Credit Suisse Group AG (CS) Q1 2017 Results - Earnings Call Transcript

Credit Suisse Group AG (NYSE:CS) Q1 2017 Earnings Call April 26, 2017 2:15 AM ET

Executives

Adam Gishen - Credit Suisse Group AG

Tidjane Thiam - Credit Suisse Group AG

David R. Mathers - Credit Suisse Group AG

Analysts

Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc

Andrew P. Coombs - Citigroup Global Markets Ltd.

Kinner Lakhani - Deutsche Bank AG

Operator

Good morning, this is the Conference Operator. Welcome, and thank you for joining the Credit Suisse Group's First Quarter 2017 Results Conference Call.

As a reminder, all participants are in a listen-only mode and the conference is recorded.

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

Adam Gishen - Credit Suisse Group AG

Good morning, and welcome to the first quarter 2017 results call. Before we begin, let me remind you of the important precautionary statements on slide 2, including the statements on non-U.S. GAAP measures and Basel III disclosures.

With that, I will turn it over to our CEO, Tidjane Thiam.

Tidjane Thiam - Credit Suisse Group AG

Thank you, Adam, and good morning, everyone. Thank you for joining this call. With me today is David Mathers, our Chief Financial Officer.

This morning, we will present our first quarter 2017 results for Credit Suisse. We will also provide you with more information on the execution of our capital plan. David and I both look forward to taking your questions at the end of the session.

We show here our Group reported on the left and adjusted on the right pre-tax income, as well as other key capital metrics, CET1 leverage, and the format that you are familiar with by now. So with that, I'll start with our key messages this morning on slide 6.

The first message we have is that, we had a strong start to 2017, continuing positive profit momentum seen in our 2016 results. A few highlights for the quarter include: A CHF 1 billion improvement in the Bank's profits; record assets under management in Switzerland and APAC, respectively at CHF 547 billion and CHF 177 billion; NNA across all divisions at CHF 24.4 billion, the highest that we have delivered in the last seven years. These results provide further evidence that our strategy is working, and our leading franchises across Wealth Management and Investment Banking, are in excellent health. We owe the progress we have been making to the trust of our clients and to the hard work of our teams globally.

The second message is that we are executing with discipline. We continue to reduce our fixed cost base after the progress made in 2016. Q1 2017 was actually the lowest quarter for absolute cost in the last four years. In addition, we have reduced leverage in the SRU by $20 billion. We have also reduced cost in the SRU by 19%.

Third message here is about the execution of our capital plan by raising capital. You will remember that the capital plan we presented in 2015 included a CHF 2 billion to CHF 4 billion capital raise in 2017, which was supposed to be done for an IPO of the Swiss Bank in the second half of the year. Today, our board of directors has decided to propose a straight capital raise for rights offering of CHF 4 billion and to retain full ownership of our Swiss Bank. This will significantly strengthen our capital position. It will allow us to further invest into highly profitable growth opportunity and to complete our restructuring. We are confident that this will create value for our shareholders over time.

So let me now look at the quarter in a bit more detail, starting with revenues. In the first quarter, we achieved CHF 5.5 billion of adjusted net revenues, reflective of constructive markets and of stronger levels of client activity. This represents an 18% increase versus the same period last year, which we acknowledge was a particularly challenging quarter, but also an 8% increase sequentially from 4Q 2016, the last quarter of 2016, which enjoyed a more supportive markets. So that's a good progression in revenue. And we have delivered this growth whilst maintaining strong discipline on cost, which we can see on the next slide, where we are making continued progress in reducing our cost base. You can see here that in the first quarter of 2017, we had adjusted operating expenses of CHF 4.6 billion; the lowest level in any quarter in the last four years.

We believe that the evolution of our non-compensation expenses, in dark blue here, is actually a very good indicator of the actual progress we are making. And we are pleased that non-compensation expenses are down 15% year on year at constant FX rates and 13% sequentially from 4Q 2016 to 1Q 2017. So these higher revenues combined with our lower costs, demonstrate our operating leverage and the discipline, which we believe, underpin our restructuring story.

Turning to slide 9, in the first quarter of 2017, we delivered an adjusted pre-tax income of CHF 889 million at the Group level. This is a CHF 1.1 billion improvement against the first quarter last year. Looking at a stronger comparative, 4Q 2016, we also achieved a material improvement sequentially, on the right here, with CHF 718 million increase in adjusted profits.

Now, within this, our Wealth Management businesses made a strong contribution. So let us now take a look for a few minutes at our Wealth Management performance, starting with slide 10, where we're showing you net new assets. We have achieved continued strong growth in the first quarter of 2017 across our Wealth Management businesses after an already very strong performance in 2016. Net asset inflows for the quarter at CHF 12 billion represents an increase of 23% year on year and an annualized growth rate of 7% over the period.

Our focus on ultra-high net worth and entrepreneurial clients provides ample opportunity for further growth. Penetration is low in that client segment and our ability to provide a holistic range of lending and investment banking solutions to those clients puts us, we believe, in an advantage position, which shows on this slide.

So let's now turn to assets under management after (07:16) stock. At the end of 1Q 2017, we achieved record assets under management of CHF 715 billon, a CHF 33 billion increase over the end of 2016. If you look at that growth of CHF 33 billion, about 40% of this growth is due to net asset inflows at CHF 12 billion, reflecting our strong asset governing capabilities, and the remainder mainly due to market performance, corresponding to the 10% annualized asset return generated by our investment managers.

Moving beyond assets under management to assets under custody, total client assets at CHF 1.6 trillion was up almost 9% year on year, highlighting the scale of our franchise in managing client assets across all of our businesses.

Now, we have been explicit about our appetite for growth in Wealth Management, but equally important for me is that this growth be quality-compliant low-risk growth. So let me address this on the next slide.

Starting with compliance, over the past two years, we have almost doubled the number of employees in our compliance function, with many of those recruits – because we track it – focusing on our Wealth Management activities and reflecting the growth we are experiencing in our Wealth Management activities. So let me highlight some of the measures we have taken.

Widespread use of Big Data. Establishing a single client view across our five divisions to mitigate cross-border risks. Extensive review of legacy clients through enhanced KYC. In 2016, I initiated and we reviewed 45,000 legacy clients globally, and we have targeted an additional 24,000 clients for a review in 2017.

We have established a single global function that better manages and mitigates financial crime risks. We have developed and implemented smarter ways to identify AML, anti-money laundering risk across our global client base. All our policies emphasize our zero tolerance approach to these issues.

I would like to take a minute to talk about how this applies to the area I spoke about, how this applies to the area of tax given recent events. The Bank has a zero tolerance policy towards undeclared assets. Over the past several years, we have gone through an extensive process of regularization with regard to our clients to ensure we do not have undeclared client assets, most notably in Western Europe, ahead of the Automatic Exchange of Information. This has led to significant outflows, which we have reported quarterly to you and that you see in our numbers, but we are comfortable with this, because it is a consequence of the standards we want to apply to this business.

Moving onto the right part of the slide after compliance to risk management, you all know that lending is core to our Wealth Management growth strategy, so I would also like to say a few words about our approach here, too. First thing I'd like to say is that the majority of our loans are Lombard loans. 50% of our loan portfolio is with ultra-high-net-worth clients who typically hold an extensive portfolio of assets at the bank and whom we know particularly well.

And finally, the model we run is a high capital velocity model on our balance sheet. In Asia, for example, we distribute 80% of our risks through wholesale and private banking channels. Our track record is excellent. Loan loss provisions were at 0.6 basis points in the first quarter of 2017, so less than 1 basis point, and impaired loans at 50 basis points.

So let us now look at the performance of our divisions in turn, starting with the Swiss Universal Bank. The Swiss Universal Bank, led by Thomas Gottstein, achieved a fifth consecutive quarter of year-on-year PTI growth. Q1 2017 was a record quarter, with adjusted pre-tax income at CHF 483 million.

Interestingly, we attracted CHF 2 billion of NNA, of net new assets in Private Banking; our best results in the last 10 quarters. We ended the first quarter with record assets under management in the Swiss Universal Bank at more than CHF 0.5 trillion, CHF 547 billion. We are also progressively seeing the benefits of our ongoing cost savings program, and now on track to deliver CHF 200 million of savings by 2018, which is our target. So the Swiss Bank is in solid health, in good health and delivering on all its commitments.

So let's turn now to International Wealth Management, where we have two businesses, basically, we've Private Banking business and our Asset Management activities, which I'll cover in turn.

Starting with Private Banking, in IWM Private Banking, we increased adjusted pre-tax income by 8% year on year to CHF 262 million, further improving our return on regulatory capital to 23%, and this is something we're very focused on. 23% is a very satisfactory return on capital we believe.

The growth in net revenues was supported by a continued growth in our loan and deposit volume and income, which I alluded to earlier. We achieved strong net asset inflows of CHF 4.7 billion, which corresponds to a 6% NNA growth rate. And this is after the impact of about CHF 500 million of regularization-related outflows. That's on Private Banking.

Turning to Asset Management, our net asset inflows were exceptionally strong in the first quarter, totaling CHF 15 billion. Under this, the key objective of our Asset Management strategy is to increase recurring income, which we believe is more valuable. And we are pleased that recurring management fees have increased by 13% year on year.

So with that, let's now move to Asia Pacific on slide 15. In Asia Pacific, as you know, we are following an integrated approach to our ultra-high net worth and entrepreneurial clients, where we combine our traditional Wealth Management-Private Banking platform with our advisory and underwriting and financing activities. So we're reporting here under this new structure.

Our Asia Pacific Wealth Management and Connected businesses, this is what we call it internally, or APAC WMC, continued to deliver strong performance in Q1 after a strong year 2016. We achieved record net revenues, which is important to us, and adjusted pre-tax profits. So revenues were up 44%, and pre-tax profits up 67% compared to 1Q 2016. And also, importantly, adjusted return on regulatory capital in the first quarter was 31%, up 7 percentage points year on year.

In Private Banking, we have also attracted significant new assets at CHF 5.4 billion of NNA, which is a 33% increase year over year. And this allowed assets under management to reach a record level at CHF 177 billion, with higher gross and net margins.

Momentum in our underwriting and advisory activities, which are now very much focused on our ultra-high-net-worth clients, continues to be strong. We have doubled net revenues year over year and have maintained our top 2 ranking in APAC ex-Japan, so we are number 2 in Asia among international banks in APAC ex-Japan.

At the bottom of the page here, you have our Markets business, which as you've seen, has posted a loss in Q1. This reflects significantly reduced client activity. We have been taking and we are taking active measures to restore profitability in this division to an acceptable level, which we consider to be between 10% and 15% return on capital.

So having covered now in sequence, Swiss Universal Bank, International Wealth Management and Asia, I'd like to turn to our advisory and underwriting activities, what we call internally IBCM, Investment Banking and Capital Markets, led by Jim Amine.

You can see here that our global advisory and underwriting activities have achieved their best first quarter revenue, net revenue performance in the past four years. Net revenues were $1.1 billion and were up 60% year on year, outperforming the market in all our key product categories. The quarter was, in effect, characterized by a high degree of investor optimism, low levels of volatility and tight credit spreads, which drove higher levels of acquisition financing in financial sponsor clients, as well as an active monetization pipeline.

At a global level, we also delivered significant performance and gained share of wallet in all our key product areas – DCM was up 94%, ECM was up 94%, and advisory was up 4%, but compared to the market, down 2%, so also a strong performance.

If we now focus on the division itself, so not our global advisory and underwriting, but the division in IBCM, we've had the strongest first quarter performance since 2013 with adjusted PTI of CHF 151 million, a significant improvement over 1Q 2016, with net revenues up 54% year on year.

In Equity Capital Markets, our teams led 19 IPOs, more than, we believe, any of our peers. And in Leveraged Finance, we priced 47 lead led (16:47) U.S. loan deals totaling $40 billion. And pleasingly, the return on regulatory capital for the division was at 23% in the first quarter and returns in the America within that 20% were actually significantly higher than 20%.

So from IBCM, now let's move to Global Markets. We have delivered a strong performance during Q1, with adjusted net revenues of CHF 1.6 billion, up 29% year on year, which you see here on the left, particularly driven by an excellent quarter in credit, 133% up. So Credit was up 133%, underscoring the strength of our U.S. Leveraged Finance trading and underwriting, securitized products and U.S. high-yield franchise, and I must say, the leadership of Brian Chin.

Our performance in Equities was resilient, down 2%, amid a weaker trading environment. We have made continued progress on lowering operating expenses. Adjusted non-compensation expenses are down 11%. And we remain on track to reach our ambition of less than CHF 4.8 billion of operating expenses by 2018. And on the next slide, you can see the benefits of the operating leverage, which we are working hard to create. And this is reflected in higher productivity and improved profitability.

So our Global Markets franchise has emerged from a challenging 2016 in good health. We are consuming less capital, here on the left, running lower risk. And we have substantially lowered our operating expenses, which have further to go but are significantly lower, and retained our strong revenue generation capability in the Credit and in Equities. We achieved a return on capital of 10% in the quarter, a good result and in line with our targets.

So this was my first action on really Q1 and a continuation in Q1 of the strong trends seen in 2016. And again, the credit here goes to the whole team, to Thomas on the Switzerland; Iqbal, IWM; Helman, Asia; Jim, IBCM; and Brian in Global Markets.

So let's move now to disciplined execution, where I'm going to talk mostly about the SRU. I have discussed operating expenses already in my presentation. And here, I will focus on the wind-down of our non-core unit, the SRU, where we are making continued progress.

In the first quarter of 2015, we reduced leverage exposure by a further $20 billion, which is down 20% sequentially, and reduced RWA by an additional $2 billion. A thing to note here is that 2016 was an RWA year where we had a lot of RWA and we reduced it significantly, and 2017 is more likely to be a leverage year as most of the assets in the SRU are now leverage-heavy and RWA-light. So this is reflected in this progression.

At the bottom, you can see that adjusted operating expenses were reduced by CHF 55 million in the quarter, so are down 19% sequentially. So as a consequence of our consistent delivery in reducing the size and capital consumption of the SRU, we have taken the decision to wind down the unit by the end of 2018, 12 months ahead of schedule. And David will cover in his section how and will further in detail the target both for RWA and leverage that we hope to hit at the end of 2018.

So let's now move to slide 20. To wrap up this section, first a summary of the key metrics, highlighting the continued progress we are making, both year-on-year, on the left, or sequentially, on the right, in driving operating leverage and profitable growth for the bank, and therefore close this section.

So let's move now to the third and final theme for me, risk capital. Strengthening our capital position was a central objective of the strategy we presented in October 2015, which is why I did here a screenshot of two of the slides from the October 21, 2015, presentation.

And you can see here that we said from the start that we would focus on internal capital generation and that we also have to raise capital externally. And as far as internal capital generation is concerned, we stated on this page, on the right, four priorities: rightsizing the Investment Bank, with significant reductions where our returns didn't exceed the cost of capital, to a more disciplined capital allocation that combines stable capital consumption and improved business unit profitability. Three, reducing fixed costs, which is also for us capital-generative, and four, transitioning non-core assets and implementing closures.

So let me review how we performed in 2016 against these priorities. What we have tried to do is to do what we say or maybe, for a better choice of words, to execute with discipline. So what have we achieved in 2016? To get capital allocation, we have allocated capital to our businesses with the highest and most stable returns, as well as improved our profitability in each of these businesses, and I covered the return on capital in the businesses earlier.

On the left here, we have substantially right-sized our Investment Bank, reducing RWA by CHF 12 billion. At the bottom, we have exceeded our cost target of CHF 1.4 billion, lowering our fixed cost base by CHF 1.9 billion. And as you know, this is net of substantial investment spent during 2016. And finally, to the bottom right, we have reduced capital in the SRU by USD 32 billion or 49% in one year.

Let me just stop for a second on capital allocation and have a blow-up of this chart, which is interesting. We have worked hard to increase the profitability of each of these businesses and we have allocated an increasing proportion of our capital to the businesses with the highest returns and you see that many are 15%-plus here, which was a key objective of the strategy.

Returns in our core businesses are strong and we believe sustainable. Many of our businesses are producing returns well north of 20% and their prospects for continued profitable growth remain attractive.

So let's now look at the progress made on the other dimension of our organic capital generation. On the left here, in the SRU, we have reduced RWA in 2016 by CHF 32 billion, so from CHF 73 billion to CHF 41 billion.

But you have to look at this and consider that there's CHF 19 billion of operational risk in our RWA. So if you take that into consideration, out of the CHF 41 billion that we now present, there is now only CHF 22 billion of non-op risk RWA left. We believe we can reduce risk by half, so CHF 11 billion, between now and 2018, to take this to a total of CHF 30 billion, when we will wind down the SRU. So we wind it down and we'll have CHF 11 billion of non-op RWA left in it.

In Global Markets, we have reduced RWA, on the right here, by CHF 10 billion in 2016. And we're operating today at CHF 52 billion of RWA, which is well below our ceiling of CHF 60 billion. And we don't intend to go below the level of CHF 52 billion.

So in summary, internal capital generation has been our primary and a very effective source of capital to support our strategy in 2016, consistent with the plan we laid out in 2015. However, as you can see here, our potential for further internal capital generation is limited, which is why we always had in our plan to raise CHF 2 billion to CHF 4 billion of capital in 2017. This was a core component of our plan and was to be done for the IPO.

So back to 2015 when we laid out our plan to raise capital from shareholders, we were clear that we would need between CHF 9 billion to CHF 11 billion of capital to complete the restructuring of the bank. As you know, the plan involved raising CHF 6 billion by way of a private placement and rights offering in the final quarter of 2015, which we did, followed by more than CHF 1 billion of asset disposals and other management actions in 2016.

We were also clear that we intended to execute a partial IPO of between 20% and 30% of Credit Suisse (Schweiz) AG by end 2017, thereby raising between CHF 2 billion and CHF 4 billion for the group. And during the fourth quarter of 2016, following the RMBS settlement, we said that we would examine a broad range of options – sorry, to be precise, at the results presentation of Q4 2016, so in February 14. And following the RMBS settlement, we said that we would examine a broad range of options to determine in the new context if there are ways to reach a more attractive risk-reward outcome for our shareholders.

As announced this morning, the group's Board of Directors has decided to propose a capital raise through a fully underwritten rights offering of CHF 4 billion. In doing so, we are also able to retain full 100% ownership of Credit Suisse (Schweiz) AG. This capital increase will allow us to continue to invest in profitable growth opportunities where we generate attractive returns. It will allow us to strengthen our balance sheet, to improve our capital ratios, bringing us more in line with our peers, and underpin our franchise and the confidence of our clients. Finally, it will allow us to complete the restructuring of the group, as we believe we still have about CHF 900 million of restructuring costs to absorb.

So in summary, and before handing over to David. Firstly, we have strongly increased profits during Q1, improving our quarterly profits by more than CHF 1 billion year-on-year. We have achieved profitable growth across our Wealth Management businesses, with strong net asset inflows of CHF 11.9 billion and an adjusted pre-tax income of CHF 1 billion. IBCM had its strongest first quarter profit since 2013. In Global Markets, where we have been conducting a deep restructuring, progress has been excellent. We achieved net revenues of US$1.6 billion, with lower costs and lower capital.

Secondly, we are executing with discipline. We have made continued progress in reducing operating costs, with non-comp expenses down 15% year-on-year and we will wind down the SRU by end of 2018.

Thirdly, we are raising capital. The announced rights issue will allow us to invest into profitable growth opportunities where we expect to generate attractive returns.

With this, I will now hand over to David. David?

David R. Mathers - Credit Suisse Group AG

Thank you, Tidjane, and good morning, everybody. I'd like to thank you for joining our first quarter earnings call for 2017. I will start on slide 29 with a summary of our financial results.

As usual, we show here the group numbers on both a reported and an adjusted basis, and these are being prepared under the same definition that we've used in prior quarters. I've also included a full reconciliation of the adjusted and the reported results for the group and for each of our divisions in the appendix.

If you look at the results for the first quarter, we achieved pre-tax income of CHF 670 million on net revenues of CHF 5.5 billion. On an adjusted basis, in line of our usual definition, we achieved a pre-tax income of CHF 889 million. Our net income was CHF 596 million, and that's equivalent to a return on tangible equity of 6.5% for the first quarter.

Now as in prior quarters, for the balance of this presentation, I will focus entirely on adjusted numbers. We continue to believe these more accurately reflect the operating performance of our businesses.

Let me turn now to slide 30 and review our capital and our leverage positions. In the first quarter, we continued to reduce our risk-weighted assets and our leverage exposure, with the most significant reductions coming from the SRU.

Risk-weighted assets stood at CHF 264 billion at the end of the first quarter, down by CHF 16 billion from the CHF 280 billion that was the level at the end of the first quarter in 2016.

Compared to a year ago, we've reduced risk-weighted assets in the SRU by CHF 24 billion and by CHF 7 billion in our Global Markets division. We've then reinvested some of this capital in our growth areas in Asia-Pacific and International Wealth Management.

And I'd note that these are like-for-like business changes net of the impact from FX and major external methodology changes. If we look at the overall year-on-year moves, there was an increase of CHF 7 billion from the appreciation of the U.S. dollar and CHF 8 billion from external methodology changes.

We've made similar progress in our leverage exposure, with year-on-year net reductions totaling CHF 34 billion. This was driven by the SRU where our positions were reduced by CHF 80 billion, and that's been offset by increases as we've invested in our growth areas.

I would note that the year-on-year net reductions include CHF 21 billion in HQLA balances as we reduced our liquidity coverage ratio. Furthermore, as you may recall, we discussed in February that we would substantially reduce HQLA in the first quarter of 2017. And I'm pleased to announce that we've reduced HQLA by CHF 32 billion from the end of 2016. If we look at our capital and our leverage ratios, we ended the first quarter with a look through CET1 of 11.7%. That compares to 11.4% in the first quarter of last year.

Our CET1 leverage ratio was stable at 3.3%, whilst our Tier 1 leverage ratio stood at 4.6% at the end of the first quarter, that's up from 4.4% at the end of the first quarter in 2016.

Let's turn now to slide 31 to review our cost reduction program. We've continued to make significant progress in reducing our expense base in the first quarter. And it puts us on track, with three quarters to go, to ensure that our full-year cost base will be at or below CHF 18.5 billion. Before I go into details, I'd just remind you that our cost program is measured on an FX constant basis from the full year 2015 baseline, which stood at CHF 21.2 billion.

Now if we look at the first quarter, the FX constant cost base was CHF 4.6 billion, which means that we've achieved cost savings in the first quarter of approximately CHF 250 million compared to the average run rate of CHF 4.85 billion in 2016. Given the progress so far in the first quarter, that means we're very much on track to achieve target savings of at least CHF 900 million for the full year. The savings in the first quarter were driven by net head count reductions of around 1,400. The bulk of this, as in 2016, was driven by the reduction in contractor and consulting count, which has led to a further reduction in professional services expenses within our non-compensation costs.

The head count reductions in the first quarter also put us on track to deliver our full year target which, as you know, is a planned reduction in contractors, consultants and employees of over 5,500 in the current year.

Now just to remind you, looking forward to 2018, of the target that we announced at our Investor Day back in December, which is that for next year, we intend for our cost base to be below CHF 17 billion, again measured on FX constant basis.

With that, I'd now like to turn to each of the division's performance, and I'll start with the Swiss Universal Bank on slide 32. Before I get to the detailed results, I'd just like to remind you that effective from the beginning of this year, the Swiss Universal Bank began serving clients through two dedicated segments. First, we have our Private Clients segment, which services both Private and Wealth Management clients, as well as our premium customers. And then we have our Corporate and Institutional Clients segment.

Overall, the Swiss Universal Bank has continued to deliver year-on-year pre-tax income growth for the fifth consecutive quarter. For the first quarter, the Swiss Universal Bank saw a pre-tax income of CHF 483 million and that's an increase of 2% year-on-year.

Net revenues were flat compared to the first quarter of last year, with higher recurring commissions and fees, offset by lower revenues from our trading service operations. Provisions for credit losses remain at low levels and that's underpinned by the very high quality of the asset portfolio within this business. Now as we summarized and indicated at the Investor Day last December, we've continued to implement efficiency measures within the Swiss Universal Bank and I hope to reduce our total operating expenses for the quarter by 2%.

Let's now turn to the Private Clients segment. Year-on-year, the pre-tax income of CHF 208 million was broadly stable. The continued success of our Credit Suisse Invest program resulted in mandates penetration increasing to 31%. That's up from 27% at the end of the first quarter last year.

Within Corporate and Institutional Clients, revenues increased by 2%. Recurring revenues were up by 11% and that was on the back of strong lending fees and growth in assets under management. We also saw continued good momentum in the Investment Banking businesses here in Switzerland, with strong deal flow across M&A, ECM and DCM.

Now if we look at net new assets division, Private Clients saw net new inflows of CHF 2 billion in the first quarter of 2017. That's a 4% growth on an annualized basis. In Corporate/Institutional Clients, we had positive net new asset inflows of CHF 1.6 billion and that was balanced by similar outflows from the selected exits in our external asset management business that we discussed last quarter.

And I'd note that the previous guidance that we've given, that is for outflows of approximately CHF 3 billion from both regularization and EAM exits in 2017 remains unchanged from our previous quarter. With that, let me turn to International Wealth Management, please, on slide 33. IWM has had a strong start to the year, with improved operating performance and a rebound in net new assets from the beginning of the year.

The cost-to-income ratio improved slightly to 73%, whilst, as Tidjane has mentioned already, the return on regulatory capital stood at 26%. The first quarter pre-tax income of CHF 327 million increased by 6% year-on-year and 9% from the fourth quarter.

Now I'd note that this growth has been achieved notwithstanding the fact that the first quarter of 2016 included a private equity gain of CHF 45 million related to the sale of the estate of London City Airport. Additionally, if we compare sequentially, clearly, the fourth quarter also included the seasonal recognition of year-end performance fees within Asset Management.

In Private Banking, pre-tax income improved by 8% year-on-year, driven by a 5% increase in both recurring commissions, fees and net interest income. Net interest income grew on the back of high loan and deposit volumes at wider margins, whilst treasury revenues from our replication book declined.

Transaction-based revenues decreased slightly compared to the first quarter of 2016. This reflects improved client activity, with 21% higher brokerage and client FX revenues, offset by 17% lower revenues from trading services, largely due to lower flows in equity and fixed income markets. Expenses remained largely flat year-on-year and were down by 7% sequentially, as the division continued to fund investments through the efficiency measures that were initiated.

The net margin was resilient at 32 basis points. That's down by two basis points year-on-year, but up by 8 basis points from the fourth quarter. Net new assets were strong at CHF 4.7 billion, equivalent to an annualized growth rate of 6% across both emerging markets and Europe.

I'd note that this CHF 4.7 billion of net new assets is after regularization outflows of CHF 0.4 billion in the first quarter. And our guidance for regularization for the whole of 2017 remains unchanged, with an expectation of around CHF 5 billion, similar to that experienced in 2016.

In Asset Management, the first quarter pre-tax income of CHF 65 million was unchanged from last year. But I'd note that last year included the private equity gain of CHF 45 million that I've summarized already. Asset Management fees improved by 13% year-on-year and 11% sequentially, both in line with higher AUM and also reflecting our strategy to increase the contribution from recurring management fees.

If we look at net new assets, we saw strong net inflows of CHF 15 billion in the first quarter, split with approximately CHF 6 billion within our core business and approximately CHF 9 billion from our emerging market joint ventures, reversing the outflows that we suffered in that business at the end of last year.

With that, let's turn to Asia-Pacific, please, on slide 34. Similar to the changes that we made within the Swiss Universal Bank, we have restructured the business in Asia-Pacific into two sub-segments with effect from the beginning of this year. First, we have Wealth Management and Connected Activities, which encompasses private banking, financing and underwriting and advisory.

Separate to that, we have our APAC Markets business, which includes our Fixed Income and Equities Trading businesses. The market segment both supports our Wealth Management and Connected Activities and also deals extensively with a broader range of institutional clients. I think as you already know, we provided a restated time series for prior periods on our Investor Relations website on this new basis last month.

In the first quarter, Asia-Pacific as a whole delivered a pre-tax income of CHF 166 million. That compares to CHF 265 million in the first quarter of 2016, reflecting a difficult market environment in the region in recent quarters.

Let's look first at the results for Wealth Management and the Connected Activities. This business delivered profitable growth, with record pre-tax income of CHF 205 million, and that's 67% higher compared to the first quarter of 2016. Net revenues grew steadily to a record CHF 589 million in the first quarter of this year. That's an increase of 44% year-on-year. This was driven by growth in financing and increased client activities, as well as M&A and debt underwriting deals.

We also had positive credit marks of CHF 29 million in the quarter, and that compares to a negative CHF 5 million in the first quarter of 2016. We were ranked in the top two in Asia Pacific, ex-Japan, amongst international banks in advisory and underwriting in the first quarter.

Asia-Pacific generated net new asset inflows of CHF 5.3 billion in the quarter and annualized growth rate of 13%, which I think clearly demonstrates the strengths and the effectiveness of our integration approach to serving ultra-high-net-worth entrepreneur and corporate clients. Year-on-year, the net margin in this business improved by 1 basis points to 33 basis points, reflecting higher client activity and increased loan and deposit volumes.

And I would note, this has been achieved simultaneously with the growth in assets under management. Our RM count has remained stable. That reflects both continued strategic hiring, as well as continued upgrades of our team.

Now if we turn now to the Markets business in Asia-Pacific. Performance in the first quarter was driven by a substantially reduced activity in rates, FX and derivatives, whilst performance in cash and particularly in credit was more resilient.

Overall, first quarter net revenues declined by 41% compared to the first quarter of last year, with resulting pre-tax loss of $39 million.

As we already mentioned, we're targeting a number of efficiency measures to improve our operational leverage and improve the returns in the Markets business in Asia-Pacific. These include a roughly 17% reduction in full-time employees in APAC markets, which has so far delivered an 8% reduction in year-on-year operating expenses.

And by 2018, we intend to reduce the APAC Markets expense base to $1.2 billion, a reduction of 17% compared to the annualized first quarter of 2016. Our goal with these cost savings is to achieve a post-tax return on regulatory capital in line with the target for our Global Markets business; that is in the range of 10% to 15%. Our strategy for this business is to reduce complexity and optimize the operating footprint in APAC markets, strengthen the linkage to our Wealth Management activities in the region.

Let's turn now to Investment Banking and Capital Markets on slide 35. The division delivered a strong result in the first quarter, with net revenues of $608 million, up by 54% year-on-year. The first quarter of 2016 clearly suffered from weak ECM and DCM issuance volumes, which makes it a weak comparable quarter. But nonetheless, notwithstanding this fact, this quarter's performance was strong across all key products, reflecting the momentum we see across our franchise.

We saw wallet share gains across all key products year-on-year and ended the first quarter with a Top 5 rank in global M&A, leverage finance and in IPOs. Advisory revenues were down 6% year-on-year, partly due to the pace of closings we saw last year. During the quarter, we announced the largest M&A deal so far in 2017, that is Johnson & Johnson's pending $31 billion bid for Actelion.

Our debt underwriting revenues of $292 million outperformed the market both year-over-year and sequentially, driven by continued strength in our leverage finance franchise and by higher DCM issuance levels. We saw the strongest momentum in equity underwriting, with revenues of $103 million, an increase of 129% year-on-year, reflecting a significant pickup in IPO activity and rights issuances.

In fact during the quarter, as Tidjane's (45:36) active IPO book runner globally, completing 19 transactions, and we played a significant role (45:42) in some of the largest and most high-profile IPOs, including Snap and Canada Goose. We also acted as a book runner in EMEA on the largest rights issuance this quarter for UniCredit (45:54).

Operating expenses for the quarter increased by 14% year-on-year. That reflects the increase in variable compensation, in line with a strong business performance. Overall, the division delivered a pre-tax income of $151 million, equivalent to a return on regulatory capital of 23%, primarily driven by the strong performance in the Americas.

Now if we look at the bottom of the slide, you can see the global disclosure includes the full breadth of our global advisory and underwriting franchise, including revenues booked in IBCM in Global Markets, Asia-Pacific and in the Swiss Universal Bank. Overall, global advisory and underwriting revenues of $1.1 billion increased by 60% year-on-year, significantly outperforming the industry-wide fee pool, which increased by 19%. This outperformance was driven across all products, but with equity and debt underwriting up significantly across the Street in all regions.

Now if we look forward, concerns over the timing of the outcome of the tax reforms in the United States, combined with the uncertainty relating to the elections in Europe, have weighed on Markets segment. Client activity has been more sporadic towards the end of the first quarter, with M&A announcements decreasing sequentially. Nonetheless, we believe the market does remain constructive for both debt and equity underwriting.

Let me turn now to Global Markets results, please, on slide 36. For the first quarter, Global Markets delivered strong results, with pre-tax income of $338 million and a return on regulatory capital of 10%, in line with our target to operate at between 10% to 15% for this division. This substantial increase in profitability reflects both the strength of our client franchise and our progress in improving both operating leverage and RWA efficiency.

Let me just discuss briefly the three subcomponents. The credit franchise, which also includes our very strong Securitized Products business, outperformed, with revenues of $921 million; that's an increase of 133%, compared to the very challenging conditions we saw in the first quarter of last year. We saw a marked improvement in Securitized Product performance, reflecting a rebound in client activity in both non-agency and agency product lines.

Our Global Credit Products revenue was robust, driven by our leading share in leverage finance underwriting activity, as well as higher trading performance.

Now if we look at equities, excluding the Strategic Market Making Group, which, as you may recall, was transitioned to a fund structure last year, revenues were broadly stable year-on-year, which we think is a solid result against the backdrop of weak trading revenues across the equity markets.

Cash equity revenues was higher in both EMEA and in the Americas, with robust underwriting activity and an improved performance in Latin America, where, as you know, we have a very strong market position. Our Prime Service results were resilient, reflecting higher client balances year-on-year.

In Solutions, first quarter revenues at $263 million decreased by 23% year-on-year, with lower macro revenues reflecting our reduced funding needs for structured notes, as well as low levels of volatility, which adversely impacted our equity derivatives business. These declines were partly offset by a significant rebound in emerging markets revenues, particularly in Latin America.

If we look at operating expenses, we continued to make good progress in improving our efficiency. Operating expenses of $1.3 billion fell by 4% year-on-year, reflecting continued progress in our cost program. And we remain very much on track to meet our 2018 ambition to have expenses at or below $4.8 billion for this division.

Let's turn now to the Strategic Resolution Unit, please, on slide 37. The Strategic Resolution Unit continues to make progress against our goals to reduce capital and expenses. Indeed, when we look at all key measures, operating expenses, risk-weighted assets, excluding operational risk, and leverage exposure, each is down by 50% or more when compared to the same period last year.

Now if we look at the SRU sequentially, compared to the end of 2016, we reduced RWA by $4 billion or 14%, excluding operational risk, and reduced leverage exposure by $21 billion, which is a 20% reduction. Reductions in the first quarter were primarily driven by mitigation activities across derivatives, loan and financing portfolios. This included the sale of the entire U.S. middle market loan portfolio, as well as a portfolio of corporate loans, as well as numerous unwinds, novations and compressions of macro derivatives.

Our bilateral derivatives trade count stood at 123,000 at the end of the first quarter, and that's down by another 19,000 trades from the fourth quarter of 2016. So in terms of the progress towards the target to achieve RWA, excluding op risk, and leverage exposure reductions of between 70% and 80% over a 3-year period, since the end of 2015, we've reduced RWA by $32 billion or 60% ex op risk and leverage exposure by $87 billion or 51%.

If we look at operating performance, the first quarter pre-tax loss was $502 million, with progress around expense reductions being partly offset by lower fee-based revenue income, which follows the successful exits from the former Private Banking businesses within the portfolio, and these have all now been substantially completed.

If we look at costs in the quarter, operating expense of $233 million was down 19% quarter-on-quarter, as we reduced head count and volume-related expenses across the division. Funding costs of $290 million were down by $17 million quarter-on-quarter, reflecting a reduction in the size of the SRU, and therefore, its funding.

Exit costs stood at $43 million, about 1% in the quarter. We continue though, as we've said before, to guide to exit costs being at or below 3% over the remaining lifetime of the SRU, reflecting both potential volatility in the macroeconomic environment, but also, as we've said before, the continued shift in focus towards more leverage-intensive, but RWA asset disposals. Let me turn now to Slide 38 just for an update on the SRU program.

So I think since the inception of the SRU 18 months ago, we've consistently exceeded the guidance that we've set for selling risk-weighted assets, reducing leverage and cutting the pre-tax loss. So I think given this track record, we feel confident to revise our ambition and we intend to reach our 2019 capital targets one year early, in other words, at the end of 2018.

So that means we're targeting to reduce our risk-weighted assets to $30 billion and our leverage exposure to $40 billion at the end of 2018. And we intend to reach these capital targets without incurring incremental costs above and beyond the guidance that we gave in December.

Just to be specific then, that means that our pre-tax loss guidance for 2018 remains unchanged at $1.4 billion. Now that means that the SRU program will be economically complete at the end of 2018, a year ahead of schedule. The residual operations, assets and stranded costs will then be absorbed across the rest of Credit Suisse's operations within our existing cost targets from 2019 onwards.

Let me turn now to Slide 40. So what I'd like to do is to give you some more details around the capital raise. As Tidjane has already summarized, at our Investor Day in October of 2015, we had originally intended to raise between CHF 2 billion and CHF 4 billion from the minority IPO of Credit Suisse (Schweiz) AG in the second half of 2017.

Subsequently, at the fourth quarter results presentation early this year, we said that following the RMBS settlement with the U.S. Department of Justice, we would examine the range of options to determine the best course of actions in order to deliver the most optimal outcome for our shareholders.

After a thorough review of these options, the Board is instead proposing to raise capital through a fully underwritten rights offering of CHF 4 billion. This capital raise will allow us to retain full ownership of Credit Suisse (Schweiz) AG, a core business, the core business, and historically, our most stable generator of capital and cash flows, whilst limiting complexity and avoiding what would otherwise be a growing minority interest on the group's balance sheet.

Furthermore, we estimate that the costs associated with the direct capital raise are approximately half that of executing the minority IPO. And we'd expect to involve – avoid some increase in operating costs from not listing this entity later this year.

I'd also say that over the last few months, we've had extensive dialogue with our shareholders, and we received clear feedback and support that the direct capital raise is preferred to the IPO alternative.

Let me turn now, please, to slide 41. What I show here is a walk-across of our capital ratio. Let me start on the left-hand side. As I've already summarized, our CET1 ratio at the end of the first quarter was 11.7%. The rights offering of CHF 4 billion will provide an immediate uplift just short of 170 basis points to our CET1 ratio, increasing it to 13.4% on a pro forma basis.

We anticipate investing some of the proceeds from this capital raise in excess of our capital generation over the next few quarters into our businesses, both into growing our Wealth Management business which operate – offer stable and attractive returns on capital and into operating Global Markets closer to target risk-weighted asset cap of $60 billion. Separately, we expect to complete our restructuring plan with associated costs of CHF $0.9 billion over 2017 and 2018. And as I've already summarized, we plan to wind down the remainder of the SRU's positions.

Given all these factors, we're targeting a CET1 ratio of approximately 13% pre-Basel III reforms. And on a quarter-on-quarter basis though, as we make these investments, we will expect to see some fluctuation in this ratio and it may fall slightly below this level at various points over the next few quarters.

I would like though to specifically confirm one point on this slide. The risk-weighted assets deployed in our Global Markets division will continue to be capped at or below the long-standing target of US$60 billion.

Let me now turn to the leverage ratio, please, on slide 42. As I've mentioned before, we ended the first quarter with a CET1 leverage ratio of 3.3% and a Tier 1 leverage ratio of 4.6%. With the capital raise, we expect our Tier 1 leverage ratio to increase on a pro forma basis to 5.1%, of which the CET1 or the equity component is 3.8%. That means that subject to the completion of this rights issue, both our pro forma Tier 1 leverage ratio and our CET1 leverage ratio within that will immediately satisfy the 2020 going concern requirements under the new Swiss Too Big To Fail rules. If we look at our leverage ratio, I would expect us to maintain our Tier 1 leverage ratio at or around 5% for the foreseeable future.

We will plan to continue to release leverage from the Strategic Resolution Unit, as Tidjane has already mentioned. There is still $83 billion of leverage in the SRU and that will enable us to fund the increases in leverage in our Wealth Management businesses, consistent with the risk-weighted asset growth in these areas.

Now with Global Markets operating at $287 billion of leverage at the end of the first quarter, we plan to continue to operate this business at or below the maximum leverage of US$290 billion, again, consistent with our previous guidance.

So let me now turn to the proposed revision to our dividend policy on slide 43. So in the course of the discussions that we've held with our shareholders around a potential minority IPO of Credit Suisse (Schweiz) AG, many have raised concerns over the dilution resulting from the scrip alternative in our current dividend policy.

Accordingly, in respect of 2017, our intention is to recommend a cash dividend at a similar level on a per-share basis to that elected by our shareholders in recent years. This, of course, would be subject to our financial performance in 2017 and the decision of the board and our shareholders next spring.

Furthermore, we were recommending the cessation of a scrip alternative with effect from 2017 onwards to avoid further dilution to our shareholders. In the longer term, that is from 2018 onwards, our intention is to operate a dividend policy that is competitive with that of our peers. We plan to return surplus capital to our shareholders, provided that we meet our capital targets.

As you know, there still remains significant uncertainty on Basel III reforms, and no decisions on this have yet been made by our regulators. Once we have clarity and definitive guidance on these reforms, we will be able to bring greater visibility to our shareholders.

In the meantime though, I'd reiterate that our intention is to maintain a capital target of around 13% CET1 for capital and approximately 5% for our Tier 1 leverage ratio. So let me just conclude now please on Slide 44 with the proposed timeline and certain key terms of the capital raise.

So just summarizing the key dates, our AGM is this Friday, the 28th of April. And our shares, subject to the results of the AGM, will go ex-dividend on Tuesday, the 9th of May.

We expect to then hold an extraordinary general meeting of our shareholders on Thursday, the 18th of May and we'll publish the prospectus of the rights issue on the 22nd of May.

Our shares will then go ex rights on the 23rd of May, and at the end of the rights exercising period, will be at noon on June the 7th, with the first trading date for the new shares on the 8th of June.

With that, I very much like to pass back to Tidjane. Thank you.

Tidjane Thiam - Credit Suisse Group AG

Thank you. Thank you, thank you David. So to wrap up, just three points. One, we have strongly increased profit of the group in Q1, very much in line with the strong momentum, positive momentum we saw in 2016 and across all divisions. Results in APAC, SUB and IWM are in line, but in line at 15%, 26% and 31% return on capital, so we'll be very happy to stay in line at those levels.

We are executing with discipline. We'll continue to drive costs down, as we have, and to complete the restructuring of the SRU to hit our 2018 closure target. And we are raising capital in 2017 as planned. The announced rights issue will allow us to invest in our profitable growth opportunities where we expect to generate attractive returns for our shareholders.

With this, we'll be very happy to take your questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you very much. We will now begin the question-and-answer part of the conference. Your first question is from Magdalena Stoklosa from Morgan Stanley. Please go ahead.

Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc

Thank you very much. Good morning. I have two broad questions. One is about the cost delivery in more detail and I would be referring to slide 31 in particular. We have – we see a delivery of the CHF 250 million savings in the first quarter. That, of course, puts you at above the – to the achieved targets. And of course, we also see the details of the 1,400 reduction.

Now could you give us kind of a more sense from the perspective of what else in terms of kind of large cost items are you likely to be executing on to deliver on the 2018, CHF 17 billion kind of underlying cost base apart from the 5,500 kind of reductions we're likely to see this year? I think what particularly interests me is what your costs on the IT infrastructure savings are, any remaining costs from the legal entity programs, real estate programs, everything that you've been talking about up until now? And I suppose within that, what sort of net investments are you still projecting for the next two years to arrive at the net savings numbers? And I have one more question.

Tidjane Thiam - Credit Suisse Group AG

Well, why don't you ask the second one, and we'll take them both if that's okay with you?

Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc

Okay, perfect, absolutely. So my second one is about your thinking about the Global Markets revenue and balance sheet commitment. Of course there is a discussion in the market at the moment about whether the increase in revenues, which, of course, you have also seen in the first quarter, is a function of the efficiency of the balance sheet or the ability to commit more. Of course, we know the numbers, we know the ceilings of CHF 60 billion. But I'm just curious about your thinking about what's going to be the kind of most important in driving revenues and taking advantage of the better market conditions, the efficiency or actually the ability to commit balance sheet or some combination of both?

Tidjane Thiam - Credit Suisse Group AG

Thank you very much. Two very clear questions. On cost, all I'd say at the high level is that all the numbers we've given you are absolute targets, and we insisted on using absolute targets, our cost-income ratios are after investment, so they're all net of investments and they're all taken into account in our planning. But David, do you want to give more granularity?

David R. Mathers - Credit Suisse Group AG

Absolutely. So I think just referring back to slide 31, I think we're clearly pleased to have reduced our expenses by approximately CHF 250 million in the first quarter. And I'm particularly pleased about the source of that in terms of the reductions that have been achieved in the non-compensation costs. And within that, our professional service costs related to the contractor and the consultants, that is the single largest contributor of the reductions in the first quarter.

I would caveat, of course, that that's a first quarter. It puts us obviously very much on track to be below CHF 18.5 billion for the full year, but it does require us clearly to continue to execute at these levels for the balance this year, not just to hit the 2017 goals, but to put us firmly on track for what we intend to achieve in 2018, which is to reduce our expenses below CHF 17 billion next year. So a good start, but we need to keep focused on this, and we will do so.

I think just in terms of the components of that, I think last year, we did emphasize we wanted to reduce our reliance on contractor/consultants, to protect our full-time employees as much as possible. We were successful in doing so. That remains very much our plan for 2017. And clearly, within both the 1,400 and the 5,500, the bulk of those will be contractor/consultants, and therefore, that will continue to keep pressure downwards on the non-compensation costs within it.

So that's probably a – in terms of guidance, that's the line you probably should expect to actually move. Clearly, we will continue to accrue compensation in line with the performance of the businesses at that point.

In terms of major programs and the major contributors are clearly the large scale reorganization programs, of which the largest obviously is in the UK, the Lighthouse II program, as it's called internally, but we do have similar programs elsewhere which are aimed at actually reducing the overhead with particularly having contractors and consultants in some of our expensive locations. So those would be the single largest components I'd actually focus on and target in terms of that.

As Tidjane said, I think we state these numbers clearly at a net level. It's an absolute target, so it is net of the investments we're making elsewhere. We clearly highlighted in Tidjane's slides the investments in the compliance infrastructure, so basically these net numbers are actually net of that increase of costs.

And that clearly applies to the investments in IT infrastructure, which simultaneously support the CCRO program, for example. So I don't think I'd go beyond those points. It's not our general intent to give cost targets by division, but I think it's clearly a good start. You can see the major components in terms of that. It will be the big programs that drive most of that.

We do have significant other cost programs which we have factored in, which I think will give us some, as we say, some further options to ensure that we actually fall below the CHF 17 billion number for 2018, notwithstanding likely investments that will come from elsewhere – and will come from elsewhere.

And we'll give guidance and updates on those as we execute, but I think the intention is to run a portfolio and to actually manage within that in terms of our cost programs. Legal entity program, I'm not going to give a specific number for next year, but clearly the legal entity costs will decline substantially in 2018 from 2017.

Tidjane Thiam - Credit Suisse Group AG

Yeah. And just to add some color. I mean, absolutely reinforce everything that David has said. Project Lighthouse in London, we have a similar project in North America where we have a platform in North Carolina that is very productive and we also use that as an opportunity to generate savings and that's actually quite material. We have in our Global Market accelerated restructuring. We have tranches that are underway that are being implemented, that are going to generate further savings. And as David said, our philosophy is to try and minimize the job losses. Our objective is to be maximize the actual (1:10:37-1:10:48) see that that has not been our experience.

I have always believed that accountability trumps structure. And what we find is that by having made the CEOs accountable, the pressure on cost is applied very effectively, not just the CEOs, I'm looking at my CRO and even my CCRO with risk and compliance function. The same pressure applies across the board. And we are as an ExB collectively accountable for this.

So it's not a project X with a Mr. or Mrs. so and so in charge of cost at Credit Suisse, we at the ExB look at this every week. We meet every Tuesday, I'm looking at all my colleagues here, and we meet every week and we go line by line through the execution of a program because when we say 5,500 for 2017, it's not a top-down objective. It's a bottom-up process that has taken place throughout 2016 to give the 2017 target.

So we know where each of this reduction is going to come from. We don't have to improvise it as we go. So all we do during the year is just monitor the execution, but we're actually doing what we planned. This is why we're so confident in the delivery of the cost savings. Because it's not an ambition, it's a plan, i.e. we have – we know how we're going to deliver the 1 billion that gets us to 18.4 billion, it's just a question of execution. Don't know if that helps, but that's how we run it.

Second question was on Global Market, it's a very interesting question. We said we'd keep a ceiling of CHF 60 billion RWA, we've driven it down to CHF 52 billion. In this process, I've asked all of our businesses heads to give me examples of deals they didn't do or opportunities they didn't capture in Q1. And it was actually a sobering list. I found things there with an 80% return on capital, 50% return on capital, 60% return on capital. And it's actually a suboptimal way to run the company because we are so CET1 and leverage-driven that we end up not giving our clients our balance sheet and not giving them the value we could provide them. That's been very frustrating for the team.

So to answer your question, where is the increase going to come from going forward? Certainly, efficiency. We've given you the CHF 4.8 billion, we're not there yet. In costs, we said CHF 4.8 billion cost, in the end, there is still some room there, so don't consider this 10% return on capital as final. There is quite a few basis points to gain in profitability by driving to CHF 4.8 billion, that's what we control. So we're going to take the cost down all the way to CHF 4.8 billion. We said we could hit CHF 6 billion of revenue. We know Q1 is seasonally strong. We had CHF 1.6 billion, but at least it means that CHF 6 billion is achievable. We're showing that the franchise can do that.

And then if you look at Global Market, the 10% is actually a return on leverage because we do, in our return on capital calculation, we do the most constraining, with either RWA or leverage. Return on RWA in Global Markets is actually very high. It's much more than 10%. It's like 15% in – I can give you the number, I didn't publish, (1:13:53) 15% in Q1.

So the 10% you see is leverage and this is where also improving our leverage position is strategic because it allows us to capture some of these opportunities that we're turning down now. So if that make sense to you. So it's really – the capital raise is also a big part of the answer to your question. Considering that we don't aim to go above the CHF 60 billion ceiling, but between CHF 52 billion and CHF 60 billion, there's quite a bit of profit that we're passing on, talking RWA, yes.

Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc

...very much.

David R. Mathers - Credit Suisse Group AG

Okay.

Operator

Thank you very much. Your next question is from Andrew Coombs from Citigroup. Please go ahead.

Andrew P. Coombs - Citigroup Global Markets Ltd.

Good morning. Three questions from me, please. One on dividends, one on APAC Markets, and then one on the Swiss Universal Bank gross margin. If I start with your dividend plans that you outline on slide 43, the CHF 4 billion capital raise obviously gives you a lot more flexibility, so you're talking about a cash dividend for 2017, but you obviously talk about becoming competitive versus peers. What I wanted to ask is does that mean you're targeting a specific payout ratio? So are we talking 50%-plus? Or would it be a case that you'd also consider paying out everything above your target 13% core Tier 1 and 5% leverage ratio given that you're already there today? That's the first question.

Second question, when I look at your APAC Markets result, there has been a sizable decline in the fixed income revenue contribution. You attribute that to lower rates activity, also lower volatility. We've seen that for two consecutive quarters now. So I just wanted to get your feeling on whether you think that's a depressed number or whether that's the new normal?

And then, finally, on the Private Banking gross margin, a drop from 152 basis points to 146 basis points Q-on-Q, largely driven by NII (1:16:02). Could you just elaborate on what the cause of that drop is, please?

David R. Mathers - Credit Suisse Group AG

(1:16:08-1:16:19) 2017, so the current year which our shareholders we asked to approve at the AGM in 2018, but also longer term there afterwards. So I think just to reiterate that, the intention in terms of the current year, which clearly is subject to performance. It will be subject to the board's decision in due course, is to recommend a cash dividend at a similar level on a per-share basis to that elected for by our shareholders in the option they have at this point between the scrip and the cash component to recent years.

So I think that's some reasonable guidance in terms of 2017. And I think – but it clearly is also subject to the board's decision in due course. And clearly, the scrip which our shareholders will be asked to approve at the AGM this Friday is the last scrip we're doing. So there will not be a scrip alternative in respect to 2017 up for the AGM in 2018. So that's our – just to be clear, that's our immediate dividend policy for 2017. I think that's fair and appropriate given the balance we have in terms of raising new capital, operating at a 13% CET1 target, but also funding the growth, as Tidjane has just summarized, in our businesses to reflect some of the opportunities we have. I think that's also very much in line with what we said previously.

Now longer term, I think just to be clear, it is not our intention or the board's intention to recommend scrip dividends there afterwards, so just to reiterate that point. We have set a dividend policy in comparison with our peers. And I think that's all I'd say at this point. I think that's an issue for the board to decide on in future in terms of that.

Clearly, some European banks have a fixed payout ratio type approach. The U.S. banks, on the other hand, tend to return surplus capital to shareholders above a certain level. I would personally lean more towards the U.S. approach in terms of this. I think it's a better approach fundamentally, but I think that's for the board to opine on in due course.

Capital targets, longer term, clearly, 13% and 5%. I've just included the caveat here that essentially Basel III reforms, which I'm sure we'll get questions on later in the course of this conference, I think it's perfectly possible we don't get much clarity on the Basel III reforms in the next six to nine months basically. So I think that does remain an uncertainty which I think is why we've given relatively clear guidance around 2017 in terms of the dividends.

But I think that's all I'd say at this point. Clearly, once we get into 2018, I think as the SRU rundown is completed, the losses decline, we'll clearly move into a phase of our bank in which as we move to the next phase of substantial cash generation, then I think it's important that our shareholders would see some returns from that in a cash form and not a scrip form. Tidjane, would you?

Tidjane Thiam - Credit Suisse Group AG

Oh, completely. I mean, the whole philosophy behind this plan and strategy is to get back to a accretive position and we have this in sights now beyond the – already in 2018 and much more so beyond 2018 with the current plan and then we're very happy to return the capital to the shareholders and that's why we see that CHF 4 billion infusion almost as a bridge and it will have a payback, and a strong payback we hope.

APAC Markets, I think you've seen the results. Maybe I should say a few words about what's going on there. You can think about it as kind of three businesses. There is a Structured Derivatives, an Equity Derivatives business, a kind of classical Equities business and a Fixed Income business. The Equity Derivatives business is amazingly strong. And even in these numbers, with this loss you can – (1:20:00) turned a very, very strong profit. And the interesting thing about it is that it's quite aligned with our Wealth Management business and it's the best part of our platform. And you saw that we had a change of management there and Ken Pang, who is now running the business, was running that Equity Derivatives business, and has done a phenomenal job there. So we are confident that he will do a similar job running the whole operation.

In Equities, frankly, it's a right-sizing issue. We just need to right-size the business to make sure that the returns are commensurate with the capital, because it's a prime (1:20:40) business in there, so you get a bit the same problem you have in Prime in Global Markets.

And Fixed Income, it's also a right-sizing issue, because the rate – the environment for rates has changed. I think what you're seeing in Asia, you can consider as a new normal. FX, to be honest, has been bad in 1Q. And what we're seeing in 2Q is that it's recovering. So between the push in equity derivatives, which is still doing well, performing well, as we speak, and driven by the Wealth Management, and the right-sizing, the restructuring, you probably have seen news stories, we've been right-sizing the business since Q4, Q4 or Q1. We think that the profitability is going to come back to the level we indicated of 10% to 15% return on capital.

I think your final question, Andrew, was on margins in Switzerland. They've gone back, effectively, they've gone down to 146 basis points year-on-year. The net interest income, it's net interest income and transaction revenues. Net interest income, some of the treasury allocation has changed. And that's, David, maybe you can give clarity on that and then I will take the transaction revenue.

David R. Mathers - Credit Suisse Group AG

So, the gross margin was 146 basis points. That compares to 155 basis points a year ago. There was both – we did have some deposit campaigns, which actually did reduce our net interest income. And as Tidjane said, there was some reduction in our central treasury allocations to the Swiss Universal Bank.

Also, I think, within the gross margin, there's also some other activity as well, the trading activities which, as we said, basically were actually down in the first quarter of this year, so those were the primary drivers of that. I mean, I think we've always said, we include the gross margins for completeness. Clearly, net margins from our point of view is a much better measure, so 43 basis points in the first quarter compared to 44 basis points a year ago and also compared to 31 basis points in the fourth quarter of last year. So I think a pretty solid net margin performance, particularly as this has been accompanied with the growth in assets under management of CHF 2 billion in the Clients business there, which I think is the thing you want to pull out.

And by the way, on the other businesses, I think it is worth reiterating that the net margin for IWM, 32 basis points, up from 24 basis points in the first quarter, notwithstanding the very strong growth we saw in net new assets there. And APAC basically, also increased as well in terms of the net margin from 32 basis points to 33 basis points, again, notwithstanding the net new assets.

Tidjane Thiam - Credit Suisse Group AG

Exactly. The way we run these businesses, we're okay with margins being flat, or even slightly declining, when we have a kind of AUM growth rate that we have, because we're creating value for our shareholders. Remember, return on capital is 15%. For me, when I'm writing business at 15%, I'm always happy to write it. In Switzerland, 26% in IWM, 31% in Asia, and those levels of return on capital. You can become overly focused on margin at the expense of PTI. In the end, we're driving absolute PTI and return on capital. And as long as recovering our cost of capital, we're happy to take it, so that's an important comment.

And right now, I think also we shouldn't over-interpret quarterly variations in margins. I would encourage, for margins, to look at the full year, because there is seasonality there, product mix moves with the macro, the AUMs move with the markets, et cetera, et cetera. If you have a depressed market for three months, your AUM goes down, your margin is up. So are we going to say that's a great quarter? No, because you lost substance, you lost AUM. So I addressed – not a great fan of margins, never have been. I'm a fan of PTI, return on capital. Margins are interesting, but they can sometimes also lead to the wrong conclusion. So I think in the case of Switzerland, we're happy with the development of the business.

Record AUM CHF 547 billion, CHF 2 billion of NNA in three months, that's very strong, and we're confident, rather than the instantaneous snapshot that over time that substance coming into the Bank is going to create a lot of value for us.

Final thing that drove gross margin down is the transaction revenues, which were down, because you will remember when we put our FX business in the SUB, into the Swiss Universal Bank in STS and FX in 1Q, I mean we're not the only bank showing that, was challenging. Actually all of the (01:25:15) transaction revenue can be ascribed to that, to the FX activity.

Andrew P. Coombs - Citigroup Global Markets Ltd.

Very helpful. Thank you, guys.

David R. Mathers - Credit Suisse Group AG

Thanks, Andrew.

Tidjane Thiam - Credit Suisse Group AG

Okay. Thank you very much, Andrew. Shall we take one more question and I think we're running into the time, but if there are questions we should took them today, let's go to our next question.

Operator

Thank you very much, sir. The last question is from Kinner Lakhani from Deutsche Bank. Please go ahead.

Kinner Lakhani - Deutsche Bank AG

Yes. Good morning. So I just had a question on the SRU, thinking about your guidance beyond 2018. So I know you'll be reintegrating that in. Should we still stick to the kind of CHF 800 million that I think you previously guided to? And would that be largely going into Global Markets? And is that kind of a sustainable run rate or does that start to diminish going into 2020, et cetera? So that's question one.

Question two is just in terms of your cost guidance, whether that includes your plans in a kind of post-Brexit scenario?

And question three is if you had any kind of updated thoughts post kind of the tax investigation of 31st of March that we read about? Thank you.

Tidjane Thiam - Credit Suisse Group AG

Thank you. Thank you very much. Can you take the SRU, David?

David R. Mathers - Credit Suisse Group AG

Thank you. So I think at last December's Investor Day, I think we guided to 2019 losses, which I think is the focus of your question, to be less than CHF 800 million in 2019. But I'd also remind you that there was some subsidiary guidance there, which is we expect the operating costs to be at or below CHF 110 million per quarter or about CHF 440 million annualized in 2019. So the question, I guess, will be, are we going to change our guidance?

I think, at this point, what we've decided to do is clearly pull forward our capital and our leverage targets from the end of 2019 to the end of 2018, and we've said there will be no incremental costs from that. Once you've made that decision, then I think the value of retaining what is frankly obviously a very successful group of people focused on what would be only about CHF 10 billion ex-op risk of RWA, frankly, I know my colleagues in front of me I think have, should we say significant interest in re-employing these guys elsewhere. So I think at that point, it does make sense, because it becomes that that level to basically move it off and reabsorb at that point.

In terms of that CHF 440 million, I'm not changing that guidance today. I think it's still 20 months away. The CHF 440 million number is actually in our cost guidance, some targets we've actually set, so it's assumed within those numbers. It's not – we have to get rid of that CHF 440 million which is our cost target, it's actually embedded and in that we'll clearly look over the course of the next few months to working out our final state plan for this. And clearly, some of these costs will be reallocated to divisions, and we'll get to that end state in due course.

I think what I wanted to tell you today, essentially, is that's going to be our goal for the end of 2018. There will be some reallocation in 2019. We'll obviously work to make sure it's CHF 440 million or less. Clearly, there is other costs in there like funding costs, obviously setting a final end state for the SRU and giving 20 months notice of that, obviously helps my treasury team figure out exactly how much funding we actually need for that reduced date as well, so that will also be another lever we can actually pull to reduce the drag on the SRU.

So that's kind of where we are at this point. We'll revert to you more formal plans. We wanted to give you guidance on something which is, as I said, 20 months in the future.

Tidjane Thiam - Credit Suisse Group AG

Thank you, David. I think your last question was on tax investigation, yeah? So I'd say maybe a few words...

Kinner Lakhani - Deutsche Bank AG

Brexit – if Brexit was incorporated in your guidance?

Tidjane Thiam - Credit Suisse Group AG

Sorry? Oh Brexit. Okay, go ahead. Do Brexit...

David R. Mathers - Credit Suisse Group AG

Yeah. I think like other international banks, we're obviously looking at the options for our access to the EU 27 countries in a post-Brexit-type-world. Clearly, the political environment continues to develop, I think that's a fair comment. And I think it is likely, but it's a decision that the board will have to make in due course, that we will probably look to increase our clearing and transaction activity within the EU 27 sites. I think you've seen similar move from other banks, but we haven't decided finally on that, where or what size. I think that fits in on some of the options we have for our cost plans, so I don't think you should see any deviation from our cost plan.

It's what I mentioned before in terms of we have a portfolio of cost projects we need to meet in order to ensure that we can both basically make the necessary investments for a changing environment and ensure we actually drop below CHF 17 billion. So we'll obviously give clearer guidance in due course, but I don't think you see that as a reason for us to deviate from the targets we've actually given so far.

Tidjane Thiam - Credit Suisse Group AG

Yes. I think in the short-term Brexit has been helpful to our cost. It's because we give FX constant cost, you haven't seen it. But...

David R. Mathers - Credit Suisse Group AG

That's right.

Tidjane Thiam - Credit Suisse Group AG

The 19.4 FX constant cost for 2016 was actually 19.1.

David R. Mathers - Credit Suisse Group AG

That's right. And that remains the case now. Obviously, the weakness of sterling continues, together and fairness with the progress on the Lighthouse II program continues to substantially reduce our U.K. costs.

Tidjane Thiam - Credit Suisse Group AG

Not taking credit for it, but it's been a tailwind.

Yes, the tax investigation, look, I think Iqbal went on Bloomberg, Iqbal Khan, to say we were surprised, I think that's a fair statement. This is an area where we have, and this really predates me, been making an enormous amount of work since 2011. We've had extensive client tax programs to go through our portfolios and ask every single individual client to provide evidence that they're tax compliant or to ask them to leave if they are not. There has been numbers in the media, I think they're correct, a number of CHF 40 billion of outflows has been mentioned, that's actually an understatement, it's more than that.

And if you take – I have some notes here, but one given country which I will not name, had 22,000 clients here, with CHF 8 billion, we took 15,000 out with CHF 5 billion, so we have CHF 3 billion left. And ones left are tax compliant or at least have told us they're tax compliant, and have given us some evidence. Another country had 4,000 clients, and they have – we have exited about 2,200 nationals of that country. They had CHF 3.5 billion of assets, we exited CHF 1.3 billion of assets. These are anecdotal, but just to give you a sense of the magnitude of the effort that has been applied to this area and therefore, our surprise.

Now, we are completely aligned with the authorities. Our policy is explicit. It's black and white internally. We have zero tolerance for undeclared asset. Could there be, in spite of all that effort, a situation or few situations where our people have misled us or have provided not the right documents? Absolutely. Or could have people done things wrong? Absolutely. And if there are such situations, we want to find them with the authorities, and we are cooperating with the authorities to find them. And this is not an area of tension.

Our interests are aligned. As a bank, we don't want to be a haven for undeclared assets, and that's not our growth strategy. So it is what it is. We will cooperate at all times everywhere with the authorities and that's about all I can say about this at this point in time, yeah?

Kinner Lakhani - Deutsche Bank AG

Gentlemen very helpful. Thank you. Thanks for the discussion.

Tidjane Thiam - Credit Suisse Group AG

Okay. Okay, thank you. Thank you all for joining our call this morning. Thank you for listening patiently and for your questions. And we're looking forward to exchanging further with you in the coming weeks.

So it's been a good quarter. We make a good progress in executing our capital plan, which was to raise capital in 2017. And that will give us the fuel, if you wish, to complete the final phase of this restructuring program. So thank you very much.

Operator

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