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Edited Transcript of CSGN.VX earnings conference call or presentation 31-Jul-19 8:15am GMT

Q2 2019 Credit Suisse Group AG Earnings Press Conference

Zurich Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Credit Suisse Group AG earnings conference call or presentation Wednesday, July 31, 2019 at 8:15:00am 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

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Presentation

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [1]

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Good morning, everyone. Thanks for attending in person and for those on the line. As is our usual custom, we will hand over shortly to Tidjane to run through the presentation of the results, and then we will open up for Q&A for those in the room and, of course, those on the line. And a special thank you for those, obviously, with the Swiss holiday tomorrow for turning up in what is deep into holiday territory, so much appreciated. Tidjane?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [2]

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Yes, thank you. Thank you, Adam. Good morning to all. I want to add to Adam's apology. Really sorry for doing this the day before the Swiss National Day, but picking a date for results is always a very tricky exercise. So hopefully, we won't do this again. And again, apologies.

I'm going to take you through our slides. Most of the slides I will be presenting this morning. And of course, after that, we will open to Q&A. So let's maybe start with the quarter.

It's been -- let's go to the next slide, please. It's been -- this shows you PTI quarter-by-quarter. It's in a regular progression since 2016. Now we have 4 series of bars. And Q2 was a good quarter. Q1 was a very difficult environment, and we navigated that. We managed a small increase over '18. And you see an acceleration in the second quarter, with a bigger jump, which we think is a different result in a challenging context.

So looking at the context. This is important. Unfortunately, we've gotten used to this challenging context, but it is highly unusual. You have on the left, an all-time high in equity markets. And it's what can be described as a convictionless rally. Volumes are thin. Share prices are high, but volumes are thin. People don't feel comfortable with the market level, and they don't really trade. That's absolutely been a characteristic.

When you look at the spreads, they've been going up and down, up and down. So it's a funny quarter because spreads went down then up then down. But there's a big impact on sentiment and what people think. And then if you look at the current activity at the bottom, these are quite extraordinary numbers. We've got used to them. But M&A street fees is down 26%, LevFin street fees down 41%. U.S. equity is trading volumes flat, but EMEA equity is down 22%. In any industry -- APAC Equities is down 16%. It would be considered a serious crisis if your demand, whether you produce boxes or whatever the goods, down 20%, 40%, 16%. This is a big shock. So we're not looking for excuses, but we want to give a context to these numbers. And the context is difficult. Less difficult in Q2 but still very difficult.

So what do we do in that context? Well, we -- there has been an important part of our strategy to have a low cost base. And we think that this just validates by this evolution of market. We don't believe in leaving things to chance. When you are in an activity where volumes can go down 40%, it's rational to have a low cost base, and that's what we focused on. We took the cost down a lot, which allows us to make CHF 1.3 billion in profit in an environment like this. And that was the objective, but we will take a break-even point down so much. But even if demand varies, we can still make money and continue and we flexed the cost down again in Q2, considering the relatively negative environment.

But that's only part of the story. The other part is really looking at our wealth management, and that's really important. If you look at the first half of '18 and the first half of '19, and I think that was a surprise for the market this morning, we have managed to maintain revenues flat, total revenues, in this context. And this is the point about strategy, I've been working 33 years. There are economic cycles. And when the economic cycle plays on, different types of business models do well. And you always have a lot of people advocating pure-play models. So yes, if all asset prices are going up, and you're an asset manager, you're going to look very smart if you're really doing very well. You're making millions.

But then what happens? Market turns, cycle turns, asset prices fall. And suddenly, you're in outflows. And suddenly your great business model doesn't look so great anymore. So we've always said, we have a diversified strategy because different things work at different points of a cycle for different clients. And this quarter is a great illustration of that. But sometimes, the net interest income comes under pressure. Well, when you have a big platform, you can push the transaction revenue. And that didn't happen by itself. I'm looking at Helman, here. In Q1 when we looked at the numbers, we saw the transaction activity in Asia under pressure, we said, "well, we need to take initiatives to drive this up in Q2." We had the explicit dialogue and explicit series of initiatives, and we did drive it up in Q2. So this is why we like having a diversified business model because it allows us to be more resilient.

Moving on to the NNA. It links to -- and I think that was maybe, I hope, a good surprise for investors that we generated CHF 9.5 billion of NNA, CHF 2.8 billion in Asia, CHF 5.5 billion in IWM. This shows also the resilience of the model. And just to pick an example, a good part of the CHF 1.2 billion in Switzerland is linked to IPOs. And when we talk about integration between the investment bank and the wealth management, is that often on the back of IPOs, we get very good flows because the entrepreneurs who did the IPO and suddenly becomes wealthy often will put his new wealth, newly acquired wealth in our bank. So this is a very positive dynamic. And we've been growing NNA at 5%, from memory, I think, in the last 14 quarters. We've done that 11 times.

So for a company of our scale to grow at 5%, we believe it is a very good performance. I think the wealth management is working very well. And that's been the case through the restructuring, which is why we kept saying -- it was written during our restructuring that all we did was cut cost. We actually disagreed with that. That is simply not true. When you're growing at 5%, you're not just cutting cost. And this is true, you now have the numbers. So we had CHF 59 million of NNA in the first half. This is important, again, for us because growing the assets is the best source of future profitability. As the AUM grow and stay, we will make money again and again and again on this. We suffer a bit from the subsequent material from the strengthening of the Swiss franc CHF 29 billion lost just to the Swiss franc. That's a lot of money. But overall, CHF 113 billion of increase. I'm quite pleased with that.

Just 2 slides on, again, the wealth management, the revenue and the PTI. So you can see revenue growing at 5%, and it's a balance, 2% is for SUB, 6% for IWM, 11% for APAC. So very, very good growth, as expected, between the mature markets and the developed markets. And then more importantly, it's easy to grow if -- I was explaining this morning that we lost quite a bit of NNA in Asia to players who pay above market rates on deposits. And actually, when the clients tell us about that, we often tell them, yes, thank you. Because if other banks are willing to give money away, we're not.

So NNA only makes sense if you're also able to grow profit. If I don't care about profit. I can get any NNA. I can tell somebody, give me a $400 million deposit. I'm going to pay you 2.5%, yes give me $400 million, and that's $400 million of NNA. But it's a loss in terms of PTI. So we really always show the NNA, the revenue growth, and PTI growth because what's difficult is to grow the 3. That means you're seeing healthy growth. And you can see the PTI grew faster than the revenue, double digit.

So a few words on this. This is why we like having Global Markets & Investment Bank because if you look on the right, you take an ultra-high wealth individual in Asia as an example. If you look at what the dark blue, that's what typical private banking will give you as revenue for that client. The rest is what we get from having an investment bank. So we manage to get basically double the revenue from any client when pure-play in the blue would get. And the beauty about it is that they are also more sticky. We gave a number this morning.

Every time a relationship manager leaves, we keep 90% of his or her assets, which was quite unique because the relationship with the client is so deep, so broad, that they don't just leave because the manager has left. So it's a question we often get, you lost some managers, something can happen, you're going to lose the business. We don't lose the business because the model we follow ensures that we don't. So I'll give you an example of a client we know well in Asia here where we've increased revenues by 40% in '18 and then by [250%] this year. And we show some of the things we've done for him. We did his first IPO, then we [showed] some bonds for him. We did a share-backed loan. We gave some advisory, we did some FX. We did another share-backed loan. We did another IPO recently. So those are the types of relationships we have. They're really good and surely valuable. And yes, you have to do this over the long term because you cannot judge the strategy that is -- on the quarter. We are really building relationships for the long term, and that will be very valuable to Credit Suisse, and we're doing this across the group.

So to summarize, just a few highlights for each business. Swiss Universal Bank, CHF 4.5 billion of NNA in '18. That's a 5% growth rate. And Switzerland is considered a mature market. We've got Best Bank in Switzerland second year in a row. We think we're doing well here. 20% return on capital, cost-to-income ratio of 55% and the Universal Bank model, which I very much like and believe in. So I call this Swiss Universal bank is a very high profitability, resilient model.

IWM, again, good quarter. NNA was weak in Q1 but came back really strongly in Q2, close to EUR 7 billion, 4% growth rate. Asset Management did very well, almost CHF 9 billion of inflows. And also, we're now investing [with focus], we grew the net number of RMs and I mentioned earlier that the RMs we hired since '16, have -- just the ones we hired booked CHF 20 billion of NNA. So when we hire, it's really to grow and with very strict targets.

So return on capital 29%. And wealth management and collecting in Asia, good quarter, second half quarter inflows, CHF 2.8 billion. That's more than many peers who are much bigger than us. We added about 20 RMs in there too, starting to invest in IBCM, we were #1 in Asia, Japan. We're #1 in China for the first time, which is a big deal. 11th consecutive quarter above CHF 200 million for IBCM and return on capital 20%, 22%. So overall, wealth management did well. This is an interesting one. We just wanted to show you that we have a lot of growth, we believe, available in our footprint. We show you some G20 economies in just the GDP here, if you add all this, it's about the size of China. And these are countries where we are active and we are underweight.

If we were to take Australia, in Australia we're seen as an investment bank. So the pivot we made at the group level from investment bank to wealth management and investment has not been made there. We just appointed a new CEO, and there's a big upside because we have a very small AUM base there.

Same thing in Korea, we basically don't do any private banking business, and we're looking at partnerships and ideas to grow private banking there. Brazil, we're doing quite a bit, but we can do more. We were a Best Bank in Latin America this year. Mexico, we can do more too. India, we can do more. And Japan, Japan is a huge opportunity for wealth management. So this is just to say that doing what we know how to do and what we're now doing, there is growth available, and we are very far.

If you look at all these countries, we have CHF 100 billion of assets under management. Every single one of these countries is bigger than Switzerland in GDP. And we have -- we have CHF 20 billion under management in Switzerland. So you can see if we do well in these countries, what kind of numbers we can aspire to. Okay, I see someone broke out their watch, but I'm going to accelerate. IBCM, up sequentially 27% rate of quarter Q1. If we move on, what's happened there is that NNA is our historic strength and NNA is our most profitable business, and we lost quite a bit of it. So of course it's typical that the profit went down. We were honestly a bit unlucky.

Some of our deals, we had a higher proportion of deals canceled or postponed than the market. The rest we did very well. In IPOs, we did very well in leverage finance. And we are more or less in line with the market, but we're continuing to invest. It's a crucial business, as I explained earlier. And I'll finish with global market. We've always believed that the sales and trading industry is in decline in terms of total revenue. That was our diagnostic in '15, a lot of people -- anyhow. We decided to reduce that -- the size of that to the size of what we need. We cut the cost. We cut the risk on the following slide.

We did all that until the end of '18. And we said now we're going to grow revenue. And there was a lot of pressure back in '18, saying are you going to announce another restructuring? Are you going to cut it or not doing it. And I was very firm in saying no. I've asked global markets to do a lot and they've done everything I've asked them to do. Let's now see what they can do. It's only fair. And really, we outdelivered. Really pleased, pleased for them, pleased for us too. We explain how we were going to increase revenue, which is a slide from the Investor Day.

And if you move on, you see that the results have followed. Plus 3% in equity, plus 11% in fixed income. We really think that's industry-leading. For global markets, no question, and it's the second time, second quarter in a row. Revenue is up 8%, cost down 7%, profit up 140%. So it's been a good story. Return on capital our leverage 11%; on RWA, 17%. So we gained a good result. Then we -- I mentioned a lot of prizes we got, the awards.

I think we can move to the second -- yes, here. This is interesting. It's a new disclosure we have, but I think the markets really like it, and I started last quarter. It shows you the revenue per month. And it shows you a little bit what we have to deal with. March was the best month in 39 months and June was the best month in 42 months, and January was the worst month in 40 months. So you get quarters where you get absolutely the worst and absolutely the best. And when we keep talking about swings and volatility, that's what we're talking about. It's difficult to manage in this environment. And that's also why we're kind of pleased with the results because it has been real tricky not to have losses, overall, and also to maximize profit.

So we've been able to grow the net income in this context. So 45% close to CHF 1 billion this quarter. And then the return on tangible equity is an important slide because people keep throwing around a 10% target. There's no 10% target. We said we want to give you a sense. We built a platform. We think it's a good platform. We think with flat revenue that platform can generate 10% return on tangible equity. So it was very clear, very explicit. It assumes flat year-on-year revenue development because we didn't want to give a target that is just volume-based, revenue-based or yield curve-based. So we gave you at the end of '18, said if '19 is like '18, this bank is a really good bank for a European bank, double-digit return on tangible equity, for year 1 plus restructuring, that's good. That's what we said.

And this quarter, it was interesting because we had -- first quarter was below 18%, and we had kind of 8%. On the next slide, but this quarter was about the same revenue level as '18, and we had 10% return on tangible equity. And the point about that is it's a starting point. We now have this restructuring, we're now doing 10%. And what we want from here is to be -- I talked about the wealth management growth, we're going to grow the revenue. And this 10%, hopefully, can grow to 11% to 12% as we grow the AUM and as we become more and more profitable.

So to close, we have also been returning capital. We mentioned buyback here, and the dividend, has been now put at the group level, but we committed that we will grow it at 5% per annum. And we're also doing the buyback, we said at least $1 billion this year, and we were up to EUR 570 million at yesterday's close. So that's really outlook, difficult to predict. It's been good kind dialogue. But often, I don't necessarily pull the trigger because the confidence is not there.

So it's not easy to translate the level of dialogue we have, Jim has, that is very good into actual activity. You also know that 3Q is always a tough quarter. People go on holiday in August, certainly in Europe. So we expect continued positive growth, but lower than expected. And market sentiment, we think will continue to fluctuate, given all the geopolitical uncertainty and will impact client activity. So that's what we wanted to share with you just to kind of stimulate the conversation, and we're happy to take your questions from here.

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Questions and Answers

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [1]

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There's -- [Manuela] in the second row, here, please. And then after it's [Patrick,] we'd come to you after this. [Johannes], yes.

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Unidentified Analyst, [2]

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First one concerning Deutsche Bank. I mean when your restructuring is over, Deutsche Bank is only (inaudible) There's a chance that you could benefit from this in a way, given the fact that they're also withdrawing from certain markets.

Second question after Iqbal Khan left, there were reports saying that there was a dispute between you and him that he was too ambitious and asking for further career prospects. Is that true or can you comment on that?

And last question, last year, FINMA criticized Credit Suisse for its low deficits and organization and IP concerning money laundering. Since then, what has happened? How far are you in eliminating these deficits?

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

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Okay. Thank you, again, and good morning. Look, on Deutsche, I think it's our really tradition and policy not to comment on other banks. So I'm not going to say anything about Deutsche other than to wish them well. I have a good personal relationship with Christian Sewing and having been through a restructuring myself, I wish him success in his restructuring. It's an important bank for Germany, and we hope they do well. In terms of our growth, we don't target. We want to grow, and we take market share where we can find it. We don't target a particular player. You've seen that we have taken share in equities and in fixed income. We're not particularly focused on where it comes from. We take it because we have -- we've been through a tough restructuring. We wanted to be a low-cost player and a very efficient player. And we invested a lot to achieve that. And that allows us to take share now. And I think others, maybe, who didn't recognize what we saw in '15 are now restructuring. And that's an opportunity for us. So that's that.

And Iqbal Khan we said -- I said everything I had to say at the time of his departure. I said that IWN has been a big success. The view that I had when I came, but we had to split the Swedbank in 2. It was Sweden domiciled business and not Swiss domicile business, and that -- those are 2 completely separate businesses. People were not unanimous in thinking that was a good idea. It turned out to be a reasonable idea, IWM has done extremely well. And Iqbal Khan has led it very well, and we wish him well. And really that's all there is to say about it.

And FINMA, it's an interesting one, I think, because really, if you look at what we said since '15, compliance has been really, really very important. And FINMA was very explicit, and I'm grateful to them for that. They really emphasized in their communication over time but things have improved a lot in '15, but in the [belt of] black and white. So the problems that were dealt with then are legacy issues. They all found their origin in the past. And I think FINMA -- you'd have to ask them what they think.

But from what we hear, I think they appreciate the effort that's done by this management team. We created that single [client] view. I think FINMA appreciated it very much. Laura led that. She's now a CRO, she's been replaced by [Landy]. But I think they see that as something that should be an industry standard, and we take that as a big complement. We're invested a lot in compliance. We continue to invest in compliance. And it's very, very important for us because it goes back to trust, and we absolutely -- we said we have a zero tolerance for any type of misbehavior, and we stick to that language.

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Unidentified Analyst, [4]

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They said to you it's working? It seems it was before.

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

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It didn't work before?

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Unidentified Analyst, [6]

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No, that's what FINMA said, that it didn't work.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [7]

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No, they said it should be extended to the front office. That's very different from not working.

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Unidentified Analyst, [8]

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Extended to what?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [9]

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The front office. It worked in compliance, and it worked so well that they wanted us to extend it to the front office. That's not the same as not working.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [10]

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Sorry. Just in order, I'd said [Patrick] will go next sorry, [Siri], if we could just pass the mic to [Patrick Winters].

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [11]

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Actually, I think we're the only bank who has it, by the way.

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Unidentified Analyst, [12]

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So first question is about the AUM in private banking. If I heard correctly on the analyst call, you said you're targeting CHF 1 trillion. A, you [have bought] or you'd like to have that CHF 1 trillion AUM in private...

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [13]

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More or less, I'd like to.

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Unidentified Analyst, [14]

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If you kind of pursue that, that would put you in the top 5 of -- globally in terms of AUM. And all those banks are basically based in the U.S. and have a U.S. business. Is that something you'd consider kind of jumping back into? Just to give you like the step-change in size? That's question number one. Question two, UBS has been kind of managing this whole tax situation in France, had various court decisions. What's Credit Suisse's own position with France, basically? And would you go to court or would you just basically settle behind the scenes?

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

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Okay, now look on the growth, I said yes it would be nice to have 1 trillion. But we are really, really not about size. I've always said, we don't want to be global. We don't want to be big. We just want to be the best. And sometimes, it's possible to be both, but when there is a choice, we choose to be the best. We talk sometimes we're not a global wealth manager. It doesn't keep any of us awake at night. We got Best Bank in Asia, Best Bank in Switzerland, Best Bank in Latin America, Best Bank in the Middle East. As I said, if we win in every single region, that's good enough for me. And we actually got also Best Global Wealth Management because we did well in every region.

So we don't aspire to be global. We aspire to win where we actually compete, which is not in the U.S. but everywhere else. And we think that there is enough growth for us to grow without being in the U.S. We added, we said CHF 113 billion in the first half without being in the U.S. So we've always been -- anyway, I have a bias. I really think that the notion that -- I think it's challenging for a foreign bank to beat JPMorgan, Morgan Stanley, Goldman Sachs and Merrill Lynch on their turf. So that's not a priority for us.

We have focused on markets where we think we can win more easily in wealth management. And we leave to others the privilege of fighting those people on their domestic turf. We don't believe in that. So we closed our asset bank in the U.S. and we wish good luck to those who are attempting that. Good Luck. So far, we haven't seen much success.

We have strength in the U.S., but not in wealth management. We got close to top 5 house in equities over there, but in wealth management, we don't aspire to that. We're top 3 in leveraged finance. We can -- we are a big player in the markets in the U.S. but not in wealth management. We also think it's not a very profitable market, hypercompetitive, low margins, controlled by the distribution and not very profitable for manufacturers.

So we -- our strategic position is that we are interested in the U.S., but we have a focused approach. We do targeted things, like Jens I mean has alluded to serving ultra high net worth. We have people we have a very good relationships with, and we lend them money. It's very profitable. So you will see us do niche things but not be a full bracket player trying to take on JPMorgan and company in their home market.

In the same way, we don't recommend to people to come take us on in the wealth management in Switzerland. We think that's a bad strategy, but if somebody wants to try, they're welcome to. It's a very attractive market. So far, it's Credit Suisse and UBS are doing pretty okay in Switzerland. So that's the way the world is. We're not going to go after the U.S. So that's the answer.

France. Look, there's much to say about it. The verdict came out Friday, the Swiss Supreme Court. We are still interpreting it, our General Counsel and see exactly what it means. I can only reiterate what I said, that we have a zero tolerance policy for tax evasion. And that's what we can say at this stage.

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Unidentified Analyst, [16]

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I mean kind of just, read into your answer, you seem to be suggesting that there is something between Credit Suisse and France. Is that just me reading into it too much?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [17]

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No, I can repeat exactly what I said, that the verdict was Friday by the Swiss Supreme Court, but it's still very early, and we are examining it to draw any implications and that we have a zero tolerance for tax evasion. But I understand why you asked the question. A fair question, but we just can't say more at this stage.

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Unidentified Analyst, [18]

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[Song,] AWP. I would like to know since you're -- you have confirmed your targets, middle-term targets, and also you're holding onto your target for the return on tangible equity in this year. Is it correct to say that you're expecting increase of revenues in the second half of 2019, year-on-year?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [19]

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Thank you. But I said, actually, we did not have a target so I can repeat on our [key] target.

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Unidentified Analyst, [20]

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To reach at least 10%...?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [21]

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No, we said if revenues are flat '19 over '18, we will hit 10%.

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Unidentified Analyst, [22]

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Are you expecting earnings to increase in the second half of 2019?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [23]

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I understand why you are asking that, but I don't make revenue forecasts. I just don't because, I mean, so much uncertainty in the geopolitical climate around the U.S.-China trade conversations and Brexit and a million issues. I would never make a revenue forecast, and I don't.

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Unidentified Analyst, [24]

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But then it says target, 10% to 11% target, 2019.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [25]

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And it says assumed flat year-on-year revenue in the gray box. Which means if revenue is not flat, this will not be achieved. That's what it means.

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Unidentified Analyst, [26]

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Yes, but...

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [27]

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No, a target means I'm going to achieve it no matter what. That's a target. Yes, but -- where? It says based on revenues we expect to reach. Yes, but I mean, really, this is -- yes?

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Unidentified Analyst, [28]

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I understood that...

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

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No, it's not. I mean that's why we put that gray box to explain. We have built a platform that if we have flat year-on-year revenue, we'll generate 10%. So therefore, well, I don't know another way to -- we expect, I didn't say we will. We expect, if revenue is flat, to reach 10%. We've never said anything else. The target rate is understood by most people. That's why we define it so precisely. The way it's understood by most people means we've got to reach that number no matter what.

And we did -- we spent a lot of time writing this page because we wanted to be very clear, that this is based on an assumption of flat year-on-year revenue. A lot of ROE targets for banks are difficult because they are unconditional. And therefore, they have embedded in there a revenue assumption. And then people get stuck because the conditions of revenue assumption are not met and then they're stuck with a number. So that's why we made this number completely conditional on the revenue environment. We will never say that we can hit a given number no matter what; never, never. We caveated it. We explained it carefully, that's why we left it the same page. Next?

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [30]

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I just want to put an end to this, to be clear, because I have noticed in some of the coverage, it is important that many banks do define things differently. This is the ROTE. I think some other people also talk about the ROCE if you want. You can work out the two, if you want to, but it's very important to be clear when you speak.

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

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Okay, okay. No, it is a really important point for us. We don't think -- this is why we didn't have an ROTE target during the restructuring. It was much debated because at the time, we just -- there's no visibility. There are so many things. We said, there's no point giving an ROTE target. We will discuss that when we finish the restructuring. And that's when we gave this -- yes. We're very, very clear. We will not be pushed into giving you some target that then you can, "Oh, he did not achieve it." This is -- [it's completely unselfish], we're transparent with you, some other target explained.

It's clear that if -- I don't know, revenue was -- goes down 10% in H2, we won't achieve 10%. And we will never say that we would. We gave you a sense of the quality of the platform that's created. I think that's really important for a bank that's been through 3 years of restructuring that without revenue growth, you can hit 10%. That's good. And then revenue growth will add to that and with some tailwind over time, we will [go both on the trend and] will leave us in a very comfortable position. But others -- I mean you have banks that have single-digit targets in many years from now. We're starting from a double-digit delivery. So we think that in the industry, it leaves us in a good place.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [32]

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Okay. Any more questions from colleagues in the audience? Okay, please? [Manuela], down here, please.

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Unidentified Analyst, [33]

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(inaudible) One question on the Swiss [U. S.] bank. You have done pretty well, where this one-off effect when it came to sales. What are we expecting for the rest of the year?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [34]

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Yes. Well, thank you. We did well. There was a sale of real estate, which we arranged and booked [87] million. So excellent number. We did 570 million versus 580 million the year before but what we say about the real estate is that if you have a negative interest rate environment, that will drive up the real estate prices, for many clear reasons, and it makes sense for us, then, from time to time, to monetize that. And it's also an answer to that environment. But -- so we absolutely claimed that revenue. And we think, yes, we think they did very well. It's a really good story. And now we are also growing, you see. We have a kind of entrepreneurial focus strategy that's been really working very well for us in Switzerland. We use one indicator of activity. We add the loans -- net loans, the AUM and the assets under custody. And if you take that as a measure, we're upward of 11% in activity in Switzerland. So the bank is really very healthy and growing. Really pleased with the delivery and so on.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [35]

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We actually have a call on the line. We have, I think, [Stephen Morris] to take on the line. Go ahead, [Stephen].

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Unidentified Analyst, [36]

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Overall, I think it was better than expected. But one area that underperformed for the second quarter in a row was your advisory and Capital Markets unit. I mean it made a loss in the first quarter, revenue down 30%. You said a couple of times that you were unlucky or unfortunate because a few deals were delayed or canceled. But are you looking at this business with a more critical eye? I mean Trulia said it's the third poor quarter in a row, you have to look at maybe changing strategy or personnel, right?

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [37]

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[Stephen], good morning. We actually don't fully agree. We think that IBCM has done very well. As I said, we're #1 in IBCM in Asia, and #1 in China for the first time, #1 in Switzerland. And if you asked Helman or Thomas, they'll be the first ones to tell you that [Jim] and his team's played a huge role in that. So I said, if you take it in the round, and you look at our IBCM performance, I believe our global [shelf] rate is 8%, and it has not changed. So there is a limit to which you can take. We give a lot of transparency on P&L by division, but you can only take it so far. IBCM as a whole has done well.

IBCM -- official IBCM, kind of our U.S. and EMEA unit has a P&L that's a bit challenged this quarter. But that takes nothing away from the overall performance of that division, which is, frankly, very, very strong. And yes, I said M&A, we had a few [of it that’s] public. (inaudible) we just -- the deal got canceled and we lost the thing. So some of it is public. When you are on a small number, it's like the law of large numbers. When you have small numbers, unique events can have a disproportionate impact. And IBCM is sensitive because it does a small number of large deals, a cancellation or postponement will have a disproportionate impact on the result. But really, there is no grounds for us to revise anything. For 3 years, they outperformed the industry. We have a 15% return on capital. We are not going to -- it's a little bit the same discussion when you wanted me to restructure GM last year. We are not going to restructure IBCM because there are 2 difficult quarters. That's not how we run the bank, period.

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Unidentified Analyst, [38]

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And I have another question about negative rate.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [39]

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Can I make a last point before you ask your question? And we're going to invest in, as we said, naturally, we are investing, recruiting top bankers in technology and health care. That's how much we believe in the business. You don't improve things in business if you change strategy every quarter. Sorry, go ahead, [Stephen].

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Unidentified Analyst, [40]

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With what was the rate outlook kind of deteriorating, both Europe and U.S., especially in Europe, looking at being negative for a long, long time, are you going to have to make any adjustments to how you treat either individual clients, wealthy clients or businesses? I mean certainly, this is going to have a big impact on Credit Suisse and a lot of other European banks' revenues.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [41]

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It's an interesting point. We look at things really in-depth in 2015 of trading [with branch or not]. One of the biggest calls we made was on macro and rates and we decided to close it, and basically, we said that business is just not going to work. And there was a lot of noise at the time. And when you look at today, the outperformance and how well we're doing operating in a dovish environment, a lot is linked to that call, which was the correct call.

Two, we have a strategy that is not a play on the yield curve. That's also a long-held belief of mine. Playing the yield curve is not a strategy. We are less NII-sensitive than many of our peers. Net interest income sensitive, less interest rate-sensitive many of our peers are and that's by choice. It really hurt us in the last 2, 3 years when expectations of rates were going up. But I promise you it's going to help us in this part of the cycle when expectations are going down. We've never wanted to be just a player in the yield curve because simply, the yield curve is something on which we have zero control, absolutely zero control.

So to come to your question, we have a few answers to the pressures now on the trajectory of factors in Switzerland. In Switzerland, we are considering measures on deposits, as I said earlier, to mitigate the pressures from the negative interest rate. And they will be targeted, and they will be towards people who hold very large cash balances. It will not affect the average customer or people who don't count their cash balances in millions. So that's that.

And you know that we're already doing this on corporate. So it's extending what we do for corporate. And that will affect SUB. It will affect IWM also to a lesser degree, particularly on euro deposits, on deposits in euro. In Asia, it's not as much of an issue because net interest income is a much smaller component. Pure numbers, NII in Switzerland is CHF 412 million; CHF 394 in IWM; it's 100 and something, 160 or something like that. In Asia, it's much less interest rate dependent.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [42]

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Okay. Thank you, [Stephen]. We've got another question in the room from [Jeff Furby]. And then there's one more from the line. And we'll probably have to wrap up questions after that.

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Unidentified Analyst, [43]

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Just 2 quick ones. I'm not sure I kind of completely heard you when you're speaking about the U.S. You mentioned that you're doing niche things there. And I was hoping that you could elaborate a little bit more on what specifically you're thinking of? And then your gross margin in Wealth Management is a lot higher than that of the competition. And I have a feeling that that's due to the more aggressive lending initiatives that Credit Suisse took into the higher net interest income. And you're shaking head, maybe it's something else. But anyway, if you could tell me how resilient you think those revenues are in light of potentially lower interest rates or deteriorating markets?

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

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Okay. Thank you, [Jeff]. Yes, niche in the U.S. I mentioned one thing that exists, which is the lending to the ultra-high net worth that [Jim] does, very profitable. [For Bret], if you allow me, we have ideas, but I never discuss ideas in the public space until they've been implemented, so we have ideas. And we're looking at things. But it's going to be small. That's why I mean by niche, opportunistic and small. We don't aspire to have a broad, large presence in the U.S. wealth management market.

Gross margin and lending, I remember years ago, you're very consistent because you had asked me in one of these calls, if all our NNA in Asia was not -- I think you were talking to somebody finishing some of that stuff. I remember very well, so NNA in Asia was just lending. Correct, yes? You are sitting in about the same place. I remember. So -- no, I know, but this is your -- us lending and how much we lend has been on your mind and it's rightly so because it was a similar question. And actually, I can tell you, I said, I don't comment on others but on this point, I will. We've got 2 large Swiss banks. The other one has been growing its lending much faster than we have for the last few years. The numbers are public. So we hear a lot of noise about how imprudent we are. So if it was inflation, their margins should be higher, right? It's public. You can look at how much lending we've done and how much we've grown. Lending to ultra high net worth. Sorry?

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Unidentified Analyst, [45]

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Lending versus (inaudible)

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

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No. No, I'm coming. I'm going to answer. Sorry, you have another question? Okay. So I'm building an answer. So I'm saying, we have grown our lending book, much less fast than comparable Swiss players. They book much faster. So that's one. Two, we don't run the book on gross margin at all. We think it's an indicator that is unreliable, not very meaningful. As I said, if you take -- if you're very successful with ultra high net worth it gives you 500 million but it's going to reduce your gross margin immediately. So then you shouldn't do it. So we really think that margin is a battle worth fighting.

In the wealth management industry, it's adverse, the origin of a lot of bad decisions. We don't disclose it. You see the whole slide presentation, from David and me, there's not one slide on margin, I think, 3 years now. We said it's about PTI and return on capital. And to run a business on margin doesn't work. Because when you chase margin or when you try to optimize margin, you rarely optimize net margin. So the thing we decided to be judged on is the net margin. And our net margin is very strong and has been going up. But the gross margin, it's largely a function of the type of clients you have, what they want to do at a given point in time. And it's something that we should -- very little control. So to try and guide on that is (inaudible). So we don't -- we just don't...

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [47]

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I think -- I don't have all the comparison in front of me, I think the outperformance you're probably referring to has been the progression in net margin over the last 3 years as opposed to gross, which is very mix-dependent as Tidjane said. That progression is predominantly driven by the efficiency measures. I mean our cost base is radically different to where it was in 2015, I think, point one. And that's -- and I think, secondly, the inflows in terms of net new assets, and actually, revenue growth is probably a benefit to a net margin.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [48]

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Look, some of you who really attack us for lending have been lending more than us and faster. Really. Seriously. All of CS -- I'm talking to the room. All of CSR performance because we are lending. Well, they're lending more, and faster, and the numbers are public. So that's not the source of our outperformance. As David said, it's really the discipline, the operating leverage, what we showed you in terms of integrating the investment bank and the wealth management and doing smart things. It's not lending. Lending is important, and we identified that in '15. We were criticized. And then all of a sudden the ones who were criticizing us started doing more than us. So lending is important, but it's a means to an end. It's a way to develop a relationship. But after that, we do a lot of additional things that go way beyond lending.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [49]

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I'm being told that we have to wrap it up. We're out of time.

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Cheick Tidjane Thiam, Credit Suisse Group AG - CEO & Member of the Executive Board [50]

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He's worried that I'll say too much now.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [51]

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Apologies to those who were expecting, but we're out of time here, so.

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

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The best way I have to make him stop. When I start diverging, he goes, okay, no more questions. That's it.

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Adam Gishen, Credit Suisse Group AG - Global Head of IR and Corporate Communications [53]

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So Tidjane, do you want to say anything to wrap up before we close?

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

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No, look, thank you for being here. I know we do get animated sometimes. But we believe in what we've been doing. Some criticism, we take them as valid, it helps us improve. Some of it is not so valid. And then sometimes you have a strong reaction. But overall, it's a good moment for us. We're pleased with the results. We're not complacent. It's a very tough environment out there. Q3 looks difficult. It's a seasonal slowdown. So the whole team here is working very hard. And we hope that we can continue with this strategy because it has been really working for us. And we think, over time, it's going to leave Switzerland with a real top quality, global wealth management with strong investment banking capabilities. And we promise we will not do another result on July 31. With that, I wish you a good day. Thank you.

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Operator [55]

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Thank you. That concludes today's conference call for media. 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 disconnect.