross reduction in expenses of CHF3.5 billion by the end of 2018. At the end of January, we'd already identified CHF1.2 billion of gross cost savings including the transfer of our U.S. Private Banking business to the SRU, as well as further planned head count reductions.

We remain committed to achieving the remaining CHF2.3 billion of cost savings by the end of 2018. So, the reductions in the SRU, the completion of Legal Entity Program, and further efficiencies across our embedded support functions.

Finally, we'll continue to strengthen our capital base. We'll focus on maximizing free capital generation. At the end of 2015, our look-through a CET1 ratio was 11.4%. Going forward, we'll build a buffer against the RWA calibration changes expected in 2018 and 2019 with the intention of targeting a CET1 ratio of 13%. Our look-through BIS tier 1 ratio was 4.5% at the end of 2015, reflecting the successful completion of the leverage reduction program last year. And just as a reminder, that compares to a target of 5% to 6% for the end of 2018.

Let me now review the divisional results, starting with the Swiss Universal Bank on slide 34. As you can see, under the current reporting structure, the Swiss Universal Bank comprises our Swiss Private Banking and Corporate Investment Banking businesses. And just as a reference, on the left-hand side of the page, we detail how the four business lines now map into the Swiss Universal Bank.

For the full year, the Swiss Universal Bank contributed CHF1.6 billion adjusted pre-tax income, more than any of the other divisions. The division also accounted for 21% share of total RWA, and 24% leverage.

Slide 35. So, here we show the results from the Swiss Universal Bank on both a reported and adjusted basis. As a reminder, the adjustment items include major litigation costs, goodwill, restructuring, and a number of small components. And in the case of the Swiss Universal Bank, this does include an adjustment for the positive impact of real estate sales. And we provide a full reconciliation on page 70.

For the full year, the Swiss Universal Bank reported a pre-tax income of CHF1.7 billion. Adjusting for the real estate disposals, full year pre-tax income improved by 4% year-on-year. Compared to the fourth quarter, reported net revenues decreased by 14%, again reflecting the lower real estate disposals compared to a year before, as well as the impact of the deconsolidation of Swisscard.

If we look at our reported full year operating expenses, they did increase by 9%, but that primarily reflects high compensation expenses due to the recalibration of Swiss employee holiday benefits. We also saw an increase in restructuring and litigation provisions in the fourth quarter, but these are partly offset by the Swisscard deconsolidation which as you may recall took place on the 1st of July.

The Swiss Universal Bank delivered strong net new assets of CHF3.2 billion from Private Banking in 2015 and CHF10.6 billion from Corporate & Institutional Banking. We also saw a significant increase in mandate penetration from 15% in 2014 to 26% in 2015 following a successful launch of Credit Suisse Invest in April 2015.

I note we now exclude assets managed by external asset managers in our (37:51) mandate penetration in line with general industry standards.

Let me look now at the Private Banking results on slide 36. For the full year, the Private Banking business for Swiss Universal Bank delivered a pre-tax income of CHF869 million. On an adjusted basis, the full year pre-tax income improved by 4% year-on- year. If we look at the fourth quarter, on an adjusted basis, we saw a 40% increase in pre-tax income year-on-year and this was driven by strong growth in net interest income as well as the dividend from the fixed (38:24) group in the fourth quarter.

The adjusted net margin improved to 23 basis points, up 7 basis points from the fourth quarter of last year, primarily driven by the growth in net interest income.

So on slide 37, we give some more detail here around the Private Banking pre-tax income within the Swiss Universal Bank. I think the key point to note here from what we've said already is we show here the impact of the deconsolidation of Swisscard. As you may recall, we actually restructured our holdings there. We still own the same 50% interest, we no longer have control, which means that in 2014, you have a full component and 2015, only a six-month component. The impact for that was CHF74 million in 2014, reducing to CHF26 million in 2015. And if you exclude that for the full year, you can see our profits were up by 11% year-on-year.

Let's move to the Corporate and Institutional Banking on slide 38. When the Swiss Universal Bank, the Corporate and Institutional Banking reported a full-year pre-tax profit of CHF790 million, up by 6% compared to 2014. On an adjusted basis, the full-year result was up 5%.

Fourth quarter revenues of CHF517 million, improved by 12% compared to the fourth quarter of last year, primarily driven by higher net interest income, partly offset by lower replication flows. This growth in net interest income was largely attributable to the successful implementation of mitigation measures which we communicated I think to you all following the SMB (40:05) actions just over a year ago.

So let's look at net new assets, please, on slide 39. In Private Banking within the Swiss Universal Bank, we saw some seasonal slowdown in net new assets in the fourth quarter. First nine months, inflows were positive CHF6.9 billion. In the fourth quarter, we saw outflows of CHF2.9 billion. This was primarily driven by CHF1.1 billion outflows from a small number of external asset manager exits as well as CHF0.3 billion of outflows relating to regularization and CHF0.3 billion from a number of cash deposit measures.

Looking at the full year, we achieved net new assets of CHF3.2 billion compared to CHF3.8 billion in 2014. Within the Corporate and Institutional Banking business, we saw strong inflows of CHF4.2 billion in the fourth quarter driven by inflows from major pension funds. This resulted in annualized growth rate of 6%. And for the full year, we achieved net new assets of CHF10.6 billion significantly ahead of the CHF5.5 billion in 2014 and our strongest annual increase since 2011.

Let me turn now to slide 40. What we show here is the International Wealth business which comprises International Private Banking and asset management businesses. These businesses contributed CHF1 billion to our adjusted pre-tax income and represented about 10% of our capital employed.

Slide 41. What we show here are the reported and the adjusted numbers for IWM. The adjustments we make are consistent with those we took at the group level and, as we said before, exclude restructuring and litigation expenses. If you look at the results, you can see our pre-tax income on a reported basis was CHF709 million.

On an adjusted basis, we had a pre-tax profit of just under CHF1 billion which was down about 16% year-on-year. I'll also come to in a minute, the primary reason for the difference between adjusted and reported for the IWM business represents litigation charges taken in the year.

For the full year, we saw a divergent performance between Private Banking and asset management. Overall, the International Private Banking businesses had a better operating performance with adjusted pre-tax income up by 6% compared to 2014. But on the other hand, asset management performance declined in a challenging environment.

Given this divergence in performance, I'd like to focus more on the individual components and start with Private Banking, please, on slide 42. For the full year 2015, the Private Banking businesses within IWM reported pre-tax income of CHF526 million. If adjusted for the specific items we identify here, the pre-tax income improved by 6% compared to 2014, and this improvement was driven by lower operating expenses reflecting sustainable expense savings in the business, as well as lower variable incentive compensation and reduced commission expenses.

On an adjusted basis, the quarterly operating pre-tax income improved by 4% year-on-year, driven by lower operating expenses. Fourth quarter adjusted revenues was slightly down year-on-year as growth in net interest income was offset by lower recurring and transaction base fees. If we look at the quarterly revenue items in more detail, we've seen continued growth in net interest income due to the expansion of loan volumes and higher margins, whilst recurring revenues declined due to the lower AUM on the back of FX movements, tax regularization, and the restructuring of Hedging-Griffo a year ago.

Lastly, I'd note that we saw an increase in mandates penetration from 23% in 2014 to 30% in 2015. This was largely due to the launch of Credit Suisse Invest, which contributed net new sales of CHF4.9 billion during the year. Lastly, in terms of the net margin, the adjusted net margin improved to 26 basis points, up by 3 basis points from the fourth quarter of last year, again driven by the growth in net interest income.

Before I leave this slide, though, I would just point out this is where you see the litigation point that I mentioned before. As we say here, litigation expenses include a matter where several clients have claimed that a former relationship manager in Switzerland had exceeded his investment authority.

Let me turn now to asset management on slide 43. Within IWM, the asset management business reported full year pre-tax income of CHF183 million, down significantly compared to 2014, and that was notwithstanding a 5% reduction in operating expenses from a change in fund management from Hedging-Griffo to Verde Asset Management.

Following transfer from management to Verde, the respective recurring fees in Hedging-Griffo declined to zero by the end of 2015. And if you exclude the impact of this, the recurring revenues were actually flat for full year and the fourth quarter.

Let me talk briefly about net new assets, please, on slide 44. What we show here is the progression within the two businesses within IWM. Private Banking delivered net new asset inflows of CHF2.2 billion in our international locations, but this was negatively impacted by a number of outflows during the year.

First, we saw regularization ratio outflows amounting to CHF3.1 billion in 2015 of which CHF2.3 billion was reported in the fourth quarter, predominantly in Italy relating to the tax regularization programs. Now that means that across all of our Private Banking activities, including those booked in the SRU, we saw regularization-related outflows of CHF8.4 billion in 2015. But that does fall within the guidance that we gave for outflows from regulation over this year to be less than CHF10 billion.

Now, in addition to regularization, we saw outflows relating to deposit repricing in the current interest rate environment and also relating to an ongoing litigation case.

If I turn to asset management, we saw strong net new assets at CHF26.5 billion in the year, up by 9% year-on-year, driven by a combination of both alternative and core investments. Within alternatives, we saw CHF7 billion of inflows primarily from credit products. In core investments, we saw CHF19.5 billion of inflows primarily into our JV in China and also index products.

So, let me turn now to Asia Pacific please, on slide 45. So, we show here the snapshot of the region which comprises the Private Banking and Investment Banking businesses across our businesses. You can see that for the full year, Asia Pacific generated CHF1.1 billion of adjusted pre-tax income and represents about 10% of our capital employed.

So as before, we show here the reported and the adjusted results for the Asia Pacific division, and the adjustments made are consistent with those at the group level and for Asia Pacific, and particularly related to small restructuring charges, but most of all, the goodwill impairment on both, which I touched on before, and which we'll talk more about in the context of GM and IBCM later in the presentation.

For the full year, the Asia Pacific region on an adjusted basis made a profit of CHF1.142 billion, an increase of 27%. And this improvement in full year result was led by high revenues from ultra-high net worth clients and by a strong performance in our equities business. Adjusted full year expenses did increase year-on-year, driven by investments in the business and in new hires.

Now if we look at the fourth quarter, we delivered an adjusted pre-tax profit of CHF148 million, up by 21% year-on-year, driven by an increase in sales and trading revenues. And we saw this increase not withstanding increased operating expenses, reflecting the investments we're making to grow this region.

Let's move to Private Banking in Asia Pacific. We saw continued momentum in our Private Bank in APAC in 2015. For the full year, the Private Bank demonstrated solid results with pre-tax income of CHF344 million, 11% up year-on-year. On an adjusted basis, the annual pre-tax income was up 13%, and this was driven by high net interest rate income, transaction-based revenues and recurring fees, and partly offset by the increase in operating expenses that I mentioned before.

We did see some slowdown in the fourth quarter with pre-tax income at CHF55 million, down about 18% compared to the fourth quarter of last year. Although net interest income continued to strengthen, this was offset by lower transaction-based revenues and some increase in compensation expenses related to new RM hires.

Our net new asset position was strong. We saw solid inflows of CHF3 billion in Asia Pacific in the fourth quarter and for the full year, net new assets were CHF17.8 billion, M&A growth 12% from 2014. Now I'd point out here that our net margin across the full year was stable at 23 basis points.

Within investment banking in APAC, the full year pre-tax reported profit income was $65 million and that's primarily driven by the goodwill impairment charge I mentioned before at $765 million. Adjusting for this, we delivered strong pre-tax income of $832 million, up 29% year-on-year, notwithstanding the macroeconomic headwinds.

Our full year results were driven primarily by higher revenues of equity sales and trading partly offset by lower revenues in underwriting, advisory and fixed income. And for the quarter, the pre-tax income was up CHF92 million, up 56% on a comparable basis, again reflecting high revenues from institutional clients and fixed income and equity sales.

Let me turn now to Global Markets on page 49. This business comprises our fixed income, equity sales and trading businesses excluding those businesses in Switzerland and in the Asia Pacific region. For the full year, the Global Markets business contributed CHF1.1 billion to our adjusted pre-tax income and represented 25% of our group RWA and 33% of our total leverage.

As in each of our divisions, we show on page 50 our results on both a reported and an adjusted basis. The adjustments include major litigation costs, goodwill impairment and restructuring charges. But you can see that the largest impact within Global Markets was the CHF2.7 billion impairment charge related to goodwill in the fourth quarter. And the reconciliation for this is provided on pages 72 and 73.

If we look at the numbers on a reported basis, Global Markets have a pre-tax loss of CHF1.9 billion, but on an adjusted basis, excluding the goodwill charge, we had a yearly pre-tax profit of CHF1.1 billion, which was still significantly down year-on-year due to the challenging market conditions in the second half of 2015.

In the fourth quarter, on an adjusted basis, we had a pre-tax loss of $664 million, down compared again to 2014. This was driven by the difficult trading conditions and also by the significant sell-off in our global credit businesses, corporate banking, and we're uncertain of our securitized products' operations. Before I leave this slide though, I would like to point out the substantial progress that's been made in reducing our leverage exposure in the division. The leverage exposure has declined by over CHF100 billion from the prior-year level including a CHF39 billion reduction from the third quarter to the fourth quarter.

Let's move to sales and trading on slide 51. In the fourth quarter, we continued to optimize the equities franchise. This business is now better aligned with clients and we have capital capture upside and invest in our business in the coming year. Fourth quarter equity sales and trading revenue of $709 million declined by 22% compared to the fourth quarter of 2014, primarily reflecting a less favorable trading environment and a reduction in client activity. Nonetheless, notwithstanding this reduction in activity, we posted resilient equity results for the quarter and we maintained our market shares across all of the businesses.

If you look at the performance compared to the fourth quarter 2014, I would note that the weakness in cash equity revenues particularly reflect the difficult macro environment in Latin America where we have a strong market position. Against that, the Prime Service business delivered a resilient performance notwithstanding the material reductions in leverage exposure that we'd put through in this year. And this highlights the continued progress we're making in terms of optimizing our client strategy for this business.

In fixed income, fourth quarter revenues were down 51% year-on-year. And our franchise was significantly adversely impacted by the widening of U.S. high-yield spreads in December, which reached 747 basis points, an increase of 212 basis points since the second quarter of 2015. We saw subdued client activity and reduced liquidity across the yield portfolio. And this market environment negatively impacted our credit businesses where we incurred negative revenues and mark-to-market losses, particularly in distressed high-yield assets.

Our securitized product business was impacted by the widening of U.S. high-yield spreads and the tightening in swap note spreads, resulting in mark-to-market losses in CLO agency, CMBS agency and non-agency trading. I would note though conversely that trends continue to be strong for asset finance franchise resulting in a significant increase in revenues for the full year.

So, as Tidjane's outlined already, in order to reduce (54:53) volatility, we will continue to proactively manage the risk positions and inventory in both credit and securitized products through sales, hedging and further reducing our inventory levels.

Slide 52. As we mentioned, in the fourth quarter, we saw significant mark-to-market losses of $632 million across both Global Markets and IBCM. The losses were incurred across our securitized products, credit and corporate loan books, although the majority were incurred in the leveraged finance business in distressed trading, underwriting and par.

Within the leveraged finance capital markets book, only 3% of the portfolio consists of oil and gas exposure, which was the most impacted sector during the quarter. In addition, I'd point out about 62% of this portfolio was BB or better, highlighting the overall quality of the positions.

So, therefore, we experienced the most write-downs within our distressed loans trading books. And within this portfolio, clearly both energy and metal and mining exposures were adversely impacted in the quarter. I would note that only about 7% of the inventory is energy-related and 2% is metals and mining-related.

Slide 53. So we show here the Investment Banking & Capital Markets division which comprises the advisory and underwriting businesses excluding those businesses in Switzerland and Asia Pacific. I'd also note that the revenue for underwriting and the split between Investment Banking and the Capital Markets business according to a JV between the two divisions. For the full year, we broke even in adjusted pre-tax income in IBCM as declines in underwriting offset the gains in our advisory strategies.

Slide 54. So, here, we show the results for IBCM on both a reported and adjusted basis. The largest adjustment item for IBCM was clearly the CHF384 billion goodwill impairment in the fourth quarter, but we also saw some small restructuring charges.

The volatility-driven market challenges that impacted some of our other businesses also result in headwinds to the IBCM capitalism in the second half of the year. For the full year, IBCM net revenues of $1.8 billion was down 21% compared to 2014 with lower debt and underwriting equity revenues which offset the increase that we achieve in advisory numbers.

Full year operating expenses increased by 24% compared to 2014, and this was primarily driven by some salary increases and investment in strategic hires for the growth plan as well as restructuring charges, some investments in our risk, regulatory, and compliance infrastructure. But this was offset by decrease in discretionary compensation.

So for the fourth quarter, IBCM reported net revenues of $402 million, down 22% compared to the prior quarter, and as I've mentioned, this was primarily due to lower debt underwriting revenues which offset improved advisory numbers. Fourth quarter operating expenses were significantly higher both quarter-on-quarter due to the goodwill impairment numbers.

On the capital side, risk-weighted assets were $18 billion at the end of 2014, up by $4 billion compared to the year-end 2014, and this increase reflected increased investment grade and non-investment grade underwriting commitments, as well as the increase in credit-related multipliers that FINMA requires for Swiss banks.

So on slide 55, we show here the increased advisory revenues which were $251 million in the fourth quarter, up by 29% compared to the prior year, reflecting a significant increase in number of completed M&A transactions. We saw continued (58:49) in the M&A franchise with an outfalling into the quarter more than double compared to the prior year quarter.

Look at equity underwriting, net revenues were $102 million, down by 33% year-on-year.

We did see some pickup in equity underwriting revenues compared to third quarter, primarily attributable to our strength in followups. Debt underwriting revenues though were down 23%, reflecting the industry-wide declines in leveraged finance activity, and the result also reflected the division's share of the mark-to-market offers in the commitment portfolio which is a joint venture with Global Markets.

For the debt underwriting portfolio on slide 56, I think we are confident in the ability to navigate current market environment while supporting the financing needs of our clients, which with mark-to-market losses and underwriting commitments amounted to $86 million in the fourth quarter, split equally between Global Markets and IBCM. Just about 1% of our total non-investment grade commitments.

If you look at our non-investment grade underwriting exposure in aggregate, $6.5 billion or 56% of the exposure is related to less risky BB credit. And of the underwriting commitments, about 3% of the portfolio is energy-related, about half of the industry average.

Just from an execution point of view, the residual portfolio flex at year-end was still well above market clearing levels, particularly for BB commitments. And during the first few weeks of the year, around 19 leveraged loans and high-yield bonds have been priced or allocated. And Credit Suisse was involved in 12 of these transactions, 6 of which were underwritten, and all 6 cleared within our fees.

Let me conclude now with the SRU which, as you know, is a stand-alone unit. And the rationale for establishing this was to right size our core divisions, especially from a capital perspective. As a separate division with an independent management team, this will help provide enhanced governance and transparency of the wind-down efforts. And over the past few months, the focus has been to finalize and segregate the transfer portfolio for switching to the primary mandate with the accelerating exit of (01:01:00) capital and the reduction of costs.

Slide 58. If we look at the full year, we saw a pre-tax loss of CHF2.5 billion in the SRU compared to CHF3.6 billion in 2014. Clearly the comparison with 2015, we saw major litigation expenses significantly lower compared to last year, as last year included CHF1.6 billion for settlement with the U.S. authorities over the outstanding U.S. matters and approximately CHF800 million compared to the RMBS litigation charges.

Clearly, full year 2015 revenues were down year-on-year due to positive gains in 2014 from non-controlling interests and lower revenues from the restructuring of our former Asset Management businesses and from the restructuring of select onshore businesses in 2015.

And for the fourth quarter, we saw a pre-tax loss of CHF1.1 billion, slightly larger compared to the fourth quarter of 2014. This reflects higher RMBS litigation expenses, restructuring charges from the transfer of the U.S. Private Banking business and higher provision for credit losses which impacted the Private Banking and Asset Management portfolio.

Let's look at slide 59. We thought it'd be helpful here to give an update on the high-level guidance we gave at Investor Day around the SRU. This division is composed of four components. First, we have the previously existing non-strategic units; the mix of legacy Investment Banking (01:02:29), legacy Private Banking businesses, and Asset Management divestures.

Next we have the businesses we're actually exiting. The European swaps into government bonds as well as market making in selected emerging market countries. We also have some exposures relating to the resizing of the investment bank. For example, in the Global Markets division, additional transfers to the SRU in close derivatives and loan portfolios for macro, global credits, securitized products, emerging markets, derivatives, and prime services. From the former PBWM division, key transfers include the U.S. Private Banking business which we announced exit from last quarter as well as selected offshore and AM exposures.

Slide 60. Similar to the prior slide where we showed the composition of RWA leverage, here we show the components of pre-tax income. I think the key takeaway is the new transfers represent about 40% of the pre-tax loss for the fourth quarter and 25% the full year and large component excluding the U.S. Private Banking business exit.

So as we said before, the primary objective is to facilitate the wind-down of capital and costs relating to business and exposures in this unit.

From a pre-tax point of view, we will reduce the drag from CHF2.5 billion to less than CHF850 million by the end of 2018. And from an RWA and leverage exposure, our aim is to reduce this by 70% over the next three years. I'd note the RWA reduction profile does not include production in the operational risk RWAs for which we will need to seek approval in the future from our regulators.

So on slide 62, we give some more detail in terms of loss reduction for the SRU. And as I said before, we expect the drag from group results to reduce to less than CHF850 million by the end of 2018. But it is important to note that we will continue to expect some downward pressure in 2016 driven by firstly, the loss of revenues from business that will have a lag in cost roll-off and secondly, the increase in exit costs given that 2016 will be the peak in terms of outflows from this portfolio. And we were able to see impact from tax redemption of some of our legacy funding assets as we've talked about before.

Let me turn now to the final section for cost and capital. So, Tidjane has already mentioned the overall move in our compensation pool, and what I want to provide here is some more details for how these actions flow through into our future compensation costs.

From 2013, you can see that awarded variable incentive compensation has been reduced steadily. Overall variable comp declined by 19% since 2013 and by 11% between 2014 and 2015. You can see we've also reduced the deferral rates from 56% in 2013 to 41% in 2013 (sic) 2014 (01:05:31). Now, from an accounting point of view, whilst the awarded variable compensation expense has gone down, this is not yet apparent in our income statement which reflects the deferrals from prior years.

Going forward, given the reductions we've made over the last three years and the changes in deferral policy this year, we will see a smaller portion of variable comp being recognized in the income statement. So, in particular, I would point out that, as you can see on the slide and in 2016, we estimate there will be about CHF1.5 billion of unrecognized compensation cost to be amortized compared to CHF1.9 billion in 2015.

Let me just conclude now with capital leverage. So we show here the movements in group capital on leveraged positions last year. And as you can see, we've seen about a CHF6 billion increase in RWA since the end of 2014, and this was driven by a combination of CHF8 billion of business movements and negative CHF4 billion related to FX movements and CFH 2 billion methodology uplifts. Compared to the third quarter, group RWA increased by CHF5 billion primarily due to business increases.

If we move to leverage, at the end of the quarter, group leverage exposure stood at CHF988 billion. During the course of year, we achieved a reduction of CHF162 billion which was driven by CHF140 billion of business movements in CHF22 billion from FX moves. As we said before, the majority of this was achieved within Global Markets and the SRU in line with our overall strategy. Compared to the third quarter, leverage fell by CHF57 billion, again driven by Global Markets and SRU.

Slide 66, as I mentioned Investor Day, we talked about our strategy to maximize free capital generation. We focus on the moves here that directly impact our capital base. During the course of 2015, you can see we utilized around CHF500 million of free cash flow, primarily due to the reported pre-tax loss of CHF2.4 billion, the impact from the regulatory reversal for own credit and goodwill impairment and further consumption for CET1 taxes and in particular, at pension exposures.

Let me discuss the detail through 2015. You can see the end of 2014, you have CET1 capital of CHF28.6 billion, with CET1 ratio 10.1 and a leverage ratio of 2.5%. After reduction in CET1 from the operating free cash flow used in the year, we had a CHF6.4 billion capital benefit in the raise. If you narrow out (01:08:10) the consumption for the cash dividend accrual and FX movements, you can see our CET1 balance increased by CHF4.3 billion to CHF32.9 billion in 2015.

When calculating our ratios, this increase in CET1 capital is partly offset by the increase in RWA I mentioned before. But overall, our year-end ratio is improved to 11.4% and 3.3% respectively. In the fourth quarter, we used about CHF2.4 billion of operating free capital compared to the third quarter leaving us with a net increase CET1 of CHF3.9 billion. I would note here by the way on particular point around the Swiss pension fund you can see that we had an adverse impact on our CET1 position of about CHF0.5 billion relating to the revaluation of the Swiss pension fund in light of the reduction in Swiss interest rates over the course of the last year.

So, let me just conclude then with a few words on the TBTF requirements. We expect these rules to be finalized and effective in the second half of 2016, and then be phased in until the end of 2019. If you start with the leverage ratio, the requirement for Credit Suisse's going concern ratio is 5% of which a minimum of 3.5% monthly service CET1 capital and the remainder with high-trigger Tier 1 incidence.

At the end of the year, our going concern leverage ratio stood at 4.8% compared to the 2020 requirement of 5%. Just to be clear, that consists of 3.3% of common equity leverage ratio and 1.5% including a high-trigger Tier 1, low-trigger Tier 1 and low-trigger Tier 2.

Based on the additional 5% gone concern leverage requirement and our target end exposure around CHF1,000 billion, we'd expect we'll need about CHF50 billion to CHF60 billion of gone concern leverage in line with our previous guidance.

Now, if you look at the new requirements for the capital ratio, the going concern capital ratio is set at 14.3%, but you can see at the end of 2015, our going concern capital ratio stood at 16.2%, so we exceed both of the 2020 requirements.

Just lastly, I'd note that under the new draft TBTF rules, high-trigger Tier2 and low-trigger Tier 1 and Tier 2 capital instruments remain eligible capital instruments. Either it's going concern capital under the Grandfathering rules or its gone concern capital. Now the new rules are more strict than the current set of rules, and we would expect clearly to be fully compliant by 2020. And we will need to increase our further gone concern capital particularly through the issue of further TLAC debt.

But we do not currently anticipate looking at the implementation of the TBTF regime in Switzerland to need to trigger regulatory calls around this.

So that concludes the results portion of today's presentation. I'd like to hand back to Tidjane.

Tidjane Thiam - Chief Executive Officer

Thank you, David. As we know, the environment has deteriorated materially during the fourth quarter of 2015. A combination of uncertainty on Chinese growth an abrupt drop in oil prices, large industry mutual fund redemptions of financial assets, asynchronous policies by leading central banks, lower liquidity have all contributed to making the fourth quarter of 2015 challenging with lower levels of client activity, lower levels of insurance and material shift in the prices of some asset classes.

In this challenging context, the bank has delivered resilient performance on the key aspects of our strategy. APAC has collected CHF17.8 billion of net new assets, Switzerland CHF13.8 billion. We have seen outflows in IWM, but that's for regularization continuing. It was in line with our guidance and decreasing.

And finally, IBCM has a very good quarter. We have the best performance in deals announced since 2010. Global Markets was challenging, but we're addressing this and reducing the inventory aggressively, transforming the model to make sure that it is less volatile going forward. And finally, we have accelerated the pace of our cost savings with CHF1.2 billion or CHF3.5 billion already actioned at this point.

With that, I will close this session and open the call to Q&A. Thank you.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer part of the conference. Your first question today comes from the line of Huw van Steenis from Morgan Stanley. Please go ahead.

Huw van Steenis - Morgan Stanley & Co. International Plc

Good morning. Just three questions. So, first, given the very weak performance in Global Markets, can I ask the same question I did at the Investor Day which is, are you doing enough? Can you actually get to a 12.5% return in Global Markets through cost-cutting alone? I was disappointed you say earlier accelerating cost-cuts rather than actually more fundamentally looking to reconfigure that unit. I was just wondering what additional actions you think may be necessary.

Number two on capital, you're obviously missing your RWA target. Do you think, in retrospect, to actually raise enough capital? And thirdly, and maybe this is more technicality. I'm just surprised you didn't pre-announce given the scale of the miss versus consensus expectations. I was just wondering, why you chose not to. But anyway, thank you very much indeed.

Tidjane Thiam - Chief Executive Officer

Okay. Good morning. Thank you. On Global Markets, we really have a comprehensive plan. If you look at what's happening, we said that we would reduce the RWA allocation to Global Market back in October when we talked about it, and we have hit that target. What we're doing now is looking under that, at the make-up of that RWA, and we found in there, positions that are not consistent with (01:14:31) new strategy, particularly in distressed debt and in CLOs. And from October, we started cutting those very aggressively. The CLOs were down 37% (01:14:41) by the end of the year, but when the spreads went out particularly in December, we got cooked by that. And that's what you're finding in the numbers. But those balances will be driven (01:14:54) and his team are driving that very hard. So that comes in a different to cost cuts which are necessary.

But the fundamental way to de-risk that stream income is to continue to cut those portfolios of activities but the key point in that is that it's relatively discrete, contained. We know what it is. We are dealing with it. It's unfortunate but we're dealing with it and those inventories will be taken down, reducing our exposure.

Capital RWA, do you want to take that, David?

David R. Mathers - Chief Financial Officer

You asked the question. You said did we actually raise enough capital? I think I would point out a couple of points really. Firstly, when we actually raised – did our capital raise last October, I think we did make it clear that part of the point of the capital raise was to actually fund restructuring and reengineering of the group, and that clearly is coming through in terms of the restructuring costs for USDC (01:15:54), And some of the other measures we're doing in terms of the acceleration.

I think we did actually warn in October, you may recall our trading statement at that point, which did refer to the substantial weakness in client activity across all of our businesses which was more than offsetting the strength in Asia Pacific and the net – our net interest income. Now I think clearly, the fourth quarter numbers, the market proved more difficult than we actually expected. But I would point out that the whole point of the plan was to reduce Global Markets and to resize the group, and there's been an awful lot of progress over the last three months in terms of actually delivering that.

I think the second point I'd make is clearly – we always make clear that the IPO of a minority stake in the Swiss Universal Bank is a core part of our strategy.

And just to update you on that, the license application for this was actually filed at the end of January, and we're anticipating go live of the new entity in the second half of this year which will put us on track for the minority IPO that we'd always scheduled in the second half of 2017. So, that's very much a part of our core plan basically.

And I think last but not least, I think I do recall we did get some criticism back in October around our caution around dividends, particularly the fact we wanted to continue to provide a scrip alternative at that time and also, basically, I think, referring to a longer-term goal of around 40% payout in terms of our cash flows. I think there's a balance there. I think we were rightly cautious in terms of that, and that's clearly a core part of our capital plan here.

You asked me a technical question about should we pre-announce, I mean, I think I would point out that, A, we did actually give a very cautious trading statement back in October and it's summarized out already. I think, secondly, we actually referred to the significant restructuring cost. We actually said we were going to be taking about CHF1.2 billion of restructuring costs, and you can see there's about CHF355 million of that already as well as further CTAs at that point.

And I think we were very clear that we did expect to see a substantial impairment in our goodwill position which, indeed has proved to be the case basically. So, I think most of those factors actually were made pretty clear back in October.

Huw van Steenis - Morgan Stanley & Co. International Plc

Okay. Thanks.

Tidjane Thiam - Chief Executive Officer

Okay. Thank you.


Thank you. Your next question is from the line of Andrew Coombs from Citigroup.

Andrew P. Coombs - Citigroup Global Markets Ltd.

Good morning. If I could please have a couple of follow-ups on Global Markets and then one on Wealth Management as well, please. With respect to Global Markets, just firstly looking at that fixed income result down 60% year-on-year and Global Markets down 50%. If you include Global Markets in Asia Pac, clearly far, far worse than peers. You've talked about the mark-to-market losses there, CLO and RMBS, but to Huw's point, I guess, firstly, is there any reason why this shouldn't continue in Q1, given the conditions have only deteriorated since then?

Secondly, at the Investor Day, you did suggest you were going to review areas that you didn't think could reach 12.5% return. I know you made some specific comments on the distressed portfolio there, the Global Markets RWAs were actually flat Q-on-Q. You're still talking about increasing that by 2018. How bad do these product areas need to get before you can reconsider the capital that you're allocating to them particularly, within global credit and structure product?

Second question, Global Markets with only about – you're talking about high and flexible cost base. I appreciate the point about expensed variable comp versus awarded variable comp. Your awarded variable comp is only down 11% year-on-year. Global Markets revenues are down 14% year-on-year, for example. Was there any reason why you couldn't cut the awarded variable comp further?

And then a final question on the outflows both in the Swiss Private Bank and in International Wealth Management, you list a number of them one-off factors as it were regarding deposit repricing, the external asset management exits, the litigation case and (01:20:02) relating to that. How many of these items are now done and finished or how many of those do you think will drag into 2016? Thank you.

Tidjane Thiam - Chief Executive Officer

Okay. Thank you. Thank you, Andrew. I'm going to take the cost base, and then I would like David to hand over your GM question. On the cost base, the 11% (01:20:20) total for the bank, in the case of Global Market remuneration, that's gone down actually more than 30%, 36% to be precise which is very, very severe, I can assure you, level of remuneration cut.

So, if you add that plus the change in the deferral, we are making that part and showing that that part of remuneration can be flexed if you wish. But clearly, given the level of drop in revenue that you have observed into a quarter, that mitigates the drop but it cannot fully absorb the decrease in profit. Therefore, you also have to cut your cost base. And we have taken out, I think, roughly 7% of the cost base, and we're going to continue doing more as the months come. You want to take the marks?

David R. Mathers - Chief Financial Officer

Sorry, Andrew. Just me – can you ask the question again on the marks? Sorry.

Andrew P. Coombs - Citigroup Global Markets Ltd.

I mean, given the marks...

Tidjane Thiam - Chief Executive Officer

Taking going forward, yeah.

Andrew P. Coombs - Citigroup Global Markets Ltd.

Yeah, exactly. Just the market conditions have probably deteriorated given the sizable mark-to-market losses you've booked, and you're talking you're trying to reduce inventory into this adverse environment, presumably some of these mark-to-market losses are recurring during the first quarter as well.

David R. Mathers - Chief Financial Officer

Thank you. Well, I think – I don't think I would want to give (01:21:44) figures, I mean, I think what Tidjane has said in the outlook statement is the market conditions that we saw in the fourth quarter have continued into the first quarter. I don't think that means we've necessarily seeing marked write-downs in the sale we've seen in the fourth quarter. That would be unduly pessimistic. And I think certainly on this leveraged finance commitments, as I said before, we've actually priced a number of deals so far have actually been the flex. So, I think that's obviously a situation we're watching, but it's not been, at least so far, a cause for concern.

I think clearly we'll obviously watch the rest of the portfolio, particularly the distressed side in the balance of the first quarter. Clearly, if we were to see a further spike up in the yields in that portfolio and therefore, on the value of those marks, then we would expect to see some further downward move on those marks. And it's clearly been a difficult January so far.

So, I think I would say we have seen some losses on these positions in January. I'm not going to quantify it. But not on the same order as what we saw in the fourth quarter and particularly in December, where we saw a lot of distress selling by a number of credit funds which did result in a very sharp market disparity.

Tidjane Thiam - Chief Executive Officer

And I think your next question was on the outsourcing IWM. I think the short answer is yeah. These are really one-offs, and you shouldn't expect them going forward.

Andrew P. Coombs - Citigroup Global Markets Ltd.

Thank you. Very clear. Just one quick follow-up there. The plan is still to grow the RWAs in Global Market to the CHF84 billion?

David R. Mathers - Chief Financial Officer

No, I think we've set a target of CHF83 billion to CHF85 billion. Clearly, the out turn for the fourth quarter was much lower than that, around the sort of CHF74 billion level. I think, as Tidjane said, we have done a very substantial resize in the Global Markets. I think the priority for Global Markets in 2016 is to reshape the business the way we've laid it out. I think we do want to see more equities like fixed income business. We do not want to see these trading books at the size they actually are. That will probably result more though in a redistribution of RWA in the existing limit. And I don't think you should really look for us to see it going up to the ceiling of CHF83 billion to CHF85 billion in these market conditions.

Andrew P. Coombs - Citigroup Global Markets Ltd.

Very clear. Thank you very much, guys.

Tidjane Thiam - Chief Executive Officer

Just to add about it. That would only happen if our profitability had improved very substantially. In one of my slides you saw the margin on RWA on where it's going. It's really going into IWM in APAC, and you see the fee decreasing in Global Markets. So, until there's a clear improvement, given that we put our business is in competition for capital, there'd been no additional investment in Global Markets.

Andrew P. Coombs - Citigroup Global Markets Ltd.

Thank you.


Thank you very much. Your next question is from the line of Jon Peace from Nomura.

Jon Peace - Nomura International Plc

Yes. Thank you. Two questions, please. Firstly, on January trading, I know you're smaller in macro than your peers, and that's an area you've reduced. But are you seeing any sort of material offset to the weaker credit environment from macro? And also, some of your peers have talked about a reasonable January for margins in Wealth Management. I just wonder if you had any comment there.

And then just separately, on oil and gas exposure, I can see you've given us numbers in various places, and thank you for that. But could you give us a sort of total consolidated exposure to oil and gas, and how much of that is investment grade versus non-investment grade? Thanks.

Tidjane Thiam - Chief Executive Officer

David, why don't you take the January trading in macro. I'll take the margin and we'll come back to the oil and gas.

David R. Mathers - Chief Financial Officer

Thank you. I think we did see some small improvement in our rates business, particularly actually in U.S. rates and Asia rates technically, but not really in European rates. But I don't think that would – it's clearly a relatively small business for us, and I wouldn't take it out of context in terms of that.

Tidjane Thiam - Chief Executive Officer

On Wealth Management in January, look, what we are seeing is Asia a continuation of what we've seen in 2015 in Q4. And, frankly, in the other areas, it's just too early to tell.

And oil and gas, do you want to comment on those?

David R. Mathers - Chief Financial Officer

Yeah, so let's just – let me take the oil and gas point. So, within the appendix, you will note basically we actually do give the oil and gas exposure. And you can see on page 80, and that was a total of a $9.1 billion within the corporate bank. So that's clear, the majority of our oil and gas exposure, if you add up what we've given elsewhere, you can see it's about a couple of billion elsewhere, say around about the $11 billion mark.

But let me focus on the corporate bank oil and gas number. You see here the number of $9.1 billion. Of that, as you can see, 58% is investment grade, 42% is non-investment grade. I think there's two points I'd make. Firstly, one, only about 22% of this actually is funded, 78% is actually unfunded. So, I think I would not get this out of proportion in terms of this.

And secondly, the lending is very heavily biased towards asset back lending in terms of this. So there's very good recovery rates against the types of exposure we actually have here. So, I think it's clearly very much worth watching, but I don't think I would be particularly concerned and I certainly wouldn't – reality is if you look at the losses that we had within the Global Markets business, it was predominantly driven by the overall distressed loan book, not particularly by the oil and gas component, although clearly, the oil and gas sell-off has actually driven the weakness in the distressed loan market.

Jon Peace - Nomura International Plc

Got it. Thank you.

Tidjane Thiam - Chief Executive Officer

Okay. And I think that's correct. Next question?


Thank you, sir. Your next question is from the line of Kinner Lakhani from Deutsche Bank.

Kinner Lakhani - Deutsche Bank AG (Broker UK)

Yes. Good morning, Tidjane. Good morning, David. Three questions. Firstly, I just wanted to revisit the capital point. Essentially, at the time of the Investor Day, I think we got a pro forma CET1 ratio of 12.2% and obviously, today, the number is 11.4%. So, the delta feels like about CHF2.5 billion, of which, I think about CHF1.1 billion is the ex goodwill loss, CHF0.6 billion is the Swiss pension, but I still kind of feel a missing almost CHF1 billion in terms of the deviation on the CET1 capital.

Secondly, on cost, again, I'm trying to get my head around the CHF1 billion miss in the underlying operating expense. How much of this is perhaps the change in the deferred comp methodology and the impact that would have had in terms of true-up in Q4?

And thirdly, just to talk about the credit or the FID business. Obviously, there seems to be a big drive now to de-risk the franchise, perhaps, to a greater extent than we might have thought at the Investor Day. Now, given that this is happening in areas that were previously considered as high ROE franchises which we saw from the chart. How does that make you feel about the ROE target, the ambition you have for 2018 which looks relatively high? Thank you.

Tidjane Thiam - Chief Executive Officer

Okay. No, thank you. Moving to your questions, the movement of 12.2% to 11.4%, Dave?

David R. Mathers - Chief Financial Officer

Let me just start on the capital numbers. So if we just refer, then please, to page 66. What you see there, basically, is a walkthrough basically from the 3Q to the 4Q numbers. So, obviously you the pre-tax loss of CHF6.4 million of which CHF3.8 billion is goodwill and it's not relevant for the look through CET1 numbers.

You then have the (01:29:35) move which is also irrelevant for the CET1 numbers. So, you're then left essentially with CHF0.1 billion of CET1 relevant taxes. There are some taxes which are payable even in a loss and CHF0.6 billion for the Swiss pension of which CHF0.5 billion basically is pension and that's the primary component.

So you have a usage of about CHF2.4 billion, of which essentially about CHF1.8 billion is losses and CHF0.5 billion, CHF0.6 billion is a Swiss pension fund, and those are the two components. So, if you look at the pro forma ratio, we actually gave of 12.2%, dropping to 11.4%, that's 80 basis points. That CHF2.4 billion on it just short of 300 (01:30:15) is essentially the reconciling item, so net-net basically you've got, as I said, CHF0.5 billion being used for the Swiss pension fund asset, which I think we did refer to last year as well, and the balance basically being the operating losses.

I just would note basically on RWA, as you look through the slides, you can see there's about a CHF4 billion increase in IBCM's RWA usage of which about one essentially was the credit (01:30:43) and the other was the increase in funding commitments for leveraged finance. So that's obviously the other part of the calculation there.

Tidjane Thiam - Chief Executive Officer

And the next question on (01:30:53) costs and deferral.

David R. Mathers - Chief Financial Officer

Yeah. I think it's – I mean, we can probably give you after a proper reconciliation of this in terms of the numbers. You can see that it's back at nine months 2015, the annualized cost of that CHF20.5 million and the number, excluding goodwill impairment, was about CHF22.1 million for the full year.

Now, within that, just to, that was the question. The major component here really is about 0.1, which is the change in deferral that you're actually referring to. Obviously, then the second point is you know that a substantial component of our expenses are actually in U.S. dollars. So, obviously, as the U.S. dollar has appreciated, and you're looking at the Swiss franc consolidated numbers, they will go up in FX terms.

There's then obviously the restructuring provisions you mentioned before, just CHF355 million. And then there's also litigation provisions which actually are taken through expenses. And there's also some indirect taxes in this as well.

So, those are the major components basically in terms of the walk-across from where we were at nine months to where we are there.

I mean, I think there's a clear point here, which is, if you adjust for all these factors, our underlying expenses are still marginally up compared to where they were at nine months. So, I think this underlines the importance of the cost program and what we need to achieve during 2016.

Tidjane Thiam - Chief Executive Officer

Yep. And the last question was really the kind of fixed portfolio and how we look at profitability. I think you have two considerations there. As you rightly said, there is the absolute return you can get from a given activity and then there is the volatility which is the standard deviation in that return, and that can be outside risk appetite. And I think the issue with some of those activities is that they really just have become too big compared to the size of our investment bank.

When you are running an investment bank with CHF200 billion of RWA, you could have a (01:32:51) of that size. When you go down to 75% or 80%, you absolutely have to resize that. So, that's a movement in which we are. So I'm not so sure what the absolute return on capital you can hit moves. What you're doing is just really cutting the absolute exposure to most product line so that they don't, if you wish, move your total profitability too much or they become the smaller part of a new profitability you have if that makes sense. So, it`s really what we are doing.


Thank you. Next question is from the line of Daniele Brupbacher from UBS.

Daniele Brupbacher - UBS AG (Broker)

Yeah. Good morning. Thank you. I had a numbers question and then one more on strategy. On the numbers, you now gave us values for additional disclosure on the divisional levels, and I saw that interesting comment, the Swiss business in Private Banking was up almost 20%, I think, in 2015, or CHF300 million and also some increases in IWM and APAC Private Banking.

I think you made some reference to the replication portfolio during your prepared remarks. Could you just elaborate a little bit on what happened there in terms of the results in 2015 and what you probably could expect going forward? And then more generally on the environment in APAC specifically, you said the environment has deteriorated materially, but you at the same time reiterated your target. So do I understand you correctly that you consider this to be a temporary challenging situation and you are still as positive as you were before on the region? And when you talked about lowering the breakeven point, I guess that was for the group overall. How should we think about it? What is your revenue breakeven point? That would be very useful to get some thoughts around that as well. Thank you.

Tidjane Thiam - Chief Executive Officer

First, let's go back to the first question the replication portfolio.

David R. Mathers - Chief Financial Officer

So, yes, I think you obviously saw the increase in net interest income. Obviously, if you look to their numbers before over the last couple of quarters, then basically, the primary driver of our net interest income has been the various repricing move that we put in place back in January.

So, that includes obviously, zeroing out in terms of deposits, although we obviously do not charge negative interest rates on our Private Banking or retail deposits, but we do pass all the negative interest rates through to some of our corporate and institutional clients I'm afraid, given the negative interest rate environment in Switzerland.

I think you also know basically that we've been working diligently to actually expand our loan portfolio across the businesses and that applies to all three businesses which is clearly positively benefiting their interest income. The impact from the replication portfolio was negative last year against that, but I think you have history of us basically, so you know this has been in a decline now for five years, because clearly what you actually have is about an 18-month swap duration, and those swap curves are actually really running out. Now, there's basically not much left as interest rates, I'm afraid, have continued to actually fall.

So, yes, it's a margin mix, but the really important thing was the moves that were taken by all three businesses in response to the interest rate environment and what we actually did in the Private Banking operations there which I think we've discussed before.

Daniele Brupbacher - UBS AG (Broker)

And is it fair to assume that this is now the full impact in the numbers? Or is there more to come assuming you will not implement further measures on the repricing side?

David R. Mathers - Chief Financial Officer

Well, I think that's probably fair.

Daniele Brupbacher - UBS AG (Broker)

Yeah. Okay. Thanks.

David R. Mathers - Chief Financial Officer

It's clearly making forward-looking statements on interest rates is not (01:36:45) I'm afraid.

Daniele Brupbacher - UBS AG (Broker)


David R. Mathers - Chief Financial Officer

I think in the current interest rate environment we have with negative Swiss interest rates as they stand today, then I think, no, I think we've completed the rollout of the measures. Clearly, if that were to change at all this year, and as I said, it's difficult to predict how 2016 will actually break out, then we'd obviously look at that again in that context.

And I think as you know though, and as Tidjane has mentioned before, the continued expansion of our lending operations across our Private Banking businesses does remain a core part of our strategy. So that should boost net interest income.

Daniele Brupbacher - UBS AG (Broker)

Okay. Thank you.

Tidjane Thiam - Chief Executive Officer

On APAC, thank you for the question. Because it's really important point in our equity story. We fundamentally believe in the long-term prospects of Asia. That is rock solid. Therefore, we're driving long-term value creation. And we think it's the right thing to do to invest in that part of the world.

Yes, there will be volatility from one quarter to another, but we are committed. And actually, that commitment has a very direct upside which is that currently, we are picking up resources of better quality than we ever have and at a lower price than we ever have because our commitment to putting capital in the region no matter what is attracting actually people who are in the region, believe in the region and want a career with a player that is unapologetic about growing in Asia.

We are absolutely convinced it's the right thing to do for our shareholders. And frankly, when I look at the performance in 2015, CHF17.8 billion of net new assets, I think that's remarkable considering all the challenges we've seen in markets. And in Q4, which everybody was nervous about, CHF3 billion for a business of that scale. We have exceeded, in absolute terms, players who are much large than us in Asia; 12% of AUM growth in what's supposed to be a very challenging market.

So, how do we continue to grow? We continue to recruit. The good thing about recruiting top quality people, we sent 40 people in the fourth quarter out of the 70 people, so an acceleration in recruiting more people and of better quality. They strengthen our teams.

Loan penetration is the lowest actually of all our regions in Private Banking in Asia. So, we see a big upside there both in the existing portfolio and in penetrating new clientele. We have geographic expansion. We have been historically underway China. We can invest and gain market share there. And I will say also that the credit track record of Asia is one of the best in the banks. We have heard a number of margin calls and surprisingly in the fourth quarter, and they've all done well. They've all done well. People have done what they're supposed to do, and there's been basically no credit incident or no issue in the Asian portfolio.

So, not only is it growing, not only is it (01:39:48) returning part of the group, but the downside is very limited when we look at the group and when we compete for that scenario. So, really, absolutely we're going to continue doing that.

Regarding (01:40:04) breakeven, what it's about, it's about six-plus. And we've talked earlier about our philosophy of being quite binary because we think that's the only way you generate durable cost savings. You've seen that with the U.S. PB. When we say CHF700 million of savings, they are real. I mean, I've visited building, entire floors are empty. We're not paying the rent anymore. Infrastructure is gone. The business is gone. So those are real, real savings.

And the other CHF500 million we've added has been a joint effort for the team here, and we've looked at things in the same spirit and these are savings that are definitely basically done (01:40:43), and we're going to continue. Because the philosophy we're trying to put in place is a continuous improvement philosophy and that's not unique to us. What we're doing is catching up with a number of savings that have not been made or cut – that have not been made and we hope that once we reach that point, we can continue on a path of generating 2% to 3% productivity improvement every year. That's really where we'd like to get to.

Daniele Brupbacher - UBS AG (Broker)

Thank you very much.

Tidjane Thiam - Chief Executive Officer



Thank you. Your next question is from the line of Kian Abouhossein from JPMorgan.

Kian Abouhossein - JPMorgan Securities Plc

Yeah. Thanks. And thanks for the disclosure on the energy side. That's very, very helpful. Three questions. It sounds to me that – and just I want to get this clarified. The endgame is 2018, all your targets are set in 2018. In the meantime, if the environment is more difficult and you talked about challenging, you talked about fourth quarter be more difficult than expected, if the environment continues to more challenging, ultimately 2018 is the endgame and if operating leverage is negative, you're willing to take that operating leverage as you're investing continuously. I just want to clarify, this is how we should think about the strategy.

And in that context, the CHF9 billion to CHF10 billion on page 20 of your strategy slides. Is that still a realistic outlook from what you're seeing in the business now, Tidjane, that you had even more time to look at it and in the current environment?

The second question is if you could explain a bit more how you go from a cash equity – how you create a fixed income cash equity like because equities is a flow agency business. DOJ is not a flow agency business, and I just try to understand what your strategy here is.

And the last point is just to clarify on cost deferral. How many years do you have now deferrals on cost, bonuses and what did you have previously? Thanks.

Tidjane Thiam - Chief Executive Officer

Okay. No. Thank you. Thank you, Kian. On 2018, I think you are right to say that the difficult conditions challenge that. Part of what we're doing is really, really, having a go at the cost as you've seen that is more aggressive to recreate a bit of room in terms of operating leverage because you're starting from a relatively bad place.

The other area where we have some leeway, and David made that point, is around dividend and how prudent we've been in total payout ratio, et cetera, during this period. And for a level (01:43:45) you have frankly is the investment because the investments are very different nature. Hiring RM is of a different scale from some of systems, et cetera, investment bear in mind, and we can also flex that.

So, at this point, I am not willing to question the CHF9 billion to CHF10 billion yet because I feel we have quite a few levers that we can pull if we fall behind in terms of revenue to protect the PTI. And this is why we gave a PTI target if you want to go over discussion and I like PTI because you've got many levers you can pull to meet a given profit target. So I would stick to a CHF9.4 billion to CHF10 billion for time-being.

Fixed income and equity, it's a longer conversation. We're not saying that we're going to run fixed income like equity. We'll keep on trying to make a lot of standard deviation and getting rid of the activities that basically increase your standard deviation and have an extremely wide standard deviation as we simply the idea and wishing that if you look at our portfolio, some activities are much more skewed in that sense than others, and if we get real because we will, through the cycle have a business that is moving much more in a range. And the cost deferrals, David, do you...

David R. Mathers - Chief Financial Officer

Sure. I mean I think the unrecognized conversation at the end of 2014 was CHF3.1 billion and the unrecognized at the end of 2015 was actually CHF2.3 billion.

Kian Abouhossein - JPMorgan Securities Plc

What is the deferral timeframe? I'm sure you get that later at the employment reports but just...

David R. Mathers - Chief Financial Officer

Three years. So, you can actually see the (01:45:33) on page 64. So, you have CHF1.5 billion in 2016, CHF0.6 billion in 2017 and CHF0.2 billion in 2018. It's a three-year deferral. But under U.S. GAAP essentially, you have to basically take one-third plus a third of the next year, plus a third the year after that, so it's a three-year declining deferral and the recognition is CHF1.5 billion, CHF0.6 billion and CHF0.2 billion.

Tidjane Thiam - Chief Executive Officer

So you can (01:45:56) it's going to work its way through.

Kian Abouhossein - JPMorgan Securities Plc

Yeah. And just on the environment, you mentioned that you could, at one point, potentially slow down. Investment can be flexed I think you said. If this environment continues is that something – is that kind of the trigger potentially? Or does it have to get much worse? I mean, how do you think about the flex on investment? What are the trigger points, really?

Tidjane Thiam - Chief Executive Officer

It's a good question. I think one of my previous answers you find part of the answer to that which is that really the place where we would be the most resolute is certainly Asia. Because for all the fundamental reasons I gave, we would continue.

There are other areas where we plan to invest wherever results is less obvious. I don't want at this point to go into too much detail on that, but we have flexibility, should the environment not improve, but I think frankly that's a quarter-by-quarter discussion that we're going to have in the coming quarters.

Kian Abouhossein - JPMorgan Securities Plc

Okay. Thank you very much.

Tidjane Thiam - Chief Executive Officer

But to summarize how I feel about it, I think the CHF3.5 billion, I think we can exceed the CHF3.5 billion of cost savings. I think what we've achieved in two, three months shows you that. I'm quite confident we'll hit that early before the end of 2018. And there's more to come from there, so that's one lever. We can save more costs, and we can also slow down or time differently the investments.

Kian Abouhossein - JPMorgan Securities Plc

Thank you.


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

Fiona M. Swaffield - RBC Europe Ltd. (Broker)

Hi. Good morning. I had questions in a couple of areas. Firstly, on the Swiss Universal Bank potential IPO, could you update us on basically how that differs from the numbers we see because I think it's the legal entity whether there's a difference in numbers and also whether you're still sticking to your CHF2 billion to CHF4 billion I think indication of a capital release. The second area was just the – I mean, because the starting cost base underlying, as you mentioned, is higher. So, are you still looking for CHF18.5 billion to CHF19 billion of absolute cost base in 2018 or has that gone up or are there other offsets? If you could discuss that.

And then lastly on RWAs, 2018 is some time off. How do you think – should we still be expecting the RWAs to grow in 2016, 2017 or do you think we'll have some offsetting impacts on where are we on kind of model changes in the Swiss multipliers coming in? If you could help us a bit on a shorter term RWA outlook. Thank you.

Tidjane Thiam - Chief Executive Officer

Okay. Thank you. Sorry, I just want to make sure we understand your last question. I missed the beginning of what you said on RWA.

Fiona M. Swaffield - RBC Europe Ltd. (Broker)

Just on RWAs, obviously, we're expecting them to grow towards 2018, but just shorter term, could the reduction in the SRU come in before the RWAs from growth? So, what's kind of the shorter term outlook?

Tidjane Thiam - Chief Executive Officer

Okay. Very good. I think they're all for you, David.

David R. Mathers - Chief Financial Officer

Thanks, Fiona. So, just on the Swiss Universal Bank. You're absolutely right. What we're reporting here is an MIS construct. So, it's the measure of reporting numbers from the Swiss Universal Bank whereas the actual entity that we IPOed is Credit Suisse (Schweiz) and that will be a separate legal entity.

I don't think – today, I actually have an update for you on the exact financials of what the entity will look like. I think that is somewhat premature. As I said, the license actually went in actually on the 31st of January and the entity expect this to operate the second half.

So, I think by the time we get to the end of the year, we're probably in position to start to give you the LE numbers but they will probably be slightly different from the MIS numbers just as we actually work through a completely separate legal entity at that point.

I think on the second question I believe was on the cost base. And I think what we said back in October was that we would set a target for the cost base excluding restructuring and litigation but including everything else. And we also said that that obviously would be dependent on the exchange rates prevailing that time. Because given we have a large portion across outside the Swiss franc, you will see moves upwards and downwards. And that was one reason why I gave that reconciliation for. And clearly, with the strength of the U.S. dollar, that's something we'd expect to continue.

Now, I think that the – at this point, basically, if you ex out that numbers, you end up with a target towards the soft end of that range, around the sort of 19 mark, but it's clearly going to be bit dependent on where the dollar moves. If it went to 110, that would have an impact on this, simply. If it went back to 90, it would have a different impact on this.

I think that the point to take away here though is two-fold. One, is that we did see some cost inflation but nothing like as much as you saw from the overall numbers, it's a couple of CHF100 million, which as I said before, underlines the need for discipline and underlines the reason for the acceleration we're actually pushing through now. And two, we are committed to at least that CHF2 billion net number. As Tidjane said, the investment will be phased to offset that depending on the market environment.

I think three, (01:51:27) that's quite a long question. I would say at this point basically, you obviously have seen that the implementation of the FRTB process is actually pushed back a year and revised proposals have actually been published. I think we gave guidance at that time. We'd expect about a CHF20 billion adverse effect from FRTB. That does look still likely to be the case. But you're now talking about something that's probably going to happen a year later in terms of it. So, the actual, as you might say, the implementation for these changes is being pushed out. I think before we actually said, end 2018 starting 2019. It's now looking at least a year later from that. And if FRTB is pushed back a year, I think it's very likely we will see further delays in re-modification around the other stuff too. Nonetheless, I think this capital strategy which we actually laid out in October is very much the right one. We need to build our CET1 ratio to 13% in anticipation of these moves.

In terms of intervening model and methodology effects, we did see methodology effects and those numbers are actually broken out on the slides. I think we will see further in 2016. I mean, the two specific ones tend to be the credit and the Swiss mortgage multiplier effects which, together, are normally worth around about sort of CHF4 billion, basically. But we will probably see some other model changes above and beyond that, Fiona.

Fiona M. Swaffield - RBC Europe Ltd. (Broker)

Thank you.

Tidjane Thiam - Chief Executive Officer

Okay. Thank you. We have time for one or two more questions.


Thank you, sir. Your next question is from the line of Jernej Omahen from Goldman Sachs.

Jernej Omahen - Goldman Sachs International

Yeah. Good morning from my side as well. I have a question on page 52. The way you discussed the mark-to-market losses in your investment banks and if I understand correctly, this was the driver of the bulk of the loss. What are you marking these things to?

And the reason why I'm asking is I'm assuming that the liquidity in securitized products in distress, securitizations and credit is virtually evaporated at this point. So, how much does it take for these spreads to blow out another 100 basis points or come in another 100 basis points?

As with the next question I wanted to ask you, so I understand that you are reiterating the strategy announced late last year. From the perspective of kind of this basic hurdle that you discussed in assessing the businesses previously which is on a fully allocated cost basis over the long term, these businesses need to cover the cost of capital. Can you just give us a refresher why securitized products, particularly under the new regulatory regime, still clears that hurdle in your mind?

Tidjane Thiam - Chief Executive Officer

Okay. Very good. David, you want to take them all?

David R. Mathers - Chief Financial Officer

Sure. I mean I think it's a good question. I think clearly, but not a new question. I mean I think there's always this question about how you actually mark these positions in declining liquidity, but I would just point out, yeah, there is no option around this. You don't mark to some index or some proxy like that, you have to mark to the prices you actually see and observe at the end of the year.

In a distressed market, we are seeing forced sales by redeeming hedge funds and credit funds and dispositions does result in some quite sharp losses, which is what you actually seen reported in our numbers. There's no doubt that the thinness of that market may basically give you some concern that essentially perhaps it's a stressed market you're actually pricing to, but we don't have any particular option to do anything different to that, and the marks do actually reflect that. So I think to that extent, therefore they are conservative but they do reflect the pricing at that time.

The liquidity event we saw, it's not a – it was a flight to quality. It was not severe flight to quality so it's nothing on the level of, I'm afraid to say what obviously I've seen in prior years, and so, there was sufficient evidence there but it certainly was a very stressed market towards the end of December. That's all I said.

Tidjane Thiam - Chief Executive Officer

Okay. On the second question, it's really an important question. If you look at again at page 52, you see the distressed look has an absolutely disproportionate size in this. So, we still think that fundamentally, the conclusion that the realized product is as good as it is correct too. And it's generating a reasonable level of losses here, (01:56:01) where the disproportionate losses come out. It's in the credit activity. So I think the question should be more directed at credit. And there, I said very clearly that distressed that they don't even belong into a new strategy, new current strategy. And it's something we simply are going to take to zero, basically. That's one.

And the other (01:56:24) CLOs, which have also created a lot of trouble. So I don't think it fundamentally changes the conclusion. If spreads had not gone out the way they did in early December, we would have run down those positions and never talked about it again.

And we're putting on a legacy issue because we're really dealing with something that is a reflection of the past strategy of the bank, not of a strategy we have going forward. But I think that both businesses run the way we want them run, our role to play and create value for the shareholders.

Jernej Omahen - Goldman Sachs International

All right. Sorry. Just, David, a follow-up on the way this is marked. So the products that you hold in your obviously held for trading portfolio, the securitized products, so how liquid are these marks? What does it take to move the spreads out another 100 basis points?

David R. Mathers - Chief Financial Officer

Well, I think that's a big question. I think I guess if we saw a similar collection of distressed outflows from our over-hedged funds, then you could see that's then actually happening. But I would just correct you on one point. The majority, the marks was actually not in the securitized products portfolio. It was actually in the credit portfolio. That's on page 52.

See the number there was the Corporate Bank was about 21%. You can see the leverage on financed underwriting was about 17%. In overall basically, it's 56%. It's really credit. It's not really the securitized products business. We did see some stress there in terms of some of the agency and non-agency positions. But it was not the primary driver of this.

Jernej Omahen - Goldman Sachs International

Okay. Thank you very much.


Thank you very much. Your next question comes from the line of Jeremy...

Tidjane Thiam - Chief Executive Officer

I think we should take your last question, because we're around the end.


Thank you, sir. Your final question is from the line of Jeremy Sigee from Barclays.

Jeremy C. Sigee - Barclays Capital Securities Ltd.

Hi, there. Thank you. Just two follow-ups really. The first one is on the subject we were just discussing there, the inventory in credit and securitized products. You talked about distressed basically heading to zero. You also said more broadly that you're reducing inventory. Could you give us idea of the scale of reduction for credit and securitization – securitized products in total? What scale of inventory reduction you have achieved since 4Q in the light of that bad experience and how much further that goes? That's the first question.

The second question just very briefly, I don't know if you've given us the number for possible but not probable litigation exposure. I wonder if you have that number.

Tidjane Thiam - Chief Executive Officer

Okay. Thank you, Jeremy. David, do you want to?

David R. Mathers - Chief Financial Officer

Yeah. I think we've achieved reductions of about 20%- 25%. Clearly, it varies a little bit by (01:59:15) trading books. Some of them are actually very liquid, we've achieved relatively more than that. Some have been less liquid, we achieve less, but, we've made good progress in that sense.

The reasonably possible number is actually CHF2.2 billion.

Jeremy C. Sigee - Barclays Capital Securities Ltd.

Okay. Thank you very much.

Tidjane Thiam - Chief Executive Officer

Okay. Well, thank you very much for joining our call. As we said, we have a clear strategy. Clearly, we're implementing it in difficult markets. And our outlook for Q1 remains very cautious. These are very unique market conditions and they are challenging. But fundamentally, we are maintaining the objectives and the targets we are presented. We're working hard to achieve those. And we'll update you in the coming quarters on our progress. Thank you very much.


Thank you, sir. That concludes today's conference. An e-mail will be sent out shortly advising you on how to access the replay of this conference. Thank you for joining today's call. You may all disconnect.

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