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Edited Transcript of CSGN.VX earnings conference call or presentation 31-Jul-19 6:15am GMT

Q2 2019 Credit Suisse Group AG Earnings Call

Zurich Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Credit Suisse Group AG earnings conference call or presentation Wednesday, July 31, 2019 at 6:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Gishen

Credit Suisse Group AG - Global Head of IR and Corporate Communications

* Cheick Tidjane Thiam

Credit Suisse Group AG - CEO & Member of the Executive Board

* David R. Mathers

Credit Suisse Group AG - CFO & Member of the Executive Board

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Conference Call Participants

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* Andrew Stimpson

BofA Merrill Lynch, Research Division - Director and Senior Analyst

* Andrew Philip Coombs

Citigroup Inc, Research Division - Director

* Benjamin Goy

Deutsche Bank AG, Research Division - Research Analyst

* Daniele Brupbacher

UBS Investment Bank, Research Division - MD, Banking Analyst and Head of Equities Research Switzerland

* Jeremy Charles Sigee

Exane BNP Paribas, Research Division - Research Analyst

* Jernej Omahen

Goldman Sachs Group Inc., Research Division - MD & Head of the European Financial Institutions Group

* Kian Abouhossein

JP Morgan Chase & Co, Research Division - MD and Head of the European Banks Equity Research Team

* Magdalena Lucja Stoklosa

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good morning. This is the conference operator. Welcome, and thank you for joining the Credit Suisse Group's Second Quarter 2019 Results Conference Call for analysts and Investors. (Operator Instructions) The conference is recorded. (Operator Instructions) I would now turn the conference over to Adam Gishen, Group Head of Investor Relations and Corporate Communications. Please go ahead, Adam.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [2]

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Okay. Thank you, 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. For a detailed discussion of our results, we refer you to the Credit Suisse's second quarter 2019 financial report.

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

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [3]

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Thank you, Adam. 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 second quarter and the first half of 2019. We look forward to answering your questions at the end of the session and discussing our results in more detail.

So let's begin, please, with Slide 4. 2Q '19 marks the second quarter after the completion of our 3-year restructuring program in December '18. As we continue to execute our strategy with discipline, we are accelerating our profit growth and have been driving returns higher.

So let's look at our 2Q performance in more detail on the next slide, please. So 2 quarters post our restructuring, we believe that the operating leverage, which we created in those 3 years is starting to bear fruit. We were able to achieve a pretax income of CHF 1.3 billion in Q2, up 24%, as you see here year-on-year, and our highest quarterly PTI in the last 4 years. As you can see here, our profit growth has accelerated against first quarter where the revenue environment was very unsupportive. We achieved this during the second quarter when markets remained challenging as we will see on the next slide, please.

So whilst equity market on the left in green here has performed strongly in the first half of '19 and are at or near all-time highs globally, credit spreads on the right remained at elevated levels compared to the same period in 2018 even if they started decreasing in turn. Client activity levels, particularly across primary markets, remained muted with leveraged finance insurance down 41% with secondary markets struggling as well. You can see here EMEA Equities down 22%, APAC Equities down 16%. So still a challenging environment. So against this backdrop, we believe we have demonstrated an ability to flex our cost base as we will see on the next slide.

We are executing against the cost actions outlined at our 2018 Investor Day in December 12 last year with operating expenses down 5% year-over-year. We believe that the sustained reduction in fixed costs that we have achieved lowering, crucially, our breakeven point and our continued focus on productivity improvements leave us well positioned to benefit from improving market conditions with any uptick in revenues dropping directly to our bottom line.

So let's move to the operating performance of our businesses in more detail, and I'll start with general comments about our Wealth Management franchise and performance. In Wealth Management, revenues have remained resilient in difficult markets, reflecting the strength of our diversified franchise and the effectiveness of our ultrahigh net worth focus. We have been able to mitigate the pressures on our recurring revenues and NII by increasing materially our transaction revenues for a number of specific actions and initiatives. Solid and resilient client relationships are built by supporting our clients on their full balance sheet, helping them manage both their assets but also their liabilities. Our broad range of capabilities gives us various options to generate client revenues, which has proven very valuable in challenging markets as we have seen in Q1 and in Q2.

Let's look now at our asset flows on the next slide. We have been able to build on our strong first quarter inflows in light blue here and generated CHF 9.5 billion of net new asset in the second quarter in dark blue here. So cumulatively, CHF 19.1 billion of NNA in the first half.

In 2Q '19, we, therefore, delivered an industry-leading 5% growth rate for a player of our scale. This represents the 11th quarter in the last 14 quarters where we were able to achieve a growth rate of 5% or more in our Wealth Management businesses. Our inflows have been broad-based and diversified with growth across all regions and client segments.

In Switzerland, we experienced strong inflows as you can see here in our Private Clients business with CHF 4.5 billion of inflows in 1H, representing a 5% growth rate. In IWM, we attracted CHF 5.5 billion in 2Q and close to CHF 7 billion in 1H, a record level with broad inflows across both Europe and emerging markets. And in Asia, we have grown at 8% in 1H '19 attracting CHF 7.8 billion of NNA, of which CHF 2.8 billion in 2Q.

So the next slide, please. So stepping back looking at the totality of our assets at the end of the first half of '19, we achieved record level group's assets under management of CHF 1.5 trillion, CHF 1.489 trillion exactly, an increase of CHF 113 billion since the end of '18. So over the last 6 months, we have been able to add CHF 59 billion of net new assets across the group, a reflection of the strength of our client franchises. To put this performance into perspective, we have added organically the equivalent of a midsized asset manager or private bank for asset inflows alone.

Let's look now at the development of our Wealth Management net revenues on the next slide, please. Since 1H '16, we have grown our half year Wealth Management-related revenues by more than CHF 900 million, CHF 946 million exactly. This again represents a CAGR of 5% over the last 3 years with a strong contribution from each of our Wealth Management businesses.

And let's look at now how this has translated, more importantly, not only in revenue but also in pretax income on the next slide. Over the last 3 years, we have grown our Wealth Management-related pretax income at a CAGR of 15%, achieving a pretax income of CHF 2.6 billion in the first half of '19. A key driver of our progress in Wealth Management has been our integrated approach across Wealth Management and Investment Banking. Simply put, we believe we are doing more with our clients, offering them a solutions-based approach covering both their wealth and business needs.

Next slide, please. I'm sure you remember this slide from our Investor Day 2018. We often refer to this as the Credit Suisse model. So what is it? It is our fully integrated approach to ultrahigh net worth client coverage, leveraging the full suite of capabilities that we possess inside the bank. And this provides you the window into why we believe our margins remain stable even in a challenging environment. As you see on the right here, we believe that we can more or less double the revenues with the ultrahigh net worth client that a pure-play wealth manager would generate in dark blue here. And ITS, our new initiative, plays a key role in this. For our integrated approach, we have found that client assets are also more sticky given the broad range of asset and liability solutions that we are offering them and our connection to both their asset and liability side, as I said earlier.

In APAC, for example, we have evidence that more than 90%, 9-0, 90% of client assets remain with Credit Suisse if an RM leaves the firm. We think that is a very, very good piece of evidence of the strength of this franchise. We keep 90% of the assets when an RM leaves.

So let's look at a real client example on the next slide. This slide illustrates the interest of our integrated one-stop-shop approach with the case of a leading Asian ultra-high-net worth entrepreneurial client whom I've met many times with Helman and who has become increasingly active with us as his business has grown exponentially over the past years. As you see on the left here, we did actually 2 IPOs for him, two successive over 5 years. And the success of this approach is visible. If you look at the revenue growth, we have been able to achieve with such a client, up 40% in 2018 year-on-year and further accelerating this year up 250% in 1H '19 year-on-year with NNA of about CHF 300 million in 2018.

So let me summarize these Wealth Management results on the next slide. In Switzerland, on the left here, we are able to fully leverage our universal banking model, which we think is very powerful. Its breadth and diversification, combined with the efforts of the last 3 years, allow us to produce a best-in-class performance in our home market. We have achieved a 20% return on regulatory capital, which is our highest 2Q since 2014, so in 5 years, with NNA of CHF 4.5 billion in H1 and a growth rate of 5%, a good performance, we believe, in what is considered a mature market.

Moving on to IWM. We delivered a resilient performance with strong net new asset inflows across both Private Banking and Asset Management delivering a return on capital of 29% at the bottom here of the page. We also added in 1H '19, and that is important, 70, 7-0, experienced RMs, and this is the first time since 2015 that we do so and roughly 2/3 of those are focused on emerging markets to accelerate our growth going forward. And this may explain to some of you why the costs in IWM were up year-on-year, 70 RMs hired.

In APAC, we had a strong quarter with revenues up 9% both year-on-year and sequentially for Wealth Management & Connected. We saw higher revenue growth across all of our 3 businesses; Private Banking, IBCM and Financing with APAC Private Banking delivering its second highest revenue quarter ever. In APAC IBCM, we achieved the 11th consecutive quarter with revenues above CHF 200 million. And we were ranked #1 in advisory and underwriting for APAC ex Japan as well as, for the first time ever, #1 in share of wallet for Greater China.

Finally, ATS, the newly created ATS, APAC Trading Solutions, our regional setup to deliver asset and liability solutions for our ultrahigh net worth clients, is off to a good start with already 5 deals in the quarter and a high level of client engagement across the region. So you can see here, we have generated strong results across all our Wealth Management businesses in 2Q. And as you can see on the next slide, we believe there are significant further growth opportunities. So please allow us here to make a relatively more macro point about the strategy.

In Wealth Management, as you know, we are following a balanced approach between emerging markets and mature markets. Looking ahead, we believe there are significant further growth opportunities in a number of sizeable economies where we are already active and we put a few of them on this slide, and where we believe for leading wealth manager, we punch below our weight in Wealth Management. You can see here Mexico, Brazil, Australia, Korea, India, Japan, there are a number of G20 countries on this slide, which we cover across IWM and APAC. Total GDP of these economies is $14.6 trillion, almost $15 trillion, and that's about the size of the Chinese economy, and wealth growth averages 5% to 6%.

So if you want to put this in perspective, you can see that our Private Banking Switzerland, which is an economy with a GDP smaller than any of these economies, manages more AUM than we do across all these countries combined today. So we believe there is still significant upside potential available to us, and we are focused on delivering over the medium term on this. We have both people and plans in place to grow over time in each and every one of these markets.

So enough on Wealth Management, let's move now to IBCM. IBCM continues to operate in a very challenging market environment. We have notable slowdown in advisory and underwriting activity year-to-date as we showed you earlier. And as you can see on this chart, which is a sequential chart of average quarterly income, we have seen a strong sequential rebound from a very depressed Q1, up 27% in Q2.

So if we go in more detail on this next slide, our advisory revenues, to be honest, were down in Q2 and in large part because of a number of deals, which did not materialize in the quarter, either got annulled or a move to another quarter. But we have outperformed The Street in leveraged finance and in IPOs where we have achieved a top 5 rank advising on 7 of the 10 largest IPOs in the U.S. and 3 of the 6 largest IPOs in EMEA.

IBCM is a strategically important business for us, we've said this many times. So over the course of '19, we will continue to invest hiring senior bankers focusing particularly on technology and health care, 2 sectors with very significant long-term potential. On the outlook for the balance of 2019, the second half, our IBCM bankers are cautiously optimistic.

Let's move now to Global Markets, next slide. This is a slide that we've shown you many times since 2015 and adding bars for '16, '17 and '18. But since '15, it was our belief that revenue pools for the global sales and trading industry would continue to be challenged.

So on the next slide, having defined a clear strategy of being a leading wealth manager with strong investment banking capabilities, we believe that having a strong global markets business was key. We undertook a deep restructuring of our business to rightsize and derisk our footprint while investing in talent and preserving our key franchises in Fixed Income and Equities. At the end of '18 at our Investor Day, we said that our aim, having completed this restructuring, would be to sustainably grow revenues and increase our returns in GM.

Next slide, please. And that day, if you remember this slide, we presented a path to improving our returns in Global Markets and identified a number of initiatives to achieve this, namely, to increase collaboration with Wealth Management for ITS, to benefit from our reinvigorated Equities platform and lower funding cost. And you can see that the benefits of these actions started to come through in our Q1 performance and even more so in our 2Q performance on the next slide.

Looking at the second quarter, we have been able to grow revenues in both Equities and Fixed Income and sales and trading and outperforming, we believe, The Street and gaining market share. Equities sales and trading revenues were up 3%, a good performance against a continued challenging backdrop from the asset class. And 2Q '19 marks, we believe, the fourth quarter in a row since Q3 '18 where we believe that we have been able to gain market share in Equities. We are making progress in expanding our client franchise across all products. We are reestablishing historic electric (sic) [electronic] trading relationships and adding new prime mandates.

Moving on to Fixed Income. Fixed Income sales and trading revenues were up by 11% in 2Q with a strong performance from our leading securitized products, which benefited from lowest rates and credit franchises.

So moving on to profitability on the next slide. Global Markets has delivered positive operating leverage in 2Q. We have grown revenues by 8% in the quarter, and I would like to highlight these numbers include no benefit from the Tradeweb IPO, which we recognized in 4Q '18. We maintained our focus on cost discipline with operating expenses down 7% as we are executing on ongoing efficiency initiatives to continue to optimize the Global Markets cost base. This operating performance has driven a significant improvement in the profitability of the franchise. We achieved a PTI of $359 million in Q2, which represents our best quarterly performance since 2Q '15 when we had more capital and a different risk profile.

We said that post restructuring, the returns of Global Market would increase and they have as is presented on the next slide. In 2Q '19, Global Markets achieved a return on regulatory capital of 11% and keep in mind this is a return on leverage. The return on RWA, as you can see at the bottom, is 17%. We've often commented over the quarters that the return on RWA is actually quite strong, and it was the return on leverage that we needed to grow because we've decided 3 years ago to take the worst off to measure the return on capital and to measure return on capital on the constraining measure of capital which is leveraged in this case. So to summarize, the performance of Global Markets in 1H is evidence that Global Market model is working. We are continuing to drive closer collaboration with Wealth Management. We are gaining market share in key products, and we are driving returns higher.

So to wrap up here, I wanted to pause to congratulate our teams across the globe and highlight some of the recognition they receive for our client-focused integrated approach. We have received a number of industry awards across a wide range of divisions, and just to name a few, World's Best Bank for Wealth Management, first time in many years; Best Bank and Best Investment Bank in Switzerland for the second year in a row; Asia's Best Bank for Wealth Management, et cetera, et cetera.

So on the next slide, just 3 quick points: one, we have delivered continued profitable growth in Wealth Management; two, our Global Markets franchise is now performing strongly post restructuring; and three, we have been driving group returns higher.

With that, I will now hand over to David.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [4]

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Thank you, Tidjane. Good morning, everybody. I would now like to take you through our financial results in more detail. For the second quarter, Credit Suisse had net revenues of CHF 5.6 billion, broadly flat against the same quarter of last year. I would note that this is an increase of 4% against the first quarter 2019 when net revenues stood at CHF 5.4 billion.

Our Wealth Management-related revenues increased by 4% compared to the second quarter of 2018, reflecting strength across all 3 divisions. Revenues in our Markets activities rose by 3% year-on-year whilst our IBCM division continued to suffer both from the reduced industry-wide levels of primary issuance and from the bias in M&A closings towards the final quarter of the year. This led to a 30% reduction in revenues.

If we turn to costs. As we said before, we remain committed to delivering year-on-year productivity increases across our businesses and our operations with the pace of reinvestment depending on the market and economic environment. Our total operating expenses in the second quarter stood at CHF 4.3 billion, a 5% reduction compared to the same quarter a year ago.

Overall, we generated a pretax income of CHF 1.3 billion in the second quarter, an increase of 24% compared to the second quarter of 2018. Our effective tax rate for the quarter was 28%, marginally less than that of 29% for the first quarter but substantially lower than the 38% that we incurred in the second quarter of 2018.

Our guidance remains we would expect our tax rate to be at around 30% for 2019 as a whole including an estimate of 2 percentage points for the marginal impact of the BEAT legislation in United States. We've accrued for BEAT at this level in the first half. However, I would caution that we're still awaiting final guidance on this point, which is now expected in the autumn.

Now including the benefit of the reduction of tax rate, net income attributable to shareholders stood at CHF 937 million in the second quarter, up by 45% year-on-year. That equates to a return on tangible equity of 10% for the second quarter, bringing our year-to-date return on tangible equity to 9%.

In the Appendix, I've included the usual walk across for RoTE showing the major variables related to our RoTE for the second quarter and for the first half of 2019. I won't cover this in detail now, but I think you can see that we've continued to deliver on all of the key strategic initiatives that we announced at the Investor Day last December.

Let's turn now to Slide 29 and look at capital, please. Our CET1 ratio for the second quarter was 12.5% compared to 12.6% at the end of the first quarter. I would remind you that as is our normal practice, we delivered our share awards to employees in the second quarter, which reduced our CET1 ratio by 12 basis points. We also continued our share buyback program, and so far this year, we've repurchased CHF 570 million worth of shares.

If we turn to leverage ratios. At the end of the quarter, our CET1 leverage ratio was stable at 4.1%, which remains well in excess of the Swiss 2020 requirement of 3.5%. And our Tier 1 leverage ratio increased to 5.3% at the end of the second quarter, again, well above our target level, which as you know, is to exceed 5.0%.

Looking at risk-weighted assets. They increased by CHF 1 billion to CHF 291 billion at the end of the second quarter. Just reconciling the moves, we saw increases of CHF 2 billion from net business growth across our divisions and CHF 3 billion of regulatory-driven model and parameter updates, those being partly offset by a currency-related moves due to the quarter-ended fall in the U.S. dollar against the Swiss franc. I'd reiterate that we continue to expect fin-related model and parameter updates to have a total adverse impact of approximately CHF 6 billion to CHF 7 billion in 2019 as a whole.

Our leverage exposure at the end of the quarter stood at CHF 898 billion, marginally lower than CHF 902 billion at the end of the first quarter. That includes an increase of CHF 8 billion primarily in our Wealth Management-related divisions, offset by CHF 12 billion of currency moves.

Let's turn to costs, please, Slide 30. Although we completed our 3-year restructuring at the end of 2018, improving the productivity of Credit Suisse's operations remains a core focus for management. In the second quarter, total operating expenses amounted to CHF 4.3 billion, a reduction of 5% year-on-year. As you can see for the first half of the year, that equates to total operating expenses of CHF 8.5 billion, of which CHF 8.3 billion would be our adjusted operating cost base stated on average 2018 currency rates. Just to put that in context, that equates to a 6% reduction from the first half of 2018.

Let's turn to our divisions, please, on Slide 31. The Swiss Universal Bank generated CHF 1.48 billion of revenue, up by 4% year-on-year, including the gain from the real estate in the quarter that Tidjane referred to. In terms of underlying business trends compared to the second quarter of last year, we saw some improvements in transaction revenues offset by a weaker recurring revenues as well as some pressure on net interest income. Compared to the first quarter though, our revenues increased by 7%.

Including the Swiss real estate gain, that resulted in a pretax profit of CHF 654 million for the second quarter of 2019 equivalent to a return on regulatory capital of 20%. Without the real estate gain, our adjusted pretax income was CHF 570 million against CHF 580 million in the same quarter of 2018. Operating expenses reduced by 2% to CHF 812 million with a cost-to-income ratio of 55%.

Let me turn now to net new assets. We saw further good performance in terms of net new asset accretion in both our Private Clients and our Corporate & Institutional Client businesses across the first half of the year. In Private Clients, we've seen total inflows of CHF 4.5 billion of net new assets in the first half including CHF 1.2 billion in the second quarter, which took assets under management to CHF 215 billion at the end of the second quarter. We have also continued to see substantial pension fund inflows into our Corporate & Institutional Clients business. We've seen CHF 36.5 billion of net new assets in the first half including CHF 8.9 billion in the second quarter, and that's lifted C&IC assets under management to CHF 411 billion, up by 15% year-on-year at the end of the second quarter.

Let's turn to Slide 32 to look at International Wealth Management. Our IWM division delivered a robust second quarter of revenues of CHF 1.37 billion, an increase of 2% year-on-year, and a 3% increase in pretax income to CHF 444 million. The quarter also saw a record NNA level in IWM's Private Banking segment with CHF 5.5 billion of net inflows in the second quarter. If we look at the whole division including Asset Management, our net new assets totaled CHF 14.1 billion.

Overall operating expenses increased by 1%, in part as a result of the investment in growth regions. Whilst we remain very focused on continuing to increase the productivity of relationship managers, both in terms of revenues and assets under management, I would note that since the fourth quarter of 2018, we have expanded by net 70 relationship managers. I'd also remind you that in the first quarter of 2019, IWM's operating expenses were reduced in part by the release of certain litigation provisions.

Private Banking revenues were stable reflecting continued robust client activity and a higher dividend from SIX, offset by lower net interest income and recurring fees as we saw clients move away from alternative assets to more risk-averse products such as fixed income, similar to the trends that we saw in the Swiss Universal Bank. The CHF 5.5 billion of NNA equates to an annualized growth rate of 6%, largely from ultrahigh net worth clients with solid inflows in both emerging markets and in Europe.

Now turning to Asset Management. We saw strong net new asset inflows of CHF 8.6 billion across both traditional and alternative investments. Revenues were up by 8% year-on-year with 5% growth in management fees. I think the continued strong inflows that we are seeing in our Asset Management business is extremely noteworthy at what is a difficult moment in this industry. This reflects the strength of our Asset Management model, particularly in alternatives, and in its collaboration with our Wealth Management divisions.

Let's turn to Slide 33 for Asia Pacific. The net revenues in our Asia Pacific division were broadly stable at CHF 913 million in the second quarter whilst pretax income increased by 9% to CHF 237 million.

If you look at Wealth Management & Connected, we saw continued strong performance across our main businesses, Private Banking advisory, underwriting and financing. Our transaction-based revenues in Private Banking increased by 15% compared to the second quarter of 2018 with Private Banking revenues up by 6% in total, whilst advisory, underwriting and financing revenues were 16% higher. Overall, we made a pretax profit of CHF 216 million in WMC, an increase of 29% compared to the same quarter of last year.

In Private Banking, we saw net new assets of CHF 2.8 billion in the second quarter following on from the CHF 5.0 billion that we received in the first quarter to take the total to CHF 7.8 billion for the first half of the year. That leaves us with total asset management of CHF 219 billion for the Asia Pacific region.

Our Markets business continued to be adversely affected by the weakness in trading volumes across the Asian markets. On U.S. dollar basis, Equities sales and trading revenues fell by 9% year-on-year whilst Fixed Income sales and trading fell by 29%. That's notwithstanding stronger performance in our Asian credit franchise. However, combined with the cumulative benefit of the cost measures that we undertook during the course of 2018, we reduced total operating expenses year by -- year-on-year by 7% in our Markets operations, leading to a pretax income of USD 21 million for the quarter.

Let's turn, please, to Slide 34 and the Investment Banking and Capital Markets division. Our IBCM business continued to suffer from industry-wide fall in primary activity that started in the first quarter and that's been exacerbated by the continued concerns over Chinese-U. S. trade tensions, slowing GDP growth as well as further macroeconomic and geopolitical friction as a result of the ongoing Brexit process in Europe. As you've already seen, fees across The Street fell by 23% in the second quarter compared to the same quarter of last year, and our advisory business was impacted by a reduction in the number of transactions that we closed in the period.

If we look at the progression during the quarter, we achieved revenues of USD 455 million, which compares to USD 650 million in the second quarter of 2018, but is notably higher than the $357 million that we saw in the first quarter of 2019. And it's noteworthy that our business continues to achieve strong rankings, particularly in IPOs and in leveraged finance. And I'd return to what we said last quarter, our investment bankers remain cautiously optimistic about the outlook and we continue to have a significant pipeline of deals to close albeit it is likely that the revenue recognition from these deals will be weighted towards the end of the year. Clearly, given these market conditions, IBCM remained very focused on cost discipline. We reduced expenses by 15% year-on-year to USD 447 million, and this, combined with the increase in revenues quarter-on-quarter resulted in a return to profit in the second quarter.

Finally, let's just conclude, please, with Global Markets. The significant momentum that we saw in our Global Markets business in the first quarter following the end of our 2015 to 2018 restructuring program has continued in the second quarter. We have continued to make further significant progress towards our strategic goal of leveraging our market exec's activities into our Wealth business through our ITS joint venture between GM, IWM and the Swiss Universal Bank. In particular, I would note that there were a number of successful joint product developments last quarter, and these helped to improve our structured product penetration from 3.6% a year ago to 4.6% this quarter.

We saw good momentum across all of our businesses, which combined with continued discipline in terms of expense and capital resource usage as well as the benefit of the reduction in funding cost that we talked about last year. Total revenues increased by 8% to USD 1.6 billion, delivering a pretax income of $359 million, and that's up from a USD 149 million in the same period of last year. That means that total pretax income for the first half of 2019 for GM came to $642 million.

Looking first at Fixed Income, we saw trading revenues in GM, up by 11%, which compares to an average decline of 7% in U.S. dollar terms so far posted to the close of last night by our American and European peers. It was a good performance for Credit overall, but particularly for our securitized products operations, where we continue to see further opportunities to grow this business.

In Equities, which you know has been a core area of investment for the last 3 years, we have seen a further improvement in our key sales and trading businesses. Equity trading revenues in GM were up by 3% compared to the 10% decline posted by our U.S. and our European peers, again, to the close of last night. Like our peers, we did see lower revenues in equity derivatives, but this was offset by an improved return on assets in our prime business and by market share gains elsewhere.

Just turning to costs. We continued to see the benefits from our past restructuring measures with total operating expenses falling by 7% year-on-year to $1.2 billion for the quarter. We remained very disciplined with the deployment of capital to the GM business with RWA and leverage uses similar to the levels seen in the second quarter of 2018, and that resulted in a return on regulatory capital of 11% for the quarter, and as Tidjane has mentioned, 17% in terms of the return on risk-weighted assets.

And with that, I would like to hand back to Tidjane to close the presentation, please. Tidjane?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [5]

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Thank you. Thank you, David. The next slide is a slide, which we showed you at Q1 and that we have rolled forward for the first half to give you a more accurate and fuller idea of the revenue environment and the level of client activity in Q2.

As you can see here, 2019 year-to-date has been punctuated by periods of low client activity with 2 sharp rebounds in risk appetite based on macro-related news flow, namely, trade tensions and central bank actions in March and June. Navigating for these markets requires our teams to stay close to our clients, executing on transactions when windows of opportunities present themselves.

So on the next slide. In the environment we just described, we have continued in Q2 to grow group net income, as you can see here, reaching CHF 937 million in the second quarter. And this takes our bottom line close to CHF 1 billion for the quarter with a 45% year-on-year increase, and it is our highest quarterly net income since 2Q '15 4 years ago.

So on the next slide, you remember that at our 2018 Investor Day, we outlined a path to drive our returns higher even in a challenging revenue environment, and this was based on executing against a number of known actions and we had said that we expected that we could achieve 10% return on tangible equity in a flat revenue environment because we didn't want to embed any strong revenue assumptions in our assessment.

So on the next slide, we have achieved a return on tangible equity of 10% in 2Q '19, which we said we could do with flat revenue which is more or less what Q2 was after a Q1 that had seen a year-on-year falling revenue.

So on the next slide. In the first half of 2019, we have been able to return about CHF 1.3 billion of capital to our shareholders. We have successfully launched our share buyback program and have bought back CHF 570 million, 5-7-0 million worth of shares -- CHF 5-7-0 million just to be precise, worth of shares year-to-date, and we have distributed CHF 695 million for an all-cash dividend, which we remind you, we plan to grow sustainably by 5% per annum. Our capital position has remained strong with a CET1 ratio of 12.5% and a Tier 1 leverage ratio of 5.3% having absorbed significant regulatory RWA inflation.

I would like to close this earnings presentation with some perspectives on the current trading environment. We are seeing healthy levels of client engagement in 3Q to date, so for July. Now whether this translates into activity and deals remains dependent on prevailing market conditions. And we expect the usual slowdown in revenues in 3Q as a result of the holiday season in many parts of the world.

Regarding growth, we expect global GDP to continue to grow for the balance of the year albeit at lower levels than previously expected. And we expect market sentiment to continue to be impacted by geopolitical uncertainty and punctuated by periods of lower client activity that will not surprise anybody.

So finally, before we take your questions, Adam Gishen has asked me to make one more announcement. Please mark Thursday, the 12th of December, in your diaries for the 2019 Credit Suisse Investor Day in London, as usual. Our IR team will follow up shortly with more details.

So with that, I thank you for your attention, and we are looking forward to taking your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Andrew Stimpson from Bank of America.

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Andrew Stimpson, BofA Merrill Lynch, Research Division - Director and Senior Analyst [2]

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First question is on Slide 37. It's good to see that things improved right at the end of the quarter. But I'm just wondering -- I just wanted to know in these -- which -- this disclosure is very helpful, but I just wanted to know is there anything that's always booked at the end of the quarter that we should look out for in this, or is this actually pretty reflective of is this on a like-for-like consistent basis across all the months? And is that mainly in IB or is that broadly across all your businesses including Wealth as well?

And then in APAC. You said that transaction revenues are up, deleveraging had stopped, but recurring fees had dropped as clients still got more cautious asset allocation. So it seems a bit conflicting there whether clients are more confident or not. So if you could talk around that a bit more, please, and whether there's any lumpy items in there that we shouldn't expect to repeat. NII in APAC looked particularly strong within the Wealth Management section.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [3]

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Okay. Well, thank you. Thank you, Andy. Yes. We hesitated to reproduce Slide 37 because it does raise this question. But I think it's helpful to you to see also sometimes the caution because inside these quarters, things look very different on each of these data points: January, February, March then April, May, June.

To answer your question, the rebound in June was pretty broad-based. I think it was a much better month across-the-board. And it's not surprising if you go back to -- it's really the resumption of U.S.-China talks combined with the kind of a reversal of feeling on the dovishness, of lack of hawkishness of central banks and we saw a big kind of bump in the risk on sentiment and that benefited, I think, the businesses across geographies.

And the thing about the setup is that we have a lot of offsets. Diversification is really a good thing. There are points in the cycle where sometimes that's criticized, but every time the cycle turns, you find that actually being diversified is good. For instance, you can see that the decreasing spread has helped our SP, our securitized product business very much in the U.S. because people refinanced mortgages, and that has been very good for us.

So we like the footprint. We think that we can do reasonably well across these variations. But this intra-year profile is quite, quite unique. In each of these quarters, we've had really bad months and really, really good months both -- March was the best month in 39 and June was the best month in 42. So it is quite extreme within a period of 6 months, and it's a reflection of the environment. That's all I can say at this point.

Yes, APAC. APAC has been a really interesting story. I think if you look sequentially -- first of all, one thing. The makeup of revenues is quite different, as you know. Transaction revenue is a much bigger component of Asian revenues than any other region, that's just completely structural. And net interest income is a smaller portion of -- it's like 1/3, 1/3, 1/3. That's quite unusual.

So if you look at what happened -- actually, net interest income has gone up a lot sequentially, kind of 15%. Transaction income has gone up 12%. And recurring is about flat at 1%. It reflects the strategy. I mentioned that we did this bundled leverage product. In Q1, we had a lot of discussions, Helman and the team, because transaction revenue was weaker, and also with the PB teams to say how do we drive transaction revenue up? We ran at kind of CHF 2 million per day average trading revenue and we've gone to CHF 2.2 million. We've also put in place ultra-high-net worth trading initiatives. That's also with Ivana's arrival and that's been quite helpful. We also took specific initiatives. We saw the U.S. dollar being very strong in Q1. We saw a lot of our clients wanting to come out of the U.S. dollars in Q2, so we did a lot of FX in Q2 taking them into cable and to other currencies. That generated tens of millions of revenues. We sold call/puts that worked very well because as markets were very volatile, people wanted to kind of sell on the up, buy on the dips, and that has generated comfortable revenue. We've got good revenues in Fixed Income, and I could go on and on and on. It's a myriad of initiatives that we take. But we're quite confident that given the quality of the relationships, we are able to do this in various market conditions. So that's strength in transaction revenue we think is there to say.

The recurring, we have also changed now the incentives for the RMs and we're starting -- we saw that actually between July, but we're starting to see an improvement in mandate sales, which have also been stronger. So the recurring will come back. And the NII -- AFG had a very strong quarter, second best I think, our financing group. So overall, we have broad relationships. Yes. The environment moves around us, but we take advantage of it. To be transparent, where things are more difficult is on the Markets side where really you've seen the numbers, you've seen the Equities, the volume going down. That remains a challenge.

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Operator [4]

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The next question comes from the line of Jernej Omahen from Goldman Sachs.

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Jernej Omahen, Goldman Sachs Group Inc., Research Division - MD & Head of the European Financial Institutions Group [5]

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I have 3 questions, please. The first one is on the outlook statement and I think the outlook statement covers a lot of topics, but it doesn't make a reference to what are likely to be lower rates globally in the second half of the year. And I wanted to ask, from your perspective, what is the ability of Credit Suisse to pass on lower rates, particularly in Switzerland, if they're cut again, to your customers? And can you broaden the scope of customers to which negative rates are charged?

The second question is on Page 35. So just on the Equities results. So the U.S. banks I think were down 8% in Equities year-on-year on aggregate. Credit Suisse has outperformed here again. What portion of this outperformance is driven by this ITS revenues?

And then just a simple question. I think David made a reference to the penetration of structured products rising by a percentage point from 3.6% to 4.6% within 12 months. Can you -- is your expectation that this continues? Do you see a healthy demand for this product? And can you just remind us exactly what the definition of this 4.6% actually is? Is it as simple as taking the balance of structured product to AUMs or is it more nuanced?

And the last question, just very straightforward. So litigation in the first half of the year was CHF 55, restructuring was 0 as far as I can tell. For the second half of the year, is it fair to extrapolate these 2 figures?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [6]

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Okay. Thank you, Jernej, and good morning. I did count 4 questions but that's okay. It's free. On the outlook. Look, as you know, if you look at NII, first of all, we have been less exposed and we are less dependent of our strategy and footprint on -- for yield curve and interest rates than many of our peers, which hurt us when the yields weren't going up but protects us when the yields are going to go down. So that's one.

Two, just look at the numbers. Where NII is a major component of our income is in Switzerland as you rightly pointed, and there, we have a number of things we can do. We are going to take measures to protect the NII that will concern deposits and that will be announced by the Swiss bank. We'll do that in a responsible way and quite targeted, but we are going to do that and that will help the NII.

The second one is what we did in Q2, which was tactical, which is to sell some real estate assets, but we think that is perfectly acceptable answer in a negative interest rate environment that drives real asset prices up because people are looking for yield. So we think that in sum, we have a good strategy to defend the NII.

I've talked APAC, but APAC is the smallest and I think it's important to take this regional approach when we talk about NII for us because it's very different from one business to another, but there also we have very strong relationship. We think that the NII is going to remain strong. Where we are the most like some our peers is in IWM, which is largely a dollar business. But you've seen also there that we have something you mentioned which is ITS and that we have a really, really strong ability to generate a large deals which protect the income. And I'll make the same comment I made earlier, the costs in IWM have gone up as -- mostly as a result of investment that we're making, which is deliberate, in the RMs.

So overall, yes, you've seen the numbers, NII under pressure, but we have won an ability to drive that up again. If you see sequentially, it's up everywhere including in Switzerland, Q1 to Q2. So that shows you the measures starting to come through. And our strategy is a broad one, so it's not just yield curve dependent.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [7]

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There's one other point, which I think it's worth reiterating. I think you'd obviously focused on net interest income. But if we actually look at our total net interest bill, you should remember obviously that we went through a very substantial restructuring of our AT1 instruments last year, and the savings from that I think we guided to being at least CHF 700 million. I'm not going to give an update today, but will it exceed CHF 700 million. So I think a lot of the things we're doing ourselves, as Tidjane has referred to already, will actually benefit us.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [8]

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Then you asked what's the role of ITS in the Equities progress. Well, it's one of the components. If you look at the Equities story, we've said we want to be at top 5. We're very close. We've been closing the gap to the top 5. You're talking a few millions now versus CHF 200 million or CHF 300 million a year ago and we've gained market share across-the-board. We've done better in prime. I mean last time, I went in detail over the measures, what we did to optimize the balance and you saw the leverage go down in prime. And we've picked up new balances in the last quarter, in Q2. We -- in equity derivatives, yes, things have been less favorable but we're still, we believe, gaining share.

And ITS clearly plays a role on that. And if you look at the first 6 months, yes, ITS has been a significant component of our progress. And it's really progress across-the-board. And we're -- and also yes, keep in mind we're #4 in Asia. We're #4 in prime in Asia. So that strength in Equities we think is there to stay.

And one last comment is on AES, our automatic trading platform which we've really revamped and we're regaining market share. So clearly, during the restructuring, we have lost share. We've come back with a completely different business. I think we've rotated 50% of the MDs in equity also 40% or 50%. So it's new people, the leadership team is new, new technology and we've been gaining share almost with every client. We do these reviews. We can see at the end of the year we ranked higher and higher, and we expect this to continue and ITS is a portion of that.

Penetration, yes, rate, yes, it's up. When we gave you guidance, we said that 80% was a reasonable penetration rate and we're tracking towards that level. But David, you want to give the definitions we use?

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [9]

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Yes. I think it's -- it comes from a report, which is produced annually by, shall we say, a well-known management consultancy. And essentially, the numerator clearly is the products that were actually sold and manufactured. The denominator includes sales through our external asset management base excludes retail and that obviously includes the NAB Bank, Neue Aargauer Bank, as well. So it's the consistent definition. As Tidjane said at the Investor Day, I think we talked about top quartile being 8%. So I think the answer is, yes, we would expect it to continue and it was one of the core objectives for the ITS formation.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [10]

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And I think the last point, Jernej, was on litigation. Look, we've been explicit that we would work hard to try and get adjusted and reported close. From memory I think adjusted is CHF 1,273? Yes, CHF 1,273 to CHF 1,302. So kind of CHF 29 million is the closest we've been. So we've moved in that direction. As you noted, litigation was low. We do have a pipeline of cases, legacy cases that is still being dealt with. You can pick that up from time to time in the media. So I wouldn't want to make a forward-looking projection. But from time to time, it will be higher than it's been in this first half.

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Jernej Omahen, Goldman Sachs Group Inc., Research Division - MD & Head of the European Financial Institutions Group [11]

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Just a short follow-on. Just on this ratio of 4.6%. Is the ratio on revenues or on AUMs?

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [12]

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No. It's revenues.

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Jernej Omahen, Goldman Sachs Group Inc., Research Division - MD & Head of the European Financial Institutions Group [13]

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Revenues?

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [14]

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Yes. It's revenues.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [15]

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I'm sorry, on litigation. Just one thing, on restructuring. Also from time to time, we will have some restructuring charges, but we will take them through the P&L because restructuring is finished, the official restructuring, and they'll go through a normal P&L. Yes. Okay.

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Operator [16]

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Your next question comes from the line of Kian Abouhossein from JPMorgan.

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Kian Abouhossein, JP Morgan Chase & Co, Research Division - MD and Head of the European Banks Equity Research Team [17]

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I have 2 questions. One is IBCM. First half revenues down $30 million, cost minus $5 million. You're going from an ROE, the year-on-year first half, you're going from a 15% ROE to a loss. You indicate environment getting better, but let's assume it turns worse. How much cost flexibility do we have in this business considering that you're more or less done with your restructuring as you state?

And then the second question is on WM and IWM, really more of a geographical factual checks that I wanted to do. How much ultra-high-net worth net inflows have you seen? And what are the cash positions in these regions?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [18]

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Okay. Thank you, Kian. On IBCM, look, we've been quite transparent about the dynamics. We've frankly done well in some portions. And I think when you do, some of your peers do that, when you do a general global analysis of IBCM at a bank's level, our share of wallet is about flat year-on-year at around 8%. You can redo the calculation that's what you'll find because we've been #1 in Asia, #1 in Switzerland and have had a few unfortunate situations in M&A. What's happened is we've had a higher proportion of our deals canceled or postponed than other players. That's all that's happened. Otherwise, we had our natural share of announced deals and when you get to that level of granularity in a given quarter, all those movements can happen. So we don't read too much into this number. As I said, we're in the top 5 globally on IPOs. We did 6 of the top 10 IPOs in the year. So we don't see anything broken here.

Now on the structure, economic side of the business. You know -- as you know yourself, it's a relatively high cost/income business because it's a people-intensive business. Therefore, the answer to your question is, yes, there is flexibility and you'll see that in the comp accruals. We have pressed down pretty hard on the comp. But we've taken a few measures also already on head count in July that you see coming through that Jim took, some rightsizing. So really, we are having expenses, from memory, we're down 14%.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [19]

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15%.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [20]

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15%. Okay. So it's significant in a business of that scale. So we're doing what we can to flex the cost, but this franchise is absolutely vital. There are ultrahigh net worth clients, a lot of them know us through IBCM. It's really the kind of figurehead of a bank, the kind of deals in which we participate. Our ECM capabilities are our key to a relationship.

If you take the flows, just to mention, if you take the flows in Switzerland, a large part of the flows that Thomas had are on the back of IPOs, and the connection between IBCM and the ultra Wealth Management business is extremely strong. IBCM in Asia referred more than CHF 1 billion net of NNA to the Private Bank in Q2. So really, there are synergies everywhere. And IBCM, as we presented, support very much what's going on in APAC and IWM.

So we see that as a core franchise. As I said in my remarks, we will invest. We're not thinking of cutting; we're thinking of investing in technology and health care and I think we're going to invest CHF 20 million to CHF 30 million over 2019 in recruitments, a number of which have already been made. So we're quite bullish.

The second one is IWM. Actually, a high proportion of the flows structurally are ultra in IWM. I think 60% or 70% we can say, yes? And sometimes higher even, up to 80%. So very high.

And actually, the other thing on cash is that actually for us, we've seen the cash balances go down 1 point, Q1 to Q2, from like 30% to 29%. So we have not seen what others have claimed. Our clients have put money to work. We focus on that very much and that's what you can read in the transaction revenue being up so strongly in both IWM and APAC. So we have not seen the level of cash that others have seen.

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Kian Abouhossein, JP Morgan Chase & Co, Research Division - MD and Head of the European Banks Equity Research Team [21]

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May I just ask also the same for a Asia, WM?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [22]

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Sorry, AUM -- sorry, Kian, what about Asia?

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Kian Abouhossein, JP Morgan Chase & Co, Research Division - MD and Head of the European Banks Equity Research Team [23]

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Yes. Sorry, the same numbers, if I may, just in terms of ultra net new money and in cash.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [24]

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It varies from one quarter to another, but yes. I think 2/3, yes, 70%, 80%, yes, absolutely. That's why we keep talking about it because it's really core to the strategy and the performance and that's also where our emphasis on trading capability, execution platform, Global Market, IBCM really makes sense because for all the ultras, it's extremely important.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [25]

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And cash balances in Asia was 26%. That compares to 27% for 2018.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [26]

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Okay. So same trend.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [27]

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Yes. Same trend.

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Kian Abouhossein, JP Morgan Chase & Co, Research Division - MD and Head of the European Banks Equity Research Team [28]

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And very briefly, lending pressure. We hear from peers there's some pressure on lending margin in the Wealth Management businesses. Do you see similar trends? Because you've been very resilient from what I can...

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [29]

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No. We haven't seen that, Kian. We've heard that comment. The only place, to be transparent, where we've seen funny behaviors is deposits, when people chase deposits. Particularly in Asia, we've had clients call us. We've had about -- the CHF 2.8 billion is about CHF 2 billion of outflows, and these are what we call deposit rates, people who pay above-market rates for deposits, and we do not participate in that. We think that NNA only makes sense accompanied with PTI. And if I relax the PTI constraint, I can achieve any level of NNA. So it's NNA and PTI. And I say in my remarks, I believe our PTI at CHF 164 million in the Private Bank is the highest in Asia in absolute terms this quarter, although some players are much bigger than we are. So that can maybe give you some indications of level of financial discipline that's prevalent.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [30]

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One clarification to Jernej's question, by the way. The 4.6% is the percent of asset under management, not revenues, please.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [31]

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It's AUM. Yes.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [32]

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AUM.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [33]

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Sorry, back to Jernej. Yes, the penetration is as a percent of our AUM.

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Operator [34]

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Your next question comes from the line of Daniele Brupbacher from UBS.

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Daniele Brupbacher, UBS Investment Bank, Research Division - MD, Banking Analyst and Head of Equities Research Switzerland [35]

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I wanted to ask about the '19 targets and then also on funding cost. On the target, you obviously showed us Slide 39 with a 10%, and if I recall correctly, that implies a stated net profit of around CHF 4 billion, CHF 4.4 billion, which itself I think implies an average run rate for the remaining quarters of around CHF 1.2 billion. So I was just wondering how you feel at this stage about this target, and whether you still think it's achievable. And just in your mind, is it mainly driven by probably cost trending further down or is it more on the revenue side, bearing in mind seasonality, and that's really on the targets for '19?

And then briefly, David, during your prepared remarks, you mentioned reduced funding cost in the context of GM and then you also briefly touched upon the CHF 700 million. Could you just tell us how much of that is already in the number as a run rate and for the group overall and specifically within Global Markets I think a bit less than half of the CHF 700 million were supposed to show up within Global Markets.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [36]

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Okay. Look, the target, we took a philosophy, which is why our slide is a bit, Slide whatever it is, 39, is a bit different from others because we had a lot of discussions internally. The problem you have as a bank is how do you give an ambition, I prefer to say ambition than target, but is not -- but doesn't have an embedded revenue assumption. So we said if we guide the market to a number that is achievable without making any assumptions about the yield curve or revenue, et cetera, we wanted a clean RoTE ambition. And that's how we came up with 10% and we showed you the walk-through.

We don't really want to call it a target because we never said that we could do 10% irrespective of market conditions. It's 10% with flat revenue. If there's a bit of a tailwind, definitely more, '19 compared to '18, to be fair. And if there is a bit of headwind, a bit less, which is what you saw in Q1.

Of course, we work hard to mitigate any revenue loss. We showed you in Q1 reflects with cost down. We mitigated a portion of revenue, but we also have to keep an eye to the franchise, et cetera, et cetera. And it can only be one for one. So '19, I'm not going to give you a revenue forecast for H2 because that's the only way to answer that question effectively.

So I think if revenue overall is flat year-on-year, which is a possibility, we should get close to 10%, but if there was a big lag down somehow in revenue, we would do, of course, our best flexible cost base to all the good things to protect the bottom line. But then 10% probably would not be achieved. I think that's the most I can tell you at this point in time. Yes, I'm sure you'll ask me again at Q3 and I hope I can be more precise. Okay. David, funding?

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [37]

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Yes. I think your second question was on funding cost. I think what we said last year is that the restructuring measures we took, together with the runoff of the certain positions within the SRU would reduce our group's funding cost by at least CHF 700 million, of which at least CHF 300 million would actually be in the Global Markets division.

I'm not really going to add to that now. I would merely say that we will exceed both of those numbers, both in total and the Global Markets division.

And in terms of the run rate, yes, it was in from the beginning of this year. As you may recall, we completed the majority of those measures in the third and fourth quarter of last year.

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Operator [38]

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Your next question comes from the line of Andrew Coombs with Citi.

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Andrew Philip Coombs, Citigroup Inc, Research Division - Director [39]

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First, a one technical question and one broader question on Global Market. The technical question will be looking at the gross margins, you gave quite a lot of detail on the improvement in Asia. If I look at the improvement in the Swiss Universal Bank, the vast majority of the improvement in the gross margin appears to be due to other revenues, which has gone from CHF 30 million to CHF 87 million. If you could just clarify what's driving the increase there and whether that's one-off in nature?

And then my more broader question on Global Markets, you talked a little about the changes you've made in Equities. You're clearly to can share there. Perhaps what's a bit more surprising, I think you're also continuing to take market share in Fixed Income. Obviously, you have more of that bias towards credit and securitized products, but could you just elaborate a bit more on how you see the outlooks for those businesses going forward, particularly if we do have a more dovish central bank environment across both the U.S. and Europe.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [40]

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Okay. Thank you. David, you want to take the gross margin?

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [41]

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Yes. I think Andrew, I mentioned it actually in my comments that we had an CHF 87 million real estate gain in Switzerland here in the second quarter. So that's -- and also we gave a breakdown in the MD&A as well. So if you actually look at the margin trends on Page 48, if you actually exclude that -- and by the way, I think it's very important to focus on net margin, not gross margin. Net is what really counts. The net margin will be flat at 51 basis points compared to 2Q '18.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [42]

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Okay. And your next question I think was on GM. And I think you're right, yes, we've been gaining shares both in Equities and Fixed Income. If we were to give you more color on Fixed Income, if you wish, our Global Credit Products, which we call GCP has had its healthy revenue quarters since 1Q '18. It was the best investment-grade trading quarter since 1Q '16 and that was largely driven by franchise investments, and we were a top 3 leveraged finance capital markets player despite the declines you've seen in leveraged loans and in single-B issuance.

And if you move the securitized products, we saw a continued rotation from private label into financing and agency businesses. The healthy agency revenues we've had since 1Q '17, that was driven by the low volatility of rates and also more dovish statements from central banks. And that is why I talked about offsets in our portfolio, but people don't always take into account and that's why we like our footprint, and despite all the pushback on securitized products, we've kept it. It's a very good franchise. It's high returns and it complements very well what we have. And it's as its 10th consecutive quarter of year-on-year revenue growth driven by strong new issue volumes.

And finally, the kind of Fixed Income linked to Wealth Management also did okay despite a very high comparative in 2Q '18. Those higher insurance, we were #1 ranked in structured product for H1 '19. And we benefited from increased volatility in EMEA. So really I mean it's a long list of things. I know people had a bearish view on credit. A lot of times a lot of bears on our stock. That's not been -- it didn't turn out to be the case. I mean credit has been a strength for us rather than a source of weakness.

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Andrew Philip Coombs, Citigroup Inc, Research Division - Director [43]

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I mean I'd assume a more dovish environment would be supportive for credit, but I just wanted to check in on the prepayments on the securitized products side because I guess that's one area of risk?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [44]

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No. I think it's not a big issue for us.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [45]

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I think, Andrew, the business is perhaps more diversified than is necessary. It's way beyond just being a mortgage servicing business.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [46]

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Exactly. It's -- we like that footprint. I mean it really allows us to ride the cycle. I think we showed that at Investor Day, the performance of the business for various cycles. And we have changed the balance. We've been trading and financing revenues. And we can flex that across the cycle. I think that's one thing people often don't take into account enough. We're not static. We can really -- business has proven its ability to really change significantly depending on the prevailing conditions.

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Operator [47]

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Your next question comes from the line of Magdalena Stoklosa from Morgan Stanley.

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Magdalena Lucja Stoklosa, Morgan Stanley, Research Division - MD [48]

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I've got a little bit more of a kind of a longer-term question because I don't want this to focus only on 2019, although I will kind of reference this Slide 39. When we look at the normalization of your return on tangible post restructuring, of course, we've got this kind of -- this really nice path from the perspective of what helps the SRU, the funding cost we've run -- that we've run through. And -- but there is a significant part kind of going forward, which kind of has to be operational on a PTI level across the businesses, so they will have to execute against your client penetration goals, your growth goals, your asset kind of accumulation. Of course, ITS helps across the business kind of as well.

But Tidjane, when you look at the last kind of 6 months, what is your assessment of more of that kind of business operational side of your normalization of return on tangible that kind of that you've delivered versus still quite tough environment in terms of kind of client engagement and markets? And to a degree, how do you see it going forward? Again, where are the kind of the operational business deltas from the perspective of that normalization of return on tangible not this year, but let's just say throughout this year into 2020 as well. So that's my first question.

And the second question is really about the efficiencies that you continue squeezing out on the operating cost side. And how do you see it from here because I assume that it gets tougher, but you still continue to kind of to talk about that 2% to 3% annual efficiencies, which you're aiming for.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [49]

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Okay. Thank you. Thank you, Magdalena It's an important point. How do we think about the kind of long term in the operations? I think we really have a lot of things. I start on the Wealth Management side and I start with AUM. It's really, really important. CHF 59 billion is a record, well, for H1, yes. CHF 59 billion is a record, the best we've ever done. It's the size of a reasonable player in Asset Management and we are very focused on that because we think that's the biggest profit driver. And even get a sense, I don't know, we claim CHF 797 million of AUM? I think we need to get to CHF 1 trillion, okay. That's kind of the ambition because that will add sufficiently to the bottom line so that the RoTE become less volatile. So that's something we're absolutely focused on.

Keep the positive leverage because to go to PTI, if you -- we showed you that we've been growing revenue CAGR at 5% in Wealth Management. I think it's a very good number, very powerful number. And I think we can continue doing that, maybe not every quarter but over 2, 3 years we can continue doing that and that's going to be very, very, very useful.

ITS, yes, plays a huge role in that because at the margin we outperform and we can produce quarters like Q2 because of the unique things we can do for -- particularly for ultra clients and that's a huge success. And it's a very promising thing in Asia. And I hear your frustration about the fact that we don't disclose the numbers. But ATS, has already -- is already having an impact in Asia in terms of new products, new flows, AUM, NNA and that's going to continue.

So all these elements are long-term trends that are going to continue. The GM, also the platform has a big upside. You start to see now the economics, and please don't go raise the H2 GM numbers too quickly. But you start to see the economics of that coming through, the fact of having a really efficient platform and then bringing on revenue. It's again operating leverage, plus 8% revenue, plus/minus 7% -- minus 7% cost.

There is more we can do in Asia on markets. We all know that we're not quite where we should be and there's a lot of thinking also there on how to grow revenue. There are things we can connect better, for instance prime in Asia, prime in Global Market need to work better together and equity derivatives too and that's kind of an ITS/ATS story we need to work better. There's a big upside there.

IBCM has upside. Remember, we have CHF 200 million lower revenue in IBCM this year versus last year. That will be added to the bottom line. So as we invest in technology and health care, which are really crucial just look at the structure of the economy today, we have to be stronger in those 2 fields and Jim is very focused on that.

And finally, I would add the kind of 2% to 3% that you mentioned productivity improvement, which is the core and probably may lead to a next question, which really is how we make our budget. And for a very simple reason, that's kind of the rate of productivity increase for world economy, and we believe that if you are not at least doing that, you're falling behind as an operation. So we build that in our plans. It's very tough discipline, but we build that in our plans. And as you saw this quarter, when necessary, we can go beyond that. We don't necessarily want to go beyond the 2%, 3%, 4% but we need 5% this quarter because the environment was what it is.

So sorry for the long answer, but really a lot of very important long-term trends. And there's also that slide, G20 slide that we showed you. There are a number of countries where actually the pivot we've done for the group is not completed yet. If you take Australia, people see us as an investment bank and we want to be a wealth manager with strong investment banking capabilities. And I see Helman nodding in the room, we have absolutely a plan to do that in Australia. That's a big upside. If you look at how much AUM we have there today, it's out of work.

Korea, it's the same thing. It's a great wealth management market and we haven't done really much there, not to say nothing.

Japan, same thing. We have negative interest rates and the willingness of health -- wealthy Japanese to diversify and go abroad. We have capabilities. We're investing. We're recruiting. We're investing in a private bank there.

India, same thing. We're doing a lot of business with the NRIs, but we could do more.

Brazil, same thing, Mexico. So there is also just more of the same using our formula and extending it to underpenetrated territories, which we believe should also generate a lot of growth. I don't know if that answers your question. Those are kind of the things we think about 2, 3 years down the road.

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Operator [50]

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Your next question comes from the line of Jeremy Sigee from Exane BNP Paribas.

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Jeremy Charles Sigee, Exane BNP Paribas, Research Division - Research Analyst [51]

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These are just a follow-ups actually on a couple of specific points. So the first one was you mentioned the cost in IWM, Private Banking are a little heavier quarter-on-quarter and you linked to RM hires. Is there any one-off elements in that or is that a new base level with those people onboard? That's my first question.

Secondly, in IBCM, you talked about you've been a bit unlucky with some of your announced deals being canceled or postponed. Do you get a sense that you go into the second half with a bigger backlog than peers because of those deals that is sort of carrying over or are most of them gone and not likely to come back?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [52]

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Okay. Thank you, Jeremy. On the cost, David, you want to comment because of IWM?

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [53]

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No. I think -- I don't think you should see as any particular one-off fees. I think we -- I think -- I mean as I said, when I spoke, I think the focus across all of our Wealth Management businesses has been to improve RM productivity whether we think about that in terms of revenues per RM or in terms of assets under management. But I think as Tidjane said, and we just had the slide up, Slide 16, we do think about our Wealth Management business on a country-by-country basis and what we can actually do in each country and that does basically mean occasionally we need to add to our RM sales force to actually build that business. And that's what we did and I think we'll carry on doing it selectively as we look at the markers that we highlighted on Page 16. But there was no particular one-off payments or anything like that.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [54]

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No. But we -- and also on RM, just to add to that. This is something we track very closely, and I can tell you we've been hiring in IWM quite a bit, but we were also pruning at the same time so you haven't seen a net increase. It's the first time you see a net increase, but we track very closely the performance of the people we hire and we bring them on a very stringent terms. And I can tell you that the ones we hired since 2016 have generated more than CHF 20 billion of NNA in IW. So by any measure, it's been a high return on investment spend. So yes, it shows up in the cost, but it's really, really an investment and we treat it as a business investment that has to meet certain return and this has been very good for us.

On M&A and IBCM, we are skewed towards 4Q based on kind of my discussion with Jim. And I think so that's where you're going to see hopefully a better revenue. Yes.

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Jeremy Charles Sigee, Exane BNP Paribas, Research Division - Research Analyst [55]

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On the IWM point because I think, as you referenced, you went through a phase where the investment was self-financing. You managed to find savings to offset investment spend for much of the last year or two. Is that sort of phase less relevant now? Is it now more sort of net increases in cost as you make investments with attractive returns?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [56]

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Yes. No. Look, it's a fair point. But what I really look at is return on capital. So what I've done is I've given up 3 points of return on capital. When you have a very high return business, you have to be careful not to kill it. And for me going from 32% to 29%, perfectly acceptable. If that's a price I have to pay to make sure that the business continues to be attractive, it hires good people, da, da, da, it's way, way, way above the cost of capital. And I just tend to think our business is longer term than just like a quarter. And then there's a point where when you've driven a profitability that high, it's sensible to invest also. But I think that's kind of how we look at it.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [57]

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I would just keep this in proportion. If you actually do look at the detailed numbers on Page 45, it was CHF 640 million in the second quarter 2018 and it's CHF 642 million in the second quarter of 2019. If you're comparing to the first quarter, you may remember I did note that the first quarter benefited from the release of certain litigation provisions. So I think, please, put this into context. I think -- as I said, I think the IWM team has done and is doing a fantastic job in terms of driving net new assets and improving productivity. There's plenty of opportunities there in terms of what we can actually continue to do. But I think it's noteworthy that the RM count was up by 70 net in terms of those numbers, but do keep it in the context on Page 45, please.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [58]

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Yes. But it will remain a high return on capital business, which is really how we drive the business.

And maybe another general point about the strategy. We've told you before, we're really focused on absolute PTI and return on capital. So if you take something like the ultra strategy in the short term, it dilutes the margin. Because every time an ultra brings you CHF 500 million, I mentioned CHF 300 million of NNA of the ultra in Japan, a kind of margin-focused strategy would tell you don't take that CHF 300 million because it will definitely dilute your margin in the short term. But we believe that the benefits and the money and the revenue we can make from them is really worth it. And really it's very accretive over time. So we look at return on capital. We look at PTI. And margin possibly over the long term, but not necessarily quarter-by-quarter because that can really lead to a wrong decision.

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Operator [59]

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Your final question comes from the line of Benjamin Goy from Deutsche Bank.

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Benjamin Goy, Deutsche Bank AG, Research Division - Research Analyst [60]

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One on capital and one on loan growth. Can you speak a bit more detailed about the outlook for H2? Is there anything you can do on the management side of the RWAs to improve the CET1 ratio? And also you mentioned the FINMA impact for 2019, it seems like we have already a significant external amount or impact in H1, so maybe you can reveal what is kind of left from FINMA for H2 because I guess not everything on H1 was FINMA driven.

And then secondly, on loan growth. Now with the different interest rate outlook, is there a bigger focus for your loan growth? And then is it also from the client side, is there maybe more demand for structured lending solutions here?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [61]

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Okay. Thank you.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [62]

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Yes. In the first one, you're correct. We've taken a cumulative, over the first quarter and the second quarter, external methodology driven by FINMA changes of CHF 5 billion across the group, and our guidance remains for a total of between CHF 6 billion and CHF 7 billion for the year. So you've seen most of it actually in the first half.

And that's not particularly surprising. You may remember when we spoke, I think it was a couple of quarters ago at the fourth quarter numbers, the majority of the changes were actually phased as well as an up-front component. So it's more exactly what we would have expected. That's all I'd say at this point.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [63]

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And if I can just make a comment in passing on capital and CET1. I -- maybe it's important to look at each one, but also at the absolute amount of capital because we all have short memories, and often we forget that the definition of CET1 keeps changing. When you each look at the total capital, CET1 capital, it's higher and higher and we actually believe that we have the highest in Switzerland in absolute terms. So we can't just look at the ratio because if you look at -- cumulatively, we've taken CHF 47 billion of RWA increase out of CHF 291 billion. That's enormous. So when you see a decrease, a [noticeable] decrease in the CET1 from 13.3% 3 quarters ago to 12.5%, it's largely a function of methodology changes. It's not a weakening of our capital position because our absolute capital is actually higher. And on the old basis, we're at 14.9% CET1, not at 12.5%. So just -- I have said that we remain very focused on the ratio, but it's worth when you analyze the strength of the respective companies looking at the absolute amount of capital, that really matters, too. We've added a lot of absolute capital and that's not always reflected in the CET1.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [64]

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I mean just to confirm the number, at the end of the second quarter 2019, which you will find on Page 57 of the financial report, was CHF 36.4 billion, which, as Tidjane said, we believe to be the highest CET1 of any bank in Switzerland.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [65]

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And we don't have a CET1 ratio in Switzerland, but we have the highest CET1 capital. So it's always good to keep in mind that, that ratio doesn't tell you the whole story. Leverage is very important, and you don't see any reduction in our leverage ratio over the quarter. So what...

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [66]

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It's actually increased to 5.3%.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [67]

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It's actually increased. So this is really -- anyway, he always tells me not to make this point, but I'd still make it. It's really important. It's really important. CET1 is a metric that changes every 3 months. So 1 point of CET1 is not always 1 point of CET1, if you understand what I mean. So what I'm saying is, fine, let's focus on CET1, but let's not forget absolute capital because absolute capital matters, and we have the highest capital of all banks in Switzerland.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [68]

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And as Tidjane said, the Tier 1 leverage ratio is independent of that. 4.1%, CET1 leverage.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [69]

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Tier 1, 5.3%.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [70]

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5.3%.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [71]

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Loan growth.

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David R. Mathers, Credit Suisse Group AG - CFO & Member of the Executive Board [72]

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Loan growth? I think in terms of our strategy on loan growth, it is part of how we actually think about a client. When we are -- we offer loans to our clients as part of the overall service we actually do, I think we've seen some releveraging now particularly in Asia Pacific from where we were a year ago. When I think you talk -- you may recall we did talk about deleveraging and we've seen that return to more normal levels, and that's been part of the reason why NII growth has been higher in Asia Pacific than elsewhere. But we don't set targets per se for loan growth. It's part of what we look to offer our clients. We offer them wealth management advisory. We offer them financing to support them in what they're doing. And clearly, we offer them all the products through ITS and ATS to support their businesses. But we don't chase loan growth. I don't think that's part of our strategy.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [73]

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Absolutely. Thank you. Thank you.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [74]

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Okay. That brings us to the conclusion of the presentation. I guess we'll hand over to the operator just to close things up formally.

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Operator [75]

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That does -- that concludes today's conference call for analysts and investors. A recording of the presentation will be available about 2 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.