UBS Group AG (UBS) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to our fourth quarter results presentation. This morning, our CEO, Sergio Ermotti, will present the highlights of our full year results. Then our CFO, Tom Naratil, will present our fourth quarter results in detail. We'll then be very happy to take your questions, and we'd like to take questions from the telephone first. After that, we'll take questions from the room. Before I hand over to Sergio, I'd like to draw your attention to this slide, which contains our cautionary statement with regard to forward-looking statements, and I'd ask you to read it carefully. Now let me hand over to Sergio.

Thank you, Caroline, and thank you for joining us. 2012 was another challenging year for the banking industry and one where we had to address our own challenges. Weak macroeconomic conditions and geopolitical issues affected clients' confidence despite equity markets performing well. But our employees met these challenges by maintaining their focus and commitment to our clients, and I want to thank them for their efforts during 2012. In 2012, we made substantial progress towards achieving our strategic objectives on capital, costs and operational risk control. At the same time, we made a solid progress across our business divisions and our strategic transformation. On capital, we exceeded our targets for risk-weighted asset reduction and strengthened our industry-leading capital ratios. On cost, we are making headway with our efficiency programs. And on operational risk, we also continued to strengthen risk controls, as well as remediating legacy issues and addressing the missteps of the past. We also demonstrated what can we do through hard work and execution of a forward-looking strategy. Based on these achievements, particularly in relation to capital, and as a sign of our confidence, we are recommending a 50% increase in our dividend for 2012. Our progress on balance sheet reduction has also allowed us to launch a tender offer to repurchase debt of up to approximately CHF 5 billion. This program will help lower our funding cost in the future, and Tom will discuss in more details later. Our strategy is a journey that we set out on just over a year ago. And in October last year, we announced an acceleration in the transformation of the Investment Bank and further cost reduction across the group. We are reshaping our business to better serve clients, deliver more sustainable performance, reduce risk and enhance value and returns to our…

Thank you, Sergio, and good morning, everyone. As Sergio noted, for the fourth quarter, we reported a net loss attributable to shareholders of CHF 1.9 billion and adjusted pretax loss of CHF 1.2 billion. These results include CHF 2.1 billion of expenses related to litigation, regulatory and similar matters. Despite the headline losses, our businesses continue to make progress in the execution of our objectives, and the accelerated implementation of our strategy is on track. Our capital ratios remain the best in our peer group, and we strengthened them further in the quarter as we continued to reduce risk-weighted assets. This is the last time we'll report Basel 2.5 capital ratios. But as we say farewell to them, we note that we ended this era with Basel 2.5 -- with a Basel 2.5 Tier 1 capital ratio of 21.3%. Balance sheet reduction in the quarter was significant. Lower funding needs will allow us to buy back debt. And today, we announced tender offers to repurchase up to approximately CHF 5 billion of senior unsecured debt. Several of our business divisions performed well in the quarter. Wealth Management Americas reported strong pretax results and very strong net new money. Retail & Corporate's performance remained resilient, and we continue to gain -- to regain market share with net new business volume growth of over 4%. Global Asset Management also did well, with improved investment performance and higher pretax profits. Our Investment Bank made good progress on its restructuring, reducing Basel III RWAs by 19%, funded balance sheet by CHF 72 billion and headcount by approximately 800 positions. In Wealth Management, we continue to see strong net new money growth in our focus areas of APAC, emerging markets and the ultrahigh net worth segment. Concerns around the U.S. fiscal cliff were at the…

[indiscernible] I have several questions. First of all, what happened in your Wealth Management unit in the fourth quarter? Yesterday, you just reported that the December was the best month in the entire year and you have net new money below expectations and margin decline and furthermore, concerning the money outflow from Western European countries. Is that due to the tax issue with Germany because Germany is the biggest country there? So perhaps you can elaborate a little bit on that. Second question concerns the bonus pool, perhaps observers might think that the reduction of 7% is a little bit disappointing and I've calculated that the compensation rate is, in 2012, about 57%. That's much higher than Deutsche Bank or your American peers. Perhaps you can elaborate on that, too.

Well, let me take the last questions and then Tom will take the Wealth Management one. I think that when we look at 2012, our people have worked extremely well in executing our strategy, both in terms of capital accretion, in terms of reducing cost and taking risk -- controlling risks. In many areas of our businesses, as we've just said, we achieved record profitabilities. Last year, our performance pool was down 40%, was affected by the unauthorized trading incident. So when we look at year-on-year performance, one has to look into this strategic and -- objectives that we achieved. The other very important point I have to say is that when you look at our compensation framework, we have introduced a more stringent conditions for -- to make sure that a big chunk of this compensation will be deferred over time and is subject to sustainable performance achievements. And last but not least, I think that's comparing our common ratio to the one of large commercial banks as like comparing apple with oranges. And I think that compensation framework, I do think, reflects the strategic objectives we have in place.

So then on your question on the gross margin and activity levels in the fourth quarter in Wealth Management, so one thing that I think, looking at the gross margin development, that we need to take into account first is net interest margin. And we've made a choice specifically in our replication portfolios not to extend duration in a low interest rate environment in order to try to chase yield. And we think that's a better long-term decision for our shareholders, and we're taking a little short-term pressure on the net interest margin to preserve the capital of our shareholders when interest rates eventually rise again. Second, if you look at the activity levels of clients in 4Q, in particular, we saw a decline in transactional activity in the funds area in APAC and also in the structured product areas, primarily in FX-related structured products as implied volatilities dropped in the fourth quarter. And we also had the seasonal effects of the holiday period in the last 2 weeks of the year. As we look out in terms of the -- some of the comments that have been made about activity levels of retail investors potentially picking up as market levels rise, I think it's important for us to point out that there is -- that, that behavior does not necessarily correlate with what you see with Wealth Management clients, and that we found the high net worth and ultrahigh net worth clients, in making their portfolio, shifts from cash assets, wherein our advisory accounts in Wealth Management we have about 28% of our clients' money in cash today. That shift from cash to riskier asset classes will become a multi-year process, not a multi-quarter process. And further, it requires us to see better progress on the global fiscal issues in a number of countries.

Let's move to Huw Van Steenis on the phone.

Mr. Van Steenis, your line is open.

On your deleveraging, it strikes me you're about maybe 6 instead 9 months ahead of the target you put out. So I have 2 questions. First, in terms of the CHF 5 billion, the senior bonds that you've highlighted today, I couldn't see the keysets of which particular securities you're buying back. Is there any indication you could give us of potential savings in net interest income? And obviously, is there a par or over par potential capital hit? And then secondly, with the acceleration in -- successful acceleration of rundown of risk-weighted assets, how did that govern the way you think about the dividend for this year and for next year and potential dividend increases?

On dividend yield, I think that's -- as we stated before, we will introduce progressive capital return policies. But the substantial steps will be done once we achieve our 13% target, which we still have in light -- in sight of delivering by the end of 2014. At that point in time, we have committed and we will commit to at least 50% capital returns policy. But between now and then, I think that it will be marginal. And Tom?

Sure. I'll take that one. Thanks, Sergio. So, Huw, on the tender offer, we have details in the tender offers that we've put out in the various jurisdictions where they're active. If you look, there is -- first, there is a U.S. tender offer that's for a purchase of up to 2.5 billion across 7 note issues of senior unsecured securities. There is 12.6 billion in total outstandings in that pool. When we look at the European tender, it's for a cash tender of up to EUR 2.25 billion across another 7 issues of senior unsecured, where there's a total of 8.1 billion outstanding. I'm trying to calculate what we're going to say because obviously, a little question on how we're trying to anticipate investor behavior in each one of the issues. I would say the best way to think about it for us, we see it as neutral within the first 12 months of the year and something that has -- should have a range of roughly 4% to 4.5% payback over the life of the notes.

Next question from Mr. Derek De Vries, Bank of America.

I have a couple of questions if you don't mind. First of all, on Wealth Management on the cost line, and fee revenues were down slightly on Q3, but your comp cost and your non-comp cost are both up with the non-comp being up pretty significantly even in distributing out restructuring charges. I was wondering if you can give us a little more color on that. Is that just seasonality? Or is there something sort of notable in there? And then I was also wondering if you can quantify the impact still in Wealth Management of moving the treasury out of the Investment Bank and reallocating it to the divisions, if you could give us the impact that, that will have on gross margin in basis points. And then just sort of related to the gross margin there, I saw you made a comment, Tom, on the -- on Bloomberg about not being overly concerned about the margin. Is that related to the treasury? Or is that just kind of in the long term, you think you'll get there? Or is there anything else that makes you not overly concerned despite the big miss versus your target there? And then just one last question, I guess, in the Investment Bank, you've now had 3 months to further sort of execute your strategy. I was wondering if you had any sort of shift in -- on the margin in terms of businesses that you were exiting or maintaining. And then, I guess, still in Investment Banking, on the VaR -- I'm sorry, not on the VaR, on the risk-weighted assets, the CHF 64 billion that's on a VaR-based sort of methodology, do you have any sense as to where that might be in the new methodology, the sort of stress losses methodology or expect a shortfall, I guess, in the new methodology and where that CHF 64 billion might go? Or is it just broadly the right number?

All yours.

Thanks, Derek. So starting first with your question on Wealth Management and cost, there actually are 2 types of seasonals that are affecting us. The first was we've had some onetime benefit that hit us in the third quarter that weren't repeated in 4Q. We also did see some upticks that are slightly seasonal. For example, in the T&E line in the fourth quarter, we also saw -- we started a new marketing campaign around our product capabilities. So we incurred the expenses for the development of that program, the initial rollout of that in the quarter. The other thing that I think I would note, we did -- as I mentioned in my remarks, we did postpone some headcount notifications that we intended for the fourth quarter to the first quarter. So we do have some future actions in place to start to take down the cost base. And then the other thing I'd note, that our long-term strategic cost-reduction program across the group will certainly benefit the Wealth Management business because our drive outside of the consolidation of the on- and offshore businesses in Europe, our desire is not -- certainly not to touch the front office portion of the businesses. In terms of your questions on the reallocation of the income to treasury and how we would, from -- sorry, from treasury to Wealth Management, I think the best way to think about it is the -- certainly, the majority of the revenues will be going to Wealth Management. But as I noted, the amount of repo productivity were going to have with the free cash generated by Wealth Management will certainly be lower than it was last year. So I'd say a rough estimate to use is in the -- roughly around the CHF 100 million…

Next question from Mr. Jon Peace from Nomura.

I've got 3 questions, please. The first one relates to the risk-weighted asset runoff you saw in the Legacy Portfolio and the Investment Bank in the fourth quarter, I just wondered if you could comment on the P&L from the reduced exposure, whether there were any exit costs and how that makes you feel about forward-looking exit costs as you continue to run those positions down. The second question is, although you're well ahead of targets on RWA reduction, I see you haven't changed your 2013, '15, '17 targets overall. Is that conservatism? Or is that because you're anticipating this same multiplier? And then the final question relates to that helpful Slide 17, where you gave us the pictures, the new Investment Bank revenue profile. I guess, as we look to 2013, you would hope to grow the Investment Banking and equities piece, but the fixed income piece is still sort of rolling off. So I don't -- if you could just help us at the highest level what you think the revenue and the mix of that business might look like in 1, 2 years' time.

Okay. Maybe I'll tackle the second question and then Tom can address the other 2. I guess -- of course, we are focusing very much on our targets and reviewing them on a regular basis. But I think it would be inappropriate to change targets on a quarterly basis based on a couple of weeks of favorable market conditions. So I think that -- we do think that considering all the problems that are still out there unresolved, it would be not realistic for us to change targets. Of course, we feel very good about the momentum we had in the fourth quarter. We feel good about our part in execution -- in executing the strategy, but we want to be realistic. In respect to multiplier of FINMA as you saw in our chart, the recent increase in our -- in the blue bar in Retail & Corporate business that goes from around CHF 95 billion to CHF 105 billion over the next years, which seem netting this kind of changes and some growth and also optimization that we will run through our portfolio. Therefore, I think that there is no need to change our target based on these FINMA multiplier introductions.

Great. Thanks, Sergio. So John, on your first question on the RWA reductions and cost of exit, as you can tell from the P&L, we obviously saw minimal exit costs during the quarter. In terms of a forward look on that, I'd repeat what I said about having a favorable environment. We certainly look to take advantage of that, but it's also a long path. At the same time, we do have the -- we are in a position that I noted when we announced the third quarter results, that we meet our capital ratio targets merely by allowing, in particular, the over-the-counter book just to roll off. And any time that we look at accelerating our reductions in our portfolio, it's only if we believe we're going to generate additional shareholder value by doing so. And we measure that by taking a look at the cost of equity and support those positions during the time period we would have to carry them versus the acceleration time period. In terms of the pro forma questions and how you should think about it, so one -- I think the first thing is, as I've mentioned, we'll have more information in the annual, which will show you a quarterly breakdown, which I think will be quite helpful, because my overall comment on the year would be, obviously, when you look at these revenues, these revenues would generate with a much higher average RWA than utilization that we're going to have in the core Investment Bank going forward. I do think your focus on what do we want to grow and where do we think the performance will come from, we certainly are looking for an improved performance from equities in the year. Our IBD division is already performing well, and we'd expect to see that continue. And obviously, FICC, which includes some of the treasury revenues previously plus almost entirely 100% of the RWA reductions that we've taken, I think that that's probably the best way for you to start think about it. And I think the quarterly time series in the annual will help you get there.

Next question from Mrs. Fiona Swaffield from RBC.

I had a couple of questions. One was you mentioned the FINMA multiplier, but I've been reading about the potential for countercyclical buffer on real estate. Could you talk about what impact that could be and how that could change your core Tier 1 target? The second issue is on fixed income going forward. I mean, I was quite surprised how strong credit was. Are there any one-off positives in there from de-risking? Or what's the long-term strategy or expectation of revenues from credit because I thought that was where the RWAs were coming out? And lastly, just to understand on the gross margin, you talked about foregoing higher revenue from net interest income because of the strategy on interest rates, but the weakness in the margin in Q4 was only partly due to interest rates. So should we expect some seasonality? Q1 is usually a good quarter. And could you talk about potential seasonality in Q1 2013?

Maybe I'll just tackle the one on the introduction of any countercyclical buffer. Of course, this will not change our target at 13%. I think that -- as we outlined last year, I think that we do intend to have an additional buffer in our capital base that, hopefully, we can control on a proactive basis. We will see how the regulatory framework changes but we -- in any case, we will not change our targets based on any introduction of additional buffers.

So Fiona, on your question on FICC and the result there, I'd say first, I think our teams in credit and rates actually handled the reduction of the positions in the portfolios extremely well. And as a result of that, I think some of the outperformance is also on reducing positions in a very smart way during the course of the quarter. So there may have been some flattering benefit due -- as a result of that. Second, we also -- when we announced the acceleration of our strategy, also indicated that we wouldn't drop in-flight client transactions, that we'd complete anything that was in the pipeline. So we had a couple of more advisory-related types of roles in structured solutions and in real estate, where those that have already been set up when we completed those transactions with our clients during the course of the quarter. So I think in order to get more visibility on that, certainly, it will be helpful when you see our first quarter results, which then, in a way, takes us to the next question, which is on Wealth Management. So what about -- is there a seasonality, 4Q to 1Q? What should we anticipate? Certainly, the fourth quarter saw a reduction in transactional activity and structured product activity related to the holiday season itself and also due to some of the factors like decreased implied volatility in currencies. As those conditions change as we move through the first quarter, that could certainly change our clients' views of their -- of how they'd like to interact with us during the course of the quarter. But overall, I'd repeat what I said about net interest margin and the fact that we are deliberately not extending duration in this environment. And so that will have a continuing drag on the gross margin. But we ultimately think that's the best solution for shareholders.

Next question from Mr. Kian Abouhossein from JPMorgan. Kian Abouhossein - JP Morgan Chase & Co, Research Division: I have a few questions. Just coming back to the margin, Slide 12, net -- you mentioned that there is the liability spread margin pressure. Can you tell us how much more, in terms of basis points or in terms of revenue impact assuming no interest rate changes, we should expect for margin pressure? And in terms of trading activity, we've seen a material improvement in trading activity both in retail and institutional. For January, shouldn't we assume that that's a good indicator for what's happening in your business? And that's, I think, what Julius Baer was referring yesterday. I'm just wondering why you are more cautious than what we heard yesterday from one of your peers. The second question is related to Slide 17. The revenue loss on your non-core, does that relate to Slide 26? You're roughly CHF 65 billion of -- CHF 67 billion of non-core. And in that respect, on Slide 22, can you explain to me the CHF 1.4 billion of cost savings? Are they realized or are they annualized, these numbers? I just don't -- it's not clear from the slide. And the last one is on tax rate. Your tax rate is, you mentioned, 25% to 30% in the first half. What is it for the full year? And what do you expect for next year? I have to say I was hoping to get a bit more detail on the new divisional breakdown and hence, a lot of detailed questions as it's not possible to do the model with the slides that you're giving.

Okay. Kian, let me tackle the first question. I think that, of course, as you are rightly pointing out, both in the fourth quarter and the beginning of the year, we see a little bit more activity, particularly by retail clients globally, but this cannot be a proxy for our Wealth Management clients, particularly high net worth and ultrahigh net worth clients behave. Therefore, to use that as a proxy could be misleading. But maybe I want to go back a year ago. You remember that a year ago, it turned out that we were coming across as a little bit pessimistic because we weren't so bullish about how January develops. So I have to say that story repeats itself. We cannot multiply January 2012, and January is not a good proxy of -- on how a year works. We do believe that there is still a lot of challenges out there. A lot of issues are unresolved in Europe, both macroeconomically and in respect of the entire financial systems. There are unresolved issues in the U.S. in terms of the fiscal cliff issues. And for sure, growth is not something I would say can be taken for granted in the global economy. Therefore, we have to manage our business according to what we expect to happen over the next 12 months. It's not being too cautious. It's just being realistic about what we have been seeing in the last few years, learning the lessons and making sure that we also fully understand that the opportunity cost for us of being wrong and being cautious is fairly limited compared to the risk we take if we are overly optimistic in positioning our business going forward.

So Kian, to go back to one of your questions, where you asked about liability and sort of the pressure on our net interest margin and how you actually should think about that. I think the pattern, excluding the effect of the strategic investment portfolio in looking at 2011 versus 2010, is a reasonable basis upon which to model 2012 versus 2011 declines in margin, assuming there is no change in interest rates. Now obviously, as interest rates are changing during the course of the year, when we're replicating portfolio tranches to the extent that interest rates rise somewhat, we may have an opportunity to improve on that. But to the extent that the environment becomes more challenging, that would continue to compress the margins. But nevertheless, obviously, since a lot of these replicating portfolio tranches could have been put on a few years ago, we're reinvesting at lower rates than the original tranches had been put on. But I would emphasize though, it is a net interest margin calculation. And so rather than focusing on duration, as I mentioned, extension of duration, we're spending a lot of our time looking at the optimization of liability structure, so reducing cost to the divisions in terms of our overall liability mix, which is why we announced the hybrid Tier 1 -- our intention to call the hybrid Tier 1 today and also, our announcement of the debt tender. So there are 3 different ways for us to approach this issue, and we're spending a lot of time focusing on the liability side of the balance sheet. On your multi-slide question, so this is from 17 and, I guess, 22 -- 17 and 22 and how you bridge those. The first one is the non-core in terms of what you should think…

Yes. I think that -- sorry, on the -- I forgot to comment on your Slide 22. I wouldn't combine Slides 22 and 17 together. The Slide 22 is the net cost savings going back and looking at our cost program that we announced at the end of the second half '11. And those are the realized run rate savings from those initiatives, which, as I mentioned, was a reduction of 3,100 personnel since the announcement of that cost savings program. I think when you look at the non-core piece, the real piece of work that we have to do on the cost base, as I mentioned, is the complex infrastructure that we have, supporting those complex businesses. And so the better that we're able to accelerate the reduction, in particular, of the OTC book, that will allow us to take out some structural costs more quickly. But I do have to tell you that that's the stickier part of the balance sheet reduction. It's also the stickier part of the cost reduction. Kian Abouhossein - JP Morgan Chase & Co, Research Division: And just -- sorry, on the CHF 1.4 billion, you say it's a run rate. So what is the real realized cost savings? And it looks like it's not the new cost savings, as I understand it.

That's separated from the incremental savings program that we announced in the third quarter. The progress -- we announced that in October. So we -- obviously, as I indicated, we notified 1,900 personnel of redundancy in the fourth quarter. That's what the restructuring charges in the fourth quarter represents. So we began the improvement in our cost base from that point. Those personnel will come out of the staff roles, and that's off the payroll, primarily in the first quarter and the second quarter. We had a slight reduction in the roles in 4Q. And there will be a slight reduction in 3Q, the bulk of which will be 1Q and 2Q.

Next question, Mr. Kinner Lakhani from Citigroup.

So firstly, I just wanted to come back on the capital point, where you basically told us that over time, the high-trigger CoCos could build up to about 1% of risk-weighted asset. How does that change the shape of the capital structure, i.e. would it substitute for common equity or would it substitute for lower trigger CoCos? Related to that, I just wanted to get an update on measures you're taking to improve resolvability, which, I guess will, over time, also help you to reduce your endgame capital target, and whether you have any kind of comments on subsidiarization, including kind of the recent Fed proposal that we've had on U.S. subsidiary. And finally, just on funding, it wasn't clear to me the interest expense that was saved on the CHF 5 billion buyback. I know you gave us some guidance but I didn't quite follow. But equally importantly, how we should think about further reduction in wholesale funding of your balance sheet over time? Should we relate it to the LCR ratio being 113%, NSFR 108%, and obviously further reduction in your balance sheet?

Okay. Maybe I'll tackle the first question on -- the first 2 questions in respect of what is additional 100 basis points of high-trigger notes means for our capital base. I think that, for sure, it's introducing a degree of flexibility in how we manage high trigger and low triggers and how we manage, what we always say that we want to have, an additional buffer above the 13%. But the most important issue, in addition to this benefit, is that we have basically created an instrument that while recognizes compensation also creates a value for shareholders. And there is as much as a message to our shareholders and bondholders about how we want employee to be aligned with their interest and vice versa, then there is just pure issues about creating capital. So in a nutshell, I think these instruments create flexibility in terms of contingent capital options, not in respect of our targets of 13%, and it's a message about creating sustainability with our shareholders. Of course, when we go into the resolution, we are working on the resolution. We are working on different ideas on how to speed up the process of subsidiarization of some of our activities outside Switzerland. But remember that this -- the eligibility. We're going to make sure that we are eligible for further capital reduction, but this is going to be a subjective assessment of the regulators in respect how much additional rebate we will get. So what we showed you last quarter was a change from the 19% to the 17.5%, which is based purely on our reduction of balance sheet. And this is a factual element of our calculation. The further reduction is a subjective assessment of our regulator in respect if we are allowed to get it or not and only -- and it's going to take time to develop all these changes in our corporate structure in order to get the eligibility to be there.

Okay, great. Then, Kinner, on your last question, talk about the funding and how I evaded disclosing the actual number. I think -- that will take some of the fun out of it for you. I think if you look at the tender offer, you'll be able to see, based on the issues that we have and the caps that we have on the total purchase, I think you'll be able to work back to what that is. I think the guidance I gave you will help you to do that by seeing pretty much assume one for one over the 12-month time period in terms of the initial expense for us relative to the savings in a year and then think about it as a 4x, 4.5x on the cost in Year 1 as to life-to-date savings over the maturity profile of the instruments.

And should we expect kind of further buyback optimization on the wholesale funding plan over time?

The way I describe, I think, overall, we obviously have set out based on our 2015 target, 2015 target liability structure, and we've laid out our funding plan for this year, including changes in that mix and the way we'd like to see that develop. I think as you see our first quarter balance sheet relative to where we are at year end and you start to do some of the comparative work, I think you'll see how we're beginning to shift that mix. But obviously, as we noted at the 3Q announcement, we're certainly shifting where deposits are higher percentage over time of our mix, but it's a part of our mix. We want to make sure we've got a diversified liability structure, one that's both optimized on the cost and tender.

Next question from Mr. Matt Spick from Deutsche Bank.

I have 3 questions, if that was possible. The first was on retrocessions and there is some disclosure on Pages 22 and 98 of the full report, but I just wondered if you could remind us what percentage of your client AUMs and discretionary mandates and whether retrocessions was one of the contributing factors to perhaps being a bit cautious on the gross revenue margin in 2013. The second question is obviously, it's quite difficult to forecast revenues for the pro forma Investment Bank, but I wondered if you could update us on roughly the headcount that will be in that business during the first quarter. I'm working with an assumption it might be 9,000 to 10,000 total, of which about 1,000 people would be fixed income, front office so on and if you thought that was a reasonable estimate. And then finally, just on the equities business in 2013, obviously, we all hope it's a lot better, but the margin pressure in cash equities is obviously still there. And I think margin pressure is picking up in prime finance. So I wondered if you had any comments on how you've got you prime finance business would position to 2013, whether you saw that margin pressure as well and whether the rescaling or descaling of the balance sheet had any impact on prime finance more generally.

So Matt, thanks for those questions. So on the retrocessions, what percent the asset is in discretionary? It's 12.8% of the assets that we have. In terms of the next -- could you repeat your third question? You did mention something about margins and volumes. I just want to make sure I got the intent correctly.

Yes. The question is really just prime finance, very high return on equity business. Historically, it's had a lot of market concentration. And I think margins are under quite a lot of pressure there. You've got quite a big prime finance business. Do you see margins under pressure? And how do you feel about that business for 2013 given the shrinkage of the balance sheet?

Yes. So certainly, as you look at 2013 equities, equities business overall as one of the Basel III-friendly businesses. It certainly is one and its various areas that has increasing competition. However, one of the reasons why we accelerated our strategy and position ourselves with greater focus on for us, key area of equities overall, is to make sure that we have the investments, the sufficient investment that we need to make in order to make sure that we are as equipped to handle our clients' business and, in particular, execution as efficiently as we can going forward and in the most up-to-date methods that we can from a technology perspective. So first, I think the changes that we've made strategically reinforce some of the investment needs that we see as a result of your thesis about what's happening in the industry. Then second one, when you're, I think -- I believe you're specifically talking about prime brokerages and prime brokerage and balance of spreads, we look at that as an additional component of the products we -- that we have for our clients and not just standalone business on its own. It's part of what we do. As we concentrate our investments in our -- in a key area like equities, we also want to make sure that we're allocating balance sheet to those clients who actually feel that we're providing the appropriate amount of service and that they're presenting us with the order flow associated with that. And then -- sorry, yes -- as Sergio is mentioning, also, all the work that we're doing on the liability optimization on the balance sheet certainly will help to put us in a good position going forward.

Next question, Mr. Christopher Wheeler from Mediobanca.

Just a few questions. First of all, perhaps you would give us a little bit detail on the issue you had with derivatives in Japan and exactly what the story was there because obviously -- that obviously had an impact against what seems to be a really good cash equity performance. Second couple of questions on litigation, Tom, I think you talked about staying at high levels of cost into this year. I assume you're relating that to the CHF 449 million of legacy issues. And related to that, in Wealth Management Americas, you talked about litigation. There is something like a 39% increase in non-comp cost, which suggests that maybe CHF 60 million or CHF 70 million of litigation. Perhaps you could clarify whether that was the case. And then finally, related on what Kinner was asking, I just want to get my head around the high-trigger loss-absorbing capital and it doesn't seem to me -- I mean, Sergio talked about the flexibly that gives you, but you didn't seem to talk about how that could mitigate the additional 3% above the 10%, which has always been the issue around why you don't like high-trigger CoCos. But I would have thought the high-trigger bail-in bonds would have fulfilled that part of that 3% requirement, and why you wouldn't try and utilize that? And perhaps related to that, could you give us some clue on the structure of the bonds that you're giving to staff? In other words, could you give us a clue on what the coupon will be? But also, I'm hearing that it may be 5-year cliff vesting. I just wondered what are you doing about rolling up the coupon, how that will work, and perhaps also how you will calculate the redemption cost. Will it be a par? Or will you calculate it based on the direction of your core Tier 1 ratio weight in the 7% trigger?

Yes. Christopher, thank you. You sound like an employee. That's -- those are not very interesting questions. Actually, to your question, the coupon, we're going to send the coupon in consideration, the yield of the outstanding low-trigger instruments, therefore, the yield to maturity. So we're going to take a conservative view on that, so -- and therefore, I think it's a fair assessment on where the coupon will be. It will stay the same for the entire 5-year life and will be repaid at par unless, of course, we have an event coming in. In respect of why we are not using it against the 3% buffer, the 3% high-trigger buffer, it's purely because we do believe that we want to have our capital strength in full equity at this stage, for sure. We want to have a 3% -- the 3% buffer being used with a pure equity and not with a contingent capital. And in any case, as we said before, we do think that we're going to need an additional buffer in the future. And therefore, we can use that flexibility. In respect of the big difference between this instrument, I guess -- I don't know if I got exactly your question. But we are against CoCos because we don't want to introduce potential dilutions to our shareholders, and this instrument doesn't necessitate the issuance of treasury shares. We potentially could dilute shareholders, and it's purely obtaining the same results by a write-off of the notion. So we do continue to believe we don't like the CoCo concept. We talk about CoCa because it's contingent capital and not contingent convertibles. So it's fundamentally a completely different instrument from our standpoint of view in respect of taking away a huge dilution problem for shareholders and something that in my point of view could also disturb the normal market dynamics of the stock trading if an event happen.

I mean, I totally agree with you on that and obviously, Barclays and other banks do as well. Would you actually think about issuing more high-trigger bail-in bonds because it does seem to make a lot of sense in terms of the kind of capital structure you're looking to achieve?

I think that our plan is to go first with our low triggers, building up our low triggers and building our 3% core equity buffer, and then using the high trigger through the employee plans. But Christopher, over time, we may change it. It's not in the foreseeable future that we can see this as being an option for us.

Chris, if I could just add on to what Sergio said about the question. I think, as you know, we've talked about how do you manage. So you have your certain targets, but then how do you manage your capital during the course of the year? And so obviously, if you think about a 13% target, where you've got a 10 plus 3 requirement, you've got to manage above that 13% level. One of the ways to do that is to introduce the high trigger that we've introduced as part of the compensation program. And that will give us more flexibility in terms of managing during the course of the year, specifically, when we talked about the management countercyclical capital buffer or how we manage our capital when we look at potential stress events that could occur. Going back and then addressing your second question, which is about Wealth Management Americas' historical litigation items, you're in a ballpark in terms of sizing the effect. I would just note that there were 2 lumpy issues in the course of the quarter rather than a series of individual small events. Finally, you asked about what exactly happened in derivatives in Japan. This wasn't a major item. We just saw a -- some trading losses in Japan in our Japan's structured product book as volatility increased during the market rally in the fourth quarter.

Okay. I just wondered whether that CHF 449 million of litigation in the non-legacy, what's the sort of benchmark against which you were saying. You expect similarly high charges in the -- in 2013.

Yes. So the litigation of the legacy -- in the legacy books, specifically deals with RMBS issues. I'm not sure about the sizing, if that's the correct way if you look at that and extrapolate that going forward. But certainly, the pressures, if you look at a year-over-year comparison and stripping out the LIBOR issue as an event, we certainly see a rising -- an increasing cost per event of operational risk in those categories.