Credit Suisse Group AG (NYSE:CS) Q4 2022 Earnings Call Transcript

Credit Suisse Group AG (NYSE:CS) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good morning. This is the conference operator. Welcome, and thank you for joining Credit Suisse Group’s Fourth Quarter and Full Year 2022 Results Conference Call for Analysts and Investors. As a reminder, all participants are in a listen-only mode, and the conference is recorded. You will have the opportunity to ask questions after the presentation. I will now turn the conference over to Kinner Lakhani, Head of Investor Relations and Group Strategy and Development. Please go ahead, Kinner.

Kinner Lakhani: Thank you, Alice. Good morning. Welcome, everyone. Before we begin, let me remind you of the important cautionary statements on Slides 2 and 3, including in relation to forward-looking statements, non-GAAP financial measures and Basel III disclosures. For a detailed discussion of our results, we refer you to the Credit Suisse fourth quarter and full year 2022 earnings release that was published this morning. Let me remind you that our 2022 annual report and audited financial statements for the year will be published on or around March 9, 2023. So, I will now hand over to our Group CEO, Ulrich Koerner; followed by our Group CFO, Dixit Joshi, who will run through the numbers.

Ulrich Koerner: Thank you, Kinner. Ladies and gentlemen, thank you all for joining today. We greatly appreciate your participation and engagement. Let me begin with some opening remarks. 2022 was an extremely challenging year for Credit Suisse with the group posting a net loss of CHF7.3 billion. Nonetheless, it was also a year which marked the beginning of the important and necessary transformation for our organization. On October 27th, we presented a targeted plan to create the new Credit Suisse, a simpler, more focused bank built around client needs. And, today, we reaffirm all of the targets we announced in October. We are building the new Credit Suisse around our Wealth Management and Swiss Bank franchises complemented by our leading and differentiated capabilities and Asset Management and Markets.

We continue to execute our transformation at an accelerated pace and in a determined manner. I will share some details of our progress over the course of the presentation. In line with the update provided on November 23rd, we reported a pre-tax loss of CHF1.3 billion and an adjusted pre-tax loss of CHF1 billion for the fourth quarter. We have a robust balance sheet, and we are executing on our transformation from a position of strengths. We reported a year-end CET1 ratio of 14.1% and a Tier 1 leverage ratio of 7.7%. Our liquidity position also improved following the impact of the events of October. The average liquidity coverage ratio was at 144% at the end of the fourth quarter, with further improvements this year. At these levels, our capital and liquidity ratios compare favorably to our peers.

The Board will propose a cash dividend of CHF0.05 per share for the financial year 2022, subject to AGM approval. This is consistent with our intention to pay a nominal dividend throughout the transformation period. We remain focused on the disciplined execution of our strategy and have made progress in restructuring our Investment Bank, the creation of CS First Boston, and the acceleration of our cost transformation program. We are confident that our fundamental reshaping of the bank will create value for all our stakeholders. Over the next three years, we will continue to execute at pace, building on our respective global franchise and delivering exceptional service to our clients. Let me turn to the fourth quarter results. The group reported an adjusted pre-tax loss of CHF1 billion for the fourth quarter, primarily reflecting an adjusted pre-tax loss of $1.3 billion in the Investment Bank.

Challenging market conditions and lower client activity had a significant impact on our Capital Markets and Advisory businesses, while the strategic actions to de-risk and exit certain business lines resulted in lower sales and trading revenues. Now, turning to Wealth Management. The division reported an adjusted pre-tax loss of CHF155 million. During the quarter, we put in place an extensive client outreach program and are already seeing the benefits of our initiatives. We are also taking proactive steps to reduce the cost base as part of the group-wide cost transformation program. The Swiss Bank division reported an adjusted pre-tax profit of CHF259 million for the quarter. This demonstrates our resilience and leadership position in our home market.

Overall, the group reported a pre-tax loss of CHF1.3 billion. This result includes several adjusting items, the largest of which were restructuring expenses related to our cost transformation program as well as real estate gains. Our new executive board remains fully focused on the successful execution of our strategic transformation and the actions we have taken so far strengthen our business momentum in 2023 and beyond. Now, let me be clear, our teams continue to work relentlessly on serving our clients. Since October, we have proactively engaged with more than 10,000 Wealth Management clients and over 50,000 clients in the Swiss Bank. As previously mentioned, we are seeing the first positive signs from our comprehensive global initiatives to regain deposits as well as assets under management.

In January, we saw deposit inflows at group level in Wealth Management and in APAC, as well as net new asset in APAC and in Swiss Bank. Importantly, clients remain overwhelmingly supportive and we remain very thankful for that. To remind you of the strengths of our Wealth Management business, we are the number two wealth manager outside the U.S. with a deep client franchise balanced between ultra and high net worth clients. We have a very clear plan to restore the Wealth Management division to profitability. We are focused on growing a more stable high net worth business. We increased our focus on recurring revenues and regaining client wallet share among ultra-high net worth clients. And we are undertaking steps to reduce costs and improve efficiency.

Let me now update you on what we have achieved since October 27th. We have made significant progress in the transformation and restructuring of the Investment Bank. Since the end of the third quarter, we have achieved about two-thirds of our Securitized Products Group asset reduction target. In the fourth quarter, we’ve reduced risk-weighted assets and leveraged exposure by about $5 billion and around $15 billion, respectively, reflecting proactive deleveraging and derisking measures in the non-core unit, that’s ahead of the target run rate we set in October. As announced, our goal is to carve out CS First Boston as a distinct leading independent Capital Markets and Advisory net business, and we are pleased with the acquisition of the Investment Banking business of M.

Klein & Company. This is a significant step forward in realizing CS First Boston’s growth potential and creating value for our shareholders. Since our strategy announcement in October, we have strengthened our capital position by raising around CHF4 billion of equity and we have completed around CHF10 billion of debt issuances, while it’s making tangible progress in deleveraging and derisking the group further. This should reduce our funding needs in the future. Our cost transformation is well underway. As previously disclosed, action initiated in the fourth quarter represent approximately 80% of our 2023 cost base reduction target of about CHF1.2 billion. I want to make it absolutely clear that me and my management team are relentless in driving our cost base lower.

We have made significant progress on our exit from the Securitized Products. We completed the first closing of our transaction with Apollo. That, along with other actions taken, contributed to an overall reduction in Securitized Products’ assets by around $35 billion, since the end of the third quarter. This is approximately two-thirds of our targeted reduction of $55 billion. So, we are on track to close the full transaction in the first half of 2023, subject to regulatory approvals. This transaction, together with the potential sale of other portfolio assets, is expected to reduce risk-weighted assets, leverage exposure and other risk metrics over time. These actions are consistent with our strategy to significantly reduce the size of the Investment Bank and release liquidity and capital to support the bank’s core businesses.

Turning to the non-core unit. As you can see on the slide, we are running ahead of schedule on both risk-weighted assets reductions and leverage exposure. Dixit will cover the important progress we have made in more detail. CS First Boston is an attractive value proposition for Credit Suisse shareholders and its carve out is an important step in our strategic transformation. We are creating a global independent capital markets and advisory led bank with distinctive capabilities and a unique market position. It will be headquartered in the US with leadership positions in Europe, Asia and selected emerging markets. We are confident that our history of innovation, market leadership and the years of experience of our core teams, together with a simpler operating and regulatory model, will provide a clear competitive advantage.

Our execution plan is already underway. We have announced the acquisition of M. Klein & Company, which will further strengthen CS First Boston’s advisory capabilities and we are right-sizing the business to reduce capital needs and release low-returning capital. In short, CS First Boston will be efficient, agile and have a comprehensive product offering designed around client needs. Importantly, the new Credit Suisse will maintain a long-term strategic partnership with CS First Boston, leveraging our leading market platform, whilst ensuring the close connectivity to our Wealth Management and Swiss Bank businesses. And we have a strong management team under the leadership of Michael Klein. Michael has an established track record in building leading capital markets and advisory led businesses as well as four decades of investment banking experience.

The acquisition of M. Klein & Company adds to Credit Suisse’s advisory capabilities and accelerates the creation of an advisory-led CS First Boston. At the same time, it creates significant revenue opportunities for Credit Suisse. The transaction is that a single digit price-to-earnings multiple and is expected to be earnings accretive with an anticipated impact on the CET1 ratio of less than 10 basis points. In October, we made a very clear commitment to simplify the group and to reduce our cost base. We intend to cut the total headcount from around 52,000 in 2022 to 43,000 over the next three years. We have already achieved a 4% reduction in the fourth quarter 2022 and we intend to continue to reduce third-party costs, including spending on contractors and consultants in a targeted and decisive manner.

We are determined to deliver on our cost reduction target of CHF1.2 billion in 2023 and CHF2.5 billion by 2025. These targets on a like-for-like basis and exclude the impact of business exits. We are making progress on our cost transformation, and we will be relentless in identifying opportunities to move further and faster. Rest assured, our cost initiatives will not impact the investments in risk management and technology, including digitalization as well as our targeted business growth. To sum up, we are well advanced on our journey to deliver a new simpler, more focused Credit Suisse built around client needs. We have a new executive board with relevant experience and a strong track record of execution in similar situations. We are building a unified culture from the top of the organization with a strong focus on risk management, collaboration and accountability.

We remain disciplined on strategic execution, strengthening and reallocating capital, delivery on our cost ambitions, and, most importantly, supporting our clients globally. As I mentioned, we have acted decisively to address the impact of the outflows experienced in the fourth quarter and we have seen deposits inflows at the group level in Wealth Management and APAC, as well as net new assets in APAC and the Swiss Bank. We are also making progress with the carve out of CS First Boston and are creating a more focused markets business that will deliver innovative solutions and products for our Wealth Management and our institutional clients. In short, we are determined to make this transformation a success, restore trust with all stakeholders, and ultimately create sustainable value for our shareholders.

With that, I hand it over to Dixit.

Dixit Joshi: Thank you, Ulrich, and good morning, everyone. I’m going to start today with the financial overview for the fourth quarter and the full year, and then provide some details on assets under management given the outflows that we saw in the quarter. After that, I’ll go through the divisional performances before setting out some of the key themes for the group. Before I begin, I’d point out that this is the last time we will be discussing our results under our current financial reporting structure. As of the first quarter of 2023, we will be publishing our earnings under the new structure that we outlined in October comprising the four key business divisions and the Corporate Center, plus the Capital Release Unit. We will provide a restated time series at the beginning of April, along with other relevant information and, of course, we plan to provide regular updates detailing our progress as we execute on our strategy.

Please note that unless I state otherwise, for example with the Investment Bank, you can assume that whenever I give a currency figure it’s in Swiss francs. So, let’s start with the group overview. The group took clear strides forward, despite the challenging fourth quarter. We delivered the strategy update alongside our third quarter earnings and started immediately on implementation. We made good progress reducing non-core related exposures, on cost reduction measures and on balance sheet reductions relating to the Capital Release Unit. We proactively managed our liquidity position following the outflows in the fourth quarter. We executed a successful series of capital and funding measures, including raising around CHF4 billion in equity and completing around CHF6 billion of debt issuance in the fourth quarter.

We strengthened our CET1 ratio to 14.1%, and we remained resolutely focused on execution and on supporting our clients. As you can see from this morning’s announcements regarding the acquisition of the Investment Banking business of M. Klein & Company and the completion of the first closing of our Securitized Products transaction with Apollo, we are executing rapidly on the strategy and we’re ahead of plan. In terms of our financial performance, the net asset and deposit outflows in the fourth quarter reduced our net interest income and recurring revenues, notably in Wealth Management. The Investment Bank experienced another tough quarter with lower client activity, the impact of our strategic actions, as well as the events of the fourth quarter, all contributing to the reduced revenues in sales and trading.

Revenues in our Capital Markets and Advisory businesses were also lower and more in line with the industry-wide slowdown. Overall, fourth quarter reported net revenues for the group were 33% lower year-on-year at CHF3.1 billion and reported operating expenses were 31% lower at CHF4.3 billion. Provisions for credit losses amounted to 6 basis points of net loans at the year-end, mainly relating to specific provisions taken in the Swiss Bank and the Investment Bank. This resulted in a reported pre-tax loss for the quarter for the group of CHF1.3 billion, in line with the guidance that we gave at the end of November of a loss of up to CHF1.5 billion. Our reported results include a number of adjusting items with a cumulative net impact on our fourth quarter results of CHF300 million.

A detailed breakdown can be found in the earnings release. However, notable adjusting revenue items included CHF191 million of real estate gains and a CHF75 million loss relating to the disposal of our remaining stake in Allfunds. In total, adjusted net revenues for the fourth quarter were 32% lower year-on-year at CHF3 billion. Reported operating expenses for the quarter included CHF352 million of restructuring expenses, broadly in line with our guidance of CHF300 million and CHF34 million of major litigation provisions. We continue to make good progress in resolving our outstanding legacy issues. Adjusting for these items, operating expenses were 3% lower year-on-year at CHF3.9 billion, resulting in an adjusted pre-tax loss for the quarter of CHF1 billion.

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The income tax expense for the fourth quarter was CHF82 million, resulting in a net loss attributable to shareholders of CHF1.4 billion. The reason we have a tax charge for the quarter, despite the overall reported pre-tax loss, is driven by the fact that we earn taxable income in legal entities, which cannot be offset by tax losses elsewhere in the group. We expect this to continue to be the case in 2023 as we execute on our transformation program. I’d like briefly to mention the Corporate Center, which booked an adjusted pre-tax income of CHF104 million in the fourth quarter compared to a loss of CHF172 million in the same period last year. This was largely driven by treasury results. Turning back to the group, for the full year, reported revenues were 34% lower compared to 2021 at CHF14.9 billion, reported operating expenses were 5% lower at CHF18.2 billion, leading to a reported pre-tax loss for the year of CHF3.3 billion.

The third quarter deferred tax impairment of CHF3.7 billion resulted in a reported net loss of CHF7.3 billion for 2022. Let me make a brief comment on compensation, which for the full year was down 2%. The fourth quarter total for the group decreased by 4% year-on-year, however it was 8% higher compared to the third quarter. This was a function of structural changes we’ve made to compensation over the course of the last year. As a result, some of the division show increases in the compensation line for the fourth quarter. Compensation is one of our key levers for controlling costs and I’d note that the total variable compensation pool for 2022 was 50% lower than in 2021, as we took actions commensurate with the decline in the group performance.

Now, before we turn to the performance of our business divisions, which I will discuss as usual on an adjusted basis, I’ll touch on the impact of the client asset outflows during the fourth quarter on Slide 15. Our assets under management were impacted by significant net asset outflows early in the quarter, which affected both our revenues and our liquidity position for the fourth quarter. Approximately, two-thirds of the net asset outflows in the fourth quarter occurred in October and they’ve reduced considerably in November and December. Group assets under management were around 8% lower quarter-on-quarter at CHF1.3 trillion, largely reflecting net asset outflows of CHF111 billion. Deposit outflows made up around 60% of Wealth Management and Swiss Bank net asset outflows in the quarter.

In total, net asset outflows represented 8% of assets under management at the end of September. Since the start of the fourth quarter, we strengthened our balance sheet, including through the capital raises to set the group on a stronger trajectory. We’re now three months into our transformation journey and we saw the first signs of the benefits of these and other proactive initiatives in January with positive deposit inflows at the group level and specifically in Wealth Management. Net asset flows in the Swiss Bank were positive and the net asset outflows in Wealth Management in January where at a reduced level compared to December with net asset inflows in Asia Pacific. Moving on to the divisional overviews, we’ll start with Wealth Management.

Lower assets under management and deposits as well as subdued client activity resulted in lower revenues. This led to a loss in Wealth Management as we had indicated in our outlook statement in November. Net interest income declined 17% year-on-year with lower loan income and higher funding costs offsetting the benefit of rising interest rates on deposit income, albeit on lower deposit volumes. Similarly, lower average assets under management resulted in a 17% year-on-year fall in recurring commissions and fees. Transaction based revenues were 20% lower, reflecting reduced levels of client activity and mark-to-market losses of CHF31 million on financing exposures. Total net revenues were down 18% year-on-year. Operating expenses were 5% higher, mainly due to higher general and administrative expenses, reflecting higher allocated corporate function costs.

I would note that a number of the measures that we took in the fourth quarter should reduce costs for the division in 2023. Overall, the division delivered an adjusted pre-tax loss for the quarter of CHF155 million. While we expect the division to report a loss for the first quarter, we are determined to return Wealth Management to profitability and Ulrich has highlighted some of the specific actions that we’re taking to achieve this. Let’s turn to the Swiss Bank on Slide 17. Swiss Bank had a resilient fourth quarter. Net revenues were 10% lower year-on-year, but quarter-on-quarter revenues held up well, 3% lower. Net asset outflows were CHF8.3 billion, primarily from private clients. The reduction in the threshold benefit from the Swiss National Bank, given rising interest rates in Switzerland, negatively impacted net interest income, so this was partially offset by higher deposit income.

NII was 11% lower year-on-year and flat compared to the third quarter. As a reminder, the loss of the SNB threshold benefits is now in the quarterly run rate and we expect the year-on-year impact, which was CHF78 million in the fourth quarter, to bottom out by the middle of this year. Recurring commissions and fees were 10% lower year-on-year, mainly due to lower average assets under management. These were flat compared to the end of the third quarter and 12% lower year-on-year, primarily the result of declining markets. Transaction-based revenues were 18% lower year-on-year, mainly driven by the impact of equity investments. Excluding these, lower client activity accounted for an 8% reduction. A 6% year-on-year increase in operating expenses mainly reflected the structural changes to compensation that I referred to earlier.

Provisions for credit losses were CHF28 million compared to a release of CHF4 million in the fourth quarter last year, equivalent to 7 basis points of net loans. Overall, the division reported a pre-tax income of CHF259 million, 41% lower year-on-year. Turning to Asset Management. Market conditions in the fourth quarter were challenging for the Asset Management division. Net revenues were down 28% year-on-year, driven primarily by lower performance, transaction and placement fees, as well as reduced management fees. Management fees were 19% lower, reflecting a decline in assets under management of CHF74 billion, CHF50 billion of which was due to FX and market effects. Net asset outflows in the quarter were CHF11.7 billion, across both traditional and alternative investments as well as outflows from investments and partnerships.

Operating expenses were 3% lower year-on-year, primarily due to lower costs relating to the supply chain finance funds matter and reduced commission expenses, partly offset by higher compensation and benefits expenses. In total, the division booked an adjusted pre-tax loss of CHF15 million for the quarter. Let’s now turn to the Investment Bank on Slide 19. Clearly, this was not a normal quarter for the group and in particular for the Investment Bank, where revenues were down 74% year-on-year. Revenues were directly impacted by: first, our restructuring actions, including the steps taken to de-risk and exit certain business lines; second, actions we took in response to the group’s deposit outflows in the fourth quarter; and third, reduced client activity as capital market conditions remained challenging.

Operating expenses were 15% lower year-on-year, mainly reflecting lower compensation and benefits, resulting in an adjusted pre-tax loss for the quarter of $1.3 billion. Our sales and trading businesses were impacted both by our restructuring and lower client activity, resulting in an 89% year-on-year decline in revenues. We estimate that the impact of the accelerated deleveraging, including that linked to our strategic actions, accounted for around 40% of the year-on-year decline. Our continued strength in macro was offset by a substantial decline in Securitized Products and Global Credit Products, largely due to our strategic actions and, consequently, fixed income revenues were 84% lower year-on-year. Equity sales and trading revenues were affected by the impact of our strategic actions, reduced client activity and less favorable market conditions on the equity derivatives business.

The exit of Prime Services also had a year-on-year effect on cash equities. Overall, equities revenues were 96% lower year-on-year. For those business lines less directly impacted by our restructuring, the performance was more resilient with Capital Markets and Advisory revenues 59% lower year-on-year, in line with the reduced industry fee pools. The reported pre-tax loss of $1.5 billion included restructuring expenses of $214 million for the fourth quarter, part of which was related to the headcount reduction program. We also booked major litigation expenses of $43 million. Looking forward, our strategic actions and the ongoing challenging market backdrop mean we would also expect the Investment Bank to report a loss in the first quarter of 2023.

However, we have taken decisive action on the structure of the division and these measures are important steps in the creation of the new Credit Suisse. I’ll now take you through our progress on some of our key financial metrics starting with capital on Slide 20. We ended the fourth quarter with a CET1 ratio of 14.1%, up around 150 basis points quarter-on-quarter. Our successful capital increases added 147 basis points, underpinning our capital strength as we continue to execute on our strategic transformation. Business RWA reductions benefited the CET1 ratio by 80 basis points, partially offset by 53 basis points attributable to the net loss for the quarter and by 24 basis points due to other CET1 movements, including FX and model and parameter updates.

Overall, RWAs declined by CHF23 billion quarter-on-quarter, mainly due to the reductions in the Investment Bank of around CHF5 billion and around CHF9 billion in Wealth Management and Swiss Bank, with a further CHF10 billion due to FX. Our parent capital ratio was around 250 basis points higher compared to the end of September at 12.2%. I should also note that as we reduce RMBS exposures and activity as part of our announced strategy towards a managed exit from the Securitized Products business and to de-risk the bank, we anticipate, based on ongoing regulatory discussions, that operational risk RWAs associated with historical RMBS activity will decrease. Turning to leverage. For the fourth quarter, we reported a Tier 1 leverage ratio of 7.7% compared to 6% in the prior quarter.

Clearly, this ratio was higher than the level we’d normally expect to maintain, primarily because of the reduced size of the balance sheet which resulted from the events early in the fourth quarter. Reductions in high-quality liquid assets, mainly from the deposit outflows, and business deleveraging contributed 102 basis points and 59 basis points, respectively, with the capital raises contributing 47 basis points. This was partly offset by 17 basis point impact resulting from the reported net loss for the fourth quarter. Leverage exposure was CHF186 billion lower quarter-on-quarter at CHF651 billion, primarily driven by CHF118 billion drop in HQLA as well as deleveraging, notably in the Investment Bank. Let’s now look at these deleveraging and derisking measures in more detail on Slide 22.

As part of our strategic transformation announced in October, on the 1st of January, we established the Capital Release Unit, which includes the non-core for non-strategic assets. The CRU will be a separate reporting division and we will provide a more detailed breakdown when we publish our restated financials in early April. We’ve made a strong start in the fourth quarter in advance of the formal establishment of the CRU. Proactive deleveraging, derisking, and market moves reduced RWAs by around $5 billion and leverage exposure by around $15 billion, excluding the impact from reductions in HQLA allocations. We’re running ahead of schedule, and I’d add that de-risking also generated an estimated $10 billion of liquidity in the fourth quarter.

We intend to continue to execute on the run down of assets to release capital and liquidity, as well as targeting cost reductions. As you can see, we’re well on track to reach our RWA and leverage exposure targets of around $25 billion and around $92 billion, respectively, by the end of this year. Moving on to our liquidity coverage ratio. Although, the group’s liquidity position was impacted by deposit outflows in the fourth quarter, our average liquidity coverage ratio at the end of December stood at 144%, well above the group’s minimum regulatory requirements and comparing favorably with our peer group. This represents an improvement from the lower levels in the quarter. It was a result of a series of proactive measures, including the capital raises, debt issuances and deleveraging.

We have continued to see the improvement in the ratio, since the start of the year and we remain focused on maintaining our LCR at a prudent level. The disciplined execution of our strategy, including our simplification program, should lead to further liquidity improvements and more efficient liquidity management across the group. Moving now to funding on Slide 24. A major consequence of our strategic transformation is that the group’s future funding needs and related costs should reduce considerably over time due to the simplification of our business model. This should result in a more efficient group balance sheet. You can see that in 2023, as a result of the balance sheet deleveraging driven by our strategic actions, redemptions should exceed our estimated debt issuance plan for the year.

This reverses the situation of recent years, and I would expect this trend to continue over the next three years. Our issuance plan for the current financial year is around CHF17 billion, less than the expected redemptions of CHF22 billion. Reduced HoldCo funding needs means we expect issuance of around CHF2 billion and AT1 issuance of around CHF4 billion. In January, we completed nearly half of our planned CHF9 billion OpCo issuance for the year and around a quarter of the overall full year funding plan. Let’s move on to net interest income sensitivity and guidance for funding costs. I would expect the cumulative revenue benefit based on current forward curves to be around CHF900 million for the next three years versus year-end 2022 with the largest benefit coming from higher US dollar rates.

To be clear, our forward net interest income assumptions are based on the static balance sheet at the end of the year. The benefit going forward will be a function of actual loan and deposit balances. Now, turning to funding costs. The widening of our credit spreads over the course of 2022 has resulted in an increase in the cost of our funding and I would expect this to continue to be the case, partially offsetting the benefit of higher interest rates over the next three years. For 2023, I expect that increase to be in the region of CHF500 million compared to 2022. However, as I mentioned earlier, we expect our funding needs and costs to reduce as we progress our transformation. Turning now to costs. Adjusted operating expenses for the year was CHF16.2 billion, broadly flat compared to 2021 and below our previous guidance of around CHF16.5 billion to CHF17 billion, reflecting our disciplined approach to costs, including compensation, which I touched on earlier.

Looking forward, our ambition to reduce the cost base to no more than CHF15.8 billion in 2023 and to around CHF14.5 billion by 2025 on a constant perimeter basis remains unchanged. What I mean by this is that as we complete the Securitized Products transaction and execute on other disposals, we’ll adjust our cost and headcount targets downwards accordingly. We are on track to deliver on our cost ambitions and, as we’ve previously disclosed, the actions that we have already initiated in the fourth quarter are expected to represent 80% of the savings required to achieve our 2023 cost target. We will, of course, be looking for additional opportunities to eliminate duplication and drive operating efficiencies across the group. In terms of restructuring costs, for the fourth quarter, we booked CHF352 million, and I would reiterate our previous guidance for restructuring costs of CHF1.6 billion and CHF1 billion for 2023 and 2024, respectively.

Touching briefly on headcount, our overall target is to reduce this by 9,000 to around 43,000 by the end of 2025 on a constant perimeter basis. And actions that we’ve taken in the last three months have enabled us to achieve around a 4% headcount reduction since the end of September. To summarize, our financial performance for the fourth quarter reflects the decisive actions we have taken against a difficult market backdrop. Looking forward, we expect that the strategic actions taken to reduce the group’s risk profile and the challenging market conditions will continue to be reflected in our financial results. I would expect the group to report a loss before taxes in 2023 given the adverse revenue impact of the exit from non-core businesses and exposures and, of course, the restructuring charges related to our transformation.

We are now well into the execution phase of our strategic transformation and have clear priorities for the weeks and months ahead as we work towards achieving the financial targets that we set out on October 27th. Let me remind you what they are. On group-wide costs, we expect to reduce our cost base on a constant perimeter basis to no more than CHF15.8 billion in 2023 and to around CHF14.5 billion by the end of 2025. With regard to the group CET1 ratio, we expect this to be at least 13% throughout the transformation period and above 13.5% at the end of 2025 pre-Basel III reforms. And by 2025, we are targeting a core return on tangible equity that is excluding the Capital Release Unit of greater than 8% and around 6% for the group, as a whole.

Thank you very much. And, with that, I’ll hand back to Kinner.

Kinner Lakhani: Thank you, Dixit. We will now begin the Q&A part of the conference. May I ask everybody to stick to two questions, please. Alice, let’s open the line, please.

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Q&A Session

Operator: Our first question comes from the line of Andrew Coombs with Citi. Please go ahead.

Andrew Coombs: Good morning. I guess my first question, I’d just like to come back to your commentary around being proactive on flows and winning back some of the client money. Thank you for the comments on January about Asia Pacific and Swiss Bank. I guess my question would be more broadly, as part of your proactive approach, could you provide any kind of color on what you’re doing in terms of pricing? Are you putting through cuts to fees? Are you offering higher rates on the deposits? How are you going about winning back that business? So that would be my first question. My second question is on what’s left of your fixed income and equities business post the SPG divestment? What is the plan for that business overall? How much is expected to be moved in with CSFB versus how much of that Markets business is to be retained by the broader CS Group?

And I’d just like an idea of any thoughts on what the revenue contribution of that Markets franchise could be. You’ve obviously given the CHF2.5 billion number for CSFB, but presumably, that’s mainly around origination and advisory retail. Any thoughts on the Markets franchise going forward? Thank you.

Ulrich Koerner: Thank you, Andrew. Let me start with the first question. So, as we were alluding to, and I’d like to reiterate that because it’s really, I think, important for where we are now, where we are going throughout the year, so this client outreach program, which I was talking about, is really unprecedented. That is at least what the colleagues here in the firm tell me being here longer than 30 years. So — and I think it has shown and has developed very good momentum and, hence, the figures I gave for January. You asked concretely about pricing. So, we try to be competitive, call it, like many of our competitors as well, so to be in the game, but we are not buying assets, just to be clear, because that would not be very smart going forward as well.

So, what is also the fact, and I think that is something which all my colleagues in the bank and myself felt and the many, many clients interactions which we had nearly on a daily basis, I would say is that the client support which we get from them is really overwhelming. And I mean this something which is absolutely, for me and my colleagues, is absolutely fantastic. So, the clients, in other words, the clients want us to be successful, and that is something which we can feel and, therefore, we are so focused on delivery.

Dixit Joshi: Andrew, I’ll take the second, and thank you for joining the call. The SPG transaction, as you know from our previous announcements, part of our strategy to reshape and rightsize the Investment Bank. That portfolio had in the region of around CHF75 billion approximately of assets at the end of September. We’ve derisked two-thirds of that portfolio overall through a combination of transactions with Apollo and the first close yesterday and other third parties in the market. And so, we’re making rapid progress in reshaping the Investment Bank starting with the SPG portfolio. And we’ll continue to enforce capital efficiency and balance sheet efficiency in the Investment Bank. The other leg of that stool is, of course, the Capital Release Unit, which, as I mentioned in my remarks, came into being on the 1st of January.