Credit Suisse Group AG

SIX:CSGN

Earnings Call Transcript 2018-Q1

[Adam Gishen, Group Head of Investor Relations]

Okay. Good morning, everyone. I think in the interests of time, I'll just hand over to Tidjane. We have a few people in the room, so we've already made a start, but Tidjane, if you wouldn't mind just reversing 20 seconds and we'll start from the top, but over to you Tidjane.

[Tidjane Thiam, CEO & Member of the Executive Board]

Okay. We're in Switzerland, so we started on time but we go back. No, I was just saying that we are 9 quarters into our 12-quarter program, but in '15, we defined a new strategy, a new structure, reorganized the entire bank and started in January '16 with the new bank. And we have done 4 quarters in '16, 4 in '17 and 1 quarter in '18. So we're 9 out of 12 quarters, 75% of the way.And the way we thought about this was that '16 was a year of deep restructuring because it was really a major reorientation for the bank. Completely new organization, completely new ways of operating and completely new strategy with some major strategic decisions, from closing the U.S. private bank to downsizing very much significantly London to closing a number of our markets activities to creating an SRU of CHF 70 billion RWA-plus. So it was heavy, heavy, heavy stuff. I have said to some of you and I maintain that anything we achieve now was actually done in '16. You are seeing today the impact of what was done in '16. And that's why we felt so strongly that '16 had been a good year internally because that's when we actually laid the foundation of the success you see now. '17 was the year of kind of stabilization, consolidation of what we had done in '16, and '18, you're now seeing the acceleration that is visible in the numbers.So to take the slides. If you look at profit, you've got here, basically, all of the quarters of the restructuring. You've got the 4 quarters of '16, the 4 quarters of '17 and the first quarter of '18. So we're saying that we have done now 6 quarters of year-on-year profit growth and that's a very good momentum. It's our eighth consecutive quarter of profitable operation. And it's the highest profit we have generated in 11 quarters. So almost 3 years. So that we're quite pleased with, it's good performance.More strategically, what we set out to do was to completely change the balance and the composition of the Group, and to do that in an accelerated way. So what you have here is basically the RWA, if you want, the capital invested. And you have the markets activities, and what I would call capital-light businesses, SUB, the Swiss Universal Bank, IWM, APAC Wealth Management and IBCM. And really this is a major shift, to shift this by 17 points in 2 years, basically from '16 to '18. You see that the blue has gone to 65% and the markets has gone to 45%. It's 2 things, it's rightsizing Global Markets, but also shrinking the SRU. It's a big, big part of the story. And exiting those assets, so you end up with a smaller asset base, but it's also completely different in its makeup. And the more interesting feature is the next one, which is really what I think a lot of observers have missed, is the complete change in nature of PTI, which is why I -- if you wish, if your read the comments or read the media, it looks like the left actually even worse, because, I think, 75% of it is above market. We just happen to be 80% Wealth Management. So this disconnect is total.It was true [indiscernible] CS it doesn't exist anymore. That CS on the left, it's gone, and that's what we're commenting on. Oh my God, activity in government is down 5%, yes, it's dead, no, no. Okay. The whole point of the strategy was to build the blue. The global market is a fraction of our 21%. So it may be time now to look at CS as it is, and not as it was. And focus on the right things, which is are we driving the NNA? Are we driving the assets under management? That's our PTI today. And we've done that. So we've basically come back and that was the big bet. When I was sitting here in '15, I knew this is what we wanted to do, but it is very hard to shrink a business that generates so much earnings and to swap those earnings for higher earnings -- higher quality earnings without destroying the group. For me the 2 points is we were carrying all those market activities, all that risk with a 10% CET1 ratio and a VaR of CHF 46 million. That was not a desirable position to be in. If you look at what's been achieved, the VaR is down 37%. You're running 37% less risk. You have a lot of capital at 12.9%. And now you're generating a very good return on capital. So reason we're so pleased today is really for having affected this shift. And we hope that as time passes, it gets understood that this is the new Crédit Suisse. And really it's not a global investment bank. And to obsess with trading activity levels is just barking up the wrong tree.So we're very happy with this. We think it's a very good mix. We think we're riding a secular trend, which is supporting the blue, which is the increasing wealth in the world economy. And so we don't have to worry week by week about the P&L.And we think that there is a very good alignment between the gray and the blue. And I'll talk about it later. However, gray supports the blue. It's not in opposition. We have a business model where the 2 work together and for a the great benefit, we believe, of shareholders and the profitability of the Group. But really, if you keep 1 slide from today, it was not [blocks in] this slide. That's -- if I was allowed 1 slide to do the results today, that's the one I would have used because that shows you what's been achieved and in 2 years.So back to then the detail of the Wealth Management. We're very pleased with this -- the NNA, with making assets. And as I said, our NNA is independently audited, so it's measured very, very rigorously and very transparently. And CHF 14.4 billion, we believe, it's a market-leading performance in every geography. We believe the CHF 2.7 billion in Switzerland is the strongest in Switzerland. We believe the CHF 6.2 billion in Asia is the strongest, I'm talking in absolute terms, and IWM the same. So it's a very good performance. Now NNA is, here it's a straight line, but just keep in mind that it's volatile. No matter how much we work on that, it's something which 1 quarter to another can vary, but the direction of travel, the focus on this is on -- is total. And there's this very interesting observation we made this morning. Remember, when we created this division in Asia, that was very much commented upon. So in Asia, IBCM and so -- Investment Banking and Markets and Private Bank report to Helman, who is here and one seat from me. CHF 4 billion out of the CHF 6.2 billion are referrals from the bankers to a Private Bank, and we think we're the only bank who does that, because we deal with entrepreneurs. And all we've told our bankers is look, give a referral. So all that is done, I have to insist, in a very compliant way. It's a very strict compliant rules around all this. And Urs is here to testify of that, but it is very effective. It allows us to grow. And these are our synergies. I'm like why not exploit them. People operate in silos. And it's just not sensible, because we're dealing with the same clients. And those clients don't make that distinction between their personal wealth and their business and their company.So I say, for a company, everything we do must be client driven, instead of doing big theories. We have 1 client. So -- and we come at it from different angles and not to coordinate that, is just not sensible. And all the organization has done is to mimic how the clients operate, and they love it. Because they really have a global dialogue -- a global dialogue with us. Some of these clients, we penetrate them through the IBCM. I have 1 case in mind, we cultivated them for years, and then we ended up doing an IPO for them, and they loved it. And then we introduced them to our financial people and then they started giving us a few hundred million dollars. So the synergies in that model are huge and we're doing that very, very successfully across the board. So the NNA drives the AUM.And this is, we said, CHF 0.07 growth rate. We're still at CHF 6.7 billion of headwind from the FX from the Swiss franc getting stronger. So in constant currency, it would be higher. But I think what's pretty attractive, most have mentioned this morning from the analysts is the next one, which was that margins are up. We keep reading about how margins in Wealth Management are going to decrease, are decreasing, are under pressure. Well, we don't see it. We have higher margins on a higher asset base, because we work differently, really because we work differently. We invented a different model and we're doing this in a different way and you see it in the PTI. Where you see for those 3 divisions, PTI is up 61% and capital is up 22%. And that's why we like this business. Because really it's capital efficient. It doesn't need much capital to generate you more profit. We can really work smartly and generate a lot of additional profit, CHF 500 million, CHF 486 million, without that much additional capital, and that's why in this capital allocation, at the group level, we made that switch.Next one is interesting, is the sources of income. Because that really tells a little bit how we work. The recurring is my favorite source of income. It's really people with whom we have a long-term relationship and they give us fees for various things we do for them. Either we have a mandate, a discretionary mandate, an advisory mandate. We have a deep relationship and they give us -- and that's repeatable. It's repeatable performance, it's recurring, it's highly attractive for us. And the good news is it's the most -- it's the strong -- most strongly growing of our income streams, and this is something we intended to do from the start. And if you think in terms of valuation and multiple, this will attract a high multiple and drive the market cap up. Net interest income, always big in any bank. So we drive that up, too. But transaction has also been a big success because a lot of that product innovation we're doing, the structured products, I'm talking about, et cetera, that go in there, and it's doing well.I see Adam is getting worried, so I'm going to accelerate. We've talked a lot about operating leverage. So if you think about what's been driving the profitability improvement, it's the Wealth Management that we've just talked about. You can't succeed in business if you can't grow. One of the problems with markets businesses is they are completely volatile. You have to ride something that is a secular trend. So we have that Wealth Management in the world, which is a secular trend which we're riding. Then we're running the company well, and that's the operating leverage. Revenue up, cost down, revenue up, cost down, revenue up, cost down. That creates those positive jewels, that drives the numbers, and that's what you see here. It's a bit muted this year because of the Swiss franc. It's only 1% revenue growth, actually it's 4%. Of course, a little bit has been eaten by the strength of the Swiss franc, which is the opposite. In the other case, it flatters the cost reduction because the Swiss franc is so strong.You also have the -- it's not just for dollars -- on dollars, it's gotten weaker, but euro has gotten stronger. So where we have costs in euro, it's gone up. Where we have costs in [pesos]. So it's quite complex, but if you take all the currencies together, it's still a positive picture, a very good increase in profit, driven by the operating leverage. The cost -- the focus on costs, which is on the next slide, lowest absolute cost in 5 years, and we talked about everything we're doing, the core, from moving systems to the cloud to decommissioning systems to reducing the square meters to using better technology from Tubac, reengineering, Project liberty in the U.S., which is moving to North Carolina, restructuring of London. A lot of things we do here in Switzerland with technology. I could go on and on and on. It's about how we run the group, but it's been a big part of the story. And it's really helped our profitability very much.Now the third part of the story. I've said growth in Wealth Management, running the company well, operating leverage is the SRU. It's that wind down of the SRU. And frankly, this was a point of great skepticism and that's fair when we started because the SRU was enormous. But there is no other way to cut the markets' activities. You just had to be quite clear about what you didn't want, stick it in the SRU and then run it down. The beauty of doing that is what is gone is gone. So in other words, when something is in SRU, we close it down or we say it, it's gone, not to come back. So it's the best way to cut costs. A lot of cost cuts, CHF 1.8 billion, CHF 1.7 billion has come out of this saying take it, put it in the SRU and get rid of it. That's -- that's -- the only thing I liked about that is you don't contaminate the rest. The problem, the worst type of cost reduction is, I want everybody to cut by 10%, that's catastrophic. What we've done is, in some places we've taken 100% out, and in other places we've left them alone. The reason why the bank has been able to perform so well in terms of revenue is that we have really insulated the restructuring from the BAU. And that's something we intended to do at the beginning. So it shows you how hard we've driven the SRU, and really a lot of the credit goes to David [indiscernible]. When I walked into your office and I said, "Why don't you take -- oversee the SRU?" I don't think you're too happy, but it's worked. A kind of Interesting appointment, but he's done very well. And we just gave, because we also listen to market. One of the things we pick up there is, oh, we're not really depleting the SRU very well. So this slide tries to address that. We think we're doing better than peers we are being compared to. And it's supported by the numbers and the numbers speak for themselves. It's just a great story.We've completely -- and when you see -- you see the -- so back one. You see we are the gray going out. You see the leverage going out. We focused on the RWA first, so now what's left there was a lot of leverage heavy stuff, and that's what we are now offloading. And we are really aiming to get rid of all the lumpy stuff this year. So what's left -- because it's never 0. What's left after that is relatively run of the mill and not problematic. But that has also helped a lot our expenses, which is the next slide. You can see on how much savings we generate from eliminating those things. So that's been a good story. So if you put all that together, the growth in Wealth Management, growing operating leverage, reducing the losses of the SRU, of course, the profit is improving and that's going to continue in '18 equally.So I want to go faster on the BUs. Switzerland really -- we knew we could take the cost down. Thomas started with a cost/income of, what, 64, 64% it's now below 60%, which in a universal bank which has a big Wealth Management business is very good, in 2 years. So that's been very good. We were still not happy that the revenue was not going up, and what we have achieved this year, that's really good news, the plus 3% increase in revenues, so a really good story, [ 515 ] more to come, 18% [indiscernible] in capital.IWM, same thing, a complete step change in scale. And again, those things take time. '16 was -- they didn't exist before '16. Well, we started in '16, pushed in '17 and you're starting now to see all that stuff coming through. [ 470 ] is what Switzerland used to do 2 years ago kind of. And Switzerland was the [drains]. So IWM has really changed scale. So I watch the competition very closely [indiscernible]. I use them -- you know what I tell you, it's very good, it's very effective. Because now I tell him I want a quote every [ 500 ], which is what I used to tell him, but now he's done it. So it's like, it moves around.APAC, APAC also has a very good story to tell. We said it would double in 3 years. I think Helman found that boring, so it trebled in 2 years. That's the same numbers, but different order. No, but more seriously, it's just -- in APAC, we're just scratching the surface.So that's China. Performance in China is phenomenal. Southeast Asia very, very strong. And it's just continuing. And our form with our bank for entrepreneurs is ideal for China. That's where you see really the power of the form. And global clients we deal with are kind of a dream client for us. They really have a kind of self-made fortune, successful entrepreneurs, a lot of money and they're aggressive investors and they want to do things in China, but also outside China, for which we're very well equipped, and we do a lot of that with Jim, too, and this team does a lot of cross-border stuff, and getting capital out of China and getting capital into China. It's just a -- it's a virtuous, it's a virtuous, it's a virtuous circle.Global market, I've talked quite a bit about. It was about really changing the scale of the business. We like the business. We like what we've kept. It's key to our success. But the issue with the global market over the past was the downside, the fact it could generate very significant losses. So we've completely cut the stress bar, i.e. for potential losses in Global Markets when there was a market dislocation, what you saw in Q4 '15. That's completely cut by a huge factor, so that now we like it as it is, it's a core capability for us. We've cut the tail. Okay. I mean the tail in terms of statistics, not the statistics. We cut the tail risk, and we have a business that is doing fine. When markets are difficult, it's making a little less money, but it is has the potential of making much more as we align it more to Wealth Management, that's what you're seeing here in the next slide.Profit is up. I don't know why, I saw a lot of commentary saying profit is down. I know. It must be a -- maybe a mistake in our papers. I was reading the e-mails. Profit is up 6% this year, on the right here. And we are around the 10% return on capital target that we gave.IBCM, sorry ITS, okay. ITS, it's just a kind of venture we created between Global Markets -- it's to bring Global Markets for Wealth Management. This is something Credit Suisse as always wanted to do, and we finally did. And it's vital because a lot of our clients in Wealth Management are quasi-institutional, they're really ultra-high net worth. They have very sophisticated needs. And the beauty is ITS and the Global Markets platform are very, very good at manufacturing products for them. I mentioned this morning that we launched 3 new products in Q1. We collected more than CHF 1 billion, and they went to more than 1,000 clients in the PB, the Private Bank. And I'm told before, if we sold CHF 200 million, we would have considered that a huge success. Today we're doing CHF 1 billion. And that's really just the beginning. There's so much more that we can do in that space. And if you look at the synergies between the funds and the Asset Management and the ability to sell, that's really, for us, an area of great optimism. So IBCM, which was the next one.Very resilient performance. We said before, that the primary markets suffered from the volatility in the volatility, if you wish, because people don't want to issue in markets like that and they are very hesitant. So we saw that. We also saw the M&A slowing down a little bit, but the pipeline is very strong. If I can give those numbers, I think, our announced is up 64%, M&A announcement, and the market is up 45%. So we're actually building a pipeline faster and more strongly when the market. So we're highly confident in our abilities. We've invested a lot. Jim is probably the only person who has not had a no yet to an investment request since I arrived. We've invested a lot in that component. We've hired a lot. And it's a people business. You need to build the capability you need to start the dialogue. I used to be a [ CO ] client, so that's something I know. You build a relationship over time. And you invest 3 or 4 [ years ] and then the business and it [ feels good ], but it's a slow burn. It's a long-term investment which you have to make in people. And over time, it comes. You can't judge IBCM. He gets very frustrated. You cannot judge IBCM quarter-by-quarter. It just doesn't make any sense. It's really a long-term business where you have to look at the evolution over 2 or 3 years, and we tend to be very quarterly oriented and over comment on quarterly variations.So all that, together with capital, as I say, we started at 10%, 12.9%, but the leverage was also very weak. And we've completely, I think, the equity in that was [ 2.7% ], now we're [ 3.6% ] from memory. That was very, very -- that was even weaker than the CET1. That was our biggest weakness in capital was leverage. We were really, really low. So that's completely transformed. And fundamentally, we've been driving return on capital. If you get '16 versus '18, you can see the progression in return on capital. And I say, return on capital is the way to be able to get to the return of capital, which is something we hope to get to as we generate more capital, we develop the capital-efficient businesses, and we're able to then reward the shareholders, which is really the kind of last 2 slides on RoTE, return on tangible equity. So 1Q, of course, '16 was a loss. We had 8% reported return on tangible equity, but the point is there is plenty of upside and we showed that at the Investor Day. We still have very expensive funding, which we're going to call in, what, October, yes. So in '19, you will get the full year benefit of that. And we still have the uplift from the SRU. Thinking about when we say we're going to lose CHF 1.4 billion in the SRU this year, CHF 500 million next year. That's CHF 900 million more of profit that's completely under our control. So part of why we're so confident that this is not finished, it's just the beginning, is we have big levers that we can pull, funding where we're going to make CHF 500 million more in the full year '19?

[David R. Mathers, CFO & Member of the Executive Board]

We would expect to save -- reduce our funding costs by CHF 200 million this year, and another CHF 700 million next year. So unchanged guidance from November.

[Tidjane Thiam, CEO & Member of the Executive Board]

So, even more [indiscernible]. The uplift in full year '19 from funding savings is very significant, plus the uplift from the SRU is also very significant. And that's basically in the bag. So the 10%, the 10%, I mean, 8% with an SRU losing as much money as it is losing is a good performance, and we're quite pleased with that.So we're continuing with transformation. There's much more work to do. It's only 2 years. There's much more to do, but growth in Wealth Management, we absolutely believe in. That's the topic. It's not the trading activity on the floor -- the trading floor. This is the story. Creating positive operating leverage, winding down the SRU and all that drives returns and hopefully delivers growing value for our shareholders.And I'll stop here, yes. Thank you. So if you want to distribute the questions.

[Adam Gishen, Group Head of Investor Relations]

We'll take some Q&A here in the room. Sir, please. Yes.

[Unknown Analyst]

One question on reports about the possible cooperation with your large competitor. [indiscernible] if there any discussions [indiscernible]?

[Tidjane Thiam, CEO & Member of the Executive Board]

Yes. Actually, I think we talked about it in 2016, we said that there was certainly a potential to do things together. We have never on the record confirmed the name of the partners we're talking to. But it's a valid idea. And something we are exploring, but also it's difficult, all kinds of, you can imagine, practical difficulties when you try to do that. But we won't give up on any opportunity to make things more efficient. And we think if you look at the Swiss market and you have the big players, then there's got to be opportunities to do things together.

[Unknown Analyst]

Second question. You say that your tax rate is 20%, but you also mentioned that there might be a change because of the BEAT. What would the implications be? Do you have any calculations about that?

[David R. Mathers, CFO & Member of the Executive Board]

Disregard, the tax rate guidance for this year is to be in the low 30s but not 20%. [indiscernible] I think it was...

[Tidjane Thiam, CEO & Member of the Executive Board]

The low 30s, yes.

[David R. Mathers, CFO & Member of the Executive Board]

Yes, it showed 34% for the first quarter. And we would expect that to drop to the mid-20s next year, basically. And as I said before, we continue to regard it as more likely than not we would not be subjected to the BEAT tax, but clearly we'll wait for final guidance from the U.S. Treasury, which will come at some point in the next 9 months.

[Tidjane Thiam, CEO & Member of the Executive Board]

So that's an additional upside I didn't mention.

[David R. Mathers, CFO & Member of the Executive Board]

That's right.

[Tidjane Thiam, CEO & Member of the Executive Board]

In the story.

[Unknown Analyst]

I was just wondering what the outside would be if the tax would apply to...

[Unknown Executive]

I would not really give the guidance on that. I mean, I think it -- we are clearing taking a number of precautionary mitigating steps. We've redirected, for example, the repo funding from our international business directly into New York, as opposed to by the U.S. subsidiary which takes it out of the BEAT network. There's a number of other measures we've taken to reduce our BEAT exposure.

[Tidjane Thiam, CEO & Member of the Executive Board]

Well, it's not just a Credit Suisse issue. I mean, I went to Washington, I met with Secretary Mnuchin, and all the European banks are basically involving in the dialogue on this. And so far really, yes, the U.S. administration seems positively disposed and it's looking for a solution. Because it doesn't just affect Credit Suisse.

[David R. Mathers, CFO & Member of the Executive Board]

I think it's recognized that -- and something which was clearly envisaged by the U.S. authorities as a means of mitigating tax avoidance. It has an unforeseen consequence...

[Tidjane Thiam, CEO & Member of the Executive Board]

Exactly.

[David R. Mathers, CFO & Member of the Executive Board]

in the sense, the funding which is provided to foreign banks by their international parents, essentially, is part of the entire recovery and resolution regime for which the U.S. authorities are obviously very committed to.

[Adam Gishen, Group Head of Investor Relations]

We're just going to actually use the microphone here. Malcolm come round here. We'll take Ralph over here in the front. For our colleagues on the phone that dialed in, yes.

[Ralph Atkins]

Ralph Atkins from The Financial Times. Mr. Thiam, you described this year as your third and final year of restructuring. So could you just summarize what's left to be done this year, more particularly in Investment Banking & Capital Markets? And then what's the big idea for growth in the period after this year?

[Tidjane Thiam, CEO & Member of the Executive Board]

Okay. Okay. The big idea for growth is Wealth Management. Kind of my favorite statistics, but if you look at personal financial assets, people with more than $1 million in the world, 2006, 2016, they have increased by $26 trillion. $17 trillion in the emerging markets, $9 trillion in developed markets, that's a lot and it's continuing. So, therefore, growth is to get our share of the growing wealth. Because it's also highly concentrated, that wealth, and we are a private bank and we are ideally placed to continue to grow with that. So we're lucky enough to be -- as I said, this is not trading. We're lucky enough to be in the -- if you look at investment banking fees, they haven't moved in the last 10 years, totally. It's a flat industry. We're lucky enough to have focused on a business that's growing. So there's plenty of growth there, as you can see in our numbers and in other companies' numbers. And that's where our effort. So we don't need a new growth story, that's been the story from the start, and we're going to continue to go after that opportunity everywhere we can, both in mature and in developing markets, and use our capabilities, which are very significant in Capital Markets and Global Markets, [ et cetera ], to win in that battle. So the first part, we need to deliver the end of the cost program. We said we'd generate CHF 4.2 billion of cost. We're probably at -- really what, CHF 220 million this quarter. So we've generate probably CHF 3.42, something like that, billion. So we have the last CHF 700-ish million of savings to generate this year. We need to wind down the SRU, and we're almost there. We've cut the [indiscernible], we've cut the leverage and it will be wound down this year and closed. It's a big, big, big step for us. And for rest, we just need to continue generating good growth, quality growth, and continue to modernize the bank, invest in our systems, et cetera. So no, there's no big new news. It's really completing this restructuring. And after that, we knew the shape of the Crédit Suisse we wanted, and the big step was to take what we didn't want and put it in a unit, which is the SRU, which we then depleted. So once the SRU is gone, well, of course, the rest is exactly what we wanted to have, so we're very happy with the shape of the rest, and we're just going to drive it forward.

[Adam Gishen, Group Head of Investor Relations]

Just to summarize what Tidjane said. If we think about the SRU, we are committed to reducing the drag on the SRUs to less than CHF 1.4 billion for this year, and then less than CHF 500 million next year. So that's a CHF 900 million step up by itself in terms of PTI. The second point which Tidjane has referenced, CHF 200 million drop in funding this year, another CHF 700 million, yes. So that's another CHF 900 million in terms of that committed reduction. Third point, clearly, completion of the expense program. Getting down to the CHF 17 billion target gives us an uplift across our businesses. And then finally, just to know, obviously, we -- if you actually look, we've set a target for our reported RoTE. So you're still seeing restructuring costs going through our P&L this year, we spent CHF 1.5 billion on that restructuring program over the lifetime. We've still got to get to CHF 1.9 billion. That clearly is -- that's is completed really for the end of 2018. There's a few bits of real estate there afterwards, but it's basically done at that point. So you think about that -- I mean, that's obviously a pretty substantial momentum coming in 2019.

[Tidjane Thiam, CEO & Member of the Executive Board]

[indiscernible] the things we've is for the -- we've dealt with our RMBS issue, which was not negligible and paid a CHF 2.45 billion fine. So, as I say, our numbers are clean. We've dealt with our big issues. We've [ built ] on our CET1, it's a clean CET1. We don't have huge fines coming. So -- and a strong capital position.

[Adam Gishen, Group Head of Investor Relations]

Okay. Great. Why don't we go to Brian Blackstone over here. Brian, just wait for the mic, if you will.

[Brian Blackstone]

This is Brian Blackstone with The Wall Street Journal. Can you talk a little bit about the current state of the financial markets, particularly the rise in bond yields? In the U.S. the 10-year yield hit a milestone of 3%. At what point is this -- if this trend continues, does it switch from being good for your bottom line to undermining kind of the economic fundamentals of the global economy and it maybe starts to hurt you?

[Tidjane Thiam, CEO & Member of the Executive Board]

Well, it's probably one of the biggest questions we're all facing. I mean, David gave an adverse sensitivity to the yield curve. Clearly, it's an upside for us if you have an upward sloping yield curve. Then when it flattens, it's always a bit complicated because it means your short-term funding costs increase and sometimes it means if the long end goes down that your prospects for growth -- it depends what's driving it, whether it's higher inflation -- lower inflation expectations or lower growth. It's a complicated event. Honestly, I think the short answer is I don't know. Personally, I think, I've never liked extremely low interest rates because I thought it was a distortion to the assessment of risk and capital allocation, making -- capital allocation in the economy. I like the fact that there is a normalization of the yield curve. That can only be good, long term because it just leads to better decision-making. I think the central banks are doing a really good job managing the transition from a long period of ultra-low interest rates to where we are now. I think the Fed has done very well. Now, when you [ feel ] on markets, it's always the same thing. It goes back to yields. We had a period where stocks started behaving like bonds. We all know that. People were buying stocks for yield. Because if you had ultra-low interest rates, the only way to get any yield was to buy a stock. And it was very funny because you could actually observe quantitatively that stocks were becoming like bonds, behaving like bonds, reacting to the same stimuli. Then you raise the interest rates. It's that dynamic. When does it flip, so that people go back to looking at stock as stock, which for me, again, long term, is a good thing. I don't think it was great that people were buying stock for yield irrespective of the fundamentals of the companies. That was a bad situation and we're getting out of that. Yes, there is a point way the yield on the fixed income gets so high that it flips. But the problem with the stock market is the stock market has never done well in terms of stagflation, where you have high yields and low growth. That's almost the worst case scenario. In all the other scenarios, I think, the stock market can cope. So as I said, I don't know, nobody knows which of the [ sales ] we're going to end up with. The most benign scenario is where you keep -- you continue to have good growth, good economic growth. You have a degree of inflation, which actually, in a number of places, we need. And you have yield curve that is compatible with that. The worst case scenario is where there's a policy mistake or something that basically, as you said, breaks the economic growth. And then you have the combination of high yield and no growth, which is bad for the stock market. Now, what does that mean for us? Honestly, I think that, again, it doesn't impact the long-term story. It can impact the trajectory, but the underlying factors that are driving the world growth ultimately are technology, demography, trade. And these are things that are long-term trends that don't -- are not too impacted by the yield curve. So no, I remain confident that we have enough diversification. We're in enough places. We support our clients over a long enough time horizon. Because if you ever think about serving entrepreneurs and families is they're very good investors and they have a long-term time horizon. So the dialogue with them is always very healthy and is very long-term focused. So we think -- the short answer is we think what's going on is good in the long term. So we think for our long-term story it's a positive. Whether there will be some fluctuations along the way, yes. But sorry, that's also why we emphasize that we have a strong balance sheet. Because to go through potential dislocations, et cetera, you cannot have a weak capital base. That's the ultimate answer. We have a strong balance sheet. We have a good franchise driving that forward. And we're confident kind of medium, medium long term. And if there are tough times, the strong balance sheet allows you to deal with it.

[Adam Gishen, Group Head of Investor Relations]

Okay. Thank you. Next question. Brenna, behind you, Tanya from Reuters.

[Unknown Analyst]

I'd like to ask about the letter sent by U.S. senators yesterday to Credit Suisse and a number of other banks asking about the banks' exposure to Russian oligarchs and other political figures on the list released by the treasury? What can you say about the bank's exposure to individuals on the list? Has the bank conducted a review over the past 5 years of its exposure? And how does it intend to handle the senator's requests?

[Tidjane Thiam, CEO & Member of the Executive Board]

I can't comment on the requests. I'm not -- but what I can tell you is that we are in full compliance with every regulation in every jurisdiction we operate in. When there are sanctions, we are fully compliant with the sanctions, of course. And we have invested a lot of resources in continuously upgrading our ability to monitor things.

[Adam Gishen, Group Head of Investor Relations]

Okay. Thanks, very much. Jan-Henrik here from Reuters -- from Bloomberg, excuse me, a faux pas.

[Tidjane Thiam, CEO & Member of the Executive Board]

Do you know something we don't?

[Jan-Henrik Foerster]

Yes, I have to correct that. Jan-Henrik from Bloomberg. Two questions. And the first one on Global Markets revenues. Could you give us an update where revenues stand so far into this quarter and also for APAC markets? And then the second question is on the Swiss Universal Banks. So the results are really good, also for IWMs. So these are the positives among the positives. But still if you look at the target and the adjusted results for the SUB where they stand now, should I assume now you will repeat that 3 more times and we get to the target? Or what is driving the gap from here to the target?

[Tidjane Thiam, CEO & Member of the Executive Board]

Well, I think the gap is certainly less then when we were doing CHK 1.5 billion a year. So that's a problem that has been reducing in size. I'm talking about SUB, Swiss Universal Bank. We stared at CHF 1.5 billion, CHF 1.6 billion. We did CHF 1.8 billion last year. And we're well on track to exceed CHF 2 billion this year, so I'm pleased with that. And really for the rest, again, targets are meant to be stretching. They drive a business forward, and even if a business has achieved phenomenal things already because there was that ambition, and that's going to continue. So let's discuss it when we do Q4 '18. That we're driving, we haven't given up on that target and we were driving towards it, the same for IWM. Global Markets, again, look, I understand the question, but really we -- again, we -- it's inside 20% of our profit. We drive it. We like having the business. We'll do our best, but it's a market dependent business and we're not going to give a lot of guidance on that. It's just market dependent, but it's well run. We're driving costs down. We have excellent teams, and we're very happy with the business and where it stands.

[Adam Gishen, Group Head of Investor Relations]

Good. Okay. Any other questions here in the room? Yes, Ralph. Do you want to just take them mic?

[Ralph Atkins]

Very quickly, the Swiss vote on June 10th on the sovereign money initiative. What impact would it have on your business if it was passed?

[Tidjane Thiam, CEO & Member of the Executive Board]

Well, we do not support the initiative. We're on the record against the initiative. And we certainly hope for the good of Switzerland, because currently it's -- Credit Suisse is a minor issue in that. It's for Switzerland as a country, I deeply hope -- it's a country I care about, that this doesn't pass.

[Adam Gishen, Group Head of Investor Relations]

Tidjane, And I'm not sure if you want to wrap up with some final...

[Tidjane Thiam, CEO & Member of the Executive Board]

I think they've heard me enough, no? I can't possibly bore them with anything else. No, look, we are -- don't get too emotional -- anyway, it's been an interesting journey. We have a good team and, hopefully, we will continue to do well together. I think, Credit Suisse is a fantastic institution. I really think that. So it's a privilege to lead it and I'm glad it's doing better. It's good.

[Adam Gishen, Group Head of Investor Relations]

Good. Great thanks, everyone, for joining, and have a good day.