Credit Suisse Group's (CS) CEO Tidjane Thiam on Full Year and Q4 2018 Results - Earnings Call Transcript

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About: Credit Suisse Group AG (CS)
by: SA Transcripts
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Earning Call Audio

Credit Suisse Group AG (NYSE:CS) Full Year and Q4 2018 Results Conference Call February 14, 2019 2:15 AM ET

Company Participants

Adam Gishen – Head-Investor Relations

Tidjane Thiam – Chief Executive Officer

David Mathers – Chief Financial Officer

Conference Call Participants

Andrew Stimpson – Bank of America

Daniele Brupbacher – UBS

Al Alevizakos – HSBC

Jeremy Sigee – Exane

Kian Abouhossein – JPMorgan

Benjamin Goy – Deutsche Bank

Andrew Coombs – Citi

Stefan Stalmann – Autonomous

Magdalena Stoklosa – Morgan Stanley

Amit Goel – Barclays

Adam Gishen

Okay, good morning. Thank you very much, operator. Before we begin, let me remind you of the important cautionary statements on Slide 2, including the statements on non-GAAP financial measures and Basel III disclosures. In this presentation, when we discuss our results, we focus on our adjusted results as it is the way we have managed the operating performance of our businesses. For a detailed discussion of our reported results, we refer you to the Credit Suisse fourth quarter 2018 earnings release and remind you that our 2018 annual report and audited financial statements for the year will be published on or around March 22nd.

With that, I will hand over to Tidjane who will run through the numbers.

Tidjane Thiam

Good morning everyone and thank you for joining our call. With me is David Mathers, our Chief Financial Officer. Together, we will present Credit Suisse’s results for the fourth quarter and the full year 2018. We look forward to answering your questions at the end of the session and discussing our results in more detail.

With that, let me begin with our full year results on Slide 4. 2018 marks the conclusion of our three-year restructuring program. Over the course of our restructuring, we have: one, successfully pivoted towards Wealth Management, allocating more capital towards our higher-growth, higher-return and less capital-consumptive Wealth Management businesses and away from more capital-intensive activities; two, we have materially increased our Wealth Management revenues, and I will come back to that later; three, we have significantly reduced our operating cost base to lower the group break-even point and make it more resilient to variations in revenue; four, we have focused on reducing risk, closed down non-strategic resolution unit or SRU; and five, we have strengthened our capital base.

So as you can see on this slide, this has allowed us to continuously increase our profits from 2016 onwards and delivered CHF 4.2 billion of full year adjusted PTI, a 52% increase against 2017 in the final year of our restructuring and showing a strong momentum, as you see, with a CAGR of 25% here on the right.

So moving to the next slide. Q4 was a challenging quarter. We have seen negative performance across almost all asset classes in 2018. You can see a contrast with 2017 here on the left. In Asia, focusing on Asia for a minute, as you can see here on the right top box, only Q4 2008 had a worse stock market performance than Q4 2018 in recent memory. This was accompanied by drastic reduction in current activity levels.

Moving on, middle chart, credit spreads, particularly across the high-yield complex, saw a sharp widening in the final quarter of 2018, particularly in December with rapid acceleration. And it’s approximately 60% higher than in 3Q. And as you know, here the steepness of the rise matters almost as much as its magnitude. So this is and was a very unfavorable development. We also experienced sharp pull-offs in primary market activity, at the bottom here, in more regions, with equity underwriting and debt underwriting down more than third compared to the same period last year.

I use this slide because in a way, Q4 was a perfect stress test for our bank, to test if a restructured Credit Suisse would have a better performance than it used to when faced with large credit spread increases, drops in client activity as well in equity market levels. This used to be a very bad scenario for us. So let’s see what our performance was in that context on to the next slide. In the box here on the right, you can see that in the fourth quarter, we achieved group adjusted PTI of CHF 846 million. That is a 49% increase year-over-year, and it’s simply our highest 4Q PTI since 2013. So that’s to be made in relation to the slide I just showed, in that context. We did our highest PTI since 2013. To put this into context, 4Q 2018, seasonally our lowest PTI of the year, is approximately at the same level as our best quarter of our previous year Q1 2017.

So on the next page, we’re trying to show you, sorry, it’s a lot of numbers, but to show you where we stand at the end of our restructuring compared, one, to our starting point in 2015, so we show you a delta on 2018 and 2015 – between 2018 and 2015, on the right here, for instance, if you take SUB, Swiss Universal Bank, CHF 2.2 billion actual result, and that’s a 38% increase delta curve over 2015. We also show you where we are compared to the target we gave for 2018, which percentage of the target we achieved on the right here. So CHF 2.2 billion for SUB represents a 96% achievement of the target we had set.

And finally, on the left, we just reminded, when relevant, you of the Investor Day guidance to show that we’re broadly, as we’ve said on the record, aligned with the Investor Day guidance. So of course, I will not comment on every single line of this table, but I will just look at a few. If you look at our Wealth Management divisions of SUB, IWM, APAC in blue here at the top, profit has increased between 38% and 180% in the four years since we started. And we are retrospectively 96%, 101% and 94% of our 2018 profit target.

To be transparent, we had initial targets in October 2015. You remember the dislocation in Q4 2015 and that at the first Investor Day in 2016, we did revise some of those targets downwards, in particular for IWM and APAC because the world had changed. And in the emerging market-focused divisions, we felt that conditions were different. So we confirm those targets have been adjusted but have not been touched since 2016. And we think that 100% and 94% is a good level of delivery for those businesses.

The other interesting observation there is on cost and capital, and many of these lines are about cost and capital, which are two of the items on this page which are the most under our control, management control, all targets have been reached or exceeded. Total cost reduction for the group is 111% of target. And both SRU and Global Markets have achieved more than their cost targets. To be fair, the least satisfactory line on this page and has the lowest percentage is revenues in Global Markets. Although Global Markets has successfully rightsized, which was difficult and important, and also reduced its cost. That is the one on which we have only achieved 85% of 2018 objective whilst exceeding our capital and cost reduction target. And here, we acknowledge that we have still work to do. We talked about it at Investor Day. And we outline a number of measures, which we believe will benefit our ability to grow revenues and increase returns in GM from here from the lower funding cost to the opportunities for collaboration in ITS, et cetera, et cetera.

So on this slide, we show that this transparency tells you about what level of achievement we’ve had on the targets, and we think it’s a reasonable outcome. So I would now like to, moving on to the next slide, to highlight what I think are some of the most interesting features of these results.

The first one is that we have grown revenue strongly in Wealth Management, and we have outperformed our key peers and the wider market in our core regions, and I will show slides on that later. Within that, we are focused on shifting towards more stable and higher-quality revenue streams, principally fee income, recurring fee income and net interest income.

We have announced our share buyback program in December, and we have started repurchasing shares in January 2019, thus starting to return capital to our shareholders. And we navigated through a severe market dislocation in the final quarter with no material losses, and that remains a very important point for me, that with the environment we had in Q4, Global Markets in particular and investment mandate they had, had generated no material losses, and that’s a very significant achievement.

So let’s take a moment to look at the first point in this list, revenue development. The kind of traditional way to look at the bank is to analyze our total revenue, like on this slide, adding all our activities together, considering them as fungible. Such an approach would indicate that we are starting to grow our revenues, and that’s a question we often get. We actually believe that the underlying reality tells a much different story.

Our whole strategy is not focused on growing total revenue for the bank, which adds together and treats in the same way CHF 1 of volatile, one-off, capital-consumptive revenue and CHF 1 of stable, potentially recurring, capital-efficient revenue. So let’s look at this maybe on the next slide. This shows you that we have been able actually to grow strongly 5% CAGR over the period.

The revenue in a more profitable, capital-light activities of Wealth Management and IBCM in blue here. In our lower-return, more capital-intensive sales and trading activities, we have conducted deliberately a deep restructuring, closing down of selling activities so that GM, Global Markets, for instance, has now materially lower cost and capital usage, but also and importantly, lower risk, as we saw in Q4.

We have accepted the attrition that such a strategy entails. It is worth noting that this attrition has also been amplified by some cyclical headwinds, as illustrated by the sector’s results in Q4, that was not an ordinary quarter.

So looking at the sales and trading industry revenue pools on the next slide. This is a slide we showed you before. Over the last six years, we have seen continued pressure on the sales and trading industry revenue pools, and they’re expected to stagnate going forward. We understand that this is a sensitive topic, but it is our belief as an increasing number of banks, I believe, have started to observe during their Q4 presentations, that structural margin pressures and overcapacity in this segment are here to stay.

While market activities play a vital role in providing access to capital and in managing risk, we believe return will stay low unless effectively integrated into a more stable source of business and customer flow, which in our case is better serving the needs of our Wealth Management franchise.

It is for that reason, next slide, that when we designed our strategy in 2015, we said we would pivot to Wealth Management, the blue here, where the prospects for revenue generation were significantly more attractive.

In Wealth Management & Connected businesses, including IBCM, at the top box here in blue, we have added more than CHF 2 billion of additional revenue in 2018 when compared to 2015. That is why we are saying are growing. The pretax margin on those revenues is 34%, up from 22% in 2015.

So we are adding more revenues of, as we said, that are structurally more profitable. Conversely, in our market activities, revenues are down by CHF 4.5 billion on the same period. Pretax margins in 2018 across Global Markets and APAC Markets were 7%. We intend to continue on the path of allocating more capital to the blue here. So let’s look at what return this approach has generated.

Taking our Wealth Management and IBCM businesses together, we have been able to continuously increase our returns quarter-on-quarter, year-on-year since the fourth quarter of 2015. And on the next slide, you can see that Credit Suisse today generates more absolute profits, thanks to this strategy, with a higher core adjusted PTI value in 2015, with better quality earnings at a significantly lower risk.

You see at the bottom that the group VaR is down about 40% and a stronger balance sheet. So you get more profit for less risk. So that was for really how we look at revenue and why we don’t believe that having so-called flat revenues is a challenge, and that we have plenty of growth achieved already in three years and that we will continue to grow, but grow in the relevant business.

So let’s now look at that Wealth Management business and the growth. Over the last three years, we have delivered strong revenue growth. We have added CHF 1.7 billion of revenues, so a CAGR of 5%, as I said earlier, which we believe is a good performance in the context of the industry.

And moving to the next slide, a lot of words here, but just to describe our approach to Wealth Management, which capitalizes on a number of positive trends. The first one, of course, is the growth in global wealth, which has doubled over the last 10 years. And in addition to the growth in global wealth, we are, and that’s the heart of the strategy really, we are focused on increasing our share of wallet with our large existing client base by bringing our institutional quality products and services to our clients.

Two third of our growth comes from existing clients in Wealth Management, so that’s really the engine room and the heart of what we do. We provide complex and bespoke financing solutions to our clients. On that, actually, I should point out that you’ve seen the numbers for Asia, our financing group in Asia had its second best quarter ever and its best Q4.

Because the point about this is clients need different things at different points in the economic cycle, and that’s why we like to have a diversified offering. Because right now, IBCM is under pressure, but AFG, our financing group, is doing great. So providing financing is important. We leverage our best-in-class execution capabilities from Global Market into ITS. We address the demand for structured product by offering unique investment and risk management solutions. And this strategy contributes to create a global broad relationship with the clients, which is very important. We, of course, invest in our digital capabilities. And one of the benefits of this is that we are able to free up time for our RMs to allow them to spend more time with their clients. So for instance, in Asia, basically, the number of RMs have been flat and the productivity per RM has increased very, very materially. So the investment we’ve made over the last four years in expanding our footprint and strengthening our client coverage is expected to be another driver of this revenue growth you just saw on the previous slide.

Moving on and get a bit regional, what have been the results of this approach? We always said that we had a balanced approach between mature and emerging markets, and we focus on both. So starting with mature markets, we tried to assess revenue growth since 2015 versus the market. So in Switzerland, we’ve clearly, clearly outperformed the market. And in Western Europe, we’ve been at market level.

Moving on to emerging markets on the next slide, you can see the NNA growth at the bottom, 7.5%, 7.45%, 8.7%, these are very strong numbers, and they have allowed us to grow revenue faster than the market. And it’s probably the reason why we always answer – well, we don’t really have a group challenge. We believe we’ve been growing revenue very, very strongly, provided one doesn’t look at the top line.

The other point about this is the makeup of these revenues, and we’re not – on the next slide. It’s something we’ve talked to you about also, how we prioritize stable and recurring revenues in Wealth Management found here at the bottom. We’ve been able to improve the quality and resilience of our revenue mix, and this reduces our dependency on the inherently more volatile and market-dependent transaction-related income. You can see here that all of the increase is actually from the stable, at CHF 1.4 billion, the transaction income has actually gone down so that the net is CHF 1.3 billion. Yes? So absolutely focused on growing a stable and recurring source of income.

Next point I’d like to comment on is AUM. You’ve seen the very good progression from 2015 to 2017, CHF 772 billion added. And then when we talk of 2018, you can see here the negative impact of market movements at CHF 46 billion, mitigated by CHF 44 billion of NNA. And this is where the NNA in the group takes all its value. So fundamentally moving flat. The NNA has allowed us to fully mitigate the market impact. What happened then is that we report to you in Swiss franc, and the FX knocked off CHF 13 billion from our NNA. So it’s not to confuse the optical 2% decrease in NNA with an operational underperformance. In terms of performance, we’ve been flat. 2% is exclusively due to the strengthening of the Swiss franc. So we actually – in the context of Q4, we think that the teams did very well here.

And breaking down the CHF 34 billion – CHF 34.4 billion, you can see that we have actually been positive in every region. In SUB in Switzerland, we have CHF 3 billion of annual inflows, a 1% growth rate. That’s including CHF 1 billion – CHF 1.1 billion of fall-through in Q4, which is going to be reported today, but structural. People pay their taxes, amortize their mortgages in Switzerland at the end of the year.

When you see IWM, very strong, CHF 14.2 billion; APAC, very strong also, CHF 17.2 billion, in spite of massive deleveraging, which you’ve been able to see across the industry in Asia, and also positive in Q4 at CHF 1.2 billion. So we think that this is good evidence of the ability of a bank and our teams to grow.

Another big point for us, and we talked about this at Investor Day, on the next slide is the collaboration between IB and Wealth Management that we see as a very promising avenue of growth. And we have told you that we would work with Global Markets on increasing our penetration rate in the private bank, which at 2.7% was not satisfactory. You see that we moved to 2.9% in 2017 and had a big step-up in 2018. That was really a very – an area of great focus for us, and we’re pleased with this. But there’s still plenty to go because the leading players are at 8%.

So this is one of the answers to the global market challenge. When we say we’re confident, we want to keep this platform, it will allow us to grow revenue. You can see that collaboration revenues here have grown by 21% per annum. In this type of activity, that is very material and there’s more to come. There’s more to come. So this was really on revenue.

So moving on to cost as a big thing. I won’t belabor the point, but we have achieved a very significant reduction of cost. As you know, we have taken a deliberate approach, which is fed by strategic decisions. Simple productivity improvements are 2% to 6% per annum. You cannot do a step change in your cost base with just productivity improvement, and this is why we closed down some businesses. You will remember we sold the U.S. private bank, restructured a lot of businesses that we put in the SRU and eliminated.

And it is strategic approach that makes us believe that these costs will not come back and these reductions are actually sustainable, have lower than a break-even point and that we believe also that our continued focus on productivity improvement leave us well-positioned to benefit from improving market conditions with upticks in revenues growing more fully to the bottom line, given that we start from such a low base. And the other thing it does is that it makes also our RoTE less sensitive to volume and revenue. It’s probably a point we will come back to in the Q&A, but it’s a central point of the strategy, to lower the cost base so that returns are not so dependent directly on revenues anymore.

Moving on to the SRU. Hopefully, it’s the last time I talked to you about it. At the end of 2018, we have closed it. Over the last few years, we have significantly reduced the PTI drag from the SRU and released USD 55 billion of RWA and USD 140 billion of leverage exposure, and that was key to the strategy also, huge source of capital for us in the period. And it has allowed us to reallocate some of this freed-up capital into our higher-returning Wealth Management businesses. And people sometimes ask us, how have you been able to grow and cut at the same time? Well, a big – part of the answer is in the SRU. It’s allowed us to invest in the business we find attractive whilst we were reducing other businesses.

Looking forward, as we told you, we expect a profitability tailwind of around $800 million in 2019 as the drag from the SRU will further reduce, of course.

Moving on to capital and the cost. We have transformed our capital position and significantly strengthened our capital ratios, both in terms of CET1 and leverage, as you can see here. And I want to make a point about 4Q. In 4Q 2018, we have absorbed the impact of greater market volatility in our Markets businesses with limited impact on our CET1 ratio. But derisking actually helps you in the tail. When you’re stress testing in the tail, having the risk reduces the variability of the CET1.

Our CET1 went down but it’s mostly because we have decided to support business growth. We have in particular sent some of our RWA in – to Asia to support specific clients, specific opportunities, which will generate profitability the next 18 to 24 months. And David will cover this more later.

Finally, we delivered group PTI of CHF 3.4 billion reported pretax income, which is at the top of the range of CHF 3.2 billion to CHF 3.4 billion we gave you at the Investor Day, notwithstanding the adverse impact of a challenging December. Over the last three years, we have had to report, in parallel, adjusted and reported results, which was very important as we carried very large restructuring costs. But as we move out of our restructuring phase, we expect now adjusted and reported numbers to converge, and we will measure our results on reported group RoTE going forward.

In 2019, I repeat that we target to achieve a 10% RoTE, assuming flat revenues, total revenues, and capitalizing on factors under our control. As you know, our Board of Directors has approved a share buyback program of up to CHF 1.5 billion in 2019. We expect to buy back at least CHF 1 billion of shares in 2019. We commenced our 2019 buyback program on the 14th of January, and we have bought back shares worth CHF 170 million in the first month of the program of 39 million shares roughly – 13.9 million, sorry, 13.9 million shares.

In 2020, we expect a similar share buyback program as in 2019, with the amount to be set subject, of course, to prevailing market conditions. So let me summarize the year on the next page. In 2018, our operating model has continued to create positive operating leverage, and the conditions of Q4 have allowed us to show that we have effectively and significantly derisked the bank.

We have improved group performance in 2018 with reported PTI of CHF 3.4 billion. 2018 marks the end of our three-year restructuring program that we have now completed. And we are well-positioned to drive returns higher and deliver growing shareholder value.

With that, I now hand over to David.

David Mathers

Thank you, Tidjane, and good morning, everybody. I’ll be taking you through the second half of today’s presentation. As is our normal practice, I will discuss results in general followed by a focus on capital, expenses and return on tangible equity, before looking into more detail at our five main operation divisions as well as the Strategic Resolution Unit.

I will start today with the usual results overview. We summarize here our group numbers on both a reported and an adjusted basis and these have been prepared under the same definition that we’ve used in prior quarters. As usual, for those who’d like to see a more detailed look, we provide a full reconciliation of the adjusted and the reported results along both group and divisional lines in the appendix.

For the fourth quarter, we had revenues of CHF 4.8 billion, taking revenues for the full year to CHF 20.9 billion, flat on 2017. But as Tidjane said already, I would note that revenues across our Wealth Management-related businesses totaled CHF 13.3 billion in 2018 and that compared to CHF 12.8 billion in 2017, an increase of 3% year-on-year. They now represent 63% of our total revenue compared to 49% in 2015.

For the fourth quarter, we generated pretax income of CHF 628 million, taking our full year pretax income to CHF 3.4 billion, an increase of 90% on 2017, at the top of the range that we guided to on our Investor Day, notwithstanding the very challenging markets that we saw in December. On an adjusted basis, we generated pretax income of CHF 846 million in the fourth quarter, taking our annual pretax income to CHF 4.2 billion, up 52% on 2017 levels.

For the fourth quarter, we achieved net income attributable to shareholders of CHF 292 million, taking us to CHF 2.1 billion for the full year, our first annual post-tax profit since 2014. I’ll cover this in more detail shortly, but this equates to a return on tangible equity of 5.5% for the full year and 6.1% excluding certain items that adversely impacted our tax rate and therefore, our return on tangible equity over the year.

Now for the rest of the presentation, I’m going to focus on the adjusted numbers, as we continue to believe they more accurately reflect the operating performance of our businesses during the restructuring phase. But as Tidjane said already, I would note this is the final quarter that I will lead with adjusted numbers. With effect from the first quarter of 2019, we will focus on our reported numbers.

With that, let’s turn to Slide 31, please, to review our capital and our leverage position. So we completed 2018 with a CET1 capital ratio of 12.6%, above our 2018 target to be greater than 12.5%. Our CET1 leverage ratio improved to 4.1% at the end of the fourth quarter, up from 4.0% at the end of the third quarter, and well above the Swiss too big to fail going concern requirement of 3.5%, which comes into effect in 2020.

And I’m pleased to note that our look-through Tier 1 leverage ratio remained above 5.0%. At the end of the fourth quarter, it stood at 5.2%, up from 5.1% at the end of the third quarter. As we enter 2019, we could continue to expect to operate with a CET1 ratio of 12.5% or better by the end of the year, maintaining our existing guidance.

Having completed, though, our restructuring program and settled a number of our large mortgage-related litigation cases, including the NY AG case in December, we have better visibility on our capital generation. We see a strong pipeline of transactions and client business opportunities ahead of us, which we believe will create value for our shareholders over the next 12 months to 24 months.

As a result, we will allow the bank to operate below 12.5% intra-year, but with a lower bound of 12% so as not to constrain our business activities in Wealth Management and advisory. In any event, we are confident that our organic capital generation will allow us to reach our target of 12.5% by the end of 2019.

Let’s turn now to Slide 32 for an update on our expenses. At the end of our third and our final year of restructuring, our commitment to increase efficiencies across our business has paid off. As you know, we set a target to reduce our adjusted operating cost base to below CHF 17 billion by the end of 2018, and that’s measured in constant 2015 FX rates and using a consistent accounting base. Our operating cost base was, in fact, reduced to CHF 16.5 billion for the full year, CHF 500 million better than our target. These savings came across all expense types and divisions as well as from the continued wind-down of the SRU.

And as you can see from the slide, since the restructuring program began at the start of 2016, there’s been a continuous downward trend in our operating cost base, which I would remind you started at CHF 21.2 billion for 2015. Since the start of 2016, we’ve now delivered CHF 4.6 billion of cost savings, ahead of our target to exceed CHF 4.2 billion over the life of this program. And I continue to believe this compares very well to the restructuring cost that we’ve incurred of CHF 2 billion over the last three years in order to achieve these sustainable savings.

And notwithstanding the formal end of the restructuring program, I would just reiterate, as I did at our Investor Day in December in London, that we will have a continuing and ongoing focus on efficiency at Credit Suisse. We will strive to deliver continued savings in order to release funding for our growth investments. And going forward, we will report our progress on 2018 FX rates under our current U.S. GAAP accounting basis.

Let’s turn now to return on tangible equity. Our RoTE for 2018 was 5.5%, reversing the loss that we suffered in 2017 as a consequence of the U.S. tax reforms. As we show on this graph, the RoTE has stayed after two factors that adversely impacted last year’s results. First, the widening of credit spreads, which boosted our shareholders’ equity by CHF 1.3 billion in the quarter.

Second, while this CHF 1.3 billion gain has taken direct to equity via other comprehensive income, OCI, there is an associated increase in our deferred tax liability, which is taken through the P&L and contributes to our reported tax charge. While this should reverse as spreads narrow, the combined impact for 2018 was a reduction in RoTE of just over 40 basis points.

The second point, as we indicated in our voluntary statement last week, is that the proposed regulations surrounding the United States Base Erosion and Anti-Abuse Tax, or BEAT, were published late last year in draft form.

Whilst these are still not due to be finalized until June, our latest assessment of these draft rules is that we will be subject to BEAT, and we have provided for this in our 2018 results. That increased our tax rate for last year by about 2 percentage points and also reduces our RoTE by about 20 basis points. In 2019, as we said last week, we would expect the tax charge to fall to around 30%, including a similar 2% adverse impact from BEAT from 40% in 2018.

In terms of our RoTE targets for 2019, we gave detailed guidance at the Investor Day last December, including the benefits that we expect from the SRU closure, from the reduction in funding costs, and not least, the end of the restructuring program and the charges that were associated with. Now including the drop in the tax rate to 30%, as Tidjane said, we continue to target a return on tangible equity of 10% to 11% for 2019.

Let me turn now to each of our divisions and start with the Swiss Universal Bank. The Swiss Universal Bank had a strong 2018, delivering pretax income of CHF 2.2 billion, an increase of 18%, in line with the range that we indicated at the Investor Day in December. This pretax result is an increase of 38% since the communication of our strategy in October of 2015. SUB’s increased full year profitability was the result of a 2% increase in revenues to CHF 5.5 billion and an 8% reduction in operating expenses. And that was derived both from the headcount reductions but also from the benefits from digitalization, including the on-boarding of clients and online mortgage renewals.

For the fourth quarter, pretax income was CHF 548 million, 25% higher than the fourth quarter of 2017. Our Private Client business delivered a full year pretax income of CHF 1.1 billion, up 26% on revenues of CHF 2.9 billion, up 2%. It generated net new assets of CHF 3 billion in the year with the usual seasonal outflows in the final quarter.

Our Corporate & Institutional Clients business delivered a 10% increase in pretax income to CHF 1.1 billion, which was supported by a strong performance from the Swiss Investment Bank on revenues of CHF 2.6 billion, which is an increase of 2.3% on last – on 2017.

Let’s turn to Slide 35, please, and look at International Wealth Management. IWM generated CHF 1.8 billion of pretax income during 2018, achieving the profit goal. Let’s put that in context. That was a 21% increase on 2017 and 78% higher than in 2015. During the year, we saw 4% growth in revenues to CHF 5.4 billion combined with a reduction in operating expenses by 3%. The cost/income ratio improved to 66%, down from 70% a year earlier.

In the fourth quarter, IWM made a pretax profit of CHF 464 million, an increase of 13% on the fourth quarter of 2017. Across IWM as a whole, it was a very strong year for net new assets, totaling CHF 36.4 billion, CHF 14.2 billion in Private Banking and CHF 22.2 billion of inflows in Asset Management. If we drill down on Private Banking, pretax income was 24% higher than in 2017. Annual revenues increased by 7% to CHF 3.9 billion, whilst fourth quarter revenues were resilient at CHF 940 million compared to CHF 923 million the same quarter, with pretax income increasing by 17% to CHF 321 million.

For the fourth quarter net new assets, we saw good momentum in our emerging markets, but offset by a small number of outflows in mainland Europe to give a net inflow of CHF 500 million. Just completing Asset Management, annual pretax income was 12% higher than in 2017 at CHF 427 million, with our fourth quarter pretax income up 6% at CHF 143 million.

Let me turn to APAC. Our Asia Pacific division delivered a stable pretax income of CHF 804 million in 2018, notwithstanding the severely challenging market conditions that we saw throughout the second half of 2018, with revenues falling slightly to CHF 3.4 billion. For the quarter, the pretax income was CHF 64 million compared to CHF 199 million in the same quarter of 2017, reflecting a reduction in Wealth Management & Connected profitability and a significantly more difficult close to the year in APAC Markets.

APAC overall resilient results over the year reflects the strength of our Wealth Management strategy in the face of the dislocation that we saw across Asian markets, which, as I said already, intensified in the second half of 2018. And I would note that during the year, we redeployed capital from Markets to WMC to improve our overall returns. WMC itself produced a pretax income of CHF 797 million for the year, down by 3%. Its Private Banking business achieved high recurring commissions and fees for the year, largely offsetting lower transaction-based revenues.

Advisory underwriting revenues saw a 5% reduction in fees in the year, mainly driven by a reduction in financing. Clearly, it was a very difficult environment for our APAC Markets business in 2018. Given these circumstances, I think it’s a testament to the restructuring measures and cost discipline. And notwithstanding the US$ 85 million loss that we suffered in the fourth quarter, we delivered an overall improvement in the profit from APAC Markets the full year to above the break-even level, and that compares to a loss that we suffered in 2017. This business remains an important part of our franchise and a key component supporting our Wealth Management businesses in Asia.

Let me turn now to IBCM, please, on Slide 37. Notwithstanding the market slowdown in the fourth quarter, IBCM delivered year-on-year growth in 2018 in both revenues and pretax income. Net revenues rose by 2% to US$ 2.2 billion the full year with pretax income of US$ 439 million, up from US$ 419 million in 2017. Now these results included a tough fourth quarter where revenues fell by 17% compared to the fourth quarter of 2017 as a result of the significant decline in our equity capital market revenues.

Operating expenses in IBCM fell by 21% in the fourth quarter compared to the fourth quarter of 2017, as a result of low variable compensation accruals and continued overall cost discipline. Profits in the fourth quarter were lower than a year ago, down 7% to US$ 114 million despite the continued focus on cost. But I would note that our advisory business saw their strongest fourth quarter since 2012 with high revenues driven by the completed M&A transactions.

Let me turn now to Global Markets, please, on Slide 38. We remain very disciplined in our resource management in the Global Markets franchise, with total operating expenses of US$ 4.7 billion, a reduction of 7% compared to 2017 and beating our 2000 ambition of $4.8 billion. We’ve also remained very focused on capital management with leverage exposure decreasing by 14% during the year to US$ 249 billion, and RWA flat year-on-year at $60 billion.

Now reflecting the difficult market conditions, which worsened in the fourth quarter and in December, GM delivered a pretax income of US$ 425 million in 2018 compared to US$ 620 in 2017. For the fourth quarter, GM saw a loss of US$ 117 million, similar to the US$ 190 million loss that we suffered in the same quarter of 2017. By business line, within Equities, we saw the strongest momentum in equity derivatives in 2018, helped by the collaboration within our ITS business, but offset by slower performance in cash equities reflecting the market conditions we saw.

In Fixed Income, revenues were 9% lower in 2018 compared to 2017 due to reduced client activity, particularly in the fourth quarter. But one important point to note is that notwithstanding the marked widening in leverage finance spreads, particularly in December, we did not incur losses in our underwriting book, and we have already seen most of that widening reverse so far in 2019.

Now finally, let me now turn to the Strategic Resolution Unit for one last time. The fourth quarter of 2018 was the final one for the SRU. And I can confirm it was closed on time at the end of the year with a residual portfolio transferred to the new Asset Resolution Unit, which will be separately disclosed within the Corporate Center going forward.

Now if we look back at the overall performance for RWA, excluding operational risk, we started in 2015 at USD 54 billion. We’ve now closed the SRU with an RWA of $7 billion, a reduction of 87% over the last three years and significantly better than the target of $11 billion that we set a year ago. For leverage, we started at USD 170 billion in 2015, and we ended 2018 at $30 billion. That’s an 82% reduction. And $10 billion, again, better than the $40 billion target that we set ourselves at the Investor Day of 2017.

But perhaps, most importantly, if you look at the drag on Credit Suisse’s profits, this was a loss of CHF 3 billion – sorry, USD 3 billion in 2016. If you can remember, we set a target of a loss of no more than $1.4 billion for 2018, and we actually closed with a loss of $1.27 billion, bettering our target by almost USD 130 million.

Now just turning to the new ARU, I will just reiterate our guidance of a profit drag approximately USD 500 million for 2019, excluding litigation. As Tidjane says, that’s a reduction of about $800 million from the loss we suffered in 2018.

And with that, I would like to thank you for listening and hand back to Tidjane. Tidjane?

Tidjane Thiam

Thank you, David. So let me please leave you with a few key messages for today. We believe 2018 has demonstrated the resilience of our new operating model amid very challenging market conditions, that we have significantly improved group performance in 2018 with a reported PTI of CHF 3.4 billion. We have successfully completed our three-year restructuring program and closed down the restructuring unit. We are well-positioned to drive returns higher and deliver growing shareholder value. And last, in terms of outlook, we remain cautious on Q1, but I’ve seen clear signs of improvement over Q4, albeit staying below Q1 2018.

With that, we all look forward to taking your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Andrew Stimpson from Bank of America. Your line is open. Please go ahead.

Andrew Stimpson

Thanks, guys. Two questions from me. Looking at the balance sheet in Markets, it’s now much lower than the CHF 290 billion limit you set yourselves there. What would you need to see to move that higher? Is it just the tighter spreads in credit? Is that all we need to see or is there something more meaningful? And I’m just – as it’s quite a long way away now, I’m just wondering if you can permanently bring that limit down at some stage.

And then secondly, the Basel Committee put out a new paper on market risk-weighted asset revisions, which look to be more beneficial than I suspect what you had expected when you spoke about this last in December. So I’m just wondering, when we’re thinking about how you’re going to be investing or spending the profits that you generate in the coming years, should we be thinking about reducing the amount that you’re allocating to risk-weighted asset inflation now? Thank you.

Tidjane Thiam

Okay, thank you. Good morning, Andrew. Thanks for your questions. On Markets, we are below. In the short term, there’s no plan to reincrease that. What Brian and the team and made sure they are doing is really optimizing the use of leverage in the prime business in particular and continuing to drive return on assets up by eliminating clients and making sure that we are rewarded when we put our balance sheet to work. So if you look at the revenue per leverage – revenue per leverage unit, that’s going up, and that’s something on which we hold, I think, both Mark and Brian, under a degree of pressure. So we’re asking them to do more with the same rev and put more at work. I believe that answers your question on that, okay? So David, do you want to take the Basel?

David Mathers

Yes. On the bar paper on FRTB, I think it was broadly positive, I think, and other banks have made similar comments. But I would point out, we are talking about a set of measures which will not actually be implemented until 2022. And we’ll have to go through a number of final regulatory papers and translation into local rules. So I think whilst it’s positive, I don’t think I’d change the guidance we’ve given now for a year or so, which is that we will probably look to see something like CHF 10 billion from SA-CCR in 2020 and CHF 25 billion to CHF 30 billion from FRTB and the other measures in 2022, which is what we said at Investor Day. But I recognize what you’re saying, Andrew, but I think it’s just a little bit too early to be banking that definitively at this point.

Tidjane Thiam

And just maybe just an additional point on your first question, the movement done was amplified by the market conditions, of course. I think we’re at 248 or 249. So that’s really, really, really low. So it may go up a little bit, but not back to 290, to be clear.

David Mathers

But I think the point we’ve always made is that if you actually look at RWA leverage, leverage is really the binding constraint for capital on GM. And as we think about how we optimize the use of capital across the business, then I think optimizing leverage is actually more important mathematically for GM than RWA.

Tidjane Thiam

Absolutely, because the return on RWA has always been actually quite decent. It’s the return on leverage that is challenging.

Andrew Stimpson

Thank you.

Tidjane Thiam

Thank you.

Operator

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

Daniele Brupbacher

Yes, good morning, and thank you. Yes, just a quick follow-up on the Global Markets question. I guess about a year ago, you still expected revenues of a bit more than $6 billion, and then now we are just above $5 billion. I mean, there are clear reasons for this, and I guess market – the environment was somewhat challenging. But how should we now think about 2019? Do you – also, probably in the overall group outlook where you expect revenues to be on an underlying basis around flat, do you expect growing revenues again in the more stable Wealth Management businesses and probably still a bit of a headwind in Global Markets? Or should we even see a stabilization there?

And then the second question is really on APAC. You mentioned deleveraging there. If I look at the division, however, the loan book is even up sequentially versus Q3, up to CHF 44 billion, I believe. So what was growing within that segment? And have you seen any kind of stabilization when it comes to deleveraging going into 2019? And just very lastly, leverage lending, can you just talk us through a bit the – how you navigated through Q4, what you have seen in the market and how probably Q1 started so far with regards to volume – steel volumes, committed pipeline and just the overall conditions? Thank you.

Tidjane Thiam

Okay. Thank you. Thank you, Daniele. Thank you for your questions. We’re going to try and cover them. Look, you’re right on GM, and thank you for saying that some of that is market in terms of revenue. But I just want to reiterate the fundamental philosophy I covered in my slides, that we are not running the bank for revenue, total revenue. Our strategy is to grow Wealth Management revenue on which, as you said rightly, we have more visibility. But market-dependent businesses have market-dependent revenues, and that’s that.

And we see it every quarter. On Wealth Management, we remain positive. If you look at – I showed a slide that shows you the kind of stable part, the 3/4 in the market side. There is a slide in the appendix, it’s something we used at Q3, showing you the standard deviation of basically transaction revenue for us and it’s 10 point. So the way I think about it is a 20-point reduction – 20% reduction is a too standard deviation move. And you know statistics, that’s a big move.

So if you think of the scale of variability on market dependency in the group, you get GM out there, then you get IBCM, then you get transaction revenue in Wealth Management. But I want to point out that it is not as volatile as actually people think. Standard deviation speaks for itself. So it can go down but not that much. So that we feel that if conditions not improve in 2019, yes, transaction revenue will be under pressure. But net interest income, and I’ll come to it later, it will probably, including the loan book, will continue to have a very good momentum. And also the recurring and the fee income is also reasonably stable. So overall, our outlook for Wealth Management remains positive.

We are encouraged by the fact that the AUM came back to the November level or even slightly above for Asia. So positive on Wealth Management, cautious on Global Market for obvious reasons. You ask about the deleveraging in Asia. You saw that we had a CHF 1.2 billion positive NNA. What happened in Asia is that actually, Helman made a demand for an extra RWA allocation, and we actually gave it to him. And it was used to do about six deals, which generated significant day one fees, but more importantly, a lot of carry in 2019.

So that’s part of a complication in managing RWA. If you look at it on a quarterly basis, you miss part of the story because a lot of the RWA you spend, we measure the velocity of the RWA a lot when we talk internally. We do this capital allocation meeting. That’s key, because it takes a while to come back, so you’re going to find it in subsequent quarters. And then these deals were all very good. Actually, a number of them had cross-sell revenues. Some of those clients generate – will generate revenues for the Markets division and that’s good, or NNA.

And mostly, to give you some sense of [indiscernible] was China and Vietnam. And actually, we deployed CHF 1.7 billion of RWA out of the CHF 2 billion we gave them. And it will be recycled, i.e., it will roll off during 2019. So it ties into the discussion on the guidance on CET1. We’re out of the restructuring. We don’t have any huge legacy issues coming anymore. We have much better visibility on our CET1.

And it’s our judgment that it would be a pity to pass up opportunities like that, which allow us to solidify our relationships. We’re only one in the market on those deals. They’re very well-priced. We’re very well remunerated for taking the risk. But there is a time lag between when you take the RWA hit and when the returns come. So actually, better return outlook. Part of the reason why we’re also reasonably confident on outlook is that we’ve done a number of those, and we know they are coming. And we were just out in Davos a few weeks ago.

Concrete example, a Chinese client comes to see me and he wants to know whether we’ll stand by him. That’s our consumer guide RWA in Q1 when we have RWA inflation to absorb. But we think it’s the right call for shareholders to do these transactions because they’re all very value-creating, which also addresses I think a little bit your question on the loan book. I think it explains what we we’ve been doing there, yes?

Daniele Brupbacher

Yes, absolutely.

Tidjane Thiam

Yes? You also asked about leverage lending. When we see – you remember what we said at the Investor Day. We said that in America, first of all, we have a lot of dry powder, people have a lot of dry powder to spend. We also have a lot of deals that we need to get out of and kind of take profit. So – and the pipeline of conversations is good, so we’re fundamentally positive. The activity levels are good. We’re very selective. I really commend the teams here because in Q4, we avoided a number of situations which we know went wrong.

So really, the experience of the team there for prudence is very, very real. You know that depending on the quarters, we’re number two or three, but in the high leverage deals, above 6.5, we dropped market share very significantly. We’re now number nine, I think. So we deliberately positioned ourselves in a low risk – or lower-risk end of the spectrum of the players. So short answer is, money is good, pipeline is good, we have appetite, but we’re just very selective.

Daniele Brupbacher

Thank you.

Adam Gishen

Operator, can we please move to the next call, please? I believe it’s Al from HSBC.

Operator

Your next question comes from the line of Al Alevizakos from HSBC. Please go ahead.

Al Alevizakos

Hi, good morning. Thank you for taking my question. I would like to focus on the costs were actually the result was really good. It was about CHF 400 million lower than the guidance that you gave just in December. So a couple of questions: I think there is a funny item in Corporate Center regarding the compensation and benefits, which I would like to get some more clarity. And then secondly, what effectively changed since the December guidance? Did you see that the revenues are going to come a bit lower than expected and you had the ability to reduce variable compensation? Thank you very much.

Tidjane Thiam

Good morning, Al. Thanks for question. I’ll let David handle them.

David Mathers

Thank you very much. So if we just turn to Page 40 in the earnings report, you can see the Corporate Center number there. I think what you’re referring to is the minus CHF 64 number for compensation and benefits in the fourth quarter. And if you look at 2018 as a whole, compensation cost in the Corporate Center were CHF 128 million compared to CHF 398 million in 2017. I mean, there’s really two factors here. If we actually look at 2018 as a whole, the biggest is what we talked about back in 2015, which is the reduction in the legal entity program and how that was going to be largely eliminated for 2018.

We never said entirely and given the Brexit situation, you can imagine there are some costs related to that, but you can see there’s been a very substantial reduction. The second factor, which is more important for the fourth quarter, relates to the sharp move in credit spreads that we saw at the end of the year, and two reasons for that. Essentially, I think you know that our employees are paid partly in a CoCo AT1-type instrument called the CCA that’s covered in our comp report.

As credit spreads and actually widen, the value of that liability to our employees declines because the value of the instrument actually falls and there is, therefore, a gain in the Corporate Center as a consequence of that. That was actually a benefit throughout 2018, and it was a reversal of what we saw in 2017, but it was particularly noted, particularly marked in the fourth quarter. There were some other spread-related moves too, but that was the primary reason that we saw that reduction. Other changes there, that’s just the usual fourth quarter true-up in terms of our compensation numbers, and I think we’ve already said publicly we’ve been quite disciplined on compensation for 2018, but that’s what generated the CC effect.

I think you then had a more broader question on costs. I think you said we were CHF 400 million better than the guidance we gave. I think there’s probably several points there. I – we were obviously prudent in terms of our guidance. I think it’s certainly clear, I think as Tidjane has remarked in previous quarters, that we have developed the technology and the infrastructure to manage our costs much more flexibly on a quarter and intra-quarter basis. We don’t just set a budget for a year and leave it at that.

That is something that is taken very seriously by the whole management team, and I think as we actually went through the year, you saw – you could see the quarterly reductions every quarter quite clearly, as we basically could see some of the stress building up in the fourth quarter and particularly in December. We were extremely disciplined about what we actually spend and we clearly came into the period with quite a lot of momentum. Obviously, that CC gain also helps that factor.

Al Alevizakos

Great. Thank you very much.

Operator

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

Jeremy Sigee

Thank you. Good morning. Two questions, please. Firstly, on Global Markets, and secondly, on costs. Global Markets, obviously, it’s quite a weak return on equity for the full year, just 3%, but also almost all of that came in the first quarter effectively, which sounds like it’s unlikely to repeat. So I just wondered what ability you have to react in Global Markets or what changes you’re sort of making at this point in time, given the poor return on equity and the poor outlook as well. And then the second question, just on costs, obviously, you’ve beaten very strongly in 2018. This has been commented on. It looks from the slides that you’re keeping your guidance unchanged for 2019, and I just wondered how we should think about that, whether there’s a sort of bit of a buffer in that and scope to do better.

Tidjane Thiam

Okay. Good morning, Jeremy. Thanks for your questions. Well, on Global Markets, we acknowledge the numbers. The business has been through a lot. 2019 will be interesting because you should note that we are not restructuring. It’s going to be the first time that we are not in restructuring mode for our Global Market staff, and it looks like a number of peers are. So it will be interesting to observe what happens in that context in terms of volumes and market share, because we heard a lot of cutting plans announced. I think we’ve done our cutting and it’s been quite significant over the over the last three years, and so it’s kind of just a timing and cycle comment.

So we think that as we have strengthened the teams, the timing is actually good for us. If you got equities, the kind of people we’ve hired – actually equity derivatives is up 111% in 2018, so bright spot in the results. And we think that we are well-positioned to gain share in the number of places given what’s going on in this – in the activity in general. We have also structural tailwinds. We talked about the funding benefit, CHF 400 million. In a way, we account, that’s why it appears in the revenue. So we’ll miss on Global Market, I think we’ll increase on revenue. So that’s going to close some of that gap that you see between the CHF 6 billion and the CHF 5.1 billion.

And the other one is really pushing the collaboration, which also generates very significant revenues. We told you collaboration revenue of 21% year-on-year, that’s going to continue. It’s not going to be a one-year story, it’s a two, three, four-year story, it’s momentum. So when we look at Global Markets, we want to give the business a chance after three years of tough restructuring. I think I said that at the Investor Day, offer a clean year or we can show what they can deliver, and I’m not convinced that they will not exceed last year’s performance, which I recognize was low. David, any more on GM?

David Mathers

No, I think I’ll just reiterate what Tidjane said. I think the ITS joint venture, I think has got plenty of attention. I think we talked about the level of penetration we have in terms of owned produced product there. It’s still lower than the industry average, let alone what it should be best-in-class, given the strength of our Wealth Management businesses and the degree of integration there. So I think I’ll just reiterate that. I think, clearly, we’ve been working very hard on the equities business. I think you’ve seen the highest mode there. As Tidjane said, this is the first full year when we would expect to see the benefits from that, so I think that’s a further measure in terms of what we’re actually achieving here.

But I think in terms of return on capital, I’ll just point out what we said already. If you actually look at the return on RWA, it’s actually significantly higher than it is on average. It doesn’t mean it’s yet satisfactory, and that’s something we need to work on and support basically, but that’s one reason why we’ve been disciplined on leverage.

Tidjane Thiam

And cost effectively, look, I think we showed an ability to manage cost and to cut cost, largely also through strategic decisions. We were happy with the platform as it is. We said also at the Investor Day that we wanted to invest, but we would also time that investment depending on market conditions. Well, unfortunately the market conditions have been better than Q4 but still not great, so the kind of leverage which are pressured that we have is really how we modulate that investment. So really, I wouldn’t say anything fundamentally new compared to what we said at the Investor Day other than we could put pressure on for continuous productivity improvement. We indicated the 2% to 3%, and that gives us some more headroom.

But if you step back from this, I’ll go back to RoTE sensitivity, the fact that we’ve taken the cost down so much, if you go back to what is our revenue line, and you shock it, what you will find is that because the cost/income ratio is so improved, the impact on the bottom line is not what it would have been when costs were much higher. So it’s really interesting, and it’s a structural change. So it’s not so much a game of absolutely driving down the cost, given the levels at which we are today.

Jeremy Sigee

So the range is still the same as guided, CHF 16.5 billion to CHF 17 billion, and then it’s subject to the pace of investment.

David Mathers

I think – I don’t think, we could add too much. I mean, I think we were very clear at the Investor Day and we had the various carousels, which I think talked about what we’re looking to do to drive continuous productivity and efficiency improvements. This is not about restructuring, we’ve come to the end of that phase. It’s how we actually make the bank consistently more efficient. We’ve always targeted to get it – to drive about 2% to 3% efficiency. I think Tidjane’s been clear. That’s what we think a modern corporation do, financial or nonfinancial. What we’re also saying, though, is, we do intend to offset that with growth investments, but the pace of how much we actually choose to offset that will depend on our assessment of market conditions.

Tidjane Thiam

And – but we keep on – the revenue of our group is much more resilient. If you take your strategy to do your own analysis and you look at what kind of shock it would take today to take the revenue down by 10%, you will see that it’s actually because we have so much Wealth Management revenue now. It’s – you’re talking about several standard deviations, so you would be in a really tough scenario, and even a 10% decrease, depending on how you conclude – do a 1.5% decrease in RoTE. So it’s that relationship I’m describing, but really the – we’ve kind of changed the connection between RoTE and revenue by changing the cost base.

That’s something – if you modelize it, you will see that, and that’s actually very, very comforting. So the 10% – that’s why we’re quite robust about the 10%. Clearly, if – yes, if the total revenue of our group went down 10%, which is a norm given how we’re structured today, it would take down the RoTE by 1.5%. But we don’t see that, we don’t see that as likely at all.

David Mathers

I think just one of the key achievements the last three years is when we started, 49% of our revenue base was pure wealth management base. It’s now 63%. So if you look at the returns from Tidjane’s chart, you can see what that does, but I think also the stability. Yes, net interest income recurring, very stable, and I think it’s a significant change in the earnings balance, the balance of Credit Suisse.

Tidjane Thiam

The downward sensitivity of the revenues is much lower than it was two years ago.

Jeremy Sigee

Thank you.

Operator

Your next question comes from the line of Kian Abouhossein of JPMorgan. Your line is open. Please go ahead.

Kian Abouhossein

Yes. Thanks for taking my question. I have one question regarding cost. I mean, you’ve done a great job on cost yet again this quarter, and just trying to understand how we should put that in context off your target. I know you want to be conservative, but you’re more or less at the lower end of your guided cost number even if you adjust for the deferred comp CDS issue, you’re pretty much at the lower end. So how should we think about how much more juice there is in terms of reducing cost and surprising us? And then what areas could that be?

And the second area is coming back to Global Markets and also IBCM. You gave targets in 2016 at the Investor Day. On Slide 7, you clearly focused on what the guidance was for the year but if I look back at the targets, you’re heavily off on the ROEs, but listening to you, it sounds like it’s okay. The market environment has changed, it’s part of the group. Now you make an ROE of 3 to 4, you’re making a low ROE in IBCM. What I’m trying to understand is, things have changed but it seems to be not an issue. And what I’m trying to understand is, at what point does it become an issue for you considering it is significantly below your original target. Thank you.

Tidjane Thiam

David, you want to take the question?

David Mathers

Sure. I think – I don’t think, Kian, there’s much I can really add to what I said to Jeremy just now, which is, I think if you look back over the last three years, we laid out a goal to go from CHF 21.2 billion to less than CHF 17 billion. We’ve clearly achieved CHF 16.5 billion. A lot of that was clearly achieved by the structural measures that Tidjane outlined, whether that was the SRU, the exits from certain business lines, but it was also driven by continuous efficiency and productivity improvements and that, I think, is how a modern corporation should be run. And as I said before, we continue to look to achieve savings of 2% to 3% across our business portfolio, and that’s what we intend to commit to for the ongoing future. In terms of how much we choose to offset that in terms of additional investments, as Tidjane said, that will clearly depend on our assessment of the market environment, which is clearly better than it was at the fourth quarter of 2018 but not as good as it was in the first quarter of 2018, so that’s a judgment that we and the executive board will make. I think, as I said, we’ve – I think proven well now that we are better at managing costs on intra-quarter basis and about driving the sort of efficiencies. So that’s what we’re going to do in 2019.

Tidjane Thiam

Yes. No, look and GM might be still in – it’s an ongoing debate in the question you’re asking. We’re very clear that we think we can drive a bank for 10% RoTE. We think in 2019, coming out of restructuring, that’s a very robust number. It’s a good objective and it will create value for the shareholders, and then we can get into an analyst debate on GM. We’ve explained that GM, actually on the return on RWA, it looks okay, but it’s the return on leverage. We explained what we’re doing on the leverage, we explained that we restructured, we eliminated 2,000 jobs, we restructured the business for three years, we want to give it one year or at least of operation.

And yes, we missed, but I don’t know, I think the characterization, we missed the CHF 6 billion, I mean that’s CHF 5.4 billion, that’s still 85% in a highly volatile business three years out and every other target has been achieved. So it’s reasonable to say that they have delivered the ones they control, and IBCM, frankly, has delivered. We had a 15% return on capital target. We hit it in 2017, we had 14% in 2018. You’ve seen the Street fees. We’ve beaten the Street, and we’re up 23% in M&A, I think, year-on-year. I’m looking at Jim here. Yes, we’ve beaten the Street. I mean, what can we ask for? We are the biggest IBCM player outside the – we’re the biggest non-U.S. player in IBCM. We’re double the size of some of our peers. We’ve beaten two of the large American banks in terms of year-on-year revenue growth in IBCM.

So this is burning platform that you’re describing, I’m not sure we recognize. And IBCM is key to what we do in wealth management, it’s where I’d like to end. But really, these are wealth management as I showed in my slides, where wealth management revenues is growing at 5% CAGR, and banking is a good performance and generating very good profits. And the linkages and the synergies between IBCM and wealth are real, and GM is now very focused on serving the Wealth Management franchise, and we’re making huge profits there. We have a structured product, and you’ll see that in Q1, it’s going well, it’s working well. It increases the resilience of the bank through the cycle because again, we have a broad relationship with our clients, we can do different things at different points in the cycle.

I really think that the kind of pure-play asset management strategy was a QE-based strategy. We had a macro context that drove every asset price up and made that strategy great. We’ll find it wanting. As the cycle turns, things will get more complex, asset classes, they correlate. The ability to learn, the ability to advise, are precious, and that’s going to – we really believe that our business model is better from the cycle having, not a pure wealth management strategy, but having that you’ve seen the resilience of the NNA, and I can point so many things. You’ve seen the resilience of the NNA in Asia. That’s because we’re not a pure asset management player. If we were, you’d see that we’d look like the others, okay?

A lot of the stickiness, a lot of the ability to grow NNA is what we learned, and I tell you we’re going to cross sell, we learned through a player in them [ph]. We knew it’s going to give us NNA in Q1. Others can’t do that, so it’s very hard. It’s very easy in the theoretical world to say, why don’t you just kill businesses A and B because C is so great? But my experience on business is, there’s always very subtle linkages between A, B and C, and it’s not like you can just take out A and B and C will work and work through the cycle. We stress tested to see that model through the cycle, we believe it works, we think you start to see that in Q4. Q4 is one of the first quarter’s where I feel like operationally, we’re starting to be really competitive, okay?

Before, we were coming back, within the restructuring, we’re starting to see things like our AUMs, so we’d stand out in the , so we’d stand out in the sector. And I think you’re going to see more of that. We – sometime we have to judge the tree by its fruit. The 10% is the target, and I think if we hit it, it will leave us in a good place. And don’t underestimate the impact of taxes on those number we’re looking at. On a comparable basis, this 6% is a 10% if we had a normal tax range, and there is upside. So sorry for a long answer, but our view – and we’ll have to stand and see if it works, but our view is that our model as an integrated model works, and there’s only so far one can push the line by line – business line by business line analysis. And the total works, and we’ve delivered on what we said we would deliver.

Kian Abouhossein

Great. Thank you very much. And, if I may, just very, very quickly, Global Markets, you mentioned a securitization gain. Can you just tell me how much that is in FY 2016?

Tidjane Thiam

Yes.

Kian Abouhossein

I think in Global Markets you mentioned in your press release a securitization gain. Securitized products. And I’m just wondering how much that is. So I just…

Tidjane Thiam

Sorry.

David Mathers

Yes. I mean, I think you’re referring to Page 33 of the MD&A. I think, what we’ll say about that is, in the course of our business, we often make investments, and as we did see a gain from that, we actually noted that in the MD&A. I wouldn’t quantify the amount. I mean, it’s just part of that normal business to actually make those investments and take realizations from it.

Kian Abouhossein

Thank you, very much.

David Mathers

Okay. Thanks a lot, Kian. Thank you.

Operator

Thank you. Your next question comes from the line of Benjamin Goy of Deutsche Bank. Your line is open. Please go ahead.

Benjamin Goy

Yes, hi, good morning. Two questions please, both on wealth management. The first on your relationship managers. They declined in the quarters, I think across regions. So just wondering, so it’s just some quarterly volatility or is it more of a strategic decision to focus even more on efficiency in this environment? And the second one is on your mandates. Maybe you can speak a bit more about it, how discussions with clients are going here and your pricing, i.e., do you see an average quarterly impact or more of an end of the quarter impact here from market levels?

Tidjane Thiam

Okay. Thank you, Benjamin. I’ll try to address your question. If I don’t quite, if I haven’t quite understood it, then please come back. I think you’re asking about the RMs, and I noted quarterly volatility. I just want to make sure I address your point. What’s your concern there on the RMs?

Benjamin Goy

Yes, because they declined. So just wondering whether there’s some quarterly volatility here or is it more of a fundamental strategy to focus more on efficiency and drive…

Tidjane Thiam

Yes. That’s a very important point. It’s really part of our model that we think we can grow without necessarily adding RMs, and that’s a view we’ve come to across divisions. What we do a lot is improve the quality of the RMs. So you can – you see a flat total number, but within that, there’s quite a bit of movement. We bring in new ones, and we progressively eliminate the weaker ones. We focus on, really on quality, and the numbers are quite striking. If you look at Asia, for instance, it has the same number of RMs as in 2015, absolute number of RMs, and the AUM have gone from like CHF 140 billion to CHF 210 billion, okay? So with the same number of RMs, you’re managing 50% more AUM, and IWM has proved the same trick.

So we have of course, we keep the total number of RMs constant and we improve the quality and also we invest in technology a lot, which we don’t talk a lot about, but we make sure that the RMs have more time, more client-facing time. We’ve worked a lot on client on-boarding, for instance, between our business, it takes a ridiculous length of time and amount of time. And the work done there with compliance, we’ve done front-to-back reengineering, putting in the same room the compliance people, the front people who do the opening of the account, and we have cut down the time, I think by – something like 80% of on-boarding.

So all that runs through. And yes, we don’t drive things with the number of RMs. We – over time, yes, actually, the number of RMs should go up slowly, but that’s not the primary driver of the growth. And as you said from a quarter to another, it will be a bit volatile. You should not read too much into that. Mandates, we’ve come under pressure a little bit, frankly, in Q4, because some of our calls were not necessarily right, but things have recovered. I said in January, very strongly bounced back, so that we’re basically above November. But more importantly, if you step back, and it’s back to my comment about not being a one-trick pony.

Mandates are important, so fees from mandates are important. But if that’s all you do, when you get hit like in Q4, certainly, your total revenues drop, and you’ve seen that for some companies, for some banks. We really believe that it is important to be diversified. Mandates are important, and we make money from them, but we also learned that’s important, and you see a different point in the cycle, people want different things. We advise, we transact. It’s really important to keep all those in perspective.

David Mathers

And just on – I wasn’t quite sure, Benjamin, exactly where that question was going, but just some supplementary numbers just in case it’s helpful. Mandate penetration was broadly unchanged for the third quarter at 26% overall in terms of wealth management business. So I think the point, which is worth focusing on, which we actually said in our outlook statement is, firstly, one, we didn’t really see the full year in AUM, I think it’s been speculated elsewhere. Our clients tend to have a reasonably conservative mix in the face of market conditions. And secondly, that had been largely reversed back to November levels by now, so you’ve seen that reversal. So I don’t think we would confirm some of the comments we’ve seen elsewhere around this.

Benjamin Goy

Okay, perfect. Thank you.

Tidjane Thiam

Okay. Thank you, Benjamin.

Operator

Thank you. And our next question comes from the line of Andrew Coombs of Citi. Your line is open. Please go ahead.

Andrew Coombs

Good morning. If I can have one follow-up and two fresh questions, please. The follow-up would be on Al’s question on the Corporate Center compensation. I think, David, you said that the majority of the CHF 127 million swing Q-on-Q in the fourth quarter was due to the moving your own credit spreads. Can you just provide us an indication of how much that’s reversed if we take the move back in credit spreads year-to-date in 2019? Fresh questions, first one would be on net new money, Slide 50. You largely reflect seasonality even if we look at the year-on-year comparison. You’ve obviously seen outflows from the Swiss Universal Bank, private bank, and IWM Private Banking is also down year-on-year. So if you could just elaborate a bit more there on what’s driven the slightly weak performance we might have expected. And then my final question would be on tax. If I go back a year ago, you were guiding to a 23% to 24% tax rate. That then moved to 28% with the Investor Day and with the recent announcements, moved to 30% for 2019. I just want to get a feel for if that’s the case for 2020 as well, or if you think there is more work you can do on the U.S. double taxation, on the base erosion avoidance tax, in order to improve that tax guidance going forward? Thank you.

Tidjane Thiam

Thank you. Thank you, Andrew. David, I think this is yours to answer.

David Mathers

Sure. So, the first question really, which I think is a good question, which is on the credit spread related moves in the Corporate Center. You’ve seen about a 50% reversal in the first quarter to give you a rough indication, but it’s a pretty volatile stat, so we’ll see where it ends up, and there are some – there are some gains and losses within that. And I think it’s fair to say we have not seen the rear volatility in our AT1s that we’ve seen elsewhere in the market, but about 50% standing where we are now in terms of the guidance, if that’s helpful. I think the second question was actually on net new assets, which was on Page 50 in the appendices there. So you can see what we show, I mean, I think, obviously, it was a very good full year in terms of our net new asset position. If we look at the mix of that, I think firstly, if we start with the Swiss Universal Bank, I just would reiterate, for consistently over many years, you would always see outflows related to the timing of mortgage payments in the fourth quarter in Switzerland. You know how it works? If you have borrowed more than 80% LTV, there’s a payment schedule agreed. Those payments are actually met in December. So there was always a degree of seasonal outflows in the fourth quarter. The extent to which that results are negative number or positive number of break-even, but it’s always going to be low in the fourth quarter depending on what other asset inflows we had there.

We did see strong inflows and assets under custody, less so in AUM, so that would be the point around SUB. I think if we look at APAC, given the market conditions, CHF 1.2 billion of net new assets I think is a very strong performance and we did see – Sorry.

Tidjane Thiam

No, no, go ahead. And I’ll do IWM.

David Mathers

CHF 1 billion of deleveraging actually in APAC in the fourth quarter, so I think pretty resilient numbers given the market conditions.

Tidjane Thiam

Yes. And IWM – what happened is that the fourth quarter of 2017 was actually exceptionally high. We don’t have enough bars here on 2015, but you would see that actually, 4Q18 is at the level 4Q16, so there is nothing untoward there. It was more of that the 4Q17 was a bit of an outlier and the total performance remains decent.

David Mathers

So just on the tax charge, let me just give you a breakdown, Andrew, which might be helpful. I think you asked a similar question, I think at the Investor Day in December. But – and I think at that point, I referred to two main components. There is the point about tax, which is driven by the actual tax rate for each valid legal entities and that’s around about 22%, then there is about 12%, which is in effect, in respect of the nondeductible cost we have. Those are predominantly funding and predominantly related to the funding of a U.S. business because we do not get relief from the IRS in respect to those funding costs above the overnight rate. And as those are seen as a U.S. cost, which they are, understandably the Swiss authorities do not give us tax relief against that, so that adds about 12% of the – to the CHF 3.4 billion number.

Then you have the final two components, which essentially was this effect we had from credit spreads moves, which as I said in my summary, you saw about a CHF 1.3 billion gain in the fourth quarter going direct to OCI. That goes to OCI, you can see that intangible book, but that creates a deferred tax charge in the quarter, which goes through the P&L, so that is obviously dependent on volatility. And just as we saw this interesting negative comp accrual in the CC as a consequence there, that also drove this tax effect to 2%.

So I think to Benjamin’s question about how much is it reversed, it has the other effect, just 2% in terms of the tax charge. And then the final component is BEAT and that’s a long topic. I think you know that the original legislation was part of the U.S. tax reforms on 22 of December, 2017. There was then a break of the year until, I think it was the 13th or the 14th December when the draft regulations are actually published.

Just recall, they may have come out on the 13th of December, but they’re backdated to the 1st of January 2018, so it’s a fully backdated tax measure. And I think there was a very substantial revision in those BEAT rules between the original draft and Trump’s first round and what was actually written and as a consequence of that, we have concluded we are likely to be subject to BEAT for 2018 and for 2019.

Just to be cautious, though, Andrew, that is a management estimate. The final rules to BEAT will not be published until later this year. They have to be published by June, otherwise it can’t backdated anymore, so we assume it will come out by June, and we’ll see if we see any change there, but I’m afraid to say, given the BEAT rules were very substantially changed between the initial version and what actually came out in December. That’s what we’re subject to. So those are the components of 2018’s tax charge. Looking forward to your question then in terms of what that means for 2019. I don’t expect the underlying reasonable change to change much around the 22% mark.

If you work out that 12% number, you apply it to the CHF 3.4 billion you could see it comes out around about the sort of CHF 400 million of more or less fixed tax charge related to – primarily to funding. We’ve been very clear that our funding cost this year will drop by about CHF 700 million. That will benefit this tax charge, but you’re still left absent a new agreement with the IRS, which we are in discussions with, with a degree of nondeductible charges. So I would expect that to go down but more importantly, it should go down as a percentage of profits given that we are pushing towards a 10% ROTE this year, so that will push up the numerator.

And on BEAT as we said before, we expect around about a 2% adverse impact on the tax charge from BEAT and that gets you to the 30% number if you work through the numbers. What does that mean for 2020 I think was that final question Andrew. I think I’ve given you the components of the solution, which – as it clearly it will depend materially on, are we successful in negotiating a better deduction for our funding cost primarily in the United States and obviously, the finalization of the BEAT rules when they come out presumably in June of this year. Those are the two intangibles we’re actually dealing with here and that’s the mass of this.

Andrew Stimpson

Thank you very much.

David Mathers

Okay. Thank you, Andrew.

Operator

Thank you. Our next question comes from the line of Stefan Stalmann of Autonomous. Your line is open, please go ahead.

Stefan Stalmann

Yes, good morning gentlemen. Thanks for taking my questions. I have two please, the first one relates to your comment on the capital trajectory during 2019, where you say that you may actually go a bit lower towards the 12% during the year. I’m not quite sure I understand what’s behind this given that you are expected to generate quite a lot of capital in 2019, 10% return and should therefore, be quite able to self fund growth in Wealth Management. So are you expecting particularly strong seasonal or traditional – transitional revenue – sorry risk-weighted asset growth during 2019 in Wealth Management or are there any other moving parts in CET1 during the year that we should sort of keep in mind?

And the other thing I wanted to come back to, please, is your guidance that 10% revenue hit would only reduce your return intangible equity by about 1.5 percentage points that looks surprisingly low, given that 10% revenue is roughly CHF 2 billion, and In order to offset that and to mitigate it, you will probably have to cut cost by more than CHF 1 billion fairly suddenly. Could you maybe walk us through how you get to this 1.5 percentage point impact on return on tangible, please, in such a scenario? Thank you.

Tidjane Thiam

Okay. Thank you, Stefan. An important point. Okay, David, I’ll let you handle what’s going on with the CET1 regulatory inflation among other issues, yes.

David Mathers

Thank you. Well, I think the first point I’ll make – I mean, and I think we probably summarized it is that we have now completed our restructuring program. We are going to see a material step-up in capital generation in 2019, and I think the point I also made is we’ve clearly settled a number of the major mortgage-related litigation issues, including the New York Attorney General case, which I think has been discussed previously. That was settled at the end of last year, so we have more visibility around capital generation.

So your point essentially as well, that’s the case, well, why are you changing your capital guidance? I think the primary reason is, we do see significant business opportunities in Wealth Management. Those are – will generate incremental cash flows, and I think as we look to continue to drive growth in that, we want to have the freedom to invest on that during the year as opposed to basically – and giving you a small flexibility intra-quarter than merely hitting the end – the target every quarter.

In terms of other moving parts, which is the question you asked, I think we gave guidance at the Investor Day that the external methodology effects relating to the FINMA, was around about the CHF 6 billion mark, that’s not materially changed. We will see some loading of that to the first quarter, but it is, by and large, phased. So I would expect at this point, just under half in the first quarter and the rest to be over that. So there is a small seasonal impact from methodology, but it’s not complete, so that’s sort of – but it – primarily, as we said, it’s about – we want the ability to actually fund the Wealth Management opportunities as we see them. And those will not necessarily be evenly spread throughout the year.

Tidjane Thiam

Does that make sense, Stefan?

Stefan Stalmann

Yes and thank you very much.

Tidjane Thiam

Okay. Your other question was the sensitivity we gave. The work was done by IRS, so I’m sure they will be happy to give you the details. I don’t want to walk everybody through it but basically, you’d take the transaction revenues, it’s about CHF 3,289 million if you add SUB, IWM and APAC, WMC. The IBCM revenue is CHF 2,177 million; GM, CHF 4,980 million, that’s a total of CHF 10.446 billion, something like that. And then if you talk about a 10%, and you look at the marginal loss ratio, so when you add a margin, what happens to net income? That leads to a total loss of net income of about CHF 550million, which is 1.5% of RoTE. And we can walk you through it with more detail, but that’s the logic.

Operator

Thank you. Your next question comes from the line Magdalena Stoklosa of Morgan Stanley. Your line is open please go ahead.

Magdalena Stoklosa

Thank you very much. I’ve got, kind of 2.5 questions really. So it’s the – my first one will be on capital then Asian markets business and the outlook. So I think I’m following up from the previous question a little bit, because to me, it’s the – I understand the quarterly differential from the perspective of the – of how your core equity Tier 1 and the trajectory can move. But I think that what would be very helpful is if you gave us the context of where those business opportunities really are. You’ve mentioned financing appetite in Asia, but what is the pipeline? What’s kind of out there that you can see in 2019 that may kind of consume up to 60 basis points of capital at any stage in a year?

So that’s my first question. And my second question is on Asia and markets, and that’s Slide 49 for reference because the Asian markets have been probably the last kind of restructuring, the last business restructuring in 2018, and we have seen it year-on-year. The contraction in revenues was really offset by the reduction in cost by more than one point, kind of, six times. So where do you think that business is going from here, since it looks like you’ve rightsized the footprint? And really my last question would be, is there anything that you would like to share with us regarding the operating conditions year-to-date? Thank you.

Tidjane Thiam

Okay. Thank you, and welcome back. David, you want to take this?

David Mathers

Yes. I mean, I think firstly that you should not read too much into the fact that we are saying rather than being every end of every quarter, greater than 12.5%, we will be the end – we will only be that at the end of 2019. What we’re saying is that we want to give ourselves more flexibility, not necessarily to be at 12.0% which I think would be implied by your 60 basis point note, but to be at 12.2% or 12.3% or 12.4% and we will lower bound to 12%, which we will not drop below.

And the reason we want to have that flexibility is for those business opportunities. Now I think you summarized it already. If we look at our Asia Pacific business, it’s predominantly about financing, but it isn’t just about Asia Pacific. We will see some seasonal fluctuations within the Swiss Universal Bank. We’ve done some significant deals here. I think investing more capital in Switzerland, given the stability and strength of this economy, I think is exactly the right thing to do for our shareholders, for everybody, frankly, and that we need the ability to actually finance that as we see those coming through.

And I think IWM, you’ve seen a very consistent package of growth over the course of the last three years, and we want to continue to finance that. You’ve seen what that generates in terms of PTI, you’ve seen what the generates in terms of return on capital, you’ve also seen what that generates in terms of net new asset. But I do not want you to walk around, Magdalena, with the idea that essentially, the ratio is going to drop from 12.6% to 12.0% at the end of the first quarter. That is not what we’re saying. What we’re saying is we want the flexibility to operate around that 12.5%, 12.6% level, to accept the ability to actually fund that business by 10, 20 or 30 basis points in any one quarter. And given the strength of capital generation, we very much intend and will be above the 12.5% mark by the end of the period.

Tidjane Thiam

Yes, if I may add, it’s not a total objective to go below 12.5 %. What we’re doing is just being prudent, because we have a dialogue, we see some of the strength, the opportunities come in. We don’t want to get to a point where we say no to a very attractive opportunity that’s going to generate good PTI over the next 18 months because it will take us to 12.45% or 12.42% , so we just want to flag to the market that we want that flexibility. It doesn’t mean that we’ll have to use it. It’s really just prudent at this point, given also the inflation we know we’re going to get in Q1, which really, to be absorbed within 12.5%, would really lead us to make decisions that are value disruptive and not do deals or withdraw from some certain segments of the market where we are actually creating value.

Magdalena Stoklosa

Of course. I mean, don’t get me wrong. I think that – yes, but – and I actually think that my question is coming from a slightly different perspective. I actually thought it was refreshing to hear that there are opportunities out there where you can deploy your capital at a kind of very decent return that you’re flagging. So it’s, for me, it was – I was kind of hoping to hear, and I have, a little bit more from a perspective of where you actually see that, because the word growth has been kind of broadly absent from a lot of quarterly commentary.

Tidjane Thiam

No, absolutely. Look, absolutely. I’m glad you – that’s exactly what we see, that’s exactly what we mean. It’s – we think it’s good news. It means that we have opportunities to put capital to work, which will generate profit in the future quarters, and we see those opportunities definitely. Clients come to us, clients see us. It’s interesting.

I think some of it is generated by the negative environment because people are being procyclical and pulling back, so you get actually – yes, sometimes more opportunities and sometimes at an even better price. So we think that tactically, it’s not unreasonable to be able to take this. I’m trying to remember your – see if – yes, APAC Markets, yes, we’ve right-sized it. As I say, it’s quite geared to Equities, our model in APAC. There’s still work to do. If you remember the target we gave for our APAC Markets was in 2019, not in 2018. So we are still going for that. We took the expenses down. You’ve seen the shock that’s been absorbed in Asia, and you also have to step back and look at the total of the division, which still generates a profit, and where Wealth Management is doing very well, and we feel that having that platform – sorry, that market’s platform is really part of the business model and is important. We’ll continue to optimize it. We have intense dialogue with Asia on what we can do, but yes, I think it’s a work in progress.

The operating environment, I think we said it’s a mixed story, some positives. Suddenly the bounce back in AUM has been good. Good dialogues, strong pipeline, that’s what we see on the IBCM side. Quite a bit of activity also pipeline in the – left inside, Transaction, still weak. I mean, better than Q4, but weaker than Q1 last year, that’s sort of the tone we’ve given in general. We need to see how – really how March plays and there’s a wide variation of March outcomes, if you look at the recent years. And that’s why we’re a bit cautious in terms of giving you more granularity on the outlook.

Operator

And your last question comes from the line of Amit Goel of Barclays. Your line is open. Please go ahead.

Amit Goel

I mean, I guess we’ve already touched a bit on the questions I had, but I guess just, again, just on the capital management and your planning for 2019. So I guess, based on your comments, is it – it would be kind of wrong to assume that your Basel principal below 12.5% for Q1 and – of this year. And secondly, in the scenario where you do draw down on the capital for investment, perhaps intra-quarter or during the first half of this year, what are you thinking in terms of the payback, in terms of when you’ll be able to get the ratio back? Because it seems like in Q4, there’s typically a bit of capital consumption, so to kind of get back to the 12.5% by year-end, if you’re, let’s say, at 12.2%, 12.3% in the first half, just perhaps looks a bit more challenging. Thank you.

Tidjane Thiam

Thank you David.

David Mathers

Well, I think, let’s just look at the full year first. We’ve been clear in terms of what our goals are for return on tangible equity. You could see that essentially, we started net income of CHF 2.1billion in respect to 2018. Getting to 10% implies net income of closer to the CHF 4 billion, CHF 3.9 billion mark, and I think we’ve given you levers that actually get you there. If you look at the funding costs, you look at the SRU, that will generate somewhere around about the CHF 1.15 billion to CHF 1.2 billion. On top of that, we have the end of the restructuring program of CHF 600 million, and I think we’ve given some pretty clear guidance in terms of the components of the tax charge, which actually drives that. So that’s what I mean about how we’re going to see a step up in terms of our capital generation. So when I look at that and I see where we start from and where we finish, I think you could see how we could readily afford meeting our growth goals but also delivering on what we said about return of capital. That is, intent – we intend to deliver at least 50% of net income to our shareholders in the course of 2018. And we’ve given the parameters that we want. We have approval from our board of a buyback of up to CHF 1.5 billion and we intend to deliver at least CHF 1 billion in the course of 2018, and we started that in January, we’ve, as Tidjane said already, about CHF 170 million of buybacks. So that’s our goal, and that’s what I think you should keep in mind. If you see fluctuations during the course of this year, so it drops below the 12.5% for one quarter or another, it’s not going to be by that much.

It is simply because if we see the opportunity to invest in our APAC Wealth Management franchise, in the Swiss Universal Bank or in IWM, we think we should make that investment. Some of those come through pretty quickly, it could come through in six months. Generally speaking, a maximum of 12 to 24 months, but you’ll see it anyway in terms of the NNA that actually flows from this. So that’s the perspective I’d give, frankly.

Tidjane Thiam

Yes. No, absolutely, and I just want to reinforce that the buyback, this all assumes a buyback. There is actually no connection to be made between this and the buyback. We’re committed to doing a CHF 1 billion buyback. We started doing it, and we will definitely do it, so our redistribution of capital to the shareholders is a given. Within that, we don’t want to compromise business growth because of the 12.5% that we had out there during three years, during the restructuring, which has become, frankly, less necessary intra-year, quarter-by-quarter, as long as the tailwinds that David described take us back to 12.5% by the end of the year, which we’re very confident we’ll do.

We don’t want to hurt the business because of a given regulatory adjustment we have to make in a given quarter. That’s all, but there is no inference to be drawn on the buyback from this discussion. A buyback is a given. We have designed this whole strategy in order to return capital to shareholders. That’s the centerpiece of the strategy, and it’s really absolutely beyond discussion, okay? So this is – yes?

Amit Goel

Yes, and sorry, maybe just one thing to make sure I understood it right. In terms of the cost expectation for 2019, so versus, for example, what was presented at the Investor Day in David’s slides, so we shouldn’t necessarily just assume CHF 400 million better than what you previously presented because potentially a chunk of that will go into some of the reinvestment into the business. Is that right?

David Mathers

Well, I don’t think that really add to what we said already, but I think just to summarize it, we are at the end of the restructuring program. So if you think about reported profits, you’re going to see a drop out of those restructuring charges in terms of your numbers. But what we are at the end of, and we will not, ever I think, be at the end of, is the drive to improve the efficiency, productivity of this platform.

And that will come from process reengineering, it will come from digital investments, and that applies to the front divisions as much as it does to our control and back-office divisions, in terms of that. Those savings will come through in the course of this year. We’ve been very clear that we expect that to be in the order of 2% or 3%. What we’re leaving open, really, therefore, is how much we choose to invest incrementally in terms of those growth investments.

And that clearly will be judged by the executive board in light of the market conditions in which we operate. I think we demonstrated our ability to be flexible in terms of our costs in response to market conditions, and I think we’ve proved that we are reasonably good at that, and that’s not something we’re going to give up in the course of 2019. But I think you should go away from the model from that, I think. I think if you – clearly if you are more pessimistic about revenues, then you should be more optimistic about cost. If you are more optimistic about revenues, you should be – you should assume we’ll make more growth investments.

Amit Goel

Thank you.

Tidjane Thiam

Yes, no, I think that’s exactly how we look at it. We have built a track record in that domain. Save major disruption in markets, we will invest, because we need to invest reasonably, and we have good returns, but it’s all market-dependent, and this is an environment that we will see is quite volatile. So maybe just to close again, thank you for attending the call. We think that Q4 was an important quarter for us. It showed that in quite an unfavorable scenario, given our footprint, the work we did to derisk has worked. It’s a profitable quarter.

The bank has gone back to profit at the end of restructuring, with more than CHF 2 billion of net income. We have started, it was a big moment for us, a buyback on January 14th. And we intend to implement it, we said at least CHF 1 billion in 2018 – sorry, 2019 and another in 2020, and we are committed to the 10% RoTE target, which for us, for the first year out of restructuring, would be a good achievement for the whole of the bank, all divisions considered. So thank you very much for being with us this morning. And looking forward to talking to you probably at Q1 or before. Thank you.

Operator

That concludes today’s conference call for analysts and investors. A recording of the presentation will be available about two hours after the event. The telephone replay function will be available for 10 days. Thank you for joining today’s call. You may all disconnect.